Archive - Apr 12, 2012

We all have had our fair share recently of Gartman the "market timer" (here and here). However, little have we experienced of Gartman "the historian". Here he is, by way of Art Cashin, being off by 300 years notwithstanding, describing something that he has intoned on recently in his ever-so-frequent appearances on CNBC: the "they" who are in control, or in this case the central planners whose decisions ultimately lead to nothing but ruin.

This is the mother of all bombshells in Europe and no one is talking about it. Germany basically announced that it will allow German banks to DUMP euro-zone government bonds off their balance sheets. It also announced it will provide up to 400 billion euros in backstops and 80 billion euros for bank recapitalization.

Bankruptcies, jobs, and the hoped-for deus ex machina....

The Apple trade, it works very well... util it doesn't. What happens when ALL of those funds change course???

Yesterday, Greek Prime Minister Papademos visited President Papoulias to announce the dissolution of the current parliament. General elections have been called for the May 6. Elections in Greece are held in a one-round national ballot. In a brief note on the actions and implications of the Greek election, Goldman notes that the Greek political scene is undergoing a significant transformation. The traditional split between center-left (PASOK) and center-right (New Democracy, or ND)) is no longer the key dilemma for Greek voters. According to a number of recent polls, there is a significant margin of undecided voters. In addition, a number of small and new parties are projected to enter the new parliament. This has created market concerns that the Greek elections could lead to an anti-Euro government, which could interrupt the adjustment efforts underway and create risks to local financial stability.

Let’s be clear: financial misdeeds ruin lives. If a Madoff takes your money and uses it to pay off other investors in a ponzi scheme, you won’t be able to get it back. If a Blankfein underling issues you with misleading advice, and then bets against you (creaming himself a nice profit), you won’t be able to get it back. If a Corzine steals your money and uses it to bet on the European sovereign debt market, you might not be able to get it back. You might end up in poverty or worse. You might lose your children’s college money, your retirement money, or capital you needed for your business. You might lose your home. So shouldn’t we take a tough line against financial misdeeds? Shouldn’t tricking and stealing from investors, tricking and stealing from the public, tricking and stealing from clients carry a heavy disincentive, like death? Would a corrupt banker not think twice about their misdeeds if they knew that apprehension would mean a noose around their neck and a kicked bucket? A lot of commentators — like for example, Max Keiser — seem to think so. And in China financial crimes are treated with a gravity far beyond a cushy minimum security cell, and home visits on the weekends. Financial criminals in China are often executed.

We guessed it wouldn't be too long before the next rumor was dropped and Gold is surging - now over $1670 - on this latest chatter... Don't tell Gartman, but gold is now of 5% higher in math terms from the minute the "world renowned" gold swing trader sold everything.

US fiscal and monetary policy summarized: Baffle them with B(L)S data. This is what happened most recently this morning, when as we noted the labor data is finally reverting to a far weaker trendline now that the weather effect first written about here in February, has been fully exposed. And if it was only that it would be case closed: more QE is coming, especially with headling PPI coming less than expected. However, we also had trade data that came in $6 billion better than expected, a number we said would result in imminent Q1 GDP hikes. Sure enough, here comes Goldman. "The US trade deficit declined to $46.0 in February following a deficit of $52.5bn in January. Most of the improvement reflected a sharp decline in real goods imports, which fell by 3.9% (month-over-month). We suspect that the weakness reflects in part seasonality related to the Chinese New Year holidays. Real goods exports also declined during the month, falling by 1.0%. On net, the report raised our tracking estimate of Q1 GDP growth to 2.5% from 2.3% previously." So what is a poor Fed chairman to do to keep the goldilocks illusion going, yet have a QE way out? Well, blame China for a jump in GDP helps. For everything else we have the weather.

For today's dose of sobering cold water we go to the Bank of International Settlements, best known for being the FX bid (and gold offer) of last resort, whose Quantitative impact study results published by the Basel Committee has some very bad news for long-term bank viability: "The Committee also assessed the estimated impact of the liquidity standards. Assuming banks were to make no changes to their liquidity risk profile or funding structure, as of June 2011, the weighted average Liquidity Coverage Ratio (LCR) for Group 1 banks would have been 90% while the weighted average LCR for Group 2 banks was 83%. The aggregate LCR shortfall is €1.76 trillion which represents approximately 3% of the €58.5 trillion total assets of the aggregate sample. The weighted average Net Stable Funding Ratio (NSFR) is 94% for both Group 1 and Group 2 banks. The aggregate shortfall of required stable funding is €2.78 trillion." You read that right: as of June 30, banks lacked €1.76 trillion in liquid assets, and needed €2.78 trillion to meet stable funding rules. And then Europe imploded.

The Wizard predicts it will be Greece, Portugal and Ireland all back at the trough in 2012 and Spain lining up for its first feeding. Italy remains a question mark but with a real debt to GDP ratio of 200% the structural issues will not be overcome by anything that Mr. Monti has proposed to date. As we all focus on the sovereigns in the last few days I point out that the European banks are down around 2%-4.5% in Germany, Italy and Spain today while the largest bank in Portugal has seen its share price drop 15% this morning.  You may ignore the ugliness and the markets may ignore it for this or that day but the European ugliness is not going away and I would be a seller on any pop in equities or risk assets because the European landscape is a quite Bleak House.

Following today's disappointing jobs data, we thought it useful to reflect on the sad reality that is occurring under the eyes of AAPL Mr. Market. As BofAML notes this morning, their Economic Data Diffusion index (which tracks macro data surprises) has been trending lower for over a month (indicating a trend of data missing expectations to the downside) and, more importantly has turned absolutely negative (indicating a marginally negative bias to the overall economic data expectations). Following our lead, they note the weather's impact and that this is likely to be the third time in this recovery that the markets and economic consensus has over-reacted to positive news and become too optimistic about growth. Looking ahead, we expect this data downshift to continue. In the near term, both higher gasoline prices and the fading weather effect will likely weigh on growth and, over the course of the second half, we expect the looming fiscal cliff to undercut confidence and growth. Party's ending, a tough economic reality is looming and the punchbowl remains out of sight for now.

So much for the endless string of "Jobless Claims in US fall to lowest since 2008" propaganda. First of all, just as we predict every week with 100% accuracy, last week's "decline" from a revised 363K to 357K was revised, and instead it surged from 357K to a revised 367K. So much for the spin. More importantly, the current weekly claims number exploded to 380K, on expectations of 355K - the highest print since January, and the biggest claim miss in a year! And also just as predicted, the "economic weakness" period to butter up the country for the NEW QE begins. Don't be surprised as claims surge to close to 400K in the next few weeks in advance of an epic BLS miss next month, all to be blamed on the "warm weather", "Chinese new year", "Sumatra earthquake" and "Bush" of course, it never happens just because, in time for the FOMC's June meeting to set the stage for MBS LSAP, just as Bill Gross has been expecting all along. 

Further confirmation of gold’s continuing but gradual renaissance as a safe haven asset was given by the IMF yesterday who warned that a “growing shortage of safe assets” poses a threat to “global financial stability.”  The IMF identified $74.4 trillion of potentially safe assets today, including gold, investment grade government and corporate debt, and covered bonds. Sovereign debt crises are reducing the number of governments that investors trust to issue "risk-free" bonds just as new financial regulations are increasing demand for safe securities from banks. Importantly, the IMF’s latest Global Financial Stability Report’s introduction finds that  "In the future there will be rising demand for safe assets, but fewer of them will be available, increasing the price for safety in global markets.” “Both the lack of political will to reshape fiscal policies at times of rising concern over debt sustainability and an overly rapid reduction of fiscal deficits limit governments’ capacity to produce assets with low credit risk.” The IMF has warned regarding illiquidity in “safe haven” markets. Gold remains one of the most liquid markets in the world and the illiquidity in bond markets would see increased safe haven demand for gold.  The IMF is warning regarding deteriorating public finances. As many governments see themselves being downgraded - safe haven bonds may become less safe.

Heading into the US open, European stock markets are experiencing a mixed session with particular underperformance noted once again in the peripheral IBEX and FTSE MIB indices. The Portuguese banking sector specifically is taking heavy hits following overnight news from Banco Espirito di Santo that they are to issue a large quantity of new shares, prompting fears that further banks may have to recapitalize. The financials sector is also being weighed upon by a downbeat research note published by a major Japanese bank on the Spanish banking sector. Elsewhere, the Italian BTP auction was released in a fragmented fashion showing softer bid/covers and the highest yield since mid-January in the only on-the-run line sold today. Similarly to yesterday’s auction, the sale was not quite as poor as some as feared. Italy sold to the top of the range and as such, the Italian/German 10-yr yield spread is now tighter by 13BPS, currently at 361BPS. From the UK, the DMO sold 20-year gilts with a lower bid/cover ratio and a large yield tail, prompting gilt futures to fall by around 10 ticks after the release. Later in the session, participants will be looking out for US PPI data and the weekly jobless numbers.

Last night it was uber-dove Janet Yellen, today it is uberer-dove, former Goldmanite (what is it about Goldman central bankers and easing: Dudley unleashing QE2 in 2010, Draghi unleashing QE LTRO in Europe?) Bill Dudley joining the fray and saying QE is pretty much on the table. Of course, the only one that matters is Benny, and he will complete the doves on parade tomorrow, when he shows that all the hawkish rhetoric recently has been for naught. Cutting straight to the chase from just released Dudley comments:"we cannot lose sight of the fact that the economy still faces significant headwinds and that there are some meaningful downside risks... To sum up, the incoming data on the U.S. economy has been a bit more upbeat of late, suggesting that the recovery may be getting better established.  But, while these developments are certainly encouraging, it is far too soon to conclude that we are out of the woods in terms of generating a strong, sustainable recovery.  On the inflation front, the year-over-year rate of consumer price inflation has slowed in recent months, and despite the recent rise of gasoline prices, we expect inflation to moderate further in 2012." Translate: NEW QE is but a CTRL-P keystroke away now that all the inflation the Fed usually ignores continues to be ignored.