22nd December 2011: Is Draghi a Dove or a Hawk?

Quote of the Day:

… we’ve certainly seen a big contrast between him and Trichet…

Danny Blanchflower (ex-BoE Committee Member) on ECB President, Mario Draghi

Macro Overview

Jury Is Still Out On Draghi

• Well? Is Draghi a Hawk or a Dove? We were led to believe he was of the same mold as Trichet – stringently hawkish and as stoic as a Bundesbanker. But we’ve been getting mixed signals. Announcements sound a little dovish but confrontations with the press sound hawkish. So how should we judge the new ECB: by its official announcements or by its verbal jousting with the press?
• Perhaps the answer is: neither of the above. Ex UK BoE Committee Member Danny Blanchflower thinks (on Bloomberg TV) Draghi has turned on the hawkish precedent of the ECB. Make no mistake, the LTRO and rate cuts is a distinct culture shift from the ECB. They are pre-empting potential deflationary hazards with money-printing – this is QE European style.
• There are some interesting questions though, for all the talk of German fears of inflation, where is the backlash? Has the German taxpayer been genuinely hoodwinked into paying for peripheral debt, not via direct tax contributions to the EFSF, but in the guise of indirect taxation from an inflationary creep on their cost of living? Hey, perhaps the timing was impeccable, perhaps Super Mario and Merkel knew all the inflation hawks would be distracted at the butchers, spitting feathers at the cost of their Christmas Turkey?
• Or did Merkel cunningly overplay the inflation hand so she could secure the negotiation over a Germanic political structure (aka treaty change)? This is what I wrote at the beginning of the month…

• Consider this: could Angela Merkel and her CDU Party be playing their EU hand beautifully? Many theoreticians and economists make the mistake of looking at the EU through a “lens of logic”. This could not be further from the reality. In a political shake-up as violent as this, self-interests, horse-trading and power-plays dominate and economic logic takes a back seat. Like shifty characters at a high-stakes poker table, EU leaders size each other up as they pore over the political hands they’ve been dealt … and some are playing their hand with much adeptness.
• Consider this: Germans have always been paranoid about inflation. But are they really as paranoid today as they are making out? Is the average German truly petrified of inflation in the midst of a (deflationary) global slump, (deflationary) debt crisis and lurching violently into a (deflationary) pan-European recession? It would be awfully clever of Merkel’s CDU to suggest that they indeed are still vehement inflation hawks (and indeed some are). But, by publicly over-blowing this risk, Merkel’s CDU have irrefutable leverage over other states (like France and the Southern Europeans) to acquire what it has truly wanted since the dawn of the European experiment.
• Consider this: Germany has has never taken its eyes off the prize. A Germanic Central Bank was a significant milestone for Germany in the context of the Euro, but, in this final chess game, Germany recognizes it as merely a sacrificial pawn. Merkel, the longest serving leader of a G8 country, is no mug – indeed Sarkozy is a political lap-dog by comparison. She may be happy to throw her lap-dog a political bone and trade a Germanic Central Bank for the ultimate prize: a Germanic European Constitution. A supra-national political body which, incidentally, would command a strategic force (economically, geographically, militarily, politically) more powerful than anything we’ve ever seen.

• Sigh… politics…

Market Overview

Traders… Saddle Up For Inflationary Trades Again

• Yep, the ECB is the new cowboy in town. Draghi’s regulators have their had on the printing lever and one swift wrist action from Super Mario would re-invigorate some of the old relationships we’d gotten used to a couple of years ago… Gold up, commodities up, equities up, dollar down etc. Ah… all the old trends that we know and love.

Warning: Potential Buying Opportunity For Equities and Commodities Ahead!

• Of course, history never repeats itself, but it often rhymes. We have to balance this new global fiat inflation paradigm with an ensuing Eurozone recession (no matter what solution they come up with) and a distinctly more challenging economic crux for Asia (lower growth with persistent inflation). One thing I’m actually quite excited about, I think the coming economic hardship will present some great buying opportunities for risk assets like selected equities and commodities.
• But my Chart of the Day is a sanguine, cheerfully Christmas chart. The VIX (normally a measure of uncertainty and risk aversion) has plummeted to new lows. Too early to call an end to economic hardship (we can start by keeping an eye on ISM numbers out in early Jan) but there is light at the end of the tunnel, things are indeed looking up in The West – yes, that’s right… I did actually say that!

Don’t Drink Too Much This Christmas! 

• Finally, I think we have to end with a message of caution for all you Christmas party-ers – by all means have a drink… but don’t drink as much as this British woman!

Chart of the Day

VIX (Source: Bloomberg)

Events

Macro Events:

Update:

• US GDP revised down (worse than expected)
• UK GDP revised up (better than expected)

Alerts:

• France GDP
• Singapore CPI
• Taiwan Industrial Production

 

Corporate Events:

Results:

• Nothing Significant

Dividends:

• Nothing Significant

Reading, Links:

Nothing Significant

12th September 2011: A “Stark Reminder” of Rifts within the Eurozone

A (Jurgen) Stark Reminder

Quote of the Day:

We are balancing between two very difficult problems – one is inflation, which is persisting at close to 10 percent, and there is growth which is slowing down

Kaushik Basu – chief economic advisor to India’s Ministry of Finance

Macro Overview

• You may not have heard of Jurgen Stark before. Well, you have now. The ECB’s chief economist opposed the Central Bank’s bond purchase program. But he just handed his resignation in to Trichet, citing “personal reasons” – demonstrating, in his own way, that mixing the two, purposefully segregated, mandates of monetary and fiscal policy clearly has its consequences in the EU – at least for him. Importantly, it illuminates potential rifts within the EU and ECB. I find it interesting that Stark resigned only a month before Trichet is due to step down to Draghi – there may be more to this than meets the eye.
• This high-profile comes only months after the resignation of the Bundesbank president- Axel Weber. Oh, and what nationality is Mr Stark? German, of course… This is another blow for Merkel and to make matters yet more convoluted, Merkel’s leading CDU party they’ve had to nominate a guy from the opposition party! See article from Der Spiegel:

In addition, the German governing coalition isn’t exactly overflowing with talented individuals who can readily be sent to Frankfurt. This has forced Merkel and Schäuble to nominate a member of the opposition center-left Social Democratic Party (SPD), Jörg Asmussen, to succeed Stark.

• So much going on in Europe that it fell under the radar that India had a horrible Industrial Production Number coming in at only half the rate projected. This is basically the lowest number outside the 2008/9 recession since the records I have in front of me – which go back to 2005.

Market Overview

• I won’t bore you with the gory details from trading today. Instead, a couple of lighthearted tidbits from ZeroHedge:

• ZeroHedge: How’s That Short Sale Ban Working Out?

A month after the short sale ban was implemented in French and Spanish banks, we thought it important (and perhaps educational for our European politician readers) to note the performance -French banks are down 14% and Spanish banks -8%. Can we finally put to rest the idea that a speculative cabal of mean short-sellers is responsible for the market’s jitteriness? Perhaps it is simply a market trying to discern reality from manipulated machinations?

• ZeroHedge: David Bianco CDS Hits All Time High Following S&P Price Target Hike from 1,400 to 1,450

Just when one thought Wall Street could not become more full retard, here comes David “Kermit” Bianco who, perfectly oblivious of the world ending one broke European country at a time, has just released the following: “S&P 500 2011 year-end target remains 1400, 12-month target raised to 1450 from 1400 12-month target raised on time value and conviction in 2012 EPS being ~$100 barring recession.” Barring recession? Has this “strategist” even looked at a TV in the past three months, let alone exited the island of lunatic asylum that is Manhattan? But wait, the humor continues, although we are 100% confident this joke of a snake oil salesman will be on CNBC any minute. As a reminder, Bianco had an S&P price target of 1650 until October 6, 2008, or after the Lehman bankruptcy. He would end up being off by only well over 100%.

Chart of the Day

Indian Industrial Production (Source: Bloomberg)

Greek 1 Yr CDS - since 2008 (Source: Bloomberg)

Events

Macro Events:

• Update:
  • Japanese Inflation – in line
  • Indian Industrial Production +3.3% vs expected +6.2% (very poor number – Q3 GDP will be interesting)

• Alerts:
  • French Inflation
  • UK Inflation

Corporate Events:

• Results:
  • Nothing Significant.

• Dividends:
  • Coca Cola [KO], Devon Energy [DVN], Israel Chemicals [ICL IT], Macy’s [M], Merck [MRK], Motorola Solutions [MSI], Viacom [VIA/B],

Reading, Links:

• Europe on the brink:
  • Euro-Brink #1
  • Euro Brink #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

8th September 2011, Confederation: The Birth of TIPSTER’s “Eurozone Consolidation Treaty”

Rethinking the Stability and Growth Pact

Quote of the Day:

Fragmentation of the Euro would incur political costs. Europe’s “soft power” influence internationally would cease (as the concept of “Europe” as an integrated polity becomes meaningless). It is also worth observing that almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war.

Stephane Deo, Paul Donovan, Larry Hatheway – UBS Economist Team.

Macro Overview

• War? YIKES!! I’ve always been a fan of Paul Donovan, back in 2008/2009 he and David Rosenberg were pretty much the only mainstream Street economists playing down the inflation threat to treasuries. Discouraging investors from dumping US Treasuries – he felt there was always going to be support for prices. A highly contentious and contrarian call at the time, but it doesn’t look so bad now does it?
• Here’s UBS’s latest report – of which I’m sure Paul is a large part: Euro-break up – the consequences. It is creating such a stir around the World I’ve had to include a link to it (courtesy of Paul Kedrosky’s blog site). As a hard-wired skeptic I’m not 100% sure about the credibility of the message, though: “don’t break up the Euro or we’ll all descend into financial chaos and civil war”. Indeed, ZeroHedge take a more satirical line to it in their comment, Bring out your Dead, quoting extensively from UBS’s piece:

“Were a stronger country such as Germany to leave the Euro, the consequences would include corporate default, recapitalisation of the banking system and collapse of international trade. If Germany were to leave, we believe the cost to be around EUR6,000 to EUR8,000 for every German adult and child in the first year, and a range of EUR3,500 to EUR4,500 per person per year thereafter. That is the equivalent of 20% to 25% of GDP in the first year. ” It also would mean the end of UBS, but we digress. Where it gets even more scary is when UBS, like many other banks to come, succumbs to the Mutual Assured Destruction trope made so popular by ole’ Hank Paulson : “The economic cost is, in many ways, the least of the concerns investors should have about a break-up. Fragmentation of the Euro would incur political costs. Europe’s “soft power” influence internationally would cease (as the concept of “Europe” as an integrated polity becomes meaningless). It is also worth observing that almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war.” So you see: save the euro for the children, so we can avoid all out war (and UBS can continue to exist). The scariest thing, however, by far, is that for this report to have been issued, it means that Germany is now actively considering dumping the euro.

• I think the UBS report sensationalizes the scenario a little as it implies that a Euro would be allowed to “freely collapse” in an uncontrolled manner – I simply cannot see this happening under any scenario unless we see parabolic escalation of geopolitical tensions withinEurope. So yeah, if we have a war, then the probability of war is high! In fact, one thing I agree with ZeroHedge on is the most concerning thing about the report is the fact UBS felt it necessary to issue it at all. What does this say about the fragility of the Eurozone – or indeed the fragility of UBS?
• That said the detail of the report highlights the probabilistic outcome for the Eurozone, in my opinion. Most people talk either of the Eurozone muddling through under its current form with the Germans reluctantly agreeing to provide huge contributions (either by Eurobonds or through EFSF) where as others think that the Euro will simply disintegrate.
• They’re missing the most obvious solution in my opinion which is what Donovan calls the confederation ofEurope. I’ll go one stage further and say I think the best solution would be to reform the Maastricht Treaty and Stability and Growth Pact. Let’s call it “The Eurozone Consolidation Treaty”.
• Remember as I mentioned in another comment the old Treaty and SGP had the two main criteria for convergence:

…Member States were required to do stick to the following two fundamental economic criteria:

1. Deficits of less than 3% to GDP
2. Debt to GDP of less than 60%

• The Eurozone Consolidation Treaty would be an evolution of this where:

• The absolute targets (level 2 criteria) are revised to more realistic levels in this crisis:
• Deficits less than 5%
• Debt to GDP less than 100%
• Additional confederative oversight – structured into the Treaty. Where, if deficits approach the level 1 criteria of: 4% or Debt 80% of GDP then the following occur:
• Government must seek approval from other 17 member states before executing the fiscal budget. Voting is weighted pro-rata among members according to size of economy (a measure of GDP)* or risk collectively enforced austerity (loss of independent political power).
• The member state immediately loses its confederative voting rights in the event of level 1 criteria being triggered.
• These initial targets are then ratcheted back to closer to their original levels over 5 years after 2013.
• LEVEL 1: 2.5% GDP Deficits, 55% Debt to GDP
• LEVEL 2: 3% GDP Deficits, 60% Debt to GDP

Benefits:

• These measures would act as a severe deterrent for member states to stray beyond their fiscal responsibilities toward convergence.
• The political structure would literally force member states to take an active and political interest in each others fiscal agenda. Much more coherence and collectivism within the Eurozone.
• There would be collective responsibility among member governments for failing Euro members.
• Greater cultural and social cohesion between populations.
• Greater credibility to the Euro and fiscal union of the Eurozone.
• Greater independence of the ECB as this would purely be inter-state legislation.

* I put GDP weightings although this could be contentious. But it’s my view that, if, during a Sovereign debt crisis, member states are expected to contribute towards bailouts (EFSF) with pro-rata weightings in accordance with their GDP, then they should be awarded confederative voting rights in this respect too. This could be made into a more sophisticated weighting (e.g. I personally favour (GDP – Debt) measure which would place significant additional encouragement towards the convergence of fiscal prudence. If you get your sovereign balance sheet in order, you’ll get more regional confederative powers.

• Listen, lots of flaws with what I’ve just suggested, perhaps it’s too complicated or too rigid or just too politically unrealistic… but it’s just a suggestion. A new European Consolidation Treaty along these lines may just work. Let’s face it, there are many positive things about a currency union in Europe– in fact Stephane Collignon of The Guardian came up with an interesting alternative solution yesterday which has many similarities with mine.

I therefore propose to abolish the SGP and to replace it by a new framework with the following features:

1. A European macroeconomic framework law is voted every year under theLisbontreaty art. 294 on the ordinary legislative procedure, which determines what the appropriate aggregate fiscal deficit is for the euro area as a whole. This law takes into account the economic environment, growth and employment, the accumulated debt levels, and the world business cycle. The macroeconomic framework law replaces the rigid deficit limits of the SGP, which were never kept, and establishes a framework with greater (vertical) flexibility that an efficient macroeconomic policy in a single currency area requires.

2. The European commission then issues deficit permits against the authorised amount of the aggregate deficit.

3. These deficit permits are allocated to member states according to their GDP shares. Modifications according to the relative debt ratios (above or below 60%) are possible.

4. Deficit permits are transferable. If one member state needs to borrow more, it can obtain additional permits from other member states that do not use them. The transfer could be subject to deals between governments in the European council, or one could set up a market where deficits are traded like pollution permits. The transfer mechanism allows for the necessary horizontal flexibility that responds to asymmetric shock in member states.

5. A banking regulation that prohibits financial institutions from lending or helping raise euros for public authorities unless the borrower can present the equivalent amount of deficit permits. In other words, member states’ capacity to issue debt is controlled at source; no need for complicated bureaucratic surveillance and punishment mechanisms.

• The point I’m trying to make is that Europe faces a political problem – there are political solutions.

Market Overview

• Trichet’s comments were not exactly what the market was expecting but, honestly, I don’t think that he’d realistically perform a U-Turn on monetary policy. I mean he’s even less reactive than Bernanke and he didn’t even hint at anything at Jackson Hole. While he downgraded his growth outlook (downside risks) and inflation outlook (balanced), Trichet in fact took a very hard line towards the independence of the ECB and the responsibilities of member governments to collectively keep ahead of the curve with respect to their collective fiscal responsibilities. Euro got hit and stocks traded down on the comments but soon recovered.
• The real issue disturbing me is the Greek CDS spread – now pricing in 91% probability of default according to Bloomberg. See chart of the day.

Chart of the Day

Greek 2 Yr CDS at all time highs (Source: Bloomberg)

Events

Macro Events:

• Update:
  • Japanese Machine Orders below expectations.
  • BoE announces rates unchanged and no “monetary activism” (QE) just yet.
  • ECB announces rates unchanged – revises growth and inflation outlook downward.
  • Russian GDP – smack in line with prior number +3.4% YoY. So the BRICs look good at a snapshot – with growth currently sustained and inflation fairly stable.
  • US Jobs data came out worse than expected (Jobless claims at 414k vs 405k and also an upward revision to old number)

• Alerts:
  • Obama Jobs Speech!
  • Chinese Inflation Numbers
  • German Inflation Numbers
  • Italian GDP
  • Japanese GDP

Corporate Events:

• Results:m
  • Nothing Significant

• Dividends:
  • Want Want [151 HK],

Reading, Links:

• European conundrum:
  • Conundrum #1
  • Solution #1

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

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

8th August 2011, Market Update: AAA is the new AA, -5% is the new “Flat”

Dollar Tornado

Quote of the Day:

Jeez, I don’t know what I’m looking for now…

I don’t understand now… what’s going on…th-there’s some kind of… I suspect that we’re now into a high frequency trading, momentum-driven, cascading downturn and I wanna get…I … I…I want to get …I… I… I want to get out of the way of it…

Barton Biggs, the normally sanguine, normally articulate, normally bullish Hedge Fund Manager.

…we decided to deviate from our monetary policy rules…

ECB’s Trichet

Macro Overview

• The European Band-Aid.
• On a day when riots in London remind us of the social consequences of our economic folly it was not Germany’s Merkel but the ECB’s Trichet who blinked first.
• The European Central Bank announced that they would stray beyond their mandate and plunge headlong into the political comedy act that is European politics, announcing finally that they’d buy Italian and Spanish bonds. The market rallied, that was what they’d been looking for. Or was it? Remedies rarely come without side effects and the markets look forward don’t they? As the BBC’s Peston admits:

Because – for the avoidance of any doubt – the ECB is taking a substantial reputational and financial risk in buying the debt of these nations: many will see the ECB as taking a serious credit risk in bailing out two financially over-stretched governments and as behaving contrary to the rules of prudent central banking.

• The Bundesbank was livid at the thought of the ECB stepping into the markets like an drunken porn star in a Shakespearean production. Not only does this impose fiscal union a little too hurriedly for the Germans but it also takes an inflationary stab at the German economy – which does not need inflationary policy at a time when its economy is humming along quite swiftly. Forget the sterilization gimmicks, this is inflationary policy from a Central Bank which has only ONE mandate: to control inflation, at a time when inflation (by its own admission) is already high enough! That’s how bad things have got – they’re throwing the kitchen sink at the problem.
• Granted, the ECB is only doing this until European Bureaucrats get the EFSF in order (at which point the EFSF will take over bond purchases) but the credibility question now hangs over the ECB. Given the fractiousness of EU politics, the ECB is much, much more sensitive to disparate political risk than any other central bank in the World. Embarrassing, given Trichet only days ago said he would not be buying Italian and Spanish debt… hopefully they sneaked that one under the carpet while Mr Market was busy licking his wounds in America – we’ll see. By the close of play the European markets were a blood bath
• S&P on the rampage.
• S&P may have made a $2 Trillion mistake but, when you have future obligations of $60 Trillion who the hell cares? Besides, their reasoning was more to do with the political dysfunction in Washington and the fact that (despite the fact other AAA rated countries, like France and the UK, have bigger deficits) the trajectory of the US public debt was simply out of control. But something tells me that the S&P is lining up the AAA European economies for a downgrade too.
• S&P are not stopping at the US government, they came out and downgraded everything connected to long term US government debt including Fannie Mae and Freddie Mac. Then they came out and downgraded Warren Buffet’s Berkshire Hathaway along with four other AAA peers – citing that any company (like an insurance company) which uses US Treasuries to park vast quantities of cash. These S&P guys are on the rampage… who’s next? Watch this space. Watch Muni’s and Corporates too.
• Bill Gross commended the agency on actually showing some “spine” but Warren Buffet and even Roubini said that this was a harsh action by the rating agency. You decide – I’m not actually sure it’s all that relevant.

Market Overview

• Welcome to the new volatility normal where 5% is the new 0.5% on the S&P. Hey, don’t bother getting out of bed for anything less than that.
• In the middle of the trading day Obama came out and made a speech which went a bit like this:

“Ahhhh… [Yawn]… I’ve just woken up, can someone tell me what’s going on…?” …a lot of words with absolutely no content, what a joke.

• The market was already down 4% at the time but it still found another 2% downward move from there after that brief reminder from the President of just how disconnected politicians are from the realities on both Main Street and Wall Street. Bank of America (being sued by AIG over “massive fraud”) and Citi had lost one third of their value in 3 days at one point. BoA closed down 20% today… that’s a 20% move in ONE DAY for one of America’s biggest banks.
• I’m still trying to look for positives … you’ll be happy to note that the Botswana stock market was up 0.09%. That’s the best I could do.
• Gold reached $1700 today – it was not long ago I was joking about it touching that level soon after we broke through $1600… and here we are.
• This has been a sucker punch, there is something quite scary about the relentlessness of this sell-off. When market traders say things like “it’s actually been quite orderly” then you know this is far worse than it looks. There has been no way any unhedged, “long and wrong” person could have traded their way through this to make back gains. This is real wealth destruction.
• Market message to the Fed: DO SOMETHING!
• I suppose the positive is that things cannot get much worse… the only thing that would make this worse is if we saw this volatility spill into other asset classes such as US or German Bonds or some sort of currency crisis in one of the major currencies (USD or EUR).

• We now are entrenched in a contagion cascade. Markets which are not directly affected by the incompetence of Western politicians are now suddenly on the sell card. Ukrainian, Romanian, Brazilian exchanges all down over 8%.
• Nasdaq closed down a cool 7% (hey it beat Argentina, which was down 10%!) and the S&P closed down just a smidge… -6.7% on the day.
• Good luck Asia!

Chart of the Day – I can guarantee these resistance levels will hold

VIX – highest level since the crisis of 08/09.

Spiky VIX (Source: Bloomberg)

5 year chart of Gold.

Gold just running away from everybody (Source: Bloomberg)

Events

Macro Events:

• Update:
  • Nothing of significance – just watch the news and markets!
• Alerts:
  • Nothing of significance – just watch the news and markets!

 

Corporate Events:

• Results:

* Nothing of significance – just watch the news and markets!

• Dividends:

* Nothing of significance – just watch the news and markets!

Reading, Links:

• ECB must “go nuclear” to save Europe
• Eurozone #1
• Eurozone #2
• Eurozone #3

7th August 2011, Market Update: PLANET BATTLE – S&P vs Treasury, Germany vs ECB, Japan & Switzerland vs FX Market

Quote of the Day:

Quote of the day comes courtesy of Peter Barnes at Fox Business News when he interviewed the American Treasury Secretary, Tim Geithner, in April 2011.

PB: … is there a risk the United States could lose its AAA credit rating, Yes or No?

TG: No risk of that.

PB: No risk?

TG: No risk.

Macro Overview

• Two Big Macro Heavy-weight issues will wage war on the markets economic outlook this week:

1. S&P downgrade of the US is the talk of the town this weekend although Greenspan said, while he sees a slowdown, he does not see a recession.
• S&P’s launch of a pretty scathing attack on the treasury was met with a petulant rebuttal from the Treasury to which they responded with a big fat “WHATEVER”. Quite right too, I mean the only controversial thing about the downgrade, in my opinion, was that it should have happened much earlier. But, can you believe this is happening? The US Government bitching with a credit rating agency? This is getting absurdly theatrical.
• Geithner defended calls for him to resign but, let’s face it, the World has lost faith in the whole political process on Capitol Hill and Tiny Tim does not seem to be the man to rally the troops and lead us out of this. Hey, apparently AA is the new AAA, don’t you know?
2. Europe jumps from Frying pan to Fire. This is how fast things are moving today on Sunday the 7^th August.
• Only three days after Trichet said “non” to quantitative easing, the Germans came out over the weekend and said “nein” to the EFSF. Which puts Trichet and Merkel in a dilemma – someone is gonna have to give in. Will Trichet start buying Italian bonds literally hours after he said no chance? Or will Merkel commit political suicide in an attempt to rekindle The European Dream against the wishes of her electorate? One almighty fight is brewing. I hope sensible minds prevail, but honestly, dear reader, you cannot take your eyes off this for a second!
• And while Italy threatens to bring the World to its knees, where is Berlusconi, the Italian Prime Minister, in all this? Oh yeah that’s right, the 75 year old man who seems to like to shag under-aged prostitutes, is off to the seaside after telling the World: Crisis? What crisis? I don’t see a crisis.
• Meanwhile as the Dollar already starts to weaken over the weekend (what happened to the safe-haven status – shouldn’t the Dollar rally on uncertainty?), European leaders scramble to disseminate positive and collaborative statements before the market opens and there is news of emergency G7 meetings to help reassure the markets. I mean, holy cow, you just cannot make this stuff up.
• In my opinion the sooner the markets open the better – this will differentiate where the priorities lie and where the next course of action should be – who knows, we may even rally this week. But there’s nothing worse than giving politicians and bureaucrats 48 hours to conjure a “Grand Plan to Save the World”.

• All this news and it’s tempting to simply forget other things that happened at the close of last week. But let’s quickly run through them.
• Thaksin Shinawatra is back in the saddle in Thailand. Sorry, did I say Thaksin? I meant his sister Yingluck Shinawatra, of course there will be a just and open process in discerning whether Thaksin should rebuff his official exile. Right, so see you in town for Christmas dinner Thaksin!
• According to the Bank of Spain, GDP growth in Spain may be +0.2%. Now this is lower than expectations but this is more in line with a soft slowdown not a recession. Spanish stocks were up when all others were down this morning. So that’s a bit of good news – see, it’s not all doom and gloom.
• UK Regulator (FSA) asks banks to disclose Belgian exposures. So it’s Belgium now is it? OK bring it on – why not add The Netherlands and France while you’re at it. But you cannot make a derogatory acronym out of BPIIGS or FNBPIIGS?
• More fighting talk from Japan’s MoF on government’s guerilla tactics over the Yen exchange rate. Pity the poor Swiss, they tried to weaken their currency and the market didn’t bat an eyelid, they’re not as experienced as the Japanese at terrorizing their own currency.

Market Overview

• S&P was all over the place on Friday and I have to say, even though we ended the day flat, this was a bearish close. You’d expect a short covering wave to storm in just before the weekend. You’d expect a dead cat bounce or some sort of reversion. You’d expect bargain-hunters, given the earnings. But no, the selling was so relentless it neutralized this as well as the bottom-fishers and opportunistic value funds.
• OK I searched for a positive bit of news. And there was a market up on Thursday… GHANA!!
• Allied Irish Banks were the biggest $ mover on Friday. Wait for it…. Down 35%. I put it on chart of the day. That big red line is significant and has a special technical resistance level. It’s called ZERO… stocks tend not to trade below that.
• Just to round up formalities (in case you forgot about them) Viacom beat earnings… P&G beat earnings for Q4 but they warned over Q1 earnings… again – generally the earnings data is quite good. But who cares on a week like this?

Chart of the Day – I can guarantee these resistance levels will hold

You may think I’m being an alarmist but the collective market capitalization of these three movers a couple of days ago was well over $120 billion – these are BIG companies experiencing BIG losses.

Lloyds – saddled with Irish Debt

Lloyds (Source: Bloomberg)

Dendreon – I predict a resistance level at around ZERO.

Dendreon - The Ultimate Resistance Level ! (Source: Bloomberg)

Allied Irish Bank – I predict a resistance level at around ZERO.

Allied Irish Banks - The Ultimate Resistance Level ! (Source: Bloomberg)

Events

Macro Events:

• Update:
  • US Non Farm Payrolls were actually OK if you remember – in fact better than expected but nobody seems interested this week.
  • Italian GDP was bang in line. Again – who cares?
• Alerts:
  • Nothing of significance – just watch the news and markets!

 

Corporate Events:

Results:

* Nothing of significance – just watch the news and markets!

Dividends:

* Nothing of significance – just watch the news and markets!

Reading, Links:

• QE3? Don’t rule it out just yet – another week like that and it’ll be almost inevitable.
• QE3 #1
• QE3 #2
• QE3 #3