Following last week's stellar auctions, this week's issuance trio has started off with a whimper. While Tim Geithner managed to sell $35 billion in 2 year notes today at a near record low rate of 0.24%, the details were very unimpressive. Because not only did the Bid To Cover decline from last month's record 4.07 to a modest 3.45, in line with the last 12 auction average, it was the precipitous drop in Indirect Bidding, aka foreign interest, that was most notable: at just 21.65% this was the lowest Indirect Take Down since February of 2008. Which means Dealers had to take on a majority of the auction. Which they did at 63.66% of the total. Naturally, this will not be a surprise to many: after all according to the latest TIC data, Chinese bond holdings tumbled in October to the lowest in a year, Russian holdings collapsed, and courtesy of the Fed's weekly custodial account updates, we know that foreigners have been selling tens of billions in US paper in the past several weeks. Slowly, the US is becoming the same ponzi scheme that it accuses Europe of being whereby Dealers buy up paper, and immediately repo it back to the Fed and other conduits. In other words, once the European repo market freeze crosses the Atlantic, then it will get very interesting very fast.
Scouring through the news screens, we nearly fell of the proverbial chair after reading the following Bloomberg headline paraphrasing a Nikkei report: "Japan May Buy Chinese Govt Bonds, Nikkei Says....Japan is seeking to diversify forex funds and strengthen economic cooperation with China by helping make yuan more international. Japan may purchase a total of $10b worth in stages." Naturally, there are two interpretations: the ugly one is that Japan, the 3rd largest holder of US debt after the Fed and China, is considering gradually abandoning the dollar or, as the term is better known in polite circles "diversifying." The second one, and the far more amusing one, is that Japan will somehow bail out China by providing the much needed credit money that will translate into GDP (at a sub 100% ratio of course, because as is well known by now the world has reached the stage where one unit of debt generates less than one unit of incremental growth). The reason why this is amusing is because as the chart below shows, Japan's debt is now a hair's width below ¥ 1.... quadrillion. And yes, ignore the fact that the demographic squeeze in Japan is already forcing households to proceeds to monetize the largely domestically held debt. So, we wonder, where will the JGB debt curve go next in the deflationary basketcase that is Japan? As for where it has been, see below.
Following the sudden and surprising death of North Korea's "Dear Leader", many are wondering what this means for risk, especially in the Pacific rim. In other words, was last night's selloff warranted? For what it's worth, here is Goldman's Goohoon Kwon with a take of how the institutional audience is trying to comfort itself that all shall be well, and that power vacuums are all inherently rational and perfectly predictable. Just ask Egypt. And Robespierre.
Paul Mylchreest, author of the Thunder Road, releases his much anticipated latest report, and it's a doozy: "2012: Dear Portfolio Manager, you are leaving the capitalist sector and heading into a full-spectrum crisis." He continues: "You were to hear a report on the world crisis. That is what you are going to hear. For twelve years you have been asking: Who is John Galt? This is John Galt speaking….Now it’s getting serious. 2012 will be a year to remember as the globalist agenda comes into focus amidst economic and geo-political crises: The titles of the last two Thunder Road Reports were prefaced with “Helter Skelter” - “The Illusion of Market Stability” followed by “Gentlemen Start Your Engines”. Sadly, the Helter Skelter I was writing about – the second part of the Great Financial Crisis is in progress and I’m expecting it to come to a head next year (2013 if we’re very lucky). The only question is WHAT brings it to a head? We’re not short of possible causes – a bank failure, sovereign default, Eurozone tipping into recession or the Middle East. Despite all the evidence to the contrary, like overwhelming debt levels and insolvent banks/sovereigns, the consensus seems convinced that we can “muddle through”. Dow Theory veteran, Richard Russell, explained it best: “In the coming two or three years we will be going through unprecedented situations beyond the understanding of most analysts.”"
In April 2007, former New Jersey governor, 'honorable', Jon Corzine had an altercation with a Garden State Parkway guardrail. A year later, he addressed a bevy of reporters at the swanky Drumthwacket mansion and expressed appreciation for “family, friends, and the fragility of life.” During his recovery period, he advocated seatbelt safety, before returning to New Jersey's budget, extracting $500 million in austerity measures from farmers, educators, and environmentalists, and hiking tolls on New Jersey roadways. On the one-year anniversary of his accident, his chief-of-staff, Bradley I. Abelow declared, “Corzine has returned to his former self as a thorough and exacting boss.” (Italics mine.) Fast forward to the current MF Global flameout. Abelow shifted to Corzine’s Chief Operating Officer. And not only did Corzine ratchet up the ante on ways to really piss off farmers, but after several days of engaging in verbal dodge ball with Congress, this ‘thorough and exacting boss’ maintained his Forest Gump type cloak of secrecy regarding the stolen $1.2 billion of his customers’ segregated money. After days of political-reality TV, we knew nothing more about its evaporation. Corzine and his stewards, Abelow and Chief Financial Officer, Henri Steenkamp, executed a perfect chorus of ‘I don’t recalls’, ‘I didn’t intends’ and ‘the butler did its’.
When we learned on Saturday that the Des Moines Register, owned by Gannett - whose Chairman just happens to be a Private Equity firm head, and worked at Citigroup for most of her career, has endorsed Mitt Romney for president we said that this development "while likely set to provide a very short-term boost to Romney's chances, it is the baseless ongoing accusations against Ron Paul that will likely solidify the groundswell behind the Texan, with such desperate platitudes as "Ron Paul's libertarian ideology would lead to economic chaos and isolationism, neither of which this nation can afford." As it turns out, according to the latest Public Policy Polling data we can skip the kneejerk reaction and go straight to the after effect, because as of the latest polling, Ron Paul has finally taken the lead in Iowa. Granted this is just one of many polling organizations, and potentially it may be biased, but the bottom line is that often time reality (objective and subjective) is self-reinforcing. And when the US public realizes that the only candidate who deserves to be in the White House has a running chance, they will flock to him. Suddenly backing Ron Paul may just become the next cool thing. As for the Gingrich "honeymoon", it was over well before the nth divorce (pardon the pun). At this point we can only hope that the electoral game of reverse American Idol where the poll head is voted off in a week or so stops with Paul. However, with Perry, Bachmann, Romney and Gingrich already having been voted off, the only possible dark horse now remains Huntsman - does he have a running chance against Paul?
As of minutes ago, BAC stock hit the nearly 3 year low value of $5.01 which immediately set off algorithmic defense programs, because as has been explained previously, should the stock trade under $5.00 during regular hours, instead of the After Hours session, when it hit $4.90 a few weeks ago, it will most likely set off numerous selling programs from plain vanilla funds which despite what pundits claims, have a hard floor of $5.00 (these are the same "pundits" who believe a downgrade of the EuropeAAAn club will have no impact on asset vallue) for held stocks.The result would be unpredictable so it is better to eat losses on algo all bid programs than to find out what would happen when the stock has $4 handle.
As we noted earlier, in his live statement, Boehner just said that the House will reject the Senate-proposed 2 month payroll tax extension, via BBG:
- HOUSE SPEAKER BOEHNER EXPECTS HOUSE TO DISAGREE WITH SENATE
- BOEHNER: 'IT'S TIME TO STOP THE NONSENSE' ON SHORT EXTENSION
- BOEHNER: HOUSE PASSED A 'REASONABLE BILL' ON TAX-CUT EXTENSION
- BOEHNER SAYS HOUSE WILL VOTE ON SENATE PAYROLL TAX BILL TONIGHT
- BOEHNER SAYS HE EXPECTS HOUSE-SENATE CONFERENCE ON TAX CUT
It is time to cut those Q1 GDP forecast as time is running out, and the GOP obviously is hell bent on making the Obama economy as ugly as possible heading in the election year.
A good way to generate hate mail is to question 1) Santa's "guaranteed year-end rally" and 2) the notion that market rallies always resume soon enough because of the Federal Reserve's backstop/intervention. If we step back from the latest shuck-and-jive data from the Ministry of Propaganda, a.k.a. the Status Quo managing perceptions, and take a longer view of the economy, money, credit and the stock market, we get an extremely troubling set of insights. Courtesy of this site's Chartist Friend from Pittsburgh, here are three charts that completely undermine the fantasy that central planning/intervention can "save the market" once again in 2012 and beyond.
Last week, in the aftermath of the global coordinated liquidity swap facility expansion (OIS+100 to OIS+50) from November 30, with the added benefit of the contemporaneous Chinese RRR cut, bond yields plunged on short-term hope that the Fed's action would be a long-term solution for the Eurozone. It wasn't. But not before the ECB received a brief respite from manipulating bond markets. As a result of the November 30 action, the ECB proceeded to buy just €635 million of Peripheral (read Italian) bonds as the BTP yield plunged. Days later, following the realization that this is nothing but yet another band aid mechanism, yields once again soared, and depending on the benchmark used, pushed beyond 7% once again. In the meantime, the story of the ECB's 3 year LTRO rescue, lost in the aftermath of the Fed action, was resurrected, and is now attributed by some as being some pseudo bazooka that will rescue the ECB. It won't as was explained yesterday. And sure enough, one week after the knee jerk reaction from the liquidity intervention, the ECB was once again out in full force picking up pennies in front of the steamroller, buying up €3.361 billion in bonds in the week ended December 16, which brings the total purchases at €211 billion (net of maturities).
Tonight at 6:30 pm the House is set to vote on the Senate’s payroll tax cut/unemployment insurance bill. As it stands right now, it appears likely that the vote will fail due to lack of support by Boehner and other house leaders. Furthermore, Senate has said it will not present an alterantive bill (as of yet). Which means that with a major portion of Q1 GDP at stake (non-renewal of payroll cuts means up to 1% of GDP being cut in Q1 2012), the futures market will be very focued on newsflow after the close. Here is Goldman's rundown of what to expect tonight in DC.
In a just released piece by Goldman's Eugene King which explains the firm's justification for why gold will peak at over $1900 in 2012, and which we will discuss in greater detail shortly, Goldman brings up a very interesting point, namely that the ongoing weakness in gold stocks, and the broad decoupling of gold miners from gold price can be attributed to one primary thing: the emergence of synthetic means of expressing a position on the gold market and "bypassing" direct gold cost pass thru exposure in the form of gold stocks. Supposedly this is a good thing, although we would caution that this is potentially a very insidious scheme to allow the world's cash-rish entities (read banks full of those ones and zeros that these days pass for "money") to procure real gold assets at very cheap prices and valuations, even as the broader retail investors proceeds to chase paper gold in the form of "synthetic CDOs" such as GLD (which as we first noted over a week ago may well disappear when the paper claims collapse and suddenly everyone has a claim on the underlying physical), only after the fact realizing they merely used gold as a paper pass thru equivalent. In other words, as the broader population continues to realize that gold is the real safe asset, yet invests in legacy forms of exposure, i.e., paper, the real hard assets: firms that actually extract gold from the ground and process it, remain out on the auction block to be snapped up quietly by all those who want exposure to the primary source of the metal, which they can then throttle at will in order to manipulate the supply side of the equation post facto.