Archive - Jul 2012 - Story

Despite some early angst, Treasury yields have been crushed lower today. Down 7bps from their European close levels, 30Y is trading with a 2.45% handle for the first time ever and 10Y now with a 1.39% handle. Both all-time record lows as the 2Y auctions with a 4x bid-to-cover as 2s5s flattens to almost five year lows as the Fed's ZIRP and Europe's NIRP has pushed investors to front-run into preservation of capital instead of pushing them out on the risk spectrum. For those who care (instead of preferring to listen to dividend-stock-touting talking heads), 10Y TSYs have plenty of room to run if rates keep falling (15% upside if Japanification takes hold) - which prompts the question - just what is the interest expense convexity for the Government if rates were ever to rise from here?

"While there are many reasons to be bearish on stocks, there is only one good reason to be bullish. The only bullish hope is that the Bernanke Put again will save the stock market" is the salient reality that TrimTabs' CEO Charles Biderman exclaims in his latest clip. Shifting to 100% bearish this weekend for his institutional clients, he believes that even if the Fed QuEases again, the equity pop is well-discounted and will have at most a 10% impact before he sees at least a 20% drop from April highs followed by potentially worse as the realization of the fiscal cliff begins. The glass-half-full-of-truth Biderman notes four specific reasons for his bearish call: from wage and salary growth slowing to barely positive YoY, to the Fed's inability to create any multiplier effect to boost the economy; and from the slowing global economy where "low tides will uncover all the hidden garbage created by booms" to the basic supply/demand of stock and money based on his 'Demand' index dropping to six-month lows. His bearish view is not even predicated on Europe's conflagration accelerating which would simply add more fuel to the growing fire.

David Einhorn throws France under the bond vigilante bus, last seen meandering back and forth all over Spain and Italy: "Under the new regime, France is now cozying up to its new anti-austerity, pro-money-printing allies, Italy and Spain. This makes sense when one considers that France's economy is more akin to that of its southern neighbors than it is to the German economy. Strangely, the French bond market hasn’t figured this out just yet."

Back in early May we noted that the 'strength' of EURUSD (at the time around 1.30) implied an expectation of a $700bn Fed NEW QE is on its way very soon - in fact, as recent developments by the two central banks have demonstrated, it was the ECB that added assets (and liabilities) over the past two months, even as the Fed has shed some excess weight. In those following six weeks, EURUSD has fallen nearly 1000pips in our favor as the FX market has finally given up hope of imminent printing (with only the most addicted of markets - US equities - left 'believing'). As Fed and ECB balance sheets have shifted in the last few weeks, so the new 'QE-less' target for EURUSD is around 1.1850 (200 pips lower), though we would suggest taking some healthy profits to leave a runner.

"What's the difference between the US and Europe?" 'About Six Years' is the punchline that CNBC's Rick Santelli ascribes the apparently magnanimous view that Europe is so much different from us. Between PIMCO's Kashkari pontificating on unsustainable debt (and the Fed's need to 'do something', and Liesman still defending the Fed with all his might, Santelli loses it - noting Kashkari's intelligence, he rhetorically asks "Do you really think [the Fed] is the solution?" - and rightly so. "It's all band-aids," he exclaims, adding that "the problem is insolvency." Speaking out loud what many are thinking, Rick blasts the hypocrisy of the Kashkaris of the world who opine on solutions (and band-aids) while missing the critical underlying problem - that no one is accountable. Between Reagan, 'unreal' spending cuts, compromised 'bad' resolutions, and the continuing ostrich economics in the US mainstream, Santelli tells it like it is - as hard as it is for the CNBC anchors to hear.

Spain's IBEX equity index closed at Euro-era lows today having dropped over 10% in the last 3 days (crushing the hopes of the afternoon post-short-sale-ban squeeze yesterday). This leaves IBEX down over 30% for the year (and Italy down over 18% YTD). Add to that; inverted long-end curves in Spain (and almost Italy), all-time record high short- and long-term spreads for Spanish debt and euro-era record high yields, record wide CDS-Cash basis, dramatic short-end weakness in Italy, new low negative rates in Switzerland (-46bps) and Germany (-7bps), and EURUSD at its lowest since June 2010 at 1.2059. But apart from that, the EU Summit seems to have done the trick nicely. Financials have been crushed in credit-land as subs notably underperform seniors and HY and IG credit continues to lead the equity markets lower in reality. Meanwhile, remember Greece? 30Y GGBs have dropped almost 20% in price in the last few days and have closed at all-time record low closing price at just EUR11.55!! S'all good though - where's Whitney?

It has been a while since Greece made the front pages. That changes now:

• GREECE SEEN MISSING EU/IMF DEBT REDUCTION TARGETS, FURTHER DEBT RESTRUCTURING NECESSARY - EU OFFICIALS

And to think all those knife catchers said the Greek bonds were the slam dunk trade of the year. All of them are about to get taken to the cleaners. As are their newsletter sales.

The chart below, which compares the change in the Richmond Fed and the Non-Farm Payrolls print, is self-explanatory. Of course, if we are indeed about to get a -400,000 NFP print, then the prayers of all those newsletter sellers whose only "thesis" is more easing, are about to be answered.

The first is a long-term chart of the Dow Jones Industrial Average (DJIA). The recent price history has traced out a pattern that looks remarkably similar to the one that presaged the crash of 2008, with one difference: massive quantitative easing and Eurozone bailouts pushed the B leg into an overextension. If this pattern is valid, the C leg down could be a real doozy.

UPDATE: *ITALIAN TWO-YR NOTE YIELD RISES ABOVE 5%, 1ST TIME SINCE JAN 11

While every wannabe bond-trader and macro-strategist can quote 10Y Spanish yields, and maybe even knows what the front-end of the Spanish yield curve is doing (and why), there are three very significant events occurring in the Spanish sovereign credit market. First is the inversion of the 5s10s curve (5Y yields were above 10Y yields at the open today); second is the velocity with which 2s10s and 5s10s have plunged suggesting a total collapse in confidence of short-term sustainability; and perhaps most critically, third is the record wide spread between the bond's spread and the CDS (the so-called 'basis') which suggests market participants have regime-shifted Spain into imminent PSI territory (a la Greece and Portugal) as opposed to 'still rescuable' a la Italy for now. As we pointed out earlier, there is little that can be done (or is willing to be done) in the short-term, and the inevitability of a full-scale TROIKA program request is increasingly priced into credit markets (though its implicatios are not in equities of course).

And another epic miss in the slow motion trainwreck that is the US plowhorse economy now to its neck in quicksand. The latest B-grade economic indicator: the Richmond Fed, which was expected to rise modestly from -3 to -1. Instead it faceplanted to -17, the biggest miss since August 2010 and the lowest print since Apirl 2009. But at least US housing has bottomed. Just kidding. At this point there should be no doubt that the US economy is in freefall - and the only recourse we have is the definition of madness: more QE which everyone by now knows will do nothing but provide a brief sugar high, and spike inflation and stock prices, only for everything to implode demanding even more QEasing from the Chairsatan, and on, and on, until in the endgame, the USD finally loses credibility. Of course, if this horrifyingly bad economic print does not send stocks soaring, we don't know what will.

This has been the recovery of downward revisions - each annual revision to payrolls and GDP since the recovery started in 2009 revealed an even sharper contraction and weaker recovery. BofAML believes this year’s revision, which is released with the Q2 GDP report on Friday, will once again show an even slower start to the recovery with growth revised lower in 2009 and 2010, and modestly higher in 2011. While it is good news that growth could be revised higher in 2011, it appears that it will only be marginal. The downward revisions to growth in 2009 and 2010 will still leave the level of GDP lower and, hence, the output gap larger. This shows that the economy has made even less progress in healing from the deep recession. The severity and duration of the recession was understated in real time and the recovery was overstated. This suggests that monetary policy may not have been easy enough over the past several years - and therefore the current slowdown is even more significant.

Things in Spain are now in freefall, and as a Spanish economist admits to El Economista "we are alone" which is not surprising: the country has cried not wolf then wolf one too many times, and following yesterday's warning by Moody's that Germany is now officially on the hook should it continue bailing out the insolvent periphery, it is no wonder that Germany will leave Spain to the same wolves it may or may not have been observing for months. Sadly, much more pain is in store for the rhyming country, but first of all for its north-eastern region of Catalonia which is responsible for a fifth of the country's economy output, and which has €13 billion in debt redemptions until the end of 2012. From El Nacional: "The Government of Artur Mas call on the help of regional liquidity fund that created the central government with 18,000 million euros, as confirmed by the spokesman Francesc Homs. After Valencia and Murcia, who have already made ??their intentions, Catalonia would be the third autonomy to resort to the rescue of the state. For its part, Andalusia may try to avoid government aid and negotiate a private loan of 800 million euros. Homs has emphasized that the decision to seek the liquidity mechanism has not yet been taken formally and according to him it is not in any case not a rescue or intervention, and that the Government of Artur Mas is studying the fine print of the conditions the fund." At least FC Barcelona has some good collateral to post to the the various German entities that will ultimately be funding the rescue. The same can not be said for Spain, however, which the same publication says, is on the verge of begging, and may demand a credit line so it can finance its funding neeeds for the remainder of the year.

Just as the summer finally arrives in Northern Europe, the Eurozone crisis is heating up once again. With an increasingly flat (heading to inversion) yield curve, and spreads at record wides,  Spain appears to be in a downward spiral of market turmoil that might require a full-fledged TROIKA bail out. However, as UBS points out, rather than taking the country off the market, the program would have to allow Spain to keep borrowing from private investors. Any bail out of Spain would have to be designed in a way that would also be applicable to Italy. Spain has been the most recent crisis focus, and looks to intensify further with nothing immediately in sight that could reverse the trend. We, like UBS, have argued for some time that a full-fledged TROIKA program will ultimately be unavoidable and the following six reasons briefly explain why anything else is a pipe-dream - as we remember Draghi's recent shift: "creditors should be part of the solution of the crisis. It is a matter of limiting the involvement of taxpayers. They have already paid a great deal."