Busy, busy today with lots of data!
At the moment (8am), I only know that retail sales were flat to last week, which was 1% better than last year but this week is 3.3% better than last year because LAST YEAR TOTALLY SUCKED! That’s right, we are now comping to numbers that are so atrocious that in order to miss them we would have to all dig holes in our backyards, cover them with tarps (no, not the bailout package but a good conceptual image) and drink only rainwater and eat earthworms. Anything better than that will give us more economic activity than we had last November, when the market was completing a 50% dive off the previous year’s highs and we weren’t sure there was going to anything to be thankful for on November 27th.
Our market hit rock bottom on November 21st, the Friday before Thanksgiving (and an option expiration day) at about 7,500 on the Dow. People were generally shell-shocked but we did bounce back to 8,500 and drifted around there through Jan 1st (9,000) before plunging to 6,500 by March 9th. THAT my friends, is the period we are comping against! So beware "improvements" being sighted in the MSM as we are now comparing our weak recovery to a total train wreck and yes, it’s much better now, but better in the way that the Chicago Bears (4-6) are better than the Detroit Lions (2-8), not the way the Minnesota Vikings (9-1) are better than the Lions.
Later today we have an update (and downgrade) of our Q3 GDP followed by Redbook Chain Store Sales and Case-Shiller Home Prices at 9. At 10 we get Consumer Confidence (or lack thereof), the FHFA Housing Price Index, the Richmond Fed Report and State Street’s Investor Confidence Index. Later today we have the results of a massive $39Bn 3-year Note Auction, the Fed Minutes at 2pm along with Industry Charge-offs and, finally, at 5pm we get the ABC Consumer Confidence (if any) Index.
It’s a very brave bunch of bulls who have run the futures up half a point off their lows this morning with all that data coming up. When I say brave of course, I mean the disgustingly manipulative and should be thrown in jail kind of brave but, since none of our regulators seem to care about the nonsense that goes on every day at the commodity and futures exchanges – I guess they are not so brave after all as there is no downside to their actions.
That’s really fine with us as we just reviewed over a dozen upside plays on our new Watch List that will benefit from some manipulation but, as it was at the beginning of the month, our hearts are not really in the bull camp. We closed out yesterday more than 55% bearish as today just seemed to be too data-heavy to support yesterday’s run. As I predicted in the morning post, the futures pump was not sustained but we did finally get our test of 10,500 but we failed to hold any of our highs so we had a great time playing the 75-point intra-day drop and setting up more bearish plays like DXD, TZA, FAZ, EDZ, VIX, DIA (puts) and RTH (puts). Those were our short-term bets from the top but we did pick up a couple of bullish plays in the afternoon as we don’t hate everything, just a lot of things at these prices.
As generally expected, our revised GDP came in at 2.8%, down 20% from the original estimate which boosted the markets considerably (and falsely). If you subtract the 3.2% that was added by government stimulus, we are still in a recession, just one that is being bailed out on a scale that has never been attempted before.
Here’s a little reality for you (skip this paragraph and the next if you don’t like bad news): According to a report from First American CoreLogic, 23% of all U.S. homeowners with mortgages – 10.7M – now owe more to the bank than their house is worth. More than 5.3M of those mortgages are at least 20% higher then the home’s value. Noting the close correlation between negative equity and foreclosures, firm calls the trend "an outstanding risk hanging over the mortgage market."
While more than 40% of borrowers who took out a mortgage at the peak in 2006 are under water, prices have dropped so much that some borrowers who took out loans more than five years ago also owe more than their home’s value. Given this, it’s hard to believe we’ve broken out of the housing death spiral. Calculated Risk reminded us yesterday that existing home sales aren’t as crucial to the economy as new home sales, housing starts and residential investment; and the "distressing gap" (caused by a flood of distressed sales) is still distressingly large.
Something distressing happened in Asia this morning – the Shanghai Composite sold off! Not just a little either, they were soundly rejected back at our predicted rejection target at 400 and fell back 3.5% on the day on big volume. The second red day of the month for the "well-regulated" Shanghai freaked out other Asian markets and the Hang Seng dove 350 points after lunch before finding "support" at last week’s low of 22,400. The Nikkei went down and down all day but only 96 points overall (1%), finding support at the 9,400 mark, which is farther below the Dow than at any point in the past 5 years.
Attempts to keep the commodity baloon inflated by holding down the dollar are taking a constant tol on Japan and the BOJ is now under pressure from their own government to take action. At 0% interest, the only action the BOJ can really take to devalue their currency is to start buying up Dollars, so this is going to be fun to watch… "Investors are becoming pessimistic about Japan’s economy. They are frustrated and very disappointed the government has not been able to launch measures to spur the economy," said Masatoshi Sato, a market analyst at Mizuho Investors Securities Co. Ltd.
Over in Europe, they are flatlining ahead of the US open and Germany is extending its jobs stimulus program, which keeps people on the job by paying them the same for working less hours. Banking stocks have kept pressure on the EU markets at the S&P issued a bearish report on the global banking industry. What report, you may ask? The report that is not reported at all in the US media in which the S&P "has given warning that nearly all of the world’s big banks lack sufficient capital to cover trading and investment exposure, risking further downgrades over the next 18 months unless they move swiftly to beef up their defenses."
Every single bank in Japan, the US, Germany, Spain, and Italy included in S&P’s list of 45 global lenders fails the 8pc safety level under the agency’s risk-adjusted capital (RAC) ratio. Most fall woefully short. The most vulnerable are Mizuho Financial (2.0), Citigroup (2.1), UBS (2.2), Sumitomo Mitsui (3.5), Mitsubishi (4.9), Allied Irish (5.0), DZ Deutsche Zentral (5.3), Danske Bank (5.4), BBVA (5.4), Bank of Ireland (6.2), Bank of America (5.8), Deutsche Bank (6.1), Caja de Ahorros Barcelona (6.2), and UniCredit (6.3).
Really, go check your sources right now and try to find this report. Do it before they all get embarrassed after reading this post and fix it. You would think this sort of thing would be leading the news, not buried. If I accomplish nothing else at all with my writings, I hope I at least get you to question the sources of the information you rely on to make decisions!
The "safest" global bank is HSBC (9.2), followed by Dexia (9.0), ING (8.9) and Nordea (8.8). UK banks fare relatively well: Standard Chartered (8.1) is in the top quintile; Barclays (6.9) is in the middle. The study left out RBS and Lloyds because their status is unclear. Chinese banks – the world’s largest – were excluded.
Many banks on the sick list are already cleaning up their books, mostly by disposing of assets or converting hybrids into common stock. Citigroup exchanged $64bn (£38.5bn) of hybrid equity in the third quarter. UBS has cut reliance on hybrids, still 80pc of its capital earlier this year.
Japanese banks score worst because they rely on hybrids and are major players on the stock exchange, buying equities at 12 times leverage. Equity virtual portfolios make up more than 50pc of their capital. This could prove troublesome given Tokyo’s bourse has fallen this year, missing out on the global rally. German banks do poorly because they have large holdings of asset-backed securities (ABS), often toxic. US banks look healthy in terms of leverage, but look less pretty when this is adjusted for risk.
S&P said past focus on leverage alone had been a recipe for trouble. It encouraged banks to opt for dodgy products – treated as if equal to top-notch sovereign debt – and could be circumvented "off-books" in any case. Rules created the illusion of safety. The illusion of safety – that’s a great summation for the entire market at the moment, so be careful!
