31st October 2011: Europe Unwilling to Relinquish its Lead in The Ding-Dong Global Race to Annihilation

Quote of the Day:

And the winners are…. Moody’s Ba2-; S&P: BBB-; Fitch: BB+ ….

ZeroHedge’s Tyler Durden on the Ratings assigned to the, now bankrupt, MF Global.

Macro Overview

• I suppose we shouldn’t laugh at Moody’s, S&P and Fitch; not only was MF Global in good nick, according to their ratings, in Moody’s and S&P’s case it was Investment Grade. Just one more reason why we should not take credit ratings all that seriously. MF were supposed to be the next Goldman Sachs, right? What was their problem? Ans: too much Italian debt… whoops. That tells you as much about Italian bonds as it does about leverage in American broker-dealers.
• The race to devaluation is intensifying. We’re used to the indirect devaluation via dollar and pound debasement through statistical and monetary deception – this has occurred over the past decade or so. Now other manufacturing nations are beginning to feel the pinch.
• China and many other nations, of course, sought a depreciating currency strategy by managing its float with respect to the capitulating global reserve fiat (the US dollar), Japan has been intervening directly for years and recently the Swiss announced they would join the Japanese by trying to intimidate the market away from their preciously stable currency. It works to an extent, but it’s like a lunatic jumping into the sea with a shotgun declaring: “I’m gonna intimidate all the fish!”… good luck with that.
• I remember writing extensively about the Japanese government and TEPCO’s ineptitude over the Fukushima crisis:
• Fukushima Red Alert 1
• Fukushima Red Alert 2
• Here is an excerpt:

It could be said that Chernobylwas an uncontained explosion on a single reactor while Fukushimais a series of contained implosions on four reactors but, nearly three months later, this internalized instability leaves the four reactors in a menacingly perilous state. Indeed, even from an environmental perspective, it is still not completely clear which event is actually worse and the reason is simply because of the word “is” in the last sentence. I deliberately use present tense when talking about the Fukushima reactor implosion because the process is still being played out before our very eyes and it appears that most people think that the threat is now over. Not so. Not so at all, in fact – as we will find out.

Also, just because the explosion was housed in vessels specifically designed to contain a criticality, does not mean that over time the eventual fallout will not be just as destructive asChernobyl. Because Chernobyl did not have a concrete containment drywell shell, observationally, it was a far more sensational criticality event, yet, incidentally, relatively little has been made of the sheer magnitude and force of the Japanese criticality events, given that they blew the foresaid containment vessels apart. As a separate calibration, Gundersen notes that ten times more radioactivity was found in the ocean from Fukushima than was found in the Black Sea from Chernobyl. So at the very least, we are dealing with new scientific and environmental challenges we have never dealt with before, we are stepping into the unknown here. The reality is, only time will tell which event was worse and only one thing remains certain – it’s still far too early to come to any conclusion about the potential fallout from Fukushima.

Fukushima did not happen. Fukusima IS HAPPENING… still.

• Here is an excerpt from Bloomberg News today [emphasis mine]:

The destroyed Fukushimanuclear plant in Japan was responsible for the biggest discharge of radioactive material into the ocean in history, a study from a French nuclear safety institute said.

The radioactive cesium that flowed into the sea from the Fukushima Dai-Ichi nuclear plant was 20 times the amount estimated by its owner,Tokyo Electric Power Co., according to the study by the Institute for Radiological Protection and Nuclear Safety, which is funded by the French government.

It’s the second report released in a week calling into question estimates from Japan’s government and the operator of the plant that was damaged in the March earthquake and tsunami. The Fukushima station may have emitted more than double the company’s estimate of atmospheric release at the height of the worst civil atomic crisis since Chernobyl in 1986, according to a study in the Atmospheric Chemistry and Physics journal.

• Of course we knew this, the only thing that surprises us, dear reader, is that it took so long for the scientists to test and mainstream media to put this headline into print…. Enjoy your sushi!

Market Overview

• This market pull-back was expected, there just was not enough momentum on the political side of things in Europe. There are too many unanswered questions. Some of the big French banks like SG and BNP down almost 10% today. What a difference a weekend makes, 3 days ago Euphoria, now the headlines are all about Europe blowing its chances, Europe cannot solve the crisis.
• The other thing which people have chosen to ignore is that once attention over Europe subsides, attention will turn once again to the other two super-economies: US and China. Both of these economies are far some comfortably positioned. The irony of a bilaterally created global imbalance is that China has too much velocity and too little consumption (as a proportion of GDP) where America has too little velocity and too much consumption. Rebalancing seems easy, but it is far, far from easy because it has been that way for so long there are huge structural impediments to change.
• Japanese Yen intervention is Chart of the Day. Trying to change the market is much like trying to change the weather… you can try … it may even appear to succeed for a long period of time. But a free market could just as easily turn around and take your head off on a whim – just ask the Bank of England.

Chart of the Day

Japanese Yen, 3 day chart (Source: Bloomberg)

Events

Macro Events:

Update:

• Taiwanese GDP Growth slightly below expectations
• Canadian GDP Growth slightly above expectations

Alerts:

• Indonesian Inflation
• UK GDP
• US ISM Manufacturing

Corporate Events:

Results:

• Chicago Metals Exchange [CME], Credit Suisse [CSGN VX], Danske [DANSKE DC], DBS [DBS SP], Hitachi [6501 JT],

Dividends:

• Nothing Significant

Reading, Links:

EU doubts:

• Doubt #1
• Doubt #2

30th October 2011: Europe’s Debt Monster is still ALIVE! Frankenstein was a Fairy

The Curse of Frankenstein

Quote of the Day:

I don’t see China’s coming to be ANY long term solution [to Europe’s crisis]…

Ken Rogoff – Harvard Professor (in response China’s potential role as Europe’s savior).

If it’s a short time, it’s because it blew up…

Ken Rogoff – Harvard Professor (in response to how long we will be talking about the Euro crisis).

Macro Overview

• The Global Economy does not climb a wall of worry; it’s a mountain range of fright and peril.
• Rogoff’s words say it all. OK, last week’s announcement was a pivotal point, but so too was every significant economic decision over the last 3 years – in many respects this was no different. The EU stumbles from one challenge to the next, but while doing the bare minimum to get through each challenge seems efficient. Over the long run, time only feeds “The Beast”, because time is against the EU. Debt gremlins do not fade away in economically challenging times – they only mutate into hideous ghoulish creatures only to then morph and grow into terrifying monsters.
• As Bloomberg reports, the sobering scrutiny has started already – my macro article, The Mother of All Sub-Prime CDOs, asks some questions to which we still need answers. Just ask the Italians; only hours after Sarkozy and Merkel declared a euphoric victory over “The Beast”, howling wolves and vampire vigilantes were already silently circling the Italian debt market – pushing 10 year yields over the critical 6% mark.
• And as I poured scorn over the dream that China would “bail out” Greece (they didn’t) and the same dream that China would “bail out” Italy (they didn’t) and the same dream that China would “bail out” the EFSF (hmmm… Reuters: China not a “savior” for Europe – says state-run news agency Xinhua - what do you think?) it makes one wonder when the financial commentators or politicians will ever get it. China is not a vampire-slayer, it is itself a day-walking Super Vigilante.
• China will always buy a certain level European debt and no more than this because, put simply: it is not in its interest to do so. China will not “bail out” profligate Europeans as a charitable act of sentiment, nor should it.

Market Overview

• Market rally lost a little steam but the credit market is where the drama is going on in my opinion.
• Chart of the Day: Italian Government Bond yields are rising.

Chart of the Day

Italian Yields (Source: Bloomberg)

Events

Macro Events:

Update:

• Nothing Significant.

Alerts:

• Canadian GDP
• French Inflation (PPI)
• Taiwanese GDP
• South Korean Industrial Production

Corporate Events:

Results:

• Barclays [BARC LN], Honda Motor [7267 JT], Lowes [L], Panasonic [6752 JT], Toshiba [6502 JT],

Dividends:

• Wynn Resorts [WYNN],

Reading, Links:

Scrutiny of the EU deal:

• Scrutiny #1
• Scrutiny #2

27th October 2011: Is The EFSF Now The Mother of All Sub Prime CDOs?

 

Happy EU

Quote of the Day:

It sounds like the World’s largest giant sub-prime CDO…

Julian Pendock – Senhouse Capital

Macro Overview

• Make no mistake, under the circumstances, overall this was a good announcement from the European Council. These were the headlines the market wanted to hear: package of €1 Trillion, Greek haircut of 50%, Banks allowed to use Contingent Convertibles, ECB to continue buying Eurozone debt. Bingo! The rally is a “GO”.
• But we must be careful, this is not a time to necessarily call an end to the crisis and a secular bull market in the Euro and Eurozone banks. There are many unanswered questions.

I go through these arguments in much greater detail in my usual Devil’s Advocate fashion on my macro blog: EFSF = TMOASP-CDO but I won’t bore you with that.

• Also, let’s not get too pessimistic, after all; Europe is once again the master of its own destiny. For the time being it is not hostage to the markets or external global dynamics, that’s good thing. To cut a long story short the EFSF CDO is a leveraged play on the European economy which buys the EU some time and a little move in the right direction but it’s success is highly dependent on two main factors:
  • The correlation of constituents – in particular on the probability ofFrance,Italy, German credit status remaining unchanged.
  • Sustained economic growth in the EU with very little political unrest (whether in the form of German electorate revolt or escalation of masses of Street protests)
• This is no time to declare “Mission Accomplished”, the challenges are still there but the effort deserves some recognition that the Eurozone leaders understand the problem and are at least looking for the right sorts of solution – let’s face it, we could not have said this a couple of months ago.

 

Market Overview

• Notice the Dollar Index got smashed to a 74-handle (see Chart of the Day). This is nothing to do with Dollar supply as a typical macro framework may suggest (QE is arguably off the table after the GDP report which would imply Dollar strength). This is all about the Euro bounce and risk appetite coming back.
• This EFSF announcement is good news from a market perspective – I don’t deny it. But let’s be clear it is only good news due to it’s relativity to market expectations. All this does really is buy a little more time and temporarily take the debt crisis spanner out of the European Economic works. If growth does not come soon, we’ll be going back through this all over again. By all means go with the momentum, this is a trading rally not (yet) a decisive economic inflection point.
• One of my favourite oversold stocks, Morgan Stanley is up over 60% this month alone – WHOOSH!!
• You’d have made 100% on those Barclays call options I mentioned – SCHHHWWIING!! 
• Not to mention the Brazilian Calls, the Euro Straddle and the Lloyds options. Luck? Probably. But these are still logged paper profits and had these been put on it’s probably a good time to use this upcoming rally in risk to take some profits off the table… and put some different types of risk on.
• What risk to put on? Well the economic future of the Eurozone has been leveraged up to growth even more than it typically is – it’s a risky game and yet V2X Eurozone volatility has capitulated (see chart of the day). You know what I’m thinking don’t you? Leveraging into a downturn always give you a chance for volatility spikes. Use this time to pick off cheap, oversold medium term (6-12 month) Eurozone volatility. Take a nibble today for scouting and perhaps that will be our macro trade for November – for now let’s just digest the present.

Chart of the Day

Dollar Index (Source: Bloomberg)

 

European Volatility (Source: Bloomberg)

 

Events

Macro Events:

Update:

• US GDP Growth in-line but overall positive (+2.5% QoQ).

Alerts:

• Belgian GDP
• Japanese Inflation
• Japanese Jobs
• US PCE Core Inflation
• Spanish Inflation

 

Corporate Events:

Results:

• ChinaConstruction Bank [939 HK], Denso [6902 JT], Fiat [FI IM],FormosaPetrochemical [6505 TT], Gazprom [GAZP RM], Hyundai Motor [005380 KS], Kia Motors [000270 KS], Merck [MRK], Total [FP FP],

Dividends:

• Nothing Significant

 

Reading, Links:

The EFSF CDO:

• EFSF CDO #1
• EFSF CDO #2
• EFSF CDO #3

26th October 2011: Is The Greek Message to Other Peripherals that “Brinkmanship Works”?

Quote of the Day:

Don’t anyone say Italy is not willing to tackle austerity with the determination of a rabid dog: retirement age to be raised by 2 years in 15 years, and an epic €5 billion to be raised from privatizations.

Tyler Durden – ZeroHedge

Macro Overview

• In case you didn’t get it, that was sarcasm from ZeroHedge.
• As we expected the meetings are going right down to the wire with Merkel and Sarkozy looking to bring the bankers back to the table as the 11^th hour. This is all smacks of a too little too late, but we may be positively surprised, who knows. Remember agreeing on a Greek haircut is but one step on a very long journey, the big question is: what do we do with the banks once we’ve bankrupted them? And what about the other nations who may be tempted to push for haircuts on their debt? All it takes is a riot in Barcelona or Lisbon to gather some political momentum.
• Will it trigger CDS? Who knows – but the CDS market began losing credibility as an effective hedge against default a long time ago. Once you delve into the nuances of the clauses it’s a highly rigged and politicized process which seems to work in favour of the banks.
• Chinese buying AAA European credit is not news, its in their interest to do so… and they do it anyway – wait until the real facts hit the tape.
• Big day for announcements: EU Summit overnight, US GDP, US Jobs, South Korean GDP (which I’m really interested in). Massive day for reporting too: just look at the names below!

 

Market Overview

• Choppy day in the markets as everybody tries to second-guess the summit outcome. There are many pieces of information the markets want, but two stick out:
• How much will the Greek Haircut be (between 50% to 60%) is most people’s guess
• What will the eventual size of the EFSF be – I think people hoping for over €750bil ($1Tril).
• I rather think that it’ll be more complicated than this, partial leveraging of the EFSF into some complex structured vehicle etc etc. No matter, the market will figure out what it’s truly worth. But remember Europe needs a bazooka mentality to this. Produce a number so big that the market backs down and you won’t actually have to spend a dime. But if it’s a borderline figure… well, sooner or later the market will test it.
• Amazon volatility – chart of the day.

 

Chart of the Day

Amazon 90 Day Volatility (Source: Bloomberg)

Events

Macro Events:

Update:

• Nothing Significant as the EU leaders are still locked in backrooms.

 

Alerts:

• USGDP
• South Korean GDP
• US Jobs

 

Corporate Events:

Results:

• ABB [ABBN VX], AstraZeneca [AZN LN], BASF [BAS GR], Bristol-Myers Squibb [BMY US], China Life [2628 HK], China Petroleum [386 HK], China Unicom [762 HK], Chunghwa Tel [2412 TT], Colgate-Palmolive [CL], Daimler [DAI GR], Dow Chemical [DOW], ENI [ENI IM], Exxon Mobil [XOM], France Tel [FTE], Heineken [HEIA NA], Hershey [HSY], ICBC [601398 CH], Komatsu [6301 JT], Kyocera [6971 JT], Las Vegas Sands [LVS], Lotte Shopping [023530 KS], Morgan Stanley [MS], Nintendo [7974 JT], PetroChina [857 HK], Procter & Gamble [PG], Royal Dutch Shell [RDSA LN], Shin-Etsu Chem [ 4063 JT], Taiwan Semi [2330 TT], Volkswagen [VOW GR],

 

Dividends:

• Texas Instruments [TXN],

 

Reading, Links:

Nothing Significant.

25th October 2011: The Dampest of Squibs?

 

Quote of the Day:

It [the EU Summit] is shaping up to be the dampest squib of modern times…

Niall Ferguson – Harvard Professor

 

Macro Overview

• Ferguson skeptical about the outcome of the European Summit Meetings. It will not be the first Europe will have disappointed us, let’s face it.
• China inflation numbers are under-reported say’s the Financial Times – you don’t say!

China chalked up an implied GDP deflator of 10.3 percent year-over-year in the third quarter, the highest since it started publishing quarterly growth figures in 1999, noted Wei Yao, an economist with Societe Generale. That was well above the 6.3 percent rise in the consumer price index during the same three months.

 

Market Overview

• Markets hit on the news that EU Finance Ministers were sent home and told not to come back.
• US Consumer Confidence number was horrific. See Chart of the Day for a 44 year chart of Consumer Confidence (since records began).

 

Chart of the Day

 

44 year chart of US consumer confidence (Source: Bloomberg)

 

 

Events

Macro Events:

Update:

• US Consumer Confidence hits all time low outside the 2008/9 recession

Alerts:

• EU Summit Conclusion!

 

Corporate Events:

Results:

• Aflac [AFL], Bank ofChina[3988 HK], Boeing [BA],ChinaOverseas [688 HK], ConocoPhilips [COP], Ford [F], GlaxoSmithKline [GSK], Ping An Insurance [2318 HK], SAP [SAP GR], Sprint [S], Visa [V],

 

Dividends:

• Nothing Significant

 

Reading, Links:

Nothing Significant.

24th October 2011: Gambling on the Euro Roulette Wheel

Quote of the Day:

The Euro is either Strong or Gone…

Kit Juckes – Societe General Economist / FX research

Macro Overview

• Mr Juckes could not have given a more concise analysis of the Euro’s predicament. The US Dollar remains structurally impaired so the outcomes for the Euro are quite binary: if the politicians get it right the Euro will go to the moon. If they don’t, the Euro is dead. This ties in with my macro view on the Euro and long-dated wide straddle trade idea on the Euro.
• Paul Donovan, another economist I love listening to, also agreed in his daily comment that the Euro had a binary outcome. I quote his satirically facetious remark:

This weekend, the “glittering wonder” that is the Euro was treated to a plethora of discussions and back-room chat, as the thirteenth summit of the crisis got underway. One has to ask: how many summits does it take before the crisis loses its of urgency?

• ZeroHedge reports the Head of China Sovereign Wealth Fund says that Europeans are “Lazy” and “Entitled” and should work longer and harder like the Chinese do. Amen!

 

Market Overview

• Strong market as people predict that the European leaders will come up with a plan that the market can actually (a) digest and (b) find attractive. That’s quite a big ask – especially with respect to (a). It’s already sounding complicated and we have not heard anything yet. I think the market may not react on the EU situation until after the weekend – it’ll take a lot to digest and work through the consequences. In the meantime, the US GDP number may dominate how the week closes.
• Chart of the Day, think of a stock with 100 bil market cap which just hit new all time highs and is up … you won’t get it trust me… the answer is: Macdonald’s.

 

Chart of the Day

Macdonald's - 1000% over 20 years (Source: Bloomberg)

 

Events

Macro Events:

Update:

• Everyone talking about the HSBC Flash PMI as if this was a mainstream data point. The market rallied because it wanted to – get over it.
• What fell under the radar was that Taiwanese Industrial Production was terrible – hit the lowest level since The Great Recession in 2008/9.

Alerts:

• New Zealand Inflation
• US Consumer Confidence (this is a lagging indicator – I’m expecting it better than expected)
• Spanish PPI

 

Corporate Events:

Results:

• 3M [MMM], Amazon [AMZN], ARM [ARM LN], BP [BP/ LN], Canon [7751 JT], Coach [COH], Deutsche Bank [DBK GR], Nidec [6594 JO], Novartis [NOVN VX], UBS [UBSN VX], UPS [UPS] Volvo [VOLVB SS]

 

Dividends:

• Tata Consultancy [TCS IN]

 

Reading, Links:

Binary Euro:

• Binary Euro #1
• Binary Euro #2

23rd October 2011: Fat Tails Will Emerge During the Rebalancing of China’s Consumption vs Growth Tradeoff

Quote of the Day:

If there is massive mis-allocation [of investment/capital] then you would also expect that which ever sector of the economy is effectively paying for this misallocation, their share of economic wealth should be declining.

Is there such a sector in China? Yes, of course there is: it’s called the household sector…

Michael Pettis – Professor at Peking University

Macro Overview

• Looks like the Swiss People’s Party will seize parliamentary victory today, but much like the situation in the US, their political power will likely be stifled.

 

• Interesting to hear Michael Pettis’ comments, courtesy of Paul Kedrosky’s Blog, on China’s Growth vs Consumption Trade-off. Whether you are bullish on China’s economic outlook (as I am, in the long term) or whether cautious or concerned about the challenges China faces (as I am, in the medium term). Then this is worth listening to and it links on many levels to my piece on the rise of China tail-risk (note this is not necessarily a market direction prediction, tail-risk can explode while the stock market trades up).
• Simplifying greatly, Pettis argues that “the Chinese household” (especially via negative interest rates and misallocated investment) has effectively been subsidizing investment in the Economic Growth Machine this is the biggest reason why consumption in China has not only been low but falling to anemic levels. Boosting consumption in this sort of development model is not as easy as it sounds – it is likely come at the expense of growth. This is not as scathing as it sounds, growth is only one way to measure economic development – it is not always the best way. Indeed, as I wrote earlier in the year, there is a price to immediate growth, which very few economists talk much about – least of all in China. Slower growth (and higher consumption) may be good news for the sustainable prosperity of the Chinese people – but the question for us is: will it be good for your investments in China?
• If Pettis is right, what should we look out for? Well, nothing in the short term, but in the medium-to-long term (especially after the leadership change), much slower growth in China. More talk of a massive wave of privatization of SOEs.

 

China Consumption as % of GDP (Source: McKinsey Global Institute)

• Looks like the European Council (not the same as the European Commission – the Council is basically all the leaders of the EU countries) have pushed the deadline for a “solution” until Wednesday. Reuters reports:

Speaking to journalists in Brussels, Sarkozy said: “Progress has been made. Between now and Wednesday a solution must be found, a structural solution, an ambitious solution, a definitive solution.” Asked if he was confident that could happen, he replied: “Yes, otherwise I wouldn’t be here.”

• Meanwhile the Greek economy has deteriorated to “critical” and the country has erupted once again into convulsions of social unrest. STRATFOR put this, rather terminal, spin on the options facing Europe.

Greek Debt Flow Chart (Source: Stratfor)

Market Overview

• The equity market rally continues in the West. A large part of this is due to hopes over the EU solution. The Wednesday conclusion inEuropeand the US GDP numbers on Thursday will determine whether this rally will continue. I actually think the moves this week will be determined more by the US GDP number because, no matter what the European Council come up with, it will take the weekend to digest all the consequences. In the US the market is expecting 2.5% growth for Q3 but I think anything between 2% and 2.5% will be received quite well and anything over 2.5% will immediately fuel another round of optimism. We could be looking at a fantastic October for equity markets!
• Interesting to note that the “risk-on” currency (the British Pound) has also rallied hard this month. See Chart of the Day.

 

Chart of the Day

British Pound - last 3 weeks trading (Source: Bloomberg)

 

 

Events

Macro Events:

Update:

• Nothing Significant.

Alerts:

• Singapore Inflation (CPI)
• Taiwanese Industrial Production

 

Corporate Events:

Results:

• Amgen [AMGN], Caterpillar [CAT], China Coal Energy [1898 HK],ChinaVanke [200002 CH], KDDI [9433 JT], NetFlix [NFLX],Texas Instruments [TXN],

 

Dividends:

• China Citic Bank [998 HK],

 

Reading, Links:

European Council Meetings

• European Council Meetings #1
• European Council Meetings #2

20th October 2011: The European Commission Could Learn a Thing or Two From The Chinese Politburo

Jiabao: Are you sure you know what you are doing?

Quote of the Day:

This whole Euro idea… I mean it was wrong right from the word go. All the way through the 1990’s economists with one voice were saying that the Euro will not work.

Paul Donovan – UBS Global Economist

Macro Overview

• Donovan has been apocalyptic on the Euro from the start. I think the Euro is structurally flawed but I do not necessarily believe it will perish – in the immediate concern there are simply too many powerful vested interests. In the broader context, broad structural challenges can be fixed by bold broad structural policy – The European Commission could learn a thing or two from Chinain this respect. How exactly? Well I highlighted an example in an article last month: “The Birth of TIPSTER’s “Eurozone Consolidation Treaty”. But this was only an example, there are alternatives.
• I have some reservations of using the EFSF as a conduit for insurance policies on government bond. By offering first-loss guarantees on new issues this is effectively trying to leverage up the capability of €440 billion fund to have the firepower of a €2 Trillion fund with financial jiggery pokery. We’ve been here before haven’t we? That’s the kind of alchemy that got us into this mess in the first place. The wizards in Europe did not address the issue of what would happen to the vast swathes of European government bonds which do not fall into the insured category. You cannot magic away debt with financial smoke and mirrors – in fact the lack of transparency is likely to push down the creditworthiness of countries like Belgium, France and Spain more than it would if they simply fronted up the necessary cash for the EFSF.
• Meanwhile as rioters take to the streets in Athensthe Franco-German alliance to save the world appears to have hit a couple of snags. As Stratfor succinctly point out, the EFSF is essentially a Germanic organization, it is run by Germans and is 50% funded by Germany.

Unlike previous EU institutions (which the Germans strongly influence), the EFSF takes its orders from the Germans. The mechanism is not enshrined in EU treaties; it is instead a private bank, the director of which is German.

• Germany has a tradition of keeping central banking well away from politics but in this case there is even more incentive – if centralized bodies like the EFSF and ECB begin easing policies for the sake of the minority peripherals it’ll put an inflationary spanner in the works of the German manufacturing machine. There are also potentially huge repercussions of credibility within the Eurozone if the ECB begins a course of flagrant favoritism towards the profligate peripherals. I can seeGermany’s logic behind keeping the ECB wholly independent and keeping the EFSF as effectively a private bank to governments. The French, though, would like it run a little more like a public bank, giving the EFSF the ability to issue bonds (and for the ECB to then purchase those bonds). But this is one sure way to upset the Germans, not only is this just another (indirect) way of politicizing the ECB, it also implies more financial tinkering – effectively just to simply leverage up the EFSF.
• This is not just a minor detail in the talks – this is a structural difference of opinion between France and Germany. The FT is not optimistic but they’d better come up with something this weekend – and someone is going to have to make some pretty huge sacrifices. Who knows, as Bloomberg reports, Merkel may even end up sacrificing her own leadership.

Market Overview

• Qaddaffi’s death barely sent a ripple through the oil markets. While sensational symbolism it was clearly a non-event for oil supply.
• So far the first few results have been good in October and the markets have been buoyed but I still think it all hangs on the GDP number next week. Equities did a bit of a head-fake today but the chart I want to show today is Copper – did anybody notice that this economic barometer (affectionately known as “Dr Copper” in financial circles) just hit a new low?

Chart of the Day

Doctor Copper needs a Doctor (Source: Bloomberg)

Events

Macro Events:

Update:

• US Jobless claims still got a 4-handle (403k today)
• US Leading indicators in-line

Alerts:

• HK Inflation (CPI)
• Canadian Inflation (CPI)

Corporate Events:

Results:

• China Coal [1898 HK], Formosa Chemicals [1326 TT], Formosa Petrochemical [6505 TT], Formosa Plastics [1301TT], General Electric [GE], Honeywell [HON], KEPCO [015760 KS], MacDonald’s [MCD], Nan Ya Plastics [1303 TT], NTT Docomo [9437 JT], Verizon [VZ], Yanzhou Coal [1171 HK],

Dividends:

• Colgate Palmolive [CL]

Reading, Links:

Merkel’s Dilemma Political Suicide or Let the Euro Fail?

• Merkel’s Dilemma #1
• Merkel’s Dilemma #2
• Merkel’s Dilemma #3

19th October 2011: Taleb prefers the Hedge Funds’ Hammurabi’s Code of Life or Death and Mark-to-Market

 

The Code of Hammurabi

 

Quote of the Day:

The bank bailout is a masquerade of economics…

You need something to break the bank cartel, for the sake of everybody…

Everybody’s wasting time talking about bank earnings, they’re not a hedge fund, they’re not marking to market. You don’t know what’s there…

 

Nassim Taleb – Options Trader – come Economist – come Philosopher

Macro Overview

• Interesting to hear Taleb’s interview on Bloomberg TV. Clearly he thinks very little of how the banks are marking their books and how they are entrenched in political lobbyism. Socialization of the losses but internalization of the gains certainly does not seem fair. As he mentioned, hedge funds like all other non-banking businesses did not get any direct bail-out – poor, incompetent and some unlucky Hedge Funds failed, the industry was almost obliterated. As a result it is now emerging and evolving into a stronger business. But what I found interesting was that Taleb felt the banking sector needed alternatives, it needs competition, something to “break the cartel” – there is no doubt in my mind that he was referring to the alternative investment community. But lobbyist in the Hedge Fund community are nowhere near as coordinated as they are in the banking sector.

Market Overview

• I’ve been away and I’m not going to comment until I’m back in the swing. But inAsiait seems the markets have recovered a little after a below-expectation Chinese GDP number. I think the Chart of the Day is the Greek CDS – it’s rising again.

 

Chart of the Day

Greek 5yr CDS (Source: Bloomberg)

 

Events

Macro Events:

Update:

• US CPI in line

Alerts:

• US Jobs
• Taiwanese Exports

 

Corporate Events:

Results:

• Union Pacific [UNP], Sony [6758 JP], Nokia [NOK1V FH], Noble Energy [NBL], Microsoft [MSFT], McGraw-Hill [MHP], Keppel Corp [KEP SP], Ericsson [ERICB SS], Eli Lilly [LLY], China Mobile [941 HK], Blackstone [BX], AT&T [T]

Dividends:

• Nothing Significant

 

Reading, Links:

 

Nothing Significant.

11th October 2011: The Spook Story of “Tail-Risk”

Tail Risk - careful mate, there's teeth in the other end.

Quote of the Day:

Assume for the moment that the [Dexia] bailout only cost the Belgian government about €30 billion (which we see as fairly conservative)… That alone would be sufficient to increase Belgium’s nation debt load to 110% of GDP putting them within easy reach of where Italy is right now.

Peter Zeihan – Stratfor

Macro Overview

• I’ll be away for a week (in Hong Kong). So comments may be off line for a few days. When I get Q3 GDP numbers will start coming in… that will be interesting. I suspect we may get a couple of downside surprises in Europe and an upside surprise in the US with Asia coming in line. The GDP reporting starts in the East though with China and Singapore next week.
• Examining the contagion risk… if you were wondering just how contagion works in Europe, in just 4.5 minutes, Stratfor’s Zeihan uses Dexia to explicitly demonstrate just how contagion could arise:

• To put this into context, in America, Congress spat the dummy out when US Debt to GDP rose to 90% of GDP. And America is a country which can print its own currency at its own free will – the World’s reserve currency, at that.

Market Overview

• Very light volume day today. Everybody seems to be talking about “tail risks” today. This is a global phenomenon… of course you’ll know all about this, dear reader. But it’s like a spook story, very difficult to hedge against and increasingly expensive to try. Most people take the attitude: ah don’t worry, you’ll know it when you see it… but of course by then it’ll be too late. Here is the FT a couple of days ago in their article, Banks dash to deal with volatility:

Investment banks are scrambling to create complex volatility-based vehicles to help shield investors from the risk of big market falls.

Institutional investors are increasingly searching out so-called “tail-risk hedging” strategies, designed to compensate for a sharp fall in the value of a diversified portfolio, amid mounting worries over the health of the global economy.

• One thing I’ll say, it certainly pays to be well hedged in this market – preferably with some exposure to a volatility strategy.
• Chart of the day is Palm Oil – been a while since we charted this one. Down nearly 30% YTD.

Chart of the Day

Bursa Crude Palm Oil (Source: Bloomberg)

Events

Macro Events:

Update:

• Nothing Significant.

Alerts:

• Just look out for Q3 GDP numbers coming out of Asia:

• >>  Singapore on Friday 14^th
• >>  China on Tuesday 18^th

Corporate Events:

Results:

• Nothing Significant

Dividends:

• Nothing Signficant

Reading, Links:

Tail-risks:

• Tail-Risk #1
• Tail-Risk #2
• Tail-Risk #3