Credit Suisse Says the Fed Will Force a Mispricing of Risk

“Credit Suisse has made an important point with respect to the Fed’s purchases of MBS. As we know, a mortgage borrower is long an option to prepay. That means a mortgage lender is short this same prepayment option. Therefore a buyer of MBS is an options seller and the Fed is in effect selling vol into the market.

CS: – It is important, in our view, that the Fed continue to sell volatility – explicitly or implicitly – into the markets. This is at the heart of its quest to reduce term premiums and hence term interest rates. Buying mortgages results in a direct sale of volatility (prepayment risk) to the public. Extending the rate guidance to “mid 2015” represents an implicit sale of volatility – the Fed is giving up the option to hike (arguments about the Fed’s ability to renege notwithstanding). ”

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“The Federal Reserve’s attempt to stimulate the economy with a third round of quantitative easing will fail to prevent the country from sliding into a recession, says Robert Wiedemer, financial commentator and best-selling author of “Aftershock.”

To spur recovery, the Fed has announced plans to buy $40 billion in mortgage-backed securities held by banks a month, a monetary policy tool known as quantitative easing.

The Fed added it would continue to sell its short-term Treasury holdings in the market and buy longer-term instruments simultaneously, with the aim of further pushing down interest rates across the economy.”

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The SEC is ”  alarmed at a recent string of high-profile technology mishaps that have roiled stock markets, …”

Therefore they must appear to be doing their job….just like they did before the 2008 debacle.

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“NEW YORK (AP) — AT&T says it set a sales record for the iPhone 5, with customers ordering more of them than any previous iPhone model on the first day of preorders and over the weekend.
The Dallas company said Monday that the iPhone 5 is still available for preorders online and will be available at its stores starting on Friday. It didn’t say how many were sold.”

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“Hussman’s general approach is to look at an “ensemble” of datapoints, and then compare them to previous market periods to see how stocks generally performed after this signals emerged.

He notes that “single lowest point” does not necessarily mean most overvalued (which was in 2000), but merely that the complete ensemble gave the most negative reading.

So what makes this moment so fraught with risk?

Hussman gives a taste of his secret recipe for measuring the market:”

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In an ongoing dispute between China and the U.S. on trade, China has filed a trade case with the WTO against he U.S. as a response our anti dumping measures and complaints.

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“Brazil’s central bank reduced reserve requirements to free up 30 billion reais ($14.9 billion) in credit as President Dilma Rousseff pushes banks to lower borrowing costs in the world’s second-biggest emerging market.

The measure came a week after Rousseff criticized Brazilian banks for overcharging for loans. Over the past year, the central bank has cut its benchmark rate by 500 basis points, more than all Group of 20 nations, though borrowing costs are still among the highest in the world. The average interest rate charged for personal loans stood at 36 percent in July.

“It was necessary for the reserve requirements to accompany structural changes” in the Brazilian economy, Aldo Mendes, the central bank director in charge of monetary policy, said in a phone interview after the measure was announced Sept. 14. “If the supply of credit increases, everything indicates that interest rates will fall.”

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“Spanish banks, already hooked on cheap European Central Bank loans, are haemorrhagingdeposits as the government debates whether to seek a bailout.

Households and companies drained 26 billion euros ($34 billion) from Spanish bank accounts in July, driving the ratio of loans to deposits among lenders to 187 percent from 183 percent in December and 182 percent a year earlier, according to data compiled by the Bank of Spain. Shrinking deposits undermine the ability of banks to support economic growth by lending to companies and consumers.”

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Since a trillion euro injection into the banking system Germany has been doling out loans to countries in the EU. The rise in lending was a huge jump in QoQ respects, but not that a significant rise in the over all picture. The good part is that a liquidity issues are trying to move back to normal.

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“Squabbling among European governments over the next steps needed to overcome the region’s sovereign debt crisis raised the specter of renewed turmoil as last week’s market rally eased pressure to forge a common path.

A Sept. 14 European Union finance ministers meeting in the Cypriot capital of Nicosia deadlocked over the timetable for a more unified EU banking sector, with a German-led coalition pushing back against a more ambitious plan sought by France, Spain and Italy. The ministers also bickered over the terms of bailout requests and the role of the European Central Bank.”

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Chinese stocks fell bucking the trend across Asia as concerns grew that there might not be more stimulus to come.

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“We are sick and tired of the unions; they are liars,” says Adam Thlolwe, a worker at the world’s second-biggest platinum mining complex near Rustenburg, South Africa.

As Thlolwe and more than 40,000 workers defy the main labor unions and cripple the world’s biggest platinum industry, officials at the Congress of South African Trade Unions gather in Johannesburg today, facing accusations that they are too close to the government and companies to represent members’ interests.”

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“Singapore’s exports fell more than economists estimated in August as shipments of electronics dropped and companies sold fewer goods to Europe. The country’s currency weakened.

Non-oil domestic exports slid 10.6 percent from a year earlier, after a revised 5.7 percent increase in July, the trade promotion agency said in a statement today. The decline, the first since March, exceeded all 15 estimates in a Bloomberg News survey, where the median was for a 4 percent drop.

Europe’s protracted debt crisis, a U.S. jobless rate stuck above 8 percent and a slowdown in China are damping demand for Asian goods and commodities, prompting Hong Kong’s Trade Development Council to cut the island’s export forecast today. The weakening global outlook has prompted Singapore’s government to trim its 2012 economic growth forecast and may put pressure on the central bank to ease its monetary policy stance.”

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“European stocks fell from a 15- month high, the euro snapped a four-day rally and Spanish bonds dropped after finance chiefs deadlocked over plans for the banking system and Spaindebated whether to seek a bailout. Chinese shares slumped, along with copper and soybeans.

The Stoxx Europe 600 Index lost 0.3 percent at 6 a.m. in New York, while Standard & Poor’s 500 Index futures slipped 0.2 percent. China’s Shanghai Composite Index (SHCOMP) sank 2.1 percent amid concern the world’s second-largest economy is slowing and as tensions with Japan escalated. The euro weakened 0.2 percent to $1.3107. Spain’s two-year note yieldclimbed as much as 15 basis points to 3.29 percent, the highest since Sept. 6. Copper slid 0.4 percent and soybeans retreated 1.6 percent.”

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World Markets

Currencies

Commodities

USD Libor

Euribor

Yields for Italy, Spain, France,  and Germany …

The fine seems to me to be very little…

It’s no wonder so many on Main Street believe the stock market is rigged.

Adding to the crisis of confidence on Wall Street, the New York Stock Exchange admitted yesterday that it gave select clients a major trading advantage over average investors.

The Big Board agreed to cough up $5 million and make a number of fixes to settle charges by the Securities and Exchange Commission that it delivered precious trading data to paying clients ahead of everyone else.

While paltry in terms of dollars, the fine marks the first time a major exchange has been slapped with a monetary penalty by Wall Street’s biggest watchdog.

Read the article and see the video here.

The Chicago Teachers Union will continue its week-old strike in the nation’s third-largest city, extending an acrimonious standoff with Mayor Rahm Emanuel over teacher evaluations and job security provisions.

Emanuel said he would seek a court order to end the strike, which he said is illegal under state law.

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Via Crossing Wall Street

What’s interesting is that despite the higher valuation’s, the S&P 500’s Price/Earnings Ratio is still lower now that it was at any point from March 1995 to October 2008. And except for some brief periods, the market’s P/E Ratio is currently lower than it was during the vast majority of the time from 1991 to 2010.

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Al Qaeda is obviously upset that they have not yet been treated to a beer summit with our Dear Leader.

Libyan President Mohammed el-Megarif said he believes Al Qaeda is responsible for the deadly attack at the U.S. Consulate in Benghazi that killed four Americans and said roughly 50 people have arrested in connection with the violence, according to two broadcast interviews Sunday.

Megarif, president of the Libyan National Congress, also reportedly differed with the Obama administration’s position that the attacks Tuesday were sparked by an anti-Islamic video on the Internet.

In an interview with NPR, Megarif said foreigners have been infiltrating his country over the past few months, which has been undergoing major changes since the uprising against the late dictator Muammar al-Qaddafi.

Megarif says the attackers, who he believes are connected to Al Qaeda, used the protests at the consulate as a cover to attack the U.S. Consulate on the anniversary of the Sept. 11, 2001 terrorist attacks.

“We firmly believe that this was a precalculated, preplanned attack that was carried out specifically to attack the U.S. Consulate,” Megarif told NPR.