Archive - Dec 7, 2010 - Story

From Reuters: FLASH - North Korea believed to have fired one artillery round in its west coast waters - South Korea's YTN reports. South Korea stocks turn negative, won extends fall on artillery fire report. And from BNO: N. Korea fires military round in west coast waters apparently as part of a drill - Yonhap via Reuters

On November 14, we took full liberty of mocking ourselves and our call for a flattening of the long end (10s30s) over and above the din of virtually every sell-side analyst and so-called pundit out there, who, with the exception of Morgan Stanley, all were screaming that the 10s30s was about to embark to levels of unseen steepness. To wit: "After recently the market took all calls of a flattening in the 10s30s
to task, one would think that those anticipating a curve flattening
(Zero Hedge included) would finally have learned their lesson." Luckily we persisted in our obstinacy. And as the chart below shows it appears that was a very good decision: since that day, the 10s30s has collapsed by almost a quarter from a high of 160 bps to 124 bps. That said, in our opinion, the curve has much more flattening to undergo still: after all virtually the entire world was long the 10 Year, and short the 30 Year, expecting that Brian Sack would be able to maintain at least the belly, if not the long-end. To everyone chagrin, groupthink has once again proven to be a disastrous trade. Furthermore, keep in mind that the 10s30s was trading sub 100 bps as recently as this summer, which implies that technicals are favorable. And lastly, the drubbing in the curve means that that mythical bank profitability (thank you Dick Bove) is once again delayed, which also means that the broader economic prospects are deteriorating, making QE3 for Long End Treasurys (those securities that are not going to be monetized municipal bonds) very likely to be purchased next as the Fed realizes that it will have no option but to buy much more of the 30Y as it will already be full to the gills with all other sections of the curve. Bottom line: we expect the flattening to persist and in fact accelerate once the always late CNBC pundit crowd realizes that a 23% flattening in the curve (not to mention record low market volume) means that bank Q4 EPS are once again going to suck.

Was this the latest case of buy the rumor and sell the news after QE 2.0 proved to be pretty much the lows in yields (for now at least)? The market started the day bright eyed and bushy tailed after last night's announcement by Washington that a tax deal is close: Republicans win, Democrats win, America loses! The conversation probably went something like this: Republicans: "If you don't extend the tax breaks we will roll back your health-care plan"; Obama: "But this is my place in history at stake here! Ok you get the tax breaks, but I am going to add my own twist with social security tax cut (it's so far under water it doesn't matter anymore) and extension of unemployment insurance, this way the folks hurting out there know I am looking out for them and I don't look like I just got owned"; Vigilante: "That's 900Bn over 2 years, who's going to pay for this?"; Republicans and Democrats: "Ha ha ha."
Now however, there are a slew of VERY nasty charts that I would like to highlight following on the heads up I gave last night. - Nic Lenoir

It always seemed to us that the whole Lehman Repo 105 fiasco seemed to be too much of a slam dunk for nobody to get sued over it. Yet here we were, almost a year after the Valukas report, and nobody was even pretend to be fighting off justice, or even a bunch of brain impaired porn addicts. Not so any longer. Bloomberg reports that per an unsealed filing in the Lehman bankruptcy docket, the Lehman 401(k) retirement plan, which had just under $230 million invested in Lehman stock, has sued Dick Fuld "and other former executives of the defunct firm for failing to disclose Repo 105, a financing method allegedly used to conceal billions of dollars of debt." And all this is occurring as the SEC is scrambling to find new and improved ways to pay off its multi-million midget porn bill, up to an including firing every staffer with an IQ over 50...All 4 of them.

Today's tax compromise in the US extended all expiring Bush tax cuts by two years.  The story though does not end here.  The most important thing missing from the tax extension was the expected extension of the Build America Bond program.  The Build America Bond program has been the municipal market's saviour over the past 18 months.  Since their introduction in April 2009 more than 174 Bio USD of taxable securities have been sold by municipalities backed by the program, one where the US pays 35% of the interest due on the debt.On a day when the market focussed on the Budget vote in Ireland, a country that makes up about 1.8% of Europe's GDP, we are concerned that no one is looking at the growing problems in New York, California and Illinois, three states that comprise 25% of the US GDP. The expiration of the Build America Bond program could prove to be a terrible price for the US to pay and we expect squabbles in the US Congress regarding the bailing out of States in 2011 that could easily rival that which we have witnessed from the European Union over Ireland and Greece....We continue to expect that QE3 will include the purchase of Municipal debt, a true can of worms.

Heretofore, Japan has been able to avoid the worst consequences of its many debts and obligations – but that may soon change. In addition to the exports referenced above, the country’s high internal savings rates have provided crucial support for the Japanese government’s energetic issuance of debt at low rates. But as you can see in the chart below from our own Bud Conrad, those internal savings – like exports – are now in decline...It all begins to get a bit circular when you consider that Japan’s aggressive financing needs make it likely the country will have to dial back its participation in future auctions of U.S. Treasuries. It would not surprise me if they followed China’s lead in reducing the U.S. paper now held in reserve. That, in turn, could lead to even higher U.S. rates, and even higher rates for Japan. Or it could lead to more monetization of U.S. Treasury debt by the Fed, which in turn leads to Mr. Market demanding higher yields to compensate for the rising potential of inflation.

Just last week we posted the follwing: "Was this the peak of the world's most overpriced stock Netflix? A new
Form 4 filing indicates that the first defection in realization of a
sinking ship may have occurred. On November 4, Netflix Chief Financial
Officer Barry McCarthy sold 100,000 share equivalents, with 91,181
shares sold between $200.36 and $201.11 and the balance from option
exercise. The sale has left Barry with just 51,563 shares of NFLX stock.
If the CFO believes the time to take profit is in, what does
it mean for the millions of other hot potato holders?" Today we get the answer: "LOS GATOS, Calif., Dec. 7, 2010 /PRNewswire/ -- Netflix, Inc. today announced the appointment of company finance veteran David Wells as its chief financial officer to succeed outgoing CFO Barry McCarthy, who has expressed a desire to pursue broader executive opportunities outside the company.  The change is effective December 10...."We offer both great gratitude and sincere best wishes to Barry.  Over
the last few years, Barry has balanced his affection for Netflix – and
the excitement all of us have felt by the tremendous growth of the
company – with his personal desire for broader professional
opportunities.  Barry concluded that now is the right time to seek out
those opportunities, and we will be cheering for him." Barry will be far more cheered by the absolutely immaculate timing of his NFLX stock dump at the all time high in the stock price, and his gratitude to the suckers who bought the stock is unmatched by that of even Netflix.

Paul Farrell lights it up in his latest market commentary, which puts even some of the more hard-core realists out there to shame: "Wall Street is a loser. Stocks are Wall Street’s ultimate sucker bet.
And it’ll sucker you again. You’ll lose, worse than in the last decade.
Wake up before Wall Street banks trigger the next meltdown, igniting
mass bankruptcy." Um, wow. And seeing how we have been saying that only absolutely immaculate top tickers should be in this market, we agree wholeheartedly with Farrel.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 07/12/10

The 10 Year Treasury surged 16 basis points this morning to 3.08%. This is the highest level since July and is now up .68% since Ben Bernanke indicated QE2 was on the way. QE2 was supposed to REDUCE long term interest rates. Mortgage rates are going up, not down. Housing prices are already in free-fall again. Higher mortage rates will destroy the housing market. Obama, Bernanke, and Congress have created the perfect storm. Keep partying today, for tomorrow will be painful.

Today's consumer credit release tells you all you need to know about who continues to fund the economy (deficit commission be damned indeed). The all important revolving credit number declined by $5.6 billion in the month, which just happens to be the 26th consecutive drop in revolving credit, as in the stuff that Americans use to actually buy stuff with using their credit cards. And while October total consumer credit rose to $3.4 billion from a downward revised $1.2 billion in September (previously $2.1 billion), all of it was due to non-revolving credit, which rose by $9 billion, and more specifically due to a whopping $31.9 billion increase in Federal Government debt used to fund student loans (the latest industry recently nationalized by the US government). Ex-federally funded student loans, consumer credit declined by about $28 billion.

The only chart that may matter until the end of the year... And no, this is not Portugal

Today, David Rosenberg has some good commentary which proves that those who say to not fight the Fed, may be 100% wrong when it comes to fighting adjusted for inflation, or as the case may be - deflation (conveniently, few talk about what bothers even seasoned hedge fund managers such as David Einhorn - i.e., "corn and oil"). And Rosie is spot on: the deflation in all credit-intensive purchases is accelerating, and will accelerate because the only thing that matters, as we have claimed for over a year, is the shadow capital/credit contained in the shadow banking system. That is the number that is collapsing at a rate of more than half a trillion per quarter. No matter what Bernanke does to M2 will even remotely offset this deleveraging deluge. Which is why we have long claimed that the only trump card Bernanke has is to devalue the dollar (both relative to other currencies and absolutely - relative to gold) to the point that its fate as a reserve currency is imperiled, ostensibly leading to a monetary crisis. One is free to name the resulting chaos in dollar denominated prices as one sees fit. But the bottom line is that as long as the shadow banking system continues to contract, which it will for years as the bulk of the funding came from European and Japanese banks: both of which are now gripped in austerity, and not really flooded with leveraged depositor money, everything else is merely a short-term blip on a long-term decline in both economic output and market terms. Also known as noise.

After hours of debates, the moment appears to have come: the vote to pass the budget, aka the "save the European senior bondhodlers" vote, is on the table and voting should commence imminently.

After Morgan Stanley's call for the 10 Year hitting 4.5% in 2010 ended up being one of the worst calls of the year (together with each FX call by the Goldman team), the firm's head rates strategist Jim Caron is back on the scene with his latest set of Top Trades for 2011, as well as some views on where the fixed income market is headed next year. In summary: just fast forward the firm's bearish 2009 view on yields one year forward. After all if the firm was so wrong one year, it can't possibly be wrong two years in a row...