Archive - Nov 30, 2010 - Story

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 30/11/10

Everyone has heard of Belgian waffles. Below we present the Belgian donut, because sometimes a chart is worth a thousand CDS runs.

In last night daily report by BofA's Jeffrey Rosenberg, one chart stands out: the spread between the 12 month S&P 500 top 50 Implied Correlation (generically a proxy of broad US equity risk) and the Sov X, or the blended sovereign risk as indicated by CDS, which recently hit an all time high. In a nutshell: the spread has never been bigger, confirming that US domestic complacency over all things European (and the continuing levitation in stocks) has reached unprecedented levels, as absolutely no fundamentals can stand in the path of the hedge fund levered beta year end rally. In other words the China-US fatally flawed "decoupling" of 2007 has been replaced with a decoupling between the US and Europe. This will also end in tears. And this is happening even as European markets are unraveling, and as the EURUSD is tumbling, guaranteeing a drop in both US exports and the top line for US MNCs. But why worry: as 58 year old Valerie Whelan yesterday summarized it best: "It's capitalism gone mad." Every move in risk assets higher is merely a bet that central bankers can kick the can down the road for one more day. Nothing else. That it is unsustainable is guaranteed. Willem Buiter makes the case all too clearly that Europe will go bankrupt soon. We expect someone to make the same argument about the US very soon, especially if China does in fact commence tightening, leaving the chairman no other choice than to open the liquidity floodgates in one last attempt to preserve the dying economic system, however, this time without the benefit of being able to export inflation to China.

Today's POMO has closed, with Brian Sack monetizing $6.8 billion of bond. This is a 3.5x Submitted to Accepted ratio as PDs realize various blogs are on their POMO funding needs and thus moderate their Submission amount. Yet what is simply surreal is that the second most monetized bond was PJ3, due 11/30/2015. This is the same issue that was just auctioned off by the Treasury last week! There is no longer even a pretense of avoiding direct monetization. It is time for Bernanke to go out and just buy bonds at auction. A one week turnaround is nothing less than criminal fraud which if anything is unnecessary and pads the PDs pockets. For just holding the bond a whopping 168 hours, PDs made a few million dollars. This is criminal. But who cares. Eric Holder has still to prove that he is anything besides an organ donor. 

David Rosenberg summarizes his latest views on Europe, the EURUSD, risk, volatility, bond curves, gold, geopolitics, oil, a subsidized shopping season courtesy of no mortgage payments, and two years of home inventories.

The propaganda crew is out in full force today, as virtually the entire growth in the confidence number was in expectations. We expect a presidential address on how Americans are delighted that Europe is disintegrating, that Ireland is on the verge of civil disobedience, that jobless benefits are expiring and that one can barter a roll of toiler paper for a house.

The Chicago PMI came at 304,955. Not really, but the index whose New Orders came at the highest since May 2007 has about as much credibility as anything out of the BLS these days. US Chicago PMI (Nov) M/M 62.5 vs. Exp. 59.9 (Prev. 60.6), highest since April 2010

PMI Components

• Employment: 56.3 vs. Prev. 54.6
• New Orders: 67.2 vs. Prev. 65.0, highest since May 2007
• Prices Paid: 70.7 vs. Prev. 68.9, highest since April 2010
• Production: 71.3 vs. Prev. 69.8, highest since April 2005

Yes, the prices paid surging means margings are taking, but who cares. After all, there are headlines to fudge R2D2's fuzzy logic with.

Perhaps the most interesting consequence of the European debacle can be seen in the cash market. Our money markets desk this morning is seeing banks pulling back their offers for term cash and money funds are starting to be cautious again. Remember 3M cash lent today means whoever you lend to shows up on your balance sheet at year-end... there are definitely some names people are eager to avoid, and year-end considerations is always prime to accentuate funding crises. Watch 99.40 as the support in EDH1 as a good indicator. If that support which coincides with last week's lows is taken out the widening of Libors will very much become self fulfilling as lending will freeze. In the same spirit we have been calling for wider swap spreads and that trend is starting to catch some proper pace. - Nic Lenoir

The Case Shiller Home Price index declined to 147.49% YoY compared to 148.59 previously. The Composite-20 Index increased 0.59% YOY on expectations of a 1.0% Increase, prices in Q3 dropped by 2.0%, with a 0.8% drop in September. In absolute terms, the Composite-20 index is back to December 2007 levels. Then again, this is data as of September so it merely confirms that the housing double dip as of three months ago was accelerating. From the release: "Another weak report; weaker than last month. The national index is down 1.5% from the third quarter of last year and 15 of 20 cities are down over the last 12 months. Other than Tampa, FL, there are no new lows this month but many analysts will argue that a double dip will be confirmed before Spring. While some of the bad numbers may reflect the end of the government’s tax incentive for first time homebuyers, there are other problems weighing on the housing market.” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor's. “The national economy is certainly the number one issue for housing. Additionally, there is a large supply of houses on the market and further, hidden, supply due to delinquent mortgages, pending foreclosures or vacant homes. New construction is running at less than half the pace needed to meet normal demand, so a sustained recovery could be a ways off." And that's from S&P.

Someone with a long euros/short gold position was just carted out feet first. Our condolences to Blythe and the rest of the RICO defense crew. And yes, no expert networks foresaw or were consulted on this latest squeeze. If those ever louder rumors that a bank is standing for December delivery end up being true, today's move will be an appetizer to a 10-fold bigger move.

• Spanish Banks Face Funding Hurdle Amid Bailout Threat (Bloomberg)
• U.S. Senators Press for Vote on China Currency Bill (Reuters)
• CFTC to unveil position limit plan Dec 16 (Reuters)
• Democrats to Test Republican Mettle With Tax-Cut Vote (Bloomberg)
• Irish Banks Remain on a Tightrope (FT)

With all the debate over which European country will default first, many are reminded that precious yellow metals, especially in physical form (and perhaps due to their inedibility), never default. This morning Europeans once again are reminded that the best performing asset in 2010, on an absolute and relative basis, continues to be gold, as EUR-denominated gold passes its all time high yet again. Luckily some of them have taken our advice over the past 2 years to move away from paper assets and into something tangible. For everyone else, may we suggest some ketchup with that semi-illegal €500 euro bill. Next up: look for a run at all European precious metal retailers and distributors just like in May and June, and more positive pricing feedback loops now that a defeated Blythe Masters is expecting her pink slip to arrive any minute.

The sovereign widening wave continues to push away from the periphery and deeper into the eurocore. While yesterday it was Italy's turn to see its spreads surge, today it is Belgium. At last check the country of monk ale and fries is flirting with 200 bps, following a 3/6 month auction of €2.8 billion bonds which was (not very) surprisingly weak: the 3-month T-Bill auction for €1.425bln came at a plunging bid/cover of 1.48 vs. 3.52 previously even as the yield jumped to 0.864% from 0.784% previously, while the 6-month €1.370 billion Bill also experienced a slump in its bid/cover of 1.54 vs. Prev. 2.67, yielding 1.000% vs. 0.901% previously. Net result widespread widening, with Italy once again taking the head at 25 bps wider to 272 bps (see chart). The bad news is that the EURUSD has once again collapsed to below 1.30, after which the next stop is John Taylor's (and certainly not John Stolper's) 1.26 target. The only good news is that just like in the US, stocks continue to be resilient in the face of massive sovereign onslaught. This will not last, to quote Market News: "Brokers suggest there is a degree of asset re-allocation taking place, where shares have become a relatively less risky asset class, while Eurozone government bond yields have ballooned. It's an interesting idea, but also looking at yield returns, you could argue that funds may start to flow from equities to government bonds in Europe given that yields have become quite comparable." In other words, very soon the Fed will need to "stabilize" not only US stock prices but European ones as well.

• Asian stock markets were mostly lower Tuesday on Europe's debt woes.
• China central banker: Loose monetary policy must change.
• Euro-zone economic sentiment indicator rose to 105.3 in Nov from 103.8 in October.
• Euro drops below $1.30 for first time since mid-September amid sov.debt fears.
• German unemployment sinks again in November as economic rebound continues.
• Fed bought $7.226B in Treasury debt on Monday, the tenth operation of QE2.
• India’s economy grew 8.9% in July-Sept quarter from year ago.
• Japan Unemployment rises, output falls, showing risk economy may contract.

Home prices, Chicago purchasing managers’ index, and the Conference Board’s confidence index, plus Chairman Bernanke in an informal Q&A setting. POMO today buys $6-8 billion. Two regional Fed presidents are also scheduled to speak (Kocherlakota at 12:30; Lacker at 19:00).….