Archive - Mar 2012

Portugal is near guaranteed to default/restructure, so why is everybody so tolerant of so-called "smart people" saying otherwise? OK, let's do this math thingy...

Last month, the world's biggest hedge fund, Bridgewater, issued a fascinating analysis of deleveraging case studies through the history of the world, grouped by final outcome (good, bad and ugly). As Dalio's analysts note: "the differences between deleveragings depend on the amounts and paces of 1) debt reduction, 2) austerity, 3) transferring wealth from the haves to the have-nots, and 4) debt  monetization. Each one of these four paths reduces debt/income ratios, but they have different effects on inflation and growth. Debt reduction (i.e., defaults and restructurings) and austerity are both deflationary and depressing while debt monetization is inflationary and stimulative. Ugly deleveragings get these out of balance while beautiful ones properly balance them. In other words, the key is in getting the mix right." Of these the most interesting one always has been that of the Weimar republic, as it certainly got the mix wrong.

Courtesy of central planning, all is now well - market complacency is back to 2007 levels, when the market hit its all time highs, and nothing, absolutely nothing, could go wrong.

As Apple gaps open by another 1% at $558, it stands less than $14bn (in market cap) away from being larger than the entire US retail sector. The good news: it still has a ways to go before eclipsing the retail and the semi sectors combined.

Yesterday we presented the view of JPM's Michael Feroli of what today's FOMC statement may say (one word: inflation). Here is what Goldman believes: "Today's FOMC statement should be relatively uneventful. The committee is likely to acknowledge the stronger labor market data and the upward pressure on headline inflation, which will undoubtedly be characterized as temporary. We also expect a softening of the phrase that “[s]trains in global financial markets continue to pose significant downside risks to the economic outlook,” although we do not expect it to disappear entirely. At the meeting, the staff is likely to give a presentation on additional easing options, followed by an extensive committee discussion. (This will not show up in the statement and will only become visible to the outside world when the FOMC minutes are released three weeks later.) We still think that the committee will announce further easing before the end of the second quarter, when Operation Twist concludes. However, our confidence in this view has fallen on net, partly because of the stronger labor market and slightly higher inflation data and partly because Chairman Bernanke chose not to repeat his very dovish comments from the January 25 FOMC press conference at the February 29 Monetary Policy Testimony." Remember: admitting inflation means no QE any time soon (and also admission that all the other central banks have succeeded in staving off deflation for a few more months courtesy of $2.5 trillion in excess liquidity injections in under 2 quarters).

What do European credit markets know that equities don't? For the 3rd day in a row, credit markets snapped higher at the open and have then sold off considerably - diverging bearishly from European equities. At the same time, European sovereigns (most notably the pivot securities of Italy and Spain) are now 20-25bps wider (in spread) from Friday's Greece 'deal' announcement. European financials are underperforming dramatically.

I just finished reading the best-selling Coming Apart by Charles Murray. I confess to not having heard of the book until I saw it in the store, but the cover of a champagne glass and a crumbled beer can instantly suggested to me that I was going to enjoy this new examination of the United States and its sociological disintegration of the past half-century.

There has been a lot of talk lately about “seasonal adjustments” and what they actually mean and do for the data. Reporting today’s forecast in “seasonally adjusted” terms would not be incorrect. Seasonality isn’t bad, and is useful in many ways, but so is the raw data and trying to figure out if the adjustments make sense or need to be modified a lot due to the particular circumstances at the time (like great warm weather). The markets are almost all doing well so far this morning, aside from European sovereign spreads which continue to leak wider (Spain now +20bps post-Greece and Italy +24bps).

Following several months of retail sales misses, the market was hoping for blow out data- after all consumers have been largely releveraging. What it got was a normal that was in line with expectations at the seasonally adjusted headline level (+1.1%), following an upward revised 0.6% increase in January (0.4% before), and a stripped number ex autos and sales of +0.6%, on expectations of +0.5%. The latter was revised as a decline from the previous 0.6% which was in turn hiked up to 1.0%. Motor vehicle sales, courtesy of the already noted soaring channel stuffing by Government Motors, rose 1.6% in February sequentially. Gasoline stations saw a 3.3% jump sequentially, and 10.3% compared to last year. This even as demand for gas has plunged to all time lows: maybe it has something to do with price. At least people are still eating (+0.8%), and are clothed (+1.8%) even if they are shopping less at General Merchandise Stores (-0.1%) and have less furniture (-1.2%). According to Bloomberg economist Rich Yamarone, the report reflects "broad-based strength," may show "commodity inflation, with building materials sales up 1.4% and gasoline stations up 3.3%." And BBG's Joe Brusuelas adds: "Two-thirds of growth in retail sales due to rising gasoline & auto sales. Gen merch declines 0.1%, due to subs effects caused by inflation." Thank you inflation - may we have another.

Second day of trading in the new Greek bonds (GGB2). It took a whopping 24 hours for the selling to resume. Per BNP "Market heavy."

Even as futures cruise happily along well in positive territory, the EURUSD has once again decoupled from risk (funny how that always happens when the EURUSD is sliding, rarely if ever when it is surging on short covering). What is the reason for this latest schism? According to Citi's Steven Englander it has all to do with Europe once again aligning itself with Obama, and against China, which the market has recently been viewing as a white knight for Europe (contrary to repeated evidence otherwise). As a reminder, China made it very clear last September that it will (somehow) save Europe, if however Europe no longer pursues trade actions against it. Well, Europe just announced it would join the US in the WTO case against China on rare earth metals. Sure enough, China is about to pull the carpet from under Europe all over again. End result: EURUSD under 1.3100 and sliding.

Reuters has been kind enough to release the "Second Economic Adjustment Programme for Greece" - a 195 page blueprint that Greece has to follow (unlike the first one, which it kinda, sorta ignored) in order for the money to keep flowing (money to bail out Europe's banks that is). We can save you the reading: below is the only chart of note. This is what the European powers expect Greek GDP to do. It needs no further commentary.

European equity markets are trading higher across the board ahead of the US open, with the financials sector outstripping others and Health Care lagging behind, although still in positive territory. The main news from yesterday’s finance minister’s meeting was instruction to reduce their deficit by a further 0.5% of GDP; this is having an effect on the Spanish spread against the German bund today, underperforming against other European spreads. The main data of the European session so far comes from Germany, with the ZEW survey for Economic sentiment beating expectations for March, as well as the UK trade balance figures showing a record high in the UK’s non-EU exports. As the session progresses, participants will be looking towards the US retail sales data and the latest FOMC rate decision.

While US equity futures continue to do their thing as the DJIA 13K ceiling comes into play again (two weeks ago Dow 13K was crossed nearly 80 times), ahead of today's 2:15pm Bernanke statement which will make the case for the NEW QE even more remote, none of the traditional correlation drivers are in active mode, with the EURUSD now at LOD levels, following headlines such as the following: "Euro Pares Losses vs Dollar as Germany’s ZEW Beats Ests" and 20 minutes later "EUR Weakens After German Zew Rises for 4th Month." As can be surmised, a consumer confidence circular and reflexive indicator is the basis for this Schrodinger (alive and dead) euro, and sure enough sentiment, aka the stock market, aka the ECB's balance sheet expansion of $1.3 trillion, is "improved" despite renewed concern over Spain’s fiscal outlook after better than expected German ZEW per Bloomberg. Next, investors await U.S. retail sales, which have come in consistently weaker in the past 3 month, and unless a pick up here is noted, one can scratch Q1 GDP. None of which will have any impact on the S&P 500 policy indicator whatsoever: in an election year, not even Brian Sack can push the stock market into the red.

• Tainted Libor Guessing Games Face Replacement by Real Trades (Bloomberg) - so circular, self-reported data is "tainted" - but consumer confidence is great for pumping a stock market?
• Japan Sets up $12 Billion Program for Dollar Loans, Increases Growth Fund (Bloomberg)
• China Hints at Halt to Renminbi Rise (FT)
• Spain Pressed to Cut More From Its Budget (FT)
• Bailout can make Greek debt sustainable, but risks remain: EU/IMF (Reuters)
• Banks to Face Tough Reviews, Details of Mortgage Deal Show (NYT)
• U.S. and Europe Move on China Minerals (WSJ)
• Use of Homeless as Internet Hot Spots Backfires on Marketer (NYT)
• Obama administration seeks to pressure China on exports with new trade case (AP)