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
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