Archive - Aug 8, 2012

UPDATE: Local Police have said that this is a false alarm and there is no emergency at the Shell Refinery.

In what can only be the strangest and most worrisome coincidence, the Shell refinery in Martinez has just issued an Immediate-Severe-Likely public "Shelter-in-Place" emergency alert:

RESIDENTS IN MARTINEZ. ARE ADVISED TO SHELTER IN PLACE. GO INSIDE. CLOSE ALL WINDOWS AND DOORS. TURN OFF ALL HEATERS. AIR CONDITIONERS AND FANS. IF NOT USING THE FIREPLACE. CLOSE FIREPLACE DAMPERS AND VENTS. AND COVER CRACKS AROUND DOORS AND WINDOWS WITH TAPE OR DAMPED TOWELS. MEDIA NEWS NETWORKS WILL CONTINUE TO CARRY UPDATED EMERGENCY INFORMATION. STAY OFF THE TELEPHONE UNLESS YOU HAVE A LIFE THREATENING EMERGENCY.

Back in 1885, to much fanfare, the General Act of the Berlin Conference launched the Scramble for Africa which saw the partition of the continent, formerly a loose aggregation of various tribes, into the countries that currently make up the southern continent, by the dominant superpowers (all of them European) of the day. Subsequently Africa was pillaged, plundered, and in most places, left for dead. The fact that a credit system reliant on petrodollars never managed to take hold only precipitated the "developed world" disappointment with Africa, no matter what various enlightened, humanitarian singer/writer/poet/visionaries claim otherwise. And so the continent languished. Until what we have dubbed as the "Beijing Conference" quietly took place, and to which only Goldman Sachs, which too has been quietly but very aggressively expanding in Africa, was invited. As the map below from Stratfor shows, ever since 2010, when China pledged over $100 billion to develop commercial projects in Africa, the continent has now become de facto Chinese territory. Because where the infrastructure spending has taken place, next follow strategic sovereign investments, and other modernization pathways, until gradually Africa is nothing but an annexed territory for Beijing, full to the brim with critical raw materials, resources and supplies. So while the "developed world" was and continues to deny the fact that it is broke, all the while having exactly zero money to invest in expansion, China is quietly taking over the world. Literally.

Gluskin Sheff's David Rosenberg details the four major downside risks for US growth over the next four quarters:

1. More Adverse News Out Of Europe
2. The Sharp Run-Up In Food Prices
3. Negative Export Shock
4. The Proverbial Fiscal Cliff

With 86% of the S&P 500’s market cap reported, 2Q earnings growth has been negative, with profits down 1.6% excluding Financials. This marks the first quarter of year-on-year profit declines since 2009. Moreover, while EPS surprises have been positive, they have been the weakest of the current recovery cycle, and revenue surprises have been negative. Following 2Q announcements, companies have issued weak guidance, resulting in increasingly rapid downward revisions to analyst estimates. At present, consensus expectations are for earnings to decline by 1.5% in 3Q. This implies further deterioration in margins. While UBS believe margins will hold up better than expected, their revised economic outlook suggests top-line expectations may be too high - and along with the FX impact we noted last night, those miraculous multiples will have to extend to magnificent levels to maintain this haughty market valuation.

The silver market was affected by “devious efforts” to move the price of the precious metal, according to Bart Chilton, a member of the U.S. Commodity Futures Trading Commission, as reported by Bloomberg. “I continue to believe, consistent with my previous statements and information from the public, that there have been devious efforts related to moving the price of silver,” Chilton said by e-mail today in response to questions from Bloomberg. “There have also been silver and gold market anomalies outside of the silver investigate window that have raised, and continue to raise, market concerns.” The enforcement division of the Washington-based agency, the main U.S. overseer of derivatives markets, began pursuing allegations of manipulation in the silver market in September 2008.  Investigators have analyzed more than 100,000 documents and interviewed dozens of witnesses, the CFTC said in a November 2011 statement. Chilton said last month the investigation may be completed as early as September.

The US stock market is up about 9% since June 1 despite weakening fundamentals for US companies and weakening economies around the world, including in Europe. Morgan Stanley's Adam Parker thinks the reason for the rally is investors’ dream that macro policy in the US and Europe will prove to be more effective this time around than in the recent past. Underneath the market rally there has been some abnormal micro structure, including the fact that mega-caps have outperformed in an up tape, high beta has underperformed, and in the last month energy was the best-performing sector while materials was the worst, despite the 0.83 correlation between the two over the past 40 years. His response to all this optimism is to remind investors that analysts and investors tend to want to be optimistic and that the market runs on a buy-the-dream mentality. Everyone talks about being pessimistic, but what we hear from our conversations with investors is generally optimism: "I am wary when people claim to be a contrarian bull today. They should not pretend they are alone on an island in their bullishness."

You may recall that one of the “tricks of the trade” was the use of people in the audience. They stood up and claimed that they had taken the magic potion and were cured of rheumatism, arthritis, cancer and that ninety year old Uncle Elijah and been able to throw away his cane after imbibing the stuff. This may remind you of what is going on in Europe presently as politicians from each and every nation claim that the newest European snake oil will cure the ailments of Europe for all time, for forever and for always. Yes, well, the printing of money has a cost besides the paper and brandishing yourself as the next new Savior of Europe is the trick of Kings and countless empires on the Continent and yet here we are after being saved so many times in the past. So I will tell you this; you produce the Vampire and then I will buy the garlic and we’ll leave it at that!

The European start was quiet in terms of news-flow, with concentration still centered on the finances of the peripheral nations as Spain still refuses to accept they may need a bailout for the country as a whole. The Spanish short-end has seen a continuation of yesterday’s downside, with profit-taking noted following last weeks rally. Bund futures have seen a part-retracement of yesterday’s weakness, boosted by a well-bid 10yr German auction and as sentiment takes a turn towards safer havens. The headline event today came out of London with the Bank of England quarterly inflation report. Alongside expectation they cut growth forecasts for this year and next, although against forecasts the report and comments from Governor King were less dovish than anticipated causing strengthening of GBP, with moves to fresh highs in GBP/USD. Short sterling suffered downside following comments from King who said cutting interest rates would damage some financial institutions and would be partly counter-productive.

A curious thing happened on the way to (ever deferred) recovery: America's goods manufacturing sector has been resilient, and in line what one would expect from a recovery. So far so good: the problem as everyone knows, 70% of US GDP is based on "services." And it is here that things get very ugly. As the charts of the day below show, while "goods have been good", it is services that have stunk up the economy in the post-depression era, and are what the Fed has been unable to do anything to stimulate, and by implication have kept US GDP subdued at stall speed levels.

• Regulators irate at NY action against Standard Chartered (Reuters)
• Recession Generation Opts To Rent Not Buy Houses To Cars (Bloomberg)
• Egypt launches air strikes on militants in Sinai (Reuters)
• Loan-Shark Lending Surge Feared In Japan (Bloomberg)
• US seeks $3bn for Sudan oil deal (FT)
• Home Prices Climb as Supply Dwindles (WSJ)... not really- just money laundering in the form of ultra luxury home purchases soars
• A lifeline is thrown to the periphery - Smaghi (FT)
• Standard and Who? Greece Credit-Rating Outlook Lowered by S&P as Economy Weakens (Bloomberg)
• BOE Cuts Growth Forecast, Sees Inflation Below Goal in Two Years (Bloomberg)
• S&P Takes CreditWatch Actions On Four Spanish Banks (Reuters)
• Japan Gets Reprieve as Drop in Oil Eases Trade Impact (Bloomberg)

A funny thing happened in European peripheral bond markets: they sold off - Spain is wider across the board, with the 2 Year back over 4%, and the 10 Year threatening to blow out above 7% for the first time since the market was re-re-fooled by Draghi. Same in Italy, where the 2s10s is once again in flattening mode. In other words after getting Draghi right for one day, then flipping and confusing what he said for the next week, the market is back to being right in itis initial kneejerk reaction to the ECB head's words. One reason (among many) - a Rabobank report by Richard McGuire and Lyn Graham-Taylor which states that Spain won’t ask for more aid if more conditions are attached add to likelihood "crisis must worsen before it improves." Hmm, where have we seen an identical turn of the phrase before. Oh yes, here. Rabobank also adds that the ECB will have to show willingness to buy across the curve (not just in tenors of less than one year) when it does intervene. Of course, for that to happen, things must get far, far worse. Just as we explained to the five-year olds in charge of the market this past weekend.