The Apple comparisons have come thick and fast but today's Bloomberg Chart-of-the-day really highlights the macro fundamental weakness in Europe and the micro-bubble in corporate America's shiny new toy. Apple's market cap is larger than the combined market cap of companies in Spain, Portugal, and Greece.
Today's import price update from the BLS was another warning red flag of margin compression for local manufacturers, as import prices, across both fuel and nonfuel imports, soared by 1.3%, well above consensus of a 0.8% rise, compared to the revised February decline of -0.1%. There is likely much more pain in store as the 3.8% increase in fuel import prices in March was a fraction of the 9.7% and 7.6% recorded in March and April in 2011 when crude and gasoline were trading at current levels. In other words, foreign makers can still absorb costs domestically before passing it on to the US. We expect this will change quickly, and the April fuel import prices will soar far more than even in March. As for the bottom line that the Fed does track, nonfuel imports, it rose 0.5%, also the most since April 2011. By all appearances, this means that the market will have to seriously tumble for the Fed to proceed with more easing at this moment, although ease it will. It is only a matter of time: about $30 trillion in excess debt demand it, and $2 trillion in Treasury debt/year needs to be monetized somehow.
As North America comes to market, there is a lot to digest. European equity markets are trading higher, with the FTSE MIB in particular outperforming after a volatile morning’s session, with bargain-hunting the active theme among investors. The first major risk event came and went with the Italian T-Bill auction. Participants were looking for a poor auction due to the ongoing Eurozone woes, and although bid/covers fell short and yields did increase, the auction was not as poorly received as many had feared. As such, Italian and Spanish 10-yr spreads have tightened with the German Bund, with the Spanish spread closing in on 400BPS, with talk of domestic buying in the periphery and profit-taking from the last few sessions adding to the tightening effect. A flashpoint of the day was the German Bund auction; results came in showing the auction to be technically uncovered, failing to sell the expected EUR 5bln. Analysts have pinned the poor auction on the Bund having record low yields providing a disincentive to buy the German security. Following the minutes after the auction, around 25,000 contracts went through on the Bund, spiking lower around 20ticks.
Chinese gold demand remains very strong as seen in the importation of 40 metric tonnes or nearly 40,000 kilos of gold bullion from Hong Kong alone in February. Hong Kong’s gold exports to China in February were nearly 13 times higher than the 3,115 kilograms in the same month last year, the data shows. Shipments were 72,617 kilograms in the first two months, compared with 10,564 kilograms a year ago or nearly a seven fold increase from the record levels seen last year. China’s appetite for gold remains strong and Chinese demand alone is likely to put a floor under the gold market.
While luckily not as powerful as last year's Japanese earthquake, which in turn led to a catastrophic tsunami, this morning Indonesia has been battered by a series of magnitude 8+ quakes and aftershocks in the Banda Aceh and Sumatra regions of the country. Also unlike last year, the nature of the quake made it less likely a tsunami was generated because the earth moved horizontally, rather than vertically, and therefore had not displaced large volumes of water, Bruce Presgrave of the United States Geological Survey told the BBC. The geological map and update from the USGS below summarizes all the action we have seen to date.
- Subprime bubble is back: Lenders Again Dealing Credit to Risky Clients (NYT)
- Housing bubble is also back: AIG Is Planning a Return to U.S. Property Investing (WSJ)
- Spain and EU Reject Talk of Bailout (FT)
- Coeure Suggests ECB Could Restart Bond Purchases for Spain (Bloomberg)
- IMF Set to Recognise Shrinking Chinese Surplus (FT)
- Government to Propose New Mortgage Servicing Rules (AP)
- Japan Currency Chief Warns Against Delay Over Finances (Bloomberg)
- The 'Michael Corleone' of Libya (Reuters)
- North Korea Says Fuel Being Injected Into Rocket (Reuters)
- SNB Reaffirms Vow to Cap Swiss Franc (FT)
If yesterday was risk off on concerns Europe is sinking following last week's disastrous Spanish long-term auction, today is risk on after Italy managed to successfully place 91 and 361-Day bills, in line with expected amounts, if at much higher yields, and lower Bid To Covers. Specifically, Italy sold €3 billion in 91 day bills. The yield soared from 0.492% on March 13 to 1.249%, while the Bid to Cover plunged from 2.23 to 1.81. Same for the 361-Day Bill auction, where €8 billion in Bills (in line with target) were sold at 2.840%, double the yield of 1.405% from a month ago, and a Bid To Cover just modestly better: from 1.38 to 1.52. As usual the market continues to blatantly ignore the thin white line of bond issuance: every Bill and Bond auction that matures within the maturity (3 Years) of the LTRO will succeed: period. It is the ones maturity longer than 3 years - such as Spain's last week - that are the test. Comparing one to another is apples and oranges. But risk on don't care, and as a result futures are surging disproportionately, even as Spanish and Italian bonds are just modestly tighter following the bond results. But we will once again meander whack-a-mole style from auction to auction until the market is reminded of this little nuance. In other news, Iran just announced it is following its cut in Greek and Spanish exports, by halting exports to Germany next, while continuing the theme of 2011 Deja Vu, Indonesia's Aceh was struck two hours ago with a massive 8.7 Earthquake, with an 8.8 aftershock off Sumatra, coupled with a tsunami warning. Luckily, there are no initial reports of casualties or major damage.
Yesterday we predicted it was imminent, and sure enough, adding insult to injury for any muppet who rode the "once in a lifetime" opportunity to buy stocks and sell bonds, Goldman just hit the stop loss on its 10 Year Treasury short, after getting stopped out in its Russell 2000 long two days prior.
FHFA Acting Director Edward DeMarco offered some prepared remarks today making it abundantly clear that his preference is for forbearance over forgiveness in the great mortgage hole in the US balance sheet's dam. As Bank of America's Chris Flanagan noted this evening "[DeMarco] effectively nixed the idea of broad-based principal forgiveness by Fannie Mae and Freddie Mac" in his comments on the Treasury's incentives to forgive principal on underwater borrowers. Citing three factors - NPV Impact to taxpayer, moral hazard, and operational costs - the FHFA Director indicated that forbearance (simply put - delaying foreclosure) is effectively a shared appreciation mortgage (SAM) without the operational complexities of a more formal SAM. BofA concludes: "his preliminary remarks on the incentive approach to principal forgiveness of GSE loans [mean] that there will be zero to minimal scale of such an approach." Back to the drawing board for the Treasury (or more forced-through unintended consequences?).
In a few weeks the Treasury will most likely launch Floating Rate Notes. Will that be the signal to get out of Dodge? If history is any precedent, and especially the 1951 Accord... you bet.
Since Goldman continues to press clients into the worst trade recommendation in the firm's history (remember that once in a lifetime long equity, bond short? no? look here) it means that at least the Goldman version of Bruno Iksil who sits on the firm's prop desk (but only hedge for god's sake, don't go getting any ideas) is having a great time since he is on the other side across from Goldman's clients. Still, while we won't feel bad for them, it is always interesting to note what are the things that Goldman watches for during market wipe outs, such as today, the worst day of trading so far in 2012. So without further ado, here is Goldman's Tuesday roundup.
Federal debt has expanded by $9.5 trillion - from $5.7 trillion in 2000 to $15.2 trillion at the end of last year and, as Neal Soss of Credit Suisse notes, is still growing over $1 trillion a year (or $5 billion per day). The state of fiscal sustainability, as explained in this compendium of slides, is perilous, but as Soss notes - interest expense did not go up because interest rates fell faster than debt went up. Looking ahead, he notes that political choice theory suggests that taxes can go up, but not a lot (even as the change-maker-in-chief presents his case) and at the same time an unprecedented aging (demographic) shock limits the ability to control expenditures. None of this is news to readers but the financial implication is critical: interest rates must be kept as low as possible to avoid explosive debt dynamics. As Soss concludes therefore, and something we have been clear about for a long time, the era of independent central banks is closing as those institutions revert to their foundational role as fiscal agents of the state.