You didn't think the Fed would let more than a few months pass without the much beloved and dearly missed near-daily POMOs now did you. The FRBNY's Brian Sacksters just released the October schedule of $44 billion in long-dated purchases, and $44 billion in short-dated sales. Since the net effect to banks is one of derisking, the offsetting rerisk will be implemented in the form of more stock purchases. Hopefully their prop desks (which no longer exist, right, after all the whole Volcker Rule thing and the UBS fiasco...) will know how to trade Netflix this time around better than last time.
While Buffett hemmed and hewed in his usual populist rhetoric, discussing how multi-billionaires can afford to be generous with other people's tax rates, all of it completely unremarkable and highly hypocritical, the Octogenarian did release, whether by accident or on purpose, something quite critical, namely that European banks have approached him with requests for money. From Bloomberg: "They need capital in their banks, in many of their banks," Buffett, Berkshire's chairman and chief executive officer, told Bloomberg Television's Betty Liu on "In the Loop" today. "We would not be a good prospect," he said in an interview from the New York Stock Exchange. He's received "very, very few" calls about putting capital into European banks. "Not quite none at all," he said, declining to name any institutions."And that, as they say, is a word out of place, because while one my pretend that borrowing $500MM from the ECBs Fed swap line is really just an (inverse) arb on Libor or some other useless excuse, a bank begging for Buffett to take a bath can not be explained away.
This week's trifecta of key financial developments, that go far deeper than superficial headlines, namely China, Morgan Stanley (and European bank exposure in general) and the equity-credit disconnect, just got another major push. CNBC just interviewed Tim Backshall (of Capital Context) to discuss the dramatic moves in MS credit risk (which we mentioned earlier) and in an undeniably convincing accent (British, Aussie, South African?), he managed to bring many of our broader concerns into focus including global financial contagion, bank funding, Chinese growth, and high yield credit. We also learned that ZeroHedge is a blog.
Update: Sorry folks, looks like another disappointment. Per the WSJ's Tamer El-Ghobashy, "#Radiohead spokesperson: “we can officially say its not happening” re: #occupywallstreet performance."
The move in Morgan Stanley CDS has been grabbing some attention. It has moved wider than any of the other banks. Its exposure to French banks in particular has been part of the reason. Potential hedging of counterparty exposure has also been listed as a reason. (Once again I can’t help but wonder why derivatives in general, and CDS in particular, didn’t get forced into clearing or exchanges after Lehman). I don’t know whether Morgan Stanley is rich or cheap at these levels, but I think there is more digging that needs to be done and it should focus on Asian exposures because that seems to correlate best to the recent moves.
David Stockman, former US Representative and Director of the Office of Management and Budget under Reagan, does not mince words. He sees the monetary systems of the world coming apart. How did we get here? He identifies the root cause as the intentional over-leveraging of world economies by central planners in a misguided effort to enjoy growth without consequence.
I blame it on the Fed. I blame it on the 1971 decision by Nixon to close the gold window and let the dollar float. Because out of that has evolved -- or morphed -- a central banking policy in the world that absorbs unlimited amounts of government debt. And so we went on what I call the "T-bill standard" or the "federal debt standard." And the other central banks of the emerging mercantilist Asian economies -- Japan, Korea, and now, especially, the People’s Printing Press of China -- have absorbed this massive emission of debt that otherwise would’ve created powerful negative consequences that would’ve forced politicians to act long ago. In other words, higher interest rates, pressure for inflationary monetary policy, and the actual appearance of price inflation. But because all the bonds on the margin were being absorbed by the central banks, we got away for twenty or twenty five years with “deficits without tears.”
And he's just getting started. The only thing more impressive than Stockman's CV of insider roles in public economics and private finance is his talent for colorful metaphor.
Corn Price Plunges To Lowest Since July 1, Hits Revised Daily Limit As Sellers Outnumber Buyers By 2000 To 1Submitted by Tyler Durden on 09/30/2011 - 12:01
Back in April, when we first discussed the hike in daily corn trading limits from $0.30 to $0.40, we had some cynical observations, namely that "inviting not only more vol (read bottom line for the business) but more margin, the CME is exposing speculators to far greater impacts from margin hikes (and drops). Which of course means a far great capacity and ability to kill any commodity rally dead in its tracks." Well, there is no margin hike today (yet), although based on today's action we fully expect one. The reason, we are currently at today's down 40 cent limit, a price of $5.925 a bushel, the lowest since July 1, and by the looks of things it will get far worse: as the chart below demonstrates right now sellers outnumber buyers by a ratio of 2000 to 1. Expect this ratio to get even bigger once the CME hikes corn (and who knows what other commodity) margins as soon as today.
In what is perhaps the biggest face-palm moment of the day, the SEC's summary report on credit raters found 22 pages worth of supervisory failure and conflicts of interest concerns at each and every one of our NRSROs. However, perhaps the most notable headline, via Bloomberg was potentially much more litigiously serious:
*SEC SAYS `LARGE' CREDIT RATER APPEARED TO LEAK PENDING RATING
*SEC DECLINED TO IDENTIFY WHICH RATER MAY HAVE LEAKED DECISION
Now who could it be?
Will Start Of Landesbank Mortgage Litigation Against Bank Of America Push Stock To New 52 Week Lows?Submitted by Tyler Durden on 09/30/2011 - 11:16
When all is said and done, Bank of America will have no choice but to charge its 6 to 8 remaining clients about one million dollars each time an ATM transaction is executed because the bank will be so deep in mortgage putback litigation it will have a negative market cap. The latest news for the bank is about the worst possible kind: the wave of lawsuits filed against the Countrywide toxic mortgage receptacle has just jumped across the Atlantic, and after the Norwegian sovereign wealth fund recently started proceedings, the real threat, German banks, have just realized that Bank of America is nothing but a legal liability piggy bank and have sued Moynihan's house that taxpayers built. Furthermore, since it is precisely purchases of toxic MBS and RMBS from BAC and other banks that caused the collapse of the Landesbanken system, with Germany going on the offensive and now trying to recoup as much money as they can, look for gray market putback estimates to soar by another $20-40 billion, which will result in BAC selling the other half of its stake in the Chinese Construction Bank any minute, especially with Chinese banks starting to tumble like dominoes on Chinese slow down concerns.
The word entitlement commonly refers to government benefits to which we are entitled as taxpayers and/or citizens/residents. But there are layers of entitlement in the American psyche far beyond government benefits programs. Let's start with the government benefits entitlements. The programs most people refer to as entitlements are Social Security and Medicare, which taxpayers pay for with payroll taxes (even if the money just goes into one giant Federal pot). Beyond these "I paid into them" entitlements are the "welfare" entitlements of Medicaid, Section 8 Housing, SNAP/food stamps, etc., which are paid out of general tax revenues and which are available to anyone who qualifies, regardless of their status as taxpayers. Buried within Social Security is another large entitlement program for the disabled and dependents (widows and orphans). Veterans are entitled to benefits as a result of their military service, as are their families. Employers pay for other employment-related entitlements: Federal and state unemployment, workers compensation and disability insurance, etc. The entitlement mindset is thus firmly established in the American psyche.
Economic activity decoupling is no longer a phenomenon between the developed and developing world. It is between the Chicago region and everywhere else. And because the Chicago PMI is supposed to be representative of the Manufacturing ISM, the market just loves (or rather loved, considering the 10 minute leak of the data) that the PMI soared from 56.5 to 60.4 on expectations of a decline to 55.0. The internals were all hot, hot, hot as follows: "Business Activity: "EMPLOYMENT expanded to highest level in 4 months; NEW ORDERS erased net declines accumulated since April; ORDER BACKLOGS remained in contraction at a 23-month low; SUPPLIER DELIVERIES approached neutral; while the buying policy was as follows: PRODUCTION MATERIEL moved to an 10-month high; CAPITAL EQUIPMENT lead times ended a 4-month uptrend." Yet as usual the amusing part, which is straight from the respondents was the following: "We are seeing unannounced and incredible inflation on one product, multiple parts, that we are purchasing out of Europe. At 400% increase we thought surely must have been a mistake. This is not related to $ exchange since we pay in Euros already. Supplier says they cannot absorb costs anymore." And that's why Houston, we have a problem.
Back on May 25, somewhere close to the irrelevant equity market's highs, when once again a little ahead of the market curve we suggested that Dexia would be the bank most impacted by the next round of Greek-induced risk flaring, we were banging the table on a long Dexia CDS SUB position. 5 Year subs were trading at 568 bps then. They are now 31/39 points upfront and every day for Dexia could be its last. Which is precisely why we are closing the trade: should Dexia go under it will drag all of Europe with it. We expect a partial or complete nationalization to be announced imminently, which in addition to all other side effects, would lead in a Bear Stearnsing of all accrued profit. With a 20% recovery rate on the CDS, the P&L on the trade is $3.6MM on $10MM notional. Not bad for a 4 month holding period.
We have been discussing US (and European) financial risk for some time (especially recently with regard MS exposure to French banks). Since we published that article, we have seen incredible shifts in MS CDS and bonds even as stocks appear to shrug of some of the reality of the situation. An excellent article on Bloomberg last evening pointed out that not only was MS CDS at rather extreme levels, it was quietly as risky (if not more so) than many of the European banks that are making the headlines. Not only is MS CDS its highest since its spike highs in Q4 2008, the curve is inverted with 1Y risk trading 500/550 against 5Y risk at 455/470 which strongly suggests jump risk (or counterparty risk) is being aggressively hedged. With over $4.5bn of debt maturing in Q4 (which we have been pointing out for months - TLGP issues) and the increasingly binary nature of any outcomes, it seems the only real buyer of any MS debt are basis traders as the difference between bond spreads and CDS has halved in the last few weeks.
The August Personal Income and Spending report is out and while there were some modest surprises in the data, namely a drop in Personal Income of -0.1%, on expectations of an increase of 0.1% (and an adverse revision for July data from 0.3% to 0.1%) - the first drop in two years, while Personal Spending was in line with expectations at 0.2% (previous revised from 0.8% to 0.7%), the biggest news of the day is that the US consumer is getting tapped out, with spending coming entirely from savings: the savings rate dropped from a revised 4.8% (previously 5.0%), to 4.5%, the lowest since December 2009.