4th October 2011: Maximus – The Great European Crisis That Simply Won’t Die

What then after "Plan Z"...?

Quote of the Day:

… you simply won’t … DIE [click here]

Commodus to Maximus (Film: Gladiator)

Macro Overview

• Interesting in films like Gladiator and Spartacus renegades at the periphery of this diverse continent were centralized to the political heart of the superpower. And yet, while seemingly politically powerless, they managed to infiltrate the order to bring the entire empire to its knees. Each year I’m astounded by our modern day senate in Brussels… with their procrastination and deliberation they succeed only to transform relatively powerlessly enslaved outlaws into a gladiatorial behemoths. We should not be surprised: snatching poverty from the jaws of prosperity is something politicians have got incredibly adept at. But that’s enough of films.
• So, Europe, how are those “let’s buy-some-time policies” working out for you? I see German CDS now at the highest level since … ermmm… actually since my records begin. But let’s put it this way 5 year Dollar German CDS is now trading 30% wider than the wides during the 2008/9 crisis. The VDAX volatility level surged to a nauseating 2 year high. See the Charts of the Day.
• As usual the focus is on The Great The European Crisis that simply will not die and the global economic drag associated with it. Goldman downgraded the economic outlook for the entire region, predicting a recession in Germany and France (albeit mild) and a severe recession at the periphery. They also put a nail in the Euro/USD coffin. That sounds about right, the only beef I have with it was their 1% target for UK growth… I’d put it closer to zero.
• A good little article by the sophistocrats at Stratfor (European Crisis: Precise Solutions in an Imprecise Reality | STRATFOR) tries to summarize the problem succinctly:

…the complexity of the European situation is less driven by the complexity of the economics than by the complexity of the politics.

—   —   —

The political and geopolitical problem is simply this: Germany is unique in Europe in terms of both size and values. It tried to create a free trade zone based on German values allied with France that looked at the world in a much more complex way. The crisis we are seeing, which Germany is trying to solve with extraordinary complexity and precision, rests on a highly unstable base. First, the European banking system, like the American banking system, does not understand its status. Second, the entire mathematics of national statistics is inherently imprecise. Third, the peripheral countries of the European Union have economies that cannot be measured at all because their informal economies are massive. The fundamental principles and self-conception of Germany and Central Europe diverge massively. The elites of these countries might like to think of themselves as Europeans first — by the German definition — but the publics know they are not, and they don’t want to be.

• “Bernanke to take further action to aid growth” – reads Bloomberg headline in a seemingly eureka moment. Boost growth! Why didn’t we think of that before? The reality of course, is exactly what Bernanke himself said, it’s no longer obvious that the upside to additional monetary stimulus exceeds the downside. But as Axel Merk points out in his latest piece, the stars are aligning for Bernanke’s QE3. As his graph, points out – operation twist has been going on for a long time now, well before the “twist announcement”.

QE 2.5 was less "twist" and more "shout"

• Bernanke’s in a tough situation. He must convince us that he has our best interests at heart while inflating our savings away like a maniac. Amusingly, Merk takes a sarcastic swipe at the Princeton Professor’s salesmanship:

It looks like Bernanke at least wants to maintain the appearance of keeping long-term inflation expectations low. Earlier this year, Bernanke complained a few times that the risk-reward ratio of another round of easing is not all that clear. Well, how about making it clearer, by:

• First crushing the short end of the yield curve by committing to keep interest rates low until the middle of 2013.
• Then lower long-term interest rates by initiating “Operation Twist”, the selling of short-term securities by the Fed in the billions, then reinvesting the proceeds in long-term securities.

• From another angle, Bill Gross points out other ineffective realities of policy-makers in this piece (Six Packin’).

Yet to return to my initial criticism of cyclically finance-based as opposed to structural policy solutions, almost all remedies proposed by global authorities to date have approached the problem from the standpoint of favoring capital as opposed to labor. If the banks could just be stabilized, if the “markets” could just be elevated back in the direction of peak 401(k) levels, if interest rates could just be lower so that borrowers would inevitably take the bait, then labor – job creation – would inevitably follow. It has not. The explanation for why not must at least include the rationale that Wall Street and Main Street are symbiotically connected and if one benefits at theexpense of the other, then both ultimately can falter.

• In a way I hope Bernanke announces “QE to infinity” it’ll do wonders for my stock investments. But of course, this will only exacerbate China’s growth recession/inflation problem (soon to be compounded by more anti-China rhetoric in America) which is not good for anybody – least of all investors in Asia, who will be yet more susceptible to fat tail risk. Let’s face it, if the answer to all our problems was purely in the one-trick-pony of a money-printing Fed we would have been high and dry and sipping Pina Coladas a long time ago.

Market Overview

• Missed by most mainstream newspapers the Hong Kong Standard picked up that the notion of a short-sell ban in Hong Kong was indeed on the table. Short-sell bans worked well for European banks didn’t it? But we need to be very wary, short positions are at a record high indicating that the short side may be more concentrated than we think and therefore highly susceptible to aggressive and protracted short-covering rallies.
• Speaking of which, as the market weighed up the consequences of a Greek default it also came to the conclusion that Dexia is basically screwed. Interesting that this (relatively small bank) had €3.4 billion exposure to Greece (the largest of any major European bank) and yet was given a bill of good health by those nonsensical European banking stress tests. As I wrote back in June in my piece, The Art of Political Deception, Part 1 – Evolution of the European Greek Debt Crisis:

…banking capital requirements and Basel III aside, let us not forget that is it was the Committee of European Banking Supervisors (CEBS – or Committee for the Effluence of utter Bullsh#t, if you prefer) who effectively told us that the banking system was hunky dory. They’d looked at the contagion effects, did a sophisticated “stress-test” (that was far more stringent than the American one, apparently) and said it was all good, saving a small handful of small Spanish regional banks. The CEBS then gave themselves a little pat on the back and gave the European banks a little pat on the bum and said: “there, there… run along now, you cheeky monkeys!” Hmmm… that was a bit of a misrepresentation then – again, the credibility question is raised. As Stephen Pope put it at the time: ”I see nothing stressful about this test. It’s like sending the banks away for a weekend of R&R,” – and so it proved to be. I didn’t delve into the detail, but we all knew that the stress tests on both sides of the Atlantic were just another comical act in a political pantomime. We are now seeing the downside of such misrepresentation.

• Well anyway, consequences of pathetically weak management are that the Dexia receives the honorary title of being in need of a bail out for a second time. If you’re a bank CEO when political leaders “pledge support” for your bank it can only mean one thing: it’s time to pack your bags.
• When the S&P traded down 2% right from the outset I feared the worst for our resistance level, but I was pleasantly surprised by how much equities held up in the end due mainly to Bernanke’s precisely timed hint at further “stimulus”. Personally, I think it may have worked in the short term, I don’t think there is a big enough sell off through the 1100 level on the S&P to spark a capitulation… as far as resistance is concerned this is a “hold” and we could rally from here into the weekend. It all depends on this ISM number tomorrow and the subsequent data thereafter.

Chart of the Day

German USD 5 Yr CDS (Source: Bloomberg)

VDAX (Source: Bloomberg)

Events

Macro Events:

Update:

• Chinese PMI Services actually came out pretty good at over 59.3 (particularly encouraging that it was the service industry putting out) – a glimmer of hope indeed.

Alerts:

• US ISM Non-Manufacturing
• UKGDP Q2 Confirmation
• Taiwan CPI
• Philippines CPI

Corporate Events:

Results:

• CostCo [COST]

Dividends:

• American Express [AXP], AT&T [T],

Reading, Links:

EU Behemoth:

• EU Behemoth #1
• EU Behemoth #2

11th September 2011: The Men that Rule the World Speak Out

Quote of the Day:

Audience Question: “How would you rate actor Paul Giamatti‘s portrayal of you in the recent movie Too Big to Fail?”

Bernanke: “I didn’t see that movie. I saw the original.”

Ben Bernanke (at Economic Club of Minneapolis)

Macro Overview

• Last week was the week that “the men that rule the World” took to the stage. Obama, Trichet and Bernanke all stepping up to the podium to deliver some very different and out-of-character performances.
• Obama’s speech wasn’t all that bad. By unveiling a definitive plan and putting the emphasis back on Congress – he did the right thing by demonstrating that his effectiveness as a leader was being stifled by Congress. The message was clear: pass this jobs bill! Krugman’s sacrastically remarked that “If Obama Called for Endorsing Motherhood, Republicans in the House Would Oppose it”. The bill did indeed look bipartisan by composition, but the delivery of the speech was very “Presidential”. Obama will not doubt hit the road and campaign on the back of this proposal. It looks like a decent piece of legislation and Zandi of Moody’s thinks, if implemented in its current form, the Obama Pan could add 2% to GDP. But that’s a big “if”, I suppose.
• At times like these, our senses are numbed by the magnitude of everything happening around us – so the main issue I have with Obama’s speech was, in these circumstances quite forgettable and slightly overshadowed by Terrorism fears in NY. In fact I think Trichet’s animated Press conference and Bernanke’s witty Q&A overshadowed this speech. My favourite Bernanke remark to a question about the Fed dissenters was:

If two people always agree, one of them is redundant.

• Bernanke’s a bit of a comedian then. I have to admit I chuckled a little when he came back with his “I saw the original” response too.

Market Overview

• Another poor week for the markets really and while equities were down on the week again – the DAX could rally 40% and still be below the level it was at mid-summer. But it’s all really about the financial system – so financial stocks, inter-bank borrowing and credit spreads are the things to watch in this market. I’ve included graphical representations of these risks in my Chart of the Day section (Soc Gen stock price, Credit Suisse 2 year CDS, Greek 5 year CDS and LIBOR over Swaps Spread). It’s not for the faint-hearted. Note, the Credit Suisse graph shows CDS level for senior level debt (subordinated CDS is much wider!)

Chart of the Day

Inter-Bank Paranoia at a high (Source: Bloomberg)

Credit Suisse 2 Year CDS (Source: Bloomberg)

Greek 5 Year CDS at all time high (Source: Bloomberg)

Soc Gen Stock Price YTD (Source: Bloomberg)

Events

Macro Events:

• Update:
  • Japanese GDP came out -0.5% on Earthquake and strengthening Yen overhang – this was pretty much expected
  • Italian GDP +0.3% – in line
  • Chinese Inflation +6.2% CPI (YoY) – high, but in line with expectations

• Alerts:
  • Japanese Inflation
  • Indian Industrial Production

Corporate Events:

• Results:
  • China Pacific Insurance [601601 CH],

• Dividends:
  • Cheung Kong [1 HK], Hewlett Packard [HPQ], News Corp [NWSA],

Reading, Links:

• Obama Speech:
• Obama Speech #1
• Obama Speech #2

Reading, Links:

• Remembrance 9/11 10 years on:
• Remembrance #1
• Remembrance #2

6th September 2011, The Great Depression 2.0?

Another Jobless Recovery.

Quote of the Day:

…this is like 1931 midway through the Great Depression when a major banking crisis in central Europe, sparked by the failure of Creditanstalt, plunged the World into the Great Depression’s second and worst round.

Niall Ferguson – Historian and Professor at Harvard

Macro Overview

• Today’s Guardian gives are rather sick diagnostic for Europe’s countries in focus. But Europe’s woes may only just be beginning. Historian Niall Ferguson thinks that Europe’s deterioration resembles The Great Depression all too closely, with 2011 resembling the 1931 inflection point – when the crisis took a turn for the worse and crossed the Atlantic hitting the European financial system.
• Not to sound too dramatic, it’s a good exercise to consider how the global economy relapsed into an even deeper recession in 1931.  One uncovers worryingly similar developments to those occurring right in front of our very noses today (see this Business Insider article from a year ago – still very relevant).
• 1931 was the year things turned from bad to worse during The Great Depression. After an initial financial shock and a “severe recession” in America a couple of years earlier the markets actually turned up for a year.
• But the financial plague not been eradicated, rather, its symptoms had only been suppressed. Severe downturns are sometimes likened to diseases or viruses, their birthplace is not always important, it’s the contagion dynamic, it’s where they finish, that matters. Like true epidemic-level illnesses they are persistent, subsiding occasionally only to reappear elsewhere, mutated, opening up old wounds and preying on the weakest organisms.
• Thus, true to form, during The Great Depression this American-born virus spread to socialistic to a region known at times for their lack of economic coherence and complacent financial rigidity: Europe – specifically Central Europe (predominant economies: Switzerland, Germany, Austria).
• At the height of the crisis banks, teetering on insolvency, were forced to bail out their failing counterparts or risk collapse themselves, but this only transferred obligations to larger, more complicated, more infectious institutions. Eventually the sovereigns themselves were pulled into the crisis, but this was always a failure of the financial system at heart.
• As a result of both incompetence and various measures of political financial protectionism (akin to Swiss Currency manipulation today) during the early 1930’s, meant the European political elite were woefully unprepared for the rapid and relentless cascading capitulation that occurred, despite years of warnings to get their act together.
• Secret credit lines were hurriedly set up within the banking system to prevent financial institutions (which had bailed out other ailing financial institutions) from triggering a domino-effect in the European financial system. But alas it was too late. The collapse of a giant bank in Central Europe, Credit Anstalt, brought the crisis home to the continent East of the North Atlantic. It was on these European shores it would wreak the most destruction.
• As Bernanke himself said, when speaking about the causes of The Great Depression, in a Council on Foreign Relations presentation back in 2009.

Globally, there were massive bank failures.  I think perhaps the most critical, in May of 1931, the Creditanstalt, which was one of the largest banks in Europe, failed, which generated a wave of financial crisis around the world.  Up till early 1931, arguably the 1929 downturn was just a ordinary — severe but ordinary downturn.  It was the financial crises and the collapse of banks and other institutions in late 1930 and early 1931 that made the Great Depression great.

Market Overview

• The Swiss intervention was swift, harsh and unexpected. Everything that you need a direct currency manipulation to be. It’s like a guerilla ambush – striking fear into forex traders: buy our currency and we’ll come and get you… GRRRR!! But the same currency traders who slew Japan’s Ministry of Finance with ease will retreat, lick their wounds, then sit back and smile – OK you got me this time, they’ll say. But we’ll just come back with more numbers and smarter tactics. Fighting the market is a war of attrition not an act of financial terror. Each manipulation by the SNB will become harder and harder to execute with time. The crucial element of surprise will diminish with each act. Just ask Trichet – his institution is far more powerful than the SNB and he may be having difficulty keeping the market at bay himself – see El Erian’s comment on CNBC’s website today:

For a while, outright ECB purchases of Italian bonds on the secondary market had succeeded in keeping that yield at or below the 5 percent level for the “old” Italian ten-year benchmark bond. In recent days,

The jury is still out as to whether the ECB “allowed” the yield to rise, as a way of putting pressure on the Italian authorities (and other European fiscal agencies) to get their act together, or whether the ECB itself is getting “overwhelmed” by market dynamics. But either way, European markets are troubled.

• Perhaps buoyed by that ISM number the markets closed only down a smidge in the US (by current standards). In fact the UK and Brazil both closed up on the day. I’d say that was a result – we could easily rally into the end of the week now.

Chart of the Day

Consolidated European CDS (Source: Bloomberg)

Greek Borrowing Costs Back to the Highs (Source: Bloomberg)

Events

Macro Events:

• Update:
  • South Korean GDP +0.9%  — which I think is actually quite good, especially considering how poorly Korean markets have performed.
  • Filipino Inflation lower than expected — that’s the good thing about a global slowdown!
  • ISM Non-Manufacturing came out at 53.3 (vs 51 expected) – pretty good number in my opinion – what recession?
• Alerts:
  • Belgian GDP – more poignant that most think, actually. We want to know ifBelgium is going to slump – it has one of the worst balance sheets in the Eurozone (Debt to GDP at 100% – worse than Spain, Ireland and Portugal)
  • German Industrial Production
  • Hope you spotted my deliberate mistake last comment – Obama’s speech is not until tomorrow (8^th)!

 

Corporate Events:

• Results:
  • Vimpelcom [VIP],

• Dividends:
  • ADP [ADP], Baxter [BAX], BHP Billiton [BLT LN], CME [CME], Diageo [DGE LN], Glencore [GLEN LN], Henderson Land [12 HK], Kimberly-Clark [KMB], PetroChina [857 HK], Shire [SHP LN],

Reading, Links:

• European Abyss:
  • European Abyss #1
  • European Abyss #2
  • European Abyss #3

28th August 2011, Market Update: ECB Whodunnit? Spotlight back on Europe’s Financial Fragility

 

Taming the Beast

Quote of the Day:

Everyone should recognize that decoupling is a myth,

If the advanced countries succumb to recession, the emerging markets will not escape.

Christine Lagarde – Managing Director of IMF

And the real question that shook markets in the last couple of weeks has still not been answered. Just which bank tapped Europe’s emergency fund? Some bankers have even suggested it was not a eurozone bank but perhaps an arm of a Swiss bank. Should that prove to be the case, French bankers, and for that matter eurozone counterparts, would be foolish to think this lets them off the hook.

Paul Betts – Financial Times article last week

Macro Overview

• Tap! Tap! Who’s there? While we were all getting hyped up about Jackson Hole it almost escaped unnoticed that sovereign creditworthiness in Europe was crumbling (see chart of the day for an example: Italian CDS spreads) and a bank within the Eurozone tapped the ECB for emergency funding. But who was it? In my opinion it’s likely to be a bank with an investment banking arm, which is by far the worse performing section of the financial industry this year (and therefore likely to be a Prime Brokerage to Hedge Funds). Supporting Prime Brokerage is of course imperative to the stability of the so-called shadow banking system, but the non-bank entities which make it up have few political friends in European political circles. One cannot under-estimate the capability for European politicians to do something insanely imbecilic in this respect. Many thought the culprit likely to be a French Bank but an FT article by Paul Betts last week throws suspicion over the Swiss Banks (one immediately thinks of the institutions with heavy investment banking operations, although Credit Suisse and UBS have since denied the claims). We’ll probably never know. But this rumour-mill only confirms the fact that it could be anyone (not necessarily a “eurozone bank”) and this is certainly no time for investors to be complacent over counterparty risk or contagion risk.
•  Bernanke showed some spine on Friday at Jackson Hole and actually put some doubt into those who think he’s just a Greenspan clone. This time Bernanke was front-running Obama slamming the ball back in Obama’s court – quite monumental shift in monetary vs fiscal impetus. Heavy emphasis now on early September when Obama delivers his great employment speech on 5^th September. Also, interestingly, Bernanke seemed to put extra emphasis on the September FOMC meeting – a two-day meet, signaling that he may be trying to build an FOMC consensus. Will be interesting to hear what the main “dissenters” (Hoenig, Plosser, Fisher) have to say between now and then.
• Meanwhile in Asia Singapore’s elections are won by Tony Tan by a margin of 0.3% – talk about a tight margin!

Germany's Battle-Axe

• Merkel says she won’t back down to “blackmail” from the markets on Eurozone restructuring. I’ll believe that when I see it, I think someone forgot to tell Merkel how European countries, including her own, fund their economic activity.

• I hate to be a downer, but, like I was saying last week, the whole Jackson Hole thing was detracting from another uprising of economic instability in Europe. In my opinion the stability of Europe’s banking system is as precarious as it has ever been right now. Let me just quote from the first and last sentences from a Bloomberg article, Lagarde Urges Recapitalization of Europe’s Banks:

Christine Lagarde, the new managing director of the International Monetary Fund chief, warned that the world economy is in a “dangerous new phase” and that officials must take new steps to strengthen growth.

…and then…

 “Everyone should recognize that decoupling is a myth,” she said. “If the advanced countries succumb to recession, the emerging markets will not escape.”

 

Market Overview

• Dollar remained quite firm yesterday, as you’d expect if you thought the Fed’s printing capability was not limitless. But then it sold off into the close which was interesting. This could signal that risk appetite is back.
• Main concern now is what’s happening in the funding and credit markets in Europe. Keep an eye on CDS spreads and inter-bank funding measures.

 

Chart of the Day

Italian CDS (Source: Bloomberg)

Events

Macro Events:

• Update:
  • US Michigan Confidence and US GDP confirmed roughly in line on Friday
  • UK GDP came out in line too
• Alerts:
  • German Inflation
  • Hong Kong Retail Sales

 

Corporate Events:

• Results:
  • China Citic [998 HK], China Merchants Bank [600036 CH], Sinopec [386 HK], China State Construction [601668 CH], Formosa Plastics [1301 TT], Hon Hai Precision [2317 TT], Hyundai Motor [012330 KS], Kia Motors [000270 KS], Lotte Shopping [023530 KS], Samsung Electronics [005930 KS], SK Telecom [017670 KS],

• Dividends:
  • Applied Materials [AMAT], AngloGold Ashanti [ANG SJ], Corning [GLW], CSX [CSX], Dover Corp [DOV], Time Warner [TWC], Union Pacific [SNP],

 

Reading, Links:

• Eurozone no the brink:
  • EU Financial Brink #1
  • EU Financial Brink #2
  • EU Financial Brink #3

 

25th August 2011, Market Update: Europe’s Rope-a-Dope on the ECB

The Risky Art of Rope-a-Dope

Quote of the Day:

If you dream of beating me you’d better wake up and apologize

- Muhammad Ali (the rope-a-dope king)

Macro Overview

• Boxing fans will know “rope-a-dope” as an outrageous strategy Ali used against the giant George Foreman, who destroyed Ali’s main rival Joe Frazier. In a bizarre display of apparently suicidal brinkmanship, Ali lay back on the ropes and turned himself into a punch bag for round after round. Eventually, Foreman punched himself out and was rendered impotent as Ali smashed him dramatically to the canvas in a series of quick-fire punches.

• Now, I should explain myself over what I meant in my previous comment, The Price of Stability is Instability, when I implied that the rumour of the rumour was more fascinating than the rumour itself, because it’s a vague, dismissive thing to say. In my opinion, there is a difference in the nature with which the reinforcement of the financial sectors is taking place on the two sides of the Atlantic.
• Let’s not forget that the Sub Prime crisis was a crisis born in America. In the US there are a host of “cross-over buyers” or comparative participants in the private sector willing to put up cash to recapitalize certain ailing banks (I’m not talking about SWFs or government entities). For example when JPM scooped Bears, when BoA bought Merrill, when Berkshire ploughed into GS and Wells Fargo and even when the Japanese bank, UFJ bought heavily into Morgan Stanley.
• In Europe, for whatever reason, these block private investments seem to be much less prevalent. As I implied in an internal memo yesterday, it’s like a bid vacuum in Europe until we get to backstops of the last resort (i.e. the direct involvement of the taxpayer via semi-nationalization of banks – such as with RBS, Lloyds, Dexia or Commerzbank which, ironically, is much less repulsive in a more socialist Europe than it is in the US).
• I don’t just put this purely down to Buffett’s patriotic tendencies – I just think the European banking risks (especially credit risk and counterparty risk) are much harder to quantify due to the risk of sovereign contagion within the region (the structural impediments of a single currency with no fiscal union*) combined with a much less collaborative “financial system”. By the latter I mean that The Fed, The Treasury and the Financial Industry are much more collusive in America than they are in Europe. There are disadvantages to this of course, but the advantages become clear when considering the efficiency of finding and implementing solutions during periods of financial disarray. I have much less confidence in the ability of the European “financial system” in this respect. For example, we did not hear many rumours of large private capital injections into RBS, Soc Gen, UBS or Commerzbank at all – there’s so little faith in the system the outcome is binary, in Europe: either you sink (nationalization/default) or you float. Also, it’s quite apparent to me that the American capital markets and evaluation of capital structures are still working quite efficiently in the financial sector. The most subordinated creditors (shareholders) take the first hit in financials and fall to point where they become attractive to a prospective investor or potential acquirer. That’s why I thought just the idea of the JPM/BofAML rumour itself was more interesting than the actual content of the rumour. It was evidence of a relatively efficiently functioning financial system – I just do not see these ideas even being entertained in Europe, the fate of recapitalization (and therefore counterparty/credit risk) is largely in the hands of the politicians and their political will… Scary!
• I’ll say it once more: it’s very unlikely that the US will have another “Lehman Moment”, Europe, on the other hand, is a different matter.  I’m not saying we’ll necessarily see another investment bank collapse but the possibility that we see some form of disorderly event in the “financial system” is moving further away from zero. Europe (and I mean all Europe – including the UK and Switzerland and other non-Euro members) is dancing in the ring with a heavyweight monster right now and its dicing with death. Whether Eurobond or EFSF, an assertive solution cannot come on line soon enough for Europe.
• All this ties into my original thought: on a relative basis, the generic, grass-roots fundamentals of the European economy ain’t so bad these days but uncertainty in the financial system is impairing (crippling) the recovery of the fragile economy. In the US, the reverse is more applicable: on a relative basis, the financial system ain’t so bad but poor fundamentals in the economy are impairing (crippling) the recovery of the fragile financial sector. Europe’s problems are much more immediate, which is why I think they’ll quickly come into focus once Jackson Hole is out of the way (IF it is out of the way). How European politicians deal with these challenges will determine whether this is a persistent or relatively short-lived crisis. The ECB still still has its gloves on, gum-shield in and still fights its corner for independence and credibility, but if this political rope-a-dope continues in Europe, it’ll punch itself out of credibility and end up hitting the deck… again. This time it won’t get up and neither fighter will recover from the consequences.

* Remember how banks like Lloyds got into trouble. Ireland’s government effectively backstopped its banks which led, almost immediately, to an Irish sovereign debt crisis because Ireland was a Eurozone member and therefore could not print its own money at will. This Irish sovereign debt crisis led to contagion into the British banks (like Lloyds) which held Irish debt – despite the fact that the UK is not even a Eurozone member! But this just goes to show how convoluted credit and counterparty risk is in all European banks, including banks not even domiciled in the Eurozone.

• Don’t mess with Irene – she’s angry and she’s heading for New York!

http://www.youtube.com/watch?v=N60xGB2c-a0

Market Overview

• I’m not going to talk about stock markets other than to show the Indian Sensex Index in chart of the day section to add insult to injury, India simply does not have the fiscal firepower other Asian nations, like China, have to weather a global slowdown. I think it’s important not to get mesmerized by the stock markets this week – they’re not communicating the important information right now. Right now the inter-bank lending, credit spreads and even the VIX are communicating more poignant information. To be honest, I’m a little worried that Jackson Hole is distracting from criticalities building up in the European financial system (as highlighted above).
• See Chart of the day – which shows the 6^th worst closing level of Greek 5 yr borrowing costs in the history of its life within the Eurozone. The Finns are putting a spanner in the European works. They signed a bilateral loan agreement with Greece which insisted on a collateralized escrow account of an estimated €500 million. Now, obviously, everyone wants deal like that and, more worryingly, some are actually entitled to it via negative pledge clauses on notes (subject to English law, not Greek law)! Consequently, Finland threatens to withdraw all its EFSF support if its loan agreement is not honoured and Greece, once again, dances with default. Such is the comedy of the state of the European “financial system”; I mean this is finance 101 – pretty sure my mum could understand the consequences of a negative pledge clause. My favourite quote comes from Andreas Koutras, of InTouch Capital Markets, in a Bloomberg article by John Glover today, which sums this up rather bluntly:

I am pretty sure the Greek government didn’t even know this, their incompetence is legendary

• As I highlighted in my last NightShift comment, it looks like Meredith Whitney (the “biggest banking bear of the decade” saying that BofA was actually in good condition as she even defended the CEO) may not have been as crazy as all that. News of the hour was that Warren Buffett plugged $5 billion into “Bank of Berkshire America”. We should have guessed shouldn’t we? Some leaky insider obviously said that “a very large, highly creditworthy financial institution was going to do a deal with BofA” and the rumour-mill immediately jumped to the JPM conclusion. We shouldn’t have over-looked the sneaky man from Omaha though! That said BofA management certainly have some questions to answer; if they did not need to raise capital – why do the deal at all? I’m assuming the answer will be “a vote of confidence as confidence vacuums often create unforeseen problems of their own” etc etc. Indeed there may be some substance to this as there is a debate as to whether this injection even affects the capitalization or fundamental creditworthiness of the bank at all. Under Basel III as it may not even affect their common equity and therefore their necessary capital ratios. But the jury is still out on this – let’s face it Warren ain’t always right is he? I think this was a bet on the US financial system as a whole. If I had the choice on betting on either the American or European financial system, I’d do the same, but the question remains: why bet on either? That said, the stock was up 25% in the opening hours today. Off the highs but it looks like it’ll add another few $billion to its market cap today.
• Here’s to Stevie “Wonder” Jobs, the man who said: “For something this complicated, it’s really hard to design products by focus groups. A lot of times, people don’t know what they want until you show it to them.”  You’ve got to love the man. Stock traded down today but it’s not just the market; the whole world mourns the exit of our generation’s most prolific business leader. Interesting how the two biggest business leaders of our generation, Bill Gates and Steve Jobs, were both geeky innovators in the environment of consumer electronics – techy products we could all relate to. Here is the memo he sent today:

To the Apple Board of Directors and the Apple Community:

I have always said if there ever came a day when I could no longer meet my duties and expectations as Apple’s CEO, I would be the first to let you know. Unfortunately, that day has come 

As far as my successor goes, I strongly recommend that we execute our succession plan and name Tim Cook as CEO of Apple.

I believe Apple’s brightest and most innovative days are ahead of it. And I look forward to watching and contributing to its success in a new role.

I have made some of the best friends of my life at Apple, and I thank you all for the many years of being able to work alongside you.

Steve

• Good luck, Stevo.

Jobs - Man of our TIME

Chart of the Day

Greece Frightening! Greek 5 yr CDS (Source: Bloomberg)

No Indian Summer - Sensex (Source: Bloomberg)

Events

Macro Events:

• Update:
  • Under the radar Mexico just reported GDP Growth at a whopping +8.9% QoQ (inflation in Mexico runs at a mere 3.5%). Now those are numbers evenChinawould be envious of. Is this an aberration? Well actually no, Mexican long run GDP is around this level anyway, just surprising how this number blew expectations away (which were way down at 7.7%). SLOWDOWN? WHAT SLOWDOWN?
  • Poor Jobs Numbers in the US – jobless claims at 417k (405k expected) last week revised up as well to 412k from 405k. Not disastrous though – which is what some bears might have been expecting.
• Alerts:
  • Bernanke Speech – Jackson Hole!
  • US GDP – expected to be confirmed at +1.1% for second quarter
  • US University of Michigan Confidence– it’s at historic lows already we really can’t afford another drop – needs to be well above 50, preferably above 55.
  • Singapore Industrial Production
  • Japanese Inflation

Corporate Events:

• Results:
  • ChinaMerchants Bank [600036 CH], China Pacific Insurance [601601 CH], China Shenhua Energy [1088 HK], China Steel [2002 TT], Genting [GENT MK], Royal Bank of Canada[RY CN],

• Dividends:
  • Johnson & Johnson [JNJ],

Reading, Links:

• Eurozone fractures in the financial system:
  • Eurozone Fractures #1
  • Eurozone Fractures #2
  • Eurozone Fractures #3

24th August 2011, Market Update: The Price of Stability is Instability

 

Moneyman to save the day!

Quote of the Day:

 

Small recessions are probably the price we pay for avoiding big recessions

– Andrew Smithers

 

Macro Overview

• Looking out over the fields and woodland from my dining room window I notice that, at exactly the same time every night, flocks of rooks fly west to roost in the woods – just before sunset. It’s become a routine, fly east into the sun in the morning to feed, fly west into the sun to rest. I can see them fighting and jostling in mid air as they approach the woods – presumably for the best roosts. We are all volatile animals and, just like the rooks, our lives run on the cyclicality of the World without us realizing. Attempts to smooth the business cycle over the last two decades have resulted only in more volatility and more violent cyclicality. We take for granted the cyclicality of the sun, the moon, the days, the seasons and, of course, the greatest cycle of all: the cycle of life. You see, we need volatility, we need cyclicality, we’re born into it, it’s hardwired into our brain, fate and physics, it’s what keeps us on our toes, it’s what makes the World go round – literally! Smithers (who says anyone who thinks stocks are undervalued are “stupid”) may be right; it may be that we need small recessions to prevent us from having big recessions. The price of stability is instability.
• National Bank of Switzerland beware: “I fought the Market and… the Market won!” said Japan’s Ministry of Finance as they beat a hasty retreat by announcing a package to bail companies exposed to FX losses out (effectively waving the white flag on direct currency manipulation) only hours after Moody’s downgraded the country’s debt. The market is, by definition, too strong for prolonged manipulative forces – if it is not, they by definition it is not a market. Well, if Japan cannot control its currency what chance do the Swiss have? If people regard the Swiss Franc as a safe asset, they’ll treat it like Gold – negative yields will not deter them.
• No let up for the European Banks – especially the investment banks. It’s a bloodbath on job-shedding.
• Yesterday I drew attention to the fact that stock market was not really up because the “FDIC’s list of problem banks is shrinking”. Today ZeroHedge ridicule that headline too, turns out 39 banks were probably absorbed by mergers and of the 23 remaining banks, it’s likely that 22 dropped off the list because they had failed!
• Bloomberg’s theme for the week seems to be “turning Japanese” – keep up guys, Turning Japanese was last week’s news!
• I suppose we should mention the BoAML rumours that JPM will step in to take them over. I find the rumour of the rumour more interesting than the rumour itself. The thought that the market even entertains this issue says something about the fluidity of ideas in the US financial system. But to the heart of the issue. Firstly an internal memo says that these rumours are “baseless and don’t even make practical sense”. This may not reassure investors, as nobody believes the CEOs of financial institutions even know what’s going on in their own companies, never mind what their opinions are about capital requirements. But when the biggest bear on the US financial sector in living memory defends the bank’s position it’s worth taking heed if only because she knows more about it that we all do and has a reputation to defend. The stock had huge rally today adding $6.5 bil to its market cap but it is still not very far off it’s lows.

 

Market Overview

• A reflux of reflexivity is back, highlighting the inverse relationship between shares and the economy. Markets were trading up from the open at the beginning of the week because the data is week. Today strong durable goods orders mean that the market obviously dipped a bit in the middle of the day (less probability of QE), but the lure of Ben’s potential arsenal display at Jackson Hole had them rallying again into the close.
• As I said, the week is all about the crescendo building up to Jackson Hole. You might as well forget about any other information. When Friday morning comes on the East coast of America, you may want to consider the following:

• Which markets should you be watching?
• Don’t get mesmerized by the stock market – this alone will not help you determine what the true market response is. Keep a close eye on the dollar, Commodities (especially Gold) and the bond markets. If the dollar drops and stocks and commodities rise then I think it’s safe to say the market is pricing in QE3 imminently. If stocks drop and bond yields rise (especially at the short end) then I think it’s safe to say the market is staring into the abyss.

• What would be a bullish/bearish Bernanke statement for stocks/commodities/your asset of choice?
• I think Bernanke has a tough job. I doubt he will “announce” any concrete, decisive action – there is too much political pressure against this and I’m not sure Jackson Hole is the correct pulpit for this. As Rosenbergsays, Jackson Hole is supposed to be a forum for central bankers and think tanks to deliberate the long term objectives of the global economy. The Fed has already hijacked this arena for its own pseudo FOMC policy announcements. But QE3 action would be going too far, I believe. Rather, Bernanke will likely explain his actions thus far and then lay on the table potential options for QE3. In the process (hopefully) reassuring the market that these options are plentiful and “shovel ready”.

• What would be considered bullish/bearish price action?
• Well plenty of theories here. In my opinion the most bullish scenario for equities and commodities is if the Bernanke basically says nothing and stocks drop to test the lows before building a sustainable rally. Then we know the market is pricing in economic conditions fully. But if we get very strong hints of QE3 and there is a knee-jerk rally, be careful – the market may call Ben’s bluff and decide to test the lows just to see if his bazookas are loaded (as Smithers warns about)! The worst case scenario is if Bernanke mentions “the limitations of Central Bank policy” (see Pilly Fed, Plosser’s comments in my piece on 18^th August) and the markets trade down through the lows within a few days (or hours!).

 

Chart of the Day

So many to choose from… here is mine for today…

Portuguese 5 year CDS (Source: Bloomberg)

 

Events

Macro Events:

• Update:
  • German IFO Consumer Confidence below expectations across the board.
  • US Durable Goods orders came out better than expected.

• Alerts:
  • US GDP – expected to be confirmed at +1.1% for second quarter
  • US Initial Jobless Claims – needs to be below 400k to add optimism.
  • US University of Michigan Confidence– it’s at historic lows already we really can’t afford another drop – needs to be above 55.
  • Mexico GDP

 

 

Corporate Events:

• Results:
  • Agricultural Bank of China[601288 CH], AirChina[60111 CH], Credit Agricole [ACA FP], Diageo [DGE LN], Glencore [GLEN LN], HendersonLand[12 HK], ICBC [601398 CH], Ahold [AH NA], Northrup Grumman [NOCUS], SeaDrill [SDRL NO], Wharf [4 HK], Woolworths [WOW AU]

 

• Dividends:
  • QBE Insurance [QBE AU], Wilmar [WIL SP],

 

Reading, Links:

• Counterparty Risk:
  • Counterparty Risk #1
  • Counterparty Risk #2
  • Counterparty Risk #3

23rd August 2011, Market Update: S&P gets skewered on the new “Axis of Evil”

Quote of the Day:

Pres Obama, show some guts & arrest the CEO of Standard & Poors. These criminals brought down the economy in 2008& now they will do it again

– Film Maker, Michael Moore

Spin the Wheel of Terror to Find the Next Coordinate on the Axis of Evil

Substitute the Word "Iran" for "S&P"

Macro Overview

• Financial Evil-doers Lurk in the S&P Offices… and we will rout them out! Not long ago I wrote (tongue in cheek) about the Financial Axis of Evil – which constituted basically anybody that did not agree with the government’s economic policies. You can crucify the S&P brand firmly on that infamous axis now. These treasonous bastards are to the Department of Justice, what Iran is to the Department of Defense. Seriously, though, the government witch-hunt on the S&P is so comical it reminds me of the propaganda associated with Iraqis during the lead up to war. No sooner were we told that “the Evil Do-ers lurk in caves”, the Bush Administration proclaimed there was also a curious connectivity to Iraq called “the Axis of Evil”. Today Michael Moore, showing his encyclopedic understanding of the economy said that Obama should arrest the CEO of S&P to stop us meeting the same fate as we did in 2008.
• Far be it for me to suggest there is a subtle undercurrent of repulsive ideological conspiracy in politics, but isn’t it strange when an organization with the role of giving opinion on the creditworthiness which was criticized for being behind the curve in 2008, should suddenly be the sole target of an investigation by the department of injustice (… sorry, I mean Department of Justice) just two weeks after it downgraded the US credit rating? I mean, did they show the same aggression when S&P downgradedJapan, for instance? Did the downgrade ultimately make any difference to Japanese yields or its long term economic outlook? Sorry, but preying on the flashpoint of peoples nationalistic emotions for the sake of political gain is an old trick now.
• Ironically, this was an investigation on the S&P’s role in the mortgage crisis of 2008 – nothing to do with the US downgrade. But, if this is the case, what about Moody’s, Fitch or anybody else for that matter? Did they not have the same opinions at that time? From what I remember the entire ratings industry missed the boat – why are they all not treated with the same hostility today?
• Then, as if to make circumstances yet more suspicious, the S&P Board fires their CEO, Deven Sharma (well apparently he stepped down to “pursue other opportunities”)… for what? For telling the truth? Or was it for not telling the truth soon enough? Who is replacing him? … Ah I see, the COO of Citigroup – effective September 12^th 2011. Set your stopwatches, place your bets… for how long it takes the newly appointed “patriot” to reverse the call under Sharma.
• 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.
• All this controversy has done is raise more questions about the credibility of America’s political system and, if anything, only ratifies the S&P’s actions – which were based on (the lack of) political credibility and dangerous moral hazard between monetary and fiscal authorities.
• Want to know who tapped the Fed the most and when? Want to know who was first to take emergency loans and who was last and who had the largest average balance? I just want to show you this amazing interactive chart – courtesy of the good people at Bloomberg. It’s called “The Fed’s Secret Liquidity Lifelines” – just play around with it. It’s just brilliant.

The euro is breaking down and the process of its breaking down is creating very considerable difficulties in the European banking system

– Alan Greenspan, 23^rd August 2011.

Read more: here.

• To understand the context for Europe’s financial sector, take a look at the chart below. It shows Italian CDS spreads (second largest debt market as percentage of GDP and third largest economy in the Eurozone). Oh, and by the way, that chart includes the spike from the 2008 crisis – looks quite small now, huh? Now there are banks which hold that debt, and there are banks which lend to the banks which hold that debt. There is only so long Italian borrowing costs can continue rising.
• But it’s important to understand what kind of crisis one is in, I think.
• In my opinion, even though, generally, the bulk of the economic fundamentals at ground level are far from horrific, (less consumer debt, less housing overhang, good performance from the growth engine in Southern  Germany) the Eurozone is facing a financial and political crisis. In the US the reverse it more appropriate: the grass-roots economic situation is dire, but these days the financial system as a whole is actually comparatively well capitalized and more prepared for financial shock. Also the Federal Reserve is a much more “politically experienced” (that’s a kind way of putting it) than its European counterpart. A collaborative blueprint already exists for any run on any member of the financial system or the system as a whole. However, the ECB, in its battle to maintain some credibility over independence, presents a much more dysfunctional political pantomime with fiscal authorities. In this sense, I think Europe’s problems will take centre stage in the short term (once the Jackson Hole Meeting passes). I also think that European banks are more at risk from a funding crisis and a potential “Lehman Moment” and ensuing counterparty risks than American banks – although admittedly so much is inter-linked these days and American shareholders in financials are certainly going to take the brunt of any earnings disappointments. But, remember, that’s just my view over the short term, as time goes on we will keep coming back to economic fundamentals in the US.
• Excerpts from this article in Bloomberg today (Europe’s Failure to Stem Banking Crisis Haunts Markets Again):

   “I’m not sleeping at night,” said Charles Wyplosz, director of the Geneva-based International Center for Money and
Banking Studies. “We have moved into a new phase of crisis.”
While they treated the symptom – a lack of ready cash — politicians, regulators and bankers in Europe have proved unable to cure the root cause: some European lenders are at growing risk of insolvency.

…continued…

  “Banks are becoming more nervous about being exposed to other banks as they hoard liquidity and become more suspicious of other banks’ balance sheets,” Guillaume Tiberghien, analyst at Exane BNP Paribas, wrote in a note to clients on Aug. 19.
By contrast, banks in the U.S. are “flush” with liquidity, loan loss reserves and capital, Goldman Sachs Group Inc. analyst Richard Ramsden wrote in an Aug. 6 report. Large commercial banks combined holdings of cash and securities at
large have climbed to 30 percent of managed assets, up from 22 percent at the start of the U.S. financial crisis in October
2007, Ramsden wrote, citing Federal Reserve data.

• And this one (European Banks Must Pay Up to Borrow $100 Billion Amid Crisis: Euro Credit):

   “This return of generalized banking risk marks a new phase in the unfolding European drama,” said Lisa Hintz, an analyst
in New York at Capital Markets Research Group, a unit of ratings firm Moody’s Investors Service. “Investors have heightened concerns about sovereign and financial institution risk.”

… continued…

 Still, Deutsche Bank’s Spick said he expects “a slower moving, but still-toxic, funding crisis.” Unless debt markets re-open in September, “this is likely to force another round of balance sheet deleveraging, bad news for banks and also the
wider economy,” he wrote.
Meantime, U.S. investors are getting out of European bank debt. As of the end of July, the 10 largest U.S. money market
funds cut their holdings of European bank securities by 9 percent from June 30 and by 20 percent from May 31, according to a Fitch Ratings report yesterday. Fitch said the funds it surveyed hold $658 billion of the total $1.53 trillion the industry invests.
The three-month cross-currency basis swap, which measures the cost of a bank selling dollar bonds and swapping the
proceeds back to euros, was at minus 84.3 basis points, close to Aug. 11’s level, which was the most expensive since December 2008.
“The stress in the interbank lending markets is not easing,” said John Brady, senior vice president in the
interest-rates product group at MF Global Inc. in Chicago. “The market remains skeptical of any near-term resolution to the debt crisis in Europe.”

• As a consequence. Europe now stares a political and financial crisis in the face and it’s these fears which are front-and-centre for the market. In Europe, another set back in the financial sector may induce a period of economic malaise in an economy which is just finding its feet on its long walk to recovery. Conversely, America’s economic malaise risks inducing another setback in the financial system (which is just finding its feet on its long walk to recovery). There is long term economic risk inAmerica, but right now that is being overshadowed by short term financial risk in Europe.

Watch your step.

Market Overview

• Headlines say today’s rally is due to the FDIC’s list of problem banks is shrinking. Yeah right. While BofA is pleading with investors that they’re doing just fine as the stock hits a new low not seen since the throes of the financial crisis? See the laughable rumour that JPM will buy BofAML – haha! No this buoyancy in the markets has traders smacking their lips over what Bernanke could say atJackson Hole this Friday. Just a bit of good news Ben… just tell us everything will be alright PLLEEEEASSSE and we can get back to buying into this rally! And who can blame them, QE has worked for equities in the past – not for the economy of course, but it has for equities and other assets linked with extreme levels of monetary inflation. Ironically, in true reflexivity style, the worse the news out the more stocks rallied – in response to QE3 probability.
• Hewlett Packard stabilizes (up a little) after the crash it took on Friday. I commented about how this may have been overdone in my market nightshift note a couple of days ago. Today the former head of HPQ, Fiorina, said that she thinks management are doing the right thing. Who knows, I guess time will decide.

Chart of the Day

Italian CDS Spreads (Source: Bloomberg)

Events

Macro Events:

• Update:
  • Taiwanese Industrial Production came out lower than expected and has been trending lower since the massive Chinese Stimulus of 2009. Now recorded at lowest level since
  • European PMI came out pretty much in line but the German ZEW Economic Survey hit a low only seen twice before in the last two decades (2008 and 1991 recessions).
  • Singapore CPI came out higher than expected and has only climbed to this level in one period during the last 3 decades… yeah, you guessed it – right before the 2008 recession. Not particularly insightful but, once again, what is worrying about Asian inflation in general is how persistently high it is. In Singapore CPI has been above 4% all year.
  • Pan European Confidence came out well below expectations.

• Alerts:
  • Nothing special.

 

Corporate Events:

• Results:
  • Bank of China[3988 HK], BHP Billiton [BHP AU], ChinaUnicom [762 HK], CNOOC [883 HK], FormosaChemicals [1326 TT], Gazprom [GAXP RM], Heineken [HEIA NA],

• Dividends:
  • Broadcom [BRCMUS], Carnival [CCLUS], HK Exchanges [388 HK],

Reading, Links:

• Looming European Banking Crisis:
  • Euro Banking Crisis #1
  • Euro Banking Crisis #2
  • Euro Banking Crisis #3

22nd August 2011, Market Update: Deficit Attention Disorder

Death of the Stimulus Monkey

Quote of the Day:

Small wonder that financial markets are worried about the risk that the US economy could tip back into recession in the coming quarters, aided and abetted by this ‘deficit attention disorder’.

– George Magnus

Macro Overview

• Obama said something about the economy, so did some Republican candidates… funny, though, nobody is listening to what politicians say any more. Only Monday and you can already hear the hum of anticipation over Friday’s Jackson Hole meeting. What will Bernanke unveil? I can say with all honesty … I have no idea… but it better be good.
• We are entering an era of counterparty risk – as Zerohedge point out… Bank CDS spreads are reaching “escape velocity” check out BoA risk spreads in Chart of the Day.
• Oil going down for the right reasons as Libyan supply looks to come on-line in the post-Gaddafi era – this could be a good boost to global GDP but from what I hear the effects of a liberated Libyan supply-line will not be immediate – give it 6-12 months before we really see any great impact on oil supply.
• Be on the look out for Irene, by the say – she looks angry.

Come on Irene?

• I don’t always agree with everything he says, but I’m a big fan of George Magnus (UBS Economist) and I’m putting the link in because it’s an interesting piece: Convulsions of Political Economy. I love his term “Deficit Attention Disorder” (it’s not what you think – he opines that people are too obsessed with near term deficits). But one cannot help noticing his metaphor between the Chinese Economy and the controversial High Speed Train Crash in Zhejiang province; both are (he says) “related to excessive speed and fundamental design flaws”. Let me just quote the penultimate paragraph on China:

And this is why the current focus on rising inflation and  credit creation matters, especially as the leadership change, along with rising political competition between technocrats and the “princelings”, draws nearer. If China doesn’t stuff the credit genie bank in the bottle properly sooner for political reasons, it’ll have to do so later under more challenging economic circumstances and possibly with more turbulent political implications.

Market Overview

• Toyota hit a new low (see chart of the day) after announcing a collaboration with Ford on hybrids. Now why would you want to do that? From what I remember Toyotaare about 3-5 years ahead of Ford with their hybrid technology – why share it with a competitor? Perhaps they are losing market share after their (accelerator pedal fiasco) faster than they anticipated? Stock hit a 3 year low.
• Bloomberg Baltic Dry Index hitting new highs lately – but to be honest I don’t understand this. It seems to be contrary to other data we are seeing over demand for commodities. Worth keeping an eye on, I suppose.

Chart of the Day

Bank of America Credit Risk (Source: Zerohedge)

Toyota: Foot off the accelerator (Source: Bloomberg)

Events

Macro Events:

• Update:
  • GDP Growth came unexpectedly negative inThailand(-0.2% QoQ vs expected +0.6%). Downfall due to Tsunami effects. Worth keeping an eye on current account balance over the next 6 months. New Prime Minister Shinawatra may flash the cash in first year of her term to live up to election promises. This may push Thailand into dangerous territory in terms of fiscal flexibility to deal with any global slowdown.
  • HK CPI slightly lower than expected +7.9% (vs expected +8.2%) – still pretty high though! Highest inflation level since 1995.  Remember my comment on growth recessions, even in fast growth economies like Greater China? Check out this Bloomberg article on HK growth.
• Alerts:
• Singaporean CPI
• Some confidence numbers out of Eurozone and, specifically, Germany (ZEW survey). Should be interesting

Corporate Events:

• Results:
  • Axiata [AXIATA MK], Bank ofMontreal[BMO CN],ChinaLife [2628 HK],ChinaTelecom [728 HK], Heinz [HNZ], Want Want [151 HK], Wynn Macau [1128 HK]

• Dividends:
  • Hershey [HSY], San Miguel [SMB PM], Wesfarmers [WES AU],

Reading, Links:

• Jackson Holeanticipation:
  • Jackson Hole #1
  • Jackson Hole #2
• Convulsions of Political Economy

21st August 2011, Market Update: The Great Brawl of China

Scene from a "friendly" exhibition basketball game designed to showcase US-Sino relations

Quote of the Day:

nothing to worry about

– Joe Biden to Wen Jiabao over safety of their exposure to US debt.

Macro Overview

• The Great Brawl of China:
• • America: We’ll pay you back all the money you lent us.
  • China: Money? Is that what you still call it?
• No sooner had Putin branded America a “parasite on the Global Economy”, Joe Biden sought to plead for China’s economic support. Your investments are “safe” he kept saying, reassuring Beijing officials that America would not fail to pay interest payments to its creditor-in-chief, The Treasury Department of PRoC. That’s stating the obvious, there is no doubt Americans will repay their debt in the accounting sense – but at what price to the Chinese economy? “Debt” is not a word reserved only for accountants and “safe” is a relative term – the frying pan may be safer than the fire, but it’s still pretty damn hot. One thing for sure, the Global Super Vigilantes are getting restless.
• It’s only a matter of time before we see what the Fed has in its arsenal locker to deal with the current Global Slowdown. But all the data appears to be ratifying one thing – we are indeed entering a Global Slowdown. In The West, this means risk of outright recession, in Emerging Markets and BRICs it means look out for a dangerous growth recession or a point at which inflation exceeds real growth and the pain of both become very hazardous to their respective economies and society as a whole.
• It’s only a matter of time before we see the continuation of the global consequences to the Fed’s policies, as it throws the kitchen sink at a looming domestic disinflation problem by inflating the World’s Reserve Currency. As Daily Reckoning’s Dan Amoss points out:

There is a huge cost to the Fed’s decision on Tuesday: it has given away its ability to hike short-term rates in the event of a US dollar crisis. If foreign creditors accelerate the pace at which they’re already diversifying out of the dollar, inflation may pick up to uncomfortable levels. While the “money velocity” of domestically held dollars may remain low in a sluggish economy, the velocity of dollars held outside the US is likely to increase.

• Unlike the US the UK and other Developed Economies, Emerging Markets face risks from both sides: slowing growth and rising inflation – which makes the risks incredibly difficult to quantify. A recent macro piece from Credit Suisse identify Malaysia and India as the two Asian economies most at risk from austerity if their growth should fall sharply.
• By the way, well done to Rosenberg for getting his call on the US economy (negative) and US treasuries (positive) 100% correct in the face of ridicule from his competitors. Looks like Dr Doom owes you a fine bottle of whiskey.

Market Overview

• It’s not Paulson’s year is it? HPQ got annihilated yesterday. Analysts could not scramble quick enough to down grade the stock after everyone almost simultaneously lost faith in management after they (after missing earnings) announced a change of direction with plans to spin off its PC business and acquire Autonomy (which I’ve always thought of as more a media/software company). This is certainly not the time to be blind-siding investors, but I wonder if this is an over-reaction? Traders erased 13 billion off the value of the company for spinning off an incrementally lower margin business and the $10 billion acquisition of what appears to be a very profitable, high margin business.
• Rather sloppy close into Friday wasn’t it? Again, I’d normally expect short-covering to buoy the markets into Friday close but it was not enough to prevent a negative close. Of course inFrance, Belgium etc they would not have had the same benefit due to short-selling bans. There is very little data out next week but it’ll be an interesting week for the markets – expect a crescendo of excitement coming into Jackson Hole Speech on Friday Morning. This coming Friday will be a much more exciting close than last Friday – that’s for sure!
• Now, here is something interesting. Greek CDS spreads are rising once again… uh oh. Better fast-track that EFSF red tape – the ECB’s running out of time.
• Japan had it’s lowest close since the violent throes of the financial crisis back in Q1 ’09. Meanwhile, it may have gone unnoticed that the Korean market (KOSPI) broke down below the lows of last week to his a new low (see chart of the day).

Chart of the Day

Greek woes resurfacing.

Hewlett Packard Capitulation

 

 

 

KOSPI hits new low

Events

Macro Events:

• Update:
  • Citi and JPM admit stall speed economic growth
• Alerts:
  • HK CPI

 

Corporate Events:

• Results:
  • GF Securities [000776 CH], Hynix Semiconductor [000660 KS], Lotte Shopping [023530 KS], 017670 KS [SK Tel],

• Dividends:
  • Sun Life Financial [SLF CN], Telstra [TLS AU], Woodside Petroleum [WLF AU]

Reading, Links:

• BRIC growth recession:
  • BRIC slowdown#1
  • BRIC slowdown #2
  • BRIC slowdown #3
  • BRIC slowdown #4

18th August 2011, Market Update: Et Tu Plosser? Et Tu Fischer?

Et Tu Brute?

Quote of the Day:

Et Tu Brute?

The last words of (William Shakespeare’s) Julius Caesar… just before his senate buddy, Marcus Brutus, joined the murderous senators, stabbing him in the back.

The public and the policy makers in the Central Bank need to understand that [they need] to have some humility about what Monetary Policy can and can’t do. And we have to recognize its limitations and be careful that we don’t over-expect or over-ask of monetary policy to do things it can’t do.

Philly Fed President – Charles Plosser

Given the extent of the drop in the stock market leading up to and following Standard & Poor’s downgrade of U.S. debt, combined with the FOMC’s commitment to hold short-term rates near zero until mid-year 2013, some cynical observers might interpret such a policy action as a “Bernanke put.” My long-standing belief is that the Federal Reserve should never enact such asymmetric policies to protect stock market traders and investors. I believe my FOMC colleagues share this view.

Dallas Fed President – Richard Fischer

Macro Overview

• Bernanke may feel aggrieved at being stabbed in the back by his dissenters, Plosser and Fischer, but one has to give them some credit for independently speaking their mind over recent Fed policies. Plosser also said putting a date on zero rates (mid 2013), aka QE2.5, so close to the stock market correction was a mistake – as it gave the impression that the Fed was reacting to stabilize stock markets (aka The Bernanke Put). Forgive my wry smile, Plosser and Fischer may be right, but if they are, they’re about two decades too late.
• Secretary and Vice President Joe Biden is the latest in a long line of “government bond salesmen (and women)” to massage the Super Vigilante that is China. Good luck Joe – not so brash with your stock manipulation accusations now, are we? Incidentally, those of you who think that Bernanke is not a currency manipulator haven’t been listening to his speeches – calling China a manipulator is the height of hypocrisy – something tells me Chinese officials may be reminding Dear Joe of this.

Market Overview

• Markets puke, Europe’s largest market (German DAX) closes at it’s lowest level of the year – the last 2 weeks have obliterated a 1 year rally.
• Financials taking it on the chin again and some are already trading BELOW the lows, Barclays and RBS hitting new lows today – check out Barclays stock on chart of the day. Bear in mind Barclays is a bank which has outperformed its
• But some interesting (worrying) developments outside the stock markets which you may want to pay attention to:
• Gold hits record high: $1815 – who knows may be it’ll be at $1850 by the time Japan opens up. I wouldn’t be surprised to wake up one morning and find Gold prices advancing to $2000.
• US interest rates capitulating as people pile into treasuries. You get paid 2% yield for lending money to the US government for 10 years… 10 years of inflation risk pushed into a 2% yield!? To give you some perspective on this, people pile into treasuries when they fear for economic growth and we have never (that’s right NEVER) seen the US 10 year note trade below 2%. We’re turning Japanese – I really think so. Check out chart of the day two decade chart of 5yr swap rates.
• Bizarrely, despite all the selling in stocks it would appear that the inverse relationship with the Dollar is losing traction. I mean yes the Dollar is off the lows (not against Gold, granted, but against other fiat trash) but not by much. If we ever get to a situation where stocks are falling and the Dollar is not rising or (worse still) if the Dollar starts falling and stocks are not rising then hear this: wear some underpants you don’t mind throwing away at the close!

Chart of the Day

RBS stock hits a new low (Source: Bloomberg)

US CPI since 2008 crisis (Source: Bloomberg)

20 year chart of US 5 year interest (swap) rates (Source: Bloomberg)

Events

Macro Events:

• Update:
  • US numbers disappointed:
    • Inflation higher than expected (inflation up and interest rates down – financial repression has never been more oppressive)
    • Housing worse than expected
    • Jobs worse than expected
    • Leading Indicators were OK, though.
    • Philly Fed “dismal” numbers, as Bloomberg put it
  • UK Retail sales worse than expected
  • Taiwanese GDP growth slightly better than expected
• Alerts:
  • HEAVY emphasis on the Bernanke Jackson Hole Speech on 26^th August after this market action. Put this date in your diary. I put much more emphasis on this than the FOMC meeting in September. If Bernanke doesn’t pull a rabbit out of the hat then bring a change of underwear to work.
  •  Canadian Inflation Numbers

 

Corporate Events:

• Results:
  • China Construction Bank [939 HK], Fortescue Metals [FMG AU]

• Dividends:
  • ArcelorMittal [MT NA]

Reading, Links:

• Bernanke Dissenters:
  • Bad Boyz #1
  • Bad Boyz #2
  • Bad Boyz #3