EuroZone to “increase” bail out fund to E940bn

The Japanese government is to announce it’s 1st (in 14 years, and to cover just 6 days of expenditures) stop gap budget as political wrangling has resulted in a lack of agreement on the budget ahead of the 1st April deadline.

Japanese retail sales by +3.5% YoY (+2.0% MoM), the highest since August 2010 and better than forecasts of +1.4%;

South Korea reported a trade surplus in January of US$639mn, as opposed to the deficit of US$969 in January. The better US economy has been very helpful. The traded goods trade surplus came in at US$1.4bn, as opposed to a deficit of US$1.6bn in January. Consumer and business confidence rose to a 4 month high. I am short and see no reason to change. High consumer debt, rising inflation etc, etc will remain a real problem, as will a slowing China;

The Chinese Yuan looks set to decline against the US$ (currently -0.23%) in the current Q. With slowing corporate earnings (impacting on the equity market), concerns over bad debts, a grossly unbalanced economy etc, etc, I remain of the view that the Yuan will not be allowed to appreciate this year and that (even though the evidence suggests otherwise), the Yuan is not as undervalued as many think;

The BRICS conference in Delhi complains that ultra lose monetary policy in DM’s is impacting their economies – higher inflation etc. Well unfortunately, that will continue;

The FT refers to an excellent Nomura report on potential Portuguese dent restructuring ie PSI. The key points are:

-Greece is not a special case, there will be further debt restructurings in the EZ;
-Private sector bondholders are subordinated to the official sector (EU/, IMF, ECB);
-The longer the delay, the larger the haircut;
-Whilst Portugal’s C/A, privatisation programme is delivering, unemployment is soaring (likely over 15% at present, as opposed to government forecast of below 14% for the year), tax receipts are down some -9.0% and ever rising SOE’s borrowings are off the governments balance sheet;
-Portugal will not reenter international bond markets in 2013 and, as a result, a E10bn financing gap is inevitable;
-About 50% of Portuguese debt is restructurable, excluding unknown, but estimated holdings by the ECB;
-Domestic institutions now hold about 30% of o/s debt, up from 16% in 2011 and 40% of restructurable debt, which means that Portuguese banks will have to recapitalised – why is anyone owning Portuguese banks?;

The bottom line, is that if the EZ/EU bought Portuguese bonds at their current prices, they could reduce debt to GDP by around 50%, making Portugal solvent, boys and girls – a much better option in my view. Whilst many of you raised their eyebrows when I suggested buying 10 year Portuguese debt yielding 15.5% a short while ago, just check out the current yield. PORTUGAL IS RESCUEABLE – that’s the bottom line. In addition, Germany and other EZ countries for political reasons (due to the fact that Portugal has implemented the austerity measures) will SAVE THE COUNTRY. Basically a carrot (Ireland and Portugal) and stick (Greece) approach. This is one of the very few issues I agree with the EZ/Germany on. Having said that, Portuguese government forecasts of of a 4.5% budget deficit and -3.3% GDP contraction for the current year is clearly pie in the sky stuff;

EZ corporate and consumer confidence fell marginally in March to 94.4, from a revised 94.5 in February and lower than the expected 94.6. EZ manufacturers are getting gloomier as well – the index declined to -7.2 in March, from -5.7 in Feb. However, the services index rose to -0.3, from -0.9 in Feb. Consumer sentiment came in at -19.1 from -20.3;

Bloomberg reports on a draft leaked EZ statement which suggests that the EZ bail out funds will be increased to E940bn, as the EFSF/ESM are run in parallel till mid 2013, with the EFSF falling off thereafter. The permanent EZ bail out fund will have E500bn of resources, which together with the E200bn committed to the temporary fund (the EFSF) and a further E240bn of unused capacity remaining within the EFSF (till mid 2013 and only to be used if agreed by all EZ heads of State) makes up the total of E940bn. EZ heads of State meet tomorrow to agree the statement. The “additional” funds should enable the IMF to raise funds from its EM shareholders in the main (China, Brazil, Middle East countries), which should rise the headline number to over E1tr. However, all the EZ funds will not be available on day 1 – they will be raised in instalments;

The Dutch coalition government today resume negotiations to reduce the budget deficit. Additional cuts of E9bn are required to bring the budget deficit down to 3.0% in 2013, on top of the proposed E18bn of cuts until 2015. The Dutch economy entered recession in the 4th Q of 2011 and its economy is expected to contract further this year. Coalition politics is also making an agreement difficult to reach – the right wing Freedom Party is opposed to spending cuts, further EZ bail outs and wants a referendum on remaining withing the Euro. The Dutch have been vocal advocates of budget disciple and any failure to meet the budget target will send a dreadful signal, especially following Spain’s unilateral announcement that they would not meet their fiscal target – Spain has agreed to keep the 2012 budget deficit to 5.3%, up from a previous +4.4% – some hope, my view is that their 2012 budget deficit will come in north of 6.0%. Holland will lose its AAA rating in my view, leaving just Germany, Finland and Luxembourg as the only remaining AAA’s in the EZ;

The Spanish Finance Minister reported that the 1st Q 2012 GDP will be “as bad” as the -0.3% decline in the 4th Q 2011, yesterday. Hmmmm, sounds like the old trick of forewarning to reduce the negative impact when the actual numbers are released. In addition, it will be interesting to see whether 2011 GDP is revised lower. The statement resulted in a weaker Euro (dropped over 30bps on the news) and European markets.

Spanish Unions are staging the 1st general strike today – 51% of Spaniards support the Union action – not good news and confirms the push back against austerity without growth measures. Spain is to announce its 2012 budget tomorrow;

Italian borrowing costs continue to decline – they sold 10 year bonds yielding 5.24% today (5.5% previously). The Government sold the full amount of bonds;

Mr Weidmann, head of Germany’s Bundesbank, remains concerned about the Target 2 imbalances, especially, I suspect, in respect of counter party risk. Essentially, current account imbalances within the EZ are, in the main, be funded through the Target 2 arrangements. On this one, I believe he’s completely right to be concerned, though it should not have come as a surprise to him in the slightest, as it reflects the impact of monetary union, exaggerated by lower financing by commercial banks. The periphery is borrowing from core Europe and their current account balances are negative, and as current account surplus countries (particularly Germany’s) continue – indeed, Germany has outstanding claims exceeding E500bn (approx 20% of it’s GDP). The bottom line is that the current account imbalances create major risk, though, in theory, makes the cost of an EZ beak up ever more expensive. However, Mr Weidmann/Germany cant have it both ways – they have benefited from the single currency in terms of exports/current account surplus to the EZ. A number of observers are relatively sanguine on this matter. However…..;

German unemployment continues to decline – down 18k to 2.84mn, as opposed to a forecast of a decline of just 10k. The adjusted jobless rate declined to 6.7%, a 2 decade low. Great, but I’m still a bit cautious about whether this is sustainable !!!;

US durable goods orders increased by +2.2% in February, (-3.6% in January), lower than the +3.0% forecast. Excluding defence and aircraft, durable goods rose by +1.2%. The numbers, ex aircraft and defence were bound to drop following the end of the accelerated capital allowances programme in the US. Communications, computers and electronic products were the sectors which gained the most, though cars and parts rose as well. Unfulfilled orders were up +1.3% still indicating expansion and up +10.5% YoY;

The UK’s M4 growth came in at -1.9% in February (MoM) and -3.4% YoY, the lowest since the data series was started – not good news. Mortgage approvals declined to an 8 month low – is not reflective of the current situation as it was impacted by by an end of 1st time buyers scheme. Residential home prices also declined (down 1.0% in March MoM, according to Nationwide) due to the ending of the stamp duty scheme. The UK Statistics office reported that the services sector rose by +0.2% in January, which suggests positive 1st Q GDp, assuming services growth (the most important part of the UK economy) continues;

US CEO’s are getting more bullish, according to a business round table survey. Overall, the sentiment index improved to 96.9 in the 1st Q 2012, from 77.9 in the 4th Q 2011. 81% of CEO’s expected revenues to rise in the next 6 months, though capex and hiring sentiment was much lower, at 48% and 42% respectively. However, just reconfirms that the US is improving, though employment is increasing slowly, which suggests that the FED is on hold/will continue with easy monetary policy for quite a while;

Geithner proposed that Fannie/Freddie cut the principal amount of underwater mortgages. Some 12.1% of mortgages are delinquent or in default at the end of Dec 2011, down slightly from 12.4% at the end of 2010. Principal reductions would cost Fannie/Freddie US$100bn, according to the head of FHFA – I would have thought much more !!!!. Having said that, a reduction in principle is inevitable, in my humble view and the FHFA is to release a report next month on the subject;

US 4th Q GDP was unrevised at +3.0%. Jobless claims came in 5k lower at 359k (the lowest since April 2008), though worse than the 350k expected. The 4 week moving average was 365k, as opposed to 368.5k the previous week. The previous weeks data was revised higher to 364k from an initial 348k – not helpful. Given Bernanke’s focus on unemployment, is QE3 coming – I still believe is more likely. However, read an interesting report from Bianco Research in the Big Picture which suggests that QE3 may not be market positive as investors will fear the inflationary impact – though what about sterilised QE;

A number of you have picked up on my high oil price comments and, in addition, the US$30 spread between spot and 5 year oil. OK, the current market suggests that demand is probably greater than thought and that spare capacity lower. In addition, the fear premium re geo political issues seems large – at least US$10/15. Furthermore, the spread suggests that gas production/usage will increase materially. All of this will, in due course, have a massive impact on oil exporters (Saudi Arabia, Russia) especially, as these countries require high oil prices to pay for increased spending which they deem necessary to avoid social tensions. If indeed the era of lower energy prices is coming, the impact globally is going to be profound. Hugely beneficial for DM’s, though in particular, EM’s (ex oil producers clearly). Will not be short of EM’s at that time, as I am now
Having said all that, I still believe that the current oil price is crazy – however, will not short, especially as a number of extremely astute observes are bullish – will not buy either though;


I attended a conference on Greece at the LSE in London yesterday – one of my friends was speaking. It was interesting to see, first hand, the serious and vocal opposition to the IMF and (even though they were not there) the Germans, in particular. The IMF reported that Greece will have to cut spending further – by 6%/7% of GDP!!!. However, the bottom line, Greece will have to default yet again – the recently issued bonds, following the PSI, effectively confirm that, as they are trading around 30%. The only interesting issue is that the majority of Greeks want to remain within the EZ and the Euro – well great, but start paying your taxes, stop the constant fiddling and corruption and liberalise you economy asap. Until Greece does that (and based on my feel following yesterday’s conference, it looks near impossible), Greece will remain a basket case.

However, Greece is no longer a major problem – its debt is basically a public sector EZ obligation and banks (other than Greek banks) will not collapse following another Greek (inevitable) default. Contagion is a possible threat, particularly to Spain – Portugal and Ireland will be OK, though I remain of the view that a further Greek default/exit from the EZ will prove to be a minor blip – bad for Greece, as they still believe they have leverage over the EZ. However, my humble view is that there is only about a 25% chance that Greece will remain in the EZ in a few years time. Greek general elections are due (most likely on 29th April or 6th May) and a coalition government formed – the worst news. I for one don’t believe this claptrap about unity governments being the solution.

I continue to receive buy recommendations on the (base metal) miners. What is it about analysts and the miners – I really don’t get it. Just one issue amongst very, very many. China remains the marginal price setter and we know that they will reduce fixed asset investment ie lower base metal demand. I am short as you know the miners (indeed have increased materially since I began to short) and see no reason to close my positions, even though one (Rio) is up today.

I do not have not a clue on Gold – never understood and, indeed, have never really played it – in my humble opinion, a loony commodity – whoops, that’s going to get my email box full.

Brent declined following reports that the US, UK and France are considering (likely will) release oil from strategic reserves. Unfortunately just down around US$1, which suggests to me that any price decline from the release of reserves will be short lived.

The “disappointment” on US durable goods orders is cited for the weakness in US equity markets yesterday and in Asian/European markets today. Personally, I thought the numbers were OK, especially as the accelerated depreciation allowance in the US ended at the end of last year, which suggests to me that US durable goods data is likely to be weaker in the 1st Q/1st half of 2012. It very much looks like the market is trading on headline numbers, rather than digging deeper, recently. Must be that fear is increasing, though no evidence of that in the VIX.

The Euro continues to decline (currently US$1.3270) – may have waited too long before shorting, though I will still wait for the EZ announcement re the bail out fund tomorrow.

My expectations of an end of the 1st Q window dressing rally does not seem to be paying off. At present, it also looks as if my insurance sector buys (mainly) were premature, but I still expect a pop in markets, so, indeed, may well add a small amount. In any event, I very short – miners, EM’s and Spain.

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