Archive - Mar 1, 2012

The problem for the Fed is that interest rates are already zero, and playing around with bonds and buying more mortgages (the Fed already owns $1 trillion) is ultimately pushing on a string: the Fed can't force all the free money into productive investments, nor can it force banks to lend or consumers to spend. The cliche is "don't fight the Fed;" there is no need to "fight the Fed" because they're busy self-destructing, and all we have to do is watch. Maybe the market will follow Apple in a trajectory to the moon here. If it doesn't, a variety of other models suggests the wheels may fall off the "growth and rising profits forever" story and the market will decline to test recent lows or even hit new lows.

Somehow or another, our earlier joke that the ISM should beat the highest Wall Street estimate quickly became the whisper number, which was to be expected in the aftermath of yesterday's comparable Chicago PMI action. Which is why when the final ISM came at a whopping miss of 52.5, on consensus of 54.5, and down from 54.1, the market was less than happy. It gets worse: while the bulk of major ISM index components dropped in February, with PMI, New Orders, Production, Employment and Deliveries all down (Inventories unch), it was the scariest component that posted a major jump as Prices soared +6 to 61.5, the highest since June. And with Exports and Imports both improving, this proves that already in February rising gasoline prices started impairing US manufacturing. But don't tell that to the cheerleaders: because who was in the top spot of Wall Street "forecasters" if not Joe LaVorgna with his estimate of 56.0 for the ISM. Regardless, expect market sentiment to immediately shift to one that despite what Bernanke said less than 24 hours ago, this miss is an immediate green light for QE3 and the market should close at or near 14,000. Unless, of course, the vacuum tubes realize the minor detail that when David Tepper went "Balls to the Wall" and both bad news and good news meant stock upside, WTI was $85. It is $108 and rising now.

So, yesterday it was revealed that both Goldman and JPM had about 145 billion of “gross” notional outstanding on CDS related to the PIIGS. That means they each had roughly 145 billion of purchases and sales. They spoke about various netting agreements that makes the real number lower. They also mentioned with collateral and on a mark to market basis, the real exposure is far lower. Fine, though I wonder why they don’t execute the “master” netting and get the gross notionals down? Wouldn’t that help the system? If these were cleared or on an exchange, all they would have a single net exposure for each country. The collateral and netting would be handled at the central clearing or exchange. Wouldn’t that be simpler? Safer? The e-mini S&P future contract seems to be able to trade that way just fine, and it is more volatile than CDS on most days. Italian CDS is in 25 bps today – seems like a lot, but the up-front payment to buy or sell Italian CDS has changed by less than 1%.

There are those who recall that not ten days ago, according to the IMF's Greek (un)sustainability analysis, worst case scenario no less, Greek GDP would somehow miraculously post just a 1% drop in 2013. Unfortunately this won't happen. According to the overnight PMI update out of Europe (where was saw the jobless rate at the highest since 1997), the Greek economy just imploded at a record pace. This follows the already horrendous budget revenue data from January which came in down 7% on expectations of a 9% rise. Sure enough, as expected the fact that the entire country has taken the rest of 2012 off with no incentive to actually work, will do miracles for Greece. From Reuters: "The Markit Manufacturing Purchasing Managers' Index (PMI) for Greece fell to a survey low of 37.7 points in February from 41.0 in January, staying below the 50 mark that divides growth in activity from contraction for each of the past 30 months. Production and new order volumes fell at the sharpest pace in the near 13 year history of the survey as austerity sapped demand. New export orders fell for a sixth straight month and at the steepest rate since May 2010." Translated: the situation is hopeless and getting worse. Expect the German, pardon Troika, Kommissar to be shocked, shocked, to find out that not only do banks in Greece have no deposits left, but the entire economy picked up and left.

Tax fraud is a national sport in both countries, yet the already reviled Germans are to reform Greece's tax collections—endearing them even more to the Greeks.

As already noted, consumer data this morning came in surprisingly weak, always a harbinger of GDP decline. Sure enough, here is Goldman with the first downward GDP revision in the aftermath.

Today for the first time ever Greek 10 year bonds slide to below 20% of par (5.9% of 2022 dropped to 19.145 cents) as expected some time ago, as increasingly the revulsion to post reorg bonds gets greater and greater courtesy of that now meaningless cash coupon of 2% through 2015. When considering that the country will redefault within a year, it explains why nobody has any interest in holding Greek paper even assuming there is an EFSF bill sweetener. Also, today's ISDA decision did not help. What is most amusing is that as of this morning, the country's 1 Year bonds hit an all time high yield of 920.2%. Well, if Greek bonds crossing 100% just 5 months ago was not quite attractive, perhaps 1000% will. At this rate we expect said threshold to cross some time today.

And some more bad news for the economy, as the driver of 70% of US GDP, the US consumer, continues to retrench. Today's personal spending and income data showed several things: that in January Personal Incomes did not keep pace with the rate of growth, rising 0.3% compared to 0.5% in December, and less than the 0.5% expected. Spending also missed expectations of a 0.4% rise, instead picking up just 0.2%, from 0.0% in December. More importantly, we once again see that living in a socialist state has its drawbacks when the spigot is shut off: among the biggest drivers for the weak data was a change in government handouts: "Personal current transfer receipts decreased $3.6 billion in January, in contrast to an increase of $13.8 billion in December.  Within personal current transfer receipts, “other” government social benefits to persons decreased $14.9 billion in January, in contrast to an increase of $1.5 billion in December.  The January change in “other” government social benefits to persons reflected a decrease of $13.6 billion due to the expiration of the Making Work Pay refundable tax credits." Luckily what the government takes with one hand it offsets with the other: "Government social benefits for Medicaid decreased $7.8 billion in January, in contrast to an increase of $0.2 billion in December.  Government social benefits for social security increased $20.3 billion in January, compared to an increase of $9.6 billion in December. The January change reflected 3.6-percent cost-of-living adjustments (COLAs) to social security benefits and to several other federal transfer payment programs.  Together, these COLAs added $30.2 billion to the January increase in government social benefits to persons."  Well at least somebody still does COLA in this day and age of ubiquitous 'deflation.'

A rather uneventful initial claims report which came in line with the election year expectations, beating consensus of +355K modestly, at 351K, which is where it was last week, except for the traditional 100% of the time, upward revision to last week's data, which was pushed higher from 351K to 353K, and in turn which will force algos to read the news as a decline in claims. Today's number gets some additional scrutiny as it comes in the NFP survey week. Continuing claims same deal: the number came a little better than expectations of 3418K at 3402K, was a deterioration compared to the unrevised last week number of 3392K but an improvement to the revised # which was 3404K. On the other hand, people at the trailing end of the cliff declined, as those on EUCs and Extended benefits dropped by 16K in the week ended February 11. As a result, people collecting extended benefits are now 1.13 million less than a year ago, and no longer collect direct BLS benefits. As for disability that's a different matter. Finally, none of this impacts America's young workers, who as noted yesterday, have an employment rate of 54%.

Very busy day today with personal lack of savings, an ISM number which will likely beat consensus so much it will be above the highest Wall Street estimate, construction lack of outlays, Ben Bernanke speech day two, GM channel stuffing, and many Fed speakers.

Here's concrete proof of a mass European bank run. If you missed it, don't worry - there'll be plenty more from where these came from...

The positive PMI data would ordinarily result in some price weakness as would the testimony from Bernanke which suggested that the Federal Reserve's ultra loose monetary policies may not continue much longer. However, the scale of the selling and size of the price falls was unusual. Respected analysts such as legendary Jim Sinclair, John Embry and Jean-Marie Eveillard suggested that the sell off was due to manipulation by bullion banks. Sinclair said it was an “intervention” and was “window dressing” that long term bullion investors should not be concerned about as inflation was coming due to “QE to Infinity.” Embry said that it was a “smash down” and a “paper fiasco.” Jean-Marie Eveillard suggested that central banks may have intervened, as they are doing in fx and bond markets, and sold gold in volume into the market. It is of course very difficult to ascertain what caused the sharp falls in the precious metals yesterday however it would be naive to completely discount what Sinclair, Embry and Eveillard believe may have happened.

European bourses are trading in positive territory ahead of the North American following a relatively quiet morning in Europe. Markets are led by the financials sector, currently trading up around 1.10%. This follows yesterday’s ECB LTRO. As such, the 3-month Euribor fix has fallen to 0.967%, a significant fall in inter-bank lending costs. PMI Manufacturing data released earlier today came in roughly in line with preliminary estimates. The Eurozone unemployment rate for February has also been released, showing the highest jobless rate since October 1997. There has been little in the way of currency moves so far in the session; however there may be fluctuations in USD pairs following the release of ISM Manufacturing data and weekly jobless claims later today.

• China’s Holdings of Treasuries Dropped in ’11 (BusinessWeek)
• Bundesbank at Odds With ECB Over Loans (FT)
• Euro zone puts Greece's efforts under microscope (Reuters)
• Bank of America Considers a Revamp That Would Affect Millions of Customers (WSJ)
• In Days Leading Up to MF Global's Collapse, $165 Million Transfer OK'd in a Flash (WSJ)
• Greece Approves Welfare Cuts for 2nd Bailout (Bloomberg)
• Irish Minister Pushes to Cut Bail-Out Cost (FT)
• China to Support Tech Sectors (China Daily)
• Spanish Bond Yields Fall in Debt Auction After ECB (Reuters)
• China to Expand Cross-Border RMB Businesses (China Daily)

As expected by virtually everyone:

• NO PAYOUT ON GREECE $3.25 BILLION DEFAULT SWAPS, ISDA SAYS

Keep in mind, as criminal as this appears, and as damaging to the CDS market, the real trigger will be what ISDA does determines following the end of the PSI process. If there is no credit event then either, especially when the CACs are triggered as expected - an event which will certifiably be a trigger event under Section 4.7, then ISDA is truly hell bent on blowing up the CDS market as a hedging vehicle in its entirety.