Archive - Dec 2010 - Story

Goldman, very much in sticking with their newly found fame of Wall Street's biggest bullish flipflopper, has decided to pen a lengthy missive, explaining why the recent surge in mortgage rates, contrary to logic, will actually not have much if any impact on housing prices. The kicker: per Goldman, rising equities creates a wealth effect. "Equity prices are moving the other way. One key reason why US consumers retrenched in 2008, besides the unpleasant novelty of widespread, steep home price declines, is that equity prices were also falling sharply. However, equity prices have risen more than 20% since mid-year, and our equity strategists expect significant additional appreciation in 2011. Under these circumstances, the bar for a home-price-induced consumer pullback is fairly high." Presumably the very same middle class which is the backbone of home purchasing will somehow forget that they have taken money out of stocks for 32 weeks, and splurge on a new home with the proceeds. And the funny thing is that even the dumb plebs realize that a 1% rise in rates is the equivalent of a 9-10% drop in purchasing power, as that is money that will go to covering interest payments over the 30 year life of a mortgage. And should rates continue rising without any indication of stoppage, all buyers will have to factor the fact that sellers are increasingly more desperate into their purchasing decisions... Which means another leg down in bids. But that is the logical, and simple, explanation. For a much longer one, which could have come straight from some Federal Reserve research desk, read the profound ruminations by Ed McKelvey below.

And like that, just before midnight, Congress, despite much protesting and posturing, passed the tax vote by a massive margin. 277 voted for with just 148 against. Now the tax extension faces the final formality of passing Obama's signature. The upside: no new taxes; the downside anywhere between $800 billion and $5 trillion in incremental debt to fund this latest stimulus which will only work if all the Wall Street sellside analysts who pushed for it so hard, are right. Given Wall Street's prediction track record we have "100% confidence" they will be spot on as usual.

For an amusing indication of just how effective the US justice system is, look no further than the JP Morgan offices in Los Angeles. A peaceful protest in front of the front doors of the megabank led to 22 arrests. Alas all of them were of those protesting: not a single banker was even touched in the making of this non-brush up with the law. From ABC News: "Police arrested 22 demonstrators who blocked entry to a downtown Chase bank branch Thursday to protest what they said were unfair home foreclosures. The demonstrators, which included homeowners facing foreclosure, community advocates and labor leaders, silently allowed officers to bind their wrists behind their backs with plastic restraints and guide them into a police van. Dozens more demonstrators chanted and marched on a nearby sidewalk holding sighs that said "Stop Bank Greed, Save Our Neighborhoods" as the 12 men and 10 women were taken into custody." So instead of the legal system finally finding at least one of the bankers who either led the country to the Great Financial Crisis even presumably guilty, the status quo marches on as those who dare to protest against what will sooner or later be disclosed as the biggest fraud in US financial history.

The drama in Congress is over... so warm up the printers. Because the $5 trillion in extra debt needed to fund just the incremental budget deficit over the next decade as a result of the tax extension vote sure is not going to fund itself. Reuters reports that a critical test vote of the tax bill has passed by a margin of 214-201. And as the market decides to use this pretext for another shake out ahead of tomorrow critical opex, expect to see a surge, or a plunge... something, as long as all the stops are triggered.

In the week ended December 6, M2 rose again, this time by $1 billion W/W, hitting a fresh all time high of $8,813 billion. This is increase 20 of 22 consecutive weeks. Perhaps just as importantly, the non-seasonally adjusted number soared by $43.7 billion, also hitting an all time high of $8,823.6 billion. Yet despite this ongoing surge in broad market money, a rather odd thing happened last week: currency in circulation: a component of the M1 and thus M2, actually declined for the first time in 22 weeks, on both a seasonally adjusted basis ($0.1 billion) and on a Non-seasonally adjusted one ($0.7 billion). Combing through the components of M2, the only actual increase in the broader monetary aggregate was in savings deposits at commercial banks which increased by $42 billion, offsetting drops in every single other category, all of which were negative W/W. The bottom line is that the Fed at least wants those who care and follow this data series, to know that the penetration broad money is spreading. Whether or not this is enough to offset ongoing consumer deleveraging is a different story.

In light of recent developments, courtesy of the Wikileaks firestorm, around the broad and narrow definition of freedom of speech, which apparently is perfectly free, until it confirms that the narrow-minded individuals at the top are truly as narrow-minded as popular folklore will represent them to be, the question of just what and how far the government is allowed to "probe" into is rapidly becoming once again very relevant. And while most Americans have an atavistic response toward having their snail mail intercepted and opened, or their phones bugged, few realize that today's the primary mode of communication, e-mail, has been subject to just the same amount of government surveillance, ever since the Patriot Act, but particularly in recent days. Which is why a recent decision by the Sixth Circuit Court of Appeals that found that email privacy is protected by the Fourth amendment, may force the administration to do some drastic changes to either its eavesdropping infrastructure, or the constitution. Or, as most often happens, nothing changes and people simply forget, as the status quo continues as it always has.

At this point the weekly updates of the Fed's balance sheet are becoming more or less an autopilot issue: each week the Fed will add between $25 and $30 billion of Treasuries, with the only real question becoming how much mortgages are being prepaid, and what is the incremental liquidity boost due to the weekly change in excess reserves. But before getting into those, here is a broad look at how the Fed's balance sheet looked as of close today (including today's $6.8 billion POMO).

Has the latest pullback in precious metals and related stocks given you a sickening feeling in the pit of your stomach? If so, then consider rebalancing – because that sinking feeling is a good signal that you are probably overinvested in the sector. I’ll have more on that topic in a moment, but first to the question of where to invest, if not in precious metals and resource stocks? That is a question we get quite often. For the time being, as least for those without international obligations, the carrying cost of cash is very low. Thus you can reduce your near-term risks, albeit at the cost of forgoing upside. If at one end of your portfolio “barbell” you have a 20% to 33% allocation to precious metals, having the same sort of allocation to cash on the other end of the barbell brings overall risk down while giving you the liquidity to act as additional opportunities arise.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 16/12/10

Fox Business' Charlie Gasparino tells us of another curious development in the insider trading affair. According to the former CNBC staffer, the FBI now not only utilizes such mob tactics as bugged phones and wearing wires, but is now resorting to actual moles within presumably innocent organizations such as hedge funds. And it is no surprise that the federal task force continues to chisel away at the SAC diaspora, in this case David Ganek's Level Global. After all the start prize is and has always been the prominent resident of 30 Crown Lane in Greenwich, CT.

Our favorite market spread: the AUDJPY-ES differential, which usually correlates like clockwork, until it doesn't, hast just hit one of those "doesn't" potholes. Courtesy of delta one desks, and their massive short vol positions which would be blown out of the water should the market trade down in a Visa like "elevator" pattern, the market levitated to totally uncorrelated levels by the close. Judging by the spread in these two risk indicators, the time to put on the compression trade is here: with the AUDJPY at 83.08 and the ES at 1243.5, there are about 8 points of ES to be picked when the spread collapses as it always tends to do (until it doesn't).

To all who watched the recent student demonstrations in London (in which members of the royal family ended up being victims of righteous mob anger), and mused that things like this can never happen in the US, Simon "Sovereign Man" Black has some words of caution: prepare to grab your ankles. His advice is what some may consider borderline anarchistic: "Stop playing by everyone else’s rules. Refuse to be enslaved by the idea that it’s your civic and moral responsibility to pay off the debts of your government’s failures. Cast off the yoke of their control… and summon the courage to live a life by your own design." Yet judging by recent violent events in ever more European countries, who have decided on precisely this outcome, is this such a far fetched perspective of what reality may soon become?

Nomura's inimitable macroeconomist, Richard Koo, whose views we have often repeated on Zero Hedge, is out with his latest prediction which unfortunately has nothing good to say about the future of the US: "We have shown—using the example of the ¥2,000trn in output that was saved in Japan and the fact that the fiscal stimulus provided by World War II quickly pulled the world’s economies out of depression—that fiscal stimulus can be a potent tool during a balance sheet recession. Unfortunately, participants in the US fiscal debate remain oblivious to this point and continue to discuss the pros and cons of fiscal policy using fiscal elasticities measured when the economy was not in a balance sheet recession. This implies that economists are heavily underestimating the elasticity of fiscal stimulus during such recessions—just as their counterparts in Japan did a decade ago—making policymakers reluctant to implement further stimulus. This reluctance leads to further economic weakness. The situation in Europe is no different from that in the US. I therefore have to conclude that the western nations have learned nothing from Japan’s lessons and are likely to repeat its mistakes." To be sure, Koo is more in the Krugman camp when it comes to rescuing a fallen Keynesian regime, and believes that stimulus at any cost is the only resolution. That said, the US now exists in a universe in which all the incremental debt issuance is being monetized directly by the Fed: an event is unparalleled in the history of the country. As such we fail to see how one can extrapolate arguments from even a bearish case that may be applicable to the current global state of affairs, which courtesy of Reinhart and Rogoff, we know is at or beyond a tipping point in terms of sovereign leverage.

Visa, which over the past several months, has become one of the darling momo names, shows just how stocks take the escalator on the way up, and the elevator on the way down. The reason, is that per the just released statement by the Fed, Ben Bernanke will cap interchange fees which will directly impact Visa and Mastercard's top line. And another shocker: per a just released note from JPMorgan, the Fed may end up cutting 80-90% of debit fees chages by the credit card companies.

Today at 2:30 pm the Fed will hold its first open to the public and telecasted board meeting. But before readers get excited (except for shareholders of Visa and MasterCard) nothing of particular significant will be discussed. The topic of the meeting will be "proposed rules governing debit card interchange fees and routing" and nothing that actually has a bearing on the future of the nation. On the other hand, based on the just released statement which recommends proposing two alternative frameworks for determining 'reasonable and proportional' interchange fees, V and MA are certainly being impacted. Nonetheless, for all who wish to see the Fed's board member live and in action, this is your chance.