Archive - 2011

Year end markets are infamous for distorting price action as illiquidity, bank and company window dressing, and risk paring tends to characterize investment decisions and valuation quirks.  In this market climate it can be challenging to differentiate between fundamental moves versus liquidity provisioning and the pursuit to flatten books and race to the finish line.  In the above spirit, typical year end position imbalances are suspicious as are global finance needs and the apparent dysfunctionality of funding market functioning and an information arbitrage between different markets in understanding of such minutia...The circular nature of worsening emerging and global fundamentals, lower sovereign growth prospects, associated financing challenges, lower asset valuations, regulatory cushions to such catalyzing asset sales, bank balance sheet illiquidity and, hence, funding stains tis the season.  Just a DAILY comment to elevate the ebb and flow adjustments of markets and policy makers to such linkages.   

With a sub-2% 10Y and a sub-3% 30Y - the sky is black

And here we go:

• Initial Claims: 366K on Expectations of390K, down from 381K, lowest since May 31 of 2008; Seasonally unadjusted dropped somehow by a ridiculous 95,506. All those thousands of bankers being laid off must not be people - that explains it?  And the stunner: those added to extended benefits was a whopping 332K, an unprecedent large number for a weekly change. (Source)
• Continuing Claims: 3603K vs. Exp. 3637K, up from 3583K. (Source)
• PPI November: 0.3% vs. Exp. 0.2% (Prev. -0.3%), inflation picking up (Source)
  
• US Empire Manufacturing: 9.53 vs. Exp. 3.00, up from Prev. 0.61; New Orders up from -2.07 to 5.10; And bad news for margins: Prices Paid up (from 18.29 to 24.42) - Prices Received down (from 6.10 to 3.49); Number of employees up, average employee workweek down (Source)
• US Current Account Balance Q3: Q/Q -110.3bln vs. Exp. -108.5bln (Prev. -118.0bln, Rev. -124.7bln) (Source)

A friend of mine took note recently that a large portion of activists involved in the Liberty Movement had hit extremely hard times, or had been struggling financially even before the general economic collapse began to take hold.  He asked me my theory on why it was that so many of us are always so broke.  I could only relate that it is almost always the working class poor in any society that first sees the effects of a corrupt government and a faulty economic system.  Those who legitimately hold to the principles of self sustainment, and fair play, are usually the first to be stabbed in the back by the establishment, and so, they are the first to become politically active against it.  That is to say, sometimes we have to lose almost everything before we are able to see the bigger picture.  While I consider this fact a source of solace in these extraordinarily hard times, it still does little to put food on the table, or survival gear in the bug-out-bag. The overall consensus within the prepper community is that survival planning is expensive, and yes, it certainly can be.  Another consensus is that you “get what you pay for”; also true...to a point.  My belief is that while no prepping model is free of expense or of quality concerns, perhaps there is a middle road that activists with thin wallets can take which will provide solid gear for less money, and that will serve most of the functions of high-end gear that is ten times as expensive.  Let’s examine a foundation list of those items that can help get you started now….

• A downbeat BoJ's Tankan report, together with a below 50 reading for HSBC Chinese manufacturing dampened sentiment during the Asian session
• ECB's Draghi said intensified financial market tensions continue to dampen economic activity in the Euroarea and the outlook remains subject to high uncertainty
• According to reports, the ECB is planning to introduce new capital rules for banks to prevent aggressive deleveraging and a credit crunch
• The SNB kept its 3-month LIBOR target rate unchanged at 0.00% as expected, and said it will stick to its 1.2000 EUR/CHF floor

Today at 8:30 am at least one HFT vacuum tube will short a filament as we get not one, not two, not three, but four concurrent economic data releases at the same time. And then there is a whole bunch of other stuff later in the day... which is not to say that the 3pm rumor will not determine the outlook of the day.

Many are doing their damnedest Ph.D.-best to somehow fuse economic theory and technical charting, and state that a breach of the 200 DMA in gold is indicative of imminent price collapse. And then there are facts. Such as this nugget from Stone McCarthy which looks at previous episodes of the 200 DMA breach and concludes based on severity of trendline penetration compared to average, that "this is just one reason we see strong potential for a rebound as participants reduce short exposure." So much for technicals.

• Merkel Mired by Woes That May Deter Crisis Effort (Bloomberg)
• Trade wars accelerate: China set to tax US-made car imports (FT)
• Bernanke Tells Senators Federal Reserve Has No Plan to Aid European Banks (Bloomberg)
• Cameron rules out putting extra €30bn into IMF (FT)
• Inside Wukan: the Chinese village that fought back (Telegraph)
• Dems Moving From Insistence on Millionaire Tax (Bloomberg)
• Republicans face voting shake-up (FT)
• Nicolas Sarkozy: David Cameron's like a child (Metro)
• China FDI flows stumble in November as U.S. drags (Reuters)
• Putin Ally Resigns Russian Parliament Post (WSJ)

According to Bloomberg's TJ Marta, market sentiment this morning is "ambivalent with modest, mixed price action on uneven developments in global growth and the EU debt crisis." In addition to the Spanish bond auction, here are the other key developments.

We start off the morning with a key bond auction out of Spain that came rather mixed as only one out of three issues priced better than the previous auction, and two out of three had lower bids to cover; yet somehow it was considered a smashing success because a total of €6.03 billion was sold more than the €3.5 billion targeted. First the details: Spain sold €2.45 Bn of 3.15% Jan'16s, at a worse bid/cover of 2.00 vs. Prev. 2.83, and a better yield of 4.023% vs. 5.276% previously; €2.18 Bn, 4.00% Apr'20, at a worse bid/cover 1.50 vs. Prev. 2.01 a worse yield of 5.239% vs. Prev. 5.006%, and lastly €1.4 Bn, 5.50% Apr'21, at a better bid/cover 2.20 vs. Prev. 1.76, and a worse yield 5.545% that was again higher than the previous 5.433%. However, in this world of living bond auction to bond auction, this is considered a smashing success and the result is 5 point rush higher in S&P. And here is the official party line courtesy of Reuters: "Spanish bond yields fell on Thursday, narrowing the spread over German Bunds after the country surprised markets by selling far more than the amount targeted in its last bond sale of the year, although its cost of borrowing remained close to euro-era highs.Bunds were steady but are firmly supported ahead of year-end by investors seeking safer liquid assets as markets question euro zone leaders' ability to find a lasting solution to the debt crisis now in its third year. Spain sold just over 6 billion euros of five- and 10-year paper, compared with a targeted maximum of 3.5 billion euros, taking issuance this year up to its target of 94 billion euros, according to Reuters data. It paid a yield on the 10-year paper maturing in 2021 of 5.545 percent. Spanish 10-year government bonds trading in the secondary market were 17 basis points lower on the day at 5.57 percent, leaving the spread over Bunds at 363 basis points." And just like High Yield issuers, the fate of Europe now relies on market windows: which means that while bond auctions such as today will "succeed", a bond auction scheduled on a day when the market crashes will fail with almost certainty. And while HY issuers can easily pull a bond issue due to "market conditions", countries do not have that luxury, and what happens next nobody knows.

To anyone who doubted that the gloves are now fully off between France and Britain, we bring you exhibit A: Speaking in an interview with local newspaper Le Telegramme de Brest to be published later on Thursday, Bank of France head and ECB member Christian Noyer said that a downgrade of France's AAA credit rating would not be justified and ratings agencies are making decisions based more on politics than economics and questioned whether the use of ratings agencies to guide investors was still valid. "In the arguments they (ratings agencies) present, there are more political arguments than economic ones," said Noyer, the head of the Bank of France and a member of the ECB's governing council. "The downgrade does not appear to me to be justified when considering economic fundamentals," Noyer said. "Otherwise, they should start by downgrading Britain which has more deficits, as much debt, more inflation, less growth than us and where credit is slumping." The bolded sentence confirms two things: i) that the Nash equilibrium in Europe is now fatally broken, because when you have the head of one central bank doing all he can to throw another central bank under the bus, that's pretty much game (theory) over; and ii) when he said that "the agencies have become incomprehensible and irrational. They threaten even when states have taken strong and positive decisions. One could think that the use of agencies to guide investors is no longer valid." it proves that this amateur has no more understanding of basic finance than your generic Reuters blogger, both of whom apparently fail to comprehend that there are several hundred thousand bond and loan indentures in the real world, not the world of "S&P has no credibility so ignore it", which are loaded with covenants discussing springing liens, rating indexed interest levels and collateral thresholds, all of which are based on a sovereign and corporate rating, and all come into play in a completely unpredictable way (hint AIG - the reason why AIG imploded was because a rating agency downgrade unleashed a terminal margin call) when there is a rating downgrade. Such as that of France in a few hours to days top.

And now a trade war has broken out. Politicians, have a word with your corporate sponsors.

Congress just passed the National Defense Authorization Act in a 283-to-136 vote. 190 Republicans and 93 Democrats voted for; 43 Republicans and 93 Democrats voted "against." Prepare to be arrested, without charge, simply because someone "up there" believes you engage in "terroristy" stuff. Good luck proving them wrong.

Everyone still dazed and confused by today's market rout will be delighted to know that Goldman is none the wiser... Or rather, Goldman knows precisely the reason why the market tumbled.