Futures are looking down big this morning as a flurry of negative news hits the tape.
Last night South Korea failed to inform North Korea that they were practicing a live fire drill. Believing they were under attack, North Korea responded by firing 100 rounds of artillery at Yeonpyeong Island in the Yellow Sea. South Korea responded with 80 rounds of artillery and scrambled fighter jets to stop the firing. Two South Korean marines were killed and 15 soldiers and civilians were wounded. Many think this was something of an accident, but others believe it stems from the sanctions placed on North Korea over the Chenoan incident and because NK was found to have a new uranium enrichment facility. Whether a demand for attention or a mistake (unlikely), the markets have been rattled and rightly so. This is a subject that I have cautioned on this blog numerous times that did not simply go away. The best we can do is hope for international assitance and a diplomatic solution.
Spain had a basically failed 3-6 month bond auction. The sovereign sold 3.2B Euro vs. the 4-5B Euro that had been planned. Spanish CDS is approx 20 bps higher and the 10-year is at all time high spreads. The EUR/USD pair is trading a full 0.0156 lower at 1.3469.
Tuesday, November 23, 2010
Thursday, November 18, 2010
Irish Bailout Talks Begin in Earnest, GM Prices, Fed Orders Stress Tests
Futures are looking significantly higher this morning as Ireland appears to be on the verge of a bailout by the EU and IMF. While Irish administration officials insist that no bailout is necessary, their central bank governor, Patrick Honohan, suggests that a bailout worth 'tens of billions' of euros is likely. Mr. Honohan also suggested he believes the rate on such a bailout loan would be 5%.
Why this is positive news I am unsure. Afterall, this goes to show that nothing European officials have been saying for weeks has had even a smidgeon of crediblity. I suppose this also means that Portugal, Spain, et al are soon to follow. The Euro is rallying on the news this morning to 1.3648 (or +0.0117).
GM priced its 'IPO' at the high end of the range at $33 on 478M common and $4.35B of preferred. With the shoe, the deal could come to $18.1B, the second largest IPO in US history. The Treasury sold $11.8B which reduces its stake to less than 37%. Ford shares are also rallying this morning on the announcement that it will sell a large portion of its stake in Japanese car maker, Mazda.
The Fed ordered new stress tests for the top U.S. banks yesterday, with a request that the top 19 banks also submit capital plans by early next year. The Fed also provided guidelines for banks that want to increase their dividends or buybacks which include meeting higher capital requirements and having shown they pass the current (and ongoing stress tests).
On the economic calendar today, we will have another Congressional Hearing on Robo-Signing and Other Mortgage Issues, this time with Citigroup, Wells Fargo, and GMAC in the hot seat. At 7 am we will get an update on the Leading Indicators, the Fed's Warsh, Kocherlakota, and Plosser will all give speeches this afternoon, along with Treasury's Wolin and Warren. Lastly, the Fed Balance Sheet and the Money Supply data will be released after the market close.
What is obviously interesting is that GM's first day of trading was a sure to be manufactured rally-up day. Reviewing the 'positive' news announcements, one sees little that is a concrete positive: Ireland 'might' be bailed out, GM priced well but the government still owns nearly 40% of the company, the banks are seeing more regular 'oversight' and stress tests prove it (right because the first round was very transparent...does anyone remember CAMEL ratings?? The European version was even more spectacular.) At best the stress tests will be taken as a token vote of confidence in the system with its obvious bias still intact. At worst, the stress tests might show the need for the four horsemen of the apocalypse to raise more capital. I can see it now, "BAC and C need to raise an additional $10B. But don't worry this dilution is no biggie. Especially not a big deal when you consider that they just raised the dividend 100 bps!!"
My non-binding advice would be to avoid buying this rally today. Hold some capital back as its unlikely we'll be able to get a borrow on GM until tomorrow or soon thereafter...
Why this is positive news I am unsure. Afterall, this goes to show that nothing European officials have been saying for weeks has had even a smidgeon of crediblity. I suppose this also means that Portugal, Spain, et al are soon to follow. The Euro is rallying on the news this morning to 1.3648 (or +0.0117).
GM priced its 'IPO' at the high end of the range at $33 on 478M common and $4.35B of preferred. With the shoe, the deal could come to $18.1B, the second largest IPO in US history. The Treasury sold $11.8B which reduces its stake to less than 37%. Ford shares are also rallying this morning on the announcement that it will sell a large portion of its stake in Japanese car maker, Mazda.
The Fed ordered new stress tests for the top U.S. banks yesterday, with a request that the top 19 banks also submit capital plans by early next year. The Fed also provided guidelines for banks that want to increase their dividends or buybacks which include meeting higher capital requirements and having shown they pass the current (and ongoing stress tests).
On the economic calendar today, we will have another Congressional Hearing on Robo-Signing and Other Mortgage Issues, this time with Citigroup, Wells Fargo, and GMAC in the hot seat. At 7 am we will get an update on the Leading Indicators, the Fed's Warsh, Kocherlakota, and Plosser will all give speeches this afternoon, along with Treasury's Wolin and Warren. Lastly, the Fed Balance Sheet and the Money Supply data will be released after the market close.
What is obviously interesting is that GM's first day of trading was a sure to be manufactured rally-up day. Reviewing the 'positive' news announcements, one sees little that is a concrete positive: Ireland 'might' be bailed out, GM priced well but the government still owns nearly 40% of the company, the banks are seeing more regular 'oversight' and stress tests prove it (right because the first round was very transparent...does anyone remember CAMEL ratings?? The European version was even more spectacular.) At best the stress tests will be taken as a token vote of confidence in the system with its obvious bias still intact. At worst, the stress tests might show the need for the four horsemen of the apocalypse to raise more capital. I can see it now, "BAC and C need to raise an additional $10B. But don't worry this dilution is no biggie. Especially not a big deal when you consider that they just raised the dividend 100 bps!!"
My non-binding advice would be to avoid buying this rally today. Hold some capital back as its unlikely we'll be able to get a borrow on GM until tomorrow or soon thereafter...
Tuesday, November 16, 2010
Hang on to your Hats
The Dow is down 200+ pts this morning as a touch of reality is sweeping over the markets.
Ireland has now admitted that it is in talks to seek IMF/EU financial support for its government and banking system.
Finland has announced it does not approve of an Irish bailout.
Portugal admits that it may soon need assistance as it can't borrow on the public market except for at prohibitive rates.
Austra admits that it is witholding a 190M Euro tranche from Greek rescue fund as it continues to fail to meet its obligations under the EU support agreement.
So much for all the glowing things Trichet has been saying about the European economy...
The President of the EU, Herman Van Rompuy, said, "We all have to work together in order to survive with the euro zone, because if we don't survive with the euro zone we will not survive with the European Union. But I'm very confident we will overcome this." Mr. Rompuy also added, "We are in a survival crisis."
It's absolutely not too late to hedge oneself with the EUO which is still sub 20 at the time of this writing.
Yesterday, many economists, hedge fund managers, mutual fund managers, etc wrote a petition to the Fed demanding that it immediately call off its planned QE2.
China moved curb its burgeoning inflation with another rate hike this morning.
At 11:30 am PST today, Congress will begin its, "Problems in Mortgage Servicing From Modification to Foreclosure" hearing.
Also, President of the NY Fed, William Dudley said that the Fed did not obviously know how hard the dollar was going to get pounded on their monetization announcement.
All this and a POMO of $5B+ that has seemed to have had no appreciable effect on supporting the market...Giddy up...
Ireland has now admitted that it is in talks to seek IMF/EU financial support for its government and banking system.
Finland has announced it does not approve of an Irish bailout.
Portugal admits that it may soon need assistance as it can't borrow on the public market except for at prohibitive rates.
Austra admits that it is witholding a 190M Euro tranche from Greek rescue fund as it continues to fail to meet its obligations under the EU support agreement.
So much for all the glowing things Trichet has been saying about the European economy...
The President of the EU, Herman Van Rompuy, said, "We all have to work together in order to survive with the euro zone, because if we don't survive with the euro zone we will not survive with the European Union. But I'm very confident we will overcome this." Mr. Rompuy also added, "We are in a survival crisis."
It's absolutely not too late to hedge oneself with the EUO which is still sub 20 at the time of this writing.
Yesterday, many economists, hedge fund managers, mutual fund managers, etc wrote a petition to the Fed demanding that it immediately call off its planned QE2.
China moved curb its burgeoning inflation with another rate hike this morning.
At 11:30 am PST today, Congress will begin its, "Problems in Mortgage Servicing From Modification to Foreclosure" hearing.
Also, President of the NY Fed, William Dudley said that the Fed did not obviously know how hard the dollar was going to get pounded on their monetization announcement.
All this and a POMO of $5B+ that has seemed to have had no appreciable effect on supporting the market...Giddy up...
Monday, November 8, 2010
Today's POMO: $6.26B
Despite the Fed's $6.26B POMO today, the Dow remains down 60 pts. With little on the economic calendar, we could sell off for the rest of today and tomorrow, until the new POMO schedule for the coming weeks is released on Wednesday.
Week in Review and Week Ahead
Last week the S&P climbed over 3.6% as the Fed announced a $600B Treasury buying program that will focus on bonds between 2 and 10 years. The program will last 8 months and can be increased or decreased at any time. The Republicans took the majority in the House of Representatives and gained a few seats in the Senate, virtually promising two years of Congressional gridlock and the impossibility of further fiscal stimulus. I do however secretly believe that John Boehner is being more than a touch coy when he says that Republicans in Congress will 'listen to our constituents' and deliver what is expected/desired. This could mean that Boehner and Co. run on a platform of fiscal austerity but when push comes to shove may deliver the medicine that the Democrats should have with 'just giving the people what they want' as an excuse. We also got the October NonFarm Payroll number last Friday. Unemployment still officially stands at 9.6%, although the private sector added 159k jobs which was the largest since March 2007. This string of at least technically good news has pushed the three major indices to two year highs. The Dow is now up 9.7% YTD, the S&P up 9.9%, and the Nasdaq is up 13.7%.
This morning, futures are looking down a bit as the market looks to take a breather after last week's surge. A breather, if one occurs, will probably only last until 7:15 am PST, when the FRB NY launches its last scheduled POMO under the current schedule. The amount should be approx $6.5B (assuming the PD's are willing sellers...) at which time the Nasdaq led by AAPL and AMZN takes off and brings energy and commodity prices and equities up with them.
The EUR/USD is below 1.40 this morning as the dollar gains on several major world currencies. World Bank president Robert Zoellick actually suggested that the world's leading economies should adopt some form of modified gold standard. Zoellick, in an OpEd in the FT, called for a Bretton Woods II where countries agree to a system of floating exchange rates. Gold hit $1,398.35 this morning in response.
Also this morning, Zhu Guangyao, China's vice finance minister told reporters that the QE2 suggests that the US "does not recognize, as a country that issues one of the world's major reserve currencies, its obligation to stabilize capital markets...Nor does it take into consideration the impact of this excessive fluidity on the financial markets of emerging countries." Mr. Guangyao also mentioned that he expects China to have a very 'candid' conversation with the U.S. at the G20 meeting in Seoul this weekend regarding QE2. "This second round of quantitative easing is a shock to the stability of global financial markets." With every major world economy - Japan, China, Brazil, Germany, etc - decrying QE2 as essentially insane and combative to our trading partners, I can't imagine that headlines out of the G20 will suggest any sort of successful resolution to the growing calls for the US to change its policy approach or lose reserve currency status.
We have a rather light economic calendar scheduled for the week. We have wholesale inventories tomorrow, trade balance on Wednesday, and Michigan sentiment on Friday.
Also this week will be an announcement of a schedule for the next 4 weeks of POMO, which will be announced on Wednesday.
This morning, futures are looking down a bit as the market looks to take a breather after last week's surge. A breather, if one occurs, will probably only last until 7:15 am PST, when the FRB NY launches its last scheduled POMO under the current schedule. The amount should be approx $6.5B (assuming the PD's are willing sellers...) at which time the Nasdaq led by AAPL and AMZN takes off and brings energy and commodity prices and equities up with them.
The EUR/USD is below 1.40 this morning as the dollar gains on several major world currencies. World Bank president Robert Zoellick actually suggested that the world's leading economies should adopt some form of modified gold standard. Zoellick, in an OpEd in the FT, called for a Bretton Woods II where countries agree to a system of floating exchange rates. Gold hit $1,398.35 this morning in response.
Also this morning, Zhu Guangyao, China's vice finance minister told reporters that the QE2 suggests that the US "does not recognize, as a country that issues one of the world's major reserve currencies, its obligation to stabilize capital markets...Nor does it take into consideration the impact of this excessive fluidity on the financial markets of emerging countries." Mr. Guangyao also mentioned that he expects China to have a very 'candid' conversation with the U.S. at the G20 meeting in Seoul this weekend regarding QE2. "This second round of quantitative easing is a shock to the stability of global financial markets." With every major world economy - Japan, China, Brazil, Germany, etc - decrying QE2 as essentially insane and combative to our trading partners, I can't imagine that headlines out of the G20 will suggest any sort of successful resolution to the growing calls for the US to change its policy approach or lose reserve currency status.
We have a rather light economic calendar scheduled for the week. We have wholesale inventories tomorrow, trade balance on Wednesday, and Michigan sentiment on Friday.
Also this week will be an announcement of a schedule for the next 4 weeks of POMO, which will be announced on Wednesday.
Thursday, November 4, 2010
Bernanke in WaPo: 'Stock prices higher, people spend more'
Today, in an OpEd in the Washington Post, Bernanke finally came clean about the true intentions of QE2.
"This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion."
This is explicit. Lower rates haven't increased home buying (tough to qualify/want a mortgage when you are jobless, banks aren't actually lending, home prices are obviously being falsely supported, etc) so that can't be the goal. Lower corporate bond rates are almost impossible at this point, so that can't be the main idea.
No, no, its obviously an attempt to boost the stock market at all costs at the expense of the dollar's reserve currency status, the respect of both our allies and our enemies, the purchasing power of the middle class, etc, etc, etc.
The S&P is up approx 15% since the beginning of September. Meanwhile, the commodity index is up 17%. This should make clear to any and all sentient human beings that this is a dollar devaluation that will hit most painfully for the already unemployed and the middle class. $8/gallon gasoline does not spur economic growth or the American consumer to again spend frivolously.
Meanwhile, leaders from countries around the world are becoming louder and louder in their demands that the US abandon its current policy on the dollar. (Brazil, China, South Korea, etc).
"This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion."
This is explicit. Lower rates haven't increased home buying (tough to qualify/want a mortgage when you are jobless, banks aren't actually lending, home prices are obviously being falsely supported, etc) so that can't be the goal. Lower corporate bond rates are almost impossible at this point, so that can't be the main idea.
No, no, its obviously an attempt to boost the stock market at all costs at the expense of the dollar's reserve currency status, the respect of both our allies and our enemies, the purchasing power of the middle class, etc, etc, etc.
The S&P is up approx 15% since the beginning of September. Meanwhile, the commodity index is up 17%. This should make clear to any and all sentient human beings that this is a dollar devaluation that will hit most painfully for the already unemployed and the middle class. $8/gallon gasoline does not spur economic growth or the American consumer to again spend frivolously.
Meanwhile, leaders from countries around the world are becoming louder and louder in their demands that the US abandon its current policy on the dollar. (Brazil, China, South Korea, etc).
GS: QE2 to reach $2T, Fed Funds = 0 until 2015
In a note to clients this morning, Goldman (aka the Fed's private, unofficial mouthpiece): "In practice, QE2 is likely to continue well beyond June 2011—at least well into 2012—if our forecasts for unemployment and inflation are close to the mark. We believe that purchases could ultimately cumulate to around $2 trillion...Under our longer-term projections it is easy to come up with models that show no tightening until 2015 or later."
Given that it was Jan Hatzius that predicted a $500B QE2 announcement and so allowed the Fed to 'surprise to the upside' with $600B, I wouldn't be surprised if QE2 does reach not just $2T by 2012, but $2.1T, ya' know so they can 'surprise to the upside.'
This note to clients is surely at least a part of the reason why the Dow is up 140 this morning. Otherwise, it looked like we were set up to see a sell the news type of event. Be careful as today's POMO is about to begin.
Given that it was Jan Hatzius that predicted a $500B QE2 announcement and so allowed the Fed to 'surprise to the upside' with $600B, I wouldn't be surprised if QE2 does reach not just $2T by 2012, but $2.1T, ya' know so they can 'surprise to the upside.'
This note to clients is surely at least a part of the reason why the Dow is up 140 this morning. Otherwise, it looked like we were set up to see a sell the news type of event. Be careful as today's POMO is about to begin.
QE2 Announcement, Today's Outlook, POT update
Yesterday, the Fed finally announced its plans (at least for now) for QE2. The program will consist of $600B in longer-term Treasury securities to be purchased by the Fed over the next 8 months ($75B/month or $110B/month if you include currently planned POMO operations to replace MBS and Treasuries as they roll off of the Fed's balance sheet.) This means that with QE2 and QE Lite, the market will be propped up by the Fed to the tune of $27.5B per week. The Fed kept its options open to do more (or less) as the economic conditions change. They also kept the extended period language regarding the Fed Funds rate.
The market, not totally impressed with this as $500B-$1T was expected, only managed to close 4 pts higher on the S&P and 26 on the Dow. This morning however, the futures are pointing much higher despite an unexpected jump in initial claims. Initial claims came in at 457K vs. the 427K expected. Continuing claims at 4340 vs. 4328K expected. The EUR/USD is now at 1.4263 (+0.0139) a level which suggests coming pain for German exporters, etc. It will be interesting to see if EU members have any creative way of addressing their ever-rising currency while we devalue the dollar at hyperspeed. The Yen is 80.62 to the USD, also a level at which Naoto Kan will likely be forced to redouble his efforts at intervening into the currency market. The VIX is again sub-20 (and by the looks of things, go lower still this morning) and gold is flying at 1,378/ounce. Oil is greater than $85. So, exactly what the new normal looks like...rising unemployment and soaring inflation. This cannot end well...
Lastly, before the market gets underway, its worth noting that per a call I've been making on this site regarding POT, the Canadian government has blocked the Australian miner's takeover bid for POT this morning. POT closed yesterday at $145.50, but is already looking down to $139.90 pre-market.
The market, not totally impressed with this as $500B-$1T was expected, only managed to close 4 pts higher on the S&P and 26 on the Dow. This morning however, the futures are pointing much higher despite an unexpected jump in initial claims. Initial claims came in at 457K vs. the 427K expected. Continuing claims at 4340 vs. 4328K expected. The EUR/USD is now at 1.4263 (+0.0139) a level which suggests coming pain for German exporters, etc. It will be interesting to see if EU members have any creative way of addressing their ever-rising currency while we devalue the dollar at hyperspeed. The Yen is 80.62 to the USD, also a level at which Naoto Kan will likely be forced to redouble his efforts at intervening into the currency market. The VIX is again sub-20 (and by the looks of things, go lower still this morning) and gold is flying at 1,378/ounce. Oil is greater than $85. So, exactly what the new normal looks like...rising unemployment and soaring inflation. This cannot end well...
Lastly, before the market gets underway, its worth noting that per a call I've been making on this site regarding POT, the Canadian government has blocked the Australian miner's takeover bid for POT this morning. POT closed yesterday at $145.50, but is already looking down to $139.90 pre-market.
Wednesday, November 3, 2010
QE2 Announcement Expected Today: Look Out!
So, today is the day, and thank goodness gracious it has finally arrived. Afterall, I was getting awfully tired of commenting on QE2. At 11:15 PST today, Ben Bernanke will announce the amount of destruction he intends to levy against the US dollar. The consensus expectation has now moved into the $500B range with $100B in monthly installments over the next 5-6 months with the express optionality to increase the program should it prove necessary in future months. The extended period language surrounding interest rates is also expected to be repeated (surprise, surprise...).
What will be interesting is whether or not the market decides to sell this news. Many were (and some still are) hoping for a $1T QE2 (QE1 was $1.8T). So, $500 or less may be seen as a disappointment for those equity bulls who hoped for nothing more than the complete and utter debasement of the USD.
My advice to anyone who would listen was to be very cautious heading into today's announcement. Positioning with too much of a directional bias is unnecessary while the stakes are so high...
Also today, we saw the majority of the results of the midterm elections. The Republicans have not surprisingly taken control of the House and have gained seats in the Senate. With gridlock guaranteed, we can all forget about the idea of having another round of fiscal stimulus, which is still what I believe the country most desparately needs. Sure, QE2 may add to the bonus pool at Goldman Sachs, but fiscal stimulus might actually be able to create jobs, rebuild the nation's crumbling infrastructure, launch the US into the race (against China) for green tech, etc. But alas, we will have at least two years of a do-nothing Congress that will likely be focused more on finding a way to smear our president (Remember Newt's '94 Congress?) than it will be on creating jobs and economic relief for suffering Americans.
The market is down a touch this morning. Probably the result of profit taking ahead of an uncertain Fed announcement and also an acknowledgment of congressional gridlock.
What will be interesting is whether or not the market decides to sell this news. Many were (and some still are) hoping for a $1T QE2 (QE1 was $1.8T). So, $500 or less may be seen as a disappointment for those equity bulls who hoped for nothing more than the complete and utter debasement of the USD.
My advice to anyone who would listen was to be very cautious heading into today's announcement. Positioning with too much of a directional bias is unnecessary while the stakes are so high...
Also today, we saw the majority of the results of the midterm elections. The Republicans have not surprisingly taken control of the House and have gained seats in the Senate. With gridlock guaranteed, we can all forget about the idea of having another round of fiscal stimulus, which is still what I believe the country most desparately needs. Sure, QE2 may add to the bonus pool at Goldman Sachs, but fiscal stimulus might actually be able to create jobs, rebuild the nation's crumbling infrastructure, launch the US into the race (against China) for green tech, etc. But alas, we will have at least two years of a do-nothing Congress that will likely be focused more on finding a way to smear our president (Remember Newt's '94 Congress?) than it will be on creating jobs and economic relief for suffering Americans.
The market is down a touch this morning. Probably the result of profit taking ahead of an uncertain Fed announcement and also an acknowledgment of congressional gridlock.
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