Archive - Jul 27, 2011 - Story

If anyone actually cares, the Committee for a Responsible Federal Budget has released the following handy summary cheat sheet which compares and contrast the key aspects of the Boehner and Reid proposals. We suggest nobody spend more than 2 seconds skimming through these as both will be vastly reworked by the end of trading today.

The trite soundbites:

• Senator Reid holds news conference on debt limit talks, says Democrats have compromised on debt limit, time for Republicans to “face facts.”
• Says Senate bill can reach $2.4 trillion cut
• “Confident” final bill will raise debt limit through 2012
• Schumer says it is time for Boehner to pull the plug on his plan
• Schumer says block of republicans can't lead nation off a cliff
• Says Reid's plan offers potential to break impasse
• Says Senate bill "is the better bill"

Apparently the GOP has cancelled its press conference scheduled for 10am, however now we have the democrats taking their place at  11:45 as Harry Reid is now expected to hold a conference 15 minutes before noon. In other news, there is some unconfirmed and likely 100% wrong rumor that a debt deal has been reached.

Update to the update:

• No deal: U.S. SENATE DEMOCRATIC LEADERSHIP AIDE SAYS "THERE IS NO DEAL" YET ON DEBT LIMIT, IN RESPONDING TO MARKET RUMORS

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

Just out from the office of David Grais of Grais & Ellsworth: "We also conferred, per the Court’s request, with the office of Attorney General of the State of New York. The Attorney General’s office has asked us to inform the Court that it is completing its analysis."

Yes, indeed it is. While everyone and their grandmother is foaming at the mouth how both republicans and democrats hiked the debt ceiling for umpteen times over the past x years, the truth is that never before has the ratio of the proposed debt ceiling to the tax receipt ratio been as high as it is now. At nearly 6 times, this means that the top line (forget bottom line) cash inflows into the Treasury are 6 times lower than the current debt ceiling. And following the upcoming $2.5 trillion this number will surge to almost 8 times. So please ignore the next "pundit" who is complaining about the hypocrisy of not agreeing to an outright debt ceiling hike this time around - as usual they have no idea what they are talking about.

And whoosh... On absolutely no news, ES just folded in on itself after a real size seller just hit every bid. Remember: there is no better trigger for affirmative policy in the 11th hour than an epic market crash. May 6 anyone?

The market has finally realized that "this" is getting real. As of the open everything, including USTs, has been sold off aggressively. Well, except for gold of course, but we all knew that. Gold just hit a new all time record above $1628. In other news, there will be a Republican press briefing at 10 am according to C-Span. Stay tuned.

Goodbye 11th hour. Hello 12th hour and 1 minute. According to MF Global's Chris Krueger, the probability that congress fails to raise the debt ceiling by August 2 is now 55%. Which means at least a 1 if not more notch downgrade by the rating agencies, which means massive and completely unpredictable spillover effects in money markets, structured finance, muni and all other financial products, which means the military will soon have to conduct many more urban exercises to prepare for "Tehran" (because the Iranian capital's downtown has at least 3 John Hancock center replicas). In the meantime, the market still thinks that Bernanke can fix this.

Yesterday, we roasted Boehner over his proposed deficit-cutting plan after it was discovered that it cut about $250 billion less than had been promised. Now it is time to do the same to Harry Reid, after the CBO has just released its analysis of his so-called "plan", which has double the credibility, and dollar, hole: per the CBO the plan will only generate $2.2 trillion in savings, half a trillion short of the promised $2.7 trillion. But wait, it gets far, far more idiotic. Per the CBO "The caps on appropriations of new budget authority excluding war-related funding start at $1,045 billion in 2012 and reach $1,228 billion in 2021" - that's right: savings from not fighting future wars - a cool trillion. But why stop there - savings from not declaring war on Mars: $1 quadrillion; savings from not paradropping suitcases full of $1 billion dollar bills for every US citizen: $333 quadrillion, and so forth. But wait: there's more: "The legislation also would impose caps of $127 billion for 2012 and $450 billion over the 2013-2021 period on budget authority for operations in Afghanistan and Iraq and for similar activities." But wait, there' even more: "Savings in discretionary spending would amount to nearly $1.8 trillion, mandatory spending would be reduced by $41 billion, and the savings in interest on the public debt because of the lower deficits would come to $375 billion." Gotta love the circularity: less interest payments are part of the actual deficit cuts! So, here's the math: of the $2.2 trillion in "savings" strip away non-savings from non-authorized "wars" and you get... $750 billion... and take out the $375 billion in, no really, interest savings, and you get... $375 billion. OVER TEN YEARS! Is there a wonder why with idiotic leaders like this the true US rating is CCC at best?

Sooner or later it was inevitable. Next up: the "tea party" lives up to its true name.

Those who had read our prediction that the Paris Air Show was a harbinger of weaker durable goods will not be surprised to read that June durable goods just came at a very disappointing -2.1% on expectations of an increase to 0.3%, from 1.9% in May. But it wasn't just Boeing's fault: ex-transportation the number was a subpar +0.1% on consensus of a 0.5% beat, with the May reading revised up to 0.7%. The driver according to Bloomberg's Joseph Brusuelas: "decline in transportation bookings, incl. 28.9% drop in non-defense aircraft orders." And that's not all: "Non-defense ex-aircraft, proxy for capex, points to slower growth in coming qtr." This means that as expected not only is Q2 GDP trending now much lower, possibly below 1%, but the weakness is starting to spill over into Q2 data. As AP reports, "Manufacturing has been the stellar performer in the two-year-old recovery. But activity slowed in the spring, reflecting in part supply disruptions following the March earthquake and tsunami in Japan. Manufacturing was also hurt by the hit the overall economy took from higher energy prices which dampened consumer demand." Ah, still blaming it all on Japan. And to think in Joe LaVorgna's world it was supposed to be a boost to GDP. Kneejerk reaction: USD plunges, futures down, gold surges to new record over $1,626. On so forth.

Markets remained apprehensive as the impasse over the issue of raising US's debt ceiling prevailed, and further risk-aversion materialised after German finance minister expressed his reluctance in the use of EFSF/ESM to purchase government bonds in the secondary market. This resulted in weakness in European equities, led by financials, which provided support to Bunds, and also weighed upon the EUR across the board. In other news, AUD received strength following higher than expected inflation data from Australia overnight, whereas a downtick was observed in GBP/USD after a sharp decline in CBI trends total orders figures from the UK.  Moving into the North American open, markets look ahead to key economic data from the US in the form of durable goods report, DOE inventories figures, as well as the release of Fed's Beige Book. In terms of fixed income, USD 35bln 5-year Note auction is scheduled for later in the session. Markets will also watch keenly US corporate earnings from the likes of Boeing, ConocoPhillips, and Visa.

• IMF Chief Raises Idea of Seeking More Cash (WSJ)
• US Money Market Funds Build Liquidity (FT)
• Interbank Loan Probe Focuses on Yen Rates (FT)
• Watchdog Sees Financial Weak Spots (WSJ)
• China’s 29% Jump in Industrial Profit to Spur Growth by Fueling Investment (Bloomberg)
• Shanghai to Step Up Probes of Home Prices (Bloomberg)
• Lessons From the Malaise (NYT)
• Hurtling toward economic chaos (LA Times)
• Who Elected the Rating Agencies? (WSJ)