Archive - Dec 2012

You know the drill: 45 minutes after the ECB announcement we get the presser. Will Draghi say anything catalytic? Most likely not: the only variable is whether or not Draghi sees a reduction in inflation and growth (despite all the recent irrational euphoria from various sellside desks), leaving the door open for negative deposit rates. Remember: the "bazooka variable" - the OMT - is now solely in Spain's, and out of the ECB's, hands now.

*DRAGHI SAYS ECB CUT GROWTH FORECASTS, SEES `DOWNSIDE RISKS'
*DRAGHI SEES WEAK GROWTH EXTENDING INTO 2013 BEFORE RECOVERY
*DRAGHI SAYS GOVTS MUST REDUCE FISCAL STRUCURAL IMBALANCES
*DRAGHI SAYS FISCAL POSITION IN U.S. MAY DAMP CONFIDENCE LONGER

Why does the Big Media other than WSJ refuse to report on the TAG subsidy grab by the largest banks?  

LOL!?

Any fringe hopes that the ECB may cut its discount rate to negative were just dashed as Goldman, pardon the ECB, decided to keep rates unchanged, largely as expected.

Yesterday we presented Goldman's first 3 Top Trades for 2013 as they come out, while also noting Goldman's recent disfatuation (sic) with gold. Today, we present Goldman's 4th Top Trade for 2013, which is, drumroll, to go long Spanish Government Bonds, specifically, the 5 year, which should be bought at a current yield of 4.30%. with a target of 3.50% and a stop loss of 5.50%. This reco comes out after the SPGB complex has already enjoyed unprecedented gains - but not driven by economic improvement, far from it - but merely on the vaporware threat of ECB OMT intervention. Of course, once the "threat of intervention" moves to "fact of intervention", everything will promptly unwind as it always does (QE was far more potent as a stock boost when it was merely a daily threat: the market's peak not incidentally occurred the day after Bernanke dropped his entire load: one simply can't move beyond infinity). And with Spain's massive bond buying cliff in Q1 2013, the days its bailout could be postponed are coming to an end.

• MSM discovers window dressing: Fund Managers Lift Results With Timely Trading Sprees (WSJ)
• White House Unyielding on Debt Limit (WSJ)
• Obama, Boehner talk; Geithner prepared to go off "cliff" (Reuters)
• Republicans urged to resist tax rises (FT)
• China looms large over Japanese poll (FT)
• As predicted here two months ago, Greek Bond Buyback Leads S&P to Cut to Selective Default (BBG)
• Japan opposition LDP set to win solid election majority – polls (BBG), but...
• Japan Opposition LDP’s Main Ally Cautions Abe on BOJ Pressure (BBG)
• U.S. and Europe Tackle Russia Trade (WSJ)
• King Seen Maintaining QE as Osborne Extends Fiscal Squeeze (BBG)
• Syria pound fall suggests currency crisis (FT)
• Irish budget seeks extra €3.5bn (FT)
• U.K. Extends Cuts Due to Poor Outlook (WSJ)
• ECB Seen Refraining From Rate Cuts as Yields Sink on Bond Plan (BBG)

A consolidative tone threatening to emerging in the foreign exchange market, as prices churn awaiting not only today's press conference following the ECB meeting, but also tomorrow's US employment data and prospects for an expansion of QE3+ at next week's FOMC meeting. 

Five major central banks were to meet this week, with only the Reserve Bank of Australia poised to act.  They did cut rates, but the accompanying statement did not tip the hand of the next move.  The market took advantage of the jobs data's favorable optics to reduce the likelihood of a follow up cut in February to about 50/50.  

The details of the employment report were really weaker than it appeared.  The 13.9k increase in jobs is misleading as it was driven exclusively by part-time jobs.  Full time work actually fell 4.2k, the first decline in four months.  The unexpected decline in the unemployment rate to 5.2% from 5.4% in Sept and Oct was a function of a decline in the participation rate.  The Australian dollar has traded now (barely) on both sides of yesterday's range.  Offers in the $1.05 area continue to slow the Aussie's ascent.

While trading during US hours is all about the Cliff On/Cliff Off debate, the rest of the world is simple: the overnight session begins (and largely ends) with whether or not China has done another reverse repo (if yes, then PBOC will not lower rates, and inject unsterilized billions into the market) and whether the Shanghai Composite is up or down. Last night, after jumping by 3% the session before, it was down 0.13% to 2029. Was this it for the great Chinese "bottom?" Japan may or may not figure in the equations, although with the 10 Year future just hitting a record overnight, it is amusing to see how the bond complex is indicating record deflation just in time for the market to anticipate a surge in inflation. Ah, the joys of frontrunning central planning's monetization of government bonds. And then we move on to Europe, which is a whole new level of basket case-ness...

Insider traders and penny stock hucksters beware...

The 8 day mini war between Israel and Gaza has come and gone and any attempts at provoking a wider regional conflict, one involving Iran (if indeed this was the intention), have failed. Which means the fallback plan - Syria - is back in play. And sure enough, as both the most recent naval map update, which shows a US aircraft carrier and a big deck amphibious warfare ship, both of which house thousands of troops and numerous offensive aircraft, and an RT news flash, indicating that thousands of troops have amassed near the Syrian shore confirm, the time for a US invasion may be near. The alibi? "Chemical weapons" of mass or non-mass destruction. In other words the Iraq playbook all over again.

It’s estimated that the pound sterling made up around 64% of the world’s official FX reserves in 1899. It had fallen to about 48% by 1913.  As you'll likely glean from the graphic below, Addogram notes that historic recurrence seems to like operating in base-100 when it comes to reserve currencies. The dollar's share of global (official allocated) FX reserves has fallen from 72% in 1999 to 62% at present. As we have pointed out before - reserve currency status doesn't last forever...

While real wages dropped 1.4%

On December 4th, 2012 at 47 minutes and 13.1 seconds after midnight, 2,035 February Gold Futures contracts GCG3 took the market down $10 as fast as the exchange could execute the order. This invisible hand that decided that that was the perfect time to execute a trade for over 200,000 ounces and $345mm notional of gold is exposed in oh-so-visible a manner by Nanex's eagle-eyed millisecond-by-millisecond charts below. As the day wore on, there were more of these sudden 'unexplained' price moves. Cue 'Twilight Zone' music...

Sluggish global economic growth means many public companies will have to rely on mergers and acquisitions to generate earnings growth in 2013 and beyond (FCX aside that is).  ConvergEx's Nick Colas notes that the academic discussion of whether such a strategy adds “Real” value to shareholders has shifted in recent years.  From an unequivocal “No, never…” to a more qualified, “It really depends,” this discussion will grow more critical as industries from financial services to manufacturing to commodity producers evaluate their long term prospects.  The key to this question, at least to Colas' thinking, is in the analysis of barriers to entry/exit and true economies of scale.  The right answer to the “Does M&A add value” question is much more about business strategy and competitive analysis than any blanket statement about the merits of buying or selling assets. In summary, M&A is now simply much more important to corporate strategy than at any point in the last 30 years; over the next 5-10 years M&A activity will be increasingly necessary to keep the tailwind of growth in almost every sector of the economy and capital markets. There’s just no other way to grow (though shareholders increasingly want that 'cash' in dividends or buybacks - and not growth!)