Archive - Jan 3, 2012 - Story

History is full of other examples of once proud nations that, facing problems for decades (or even centuries), completely unwound in a matter of years. The Ottoman Empire. The  Ming Dynasty. Feudal France. The Soviet Union. Bottom line, when the real change comes, it comes very, very quickly. Think about the pace of change these days. It’s quickening. Europe is a great case study for this– when concerns about Greece first surfaced, European leaders were able to contain the damage. There was disquiet, but it soon dissipated. Fast forward to today. We can hardly go a single day without a major, market-rocking headline. And European politicians’ attempts to assuage the damage have a useful half life that can be measured in days… sometimes hours now. Like the Ottomans, the Soviets, the Romans before them, Western civilization is entering the phase where its rate of decline will start looking like that upside-down hockey stick.

European credit and equity markets rallied today but there was considerable relative underperformance by the former (especially in financials). Sovereign spreads leaked wider all day and started to lose it more rapidly into the close. It looks like Senior versus Subordinated decompression trades were placed in the European afternoon (a bearish trade ion financials) and even with the ECB in the market, BTPs closed above 500bps over Bunds (just shy of 7% all-in yields). Broad risk assets also lost ground as Europe's bid eased off as Oil eased back off its best levels and FX carry came off its highs of the day. US Treasuries are rallying after trying to converge earlier and 2s10s30s is also dragging risk lower for now.

Presented with little comment - Silver - having (like Gold) retraced all of last week's losses is seeing a record-breaking move today. This jump of 6.6% is the largest since 11/24/08 - over three years ago.

Earlier today, we reported of Iran's threat to further escalate if the US were to bring back its aircraft carrier (either CVN74 or any other one) back into the Persian Gulf. Now, the US has just decided to call Iran's bluff. From Bloomberg:

• CARRIER DEPLOYMENTS IN GULF WILL CONTINUE, U.S. SAYS
• PENTAGON SAYS NAVY TRANSITS THROUGH STRAIT OF HORMUZ ARE NECESSARY TO SUPPLY U.S. MISSIONS IN GULF REGION
• U.S. MILITARY MOVEMENTS IN PERSIAN GULF `REGULARLY SCHEDULED'
• U.S. RESPONDS TO IRAN WARNING AGAINST FUTURE CARRIER MOVES

And so the fully-armed grenade is now back in Iran's court.

It was the best of times, it was the worst of times. Given today's excitement at a rallying equity market, we are already hearing chatter on raising GDP estimates even though macro data is benefiting from standard seasonal improvements. However, while these good times are rolling for some (who, we are not sure), Sean Corrigan (of Diapason Commodities) points to our real disposable income. The man on the street's spend-ability has seen the worst five years' growth in half a century. For four decades, US real per capita disposable income has risen at ~20% a decade. For the average working man, that is a doubling of disposable income in a typical working life. The last 5 1/2 years, however, have seen no change whatsoever - the worst performance in at least half a century.

One of the reports making the rounds today is a previously little-known academic presentation by Princeton University economist Hyun Song Shin, given in November, titled "Global Banking Glut and Loan Risk Premium" whose conclusion as recently reported by the Washington Post is that "European banks have played a much bigger role in the U.S. economy than has been generally thought — and could do a lot more damage than expected as they pull back." Apparently the fact that in an age of peak globalization where every bank's assets are every other banks liabilities and so forth in what is an infinite daisy chain of counterparty exposure, something we have been warning about for years, it is news that the US is not immune to Europe's banks crashing and burning. The same Europe which as Bridgewater described yesterday as follows: "You've got insolvent banks supporting insolvent sovereigns and insolvent sovereigns supporting insolvent banks." In other words, trillions (about $3 trillion to be exact) in exposure to Europe hangs in the balance on the insolvency continent's perpetuation of a ponzi by a set of insolvent nations, backstopping their insolvent banks. If this is not enough reason to buy XLF nothing is. Yet while CNBC's surprise at this finding is to be expected, one person whom we did not expect to be caught offguard by this was one of the only economists out there worth listening to: Ken Rogoff. Here is what he said: "Shin’s paper has orders of magnitude that I didn’t know"...Rogoff said it’s hard to calculate the impact that the unfolding European banking crisis could have on the United States. “If we saw a meltdown, it’s hard to be too hyperbolic about how grave the effects would be” he said. Actually not that hard - complete collapse sounds about right. Which is why the central banks will never let Europe fail - first they will print, then they will print, and lastly they will print some more. But we all knew that. Although the take home is the finally the talking heads who claim that financial decoupling is here will shut up once and for all.

The American ability to delay the lag with the rest of the world persists for one more month, as December's ISM printed just better than expectations, coming in at 53.9, on expectations of 53.5, and compared to 52.7 in November. This was the best manufacturing data since June. As it turns out in December virtually every single component of US manufacturing improved, even as Customer Inventories somehow declined contrary to what retailer data has been indicating, and even as Europe went further into its recessionary shell following the 5th consecutive month of PMI contraction, and China saw a dramatic drop in the trade balance. But why bother to debate the numbers: here they are: New Orders rose from 56.7 to 57.6, Employment rose from 56.5 to 59.9, and so on. From the PMI: "The PMI registered 53.9 percent, an increase of 1.2 percentage points from November's reading of 52.7 percent, indicating expansion in the manufacturing sector for the 29th consecutive month. The New Orders Index increased 0.9 percentage point from November to 57.6 percent, reflecting the third consecutive month of growth after three months of contraction. Prices of raw materials continued to decrease for the third consecutive month, with the Prices Index registering 47.5 percent, which is 2.5 percentage points higher than the November reading of 45 percent. Manufacturing is finishing out the year on a positive note, with new orders, production and employment all growing in December at faster rates than in November, and with an optimistic view toward the beginning of 2012 as reflected by the panel in this month's survey." Oh well - the banks will need to get even more apocalyptic with their forecasts if they want the Fed to start printing as +250 DJIA up days will not help the cause.

We are 30 minutes into the day session. Do you know where your sanity is? Silver and Oil (over $102) are up 3.5% from last week's close, Copper and Gold up 1.5-2% and the USD down 0.7%. The USD weakness, along with Treasury selling, is enough to juice stocks up nicely as they catch up to yesterday's European extravaganza. European sovereigns are giving back a lot of their gains from yesterday so far but ECB buying chatter is supporting BTPs at the moment. US financials are up 2.8% as the Treasury-Stock disconnect of last week converges rapidly.

We are always amused by technicians trying to predict what the market will do based on something that may have happened some time in the past, when in reality the only thing that matters is the distinction: "Pre-Central Planning" and "Post-Central Planning" or PCP (for both) - in other words, anything prior to 2009 is completely irrelevant when it comes to analyzing the market. Yet people continue doing it. And while the predictive pattern of such formerly "self-fulfilling prophecies" is now gone, courtesy of whatever side the Chairman wakes up on, traders habits die slowly. Here is Art Cashin with his summary of what trading patterns are relevant for the new year. That said, we remind readers that the first trading day of 2011 saw the S&P rise from 1257 and close at 1272, something which #CarbonCopy2012 seems dead set on imitating. After all, with central planning, why recreate the wheel - Brian Sack can just hit the "repeat 2011" program button and all shall be well. All the way up to a 2012 year end close at 1257.

We have heard more than enough about both the "resiliency" of holiday spending and the resurgence of the US consumer as shopping supposedly surprised in the past several months (on nothing else than as Bridgewater's Prince indicated was merely the exhaustion of consumer savings). Now we get the confirmation that this was nothing but a prelude to a tsunami of retail returns as "shoppers" push to complete the other side of the transaction, whereby retailers part with the just received cash, leaving them with even greater inventories, and even thinner margins. As Reuters reports, "With a Christmas season that has seen record e-commerce sales coming to a close, returns should hit an all-time high on Tuesday for United Parcel Service." It is only fair that one record nets off another record. And with it goes away the myth that US consumers had found some mysterious and mystical money growing tree. Until Ben boards Commanche One and starts jettisoning the money sacks, this simply won't happen.

Stock futures are up sharply after another week of unprecedented volatility. Although last week was relatively tame, only 13 times in the last 60 years has the S&P 500 had a down 1% day during the week between Christmas and New Year's.  We managed one of those days last week.  We also had a 1% positive day.  Futures are strong and looks like stocks will open above 1272 (where they closed on Jan. 3, 2011). Not only does volatility remain elevated, the stories are about the same. We have some new acronyms to contend with, but ultimately the European Debt Crisis (it is both a bank and sovereign crisis) and the strength of the US economy and China's ability to manage its slowdown are the primary stories. Issues in the Mid-East remain on the fringe but threaten to elevate to something more serious with Iran flexing its muscles more and more. So what to do?  Prepare for more headlines, more risk reversals, and more pain.

First Morgan Stanley issued the first market forecast of 2012 before the market has even opened, and now it is Greece's turn to threaten fire and brimstone (aka to leave the Eurozone, but according to UBS and everyone else in the status quo the two are synonymous) within hours of the New Year, if the second bailout, which as far as we recall was arranged back in July 2011, is not secured. Quote the BBC: ""The bailout agreement needs to be signed otherwise we will be out of the markets, out of the euro," spokesman Pantelis Kapsis told Skai TV." And cue several million furious Germans and tomorrow's German newspaper headlines telling Greece bon voyage on its own as it commences braving the treacherous waters of hyperinflation. In other news, the sequel to Catch 22 is in the works, and explains how Greek tax collectors (i.e., people who collect those all important taxes so very needed for government revenues) continues to strike. In it we also learn that the first strike of the year in Athens is already in place, with Greek doctors saying they will treat only emergency cases until Thursday, in protest at changes to healthcare provision. All in all, the complete collapse of the Greek debt slave society is proceeding just as planned.

• Tight race in Iowa kicks off 2012 campaign (Reuters)
• West Is Using Cultural Means to Divide China: Hu (Bloomberg)
• Economists see bleak year ahead (FT)
• Billions needed to upgrade America’s leaky water infrastructure (WaPo)
• Sarkozy, Merkel set bilateral euro talks (WSJ)
• Romney’s hope of Iowa lead in balance (FT)
• Greece: Clinch Bailout or Face Euro Exit (Reuters)

• Market talk of a French sovereign downgrade continues to do the rounds – Unconfirmed
• German Unemployment Change (000's) (Dec) M/M -22K vs. Exp. -10K (Prev. -20K, Rev. to -23K)
• EU says the commission and member states have submitted amendments for new EU treaty