EURCHF has been making all time lows, and so it did get one meager headline on Bloomberg but it wasn't exactly the talk of the town. However, the attached chart shows that EURCHF selling off implies that something bad is brewing for sovereign bonds in Europe. The chart represents the EURCHF against the spread between the 2Y average sovereign yield (weighted by notional outstanding) and the 2Y EONIA which is 2Y compounded overnight rate. One can see fairly quickly that over the past couple 18 months one rarely goes without the other. Practically it just means that whenever money is flying out of Euro into Swiss Franc it's highly likely that people (the same people) are getting rid of their Eurozone sovereign bonds. This is not the widest divergence we have seen but the EURCHF is breaking out lower, and with reports that last week's purchases of Eurozone bonds by the ECB was the lowest since the beginning of November it is not crazy to expect renewed selling pressure to manifest shortly. - Nic Lenoir
Even as the S&P closed modestly positive, there is yet another indicator added to all the other "massively overbought" technical signs we have discussed recently: namely the cumulative TICK. As can be seen on the charts below, both the S&P and the Nasdaq's cumulative TICK readings closed at the lows of the past several days, despite the fact that stocks once again rose to 2010 highs, while the Nasdaq hit 3 year high levels. For those who need a quick refresher course on what the TICK indicator shows, here is a great rehash by Brett Steenbarger. So how does explain this very apparent divergence between underlying buying, or as the case may be, selling pressure, and actual price dynamics? We wish we could tell you. At this point, with no volume, little volatility, stock markets are increasingly the plaything of those who continue to dabble in vol and other Greek letters. It is merely another indication that contrary to actual bid/offer interest, the market continues to do what the marginal market maker decides. In a normal world, we would claim there is some risk for a substantial reversion to the mean. However, for that to happen it would require at least some participation by trading interests which are not aligned with that of the Fed. And at last check, and following an endless equity fund stream of outflows, such did not exist.
Data this week is relatively light given and it's a holiday week. 3rd Quarter GDP at this point has no informative value regarding current and future economic activity. The slew of housing data is also inconsequential. Everyone knows housing is in a double dip so any slight improvement will be used by pundits to talk up the economy but fundamentals remain in the dumpster. Continuing claims is probably the most important piece of data this week given that durable goods is such a volatile series. As a result I feel the markets this week will be mainly driven by sentiment and price action rather than news flow, especially given thin late December markets. Here are some of the key elements I am watching. - Nic Lenoir
Heading into 2011, assuming there are no major liquidity/insolvency events (and that is a big assumption, considering Europe is out there, somewhere) which will force more countries to come begging to various central banks, and international monetary authorities, and ultimately, the Federal Reserve, the key question is how should one look at rates, particularly on the long-end, opportunities in a world in which suddenly everyone (expect the US of course), is seeing their economies contract courtesy of austerity (which was just voted Webster's word of the year 2010). Demonstrating the continuum when it comes to making credit differentiation conclusions based on fiscal inequality, is Nomura's chart of the week, which provides a convenient tearsheet for the progression from Hong Kong on one end of the fiscal balance shortfall forecast spectrum, and ending with Greece, Ireland and Spain on the other. As Nomura notes: "Heading into 2011, significant fiscal divergence looks like a key theme for markets." This merely goes back to our broader theme from earlier this year, that any real asset upside will have to be made in the FX market, where relative performances are likely underappreciated, as opposed to equities, which are largely shunned by most, and where the only possible trade remains a levered beta play which, as always, takes the escalator up and the elevator down.
The NIA continues with its series of bite-sized video documentaries exposing the stupidity and lies out of the US government. While the previous clip looked at a fictitious world in which the dollar had just died, today's is one which analyzes the plethora of unintended consequences that emerge as a result of the government's centrally planned tinkering. As always, it is a must watch, even if one does not agree with the NIA's overarching theme that government policies will ultimately result in uncontrollable price moves following the destruction of the reserve currency.
Today's second POMO just closed and the Fed has now purchased a total of just over $14 billion in bonds maturing between 2014-2016 and 2018-2020. Brian Sack has bought another $6.8 billion in bonds, at a Submitted to Accepted ratio of 2.4x, higher than the 2.2x earlier in the day as we expected. The flow proceeds appear to have had the express designation of being used to purchase ES as the second the second [sic] POMO closed, equities ramped up. To those who care, are positioned appropriately in this Madoff-style ponzi, and hope that just like in the Madoff case will not one day be forced to clawback proceeds (under calm and collected conditions or otherwise), our sincerest congratulations. To everyone else, we would like to note that today's 2Pm ramp in stocks comes at the cost of the Fed now being the proud owner of $991 billion in US debt. Tomorrow's two POMOs will likely seal the deal, making the Fed the only institutional holder/hedge fund in the world to own 13 digits worth of US paper.
Ben Bernanke is a highly educated PhD from Princeton who has never worked a day in the real world since he graduated from college in 1975. His entire life has been spent in the ivory tower of academia surrounded by models and theories that work perfectly in the comfort of his office. After building his reputation as an “expert” on the Great Depression by studying it and reaching the wrong conclusions, he came down from his ivory tower in 2002 to join an organization that has systematically destroyed the value of the US currency, thereby undermining the well being of the once vibrant middle class...If the Grinch had been pimping for a small pack of Grinchsters who impoverished the honest people of Whoville, then the Dr. Seuss poem would have perfectly described Ben Bernanke, the Federal Reserve and the banksters that run the show here in the USA. The actions taken by Ben Bernanke, Alan Greenspan and their brethren on the Federal Reserve over the last quarter century have destroyed the middle class and left senior citizens impoverished, while enriching its Wall Street masters. Now he is stealing Christmas from the hard working middle class of this country.
The theater of the macabre goes one further following the just released response by Whitney Tilson to this morning's attempted rebuke of the short Netflix thesis by Reed Hasting. StreetInsider cites Tilson, who told the breaking news site the following: ""I'm glad Reed Hastings took the time to reply to some of the issues we raised. He made a number of good points and helped us -- and other investors -- understand him and his company better. I think a friendly, respectful debate like this is healthy and wish there was more of it." We are now holding our breath until we get Reed's response to this follow up response, to his original response, over just how overvalued his company is. Ironically, we don't really see what the reason for this theatrical acrimony is: after all it is pretty obvious that both Hastings (and the firm's CFO prior to his surprising resignation recently) and Tilson are on the same side of the trade.
Nothing to see here: just Brian Sack handing out fitties for the second time today so Prime Brokers such as Jefferies which apparently can't even balance its books (from Jefferies preliminary results: "The results were preliminary because Jefferies is trying to reconcile differences in records between it and an unnamed clearing bank that deals with a portion of its fixed-income business. The clearing bank’s records differ from Jefferies’s figures by $39 million, and if correct, may cause 2010 profit to be reduced by 7 cents to $1.08, the firm said in the statement." All in a day's work when nobody gives two cents about what lies behind the numbers, pun intended) go out and buy some Amazon for prop accounts. This particular POMO will buy Treasurys due between 12/31/2014 - 05/31/2016 for a total of about $7 billion. Results posted here in 45 minutes. We expect the submitted to accepted ratio to be notably higher than this morning's 2.2x.
By now everyone has seen and played with the US debt clock via usdebtclock.org whereby anyone who so wishes, can find every little detail about America's current sad fiscal state. The fact that America currently has just under $14 trilllion in national debt should be no surprise to anyone who professes to having an even modest interest in the state of the US economy. Yet a new feature on the "debt clock", namely one which extrapolates future debt at current rates of advancement (instead of one based on the always completely inaccurate CBO estimates), and looks at US debt in the year 2015 will probably make many stop dead in the their tracks. If anyone thought that $14 trillion in 2010 debt is bad, just wait until we hit $24.5 trillion in total US national debt in 2015. And it gets even more surreal: total US Unfunded Liabilities are estimated at $144 trillion, roughly $1.2 million per taxpayer... Was that a pin dropping?
We want everything and we want it now, and we don't want to sacrifice anything to get it. Our solution is pathetically childlike: just borrow trillions of dollars every year to buy what we want, so no adult trade-offs are ever required. Just buy our energy from somewhere else so we don't have to make any sacrifices or balance competing demands...We want abundant, cheap energy, and we want someone else to supply it to us so we don't have to make any difficult trade-offs. We want all our entitlements and we also don't want higher taxes. Isn't this the acme of childish fantasy? When pressed about energy, we want to hide behind fantasies of fusion, or algae-based fuels, or some other technology which has been "10 years away" for the past 30 years or which is 20 years away from scaling up to industrial production, if ever. Our ignorance of the actual science is breathtaking, but we refuse to consider the possibility that breeder reactors and algae-based fuels may not pan out. At some point, probably within the next 5-6 years, the oil exporters will stop shipping their hydrocarbons to us in sufficient quantities to meet our demands, and bond buyers will stop trading their capital for absurdly low rates of return on U.S. Treasury bonds. Once it costs $1 trillion just to pay the interest on existing (and rapidly ballooning) debt, then we won't be able to borrow enough to fund the Empire and the Savior State and the interest. Trade-off time will finally be forced upon us.
One look at last week's insider transaction list confirms that the deluge of insider selling refuses to end, and is now well in the double digit billion category in recent months. S&P Insiders sold $512 billion in notional in the week ended December 17 per Bloomberg, slightly above the 6 month average, with the top five sales taking place in Google, Ralph Lauren, UnitedHealth, General Dynamics and Starwood Hotels: in these five names alone executives sold nearly $200 million worth of stock. On the buy side, one purchase skewed the distribution to the tune of 96%: an acquisition of TIMET stock (TIE) for $34 million represented nearly all of the $35.7 million in insider purchases in the past week. Incidentally this is the second week in a row in which we have observed material purchasing in TIE, with $2.6 million in Titanium Metals purchased last week (when it accounted for 75% of all insider buying). And with this week's TIE purchase, the insider buying recorded in the past week is the biggest we have seen since beginning to keep track of insider transactions.
As noted earlier, the first POMO of the day is now complete and the Fed's balance is now $7.790 billion bigger. This is only part one of today's monetization game as the afternoon will see Bernanke's asset increase by another $8 billion at 2 pm. The Submitted to Accepted ratio one POMO 1 came at a surprisingly low 2.2x, which indicates that PDs are not cash starved, and instead it leads us to believe that the selling in the markets is Primary Dealer driven. Hopefully the GETCOs will be able to sustain the offer-pressure should the selling intensify by day end as more and more banks seek to exit profitable risk positions.
From under the always interesting pen of CRT's David Ader and Ian Lyngen comes the firm's 2011 outlook for the Treasury market. The summary: "From the supply and demand perspective, there’s QE lite and QE2 vs. knowledge that at some point they’ll stop, eventually hike, and follow suit possibly on asset sales. (In point of fact we doubt the Fed may EVER do asset sales, but rather allow their assets to simply mature/redeem and stop reinvesting.) In any event we don’t see this as a 2011 threat but it’s fair to say that any bear market will be more substantial than whatever bull market we can connive. The problem is positioning for the latter when the former hangs as an inevitability someday." This dovetails perfectly with what we have been saying: ever increasing supply of USTs (potentially hit up to $2 trillion in 2011), will be offset by an ever more ravenous Fed monetization. Should rates continue to rise, the moment when this dynamically unstable balance reaches its tipping point will come far sooner than most expect. If, on the other hand, new signs of economic weakness-cum-deflation emerge, and if Rosenberg is proven right for the second year in a row, the Fed may just be able to postpone the point of "inevitability" as defined by CRT. Much more nuanced observations inside, which also include the firm's forecast for possible "tail risk" events.
Today is only the second time in 2010 that the New York Fed has scheduled not one, but two POMOs. Currently in process is a buyback of $7 – $9 billion of 2018-2020 bonds. After this concludes at 11 am, it will be promptly followed by a second POMO, this one beginning at 1:15pm and ending at 2:00pm, and will seek to monetize $6 – $8 billion of 2014-2016 in bonds. Of particular attention is CUSIP PC8 which is the 10 year auctioned off on December 8, less than two weeks earlier, and at a rate of 3.340%. It will be interesting to see just how much instaflip the PDs will exercise in order to pad their year end P&Ls via the move in price and the wide bid/ask margins paid by Brian Sack. We will provide the results as soon as they are published in just under half an hour. And just to make sure there is a wealth effect in time for Christmas, today's double POMO will be followed by another double POMO... tomorrow.