Archive - May 2010 - Story

With Greece now a distant, proforma bankrupt memory, rubberneckers have finally started paying far more attention to the Spanish slow motion trainwreck. And things in the Pyrenean country are deteriorating: earlier, Market News reported that the market's reaction to Spain's austerity package was one of ridicule, and its credibility will be further eroded now that Spanish bilateral labor reform talks have ended unsuccessfully , leading the way for general strikes as early as next week. Pouring even more gas into the fire is the just released announcement by the Spanish government that earlier economic forecasts were too optimistic: a hallmark of any floundering Keynesian state (and all of this even without the ongoing liquidity crisis as seen by rumors about BBVA's CP access and the ongoing flash merger rage among all the insolvent savings banks). The government, which is currently saddled with 20% unemployment, said that the economy will grow by 2.5 percent in 2012, down from its previous forecast of 2.9%. GDP growth in 2013 is seen at 2.7%, down from 3.1% previously. And while a realistic unemployment picture courtesy of austerity is now in the upper 20% range, a step in the right direction was the revision to the unemployment forecast, which was pushed higher to 18.9 percent in 2011, up from the 18.4 percent previously seen.

The Chicago PMI (whose early release to subscribers pushed the market lower as usual), dropped by the biggest amount so far in 2010: at 59.7, it saw its largest decline YTD, at -6.4%. The only item that rescued the PMI was the ongoing surge in inventories as end demand collapses. How much longer can the inventory rebuild continue? Aside from the inventory "junk food" restocking, all other PMI components tumbled, with the Prices Paid, Order Backlogs and Employment all coming in at 2010 lows, in signs that the fiscal stimulus benefits are all virtually over. Once the inventory inversion begins, look for the overall business barometer to make a sharp correction to the downside as the sugar high is on its last fumes.

Remember the prediction that CajaSur was Spain's New Century? Yup, it's accelerating: keep an eye on this trend as it will soon become an avalanche. Can Goldman reverse merge its FDIC subsidiary over to Madrid, to "prevent" the imminent implosion of that banking system?

I am about to head out on the road (not to serfdom hope!) and before I do I want to issue a rallying cry to everyone that craves freedom both politically and economically. We must all at once stop identifying ourselves as Democrats and Republicans. The elites use these definitions as part of a divide and conquer strategy. In any event, Bush and Obama seem pretty similar to me anyway. Two thugs. We must get back to our roots and what made this country great. The enemy is not someone from a different political party or a “capitalist” or a “socialist.” The enemy is collectivist thought imposed on humanity from the top down. Top down collectivist thought has taken on many forms whether it is Communism or Fascism but in the end what happens is a small ruling elite run the lives of 99% of the population. Those that resist are killed or imprisoned. I certainly do not think I have all the answers. What I do know is that freedom loving people the world over must shed their prior false political identities and together agree on certain key principles. There is a battle going on between a small highly organized group that wants a collectivist top down structure of world government and they are rushing to put these plans into action. This is not conspiracy theory it’s very obvious if you open your eyes. Get your money into real assets and get prepared so that you are not destitute when it comes time to stand up and rebuild. We can make this world a better place but it’s not going to be easy. - Mike Krieger

A lot of people have been attributing the bounce in risk to end of month rebalancing by mutual funds. If that's the case even better it means it's "static" portfolio rebalancing providing us better levels to sell. Fixed percentage asset allocation is a prehistoric investing strategy and it's only fair for other market participants to be able to make money off it. I am sure all the market making equity desks had another perfect week trading! The funding story is not going away, European banks have loan books that require uncollateralized funding in USD they cannot access right now, nothing has changed there. We are watching a repeat of 2007 in slow motion and market participants better acknowledge it. - Nic Lenoir, ICAP

According to the BEA's April consumer income and spending data, personal income increased by 0.4% in April, in light with expectations and the same as in March (revised). Expenditures, however were flat with March, after posting a 0.6% increase in current dollars in March, and below expectations of 0.3%. May data will likely demonstrate increased frugality courtesy of the explosion in market volatility, the flash crash, and the market correction. The only favorable outcome of this data is that the US personal savings rate increased from a revised 2.8% to 3.2% in April, which however is still in line with the lowest readings since late 2008. Another good data point: "Government wage and salary disbursements increased $1.9 billion, compared with an increase of $2.9 billion." Stunningly the centrally planned state allowed the salaries of its workers to increase less than those of the private sector: "Private wage and salary disbursements increased $24.4 billion in April, compared with an increase of $13.7 billion in March."

• Asia stocks rise for a third day after US shares rally; Euro declines.
• China's foreign-exchange regulator denied it is reviewing its holdings of euro-zone debt.
• European banks are increasingly hoarding cash while borrowing far less.
• Greece may yet have to restructure its debt, despite assurances to the contrary from EU, IMF.
• Japanese prices decline, unemployment rises in signs recovery is slowing.
• Workers protested French govt plans to raise the retirement age past 60 years old.
• BP puts total cost to date at $930M; 'top kill' may take another 24 to 48 hours.
• KKR, Bain Capital hire Goldman Sachs for a $1B IPO of Toys R Us Inc.

Lipper FMI reports that investors pulled $5.3 billion from equity mutual fund during the past week, the largest outflow since March 2009.  Including ETFs, the outflow was a massive $16.7 billion, the largest since 2002. And now, back to your regularly scheduled futures ramp, where courtesy of Ben Bernanke's bizarro supply-demand curve, selling begets higher stock prices.

The shadow bailout of the weak(est) Spanish banks continues under the guise of a forced national M&A program, as banks with some toxic asset capacity "merge" with the worse ones. Today's first "cold fusion" casualty is savings Caixa Girona which was merged by Barcelona's massive (in size if not solvency) La Caixa. With the recent change in requirements for loan loss provisioning by the Spanish Central Banks, which will make balance sheets far weaker, we will be bringing you many more such merger news going forward.

Full report

"The World Gold Council believes that with ongoing uncertainties surrounding the US dollar and the Euro, the search for alternative international asset choices within the central bank sector should clearly involve consideration of gold.Q1 net sales of 15 tonnes were very modest in comparison with historical averages. The IMF was the main contributor, with sales of 24.1 tonnes during the course of the quarter falling well within the limits of the Central Bank Gold Agreement (CBGA). The Fund remains committed to its aim of ensuring that its sales are not disruptive to the gold market. Sales among other CBGA signatories were nonexistent, while outside of the agreement, net purchases were concentrated in Russia, where the central bank continued its programme of steady accumulation." - World Gold Council

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 28/05/10

Jim O'Neill, who did not make any friends within the bear community earlier today, has written an interesting paper on the IMF's Special Drawing Rights, and whether this hypernational currency can ever become a reserve currency as is, and/or with the CNY as a constituent member. While O'Neill as usual focuses on the angle of the "next paradigm" BRICs, and how they will increasingly dominate global economics, he does pose an important question: with the dollar likely to suffer the side effects of either hyperdeflation, hyperinflation, or hyperstagflation, will the next reserve currency be a diluted melange of other flawed fiat constructs (i.e., the SDR), or the currency of the one country, which for all its flaws, still has the cleanest balance sheet backing its own fiat construct. On the other hand, the question of whether this analysis is moot to begin with, and the world will revert to the gold standard as the ongoing crisis of confidence in all paper money flares up, is not raised even once... We wonder (not really) what Jim O'Neill would have to say on that particular issue.

Thus far unreported, but quietly gaining momentum in the polls is the provision for Financial Equalization. Spurred on by the recent announcement of the SEC's inquiry into Goldman Sachs, legislators and soccer moms are gathering behind a system proponents claim will finally bring fairness and equality to the financial system.
The SEC investigation into Goldman has become a rallying point, a prime example of the corruption and inequality of the financial system.

A long time ago in a galaxy far, far away, fundamentals used to matter. In this place tonight's news that Japan is slipping back into its +/-20th sequential recession would have resulted in a plunge in the Nikkei, and a lot of overtime work for the Japanese plunge protection team, which unlike its US equivalent, does not hide in the shadows, and is well-known to intervene when equities plummet. Earlier, Japan announced that not only did its jobless rate increase more than the expected 5%, hitting 5.1%, once again openly starting on its one way trek to the record 5.6% achieved at the trough of the crisis, but deflation also picked up, hitting -1.5% in April (and where prices did not fall, they were supported by government subsidies), and completing the trifecta was that household spending came in at -0.7%, after estimates called for a 2.5% increase after the 4.4% prior reading. Instead, in our current galaxy, the Nikkei was up 1.5% because China said that it would not sell its European bonds, an act which would have brought the euro to parity and slashed the value of China's trillions in foreign reserves by about 10% overnight (also, the fact that a dollar-strapped BOJ demanded $200 million in FX swaps from the Fed was certainly also not lost on the market). Gee, it is truly shocking they did not confirm they are selling their German bond holdings. After all, even PIMCO is liquidating its European exposure: we would contend that China is not all that much dumber than Bill Gross.

The power games among the ranks of Europe's puppet elite continue (the real elite as is well known consists of a few CEOs of insolvent banks). Earlier today, Pierre Lellouche, France's Europe minister, came out with another statement our of left field, that could set off the next round of European destabilization. In an interview with the FT, Lellouche said that the €440 billion European bailout "is an enormous change. It explains some of the reticence. It is expressly forbidden in the treaties by the famous no bail-out clause. De facto, we have changed the treaty.” As the bailout is already being pursued by various German scholars on grounds it is forbidden by the EU constitution, this statement will not be taken lightly by Germany which has had to lose major internal political credibility to enforce a bail out that it itself is not enamored with. Sure enough, the FT notes: "Mr Lellouche’s comments are likely to go down badly in Germany, where the government has insisted the debt guarantee scheme to help beleaguered eurozone members is a temporary mechanism, set up on an intergovernmental basis where Berlin retains a veto, and in no way implies a breach of the EU’s treaties."Furthermore , as was noted previously, a finding that the bailout is not constitutional would render the entire support mechanism moot, resulting in the imminent bankruptcy of Greece. Is this yet another concerted subversive effort on behalf of the European labor interests to expel the underperforming PIIGS and sink the euro?