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.