As more Chinese IPOs come to market in the US (thank you NYSE) providing an endless supply of surefire shorts for addition to the "Chinese Fraud" basket, that epitome of Chinese accounting perfection RINO has reopened, after a nearly one month hiatus, on the pink sheets... and is down almost 70%. Expect many more comparable "inverse fireworks" chart formations out of the recently IPOed Chinese crowd.
Bernanke's 60 Minutes appearance was an unmitigated disaster. Two major failure points, namely "QE is not printing money" and 100% cock-sure-ness, have become an instant butt of jokes. Just because we don't have an economics PhD from a decent department, doesn't mean he should treat us as idiots. Yes, QE doesn't expand the M1 monetary base. But after credit is included, it is expansionary, and this is exactly what he was hoping for. It was embarrassing to watch the Fed chairman talking like a disingenuous, idiotic politician. So, Fed wants inflation, and inflation is what they'll get. 30-yr treasuries yield has shot up since the announcement of QE2, meaning mortgage rates will go up soon. Coupled with the glut of supply and timid demand in housing, we can all thank the Fed for a prolonged housing dip. Yes, the treasury curve has flattened a bit in the last few days, but the bad news is it's by 10-yr yield going up, not 30-yr going down. Oops. Did somebody just say 100% sure about something?
It seems it was just yesterday that the Chairman penned the following famous last words in his Washington Post Op-Ed: "The FOMC intends to buy an additional $600 billion of longer-term Treasury securities by mid-2011 and will continue to reinvest repayments of principal on its holdings of securities, as it has been doing since August. This approach eased financial conditions in the past and, so far, looks
to be effective again. Stock prices rose and long-term interest rates
fell when investors began to anticipate the most recent action. Easier
financial conditions will promote economic growth. For example, lower
mortgage rates will make housing more affordable and allow more
homeowners to refinance." Um, Chairman, so what happens now, a month after your Op-Ed justifying QE2, when the prevailing mortgage rate is about 1% higher, and is resulting in about a 10% decline in home prices to maintain the same level of affordability?
Sick of bears explaining QE2? Prefer to watch Jon Stewart roasting the monetary Hewlett Retard instead? Here is your chance. Somehow catching Ben Bernanke lying on national TV has become not only a national sport, but one that provokes uncontrollable laughter... Ironically that is the laughter of all those whose money on a daily basis is worth less and less, courtesy of the Chancellor (Chairman is so QE1) buying back $50 billion in debt every week. Presumably laughing as one's net worth is getting destroyed makes it more palatable. Just wait as the country collapses into uncontrollable hysteric guffaws as the 30 Year mortgage passes 5%, then 6%, then 7%, etc. destroying up to 25% of household net worth.
As the 10 Year continues to plunge, the one topic nobody on CNBC is daring to discuss is the absolute slaughter for all those calling for a steeper curve, and the resultant misery that banks are again experiencing as a result. With financials supposed to be the new market leaders one can't possibly bring up the sad truth that as QE2 fails, the US financial system will take the brunt of the hit. And even as Goldman and MS get their wish for a sell off in the 10 Year, unfortunately for them this is accompanied by a less than comparable dumping of the long-end, resulting in an even greater flattening of the curve, and validating our call from last night that the bond world is about to get a whole lot more flat. Lastly, as the 30 Year Cash Pay Mortgage jumps by 20 bps W/W, the result is about a $200 billion loss in home net worth in just one week. The Uberprinter is now torn whether QE3 should be one of monetizing municipals, or, as Bill Gross has been positioning so very well for the past two months, throw it all into MBS once again.
Update: Reliable sources in the trading community with closer ties to Wolverine assured us that the story published about Wolverine Trading has zero validity.
We received contacts from several independent sources in our community yesterday that Wolverine Trading, a PMM, options market-making firm in everything from global equities to commodities may have solvency issues. As of this writing this is unsubstantiated. Sources were CME floor members and financial analysts familiar with their business model. The only physical sign we saw was a lack of physical presence in some major commodity option pits for the last two days. If this is true it would be a terrible thing for the markets, as Wolverine was a classic market-making firm, one that provided backstop liquidity in all kinds of assets.
There is only so long that the Bundesbank can keep ignoring the fact that it has recently started piling on failed auction after failed auction. Today, Germany tried to sell €5 billion in 2 Year 1% Schatz notes. And while the official tally on the auction was a 1.1 Bid To Cover at a 0.92% average yield, just above our own 3 Year auction yesterday, (and a drop from the 1.4 previously) this was yet another failed auction, as the bank managed to get only €4.33 billion in competitive and non-competitive bids. The kicker: the Bundesbank retained €995 million of the issue, a whopping 20% of the proposed issue size - this is the amount it could not find any buyers for, and the deficit to what have been a non-failed auction. In other words, after the entire world was rushing to buy German paper, suddenly there is nobody willing to get in.
- Germany Trade Balance 14.2B - lower than expected
- Bachus picked to chair financial panel (Reuters)
- China’s CPI expected to hit 3.2% in 2010 (China Daily)
- Bond Vigilantes May Thwart Tax Deal (Barrons)
- U.S. sends more subpoenas in insider trading probe (Reuters)
- Banks face dark pool battle with Europe's bourses (Reuters)
- Obamanomics Takes a Holiday (WSJ)
- Every Income Group Hit as Budget Increases Taxes and Cuts Benefits (Irish Times)
- Asia's Inflation Worries Damp Holiday Shopping Cheer (WSJ)
RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 08/12/10
From Reuters: FLASH - North Korea believed to have fired one artillery round in its west coast waters - South Korea's YTN reports. South Korea stocks turn negative, won extends fall on artillery fire report. And from BNO: N. Korea fires military round in west coast waters apparently as part of a drill - Yonhap via Reuters
As The Treasury Curve Pancakes Again, Bank Profitability Goes Out Of The Window (Making The Curve Flatter Still)Submitted by Tyler Durden on 12/07/2010 - 20:51
On November 14, we took full liberty of mocking ourselves and our call for a flattening of the long end (10s30s) over and above the din of virtually every sell-side analyst and so-called pundit out there, who, with the exception of Morgan Stanley, all were screaming that the 10s30s was about to embark to levels of unseen steepness. To wit: "After recently the market took all calls of a flattening in the 10s30s
to task, one would think that those anticipating a curve flattening
(Zero Hedge included) would finally have learned their lesson." Luckily we persisted in our obstinacy. And as the chart below shows it appears that was a very good decision: since that day, the 10s30s has collapsed by almost a quarter from a high of 160 bps to 124 bps. That said, in our opinion, the curve has much more flattening to undergo still: after all virtually the entire world was long the 10 Year, and short the 30 Year, expecting that Brian Sack would be able to maintain at least the belly, if not the long-end. To everyone chagrin, groupthink has once again proven to be a disastrous trade. Furthermore, keep in mind that the 10s30s was trading sub 100 bps as recently as this summer, which implies that technicals are favorable. And lastly, the drubbing in the curve means that that mythical bank profitability (thank you Dick Bove) is once again delayed, which also means that the broader economic prospects are deteriorating, making QE3 for Long End Treasurys (those securities that are not going to be monetized municipal bonds) very likely to be purchased next as the Fed realizes that it will have no option but to buy much more of the 30Y as it will already be full to the gills with all other sections of the curve. Bottom line: we expect the flattening to persist and in fact accelerate once the always late CNBC pundit crowd realizes that a 23% flattening in the curve (not to mention record low market volume) means that bank Q4 EPS are once again going to suck.
Was this the latest case of buy the rumor and sell the news after QE 2.0 proved to be pretty much the lows in yields (for now at least)? The market started the day bright eyed and bushy tailed after last night's announcement by Washington that a tax deal is close: Republicans win, Democrats win, America loses! The conversation probably went something like this: Republicans: "If you don't extend the tax breaks we will roll back your health-care plan"; Obama: "But this is my place in history at stake here! Ok you get the tax breaks, but I am going to add my own twist with social security tax cut (it's so far under water it doesn't matter anymore) and extension of unemployment insurance, this way the folks hurting out there know I am looking out for them and I don't look like I just got owned"; Vigilante: "That's 900Bn over 2 years, who's going to pay for this?"; Republicans and Democrats: "Ha ha ha."
Now however, there are a slew of VERY nasty charts that I would like to highlight following on the heads up I gave last night. - Nic Lenoir
It always seemed to us that the whole Lehman Repo 105 fiasco seemed to be too much of a slam dunk for nobody to get sued over it. Yet here we were, almost a year after the Valukas report, and nobody was even pretend to be fighting off justice, or even a bunch of brain impaired porn addicts. Not so any longer. Bloomberg reports that per an unsealed filing in the Lehman bankruptcy docket, the Lehman 401(k) retirement plan, which had just under $230 million invested in Lehman stock, has sued Dick Fuld "and other former executives of the defunct firm for failing to disclose Repo 105, a financing method allegedly used to conceal billions of dollars of debt." And all this is occurring as the SEC is scrambling to find new and improved ways to pay off its multi-million midget porn bill, up to an including firing every staffer with an IQ over 50...All 4 of them.
Today's tax compromise in the US extended all expiring Bush tax cuts by two years. The story though does not end here. The most important thing missing from the tax extension was the expected extension of the Build America Bond program. The Build America Bond program has been the municipal market's saviour over the past 18 months. Since their introduction in April 2009 more than 174 Bio USD of taxable securities have been sold by municipalities backed by the program, one where the US pays 35% of the interest due on the debt.On a day when the market focussed on the Budget vote in Ireland, a country that makes up about 1.8% of Europe's GDP, we are concerned that no one is looking at the growing problems in New York, California and Illinois, three states that comprise 25% of the US GDP. The expiration of the Build America Bond program could prove to be a terrible price for the US to pay and we expect squabbles in the US Congress regarding the bailing out of States in 2011 that could easily rival that which we have witnessed from the European Union over Ireland and Greece....We continue to expect that QE3 will include the purchase of Municipal debt, a true can of worms.
Heretofore, Japan has been able to avoid the worst consequences of its many debts and obligations – but that may soon change. In addition to the exports referenced above, the country’s high internal savings rates have provided crucial support for the Japanese government’s energetic issuance of debt at low rates. But as you can see in the chart below from our own Bud Conrad, those internal savings – like exports – are now in decline...It all begins to get a bit circular when you consider that Japan’s aggressive financing needs make it likely the country will have to dial back its participation in future auctions of U.S. Treasuries. It would not surprise me if they followed China’s lead in reducing the U.S. paper now held in reserve. That, in turn, could lead to even higher U.S. rates, and even higher rates for Japan. Or it could lead to more monetization of U.S. Treasury debt by the Fed, which in turn leads to Mr. Market demanding higher yields to compensate for the rising potential of inflation.