Archive - Oct 2010 - Story

Just because every radioactive cloud has a humorous lining, here is how the event that will take home prices another major leg lower is made funny, thanks to Jon Stewart.

Investors should prepare for an acceleration of a slow motion return to economic nationalism, with particular focus on currency manipulation and protectionism—the so-called “beggar they neighbor” policies of the dirty thirties. Countries like the U.S. will attempt to pass laws that will provide largesse to the groups of losers who complain the loudest. Lip service will be paid to deficit reduction promises. The reality will be more spending, big deficits and a continuation of the upward spiral in the government debt:GDP ratio. What is the bottom line? We do know that when Americans are nervous, anxious and angry, change is coming and investors had better take note. Further state intervention in markets will occur, leading to greater distortions and unintended consequences. Excessively expansionary U.S. monetary policy—essentially the “our currency, your problem” attitude—may eventually lead to foreign retaliation in currency markets. With the Chinese having close to $3 trillion worth of dollar assets and a U.S. bond market that is seriously overvalued and vulnerable, the current situation is unsettling to say the least. - Tony Boeckh

From S&P's just released downgrade on Allied Irish Bank: We consider that Allied Irish Bank PLC's (AIB) reputation has deteriorated further as a result of the higher level of capital that it is required to raise by its regulator and due to government-imposed management changes. In our opinion, the ability of AIB to return to an 'a' category stand-alone credit profile is unlikely for a number of years. As a result, we are lowering our ratings on AIB to 'BBB+' from 'A-'. At the same time, we are lowering AIB's Lower Tier 2 debt ratings to 'BB' from 'BBB+', reflecting our view that the Irish authorities are now demonstrating a strong willingness to direct a restructuring for certain other Irish banks that could be detrimental to all Irish banks' Lower Tier 2 debt. # The negative outlook reflects our opinion of the downside risk to the recovery in AIB's earnings, our expectation that AIB's significant reliance on funding and liquidity support from central bank authorities will persist for the foreseeable future, and a degree of uncertainty that persists over AIB's business disposal program.

The kneejerk reaction in the USDJPY is now threatening to tear off both of Shirakawa legs. After plunging to below 82.00 on the NFP number, the subsequent overreaction continues to create tremors at the BOJ, with the pair just printing a fresh 15 year low of 81.72. Keep a very close eye on this as Kan knows that with every downtick, his termination day is getting closer. Last but not least, cast an occasional glance at the EURUSD as well, as judging by Juncker's comments, there is a very high likelihood of gentle currency prodding (note: not war) over there as well.

Some flashing headlines out of Reuters on what could be the first shot in the Transatlantic currency war. In a nutshell: Europe put a top in EURUSD at 1.40. As usual, Goldman's revised call for a EURUSD to 1.55 top ticked the market. From Reuters:

The euro erased gains against the dollar in early New York trade on Friday after Eurogroup Chairman Jean-Claude Juncker said he was not happy with the euro zone single currency reaching $1.4000.

Juncker also added that the EUR is too strong, and the weakness of the dollar is not in line with economic fundamentals. Perhaps not, but it sure is in line with monetary ones. We just hope Benny and his Inkjets will be willing mercenaries to kill the European currency (for a price), after they are done with ours.

Probably the most contradictory chart in today's NFP report: the number of people who are not in the labor force climbed to the second higher number ever, at 84,161K, a jump of 175K from the prior month, even as the number of people who declared they want a job now, surged by 230K, from 5,972K to 6,202K in September, also the second highest ever, and the highest year to date. In other words, people really want a job, but don't really want to look for one. Good luck reconciling that. All we can tell these people: QE2 will save you all, and some advice: become TBTF.

The BLS, as part of the NFP report, has issued its preliminary estimate of the benchmark revision, which confirms that the BLS is really just BS. According to the report, for the period ended March 2010, the BLS has overestimated jobs by 366,000 (0.3%), or just over 30K jobs per month. While not as bad as the prior benchmark revision of almost one million for the period ending March 2009, this continue to be a blow to both the credibility and the data tracking capability of the US Bureau of Truth. By industry, the biggest hit was to the trade, transportation and utilities industry (-144K), Manufacturing (-114K) and Leisure and Hospitality (-91K). Luckily, losses in these critical sectors were offset by even more bankers than had been previously expected: Professional and business services ended up being revised higher by 14K.

An interesting "Goldilocks" read, in which total jobs missed expectations of -5K wildly, yet Private jobs missed much more modestly by just 11K (and beat Goldman's expectation). The unemployment rate came in at 9.6% on expectations of 9.7%. The actual number of people unemployed was 14.767 million, a small decline from August' 14.860, and since the civilian labor force continues to refuse to increase at 154.1 million, the jobless rate is obviously flat. Government workers declined by 159,000, and census took out 77,000. And of course, prior data was revised adversely for both August and July. Yet the most notable number appears to be the U-6, which jumped to 17.1% from 16.7% in August. The reason futures are struggling on this report, is that it is not so bad to guarantee QE2, and is most certainly not "good."

The Federal Reserve is doing an excellent job with its chosen policy option of communication. With just three words, the Fed has brought down rates while boosting equities, gold, oil, and most commodities. Of course the three words I’m talking about are those that I’ve highlighted a few times since the release of the last FOMC statement or “provide additional accommodation” but since that formal statement the Fed has used even more nuanced communication to herd investors toward risk. And at this point it seems more stage-managing than just bluffing for a few reasons.

Payroll day, wholesale inventories, and one Fed speech….

• Asian stocks fall for first time in six days after commodities prices drop.
• China cuts Japan debt holdings most on record after seven months of buying.
• China's credit rating may be raised by Moody's, Shanghai stocks rise 3.1%.
• Germany's exports drop 0.4% in August; U.K. Sept. producer prices rise 0.3%.
• Greenspan says Fed asset purchases may not be enough to get 'money moving'.
• India said to consider allowing foreign retail buying of stocks.
• Ireland' rating cut to A+ by Fitch, outlook negative.

The doubts over QE2 are increasing. Yesterday, Dallas Fed's Fisher raised the warning flag when he said that "despite recent speculation in the press and among market pundits, we did little at that meeting to settle the debate as to whether the Committee might actually engage in further monetary accommodation, or what has become known in the parlance of Wall Street as “QE2,” a second round of quantitative easing." Today, St. Louis hawk Bullard makes an even stronger case that the run up in stocks since the August lows is unjustified, or at least, largely premature, when he told CNBC that "Federal Reserve officials could wait until December before making any decision to ease monetary policy further if they feel they need more clarity on the outlook." He added that "We did hit this soft patch in the economy but it's not so soft that it's obvious that you have to do a lot right now. It's still possible to make the case that the economy will improve naturally." Most importantly, Bullard clarified that the Fed missing its policy targets do not make a case for further easing a slam dunk, that the economy may still improve without extra help, and that has not heard of any discussion at the Fed moving in the direction of buying a broader range of securities. On the other hand, Bullard also said that it doesn't look like the Fed will be able to get inflation back close to target without more policy help, making the confusion complete.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 08/10/10

Some more observations on what will be the most contested capital markets topic through November 3. Goldman's Sven Jari Stehn has attempted to do quantify the response to the question that most equity and bond investors are banging their heads over: namely, how much of QE2 is already priced in. Goldman's findings: "a purchase program of about $1tr may now be reflected in 10-year Treasury yields, the three-month Libor rate and the dollar." Of course, there is a qualification: "This finding, however, is sensitive to when we think the market started pricing in QE2; equity price gains since Bernanke’s Jackson Hole speech have been more pronounced." Then again, there are those who will say that using QE1 as a framework for any comparative efforts is useless, as QE1 had little to no effect. While that may be true for the general economy (read Main Street), it certainly helped liquidity conditions on Wall Street: "our estimates suggest that “QE1” eased financial conditions significantly through lower long-term yields, higher equity prices and a weaker dollar." In other words Wall Street and Corporate America 1, Everyone else 0. But we knew that long ago. So here are Stehn's full findings, which may disappoint all those who are hoping for the absence of a sell the news event at 2:15 pm on November 3 (and will certainly disappoint all those who are hoping there will be no broad flash crash if there is no news): in a nutshell double the upcoming $1TR QE2 is already priced in in bonds, and half of it: in equities. Using the law of averages and Gaussian distribution, which backs every flawed economic theory, means QE2 is now fully discounted.

Karl Denninger, who has been tracking the issue of title fraud in the mortgage space for years, was on the Dylan Ratigan show earlier, and not only provided one of the most comprehensive explanations of where we are, how we got here, and where we are going (unfortunately nowhere pleasant) to date, but also was gleefully and sarcastically rhetorical with his closing remarks: "What if we find that of these $6 trillion in securities that are out there, outstanding right now, half or more of them are defective. You put them back on the banks and they all blow up. You know what - we have a resolution authority under Frank-Dodd, how about if we use it?" We would only add that courtesy of second degree, third degree, and fourth degree leverage, as we presented yesterday, the final amount of net capital at risk, courtesy of numerous other layers of debt, will end up being far, far greater than just $3 trillion. And yes, there is a reason why the OCC keeps a track of the $233 trillion in total derivatives held by US banks.