Archive - Oct 10, 2013 - Story

The Speaker of the House has a plan - apparently - that enables the debt-limit "can" to be kicked 6-weeks down the line to Nov 22nd in a "clean" bill that appears dirtied by the lack of a CR for the government shutdown (though including a broader budget talks process). Democrats are already pushing for an end-2014 debt-ceiling extension that McConnell says "wil not fly." We look forward to hearing from Boehner on how this is not a "fold" and how the rank-and-file will agree to this... see you in six-weeks... (and while stocks are incapable of discounting anything that far out, T-Bills are starting to price in that reality). But. U.S. HOUSE REPUBLICAN LAWMAKERS CONCERNED THAT CLEAN DEBT LIMIT INCREASE WOULD NOT FORCE OBAMA TO NEGOTIATE-SENIOR REPUBLICAN AIDE and HOUSE REPUBLICAN LEADERS PLAN TO PRESENT PROPOSED SHORT-TERM DEBT LIMIT HIKE TO WHITE HOUSE ON THURSDAY; WANT TO SEE WHAT OBAMA OFFERS IN RETURN-SENIOR REPUBLICAN LAWMAKER

The S&P 500's 32 point rally off the lows yesterday has some excited that the "All-Clear" will be signaled soon from Washington and traders can go back their business of BTFATH. In an effort to provide guidance for just what that would mean, and assuming Yellen/Bernanke (absent any jobs data to guide their hand from the "buy" button to the "strong buy" button) stays the course, the Fed balance-sheet flow suggests an End-October S&P 500 Target of 1,800... and all driven by the optimistic expansion of multiples.

Is it any wonder that there are rumors of CEO after CEO turning down the top-job at Microsoft? As Gartner just announced, the 2013 "back-to-school" sales quarter experienced its lowest PC volume since 2008. Excuses are myriad - from inventory channel delays, currency volatility, and operating system upgrades - but the bottom-line is that "cheaper Android-based tablets attracted first-time consumers," and the PC slide continues to its sixth consecutive decline in worldwide shipments.

Gold may not be money, but the proceeds from selling it sure is, at least to the IMF, which moments ago announced that it has received government approval to "transfer the profits from gold sales low-income countries." Reuters reports that "The International Monetary Fund has received approval from its member nations to transfer the profits from gold sales conducted a few years ago to a fund to help low-income nations, IMF chief Christine Lagarde said on Thursday. "We have just reached the threshold of enough approval from our membership to transfer the existing gold profit to meet the financing needs of our low-income countries," she said at a news briefing opening the fall meetings of the IMF and World Bank." What was left unsaid is that the bailout needs of the high-income countries, once the debt crsisis comes back with a vengeance as it always does - which as the Keynesian uberminds have demonstrated can only be "solved" with more debt, more monetization, and more pent up inflation - will make sure that gold prices jump right back to new highs at which point the IMF can sell another batch of gold to fund the "poor countries" again, and so on, repeating the process until all fiath is extinguished, or until the IMF runs out of gold, whichever comes first.

Forget about the headlines, the most concerning statement from the entire circus of Jack Lew's hearing was his comment that the world counts on the US to be responsible. It seems that boat sailed a long time ago. The following succinctly summarizes the key aspects of his testimony and the Q&A. As a reminder, Lew noted "Obama did negotiate," denied the chance of "prioritization," and warned that other nations appear ready (and somewhat excited) for the US to falter.

After reading the coverage of Janet Yellen’s Fed Chair nomination yesterday, it feels as though it’s 2006 all over again. Confidence in our central bankers seems to be approaching all-time highs, little more than five years after it collapsed alongside the financial sector. The overwhelmingly positive response to Yellen’s nomination is worrisome because, well, it’s overwhelming positive. As Galbraith once astutely observed: “In economics, the majority is always wrong.”

As investors "celebrate" a potential can-kicking "resolution" - the T-Bill market is pricing in a recurrence of the catastrophe in just 6 weeks. While the shortest-dated bills are rallying, the End-November to mid-December bills are selling off dramatically... the 12/05/13 Bills are now +8bps to 12bps.

As we noted last night, finally, it appears that the resolution to the debt ceiling, now due to hit in one week, will be a 6 week can kicking to late November, early December so the whole thing can repeat again, while the government shut throughout according to the GOP proposal, which also means no nonfarm payroll reports for September, October and November:

• *HOUSE REPUBLICANS SAID CONSIDERING CLEAN 6-WEEK DEBT-LIMIT BILL
• *REPUBLICAN LEADERS TO PRESENT PROPOSAL TO MEMBERS TODAY
• *U.S. GOVERNMENT WOULD REMAIN CLOSED UNDER HOUSE PROPOSAL

The USD and Treasury Yield are soaring, US equities are waking up slowly to the news but T-Bills remain unimpressed for now. Bear in mind this was originally reported on October 5th.

Initial Jobless Claims spike 66k this week, to its 2nd highest print of the year. For 5 weeks in a row we have see initial claims slide lower as the market celebrated multi-year lows and rallied on recovery hopes... and now it's all gone. Continuing claims has also missed expectations for the second week in a row. The Labor department explains this credibility-destroying data as due to the government shutdown and to "glitches" in the California computer system (which were supposedly resolved two weeks ago when the claims number was printing in the mid 200k range) as well as due to 15,000 non-Federal workers filing claims (being fired) due to the government shutdown. Of course, anyone fired in the past week can and likely will say they were fired due to the shutdown. The market shrugged off this data as irrelevant, which it is for the simple reason that initial claims reporting, now flawed for 5 weeks in a row, has become the latest "data" set to succumb to total farcism.

UPDATE: *CBOE: CFE WILL OPEN THE VX FUTURE PRODUCT AT 8:10 AM CT

It would appear that the overnight melt-up exuberance of an optimistic investing public has been stymied as the exchanges break once again. Following record volume levels on VIX options this week, we are told this morning by CBOE:

• *CBOE: CFE EXPERIENCING TECHNICAL ISSUES
• *CBOE: CFE EXPECTING DELAYED OPENING FOR THE VX
• *CBOE:CFE WILL BUST ERRANT VX, VXT TRADES FROM 7:00-7:12:01 CT

SSDD... Let's hope Jack Lew has something positive to say and doesn't "surprise" an unhedged market.

Nearly exactly five years after Hank Paulson appeared before Congress dangling a 3 page term sheet ultimatum warning it was his way or the apocalypse, it is time for the sequel. Since we all love the smell of a good Mutually Assured Destruction spectacle in the morning. Which is why we can't wait for Treasury Secretary Jack Lew's presentation before the Senate Finance Committee discussing the Debt Limit, in which he will rain fire and brimstone on anyone who suggests that the Treasury can enter the X-Date without a debt ceiling deal in place, and will most certainly seek to crucify anyone who points out the logical, namely that payments can be prioritized and interest expense is a fraction the revenue the Treasury brings in, and that the end of the world would be nigh should the US actually be forced to live within its means.

While there is hope that DC will engage in its favorite, can-kicking activity any minute and if not resolve then at least push back the funding and debt ceiling stalemate by a few weeks, the reality is that without a deal in seven days, there may be no cash to pay down maturing Bills starting with the October 17 issue whose yield soared to nearly 50 bps yesterday. The reason for the capitulation as was revealed yesterday, is that various money market funds such as Fidelity's have been selling all paper around the X-Date. This morning the contagion surrounding the use of Bills as collateral has crossed the Pacific, following news that the "Hong Kong’s futures and options market operator will require traders to put up more collateral when using some Treasury bills to back their positions, citing concern that the U.S. is at risk of a default." In other words, as we forecast on Monday, the debt-ceiling confusion in cash-land has now openly engulfed the repo market, which only makes the states of a debt deal that much higher. Because if the repo, $2.5 trillion money market, and subsequently, the entire $80 or so trillion custodian market freeze up, what happens next will make Lehman seem like a quiet walk in the park.

• The ice breaks; fiscal talks set (The Hill); Ryan steps up to shape a deal (The Hill), as predicted here yesterday
• Republicans consider short-term U.S. debt ceiling increase (Reuters)
• Shutdown Standoff Shows Signs of a Thaw (WSJ)
• JPMorgan Clients in Cash as Schwab’s Options Hedge Default (BBG)
• Mitch McConnell, Senate GOP search for way out (Politico)
• Meredith Whitney Winds Down Brokerage Unit After Setting Up Fund (BBG)
• Washington Budget Chaos Keeps Fed Rates Low for Longer (BBG)
• Chinese Premier Outlines US Debt Concerns (FT)
• Saudis brace for 'nightmare' of U.S.-Iran rapprochement (Reuters)
• Obama Urges Action on Yellen’s Fed Nomination (Reuters)
• Libyan Prime Minister Ali Zidan Freed After Kidnap (WSJ)

As reported previously, the latest meme surrounding the D.C. impasse is that Obama is suddenly willing to compromise on a short-term, supposedly six-week funding and debt ceiling extension, on the verge of his latest talks with republicans at the White House scheduled for this morning, as previously floated by the GOP. Throw some additional headlines such as "Ryan steps up to shape a deal" (in line with what we predicted yesterday) and "The ice breaks; fiscal talks set", by The Hill, and "GOP quietly backing away from Obamacare" from Politico, and one can see why futures are in breakneck soaring mode this morning, driven as usual by the two main JPY cross (USD and AUD), the first of which is less than 100 pips now away from being Stolpered out.  So will a compromise deal finally emerge 7 days ahead of the first X-Date, or will a last minute snag once again derail the (non)-negotiations? We will know quite soon.