Amazingly, Europe is opening up 1% and that's reversed the dip in our futures (now up slightly).  That article makes a great point because the European banks are completely playing a scam where they borrow $1.5Tn at 1% and then lend it to the PIIGS at 6-20% because, if the PIIGS fail, they feel they will be able to say it's not their fault as the same government that lent them the money also promised them that they were rescuing the PIIGS and that their bonds were so safe, they threatened the ratings agencies with criminal charges for downgrading them. 

This is "moral hazard" to the max.  The banks can't make that kind of return lending money to people and businesses so why should they?  

 

While the banks are buying more sovereign debt, they are cutting credit to the rest of the economy, with falls of 2.4pc in Italy and Portugal in December, and 0.8pc for the eurozone as a whole.

The whole LTRO scheme increases "debt cross-holdings and systemic risk", and ultimately lowers recovery rates for creditors. Mr Gallo thinks the next spasm of the crisis may hit as Italy redeems €97bn in February and March, and Spain redeems €30bn, with Portugal sliding into ever deeper debt as the economy contracts violently.

Guy Mandy from Nomura said the Draghi LTROs have certainly averted a liquidity shock and prevented a financial disaster, but the effect of the policy "is increasingly punitive" over time. "It is a Pyrrhic victory," he said.

Banks have to provide assets to the ECB as collateral, with a haircut depending on quality. The more they use the facility, the more collateral they hand over, crowding out their balance sheets.

Since the ECB has senior status, everybody else faces "subordination". This process cannot be pushed much further before investors take fright. At that point it becomes counter-productive, causing private credit to tighten. If so, an extra €1 trillion in February would be a very bad thing indeed.

 

79.15 should hopefully be the bottom on the Dollar so $99.20 oil (/CL) is an interesting short.  We're at 76.03 Yen so I have to think the BOJ will put their foot down before hitting 76 on the Yen or 79 on the Dollar. 

Berlin-Athens Tension Grows

Germany is continuing its push for controls over Athens' budget, despite being rebuffed by Greece and other euro-zone countries at Monday's European summit.

Greek Talks Pressure ECB

The European Central Bank, Greece's biggest creditor, is finding it hard to stay on the sidelines as the country negotiates a debt restructuring deal with its private-sector bondholders.

• Europe's Debtors Look West
• Contraction Threat Clouds Bloc

Greek Bondholders Are Said Set to Get GDP-Revival Sweetener in Debt Swap. Bondholders negotiating a debt swap with Greece may get a sweetener tied to a revival in economic growth that would ease the impact of accepting a lower interest rate on the new bonds, people with knowledge of the talks said.

Wednesday's economic calendar:

Auto sales

7:00 MBA Mortgage Applications

7:30 Challenger Job-Cut Report

8:15 ADP Jobs Report

10:00 ISM Manufacturing Index

10:00 Construction Spending

10:30 EIA Petroleum Inventories

4:22 AM EU shares are higher early on following better-than-expectedChinese manufacturing data, with the downturn in the sector in Europe also easing. London +1.2%, Paris +1.5%, Frankfurt +1.5%, Madrid+1.4%, Milan +1.8%.

Rumor du jour:  President Obama is expected to detail today a program to let millions of homeowners refinance their mortgages with lower-interest federally insured loans. Borrowers would qualify even if they were in negative equity, although Obama is likely to face opposition over plans to levy a bank tax to pay for the proposal. – This is a good one as it weakens the Dollar and boost the markets at the same time.  Even if Obama says he wants to do it (and I hope he does), I don't see where he gets the funding approved. 

Markit eurozone manufacturing PMI 48.8 in January vs. flash reading of 48.7 and 46.9 in December. There were signs of recovery in Germany (51) and Austria (51.8), where PMIs rose back into expansion territory, while contraction eased in Italy (46.8), Spain (45.1) and the Netherlands (49). (PR .pdf)

China's official PMI 50.5 in Jan. vs. 50.3 in Dec., indicating expansion and beating expectations for a contraction. HSBC PMI (.pdf) 48.8 in Jan., broadly in line with its flash reading. The official figure supports hopes China will avoid a hard landing, but HSBC said its survey "confirmed the still weak growth momentum of manufacturing."

China's Commodities Bubble Is Set To Pop.

South Korea's Exports Decline, Inflation Moderates on Europe. South Korea’s exports unexpectedly fell for the first time in more than two years and inflation moderated to the slowest pace in 12 months as Europe’s debt crisis dimmed the outlook for demand, giving the nation’s policy makers scope to hold interest rates. Overseas shipments dropped 6.6 percent in January from a year earlier after a revised 10.8 percent rise in December as Europe and the Lunar New Year holiday disrupted shipments, the Ministry of Knowledge Economy said in a statement today. Consumer prices rose 3.4 percent from a year earlier, the slowest since January 2011 when they gained at the same speed, a separate report today showed.

Ugly chart of the day: European youth unemployment has reached shocking levels – Spain, 51.4%; Greece, 46.6%; Portugal, 30.7%. Zero Hedge: "If there is no hope for tomorrow, what is the opportunity cost of doing something stupid and quite irrational today?"

It's the ECB – not the Fed – that is running and will continue to run the looser monetary policy, writes Vince Cignarella, who thinks the euro has at least another 10% downside vs. the dollar this year. Keep your eye on February's LTRO – if it comes in towards the top of skying estimates, the euro's a sell.

Why Europe Really Must Pursue 'Structural Reform': Clive Crook.

Fed Bank Presidents' Holdings Range From Ranchland to Equities. Federal Reserve regional bank presidents provided unprecedented disclosure of their wealth, revealing assets ranging from a Missouri farm and Texas ranchland to stocks and Treasury Inflation Protected Securities. 

A good chunk of January's stock market success comes courtesy of Apple (AAPL) and Caterpillar (CAT): AAPL's blowout quarter boosted overall S&P Q4 earnings growth to 9.4% from an otherwise lackluster 3.7%, and CAT's 20% surge contributed a third of the Dow's 415-point advance. 

Oil Trades Near One-Week Low on Rising Stockpiles, U.S. Outlook. Oil traded near the lowest price in more than a week on signs that consumer confidence and demand for fuel are slipping in the U.S., the biggest crude consumer. “In the U.S., we have seen long-term demand destruction on gasoline that may never come back, even if the economy improves,” Phil Flynn, vice president of research at PFGBest in Chicago, saidin an e-mailed response to questions. U.S. drivers bought 8.51 million barrels a day of gasoline in the week ended Jan. 27, according to MasterCard Inc.’s SpendingPulse report on Jan. 31. While that was up from 8.48 million the prior week, fuel demand fell below year-earlier levels for the 22nd consecutive time last week, declining 5.5 percent from 2011, the report said.

Fracking Boom Could Finally Cap Myth of Peak Oil. The U.S. oil market could be on the verge of its own fracking revolution, similar to what the natural-gas market is already experiencing. As a result, domestic production is now projected to rise significantly over the coming decades, reducing the relative share of imports in U.S. oil consumption.

California's cash may be exhausted by March as tax collections trail budgeted amounts, according to Controller John Chiang. The state needs $3.3B for March and the first two weeks of April, but will not need to issue IOUs to creditors as it did in 2009; Chiang says the current shortfall can be managed through payment delays and external and internal borrowing. 

Hong Kong Homes Face 25% Drop in Year of the Dragon. The Year of the Dragon, representing wealth and power in China, is shaping up to be the opposite for the world’s costliest housing market, Hong Kong. Mortgages (HKMGLEND) that need to be insured by the government because of risk experienced the steepest plunge in six years in 2011, a sign the biggest home price decline since the global credit crisis is accelerating. Property prices that have slid 6 percent since June may fall as much as 25 percent by 2013, estimates Andrew Lawrence of Barclays Capital, who predicted the initial slide in April.

Record Slump in Australian House Prices in 2011. Australian house prices plunged by the most on record in 2011 as global economic uncertainty and concerns about its impact at home kept a lid on demand. An index measuring the weighted average of prices for established houses in eight major cities slid 4.8 per cent from a year earlier, according to the Australian Bureau of Statistics, the biggest calendar-year drop since the data began in March 2002. They fell 1 per cent in the three months to December from the previous quarter, when they retreated a revised 1.9 per cent. Economists had predicted a 0.6 per cent quarterly fall.

MasterCard (MA +1%) urges merchants and banks to upgrade checkout systems to handle high-tech credit and debit cards that store information inside a computer chip rather than a magnetic stripe. “We’re moving toward a world beyond plastic, where consumers will shop and pay… with a simple tap, click or touch in-store, online or on a mobile device," MA's U.S. president enthuses. 

MasterCard(MA) Is Planning To Usher In The Digital Age Of Consumer Spending.

More on Aflac (AFL): Q4 misses estimates across the board, despite a 25% Y/Y rise in revenue on higher premiums in Japan and fewer investment losses. The company issues a cautious outlook for 2012 however, forcasting operating earnings that are below Street expectations. Shares +0.4% AH.

Broadcom(BRCM) Forecasts First-Quarter Sales That May Beat Analysts' Estimates. Broadcom Corp. (BRCM), a maker of chips that help mobile devices connect to the Internet, forecast first-quarter sales that may exceed analysts’ estimates amid stronger demand for parts for Apple Inc. (AAPL)’s iPhone. 

Boston Properties (BXP): Q4 funds from operations (FFO) of $1.21 beats by $0.02. Revenue of $452.8M (+15% Y/Y)beats by $26.3M. Expects Q1 FFO of $1.12-$1.14 vs. $1.14 consensus. Expects 2012 FFO of $4.65-$4.78 vs. $4.76 consensus. (PR)

Mentioned during Amazon's Q4 earnings call: The company ended Q4 with 56,200 employees, up 67% Y/Y. 17 fulfillment centers built in 2011, raising total to 69. Plans to keep up its aggressive investment pace. Video game revenue fell Y/Y. Company willing to buy back stock "at the right value." Still no details on Kindle Fire sales.AMZN -8.7% AH. (live blog) (webcast)

79.00 on the Dollar – 76.04 Yen, Euro flying to $1.3167, Pound $1.5808.  

We're down from 79.60 yesterday so of course we have a 1% market "rally".  

Oil $99.35 again – where we topped out earlier so tempting again.