Archive - Jul 19, 2012 - Story

So much for last week's shocking beat in Initial Claims, which as a reminder printed at 350K on expectations of 372K, driven by the July 4 holiday and, what we described were "onetime factors such as fewer auto-sector layoffs than normal likely caused the sharp decline." This week the initial claims soared right back to 386K on expectations of a 365K print: so last week's 22K beat was promptly reversed following this week's number- a miss 21K above expectations. And of course, last week's 350K was upward revised to352K. Of note is what we said last week: "the Not Seasonally Adjusted claims number rising by 70K is very much irrelevant." Sure enough, this week the unadjusted number rose even more, by 10.8K to 453K, just 13K below last year's number of 470K. This compares to the 32K difference from a year ago for the seasonally adjusted numbers. That this stinks to high seasonally adjusted heaven needs no observation. Finally, people for whom extended claims expired soared by 84K in one week, as those on EUC 2008 benefit is imploding with each week. Overall, a very ugly number, but not horrible enough yet to send the S&P up 100 on imminent NEW QE.

China has proposed to broaden trading of precious metals in its local market in order to help China become a "major gold trading centre" (see News). The Wall Street Journal was briefed about China's plans by "a person involved with the matter." The paper reports that "the move could increase liquidity and help Beijing gain stronger pricing power for key commodities like gold". China is the largest consumer and now the largest producer of gold in the world and has aspirations to become a major gold trading center on a par with London and New York. China is also the fifth largest holder of gold reserves in the world after the U.S., Germany, France, Italy. Chinese officials have spoken of China’s aspirations to have gold reserves as large as the U.S. in order to help position the yuan or renminbi as a global reserve currency. Indeed, it would be only natural for China to aspire to have their currency become the global reserve currency in the long term. In the longer term, being a major gold trading center would make China a more powerful financial and economic player and indeed could allow them to influence commodity and other important market prices. Indeed, Reuters reported that becoming a major gold trading center "would boost the country's clout in setting global prices".

Recently two noted Spanish economists were interviewed. One was always an optimist and one was always a pessimist. The optimist droned on and on about how bad things were in Spain, the dire situation with the regional debt, the huge problems overtaking the Spanish banks and the imminent collapse of the Spanish economy. In the end he said that the situation was so bad that the Spanish people were going to have to eat manure. The pessimist was shocked by the comments of his colleague who had never heard him speak in such a manner. When it was the pessimist’s turn to speak he said that he agreed with the optimist with one exception; the manure would soon run out.

• U.S drought wilts crops as officials pray for rain (Reuters)
• Obama backs aid for drought farmers (FT)
• Greek leaders identify two-thirds of spending cuts (FT)
• Central bankers eyeing whether Libor needs scrapping (Reuters)
• Markets Face a Life Sentence of Hard Libor (WSJ)
• World Bank chief warns no region immune to Europe crisis (Reuters)
• China big four banks' new loans double in early July (Reuters)
• Nokia Loss Widens as Smartphone Sales Slump (WSJ)
• Bundesbank Expected To Buy Australian Dollars In 3Q (WSJ)

Morgan Stanley reported earnings this morning, and showed that unless one has massive loan loss reserves to release, US banks are in big trouble. The firm just reported $0.28 EPS including DVA benefit, on expectations of $0.29. But it was the top line that got blown out, with the firm reporting $7.0 billion in revenue including the DVA fudge, but more importantly $6.6 billion. The expectations was for a $7.58 billion top line: a 14% miss. The top line number plunged over 25% compared to a year ago. The main reason for the collapse in profit: the virtual disappearance of any cash from combined fixed income, commodity and equity sales and trading, which imploded from $3.7 billion a year ago, to just $1.9 billion this quarter. And while the company slashed comp in Q2 as was to be expected following such horrible results, by over 33% to $1.4 billion from $2.2 billion, here is what most are focused on: "As a result of a rating agency downgrade of the Firm's long-term credit rating in June, the amount of additional collateral requirements or other payments that could be called by counterparties, exchanges or clearing organizations under the terms of certain OTC trading agreements and certain other agreements was approximately $6.3 billion, of which $2.9 billion was called and posted at June 30, 2012." In other words, the company has yet to post more than half of its contractually required collateral. In the aftermath of these atrocious earnings, we wish them all the best in getting access to this cash.

In retrospect, this may be one of the funnier "research" notes to have come out of Barlcays in the past 5 years.

Instead of sticking to selling short-term, LTRO covered debt, Spain was so desperate to show it has capital markets access that this morning it tried selling bond due 2014, 2017 and 2019 with a maximum issuance target of €3 billion. It failed to not only meet the target, but to price the €1.074 billion in bonds due 2017 at anything less than an all time high (6.459%) as a result sending the entire curve blowing out wider, and the 10 Year above the critical 7% threshold again, for the first time since the June Euro summit, whose only function was to give a positive return for the fiscal year to such US pension funds as Calpers and New Year. In summary:  Spain sold 2.98 billion euros of short- to medium-term government bonds on Thursday in a sale at which borrowing costs rose and demand fell. The average yield at a sale of 1.07 billion euros of five-year bonds rose to 6.46 percent compared with 6.07 percent at the previous auction of the debt last month. Investors' bids were worth 2.1 times the amount offered for the five-year paper versus 3.4 times at the last auction, and 2.9 times for the seven-year bond. The average yield at the seven-year sale rose to 6.7 percent from 4.83 percent.