Archive - Sep 27, 2010 - Story

Today's 2 Year $36 billion bond auction closed as expected at a fresh all time low high yield of 0.441%, as everyone continues frontrunning the Fed and making a mockery of unsecured overnight market rates. Indicatively, the auction was trading at 0.446% WI, showing just how strong demand is for paper. Furthermore, at 3.78, the Bid To Cover came at 3.78, which is the highest since August of 2007. In terms of takedown, there is no surprise that Primary Dealers took down more than half, or 50.19% specifically, of the auction again: after all the Fed will promptly monetize this debt shortly via one of the tens of billions in POMOs coming down the road. Directs were responsible for 10.78% and indirects took the balance or 39.04%, higher than the recent average of 34.14%. Yet even with the collapse in the 2 Year yield today, the 2s10s is still plunging, and has now hit 208, an 8 bps drop on the day, as ever more investors are shifting their purchase ever more to the right in anticipation of QE2.

It is certainly no secret that we live in volatile times. It is also no secret that the global economy is as far from equilibrium as it has ever been courtesy of historic direct monetary infusions from global central banks, which keeps world markets propped up at levels that according to some, are between 75% and 150% higher than fair values. What has recently become obvious is that nobody dares to take on the central banks, and specifically the Fed, as there is now a wholescale effort to destroy all bearish mindsets, whether it is by perpetuating the blatantly illegal HFT infested upward-bias broken market structure, encouraging custodian house wholesale short squeezes, or outright fraud, such as the recently disclosed illegal cash transfers to mortgage servicers, and fake fundamental data disclosure of such accounting monsters as Repo 105, and FASB mark-to-market redundancies. Should all these measures to keep the market rangebound, and hopefully cause an even greater short squeeze, fail, we have little doubt that selling of any assets, together with non-naked shorting, may soon be deemed illegal in the current system's last ditch attempt to keep the broken ponzi regime working. Yet what is certain, is that all of these measure will sooner or later fail. Which means that the most industrious investors are currently looking for ultra cheap ABX-like insurance trades, which have little cost of carry, and which promise Pellegrini-like returns when one or all elements of the Ponzi once again begin collapsing. To that end, we present the most recent "cheap insurance" ideas from SocGen's Dylan Grice, who has compiled what may be the cheaper ways to bet against the central banks in such items as inflation, deflation, bond market blow-ups and instability in the oil market. Here are the suggested trades.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 27/09/10

Yesterday, Reuters ran an article "Traders Manipulating Cheap Stocks" in which it cites Jamil Nazarali, Knight's global head of electronic trading, who basically confirms what we have been saying for as long as we can remember, namely that: "Some traders are manipulating U.S. stocks that are worth less than $1 by taking both sides of trades in order to earn big rebates. It happens for hundreds of millions of shares per day." In other words, HFT algos that do nothing but churn and collect "maker-taker" liquidity rebates, are forcing fake prices in, yes, thousands of names. And what that the self-cannibalization fight between the eletronic traders and the HFT rebate seekers just got very real. But what is much more relevant, as Themis Trading points out in their response to the article, is that this is also true for all of the most liquid names, which as the latest Abel/Noser analysis demonstrates, includes such names as SPY, Apple, Intel and Bank of America. In other words, the market structure established by the exchanges to compete with alternative ECNs has now destroyed the very act of price discovery.

For all those who thought last week's "dramatic" improvement in the ratio of insider selling to buying from 650:1 to "just" 290:1 was a sign things are turning and insiders may soon be selling only 100 or so times more stock per week than buying, we have some bad news. According to Bloomberg, the latest ratio of insider selling to buying was 1,411 to 1. Let us repeat: 1,411 to 1. Needless to say, corporate insiders are totally buying the Fed reflation story, and the economic recovery. Like, totally.

The Dallas Fed Manufacturing Index came at -17.7, on expectations of -6.0 and compared to -13.5 previously. Needless to say this is a whopping miss. It was almost worse than the worst estimate in the series of economist predictions which came at -21. And of course, with the only thing left for decimated Texas-region manufacturers being hope, the General Business Activity six month ahead reading surged from -4.3 to 5.2. So what happens? Stocks completely ignore the actual data, which now virtually guarantees that a sub 50 ISM is coming any minute. But why should anyone care - after all only Brian Sack, the 18 PDs, and a few vacuum tubes are trading. So let em rip. Then again, no POMO today, so this could be the first Monday that the Fed is unable to close the DJIA green.

It has been a while since Iceland's unpronounceable volcano shut down European airspace for a week. This could be about to change, because as FromTheOld demonstrates, the seismic activity at the base of Bárðarbunga stratovolcano, which also happens to be the highest mountain in Iceland, has picked up materially over the last 48 hours. As a reminder (courtesy of Wikipedia), Bárðarbunga “The largest lava flow in Iceland and the entire earth from a single eruption is originated from Bárðarbunga about 8500 years ago (causing mass extinctions)." Have we come down to this? A supervolcano demanding the sacrifice of a former FRBNY demagogue and current Napoleon Dynamite Ph.D. lookalike or threatening another, much more vicious, lock out of Europe?

The ECB has announced that for the week ended September 24, the Fed's much more impotent European cousin has purchased €134 million in sovereign bonds under its Securities Markets Program. This compares to an increase of €323 million in the preceding week, and €237 the week before that. While the ECB does not provide the breakdown of the actual bonds purchased, one can be certain that the names of Ireland and Portugal featured prominently in the trade tickets. And even as the ECB is caught between a rock and a hard place, knowing full well it would like to resume to bond purchases to the multi-billion level seen at the beginning of the Euro crisis, such a move would infuriate Germany - as the WSJ highlights: "Elevating [purchases] back up to several billion euros a week would likely
spark renewed opposition in Germany, where both the central bank and the
public were against buying government bonds, Mr. Annunziata says. In
addition, he says, the ECB may want to "keep up the pressure" on
governments to stick to their austerity pledges." Yet even at the moderated pace of sovereign debt monetization, the holdings by the Eurosystem of securities held for monetary policy purposes increased to €122.8 billion. What is not included in this number is the hundreds of billions in capital pledged directly to host banks in exchange for covered bonds, bankrupt stocks, beads, and other worthless objects which Jean Claude Trichet seem to believe are worth 100+ cents on the dollar even in an apocalypse case.

CNBC (the infinitely more credible European edition) has run a stunning interview with Cazenove technical strategist Robin Griffiths in which the banker discusses such taboo items as the Plunge Protection Team's intervention in the market for the month of September in a last ditch effort to keep stocks from tumbling following the horrendous August performance. First Griffiths dissects POMO: "One of the reasons [for the surge] is POMO: what happens is the Fed buys Treasurys off the banks, the banks put the money into the market...That amount of money turns the algorithms up, then all the algo trading hits the market. Real life investment managers are not doing this buying. They know that equities are for losers." And the stunner: "The S&P is being effectively goosed up by the Plunge Protection Team - they can keep doing this for a little bit longer... But according to me the April high will not break...as...all of those Keynesian stimuli did not work." As for bonds: "There is an old saying, don't buy the Fed - yields will go down. Even now you should be buying bonds and not equities. The bubbles never burst when wiseheads in the media tell you it's a bubble that's gonna burst, they burst when they've given up on that and tell you this time it's different."

Today’s trading activity will be dominated by options expiries. Gold prices are likely be pinned near the 1300 strike because of the large open interest there. For a more extensive snapshot of the pin risk please refer to the tables below.

• Last week's key story , conveniently buried late on Friday: "Three Wholesale Credit Unions Nationalized As US Securitizes $50 Billion In Legacy Toxic Assets; Failure "Sweep Under The Rug" Friday Just Got Real" - (Zero Hedge)
• From media shy to publicity whore, book-talker extraordinaire, David Tepper is now everywhere (New York Mag Profile)
• China Imposes a Steep Tariff on U.S. Poultry (NYT)
• Gold is the final refuge against universal currency debasement (Ambrose Evans-Pritchard)
• Japan Looks At $55bn Stimulus Package (FT)
• Fed Relative Value Model for Treasuries Showing Diminishing Market Returns (Bloomberg)
• Wolfgang Munchau on why the European Rescue Facility (EFSF) is one
  bid CDO, and would collapse immediately if France is downgraded  (FT)
• Eurozone banks face test as loans expire (FT)
• Interview: Marc Faber on the Federal Reserve and Hyperinflation (Seeking Alpha)

• Asian stocks rise to five-month high on US capital goods.
• Brazil crops shrivel as Amazon dries up to lowest in 47 years.
• Europe’s central banks halt gold sales; run of large disposals ends.
• Euro trades close to 5-month high against dollar, buys $1.3469.
• Eurozone annual M3 money-supply growth grew at a 1.1% in August vs. 0.2% in July.
• German business confidence rose unexpectedly in September.
• Germany backs tough EU deficit rules.
• Gold may advance to record on weaker dollar; Silver climbs to 30-year high.
• Japan said to consider up to $55B extra stimulus as recovery slows.

Boring day, with just Dallas Fed on the roster.

Ireland wakes up to some very ugly news this morning: "Moody's expects a continued asset quality deterioration in the loan book of Anglo Irish that will require further government support for the bank's liabilities," says Ross Abercromby, Vice President and lead analyst for Anglo Irish at Moody's. The rating agency believes that the novation of the deposits into the FB could increase the government's options to share the burden of such support with other creditors that remain in the ARB. Without an explicit government guarantee for senior unsecured note holders, Moody's believes that the ratings for these instruments need to incorporate this greater marginal risk. While Moody's considers the likelihood of the government not supporting this debt to be very small, this risk has been reflected in the three-notch downgrade to Baa3 and will continue to be a focus of the review for possible downgrade. Moody's expects to receive further clarity from (a) the Irish government's upcoming announcement of further details of its plans for Anglo Irish over the coming weeks, and (b) the European Commission's verdict on the proposed restructuring. Until such clarification is forthcoming, Moody's review for possible downgrade will continue. "In the absence of explicit government guarantees, the senior unsecured debt ratings could be further downgraded into sub-investment grade," says Mr. Abercromby.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 27/09/10