Archive - Mar 21, 2013 - Story

More details are appearing on the latest and greatest plan in the shambles to solve Cyprus' (and Europe's unsolvable) problem. It appears the European Group is implicitly declaring economic war on the 'wealthy' depositors (we noted here non-domestic depositors dominated recent inflows) as these headlines hit:

*EURO AREA SAID TO WEIGH CLOSING CYPRUS POPULAR, BANK OF CYPRUS
*EURO AREA SAID TO WEIGH GOOD BANK, BAD BANK FOR CYPRUS BANKS
*UNINSURED DEPOSITS COULD GO TO CYPRUS BAD BANK, FACE 40% LOSS

We assume followed rapidly by some eurozone law-breaking capital controls to stop the remaining 60% flooding out instantaneously...

Oh the irony:

18/01/2008, Trichet: "For a small, open economy like Cyprus, Euro adoption provides protection from international financial turmoil."

Expected to last 60-90 minutes - if Monday's call is any guide - it seems the European Group's teleconference to discuss Cyprus has pressured stocks and WTI (seemingly the new anchor risk asset) to the lows of the session and VIX to highs...

Just as we predicted, it seems Cyprus is rapidly escalating down the path we feared. The latest step:

Cyprus Popular Bank announces restrictions on ATM withdrawal to EUR 260 per customer per day

Bt on the bright side, for the next few hours, they still have liquidity... We just hope the steps we outlined get stalled before this really escalates.

It appears, based on government officials, that things are going a little critical in Cyprus. Following rumors of the closure (restructuring) of good/bad bank assets for Cyprus Popular Bank, we get this news:

*CYPRUS HASN'T HAD ANY FURTHER NEWS FROM RUSSIA: OFFICIAL
*CYPRUS POPULAR BANK HAS "FEW HOURS OF LIQUIDITY LEFT": OFFICIAL

For a while there, one might have been forgiven for believing that all was going to be well; that the recovery was V-shaped and the new-normal was nothing but the old-normal and Goldilocks would reappear. It appears, however, that the central bank lipstick slapped on the deflationary pig of the over-levered global economy is starting to wear off. As the following 4 charts show, things are not as 'recovering' as many hoped (and still hope).

Following the dismal PMIs this morning, most EU equity indices were declining. From around the open of US equity markets, EURUSD began to levitate as the 'bad' news hit Cyprus Popular Bank being 'restructured', no deal with Russia, and ATM lines mounting. Of course, the machines interpreted EURUSD's rise as a positive and European equities (and US equities) got a lift into the EU close. We suspect, in reality, this EUR strength is very different and given the surge in demand for Swiss 2Y rates (now at 2 month lows), EUR-USD basis swaps, and European sovereign bond markets in the last hour, it would appear this is very much repatriation flows and not 'we love the Euro' flows. European stocks did end the day lower though - catching down to credit's earlier week weakness.

Local TV station CYBC reports that police in the Cyprus' capital are scuffling with protesters (including employees of Cyprus Popular Bank) outside the nation's parliament:

*CYPRUS POLICE CLASH WITH BANK EMPLOYEES OUTSIDE PARLIAMENT

CYBC says more protesters gathering at Parliament House

Refuting earlier comments from the regulator that Cyprus Popular Bank would not be shuttered, CYBC is reporting (following the failure to sell it to the Russians) that the bank is to be shut down, split into good-bank-bad-bank, and that deposits under EUR100,000 will be protected.

• *CYPRUS POPULAR BANK TO BE SHUT DOWN, STATE-RUN CYBC SAYS
• *CYPRUS POPULAR BANK TO BE SPLIT IN GOOD, BAD BANKS: CYBC
• *CYPRUS POPULAR BANK ASSET PROCEEDS TO BE RETURNED TO DEPOSITORS
• *CYPRUS POPULAR BANK DEPOSITS OF LESS THAN EU100,000 GUARANTEED

Of course, we await the re-refutation but for now it seems the latest news trumps the regulators 'lies' earlier.

Remember that infamous business school in Illinois known for its farcical and utterly ridiculous hypothesis that the market is efficient? We disagree. Exhibit A: nationalized mortgage lender, Fannie Mae, and no news.

Given the public unrest of the last few days, it would appear that the Cypriot government, having tried and failed with Plan A (wealth tax versions 1 and 2) and Plan B (beg the Russians directly), they have decided to go with Plan C (Collateralized Cypriot Obligations). The current proposal, ekathimerini reports, to theoretically be voted on in a few hours (about to be in cabinet), is that Cyprus will form an investment fund to raise the capital needed to payoff their EU overlords. This fund will be collateralized by state assets, possibly including natural gas revenues, church property, and social security fund reserves. Though some form of deposit tax was 'apparently' not ruled out, it seems the next last best hope for Cyprus is begging the Russians to extend a loan and begging the world to fund more debt from a nation about to see huge capital outflows. The approach is, it appears, a 'solidarity' approach - rather than tax the current wealth of depositors (and hand it over to Troika), 'tax' the future possibility of wealth creation and sell that to the next greater fool sovereign wealth fund (or will the ECB decide that these CCOs are acceptable collateral?)

Overly optimistic expectations are commonplace in non-recessionary periods, and confirming what we discussed here, estimates have continued to decline over the past few quarters while markets have pushed higher. In fact, as JPMorgan notes, and despite the protestations of the commission-takers, S&P 500 EPS are now forecast to be less than they were at the previous peak in 2007/2008. Of course, the multiple expansion argument comes to save them but we note that given where we are in the profit cycle with margins at their current levels (as discussed here) the majority of earnings growth moving forward must come from revenues rather than margin expansion. Revenues for the S&P 500 have historically grown in-line with nominal global GDP, so let's hope that FDX, CAT, and ORCL are all one-offs. So given indices are at all-time highs but EPS expectations are well below the previous peak - we wonder just how this market is deemed 'cheap'?

For a few days, the people of Cyprus were calm, quietly and orderly accepting the unreality of the levy being imposed upon them - incredulous that it was even possible. As we reach the 4th day of bank closures, amid rolling rumors and ECB threats, it appears the people have reached a tipping point as this series of images from Cyprus ATM lines indicates - the bank-jog has arrived. When will it become a full blown sprint?

Ignore corporate margins tumbling to a three year low: the Philly Fed is here to kiss and make it all better, after surging from -12.5 to +2.0 , beating expectations of a -3 headline print. This was driven by a bounce in New Orders from -7.8 to +0.5, Inventories up from -10.0 to 0.0, and number of employees rising from 0.9 to 2.7. Curiously, the average employee workweek plunged from -1.6 to -12.9, but who needs to actually put in hours when one has a part-time job. Alas, if today's Philly Fed, which printed at levels seen last in 2012, 2011, 2010 and 2009, was supposed to push the market higher, it has failed, as economic data is so "pre-QE" - now all that matters is if a central bank will inject a few trillion into the "market", and if yet another sovereign bankruptcy can be prevented at a time when the DJIA has never been higher.

The S&P 500 gained 12% in 2012 and has almost reached that level of return in 2013 YTD , delayed only by the apparent non-event in Cyprus, led, if one is to believe the talking heads and asset gatherers, not by a Fed-driven liquidity flush but by the mother's milk of stocks - earnings. A major driver of these earnings has been corporations ability to squeeze more blood out of their stones (read - layoff and automate as much as possible) and margin expansion is often cited as the catalyst for the next leg higher in stocks. The trouble with that 'anecdotal' meme, trotted out again and again, is it appears to have hit its unemployment/consumerism-driven limiting point. As JPMorgan notes, in light of the robust cost cutting experienced during the recovery, additional margin expansion remains unlikely going forward, leaving future earnings growth dependent on stronger revenues - recoupling expectations to GDP growth and we know what that means. Critically, in reality, S&P 500 profit margins have dropped rather notably in the last two quarters - now at their lowest since Q1 2010 - not exactly the 'expansion' the advisers told us would happen.