Financial Market Report for September 22, 2011
1) … Ben Bernanke called for Operation Twist; but the market retorted with a shout of deleveraging, derisking, and disinvesting: a deflationary collapse is underway.
Yes, the Fed disappointed and the great collapse is here. Definitely, a global bear market is underway, as Bespoke Investment Blog writes The Bloomberg World Index, which is a capitalization weighted index of all equities tracked by Bloomberg, is down nearly 4% today, and it is down 21% from its closing high on May 2nd. The threshold we're using here for a bear market is a 20% decline.
The Banks, KBE, IAT, and KRE, experienced a capital run again today, with Bespoke Investment Group Blog reporting Bank of America (NYSE:BAC) is now down 52% year to date, Morgan Stanley (NYSE:MS) is down 49%, Citigroup (NYSE:C) is down 46%, and Goldman (NYSE:GS) is down 42%.
Tyler Durden reports, This week is the 3rd largest weekly downswing in the Dow ever (9/11 and Lehman the others). The Dow, DIA, lost 3.7% today, as Wall Street tumbled on recession fears. Major stock indexes fell sharply Thursday as a grim outlook from the Federal Reserve and as Manufacturing PMI reports from China and the Eurozone came out worse than expected Oil, USO, fell near $80, as the Fed warned of economic risks. Commodities, DJP, and base metals, DBB, fell strongly lower on lowered growth prospects and on competitive currency devaluation, which caused a fall in world government bonds, BWX, to near its 200 day moving average. Mortgage Backed Bonds, MBB, and Municipal Bonds, MUB, rose strongly and long duration bonds, BLV, jumped to a likely evening star pattern. Bonds, BND, jumped, but Junk Bonds, JNK, collapsed. Yield curves flattened across the board again today as is communicated in the rise of FLAT and the fall of STPP.
Only the Yen, FXY, rose today as Bespoke Investment Group Blog relates Non Dollar Currencies Tank with FXA, FXE, FXM, FXC, ICN, FXB, FXS, SZR, FXF, BZF,BNZ, CEW, CCX, sinking terribly, causing country shares to plummet while the US Dollar, $USD, broke out to close at 78.38. Gold, GLD, is a currency, which often trades inversely of the dollar; fell 2.6%.
The fall in the interest rate on the 10 Year US note, $TNX, fell to a record low at 1.715; this together with the dramatic rise in US Treasuries, TLT, EDV, and ZROZ, foretells a recession. And the fall in stocks, ACWI, and commodities, DJP,and base metals, DBB, as well as the major currencies, DBV, and emerging market currencies, CEW, along with a rise in the US Dollar, traded by UUP, communicates not only a recession, but a depression with Associated Press reporting The IMF director Christine Lagarde says that the world economy is entering a dangerous phase. Mike Mish Shedlock, in chart article Hello Global Recession, relates that today’s yield curves are not synonymous with growth and goes on to note in particular the bleak picture in the hard currencies of Australia and Canada. There is no reason to believe the Loonie or the Australian Dollar will be a safe haven. When China slows (and it will), it will hit the commodity currencies hard.
An inquiring mind asks, will those investment banks that have written Credit Default Swaps, live to pay on their contracts? Zero Hedge writes Morgan Stanley's exposure to French Banks is 60% greater than its market cap ... and more than half its book value.
2) … The derisking, deleveraging, accompanied by political turmoil, communicates that the economic, investment and political tectonic plates have shifted, causing a regime change, from the Milton Friedman Free To Choose Regime, to the Ten Toed Kingdom Regime presented by the Club of Rome in 1974.
OfTwoMinds relates the eurozone's three fatal flaws and CreditWriteDowns relates Munchau: we are moving closer towards an involuntary eurozone break-up and the NYT reports the political patronage and economic pork of European Socialism, relating that under the Greek Constitution, public sector workers cannot be fired. The Greek people know a state worker system, where in every household, at least one worker is employed by the government. Free enterprise and meritocracy is non existent. For all practical purposes, the only political parties are socialist or communist. An inquiring mind asks, just who and what, will provide for the fiscal spending of the Greeks, when Greece defaults on its debts? Greek socialism, just like freedom and choice, are epitaphs on the tombstones of Neoliberalism, as the 1974 Clarion Call of the Rome is coming across loud and clear to introduce Neoauthoritarianism, providing austerity and debt servitude for all, in a Ten Toed Kingdom of regional economic government, whose footprint will occupy in all of the world’s ten regions, with a king, that is a sovereign, to rule over all. Angela Merkel and Nicholas Sarkozy are ambassadors of the Beast Regime, as they have called for a true European economic government in their August 2011 Joint Communique. A European Chancellor, the Sovereign, will be called to the office of the President of the EU. Might Herman Van Rompuy, be the One to head up a Eurozone Fiscal Union? He is one who is familiar with the scheme of regional framework agreements. The Slovak Spectator reports Radičová meets Van Rompuy, warns of Slovak political deadlock over the EFSF monetary authority.
Open Europe reports Bundestag Budget Committee approves EFSF changes. FAZ reports that the Bundestag budget committee yesterday approved the expanded role of the EFSF, the eurozone’s bailout fund, and supported the proposals to give the Bundestag a greater say over the use of the EFSF, however, both issues still need to be approved by the Bundestag as a whole. In an interview with the paper, German Finance Minister Wolfgang Schäuble criticised the German Constitutional Court, saying, it is "absurd" that the Court adheres to "the old regulatory monopoly of nation states dating back to the 19 century", adding "now the challenge is to make our Europe more capable and stronger through limited transfers of competences." Speaking at a New Direction Debate in Brussels, German Professor Markus Kerber, who challenged the eurozone bailouts at the German Constitutional Court said, "it is crystal clear that with his daily buying of government bonds, [ECB President] Jean-Claude Trichet is overstepping his powers,” adding, "the fact that the European Parliament has applauded Trichet shows that it is completely disoriented from its voters, who are weary of the ECB's actions." FAZ Berliner FAZ 2
I recommend a subscription to Euro Intelligence which reports Wolfgang Schäuble criticises the Constitutional Court and calls its views of the nation state old-fashioned, Schäuble calls constitutional court’s insistence on the nation state an “absurdity” In an interview about the German Constitutional Court Wolfgang Schäuble, who is a lawyer by training, calls on the court to exercise restraint and openness when it rules on European matters. “We cannot stick to the old regulation monopoly of the 19th century nation state”, Schäuble said talking to Frankfurter Allgemeine Zeitung. “This has proven to be an absurdity a long time ago. It is obviously right if the Constitutional Court rules that we will one day reach a limit with the European unity where we will have to think about a new constitution. But at the moment the issue is merely to make Europe more capable of acting and stronger by transferring competencies in a limited manner.” Schäuble is referring to sentences in past Karlsruhe rulings that defined core competencies for the Bundestag like budgetary matters where there can be no durable transfer of sovereignty to the European level within the present German constitution implying that it would have to be changed potentially by referendum.
3) … In today’s news
Tyler Durden writes another massive 103,000 people dropped off extended benefit claims in one week. Just as troubling is that 1.7 million people have dropped off the government's dole in the past year as can be seen in the chart below: these are people that haven't gotten a job, they have just stopped being counted by the govt.
The damned dam, now destroyed, frees river, the NYT writes in article The Return of the Elwha River.
Love is growing cold in the age of deleveraging. Charity won’t be found at the red brick Baptist Church on the outskirts of former textile mill town, Greenwood, SC, as the marquee reads: “Have your tools ready and God will find you work” reports Sabrina Tavernise in NYT article Data show County’s pain as economy plummeted. The manufacturing plant closed in 2007. “It’s what held this town together, all the mills,” Ms. Flaherty said, watching another thinly attended lunch hour go by. According to an analysis of Census Bureau figures made public on Thursday, its poverty rate more than doubled to 24 percent from 2007 to 2010, the largest increase for any county in the nation. The decline also engulfed the middle class. Median household income plunged by 28 percent over the same period, shaving nearly $12,000 off the annual earnings of families here during the recession, according to the analysis, by Andrew A. Beveridge, a demographer at Queens College. The numbers tell the story of a painful decade in Greenwood, which began with poverty levels that were close to the nation’s, and ended far above, after layoffs in textile mills, a foundry, restaurants and construction companies pummeled the county’s residents. “There just aren’t any jobs in Greenwood anymore,” said James Freeman, 58, a former textile mill worker. “My son can’t even get a job flipping burgers.” Mr. Freeman worked for years in the textile mills, including the Matthews plant. He lost his last mill job in 2007 and was unable to find another. The work at one of the mills that employed him went to Argentina, he said, because the fabric was cheaper to produce there. Those workers were paid less, he was told, and got no benefits. “That made me feel kind of bad,” said Mr. Freeman, who now collects disability. The mill’s closing “hurt a lot of people here in Greenwood.”
4) … Between The Hedges relates Bloomberg reports
Banks Denied Senior Bond Funding as Crisis Deepens: Euro Credit. It's been 2 1/2 months since a bank managed to sell a conventional bond in Europe's public markets, the longest period without a deal ever and another example of the sovereign crisis choking off funding. UniCredit SpA was the last non state-owned bank to issue senior, unsecured benchmark notes in Europe with a 1 billion- euro ($1.3 billion) sale on July 13, according to data compiled by Bloomberg. That compares with deals worth 41.9 billion euros in the third quarter of last year. Banks are the biggest buyers of other lenders' bonds as well as debt sold by euro-region nations, and are being hurt by Greece's flirtation with default and proposed laws that would force their creditors to take losses before taxpayers. That's pushed the cost of selling bonds to within three basis points of the record reached in the aftermath of Lehman Brothers Holdings Inc.'s failure three years ago. "Senior unsecured at these levels is unsustainable," said Ben Bennett, a credit strategist at Legal & General Investment Management in London which oversees about $500 billion. "The real economy is being put under too much pressure. Every day things are getting wound tighter and tighter." The extra yield investors demand to hold banks' senior bonds instead of benchmark government debt has soared to 322 basis points, from 202 at the end of July, according to Barclays Capital's Euro Aggregate Banking Senior Index. The gauge reached an all-time high 325 basis points on Dec. 30, 2008.
German, French Bond Risk Climb to Records on Slowdown Concern. The cost of insuring sovereign bonds jumped across Europe with credit-default swaps on France and Germany surging to records as the global economy slows. Contracts on Germany rose 13 basis points to 109, swaps on France jumped 16 to 205 basis points and Belgium, Italy and Spain also reached records, according to CMA prices at 5 p.m. in London. The Markit iTraxx SovX Western Europe Index of debt swaps on 15 governments climbed eight basis points to an all- time high of 362 based on closing prices. Credit-default swaps on Germany have almost tripled from 39 basis points in July, while France is up from 80, CMA prices show. Contracts on Belgium surged 26 basis points today to 304, while Italy rose 14 to 536 and contracts on Spain climbed 7 basis points to 437, according to CMA. Swaps on Ireland increased 14 basis points to 817 and Portugal rose 46 to 1,184. The Markit iTraxx Crossover Index of swaps on 50 companies with mostly high-yield credit ratings rose for a fourth day, climbing 41.5 basis points to 846.5, according to JPMorgan Chase & Co. That’s the highest since April 2009 and the biggest daily increase since Sept. 9, when the previous series of the index increased 59 basis points. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings climbed 12.5 basis points to 199.5, near the highest since March 2009. Bank bond risk also soared, with the Markit iTraxx Financial Index of swaps on the senior debt of 25 lenders and insurers rising as much as 29 basis points a record 318, before paring the advance to 302. The subordinated-note gauge increased as much as 53 basis points to an all-time high of 555.
Euribor-OIS Spread Measure Rises to Highest Since March 2009. A measure of banks’ reluctance to lend to one another in Europe rose to the highest in 2 1/2 years after the Federal Reserve signalled “significant downside risks” to the U.S. economy. The Euribor-OIS spread, the difference between the three- month euro interbank offered rate and overnight index swaps, climbed to 85 basis points as of 3:45 p.m. in London, the highest since March 2009, Bloomberg data show. The gauge was at 82.6 yesterday. European banks have the highest dollar funding costs in almost three years, according to one indicator. The three-month cross-currency basis swap was 106 basis points below the euro interbank offered rate, from 99 basis points yesterday. The cost was 112.5 basis points under Euribor on Sept. 12, when the swap was the most expensive since December 2008. The TED spread, the difference between what lenders and the U.S. government pay to borrow for three months, rose to 36 basis points, the highest since July 20, 2010, from 35 basis points.
Commerzbank Says Greek Default Poses Risk of 'Domino Effect'. European banks face the risk of a “domino effect” on debt markets were Greece to default, a Commerzbank AG executive said today. Institutions would be able to handle a Greek default, regardless of the level of bondholder losses and the bigger concern is how it would affect Spain, Portugal, Ireland or Italy, Markus Beumer, a member of the German lender's board of managing directors, said at a press briefing in Brussels. “We have no concerns to handle and to manage Greece, but what happens afterwards, nobody knows,” Beumer said.
Real's Plunge Triggers Intervention Reversal: Brazil Credit. The real's biggest five-day plunge since 1999 prompted Brazil to use derivatives to shore up the currency, reversing a 28-month-old strategy aimed at stemming gains. Brazil's currency tumbled as much as 4 percent against the dollar today before the central bank auctioned swaps that are equivalent to selling dollars in the futures market, helping the real erase losses. The real has lost 8.4 percent since Sept. 14, handing investors in real-denominated bonds a loss of 13.5 percent in dollar terms this month through yesterday, the worst performance in emerging markets, according to data compiled by JPMorgan Chase & Co. Speculation is mounting that the real's slide may deepen, pushing up import prices and adding to the highest inflation rate in six years, if the central bank fails to provide dollars or deploy some of its $352 billion in reserves to defend the real. Concern policy makers' surprise rate cut last month signals they are giving up on their goal of slowing inflation is compounding the real's decline as Europe's debt crisis erodes demand for emerging-market assets. "The central bank is signaling it's uncomfortable with the current foreign-exchange rate," said Carlos Thadeu de Freitas Gomes Filho, chief economist with Franklin Templeton Investments in Brazil. "Other measures to defend the real may come."
Europe Services, Manufacturing Industries Shrink for First Time Since 2009. Euro-area services and manufacturing output shrank for the first time in more than two years in September as the region’s worsening debt crisis added to concerns that the economy could slide back into a recession. A composite index based on a survey of purchasing managers in both industries fell below 50, indicating contraction, for the first time since July 2009, London-based Markit Economics said in an initial estimate today. The index fell to 49.2 this month from 50.7 in August, a deeper slide than the drop to 49.8 that economists had forecast, according to the median of 17 estimates in a Bloomberg survey.
Handelsblatt reports Kenneth Rogoff, a former chief economist at the IMF and now an economics professor at Harvard University, said the biggest risk to the eurozone at present is a run on southern European banks. In an interview with the newspaper, Rogoff said people may move their deposits to banks in safer countries such as Germany. A sovereign debt restructuring in some euro area states shouldn't be "a taboo," Rogoff said.
5) … What we have is not contagion, but gangrene.
Strong fallers today included:SSRI, -9.,8 and SIL -10.4% and GDXJ, -0.8, GDX, carry trade investing in the HUI precious metal mining stocks, ^HUI, evaporated today, -7.8%, with CRBI, -10.4, COPX -10.1, KOL, -9.0, CHIM, -7.0, ALUM, -6.7, PSCE -6.4, and HAP -6.1.
6) … Credit and moneyness, that is seigniorage, will come from diktat
David Gallard, of Casey Research asks Is the US Monetary System on the verge of collapse? Clearly a threat to the international monetary system has developed: systemic risk is off the wall. I’ve written consistently that a global economic collapse is coming. The National Bank of Greece, NBG, fell 11% and European Financials, EUFN, 4%. While Phoenix Capital Research writes in Zero Hedge Buckle up, because it's game over for the Fed, I believe banks will be nationalized as Les Echos is reporting credit evaporation: BNP Paribas SA and Societe Generale have stopped lending to aircraft purchasers because of difficulties in obtaining dollar refinancing. Airbus SAS may be affected more than Boeing(NYSE:BA), which has easier access to credit in the U.S. Credit, lending, and moneyness will come via diktat as the Fed, Banks and the Government will become one and known as The Government bank or Gov Bank.
7) … Charts of the day
300% of the 30 Year US Government Bond, TMF,
The Flattner ETF, FLAT
The Ten Year US Government Bond, TLT,
West Texas Intermediate Crude, $WTIC