Bond Surge Continues

Heading out for the weekend but I wanted to post a few things before I take off. 

The market has been pretty quiet today except for bonds which seem to move higher on an almost daily basis.

Just take a look at the 10 year the past couple weeks:

Pretty historic stuff.

David Rosenberg

Famed economist Daid Rosenberg discusses the likely hood of a "double dip" recession.  He also does a great job explaining why most of the economists have gotten it wrong throughout this crisis. 

What I find humorous here is the two bulltard economists that follow David used the same failed economic analysis that David warned about earlier in the piece as they both attempted to explain why Rosenberg was wrong.

Sigh....Stupidity at it's finest.




Other Reads

-  10 Reasons to worry.  Great piece from the Wall St Journal why the market may crash.

-  AP did a story describing how the majority of the TARP bailout ended up going overseas.  This article made me want to vomit but I am not surprised:

"WASHINGTON — The $700 billion U.S. bailout program launched in response to the global economic meltdown had a far greater impact overseas than other countries' financial rescue plans did on the U.S., according to a new report from a congressional watchdog.
Billions of dollars in U.S. rescue funds wound up in big banks in France, Germany and other nations. That was probably inevitable because of the structure of the Treasury Department's program, the Congressional Oversight Panel says in a new report issued Thursday."

- Hoenig lashes out at his Fed colleagues.  Disagree with his argument but it's interesting to to see that there is some definite tension within the Fed.   I guess this is to be expected as their recovery policies continues to fail.

The Bottom Line
I didn't go short today.  I still believe we might get one more burst higher before things unravel.  The bond trade tells you the market is still scared to death as it continues to price in deflation.

Something else that caught my attention today was the drop in the Euro vs. the dollar despite the fact that Germany knocked it out of the park when it announced it's best economic growth in 23 years.

Shouldn't the Euro have taken off on such news?  Hmmmm...Trouble in PIIGSville perhaps?  Greek debt sold off again today. 

Keep your eyes on what's going on in Europe.

That's it for me this week folks.  Been an interesting week to say the least.  I hope everyone has a wonderful weekend!

Edit:

Just picked up this classic rant from Rick Santelli who actually quoted Zero Hedge in the piece.  The housing nightmare is described perfectly in a nutshell by Rick in the last 2 minutes of the video:

Wall St Goes Long Deflation

I thought I would start with a little video from Gary Shilling who has been calling for deflation since this crisis started in 2007.

Gary does a great job here explaining why deflationary is so devastating and also gives some great advice on how to invest in a deflationary environment:



My Take:

Gary pretty much nails it.  It appears the street was listening if you look at today's 30 year bond auction:

"NEW YORK (MarketWatch) -- The Treasury Department sold $16 billion in 30-year bonds on Thursday at a yield of 3.954%, the lowest since March 2009. Investors offered to buy 2.77 times the amount of debt sold, compared to an average of 2.44 times at the last four new sales of 30-year bonds /quotes/comstock/31*!ust30y (UST30Y 3.94, +0.02, +0.43%) . Indirect bidders, a group that includes foreign central banks, purchased 46% of the auction, versus 38.3% of recent sales, on average. Direct bidders, a class that includes domestic money managers, bought another 18.6%, compared to 16.7% on average. The broader bond market remained lower after the auction, the last of the week. Yields on 10-year notes /quotes/comstock/31*!ust10y (UST10Y 2.75, +0.06, +2.12%) , which move inversely to prices, rose 2 basis points to 2.74%."

Take Continued

I'll be honest here.  I was glad to see this auction go so well.  I had posted on here a few days ago that the the Fed may have incited a panic by avoiding the 30 year bond with it's announced purchasing of treasuries.

After getting a chance to digest the FOMC announcement I became less concerned because the Fed is not going to be purchasing huge amounts of bonds.  I believe the number is only about $20 billion a month.

The feeding frenzy seen in the 30 year auction today pretty much confirms that the fear of deflation overrides anything the Fed announces which is kinda scary when you think about it.

Perhaps the market is beginning to tune out the Fed and as they begin focusing on the deflationary mess we have gotten ourselves into?

I believe so.  The fact this auction went so well tells me that some investors consider the Fed to be impotent at this point.

They are smart if they start looking at the Fed in this light.  There really isn't anything else they can do at this point.  If they do QE(and I am sure they will at some point) it's not really going to matter because none of the money can get into the real economy.

It's pretty clear that the banks have no desire to lend at this point.  Why waste the money if it can't get into the economy. 

Common sense doesn't matter here though because the Fed is obsessed with stopping deflation so I full expect more quantative easing. 

Another QE would just be another win for the banks and another loss for Main St because we are the ones that have to pay it off.  Should we be surprised at this point?

The bottom line here is the money supply will still shrink either way because it cannot expand unless people and companies are borrowing the money and putting it into circulation. 

The Bottom Line

The bond market told you that the deflation trade is still definitely on.  The Fed's treasury purchases probably aren't even needed at this point as the economic data continues to spell deflation.

Perhaps they should use this money to pay down our national debt instead of wasting it on securities that already have high demand. 

Maybe they should sock the money away and use it to feed the millions of unemployed as they run out of their 99 week of jobless benefits. 

God knows we will need it after seeing the today's weekly jobs report:

From Haver:

"The bad news about the labor market continued today. The Labor Department's report that initial claims for jobless insurance rose to 484,000 last week from an upwardly revised 482,000 brought them to the highest level since February. The four-week moving average of initial claims which smoothes out some of the w/w volatility rose to 473,500, also the highest level since February."

Get ready for a lost decade folks.  It's heading straight towards us like a freight train. 

The only way to play this in the markets is to get out of stocks as Gary says and either buy bonds or short stocks over the longer term.

Going short can be very difficult to stomach at times because you have to fight constant government interventions as well as the slick Wall St trading wizards/HFT traders so enter this trade at your own risk.

I am still bullish on bonds.   Yields should keep dropping now that the Fed has spoken.  The only risk here is if the bond market begins to focus on our deficits and starts taking rates higher.  If they do this we could pull a "Greece" rather quickly.

Cash will also be king in this deflationary environment as the money supply shrinks.  The dollar will buy you much more in this world than it does today.

Interestingly gold shot up today which was kinda strange.  Gold often struggles during deflationary times.  This tells me people are still very afraid and don't have a lot of confidence in anything right now.  I will hold onto the gold I own because I am scared too!

One other thing worth noting:  Technically speaking we had a Hindenburg Omen today.  This is not good if you are a bull.  Hindenburg's are made when a certain percentage of stocks hit 52 week new highs at the same time others are hitting 52 week new lows.

Historically this is ugly for the markets according to Wiki:

"Looking back at historical data, the probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen was 77%, and usually takes place within the next forty-days."

Those are nice percentages if you want to go short.  I hope we see a nice bounce tomorrow because plan on buying some shorts on any upward move.  I plan on buying some SDS and a few PUT's because I love these odds. 

Disclosure:  No new positions at the time of publication.

Stocks Tumble as Investor Confidence Deteriorates

I will have a come comments around today's market tankage in "The Bottom Line" segment of my posts.

I wanted to start out tonight with a few great Tech Ticker's on yahoo today.   The first cluster features Bill Black who was one of the key regulators that helped clean up the last S&L crisis in the late '80's/early '90's.

Bill has been very critical of both Wall St and the regulators when it comes to how we have reacted to the worst fiscal crisis seen since The Great Depression. 

I strongly suggest you watch both videos because Bill clearly describes how the fraud on Wall St has actually gotten worse instead of better.  I'll have a few comments after the videos:

Part 1



Part 2



My Take:

Mr Black flat out hits it out of the park when it comes to describing how the fraud on Wall St works.

The key issue has to do around compensation.  I have a banker friend of mine who has consistently preached this same point to me..

Here is the problem with Wall St compensation and why it needs to change:

Wall St is making a fortune each year because they can borrow at zero and then use the money to speculate in a variety of areas of the market.  They have been able to create massive amounts of capital to invest because the regulators are allowing them to not take the losses on their bad "Ponzi style" loans.

Mr. Black does a great job explaining the bond game that I have regularly talked about on here for the past year which is borrow at zero and buy the long bond and thenpocket the spread.

In this "perfect world": Wall St is able to line their pockets with billions of dollars in profits. 

Now here is where the fraud and corruption kicks in:

What the regulators should be doing is forcing Wall St to use these profits to write off the trillions in toxic assets that the taxpayers are now responsible for after we bailed out the TBTF banks.

Instead, the SEC has totally looked the other way as Wall St has chosen to line their pockets in the form of bonuses instead of paying off their bad debts.  The regulators have done nothing to stop this because they are bought and paid for by Wall St.

This is disgusting because without the taxpayer they would all be toast!  Not one dime was sent back our way as Wall St made near record profits in 2009.

Wall St usually pays out about 50% of their profits in the form of bonuses. Goldman Sachs made $5 billion in Q4 alone last year.  This means over $2 billion went straight into their pockets in the last 3 months of 2009.   This is an outrage and it needs to stop!

How can this country allow Wall St to carry bad loans at full value via fraudulent accounting, drop rates to zero at the savers expense so that the banks can make billions of dollars, and then not hold them accountable for paying back losses that the taxpayers are eventually going to be forced to eat as this crisis intensifies?

This is obscene!  Where is the SEC? 

Kudos to Bill Black for exposing this disgusting fraud.

Another 30% Drop in Home Values by 2014?

Richard Suttmeier of ValuEngine.com sure thinks so.  Richard has been a credit trader on Wall St since 1972 before starting his site so he is someone that deserves your attention:



My Take:

As you can see we are basically just playing "kick the can" with the housing market until the elections pass.  The Fannie and Freddie nightmare continues to hang over the market and stay off of our balance sheet.  This monstrosity needs to be wind down but no one wants to touch it before Novemeber,

As Richard notes, the loan modification failure has really slowed down the price adjustments in the housing market.  Extend and pretend right?

Foreclosures will now begin to accelerate as these loan mods fail at the same time others decide to walk away from their homes as they lose their jobs.  Adding to the troubles in housing is the fact that the community banks have no desire to do more loans because their books are filled with losses.

The lack of home building is doing nothing but adding pressure to the jobs problem.  Our economy became highly dependent on the housing market for jobs.  This just makes the housing problems worse.

CNBC on Falling Home prices

There was more news around prices on CNBC.  As you can see below, 25% of sellers have now dropped their price which was the 4th straight increase:



Diana also notes above that the price stabilization seen in Q2 of 2010 is an aberration  because the comps from a year ago in Q2 2009 were mainly foreclosure sales that were priced much lower.

What can I say here folks? Housing is basically dead.  We all need to accept the fact that it's over and prices are not coming back for a decade or more as we clean up this bubbly mess.

The Bottom Line

It would be easy to blame the drop in equities today on yesterday's Fed decision.  I believe it goes much deeper than that.

The confidence in the economic recovery is rapidly losing steam as gigantic holes in the dam continue to get exposed.  There were several other bad pieces of news that I couldn't even get to tonight.

The Fed painted a pretty gruesome picture on the economy yesterday and I think many are beginning to feel hopeless as they realize that the Fed has run out of bullets.

People are also starting to lose faith in Wall St.  Money continues to pour out of index funds and into treasuries which soared once again today despite an average 10 yr auction results that were announced this afternoon.

IMO, the macro economic data combined with the lack of confidence from the Fed has killed the positive psychology around the economic recovery.  As Dr. Shiller from Yale loves to point out:  Psychology is very important when it comes to the markets. 

The anger and frustration felt during a depression can just as powerful as the mania that we all feel during prosperity.

We had an incredible 27 year run of prosperity as this country flourished by borrowing from Peter to pay Paul.  The problem is Ponzi financing can only last for so long because it's unsustainable.  Just ask Greece!

The evidence is clearly beginning to show that all good things must come to an end and it appears that our time has come.  We must begin to start taking our medicine and cleanse ourselves of the excesses that have been built up over the last 27 years.

Disclosure:  No new positions taken at the time of publiching.

Quasi Quantitative Easing By The Fed?

What a day in the bond market and on Wall St.  Stocks gyrated like a roller coaster today as the Fed announced some dramatic changes when it comes to their balance sheet.

Essentially the Fed announced that they plan to start buying treasuries using the principal payments they earn from their $1+ trillion dollar MBS(mortgage backed securities) holdings.  Here are the details from the New York Fed:

"On August 10, 2010, the Federal Open Market Committee directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities (agency MBS) in longer-term Treasury securities. The most recent H.4.1 data release indicates that outright holdings of domestic securities in the System Open Market Account (SOMA) totaled $2.054 trillion as of August 4, 2010. The Desk will seek to maintain the face value of outright holdings of domestic securities in the SOMA at approximately this level. Due to differences in settlement dates for purchases and principal payments, it is anticipated that the actual level of domestic securities held will vary around this level to some degree."

Quick Take

Sounds like a win win for the Fed right?  They Fed kept its balance sheet the same size, and also kept Wall St happy by announcing more treasury purchases.

The problem here is this little sentence that is seen at the bottom of the NY Fed piece above:

"The Desk will concentrate its purchases in the 2- to 10-year sector of the nominal Treasury curve, although purchases will occur across the nominal Treasury coupon and TIPS yield curves. The Desk will typically refrain from purchasing securities for which there is heightened demand or of which the SOMA already holds large concentrations."


Ummmm...Needless to say the bond market wasn't happy about where the buying will take place when it came to the 30 yearbond.  Yields on the 30 year soared higher after the initial drop following the easing news out of the Fed:

Check out Bill Gross's take on this at around the 12:14 mark of the video below.  He pretty much confirms where the buying will likely take place and why:





My Take:

As you can see Bill believes the majority of the treasury purchases will be in the 5yr and 10 yr maturities.

The Fed wants to stay away from the 30 year according to Gross because they know that they will be expanding their balance sheet which will be reflationary not deflationary.

The 30 year bond is a deflationary trade.  This all but assures you that we will be seeing another QE from the Fed.  The Fed doesn't want to own 30 year bonds because they are going to fall in value when their balance sheet expands as the next batch of money is dropped out of helicopters. 

This reflationary move will then force people out of the 30 year because they are going to drop in value over the longer term when this reflation takes place.

By avoiding the 30 year(due to the fear of losses as they reflate) the Fed has created a serious distortion in the bond market. 

This is not good folks because markets hate uncertainty.  That sell off in the 30 year today following the news was flat out violent.  What's even more interesting here is that we have $60 billion in 30 year bond auctions this week.

We could see some real bad bid to cover ratios on these auctions.  However, I also wouldn't be surprised if they went smoothly as the Fed makes sure the Primary Dealers have this weeks sales covered as they attempt to tie a pretty bow on top of the bond market following their announcement. 

Over the longer term the 30 year is in trouble.  Why would you want to own these when the Fed is avoiding them?

The Bottom Line

Today was an extremely important day folks.  The Fed has backed itself into a corner.  Investors are now going to pile into the 2-10 year area of the bond curve in an attempt to front run the Fed.  The 3yr auction today saw record bidding.

The problems with today's announcement are multifaceted.  Here are the questions that I have:

-   What happens if there is a run on the 30 year?

-   What happens to our currency as the Fed continues to print money?  The  dollar tanked on the news today.

-  What happens to MBS now that the Fed is abandoning this market and continues to invest the principal into treasuries?

-  Who is going to buy the newer MBS issuance if the Fed plans to focus on treasuries instead of MBS?

-  What will this do to interest rates?

I will end it there.  Expect some serious unintended consequences from today's policy shift.  We already saw one today with the move in the 30 year.

Folks, you need to seriously ask yourself why the Fed decided to pile into treasuries when rates are at all time lows.  I mean what is the point?  It's not as if this is going to push rates much lower.

The only conclusion I can make is they are running short on demand from the rest of the world.  China announced this morning that it is having troubles with their banks today.  We also got news today that their imports slumped.  Perhaps their reserves are going to be spent fixing these problems instead of piling into our treasury market.

Mark this day in your calendar.  The Fed piled into treasuries for a reason and in my eyes it's a desperation move when you look at how low yields already are.

If the demand for treasuries is weakening then we are in deep trouble folks.  As I said yesterday they will keep easing in order to keep the status quo.  However, it's clear they are running out of options.

Today's move just took us one step closer to the day of reckoning that cannot be avoided at this point.

Disclosure:  No new positions held at the time of publication.

The Fed: To QE or not to QE?

We all know what the right answer is here.  The math is simple.  The problem is the Fed feels the heat from there buddies on Wall St who badly want to see more stimulus.

The right thing to do of course is to not even consider another QE.  There are many risks and "unintended consequences" of pulling the QE trigger for a second time(more on this later).

Goldman was out with a report this weekend(hat tip to zero hedge) claiming that a second $1 trillion QE is imminent.

The Ponzi boys on Wall St love this idea of course:

"The Fed will likely leave its federal funds rate near zero, but the central bank could signal plans to restart some programs such as its purchase of mortgage-backed securities or buy Treasury bonds. The central bank's programs ended earlier this year when it appeared the recovery was proceeding well.


"The Fed has a lot of tools in its tool shed," said Larry Rosenthal, president of Financial Planning Services in Manassas, Va. "They have to bring buyers back into the market; they have to bring consumption back into the market."


My Take:

The reality here is Rosenthal's comments couldn't be further from the truth.  The Fed is just about out of tools with rates sitting at zero.  The Fed cannot bring consumption back to the market because the consumer is tapped out.

The consumer no longer have the ability or the desire to borrow anymore.  They are over leveraged and worn out.  If the consumer's mortgage payment isn't wiping them out than his/her child's $40,000 a year college bill is.  If that's not hitting them then their credit cards or Ponzi car payment most assuredly are.

The Fed must face the reality that the US just finished the largest spending binge ever seen on planet earth.  Trying to force more debt down there throats will not work!

In order for a consumption economy to work the consumer must have the ability and willingness to borrow.   Right now we have neither because the consumer is up to it's eyeballs in debt. 

The only answer to this problem is to allow the consumer to deleverage via paying off debt or defaulting on it.  This process is going to take several years if not a decade and the Fed HAS to start accepting this. 

How many bailouts will it take before they realize this is not working?  We have fiscallythrown everything but the kitchen sink at this economy and it has done nothing but tank in the process. 

Unemployment is soaring despite what the government statistics are telling you.  The unemployment rate stayed flat at 9.5% but what they fail to tell you is 180,000 workers ran out of UE benefits and fell out of the statistics last month.   We are closing in on 20% U6 unemployment.  I expect us to be there by the end of the year.

The reality here folks is the Fed could do a $5 trillion QE and it wouldn't matter because none of the money would end up in the real economy because no one has the ability to borrow it. 

As a result of the inability of it to flow into the real economy, the money would likely start flowing into other assets which would create even more distortions in things like commodities and treasuries. 

This could be devastating from a commodities perspective because it could push the cost of things like food and oil up sharply.  The money has to go somewhere right?  If it can't go into your pockets it's going to end up somewhere else.

The trading desks would have a field day in such an environment like they did in early 2008 when they pushed oil to $150 a barrel.

The Bottom Line

I suggest that the Fed ask themselves the following questions before deciding to take this reckless QE path:

Does going the QE route instantly make us a target as the world chooses austerity while we continue to spend like drunken sailors? 

How will the $2 trillion FX market react to such reckless policy?  Does the dollar get destroyed as we become the last keynesians on the planet?

What happens if the bond market rejects this idea and starts pushing rates higher?

There are other questions but I will stop there. 

The bottom line here is all the Fed will be doing is kicking the can a little further down the road if they decide to do another QE.

Japan basically attempted QE from 2002-2006 and accomplished nothing.

The Fed knows this won't work.  They saw what happened in Japan. 

However, that doesn't mean they won't pull the QE trigger.  In fact, I fully expect them to do so. 

Why? 

All you need to do is ask yourself who wins with a QE policy?  The bankers of course!  A QE would help them keep the status quo which if FINE by them.

Today's environment doesn't get any better if you are a banker:

You have zero interest rates which is a gift that keeps on giving.  This gives the banks the opportunity to make a killing on bonds as they borrow at zero from the Fed and then buy the long dated bonds.

I laugh when people suggest that we need more stimulus money via QE in order to stimulate lending. 

The banks could care less if they dont have any borrowers.  Who in the heck needs borrowers? They could care less if they lent anyone another nickel.

They are making a fortune by playing the bond game that I explained above.  They alos don't have to take the losses on their bad loans in this current environment which makes the current situation even more beautiful for them.

Life is basically perfect for a banker right now and they have no desire to lend to you althought they would never admit it of course.

Think about it:

Why would the banks want to take on a bunch of risk by lending to a bunch of borrowers who facing the worst economy since The Great Depression!  The only loans they are interested in doing right now are ones that are backed by you the taxpayer via the government.  This is why just about ever home loan goes through FHA now.

The system is perfect for the pigmen and the idea of having the Fed sit on the sidelines without easing and risking an all out collapse is not acceptable.

This is why I fully suspect that you will see a QE2 at some point.  I also expect to see a QE 3,4, and 5 too.  Extend and pretend has been the policy all along.  Why should we believe this will change anytime soon?

I don't know if the Fed will pull the trigger tomorrow.  They may very well wait for more data before pressing the QE button.  The market will likely sell off if the Fed doesn't announce at least some type of easing program IMO.

I fully expect some type of announcement of assistance from the Fed.  Whether or not it will be a QE is debatable.    

If a QE is announced we will see how the bond market reacts, and it will be easy to see how they feel because the government is selling a boatload of long term treasuries this week.

Disclosure:  No new positions taken at the time of publication.