Some of the major events over Thursday and late Wednesday...
As I pointed out late Wednesday, High Yield Corporates looked the worst and lost ground all day, important because credit leads equities. The credit markets which are much larger certainly seemed to have been aware of the risks over the holiday and were clearly telegraphing those risks Wednesday as you can see in this post from Wed.
ES hasn't been able to hold a rally whatsoever as every situation from Syria, to Egypt, to the EU to the US has deteriorated at break neck speed. As I mentioned Wednesday, what we see in a single day use to be 6 months worth of news so we have in my opinion, hit the point of no return. The credit markets are as frozen as they have ever been, I have showed you the proof of that, there are too many canaries keeling over in the coal mines. Liquidity and interbank lending is so bad that the London stock exchange is providing EU banks loans against the exchange's customer's trades, this is a disaster that will make what is happening in the Futures market do to the liquidation process of MF Global, look like a pale shadow in comparison. People are leaving the futures exchanges out of a lack of trust, the London Exchange faces an all out collapse. How regulators killed the Lehman/Barclay's deal in 2008 allow this to go on, which is a far greater systemic risk, have no clue. The collapse of Lehman is one thing, an entire exchange is another, but even that will seem like a minor event compared to what caused it.
As predicted when the "new and improved" leveraged EFSF idea was put out and has since been a dismal failure, Ireland is now looking for the same concession Greece got, Portugal will be next and this even in spite of the fact that there is no leveraged EFSF to even make good on Greece. I think it's probably more telling of the negative impact austerity measures that Ireland agreed to in exchange for a bailout are having on the growth or lack of growth in the economy. It's a Chinese finger trap and the more the EU brainiacs do to halt the crisis or slow it, the worse they make it at every turn which is precisely why French Yields are rising and Germany had its first failed Bund auction this week in as long as any one can remember.
When I posted the conditions that lead to the point of no return, chief among them was lack of trust. There's no trust in the EU and this is why they can't even credibly sell $3 bb euros of EFSF bonds when they need to raise over a trillion! This is why there is a liquidity freeze and Italian banks make you place an order for a withdrawal that you pick up several days later, AFTER they place an order with the London Stock Exchange for the money. This is why in Germany and other countries, there are maximum withdrawal levels set and customers having to answer why they are withdrawing their own money!
As the Dexia deal collapses and France's AAa rating is in more danger then ever, bank runs are only weeks away at this pace, expect the EU to lock down accounts-bank holidays.
In Syria, not only is the George Bush Aircraft Carrier Strike group right off the coastal waters, but so are 3 Russian warships. Medved's answer to the movement of the GB carrier group from the Strait of Hormuz to Syrian waters?
Hit the closed caption button for a translation, the crisis just escalated and the placement of Iskander Missiles in the Kaliningrad Region is to say the least, provocative. Look at a map of where the region is, Russia couldn't put those missiles any closer to the heart of Europe.
Yesterday China, how also vehemently opposes any UN/Nato/US intervention is Syria (as an aside) downgraded Portugal's rating to JUNK, this morning Fitch Rating's followed suit. But it gets worse for Portugal and the EU, that's coming in a moment. Also, while not much of a surprise since Hungary's move for IMF help last week, Moody's cut Hungary to JUNK status.
While we are talking about Global Strategic affairs, any member who was with us during the Mubarak removal, NOT BY THE PEOPLE, but by the military, I pointed out that the trouble in Egypt will flair right back up. The military has run Egypt since Nasser, they choose the leaders and the leaders all come from within the military. I told everyone here that the promise of democratic elections would NEVER happen in Egypt. Mubarak was removed under the cover of the Arab Spring, but the real reason was he was grooming his son to succeed him, which bypassed the military, so the people's uprising was convenient cover to remove him which would have happened in any case. The people of Egypt have seen the "Elections" come and go and realize what was pointed out here, the military won't allow it, so once again protestors have taken to the streets, thus time the military won't be there to protect them, but to crush them. We've already seen in Iraq and Afghanistan, even with massive US logistical, political, monetary and military support, neither country has been able to put together a credible government in 9 years that can project power outside of the capital, how much worse will it be for the Arab Spring nations? This is precisely what Hamas has been slipping in to the country ever since it started, they are organizing in the soon to be, total power vacuum.
I mentioned the last few weeks that commodities performance have raised serious questions as to the real condition in China, this week we saw Chinese PMI in contraction for the first time in 32 months-commodities were telling us that if we just listened. The Chinese fear 1 thing above all others, political unrest of their massive population-IT'S COMING.
Remember what I said about Sarkozy's VERY strange 180 degree reversal on Wednesday after the German Bund auction and after the Dexia deal fell apart?
Specifically:
- SARKOZY SAYS EURO ZONE MUST FURTHER INTEGRATE (This means fewer EU nations, not more)
- SARKOZY SAYS TROUBLED EURO COUNTRIES DIDN'T UNDERTAKE REFORMS(Translation: It's your own fault, don't cry when you are left hanging out to dry) and even more interestingly, France has been one of the countries (thus the divide between Germany and France recently that has seen some very barbed comments from both sides) that has been screaming for the ECB to PRINT. Now they seem to be abandoning that position-something big is happening between Germany and France on the issue or France is making overtures to Germany as they see their AAa rating in more danger everyday-today was Dexia. The importance of this should not escape you, think hard about this one, it's much bigger then a bullet point headline.
- SARKOZY SAYS EURO ZONE MEMBERSHIP IMPLIES OBLIGATIONS (Taken with the comment above, he's saying the same thing, you had your chance, you blew it, you will be out). Again, a 180 degree turn from PRINT!
- SARKOZY SAYS EUROPE'S FUTURE REQUIRES CONVERGENCE (Here is is simply moving toward the German position).
Today Merkel, Sarkozy and an awkward looking Monti held a presser. Besides saying they would do everything to save the Eurozone, which in political talk pretty much means, "we have already done everything we can do", it is nothing like the talk of the last 2 years which was more along the lines of "The Eurozone will NOT be allowed to fail". While interesting to watch politicians pare words, what was interesting was 1 day after I pointed out Sarkozy's TOTAL 180 degree about face, he adds this, Sarkozy just said they have agreed to abstain from making demands on the ECB.
Hello? What? Sarkozy was the head of the ECB must print crowd. Something is definitely going on behind the scenes and Merkel hold the key to the new EU, Sarkozy has realized that without the much needed AAa rating, which is in more danger then ever, he's not any better (for Merkel's purposes) then Monti. The leader of France, who clearly has a Napoleon complex with his 4 inch shoe soles and podium box that makes him look as tall as Merkel, must feel the bitter sting of going from a political celebrity A lister to a B lister in little more then 3 weeks. G-PAP and Berlusconi must be feeling some satisfaction right about now and surely must be tempted to send sympathy cards to Sarkozy.
However the big news today which took an early European rally and sent it to another risk off decline came when as has been obvious to any one paying attention, Merkel announced,
She stands firmly against joint Euro-bonds.
The Euro lost 40 pips in about 4 mins and the European rally was dead, another data point for those paying attention that Germany is clearly up to something that ill change the EU forever.
Exactly what the CDU is up to is hard to say, as I mentioned in the post liked above about Sarkozy, there's either 2 plans, 1 a much smaller Europe or 2 Germany is busy printing Deutsche Marks and simply letting the ECB keep contagion out of German borders until the transition is complete at which point, ALL PIIGS fall and likely take Austria, France, maybe Belgium and several others with them.
This of course devastates China's main trading partner and expect their PMI to continue to post consecutive new lows. They obviously se the writing on the wall, thus the EFSF dream box remains empty as China, much like out F_E_D becomes reluctant to spend any more treasure until they see where their own leaks are first.
The bond vigilantes WILL punish yields across Europe for Merkel's statement and watch for Italian BTPs back above the bailout threshold of 7% next week, despite ECB secondary buying-Spain too.
The French yields are the true measure of risk as they are NOT able to be bought up by the ECB, at least not yet, but I suspect Sarkozy will be forced to change positions as French rates continue to climb into the red zone.
In a very little noticed piece, the IMF says Japan could quickly become unstable over bond yields, making the 3rd largest world economy just another one of the PIIGS and who bails out Japan when yields become so high that they can no longer service them? These are the tidbits that many investors miss, but this has all been predictable, Ireland, Portugal, Italy, Span, France-contagion was predictable. What is surprising is to hear that the coming global recession could put Japan in a position in which they may actually default. UST's will long be sold en masse before then and America would soon be in a very similar situation, regardless of the last 3 treasury auctions that have been almost spectacular as the USTs seem to be the only safe haven left. With the Super Committee becoming the super flop that i was always intended to be, watch for another US downgrade before 2012 is finished.
As earlier mentioned, the all but done Dexia deal started falling apart this week, exposing Belgium to big problems, they showed up today in their yields which hit record highs as well as record highs vs Bunds. Historians will look back and debate whether MF Global or Dexia was 2011's Bear Stears/Lehman Brothers. Austria's ERSTE will get an honorable mention and our own Jefferies will be in the cliff notes.
3 a.m. EDT is rapidly approaching and we will get our first view of our credit indicators, I expect credit to continue Wednesday's decline and equities to follow. Yields in Italy and Spain hitting 7% will be a disaster even as the ECB embarks on the 20th intervention. France is the one to watch though, that's the only one the ECB can't support and therefore is the only accurate mechanism for actual price discovery.
Not sure if I did or did not mention it, but as you know 3C has been calling this since mid October and it's been rough holding positions when the market is going the opposite way, but 3C is what matters to me. So the weekly WOWS portfolio for the first time has cracked in to the top 10 at #9 with nearly a 52% return on the week and #22 for the month with an 85% return- this out of almost 19,000 portfolios!
3C has always come through for me, even if it was hard to maintain the faith, but as I have implored all of you, keep your eye on the forest, not the trees. Take emotion out of the trade.
