Archive - Jul 24, 2012 - Story

The major European bourses are down as US participants come to their desks, volumes still thin but higher than yesterday’s, and underperformance once again observed in the peripheries, with the IBEX down 2.5% and the FTSE MIB down 1.2%. Last night’s outlook changes on German sovereign debt caused a sell-off in the bund futures, with the effect being compounded as Germany comes to market with a 30-year offering tomorrow. The rating agency moves, as well as softer Euro-zone PMIs and reports that Spain is considering requesting a full international bailout have weighed on the riskier asset classes, taking EUR/USD back below the 1.2100 level. Furthermore, with Greece and a potential Greek exit now back in the news, investor caution is rife as the Troika begin their Greek report of the troubled country today.

UPS, traditionally considered one of the legacy bellwether, came out with earnings. And they were ugly. The company missed both the top and bottom line, with the revenue coming at $13.35 billion, below expectations of $13.7 billion, and EPS at $1.15 on expectations of $1.17. This merely confirms what those who did not have their head in the sand in Q2 knew all along: without Europe, global trade stalls every time. But it was the outlook cut that was the cherry on top: "The company’s performance was mixed during the second quarter,” said Kurt Kuehn, UPS’s chief financial officer. "The results in the U.S. Domestic and Supply Chain and Freight segments were partially offset by the weakness in International. “As we look toward the second half of the year, customers are more concerned as greater uncertainty exists. Additionally, economic growth expectations have come down,” Kuehn continued." China bull take note: "Revenue was $3 billion as the segment remains under pressure due to weaker global economies and reductions in exports from Asia." Going back to Kuehn: "Consequently, we are reducing our guidance for 2012 diluted earnings per share to a range of $4.50 to $4.70, an increase of 3%-to-8% over 2011 adjusted results.”  The firm's previous guidance was $4.75-$5.00, with sellside consensus of $4.82. Somehow we fail to see how the Q3 and Q4 renaissance, which is so critical to meet the S&P target of over 100 in earnings, will happen. Actually scratch that: it won't. Expect reality to slam stocks head on some time in Q3 as the realization that the air out of the US corporate juggernaut has come out, courtesy of a sliding EUR and surging USD. Or at least until the Chairman has something to say about it.

• Greece now in "Great Depression", PM says (Reuters)
• Geithner "Washington must act to avoid damaging economy" (Reuters)
• Moody’s warns eurozone core (FT)
• Germany Pushes Back After Moody’s Lowers Rating Outlook (Bloomberg)
• Austria's Fekter says Greek euro exit not discussed (Reuters)
• In Greek crisis, lessons in a shrimp farm's travails (Reuters)
• Fed's Raskin: No government backstop for banks that do prop trading (Reuters)
• Campbell Chases Millennials With Lentils Madras Curry (Bloomberg)

Curious just how we were 100% certain that the June 29 summit was an epic disaster, in addition to the obvious? Because in a note from that morning we said the following: "Below is Goldman's quick take on the E-Tarp MOU (completely detail-free, but who needs details when one has money-growing trees) announced late last night. In summary: "We recommend being long an equally-weighted basket of benchmark 5-year Spanish, Irish and Italian government bonds, currently yielding 5.9% on average, for a target of 4.5% and tight stop loss on a close at 6.5%." By now we hope it is clear that when Goldman's clients are buying a security, it means its prop desk is selling the same security to clients." Sure enough, its prop desk was selling, and selling, and selling. Since then Spain and Italy have blown out, and only the strange tightening in Ireland has prevented yet another stop loss from the squid which is now known for cremating clients more than anything else. The stop loss is certainly not far: the basket is now at 6.20%, and has just 30 bps to go until yet another batch of Goldman clients is slaughtered. Which is now only a matter of time - Goldman just told its clients it has a little more of its 5 Year exposure left to sell, and then it will be done. Of course by then another muppet murder scene will have to be cordoned off.

Spain is not Uganda: this morning Spain is increasingly looking like the 10th circle of bondholder vigilante hell with its 10 Year trading at 7.59% after hitting a record 7.607% moment prior. The short end has blown out even wider and the 2 Year very appropriately at 6.66% and rising. Italy has also joined the party blowing out to just why of 6.5% and Italy's banks about to be halted across the board despite the short-selling ban. Next up: selling anything forbidden. Finally, the scramble for safety into Swiss 2 year notes accelerates as these touch a mindboggling -0.44%. There was no specific catalyst to lead to today's ongoing meltdown, but the fact that Spain just paid a record price for 3 and 6 month Bills is not helping: the average yield was 2.434 percent for the three-month bills compared with 2.362 percent in June and 3.691 percent for six-month paper compared with 3.237 percent. With each passing day, the selling crew is demanding the ECB get involved and stop the carnage. For now Draghi is nowhere to be seen as Germany continues to have the upper hand. After all recall just who it is that benefits from keeping the periphery on the razor's edge and the EURUSD sliding.