Archive - 2010 - Story

Today's second POMO just closed and the Fed has now purchased a total of just over $14 billion in bonds maturing between 2014-2016 and 2018-2020. Brian Sack has bought another $6.8 billion in bonds, at a Submitted to Accepted ratio of 2.4x, higher than the 2.2x earlier in the day as we expected. The flow proceeds appear to have had the express designation of being used to purchase ES as the second the second [sic] POMO closed, equities ramped up. To those who care, are positioned appropriately in this Madoff-style ponzi, and hope that just like in the Madoff case will not one day be forced to clawback proceeds (under calm and collected conditions or otherwise), our sincerest congratulations. To everyone else, we would like to note that today's 2Pm ramp in stocks comes at the cost of the Fed now being the proud owner of $991 billion in US debt. Tomorrow's two POMOs will likely seal the deal, making the Fed the only institutional holder/hedge fund in the world to own 13 digits worth of US paper.

Ben Bernanke is a highly educated PhD from Princeton who has never worked a day in the real world since he graduated from college in 1975. His entire life has been spent in the ivory tower of academia surrounded by models and theories that work perfectly in the comfort of his office. After building his reputation as an “expert” on the Great Depression by studying it and reaching the wrong conclusions, he came down from his ivory tower in 2002 to join an organization that has systematically destroyed the value of the US currency, thereby undermining the well being of the once vibrant middle class...If the Grinch had been pimping for a small pack of Grinchsters who impoverished the honest people of Whoville, then the Dr. Seuss poem would have perfectly described Ben Bernanke, the Federal Reserve and the banksters that run the show here in the USA. The actions taken by Ben Bernanke, Alan Greenspan and their brethren on the Federal Reserve over the last quarter century have destroyed the middle class and left senior citizens impoverished, while enriching its Wall Street masters. Now he is stealing Christmas from the hard working middle class of this country.

The theater of the macabre goes one further following the just released response by Whitney Tilson to this morning's attempted rebuke of the short Netflix thesis by Reed Hasting. StreetInsider cites Tilson, who told the breaking news site the following: ""I'm glad Reed Hastings took the time to reply to some of the issues we raised. He made a number of good points and helped us -- and other investors -- understand him and his company better. I think a friendly, respectful debate like this is healthy and wish there was more of it." We are now holding our breath until we get Reed's response to this follow up response, to his original response, over just how overvalued his company is. Ironically, we don't really see what the reason for this theatrical acrimony is: after all it is pretty obvious that both Hastings (and the firm's CFO prior to his surprising resignation recently) and Tilson are on the same side of the trade.

Nothing to see here: just Brian Sack handing out fitties for the second time today so Prime Brokers such as Jefferies which apparently can't even balance its books (from Jefferies preliminary results: "The results were preliminary because Jefferies is trying to reconcile differences in records between it and an unnamed clearing bank that deals with a portion of its fixed-income business. The clearing bank’s records differ from Jefferies’s figures by $39 million, and if correct, may cause 2010 profit to be reduced by 7 cents to $1.08, the firm said in the statement." All in a day's work when nobody gives two cents about what lies behind the numbers, pun intended) go out and buy some Amazon for prop accounts. This particular POMO will buy Treasurys due between 12/31/2014 - 05/31/2016 for a total of about $7 billion. Results posted here in 45 minutes. We expect the submitted to accepted ratio to be notably higher than this morning's 2.2x.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 21/12/10

By now everyone has seen and played with the US debt clock via usdebtclock.org whereby anyone who so wishes, can find every little detail about America's current sad fiscal state. The fact that America currently has just under $14 trilllion in national debt should be no surprise to anyone who professes to having an even modest interest in the state of the US economy. Yet a new feature on the "debt clock", namely one which extrapolates future debt at current rates of advancement (instead of one based on the always completely inaccurate CBO estimates), and looks at US debt in the year 2015 will probably make many stop dead in the their tracks. If anyone thought that $14 trillion in 2010 debt is bad, just wait until we hit $24.5 trillion in total US national debt in 2015. And it gets even more surreal: total US Unfunded Liabilities are estimated at $144 trillion, roughly $1.2 million per taxpayer... Was that a pin dropping?

We want everything and we want it now, and we don't want to sacrifice anything to get it. Our solution is pathetically childlike: just borrow trillions of dollars every year to buy what we want, so no adult trade-offs are ever required. Just buy our energy from somewhere else so we don't have to make any sacrifices or balance competing demands...We want abundant, cheap energy, and we want someone else to supply it to us so we don't have to make any difficult trade-offs. We want all our entitlements and we also don't want higher taxes. Isn't this the acme of childish fantasy? When pressed about energy, we want to hide behind fantasies of fusion, or algae-based fuels, or some other technology which has been "10 years away" for the past 30 years or which is 20 years away from scaling up to industrial production, if ever. Our ignorance of the actual science is breathtaking, but we refuse to consider the possibility that breeder reactors and algae-based fuels may not pan out. At some point, probably within the next 5-6 years, the oil exporters will stop shipping their hydrocarbons to us in sufficient quantities to meet our demands, and bond buyers will stop trading their capital for absurdly low rates of return on U.S. Treasury bonds. Once it costs $1 trillion just to pay the interest on existing (and rapidly ballooning) debt, then we won't be able to borrow enough to fund the Empire and the Savior State and the interest. Trade-off time will finally be forced upon us.

One look at last week's insider transaction list confirms that the deluge of insider selling refuses to end, and is now well in the double digit billion category in recent months. S&P Insiders sold $512 billion in notional in the week ended December 17 per Bloomberg, slightly above the 6 month average, with the top five sales taking place in Google, Ralph Lauren, UnitedHealth, General Dynamics and Starwood Hotels: in these five names alone executives sold nearly $200 million worth of stock. On the buy side, one purchase skewed the distribution to the tune of 96%: an acquisition of TIMET stock (TIE) for $34 million represented nearly all of the $35.7 million in insider purchases in the past week. Incidentally this is the second week in a row in which we have observed material purchasing in TIE, with $2.6 million in Titanium Metals purchased last week (when it accounted for 75% of all insider buying). And with this week's TIE purchase, the insider buying recorded in the past week is the biggest we have seen since beginning to keep track of insider transactions.

As noted earlier, the first POMO of the day is now complete and the Fed's balance is now $7.790 billion bigger. This is only part one of today's monetization game as the afternoon will see Bernanke's asset increase by another $8 billion at 2 pm. The Submitted to Accepted ratio one POMO 1 came at a surprisingly low 2.2x, which indicates that PDs are not cash starved, and instead it leads us to believe that the selling in the markets is Primary Dealer driven. Hopefully the GETCOs will be able to sustain the offer-pressure should the selling intensify by day end as more and more banks seek to exit profitable risk positions.

From under the always interesting pen of CRT's David Ader and Ian Lyngen comes the firm's 2011 outlook for the Treasury market. The summary: "From the supply and demand perspective, there’s QE lite and QE2 vs. knowledge that at some point they’ll stop, eventually hike, and follow suit possibly on asset sales. (In point of fact we doubt the Fed may EVER do asset sales, but rather allow their assets to simply mature/redeem and stop reinvesting.) In any event we don’t see this as a 2011 threat but it’s fair to say that any bear market will be more substantial than whatever bull market we can connive. The problem is positioning for the latter when the former hangs as an inevitability someday." This dovetails perfectly with what we have been saying: ever increasing supply of USTs (potentially hit up to $2 trillion in 2011), will be offset by an ever more ravenous Fed monetization. Should rates continue to rise, the moment when this dynamically unstable balance reaches its tipping point will come far sooner than most expect. If, on the other hand, new signs of economic weakness-cum-deflation emerge, and if Rosenberg is proven right for the second year in a row, the Fed may just be able to postpone the point of "inevitability" as defined by CRT. Much more nuanced observations inside, which also include the firm's forecast for possible "tail risk" events.

Today is only the second time in 2010 that the New York Fed has scheduled not one, but two POMOs. Currently in process is a buyback of $7 – $9 billion of 2018-2020 bonds. After this concludes at 11 am, it will be promptly followed by a second POMO, this one beginning at 1:15pm and ending at 2:00pm, and will seek to monetize $6 – $8 billion of 2014-2016 in bonds. Of particular attention is CUSIP PC8 which is the 10 year auctioned off on December 8, less than two weeks earlier, and at a rate of 3.340%. It will be interesting to see just how much instaflip the PDs will exercise in order to pad their year end P&Ls via the move in price and the wide bid/ask margins paid by Brian Sack. We will provide the results as soon as they are published in just under half an hour. And just to make sure there is a wealth effect in time for Christmas, today's double POMO will be followed by another double POMO... tomorrow.

As usual, trust Rosie to cut through the chaff regarding the $858 billion tax package, which he views not as stimulative, contrary to what the suddenly bullish sell-side crew claims, but merely as preventing the government becoming a "contractionary economic force" - "How much
of the tax cuts will go into saving and imports remains to be seen. We think the “stimulative” effects are over exaggerated." Specifically, his trade recommendation based on a paralyzed congress and a debt ceiling hike is as follows: "by the time the second quarter rolls around, it will be time to buy volatility, S&P 500 puts, and gold." And in further debunking the perpetually wrong sellside groupthink, Rosenberg looks at bond forecasts from late 2009 and finds that virtually everyone who is now once again calling for a drop in yields was doing the same a year ago...and was wrong. The tangent is that if Morgan Stanley's Jim Caron is completely wrong for the second year in a row, we fail to see how the rates strategist can possibly claim to have credibility should he get this most important call wrong in two consecutive years. Lastly, for those who care about market fair values, Rosie shares his fair value model updates on the S&P, the TSX, Corporate bonds and the CAD.

In the past few days, European peripheral spreads have once again taken to widening both in absolute terms and relative to Bunds. The culprit: the ECB's permabid for insolvent debt has plunged from €2.7 billion to €603 million in the past week: this represents the lowest amount of bonds purchased by the ECB since the beginning of November. And without the backstop of wanton ECB buying sure enough the sellers emerge. Total debt holdings in the ECB's SMP program are now €72.5 billion. Incidentally one country which is certainly not benefiting from Jean Claude Trichet's largess with his bank's money is France, whose CDS earlier today hit an all time wide of over 100 bps on completely unfounded rumors that the country may be downgraded by one or more rating agencies. At this point expect to see the chart below yoyo in direct correlation to just how steep the sell off of European bonds may have been in the prior week.

It was only a matter of time: back in March, following revelations of the Lehman Repo 105 scam, we speculated that the days of Ernst & Young are numbered. Back then we said "we are confident that (again, with the assumption that we live in some
semblance of a sane/ration world), E&Y's Financial Services Office
is done...
and quite possibly the entire firm. Integrity is the number one
currency for an auditor, and just like Anderson, E&Y's just went out
in a puff of green-colored smoke." Today we learn that Andrew Cuomo is about to make E&Y's life a whole lot more difficult. Per the WSJ "State Attorney General Andrew Cuomo is close to filing the case, which
would mark the first time a major accounting firm was targeted for its
role in the financial crisis." Too bad - E&Y was surely hoping that just like everything else in this corrupt country, out of sight would mean out of mind, and soon everyone would forget about the firm's involvement in the biggest bankruptcy in history. Better luck next time...

One of our more successful predictions in advance of QE2 was that the Fed would raise the SOMA limit on holding at most 35% of any one treasury CUSIP. Sure enough, one of the paramaters of the QE2 launch included an indefinite lifting of the SOMA barrier. CNBC has just reported that the Fed will impose a new SOMA barrier of 70%. Of course, just like the US Treasury limit, this is a token number and can be removed on a whim - after all, the Fed is not accountable to anyone. We expect this new revised limit to be eliminated concurrently with the announcement of QE3 (or QE4 at the latest). In the meantime, this will have an impact on POMO dynamics as various treasurys that approach this barrier will see their buybacks slowed down. This is only relevant if one is involved in the Fed frontrunning business. Which these days is everyone.