Archive - Mar 2013 - Story

Those wondering why the overnight ramp has not yet materialized despite promises from BOJ's new governor Kuroda to openly-endedly monetize Fukushima radiation if necessary in order to reflate the economy, will have to look at Europe where a raft of horrifying PMIs confirms what most have known: the relapse into a multi-dip European recession is progressing nicely, and the hoped for rebound in the core economies of France and Germany is once again on track to not happen, but at least there will be Cyprus to blame it all on this time. The specific reason this time was French and German Flash Manufacturing and Services PMI for March, all of which came far below expectations: German Mfg PMIs printed at a contracting 48.9 vs Exp. 50.5 (back from 50.3), while Services came at 51.6, down from 54.6 on expectations of a rise to 55.0, while French Mfg PMI stayed stubbornly flat at 43.9, despite hopes of a "bounce" to 44.3, even as the Service number ticked even lower from 43.7 to 41.9, below expectations of 44.3 and the lowest since February 2009. End result: Eurozone March Services PMI down from 47.9 to 46.5, vs Exp. of 48.2, while Manufacturing slid from 47.9 to 46.6 on hopes and prayers of a bounce to 48.2. Which then takes us back to Cyprus, where things are not fixed yet, where the parliament is not expected to vote for a revised Bailout proposal yet, and where we got a cornucopia of brilliant one liners, such as these from the new Eurogroup head, who is filling in the shoes of his predecessor Juncker in style, and proving quite well that "things are serious."

While one night in Bangkok is enough for most, the following images (via Reuters) taken over nine days in Tiananmen Square, Beijing should highlight just how appalling the smog situation is in that country. As we discussed recently, this is more than a major problem for health, the reforms that the government proclaims means significant shifts in the economy (to say nothing of the increasing appeals for clean water and purchased clean air).

When someone tells the Fed Chairman, Ben Bernanke CFA, Series 7 and 63, certified, that "the stock market has been hitting all time highs, it's recovered all of its losses from the financial crisis" and then proceeds to ask, even jokingly, during the Q&A of the most important monetary policy conference in the world, if he "still has time to get in," you know it has all become, quite literally, one big joke.

HSBC's China Flash PMI just printed above expectations at 51.7, disappointing those hoping for more stimulus but just Goldilocks enough to satisfy the world that China is firing on all cylinders... But, and there's always a but, the following chart suggests that the diffusion-driven survey-based PMI data may be just a little different from the hard data on the ground. Of course, everything could have magically turned around in the last 3 weeks (aside from Copper demand and PBoC repo/rev. repo that is). For now, we tip our hat to the well planned PMI print as indicative that all is well in the smog-ridden pig-barren nation but scratch our chin at just what is powering all this growthiness...

February marks the first three-months of consecutive declines in restaurant sales in almost three years as Bloomberg reports consumers caught in "an emotional moment" spooked by higher payroll taxes, surging healthcare premia, and spiking energy costs. "February was pretty ugly" for many chains after January delivered an initial blow." Malcolm Knapp notes that "it's important to keep in mind that companies also are facing unusually tough comparable sales because of favorable weather in 2012," so the result is an industry that’s been "a lot softer so far this year." "People are acting fearfully, or you could almost say rationally in a way,” because it’s not surprising they change their dining habits when they feel less confident; as once again it's the middle class that appears under pressure. Casual dining is "definitely being squeezed" because "it's not food on-the-go and it's not high-end food for people trying to treat themselves."

Something extreme is happening in Europe. Since Sunday, Bloomberg Businessweek reports a trio of Bitcoin apps have soared up Spain's download charts, coinciding with news that cash-strapped Cyprus was planning to raid domestic savings accounts to pay off a $13 billion bailout tab. “This is an entirely predictable and rational outcome for what’s happening in Cyprus,” says ConvergEx's Nick Colas. "If you want to get a good sense of the stress European savers are feeling, just watch Bitcoin prices." The value of the virtual currency has soared almost 30 percent in the last two days. "One hundred percent of that is due to Cyprus," says Colas. "It means the Europeans are getting involved." As German economist Peter Bofinger warned in an interview with Spiegel Online: "European citizens must now fear for their money." The same apps download data, however, showed that Italians aren’t ready to abandon commercial banking, remarkable as many Italians still recall that black day in 1992 when they woke up to a levy on their savings accounts to prop up the nation’s teetering finances.

It appears Abe and his henchmen had better stop doing things and say something as the huge devaluation of the JPY so far is NOT having the effect he had hoped for. Exports dropped 2.9% - more than expected - and while imports rose less than expected, the currency drop still meant an 11.9% surge in imports. All this means is that on a seasonally-adjusted basis, the Japanese Trade Balance just hit a new all-time record low (negative). USDJPY is strengthening on the news... it seems that well-placed non-news headline at 2am Japan time is well worth it now to cover this debacle... We assume the lesson is - just wait, "if we devalue, they will come."

In 1729, that Jonathan Swift (of Gulliver's Travels fame) penned a famous satirical essay from England entitled "A Modest Proposal." It's still famous to this day as mandatory reading in many a high school literature class. As you may recall, Swift addresses the problem of the ultra-depressed Irish economy and mockingly advocates that the Irish should sell their children for rich Englishmen to eat. Lovely thought. I thought about the essay this morning when one of our Liberty Alert Service researchers alerted me to a new bill just introduced in the Land of the Free, HR 1160. The bill aims "to set the retirement benefits age for today's six-year-olds at age 70." Maybe Swift wasn't so far-fetched. Screw the kids. No doubt, governments are adroit at finding ways to steal from people.

So far the market has been largely oblivious of the shattered trust and changed dynamic in European banking dynamics for one simple reason: Cyprus banks have been closed, and likely will be closed indefinitely, preventing the mass media from broadcasting what happens when an entire population, and foreign depositors, decide to clear out the holdings of their bank accounts, either physically or electronically, and the public anger the will result when they find that courtesy of fractional reserve banking, only a tiny amount of said deposits is actually present. In the meantime, retail depositors have had their withdrawals limited through a form of capital controls, allowing them to pull only as much as the daily limit is on given ATMs. So far the banks have had enough cash to keep ATMs stocked up to the daily required minimum, but that may soon be ending. BBC's Mark Lowen, in Nicosia, reports that "Cyprus' banks are still giving out cash through machines - although with limits, and some are running low." Ironically, as physical cash becomes ever scarcer, merchants are now clamping down on electronic payments unsure if they will ever be able to convert electronic euros into actual ones: "Some businesses are now refusing credit card payments, our correspondent reports."

As FedEx rained on the market's parade modestly today (with its biggest drop in 18 months and heaviest volume since Jun 2010), it is the 'crash' in Caterpillar's sales that should be more worrisome. Just as the economies of the world are supposed to be getting ready to re-surge and expectations are set for a second half renaissance, it seems that in reality, corporations that build stuff, mine stuff, and move stuff are not buying in anticipation. As the following chart suggests, perhaps CAT is yet another canary in the global economic decline coalmine?

How quickly the mighty can fall. Once again, a leading market bellweather for how awesome everything is has missed. Missed Top-line; missed bottom-line; guided top-line lower; guided bottom-line lower. It seems, surprise surprise, currency headwinds are to blame for some of the damage.

• *ORACLE 3Q NON-GAAP EPS 65C, EST. 66C
• *ORACLE 3Q NON-GAAP REV. $8.97B, EST. $9.37B
• *ORACLE SEES 4Q NON-GAAP REVENUE DOWN 1% TO UP 4%, EST. UP 5%
• *ORACLE SEES 4Q NON-GAAP EPS 85C-91C, EST. 88C

And after all that, ORCL is now trading down for 2013... and don't forget, ORCL is one of the Top 10 S&P 500 stocks accounting for 90% of its earnings beats last quarter...

We have seen again that the Eurozone is unable to deal rationally with its problems. This has got to be the most incompetent handling of a Euro crisis event so far, but underlines the hopeless situation the 17 countries that share the common currency are in. The idea of a one-off wealth tax, however, is not new. Several research reports have pointed in recent years to the fact that the desperate need for funding in the public sector could - and probably will - eventually lead to confiscation of wealth in a monumental scale. Boston Consulting Group suggested in a recent report that about 29 percent of ALL private wealth, not just deposits, will eventually be likely to be confiscated to cover the debts already incurred. So we had better get used to seeing our money being appropriated by money-hungry politicians. This is just the beginning. The cat is out of the bag, no matter if this particular deal should fall apart.

It was a dream come true new normal FOMC day - green all around as the overnight pump on Russian hope provided the anchor. US equities (except Transports which were hammered by FDX) wiggled sideways around unchanged from pre-Cyprus, ignored the Fed, jumped on the BoJ non-news, ran some stops into the close, and then gave back all the open-to-close gains as JBL and ORCL missed and reality sunk in. Post-Cyprus, Morgan Stanley remains -4% (and BofA +2%) but homebuilders led the way. Volume was average; average trade size was low (and has been falling). For most of the day Treasury yields (+5bps on the day), S&P 500 futures (+6pts), and EURJPY were inseparable as algos ruled the VWAP waves. The S&P 500 ends below pre-FOMC levels but Oil was among the biggest post-FOMC gainer.

From the cover pages of The Bank of Cyprus 2011 Annual Report...