Archive - Mar 7, 2012

While many look for a specific event (PSI or NFP) to be the catalyst for the next leg up (or down), Goldman sees several factors at play that could create a 'sell-off by a thousand cuts', rather than one big flush, as macro- and micro- news impacts stocks. First, after habitually delivering better-than-expected news for much of the last several months, recent data points have not been able to best expectations. Second, cyclical weakness has coincided with oil price rises, and third, Bernanke's recent testimony was a little less unconditionally accomodative than the hoards would have liked. Decomposing US equity performance into risk-appetite, growth-expectations, and European-event-risk concerns shows two of the three rolling over and dragging on stocks since March began. With market growth views under pressure and signs of frayed data on the edges, following last week’s marginally disappointing Manufacturing ISM print, last Thursday Goldman went market neutral as in their words, they are taking 'market signals seriously', as the gap between market growth views and the index itself reached 'wides' reminiscent of 2011.

A tale of two civilizations, one in ascent and one in decline, can probably be best summarized by how they ration for the future in that most important of commodities - energy, in this case vis-a-vis the respective treatment of the strategic oil reserves of China and the US. Because while all the rage in D.C. political gab in recent weeks has been whether the US will allow a release of oil from the SPR, just to appease those Obama voters who actually have a job and have to take a car to get to it, things over at America's nemesis in civilizational conflict are diametrically opposite. As Bloomberg reports, China has "started filling its emergency petroleum reserve at Lanzhou in the nation’s northwest, according to an official at the nation’s largest crude producer." Unlike the US, where everything is now a function of market liquidity, evil speculators, and political ambitions (rest in peace supply and demand), China is completely ignoring all the day to day mundane drivel, and is doing what is right - which is to make sure it is prepared for an "eventuality" in the crude supply. Said eventuality is 100% guaranteed to happen if the Panetta-McCain is given a green light to allow the liberation of Iranian crude to finally proceed following years of foreplay.

If one chart was worth a thousand words, it is the difference in 'value' between strong and weak covenant bonds in Greece. Since we first brought this 'arbitrage' to the market's attention back in mid January, explaining the subordination impacts of the ECB and the legal implications of bonds issued under various law-regimes, the spread between English-Law (strong) and Greek-Law (weak) bonds has widened dramatically and today reaches a new high. Ignoring accrued interest for simplicity, investors are willing to pay over EUR46 for the strong UK protection relative to less than EUR20 for weak Greek protection for similar maturity bonds. It seems some bondholders are very much set not to partake of the Troika Greek's generous offer.

As the week's panacea event (no, not iPad3) draws ever closer, overnight news our of Argentina may be critical for any fence-sitting Greek PSI holdouts. As Reuters reports, a US judge has ruled in favor of a holdout creditor forcing Argentina to pay $650mm interest and principal on their long-forgotten defaulted/restructured debt. Argentina defaulted on $100bn bonds in 2002 and has yet to return to the international capital markets. While the Argentinians continue to litigate holdouts, the judge's decision in favor of these so-called 'vulture funds' (an affiliate of Elliott Management) offers renewed confirmation of considerable payouts in time for Greek bond PSI holdouts. Argentina's whiny reasoning that "bondholders who did not take part in the 2005 and 2010 debt swaps do not deserve full recovery because it is unfair to bondholders who accepted less" sums up the perspective of cram-downs and forced action that sovereigns will try to take. The vulture-fund litigation (and successful precedent here) blocks any new debt operations by Argentina until settlement is reached. This coincides with Bingham McCutchen's committee of Swiss-law Greek bond holders who look set to holdout or 'protect the rights of bondholders' as there appears to be several investors actively considering all of their options, including litigation - but as noted above, litigation can take years (though returns could conceivably be very large given par payouts of bonds trading sub-20% currently).

Looking for some clues of US military strategy in Syria, especially in the aftermath of McCain's statement that he requests an air strike over Syrian government forces? Curious why Crude may gyrate over the next hour? Then watch the following webcast from the Senate Armed Services Committee where the honorable warmonger #1 John McCain is presiding, and questioning US Defense Secretary Leon Panetta over the latest thoughts on what to expect in Syria and thus Iran.

The problem with the latest hare-brained scheme in Europe, namely to organize Greek bondholders among the various institutions that for 2 years did everything in their power to dump said Greek bonds in the open market, is that said institutions end up having no Greek bonds in inventory just at the time when they are supposed to have Greek bonds, 24 hours ahead of the Greek PSI deadline. As a reminder, participation in the PSI has to be 75%, with a CAC threshold of 66%,  and according to some interpretations even 50% of Greek bondholders voting for the PSI will be sufficient. Which means that with the PSI conclusion just around the corner, or 8 pm Athens time time tomorrow, the IIF, which is the consortium of entities that have every interest in perpetuating the status quo (i.e., do not have Europe ransom demands) and more than happy to "volunteer" for a 70%+ haircut, the IIF only has...

Now that the hype of LTRO is over (for now) people are starting to focus on the details and some of the potential consequences.  This is a first cut based on bits and pieces from various LTRO documents released by the ECB.  We haven’t seen anything that resembles a document fully describing the current LTROs, but are trying to find it, and will refine this analysis as more details come to light. Between early maturity possibilities, the floating rate nature of the loan, and now the variation margin we discussed last night, it seems LTRO may rightfully be the driver of the 'stigma' extensively noted here previously.

German lawmakers are to review Bundesbank controls of and management of Germany’s gold reserves.  Parliament’s Budget Committee will assess how the central bank manages its inventory of Germany’s gold bullion bars that are believed to be stored in Frankfurt, Paris, London and the Federal Reserve Bank of New York, according to German newspaper Bild.  The German Federal Audit Office has criticised the Bundesbank’s lax auditing and inventory controls regarding Germany’s sizeable gold reserves – 3,396.3 tonnes of gold or some 73.7% of Germany’s national foreign exchange reserves. There is increasing nervousness amongst the German public, German politicians and indeed the Bundesbank itself regarding the gigantic risk on the balance sheet of Germany's central bank and this is leading some in Germany to voice concerns about the location and exact amount of Germany’s gold reserves. The eurozone's central bank system is massively imbalanced after the ECB’s balance sheet surged to a record 3.02 trillion euros ($3.96 trillion) last week, 31% bigger than the German economy, after a second tranche of three-year loans. The concern is that were the eurozone to collapse, Bundesbank's losses could be half a trillion euros - more than one-and-a-half times the size of the Germany's annual budget. In that scenario, Germany’s national patrimony of gold bullion reserves would be needed to support the currency – whether that be a new euro or a return to the Deutsche mark.  The German lawmakers are following in the footsteps of US Presidential candidate Ron Paul who has long called for an audit of the US’ gold reserves. It is believed that some 60% of Germany’s gold is stored outside of Germany and much of it in the Federal Reserve Bank of New York.

The traditionally C-grade, and very noisy ADP number, has printed at a 216K private payrolls added, on expectations of 215K, or precisely in line, even as the January print was revised modestly higher from 170K to 173K. Of course, since the track record of the ADP as a NFP predictor is absolutely atrocious, and when one adds that the ADP had its annual revision take place today, this number is all about seasonal adjustments as was the BLS January print. What was amusing is that not only were finance jobs added (+14k), but so were manufacturing (+14K) and construction (+16K) jobs.

Markets appear to be tentatively recovering some of yesterday’s heavy losses, recording modest gains so far this morning. Comments made overnight by the German finance minister as well as senior officials from the Greek finance ministry may have mercifully given market participants some hope as they are confident the Greek PSI deal will be completed by the deadline tomorrow evening. The DAX index has underperformed the other European equity indices in recent trade following the release of some disappointing factory orders data for January, with markets expecting an expansion of 0.6%, however the reading came in at -2.7%, moving DAX stock futures into negative territory. WTI crude and Brent have also retraced some of their losses made earlier in the week following a drawdown in US gasoline inventories reported last night as well as a generally weak USD index in the FX markets today. Markets are awaiting US ADP employment change later in the session, as well as the weekly DOE oil inventories casting further light on the US energy stocks.

Something funny happened in January as the EURUSD rose from its period low in the 1.26 level: German Industrial Orders imploded as the joint currency strengthened. But not so much for domestic orders within the Eurozone, which actually increased by 0.9% in January (as a reminder, the sole reason mercantilism still works efficiently within the Eurozone is that the Bundesbank, via TARGET2 and the ECB, subsidizes the import economies of the periphery via recycled Current Account proceeds, as shown here). Where the demand collapse came from was non-Eurozone (read China and America) orders which fell a whopping 8.6% in January, after posting a 12.1% rise in December as the EUR was plumbing 2011 lows. As a result, the blended orders rate was down 2.7% on expectations of a 0.6% increase. Does it become clear now why resolving the Greek crisis is not in Germany's interest, as all that would do is send the EUR even higher, and impair German industry - the lifeblood of Europe - even more? Alternatively, does it become clear why Bernanke is just itching to shift the weak currency regime from Europe and back to the US again, with the only thing holding him back being the fear of crude exploding, especially if some Made in Israel bunker busters explode somewhere deep in the Zagros mountains?

• Key rate for $350 trillion market in limbo - Libor Links Deleted as U.K. Bank Group Backs Away From Rate (Bloomberg)
• Rift Grows Between Germany's Bundesbank and ECB (Spiegel)
• Athens issues threat to bond holdouts (FT)
• SNB to Reveal Board Members’ Currency Transactions After Hildebrand Furor (Bloomberg)
• Sarkozy Floats New Corporate Tax (WSJ)
• Super Tuesday Ensures a GOP War of Attrition (WSJ)
• Martin Wolf - The pain in Spain will test the euro (FT)
• Refinancing Fees Are Reduced for Some F.H.A. Borrowers (NYT)

Following yesterday's broad risk off day, some positive sentiment has returned to markets despite ugly economic data from Germany, and an odd indefinite halt of trading of Greek bonds on the Milan Borse. As BAC notes, for the third straight day, Asian equity markets sold off, as investors are concerned about a Greece debt-swap deal. The regional MSCI Asia Pacific Index slid 0.9%, to finish at its lowest close in a month. The worst-performing market was the cyclical-sensitive Korean Kospi. Its economy, along with many other emerging Asia economies, is highly dependent on exports, so yesterday's data that showed that the Euro area's economy contracted in the fourth quarter added to the bad news. The Hang Seng also lost 0.9%, while the Shanghai Composite fell 0.7%. Japan's Nikkei lost 0.6% and the Indian Sensex fell 0.2%. In Europe, equities are rebounding from their biggest drop since November. Part of the rebound is investors returning to equities to buy the dip, while investors are also expecting a strong ADP employment report later in the day - at 8:15 am. In the aggregate, European equities are up 0.4%. At home, futures are pointing to a solid opening later today. The S&P 500 is set to open 0.5% higher. Elsewhere, German factory orders plunged -2.7% M/M on expectations, from a +1.6% December print, driven by a total collapse in orders from outside the Eurozone which imploded by 8.6% down from +12.1% in December (more shortly). And Europe is now bracing for a Greek default as the Milan Bourse earlier announced it has suspended Greek bonds from trading indefinitely - perhaps related to this is the fact that after trading in the triple digits yesterday, the Greek 1 Year just slid to an all time record 1114% - looks like there is not much value in that post-reorg Greek package offered to PSI volunteers. Finally, the deposit money held at the ECB barely budges, as it prints at €817 billion, down just modestly from yesterday's record print as Europe's banks brace for Thursday's PSI announcement with a big cash buffer.

We are getting that deja vú feeling all over again. Remember what happened this time around last year?