Toxic Assets or Toxic liabilities? Geithner, what are you trying to offload?

‘Cash for trash’, is a recycled plan to promote the theory that bankers know what they are doing and financial institutions are ‘sound’. Geithner is now promoting ‘toxic debt’, which was previously declared immeasurable on banks’ books. They are being marketed as being worth much more than anyone is currently willing to pay for them. In fact, their ‘true value’ is so high that if they were properly priced, banks would not be in this mess. So let’s use taxpayer’s monies to drive up prices and give it to hedge funds. The catch, there is always a catch, if asset values go up, investors profit, but if they go down, the investors can walk away from their debt. ………a stroke of pure genius!

The US$ is stronger in the O/N trading session. Currently it is higher against 12 of the 16 most actively traded currencies, in another ‘whippy’ trading range.

Forex heatmap

Yesterday, Geithner introduced his ‘not’ well kept secret of off loading toxic assets (should it not be toxic liabilities). The initial reaction has been another ‘new’ recycled plan with few surprises and whose success depends on active participation. Madoff would be proud of this scheme. It’s the PPIP or ‘Public-Private Investment Program’ which will provide ‘$500b in purchasing power to buy legacy assets’. The program includes financing assistance from the Fed and FDIC. Treasury will ‘provide 50% of the equity capital’, while the private sector will manage the investment (another way to promote Hedge funds!). The private sector manager will be overseen by the FDIC. What a no-brainer, being insured for losses! The structure of the plan is to encourage private participation. Another scheme to delay default…..

Existing US home sales once again surprised to the upside yesterday (+4.72m vs. +4.45m). Record foreclosures are finally attracting bargain hunters back into the market. Median house prices have slumped close to -16% y/y last month ($165k from $195k, 2nd-biggest drop on record), and distressed properties accounted for +45% of all sales.

The US$ currently is higher against the EUR -0.32%, CHF -0.04% and JPY -1.26% and lower against GBP +0.42%. The commodity currencies are weaker this morning, CAD -0.06% and AUD -0.17%. 50% of Canada’s total export revenue is commodity based. So, it was no surprise yesterday to see the loonie gain ground on the back of the US Treasury’s program to help banks dispose of ‘distressed assets’ which boosted global equity and commodity prices. The currency has soared over the last couple of trading sessions as the USD$ has plummeted vs. its biggest trading partners. Robust commodity prices have certainly given the currency a temporary leg up. It’s all about the big dollar, for now look to sell USD rallies as long as commodities remain buoyant.

The AUD gained for a 11th consecutive day (longest winning streak in nearly 3-years) on the back of the ‘cash for trash’ idea that has boosted speculation that the global recession may subside. Global growth is the key to this commodity high yielding asset. The Fed’s plan to keep interest rate yields low will only weaken the USD$ further and promote the higher yielding AUD$ (0.7042). In this current environment one should expect better buying on pull backs.

Crude is lower in the O/N session ($53.38 down -42c). The covert weak dollar policy is becoming a boom for crude prices. Oil advanced yesterday to its highest level in nearly 4-months as the greenback suffered once again vs. the EUR, thus boosting demand for most commodities as a hedge against inflation. The depth and scope of the Fed’s announcement on quantitative easing has temporarily at least instilled optimism about the outlook for the US economy. This has given crude the desired support and certainly helping OPEC with its own problems. We are back to moving on the USD$, crude prices rose 10% last week and year to date has advanced 17%. It’s not just OPEC’s support that’s pushing crude higher. Demand destruction remains a concern, there is nothing to suggest that demand has increased or will increase in the short term. Crude prices could remain vulnerable unless the greenback continues on this path of weakness. Even last weeks weekly EIA report was bearish for crude prices. Inventories climbed +1.94m barrels to +353.3m vs. an expected increase of +1.5m. Supplies of gas and distillate fuel (heating oil and diesel) also increased. US demand dropped -0.6% last week to +18.8m barrels a day, while total daily fuel demand over the past month was + 19.1m, down -3.2% from a year ago. Gold remains under pressure as the rally in global equities has eroded the appeal of the ‘yellow’ metal as an alternative asset ($933).

The Nikkei closed 8,488 up +272. The DAX index in Europe was at 4,218 up +42; the FTSE (UK) currently is 3,961 up +10. The early call for the open of key US indices is higher. The 10-year Treasury yields eased 1bp yesterday (2.65%) and are little changed in the O/N session. Despite global equities aggressively advancing after Geithner’s ‘new’ proposed plan to deal with toxic assets on banks balance sheets, treasuries remain better bid on pull backs. As per usual, traders continue to cheapen up the front of the yield curve ahead of another record $98b issue of new debt this week. However, policy makers are now determined that yields will not rise given the current economic environment after last weeks FI buyback announcement.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell