Archive - Nov 2012

• Goldman Turns Down Southern Europe Banks as Crisis Lingers (Bloomberg)
• Euro Ministers Take Third Swing at Clearing Greek Payment (Bloomberg)
• Chamber Sidestepped in Obama’s Talks on Avoiding Fiscal Cliff (Bloomberg)
• Republicans and Democrats Differ on Taxes as Fiscal Cliff Looms (Bloomberg)
• Republicans bargain hard over fiscal cliff (FT)
• Catalan Pro-Independence Parties Win Regional Vote (BBG)
• Shirakawa defends BoJ from attack (FT)
• Run-off looms in Italy’s centre-left vote (FT)
• BOJ rift surfaces over easing as political debate heats up (Reuters)
• Barnier seeks ‘political will’ on bank union (FT)
• New BOJ Members Sought More-Expansionary Wording (Bloomberg)
• Osborne May Extend U.K. Austerity to 2018, IFS Says (Bloomberg)

Two immediate opinions on what yesterday's resounding pro-independence vote in Spain's Catalonia region means: a tactical one, with trading implications, from SocGen, and a strategic one, from European think tank Open Europe.

Another week begins which means all eyes turn to Europe which is getting increasingly problematic once more, even if the central banks have lulled all capital markets into total submission, and a state of complete decoupling with the underlying fundamentals. The primary event last night without doubt was Catalonia's definitive vote for independence. While some have spun this as a loss for firebrand Artur Mas, who lost 12 seats since the 2010 election to a total of 50, and who recently made an independence referendum as his primary election mission, the reality is that his loss has only occurred as as result of his shift from a more moderate platform. The reality is that his loss is the gain of ERC, which gained the seats Mas lost, with 21, compared to 10 previously, and is now the second biggest Catalan power. The only difference between Mas' CiU and the ERC is that the latter is not interested in a referendum, and demand outright independence for Catalonia as soon as possible, coupled with a reduction in austerity and a write off of the Catalan debt. As such while there will be some serious horse trading in the coming days and week, it is idiotic to attempt to spin last night's result as anything less than a slap in the face of European "cohesion." And Catalonia is merely the beginning. Recall: "The European Disunion: The Richest Increasingly Want To Fragment From The Poorest" - it is coming to an insolvent European country near you.

Why ever sell? Such is our markets where investors have been conditioned that they will not experience the pain of deep (any?) losses for any length of time.

Diapason Commodities' Sean Corrigan provides an insightful introduction to the critical importance of a market-set rate of interest and central banks' manipulated effect on the factors of production.

"Fixated with using their illusory ‘wealth effect’ to avoid a full realization of the losses we have all suffered in a boom very much of those same central bankers’ creation - or else cynically trying to achieve the same denial of reality by driving the income-poor into accepting utterly inappropriate levels of financial risk – they are destroying both the integrity and the signalling ability of those same capital markets which are the sine qua non of a free society."

As Ron Paul also confirms in the clip below "with artificial interest rates, we get an artificial economy driven by mal-investment leading to the inevitable bubbles" and while central banks hope for this 'created credit/money' to flow into productive means (Capex), instead it has (in today's case where QE is no longer working) created an investor-class demand for yield - implicitly driving management to forfeit growth-and-investment for buybacks-and-dividends.

As we approached the debt-ceiling debacle last year, there was much wailing and gnashing of teeth among talking heads and portfolio managers and indeed the latter actually started to put their money where there mouth was - i.e. they sold/reduced exposure to US equities. A year or so later and the fiscal cliff and debt-ceiling SNAFU is once again upon us but this time, while sentiment is just as negative, real speculative positioning is at multi-year record high longs. It would seem to us that all those holding out for a hero in Congress and some compromise to provide a liftathon in stocks are already all-in (as the two charts below indicate oh so clearly). One can only hope they are not disappointed as the 'money on the sidelines' appears to be more exposed than ever and unlike last year's massive net short positioning, there is no more squeeze ammunition left for the next leg.

If the US Dollar was not the world’s reserve currency and US Treasury IOUs were not the world’s preferred holding of reserves behind their own currencies and financial systems, the Treasury’s debt limit would have been done away with a long time ago. But the US Dollar IS the world’s reserve currency so the debt of the US government IS the underpinnings of the global financial system. That being the case, the system stands or falls on the continuing perception that Treasury debt paper is a viable form of “reserve” and that the debt of the US government will NEVER become “unsustainable”. An announcement by the US government that it was getting rid of any “limits” to its debt-generating capacity would put that perception at risk - quite possibly at grave risk. That is the reason why the debt limit remains - even though it has not been an impediment to ever increasing Treasury indebtedness for well over half a century. It is easy to laugh at the seeming absurdity of a Treasury “debt limit” and many people do. Take it away, however, and the fiction that sovereign debt is “sustainable” - let alone any “confidence” in its eventual repayment - would be MUCH harder to maintain. Absurdities abound in history, and the more abject the absurdity, the more tenacious it tends to be. Today, a US Treasury debt “limit” is a very necessary absurdity.

In “The Biggest Myth About the Fed,” David Beckworth, an assistant professor of economics at Western Kentucky University, suggests that the pessimists are wrong to be concerned about what Mr. Bernanke and Co. are up to. The notion that current benign market conditions are a reason for optimism sums up just how out of touch with reality most academic economists (and other alleged experts, including journalists-cum-forecasters who parrot this nonsense) are.

By this sort of logic:

• Mid-2005 was the right time to be optimistic on housing
• January-2007 was the right time to be optimistic on the banking sector
• The spring of 2007 was the right time to be optimistic on credit markets
• The fall of 2007 was the right time to be optimistic on global equity markets
• Mid-2008 was the right time to be optimistic on commodities
• This past September was the right time to be optimistic on technology stocks

Of course, we know how those all worked out (hint: not well).

Catalonia's exit polls confirm over two-thirds of votes will go to pro-independence parties that will likely push for a referendum to break away from Spain, which the central government will challenge as unconstitutional. The more-populous-than-Denmark region is home to car factories and banks that generate one-fifth of Spain's economic wealth (larger than Portugal's). The incumbent, Artur Mas, has converted to a more radical separatist bias since huge street demonstrations in September showed the will of the people. As Reuters notes, growing Catalan separatism is a huge challenge for Prime Minister Mariano Rajoy, who is trying to bring down painfully high borrowing costs by persuading investors of Spain's fiscal and political stability. Critically, the exit polls suggest the dominance of separatist parties will mean a referendum for secession within two years - leaving us asking the simple question: who will buy any Spanish debt, even fully backstopped by the ECB, if there is a real risk that in under two years, 20% of Spanish GDP will simply pick up and leave.

Egyptian stocks cliff-dived by their most since the Arab Spring in January 2011 as Morsi's reach-for-omnipotence sends concerned ripples through the nation that they have replaced 'military fascism' with so-called 'islamofascism'. Tensions are rising once again in Tahrir Square, but as Russia Today notes in this clip, the new regime is somewhat more heavy-handed than the previous one in its control of protesters. Critically, the Musilm Brotherhood's opposition forces, who have been quite divided recently, are joining to fight the common enemy as clashes between pro-Morsi and anti-Morsi forces are erupting. Perhaps just as worrisome as the social unrest is the fact that Egypt's Stock Exchange Director Said Hisham Tawfiq fears "Egypt announces bankruptcy within 3 months in the case of the continuation of the current situation," though we note Egypt CDS are near 16-month lows.

Visual Combat BAN-PSY 7

Two Fridays ago, just as AAPL was in danger of plunging below the absolute last support level of $500 after which freefall for it and the entire market begins, a truly unexpected deus ex machina appeared for those still clinging to long stock positions: politicians, in this case John Boehner and Nancy Pelosi, who held a press conference in which they defined the recently launched "Fiscal Cliff" talks as "constructive." In reality, this appearance was nothing but a photo opportunity for talking heads (as explained in "Risk Ramp on Boehner Banality"), and one which as Nancy Pelosi herself admitted later, served simply to halt what then looked like an assured free fall in the markets. Since then the ongoing rally in stocks and the EURUSD has been predicated on the "constructiveness" of the talks actually being real. Judging by the latest update from Reuters, Goldman will likely be right, if only in the short term. As Reuters admits, " U.S. lawmakers have made little progress in the last 10 days toward a compromise to avoid the harsh tax increases and government spending cuts scheduled for Jan. 1, a senior Democratic senator said on Sunday." That this update comes after the "big" market swoon into the recent lows from November 16, is certainly cause for alarm, because it means that at least one more violent market whipsaw to the downside will have to take place before there is any cliff progress to report.

With all bad news on the tape now having a suitable "explanation", be it a prior president, a tropical storm, the weather being too hot, the weather being too cold, the weather being just right, but never, ever someone actually taking blame for the fact that life is what happens when corporate CEOs (and sovereign presidents) are busy making "priced to perfection" plans. So it is with what is now a confirmed flop of a Black Friday, which according to ShopperTrak saw sales drop by nearly 2% to $11.2 from 2011, which in turn was a 6.6% gain over 2010 (and would be revised to far lower once all the refunds and exchanges to cash took place in the two weeks later). This occurred despite a 3.5% increase in retail foot traffic to 307.7 million store visits. The nominal drop in retail sales also occurred despite a nearly 1% increase in the total US population over last Thanksgiving, and a 2% Y/Y inflation. But fear not: the ad hoc excuse for this "surprising" loss in purchasing power is already handy: it is all Black Thursday's fault, or the latest idiotic attempt by retailers to cannibalize their own future sales by diluting the exclusivity of Black Friday, and which will force all retailers to follow the sovereigns in a race to the bottom, as soon every day will be the equivalent of Black Friday. But at least retailers have another 364 years worth of excuses for the conceivable future to excuse any and all store weakness. Next year: it's all Black Wednesday's fault.

For those still unsure why Spain PM Mariano Rajoy is fighting tooth and nail to avoid requesting an official activation of the ECB's SMP reincarnation: the OMT, which is a conditional bond buying program supposedly pari passu with the private market (but not really) here is an explanation. While Spain already requested, and received, a bailout of its banking system, which according to eronous analyses by firms such as Oliver Wyman will be at most €60 billion, and which according to others (such as us) will eventually end up costing orders of magnitude more once the green light for extortion is open for the New Normal modified vigilantes, said bailout would come with full conditions. Today we learn what a major condition of the first bank bailout tranche disbursement will be. It should come as no surprise to our readers- recall that in May when discussing the absolute lack of any actual austerity implementation we said, that "In fact, the epicenter of the current meltdown - Spanish banking - has seen only de-minimus headcount reduction over the past few years - so who is tightening their belts?" It seems someone at the Troika was paying attention, because as El Pais reported, European condition number 1 will be an epic bloodbath of pink slips come Monday, with Spanish banks expected to fire thousands of bank workers immediately and shut down 1,000 branches.