Central Perk

sâmbătă, 10 ianuarie 2015

Mish's Global Economic Trend Analysis

Huge Capital Raising Effort at Spanish Bank Passing Latest Stress Test; New Game in Town; Smell Test Failure

Posted: 10 Jan 2015 02:11 PM PST

Spanish bank Banco Santander was halted on Thursday, followed by an announcement it would raise capital. When the bank reopened its shares plummeted as much as 14%, with the Spanish stock market down about 4%.

Banco Santander passed the last "stress test" so allegedly it had no need to raise capital.

With that thought in mind, let's recap the ECB's love affair with stress tests that seldom find much need to raise capital.

On June 22, 2012, I commented Laugh of the Day: Stress Tests Show Spanish Banks Only Need Between €16bn and €62bn in New Capital; ECB to Accept BBB- Rated Debt (One Step Above Junk) as Collateral.

In October 2013, after two previous stress tests blew sky high, ECB president Mario Draghi announced that he would not hesitate to fail banks in the third test.

In Translating "Draghize", I commented "When it comes to stress tests, especially for European banks, the one thing history suggests is the tests will be essentially stress-free, by design. Why should this time be any different?"

Translating Draghize

For those of you who do not speak Draghize I offer these translations.

Draghize: "Banks do need to fail to prove the credibility of the exercise".
Mish: We are carefully scrutinizing several non-critical banks, looking for a couple of scapegoats, hoping to fool the public regarding the credibility of the exercise.

Draghize: "If they do have to fail, they have to fail. There's no question about that."
Mish: If any big banks are in trouble. They won't fail. There's no question about that.

Draghize: "The test is credible because the ultimate purpose of it is to restore or strengthen private sector confidence in the soundness of the banks, in the quality of their balance sheets"
Mish: The test is credible because we say it is.

Stress Tests Watered Down

On January 16, 2014 I commented ECB Waters Down 2014 Stress Tests Second Time; Yet Another Sham Stress Test.

One of the things the ECB watered down was in relation to sovereign bonds. They were assigned a "zero risk". Do Greek bonds look like zero risk here?

The second thing the ECB did was make a 25% reduction in the amount of capital banks had to hold.

Stress Tests Announced

On October 27, 2014 alleged stress tests were a glowing success. The ECB announced Most Banks Are Healthy, failing only 13. Another 12 would have failed but had already taken steps to raise sufficient capital.

The Wall Street Journal posted a table of Participating Banks With a Shortfall. The list includes all 25 banks.

click on chart for sharper image

Total Capital Shortfall

The total capital shortfall of all failing banks was €9.5 billion. The Journal reported "Overall, 25 banks technically failed the so-called stress tests, facing a cumulative shortfall of €24.6 billion. But most have already taken steps to solve their problems since the end of 2013, the cutoff date for the exercise."

Please note that the largest shortfall was a 2.11 billion euros. Only three banks had shortfalls over 1 billion euros.

Guess what bank was not on the list.

Banco Santander Announces Capital Increase of €7.5 Billion

Via translation from Libre Mercado, please consider Banco Santander Announces Capital Increase of €7.5 Billion.

Banco Santander announced on Thursday it would make a capital increase amounting to €7.5 Billion euros, equivalent to 10% of capital and apply a cut in dividends of 66%.

Minutes earlier, the CNMV decided to temporarily suspend trading to avoid unnecessary volatility before the bombshell. The CBMV lifted the suspension on Friday, accompanied with a sharp drop in the stock market.

1,213,592,234 new shares will be issued at a share price of €6.18. New shares will commence trading on the Stock Exchange on January 13.

The decision by Chair Ana Botín and CEO José Antonio Alvarez is preceded by a series of events that have taken place in recent months. Last September some discrepancies arose between the ECB and the bank entity with respect to capital levels. Banco Santander thought it was sufficiently capitalized but was pressured to improve its creditworthiness.

Following the announcement, rumors flew that Banco Santander would be interested in buying the Italian bank Monte dei Paschi di Siena.

Capital Shortfalls and Expansion Plans

Bloomberg comments Ana Botin Reveals Santander's Vision in Bank's Drive to Raise Capital

"The former management always maintained that they didn't want or need to raise capital," said Benjie Creelan-Sandford, a banking analyst at Macquarie Group Ltd. in London. "It reflects well on the new management that they have finally grasped the nettle and are taking steps to address the capital issue."

Santander will use the funds to expand its business and lending in markets where it already operates and economies are improving, Botin said, adding that Spain's crisis was at an end.

Botin said the bank had no plans to make significant acquisitions because it sees a "huge opportunity internally." Her emphasis on growing without purchases also marks a shift from her father who spent more than $70 billion on acquisitions after taking on the chairmanship in 1986.

Speculation

The BBC reports Santander Asks Shareholders for 7.5 Billion Euros.

Santander is asking shareholders for €7.5bn (£6bn), about 10% of its capital value. Santander comfortably passed a recent bank stress test, but there was speculation about its capital strength and whether it might float its UK arm.

There was also speculation on Thursday that the cash-call might herald a big acquisition. Shares in Italy's Monte Paschi bank jumped 8% on the news.

Monte Paschi, the world's oldest bank with roots dating back to 1472, is looking for a buyer after a poor showing in the stress tests.

Yohan Salleron, an equity manager at France's Mandarine Gestion, told Reuters: "We met Santander one month ago and they didn't say they needed a capital increase. We need to understand why they need (it)."

New Game in Town

The new game in town appears to be "let the banks pass stress tests in public, fail them in private". Only 13 banks failed the stress tests to a total tune of €9.5 billion.

Curiously the BBC headline reads "Santander Asks Shareholders ...". Is "ask" the right word? Did shareholders have a choice?

Santander maintains it was well capitalized yet raised €7.5 billion. Why? For acquisitions?

Speculation is that Santander would purchase the seriously troubled Italian bank Monte Paschi. Yet Botin said the bank had no plans to make significant acquisitions because it sees a "huge opportunity internally."

Smell Test Failure

Something here does not pass the smell test. It's difficult to say precisely what, yet one thing's for sure: Banks don't go raising huge amounts of capital for no reason. So what's the reason?

Santander was pressured by the ECB to raise capital because it really should not have passed the stress test
Santander raised money (or additional money) to make significant acquisitions but does not want that to be known for fear of bidding wars
Both of the above.

Let's return one more time to Botin's statement regarding "no plans to make significant acquisitions because it sees a huge opportunity internally."

Take out the word "opportunity" and replace it with the word "problem" and everything fits nicely.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Seth's Blog : Confused about the sample

Confused about the sample

If you survey 10,000 of your customers by email and 200 reply, what will you learn from the responses?

You will probably not get a statistically accurate presentation of how your customers feel. What you will get is an accurate understanding of how customers who answer email surveys feel. Two different things.

People who vote are not always the same as people who answer surveys. People who post Yelp reviews are not the same as people who buy from you. Customers who complain are not the same as all customers.

Sure, sometimes the groups are similar enough that it's okay to use one as a proxy for the other. But often, that's just not the case, and we mistake proximity and noisiness for accuracy.

• Email to a friend •

vineri, 9 ianuarie 2015

Mish's Global Economic Trend Analysis

Ding! Ding! Ding! Pimco Plans a Push Into Stocks With 7 New Equity Strategies; No Forecaster Predicts S&P Decline in 2015
Average Hourly Wages vs. CPI: Are You Ahead?
Nonfarm Payrolls +252K; Unemployment 5.6%; Employed +111,000 (Household Survey)
Another Run on Greek Banks Begins; Get Out While You Still Can; Buy Gold

Ding! Ding! Ding! Pimco Plans a Push Into Stocks With 7 New Equity Strategies; No Forecaster Predicts S&P Decline in 2015

Posted: 09 Jan 2015 02:04 PM PST

Ding! Ding! Ding!

Signs of a major market top keep piling on. Pimco provides the latest bell-ringer with launch of 7 new equity strategies.

Please consider Pimco Plans a Push Into Stocks.

Long known as a bond powerhouse, Pacific Investment Management Co. is once again attempting an expansion into stock mutual funds.

The Newport Beach, Calif.-based company, still reeling from the departure of its star manager Bill Gross late last year, said Thursday that it is launching seven new equity strategies in partnership with the asset manager Research Affiliates.

The strategies include investments in large and small companies, as well as international and emerging-market stocks.

The new Pimco strategies will be based on indexes created by Research Affiliates. The firms aim to boost returns and protect from volatility by rating companies based on their size and other economic factors, rather than the price of the security.

"We're responding to client needs," Pimco Chief Executive Douglas Hodge said in an interview.

Client Needs?

Pray tell what client needs are those?

Bill Gross, Pimco founder and former CIO (now with Janus), provides a more rational outlook.

Bill Gross says 2015 Is Going to Be Terrible.

Bill Gross, bond king, ousted executive, self-styled poet of the markets, has a bold, depressing prediction for 2015, and he's not couching it in any of his usual metaphor: "The good times are over," he wrote in his January investment outlook note. By the end of 2015, he goes on, "there will be minus signs in front of returns for many asset classes."

 Gross is putting himself way out on a limb: Not one of Wall Street's professional forecasters predict the S&P 500 will drop in 2015. Their average estimate calls for an 8.1 percent rise.

Gross has been wrong before, most famously in his predictions that bond yields would rise when the Federal Reserve ended quantitative easing. But maybe this time he sees something other market observers don't. As Gross writes, deploying the commentary's only off-color metaphor: "There comes a time when common sense must recognize that the king has no clothes, or at least that he is down to his Fruit of the Loom briefs."

No Forecaster Predicts a Decline

When not a single forecaster predicts a decline in equity prices in 2015, I like the odds something else will happen in a big way.

As for what Gross sees, I cannot say. However, I can say that I see one of the most overbought, overloved, equity and corporate bond markets in history, with valuations nearly as high as 1929 and the dot-com bubble in 2000.

In fact, this bubble is worse than 2000 because valuations in nearly every equity class are stretched as opposed to just technology.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Average Hourly Wages vs. CPI: Are You Ahead?

Posted: 09 Jan 2015 11:02 AM PST

Average hourly earnings for all employees unexpectedly declined 0.2%, $0.06 per hour in December vs. November. This was the largest month-to-month percentage drop since the data series began in 2006.

The following charts will help put wages in perspective, on an annual basis (percent change in wages vs. wages the same month a year ago).

Average Wages All Private Employees

click on any chart for sharper image

Average Wages Production and Nonsupervisory Workers

Average Wage Increase Minus CPI

No Benefit From Inflation

Economists tout the benefits of inflation. The idea is nonsensical.

Wages vs. the CPI are up 0.88% vs a year ago, but wages minus the CPI have spent more time in negative territory than positive territory since June 1973!

Moreover, please note the CPI does not take into consideration property taxes, income taxes, payroll taxes (social security, disability, unemployment), debt service, or various fees. The above numbers are even worse than they look.

I repeat my challenge to Keynesians: "Prove Rising Prices Provide an Overall Economic Benefit".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Nonfarm Payrolls +252K; Unemployment 5.6%; Employed +111,000 (Household Survey)

Posted: 09 Jan 2015 08:59 AM PST

Initial Reaction

The big surprise in this month's report was a decline in average hourly earnings. Details below.

For the second straight month there has been a huge discrepancy between the household survey employment and the establishment jobs survey. Swings in household survey employment and the labor force have been wild lately.

Last month household survey employment rose by 4,000 while the payroll survey had job gains of 321,000 (revised up this month to 353,000). This month the household survey shows a modest gain in employment of 111,000 vs. a payroll survey of 252,000 jobs.

The unemployment rate dropped this month primarily because 273,000 people dropped out of the labor force.

Once again we are in a situation where the establishment survey and the household survey are at odds. Over time these fluctuations tend to smooth out. The question, as always, is "in which direction".

BLS Jobs Statistics at a Glance

Nonfarm Payroll: +252,000 - Establishment Survey
Employment: +111,000 - Household Survey
Unemployment: -383,000 - Household Survey
Involuntary Part-Time Work: -61,000 - Household Survey
Voluntary Part-Time Work: -241,000 - Household Survey
Baseline Unemployment Rate: -0.2 at 5.6% - Household Survey
U-6 unemployment: -0.2 to 11.2% - Household Survey
Civilian Non-institutional Population: +183,000
Civilian Labor Force: -273,000 - Household Survey
Not in Labor Force: +456,000 - Household Survey
Participation Rate: -0.2 at 62.7 - Household Survey

December 2014 Employment Report

Please consider the Bureau of Labor Statistics (BLS) November 2014 Employment Report.

Total nonfarm payroll employment rose by 252,000 in December, and the unemployment rate declined to 5.6 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in professional and business services, construction, food services and drinking places, health care, and manufacturing.

Click on Any Chart in this Report to See a Sharper Image

Unemployment Rate - Seasonally Adjusted

Nonfarm Employment January 2011 - December 2014

Nonfarm Employment Change from Previous Month by Job Type

Hours and Wages

Average weekly hours of all private employees was stationary at 34.6 hours. Average weekly hours of all private service-providing employees was flat at 33.4 hours.

Average hourly earnings of production and non-supervisory private workers declined $0.06 to $20.68. Average hourly earnings of production and non-supervisory private service-providing employees also declined $0.06 to $20.47.

For discussion of income distribution, please see What's "Really" Behind Gross Inequalities In Income Distribution?

Birth Death Model

Starting January 2014, I dropped the Birth/Death Model charts from this report. For those who follow the numbers, I retain this caution: Do not subtract the reported Birth-Death number from the reported headline number. That approach is statistically invalid. Should anything interesting arise in the Birth/Death numbers, I will add the charts back.

Table 15 BLS Alternate Measures of Unemployment

click on chart for sharper image

Table A-15 is where one can find a better approximation of what the unemployment rate really is.

Notice I said "better" approximation not to be confused with "good" approximation.

The official unemployment rate is 5.6%. However, if you start counting all the people who want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

U-6 is much higher at 11.2%. Both numbers would be way higher still, were it not for millions dropping out of the labor force over the past few years.

Some of those dropping out of the labor force retired because they wanted to retire. The rest is disability fraud, forced retirement, discouraged workers, and kids moving back home because they cannot find a job.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Another Run on Greek Banks Begins; Get Out While You Still Can; Buy Gold

Posted: 08 Jan 2015 11:34 PM PST

In November, Greeks withdrew €220 million from banks. In December, the figure soared to €3 billion.

My advice to Greeks is simple: Get out while you still can. That means now!

Via translation from Libre Mercardo, please consider ECB Threatens to Unleash the 'Banking Yard'

The term "banking yard" is in reference to what happened to Cyprus depositors. What follows is my translation of the article.

According to initial estimates, Greeks withdrew €3 billion from their bank accounts in December. €600 million of that total came on December 29, when Greece failed to elect a new president, thereby forcing national elections on January 25.

In comparison, November when net outflows totaled about €220 million.

The risk of bank runs in Greece is reactivated. In this sense, just remember that since 2010, when the crisis hit the euro, the Greek bank deposits dropped 37% but even after the rescue by the troika, deposits never recovered. This data demonstrates strong distrust by Greek depositors of the monetary union.

The Greek financial system is artificially sustained by the ECB, the lender of last resort. It survives because the ECB accepts junk debt (including Greek state bonds) as collateral. If the ECB were to cut support, the Greek banking simply would close and the government would set strict limits on the withdrawal of deposits.

On Thursday, the ECB said that its funding to the Greek banking system depends on the success of the current bailout program and a subsequent agreement in Athens with the EU and the International Monetary Fund (IMF).

The rating agency Moody's also warned Thursday that the growing political uncertainty in Greece is damaging the liquidity of Greek banks, causing an outflow of deposits.

Investor Fear

Fear not only grows among depositors. Investors also show their misgivings by their rejection of the Greek public debt. The yield on Greek ten-year bonds has just surpassed the threshold of 10% for the first time in 15 months, while the risk of sovereign default is increasing, as reflected in the price of credit default swaps of Greek debt, now exceeding 1,500 points.

End Mish Translation

Soaring interest rates, soaring credit default swaps, and yield curve inversion are all signs of tremendous stress.

Inverted Yield Curve

Yield on the Greek 10-year bond is 10.24%
Yield on the Greek 3-year bond is 14.165%

The yield curve reflects the weight haircuts would have on shorter-term deposits.

Moody's Warns of Liquidity Crisis

Please consider Greek Banks Face Liquidity Crisis on Weak Deposit Base.

Greek banks' liquidity scenario is going to worsen thanks to the political uncertainty in the country as banks' deposit base is not adequately strong and borrowers are not willing to restructure bad loans until normalcy is back to the political system, Moody's said.

Greek banks' main focus has been to tackle high level of non-performing loans (NPLs) on their books, which were 34.1% of total banking system loans in June 2014.

This uncertainty is credit negative for Greek banks, including National Bank of Greece, Piraeus Bank, Eurobank Ergasias, Alpha Bank and Attica Bank, the rating agency said.

"We expect the alternative funding that Greek banks have recently obtained through interbank borrowing and loan securitisation to temporarily dry up and exacerbate the system liquidity, at least until the political situation normalises," Moody's said.

At the end of November, private-sector deposits were €164.3b and that ECB funding was €44.9b in the Greek banking system.

The ELA from the Bank of Greece is not unlimited and is subject to ECB governing council approval. The ELA from the Bank of Greece is not unlimited and is subject to ECB governing council approval.

Get Out While You Still Can

ELA stands for Emergency Liquidity Assistance. It's not unlimited. Given the political environment, if the run on Greek banks picks up steam, the ECB may be unwilling to step in.

The important message to Greeks is get out now, while you still can. If this panic escalates, Greece may very well respond with capital controls, even before the election.

Those who do not get out while they can may suffer devastating consequences.

Get Out Where?

As the chart of deposits shows, the smart money left long ago and did not return. I don't know where it went, but all European banks are suspect.

If I were a Greek citizen, I would personally worry that any euro-denominated bank (not just Greek banks) would confiscate my money.

Options

For short-term needs, consider US dollars or euros, in hand, not in bank safe deposit boxes. For mid- to long-term needs, US treasuries (or US treasury ETFs), and gold look attractive, especially gold.

In spite of all the attacks by mainstream writers on gold, it was still the second best performing currency in 2014.

Gold was up 13% vs. the euro, 15% vs. the Yen, and 6% vs. the British pound. Gold was down 1.3% vs. the dollar.

Get Out!

There is no reason to hold money in Greek banks, and every reason not to (even if there is talk of ECB guarantees). At this point, the "Juncker Rule" applies (they will lie when it's serious).

It's serious. Get out!

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com