Archive - Feb 2012 - Story

The softer PMI reports have weighed on risk markets, which as a result saw equities trade lower throughout the session. In addition to that, market participants continued to fret over the latest Greek debt swap proposals, which according to the Greek CAC bill will give bond holders at least 10 days to decide on new bond terms following the public invitation, and the majority required to change bond terms is set at 2/3 of represented bond holders. Looking elsewhere, EUR/USD spot is flat, while GBP/USD is trading sharply lower after the latest BoE minutes revealed that BoE's Posen and Miles voted for GBP 75bln increase in APF. Going forward, the second half of the session sees the release of the latest Housing data from the US, as well as the USD 35bln 5y note auction by the US Treasury.

After months (it seems like years) of trying to avoid a CDS Credit Event, it looks like one is inevitable.  The Greek 5 year CDS is at least 70 bid which may be the highest ever.  The game plan seems to be that Greece will put in retroactive CAC laws.  The PSI will come in below 100%.  Greece will trigger the CAC clauses on the Greek bonds, and we will get 100% participation in all those bonds, and we will get a Credit Event.  The interesting part is that depending on what they manage to do with English law bonds, the only bonds outstanding (not in the hands of the central bank only bonds, and troika loans) will be the new bonds.  If they start CAC’ing each bond, it is possible that there will be no existing bonds outstanding left.  Settlement would be based on the new bond (yes, ISDA has a Sovereign Restructured Deliverable Obligation clause – Section 2.16 of the definitions).  With the amortization schedule in place (and not including any value attributable to the GDP strippable warrants), I get that the new bonds would trade at 30% of par with a yield of just over 13%.  I would be careful paying up for CDS here, because settlement will be against these new bonds, not existing bonds if every old bond is CAC’d.  And given the attitude out of Greece late yesterday, and harsh IMF demands, we may well see that. 

• Obama Administration Said Set to Release Corporate Tax-Rate Plan Today (Bloomberg, WSJ)
• Greece races to meet bail-out demands (FT)
• IAEA ‘disappointed’ in Iran nuclear talks (FT)
• Hilsenrath: Fed Writes Sweeping Rules From Behind Closed Doors (WSJ)
• Fannie-Freddie Plan, Sweden FSA, Trader Suspects, CDO Lawsuit: Compliance (Bloomberg)
• Bank of England’s Bean Says Greek Deal Doesn’t End Disorderly Outcome Risk (Bloomberg)
• Greece Second Bailout Plan an ‘Important Step,’ Treasury’s Brainard Says (Bloomberg)
• Shanghai Eases Home Purchase Restrictions (Bloomberg)

January's hopium catchphrase of the month was that Europe's recession would be "technical" which is simply a euphemism for our Fed's beloved word - "transitory." Based on the just released Euroarea PMI, we can scratch this Euro-accented "transitory" addition to the lexicon, because contrary to expectations that the Euroarea composite PMI would show expansion at 50.5, instead it came out at 49.7 - the manufacturing PMI was 49.0 on Exp of 49.4, while the Services PMI was 49.4, on hopes of expansion at 50.6, which as Reuters notes suggests that firms are still cutting prices to drum up business and reducing workforces to cut costs. This was accompanied by a overnight contraction in China, where the flash manufacturing PMI rose modestly from 48.8, but was again in contraction at 49.7. We would not be surprised if this is merely the sacrifice the weakest lamb in the pack in an attempt to get crude prices lower. So far this has failed to dent WTI much if at all following rapidly escalating Iran tensions. What is curious is that Germany and France continue to do far better than the rest of the Eurozone - just as America has decoupled from Europe, so apparently have Germany and France. This too is surely "sustainable."

As if the market needed another bizarro catalyst to ramp even higher courtesy of an even more pronounced drop in corporate earnings courtesy of soaring energy costs, that is just what it is about to get following news of further deterioration in the Nash equilibrium in Iran, where on one hand we learn that IAEA just pronounced Iran nuclear talks a failure (this is bad), and on the other Press TV reports that the Iran army just started a 4 day air defense exercise in a 190,000 square kilometer area in southern Iran (this is just as bad). The escalation "ball" is now in the Western court. And if Iraq is any indication, after IAEA talks "failure" (no matter how grossly manipulated by the media), the aftermath is usually always one and the same...

While nothing is more certain than death and taxes (and central bank largesse), David Rosenberg of Gluskin Sheff uncovers The Unlucky Seven major tax-related uncertainties facing households and businesses that will likely lead to multiple compression in markets (rather than the much-heralded multiple expansion 'story' which appears to have topped the talking-head charts - just above 'money on the sidelines' and 'wall of worry', as 'earnings-driven' arguments are failing on the back of this quarter). As he notes the radically changed taxation climate in 2013 and beyond will have an impact on all economic participants as they will probably opt to bolster their cash reserves in the second half of the year in preparation for the proverbial rainy day.

To be or not to be (in the Euro), that should be the question on the Greek people's minds and not whether 'tis nobler to suffer the slings (fiscal occupation) and arrows (sovereignty destruction) of an outraged 'fiscally fascist' Troika. As Rodney Shakespeare so eloquently explains in this Russia Today interview, the projected trajectory of the debt/GDP for Greece is nonsense and are simply 'manipulations that justify the banking occupation of Greece'. In words that should ring true to any reader of the Bard, Rodney goes on to highlight the terrible plight that is to come to generations of Greeks citing the 'whole thing as a fraud'. The brave and highly inventive Greek people can succeed if they are not forced to bailout the banks and instead leave the Euro; dismissing the office of the financial fascists that will soon occupy the nation. Strong (and emotional) words describe why the IMF/EU/ECB bloc is so keen to maintain the status quo that is clearly crumbling at their feet as perhaps they would do well to remember the final words of this Hamlet soliloquy: 'be all my sins remembered'.

If there is one war that Greece could not afford to join, that is with the global computer hacking collective known as Anonymous. Yet as of minutes ago, that is precisley what happened, after Anonymous, as part of what it now calls Operation Greece, took down the Greek Ministry of Justice (http://www.ministryofjustice.gr/). While the pretext for the hacking appears to have been an arrest of the wrong people, is seems to have angered Anonymous to the point where they have left an extended message of demands on the Greek website, warning that unless the IMF withdraws from the country and the government resigns, all debts of Greek citizens will be wiped clean.

Today, without much fanfare, US debt to GDP hit 101% with the latest issuance of $32 billion in 2 Year Bonds. If the moment when this ratio went from double to triple digits is still fresh in readers minds, is because it is: total debt hit and surpassed the most recently revised Q4 GDP on January 30, or just three weeks ago. Said otherwise, it has taken the US 21 days to add a full percentage point to this most critical of debt sustainability ratios: but fear not, with just under $1 trillion in new debt issuance on deck in the next 9 months, we will be at 110% in no time. Still, this trend made us curious to see who has been buying (and selling) US debt over the past year. The results are somewhat surprising. As the chart below, which highlights some of the biggest and most notable holders of US paper, shows, in the period December 31, 2010 to December 31, 2011, there have been two very distinct shifts: those who are going all in on the ponzi, and those who are gradually shifting away from the greenback, and just as quietly, and without much fanfare of their own, reinvesting their trade surplus in something distinctly other than US paper. The latter two: China and Russia, as we have noted in the past. Yet these are more than offset by... well, we'll let the readers look at the chart and figure out it.

Volumes were below average but not dismally so as the sad 6.5pt drop in ES (the e-mini S&P 500 futures contract) from Sunday's open to today's close is incredibly the largest drop since 12/28 [correction: 2/10 saw a slightly larger open to close drop] on a day when the problems of Greece are now apparently behind us and Dow 13,000 means that retail will come storming back. High yield credit underperformed (and investment grade outperformed) as stocks drifted to Friday's lows suggesting some up-in-quality rotation (though HYG - the high-yield bond ETF - was strong most of the day). Financials ended the day red with the majors losing significant ground off intraday highs (and CDS widening still further) but the bigger story of the day was the rise in commodities with Copper (RRR cut?) and Silver outperforming (up 3.3% since Friday's close already), WTI managing $106 intraday and Gold touching $1760 (both up over 2% from Friday). What was surprising was the dramatic outperformance with the USD which weakened by 0.44% from Friday as EUR is up 0.75% from Friday alone (while Cable, JPY, and most notably for risk AUD are all weaker against the USD). Treasuries sold off through European hours today and then recovered about half the loss only to ebb quietly into the close with 30Y +6.5bps from Friday (another divergence with stocks) and steeper curve. All-in-all, it seems confusion reigned on Europe but the bias in credit (and financials) seemed more concerned than equities (even with HD and WMT) and FX as real assets were bought aggressively.

Highly paid shills for the status quo on Wall Street have recently been wheeled out to observe the fundamental ugliness of western government bonds. They are correct. This is an asset class that has managed to defy the laws of economics in becoming ever more expensive even as its supply swells. Their response has been to recommend piling into stocks instead. The logic here is not so pristine. If Napier's thesis is correct, the West faces a period of outright deflation, which will be deeply traumatic for exactly the sort of speculative stocks that have lately done so well. Admittedly, the picture is confused, and prone to all sorts of political horseplay, as observers of the long-running euro zone farce can attest. Nevertheless, when faced with a) huge underlying uncertainties; b) structurally unsound banking and government finances; and c) central banks determinedly priming the monetary pumps, we conclude that the last free lunch in investment markets remains diversification. G7 government bond markets are a waste of time (though you may end up being cattle-prodded into them regardless). But there are still investment grade sovereign markets offering positive real yields. Stock markets are partying like 1999. Which, in many cases, it probably is. We would normally advise to enjoy the party but dance near the door.

Much has been written of the dramatic drop in the Debt/GDP multiplier, or Keynesian accelerator, over the last few years that shows the marginal utility of adding more debt produces less and less growth (and in fact can become a drag). More debt to solve too much debt seems put to bed as a solution except in the surreal world of central bankers and politicians. Well, with all the hoop-la today for the 'peek' over Dow 13000 and our discussion of the nominal versus real 'value' of the Dow as central banks of the world have printed $7tn into existence in the last few years, we thought an examination of the marginal utility of central bank printing would be useful. The depressing truth is that, using Gold as a proxy for central bank ebullience, the impact of implicit devaluation (or explicit printing) by central banks is having a smaller and smaller impact on stock market (asset) prices. Since the lows in March 2009, the impact of central bank intervention on the Dow has rapidly diminished from over 20 Dow points per $1 Gold move to only 2 Dow points per $1 Gold move in the last few months. What is dramatically clear is that investors are losing 'value' even as they see their brokerage statements rise and while Gas prices will inevitably slap reality into their faces, perhaps just as the Debt/GDP multiplier signaled the Keynesian Endgame, then the Gold/Dow multiplier signals the Currency-Wars Endgame - or alternatively, Central Banks will have to go exponential in their extreme experimentation to fulfill equity-holder's hopes and dreams as they approach their event horizon.

Something funny happened on the road to Dow Jones 13,000 - the car ran out of gas, and the driver noticed what the latest and (literally) greatest price of unleaded is...