Archive - Nov 2012 - Story

Yesterday's home sales data, which came far better than expected, apparently had nothing to do with Hurricane Sandy (had it been a disappointment the narrative would have been far different). What Hurricane Sandy did have an impact on for the second week in a row, is today's Initial Unemployment Claims, supposedly, which for the second week in a row printed well above 400K, and just as expected, at 410K, "down" from last week's upward (naturally) revised 451K (previously 439K). NSA claims declined from 478.5K to 397.7K, while Continuing Claims were just below expectations at 3,337K on a consensus print of 3,345K, and down from an upward revised 3,367K. Notable is that the dropping trend in those on extended claims, which recently dropped to a multi year low of around 2 million, had reverse, and 60.8K applied for EUCs.

The simple Bloomberg chart below summarizes the running insanity that is the ongoing Greek bailout. To date, the existing bailouts - already completely wasted - amount to well over 100% of Greek GDP.

An initial lower open in major European cash bourses has been pared despite concern over Greek and a lack of any progress in agreement between Eurozone officials and the IMF. Source comments early on in European trade helped provide renewed optimism that a plan for Greece is edging closer after it was reported that the German Chancellor Merkel told lawmakers Greece's financing hole through 2016 can be filled with combination of lower rates and increased EFSF. The FTSE is under-performing its European peers at the mid-point of trade today as several large cap stocks go ex-dividend, although strength has been seen following the latest Bank of England minutes which showed a less dovish than expected 8-1 vote split to hold fire on QE between the MPC meetings. Following the release of the minutes, a now reduced expectation for asset buys at the December meeting saw upside in GBP/USD in a move away from the 1.5900 handle, and Gilt under pressure, although short-sterling shrugged off the comment that the central bank is unlikely to cut bank rate in foreseeable future.

• Rough start for fiscal cliff talks (Politico)
• Europe Fails to Seal Greek Debt-Cut Deal in IMF Clash (Bloomberg)
• Japan’s Exports Reach Three-Year Low as Recession Looms (BBG)
• Beggars can be angry: Greek leaders round on aid delay (FT)
• More financial blogs launching soon: Financial Times Deutschland closing (Spiegel)
• China's backroom powerbrokers block reform candidates (Reuters)
• BOE Voted 8-1 to Halt Bond Purchases as QE Impact Questioned (Bloomberg). In the US the vote is 1-11
• UK heads for EU budget showdown (FT)
• Eurodollars - another epic scam: How gaming Libor became business as usual (Reuters)
• Clinton Shuttles in Mideast in Bid for Gaza Cease-Fire (Bloomberg)
• Fed Still Trying to Push Down Rates (Hilsenrath)

After tumbling to lows of 1.2735, and dragging the entire 100% correlated risk complex down with it, the EUR has since seen a straight line push higher despite the sad reality that for all expectations, Europe was embarrassingly simply unable to come to a resolution over Greece and has kicked the can to November 26, leaving Greece with zero cash to fund obligations to European banks, and if anything is left over, to fund domestic operations. The reason for the move up? The market, in all its wisdom, hopes  that 6 short hours after saying "9", Merkel has already softened her stance and that a deal in 5 days is inevitable. Of course, these are the same people who said a deal last night was inevitable. These are the same people who also said that Washington is this close from a reconciliation on the Fiscal cliff, despite this thing called reality (see Rough start for fiscal cliff talks from Politico). Adding to the surrealism was a French spokesman who said the country would "do everything to reach a Greek accord." Since a recently downgraded France will "do" nothing (that's Germany), but will "say" everything, it is safe to say that France is now the comic relief typically attributed to Jean-Claude Jun(c)ker. Finally, and wrapping up the bizarro surreality of central planned markets, the recent spike in Brent on Gaza re-escalations has been interpreted by those uber-complex DE Shaw algorithms as a risk on move, and pushed all risk indicators to overnight highs. With volume today set to be abysmal as trading desks will be empty around noon, expect some more absolutely insane zero volume moves in the SkyNet battleground formerly known as the "market."

Update: Israel launches massive airstrikes on Gaza after Tel Aviv bombing (RT). As expected

So much for hopes of a ceasefire as day 8 of of Operation Pillar of Defense begins. Around midday local time, an explosion took place in a bus in Tel Aviv near the military headquarters. As Jerusalem Post reports, "a total of 16 people were injured in a terror attack in central Tel Aviv on Wednesday, according to a spokesperson from the city's Ichilov Hospital. One person was severely injured, one moderately and one light to moderately. The remainder of the casualties were light or suffering shock. None were in a life threatening condition, though two were already in surgery, the hospital spokesperson said." According to witnesses a man climbed in the bus and threw a bomb on board. The explosion has sent Brent to its session highs over $111, and with Hilary Clinton briefly on location, it appears that Israel may well escalate to the next phase of the conflict which would be a land invasion.

Given our earlier comments, it is hardly surprising but the Eurogroup meeting just ended and there is no agreement; headlines via Bloomberg:

• *FRIEDEN SAYS NO DECISIONS REACHED TODAY ON GREECE BY EUROGROUP
• *FRIEDEN SAYS EURO FINANCE CHIEFS TO CONTINUE TALKS ON MONDAY
• *SCHAEUBLE SAYS EUROGROUP UNABLE TO REACH CONCLUSIVE AGREEMENT
• *LAGARDE SAYS MORE WORK NEEDED FOR GREEK SOLUTION
• *JUNCKER IDENTIFIED 'CREDIBLE' IDEAS TO BRING DOWN GREEK DEBT (well he would wouldn't he?)

EURUSD is tumbling (as are S&P 500 futures in their oh-so-correlated manner)

UPDATE: *EURO FINANCE CHIEFS REACH DECISION ON GREECE, OFFICIAL SAYS

Can't wait to see what they came up with...

EURUSD is limping lower (-20 pips to 1.2800) as the early morning hours tick by in Europe and still Greece is not ceremoniously considered fixed. Reuters, citing official sources, got its hands on the 15-page report prepared for the meeting and it is grim reading indeed - summarized below (via Bloomberg): "The [extensive] package of options will not make it possible to arrive at a debt-to-GDP ratio of close to 120 percent in 2020 without taking recourse to measures that would entail capital losses or budgetary implications for euro area member states or envisage a more comprehensive Debt-buyback entailing the activation of collective action clauses." It would seem the GGB trade may well be the 'no brainer' trade of the year after these new haircuts.

Things are going from worst to worsterer in Japan. Somewhat ironically (given our recent post), this update to the state of play awaiting Mr. Abe is not good. With the Senkaku debacle flaring still in the background, we wonder just how much 'face' the Japanese are willing to lose as their exports fall 6.5% (for the fifth month in a row) dominated by an 11.6% drop 'to' China (which accounted for around 20% of Japanese exports until recently) making it extremely likely the nation is headed for yet another recession. The trade balance missed large to the downside yet again, extending a multi-year trend (and drastically reducing the 'net' exports capital buffer), and so (as USDJPY remains 'strong' despite REER being well below its 1995 peak) we are to believe yet another JPY1tn Koo-nesian fiscal stimulus will do the trick.

Last week, when discussing the next steps for the company, and specifically the hope that mediation may resolve the epic animosity between management and workers, we stated that "What makes a mediation improbable is that the antagonism between the feuding sides has certainly hit a level of no return: "Several unions also objected to the company's plans, saying they made "a mockery" of laws protecting collective bargaining agreements in bankruptcy. The Teamsters, which represents 7,900 Hostess workers, said the company's plan would improperly cut the ability of remaining workers to use sick days and vacation." Sure enough, moments ago we learned that mediation has now failed and the liquidation may proceed. And since in America nobody understands that proper sequence of events involved in a bankruptcy liquidation, where the valuable parts always end up being acquired by someone, in this case the Twinkie brand and recipe, let the pointless Ebay bidding wars over twinkies continue. As for what really happens next, if indeed Bimbo is prohibited from acquiring the assets in the Stalking Horse auction due to anti-trust limitations, then the buyer will almost certainly be a "financial", i.e., another PE firm, whose coming means the end of any hopes and dreams of preserving union status at fresh start Hostess, or whatever the new firm will be named.

Xi Jinping has taken the reigns of the Communist Party. With multiple domestic and international challenges mounting, there is much to be done. The most immediate obstacle to any prospects of major policy shifts lies at the very top.  The new standing committee has a strong conservative presence.  The perception of the new team is that it is dominated by relatively mediocre  and risk-averse leaders. It would be too optimistic or premature to believe that such a delicately balanced body could address China’s problems quickly and decisively. The result of this delicate balancing act is likely a cautious start characterized by the adoption of relatively easy policy measures designed mainly to differentiate the new leadership from its immediate predecessor. The bottom line in evaluating China’s new leadership in general, and Xi in particular:  he and his colleagues will have to walk the walk. His predecessors have done enough talking already.

"When you let the politicians run monetary policy, well, that is how it [ends]... All of the ingredients are there [for Japan now] for this vicious cocktail to fall apart" is how Kyle Bass concludes this broad and succinct recent interview. With total credit market debt-to-GDP globally around 350% (or ~$200 trillion), his thesis remains that many countries will reach their profligate endpoint soon (if not already in Greece's case - where investors have already lost 90c on the dollar); but that managing around this current evolution is the single-hardest period for investing of the last few decades. The modest Texan notes it is naive to think he can call the end of a 70-year debt-super-cycle with any precision (as in mid-December's Japan fiscal data and Abe's election) but when you look at all of the inputs, he believes that Japan has crossed the proverbial Rubicon in the last two months and describes in this rather breathtaking clip how the end of twenty years of conjecture on what may happen to Japan will come to pass.

Something odd popped up while going through the weekly H.6 update...

Umm yeah...close-to-close, equity indices were mixed (Dow small red - HP/IBM, NDX/SPX small green on closing rampfest) amid dismal volumes but for anyone that paid attention to the debacle in the markets today, this was another odd one. Thanks to EUR strength's correlated power (retracing last night's France loss), stocks trickled up all morning into the European close; Bernanke suggested he was not omnipotent and stocks dumped 13 S&P points (~1%) to yesterday's day-session open; and then on no news - as Greece remains unfixed and cease-fire deadlines come and go, we pumped ingloriously on small lots and stupid volume up to VWAP/unch - paused for thought - and then ran to the day's highs just after the close day-session close in S&P futures. Treasuries suffered - yields up 5-6bps on the day as our broad risk-asset proxy lifted along with modest moves in FX carry pairs and USD weakness into the close. Oil was headline-maker (away from BBY and HPQ that is) - down almost 4% from the highs yesterday but closing still green on the week just above $87 as Israel re-flared. Credit was less noisy and VIX compressed a little more to 15.11% at the close (lowest in 5 weeks).