Archive - Oct 2010 - Story

One of the most bullish stories coming out of Europe last month was that Ireland, despite a drunk and disorderly finmin, and banks either increasingly more nationalized or on the verge of full scale restructuring, managed to fund its €25 billion in sovereign debt maturities. Of course, the European media took that as a sign of strength and from that point on it was off to the races for the EUR. Yet it appears the celebration was just a little premature. We learn today that virtually all of the maturities were funded indirectly by the ECB: in other words the monetization shell game so well mastered by the Fed is now being conducted by European banks everywhere. In September Irish bank borrowings surged from €95 billion to €119 billion, a €24 billion increase, and virtually a euro-for-euro match for all the new Treasury issuance. And since no demented monetization ploy goes unpunished, the action raised Irish ECB borrowings to 9% of liabilities, the same as Portuguese banks. As for the balance, as readers will recall we highlighted that last week the ECB purchased €1.4 billion of government bonds directly, therefore confirming that every single Irish bond auction would have been a 100% failure had it not been for Jean Claude Trichet's direct and indirect monetization scheme. But yes, somehow the euro is considered more viable than the dollar.

FOMC minutes, retail sales, CPI, trade balance. The minutes of the Sep 21 FOMC meeting out on Tuesday will be worth watching closely for anything special about the rationale for highlighting the low level of inflation and also to gauge how strong the support was for the decision to signal readiness to make further asset purchases. Speeches by Fed officials Dudley and Bernanke on Monday and Friday respectively will also be watched.

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Columbus Day, many markets will be closed, but some futures markets are now trading.

Perhaps the ruling Fed dictators can just go for a trifecta on November 3, and in addition to determining who wins the mid-term elections and announcing QE2, they can formalize TARP 2 as well. The reason is that starting tomorrow, 36 attorney's general are expect to launch a joint probe into "charges some banks used fraudulent paperwork to kick struggling borrowers out of their homes." Which of course means that Dick Bove is about to start appearing on CNBC every 10 minutes, providing instanalysis how banks have gone from overcapitalized to non-capitalized in the span of a weekend, under very "mysterious" circumstances. More from Reuters: "The source, who spoke on condition of anonymity, said the deadline for attorneys general to sign on to the investigation effort led by Iowa's Tom Miller was at the end of the day Monday, so a formal announcement could be made Tuesday." Whether or not that call will also include demands for a moratorium remains to be seen.

Will the High Frequency Signing scandal be the proverbial straw on the camel's back. Perhaps. In the meantime, here is a soon to be viral, and all too real, parody of foreclosure gate. At this point the guilty parties are irrelevant. All that matters is that America's terminal collapse into a banana republic status is now obvious for all to see. And as for Cramer saying foreclosure gate will only force home prices to go higher, pray tell dear Jim, just which buyers will put their own money into a home when they have no idea at what time the real title holder shows up with a restraining and eviction order, and demands immediate access. Of course, there is a loophole: the Fed will simply henceforth pay for all home purchases. And should the government drop mortgage rates to zero, and subsidize tax and insurance payments into infinity, that may well happen. Of course, it will also bankrupt the country, but since when was America's insolvency news to anyone...

We have run some numbers using the New York Fed's Primary Dealer Statistical database, which in combination with the Fed's POMO operations in the second half of September, result in some peculiar conclusions. First, we have summarized all of the Fed's coupon POMOs from September 15 through the end of the month (we excluded the $550MM TIPS POMO from September 28): as the table below demonstrates, in five operations Brian Sack repurchased a total of $16.4 billion in Treasurys. So far so good. Yet when juxtaposing these presumed repurchases of coupon securities, with the disclosed holdings of coupon Treasurys by Primary Dealers, something does not jive: to wit - PDs disclosed a total of $6.8 billion in coupon (not Bill) USTs held as of September 15 (split between holdings of 1-3 Year, 3-6 Year, 6-11 Year, and 11+ Year positions). One would surmise that courtesy of over $16 billion in Coupon (not Bill - this is important) monetizations, PD holdings would at least declined, if not by the fully monetized amount, then at least partially. No such luck: in fact UST holdings increased by $400 million headed into September 29, or the last end of quarter number. What did decline, however, and to a much greater extent, was the PDs holdings of Bill securities, which dropped by a 2010 record of $50+ billion over the same period. And it did not stop there: adding in changes in the other four PD disclosed security holding categories, Agency Coupons, Discount Notes, MBS and Corporate Bonds, and the total decline since September 15 was a whopping $62 billion in PD holdings! So while POMO was used by the PDs for everything but what it was intended to monetize, the same primary dealers who were the benefactors of the Fed's guaranteed UST bid instead used the end of quarter, FRBNY-facilitated window dressing to not only not offload coupons, but to dump everything else, and use the proceeds to buy stocks, thereby explaining both the massive ramp into the end of September, and also the ongoing attempt to flush NYSE shorts, which as of September 15, were still near 2010 records.

Pimco's Mohamed El-Erian continues to attempt to push for the bond over the equity case, most recently with his just released lecture remarks for the Per Jacobsson Foundation. In it the New Normal economist reconciles, once again for all those who missed it the first few hundred times, just what the New Normal means, and warns about a short-sighted, cyclical response by the international community, being extremely vocal in his critique of the post-crisis response, which is nothing less than a continuation of the emergency measures that prevented what some believe would have been an all out collapse had Goldman and AIG been allowed to fail: "Two years ago, policymakers from around the world gathered here in Washington, DC and recognized that the world was on the verge of an economic meltdown. Together they initiated an impressive set of measures, showing a commonality of purpose, narratives, interests, and actions. The private sector also responded as companies and households took steps to navigate the sudden stop in global financial flows. The war against a global depression was won. History books will report with admiration on the crisis management phase. Unfortunately, they will be less generous when it comes to the post-crisis period. Having won the war, industrial country societies are in the process of losing the peace. Indeed, absent some important mid-course corrections, industrial countries confront the prospects of low growth; high unemployment that is increasingly structural in nature; welfare losses, including a growing number of citizens falling through the large gaps created by overly stretched safety nets; and a rising risk of protectionism.This dichotomy between winning the war and losing the peace is an important one. It points to shortfalls in diagnosis, inappropriate operational constraints, and the fact that structural and balance sheets imbalances that were years in the making cannot be overcome immediately."

Today, we have three headlines of relevance. The first one comes from BusinessWeek as of October 9, "Finance Chiefs Warn Currency ‘War’ Is Risk to Growth" in which we read: "As the International Monetary Fund’s annual meeting began in Washington, policy makers warned that efforts to boost exports by embracing weaker currencies threatened to provoke protectionism and trade imbalances at a time when economic growth is already slowing. China was again the target of criticism as foreign officials called the yuan undervalued and pushed for its appreciation to be accelerated." This was promptly followed by the Telegraph's "IMF fails to strike deal over currency frictions", in which we learn part two of the weekend's key festivities: "The International Monetary Fund on Saturday night failed to reach agreement on tackling mounting global "frictions" over exchange rate policies despite US calls to deal with the issue more forcefully." Which brings us to today's game of 'date the headline', which comes, somewhere in time, from the New York Times: "US said to allow decline of dollar against the mark" in which we read a paraphrase of a quote by then Treasury Secretary James Baker III, together with some additional commentary: "'I think if you look at the underlying economic fundamentals in this country, they're very, very good,' he said. But he added that the stock market appeared to be reacting to prospects of tax increases by Congress, the enactment of protectionist legislation to reduce foreign imports, and to fears of rising interest rates and inflation. He also said growth of computer-generated ''program trading'' of securities had contributed to the size of the daily sell-offs." Oddly enough, the situation described in the New York Times was identical, if not better, to what is transpiring right about now. As to what happened 24 hours after the original NYT article appeared, well, we all know that...

As more people realize that the fake title transfer aspect of foreclosure fraud is just the tip of the iceberg which runs, via MERS (Mortgage Electronic Registration Systems) conduits all the way to the core of the securitization system, and thus $10 trillion in first level debt (and who knows how much in 3^rd and 4^th level layering of debt on top of this: think CDO-squared and cubed), we expect an increasing number of denials from the enablers in the explosion of securitization over the past ten years. Such as MERS. Which is why it is not surprising that late last night, it was precisely MERS who not only acknowledged for the first time its involvement in this whole fiasco (by a press release and a "fact and rebuttal" session), but has made it all too clear just how deep the problem truly runs. We would like to highlight just how very alike is the defense prepared by the High Frequency Signing Lobby to that by the High Frequency Traders out there: it is all just technological advancement, and if you want to blame it on someone, blame it on Intel and their fast fast chips: "What we're seeing now is that the
foreclosure process itself was not designed to withstand the extraordinary
volume of foreclosures that the mortgage industry and local governments must now
handle." Obviously the volume only exploded once failed systems such as MERS appeared on the scene: it is precisely in this aspect that MERS served as an enabling catalyst to let loose the wave of exponential re-re-securitization. It continues: "The MERS process of
tracking mortgages and holding title provides clarity, transparency and
efficiency to the housing finance system." And here is where MERS basically puts the ball back in the corrupt legal system's court: "We are committed to continually
ensuring that everyone who has responsibilities in the mortgage and foreclosure
process follows local and state laws, as well as our own training and rules." Because why not blame the entire judicial system, when one could just acknowledge the burden of having failed at doing their own job properly... One thing is certain: someone is going down for this biggest snafu in the history of mortgages/securitization.

Rick Santelli was on King World News today, discussing the distinction between deflation and deleveraging, or what some have dubbed the phenomenon of surging prices in things that one can buy without leverage (Friday's limit up open in various commodities being one example), and plunging prices in everything that requires debt (i.e., one's house). And while the Fed can game the CPI as much as it wants, once middle America see the cost of basic foodstuffs double (and it will once producers hit negative profit margins and are forced to pass input cost inflation to end consumers) they will realize just how serious this problem will be. Of course, the only way to offset this localized inflation is by returning to the time when America could use its houses as piggybanks in the form of taking out equity lines of credit. The problem with that, of course, is that the Fed will be forced to increase home prices at all costs, even as speculators take basic commodity prices up in anticipation of the coming hyperinflation. Which means that the Fed will be behind the ball, and will be forced to increasingly devalue the dollar as it is now obvious that no matter how cheap credit becomes, and how pervasive free money is, the last thing to go up are home prices which make up the bulk of US consumer "wealth." As such, today's collapse in the ceasefire in monetary talk is no surprise: every central bank is fully aware that with the monetary component to intervention, via cheap credit, now priced in, but priced in in terms of equities and commodities, the only way to create equity value in housing (of which per some estimates, 25% of all homes (and rapidly rising) are underwater to the underlying mortgage) is to broadly debase the currency. This is now a virtual certainty, and the higher gold (and soybeans, and corn, and what) goes, the faster the Fed will need to destroy the dollar, making the vicious loop of hyperinflation spin faster and faster...

• Russia Makes Major Headway with South Stream Pipeline
• Pakistani Supply Route Blockade Puts ISAF Forces at Risk
• US Drones Kill Five German Nationals, Amid Europe-Wide Terror Alert
• Bosnian Elections See Moderate Gains, but Little Hope for Change
• Nigeria Attacks May Show Dangerous Rift in MEND
• UK Diplomats Targeted in Yemen Attack

True story: A retired couple I know, Brian and Ilsa, own a home in the Southwest. It’s a pretty house, right on the manicured golf course of their gated community (they’re crazy about golf). The only problem is, they bought the house near the top of the market in 2005, and now find themselves underwater. They’ve never missed a mortgage payment—Brian and Ilsa are the kind upright, not to say uptight 60-ish white semi-upper-middle-class couple who follow every rule, fill out every form, comply with every norm. In short, they are the backbone of America. Even after the Global Financial Crisis had seriously hurt their retirement nest egg—and therefore their monthly income—and even fully aware that they would probably not live to see their house regain the value it has lost since they bought it, they kept up the mortgage payments. The idea of them strategically defaulting is as absurd as them sprouting wings. When HAMP—the Home Affordable Modification Program—was unveiled, they applied, because they qualified: Every single one of the conditions applied to them, so there was no question that they would be approved—at least in theory. - Gonzalo Lira

Next week 78% of the S&P companies will announce their Q3 results, (even as the the ratio of insider selling to buying hits the 5 digit range.) All cynicism aside, here is David Kostin's advance look at numbers and this week's complete charts that's fit to post. In a nutshell from Goldman: "Consensus expects 3Q earnings to be below 2Q actual results for six of ten sectors despite the US economy expanding during the quarter, albeit at a weak pace. We expect positive EPS surprises in 3Q but a restrained market reaction given the strong September rally and uncertainty surrounding the upcoming election and prospects for a second round of QE."

The research firm OLP Global came out with an excellent research report on Wonder Auto Technology, Inc. (WATG) last week, which I’ve attached here. The report examines a $15 million acquisition that the company made in July 2010, and raises serious questions about whether the acquisition was legitimate.