Financial market report for October 11, 2011
1) …. Reuters reports Wall Street Flat Before Slovakia Votes On EFSF Fund.
Navistar, NAV, traded up today as the company unveiled its International Saratoga light tactical vehicle. Airlines, FAA, rose 2.3% to 200 day moving average. China Financials, CHIX, blasted 5.0% higher as the government used FX currency accounts to buy banks. … NAV, FAA, CHIX
Reuters reports S&P Cuts 10 Spanish Banks, Including Santander, BBVA. Standard & Poor's on Tuesday downgraded the credit ratings of 10 Spanish banks, saying that dimming economic prospects for the country will continue to hurt the banking sector in the next 15-18 months. Among the banks downgraded were STD and BBVA, and numerous cajas. ... BBVA,STD
Copper, JJC, turned lower as Bloomberg reports Edward Meir, a senior commodity analyst at MF Global Holdings Ltd. in Darien, Connecticut, said, Not only are there growing concerns about growth prospects, but renewed attention is being placed on the state of Chinese banks and the billions of dollars of nonperforming loans they are carrying. … JJC
2) … News of the day
Tyler Durden relates WSJ reports Slovakia’s Lawmakers Delay European Bailout Fund Vote Vote on EFSF may be held later this week; unlikely to take place Wednesday as more time for political talks needed, WSJ reports, without citing anyone. Govt expected to lose confidence vote, paper says. However, the confidence vote is expected to still pass, or rather, fail. Which would lead to a government reshuffle into a configuration that will pass the EFSF vote. … EUFN, VGK, EWI, EWG, EWQ,
Oliver Knox of AFP writes that the U.S. Senate is expected to approve its controversial China currency bill today, which seeks to tax imports from countries that manipulate their currency. Meanwhile China's government news agency Xinhua likened the legislation to protectionism that exacerbated the Great Depression, and warned of a trade war.
Bloomberg reports ECB president Jean-Claude Trichet said Europe's debt crisis has become "systemic" and moved from smaller economies to some of the larger ones. Meanwhile, European leaders pushed back a debt-crisis summit as opposition mounted to Germany's demand for deeper-than-planned writedowns on Greek bonds. … FXE
Bloomberg reports Greece's 2011 Deficit May Close at 9.1% of GDP, Kathimerini Says. Greece’s 2011 budget deficit may be 9.1 percent of gross domestic product, according to a European Union, European Central Bank and International Monetary Fund mission, Kathimerini said. The so-called troika, which completed its fifth review of the country’s economy, found Greece will miss the original target of 7.5 percent of GDP as well as a revised target of 8.5 percent for this year in the 2012 budget draft, the Athens-based daily reported, without citing anyone.
IBM becomes safe haven investment. Bloomberg reports IBM Advances to Record Price as Investors Consider 'Safer' Bet. International Business Machines Corp,IBM, the world’s largest computer-services company, rose to a record, surpassing the mark set in July. IBM rose 2.3 percent to $186.62 at the close in New York, giving it a market value of $222.9 billion. The price topped the $185.21 it reached July 19. “It’s attractive as a safer, less volatile investment in tech in very turbulent times,” said Ed Maguire, an analyst at Credit Agricole Securities USA in New York who rates the shares “outperform.” IBM, which went public in 1915, has gained 27 percent this year, making it the best performer of the Dow Jones Industrial Average. … IBM
Shipping sector continues to loose money. Bloomberg reports Most Supertankers Idled Since '80s Won't Buoy Charter Rates: Freight. Owners of supertankers, losing money for a sixth consecutive quarter, will probably idle the most ships in more than two decades as they contend with a glut that drove charter rates to the lowest in at least 14 years. The combination of too many ships and slowing demand growth for oil means that about 6 percent of the fleet will be anchored in a year from almost none now, according to the median in a Bloomberg survey of eight brokers and analysts. That may not be enough to end the slump. Forward freight agreements, traded by brokers and used to bet on transport costs, anticipate rates no higher than $13,819 a day through 2013. Frontline Ltd., the biggest operator of the vessels, says it needs $29,800 to break even. The Hamilton, Bermuda-based company will report its biggest annual loss in 12 years in 2011, analysts’ estimates compiled by Bloomberg show. While owners can cut operating costs to as little as $2,000 a day from $12,000 by anchoring ships, it also means no income, said Andreas Sohmen- Pao, chief executive officer of the oil and gas shipping unit of BW Group Ltd., which is idling three vessels. … SEA
CNBC reports Nervous Asia Has Good Reasons to Fear Euro Zone Crisis. Over recent weeks, Asia’s largely dispassionate observation of the economic slowdown in Europe has given way to fears that the eurozone’s sovereign debt woes could trigger deep problems for the broader Asian economy and its financial centers. Singapore and neighboring Southeast Asian nations are among the most vulnerable to direct disruption, because so much of their economic activity depends on international trade. Even the least bearish bankers are braced for at least a repeat of the 2008 hit to Asia’s economy — and its banks — when the first flush of the global financial crisis led to two quarters of negative growth in the region. The old idea of Asia, or many other emerging markets for that matter, being a safe haven from troubles in developed markets, has been discredited. As 2008 showed, there is no such thing as a decoupled economy in a globalized world.Asia today faces two waves of pain.… IDX, THD
The Guardian reports Spain Unlikely to Meet Deficit Target. Alarm is sounded over the country's borrowing, with the chance of the public deficit being cut from 9% to 6% said to be slim. The deficit could now head for between 7.5 and 8%of GDP – well off the target agreed by the socialist government of prime minister José Luis Rodríguez Zapatero and the European Union and much worse than previous analysts' estimates. "Most of the year has already gone so I think it is impossible to meet 6%," Laborda said. "I'd say it will be closer to 8%." He blamed the problem on the regional governments, who account for a third of public spending. … EWP
Associate Press reports China Buys Bank Shares To Prop Up Stock Market China is moving to support its state-run banks and financial markets, with a government investment arm purchasing shares in the four biggest lenders as worries mount over debt and slowing growth. CHIX, CHII, CHIM, HAO,
Credit is seen evaporating as French banks are unable to provide finance for aircraft purchases. Tyler Durden relates the Dow Jones News Service report that ADS' (Airbus parent European Aeronautic Defence & Space) turns to warn about French bank liquidity. French banks are experiencing difficulties providing financing for aircraft purchases by airlines, a market that is largely dominated by dollar transactions, Louis Gallois, chief executive of European Aeronautic Defence & Space Co. (EAD.FR, EADSY), said Monday. French banks clearly have problems financing aircraft purchases, he said, speaking on the sidelines of an event to launch a new French think-tank to promote the French industry. Mr. Gallois's comments come as French banks have indicated that they were planning to cut back on dollar financing, as raising dollars has become increasingly difficult. …. EWQ, EUFN, EWG, VGK
Dave Clarke of Reuters writes US To Unveil Criteria For Picking Systemic Firms. Regulators Tuesday are set to give nervous insurance companies, mutual funds and other big players in financial markets a better idea of whether they will be tapped for the same type of additional government scrutiny facing large U.S. banks. None of these industries are eager to be on the receiving end of the added attention that comes with being named "systemic" and have spent the past year lobbying to be ignored. The concern is that new scrutiny will mean new restrictions that could hit firms' bottom lines. Tuesday the Financial Stability Oversight Council is scheduled to release a new proposal on how it will determine which non-bank firms are important enough to the financial system that they merit greater oversight by the Federal Reserve. Also Tuesday, banking regulators are scheduled to vote on a proposal banning most proprietary trading done by banks, known as the Volcker rule. Both rules are highly anticipated parts of the 2010 Dodd-Frank financial oversight law.Companies that are tapped for greater Fed supervision will be designated systemically important financial institutions (SIFIs), and will be subject to new capital and liquidity rules. They will also be required to draft detailed plans on how they could be broken up if the company falters and is seized by the government. The SIFI rule is in large part a response to the market havoc caused during the 2007-2009 financial crisis by American International Group Inc, an insurer not overseen by banking regulators.
In another area of critical importance to major financial players, the board of the Federal Deposit Insurance Corp will officially release Tuesday a proposed version of the Volcker rule. The rule aims to prevent banks from recklessly engaging in risky trades by prohibiting them from trading for their own profit in securities, derivatives and certain other financial instruments. The law contains some exemptions to the ban for trades done to make markets for customers and for those used to hedge against certain risks.
How these exemptions are crafted will have a major impact on large banks such as Goldman and Morgan Stanley. A draft of the proposed Volcker rule leaked last week and it received a mixed reaction from industry groups. The Securities Industry and Financial Markets Association, for instance, raised concerns about whether the exemption for trades intended to make markets for customers is too narrow.
Sybille Fuchs and Johannes Stern of WSWS write Pseudo Left Unity List Backs New Rght Wing Danish Government During the election campaign, the Unity List had already been striving to represent the so-called “Red Alliance” (Social Democrats, Socialist People’s Party, Social Liberal Party and the Unity List) as a left alternative to the “Blue Alliance” (consisting of conservative, right-wing liberal and right-wing populist parties). However, their leftist-sounding phrases in the campaign were nothing more than window dressing. They were used to hoodwink voters and prepare the way for a government ready to enforce drastic cuts in social spending,
Shortly before the announcement of new elections in late August, Finance Minister Claus Hjort Frederiksen had presented a budget for 2012, which contained a deficit of 4.6 percent of GDP, widely exceeding the EU’s stability criteria. Denmark’s state deficit, primarily the result of bank rescue packages, amounts to more than 100 billion kroner (€13.5 billion), and thus reaches a level comparable to that in the country’s crisis years of the 1980s. The former government had estimated the deficit at “only” 85 billion kroner, but financial experts believe economic data points to a significant deterioration, and a further increase in the deficit can be expected. Rasmussen was criticised for failing to enforce “fundamental structural reforms” and taking “the course of least resistance”.
It is already clear that the new government will intensify Rasmussen’s austerity programme. During the election campaign, Thorning-Schmidt advocated balancing the budget by 2020, and the Social Liberal Party also campaigned for a neoliberal economic programme, including demands for economic reforms and tax cuts. The centre-left government has now largely adopted this same programme.
Given the poor economic data, rising unemployment and the high public deficit, the new government will in the future intensify the dismantling of the welfare state to the benefit of business corporations. In addition to tax benefits for investors and a “modernisation” of the hitherto relatively generous system of unemployment compensation, an “active labour market policy” modelled on Germany’s Hartz Reforms is also planned.
Doug Brandow writes in Forbes Economic Policy In The EU: More Bailouts, More Debt, More Crises Belgium’s capital dates back to the sixth century, but today the modern dominates. As the headquarters of the European Union, Brussels is filled with contemporary office buildings overflowing with meddlesome bureaucrats. What began as a system of economic cooperation has turned into quasi-continental government.
But the so-called European Project risks collapse. While establishment elites want more political integration, Europe’s financial crisis is turning its people inward. So far the E.U.’s confused response to Greece’s fiscal crisis has exacerbated the continent’s long-term economic and political problems. Proposals for European integration go back decades, even centuries. After World War II pan-European cooperation was seen as the best way to reintegrate Germany.
However, the Eurocrats, a mix of politicians, academics, businessmen, bureaucrats, journalists, and others, wanted more. The Common Market was turned into the European Union, with expanded powers. Even that was not enough to transform the continent into a country, a Weltmacht which could act as a great power. Complained French President Nicolas Sarkozy: “Europe cannot be a dwarf in terms of defense and a giant in economic.” A bit like the Israelites of old who asked God for a king to be like other nations, the Eurocrats demanded a president to be like America and China. Explained Wilfried Martens, a Member of the European Parliament (NYSE:MEP): “the E.U. must be united and able to speak with one voice on the world stage.”
But the European people were far less enthused about the European Project. In 2005 voters in the Netherlands and France rejected a new constitution to shift power from member nations to Brussels, reduce the requirement of unanimity for E.U. action, expand the authority of the European Parliament, and create an E.U. president and foreign minister. The measure was repackaged as the Lisbon Treaty, which did not require popular approval, except in Ireland, where the constitution mandates that treaties be put to a vote. Then the Irish said no, leading to a frenzied but successful effort to force a revote — with the “correct” result. On Dec. 1, 2009 the Lisbon Treaty took effect. Officials believed they finally had answered the derisive question asked by U.S. Secretary of State Henry Kissinger years ago: What is the phone number for Europe? Now there’s a phone number. In fact, there are several phone numbers. But the 27-member E.U. is no closer to becoming a functioning country.
Baroness Catherine Ashton, the High Representative for Foreign Affairs, has made no policy of note and struggled with only indifferent success to establish her authority against other E.U. officials as well as member states. The new E.U. diplomatic corps just adds more Europeans for other governments to talk to. Herman van Rumpuy was chosen to be president of the European Council, but Jose Manuel Barroso remains president of the European Commission. And member states continue to rotate as presidents of the Council of the European Union; Poland will hold the slot until year end, when Denmark will take charge. No one outside of Europe treats this tri-headed bureaucratic curiosity seriously.
The 17-member eurozone is in even greater trouble. The euro entered circulation in 2002, even though some supporters recognized the danger of instituting monetary union without fiscal union. German Chancellor Helmut Kohl called the system “a castle in the air,” but he still agreed to give up the fabled Deutsch Mark
In fact, the euro’s objective was as much political as economic, to drive European federalism. Create the national currency and the nation will come. That was the hope, anyway. Gerhard Schroeder, Kohl’s successor, contended that Europeans eventually would have to abandon “some erroneous ideas of national sovereignty.” Any problems could be solved by increasing political and economic integration and transferring more national powers to Brussels.
Now the entire E.U. is under siege, with the threat of financial crisis in several countries and spreading “contagion” which could take down banking systems and even national economies. Greece appears headed for a default. Ireland and Portugal also have received bailouts.
Spain’s economy is almost twice the size of the other three combined and the government suffers from a rapidly increasing debt load. Moreover, noted the Economist: “Spain shared several of the smaller economies’ weaknesses, like a loss of competitiveness and big current-account deficits.” Italy, with Europe’s fourth largest economy, recently had its credit rating downgraded by three levels.
The conventional wisdom in Europe is that the way to combat too much debt is to issue more debt. The way to transform bad banks is to turn the European Central Bank into a bad bank. The way to respond to opposition to more political integration is to impose more political integration. Council President Van Rompuy summed up this approach: “we’ll do more.”
European leaders recently agreed to double the European Financial Stability Facility, the EU’s bail-out fund. Where is the money to come from? Warned Gideon Rachman of the Financial Times, the bailouts “impose a financial strain on countries that fund the emergency loans but are themselves heavily indebted.” In fact, many Europeans doubt the wisdom of turning the onetime continental free market into a debt and transfer union. Slovakia’s government is having trouble rounding up the necessary votes for passage. Malta has delayed its decision. Finland earlier demanded that Athens provide collateral for any Finnish aid. Moreover, while German Chancellor Angela Merkel won the necessary parliamentary consent, most Germans oppose the bailouts and a majority of Germans want to return to the D-Mark. Bundestag member Frank Schaeffler, a member of the Free Democratic Party, Merkel’s coalition partner, has collected signatures from five percent of FDP members requiring a party referendum on the E.U.’s permanent bail-out mechanism. The result would bind FDP parliamentarians and could threaten Merkel’s government.
With money goes control, so E.U. leaders want to assert greater authority over members’ fiscal as well as monetary policies. For instance, Juan Manuel Barroso advocated a “single, coherent framework to deepen economic coordination and integration, in particular in the Euro area.”
Many Eurocrats see Eurobonds as a panacea. Explained Barroso, “Once the euro area is fully equipped with the instruments necessary to ensure both integration and discipline, the issuance of joint debt will be seen as a natural and advantageous step for all.” Advantageous for everyone but Germany, anyway, which would share its top credit rating with Greece, whose bonds trade as virtual junk.
European leaders continue to deny that Greece is likely to default. But virtually everyone believes otherwise. Michael Fuchs, the Merkel government’s deputy parliamentary floor leader, observed: “Greece is bankrupt. Probably there is no other way for us other than to accept at least a 50% forgiveness on its debt.” Such a write-down would be painful for investors across the continent. The cost would be particularly high for European — and especially German and French — banks, which hold much Greek debt. Also threatened would be the ECB, supposedly the continent’s economic guarantor, which has been buying bonds from Greece and other over-extended member nations at face value.
Moreover, the ECB has been lending to weak banks to maintain their liquidity. Concern over the stability of Europe’s banks led E.U. finance ministers to promise to recapitalize financial institutions, which means another bail-out financed by already heavily indebted states.
Today everything depends on unending German munificence. Juliet Samuel of CityAM noted that “Markets and European politicians are tying themselves in knots [attempting] to convert junk bonds into triple-A rated bonds. Whatever the details, the aim is the same: Brussels wants to underwrite Greek debt with German cash — all without letting the voters know.” British Foreign Secretary William Hague was equally blunt, warning: “Germans will have to accept that they are going to subsidize those countries for a long time, really for the rest of their lifetimes.”
To keep the money flowing European leaders have played upon German guilt persisting out of World War II. However, Daniel Hannan, a British member of the European parliament, doubts this tactic will work on Germany’s young, whose formative experience was the fall of the Berlin Wall, not Adolf Hitler’s seizure of power. At some point the German people are likely to say Nein! to subsidizing their more profligate European neighbors.
Moreover, while the Eurocrats may consider extending Brussels’ control over member states to be the only answer, doing so would require a new treaty, which would generate fierce and perhaps insurmountable opposition. Germany’s constitutional court already has set limits to Berlin’s transfer of sovereign powers. Moreover, Great Britain, which refused to join the eurozone, has resisted continental intrusions on its sovereignty. The price demanded by London for its assent to any new treaty could be high: Prime Minister David Cameron indicated the ongoing fiscal crisis may provide Britain “future opportunities” to repatriate some national powers back to London.
Earlier this year the majority of E.U. members said no to a German and French proposal for a “grand bargain” involving greater control by Brussels over deficits, pensions, retirement, and more. Euroskeptic political parties have been gaining strength across Europe. French economists Dagustin Landier and David Thermar argue that “voters opposed this big step towards federalism, and politicians know it.”
The obvious alternative is to let Greece default and restructure the Euro, either creating a two-tier currency, divided between strong and weak members, or dropping Greece and other heavily indebted states from the eurozone. However, EU leaders worry that doing so would kill the larger European Project. Warned Chancellor Merkel: “If the euro fails it’s not just the currency that fails, but Europe and the idea of European unification.” French President Sarkozy, said, “The euro is Europe, and Europe is 60 years of peace on our continent.”
The failure of the euro might be complicated and costly, but it would not plunge the continent into chaos. Nevertheless, for dedicated Eurocrats failing to continue European integration would be almost as bad as war. It would invalidate their main political agenda.
Europe is not alone in its economic distress. Washington’s public finances are even worse in some ways. However, the E.U. remains a collection of nations rather than a nation, with continental government as distant as ever. Instead of giving the E.U. more power, Europe’s leaders should start emptying those imposing buildings which fill Brussels. Europe desperately needs more liberty, not more bureaucracy, and more growth, not more debt.
3) … As a default of Greece nears, are leaders considering nationalization of European banks?
Bloomberg reports European Banks May Face Forced Recapitalization, Welt Says. European governments are considering setting banks a deadline for boosting their capital levels, the German newspaper Die Welt said, citing an unidentified person involved in the negotiations. Under the plan, governments would force banks to accept public funds to increase their capital after the deadline has expired, the newspaper said today. For a public-funding guarantee to calm markets, European Union countries would have to act jointly, the newspaper cited the person as saying. While there is no agreement on the proposal at this time, a decision may be taken within the next two weeks, the newspaper cited unidentified people involved in the negotiations as saying.
Graham Summers of Phoenix Capital Research writes in ZeroHedge writes We're Fast Approaching the Lehman Event in Europe (Greek Default) So nationalization is now the name of the Game in Europe. Indeed, we've now seen three European banks nationalized in the last few days; and France has announced a plan to nationalize 2-3 banks "just in case." In plain terms, we're fast approaching the "Lehman" event for 2011. However, this time around, instead of a bank going under, it's going to be Greece's sovereign debt. Consider the Belgian bank Dexia which just went under... it only had 5.4 billion euros' exposure to Greek debt. Well, French, German, UK and US exposure to Greece is north of $165 billion. And those same countries have $2.6 trillion in exposure to PIIGS debt in total. So suffice to say that when Greece defaults (and it will) we're going to enter a very very interesting time. Indeed, this will be the Crisis to which 2008 was just the warm-up. You see, 2008 was caused by toxic debts on private bank balance sheets. Today, thanks to US Federal Reserve and other Central Banks' moves, these toxic debts have moved onto the PUBLIC's balance sheet. So this time around, the market collapse is also oing to feature the bond bubble bursting, sovereign defaults (including eventually the US), major bank failures (Bank of America?), bank holidays, government shutdowns, civil unrest, and food shortage.
The European Systemic Risk Board relates Jean Claude Trichet says The crisis has reached a systemic dimension. If the leaders are indeed considering bank nationalizations across Europe, might this be the first step in collectivization of Europe? Will national labour law be rescinded? Will the Constitutional right to not be terminated from a state job in Greece be abrogated? Renee Maltezou of Reuters writes Constitutional Crisis Looms: Greece to tackle difficult task of firing state workers
Libertarians desire freedom but fate is operating through the actions of Angela Merkel and Nicolas Sarkozy to establish a European Economic Government, a Federal Leader, and a Fiscal Union, with banking powers granted to the ECB. Leaders will meet in summits and waive national sovereignty, as well as to appoint a President of the EU. Europe’s Chancellor, the Sovereign, and his banking partner, the Seignior, will provide a new moneyness based upon diktat. With banks nationalized, credit will be extended only to those companies deemed central to the region’s security and prosperity. All people will be one living under austerity measures, and in debt servitude. Totalitarian Collectivism is Europe’s Future.
If banks are nationalized in Europe, might banks in the US be nationalized as well?.
An inquiring mind asks when banks are nationalized, will properties be marked-to-market, and if so will the banks take a loss on the property? Will second mortgages be written off? Irvine renter relates, Forty-four percent of the first mortgages are underwater. When the first mortgage is underwater, the second mortgage has no value. And an inquiring mind asks, if banks are nationalized, Will the amount on second mortgages be written off? … Irvine Renter also relates, Without a dramatic increase in home prices, strategic default will eventually expose these loans as worthless. An inquiring mind asks as well, if the banks are nationalized, will pressure be place on non-paying loan owners to settle, up or move out?
4) … Fliers or fallers: will the leading stocks and ETFs fly or fall?
Will the natural resource trade in WCAT, COPX, ALUM, KOL, XME, CRBI, fly or fall? Did you go short WCAT today?
Will the credit trade in KCE, AXP, NNI, COF, SLM, ECPG, fly or fall? Did you go short ECPG today?
Will the emerging market trade in EWX, EEM, EMT, IDX, THD, fly or fall? Did you go short THD today?
Will the banks KBE, continue to trade higher? Did you go short STI today?
Will the silver mining stocks, SIL, MVG, CDE, PAAS, SLW, HL, fly or fall? Did you go short HL today?
Will the small cap country trade EWI, HAO, EPOL, RSXJ, BRF, SCIN, SKOR, KROO, GERJ, fly or fall? Did you go short HAO today?
Will the growth trade in CHIX, CHII, and CHIM, fly or fall? Did you go short CHIX today?
Will the QE trade shares TAN, ENY, ABCS, ROOF, ITB, BJK, PSP, FAA, SEA, fly or fall? Did you short ABCS today?
Will retailers ANF, ORLY, AZO, fly or fall? Did you go short AZO today?
Did you go short IBM today?