Our government now faces in shutdown in less than 24 hours. While its more likely than not that a shutdown will be diverted once House Republicans appease their constituents that they've done everything in their power to send a message, the stakes are becoming increasingly high. What likely started as a bluff has seemed to take off down a steep and slippery slope. Harry Reid said this morning,"I'm not nearly as optimistic as I was eleven hours ago." Let's review a few things what will happen in the case of a government shutdown...
1. National Parks will be closed. There goes summer driving season, gasoline demand, and the ability of an ailing populace to vacation close to home in relatively inexpensive fashion. For us climbers, hikers, etc this actually is more brutal than you'd think!...Also, many national park jobs and concessionare jobs in national parks will be lost/postponed. These poor souls will be among the nearly 800,000 Americans whose jobs will be lost so that House Republicans can look good for the next election.
2. Pay to U.S. troops will be delayed.
3. Tax audits will be suspended.
4. *** FHA would stop guaranteeing loans *** There goes what remains of the housing market!
5. *** Loans to small business would be suspended ***
Meanwhile, Japan's nuclear crisis continues to worsen by the day, Portugal's Prime Minster yesterday announced that the nation will need to seek a bailout, the ECB hiked rates this morning, China inflation may hit 6%...so no end to tightening anytime soon in the People's Republic (4 rate hikes since last October already). A former IMF director this morning said that Ireland will need another bailout, and the Middle East continues to boil.
Message from the Fed, our media, and our politicians...buy stocks...everything will be fine.
Oil is over $109 this morning, and yet with all this going on, the VIX stands at sub 17 and the Dow remains over 12,400.
You may draw your own conclusions.
Thursday, April 7, 2011
Friday, January 7, 2011
Debt Ceiling; Defense Cuts; NFP
"Let me tell you what's involved if we don't lift the debt ceiling: financial collapse and calamity throughout the world. That's not lost upon me," commented Senior Republican Senator from S.C., Lindsey Graham on CNN yesterday. Treasury Secretary Timothy Geithner recently warned that we could be push up against the debt ceiling by March 31st, and while the Republican party took control of the House in November with the promise to deliver budget cuts, it appears that senior leadership is already backing down from using a vote to increase the debt ceiling as a political weapon. It will be interesting to see how many other senior republican lawmakers join Senator Graham's chorus in the coming weeks. I would imagine that many freshman lawkmakers do not understand the full implications of their vote on this matter. While I don't anticipate a failure to pass another increase in March, it is yet another reason for investors to be wary of chasing beta. Coming into this vote and the final months of QE2, I would expect that institutions will begin to decrease VaR, probably most profoundly affecting the Nasdaq darlings and high beta small-and mid-cap names.
In another intersting turn, Defense Secretary Robert Gates announced yesterday a plan to shave $78B off of the Pentagon's budget over the next five years. While Secretary Gates has been characterized in a number of publications over the past year as something of a Six Sigma-style-COO with budgets and efficiency measures always on his mind, this announcement is still an interesting opening salvo in what is likely to be a face off between Republican deficit hawks and Keynsian influenced Deomcrats. This announcement, again while expected, will likely only increase speculation that Obama will use the Defense budget as one of his key leverage points against non-cooperative Republicans. Obama could propose greater cuts to the Defense budget and thus drive a wedge between Republican lawmakers who truly believe in the need for budget reductions vs. those who are only acting hawkish in order to appease the electorate and secure the Presidency for the Republican Party in 2012. While battles over the budget are likely to be fought for years to come, I wouldn't expect any real action one way or the other until either a) US economic data (esp jobs data) markedly improves and appears sustainable, or b)the 2012 Presidential Election has concluded (regardless of who wins.)
The nonfarm payroll number for December was released this morning to great applause. Unfortunately the 9.4% reported includes just 103,000 jobs created, while dropping 260,000 unemployed workers from the labor force. Renowned economist Peter Morici reminds that we need to add an average of 350,000 new workers each month to bring unemployment down to 6% by 2013. No wonder that the majority of economists today assume unemployment will stay high for some time. Until there are real efforts at either job producing stimulus, an effort to block the flow of jobs overseas (if nothing else than at least public and political will aimed at corporations to behave patriotically), or a push to support new secular growth producing industry (world leader in electric cars, nuclear power plants, etc) then we will continue to see the strength of the American consumer diminished.
In another intersting turn, Defense Secretary Robert Gates announced yesterday a plan to shave $78B off of the Pentagon's budget over the next five years. While Secretary Gates has been characterized in a number of publications over the past year as something of a Six Sigma-style-COO with budgets and efficiency measures always on his mind, this announcement is still an interesting opening salvo in what is likely to be a face off between Republican deficit hawks and Keynsian influenced Deomcrats. This announcement, again while expected, will likely only increase speculation that Obama will use the Defense budget as one of his key leverage points against non-cooperative Republicans. Obama could propose greater cuts to the Defense budget and thus drive a wedge between Republican lawmakers who truly believe in the need for budget reductions vs. those who are only acting hawkish in order to appease the electorate and secure the Presidency for the Republican Party in 2012. While battles over the budget are likely to be fought for years to come, I wouldn't expect any real action one way or the other until either a) US economic data (esp jobs data) markedly improves and appears sustainable, or b)the 2012 Presidential Election has concluded (regardless of who wins.)
The nonfarm payroll number for December was released this morning to great applause. Unfortunately the 9.4% reported includes just 103,000 jobs created, while dropping 260,000 unemployed workers from the labor force. Renowned economist Peter Morici reminds that we need to add an average of 350,000 new workers each month to bring unemployment down to 6% by 2013. No wonder that the majority of economists today assume unemployment will stay high for some time. Until there are real efforts at either job producing stimulus, an effort to block the flow of jobs overseas (if nothing else than at least public and political will aimed at corporations to behave patriotically), or a push to support new secular growth producing industry (world leader in electric cars, nuclear power plants, etc) then we will continue to see the strength of the American consumer diminished.
Monday, December 13, 2010
VIX Falls off a Cliff
Today the S&P VIX is sub-17. This level of complacency usually signals that we are topping out or at least due for a correction. Rather than short individual equities, at these levels I find the idea of buying Feb VIX calls (struck in high teens/low 20s) to be a very interesting one. This is not even a bearish call and doesn't require bearish thinking. It should be a prop-bet or hedge and nothing more. It's always important when buying volatility to give yourself ample time. While Bernanke continues to monetize our debt with daily POMOs under QE2 and suggests on 60 minutes that QE3 is a possibility, this market could stay at these lofty levels for longer than a person could fundamentally believe possible (...it already has!) Several months should provide ample time despite the higher costs. Also it is worth noting that options buyers of VIX calls/puts realize that by definition volatility tends to spike higher/lower in short periods of time. Therefore, one must be nimble if considering this idea. The premium, unless very near its maturity date, will be less than the actual in-the-money amount. For example, if buying Feb 20's at 3.00, and the VIX goes to 27, the option is not likely to be worth 7 (as expected) but more likely 5.50 or 6. This is because VIX tends to snap up and come back down almost as quickly.
Other indications that market participants have become too complacent:
1. In the last three months alone, insiders have sold just under $10B worth of their own stock. (Tyler Durden at Zero Hedge.)
2. Valuations of NASDAQ darlings such as AAPL, NFLX, AMZN, OPEN, BIDU, etc are trading at shockling high forward multiples. This is very reminiscent of the low-rate manipulated market that led to the tech bubble in the early 2000s. The marginal buyer here is almost certainly playing a dangerous game of hot potato and is likely only piling in at this point as an inflation hedge and because of some hubristic belief that they will be the first out when Bernanke and Co can no longer successfully prop up the market. If this segment of the market turns sour, it will do so rapidly as there are far more 'renters' than 'buyers' in these names.
3. The Eurozone debt crisis is far from over. The media does an almost fascinating job of avoiding discussing this theme until something dramatic enough happens that it must be reported on. In the days between pronouncements from Merkel, or bond restructurings, the media is happy to behave as though the entire debacle has suddenly disappeared. I assure you, it has not. While I do not personally believe the European Sovereign Debt Crisis will play out in the coming weeks or even months, its very existence will continue to trouble markets for years into the future, which should at least make marginal buyers at these levels nervous about playing the role of the greatest fool...
4. Ditto for tensions on the Korean Peninsula. From headlines suggesting war is imminent to narry a mention the following day, it is almost amazing to witness a) how short-term oriented we've become as a society and as an investor class, and b) how effective the media is at setting the agenda. What is frightening is that the situation in Korea is not developing in a vacuum. With the US engaged in what many central bankers have dubbed a currency war, the price of food in China spiking higher as a result, the US monetizing debt and devaluing China's dollar holdings in the process, one must at least acknowledge that a proxy war between China backed NK, and US backed SK is not an impossibility. It may be mutually destructive and may be outside of the realm of current thinking, but WWI and WWII were economically motivated conflagrations that seemed to escalate rapidly after a tipping point incident that alone shouldn't have caused so much destruction, let alone worldwide participation. Follow the bonds...
5. Margin compression will occur sometime in the near future. If inflation should begin to pick up meaningfully (which it already has) then input costs will also trend higher. Not all of these costs can be materially passed through. Demand for certain goods is relatively inelastic, but clothes retailers, boat makers, household appliance makers, etc will not be able to pass on higher input costs to consumers who have seen their incomes, job security, and net worth all deteriorate. Without wage inflation, it is unlikely that we will see much successful pass-through pricing without a reduction in the top-line. Therefore margin assumptions must begin to be revised downwards.
6. On the topic of demand and inflation, one must consider that higher food and fuel prices will restrict the amount of disposable income that the American consumer has available for more fully priced goods and services. A reduction in the top line is therefore imminent for discretionary service providers and goods manufacturers. The Federal Reserve's goal of propping up the stock market to create a 'wealth effect' is providing an opportunity for insiders to sell and giving officials more time to work out potential solutions, but it certainly is not trickling-down to the majority of American workers, most of whom have very limited equity ownership, and who view a higher stock market not as a sign of a recovering economy but as endemic of a kleptocracy making off with what's left before the whole thing comes crashing down.
There is a notable rise in the 'end the Fed' rhetoric lately and one need look no further than the growing Tea Party movement, the appointment of Ron Paul to head the Fed oversight committee, etc. The political turmoil in this country is not, in my opininon, rooted in foreign policy ideology, or family values issues, but instead mainly represents a class struggle. Somehow the Democratic Party has been colored as the political arm of 'nothern elitists' now seen by populists everywhere as being detrimental to the quality of life of the people in this country. Meanwhile, deficit-hawk Republicans get elected to 'rein in spending' who intern immediately move to deny unemployment insurance extensions to our nations involuntarily unemployed if they are not granted extensions to $600B tax cuts for the nation's wealthy. Really? Is the country too naive or disinterested to even consider how bizzare and hypocrtical that this is? If this Democratic administration had the guts people previously assumed that it did, why not push to end the tax cuts (and the Reaganomics obsession along with it) and redirect this money to at least a less inflationary way to directly create jobs via subsidies and invesment in new secular growth industries such as electric cars, the smart grid, wind and solar, nuclear power plants, rebuilding the nation's infrastructure, etc, etc, etc. Instead our nation's 'populists' decry this idea as 'fascist' or 'socialist' and instead prefer that we provide a shadow subsidy to our wealthy through unaffordable tax cuts and daily POMO operations. Are you kidding me? This will not end quietly. It may not be the coming of another civil war, but the political discourse surely is hotter than its ever been during a period when the equity market was bounding higher and higher.
7. The ability for the US Treasury to sell bonds at record low rates while monetizing our debt will not last forever. At some point foreign buyers will refuse to participate and the pricing will have to work higher unless you believe the Fed and the Primary Dealers can take down every issue from here to eternity. Any material rise in rates will certainly constrain real economic activity and our ability to return to reasonable employment levels and capacity utilization will be pushed out that much further.
8. There has been no real effort to reform HFT market manipulation. In fact, Getco, a leading HFT, was tasked as head market maker on the GM IPO. Wow. I knew it must have been substantial, but with this decision its now guaranteed that HFT lobbying efforts must be some of the most amazingly robust (and well-funded) of any such efforts on Capitol Hill. HFTs, along with the PDs, and the Fed, continue to make the stock market an unsuitable place for retail investors to invest. People are not as oblivious to ramp jobs, and stick saves, and bizarre low volume sell-offs/ramps as TPTB would like to believe. There is a reason that retail money has been steadily streaming out of the market, and that reason is that people don't like to play a game that they know is rigged against them. The flash crash was also a lesson on just how dramatically and rapidly markets can change when volume is dominated by algo traders and fast money institutions and not honest investors seeking to allocate capital to high EVA or ROIC generating businesses. Unless we see meaningful regulation and increased transparency regarding HFT, algo trading, dark pools, etc then those wise enough to have amassed investible wealth, will also be wise enough to avoid throwing it away in a casino.
I could go on and on, but to summarize, the incredible amount of both serious and pervasive issues confronting this market are, for at least the intermediate term, here to stay. It would behoove those with the wisdom to be intellectually honest to avoid being the marginal buyer in any stock which has risen 30%+ in a few short weeks. If you insist on staying on for the ride, at least take the opportunity to hedge yourself when volatility gets this cheap by purchasing longer-dated VIX calls at reasonable strike prices. Willing to discuss hedgining instruments off-line with anyone interested.
Disclosure & Disclaimer: This post should be taken as the opinion of the author only and is in no way a recommendation to buy or sell any security. The author may be long or short volatility at any given time without notice.
Other indications that market participants have become too complacent:
1. In the last three months alone, insiders have sold just under $10B worth of their own stock. (Tyler Durden at Zero Hedge.)
2. Valuations of NASDAQ darlings such as AAPL, NFLX, AMZN, OPEN, BIDU, etc are trading at shockling high forward multiples. This is very reminiscent of the low-rate manipulated market that led to the tech bubble in the early 2000s. The marginal buyer here is almost certainly playing a dangerous game of hot potato and is likely only piling in at this point as an inflation hedge and because of some hubristic belief that they will be the first out when Bernanke and Co can no longer successfully prop up the market. If this segment of the market turns sour, it will do so rapidly as there are far more 'renters' than 'buyers' in these names.
3. The Eurozone debt crisis is far from over. The media does an almost fascinating job of avoiding discussing this theme until something dramatic enough happens that it must be reported on. In the days between pronouncements from Merkel, or bond restructurings, the media is happy to behave as though the entire debacle has suddenly disappeared. I assure you, it has not. While I do not personally believe the European Sovereign Debt Crisis will play out in the coming weeks or even months, its very existence will continue to trouble markets for years into the future, which should at least make marginal buyers at these levels nervous about playing the role of the greatest fool...
4. Ditto for tensions on the Korean Peninsula. From headlines suggesting war is imminent to narry a mention the following day, it is almost amazing to witness a) how short-term oriented we've become as a society and as an investor class, and b) how effective the media is at setting the agenda. What is frightening is that the situation in Korea is not developing in a vacuum. With the US engaged in what many central bankers have dubbed a currency war, the price of food in China spiking higher as a result, the US monetizing debt and devaluing China's dollar holdings in the process, one must at least acknowledge that a proxy war between China backed NK, and US backed SK is not an impossibility. It may be mutually destructive and may be outside of the realm of current thinking, but WWI and WWII were economically motivated conflagrations that seemed to escalate rapidly after a tipping point incident that alone shouldn't have caused so much destruction, let alone worldwide participation. Follow the bonds...
5. Margin compression will occur sometime in the near future. If inflation should begin to pick up meaningfully (which it already has) then input costs will also trend higher. Not all of these costs can be materially passed through. Demand for certain goods is relatively inelastic, but clothes retailers, boat makers, household appliance makers, etc will not be able to pass on higher input costs to consumers who have seen their incomes, job security, and net worth all deteriorate. Without wage inflation, it is unlikely that we will see much successful pass-through pricing without a reduction in the top-line. Therefore margin assumptions must begin to be revised downwards.
6. On the topic of demand and inflation, one must consider that higher food and fuel prices will restrict the amount of disposable income that the American consumer has available for more fully priced goods and services. A reduction in the top line is therefore imminent for discretionary service providers and goods manufacturers. The Federal Reserve's goal of propping up the stock market to create a 'wealth effect' is providing an opportunity for insiders to sell and giving officials more time to work out potential solutions, but it certainly is not trickling-down to the majority of American workers, most of whom have very limited equity ownership, and who view a higher stock market not as a sign of a recovering economy but as endemic of a kleptocracy making off with what's left before the whole thing comes crashing down.
There is a notable rise in the 'end the Fed' rhetoric lately and one need look no further than the growing Tea Party movement, the appointment of Ron Paul to head the Fed oversight committee, etc. The political turmoil in this country is not, in my opininon, rooted in foreign policy ideology, or family values issues, but instead mainly represents a class struggle. Somehow the Democratic Party has been colored as the political arm of 'nothern elitists' now seen by populists everywhere as being detrimental to the quality of life of the people in this country. Meanwhile, deficit-hawk Republicans get elected to 'rein in spending' who intern immediately move to deny unemployment insurance extensions to our nations involuntarily unemployed if they are not granted extensions to $600B tax cuts for the nation's wealthy. Really? Is the country too naive or disinterested to even consider how bizzare and hypocrtical that this is? If this Democratic administration had the guts people previously assumed that it did, why not push to end the tax cuts (and the Reaganomics obsession along with it) and redirect this money to at least a less inflationary way to directly create jobs via subsidies and invesment in new secular growth industries such as electric cars, the smart grid, wind and solar, nuclear power plants, rebuilding the nation's infrastructure, etc, etc, etc. Instead our nation's 'populists' decry this idea as 'fascist' or 'socialist' and instead prefer that we provide a shadow subsidy to our wealthy through unaffordable tax cuts and daily POMO operations. Are you kidding me? This will not end quietly. It may not be the coming of another civil war, but the political discourse surely is hotter than its ever been during a period when the equity market was bounding higher and higher.
7. The ability for the US Treasury to sell bonds at record low rates while monetizing our debt will not last forever. At some point foreign buyers will refuse to participate and the pricing will have to work higher unless you believe the Fed and the Primary Dealers can take down every issue from here to eternity. Any material rise in rates will certainly constrain real economic activity and our ability to return to reasonable employment levels and capacity utilization will be pushed out that much further.
8. There has been no real effort to reform HFT market manipulation. In fact, Getco, a leading HFT, was tasked as head market maker on the GM IPO. Wow. I knew it must have been substantial, but with this decision its now guaranteed that HFT lobbying efforts must be some of the most amazingly robust (and well-funded) of any such efforts on Capitol Hill. HFTs, along with the PDs, and the Fed, continue to make the stock market an unsuitable place for retail investors to invest. People are not as oblivious to ramp jobs, and stick saves, and bizarre low volume sell-offs/ramps as TPTB would like to believe. There is a reason that retail money has been steadily streaming out of the market, and that reason is that people don't like to play a game that they know is rigged against them. The flash crash was also a lesson on just how dramatically and rapidly markets can change when volume is dominated by algo traders and fast money institutions and not honest investors seeking to allocate capital to high EVA or ROIC generating businesses. Unless we see meaningful regulation and increased transparency regarding HFT, algo trading, dark pools, etc then those wise enough to have amassed investible wealth, will also be wise enough to avoid throwing it away in a casino.
I could go on and on, but to summarize, the incredible amount of both serious and pervasive issues confronting this market are, for at least the intermediate term, here to stay. It would behoove those with the wisdom to be intellectually honest to avoid being the marginal buyer in any stock which has risen 30%+ in a few short weeks. If you insist on staying on for the ride, at least take the opportunity to hedge yourself when volatility gets this cheap by purchasing longer-dated VIX calls at reasonable strike prices. Willing to discuss hedgining instruments off-line with anyone interested.
Disclosure & Disclaimer: This post should be taken as the opinion of the author only and is in no way a recommendation to buy or sell any security. The author may be long or short volatility at any given time without notice.
Tuesday, December 7, 2010
Market Update
Futures are looking higher this morning as Obama agreed to a 2-year extension to the Bush tax cuts and Ireland prepares to announce an austerity budget with $6B in spending cuts and $2B in tax increases. Amazing that the 'budget hawk' Republicans were able to push through this tax cut extension despite its $600B annual cost. Why not approve a $600B federal jobs program instead? I suppose its for the same reason that Republicans were blocking unemployment benefit extensions without compromise on these tax cuts. If one continues to believe wholeheartedly that trickle down economics is more stimulative than putting people directly back to work, then I encourage them to challenge my position in the comments section. I would be delighted to finally be convinced of the effectiveness of this ideology (if only to improve the flavor of the Kool Aid we are all being forced to drink...)
Last night the EU announced they had failed to reach an agreement to increase the size of their $1T rescue fund. Germany will not be adding to the bailout fund for its freewheeling neighbors (not yet anyway.) The fear is that more funds will be needed should larger nations such as Spain and Italy need assistance. (Does this amount to an admission on the part of EU leaders that the domino rally is already underway?) One would think this would put a dent in the futures, but not so.
China may see a rate hike soon, as inflation in October reached 4.4%, driven by a 10.1% jump in food costs.
With so many positive developments (I kid, of course!) why shouldn't we soon see Dow 36,000? And by the way, did anyone else catch Bernanke on 60 Minutes discussing the possibility of QE3? One would think that increasingly vitrolic commentary from both foreign and domestic leaders surrounding QE2, would make our proud Fed chairman at least somewhat apprehensive about discussing another round of asset purchases a month after the commencement of the current program, but you would be wrong.
Bring on the POMO.
Last night the EU announced they had failed to reach an agreement to increase the size of their $1T rescue fund. Germany will not be adding to the bailout fund for its freewheeling neighbors (not yet anyway.) The fear is that more funds will be needed should larger nations such as Spain and Italy need assistance. (Does this amount to an admission on the part of EU leaders that the domino rally is already underway?) One would think this would put a dent in the futures, but not so.
China may see a rate hike soon, as inflation in October reached 4.4%, driven by a 10.1% jump in food costs.
With so many positive developments (I kid, of course!) why shouldn't we soon see Dow 36,000? And by the way, did anyone else catch Bernanke on 60 Minutes discussing the possibility of QE3? One would think that increasingly vitrolic commentary from both foreign and domestic leaders surrounding QE2, would make our proud Fed chairman at least somewhat apprehensive about discussing another round of asset purchases a month after the commencement of the current program, but you would be wrong.
Bring on the POMO.
Tuesday, November 23, 2010
Korean Peninsula Conflict Heats Up
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.
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.
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.
Wednesday, October 27, 2010
Market Update
With no POMO on the calendar today and the WSJ suggesting that QE2 may be a couple of hundred billion over several months, but by most measures a disappointment for the bulls who were using it as an excuse to run up the market over the past two months, futures are looking down big this morning.
Yesterday, William Dudley, the president of the FRB NY said the central bank cannot fix the sluggish economy. If you recall from the special report I wrote on QE2, Dudley has been one of the largest advocates of loosening monetary policy. Perhaps with currency wars and protectionism, angry allies who have been forced into currency interventions of their own as a result of our actions, and an American electorate who has by now somewhat begun to understood the risks of more Fed action, Dudley has decided that it may be time to back it off a bit.
Yesterday, William Dudley, the president of the FRB NY said the central bank cannot fix the sluggish economy. If you recall from the special report I wrote on QE2, Dudley has been one of the largest advocates of loosening monetary policy. Perhaps with currency wars and protectionism, angry allies who have been forced into currency interventions of their own as a result of our actions, and an American electorate who has by now somewhat begun to understood the risks of more Fed action, Dudley has decided that it may be time to back it off a bit.
Tuesday, October 26, 2010
Market Update
Futures are pointing down this morning after disappointing earnings from ArcelorMittal (MT) and UBS. UBS beat estimates with the help of an 825M franc tax credit, but its investment banking unit posted a surprise pretax loss of 406M francs due to 'very low levels of client activity' and a charge on the bank's own debt.
Meanwhile, UK GDP grew twice as fast as expected in Q3 at 0.8% and S&P reaffirmed the U.K.'s AAA credit rating and revised its outlook to stable from negative. Interestingly though, this could pressure the BOE to delay additional bond purchases. Goodbye stimulus?
The U.S. will report 3Q GDP on Friday this week, just ahead of the FOMC meeting on November 3rd. If we posted a better than expected 3Q GDP (unlikely given the durable goods orders data, etc over the past few months) on Friday, would QE2 expectations have to come way down, and in the process, bring the market way down?
Another two signs that expectations for further monetary stimulus in the U.S. may be overdone include comments from Nissan COO Toshiyuki Shiga this morning, "we can't adequately express our concern about the sharp yen rise on our earnings by simply saying...we are worried about it. The company is now working with a sense of crisis."
And, a 5-year TIPS auction yesterday was done at a negative yield for the first time ever. Investors bought $10B at (0.55%) on expectations for higher inflation (monetary stimulus). It will end up being a shame if these investors end up paying the government to loan it money...
On today's economic calendar we will have the Case Shiller 20 city home index and Consumer Confidence.
We will also have another round of POMO. The target of which will be longer dated treasuries.
Remember that the market tends to see its apex on POMO days at 8:30 PST. So, if we sell of hard in the morning, you might buy a few beaten down names going into the POMO (if they be tech or materials names...with MT down 5% pre-market, that could be a decent candidate...) and cover your shorts.
Meanwhile, UK GDP grew twice as fast as expected in Q3 at 0.8% and S&P reaffirmed the U.K.'s AAA credit rating and revised its outlook to stable from negative. Interestingly though, this could pressure the BOE to delay additional bond purchases. Goodbye stimulus?
The U.S. will report 3Q GDP on Friday this week, just ahead of the FOMC meeting on November 3rd. If we posted a better than expected 3Q GDP (unlikely given the durable goods orders data, etc over the past few months) on Friday, would QE2 expectations have to come way down, and in the process, bring the market way down?
Another two signs that expectations for further monetary stimulus in the U.S. may be overdone include comments from Nissan COO Toshiyuki Shiga this morning, "we can't adequately express our concern about the sharp yen rise on our earnings by simply saying...we are worried about it. The company is now working with a sense of crisis."
And, a 5-year TIPS auction yesterday was done at a negative yield for the first time ever. Investors bought $10B at (0.55%) on expectations for higher inflation (monetary stimulus). It will end up being a shame if these investors end up paying the government to loan it money...
On today's economic calendar we will have the Case Shiller 20 city home index and Consumer Confidence.
We will also have another round of POMO. The target of which will be longer dated treasuries.
Remember that the market tends to see its apex on POMO days at 8:30 PST. So, if we sell of hard in the morning, you might buy a few beaten down names going into the POMO (if they be tech or materials names...with MT down 5% pre-market, that could be a decent candidate...) and cover your shorts.
Wednesday, October 20, 2010
France, Germany, Currencies, G20 and QE2
Reuters paraphrases Angel Merkel today as having said that 'the vulnerability of the euro has not yet been lastingly overcome and the currency is being shielded at the moment by the euro zone's safety net.' Relatedly, the German chambers of industry and commerce said today that if the Euro rises to $1.50 that the German economy will come under pressure.
This is a not so subtle demand for the US to cease devaluation plans.
Sarkozy is calling for currency manipuliaton to be on the docket at the G20.
Brazil is boycotting the events and has been forced recently to play vigorous defense to offset the impacts of USD moves on the Real.
The Yen is flying.
Those believing the Fed will still announce a full QE2 effort on November 3rd may be mistaken.
For the Fed to turn around only two weeks after the G20 and in defiance of an almost global insistence on stopping the dollar slide, I can't imagine we move forward with massive monetary stimulus. I'm not ruling out the possibility for a morsel of monetary stimulus to be announced, but even voting Fed governors (Dallas Fed's Fisher for ex) are starting to suggest they have questions about both the efficacy of another round of monetary stimulus and also the Fed's ability to implement it without taking extraordinary risks (hyperinflation, currency wars, increased protectionism, destroying purchasing power of American consumer who could be bogged down by high food and fuel costs, etc).
This is a not so subtle demand for the US to cease devaluation plans.
Sarkozy is calling for currency manipuliaton to be on the docket at the G20.
Brazil is boycotting the events and has been forced recently to play vigorous defense to offset the impacts of USD moves on the Real.
The Yen is flying.
Those believing the Fed will still announce a full QE2 effort on November 3rd may be mistaken.
For the Fed to turn around only two weeks after the G20 and in defiance of an almost global insistence on stopping the dollar slide, I can't imagine we move forward with massive monetary stimulus. I'm not ruling out the possibility for a morsel of monetary stimulus to be announced, but even voting Fed governors (Dallas Fed's Fisher for ex) are starting to suggest they have questions about both the efficacy of another round of monetary stimulus and also the Fed's ability to implement it without taking extraordinary risks (hyperinflation, currency wars, increased protectionism, destroying purchasing power of American consumer who could be bogged down by high food and fuel costs, etc).
Market Update: POMO
Today's POMO was a mere $660M (after Monday's massive $6.26B). Dow is up 120 at its completion.
Market Update: BAC Thoughts
Two hours into the trading session, the Dow is up 115 points, the S&P up 10, and the Nasdaq up 20. High beta stocks are off and running. This is a POMO day afterall.
Meanwhile, BAC is getting hammered on the threat of mortgage put-backs. Paul Miller at FBR says the amount of pushbacks might be nearly unquantifiable. Stifel Nicholas downgraded BAC this morning with an apologetic tone given it was downgrading one of the four horsemen at a time when the stock is trading below its just-announced TBV (BAC 11.39, -0.40, -3.5%) of 12.91. At some point, BAC is probably a buy for a trade, especially if the selling takes this even a little bit further. We are now at 0.9x TBV. At 10.30, we'd be at 0.8x. How much BV could the mortgages pushed-back actually consume....? No one knows, hence the sell-off. But, TBV is approx $128.673B. The market cap is now $114.74B. So, the market has already essentially sliced off $13.9B. The headline articles suggest BAC would be on the hook for put-backs on securitizations with total value of $46B. So, 30% of the loans in the securitizations being delinquent/fradulent, etc. has already been priced into the stock. I'd caution against trying to catch a falling knife, but at some point this becomes interesting. At 10.30, or at 0.8x TBV, we'd see ~$26B taken off (or 56% of the securitizations' total value).
Disclosures & Disclaimers: This post is intended for informational purposes only and is not a recommendation to buy or sell any security.
Meanwhile, BAC is getting hammered on the threat of mortgage put-backs. Paul Miller at FBR says the amount of pushbacks might be nearly unquantifiable. Stifel Nicholas downgraded BAC this morning with an apologetic tone given it was downgrading one of the four horsemen at a time when the stock is trading below its just-announced TBV (BAC 11.39, -0.40, -3.5%) of 12.91. At some point, BAC is probably a buy for a trade, especially if the selling takes this even a little bit further. We are now at 0.9x TBV. At 10.30, we'd be at 0.8x. How much BV could the mortgages pushed-back actually consume....? No one knows, hence the sell-off. But, TBV is approx $128.673B. The market cap is now $114.74B. So, the market has already essentially sliced off $13.9B. The headline articles suggest BAC would be on the hook for put-backs on securitizations with total value of $46B. So, 30% of the loans in the securitizations being delinquent/fradulent, etc. has already been priced into the stock. I'd caution against trying to catch a falling knife, but at some point this becomes interesting. At 10.30, or at 0.8x TBV, we'd see ~$26B taken off (or 56% of the securitizations' total value).
Disclosures & Disclaimers: This post is intended for informational purposes only and is not a recommendation to buy or sell any security.
BHP/POT and Meryvn King on Protectionism and Global Co-op on Policy
WFC reported record profits this morning as credit improved. $0.60 vs. $0.56 consensus on $20.9B of revenue. USB also reported this morning, and saw its 3Q profit rise 51% YoY, to post $0.45 vs. $0.43 expected. (Incidentally, these reports should bode well for Fairfax which owns large stakes in both banks.)
Bloomberg has a story out this morning detailing the deepest budget cuts in British history as Chancellor of the Exchequer, George Osborne, outlined austerity measures designed to virtually eliminate a $245B budget deficit. These plans include eliminating approx 490,000 public-sector jobs, putting a permanent maximum sustainable tax revenue on the financial services sector, cuts to the royal family's funding from the 'civil list', a 7.1% decrease in funds for local governments by 2015, a 24% cut to the Foreign Office budget, and a 6% cut to the Ministry of Justice. The pound is little changed this morning on the announcement.
BHP's offer to Saskatchewan of $360M for infrastructure investment was turned down by the province, as BHP's offer doesn't come close to offsetting the C$3B in revenue thed province would lose if BHP is successful in its attempted acquisition of POT. Saskatchewan Premier Brad Wall will lay out the province's position on the hostile offer in a speech today. Canada has until Nov. 3 to block the bid if it doesn't provide a net benefit to the country. (Bloomberg)
Bank of England Governor Mervyn King gave a speech yesterday ahead of this weekend's G20 meeting discussing the dire need for globally coordinated policy decisions in order to keep the level of protectionism from rising to a point where it would slow global output. “The risk is that unless agreement on a common path of adjustment is reached, conflicting policies will result in an undesirably low level of world output, with all countries worse off as a result,” King said. “The need to act in the collective interest has yet to be recognized, and, unless it is, it will be only a matter of time before one or more countries resort to trade protectionism.” Mr. King went on to discuss how countries with floating exchange rates are 'innocent victims' and how Brazil has had to retaliate and even how India is considering intervening in the market if the rupee appreciates past 43 to the dollar. His most troubling statement however was when he said that a real agreement at the G20 would require a "revolution". (Bloomberg)
Bloomberg has a story out this morning detailing the deepest budget cuts in British history as Chancellor of the Exchequer, George Osborne, outlined austerity measures designed to virtually eliminate a $245B budget deficit. These plans include eliminating approx 490,000 public-sector jobs, putting a permanent maximum sustainable tax revenue on the financial services sector, cuts to the royal family's funding from the 'civil list', a 7.1% decrease in funds for local governments by 2015, a 24% cut to the Foreign Office budget, and a 6% cut to the Ministry of Justice. The pound is little changed this morning on the announcement.
BHP's offer to Saskatchewan of $360M for infrastructure investment was turned down by the province, as BHP's offer doesn't come close to offsetting the C$3B in revenue thed province would lose if BHP is successful in its attempted acquisition of POT. Saskatchewan Premier Brad Wall will lay out the province's position on the hostile offer in a speech today. Canada has until Nov. 3 to block the bid if it doesn't provide a net benefit to the country. (Bloomberg)
Bank of England Governor Mervyn King gave a speech yesterday ahead of this weekend's G20 meeting discussing the dire need for globally coordinated policy decisions in order to keep the level of protectionism from rising to a point where it would slow global output. “The risk is that unless agreement on a common path of adjustment is reached, conflicting policies will result in an undesirably low level of world output, with all countries worse off as a result,” King said. “The need to act in the collective interest has yet to be recognized, and, unless it is, it will be only a matter of time before one or more countries resort to trade protectionism.” Mr. King went on to discuss how countries with floating exchange rates are 'innocent victims' and how Brazil has had to retaliate and even how India is considering intervening in the market if the rupee appreciates past 43 to the dollar. His most troubling statement however was when he said that a real agreement at the G20 would require a "revolution". (Bloomberg)
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