Archive - Oct 2013 - Story

"If the politicians lead us into a 'prioritization of payments' situation for Treasury Secretary Lew or an actual missed payment, there is nothing you can do to protect yourself from that!" are the ominous words that Kyle Bass uses to describe the farce that is rapidly approaching (and for now being ignored by stocks). Bass went on to pull no punches in his "disappointment" in JCPenney's performance (and dilution) coming as close as he can to saying "sell." But his piece de resistance was a dismal destruction of any silver lining for Puerto Rico and the significant implications that will have on Muni bonds in general.

Confused at the growing pile of unpaid food-stamps? Unsure just how many non-essential government-workers are still on furlough? Befuddled by the duration of the shutdown? Fear no more, the following interactive "Shutdown Clock" quantifies just how dismal US politics has become.

Unlike her predecessors, Janet Yellen has never had a youthful dalliance with hawkish monetary ideas. Before taking charge of the Fed both Alan Greenspan, and to a lesser extent Ben Bernanke, had advocated for the benefits of a strong currency and low inflation and had warned of the dangers of overly accommodative policy and unnecessary stimulus. (Both largely abandoned these ideals once they took the reins of power, but their urge to stimulate may have been restrained by a vestigial bias against the excesses of Keynesianism). Janet Yellen, who has been on the liberal/dovish end of the monetary spectrum for her entire professional career, has no such baggage. As a result, we can expect her to never waver in her belief that stimulus is the answer to every economic question.

Yeah, he actually said that, although his thoughts are subject to interpretation...

House Dems emerge from meeting with Pres Obama reaffiming determination to bring Govt shutdown to an end.

— Mark Knoller (@markknoller) October 9, 2013

As we noted last night, yesterday's move in US equity markets showed signs of investor panic and capitulation. BofAML points out that the inversion of the VIX to levels that have coincided with market lows for much of this year, the significant underperformance of recent outperformers (the NASDAQ Comp fell 2% and the Russell 2000 fell 1.72% vs an S&P500 decline of 1.23%), and pop in the ARMS Index all point to signs of capitulation. While this is encouraging from a technical perspective, as it says we are one step closer to completing the multi-week correction, they warn - it does not mean the correction is finished.

Not much comment necessary on a topic we have beaten to horse pulp in the past 2 weeks aside to note that this time is ironically different from 2011 as the inversion in the CDS curve is considerably more biased to a piling up of short-term default risk than in 2011.

It would appear the US government, in all its shutdown might, has made a decision. The State Department has issued a statement that the US "wants to see Egypt succeed," via an "inclusive, democratically elected civilian government," but in the meantime will be "recalibrating assistance to Egypt to best advance US interests." A translation of the political double-speak - it's a coup and we won't be sending any military aid or cash directly to the country anymore...

As headline after headline was regurgitated and used a momentum igniting ammo in stocks, the S&P managed to get back to post-Yellen-news highs before dumping into the close on the back the Fidelity "Sell" news. S&P futures closed perfectly at VWAP (and green) but the Russell and Nasdaq closed red. The Dow bounced off its 200DMA and set the lows for the day. USD strength across the board was not rotating into stocks or bonds or PMs as we suspect cash is the friend of the repo-angst deleveraging ahead. Copper and Oil are -2.3% on the week, Gold -0.4% and Silver remains positive +0.5% on the week. Treasury yields limped higher to +2bps or so on the week. VIX fell back on the day from spike high levels of 2013.

Everyone knows that one of the immediate catalysts of the near systemic collapse in the aftermath of the Lehman bankruptcy, one which set in motion the sequence of events that led to Bernanke increasing the Fed's balance sheet fourfold, was when the Reserve Primary Money Market Fund announced on September 16 that the value of its shares had dropped to 97, sparking an epic run on money market funds, and requiring an immediate bailout first from its sponsor, and then the Federal Reserve and US government. What is far less known is that the Reserve Primary Fund was just one of many money market funds that got locked out and was in danger of collapse following the decision to let Dick Fuld hang. How many? According to a research note released by the NY Fed itself, at least 28 more!

Many market-watching prognosticators have dismissed the spike in T-Bill rates on the basis of "well it's only a few pennies, why worry..." missing entirely the 50-100x leverage in TRS and the almost inifinite rehypothecation risk implicit in a missed payment (even if temporary). It seems, despite these views, Fidelity Investments  - the largest manager of money-market mutual funds - said, according to AP, that it no longer holds any US government debt maturing around the time of the nation could hit ist borrowing limit. Action - it would seem - speaks louder than words.

As the old Mark I Bernanke rusts and loses power, President Obama has been working on the new improved Mark II version of the Fed Chair. It's older, more female, less facial hair (from what we can see), but critically more dovish in all the places the US investing public demands... Behold, Yellenomics...

In 4 minutes (and really under 1 minute when the summary headlines hit), WSJ's Jon Hilsenrath managed to parse the 25-page and considerably more diverse of opinion FOMC Minutes into a bite-sized 535 words summarizing the key sections. His conclusion, as we noted previously, despite the various members' angst, they still want to start winding down QE this year and end it next year. It would appear that his 'translation' of the minutes for the investing public offers little hope for moar QE anytime soon - even if fiscal drags are sustained. We are confident neither Hilsenrath, nor anyone else in the legacy media, ever breache[s|d] s the FOMC embargo when they receive the minutes ahead of general release for broader preparation: after all, in a time when everyone is suddenly concerned with the Fed leaking data in advance, that would just be uncivilized.

In a second iteration of news not being read hours ago and suddenly surprising the algos in charge of stock market momentum, minutes ago headlines blasted reports that Boehner would go to a White House meeting. This is precisely what Politico, again, said would happen at 7 am this morning but since apparently nobody bothered to read it, and since it is suddenly news again, everyone is grasping on this "revelation" as if it is a new development. It isn't.

"... the announcement of a reduction in asset purchases at this meeting might trigger an additional, unwarranted tightening of financial conditions, perhaps because markets would read such an announcement as signaling the Committee’s willingness, notwithstanding mixed recent data, to take an initial step toward exit from its highly accommodative policy...the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market...  it was noted that if the Committee did not pare back its purchases in these circumstances, it might be difficult to explain a cut in coming months, absent clearly stronger data on the economy and a swift resolution of federal fiscal uncertainties.... postponing the reduction in the pace of asset purchases would also allow time for the Committee to further discuss and to implement a clarification or strengthening of its forward guidance for the federal funds rate, which could temper the risk that a future downward adjustment in asset purchases would cause an undesirable tightening of financial conditions."