Archive - 2012 - Story

The last time we saw a 10 Year auction with comparable confusing internals, it was in July, when in a bond issue that smashed virtually all record, the sold 10 year paper in what we then dubbed a "WTF auction." Today's 10 Year $21 billion reopening, while maybe not quite as stunning in all categories, and coming at a yield of only the third highest in history or 1.65%, certainly had enough drama in the internals to qualify for the designation of WTF 2.0. It wasn't the Bid to Cover either that made it remarkable, which at 2.95 was higher than November, but well below the TTM. What truly set aside this reopening was that the Directs, continuing on yesterday's surge, took down a massive 42.7% of the auction: only the second highest since the July 45.4%. The flipside of course is that Indirects were left holding 24.2%, or the lowest Indirect take down since April 2009. Why did this dramatic inversion happen? Why the collapse in Indirect bidder interest (only $6.6 billion in bids tendered for an allocation of $5.1 billion)? It is unclear, for now.

There was a time when the only media ambush Columbia business school dean Glenn Hubbard had to watch out for was humiliating exposes from the likes of Inside Job's Chris Ferguson. However, when even the stage props are off to get you (as they clearly are at 1:56 in the clip below), perhaps someone is sending you a signal it is time to take a sabbatical from the media circuit (especially since any hope of making Fed head of even SecTres is now gone for good.)

At the top of the agenda for today’s FOMC meeting is deciding what to do about the Maturity Extension Program (MEP). SocGen agrees with consensus (as we noted the day QE3 was announced means a ~$4tn Fed balance sheet is on its way) that the MEP (Twist) will be converted into outright QE. The size is more uncertain, but we see several reasons why the current pace of $45bn/month should be maintained (which combining with the $40bn MBS means the Fed’s balance sheet is expected to increase by $85bn/month from January onwards). There has been no “significant” improvement in the outlook for employment (recent data is likely to be played down by Bernanke). Scaling back monetary accommodation also seems at odds with the looming fiscal contraction which could dampen growth in early 2013, which SocGen suggests will lead to the FOMC’s economic forecasts being updated (and downgraded we suspect) as the 2013 GDP forecast of 2.5%-3.0% looks too high in the context of contractionary fiscal policy and is at risk of being revised down. As for the “Evans Rule,” we believe that it will be adopted eventually, but don’t expect an announcement for now.

When two weeks ago Mark Carney was appointed head of the Bank of England (despite his firm denials of any interest in the position) many were surprised. Not us: we were certain the former Goldmanite, and incidentally current head of the Bank of Canada, would lead the world's oldest central bank. We were even more convinced Carney would become BOE head after on November 8 the Bank of England halted QE as its "potency was questioned." Needless to say to the banker sponsors of the MIT monetary genius diaspora (as profiled previously), there is nothing more terrifying than the prospect of an end of electronic money conceived literally out of thin air, and debiting it into perfectly willing excess reserve accounts at any/all banks. So what is a statist financial system caught in the final days of its existence and desperate to extend its life as long as possible to do? Why, appoint the one person who would turn this "disastrous" conclusion on its head, and promptly proceed with doing exactly the opposite: printing like a drunken Hewlett Packard laserjet.

With the Fed nervous to even let a little MEP 'Twist' expire (tightening), we can't help but be a little nervous of their unbridled and passionate belief that if inflation should rear its ugly (or virtuous, perhaps, in their satanic eyes) head, they will be able to manage and tighten to control it. To wit, we note that one of the Fed's most-watched indicators of inflation - the 5Y5Y forward inflation breakeven - has just reached its highest level in 17 months and is near its peak since the financial crisis lows in 2009 at over 3.08%. We have six little words for Bernanke, Yellen, et al. "Be Careful What You Wish For." And by the way, the last few times, the 5Y5Y reached these levels marked a short-term top in the S&P 500.

In our fair-and-balanced way, it was Harry Reid that slayed the bullish beast yesterday and today it is the words coming out of Boehner's mouth that have cracked the pre-FOMC euphoria. Admittedly, we had started to slide from the open, but the Republicans bluster helped stocks take another leg down (to the overnight session lows) as the rhetoric picks up once again... but but but a deal is just around the corner so buy buy buy...

The much-heralded $1.05 billion patent lawsuit win on August 24th appears to have marked "Peak AAPL-ness" as investors look through the first-round win for Apple to Samsung's potential second- and third-round wins on margins and revenues as a supplier to their rival. As Bloomberg's Chart of the Day notes, since that analyst-exuberance-inspiring date, Samsung is +16.8% (or 23% in USD terms) and Apple is -18.4%.

Define irony: when the most vocal supporter of a dramatic change to the existing tax policy takes advantage of the last few days of the old one...

• BERKSHIRE HAS PURCHASED 9,200 OF CLASS A SHRS AT $131,000-SHR
• BERKSHIRE RAISED PRICE LIMIT FOR BUYBACKS TO 120% BOOK VALUE
• BERKSHIRE MAY BUY ADDED SHRS AT NO MORE THAN 120% BOOK VALUE
• BERKSHIRE BOOSTS BUYBACK PRICE LIMIT TO 120% BOOK VALUE VS 110%

A total $1.2 billion spent to avoid a few hundred million in new taxes. And now back to the hypocrticy of the "Buffett tax", and "Patriotic Millionaires for America." In other news, total donations to pay down the debt in Fiscal 2013 (starting October 1): $290,195.03.

Ever get the feeling that the entire global economy is one big experiment conducted by several former Keynesian economists from MIT with a bent for central planning, who sit down in conspiratorial dark rooms in tiny Swiss cities and bet it all on green until they double down so much nobody even pays attention to the game? No? You should. Jon Hilsenrath, of all people, explains why.

It has been a while since we looked at the Baltic Dry Index, which when normalizing for the excess glut in dry container ship supply (such as right now - 5 years after all the excess supply in the industry - has long been normalized), continues to be one of the best concurrent indicators of global shipping and trade. We look at it today, moments ago it just posted an epic 8.2% plunge, crashing from 900 to 826, or the biggest drop since 2008! Of course, conisdering the collapse in global trade confirmed in past days by both Chinese and US data, this should not come as a surprise, although we are certain it will merely bring out the BDIY apologists who tell us that supply and demand here (like in every other Fed-supported market) are completely uncorrelated.

Turkey’s trade balance may turn on whether President Barack Obama vetoes more stringent sanctions against Iran after the U.S. Senate passed a measure targeting loopholes in gold exports to the Islamic Republic. Turkey’s gold trade with neighbouring Iran has helped shrink its trade deficit over the past year according to Bloomberg. Incredibly, precious metals accounted for about half of the almost $21 billion decline. That’s calmed investor concern over its current-account gap, and helped persuade Fitch Ratings to give Turkey its first investment-grade rating since 1994.  The U.S. Senate voted 94-0 on Nov. 30 to approve new sanctions against Iran, closing gaps from previous measures, including trade in precious metals. Obama, who opposes the move on the grounds it may undercut existing efforts to rein in the nation’s nuclear ambitions, signed an executive order in July restricting gold payments to Iranian state institutions. Turkey exported $11.9 billion of gold in the first 10 months of the year, according to the Ankara-based statistics agency’s website. A very large 85% of the shipments went to Iran and the United Arab Emirates. Iran is buying the gold with payments Turkey makes for natural gas it purchases in liras, Turkish Deputy Prime Minister Ali Babacan told a parliamentary committee in Ankara on Nov. 23.

• Here come the low margin products: Apple Tests Designs for TV (WSJ)
• Obama and Republicans Trade Offers to Avert Fiscal Crisis (BBG)
• Carney broaches dumping inflation target (FT)
• Bernanke Critics Can’t Fight Bonds Showing No Inflation (BBG)
• Corporate Taxes on Table in Cliff Talks (WSJ)
• US business chiefs back tax rise (FT)
• Greece Confident Bond Buyback Needed for Aid Succeeded (BBG)
• New Faith in Europe's Banks (WSJ)
• European Bank Sees Little Room for Rate Cuts (WSJ)
• North Korea Claims Success in Rocket Launch (WSJ)

Today is probably the first day in a while in which minute-by-minute rumors on the Fiscal Cliff will not be on the frontburner (with yet another late day rumor yesterday of an imminent deal turning out to be a dud, when it was reported that Obama's latest grand compromise was to lower his initial tax hike demand from $1.6 to $1.4 trillion, or still $600 billion more than last summer's negotiated number), with Ben Bernanke and QE4 taking center stage instead. By now it is a foregone conclusion that Ben will proceed with extending Twist as first predicted here, into an unsterilized bond buying operation, in effect confirming that there has been zero improvement in the economy, as another $1 trillion is about to be injected until the end of 2013, and more trillions after that. The good thing is that all pretense that the Fed cares about anything but the market is now gone. The bad thing is that the Fed will continue to take over the capital markets until it and the other central banks are the only traders remaining. The only question is whether the market, now well into massively overbought territory, will fizzle and snap back after Bernanke's news announcement, and will QE4EVA (as we believe QE3+1, aka QEternity-er, should be called) have been fully priced in by the time it was announced?

It seems not every nation's head of central banking believes in the Bernanke Doctrine of moar QE is better QE... Hong Kong Monetary Authority Chief Executive Norman Chan said Monday that quantitative easing is not a panacea, and added:

... there is a possibility that the process of deleveraging is disrupted by quantitative easing, leading to sharp increases in asset prices in the first place. Yet, since such increases are not supported by economic fundamentals, any increase in wealth will be seen as transient... (and asset prices might drop sharply and remain volatile). As a result, households are unwilling to increase spending and in the end, the real economy fails to rebound.