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Bernanke Brouhaha Continued, Greek Success, Dec. Existing Home Sales Plummet, CDS Curves vs. VIX

The Ben Bernanke Brouhaha follow up: Markets are quiet this Monday as the Bernanke reappointment story begins to take shape. The Obama administration rallied the troops over the weekend and a stay of execution seems likely…

Embattled Bernanke edges closer to a second term – Reuters

Reuters reports Federal Reserve Chairman Ben Bernanke edged closer to winning support for a second term after the Senate’s Republican leader predicted confirmation and Democrats aimed to have a vote this week. Bernanke’s prospects appeared shaky last week when two Senate Democrats announced their opposition. A spokesman for Senate Majority Leader Harry Reid said on Sunday that the senator hoped to have a vote to confirm Bernanke this week. Bernanke’s term expires at the end of the month. Top Senate Republican Mitch McConnell said he expected Bernanke to be approved. “He’s going to have bipartisan support in the Senate and I would anticipate he’d be confirmed,” McConnell told NBC’s “Meet the Press.” But McConnell would not say how he would vote. Concerned about the surge of opposition to Bernanke’s renomination, President Barack Obama contacted the Democratic Senate leadership Saturday to make sure there were enough votes. “The president is very confident that the chairman will be confirmed,” White House senior adviser David Axelrod said on CNN’s “State of the Union” program Sunday. “The readings he’s getting from his conversations are that Chairman Bernanke will be confirmed.” At least 29 senators have said they will back Bernanke or are leaning toward supporting him and at least 17 senators have either already voted against him in committee, come out against or said they are leaning against the central banker, according to a check by Reuters.

…Meanwhile, the weekend brought tidings of an EU that is no longer in jeopardy of a Greek default.  Trouble for the Euro seems less imminent. Fear caused by the Bernanke Brouhaha and the Greek Tragedy are beginning to abate, which in turn takes some steam out of the US$ rally….

Greece bond issue met with success – WSJ

WSJ reports the Greek government enjoyed a much-needed boost Monday as investors piled into its new €5 billion ($7.07 billion), five-year syndicated bond issue, registering more than €20 billion of orders in around three hours. But while getting some cash in the bank is the top priority, Greece is paying a chunky premium to ensure success. The huge demand for the bonds bodes well for the fiscally-challenged nation as it suggests Greece will be able to secure the €5 billion it was aiming for, which should give it sufficient funds to repay debt maturing until the start of April. The transaction also marks a show of strength from the Greek authorities, which could have opted to place bonds privately with domestic investors. However this could have been seen by markets as an effort by the Greek government to avoid direct exposure to international markets. “A successful takedown of this deal is in our view pivotal for a change in the current bearish moment in Greek spreads,” ING Strategist Wilson Chin said.

…We continue to monitor the housing situation as it is key to any sustained economic turnaround. Today’s news does not surprise us in the least. We predicted, in fact illustrated in Rumplestiltskinesk detail, existing home sales would plummet in December….

December Existing Homes Sales 5.45 mln vs 5.90 mln consensus; -16.7 % m/m

Existing Home Sales Plummet

Existing home sales fell 16.7% to 5.450 million in December. While a drop in sales was expected, the consensus predicted a much more modest decline of 9.8%. The supply of existing homes increased from 6.5 months in November to 7.2 months in December. The drop in sales was the aftereffect of the government tax credit for first-time homebuyers. The credit was originally set to expire in November and potential buyers rushed into the market before the expiration date. As a result, purchases that would have been made in December and January were instead completed in October and November. Since first-time homebuyers tend to buy lower priced homes, the drop off of these buyers from the market allowed the median and average home prices to increase 4.8% and 6.4% respectively.

…However, I would like to remind the reader bad news for the economy is good news for the equity markets. All three stories above are US$ bearish, commodity and equity market bullish. As long as the administration remains the same and Quantitative Easing is the tool of choice to default the economy then a bullish stance on equities and commodities should lead to successful investing.

On that note, I would like to offer up the thoughts of a respected colleague who monitors the debt markets. Debt has led equity during this dramatic rollercoaster ride of the last few years. Debt signaled trouble for the equity markets well in advance of the 2008 equity market collapse and again gave the all-clear sign over a month in advance of the March bottom in 2009.  So it behooves us to give the debt markets a little respect and see what signs, if any, were generated last week….

 M.S. Howells & Co.

Bank Credit Curves do not support the magnitude of the VIX spike – Michael Johnson

 …The difference between the traded spread of the CDX IG13 Index and the average spread of the index’s underlying members widened to nearly 10bps as of last Friday’s close. The difference between these two measures, often called the skew, indicates that a large portion of last week’s sell-off was driven by market sentiment and momentum trading rather than on the deterioration of individual company credit concerns. This same type of phenomenon has occurred numerous times since the rally began last March, and ended up whipsawing investors who believed the market was heading for a major correction…

 …The increase in systematic market risk, as measured by the VIX Index, is overemphasizing the White House’s decision to pursue a “War on Banks.” Money Center Bank 5-year CDS spreads have widened in response to the “War” rhetoric, however the steepening of their 1-to 5-year CDS credit curves indicate that the widening does not reflect a heightening of short term default risk….

…Taken as a whole, the performance of the credit markets indicates that the recent spike in the VIX index is an opportunity to short equity market volatility. We expect the continued performance of the credit markets will gradually cause the White House’s rhetoric to fall on increasingly deaf ears.



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