Week of 10/30/11

Italian Yields Up, US Jobs Weak

EU efforts to contain bond yields and therefore its crisis have been for naught, as Italian yields are now over 6.35 pct — their crisis-high region, where they began August, and you may recall what a swell month that turned out to be. Don’t worry, though, Italy invited the IMF to monitor its progress toward meeting austerity targets “to make sure there is credibility.” Right, because they did such a bang-up job with Greece.

Meanwhile, job growth is still weak in America with October nonfarm payrolls increasing only 80K instead of the 95K expected. Barry Ritholtz suggests that the specific figures don’t matter, anyway, but the trend does: “Are jobs readily available? No. Is the economy creating enough jobs to reduce the unemployment rate? No. Are we even creating enough new jobs to keep up with population growth? No. Is the overall employment situation having an impact on Consumer confidence? Yes, negatively. Is this impacting consumer spending and retail sales? Yes, in a negative way.— 11/4/11

Living With Leverage

It’s amazing to recall, with the help of Roger Lowenstein, that the person at Goldman who scolded Long-Term Capital Management’s founder, John Meriwether, 13 years ago on the perils of leverage was none other than Jon Corzine — the man whose futures trading firm, MF Global, just collapsed from leveraged exposure to Europe.

On why Greece is holding a rare referendum, David Zervos at Jefferies wrote in a client note: “The idea that any country in the EU is contemplating a referendum on exit will have EMU leaders quaking in their boots. Papandreou is playing an aggressive card as we head into the Cannes G20 meetings … This move could pay off very nicely for the Greeks with better bailout terms. Alternatively, the downside of exit is probably not as bad as staying in the zone under all of the agreed austerity conditions. In that sense it is a free option for Greece. From what I see, Papandreou just showed the north who is boss in this situation: ‘It’s our debt, but it’s your problem’ should have been the title of his announcement.” — 11/2/11

Back To The Cliff

LA Times: “When European leaders Thursday announced their new strategy to end the debt nightmare, one goal of the plan was to make investors feel confident about buying Italian bonds, thereby driving interest rates down. Instead, yields are rising. The yield on Italy’s 10-year government bond rose to 6.09 pct on Monday, the highest level since early August and up from 6.02 pct on Friday.”

MF Global is the first US casualty of the Eurozone crisis. Greece, the EU’s first colony, derives little comfort from the 50-pct haircut in its bonds. Comstock says the recent stock rally was another bear market trap “and that the lows of 2009 will eventually be retested.” John Hussman reminds investors to watch out for whipsaw traps and thinks the EU’s announcement amounts to: “We have agreed to solve our debt problem, leveraging money we do not have, to create a fund, which will then borrow several times that amount, in order to buy enormous amounts of new debt that we will need to issue.” – 11/1/11

Happy Halloween!

Knuckle sandwich jack-o-lantern by Ray Villafane

EU Ponders ‘Yuan Bond’

Tim Worstall at Forbes: “The head of the European rescue fund says it could issue bonds in yuan, as he attempted to tempt China into backing Europe’s bailout. …

“This is really stupid. The whole Eurozone problem is that each Eurozone country was issuing bonds in what was effectively a foreign currency, and so it lacked an effective lender of last resort. Now, if the Telegraph is correct, the Eurozone as a whole is planning to repeat the mistake, and become just like Greece. …

“If you can issue more money as and when you want, which you can if you control your own currency, then if the banks of the financial system get into trouble then you can just print more money to help them out. You don’t end up with your entire financial system in a pile of smoking rubble. …

“So what we seem to have is the head of the EFSF stating that they’d just love to issue bonds in yuan: a currency that they don’t control and cannot print more of. Making, as the quote shows, the EFSF make the same mistake now as the Eurozone did those years ago which brought us to this current crisis.” — 10/31/11

Socks for Japan, Phase II

On Saturday, October 8, Socks for Japan will embark on its first Phase II distribution, to Ishinomaki. Phase I ran from March 13 to July 7. Phase II will run from October 1, 2011 to March 12, 2012.

You may be interested in our expenses for Phase I. Using an average exchange rate of 81 yen per dollar:

$4,228 vehicle rentals
$3,632 fuel
$1,134 press-seal bags, trash bags, etc.
$770 food and drink for volunteers
$188 photocopies
$175 highway tolls
$123 phone
$35 other
$10,285 total

That came to 7 cents per pair of socks distributed, not including the cost of buying and shipping them — which our donors generously funded. We think 7 cents per hand-delivered care package is very efficient. Read the article and follow our journey through Phase II as we continue getting this wonderful nation back on its feet.
— 9/29/11 to 10/31/11

Rally Is No One-Day Wonder

Tom Sowanick at OmniVest sent the following to clients on Friday: “Too many market participants are discounting the strong equity market rally yesterday in response to the apparent resolve of the European sovereign credit crisis. While it is clear that all issues have not been resolved, it is equally clear that we are now moving in the right direction. …

“Have the earnings environment and the economic fundamentals improved in recent months? Yes. It wasn’t too long ago that certain prominent economists were describing the risk to the US falling back into recession as almost a guarantee by the end of this year. The 2.5 pct GDP report for the 3rd quarter released this week clearly pushes, into distant quarters, any risk of a recession. While the relief rally may have lasted only one day, the equity rally has now completed its 4th consecutive week and that alone does not constitute a one-day wonder of any kind.” — 10/31/11

Lathered Levering

Joan McCullough of East Shore Partners wrote in a recent comment to clients: “They didn’t vote on a damn thing except agree to use leverage. Right. An agreement in principle to use leverage contingent on the Budget Committee voting on the particulars of same. …

“You would think that by now the Euro-nuts would try to get Lehman or Bear on the phone in order to ask about that leverage stuff. And once they got the recording announcing that the ‘line has been disconnected at the customer’s request,’ might have put 2 + 2 together, come up with 5 … and then high-tailed it away from ‘capacity increase,’ i.e., ‘leverage.’ Nope. So are they that stupid? Or are they just that desperate? Methinks it’s mostly the latter, unfortunately. Because stupid can be reckoned with. But desperation has no bounds. …

“Option one is this partial-protection certificate which we joked is the investor’s proof that he’s screwed. [Sovereign debt is supposed to be of the highest quality, risk-free, what you buy when you just want to protect your capital.] Even with the ECB in there, buying Spanish bonds and noting that the country’s economic data is not a total bust, they still have been downgraded several times and continued to get hammered. Which suggests that a large part of the issue is the Euro crisis itself. (And then we can argue the chicken/egg story until the cows come home.) The bottom line is that it is almost bizarre to offer protection to an investor who is buying the sovereign debt of developed economies. … I can’t face it any more; enough for one day.” — 10/28/11

Now China Has Debt Trouble

As President Nicolas Sarkozy of France goes hat-in-hand to China for money to save Europe, it comes to light that China’s wrestling with debt problems of its own.

The Washington Post reports that a “half-dozen Mercedes-Benzes, an equal number of BMWs, several Porsches, a Range Rover, a Rolls-Royce and a Hummer, most just a few years old and in pristine condition” are for sale by factory bosses “for cash to pay back their business loans.” China could be facing “a massive amount of accumulated debt that could rival the subprime crisis in the United States … The small and medium-size factories that drive the local economy found it increasingly hard to get bank loans this year as the government announced it was ending its stimulus spending and tightening the money supply to rein in inflation. The factories turned to the murky private lending market … much of the money went into more speculative ventures, such as investing in real estate or expanding into newer, riskier businesses with the lure of higher returns … But the continued economic slowdown in the United States and Europe meant orders dried up … Inflation has been increasing — currently about 6pc in China … With the loans coming due, many cannot pay.” — 10/28/11

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