Capital Markets

Following Friday's stunner of a stock halting press release, moments ago BBRY was halted again, this time however for some "good" (relatively speaking) news. The firm reported that it has entered into a Letter of Intent (so nothing definitive yet) with Fairfax Financial, according to which BBRY shareholders would receive U.S. $9 per share in cash - Transaction valued at approximately U.S. $4.7 billion - Consortium permitted 6 weeks to conduct due diligence - BlackBerry entitled to go-shop during due diligence period, subject to payment of a termination fee in the event alternative offer accepted. In other words an LBO, one which however has not only but many outs: "There can be no assurance that due diligence will be satisfactory, that financing will be obtained, that a definitive agreement will be entered into or that the transaction will be consummated." Which means that once the buyers figure out the potential disaster on the books, expect the final price (if any) to be revised lower as one after another MAC clause is triggered. 

Once upon a time, US thrift institutions were the primary provider of credit to keep the American housing market humming along. Then the great Savings and Loan crisis happened, and by and large thrifts disappeared from the housing credit landscape. The result was the advent of Fannie and Freddie (i.e., the GSEs) as the "rug" that tied the US housing market room together. The chart below shows the dramatic increase in the role that the GSEs started playing following the S&L crisis, and which culminated with the great financial crisis, or rather the failure of the GSEs a month ahead of the Lehman bankruptcy.

Dispassionate macro overview.

As it turns out, a lot... and also very little.

It would appear, as uncomfortable as it may be for the mainstream, that the Fed's Bullard has been reading Zero Hedge and realizes the error of his (and his academic friends') ways. In his speech today he noted: "Many of my friends in academia and in financial markets argue that changes in the pace of purchases should not have an important effect in financial markets (and hence would have no eventual effect on the real economy either). However, the empirical evidence from these two episodes provides striking confirmation that changes in the expected pace of purchases act just like conventional monetary policy." In other words, as we said when QE3 was announced, "it's the flow not the stock that matters" and implicitly - as Bullard confirms - tapering asset purchases has the same effect as hiking rates.

With Septeper an epic disappointment, some terms being casually thrown now include Octaper and Dectaper. But while the first is quite improbable, despite Bullard's attempt at a trial balloon floated on BBG TV moments ago, the prevailing consensus has now shifted to December. Which incidentally is when Bank of America, which was the only big/TBTF bank to correctly forecast a Snotaper announcement, has marked its calendar in expecting the first $10 billion reduction in the monthly $85 billion flow injection by the Fed. To wit: "In line with our out-of-consensus call, the Fed surprised most market participants and did not taper at their September meeting. Moreover, the FOMC statement, updated projections, and tone of Chairman Bernanke’s press conference all were dovish, as we had anticipated. Thus, our base case remains for a December taper. We now expect a modest-sized reduction of $10 bn, split evenly between MBS and Treasuries, followed by a gradual, data-dependent wind-down of purchases likely to end in October 2014. We also now expect the first rate hike in late 2015 at the earliest (previously we had looked for the first hike that summer), putting the target funds rate at 50 bp at the end of 2015 and 1.50% at the end of 2016."

• JPMorgan Guilty Admission a Win for SEC’s Policy Shift (BBG)
• Pricing Glitch Afflicts Rollout of Online Health Exchanges (WSJ)
• This will end well: Japan LDP Considers Draft Bill to Put Government in Control of Fukushima Cleanup (WSJ)
• How a German tech giant trims its U.S. tax bill (Reuters)
• Despite Merkel's Popularity, Angst Creeps In (WSJ)
• Hank Paulson warns of regulatory conflict (FT)
• Rajan Surprises With India Rate Rise to Quell Inflation (BBG)
• Apple Begins Selling New iPhones (WSJ)
• Pope Says Church Should Stop Obsessing Over Gays, Abortion (BBG)

The cardinal rule of investing – and life, frankly – is, according to ConvergEx's Nick Colas, "When the facts change, you have to change your point of view."  The Fed’s decision to maintain its current pace of bond buying at yesterday’s FOMC meeting is one of those fact-changing events.  Markets were primed for a reduction, and along with a host of other flashing yellow lights that was enough to make plenty of market watchers cautious.  Yes, the Fed will eventually cut the QE tow rope if/when labor markets improve, but for now, Colas notes, they seem content to keep toting the barge and lifting the bale.  That leaves markets free to head to the bar, hopefully avoiding incarceration along the way.  Remember 1999 though, he warns, when markets ripped through Q4 because so many investors had bided their time waiting for the dot-com bubble to collapse earlier in the year?  Cue the music, because this is beginning to look like the same market setup.

The "market is in a state of shock" after the Fed's decision to postpone taper, noted Credit Agricole's David Keeble adding that "Fed credibility and its communication strategy are in tatters." This, as others have noted, will make it many times more difficult to manipulate yields lower in the future as the "Fed is moving to a new way of looking at asset purchases." As we explained in detail 15 months ago, Keeble notes the Fed appears to have clearly signaled that the degree of accomodation is not linked to size of the Fed balance sheet, but that the flow of Fed buying is "very important."

So, it's the flow, not the stock; and that means, as we noted here, that unless The Fed is actively engaged in monetization at every given moment, the impact from easing diminishes progressively; ultimately approaching zero and subsequently becoming negative.

• Expectations for Fed to begin to taper asset purchases by USD 10-15bln
• Ranges for pace of Treasury purchases: high USD 45bln, low USD 25bln
• Ranges for pace of MBS purchases: high USD 45bln, low USD 30bln
• Some see FOMC lowering unemployment threshold from current 6.5%
• Summary of Economic Projections and Press Conference from Fed Chairman Bernanke follow the announcement

The day when the Fed will begin the unwind of its latest QE program (for the fourth time) has finally arrived (as has the day when an impeachment committee will vote whether to ban Berlusconi from public office, but understandably that is getting far less press). In a few short hours the answer to all those questions of whether and how much of the taper was priced in, will be revealed. But while the Taper discussions will dominate the airwaves, as they have for the past five months, there actually were some news in the world that had nothing to do with the US Politburo in charge of capital markets and the US economy, located in the Marriner Eccles building. Here is a brief summary.

Why Treasuries will likely rally and the dollar sell-off in response to the FOMC.  

Over the past year, India has unleashed the most unprecedented series of gold "capital controls" ever seen in a modern nation, shy of confiscation (and even that may be imminent). Today, India added yet another more measure to its list of prohibitions that seek to minimize the size of the gold market available to citizens, yet which will only result in even more interest and demand in the yellow metal. As Reuters reports, India increased its import duty on gold jewellery from 10 percent to 15 percent, setting it higher than the duty on raw gold in a move to protect the domestic jewellery industry. Why is the government doing this? Simple: "To protect the interests of small artisans, the customs duty on articles of jewellery ... is being increased," the ministry said.

A decisive tipping point in the evolution of American capitalism and democracy - the triumph of crony capitalism - took place on October 3, 2008. That was the day of the forced march approval on Capitol Hill of the $700 billion TARP (Troubled Asset Relief Program) bill to bail out Wall Street. This spasm of financial market intervention, including multi-trillion-dollar support lines provided to the big banks and financial companies by the Federal Reserve, was but the latest brick in the foundation of a fundamentally anti-capitalist régime known as “Too Big to Fail” (TBTF). It had been under construction for many decades, but now there was no turning back. The Wall Street bailouts of 2008 shattered what little remained of the old-time fiscal rules. There was no longer any pretense that the free market should determine winners and losers and that tapping the public treasury requires proof of compelling societal benefit.

One would think Laura Dimon, the daughter of one James Dimon, would be on familiar terms with such concepts as bonds, capital structure and finance (especially the more arcane substrata thereof). After all the father of the graduate from the Columbia School of Journalism (author of such previous pieces as "The Last Office Taboo for Women: Doing Your Business at Work" which examines "the lengths women go to avoid getting caught in the stall") is none other than the CEO of the largest bank in the US, best-known for such "one-time items" as constantly recurring legal charges associated with financial innovation gone horribly wrong (today's rumor of a $750MM settlement over the bank's London-based prop trading group being a case in point). As it turns out, one may be mistaken...