Archive - Jul 24, 2012

And another epic miss in the slow motion trainwreck that is the US plowhorse economy now to its neck in quicksand. The latest B-grade economic indicator: the Richmond Fed, which was expected to rise modestly from -3 to -1. Instead it faceplanted to -17, the biggest miss since August 2010 and the lowest print since Apirl 2009. But at least US housing has bottomed. Just kidding. At this point there should be no doubt that the US economy is in freefall - and the only recourse we have is the definition of madness: more QE which everyone by now knows will do nothing but provide a brief sugar high, and spike inflation and stock prices, only for everything to implode demanding even more QEasing from the Chairsatan, and on, and on, until in the endgame, the USD finally loses credibility. Of course, if this horrifyingly bad economic print does not send stocks soaring, we don't know what will.

This has been the recovery of downward revisions - each annual revision to payrolls and GDP since the recovery started in 2009 revealed an even sharper contraction and weaker recovery. BofAML believes this year’s revision, which is released with the Q2 GDP report on Friday, will once again show an even slower start to the recovery with growth revised lower in 2009 and 2010, and modestly higher in 2011. While it is good news that growth could be revised higher in 2011, it appears that it will only be marginal. The downward revisions to growth in 2009 and 2010 will still leave the level of GDP lower and, hence, the output gap larger. This shows that the economy has made even less progress in healing from the deep recession. The severity and duration of the recession was understated in real time and the recovery was overstated. This suggests that monetary policy may not have been easy enough over the past several years - and therefore the current slowdown is even more significant.

Things in Spain are now in freefall, and as a Spanish economist admits to El Economista "we are alone" which is not surprising: the country has cried not wolf then wolf one too many times, and following yesterday's warning by Moody's that Germany is now officially on the hook should it continue bailing out the insolvent periphery, it is no wonder that Germany will leave Spain to the same wolves it may or may not have been observing for months. Sadly, much more pain is in store for the rhyming country, but first of all for its north-eastern region of Catalonia which is responsible for a fifth of the country's economy output, and which has €13 billion in debt redemptions until the end of 2012. From El Nacional: "The Government of Artur Mas call on the help of regional liquidity fund that created the central government with 18,000 million euros, as confirmed by the spokesman Francesc Homs. After Valencia and Murcia, who have already made ??their intentions, Catalonia would be the third autonomy to resort to the rescue of the state. For its part, Andalusia may try to avoid government aid and negotiate a private loan of 800 million euros. Homs has emphasized that the decision to seek the liquidity mechanism has not yet been taken formally and according to him it is not in any case not a rescue or intervention, and that the Government of Artur Mas is studying the fine print of the conditions the fund." At least FC Barcelona has some good collateral to post to the the various German entities that will ultimately be funding the rescue. The same can not be said for Spain, however, which the same publication says, is on the verge of begging, and may demand a credit line so it can finance its funding neeeds for the remainder of the year.

Just as the summer finally arrives in Northern Europe, the Eurozone crisis is heating up once again. With an increasingly flat (heading to inversion) yield curve, and spreads at record wides,  Spain appears to be in a downward spiral of market turmoil that might require a full-fledged TROIKA bail out. However, as UBS points out, rather than taking the country off the market, the program would have to allow Spain to keep borrowing from private investors. Any bail out of Spain would have to be designed in a way that would also be applicable to Italy. Spain has been the most recent crisis focus, and looks to intensify further with nothing immediately in sight that could reverse the trend. We, like UBS, have argued for some time that a full-fledged TROIKA program will ultimately be unavoidable and the following six reasons briefly explain why anything else is a pipe-dream - as we remember Draghi's recent shift: "creditors should be part of the solution of the crisis. It is a matter of limiting the involvement of taxpayers. They have already paid a great deal."

Lumber giant Universal Forest Products’ CEO Matt Missad said in the company’s latest earnings conference call, “We are watching our inventories closely and trying not to get too far ahead because we are concerned about disappointing employment figures and lack of  construction growth in the U.S.” Rather than observe the trends in the Mortgage Bankers Association’s headline Mortgage Applications Index, which includes refinancing, a far better gauge of economic conditions is the Mortgage Purchases Index trends. This weekly representation of demand for mortgages related to home buying is little changed from levels registered at the bottom of the housing market collapse. The level of residential housing construction is an important indicator, and has made little improvement since the apparent market bottom in 2009. The sunken pace of residential construction spending in May was $268 billion – essentially the same levels seen in 1997. This  profoundly low level of activity is not limited to the residential sector; spending on commercial structures is currently the same as in 1996. Since there is diminished activity, the need for workers in the construction industry has also stagnated. During June construction employment totaled 5.5 million workers – a near 30 percent decline from the peak in April 2006 and the same number as in mid 1996.

It was inevitable and despite all of the usual huffing and puffing on the Continent; the moves are correct. First Egan-Jones and then Moodys and Germany is downgraded or threatened with a downgrade and for sound reasons. The German economy is $3.2 trillion and they are trying to support the Eurozone with an economy of $15.3 trillion that is in recession and rapidly falling off the cliff. Each new European enterprise gives the markets a shorter and shorter bounce as we all watch the yields in Europe rise, the stock market’s fall and the Euro in serious decline against both the Dollar and the Yen. There has been no Lehman Moment to date but moment-by-moment the decline in the fortunes of Europe diminishes. There is almost no historical precedent where debt paid by the addition of more and more debt has been a successful operation. There is always the inevitable wall or walls and the concrete slabs of Greece and Spain fast approach.

The major European bourses are down as US participants come to their desks, volumes still thin but higher than yesterday’s, and underperformance once again observed in the peripheries, with the IBEX down 2.5% and the FTSE MIB down 1.2%. Last night’s outlook changes on German sovereign debt caused a sell-off in the bund futures, with the effect being compounded as Germany comes to market with a 30-year offering tomorrow. The rating agency moves, as well as softer Euro-zone PMIs and reports that Spain is considering requesting a full international bailout have weighed on the riskier asset classes, taking EUR/USD back below the 1.2100 level. Furthermore, with Greece and a potential Greek exit now back in the news, investor caution is rife as the Troika begin their Greek report of the troubled country today.

UPS, traditionally considered one of the legacy bellwether, came out with earnings. And they were ugly. The company missed both the top and bottom line, with the revenue coming at $13.35 billion, below expectations of $13.7 billion, and EPS at $1.15 on expectations of $1.17. This merely confirms what those who did not have their head in the sand in Q2 knew all along: without Europe, global trade stalls every time. But it was the outlook cut that was the cherry on top: "The company’s performance was mixed during the second quarter,” said Kurt Kuehn, UPS’s chief financial officer. "The results in the U.S. Domestic and Supply Chain and Freight segments were partially offset by the weakness in International. “As we look toward the second half of the year, customers are more concerned as greater uncertainty exists. Additionally, economic growth expectations have come down,” Kuehn continued." China bull take note: "Revenue was $3 billion as the segment remains under pressure due to weaker global economies and reductions in exports from Asia." Going back to Kuehn: "Consequently, we are reducing our guidance for 2012 diluted earnings per share to a range of $4.50 to $4.70, an increase of 3%-to-8% over 2011 adjusted results.”  The firm's previous guidance was $4.75-$5.00, with sellside consensus of $4.82. Somehow we fail to see how the Q3 and Q4 renaissance, which is so critical to meet the S&P target of over 100 in earnings, will happen. Actually scratch that: it won't. Expect reality to slam stocks head on some time in Q3 as the realization that the air out of the US corporate juggernaut has come out, courtesy of a sliding EUR and surging USD. Or at least until the Chairman has something to say about it.

• Greece now in "Great Depression", PM says (Reuters)
• Geithner "Washington must act to avoid damaging economy" (Reuters)
• Moody’s warns eurozone core (FT)
• Germany Pushes Back After Moody’s Lowers Rating Outlook (Bloomberg)
• Austria's Fekter says Greek euro exit not discussed (Reuters)
• In Greek crisis, lessons in a shrimp farm's travails (Reuters)
• Fed's Raskin: No government backstop for banks that do prop trading (Reuters)
• Campbell Chases Millennials With Lentils Madras Curry (Bloomberg)

Curious just how we were 100% certain that the June 29 summit was an epic disaster, in addition to the obvious? Because in a note from that morning we said the following: "Below is Goldman's quick take on the E-Tarp MOU (completely detail-free, but who needs details when one has money-growing trees) announced late last night. In summary: "We recommend being long an equally-weighted basket of benchmark 5-year Spanish, Irish and Italian government bonds, currently yielding 5.9% on average, for a target of 4.5% and tight stop loss on a close at 6.5%." By now we hope it is clear that when Goldman's clients are buying a security, it means its prop desk is selling the same security to clients." Sure enough, its prop desk was selling, and selling, and selling. Since then Spain and Italy have blown out, and only the strange tightening in Ireland has prevented yet another stop loss from the squid which is now known for cremating clients more than anything else. The stop loss is certainly not far: the basket is now at 6.20%, and has just 30 bps to go until yet another batch of Goldman clients is slaughtered. Which is now only a matter of time - Goldman just told its clients it has a little more of its 5 Year exposure left to sell, and then it will be done. Of course by then another muppet murder scene will have to be cordoned off.

Spain is not Uganda: this morning Spain is increasingly looking like the 10th circle of bondholder vigilante hell with its 10 Year trading at 7.59% after hitting a record 7.607% moment prior. The short end has blown out even wider and the 2 Year very appropriately at 6.66% and rising. Italy has also joined the party blowing out to just why of 6.5% and Italy's banks about to be halted across the board despite the short-selling ban. Next up: selling anything forbidden. Finally, the scramble for safety into Swiss 2 year notes accelerates as these touch a mindboggling -0.44%. There was no specific catalyst to lead to today's ongoing meltdown, but the fact that Spain just paid a record price for 3 and 6 month Bills is not helping: the average yield was 2.434 percent for the three-month bills compared with 2.362 percent in June and 3.691 percent for six-month paper compared with 3.237 percent. With each passing day, the selling crew is demanding the ECB get involved and stop the carnage. For now Draghi is nowhere to be seen as Germany continues to have the upper hand. After all recall just who it is that benefits from keeping the periphery on the razor's edge and the EURUSD sliding.