Archive - Oct 2012

Risk averse sentiment dominate the session, as market participants looked forward to the latest European finance ministers meeting who are due to discuss Spain’s finances, as well as Greece, which is yet to formalise spending cuts in order to receive the next aid tranche. Reports that China's economic growth is expected to have slowed to 7.5% in Q3 from 7.6% in Q2 weighed on basic materials and industrials stocks. The World Bank cut its 2012 GDP forecast for China to 7.7% from 8.2%; 2013 to 8.1% from 8.6%. Uncertainty surrounding the never-ending sovereign debt crisis in Europe weighed on financials, and in turn translated into lower 3m EURUSD cross currency basis. Peripheral bond yields rose, with Italy underperforming, ahead of the supply later on in the week. Going forward, given the Columbus Day holiday across the pond, trade volumes are expected to be below the average.

• Italy rejects need for EU control (FT)
• ‘Worst US quarterly earnings since 2009’ (FT)
• Chinese firm helps Iran spy on citizens (Reuters)
• World Bank cuts East Asia GDP outlook, flags China risks (Reuters)
• Foxconn factory rolls on in spite of strike (China Daily)
• Economic recovery ‘on the ropes’ (FT)
• Japan Tries Cars That Make the Mini Look Maxi (Businessweek)
• Euro Finance Chiefs to Give Positive Greece Statement, Rehn Says (Bloomberg)
• Romney attacks drones policy (FT)
• Euro zone mulls 20 billion euro separate budget (Reuters)
• Hong Kong’s Leung Seeks Turnaround With Economy Focus (Bloomberg)
• RBA Keeps Some Documents Private in Securency Bribe Probe (Bloomberg)
• India Inflation to Remain at 7.5%-8% Till Early 2013 (WSJ)

Usually on semi-US holidays such as today, when bonds are closed but equities left to the whims of vacuum tubes, equities do their mysterious ramp and never look back. So far today, however, this has failed to happen with futures at lows, driven by a noticeably weak EURUSD, which has traded down nearly 100 pips from the Friday late day ramp close, currently at 1.2940. It is unclear what has spooked the Euro so far, although all signs point to, as they did 2 months ago, the Spanish lack of willingness to throw in the towel and demand a bailout, thus easing conditions for everyone else if not for Spain PM Rajoy. Today's main event will be European finance ministers meeting in Luxembourg to discuss the recent Spanish economic transformation efforts as well as an attempt to accelerate banking cooperation and implement a banking regulator - something which is needed for the ESM to monetize bank debt, and something which Germany has been firmly against from day one. Additionally, a day ahead of Merkel's visit to German (where she will be protected by 6-7,000 cops), the ministers are likely to make a positive statement on Greece’s progress toward austerity targets, according to European viceroy Olli Rehn said. In other overnight news, German Industrial Production saw a -0.5% decline, which was modestly better than the -0.6% expected. Over in Asia, China reopened from its 1 week Golden Week hibernation with the SHCOMP down -0.56% to 20.76.42 following a small bounce in the China HSBC Services PMI to 54.3 from 52 in August, and with average house prices rising for a 4th month in a row, and even more repo operations by the PBOC, the result is that the market's ungrounded hopium for an immediate PBOC liquidity injection was taken away pushing regional markets lower.

Happy ColumBen Day 2012!

Moments ago the Venezuelan Electoral Council (one wonders if the term 'Hanging Chad' has a different meaning down there?), announced that with 90% of the votes counted, and an 80.4% turnout, the winner of 54.4% of the vote, and still reigning presidential champion, is Venezuela's Hugo Chaved. This is not surprising. What is quite stunning however, is that someone made an absolute killing in the Chavez reelection contract, which after trading in the 80s range (indicating an 80% probability of reelection), dipped moments ago to the low 20s, following speculation Chavez may be on the way out, only to soar to 99.9 as of the last trade. In other words, someone just made 5x their money on the Chavez vote in minutes, money which has most likely been well spent on Cuban Cohibas by now. Congrats.

Forget the nuances of taxes, abortion rights, social warfare welfare, religion, or entitlements. The following chart is all the average US Citizen needs to know in order to unflap that hanging chad in November...

Update: HUGO CHAVEZ WINS VENEZUELA RE-ELECTION, ELECTORAL COUNCIL SAYS. Contrary to exit polls as noted earlier, Chavez won 54.4% of the vote, with 90% of the votes counted, and a 80.4% turnout, according to the Electoral Council. At least the local APCs are fully stocked on Whoppers for the next few days.

While the world awaits with bated breath to find out if Hugo Chavez has lost the first "presidential" election in 14 years (an outcome with major implications for the crude market), which according to the latest exit polls he was trailing 48.1% to 51.3% to challenger Henrique Capriles, Diebold post-processing and hanging chad pro forma-ing notwithstanding, the question is what happens if there is a peaceful overthrow at the helm of the Latin American commodities powerhouse. And we use the term "peaceful" loosely: because the twitter stream is currently abuzz with a picture of tanks in Venezuela's capital as seen below. Hopefully they are merely waiting in line at the drive thru for the latest BK value meal and nothing more.

Spoiler Alert: They’re mostly still in office  (so much for building suspense).

On October 3, 2008, 338 elected officials (263 House reps, 74 Senators and 1 President) took it upon themselves to save America from certain financial doom by passing the Emergency Economic Stabilization Act of 2008, completely ignoring the will of the American people,  opting instead to fulfill a Thomas Jefferson prophesy:

“The end of democracy and the defeat of the American Revolution will occur when government falls into the hands of lending institutions and moneyed incorporations.” 
~ Thomas Jefferson

Back in July, when the news of the French foray into the "fairness doctrine" hit, and we learned of Hollande's plan to tax all those making over €1 million at a 75% tax rate, we said that "we are rotating our secular long thesis away from Belgian caterers and into tax offshoring advisors, now that nobody in the 1% will pay any taxes ever again." We should have also added that we are buying all the available long-dated call options in French real estate firms, with the imminent surge in luxury real estate dumping, once the French "1%" decide they want nothing to do with a regime that is hell bent on confiscating 75% of their annual cash flow at first, and slowly moving toward pocketing the balance of their assets (remember what we said in September 2011: that 30% global tax on all financial assets in a New Normal insolvent, and wealth redistributive world, is inevitable, and it is coming). Sure enough, the wholesale dump of luxury properties has now begun. AFP writes: "A flood of top-end properties are hitting the market as businessmen seek to leave France before stiff tax hikes hit, real estate agents and financial advisors say. "It's nearly a general panic. Some 400 to 500 residences worth more than one million euros ($1.3 million) have come onto the Paris market," said managers at Daniel Feau, a real-estate broker that specialises in high-end property." But that would mean that in the New Normal real estate is once again merely a credit-bubble dependent, flippable asset: not a long-term housing investment, but merely one in which the pursuit of the greater fool is all that matters (not news to anyone here, but certainly news to all those who actually believe that 'housing has bottomed').

Whether you believe China is an economic miracle - or a government-sponsored fraud; and can ignore the broken growth model or believe that the CCP can bailout the world; Michael Pettis, of China Financial Markets, provides a much-needed dose of reality for bulls and bears when it comes to the future of the global growth engine. After summing up (and laying-waste to) the three mainstays of China bulls' arguments: he asks the three toughest questions any China bull must be able to answer. Analogizing China's position perfectly he cites Mills: "Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works." Simply put, the bull argument cannot ignore the hidden bad debt.

With the S&P 500 once again testing multi-year highs, forward P/Es over 14 in a real-rate environment which suggests single-digit P/Es, abnormal micro-structure (mega-caps outperforming and high-beta fading in an up-tape), and a buy-the-f$$king-'dream' mentality soaking in everywhere, we take a close-up view of the earnings season reality that is about to come crashing down on multiple-expansion hopes. Following on from the five most ridiculous charts in US equity markets, these five 'facts' will be assuaged by every long-only manager as 'priced-in' - we suspect otherwise.

"Detroit is America's most violent city; its homicide rate is the highest in the country." Detroit Police department's "Enter At Your Own Risk" warning to citizens came at a rally yesterday as they fear under-staffing in the midst of what CBS reports as "the explosion in violent crime" leaves police in "deplorable, dangerous, and war-like conditions." While the union presses for more staff - or higher wages to compensate for the risk - we are sure Snake Plissken can be relied upon to rescue GM's CEO if he needs it.

Ueli Maurer, the Swiss defense minister, has been making coy statements about the European crisis getting ugly – as in really ugly, like needing armed troops to deal with it. This sounds more like Greece, where the rioting is regular and increasingly scary, than anything in Central Europe, but where the whole EU furball is headed does seem less than clear of late. The Swiss are famous for preparing for everything and having an absolutely huge army, relative to their population, to deal with any eventuality. It’s easy to dismiss the Swiss, since they are a tiny country whose military hasn’t actually fought anybody in a couple centuries. On the other hand, they managed to stay out of both of Europe’s catastrophic World Wars precisely though preparing for eventualities and maintaining a strong defensive capability. They’re clearly on to something.

Whether it is a fringe-blog pointing out the statistical un-possibility (here and here), or a previously well-respected 'elite' pointing out the suspiciousness (here), most of the general public (or their media-based oracles) prefer not to swallow the red pill of reality with regard Friday's data SNAFU. However, given the political (and economic) consequence of a single-number, Gallup has decided to weigh in on reality as they note "even though the Household survey tends to be very volatile, this decline seems to lack face-validity, particularly after the prior month's numbers" as they analyse why the household results should be discounted heavily. Critically, they, like us, suggest the 'unemployment rate' needs to be replaced as a measure of joblessness, suggesting a far simpler (and more transparent) measure - Payroll-to-Population - would avoid the 'adjustments' and 'biases' that are inherent in the BLS's bafflement. The Gallup measure suggests, as one would perceive using common-sense, that the real jobs situation was essentially unchanged last month.