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business newsBuzz on the Street: Fed's QE Lite Sparks Dollar Rally
Some of this week's most insightful and timely vibes.
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Monday, August 9, 2010
Treasury Outlook for Aug. 9, 2010
Michael Davis
Treasuries pushed to higher levels Friday as the jobs report was a major bomb. Payrolls at -131k were almost twice as bad as the consensus and the prior number was revised down by nearly 110k to - 221k.
The job situation appears to be deteriorating at a rapid pace and markets are now fully expecting some type of action from the Fed at the FOMC announcement on Tuesday. Opinions range far and wide for what exactly will happen? Stocks are pricing in drastic measures on the QE 2 front. The Dollar and Gold are telling the U.S. to beware of overextending itself even more as the greenback falls and the Gold rally threatens to be back on.
Either way the FOMC looks to be a major event. The question is does simple buybacks accomplish anything? The buybacks from QE 1 helped ensure that the U.S. could continue to issue debt at a lower rate for themselves but did it do anything other than line the pockets of the Primary Dealer community via ZIRP ?
The consumer world, which is estimated to make up 70% of GDP, still faces a horrendous job market and asset deflation especially in the form of housing wealth. The Fed stimulus plans since 2008 have been a disaster thus far in offering much relief to the general populace and political upheaval seems to be stirring.
Momentum for treasuries is pricing in more bad news and has been correct in leading the charge since April. More lack of action from the fed and the rally could really accelerate more.
For Today
Ten Year Futures support at 124-15.5, 124-07.5 and 124-01.5. Resistance at 124-22, 124-27 and 125-05. Yield range looks to be 2.887% to 2.759% before breaking current trend .
Thoughts for FOMC Tuesday
William Fleckenstein
Given the trial balloons by former hawk James Bullard, and other stories that have started to percolate, I think it is a foregone conclusion that the Fed will have new Q.E. tricks up its sleeve at Tuesday's FOMC meeting. What's unclear to me is whether it will start with baby steps (which Greenspan loved to employ), i.e., using the paydowns on its vast bond holdings to buy more paper, along with the promise to "study the problem" and do something novel soon. Or will the Fed opt for some sort of shock and awe, as it tries to get ahead of the curve now that it's clear that the economic views held by its best and brightest -- namely, that it had done enough to prod the economy into a self-sustaining recovery -- might be wrong.
Intellectually, the latter seems more likely to me, especially when you consider all the writings of Ben Bernanke -- which I've discussed, as have others -- coupled with the new paper last week from Bullard.
If I had only read what these two had written, then tried to triangulate what they actually think to anticipate what they might do, I would expect the Fed to try and shock the market somehow. It could do so by saying it would hold rates at some low level for an indefinite period, meaning it could suspend however much it wanted on whatever it wanted, or some other variation. In any case, we will know soon enough. Given that the expectations for the Fed to save the day have picked up, even as those for economic improvement have been dashed, if it doesn't act the stock market will probably tank hard and then the Fed heads will feel compelled to react (though from a defensive position).
Tuesday, August 10, 2010
Ambac Down
Peter Atwater
I know Minyans must get tired of my rants regarding the "non-cash" writedowns of things like deferred tax assets and goodwill, but I know no better early warning sign of trouble that a company's balance sheets isn't worth what you think than these writedowns - which management team after management team tries to dismiss as nothing because they are non-cash..
But they matter.
Ambac (ABK) is down significantly today based on comments regarding a potential bankruptcy filing.
Am I surprised? Not at all. Go back and look at how much of their capital base was attributed to deferred taxes and you could see the problem ahead.
Once the writeoffs start its hard to recover - especially as the writeoffs are a function of lowered future forecasts.
Its a capital death spiral. Earnings are the past. Balance sheets are the future.
When the writeoffs start its pretty clear what future you are buying into.
I Smell Money Printing
Lance Lewis
The FOMC statement is out, and surprise, surprise… the Fed has pledged to keep its balance sheet at its current level by redeploying principal payments from agency debt and agency MBS.
We expected that part, but here’s the kicker… The Fed is also going to reinvest those funds exclusively in long-term Treasuries. Thus, over time the Fed is basically going to be converting its $200 bln of agency debt and 1.25 trln of agency MBS on its balance sheet into $1.45 trln of long-term Treasuries (i.e. – the Fed has pledged to monetize $1.45 trl of government debt).
Needless to say, this is extremely bullish for gold and very bearish for the dollar in my view.
Positions in gold, gold stocks
Wednesday, August 11, 2010
Gimme My Greenback!
Todd Harrison
Note the dollar, which is up 1.5% against a basket (case) of securities. That's not what one would expect given the FOMC news yesterday, which leads to one of two intuitive conclusions. First, traders were positioned for more easing and/or follow through to the downside and are covering up; that's the "mechanical" side. Second, the market "smells" a fear of deflation coming out of the Fed and is jumping the shark to arrive at that conclusion.
I would also note the relative strength in gold, which is counter-intuitive to a stronger dollar but consistent with an uber-easing (weaker dollar) posture.
Man, it's like a big, goofy jigsaw puzzle.
Oh, and note the VXO... up 20% today, or 25% since Monday...
R.P.
Dollar Index
Smita Sadana
With the dollar close to an important Fibonacci retracement level of its Dec to June advance, I would continue to keep it on my radar.
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