miercuri, 9 noiembrie 2011

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis


Judge Unloads on Deal SEC Struck with Citigroup; No Lessons Learned, Citi Still Too Big to Exist

Posted: 09 Nov 2011 07:31 PM PST

A federal judge today blasted 40 years of slap-on-the-wrist, no-admission-of guilt deals the SEC has reached with Citigroup.

In the latest deal, with no admission of guilt, the SEC fined Citigroup for $160 million in illicit profits, even though regulators claim Citigroup profited by $700 million.

Please consider Judge Unloads on Deal SEC Struck With Citi
A federal judge sharply questioned the Securities and Exchange Commission about why it didn't force Citigroup Inc. to admit to "what the facts are" before the agency agreed to settle a mortgage-bond case for $285 million.

During an hour-long hearing Wednesday, U.S. District Judge Jed S. Rakoff, an outspoken critic of the SEC's approach to securities-fraud settlements, challenged the SEC on why the regulator allowed Citigroup to settle the case using boilerplate language in which it neither admits or denies wrongdoing.

"Why does that make any sense in this context?" the judge said.

Judge Rakoff didn't issue a decision on the Citi settlement Wednesday, saying he wants to think about the case and issue an opinion later. He also expressed other concerns.

He questioned why the SEC only sought $160 million in alleged illicit profits—the regulator claims Citigroup profited from the deal—when investors may have lost more than $700 million in the deal.

"They're out something like $600 million, so the net effect of this is, you're only returning a small fraction of what the plaintiff's lost, yes?" the judge asked.

The judge also asked Citigroup lawyer Brad Karp if the company admitted to the allegations. He said the company didn't. "If it's any consolation, we don't deny them either," Mr. Karp said.
No Lessons Learned, Citi Still Too Big to Exist

As long as the rules of the game are such there is no chance of being fined more than illegal profits are made, banks will ignore rules and go for illegal profits.

The SEC has learned nothing from these deals, but the financial sector has. Banks have learned they will profit more from illegal activities than they will be fined if they are caught. The added bonus is they are unlikely to get caught in the first place.

Such actions prove Citigroup remains too big to exist even though Citigroup CEO Claims Citi has Learned a Lesson on Leverage and Banks Should be Banks, Not Supermarkets.

Banks should be banks, not criminal operations. Then again, some might wonder, is there a difference?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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France, Germany have "Intense Consultations" on Smaller Eurozone; Breakup Inevitable, but How?

Posted: 09 Nov 2011 02:08 PM PST

Realization the Eurozone is no longer tenable is at long last at hand. In fact, "intense discussions" have been underway for months but are just now admitted to by senior EU officials.

Bloomberg reports U.S. Stocks Extend Declines on Concern Nations May Exit Euro
U.S. stocks extended declines following a report that German Chancellor Angela Merkel's party wants to make it possible for European nations to exit the euro area.

Merkel's Christian Democratic Union party wants to make it possible for European Union members to exit the euro area, Handelsblatt reported in a preview of an article to be published tomorrow, citing unnamed participants in the discussion.

A commission within the party, that is crafting a framework to be presented at a party meeting, has proposed allowing a euro member who doesn't want to or isn't able to comply with the common currency rules to leave the euro region without losing membership in the EU, the newspaper said.
France and Germany have "Intense Consultations" on Smaller Eurozone

Please consider French and Germans explore idea of smaller euro zone
"France and Germany have had intense consultations on this issue over the last months, at all levels," a senior EU official in Brussels told Reuters, speaking on condition of anonymity because of the sensitivity of the discussions.

"We need to move very cautiously, but the truth is that we need to establish exactly the list of those who don't want to be part of the club and those who simply cannot be part," the official said.

The change has been discussed on an "intellectual" level but had not moved to operational or technical discussions, the EU official said.

A French finance ministry spokesman denied there was any project in the works to reduce the currency bloc's membership.

"There have been no conversations between French and German authorities at any level on decreasing the size of the euro zone," the spokesman said .

A radical overhaul of the European Union would be opposed by many members.

"This will unravel everything our forebears have painstakingly built up and repudiate all that they stood for in the past sixty years," one EU diplomat told Reuters."This will redraw the map geopolitically and give rise to new tensions. It could truly be the end of Europe as we know it."
Never Believe Anything Until It's Officially Denied

We now have an official denial from France that breakup conversations are taking place. This contradicts an admission by others that such discussion are taking place.

According to the 1980's British sitcom Yes Minister, "The first rule of politics," Sir Humphrey, the wily civil servant in the show, insists is: "never believe anything until it is officially denied."

Eurozone Breakup Inevitable, But How?


The Eurozone is a failed experiment. A breakup is inevitable just as it has been from the beginning. Structural flaws were too great, built up over the years. No currency union in history has ever survived unless there was also a fiscal union.

The German supreme court has ruled out a fiscal union and printing unless German voters approve (and they won't). Please see Germany's Top Judge Throws Major Monkey Wrench Into Leveraged EFSF Machinery, Demands New Constitution and Popular Referendum for Further Powers for details.

The Italian bond market revolt (see Yield Blowout, Bond Market Emphatically Rejects Italy's Solution; No Place to Hide) and the collapse of Greece says the breakup is sooner rather than later. However, politicians have a propensity to kick the can down the road longer than anyone thinks possible.

The key question now is how?

It would be best for all involved if Germany left the Eurozone and went back to the Deutschmark. Germany would have an immediately credible currency. Should Greece or Spain leave first, those countries might experience hyperinflation or massive inflation.

Breakup Scenarios and Logistics of Denial

For further details discussion of various breakup scenarios as well as a discussion on the "Logistics of Denial", please see my September 16 article Eurozone Breakup Logistics (Never Believe Anything Until It's Officially Denied)

It's important to remember that Germany suffers regardless. As long as the Eurozone stays intact (it can't and won't over the long haul) German taxpayers have to keep acting bailing out foreign countries, foreign banks, and their own banks.

On the other hand, were Germany to leave, the debts to German banks will not be paid back in Deutschmarks but rather deflated Euros.

On the whole, Germany exiting the Eurozone would be less disruptive, than massive inflation scenarios in Greece, Portugal, and Spain.

If France wants to stay in the Euro, let them. They can have the ECB as well. Then the ECB will print money to bail out the French banks (just as French president Sarkozy wants).

Sarkozy may not want a collapse of the Euro, but it would happen. The message here is simple: If you are in Euros, get the hell out.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Banks Create New Rules to Show they are Already "Well Capitalized"; Magic Spreads at Lightning Speed

Posted: 09 Nov 2011 11:30 AM PST

Regulators have said European banks need to come up with additional capital. The amounts vary from 8 to 413 billion Euros.

Anything less than 200 billion Euros (the IMF's proposed number) is preposterous. Given the rout in Italian bonds today and the gloomy outlook for Spain and Portugal, even 400 billion Euros is far too low.

One Trillion Euros would not be surprising.

The number that Merkel and Sarkozy hammered out with banks is a lousy 106 billion Euros. However, more stories are out today showing the intent of banks is to raise 0 billion in additional capital (because they don't need to!)

For example, Bloomberg reports Financial Alchemy Foils Capital Rules as Banks Redefine Risk
Banks in Europe are undercutting regulators' demands that they boost capital by declaring assets they hold less risky today than they were yesterday.

Banco Santander SA, Spain's largest lender, and Banco Bilbao Vizcaya Argentaria SA, the second-biggest, say they can go halfway to adding 13.6 billion euros ($18.8 billion) of capital by changing how they calculate risk-weightings, the probability of default lenders assign to loans, mortgages and derivatives. The practice, known as "risk-weighted asset optimization," allows banks to boost capital ratios without cutting lending, selling assets or tapping shareholders.

Regulators in Europe, seeking to stem the region's sovereign-debt crisis, ordered banks last month to increase core capital to 9 percent of risk-weighted assets by the end of June. Lenders, facing a 106 billion-euro shortfall, are reluctant to plug the gap by cutting dividends or bonuses and are struggling to sell assets or raise cash in rights offerings. Politicians are trying to stop banks from the alternative, cutting back lending, because it could trigger a recession.

"By allowing sophisticated banks to do their own modeling, we are allowing the poacher to participate in being the game- keeper," said Adrian Blundell-Wignall, deputy director of the Organization for Economic Cooperation and Development's financial and enterprise affairs division in Paris. "That risks making core capital ratios useless."

Commerzbank, Lloyds

Spanish banks aren't alone in using the practice. Unione di Banche Italiane SCPA, Italy's fourth-biggest bank, said it will change its risk-weighting model instead of turning to investors for the 1.5 billion euros regulators say it needs. Commerzbank AG, Germany's second-biggest lender, said it will do the same. Lloyds Banking Group Plc, Britain's biggest mortgage lender, and HSBC Holdings Plc, Europe's largest bank, both said they cut risk-weighted assets by changing the model.
The IMF recapitalization need is 200 billion Euros, a figure I think is exceptionally low because it ignores writedowns on Portuguese, Spanish, and Irish debt (and of course Italian debt as well). It also presumes Greek losses will be pegged at 50% when losses are likely to be in the 70-90% range.

Nonetheless, the agreement worked out by Merkel reduced that 200 billion euro figure down to 106 billion.

I talked about reluctance of banks to raise needed capital on October 31, in Europe to Recapitalize Banks Without Raising any Capital; Berlusconi Defiant as Focus Shifts to Italy; Sarkozy Under Fire for Seeking China's Help
The answer to the question "How Does Europe Recapitalize Banks Without Raising any Capital?" should now be perfectly clear ...

Oh Ho Ho Its Magic!

Magic Spreads at Lightning Speed

What one bank does, they all do.
The Bloomberg article clearly shows Magic has Spread.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Ceridian Fuel Index Rises but Compared to What?

Posted: 09 Nov 2011 09:12 AM PST

Inquiring minds are digging into the Ceridian Report for October which shows the Pulse of Commerce Index Increased 1.1 Percent in October Offsetting the 1.0 Percent Decline in September.

However, appearances may be deceiving because month-over-month comparisons are easy and the three-month moving average is still falling.
The Ceridian-UCLA Pulse of Commerce Index® (PCI®), issued today by the UCLA Anderson School of Management and Ceridian Corporation rose 1.1 percent in October after three consecutive negative months: -1.0 in September, -1.4 percent in August and -0.2 percent in July.

The October data offers a welcome relief from the double-dip fears that were rampant a month ago, but one month does not mean a new trend. Until we get a series of positive months, it remains a she-loves-me, she-lovesme- not economy with bad news followed by good followed by bad.

Moreover, the positive month-on-month news in October is relative to a very disappointing September result. Though the growth in October offsets the September decline, it doesn't offset the cumulative decline including August and July. The average of the last three months has declined compared with the previous three months at an annualized rate of 5.8 percent, and the PCI remains lower than it was during most of the first half of 2011.
About Ceridian-UCLA Pulse of Commerce Index

The Ceridian-UCLA Pulse of Commerce Index® is based on real-time diesel fuel consumption data for over the road trucking and serves as an indicator of the state and possible future direction of the U.S. economy. By tracking the volume and location of fuel being purchased, the index closely monitors the over the road movement of raw materials, goods-in-process and finished goods to U.S. factories, retailers and consumers.

Year-Over-Year Growth of PCI



Retail Sales and the PCI: Inventories in Motion



Ceridian reports ....
The growth in real GDP is to a large extent driven by growth in consumer spending. In the above figure, both the PCI and the real retail sales have been normalized by their maximum value, making it easy to see that both declined from their peak values by 13 or 14 percent.

Last year the disconnect between the PCI and real retail sales was resolved with a burst in trucking activity, which seems most likely this year although some commentaries suggest retail sales are falling short of expectations.
Retail Sales Short of Expectations

The last line above is interesting because the Financial Times does indeed report US retail sales fall short of expectations
November 3, 2011

US retail sales rose in October but growth decelerated and fell below market expectations as retailers head into a holiday shopping season of fragile sentiment and fierce competition.

In spite of a weak economy, sales increased 3.8 per cent from a year ago to rack up a 26th successive monthly rise, according to Retail Metrics. But they fell below analyst forecasts of 4.4 per cent growth and below the 5 per cent-plus increases of the previous three months.

Fifty four per cent of the retailers that report monthly sales fell short of expectations, among them both those that reported overall increases and declines.
In September, half of the retail sales gains were in autos. Yet, Auto sales are counted when cars are shipped to dealers, not when they are sold to consumers.

Please consider GM Sales Barely Rise, Chrysler's Up 27%; What Does It Mean?
GM Sales Barely Rise, Chrysler's Up 27%
Chrysler Group LLC's October U.S. auto sales rose 27% while General Motors Co. climbed just 1.7% amid a mixed picture for the largest U.S. auto makers.

GM suffered declines in all its brands except Chevrolet, the Detroit auto maker said on Tuesday. Its dealer inventory was up 15% from a year ago and up 6.1% from September.

The auto maker reported total sales for the month of 186,895 vehicles. Its Chevrolet sales rose 6% while Cadillac sales fell 11.9%, Buick declined 7% and GMC sales dropped 4.6%. Overall, GM's retail sales were up 2.6% ...
Sales down and dealer inventory up 15% at GM.

The key takeaway from last months "good" GM sales report is it was largely based on channel stuffing. "Sales" get reported when cars are shipped to the dealer and cars are stacking up at GM dealers.
I do not think sales, especially auto sales, were as robust as reported. Even if they were, there is no reasonable expectation the increase in sales should continue.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Yield Blowout, Bond Market Emphatically Rejects Italy's Solution; No Place to Hide

Posted: 09 Nov 2011 08:58 AM PST

Italy has a debt rollover needs and the market just shut off efficient funding across the entire yield curve. There is no place to hide while waiting for the long-end of the curve to calm down.

Italian government debt yields are above 7% from 2-year bonds all the way to 10-year bonds, with an inversion in 3-year and 5-year yields vs. 10-year yields. Moreover the 2-year yield is very close to inversion as well.

Sovereign Debt Table Italy vs. Germany

DurationGermanyItalySpread
2-Year0.367.186.82
3-Year0.497.557.06
5-Year0.897.596.70
10-Year1.737.255.52


Note that the spread between German and Italian 3-year bonds exceeds 7%.

This capture is at about 10:45 Central, after the market calmed down a bit. Here is a chart to show the "calming".

Italy 10-Year Government Bond Yield



Yields are well below the highs of the day, yet still up significantly.

Expect emergency meetings at the ECB, IMF, EMU, EU, and Italian Government to start anytime. Actually they are probably underway right now.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Margin Call of 4-5 Billion Euros as Clearing House Raises Deposit Requirements on Italian Bonds; Roman Empire Under Pressure

Posted: 09 Nov 2011 12:42 AM PST

Yields on Italian bonds rose once again on Tuesday as margin requirements on those bonds rose sharply. Bloomberg reports LCH Clearnet Boosts Deposit Required for Trading Italian Government Bonds
The so-called deposit factor charged for Italian bonds due in seven-to-10 years will be raised to 11.65 percent, LCH Clearnet SA said in a document on its website dated yesterday. That compares with a charge of 6.65 percent announced in an Oct. 7 document. The additional charges will be applied from close- of-day positions today, LCH said.
Roman Empire Under Pressure

Steen Jakobsen, chief economist at Saxo Bank, pinged me with these comments.
Major investment banks calculate the "margin call" to be around 4-5 billion EUR as of tomorrow.

The Italian situation is very complicated – on one hand Berlusconi has promised to step down, on the other there are no alternatives to him in the opposition, there is no real hope for majority for "someone else".

Berlusconi has a long history of comebacks, and being 75 years old he has little to lose. The main issue remains whether Italy truly moves forward with austerity and reforms. One without the other has no value for market and for building a fire-wall around Italy.

The facts are simple: No one but Italy itself can save Italy under present conditions.

ECB intervening is merely delaying the inevitable. Italy needs to move forward.

Only two countries has had lower growth than Italy since 2000 – Haiti and Zimbabwe!

This is the present outlook for 2011 and 2012:



Conclusions

A bureaucrat government in Greece and potentially Italy will not solve anything. What's needed in both countries are:

  • A government elected to deal with crisis
  • A plan for creating growth and reforms
  • An austerity plan underwritten by politicians, labor unions and employers.

That does not seem likely for now, in either country.

At a bare minimum we will have another month of uncertainty. A concerning trivia remains in place: When a country passes 6.5% in 10 year yield – the call for help from the IMF has only been 14 days behind. Italy is different, but the timeline is running out.

Safe travels,

Steen
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List


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