Economic Strength, Where Is It: European and U.S. Data

European Economic Weakness Tells of Global Markets

Following European Central Bank's flood of money across Europe, inflation is staying flat through the region. March 13, France reported a Consumer Price Index that rose only .4% in February, giving a year over year result of 2.3%. Both results were lower than consensus expectations. Italy posted similar numbers, together with Germany. Great Britain's CPI provided a month over month rate of .6%, and year over of 3.4%. Generally contributing to price increases across the region was fuel.

Muted inflation amid liquidity floods may not be surprising, and certainly gives indication that interest rates in Europe might not be increasing very soon. Failure of inflation numbers to surprise originates out of the region’s economic performance.

European Union (EU) GDP posted early in March for Q4, 2011. Data revealed a GDP contraction of -.3%  for the quarter and compares with a .2% gain in Q3. Yearly numbers show Eurozone GDP still growing, but at .7% versus a previous gain of 1.4%.

A majority of European states are experiencing GDP contraction with Belgium down .2%, Netherlands down .7%, Slovenia down .7%, Italy down .7%, Spain down .3%. Even Germany is down .2%, leaving France as one among few still expanding economies. Great Britain, while not a euro country, is slowing faster than France with Q4 down -.3%, leaving a yearly gain of only .5% versus France’s yearly gain of 1.3%.

Q1 European Strength Not Showing In Its Economy

Data for Q1, 2012 isn't making EU GDP prospects look more optimistic. European Union's Purchasing Managers Index (PMI) provides insight. PMI results are produced for both service and manufacturing sectors and reflect business conditions. Numbers at 50 or above show business expansion, while numbers below 50 show contraction.

European Union service sector PMI reported on March 22 for March, 2012. The number was 48.7, down from February's result of 49.4. Accounting for deterioration, new orders fell at their fastest rate in three months revealing an overall decline in demand.

PMI numbers for EU's manufacturing sector also revealed weak demand at 47.7 versus February's result of 49.0. With new orders and backlog orders being down, next months results could continue into weakness. Germany and France also posted contracting PMI manufacturing results at 48.1 and 47.6 respectively.

January 2012 European Union industrial production numbers were released on March 14 and show less than encouraging signs. In December, industrial production fell -1.1%, but in January increased .2%. Such a January increase did little to improve yearly results which were down -2.0% in December and remained down in January at -1.2%. Disappointing PMI manufacturing data could signal continuing deterioration in the region's industrial production.

Retail in the region looks very suspect, and even more so with more recent EU service sector PMI data. Italy found itself faltering with a yearly retail decline of- 3.7% in December. This month Italy reported January retail with a gain for the month of .7%, but still a yearly result of 0.8%. EU retail sales record similarly. Reporting early in March for January results, we see a monthly number of .3% and yearly results of 0.0%. Notable here is that December monthly and yearly numbers were -.5% and -1.3% respectively.

Asian Economies Have Their Problems

Outside of Europe, China industrial production slowed quarterly in January/February to .70% from a previous 1.1% gain. Yearly numbers are also down to 11.4% from a previous 12.8%. China's retail sales show yearly weakness for the same period at 14.7% versus a prior gain of 18.1%.

Japan released its All Industry Index on March 21 showing January results. The index is akin to GDP in that it combines output from various sectors such as agriculture, construction, public sector and industrial output. Month over month, bottom line is -1.0% versus December’s 1.3% advance. Year long data show December at 0.0% with January at -0.2%. Perhaps an acceleration of decline.

U.S. On Its Economic Cusp Of Lead Or Not

Looking at some leading indicators in the U.S. are Federal Reserve Bank regional surveys. Among these so far this month are the Richmond Fed Manufacturing Index, Dallas Fed Manufacturing Survey, Empire State Index, and Philadelphia Fed Survey.

These Federal Reserve products are monthly, but limited in data population. This makes the data more anecdotal, but with corroboration among other surveys and evidence, a good idea.

Out of the four Fed regions reported, data generally shows a decline in new orders, shipments and delivery times. All tell of weakening future demand.

Namely, the Empire State Index showed the strongest result with a fourth consecutive monthly increase. Still its new orders, shipments and unfilled orders declined this month, while delivery times actually increased. Not as busy this month, except for delivery times on declining demand. Which will go into next month, as a liability. Or, might appear this month on prices paid….

Prices paid for raw materials increased steeply and at their highest level since summer of 2011, when commodities were very high. Yet, prices received in the current period for manufactured products declined. Seems telling of a consumer’s line in the sand.

Compare Empire State results with the Philadelphia Fed Survey. Very similar, but prices paid and received are both down. Also down are new orders, shipments, unfilled orders, while delivery times actually decreased. Again not very busy this month. Overall, next month is not looking firm.

East Coast dynamics ultimately have petroleum refinery closures that must be taken into account.

Richmond Fed Manufacturing Survey says there is an essential decline in demand. Its results are like the others in terms of new orders, shipments, unfilled orders and delivery times.

But Dallas Fed Manufacturing Survey results show a product of petroleum drives. While its headline number shows a decline in business activity, its production index is sustaining. The difference is probably petroleum activity versus the rest of the economy. For production activity, mixed results are noticed. Unfilled orders, shipments and delivery times, and capacity utilization are increasing. But new orders are down.

All told, global economic conditions are slowing. U.S. economic conditions are slowing. Still, in the U.S. there are powerful economic generators needed by the world.   

Rail Road Traffic Tells Of Decling Demand, But Known Demand

Economic Weakness Seems To Loom

Very telling of economic activity is the Association of American Rail Roads (AARR) weekly traffic report. Railroad reports show shipment volume among various goods and commodities on a weekly basis, and are compared year over year.

Rail shipments actually correspond with other economic numbers, demonstrating economic connections. In many previous articles I wrote about support in retail coming from gas stations, vehicle sales and building material retailers. Economic evidence of these propositions are supported by rail shipments.

Two things stand out of note in rail activity. Firstly, declines in rail shipments of grain and farm products. Secondly, an overall weakening in shipment activity, perhaps corresponding with softening in manufacturing.

AARR last reported on March 22 showing results for the week of March 17. Data reveals that rail car shipments for the week declined by 5.3% versus the same week a year ago March 2011. Intermodal containers, very well suited for export purposes, are nonetheless up 2%. Intermodal containers can ship wheat, apparels, cars, lumber, etc. But are noted here especially for their common use in export activity.

For the 11 weeks ending March 17, AARR reports that rail car shipments declined 1.8% versus the same period of 2011. Intermodal, on the other hand and for the same period, increased by 2.3%. March  rail car numbers are trending with February shipments, which were down .3% for the first 7 weeks of 2012, versus year ago results.

Knowing the story means knowing that intermodal shipping unit numbers are progressively becoming ever closer to rail car unit numbers. Progressing numbers of intermodal units perhaps tells of ultimate export activity, or at least a search to move a good or commodity among various forms of transportation, in increasing numbers. Maybe simply a search to overcome U.S. infrastructure deficits.

Real Weakness Can Show A Change In Dynamic

March activity among particular commodity groups tend to reflect activity in retail sales, but show developing dynamics. Developing numbers are grain shipments for March 2012 versus March 2011 being down a considerable -8.4% year/year for the month, and down -10.3% for the eleven weeks ending March 17. Farm products excluding grain look more concerning, with a decline of -21.9% versus March 2011 and a decline of -12.4% for the 11 week period ending March 17.

Food and Grain Mill products are also showing noted declines. Surmising causation of these declines is the expectation of greater than expected agricultural production. Perhaps due to weather and also sustained inventories. Also added to grain and farming declines might include the discontinuation of the federal subsidy on ethanol.

Existing Strength Remains Strong

Advancing on the rail line are our typical suspects. Petroleum up 32% for the period and for the 11 weeks, up some 27.6%. Such results show more a consequence of pipeline and tanker deficits than actual demand. Rail is now moving where capacity in conventional transport can't currently increase. How many barrels of oil can one put into an intermodal container?

Aside from Petroleum, we have cars rising 15. 5% and 19.4%; stone, clay and glass 11.3% and 8.4%; metals at 8.2% and 11%.

All of these show the strength in not only the need for oil and gas to find a new way around the country and into export terminals, but also demand shown in retail. While gas retail has ultimately increased due to price, and new production searches for delivery avenues; vehicle sales seem to be organic. Vehicles have supported associated industries such as metals and glass. A more recent component is building materials and home improvement. Apparel sales have also demonstrated strength.

Given the guide of indicators, weakness seems generally present. A few components have lead with considerable strength. But for how long, and will the other growing sectors develop.

The seriously weak components must be investigated, being grain, food, coal.

A Perspective on Collateral and Liquidity

U.S. collateral, together with G7 collateral in general, consists of premium funding sources for banks. Today the key is to support yields on strong banking collateral. We've seen a collapse of liquidity in Euorope, and a collapse in interest rate arbitrage in the U.S.

Where the Eurpean Central Bank engaged in heavy bond purchases and LTRO, the U.S. Fed previously engaged in heavy rounds of QE. All provided untold amounts of liquidity into the international system--and pricing increases, with yield declines.

Where the fight in Europe was to support bond prices and keep down European bond yields, the fight in the U.S. has been to sustain yields and increase pricing.

Reported globally as a liquidity consequence are negative yields in the U.S., which compares to returns on various yields against depostis. Especially in view of FDIC fees on deposits.

Ultimately, the goal has allways been to keep U.S. collateral healthy, and to support European collateral.

Due to central bank efforts, and to their support of economies and collateral, lots of liquidity must be absorbed. Asset yields must be increased and prices decreased in the U.S. In Europe, however, the worry is that U.S. goals will become Europe's hardship. In Europe, bond yields must stay below a ceiling and prices above a ceiling.

Countervailing goals exist in that the U.S. wants to set a ceiling on bond prices, while Europe needs to set a floor. And, the U.S. wants a floor on bond yeilds, while Europe needs to enforce a ceiling.

Between the two countervailing goals, a symbiosis seems to exist, given the ECB's previous rounds of liquidity infusion.

Bottom line for business is that U.S. and European economies compose the lion share of economic activity. While the two economies don't grow at rates observed in smaller economies, they still compose the largest demand in the world. Like it or lump it, we have a reality knocking on our back door. Make it work is what needs to be said.

Any opinion is welcomed. We appear to be in a state of reality, unless I'm mistaken.

U.S. Collateral Demand Pressuring Equities And Sovereign Debt

Interesting performance can be seen now days in treasury yields versus the S&P 500. While the S&P 500 moves sideways at increasing heights, yields of treasuries are beating stock performance. Keep in mind that demand in treasuries, or bonds in general, drive up their price, which decreases their yield--as a matter of convention. Stocks simply climb or go down.

Stock strength, in view of treasury yield spikes seems to tell of increased treasury demand in a manner of unusual form. Likely the form occurring is an effort to strengthen the quality of banking collateral. One would normally expect to see an increase in demand for treasuries to cause an increase in their price, with a decline in their yield. Now, we are seeing increases in treasury yields, and decreases in price amid a vacuum of quality sovereign bond collateral.

Stocks have been climbing to 4 year highs, or moving sideways until their next move higher. And Treasury bonds have also been climbing in yield, but at stronger rates than stocks.

Based on the chart above, S&P 500 stocks are compared with 10 year Treasury Note yields. Stocks have been under performing considerably since the later part of February. This occurrence is of thoughtful note in that stock prices have remained strong, alongside greater momentum in U.S. bond yields.

Typically, and for some time, treasuries are safety nets where stock returns are a risk-on asset class. This means that when the market gets insecure, stocks fall and treasury prices increase. The reverse occurs when the market is secure and feels that more risk is warranted. Otherwise spoken, stocks and treasury prices typically trade inversely to each other.

Now, stocks are holding strong, when treasury yields are finding greater strength. Causes for both asset classes holding strength can perhaps be found in demand for U.S. bonds as a form of banking collateral. Evidence can be seen not only in the 10 year note, but also the 30 year bond, demonstrated above.

Week before last, I made comment on the Fed’s proposed reverse repurchase operations. Operations of this nature involve the fed lending its collateral of treasuries in exchange for deposits at its location. Net results are dollar values flooding across the globe, lead by loans of treasuries.

Ultimately, the U.S. dollar underperforms as with conventional forms of quantitative easing. Currently, where we see sustained equity prices but not major increases, and strong performance in treasury yields, we are also seeing the dollar underperforming equities. Usually, the dollar will rise in association with increases in treasury prices, while equities decline. Now while equities stay level, and treasuries yields spike, the dollar under performs. For example, compare the dollar against the S&P 500 in the chart.

Look for example at the performance of the dollar against the 10 year treasury note yield below.

It does appear that demand for treasury securities has increased considerably, without the typically expected decline in equities--and especially the increase in treasury pricing. Still, the dollar is underperforming equities and treasury yields. Dollar performance, amid the other named dynamics, tells of increased U.S. dollar availability or U.S. asset availability.

Viewed another way, is a look at S&P pricing against the price of 30 year U.S. bonds. Where stocks aren't spiking, treasury prices are spiking down while their yields are spiking up.

Now, it does appear that U.S. treasuries are supporting values of international banking collateral. Causation for this proposition is through the reverse repurchase agreement.

Essentially the party, or primary dealer, loaning the treasury to a foreign bank counter-party will want to lend the treasury at a higher price than the price at which the lending party will have to buy-back the treasury. Ergo, lend at high prices, to buy back at low prices. Yields, being inverse, also support the lender by increasing at buy back time, when yields are higher and prices lower.


Dynamics of this nature are perhaps risky due to the ECB’s existing exposure to various European bonds. While strong collateral is bought by international banks at decreasing prices, but increasing yields, look at the overall price/yield consequence to be absorbed by European sovereign bonds.

Propositions for sovereign bond consequences is that their prices could continue to fall, and yields rise. All contrary to realizing expected results of increasing the credit ratings of bank collateral.

Still, there are likely few alternatives in the effort to support banking health.

International Banking, Petroleum and Retail: A Linked Proposition

Global Banking Gets Guidance From Greek Bond Auction, and CDS Payments.

Greek bonds came in today at auction with a price of 21.50 cents on the dollar, which indicates a CDS payout of 78.50 cents on the dollar. Resulting CDS obligations are looking in the range of $2.5 billion. See http://online.wsj.com/article/BT-CO-20120319-712957-html.

A $2.5 billion dollar price is very well below the $3.5 billion price tag initially thought. Indications to be derived are improved demand for weak collateral. Which portends well for the Fed announcing potential reverse financing operations week before last.

If one looks at the European Central Bank's (ECB) balance sheet, its cash and reserves are very low versus their their assets. Such a ratio tells of ECB exposure to asset, or collateral pricing. Currently, the ECB holds many Greek bonds, to an extent that should Greece withdraw from the European Union, a huge loss would be realized by the ECB.

A magnitude of loss associated with a Greek withdrawal from the Union would severely damage the ECB. That is why public creditors were exempt from the Greek bond write down......But it will come for the ECB in terms of Greece, in a matter of time.

A surprise today was the value brought on Greek securities, being higher than expectation. Accordingly, risk of Greece and its counter parties declined from initial expectations. A good thing.

Just last week Citi Bank failed a stress test. Indication of the failure portends of its future in working through Europe's very real liquidity and reserve situation. Banking is essentially scared right now, with corporations holding cash. The frank reality is that across the globe, we must ride this liquidity trap. Central banks have primed markets in view of potential liquidity ice. Hope remains that banks continue to function at existing levels of market increases.

U.S. Retail tells of Real Global Strength.

Turning to the U.S., retail sales were reported last week. Sales for February were up 1.1% versus January results showing an increase of .6%.

Looking at the causes of retail sales increase is first Gasoline Stations presenting a month over month increase of 3.3% leading to a year over year increase of 10.3%. These results lead the retail index.

Coming in second are clothing and accessory stores with month over month increases of 1.8% and year over year, 7.3%. Then we have what has become America's economic lead, the Automobile. Which showed results at 1.6% month over month and 6.9% year over year.

Of all elements, none is comparing to what we saw a few weeks ago in Building Materials and Garden Equipment stores. They show major increases of 1.4% monthly, but 13.8% year over year. These results beat even gas stations.

Effective retail results are showing the hope of diversified demand. A fundamental need in economic growth. Autos started the lead, now the lead is not just gas stations associated with rising gas prices, but real consumer demand. Demand must be examined on the basis of its breadth. In so doing, growth in clothing and building materials signals a diversification, combined with continued growth in car sales.

Petroleum costs create a very real effect on business. It appears that a mini-cycle occurs with gasoline price increases. When gas prices start to grow, the consumer starts to display congruent levels of insecurity, decreasing demand and ultimately declining purchases.

Retails Sales Must be Viewed With Petroleum Results.

Viewing economic progress requires ultimately a look at 2011 GDP advances. Recall that in Q1, 2011 GDP grew at .4%; Q2, 2011 at 1.3%; Q3, 2011 at 1.8%; and then at last a rate of 3.0% in Q4.

So much of this growth was driven by autos. Currently we see a huge contribution brought by gasoline stations. Yet a necessary consideration is the ultimate petroleum demand. Seeing this demand places retail sales into a perspective.

Where gasoline stations account for major increases in retail, demand for gas is declining. Year over year, refinery production is down -7.3%.

U.S. consumers still compose 2/3 of the world's largest economy. Where banks are getting tremendous support to ensure liquidity, the ultimate consequences of lost bond value remain to be seen. Especially for the ECB and an event of Greek Euorzone withdrawal, which would foist losses on the ECB. International capacity for salvation, through the IMF and Eurozone fiscal efforts, is looking progressively weak.

From there, petroleum numbers among various PAD districts are showing interesting numbers on the East Coast and in the Gulf regions. I will watch these numbers closely.

Construction Decline Hits Affordable Housing

By Sean M Carpenter

The slump in the housing market has had far-reaching effects. Home prices have fallen significantly on existing homes, especially because there are so many foreclosures on the market. It has also affected new construction, including affordable housing projects.

Because there are so many existing homes on the market, the demand for new housing just isn't there. The need exists, especially for low- and moderate-income families, but developers are having a hard time finding financing. Investors struggle to see the benefit of new home construction of any kind when there are so many homes already on the market. In addition, many new construction projects are sitting idle, having lost their financing.

A story out of Massachusetts shows just how dramatic the effect has been. New construction permits in the state fell to 7,260 in 2011, compared to over 9,000 in 2010. That's a 20 percent decline in just one year. Unfortunately, the drop in production is mostly driven by the drop in single-family home prices. Markets across the United States are nearly saturated, creating the strongest buyers' market in decades.

The decline in new construction has a wide-reaching economic impact. Lack of construction jobs adds to unemployment figures. In addition, the lost wages translate into lost tax revenue for cities and the state. It also means less money is being spent in the local economy, potentially causing job losses in non-construction-related industries.

Though the foreclosure crisis has caused a sharp decline in housing sale prices, it has had the opposite effect on rental prices. Because more families have been forced out of their homes, rental units are in high demand. Consequently, rental prices have been increasing and the number of available units has been falling. The need for affordable housing has risen dramatically in the last few years, especially rental housing.

Restrictions placed on existing affordable housing prevent owners of those using from raising rent to reflect market rates. However, because more people need low-income housing, available units are being filled quickly. All across the country, cities and states have closed Section 8 and other affordable housing waiting lists to new applicants because the existing lists will take years to cycle through.

The combined slump in multi-family housing production and increase in rental prices points to a market need that affordable housing developers are uniquely able to meet. Their experience successfully completing low-income housing developments, combined with their knowledge of the housing market enables them to present solutions that are both creative and financially viable.

Want to get a free program guide of Sean Carpenter's top 8 favorite government programs for real estate developers and investors? Request your free program guide today at:
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Article Source: http://EzineArticles.com/?expert=Sean_M_Carpenter

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Market Expectations, Viewing Europa

What is so confusing about the U.S. equity market is the way it sustains at historical levels, while the fundamentals support something less. From there one must look at different asset classes. In so doing, one must start to see the overbought perspective of oil. The liquid by itself has told of micro cycles in the U.S. economy. When its price increases, the American consumer retracts…and with the American consumer, 2/3 of the leading economy of the world retracts.

Current economic indicators have displayed month over month declines in new orders and backlogs in orders, together with shipping time, all associated with manufacturing. These numbers were supported by a decline of -1.00% in U.S. factory orders reported last week. The chain is catching up to itself and starting to reflect the more anecdotal of numbers, potentially revealing a statistical fact.

Time has also revealed strength in the U.S. economy.  We have seen increases month over month in demand in a major sector, namely autos, which expand other sectors. Such would explain GDP growth of 3%, but portend of Fed expectations of a lesser growth rate…If auto growth will not sustain at these rates, for the next year.

Confusing in this analysis is the combination of advancing auto sales, versus general retail sales in the U.S. Where autos and associated industries have enjoyed growth, industries reliant on other retail forms of growth are very competitive, such as grocery dollars, See, Target Corp.: Shop There, Invest There?  and Durable Goods, Finding Business Cycles along with Costco Results Show a Magnitude of Competition.

Data suggests a slowing of economic growth here in the U.S. Properly anticipated in view of the major governmental and banking unknown write-downs viewed through Europe’s recent Greek bond default. This development in Greek bonds and its potential ramification through the international system, shows how closely banking has become connected in today’s environment of commerce.

All people, business entities and governments, are today connected in what we once theoretically called the global economy, but today rises from the theoretic to reality

On March 19 a bond election will be held to see what price the CAC bonds will bring. From there the CDS parties will deduct that amount from their payment. With the auction of defaulted bonds, one needs to look at the ability of all counterparties paying the required sums. Should one counterparty fail, a domino effect of cascading failure could occur.

Because of the exceptional liquidity offered by the ECB and other world banks, together with the Fed’s offering of Reverse Repurchase Agreements, all should sustain. At least for now, and into the next year. We need to see some real business impetus for sustaining this purpose. That cause exists in the form of support of U.S. natural resources.  

For the next few weeks, business should be very alert to Greek consequences in that such propositions can tell so much of international liquidity. Essentially, injections of global liquidity provided in the past, along with propositions of future liquidity, should keep money flowing.                         

QE3 NOT LIKE GRANDPA'S QE

Quantitative Easing 3 Actually Mentioned

Today Wall Street Journal reporter Jon Hilsenrath broke the story that drove up equities after their fall yesterday. He reported remarks from Federal Reserve officials suggesting a new round of quantitative easing. See, http://online.wsj.com/article/SB10001424052970. Suggested new rounds of easing are very different from the conventional two rounds of  easing.

Previously we witnessed two rounds of basic Federal Reserve Open Market Operations using Repurchase Agreements. Here, the Fed loans printed cash to primary dealers (major banks), and primary dealers pledge their U.S. treasuries as collateral. With low interest rates on the loaned Fed money and collateral pledged, money has been made by investing in higher yielding risk assets such as stocks, commodities and certain currency pairs.

Inflation is commonly associated with QE, and is a basic consequence of the cheap cash being plowed into risk assets, especially commodities. Across the globe, commodities have come under increasing demand from those that actually use materials for manufacturing. This contrasts with the investor that simply can profit off increasing demand.

Twist Past QE into Today's QE Proposal

However, today the method of quantitative easing is called “sterilized”. Sterilization means that the added money to the system will not push inflation. The Fed is very sensitive to inflation at this point due to oil prices, and food prices. Sterilization could be more theoretical than practical.

Quantitative easing part three is different in many other respects. First, sterilization of the effort is purportedly accomplished by reversing the proposition. That is, from the Fed lending money to the Fed borrowing money, in a Reverse Repurchase Agreement. Basically primary dealers loan money to the Fed, and the Fed pledges its U.S. treasuries as collateral to primary dealers. For a good explanation on this see, http://www.newyorkfed.org/aboutthefed/fedpo

QE3 proposes to pour out U.S. securities, as opposed to cash. Why would the Fed be looking at pouring out securities instead of cash? Not only inflation...Look also at looming propositions for European securities, or simply European bonds. Any trigger of Credit Default Swaps (CDS) amid the biggest sovereign debt restructuring in history, and anyone can take a guess on net results.

Only disaster is for a $3.2B net loss on CDS's to turn into an immeasurable loss by a counter-party bank not making their obligated payment on a CDS...due to inadequacy of collateral.  Consider recent stress tests of European banks versus extensive efforts of ECB to shore up liquidity.

Only Way QE3 Can be Justified

Through the above scenario, potential for banking failures spreading across Europe exists. Reading between the lines, there was a reason that banking liquidity in Europe froze. To keep the Euro currency alive, there is a reason why the European Central Bank bought such huge quantities of troubled sovereign bonds, in exchange for loans to European banks. ECB bought troubled securities, or accepted them as collateral, to create a demand, and flooded banks with cash.

Now, the cash can be loaned to the Fed in exchange for a backup security...the U.S. Treasury bond, or Euro bonds, depending on the market. Deposits from other banks at the ECB remain at “elevated” or historical highs. Essentially the banks that took advantage of the recent ECB LTRO are waiting to see what the haircut for Greek bonds will look like.

Supporting evidence for such Fed efforts is Europe's Central Bank balance sheet, which titters south on the continuum of liquidity. Consider its huge inflation in assets versus capital and reserves. It's leverage is also historical against its capital and reserves. Then, look at the quality of its assets, pledged as collateral against its recent rounds of LTRO. See http://www.ecb.int/press/pr/wfs/2012/html/fs120306.en.html, and http://www.ecb.europa.eu/press/pr/date/2012/html/pr120228.en.html

Appearances seem to appear to look like the Fed knows that collateral in Europe will have to be supported. With the support of collateral, goes support of ECB created liquidity. ECB bought declining collateral in a down market to save a market. Now, European banks have cash to help sustain Europe and collateral in general. But the problem is that European collateral might take a loss, depending on Greek results.  

Yes, cause certainly exists for supporting the value of international collateral, supported by the reverse repos of the Fed. It logics out.

Greek Full On Default No, Triggering Credit Swaps....YES

Uncontrolled Default Unlikely

Today the Institute for International Finance reported, through Reuters, consequences of a “disorderly” Greek default. Its report details a litany of apocryphal horrors. Where complete default by Greece on some 177B euros of bonds is unlikely, also unlikely is complete compliance with all Greek bond investors accepting a 53.3% reduction in their investment. More likely is an orderly default....with many implications.

Full blown default shades off in likelihood with  Greece having the “Collective Action Clause” (CAC) to create demand for a 53.3% cut in bond principle. Knowing that investors wouldn't like a 53.3% reduction on investment, Greek legislators approved CAC. CAC permits the nation to hold all bond holders to the cuts if 2/3 of a voting quorum of 50% of bond holders approve cuts. Based on estimated figures, 58.4B euro worth of Greek bonds must express agreement to allow activation of CAC terms.

Nearly all major news outlets reported today acceptance of the cuts by 12 out of 13 steering committee members of the Institute of International Finance (IIF). IIF negotiated Greek bond cuts on behalf of private bond holders with officials. 12 of the13 members result in a reported 40B euros of Greek bond voting power.

A deficit of support seems indicated with IIF members alone. But add the accepting IIF members, with support of Greek and closely associated banks, the value of acceptance is at 60B euros. Enough to prevent calamitous default, but not enough to avoid a CAC trigger.

CAC Activation, Activate Credit Default Swaps

To avoid CAC, it appears that enough magnanimous bond holders must agree to cut a total Greek bond debt of 177B euros in at least half, some long cry from current support. Present known support is only 60B at most. Not enough to avoid CAC, still enough to avoid all out default.

Bottom line; CAC imposition gets the demanded cuts to accomplish 50% plus cuts in Greek bond debt; which frees up bailout money to Greece from IMF and Euorzone resources; all needed to meet a March 20^th 14.5B euro bond payment.

So....appearances are that CAC will be involuntarily imposed upon investors....Unless the magnanimous crowed shows up before Thursday. Noted on Sunday in “Markets Hinge on Greece, March 8” is how CAC is likely to cause Credit Default Swaps (CDS) to be executed and paid.

Involuntary default by Greece is the most likely scenario, through the CAC provisions of Greek bonds. Consequences of any involuntary default were revealed in a decision by International Swaps and Derivatives officials. They gave confident indications that involuntary cuts to investors imposed by CAC will be a credit event. Credit events trigger payment of CDS. CAC triggers prevent a full blown Greek default, but fully imply the unknown of the CDS event.

ECB Capacity for Further Easing, A Ghost in the Closet

When likely results of Greek bond cuts require triggering CDS payments, the real question today is the net result. Consensus is a net of $3.35B loss, very far from the IIF’s projected $1T loss pronounced today in event of a full default.

An organized default through CAC activation, which is anticipated, is also apparently expected by fiscal policy officials controlling added aid for Greece and the other European countries. Fiscal policy officials committed themselves to add aid money if at least bond principle cuts occur.

It now appears that bond principle cuts will occur. But the real question now is at what price versus execution and activation of Credit Default Swaps. Where net losses are proposed at $3.35B, what if counter parties are weak and fail on their payments.

But perhaps that accounts for the massive LTRO’s of the ECB since last December. What is the condition of the ECB’s liquidity. Certainly if it's asked to absorb any decrease in sovereign bond prices and increases  in borrowing costs, after the ECB’s massive sovereign bond purchases, no capacity exists to meet the request.

Market insecurities will result. Along with the associated declines in equities, increases in treasuries and safe currencies.  Currency carry trades might return with declining currency prices in high interest rate countries.  

Rising Energy Costs Threaten to Further Weaken Region's Economy

Rising Energy Costs Threaten to Further Weaken Region's Economy

by Air Max Pas Cher

Zurich/Brussels---European inflation accelerated in February while manufacturing output contracted as political tensions in the Middle East boosted oil prices even as the economy heads into a recession.

The inflation rate in the 17-nation eurozone rose to 2.7 percent from 2.6 percent in January, the European Union's statistics office in Luxembourg said in an initial estimate on Thursday. Unemployment rose to 10.7 percent in January, a 14-year high, it said in a separate report.

Manufacturing output contracted for a seventh month in February as the eurozone economy struggles to rebound from a contraction in the fourth quarter. A manufacturing gauge based on a survey of purchasing managers in the 17-nation eurozone rose to 49, a six-month high, from 48.8 in January, the London-based Markit Economics said on Thursday. That's in line with a preliminary estimate on Feb 22. A reading below 50 indicates contraction.

Manufacturers may see waning sales growth as EU governments toughen spending cuts just as global demand weakens. Europe's economy may struggle to gather strength after shrinking in the fourth quarter as governments from Italy to Greece step up budget cuts, undermining hiring and consumer demand. While crude-oil prices have increased about 23 percent over the past year, companies may find it difficult to raise prices in coming months, economists said.

"Oil-price developments will be a key factor in future eurozone consumer-price developments," Howard Archer, chief European economist at IHS Global Insight in London, said before Thursday's reports."But the likelihood remains that weakened economic activity and high and rising unemployment should generally limit underlying price pressures," he said.

The eurozone economy may shrink 0.3 percent this year after expanding 1.4 percent in 2011, the European Commission said on Feb 23. While Germany's economy, Europe's largest, is seen growing 0.6 percent in 2012, the commission projected contractions for Belgium, Greece, Spain, Italy, Cyprus and the Netherlands. Rising energy costs threaten to further weaken the region's economy by sapping the purchasing power of companies and consumers.

Oil prices have increased in recent months on the concern that sanctions against Iran will disrupt supplies from the second-largest producer in the Organization for Petroleum Exporting Countries.

Ewald Nowotny, a council member at the European Central Bank, said at a conference on Tuesday that "disturbing developments in the Middle East" could fuel eurozone inflation. "That could make life a bit more difficult," he said.

The ECB cut borrowing costs twice in the fourth quarter, bringing the benchmark rate to 1 percent, matching a record low, to bolster the economy. The Frankfurt-based central bank will publish its latest inflation projections when council members meet on March 8. In December, it forecast that inflation will slow to 2 percent this year from 2.7 percent in 2011.

The statistics office is scheduled to release a breakdown of February consumer prices later this month. Core inflation, which excludes volatile costs such as energy, in the eurozone slowed to 1.5 percent in January from 1.6 percent in December.

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About the Author: Air Max see http://www.articlesxpert.com/authors/jordan%20Mc/, or http://goarticles.com/article/EU-inflation-rising-

MARKETS HINGE ON GREECE, MARCH 8

Greece Needs Money to Avoid Default, But Complications Arise

Europe's financial issues have all the ability to gravely effect U.S. propositions. We have witnessed in the past, starting just last December, a stable climb in equity values. This climb is certainly coincident with the European Central Bank's (ECB) release of billions in loans to European banks. Not only a form of quantitative easing, but in reality a thawing of frozen European bank liquidity.

Presently, equities are moving sideways or otherwise stalled—as if they hold suspense in whether an economic shoe will drop. Certainly such is the case. For Greece; its debt, the exposure of this debt to world banks, and credit default swap parties, all swing in the balance, only for all to wonder of net losses.

Firstly we have Greece's need to reduce its debt. Aside from simply cutting its fiscal budget, the call is for Greece to reduce its sovereign bond payments. To make the reduction, private bond holders have been identified as targets. Where the taxpayer supported ECB has negotiated an exemption from loss, private bond holders will take a loss. Private bond holders are primarily composed of European banks, tied to international money like Lehman.

Cuts to bonds are 53.3% of face value, as negotiated by the International Institute of Finance, lead negotiator for the private sector. A 53.3% reduction in outstanding bond payments (or redemptions) comes from an effort of Greece to cut its fiscal budget, on the debt side, by 170B euros. Cuts to bond payments are demanded by the Eurozone for Greece to receive its second round of bailout money. Greece needs a second bailout, of real cash, by March 20.....to make a 14.5B euro bond payment.

Who Wants to Take Half Off Their Investment

Cutting Greek bonds by 170B euro seems fairly expected and anticipated. Greece's fiscal budgetary cuts, however, are still very slippery and hard to hold. Currently, the goal is to see if the 53.3% cut in bond asset value will be accepted by private bond holders. The agreement due date for private bond investors is March 8.

Greece is hedging its own participation in bond reductions by saying that if 90% of bond holders don’t agree to stated cuts, it’s not obligated to continue with the plan. Big questions remain in an event bond holder participation is in the 75% to under 90% range. Should such a range develop, Greece says it will consult with the public sector.

Naturally, the glitch is that private bond holders aren't really excited to lose 53.3% off the top of their investment. Add to it lost interest over the period of the bonds, and some say 70%. For large investors, these issues are why credit default swaps (CDS) are purchased. 

 A CDS is simply insurance purchased against loss on an investment. Should a bond issuer default (Greece), the CDS pays a negotiated percentage of the purchase value of the asset. CDS platforms get the asset and you as purchaser get the negotiated payment.

 A key event that leads to CDS payment is default. Defaults are called credit events. A credit event can occur when one creditor is given payment priority over another creditor....subordination. Another credit event can occur when a majority of creditors take a reduction in payment or terms of payment, involuntarily.

Credit Default Swaps Could Cover the Losses

Looking to lose money, obviously anyone bondholder will get curious about their insurance policy. Curiosity is addressed to the International Swaps and Derivatives Association, which monitors CDS's. Because CDS's are essentially insurance policies, CDS questions are analyzed according to contract law.  This means that if certain terms are not addressed in the CDS agreement, they will be addressed by Agency interpretation, rules, statute, or court rulings. In the end, there are no statutes, rules or court decisions. Which leaves agency interpretation as the law.  

Euro bond holders asked two questions of the ISDA about their CDS insurance:

1)      If creditors (bond holders) take a reduction in obligated payments on a bond versus the ECB not taking a reduction, is that a subordination? That is, where private investors take a cut in principle, but the ECB’s principle is the same, is that a subordination.

2)      If creditors submit to a bond cut of 53.3%, in numbers sufficient to bind all creditors, (2/3 of bond holders of record based on the Collective Action Clause), does that result in a credit event (default)?

Maybe Credit Default Swaps Work, Maybe Not

The ISDA answered both questions saying no credit event is implicated at this time. For the ECB question, ISDA officials said documents addressing the 53.3% bond reduction mentioned no subordination. Though in reality it’s a subordination of creditors to other creditors, it’s not according to the ISDA.

Binding all bondholders through the Collective Action Clause is another issue. The Collective Action Clause is a product of legislation recently passed by Greece having retroactive effect. It requires that once 2/3 of bond holders agree to a measure, such measure can be treated as a collective act, and imposed upon all bond holders. It’s akin to collective bargaining, and its associated laws.

Should the Collective Action Clause be enforced by Greece, the bond reductions will not be voluntary at that point. By implication of the ISDA’s decision, such enforcement of the clause by Greece will be a credit event triggering CDS payments.

Bottom line: 1) Greece needs a second bailout of 130B euros to make a March 20 payment on bond redemptions of 14.5B euros. 2) Greece needs to cut 170B euros of debt and the Eurozone expects it to come from private bond holders. 3) The International Institute of Finance negotiated at 53.3% reduction on behalf of private bond holders. 4) March 8 is the due date to see if private bond holders will take the voluntary reduction. 5) Should 90% of private bond holders not accept the reduction, Greece will have to make a move against public entities holding their bonds. 6) Should the Collective Action Clause be invoked, or Greece not meet the demand of cutting 170B euros, a credit event is likely and will trigger CDS payments.

Success for this plan hinges on March 8, and whether private bond holders participate to the tune of 90%.



COSTCO RESULTS SHOW A MAGNITUDE OF COMPETITION

COSTCO SHOWS EXCEPTIONAL SUCCESS WITH CONTROL OF COSTS

 

 

Aside from GDP and Durable Goods orders, yesterday also saw the release of the ICSC-Goldman Store Sales report. This report monitors the weekly and yearly same store sales at major retail chains. For the week of February 25, sales declined -1.0% resulting in a year over year gain of 2.7%. Last week, the numbers showed a 3.0% weekly gain with the yearly gain at 3.2%.

So far this year, the ICSC-Goldman report shows bouncing weekly figures and a yearly figure that can’t seem to sustain above 3%. Drawing from such results is a lingering weakness in the nondurable goods portion of the GPD commented upon here in “GDP, Durable Goods, Finding Business Cycles.”

Also reporting yesterday was Costco. When macroeconomic conditions are difficult for retail, some companies compete better than others. Recently, in “Target Corp.: Shop There, Invest There?”, I looked at Target’s operations in this challenging environment. Where Target’s sales increased by 3.3%, profits fell by 5%. A phenomenon apparently associated with Target’s model of increasing prices, increasing operational costs, and reduced traffic.

 

 

Costco offers a counter view where they keep prices low, control operating costs and make money. They also increase their same store sales (stores open for a year or more) results at impressive rates.

COSTCO’S EXCEPTIONAL COST MANAGEMENT, AND VALUE TO CUSTOMERS

 

What is remarkable about Costco is their control over operating costs. While SG&A expenses tend not to be that flexible or dynamic as a general matter, Costco can adjust this expense item to parallel sales.

  

Looking at Costco’s income statement reflected on the table to the left, one is again reminded of a good way to read operational efficiency. Once pointed out on this site is the metric Walmart identifies in its SEC filings.

According to the metric, one looks firstly to see if a company is controlling operating expenses such that net sales exceed operating expenses. Then, is the company growing operating income (EBITDA) faster than net sales.

Throughout Costco’s income statement, one can see an uncanny ability to control operating expenses. Starting with, for example Q1 2011, sales fell by -20.25%, but SG&A costs fell by practically an almost equal amount. That being  -19.16%, a rare occurrence anywhere.

Q2 and Q3 were nearly identical quarters with all things essentially even. The surprise is that after sales dropped by -20.25%, sales then ticked up by 7.19%. Against a deep sales drop and deep rise rise, SG&A grew at a meager 2.58%.

 

A constant with Costco is dropping SG&A expenses when sales drop. Even if the sales drop is deep, Costco has magically managed to equally drop operational costs….sequentially. When Costco finds increased sales, their habit is to suppress operational expense below their increase in sales. A very good thing.

Certainly Costco's results meet a first criteria of operational efficiency. When increases are being realized in food and fuel, Costco can manage the overhead and bring value to the customer.

What about increasing operations' income at a faster rate than sales? In today’s environment, such a metric betrays increasing costs, witnessed through nearly all companies. When cost of goods or materials impinge deeply on margins, raising operating income faster than sales takes a shadow to managing rising costs of goods and materials. Costco has recognized this and moves well through its course.

Margins for Costco might be slim, but they have stability. Costco’s margins are stable due to a stable business model of actually passing savings onto the consumer. Like Walmart, Costco delivers value. Unlike Walmart, let alone Target, Costco has a method of controlling operational expenses rare to  be witnessed through business.

MEMBERSHIP HAS ITS VALUE

Given commentary on Costco, we have the membership aspect to consider in this analysis. It brings money to be sure, but at a rate that increases Same Store Sales, revenue and the ability for a consumer to add value to any purchase versus other stores.

In 2011, Costco grew their membership into a major means of organic growth, in keeping with the past.

Quarter over quarter (read left to right), the side table, based on SEC data, shows that Same Store Sales are growing faster than actual numbers of members. Moreover, membership fees are rising faster than the actual numbers of membership growth.


Basically, data shows sales increasing from existing members. At the same time, the rate of increase in membership fees have slowed, while the rate of actual member numbers have slowed…..ALL against a strong organic growth in sales.

In the macroeconomic environment, Costco is dynamic and fluid. Very capable of returning value to investors, who can take comfort in Costco’s stable performance.