Just in case the epic collapse in the NY ISM (an indicator virtually nobody had heard of until today) which tumbled from 61.2 to a 49.9 contraction, was not enough of a hint that the economic virtuous cycle is a myth, and that CTRL-P'ing will be required, here comes the latest rumor via Reuters:
- G7 FINANCE MINISTERS AND CENTRAL BANK GOVERNORS TO HOLD PHONE CALL ON EUROPE TUESDAY MORNING - CANADA FINANCE SPOKESWOMAN
Will they discuss just any old plan, or DAS MEISTER PLAN? Stop talking about and just do it already. It's not like anyone expects it.
For those who missed Obama's post-NFP sermon on Friday, here is a summary of the Keynesian-in-Chief's latest plan to fix the country: $3000 for everyone to buy "thingamajigs." We wish this was a joke.
We have recently witnessed a boom-and-bust cycle in Real Estate in Europe that overcame the banks of several nations including Ireland and Portugal. Now Spain is about to show up to be counted in my view. The issue all across Europe is that the sovereign does not have enough assets or capital to bailout their banks and many European banks are impaired; make no mistake. The first move was to lay off a lot of non-performing assets in securitizations at the ECB but the price always gets paid which will either be severe losses at the ECB requiring re-capitalization or the ECB handing back the collateral to the various banks which would probably bankrupt some of them especially in Spain, France and Italy. The ECB maneuver brought early success but now, as loans become due and as non-performance builds and losses must be recognized; the real truth forces itself upon balance sheets. There is a day when the auditors say, “Show me the money” and when it isn’t there the infamous “Oh My God” moment begins. Now Bubba, when you use the screwdriver and release the air from the tires it causes all of those little lights on the dashboard to begin to flash and then if you try to drive the car it goes “bump-bump” down the road. No Bubba, get off of your knees and get your mouth off of the thingy; you cannot blow air back into the tires that way.
While the Mutually Assured Destruction game is playing out economically in Europe as Spain (et. al.) square off with Germany, it seems we just ticked a minute closer to midnight on the doomsday clock globally. In a somewhat stunning report from Der Spiegel, Israel is arming up to six new German-made submarines with nuclear weapons. These subs are being built in Germany and it turns out the helpful German government has known of this Israeli nuclearization for decades - despite official denial (more lying when it matters we presume). In one of the more ironic comments, according to extensive research carried out by the magazine, Israel is equipping submarines that were built in the northern German city of Kiel and largely paid for by the German government (Not only is Berlin financing one-third of the cost of the submarine, around €135 million ($168 million), but it is also allowing Israel to defer its payment until 2015) with nuclear-tipped cruise missiles. The missiles can be launched using a previously secret hydraulic ejection system. Israeli Defence Minister Ehud Barak told Spiegel that Germans should be "proud" that they have secured the existence of the state of Israel "for many years." Vendor-financing for WWIII FTMFW.
The first step toward the terminal McClendon ouster is here, because as a reminder, broken management teams are fixable, as we explained last week. Not surprisingly, stock is up 5% in the premarket. Next steps: a big balance sheet suitor? Carl C. Icahn, Chesapeake’s second largest shareholder, said, “We appreciate the Board’s willingness to listen to shareholders and to respond appropriately. Under Aubrey’s leadership, Chesapeake has assembled great assets and I am confident I can help the Company create significant shareholder value from these assets. We enjoyed a very good relationship when I acquired almost 6% of the Company’s stock in late 2010 and I look forward to a similarly constructive relationship now.”
While we do not agree that anything will happen on Wednesday (or pre-Greek-election to be more precise) - aside from perhaps a small bump in BoE LSAP, Peter Tchir provides a useful update to our original 'full central bank menu' two weeks ago. Markets and economies are teetering across the globe. More and more people are coming to the conclusion that a Greek Exit would be catastrophic. Central banks won’t want to act as though they are panicking, but neither will they want to wait much longer to act. Tchir believes investors will be extremely disappointed if nothing happens and expects markets to decline rapidly. If central bankers do take some policy actions, it is key to figure out which ones are practical, which are merely symbolic, and which are just a dream and not an action. Who says what is just as important in some cases as what they say. When Merkel says something, we all need to listen. When anyone from the EU in Brussels says something, it will be the same thing they have said over and over and is completely self-serving and should be ignored. Anything Draghi and Bernanke might say is critical to listen to, because in this weird world, they have the most power to do something meaningful in a short period of time.
We all know that things are bad and getting worse. Goldman's Jan Hatzius take this opportunity to summarize all the various ways in which the global economy is floundering and once again floats the Goldman solution to everything: More QE, this time with a Bill Gross twist, pun and all, where the Fed again pulls a 2009 and goes for MBS: "Our confidence that the FOMC will ease policy once more at the June 19-20 meeting has also grown... Our baseline remains that Fed officials will purchase a mixture of mortgages and long-term Treasuries, financed via balance sheet expansion and possibly coupled with an extension of the forward guidance into 2015. This would be considerably more powerful than an extension of Operation Twist or other ways of changing the composition of the balance sheet, which are possible alternatives but are limited by the relatively modest amount ($200bn) of short-term paper that is still available for sale on the Fed's balance sheet." Well, if anything, global or Fed-based easing will most likely not come before the Greek June 17 elections - after all Greek confidence has to be crushed heading into the Euro referendum, and the only way to do this is by facilitating collapsing markets. So those hoping for a groundbreaking ECB announcement on June 6 will be disappointed. But June 20? That is fair game. We look forward to seeing PIMCO MBS holdings rise to a new all time high when the monthly TRF update is posted in a few days. Also look for something like this in the EURUSD if and when Bernanke surprises few at 2:15 pm on June 20.
The absence of the UK from today’s trade is particularly evident, with volumes remaining particularly light across all asset classes. Nonetheless, European equities are largely seen drifting higher with the exception of the DAX index, which is yet to move over into positive territory. News flow remains light with the highlight of the day so far being comments from the Troika, confirming that Portugal remains on track with its bailout program, and have confirmed that the country will receive the next EUR 4.1bln tranche in July. FX moves remain in a tight range, with EUR/USD looking relatively unchanged, with the USD index slightly weaker as the US comes to market. Looking ahead in the session, participants can look forward to US ISM New York and Factory Orders data as the next risk events of the session.
One word explains the overnight action: confusion. After opening down 10 points just shy of unchanged for the year following fearful Asian trade, futures have rebounded and are now almost unchanged courtesy of a UK-market which is offline for the next two days, letting Europe take advantage of another day of impotent rumor-mongering and wolf-crying, this time focusing on a 7pm press conference in which Merkel will say more of the same vis-a-vis Europe's non-existence Banking Union, but at least Europe will have closed at the highs. Not much on today's docket so expect more kneejerk reactions to rumors, which have a positive half-life measured in the minutes.
- Spain Seeks Joint Bank Effort as Pressure Rises on Merkel (Bloomberg)
- Banks Cut Cross-Border Lending Most Since Lehman: BIS (Bloomberg)
- Shirakawa Bows to Yen Bulls as Intervention Fails (Bloomberg)
- Merrill Losses Were Withheld Before Bank of America Deal (NYT)
- Investors Brace for Slowdown (WSJ)
- China's lenders ordered to check bad loans (China Daily)
- Obama Seeks Way Out of Jobs Gloom (WSJ)
- Noda Reshuffles Japan Cabinet in Bid for Support on Sales Tax (Bloomberg)
- China to open the market further (China Daily)
- Australian Industry Must Adapt to High Currency, Hockey Says (Bloomberg)
- Tax-funded projects to be more transparent (China Daily)
The past two weeks it was Spain, now it is back to Portugal, which overnight announced it is bailing out three banks to the tune of €6.65 billion. If at this point who is bailing out whom is becoming a confusing blur - fear not: that is the whole point. From AAP: "Portugal will inject more than 6.65 billion euros ($A8.49 billion) into private banks BCP and BPI, and the state-owned CGD to meet criteria established by the European Banking Authority. "In all, the state will inject more than 6.65 billion euros in these banks," though five billion euros is to come from an envelope worth 12 billion included in a financial rescue plan drawn up in May 2011, the finance ministry said. Portugal last year became the third eurozone country after Greece and Ireland to be bailed out, receiving an EU-IMF package worth up to 78 billion euros in return for a commitment to reform its economy and impose austerity measures." And surely that will be it, and Portugal will be fixed. Just like Spain was fixed, until someone actually did some math and found a hole up to €350 billion out of left field. Funny how those big undercapitalization holes just sublimate into existence, usually moments before client money is vaporized.
Contrary to what some may have been expecting, there was no coordinated grand central-bank bailout announcement over the weekend (and likely won't be one for a while). Instead we got promises of plans for a master plan, even as Soros gave Europe 3 months (or 2 months and 29 days as of today). Still, that has not prevented European stocks from rising to intraday highs driven by the EUR, and fears of a major snap-back rally in the record oversold currency as explained here yesterday. It also means that, as warned repeatedly, even the faintest hint of German capitulation will trigger buy programs. Such as this one just hitting the tape:
- MERKEL, BARROSO TO MAKE STATEMENTS AT 7 P.M. IN BERLIN
- EU SAYS BANKING UNION ON AGENDA FOR BARROSO-MERKEL MEETING
No clarification, nothing of substance: the mere suspense now is enough to make traders ignore that nothing is getting better. But at least for the time being nothing is (much) worse.