18th April 2012: Is The European Economic Union Becoming Less Unified?

 

Barcelona players trudge off the pitch - begrudgingly...

Quote of the Day:

Congratulations to Chelsea. We’d win every game if it all was about possession of the ball because our average is more than our opponents.

Pep Guardiola – Barcelona FC Manager

 

Macro Overview

All About Spain

• Well, only a few days ago, in my Spanish Imposition piece, I facetiously remarked that Spain only had its football to celebrate. Tonight, the Spanish could not even celebrate that, as Barcelona,  supposedly the World’s best team, were beaten by Chelsea FC in the first leg of the Champions League semi-final in London.
• Ho Hum, back to more mundane topics in Spain and all eyes are on the Spanish Bond Auction tomorrow, which is TEN YEAR paper so this is a really test of market appetite. Anyway, I was reading John Mauldin’s piece on Spain (see here: The War of Spain) and I couldn’t help but chuckle when he opened with:

I fully intended to ignore Spain this week. Really, truly I did. I had my letter all planned, but then a few notes drew my attention…

• That’s just exactly how I feel about Eurozone woes… I’d love to write about something else, but from an international perspective (hey, that’s the name of my blog hub) it’s simply by far and away the most important issue in the World right now.
• I’m not going to comment much on this as Mauldin does a good job of summarizing the situation – and, incidentally, I highly recommend you subscribe to his FREE letter. Any person that dishes out this sort of insight for free is a true champ, in my opinion!
• A little paragraph in that piece made me think about the Eurozone cohesiveness, though. You see the union used to be called the EEC, which stood for European Economic Council … but it was soon changed to the European Council (EC) and European Union (EU). But the point I was trying to make was that it was first and foremost an economic union.
• Recently, there has been much political chest-puffing and strutting about the adhesiveness of the Union and the political solidarity between the various states (except Britain, remember!). But for all this political huff and puff I wonder… is the European Union taking a step backwards with respect to its fundamental cause: Economic Unity? Here is the Mauldin paragraph in question:

 

Second, let’s review what I wrote a month ago. I noted that the LTRO money was being used by Spanish banks to buy Spanish government debt (and Italian banks were buying Italian government debt, etc.). The intention was to help the two countries specifically and Europe in general to finance their debts and allow banks to shore up their capital as part of that effort. But what that does is yield the unintended consequence of making a breakup of the eurozone easier, as it helps get Spanish and Italian debt off the books of German and French banks.

 

Market Overview

Nervous Markets?

• Was it me? Markets felt a little nervous all day today. Perhaps Spanish 10 Year Auction jitters compounded by some rather disappointing revenue growth numbers by the tech giants Intel and IBM put a dampener on the markets despite Ebay’s peachy report.
• There are some new trends being set in the currency markets though. See the Sterling hit a new high against the Euro? That’s my Chart of the Day today.

 

Chart of the Day

 

 

Events

Macro Events:

Update:

• Nothing Significant

Alerts:

• Nothing Significant

Corporate Events:

Results:

• General Electric [GE], LVMH [MC FP], Macdonald’s [MCD], Posco [005490 KS],

Dividends:

• Colgate-Palmolive [CL], Volkswagen [VOW GR]

Reading, Links:

Nothing Significant

13th March 2012: Bear Fights On China, Bonds and Banks

Quote of the Day:

The only thing certain in China this year is that the Communist Party will win in a landslide come October.

 

I’ll tell you how bad the Chinese banking system is: this Chinese banking system is worse than the Texas S&L business in the 1980’s.

 

Jim Grant

 

Macro Overview

Bears Buy Banks?

• I remember going to a Rosenberg presentation a few years ago where he practically prided himself in being “the only guy more bearish than Stephen Roach”. As it turns out both these bears turned out to be right, but neither has really changed their tune on the fundamental outlook for Western economies – they’re both very cautious and are of the Fed’s harshest critics.
• Now I’m all for reflexivity of the markets. In fact, I own more equity risk than I have ever done in my life largely because I am pessimistic on the fundamentals of the economy (and optimistic on Western Central Banks susceptibility to collaboratively over-print fiat currencies). Never-the-less I was a little surprised to hear Roachie say that he thought the banking sector had turned the corner and played down the fact that a couple of banks had failed the stress-tests…stressing that it was indeed a test under stress … a stress, he stressed, which would be unlikely to stress the banks.
• Now here is Rosenberg saying firstly that there was going to be “very strong growth rate in mergers and acquisitions” and secondly (and more interestingly, I think) that the banks were screening the best of all the equity sectors he looks at from a pure GARP (growth and reasonable price) valuations perspective. Check this out if you don’t believe me… here.

Bear-Fight Over Bonds and Chinese Prospects

• Grant and Rosenberg are two bears who have long been at logger-heads over bonds. Grant calls the bond market a “desert of value” whereas Rosenberg has continuously been bullish bonds due to underplayed deflationary fundamentals in the US economy. So far Rosenberg has been calling it right for a very long time.
• But sticking with Stephen Roach for a minute. He has been a staunch supporter of Chinese economic policy and certainly, when you compare China to its Western counterparts, its record has been admirable. But Jim Grant is less bullish on China (see Bloomberg video here – comments on China towards the end of the interview). Where Grant sees uncontrollable problems in the property markets, Roach sees yet another challenge which the Chinese leadership have long identified and will overcome.
• To add further fuel to this debate, in the eyes of JP Morgan’s Chief Analyst, the debate over soft vs hard landing in China is mute: China is ALREADY in hard landing!
• Who is right? Actually, I’m not sure it matters. Just like the decoupling debate it’ll probably come down to semantics. The reality is; China is embarking on an incredibly ambitious transitional phase…China will succeed in attaining most of its objectives and will probably do so much to the surprise of many Western nay-sayers. But it will not be without a significant degree of volatility and in some cases, complete upheaval. Indeed I think there will be more volatility than most investors are prepared for – for those that are prepared, the next couple of years will present exquisite opportunity in Greater China and, indeed, across Asia.

 

Market Overview

China On My Mind

• Equities in most markets remained quite buoyant with one clear exception:China. Chinese stocks got whacked after a not-so-sanguine speech from the Chinese Premier, “Grandfather Wen”, after his last National People’s Congress. In fact there was an air of emergency about his stark warnings about the need for “urgent” reform.
• What I’m also finding interesting is the talk about the fair valuation of the Yuan. Many people think that it may not be far from where it is now. Recently the Yuan has been allowed to devalue against the dollar. Chart of the Day – Yuan.

 

Tech Giants

• I cannot leave Apple out today. The stock has simply gone ballistic. I also want to put Samsung on the blog too. These stocks are leading the charge in global equity indices. See Chart of the Day for these two stocks plotted over 1 year time frame.

Chart of the Day

Renminbi or Yuan (Source: Bloomberg)

Apple (Source: Bloomberg)

Samsung (Source: Bloomberg)

 

 

Events

Macro Events:

Update:

• Nothing Significant

Alerts:

• Australia CPI

 

Corporate Events:

Results:

• China Overseas Land & Investment [688 HK],ChinaSteel [2002 TT], Ping An [2318 HK], Porsche Automobil [PAH3 GR], Swire Pacific [19 HK], Swire Properties [1972 HK],

Dividends:

• Nothing Significant

 

Reading, Links:

Nothing Significant

7th March 2012: The LTRO May Be “All You Can Eat” But It’s No Free Lunch

Quote of the Day:

… this kind of giving be but to give with one hand, and take away with the other, which is deluding, not a giving.

John Milton (1608 – 1674)

 

Macro Overview

What The ECB Giveth With One Hand, It Doth Take Away With The Other

• We ought to have a word for John Milton. He might be a poet and he might have died nearly half a millennium ago but the old boy knew what he was talking about. Beware the charitable man bearing gifts with one hand, while the other hand remains tucked behind his back.
• Wall Street should know this. I don’t know how many times I’ve heard a banker or broker say: “there’s not such thing as a free lunch”.
• So when the ECB comes bearing gifts of freshly minted Euros and demands only “trash” in return, the banks ought to be wary of this “cash for trash” scheme – as Bill Gross calls it. All you can eat buffet? Perhaps, but there’s no such thing as an entirely free lunch.

 

Central Banks Oversight Expands In Lockstep With Their Respective Balance Sheets

• I’m drawn to a comment Ben Bernanke made at a dinner in 2008 during the height of the Sub Prime crisis. When asked what he would most like to have knowledge of he basically said that he’d love to know who the hell owned all this crap. It was at a time when banks were keeping their cards very close to their chests on liabilities related to Sub Prime mortgages – nobody wanted to suffer the same fate as Bear Stearns, or later Lehman.
• The Fed found an ingenious way of acquiring such knowledge, killing two birds with one stone, in my opinion. Bernanke was able to draw the most offending banks out of the wood work by allowing them to put trash for collateral in return for cash. This eased up the banking sector while also putting the newly defined banking sector firmly under the regulatory scope.
• The ECB’s LTRO may be performing a similar trick.

ECB Margin Calls Show Increasing Oversight From ECB

• An article in ZeroHedge caught my attention. Let’s start with this table on the official ECB website which summarizes the state of the ECB balance sheet. You see item 2.5 on the liabilities side of the balance sheet – that shows the amount of deposits which effectively represent margin calls by the ECB on the banks. It is at €17.143 billion – which is not very much in the grand scheme of things (remember the size of LTRO is well over 500 billion).
• But to help you put this in context Bloomberg, rather conveniently, have been plotting the size of this margin call allotment over time. It is my Chart of the Day. Looks a little more dramatic doesn’t it?
• We should keep perspective on this of course, having done so much to protect Europe from a financial sector crisis it is unlikely that the ECB will push a major bank over the brink with intense margin squeezes. But generally speaking, it’s a fairly simple concept, dear reader, if you post collateral on a loan it is generally accepted that the collateral will need to be paid good, otherwise it’s fairly typical for the lender to request more collateral or “margin” as reassurance.
• But, if anything these margin calls on the banks go to show that, if they want some nice, freshly minted Euros to boost their capital ratios, they’d better be prepared for much, much more oversight and interference from the central bank and, as a result, the profit margins and indeed share prices of some banks may enter some resistance as a result.
• My mind operates on a simple system, dear reader. I believe for every action there is a reaction and this even includes creative QE monetary policies, like the LTRO – and we have not even touched upon moral hazard or inflationary expectations or the stigmas associated with drawing down on it. The LTRO is no free lunch – what the ECB giveth the banks with one hand, it doth take away with the other.

 

Market Overview

A Blip, A Wobble or A Correction?

• So far it looks like just a blip. The equity markets are recovering well from the little set-back it had this week. In fact the economic data out of the US has been pretty sanguine – indicating an economy on the front-foot not the back-foot.
• ISM data was high (if anything a little too high), jobs numbers and payrolls were pretty good too.  The two main thorns in the side of the market are the Greek workout and Oil prices. But these two issues are at least known-unknowns and in Greece’s case soon to be a known-known.
• Chart of the Day – as mentioned above – Margin Deposits on the ECB Balance Sheet.

 

Chart of the Day

ECB Margin Deposits (Source: Bloomberg)

 

 

Events

Macro Events:

Update:

• Australia GDP +0.4% QoQ a long way below expectations

Alerts:

• Japan GDP

 

Corporate Events:

Results:

• Carrefour [CA FP], Deutsche Post [DPW GR], MTR CorpHong Kong[66 HK]

Dividends:

• FedEx [FDX], Roche [ROG VX], Wal-Mart [WMT],

 

Reading, Links:

Nothing Significant

13th February 2012: Eurozone Hatred – Where Is The Love?

 

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.

14th December 2011: EUeerie Silence In The Corridors In Brussels

Quote of the Day:

If you attempt to confiscate the savings of your populous after you’ve sold them bonds to the tune of 227% of GDP you’re going to have a very difficult social scenario on your hands. We’re going to look back at this in two or three years from now and we’re going to say: if you took the time to understand their balance sheet and their income statement as a country, it’s the single most obvious thing I’ve ever seen in my adult life. The reasoning I hear from the other side we keep finding one or two reasons why they might be able to hang on for a little longer and clearly that’s not an investable theme…

Kyle Bass (onJapan)

Macro Overview

Eeerie Silence In The Corridors Of Brussels

• It’s easy to tell when someone’s being really naughty in our house: it falls eerily silent.
• While I, like others, celebrated the political directness of the actions over the weekend I did sound a few notes of caution. In my comment: Market Asked For A Monetary Bazooka… So Merkel Took A Sniper-Rifle To Cameron Before Dropping Political Napalm On Europe:

• That said this is far from victorious, all that has happened is a potential path has been cleared toward as solution – Merkel and Sarkozy deserve credit for that part, at least. Whether the European political elite take the right path from here is an entirely different matter – perhaps another time we will examine the potential pitfalls and legislative landmines that EU politicians will have to circumnavigate to make sure this incisive rhetoric is effectively manifested in a fair and transparent political structure which all EU members can feel happy about.
• It’s all very well France and Germany uniting to cut out Britain and ensure their dominance in the region but will they now do the right thing by the other 15 states in the Eurozone and the other 24 states in the “new EU”? That’s a monumental question and the questions within the new EU will only become harder.

• This was supposed to be one of many steps “The Union” (I don’t know what else to call it) had to take. As I’ve alluded to before, the EU needs to concurrently implement long, medium and short term solutions to fixing their cancer. In many ways they have taken the hardest decision over treaty change, but it would be just like Europe to let egotistical politics get in the way of a good solution. Note, Sarkozy has an election coming in a few months and a black eye for Cameron is not a trophy you can plaster on your campaign bus.
• So no news is bad news in Europe at the moment. Right after “Merkozy” pulled the trigger to release their euphoric silver bullet, the microphones fell silent. No more clarity or definition or specifics, not even passionate resounding speeches by the main leaders to their domestic electorates, who all wait with bated breath and twitchy sphincters to hear what their government has signed them up for. It’s left the market thinking that there may indeed be devils in the details.
• Make no mistake, Cameron’s approach was poor, even naive, and I’ve already aired this. He could have left with significantly more friends in Europe and still implicitly played the veto card. But history will judge whether this new Germanic States of Europe would ever have been a good thing for the British to be part of.

Kyle Bass Puts China’s “Infinite” Reserves Into Perspective

• Great quote from Bass, above. Well I have to say, Bass makes an incredibly logical argument as to whether Japanese Government Bonds are the best looking short in the World. I agree with his logic for shorting Japan… I just daren’t. My appetite has not really changed much since I wrote: I ain’t shorting JGBs ‘til they stop the road works at Roppongi – but I will avoid them.
• But Bass’ view on China strikes a few more chords. This is what I wrote a few months ago about the so-called Chinese trump card that is supposed to be able to underwrite the World-economy.

It is not easy to get good access to default rates in China but the FT reports that yields on loans to developers are hitting 20%+, suggesting that “developers are losing access to funding”. My guess default rates will rise exponentially over the next 2 years – if they are not doing so already.

Never-the-less, we hear many reassurances that non-performing loans (NPLs) in China are “contained”, but where have we heard that before and how on earth is it possible to quantify a risk which, as Pettis correctly asserts, by it’s very nature we cannot see? The NPLs we are currently able to observe in China are but the tip of a rather imposing iceberg.

Some of my friends in closer dialogue with Greater China businesses think that magnitude of bank losses due to NPLs may be greater than book equity of the banking sector as a baseline case. Don’t ask what the worst case scenario is, it’s too horrific to put into print.

• Bass, while admitting China is an “enigma” to him, he makes some interesting comments on Chinese banking sector too…

In the last two years China has grown their banking sector (their banking assets) 50% of Chinese GDP two years in a row. That’s analogous to theUSlending $14.5 Trillion into our economy last two years. One thing I’m fairly certain of: if we lent $14.5 Trillion into our economy in the last two years, we would grow at more then 8%. So I think it’s very important to think about China’s FX reserves that everyone points to as being the piggy bank for the World at now $3.5 Tillion, but it’s important to understand that Chinese non-performing loans in the banking sector are right around 1.5%. Historically they’ve been 19%. So if you have 13.5/14 Trillion (call it) dollars worth of assets in your banks and your non-performing loans go back to what’s normal in China you can do some quick maths and realize that you could end up losing almost $3 Trillion and that magical pot of money that sits in China goes away…

• Interestingly Bass has not real view on China though, because he recognizes (correctly) that China can keep the game going for a lot longer. While Hugh Hendry may have profited from short-China plays, big China bears like Chanos need to be aware that if there is one market which can remain irrational longer than you can remain solvent – it is China.
• But sino-pessimism aside let’s be sure, China is pretty much the only large economy which actually possesses any wiggle-room in fiscal and monetary policy. My view is that China can use what economy fire power it has to rotate its economy towards a more service-based, consumption-based economy as part of its 12^th 5 year plan – which I have commented about. Be sure about one thing though, even if trend growth in China remains robust, this process will not be seamlessly smooth – volatility in Asian assets is here to stay and with it the fat-tails of default, scandal, fraud and other terrors of the black-swan variety.
• Enough talk from me: just listen to Bass for yourself, courtesy of BNN links:
1. Kyle Bass BNN, Part 1
2. Kyle Bass BNN, Part 2

Market Overview

Silence Is Deafening Risk-Takers

• Today nothing went up, the German markets traded down, the French markets traded down, the UK markets traded down, oil traded down… heck even Gold broke through $1600… to the downside. Oh actually, I’ll tell you what went up… the US Dollar! That ought to tell you how bad things are in the World!
• Chart of The Day has to be the Euro – breaking the psychologically significant 1.30 mark.

Chart of the Day

Euro 6 Month Chart (Source: Bloomberg)

Events

Macro Events:

Update:

• Nothing Significant

Alerts:

• Brazil Inflation
• Eurozone Inflation (collated)
• Japan Tankan Survey
• US Jobs

 

Corporate Events:

Results:

• FedEx [FDX], Research In Motion [RIM CN],

Dividends:

• Nothing Significant

Reading, Links:

Nothing Significant

8th December 2011: Merkel: All I Want For Christmas Is “EU” (With A Brand Spanking New Treaty Of My Design, Please)

 

Quote of the Day:

The method by which money is being channeled to European countries should not obscure that fact that the treaty says no monetary financing to governments.

The spirit of the treaty is always on our minds.

Mario Draghi – ECB President

Macro Overview

Super Mario’s QE … Kinda…

• Super Mario Draghi looked comfortable at his second news conference as the head of the ECB. Although I think he needs to get into the habit of remembering the questions that were asked to him – I lost count of how many times he said “sorry, what was the question, again?”
• As well as cutting rates by 25bps (apparently a 50bps cut was not even on the table), Draghi announced additional liquidity to banks including terms as long as 3 years (with option to pay back after 1 year). I mean the European banks are going to have to work pretty hard to run out of cash, even with Greek sovereign debt loaded on their balance sheets.
• Critically, though, he remained Trichet-esque as he stood firm on debt monetization and declared that the ECB would not be capping borrowing rates or direct purchases of government bonds and (interestingly) emphasized that they would honour and respect the “spirit of the treaty”. So while the banks will have to work hard to go bankrupt due to lack of liquidity, they’ll have to work pretty hard to remain solvent and profitable.
• So this is QE – it’s an unconventional monetary easing measure – but it’s not what the market was hoping for. I hate to be a kill-joy but from the point of view of moral hazard and legality, this was the right thing to do. The ECB’s job is to support the financial system, that’s not the same as writing-off bad decisions by bank CEOs. But I’ll admit, Super Mario is treading a very fine line here.

 

Redefining GSE’s

• A government sponsored enterprise (GSE) usually applies to a single government. But in many respects the EU is a GSE just sponsored by many governments. It serves the interests of the entire population of the Eurozone as a whole. But does it serve the interests of some (the European “elite”) more than others, that is the question.
• While the ECB meeting moved the markets, make no mistake. December will be defined by tomorrow’s summit in the EU. OK, Treaty Change – fine. But now we want to see the small print. Draghi pointed to some automatic punitive kickers to be wired into a treaty change… that’s exactly what I explicitly defined months in my piece (TIPSTER’s “European Consolidation Treaty”) ago, before it was hyped up in the media by politicians (keep up Mario!).
• If we see language of this form – directly specifically at fiscal ruling. Then I think this would be a good thing. However there are already rumours that Merkel wants to plan another summit before Christmas, indicating that they may not have anything substantial to deliver. Worse still, Merkel may push the rest ofEuropetoo far by asking for anti-monetization clauses to be put directly into the Treaty itself. If this happens I think the market outlook will deteriorate all over again. Indeed, brinkmanship of this sort from Merkel would indicate to me that the Germans are actually pushing for a break up of the Euro themselves.
• Of course I think Treaty Change on supra-national fiscal discipline is a great idea – it was my idea! But it needs time to work otherwise it will be dead in the water before it is even born. I also stated that Europe would probably concurrently need some additional (short and medium term) aggressive liquidity measures to ensure the survival ofEurope’s financial union until such fiscal measures take effect.
• One thing for sure, we may have to get used to a new European GSE, a government sponsored enterprise of an entirely German mold. But in this case the acronym stands for: the Germanic States of Europe.

 

Market Overview

ECB reaction

• Market started to sell off as soon as Super Mario started talking really. There was no silver bullet today from the ECB. I’m not sure what the market was expecting – but liquidity to the banking sector was not “the right type” of QE… they wanted the banks to be able to sell their bad loans at par to the ECB. It ain’t gonna happen under this treaty under this ECB President – that’s what Draghi told them. All eyes on the summit – every economist, political scientist, investor and businessperson under the sun will be digesting the minutes from this over the weekend. Next week could be lively!
• Chart of the Day is LIBOR-OIS for Euro. Inter-bank funding looking a little painful.

 

Chart of the Day

EUR LIBOR-OIS (Source: Bloomberg)

 

Events

Macro Events:

Update:

• UK BoE keeps rates unchanged
• ECB cuts rates by 25bps, announces QE long term liquidity measures
• US Jobs slightly better than expected

Alerts:

• Japan GDP

 

Corporate Events:

Results:

• Nothing Significant

Dividends:

• FedEx [FDX]

 

Reading, Links:

Nothing Significant

1st November 2011: Greek Bombshell – Papa Don’t Preach, We’re in Trouble Deep

 

Papa Don't Preach

Quote of the Day:

At Goldman they used to call Jon Corzine: “Fuzzy”…

—   —   —

It was a reference to his loose thinking, his lack of precision around ideas…

—   —   —

I just hope that he wasn’t fuzzy around accounting or making sure that these customer accounts were where they needed to be…

William Cohan on the demise of Jon “Fuzzy” Corzine – (ex) CEO of the bankrupt MF Global

Macro Overview

Corzine: Say Goodbye to Jon Corzine

• Corzine better have thick skin. The scandal is piling up, in this business you gotta be squeaky clean if you want to avoid the wrath of a political backlash. Mr Corzine is in the cross-hairs of every single politician, every single regulator and litigious authority, every single person who has been disgruntled with how the Financial Industry has handled risk over the last 5 years. The guy is history.

 

Europe: Papa Don’t Preach, We’re in Trouble Deep

• Welcome to the ECB front line Mr Draghi! Not a bad way to start your job.

Papa don’t preach, I’m in trouble deep
Papa don’t preach, I’ve been losing sleep

• Papa (Greek Prime Minister, Papandreou) dropped a right clanger announcing that he was going to hold a referendum in the middle of a European crisis of which he is at the centre. This is a bold (reckless?) political gamble. This is as much about Greece’s domestic politics as anything – he’s effectively calling his critics’ bluff. Nobody knows the details of the red pill, blue pill referendum but basically it’ll likely be of the form:
• “Yes”, you can side with me in Europe, or
• “No” we can declare ourselves a bankrupt nation tomorrow
• Tough love? Brinkmanship? Blackmail? Cunning? Prudent? Many talk about the immediate mechanical effects of this referendum but, to me, the symbolism is screaming out loud: there is a limit to how long leaders of EU peripherals can hold out against their own domestic electorate; they are willing to consider the option of exiting the Eurozone. Meanwhile:
• China officially announces it will not come to Eurozone’s rescue… ZZzzzzzz… tell us something we didn’t already know, dear reader…
• Italian bond spreads reach a Euro-era high on EU political uncertainty…  ZZzzzz… tell us something we didn’t already know, dear reader…
• There are just so many ingredients in the cauldron here: political gamesmanship, national pride, economic sentiment, social unrest, moral hazard… it’s just a boiling soup of risk.

Pacific Rim: Convoluted Signs of a Slowdown

• Australia Cuts Rates – did I get that right? Yes … Australia has never cut rates out of recession in the last decade (see Chart of the Day). In fact the only time Australiacut rates was during the Great Recession. That ought to tell you something about global aggregate demand – especially out of Greater China. Last week I commented on the market reaction to the HSBC Flash PMI.

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.

• Who the hell follows the HSBC Flash PMI? HSBC PMI was above expectations, today the conventional PMI came out below expectations. They contradict each other, but I wouldn’t worry too much, they both are pretty useless pieces of data.

Market Overview

• Surprise surprise … unpredictable, unquantifiable political event in Europe sends the whole world into a tailspin. The political whim of one man changes the lives of 7 billion others in a split second. Yawn… ZZZzzzz…. Throw away your textbooks, in fact burn them, economic theory doesn’t matter anymore – to be honest it hasn’t done for months now.
• British bonds (Gilts) rally to their lowest yield … well the long dated swap (30 year) is pretty much the lowest on record (see Chart of the Day for decade long chart of 30 year swap rates). Keep an eye on those fixed mortgage rates! All due to Europe’s craziness and the GDP report. Britain? A safe haven? Surely not – says something about the state of the Global economy if it is.

 

Chart of the Day

 

British 30 Year Swap Rates (Source: Bloomberg)

Aussie Base Rates over the decade (Source: Bloomberg)

 

Events

Macro Events:

Update:

• UK GDP above expectations at +0.5%
• US ISM below expectations 50.8 (we are hovering just above relapse level)

Alerts:

• German unemployment data.

 

Corporate Events:

Results:

• Australia and NZ Banking [ANZ AU], Kraft [KFT], MasterCard [MA], Nissan Motor [7201 JT], NTT Docomo [9437 JT], Prudential [PRU], Sony [6758 JT],

 

Dividends:

• BP [BP/ LN], GlaxoSmithKline [GSK LN], Royal Dutch Shell [RDSA],

 

Reading, Links:

Papa Don’t Preach:

• Papa Don’t Preach #1
• Papa Don’t Preach #2

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

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.

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.