Archive - Jan 4, 2013 - Story

If you own the debt of Spain; sell it. If you are thinking about buying their sovereign debt; don’t. I hope that is clear enough. I don’t believe that I have left out any corner of my thinking or that there is any wavering on my part. All of the new Spanish debt will carry Collective Action Clauses which gives Spain the right to force bondholders to their knees. This is reminiscent of Greece and we should have all learned the lesson from that experience. It is my opinion that Spain will be forced to the till at the ECB and the EU and that the amount of financing that will be demanded will cause rancor in the fiscally disciplined nations.

It has been an 'epic' week in European sovereign bonds. Whether it was returning traders or pension fund asset managers forced to reach-around, Spain and Italy 10Y spreads are 44bps tighter this week and Portugal a ridiculous 92bps (on what!!? - US fiscal cliff?), though Spain and Italy stabilized today. Broad European equities surged the most during the first 3-days of 2013 in five months (with Spain and Italy up 3.6-4%) but today saw credit notably divergent from the ongoing exuberance in stocks. EURUSD gave up some significant strength this week as repatriation flows reversed but Europe's VIX has been crushed just like in the US. Europe's Composite PMI is still below (though modestly rising) but it is the stagnation of the New Orders sub-index that should be most concerning - perhaps that is what credit is anticipating.

We are living in the United States of Delusion. The delusion has four key sources. The irony is that clinging to delusion rather than face the necessity of deep cuts in borrow-and-squander budgets will lead to the involuntary reset of the entire system, depriving every vested interest of their share of the swag. Is delusion a sustainable state? No. Thus we can confidently predict that causality, factuality and karma will eventually sweep aside delusion and all those who cling to it.

And we're off to the races. Despite, or maybe thanks to, the relentless collapse in paper gold prices, US retail continues to ignore the day to day fluctuations in the stated value of the shiny metal (most of it driven by the BIS' Benoit Gilson), and instead has learned to take advantage of every drop to BTFD. As the US mint website reports, the very first day of 2013 saw a whopping 50,000 gold ounce sales, and another 7,000 on the second, which is nearly the entire amount sold by the mint in December, and just shy of half in all of January 2012. Which in turn means that gold raids are now becoming counterproductive: instead of disincentivizing retail purchases, they are merely accelerating them, in the process leading to ever more paper to physical currency conversion. The "trillion dollar platinum coin" may well be the dumbest idea around, but the "one ounce gold coin" idea is rapidly becoming the most popular one, shared by all who see that the only possible outcome for the "developed world" is more ceaseless devaluation of every paper currency in the world.

AAPL is now in the red for 2013 having filled its January 2nd opening gap. Down around 5% from its highs of that day, AAPL is down over 2% today alone (on decent volume) on the back of further concerns (prompted by Deutsche Bank) about iPhone 5 sales. It seems the meme on rotation from bonds to stocks is just not holding up for AAPL - perhaps it is time to plunder our Social Security fund to buy AAPL?

Remember when the US economy was spun as shaking in its boots due to the "threat" from the fiscal cliff? Neither do US services. According to the just released Services ISM, the composite index spiked to a 56.1 print, a big beat of expectations of 54.1, and back to early 2012 levels. The biggest boost? Employment, which soared from 50.3 to 56.3, a jump in 6 points. It would appear that the Fiscal Cliff was an opportunity for financial firms, which were already laying off tens of thousands, to add many more. Or some other such convoluted logic which has become simply laughable now: even the ISM's own Nieves can't figure it out, saying the jump in employment was "surprising." Other components seeing an increase: New Orders up+1.2 to 59.3, and naturally Inventories + 3.0. Declines were recorded in Business Activity, -0.9 to 60.3, Prices down -0.4 to 56.5, Order Backlogs down -4.0 from 53.3 to 49.5, Inventory Sentiment whatever this is, down -4.5 to 58.0, and Imports down -6.5, to 49.0.

A good jobs report? Sure, if one is 55 and over. In December the American jobs gerontocracy continued its relentless course, and as the two charts below summarize since Obama's first term, some 2.7 million jobs in the 16-55 year old category have been lost. The "offset": 4 million jobs for Americans between 55 and 69. For all those young people graduating from college (with $150,000 in student loans) who are unable to get a job, here is our advice: tell your parents, and grandparents, to retire already. Oh wait, they can't because Bernanke destroyed their savings. Oops - better luck next time.

It would appear that even the venerable Art Cashin had to rub his eyes in incredulity at the recircling of the idea of the Treasury minting a "Trillion Dollar Platinum Coin" to solve the debt-ceiling 'problem'. His brief discussion on the idea is summed up perfectly in his final six words "anybody got an ebook on alchemy?"

Equities have only one direction (so far) since the payrolls report - leaking higher in general up around 3 points. On the other hand, Treasuries are also bid (though considerably more volatile - having chopped in a 4-5bps range since NFP). USD weakness and precious metal strength are a little more clear-cut but AAPL is fading.

A surprisingly uneventful report, as BLS reports that 155,000 Jobs were added in December, right on top of the 156,000 expected, and in line with the number needed to keep up with the growth in the population, or at least the Old Normal growth. The unemployment rate was 7.8%, vs the 7.7% expected: who else is surprised that the rate is now rising with Obama reelected and when a lower unemployment rate means an earlier end to QE4EVA? The November unemployment rate was revised from 7.7% to 7.8%, just so headlines can proclaim the rate was unchanged, even though it was fractions away from a 7.9% print, compared to November initial 7.7%. According to the Household survey a materially less, or 28,000 jobs were added even as the number of unemployed rose by 164K. Average hourly earnings for all employees rose 0.3% in December from November, compared to the 0.2% expected. The confusion continues as the BLS reports retail jobs were mysteriously down by 19,000 even as every retailer announced it was hiring the kitchen sink, while manufacturing jobs supposedly rose by 25,000 while the ADP report reported 6 months of reductions in a row. Construction jobs increased by 30,000. The Underemployment rate, U-6, remains steady at 14.5%. ADP, which will certainly be revised lower now, remains a farce.

The median Bloomberg expectation for NFP is 153k, Citi is at 140k; the central tendency of the forecasts is about 125-185k. Now that the Minutes are out and have raised market fears that the fed will pull back from ease earlier than anticipated, investors are worried about a repeat of 1994, when a surprise Fed tightening after a long period of easy money (by standards of those days) devastated fixed income markets. Then 10yr Treasury yields rose 170bps over a two month period. In that light, you have to respect bond market skittishness. However, you have to respect the market response. And if payrolls come anywhere near close to a 200k handle we will very likely see further a further equity and fixed income sell off. So there is the possibility that we will have a much more exciting morning after payrolls than anyone had anticipated.

• Just like last year: A Postholiday Letdown for Retailers (WSJ)
• Obama Fights Republicans on Debt as Investors Seek Growth (BBG)
• Housing a Sweet Spot for U.S. Economy as Recovery Expands (BBG)
• House chooses Boehner as speaker again despite dissent (Reuters)
• Backlash pushes Republicans to seek cuts (FT)
• Jobs Lost Hit 5 Million With Rigged Currencies (BBG)
• Chavez still has "severe" respiratory problem (Reuters)
• Paris promises flurry of economic reforms  (FT)
• Investors Sour on Pro Stock Pickers (WSJ)
• Abe moves to ease South Korea tensions (FT)
• Wildfires Hit Australia Amid Worst Heatwave in Decade (BBG)
• Monti attacks ‘extremist’ rivals (FT)