Hot off the heels of former Greek president G Papandreou turning tail and jumping ship, the financial crisis spotlight focused directly on the amorous EU nation of Italy. The world is wrapping its head around the sobering reality that nations, like individuals and corporations, can and do go bust.
Greece has become a bad debt 'fait du compli' afterthought thanks to reckless sub-standard leadership(sic). It has become very apparent that the socialist visionaries never had long term solutions to obligations they eagerly and fearlessly assumed. No 'worst case scenario strategy' or 'book balancing exit plans' were considered - other than being whisked away in comfort of their bullet proof limousines with a cordial 'good luck' wave and smile to their shell shocked citizenry - and leaving their disastrous 'socially consciencious' creation far behind!
With Italy, the stakes and risks have increased exponentially. Italy accounts for 25% of Euro bonds outstanding, 17% of Euro GDP, and 7% of German exports. Italy debts total $US2.6T or 120% of its GDP. The rule of thumb for most economists is that a debt to GDP ratio of 90+% in a low/slow/no growth economy is 'pericoloso' (perilous). Italy is the 8th largest economy in the world at more than $US2T in annual output. Italy has the 3rd largest bond market in the world. Italy's debt exceeds that of Greece, Spain, Portugal, and Ireland combined. Italy is too big to bail or fail! PM Berlusconi's offer to (de)part company (Il Bunga Bunga festa e finita) has further complicated the possibility of key 'promised' austerity. Next week Italy welcomes academic technocrat Mario 'Let's Make a Deal' Monte - pay rolled International Advisor to the 'Masters of the Universe' Goldman Sachs - to be the new 'Primo Prez.' The Berlusconi media tabbed the move as 'bringing in the arsonist to put out the fire!' This weeks 5B euro 1&2yr Italian Bond issue went better than expected (read: ECB presence) but the yield was over 6% the highest rate since 1997.
On the plus side, Italy has a budget surplus of 1% of GDP, it has lower total leverage, its average maturity of it's public debt is 7.3 years, it has very little foreign debt (21% GDP), its bank sector loan to deposit ratio is lower than the rest of Europe, and it has high private wealth to government debt. If Italy's debt problems can be solved in a workable and practical manor a big chunk of the PIIG problem will be solved. It looks like make or break to me!
The German influenced ECB has raised their 'no mas' white flag dashing hopes that they might ramp up bond purchases to lower Italy's borrowing costs. To date the ECB has extended $970b euros to Euro banks and governments through sovereign covered bond purchases and repos. Germany has warned that the ECB is risking losing credibility by buying bonds of heavily-indebted countries blurring both monetary and fiscal policy. (read: monetizing sovereign indebtedness) Buying 'troubled' bonds on 'behalf' of tax payers effectively sticks them with the bill for the widespread 'excessive/reckless' bank lending. It also appears that most friendly deep pockets are now empty. Bond yields in Italy, the 3rd largest economy in the 17 nation EEU, have surged above the unsustainable 7% level (7.4% high) that led Greece, Portugal, and Ireland to seek bailouts from the EU and IMF.
Despite the thinly veiled threats expect the ECB to become much more aggressive. There are no practical alternatives. Italian ECB chief Mario Draghi will likely do 'everything necessary' to 'stabilize markets.' The ECB has over half a trillion Euros invested to 'peripheral' Europe and more than likely would like to see the return 'of' their investment.
We are reminded of the prescient words of 'Comando Supremo' Il Duce Benito Mussolino who said, 'Italy isn't hard to manage ... it's impossible!' He also (incredibly) said, 'Fascism should rightly be called 'Corporatism' because it is the merger of state and corporate power.'
I'll be looking for an eventual 'offer that the bond holders can't refuse!'
In the US, attention will soon be drawn to the almost forgotten 'Supercommittee' - the 'appointed' sub-branch of the legislative body which hopes to find over $US1T in budget cuts necessary to enact the Obama debt ceiling hike and subsequent 'spend-a-thon!' The 12 member (6Dem-6Rep) bipartisan supercommittee faces a Nov 23 deadline for agreeing on a plan to carve $1.5T (over 10 years) of fat out of the monsterous US federal budget. One wonders how big the supercommittee would need to be to cut out $US1.5T of 'borrowed' largesse per YEAR? If the panel doesn't agree on these modest reductions, or if Congress stonewalls, $US1.2T would automatically be deducted from defense and non-defense programs beginning in 2013. At last check, they were at least $US1T apart. It might be a good chance to pick up a General Dynamics F-16 Fighting Falcon on the cheap at the garage sale! Ever vigilant Zero Hedge notes that since this supercommittee was formed the US Government has issued $US700b in debt bringing the new grand total to just under $US15.1T offsetting any benefit which the expected 'cuts' were to bring. So much for the 'hope' and 'change' we can believe in!
The blistering S&P earnings season bonanza has come to an end registering the best quarterly results EVER! Warren Buffett's Berkshire Hathaway Inc. invested almost $US24b in the third quarter, the most in the last 15 years. BH accelerated stock purchases and broadened their portfolio beyond consumer and financial-company holdings. The Oracle of Omaha is expecting big things and let's hope he is right ... as usual.
The US returned to the Pre-Crisis levels of job postings of 3.4 million in September - the most since August 2008. This high is still below thepre-recession level of 4.4 million jobs in December 2007 - but ain't bad at all! Getting the 'demoralized' unemployed fired (no pun) back up again may take some time. I expect that US economy will shave off at least 2 unemployment percentage points before the November 2012 Presidential election. Weekly unemployment claims came in below expectations with 390k vs 400k. The Monster Employment Indices for October showed 'improved overall online job availability compared to October 2010' with the index up 11% over the past year. The University of Michigan survey of Consumer Confidence Sentiment rose to 64.2 from 60.9 and beating expectations of 61.5 - the most since June 2009. This number is still 25% below the average of the last 33 years.
Our friends at Fannie Mae tapped another $US7.8b from the Treasury as losses widen. A Fitch mortgage reports suggests that the prevailing 28% of reported mortgages which are underwater may be too low. The long and difficult real estate fiasco is slowly and painfully unwinding. A wholesale mortgage liquidation by giant Fannie Mae would indicate rock bottom to me.
Despite the Euro debt hysteria recent data out of the US and China has been encouraging. Both countries saw their respective manufacturing PMI new orders rise above the key threshold of 50 in the month of October. The US and China account for 35% of global GDP. Assuming a 'non collapse' in Europe any time soon the global economy is set to continue to expand in Q4. This week the DJIA finished up 1.5% and is now +5.01% YTD. The S&P closed up almost 1% but is virtually unchanged YTD. The NASDAQ finished almost unchanged and is up about 1% YTD.
In Commodities, Crude Oil was the standout rallying almost $US4/bl to $US98.18 or +4.16% on the week. Crude oil is up 7.44% YTD. Continued upside technical pressure could see Crude Oil adding 5-10% before the end of 2011. Gold had a positive but volatile week closing up $US20.90/oz or 1.2% and up almost 25% YTD. Gold has retraced over 60% of its September swing from high to low - a rally of almost 12% from the September low. Gold and Silver equities are very historically inexpensive to the prices of the underlying bullion. Gold and Silver equities have lagged bullion prices since 2008 based on historical price-to-cash flow multiples. The group is trading at a 40% discount to the 10 year average price to cash flow data. The precious metal equities are currently discounting a gold price of $US1,100/oz for Gold and $US20/oz for Silver. Natural Gas and Copper continue to consolidate recent gains. The Agra/Grain complex remains moribund despite bullish crop reports and rising demand. The US is reaping its smallest corn harvest in 3 years after a drought damaged what looked to be a record crop. Most key grains have been consolidating in a very tight range perhaps as a prelude to a strong year end move. Early in the week, ICE and CME lowered the initial margin rate for all speculative accounts due to the ongoing MF Global unwind. No word was given how long this change may be in effect.
In Canada, Canadian housing starts remained high with an annual rate of 207k units. Canadian housing starts over the last 6 months have averaged over 200k - a first since the recession. Critical Canadian trade returned to the black in September with a $CD1.25b surplus as exports rebounded. The TMX officially agreed to be taken over by the Maple Group in a $CD3.73b friendly deal. The TSX Markets Group announced that as of September 30 the TSX and TSXV together had more new listings in 2011 than any other exchange in the world. With 318 new listings the TMX ranked ahead of Shenzhen Stock Exchange with (201) and the Deutsche Borse with (176). It was the 3rd straight year that the TMX has led global exchanges in the number of listing. The TMX ranks 2nd in the world in the number of listings, 7th by market capitalization, and 7th by equity capital raised.
The Bank of Canada left inflation target unchanged at between 1 and 3 percent - with 2 percent remaining the optimal target. The consumer stocks earnings reports garnered much of the attention with blowout numbers recorded by Tim Hortons, Canadian Tire, and Cineplex.
An effect of the Euro debt crisis hit home when Finance Minister Jim Flaherty cut the projection for government revenue and moved the target for balancing the budget. $CD53b was slashed from the revenue estimates between 2011-2016 due to slowing global growth and rising financial risks. The plan to shrink the deficit from $CD32.3b this year to a surplus of $CD3.7b looks to be unlikely.
TransCanada Pipeline Ltd was disappointed to discover that B. Obama kicked the Keystone XL pipe further down the road in true Presidential vote saving fashion until 2013. The poll watching Potus bowed to pressure from Californian environmentalist lobby types who opposed the so-called dirty oil we send them. The major issues of energy supply security and creation of tens of thousands of new 'unfunded' long term jobs were non starters. This decision brings into question the administration's view of trade and development with Canada. The 'Carbon Cossacks' have deluded themselves into a no win economic fantasy of higher long term energy prices and substantially lower revenues which feed all their 'green' planet saving nonsense.
On the week the TSX dropped 1% closing at 12,300. The key 'under-performing' financial sector will need an upside burst for the TSX to breach key upside resistance.
Bottom line, despite socialist EU leaders that are dropping like flies, and hysterical threats of pending credit and currency doom, North American equity markets continue to outperform admirably. It is my opinion that many of the Euro banking issues will be solved probably by an actively printing leveraged ECB.
Should the dark debt clouds begin to part and the economic sun begin to shine, trillions of dollars which have been parked on the sidelines or in no-return bonds will quickly move back into attractively valued equities and other hard assets. I would not be surprised to see a move for the major indexes back to all-time high territory sooner rather than later. The 'half full glass' will fill faster than Leaf Fans jumping off the bandwagon!
A heartfelt thank you and prayers to the brave fighting men and women who have made the ultimate sacrifice on this special day of Remembrance 11/11/11.
'It is well enough that people of our nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before morning'
Henry Ford - 1930
Sunday, November 13, 2011
Friday, November 4, 2011
Week Ending 4/11/11 - Debtocracy
All attention is riveted on the birthplace of democracy and the cradle of Civilization for the pending 'Big Fat Greek Referendum' - or not! Leadership in Athens are changing their minds about a historic vote faster than wedding invitations to a Kim Kardashian wedding.
The epic motion would be a vote to either partially or entirely 'welch' on their collective responsibilities. It is a long overdue great question in which an enormous cast of self interested business and government leadership should be held to account!
A vote that would be a final watershed moment which highlights reckless and irrational public policy as it gasps for its last & final few precious breaths of subsidized life. The painful moral of this sad tale will be when the lenders (of last or final resort) hold their own referendums on, if and when, they remove terminal debt nations from life support systems.
I am all for the good old town hall referendum process which clearly and democratically decides significant matters. It should be standard fare for all financial matters over and above the net worth of any elected Potus. 'Referendi' removes the burden of responsibility/temptation from 'motivationally challenged' elected officialdom! Most importantly it returns the power of rule to the people and away from self interested fascist leadership. Unfortunately political types of all spots & stripes are exceedingly reluctant to cede power and return to any form of pure democracy such as the referendum process.
Faced with unpalatable debt solutions and unsavory repayment alternatives Greek President G Papandreou unilaterally decided to lay his complex fiscal nightmare at the feet of his (non) tax paying citizens. A vote which clearly defines the moral character and fortitude of socialist leadership an its quasi Marxist citizenry!
It might have been handy though if the Greek kleptocracy decided to hold a referendum 'prior' to recklessly borrowing billions of euros and spending themselves into oblivion. A simple 'pre-borrowing' question asking the people if they had any interest in repaying the leveraged banking system who fatefully financed the free for all.
It sure would be interesting if the referendum included a vote on reducing or ending an obviously failed socialist welfare state experiment in order to allow free and open 'unstimulated' markets to repair excesses and mend the ugly debt chasm left behind. A clear rational motion on significantly reducing the bloated size of a seriously flawed governmental model of mindless spending, irrational irresponsibility, and criminal unaccountability. I won't hold my breath in anticipation for that to happen!
It is demoralizing to see how various infected abusive political systems have distorted the first principals of freedom, business, and enterprise. All credit cards should have limits. Creditor nations should have demanded this referendum long ago! They sure will next time!
As I dream about what should be, the fearless G20 types gather in plush quarters in Cannes mapping out possible 'ring fenced' exit scenarios for the free loaders from the Aegean. Evidently the EU 'can get over and live without' their Greek brothers? Reports from Cannes (not) suggests that an IMF financing agreement was DOA and nada uno member had any interest in participating in the 'leveraged' EFSF bank rescue scheme. Newly minted ECB chief Super Mario Draghi, (former vice chairman and managing director Goldman Sachs), in a major change of Euro inflation fighting direction, cut its key lending rate by 25 basis points to 1.25% in the hopes to offset G20 inaction.The 'behind closed doors' meeting of the Terrific Twenty hopefully will call out the dithering Greek PM to make an example of those who think only in 'political' terms! Portugal and Spain would not be as likely to be as indecisive. Italy is likely to do almost anything - and likely will! PM Bunga Bunga has even halted the release of his latest Love Serenade CD! He will need all the sweet lyrics he has got to improve Italy's rapidly falling GDP/capita and refinance the 310b+ euros of debt maturing in 2012. Germany has totally lost its infectious sense of humor and joie de vive! The French stand at the ready by their ATM's should the debt 'merde' hit the fan! China will do exactly what it wants to do without the emotion or drama & minus the referendum solution. G20 members (China) have no interest bailing out any other countries banker's IOU's. And the first place Leaf's (9-3-1) aren't sure aren't sure what to do or say! Can life get anymore interesting?
We get to celebrate with the fine 95+ million Filipino people for creating our 7 billionth world citizen - Danica May Camacho. Her joyous parents were presented with a chocolate cake and a gift certificate for free shoes for their fine efforts. There is beauty in simplicity!
In the US, a fragile and shaken financial sector was rocked with the shocking news of how the 200 year old MF Global Holdings Ltd. was destroyed with yet more spectacular recklessness. MF Global (was) a global powerhouse commodities brokerage run by (former Goldman Sachs CEO) J. Corzine. He was appointed in March 2010 and decided to transform the derivatives agency broker into more of an investment banking Goldman Saks type clone. A $US6.3 bet on European Bonds based on '2007 like' 40x's leverage vaporized all of MF's capital before you could say 'au revoir.' MF Global was recently selected to be in the elite group of US Treasury dealers. Billionaire Mr. Corzine (Dem) gave a sermon last year to the Princeton faithful about the compensation sins of Wall Street. He stands to collect $12.1m for 19 months of stellar duty and stewardship with the now former MF Global. It is reported that he may decline such largess and is well 'lawyered' up. Lots of money is 'missing' and it looks like he will need all of his 'political relationships' to circle their protective wagons. Once again, the compliance and regulatory world is conspicuously absent from the proceedings.
After two sharply lower profit taking days early in the week US equity markets rallied back challenging the October recovery highs registered last week. Recent economic stats have been mixed to positive. Non farm payrolls for October increase less than expected at +80k with the unemployment rate little changed at 9.0%. The US needs to generate over 250k jobs per month until the end of Obama's 'second' term in order to return to pre-recession/depression employment. Sounds like lots of 'hope and change' to me!
SM non-manufacturing data was 52.9 for October with a median forecast of 53.5. Factory orders rose slightly 0.3% for September with a median forecast of -0.2%. Levels of production and new orders fell slightly over the month while new export orders declined at the quickest pace for almost two-and-a-half years. The employment index encouragingly jumped from 48.7 to 53.3%.
Fed head B. Bernake solemnly declared that he was 'also' an unhappy camper about the sluggish US employment growth while reiterating his 'significant downside risks' to economic outlook mantra. The Fed is looking for 2011 GDP of between 1.6-.7% and 2.5-.9% for 2012. They expect 2011 unemployment to drop marginally from between 9.0-.1% to 8.6-.9% in 2012. Bernake skirted both the MF Global meltdown and Greek referendum issues in typical political fashion. No change in FOMC policy was the order of the day and continuation of the very business friendly interest rate structure until 2013.
On the week the DJIA closed down -2.8% but up +2.6% YTD. The S&P 500 closed down -3.1% and down -1.1% YTD. The NASDAQ closed down -2.4% on the week and almost unchanged on the YTD.
In commodities, Gold has resurrected it role as the #1 'non printable' currency amidst the Euro financial non-action. Gold has rallied (+.50%) into significant resistance in the $US1,770/oz to $US1,810 area. Central Banks have quietly been buying gold at a frenetic pace having purchased over 200 tonnes this year. The various money printing stimulus programs, zero interest rate mandates, and assorted 'twist' schemes has created a potentially (probable) high risk inflationary environment. Silver continues to consolidate in the mid $US30/oz range. $US37-39/oz represents significant over head resistance for Silver. $US30-32/oz represents considerable intermediate support. After last weeks' power rally for Copper the red metal has consolidated in the $US3.50-.65/lb range. I favor Copper to rally back into the low $US4/lb range in this positive hard asset environment. Crude oil remains range bound in the low $US90/bl level as relentless demand challenges the growth of supplies. A move above $US95/bl for Crude Oil could be explosive on the upside. The Agra/Grain sector trading has become much more subdued and is quietly consolidating in tight trading ranges. Seasonal factors should provide evidence of long term trading trends before long.
In Canada, major props go out to no other than our BofC chief Mark Carney, (former investment banker Goldman Sachs), for being named as head of the global banking regulator FSB. Conservative Canadian banking principals may have arrived a tad late now that most Euro regimes are deeply on the dole and are inextricably linked to each other. Carney will remain as BofC head and only part time his FSB role. His skills & patience will be well tested.
The Canadian economy shed an unexpected 54,000 jobs last month. The expectation was for a gain of 15,000 new workers. The unemployment rate now stands at 7.3% from 7.1%. Hopefully this is nothing more than a seasonal one-off report and not the beginning of a long term trend. Canadian GDP grew 0.3% in August better than consensus expectations of 0.2%
It looks like the $3.8b marriage of the TMX and banker/broker led Maple Group is about to be consummated. It will be interesting to see how the regulators deal with the obvious vertically integrated monopoly implications of this cozy deal. Resource earnings for miners and oil & gas companies were outstanding this week as expected. AGU, CNQ, TLM, ECA, K all blew away expectations and in some cases raised dividend payouts. Grande Cashe Coal is lifted from the exchange in a $1b (60+% premium) all cash deal from a partnership of Chinese and Japanese companies. The takeover and merger environment in the resource sector is expected to remain robust through 2012. CP has a new 'activist' shareholder (Pershing Square Capital) on board to deal with which should make board meetings much more animated. Beleaguered smart phone manufacturer RIM reported that their share of the US handset market share dropped to 9% from a high of almost 40%.
The S&P/TSX closed down -1.0% on the week and almost -8% YTD. The S&P/TSX Venture exchange of small cap resource stocks closed up fractionally on the week and a walloping 600 points or -30% lower YTD.
Bottom Line, 'Trim Tabs' reports that since the beginning of 2010 corporations have been buying back $US2b/day of their own stock while fund holders have been redeeming $US800m/day of their holdings. 'Trim Tabs' has calculated that since 2009 corporations have sold $US3T of their bonds and $US800b of equity to the public. Corporations have been using this extraordinary period of record low interest rates to borrow and repurchase what they think to be is undervalued equity. The pool of quality investment is rapidly shrinking as outstanding equity is purchased from the public. As economic conditions improve corporate repurchase programs will continue to be a significant driver for higher stock prices and valuations.
The Euro debt mess, as muddled and complex as it appears, is heading toward an inevitable (Goldman Sachs inspired) resolution/conclusion. To this point it appears that some kind of 'controlled' inflationary plan is the desired course of action. I doubt that any tabs will be covered!
It is suggested that the Federal Reserve Board should target a 'nominal gross-domestic-product growth rate' of 4.5% to decide how much money to inject into the economy. Concerns of real vs inflationary growth and associated price stability become a low priority immaterial consideration. The newly 'acronymed' NGDP scheme of 'creating' money in a 'variety' of methods smacks to me as nothing more than the same concerted Keynsian plan of unbridled inflationary 2-ply paper printing. The US plans to issue $US846b in Treasury's in the next 6 months : +35% more than the previous 'stimulated' year. It looks like the Fed is walking through its open stimulus door once again. We may be closer to dealing with inflationary challenges than we think.
I continue to favor hard asset and inflation sensitive sectors in this monetizing environment. Interest rate dependant sectors will be challenged to perform as financial markets demand more real return 'on' capital - and ultimately the return 'of' capital.
'Creditors have better memories than debtors.'
Benjamin Franklin (1706-1790)
The epic motion would be a vote to either partially or entirely 'welch' on their collective responsibilities. It is a long overdue great question in which an enormous cast of self interested business and government leadership should be held to account!
A vote that would be a final watershed moment which highlights reckless and irrational public policy as it gasps for its last & final few precious breaths of subsidized life. The painful moral of this sad tale will be when the lenders (of last or final resort) hold their own referendums on, if and when, they remove terminal debt nations from life support systems.
I am all for the good old town hall referendum process which clearly and democratically decides significant matters. It should be standard fare for all financial matters over and above the net worth of any elected Potus. 'Referendi' removes the burden of responsibility/temptation from 'motivationally challenged' elected officialdom! Most importantly it returns the power of rule to the people and away from self interested fascist leadership. Unfortunately political types of all spots & stripes are exceedingly reluctant to cede power and return to any form of pure democracy such as the referendum process.
Faced with unpalatable debt solutions and unsavory repayment alternatives Greek President G Papandreou unilaterally decided to lay his complex fiscal nightmare at the feet of his (non) tax paying citizens. A vote which clearly defines the moral character and fortitude of socialist leadership an its quasi Marxist citizenry!
It might have been handy though if the Greek kleptocracy decided to hold a referendum 'prior' to recklessly borrowing billions of euros and spending themselves into oblivion. A simple 'pre-borrowing' question asking the people if they had any interest in repaying the leveraged banking system who fatefully financed the free for all.
It sure would be interesting if the referendum included a vote on reducing or ending an obviously failed socialist welfare state experiment in order to allow free and open 'unstimulated' markets to repair excesses and mend the ugly debt chasm left behind. A clear rational motion on significantly reducing the bloated size of a seriously flawed governmental model of mindless spending, irrational irresponsibility, and criminal unaccountability. I won't hold my breath in anticipation for that to happen!
It is demoralizing to see how various infected abusive political systems have distorted the first principals of freedom, business, and enterprise. All credit cards should have limits. Creditor nations should have demanded this referendum long ago! They sure will next time!
As I dream about what should be, the fearless G20 types gather in plush quarters in Cannes mapping out possible 'ring fenced' exit scenarios for the free loaders from the Aegean. Evidently the EU 'can get over and live without' their Greek brothers? Reports from Cannes (not) suggests that an IMF financing agreement was DOA and nada uno member had any interest in participating in the 'leveraged' EFSF bank rescue scheme. Newly minted ECB chief Super Mario Draghi, (former vice chairman and managing director Goldman Sachs), in a major change of Euro inflation fighting direction, cut its key lending rate by 25 basis points to 1.25% in the hopes to offset G20 inaction.The 'behind closed doors' meeting of the Terrific Twenty hopefully will call out the dithering Greek PM to make an example of those who think only in 'political' terms! Portugal and Spain would not be as likely to be as indecisive. Italy is likely to do almost anything - and likely will! PM Bunga Bunga has even halted the release of his latest Love Serenade CD! He will need all the sweet lyrics he has got to improve Italy's rapidly falling GDP/capita and refinance the 310b+ euros of debt maturing in 2012. Germany has totally lost its infectious sense of humor and joie de vive! The French stand at the ready by their ATM's should the debt 'merde' hit the fan! China will do exactly what it wants to do without the emotion or drama & minus the referendum solution. G20 members (China) have no interest bailing out any other countries banker's IOU's. And the first place Leaf's (9-3-1) aren't sure aren't sure what to do or say! Can life get anymore interesting?
We get to celebrate with the fine 95+ million Filipino people for creating our 7 billionth world citizen - Danica May Camacho. Her joyous parents were presented with a chocolate cake and a gift certificate for free shoes for their fine efforts. There is beauty in simplicity!
In the US, a fragile and shaken financial sector was rocked with the shocking news of how the 200 year old MF Global Holdings Ltd. was destroyed with yet more spectacular recklessness. MF Global (was) a global powerhouse commodities brokerage run by (former Goldman Sachs CEO) J. Corzine. He was appointed in March 2010 and decided to transform the derivatives agency broker into more of an investment banking Goldman Saks type clone. A $US6.3 bet on European Bonds based on '2007 like' 40x's leverage vaporized all of MF's capital before you could say 'au revoir.' MF Global was recently selected to be in the elite group of US Treasury dealers. Billionaire Mr. Corzine (Dem) gave a sermon last year to the Princeton faithful about the compensation sins of Wall Street. He stands to collect $12.1m for 19 months of stellar duty and stewardship with the now former MF Global. It is reported that he may decline such largess and is well 'lawyered' up. Lots of money is 'missing' and it looks like he will need all of his 'political relationships' to circle their protective wagons. Once again, the compliance and regulatory world is conspicuously absent from the proceedings.
After two sharply lower profit taking days early in the week US equity markets rallied back challenging the October recovery highs registered last week. Recent economic stats have been mixed to positive. Non farm payrolls for October increase less than expected at +80k with the unemployment rate little changed at 9.0%. The US needs to generate over 250k jobs per month until the end of Obama's 'second' term in order to return to pre-recession/depression employment. Sounds like lots of 'hope and change' to me!
SM non-manufacturing data was 52.9 for October with a median forecast of 53.5. Factory orders rose slightly 0.3% for September with a median forecast of -0.2%. Levels of production and new orders fell slightly over the month while new export orders declined at the quickest pace for almost two-and-a-half years. The employment index encouragingly jumped from 48.7 to 53.3%.
Fed head B. Bernake solemnly declared that he was 'also' an unhappy camper about the sluggish US employment growth while reiterating his 'significant downside risks' to economic outlook mantra. The Fed is looking for 2011 GDP of between 1.6-.7% and 2.5-.9% for 2012. They expect 2011 unemployment to drop marginally from between 9.0-.1% to 8.6-.9% in 2012. Bernake skirted both the MF Global meltdown and Greek referendum issues in typical political fashion. No change in FOMC policy was the order of the day and continuation of the very business friendly interest rate structure until 2013.
On the week the DJIA closed down -2.8% but up +2.6% YTD. The S&P 500 closed down -3.1% and down -1.1% YTD. The NASDAQ closed down -2.4% on the week and almost unchanged on the YTD.
In commodities, Gold has resurrected it role as the #1 'non printable' currency amidst the Euro financial non-action. Gold has rallied (+.50%) into significant resistance in the $US1,770/oz to $US1,810 area. Central Banks have quietly been buying gold at a frenetic pace having purchased over 200 tonnes this year. The various money printing stimulus programs, zero interest rate mandates, and assorted 'twist' schemes has created a potentially (probable) high risk inflationary environment. Silver continues to consolidate in the mid $US30/oz range. $US37-39/oz represents significant over head resistance for Silver. $US30-32/oz represents considerable intermediate support. After last weeks' power rally for Copper the red metal has consolidated in the $US3.50-.65/lb range. I favor Copper to rally back into the low $US4/lb range in this positive hard asset environment. Crude oil remains range bound in the low $US90/bl level as relentless demand challenges the growth of supplies. A move above $US95/bl for Crude Oil could be explosive on the upside. The Agra/Grain sector trading has become much more subdued and is quietly consolidating in tight trading ranges. Seasonal factors should provide evidence of long term trading trends before long.
In Canada, major props go out to no other than our BofC chief Mark Carney, (former investment banker Goldman Sachs), for being named as head of the global banking regulator FSB. Conservative Canadian banking principals may have arrived a tad late now that most Euro regimes are deeply on the dole and are inextricably linked to each other. Carney will remain as BofC head and only part time his FSB role. His skills & patience will be well tested.
The Canadian economy shed an unexpected 54,000 jobs last month. The expectation was for a gain of 15,000 new workers. The unemployment rate now stands at 7.3% from 7.1%. Hopefully this is nothing more than a seasonal one-off report and not the beginning of a long term trend. Canadian GDP grew 0.3% in August better than consensus expectations of 0.2%
It looks like the $3.8b marriage of the TMX and banker/broker led Maple Group is about to be consummated. It will be interesting to see how the regulators deal with the obvious vertically integrated monopoly implications of this cozy deal. Resource earnings for miners and oil & gas companies were outstanding this week as expected. AGU, CNQ, TLM, ECA, K all blew away expectations and in some cases raised dividend payouts. Grande Cashe Coal is lifted from the exchange in a $1b (60+% premium) all cash deal from a partnership of Chinese and Japanese companies. The takeover and merger environment in the resource sector is expected to remain robust through 2012. CP has a new 'activist' shareholder (Pershing Square Capital) on board to deal with which should make board meetings much more animated. Beleaguered smart phone manufacturer RIM reported that their share of the US handset market share dropped to 9% from a high of almost 40%.
The S&P/TSX closed down -1.0% on the week and almost -8% YTD. The S&P/TSX Venture exchange of small cap resource stocks closed up fractionally on the week and a walloping 600 points or -30% lower YTD.
Bottom Line, 'Trim Tabs' reports that since the beginning of 2010 corporations have been buying back $US2b/day of their own stock while fund holders have been redeeming $US800m/day of their holdings. 'Trim Tabs' has calculated that since 2009 corporations have sold $US3T of their bonds and $US800b of equity to the public. Corporations have been using this extraordinary period of record low interest rates to borrow and repurchase what they think to be is undervalued equity. The pool of quality investment is rapidly shrinking as outstanding equity is purchased from the public. As economic conditions improve corporate repurchase programs will continue to be a significant driver for higher stock prices and valuations.
The Euro debt mess, as muddled and complex as it appears, is heading toward an inevitable (Goldman Sachs inspired) resolution/conclusion. To this point it appears that some kind of 'controlled' inflationary plan is the desired course of action. I doubt that any tabs will be covered!
It is suggested that the Federal Reserve Board should target a 'nominal gross-domestic-product growth rate' of 4.5% to decide how much money to inject into the economy. Concerns of real vs inflationary growth and associated price stability become a low priority immaterial consideration. The newly 'acronymed' NGDP scheme of 'creating' money in a 'variety' of methods smacks to me as nothing more than the same concerted Keynsian plan of unbridled inflationary 2-ply paper printing. The US plans to issue $US846b in Treasury's in the next 6 months : +35% more than the previous 'stimulated' year. It looks like the Fed is walking through its open stimulus door once again. We may be closer to dealing with inflationary challenges than we think.
I continue to favor hard asset and inflation sensitive sectors in this monetizing environment. Interest rate dependant sectors will be challenged to perform as financial markets demand more real return 'on' capital - and ultimately the return 'of' capital.
'Creditors have better memories than debtors.'
Benjamin Franklin (1706-1790)
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