Archive - Mar 2012

European equity prices fell for the third day in a row and pulled back near six week lows, breaking below the 50DMA for the first time since it crossed above on 1/16. Today's drop was the largest in three weeks as Italian banks were halted, plunging their most in over three months and back at levels not seen since mid January. Most Italian banks are down 9-11% in March but BMPS is down over 24% as Italian sovereign yields start to come unhinged again (ironically a day after Monti announced the crisis was over). 10Y BTPs broke back below last Friday's lows (the moment the ECB stepped in last time to save the day) up over 5.2% yield - catching up to CDS levels (and ITA spreads are +23bps on the week). Spain is also weak (+15bps on the week) and heading for 3 month highs in its yields. Since the CDS roll (March 20th), the sell-off has accelerated with equity and credit markets tracking lower together (as opposed to the last few months where credit underperforms and then snaps back higher). We discussed the LTRO Stigma trade earlier and that has continued sliding notably wider today as LTRO-encumbered banks hugely underperform. We suspect hedges (sovereign credit, financial credit, and equity) placed early in the year for the 3/20 Greece event (among other things) have run off and now managers are reducing risk in real terms (selling) as opposed to replacing hedges which is why the uber-supported markets of Italy and Spain are losing the battle now. Lastly, Europe's VIX is its richest relative to US VIX since the rally began, jumping dramatically today.

When it comes to open questions and general issues surrounding the gold market, The Thunderroad Report's Paul Mylchreest is among the leading contrarian voices who always injects a dose of reality in an otherwise nebulous topic, and one which has been a great disappointment for central bankers over the past century, because as Chris Martenson explained yesterday, "Gold is an objective measure of the degree to which fiat money is being managed well or managed poorly" and never has fiat money been managed as badly as over the past 4 years. In his latest report, Mylchreest focuses on a topic that is near and dear to many precious metal fans: manipulation, and specifically capturing it in practice. In an extended overview of what he dubs various "repeating algorithmic trading programmes" Mylchreest is confident he has enough evidence to demonstrate a recurring pattern of blatant gold manipulation. And he very well may: at the end of the day price merely express the relative confidence of buyers versus sellers, but at the end of the day, we once again go back to the one question we keep on repeating, and one which Martenson also picked up on: if gold is manipulated, so what? Not only so what, but thank you! Because what keeping the price artificially lower does is provides a cheap entry point to pick up physical. As a reminder, those who buy gold, at least so they claim, are not doing it to flip it higher in some fiat equivalent, unless they are merely speculators of course, and instead preparing for the period that follows the collapse of paper money, in which only sound currency, such as gold and silver, will be relevant. In this context, we can only say - bring on the manipulation, in fact send gold to zero if possible please. Frankly neither we, nor anyone else, should be that much concerned with day to day gyration of the value of gold. The long-term trajectory is well-known, however the only question is- does one buy gold to sell it (in dollars, euros, rial, or dong), or to have a true backstop to a failing currency when point T+1 finally comes?

Looking at the parabolic rise in AAPL shares in the past 3 months one would imagine that the company's product line up, so well telegraphed over the past several years, has changed, or at least has found a way to cure cancer, while expanding margins, and also providing loans to cash-strapped US consumers to buy its products exclusively. Truth is nothing substantial has changed - we have merely seen a ramp as every hedge fund and asset manager jumps on the Apple bandwagon (we fully expect at least 250 funds to hold Apple as of March 31: at least 216 were in the stock as of December 31 and then even Dan Loeb jumped in after) which is fun and games on the way up, but pain and tears when the bubble finally does pop. Many have attempted to warn the public about the latest manic phase of Apple expansion, but few have succeeded - such as the the reality of bubbles: they pop when you least expect them. Yet giving it the old college try, here is Obermeyer Asset Management's John Goltermann with an extended commonsensical approach to his perspective on the company with two main growth products, and why unlike everyone else, he is not buying the iKool-Aid.

The last time the S&P 500 rallied in such a serene manner as the current trend was March 1987 - a few months before monetary imbalances came undone and crashed in October 1987. Further, JPMorgan's Michael Cembalest notes that prior to WWII, the previous rally as calm and uninterrupted as this was in November 1928 - a year before the crash. The JPM CIO points out how the Fed's ZIRP has created a 'Portfolio Rebalancing Channel' (PRC) transmission mechanism from cheap credit to wealth effect through spending and profits (that has worked as planned) but the last leg on this mechanism has not functioned so well. Payroll growth has been underwhelming and the housing market remains stunted - leaving the real economy remaining fragile despite the market's appearance. The Fed remains committed to driving this 'channel' but, as Cembalest points out this could easily be derailed by inflation, a bond market revolt towards funding our 'Ecuadorean' deficits, or the pending fiscal cliff legislated for 2013. "So the PRC keeps chugging along, until the Fed's job is done (and Goldilocks continues), or something breaks." History does not rhyme; ninety years ago, money-printing led to calamity in Germany, and eventually, to disaster in Europe. Today, money-printing is designed to save it.

It has been at least 1 hour since the president decided to scapegoat someone for something. Here he is now, bashing Big Oil for his own policy errors. Will Obama also bash Big Oil for not defying him in blocking strategic pipeline expansions? Find out here, and do a shot every time "clean energy" is mentioned.

We have discussed numerous times the surge in Student Loans as the lifeblood of the consumer credit expansion that we seem to be having but now its just getting ridiculous. Smart Money reports on the growing use of student loans for the private K-12 education needs of affluent families. This is not affordable loans for impoverished savants to get their PhD at 14 years old, roughly 20% of families that applied for aid to pay for their children's kindergarten through 12th grade private school education had incomes of $150,000 or more, up from just 6% in 2002-3. 'Pre-college' loans are becoming more popular as the story notes "It used to be that families first signed up for education loans when their child enrolled in college, but a growing number of parents are seeking tuition assistance as soon as kindergarten." These loans, which do not have to be repaid until the child graduates college are expensive (varying between 4 and 20% and average $14,000) which would be on top of the nearly $34,000 average that 1 in 6 parents already carry for college graduates - leaves parents at risk of owing considerably larger sums of debt.  Still, perhaps the e*Trade baby will put that cash to good use but one parent sums up the alternate reality that exists within so many US households with regard to debt: "We'll figure out how to pay for it then, or with any luck they'll get scholarships," he says. "Right or wrong, we're hoping our experiment works." Keep buying those Mega Millions tickets too...

It is funny to hear the talking heads preface virtually every bullish statement with "the US economic data is getting better." It's funny because it's wrong. We have been tracking economic data based on our universe of indicators and as of today we have seen a miss rate of about 80%. And now, Deutsche Bank has joined us in keeping track of economic beats and misses, with their own universe of 31 economic indicators. The results are shown below and the verdict is in: the US economy has officially turned the corner... lower, now that the seasonally adjusted boost from a record warm winter fades and becomes an actual drag (not to mention the fading of the $2 trillion in central bank liquidity).

All you need to read and more.

When I first attempted to find a more realistic debt to GDP ratio for Spain, Belgium, Italy et al I did it on a stand-alone basis; no inclusion of their European liabilities. When I approached Germany, given their size and importance in the EU, I focused upon their liabilities to the European Union. Several institutions have since asked me to consider the total liabilities for each country as every nation in the European Union has national debts as well as debts for their percentage of ownership for the EU and the European Central Bank. Using the combination of national liabilities and any nation’s percentage of EU/ECB liabilities one then could ascertain a final and complete picture of a real debt to GDP number that, unlike the Eurostat data, would be inclusive of sovereign guarantees, contingent liabilities and their responsibilities to the EU and the ECB. This schematic then would tell each of us what a given country actually owed so the total reality could be assessed for judgment.  Given that Spain is currently in focus and that nowhere that I have ever seen has there been an accurate national debt coupled with Spain’s European debt schematic; I have decided to provide you one.

Jobless claims still are good news but their newest news is not so good news. The progress on claims falling is less than we thought and the current momentum is diminished.

The big broad downtrend is still there but the recent downtrend which saw the pace of claims falling faster has had its wings clipped. Too soon to say if this is a key development or not. But it could drive optimists to drink.

The sad reality of an austerity induced slowdown in Europe and an ESFS/ESM as useful as a chocolate fire-guard seems to be creeping into risk asset premia across Europe (and implicitly the US). GGB2s are all trading back under EUR20 (that is 20% of par), Sovereign yields and spreads are leaking wider despite the best efforts of their respective banks to back-up-the-truck in the 'ultimate all-in trade' and the LTRO Stigma has reached record levels as LTRO-encumbered banks' credit spreads are the worst in over two months. Spanish sovereign spreads are back at early January levels and with Italian yields comfortably back over 5% and the bonds starting to reality-check back towards the much less sanguine CDS market. It seems apparent that much of the liquidity-fixing LTRO benefits are now being washed away as investors realize nothing has changed and in fact things are considerably worse now given encumbrance and subordination concerns and the increased contagion risk that the LTRO and the Sarkozy trade has created.

The Greek central bank - whatever that is: some local subsidiary of the ECB? - released February corporate and household deposit data. The chart below explains it all: back to May 2006 levels and the run shows no sign of abating And remember Venizelos' sage February words of advice? "VENIZELOS SAYS NOW IS THE TIME FOR DEPOSITS TO RETURN TO BANKS"... that didn't work too well.

The threat of a gas tanker-driver strike has brought out the best in British political double-speak to calm a fearful nation. Queues Lines are forming at every and any gas station as fears of an Easter-break strike has the blokes back in blighty filling up every and any container they can to stockpile petrol. In response to a panic-worthy statement by Cabinet Minister Francis Maude who said "People should take precautions, just in the way the Government has taken precautions doing some sensible planning," and drivers should keep their tanks at least two-thirds full in anticipation of a shortage, sales of Jerry cans have risen this week. This pre-emptive stockpile-driven panic-buying to avoid real panic-buying should the strike occur spurred some calming words from Energy secretary Ed Davey "I don't think they (drivers) need to queue, I don't think they need to change their behavior very much,". Too late mate! More economically concerning were comments, cited by The Telegraph from the government that "We are under no illusion, the impacts of a tanker strike could be very severe for our economy, could really disrupt the lives of millions of people." As the head of the retail motor industry federation noted "I think the government have mishandled this from the very start" and in the pun-of-the-day, Sky News notes the government "made a crude decision to play politics with petrol without regard for the consequence." When will the Fed's actions finally lift sales of currency-stockpiling wheelbarrows we wonder? Or alternatively, a Toilet Paper run based on the Treasury's relentless "actions"?

Following last Thursday's weekly claims release we said "Initial Claims Beat Expectations, To Miss Next Week Following Revision" and sure enough, last week's 348K beat of 350K expectations has been revised wildly higher, to 364K, meaning the initial beat was not only a miss, it was wide by a mile relative to the 350K preliminary expectation. But robots do not care - all they care is the current print, which however this time also missed, printing at 359K on expectations of a 350K number. This is the first 4 week increase in the 4 week SMA since September as the weather impact of the record warm winter starts to fade away, as explained yesterday. Same gimmicks in the continuing claims number too which like everything out of the BLS is so meaningless for concurrent data, we will probably just wait until the next week revision to get a sense of what is truly happening. More troubling is that 78K people fell of extended and EUC claims as more and more drop out of the workforce. This means the unemployment rate just dropped courtesy of even more people giving up on finding work. Thank heavens for BLS math. In other news, the final Q4 GDP revision came unchanged at 3.0%, in line with expectations. There were no major changes to the components, however Personal consumption did decline modestly from the second revision's 1.52% to 1.47%. It also appears that the government has been consistently taking away less and less from "growth", detracting 0.93%, 0.89% and 0.84% with every consecutive revision. Overall, a wash, meaning March is about to close with about with 17 misses out of 19 key economic indicators.

Much noise has been emanating out of Israel vis-a-vis its Iranian intentions, with some opinions suggesting an attack is imminent, while others claiming that Israel will ultimately defer to D.C., and postpone an attack, and the eventual gasoline price shock, until after the election. The truth is nobody but a few select generals, knows: in warfare surprise is the key factor, so outright flashing invasion intentions is usually an indicator of just the opposite. That said, the most recent update that Azerbaijan has granted Israel access to its airbases along the Iran border is hardly encouraging for Nobel peace prize winners and other pacifists. Yet as we have been claiming for the past two weeks, ever since the launch of CVN-65 on its last tour of duty, the true catalyst will be the arrival of the USS Enterprise at what may well be its last place of anchor - somewhere in the Arabian Sea, just off the side of CVN 70 and CVN 72 both of which are patrolling the Straits of Hormuz. And as the map from Stratfor below shows, the Enterprise is about to cross the Suez Canal, from which point it will be at most days from entering its catalyst location, namely supporting the Israel air force. Just because the US has never had 3 concurrent aircraft carriers in proximity to Iran before.