Thursday, July 12, 2012


Euro Strength? A Mystery No More

In October of last year, when the last European crisis risk flare was peaking, we explained in gruesome detail the paradox of Euro strength in the face of crushing fundamentals - namely repatriation (or as BofAML calls it 'deleveraging'). Since the crisis hit in early 2010, EURUSD has average 1.35 - about 11% above its historical average - and in PPP terms, EURUSD has been overvalued by an average 18% during the crisis (over 8% above its overvaluation since the Euro was introduced). The mystery is over. Just as we said, it is bank deleveraging, as evidenced by the chart below which shows a massive $4 trillion (or 42.8%) drop in Eurozone banks' foreign assets since the peak in early 2008. At the same time the reduction in foreign bank claims from the Eurozone over the same period was only $0.4 trillion. As BofAML note, 'even if some of the Eurozone’s bank claims were not converted back into euros, these magnitudes are large enough to suggest a strong positive impact on the euro.' The concern remains that the recent weakening of the EUR has to do with increased risk aversion, the deterioration of the Eurozone crisis, and global policy uncertainty as they suggest in the short-term the worst of the deleveraging may be over thanks to ECB bank support measures - but with such a vicious circle of flow, the squeezes could be painful if the paradox of further crisis escalation hits and drives EUR stronger on these deleveraging flows starting again.




Initial Claims In Holiday Shortened Week Drop To 350K From Upward Revised 376K Due To "One-Time Factors"

First the expected: last week's 374K in initial claims was revised upward to 376K as is now the norm. Then the unexpected: this week's initial claims dropped to 350K, well below expectations of 372K, and purely an artifact of the holiday shortened week as this was the biggest miss to expectations since November 2008. Of course, the Not Seasonally Adjusted claims number rising by 70K is very much irrelevant: it is all about statistical smoothing as those who have leaked access to early release BLS data will tell us. Finally, here is what the BLS actually said: "onetime factors such as fewer auto-sector layoffs than normal likely caused the sharp decline." Continuing claims did miss expectations of 3300K printing at 3304K, and down from a revised 3318K. The market reaction is typical schizophrenia: first risk is up on "better than expected" news, then right back down as the meme spreads that this makes the NEW QE even less realistic. Our condolences to all whose job it is to trade this newsflow. Finally, in the all important cliff category, another 13K fell off extended claims programs, and no longer are eligible for Uncle Sam funded X-Box 360 playtime compensation.



Full Frontal Of ECB's ZIRP: Record €484 Billion Drop In Overnight Deposits

A week ago, the ECB decided to lower its deposit rate to 0%. Today, we get the first real full frontal visual of what this really means, and how banks react under ZIRP. As the ECB just reported, overnight deposits parked in its electronic basement by member banks plunged by the most on record, or €484 billion in one session. This is a lot of money. And this money has to go somewhere. Judging by the reaction in European equities, which continue sliding, bank did not put the money in stocks. Also, judging by the continued slide in the EUR and the daily record negative yields in core European bonds, banks are aggressively buying up "safe" debt, as well as that of other currencies, to place this ZIRP cash somewhere liquid regardless of location, leading to one-time strange events like yesterday's "WTF" 10 Year auction. If indeed the case, look for some serious insanity in the form of record Direct take down in today's 30 Year auction. Which, along with other much more weird things, is to be expected when one has a nearly half a trillion fund flow overnight, and don't forget to add hundreds of billions in now defunct European Money Market funds which have to be parked somewhere as well. One thing is certain: goodbye 0.25% deposit income on nearly €1 trillion in mostly German and Dutch-bank sourced cash.



S&P Futures At Day Session Lows As German 2Y Hits Record 'Negative' Yield

As Europe opens, S&P 500 e-mini futures (ES) have given up all gains for the day and are back below yesterday's day session lows (down 9pts from the close). German and Dutch 2Y interest rates just hit record lows at -0.021% and 0.033% respectively (and Swiss 2Y is back at -35bps just off its lowest ever). Major AUD weakness following its worst of the year drop in employment is impacting carry pairs (notable JPY strength) and the EURUSD is back at yesterday's lows - which is pushing the USD up to week's highs and dragging commodities lower (with Silver and WTI dropping the most). Treasury yields are leaking lower but remain well off post-10Y-auction spike lows for now. Meanwhile - Italian and Spanish sovereign bond spreads are modestly lower. This seems like a combination of technicals from CDS-cash basis traders stepping in at notably wide spreads as well as the considerable decompression in subordinated bank spreads relative to senior/sovereigns - which is/was a popular trade and seems to have gathered steam once again as the Spanish MOU is leaked (and as we suggested Subs get 'bailed-in'). European credit remains markedly underperforming European stocks post EU-Summit, but the stocks seem to be playing catch-down for now today.



Middle Class? Here's What's Destroying Your Future

In broad brush, financialization enabled the explosive rise of politically dominant cartels (crony capitalism) that reap profits from graft, legalized fraud, embezzlement, collusion, price-fixing, misrepresentation of risk, shadow systems of governance, and the use of phantom assets as collateral.  This systemic allocation of resources and the national income to serve their interests also serves the interests of the protected fiefdoms of the State that enable and protect the parasitic sectors of the economy. The productive, efficient private sectors of the economy are, in effect, subsidizing the most inefficient, unproductive parts of the economy.  Productivity has been siphoned off to financialized corporate profits, politically powerful cartels, and bloated State fiefdoms.  The current attempts to “restart growth” via the same old financialization tricks of more debt, more leverage, and more speculative excess backstopped by a captured Central State are failing.
Neofeudal financialization and unproductive State/private vested interests have bled the middle class dry.



What Do Bonds Say About S&P 500 "Fair Value"

On a day when the reflexive NEW QE knife-catchers seem to have stepped away from the desk, we thought it useful to get some cognitive clarity on where exactly Treasuries think the post-FOMC-disappointment equity market is likely to end up in the short-term (especially as they retrace all the way down to yesterday's low yields). It seems, as we noted yesterday, that bonds believe ES needs to be well under 1300 before deflationary concerns rear their ugly head and NEW QE can be back on the table.



HUI to Gold Ratio Dipping Down Towards Undervaluation Levels Once Again

Trader Dan at Trader Dan's Market Views - 12 minutes ago
The breech of the 400 level in the HUI has brought out some further stop-loss related selling as well as fresh shorting by hungry bears in the sector. GoldCorp's news from yesterday is still impacting the miners in general. That being said, the underperformance of the mining shares against the price of Gold is dropping this important ratio down toward those levels which have been considered as "undervalued" once again. While it is small consolation to mining equity bulls to see the value of their holdings being diminished once again, it does appear that we are entering a region that... more » 


Trader Dan on King World News

Trader Dan at Trader Dan's Market Views - 52 minutes ago
Please take a bit of time to check out my recent written interview with Eric King of KIng World News as we discuss the technical price chart of the US Dollar and some general concepts about price action. It should be kept in mind that a rallying Dollar tends to bring pressure across most of the commodity complex as a sector. There are exceptions however and we note those. http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/7/12_Crucial_Chart_%26_What_to_Expect_From_US_Dollar,_Euro_%26_Gold.html

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Is The MBIA vs BAC Saga Ending In Under 24 Hours?

Anyone who has followed the MBIA vs Bank of America saga knows that the only reason why there has been no settlement so far is due to BAC's relentless stonewalling tactics that seek merely to delay the production of discovery which based on preliminary indications is sufficiently damning to let MBIA prevail in the case, and with that to force settlement that based on our and others' former evaluations, could lead to a doubling in the stock (ignoring the massive short-covering squeeze it would immediately create courtesy of the 15.5% Short Interest of the total float, sending the stock even higher than where fundamentals say it should go). Well, based on a just released transcript of Judge Eileen Bransten motion to compel discovery, the end may be in sight, and may come as soon as July 13, or tomorrow. And what is more important, her displeasure with BofA's relentless stonewalling has come to an end. Will Bank of America have no choice but to settle in the very immediate future? Stay tuned to find out.




S&P 500 Futures On Brink As Banks Lead Losses on Libor Probe

The selling started as Europe opened last night and despite a few pull-backs to VWAP, has continued all morning. S&P 500 futures have crossed the chasm and are heading back to new cycle lows here as the major financials are being sold aggressively on the back of tomorrow's release of the NY Fed's Libor report (among other things we are sure) and have given up all their post EU-Summit gains. USD strength, commodity weakness (with Silver And Gold leading the charge lower this week now) and Treasury yields back to yesterday's post-auction spike lows. VIX up to 19.5% and correlation rising very systemically.



Fed Has No Hammer, Uses Handsaw And Chisel To Pound Nails

The Fed is promising once again to pound nails with the only tools in its toolbox, a saw and a chisel. The "nails" the Fed is trying to pound down are unemployment and deflation. Needless to say, whacking these big nails with a handsaw and a chisel is completely useless: they can't get the job done. The Fed claims all sorts of supernatural powers to sink nails at will--"unconventional monetary policy," quantitative easing, money dropped from helicopters and so on. But all it really has are two tools which have no positive effect on unemployment or the real economy.
  1. The Fed can manipulate interest rates to near-zero
  2. The Fed can shove "free money" to the banks
That's it. That's all the tools the Fed has in its toolbox. Let's consider what these tools accomplish in the real world.





The End Of Swiss And Japanese Deflation

Nearly full employment in all the cited developed economies except the US shows that the deflationary environment of the recent months is only temporary. Deflation is rather an effect of the recent strong fall in commodity prices. No wonder that the Fed is still reluctant to ease conditions; they saw the opposite temporary commodity price movements last year. We do neither expect a global inflation nor a deflation scenario but a balance sheet recession in many countries but still an increase of wages and therefore a very slow global growth in both developed and developing countries and continuing disinflation (see chart of Ashraf Alaidi to the left). CPIs will look soon similar for all developed countries, with the consequence that the currencies of the most secure and effective countries (measured in terms of trade balance and current accounts) will appreciate. These are for us e.g. Japan, Switzerland, Singapore and partially Sweden and Norway. The overvalued currencies with weaker trade balances like the Kiwi and Aussie must depreciate.



Not All Prayers Are Answered Affirmatively

Because I pay attention to these things; I have the sense that there has been a lot of praying recently. Prayers for QE3, prayers for Quantitative Easing mortgage bond buying, “Please SIR;” and for words to the effect in each and every FOMC minutes that “Money will be printed forever and ever Amen.”
“Now I know I'm not normally a praying man, but if you're up there, please save me, Superman!”
                          -Homer Simpson
Now I hate to do this to you and I feel like the bad boy with the pin about to prick someone’s bubble but these prayers have gone unanswered as you know and are not likely to be answered any day soon unless Europe goes up in pixie dust which, while certainly possible, will be far more serious for the markets and will more than offset the Fed dragging out their printing presses and plugging them in once again.



Daily US Opening News And Market Re-Cap: July 12

European equities are seen softer at the North American crossover as continued concerns regarding global demand remain stubborn ahead of tonight’s Chinese GDP release. Adding to the risk-aversion is continued caution surrounding the periphery, evident in the Spanish and Italian bourses underperforming today. A key catalyst for trade today has been the ECB’s daily liquidity update, wherein deposits, unsurprisingly, fell dramatically to EUR 324.9bln following the central bank’s cut to zero-deposit rates. The move by the ECB to boost credit flows and lending has slipped at the first hurdle, as the fall in deposits is matched almost exactly by an uptick in the ECB’s current account. As such, it is evident that the banks are still sitting on their cash reserves, reluctant to lend, as the real economy is yet to see a boost from the zero-deposit rate. As expected, the European banks’ share prices are showing the disappointment, with financials one of the worst performing sectors, and CDS’ on bank bonds seen markedly higher. A brief stint of risk appetite was observed following the release of positive money supply figures from China, particularly the new CNY loans number, however the effect was shortlived, as participants continue to eye the upcoming growth release as the next sign of health, or lack thereof, from the world’s second largest economy.



Overnight Summary: No More SSDD

Something is different this morning. Whether it is the aftermath of yesterday's inexplicable 10 Year auction demand spike, or more explicable plunge in the ECB's deposit facility usage, or, the fresh record low yield in the supreme risk indicator, Swiss 2 Year bonds, now at under 0.5%, market participants are realizing that the status quo is changing, leading to fresh 2 year lows in the EURUSD which was at 1.2175 at last check, sliding equity futures (those are largely irrelevant, and purely a function of what Simon "Harry" Potter does today when the clockworkesque ramp at 3:30pm has the FRBNY start selling Vol like a drunken sailor), and negative yields also for German, French, and Finland, with Austria and Belgium expected to follow suit as the herd scrambles into the "safety" of the core (which incidentally is carrying the periphery on its shoulders but who cares about details). Either way, Europe's ZIRP is finally being felt, only not in a way that many had expected and hoped and instead of the money being used to ramp risk, it is further accelerating the divide between risky and safe assets. Look for the Direct take down in today's 30 Year auction: it could be a doozy.




Frontrunning: July 12

  • If Hilsenrath leaks a Fed party line and nobody cares, does Hilsenrath exist? Fed Weighs More Stimulus (WSJ)
  • Clock Is Ticking on Crisis Charges (WSJ)
  • South Korea in first rate cut since 2009 (FT)
  • Shake-Up at New York Fed Is Said to Cloud View of Risk at JPMorgan (NYT)
  • Italy stats office threatens to stop issuing data (Reuters)... because Italy is "out of money"
  • China New Yuan Loans Top Forecasts; Forex Reserves Decline (Bloomberg).. and here are Chinese gold imports
  • Italy Faces 'War' in Economic Revamp, Monti Warns (WSJ)... says Mario Monti from Sun Valley, cause Italy is "out of money"
  • NY Fed to release Libor documents Friday (Reuters)
  • U.S. House Again Votes to Repeal Obama’s Health Care Law (Bloomberg)
  • Germany May Turn to Labor Programs as Crisis Worsens, Union Says (Bloomberg)
  • Ireland to unveil stimulus package (FT)
 


Swiss 2 Year: -0.38%

The record Swiss nominal 2 year yield is presented without commentary (but in conjunction with the previous post showing an outflow of just why of €500 billion overnight from the ECB as a clue where the money is going).








Today’s Items:

First…
Russia Sending Warships To Syria
http://www.ibtimes.com
Despite Hillary Clinton’s warning, Russia has sent a destroyer-class warship, carrying marines, to Syria.   Russia has been one of Syria’s few remaining allies in the world as the U.S. led coalition continues its war of terror on the Mideast.   Things are getting more interesting folks.

Corn prices are jumping after the USDA cut corn yield by 20 bushels to 146 bushels per acre.   This 12% cut is due to the heatwave and drought conditions that are the worst since 1988.   Corn, used in 95% of all foods and feed for animals for meat only mean one thing.   As corn goes up, so will your grocery bill; therefore, panic now and avoid the rush and get your food supply in order.

Next…
The Other Foreclosure Crisis
http://money.cnn.com
People are losing their homes over unpaid tax bills that, in some cases, add up to just a few hundred dollars.   Because they are on a fixed income, the elderly are particularly vulnerable to property tax delinquencies.   While many people are able to pay off their debts and reclaim their homes, a growing number of people are becoming vulnerable to tax lien foreclosures.

Next…
Obama’s Legacy
http://townhall.com
Obamacare may be destroyed; however, Obama has found his niche in history.   As in Germany in the thirties, Barack Obama has mandated that all healthcare plans must offer free sterilizations to all women, but not men, capable of breeding.   This sterilization mandate will define Obama as a man, a president and a historical figure.

Next…
Small Business Confidence Plunges Most In 24 Months
http://www.zerohedge.com
Small Business Confidence has just plunged by its largest percentage in 24 months to its lowest level since October 2011.   The sad reality is that small business, that is the main engine of economic growth and job creation, is rolling over.   In an environment that is openly hostile to small business, is anyone surprised?

Next…
San Bernardino Seeks Bankruptcy Protection
http://www.latimes.com
With years in the making, San Bernardino, facing the possibility of not being able to cover payroll for the summer, becomes California’s third city in less than a month to authorize a bankruptcy filing.   The city faces a $46 million deficit and there will be “draconian cuts” to all city services, including the police and fire departments.   Now for a state that is doing better economically…

Next…
Texas Is America’s Top State for Business 2012
http://www.cnbc.com
From categories like “Cost of doing Business”, “Quality of Life”, to “Access to Capital”, Texas is once again America’s top state for business.   All this, despite having Rick Perry as governor.   Texas and Virginia have traded places each year in first and second place until 2012 when Utah took second place.

Finally, Please prepare now for the escalating economic and social unrest. Good Day

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