Archive - Mar 2014 - Story

Moments ago the Treasury sold $21 billion in benchmark OTRs in the form of a 9-year-11-month reopening of Cusip B66, in a whopper of an auction that saw the high yield of 2.729% price 1.4 bps through the 2.743% When Issued. But more than just blistering demand at the pricing, all the internals were solid across the board: the Bid to Cover of 2.92x was well above the 2.54x from February, and the 2.68x TTM average. In fact, this was the highest BTC since March of last year. And in keeping with one year anniversary records, the Dealer Award was a paltry 29.1% which also was the lowest in a year. Indirects were 43.4%, down from 49.7% in February, which means that Direct soared, and sure enough they did, from 16.2% to 27.5%. Overall a stellar auction, and one confirming that the smart money continues to prefer allocation to fixed income, instead of believing the latest "growth stories" explaining away the second coming of the dot com bubble in Bernanke's centrally-planned farce of a market.

"Higher equity prices will boost consumer wealth and help increase confidence, which can spur spending" - Ben Bernanke, 2010 But history suggests the opposite: it is higher savings rates which lead to economic prosperity. Examine any economic success story such as modern China, nineteenth century America, or post-World War II Japan and South Korea: did their economic rise derive from unbridled consumption, or strict frugality? The answer is self-evident: it is the savings from the curtailment of consumption, combined with minimal government involvement in economic affairs, which generates economic growth.

"Daylight Savings Time"

Since Wall Street has been explicitly fighting the Fed (remember: the main reason there is no volume is because nobody is selling) Wall Street has once again lost, and despite its appeals, the time to pay the piper has come. Said payment will be taken out of bank Q1 earnings which as everyone knows, will continue the declining trend seen in recent years (so much for that whole Net Interest Margin fable), but to learn just how bad, we go to the FT which reports that fixed income groups across Wall Street "are set for their worst start to the year since before the financial crisis, with revenue declines of up to 25%." The punchline: "Analysts now expect Goldman Sachs to record its weakest first quarter since 2005 and JPMorgan Chase and Bank of America are forecast to see their lowest revenues since they bought Bear Stearns and Merrill Lynch, respectively, in 2008."

Between AUDJPY and and VIX slamming, the S&P 500 is pushing back up towards green. However, a glance at gold prices (at six-month highs $1365), Treasuries (retraced all of Friday's non-farm-payrolls losses), and Swiss 2Y rates shows a safe-haven bid is alive and well. Yuan offshore rates are modestly strengthening and copper prices are bouncing as hopes remain that the unwind of the multi-trillion-dollar inflation of the Chinese shadow-banking system has run its course and all is well again. Perhaps the algos are confused once again that Europe does not close for another hour.

The truth is the Fed incentivizes and rewards the most parasitic, least productive sector of the economy and forcibly transfers the interest that was once earned by the productive middle class to the parasites. Though the multitudes of apologists, lackeys, toadies, minions and factotums of the Fed will frantically deny it, the inescapable truth is that the nation and the bottom 99.5% would be instantly and forever better off were the Fed closed down and its assets liquidated. The only way to eliminate the financial parasites is to stop subsidizing their skimming and scamming, and the only way to stop subsidizing the financial parasites is to shut down the Fed.

Despite promises by the West to do "whatever it takes" and Treasury Secretary Lew's note today that Ukraine aid could reach $15 billion, it appears the market is not buying it with June 2014 Ukraine government bond yields spiking above 53% today. Of course, this should be no surprise to Goldman Sachs clients who were told on Feb 21st that events were "unambiguously positive" for short-term bonds (then trading above 97) but are now trading below 90. It seems that the market believes default is highly likely and that any "aid" will flow directly to Russia for energy bills.

With diplomacy having failed miserably to resolve the Russian annexation of Crimea, and soon East Ukraine (and with John Kerry in charge of it, was there ever any doubt), the US is moving to the heavy artillery. First, moments ago, the US DOE announced in a shocking announcement that it would proceed with the first draw down and sale of crude from the US strategic petroleum reserve, the first since June 2011, in what it said was a "test sale to check the operational capabilities of system infrastructure", but is really just a shot across the bow at Putin for whom high commodity prices are orders of magnitude more important than how the Russian stock market performs. And now, as Bloomberg just reported, the US has escalated even further, citing the Chairman of the Joint Chiefs of Staff, General Martin Dempsey, who "has claimed that in the case of an escalation of unrest in Crimea, the U.S. Army is ready to back up Ukraine and its allies in Europe with military actions."

WTI crude prices are faling rapidly as Reuters reports that the US is set to 'unleash' its Strategic Petroelum Reserves in a "test-sale"...

*U.S. TO RELEASE CRUDE FROM STRATEGIC PETROLEUM RESERVE: REUTERS

Of course, this is a direct aim at Putin's pocket-book as his stumbling economy needs high prices to sustain itself. However, the 5 million barrell release is less than a third of the US daily consumption rate (though does sound some alarms we are sure).

Emergency crews are reportedly on the scene of a possible building explosion in East Harlem.  Details are limited but the incident reportedly happened this morning in the area of East 116th Street and Park Avenue. NY1 has a crew heading to the scene and will have more information as it becomes available.

It’s safe to say that America — especially the American media and Wall Street firms — has fallen in love with real estate again. But, this time around it’s not ‘all of America’ like the last time; when the most exotic mortgage loans known to mankind turned every ma and pa end-user homeowner into a raging speculator. One has to look no further than the generationally low level of purchase loan applications — with rates at generational lows — to realize something isn’t ‘normal’ about this housing market. Rather, controlling this housing market over the past three years has been a small, unorthodox slice of the population that “invests” in real estate using tractor-trailer trucks full of cash-money slopping around the financial system put into play specifically for this purpose. Over the past few years so much cash-money has been deployed into the housing sector by unorthodox parties, that in many regions ma and pa end-user hasn’t stood a chance to buy. Especially, if they need a mortgage loan, which of course presents numerous risks to the seller vs the all-cash buyer.... We could be back in a house-price bubble right now and not even realize it. And also because everybody is looking at the wrong thing…house prices. Sound confusing? It’s not, really.

With NATO actively building up its airforce support in Poland and the Baltic states in recent days in a flashback to cold war military escalation and deterrence, and even launching AWACS planes over Poland and Romania to monitor the Ukraine crisis and "enhance the alliance's situational awareness," the inevitable has finally happened, and other Russian neighbor states, ones not alligned with the military treaty, have escalated in turn only this time the are showing their allegiance not to the west but to Russia. Moments ago RIA reported that Minsk will "adequately react to the strengthening of NATO forces near the borders of Belarus, and will offer to host up to an additional 15 Russian aircraft, according to the President of Belarus Alexander Lukashenko on Wednesday at a meeting of the Security Council of Belarus.

The G-8(-1) is clearly concerned about the fall-out from this weekend's referendum in Crimea and in its strngest language yet is condemning (and threatening) Russia:

• *G-7 CALLS ON RUSSIA TO 'DE-ESCALATE THE CONFLICT IN CRIMEA'
• *RUSSIA ANNEXATION OF CRIMEA WOULD VIOLATE UN CHARTER: G-7
• *G-7 CALLS ON RUSSIA TO HALT SUPPORT FOR CRIMEA REFERENDUM
• *G-7 SAYS WILL NOT RECOGNIZE RESULT OF CRIMEA REFERENDUM
• *'CEASE EFFORTS TO CHANGE' STATUS OF CRIMEA, G-7 TELLS RUSSIA
• *G-7 SAYS ANNEXATION OF CRIMEA WOULD HAVE 'GRAVE CONSEQUENCES'

Then, after the threats, calls on Russia to let observers into the country and enter into talks with the Ukrainian government (which has already appeared to give up on Crimea). This comes as Ukraine's PM visits Obama in D.C.

Angst in Asia overnight sparked another round of demand for the precious metal pushing gold up over $10 as copper crumbles and Chinese corporate bond markets drop. At $1,363.97, gold is at its highest since September and breaking above its 1-year moving-average.

The Turkish yield curve has inverted once again as the 10Y bond yield in the troubled nation crosses 11% and hits record highs for that maturity. 2Y at 11.2% has broken to almost 5 year high yields as the Lira also presses back lower to six-week lows. This comes as the nation mourns the death of a teenager from last year's riots and Erdogan remains defiant ahead of March 30 elections in the face of rising calls from the EU to let the law run its course:

• *TURKEY 10-YR BOND YIELD RISES TO 11.34% RECORD ON CLOSING BASIS
• *ERDOGAN: MAR 30 VOTE MOST IMPORTANT IN TURKEY DEMOCRACY HISTORY
• *ERDOGAN SAYS VIOLENT PROTESTS WON'T BRING DEMOCRACY TO TURKEY
• *EU PARLIAMENT URGES TURKEY NOT TO INTERFERE WITH LEGAL PROBES
• *ERDOGAN RECITES ISLAMIC POEM FOR WHICH HE'D BEEN JAILED IN 1997

So once again political instability is soaring and with it capital outflows and bond yields. No, EM is not fixed!