The European Central Bank's (ECB) unprecedented use of a three year, low cost LTRO (Long Term Repurchase Agreement) policy initiative may have removed some of the short term pressures from the EU Banking crisis, but like the Greenspan PUT, the unintended consequences are not yet fully understood. One is the moral hazard which is fostering financial "games" to be played with reckless abandon. Some of the mischievous and cunning games are frankly questionably as being even legal! But then, nothing is illegal if the regulators and those organizations charged with surveillance are not bothering to investigate. Extend > Pretend > Bend is the new approach. MORE>>
The Global Markets have reached the point of waht can be best labeled as "Elevated Risk". Analytics measurements including Fundamenal Analysis, Techncial Analysis and Risk Anlysis all are independently signalling this along with warnings. This months report lays out the Risk Assessment, Risk Levels as determined by our proprietary aggregated Global Financial Risk Index, changes in Tipping Points and the Macro Risk-On, Risk-Off Drivers.
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The market action since March 2009 is a bear market counter rally that has completed a classic ending diagonal pattern. The Bear Market which started in 2000 will resume in full force when the current "ROUNDED TOP" is completed. We presently are in the midst of of a "ROLLING TOP" across all Global Markets. We are seeing broad based weakening analytics and cascading warning signals. This behavior is typically seen during major tops. This is all part of a final topping formation and a long term right shoulder technical construction pattern.
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EURO EXPERIMENT : ECB's LTRO Won't Stop Collateral Contagion! Released December 27th, 2011
I would argue that the problem short term is a shortage of real collateral and that US dollar cash, versus 'encumbered' cash flow, is now king. It is clear that the rampant advancing Collateral Contagion will quickly eat the futile LTRO attempt like ravenous wolves. A well circulated Tweet from PIMCO bond king Bill Gross said it all: " What does LTRO stand for? 1- A shell game; 2-Cash for trash; 3 Three-card Monti; or 4. All of the above." Here is the stark reality of what forced the ECB to offer unprecedented three year loans at absurd rates and most alarmingly, the acceptance of collateral that no other financial institutions will accept. The ECB has sacrificed its balance sheet in yet another EU "kick at the can". MORE>>
04/26/2012 3:57 AM
Postings begin at 5:30am EST
and updated throughout the day
Countries not matching the new Merkozy-limit of a maximum of 3% budget deficit were Greece, Ireland, Portugal, Spain and... France
In simple terms - countries need to be in the lower left quadrant (green) and yet the PIGS are rapidly heading in the exact opposite direction (upper right orange quadrant) missing both debt and deficit convergence criteria.
Citigroup's Economic Surprise Index which tracks the rise and fall of both misses and beats as well as better or worse data. For the first time in over six months, macro data for the G-10 has turned negative (with Europe having been there for a while and the US getting very close) indicating significant weakness. When this data turned from positive to negative in July 2010 it pre-empted the 'rescue' of the global economy via QE2 and each time it has dropped below its 200DMA (which it also just did) we have seen notable deterioration in equity prices soon after. What is more worrisome perhaps is the rate of deterioration over the last two months or so. Four of the last five times we dropped this rapidly we saw significant drops in stock prices soon after (Dec 2008, August 2010, and June 2011).
G-10 macro data has turned negative (upper pane) dropped below its 200DMA and is at its lowest in over six months. The pace of deterioration has been rapid (lower pane) and 4 of the previous 5 times this pace of drop has occurred, equity prices have dropped considerably soon after...
US and Europe are now back in sync as decoupling becomes a dim and distant memory though on the bright side we are not missing as badly as Europe...
and in case you were wondering how well this syncs with stock performance, her is the US-only Citi ECO surprise index relative to 3 month changes in the S&P 500...
The southern strain of Eurovirus has a much larger non-proportional impact thanks to transmission risk via its significantly greater share of sovereign and bank debt relative to the world and how these debts are financed. The transmission risk to the much-larger Northern Europe is material. We are already seeing Germany's new orders from within the Euro-zone slumping and this week's business sector surveys were very weak.
The problem with Southern Europe is one of transmission risk and non-proportional impact:
In recession, the region causes more than a proportional problem for the leveraged financial system described on the prior page. Even with German and French bank claims on Southern Europe having fallen in half since 2007 (see page 6), potential losses on remaining claims still represent a large percentage of European bank capital.
The table shows what each country reports as its sovereign debt, but these figures may be underestimated. Spain’s central government and regional debt is reported at 68% of GDP. After accounting for bank restructuring costs, write-downs on development bank loans, potential losses on government guaranteed private sector debt, and possible losses on Spain’s share of loans to other countries in Southern Europe, we estimate Spain’s debt as being ~85% of GDP.
The table does not capture how countries finance their sovereign debt. Japan’s sovereign debt is large relative to its GDP, but is 93% owned domestically; and the US is (for now) the world’s reserve currency. Southern Europe’s reliance on crossborder capital required the ECB to take extraordinary steps to offset it when it fled.
The transmission risk to Northern Europe is material. As shown below, the collapse in Germany’s new orders from within the Euro area is substantial. This week’s business sector surveys in Europe were very weak, and the only surprise to us was that people were surprised. The French and German economies are stagnant right now.
3 - Risk Reversal
FRENCH ELECTIONS - Signals Major Shift Away From Austerity In Europe
Europe is similar to the Soviet Union in the way that the euro crisis has the potential of destroying, undermining the European Union,” he said in a debate on public policy education Tuesday. “With the profound social, economic and moral crisis that Europe is in, we can see a similar process of disintegration.”
In a little over a month, the risk of the 30 most systemically important global banks has jumped an impressive 45%.
What is intriguing is how absolutely end-of-the-world the situation felt heading into Q1 2009 and yet - with banks' risk considerably higher now, we have become so much more 'used' to this state of chaos that our anchoring bias says - all is well?
3 - Risk Reversal
JAPAN - DEBT DEFLATION
FRANCE: Austerity or False Growth. Votes choose the Socialist "promise" of Growth
No matter how you spin it, having debt three times your income before you are responsible for paying it down as a mitigating circumstance is simply idiotic.
UK: English graduates don’t have to repay their loans unless they make 21,000 pounds a year. They pay 9 percent of their earnings over that amount and all debts are forgiven after 30 years. Payments are automatically deducted from paychecks. Graduates don’t have to pay if they lose their job or transition to part-time work, as many working mothers do.
US: By contrast, U.S. education debt can’t be discharged through bankruptcy and almost 2 million Americans with student debt are over 60, according to the New York Federal Reserve. About $85 billion in student debt was delinquent in the third quarter of 2011. In March, the Consumer Financial Protection Bureau said U.S. student-loan debt had reached $1 trillion, based on preliminary findings.
EU: In the rest of Europe, where higher education is free or relatively inexpensive, governments are watching to see if the U.K. plan succeeds
13 - Social Unrest
Gold & Silver Backed, Absolute-Return
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past performance is no guarantee of future results.
MACRO News Items of Importance - This Week
GLOBAL MACRO REPORTS & ANALYSIS
US ECONOMIC REPORTS & ANALYSIS
CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES
TECHNICALS & MARKET ANALYTICS
EARNINGS - Extremely Misleading Graphs and Headlines
There is one simple reason why the market is less the jubilant about recent earnings "beats" - they all come on trails of aggressive recent trimmings to near forecasts, all at the expense of hockeysticking latter part of the year expectations.
Consensus revenue growth expectations (excluding energy and financials) are 6.5% in 2012 and 5.8% in 2013. This is lower than the 8.2% growth achieved in 2011. We think it is sensible that the revenue growth expectations are lower for 2012 and 2013 versus 2011 but don’t think estimates embed risks like the 2013 fiscal cliff or a recession in Europe. At the sector level, 2012 earnings growth expectations are highest in financials, technology, and industrials. The lowest growth estimates are in utilities, telecom, and health care.
MARGIN EXPECTATIONS - Not Realistic, Don't Pass the Common Sense Test.
One place where it is more obvious than anywhere: margin expectations, which somehow the consensus see soaring in 2013 after what has now become a very tepid 2012 (despite irrational exuberance toward the mid/late part of 2011).
With much more downside risks associated with the longer-term corporate outlook (fiscal cliff, Europe, China slow down), the market has once again reverted to its "show me" phase, where Q1 results are good, but simply not good enough to where mere hockeysticks in expectations will offset the overhanging fears of a global slowdown.
4 COMPANIES CARRING MARKET: AAPL, GOOG, IBM & ORCL
3 companies, GOOG, IBM and ORCL, and the Financial sector in general (which is neck deep in so much "one-time" DVA and otherwise accounting-based trickery we wouldn't know where to even begin) account for more than 60% of the EPS upside!
ESTIMATES STEADILY DOWN - Until Recently
The 2012 EPS estimate, currently at $106.16, reached a near-term bottom of $105.34 in February 2012, while the 2013 estimate troughed at $118.47 in early March versus the current reading of $119.24.
COLLATERAL CONTAGION - Determining True Value and Wealth
In a world with hundreds of trillions of imaginary collateral whose ultimate owner will never be tracked down, (and a daisy-chained bankrupt domino collapse will come before anyone finds out who owns what), only that which is:
Tangible, Undilutible and Real
will have value.
CORPORATOCRACY -CRONY CAPITALSIM
GLOBAL FINANCIAL IMBALANCE
STANDARD OF LIVING
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Tipping Points Life Cycle - Explained Click on image to enlarge
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