Archive - Feb 2, 2010 - Story

It appears that the upcoming NFP report due this Friday will be a doozy. With estimates all over the place, it seems that the actual number will be anything but what is reported due to at least four fudge factors that will likely end up stretching reality extensively in either direction. Knowing this administration's propensity to hand out blue pills with reckless abandon, it is our guess that Goldman is probably underestimating the "real" number, although we were proven wrong the last three times we distrusted the Hatzius/Tilton crack economic team.

You hear the bull story every day on TV and from the likes of Tom Friedman. Michael Pettis and Chanos take the bear side. Below is a recent must-watch, hour long presentation by Jim Chanos, courtesy of Peter Schiff.

If there is one thing the rating agencies can be proud of, it is... well, there isn't one. And if after yesterday's mindboggling budget proposal which sees the deficit increasing to $9 trillion in 10 years, coupled with the fact that GSE liabilities now should be counted as part of overall US obligations, neither S&P nor Moody's could muster enough courage to at least put the US on even the weakest form of downgrade review, one can say that after 2 years of pretending otherwise, both rating agencies are still as [clueless/corrupt] as always. Then one barely visible silver lining, the following disclosure from Moody's in the report released today:

The ratios of general government debt to GDP and to
revenue are deteriorating sharply, and after the crisis they
are likely to be higher than the ratios of other Aaa-rated
countries.

If the current upward trend in government debt were to
continue and become irreversible, the rating could come under
downward pressure. The trend and the outlook would be more
important than any particular level of debt.

The most recent ABC Confidence index came in at -49, just five points higher than the all time low of -54 set last January and is now at the lowest level since last fall. The prior week reading was -48, and the consensus for this week was -45, implying a substantial miss from expectations. The persistent deterioration in this index is increasingly at odds with other consumer readings, considering that the other two CONfidence indexes , the UMichigan consumer sentiment and the Conference Board consumer confidence index both increased in January from the December readings. Currently the relative divergence between the ABC index and the UMich and Conference Board is at record wides. We sincerely hope that the government will soon come out with an index that tracks the credibility of all its other indexes.

"On August 27, 2008 we published “An Open Letter to the Department of Treasury” where we advised the Government to buy $500bn FN 5.5s (then trading at 98-16) and fund it by issuing $500bn Treasury Five year notes (then priced at 3.02%). [Note: CMM vs. 10CMS was at 135bps]

Soon afterwards, they took our advice in spades, eventually agreeing to buy $1.25Trillion MBS bonds. This has lowered the Par MBS rate by over 140bps and tightened spreads by 70bps. (Actually, 165bp and 125bps respectively from the Post-Lehman wides.)

Unfortunately, this policy brilliance has not been executed in the most optimal manner. This has resulted in a missed opportunity to reach deep into the market to help those homeowners who are most distressed." - Harley Bassman of BAS/ML

We start with Fixed Income. With supply next week and unemployment report on Friday we had a preference being short fixed income this week. Technically we see that on the bund we have been in a narrow 123/123.65 range, and the slow stochastic is about to turn which has not generated a false signal in quite some time for that market that decent sell-off of at least 2 figures is on the way. 10Y treasury futures have held the 118-10 resistance but curiously look like they are in the process of doing a 5th wave up with potential between 118-27 and 119-05. It is not ou preference to view the recent price action as a bullish impulse with respect to the overall market dynamic since the highs last March but we remain cautious about the possibility of extending further on the upside. The bund paints a slightly more bearish picture for now. Still we are fairly overbought here and we think the risk reward is tilted to the downside. People who do not wish to express this view directionally can engage in a 5s/10s flattener (charted here using implied yield on the future). We see that we are back testing the former wedge support as resistance and we are fairly close to the highs excluding the post-lehman spike in the curve. Negative carry on the position is only 9bps per quarter so it is not too expensive to hold the position as well.

In the past Zero Hedge had respect for Ten. Senator Bob Corker due to his opposition to the nationalization of the bankrupt automakers and making them yet another ward of the ever larger central-planning state. However, after today's hearing with Paul Volcker on the Prop trading ban, any respect we may have had for the Senator has promptly dissipated. While we understand that the pointless bashing of Volcker's proposal by Corker was predicated by his sizable lobby interest (over $21 million raised in the course of his career) and his talking points were undoubtedly a transliteration of a memorandum submitted by one of the Too Big To Fail banks that stand to experience substantial losses should the Volcker proposal pass, one line of argument in Corker's speech that is flagrantly flawed was Corker's naive rhetorical question whether there has been a single instance during the financial crisis where a commercial bank engaging in proprietary trading led directly to that institution failing or having to be bailed out by the taxpayer. Corker assumed the answer is no and kept pouncing on that answer. Well, Senator, you are wrong - meet Merrill Lynch, incidentally one of your biggest financial backers. Also, please meet Merrill's prop basis trade and its prop HVOL4 trade, which combined were the primary reason for the firm's $15 billion writedown in Q4 of 2008 and the subsequent bail out of the firm by Bank of America.

More wishful thinking and generic talking points from the FHFA which will end up being the opposite of what will end up happening. In the meantime, still no update on proposed GSE regulation or why they are still not included in the Federal Budget.

At this point blatant episodes of insider trading are a weekly if not daily occurrence. While we still expect to hear back from our friends over at Mary Schapiro's woefully underfunded Syndicate Encouraging Corruption (SEC), regarding the previously disclosed insider trading in New York Bancorp, here is another one for Mary and her gray matter-challenged subordinated to mull, this time involving clothing retailed Ann Taylor.

Navigating today's market is akin to trying to juggle 3 bi-polar psycho girlfriends at the same time. Wild mood swings and total unpredictability is making many traders head spin. No doubt, Goldman is engineering a plethora of "shakeouts" and "fakeouts" to burn its biggest clients who have outsized positions in various stocks or sectors.

Analyzing the just released Treasury funding expectations, and juxtaposing the data with January tax withholding data indicates that Tim Geithner is unjustifiably optimistic about the Treasury's need to borrow less than expected in the January-March period. Once the Treasury is forced to recognize the incremental borrowing needs, the Treasury market is likely to react adversely due to the apparently lack of foresight exhibited by analysts at the US Treasury Department.

In a seeming reversal of yesterday's FT rumors that Chris Dodd would do everything in his power to undermine the passage of the Volcker rule, as part of his prepared remarks at today's hearing on high-risk investment activities by banks, Dodd said that he "strongly supports" a proposal to restrict large commercial banks from engaging in significant proprietary trading or owning hedge funds or private equity arms.

Paul Volcker's live testimony before Chris Dodd's Senate Committee on Bribery, Vice and Corruption can be seen live here.

With every Tom, Dick and Harry convinced they can take on Goldman's Jim O'Neill and come up with a wittier, edgier, Gen Y/Z BRIC equivalent, Zero Hedge has decided to join the fray. We present the STUPIDs: Spain, Turkey, UK, Portgual, Italy and Dubai. We admit that while the BRICs and some the other more ridiculous sounding acronyms we have seen out there recently are a gauge into various countries' pent up "growth" potential, the STUPID index is merely a countdown to the inevitable sovereign debt implsion that so far has been postponed due to cash printers working on overdrive 24/7. And to make it simple for the armchair acronym specialists, since the index is in CDS, the chart will go up... but not on the pervasive permabullish sentiment.

Gee, channel break out... on negative trendline volume. Where have we seen this algo driven market before? Yawn. Wake us up when one SPY VWAP order can move the market 10%.