Kitchen Sink 2.0

Some midday sanity from Goldman's Bob Savage. Zero Hedge does not necessarily agree with some of the assumptions/conclusions here.

The doubters about the US PPIP and TALF are significant. Most point to three issues:
1) Where is the money coming from? The FDIC is guaranteeing a loan but the raising of new capital appears to be coming from market. So leverage of 6-1 is a limit put on that hope that money will rush in. FED and Treasury aren’t on hook for more than $100 bn, nor is FDIC providing loans just insurance like AIG.
2) Who will sell their toxic assets? The implicit point of the program is that it will clear banks of their bad assets – but unless forced its hard to understand this will happen. The inducement for banks to realize losses must be linked to the “stress test” upcoming.
3) What price works? The 84 cent price listed in the US Treasury fact page may be a wishful rate but it underscores the need for a market as many think it’s a 20 bid at 90 offered story with the in between a neverland of dreams over reality. But if you dwell on the negative you are likely to misunderstand what is going on today and over the last two weeks in the US. The government action is having an effect. The data isn’t getting much worse – the housing sales suggest stabilization. [Cornelius disagrees with this statement and rightfully so.] In fact the confidence of government officials is beginning to sink into the greater public. The Pew Research Center for the People & the Press reported a shift in the way Americans perceive the news they are hearing –with the mix of good and bad news rising significantly.

So as we sit through a 5% plus rally up in stocks to test the S&P500 805 resistance many are wondering why this is working – and that may be one answer. But in FX the story shifts from US to Europe with many wondering if the ECB will get it. The European trade data this morning shows some real pain – an over 10% drop in Exports. The value of the EUR isn’t going to help. The better US asset markets today has sent the EUR back down after an early rally in London. But the risk of a break in the uptrend rests on what happens to data and the ECB policy. Many point to AUD/EUR as the next logical trade. The AUD holds value due to its linkage to commodities while the EUR faces policy uncertainty. So we wait for more information even as the world wishes the Geithner plan will work so others won’t have to do something more extreme. If you want to be worried – read the IMF comments about the risk of war. In the interim – enjoy the mix of good and bad news. Sphere: Related Content

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Knee-jerk Response To Fed Stupidity

As the dust is settling, some good preliminary observations on how the latest (and maybe last) move by the Fed changes the landscape, from Bob Savage.

What worries people now?

1) FED surprise action begs the question of what do they know that the market doesn’t? So many fear their forecasts for a much weaker economy.

2) FED action is viewed as the last measure. The ability for the FED to do more than this is now a game of how much more to buy. So the over $1 trillion expansion of its balance sheet announced today can be followed by more and more. But the shock and awe effect will be less and less. The last bullet has to be the most accurate and many fear it may miss the mark.

3) Deficits and USD The action of the FED and the stimulus package sparks concerns over how the US will pay for this and what it means for the USD. So the break in the DXY at 85. The risk of a much bigger down turn in the USD is set up by the charts and many fear it will be part of policy. Weaker USD flows out of this action.

4) Inflation This worry seems years away but many will watch for it and trade accordingly. The risk stems from the FED being ahead of deflation and therefore well behind risk of inflation. Being able to discern the difference will be tricky eventually – but it’s a risk that won’t be known until its too late – not unlike reading in the garage with the car on.

Sphere: Related Content

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Savage Thoughts

Today was one of only four times in history for the Swiss National Bank to intervene alone, that last time being in the mid-1990’s. So for that extraordinary action we receive an extraordinary move in many markets – a veritable reversal of fortune for emerging markets, banking shares, commodities and the USD. For US equities it was a three-peat – three up days in a row – surprising many technicians with the break of S&P500 741 leading to calls of 768. A 4% up day for equities had other drivers – the retail sales drop was modest and in fact it suggests the return of the US consumer – something that may mean trouble on other fronts. The commodity market saw an early rally in oil extend to a dramatic one – with oil up 10% and breaking from recent correlation gold rallying $15 to 925 up nearly 2%. But the surprise result on the day may really be in fixed income where a bid equity market, a weak USD and a higher energy complex along with $11 bn in new supply – all this left the 30Y US 4 bps lower – with an auction notable in its foreign demand. The underlying driver of why today’s SNB action had such a broad effect rests with the G20 Finance Minister’s meeting ahead. The talk for the week has been that the IMF will get promises for more money – targeted to aid the emerging markets. This was followed by the Obama, Yang pledge for more global stimulus and by the push of some emerging markets to intervene or promise to intervene. What remains to the day is sustainability. Headlines persist about the trouble ahead – BOE Barker warns on the economy and the danger of a swift recovery leading to a swifter removal of stimulus. The US jobless claims continue to show the vulnerability of the US consumer and the GS research team – like many others – just cut their view of European GDP to -3.6% in 2009 – worse even than our US outlook. The global great recession remains despite the extraordinary actions. So its going to be difficult for many to get beyond the charts and reversal momentum to actually believe in something different. There are dangers in the SNB action as well as it could lead to another set of devaluations elsewhere. JPY moved back over the 97.80 level on back of the SNB action and despite fiscal year-end flows the risk may be for 100 over 95. The EUR from 1.2730 to 1.2940 today helps the US but risks trouble in Europe. SNB needs both EUR/CHF and USD/CHF weaker. The world also needs to see a rebalancing of the global trade game and the US consumer and credit cycle aren’t the answer but the problem. Sustainability won’t be found on this roulette wheel today but perhaps in the confidence boost of a real, globally planned, coordinated policy plan from the G20.

Bo Savage Sphere: Related Content

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Late Savage Thoughts

We climbed the wall of worry today only to step off the top rung almost level to where we started. So it goes – sideways is the new up. Bears continue to predominate every discussion – leaving a 0.25% rally in equities a win. Similarly, bonds at 2.91% in 10Y is a significant rally as 3.02% holds again. The drivers of the day were Geithner – calling this a “global crisis” and JPMorgan’s Dimon – seeing “signs of moderate improvement.” Overnight the news of the China trade balance shocked many as they recognized that while China may have the money and will to spend its way out of its global trade induced recession it probably can’t do much for the rest of the world. The dirty USD peg of China will leave many trying to figure out the role of the USD and EUR and other FX pairs in setting the economy straight. So what happened in the US is interesting in this context – with a weaker USD, a bid bond market and a steady equity market – all those feed the financial conditions index in the US and make it easier moving it away from the tight levels of October. Unfortunately one day doesn’t make a spring and so many will be watching overnight for more information. The SNB, the AUD unemployment – they may be the movers – but the relationships in FX are shifting around from a risk aversion play for USD to a relative value framework for growth. The move up in EUR has technical legs and may surprise many despite the refusal to spend like the Americans. The G20 meeting in London continues to build up as a key event for not just FX but all markets as regulation, stimulus and coordination all will be discussed. The relief rallies in EM FX today remain the largest story of the day – with the move in MXN below 15.15 significant but ZAR the star performer closing at 10.05. The success of today lies in how little really happened despite the wall of worry that hangs over every investor. Oil dropping almost $3 bbl ahead of the OPEC Sunday meeting leaves many wondering if a production cut will really matter. CAD reflects the oil drop more than NOK. SEK stands out as the best correlation to the worry wall. NZD gains even with a rate cut as the easing was expected and the slightly hawkish statement has been taken as the near end of cuts rather than something in between. It’s the in-between that frustrates many as the direction of the next 10% appears to be more a coin toss than a fundamental call on Spring following Winter or good money chasing bad.

Robert Savage Sphere: Related Content

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Savage Thoughts: Why The 6% Move

From Robert Savage of GS.

The question of the day is whether today is a risk rally or a short squeeze or a bit of both. Hard to tell the difference as you experience the shove of pricing with US equities up 6% after Europe closes up 5-6%. The HSBC and Citibank headlines on encouraging earnings helped spur this move – but they aren’t the only reasons. The Bernanke comment on bank reserves helped. The data on inventories and investor confidence – both minor stories – helped. But mostly today is about the indecision of the bears over the last 3 trading sessions to print aggressive new lows. So if things don’t go down, they go up – its that simple. For FX the knock on effect has been notable – SEK has been a big winner, so too has NOK and EM FX. Gold as an alternative currency fails today – as both the EUR and USD regain status in a world less concerned about the end of the world. Some of this is the G20 meeting speeches and the drumbeat for more global coordination and spending. Perhaps most surprising outcome is the lack of action in EUR or JPY or AUD or CAD. The most clearly confusing signal on the day is that oil – which has been a barometer of global demand – is lower. So many have their doubts about today and its sustainability - For now enjoy the sunshine. Sphere: Related Content

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