How Safe Are Central Banks? UBS Worries The Eurozone Is Different

With Fed officials a laughing stock (both inside and outside the realm of FOMC minutes), Bank of Japan officials ever-watching eyes, and ECB officials in both self-congratulatory (Draghi) and worryingly concerned on downgrades (Nowotny), the world's central bankers appear, if nothing else, convinced that all can be solved with the printing of some paper (and perhaps a measure of harsh words for those naughty spendaholic politicians). The dramatic rise in central bank balance sheets and just-as-dramatic fall in asset quality constraints for collateral are just two of the items that UBS's economist Larry Hatheway considers as he asks (and answers) the critical question of just how safe are central banks. As he sees bloated balance sheets relative to capital and the impact when 'stuff happens', he discusses why the Eurozone is different (no central fiscal authority backstopping it) and notes it is less the fear of large losses interfering with liquidity provision directly but the more massive (and explicit) intrusion of politics into the 'independent' heart of central banking that creates the most angst. While he worries for the end of central bank independence (most specifically in Europe), we remind ourselves of the light veil that exists currently between the two and that the tooth fairy and santa don't have citizen-suppressing printing presses.

The Rise Of Activist Sovereign Hedge Funds, The "Subordination" Spectre, And The Real "Coercive" Restructuring Threat

When Zero Hedge correctly predicted the imminent rise of the "activist sovereign hedge fund" phenomenon first back in June 2011 (also predicting that the "the drama is about to get very, very real") few listened... except of course the hedge funds, such as Saba, York, Marathon, and others, which realized the unprecedented upside potential in such "nuisance value", long known to all distressed debt investors who procure hold out stakes, and quietly built up blocking positions in European sovereign bonds at sub-liquidation prices. Based on a just released IFRE report, the bulk of this buying occurred in Q4, when banks were dumping positions, promptly vacuumed up by hedge funds. More importantly, we learn from IFRE's post mortem of what is only now being comprehended by the market as having happened, is the realization that the terms "voluntary" and "collective action clauses" end up having the same impact as a retailer (Sears) warning about liquidity (and the result being the start of the death clock, with such catalysts as CIT pulling vendor financing only reinforcing this) to get the vultures circling and picking up the pieces that nobody else desires. As a reminder, it was again back in June we predicted that "the key phrase (or two) in the proposed package: "Voluntary" and "Collective Action Clauses"." Why? Because what this does is unleash the prospect of yet another word, which is about to become one of the most overused in the dilettante financial journalist's lingo: "subordination" or the tranching of an existing equal class of bonds (pari passu) into two distinct subsets, trading at different prices, and possessing different investor protections (we use the term very loosely) with the result being an even greater demand destruction for sovereign paper.

Has The ECB Given Up On Portugal?

  Despite disappointing auction results in France, the downgrade hangovers (sell the rumor, buy the news?), and increasingly likely Greek PSI talk epic-fail, most European sovereigns are rallying modestly on the day. Given the expected shift in the AAA benchmark used for margining (dropping higher yielding France 'AAA's as they are downgraded will lower AAA benchmark significantly and implicitly widen the yield differential for other sovereigns), it is perhaps no surprise that TPTB are active in BTPs (Italian bonds) but it appears that Portugal (admittedly illiquid) has been left to its own devices. Portuguese 10Y bond spreads to bunds just broke 1250bps, +180bps on the day and at record wides. Given the subordination concerns as ESM is accelerated, it is perhaps no surprise that the ECB's SMP has seemingly decided that Portugal has crossed the Rubicon into Greece territory.

The ECB Is Very P.O.'d

The big news out of Europe on Friday was not S&P’s downgrade of 9 countries, France included. The ratings agency told us weeks ago that it might do this. No, much more important was the ECB’s saying in the bluntest possible terms that the EU leaders are backtracking on the fiscal compact agreed just 5 weeks ago by 26 of the 27 countries... Now the folks responsible for the actual writing of this fiscal treaty have only two weeks before the next EU summit to come up with something that satisfies both the EU heads of state — whose attempts to soften the terms show that they are apparently having second thoughts about giving away fiscal sovereignty — and the ECB paymaster. They’ll need to be as flexible as Chinese acrobats to make it work.

European Banks Deposit Entire LTRO, And Then Some, With ECB As Deposits Approach €500 Billion

Back on December 21, the day when the deus ex 3 year LTRO was completed and €489 billion in gross capital was provided to banks at a 1.00% cost, of which €210 billion was net new incremental capital (pro forma for rolling maturities), the ECB deposit facility usage was €265 billion. As of Friday, the ECB announced deposits have grown to just shy of €500 billion, or a new record of €493 billion (which pays banks just 0.25%). In other words, between the LTRO effective date, and today, an additional €228 billion has been deposited, or more than the entire LTRO! And so Sarkozy's carry promoting dreams are entirely dashed, as instead banks end up paying €1.6 billion a year net just to hold the €210 billion with the ECB. In the meantime, the question becomes whether banks are already preparing for the February 29 3 year LTRO next? Check back when the deposit facility usage hits €700 billion in 2 months as banks stash aside about $1 trillion in capital shortfall cash with the central bank. And rising.

Frontrunning: January 16

• Jon Huntsman Will Leave Republican Presidential Race, Endorse Mitt Romney, Officials Say (WaPo)
• Dont laugh - Plosser: Fed Tightening Possible Before Mid-2013 (WSJ)
• Greece’s Creditors Seek End To Deadlock (FT)
• France Can Overcome Crisis With Reforms – Sarkozy (Reuters)
• Nowotny Says S&P Favors Fed’s Bond Buying Over ECB’s ‘Restrictive’ Policy (Bloomberg)
• Bomb material found in Thailand after terror warnings (Reuters)
• Ma Victory Seen Boosting Taiwan Markets as Baer Considers Upgrading Stocks (Bloomberg)
• Japan Key Orders Jump; Policymakers Fret over Euro (Reuters)
• Renminbi Deal Aims to Boost City Trade (FT)

Nigerian Countrywide Strike Suspended

Just out from Reuters:

• NIGERIA'S LABOUR UNION LEADERS SAY STRIKE SUSPENDED - RTRS

Minor down tick in crude on the news, maybe because everyone is still sleeping. So, does this mean that the Iran embargo is back on, and the joint US-Israel wargames are set to resume as "budgetary" conditions have loosened?

Gold Nears €1,300/oz - Euro Lower After EU Downgrades and Greece Jitters

Although gold had its largest drop in the last 2 weeks on Friday, (-1.6%), it was 1.3% higher on the week and trading higher this morning.  Many analysts feel that current sovereign, macroeconomic and geopolitical risks are not reflected in gold's price. Friday's news of France's loss of its AAA rating has put the European Financial Stability Facility (EFSF) at risk. The Eurozone economy resembles a large ship sailing in rough seas since France fund's 20% of the EFSF fund and 8 other members were also downgraded. This will almost certainly lead to the EFSF's downgrade which would result in the fund too paying more to borrow as credit costs rise.  There are icebergs lurking in increasingly murky Eurozone waters. The European downgrades were long expected and may have been priced in the markets. The risk of a non orderly Greek default and of contagion in the Eurozone remains and is not priced into markets. It would lead to the euro falling sharply against other fiat currencies and particularly against gold.

Summary Of The Upcoming Week's Key Events

After the fairly muted Wellington open, the reaction of the European bond markets to the S&P downgrade will be the next focus of attention. One benefit of the S&P ratings action is that it takes away one source of uncertainty. Given a French downgrade wasn't widely anticipated, market focus on this issue may well be short lived. Related to the European downgrades is the rating of the EFSF, which was also put on credit watch in early December. S&P have commented that they are in the process of evaluating the impact of the sovereign downgrades on the EFSF rating. For the AAA rating to be maintained it would require further commitments from European governments. Remaining in Europe, newswires report that Greek debt talks will resume Wednesday, thus the Greek PSI is likely to remain a focus all week.

Stocks Open Down As EURJPY Hits Fresh 11-Year Low

UPDATE: ES leaking lower as Packers fans sell (and China's Shanghai Composite -0.8% at open and Hang Seng -1%)
Following EURUSD's modestly weak opening (though managing to hold above Friday's lows and inching higher), EURJPY has pushed to fresh new 11-year lows (and JGB yields at one-year lows). Asian equities are trading notably lower with Japan's Nikkei down 1.6% in early going (coming back a little now) and South Korea's Kospi down 1.1% so far. ES (the e-mini S&P 500 futures contract) opened lower, tried to get back up to Friday's close, failed and is now down around 6pts (at 1285) - still shy of where broad risk assets (CONTEXT) would expect - around 1280 for now - though AUD weakness (housing data bad not totally dire though carry being lifted), JPY strength (government comments on the flatness expected in Japan's recovery and safety flow) and Treasuries not open is undermining support for stock futures so far. The economically-sensitive commodities are leaking lower with Silver having given back its earlier gains and Copper down 0.75%, Oil is holding near $99 and Gold is down a smidge (and more stable than the rest) at -0.23% ($1635). The market's message is risk-off for now and we would expect Bunds to benefit (as JGBs are for now while corporate credit leaks wider) as without Treasuries open, where is risk capital going to flow.

As Two Thirds Of Companies Report EPS In The Next 3 Weeks, Talk Of "Record Earnings" Is About To Hit Mute

Just like back in the first half of 2011, when GDP experienced a premature climax to coincide with the end of QE2, only to tumble promptly afterwards, so just as two thirds of the S&P by market cap prepare to announce earnings starting tomorrow, Q4 EPS forecasts have hit the lowest they have been at in the past 12 months. While the general economy has been lagging the contraction of Europe and Asia, yet finally hit a downward inflection following the disappointing data of the past week (more on that shortly, as we explain why with the Fed set to begin an easing bias in 10 days, all economic indicators are about to take a dive), it has been corporate results that have so far managed to keep the market afloat. This may be coming to an end, courtesy of a perfect storm of negative earnings preannouncements (which have soared to a ratio of 3.5x compared to positive ones; the highest since Q1 2008) together with outright coincident misses. Because as the chart below shows, at $24.09 and pointed decidedly downward, Q4 EPS and its transition to Q1 2012 does not portend anything good for the world economy or markets. In fact, with the EUR plunging, while the news is welcomed by German exports, the adverse impact to US companies, via FX losses and otherwise, is about to be unveiled.

US Backs Off Iran Attack?

The United States has cancelled a joint military exercise with Israel in a move some analysts are saying could represent a reluctance to support an attack on Iran. “Israel and the United States have postponed a massive joint defense exercise, which was expected to be carried out in the coming weeks, in order to avoid an escalation with Iran,” reports Haaretz.
Although the United States has already sent 9,000 troops to Israel, a move described as a “deployment” rather than an exercise by US Commander Lt.-Gen Frank Gorenc, the Austere Challenge 12 drill, intended to be a wargame response to missiles fired by Iran, has now been postponed until the summer.
The Obama administration cited “budgetary constraints” as the primary reason for delaying the exercise, although observers suggest the move could be explained by a number of different circumstances, including Washington’s anger at how last week’s assassination of Iranian scientist Mostafa Ahmadi Roshan, all but admitted to have been the work of the Israeli Mossad, was conducted so brazenly.
Read More @ InfoWars.com

Technician John Bollinger: “Putting Money Into Bonds Will Be Deeply Regretted”

Also Jim’s Big Picture: “What if it was Thanksgiving and you’re the turkey?” and Ryan Puplava on this week’s market
im welcomes famed technician John Bollinger this week to discuss, among other subjects, the rally no one believes in. In Jim’s first Big Picture topic, “What if it was Thanksgiving and you’re the turkey?” he looks at the rising cost of food. Ryan Puplava also wraps up this week in the markets. Ryan joined PFS Group in 1995. He holds a B.S. in Business Administration/Finance from San Diego State University. His professional designations include FINRA Series 4, Series 7, and Series 66 Uniform Combined State Law Exam. He earned the Chartered Market Technician’s designation in 2007. Mr. Puplava is Senior Trading Manager and works closely with Jim Puplava on PFS Group’s Growth investment objective. He also contributes a monthly Market Observation to Financial Sense and co-authors In the Know—a weekly communication for Jim Puplava’s clients only—with other members of the trading staff.
John Bollinger is the president and founder of Bollinger Capital Management, an investment management company that provides technically-driven money management services. Bollinger Capital Management also develops and provides proprietary research for institutions and individuals. He is perhaps best known to the public as the creator of Bollinger Bands, which he developed in the mid ‘80s. Over the past two decades, investors and traders worldwide have come to view Bollinger Bands as a most reliable tool for assessing expected price action and the bands are featured on most financial charting software and websites.
Click Here to Listen to the Interview

Ron Paul Receives “Game Changing” Endorsement From South Carolina Senator

GOP presidential candidate Ron Paul received what his campaign described as a “game changing” endorsement Sunday, as influential South Carolina State Senator Tom Davis, officially gave his support to Paul.
The Senator, a heavyweight fiscal conservative in the South Carolina General Assembly, is extremely well regarded amongst Republicans and Tea Party activists and will undoubtedly bring voters to Ron Paul’s campaign ahead of the “First in the South” primary.
A Public Polling Policy poll of South Carolina voters released Friday shows 30 percent of voters in the state identify themselves as Tea Party members. Although Ron Paul is and always has been at the core of the real Tea Party message, Newt Gingrich and Rick Santorum have, up until now, polled the highest with self proclaimed Tea Partiers In South Carolina.
It is particularly important for Paul to secure Tea Party votes in this week’s primary, given that there are less independent voters in the state than in Iowa and New Hampshire.
Read More @ InfoWars.com

Iran War is Only Matter of Time

by Greg Hunter’s USAWatchdog.com:

Two weeks ago, Iranians were saved from pirates on their hijacked ship by the U.S. Navy. Last week, the U.S. military saved a sinking ship in the Persian Gulf. It’s too bad that will not be enough goodwill to stop the coming Iran war. Headlines in the last few weeks look like a stark warning for a coming conflict. The West, spearheaded by America, is putting into place tougher sanctions that will target Iran’s financial and oil interests. Tension has been increasing by the week over the nuclear program that Iran steadfastly claims is for the peaceful production of energy. New sanctions will be fully implemented in about six months.
Iran has threatened to shut the Strait of Hormuz if sanctions are carried out. Iran has also warned Gulf oil producers against boosting production if an embargo stops or slows oil from the region. (Click here for more on this story.) The U.S. has warned Iran against any action to close this narrow shipping passage where up to 40% of the world’s oil passes every year. The Pentagon has flatly said it will not allow that to happen. Meanwhile, the U.S. has warned Israel not to attack Iran. The Wall Street Journal reported over the weekend, “U.S. defense leaders are increasingly concerned that Israel is preparing to take military action against Iran, over U.S. objections, and have stepped up contingency planning to safeguard U.S. facilities in the region in case of a conflict. President Barack Obama, Defense Secretary Leon Panetta and other top officials have delivered a string of private messages to Israeli leaders warning about the dire consequences of a strike. The U.S. wants Israel to give more time for the effects of sanctions and other measures intended to force Iran to abandon its perceived efforts to build nuclear weapons.” (Click here for the complete WSJ report.)
Read More @ USAWatchdog.com

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