European Central Bank
US data this week is relatively sparse (as usual in a post payroll week) leaving little evidence over the next few days to progress the seasonality debate but after a long weekend of derisking in mind and now in reality, Europe is front-and-center once again. Spain (and less so Italy) has decompressed to its worst levels of the year (5.96% yield and 425bps spread on 10Y) has now lost all of the LTRO gains as the curves of these liquidity-fueled optical illusions of recovery bear-flatten (as front-running Sarkozy traders unwind into the sad reality - most specifically for Spain - that we described in glorious must read detail here). Divergence and decoupling remain sidelined also as Deutsche Banks' Jim Reid notes the 4-week rolling beat:miss ratio in the US macro data has fallen to 24%: 73% (3% in line) from a recent peak at a string 70%:30% on February 29th. His view is still that in a post crisis world, especially as severe as the one we've just been through, Western growth is going to continue to be well below trend for many years and with more regular cycles. With Spain teetering on the verge of a 6% yield once again, we are still off the record wides from late November but not by much as the vicious cycle of sovereign-stress-to-banking-stress-to-banking-stress re-emerges in style. The European situation is still incredibly political and while we'd expect much more intervention down the line, expect the discussions and rhetoric to be fairly tough. The ECB last week indicated that they felt the recent widening in Sovereign spreads was more due to sluggishness in the pace of reforms. They are therefore unlikely to intervene in a hurry. So if Europe does need further intervention it is likely to need to get far worse again first.
Bob Janjuah, who has been quiet lately (recall his last piece in which he quite honestly told everyone that "Markets Are So Rigged By Policy Makers That I Have No Meaningful Insights To Offer"), is out with his latest, in which he gives us not only his long-term preview, "ultimately I still fear and expect the S&P500 – as the global risk-on/risk-off proxy – to trade at 800, and the Dow/Gold ratio to hit parity (currently at 8, down from an all-time high of 45 in late 1999) before we can begin the next multi-decade bull cycle", but also his checklist of 8 things to look forward to in the short-term centrally-planned future.
UK and EU markets played catch up at the open this morning following Friday’s miss in the US non-farm payroll report. This coupled with on-going concerns over Spain has resulted in further aggressive widening in the 10yr government bond yield spreads in Europe with the Spanish 10yr yield edging ever closer to the 6% level. As a result the USD has strengthened in the FX market in a moderate flight to quality with EUR/USD trading back firmly below the 1.3100 and cable falling toward the 1.5800 mark. There was some unconfirmed market talk this morning about an imminent press conference from the SNB which raised a few eyebrows given the recent move in EUR/CHF below the well publicised floor at 1.2000, however, further colour suggested an announcement would be linked to the naming of Jordan as the full-time head of the central bank when they hold their regular weekly meeting this Wednesday. Elsewhere it’s worth noting that the BoJ refrained from any additional monetary easing overnight voting unanimously to keep rates on hold as widely expected. Meanwhile, over in China the latest trade balance data recorded a USD 5.35bln surplus in March as import growth eased back from a 13-month peak.
There is no free-lunch - especially if that lunch is liquidity-fueled - is how Gluskin-Sheff's David Rosenberg reminds us of the reality facing US markets this year and next. As (former Fed governor) Kevin Warsh noted in the WSJ "The 'fiscal cliff' in early 2013 - when government stimulus spending and tax relief are set to fall - is not misfortune. It is the inevitable result of policies that kick the can down the road." Between the jobs data and three months in a row of declining ISM orders/inventories it seems the key manufacturing sector of support for the economy may be quaking and add to that the deleveraging that is now recurring (consumer credit) and Rosenberg sees six rather sizable stumbling-blocks facing markets as we move forward. On this basis, the market as a whole is overpriced by more than 20%.
The place that worries Michael Cembalest, of JPMorgan, the most is Spain. Historically, the kind of dismal position it finds itself in currently has not ended well with 13 defaults since 1500 A.D. and he suspects its going to take a lot of bilateral aid and ECB financing to prevent another one.
I continue to see articles in the media claiming that Europe’s problems are solved. Either the folks writing these articles can’t do simple math, or they don’t bother actually reading any of the political news coming out of Europe.
We have been mis-lead first by the short term effects of the LTRO and then by the political commentary that everything had returned to normal. Hard data will show that things now are about as normal as 9/15/08, the day Lehman filed for bankruptcy... It is just not Greece and Ireland that are experiencing huge drop-offs in the M-1 money supply but Portugal -14.00%, -13.80% in Italy and Spain is quickly approaching double digit numbers. Even in developed countries the signs are worsening as the Henderson Global Investors gauge, the Real Narrow Money Supply, peaked at 5.1% in November, then dropped to 3.6% in January and was 2.1% for February. This is comparable to the declines seen in mid-2008 and so I bring this to your attention. Equally as worrisome is M-2 in the United States which fell below 1.6% last month for the first time since records have been kept in 1959.
Last Friday saw the release of a below-expected US Non-Farm Payrolls figure, causing flight to safety in particularly thin markets, with equity futures spiking lower and US T-notes making significant gains. Data from this week so far in Asia has shown Chinese CPI is still accelerating, coming in above expectations at 3.6% against an expected 3.4% reading. Looking ahead in the session, there is very little in the way of data due to the reduced Easter session in the US and the European and UK markets closing for Easter Monday.
In simple terms, the Fed’s hands are tied and the ECB is out of ammo. The End Game for Central Bank intervention is approaching. And it won’t be pretty… First Europe. Then Japan. Then the US. So if you’re not already taking steps to prepare for the coming collapse, you need to do so now.
Let us take another step down the Holmesian path. As the economies in Italy and Spain deteriorate who will be seriously affected: Germany. Two of their largest buyers of their goods and services will radically cut back on their purchases and the German economy, for the first time in this cycle, will suffer as buyers are no longer able to afford various services. The circle always completes and the consequences will not be pleasant; this circle, in fact, will resemble a noose that is pulled tighter and tighter with each passing quarter and the pay master for the European Union will shrink as their economy, currently at the $3.2 trillion mark, sinks back towards $2.5 trillion during the next year. There will be screams of anguish aplenty and you might begin now to make the necessary adjustments to this coming reality. Then as Italy and Spain soon line up at the till you will see the Real Hurt being on which is why Europe is begging the IMF, the G-20, China and Japan for funds because they now have the burning smell in their nostrils of damaged flesh that has been singed and is about to be cooked and served up fresh in the begging bowls of those urchins turned out into the street.
In a very thin market, the S&P futures came very close to hitting their 50 DMA on Friday. The S&P futures went from a high of 1,418 on Monday, to trade as low as 1,372 on Friday. A 46 point swing is healthy correction at the very least, if not an ominous warning sign of more problems to come. There were 3 key drivers to the negative price action in stocks this week. All 3 of them will continue to dominant issues next week.
With the world focusing on the latest disinformation from the BLS, one would be forgiven to miss the Bank of Italy's monthly balance sheet aggregates data. A quick perusal thereof reveals that in March, Italian banks saw their ECB support surge from €195 billion to €270 billion, the highest ever, 39% more than in February, and 776% more than greater than a year earlier, and now merely the latest parabolic curve to love and hold dear. Indicatively, on the chart below we have also added Spanish bank borrowings from the ECB (still pending a March update), which in February were also at an all time high of €152 billion. So aside from this last recourse lifeline from the ECB which is now openly keeping Europe's banks afloat, "the crisis is nearly over" to quote Mario Monti.
Q1 Post Mortem Stunners: Full Year 2012 EPS Forecasts Are Down 2% YTD; Apple Represents 15% Of S&P RiseSubmitted by Tyler Durden on 04/05/2012 18:46 -0400
With the record first quarter in the books we perform a quick postmortem and find some stunning things, the first of which is that the 12% YTD growth in the S&P YTD has been entirely due to multiple expansion: consensus 2012 EPS has declined by 2% since the start of 2012. Why multiple expansion? Because as Goldman (this would be "bad" Goldman in the face of David Kostin, not "good" Goldman ala Peter Oppenheimer who top ticked the market two weeks ago by telling everyone to get out of bonds and into stocks) which still has a 1250 year end price target says "the ECB reduced “tail risk” via the LTRO." Which means that as of today, the market is officially overvalued: "Since December the forward P/E multiple has expanded by 10% from 12.1x to 13.2x, above its 35-year average of 12.9x" even as EPS estimates have actually declined by 2% since the beginning of the year! It gets funnier when one accounts for the outsized impact of just one company. Apple. "Apple continues to have a significant impact on sector- and index-level results. Info Tech contributed 399 bp of the S&P 500 12% YTD return, but AAPL alone accounted for 179 bp or 15% of the rise in S&P 500 during 1Q. The company constitutes 22% of the Info Tech sector’s market cap and generates 22% of its earnings. Consensus expects year/year EPS growth in 1Q 2012 of 6% for S&P 500 and 12% for Info Tech, but excluding AAPL these expectations fall to 4% for both Tech and the index. While Information Technology was the only sector to see margin growth in 4Q 2011, margins declined without Apple. In 1Q 2012, Tech margins are expected to grow by 16 bp YoY in total, but fall 33 bp without AAPL." Finally as the chart below shows, 2012 forward EPS have been declining ever since July, when they peaked just short of 114, and are now down to just about 105. In other words: without Apple and the margin boosting impact of the LTRO, the quarter (and really last two quarters) would have been a disaster. As noted earlier (and to Spain's detriment) the LTRO effect has now phased out. How long until the Apple mania meets the same fate?
Whatever one thinks about Lord Wolfson’s euro-skeptical meddling, it certainly has been entertaining. The British baron’s offer of a £250,000 prize for the best ideas to deal with a possible breakup of the eurozone has brought all sorts of people out of the woodwork. (Including this precocious 11-year old.) But one of the most fascinating ideas on the shortlist has come from Neil Record — although I’m not sure that my takeaway was his main intent. Suppose that a country does leave the eurozone — this was the starting premise of all the responses to Wolfson’s essay contest. Greece, as the weakest link, seems the most likely candidate. But on the other hand it’s possible that one of the strongest countries chooses to go its own way. Of course we’re talking about Germany. Whether it remains in the euro or decides to take its chances by introducing a new Deutschemark, the fact is that in the case of a euro breakup, Germany is where it’s at. Its fiscal position and reputation for prudence is among the strongest of all developed countries. If it were on its own then its currency would rise to reflect this. So, to the extent that you can choose, you will want to get your banknotes from Berlin
You don't spend over $1 trillion in nine months unless something very, very bad is coming down the pike. That something "BAD" is the collapse of Europe's banking system: a $46 trillion sewer of toxic PIIGS debt that is leveraged at more than 26 to 1 (Lehman was leveraged at 30 to 1 when it went under).