Archive - Feb 16, 2012 - Story

If the ECB switches 50 billion of old bonds for 50 billion of new bonds, what does Greece get?  No notional reduction. Possibly a reduction in interest payments but that depends on the coupons on the bonds the ECB owns. The new bonds allegedly have some covenants and possibly other projections for the bond holders. That is a negative for Greece - they can default on these old bonds and the ECB can't do much about it. Maybe the reporter is wrong, but this is a good deal for the ECB, marginal for Greece, but does make it easier to jam holdouts. They can default on old bonds or retroactively CAC old bonds and the ECB won't be affected. This announcement is either marginally good or marginally bad depending on the details. It is not great or a game changer - except maybe the money printing angle.

A number of headlines from Bloomberg, via Die Welt, that the ECB will undergo a bond swap on their greek government bonds and the 'profit' will flow to governments. This is absolute delusion. The ECB claims EUR50bn nominal value of GGBs - so likely took a EUR20-30bn loss on this given the prices they bought at under the SMP and the current market price. We explained last week (must-read) the delusional nature of these profits (given the losses that occur once the new bonds break) and assume this is yet another attempt to make market participants believe they wil help with PSI. However, there is more to this in our humble opinion. Since the ECB says they will distribute profits (which we know are illusory) to governments - it is nothing but a covert attempt to funnel money (think printing) to local government central banks - and the illusory profits here are simply giving away free money. Perhaps the loud screaming over the pain associated with even an 'orderly' Greek default is enough that the ECB needs to placate them with some new freshly printed money? For now, the PSI remains in limbo for the hold-out blocking stake reasons we have discussed at length - if the ECB were to step into the market and buy/swap with hold-outs all of their UK-law bonds at Par (for huge gains to the hedgies) then perhaps we get a deal done - but this would be astounding and leave the rest of the European sovereign debt market disabled as investors pushed for the same deal and vigilantes drove Portugal and then Spain to this point...

Is it perhaps cheaper for the Troika to fund the ECB's EUR30bn loss (and let Greece default) than pay the EUR130bn for them to stay?

Two formal requests to Mr. Draghi - please show where the profit is booked on your balance sheet and also explain how a notional swap (no debt reduction) in any helps the Greeks?

The task of the financial/political/media Status Quo is to convince Americans to overlook the abundant evidence of economic deterioration and focus on heavily juiced "evidence" of robust "growth." The game plan is this: if the Status Quo can convince you that the economy has righted itself and from here on in everything will get better and better, every day and in every way, then we will abandon financial rationality and start buying homes we can't afford on credit, cars we can't afford on credit and boatloads of stuff from China that we don't need on credit (of course looking cool is a "need," i.e. having an iPad to carry around). In other words, believing it is so will make it so. That is the essence of the campaign to stimulate "animal spirits" confidence: though the economy is actually tanking, if they can only convince us the Dow is moving to 15,000 and then on to 20,000, jobs are being created left and right and things are looking up everywhere, then the resulting piranha-like shopping-feeding-frenzy will create the expansion that is currently chimerical.

It appears that slowly but surely the NDAA equivalent for the less than compliant on air mainstream media is picking up steam. First it was Napolitano's Freedom Watch getting cancelled by Fox (ostensibly for his endorsement of Ron Paul but who knows) some days ago, and now Politico reports that that political uber-lampoon Stephen Colbert has been also temporarily "suspended". From Politico: "The late-night comedy program hosted by Stephen Colbert will suspend production for at least two days this week, POLITICO has confirmed. The Colbert Report, the home of relentless parodying of super PACs and the campaign finance system, will not air original episodes on Wednesday or Thursday. "Due to unforeseen circumstances, the show will air repeat episodes on Wednesday, February 15 and Thursday, February 16,” Comedy Central Senior VP for Communications Steve Albani told POLITICO. Albani would not comment on the specific reasons for the suspension. It is expected that the suspension of original production will not be indefinite, and that the show will return soon." We can only hope that the ringing endorsement of freedom of speech by CC owner Viacom was not a major reason of the "uncommented" reasons for the suspension. Or lack thereof as the case may be in the US these days.

The long-term link between demographic supply-demand shifts and the dynamics of asset price changes is hard to quantitatively dismiss and while it is just as difficult to trade these long-term shifts, as Credit Suisse notes, it is a useful context for considering tactical and strategic asset allocation. Based on projections of two interesting ratios (Middle-/Old-age ratio for equity multiples and Yuppie/Nerd ratio for bond yields), they find that US and European equity P/E multiples are set to structurally fall for the next decade (while Japan may see expansion) and similarly Japan is expected to see bond yields continue to structurally fall while US and European yields will rise (with US yields rising only modestly - though still painfully for governments - and UK quite significantly). While, of course, significant differences exist in the equity and debt market participation level and demand and supply mechanics of foreign investors, the relationships have stood the test of time and should warrant concern for the medium-term in both US and European markets as perhaps monetary policy's extreme experimentation is fundamentally fighting these trends that are exaggerated in the short-term by the cyclical-to-secular end of the leverage super-cycle.

Of course, if only one had seen that there is absolutely nothing different or new about the gold "story" at all since March 2009, there would have been no need to strengthen positions. Otherwise, more or less as has been said here all along. Furthermore, below are some pretty charts from the latest World Gold Council demand trends letter, presented below.

While one can discuss seasonal factors, such as abnormally warm weather, as a driver of today's beat in Housing Starts, a far less noted number for headline purposes is the other side of the equation - Housing Completions. Because after all, every house that is started has to be completed at some point. One look at the chart below, shows why completions is quietly ignored, as it presents a far less optimistic picture about the housing market. Indeed, printing at 530k seasonally adjusted annualized units, the completions number was just the second lowest in decades, better only than the 509K from January 2011. And where this becomes rather glaring is when looking at the relative, or percentage, spread between Starts and Completions: at 31.9%, this was the highest in, well, as far as our data series goes back to. Does this mean that homebuilders are merely "breaking ground" for book keeping purposes, just to "paint the tape" and then quietly fading away into the night? We will know for sure in February when we get at least one more data print to validate or deny the recent troubling trend, but for the time being, to paraphrase a famous Bill Murray movie, is there something here being "lost in construction?" Or, far more simply, is this merely the latest ploy to paint not the tape so much as the economy in an election year with the latest incarnation of "cash for clunking construction"?

Following yesterday's paradoxical Empire Fed print which saw an increase despite two thirds of its subcomponents dropping, we get a Philly Fed number which came in better than consensus estimates of 9.0, printing at 10.2, compared to 7.3 previously. Here, unlike yesterday, at least the number made sense with New Order rising from 6.9 to 11.7, as well as shipments, unfilled orders, and delivery times. What did not increase was the Number of Employees which dropped from 11.6 to 1.1. But don't tell the BLS. Also don't tell the market that margins are now contracting even more, with Prices Paid rising by 6.9 points as prices received rose by 3.8. Last, and not least, the Six Months Outlook plunged from 49 to 33.3, the largest drop in 6 months. Is the hopium going away?

The good people at Knight put together a comprehensive list of potential ratings for banks in Europe after Moody's came out with their outlooks. We agree that banks getting shifted to non-investment grade is a big deal.  We saw the impact for Portugal once it got taken out of the indices, and we think for banks it will be an even bigger deal to lose that investment grade status.  Sure, they can still go to the LTRO, but it is hard to function as anything other than a zombie bank once you lose that rating...

Hubris is at the heart of this. Everyone says this cannot happen – we won’t allow it. Says who? The EU says: if it is written in an agreement, it must be totally correct, unchangeable, and followed at all costs. New realities can’t intervene and no slippage is allowed. Why the Germans are so sure that they know the future is beyond me. They are fallible too, but they won’t admit it, and the Greeks can’t make them budge. Haven’t they looked around? Santorini has a different economic and social cost structure than Wiesbaden. Humanity (and common sense) seems totally lacking in the negotiations with the Greeks and a violent backlash would be totally understandable. Why the countries that have been fattening up their current account surpluses selling products to Greeks, whom they should have known were basically broke – just as they always have been – should be paid 100% on the euro is beyond me. Major losses should apply not only to sovereign borrowings but also to accounts receivable for cars, electronics, and other consumer goods. The market has not opened its eyes to the impact this Greek unraveling will have. The Eurozone will be mortally wounded and the world will suffer a significant recession – maybe as deep as 2008. European banks will lose much of their capital base and many should be bankrupt, but just as in the Lehman aftermath, the governments will try to save the banks and the banks’ bondholders, solvent or not. As the bank appetite for Eurozone sovereign paper will be decimated, austerity will probably follow shortly, followed by deflation and uncontrollable money creation. The European recession should be one for the record books.

While many will point to the drop in front-end Italian bond yields as proof positive that all is well in the still-peripheral nation, we note that today saw 10Y Italian bond (BTP) spreads crack back above 400bps for the first time in 3 weeks and nervously remind readers of the stock market reaction in Eastman Kodak a week or two before its death. Of course, Italy is perhaps not quite as imminently terminal as EK was (thanks to the ECB reacharound) but the excitement about BTP's 'optical' improvement will be starting to fade as banks are underperforming dramatically, we have exposed the sad reality of the LTRO, and now even the short-dated BTP yields are now over 40bps off their tights from last week. Why? Deutsche Bank's Jim Reid may have the answer that Italy has now been in recession four times in the last decade and while hope is high that the new austere budget will take the nation to debt sustainability, he notes that the cumulative forecast miss since 2003 on GDP estimates is approaching an incredible 20%. As Reid notes, "When debt sustainability arguments are finely balanced and very dependent on future growth the question we'd ask is how confident can we be that economists’ forecasts are correct that Italy will pull itself out of the perpetual weak and disappointing growth cycle seen over the last decade or so." As we (ZH) have been vociferously noting, LTRO did nothing but solve a very short-term liquidity crisis in bank funding, and the reality of insolvent sovereign and now more encumbered-bank balance sheets is starting the vicious circles up again. Deutsche's base case remains that peripheral growth will disappoint and the sovereign crisis will re-emerge shortly - we tend to agree.

The onslaught of 'favorable' jobs numbers continues with the latest initial claims printing at 348K, down from an upward revised 361K, on expectations of a rise to 365K. This was the lowest number since March 2008. As a reminder, the abnormally warm January and February weather as discussed previously by David Rosenberg is a key reason in the ongoing favorable impression of the economy that this data skew creates. Granted the self-delusion of employers is just as palpable as that of market participants: claims went from sub 400K in the days before Lehman to nearly 600K in the weeks after. Continuing claims printed at 3.426MM down from 3.526MM, on expectations of 3.495K. Those seeing the 99-week expire increased as 23K people dropped out of EUCs and Extended Claims. Expect to see this "favorable" trend reverse within weeks, as the groundwork for more easing has to be set (more on that shortly). Elsewhere, the headline PPI came below expectations of 0.4%, printing at 0.1%, up from -0.1% previously, while Core PPI, paradoxically, beat this time, rising from 0.3% to 0.4%, on consensus of a decline to 0.2%. Finally Housing Starts was a meaningless and noisy 699K on expectations of 675K, where it has been crawling along the bottom for years. Permits Missed Expectations of 680K coming at 676K.

Global demand for gold reached 4,067.1 tonnes last year, the highest tonnage since 1997, due in large part to a nearly 5% increase in investment demand, which hit a record 1,640.7 tonnes. Asian countries like China, India, Vietnam, Thailand and others see bullion as a store of value against the growing inflation and the ongoing debasement of their currencies. The fundamentals for gold in 2012 look good.  Continuing low and often negative real interest rates will continue to support gold’s safe haven status. The Fed’s statement that it will continue to see rates remain very low until 2014 is very bullish for gold. Central banks were net buyers of gold and their demand surged nearly 6 fold (570%) to 439.7 tonnes in 2011 (compared with 77 tonnes in 2010), more metal than at any time since the end of the gold standard in 1971. The World Gold Council noted that, “The buyers are all ... in Latin America, Asia and the Far East and they are basically enjoying strong growth, fiscal surpluses and growing foreign exchange reserves." 

It is only appropriate that in the days after Valentine's day, the theme of dumping is revisited. Specifically that of securities. As was pointed out yesterday following the latest TIC data, there was a lot of dumping of US Treasurys by foreign official authorities, with both China and Russia (but not only) proceeding to sell a demonstrative amount of US paper. However, that is not all. As the first chart below from today's Bloomberg Brief shows, foreign purchases of US corporate bonds has once again rolled over and remains quite week. As Bloomberg notes: "Foreign investors appear to have little faith in the U.S. economic recovery. They sold $20.7 billion of corporate bonds in December, leaving the one-year mean at minus $3.6 billion. That compares with a 12-month average of $47.3 billion in May 2007. Acquisitions of U.S. stocks were also weak. They totaled minus $11 billion versus a 12-month average of $2.1 billion." And in a stunning display of reciprocity, US residents, not content with selling of US stocks as retail outflows soared in December, also proceeded to dump the rest of the world en mass, as the net sale of foreign securities by US Residents soared to an all time high.