Archive - Aug 2012

Several recent releases of data bring the problem into focus; a sharp focus. In Germany, once thought to be almost invincible and somehow outside the recession that is raging in Europe, the crisis is just beginning - but it is clearly indicated by the newest data which shows that Germany has begun the descent down the rabbit hole with the rest of its brethren. Germany is now trapped; having lost control of the situation - first by the way the game has been played; and second by the limitations of her capital. We suspect you will soon find a politician in Germany who is opposed to the policies of Ms. Merkel and who will rise to power based upon "Germany for the Germans". All of this is also defined by a very warped time-line. The problems are now, the recession is now, the economic difficulties are now and the solutions that have been proposed are one to three years out. Germany is in the box and we are afraid that it is now Frau Pandora and not Frau Merkel who owns the key.

Personal Spending rose 0.4% MoM, its first rise in three months, but this seems to have been 'funded' by consumers dipping into savings mode with the rate of growth of income rising at the same level as last month and as expected +0.3%. The Spending rate of increase missed expectations however and with the savings rate dropping for the first time in 5 months (to 4.2%) - it suggests a 'man on the street' who is perilously close to the edge to meet his needs.

Initial claims were unchanged from last week - thanks to the now ubiquitous upward revision of the previous week's data. This is the highest print in six weeks and the third week in a row that the claims data has been greater than expected. The market is unsure - is this enough pre-FOMC to make a real difference or just more 'seasonal' noise? One thing is sure - the trend is higher in the last six weeks, hardly a positive sign (as the 4-week moving average rises 1,500 to 370,250) - and after the standard upward revision today's 374k claims will be 377k by next week.

As noted yesterday, the confounding divergence between the stock markets of the Chinese growth "dynamo" which is at three year lows, and that imploding basket case of a banana republics known as Europe, whose stock markets trade like a penny stock and have been soaring laelt, may never have been wider, but when it comes to how people feel, unlike in the US, they refuse to be fooled by some arbitrary manipulated level of the DAX, CAC, IBEX or MIB. In fact, Europe's "chip on its shoulder" grow to the largest it has been in three years as confidence plunged. Specifically, consumer confidence in the euro area slumped to the lowest in three years at minus 24.6, according to the final estimate for August. The 3.1 deterioration in August represents the sharpest decline in a year. The index has been lower in only two periods over the past three decades. Not unexpectedly the least unconfident is Germany, while Greeks are urgently trying to find new reasons to keep pushing the rock uphill day after day.

Unlike the last two weeks, overnight sentiment for once can not be simply described as zombified, as there has been a decidedly negative undertone to risk, first in Asia, then in Europe, and finally in the US, accompanying the stealthy climb in the VIX which from a 13 handle a few days ago has quietly crept to 17. Will the market, finally realizing Bernanke will not say anything groundbreaking tomorrow, sell off just in time for J-Hole, or will the mysterious buying force-cum-Knight Algo reappear at one or more inflection points and push stocks to unchanged or green on the day. Find out in 9 hours. As for the key events of the past several hours, here is Bloomberg's dealbook summary of all the news that's fit to copy and paste.

• Merkel Adviser: Unlimited ECB Bond Purchases Would Violate Mandate (Dow Jones)
• Illinois' credit rating downgraded after pension reform failure (Chicago Tribune)
• Correspondence and collusion between the New York Times and the CIA (Guardian)
• ECB action prospects underpin Italian bond auction (Reuters)
• Ryan puts down calculator, picks up bullhorn (Reuters)
• Barclays Names New CEO (WSJ)
• Barclays’s New CEO: Analysts React (WSJ)
• September Offers 15 Days to Cement Crisis Solutions (Bloomberg)
• Iran's Nuclear-Arms Guru Resurfaces (WSJ)
• Rocket blasts off to put NASA radiation belt probes into orbit (Reuters)
• Citi to Settle Suit for $590 Million (WSJ)
• Swiss-Style Latvian Banking Hub Thrives on Ex-Soviet Cash (Boomberg)

Markets are soooo boring, nothing to write about. A few things that caught my eye.

Today may be the final snorefest before tomorrow Uncle Ben Chairsatan disappoints everyone (sending the market even higher on hopes and prayers he is really saving the super-duper nitrous turbo bazooka for the Sept 13 FOMC meeting) with nothing actionable coming through the J-Hole teleprompter, but that doesn't mean the day has to be boring. Luckily, Goldman has made sure of just that with a report on the surprising higher than expected rise in German unemployment, which coupled with yesterday's higher than expected inflation in Deutschland (they didn't build that inflation, someone else did it for them) is certain to get all ze Germans in a very bailouty moody. However, this being Goldman: the bank that runs the ECB, the Fed, the BOC, and soon, if all goes according to plan, the BOE, the base coverage is enough to make one's head spin. To wit: 'Unemployment edges higher, but employment continues to rise." In other words, add both German employment and unemployment to that other list of items that just goes up come hell or high water, such as stocks, bonds, VIX, crude, gold, blood pressure, coffee consumption, and so forth. Why, one may ask? Simple - "the new central-planned normal." Which of course is the same as the old central-planned normal from circa 1954 Stalingrad.

It's been a while since the ridiculous "China bails out Europe" rumor made the scene: in fact, the last time we can find with definitive confirmation was back in September of 2011, just before the bottom fell out of Europe, and when the FT, based on "anonymous sources" tripped over itself to report that "[insert European country] is in talks with China to buy bonds, assets." Sure enough, now that Merkel came, and saw, but hardly conquered Beijing, it is the turn of China's Wen Jiabao to add his 10 pips to the EURUSD rumormill: Reuters reports: "China is prepared to buy more EU government bonds amid a worsening European debt crisis that is dragging on the world economy, Premier Wen Jiabao said, in the strongest sign of support for its biggest trading partner in months." Naturally, considering how often this rumor (re)appeared in the past it will be excusable if nobody but the dumbest vacuum tubes fall for it this time, especially considering that the Chinese economy itself is going down in flames faster than the October Iron Ore contract. And lest there be any confusion, China's commitment is about as definitive as a Best Buy LBO "preunderwritten" with a Jefferies highly confident letter: "China is willing, on condition of fully evaluating the risks, to continue to invest in the euro zone sovereign debt market, and strengthen communication and discussion with the European Union, the European Central Bank the IMF and other key countries to support the indebted euro zone countries in overcoming hardships," [Wen] said after meeting Merkel." Ah, conditional aid. The kind that gets Mario Monti to break out the petulant ex-Goldman child act and refuse to leave the Belgian catered dining room until the beggees succumb to his technocratic platitudes. Needless to say, we'll believe China's "continued" investment in Europe when we see it.

While last week's surprise announcement that GM was desperately seeking up to $5 billion in additional cash through a new revolver (meaning the administration's pride and bailed out joy, Government Motors, is once again burning far too much cash and that channel stuffing only pays in porn movies) took precisely nobody by surprise (at least not anyone who has been following our 2 year long series tracking AOL GM's dealer inventory warehousing habits), a far more sinister cash need has developed a very short time ago in a continent far, far away. Because while we have also noted the collapse in steel inventories and iron ore prices , which have recently imploded to 3 years lows as the Chinese hard landing, no longer maskable or avoidable, is finally sending shock waves around the world, as well as what these mean for a world that is sliding into a deep recession, promises by various impotent central bankers notwithstanding (see here, here and here), so far this wholesale collapse in the iron market had not translated into discrete events at the corporate level. Until now that is, because that second derivative of the "Chinese economic miracle", Australian hyper-levered iron ore miner, Fortescue, which is the fourth largest in the world, and is also the kangaroo in the iron ore mine for not only China, but Australia as well (and with a cornucopia of junk bonds in its balance sheet, a massively levered one at that) just telegraphed to the world that it is in desperate need of cash. According to Bloomberg, Fortescue Metals Group has approached about 20 banks as it markets a $1.5 billion loan in syndication, according to three people familiar with the matter.

The market over the summer has been quieter than we had expected - thanks to Draghi's threats placating-words and Bernanke's promises. Equities rallied, Bunds and Treasuries sold off, and government spreads in Europe declined. All these markets look more constructive. However, the event calendar in the near future is very heavy, notably the political one. This article from UBS' global strategy group does three things. First, they provide a list of events until the end of the year. Second, the relative importance of the various events are ranked; and finally, they provide, where needed, a comment on what to expect. We still believe three topics will drive markets: (1) the ongoing European sovereign crisis, where we see some progress (albeit slow) as Draghi has pushed forward his agenda and found some support from politicians; (2) the political issues in the US, although the main change is the more dovish Fed; and (3) world growth, which has been disappointing and is a major risk to monitor. 

Presented without comment. Those who need explanation are encouraged to call Jim O'Neill. He will be delighted to explain this.

The largest consumer products companies and retailers are already adjusting to it.