Archive - Jan 2012

• ECB Cash Averts ‘Funding Crisis’ for Italy, Spain (Bloomberg)
• Bailout talks in Greece ‘crucial’, Premier says (WSJ)
• Spain sees €50bn of new bank provisions (FT)
• Fed says expand Fannie, Freddie role to aid housing (Reuters)
• France’s Borrowing Costs Rise at Bond Sale (Bloomberg)
• Europe worries linger after French auction (Reuters)
• PBOC Suspends Bill Sale as Money Rates Rise Before Holiday (Bloomberg)
• Turkey warns against Shi'ite-Sunni Cold War (Reuters)
• New capital rules for banks ‘delayed to 2H’(China Daily)

Gold's fifth day of price rises is the longest rally we've seen in two months. Concerns about the solvency of European banks and sovereigns is overcoming the 'risk on' appetite of late 2011 and early 2012. The euro has fallen to 1.2840 USD and to €1,256/oz. Growing tensions with Iran including the European Union's preliminary agreement to ban Iranian oil, will fuel gold's  safe haven status for investors. Gold is trying to consolidate above psychological levels of $1,600/oz, £1,000 and €1,200/oz. The 200 day moving average is $1,631.60 which remains resistance. The intraday high hit $1,624.66, was gold's highest price since December 21. We expect gold demand to pick up ahead of the Chinese Lunar New Year, The Year of the Dragon, which begins on January 23.

UPDATE: EURUSD is moving to new lows for the day now at 1.2831

French 10Y bond spreads had widened almost 50% (from 100bps to 149bps) in the last week of trading ahead of this critical auction and the EURUSD is over 200pips lower. The auction results are in and it is not a total disaster but the bid-to-cover dropped significantly to its lowest since October 2010 and they missed their maximum target.

• *FRANCE SELLS TOTAL EU7.963B VS MAX TARGET EU8B OF BONDS
• *FRANCE SELLS EUR4.02 BLN 3.25% 2021 BONDS; YLD 3.29%
• *FRANCE SELLS EUR690 MLN 4.25% 2023 BONDS; YLD 3.5%
• *FRANCE SELLS EUR1.088 BLN 4.75% 2035 BONDS; YLD 3.96%
• *FRANCE SELLS EUR2.165 BLN 4.5% 2041 BONDS; YLD 3.97%
• *FRANCE SELLS 2021 BONDS AT AVE. YIELD 3.29% VS 3.18% DEC. 1
• *FRANCE 2041 BOND BID-TO-COVER 1.82 VS 2.26 AT DEC. 1 SALE
• *FRANCE 2021 BOND BID-TO-COVER 1.64 VS 3.05 AT DEC. 1 SALE

EURUSD is leaking a little lower and 10Y French spreads are widening modestly but the initial reaction is unimpressive for now.

UPDATE: EFSF said to get EUR4bn of orders for 3Y issue is providing some cover (at what rate? We offer to buy 1tn at 300% yield...)

With plenty of time left until France unleashes its supply (and a dismal consumer confidence print earlier), there is a plethora of notable market moves: Unicredit is halted down 7.9% (seems to be the culprit for the initial risk-off turn in Europe), but Deutsche Bank is down over 5% on liquidity problem rumors, EURUSD traded under 1.2850 at its lowest level since September 2010, 10Y Italian bonds have pushed well above 7% yields and 510bps spread to Bunds as Unemployment rises to 8.6%, Belgian 10Y yields are over 4.5% - highest in 3 weeks, and the rest of European Sovereigns are all leaking wider (near wides of the year). Risk assets (CONTEXT) broadly are under pressure but ES (the S&P 500 e-mini futures contract) is holding off yesterday's early morning lows for now. Commodities are all dropping fast with Gold (actually outperforming in this slide) back at $1615, Oil at $102.50, and Copper approaching $340. Treasuries are bid but trading in line with Bunds' movements so far in general. Some chatter of ECB buying in the last few minutes is stabilizing things a little here.

And once again, US taxpayers are asked to create high-level jobs overseas. Contenders: Germany, Japan, France, and China....

The fact is that the US has been on a slippery slope for decades, and it's about to go over a cliff. However, our standard of living, while declining, is still very high, both relatively and absolutely. But an American can enjoy a much higher standard of living abroad. On the other hand, if I were some poor guy in a poverty-wracked country with few opportunities, I'd want to go where the action is, where the money is, now. Today, that means trying to get into the United States. The US is headed the wrong direction, but it's still a land of opportunity and a whole lot better than some flea-bitten village in Niger...This is one of the advantages of studying history, because it shows you that things like this rarely happen overnight. They are usually the result of trends that build over years and years, sometimes over generations. In the case of the US, I think the trend has been downhill, in many ways, for many years. Pick a time. You could make an argument, from a moral point of view, that things started heading downhill at the time of the Spanish-American War. That was when a previously peaceful and open country first started conquering overseas lands and staking colonies. America was still in the ascent towards its peak economically, but the seeds of its own demise were already sewn, and a libertarian watching the scene might have concluded that it was time to get out of Dodge –

When it comes to the markets one can easily ignore the fact that the world is one big ponzi and things, as we know them, are coming to an end as long as the can can be kicked down the street at least one more time. In other words, without a hard deadline, there is nothing that can force change upon a system already in motion, no matter how self-destructive. Unfortunately, the clock in Europe is ticking as a deadline approaches, and somewhat poetically, the place where it all started is where it may end. In March Greece faces a redemption cliff: if by then the €130 billion promised to it by the Troika as per the July 21 second bailout, is not delivered, it is game over - first for Greece which will default, then for the ECB, which will be forced to write down holdings of Greek bonds, in effect wiping out its equity and credibility, and lastly, for the Euro, which will see a core member leaving (in)voluntarily.

The Santa rally into the year end was taken good advantage of by retail America. As ICI reports, in the week ending December 28, investors pulled another $3.988 billion out of domestic equity mutual funds (and $1.2 billion out of foreign equtiy funds). This represents the 19th consecutive outflow since a tiny inflow in mid-August, which if excluded would mean 36 consecutive weeks of outflows beginning in late April, or roughly the time when the market peaked. Altogether a whopping $140 billion has been redeemed from domestic equity-focused mutual funds, which compares to "only" $98 billion in 2010. Unfortunately for the permabulls, the rangebound market since then indicates that absent retail investors returning to the broken casino that is the equity market, the probability of another break out of previous high is slim to nil. In fact as the chart below confirms judging by how long the area chart has been negative (or in outflow territory), the only thing Joe Sixpack wants is to get his money out of the rigged ponzi scheme pronto. And the longer the market trades like an irrational, pustular (for all the 19 year old HFT Ph.D's out there) and outright rabid teenager, the more investors will just say no and park their cash in either taxable bond funds (another $1.2 billion inflow in the past week), in their mattress or in gold. And unlike the Fed, equity funds can not print their own money: given enough redemptions and the liquidation selling will be inevitable. It also means that following $140 billion in redemptions with the market ending unchanged, the leverage used by mutual funds, whose cash is already at record lows, must be at record levels. And we all know how "record leverage" situations end...

The S&P 500 closed practically unchanged today - recovering from decent selloff to a late-Europe-session low - amid volume that was over 30% lower than at the same time last year. Investment grade credit, the high-yield bond ETF HYG, and broad risk assets in general kept pace with ES (the e-mini S&P 500 futures contract) but high yield credit (tracked by the HY17 credit derivative index) outperformed considerably - moving to its best levels since late October. This disconnect appeared as much driven by technicals from HY-XOver (Long US credit vs Short EU credit) and HYG vs HY17 (a high premium-to-NAV bond ETF vs relatively cheap high yield spread index) trades as it was a pure risk-on trade. Elsewhere, the USD retraced only marginally the earlier gains of the day (with EUR hanging under 1.2950 by the close) as Treasury yields jumped 5-7bps more (30Y +14bps on the week now) as we can't help but notice the correlation between TSY weakness and EUR strength for a few hours this afternoon (repatriation to pay up for tomorrow's French auction?). Commodities were very mixed with Copper sliding notably (decoupling from its new friend Gold which rose and stabilized this afternoon over $1610) as Oil pushed higher all day (over $103) on Iran news and Silver leaked back this afternoon (under $29.5).

The Citi Economic Surprise indices have been useful indicators for finding short-term turning points in risk assets for many years. While not perfect, the mean-reverting nature is very instructive as to economist over- or under-optimism through the cycle. A recent SocGen strategy report noted that since the US rating downgrade, the majority of US macro data have beaten consensus - driving the surprise index up to cycle highs (from dramatically bad cycle lows). It appears that the US economic surprise indicator has peaked again and economists are currently upgrading their forecasts. We noted earlier, that markets are getting very sensitive to misses and this turn in 'economic data relative to over-optimistic forecasts' performance creates significant room for disappointment and implicitly, equity underperformance.

Someone gave Kashya Hildebrand very bad advice. She went on TV. Now there are more questions than ever.

There is literally no difference between Obama and a moderate Republican when it comes to the truly important policies governing the nation's insolvent finances, its predatory financial sector, its corrupt and fraudulent sickcare system or its sprawling Empire. Obama's policies have all aided and abetted existing Status Quo cartels and fiefdoms. He has changed absolutely nothing of import except further eroding civil liberties. President Obama can be charitably characterized as an ineffectual Demopublican. From those demanding more, then he can be accurately described as a well-meaning puppet of Wall Street and the rest of the Status Quo cartels and fiefdoms.

Whether its our old friend Binky from Deutsche or Tommy Lee from JPMorgan, the uber-bullish permanence of these well-paid serial extrapolators seems to pivot critically for 2012's forecasts on one thing: multiple expansion. On whatever empirical metric the Bill Millers of the world look at, stocks are cheap - no matter the changing dynamics underlying the entire system that seems so obvious to the rest of us. As JPMorgan notes, even assuming a 15% earnings decline (possible since in Q4 2011, the percent of negative S&P 500 earnings pre-announcements matched its 2001 and 2008 peak) the S&P 500 is priced at the cheap end of history. The answer to why measures such as Price-to-Book and Price-to-Earnings have adjusted down so considerably is, however, very evident when once considers where the profitability has come. In contrast to prior recovery cycles, current cycle profits have been driven significantly by very low labor compensation. David Cembalest says it best: "Given the fiscal, social and political issues this creates, it’s hard to pay a very high multiple for this kind of profits boom."