Archive - Jul 20, 2011 - Story

A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.
Market Recaps to help improve your Trading and Global knowledge

Bloomberg has just released some additinal details from the proposed plan based on a document it has received:

• GANG OF SIX SETS TOP PERSONAL TAX RATE BETWEEN 23% AND 29%
• PLAN LOWERS CORPORATE TAX RATE TO MAXIMUM OF 29% MINIMUM OF 20%
• SENATORS' PLAN URGES 'REFORM' OF MORTGAGE, CHARITY TAX BREAKS

We will bring you more if we get the full document.

In the past few minutes both gold and silver have seen a dramatic rally of buying on seemingly no news. The reason for this rally are remarks from a Bloomberg TV interview with FX Concepts' John Taylor, who just predicted that Gold will extend its rally to $1,900 by October, or in three months, coupled with a rally in the Assuie and Loonie as the EU debt crisis eases. But not for long: this record price will be promptly followed by a plunge down to $1,100 following liquidations as the latest and greatest recession grips the world, which he believes will be worse than the 2008 one due to the US running out of "gimmicks" to avert a slowdown. He believes the EU will slow as well, and the euro will drop to $1.15, and may hit parity next year (not a new call for Taylor).

As was announced before, Sprott's PHYS fund (which previously had not disclosed terms of its offering) has just priced 19 million units at $14.00/unit for a total raise of $266 million, all of which will go to removing another 5 tonnes of physical gold out of the broader lendable circulation.

Has housing bottomed? Here is the sure-fire way to tell: Stories titled "Has housing bottomed? Here's how to tell" have vanished for lack of interest. The absence of stories about the bottom in housing will mark the final nadir, because the real bottom can only be reached when everyone has abandoned housing as a pathway to easy money. Only when the public and investor class alike have completely lost interest in real estate as a "sure-fire" investment can the real trough be reached. This destruction of long-held habits and beliefs takes a long time. The closest analogy might be the stock market in the last secular Bear market. Stocks topped out in 1966, though the economy lumbered on until 1969 before faltering. Stocks then meandered for 13 years of stagflation, losing 66% of their inflation adjusted value in 1966 by 1982. People gave up on stocks. I call this loss of faith "when belief in the system fades:" note how household participation in stocks topped out in 1969, three years after the peak in the market. Participants clung to their belief in stocks for about four years after 1969, at which point participation cratered as they finally abandoned their faith in a "permanent Bull market."

Up, down, up, down. The daily volatility in the 30 year is now openly inducing nausea in the $60 trillion bond market. But at least the Fed is clearly instituting price stability for 98 years running.

Irrational exuberance part two. The vacuum tube that bought Z at $60 lost 33% literally in seconds.

Remember that surprisingly strong home starts data from yesterday which drove the market by 100 DJIA points higher yesterday? Neither do we. According to the NAR, June existing home sales once again declined, this time to 4.77MM from 4.81MM, the lowest since November, and well below the expected rise to 4.90MM. This number was 8.8% below June 2010's 5.23MM. Total inventory increased by 3.3% to 3.77 million units, or 9.5 months of supply at the current sales rate up from 9.1 in May. The biggest question mark is the surge in order cancellations which soared from 4% in May to an unprecedented 16% in June. That's one in five home transactions being cancelled in the middle of the deal. Here is Larry Yun's explanation for this shocking development: "The underlying reason for elevated cancellations is unclear." So let's get this straight whenever the number is better than expected it is always due to the economic recovery. When it is worse, it is "unclear." Thanks Larry. Now go back to fudging data please.

Markets are better this morning, at least in part because there is renewed hope that Europe will band together and create a new and improved EFSF. This EFSF V3.0 will, allegedly, finally solve the European debt problem. It sounds great on the surface, but is it possible? I think there are problems with virtually every step in the process. The ability for EFSF to retain a AAA rating is dubious, and the willingness of investors to buy an expanded mandate EFSF may not be as great as the politicians believe. Here is a quick summary of many of the problems facing the new EFSF in reality as opposed to in a quick and optimistic press release. Just like the “rollovers” that were announced, the details will prove to be unworkable and will not provide the benefits expected. The last round of EFSF had the Over-Guarantee Percentage increase from 120% to 165%. Italy is the 3rd largest guarantor at 18%, just below France’s 20%. Italy is Aa2 on negative watch at Moody’s and negative outlook at S&P. Spain is the 4th largest guarantor at 12%. It is Aa2/AA on negative outlook at both agencies. So 30% of the guarantees are coming from 2 countries that are rated less than AAA, are on negative outlook, and will likely draw on the EFSF funds? Even the rating agencies must be scratching their head wondering how to let AA entities guarantee themselves and still provide a AAA rating.

While the CDS market for various insolvent European names whose credit default swaps are trading 10 or more points upfront has become more or less nothing but noise, and the only true way to hedge risk exposure, courtesy of ISDA's advance warning that no matter what a CDS will never be triggered, is to sell cash bonds, the market for default risk is quite active for those names which still trade in a reasonable range: such as between 50 bps and 200 bps. And while the Bloomberg chart below demonstrates on an absolute basis the US is due for a two notch downgrade by S&P based on the recently observed spike in US default risk, it is DTCC data that is more troubling. As most revel in the latest nonsensical Group of 6 plan, the bond vigilantes are already quietly setting the trap.

"CIT Group, which is the largest institution we let fail since the class of Lehman and since those really crazy days of before 2008. That was about an $80 billion bank in terms of assets, 8-0. Goldman Sachs fluctuates between $800 billion and $1 trillion. And I don’t think we’d let Goldman Sachs fail. So somewhere between $80 and $800 billion. Where exactly is that line? Great question. I hope we don’t have to find out. But we should know and we should know how to handle it."

• Proposals Emerge to Curb Greek Debt Load (WSJ)
• IMF Warns Euro-Zone Crisis Risks Global Spillover (WSJ)
• Senators craft potential escape from default (FT)
• In response to Geithner's Op-ed: Little to celebrate on Dodd-Frank’s birthday (FT)
• IEA not decided on second oil release – Tanaka (Reuters)
• Papandreou Sees Make-or-Break Time in Crisis on Eve of Summit (Bloomberg)
• Alan Beattie: Let Europe pay for its policy failures (FT)
• Berlin and Moscow leaders foster trade ties (FT)
• China's moderating growth to aid inflation fight (Reuters)
• Give Greece What It Deserves: Communism (Forbes)
• IMF Signals BOJ Could Buy More Assets as Price Outlooks Diverge (Bloomberg)
• Joke Is on China as U.S.’s AAA Becomes Laughable (Bloomberg)

European equities traded higher during the session, led by financials, as markets look ahead to a key Eurozone leaders' summit tomorrow in anticipation of clarity over the implementation of Greece's second bailout package. Equities received further support following comments from sources that the EU is expected to weigh enabling the EFSF to recapitalise banks, and to buy bonds in secondary market. Strength in equities weighed on Bunds, whereas the Eurozone peripheral 10-year government bond yield spreads narrowed across the board. The USD-Index remained in negative territory, amid risk-appetite, which in turn supported EUR/USD and GBP/USD, whereas the latter received further strength following the release of the BoE's July minutes, which showed that the MPC members didn't change their stance on further monetary easing from last month. Also, strength was observed in the CHF, in early European session, partly on the back of news that China's CNOOC has agreed to buy OPTI Canada for approximately USD 2.1bln. Moving forward, markets look ahead to economic data from the US in the form of existing home sales, and DOE oil inventories figures. Markets will also keep a close eye on quarterly corporate earnings results from the likes of Intel, and Qualcomm among many others.

Forget M2, the monetary base, irrelevant Keynesian aggregates, reserve balances, and all that other mumbo jumbo. According to Sean Corrigan of Diapason, the ultimate indicator of easy money and speculative access is none other than Sotheby's share price.

Risk is back on in Europe (and thus spilling over to the US), confirmed by both a tightening in PIIGS spreads across the board and a jump in the EURUSD by 100 pips from overnight lows following a rehash of the same old rumor that the EFSF, or Europe's "toxic bank" off the books CDO equivalent, will provide emergency credit for insolvent countries. With the European Parliament summit starting tomorrow at 1pm (moved back by an hour), there is anticipation that Europe will finally present a strong resolution to ongoing problems. The expectations are not lost on Europe itself: as Barroso said "The minimum we must do tomorrow is to provide clarity on the following: measures to ensure the sustainability of Greek public finances; feasibility and limits of private-sector involvement; scope for more flexible action through the European Financial Stability Facility, the EFSF; repair of the banking sector still needed; and measures to ensure the provision of liquidity to our banking system." Unfortunately just like every previous time, Europe will disappoint as there is no holistic resolution that does not involve the default of the PIIGS. In the meantime, as Bloomberg reports, "European officials are considering steps previously rejected by Germany, including the use of precautionary credit lines, to prevent the spread of the region’s debt crisis, a person close to the talks said. Other options up for discussion at tomorrow’s Brussels summit include enabling the main 440 billion euro ($624 billion) rescue fund to lend to recapitalize banks, said the person, who declined to be named because the talks are in progress. Nothing will be decided until leaders convene. Together with a second Greek aid package, the goal is to prove to markets that Europe has the will and the tools to prevent the crisis from engulfing Spain and Italy." With Italy already "engulfed" it shows just how badly behind the curve Europe still is.