Archive - Jul 2011 - Story

Who would have thought a few years ago that Moody's would be one of the biggest supporters of the gold bulls..."Moody's Investors Service has today downgraded Ireland's foreign- and local-currency government bond ratings by one notch to Ba1 from Baa3. The outlook on the ratings remains negative. The main driver of today's downgrade is the growing likelihood that participation of existing investors may be required as a pre-condition for any future rounds of official financing, should Ireland be unable to borrow at sustainable rates in the capital markets after the end of the current EU/IMF support programme at year-end 2013. Private sector creditor participation could be in the form of a debt re-profiling -- i.e., the rolling-over or swapping of a portion of debt for longer-maturity bonds with coupons below current market rates -- in proportion to the size of the creditors' holdings of debt that are coming due."

Yesterday, when sharing our latest thoughts and observations on the $8.5 billion Bank of America settlement we said, "One thing is certain: the final BAC settlement, if one even comes to fruition, will not be $8.5 billion." Once again: we may have been correct...

• NEW YORK INVESTIGATING $8.5 BLN BANK OF NEW YORK MORTGAGE DEAL
• NEW YORK ATTORNEY GENERAL SEEKS DATA ON BANK OF AMERICA ACCORD
• NEW YORK PROBE IS PART OF MORTGAGE SECURITIZATION INVESTIGATION
• NEW YORK SENDS LETTER TO GOLDMAN SACHS, BLACKROCK, ING, INVESCO

BAC stock not liking this latest development at all.

The only section that matters: "Some participants noted that if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate and if inflation returned to relatively low levels after the effects of recent transitory shocks dissipated, it would be appropriate to provide additional monetary policy accommodation....A few members noted that, depending on how economic conditions evolve, the Committee might have to consider providing additional monetary policy stimulus, especially if economic growth remained too slow to meaningfully reduce the unemployment rate in the medium run." Translation: QE3?

There probably is a reason for the sudden move higher in gold, but we don't know or care. At this point the end of Ponzism is a given. Just a matter of time. Next stop for gold $2,000, then various multiples of $1,000 after. But first, the all time nominal high of $1,577 from May 2.

It worked for Hank Paulson who showed up in Congress with a three page termsheet, delusions of grandeur, a scary story, and an easily frightened audience. Why should it not work for the president. As Reuters reports, "Barack Obama said in an interview on Tuesday that checks to recipients of the Social Security retirement program may not go out in early August if he and congressional leaders do not agree a debt deal. "I cannot guarantee that those checks go out on August 3rd if we haven't resolved this issue," Obama said in an interview with CBS, according to a transcript on the network's web site. "Because there may simply not be the money in the coffers to do it," Obama said." Is that so Mr. President? Please explain then how according to the most recent DTS the YTD (fiscal) amount paid out on Social Security is $469 billion, well below the amount collected from Federal Tax Deposits of $780 billion. As a comparison, this number is lower than the combination of Medicare and Medicaid ($638 billion YTD), and the combination of Defense and Education Payments ($480 billion). Indicatively, Federal salaries are a whopping $137.6 billion, or said otherwise, all of the SSN payments to date are just three times bigger than what the government pays its own employees. Perhaps a bigger issue is that the debt held by the public has increased by $720 billion YTD, a number which will soon grow to $1.5 trillion if the government does get debt hike it so desperately needs.

With the When Issued trading at 0.688% just before 1pm, some were expecting a relatively weak 3 Year auction to price. Instead, the Treasury managed to place the $32 billion in paper at a new 2011 low yield of 0.67%, nearly 2 bps inside the WI. The Bid To Cover was nothing to wrote home about at 3.219, the lowest since February, although certainly not a bad number. There was little else to cheer about: Dealers took down 49% of the total, with the Indirect share declining once again, from 35.6% to 34.5%. The offset was a surge in Directs bids which were responsible for 16.5% of the auction, the highest of 2011. Whether this is merely London-based Chinese proxies, or some other Vince Reinhartian contraption keeping rates low, is unknown. As a result of the auction which many were quite nervous about, the Green eurodollar pack was down 1.75 bps as was the Red (down 1.75 bps) and White (1 bp) after the auction after being down 3.5, 3 and 1.25 bps before the auction. Bottom line: good appearance by the Dealers in the post QE2 era. The question now is who do they offload to.

"The rule of law has basically been thrown out the window. Money printing is the order of the day. And when politicians take control of central banks, which they have done in the United States and they are also doing in Europe, that basically destroys the currency. It puts the currency on the road to what I call the Fiat Currency Graveyard, so I expect there are going to be massive currency problems as we go forward. The financial crisis that we have been dealing with for the last several years has not been solved." So cautions James Turk, widely-respected precious metals expert and founder/chairman of GoldMoney. In this detailed interview (recorded in June), Chris and James explore the probable outcome of the current US debt-ceiling operatics, the likelihood of future Fed money printing, and strategies for preserving wealth. In short, James believes we are witnessing the decline of the world's major fiat currencies, and expects gold to be remonetized in the aftermath.

Call it the gift that keeps on giving (if one is a corporation that is): the US Tax system, so effective at extracting income tax from America's working class, is just as "effective" at redistributing said income tax at the corporate level. Case in point: News Corp, which after generating $10.4 billion in profits over the past 4 years, and which would have been expected to pay the IRS $3.6 billion at the statutory corporate tax rate, instead received $4.6 billion back from Uncle Sam. Bottom line: Murdoch's corporation had a cash paid tax rate of -46% between 2007 and 2010. The culrpit: two little somethings called Deferred Tax Assets and Net Operating Loss Carry-forwards.

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

The Treasury just auctioned off today's $28 billion 4 week Bill. Details of the auction were expected by the investor community to see what the closing yield on the auction would be. And at 0.02% it probably shouldn't be very memorable. Yet it is, because this just happens to be the worst yield in over a month (and certainly a deterioration from the free money the Treasury was able to get during the last 4 week bill which closed at 0.000%). The last time we had a 4 Week Bill price wider than this high yield was June 1, when the auction priced at 0.04%. Now is this micro move indicative of much? Probably not, although it does show that the quarter end window dressing phenomenon was not responsible for the surge in Bill demand (the prior auction was July 6 or after the Q2 end period), and that is now over. Also, demand for General Collateral is as high as ever at -0.01%, thus this is not an aversion from short-term paper. So is the money scrambling into equities? Hardly. This begs the question: is this micro move in ultra short term yields, the first canary in the coalmine from the bond market which may, just may, be getting a little nervous that there won't be a resolution to the debt ceiling issue by the July 22 deadline. We will know for sure next week when the next 4 week Bill is auctioned off. In the meantime, later today we get the first test of QE2-less demand when $32 billion in 3 Year bonds are auctioned off.

So the way my world works is I wake up and I check my BlackBerry, which is a uranium mine of information. The reason it's so rich with information is I have the benefit of all my legacy brokerage and financial research coming into it, I have all the current NBC clippings and headlines (from tsunami coverage to Casey Anthony to the White House) and I have my Twitter feed, which is probably the best monitor of what's breaking. For my first pass, I look at The New York Times, The Wall Street Journal, Financial Times and all the major news organizations' Twitter feeds. On the second pass, I'm looking at the financial universe: the price of oil, currency pricings, etc. Then I'll log onto my computer and check the homepages of The Huffington Post, Politico, Zero Hedge, The New York Times and Financial Times and I'll read Naked Capitalism just to see what Yves Smith is saying about the banking system. I don't subscribe to any print media. I wouldn't read a newspaper now unless you put a gun to my head and even then I would really try to negotiate with you. It's not that I reject the content, it's that I reject the format.

While the European economy is imploding, the Chinese are struggling to hide 10% of their GDP in bad debt, and the US is scrambling to come up with a compromise to the debt ceiling, which is so far not even close with only 10 days left until the July 22 deadline (no, it's not August 2), one can be forgiven to forget that the US stock market continues to be nothing short of a crime scene. We are happy to remind you. Nanex has just spotted today's flash crash du jour, which promptly took $10 billion Brown Forman from $70 to $16.64, a 75%, or $7.5 billion, loss, in about one second. No, not a fat finger: an algorithm, which hit every bid on the way down for precisely 8,409 shares. We fully expect the pustular math Ph.D. (most likely out of Getco) to be promptly relieved of any responsibility for coming up with a massively wrong algorithm, as the NYSE shortly cancels all the bad trades. If nobody else is punished for their mistakes, why should the parasites who churn our stocks be treated any different?

There was nothing to smile about in today's May JOLTS release from the BLS. Those expecting a pick up in job openings (traditionally the key requirement for an sustained increase in NFP) will have to wait some more, after the May number came at 3.0 million, the same as April. This is modestly better than the all time low of 2.1 million in July 2009, but is a far cry from the 4.4 million when the Depression started. And while there was no good news in Job Openings, there was some bad news in Total Separations which increased by over 200K sequentially from 3.833 MM to 4.059 MM. And for the first time since late 2010, the separations rates (defined to include voluntary quits, involuntary layoffs and discharges) rose to 3.1%, the same as the hires rate. Should the separations rate (especially if driven by involuntary departures) surpass the hires rate it will likely portend another period of NFP weakness ahead. What is most surprising is that contrary to conventional wisdom, the voluntary quits level among government workers increased from 38% to 41% of total, while the layoffs and discharges level dropped from 44% to 38%, which means that government workers were not "let go" - they left voluntarily. This throws a bit of a wrench in generic interpretations of the surge in the government component of the unemployment rate. What is worse is that the quits rate in the Private employment stayed flat at 50%, while the layoff and discharges rate increased from 42% to 44%. Ironically, it is Private workers who are getting fired more, while it is government workers who are quitting voluntarily.

Willem Buiter, Citigroup's chief economist and former BOE policy maker, told reporters in London today that "the ECB will intervene on whatever scale is necessary to allow Italy to conduct its auction on Thursday. If the ECB doesn’t come in, the Italian bond auction is likely to fail. What we’re going to have is the ECB are going to be doing the heavy lifting." To anyone who watched the sharp move in Italian sovereigns, so reminiscent of central bank FX intervention overnight, Buiter's conclusion is all too obvious. As we reported, there were extensive rumors, and certainly validated by trading activity, that either the ECB or the PBOC or both, intervened in the Italian bond market to make sure today's Bill auction priced, which it did, but absent the reinforcement of the central banks could have very likely failed. What is amusing is that it was just last week that reporters were querying Trichet why the ECB's SMP bond purchasing operation had been all but abandoned. Well, here's your answer: JCT was simply preserving his dry powder for all the upcoming contagion casualties, such as Italy first, then everyone else.

It looks like SOVX completely broke down for periods of time yesterday where bid/offer widened, and in spite of that, the index moved on no trades. For a brief period this morning, that looked like it affected MAIN as well. So far U.S. credit markets have been far more stable and the technicals seem better, though I'm not sure how true that would have been if people were trading IG when Main went to 127 bid earlier. Main is back to 120. That is a very large swing. This heightened volatility needs to subside soon, or we will see weakness in the market as investors (particularly hedge funds) are forced to shrink their positions because they do not (cannot) tolerate the P&L volatility from these sorts of moves. Main traded in a 10 bp range (95.75 to 105.75) from March 20th until June 8th. Almost 3 months and the entire range was 10 bps, and most of the time it traded in a tighter band. Today it has traded in a 7 bp range. That level of volatility is unsustainable, but even if we continue at the pace of the past couple of weeks, investors will have to scale back their positions as the only way to manage their P&L. We may continue the bounce, but without real evidence of some new plan, I think the upside is credit is very limited short term.