- BOJ Crosses Rubicon With Desperate Monetary Policy, Hirano Says (Bloomberg)
- Europe’s bailout bazooka is proving to be a toy gun (FT)
- Monti Signals Spanish Euro Risk as EU to Bolster Firewall (FT)
- Merkel set to allow firewall to rise (FT)
- Banks set to cut $1tn from balance sheets (FT)
- Supreme Court weighs historic healthcare law (Reuters)
- Spain PM denied symbolic austerity boost in local vote (Reuters)
- Anti-war movement stirs in Israel (FT)
- Obama to Ask China to Toughen Korea Line (WSJ)
- Pimco’s Gross Says Fed May ‘Hint’ at QE3 at April Meeting (Bloomberg)
Next week will be relatively light in economic reporting, and with no HFT exchange IPOs on deck, and the VVIX hardly large enough to warrant a TVIX type collapse, it may be downright boring. The one thing that will provide excitement is whether or not the US economic decline in March following modestly stronger than expected January and February courtesy of a record warm winter, will accelerate in order to set the stage for the April FOMC meeting in which Bill Gross, quite pregnant with a record amount of MBS, now believes the first QE hint will come. Naturally this can not happen unless the market drops first, but the market will only spike on every drop interpreting it for more QE hints, and so on in a senseless Catch 22 until the FRBNY is forced to crash the market with gusto to unleash the NEW qeasing (remember - the Fed is now officially losing the race to debase). For those looking for a more detailed preview of next week's events, Goldman provides a handy primer.
Back in early 2011, even as the global economy was at best flatlining, the one goalseeked explanation to justify a levitating stock market (which was rising solely due to the short-term effect of transitory QE2 liquidity), was soaring corporate profitability (which only lasted as long as companies could trim some residual SG&A fat; they have now cut into the bone in terms of layoffs). This time around, with corporate margins having peaked, there had to be some other validation to explain away the "narrative" of the latest bout of central bank infused stock market levitation: it just happened that this time it was once again that old faithful, and always wrong, justification - decoupling. After all one just has to listen to 5 minutes of CNBC to hear it taken for granted that the US economy is doing oh so swimmingly. Here is a newsflash for all the permabulls out there. It isn't. Not only that, but as David Rosenberg highlights, 11 of the 13 most recent economic indicators have missed consensus expectations, and one can demonstrate that the other 2 - car sales and jobs - have been simplistically manipulated into a favorable outcome. So now that the market is turning over, with Europe and China both solidly into contractionary territory, with Corporate profit margins turning over, and with US data missing virtually every print, how long until the permabullish validations all go up in smoke, and the one true source of stock market "nirvana" - cheap money - is once again in high demand from the central planning cabal. In turn, the Chairsatans of the world will do as requested, as they always do, however not with crude (the real one - Brent, not that Cushing-buffered substitate) at $125, and with the risk that Israel may attack Iran any day now, with or without the blessing of the Fed's Class A director.
Following last Friday's majority vote by the Israel Security Council authorizing Iranian "action" when required, answering the "if", the only open question remains "when." As it turns out, based on the following analysis by Rapidan Group, there are only 10 or so distinct 10 day New Moon windows for the remainder of 2012. If one removes the sandstorm prone months of April, July and September, there are 7 periods in which a military strike is realistic. Also CVN 65 is moving at a snail's pace and is just now approaching the Straits of Gibraltar. Since any action will likely not take place unless 3 aircraft carriers are in the vicinity, and because the ICE yesterday instituted ultra-short term trading spike curbs in crude, starting April 1, one can likely eliminate the immediately proximal March 17-27 window. Which leaves six. Our advice would be to buy up OTM calls in Brent in the days just ahead of the start of any such window, as any "surprise" attack will have a uplifting impact on all combustible assets, doubly so for levered ones.
Goldman screams it is a generational buy, Larry Fink goes all in stocks, Notorious BIGGS is 90% long, anchors on comedy-financial fusion channels are channeling the producer in their earpiece and screaming at the teleprompter to "sell bonds and buy stocks", even as stocks are at their highest in nearly 5 years and... what happens? In the latest week, ICI just reported that domestic equity retail funds just saw another $2.9 billion outflow, the 4th consecutive in a row, and the 23 of out 27 outflows during the entire parabolic blow off top phase the market has undergone since October, and instead put another $9 billion in fixed income funds "soaring" yields be damned. What does this mean? Probably that the stock ramp is about to get uber-parabolic for the simple reason that this is the only thing left in the status quo's arsenal - to keep doing the same old same old, hoping for a different outcome, because this time it's different. Only this time the dumb money either doesn't have the cash to burn, or just doesn't want to participate in a rigged, corrupt, centrally-planned market. Whatever the case, the Primary Dealers and the Fed will just have to keep hoping more central banks pull a Bank of Israel and sell the hot grenade axes to them, since Joe Sixpack is done being the "dumb money."
There are those cynical elements out there, who think that the primary reason why Germany has been unhappy with Greece is that the Germany military-industrial complex has lost a staple buyer of its military products (recall: "Greece Spends Bailout Cash On European Military Purchases" and one wonders just how instrumental the brand spanking new PASOK leader, Venizelos, who was Greek Minister of National Defense, has been in such arrangements in the past). Well, Germany may have just found a way out. Reuters reports:
- GERMAN DEFENCE MIN SAYS TO DELIVER ANOTHER SUBMARINE TO ISRAEL FOR WHICH GERMANY WILL PROVIDE FINANCIAL HELP
While it has no chance of passage, the GOP 2013 budget, details of which have been leaked by the WSJ, proposes slashing corporate and individual tax rates, collapsing the current six tax bracket system into just two tiers (10% and 25%), lowering top corporate tax rate to 25% and scrapping the anachronism that is the AMT, or Alternative Minimum Tax. Finally, the proposed plan would nearly eliminate U.S. taxes on American corporations' earnings from overseas operations: something which companies with foreign cash would be rather happy to hear. Needless to say, Democrats will promptly dead end this budget in the Senate: "The proposal, to be offered by Rep. Paul Ryan (R., Wis.), who has become the Republicans' leading figure on budget issues, has little chance of becoming law soon. While likely to be welcomed by House GOP rank-and-file members, it would be rejected by the Democratic-controlled Senate."
Earlier today, Al Arabiya made waves in the energy market following reports that a Russian ship carrying special forces had arrived in the Syrian port of Tartus, previously demonstrated here to be a key strategic asset in the Mediterranean. This news was promptly denied by RIA, which said that "there were no Russian military ships off Syria coast" and that the Iman ship is a tanker which is merely conducting resource support functions. Furthermore, according to the Russian Ministry of Defense, the crew of Iman consists solely of "civilian personnel, which is being guarded." That may or may not be the case, but has not stopped ABC from blasting, minutes ago, a headline that "Russian anti-terror troops arrive in Syria" a development that a "United Nations Security Council source told ABC News was "a bomb" certain to have serious repercussions." Which begs the question: is everyone now dead set on having war in Syria, and by proxy, Iran?
Yesterday I got my new iPad. Yeah, I bought one like millions of other suckers. Apple can take my dollars and recycle them buying treasury bills and so partially fund, at least for a short while, America’s unsustainable debt position. But really, I bought one to enjoy the twilight of the miraculous system of global trade. An iPad is the cumulative culmination of millions of hours of work, as well as resources and manufacturing processes across the globe. It incorporates tellurium, indium, cobalt, gallium, and manganese mined in Africa. Neodymium mined in China. Plastics forged out of Saudi Crude. Aluminium mined in Brazil. Memory manufactured in Korea, semiconductors forged in Germany, glass made in the United States. And gallons and gallons of oil to ship all the resources and components around the world, ’til they are finally assembled in China, and shipped once again around the world to the consumer. And of course, that manufacturing process stands upon the shoulders of centuries of scientific research, and years of product development, testing, and marketing. It is a huge mesh of processes.
Looking at the tranquil sea that is the S&P one may be forgiven to ignore the rapid intraday surge in Brent which was up over $3 in a few hours, approaching $126 once again. But why? After all the FOMC minutes were oh so very slightly hawkish, and not to mention that the Fed's scribe Hilsenrath told everyone at best the Fed would proceed with sterilized QE which would leave risk prices untouched. Maybe it has something to do with this. According to Israel's NRG, in a just completed cabinet vote, for the first time Netanyahu has gotten a majority (8 over 6) supporting an Iran attack. NRG also notes that at this point Israel has decided to not wait until the US elections in November before proceeding with sending crude to the stratosphere. From NRG (google translated): "Israeli political sources believe that Prime Minister Benjamin Netanyahu a majority Cabinet support Israeli military action against Iran without American approval....He announced that he would not hesitate to perform the operation without the approval of President Obama mentioned the precedent of the decision to attack the Iraqi reactor, Prime Minister Menachem Begin, and with the comments heard yesterday some cabinet ministers say privately that "It sounds like a speech preparation for attack." Political - Security Cabinet 14 ministers. According to estimates, at this stage tend to support Netanyahu and Barak's approach eight ministers, and six against it (including the traditional opponents octet: Moshe Ya'alon, Dan Meridor, Benny Begin and Eli Yishai)." So... $4.00 gas is just around the corner. As is, probably, $5.00 gas. And $6.00 gas.
In what can only be seen as raising the rhetoric bar on the timing, scale, and seriousness of the Iran 'situation', Kommersant is reporting that "Tehran has one last chance" as US Secretary of State Clinton asks her Russian counterpart Sergei Lavrov to relay the message to Iranian leaders. If this 'last chance' is wasted an attack will happen in months as diplomats noted that the probability of an Israel/US attack on Iran is now a specific 'when' instead of an indefinite 'if'. The sentiment is best summarized by a quote from inside the meeting "The invasion will happen before year’s end. The Israelis are de facto blackmailing Obama. They’ve put him in this interesting position – either he supports the war or loses the support of the Jewish lobby". Russian diplomats, as Russia Today points out, criticized the 'last chance' rhetoric as unprofessional suggesting "those tempted to use military force should restrain themselves - a war will not solve any problems, but create a million new ones."
Going into the US open, European equity markets have carried across some risk appetite from last night’s Wall Street news that 15 out of 19 major US banks had passed the Fed’s stress test scenarios. This risk appetite is evident in Europe today with financials outperforming all other sectors, currently up over 2%. Data released so far today has been relatively uneventful, with Eurozone CPI coming in alongside expectations and Industrial Production just below the expected reading for January. Taking a look at the energy complex, WTI and Brent crude futures are seen on a slight downwards trajectory so far in session following some overnight comments from China, highlighting the imbalance in the Chinese property market, dampening future demand for oil. Looking ahead in the session, the DOE crude oil inventories will shed further light on the current standing of US energy inventories.
- Tainted Libor Guessing Games Face Replacement by Real Trades (Bloomberg) - so circular, self-reported data is "tainted" - but consumer confidence is great for pumping a stock market?
- Japan Sets up $12 Billion Program for Dollar Loans, Increases Growth Fund (Bloomberg)
- China Hints at Halt to Renminbi Rise (FT)
- Spain Pressed to Cut More From Its Budget (FT)
- Bailout can make Greek debt sustainable, but risks remain: EU/IMF (Reuters)
- Banks to Face Tough Reviews, Details of Mortgage Deal Show (NYT)
- U.S. and Europe Move on China Minerals (WSJ)
- Use of Homeless as Internet Hot Spots Backfires on Marketer (NYT)
- Obama administration seeks to pressure China on exports with new trade case (AP)
The Greek CDS auction has not yet taken place, nor has one quantified how many Greece-guaranteed orphan bonds with UK-law indentures have to be made whole (at a cost to Greece of course, no matter how much Venizelos protests), and somehow the world is already moving on to bigger and better risk strawmen. Because if one sticks their head in the sand deep enough, it will be easy to ignore that European banks have gradually over the past year or quite suddenly (as in the case of Austrian KA Finanz) taken about €100 billion in now definitive losses on their Greek bonds and CDS exposure. Luckily, just like in the US, there is now over $1.3 trillion in fungible cash sloshing in the system, allowing banks to 'fungibly' fund capital shortfalls and otherwise abuse every trace of proper accounting, when it comes to a post-Greek default world. The problem is that none of this actually solves the fundamental insolvency issues plaguing the 'old world', but what it does do, is force the accelerated depletion of an aging and amortizing asset base. That's fine - as Draghi said the ECB can "always loosen collateral requirements even more." So while we await to hear just who will sue Greece and Europe, and how much cash will have to be paid out to UK-law bondholders (before the Greek default is even remotely put to rest), here is a listing of what Bank of America (recall - BofA is the one bank most desperate to remove any lipstick from the pig due to its need for more QE) believes will be the biggest risks to its outlook going forward. In order of importance: 1) Oil prices (remember when a month ago we said this then ignored issue may soon hit the very top of investors worry lists?), 2) Europe; 3) US Economy; and 4) China. That about covers it. Oh and massive debt issuance supply too as well as the even more epic straw man that is this Thursday's stress test. Remember: stress tests will continue until confidence in the ponzi returns!