March 15. Repo 105 as negative catalyst?

Interest rate futures immediately sold off on stronger than expected Retail Sales, but snapped back with notable curve flattening on the rebound.  2/10 treasury spread fell 2 bps to 275.5.  Red/gold pack spread (new) fell 3.5 bps, with reds down by 1.75 and golds up by an equal amount.  The market appears to be anticipating a change in language for tomorrow’s FOMC, perhaps to indicate stronger growth prospects.  However, the “low rates for an extended period” is almost sure to remain. 

–While stocks continue to rise, there is divergence in some commodities that have had very similar charts.  For example, copper has probed lower in latter part of the week and crude oil had a large reversal Friday; the May contract had over a two dollar range, an outside day, essentially matched Wednesday’s high (double top) and closed lower. 

–Probably the biggest news over the weekend is that China’s Wen said “I don’t think the yuan is undervalued” and is concerned about a double dip recession. In other China news, the FT reports Google is almost certain to close its China search engine over censorship issues.  My own feeling is that the US (investors and Obama admin) should take pause when pinning hopes on China as a benign engine of world growth.

–Another lurking risk is the Lehman report exposing Repo 105 transactions. It can easily be argued that institutions on the other side were abetting fraud. (Repo 105 allowed LEH to show cash on books at quarter end, rather than questionable assets).  From Reuters:

“An astounding fact to me is that we are sitting here in March 2010 and we’ve done nothing in the way of financial reform up to now, nothing,” Alan Blinder, an economics professor at Princeton University, said in a speech. “That’s an amazing event in itself. We hope it’s not going to end in nothing, but so far it’s nothing.”

(A bit of editorializing here…) The financial engineering that has allowed the obfuscation of the true conditions of Greece, Lehman, etc, at the expense of the population in general is disgusting.  My own feeling is that the US government is complicit in perpetuating these schemes, and is indeed engaging in the same sort of behavior.  For example, while the number of people receiving food stamp assistance, unemployment benefits, etc has swelled along with the budget deficit and Fed Reserve’s balance sheet, stocks have risen and the upper tier in the US has done quite well.  In other words, structural problems are being masked in the same way as Repo 105, and the Fed’l govt is guaranteeing many of the worst assets, while supporting consumption through transfer payments.  China seems to recognize this better than internal analysts. 

–I am personally wrestling with the idea as to whether the lower half of the population is at all meaningful when it comes to growth/stock values.  Perhaps the upper tier can prod the govt to “pay off” the less fortunate at the expense of slightly higher taxes while reaping outsized rewards from gov’t guarantees of assets and ultra low financing rates.  But remember, it was SUBPRIME that was the catalyst for the current problems.  Therefore I have to conclude that the current situation remains unstable, and Repo 105 may be the catalyst that determines whether Sarbanes-Oxley, enacted after the Enron debacle, has any teeth.   


Reuters story on States’ emergency benefits:   From June 2008 to June 2009, the number of families receiving Temporary Assistance to Needy Families rose in 12 of the 21 states the GAO reviewed and dropped in six states. But, it said, the magnitude of those taking the direct cash grants varied widely, with Nevada experiencing a 22 percent increase in need and Texas seeing a 9 percent drop.


HuffPost-Robt Reich

Big global companies, Wall Street, and high-income Americans who hold their savings in financial instruments are clearly doing better. As to the rest of us — small businesses along Main Streets, and middle and lower-income Americans — forget it.

To wit, the FDIC’s own financial woes haven’t prevented it from opening a huge new satellite office in the Chicago area. The facility will be dedicated to managing receiverships and liquidating assets from failed Midwest banks, and will occupy seven floors of an 11-story building. The office space being leased is well over 100,000 square feet and will employ approximately 500 temporary employees and contractors. 

Does the FDIC know something we don’t? We can’t say for sure, but the fact is that the agency has already opened similar offices in Irvine, California, and Jacksonville, Florida.  Each time, the number of bank failures in those states spiked dramatically after the FDIC set up shop.

Posted on March 14, 2010 at 1:30 pm by alexmanzara · Permalink
In: Eurodollar Options

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