Archive - Feb 2013

Europe keeps banking on these two pillars holding the system up. But the pillars are cracking... it's only a matter of time before the whole thing comes crashing down.

With a week to go until the Italian elections, things are getting a little odd to say the least. The somewhat scandal prone Berlusconi, who self-declared himself leading in the polls just recently, has come out swinging in defense of his fellow business leaders' ethical egressions. The Bunga party banner-man defends bribery, "These are not crimes," he notes, as The FT reports, "bribes are a phenomenon that exists and it’s useless to deny the existence of these necessary situations..." This apparently on the heels of the Finmeccanica CEO's Indian helicopter deal bribes and Monte Paschi's derivative debacle. It would appear his argument lies somewhere betweeen, 'if everyone's doing it - then it's ok', and 'everyone's been doing it forever so why stop now?' One Italian paper, though, disgusted at the state of their nation, describes the entire political and elite establishment of 'guilty inertia' - calling for an end to what Berlusconi appears to be saying is corrupt business-as-usual. And yet we are to trust these technocrats when they say 'crisis over', all is well, recovery is here?

In the video clip below, I explain that the rating agencies DID NOT fail to do their jobs during the credit bubble and subsequent bust of 2008-2009, nor did they fail in the ongoing pan-European sovereign debt crisis. They succeeded wildly because they served their actual constituency --- the banks!

While it is certain that derivative-hopers and uptick-algo-watchers are relieved to see a better than expected rise in University of Michigan's Confidence index (thanks to a generous rise in current economic expectations - which we suspect is as co-dependent on the miracle of rising stock prices as it is used to reflexively justify higher equity prices). Stocks are bid (briefly) on this but remain, medium-term, notably dislocated from the real state of less-than-exuberance among the people. And in great rhetorical questions, this one remains: are stocks now higher because rising consumer confidence, or is consumer confidence rising because stocks just spiked.

Many investors understandably have not focused on France. The threat of scandal in Spain, the need for yet another round of government support for Italy's third largest bank and the country's upcoming election have commanded attention. What seems to have been a free ride for France may be coming to an end.

Even though the German economy contracted twice as much as the French economy in Q4, we learned this week, the implications for France are greater. Recent data suggests that the German economy has stabilized and may be expanding albeit slowly this quarter. French data continues to disappoint. This is particularly important because the French government's growth forecast for this year is optimistic, well above the consensus.

One of the more perplexing developments in the end of 2012, when as we pointed out previously US investors scrambled to deposit some $220 billion into the "safety" of savings accounts, resulting in major cash outflows out of US equities - cash which has since been returned, explaining the spike now declining, in equity reallocations back into stocks - ahead of the confusion over the Fiscal Cliff dividend and capital gains tax rates, was how US stocks did not tumble far more on this accelerated withdrawals out of equities. We now have the answer. As the TIC data reported minutes ago, in addition to purchasing some $30 billion in Treasurys, and $18.1 billion in MBS, as well as $2.6 billion in corporate bonds, foreigners bought a whopping $25.9 billion in US stocks in December, just as US investors were withdrawing over tax-related fears. This followed another whopping $21.5 billion inflow from foreigners in November, and was the highest equity inflow since the $30 billion allocated to US stocks in July 2009. This in turn brings the 6 month moving average to $14.2 billion, also the highest since the summer of 2009. Mystery solved who the banks have to thank for keeping the US stock market afloat in those days in mid to late December when the US equity investors was getting the hell out of dodge.

It would appear that the channel-stuffed awesomeness of the auto manufacturing business has caught up with the inexorable reality of demand (even with uber cheap credit and subprime financing). January's Industrial Production missed positive (+0.2%) expectations and fell -0.1% for the first time in 3 months. What drove the slide? A 5.5% plunge - the largest in 6 months - in vehicle production (which dragged Manufacturing production -0.4% overall). This slide in Industrial Production does not offer much additional hope/hype for those looking to discard Q4's negative GDP print and expecting a Q1 jump.

Curious why nobody at the G-7 or G-20 had the gall to outright accuse Japan of currency manipulation? Simple: because everyone else in the G-7 and G-20 has been doing precisely what Japan only recently started doing a few months ago. As such, it would be outright "glass house" hypocrisy if there was a formal Japanese condemnation by the group of overlevered nations, which moments ago released its draft communique not naming the island nation outright as was widely expected. Of course, that the G-20 did not accuse Japan of engaging in what everyone clearly knows is currency war, does not mean that everyone else is not doing this. To the contrary: they are, and the lack of a stern rebuke of Japan simply means the currency wars will now intensify, devolving into the same protectionism and trade wars as the first Great Depression was so familiar with, which to borrow a parallel from history again, will end with the kind of war that ultimately ended the first Great Depression.

As the G-20 continues to craft the most egregiously hypocritical words to describe what is declaring currency war and what is merely commenting on the need for a weaker currency, JPY has plunged back towards the week's lows and Gold and Silver have been slammed lower in another instantaneous 1% gap-down (as we have seen at 8amET every day this week). Silver now below $30 is back near the lows of the year. Treasuries are leaking higher in yield as the precious metals are sold.

After the January Empire Manufacturing data came at the worst level in years, it was only logical that the February print would post a massive surge of some 18 point, from -7.78 to 10.04, the highest since May 2012, the first positive print since August, and above the highest expectations whose consensus saw a rise to -2.00. The driver: a surge in the New Orders number which soared from -7.18 to 13.31, indicating that the recent northeast snowfall did little to impact manufacturing unlike various other series, whose miss was blamed on snow in the winter. And while there were increases in all subindices, the divergence between prices received, which dropped, and prices paid, which rose, implies corporate margins will continue to suffer. But in this new dot com/housing/credit bubble, who cares about such trivial things as profitability.

A German pope may be vacating the Vatican but a German lawyer is about to head its bank, an institution some say is as important if not more, and whose shady dealing some say may have been the reason for the pope premature departure. Per Reuters, "The Vatican appointed German lawyer Ernst von Freyberg to be the new president of its bank on Friday, filling a post left vacant since May when the previous head was ousted from the scandal-tainted institution. The appointment was made by a commission of cardinals and approved by Pope Benedict and is likely to be one of his last major decisions before he resigns at the end of the month. The Vatican has been trying to shed a reputation for a lack of financial transparency at the bank, officially known as the Institute for Works of Religion (IOR), but has been dogged by scandals for decades." And no, apparently he does not work for Goldman.

The bangish enthusiasm that European banks launched off LTRO repayment season, when on January 25 some 278 banks repaid a grand total of €137.2 billion in LTRO funds, has dried down to a whimper, and as reported earlier today, the ECB announced that just 9 banks opted into the latest weekly putback of excess ECB capital. This is the lowest weekly number of participants since the LTRO repayment window was opened, and may indicate that European banks are starting to get seller's remorse about parting with Draghi's money a little too fast in a desperate attempt to telegraph an all clear when it comes to their balance sheet and funding needs.

In perhaps the oddest news of the day, workers in the Chelyabinsk region in the Russian Urals were greeted this morning with a spectacular show: an exploding meteor. Bloomberg reports "A meteor exploded in the skies above Russia’s Urals region and sent shock waves that shattered windows, hurting hundreds of people, hours before an asteroid half the size of a football field hurtles past the Earth. The meteor broke apart above the Chelyabinsk region at about 7:25 a.m. Moscow time, the Emergencies Ministry’s division in the Urals district said today on its website. “A serious meteor fell,” billionaire Sergey Galitskiy, chief executive officer of OAO Magnit, Russia’s biggest food retailer by value, said in a post on his Twitter Inc. account. “At our hypermarket in Emanzhelinsk, windows were blown out, the roof shook, there was a strong shock wave.”  More than 290 people reported injuries, according to the website of Chelyabinsk Region Governor Mikhail Yurevich. The number may be higher than 500, Interfax reported, citing an unidentified Interior Ministry official."

• G20 struggles over forex, at odds over debts (Reuters)
• Alwaleed Sells Airbus A380 to Invest in Middle East Firms (BBG)
• GOP Stalls Vote on Pick for Pentagon (WSJ)
• ECB officials rebuff currency targeting as G20 meets (Reuters)
• Not good for the reflation effort: Muto leads as Japan PM close to choosing nominee for Bank of Japan chief (Reuters)
• M&A Surges as Confidence Spurs Deals in Computers to Consumer (BBG)
• JPMorgan’s head of equity prop trading Gulati to launch own fund (FT)
• Tiffany & Co. sues Costco over engagement rings labeled ‘Tiffany' (WaPo)
• JPMorgan Said to Fire Traders, Realign Pay Amid Slump (BBG)
• Broker draws Tullett into Libor scandal  (FT)
• Airbus drops Lithium-Ion batteries for A350 (Reuters)

The quiet overnight session was started by comments from Buba's Weidmann, whose statement, among others, that the ECB will not cut interest rates just to weaken the EUR together with the assertion that the EUR is not seriously overvalued, sent the EURUSD briefly higher in pre-European open trading. Of secondary importance was his "hope" that the ECB will not have to buy bonds (it will once the market gets tired of Draghi open-ended verbal intervention), something he himself admitted when he said the ECB "may be forced to show its hand on OMT." The stronger EUR did not last long, and in a peculiar reversal from prior weeks when the European open led to a spike in the cross, saw the EURUSD dip to three week lows, touching on 1.3310, before modestly rebounding. This validity of the drop was confirmed two hours later when in the first key economic datapoint, it was revealed the Euroearea exports fell 1.8% in December, the most in five months. As SocGen said "the monthly trade data rounded off what has undoubtedly been a pretty dismal quarter for the euro area. Overall euro area exports fell by 1.8% m/m in December although this was offset by a even bigger 3% decline in imports - which itself reflects the weakness of domestic demand in some euro area countries. Maybe of more interest is the latest data on the destination of euro exports. These continue to show a pronounced weakness in global demand (albeit for November). This indicates that weakness in Q4 is not solely a domestic affair but also reflects a wider slowdown in the global economy."