Another day, another set of disappointing European economic data. While the final Euroarea Composite PMI index increased by one tick from the 45.9 Flash reading to 46.0 in the final, the prior revision was also upward from 46.5 to 46.7 thereby indicating that while things had not necessarily deteriorated much in the past 2 weeks, they did relative to benchmark. Also minutes ago German April factory orders printed at -1.9 on expectations of a -1.2 decline, and coupled with the prior revision from 2.2% to 3.2%, this confirms that the peripheral shakedown in Europe is impacting the core countries, as well as non-Eurozone targets increasingly more. This was confirmed when looking at the spread of domestic vs foreign orders. Again, per Goldman: "Domestic orders rose 0.4%mom after +1.8%mom, while foreign orders declined -3.6%mom after +4.4%mom. Within foreign orders, orders from the Euro area declined 1.8%mom after +0.9%mom, continuing the downward trend. Foreign orders from outside the Euro area declined +4.7%mom after +6.6%mom, still showing an upward trend (see chart below). There is no indication in these data that activity in the German manufacturing sector saw a sharp deterioration in Q2. Business sentiment, however, suggests that the sector is likely to lose some momentum going forward." Which means that once again, everyone's attention is now focuses on what external help can come: either from the G7 phone call in minutes, which will be a disappointment, or the ECB on Thursday, which we are confident, will also be a whimper, not a bang. As a reminder: there must be blood in the streets for coordinated intervention by both banks and fiscal authorities in Europe, for it to be effective.
Earlier today, by way of a simple graphic, the world's biggest hedge fund, Bridgewater, was kind enough to remind the world just how pointless any debates about Europe's future viability are if the primary funding conduit: the EFSF/ESM hybrid can not provide the cash needed for even half the combined funding needs of Italy and Spain. Now, Bridgewater strikes at Europe once again, this time redirecting the general attention to where it is long overdue: Italy.
A picture says more than a hundred words, so I wanted to present in graphical terms what happened at the Swiss National Bank over the last few quarters. Central banks have tried to “manage” currencies in the past. Sooner or later, market forces win. As all other major central banks keep printing additional Euros, Dollars, Yen etc., the SNB looks prone to lose this game. A run on the Swiss Franc could lead to a further increase in prices of Swiss government bonds. Swiss equities however would decline, at least measured in Swiss Francs.
When it comes to the future, suddenly torn by economic uncertainty driven by a plunging stock market and a tanking economy, the talking heads and the sellside brigade have opined: more QE, preferably in the form of asset purchases. After all it was none other than Goldman earlier today who said that "our confidence that the FOMC will ease policy once more at the June 19-20 meeting has also grown... Our baseline remains that Fed officials will purchase a mixture of mortgages and long-term Treasuries, financed via balance sheet expansion... If they decide to extend their balance sheet, they could add excess bank reserves or “sterilize” the reserve impact via reverse repos and/or term deposits." In other words: not sterilized, or bye bye Chubby Checker (recall that even Goldman finally admitted two months ago that when it comes to Fed intervention, what matters is flow - as a result Twist has been largely ineffective in recreating the effect of QE1 and 2). To be sure even more respected investors like Pimco have bet the house that the NEW QE will constitute primarily of more MBS purchases. Yet the real question is what is the bond market telling us: after all when it comes to matters such as these, one should completely ignore stocks, and certainly the talking heads, and instead focus on what bonds are saying. And here is where the stock market may be headed for a great disappointment: because now that the bar has been set so far, anything less than full blown LSAP, or a merely extension of Twist, would likely send stocks plunging. Which, ironically, and completely in opposition to stocks, is what bonds are expecting...
This past Friday, Barack Obama was at a Minneapolis-area Honeywell plant touting his economic recovery credentials to cheering disciples. One of the excited faithful was a young boy, fifth-grader Tyler Sullivan, who took the day off from school to hear the President speak. The President was full of the usual bombast about how Congress needs to work with him to ‘build a strong economy’, and how he wants to get $3,000 to everyone in the American middle class so that people can go out and buy ‘thingamajigs’. Naturally, the crowd cheered. It was the typical sort of gross misunderstanding of economic prosperity that you see from politicians… and most people at this point. People these days think it’s a great idea when the government sprinkles money around the middle class, and love the idea of politicians ‘coming together’ to build a better economy. In reality, when people hear talk about politicians ‘building an economy’ they should run away like a scalded dog. Throughout history, a lot of other politicians have also tried building an economy– it’s called central planning, and it just doesn’t work.
DAVID BIANCO NO LONGER WORKS AT BOFA, SPOKESWOMAN SAYS
Now, we are even more delighted to bring you the following breaking news:
BLACKROCK CHIEF EQUITY STRATEGIST BOB DOLL TO RETIRE
And then there were three...
Last month, when the USDA released the latest foodstamps numbers for the month of February, there was some hope that following a third month of declines, we may just have seen the peak of US foodstamp usage and going forward we would only see the number decline. Sadly, the latest numbers refutes this: in March a total of 46,405,204 persons were at or below poverty level and thus eligible for foodstamps, a 79K increase in the month. Yet while many individuals have learned to game the system, and this numbers at the peak may fluctuate, when it comes to the far more comprehensive and difficult to fudge "households on foodstamps" number, there was no confusion: at 22,257,647, the number of US households receiving the "SNAP treatment" rose to an all time high, even as the benefit per household dropped to the second lowest ever. At least all these impoverished believers in hope and change have FaceBook IPO profits to look forward to. Oh wait.
The problems facing the U.S. economy are daunting especially when it comes the issues of Government spending and the current deficit. We recently wrote about the dependency on Government programs which is currently making up as much as 35% of personal incomes. Social Security, Medicaid and Medicare make up the largest portions of the current spending requirements of the Federal Budget. The current administration has promised that cuts will not be made to government "entitlement" programs but is that a promise that any administration can actually keep? When it comes to Social Security the facts are rather alarming. By 2017 the Social Security Administration will pay out more in benefits than it takes in. This is not surprising given that in the 1950's there were roughly 5 workers for every retiree. Today, it is roughly half of that. With 78 Million "baby boomers" moving into retirement the demands on social security are set to spiral higher in the coming years ahead. Is it really any wonder then that with demographics heading in the wrong direction, not to mention a much slower growth economy, that the Social Security Administration has moved up its estimate that the Social Security Fund will be exhausted entirely by 2033?
Little to be said here: everyone's favorite proxy of all that is broken with Europe, and now the retail investor, Margin Stanley just closed at the lowest price since December 2008. The move lower continues as Zero Hedge warned back in September of 2011. Compare this to Jim Cramer's February 2 pronouncement that Morgan Stanley is a "dirt cheap stock"... at $19.66!? The 40% prolapse in the four months since (120% annualized?) probably make it dirtest cheapest?
With Europe's credit traders on vacation, volumes overall were muted today in Europe but average in the US. The lack of discipline that normally occurs when the credit boys leave the room helped lift sovereign credit in Europe and implicitly US equity futures (ES) into the open today, which marked the top for the day (back in the green after an ugly Sunday night) as dismal macro data dragged debt and and equity markets back down to overnight lows. Credit and equity moved in sync in general but across broad risk-assets, correlations were loose at best as Gold was very stable holding gains from Friday while Silver exhibited its high beta ebullience and Copper and Oil followed stock's path down and back up. Treasuries leaked higher in yield with a steepening in the curve (though 10Y and 30Y outperformed 7Y as the Twist pivot maturity seemed most active). EUR strength was sustained from early morning in Europe with JPY weakness providing some support for stocks but it seemed both VWAP and the 200DMA were the key levels today and despite two stop-runs in the afternoon, we flushed down at the last minute (off near day's highs - thanks to Egan-Jones' UK downgrade news) to close red for ES (2nd day in a row below 200DMA). Financials (which are close to red for the year and about to cross below Healthcare and Staples) did not participate in the swings as much with JPM and MS worst today -3% (with the latter now 25% lower than the March 2009 market trough levels) and the other TBTFs around -1.9%. VIX oscillated rather like ES today - as usual but popped back above 26% to close marginally lower on the day. While correlations did drift today, stocks remain a little too full of hope still against overall risk markets but with UK closed again tomorrow, we may have to wait for Wednesday to see how Europe (and implicitly the rest of the world) feels.
When one is expected to go down for missing a comma in their NRSRO application, one at least should go down swinging. Sure enough, Egan-Jones, the only rating agency with any credibility left, is at it again, this time cutting the big momma itself - the UK - from AA to AA-.
The other government-sponsored Ben-with-a-beard was in contemplative mood as the CEO of AIG relaxed at his Croatian seaside villa in a recent Bloomberg TV interview. Benmosche stated that "Retirement ages will have to move to 70, 80 years old" as that "would make pensions, medical services more affordable... taking the burden off of the youth." Opining on Greece (well the Greek people really): "they have to see that there is no easy way out of this" and the government must get them to work longer (Greek life expectancy is 81.3 years so there's plenty of hours left for retirement). Towing his corporate over-lord status quo line, he notes that Greece abandoning the euro could be a disaster for the country but we assume if only they would work 23 hours-a-day for 81 years at a 95% tax rate then TROIKA will be more than happy to use them as a rotating receptacle for European bank holdings.
A month ago we were delighted to counterpoint Charlie Munger's prior remarks about the level of "civilization" of a given consumer based on their sentiment vis-a-vis gold, by demonstrating that Chinese purchases of gold from Hong Kong rose to a record. To wit: "Imports from Hong Kong were 135,529 kilograms (135.53 metric tons) between January and March, from 19,729 kilograms in the year-earlier period, according to data from the Census and Statistics Department of the Hong Kong government. Shipments in March rose 59 percent from February, yesterday's data showed." We have just gotten the April update, and, lo and behold, the country which is now the biggest buyer of gold, having surpassed India, just set a new record: "Gold imports by mainland China from Hong Kong climbed 65 percent to a record in April, advancing for a third straight month as investors sought a hedge against financial-market turmoil and an economic slowdown. Shipments totaled 103,644.5 kilograms (103.6 metric tons) in the month from 62,913 kilograms in March, according to export data from the Census and Statistics Department of the Hong Kong government today. In the first four months, imports were 239,174 kilograms from 27,114 kilograms a year earlier, according to Bloomberg calculations. China doesn’t publish such figures." In other words: in the first four months of 2012 Chinese purchases have increased by an unprecedented 782% over 2011.
While Australian bank credit spreads are rising dramatically in the last few months and the ASX 200 index has dropped significantly (though remains 27% above its 2009 lows), nowhere is the levered bet on China's ongoing dominance and growth writ larger than in the massive number associated with Australian Miners' Capex in the last few years. As Sean Corrigan of Diapason Commodities notes, the 1017% (or 39.5% annualized) rise in the absolute spend over the last 7 years clearly went exponentially ponzi-like in the last few years as it did compared to Manufacturing and Total CapEx. While equities and credit have fallen, it seems the 'expected' cut in spending from slowing China demand has yet to hit CapEx and that means troubled for all those levered bag-holders.