Today's 5 Year bond auction merely confirmed what we already knew from the 1 month Bill auction (and recurring negative yields thereof), namely that heading into year end everyone is scrambling for the "safety" of uncle Sam. The auction priced at a fresh record low yield of just 0.88%. In other words people will collect less than 1%/ year to hold US paper for 5 years. Naturally, the market is telegraphing that either it either does not buy any optimistic views about the LT economy, or, far more likely, is betting that very soon Bernanke will extend the ZIRP promise well beyond mis-2013 as Bernanke is left with no choice but to push the risk free security further and further to the right, and force everyone to chase every more duration, and go into risky assets to reflate if not the economy, then at least the stock market. Otherwise, the Bid To Cover dropped to a 4 auction low of 2.86, although above the 12 auction average of 2.83%, with Directs, Indirects and Dealers taking down 9.1%, 50.6% and 40.3%, respectively. Oddly enough, following yesterday's collapse in 2 Year Indirect interest, today foreign buyers, who tendered a total of $22 billion at a 79% hit rate, once again took down more than half the auction, and the highest since August 2010's 50.8%. Overall, this is merely more year end liquidity shennanigans, as equities experience a short squeeze, while credit parks all the money it can find in the safest paper. What this means for tomorrow's LTRO tender interest is still unclear.
HOUSE HAS VOTES TO REJECT SENATE TAX PLAN; VOTE CONTINUING
Watch as the house votes on the Senate proposed two-month payroll tax extension, coupled with a motion to go to conference.
Morgan Stanley Deconstructs The Funding Crisis At The Heart Of The Recent Gold Sell Off, And Why The Gold Surge Can ResumeSubmitted by Tyler Durden on 12/20/2011 12:10 -0400
A week ago, we touched upon the likelihood that the recent gold sell-off was driven primarily due to a quirk in liquidity provisioning in which gold plays a key role via its "forward lease rates", or the Libor-GOFO differential. Specifically, in "As Negative Gold Lease Rates Collapse, The Gold Sell Off Is Likely Coming To An End" we said, "In a nutshell, negative lease rates mean one has to pay for the "privilege" of lending out one's gold as collateral - a prima facie collateral crunch. The lower the lease rate, the greater the use of gold as a source of liquidity - and since the indicator is public - it is all too easy for entities that do have liquidity to game the spread and force sell offs by those who are telegraphing they are in dire straits and will sell their gold at any price if forced, to prevent a liquidity collapse." Said otherwise, the lower lease rates drop, and they recently hit a record low for the 3M varietal, the likelier it is that gold may see substantial moves lower. Today, Morgan Stanley's Peter Richardson recaps precisely what was said here, in a note titled "Recent fall in gold prices points to bank funding costs." Granted, MS only looks at the first part of the equation - the dropping lease rates, and ignores the re-normalization in gold, aka the tightening in lease rates. Well, with the 3M forward lease rate now almost back to unchanged, it appears our speculation that the gold sell off, with spot at $1575 on the 15th, is over were correct, and gold is now $40 higher, and just below the critical 200 DMA that everyone saw as the catalyst of gold going to $0. So what does MS have to add to our analysis? Well, much more optimism for one, because not only does the bank think we are right that the collapse in negative lease rates (i,e., the flattening to practically unchanged) mean the sell off is over, but such a normalization of the gold lease market has "the makings of a renewed upward assault on the recent all-time high.... Our current gold price forecast for 2012 of US$2,200/oz remains in place under these circumstances." Qed.
The death throes of the debt-based consumerist lifestyle are already visible beneath the glossy propaganda of "rising revenues this Christmas season." Those revenues were obtained by selling goods at below cost, in the absurd hope that income-strapped, over-indebted consumers would make profitable "impulse buys." As Mish has documented, the "impulse buys" are being returned even before Christmas to the tune of hundreds of millions of dollars. The Fed is desperately attempting to re-inflate the debt bubble by lowering interest and mortgage rates and buying up all sorts of semi-toxic/impaired debt. What the Fed dreads is the reality we all feel and see: fear of the future due to diminished wealth and insecure incomes. If your assets have fallen in value, you feel poorer because you are poorer. Borrowing more at any interest rate will not make anyone feel wealthier. People who fear their income may plummet due to layoffs or their hours being cut are not in the euphoric mood to borrow more, and banks which cannot dare to lose more money loaning to people who will default have cut off credit to millions of previously rabid consumers of debt. Ask yourself this simple question: how much stuff could people buy if they could only spend surplus cash, after all their expenses and debt servicing payments were paid in full?
The chart below is the bid to cover on the US 4 Week Bill auction. Needless to say, it just yielded 0.000%. We will leave it up to readers to figure out why the announcement of the result at 11:30 am today led to a violent sell off in EURUSD.
So the market has completely latched on to the idea that LTRO is back-door QE. Does this make any sense and can it even work? So banks can borrow money for up to 3 years from the ECB. They can buy sovereign bonds with that money. Those bonds would be posted as collateral at the ECB. The bull case would have banks buying lots of European Sovereign Debt with this program. The purchases would be focused on Italian and Spanish bonds with maturities less than 3 years. Buying bonds with a maturity longer than the repo facility is risky. The banks would need to be assured they can roll the debt at the end of the repo period. Some may be convinced, but the bulk of the purchases will be 3 years and in so that they loans can be repaid with the redemption proceeds. So banks buy the bonds and earn the carry and all is good? Not so fast. The LTRO can help the banks with their existing funding problems without a doubt, but it is unclear that encourages new bond purchases. I think we have already seen the initial impact. There will be significant interest in tapping the LTRO for existing positions. Some small amount of incremental purchases may occur at the time, but the banks will use this to finance existing positions. Now we will wait to see rates do well, but will be disappointed. The big banks with risk management departments will decide to decline. The risk/reward just won’t be attractive to them. In the end, this won’t do much for the sovereign debt market, but will shine a spotlight on which banks should be shorted and will possibly expedite their default.
While the world of risk explodes to the upside on the back of the LTRO-based carry trade expectations (which is not evident at all in some of the more technical relationships across the sovereign space no matter what headlines try and tell you), the very backbone of support for the fiscal evolution that Europe thinks it will achieve is now trading at a five-day low price having dropped notably post the earlier Fitch 'FrAAAnce' announcement. It is simple enough to think that banks will rapidly seek risk and buy sovereigns with their newfound wealth, but looking at CDS-Cash basis (the difference between CDS spreads and bond spreads) there has been almost no shift in supply/demand (which we would expect to tip to bond outperformance if the carry trade were being placed) and moreover, the sovereign spread curves are NOT bull steepening as one would expect from modest reach for say 2Y/3Y peripheral yield versus the 3Y LTRO. The bottom-line seems to be that equity markets are buoyed by a broad risk asset rally (and TSY selling and 2s10s30s rally) while the underlying beneficiary of this 'solution' does not seem to be improving so much. The strength in ES appears like simple momentum off an overshoot yesterday as risk assets broadly never really sold off like ES did and are now holding up well enough for today.
As pointed out earlier, today's manic shift in market sentiment is being squarely attributed to the latest deux es out of Europe - the last Hail Mary attempt to come out of Europe - the 3 year LTRO, which was announced 2 weeks ago. So before said machnia becomes a flop ex, here is, courtesy of Bloomberg, a summary of Wall Street's expectations for what tomorrow will bring. Incidentally, the reason why the bulk of outlooks on the LTRO are negative, is because all this action does is push any real action from the record-levered ECB (whose balance sheet can be seen in its full perspective here) further back, and forces Europe's banks (and numerous American ones) to hope and pray they can survive one more [day|week|month] on their own without real central bank support.
With many thanks to Art Cashin, whose note this morning reminds us of today's bipolar shift in the market attitude. Of course, if said "Yes, Virginia" letter was written today, it would come from a desperate hedge fund manager seeing fax after fax of inbound redemption notices, and the New York Sun's response would even be able to give the name of the appropriate individuals in the Santa Claus Central Planning administration.
Goldman Takes Client Abuse To Next Level: Closes, And Reopens, Copper And Zinc Recommendations At Massive LossesSubmitted by Tyler Durden on 12/20/2011 10:14 -0400
We thought we had seen it all. And then comes Goldman. The firm, which continues to eviscerate its clients, just closed its Long Copper and Zinc June 2012 trades at massive losses: the first was opened on May 23 at $8,804/t, and closed on December 19 at $7,274/t, for a loss of $1,530/t, the second opened May 23 at $2,189/t, closed on December 19 at $1,891/t, for a loss of $298/t. So far so good - as all our readers know by now, one should do what Goldman does (i.e., sells to "clients"), not what Goldman tells its clients to do. This is not surprising. What however, is hilarious is that in the same report that Goldman closes its June 2012 Cu/Zn longs, it also... opens Cu/Zn longs. That's right - "While we maintain our bullish views on copper and zinc into 2012, we close out our May 23 recommendations for these metals at a considerable loss, and resetting the recommendations at December 19 prices." So somehow, while losing clients up to a blended 15%, Goldman continues holding the feet of those who still listen to them to the fire. Because this time it will be different.
Once again the US Department of Truth succeeds in fooling the algos: today's November Housing Starts number was a blockbuster: at 685K annualized units, it came higher than the highest estimate (range was 600K to 655K), and certainly higher than the average estimate of 635K. It was obviously higher than the downward revised previous number of 627K. All great: housing soaring, employment must be back. Right? Wrong. One peek under the covers shows where all the "growth" comes from - the entirety of the surge was due to the absolutely hollow 5+ multi-family units which jumped by a whopping 25% sequentially, and which as everyone in the industry knows are nothing but inventory padding by homebuilders who "build just to build." Unfortunately, as the all important 1 Unit structure trendline shows, there is absolutely no improvement in this critical series. But hey - it fooled the robots. And now it will take at least 12-24 hours before vacuum tubes process the reality of this latest spin. By then, however, we may well have had our Christmas rally.
ECB's Balance Sheet Now Far Bigger Than Fed's, More Levered Than Lehman, PIIGS Exposure Up 50% In 6 MonthsSubmitted by Tyler Durden on 12/20/2011 09:31 -0400
While well-known to most, what may be lost on all those calling for the ECB to commence outright printing, is that as today's Bloodmberg chart of the day shows, the ECB's balance sheet is not only far greater than the Fed, at $3.2 trillion compared to $2.9 trillion for Ben Bernanke, but at 30x leverage, has the same risk as Lehman did at its peak. However, one major distinction between the Fed and the ECB is that while the Fed continues to be shrouded in almost impenetrable secrecy on an absolute basis, it is transparent as a wet t-shirt competition during Spring Break at Panama City Beach compared to the ECB. From Bloomberg: "Without information on the quality of assets on the ECB’s balance sheet or how far it’s willing to allow leverage to increase, investors may doubt the bank’s ability to prop up the financial system, and demand higher yields to buy some countries’ bonds, he said. "Sovereign spreads could rise again if investors become uncomfortable with ECB leverage without a fully detailed rescue package,” said Tyce. “The ECB is providing liquidity and confidence to the banking system, yet all the while its own leverage and balance sheet size is hitting new highs. It seems likely that the market will begin to watch the rising leverage with interest and growing concern."
- According to an EU source, EU finance ministers failed to agree on raising ESM/EFSF EUR 500bln joint ceiling. However, Eurozone finance ministers agreed to provide EUR 150bln in bilateral loans to the IMF for bailout use, according to an EU statement
- Stronger than expected IFO data from Germany, together with successful T-Bill auctions from Spain helped risk-appetite
- Weakness in the USD-Index provided support to EUR/USD, GBP/USD, commodity-linked currencies, and WTI crude futures