Well the day has finally arrived that after two years of promises, jawboning and hope - the European Central Bank finally announced they will take the plunge into the Quantitative Easing (QE) pool. Whether or not the ECB's QE program has the desired effect or not will not be realized for a while. However, this week's reading list is a variety of opinions and initial takes on the "ABC's of the ECB's QE."
What is going on in Europe? Nothing short of the biggest multiple expansion episode in history. As SocGen calculated two days ago "the reported P/E multiple on Eurozone equities has risen from 11.5x to 18.7x today – a multiple expansion of over 60% in 30 months – and now stands at a premium to both the rest of Europe and RoW." And now, with today's latest surge in the Eurostoxx, the multiple has hit what may well be a record 19x, pushing the expansion well into the 60% range over the past two and a half years, making Europe the most expensive market on a PE-multiple basis in the entire world.
SocGen Explains That Since The ECB's QE Will Fail, It Will Need To Be Increased To €3 Trillion, Include StocksSubmitted by Tyler Durden on 01/22/2015 15:27 -0500
"The potential amount of QE needed is €2-3 trillion! Hence for inflation to reach close to a 2.0% threshold medium term, the potential amount of asset purchases needed is €2-3tn, not a mere €1tn. Should the ECB target such an expansion of its balance sheet, it would have to ease some conditions on its bond purchases (liquidity rule, quality...) or contemplate other asset classes- equity stocks, Real Estate Investment Trust-(REIT), Exchange-traded fund (ETF)...- as the BoJ, previously."
The "Deflationary Vortex": Global Dollar Economy Suffers Biggest Plunge Since Lehman, Down $4 TrillionSubmitted by Tyler Durden on 01/20/2015 16:28 -0500
One of the macroeconomic observations that has gotten absolutely no mention in recent months is the curious fact that while global economic growth has not imploded in recent quarters, it is because GDP has been represented, as is customary, in local currency terms. Of course, this comes as a time when local currencies (at least those which are not the USD) have been plunging against the greenback on the back of the expectations that the Fed will hike rates some time in the summer or later in 2015. Which also means that in "dollar economy" terms, i.e., converted in USD, things are not nearly as good. In fact, as the chart below shows, the global dollar economy is not only shrinking fast, but it is doing so at the fastest pace since the Lehman collapse, having lost a whopping $4 trillion, or a whopping 5% drop, in just the last 6 months!
The problem, and the source of hope for Eurozone equity investors, is that Eurozone corporate profits have not matched this strong equity price performance. Headline EPS and DPS growth have not advanced since 2012. In fact, aggregate earnings and dividends as measured by MSCI are down by 7% and 5% respectively, whilst the equity index is up 50%." We'll repeat that again: in the past 2 and a half years, Eurozone earnings are down 7%! So where did this upside come from? "This strength in share prices but not in profits has meant the reported P/E multiple on Eurozone equities has risen from 11.5x to 18.7x today – a multiple expansion of over 60% in 30 months – and now stands at a premium to both the rest of Europe and RoW."
Quality stocks along with everything else are expensive. Increasing risk while valuations in the equity market are so elevated seems dangerous, so the obvious answer is to hide in cash. Given valuation dispersion is so tight, avoiding risk will be pivotal in 2015. To that end, avoiding or even shorting companies with a high degree of earnings manipulation seems sensible. This style was a particular strong performer in Europe and Japan last year. We expect to see similar effects emerging in US stocks this year. Simply put, the lack of quality income stocks to invest in is often a precursor to a market downturn.
We’re getting back to normal, and though normal’s going to hurt – and far more than you realize yet - it’s hugely preferable to upside down; you hang upside-down long enough, it makes your brain explode. The price of oil was the first thing to go, central banks are the next. And then the whole edifice follows suit. The Fed has been setting up its yes-no narrative for months now, and that’s not without a reason. But everyone’s still convinced there won’t be a rate hike until well into this new year. And the Swiss central bank said, a few days before it did, that it wouldn’t. And then it did anyway. The financial sectors’ trust in central banks is gone forever. And none too soon. Now they’ll have to cover their own bets. If anything spells deflation, it’s got to be that. But not even one man in a thousand understands what deflation is.
'After two days of sharp intraday and vicious reversals, the BTFD algos are suspiciously missing overnight, when as reported earlier, a bout of margin calls and stop loss selling meant not crude but copper would crash in today's episode of "guess the crashing commodity", on what Goldman dubbed a Chinese demand collapse which for those confused is different than an OPEC supply glut, and is also the reason why the entire commodity complex is trading at a decade plus low. As a result copper plunged to a five and a half year low, in the process halting the market due to the severity of the plunge. But the big event overnight was the farcical announcement by the European top court, which as everyone expected, rejected the German rejection of the OMT as illegal, stating it was not only legal (with certain conditions) but greenlighting the way for the ECB's QE in one week, a move which sent the EURUSD crashing to a fresh 9 year low!
Moments ago, the Advocate General Pedro Cruz Villalon of the EU Court of Justice in Luxembourg delivered the non-binding opinion on issue of Mario Draghi's "unconditional" OMT. Here are the details from Reuters and Bloomberg:
- EU COURT ADVISER SAYS OMT PROGRAMME IN LINE WITH EU LAW SO LONG AS CERTAIN CONDITIONS MET
- EU COURT ADVISER SAYS OMT LEGITIMATE SO LONG AS THERE IS NO DIRECT INVOLVEMENT IN FINANCIAL ASSISTANCE PROGRAMME THAT APPLIES TO STATE IN QUESTION
- EU COURT ADVISER SAYS ECB MUST OUTLINE REASONS FOR ADOPTING UNCONVENTIONAL MEASURES SUCH AS OMT PROGRAMME
In other words, Draghi's "unconditional" bazooka just became conditional, but it is still a bazooka, albeit one that will never actually be used since well over two years after it was revealed following Draghi's famous "whatever it takes" speech, it still has no legal termsheet or basis, and no definition on its pari passu or burden-sharing status. And it never will: after all it was merely meant as a precautionary device designed to scare away the bond vigilantes, and never to be actually implemented.
Every couple of years the same identical European drill repeats itself: 1) Greece makes loud noises as it approaches an election, 2) Europe says it couldn't care what the outcome is and that Greece should stay in the Euro but if it exits it won't be a disaster, 3) the ECB reminds everyone of the lie that it is not preparing for Plan B (it is) despite holding on to over €100 billion in "credibility-crushing" Greek bonds, 4) panicking Greek banks say the deposit outflow situation is completely under control (adding that "The Bank of Greece along with the European Central Bank are monitoring closely the developments and intervene whenever this is necessary," which is code word for far more familiar, five-letter word), and meanwhile 5) all non-Greek banks quietly start preparing for the worst case scenario. So far this time around, we had everything but step "5". We do now.
History literally appears to be repeating. The mainstream media and our politicians are promising Americans that everything is going to be okay somehow, and that seems to be good enough for most people. But the signs that another massive financial crisis is on the horizon are everywhere.
“Don’t look back - something might be gaining on you,” Satchel Paige famously warned. For connoisseurs of civilizational collapse, 2014 was merely annoying, a continued pile-up of over-investments in complexity with mounting diminishing returns, metastasizing fragility, and no satisfying resolution. So we enter 2015 with greater tensions than ever before and therefore the likelihood that the inevitable breakdown will release more destructive energy and be that much harder to recover from.
Russia Busts "Gold-Selling" Rumors, Reports It Bought Another 600,000 Ounces Taking Gold Holdings To New Record HighSubmitted by Tyler Durden on 12/19/2014 09:40 -0500
Moments ago, as if to sway further speculation that Russia is indeed converting hard money earned from real resources for fiat paper, the Russian monetary authority made it quite clear, that at least in November, Russia not only did not sell any gold, but in fact bought another 600K ounces in the month of November.
"It appears possible that the Central Bank of Russia has started to sell off some of its gold reserves in December, with some sources reporting that official gold reserves dropped by $4.3 billion in the first week of the month."
We recently noted the rise of counterparty risks in the financial system due to oil prices dropping (and leveraged derivative exposures) but as the Russia situation has deteriorated so dramatically this week, a renewed focus on bank exposures has sent stocks reeling (and credit risk soaring) among many European (and US) banks. As Bloomberg reports, Raiffeisen Bank International and Societe Generale, the European banks with most at stake in Russia, led European lenders lower. Raiffeisen fell as much as 10.3% to 11.40 euros in Vienna, the lowest level since it went public in 2005. Societe Generale dropped as much as 7.3% to 31.85 euros, hitting the lowest intraday level since August 2013. CDS markets for both also exploded with Raffeisen risk at 27 month highs. As one analyst noted, "There remains a huge amount of uncertainty at this juncture, but the key point is that there are no benign scenarios." While not on the same scale, US bank risk has also widened signicantly in recent weeks (despite equity strength).