Archive - Feb 2010 - Story

Ben Bernanke has got to be laughing it up after being reappointed to another term as Federal Reserve chairman. What else could we expect from the ex-lawyers and lifetime Beltway bandits voting on global monetary policy? As he starts his second term, I’m once again reminded about how supremely unqualified this man is for the job. Prior to becoming Fed chairman, Ben Bernanke basically had zero experience outside academia. His resume only includes three full-time years working for the Federal Reserve and eight months on George W. Bush’s Council of Economic Advisors. The other 23 years of his career were spent teaching college.

Jose Pinera provides an Entitlement State 101 lecture, in which Chile's former Labor and Social Security Minister demystifies the U.S.'s $100 trillion unfunded benefits problem. Since Pinera is the man who many years ago privatized Chile's entitlement system, America, and the entire Western system, which for the past century has been relying on unfunded liabilities to provide benefits to the population in the hopes that funding day will never come, may do well to listen to what he has to say. His message: the American way of life, more so than anything else, in which reckless spending, living on credit and not saving for the future, is precisely why the US will be bankrupt very soon. Chile swallowed the bitter pill 30 years ago and after a lot of pain, managed to get out of the hole. Will enabler state #1, America, fail where this allegedly "backward" South American country succeeded?

Tomorrow's Bernanke testimony will be eagerly watched by all, not so much for anything that may be revealed in the prepared remarks (those will not disclose anything not already known), nor for the Q&A (because unfortunately the people in Congress who understanding the first thing about monetary policy can be counted on two fingers), but because it is not every day that the undisputed and underrepresented ruler of the not so free world gets to sit down in a kabuki theater in which he pretends to be accountable to some 300+ million peasants and a couple million compulsive gamblers and kleptomaniacs. All in all good, wholesome, TiVoable, and, luckily, just biannual fun. Yet for those who hope to get something out of this meeting than merely a popcorn overdose, we recommend the following Testimony Preview from Goldman's Hatzius & McKelvey, which goes through not only the background of the spectacle but focuses on some oddly relevant questions which our Congressmen may be wise enough to ask. We point out the latter, because we know full well that nobody will ever ask the really relevant questions (until it is too late), unless of course Alan "Taz" Grayson is wearing his dollar tie, In which case all bets are off.

Not a good day for consumer confidence. First, the vastly irrelevant Conference Board crashed and burned earlier, dropping nearly 10 points below consensus expectations after its only driver, the market, turned down in January, showing just how unreliable this index is, and now the ABC Consumer Comfort came in at the "dreaded" -50 level (and don't get us started on UMich, whose entire rolodex consists of the home phone numbers of Blankfein, Dimon and Pandit). The is the lowest reading for the index since -51 recorded in October 2009, and just 4 points above its 24 year record low. Of the three main readings in the index, the Personal Finance component declined even as Buying Conditions and the National Economy both stayed at depressed levels. Notably, the racial gap among the respondents who view the economy as being in total shambles has all but disappeared, even as increasingly more Democrats perceive the economy as worse off than Republicans. Funny, isn't the president a Democrat?

With Geoffrey Batt

With everyone's attention drawn to each and every step the IMF takes, while contemplating the imminent Greek bailout, which without exception and with the grace of a drunk 3-ton bull in a China store, leaves nothing but annihilation and currency boards in its wake, is the popular opinion once again getting the Houdini treatment courtesy of the mainstream media? One thing learned over the past year is that everything is a distraction for something else, and that something else, quite usually without failure, ends up being the Marriner Eccles building on Constitution Avenue in D.C. What we refer to is disclosure from a paper written by none other than the Maestro Jr, in 2004, titled "Conducting Monetary Policy at Very Low Short-Term Interest Rates" (oddly appropriate). In this paper, Bernanke discusses not only the possibility of purchasing corporate assets (bonds and stocks), but emphasizes that one other security class which the Fed may be inclined to acquire under conditions such as those today, and has an explicit authority to do so, are foreign government bonds. After singlehandedly rescuing every Wall Street bonus in the prior year, is the Fed now the shadow backstop for the Greek economy as well?

Cutting straight to the chase, and to Bernanke's musings:

From Fox Business News and its latest addition, Charlie Gasparino:

[Erin Callan] went to Credit Suisse and then she went on a lengthy leave of absence.  It was pretty bizarre—she was gone from the scene, until, from what I understand—I checked yesterday—December 31st she’s officially out of there.”

Note: not a single mention of this on CNBC yet. Of course, nobody gives a rat's ass about Lehman's former CFO, or this news in particular. What is interesting, are the dynamics at play now that CNBCOMASTAGANDA (49/51) is stuck without even one investigative reporter in possession of even half a rolodex. Sure, flashing wire headlines are great, but anybody can do that, even fringe bloggers. Absent Rick Santelli (and on occasion David Faber), the network does not have a single person worth unmuting the TV for. And if we want to listen to propaganda ad nauseam we are sure someone will recreate Goebbels constant radio droning on some 24/7 stream relatively soon. And this is precisely what Bloomberg TV and Fox Business are waiting to pounce on.

David Roche, former Head Of Morgan Stanley Research And Global Strategy, and currently president of Independent Strategy shares perspectives that should be read closely by any bull who believes that there is anything else to this market rally than pure liquidity driven euphoria riding on the coattails of the Fed's Quantitative Easing program. Deconstructing one by one all the myths that make up the arsenal of every pundit who appears on CNBC to talk up their book, Roche concludes "Of course, the insider game between financial institutions and the central banks can go further. But we do not want to be a part of it because it is unsustainable. It is as finite as QE." And QE is ending in one month, at about the same time when Greece will have to bailed out as its money will finally run out. About 30 days and counting.

Okay, maybe not something that would look good on a billboard- but today Toyota apologized for its safety issues- and how they handled them.

"In a volatile and ultimately difficult month for global equity markets, the Fund returned a profit of 1.2%. Going into February the Fund has increased its government bond exposure with an additional 7.5% points in the German 30yr Bund. The Fund has also added to the currency holdings with a 3% long US Dollar/short South African Rand position. The current portfolio is 25% of NAV long equity, 1.5% short equity (via Eurostoxx put options), 24% government bonds, 4.5% corporate bonds, 1.8% commodities and 29% currency." Hugh Hendry

Game plan has been to play long in Gold since 1,063. However we advised taking chips off the table partially at 1,125 as the market has not validate a break-out with a daily close. We have pulled back on the 1,097/1,100 support zone today, we would be cautious here. If we break lower the market will drop to 1,076 (61.8% of recent rally, and support zone established Januray 28/29), and possibly down to 985/1,011 which cannot be violated at the risk of invalidating the bullish dynamic completely (keep in mind we are still fighting deflation in most developped economies...). On the upside we need a daily close above 1,125, and then 1,165 to confirm a rise towards new highs. Note that a drop to 1,076 followed by a rise past 1,125 would form an inverted H&S so the market would likely accelerate past 1,165 at that point. - Nic Lenoir

Just headlines for now. Headlines will turn to headaches for Goldman longs shortly. And what will really set off the migraine is the just released announcement that the European Commission will back a Tobin Tax on financial institutions. We are fairly confident that this would not be proposed without at least a preliminary nod from their counteparts across the Atlantic. We believe that the slow but certain conversion of the banking sector into a utility industry is now reality. And yes, bonuses in utilities max out at 25% of the base, not 2,500%.

We previously wrote about the possibility of a bank run in Greece following unsubstantiated reports that Greek citizens don't trust the Greek financial system all that much anymore, courtesy of the whole bailout and GDP reporting fraud thing. The rumor was not only just confirmed and also quantified: Dow Jones reports that in the past three months Greeks have moved about €8 billion out of local banks "fearing a possible new tax on bank accounts, increased government scrutiny on assets and a run on the banks if Athens is forced to turn to the International Monetary Fund." This represents over a quarter of the money held by private banks in the country. This also represents about €400 billion in total money leaving the system courtesy of fractional reserve banking and the money multiplier. Yet the worst news for Greeks: money controls are coming.

• Yields 0.895% vs. Exp. 0.88-0.90
• Bid To Cover 3.33 vs. Avg. 3.21 (Prev. 3.13)
• Indirects 53.60% vs. Avg. 42.45% (Prev. 43.22%)
• Indirect hit ratio 65%
• Allotted at high 14.79%
• Direct take down: 8.2%

The ascending channel in the ES has now been broken, with barely notable volume - just kidding. With volume spiking (remember market algo 101: volume low, buy; volume high, sell) today is not looking good for the bulls.

Today's 4 week Bill auction was unique in that the hit ratio for the indirect bid hit a record (and can't really go any higher) at 100%. We have charted the hit ratio over the past 3 months, where aside from the window dressing auction from December 29, the average ratio has been at 68% (69% including that particular 97% hit ratio auction). The implications from this result: the Indirect bidders put the greatest amount of 0.000% or as close to preliminary bids as possible (remember, this means bidding at the highest actual bond price), followed by directs and primary dealers as we approached the 0.055% stop out to fill the $31 billion reverse dutch auction. Yet the hit ratio has never been 100% before (or at least not according to our data). This means that indirects are not price fishing, trying to jigger the auction with low ball bids: they are simply reducing their absolute nominal exposure to the Bill space, further confirming the TIC data which showed China is now happy to let its Bills expire without rolling . We expect an increasing amount of 100% hit ratio Indirect bids in Bill auctions in the future, as the full amount of Bills tendered progressively declines, forcing Primary dealers to take down 80% or more of all future Bill auctions.