As predicted, Ireland's debt auction went 'well' this morning.
Results:
1B Euros of 8 year bonds at 6.023% vs. prior of 5.089% (increase of almost 100 bps)
0.5B Euros of 4 year bonds at 4.767% vs. prior of 3.627% (increase of > 100 bps)
As a result, Irish CDS fell by 15 points and the Euro is up again this morning at approx 1.3128.
While Yahoo Finance touts this as a 'success', it goes without saying that an increase of 100 bps suggests further uncertainty. It must also be understood that the ECB has been backstopping much of these debt issuances. Since May in fact, the ECB has purchased 61.5B Euros worth of sovereign debt, including 323M Euros worth last week.
In re: to the FOMC meeting today, I would like to reiterate my view that the Fed will not announce any major new expansion of its balance sheet. The macro data, while suggestive of a considerable slowdown, does not seem to have been weak enough to prompt immediate action by the Fed, and I believe Bernanke will do his best to stay out of what could be construed as partisanship ahead of the November elections.
It also is not inconsequential that there is a massive amount of POMO planned for tomorrow and Friday. The market may sell-off following an FOMC announcement of non-action this afternoon, but not to fear, the Fed will be out buying like mad tomorrow morning to make sure the September rally doesn't fade.
It would seem that the goal of this rally is to halt the 5 straight months of equity outflows by finishing the third quarter on a high note.
Then we move into October, which has a strong history of bringing tail risk to the forefront. There is no FOMC meeting in October to keep the market up (ignoring POMO for the moment.) I also am concerned that when Ireland finally reports the cost of Allied Irish in early October, many may be shocked. The campaign rhetoric over taxes, stimulus, etc is bound to heat up, and the market could be in for a drubbing.
The Fed will meet again on Nov 2nd. I view any action by the Fed on election day as incredibly unlikely.
Which brings us to December 14th, at which point the Fed probably will unleash QEII.
If I am correct, then we could see this low volume, HFT and Fed driven rally come to a close, prompting a mass exodus from equities in October which may or may not be made worse by any number of tail risks (Sovereign debt crisis, report on Allied Irish, rising CDS rates, Japanese currency intervention, U.S.-China currency spat, Japan-China fight over Chinese sailors being held, Korean Peninsula troubles, strikes in Greece (next one planned for Oct. 7th), any surprise misses in Unemployment, 3Q GDP report on last day of October could actually come in negative, etc, etc, etc).
Then the bulls had better hope that a Republican win in November does not bring gridlock to Congress, as it is obvious to anyone breathing that additional fiscal stimulus will be necessary if we are to avoid a double dip. GDP is trending lower as stimulus fades (1Q10 = 3.7%; 2Q10 = 1.6%, 3Q10 = negative?). Without fiscal stimulus, it is very unlikely in my mind that the inventory rebalance can continue to drive the stock market in the face of falling aggregate demand.
The remaining arrows in the Fed's quiver may not be enough without something on the policy side. David Greenlaw at Morgan Stanley estimates that a $2T addition to the Fed's balance sheet would only result in:
10 Year down 50 bps to 2.2%
GDP growth increased by 0.3% in 2011 and 0.4% in 2012
Unemployment goes down by 0.3% in 2011 and 0.5% in 2012, or 9.6% goes to 9.1%
This hardly seems like enough of a return for the risks the Fed will take by increasing the balance sheet with never before tried programs, which supports my conclusion that without further fiscal stimulus, we are destined for a massive slowdown in the economy (and possibly the market).
Also of note, Bloomberg confirmed my suspision this morning that, "The U.S. has fallen behind emerging markets in Brazil, China, and India as the preferred place to invest." As long as the SEC allows HFTs to control/manipulate the market, and government intervention muddies the ability to properly assess risk based on fundamentals, foreign investors will seek to do business elsewhere. One of the greatest drivers of our relative economic success in the United States has been extremely efficient and liquid equity capital markets that allow companies to access capital for growth. With the sudden disdain for fairness and the rule of law, our policy makers and the Fed run the risk of permanently damaging investors' perspective that the U.S. markets provide equality for all participants under strictly enforced laws. With never ending POMO, currency interventions, rate manipulation, allowing HFTs to continue to steal from ordinary investors, and questionable economic reports that as a rule are always revised downward, its no wonder that people are leaving the 'casino' in droves...
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