Archive - Sep 2012

Even in the face of worsening odds of re-election (no sitting government has been returned to power in EU elections since the start of the crisis) one would expect national governments to do what is necessary to maintain current stability. The ultimate arbiter of burden sharing capacity, or whether the Euro will continue on the steady incremental path to integration, is whether regular voters vote for it. Hence the importance of elections, like the Dutch election this week. The anti-austerity Socialist Party (SP) has gained significant ground on the incumbent VVD party - focusing the market's attention on the willingness of the Dutch to meet the 3% of GDP deficit targets in 2013. The two 'extreme' parties look set to gain considerably more seats, and either a very broad coalition would be required, including a tail of small parties, or all four mainstream parties will have to participate in the new government: either way, government stability might be questionable. The scenario troubling markets is the potential for a long government formation process coinciding with the euro area’s need to fight the crisis and progress communal policies - though in the last week or two, support for the SP has declined. With the 2013 budget an immediate test, a 'new' Dutch government faces decisions over Greece, Cyprus, EFSF bond buying, and a common-bank supervisory body - none of which have anything like majority support across the coalitions.

Watching Phil LeBlow providing Ford with a reacharound this morning reminded us of the total farce that is both the forest and the trees of the US auto industry. We have discussed the FUBAR channel-stuffing and the subprime-lending SNAFU but now, as Reuters reports, we see the ugly truth about GM's little baby "the Volt is over-engineered and over-priced". Nearly two years after the introduction of the path-breaking plug-in hybrid, GM is still losing as much as $49,000 on each Volt it builds. Furthermore, there are some Americans paying just $5,050 to drive around for two years in a vehicle that cost as much as $89,000 to produce. Of course, with seemingly unlimited Government backing the hope can continue, funded by the US taxpayer, as GM's Volt development chief admits "It's true, we're not making money yet," but the Volt will "eventually will make money. As the volume comes up and we get into the Gen 2 car, we're going to turn (the losses) around." Estimates on the cost to build a Volt range from $76,000 to $88,000, according to four industry consultants contacted by Reuters with one concluding: "I don't see how General Motors will ever get its money back on that vehicle."

"Trenton makes, and the world takes", but the mob has dibs on everything. And by mob we mean the city's mayor, who in collaboration with a convicted sex offender, were just arrested by the FBI. At least we now have a reason why jobs in New Jersey are "confirming" the stock market "recovery."

Former Reagan OMB Director David Stockman was 'allowed' on CNBC this morning - much to their chagrin now we suspect - and espoused his own brand of truthiness, starting with this epic tirade: "Ron Paul is the only one who is right about the Fed, and the Fed is the heart of the problem. They have destroyed the capital markets and the money markets; interest rates mean nothing; everything is trading off the Fed and Wall Street isn't even home - as it's now a bunch of computers trading word-clouds emitted by this central banker and that" In this environment, he goes on, everyone is being given the wrong signal - i.e. the Ryan/Romney campaign is abnout restoring vibrant capitalism; how can you do that when the financial markets are dead - the lifeblood of a capitalist system. And that is the problem today: "The Fed (and the lunatics that run it) are telling the whole world untruths about the cost of money and the price of risk." Must watch clip.

Perhaps never a more truthful 'lifting-the-veil' paragraph has been written by the squid as the following discussion of just what NEW QE will consist of and what it will achieve; sad that our economy market has come to this.

"The form of any return to QE is less clear. The issue is not so much whether the Fed buys Treasuries or agency mortgage-backed securities; we are pretty sure that any new program would be primarily focused on agency MBS purchases. These should have a somewhat bigger per-dollar effect on private-sector demand and are probably less controversial with the public than Treasury purchases. They can be framed as help for homebuyers to achieve the American Dream, which sounds better than help for the government to run large budget deficits."

The unremitting deterioration of the eurozone’s sovereign debt landscape continues to fuel uncertainties about the longevity of the euro as a hard currency. Such uncertainties are not only leading to capital flight from the EMU’s periphery to the core and destabilizing markets worldwide, but they are also beginning to frighten southern European savers into seeking refuge outside their 10-year-old currency. Such is the case of Spain – the latest tumbling economy to threaten the euro’s survival. As the crisis deepens, there is still a window of opportunity for Spaniards to turn to gold as a means to protect their wealth against the risks of increased foreign exchange volatility, forced re-denomination, or even a total currency collapse.

Last August, a 400 point move in the DJIA was the norm. This August, a 50+ point drop in the second coming of the "Balls to the Wall" DJIA was the green light for sheer market panic. While unknown if it is the cause, or effect, of this collapse in volatility, the NYSE just reported that August cash volumes imploded by exactly 50% from last year, one thing is certain: for banks, which no longer make money on net interest margin courtesy of ZNIRP, and $1.6 trillion in inert reserves, the bulk of which are used to buy TSYs, then promptly repo them back to the Fed and use the cash proceeds to buy 200x+ P/E stocks, imploding stock volumes mean only one thing - a collapse in revenues and profits, terminations of entire divisions, collapse in tax revenues for the US Treasury, an increase in deficit, the need for more debt issuance, and a green light for the Fed to monetizing even more supply. And just to avoid the noise from "unseasonal" Y/Y comparisons, in August total ADV dropped by 12.6% from July. ETF volume imploded by two thirds from last year, and 14% from last month. Cue the financial earnings forecast reductions ahead of Q3 results.

Gold has been consolidating the nearly 100% gains that took place over the prior 2.5 year period from 2009 to mid-2011.

Dante would be proud; the Baltic Dry Shipping Index has now plunged through at least eight levels of hell on its way to record lows as it drops to 666 today. This is the lowest since Feb 2012's Chinese New Year lows and is a stunning 55 percentage points lower than the normal seasonal shift in the global aggregate trade indicator (and down 69% from its Oct 2011 swing high). Whether its over-supply, under-demand, or too many Chinese New Years, it is unarguably the next level of hell for the global economy - that will surely bring all the bottom-callers out as this time is different.

On Wednesday the German constitutional court, aka the KKK (Krimson Kardinals Of Karlsruhe, any association with other acronyms is purely accidental), will decide if Europe stays or goes. There is some possibility Karlsruhe may delay the September 12 decision even further, following a new complaint by a Merkel conservative, Peter Gauweiler who said in a statement on Sunday the fund should not be ratified unless the ECB rowed back on its plans to make unlimited purchases of sovereign bonds, since that he said, posed a major risk to Germany's own national budget. The Constitutional court is expected to opine on this latest hurdle today or tomorrow at the latest. However we doubt it. So what does the binary outcome ahead of Wednesday look like? Here are some Wall Street pundits opining. Curiously, while the market is also pricing perfection as the outcome to this event, there may be gray skies forming.

There is a Transfer Union underway in Europe. While Germany has tried to avoid this at all costs, Europe, has found a clever way of implementing such a program and keeping it under the radar from the German citizens. In Greece, Spain, Portugal and Italy the ECB has implemented a program where the sovereign guarantees some bank’s bonds. The bank then pledges them as collateral at the ECB and gets cash. The bank then turns around and lends the money back to the sovereign nation and provides liquidity and economic sustenance. The Transfer Union is completed as Germany guarantees 22% of the ECB and the European Central Bank is nothing more than a conduit to lend money to the various nations. This contrivance is also not sterilized so that the ECB is, in fact, printing money. In a very real sense the ECB is the only fully operational part of the European construct at present as the European Union does not have the “political will” to carry out its mandate.

Gold has risen to new record highs in euro terms overnight in Asia when gold consolidated on last week’s 3% gains and rose above €1,360/oz for the first time.  Significant consolidation has been seen in the last year between €1,200/oz and the previous record high at €1,359.01/oz. This record high was seen almost exactly a year ago on September 9th 2011. Gold is being supported by the unrest in South Africa which continues to destabilise the mining sector. Gold Fields said this morning that some 15,000 workers were still on strike at one of its gold mines outside of Johannesburg. The tally of workers on strike at the West Section of the KDC Gold Mine is about 3,000 higher than last week. All production at the mine has been brought to a standstill. With the US job growth contracting significantly in August, investors see that the Fed will be inclined to announce QE3 at this week’s policy meeting on the 12th & 13th. US gold futures and options climbed to 6-month high 144,775 contracts in the week ended September 4, according to data from the U.S. Commodity Futures Trading Commission. Gold ETF’s grew to a record high of 72.125 million ounces on Friday. Also, Hong Kong's July gold shipments to China was almost double on the year and exports for the first 11 months were greater than 2011, suggesting China will overtake India as the world's top gold consumer.

Stocks in Europe traded lower throughout the session, as market participants reacted to another round of weak data from Asia. In particular, China’s imports fell 2.6% on the year in  August vs. Exp. 3.5%, underpinning the need for policy easing measures from the People's Bank Of China. Some of the weakness in equity space was also attributed to profit taking following last week’s gains. Spanish bonds continued to benefit from the ongoing speculation that the government will seek a full scale bailout. As a result, SP/GE 10y bond yield spread is tighter even though there is an outside chance that the constitutional court vote in Germany will delay this. On the other hand, IT/GE and NE/GE bond yield spreads are wider, reflective the upcoming issuance, as well as elections. EUR/USD and GBP/USD, both seen lower on the back of touted profit taking, as well as pre-positioning into near-term risk events mentioned above. Commodity linked currencies are also weaker, weighed on by the weaker data from China, which also showed that imports of crude oil hit a 22-month low. In terms of notable stocks news, Glencore said it will not improve its offer for Xstrata after the company raised offer for Xstrata to 3.05 from 2.8.

Perhaps one of the best advance indicators of the market respite that took place in August was the slowdown in Bundesbank TARGET2 claims, which until then had been rising at an exponential pace, only to see its first monthly sequential decline since 2011, dropping €1.4 billion. Now that August is gone, and the vacation that brought Europe to a merciful halt is over, the time to resume sucking Germany dry in order to fund current account (and other) deficits is back, and sure enough the just reported Bundesbank August update of TARGET2 claims shows that the increase is back. At a record €751.4 billion (or just shy of $1 trillion at today's exchange rate), Germany funded the periphery, mostly Spain with record €415Bn in liabilities, Italy with a record €280Bn, Greece at €105Bn, via the transfer of public risk to private sector benefit (sunk "public" Buba costs are a concurrent benefit to the German export sector) to the tune of over €1 billion each work day, with a total monthly increase of €24 billion in August. Look for this number to resume its astronomic rise as the periphery realizes its inventories needs restocking and that it needs to import German stuff using Bundesbank liabilities that will never be satisfied.