THESIS 2011: Beggar-Thy Neighbor -(OPEN ACCESS - 37 Pages of 217)

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FEBRUARY 2012: MONTHLY MARKET COMMENTARY - (Subscription Plan II)

The European Central Bank's (ECB) unprecedented use of a three year, low cost LTRO (Long Term Repurchase Agreement) policy initiative may have removed some of the short term pressures from the EU Banking crisis, but like the Greenspan PUT, the unintended consequences are not yet fully understood. One is the moral hazard which is fostering financial "games" to be played with reckless abandon. Some of the mischievous and cunning games are frankly questionably as being even legal! But then, nothing is illegal if the regulators and those organizations charged with surveillance are not bothering to investigate. Extend > Pretend > Bend is the new approach. MORE>>

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MARKET ANALYTICS & TECHNO-FUNDAMENTAL ANALYSIS

FEBRUARY 2012: MARKET ANALYTICS & TECHNICAL ANALYSIS - (Subscription Plan IV)

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.

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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>>

ECB - LTRO

UBS On LTRO: 'One More Is Not Enough' - next will be a €300 billion take-up 02/08/12 Zero Hedge

Above - SX7E Is an EU Bank Index

With the SX7E bank index up 17% YTD, the market is in our view discounting that the LTRO has proven a fundamental turning point in the euro area crisis. In Chart 7 we highlight that the reception to the original, “game changing” one year LTRO in 2009 was a rise in the index of 42%.

The LTRO has been seized on by equity and credit markets as the saviour of economies and banks. It could indeed prove to be so – but only in our view if there are an indefinite number of future LTROs stretching out ahead. As soon as there are none, some macroeconomic risk will appear from the list of Greece, Ireland, Portugal, Spain and Italy to provide a challenge to the financing of the banks – and would be likely to cause a return to the funding concerns prevalent at the end of 2011. Bank funding markets are very forward looking, as those buying long-dated debt need some reason to believe the borrower will be able to redeem at maturity. Therefore, as soon as the LTRO window is closed, we are once more counting down to the point at which banks’ funding is challenged – a point which will be accelerated by the macro volatility implicit in trying to run a single currency without socialising the debts of the currency area.

ECB - BONDS

The ECB Opens The Door To Debt Forgiveness Across Europe 02/08/12 BI

ECB Concession Smooths Way Toward a Greek Debt Deal 02/08/12 WSJ The European Central Bank has made key concessions over its holdings of Greek government bonds, which will contribute to a reduction of the country's debt burden and smooth the path toward a new bailout for the country

• The ECB has agreed to exchange the government bonds it purchased in the secondary market last year at a price below face value, provided the debt-restructuring talks have a successful outcome. The ECB won't take a loss on the transaction, but it isn't clear whether the bank will exchange the bonds at the below-par price at which it purchased them or whether it will make a profit.
• The ECB bought the bonds (12B Euro) at a discount to face value in a vain effort to support the price of Greek bonds. Until now, it has insisted it be repaid the full amount. Its concession means Greece reaps the benefit of the discount, rather than the ECB itself.
• The idea is for the ECB, in effect, to exchange its Greek bonds for bonds of the European Financial Stability Facility, the euro zone's temporary bailout fund. The EFSF won't hold the bonds on its balance sheet, but will return the bonds to Greece, and Greece will then agree to repay the EFSF for the price at which the fund bought the bonds from the ECB.
• Greece has a €14.5 billion bond repayment due March 20, and officials have sworn to include these bonds in a restructuring that will see creditors receive new bonds with half the face value of the old ones.

BANK DOWNGRADES - ITALY

S&P Downgrades 34 Of 37 Italian Banks - Full Statement 02/11/12 Zero Hedge "We classify the Italian government as "supportive" toward its banking sector. We recognize the government's record of providing support to the banking system in times of stress." Even rating agencies now have to rely on sovereign risk transfer as the only upside case to their reports.

S&P CUTS RATINGS OF 34 ITALIAN BANKS, INCLUDING UNICREDIT AND MEDIOBANCA 02/10/12 BI Among them was Unicredit SpA, Italy's biggest bank, which was cut from A to BBB+ with a negative outlook. Standard & Poor's said the ratings cut follows as a consequence of the Italian downgrade to BBB+ on January 13.

• S&P downgrades 34 Italian banks 02/10/12 FT

ECB - LOWERS CREDIT STANDARDS

Germans concerned over Draghi liquidity offer Bundesbank voices worries about lowering of ECB credit standards

• ECB's Draghi Urges Banks to Take Cheap Loans 02/10/12 WSJ
• ECB action lowers euribor rates 02/10/12 FT
• Draghi attacks bankers over ECB fears 02/10/12 FT
• Banks Urged to Take ECB Loans 02/10/12 WSJ
• ECB’s rescue act comes with risks attached FT

BANK OF ENGLAND

Bank Of England Expands Asset Purchases By £50 Billion 02/09/12 BI As expected, the Bank Of England has expanded its Quantitative Easing program by 50 billion pounds. The total size of purchases will now be 325 billion pounds. There had been some worries that perhaps it would be more - the pound is jumping. The BOE also says it expect an ongoing "significant shortfall" in the economy to persist. Announcement

• Is QE Still Working 02/08/12 Gavyn Davies
• QE adds to gloom for pension savers - Gilt-purchasing programme will depress annuity rates further 02/11/12 FT

Why I Don't Believe The European Crisis Is Over

GREECE

Violent Protests in Greece; 6 Cabinet Members Resign; LAOS leader "I Would Rather Starve Than be Under German Jackboot" 02/11/12 Mish

Eurozone dismisses Greek budget deal - Bail-out hopes dashed as finance ministers find €325m hole in package 02/10/12 FT

• Euro-Zone Ministers Seek Vote in Athens 02/10/12 WSJ Greece's leaders agreed on austerity moves needed for a new bailout, but euro-zone finance ministers demanded the measures formally pass the Greek parliament.
• Deal faces sorry fate 02/10/12 El-Erian
• Deal sparks backlash in Athens 02/10/12 FT

New Greek demands threaten debt deal - Disagreement over pension cuts stalls talks 02/09/12 FT

Greek debt talks fail to break deadlock - Negotiators given extra 15 days to reach agreement

• TROIKA DRAFT GREEK ACCORD SAYS 2012 GDP TO SHRINK AS MUCH AS 5% - so make that 15%-25% realistically
• GREECE TO CUT MEDICINE SPENDING TO 1.5% OF GDP FROM 1.9% OF GDP - why not just "cull" 15-20% of the population?
• GREECE PLEDGES TO MERGE ALL AUXILIARY PENSION FUNDS - one problem - following the default, there will be no pension funds left.
• GREECE TO PLEDGE 20% CUT IN MINIMUM WAGE IN TROIKA DRAFT - and Greek citizens pledge to never work again.
• TROIKA DRAFT GREEK ACCORD RENEWS PLEDGE TO CUT 150,000 EMPLOYEE - or the US equivalent of nearly 5 million workers...

New policies include:

• A 20% reduction in Greece's minimum wage,
• More than €3 billion of new government spending cuts, and
• Further steps to slash supplemental pension benefits for retirees

Greece misses bail-out deadline Delay fuels anxiety that Athens may be forced into default 02/08/12 FT

New Greek bail-out to prioritise debt holders Plan for escrow account to ensure debt holders paid off

Greece to Lay Off 15,000 Public-Sector Workers 02/06/12 WSJ

Greece was expected to report by noon (5 EST) whether its political parties have agreed to accept austerity proposals, according to a deadline set by Prime Minister Lucas Papademos. Less than an hour before the deadline, however, a Greek official told Reuters that there is no deadline today.

Greece takes step closer to default No decision on terms for international lenders over cuts 02/06/12 FT

Chinese imports fall sharply in January Data will fuel concerns about Chinese growth 02/10/12 FT

Chinese inflation jumps to 4.5% Spike blamed on food prices ahead of New Year celebrations 02/09/12 FT

• Kiss Hopes Of Chinese Easing Goodbye: January Inflation In China Soars To Highest Since October 02/09/12 Zero Hedge

IMF WARNING

The IMF Issues A Chilling Warning About China's Vulnerability To Europe

Should such a tail risk of financial volatility emanating from Europe be realized, it would drag China’s growth lower. The channels of contagion would be felt mainly through trade, with knock-on effects to domestic demand. In the downside scenario outlined in the WEO Update—which would see global growth falling by 1¾ percentage points relative to the baseline—China’s growth would fall by around 4 percentage points. The risks to China from Europe are, therefore, both large and tangible. From 8.25% to 4.25% that is.

• This Chart Makes It Hard To Believe That China Is Rebalancing

Greeks inflamed by bail-out demands Ministers quit 02/11/12 FT

Painful cuts hit home for Greek elderly 02/11/12 FT

The Greek Government Is Falling Apart 02/10/12 BI

Greece Is Nicht Sehr Happy With Frau Merkel 02/10/12 Zero Hedge

CHRONIC UNEMPLOYMENT

The New Youth Normal - Your Parents' Basement 02/11/12 Zero Hedge In the 25 to 29 age range a shocking 34% have moved back home with mom and pop

Greek Unemployment Rate Surges To 20.9% 02/09/12 BI - Up from 18.2% in October

HUGE Job Cuts At Pepsi, As Firm Plans To Slash 3% Of Workforce

Nokia to Cut 4,000 Jobs 02/08/12 WSJ

• GM Seeks Cuts at Opel 02/08/12 WSJ

Budget Plan Has Familiar Ring Obama will release a familiar budget plan, calling for $3 trillion in deficit reductions over 10 years, including $1.5 trillion in tax increases to fall mostly on the wealthiest Americans.

• Budget Ducks Big Benefit Cuts 02/10/12 WSJ Obama's budget proposal will offer measures to trim the federal deficit but will leave largely unchanged the biggest drivers of government spending: Medicare, Medicaid and Social Security.
• The Fed is Engineering Obama's Re-Election Campaign 02/07/12 Dorsch

Are Pension Forecasts Way Too Sunny?

• Pension liabilities to hit earnings of US blue-chips 02/06/12 FT

EARNINGS

Credit Suisse suffers fourth-quarter loss Regulatory and capital requirements weigh on Swiss bank

• Credit Suisse Reports A Big Q4 Loss, Will Cut Bonuses By 41% 02/09/12 BI

ING Feels Impact of Euro Crisis 02/09/12 WSJ Dutch financial services company ING said it expects only a weak economic recovery in 2012 after reporting that its fourth-quarter results were dented by fallout from the euro-zone crisis.

Corporate profits aren't what they seem 02/07/12 AP Is the great profit engine of corporate America running out of steam?

Coke's Profit Slides 02/07/12 WSJ Coca-Cola said its earnings fell 71% from a year-earlier period that included a gain from the purchase of some bottling operations, while the soda giant's unit-case volume continued to rise.

Profit Falls at UBS 02/07/12 WSJ Presenting its first set of earnings under new Chief Executive Sergio Ermotti, UBS reported a 76% fall in fourth-quarter net profit, as trading in shares and bonds slowed. The bank will cut its bonus pool 40%

Negative Bank Preannouncements Begin 02/07/12 Zero Hedge

Why is this the case?

1. Just read the previous post on market volume hitting decade lows. And while there are just under 2 more months left in the quarter, absent some seismic volatility explosion in the next month (ahem, Greece) we fail to see how bank revenues will grow at all sequentially, let alone QoQ.
2. Furthermore, with the curve once again flattening, and mortgage rates dropping to all time lows to the point where Net Interest Margin benefits for banks have disappeared (read more on the impact on the liquidity trap from this morning's Bill Gross note),
3. Key M&A activity being halted by regulators on either side of the pond, and
4. Facebook about to suck up all IPO unencumbered capital for months, we fail to see how banks hope to generate any incremental pick up in their top line.
5. Furthermore, SG&A slash and burn  (which the BLS fervently refuses to acknowledge ever happened) will only make top line growth far slower if a true rebound for the financial sector ever materializes.

Bottom line: the dash for trash in the financial sector is coming to an abrupt close.

Shaky Profits Threaten U.S. Rally 02/06/12 WSJ U.S. corporate profits are showing signs of flagging, even as share prices reach multiyear highs. Margins are slipping as already-lean firms find it harder to continue cutting costs

Corporate defaults set to jump in Europe - Smaller companies look vulnerable to looming debt repayments

• US dealers desert corporate bond market 02/07/12 FT

GLOBAL CONSUMER CONFIDENCE

China and US Improve, but Overall Consumer Confidence Fell in 60% of Global Markets 02/11/12 Nielsen Consumer confidence declined in 35 out of 56 markets, according to fourth quarter 2011 global consumer confidence findings from Nielsen. Global consumer confidence increased one point last quarter to a score of 89, while Europe led confidence declines in 24 of the region’s 27 measured markets.

US Michigan Consumer Sentiment Declines in Preliminary Survey 02/11/12 dshort The University of Michigan Consumer Sentiment Index preliminary report for February came in at 72.5, a decline from the 75.0 January final report. Today's number was below the Briefing.com's consensus forecast of 74.0 and Briefing.com's more optimistic 75.5.

The Fed Resumes Printing The Federal Reserve balance sheet expanded dramatically as the credit crisis became acute in 2008. The Policy Tools (shown below in black) grew by $2 trillion with the QE1 purchase of mortgage-backed securities and the QE2 purchase of long-term Treasuries. This was an unprecedented effort to support those markets, provide liquidity, and drive rates down to zero. A simple extrapolation of similar expansion policies to the end of 2014 suggests that the Fed may require an additional $2 trillion to extend its goals. The problem is that such action would surely weaken the dollar and drive gold much higher. If confidence is lost, rates could rise even as the Fed continues to print and buy securities. The Fed says that it will change its policy if conditions warrant. I think they will be forced to stop this policy well before 2014 is over. Nonetheless, in the meantime, they will plant the seeds of rising prices with ultralow rates.

Dollar's China Conundrum If a stronger-than-expected recovery in the U.S. combined with continued uncertainty about the future of the euro means the dollar strengthens, it will be more difficult for China to chalk up even limited bilateral gains without having a serious impact on competitiveness elsewhere. Financial markets are pessimistic about the outlook for yuan appreciation. Expectations for the year ahead are for 2% to 3% nominal gains against the dollar in 2012, compared with 5.1% in 2011. With China's exporters facing a tough year, and falling inflation also weakening the case for yuan appreciation, such muted expectations make plenty of sense.

1. if a stronger-than-expected recovery in the U.S. combined with continued uncertainty about the future of the euro means the dollar strengthens, it will be more difficult for China to chalk up even limited bilateral gains without having a serious impact on competitiveness elsewhere. Pessimistic predictions on the outlook for yuan appreciation could easily come true.
2. if expectations of continued loose monetary policy in the U.S. and a brighter outlook for the euro push the dollar down, the pressure will be in the opposite direction. A falling dollar opens space for bilateral appreciation without denting competitiveness too much. A weak dollar also raises the cost of the commodities that China imports, so allowing the yuan to follow it down would mean importing inflationary pressure.

Japan Adopts Stealth Intervention on Yen Threat 02/07/12 BL

FINANCIAL REPRESSION - TOOLS

Fed's 'Operation Twist' Tangles Treasury Trade 02/10/12 WSJ

FINANCIAL REPRESSION - TOOLS

Fed's Williams: If Recovery Falters, QE3 Is on the Table 02/11/12 WSJ

QE adds to gloom for pension savers - Gilt-purchasing programme will depress annuity rates further 02/11/12 FT

• Protect your pension from 55% tax 02/11/12 FT

Is QE Still Working 02/08/12 Gavyn Davies

U.S. Sets Money-Market Plan The SEC is finalizing a proposal to shore up the money-market fund industry, more than three years after Lehman's collapse sparked a panic that threatened the savings of millions

Cash Exits Money Funds 02/03/12 WSJ

FINANCIAL REPRESSION - RISK

Itchy Investors Ramp Up the Risk With interest rates likely stuck near zero for nearly three more years, conservative investors face a tough choice: move into riskier investments or continue coming up short from low-risk investments.

FINANCIAL REPRESSION - FLIGHT TO HARD ASSETS

Mining Deals to Pile Up A Glencore-Xstrata merger would create a true rival to global mining heavyweights like Vale, Rio Tinto and BHP Billiton, as well as put pressure on midsize players to either team up or grow through acquisitions.

INSIDER TRADING - SOMEONE KNOWS SOMETHING?

Pimco Borrows A Record $88 Billion To Bet On Fed's Upcoming MBS Monetization 02/10/12 Zero Hedge Regular readers of Zero Hedge know that in recent months tracking the portfolio and thoughts of one Bill Gross via the holdings of his flagship Total Return Fund (which just jumped by $6 billion in the past month and is just shy of its all time record north of $250 billion) has meant one thing and one thing only: betting on the Fed monetizing Mortgage Backed Securities or bust. Well, in January he just took it to a whole new level. The fund has now borrowed a record $88 billion, or -35% of its AUM, in cash (shows how much he things of the dollar) and used the proceeds (together with dumping European sovereign bonds from 18% to 11% of AUM) to bet on MBS which now stood at a whopping 50% of the entire portfolio - the highest since July 2009 when QE1 was in full force. However, in absolute dollar terms, due to the growth of the fund's AUM, the actual bet on MBS has never been bigger, and at $125 billion, represents the biggest notional bet ever made by PIMCO. Treasury holdings of just over $100 billion with an effective duration of 6.33 complete the epic bet that the fund has now put on QE3.

INSIDER TRADING - CONGRESSIONAL INSIDER TRADING

Insider Bill Passes With New Backers 02/10/12 WSJ The House passed legislation that would formally ban insider trading by Congress, picking up support from lawmakers who actively trade stocks.

• Probe Aims at House Member 02/10/12 WSJ
• Insider-Trade Suspect Tied to Rep. Lowey 02/10/12 WSJ The husband of a Westchester congresswoman who backed a bill to ban insider trading by federal officials has put $350,000 into an investment fund founded by a businessman facing criminal insider-trading charges, according to records and her spouse.

SETTLEMENT - US BANK MORTGAGE SETTLEMENT

US banks in $40bn mortgage settlement 02/10/12 FT

INVESTIGATION - LIBOR INVESTIGATION

Manipulation And Abuse Confirmed In $350 Trillion Market 02/11/12 Zero Hedge And yet this should be the most aggravated offence in the capital markets, because LIBOR just so happens is the primary driver in determining implicit risk as a reference rate for $350 trillion worth of financial products. That's right - that one little number, now thoroughly discredited, has downtstream effects on $350,000,000,000,000.00 worth of notional assets.

Bank lending probe lights up dark financial corners 02/10/12 Tett

• Citigroup takes $50m loss in Libor probe - Bank employees accused of trying to influence global rates
• Probe reveals scale of Libor abuse 02/10/12 FT

GLOBAL FINANCIAL IMBALANCE

This Is Why The US Doesn't Care About Europe 02/09/12 BI

FBI warns of threat from anti-government extremists

• This Is How Once-Great Empires End 02/07/12 Charles Hugh Smith