Archive - Aug 2010 - Story

Some interesting observations out of BofA's Jeffrey Rosenberg this morning, who plots the inverse correlation between the 2 Year yield and the Fed Fund futures implied time until the first Fed tightening. No surprise there, as the correlation is pretty much inverse, with the lower the 2 year yield goes, the further out into the future is the Fed's expected first tightening episode. Given the recent (expected and confirmed) collapse in the economy, this is no surprise. What is somewhat interesting, however, is plotting the increasing probability of a Republican control of the House versus the Fed's liquidity mopping expectations. Here, the two correlate almost one to one. This can be interpreted that the longer the economy deteriorates, the greater the revulsion toward the current political regime. Hopefully the consequence of this observation, that the Republicans will endorse a perpetual dovish stance on the Fed, is not true. Although at this point believing that the Fed will ever tighten again before there is a (violent) regime change seems quite naive. Lastly, some very bearish considerations by Rosenberg, who now estimates that the expiration of the Bush tax cuts will have an impact of 2% annualized reduction in household income worth about 1.3% of GDP, and that "such an increase if not reversed could trigger a double-dip recession." Setting aside the fact that we already are in the dreaded double D, the question of just how much worse the economic reality will get unless there is something done on the tax front, bears consideration by whatever is left of Obama's economic team.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 31/08/10

Submitted by Themis Trading

Bachus Hensarling Letter to Schapiro, and Our Comments.

This morning we awaken to find the Bachus/Hensarling August 24^th
2010 letter to Mary Schapiro in our inbox, which we include as an
attachment for you to read. Ever since the HFT industry formed their own
lobbying group in Washington DC a few months back, we have expected a
letter like this to surface. We certainly have expected it to surface
given the recent anti-HFT media attention post May 6^th. Please allow us summarize their letter for you. In 2008 markets functioned exceptionally well. High Frequency
Trading is beneficial to all. We all benefit from their liquidity. If it
goes away we will all suffer.  Spreads have never been narrower. Costs
of trading have never been lower. There is no evidence that flash order
types are bad. Don’t make any changes unless you have more data. Turning
back the clock on innovation will do harm. With our bias in mind,
please answer in writing to us by September 10^th, 2010 the following 15 rhetorical questions. Had we told you this letter was written by the HFT lobby, you would
have shrugged while commenting that such drivel is what you would expect
that lobby to say. Perhaps we all should shrug less, and be more
alarmed, that it comes from two congressman up for re-election, and
written on the Committee on Financial Services letterhead. Incidentally,
you can see who contributed to Representative Bachus so far in 2010
here : Open Secrets Bachus, and you can see who contributed to Representative Hensarling so far in 2010 here: Open Secrets Hensarling.

And meanwhile in Europe, things are going from horrendous to abysmal. The EURCHF just touched on a fresh all time record low, as everyone is now funneling their capital, deposits and assets into Zurich, Geneva and Bern. Hungarian debtors are now writing in pain, as is Phillip Hildebrand as the Swiss export industry is one foot in the grave. All those in the market for a new Patek perpetual calendar will have to wait.

Time to short the ES, long the AUDJPY. With nothing except momentum (and grotesquely mutated at that) working right now, the recent batch of horrible news only managed to push stocks about 8 points rich to intrinsic. It seems the beta chasing levered play is getting exponential, with corerlation desks now applying multiple of leverage to underlying correlations that were not there before, explaining the disproportionate surge in the ES compared to the move in AUDJPY. Which is why the time to put today's FX-risk convergence trade on is now.

The Conference Board reported a 2.5-point increase in its index of consumer confidence, to 53.5. Although this was better than generally expected, the composition of the change was soft. In particular, the gain was all in expectations; the index of present situation fell to 24.9 from 26.4. Moreover, the split between those seeing jobs as plentiful vs. hard to get widened to -41.9% of the respondent sample from -40.7% (revised from -41.5%) previously. As a result, we have judgmentally adjusted the US-MAP reading to show no significant surprise, with the composition offsetting the better-than-expected headline. - Goldman Sachs

Paul Farrell's take on Jeremy Grantham's recent essay Seven Lean Years (previously posted on Zero Hedge) is amusing in that his conclusion is that should Obama get reelected, his entire tenure will have been occupied by fixing the problems of a 30 year credit bubble, and if anything end up with the worst rating of all time, as the citizens' anger is focused on him as the one source of all evil. "Add seven years to the handoff from Bush to Obama in early 2009 and you get no recovery till 2016. Get it? No recovery till the end of Obama's second term, assuming he's reelected -- a big if." Also, Farrell pisses all over the recent catastrophic Geithner NYT oped essay, which praised the imminent recovery which merely turned out to be the grand entrance into the double dip: "In his recent newsletter, "Seven Lean Years Revisited," Grantham tells
us why expecting a summer of recovery was unrealistic, why America must
prepare for a long recovery. Grantham details 10 reasons: "The negatives
that are likely to hamper the global developed economy." Sorry, but
this recovery will take till 2016."

nsumer confidence comes in at 53.5 in August versus 51.0 in July: somehow the fact that the economy officially double dipped in the month was lost on the 6 or 7 top CEO respondents in the Conference Board rolodex. Just one word can explain this one: Lol. At least the idiots at the CoCo retardo institute made their tail wags dog shell game seem just a little credible by declining the read on the job plentiful from 4.3 to 3.8, and there was even a decline in the jobs hard to get category from 45.8 to 45.7... but somehow confidence was higher. Enjoy your bizarro day trading.

The Chicago August PMI just came out at a new 2010 low of 56.7, missing expectations of 57.0, and a plunge from the prior read 62.3. The decline was across all key subindices, with Employment (55.5), New Orders (55.0), Prices Paid (57.2), and Production (57.6) all coming in below the prior prints. And yes, this was a miss, which makes it a little odd and embarrassing trying to explain to dramatic surge in the AUDJPY (and its derivative, stocks) the second this number hit the tape: almost as if someone will do anything in their power to prevent a plunge in the market on this day of ongoing weak data, especially since the NY ISM came in at a one year low earlier, confirming the double death of the economy.

The two month delayed Case Shiller index came in at 4.4% for Q2, after having fallen 2.8% in the first quarter. Nationally, home prices are 3.6% above their year-earlier levels. In June the Y/Y change for the Composite 20 portion of the index was 4.23% on expectations of 3.6%, with the previous 4.61% revised to 4.64%. Again, as this index shows how the economy performed almost a quarter ago, this can and should be completely ignored. Furthermore, the non-seasonally adjusted index came in at a far more somber 2.3% increase, but this number too is irrelevant. Obviously, nobody has explained the definition of lagging indicators to the computers trading the SPOOs, so this headline was enough to push futures a few handles higher, even though we have much more coincident data that show just how bad housing has been in July already. But who cares. Just give Atari an excuse to do its positive feedback loop thing.

• Waldo spotted: secondary accounts of Zhou's whereabouts come streaming in as a panicked China can not put enough pictures of him on the PBoC site, Japan can not confirm his existance loudly enough (Bloomberg), Stratfor now reports defection has been refuted (Stratfor), and Washington Post confirms no sightings of Zhou in downtown D.C. (WaPo)
• Gold Rallying to $1,500 as Soros's Bubble Inflates (Bloomberg)
• Steve Keen - Bernanke's blind spot (Business Spectator)
• Ireland Seeks to Wean Banks Off State Guarantee (FT)
• China should act if property market defies cooling  (Reuters)
• Japan Defends Economic Policy Steps as Yen Strengthens Anew, Stocks Slide (Bloomberg)
• US Housing woes compound job fears (FT)
• Bernanke's song & dance act in Jackson Hole (Post)
• The Paradox of the Zero Bound (Hussman)
• Bank of Japan takes fresh stimulus steps (except for actually taking any real steps, the SNB can do that) (FT)

Here are the highlights of today's economic data release schedule: Case-Shiller, Chicago purchasing managers, Conference Board confidence, FOMC minutes, ABC consumer poll.

The firm, whose calls so far in 2010 on the EURUSD have been a reactionary disaster and cost clients millions, once again contemplates its navel, after the EURUSD has been trending increasingly away from its latest mid-term 1.35 target (but directly toward its 3 month target of 1.22). That said, it appears the Goldman FX guys are about to drop their 6 and 12 month forecasts on the pair once again, now that the EURUSD has tumbled almost 700 pips from recent 1.33+ highs, at the peak of Europe's artificial and so very temporary, export-driven economic golden age. Goldman's Mark Tan explains why.

• Asian stocks fall as US data fuels economic growth concern; Sony drops.
• Australia's current-account deficit totalled $5.05B in Q2, down 66% from Q1 levels.
• BOJ is 'too little, too late' in tackling Yen, Nakahara says. Nikkei finishes down 3.6%.
• Eurozone Confidence rose for the third straight month, to 101.8.
• Eurozone inflation rate eases in August to 1.6%.
• Fed purchased $360M in inflation-indexed Treasury debt
• US Treasury to sell $25B cash management bills.
• India's GDP grew 8.8% in April-June qtr, driven by the manufacturing sector.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 31/08/10