Archive - Oct 18, 2012

Forget the day-to-day images of riots and protests, the truth on the ground in Greece is far harsher. Just as we warned numerous times, social unrest is escalating rapidly and the extremists are gaining strength and power. One of Greece's neo-nazi Golden Dawn party MPs says "there is already civil war, and Greek society is ready - even though no-one likes this - to have a fight." The BBC's Paul Mason reports on recent demonstrations surrounding the performance of a controversial play as tensions escalated and the Golden Dawn party "de-arresting" demonstrators - pulling them from police detention, as the police do nothing. The somewhat shocking clip below points out the incredible reality that is occurring on the streets of Greece - even as EU leaders claim Greece was not a topic at the EU Summit. The people ask "if we are in a democracy or a dictatorship?" and Golden Dawn (which has 18 seats in parliament) proclaims "On the one side there will be nationalists like us, and Greeks who want our country to be as it used to be; and on the other side illegal immigrants, anarchists and all those who have destroyed Athens several times." As Mason concludes: the social and political outcome of the IMF and EU austerity program, and of the implosion of mainstream politics in Greece, looks like a catastrophe for democracy. "Europe must do something if they don't want a revival of the Third Reich again"

The ridiculous economic data continues. Those looking at the headline Philly Fed, which jumped from -1.9 to 5.7, trouncing expectations of 1.0, such as the NY Fed's Simon Potter are pushing buy buttons left and right. And yet anyone who takes the 2 minutes to look at the internals, such as the collapse in the Number of Employees Sub-Index, which tumbled from -7.3 to -10.7 (the lowest since September 2009), the decline in the Average Employee Workweek, or the surge in Prices Paid from 8 to 19, double the change in Prices Received which means plunging corporate profits, or the ever critical New Orders which declined from 1.0 to -0.6, and one can see why this is a report only an Econ Ph.D-cum-Central Planner can love. Finally adding insult to injury, is the 6 month forecast, which unlike all other regional Fed diffusion indices, collapsed by half, from 41.2 to 21.6, as the Hopium at least in the city of brotherly mugging appears to be running out. Stocks kneejerk in every possible direction hoping the Fed will provide a direction.

As the Euro infection commences, is it time to profit?

On this day (+1) in 1987 (that's 25 years ago, if you are burdened with a graduate degree), the NYSE had one of its most dramatic trading days in its 220 year history.  It suffered its largest single day percentage loss (22%) and its largest one day point loss up until that day (508 points). No one who was on the floor that day will ever forget it. While it was an unforgettable single day, there were months of events that went intoits making. The first two-thirds of 1987 were nothing other than spectacular on Wall Street. From New Year to shortly before Labor Day, the Dow rallied a rather stunning 43%.  Fear seemed to disappear. Junior traders laughed at their cautious elders and told each other to "buy strength" rather than sell it, as each rally leg was soon followed by another. One thing that also helped banish fear was a new process called "portfolio insurance". It involved use of the newly expanded S&P futures. Somewhat counterintuitively, it involved selling when prices turned down.

Translation: Goldman is now buying Brent from its clients, aka Goldman 101.

Homework favors the wealthy. This is the position that the increasingly imbecilic President of France is taking in proposing a ban on homework as part of a series of educational reforms. As ABC reports, Hollande sees "education as a priority" but work should be done during school hours rather than at home "in order to establish equal opportunities." But before the children of France rejoice, Hollande is unlikely to garner their future votes, as his proposal also looks to extend the French school week to nine half-days a week to be spread over four, five, or six days (as opposed to the current four days a week with Wednesdays off). Though we may sneer at this oh-so-socialist ideal of 'sharing' the homework load into the school-day, it is perhaps noteworthy that the US still lags France in Math (US 31st in the world vs France 22nd).

So much for last week's aberration initial claims print of 339K (revised higher of course to 342K). With expectations of an increase to 365K, the DOL just came out with a whopper of a miss, the largest in three months, at 388K, an increase of 46K in one week, which was also the highest print in three months. Remember: this number will be revised to 391K next week. So much for single print indicative of a recovery. As the chart below shows, the rate of change was a 13.45% from last week: the highest in five years! So far, there has been no explanation from the BLS or DOL for last week's outlier print. And no, last week's print was not due to  California, which the DOL reported just decreased by 4,979 in the week ended Oct 6, not the required 49K. What is however worse, is that it is becoming increasingly clear that nobody at the DOL knows what is actually going on following a statement by the Labor Dept that "it appeared that state-level administrative issues were distorting the data", and numbers are simply picked out of thin air. Finally, in truly amusing news, those on Extended Benefits have once again started to rise, after dropping to virtually 0 following expiration of state benefits. 

It just refuses to get any better in Spain, whose banks are now aggressively marking down real estate to something resembling fair value. Last month we reported that Spanish bad loans jumped by the most ever, rising by over 1% to just under 10%. Today, last month's number was revised even higher to 10.1%. But the worst news is that the August bad loan total just hit a fresh record of €178.6 billion, or 10.5% of the total €1,698.7 billion in bank loans. Making things worse is that the primary bank funding lifeline - deposits - continues to flow out. That both Spain, and its banking sector are utterly insolvent, is clear to anyone but Oliver Wyman and those who have bought SPGBs (although granted the latter are merely hoping for a quick flip). And the ECB of course. Indicatively, as a % of GDP, this would be equivalent to roughly $2.7 trillion in US bank loans going sour (for more on the collapse of Spanish banking, and the laughable stress test whose worst case has already become the baseline, read here). The chart summarizing this staggering statistic is below.

Wall Street is doing some wild and wacky things. UBS has just launched a 16-times-leveraged MBS ETN. The ETN, called the ETRACS Monthly Pay 2x Leveraged Mortgage REIT, offers double the return of the Market Vectors Global Mortgage REITs Index – itself an investment vehicle 8x leveraged to mortgage-backed securities. The idea appears to be that with the Fed acting as a buyer-of-last-resort that prices will take a smooth upward trajectory and that 16:1 leverage makes sense for retail investors as a bet on a sure thing.

The World Gold Council issued a summary on gold’s price performance in various currencies during the third quarter.  The report looks at influences that monetary policies and central bank actions have on gold. Gold’s 11.1% USD/oz return in 3Q was in response to central bank stimulus measures. Volatility decreased and generally correlated with other assets. Central banks announced a continuation of their unconventional monetary policy programmes in Q3 which mainly are used to lower borrowing costs and supporting financial markets.Financial assets have responded to central bank policy announcements, but gold's reaction has been the strongest. There is a consensus that these policies drive investment into gold purely due to inflation-risk impact. The World Gold Council believes that there are not one but four principal factors that provide further support to the investment case for gold: Inflation risk, Medium-term tail-risk from imbalances, Currency debasement and uncertainty, and Low real rates and emerging market real rate differentials.

• Germany will pay Greek aid (Spiegel)
• Spain Banks Face More Pain as Worst-Case Scenario Turns Real (Bloomberg)
• China’s Growth Continues to Slow (WSJ)
• Executives Lack Confidence in U.S. Competitiveness (WSJ)
• Poor Market Conditions will See 180 Solar Manufacturers Fail by 2015 (OilPrice)
• Wen upbeat on China’s economy (FT)
• Gold remains popular, despite the doubts of economists (Economist)
• Armstrong Stands to Lose $30 Million as Sponsors Flee (Bloomberg)
• IMF urges aid for Italy, Spain but Rome baulking (Reuters)
• EU Summit Highlights Financial Divide (WSJ)
• FOMC Straying on Price Target, Former Fed Officials Say (Bloomberg)
• Putin defiant over weapons sales (FT)

Same old, same old from the country whose future is supposedly being decided at today's latest (we have now lost count) Eurosummit. Spoiler alert: nothing will be decided until after the US election. From AP: 'Violence has broken out at an anti-austerity demonstration in Athens during a 24-hour general strike, with youths pelting riot police with petrol bombs and rocks. Riot police responded with tear gas to disperse the troublemakers during the clashes Thursday in the capital's central Syntagma Square, as thousands of people marched through the streets. Greek workers are holding their second general strike in a month, protesting new austerity measures the government is negotiating with the debt-ridden country's international creditors." Too bad "rioter" is not a Full Time Equivalent employment position according to the Greek BLS. Or at least not yet.

Today Europe awakes to yet another Eurozone summit, one at which such topics as Greece, Spain, the banking union project or a economic/budgetary union will have to gain further traction, if not resolution. In fact Greece could hardly wait and has already launched it latest 24 hour strike against austerity. The same Greece which demands a 2 year, €30 billion extension from Europe to comply with reform, a move which Europe has/has not agreed to as while the core have said yes to more time, all have refused to fund Greece with any more money. Alas the two are synonymous. As SocGen predicts unless there is some credible progress today, all the progress since the September ECB meeting, which has seen SPGB 10 Year yields decline from 690 bps to sub 550 bps, may simply drift away. And as everyone knows, there is never any progress at these meetings, except for lots of headlines, lots of promises (the Eurozone June summit's conclusions have yet to be implemented) and lots of bottom line profits by Belgian caterers. Elsewhere, Spain sold 3, 4 and 10 year bonds at declining yields on residual optimism from the pro forma bailed out country's paradoxical Investment Grade rating. In non-hopium based news, Spanish bad loans rose to a record 10.5% in August from 10.1% previously while the oldest bank in the world, Italy's Banka Monte dei Paschi was cut to junk status. All this is irrelevant though, as no negative news will ever matter again in a centrally-planned world. Finally the only real good news (at least until it is revised)came out of the UK, where retail sales posted a 0.4% increase on expectations of a 0.2% rise from -0.2%.

This week the US, UK, France, and a few Middle Eastern countries are conducting naval exercises in the Gulf of Persia to practice clearing mines that Iran, or other groups may place around the Straits of Hormuz in an attempt to disrupt the movement of oil tankers in the region. Mohammed Ali Jafari, the commander of the Islamic Revolutionary Guard Corps, said that the “exercise is a defensive exercise and we don't perceive any threats from it. We are not conducting exercises in response.” Yet this is not the impression that is given. Just yesterday, according to the official IRNA news agency, upon the direct orders of Supreme Leader Ayatollah Ali Khamenei Iran launched a refitted Tareq-901 submarine and a Sahand destroyer into the Gulf from the port of Bandar Abbas.