Comment by Phil

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Phil
January 11th, 2012 at 10:09 am

Good morning!  

Everything is proceeding as I have foreseen but keep in mind that's what the Emperor said before a bunch of teenagers blew up his Death Star…  You never know where the flaw in your master plan is until it's tested so we'll keep on our toes today and be ready to go with the flow.  

Dollar 81.62 and markets not down much considering that's more than a half-point gain.  Usually, it's a 2:1 move so either the Dollar goes back under 81.50 (not likely ahead of the auction as it's hard to sell notes priced in declining Dollars) or we have a bit further to drop.  

I did a big news review early this morning (yesterday's chat) and boy does it suck.  On the other hand, that's all baked in and the Dollar is up and if we don't sell off, then the market is just bullish and won't be listening to facts again until it's too late, most likely.  

The Euro is back below $1.27 but Germany is getting paid to take people's money as they will be happy just to get paid back.  I suppose it doesn't occur to them the Germany will be paying them back in Euros, not in Marks and it really makes no sense to pay Germany to hold your money when Italy will pay you 7% and – really – if Italy goes, what are those German Euros going to be worth?  

That's why Hedge Funds are flying into EU debt (didn't work for Corzine but it doesn't stop others) as the logic is they are getting paid good interest on March debt and Italy or Spain's debt is as good as Germany's in that short run.  This then is the main reason that other countries are "improving" in their note sales but I would be very careful about drawing long-term conclusions from the action.  

Nasdaq has been flying up as I write this (and shortable at 2,700, 2,370 futures (/NQ)), complete reversal and now flat for the morning.  RUT right on that 760 line in Futures (763.50 on index) and we have Dow 12,429, Nas 2,701, S&P 1,289, NYSE 7,639 along with it.  TLT at $119.15 and, of course, they want it higher.  Oil $101.48, gold $1,640, silver $29.80, copper $3.506, nat gas $2.82 (Danger Will Robinson, Danger, Danger!) and gasoline $2.77.  We do have oil inventories at 10:30 and if they are another build, that could start the big market slide into 1pm. 

Wednesday's economic calendar:
7:00 MBA Mortgage Applications
8:40 Fed's Evans: Economic Outlook
9:00 Fed's Lockhart: Economic Outlook
9:30 CFTC Meeting: Swap Rules
10:30 EIA Petroleum Inventories
12:30 PM Fed's Plosser: Economic Outlook
1:00 PM Results of $21B, 10-Year Note Auction
2:00 PM Fed's Beige Book 

At the open: Dow -0.44% to 12408. S&P -0.4% to 1287. Nasdaq -0.2% to 2363.
Treasurys: 30-year +0.35%. 10-yr +0.21%. 5-yr +0.07%.
Commodities: Crude -0.95% to $101.27. Gold +0.31% to $1636.55.
Currencies: Euro -0.72% vs. dollar. Yen +0.21%. Pound +0.65%.

Pre Market Cheerleader – 9:07 AM Chicago Fed President Charles Evans repeats his call for "substantial" monetary ease, and says the Fed should signal rates will not rise until unemployment drops below 7% or inflation rises above 3%. Evans dissented from the last 2 Fed decisions on the grounds policy wasn't easy enough. He sits out from voting on the FOMC this year.  – Well, that's the last of the Super Doves making his swan song…

Speaking on CNBC the Richmond Fed's Jeffrey Lacker – maybe the only remaining hawkish voter on the FOMC – says the economic headwinds are more persistent than he thought last year. Seeing 2012 GDP growth of 2-2.5%, he says to take his predictions with a "grain of salt." Don't worry, we do.

More from Lacker: He says he's not comfortable with some of the proposals in last week's then little-noticed, but now controversialwhite paper on housing in which Chairman Bernanke appears to be attempting to create fiscal policy in the midst of election season.

Market preview: Green premarket yesterday, U.S. futures and EU stocks are red this morning following Fitch's warning of cataclysm for the euro, although falling German GDP can't be helping either. S&P futures -0.25%. SuperValu is terrible value, diving 10%following its earnings miss. Textron +4.7% after it says its conducting a strategic review. Later: Fed's Beige Book, Fed's Plosser.

Fitch's David Riley calls on the ECB to redouble its efforts at buying troubled EU sovereign debt or else risk a "cataclysmic" collapse of the euro. He also would have the EFSF turned into a bank so it could borrow from the central bank window, rather than going to the market (which is mostly sitting on its wallet).

The euro dives below $1.27 and European shares are down alongside with some crediting Fitch's comments with spooking the markets. The Stoxx 50 gives up gains of about 0.5%, now -1.1%. The euro is back within a handful of pips of a 16-month low, -0.7% at $1.2688. 

Germany sells €3.15B of five-year notes carrying a yield of 0.9%. Bid-to-cover ratio of 2.8.

The EU fiscal treaty, a major element of which is balanced budgets, could reportedly allow eurozone countries to incur deficitsduring severe recessions or other exceptional events. With the eurozone slumping, countries could use the escape clause before the treaty even comes into force, which is slated for the start of 2013.

Merkel/Monti press conference:  Angela Merkel and Mario Monti head for the cameras after wrapping a meeting in Berlin (following Monday's Paris meeting that included Sarkozy). Monti: German discipline is best recipe to overcome crisis. Merkel: She expects a final version of the new EU fiscal compact by Jan. 30. Next meeting: Jan. 20 in Rome.  To send a signal to the markets, Merkel says Germany would be willing to pay more capital into the permanent EU rescue fund (ESM). Message received. European stocks trace out a "V," the Stoxx 50 now off just 0.3%. – Not good enough. 

News EU banks have sold €14.9B of unsecured debt in the first 10 days of January – more than the entirety of H2 2011 – may be less than meets the eye. First, banks have to roll €800B in 2012 so the sales hardly make a dent. Second, it appears the issuance has been mostly limited to Scandinavian, Dutch, and U.K. banks.

Irish finmin Noonan claims the country is fully funded through the end of 2013, calling speculation about a 2nd bailout "ludicrous." The chatter started when Citigroup chief economist Willem Buiter said Ireland should start filling out an application for another rescue, rather than waiting for the last minute.

Last night's modest fall in Shanghai (-0.4%) broke a 3-day rally that saw the index gain 6.4% – the largest such move since 2010. Credit Suisse was out with a contrarian note arguing the PBOC may continue to hike interest rates this year as inflation remains high. December price data is due out tonight. 

Their balance sheets stuffed with bad real estate and unwilling to take the necessary markdowns, Spanish banks have instead become builders as they try to extract value from the assets. Given Spain's massive overhang of vacant property and a 22% unemployment rate, it's a dubious strategy, but the banks insist they are building only in strategically attractive spots. Remarkable stuff.

It's the kind of headline a prognosticator will often come to regret he ever wrote, but Robert Sinn proclaims $70 oil is a "thing of the past." He points to a Der Spiegel graph showing the breakeven prices for several of the OPEC states. They're a lot higher than one might think. For Saudi Arabia, it's $80.

Chinese gold imports from Hong Kong rose to a record102.8K kilograms in November, stoked by the upcoming Lunar New Year holiday and, of course, the generally growing wealth of the country. For the 1st 11 months of 2011, imports tripled 2010's pace.

More chatter from the Detroit auto show: Execs with GM and Ford (F) both say anecdotally that sales are brisk in January through the first 10 days of the year. Though it's unclear if it's the mild winter weather or improved consumer sentiment pushing buyers to showrooms so far this year, another overlooked factor to watch in 2012 is that the average age of cars in the U.S. is close to 11 years.

Citing valuation, Goldman Sachs downgrades MasterCard(MA) to Neutral from Buy, lowering its price target to $380 from $400. "We see a near-term risk from the tepid European backdrop, currency exposure, and an increasingly competitive U.S. debit landscape."

SuperValu (SVU): FQ3 EPS of $0.24 misses by $0.01. Revenue of $8.3B (-4.3% Y/Y) misses by $120M. Shares -4.6%  More on SuperValu (SVU) earnings: FY'12 EPS guidance excluding impairment charges of $1.20-1.30 vs. consensus of $1.10-1.30; Revenue guidance of $36.1B vs. consensus of $36.1-37.1B. Same-store sales growth seen at -2.5-3%. Shares, now <font color