Archive - 2012

The ECB released its update of SMP purchases in the week ended January 6 (so with settlement through Wednesday): following two weeks of barely any acquisitions (€19MM and €462MM in the two weeks prior), the most recent number was €1.1 billion so gradually we are getting back to normal. The total amount of gross purchases is now €218.4 billion and €213 billion net of maturities. This will also be the amount the ECB will have to sterilize, hopefully without hiccups. Naturally, the more money is parked with the ECB, the less is available for sterilization. And since the total under the SMP will only keep rising, very soon the ECB will likely hit a plateau beyond which it will become increasingly difficult to successfully sterilize the entire weekly rolling amount. And the worst news is that despite the hundreds of billions in "sterilized" (when the banks are kept alive by the central bank, is it really sterilized?) monetizations, Italian yields are once again well over 7%, and the spread of Bunds is now back to a nosebleed inducing 522 bps: how long until LCH wakes up again and hikes margins sending the entire European bond complex a step function lower?

While relying on technical analysis and chart patterns may lack the academic rigor that fundamental analysts (such as Bill Miller) and economists (such as Joe LaVorgna) assume, it seems that relying on the reality of what is actually going on within businesses is a fool's errand currently. Furthermore, the just-around-the-corner nominal price action impact of a Fed-driven QE3 expansion is on every long-only manager's mind as good is bad and bad is great. As an antidote to this enthusiasm, Dolmen Securities note two longer-dated chart analogs that should provide some food for thought for the more bullish equity investors (which now represents the massive majority of individual investors). The 115 year Dow chart points to sideways price action in a broad range to an 80 year trend at best while the analog to the wave structure from the 2011 peak in the S&P 500 is echoing 2007/8's pre-crash levels rather accurately. While neither chart portends or guarantees an imminent precipice, given earnings downgrades and the box Bernanke appears to be increasingly squeezed in, perhaps they signal the flush that the market needs as an excuse to ramp up the printing press one more time.

As one can glean from the title, in this comprehensive report by Goldman's Paul Hissey, the appropriately named firm deconstructs the divergence between gold stocks and spot gold in recent years, a topic covered previously yet one which still generates much confusion among investor ranks. As Goldman, which continues to be bullish on gold, says, "There is little doubt that gold stocks in general have suffered a derating; initially with the introduction of gold ETFs (free from operational risk), and more recently with the onset of global market insecurity through the second half of 2011. However, gold remains high in the top tier of our preferred commodities for 2012, simply because of the extremely uncertain macroeconomic outlook currently faced in many parts of the world. The official sector also turned net buyer of gold in 2010 for the first time since 1988, and has expanded its net purchases in 2011." And so on. Yet the irony is, as pointed out before, that synthetic paper CDO, continue to be the target of significant capital flows, despite repeated warnings that when push comes to shove, investors would be left with nothing to show for their capital (aside from interim price moves of course), as opposed to holding actual physical (which however has additional implied costs making it prohibitive for most to invest). Naturally, this is also harming gold stocks. Goldman explains. And for all those who have been requesting the global gold cash cost curve, here it is...

Just one headline from Bloomberg, which says it all:

• HILDEBRAND RESIGNS

It is unclear which FX trading company he will join next. As expected, the entire politically charged campaign against Philipp was set to culminate with his departure. And now that the scapegoat is official, it may be time to revisit the EURCHF floor which will likely be the next to go.

Peter Tchir submits: "The market is essentially frozen ahead of yet another Merkozy press conference. I have lost count of how many of these press conferences they have had. I haven’t lost count of how many resulted in anything particularly useful – zero is an easy number to remember."

• SEC calls for detail on debt exposure (FT)
• Calls for US taxpayers to bear housing (FT)
• Beijing Sets Meek Tone on Reform to Banking Sector Amid Uncertainty (WSJ)
• Merkel, Sarkozy to seek growth, jobs for euro zone (Reuters)
• UK leaves door open for cash to IMF (FT)
• Hungary Runs Out of Options in Row With IMF (Bloomberg)
• Monti Says No More Budget Cutting Needed to Balance Italian Budget by 2013 (Bloomberg)
• China to maintain 'prudent' monetary policy (China Daily)
• Regional free trade talks in the pipeline (China Daily)

Today's key Euro-centric event, the Merkel-Sarkozy conference is about to begin. Follow it live here.

Markets are quiet halfway through the European session as most are awaiting the outcome of the meeting between German Chancellor Merkel and French President Sarkozy in Berlin at 1230GMT. The meeting is likely to centre around Greece, as well as the PSI update that, according to the FT may see the holders of Greek bonds accept higher losses as the contentious negotiation over writing down Greece’s debt burden are due to be concluded soon. German Industrial Production figures for November came in roughly in line with expectations, with the German Economic Minister commenting that this measure is likely to remain subdued over the winter months. Data released from Switzerland today shows Retail sales performing much stronger than expected, showing strong consumer demand in Switzerland across November.

Continuing the schizoid overnight theme, we look at Germany which just sold €3.9 billion in 6 month zero-coupon Bubills at a record low yield of -0.0122% (negative) compared to 0.001% previously. The bid to cover was 1.8 compared to 3.8 before. As per the FT: "German short-term debt has traded at negative yields in the secondary market for some weeks with three-month, six-month and one-year debt all below zero. Bills for six-month debt hit a low of minus 0.3 per cent shortly after Christmas...The German auction marks the start of another busy week of debt sales across Europe. France and Slovakia are also selling bills on Monday, with Austria and the Netherlands selling bonds on Tuesday. Germany will auction five-year bonds on Wednesday, while Thursday sees sales of Spanish bonds and Italian bills. Italy finishes the week with a sale of bonds on Friday." Still the fact that the ECB deposit facility, already at a new record as pointed out previously, is not enough for banks to parks cash is grounds for alarm bells going off: the solvency crisis in Europe is not getting any easier, confirmed by the implosion of UniCredit which is down now another 11% this morning and down nearly 50% since the atrocious rights offering announced last week. On this background Germany continues to be a beacon of stability, yet even here the consensus is that recession has arrived. As Bild writes, according to a bank economist survey, Germany's economy is expected to shrink in Q1, with wage increases remaining below 3%. And as deflation grips the nation, potentially unleashing the possibility for direct ECB monetization, look for core yields to continue sliding lower, at least on the LTRO-covered short end.

Europe has opened a new week with a modestly schizophrenic session: after hitting a multi year low against the USD and an 11 year low against the Yen, the Euro has seen a constant rise and traded nearly 100 pips higher last at 1.2770 on renewed hopes that today's Merkozy meeting would finally yield success. While that is clearly an utter delusion, with the abosolute record of shorts in the EUR as we pointed out last Friday, the smallest move higher can generate an avalanche of covering, and as we said previously a "potential" margin hike by the CME at any point in Euro contracts would leads to a QE-like surge higher in the EUR. If only briefly. Elsewhere, bond yields were mostly unchanged with the 10-yr Italian yield -3bps to 7.1% after rising as much as 4bps to 7.17% earlier; the 10-yr Spanish yield -5bps to 5.66%; was +1bp to 5.72% earlier; the 10-yr bund yield +2bps to 1.88%, first rise in 3 days. Most importantly, but no longer surprisingly, the ECB Deposit Facility usage soared to a new all time high of €464 billion, an increase of €199 billion since the LTRO hit the bank balance sheets on December 21, which accounts for virtually all the non-rolled cash. Simply said, Europe remains in suspended animation with hopes that a deus ex (now that the aliens have been downgraded from "possible" to "interference") will materalize preventing an allout spread collapse.

All you need to know.

Overall, there are both internal structural factors and external global factors, which contribute to the making of an epic hard landing in China. China will be really vulnerable when the US and Europe both unleash the quantitative easing. These are things China has no control of. Nevertheless, the best China can do to avoid the worst is to continue the painful structural adjustment: marketize the “big four”-dominated banking industry to allow for more efficient monetary allocation; Transform the labor intensive low value-added economy to the high value-added knowledge economy; reform the wealth redistribution system to empower the broad consumer base and honor its promise of a consumption-led economy.

While the US enjoys the luxury provided by the dollar’s world currency status and diplomatic alliance with many major trade partners to export its liquidity and inflation, China enjoys none of that. They should look at the dollars in their hands with fear and doubt. So called Beijing consensus makes little sense, because the world is fast changing, pegging a country’s growth to a certain set of policy tools or a certain reserve currency (the US dollar) is equally dangerous. The battle between Keynes and Friedman has long proven the only consensus is to adapt and change. Right now China needs to adapt and change fast. Or this will be the best time in history to short China.

Can Austerity Work?

Early Friday morning, Jon Najarian of optionMONSTER fame noted (on his site as well as CNBC) some 'unusual' action in an illiquid little stock called Inhibitex (INHX). It turns out that over the weekend, that same company was purchased by BMY for $2.5bn (or $26 per share - more than double the closing print of $9.87 on January 6th). This won't be the first time we have 'helped' Mary (Schapiro) and her little SEC lambs but it seems surprising that this would not generate at least an 'alert' when as Najarian so promptly pointed out on Friday - a total of 11,138 calls traded against only 937 puts with this call volume more than half the entire call trades of the month of December (when 19,000 calls changed hands). Friday's call activity was more than 12 times average, with the $10 Feb Calls' volume over 17 standard deviations above normal. While some of the action could potentially be discounted as front-running the JPMorgan Healthcare conference next week, we leave it to you to judge the option volume for itself: either the deal was leaked or the buyer of these calls had exceptional timing and is now considerably richer.