headlines

This is not the rumor that the central planning doctor ordered. This time from Dow Jones:

• No Intention By Euro Zone, IMF To Give More Money To Greece, Say Dow Jones Sources -DJ
  
• Major Greece creditors made clear EUR130 bn bailout loan "won't be increased by a single euro" - DJ

It remains to be clear if Greece will even get the €130 billion loan still, but that is a different story. EURUSD, and stocks, not happy.

Macro news from Europe has refuted claims made last week that the ESM fund would be doubled to EUR 1tln, with a German spokesman commenting that the country is not of mind that ESM resources should be increased to that level. Discussions concerning the management of the EFSF and the ESM from German members of parliament have spurred talks that the funds could be run in parallel and even together in an emergency scenario. The ECB’s Weidmann has commented on his confidence in the Eurozone and the German economy, stating that current stagnation is temporary and that we should see a recovery in the Eurozone during 2012. Financial stocks have shown volatility this morning following comments from French and German Finance Ministers that banking regulations may be relaxed under the Basel III agreement, however this was later denied by the German Finance Minister.

For the Fed to continue ZIRPing, Twisting and QEing, it has to support the policy with a bleak assessment on the economy. 

European indices as well as major currency pairs are trading in slight negative territory at the midpoint of today’s session due to profit-taking and cautious sentiment dominating the market, with the worst performing sector being Oil & Gas showing volatile trading this morning.  In European macro news, Greek PSI talks are closer to coming to a conclusion, with a source saying that the haircut announcement is likely to be today.

As usual benchmark revisions have saved the day for the headlines on the Philly Fed print. Expectations for the data was a 10.3 and it came at 7.3, a definitive miss to expectations, but of course thanks to revisions this rise to 7.3 (from 6.8 revised) is heralded (in a short-lived manner) as evidence of improvement. Under the covers though, things aren't so rosy. New Orders and Shipments dropped notably, number of employees was merely flat and while restocking seems to be occurring modestly (inventories improved) they still printed negative. On the six-months ahead outlook, expectations are for lower prices received but everything else reflects the hope-infused perception of steady growth - especially the notable rise in capex. Initial market reaction is negative to the miss.

We have been rather vociferous in our table-pounding that even if a Greek PSI deal is achieved (in reality as opposed to what is claimed by headlines only to fall apart a month later), then Greece remains mired in an unsustainable situation that will likely mean further restructuring in the future. JPMorgan's Michael Cembalest agrees and notes that Debt/GDP will remain well above 100% post-deal but is more concerned at the implications (just as we noted earlier in the week) of the process itself including ECB preferred credit status, retroactive CACs (law changes), and CDS trigger aversions. In his words, the debt exchange is a bit of a farce and we reiterate our note from a few days ago - if this deal is so close, why is the 1Y GGB (AUG 2012) price trading -8.75% at EUR 28.75 (or 466% yield) and while longer-dated prices are rallying (maybe bear flattener unwinds), the moves are de minimus (-17bps today on a yield of 3353bps?) as selling pressure is clearly in the short-end not being rolled into the long-end as some surmise.

Headlines for now but the inevitable has become well 'evitable' as EK goes BK...headlines via Bloomberg:

• *KODAK FILES FOR BANKRUPTCY IN NEW YORK
• *EASTMAN KODAK SECURES $950M IN DEBTOR-IN-POSSESSION FINANCING
• *KODAK TO MONETIZE NON-STRATEGIC INTELLECTUAL PROPERTY    :EK US
• *EASTMAN KODAK SAYS NON-U.S. UNITS NOT INCLUDED IN U.S. FILING
• *KODAK SAYS CHAPTER 11 A `NECESSARY STEP', `RIGHT THING TO DO'
• *KODAK EXPECTS TO PAY EMPLOYEE WAGES-BENEFITS             :EK US

We guess the 128% stock rally from 1/6 to 1/11 can be ignored now (and the Einhorn rumors)

Amid the best start of the year for the S&P 500 since 1987, Nic Colas of ConvergEx offers some deep thoughts on how behavioral finance concepts can help us understand the dichotomy between last year's derisking and this year's rerisking in terms of market participant psychology. Between delving into whether a short-sharp or long-slow colonoscopy is 'preferable' Nic reflects (antithetically) on 10 bullish perspectives for the current rally and how the human mind (which still makes up maybe 50% of cross-asset class trading if less in stocks) processes discomfort in very different ways. Critically, while it sounds counter-intuitive to him (and us), focusing on the pain of recent volatility is actually more conducive to investors' ability to get back on the horse especially when the acute pain is ended so abruptly (intervention). As studeis have found, "subjects who actually focus on a painful experience while it is happening are more willing to immediately undergo further pain than those who performed some distracting task"

The Greek PSI is once again (still) hitting the headlines. Here is what we think the most likely scenario is (80% likelihood). Some form of an agreement will be announced.  The IIF will announce that the “creditor committee has agreed in principle to a plan.”  That plan will need to be “formalized” and final agreement from the individual institutions on the committee and those that weren’t part of the committee will need to be obtained.  The headline will sound good, but will leave a month or so for details to come out.  In the meantime every European and EU leader (or employee) with a press contact will say what a great deal it is.  That it confirms that Europe is on the path of progress and that they are doing what they committed to at their summits. That will be the hype that will drive the market higher (or in fact has already done so). However, the reality (as we noted earlier in Einhorn's market madness chart) is that this still leaves hedge funds to acquiesce (unlikely) and furthermore focus will switch to Greece's actual debt sustaianability post-default (yes the d-word) and as we are seeing recently, Portugal will come into very sharp focus. If they cannot bribe and blackmail and threaten their way into something they call PSI, then we will see Greece stop making payments, and then the markets will get very ugly in a hurry.

Anyone wondering why FSLR just jumped, it is because as was just made known, David Einhorn's Greenlight has decided to close its FSLR position, after bleeding that particular corpse dry. "Our largest winner by far was our short of First Solar (FSLR) which fell from $130.14 to $33.76 paper share and was the worst performing stock in the S&P 500." Einhorn also announces that he was among the "evil" hedge funds who dared to provide market clearing transparency and buy CDS on insolvent European governments: "We also did well investing in various credit default swaps on European sovereign debt." As for losers, Einhorn and Kyle Bass can commiserate: "For the second year in a row, our biggest loss came from positions designed to capitalize on eventual weakening of the Yen." He summarizes the global economic environment as follows: "The global environment is very complicated. On the one hand the Federal Reserve has taken a much-needed break from quantitative easing (at least for the moment). Accordingly, inflation in oil and food has abated, providing relief to the US economy. Bearish forecasts that the US was headed back into recession proved wrong for the third time since the end of the last recession. On the other hand, Asia appears to be in much worse shape than it was at this time last year and could be a drag on the world economy going forward. Very few people trust any of the economic data coming out of China, making it difficult to gauge the situation there. Some of the smartest people we know have very dim views. The Chinese have been a leading growth engine for the last two decades and are largely credit with leading the world out of the recession in 2009. A change in their economic circumstances could really upend things." Yet the best thing is his summary of the current investing climate in our utterly and hopelessly reactionary broken markets.

When it comes to attempts at predicting the future, it often appears that the most desirable outcome by everyone involved (particularly those from the status quo, which means financial institutions and media) is that of the "muddle through" which is some mythical condition in which nothing really happens, the global economy neither grows, nor implodes, and it broadly one of little excitement and volatility. While we fail to see how one can call the unprecedented market vol of the past 6 months anything even remotely resembling a muddle through, the recent quiet in the stock market, punctuated by a relentless low volume melt up has once again set market participants' minds at ease that in the absence of 30> VIX days, things may be back to "Goldilocks" days and the muddle through is once again within reach. So while the default fallback was assumed by most to be virtually assured, nobody had actually tried to map out the various outcome possibilities for the global economy. Until today, when Morgan Stanley's most recent addition, former Fed member Vince Reinhart, better known for proposing the Fed's selling of Treasury Puts to the market as a means of keeping rates at bay, together with Adam Parker, have put together a 3x3 matrix charting out the intersections between the US and European economic outcomes. Here is how Parker and Reinhart see the possibility of a global goldilocks outcome, and specifically those who position themselves with expectations of this being the default outcome: "A “muddle through” positioning is potentially dangerous: Our main message is that the muddle-through scenario might be the most plausible alternative, but its joint occurrence in the US and Europe is less likely than the result of a coin toss. Uncertainty is bad for multiples." Specifically - it is 37% (with roughly 3 significant digits of precision). That said, as was reported here early in the year, Morgan Stanley is one of the very few banks which expects an actual market decline in 2012, so bear that in mind as you read the following matrix-based analysis. Because at the end of the day everyone has an agenda.

Friday was the most active day in ES (the e-mini S&P 500 futures contract) since 12/16 and today saw volume once again surge in the futures market as it tested 1300 for the first time since 7/28. However, NYSE stock volume (which managed a very late-day spurt on Friday) was dismal once again today (for instance -25% from Friday with 3 minutes to go) with another extremely late jump taking it back to 'normal' for the year so far (but still dramatically low compared to previous year 'norms'). Stocks rallied on China GDP and an optically decent Spanish auction but as we moved into the European close, risk started to leak off and accelerated in the afternoon as IMF headlines, LTRO rumors, and IIF/PSI chatter hit though more expansive ECB rumors seemed to stall losses at last night's ES re-open levels. ES is down very marginally from Friday's late-day ramp close and credit outperformed today (though HYG hung in with stock's weakness) as financials underperformed. The majors were the worst performers with Citi and BofA giving decent amount of YTD gains back. EUR stabilized post-Europe (after selling off into their close) with the USD (DXY) down 0.4% from Friday and GBP underperforming. In the face of the USD stability this afternoon, commodities were mixed with Oil spiking back over $100 (as NatGas was crushed), Copper leaking off but holding gains 2%-plus gains from Friday (China), as Silver and Gold lost their earlier gains (3% and 1.5% at best) to end around 0.75-1% better from Friday's close (still a double on USD weakness). Treasuries closed marginally lower in yield from Friday (1bps max) but were 4-5bps lower in yield from around the European close (as 2s10s30s slid also). Stocks closed well below broad risk assets as FX carry never really joined the derisking craze and oil's strength seemed divergent for now.

When yesterday we presented the view from CLSA's Chris Wood that the February 29 LTRO could be €1 Trillion (compared to under €500 billion for the December 21 iteration), we snickered, although we knew quite well that the market response, in stocks and gold, today would be precisely as has transpired. However, after reading the report by Credit Suisse's William Porter, we no longer assign a trivial probability to some ridiculous amount hitting the headlines early in the morning on February 29. Why? Because from this moment on, the market will no longer be preoccupied with a €1 trillion LTRO number as the potential headline, one which in itself would be sufficient to send the Euro tumbling, the USD surging, and provoking an immediate in kind response from the Fed. Instead, the new 'possible' number is just a "little" higher, which intuitively would make sense. After all both S&P and now Fitch expect Greece to default on March 20 (just to have the event somewhat "priced in"). Which means that in an attempt to front-run the unprecedented liquidity scramble that will certainly result as nobody has any idea what would happen should Greece default in an orderly fashion, let alone disorderly, the only buffer is having cash. Lots of it. A shock and awe liquidity firewall that will leave everyone stunned. How much. According to Credit Suisse the new LTRO number could be up to a gargantuan, and unprecedented, €10 TRILLION!

Eurozone special: the only developed economy where credit markets still have a say.

European Indices are trading up at the midpoint of the session following strong performance from financials, however, Italian bond auction results dampened this effect after failing to replicate the success of the Spanish bond auction yesterday with relatively lacklustre demand. There has been market talk that this lull in demand for Italian bonds is due to technical error preventing some participants from bidding in the auction, but this still remains unconfirmed. Heading into the North American open, fixed income futures are still trading higher on the day having seen the Bund touch on a fresh session high and with peripheral 10-year government bond yield spreads widening ahead of the treasury pit open. Markets now anticipate the release of US trade balance figures and The University of Michigan confidence report.