Archive - Oct 2010 - Story

Today's POMO eligible CUSIP list has been released: 28 different securities means a solid $3-5 billion in tender interest, although judging by last week's paltry notional submission in the long-end POMO, we wouldn't be surprised if more and more PD opt to hang on to whatever is providing any yield in this market. On the other hand, why wait a year to collect 1% when you can just buy Netflix and collect that in one 4 hour flip. The full results and the traditional fade begins at the usual 11:00 am time slot. What is distrubring is that ever more CUSIPs make the exclusion list: today 11 bonds are ineligible for repurchase, because, we assume, 35% SOMA holding limits and cheapest to deliver thresholds have been breached. Little by little the Fed will have increasingly less open market optionatlity and will be forced to monetize directly at auction.

So the ISM Manufacturing miss caused the market to surge, and the ISM non-manufacturing beat caused markets... to surge. ISM non-manufacturing came at 53.2 up from 51.5, slightly beating expectations of 52.0. The various components come as follows: New Orders: 54.9 vs. Prev. 52.4; Employment: 50.2 vs. Prev. 48.2; Prices: 60.1 vs. Prev. 60.3; Business Activity: 52.8 vs. Prev. 54.4.Although the one most important metric, and definitive outlier, was the Export New Orders, which exploded at 58, an increase of 11.5: the highest since June 2007. Thank you weak dollar: it appears the US is once again exporting weapons of mass financial destruction.

While developing my outlook on the US dollar, Bob Farrell’s rule number 9 comes to mind- “When all the experts and forecasts agree––something else is going to happen”. The number of dollar bears is disturbing. I find my own forecast moving inversely from the growing consensus; while I am not officially bullish on the currency yet, the time may come in short order.

The Bank of Japan is back pounding the QE/debasement/Keneysian madness table: this time they don't buy bonds, they buy REITs and ETFs. Did you hear that Mr. Bernanke? You no longer have to wait for a business to be insolvent to buy (bail?) it. More and more countries are in the pool. Central banks joining the game range from Peru with a few millions worth of USD, Brazil, to Japan committing to $300Bn of FX intervention with the first $20Bn unsterilized, to the Fed where estimates for QE 2.0 range from $300Bn to $500/750 Bn every quarter. Commodities love it obviously and last night Japanese quantitative escapade did not leave Copper or Gold insensitive as they scream to new (recent or all time) highs. - Nic Lenoir

In an advance preview of what will happen in the US once tens of millions of "homeowners" are forced to actually start paying their mortgage bills, Iceland's disgruntled population "gathered in their thousands, beating makeshift drums and hurling red paint at the legislature." As Bloomberg further describes the festivities: "protestors lit a bonfire and threw firecrackers at police while others threw eggs, tomatoes and paint at the parliament as they tried to break through the steel fence protecting the building." And while 8,000 protesters seems like a de-minimis number, keep in mind it is 2.7% of the country total population, and would be equivalent to 9.5 million American lining up to throw rotten vegetables at Ben Bernanke. Seeing how not even one has done so ever, it appears the Volcano dwellers have infinitely more guts than their infinitely more weaponized American equivalents. As to what sparked the ire of the egg-throwers: "A six-month freeze on mortgage repayments put in place by the government expired on Thursday, triggering the anger of many Icelanders who will fall short on home payments." Perhaps when in a decade or so, Americans are once again forced to pay down their debts, we may actually see comparable footage in the US as well. Too bad the world's central banks will start a world war long before that.

Remember when once, less than 8 hours ago, the BOJ decided to punish its currency in yet another rate reduction-cum-QE decision? Neither do we, and neither does the market - the half-life on currency intervention by the Japanese central bank is now 4 hours (and dropping), as the USDJPY is lower than where it was pre-intervention.According to market rumors, Shirakawa is preparing to take the honorable way out as he has now lost all control. Either that or LBO Radioshack. As for what does matter today, there are only two thing: $3-4 billion POMO today is currently being front run by millions of tiny, hollow vacuum tubes, while the 2-3 traders remaining are fully aware that SPY and IWM are on the Reg SHO 'suggested' buy-in list. All else is noise as the Fed will get the market higher today period. Also, don't look now, but gold just passed $1,330 - and you still can't eat the damn thing!

• We hope SocGen accepts checks: Kerviel gets three years, told to repay $6.8 billion (Bloomberg)... does that mean Bernanke, one day, will be told to repay $23 trillion?
• Another predicition by Zero Hedge coming true - wifebeating Judge Peck will soon be forced to undo Lehman bankruptcy sale (Bloomberg)
• Soros Op Ed: America needs stimulus not virtue (FT)
• It's October. Is it time for a stock market crash? (Fortune)
• Art Laffer: The Bill Gates Income Tax  (WSJ)
• Bernanke Says Fiscal Limits Can Improve Federal Budget Path (Bloomberg)
• The Federal Reserve is selling paper gold and buying physical gold (Financial Sense)
• See what happens when you don't kill your currency fast enough - Europe Services, Manufacturing Cool as Retail Sales Decline (Bloomberg)
• Is 'Stupid' Replacing 'Silly' Good for Stocks? (RCM)

As Zero Hedge speculated yesterday, as a conclusion to its two-day meeting the BOJ has decided to aggressively engage in competitive devaluation of the Yen (for the n^th time in a row). Specifically, Shirakawa's impotent henchmen cut interest rates and pledged to keep rates at zero until prices are seen stable in what Reuters cited was "a surprise move showing its concern that a strong yen and slowing growth are undermining a fragile economic recovery." Luckily this move was not at all surprising to ZH readers. And, as we further expected, "the central bank also decided to set up, as a temporary measure, a 35 trillion yen ($419 billion) pool of funds to buy or accept as collateral assets such as government bonds, commercial paper and asset-backed securities." And to those who think Bernanke will allow Japan to engage in QE1002 without the US doing a little dollar debauchery of its own, we have some California real estate with just modestly fake title deeds to sell. Of course, none of this matter on a relative basis, as it will be followed merely by more devaluations elsewhere, but on an absolute basis it merely sent gold to a fresh all time high over $1,327. We hope that even gold's staunchest critics start seeing the pattern at this point...

A light day, with only the ISM nonmanufacturing index this morning and the weekly confidence survey later in the afternoon….

• Europe, Japan economies slowing, lower inflation likely: Pimco.
• Yen weakens on speculation Japan will intervene to curb currency's gains.
• AIG is said to seek up to $14.9B in Asia unit's IPO.
• AK Steel hikes electrical steel products prices by $350 per ton.
• Amazon likely to announce a deal to buy Spanish Internet retailer BuyVip for $96.5M.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 05/10/10

The Massive Mortgage Mess as we affectionately call it seems to be getting new names with each passing day - the latest one is, quite appropriately, RoboSigning Scandal (funny how after the stock market, "robotic" technology will soon becoming equated with the biggest mortgage scam in history). During today's Kudlow segment, CNBC's Diana Ollick who is by and far the company's best (and only) investigative reporter, confirms various so far unfounded rumors, that the government is planning to institute a 90 day foreclosure moratorium as it deals with the realization of just how big and pervasive the mortgage problem is, and even worse, will soon be. It is so bad that even a typically ebullient Larry Kudlow is forced to note that this is the "housing equivalent of the credit financial meltdown" and that "this is going to go on for ever." The biggest issue that is now developing, as we noted last week, is the fact that title insurers (firms such as Fidelity National, First American, Stewart Info and Old Republic) are refusing to insure mortgages in foreclosure or otherwise, uncertain as to who actually owns the title. And for all those who believe this will merely keep prices artificially high, we have very bad news - the problem with the title insurers walking away on fears of lawsuits is that no lender will be willing to write a mortgage without title insurance, meaning that suddenly the up-front component of home purchases will either necessarily have to surge, or home prices will have to plunge by a like amount, as there is simply not enough equity (read money) to cover the resulting debt deficiency. Alas, this mess is just starting, and as people realize how bad it is, it very well may lead to a total collapse in the housing market.

A quick glance at the USDJPY chart shows that something is afoot in the land of the rising sun. Following an earlier report from Bloomberg, that the BOJ may lose its independence (kinda like our own Fed) after 20 years of feeble QE have proven to be unsuccessful, BOJ governor Shirakawa must know the end (for quasi-prudent monetary policy) is in sight: "Your Party, an opposition group, plans to submit a bill in the Diet session running through December that would give the government a greater role in BOJ policymaking. Ichiro Ozawa, a former challenger to Prime Minister Naoto Kan whose calls for currency intervention and enlarged fiscal stimulus have been adopted by Kan, made a similar proposal last month." Which means that the BOJ's balance sheet, which has been relatively flat when compared to peer central banks, especially since FX interventions will likely be sterilized, is about to explode and the JPY will plunge once the carry traders reorient themselves to shorting the original carry currency of choice. Indeed, Reuters cites a Nikkei report that now that the BOJ two-day meeting is winding down, may announce yet another case of asset-backed security purchases. If that happens look for the recent dollar strength to persist, as Yen poundage becomes the mangaporn choice du jour.

Over the past few weeks the broad stock market has seemingly grown increasingly more bullish. Market pundits, traders, and even high profile money managers are stating publicly that the easy trade over the next few years will simply be being long high quality stocks. While time may prove these managers wise, it is likely a bit early to be that bullish. As a trader, our job is to create profits consistently regardless of price action. The best traders are masters of blocking out the noise and emotion, and letting various forms of data guide their decision making. At this point in time the bulls have the bears pushed against key resistance at the SPX 1150 area. However, the bears have their eyes set on the 1130 level and from there the key SPX 1040 support area. If the S&P 500 breaks out over the 1150 area with strong volume we could move higher to test recent highs; however, if the 1040 area were to give way to the bears the bullish parade would end. At this point in time, it is too early to tell which side is going to win this battle. The monthly chart of SPX tells the entire story.

David Kostin's recent track record leaves something to be desired: his most recent pair of thematic trade recommendations (Buy High Dividend stocks, Sell S&P; and Buy High Sharpe Ratio/Sell S&P) has not only underperformed the market, but has generated a negative absolute return. Which is not to say he has been wrong: in fact his latest recommended pairings were the most sensible he has suggested in a while. Yet the market does not care for rational choices, and either rewards high beta names in droves, or punishes them, while everything else languishes, in a zero alpha environment, coupled with low or no beta for the non risk-on sector. Yet that was September, and September is now over. What will happen in October? As Kostin suggests in the preface of his exhaustive monthly chartbook, "The fate of market rally depends on October data; 3Q earnings season: trick or treat?" With mid-term elections three days after Helloween, there may just be far too much money for the former to be even an option.