Archive - Dec 2012 - Story

It appears that unlike UBS, which enjoys transacting in bulk, and announcing the firing of thousands of bankers en masse concurrent with the flurry of pink slips, its more nimble (but just as LIBOR-troubled) Swiss colleague, Credit Suisse, prefers transacting in the pink slip shadows. Specifically, instead of opting for large-font headlines, Credit Suisse prefers to keep its workers on their toes, and yesterday once again warned 120 unidentified employees in its 1/11 Madison Avenue NY headquarters are about to be laid off via the DOL's WARN website. This is only the fourth time in the past year CS has opted for this stealthy method of motivation, laying off 268 in November 2011, December 2011, October 2012 and now this. Why motivation? Because by keeping the list of unlucky souls who will start getting pink slips as soon as December 30, it is motivating everyone to work far harder and preserve the hope that the bell tolls not for them. Indeed: a truly brilliant employee motivational mechanism.

In a sharp turn around from the open, Italian and Spanish 10yr government bond yield spreads over German bunds trade approx. 10bps tighter on the day, this follows several market events this morning that have lifted sentiment. Firstly from a fixed income perspective, both Spain and Greece managed to sell more in their respective t-bill auctions than analysts were expecting and thus has eased concerns ahead of longer dated issuance from Spain this Thursday. In terms of other trigger points for today's risk on tone the December headline reading in the German ZEW survey was positive for the first time since May 2012 coming in at an impressive 6.9 M/M from previous -15.7 with the ZEW economists adding that Germany will not face a recession. Finally, reports overnight have suggested that Italian PM Monti could be wooed by Centrist groups which means that if he wanted too the technocrat PM could stand for elections next year albeit under a different ticket. As such yesterday's concerns over the Italian political scene have abated and the FTSE MIB and the IBEX 35 are out performing the core EU bourses. Looking ahead highlights from the US include trade balance, wholesale inventories and a USD 32bln 3yr note auction, however, volumes and price action may remain light ahead of the key FOMC decision on Wednesday.

• Fed Seen Pumping Up Assets to $4 Trillion in New Buying (BBG)
• China New Loans Trail Forecasts in Sign of Slower Growth (BBG)
• U.S. "fiscal cliff" talks picking up pace (Reuters)
• Insider-Trading Probe Widens (WSJ)
• U.K.'s Top Banker Sees Currency Risk (Hilsenrath)
• Three Arrested in Libor Probe (WSJ)
• Nine hurt as gunmen fire at Cairo protesters (Reuters)
• Egyptian President Gives Army Police Powers Ahead of Vote (BBG)
• Pax Americana ‘winding down’, says US report (FT)
• Japan Polls Show LDP, Ally Set for Big Majority (DJ)
• HSBC to pay record $1.9 billion U.S. fine in money laundering case (Reuters)

In a session that has been largely quiet there was one notable macro update, and this was the German ZEW Economic Sentiment survey, which after months in negative territory, surprised to the upside in December, printing at 6.9, on expectations of a -11.5 number, and up from -15.7. This was the first positive print since May, and in stark contrast with the dramatic cut of German GDP prospects by the Bundesbank from last Friday, which saw 2013 GDP slashed by 75% from 1.6 to 0.4%. In fact, moments after the ZEW report, which is mostly driven by market-sentiment, in which regard a soaring DAX has been quite helpful, the German RWI Institute cut German 2012 and 2013 GDP forecasts from 0.8% to 0.7% and from 1% to 0.3%. In other words, any "confidence" will have to keep coming on the back of the market, and not the economy, which is set to slow down even further in the coming year. But for a market which will goalseek any and all data to suit the narrative (recall the huge miss in US Michigan consumer confidence which lead to a market rise), this datapoint will undoubtedly serve as merely another reinforecement that all is well, when nothing could be further from reality. Also, since we live in interesting "Baffle with BS" times, expect the far more important IFO index to diverge once again with its leading ZEW indicator (as it did in November) - after all everyone must be constantly confused and live headline to positive headline.

While some saw the clip of the lady implying 'victory for Obama means phones for everyone' as perhaps exaggerated out-of-context right-wing propaganda - as that would be preposterous right? - it appears San Francisco took it a little more serious. As SFGate reports, the California Public Utilities Commission is expected to approve (within a couple of weeks) a plan to offer homeless and other poor people in California 'virtually free cell phones and service'. The plan is funded through the federal LifeLine program and is designed to enable these individuals to 'keep in touch with family, potential employers and others crucial to improving their lives'. "This is great - it is transformative for homeless and low-income people," said San Francisco's head of homeless initiatives, adding that, fundamentally, to be in the mainstream of our society you have to have a phone." Setting up the program in California has been no easy task, officials said. "I would prefer it to be free..." said Dufty, and said he would explore other funding sources. Perhaps worth remembering the cost of kidding ourselves once again.

The CBO has outlined a number of options for balancing the budget (full paper below). From 'Increases In Tax Revenue' to 'Cuts to Annually Appropriated Spending' and 'Cuts to Benefits or Entitlements', it's all here in a handy Do-It-Yourself Interactive Deficit-Reduction Plan tool from WSJ. All 'compromises' welcome...

The infamous debunker of most-things-classically-economic was recently asked to brief Congress on the fiscal cliff, and how the downturn of 1937 could be a foretaste of what will happen if the Cliff comes to pass. The paper, slides, and presentation - designed to be simple enough for Dennis Kucinich and his colleagues in Congress to comprehend - provide another glimpse as Steve Keen argues that an attempt by the government to reduce its debt now may trigger a renewed bout of deleveraging by the private sector - and this is what appeared to happen in 1937, when confidence that the worst of the Depression was over led to the government reducing its deficit. Private sector deleveraging, which had stopped in 1934-35, began once more and unemployment rapidly rose from about 10 to almost 20 percent. The main danger with the Fiscal Cliff is therefore not what the reduction of government spending will do on its own, but that it might trigger a renewed bout of deleveraging from the $40 trillion overhang of private debt that Keen calls the "Rock of Damocles".

It must be pointed out that gold is certainly no longer the bargain it was at the lows over a decade ago (at which time Warren Buffett undoubtedly hated it just as much as today). This is by no means akin to saying that there is no longer a bull market in force though. What seems however extremely unlikely to us is that the long term bull market is anywhere near to being over. After all, the people in charge of  fiscal and monetary policy all over the globe are applying their 'tried and true' recipe to the perceived economic ills of the world in ever bigger gobs of 'more of the same'. Until that changes – and we feel pretty sure that the only thing that can usher in profound change on that score is a crisis of such proportions that the ability of said authorities to keep things under control by employing this recipe is simply overwhelmed – there is no reason not to hold gold in order to insure oneself against their depredations.

Some have argued that a fiscal-cliff-impacted US economy would enter a recession as hard as Manny Pacquiao hit the canvas on Saturday night but for most of the nation it seems the fiscal cliff is of secondary importance... Will Pacquiao-Marquez 5 coincide with Debt-Ceiling II?

These three letters - C.A.B. - might just be the Dis-Humor story of the day. NPR reports that more than 200 schools across California are coming to the shocking realization that the upfront cash they needed so badly came at quite a price. These 'Capital Appreciation Bonds' are unlike normal bonds (requiring regular coupon payments and principal repayment); instead they provide the 'lent' money upfront and defer all interest and repayment to some magical faery land time in the future (by which time the interest accrued has grown exponentially as the interest accrues on the rising 'principal plus previously accrued interest'). Brilliant - as the Guinness chaps might say. So California schools are now undertaking PayDay or loan-shark style loans defending the idiocy of super-short-term thinking with such statements as "Why would you leave $25 million on the table?" referring to the upfront cash that one Treasurer was able to get his hands on - with clearly no comprehension of the financial instrument's massive convexity. California State Treasurer Bill Lockyer said "It's the school district equivalent of a payday loan or a balloon payment that you might obligate yourself for, so you don't pay for, maybe, 20 years - and suddenly you have a spike... It's so irresponsible."

Behold the fund-tastic four: Ireland, Greece, Spain and... the US? These are the four countries that in the past four years have accumulated the greatest deficit as a % of GDP (and yes, at just under 50%, the US is worse than Spain whose cumulative deficit has been over 40% of GDP), which in turn they have had to fund with what else: new debt.

In many countries around the world the main equity market has a dividend yield above its 10 year bond yield and in many cases its average IG credit yield. Although this isn't the first time that such an outcome has been seen through history, at a minimum it's reversing what has been a 50-year-plus trend where equity dividends were below bond yields. Currently, the US, UK, Germany, and France all have equity dividend yields above their 10 year govvie. However, before the world and their pet snake Sebastian decide this is the buying opportunity of a lifetime, a little more context shows that this was the normal from the start of the 20th century to around the end of World War II. In fact - if we replace government bond yields with corporate bond yields the picture appears to be a huge mean-reversion back to pre-World-War II relative valuations (where dividend yields were consistently higher than corporate bond yields). As Deutsche's Jim Reid notes though - it is more likely that it might be that fixed income and equities are both expensive as central banks have artificially elevated prices in everything in an attempt to keep the financial system solvent - and furthermore this is not the time for epic asset allocation switches.

In a move that we can only presume is to provide more room in their book for some GM Fleet purchases or Twinkie benefits, the US Treasury just announced (via Bloomberg):

• *TREASURY ANNOUNCES OFFERING FOR ALL OF ITS REMAINING AIG SHRS

but:

• *TREASURY SAYS IT WILL CONTINUE TO HOLD WARRANTS FOR AIG COMMON

AIG's share price is sliding (-3.5% AH) - surprise - as the decision to liquidate 234 million shares (10x the recent daily average) into such a highly liquid market will, we are sure, be spun as nothing but positive (and a great success for Geithner et al.). Of course, unwinding the even more illiquid warrants was not on the cards. Interesting timing following the sale of AIG's ILFC unit so close behind to the Chinese.

UPDATE: In the last few seconds of trading ES jumped 3 points on Buffet comments about Dimon for Treasury and WSJ chatter about Fiscal Cliff progress (ES +4.25pts on day)

We have officially run out of expletives to describe the volumelessness of the equity trading markets. Today's S&P futures volume was dismal - among the lowest volume days of the year (even including holidays and half-days). Today's range was relatively narrow and while risk-assets in general were highly correlated, there was noise and the liquidity was simply not there. AAPL continued its VWAP-based slide - holding NASDAQ back overall - but with MCD's gains accounting for around half of the Dow's gains on the day (and the S&P getting lifted with every VWAP-driven jerk lower in AAPL), it seems the 'buying' interest was largely absent. Treasury yields ended lower, VIX higher (though well off its highs of the day), high-yield credit practically unchanged, and the USD very modestly lower providing just enough impetus to keep the S&P green on the day (and the month +0.15%). The Industrials and Transports have recoupled at +1.2% on the month while the NASDAQ languishes -0.77% since 11/30. Oil was probably the mover of the day with WTI -0.3% - notably awry of the +0.5% gains in Silver and Oil and +1.1% in Copper. Financials lagged and Materials led as the day came to a quiet end around VWAP with the machines well and truly in charge.