Archive - Feb 14, 2012

European (like US) stocks remain in a narrow range just above the cliff of the unbelievably good NFP print of 2/3. US and European credit markets have lost significant ground since then and it seems equity investors just want to ignore this 'uglier' reality for now. The BE500 (Bloomberg's broad European equity index) is unchanged from immediately after the NFP 'jump', investment grade credit is +10bps from its post-NFP tights, crossover (or high yield) credit is around 50bps wider, Subordinated financial credit is +50bps off its post-NFP wides at 382bps, and senior financial credit is an incredible 36bps wider at 225bps (by far the largest on a beta adjusted basis). The divergence is very large, increasing, and a week old now and perhaps most importantly as we look forward to LTRO Part Deux, LTRO-ridden banks have underperformed dramatically (40bps wider since 2/7 as opposed to non-LTRO banks which are only 10bps wider) - how's that for a Stigma? Some 'banks' have suggested the underperformance of credit is due to 'technicals' from profit-taking in the CDS market - perhaps they should reflect on why there is profit-taking as opposed to relying on recency bias to maintain their bullish and self-interest positioning as the clear message across all of the credit asset class is - all is not well.

And so the great American retail recovery continues being delayed following the third consecutive miss in headline retail sales in a row, despite what was ridiculous and erroneously touted as a record spending season. Well here come the 'product returns' as retailer margins shrink further into negative territory. Today's advance retail sales number came at 0.4% on expectations of a 0.8% increase, from a downward revised 0.0% (0.1% previously), which makes a mockery of both the car sales numbers in December which were the weakest link in today's retail sales, and of surging consumer credit as it proves beyond a shadow of a doubt that US consumers are now using credit cards for the most basic of staples, forget discretionary purchases! And while the number below the headlines was modestly better with ex autos and gas coming at 0.6% on expectations of 0.5%, the prior revision took December to a decline -0.2% from a previously unchanged number. In other words, expect today's ex cars and gas number to be revised to a miss next month as as the Census Bureau learns some key number fudging lessons from the BLS. Yet here is the punchline: there have not been three consecutive retail sales misses since... drumroll please... July 2008. And we all know what happened in the months following. For those who don't, here it is.

The US aircraft carrier Abrham Lincoln, which demonstratively passed through the Straits of Hormuz a month ago just to "test the waters", has now sailed out of the Persian Gulf following a several day stay in the 5th Fleet base in Bahrain. And unlike the previous passage, Iran decided to get up close and personal. As AP reports: "The American aircraft carrier USS Abraham Lincoln has passed through the Strait of Hormuz, shadowed by Iranian patrol boats. But there were no incidents on Tuesday as the Lincoln’s battle group crossed through the narrow strait, which Iran has threatened to close in retaliation for tighter Western sanctions. Several U.S. choppers flanked the carrier group throughout the voyage from the Gulf. Radar operators also picked up an Iranian drone and surveillance helicopter in Iran’s airspace near the strait, which is jointly controlled by Iran and Oman. The Lincoln entered the Gulf last month amid heightened tensions with Iran. It is scheduled to begin providing aiding the NATO mission in Afghanistan starting Thursday." Which mission would that be: the one where the US has withdrawn from? Luckily, this time no "hacker" managed to take over an Iranian boat and to send a few stray torpedoes in the Lincoln's general direction. Hopefully that continues. Also, it is unclear if the drones shadowing CVN-72 were the same that Iran with China's help, reverse engineered after the US drone fell in the middle of Tehran and did not self-destruct.

The bearish sentiment following Moody’s overnight catch-up move to S&P failed to have a long-lasting effect on sentiment today. Instead, better than expected German ZEW, together with another well bid Italian debt auction saw equities stage an impressive rally which in turn lifted indices into positive territory. As a result, Bund futures are trading back below the 138.00 level, while peripheral bond yield spread are generally tighter on the session. The risk on sentiment also boosted the energy complex which saw WTI crude futures climb back above 101.00 level (note: Brent March future expiry). Looking elsewhere, EUR/USD advanced above 1.3200 level after triggering stops. Of note, intraday option expiries are seen at 1.3220 and then at 1.3300 (large). USD/JPY is up after the BoJ announced that it will undertake additional monetary easing action and expand its asset-purchase fund by JPY 10trl, while touted buying by Russian names also supported the pair this morning.

There had been some hopes for Greece following the Q3 GDP number which slowed the decline in the country's economy when it dropped by just 5%, following drops of 8% and 7.3% in Q1 and Q2. These may have to be doused following a report that Q4 GDP came in at a disappointing -7%. As Athensnews reports: "The country's economic slump is headed towards a record annual plunge close to 7 percent in 2011, the fourth consecutive year of a deepening recession.  After an official confirmation by the Hellenic Statistical Authority (Elstat) on Tuesday that GDP dropped 7 percent year-on-year in the fourth quarter of 2011, the economy has shrunk by an average of 6.8 percent.  The latest quarterly contraction followed a slight slowdown of the depression in the preceding quarter, with GDP shrinking 5 percent due to the customary seasonal surge of tourist revenues in the summer." The full year drop was a record 6.8%, compared to the expected 6% projected in the 2012 budget. No comment there.

While all the focus has been on Greece in recent days, the global nature of the debt crisis came to the fore yesterday and overnight. This was seen in the further desperate measures by the BOJ and Moodys warning that the UK could lose its AAA rating. Some of us have been saying for some years that this was inevitable but markets remain myopic of the risks posed by this. Possibly the greatest risk is that of the appalling US fiscal situation which continues to be downplayed and not analysed appropriately. President Obama unveiled a massive $3.8 trillion budget yesterday and he is to increase Federal spending by 53% to $5.820 trillion by 2022.  The US government is projected to spend over $6 trillion a year by 2022.  Still bizarrely unaccounted for is the ticking time bomb of unfunded entitlement liabilities - Social Security and Medicare, which Washington continues to deal with by completely ignoring them. While Washington and markets are for now ignoring the fiscal train wreck that is the US. This will change with inevitable and likely extremely negative consequences for markets – particularly US bond markets and for the dollar.

The economic headlines return with Retail Sales, Imp-Ex price indices, Buisiness Inventories and more Fed speeches

Earlier today we got another indication that Europe's recession will hardly be a "technical" or "transitory" or whatever it is that local spin doctors call it, after the European December Industrial Output declined by 1.1% led by a whopping 2.7% drop by European growth dynamo Germany, which slid by 2.7% compared to November (which in turn was a 0.3% decline). This was worse than the Greek number which saw a 2.4% drop, however starting at zero somewhat limits one's downside. Yet even as the German economic decline accelerated, German ZEW investor expectations, which just like all of America's own consumer "CONfidence" metrics are driven primarily off the stock market, which in turn is a function of investor myopia to focus only on nominal numbers and not purchasing power loss - a fact well known to central bankers everywhere - do not indicate much if anything about the economy, and all about how people view the DAX stock index, which courtesy of the ECB's massive balance sheet expansion, has been going up. And if there has been any light at all in an otherwise dreary European tunnel, it has been the dropping EURUSD, which however has since resumed climbing, and with it making German industrial exports once again problematic. Which in turn brings us back to the primary these of this whole charade: that Germany needs controlled chaos to keep the EURUSD low - the last thing Merkel needs is a fixed Europe. It is surprising how few comprehend this.

• BOJ Adds to Monetary Easing After Contraction (Bloomberg)
• EU to punish Spain for deficits, inaction (Reuters)
• Obama, China's Xi to tread cautiously in White House talks (Reuters)
• Global suicide 2020: We can’t feed 10 billion (MarketWatch)
• Greece rushes to meet lender demands (Reuters)
• Obama Budget Sets Up Election-Year Tax Fight (Reuters)
• Foreign Outcry Over ‘Volcker Rule’ Plans (FT)
• Moody’s Shifts Outlook for UK and France (FT)
• France to Push On With Trading Tax (FT)

Below are the main overnight catalysts:

• ECB won’t take loss on Greek bond holdings - Benoit Coeure, member of the ECB’s executive board
• European Industrial Output Declines 1.1%, Led by German Slump
• Greece to Cut Ministry Spending for EU325 Million Gap, ANA Says - so... Greek politicians will fire themselves?
• EU spokesman Hughes speaks to reporters in Brussels, Says EU still expects Greece to take ‘certain measures’
• Spanish Banks’ ECB Borrowings Rise to EU133.2 Bln in Jan from 118.9 billion in December
• Banks deposited €510.2 bn with ECB, up from 507.9 bn yesterday
• Central Bankers Doubt Greek PSI Deal, Handelsblatt Reports
• BOJ Governor Says JGB Purchases Not for Financing Government
• Schaeuble Says EU Now Better Prepared Should Greece Default

The full series...[COFFEE NOT RECOMMENDED)

In a move that will surely shock, shock, the monetary purists out there, the Bank of Japan has just gone and done what we predicted back in May 2011, with the first of our "Hyprintspeed" series articles: "A Look At The BOJ's Current, And Future, Quantitative Easing" (the second one which discussed the imminent advent of the ¥1 quadrillion in total debt threshold was also fulfilled three weeks ago). So just what did the BOJ do? Why nothing short of join the ECB, the BOE, and the Fed (and don't get us started on those crack FX traders at the SNB) in electronically printing even more 1 and 0-based monetary equivalents (full statement here). From WSJ: "The Bank of Japan surprised markets Tuesday by implementing new easing policies and moving closer to an explicit price target, the latest sign of growing worries around the world about the ripple effects of the European debt crisis on the global economy. With interest rates already close to zero, the BOJ has relied in recent months on asset purchases to stimulate the economy. In Tuesday's meeting, the central bank expanded that plan by ¥10 trillion, or about $130 billion. The facility, which includes low-cost loans, is now worth about ¥65 trillion, or $844 billion." The rub however lies in the total Japanese GDP, which at last check was $6 trillion (give or take), and declining. Which means this announcement was the functional equivalent to a surprise $325 billion QE announced by the Fed. What is ironic is the market reaction: the BOJ expands its LSAP by 18% and the USDJPY moves by 30 pips. As for gold, not a peep: as if the market has now priced in that the world's central banks will dilute themselves to death. Unfortunately, it is only at death, and the failure of all status quo fiat paper, that the real value of the yellow metal, whose metallic nature continues to be suppressed via paper pathways, will truly shine.

Even Greek politicians scored higher.