The February TIC data is out and here are the notable items. Total long-term purchases across all securities classes came in at an underwhelming $10.1 billion on expectations of a $42.5 billion increase, although when combined with Short-Term transactions, the total rose to $107.7 billion, greater than expected. However, since this series includes extensive irrelevant noise, tracking just LT data on a sequential basis, shows that in February foreign purchases of the 4 key security classes (TSYs, Stocks, Agencies and Corporate bonds) came in at a relatively weak $24.8 billion, down from $95.7 billion in February, of which $15.4 billion was US Treasurys. What is notable is that equities accounted for $7.6 billion of this total, the largest foreign purchase of US equities since May of 2011. Well, if US consumers will not buy stocks at least foreigners stepped up, and it also explains where at least some demand came from. It also means that the 6 month moving average of foreign stock dumping has finally reversed from all time lows. However, what chart 1 vividly shows, is that over the past several months foreign flows into US securities, previously stable regardless of global events, has also become Risk On - Risk Off, with ever increasing a monthly amplitude. In other words everyone now has a 30 day attention span tops. Finally, now that the UK has been "disambiguated" from Chinese data, and thus saw its holdings drop to a realistic $103 and about to slide into double digit territory for the first time in years, Chinese holdings in turn tose to $1178.9, the highest since the big selloff in December, while Japan continues to find better bargains in US paper, with its holdings soaring to a record $1.095.9 billion.
It seems all that confident over-extrapolating of warm-weather-based foot-traffic into closed sales and a recovery in housing was, as we vociferously warned, simply wrong. There's no schadenfreude here as this was too obvious for anyone except the blinkered hopium peddlers as even the NAHB is forced to admit things aren't so rosy in home-sales-land "interest expressed by buyers in the past few months has yet to translate into expected sales activity". The NAHB Index fell for the first time in 7 months, dropped the most in 10 months and missed those glorious expectations by the most in 22 months - quite an impressive set of statistics.
European equity prices are pushing up towards Friday's highs, as Spanish and Italian sovereign bonds mysteriously surge back to unchanged on the day - but European corporate and financial credit markets are notably wider. Financials, most notably, remain underperformers and significantly worse than Friday's worse levels - seemingly treating with disdain yet another false hope in equity markets.
Each day then that passes, as the cash river runs dry, will change the dynamics of the investment world. The biggest change that I see forthcoming on the landscape, beyond those which I have noted, I believe will take place in Germany. China is heading towards some sort of landing and most of Europe is now officially in a recession. The bite of the austerity measures will deepen the process and between the two I think we will begin to see a decline in the finances of Germany which will bring all manner of howls and screams. Germany cannot keep heading in one direction while the rest of its partners founder all around them. The demands of Berlin are self-defeating eventually as demand falls off and I think we are just at the cusp of deterioration in Germany. The problem, all along, has been that Eurobonds or other measures representing a transfer union will cause the averaging of all of the economies in Europe so that the periphery countries benefit with a higher standard of living while the wealthier nations have standards of living that decline as the result of accumulated debts for the troubled nations. This will bring out nationalism again in force as the grand dream succumbs to the grim reality of the costs for nations that have lived beyond their means. The Pied Piper always gets paid and Hamelin still rests upon German soil.
When in doubt: baffle them with an economy that is both alive and dead (as has been the case for the past 4 months). While on one hand we saw a big miss in the Empire State Manufacturing Index, which slid from 20.21 to 6.56, on expectations of a +18.00 print, and the lowest since November, March retail sales in turn beat expectations, coming in at +0.8% on both headline and ex-autos, with the expectation for retail sales ex-autos at 0.6%, slightly less than the +1.1% retail sale change reported for February. Why are retail sales still strong? Goldman explained it earlier: "We expect that warm winter weather boosted retail sales over the last several months, but it is probably too soon to expect a negative payback in today's report, given that temperatures were still higher than normal in March (and to a greater degree than in February)." Translation: consumers use credit cards to buy things in March they would otherwise have bought in May.
Earlier today Citi reported earnings that missed expectations of $1.02 on an unadjusted basis ($0.95) but beat adjusted ($1.11). Same with revenue. And while one can go through the bank's 10-Q and earnings presentation, there are just two charts worth pointing out which show the same trend exhibited by JPM last week: loan loss reserve release was $1.2 billion or 40% of the $2.931 billion in after tax net income. Which is to be expected: the traditional primary driver of "earnings" continues to be an accounting fudge. Where things get dicier is when considering that in Q1 2012 mortgage credit trends are not exactly good, because just like in the case of JPM, net credit losses rose for the first time in, well, years. So: loan loss reserves are released even as the inflection point in credit losses is reached. Brilliant.
Ten days ago, somewhat tongue in cheekly, we presented the "people bringing you currency manipulation on a daily basis" or in other words the BIS execution team for Europe's central banks, which is most directly engaged in FX and precious metals 'interventions' when needed. The execution chain we presented was headed by one Richard Austin Jones, head of central bank services at BIS, Basel, yet more importantly the actual trader at the bottom of the totem pole was a Mikaël Charozé, whose various tasks included the "management of the liquidity for big amounts" primarily interventions and portfolio diversification, as well as "holding and managing proprietary positions on all currencies including gold." We posted this on April 5. Funny then that just 10 days later, one would never know that Mikaël no longer counts "holding and managing proprietary positions on all currencies including gold" among his duties as well as task of "management of liquidity for big amounts including interventions". In fact his entire profile, since our little humorous exposes, appears to have been rather completely altered. Inquiring minds would love to know: why?
Eurozone periphery concerns continue to loom as Italian and Spanish spreads against the German 10yr remain elevated, but have come off their widest levels in recent trade amid some unconfirmed market talk of real money accounts buying Spanish paper. Despite the concerns in Europe, the major European bourses are trading higher with individual stocks news from over the weekend propping up indices with reports of intra-European M&A and a string of good news for mining stocks pushing up markets today. Some stock stories of note include the agreement of an offer between France’s GDF Suez and UK’s International Power for GBP 4.18 per share, and a speculated merger of BHP Billiton’s and Rio Tinto’s diamond units by private equity firm KKR. The financials sector, however, is showing the strain, as the 3m EUR basis swap moves sharply lower to -53.87 from approximately -50 on Friday, with particular underperformance noted in the French banking sector. The session so far has been very data-light, with Eurozone trade balance coming in slightly lower than expectations but markets remained unreactive to the release.
The question most asked by clients is why, with all that is going on in Europe, is the currency not much lower as nearly every analysts has a target of between parity and 1.2000? It is a very good question but way back at the start of 2011 I suggested that I felt some accord had been reached by the G20 to hold the EUR stable and this I still believe. The issue is that the EU leadership and indeed all those that trade with the zone, realize that equity markets would be held up by QE and that bond yields could be kept down (wrong) using the same method but the whole house of cards could be brought down if there was a run on the currency and a general loss of confidence in the currency. It would simply be a disaster and to me it is central bank manipulation that is keeping the EUR so ridiculously strong so selling breaks to the downside has seen many karted out on a stretcher and sent to the asylum.
At least that is the bogey according to JPMorgan's Pawan Wadhwa, who in a note announced that the ECB may resume SMP purchases if the 10 year hits 6.5% (as in a few hours), much to the chagrin of Germany, which was foosed into believing LTRO 1+2 would mean no more SMP purchases. More importantly, since the 6.50% barrier will be taken down with impunity in days if not hours, and the SMP has proven time and again to be powerless to prevent mass selling, the next big bogey is 7.50% at which the ECB will likely announce another 3-year Discount Window bazooka, pardon, LTRO. What JPM does not say is that with the halflife of each successive LTRO getting cut in half, LTRO 4 will be needed in June, LTRO 5 in July, LTRO 6 in July, LTRO 7 in July and so on. Most importantly, now that banks, who are desperate for some cash infusion from either the Fed or the ECB, know what the critical threshold bogey for action is, they will be sure to facilitate the ECB's life, and send Spanish 10 Years plunging to at least 7.50% and demand Draghi play ball, again. In other words: now that the market knows what the consensus is to get more European QE, it will promptly do it. After all the LTRO was never for the benefit of the countries: it was always and only to benefit Europe's insolvent banks. If that means "Greecing" Spain in the process, so be it.
- Downgrades Loom for Banks (WSJ)
- China Loosens Grip on Yuan (WSJ)
- Sarkozy Embraces Growth Role for ECB (WSJ)
- A Top Euro Banker Calls for Boost to IMF (WSJ)
- Wolfgang Münchau - Spain has accepted mission impossible (FT)
- Hong Kong Takeovers Loom Large With Banks Lending Yuan: Real M&A (Bloomberg)
- Banks urge Fed retreat on credit exposure (FT)
- Drought in U.K. Adds to Inflation Fears (WSJ)
- France faces revival of radical left (FT)
- Euro Area Seeks Bigger IMF War Chest as Spanish Concerns Mount (Bloomberg)