EU Politicians Release This Picture Of A Well-Known Hedge Fund Manager

Quote of the Day:

The republic needs a president who can dedicate himself unhindered to these and other national challenges and enormous international challenges, a president who is supported by the confidence of not only a majority but a wide majority of citizens.

The last few weeks have shown that this trust and therefore my ability to be effective have suffered sustained damage.

Christian Wulff – the EX German President

Macro Overview

The Corruption Of Credibility

• A few days ago, I don’t know if you noticed, but German President and close ally to Merkel, Christian Wulff, resigned over what was effectively a collapse in his credibility after he was rumored to be “on the take” prior tenure as German President.
• What has this to do with economics? Nothing really. I only point it out to show that European politicians do actually understand the consequences of what I will call a “corruption of credibility”. Because his reputation had been unequivocally tarnished, no matter how much his aids waxed and glossed… it was virtually impossible for anyone to trust him. There is simply nowhere to hide from an unequivocal and public corruption of credibility.

Troika’s Disdain For The CDS Market And The Holders Of CDS Contracts

• Fast forward to the latest news out of Europe regarding the Greek crisis and we find that it looks likely that the haircut imposed on even a relatively small proportion of holders may slouch from “voluntary” to “coercive”. I love all these slimy adjectives sliding out of Europe- when was the last time you heard someone say: when I pulled the trigger on this gun the bullet was “coerced” out of the barrel? Anyway, if a “coercive” default happens (perhaps as the result of a collective action clause – CAC) it may be likely that the CDS (finally!) will be triggered.
• But seriously, how much time and money have the European politicians thrown at the problem, either directly or indirectly via inducing inflationary policies at the ECB, to avoid the stigma of, the rather petty technicality, of an ISDA default trigger.
• Pretty much the entire market knows Greece has defaulted, the Germans know they have defaulted, the Greeks know they have defaulted, the bond holders sure as hell know they’ve defaulted… heck, even the ratings agencies know they have defaulted and they’re normally about 24 months behind everyone else! So why are the Feds throwing so much of taxpayers wealth at fighting the nuances of an ISDA clause – or is it just me?
• The common argument is that if Greece defaults then it will never recover, it will have difficulty raising money in the markets again. Oh…. Right. So if the ISDA default is circumvented all Private Investors will fill their boots on Greek debt knowing it’s A-OKAY, yeah? The credibility of the Greek government has been tarnished no matter how much lipstick you put on this pig. Why do European politicians understand “corruption of credibility” when it concerns their own kind but not when it concerns the, rather specific, ISDA definitions in the credit derivative markets.
• Perhaps I shouldn’t say this but, could it be they have a rather vindictive attitude towards the holders of CDS contracts – namely the Hedge Funds? We’ve heard the rhetoric from both Sarkozy and Merkel towards this segment of the investment community.
• Note, if politicians throw enough real and political capital and succeed cheating CDS holders out of a default trigger, then there is a good chance the credibility of the entire credit insurance market in Europe will suffer. Would you invest in European credit risk, knowing that one of your main investment exits was now effectively a rigged market? Perhaps you would, but you’d be a fool not to demand a higher premium for this additional risk. Borrowing costs in Europe could surge.
• It is impossible to calculate just how much wealth has been thrown at this imbecilic objective and indeed how much will be lost if indeed the EU-Feds succeed in destroying the credibility of the market place in credit insurance. But I’d rather that wealth was in my pocket and I’d rather the Merkozy meddlers and political peddlers kept their dirty fingers out of the specialized nuances of the credit derivative markets.

Market Overview

The Fragility Of Consumption

• Well Dell, Hewlett-Packard, Wal-Mart didn’t do so well but Target did. While the jobs numbers are still coming out strong, I’m not yet convinced that this consumption growth (over two-thirds of the US economy) is here to stay.
• I read yesterday somewhere that “Oil was the new interest rates”… rates are irrelevant now and oil plays a bigger part in dictating economic activity. I don’t know why but it was an interesting comment and I thought I should share it with you. Any of you that peek at Google Trends will know that “gas prices” is one of the fastest growing searches at the moment.
• Ironically, by trying to boost consumption with monetary easing, the Fed must be careful that it does not stifle consumption by boosting the cost of energy.
• Chart of the Day (obviously) is NYMEX sweet light crude.

Chart of the Day

Sweet Light Crude (Source: Bloomberg)

Events

Macro Events:

Update:

• Nothing Significant

Alerts:

• UK GDP
• German GDP nsa

Corporate Events:

Results:

• Nothing Significant

Dividends:

• Nothing Significant

Reading, Links:

Nothing Significant.

Quote of the Day:

Fitch considers that the proposal to reduce Greece’s public debt burden via a debt exchange with private creditors will, if completed, constitute a rating default, and result in the country’s IDR being lowered to ‘Restricted Default’ (‘RD’) upon completion. The ratings of GGBs affected by the exchange, including those not tendered but restructured under CACs, which are expected to be imposed retrospectively on bonds issued under Greek law, will also be lowered to ‘D’ (‘default’) at this time.

Shortly after completion of the exchange with the issue of new securities, Greece’s sovereign rating will be moved out of the ‘RD’ category and re-rated at a level consistent with the agency’s assessment of its post-default structure and credit profile.

Fitch regards the imposition of retrospective CACs as a material adverse change in the terms and conditions of GGBs in the context of an imminent debt exchange and confirms its assessment that the exchange will be distressed and de facto coercive on private holders of Greek bonds. Nonetheless, the primary credit event is the exchange itself and Fitch will rate Greece and its securities accordingly.

Fitch Research [Emphasis mine]

Macro Overview

BoE Split on QE

• The BoE were split today on their decision to leave QE unchanged. Can you believe it? We’ve stopped talking about base rates … I can’t remember the time we did. The only thing we talk about is monetization of debt, printing paper promises up the wazoo. Nobody pauses to question the validity of the underlying promise. Except perhaps the holder of Gold – who took the hard currency to a new 3 month high of $1780 today.
• The game is getting tighter for the Brits. Only a few months ago we were lamenting the CPI at over 5%! But we’re already talking about increasing the current rate of asset purchases. It’s a currency war out there… bring out the heavy artillery.

Default Semantics – It’s All Greek To Me

• I’ll try to keep my comments on Greece brief. To be honest I have Greece-writing-fatigue. The politicians have bought themselves some more time. But it appears that the Feds are inflating everything… even the cost of time!
• Already the doubts are creeping in and we have not even got to the implementation + riots on the streets stage yet. The Independent writes in an article today:

That pessimistic view was reinforced by a confidential document on Greece, compiled by European and IMF analysts, that was leaked on Monday night. The secret report showed that Greece’s debt burden could easily still stagnate at an unsustainable 160 per cent of GDP at the end of the decade if the economy does not return to growth quickly.

Analysts also expressed doubts over whether the Greek government would be capable of delivering the austerity measures that have been demanded by Greece’s European creditors in exchange for the new bailout funds.

• The article also details the leakage of a secret Troika report which showed that the bailout may not even make a dent in the Greek debt to GDP ratio. You can’t make this up.
• Already the mob is reforming, they are restless, they may have little power individually right now and some of them may have “riot-fatigue” … but they also have numbers on their side.
• Fitch is the latest agency to shut the door on Greeceafter the horse had bolted and long galloped gaily over the horizon. As Forbes implied in their article, it’s not really enough to save them from default – it’s like giving a bankrupt man a new limit on his credit card… it means you can live a little longer, but it doesn’t help, it only hurts.
• I’ve stopped using ISDA terminology as it no longer has any meaning. So I think Fitch downgraded Greece to official rating “stick-a –fork-in-me-I’m-done”. After stopping time to ponder whether a 70% gun-to-the-head haircut on the NPV of a bond constitutes a default… errmmm… let me think about that for a minute… one day we’re gonna look back on all this and laugh… but first let us join hands and weep.
• The Greek 5 yr CDS (if indeed it makes any sense anymore to call it Credit “Default” Security) is back trading above 10,000 bps … if indeed that number even makes any sense anymore…I don’t know anymore.
• Here is an interesting question though; if you were a hedge fund with a shed load of CDS protection on Greece would you have considered buying the distressed bonds off the banks (perhaps in concert) in order to have enough sway among the bond holder committee to put a spanner in the CAC-enforced bond swap and force a CDS default trigger? I guess we’re about to find out. Something tells me this is all going to get very litigious.

Market Overview

What’s Happening To The Consumption Revival?

• I dunno about you but if consumption was on the up and up I’d kinda expect a better day from WMT and DELL. Both stocks seem to be having difficulty putting out optimistic vibes about consumption patterns.
• Chinese Flash Manufacturing disappointed too, but this is not a number I give huge credence to. We’ll see later on when inflation numbers are published how things are fairing. If inflation is too high then this is a worrying sign for the Central Bank as it will have little room to stimulate consumption in China. If inflation is too low it may be a sign of a genuine slowdown taking course.
• Tomorrow look out, more consumption plays reporting including Gap and Target.

Land Of The Rising Dollar

• I say this because factors which determine the backdrop for Japanese stocks originate largely from outside the country.
• Japan’s growth comes from its export engine. It’s main trade partners being the US and China. So the Japanese economy is highly dependent on consumption patterns outside its borders and across its seas.
• The Yen is falling, but for no other reason than it has simply lost its luster as a safe haven currency. The fact that we have been talking about the Yen as a safe haven currency speaks volumes in itself. Chart of the Day today is the Yen-Dollar.

Chart of the Day

Yen/Dollar (Source: Bloomberg)

Events

Macro Events:

Update:

• China HSBC Flash Manufacturing 49.7

Alerts:

• Mexico GDP – I don’t know why but I’m actually really anticipating this number… perhaps it’s the fact that Mexico has been growing so rapidly (even faster than Chinaover the last couple of years) … and the fact it’s so close to America.
• Taiwan– Industrial Production
• US Jobs

Corporate Events:

Results:

• AIG [AIG], Commerzbank [CBK GR], Credit Agricole [ACA FP], Deutsche Tel [DTE GR], The Gap, Honeywell [HON], [GPS], Target [TGT],

Dividends:

• GE [GE].

Reading, Links:

Nothing Significant.

Cartoon from Guardian Newspaper

Quote of the Day:

No No No!

Margaret Thatcher – British Prime Minister (1975 – 1990)

Macro Overview

The Iron Lady Of Europe

• Angela Merkel has resisted all comparisons with Britain’s Iron Lady of the 1980’s, Margaret Thatcher. For one thing, she stands for something different ideologically speaking – Merkel is staunchly pro-European integration. Thatcher, by comparison, made her opinions quite clear on the matter, as you see above!
• But there are striking similarities between these two political female powerhouses. Perhaps it is something that comes with being a woman who has fought tooth and nail through the ranks to the pinnacle of European politics. Merkel, like Thatcher, sticks to her guns. She sometimes initially appears quite methodic and patient at the negotiating table but when she makes her demands, she normally gets what she wants. You don’t have to agree with the policies of either Thatcher or Merkel to have a degree of admiration for their aggressive ability to get what they want done and get it done with authority.
• There is plenty of talk about “union” and “helping” or even “bailing out” other European nations, but let’s make no mistake this is nationalistic politics at its most ferocious. Merkel’s obligation is, first and foremost, to the German electorate – not the Greeks or the Portuguese or the French or the “Union”. Her actions so far have not dissuaded me from this in any way. And judging her on this alone, she is indeed an exceptional politician.
• Domestically, Merkel has quenched the anti-Europe swell while overseas she has pressed for treaty change while venting about the inflationary consequences of ECB participation – a shrewd tactic to shield intentions and lever into political negotiations. While holding the Greeks et al over an austerity barrel, she has France right where she wants it – begging at the end of a very short dog-lead. She has Britain right were she wants it – exiled, insulated and in splendid isolation. And the rest of Europe potentially chastised to an iron-fist treaty of curiously Germanic design.
• What is perhaps more poignant about The Iron Lady of Europe is what she does not do. When there is political sensitivity in Europe, she remains practically silent, allowing other political voices to vent the heat before taking a line which is true and unequivocally assertive. Which reminds me of one of Thatcher’s quotes:

Being powerful is like being a lady. If you have to tell people you are, you aren’t.

Market Overview

Gold Rising On European Doubts

• Seems strange doesn’t it? We have “momentous” news out of Europe on the latest Greek bailout and Gold hits a new high? Something does not add up in Europe… I imagine it’s the Mathematics!
• Reuters reports: Gold Rises over 1 percent on Greek deal uncertainty.
• Bloomberg reports: Greek Rescue Leaves Europe Default Risk Alive.
• Wait… so all this turmoil in the markets, hundreds of billions of Euros thrown over The Med and we still cannot draw a line under the problem?  Hmpft! You know the score, dear reader; like a NINJA (No Income, No Job or Assets) with a huge mortgage, Greece is insolvent, she doesn’t need a loan… she needs a fresh start.
• Europe will not move forward while the Greek people are beholden (or even feel they are beholden) to German politicians, no matter how deftly the European Elite try pull the puppet strings of the “Greek Government” and the Wool over the ordinary Greek person’s eyes. In fact I should not really call them the Greek Government I should call them “The Unelected Representatives In The Eurozone of Greek Descent” – because that’s what they are.
• Europe will not move forward while private investors feel cheated either by indirect subordination by the ECB or CDS trigger-gaming by the politicians.
• Europe will move backwards if growth in the Eurozone stalls further and Europe will move backwards faster than you can say “what’s that horrific sucking sound?”  if investors begin to doubt the credibility of the ECB.
• Chart of the Day shows Gold and Greek CDS Steepness – which hit a new low (or a new INVERTED steepness) as the 2 year spiked.

Chart of the Day

Gold (Source: Bloomberg)

Greek CDS Steepness (Source: Bloomberg)

Events

Macro Events:

Update:

• Eurozone Consumer Confidence in line (-20.2) … not really very good.

Alerts:

• France CPI
• Hong Kong GDP
• Malaysia CPI

Corporate Events:

Results:

• ChinaSteel [2002 TT], FranceTelecom [FTE FP], Genting Singapore [GENS SP], Hewlett Packard [HPQ], Wilmar [WIL SP],

Dividends:

• Barclays [BARC LN], Hershey [HSYUS],

Reading, Links:

Nothing Significant.

Quote of the Day:

Mitch: [after seniors threaten him] Er, Mr. Payne. Sir. You know every second that you could let us out early would really increase our chances of survival.
Mr. Payne, junior high school teacher: It’s like our sergeant told us before one trip into the jungle.
[shouts]
Mr. Payne, junior high school teacher: Men!
[the boys jump]
Mr. Payne, junior high school teacher: Fifty of you are leaving on a mission. Twenty-five of you ain’t coming back.
Mitch: Okay.

Macro Overview

Dazed And Confused In Euroland

• I love that movie. It pretty much single-handedly propelled Ben Affleck and Matthew McConaughey into stardom overnight. The kids lining up for the ritualistic beating must have felt like Eurozone countries. It’s like Mr Payne said… 17 of them are leaving on a mission and not everyone is coming back.
• Eurozone investors must be dazed and confused themselves now. Judging investment conditions these days you need a mole in Brussels, a spy in Berlin and a PhD in Political Sociology.
• But anything can be simplified, I suppose. For example, Harvard Professor Ken Rogoff agrees with Mr Payne’s analogy, as ZeroHedge points out in an excerpt from German journal Der Spiegel today… the Eurozone only really has two options: reverse and dismantle the Euro or foot-on-the-gas and full speed ahead for political union. I’m more of an optimist than some people think. I actually believe the latter will happen (for example, TIPSTER’s treaty idea was all about ratcheting up political integration in Europe)… but we will not get there without some rather raw buttocks along the way.
• The noises out of Schaeuble and Venizelos are very positive. But remember, the political conflict zone is not between the members of the Eurozone administration. It is between the peripheral public (in this case Greek public) and the political elite of the Eurozone core. Whoever bends (and, politically speaking, Venizelos is looking like limbo-dancing rubbery Mr Fantastic) will have to turn around and face the public onslaught of their own people.

Market Overview

Onwards And Upwards For Risk Assets

• Nymex Sweet Light Crude hit $105 today. It has not traded that high in 10 months and to be honest that pretty much signifies the tone out there. Global Monetary policy still supports risk assets and it still supports hard currencies over soft currencies. In this respect, I always feel that there is too much focus on Gold and Silver, but other commodities, like oil and even food, can also be considered currency alternatives. See my old comment on Neanderthal Economics.
• Today the Chart of the Day is NYMEX Sweet Light Crude and Soy Beans. Both of which are near their highs.

Consumer In The Dock Tomorrow

• With Eurozone Consumer Confidence and Dell, Home Depot, Kraft, Macy’s and Wal-Mart all reporting tomorrow we should have some good insight into Western consumer patterns. Eurozone consumer confidence projection is so low that I think it may even exceed expectations, but I’m particularly interested in WMT and DELL’s report/projection on revenue growth.

Chart of the Day

NYMEX Sweet Light Crude (Source: Bloomberg)

Soy Beans (Source: Bloomberg)

Events

Macro Events:

Update:

• Nothing Significant

Alerts:

• EU Finance Minister Meeting – It’s Coming Soon To A Blogsite Near You … honest!
• Eurozone Consumer Confidence

Corporate Events:

Results:

• Dell [DELL], Home Depot [HD], Kraft [KFT], Macy’s [M], Wal-Mart [WMT],

Dividends:

• Nothing Significant

Reading, Links:

Nothing Significant.

Quote of the Day:

I’m gonna make him an offer he can’t refuse.

Don Corleone – aka The Godfather

Macro Overview

The Fable Of Football

• Readers will be familiar with the Vadar, a small island state with its own “independent” central bank. This is an interesting story which occurred a while back in the prison-system of the small, isolated nation. There was only one prison on Vadar, but it was getting over-crowded and more costly to police. That is until the Vodor prison guards, aptly nick-named, “Storm-Troopers” devised and interesting little plan.
• The prison guards would regularly hold sporting fixtures against inmates. The most popular of which was (American) Football. It was popular because it allowed highly-charged, full-physical contact between inmates and guards, sometimes with gruesome consequences. It was a fantastic gladiatorial spectator sport and soon it was drawing huge crowds from the paying public. All proceeds would go towards upkeep of the prison and new prison facilities – everyone was a winner.
• The rivalry got more intense and the games got fiercer. The prison guards realized that the inmates were taking things very seriously and began to restrict their training times to gain the upper hand. While the prisoners felt slightly cheated, they accepted. Consequently, the guards would win almost every game, but the rivalry remained strong and a huge drop in inmate crime was observed, as it was a welcome distraction and new focus for the convicts.
• The games were officiated by a qualified referee with the dubious name of Ramio Repus. He also administrated all the funds and match-proceeds for games and ensured that they were fairly allocated to prison facilities for both guards and prisoners alike.
• Of course, the prisoners were initially wary of him, but as more and more games were played their confidence grew that he was indeed a fair and sporting man who stuck strictly to “the rules of the game”. Indeed, he would become an essential part of the Vadarian judicial system, for he was the one and only man highly respected by both the prison guards and the prisoners: he was practically criminological priesthood.
• There was chatter on the streets and alleyways of Vadar that Ramio Repus had unfathomable political clout and even of him becoming the next Mayor of Vadar…

The Game-Changer

• But, as the final game of the winter approached, there were mutterings in the canteen and whispers in the courtyard… a few rumors were circling. Something was afoot. You see there was more than just pride as stake; both prisoners and guards had been placing bets on their respective teams to win – the prisoners by “gangster proxy”, of course – and the stakes were the highest they’d every been, some prison guards putting their future earnings for the remainder of the entire year down. Of course, there was only one major bookmaker who could be trusted: Ramio Repus. To ensure complete security and confidence, he held all bets in an escrow account.
• What is important to understand is how much of this system was based on Trust. In fact, the beauty of the system was that it was a trust based-harmony.
• However… against form and all the odds, the inmates won the game convincingly… that’s where things started to fall apart.
• The gangsters and prisoners who had bet on the game were, by their right, due a huge windfall in winnings. But it emerged that some of the prison guards would go broke in the process – in fact, a lot of them would. The officiator, Raimo Repus adjudicated that: “for the survival of the system as a whole”, it would be impossible for a mass-bankruptcy of prison guards, there would have to be some form of settlement agreed.
• The prisoners didn’t want to lend the guards any more money, they just wanted to settle for what cash they could. But there was a complication. It became apparent that the, supposedly neutral, officiator Raimo Repus had invested in the game too… he’d bet on the Prison Guards to win. In fact… he was by far and away the biggest gambler in the game.
• The guards told prisoners and gangsters that they would only given them only a fraction of their winnings and, even then, they would have to sign a disclaimer protecting the prison guards from a class-action law-suit. The prisoners were repulsed by this… “aren’t we supposed to be the f***ing criminals, not you?” Hissed one of the furious inmates at national television camera. The following week, prison management informed the prisoners that they “set prison rules”, not the prisoners. This did not go down well – prisoners revolted, burning down the entire East Wing of the prison. Crime rates inside and outside of the prison spiked horrifically.
• Ramio Repus’ star was falling too, but still had some credibility left and he used that to decree that the money he personally owed would be conveniently written off by the escrow account because his bets were all null and void. To add insult to injury, he vowed to help the indebted prison-guards honor as much of their obligations as they could, but he would do this by selling the assets for the prison bought with game-revenues…
• The stand-off prisoners and guards has never been under more tension. Guards are frequently called in for aggressive zero tolerance action against prison gangs, who now appear to be united against the authority of the guards. The very fabric of trust in the entire judicial system is now under much more strain than it ever was.
• Outside the prison, hit-squads and criminal cells of livid gangsters are running riot – prison is no longer a deterrent it is a call to join their suffering comrades-in-arms. Off-duty guards have received death threats against themselves and their families. One guard was executed in a nightclub while out with his colleagues, another guard, who did not even participate in any betting syndicates for religious reasons, was beaten to a pulp in broad daylight… the streets are a war-zone.
• There is chatter on the streets and alleyways of Vadar that Ramio Repus had unfathomable clout in the criminal underworld and even of him actually being the biggest gangster in Vadar …

Exercising Trust

• I won’t insult your intelligence any more, dear reader. This is not a true story, nor is it even accurate. It is just an exercise in the power and fragility of trust. Vadar does not really exist and the characters are made up.
• But they do have representation in our world. The prisoners are the Greek bondholders, for example – “prisoners of debt”. The prison guards are the Greek Government… As for Ramio Repus? Why, an anagram of  “Super Mario”, of course.

Friend or Foe?

Market Overview

VIX

• I’m not going to make a market comment today. I’m just going to introduce my Chart of the Day -  The VIX. Trading nice and low… for now, at least.

Chart of the Day

VIX (Source: Bloomberg)

Events

Macro Events:

Update:

• US Inflation – in line with expectations

Alerts:

• EU Finance Minister Meeting – This Time It’s For Real … honest!

Corporate Events:

Results:

• Carlsberg [CARLB DC], Petronas [PCHEM MK],

Dividends:

• Nothing Significant

Reading, Links:

Nothing Significant.

Quote of the Day:

I cannot accept Mr Schaeuble insulting my country

Karolos Papoulias – Greek President

Macro Overview

Europe’s Greek Ball ‘n’ Chain

• The quote above comes from an article in Reuters: Greece battles mistrust to target bailout deal. The headline says it all really. This will be a nervy weekend for the markets, Monday EU finance ministers decide the fate of small Mediterranean country. There are so many internal dynamics at play within the Eurozone other than peripheral profligacy, such as German political motives, French elections, French banking system (heavily exposed to Greek debt), it is almost impossible to predict what the outcome of this meeting will be.
• As I pointed out yesterday, I’ve been writing about Greece for over 2 years now. I don’t particularly enjoy writing about it, it’s depressingly repetitive and I can completely understand how international investors have “Euro-fatigue”. Perhaps this is why the Euro-Dollar is down 10% since September. But, every time I turn my back to look at the next big macro thing Greece sucks me back in.
• According to his latest newsletter Jim O’Neill cannot understand why Greece is such a big deal. He reckons that China creates the economic equivalent of half a Greece every 6 weeks. So what is there to be worried about? Well, he’s in the minority on this one, this was never a mathematical problem, I think it’s more an issue of precedent, politics and the psychology of contagion.
• Accordingly, Germany wants to do everything in its power to help Greece and Greece has done everything it can to appease German concerns… so Monday’s meeting should be a walk in the park… (ahem!)

Market Overview

Mixed Markets

• European stocks did not really make any headway today as Greece once again off-set any positive data out of the US.
• What is more interesting is the Yen’s slide to 78.90 as people sought to buy Dollars in the build up to the big EU meeting over Greece.
• I look at the steepness of the CDS curves for clues and the Greek curve has just imploded (see Chart of the Day – note, the scale is negative basis points). The Greek CDS 10s-2s is now -9844bps. That’s right; effectively there is a 10,000 basis point difference between insuring short term Greek debt vs long term. That implies the market thinks a CDS default trigger is imminent.
• Interesting that the currency markets and credit markets are not really telling the same sanguine tale as equity and commodity markets (did you see the $120 print on Brent Crude today?)
• Stock of the day is Nestle, sales growth looking healthy. Hey, we all need food, right? Check out the chart below.

Chart of the Day

Greek CDS Steepness, 10s-2s (Source: Bloomberg)

Nestle (Source: Bloomberg)

Events

Macro Events:

Update:

• EU Finance Minister Meeting CANCELLED !
• Spain GDP -0.3% QoQ – bad, but it was expected.

Alerts:

• Brazil CPI
• Canada CPI
• US CPI

Corporate Events:

Results:

• Anglo American [AAL LN], Heinz [HNZ], Lafarge [LG FP],

Dividends:

• San Miguel [SMB PM],

Reading, Links:

Nothing Significant.

Quote of the Day:

Insanity: doing the same thing over and over again and expecting different results.

Albert Einstein – German Theoretical Physicist

Macro Overview

A Duty To Write

• Great quote from Einstein – if it indeed was his quote. But it’s a shame German finance ministers do not follow the same logic as their famous scientists.
• Today I’m getting nostalgic. It’s good to look back in time every now and again and contemplate the positions and opinions you held one or two or even five years ago. It helps us to learn from our mistakes and our achievements. Some psychological analysis suggests that we tend to remember only a fraction of the truth or only the bits we want to remember. The truth is, it’s much more complicated than this, but we do not really know the whole truth about even our own, most intimate, past because we do not know what we forget, we only know what we remember. This is why I write a blog. I don’t need to, it’s not my vocation nor is it required of me, but I see it as a matter of discipline and convenience, which, by chance, has also become a rather rewarding hobby.
• Firstly, as an investor I think it’s essential that one commits to definitive view points on many things – especially micro economics, macro economics, and increasingly, sociology and politics. I can’t help feeling that many people still have an apprehensive attitude towards airing opinion. It does not matter if one is proved wrong or has to admit defeat, that’s how we all learn. But as we get older we get lazy, as our knowledge increases out intelligence (as defined by our “learning curve”) decreases.
• Secondly, as a professional or amateur working within a team it’s important one maintains an open communication on opinions and views both macro and micro. For a professional, it is equally important that one documents or stores those opinions in a manner which is easy to refer to and archive. That’s the primary reason I write a blog – the rest is just all just a bonus to me (don’t get me wrong it’s a great bonus, which I cherish).
• I should be more humble, I get things wrong a lot of the time… only recently I had to admit that, after praising Germany’s clear stance on Greece I may have underestimated the political motivations at play within the dark corridors of Brussels. Indeed only this week I wrote:

It is becoming clear now where Germany’s path is diverging from idyllic (naïve?) suggestions I have made in the past – I forgot that there was politics involved, which means unfortunately there is constant opportunity for politicians on all sides to power grab.

A Snapshot in Time

• So, what was I blogging this time 2 years ago: 15^th February 2010? Well if the truth be told I was on holiday in Australia with my wife and kids on that exact date. But my friend Omar Sayed and I had spent a lot of early 2010 writing about one specific topic, which was insignificant to some people, but not us. It was a small economy in the south of Europe: Greece. Here is an excerpt from that piece, exactly a year ago today.

Greece

Today examples of debt profligacy surround us each day and no more so than the crisis surrounding Greece.  Greece will not be able to repay its debts on its own.  I am not talking about the short term and whether the EU will extend bilateral loans and other arrangements.  This “fix” is merely a stop-gap measure.  Rather in the years ahead Greece will not be able to take the steps it needs to bring downs its debts to a manageable position on its own.  There needs to be a debt write-down or a bail-out.

The EU is expecting Greece to shrink fiscal spending by 5%-10% of GDP per year for three years.  There is no clear incentive or penalty if the goal is not achieved.  Tax officials, doctors, teachers and civil servants have all held strikes over the past month against austerity measures that are not nearly austere. Sweden called Greece’s fiscal deficit data “fraudulent” after it was three times what official numbers stated. Greece hid E40 billion of debt from the public and the EU.  The Transparency International Corruption Perceptions Index ranks Greece dead last in the euro-zone with the “shadow” economy being worth 28% of GDP (the U.S. is 8%).  Where do you get tax revenue if 28% of GDP is in the “shadows”? Greece’s debt load is €254 billion.  It needs to refinance €64 billion of debt this year and €30 billion over the next few months.

• Today’s headlines, 2 years and hundreds of billions of dollars later, read:
  • Greece Talks Hit A Snag – Bloomberg
  • Greece Spiralling Into Catastophic Depression – The Independent
  • Greece Battles To Salvage Bailout Package – Reuters
• It’s all getting very messy again. Hey, it’s Deja vu every day in Europe – they got some serious “glitches in The Matrix” going on.
• Poor Venizelos, he was supposed to be the placid “technocrat” mediating between the Greek public and the EU elite. Now both sides are hating and slating him so, like a cornered boxer, he hit back at the EU core elite accusing them of forcing Greece out. Yet still the blessed politicians forge forward to batter another austerity bill into the Greek economy. Hmmm… what was that Albert Einstein quote again?

Market Overview

Another Yoyo Day

• Quite a few smallish things going on in the market today but one specific data point was dominant really.
• To start with the data kept us on our toes. German and French GDP provisional numbers were better than expected. Then the Dutch and Italian GDP figures had us in a sulk. Then Brazilian inflation came out low (great news for the Brazilian economy – where inflation has been #1 threat for decades) and Malaysian GDP growth came out at a euphoric 5.2%. Right, we’re back … but then people digested the UK unemployment number (v poor unemployment is now higher than the US for the first time since before the crisis), Greece weighed on the mood again and the industrial production number disappointed in the US… the brief rally came apart at the seams.
• Apple stock is one of my favourites but my model (which is mainly based on fundamental data) could not get past the overbought technical spanner in the works. This stock was due a pull-back and, in the middle of the day, it got one. Plenty of chatter about Apple not selling ipads in China but, let’s face it, momentum in this stock was getting ridiculous.
• If you want a more pleasant chart, I’m particularly interested today in Comcast – up over 20% this year (see Chart of the Day).
• Tomorrow will be just as skitty as today – some big names reporting like GM and Soc Gen (see below).

Chart of the Day

UK vs Us unemployment (Source: Bloomberg)

Comcast (Source: Bloomberg)

Events

Macro Events:

Update:

• EU Finance Minister Meeting CANCELLED !
• Brazil Inflation nice and low at +0.04% MoM
• France GDP +0.2% QoQ vs -0.2% expected … nice!
• Germany GDP -0.2% QoQ vs -0.3% expected … better than a poke in the eye with a sharp stick, I suppose.
• Italy GDP -0.7% QoQ vs -0.6% expected … could have been worse I suppose.
• Netherlands GDP -0.7% QoQ vs -0.3% expected… hmm…not much better than a poke in the eye with a sharp stick

Alerts:

• Mexico GDP
• Singapore GDP
• Spain GDP

Corporate Events:

Results:

• ABB [ABBN VX], AXA [CS FP], BAE Systems [BA/ LN], Baidu [BIDU], Bridgestone [5108 JT], Saint-Gobain [SGO FP], EDF [EDF FP], General Motors [GM US], Nestle [NESN VX], Pernod-Ricard [RI FP], Renault [RNO FP], Soc Gen [GLE FP], UPS [UPS],

Dividends:

• ConocoPhilips [COP US],

Reading, Links:

Nothing Significant.

Quote of the Day:

We can and want to help only if there is a quid pro quo on the Greek side

Philipp Roesler – Germany Economy Minister

Macro Overview

Moody Moody’s

• Too much of anything is bad for you, that’s what my Mom said… even austerity. Today Moody’s mood finally swung on Europe. They downgraded a bunch of Southern European sovereigns and put France and the UK on negative outlook. This seemed to dominate the morning chatter, apparently rating agency deductions are important news. I beg to differ, its importance is questionable… but it certainly isn’t news. Even if S&P and Moody’s downgraded France and the UK this year, they’d be about 2 years too late, in my opinion.
• See comment on S&P downgrade “massacre” last month. I quoted an old piece of mine.

You know my opinion; one must earn an AAA rating – it is not bestowed on any profligate nation with the biggest printing press. In any case, AA is not the end of the World – it hasn’t affected Japan much. It just means your house is not as perfect as it could be – I don’t know any American that would not admit that. But, alas, the US should have been downgraded much earlier. S&P’s main crime was not that they screwed up the maths, it was that they were too late in finally downgrading nations with explosive debt trajectories, which could potentially be financially gridlocked in political disharmony. Farcically, Moody’s and Fitch, on the other hand, have little to gain, politically, by doing anything other than keeping mum and towing the party (i.e. whichever party is in the White House!) line. And, yes, France and the UK should probably lose their AAA status too – or at least be on negative watch. In the case of the UK, it should probably have been downgraded years ago.

• For what it’s worth, here is an excerpt from Moody’s official release:

London, 13 February 2012 — As anticipated in November 2011, Moody’s Investors Service has today adjusted the sovereign debt ratings of selected EU countries in order to reflect their susceptibility to the growing financial and macroeconomic risks emanating from the euro area crisis and how these risks exacerbate the affected countries’ own specific challenges.

Moody’s actions can be summarised as follows:

-Austria: outlook on Aaa rating changed to negative

-France: outlook on Aaa rating changed to negative

-Italy: downgraded to A3 from A2, negative outlook

-Malta: downgraded to A3 from A2, negative outlook

-Portugal: downgraded to Ba3 from Ba2, negative outlook

-Slovakia: downgraded to A2 from A1, negative outlook

-Slovenia: downgraded to A2 from A1, negative outlook

-Spain: downgraded to A3 from A1, negative outlook

-United Kingdom: outlook on Aaa rating changed to negative

Please see the individual country specific statements below for more detailed information relating to the rating rationale and the sensitivity analysis for each affected sovereign issuer.

The implications of these actions for directly and indirectly related ratings will be reported through separate press releases.

The main drivers of today’s actions are:

- The uncertainty over (i) the euro area’s prospects for institutional reform of its fiscal and economic framework and (ii) the resources that will be made available to deal with the crisis.

-Europe’s increasingly weak macroeconomic prospects, which threaten the implementation of domestic austerity programmes and the structural reforms that are needed to promote competitiveness.

- The impact that Moody’s believes these factors will continue to have on market confidence, which is likely to remain fragile, with a high potential for further shocks to funding conditions for stressed sovereigns and banks.

To a varying degree, these factors are constraining the creditworthiness of all European sovereigns and exacerbating the susceptibility of a number of sovereigns to particular financial and macroeconomic exposures.

Moody’s has reflected these constraints and exposures in its decision to downgrade the government bond ratings of Italy, Malta, Portugal, Slovakia, Slovenia and Spain as listed above. The outlook on the ratings of these countries remains negative given the continuing uncertainty over financing conditions over the next few quarters and its corresponding impact on creditworthiness.

In addition, these constraints have also prompted Moody’s to change to negative the outlooks on the Aaa ratings of Austria, France and the United Kingdom. The negative outlooks reflect the presence of a number of specific credit pressures that would exacerbate the susceptibility of these sovereigns’ balance sheets, and of their ongoing austerity programmes, to any further deterioration in European economic conditions and financial landscape.

Santorum Rising?

• What’s this I see, Santorum takes the lead in the GOP race, CBS reports. It’s a strange race, isn’t it? Romney is clearly the leading candidate but he’s like what a Brit might call a “Marmite Candidate”… you either love him, or you hate him and it seems half the Republicans cannot stand him. That’s why the challengers seem to be continually revolving.
• It was also interesting to see Ron Paul ranking ahead of Gingrich at 12 percent (I was honestly expecting him to be in the single-digits). He’ll never get to be a challenger of course, but he may get to the point where he has significant influence. For what it’s worth (and it isn’t worth much, I admit), I still think Romney wins and I also think he’s the Republican most likely to beat Obama, given that he holds a greater pull in the middle-ground among swing-voters and independents.

Big Day For Macro Data Tomorrow

• Big day for macro data tomorrow – see the macro alerts below. The largest European economies all set to report GDP growth. The numbers are all expected to be below zero … the question, just how far below zero will they be? It could all go swimmingly, but I’d be surprised if the equity markets do not break out of the range they’ve been in for this week and last.
• It’ll set the tone for the rest of the month and don’t forget the discussions taking place between EU finance ministers on the next Greek bailout package. All this ahead of Germany’s finance minister, Schauble saying that he feels the Europe is “better prepared” for a Greek default – is he trying to manage expectations? A Bloomberg article today quotes someone succinctly describing Greece’s predicament as an “overdose of austerity”, will EU finance ministers agree on this? Watch the news and data out of Europe tomorrow.

Market Overview

Yoyo Day

• The day was going well until those GDP numbers came out in Greece (ouch) with some interesting comments in the FT from the Chairman of Bosch – the largest car parts supplier in the World:

Meanwhile, in a fresh sign of the unease surrounding the future of Greece among corporate bosses in Europe, Franz Fehrenbach, the chief executive of Bosch, the world’s biggest car parts supplier, on Tuesday urged Greece to leave the European Union and single currency.

Mr Fehrenbach described Greece as an “unacceptable burden” on the EU and eurozone. He told Manager Magazin in an interview that if the country did not leave voluntarily, the EU should change its laws so Greece could be made to do so.

• Then the Advance Retail Sales numbers in the US were poor, but I hardly think this was a major data point. Still, the markets did not like something… and Mr Market is always right! Something tells me this was more to do with the clanger in Greece than the hiccup in America.
• Chart of the Day is Greek GDP growth. I emphasize growth because this is, of course, the second derivative of the size of the economy. Even if the line on this chart ceases to go down, Greece is still is a terrible “downward spiral” as the IMF and the Telegraph communicated today. Scroll through the charts in the Telegraph article I linked – pictures say a thousand words, but they ain’t pretty.

Chart of the Day

Greece GDP Growth (Source: Bloomberg)

Events

Macro Events:

Update:

• Greece GDP Growth -7% YoY – worse than the last reading… by quite some margin.
• Portugal GDP Growth -2.7% YoY – marginally better than expected.
• UK inflation is finally negative – gives the BoE a little breathing room for QE.

Alerts:

• EU Finance Minister Meet In Brussels to discuss the new Greek Bailout Package.
• Brazil Inflation
• France GDP
• Germany GDP
• Italy GDP
• Netherlands GDP

Corporate Events:

Results:

• BNP [BNP FP], Danone [BN FP], Deere [DE],DevonEnergy [DVN], ENI [ENI IM],

Dividends:

• 3M [MMM], Chevron [CVX], Shell [RDSA LN], Unilever [ULVR], VISA [V]

Reading, Links:

Nothing Significant.

German Focus Magazine: "Cheaters in the Euro Family".

Quote of the Day:

But if you only have love for your own race
Then you only leave space to discriminate
And to discriminate only generates hate
And when you hate then you’re bound to get irate
Madness is what you demonstrate
And that’s exactly how anger works and operates

Black Eyed Peas

Macro Overview

Where Is The Love?

• At times it seems the mainstream media in both Germany and Greece are hell bent on inciting hatred between the two nations. I guess that’s what sells papers. But what happened to the “Union” in European Union? What happened to the “Community” in European Community? Greek parliament passed the Troika-engineered austerity bill. I don’t know what else to say about Greece other than I’m glad I’m not Greek.
• The German political front is throwing the book at the the hapless Greek public and then some, in my opinion. Greece should, of course, bear the cost of its fiscal follies, but many of the problems were rooted in the political design, which was the responsibility of, not one nation, but many. This is more than the European Union collectively making an example of a rogue state, this is “tough love”… only without the love.

Market Overview

Financials Take A Beating

• European banking giants BNP and Unicredit led the way downwards for the financials today – it was not a good day for European financials.

$500 Apple

• $500 Apple. Apple stock tops $500. Man that’s just amazing. Market cap is over $460 billion – are we looking at what may be the first $ Trillion company? A bit to early to say… but some people think so and if central banks keep the global printing frenzy up $1 Trillion will not seem like much in the next few years. I mean it!

Chart of the Day

Unicredit 4-day chart (Source: Bloomberg)

Events

Macro Events:

Update:

• Japan GDP came out at -2.3%… errrmm… yuck… the less said about this the better!

Alerts:

• Greece GDP (provisional)… Yoicks! As a yardstick, the last YoY reading was -5%.
• Japan Industrial Production
• Portugal GDP (provisional)… Yoicks! As a yardstick, the last YoY reading was -1.7%.

Corporate Events:

Results:

• Tata Motors [TTMT IN], ThyssenKrupp [TKA GR],

Dividends:

• Microsoft [MSFT], Wynn Resorts [WYNN],

Reading, Links:

Nothing Significant.

Quote of the Day:

The law must be passed by midnight because come Monday morning, the banking and financial markets must have got the message that Greece can and wants to survive.

Evangelos Venizelos – Greek Finance Minister

Macro Overview

Greece Versus Germany

• Hundreds of thousands of protestors take to the streets brandishing Molotov Cocktails. It could be a scene from a bad day in Syria but it isn’t… if you want the definition of fiscal brinkmanship, if you want a summary of all that is flawed with the Eurozone, look no further than Athens, Greece.
• Reuters reports that the Greeks are rising (rising to boiling point, that is). Bloomberg reports “Athens in Flames” as Greek parliament gets ready to vote on an agreement to plunge the austerity knife deeper into the midriff of the Greek workers. RT news make a lot of the fact that the youth contingent is high. You know the score with this dear reader high youth unemployment and supra-nationally forced austerity is an explosive mixture. Only a week ago I drew reference to the number of unemployed under 25 years old in Greece (50%!).
• What is interesting about this is that The Greek Government are just a proxy for EU economic policy, a medium for the conflict, if you like. When you read between the lines, actually, the fiercest conflict is actually between the Greek public and the German elite. The Greek government and the German public opinion appear to be somewhat of a sideshow to the main drama and it’s becoming quite clear that the Greeks see through this “technocratic” government as effectively EU puppets.
• Almost all the assertive political rhetoric is coming from Berlin. It is becoming clear now where Germany’s path is diverging from idyllic (naïve?) suggestions I have made in the past – I forgot that there was politics involved, which means unfortunately there is constant opportunity for politicians on all sides to power grab. In the case of the German elite, this gives the impression that part of the motivation towards playing hard-ball with the Greeks is to cement their political dominance within the Eurozone. If this is indeed the case (and I may be wide of the mark by some distance here) it begs one to ask what the “U” now stands for in “EU”; it is European Union or European Unilateralism?

Sovereign Debt Calendar

• I was going to stop the Sovereign Debt Calendar, but Greece has made it relevant again. So I’ll keep it up … for now. See Chart of the Day.

Market Overview

Risk Off

• Not a great day for risk assets – Friday was definitely a “Risk Off” day and judging by the way momentum is picking up in Athens we could have a volatile week in front of us. Pretty much every major index in the World was down and it was hard to find stocks that did not take a beatin’.

Chart of the Day

Sovereign Debt Auction Calendar - Weekly

Events

Macro Events:

Update:

• Nothing Significant

Alerts:

• Japan GDP

Corporate Events:

Results:

• Deutsche Boerse [DB1 GR],

Dividends:

• Du Pont [DD],  Eli Lilly [LLY], Target [TGT],

Reading, Links:

Nothing Significant.