Quite a shocker of a day in FX and European corporate bond and stock markets as shorts are squeezed back up to last Wednesday's levels. Sovereign bonds - which one would think the beneficiary of all the exuberance are flat as a Gaza-strip apartment building: +/-2bps in the last 4 days (aside from Portugal which rallied over 30bps today). The following four charts gives a sense of the anxiety both ways in this market with the low volume this week likely to help all those hoping for a final solution. Credit markets gapped tighter and kept going (one of the biggest moves of the year with XOver -35bps) with financials outperforming (more life-lines for the over-levered?); equity markets all retraced last week's losses in large part (aside from Greece); EURUSD broke back above 1.28 and its 200DMA; and Europe's VIX has collapsed from over 22% to 19.6% at the close today.
On the basis of a joint press conference following a one-hour chat, the S&P 500 is up over 2.5%; it seems there is little doubt that the fiscal cliff is front-and-center in people's minds. And yet, positioning is far from biased towards negativity and sentiment remains positive - the 'they will fix it; they have to, right?' meme is everywhere. As Morgan Stanley notes, however, a smooth resolution requires some of the same public officials who created the cliff to cooperate to avoid it. As far as hope of a short-term solution, Obama's Burma trip aside, Speaker Boehner has already indicated that it would be inappropriate to pass comprehensive legislation in the Lame Duck session, given that more than 100 current members of the House will not be returning next year; and as for any actual substantive change: the sequence most talked about is patch (stop-gap legislation) and promise (ten-year budget reduction), followed by a plan. In that regard, politicians’ solution to the 2012 fiscal cliff will be to create another one in 2013. Thus, only a portion of the uncertainty about policy will be resolved by the patch and promise, as much could go wrong with the plan.
On the block of Hazelwood Road in Memphis, Tennessee, where Rebecca Black used to live, 17 out of 30 parcels have either been completely reclaimed by nature or have houses that sit empty. Five of the 15 parcels on her side of the street were abandoned after the recession ended, public records show. Many of the deserted properties are still legally owned by the mortgage borrowers. Nine of the properties are behind on taxes owed to the city or county governments, or both, public records show.
Whether it is a pure low volume technical run for the 200DMA, or fundamental bias as 'officials' comment that the release of a EUR44bn aid tranche to Greece is expected by December 5th, is unclear. One thing is certain, the Eurogroup is placing the decision squarely back in Madame Lagarde's lap as it appears to be behaving as if the IMF's threat not to disburse funds (due to Greece's unsustainable debt load) does not exist. While Lagarde is unlikely to want to be the trigger for GRExit, the non-European members may have differing perspectives or will they all just continue kicking the can down the road - proving once and for all that all the power lies with the Greeks as their supposed overlords "can't handle the truth".
Back in April, we did an extensive analysis of what, in our opinion, is the primary reason for the slow burn experienced by the US, and global economy, and why virtually every liquidity pathway used by central banks is hopeless clogged: the complete lack of capital expenditures at the corporate level, and lack of (re)investment spending. Specifically we said that in both the context of Japan's plunging corporate profitability over the past 30 years despite year after year of record budget deficits, and its implications everywhere else, that "we get back to what we have dubbed the primary cause of all of modern capitalism's problems: a dilapidated, aging, increasingly less cash flow generating asset base! Because absent massive Capital Expenditure reinvestment, the existing asset base has been amortized to the point of no return, and beyond. The problem is that as David Rosenberg pointed out earlier, companies are now forced to spend the bulk of their cash on dividend payouts, courtesy of ZIRP which has collapsed interest income. Which means far less cash left for SG&A, i.e., hiring workers, as temp workers is the best that the current "recovering" economy apparently can do. It also means far, far less cash for CapEx spending. Which ultimately means a plunging profit margin due to decrepit assets no longer performing at their peak levels, and in many cases far worse." Today, with the usual six month or so delay, this fundamental topic has finally made the mainstream media with a WSJ piece titled "Investment Falls Off a Cliff: U.S. Companies Cut Spending Plans Amid Fiscal and Economic Uncertainty."
The always prescient NAHB index reached levels not seen since May 2006 this morning completing its sixth beat out of the last seven with its biggest jump since July (a five-sigma beat of expectation no less!). Driven by a huge 8 point jump in 'present' sales and a rise in the outlook driven by a huge jump in Midwest expectations. We can only look on with incredulity that this index is given any credibility at all. Perhaps a longer-term look at the index is useful to realize that while we have risen, we are merely at the 9/11/01 trough levels - as always context is king.
A shockingly low 30% of S&P 500 firms beat revenue expectations in the prior quarter and while Bloomberg's data suggests around 65% beat earnings expectations, the in-period adjustment of expectations (analysts ratcheting down earnings as the season progresses) naturally biases this to look rosier. The critical question is - how much more fat is there to cut? With Sales (and outlooks) so weak, how many more jobs need to be cut to meet margin expectations? 2013 top- and bottom-line (+13.6% EPS growth) expectations remain magnificent in their optimism - do you believe in miracles?
It all makes perfect sense. S&P 500 futures are 33 points off Friday's lows (Boehner's 'constructive chatter' and Fiscal Cliff is fixed), EURUSD is rallying decently (Greece is fixed), and commodities in general have gone vertical. Gold is back above $1730 but its Silver and Oil (tensions rising - despite cease-fire?) that is running the high-beta pump this morning. WTI is almost 4% higher than Friday's lows up near $89. The highly correlated nature of everything is perhaps merely sympomatic of a low volume week ahead and short-term oversold conditions - we suspect little is really resolved in any of these three 'event risks' and the same real-money anxious investors will use strength to reduce exposure further - since remember, if the S&P 500 is anywhere near its highs by year-end, there will be no fiscal cliff resolution.
In a watershed moment for inverse inflation watchers everywhere, Russia, and specifically its alcohol watchdog entity aptly named "Rosalkogoluregulirovaniye" just delivered the judgment blow, with a decision to hike the minimum vodka price by 36% in 2013... as if a million cirrhotic livers cried out (or was it rejoiced) and were suddenly silenced. The reason for this shock and awe approach to defeating deflation: fighting counterfeiting, by hiking the tax on alcohol purchases, which in turn will push the baseline price of alcohol everywhere higher. In other news, a lightbulb is slowly lighting up above the president's head: "new taxes -> booze -> "fairness doctrine" -> bingo" as vice taxes are set to surge in a banana republic near you. Remember: "that's a tax for that" and if there isn't yet, there will be.
Sentiment surveys are sending the all-clear; the US Consumer (that 72% of all economic activity in the US) is as happy as they were five years ago (pre-crash) and American Idol is due to start again soon. However, recency-biased surveys apart, the reality in the data is far more dismal. The Philly Fed's ADS business conditions index is back at its worst since the crisis and decidedly recessionary (critical since it tracks many of the same indicators as the recession-confirming NBER). Even more concerning, as Bloomberg Briefs notes, the stagnancy of real disposable income and contraction of revolving credit has led to a disaster-prone drop in industrial production of consumer goods (-0.9% in October) and a significant slide in the all-important retail sales data. Once adjusted for inflation, retail sales fell to a lowly 1.7% YoY gain and while Sandy's effect is tough to discern, it seems anecdotally to be a net positive due to home supply stores sales - offering little real hope of a surge. Of course with Black Friday, Cyber Monday, and Terrific Tuesday (we made that up) around the corner, we are sure the media will trot out as many CEOs and store-owners to explain how great things are - we will wait for the data.
In what is becoming a monthly parabolic charting tradition, it is again time to update the Spanish bad loan total: in September, Spanish loans that fell into arrears increased by €3.5 billion from August, reaching €182.2 billion in September. This is 10.71% of the total Spanish bank loans of €1.7 trillion, and an increase from 10.5% in the prior month. At the same time, new bank loans expanded 0.2% in September and dropped 4.9% from a year ago, the Bank of Spain said. Deposits rose 1.4% from the previous month and declined 7.3% from a year earlier. Putting the bad loan number in context, it is nearly double the €100 billion that the Spanish banks will receive as part of the bank bailout plan disclosed in July, and well above the "only" €40 billion that Spain promises it will need to actually fund bank capital shortfalls. Putting it into further context, as a percentage of GDP, it would be the equivalent of $2.8 trillion in US loans going bad. Naturally, just like with any "forecast" involving Greece, the final bailout (of both Spain's banks, and the sovereign) will be orders of magnitude higher, but for now everyone is forgiven to stick their head in the sand for at least a few more days/weeks.
The phrase "Constructive Discussions" will have us all pulling our hair out within a few weeks. Markets will be rock and rolled by anything anyone says about the Fiscal Cliff. The received European news-flow, (ie the stuff the Euro Elites want to you read and believe), says. progress on Greek Compromise and close to a solution on Tuesday with Schaeuble confident of "closing the funding gap". All of which means Greece is essentially solved - well for a while longer. As long as no one asks any difficult questions about debt sustainability and unlikely targets, haircuts for the ECB, or how the economy is doing, the Greece will be just fine and dandy. Unfortunately some folk haven't been reading the script - Lagarde has woken up to the fact she heads an "international" organisation and says a solution must be based on reality, solid and sustainable. Asmussen says a new programme will be needed, and the EU Energy Commissioner (?) says debt restructuring for the "official sector" will happen and therefore real losses are unavoidable. er.. who let him opine?
The yellow metal soared 4.9% in euros in one week from the 11 week low set November 2nd and has since fallen 1.3%. The rebound from the November dip means prices should recover to reach the all-time euro high set last month, before rising to the point-and-figure target at 1,395 euros, said the bank’s research. Point and figure charts estimate trends in prices without showing time. Gold may then reach a Fibonacci level of about 1,421, the 61.8% extension of the May-to-October rally, projected from the November low, Commerzbank wrote in its report on November 13th which was picked up by Bloomberg. Fibonacci analysis is based on the theory that prices climb or drop by certain percentages after reaching a high or low. “What we are seeing is a correction lower, nothing more,” Axel Rudolph, a technical analyst at Commerzbank in London, said by e-mail Nov. 16, referring to the drop since November 9th. Rudolph remains bullish as long as prices hold above the November low at about 1,303 euros. Technical analysts study charts of trading patterns and prices to predict changes in a security, commodity, currency or index.
With Thanksgiving this Thursday, trading desks will be empty on Wednesday afternoon and remain so until next Monday. So even though it is a holiday shortened week, here are the main things to expect in the next 5 days: Bank of Japan meeting, the European Council meeting and the Eurogroup meeting. Key data releases include European and Chinese Flash PMIs.