Archive - Sep 2012

Despite consensus for a 25 bps cut by the ECB, Mario Draghi decided to leave rates unchanged. To say that this is ominous for the press conference in 45 minutes is an understatement.

The chart below needs no commentary, neither does what it represents. In May Greek unemployment, pre revision, was 23.1%. It was subsequently revised higher to 23.5%, but this is merely to make the jump to the June number more palatable. What was June? 24.4%. In other words, no matter how one looks at it, the unemployment rate rose by 1% in one month.

• Draghi Credibility At Stake As ECB Tries To Save The Euro (Bloomberg)
• Clinton Returns to Back Obama (WSJ)
• Taxi fares up 17% in New York City (Toronto Sun)
• High Speed Scandal: Ferrari Incident Rocks China (Daily Beast)
• China’s Richest Man Benefits From Thirst For Soft Drinks (Bloomberg)
• China August export growth seen weak, imports slow (Reuters)
• Death to PowerPoint! (BusinessWeek)
• Sweden surprises with interest rate cut (WSJ)
• IMF demands greater clarity on Irish austerity plans (Reuters)
• At Abercrombie & Fitch, Sex No Longer Sells (Bloomberg)
• And the best for last: California Treasurer Backs Law to Ban Costly Long-Term Bonds (Bloomberg) -> legislating low, low yields

There is only one event on pundits and traders minds today: the ECB's press conference, during which Draghi will announce nothing material, as the substance of the bank's message has been leaked, telegraphed and distributed extensively over the past three weeks before just to gauge and test the market's response as every part of this latest "plan", which is nothing but SMP-meets-Operation "Tsiwt" was being made up on the fly. And not even a weaker than expected Spanish short-term auction in which €3.5 billion in 2014-2016 bonds were sold at plunging Bids to Cover, sending yields paradoxically spiking just ahead of what the ECB should otherwise announce will be the buying sweet spot, can dent the market's hope that Draghi will pull some final detail out of his hat. Or any detail for that matter, because while the leaks have been rich in broad strokes, there has been no information on the Spanish bailout conditions, on how one can use "unlimited" and "sterilized" in the same sentence, and how the ECB can strip its seniority with impairing its current holdings of tens of billions in Greek bonds without suddenly finding itself with negative capital. Elsewhere, the Swedish central bank cut rates by 25 bps unexpectedly: after all nobody wants to be last in the global currency devaluation race. Ironically, just before this happened, the BOJ's Shirakawa said that he won't buy bonds to finance sovereign debt: but why? Everyone is doing it. Finally, in news that really matters, and not in the "how to extend a ponzi by simply diluting the purchasing power of money" category, Greek unemployment soared to 24.4% on expectations of a rise to "just" 23.5%. This means there was an increase of 1.3% in Greek unemployment in one month.

Earlier we noted Gold's seeming clairvoyance with regard the expansion of the Fed and ECB balance sheets over the last few years. It seems the EUR strength overnight (or stop-run) has provided just enough USD weakness impetus to nudge spot Gold (not futures) back over $1700 for the first time since March 13th.

Just what is priced in? That is the question. Based on the aggregate size of the Fed and ECB balance sheets, it appears the S&P 500 is pricing in an increase of around USD300bn in the short-term. This USD 300bn amounts to EUR 240bn - a very special and rather too coincidental number. Based on expectations of supply, the EMU16 nations have EUR 245bn issuance remaining for the rest of 2012. So, it would appear that the market, in its ever-hopeful ebullient way has priced in the expectation that the ECB will soak up the entire remaining debt issuance of the 16 (remaining) Euro nations for the rest of the year. Anything less will be a disappointment - and remember each nation will have to ask for 'help' before receiving this 'support'. Coincidence, maybe? Over-confidence, perhaps? Reality, not a chance.

Who built that?

Where is the bacon, Mrs. Clinton?

Exceptionally low interest rates are bad for banks, insurers, and, more generically, anyone wishing to save money. Of the three, it’s the situation of the savers that is most untenable. In particular, Citi notes in a recent report, those wishing to retire at 65 or thereabouts are in for a nasty surprise when they start to run the numbers. Given that real yields are negative for Treasury bonds inside of 20-years, the steady stream of inflows into investment grade bond fund that hold a mixture of government, agency, and high grade corporate securities, will simply fail to return an adequate rate of return commensurate with the current savings rates of most retirement savers. What savers need to do is find higher asset returns or increase their personal savings rate. As the chart below shows, there are few options but to go all-in to the most excessive ends of the risk spectrum, or raise the proportion of savings and higher savings rates lead to lower consumption, a decline in corporate profits, and recession.

Today's ZH articles in audio summary! "It's a slap in the face. A wake up call. Turkey, anyone?" Everyday, 8pm New York Time.

Are you ready for some.. free-money? With 15 minutes until the NFL season opens this evening, we thought this little gem from Bloomberg was perfect to stoke the fires of Giants-Cowboys fanatic antagonism. That’s because the 80,000-seat Cowboys Stadium was built partly using tax-free borrowing. The resulting subsidy comes out of the pockets of every American taxpayer, including Giants' fans. The money doesn’t go directly to the Cowboys’ billionaire owner Jerry Jones. Rather, it lowers the cost of financing, giving his team the highest revenue in the NFL and making it the league’s most-valuable franchise. "It’s part of the corruption of the federal tax system, subsidizing activity that the private sector can finance on its own." This is not just the Cowboys but such tax-free public borrowing 'municipal' debt helped build structures used by 64 major-league teams, including baseball, hockey and basketball. As Bloomberg concludes, “You come back to this thin line of, ‘What is a legitimate municipal government undertaking?’ If the owner can get away with the public putting up part of the money, he’s going to do it.”

"Australian mining magnate Gina Rinehart has criticised her country’s economic performance and said Africans willing to work for $2 a day should be an inspiration. Ms Rinehart is said to make nearly A$600 (£393) a second." The richest woman in the world is making an increasing number of public appearances, and speaking of increasingly controversial topics. I wonder why. It couldn’t be that she is becoming increasingly aggressive and controversial because her core business is in trouble, could it? Marc Faber suggests so: "There have been four mega bubbles in the past 40 years. In the 1970s it was gold; in the 1980s it was the Nikkei, and in the 1990s it was the Nasdaq. Bigger than all of them, though, has been the iron ore bubble, a tenfold increase in prices in less than a decade."

It seems the world is willing to come on TV and tell the rest of the world that consensus is bearish, sentiment is weak, and that this rally 'proves' that investors are resilient. We have shown in recent days that the consensus is much more bullishly positioned in fact and as Citi's HY credit desk noted today:

"I'm a little cautious on how much further this rally goes. Not because I think that the September road bumps that have been very well flagged are going to come and bite us, but more because the consensus, which towards the end of August was mixed, to slightly wider, is now getting into a "this market is bullet proof, the ECB and FED put is there, and the technical is still great, and we're only going one way... Tighter". When the market consensus moves like this, it's small red flag, even though it definitely doesn't feel like that at the moment."

 

"One recurring lesson of the last few years is that the threats of central bank intervention tend to be far more effective than the actual programs."

Moments ago we learned that the Democrats have once again reinstated language into their party platform that recognizes Jerusalem as the capital of Israel as well as the words "God-given" that were removed in this year's platform. However, the 'vote' on this controversial decision (shown in the clip below), brings back vivid memories of the GOP convention's own Ron Paul moment; and must be seen to be believed as the true state of our nation's "democratic process" is once again exposed for all to see. Simply remarkable...