Markets

CJF Read of the Week – Acting Man: “The ECB and Balance Sheet Recessions”

December 4, 2011
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CJF Read of the Week – Acting Man: “The ECB and Balance Sheet Recessions”

Pater Tenebrarum, writer for Acting Man, did a great job of putting together a timely and comprehensive update on Mario Draghi’s speech to European Parliament. He highlights the hints that Mario Draghi and the ECB are moving closer towards monetary pump priming. Some great charts, relevant excerpts, and good humor. Click for the full piece at Acting Man    

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Germany’s First Failed Bond Auction – The European Crisis Continues to Spread

November 23, 2011
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Germany’s First Failed Bond Auction – The European Crisis Continues to Spread

Germany failed to get bids for 35% of the 10-year bonds auctioned today. Yields are up about 10 basis points this morning. The increase in borrowing cost is insignificant for Germany. Yields are still well below 2%, and Germany continues to benefit from the combination of very low borrowing costs, and a declining euro which helps support export competitiveness. The first sign of German bond market stress does highlight the risk the EU-17 is flirting with; the breakdown in confidence across the entire region. What started as a crisis in Greece has spread one-by-one to the rest of the European sovereigns. The reason the crisis has spread is not based upon profligate actions by the rest of the Eurozone. On the contrary, progress has already been made across Europe...

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Emerging Market Currencies Signaling More Risk Aversion

November 22, 2011
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Emerging Market Currencies Signaling More Risk Aversion

For almost a decade, emerging markets have been in a bull market with high growth rates, declining interest rates, and capital inflows. During the financial crisis, emerging markets were hit like financial assets around the world, and capital flowed out of the asset class. Over the course of 2010, and most of 2011, emerging market currencies strengthened once again. Recently, the European financial crisis cast doubts on the risk appetite for emerging market investment. EM currencies experienced a sharp, across the board, selloff in September 2011. Currencies such as; the Brazilian Real, Mexican Peso, and Indonesian Rupiah quickly declined by 20%. Part of the decline was based on the start of EM central bank rate cuts but the majority of the move was simply risk aversion. Many of the...

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Que Lastima – Spain in a Vice as Interest Rates and Unemployment Soar

November 17, 2011
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Que Lastima – Spain in a Vice as Interest Rates and Unemployment Soar

I’ve been writing about the impossibility of the ECB running appropriate monetary policy for 17 different nations. The dilemma couldn’t be more evident when contrasting the economy of Spain with the economy of Germany. Spain actually has less sovereign debt relative to GDP than does Germany. The problem for Spain isn’t the level of debt the country has incurred, but the depth of the current recession and the questionable capitalization of the Spanish banking system. Spanish inflation is running in a range of 1.7%-3.0% depending on how you define it (1.7% core inflation). This morning, bond auctions in Spain only attracted investors at much higher yields, approaching 7%. As a result of higher interest rates and a deepening recession (which is helping to reduce inflation), real interest rates in...

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Europe’s Crisis Spreads as Spain, Belgium, France, the Euro and EU-17 get Questioned – How Does It End?

November 16, 2011
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Europe’s Crisis Spreads as Spain, Belgium, France, the Euro and EU-17 get Questioned – How Does It End?

For a number of months, the financial crisis in Europe has been explained under the guise of sound versus unsound policy. If this were indeed the case, the fix would be simple; eliminate unsound and unsustainable policy and voila, the problems would just go away. European leaders have shifted blame continuously from one problem to the next. First the issue was speculators, then Greece, then Ireland, then Portugal, then Spain, then Belgium, then Italy, then the need for austerity, then the macro economy, and now the problem has erupted to everywhere. The current set of events will hopefully amount to a positive development as it becomes clear that the problem is the construct of the Eurozone itself. Europe’s misguided attempts to reform its way out of a crisis are...

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Europe Must Decide Its Future – Self Induced Financial Crisis Has Led Europe to the Brink

November 10, 2011
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Europe Must Decide Its Future – Self Induced Financial Crisis Has Led Europe to the Brink

After Wednesday’s market action around the world, it’s a good time for a big picture assessment on the state of the financial markets. The attitude out of Europe has pendulated between nonchalance and vitriolic attacks among the EU-17. Italian sovereign rates spiraling above 7% have brought the eleventh hour upon the region. Escalation of the crisis has caused all types of forward looking investment to become somewhat of a farce. The environment of complete and utter policy uncertainty will no longer be withstood by markets as the full scale part of the European financial crisis enters its fifth month. After bungling the first few opportunities to implement a fix, it has become clear that dramatic action will be required to keep the Eurozone intact. The problems of the Eurozone’s...

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New York City Taxi Medallion Bubble – Prices Appreciate to $1M

November 8, 2011
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New York City Taxi Medallion Bubble – Prices Appreciate to $1M

Bloomberg recently reported that New York taxi medallions changed hands this October for a record $1 million. There have been a number of reports over the years demonstrating that investment in taxi medallions outperformed stocks, bonds, real estate, and other financial assets. While this may be true, the yield has clearly come way down making investments at the new elevated prices much riskier. Reportedly, a $1M taxi medallion returns $2,500 in profit per month ($30k per year) which amounts to a 3% annual yield. The argument for medallion investment revolves around the regulated supply and recession-proof taxi fare industry dynamics. There is a public company called Medallion Financial Corp (TAXI) which has participated in the bull market. The company offers financing for the purchase of the medallions, has purchased...

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Market Confidence in Italy Hits New Lows – Berlusconi to Face New Rounds of Confidence Votes

November 7, 2011
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Market Confidence in Italy Hits New Lows – Berlusconi to Face New Rounds of Confidence Votes

Italian 10-YR bond yields hit 6.62% this morning, which marks a new high since concerns over the sustainability of European sovereign debt began to unfold. This wasn’t supposed to work this way after the Eurozone leaders announced a new structured investment vehicle to be put in place to leverage up the EFSF. It remains unclear who is going to fund the SIV which raises doubts around how much firepower the EFSF will really have and whether Italian interest rates can be maintained at sustainable levels? All of this uncertainty takes place while Italian bonds yields escalate towards unsustainable levels, government approval ratings hit new lows, Berlusconi’s trial for soliciting an underage prostitute moves forward, and the real economy in Italy remains under intense pressure. The above issues are scary...

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When Will the Market Start to be Forward Looking – Early Signals from Asia?

November 2, 2011
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When Will the Market Start to be Forward Looking – Early Signals from Asia?

The markets have been through a period of wicked volatility with a significant pullback almost to the point of entering a new bear market. Intraday the S&P 500 was down 20% from its high but closed above those levels and went up from there. From the market’s closing bottom of 1,099 the S&P had a tremendous move higher up about 17% in 4-weeks. During this period, the market maintained an obsession with day-to-day and even hour-to-hour news. The situation becomes impossible for investors because the news flow is utterly unpredictable and investors can get whipsawed and hacked up quite easily. Often the market is described as a voting mechanism for 6-9 months out. Understanding that this is the normal state of things will be important at some point in...

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Yen Intervention Take Three – Reminder That There Are No Safe Haven Currencies

October 31, 2011
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Yen Intervention Take Three – Reminder That There Are No Safe Haven Currencies

Japanese leaders intervened for the third time this year as JPY strength below 77 yen/usd is clearly constraining a recovery in the world’s third largest economy. Japanese Finance Minister, Jun Azumi, announced a unilateral move with an additional pledge to keep selling in the future. The action took place because Japan believes the yen strength broke from normal economic fundamentals and linkages. Japan’s leaders are right. In the recent couple of months, the US economy has been the most resilient of the developed market major economic zones. Normally when the US economic growth rate picks up relative to other nations, the dollar strengthens. The FX flows related to the fear of a financial crisis in Europe have thrown a lot of normal relationships out of whack. The Yen has...

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Europe’s Eleventh Hour Fix

October 27, 2011
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Europe’s Eleventh Hour Fix

After keeping the world on edge and pushing up against the brink of a European recession, details of the European fix are trickling out. It is sure to be a headline filled Thursday, Friday, and weekend. I won’t focus on the specific details because many of them still aren’t known and the ones that have been announced are likely to evolve regardless. Europe has recognized the enormity of its financial crisis. The European financial system couldn’t fund itself, sovereign interest rates started to spiral out of control, and the Euro experienced a rapid and unhealthy correction. It seems absurd to highlight that Europe recognized that this was collectively a very big problem but at times, even right up until the end, European leaders at any moment could seem either...

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US Industrials See No Evidence of Global Recession – Results from Caterpillar (CAT) and Parker Hannifin (PH) Hammer Home the Point!

October 24, 2011
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US Industrials See No Evidence of Global Recession – Results from Caterpillar (CAT) and Parker Hannifin (PH) Hammer Home the Point!

Caterpillar (CAT) reported very strong earnings this morning, beating estimates quite handily. EPS of $1.71 compared to consensus of $1.57 (a 9% beat). As important, the company outlined an environment consistent with global growth persisting and a strong outlook for 2012. Caterpillar’s organic sales grew by 34% this quarter excluding the recent acquisition of Bucyrus. Caterpillar is a cyclical company, and overly sensitive to changes in the global economy. For perspective, in 2009, Caterpillar saw sales decline by 37%. Each of CAT’s business segments has what are called “trough plans” which are fire drills that prepare CAT in advance for sudden slowdowns in the global economy. This is a company and management team used to handling volatility in the global economy so they are well worth listening to during...

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