RESULTS OF 10-28-2010 POMO. Very High 23.6X Submitted to Accepted Ratio

This is where the Govt. buys back debt. So front running would be to buy it the day before and sell it on the day of.
i.e. Profit off the Govt.'s ridiculous monetary policy. This is precisely what Goldman Sachs studied and recommended to their clients and it would have yielded an 11% return for 2010 in 16 days of trading.

Today's POMO closed at a very light $1.66 billion, leading to a whopping 23.6x Submitted to Accepted ratio (on a massive $39.2 billion in submitted indications), which as we presented yesterday historically indicates a very weak outcome as the Primary Dealers will not be able to satisfy risk frontrunning capital requirements. And, as expected, the only two CUSIPS executed on, were within the list presented, with the 3/15/2013 receiving 70% of the take down. Overall a very weak POMO and one which would validate the current weak market action.

A day in the life of a POMO (Permanent Open Market Operation) also known as Uncle Sam the Ponzi Man

Read this below and then I will post the results when they are announced, this is how we should have been making money in 2010.


Today's POMO has started. As we disclosed previously the top 10 CUSIPs we expect to be monetized are highlighted below. We expect the bulk of the action to occur in the shaded cells as the PDs sell back to the Fed the bonds they bought initially, and will do so in the future, knowing precisely how much debt will be issued (and currency printed) going forward. With the initial stock rally fizzling, our assumption that POMO frontrunning is now completed the day before may be validated. Keep an eye on the Accepted to Submitted ratio at 11 am for further guidance on broad market color through close.

The Fed has finally lost it. They are in real trouble here...read below

As if there was any doubt before which way the arrow of control, and particularly causality, points in America's financial system, the following stunner just released from Bloomberg confirms it once and for all.
 According to Rebecca Christie and Craig Torres, the New York Fed has issued a survey to Primary Dealers, which asks for suggestions on the size of QE2 as well as the time over which it would be completed. It also asks firms how often they anticipate the Fed will re-evaluate the program, and to estimate its ultimate size. This is nothing short of a stunning indication of three things:
 i) that the Fed is most likely completely paralyzed due to the escalating confrontation between the Hawks and the Doves, and that not even Bernanke believes has has sufficient clout to prevent what Time magazine has dubbed a potential opening salvo into a chain of events that could lead to civil war: in effect Bernanke will use the PD's decision as a trump card to the Hawks and say the market will plunge unless at least this much money is printed.
ii) that the Fed is effectively asking the Primary Dealers to act as underwriters on whatever announcement the Fed will come up with, and thus prop the market.
 iii) that the PDs will most likely demand the highest possible amount, using Goldman's $2-4 trillion as a benchmark, and not only frontrun the ultimate issuance knowing full well what the syndicate of 18 will decide in advance of what the final amount will be, but will also ramp stocks on November 3 to make the actual QE announcement seem like a surprise.

This also means that the Primary Dealers of America, which include among them such hedge funds as Goldman Sachs, such mortgage frauds as Bank of America, such insolvent foreign banks as Deutsche, RBS, UBS and RBS, and such middle-market excuses for banks as Jefferies, are now in control of US monetary and fiscal policy.

Below is the article from Bloomberg-

Fed Asks Dealers to Estimate Size, Impact of Debt Purchases

By Rebecca Christie and Craig Torres - Oct 28, 2010 10:29 AM ET

William Dudley, president of the Federal Reserve Bank of New York. Photographer: Andrew Harrer/Bloomberg

 

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Oct. 28 (Bloomberg) -- Thomas Tucci, U.S. government bond trading head at primary dealer Royal Bank of Canada's RBC Capital Markets, discusses the Federal Reserve's survey of bond dealers and investors on quantitative easing. The New York Fed asked dealers and investors for projections of central bank asset purchases over the next six months, along with the likely effect on yields, as it seeks to gauge the possible effects of new efforts to spur growth. (Source: Bloomberg)

 

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Oct. 28 (Bloomberg) -- John Ryding, chief economist at RDQ Economics, talks about the amount of asset purchases he expects the Federal Reserve to announce as it implements another round of quantitative easing. Ryding, speaking with Betty Liu on Bloomberg Television's "In the Loop," also discusses the U.S. economy and currency markets. (Source: Bloomberg)

 

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Oct. 28 (Bloomberg) -- John Taylor, chairman and founder of FX Concepts Inc., discusses the outlook for currency markets. Taylor, speaking with Erik Schatzker on Bloomberg Television's "InsideTrack," says another round of quantitative easing is mostly priced into the market and that the U.S. dollar will weaken through the end of November before recovering. (Source: Bloomberg)

 

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Oct. 27 (Bloomberg) -- Joseph Battipaglia, market strategist at Stifel Nicolaus & Co., talks about Federal Reserve monetary policy. Battipaglia also discusses U.S. stocks and the economy. He talks with Carol Massar and Adam Johnson on Bloomberg Television's "Street Smart." Doug Prskalo of Blue Capital Group also speaks. (Source: Bloomberg)

 

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Oct. 27 (Bloomberg) -- Christian Thwaites, chief executive officer at Sentinel Investments, and Peter Andersen, portfolio manager at Congress Asset Management Co., talk about Federal Reserve monetary policy. Thwaites and Andersen also discuss U.S. stocks and their investment strategy. They talk with Pimm Fox on Bloomberg Television's "Taking Stock." (Source: Bloomberg)

 

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Oct. 27 (Bloomberg) -- Dan Fuss, vice chairman at Loomis Sayles & Co., talks about Federal Reserve policy and the outlook for bonds. Treasury 10-year notes dropped for a sixth day, the longest streak in two years, as a report showing new-home sales rose more than forecast added to speculation a Federal Reserve program to boost the economy may be gradual. Fuss talks with Carol Massar on Bloomberg Television's "Street Smart." (Source: Bloomberg)

The Federal Reserve asked bond dealers and investors for projections of central bank asset purchases over the next six months, along with the likely effect on yields, as it seeks to gauge the possible impact of new efforts to spur growth.
The New York Fed survey, obtained by Bloomberg News, asks about expectations for the initial size of any new program of debt purchases and the time over which it would be completed. It also asks firms how often they anticipate the Fed will re- evaluate the program, and to estimate its ultimate size.
With their benchmark interest rate near zero, policy makers meet Nov. 2-3 to consider steps to boost an economy that’s growing too slowly to reduce unemployment near a 26-year high. Financial-market participants are focusing on the size, timing and maturities of likely purchases aimed at lowering long-term rates, with estimates reaching $1 trillion or more.
“If they buy too much, I think there’s a real chance that rates are going to rise because people are worried about inflation,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “If they don’t buy much, they’re not going to have a market impact.”
William Dudley, president of the New York Fed and vice chairman of the Federal Open Market Committee, set expectations of about $500 billion for a new round of so-called quantitative easing, or QE, a figure he used in an Oct. 1 speech.
Investor Concern
“QE is a very hot topic right now and will be a major factor for us,” Tom Tucci, head of U.S. government bond trading in New York at Royal Bank of Canada’s RBC Capital Markets unit, one of 18 firms that trade directly with the Fed, said in an interview today with Bloomberg Television. “We feel that the need for this is about $100 billion a month.”
Treasury 10-year notes rose for the first time in seven days today, pushing the yield down four basis points, or 0.04 percentage point, to 2.68 percent as of 9:41 a.m. in New York. The yield climbed to the highest in more than a month yesterday on speculation that the Fed will buy less debt than some traders had been expecting.
The New York Fed surveyed primary dealers required to bid in U.S. debt auctions. Among other questions, the Fed asked for reactions to Chairman Ben S. Bernanke’s speeches at regional Fed conferences at Jackson Hole, Wyoming, on Aug. 27, and in Boston on Oct. 15.
FOMC Statement
Dealers were asked what percent chance they assign to the Fed easing through communications changes in the FOMC statement, additional purchases, or some other means. They were also asked how they expect communications to change, and how the Fed might carry out new purchases.
The New York Fed routinely surveys bond dealers and shares the results with the FOMC. Deborah Kilroe, a spokeswoman for the New York Fed, declined to comment.
The Fed’s survey coincides with a Treasury Department questionnaire asking dealers about the outlook for bond-market liquidity. Treasury officials say any additional program of asset purchases by the Fed won’t affect borrowing plans.
Treasury officials say they want to avoid any disruption to the $8.5 trillion market in U.S. government debt, the world’s most liquid, as the Fed weighs restarting purchases. The Treasury also doesn’t want to give any impression to investors, particularly those based overseas, that it might be coordinating with the Fed to finance the national debt.
Lowest Cost
“Treasury debt-management decisions are designed to deliver the lowest cost of borrowing over time and are entirely independent from monetary-policy decisions made by the Federal Reserve,” Mary Miller, assistant secretary for financial markets, said in an e-mail to Bloomberg News yesterday. Before joining the Treasury last year, Miller was head of global fixed- income portfolio management at T. Rowe Price Group Inc. in Baltimore.
The Treasury is scheduled to hold its quarterly meetings with bond dealers tomorrow, ahead of the department’s Nov. 3 refunding announcement.
It asked dealers to estimate changes in nominal and real 10-year Treasury yields “if the purchases were announced and completed over a six-month period.” The amounts dealers can choose from are zero, $250 billion, $500 billion and $1 trillion.
“Yields would have to back up” if the market is overestimating the size of Fed purchases, said Joseph Abate, money-market strategist at Barclays Capital Inc. in New York. “The dealer community is running much less leverage than they did before. The amounts of inventory they are financing is smaller. Their capacity to absorb extra supply is lower.”
Avoiding Disruptions
The Treasury is watching for signs the Fed’s buying program might affect market operations. Fed purchases would take place as the Treasury reduces debt issuance, raising questions of whether the government would have to sell additional securities to avoid market disruptions.
“That’s certainly kind of a nuclear option for Treasury,” Stanley said. “They would always and everywhere like to avoid that.”
Extra debt sales have happened just twice in the past decade, with so-called snap reopenings of existing securities in the aftermath of the Sept. 11, 2001, terrorist attacks and at the height of the financial crisis, in October 2008. The Treasury acted to shore up market liquidity and prevent a trading freeze caused by shortages of highly sought securities.
Predictable Sales
The Treasury has put a premium on selling its debt in a regular and predictable fashion. Those efforts may be tested by the Fed’s purchase campaign, which would take place in the secondary market rather than at Treasury auctions.
The Fed’s purchases might run as high as $100 billion a month, some analysts say -- almost equaling the entire amount the government is likely to sell.
“If the Fed commits itself to buying back the bulk of the Treasury’s net new issuance through open-market purchases, it will have more than one hand tugging on the wheel of federal debt management policy,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey.
Crandall said the frequency of note auctions, combined with low interest rates, “sharply increases the likelihood of accidental reopenings in the next phase of the rate cycle.”
The Fed is unlikely to buy up the entire supply of new securities, although it may adjust its internal guidelines of how much it can hold of any given issue. The Fed limits itself to owning no more than 35 percent of any specific security it holds in its System Open Market Account, or SOMA.
Pricing Distortions
“Our Treasury strategists point out it could also cause pricing distortions along the curve, if, for example, the Fed continues to target a 40 percent purchase concentration in the 6-10 year maturity bucket, as it has in its recent purchases,” analysts at JPMorgan Chase & Co., including Alex Roever, wrote in an Oct. 22 research report. The report predicts the Fed will buy about $250 billion a quarter during the easing campaign.
The central bank makes the securities in its portfolio available to dealers through its daily securities lending operation, making it unlikely that Fed purchases alone would lead to an acute shortage of a given issue.
For now, the Treasury is doing everything it can to show borrowing independence. The department is extending the average maturity of its debt and ramping up sales of 10-year and 30-year securities while cutting issuance of the medium-term securities the Fed is more likely to buy.

(BLS) Bunch of Liars and Scheisters revises last weeks claims up again. Ratio now 40:6 for Upward vs Downward revisions

Since the current week claims number is irrelevant and will be adjusted higher next week, we first point out last week's 27 or so consecutive revision, which was pushed higher from 452K to 455K. This also brings the total YTD prior revision at 34 up and 6 down.  The current week number of 434K was below expectations of 455K. Look for the next week's revision to meet or beat the actual expectation but who will care then. In the meantime, with the last number before QE2 announcement, we expect the Primary Dealers to immediately tell the Fed no more POMOs are needed. And as an aside, continuing claims were revised from 4441K to 4478K. This is 40 up revisions, and 2 down.
Probably the most important data from an economic perspective is that 400k people dropped from EUCs and extended claims. What would be interesting to know is how many of the 400K have simply given up and cannot receive unemployment either.

The chart below tells the complete revision picture:

Insider Selling Highest on record.

The overwhelming volume of sell transactions relative to buy transactions by company insiders over the last six months in key leading sectors of the market is the worst Alan Newman, editor of the Crosscurrents newsletter, has ever seen since he began tracking the data.

The strategist looked at insider trading activity amongst the top ten companies that make up the Nasdaq such as Apple [AAPL  307.1495    -0.9005  (-0.29%)   ] , Google [GOOG  617.00    -1.60  (-0.26%)   ] and Amazon [AMZN  167.435    -2.515  (-1.48%)   ] .

RETAIL HLDRS TR (RTH) 98.90     -1.55  (-1.54%%) AMEX

Then he analyzed the biggest members of the Retail HOLDRs ETF like Gap [GPS  19.17    -0.51  (-2.59%)   ] , Target [TGT  52.2925    -0.8475  (-1.59%)   ] and Costco [COST  62.72    -0.96  (-1.51%)   ] , as well as the top insiders in the semiconductor industry at companies such as Altera [ALTR  31.03    0.70  (+2.31%)   ] , Broadcom [BRCM  40.95    3.73  (+10.02%)   ] and Sandisk [SNDK  37.72    0.53  (+1.43%)   ] .

The largest companies in three of the most important leading sectors of the market have seen their executives classified as insiders sell more than 120 million shares of stock over the last six months. Top executives at these very same companies bought just 38,000 shares over that same time period, making for an eye-popping sell to buy ratio of 3,177 to one.

The grand total for the three sectors are “as awful as we have ever seen since we began doing this exercise years ago,” said Newman, who was ahead on such trends as the dangers of high-frequency trading and ETFs before the ‘Flash Crash’. “Clearly, insiders are seeing great value only in cash. Their actions speak volumes for the veracity for the current rally.”

S&P 500 INDEX (.SPX) 1176.32     -9.32  (-0.79%%) INDEX

But the overall market doesn’t seem to care. The S&P 500 is up 16 percent since its 2010 low hit on July 2nd on the back of strong earnings driven by cost-cutting and the hopes for even more quantitative easing from the Federal Reserve.

The insider data “is good reason for considerable caution once the price action fades,” said Simon Baker, CEO of Baker Asset Management. Still “insiders normally buy early and sell early too. Longer term -- 12 months out -- it is more of a red flag.”

Newman isn’t alone in warning about insider selling. The latest report from Vickers Weekly Insider, a publication that makes investments based upon these transactions, shows that total insider sell transactions relative to purchases on the New York Stock Exchange are running at a ratio of more than four to one over the last eight weeks. The normal reading, because of options selling and other factors, is about 2 sales for every buy, according to Vickers.

To be sure, many investors feel the heavy insider selling is just an anomaly based on other reasons.

“These are folks that have had to dip into their stocks for the first time in years, as their salaries have been cut and their bonuses, outside Wall Street, have been significantly curtailed,” said J.J. Kinahan, chief derivatives strategist for TD Ameritrade. “ This may speak more to a cash flow problem, then a market belief.”

Still Newman, who is also a favorite commentator of Barron’s columnist Alan Abelson, sees the insider selling as just the latest reason, along with the mortgage foreclosure mess and fully invested mutual fund managers with no fresh powder to put to work, to be cautious on the market.

“At the risk of sounding like a broken record, we expect a significant correction,” said the newsletter editor.

$1Trillion Corporate Cash. Interesting. IMPORTANT. Read bullets below in article.

• Non-repatriatable without impact
• Not being deployed
• Increase from ongoing operations is marginal
• Look at largest cash holders in general and in technology for future reference when this mess resolves

Perhaps the biggest, and most overtouted, silver lining of the US depression is the massive (presumably) amount of cash held by corporate America, built up over the past two years thanks to massive headcount reductions, overall cost-cutting, and record drops in CapEx investment. And while American non-financial companies currently do indeed have a record $943 billion of cash (of which however $233 billion is in short-term investments), they also have a record amount of debt to go with the cash: 3,394 billion at mid 2010. In addition, as we have long cautioned, nearly a quarter of this cash is held abroad and can not be repatriated. Furthermore, putting the $1 trillion in perspective, it is slightly higher than the total combined annual corporate capital spending and dividend payments by non-financial companies. As such, the cash buffer is certainly not as big as is touted by assorted permabulls. In fact, as even Moody's, which has just released the most comprehensive analysis on US corporate cash discloses, "companies are unlikely to spend their cash on expansion and hiring until there is greater certainty about the direction of the U.S. economy." The primary culprit: companies are all too aware of the record excess capacity slack, and that there is no need to invest for the future until others do so first. But we already knew that. And since we have already been digging underneath the surface of the US cash hoard, and uncovered a variety of unpleasant facts, it has been remarkable how quickly this topic is no longer a talking point among CNBC's anchors and is only brought up by its most clueless guests who don't realize only the dunces now use this argument (kinda like the whole "green shoots" thing that did miracles for Dennis Kneale's career). So here are all the details about the corporate cash stash, and a whole lot more.
First, we present some big picture thoughts from Moody's, which to our surprise was also unable to come up with a favorable scenario that sees this cash as being promptly reinvested into the floundering economy:

The balance sheets of U.S. non-financial companies are in good shape, in contrast to government and household balance sheets. Some $943 billion of cash and short-term investments sat in their coffers at mid-year 2010, compared with $775 billion at the end of 2008. Corporate America could use these cash holdings to cover a year’s worth of capital spending and dividends and still have $121 billion left over.

Economists, politicians and everyday Americans contemplate how that cash, if invested in inventory and plants, could strengthen the U.S. economy and get more people back to work. But we believe companies are looking for greater certainty about the economy and signs of a permanent increase in sales before they let go of their cash hoards, which they suffered so much to build. Given low demand and capacity utilization within certain industries, companies are wary of investing their cash in new capacity and adding workers, thereby doing little to abbreviate the jobless recovery. It also does not help that much of the cash, perhaps one-fourth, is located offshore and unlikely to be repatriated to the U.S.

And confirming that there are no organic growth opportunities in the US, a fact that the administration should be ashamed of more than any of its other disastrous economic policies, is Moody's osbervation that the only possible use for the record cash is not for capex and hiring, but for synthetic shareholder friendly actions:

The cash provides U.S. companies safety come rain or shine. In the event of a relapse in the U.S. economy, the cash will buffer the downturn. If the economy gradually improves, we expect more companies to begin buying back shares as it is hard to justify to shareholders ever-increasing cash balances that yield a less than 1% return. We also think that mergers and acquisitions will be a more probable use of cash over the next couple years. With low interest rates and generally low company valuations, we expect companies will seek to consolidate their market positions or add complementary businesses.

In fact, by "adding businesses" companies will ultimately let even more people go! After all the primary driver of most M&A are "synergies" which is a prospectus-friendly way of saying mass layoffs. Essentially, the greater the corporate behemoth, the worse off the US middle class is. But far be it for us to point us such minor details on the grand scheme to a communist paradise.
The chart below summarizes the total cash and short-term investment holdings of corporate America. It is notable, that while the total has grown since 2009, it has been purely due to the increase in short-term investments (we are confident companies would love to hear about another run on money markets that would lock their $233 billion in short-term holdings indefinitely).

Here are the key summary findings on America's cash:

• Total cash and short-term investments at U.S. non-financial firms that have Moody’s ratings were $943 billion as of mid-year 2010, up from $775 billion at year-end 2008 and $937 billion at year-end 2009.
• The top 20 companies held $346 billion of the cash, or 37% of the total.
• The top cash-heavy industry sectors are technology ($207 billion), pharmaceuticals ($124 billion), energy ($105 billion), and consumer products ($101 billion).
• Much of the cash held by the larger companies is overseas and not likely to be repatriated to the U.S. Multi-national companies need this cash to finance their international operations, which are often growing faster than their domestic businesses. In addition, unfavorable tax consequences discourage the repatriation of cash to the U.S.
• The firms’ aggregate capital expenditures over the last 12 months were $576 billion, making the ratio of cash to capital expenditures 1.64 times. This exceeds the ratio as of December 2007 and December 2008, when it was 1.1 times, and it may be an all-time high. U.S. companies have the capital to fund normal and even extraordinary capital spending, and in many cases acquisitions, without having to raise additional financing.
• Likewise, current cash can easily cover the study group’s annual dividends, which were $246 billion over the last 12 months.
• Together, capital spending and dividends were $822 billion over the last 12 months, equal to 87% of the firms’ mid-2010 cash holdings.
• Many companies have bolstered cash through debt offerings, especially in 2010. Much of the debt-issuance proceeds have been used to refinance existing debt, but some has been stockpiled for broadly termed general corporate purposes.
• At mid-year 2010, the aggregate cash-to-debt ratio was 0.28, materially better than the 0.23 at December 2008. While we hear a lot about the looming debt refinancing cliff, receptive bond markets and generation of operating cash flow are combining to make the cliff look less intimidating for the stronger, higher-rated companies.

As the chart below demonstrates, total cash has grown not so much as a function of cash from operations increasing notably (it hasn't), which has been flat for the past 4 years, but due to a massive cut in the outflow side of the equation: CapEx and Dividends.

While the much ignored concept of corporate debt is also at a record, the total debt/cash ratio has indeed dropped. However, since the end of 2009, it has once again started to creep back up, and is now at 3.6x from 3.58x at December 31.

And just like in the stock market, where a few companies are accountable for a majority of the action, so here, the top 20 US companies are responsible for 37% of the total cash and short-term investments, holding $346 billion of cash and ST investments.

A granular analysis of cash sources and uses indicates that in 2009 Working Capital was a notable source of cash, at a time when debt issuance dropped notably (but is again growing in 2010), while cash buybacks have been relatively flat.

Focusing specifically on Funds From Operations (net income):

The speed and depth of the economic downturn led U.S. companies to very quickly downsize their operations and lower costs. The latest recession was not a rolling recession like we have often experienced. In the past, companies typically delayed taking painful actions or took small steps while they waited to see how bad and how long-lived the downturn was likely to be. However, in the autumn of 2008, it was painfully clear that the downturn was going to be bad. Many industrial companies reported that “the phones just stopped ringing.”

For example, in the U.S. steel industry, industry-wide capacity utilization went from 86% in mid-September 2008 to 50% by Thanksgiving. It was to remain in the low 40% range through the first half of 2009. The energy industry had been flying high with oil prices at $140 per barrel in July, but they declined to $32 per barrel by December, and the U.S. rig count dropped in half between mid-September 2008 and May 2009. The Purchasing Managers Index (PMI) dropped from 49.2 in August 2008 to 32.5 in December, the lowest level since 1980.

On top of the dire demand picture, the near total freeze-up of credit markets was a shock. Companies adopted the view that their lenders could not be relied on to help them through a liquidity problem. They were in the middle of the ocean in a leaky boat and no one was coming to the rescue. Just to be safe, many non-investment grade rated companies drew down their credit lines and parked the cash in the bank.

Therefore, with little hesitation, the companies moved quickly to ratchet down costs. They idled plants, took rolling downtime, and furloughed or laid off employees. Some large manufacturers cut their workforces by up to one-third of pre-recession levels.

Today, with demand still relatively low, companies are not rushing to bring back workers until they are certain the storm has passed. While the net effect of these cost-cutting actions has not fully offset lower sales, it has enabled many companies to at least be modestly profitable. In many cases, this has been a remarkable performance compared to previous, more mild recessions.

The cost cutting also positions them well for what should be an impressive performance once the economy normalizes. The benefits of even the small recovery we’ve had so far are evident in sales and operating income. In 2009, the firms we studied for this report had operating income of $812 billion on sales of $8.65 trillion. As of mid-year 2010, only six months later and without a meaningful improvement in most key economic indicators, sales were up 5% (to $9.07 trillion) but operating income was up 19% (to $969 billion), on an LTM basis. We also note as of mid-year 2010, corporate sales and operating income are almost back to their 2007 pre-recession levels.

In other words, companies are massively leveraged to economic improvement. It also means that record high corporate margins have only one way to go from here: down. The trade off to this record lean efficiency is 17% unemployment. And just as corporate cash levels will not drop any time in the near future, so will employment levels not improve. But at least corporate CEOs are better off. And they all have the chairman to thank.
Next, we look at working capital:

In 2009, aggregate sales for the study group fell 12% from 2008. But for companies in highly cyclical industries such as manufacturing, durable consumer goods, chemicals, automotive, and construction, the sales declines were often 20% to 40%. In this environment, working capital investment fell sharply and released a total of $72 billion in cash in 2009. It is not an exaggeration to say that, at the height of the credit crisis, working capital was a more certain source of liquidity than the banking system.

Reduced inventory was the largest contributor to cash from working capital. Companies were able to live off their pre-recession finished goods inventory for many months and at times waited to have orders in hand before purchasing materials or manufacturing necessary parts. In other words, inventory was pulled down and not replenished. Many companies are still taking a cautious approach to inventory until there are stronger signs of economic growth. As a result, inventory in terms of days or months on hand is below the historical average for many industrial sectors.

Accounts receivable also shrunk, but a good portion of this dis-investment was offset by reductions to accounts payable.

Note the underlined text: during the next crisis, it will be prcisely working capital that will serve yet again as an in house cash flow substitute for short- and mid-term capital funding needs. Oddly enough, despite this so called "cautious approach" to inventory stocking, according to top down diffusion metrics, inventory levels are again creeping higher, meaning that going forward working capital will likely be a drain of cash once again, just like in the good old times.
Lastly, the historically biggest source of cash in the pre-Lehman years was debt issuance. This will once again soon be at the forefront of cash sourcing. For now, companies are merely refinancing record amount of debt as part of the 2012-2013 cliff issue. Very soon, they will start incurring incremental debt, and the debt/cash ratio will once again start to rise drastically. We anticipate non-fin companies to accumulate over $4 trillion in total debt by the end of 2011, just because they can, and just because as BofA earlier noted, they would be stupid not to take advantage of virtually zero cost debt at a time when Bernanke has pretty much guaranteed he will not raise interest rates ever.

The last big contributor to an expansion of cash at U.S. companies is the issuance of new debt. This source of cash predominantly came into play in 2010. As the economy stabilized and the credit markets, especially the bond market, opened up, companies took advantage of the opportunity to refinance near-term debt maturities. In the first nine months of 2010, U.S. high-yield debt issuance was a record high $170 billion, with another $300 billion of investment-grade debt issued. In our study group, total debt was $3,394 billion at mid-year 2010, up $42 billion since December 2009. This puts the ratio of debt to cash at U.S. corporates at 3.6 times, a little higher than at December 2009 (3.58 times) but otherwise the lowest it has been in the last five years (see Figure 3).

As for which industries are the biggest holders of excess cash, there are no surprises there:

The top cash-heavy U.S. industry sectors are technology, pharmaceuticals, energy and consumer products. In this section we list the cash leaders in these four sectors and compare the industry-wide cash to aggregate industry capital expenditures over the 12 months ended mid-2010. We list every company in these four industries that have more than $5 billion of cash and short-term investments. Cash at the other major industries is shown at the end of this section.

The table below looks at the individual tech companies responsible currently for the biggest cash hoard in the world:

A total industry breakdown is as follows:

Next up, we will attempt to determine just how much of this $1 trillion in total cash is held abroad. Per Moody's it is $250 billion. According to others, the amount is as high as half a trillion. If the latter case is valid, it would mean that of the actual $710 billion in cash ($233 billion in ST investments aside, which are far less fungible), almost 70% of the cash is non-touchable!
And even that aside, the bottom line is that companies have done nothing less than the inverse of what our Keynesian government is doing: they have cut all investment in future business to the benefit of building out a cash buffer (while the government has taken all future benefits to the present day courtesy of an unlimited taxpayer funded piggybank). And since this capex will need to be reinvested at some point, assuming some reversion to the corporate mean, it is only a matter of time before cash levels decline dramatically once again, only this time nominal debt levels, as pointed out previously, will be at fresh record high levels, courtesy of Bernanke's ZIRP insanity.
At this point, we dare someone to bring up the cash on the sidelines theory: within a few months this will be as forgotten as the whole "green shoots" propaganda fiasco.

Foreclosure angst and anger building momentum. The story is fairly typical.

The US population is starting to get restless: investors are beginning to sue, there are protests over HAMP, and foreclosure probes are happening.

HAMP Protests
http://www.huffingtonpost.com/2010/10/26/homeowners-protest-hamp-i_n_773582.html

Washington Post: Economists: U.S. should remove top bank execs over foreclosure mess
http://voices.washingtonpost.com/political-economy/2010/10/economists_remove_the_senior_l.html

Assured Guaranty Sues Deutsche Bank Over Mortgages
http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=ada1QmQYr_BI

Assured said more than 83 percent of 1,306 defaulted loans examined in one of the transactions, ACE’s Home Equity Loan Trust, Series 2007-SL2, breached Deutsche Bank’s representations and warranties. In the second deal, Home Equity Loan Trust, Series 2007-SL3, 86 percent of the 1,774 loans breached the agreements, Assured said.
Faulty Foreclosures, by Adam Levitin
http://www.creditslips.org/creditslips/2010/10/faulty-foreclosures.html

Bank of America Mulls Dividend Hike
http://www.thestreet.com/story/10893231/1/bank-of-america-mulls-dividend-hike.html?cm_ven=GOOGLEN

U.S. probing foreclosure processing firms (uses the criminal word…)
http://www.washingtonpost.com/wp-dyn/content/article/2010/10/25/AR2010102505731.html

Homeowner says Stern sent retaliatory letter
http://www.dailybusinessreview.com/PubArticleDBR.jsp?id=1202473895545&Homeowner_says_Stern_sent_retaliatory_letter
From the last must read article showing how desperate parties on both sides of the table are getting:
A lawyer for a homeowner who went to Florida's attorney general about a law firm's conduct in a foreclosure case claims the firm sent his client a "discriminatory and racially degrading" letter to frighten him into dropping the complaint.

The letter, which the homeowner asserts emanated from the Law Offices of David J. Stern in Plantation, was filed with a counterclaim to a foreclosure action brought by CitiMortgage in Miami-Dade Circuit Court.

Stern's attorney questioned the authenticity of the letter and said it was not authorized if it was generated by the law firm or by its back-office foreclosure processing business, DJSP Enterprises.

Jorge Porter and his attorney, John Herrera, said the letter arrived in the mail after Porter took complaints about his foreclosure to the state attorney general's office. Twelve homeowners are named in the attorney general's subpoena for Stern's records, and Porter is one of them.
The counterclaim filed on Porter's behalf characterizes the letter as "threatening, discriminatory and racially degrading" and also says it "threatened Porter with criminal action if he did not pay the total amount due to their client, CitiMortgage."

"This particular letter is a direct response to my client's allegations of fraud," Herrera said in an interview. "You can almost categorize that letter as extortion."

Some of the country's largest lenders stopped doing business with the law firm since early this month.
The letter to Porter dated Aug. 18 instructs him to vacate his home within 30 days or face eviction on an April foreclosure filing in the circuit court. But in a counterclaim filed with the court, Herrera raises 25 affirmative defenses to the foreclosure. One asserts CitiMortgage did not own or hold the mortgage when the action was filed. Herrera, who filed the letter Oct. 19 as a court exhibit accompanying Porter's counterclaim, sees the letter as an effort to frighten his client into withdrawing the complaint he filed with the attorney general.

Under a label "publication or dissemination is prohibited," the unsigned letter on Stern law firm stationery states, "You should be relieved to be able to live in a civilized society and not take for granted the many opportunities available to people like you here, instead of taking advantage of the system by continuing to occupy a property you don't legally owned [sic]."

"Frankly speaking, you seem to ignore how 'The Rule of Law' works in this Country," the letter states. "We therefore encourage you to educate yourself, as to what is 'legally' acceptable in the United States. The fact that you are a foreign national from a third world country doesn't excuse you from such ignorance."
The letter leaves a white gap for a signature above the typed words "Law Offices of David J. Stern."

Stern's attorney, Jeffrey Tew of Miami's Tew Cardenas, said a security officer at Stern's firm couldn't find the letter in the firm's database. Tew noted the foreclosure case number listed in the letter did not adhere to the firm's style.

"We have examined the letter. There appears to be some things about the letter that bring its authenticity into question, and, in any event, it wouldn't be an authorized letter from the law firm," Tew said.

A Pitney Bowes postage-meter number on the envelope traces back to Stern's offices, according to Herrera. He said Stern's representatives can examine the original, and he would make his computer databases available for inspection.

Herrera, a Coral Gables solo practitioner, contends CitiMortgage lacked standing to sue because Porter's mortgage was sold in 2005 by Mortgage Warehouse to ABN Amro Mortgage Group. He asserts CitiMortgage did not "own, hold or possess" the mortgage when the foreclosure was filed.
The counterclaim alleges slander of title, fraud, fraudulent misrepresentation, abuse of process, civil conspiracy, violation of Florida Consumer Collection Practices Act and violation of the Fair Debt Collection Act.

Court papers initially listed CitiMortgage as the mortgage servicer. A mortgage assignment from Mortgage Warehouse to CitiMortgage was executed Aug. 18, four months after the original foreclosure filing. Herrera called that "a legal impossibility."

'Fabricated Documents'

Herrera said Porter complained to the attorney general's office about the foreclosure earlier that month. On Aug. 10, Attorney General Bill McCollum announced the filing of subpoenas against Stern's firm and three others, claiming "fabricated documents" have been filed in foreclosure cases to oust homeowners.
The law firms say they committed no systemic wrongdoing.

The Aug. 18 date on the letter with the offensive language is the same date as the mortgage assignment.
"This 'sore losing' demeanor will not be tolerated any longer," the letter states. "You know the charges you have filed against our Law Firm are totally false, defamatory, unfounded as are also both embarrassing and shocking."

Porter said the letter came as a shock.
"He makes a major insult against me, my nationality, my ethnic background," Porter said. "Add this to all the humiliation of the foreclosure and everything I had been going through with the bank, it's just not right."

Porter moved to United States with his family when he was a child, settling first in New England before coming to Miami. He said the letter reminded him of something his grandmother used to say: "I'm too American to be Colombian and too Colombian to be American."

Porter, a real estate agent, said he was not going to let his home of 20 years go without a fight. But he said he could never get through to a lawyer at Stern's firm and was belittled by the staff when he called. He said they would purposely pronounce his first name Jorge as "whore."

"I would say, 'Ma'am, you are not being funny," Porter said. "They hung up on me so many times."

Loan Modification

He asserted he tried to work with CitiMortgage from the start. He worked on a loan modification and continued to make mortgage payments though he was in arrears on the $200,000 loan. He said CitiMortgage kept losing his paperwork and eventually his whole file. He said he rejected a modification packet that was mailed to him with different terms than were discussed. The foreclosure suit was filed a few weeks later.

Porter said he went to the FBI, the Federal Trade Commission and finally the state attorney general's office.

"This is the poster child case for the mess that we are in," Herrera said.   

What is the real rate of inflation? Check this out.

The Casey Report provides a useful glance at the real inflation currently ravaging items that are actually purchased by Americans, not those captured by the Fed's BLS statistics: "On average, our basic food costs have increased by an incredible 48% over the last year (measured by wheat, corn, oats, and canola prices). From the price at the pump to heating your stove, energy costs are up 23% on average (heating oil, gasoline, natural gas). A little protein at dinner is now 39% higher (beef and pork), and your morning cup of coffee with a little sugar has risen by 36% since last October." Of course, the ongoing deflation in items purchases requiring leverage will continue to skew the CPI so far south to make all those who bought 5 Year TIPS yesterday at negative yields end up losing money on the transaction.
Chart of the Week: Inflation in the Real World, by Jake Webber of Casey Report
As is often the case, there is a big difference between what the government statistics are reporting and what’s going on in the real world. According to the most recent inflation reading published by the Bureau of Labor Statistics (BLS), consumer prices grew at an annual rate of just 1.1% in August.

The government has an incentive to distort CPI numbers, for reasons such as keeping the cost-of-living adjustment for Social Security payments low. While there’s no question that you may be able to get a good deal on a new car or a flat-screen TV today, how often are you really buying these things? When you look at the real costs of everyday life, prices have risen sharply over the last year. For simplicity’s sake, consider the cash market prices on some basic commodities.

On average, our basic food costs have increased by an incredible 48% over the last year (measured by wheat, corn, oats, and canola prices). From the price at the pump to heating your stove, energy costs are up 23% on average (heating oil, gasoline, natural gas). A little protein at dinner is now 39% higher (beef and pork), and your morning cup of coffee with a little sugar has risen by 36% since last October. 

You probably aren’t buying new linens or shopping for copper piping at the hardware store every day, but I included these items to show the inflationary pressures on some other basic materials that will likely affect consumer prices down the road.

The jump in gold and silver prices illustrates that it’s not just supply and demand issues driving the precious metals higher – the decline in purchasing power of the dollar is also showing up in the price of physical goods. It is because stashing wheat and cotton in the garage is an impractical way to protect purchasing power that investors are increasingly looking to protect themselves with the monetary metals – a trend that is now very much in motion.

Jeremy Grantham ( GMO), manages over $105B ( yes B not M), here are his views on the Feds manipulation of the markets.

Jeremy Grantham launches into his most aggressive and succinct anti-Fed diatribe yet. He is a man who gets it. 'If I were a benevolent dictator, I would strip the Fed of its obligation to worry about the economy and ask it to limit its meddling to attempting to manage inflation. Better yet, I would limit its activities to making sure that the economy had a suitable amount of liquidity to function normally. Further, I would force it to swear off manipulating asset prices through artificially low rates and asymmetric promises of help in tough times – the Greenspan/Bernanke put. It would be a better, simpler, and less dangerous world, although one much less exciting for us students of bubbles. Only by hammering away at its giant past mistakes as well as its dangerous current policy can we hope to generate enough awareness by 2014: Bernanke’s next scheduled reappointment hearing." Pretty much all familiar topics to Zero Hedge readers.
And for those pressed for time, and unable to read the full 16 page must read letter (attached), here is a bulletized form of all Grantham's key issues of contention with our zombifying chairman.

1. Long-term data suggests that higher debt levels are not correlated with higher GDP growth rates.
2. Therefore, lowering rates to encourage more debt is useless at the second derivative level.
3. Lower rates, however, certainly do encourage speculation in markets and produce higher-priced and therefore less rewarding investments, which tilt markets toward the speculative end. Sustained higher prices mislead consumers and budgets alike.
4. Our new Presidential Cycle data also shows no measurable economic benefits in Year 3, yet point to a striking market and speculative stock effect. This effect goes back to FDR, and is felt all around the world.
5. It seems certain that the Fed is aware that low rates and moral hazard encourage higher asset prices and increased speculation, and that higher asset prices have a beneficial short-term impact on the economy, mainly through the wealth effect. It is also probable that the Fed knows that the other direct effects of monetary policy on the economy are negligible.
6. It seems certain that the Fed uses this type of stimulus to help the recovery from even mild recessions, which might be healthier in the long-term for the economy to accept.
7. The Fed, both now and under Greenspan, expressed no concern with the later stages of investment bubbles. This sets up a much-increased probability of bubbles forming and breaking, always dangerous events. Even as much of the rest of the world expresses concern with asset bubbles, Bernanke expresses none. (Yellen to the rescue?)
8. The economic stimulus of higher asset prices, mild in the case of stocks and intense in the case of houses, is in any case all given back with interest as bubbles break and even over correct, causing intense financial and economic pain.
9. Persistently over-stimulated asset prices seduce states, municipalities, endowments, and pension funds into assuming unrealistic return assumptions, which can and have caused financial crises as asset prices revert back to replacement cost or below.
10. Artificially high asset prices also encourage misallocation of resources, as epitomized in the dotcom and fiber optic cable booms of 1999, and the overbuilding of houses from 2005 through 2007.
11. Housing is much more dangerous to mess with than stocks, as houses are more broadly owned, more easily borrowed against, and seen as a more stable asset. Consequently, the wealth effect is greater.
12. More importantly, house prices, unlike equities, have a direct effect on the economy by stimulating overbuilding. By 2007, overbuilding employed about 1 million additional, mostly lightly skilled, people, not counting the associated stimulus from housing related purchases.
13. This increment of employment probably masked a structural increase in unemployment between 2002 and 2007, which was likely caused by global trade developments. With the housing bust, construction fell below normal and revealed this large increment in structural unemployment. Since these particular jobs may not come back, even in 10 years, this problem may call for retraining or special incentives.
14. Housing busts also help to partly freeze the movement of labor; people are reluctant to move if they have negative house equity. The lesson here is: Do not mess with housing!
15. Lower rates always transfer wealth from retirees (debt owners) to corporations (debt for expansion, theoretically) and the financial industry. This time, there are more retirees and the pain is greater, and corporations are notably avoiding capital spending and, therefore, the benefits are reduced. It is likely that there is no net benefit to artificially low rates.
16. Quantitative easing is likely to turn out to be an even more desperate maneuver than the typical low rate policy. Importantly, by increasing inflation fears, this easing has sent the dollar down and commodity prices up.
17. Weakening the dollar and being seen as certain to do that increases the chances of currency friction, which could spiral out of control.
18. In almost every respect, adhering to a policy of low rates, employing quantitative easing, deliberately stimulating asset prices, ignoring the consequences of bubbles breaking, and displaying a complete refusal to learn from experience has left Fed policy as a large net negative to the production of a healthy, stable economy with strong employment.

Check out this headline on CNBC.COM ! It says it all!!

Insider Selling Volume at Highest Level Ever Tracked

Published: Tuesday, 26 Oct 2010 | 2:26 PM ET

Text Size

By: John Melloy
Executive Producer, Fast Money

Closet Indexing. Job security and bad money management

Closet indexing is when a Mutual Fund goes against their mandate and buys individual stocks inside an index even though they are supposed to be selecting companies non-correlated to the index. This allows them to match or marginally beat the funds performance. This allows them to claim they are performing well enough to deserve your money. The video below is quite revealing and should bring to bear the entire premise of how you select who manages your money.


http://insider.thomsonreuters.com/link.html?ctype=group_channel&chid=3&cid=156510&shareToken=MzphNjgxMzRmMi0wYWVhLTRjNGUtYTJkOC05ODA2ZTVkOWM3OGU%3D%0A&playerName=ReutersNews

Goldman Sachs advises clients to front run the Fed POMO.

After a few months of breaking down what the simplest trade in the world is, that would be frontrunning the Fed for the cheap seats, Zero Hedge is happy to advise our readers that finally Goldman Sachs itself has capitulated and is now indirectly telling its clients to frontrun Ben Bernanke via POMO. No complicated value investor nonsense, no pair trades, no cap structure arbitrage, no hedging, no levered beta plays. Buy ahead of POMO. Sell. Rinse. Repeat.
From a GS distribution to clients:

On the interplay between the FED and STOCKS: Since Sept 1 – when QE was becoming a mainstream focus – if you only owned S&P on days when the Fed conducted Open Market Operations (in US Treasuries), your cumulative return is over 11%.  in addition, 6 of the 7 times when S&P rallied 1% or more, OMO was conducted that day. this compares to a YTD return of 5.8%.  the point: you would have outperformed the market 2x by being long on just the 16 days when – this is the important part – you knew in advance that OMO was to be conducted. The market's performance on the 19 non-OMO days: +70bps.

And there you have it - the top in frontrunning the Federal Reserve is now in.
The most recent Fed POMO calendar is linked (there is one tomorrow). Frontrun away.
Oh, and Ben, your criminal organization will one day pay for making a complete manipulated travesty out of capital markets.

The REAL Unemployment story is highlighted. +30K on continuing and +152K on Emergency

New U.S. claims for unemployment benefits fell more than expected last week, government data showed on Thursday, pointing to some improvement in the labor market.

Initial claims for state unemployment benefits fell 23,000 to a seasonally adjusted 452,000, the Labor Department said.

Despite the drop, which also saw the unwinding of the prior week's administrative related-jump, claims remain perched above levels usually associated with a strong job market recovery, making it all but certain the Federal Reserve will ease monetary policy further next month.

Analysts polled by Reuters had forecast claims falling to 455,000 from the previously reported 462,000. The government revised the prior week's figure up to 475,000.

Last week's claims data covered the survey period for the government's October non-farm payrolls report. A Labor Department official said only the Virgin Islands' claims had been estimated in the most recent week and noted the prior week's claims number had been pushed up by administrative factors.

The Federal Reserve is widely expected to announce a second round of asset purchases, also know as quantitative easing, at its Nov. 2-3 meeting to keep interest rates low in an effort to combat high unemployment and boost demand.

The labor market has stumbled as the economy's recovery from the most painful recession 70 years fizzled, leaving the jobless rate at an uncomfortably high 9.6 percent.

Last week, the four-week average of new jobless claims, considered a better measure of underlying labor market trends, fell 4,250 to 458,000.

Claims for jobless benefits have moved sideways for much of this year and continue to hold below a nine-month high touched in mid-August.

The number of people still receiving benefits after an initial week of aid dropped 9,000 to 4.44 million in the week ended Oct. 9, the lowest level since the week ending June 26, from an upwardly revised 4.45 million the prior week.

Analysts polled had forecast so-called continuing claims edging up to 4.41 million from a previously reported 4.40 million. MISSED BY 30,000

The number of people on emergency benefits increased 152,112 to 4.04 million in the week ended Oct. 2.INCREASED BY 152,000+

Outflow from Domestic Equities - 24th week in a row. $81 Billion out

At this point what is there to say that has not been said already 23 times in a row? ICI reports the latest fund flow data: flows into everything are up... except domestic stocks. The only silver lining: the outflow is declining, and we may just see an inflow next week. Although at $81billion in redemptions YTD, even an uptick eventually would be too little to late. The only marginal buyers continue to be the primary dealers (using POMO cash), desperate pension funds (getting led to the slaughter), and algos which churn stocks a few million times per day, end on a loss, but then collect liquidity rebates from the exchanges and are happy. Aside from these three, there is nobody else.

Weekly flows:

Cumulative flows:

Both the funds below have B of A among their top 2 holdings !!

David Tepper, Appaloosa Top Holdings

Paulson and Co. Top 25 Holdings