Archive - Jul 13, 2011 - Story

The second auction in that brief period between the end of QE2 and start of QE3 has closed and the Treasury has just raised another $21 billion in exchange for pieces of paper promising said amount in 9 years and 10 months, yielding 2.92%, or the lowest amount in 2011. And just like in yesterday's 3 Year auction which saw a drop in Indirect interest, today's 10 Year continues the long-term trend where foreign banks recycle less and less dollars via US paper. At 42%, the Indirect Takedown was the lowest of 2011 and the worst since October 2011. Who saved the auction: once again that suspicious category - the Direct Bidders, which took down 13.9% of the full amount, the highest since January's 14.9%. The Direct Bidder hit rate was a low 29.1%, as $10 billion of competitive bids were placed in the auction. Like yesterday, the final result came surprisingly tighter to the When Issued which was at 2.935% before the close. And interestingly for those who care about such things, there was a block trade of 6,895 10-Yr Treasury Futures at 124-14 just before the pricing, and a Vol. spike of 29,565 contracts at 12:50pm: is the Fed now pulling an ECB in the TSY derivative market? Either way, regardless of what manipulation may have been involved, the entire curve has flattened substantially.

New money is required to address Greece's fiscal funding shortfall that would otherwise emerge in 2012 - a key weakness of the current EU-IMF programme highlighted by Fitch at the turn of the year. Fitch had expected the uncertainty surrounding new money, along with the role of private creditors, to be resolved with the completion of the fourth review of the current EU-IMF programme earlier this month. The agency notes that while the main parameters of a new multi-annual adjustment programme were discussed at an Ecofin meeting on 11-12 July, no further clarity on the volume and the terms of new money or the nature of private sector participation was forthcoming.

While the operator of printers of mass destruction drones on about QE3, 4, 5 and so forth, confirming that if not inflation, we will surely get hyperinflation or bust, a long-term Treasury bull, Van Hoisington, once again chimes in with his big picture macro view. As usual, it all boils down to the inflation/deflation debate. His take: "While the massive budget deficits and the buildup of federal debt, if not addressed, may someday result in a substantial increase in interest rates, that day is not at hand. The U.S. economy is too fragile to sustain higher interest rates except for interim, transitory periods that have been recurring in recent years. As it stands, deflation is our largest concern, therefore we remain fully committed to the long end of the Treasury bond market." Too bad the Chairsatan just said each and every episode of deflation will be met with round after round of monetary devaluation. And last, we still can't find the chapter in the history books that indicates a sovereign state (either in Roman times, or modern, and especially since the invention of the printing press) imploded due to hyperdeflation. That long end of the bond market is sold to you Van.

Remember insolvent Greece: the country that "was resolved" causing a 600 surge in the Dow in the last week of June (a ramp whose main purpose was to get pension fund performance up to snuff for the end of their fiscal year end). The same country whose PM sent out a blusterous letter full of sound and fury on Monday bashing Europe just after it had agreed to bail out the insolvent Mediterranean country for another month. Something tells us he won't be writing such letters any time soon. According to FT Deustchland, G-Pap said the country needs a decision soon on a second aid program. Papandreou said he’s “open” to the idea of a bond buyback program financed through the European Financial Stability Facility as it could reduce the debt burden and interest payments. In fact, G-Pap forgot to add that he is open to anything that will allow him to rule a hollow shell of a country which will probably soon be used a reverse merger shell by some Chinese company which is banned from listing anywhere in the free world, except for the Athens stock exchange of course.

A snapshot of the US Afternoon Briefing covering Stocks, Bonds, FX, etc.

Market Recaps to help improve your Trading and Global knowledge

Bernanke picks gold over diamonds due to "tradition".

Fed Chairman Bernanke delivered a balanced assessment of the policy outlook, saying that the economy could evolve in a way that would “warrant a move toward less-accommodative policy”, but that persistent weakness in activity and renewed deflationary risks would “imply a need for additional policy support”. In contrast to our expectations, the prepared remarks included a list of potential easing options—communication changes, changes in the interest paid on reserves, and security purchases. We see this as an upgrade of the seriousness of the easing discussion on the committee, and therefore interpret the speech as a moderate dovish surprise (the easing options were already discussed in the last post-FOMC meeting press conference). We believe the probability of easing over the next 6-9 months is higher than the probability of tightening.

Major, major divergence as the robots once again are drunk on positron juice.

As Bernanke reminds the world that the one and only weapon in his arsenal is stealth inflation through dollar devaluation (yes, some had already forgotten it, especially all those economists, think tanks, and others who claimed there was no QE3 hint in the FOMC minutes), there is one clear winner: gold, which continues to surge to all time highs and will likely cross $1,600 within the week (if not day), from which point it is smooth sailing to $_,000.

Watch live the first of two official monetary policy testimonies by Ben Bernanke, today being before Congress, and thus Ron Paul, tomorrow before the Senate. Among the critical items to be discussed are the role of fiscal policy, whether there will be QE3, and how (and when) the Fed will proceed with future rate hikes. Mostly, it is expected be a whole lot of hot air. Full text of the report can be read here. The reason everything is surging is because, as predicted, the Chairsatan appears to have just ushered in QE3: "The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support. The Federal Reserve remains prepared to respond should economic developments indicate that an adjustment of monetary policy would be appropriate."

For everyone asking who will be broadly liquidating to compensate for the News Corp-BSKYB merger arb catastrophe, meeting margin calls, and overall trying to prevent a fund blow up, here is the list. The biggest recent accumulators: Odey, Nomura, State Street, Lloyds, Taconic, Perry and PPM. These are the funds, which per CapIq loaded up LSE:BSY shares in the last 1-2 quarters, almost certainly based on merger arb assumptions.

From Sky News: News Corporation has withdrawn its bid for BSkyB, Sky News City editor Mark Kleinman has exclusively revealed.

The year was 2002, and while the majority of Americans were completely obsessed with the so called “War On Terror” and other devices of distraction, something much more real and decidedly prophetic was going on in our southern hemisphere. Argentina was in the midst of total collapse, driven by banker fraud and extreme currency devaluation in tandem with government mismanagement and corruption. First, cities exploded with rioting and violence as Argentinian police and military attempted to crush all dissent. Soon after, displaced refugees from population centers along with roving bands of thieves flooded into the countryside, wiping out isolated farms, murdering families, and hunting down any small group of survivors weaker than themselves and flush with supplies. The authorities (and I use the term loosely) were too busy trying to suppress civil protests to bother protecting those who were caught unprepared. This behavior is part and parcel of economic destabilization, regardless of the time or place in which it occurs.

It is good to see that Thomas Stolper has not lost his value destroying touch. In just the latest iteration of the company's FX team costing clients oodles of money (and making lots of money for its prop traders), we remind readers that on June 19, a full two weeks ago, Goldman advised clients to "Go long AUD/JPY for a target of 90 with a stop at 84." Our jaded Goldman translator kicked in and provided the following interpretation of Stolper's words: "As of tonight Goldman is advising clients that its prop desk has a lot of AUDJPY to sell up until 90, and will buy everything below 84, in other words Thomas Stolper says to go tactically long the AUDJPY until 90, with an 84 stop. Of course, this makes all the sense in the world if China is slowing down." Well, it seems that Goldman is now done offloading it AUDJPY exposure. As for any remaining Goldman clients who bought into the recommendation: Sorry. As of yesterday, AUDJPY traded below 84 on at least two occasions, droppoing as low as sub 83.10, thereby stopping everyone out. 

The BLS reported that import prices declined by 0.5% in the month of June, slightly less than the 0.6% predicted by the consensus. This was a substantial drop from the revised 0.1% increase in May and was the biggest monthly drop since June 2010's -1.2% drop. More importantly, on a year over year basis the increase in import prices was 13.6%. The key driver was the drop in Fuel Import prices, which slumped by 1.6%, after a 0.8% drop in May. "Both petroleum and natural gas prices contributed to the June decrease in fuel prices, falling 1.6 percent and 1.4 percent, respectively. Despite the declines over the past two months, fuel prices rose 46.9 percent over the past year. That increase was primarily led by a 49.8 percent jump in petroleum prices." Core import prices were down 0.1%, the first monthly decline for the index since a 0.3% decrease in July 2010. "The June decline was driven by a 0.4 percent decrease in nonfuel industrial supplies and materials prices and a 1.9 percent drop in foods, feeds, and beverages prices, which more than offset higher prices for automotive vehicles and consumer goods. Nonfuel import prices advanced 4.8 percent for the year ended in June." According to Bloomberg economist Joseph Brusuelas lower petroleum, food, industrial supplies “should provide a breather” for cos. facing margin compression. At the same time, rising cost of motor vehicles, parts likely to fuel near-term core inflation rise.