Archive - Jul 2011 - Story

There’s one question that I’ve been seeing over and over for the last several weeks as the price of gold has taken out its all-time highs and continued a nearly uninterrupted ascent: Should I buy gold now? It’s understandable, especially for people who don’t own precious metals yet. Nobody wants to be the sucker who buys gold at the top, only to watch it crater back to $1200 or below. But here’s some food for thought...

SSDD in the just completed 5 Year $35 billion auction. With the When Issued trading at 1.565% into the pricing, the auction came at 1.58%, confirming there was some serious lack of understanding into the close. The Bid To Cover was 2.62, a modest jump from June's 2.59, but still on par among the lowest BTCs in the last year. The ugliness behind the headlines was once again concentrated, with directs surging to the highest since November at 14.6%, obviously an artifact of the end of QE2 as "someone" has to pick up the slack. Indirects dropped to 36.6%, well below the average LTM 41.3% in the past year. Dealers were left on the hook with 48.8% of the take down. Altogether this was a very ugly auction which spooked the bond market, which received another punch in the face after the Treasury admitted that despite rosy estimates by Barclays and others it has not seen a surge in tax receipts (thank you unemployment) and will not have enough cash to last it through August 15 (at which point all the case runs out period).

We view the proposed restructuring as one that would amount to a "distressed exchange" under our criteria because, based on public statements by European policymakers, the debt exchange or rollover is likely to result in losses for commercial creditors, and the objective of the debt exchange/rollover is to reduce the risk of a near-term debt payment default. Under our criteria, we characterize a distressed borrower as one that would--in the absence of debt relief--fail to pay its debt on time and in full.  While no exact date has been announced to initiate Greece's debt restructuring, we understand that it will commence in September 2011 at the earliest. Our recovery rating of '4' for Greece remains unchanged, indicating an estimated 30%-50% recovery of principal by bondholders.

Tired of all the lies that a US downgrade will have no impact whatsoever on unsecured funding be it money markets, repo or so many other shadow banking system components (full list is below)? So are we. Which is why we were very interested to read the following summary of a Nomura research report that a US downgrade "may cause a repo liquidity freeze." Remember the Ice-9 in money markets following Lehman? Well, it may not be quite as big as money markets (last at $2.7 trillion), but at $1.3 trillion, frozen Repos will certainly cause a lot of headaches, especially with a dramatic scarcity of short-term Bills available in the market place for replacement capital flow. For all those wondering why the Fed and the BIS have been writing paper after paper (here, here and here) warning about the potential complications arising from the shadow banking system, this is precisely the reason.

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?