Archive - Sep 29, 2010 - Story

After earlier saying in prepared remarks that "based on my current outlook, I do not support
further asset purchases of any size at this time," Philly Fed President Charles Plosser has confirmed he is firmly in the anti-QE camp of Fed members. And as remarks from the Q&A following Plosser's speech hit the tape, we discover just how ugly the situtation in America's economy truly is. Among the soundbites, Plosser has said that there is a "very limited amount of things we can do at this point", noted that he is "worried about the downside of further easing", says that the doesn't see "deflationary expectations emerging" , and, last but not least, tells everyone else after Fashion Island apparently already was well aware of all this weeks ago, that the 2010 forecast is "somewhat lower than what it was." This statement validates Kocherlakota's reduction in his 2011 GDP forecast earlier from 3% to 2.5%, which we discussed previously.

Last week, to much pomp and circumstance, Petrobras IPOed in a $69 billion offering of stock, which was promptly praised by Brazil president Lula as the "the biggest equity offer in the history of capitalism." Yet when one digs through the numbers it becomes glaringly obvious that not only was the "real" IPO one third the size of the vaunted amount, but that a major part of the offering is nothing less than a major shell game, which not only distorts the perception of end demand for the offering for other, more naive investors, but also allows the Brazilian government to lie in open public that it has met its primary account surplus of 3.3% of GDP. Market News has broken down the math works behind what is quickly becoming the biggest act of diversion since the days of Houdini.

And so the Treasury records continue, as does the reach for yield. Today's 7 Year came at the lowest yield in history or 1.89%, while the Bid To Cover surged to an all time high 3.04. And as we have been asserting for months, foreign investors continue to creep ever longer on the curve, with Indirects once again taking down more than half of the auction, or 50.24%. Directs oddly jumped by over 50% from August, taking down 13.38% of the auction, leaving the remaining 36.38% to the primary dealers. And so the divergence continues: those who no longer trade stocks (i.e., humans), are bidding up any fixed income paper they can get, even if it means being stuck for 7 years with a taxable annual yield of under 2%. At the same time the vacuum tubes are buying rental DVDs at a quadruple digit PE multiple. Obviously, this divergence is unsustainable, and the longer it persists, the greater the pain all around when it finally collapses.

One of the last true defenders of a long lost honest and efficient market is riding away into the sunset. Today, at 2:15 PM Delaware Senator Ted Kaufman will deliver his farewell address on the Senate Floor. The full speech will be broadcast here. He will be sorely missed by everyone who laments the days when good news meant to buy stuff, while bad news did not mean to buy ten times more stuff. Alas, in the great race for technological supriority, the market broke some time ago, and the retail investing class, which accounts for a vast majority of the stock market's capitalization via its trillions in ever diminishing investments, has now lost all faith that stocks reflect anything but the Fed's desire to reflate the troubles of a few massively underwater bankers away. It is sad, but it is a fact. There is no more fair and efficient market. Which is why we know that those corrupt and captured cronies of the status quo at the SEC will be applauding Kaufman's departure - after all he was the last voice in Washington who dared to put up a fight for the little investor. Soon, everything will be back to normal, where the only guaranteed outcome of any stock trade is a loss. In the meantime, we present to you Senator Kaufman's last speech (of seven) on market structure issues and the unending scourge that is high frequency trading. We also present Carl "Shitty Deal" Levin's follow up comments to Kaufman's speech.

Must read commentary by BigMacro & Co.'s Daniel Somos on how "Apple is really taking over the world" which confirm why the entire market can be summarized by the following equation: APPLE = STOCKS = AUDUSD = GOLD.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 29/09/10

In a market where the Fed has assured that up is always and forever, or at least until such time as Primary Dealers can take down 99.9% of any given bond auction, down, it is no surprise that even monthly and seasonal patterns are completely inverted. The traditionally weak September market performance, has been flipped on its head in an attempt by all those involved to rescue the vast majority of underperforming hedge funds which would otherwise see an influx of redemption notices and terminations (ref: DE Shaw). So now that September is in the books, what does conventional knowledge tell us about October, so that in this Fed-induced bizarro world traders can come in and do the opposite. We look to Art Cashin for the answer.

A week ago we wondered how it was that Pimco's Bill Gross, who is now rumored to be Larry Summers replacement as the QE infinity whisperer on the right side of President Obama, had an advance look into how the Fed will adjust its GDP forecast ahead of the general public. Today, we got the first half of the response: in a speech to the European Economics and Financial Centre in London, Minneapolis Fed president Narayana Kocherlakota has just lowered his GDP forecast from 3% to 2.5%. And most importantly, the Fed President's speech in decidedly QE-negative: our favorite quote on QE from a Fed president so far: "The Fed cannot literally eliminate the exposure of the economy to the risk of fluctuations in the real interest rate. It can only shift that risk among people in the economy. So, where did that risk go when the Fed bought the long-term bond? The answer is to taxpayers." Thank you Fed.

In what appears to be a beginning of the rerun from late April, when mints all around the world were running out of bullion and dealers had no coins in inventory, the US Mint has announced it has run out of one ounce Gold Buffalo coins: "The United States Mint has depleted its inventory of 2010 American Buffalo One Ounce Gold Bullion Coins." And even though one can't eat the gold coins, this is happening as gold is touching daily fresh record prices. Oddly enough, as Reuters reports: "The mint said it will not stock more of the 1-ounce, 24-karat American Buffalo bullion coins." Keeping in mind that the Buffalo is "among the world's purest gold coins in terms of the fineness of the metal they contain" one wonders just how heavy the physical depletion of ultra pure gold must be for the mint to only stock "more diluted" versions of gold bullion.

The recent decline in the futures is attributed to a 40 pip move lower in the EURUSD (yes, it is pathetic that the entire market once again is merely a tick for tick xerox of the FX pair, which in turn is driven almost exclusively by excess liquidity expectations/QE on either side of the Atlantic) which is attributed to the just released September issue of the EU Banking Sector Stability report. In it, the central bank opens up fresh wounds, by reminding just how fragile the European banking system is. Which should be a stark reminder for all who believe the euro will go straight up without interruption, that Europe is currently panicking and will soon gladly retract everything said recently in the Stress Farce about how stable the banking system is, if it means a drop in the euro and a resumption in exports.

As concerns over Green Mountain, well, mount, here are the first two sellside responses following last night's GMCR 8-K announcement of an SEC inquiry into its "revenue recognition practices and the Company’s relationship with one of its fulfillment vendors."

There is no debating that the FOMC announcements and liquidity injections are if not the key factor that drives stocks then certainly one of the main ones. Yet for those who wish to frontrun the Fed without participating in the stock market, which these days would be pretty much everyone, as the risk of a market crash increases exponentially with every single day that equities ramp ever higher not on fundamentals but merely liquidity, Morgan Stanley has found another cheap FOMC-coincident trade that at least on the surface allows for a quick and painless pick up in a few bps, and can be conducted without touching stocks at all.

• Asian stocks rise to five-month high, Japanese bonds rally.
• Central banks of SKorea, S'pore, Thailand & Indonesia suspected of intervening in foreign exchange markets.
• China’s manufacturing activity accelerated in Sept - the second straight month.
• Gold for December delivery rose to a fresh record above $1,313.00 an ounce.
• Japan's Tankan Index rises least in 18 months as Yen gains, Economy slows.
• US Home prices rose for the 4th straight month in July, but at a slower pace.
• AOL acquires social software start-up Thing Labs; Terms were not disclosed.

Today the ECB completed a €104 billion 84 day liquidity providing LTRO, which saw the participation of 182 banks, receiving an allotted 1% fixed rate as part of the refinancing. Importantly, this amount was far less than was expected to be refied, as nearly €225 billion of 3, 6 and 12 month ECB loans were set to expire today and tomorrow, implying that the eurozone saw the extraction of about €120 billion in liquidity out of the system. As a result OIS has spiked on liquidity concerns, as well as expectations of future interbank borrowing to cover the lost liquidity. As per Market News: "The three month euro LIBOR/OIS spread narrowed sharply Wednesday, as a result in the spike of the OIS rate following the much weaker than expected demand at the European Central Bank's 3-month Long Term Refinancing Operation. Banks borrowed much less than widely expected, borrowing E104 billion in the 3-month LTRO, and driving predicted future lending rates sharply higher. There is E225 billion in ECB loans expiring this week, and the low take up at today's 3-month implies, on the face of it, there is going to be reduced liquidity in the euro area, although banks could use alternative central bank financing to get through the year end or wait until ECB conducts its 6-day fine-tuning operation on Thursday." The immediate result of this news pushed the EURUSD 50 pips higher, as it implied, at least on the surface, that European banks are in less need of ECB handholding than expected. Of course, it is also possible that European banks have simply found less obvious ways to use ECB backstops to prop their daily operations.

It’s all Fedspeak today after this morning’s weekly report on mortgage applications as three regional presidents weigh in…