After two days of solid gains, European equities continue the upward trend and are seen higher at the North American crossover, with the Basic Materials sector leading the way, followed by financials. The moves in equities follow overnight reports from Chinese press, once again calling for the PBOC to slash their RRR, as well as expectations that this Thursday both the ECB and the BoE will conduct monetary easing, possibly boosting future commodity demand. In the fixed income markets, the European 2s/30s curve continues to see bear-steepening following last night’s announcement from the Dutch Central Bank that has changed Dutch insurers’ Solvency II interest rate curve; modifying the maturities in which the firms must hold assets towards the longer-end. Today also saw official confirmation from the Irish debt agency that they are to return to capital markets with T-bill issuance on July 5th, their first return to the market since 2010. Investor reaction to this news is evident in the shorter-end of the Irish yield curve, where the 2-yr bond yield spread against their German counterpart is firmly indicating the risk of returning to the market; currently wider by around 20bps.
A worldwide phenomenon – just as the slowdown is cascading around the globe.
Three weeks ago we noted that Goldman Sach's Global Leading Indicator (GLI) and its Swirlogram had entered a rather worrying contraction phase. Today's update to the June GLI data suggests things got worse and not better as momentum is now also dropping as well as the absolute level. This continued deterioration in momentum suggests further softening in the global cyclical picture. Of particular concern is the broad-based deterioration in the GLI’s constituent components in June. Nine of ten components weakened last month, only the second time this has occurred since the depths of the recession in 2008Q4. The June Final GLI confirms the pronounced weakening in global activity in recent months. Goldman has found elsewhere (as we noted here) that this stage of the cycle, when momentum is negative and decelerating, is typically accompanied by deteriorating data and market weakness.
The markets are getting mislead, one more time, by the spin that Europe places on events; by the focus that the giant European propaganda machine spits out from various sources again and again and again. You may recall, in the not too distant past, how the firewall was the thing, how the money needed to be bigger and how we were all led to believe that this giant, massive wall of Euros would protect the core nations of Europe. These nations included Spain and Italy without question and now the first mighty oak has fallen as Spain stepped up to the plate and swung the begging bat. Firewalls, of any size, do not do one thing to stop the infection of those that are heading economically south and Europe has placed its full concentration on the totally wrong aspect of the problem which has been to ward off the evil spirits of the bond vigilantes instead of on fixing the financial problems of the nations and so the problems continue and worsen. Over the weekend Spain said their second quarter results would be worse than the first quarter and Italy said there may come a moment when she needs help and the basis of what is driving the markets heightens as the economies of a mostly recession bound Europe are getting worse. What have we learned in short, in brief, in actuality is that the concept of some mighty firewall is a failed concept and Spain has just proved the truth of that.
I’ll be the first to admit the incredible aggravation I feel whenever liberty is trampled upon by the state’s obedient minions. Everywhere you look, government has its gun cocked back and ready to fire at any deviation from its violently imposed rules of order. A four year old can’t even open a lemonade stand without first bowing down and receiving a permit from bureaucrats obsessed with micromanaging private life. The state’s stranglehold on freedom is as horrendous as it is disheartening. The worst part is that the trend shows no signs of slowing down, let alone reversing. Politicians are always developing some harebrained scheme to mold society in such a way to circumvent the individual in favor of total dictation. If it isn’t politicians, then it’s an army of unelected bureaucrats acting as mini-dictators.
Even as Spain, Italy and soon France are scrambling to break the link between sovereigns and banks, an unpopular move that until recently Germany was very much against as it permitted the culture of endless unsupervised bank bailouts on taxpayer dimes to continue, we get a fresh reminder of why any unconditional aid, entitlement, or backstop guarantees funded by "other people's money" is always inevitably a bad idea. Case in point: Spain, which just said that its economy will contract in Q2 even more than in Q1. This reminds us why any claims of "austerity" are a total mockery: only Keynesian priests seem unable to grasp that countries gain much more upside from pushing their economies to the brink only to be bailed out, than from engaging in real economic viability and sustainability programs: i.e., living within your means (something we proved empirically before). Finally, this is also a stark reminder that when one removes out all the bailout noise and the daily high-beta gyrations of sovereign debt, the real reason why sovereign bondholders should be buying Spanish debt - an actual improvement in its economy- continues to not only be absent, but by the very nature of endless now-monthly bailouts, becomes impossible as debt never fixed more debt.
A confluence of factors is forming a perfect storm for the oil market to face some major headwinds for the next 5 years.
Beware The Day When The Bulging Bunds Go Bust From The Bullshit - Or Doesn't Anyone Use Math Anymore???Submitted by Reggie Middleton on 06/29/2012 09:55 -0400
It's just a matter of time before Bunds become the target of bond vigilantes unless Germany pulls out of the political fundfest that is runnnig nowhere very fast
In the final analysis Europe is quite exposed at this moment and may be for quite some time. The ESM, after the change in seniority status, must be re-affirmed in at least two countries that are the Netherlands and Finland and Germany has not yet approved it yet either. The EFSF has already spent $450 of its capacity on Greece, Ireland, Portugal and now $125 billion for Spain. The balance left in the fund is tissue paper thin and that is all that is in existence presently for any more problems in Europe. Plans and schemes aside, the amount of money that could actually be used today is a drop in the proverbial bucket.
Nothing exemplifies the ghetto status of the U.S. economy more than the success of Wal-Mart in the face of the ongoing destruction of what was once a vibrant and strong middle class. In case you missed it, Marion Nestle, Professor in the Department of Nutrition, Food Studies, and Public Health at NYU, came out with some interesting tidbits regarding the food stamp program. One of them is extraordinarily disturbing. She shows that Wal-Mart’s gets as much as 25% to 40% of revenue at some stores from food stamp dollars. This says it all folks. Food stamps are or course the perfect business for Wal-Mart and JP Morgan, which as I pointed out previously makes a lot of money running the program and keeping the populace in perpetual serfdom. Meanwhile, guess what another of the best performing stocks this year is? Corrections Corp of America, ticker CXW, up 41% YTD! Guess what they do? Yep, you guessed it. They lock up the serfs that get out of line.
Today's release of the final estimate of 1st Quarter GDP came in unchanged at 1.9% at the headline which was sharply lower than the 3% growth rate in the 4th quarter of 2011. However, what was masked by the headline, was the impact of the unseasonably warm winter that boosted construction spending while the rest of the economy deteriorated. The chart shows the changes between the second and final estimates of GDP. As you will see the consumer was weaker than originally estimated along with all the areas that the consumer directly effects - goods and services. The warmest winter over the last 65 years helped to boost construction spending and investment more than originally estimated which provided the offset from the drag in virtually every other category. Had it not been for this higher estimation in construction spending our estimate of 1.7% would have been obtained.
We recently commented in detail on (and often discuss) the extreme high correlations across not just asset-classes but across all individual stocks. As Goldman notes today correlations across equities reached new record high levels during the financial crisis and remain extremely elevated compared to long-run averages. There are both structural (for instance, the dramatic rise in popularity of ETFs) and cyclical drivers (for instance, the severity of the great recession and the ongoing deleveraging in developed economies which maintains a high risk of another recession given the lack of fiscal and monetary flexibility) that are causing this shift. This high level of equity correlations has huge implications for the investment community as opportunities for diversification are significantly reduced and adding value by stock-picking is reduced (as evidenced by the notable drift lower in long/short hedge fund performance). This introduces a chicken-and-egg problem with regards to the growth in index investing and trading - while it has likely contributed, it is more likely a symptom than the cause of higher correlations. With currently elevated macro risks investors have a better chance to generate alpha by focusing on 'trading' and picking equity indices rather than stock-picking. Only with a sustained improvement in macro conditions are equity risk premia and correlations likely to decrease.
As it dawns upon the world that Ms. Merkel means exactly what she says and is not going to back down you may expect a quite negative reaction in the equity markets and a widening of spreads for some risk assets along with a strengthening of the Dollar. I am talking about the “Trend” here and not some trading strategy for today’s business. Germany is not going to flinch and cannot both due to local politics and to the now obvious fact that Germany has just about reached the limits of what she is financially able to do with a $3.2 trillion economy. To put it quite simply; they have run out of excess cash and more European contributions are only going to weaken the balance sheet of the nation and seriously imperil Germany’s financial condition. I say, one more time, Germany is not going to roll over and all of the pan European schemes brought forward by the bureaucrats and the poorer nations are not going to go anywhere. There is one novel possibility here and that is that the Germans, like the British, may opt out. Germany, Austria, the Netherlands, Finland et al may just say, “Fine, go ahead if you wish to have Eurobonds and the like but we will not guarantee them.” All plans do not need to have an either/or solution and this may well be Germany’s position in the end which would place the periphery nations and France in quite an interesting, if unenviable, place.
For the past six months we have extensively discussed the topics of asset depletion, aging and encumbrance in Europe - a theme that has become quite poignant in recent days, culminating with the ECB once again been "forced" to expand the universe of eligible collateral confirming that credible, money-good European assets have all but run out. We have also argued that a key culprit for this asset quality deterioration has been none other than central banks, whose ruinous ZIRP policies have forced companies to hoard cash, but not to reinvest in their businesses and renew their asset bases, in the form of CapEx spending, but merely to have dry powder to hand out as dividends in order to retain shareholders who now demand substantial dividend sweeteners in a time when stocks are the new "fixed income." Yet while historically we have focused on Europe whose plight is more than anything a result of dwindling cash inflows from declining assets even as cash outflow producing liabilities stay the same or increase, the "asset" problem is starting to shift to the US. And as everyone who has taken finance knows, when CapEx goes, revenues promptly follow. Needless to say, at a time when still near record corporate revenues and profit margins are all that is supporting the US stock market from joining its global brethren in tumbling, this will soon be a very popular point of discussion in the mainstream media... in about 3-6 months.