THESIS 2011: Beggar-Thy Neighbor -(Open Access- 37 Pages of 217)

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DECEMBER 2011: MONTHLY MARKET COMMENTARY -(Subscription Plan II - 24 Pages)

The European financial markets in the six weeks since the last EU Summit, have had a complete, unofficial and unreported implosion in the bond and credit markets .

1. Wholesale Lending is now completely frozen,
2. Sovereign yields have reached unfundable levels as even sovereign yield curves have inverted,
3. Collateral Contagion is running rampant,
4. Banks runs are quietly occurring,
5. Shadow Banking Dis-intermediation is under distress,
6. The Euro-Yen Carry trade unwinding is rapidly accelerating,
7. The Shadow banking system is seizing up,
8. European banks have nearly stopped lending, sopped interbank lending, have been repatriating funds globally and are now increasingly depositing funds at central banks for safe keeping.
9. The Credit rating have placed 15 EU sovereign countries on negative credit watch includes EU Core countries.
10. The EFSF yields have soared and foreign funding sources dried up

The current agenda of the upcoming EU Summit does nothing to fundamentally address the underlying causes. MORE>>

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The World Economic Forum's 2012 Risks Report, the IMF's Global Financial Stability Report and our proprietary Aggregated Global Risk Level Index (AGRLI) all suggest global macroeconomic risks are increasing. The consensus findings are that the center of gravity of Global Macro issues are a combination of Chronic Fiscal Imbalances and a Global Governance Failure.    MORE>> EXPANDED COVERAGE INCLUDING AUDIO & MONTHLY UPDATE SUMMARY

MARKET ANALYTICS & TECHNO-FUNDAMENTAL ANALYSIS

DECEMBER 2011: MARKET ANALYTICS & TECHNICAL ANALYSIS - (Subscription Plan IV - 165 Pages)
The market action since March 2009 is a bear market counter rally that has completed a classic ending diagonal pattern. The Bear Market which started in 2000 will resume in full force when the current "ROUNDED TOP" is completed. We presently are in the midst of of a "ROLLING TOP" across all Global Markets. We are seeing broad based weakening analytics and cascading warning signals. This behavior is typically seen during major tops.  This is all part of a final topping formation and a long term right shoulder technical construction pattern.

MORE>> EXPANDED COVERAGE INCLUDING AUDIO & EXECUTIVE BRIEF

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>> LONGWave >> GOLD & SILVER: CRISIS or OPPORTUNITY?? December 15th, 2011

>> LONGWave >> VOLUME & VOLATILITY December 12th, 2011

>> LONGWave >> BEWARE OF EURO WEAKNESS October 25th, 2011

>> Under The Lens >> US ECONOMIC UPDATE October 22nd, 2011

>> Under The Lens >> EU FRENCH-GERMAN DISAGREEMENT October 21st, 2011

EURO EXPERIMENT :  ECB's LTRO Won't Stop Collateral Contagion! Released December 27th, 2011
I would argue that the problem short term is a shortage of real collateral and that US dollar cash, versus 'encumbered' cash flow, is now king. It is clear that the rampant advancing Collateral Contagion will quickly eat the futile LTRO attempt like ravenous wolves. A well circulated Tweet from PIMCO bond king Bill Gross said it all: " What does LTRO stand for? 1- A shell game; 2-Cash for trash; 3 Three-card Monti; or 4. All of the above." Here is the stark reality of what forced the ECB to offer unprecedented three year loans at absurd rates and most alarmingly, the acceptance of collateral that no other financial institutions will accept. The ECB has sacrificed its balance sheet in yet another EU "kick at the can". MORE>>

CURRENCY WARS:  EU: A FLAWED FOUNDATION, BUT A BRILLIANT STRATEGY Released May 31st, 2011
It was the perception of getting something of value without any meaningful sacrifice that initially fostered the EU Monetary Union. Though the countries of Europe were fiercely nationalistic they were willing to surrender minor sovereign powers  only if it was going to prove advantageous to them.  They were certainly  unwilling to relinquish sufficient sovereignty to create the requisite political union required for its success. After a decade long trial period it is now time to pay the price for Monetary Union.  I suspect that the EU membership is unwilling to do so. Though they likely will see the price as too high to do so, the price to not do so has become even greater.  They have unwittingly been trapped by a well crafted strategy. MORE>>

CURRENCY WARS:  The Economic Death Spiral Has Been Triggered Released May 27th, 2011
For nearly 30 years we have had two Global Strategies working in a symbiotic fashion that has created a virtuous economic growth spiral. Unfortunately, the economic underpinnings were flawed and as a consequence, the virtuous cycle has ended.  It is now in the process of reversing and becoming a vicious downward economic spiral. One of the strategies is the Asian Mercantile Strategy.  The other is the US Dollar Reserve Currency Strategy. These two strategies have worked in harmony because they fed off each other, each reinforcing the other. However, today the realities of debt saturation have brought the virtuous spiral to an end. MORE>>

CURRENCY WARS:  Debt Saturation & Money Illusion Released April 27th, 2011
Most of the clearly evident financial problems that surround us today stem from one cause - Debt Saturation. Most, intuitively, sense this to be a correct assessment but few can either prove it or articulate it to the less sophisticated. Let me arm you to be the "Nostradamus" amongst your friends and colleagues in explaining the problem and what the future therefore foretells. However, let me make it very clear, this will not make you popular. Smart maybe, but highly likely to make you unwanted at the social gatherings of the genteel. MORE>>

BUNDESBANK

Bundesbank in debt

“This is reaching the danger point. It is already one and a half times the total budget of the German government. If any of the crisis countries exits the euro or if there is an EMU break-up, the Bundesbank bears extreme risks.”

• Germany Faces Tough Decisions in Europe's Debt Crisis George Friedman, MercatorNet

ECB

Survey of European Banks Shows a Sharp Cutback in Lending; Three Reasons LTRO Will Not Get Banks to Lend 02/02/12 Mish

Contrary to popular belief the LTRO is not going to do much if anything to get banks to lend. Here are the reasons.

1. Banks are capital impaired if not outright insolvent
2. There are few credit-worthy borrowers
3. Banks have three years guaranteed profits by speculating in government bonds

• Expanding the LTRO looting program Zero Hedge

The perils of Mario Draghi's 1.5 trillion blitz 02/01/12 Ambrose Evans-Pritichard

• Europe May Be Planning 1.5 Trillion Euro Backstop Fund 01/31/12 Spiegel
• You Ain't Seen Nothin' Yet; Another Trillion (or Two) Euro LTRO Coming Next Month 01/30/12 Mish

Europe is alive but stuck on life support

JAPAN

Japan’s top megabank braces for government bond crash

• Huge losses put Japan’s top brokerage in survival mode 02/02/12 Asahi

GLOBAL GOVERNANCE FAILURE

Plan to Help Homeowners and Heal the Housing Market

Key Aspects of the President’s Plan as Presented

• Broad Based Refinancing to Help Responsible Borrowers Save an Average of $3,000 per Year: The President’s plan will provide borrowers who are current on their payments with an opportunity to refinance and take advantage of historically low interest rates, cutting through the red tape that prevents these borrowers from saving hundreds of dollars a month and thousands of dollars a year. This plan, which is paid for by a financial fee so that it does not add a dime to the deficit, will:
• Provide access to refinancing for all non-GSE borrowers who are current on their payments and meet a set of simple criteria.
• Streamline the refinancing process for all GSE borrowers who are current on their loans.
• Give borrowers the chance to rebuild equity through refinancing.
• Homeowner Bill of Rights: The President is putting forward a single set of standards to make sure borrowers and lenders play by the same rules
• Moving the Market to Provide a Full Year of Forbearance for Borrowers Looking for Work: Following the Administration’s lead, major banks and the GSEs are now providing up to 12 months of forbearance to unemployed borrowers.
• Pursuing a Joint Investigation into Mortgage Origination and Servicing Abuses: This effort marshals new resources to investigate misconduct that contributed to the financial crisis under the leadership of federal and state co-chairs.
• Rehabilitating Neighborhoods and Reducing Foreclosures: In addition to the steps outlined above, the Administration is expanding eligibility for HAMP to reduce additional foreclosures, increasing incentives for modifications that help borrowers rebuild equity, and is proposing to put people back to work rehabilitating neighborhoods through Project Rebuild.

• Funds, Wall Street, Fixing MERS and Screwing Taxpayers at Same Time; Key Aspects of Plan as Presented vs. Reality 02/01/12 Mish

CURRENCY WARS

Brazil Confronting Limits on ‘Capacity’ to Weaken Currency, Pimentel Says If it did sell a large amount of government bonds, other investors might follow suit, sending the interest rate even higher...

• Japan Hardens Currency Rhetoric 02/02/12 WSJ The dollar fell to ¥76.02 Wednesday, the lowest since Oct. 31, when Japan carried out a widely publicized currency-market intervention that sold an estimated daily record of around ¥7.5 trillion. There is speculation that without official actions to bolster the dollar, it may soon drop below a record low of ¥75.31, also marked on Oct. 31, on expectations that the U.S. Federal Reserve will continue its loose monetary policy for longer and keep the U.S. currency weak.

FINANCIAL REPRESSION

Negative Treasury Bill Auction Yields Would Avoid ‘Grab-a-Thon’, CRT Says The negative yields reflect investor willingness to pay to use the government as a “safe deposit box” that will ensure the return of principal

• Life – and Death Proposition 02/02/12 PIMCO Bill Gross zero-bound interest rates do not always and necessarily force investors to take more risk by purchasing stocks or real estate, to cite the classic central bank thesis
• The perniciousness of ZIRP Gonzalo Lira
• Counterfeit Money, Counterfeit Policy 01/31/12 Charles Hugh Smith
• Our Counterfeit Economy 02/01/12 Charles Hugh Smith

EARNINGS

• Deutsche Bank Swings to Pre-Tax Loss 02/02/12 WSJ
• Decline in trading hits Deutsche Bank - Largest German bank by assets drops to fourth-quarter loss 02/02/12 FT
• SONY: Sony warns of ballooning full-year loss Japanese group expects $2.9bn net loss for the full fiscal year 02/02/12 FT
• Amazon misses sales expectations - Shares in online retailer tumble 9 per cent
• Amazon Slides After Missing Revenues Expectations, Guides Much Lower 02/01/12 Zero Hedge Amazon slides 10% after hours as it reports much weaker revenues of $17.43 billion on expectations of $18.26 billion. EPS are not really comparable but seems to beat EPS of $0.16 on Exp. of $0.38. This may not be apples to apples. More importantly, the company guides Q1 to Operating Loss of $200MM to Income of income of $100MM, on Wall Street Consensus of $268MM, and guides to Q1 revenue of just $120-$13.4 billion on Estimates of $13.4 billion: pretty wide range there
• Amazon's Spending Hurts Profit 02/01/12 WSJ Amazon is struggling to make money as quickly as it spends it, putting the squeeze on the online retailer's latest financial results and crimping its outlook
• Nomura avoids second quarterly loss 02/01/12 FT
• Banco Popular profits fall on economic woes 02/01/12 FT
• Pfizer, Lilly Profits Fall as Drugs Lose Patents 02/01/02 WSJ
• Biogen's Net Rises 25% 02/01/12 WSJ
• HONDA: 01/31/12 Honda announced net profit fell 41 percent to ¥47.66 billion, or $624.3 million, as a strong yen eroded international margins and Thai suppliers only started coming back on line. The company forecast full year net profit of ¥215 billion, well below analyst expectations for ¥250.5 billion.
• Here's What Big Companies Are Telling Us About The World Economy BI

ECB

Banks set to double crisis loans from ECB Emergency funding take-up could reach €1tn European banks are preparing to tap the European Central Bank’s emergency funding scheme for up to twice as much as the ECB supplied in its debut €489bn auction last month, providing further evidence of the sector’s liquidity squeeze. Several of the eurozone’s biggest banks have told the Financial Times that they could well double or triple their request for funds in the ECB’s three-year money auction on February 29. “Banks are not going to be as shy second time round,” said the head of one eurozone bank at last week’s World Economic Forum in Davos. “We should have done more first time.” Three bank chief executives, all of whom asked to remain anonymous, said they were planning to increase their participation twofold or threefold.

You Ain't Seen Nothin' Yet; Another Trillion (or Two) Euro LTRO Coming Next Month 01/30/12 Mish Last month, European banks tapped the ECB for €489bn in a long-term refinance operation dubbed LTRO. On February 29, another round of LTRO is coming up and expect banks to go for the gusto. Banks like cheap money to speculate and that is exactly what they will do. The money is supposed to go for bank lending but it won't. Why should banks lend? They have a guaranteed profit by speculating in Spanish or Italian bonds, assuming of course Spain and Italy do not need bailouts coupled with a writedown on government debt

• Super Mario’s bank funding scheme is no panacea 01/31/12 FT

Mario Draghi, the Latin Bloc’s monetarist avengerOne dreads to think what would have happened to Europe’s banking system and to the solvency of Italy and Spain if Mario Draghi had not come to the rescue before Christmas...

• ECB fuels rebound in bank bonds - Debt enjoys best monthly rally in nearly three years 01/30/12 FT
• Eurozone lenders cling tightly to ECB life raft 01/30/12 FT
• ECB’s three-year loans lift sentiment 01/30/12 FT

Santander Profit Tumbles 98% Banco Santander said its fourth-quarter net profit plummeted 98% after it took a $2.38 billion charge on its Spanish real estate holdings, and as the bank set aside more funds to cover bad property loans.

• Europe's banks afloat on dwindling credibility 01/30/12 Zero Hedge

Eurozone manufacturing downturn eases in January as Germany returns to growth

• Euro area manufacturing declined for the sixth-consecutive month, data from Markit's Eurozone Manufacturing Purchasing Managers' Index showed. The index improved to 48.8 from a 46.9 reading in December, but remained below 50. Germany and Austrian PMI's topped 51, while French PMI was down slightly to 48.5
• Euro zone manufacturing shrinks again in Jan: PMI 02/01/12 Reuters

You're Going To Need Big Haircuts To Make PIIGS Debt Sustainable

Interesting calculations posted by Spiegel from the Kiel Institute on the sovereign haircuts which would make the debt of the listed countries sustainable.

European Bailout Infographic: Presenting The Truckloads Of Cash Needed To Rescue The Insolvent PIIGS 01/30/12 Zero Hedge one would need a 13 lane highway, filled with trucks bumper to bumper, stretching for about 3 kilometers to represent the €2.91 trillion in total amounts owed by the PIIGS and their citizens (whether voluntarily or not... actually make that involuntarily) to Europe's largest banks. What is most frightening is what is not shown: just how it is that the world's central banks are keeping all of these banks propped up. Because sooner or later all this money will be discovered to have been fatally misallocated. Then the real bailout cost will become all too evident, and just like in the US, it will be in the double digit trillions. Which means the metaphorical highway of trucks full of cash will stretch on for kilometers and kilometers and so on (or miles, for the naive US-based truckers). But since that day is in the future, there is no reason to worry about it.

EU SUMMIT

Europe Tightens Fiscal Ties European leaders agreed on a pact to move to closer fiscal union and signed off on details of a permanent bailout fund for the euro zone—yet Greece's debt restructuring threw a shadow over the summit

The European Union headed closer to fiscal unity when leaders of 25 member countries agreed to sign a treaty ('FISCAL COMPACT') designed to stop overspending and move forward with the establishment of a permanent E.U. rescue fund. The compact includes rules that limit debt allowances and makes it harder for countries to avoid sanctions if running debt above certain metrics. Britain and the Czech Republic said they were against the new ties.

• Fiscal Pact Won't Be Panacea or Poison 01/31/12 WSJ
• 25 EU Nations To Sign Treaty To Stop Overspending 01/30/12 BI
• Europe Crisis Tracker - Interactive Graphic WSJ
• Eurozone ministers push toward tighter budget rules 01/29/12 Washington Post

Overall, 23 million people are jobless across the EU, 10 percent of the active population. In Spain, unemployment has soared to nearly 23 percent and closed in on 50 percent for those under age 25, leaving more than 5 million people out of work as the country slides toward recession.

GREECE

Greek Debt Deal Could Come This Week 01/31/12 WSJ

Papademos: Greece Could Need More Public Funding 01/30/12 AP: Lucas Papademos, the Greek prime minister, warned that the country could need more public funding to help solve its debt crisis. Recent reports put the private sector write downs at 70 percent, on top of a €100 billion plus bailout.

• Greek Bondholders May Face 70% 'Haircut': Source AP
• Greek Bond Math (Assuming the Deal Goes Through) ; Merkel Faces Backlash Over Deal; Political Zugzwang 01/30/12 Mish

PORTUGAL

Portuguese yields drop on ECB intervention

Portugal’s economic mess worsens 01/31/12 G&M

• Portugal's Debt Will Be Restructured; 3-Year Government Bond Yield Tops 25%; CDS at Record High, Implies 72% Chance of Default 01/30/12 Mish
• What Portugal's surging bond yields means for Europe's crisis 01/30/12 WSJ
• Portugal suffers as loss of confidence in bonds sends yields higher 01/30/12 NY Times
• Portugal's debt will be restructured 01/30/12 Mish

SOMETHING SMELLS SOMEWHERE!!

Portugal has a tiny economy, but the one country that's overwhelmingly exposed to it is Spain. And yet, here's the Spanish 2-year. It's pretty much making the exact opposite move of late.

CHINA

Goldilocks Is Back - China PMI Rises To 50.5, Modest Beat Of Expectations, Shy Of Whisper Number 02/01/12 Zero Hedge China's goal-seeked economy performed admirably in January, and its Manufacturing PMI came absolutely golidlocks at 50.5, an increase from 50.3, previously, just modestly beating Wall Street expectations of a slight contraction of 40.6, yet a less than earlier whisper numbers which put it at 52. As such, thereis absolutely no indication if the PBoC will further tighten or ease in the next month, just as the PBoC likes it, because while many have been demanding easing in the last several weeks, and especially the housing market, the reality is that hot pockets of inflation still remain. Furthermore, the last thing China needs is to proceed with full on easing just as Bernanke goes ahead and launches QE x which will export more hot money, and thus inflation, to China than anywhere else, with the possible exception of gold.

And here are some observations from Bloomberg's Michael McDonough:

• Headline PMI remained above 50 for two consecutive months; another 50-plus reading in Feb. would be very positive sign,
• Underlying data still weak with new export orders falling to 46.9 from 48.6, while new orders rose to 50.4 Typically if this were true bottom, all forward-looking sub-components would rise above 50 in a month prior or the same month as headline index
• Building domestic pressure coupled with foreign risks should continue to weigh on the Chinese economy, including the PMI going forward, forcing policy makers to cut RRR and eventually policy rates once they are convinced threat of inflation has been squelched

Nomura Pours Cold Water On That 'Strong' Chinese PMI Report 02/01/12 BI

As Nomura notes, there seems to have been an unusual seasonal adjustment.

China’s official Purchasing Managers' Index (PMI) unexpectedly rebounded to 50.5 in January from 50.3 in December, much better than expected (Consensus: 49.6; Nomura: 49.0). The uptick may be partly due to an unusual seasonal adjustment. Since 2005 the PMI has shown a strong seasonal decline of 1.1 points on average in January (except for 2009). The accompanying press release indicates that the PMI this month was seasonally adjusted; an unusual move that may have contributed to the rebound.

What's also worrisome is that several key subcomponents showed strain.

...the export outlook appears to be under increasing strain, as the new export orders component fell sharply to 46.9 from 49.8 in December. Moreover, the overstock order component fell to 43.2 from 46.6 and the import component to 46.9 from 49.1, both now at their lowest levels since early 2009, when the economy was seriously affected by the global financial crisis. The employment component fell sharply to 47.1 from 48.7, the lowest in 35 months. Besides the impact from the new year, we believe the employment component reading may also reflect the strain facing the labour-intensive export sectors.

• China’s factories in strong start to 2012 - Domestic orders cushion impact of Europe’s debt woes 02/01/12 FT
• China PMI Unexpectedly Rises on Orders, Output 01/31/12 BL
• China HSBC PMI shows more contraction in January MW

SOCIAL UNREST

Occupy Protesters in Oakland Clash With Police Violence between authorities and Occupy protesters in Oakland flared over the weekend in a showdown demonstrators planned and police expected. Oakland police said they arrested more than 400 people

Tensions mount with arrest of Occupy D.C. protester and approach of deadline 01/29/12 Washington Post PHOTOS

• 'Occupy' Movement Tries Again in Another Park 01/30/12 WSJ
• 300 People Were Arrested During Incredibly Violent Oakland Protests Last Night 01/29/12 BI

IRAN

Iran to halt oil sales to ‘some countries’ Parliament seeks to pre-empt looming European embargo

• Iran Blinks, Delays Vote On European Crude Export Halt Even As US Escalates Military Developments Against Country 01/29/12 Zero Hedge
• India says it won’t cut back on Iran oil imports, in defiance of stiffer US and EU sanctions 01/31/12 AP

Rising Income Is Saved, Not Spent Incomes ticked up in December but consumers chose to save instead of spend, suggesting a still-cautious outlook that likely has carried into 2012.

• U.S. consumers fizzle out even as incomes rise 01/30/12 Reuters

MARKET ANALYTICS

Yields Plunge Most In 3 Months As Equity-Debt Divergence Remains The Treasury complex is seeing yields (and curves) compress dramatically today. With 5Y at all-time low yields and 30Y rallying the most in three months, the divergence between stocks and bonds appears ever more glaring. 30Y (which just went positive YTD in price) has traded around the 3% yield mark for much of the last 4 months (around 120bps lower than its average in Q2 2011 - pre-US downgrade) and most notably curve movements (as the short-end becomes more and more anchored to zero) have been dramatic. 2s10s30s is now at almost four-year lows and the last four times we saw equities diverge (up) from bonds' sense of reality, it has been stocks that have awoken. Back of the envelope, 2s10s30s suggests that the S&P should trade around 1100 (as we test 1300 in cash today).

Technical Chart That Looks Exactly Like The Crash Of 2008

A Sign Of The Extreme Hunger For Risk Right Now..

SOCIETE GENERALE: The spread between high and low beta equities has also been very wide. When measured using deciles, we find a spread of around 15% in the US, and a remarkable 20% gap in Europe. Over the last 22 years we have only recorded such a wide spread in Europe on two other occasions – in October 2002 and in March/April 2009. This isn't necessarily bullish, however. While the strong performance of high beta names may indicate a potential bottoming out of equity markets, we have seen numerous occasions in the US where the spread has been wider than the current 15% and where the equity market continued to trend lower. Notably almost all these bear market beta rallies coincided with an interest rate cut from the Fed.

NOMURA: The decline in implied volatility (red line) vs. the a basket of "high-risk" stocks (grey line, inverted). As you can see, the grey line hasn't caught up to the red line, suggesting more strong performance for the risk basket.

MARKET WARNING

Hussman Warns : Goat Rodeo: "Conditions like today's have generally been followed by a 25% crash within 6 months"

• WARNING: Stocks May Be About To Collapse 01/31/12 BI

The Mother Of All Head And Shoulders

From To Email Sent!You have successfully emailed the post. A 'Golden Cross' Is About To Appear In The S&P 500

WHAT GOES UP MUST COME DOWN: Today's Profit Margins Should Eventually Collapse...

Dead Market Exhibit A: January Volume Presented with little comment except to say that the total lack of volume (and massive concentration of what volume there is at the close) is hardly reflective of a market that is anything other than broken and dying. Last January (2011) the average number of stocks traded on the NYSE per day was 891mm shares vs 661mm for this January (a 26% drop YoY!) and this is down an incredible 59% from January 2008.