Archive - Sep 2, 2011 - Story

What is twist?  We know it is a prospective transformation of Fed balance sheet whereby selling shorter maturity debt to purchase and impact longer term debt.  But is twist QE3?  Who cares?  One thing is for sure that policymakers increasingly don’t want to be pinned or associated with incremental EXPLICIT policy. Why would you want to semantically define a series of quantitative numbers of failed policies?  QE3, QE99 bottles of beer on the wall.  Does that fan 98 bottles of ineffective policy?  By virtue of having another number does that mean the underestimation framework of a previous number? In fact, QE3 SHOULD take the form of the Fed having a 3 day offsite teach in with other branches of Government.  COMMUNICATION with stakeholders in government like Congress, Treasury, Comptroller of Currency, FDIC, HUD, leaders of banks, mortgage companies and business interests.  What the market is looking for is COMMUNICATION between stewards.  This alone should encourage resolve, incentives, confidence, less uncertainly, productivity, uniformity and an EASING of collective psyche.  Forget twists, and other policy minutia which REWARD poor decision making, leadership, and the current lack of communication and, hence, capital flight and investment valuation decisions globally in efforts to seemingly futilely preserve capital.   Hello gold and Swiss Franc!!!!!

For the second month in a row, Dan Loeb's $7.9 billion Third Point retains gold as its top position. And if that was his only holding he would have done quite well. Unfortunately, he also has quite a few equities, and courtesy of his net 17.7% exposure to equities (and 18.5% to credit) his funds dropped anywhere between 2.7% and 4.5%. Even so, Loeb's flagship fund is up 3.9% YTD, a performance 13F-chasing Whitney Tilson (not to mention mutual fund Paulson & Co.) can only dream about. Loeb continues to be most bullish on ABS credit, while accentuating his hatred for govvies, which account for his biggest short net exposure or -10.3%, an increase from last month's -8.9%. Top equities (except for confidential and FX positions - oddly a new footnote disclaimer, was not there last month - does it mean Loeb has engaged in a major "confidential" position or is he now a major FX trader?) for 3rd Point are Delphi, CIT, Technicolor (a new addition) and El Paso.

It is also ironic that more time has been spent trying to figure out the impact of 45,000 Verizon strikers on NFP, than has been spent on trying to figure out what sort of a system we have where 45,000 employees feel comfortable going on strike when there are NO jobs, and management caves in to their demands. Maybe Obama should address that sort of mentality in his jobs speech next week. Maybe the problem is more at the core of what this country has become than what some new tax incentive to hire can fix. If anything, the tax incentive will likely be good for lawyers who will be paid by big corporations to figure out how to get the most benefit for the least amount of actual change.

Little surprise to the payroll report on Wall Street, which is now united in its call that the only option is for the Fed to do more QEⁿ⁺¹

We dont have real time pricing on spam, but luckily we do on gold and silver. And to all those who BTFD in the past 2 weeks as we suggested, congratulations. Next up: another futile CME margin hike which will do nothing but confirm that a standalone gold standard is imminent.

Not a lot of commentary in Jan Hatzius' response to the horrendous NFP number, although what he says, speaks volumes: "BOTTOM LINE: We now look for the FOMC to announce a lengthening in the average maturity of its balance sheet at the September 20-21 meeting."

Take Green (i.e. double zero), and subtract from it the Birth Death adjustment and presto: you have reality, or what we predicted earlier today- a negative NFP print. Also, for the seasonal sticklers Birth Death has added 491k jobs in the past year: no seasonality here.

Key Highlights:

• At 0, the NFP number is a plunge of 85K, from a downward revised July, which was previously at 117. This is the biggest drop since September 2010
• The Household Survey saw an increase of 331K in the number of employed
• Average hourly earnings for all employees on private nonfarm payrolls decreased by 3 cents, or 0.1 percent, to $23.09. This decline followed an 11-cent gain in July. This is the first time the avg hourly earnings have been negative MoM since January 2008
• Underemployment, U-6, rose to 16.2%, from 16.1% in July
• The labor force rose to 153.6 million in August.
• Ironically the only good news in the report, was what many have been indicating is a negative for months: namely that the Labor Force Participation rate actually rose for the first time in months from the nearly 30 year low of 63.9% to 64.0%

Once again European debt problems are hitting the headlines and putting pressure on stocks globally. While we were busy basking in the glow of the now annual Jackson Hole rally, the situation in Europe actually got worse. The bickering and finger pointing seems constant now. A few key things are worth watching are presented below. In the meantime, as we wait for NFP, SOVX is back above 300, MAIN is above 160, and IG and HY are both well off their tights and are trading as though a lot of bears got long for a trade jumping on the momentum from last week and the month-end and long weekend technicals.

With just half an hour left until the NFP report, all bets should have been made by now if the number will come above the consensus of 68K, or well below it. One who is confident the number will be a big disappointment is Goldman's Jan Hatzius and team who lists the following reasons for why the number will not meet Wall Street's traditional permabullish outlook: Weakened hiring, due to a deterioration in households' assessment of the labor market, weaker real time economic employment indices, fewer online job ads, moderate ADP employment gains; the picture is not better on the demand side as jobless claims remain low, and announced job cuts are rising. There is always a strawman in the form of the Verizon strike which would cut about 45,000 people from the NFP, but laslty, and most importantly, Income tax receipts have dropped substantially in recent weeks: an indication that either employees are paying less in taxes, or there are just less of them. Goldman's summary: "Taken together, our models suggest a deceleration in the pace of payroll growth in August. We therefore expect a gain of 25,000 in the 's report (revised down from 50,000 previously)." Also, let's not forget that the Fed needs some ammunition if it wishes to proceed with announcing QE3 at the September 21 FOMC meeting- yesterday's ISM certainly did not provide it.

Everyone will focus on the Non Farm Payrolls report, which even Goldman expects will be just a shade higher than negative. We, for what it's worth, are confident that when all the revisions are said and done, and when removing the birth/death adjustment, both the headline, and the private jobs number will be negative.

• White House sharply cuts U.S. growth forecast (Reuters)
• U.S. judge pans rush in BofA $8.5 billion mortgage pact (Reuters)
• Italy cobbles together austerity compromise (FT)
• Fresh Scrutiny of BofA (WSJ)
• Fed asks BofA to list contingency plan: report (Reuters)
• Germany backs calls to widen IMF currency basket (FT)
• U.K. Warns Scotland on Costs of a Split (WSJ)
• U.S. Is Set to Sue a Dozen Big Banks Over Mortgages (NYT)
• US Deficit forecast falls below estimates (FT)

Today, the President of the ECB, Jean- Claude Trichet did not rule out a gold backed euro bond in an interview with ‘Il Sole 24 Ore’ published on the ECB’s website. The comments were a response to former Italian Prime Minister Romano Prodi who proposed - in Italian national daily business newspaper ‘Il Sole 24 Ore’ last week - the creation of a euro bond backed by member states’ gold reserves. Prodi was President of the European Commission from 1999 to 2004. Trichet was asked about “the creation of a fund guaranteed by the gold reserves of countries that would issue bonds to buy back national debt and make new investments.” Trichet did not answer the question directly but said “at this stage, we have the EFSF bonds, which are bonds with a European signature. The main message of the ECB Governing Council to governments is to implement rapidly, fully, comprehensively the decisions taken by the European heads of state and government on 21 July.” Separately the Central Bank of Ireland has said that it will not disclose whether the gold reserves of Ireland (a paltry 6 tonnes) have been swapped or loaned out or had any other receivable status recorded against them (see Commentary below). A senior administrative officer for financial control at the Central Bank of Ireland responded to an inquiry regarding the custody and ownership of Ireland’s gold reserves: “The bank is not, however, in a position to provide further information, nor to outline its investment strategy in relation to the gold holdings.”