Archive - Oct 2012 - Story

So much for last week's aberration initial claims print of 339K (revised higher of course to 342K). With expectations of an increase to 365K, the DOL just came out with a whopper of a miss, the largest in three months, at 388K, an increase of 46K in one week, which was also the highest print in three months. Remember: this number will be revised to 391K next week. So much for single print indicative of a recovery. As the chart below shows, the rate of change was a 13.45% from last week: the highest in five years! So far, there has been no explanation from the BLS or DOL for last week's outlier print. And no, last week's print was not due to  California, which the DOL reported just decreased by 4,979 in the week ended Oct 6, not the required 49K. What is however worse, is that it is becoming increasingly clear that nobody at the DOL knows what is actually going on following a statement by the Labor Dept that "it appeared that state-level administrative issues were distorting the data", and numbers are simply picked out of thin air. Finally, in truly amusing news, those on Extended Benefits have once again started to rise, after dropping to virtually 0 following expiration of state benefits. 

It just refuses to get any better in Spain, whose banks are now aggressively marking down real estate to something resembling fair value. Last month we reported that Spanish bad loans jumped by the most ever, rising by over 1% to just under 10%. Today, last month's number was revised even higher to 10.1%. But the worst news is that the August bad loan total just hit a fresh record of €178.6 billion, or 10.5% of the total €1,698.7 billion in bank loans. Making things worse is that the primary bank funding lifeline - deposits - continues to flow out. That both Spain, and its banking sector are utterly insolvent, is clear to anyone but Oliver Wyman and those who have bought SPGBs (although granted the latter are merely hoping for a quick flip). And the ECB of course. Indicatively, as a % of GDP, this would be equivalent to roughly $2.7 trillion in US bank loans going sour (for more on the collapse of Spanish banking, and the laughable stress test whose worst case has already become the baseline, read here). The chart summarizing this staggering statistic is below.

Wall Street is doing some wild and wacky things. UBS has just launched a 16-times-leveraged MBS ETN. The ETN, called the ETRACS Monthly Pay 2x Leveraged Mortgage REIT, offers double the return of the Market Vectors Global Mortgage REITs Index – itself an investment vehicle 8x leveraged to mortgage-backed securities. The idea appears to be that with the Fed acting as a buyer-of-last-resort that prices will take a smooth upward trajectory and that 16:1 leverage makes sense for retail investors as a bet on a sure thing.

The World Gold Council issued a summary on gold’s price performance in various currencies during the third quarter.  The report looks at influences that monetary policies and central bank actions have on gold. Gold’s 11.1% USD/oz return in 3Q was in response to central bank stimulus measures. Volatility decreased and generally correlated with other assets. Central banks announced a continuation of their unconventional monetary policy programmes in Q3 which mainly are used to lower borrowing costs and supporting financial markets.Financial assets have responded to central bank policy announcements, but gold's reaction has been the strongest. There is a consensus that these policies drive investment into gold purely due to inflation-risk impact. The World Gold Council believes that there are not one but four principal factors that provide further support to the investment case for gold: Inflation risk, Medium-term tail-risk from imbalances, Currency debasement and uncertainty, and Low real rates and emerging market real rate differentials.

• Germany will pay Greek aid (Spiegel)
• Spain Banks Face More Pain as Worst-Case Scenario Turns Real (Bloomberg)
• China’s Growth Continues to Slow (WSJ)
• Executives Lack Confidence in U.S. Competitiveness (WSJ)
• Poor Market Conditions will See 180 Solar Manufacturers Fail by 2015 (OilPrice)
• Wen upbeat on China’s economy (FT)
• Gold remains popular, despite the doubts of economists (Economist)
• Armstrong Stands to Lose $30 Million as Sponsors Flee (Bloomberg)
• IMF urges aid for Italy, Spain but Rome baulking (Reuters)
• EU Summit Highlights Financial Divide (WSJ)
• FOMC Straying on Price Target, Former Fed Officials Say (Bloomberg)
• Putin defiant over weapons sales (FT)

Same old, same old from the country whose future is supposedly being decided at today's latest (we have now lost count) Eurosummit. Spoiler alert: nothing will be decided until after the US election. From AP: 'Violence has broken out at an anti-austerity demonstration in Athens during a 24-hour general strike, with youths pelting riot police with petrol bombs and rocks. Riot police responded with tear gas to disperse the troublemakers during the clashes Thursday in the capital's central Syntagma Square, as thousands of people marched through the streets. Greek workers are holding their second general strike in a month, protesting new austerity measures the government is negotiating with the debt-ridden country's international creditors." Too bad "rioter" is not a Full Time Equivalent employment position according to the Greek BLS. Or at least not yet.

Today Europe awakes to yet another Eurozone summit, one at which such topics as Greece, Spain, the banking union project or a economic/budgetary union will have to gain further traction, if not resolution. In fact Greece could hardly wait and has already launched it latest 24 hour strike against austerity. The same Greece which demands a 2 year, €30 billion extension from Europe to comply with reform, a move which Europe has/has not agreed to as while the core have said yes to more time, all have refused to fund Greece with any more money. Alas the two are synonymous. As SocGen predicts unless there is some credible progress today, all the progress since the September ECB meeting, which has seen SPGB 10 Year yields decline from 690 bps to sub 550 bps, may simply drift away. And as everyone knows, there is never any progress at these meetings, except for lots of headlines, lots of promises (the Eurozone June summit's conclusions have yet to be implemented) and lots of bottom line profits by Belgian caterers. Elsewhere, Spain sold 3, 4 and 10 year bonds at declining yields on residual optimism from the pro forma bailed out country's paradoxical Investment Grade rating. In non-hopium based news, Spanish bad loans rose to a record 10.5% in August from 10.1% previously while the oldest bank in the world, Italy's Banka Monte dei Paschi was cut to junk status. All this is irrelevant though, as no negative news will ever matter again in a centrally-planned world. Finally the only real good news (at least until it is revised)came out of the UK, where retail sales posted a 0.4% increase on expectations of a 0.2% rise from -0.2%.

This week the US, UK, France, and a few Middle Eastern countries are conducting naval exercises in the Gulf of Persia to practice clearing mines that Iran, or other groups may place around the Straits of Hormuz in an attempt to disrupt the movement of oil tankers in the region. Mohammed Ali Jafari, the commander of the Islamic Revolutionary Guard Corps, said that the “exercise is a defensive exercise and we don't perceive any threats from it. We are not conducting exercises in response.” Yet this is not the impression that is given. Just yesterday, according to the official IRNA news agency, upon the direct orders of Supreme Leader Ayatollah Ali Khamenei Iran launched a refitted Tareq-901 submarine and a Sahand destroyer into the Gulf from the port of Bandar Abbas.

Whereas yesterday we learned that Chinese September electricity consumption had dropped to a multi-year low of 2.9% Y/Y (ignoring the Chinese New year data aberration of -7.5% from January which should be a blended reading with the February surge of +22.9%), down from 3.6% in August, and the lowest since August 2010, today in turn we find that the flip side to the this number, electricity production, was an even bleaker +1.5%, and the lowest in three months. And while it has been rumored that China has an incentive to manipulate the former down, this has been offset by manipulating the latter - output - up. Which is why whereas the consumption data implies a modestly weaker GDP, which declined and missed the official target (if ended precisely as the goalseek-o-tron expected), it is the electricity production data that is the outlier, and which indicates that in reality the GDP is now trendlining well below the official 7%.

We are now entirely used to the daily mini-flashes in US equities as algos lose their stabilizer and run one way or another. Recently we noted the same algos-gone-wild had hit the India stock exchange. Tonight, the HFT-bug has moved to Australia, where the open - which just happens to be option expiration - saws a number of major equities (including several of the banks - e.g. ANZ and CBA) get smashed instantaneously higher (by 5-7%) at the open - only to plummet back to normalcy soon after. The cuplrit - it would appear to us - is a market-clearing wipe-out of all resting stops above the multi-year highs that the stocks were at the edge of. Regulatoirs are 'investigating' though their first comment was "it is certainly nothing to do with the trading system." As the Sydney Morning Herald notes a market participant: "Either that or an algorithm has gone haywire, a mistake has been made, or these trades are deliberate.' Either way, do we have an orderly market?"

Chinese economic data has in general been surprising to the downside in recent weeks - in opposition to the positive (seasonally adjusted awesomeness) of US data. However, for tonight's entertainment we have GDP at 7.4% YoY - perfectly in line with expectations (but the 7th consecutive quarter of slowing growth), Industrial Production beat modestly, Retail Sales beat handsomely (biggest beat in 18 months), and FAI beat...

• *CHINA 3Q GDP RISES 7.4% VS ECONOMISTS' EST. 7.4%       :NBSZ CH
• *CHINA SEPT. INDUSTRIAL OUTPUT RISES 9.2% VS 9% ECONOMISTS' EST.
• *CHINA JAN.-SEPT. FIXED-ASSET INVESTMENT UP 20.5% VS EST. 20.2%
• *CHINA SEPT. RETAIL SALES RISE 14.2% FROM YEAR EARLIER

So, no new stimulus coming anytime soon - leaving Bernanke and Draghi all alone (and the latter is stuck waiting for Rajoy to say 'Si'). AUD lurched violently up and down; US equity futures are unmoved; and Treasury yields rose perhaps 1bps.

Physical strength, endurance, flexibility, adaptability, and mental discipline are all attributes of a true survivor.  Unfortunately, they are also attributes that are often neglected by the average survivalist.  The popular assumption is that if you have sizable food storage and can shoot straight, you are ready to rock-and-roll.  Reality has some harsh lessons for those with this mindset.  The first and most important weapon in any prepper’s arsenal is his own body; strong, healthy, and well taken care of.  If a person’s body is left to decay, no amount of gear is going to save them in the middle of a crisis situation...

Xiao Gang, Chairman of the Bank of China, took on the issue of “shadow banking,” recently in an op-ed. Chinese finance is undergoing dramatic changes which are not yet widely understood. Historically (mainly before 2008), the vast majority of lending in China was done by the normal banking sector in the form of loans.  The process was a cornerstone of the government’s control over the economy.  The vast majority of banks in China are controlled by the government, so the “who and when” of lending was firmly in the hands of China’s leaders. But, the years 2008/9 will be remembered as watershed years for Chinese finance, as two trends appeared – an economy relying increasingly on debt creation for growth, and that debt creation becoming more and more complicated and obscure - making it is easy to see why so many officials and analysts are worried about the 'hazy and complicated area of finance' out of teh government's direct control.

The primary, if not only, reason there has been a brief spike in subsidized demand for housing in recent months, has been the GSE/FHFA endorsed REO-To-Rental plan, and associated securitization conduits, in which large asset managers have been encouraged to take advantage of government funded, risk-free financing (and entirely bypassing banks who have given up on loan origination due to legacy liability issues which have every bank tied up in litigation from now until Feddom come - just see today's Bank of America results) and purchase foreclosed properties in bulk, with the intention of converting them into rental properties. Needless to say, the subsidization of this wholesale purchasing of foreclosures, coupled with the ongoing "foreclosure stuffing" pursued by the big banks (as a reminder days to foreclose in New York just hit a record 1,072 per RealtyTrac as banks simply refuse to clear housing inventory faster knowing full well withheld inventory is an additional clearing price subsidy) is the main reason why the punditry has been confused into believing there is a housing rebound. That this "rebound" is merely a subsidized demand pull phenomenon a la the "cash for clunkers" auto sales program is patently clear to most. Nonetheless what little confusion is left, is finally coming to an end, thanks to none other than one of the first entrants in the REO-To-Rental space, $31 billion hedge fund Och Ziff, which a year after entering the program with hopes of quick riches, is now looking to cash out.