Archive - Mar 2011 - Story

As we wave goodbye to David Rosenberg, with his last free Breakfast with Dave issue coming out today, we present his most recent free thoughts on QE3: "QE3 will come but not as early as Mr. Market would like."

When we reported on some peculiar action in MBIA CDS back in February, we said that one of the reasons for the massive tightening in MBIA CDS which ripped from 55 pts up to 37 pts in the span of two weeks was possibly on CDS commutation speculation (this in addition to ongoing aggressive litigation by MBIA against mortgage originators who may be commutating CDS in a quid-pro-quo fashion to achieve prompt settlement). But whatever the reason for the move, one thing was certain: one bank more than anyone, will be hurt materially by the move - Morgan Stanley. As we said "According to a source, Morgan Stanley was short risk the monoline after it had obtained protection on a static pool of CMBS via an MBIA-related entity called LaCrosse Financial. And as LaCrosse wrote protection against the static pool that was non-transferrable by Morgan Stanley, the bank hedged its counterparty risk by purchasing protection on MBIA itself. So while CDS was blowing out, MS was profiting. Then over the past two weeks, the bank has seen hundreds of millions in paper P&L evaporate through the window. The only question is when will Morgan Stanley close its now underwater protection (which continues to bleed a substantial amount of theta), especially since the actual credit event may have just been pushed back indefinitely. In other words, those who are short the MBIA CDS may wish to wait just a little longer, and see just what the breaking point on Morgan Stanley's collateral call is." Well, per another source, and per Euro Money magazine, that breaking point has been reached and MS has now been forced to close its exposure, at a loss that some speculate could be in the billions.

The Confidence Board has released its Consumer Confidence Number, which in March went in freefall from the revised previous print of 72, highest in 3 years, to a below consensus 63.4 (expectations of 65). But while this number is largely irrelevant, the Inflation Rate index surged from 5.5 to 6.7, the highest since October 2008.

From S&P, although nothing new here. EURUSD does not even blink on the news: "Given Portugal's weakened capital market access and its likely considerable external financing needs in the next few years, it is our view that Portugal will likely access the EFSF and thereafter the ESM. While we believe Portugal's public sector debt trajectory could start to decline in 2013, thereby creating the possibility that Portugal may be able to obtain ESM funding without being required to restructure its debt (based in part upon our reading of the "sustainable path" language in the EC's concluding statement), the issue of subordination remains. We are therefore lowering our sovereign credit ratings on Portugal to 'BBB-/A-3'. The negative outlook reflects our view that the macroeconomic environment could weaken beyond our current expectations and that a political impasse could undermine the effective implementation of Portugal's adjustment program, leading to non-negligible policy slippages."

Case Shiller data is out, and it is as horrible as ever. The Home Price Index came at 140.86 compared to 142.42 previously. Basically the double dip refuses to stop, and that even despite yesterday's "stunning"(ly irrelevant) pending home sales number.“Keeping with the trends set in late 2010, January brings us weakening home prices with no real hope in sight for the near future” says David M. Blitzer, Chairman of the Index Committee at Standard &  Poor's. “With this month’s data, we find the same 11 MSAs posting new recent index lows. The 10-City and 20- City Composites continue to decline month-over-month and have posted monthly declines for six consecutive months now. “These data confirm what we have seen with recent housing starts and sales reports. The housing market recession is not yet over, and none of the statistics are indicating any form of sustained recovery. At most, we have seen all statistics bounce along their troughs; at worst, the feared double-dip recession may be materializing."

Confirming just how leveraged hedge funds and general investors were exiting February is the latest margin debt data from the NYSE, which indicates that the recent trend of pursuing beta on ever increasing margin continues.Total margin debt jumped by a whopping $21 billion from $289.6 billion to $310.3 billion, the highest it has been since July of 2008. It should, however, be kept in mind that this is a gross leverage number. To get the far more accurate net number, one needs subtract the margin debt from Free Credit Cash Accounts and Credit Balances in Margin Accounts, or in other words, the "net worth" of the investor (the less the supporting cash, the lower the "capitalization ratio" of the speculator). And here things get very concerning. The Net Free Credit (or net margin debt depending on whether one puts the + or - sign in front), calculated as Total Free Credit less Total Margin Debt jumped from ($46) billion to a massive ($57) billion. This is the third lowest net worth reading ever reported by the NYSE. Only the ($67.8) billion in May 2007 and ($79) billion in June 2007 are worse, and confirm that everyone is levered to the gills at virtually the same level as when the market was at its all time highs. We all know what happened next.

Just headlines for now. Unclear what prompted the move, and whether this will embolden the discontents to push even harder for a full regime overhaul.

Asian demand is especially strong in the increasingly important China. The Chinese strong cultural affinity and love affair with gold (primarily due to a distrust of Chinese paper money) shows no signs of abating. Indeed, it may be accelerating as was seen in the recent figures from the Shanghai Gold Exchange and customs in China and now reports (including from CNTV – the national TV station of the People's Republic of China) of shortages of raw gold or unrefined gold. China, now the largest producer of gold in the world is seeing its gold mines struggle to cater for surging Chinese demand. The raw gold trade has been growing by up to 30% per annum and demand has leapt in recent months leading to a developing raw gold shortage in China. The industry in China expects only 27,000 tonnes of raw gold can be delivered this year. That is way below the estimated demand of 50,000 tonnes. A potential supply shortage of 23,000 tonnes of gold is a large amount of gold in the small gold bullion market which is tiny versus equity, bond and derivative markets. It is infinitesimal when compared to the $4,000 billion a day traded in currency markets.

Markets worldwide are negative this morning on the news of a possible increase in European bank capital levels while U.S. futures are still in positive territory. The U.S. Treasury Dept. has announced that it will publically grade mortgage providers on response quality to homeowners that need payment reductions. Italian bank equities dropped on UBI Banca announcing a €1B capital increase in order to boost its core Tier 1 capital. As a result of the announcement, speculation that other banks would follow suit resulted in a selloff in the equity markets. Increases in commodity prices sent New Zealand’s February trade balance surging to +NZD194MM v -NZD3MM prior, making it the country’s first trade surplus in eight months. Japan’s Vice Finance Minister said yesterday that the government may have to abandon a planned five percentage point cut in corporate taxes to help pay for earthquake damage. PM Kan followed that up today signaling that multiple government spending plans may be needed to pay for disaster rebuilding.

• Fed’s Bullard Says QE2 Exit Debate Likely ‘Key’ 2011 Issue (Bloomberg)
• Obama Defends Libya Fight (WSJ)
• Radiation Found Outside Japan Reactor, Signaling Meltdown (Bloomberg)
• Radioactive Flood in Japan Reactor Tunnels (FT)
• SEC focusing on hedge funds that outperform “market indexes by 3% on a steady basis.” (Securities Docket)
• Schaeuble Sees Portugal Seeking Bailout, Handelsblatt Reports (Bloomberg)
• Budget negotiations breaking down (WaPo)
• Democrats, White House Said to Back $20 Billion of Additional Budget Cuts (Bloomberg)
• A Requiem for Detroit (WSJ)

Almost all Americans have heard Franklin Roosevelt’s speech to Congress on Dec. 8, 1941: “Yesterday, Dec. 7, 1941 — a date which will live in infamy — the United States of America was suddenly and deliberately attacked by naval and air forces of the Empire of Japan … I ask that the Congress declare that since the unprovoked and dastardly attack by Japan on Sunday, Dec. 7, a state of war has existed between the United States and the Japanese Empire.” It was a moment of majesty and sobriety, and with Congress’ affirmation, represented the unquestioned will of the republic. There was no going back, and there was no question that the burden would be borne. True, the Japanese had attacked the United States, making getting the declaration easier. But that’s what the founders intended: Going to war should be difficult; once at war, the commander in chief’s authority should be unquestionable.

With so much changing in Fukushima on a daily basis, it is easy to lose track of what is happening on any given day. In fact, some like Zero Hedge are now weary of reporting Fukushima news due to expectations of a full detraction within half an hour or so, after someone is discovered to have no idea what a decimal comma is, or another is simply lying, in ongoing efforts to spread confusion. Which is why the following Q&A from Reuters on the latest situation in the radioactive power plant is a useful recap for virtually everyone, even though most likely the party line, not to mention "fact" will change shortly.

In the second day full of Fed president speeches we hear from St. Louis hawk James Bullard who spoke in Prague on recent developments in monetary policy, and delivered remarks titled “U.S. Monetary Policy: Recent Developments” as part of a central bankers panel discussion at the 19th European Banking and Financial Forum in Prague. During his discussion, Bullard explained how the Fed’s second round of
quantitative easing was “a classic easing of monetary policy” and “an
effective tool, even while the policy rate is near zero.”  He also
discussed the situation in early 2011, stating that “U.S. growth
prospects remain reasonably good for 2011.”  He added that recent global
and domestic events “present considerable uncertainty, but can be
resolved in benign ways.” Finally, Bullard talked about the path to
normalization.  “Discussion of the normalization of U.S. policy will
likely return as the key issue in 2011,” he concluded.  Overall, the presentation had a not surprisingly hawkish tone. Don't forget it was precisely a year ago that the Fed was being extremely hawkish all over again, with reverse repos flying left and right, and everyone expecting that the economic "growth" was self sustainable, until it wasn't.

The decline in house prices may have slowed in January, but consumer confidence probably dropped in March. Daily POMO viagra today is in midget dose, with just $1.5 billion in monetization.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 29/03/11