Archive - Oct 16, 2013 - Story

Senate Majority Leader Harry Reid and Senate Minority Leader Mitch McConnell will soon announce an agreement to reopen the government and avert default on U.S. debt, Politico reports, according to several sources familiar with the talks. Here is what that "stunning reversal for the speaker" deal looks like. In short: the can has been kicked for three months, to early February.

Following the battery of optimistic news from this morning that the debt deal is all but done, yields on short-term debt, soaring until about 9am, have tumbled as fears of an immediate default have been taken off the table. And moments ago today's most important auction, that indicating whether the "Money Market Vigilantes" have gone home, the auction of $20 billion 4-Week Bills took place. As a reminder, it was last week that yields on the same issue soared to a high of 0.35% - the most "distressed" yield since October 2009. Today, the fireworks were far more muted, however with a high rate of 0.24%, this was still a very elevated closing level, and still the second highest in years. So the question becomes: is this higher yield just a function of the lack of a definitive deal on the table, or has the broken Congress now assured that going forward so called "money equivalent" Treasury paper will have a step-wise higher clearing haircut, and if so, just how substantial is the structural damage to money markets, especially if all Congress does is kick the can forward by a few months?

With Boehner having given up resistance, in the process throwing his speaker position in jeopardy, and a bipartisan deal virtually assured, the only remaining wildcard is whether any Republican Senator will filibuster, or in any other procedural way, delay a 11th hour deal. Naturally, the most likely candidate here is Ted Cruz of record filibuster fame. And indeed, when asked earlier, if he will "obstruct" any deal in a process that may delay the final debt-ceiling resolution until the weekend, Cruz had no comment. Bloomberg quotes Cruz as saying "I am heading to this meeting," as he entered meeting of Senate Republicans. That said, even a full frontal assault by Cruz would at best delay the deal should it have the support of the two chambers. So while the popcorn is almost over, the drama may still have a few hours left in it.

Well that un-esclated quickly... (for now) despite this:

*BOEHNER SPOKESMAN STEEL SAYS NO DECISION MADE ON SENATE BILL

While the debt ceiling fracas has done nothing to stymie the demand for high-beta equity lottery tickets, it has decimated the demand for the most leveraged trade an American tends to make... home purchases. While real data is few and far between, we thought that the cracking of yet another foundational pillar of the US economic "recovery" was worthwhile noting although it is squeezed to the back pages as the mainstream media focuses on rumor after rumor to juice equities ever higher. With the hedgies having turned from marginal buyer to marginal seller, it seems the demand for mortgages for home purchases has collapsed to its lowest level in 2013 - even as rates have dropped notably from the year's highs.

As we count down to doomsday or not (and equity investors pile their last cash on the sidelines into stocks), we thought some reflection on an interesting analysis of the last debt ceiling debacle was worthwhile. In a few brief minutes, William Spaniel shows the payoffs and decision trees that led to the decision to compromise on what was close to the Gang-of-Six middle ground when the stuff hit the fan last time. Crucially, while the process is similar this time, it appears to us that the lack of middle-ground this time shifts the optimal path increasingly to a 14th Amendment possibility. Nevertheless, his process may provoke some thoughts on just how this "game" is played even as Boehner exclaims "this ain't no game."

What is there to say here that hasn't been said at least 20 times before (beyond which we have lost count of how many times the trading "recommendations" by Goldman's FX guru Tom Stolper have generated guaranteed returns to everyone who did the opposite)? From October 3: "What would the world be without Tom Stolper FX recos? Very confusing, with no sure money to be made, and without anyone to fade, that's what. Which is why we are happy to bring the Goldman muppet slayer's latest FX "recommendation" In short: "We recommend going short $/JPY at current levels of about 97.30 for a tactical target of 94.00, with a stop on a close above 98.80." In even shorter: Goldman is now buying USDJPY from its clients." While the trade was clear - do the opposite of what was recommended - we had a question: "The only question we have: will the length of time before Stolper is once again Stolpered out be measured in days, or hours?" The answer: two weeks.

Total chaos

• No decision yet, House Republican aide tells Bloomberg’s Phil Mattingly, speaking on condition of anonymity
• Rep. Kevin Brady, R-Texas, tells Bloomberg Television, he doesn’t know if House will vote first on any Senate agreement on govt shutdown, debt ceiling.

Obligatory Bazooko circus clip below

The USD is bid; Treasury Bonds are being abandoned; the 10/24/13 Bill remains lost though; but stocks are entering escape velocity. S&P 500 has screamed 15 points higher (no surprise given Nanex noted that S&P 500 futures had the lowest liquidity of the year for this time of day prior to the rumor) and the Russell 2000 has broken back to new all-time highs (why not). Of course JPY-crosses are largely responsible for the knee-jerk move and we wait to see if this becomes a sell the news moment (or for Boehner's denial)... Commodities are not moving much for now.

Per Sen sources, Boehner has agreed to take up the Senate's plan and allow it to pass with Dem votes.

— Robert Costa (@robertcostaNRO) October 16, 2013

Equity investors can't buy enough this morning. The latest rumor - that the House Republicans are willing to consider voting first on an emerging Senate proposal - provided some fillip to an opening selloff. As Politico reports, this move could expedite bipartisan legislation developed by Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell. If the House passes the bill first and sends it to the upper chamber, it would eliminate some burdensome procedural hurdles in the Senate and require just one procedural roll call with a 60-vote threshold needed to advance the bill toward final passage in the Senate. Of course, the big question here is "If" the House passes the bill...

While stuff like soaring Bill yields, the threat of Money Market funds breaking the buck, and the gradual phase out of near-term money equivalent collateral thanks to the complete dysfunction in Congress which has managed to breach the repo market into "good" and "bad" Bills, may be too arcane to the various JPY-correlating, ES-ramping algos, those who care about real signals, now that the US flirtation with the X-Date is hours ago may be interested to know that according to ICAP, as reported by Stone McCarthy, overnight General Collateral, the key rate in the determination of collateral pricing for trillions worth of assets, just exploded once again and in following the surge in Bill cash rates, hit 0.32%, the highest since December 7. Indicatively, at 0.32%, GC is now well above both overnight LIBOR (10.69 bps) and the Fed Funds rate (10 bps).

While everyone knows by now that the best place to cook eggs at 40,000 feet is on the Dreamliner battery compartment, little did anyone know that Boeing (which was just caught selling used parts as new to the Pentagon) has now put into circulation a new and improved version of the Dreamliner: the Cabriolet. This is what Air India discovered, much to its surprise, yesterday when an 8 by 4 foot panel on a Boeing 787 fuselage "flew off" on a routine Delhi to Bangalore flight."The Dreamliner 'miraculously' landed safely in Bangalore without the pilots realizing a thing. The gaping hole caused by the missing part — measuring 8 by 4 feet — was discovered when the plane was being prepared for the return flight to Delhi. The aviation safety regulator is investigating this incident." But as usual, we have saved the best news for last: the Dreamliner Cabriolet "option" from Boeing does not cost one penny extra.

Having given back all of Charlie Dent's optimism rally overnight (and half of Harry Reid's), US equities are rallying once more on the back of another JPY induced momentum ignition. This utter farce is becoming whimsical as the Treasury Bill market is literally collapsing. 10/31/13 Bills are 16bps higher in yield overnight at 62.5bps as the whole front-end has lifted dramatically from just yesterday. GC Repo is higher again and as we noted last night fails-to-deliver are on the rise again. Something is very broken here and one can only hope that the heavy bid for Dec VIX futures is enough to protect the machines buying stocks if Reid's hope turns to its normal disappointment. Note that the USD and US Treasuries are alse being sold aggressively.

Mere weeks after the Merkel re-election, it will come as no surprise to anyone that Greece is to be bailed out for the third time. Germany's Die Zeit newspaper notes the government is assembling a Greek bailout plan which essentially has four gimmicks to fill the "high-single-digit-billion" budget shortfall. Despite having been told time and again that the worst is over, Greek Bailout III will entail shifting cash from the bank recap fund, Bill sales to specific banks which can be instantly collateralized with the ECB, possible extensions of credit by existing creditors, and reduction in interest rates on existing debt. Of course, we will be told that this is the last time and that Greece will emerge victorious in just 1 or 2 more years...but after a few weeks of epic strength, the Athens stock index is giving some back in the last 2 days.