Archive - Aug 18, 2010 - Story

Reader Mark submits the following list of eight questions to the attention of Tim Geithner, requesting clarification on the "Other Investors" category of bond purchasers in the Z.1, and also seeks several other answers. Mark notes: "In perusing the 2010 Q1 Treasury Bulletin, released June 11, 2010, I am left with many questions concerning the ownership of US Treasuries (Table OFS-2). What follows is a list of specific questions I submit to you on behalf of the American people. Please be advised that your responses (or lack thereof) will be made public." We believe this query deserves broader public scrutiny as it does pose several relevant questions at a time when even the smallest hiccup in rates would throw the Treasury curve out of skew and present big concerns for the funding of the upcoming ~$10 trillion in new bond issuance.

Earlier rumors of a liquidation-based selling have proven to be false, as gold has surged by over $12 from the day's lows to its highest level in months. Elsewhere, the new carry correlation trade confirms it is truly the 2s10s30s butterfly that is the new source of funding for stocks, and for spiking HFT momentum. And the big institutions who have now gamed the latest funding pair, continue to sell into the HFT bid, as stocks rise purely as a side effect of a normalization in the butterfly wings, and never on any actual fundamentals, which as David Rosenberg once again demonstrated earlier, continue to get worse and worse. But remember: GM has to IPO today, and Geithner can't possibly do it on a downtick, let alone a red close. Also, we have another POMO tomorrow as the Fed once again prepares to give a blank check to the PDs to ramp the S&P another 3% higher. All in all, another day in Central Planning.

Those patiently following the Greek Bond-Bund spread to its inevitable conclusion have been fully aware that the plan that Europe is betting its entire future on, is patently flawed: namely that austerity, by its definition does not, and will not work. In fact, instead of bringing stability, austerity will slowly but surely eat away at the economy of whatever country it is instituted in - in some cases slowly, in others, like Greece, very rapidly. Indeed, the Greek spread has now risen to levels last seen during the early May near-revolution in Athens, at well over 800 bps. And for the specific consequences of austerity, Germany's Spiegel has done a terrific summary of what it defines as a "death spiral" for the Mediterranean country: "Stores are closing, tax revenues are falling and unemployment has hit an unbelievable 70 percent in some places. Frustrated workers are threatening to strike back. A mixture of fear, hopelessness and anger is brewing in Greek society." Spiegel quotes a a typical Greek: ""If you take away my family's bread, I'll take you down -- the government needs to know that. And don't call us anarchists if that happens! We're heads of our families and we're desperate." All those who think violent strikes in the PIIGS are a thing of the past, we have news for you. The (pseudo) vacation season is over, and millions of workers are coming back. They may not have money, but they have lots of free time, lots of unemployment, and even more pent up anger. Things are about to get very heated once again, first in Greece, and soon after, everywhere else.

Paul Farrell knocks it out of the ballpark today: "Yes, it's going to get worse, a whole lot worse ... Bill Gross warns this is the "New Normal. Forget 10% returns. Think 5%". ... Economist Larry Kotlikoff, author of The Coming Generational Storm, warns: "Let's get real. The U.S. is bankrupt. Neither spending nor taxing will help the country pay its bills" ... Economist Peter Morici warns: "Unemployment is stuck near 10%. Deflation coming. Stock market threatens collapse. The Federal Reserve and Barack Obama are out of bullets. Near zero federal funds rates, central bank purchases, a $1.6 trillion deficit have failed to revive the economy." ... Simon Johnson, co-author of 13 Bankers, warns: "We came close to another Great Depression, next time we may not be so lucky." Why? Because Wall Street's already well into the next bubble/bust cycle -- the "doom cycle."

We are getting a sense why traditionally optimistic and hopeful Americans tend to broadly despise realists...

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 18/08/10

In advance of Druckenmiller's resignation, Duquesne Capital was kind enough to supply an updated 13F with a listing of its $2.4 billion in stock holdings. The top 50 positions are presented below, now that the firm will be actively dumping shares as it enters wind down mode. The top 5 holdings are: Apple, Wells Fargo, McDonalds, JPM and Cisco (the last one must have hurt).

A week ago Goldman raised its price target on gold to $1,300/ounce, an action which judging by the firm's historical record of putting its clients' interest in its rightful last place, led us to be skeptical: "The report will likely result in a brief pop in spot as the idiot money rushes into the latest Goldman trap. Alas, it
also means that GS is now offloading. Be very wary of market dynamics
over the next month." Today we realize our skepticism was perfectly justified: in the latest Perspectives from Goldman Sachs Asset Management (intended FOR BROKER-DEALER, FINANCIAL INSTITUTION, OR INSTITUTIONAL INVESTOR USE ONLY. NOT FOR DISTRIBUTION TO CLIENTS OR THE GENERAL PUBLIC), in addition to summarizing all the other recent actions presented by the firm's key departments, way in the back, in very small print when discussing commodities, the letter author notes: "Shifted our stance on gold after years of being long; see gold as vulnerable to Central Bank inactivity in the face of rising deflation risk." Once again, those who bet that Goldman does precisely the opposite of what it tells clients to do, win.

One more casualty of the machines carted off the trading floor. "Druckenmiller, 57, said he was tired of the stress of managing money for others and frustrated by his failure in the past three years to match returns that had averaged 30 percent annually since 1986." And retail investors hope to have any chance in this market where the big boys can no longer cut it? Good luck.

Ever wonder why the SEC, FINRA and all other regulators actively continue to ignore the flagrant quote stuffing, frontrunning (yes, Flash trading is still a perfectly accepted practice) and all other destabilizing market activities facilitated and performed daily by High Frequency Trading (when comparable such actions result in jail sentences in Norway)? Hopefully the chart below will explain it...

The Administrative Office of the U.S. Courts reports that personal bankruptcy filings for the year ended June 30, 2010 surged to a five year high, hitting 1.57 million, a 20% increase from the prior year. Furthermore, in the period between April and June, there were 422,061 bankruptcy filings, a 9% increase from the 388,148 in the previous quarter, and up 11% from 381,073 a year earlier. As Reuters highlights, quarterly filings surpassed 400,000 for the first
time since a record 667,431 bankruptcies were begun in the fourth
quarter of 2005, when Congress overhauled federal bankruptcy laws and
made it harder for people and businesses to file. Yet while that was an administrative adjustment to bankruptcy law, this time it is all organic, and an indication of the ongoing incapability of America's politicians to fix the economic collapse. Indicatively, Nevada had the highest rate of filings on a per
capita basis in the last year, with 11.74 per 1,000 people, while Alaska
had the fewest, with just 1.58 per 1,000. The states with the most bankruptcies were California (241,975), Florida (107,373), Illinois (80,801), Georgia (77,809), and Ohio (72,924). A full split of all bankruptcies by state and by filing type is presented below.

The Fed is back buying Treasuries. Yesterday's pop in equities was a nice resh reminder of what happens when the Fed pumps liquidity into the system. I added a chart of the 10Y US Treasury future because it is too funny to be ignored: the market rallies ahead of the Fed buying... and then dips, so the Fed not only injects liquidity in the system supporting a doomed market with your tax dollars, but it also splashes primary dealers in the process. The gift will keep on giving. I am working on digging up the hourly price action for the 24H before and after the POMO days of 2009 in order to isolate the patterns for equities and Treasury futures and also try to measure the impact of the maturity being purchased on the curve. More to come on this when I have a chance to finish the study! Remember tomorrow is a POMO day so don't expect Treasuries to lose their bid, and then expect tomorrow to see today's gains washed away as dealers cash in. After all can you blame them: would you sell today if I told you a multi-billion buyer is guaranteed tomorrow? I didn't think so... - Nic Lenoir

• The end of Germany export miracle confirmed? Germany Current Account (Euro) for June -1943MM Previous 250MM
• Mortgage Applications Rise 13% As Refinancings Soar (Bond Buyer)
• Siegel and Schwartz: The Great American Bond Bubble (WSJ)
• China Doubles Korea Bond Holdings as Asia Switches From Dollar (Bloomberg)
• China Asks Banks to Study Mortgage Loan Defaults, 21stReports (Business Week)
• China Drains Obama Stimulus Meant for U.S. Economy: Andy Xie (Bloomberg)
• Ukraine set to halve grain exports (FT)
• Geithner Sees U.S. Role in Mortgage Market (WSJ)
• Mortgage Market Knocked By 'Mega-Refi' Talk (WSJ)
• Bill Gross: Refinance Wave Could Lift Home Prices (WSJ)
• Chavez signs law barring Venezuela brokers from fx, govt debt (Reuters)

• Asia stocks rise for fourth day, bond risk drops on US output; Yen gains.
• China doubles Korean bond holdings as Central Bank switches from US debt.
• Germany's Q2 GDP growth unlikely to continue : ZEW survey.
• US govt will likely continue to play a role in guaranteeing mortgages: Geithner.
• Vietnam devalues currency by 2.1% to boost exports as stocks approach bear market.
• Wholesale costs in the U.S. increased in July - first time in four months.
• Vestas Wind Sys swings to Q2 loss of €119M, as revs fall fell 17%. Cuts 2010 outlook.

Economic Calendar: Data on Crude Inventories to be released today.

After last week 2 European banks announced they are using $430 million in a Liquidity Providing 7 Day USD operation, better known as suckling on the Fed's FX swap line, today's the ECB confirmed that one bank had bid on the facility, effectively withdrawing $35 million. The operation came at a rate of 1.19%, higher than last week's 1.18%. It is unclear if the lone bidder is one of the two banks that used the swap facility in the prior week. All this confirms is that the liquidity situation among European banks is certainly not getting better, as financial institutions continue to be squeezed for both dollars and euros, even as the 3 Month Euribor spot had receded slightly in the past week, in direct correlation with the EURUSD fixing.

The British pound jumped 50 pips earlier after the BOE decided to keep rates unchanged at 0.5% and not increase the level of QE from the current 200 billion pounds. In a situation that mirrors our own, the bank's board saw one member,  Andrew Sentance, voting for a rate hike, with 8 others deciding to keep rates at the current 0.5%. Sentance pushed for an increase in the rate to 0.75 percent on concerns that inflation expectations may become dislodged. And in a somewhat analogous loosening-tightening dynamic to that of the US, even as many had expected the BOE to actually loosen some more by raising the amount of QE, the bank kept QE total at the existing level, without adding on a Lite, 2.0 of some other silly designator. The reason is that unlike in the US with its doctored core CPI metric, the UK is already experiencing inflation over 3%. As BusinessWeek notes: "Annual consumer-price gains exceeded the 3 percent ceiling in July,
requiring King yesterday to send a public letter of explanation to
finance minister George Osborne on how he plans to control the cost of
living. King argued that inflation has been driven higher by “temporary”
factors and reiterated the central bank’s readiness to change policy in
either direction." It appears that for the time being, the US is all alone, and well in the lead, in the currency debasement via more printing race.