Archive - Jun 16, 2010 - Story

EVERY GDP rebound in US has been led or at least accompanied by a rebound in housing starts. The one exception was the period 1963-66 (highlighted in blue), which occurred under Lyndon B. Johnson's presidency. Then as now the divergence in GDP from housing was heavily driven by government spending under the "Great Society" legislation, which included Medicare and Medicaid as well as significant spending on Vietnam (sound familiar). Ultimately, the binge was unsustainable and growth collapsed starting in 1966 as bond the vigilantes started to growl and inflation picked up. This is the scenario I believe we are facing and I think that growth will erode significantly into the end of the year as the economy falters possibly dragging growth to -3% YoY by Q1 of 2011. Further fiscal spending will be impossible as the public mood is turning against spending and political gridlock will tighten ahead of this autumn's elections. The big difference between the 60's and now is that we aren't looking at inflation but full blown deflation.

If anyone still harbored any doubts that there is an urgent need to resolve the Middle East crisis one needs only look at the events that unfolded two weeks ago off the coast of Gaza when Israeli commandos stormed a Turkish relief vessel heading for the besieged Palestinian territory. The end result of that operation, one which turned out to be a monumental public relations fiasco for Israel, was that it raised the level of animosity between Israel and Turkey, a level which was already dipping well into the red zone – pushing it another notch deeper into the danger zone. One must not forget that Turkey is a full-fledged member of the North Atlantic Treaty Organization and that further schism between the Jewish state and a NATO country could have serious implications on the Alliance.

The master book talker, does what he is a master in - talks his book. In other news, as BP has about $24.9 billion left in debt, could all American Pension funds purchase it post haste, so that a collapse of BP would not only cause widespread pension destruction, but yet another US taxpayer funded bailout. One thing that is (virtually) certain- the Chicago TRS is selling each and very BP CDS, just cause, you know, they like to live dangerously.

Tomorrow Spain is coming to market with €3.5 billion in 10 and 30 Year Bonds, which just like all previous recent auctions, are expected to come in at far wider spreads to prior issuance in May and March. The 10 Year benchmark will come with a 4% coupon, while the 30 Year will have a 4.7% clip. Which is not to say these will come at par. At the last 10 Year issuance on May 20, the 10 Year came in at 4.045%, while the 30 Year priced to yield 4.758% on March 28. Reuters reports that some so-called analysts see demand for the bonds to be strong: "Domestic has supported until now and I don't see why that would change," said sovereign debt analyst at RBS Harvinder Sian. Of course, this is the same Harvinder, who blasted Zero Hedge for correctly predicting the bank run in Greece in February, long before anyone else, at a time when investors could have listened to us, instead of Sian's soothing words, have a great exit point and not lose their shirts, unlike those who are still holding bonds at a 600 spread. In other words, in our book Harvinder is as good a contrarian indicator as Goldman's FX team, and is simply confirmation that in addition to Greek exposure, RBS is likely loaded to its nationalized gills with soon to be even worthlesser Spanish Treasuries. Our advice: fade the auction, especially with refuted, and thus confirmed, rumors that Spain is not, repeat not, about to demand €250 billion in European/IMF rescue funds. And, as if anyone needed another indication, the ticker of Banco Santander is STD... That about says it all.

Let's see: Simmons sees BP at $0 and expects nukes to be deployed to clean it up its mess; Simmons & Co. on the other hand upgrades BP to a Buy on Friday with a $52 PT. Should pretty much explain it.

Back in February, I wrote about a $2 bet I’ve had with a colleague since last spring on the state of the housing market. My side: residential housing had further to fall. His side: the worst was behind us. We spoke the other day and I told him to start saving: the housing market is about to take another tumble.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 16/05/10

For the first time in over 2 months, last week CDS traders ignored their ongoing derisking barrage in Great Britain CDS, and instead shifting their attention to the very heart of European darkness, the two countries that are in charge of it all - Germany and France. There was over 750 million worth of German CDS derisked, in 58 contracts, with France close behind at $728 million. Two other notable names rounding out the top five were Turkey and Spain. Quiet, little Finland was there for some reason. Other name filling out the list of top 10 were Brazil, Ukraine, Korea, Portugal and Japan: all names that have very valid reasons to be concerned about their future, and CDS traders agree. On the other end, rerisking was rampant in Mexico, Slovenia, Holland, Indonesia and Thailand. Most likely these are just hedge pairs as there is no reason why any of these names should be in play. Two names which we will focus on shortly, Romania and Bulgaria, were in no man's land. We expect they will slowly migrate toward the red part of the chart.

You know it, you love it, it's here. The daily EURJPY-ES decoupling appears like clockwork the second there is any BP news. ES takes off like a bottlerocket, even as E&Y (representing EURJPY, not an incompetent and allegedly criminal Repo 105 specializing auditor). Sell ES here, buy EY. Rinse. Repeat.

WASHINGTON — BP tentatively agreed on Wednesday to create a $20 billion fund to pay claims for the worst oil spill in American history. The fund will be independently run by Kenneth Feinberg, the mediator who oversaw the 9/11 victims compensation fund, according to two people familiar with the deliberations.

In May, US listed ETFs were down 5.7%, or $47.3 billion, to $788.5 billion. The decline was less than the general US market performance of 8.2% due to $7.9 billion in net inflows across ETFs, even as market values declined. Of various ETF asset classes, not surprisingly, commodities performed the best, seeing the bulk of the inflows, or $5.1 billion, bringing total commodity assets to $74.6 billion. Drilling down even further, the one single ETF that represented more than half of the positive inflow was the SPDR Gold ETF, GLD, which saw $4.2 billion in May inflows,bringing total assets to $49.2 billion. The exodus from paper to real assets continues, and a very confused Ben Bernanke is powerless to stop it.

The BP Curve has really flipped (out). The 1 year point on the curve is now over 1,000 bps, a 400 bps move in one day. The point is also offerless (bidless in traditional cash jargon). Granted the DV01 so close to 0 is rather low, but this kind of ridiculous curve inversion is simply wreaking havoc on correlation desks. The 6 month point is now 0.5 pts upfront. Pretty soon BP will need to apply for the same ECB bailout that rescued all those banks who were risking a wipe out when Greek spreads were trading at comparable levels. The question now becomes: who sold the bulk of the BP protection? BofA's announcement yesterday that it is limiting counterparty risk exposure with BP to all contracts over 1 year could be a rather material clue as to the identity of at least one such entity.

In a stunning development for millions of American who no longer pay their mortgages with the blessing of Uncle Obama, only to use all this "excess" money to buy Apple apps and whatever latest gadget Steve Jobs' gizmo factory comes out with, they are now fresh out of luck in redirecting cash flow that otherwise would go to adding some much needed realistic cash to support bank mark-to-myth balance sheets (we wonder if the FASB will ever release a pro forma analysis of how many hundreds of billions, if not trillions, the combined TBTF capitalization is underwater if banks are indeed forced to mark their loans to market). In an internal AT&T memo, reported by the Boy Genius Report, and likely leaked intentionally to drive up the iPhone 4 release frenzy a few notches higher, the firm has told its employees "that pre-orders for the iPhone — whether they be new activations, upgrades, or exchanges — have been “temporarily suspended.” What will the great unwashed masses do now? Could this, gasp, force the pathetic US Savings rate to increase above its one year low reading in the mid 3%, thus spitting in the face of the Fed Chairman, whose doctrine of "spend now, worry about maxed out credit cards tomorrow" is being flagrantly ignored? Surely civil disobedience can not be far behind if Americans are thus prevented from spending the money that contractually belongs to their mortgage servicers.

A not very long time ago, in a galaxy known as the Milky Way, the member of an occult group of sinister individuals warned that should this group ever get to a point where it believed it could fix fiscal problems through printing money, this would present "a paramount risk to the long-term welfare of the U.S. economy." The group is better known as the Federal Reserve and the individual was Dallas Fed president Richard Fisher. The same Richard Fisher, who recently wrote about the FinReg unaddressed concept of how Too Big To Fail will lead to another massive systemic crash, went as far as saying that "even the perception that the Fed is pursuing a cheap-money strategy to accommodate fiscal burdens" would be disastrous, and that "the Federal Reserve will never let this happen. It is not an option. Ever. Period." Boy, was he wrong. Nonetheless, Fisher's speech from May 28, 2008 before the Commonwealth Club of California, should be read by all Keynesian fanatics as it is without doubt one of the most lucid presentations of rational thought from the ranks of the Fed. With observations such as that "we know from centuries of evidence in countless economies, from ancient Rome to today’s Zimbabwe, that running the printing press to pay off today’s bills leads to much worse problems later on", one may only hope that all those who advocate even more rampant spending and irresponsible money printing to "fix" the economy, will finally see the light. Alas, mired in their own stupidity, they won't. And Fisher's words, so prescient in 2008, yet so ignored, will suffer the same fate today, and the Fed will continue on its way to singlehandedly destroying this once great country.

Once again, aided and abetted by some soothing noises out of the financial media, and some non-disastrous bond sales in Europe, the bulls decided to take another run at the resistance at the 200 day moving averages (DMA). First, they fueled up the tank as the dollar dipped and the Euro bounced. That brought the usual response – oil and most commodities rose as did U.S. stock futures. The initial assault by the bulls retreated slightly on some less than glorious housing data around 10:00. The media pundits dismissed the data dip as an “expected reaction” to the ending of the real estate tax incentive. That allowed the bulls to regroup within twenty minutes.