Yes Comrade! Obama ‘orders’ pay cuts. What’s happening to Capitalism?

Obama’s orders to slash pay to bailed out financial companies is a kick in the teeth to ‘pure’ capitalism. How is Goldman going to spin this one? Year-to-date they have set aside nearly $9b in compensation. That will be a hefty charitable donation and expensive PR firm bill needed to justify their actions. On the other hand he has announced new measures to open up credit for small businesses. The plan would make small community banks eligible for lower-cost capital. With Sched 1 Banks looked after, regional banks will be the administration biggest problem. The objective is to use TARP money to finance this plan. Some credit unions would also have access to the capital, the first time those institutions are eligible to the rescue funds. Finally, the administration is widening the net and printing more money! Bye, bye Buck!

The US$ is stronger in the O/N trading session. Currently it is higher against 14 of the 16 most actively traded currencies in another ‘whippy’ trading range.

. According to yesterday’s Beige book release, US economic activity remains sluggish across the country, with only a few districts reporting ‘stabilization or modest improvement in many sectors’ since the last go-around. Digging deeper, it is not surprising to see that the commercial real estate section remains the weakest sub-sector as it has been for the longest period. But, surprisingly enough, residential and manufacturing were the stand out stars in yesterday’s afternoon release, obviously supported by the stimulus packages. It must be noted that there was an upsurge of bank lending to first-time home buyers, just in time for the tax credit to expire in Dec.! Overall, consumer spending remains weak as the cash-for-clunkers incentive program has also expired. It’s going to interesting to see what the holiday sale season will bring us, more misery perhaps. Most of the districts reported a decline in loan demand (Bernanke’s savings ration just increased!). On the labor front, no good news there, market conditions are consistently weak, which would suggest we will probably see similar NFP prints to the ones we have witnessed over the last few months. Wages however remain unchanged!

The USD$ is currently higher against the EUR -0.05%, GBP -0.09%, CHF -0.22%, JPY -0.60%. The commodity currencies are stronger this morning, CAD -0.31% and AUD -0.32%. With no Canadian data out yesterday the loonie took its cue from commodities and global equities. Already this week Governor Carney’s soft verbal tirade on the effects of a strengthening currency managed to pare 2% off the rapidly strong currency, pushing it to a 2-week low. This once again gave speculators the perfect opportunity to add to their long CAD positions at better levels as soft long CAD positions were stopped out after the BOC communiqué. With the BOC stepping up its dovish rhetoric expect the market to continue to take some of the winning premium off the table. The market wants parity, we don’t need parity, but the market will want to test the loonies’ highs again. Futures have priced in a 62% that we will have reached parity by year end. Just seek how sick the greenback is it may be much sooner than we think.

The RBA keeps providing the ammo to lift the AUD towards parity. They said it was ‘possibly imprudent’ to keep borrowing costs at a 50-year low in the minutes of its October meeting, this week. The currency managed to touch its strongest point in more than 14 months yesterday before Asian stocks plummeted and with China’s economic growth falling shorter than analysts forecasts added more pressure to the currency.

Crude is lower in the O/N session ($80.09 -128). Oil prices temporarily managed to do a u-turn yesterday and rise after the weekly EIA report showed a bigger than forecasted decline in supplies of gas. Gas inventories fell -2.2m barrels to +207m last week vs. an expected drop of only -850k. On the flip side crude stocks rose +1.3m barrels to +339.1m vs. the forecasted climb of +1.5m barrels. With the ‘big dollar’ remaining under pressure and equities managing to advance also gave the black-stuff an extra boost. Already this week we hit the $80 mark, it was short lived after OPEC Secretary- General El-Badri said that ‘prices above $80 would hamper economic growth’! Technically, prices have been aggressively mobile on pure ‘speculation’. Earlier in yesterday’s session, Crude had extended the previous day’s retreat from the one-year peak after the API reported that crude stocks rose +3.8m barrels, much more than the forecasted. However, the EIA report is considered the ‘bible’ of reporting as energy firms are required to participate. Year to date crude has advanced +11%, this report was not bearish and can only give speculators more ammo to push prices higher! Fundamentals do not support those actions, only when floating storage is eliminated then demand destruction will end!

Gold tried to fall for the 1st time this week during yesterday’s session all on the back of investors speculating that the ‘big dollar’s’ downfall will not continue on its linear path, it will in fact stall. The contrarians lost that argument again! The sickly dollar continues to boost the appeal of the ‘yellow metal’ for now. The commodity will remain well supported on deeper pullbacks as long term inflation worries continue to be a concern ($1,056).

The Nikkei closed at 10,267 down -66. The DAX index in Europe was at 5,735 down -98; the FTSE (UK) currently is 5,185 down -79. The early call for the open of key US indices is lower. The 10-year bonds backed up 5bp yesterday (3.39%) and are little changed in the O/N session. The bond rally lasted a mere 3-day’s. Prices fell on speculation that global policy makers are preparing to withdraw the fiscal stimulus measures designed to revive the economies. Governor King at the BOE and Bollard at RBNZ seem to preparing some ground work. Analysts believe that there is good technical support at 3.50% the first time for 10’s. However, looking at the big picture, Treasury buybacks are almost over. MBS buybacks have about $250b to go. The US Treasury still has to raise $1.8t per year (more pressure on the curve). Despite the USD encroaching again on its 14 month low, analysts foresee 4% 10-yr notes before the year-end and 4.5% by middle of next year!

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