Archive - Jun 13, 2013

Four days ago we timed the Nikkei short perfectly: after all we had the irrefutable top indicator - a Goldman "buy" recommendation, which hit the tape on Sunday night when the Nikkei was at 13250. Here is what Goldman said. "Nervousness over local bond market volatility, amplified by concerns about Fed tapering, has raised fears about whether QE policies can be effectively delivered. We think those fears are overdone and are recommending long positions in Nikkei September futures (NKU3) with a target of 14,500 and a stop on a close below 12,700." We, in turn, were cautiously optimistic on the imminent collapse in the Nikkei which however surpassed our wildest expectations, plunging by 800 points in under 4 days and hitting 12400 a few hours ago where the Nikkei closed.  One would think that following this horrible trade, whose catalyst never panned out ("Our central expectations for Tuesday’s BOJ meeting are relatively modest – we expect the term period for fund-supplying operations against pooled collateral will be extended to two years"), Goldman would have the dignity to spare the muppets further losses. Alas, no such luck.

Let's start with the oldest economics joke in the book: "assume there is a housing recovery."

This past March, Jeroen Dijsselbloem, the head of the finance ministers of the eurozone, shocked the markets with seemingly off-the-cuff comments suggesting that the Cyprus banking solution will, “serve as a model for dealing with future banking crises.”¹ Depositors across Europe took a collective gasp of horror – could banks possibly confiscate depositors’ funds in a form of daylight robbery? Indeed they could, and last week the Bank for International Settlements (“BIS”), the Central Bank's Central Bank, published what we have referred to as ‘the template’; a blueprint outlining the steps to handle the failure of a major bank and the conditions to be met before ‘bailing-in’ deposits.

Those who have been following our coverage of the bipolar Chinese liquidity situation (most recently here and here) are well aware of the unique position the world's fastest (if only on paper) growing economy finds itself in: on one hand, it is the target of massive external hot money flows from both the Fed and the BOJ, which are pushing select inflation in the country higher, manifesting itself best in the real-estate market now higher for 12 consecutive months. On the other hand, the local banking system is in such dire need of liquidity, that not only have various short-term SHIBORs soared to multi-year highs but as Market News reported last week, China Everbright Bank failed to repay 6b yuan ($977m) borrowed from Industrial Bank on time yesterday because of tight liquidity, leading to “chain effect” borrowing in the market overnight and almost ushering in the first bank failure in China. The unprecedented liquidity shortage in China is seen best on the overnight SHIBOR chart below which just hit an all time high. In a nutshell there is zero free liquidity in the system. So what would have happened if the PBOC had continued on its merry way of withdrawing liquidity from the interbank market? Very bad things. “If the PBOC sold repos or bills today, the market would have collapsed.”

Just as during the Great Moderation, buying financials has become the no-lose trade for any and all momo junkies. From their 'fortress' balance sheets (prone to total leveraged collapse at any moment from giant over-zealous trades and mismarking of assets) to their 'can't lose' scenario analysis if rates rise because NIM will make them rich (aside from the fact that it won't), bank stocks have been among the best performers in recent months (dramatically outperforming credit in the last few weeks). So we have a simple question. If things are so great... if the outlook so rosy... if the price-to-book so misvalued... why are the bank laying off people in 2013 at a rate almost as fast as they did in 2009?

Repossessions! Home repossessions in the USA increased by 11% in May. Foreclosure filings (default notices and scheduled auctions as well as repossessions) were also up by 2.3% (148, 054) according to a report just published today by RealtyTrac.

Liquidity overcame common sense and economic fundamentals for a time. A lot of money was made and a huge amount of leverage was put on. Everything rose with the tide. Look around you though; look carefully. We think the tide is beginning to go out. We believe recession in Europe will spread to America as the severity of the European crisis becomes more and more apparent. Upcoming economic data in France is also going to be quite troubling in my opinion and the contagion will become apparent in the United States.

Moments before the retail sales number was reported, when we reminded readers that last the April retail sales was revised lower from a 100% beat to miss, we predicted that the May retail sales number (driven as usual by seasonal adjustments) would be a beat. Sure enough, that's just what happened, following a headline retail sales increase of 0.6% on expectations of a 0.4% print. After all the algos need their morning kick following last night's global risk off session. As for the final data, as we also noted, which will likely be revised lower, who cares - it is the upward kneejerk algo reaction which is all that matters. Also ignored will be the non-headline retail sales, such as ex-autos and ex-autos and gas, both of which printed +0.3%, or just in line as expected, the latter of which was a decline from last month's even more downward revised number, which dropped from 0.6% to 0.5%.

Apple bond buyers, after paying a premium to bathe in the Steve Jobs RDF (Reality Distortion Field), consequently get bathed with a 9% loss within weeks. I suppose an "I told you so" would be inappropriate here?

The Greek national broadcaster ERT situation is nowhere near a resolution, and the nation's political stability remains in the balance with  Antonis Samaras’s coalition partners, Evangelos Venizelos of PASOK and Fotis Kouvelis of Democratic Left, appealing to him Wednesday for talks on the future of the TV and radio station, but the premier has so far stood by his decision to close and later reopen ERT, leaving the government’s future in doubt. What is certain to make matters worse is that today, Greek public transport and state services will be disrupted as thousands of workers join a 24-hour snap general strike called on Wednesday by the country’s two main labor unions, GSEE and ADEDY, in protest to ERT's shut down. The claim is that Samaras' unilateral decision was the equivalent of a coup, which of course is not true: one can't overthrow a country in which sovereignty has long since been ceded to the European Commission, and Germany in specific.

• Global shares pummeled, dollar slumps as rout gathers pace (Reuters)
• Hong Kong to Handle NSA Leaker Extradition Based on Law (BBG)
• Lululemon chairman sold $50 million in stock before CEO's surprise departure (Reuters)
• Companies scramble for consumer data (FT)
• Traders Pay for an Early Peek at Key Data (WSJ)
• When innovation dies: Apple looking at bigger iPhone screens, multiple colors (Reuters)
• Washington pushed EU to dilute data protection (FT)
• Japan-U.S. drill to retake remote island kicks off (Japan Times)
• EM economies in danger of overheating, World Bank says (FT)
• Don't forget the Indian crisis: Chidambaram seeks to quell concerns over rupee (FT)

In the brief but tempestuous fight between Abe and the "deflation monster", the latter is now victoriously romping through an irradiated Tokyo, if last night's epic (ongoing) collapse in the Nikkei is any indication: down 6.4%, crushing anyone who listened to Goldman's "buy Nikkei" recommendation which has now been stopped out at a major loss in three days, and now well in bear-market territory, it would appear that a neurotic Mrs. Watanabe is finally with done with daytrading the Pennikkeistock market, and demands Shirakawa's deflationary, triumphal return to finally clam the market. Only this time the Japan's selling tsunami is finally starting to spill, if not to the US just yet (it will) then certainly to Asia, where the Shanghai Composite which was down 2.7%, and is once again well down for the year, and virtually all other Asian stock markets. Except for Pakistan - the Karachi Stock Exchange is an island of stability in the Asian sea of red.

This week, the US Ministry of Propaganda presented a patently absurd gem of a news article in which it equated a growing percentage of US workers quitting their jobs in April as a sign that Americans’ confidence in the US economy is returning.