Saturday, October 3, 2009

If You Were Watching Treasury Auction Last September might have been able to get the @#$% out of the stock market in time.

As I was looking for next week's treasury auction information at for my other blog, it occurred to me, for some unknown reason, to take a look at CMB (Cash Management Bill) auctions, if any, in September 2008. Since I started tracking the Treasury auctions and Fed's open market operations in May, I know there are CMB auctions done for the Federal Reserve use, and not for the government use.

I wish I had checked these auctions when they were taking place in September 2008.

Here are the CMB auctions under the SFP (Supplementary Financing Program), which was initiated by the Treasury Department at the request from the Federal Reserve on September 17, 2008, the day A.I.G. was bailed out by the Federal Reserve:

September 17, 2008: 35-day CMB, $40 billion (Primary Dealer: $18.68 billion)
September 18, 2008: 76-day CMB, $30 billion (Primary Dealer: $20.58 billion)
September 18, 2008: 20-day CMB, $30 billion (Primary Dealer: $15.43 billion)
September 19, 2008: 45-day CMB, $30 billion (Primary Dealer: $20.47 billion)
September 19, 2008: 59-day CMB, $30 billion (Primary Dealer: $19.60 billion)
September 24, 2008: 7-day CMB, $40 billion (Primary Delaer: $18.34 billion)
September 25, 2008: 34-day CMB, $40 billion (Primary Dealer: $23.98 billion)
September 26, 2008: 101-day CMB, $60 billion (Primary Dealer: $33.60 billion)
September 30, 2008: 15-day CMB, $45 billion (Primary Dealer: $34.05 billion)

September Total: $345 billion

Of that, Primary Dealers absorbed $204.73 billion, 59.3% of the total issue.

On September 4, 2008, the Federal Reserve's balance sheet was $935 billion.

On October 2, 2008, it swelled to $1,274 billion.

(Currently, it stands at $2,179 billion, the level attained since early November 2008.)

At that time, the news focus was on the gyrating stock market and the political front (Fannie and Freddie effectively nationalized, Lehman Brothers bankrupted, AIG effectively nationalized, short sale ban on financial stocks, bank bailout bill pushed by then-Treasury Secretary Paulson and the Fed chairman Bernanke - for more on those hectic days, see my "What the @#$% Happened" series of posts in the "In case you missed" box of the blog). The focus was more on the bank bailout bill as the month progressed, and many analysts, economists, pundits were busy hyping the bill as the savior and cure-all.

"What would happen if we DIDN'T pass this bill?? It would be a DISASTER!!"

was a scream I often heard in certain cable network (that starts with C and ends with C).

We all know what exactly happened the moment the bill was passed: the stock market took a nosedive and kept on diving for 8 trading days.

That caught many investors, big and small, off-guard, myself included. For many people, their portfolios took a huge dent in a very short time.

But if I had paid attention instead to the almost frantic auctions of CMB in September, I could have sensed that things were not well at all, and it was not just the matter of AIG if they needed to raise over $300 billion in such a hurry. I would have probably get out of my long positions, and even bought short ETFs.

This year, the stock market swooned on October 1 on a larger volume, and continued to go down the next day. Many analysts and pundits as well as traders are calling an imminent sizeable correction, if not outright crash (though some do); perhaps they are doing it so that they wouldn't be accused of being caught off-guard yet again, after one year.

This time, however, at least one thing is different: the Treasury Department wasn't frantically raising money via CMB in September.

Friday, October 2, 2009

OT: Who Was Michelle Obama's Speech Writer?

He/she should have checked some basic facts before letting Michelle speak in front of International Olympic Committee in Copenhagen...

From LRC Blog at

Michelle the First Fibber (Lew Rockwell, 10/2/09 LRC Blog)

Writes Jonathan O’neal:

Michelle Obama lied the whole time in her Olympics pitch. Big surprise, huh? She refers at one point to the time that she watched, from her father’s lap as Carl Lewis broke all of the records. Carl Lewis is only 3 years older than Michelle Obama, and his career took off around 1981. I assume that she was referring to the 1984 Olympics. This would have made Michelle a twenty-year-old college student, sitting in her father’s lap and dreaming of becoming an Olympic athlete. Late start, huh? Next, we’ll hear about how her helicopter was fired upon during the ‘88 Olympics, and she was forced to make an emergency landing while under intense sniper fire.

IMF Wants to Collect from Banks

If you've been deriding those who mentions NWO (New World Order; Mr. Kissinger's remark after 2:00 mark) as "conspiracy nuts", it's staring right in your face if you care to recognize. The so-called conspiracy is not done in some dark, smoke-filled back room. It's in your face.

IMF, an institution no developing country wanted to deal with any more before the financial crisis and the global recession triggered by it, is back to wheeling and dealing. The crisis has been God-sent for their raison d'être; it clearly revitalized the institution, with funds pouring in from China, Japan, and Russia, dispensing money and austerity programs again to countries who suddenly found themselves facing insolvency.

Feeling confident that it is finally becoming what it was designed back in 1944 in Bretton Woods, IMF has started to talk like the global central bank.

IMF presses for tax on banks' risky behaviour (10/2/09 Guardian UK)

"The International Monetary Fund today threw its weight behind a new tax on the global financial sector designed to limit risky speculative behaviour and help the world's poorest countries.

"Dominique Strauss-Kahn, the IMF's managing director, said banks and other big financial institutions were responsible for systemic risk and it was only right that they provided resources to mitigate those threats to the world economy."

With due respect (meaning I don't have much respect), I disagree with Strauss-Kahn's assessment that banks and financial institutions were responsible for systemic risk. The ones who were truly responsible were the central banks, and one in particular, the U.S. Federal Reserve, and politicians who need central banks to print money for their grandiose government policies and projects. Mr. Strauss-Kahn was the Finance and Economy Minister under Lionel Jospin's cabinet from 1997 to 1999, and has been the Managing Director of IMF since November 2007.

And who will define what the "risky behavior" is? IMF bureaucrats under the direction of member countries' politicians?

And why should IMF direct banks to help the world's poorest countries? Whatever tax is assessed on banks' activities, it will ultimately be paid by the taxpayers of mostly developed countries where those "risky" banks reside. It will be paid either through increased fees for bank transactions, or through outright bailout.

That will be on top of the extra burdens that the taxpayers are straddled with in the form of "stimulus" programs, new taxes, and bank bailouts.

The finance minister of Brazil, host to 2016 Olympics, expressed support for IMF as 'central bank':

Brazil would support "central bank" role for IMF (10/2/09 Reuters)

"ISTANBUL, Oct 2 (Reuters) - Brazil would support the International Monetary Fund acting as a kind of global central bank, offering liquidity and currency swaps, Brazilian Finance Minister Guido Mantega said on Friday.

"Such a role for the IMF would be part of increasing coordination in global policy and efforts to fix economic imbalances between countries, Mantega told reporters at the semiannual meeting of the IMF in Istanbul."

What the hell is "economic imbalances between countries"? That some countries are richer than the other? Is that something bad?

Toward the end of the article,

"The idea of the IMF effectively becoming a global central bank is one of many ideas for radical reform informally discussed by officials and academics around the world over the past year."

Sorry. That idea may seem "radical", but it's hardly new. As I said earlier, that was exactly the original intent when IMF was created along with what has become World Bank in 1944 at Bretton Woods. (For more on the subject, I highly recommend The Creature from Jekyll Island: A Second Look at the Federal Reserve)

You know what's next: global currency. Oh wait, they have been talking about that for quite some time already (China wants one and UN wants one). Maybe they have already picked the name for the currency then. Oh wait again, John Maynard Keynes already picked the name: it's "Bancor".

Technocrats in regional and global organizations like EU, IMF, World Bank are increasingly dictating how we live our lives. If you are not a 'globalist' and if you still insist on national sovereignty (not to mention regional or local sovereignty), you might be accused of being a "racist", a popular word these days to describe any opposition to official policies.

Chicago Lost Olympic Bid

despite promo by the U.S. Presidential couple + Oprah..

Rio de Janeiro will host 2016 Summer Olympic, the first ever in South America.

First round: Madrid 28, Rio 26, Tokyo 20, Chicago 18 (Chicago out)

Second round: Rio 46, Madrid 29, Tokyo 20 (Tokyo out)

Third round: Rio 66, Madrid 32 (Madrid out)

(Vote counts from Reuters "WRAPUP 3-Olympics-Rio win 2016 Games as IOC rebuff Obama", 10/2/09)

Thursday, October 1, 2009

What Difference Does A Year Make?

not much, really...

These are from the headlines from Investor's Business Daily newspaper on October 2nd, 2008, describing what transpired on October 1st:

Dow Jones Industrial Average ended at 10,831, S&P 500 at 1,161, and Nasdaq at 2,069.

(Nasdaq has come back to that level after one year. Dow and S&P about 11-12% below.)

Mortgage Rescue Returns To Senate; House Vote Friday

(After one year, not much of a rescue for homeowners whose mortgages are underwater.)

Buffett Will Buy $3 Bil GE Stake

(GE was $22 stock. Now it is $16. Mr. Buffett is under water on GE, though it is more than made up by his investment in Goldman Sachs.)

Factory Index Hits A 7-Year Low: Sept's ISM manufacturing index dived 6.4 points to 43.5, the lowest since Oct. '01.

(Today's market dive is also because of lower ISM number, although it is now in 50s.)

Automakers' Sept. Sales Plunge

(Same this year. September sales plunged. Cash for clunkers articifially propped up the number during the summer.)

Army General David McKiernan, commander of NATO forces in Afghanistan stressing the need for more troops and aids

(It is now General McChrystal, but he is asking exactly the same thing, and the president, then and now, is taking time thinking about it.)

Obama's Economic Advisor Jokes: President Was Born In Kenya

The president's economic advisor Austan Goolsbee won the "DC's Funniest Celebrity" contest last night.

Top Obama adviser jokes that the president was born 'in a village in Kenya' (10/1/09 Washington Examiner)

The article has the video (originally posted at Politico) of the funniest guy in Washington DC.

Some choice moments as cited in the article:

Goolsbee said that veterans of the Obama campaign "share this bond, and we came here because we knew that the president had a lot of things to do. Number one on the list, we wanted to make sure -- all the Clinton people got their jobs back -- that we were going to do something to help the country."

"The president, I'm happy to say, is still pretty much the same regular guy that he always was in Chicago, and that makes me feel good."

(I wonder what's regular in Chicago means these days...)

"Look," Goolsbee joked, "I'm not saying that in 1961 we were, like, separated at birth -- in a village in Kenya -- what I'm saying is that we're friends."

"When we came in office, it was not that fun of a time to be here in the economy," Goolsbee said. "But it was OK, because as we took office, it was an all-star team of economists and we basically knew what to do -- panic -- what we were coming in, was let's react the right way when things happen -- AAAAAAAAARGH! -- let's just sort it out and start from the fundamentals -- how do we throw money at this problem? -- and the thing is, most of the lessons aren't recent…so we kind of had to go back and look at the old textbooks -- Karl Marx, Trotsky -- "

(The inner voice sounds more plausible than the 'tatemae' - Japanese word for 'pretence, facade'.)

Neil Hennesey: 10-Year Bull Market Has Begun

and Dow will double, for sure.

Looking at this headline at Yahoo Finance, I thought to myself: OK, this is as most diametrically opposed to my fundamental outlook as can be, SO I'D BETTER WATCH THE VIDEO.

The interviewer looks just as incredulous as anyone who's gone through the market since September 2008. The interviewee is Neil Hennesey, Chief Investment Officer of long-only Hennesey Funds.

Let's examine his thesis. He says there is nowhere else for the money (he cites "the sideline money" of $9.5 TRILLION) go to. Investors got burned by leveraged investments, and yields on long-term Treasury notes and bonds are low (3% for 10-year note, 4% for 30-year bond). Companies are slashing employment, increasing productivity, and will have a better bottom line.

So, his call is partly based on improved bottom line due to cost cutting, and mostly on the assumption that there is nowhere else for the investors to go but the stock market to get a decent return.

(How about gold?)

For the first day of October 2009 (and in a 10-year bull market according to Mr. Hennesey), Dow is down 172 points (1.75%) to 9540 at 1:25 PM EST. Auspicious start. (But then, September started with 181-point dump on Dow. What do I know at this point?)

John Paulson (IndyMac + CIT )= FDIC Disaster

Let's do some arithmetic.

Add this:

FDIC is backstopping the mortgage losses at IndyMac Bank (now OneWest Bank), and IndyMac Bank is hell-bent on foreclosing the properties, as in:
Is FDIC Killing Short Sales? (Active Rain, September 09)

To this:

Creditors of CIT Group is mulling the merger of CIT with IndyMac Bank, as in:
John Paulson mulls CIT and IndyMac merger: report (9/29/09, Reuters via Yahoo Finance)

Then multiply it by the common denominator:

John Paulson, a hedge fund billionaire

And the product is:

Potential huge profit for Paulson and his co-investors in IndyMac and CIT, and potential huge loss to taxpayers (because FDIC is already broke).

John Paulson's firm is one of the large creditors to CIT Group; it is also one of the private investors who are behind OneWest Bank that bought IndyMac from FDIC back in April this year. IndyMac Bank's press release lists the following entities as OneWest Bank investors:

Steven Mnuchin (former Goldman Sachs exec)
entities advised by
  • J.C. Flowers & Co. LLC,
  • Paulson & Co.,
  • MSD Capital, L.P.,
  • Stone Point Capital LLC,
  • SSP Offshore LLC and
OneWest bank president Terry Laughlin is a former Merrill-Lynch, Fleetboston, and Mellon Bank executive.

IndyMac-CIT merger talk is simply a rumor at this point, may or may not be true. CIT share jumped on the news on Tuesday, surging 31% to close at $2.20. Then, this news broke after hours, and the stock took a nose-dive on Wednesday, plunging 45% to $1.16:

CIT near plan to turn over co to bondholders: sources
(9/29/09 Reuters via Yahoo Finance)

"NEW YORK (Reuters) - CIT Group Inc (NYSE:CIT - News) is nearing a plan that likely would hand the commercial lender over to its bondholders, sources familiar with the matter said on Tuesday.

"CIT was preparing an exchange offer that would eliminate up to 40 percent of its more than $30 billion in outstanding debt, said the sources, who did not wish to be identified because they were not authorized to make public comments about the deal.

"The plan would offer bondholders new debt secured by CIT assets, as well as nearly all of the equity in a restructured company, one source said.

"If not enough bondholders agreed to the plan, the company could seek to restructure in bankruptcy court, the source said. This would result in one of the largest Chapter 11 bankruptcy-court filings in U.S. history."

As structured, the current offer will practically hand over the entire company to the bondholders. I have a feeling that the bond holders will refuse, and force the company to go through Chapter 11 so that they can pick apart CIT's assets. Then, the bondholders, including John Paulson, will discuss the merger of thus restructured CIT and IndyMac (now OneWest), combining troubled mortgages and troubled commercial loans to create a potent money making machine for them. Fully backstopped by FDIC (i.e. taxpayers).

The Treasury Department, FDIC, and the Federal Reserve have all refused to help CIT, the largest lender in the United States that lends to small and mid-sized businesses for more than 100 years. Like they've done many times since last March when Bear Stearns went down, they are picking who's to survive and who's to die.

October 1st is the deadline for CIT to present a restructuring plan to its lenders.

Wednesday, September 30, 2009

Japan's Tankan Improves, Nikkei Drops Below 10,000

because recent yen surge wasn't priced in ...

Japan Tankan Sentiment Rises for Second Quarter
(9/30/09 Bloomberg)

"Oct. 1 (Bloomberg) -- Confidence among Japan’s largest manufacturers rose for a second straight quarter as global government stimulus spending rekindled exports.

"The Tankan index of sentiment among large makers of cars, electronics and other goods climbed to minus 33 from minus 48 in June and a record low of minus 58 in March, the Bank of Japan said in Tokyo today. A negative number means pessimists outnumber optimists."

Now the Tankan sentiment has recovered to the level of 2001 recession, according to Bloomberg. Although the numbers improved, companies continue to slash inventories and slash/withhold capital investment. Capacity utilization also remain low. 1/3 of Toyota's factories will remain unused, and the company will reduce capital investment by 36%.

The Tankan result is weighing heavily on Nikkei, which dropped 143 points to dip below 10,000 at the close of the morning session. Currently (at 1:18 PM Japan Standard Time) it is down 165 points to 9,967. The reason?

Japanese yen.

Companies surveyed in the Bank of Japan's Tankan based their business outlook on Yen/Dollar exchange rate at 94.50 yen/dollar, according to Japan's Nikkei article (in Japanese). Yen is currently trading in Japan at 89.79-89.82. Most exporters have priced in yen fairly stable at mid 90s. If the pace of appreciation of the currency is gradual and over time, stronger companies can still adjust, without abandoning their manufacturing base within Japan. However, rapid appreciation in short time to mid to lower 80s could finally kill off manufacturing in Japan.

It would then have little choice but to become like the U.S.: consumer-driven economy with majority of employment in the service sector, and with increasing government share in the economy.

According to the stock market commentary at Nikkei Net, the market does not like the uncertainty of the new Hatoyama administration, which is yet to clearly define its policies.

Politico: Grayson Calls Health Care Crisis 'Holocaust'

As much as I respect Representative Alan Grayson (D, Florida) on his stance vis-a-vis the Federal Reserve and his tough questioning of the Fed officials in the House Financial Services Committee, this is going a bit overboard, isn't it? To raise a spectre of 'holocaust' against the opponents who include not just Congressional Republicans but a wide swathe of citizens in the U.S. as evidenced by town hall meetings across the country this summer?

Grayson calls health care crisis 'holocaust' (Ben Smith, 9/30/09 Politico)

"Florida Rep. Alan Grayson, under fire for conservatives for describing the gist of their health care plans as "die quickly," is not exactly backing down from claims he's crossed a line of civility.

"Just now on the floor, he called on members of the House to pass health care reform in the most extreme terms possible:

""I apologize to the dead and Fltheir families athat we haven't voted sooner to end this holocaust in America," Grayson said."

Politico's page has the video of Grayson making the "die quickly" remark.

And this is the video from C-SPAN of Grayson calling the health care crisis 'holocaust':

Bank vs Credit Union

Video from, fashioned after the Apple/PC commercial.

...And Fed Is Back to Accommodative Stance

A Fed board member and two presidents of regional Federal Reserve banks have spoken about the need for the Federal Reserve to tighten the monetary policy (i.e. raising the Fed funds rate) aggressively even without the overt sign of inflation (for that matter, without overt sign of recovery).

This morning, the Fed trotted out the Federal Reserve Atlanta's president Dennis Lockhart, who said there is no rush for the Fed to begin to tighten the monetary policy.

No rush to tighten, Atlanta Fed's Lockhart says (9/30/09 MarketWatch)

"WASHINGTON (MarketWatch) -- There is no rush for the Federal Reserve to begin to tighten monetary policy, said Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, on Wednesday.

""I think it may well be some time before a comprehensive exit need be under way," Lockhart said in a speech in Mobile, Ala.

"There has been much speculation in financial markets and economic circles about the U.S. central bank's so-called "exit strategy" -- when and how it will start winding down the stimulus and liquidity measures implemented to battle the financial crisis that took hold a year ago."

Well, that speculation has been fueled by none other than the Fed officials. First, it was last week's FOMC meeting (September 22/23): the Fed said it would continue to keep the rate low for a long time to assist the recovery. Then on Friday last week, Kevin Warsh, a Fed board member and former Morgan Stanley banker who worked in the President's Working Group on Financial Markets (aka Plunge Protection Team), wrote an Op-Ed piece on Wall Street Journal strongly indicating that the Fed would move aggressively even if the signs of inflation were not evident. Then came Richard Fisher, president of the Dallas Fed yesterday, basically saying the same thing as Warsh in a plainer English. He was joined by the Philadelphia Fed president Charles Plosser, who delivered the speech in Pennsylvania saying "The Fed will need courage. I believe we will need to act well before unemployment rates and other measures of resource utilization have returned to acceptable levels."

Then today the Atlanta Fed president is sounding like a voice of reason by saying "Assuming stable inflation, I would like to see more evidence of private activity in the economy before advocating change in the Fed's overall monetary-policy stance."

Is the Federal Reserve playing "bad cop, good cop" routine?

The stock market doesn't seem to know what to think of these utterances by the Federal Reserve officials. Chicago PMI number registered a fall instead of expected increase, and that overwhelmed the good news of 2nd quarter GDP (final reading) revised to decreasing only by 0.7% (annualized) instead of -1.1% consensus.

Tuesday, September 29, 2009

Fed Is Back to Threatening with Rate Hike

On Friday last week, a Fed Board member Kevin Warsh wrote a please-read-carefully-between-the-lines-and-between-the-words Op-Ed piece on Wall Street Journal.

Today, Federal Reserve Dallas president Richard Fisher spoke in a plainer English.

Official: Fed will need to boost rates quickly
(9/29/09, AP via Yahoo Finance)

"WASHINGTON (AP) -- To prevent inflation from taking off, the Federal Reserve will need to start boosting interest rates quickly and aggressively once the U.S. economy is back on firmer footing, a Fed official warned Tuesday.

""I expect that when it comes time to tighten monetary policy, my colleagues and I will move with an alacrity that, if needed, will be equal in speed and intensity" to when the Fed was slashing rates to battle the recession and the financial crisis, said Richard Fisher, president of the Federal Reserve Bank of Dallas.

"Although Fisher has a reputation for being one of the Fed's toughest inflation fighters, it marked the second such warning by a central bank official in recent days. Fed member Kevin Warsh on Friday said the central bank will need to move swiftly when the time comes to raise rates.

"It's all part of a high-wire act that the Fed has to perform as the economy transitions from recession to recovery."

I guess you could say that. You could also say that the Fed is empowered to make or break the economy. As you see in this comment in the article from a monetary policy expert at University of California Santa Cruz (I didn't even know they have the economics department):

"When the decision is made to boost rates, they will need to be "increased aggressively," argued Carl Walsh, a professor of economics at the University of California, Santa Cruz, and an expert on monetary policy. "Committing to a gradual increase in the policy rate is not justified."" [emphasis is mine]

Not justified?? And "aggressive increase" is justified, then? Why? By who (or what)? The expert continues:

"Consumers, businesses and investors must feel more confident that prices won't spiral higher in the future, so their inflation expectations don't become "unanchored," Walsh said last month."

Is this based on any kind of historical observations, or is it solely his conviction of how consumers, businesses and investor should feel when they see the interest rate being jacked up suddenly and aggressively?

I have this nagging feeling that it's the latter, because it is consistent with other policies having been floated, particularly since the current administration took over. Key word is "should". Policy decisions are to be made on how things "should be", as perceived and determined by the policy makers, whether they are legislators or industry lobbyists or administration officials or the Fed officials. It is normative, as opposed to positive.

It is not new; an unnamed aide to the previous administration said they were not working in the reality-based community. It's just that the current government has turned up the heat on the proverbial pot very aggressively and rapidly. They are not slow-boiling the proverbial frog anymore, and the frog now knows something bad is up and getting rapidly uncomfortable.

FDIC Admits It Is Broke

Zero Hedge's Tyler Durden reports that FDIC now admits its DIF (deposit insurance fund) is negative as of September 30. FDIC is insolvent.

FDIC Discloses Deposit Insurance Fund Is Now Negative
(9/29/09 Zero Hedge)

"In an unprecedented disclosure, the FDIC has highlighted that it expects the DIF reserve ratio to be negative as of September 30. As there are a whopping 48 hours before that deadline, one can safely assume that the DIF is now well into negative territory: as of today depositors have no insurance courtesy of a banking system that has leeched out all the capital of the Federal Deposit Insurance Corporation. Let's pray there is no run on the bank soon."

For FDIC to announce something like that is indeed extremely unusual. They are not known for timely disclosure. Their Quarterly Banking Profile Report, for example, is not filed until after nearly 2 months after a quarter ends.

In this case, it is also highly deceptive. It was just last month, August, when the chairman Sheila Bair said in the press conference when FDIC (finally) released the Quarterly Banking Profile for the 2nd quarter that she was not planning on doing anything about DIF anytime soon, and that FDIC had enough money. "Our resources are strong. Your insured deposits are safe," she repeated. Uh-huh.

Zero Hedge has the FDIC document discussing the negative DIF embedded in the article, and also has this choice words for the situation:

"First Mary Schapiro [SEC chairman] has failed at her task of "regulating" anything on Wall Street, and now Sheila Bair presides over a newly insolvent institution. Chalk one up to Washington's success at "containing" the crisis. Zero Hedge wishes Ms. Bair all the luck in the world in returning the DIF to its statutory minimum requirement of 1.15% of all insured deposits (a shortfall of a mere hundred billion or so). Maybe she can convert the FDIC to a REIT and have Merrill Lynch do a concurrent IPO and follow-on offering (while Goldman raises it to a Conviction Buy which incorporates the firm's expectations for 10% GDP growth in 2010 coupled with projections for $1,000 per barrel of crude)?"

Haha. One more thing: Goldman Sachs will short the hell out while putting it on their Conviction Buy list and recommending it to their clients (not the ones in the 'huddle', who will short alongside Goldman's trading desk).

DIF reserve ratio dropped below the statutory minimum in the 2nd quarter of 2008 (see my post). Sheila Bair was appointed the chairman at FDIC in June 2006 for a five-year term. She could have raised the fund to replenish DIP, well before the financial crisis hit in full force in September 2008. She either decided to sit on her hands or was told to; I don't know which. Incompetency (or appearance of it) is highly rewarded in Washington D.C., it seems. She is still the head of FDIC.

Monday, September 28, 2009

Mercury Retrograde Ends Tomorrow

In case you haven't noticed.

You probably didn't think about Mercury Retrograde, because the stock market went UP, instead of downs in so many M. Retrograde periods before.

I don't trade on astrology, but I hear that some Wall Street traders do pay attention to Mercury Retrograde. (And that's the only reason I follow it.)

From what I understand, Planet Mercury is in charge of communication, and when it goes retrograde, communication, or information exchange, goes awry. The stock market, in a sense, is all about communication: sellers and buyers each trying to assess the value of a company and exchange that information through stock pricing in an open market, and each making their own decisions based on that communication.

Here's how the stock market behaved in the past several Retrogrades.

  • 10/11 - 11/1, 2007: Dow Jones Industrial went from 14198, all-time high, to 13568. 11/1 happens to be one day after Nasdaq registered the high for the year. The market made a series of jerky movements in both directions, until it finally started to go down, down, and down in late December. (Now we know what the market top looks and feels like, don't we?)
  • 1/28 - 2/19, 2008: DJI went from 12386 to 12337. This was right after the relentless January down days. (And we thought the worst was over.)
  • 5/26 - 6/19, 2008: DJI went from 12573 to 12063. In retrospect, I think this was the first swoon that ended up in a spectacular crash later in September/October. The market never regained the May high.
  • 9/24 - 10/15, 2008: How could we ever forget this Retrograde?
    DJI went from 10928 to 8578. (And we thought the worst was really over.)
  • 1/11 - 2/1, 2009: DJI went from 8603 to 7937, including 343-pt drop on 1/20, largest ever drop on the inauguration day. Then the market accelerated the descent, and kept going down for almost entire month of February. Dow hit the lowest on March 6, at 6470.
  • 5/6 - 5/30, 2009: DJI went from 8512 to 8500. In other words, DEAD FLAT.

  • 9/7 - 9/29, 2009: DJI went from 9511 to 9789 as of 9/28 close. One more day left.

    If the gain holds, it will be the first Mercury Retrograde in which the stock market will have gone UP since 2007 market top. (Now the astrologically-inclined market bulls will say "It's a new bull market!")

Here are future dates of Mercury Retrograde:

  • 12/26/2009- 1/15/2010 (Capricorn)
  • 4/18/10 - 5/11/10 (Taurus)
  • 8/20/10 - 9/12/10 (Virgo)
  • 12/10/10 - 12/30/10 (Capricorn-Sagittarius)

Fed Considers Reverse Repo with Money Market Funds

Your 401K and IRA may get stuffed with bonds no one wants.

Last week the Financial Times reported that the Federal Reserve was considering the use of reverse repurchase agreements (aka 'repos') as a way to reduce its balance sheet ("Fed turns to mutual funds to stave off inflation", 9/24/09 Financial Times). The twist is two-fold: that the Fed wants to do it with large money market funds and not with Primary Dealers, and that the Fed wants to do it with agency bonds and agency-backed MBS, and not Treasuries as they normally do.

The Federal Reserve has used 'repos' with Primary Dealers, and never with any other financial entity. I simply do not know if their charter allows them to deal with money market funds. The reason for the Fed's wanting to deal with money market funds is their sheer size: $2.5 trillion. According to the FT article, the Fed thinks Primary Dealers do not have big enough balance sheets to absorb the Fed's collateral (agency, MBS). By the Fed's estimate, Primary Dealers would have $100 billion that they can spare to accommodate the Fed.

Thus the Fed targets the $2.5 trillion money market funds, where the investors very large and miniscule alike park their unused funds, in 401K, in IRA. And the Federal Reserve wants to stuff them with securities that hardly anyone in the world wants to hold at this point.

Repos and reverse repos are used by the Federal Reserve to temporarily increase (repo) or decrease (reverse repo) the bank reserves. In repos, the Fed temporarily buys Treasury securities from Primary Dealers, thus adding to the bank reserves. In reverse repos, the Fed temporarily sells Treasury securities to Primary Dealers, draining the bank reserves. Repo and reverse repo agreements are usually overnight; though it can be as long as 65 business days it is rarely longer than 14 days (in other words, not very long). [information from Federal Reserve Bank of New York]

Now, if the Fed wants to do reverse repos with money market funds by selling them agency bonds and agency-backed MBS, my questions are:

At what price?
Currently the Fed carries these bonds at FACE VALUE on their balance sheet. Many believe agency bonds and agency-backed MBS trades well below their face values. I don't see why the Fed, in reverse repo, would mark them to market. So the Fed would sell these bonds that hardly anyone in the world wants at this point to money market funds at face value. A dollar for a dollar.

How to account?
Since money market funds are not Primary Dealers, they are not banks and they are not even the Federal Reserve members, where would the reverse repos be accounted for on the Fed's balance sheet?

The Fed sells agency bonds/MBS, which decreases their asset balance temporarily. It receives money for the sale, which then increases the asset balance. So on the asset side of the balance sheet it is basically a wash.

On the liability side, the Fed records 'reverse repo', thus increasing the liability. Since the asset side is a wash, the liability side has to be a wash, too. But since the money market funds are not Primary Dealers and not even the Fed member banks, the Fed cannot reduce the bank reserves as they normally do with regular 'reverse repos' using Treasury securities. So they will have to create a new line item on the liability side of the balance sheet that would offset the 'reverse repo' amount, or create a new line item on the asset side that would somehow account for the reverse repo not being offset on the liability side. How they do it I haven't a clue. But the book has to balance somehow.

Is the Fed allowed to do this?
Money market funds are not Primary Dealers, they are not banks, and not the Federal Reserve member banks. Unless the monstrocity which is the financial system overhaul as envisioned by the administration passes and gives the Fed power to do just about anything (it already does just about anything, with its charter gets amended constantly) on any industry that it declares is related to "finance" (thus any on-going business entity would be the fair target), the Fed has no authority over them.

Financial Times notes,

"Fed officials believe that there may be appetite among money funds to lend the money, since these funds are under pressure from investors and regulators to stick to risk-free and highly liquid business."

Risk-free? Agency bonds and MBS risk-free? Now who is going to be the bag holder?