Archive - Mar 2013

The Dutch Finance Minister chaired the meeting on Cyprus. He was the one that directed the entire affair on Cyprus and the template that he revealed was first denied then admitted, then denied by the ECB and confusion reigned supreme. Now here comes the first pig; the representatives of the Eurozone finance ministries released a document this morning stating that Cyprus was not the template for future bail-outs. I suppose it was initially written in German and translated into English however they must have forgotten to translate it into Dutch. This is because when the Dutch Finance Minister was asked about this document, and he is the Chairman of the Finance Minister group remember; he said he knew nothing about the document. I am not making this up. My imagination is good but not this good. The good news this morning is that we already know which country is going down next. That country is Luxembourg.

It seems the realization that i) Cyprus mattered, ii) If Europe slumps then US will be infected (no matter how clean the asset-gatherers believe the shirt to be) is impacting markets globally once again. A slew of horrible data overnight following yesterday's US data disappointments (following US earnings bellwether misses) is finally (now at quarter-end) having some impact on the euphoria. European stock markets are dropping rapidly with Spain and Italy down 5 to 6 % this week now. Spanish, Italian, and Portuguese bond spreads have blown back wider (Spain yield back over 5%) by 30 to 40bps this week alone and EURUSD is getting monkey-hammered breaking back below 1.2800 - its lowest in over 4 months. European (and US) banks are also in trouble with the former now negative year-to-date. US Treasuries are well bid on this safe-haven flow (down 6 to 7bps on the week) and Swiss and German 2Y bond yields are negative once again (with the latter more negative as the 'safety' of offshore financial centers seemed less than the core of Europe).

Russia and South Africa, which together control about 80% of the world’s reserves of platinum group metals, plan to create a trading bloc similar to OPEC to control the flow of exports according to Bloomberg. “Our goal is to coordinate our actions accordingly to expand the markets for realization of these metals,” Russian Natural Resources Minister Sergey Donskoy said yesterday in an interview at a summit of leaders from Brazil, Russia, India and South Africa in Durban. “The price depends on the structure of the market, and we will form the structure of the market.” South Africa mines about 70 percent of the world’s platinum, while Russia leads in palladium, a platinum group metal used in autocatalysts, with about 40% of output, according to a 2012 report by Johnson Matthey Plc. Palladium rose 0.8% yesterday to $763.50 after Donskoy’s comments, reversing declines to reach the highest level since March 18. Platinum, used to make jewelry and autocatalysts, has risen 2.3% this year because of increased demand from the auto industry and after supply disruptions at mines. The price jumped yesterday in the hour after Donskoy’s comments, narrowing yesterday’s decline. South African Mines Minister Susan Shabangu confirmed that the two countries aimed to counter oversupply of platinum, and said possible measures could include taxes and incentives. “We’re not really controlling the market,” she said in an interview in Durban. “We want to contribute without creating a cartel, but we want to influence the markets.”

On Monday we reported the very disturbing news that despite the ongoing liquidity blockade, capital controls and (somewhat) closed Cyprus banks, one particular group of people - the very same group targeted to prompt this whole ludicrous collapse of the island nation - Russian Oligrachs had found ways to bypass the ringfence and pull their money out quickly and quietly. We said that, if confirmed, "If we were Cypriots at this point we would be angry. Very, very angry." Turns out the Cypriots did become angry, and the questions are finally starting. As Spiegel reports, the Cypriot Parliament, which may or may not last too long once the banks reopen tomorrow and the people realize that in a fractional reserve banking system, those deposits you thought were there... they are gone, poof, has begun investigating the capital flight that may means the destruction of Cyprus has been for nothing. Sadly, it is now too little, too late.

Recall the fate of the East German MZ motorcycle company (see picture below). Prior to the 1990 reunification of Germany these motorcycles were an extremely common sight (eyesore?) on the streets of London. But in what many saw as a cynical vote catching measure, Chancellor Kohl allowed the East German savings in Ostmark deposits to be converted into the Deutschmark at a one-for-one exchange rate (the black market rate was nearer to 10-1). The immediate euphoria of East Germans being able to spend their savings at a favourable exchange rate was replaced by gloom as East German industry was bankrupted at this wholly incorrect exchange rate.

• What bread... What circuses... JPMorgan Chase Faces Full-Court Press of Federal Investigations (NYT)
• European Regulators to Charge Banks Over Derivatives (WSJ) ... but forgive us if we don't hold our breath
• Cyprus readies capital controls to avert bank run (Reuters)
• Damage ripples through Cypriot economy (FT)
• G4S readies guards as Cypriot banks prepare to open (Reuters)
• Global pool of triple A status shrinks 60% (FT)
• Customers Flee Wal-Mart Empty Shelves for Target, Costco (BBG)
• BOE Says U.K. Banks Have Capital Shortfall of $38 Billion (BBG)
• U.K. Banks Facing Capital Shortfall (WSJ)
• Cyprus Details Bank Revamp (WSJ)
• Kazumasa Iwata Joins Kuroda Naysayers as BOJ to Meet (BBG)
• BRICS Nations Need More Time for New Bank, Russia Says (BBG)

While everyone likes to hate on Cyprus, it is Italy that is the focal point of today's European "omnishambles" that has seen the EURUSD tumble to a five month low as of this writing. First it was economic data that scared investors, with Industrial Sales and Orders tumbling far below expected, posting numbers of -1.3% and -1.4%, respectively, on expectations of an increase. Retail sales were just as ugly, declining by -0.5% in January, on expectations of an unchanged print, with the December 0.2% number revised also into negative territory. Then Bersani, who has been tasked to form a government until tomorrow, said that the possibility of a broad coalition government does not exist, adding that no lasting government is possible without him as a premier, and requesting that Grillo's Five Star party not block his path to government, for which we wish him the best of luck as moments later Five Star ruled out all external support for a broad government and would vote no confidence for Bersani. Then we got news that the Italian financial police has searched the Nomura in Milan in connection with the Monte Paschi case, which means even more skeletons in the closet are about to be uncovered. Finally, Italy just held a 3.5% 5 and 4.5% 10 year bond auction in which the country raised less than the maximum targeted €7 billion, and in which the Bid to Cover on the 5 Year dumping to the lowest since 2002, with bidding quite soft and the yield rising to 3.65% versus 3.59% previously. This has resulted in a blow out in Italian yields by 16 bps to 4.73% compared to 4.705% earlier. End result, as noted yesterday, has been an acceleration in the rush out of the EUR, with the EURUSD sliding to under 1.28 for the first time since November 21, a blow out in Greek bonds with yields pushing up 55 bps to 12.68% and a push for real safety (sorry, not the DJIA) in the form of German 2 Year bonds, which have dipped to -0.018%, the lowest since December, on rising fears that despite endless lies out of its bureaucrats, Europe may not be fixed after all.

Do you think that depositors in Cyprus are being taxed? That their money is being taken from them to go to the government in Cyprus or to Europe? Most analysis of the Cyprus bailout is wrong...

Bloomberg reported recently that Russia is now the world's biggest gold buyer, its central bank having added 570 tonnes (18.3 million troy ounces) over the past decade. At $1,650/ounce, that's $30.1 billion worth of gold. Russia isn't alone, of course. Central banks as a group have been net buyers for at least two years now. But the 2012 data trickling out shows that the amount of tonnage being added is breaking records. Based on current data, the net increase in central bank gold buying for 2012 was 14.8 million troy ounces – and that's before the final 2012 figures are in for all countries. This is a dramatic increase, one bigger than most investors probably realize. To put it in perspective, on a net basis, central banks added more to their reserves last year than since 1964. The net increase – so far – is 17% greater than what was added in 2011, which was itself a year of record buying. The message from central banks is clear: they expect the dollar to move inexorably lower. It doesn't matter that it's been holding up against other currencies or that the economy might be getting better. They're buying gold in record amounts because they see a significant shift coming with the status of the dollar, and they need to protect themselves against that risk. Embrace the messages central bankers are telling us – the ones they tell with their actions, not their words.

Today, the very orders that make HFT a beneficial trading strategy and one worth the massive capex, are controlled by the exchanges.  That's the difference between this form of "technological advancement" and those of the past, the direct ownership of the critical intersection between information processing and order execution.

Ever wonder how much iTunes represents of Apple's revenue model? Ever consider just how high the cost of sales is for Apple's products? This beautiful chart from Asymco shows just where Apple's revenues come from and where they are spent for the last quarter....

The present confusion is legitimate: it is far too early to be projecting much from Cyprus except a continued erosion of faith in Eurozone banks and leadership, and by default, the euro as a placeholder of purchasing power.

As we previously expected, 2013 has started in a strikingly similar vein to 2012 and 2011 and we are nearing that deja-vu turning point once again. However, the extreme relative outperformance of stocks to bonds in Q1 suggests very sizable quarter-end pension-fund rebalancing flows - and perhaps today's ramp was perfectly presented to enable that into the next two days. UBS expects US defined benefit funds to do sizable Q1 quarter-end rebalancing - anticipating $29-35 billion of equity outflows and perhaps as much as $15-19 billion of fixed income inflows. Equity outflows should be dominated by domestic stocks, with $22-27 billion of large cap and $10-12 billion of small cap sales. Furthermore, reading through the recent 10K statements of large corporate pension sponsors, they note consistent, and growing, interest in liability-driven strategies and even full-blown de-risking - supporting high grade long and intermediate government and corporate bonds. Not only are the flows pointing in a similar direction but the catalysts are lining up too.

We’ve all seen these statistics before in one form or another, but David Cay Johnston does an excellent job going into more detail for us in an article he published late last month.  As he correctly notes, when things get extreme like this you ultimately end up with extreme social unrest.  Furthermore, as we have pointed out for years and years, this kind of disparity does not happen under free markets with rules and regulations applied equally to all.  It happens under totalitarian societies, whether fascism, communism or crony capitalist corporatism (which is the model in the USA).  It only happens when a very small oligarch class takes over the political process of a nation and then uses it to game the system.