Archive - Nov 2010 - Story

After posting an all time low rate of 4.17% in the week ended November 11, the 30 Year Freddie Mac Fixed-Rate Mortgage has surged by 22 bps to 4.39%, the highest average rate since August 19, before QE2 had started to be priced in. This is a direct reaction to the recent drubbing in the 10 Year bond which continues to see an unwind of the QE2 frontrunning trade. Which brings the Fed to the key dilemma: does it focus once again on reducing interest rates, as a continuing widening in mortgages will make home purchases increasingly more problematic, foreclosure crisis aside, or does it persist in sponsoring the imaginary "wealth effect" by pushing stocks ever higher. It seems the inflection point where investors would buy both bonds and stocks with the same fervor has passed, and the time for Bernanke to choose one of the two has come. Of course, a simple resolution would be to start leaking QE3. And with the municipal collapse continuing today, the Fed's choice may soon be moot.

It seems more Wall Street settlements are coming (because nobody ever goes to prison for fraud in this country). ProPublica's Jake Bernstein and Jesse Eisinger report that the SEC is investigating Citigroup's role in a $1 billion deal that the bank created in the run-up to the financial crisis. The agency is looking at whether Citi improperly pushed an independent manager to put specific assets into the deal, according to people familiar with the probe. Of course, we expect that if this is indeed the case, then Citi is currently in negotiations with the SEC to have a settlement ready in hand the second there is a formal announcement.

The Federal Reserve is an example not just of run-of-the-mill hubris but of the far more profound Pathology of Power. The rule of law has been supplanted in the U.S. by self-serving propaganda campaigns serving State and financial Elites: this is the Pathology of Power. The Federal Reserve is an instructive example because it is so blatant. Despite the dearth of evidence that goosing the stock market actually generates a "wealth effect" which "trickles down" from the top 10% who own the vast majority of equities to the bottom 90%, the Fed has waged a ceaseless propaganda campaign claiming this policy goal is now essential for the nation's well-being. No mention of its positive effect on Wall Street; cui bono (to whose benefit?) indeed.

Jeremy Grantham, who has been rather vocal in his condemnation of the Fed recently, and has been rather lukewarm in his endorsement of equities as an asset class, has released an updated (as of Oct 31) estimate for 7 Year returns by asset class. And it has bad news for pension funds which have a rather high bogey of about 8% per year. If Grantham is correct the 'new normal' (which is really the normal normal but with the cheap credit spigot taken away due to a new deleveraging regime) also means that pension fund actuarial models have to be scrapped as they will likely not be able to attain the kinds of returns needed to keep them solvent based on capital appreciation expectations. Where Grantham sees the best return potential is in international and emerging equities, presumably on the assumption that decoupling will take place. On the other hand, many are increasingly seeing the possibility of a China topping as a major risk factor. While Grantham is bearish on small cap US equities and sees just a modest outperformance of large caps, what he hates the most are all bonds, where in four out of five categories he see a negative 7 year return. Perhaps it is time for a Rosie-Grantham round table.

Following one of the biggest drops ever in the Empire Manufacturing Index a few days ago, it is only completely logical that the Philly Fed would follow through with one of the biggest jumps in history. The Philly Fed prints at 22.5 versus expectations of 5, and a previous read of 1. GM, which was about to take out all the bids at 34.60 pre-news, the US Treasury, GETCO, and nervous flippers, all thank the Philly Fed. Then again, a look behind the headlines indicates that the scariest trend: that of margin collapse, is in full force, as the prices paid-received margin is over 40. From the release: "Price increases for inputs remain relatively widespread this month. Thirty eight percent of the firms reported higher prices for inputs this month. The prices paid index, which had increased in the previous month, increased 3 points. On balance, firms continued to report declines in prices for their own manufactured goods: Slightly more firms reported decreases in prices (16 percent) than reported increases (14 percent). The prices received index remained negative for the sixth consecutive month, although it increased 7 points this month."

WSJ headline "SEC Files Civil Lawsuit Against Rattner In Pension Fund Kickback Case" We are shocked someone is punished for (alleged) criminal activity. Shocked.

As Wall Street finally takes its Teleprompter General prescribed daily dose of Lithium, and the euphoria is back with a vengeance, as suddenly all the troubles seem so far away, here is David Rosenberg who again battles the prevailing mainstream mania (of the day, tomorrow who knows) and continues to see "Trouble Ahead."

Human traders finally appear on the NYSE floor for the first time in years to allow the biggest flip in history to begin. And courtesy of the green shoe, Wall Street's underwriters are about to make $2 billion. Free lunch for everyone. Ironically, Getco's DMM status being fully tested as HFT moves entirely to trading GM. Some very appropriate commentary from a desk: "20% OF ISSUE SIZE TRADED IN 10 MINUTES. THIS IS THE MOST AMAZING CHURN I HAVE SEEN IN MY LIFE."

For a stark demonstration of market momentum euphoria look no further than the AAII weekly bullish/neutral/bearish sentiment. After hitting 57.56% in the week ended November 11, the highest since 2007, bullish sentiment plunged by 17.56%, to 40.00%, the biggest drop since January 2009, and the fourth biggest shift in sentiment since 2006. Alas, this is the kind of bipolar sentiment shift that will accompany a market in which everything continues to correlate with near precision to the dollar, and in which no bad news matter until they matter, and from all in buying the mood shifts to relentless selling.

One of the most popular American sayings between the 1940’s and the 1970’s was “there is no such thing as a free lunch.” Somehow that phrase and the pithy concept behind it seemed to have dropped from common parlance in the last twenty years to be replaced by the idea of “win, win.” Win, win still has many adherents but its days as the global credo are dwindling down toward zero. During the next few years ‘no free lunch’ should roar back in vogue, especially in the Eurozone. The euro brought tremendous benefits to almost all Europeans over the past decade, but there is no free lunch, and now someone has to pay for all the good times. The question is: who? This simple query is behind the millions of man/woman hours of meetings and writing that has been, is, and will be spent trying to parcel out the costs. Remembering that hundreds of millions of people gained a great deal for many years, the costs will be huge and they will be drawn out for at least a decade as well. All those who are in the markets’ sight as likely payors will pose as victims with much gnashing of teeth, at a minimum, and violence at a maximum. The scene is only just being set and there will be many plot twists before we reach the denouement, but we can sketch an early draft of those groups that will struggle mightily to avoid the brunt of the previous euphoria.

Initial jobless claims come at 439K, up 2K from an upward revised (no surprise) prior 437K (was 435K), and just shy of expectations of 441K. Continuing claims come at 4.295MM compared to 4.343 MM in the prior week (revised from 4,301MM to 4,343MM). As there was a holiday in the prior week, the BLS noted that the level of estimates was once again high. In other words 20% of the data was estimated due to Veteran's Day. And since we refuse to let the BLS off the statistically irrelevant hook, here is the latest revision schedule on initial and continuing claims. Do the math.

• Fed Orders 2nd Round of Stress Tests  (WSJ), translation: more capital raises for Bank of America, Wells Fargo and Citi.
• Lenihan Says Ireland May Ask for Bank Package as Bailout Nears (Bloomberg)
• One in 20 Irish Mortgages in Arrears (FT)
• China Vows to Tame Inflation (Reuters)
• Korea to Revive Tax on Foreigners' Bond Holdings to Slow Capital Inflows (Bloomberg)
• IMF Says HK Currency Peg Boosting Property Prices (FT)
• India Microcredit Faces Collapse From Defaults (NYT)
• Vilsack: Food Costs Won't Surge  (WSJ)
• Failed Models and the Real Costs of QE2 (Economics21)
• California Shrinks Planned Tax-Exempt Sale, Expands Taxable (Bond Buyer)

• Asian stocks rebound as commodities climb, China government acts on prices.
• BoE plans to adopt a less-intrusive approach to overseeing U.K. banks.
• Euro climbs versus Yen, Dollar on optimism Ireland aid to calm debt market.
• IMF warns of Hong Kong housing-bubble risks.
• Irish talks turn to government bailout as EU officials join IMF in Dublin.
• Moscow approves $32B sale of state assets; disposals to help cover budget deficit.

In attempting to validate today's futures ramp, brought to your courtesy of government motors and The Sack, Goldman presents the main tangential factors, good enough for a media headline and adjoining irrelevant plotline. Amusing nonetheless.

We start with a typical third Thursday of the month—claims, Philly Fed, and leading indicators—then pile on with mortgage delinquencies and five Fed speakers. Today's POMO focuses on bonds due 5/31/2013 – 11/15/2014