Two weeks ago, when we first announced the catastrophic earnings preannouncement by Sears we noted that we were stunned "that as part of its preannouncement, Sears has decided it would be prudent to provide an update on its credit facility status as well as availability. As a reminder to anyone and everyone - there is no more sure way of committing corporate suicide than openly inviting the bear raid which always appears whenever the words "revolving credit facility" and "availability" appear in the same press release. Just recall MF Global. And here, as there, we expect shorting to death to commence in 5...4...3..." Subsequently, when the company was downgraded to triple hooks S&P we said that "Accounts Receivable about to become one big perpetition charge off", the implication naturally being that the company is about to lose its vendor financing - which for retailers is the last step before outright default. Sure enough, the WSJ reports that this is precisely what happened. "Struggling Sears Holdings Corp. suffered another setback when a large lender said it would no longer finance loans to suppliers awaiting payment from the company. Sears representatives played down the decision by CIT Group Inc., the largest U.S. provider of what are known as factoring services for vendors, saying the payables the firm had financed amounted to only about 5% of the retailer's inventory." Basically this means that the company Net Working Capital is about to go poof, as there will be nobody to finance the Receivable-Payable spread, SHLD will have to demand COD or even cash upfront, vendors will balk and switch to other, and slowly Sears will suffer an inventory liquidation stranglehold which will culminate with the company's bankruptcy unless Lampert provides a massive liquidity injection, which also however will have a brief impact, as the company is now perceived by all as Dead Man Walking. In other news, we are hearing that several bankruptcy advisors are already preparing the K-Mart pre-pack/freefall pitchbooks... all over again.
Demand in Asia continues to be strong. China remains the world’s largest producer of mined gold. Premiums for gold bullion bars in Asia are rising again and are at their highest since October in Hong Kong and Singapore. Premiums are at $2.15/oz in Hong Kong and $1.65/oz in Singapore. Bullion’s strength was also attributed to the euro’s 16 month low, with Fitch warning the ECB to purchase assets to try to stabilize the euro. Spot gold was up 0.6 percent at $1,650.34 an ounce at 1009 GMT, having earlier touched a one-month high at $1,652.30. U.S. gold futures for February delivery were up $12.60 an ounce at $1,652.20. A stronger rupee has boosted the purchasing power of gold bullion consumers in India. This is in the run up for the Indian Wedding Season which resumes January 15th and continues until April, leaving a few weeks break for a period that is considered bad luck for nuptials. Chinese demand will weaken next week as many factories and businesses are set to close for the Lunar New Year’s celebrations.
Just like during the holiday "break" the market is euphoric, however, briefly, on the fact that Italy sold Bills , however many, in a period protected by the 3 year LTRO. And just like the last time this happened, about two weeks ago, this auction shows nothing about the demand for Italian paper longer than 3 years, which unfortunately Italy not only has a lot of, but is rolling even more of it. And none of this changes what World Bank President Zoellick told Welt yesterday, namely that the Europe’s interbank market is frozen and continent’s banks only lend to each other through ECB due to a lack of confidence within the financial industry, World Bank President Robert Zoellick is quoted as saying by German daily Die Welt. He continues: "If European banks don’t lend to each other, how can others in the U.S. or in China be expected to do it." Anyway, here courtesy of Bloomberg's Daybook are the key overnight events as we prepare for the ECB 7:45 announcement and subsequent conference.
Today's key events in the US, as opposed to Europe, where in a few minutes the ECB is expected to do nothing.
- Hedge Funds Try to Profit From Greece as Banks Face Losses (Bloomberg)
- Spain Doubles Target in Debt Auction, Yields Down (Reuters)
- Italy 1-Year Debt Costs More Than Halve at Auction (Reuters)
- Obama to Propose Tax Breaks to Get Jobs (WSJ)
- GOP Seeks to Pass Keystone Pipeline Without Obama (Reuters)
- Debt Downgrades to Rise ‘Substantially’ in 2012, Moody’s Says (Bloomberg)
- Petroplus wins last-minute reprieve (FT)
- Geithner gets China snub on Iranian oil as Japan plans cut (Bloomberg)
- Fed officials split over easing as they prepare interest rate forecasts (Bloomberg)
- Draft eurozone treaty pleases UK (FT)
- Premier Wen looks at the big picture (China Daily)
- US Foreclosure Filings Hit 4-Year Low in 2011 (Reuters)
Draghi will downplay the potential for QE. Not only will he not say they are going to increase the program, he will downplay the potential. They haven’t wanted to do QE (they don’t really believe it helps the real economy) and now they have the excuse. The auctions went well. LTRO is up and running and there is another tranche coming up in February. They will really go out of their way to demonstrate that QE or increased SMP is off the table. I think this will disappoint the market, but only mildly. The strong auctions will be enough to reduce the impact from the ECB shooting down QE expectations, but I think the market will fade on that news, if only a little. I’m not sure how the Euro will react, in theory no QE should be positive for the currency, on the other hand, the mention of QE has been positive for the Euro enough times that the FX market reaction to this specific outcome is unclear.
When back in December we observed that Pimco's Total Return Fund (which contrary to rumors actually closed the year at $244 billion, or $4 billion more than in the beginning) had a $60 billion margin "cash" position, the proceeds of which were used to purchase a near record $103 billion in Mortgage Backed Securities we thought this is about as far as Bill Gross would go betting the ranch on QE3, and specifically that kind of QE3 that assumes at least a big portion is used to buys MBS (the same instrument that SocGen believes, along with gold, will benefit the most from an imminent QE3 announcement). It turns out we were wrong, and in December the fund doubled down on its QE3 all in bet, by "borrowing" even more cash, or a record $78 billion, using the proceeds to buy even more MBS, as well as Treasurys, which hit a combined 31% of the TRF's holdings. In other words, between MBS and USTs, Pimco holds a whopping 79% of total, mostly in very long duration exposure. In fact, this combination of long duration and pre-QE exposure has not been seen at PIMCO since late 2008, early 2009, meaning that as many banks have been suggesting, Gross is convinced that the Fed will announce if not outright QE3 this January, then at least intimate it is coming.
Quick, what country is the economic engine that will power world growth? If you answered "China," you're far from alone. But there's another country that deserves as much attention and better yet, is much friendlier to investment: India, home to 1.2 billion people. To electrify all those houses, power the industries that keep all those people employed, and fuel the vehicles that more and more Indians own, India's energy needs are shooting skyward. First question to consider: what kind of energy does India need? Just about every kind, really. India encompasses significant reserves of coal, oil, and gas, but each year it has to import more and more to meet its rapidly rising demand. Domestic production increases have been hampered by land disputes, interminably slow permitting, and government-regulated pricing mechanisms that discourage development. That's got to change if India wants to keep up, and its government knows it. Domestic supplies always come with better reliability, better prices, and other benefits that we can shorten into two words: energy security. So India is reaching out to foreign oil majors, quietly setting up deals to exchange stakes in giant, underexplored oil and gas fields for the technical expertise it needs to best develop these resources. These partnerships are working into place slowly. However, they show Delhi is serious about the welcome mat it rolled out in 2000, when it passed a policy that allows foreign companies to own 100% of any oil and gas assets they may want to acquire for exploration and development. And what we really like is that explorers are welcome in a democratic and reasonably friendly country that harbors none of the risk of asset nationalization that clings to other underexplored locales, like Venezuela.
As both anecdotal, local and hard evidence of China's slowing (and potential hard landing) arrive day after day, it is clear that China's two main pillars of strength (drivers of growth), construction and exports, are weakening. As Societe Generale's Cross Asset Research group points out, China is entering the danger zone and warns that given China's local government debt burden and large ongoing deficits, a large-scale stimulus plan similar to 2008 is very unlikely, especially given a belief that Beijing has lost some control of monetary policy to the shadow banking system. In a comprehensive presentation, the French bank identifies four critical themes which provide significant stress (and opportunity): China's economic rebalancing efforts, a rapidly aging population and healthcare costs, wage inflation and concomitant automation, and pollution and energy efficiency. Their trade preferences bias to the benefits and costs of these themes being short infrastructure/mining names and long automation/energy efficiency names.
They detail their concerns about the Chinese economic outlook (weakening exports, housing bubble about to burst, local government's debt burden, and large shadow banking system), and show that China has no choice but to transition to a more consumption-driven economy leading to waning growth for infrastructure-related capital goods and greater demand for consumer-related manufacturing. Overall they see a hard-landing becoming more likely.
Everyone's favorite oracular-orifice-of-the-oval-office may perhaps have met his match (if not in real terms, in rhetoric) as Senate Minority Leader Mitch McConnell and Warren Buffett call each other's bluff...again. As reported in Time's Swampland, the cantakerous Kentuckian said that if Buffett was feeling 'guilty' about paying too little in taxes, he should 'send in a check'. The flim-flam improves though, as Buffett mocks the 'Buffett Rule Act' that enables the rich to donate 'extra' money on their tax form as a "policy only a Republican could come up with" and then goes on to lay down the gauntlet, pledging to match one-for-one all such voluntary contributions made by Republican members of Congress. "I'll even go three for one for McConnell", Buffet pronounced (with a metaphorical white glove to McConnell's face) noting that he was not worried about the bill. So there it is, Republicans only have to donate $50 billion toward paying down debt to bankrupt Buffett.
In each of the years 2008, 2009, and 2010, significant worries emerged that Western nations might attack Iran. Here again in 2012, similar concerns are once again at the surface. Why revisit this topic again? Simply because if actions against Iran trigger a shutdown of the Strait of Hormuz, through which 40% of the world's daily sea-borne oil passes, oil prices will spike, the world's teetering economy will slump, and the arrival of the next financial emergency will be hastened. Even if the strait remains open but Iran is blocked from being an oil exporter for a period of time, it bears mentioning that Iran is the third largest exporter of oil in the world after Saudi Arabia and Russia. Once again, I am deeply confused as to the timing of the perception of an Iranian threat, right now at this critical moment of economic weakness. The very last thing the world economies need is a vastly increased price for oil, which is precisely what a war with Iran will deliver. Let me back up. The US has already committed acts of war against Iran, though no formal declaration of war has yet been made. At least if Iran had violated US airspace with stealth drones and then signed into law the equivalent of the recent US bill that will freeze any and all financial institutions that deal with Iran out of US financial markets, we could be quite confident that these would be perceived as acts of war against the US by Iran. And rightly so.
Today saw NYSE trading volumes at their 3rd highest of the year and ES (the e-mini S&P 500 futures contract) saw its second highest volume of the year (though both still well below recent averages) as stocks managed marginal gains, outperformed handily by high yield credit. For the sixth day of the last seven ES closed only a smidge from where it opened but average trade size was dramatically higher (its highest since 8/31) which historically has suggested a short-term top (and certainly seems odd heading into tomorrow's European bond auctions). In a similar manner to yesterday, HY17 (the high yield credit index) surged (absolute and relative to ES and HYG) from the European close to US day session close (index RV to Europe and Index arbitrage seems much more of an effect than rerisking. The major Financials were among the best performers today once again (as XLF managed +1.13%) with BofA now up an impressive (if not ridiculous) 24% YTD (and Citi +19%). Perhaps of note is the fact that the major financial CDS rally stalled today with MS, GS, and JPM all leaking a little wider into the close. Treasuries continued their ain't-no-decoupling rally as the 10Y auction went well (beige Book mixed/weak) leaving longer-dated TSY yields near day (and year to date) lows and ES near day highs (sell EUR, buy anything USD-denominated?). The dollar is practically unchanged on the week now as EUR 1.27 (and GBP more so) weakness dragged it up (even as AUD rallied - helping stocks). Copper outperformed among the economically sensitive commodities as Gold gained modestly (slight beat of Silver) and Oil slid back to $101 and remains down on the week as Silver holds over 4% gains. As an aside, from the 12/30/11 close, Gold is up 4.95%, the S&P 500 is up 2.77%, and the Long Bond is down 0.65%.
Presented with little comment, if only to add that at the current rate of degradation in NYSE total trading volume - from post US downgrade to now, Birinyi's Ruler implies volume will entirely disappear by December 11th 2012 - perhaps the Mayans were right after all...