Archive - Mar 2011 - Story

Markets positive in the U.S., but mixed globally as this week will show the results of Ireland’s bank stress tests and possibly more events related to Portugal’s growing debt crisis. Speculation abounds this morning as to the future of QE2 as St. Louis Fed president James Bullard called the program into question. Germany sold €2.66B in 12M bills at 1.2649% v 1.0636% prior with b/c at 2.2x v 2.0x prior while waiting on ECB president Trichet’s statement today that may reaffirm his rate hike plan. German Chancellor Merkel’s CDU party showed further weakness in regional elections yesterday as the Green party and its anti-nuclear platform surged in the polls. The election results prompted the CDU to announce that most of the country’s older nuclear power plants will be shut down. Japan’s nuclear crisis persists as high levels of radiation at the power plant delay reactor cooling efforts.

More bad news for Portuguese bonds which just traded at lifetime high yields. From Moody's: "We are lowering our long- and short-term counterparty credit ratings on the five Portuguese banks and two related subsidiaries that we rate. The long-term ratings remain on CreditWatch with negative implications. The negative CreditWatch implications reflect the possibility of a further sovereign downgrade, which we expect could take place as early as this week, and its direct and/or indirect impact on our view of Portuguese banks' creditworthiness."

Today's economic docket includes Personal Income and Spending (which is expected to show a jump in inflation) and the Savings Rate, core PCE, Pending Sales, the Dallas Fed, and a whole lot of dovish Fed speeches. These will be analyzed under a fine toothed comb to see if any of the more dovish members are starting to become as hawkish as their brethren from last week. In the meantime, Frost-Sack will monetize another $5.5-7.5 billion in 5 year debt.

It only took TEPCO about two weeks to realize what had been so glaringly obviously to many - namely that the company is largely unprepared to deal successfully with the Fukushima catastrophe on its own. Reuters reports that TEPCO, which has conceded it faces a protracted and uncertain operation to contain the crisis, sought outside help, asking help from French firms including Electricite de France SA and Areva SA. The question now arises whether it is too late for any help to come, and how fast before the sudden inlfux of new cooks spoils the radioactive broth. The news comes after TEPCO announced highly radioactive water has leaked from a reactor at Japan's crippled nuclear complex, as environmental group Greenpeace said it had detected high levels of radiation outside an exclusion zone.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 28/03/11

The latest in the tragic story that just gets weirder by the minute.

• TEPCO's mishandling of info on nuclear crisis 'unacceptable': Edano
• Partial meltdown of fuel rods believed to be temporary: Edano
• Radioactive water from No. 2 reactor due to partial meltdown: Edano
• Contaminated water due to condensed steam, not reactor crack: Edano

And our personal favorite:

• Locals within 20-km evacuation zone asked not to return for now

As this whole farce has gone beyond the surreal, we are now actively waiting for a cartoon Mr. Burns to show up at any ongoing press conference and announce that Springfield Nuclear Power Plant has LBOed Fukushima with Discount Window financing, at a #Ref! EV/EBITDA considering 9501.JP will not see any positive cash flow for millennia, and is appointing Mr. Sparkle (aka Homer Simpson) chief safety inspector.

Curious what Bernanke thinks of ongoing oil price shocks? Wondering how long before the great Chairsatan will tighten in response to $120 Brent? The shorts answer - never. But don't take our word for it. Here is a paper titled by the eponymous nemesis of printer cartridge conservation, titled "Systematic Monetary Policy and the Effects of Oil Price Shocks" written when the urge for genocide was just a germ, a seedling if you will, back in the good old 1997. In it, Bernanke, who was yet to make his epochal statement about paradropping crisp Benjamins, makes it all too clear why neither oil at $120 nor oil at $1,120 will be enough to push the FOMC to hike: "an important part of the effect of oil price shocks on the economy results not from the change in oil prices, per se, but from the resulting tightening of monetary policy.” And there you have it: it is not the natural price response to a period of extensively loose monetary policy that is the issue, it is the Fed doing the right thing and ending the spigot that will be the end of the economy, sayeth the Bernank. And somehow this man runs the world...

Full paper below:

Because the state is inherently antisocial, we make a distinction between government and governance. We distinguish, that is, between an overarching entity on the one hand and an underlying process on the other, answering Thoreau’s question by asserting that the next step “towards recognizing and organizing the rights of man” will be taken via the latter, i.e., via the self-organization that is but another term for the spontaneous order by which human society came to be in the first place and has evolved ever since, concomitantly evolving the rules necessary for its governance. And the fact is, all one really need do to know that this is true is to look around...If looking around does not suffice, of course, one can explore the matter in depth, mindful, however, that to whatever extent rational argument and empirical analysis fail to persuade, the fact remains that actual experimentation is prohibited. That is, the state does not allow free societies to be attempted for the simple reason that the state depends on the legalized theft of taxation for its existence. And simply put, a successful experiment in a free society would therefore threaten the state’s chokehold (for that is what it is) on humanity.

By now the only homo sapiens in the world who don't realize that the Japanese earthquake/tsunami/nuclear disaster will have profound implications on supply chains, inventory levels, profit margins, corporate bottom lines and broad economic output are Wall Street sell side analysts, who remain convinced that the Lemming view is the right one, at least until management teams start coming out, most likely in the upcoming week, and issuing profit warnings, conveniently blaming their declining profitability on Japan, the weather and other "one time items." In fact, in the old tried and true mentality of "he who defects first, loses the least" and the even trieder and truer mentality of "never let a crisis go to waste" we may suddenly see a scramble of management teams taking advantage of the economic adversity posed by Japan to buffer their own declining margins, therefore buying them at least a quarter before the market realizes that the entire QE2 inspired "golden age" is now over. After all, one would be stupid not to blame an event which most will perceive as non-recurring, thereby eliminating its follow through to the top and the bottom line in future quarters and minimizing the impact on the stock price. So while corporate treasurers and CFOs are wording their press releases appropriately, which we expect will start hitting the tape as soon as tomorrow, here is the most recent recap of known auto and electronic-maker disruptions as reported by Reuters.

When even Goldman's summary update on Ireland, which conveniently ignores today's news that the country may be preparing for a senior bondholder haircut and most certainly ignores last week's dump of Irish paper by LCH Clearnet from the repo market), is unable to find much if anything good to say about Irish bonds it is really time to get out of dodge (not like anyone was still left in it). The kicker in Francesco Garzarelli's just released analysis: "With around EUR 30bn worth of senior bonds maturing in 2011-12 (40% of
which is not already government guaranteed) and under continued
reduction of funding efficiency of the covered bond program, rolling
over maturing debt remains indeed one of the biggest challenges faced by
the Irish banks." Everything else is noise. Add to this the Portuguese government crisis, its own funding crunch, and the rapidly deteriorating German political crisis and Europe will be a very fun place over the next few months. In fact for once we agree with Goldman: "In light of this, Irish bonds [ZH: aka Paddy Paper] will continue to exhibit high volatility, in our view."

With David Rosenberg's free economic updates soon to be a thing of the past, now that the Gluskin Sheff strategist has decided to go premium, it seemed there may be a large void needing to be filled in the economic commentary space. It appears said void may have already been filled, by Grant Williams, publisher of the fantastic Things That Make You Go Hmmm report which combines individual commentary and linked content in one delightful package, who after a brief hiatus is now back online and making readers go hmmm. Whereas Williams previously published within the editorial confines of bulge bracket wannabe Jefferies, he has since liberated himself (and his cynicism), and is now publishing, as he puts it, "under my own auspices and without any compliance filter." Zero Hedge agrees that those are certainly the best auspices and the best filter. So for those for whom TTMYGH is a new summary, here is your introduction.

Yet another clip of the March 11 tsunami advent has emerged and this one could be by far the most jarring. Nothing but the brute force of nature here. And this is what central planners believe can be papered over with a few trillions monetary ones and zeroes?

There is always someone on the other side of a trade, of course: someone originated the option or futures, and someone sold the shares that someone else bought. The problem arises when a "can't lose" trade rolls over, then there are no longer enough buyers to offset the panicky, underwater sellers who are overleveraged via margin or other forms of debt. This is in effect what still plagues the U.S. housing market: there are still plenty of sellers in the wings, hoping to unload properties, and a dearth of buyers willing to gamble that "the bottom is in." Even worse, there is a dearth of buyers qualified to buy properties at today's prices. That will become even more of an issue as interest rates rise. As a reminder of how things can play out at real bottoms: in the depths of the 1930s Depression, a Manhattan skyscraper was sold for the original cost of its elevators. In other words, the rest of the building was "free." People talk about replacement cost as a metric of value in homes and buildings. In other words, this house can't drop much below $200,000 because it would cost that much to buy the lot and construct a replacement house. That is another thing "everyone knows to be true" that is actually not true at real bottoms. Stocks can end up trading for less than the cash the company is holding.

Following much ongoing confusion about a fact-based reality in Japan, leading many to express somewhat extremist opinions due to persistent scarcity of facts, here are three much needed clips showing the sentiment on the ground in Tokyo courtesy of the mostly impartial BBC News.

Here is a simple way to clear up the flap over the earlier "false" reporting on whether or not TEPCO screwed up by releasing the figure of 1 sievert of radiation as emanating from the water pool at Reactor 2. From the IAEA: "As previously reported, three workers at the Fukushima Daiichi
nuclear power plant were exposed on 24 March to elevated levels of
radiation. The IAEA has received additional information on the incident
from the Japanese authorities. For two of the three workers, significant skin contamination over
their legs was confirmed. The Japanese authorities have stated that
during medical examinations carried out at the National Institute of
Radiological Sciences in the Chiba Prefecture, the level of local
exposure to the workers’ legs was estimated to be between 2 and 6
sieverts. While the patients did not require medical treatment, doctors decided to
keep them in hospital and monitor their progress over coming days." All that needs to be disclosed now is how long these workers were in the contaminated water for. If it was between 2 and 6 hours, and the cumulative exposure was 2 - 6 sieverts, it would be rather consistent with the reported record exposure of 1 sievert/hour. If it was shorter, and the upper estimate is correct, the exposure could be as high as 6 sieverts/hour, a figure, based on the prior methodology, about 60 million times higher than permitted.