Archive - Apr 2012

The IMF meeting ended yesterday and leading world economies agreed to more than double the lending power of the IMF in an effort to protect the global economy from the euro zone contagion. This was still short of Lagarde’s $600 billion goal. The Netherlands  was drawn into the spotlight over the weekend when the government failed to agree on budget cuts, making elections nearly unavoidable and casting doubt on its support from future euro zone aid.  Investors will watch the China HSBC manufacturing survey at 1430 GMT as a measure of the conditions of the world’s 2nd largest economy.  The Federal Reserve meets on Tuesday and Wednesday, and its statement on monetary policy is given on April 25th.  The Bank of Japan meets on Friday and is expected to ease again. Trading is sluggish as the market waits for clues.

• A Forecast of What the Fed Will Do: Stand Pat (Hilsenrath) - they finally realized that they have to leak the opposite...
• Draghi's ECB Rejects Geithner-IMF Push for More Crisis-Fighting (Bloomberg)
• Wal-Mart's Mexico probe could lead to departures at the top (Reuters)
• The Sadly Unpalatable Solution for the Eurozone (FT)
• US Regulators Look to Ease Swaps Rules (FT)
• Yuan, Interest Rate Reform to be Gradual: China Central Bank Chief (Reuters)
• Run, Don't Walk (Hussman)
• Hollande Steals Poll March on Sarkozy (FT)

Our equity Bloomberg screens are bright red, as equity markets sell off across the globe. Several reasons are contributing to the market selloff: 1) several firms in Asia posted weaker-than-expected earnings, 2) worries that Europe's debt crisis still threatens global growth, 3) the French elections, and 4) a breakdown of budget talks in the Netherlands.

If last week was Europe's days of hope, even as the continent was again breaking, predicated by the utterly ridiculous such as a successful Bill auction, a weak Spanish Bond issue, somehow spun by the propaganda crew as good despite pricing at an utterly unsustainable interest rate, and various German confidence indicators which soared to multi-year highs, today is the bitter hangover. Where to start...

These are interesting times in the Netherlands. I'm glad things are shaking up personally. Things have been going nowhere fast, with no indications from the elites of any real solutions to the euro crisis. Dutch politicians generally say they'd still like to send a budget to Brussels by the end of the month, and hold elections.

Apple is scheduled to report earnings on Tuesday April 24th.   Our analysis is simply to try and match the enthusiasm of the recent price movement and fundamental story of Apple in relation to what has happened in the options markets. 

Price action for Apple stock over the past few weeks has been noticeably poor.  Not only has it traded down 10% from its April 9th closing high of $636 to $572 today, but it has led the market several times with somewhat dramatic intraday reversals.  Even so, the options market has not yet expressed this same recent bearish opinion on the stock. 

UPDATE: BofA already calling the bottom in China's slowdown and CSI drops 0.2%

China's April HSBC Flash PMI came slightly stronger than expected but suggests manufacturing may remain in a contractionary state for the sixth month in a row. The problem for all those stimulus junkies is that while it does suggest contraction, the data rose modestly from last month's final HSBC Manufacturing PMI print. So is this data not cold enough for massive stimulus (which Australia must be craving given tonight's dismal PPI print) and not warm enough for the 'double-rip' camp and the expected hockey-stick in global growth that is to occur any moment now? For now the market seems on the fence.

The last two weeks have seen the market's perception of the risk of Europe's 'firewall' rise at its fastest rate in six months (the peak of the crisis). At 142bps wider than Bunds, EFSF bonds now trade at their widest in three months and look set to break out to peak-crisis levels. We are sure the Japanese will still back-up-the-truck at the next issuance of self-referential ponzi bonds, but not only is the credit risk of this staggering CDO rising fast, as Bloomberg notes, the market's anticipation of the PPCs (Partial Protection Certificates), that - akin to CDS - provide an uncollateralized protection for 'some' of the potential losses investors may face in buying sovereign debt at issuance, is dreary at best and "not something that appears immediately hugely attractive". CDS already trade on these bonds and the only willing players taking advantage of that market in size are the basis traders currently; as real money "will buy peripheral bonds outright, because they’re attractive enough, or they won’t buy them at all, and financial engineering [is not] necessarily going to change that dynamic.” Just as we have again and again pointed out, the reality is that investors have seen through these self-guaranteed and 'irrelevantly convoluted' attempts to kick the can and Draghi's rejection of the IMF-Geithner calls for more crisis-fighting (as noted by Bloomberg this evening) - arguing that they have done enough by cutting rates and issuing bank loans, perhaps reflects a Europe that knows it is on the brink. This was further reinforced by the Bundesbank's Joachim Nagel, who, in a moment of sublime reality-awareness, ruled out any direct EFSF 'help' to the banks "as that would pass on the risk of a bank bailout to all European taxpayers" - but why does Geithner care so much - we thought US banks were 'safe' and unexposed to Europe (eh Jamie?).

For all those starry-eyed readers of Floyd Norris' New York Times real-estate column this morning who have been out viewing new homes this afternoon and already scratching together the down-payment with the family's EBT cards, we have a little contextual reality checking. Norris points to the factual reality that a broad ratio of all financial obligations - both homeowners and renters - relative to disposable income stands at an impressive-sounding lowest level since 1984, and uses this wondrous statistic, in its sublime uniqueness, as an indication to suggest the consumer (and home-buyer we assume) may be coming back as the household debt burden has been so reduced from a record 14% of disposable income to a 'mere' 10.9% now indicating just what good little deleveraging beings we Americans have been. However, as Nomura noted so clearly this week, this statistic is just a small part of everything when we consider the balance sheet (and not just cash-flow) of the household, 'many homeowners are likely to take little comfort from the decline in average debt service costs relative to incomes.' For millions of homeowners whose property is now worth less than the debt used to finance it, mortgage interest costs may be more usefully gauged relative to the equity they retain in their homes. For them, these monthly debt service payments are necessary to retain their claim on an asset whose value has fallen and might not recover, as the $3.7tn negative-equity 'gap' should remind us that the economic crisis of the past decade has taught a new generation a painful lesson about the dangers of excessive debt.

Hayek, while a brilliant mind, was not right on everything.  He saw the welfare state is legitimate, a need for regulation into private industries such as education and food, and the necessity of the state in providing for individual and national defense.  Yet even he was able to distinguish how political power attracts those who will use in the worst manner. The Secret Service agents who procured prostitutes may be relieved of their duty but it will only serve as a cautionary tale for the rest to keep their off-duty exploits better concealed in the future.  The waste and graft will go on despite a pledge from Obama for a “rigorous” probe and his potential successor’s promise to “clean house.”  These promises are just political theater used to conceal the playground like mentality which possesses the attitudes of all those who wield the guns of the state.

Two months ago, we warned that while the world had decided to blissfully move on from last year's topic #1, the MENA revolutions, and specifically the massive power vacuum left in their wake, things in the region were far from fixed. Quite the contrary, and as we added back then "it is very likely that the Mediterranean region, flanked on one side by the broke European countries of Greece, Italy, Spain (and implicitly Portugal), and on the other by the unstable powder keg of post-revolutionary Libya and Egypt, will likely become quite active yet again. Only this time, in addition to social and economic upheavals, a religious flavor may also be added to the mix". Yet nobody cared as after a year of daily videos showing Molotov Cocktails dropping like flies, people had simply gotten habituated and needed some other source of excitement. Nobody cared also when a week ago Art Cashin warned that the hidden geopolitcal risk is not Spain but Egypt. Today, Egypt just reminded at least one country why perhaps caution about the instability caused by having a military in charge of the most populous Arabic country and the one boasting "the Canal", should have been heeded after Egypt just announced that it is cutting off its natural gas supplies to Israel, which just so happens relies on Egypt for 40% of its energy needs.

8 pm has just passed in France, and all the polls are now closed, which means official preliminary data is now allowed - the first results from IPSOS are in, and are as follows:

• Francois Hollande: 28.4% - with victory virtually assured in the runoff round on May 6, it is now Hollande's election to lose. Could he? Yes - read here how Sarkozy can still catch up per DB.
• Nicholas Sarkozy: 25.5% - make the runoff round
• Marine Le Pen: 20.0% - extreme right: much better than expected as nationalism is back with a bang.
• Jean-Luc Melenchon: 11.7% - extreme left: best communist showing since 1981 yet weaker than expected.
• Francois Bayrou: 8.5%
• Eva Joly: 2.0%

"See you tomorrow, pedophile friends."--Nicholas Sarkozy