Archive - Apr 13, 2012 - Story

It appears the chaotic volatility of last Summer is rearing its ugly head once again as credit and equity markets in Europe flip-flop from best performance in months to worst performance day after day. With Spain front-and-center as pivot security (as we have been aggressively noting for weeks), sovereigns and financials are lagging dreadfully once again. The Bloomberg 500 (Europe's S&P 500 equivalent) back near mid January lows, having swung from unchanged to pre-NFP levels back to worst of the week at today's close, European banks are leading the charge lower as the simple fact that liquidity can't fix insolvency is rwit large in bank spreads and stocks. Treasuries have benefited, even as Bunds saw huge flows, outperforming Bunds by 18bps since pre-NFP but it is Portugal +33bps, Spain +22bps, and Italy +9bps from then that is most worrisome. LTRO Stigma remains at its 4 month wides but financials broadly are under pressure as many head back towards pre-LTRO record wides. Europe's VIX is back up near recent highs around 30%. With too-big-to-save Spain seeing record wide CDS and even the manipulated bond market unable to hold up under the real-money selling pressure, the ECB's dry powder in SMP looks de minimus with only unbridled QE (since banks have no more collateral to lend) and the ECB taking the entire Spanish debt stock on its books as a solution, access to capital markets is about to case for Spain (outside of central-bank-inspired reacharounds) and as we noted earlier - every time the ECB executes its SMP it increases the credit risk for existing sovereign bondholders (and implicitly all the Spanish banks). Spain's equity market is a mere 5% above its March 2009 lows (55% off its highs).

...Add all these charts up and we get a snapshot of a housing recovery that seems to have stalled or rolled over. The reasons why are apparent: mortgage debt remains elevated, a vast "shadow inventory" of underwater or foreclosed homes remains off the market and household income has stagnated or declined, as reported in What If Housing Is Done for a Generation?.

Art Cashin goes through the history of Friday the 13th on Wall Street, and tells us it has a slight upward bias, being "up 55% to 60% of the time." Just don't tell that to Europe today, and especially Spain and Italian banks, both of which are getting monkeyhammered at this moment.

Courtesy of the class division SWAT team, we already know all too well that Buffett had a lower tax rate than this secretary. We however have a question: according to just released data, the Obama's paid $789,674 in taxes in 2011...

• OBAMAS PAID 20.5% IN TAXES ON $789,674 IN 2011

So... inquiring minds want to know if the Fairness Expert in Chief paid less than his secretary in 2011?

UPDATE: Break out your Spain CDS 500bps Hats! All-time record wides.

Spanish CDS, at 493bps, have just pushed above their previous record wide closing levels (though remain a few bps below their record intraday wides at 499bps from 11/17/11). The Spanish bond market, which we have numerous times indicated does not reflect the economic realities since it is so dominated by LTRO-buying and government reach-arounds, remain 45bps off their record wide spreads to Bunds. BBVA (430bps) and Santander (415bps) are also close to their record wides back in late November as their stock prices plummet.

The low interest rate 'logic' is not working and "the economy can't gain any zest, can't gain any vigor" is how Michael Steinhardt describes the crushing of 'widows and orphans' that the Fed has embarked upon. In a Bloomberg TV interview, the WisdomTree chairman notes the broad 'pall' over the equity markets (conjuring images of a funereal procession down Trinity Street) pointing out that there is no reason to be wildly bullish here. Citing Wall Street's lack of 'spirit', he questions the entire raison d'etre of efficient capital transfer as becoming secondary as he rather poignantly asks who has benefited from Fed's policies "Certainly the banks. But ordinarily you'd say, well, low interest rates benefit housing. It certainly hasn't benefited housing." Reflecting on his performance as a hedge fund manager he concludes that extraordinary performance is sadly not necessary anymore as the money flowing into hedge funds means people do exceptionally well for themselves despite diminished performance. While finding equities broadly unappealing, and suggesting talk of QE3 should cease, he notes there are pockets he would invest in but ends by noting that "Bonds are no place to be".

As predicted earlier, UMich had no choice but to miss, because in centrally planned Bizarro markets only weak economic data leads to a rise in risk. Sure enough, with expectations of 76.2, the same as the March print, Consumer Confidence posted only its first decline since August, while missing expectations, printing at 75.7. And while a miss on its own would have led to a surge in stocks as NEW QE WOULD BE IMMINENT ANY SECOND NOW, the miss was less than the whisper number of 73.2 predicted, and as such this was merely one month of coincident data propaganda flushed down the drain. Also not helping things is that the Expectations index printed at 72.5, up from 69.8 and the highest since September 2009. With hope still so high it is hardly likely that the Fed will go ahead and appease everyone. Hope first has to be brutalized before Bernanke comes in to save the day and make the Fed appear like the 401(k)night in shining armor.

"What Bernanke is to the Treasury market, Iksil is to the derivatives market"

As Spanish CDS surge and bonds shrug off the very recent gloss of a 'successful' Italian debt auction, the sad reality we pointed out this morning is the increasing dependence between Spanish banks, the sovereign's ability to borrow, and the ECB. As ING rates strategist Padhraic Garvey notes this morning, the bulk of the LTRO2 proceeds were taken down by Italian (26%) and Spanish (36% of the total) and the latter is even more dramatic given the considerably smaller size of Spanish banking assets relative to Italy. The hollowing out of the Spanish banking system, via encumbrance (ECB liquidity now accounts for 8.6% of all Spanish banking assets), is a very high number - on par with Greek, Irish, and Portuguese levels around 10% where their systems are now fully dependent on the ECB for the viability of their banks. His bottom line, Spain is not looking good here and while plenty of chatter focuses on the ECB's ability to use its SMP (whose longer-term effectiveness is reduced due to scale at EUR214bn representing just 3% of Eurozone GDP), consider what happened in Greece! The ECB did not take a Greek haircut and so the greater the amount of Greek debt the ECB bought, the greater the eventual haircut the private sector was forced to take. By definition, every Spanish bond that the ECB buys in its SMP program increases the default risk that private sector holders are left with.

No surprises in today's release of US CPI, which unlike China's still searing inflation (which is the PBoC's way to check to Bernanke on more easing) came just as expected at 0.3% headline and 0.2% core, or 2.7% Y/Y.  From the release: "The indexes for food, energy, and all items less food and energy all increased in March. The gasoline index continued to rise, more than offsetting a decline in the household energy index and leading to a 0.9 percent increase in the energy index. The food index rose 0.2 percent as the index for meats, poultry, fish, and eggs increased notably. The index for all items less food and energy rose 0.2 percent in March after increasing 0.1 percent in February. Most of the major components increased in March, with the indexes for shelter and used cars and trucks accounting for about half the total increase for all items less food and energy. The indexes for medical care, apparel, recreation, new vehicles, and airline fares increased as well, while the indexes for tobacco and household furnishings and operations were among the few to decline in March." The items rising the most in March sequentially: fuel oil at 2.7%, gasoline at 1.7% and apparel at 1.3%. The only decliner was electricity at -0.8%, courtesy of nat gas plunging. With a record hot summer approaching, this is a good thing.

Gold bullion remains supported, mostly due to a pickup in physical Indian and Chinese gold demand this week. There are expectations of sustained Indian consumption next week in the lead up to the Akshaya Tritiya festival later this month.  Western physical buying remains unusually anaemic - for now. In recent years, April and May have been positive months for gold in terms of returns (see table above). April has returned 1.4% per annum in the course of the current bull market since 2000.  May has returned 1.75% per annum in the course of the current bull market since 2000. Interestingly, the last month of Q1 and Q2, March and June, have been negative in terms of returns. March in particular has seen the poorest returns for any month in the last 11 years with average falls of 0.6%.  Therefore the very poor performance of gold in March 2012 (-6.4%) may represent another buying opportunity as it did last year (see chart below) and in previous years.

Risk-aversion is noted in the European markets with all major European bourses trading lower heading into the US open. Participants remain particularly sensitive to Spain following a release from the ECB showing that Spanish bank’s net borrowing from the ECB hit a new record high at EUR 227.6bln in March against EUR 152.4bln in February. Further pressure on the equity markets was observed following the overnight release of a below-expected Chinese GDP reading, coming in at 8.1% against a consensus estimate of 8.4%. As such, markets have witnessed a flight to safety, with Bund futures up over 40 ticks on the day. In the energy complex, WTI and Brent futures are also trading lower, as the disappointing Chinese GDP data dampens future oil demand, however a failed rocket launch from North Korea may have capped the losses.

• ECB Seen Favoring Bond Buying Over Bank Loans (Bloomberg)
• Italians Rally Against Monti’s Pension-Overhaul Limbo (Bloomberg)
• Spain Cracks Down on Fraud as Rajoy Says Aid Impossible (Bloomberg)
• Europe’s Capital Flight Betrays Currency’s Fragility (Bloomberg)
• China’s Less-Than-Forecast 8.1% Growth May Signal Easing (Bloomberg)
• China Banks Moving to Lower Mortgage Interest Rates (China Daily)
• Fed Officials Differ on Need to Keep Rates Low to 2014 (Bloomberg)
• North Korea Confirms Rocket Failure (Reuters)
• Yuan Lending Set to Cross New Border in Pilot Plan (China Daily)