Archive - Mar 22, 2012

Bailed-out but un-restructured. And now Fiat-Chrysler CEO is crying for help as EU car sales crash.

While financial and sovereign spreads in the most optically sensitive entities has rallied magnificently for the last few months – helped and extended by LTRO 1 and LTRO 2 – the weakness of the last week or so in both of these critical systemic risk indicators (Sovereign spreads in Spain and Italy and the LTRO Stigma that we noted earlier) should be worrisome for many of the leaders who are using market action as a corollary for their actions. What is most worrisome however is the absolute and utter lack of impact to the ‘real economy’ of Europe as PMIs have continued to slip and sentiment stumbles – nowhere is this more evident than in charts of Corporate Credit Demand and Corporate Credit Availability, which as Morgan Stanley notes today, suggest the deleveraging balance sheet recessionary impacts felt in Japan and the US are now writ large in European minds as minimizing debt dominates maximizing profits (or living standards). Demand for credit is sliding for both large and small firms and bank lending standards continue to tighten aggressively for both large and small firms. As austerity continues and credit contracts, it seems apparent that the much-hoped for shallow recession in Europe will be deeper and longer than most currently believe.

I know many of you are thinking “the ECB or Fed could just print money.” That answer is wrong. If the ECB chooses to do this, Germany will walk. End of story. They’ve already seen how rampant monetization works out (Weimar). And if the Fed chooses to monetize everything to hold things up, then the US Dollar collapses, inflation erupts creating civil unrest, interest rates rise killing the banks, US corporations and the US economy… all during an election year.

A mere two days ago we were enlightened on the glory of the central banking system and the general denigration of sound money and the gold standard as Part 1 of Bernanke's re-education lecture series. Today we are treated to Part 2 - a historical perspective of how the Fed has saved the world since World War II. As we watch the stream below, we suspect the word 'inflation' will outpace 'deflation' and 'monetary policy' will dominate 'intervention' or 'picking-winners' as the Chairsatan presents his view of the world-according-to-central-planners. Some early headlines of note:

*BERNANKE: MOST EVIDENCE SHOWS FED DIDN'T CAUSE HOUSING BUBBLE

The March silver futures contract first entered backwardation on Mar 9 and with a few zigs and zags has not only remained there but has gone deeper and deeper in. The April gold future just entered backwardation today. We shall see what the coming days bring for the April gold future, but the fact that backwardation has occurred at all is significant. The fact that it is now a “normal” occurrence since fall 2008 indicates a deep pathology. Backwardation means that anyone who has gold or silver could simultaneously sell the metal and buy futures contracts to recover their position, and make a profit. The market is tight. The metal is out there, but obviously those who have it in an unencumbered form are not able (retail) or willing (others?) to take this backwardation bait.

An ugly day all around as European sovereign CDS jump the most in three weeks...

                    5Y                       10Y             5/10's
ITALY           374/382  +15      365/385         -10/0
SPAIN          432/440  +15      426/446          -5/5

Bernanke and Draghi in a snit? Fed and ECB at odds? US-German regulatory run-around? Has Draghi just enaged in an act of ill-advised hubris or does he have a secret plan to stimualte Europe?   

While some believe we can decouple from the primary and secondary impacts of a China slowdown (jst what happens if we all decouple from the world?), it seems like wishful thinking that the growth engine of the world can now be waved aside on the back of "well, they will just re-stimulate and will be well" especially given where oil prices are currently. Michael Cembalest is little more sanguine that us on China's growth  (expecting 7-8% GDP growth to fuel Asian economic activity) but given the 'easing' that has already occurred in China: Chinese government has injected more liquidity; expanded the quota for foreign equity investment; cut bank reserve requirements; delayed tighter capital adequacy rules; created a program through which municipalities can issue bonds with government guarantees (rather than having to borrow from banks); eased first time homebuyer restrictions; and injected capital into its biggest banks; and yet still the macro data is leaking weaker as these 12 charts highlight only too harshly.

Commodities are broadly under significant pressure but nowhere is it more noteworthy than in Crude (even though the USD is only modestly higher on the day). Brent is falling but WTI is underperforming as it trades down on the day at the biggest drop in over three months. Brent-WTI is leaking higher though as the focus shifts increasingly to Brent. WTI and Brent are trading down close to the SPR-rumor spike-low levels as China and Russia both raise the rhetoric against the US on Iran.

Depending on debt to fuel nominal growth leads to an economic death spiral. Sometimes one chart says it all. Charted against consumer credit, the S&P 500 (SPX) collapsed after the 2000 dot-com bubble burst and has been tracing out a descending channel since then. The Fed's injections of liquidity via trillion-dollar purchases of toxic mortgages and Treasury bonds does not funnel money into productive investments--all it accomplished was to further incentivize speculative churning and financialization to enriched the few at the expense of the many. So sit back, tighten your seatbelts and enjoy the death spiral ride, brought to you by the Federal Reserve and your elected servants of the financial Elite.

FX traders of the world have been forlorn for a week or two as the lack of directional guidance from the anti-guru-du-jour Thomas Stolper of Goldman has been sorely lacking. Worry no more. He is back with with his latest 'Fadance' (/fey-dyns, verb/ - "Advice" which Goldman Sachs provides to "muppets") in that he prefers to be short USDJPY from 82.8 (suggesting JPY strength on the back of seasonal patterns and the recent deterioration in the trade balance as being transitory temporary). Given his recent track record, being long the USD against the JPY would seem appropriate and his stop (and therefore the target) at around 84.5.

It will come as no surprise to many that the warm-weather-induced ebullience and renaissance in the US housing market is perhaps floundering as all that demand was dragged forward. Today's notable miss in the FHFA Home Price Index (at unch vs an expectation of +0.3%) is ugly but the huge downward revision from +0.7% to merely +0.1% in the previous month is now the ninth consecutive notable downward revision.Add to that the fact that FreddieMac just reported mortgage rate cracking over 4% (from 3.92% to 4.08%) and the ugly data on MBA applications and...well at least we're decoupling.

Freeh accused of taking $ from Iranian terrorists and taking an MF insurance policy away from customers to pay Corzine's legal defense

We have covered the topic of BLS seasonal adjustment to death and beyond, as well as the endless expansion of those dropping out like flies from the labor pool (did those not in the US labor force, one way or another, whether due to mistracking, statistical aberrations, or outright data manipulation, increase by 1.2 million in January? It did? Next question... or does the government now desperately need an apologist for its own upwardly biased data 'mismanagement'?). Yet some of the formerly relevant elements at the less than cutting edge of asset management-cum-blogging decided to call out Art Cashin for daring to point out just this glaringly obvious seasonal adjustment issue. Of course, Art does not need us rushing to his defense. He can do a good enough job on his own.