Archive - Nov 2010 - Story

Not even a week has passed since it was disclosed that FrontPoint was one of the main funds benefitting from a biotech insider trading scandal (for another possible beneficiary, see here), and the former Morgan Stanley fund is on the ropes, battling for its survival: the reason, per Reuters, is that LPs have decided to pull half the fund's assets, roughly $750 million. Which means that as the fund struggles to liquidate holdings, many of which in less than liquid names which will likely need to be internalized by investment bank prime brokers, various biotech stocks are about to see some notable selling pressure. One wonders why Morgan Stanley was rushing to spin off the soon to be defunct asset manager...

Given that interest rates are already quite depressed, Bernanke seems to be grasping at straws in justifying QE2 on the basis further slight reductions in yields. As for Bernanke's case for creating wealth effects via the stock market, one might look at this logic and conclude that while it may or may not be valid, the argument is at least the subject of reasonable debate. But that would not be true. Rather, these are undoubtedly among the most ignorant remarks ever made by a central banker. - John Hussman

• Germany Attacks US Economic Policy (FT)
• Forget left and right. The real divide is technocrats versus populists (Reuters)
• China Is `Available' to Support Portugal Through Financial Crisis, Hu Says (Bloomberg), they also better be available to support Ireland, Spain, Italy, Greece, and all those other bankrupt European countries
• Hatzius is now bullish: Goldman Says Bernanke Engineers `Substantial Pickup' (Bloomberg), he will be even more bullish when QE2 is expanded to $4 trillion
• BofA May Pay Bonuses in Stock as Deadline Looms on Capital Gap (Bloomberg), unclear if it will throw in toxic MBS as part of compensation
• Citigroup debt funds probed by SEC (Reuters)
• Andy Xie: To Hell Through QE (China Int'l Business)

• CEOs most optimistic on US profits since 1999 in bull signal for S&P 500: Bloomberg.
• China is 'available' to support Portugal through financial crisis, Hu says.
• China's trade surplus likely rebounded in October after narrowing in September.
• ECB rejects request for files on Greek derivative use, cites 'acute' risks.
• Euro falls as concern over Irish bond sales, Greece damps investor demand.
• G-20 conflict risk eases as US says current-account targets unrealistic.
• Oil extends longest rally since April as US jobs report beats forecasts.
• World Bank Chief: G20 should consider adopting a global reserve currency based on gold as part of structural reforms.
• World Bank’s IFC plans to offer benchmark debt in US dollars.
• AIG hopes to complete its government exit before year end. Posts $2.4B loss in Q3.

Three Fed speeches and the quarterly survey of senior bank lending officers. Last QE-lite POMO closes at 11 am.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 08/11/10

Last week's Op-Ed du semaine was Ben Bernanke's WaPo glowing endorsement of the Fed market put, whose sole purpose was to remind stocks, which ended up drooping on the day QE2 was announced, that Bernanke will stop at nothing to achieve his now primary goal (as loosely interpreted under the Fed's broad, and unsupervisable, mandate) - surging stock prices. This week, however, may likely belong to Fed Board Governor, and former member of the President's working group on capital markets, Kevin Warsh. In an Op-ed just released in the WSJ, Warsh, whose series of accomplishments include being the youngest ever appointee to the Fed BOD at 35, and being married to Jane Lauder of Estee Lauder fame, writes "Lower risk-free rates and higher equity prices—if sustained—could
strengthen household and business balance sheets, and raise confidence
in the strength of the economy. But if the recent weakness in the
dollar, run-up in commodity prices, and other forward-looking indicators
are sustained and passed along into final prices, the Fed's price
stability objective might no longer be a compelling policy rationale. In
such a case—even with the unemployment rate still high—we would have
cause to consider the path of policy. This is truer still if inflation
expectations increase materially." Translation: if gold continues to exhibit a beta > 1 w/r/t ES, then we are screwed, and all Fed policies will have failed. Elsewhere, look for most commodities to open limit up again tomorrow for the n^th day in a row as inflation expectations continue to "increase materially" and more and more Fed members understand just what Warsh is saying.

One of the most serious condemnations of the race to the currency bottom to date comes not come from some peripheral media, but from the head of the World Bank itself, who in a just released Op-Ed in the Financial Times says that since the system of floating currencies established by the 1971 Bretton Woods II system, has broken down, it is time to look to a new international system of commerce, one which "should also consider employing gold as an international reference point
of market expectations about inflation, deflation and future currency
values." In other words, welcome back gold standard 2. Of course, this proposal will never attain more than a casual academic reference, as even a partial gold standard will immediately establish a lower bound on how much any given monetary authority can debase its (and, by retaliation, others') currencies. What, however, if very curious, is why this proposal is being floated precisely 3 short days after the Fed has launched its most ambitious attempt to reflate global asset prices and devalue fiat paper. And as is well-known, the IMF has also been quietly proposing a return to an ven more powerful version of the SDR.... Just what will take for the scales to tip, and for the dollar to remain a reserve currency just in retrospect.

This week brings the China trade balance for October, where a widening in the trade surplus is expected. Given the G-20 summit this week and the discussion over indicative target ranges for current account surplus countries, this number will be widely watched. We also get the usual activity and inflation indicators (per GS). Most importantly for market participants, tomorrow is the last POMO of the year at about $6.5 billion, and November 10th will see the first QE2 POMO schedule released.

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William Black ratchets his campaign for putting an allegely insolvent Bank of America into conservatorship by several notches, following up on Jonathan Weil's argument presented a few days ago that there is massive "book cooking" by Moynahan's henchmen, and that it is about time that BofA truly opens it books for all to evaluate just how undercapitalized the mega bank truly is.

Diapason's Sean Corrigan is out in full force for the second week in a row, this time looking at the consequences of a QE2, in which as he explains, the very premise of cause and effect has been inverted by the Federal Reserve, and which will result in even more dire consequences bequeathed by the launch of the HFRBS QE2. Yet in the last ditch effort to preserve a crumbling system, Bernanke is willing to sacrifice it all: the middle class, the dollar, and now logic. Here is how... and why.

The long-end of the curve has recently suffered a major whammy: first, contrary to expectations, the FRBNY announced that it would do just 6% of the total buybacks in the 10-17/17-30 Year area; and second, the overall size of the announced monthly monetizations ($75 billion excluding MBS reinvestments) ended up being far less than the $100 billion hoped for (again excluding reinvestments), although the market has conveniently so far ignored this major surprise. Yet what is interesting is that despite the presumed disappointment focusing on the long-end of the curve, the chart below from Morgan Stanley shows just why the long-end is about to experience a fresh surge in buying interest, undoing all the positive work the Fed has done on behalf of the banks by steepening the curve, and leading to yet more flattening. Another observation is that, as we have said many time before, the Fed's existing plan leaves just under $250 billion in the form of a demand gap that has to be closed by foreign central banks - and once QE 2.1 or greater is announced, America's will become completely independent of foreign monetary retaliation: even if foreigners go on strike, and like US stock investors, refuse to touch the market, the Fed will still monetize every single cent of deficit spend funding. In one brilliant stroke, Bernanke made America completely impervious to international retaliation.

With republicans back in control, it was only a matter of time before the military-industrial complex reminded the world of its existence. It took about 72 hours: republican senator Lindsay Graham, who apparently has not received the memo that all modern wars are now waged in binary, and are won by those who can push the FX bid/ask the furthest and the fastest away from equilibrium, spoke at the Halifax International Security Forum, giving a very distinct taste of what US foreign policy is about to look like: "Iran is a major threat to any conceivable world order" and that he sees an almost inevitable confrontation with Iran. As AP reports, the South Carolina Republican saw the United States going to war with
the Islamic republic "not to just neutralize their nuclear program, but
to sink their navy, destroy their air force and deliver a decisive blow
to the Revolutionary Guard, in other words neuter that regime." And the Democrats, still in shock over their recent pummelling, will likely not have the resolve to respond palliatively to such warmongering, which they likely deem as supported by the broad population: "US Democratic Senator Mark Udall, who joined Graham during a panel
discussion at the forum in Halifax, Nova Scotia, urged continued
sanctions against Iran. But he also noted that "every option is on the
table," a thinly veiled reference to possible military action." And just when the world was getting along so well, and all the international bickering appeared to be taking place over various Forex terminals...