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Monthly Archives: March 2013

German Business Confidence Unexpectedly Falls

“German business confidence unexpectedly fell from a 10-month high in March as Cyprus inflamed the euro region’s debt crisis.

The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, declined to 106.7 from 107.4 in February. That’s the first drop in five months. Economists predicted a gain to 107.8, according to the median of 42 forecasts in a Bloomberg News survey. In France, industrial confidence was unchanged this month.

With the European Central Bank threatening to cut off emergency funding for Cyprus’s banks unless it agrees to the terms of a European Union-led bailout, the tiny Mediterranean island has re-ignited concerns about the euro and roiled financial markets. Still, German investor sentiment unexpectedly rose to a three-year high this month and the Bundesbank said the nation’s economic recovery remains on track.

“While the decline in confidence is certainly a damper after the recent surge in optimism, the scenario of a moderate recovery gradually picking up speed in the course of the year hasn’t changed,” said Heinrich Bayer, an economist at Deutsche Postbank AG in Bonn. Uncertainty around Cyprus may weigh on the outlook for companies, “but it probably won’t have any real consequences for the German economy,” he said.

Executives’ Expectations…”

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Merkel Upset That Cyprus is Not In Contact With the Troika

German lawmakers from Chancellor Angela Merkel’s coalition criticized the handling of Cyprus bailout proposals before the parliament in Nicosia began to debate them, deepening a standoff days before the deadline for a cut in ECB funding.

Merkel told a closed-door meeting of legislators in Berlin today that she’s annoyed the Cypriot government hasn’t been in touch with the so-called troika of international creditors for days, according to a party official who spoke on condition of anonymity because the briefing was private. Cyprus’s decision to test Europe is unacceptable, she told them.

“We’re not ready to accept solutions that are full of wind,” Michael Fuchs, deputy parliamentary leader of Merkel’s Christian Democratic Union, said after the meeting. “I don’t think it’s appropriate to play poker in this matter, especially when you think that there’s a risk that two banks will become insolvent next Monday.”

European patience with Cyprus is running out as Cypriot lawmakers consider proposals to unlock bailout funds and prevent a financial collapse. They rejected a proposal to tax bank deposits hammered out last weekend by the 17 euro-area finance ministers. The European Central Bank, which makes up the troika along with the International Monetary Fund and the European Commission, issued an end-March 25 deadline for a deal before it cuts off emergency funding to the nation’s lenders.

‘Slipping Away’…”

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Aussie Dollar Risk Hits a 13 Year Low as Central Banks and Money Managers Bid on Weakness

“Expectations for price swings in the Australian dollar are near the lowest in almost 13 years relative to major currencies, as central bank purchases of the so-called Aussie damp its sensitivity to political turmoil.

Implied three-month volatility on the Australian dollar, a measure used to price options, fell to 7.20 percent as of 4:21 p.m. in Sydney, the lowest level this week, data compiled by Bloomberg show. The JPMorgan Group of Seven Volatility Index climbed to 9.52 percent, a three-week high. Aussie volatility was 2.43 percentage points less than the JPMorgan gauge on March 19, the widest discount since March 31, 2000.

Central banks buying Australian dollar debt have helped drive the currency’s record eight-month stretch above parity with the U.S. dollar. The Aussie has climbed 0.2 percent this week to $1.0427 and reached $1.0459 yesterday, the strongest since January. Prime Minister Julia Gillard held on as leader of Australia’s minority government, winning the second challenge in a year, while an impasse on Cyprus curbed global risk appetite.

“The Aussie has been attracting really good demand on dips from real money accounts and reserve managers, attracted by the highest yields among a shrinking pool of AAA assets worldwide,” said Sue Trinh, a senior currency strategist at Royal Bank of Canada in Hong Kong. “There’s not enough of a policy difference between the two sides to see the Australian dollar react to the political shenanigans.” …”

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Kuroda Vows He “Will Do Whatever It Takes” to Maintain 2% Inflation Target, Nikkei Still Tanks Over 2%

“March 22 (Bloomberg) — Bank of Japan (8301) Governor Haruhiko Kuroda said he’s confident in achieving a 2 percent inflation target, rebutting doubters who predict his efforts will fail as he prepares to strengthen monetary stimulus.

“We will do whatever we can to achieve the 2 percent price target at the earliest time possible,” Kuroda said yesterday in his inaugural press conference after taking the helm of the BOJ this week. Kikuo Iwata, one of two new deputies, told reporters the bank should commit to achieving the goal for consumer-price increases within two years….”

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What Will it Take to Drive Interest Rates Higher ?

“There is an interesting paradox at work as central banks suppress interest rates.

Correspondent Mark H. recently asked: “What is your take on what the outcome will be if/when interest rates start rising?” Let’s break this excellent question into two parts: 1) what might cause rates to rise, and
2) what consequences will likely result from rising rates/yields?

There are two articles of faith in the central-bank religion:

1) We can keep interest rates near-zero for as long as we deem necessary, and

2) We can suppress inflation at will, too.

The question is: can they do both at the same time for as long as they wish?

If either interest rates or inflation (and they are correlated) start rising, the central banks’ claims of control evaporate.

There is an interesting paradox at work here:

The only way central banks can keep interest rates low is to buy the bonds issued by their respective governments, i.e. monetize the sovereign debt. They do this by creating money out of thin air, i.e. expanding their balance sheet with government bonds and other debt instruments such as home mortgages.

Theoretically, the Federal Reserve could continue to artificially suppress rates by expanding its $3 trillion balance sheet to $30 trillion.

Since there is an unlimited buyer for low-yield bonds (the central banks), there is no market pressure for higher rates. Why raise yields when you can sell trillions of dollars of low-yield bonds to the Federal Reserve, Bank of Japan, etc.?

By buying the new debt with newly created money, the central banks have marginalized the market’s ability to transparently price risk and credit: the bond market has in effect been captured by the central banks, who can counter any reduction in demand with newly created money.

But the central banks don’t control where all this newly issued money goes. If it goes into the real economy, it triggers inflation; if it goes into assets, it inflates asset bubbles.

Inflation and bubbles have consequences. Inflation eats away at the purchasing power of wages, and since interest rates are already near-zero, the central banks’ game of enabling lower payments by lowering interest rates has run out of room. Once inflation kicks up, the central banks will not be able to fight it except by raising rates, which will quickly choke off consumer spending and the auto and housing markets.

If the central banks keep pumping money into asset bubbles, they are playing with a ticking time bomb, as every asset bubble in history eventually pops: the bigger the bubble, the more spectacular the implosion. The more the central banks inflate assets, the deeper the eventual crash.

Inflation and asset crashes share one characteristic: they undermine the credibility of the central state and central bank. The Federal Reserve and other central banks have claimed monetary omnipotence for years, and they have staked their credibility on keeping inflation and interest rates low and boosting the prices of assets such as stocks and bonds.

Higher rates undermine both stocks and bonds. Every existing bond loses market value as rates climb, and the reason to own a stock paying a 2% dividend fades rather quickly when bonds start paying 5+%. Needless to say, rising rates that choke off consumption won’t be positive for corporate profits, either.

In other words, the central banks can’t have it both ways. If they keep printing money (expanding their balance sheets), the new money will go somewhere. If it goes into the real economy (no sign of that yet), the flood of new cash will spark inflation in at least those resources and goods where labor costs are not the primary factor (oil and agricultural commodities, for example).

Since labor is in over-supply (see How I Became a Trillionaire (and Some Thoughts on Inflation), this will not be the sort of inflation where wages will rise along with the cost of goods and services: wages will continue to stagnate as costs of essentials rise. That is a recipe for stagflation and recession.

If the flood of central-bank money continues flooding into assets, eventually it chases essential commodities such as oil and grain, sparking inflation via the back door, not from supply-demand issues but from money-printing-driven speculation.

All the central-bank inflated asset bubbles will pop, impoverishing those who gambled with debt (margin) and triggering yet another financial crisis….”

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Time to Celebrate: Synthetic CDOs Return to Wall St.

“Japan swore off nuclear weapons for generations after the bombings of Hiroshima and Nagasaki. Wall Street’s memory vis-a-vis weapons of mass destruction is just a bit shorter.

Ladies and gentlemen, whether you like it or not, the synthetic collateralized debt obligation (CDO) is making a comeback, Bloomberg reports. The numbers are small so far, and the bets being made with them appear to be sober. But that’s always how these things start out.

What on earth is a synthetic CDO, you likely ask? It is a side bet on a bunch of side bets on somebody else’s debt. First you take a bunch of corporate bonds. Then you write insurance protection on those bonds, in the form of derivatives called credit default swaps. And then you jam a bunch of those credit default swaps together into a toxic meatball called a synthetic CDO, on which you can also bet as much money as you like, assuming you have any money, considering you are the kind of doofus who bets money on toxic meatballs.

These have absolutely no economic value, aside from enriching the bankers that sell them and maybe giving investors a way to make an extra buck. And they are potentially disastrous, depending on how they’re filled: These were among the derivatives that helped nearly bring down American International Group and the financial system less than four years ago. Now, with investors hungry for anything that offers the slightest bit of yield, these derivatives are making a comeback, which I’m sure is totally fine, because Wall Street has of course learned its lesson.

So far these things are only being sold to hedge funds; they’re not getting credit ratings or being sold to investors the way synthetic CDOs were during the crisis. The filler in the meatballs so far are corporate bonds, not subprime mortgages. And we’re not talking about a bunch of money here, yet. Synthetic CDOs on about $2 billion in debt were sold last year, Bloomberg writes, citing Citigroup data, and CDOs on another $1 billion have been sold so far this year.

And those totals overstate the total amounts actually being wagered on CDOs, Felix Salmon points out — they’re what’s known as “notional” amounts, or the total of the underlying debt on which investors are betting.

If you’re betting on the default of $100 million in bonds, for example, you don’t have to bet $100 million. You can just bet $1 million. So far, the amounts being bet in the synthetic CDO market are pretty tiny….”

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Credit Suisse Says Corporate Profit Margins WILL NOT DECLINE

“Here’s a contrarian view for you on the corporate profit mean reversion front.  Credit Suisse says profit margins are likely to stay high due to two primary factors – an accommodative Fed and a weak labor class:

  • Net income margins are unlikely to fall significantly until rates rise

50% of the improvement in margins has come from lower interest charges. We believe that the interest charge will not rise unless rates go up. Indeed, looking at the relationship between the corporate bond yield and the interest charge suggests that, if anything, the interest charge will fall….”

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Charting the Fed Action

“What’s Ben Bernanke thinking? With this series of charts, we’ll help to explain why the Fed left interest rates at near-zero levels and kept intact its $85 billion a month bond-purchase program….”

Full infographic article

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An App to Help You Invest Like a Billionaire

“The iPhone has made a fortune for Apple, and turned a handful of app developers into instant millionaires, but a new app aims to help average investors be more like Warren Buffett.

Available for download starting next week for $1.99 a month, iBillionaire promises to let investors follow moves of a roster of 10 billionaire investors, such as Buffett, Carl Icahn and hedge fund poobah’s like John Paulson, David Einhorn, and Bill Ackman. The app will compare a user’s portfolio to—at least in a small way—see what the billionaires are doing and offer advice accordingly.

“When you get these 10 people together, there is a lot of insight,” says iBillionaire co-founder Raul Moreno. “They think alike.”

The Securities and Exchange Commission requires large investors to disclose their holdings once a quarter in so-called 13-F filings—the raw data used by the iBillionaire. The app then shows the holdings of each billionaire and charts how well the portfolios perform against the S&P 500.

When users can then plug in their own holdings, the app offers suggestions based on what the billionaires are doing.

iBillionaire is the product of a pair of serial entrepreneurs. Moreno, 29, previously co-founded Kinetik, an app recommendation service. His partner Alejandro Estrada, 44, is a co-founder of Dineromail, a Latin American version of PayPal, acquired last year by South African media company Naspers Ltd. NPSNY +0.57% .

Among the most popular stocks among billionaires are Apple AAPL -0.15%   and GoogleGOOG -0.18%  , each owned by four billionaires. Perhaps a bigger surprise: Delphi Automotive DLPH -0.67%  , an auto parts maker that emerged from bankruptcy in 2009, is held by five. And its stock is up 37% over the past year.

See: MarketWatch’s hedge-fund tracker

Investing like a billionaire isn’t necessarily as easy as winning at Angry Birds, however. These financial superstars get insight, sway over management decisions and trading opportunities not available to those playing along from home.

Just one example: Einhorn, one of the five billionaires that owns Delphi, was involved well before the company’s initial public offering, the first time small investors would have had the opportunity to buy….”

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Axel Merk: ‘Yen Is Going to Be Worthless’

“Japan stands on a path toward for victory in the global currency war, with the yen set to fall a long way, says Axel Merk, president of Merk Investments and a Moneynews contributor.

“The market will take the yen to [zero],” he tells the Financial Braintrust Alliance in an exclusive interview.

“That means the yen is going to be worthless. We published a piece last November whether the yen is doomed, with a question mark, and we’ve since removed the question mark.”

The dollar hit 96.71 yen March 12, its highest level since August 2009.

It pays to look at Japan’s political history to understand the yen, Merk says. “In the past, the yen was strongest the more dysfunctional the government was,” he explains.

“A dysfunctional government is a government that can’t spend money, a government that cannot exert pressure on the central bank [to ease].”

Editor’s Note: Put the World’s Top Financial Minds to Work for You

But now the government of Prime Minister Shinzo Abe is strong, with a two-thirds majority.
It wants fiscal stimulus. “So more spending,” Merk says.

Abe also seeks plenty of monetary stimulus, and he has a new Bank of Japan Governor, Haruhiko Kuroda, to implement it. “So there’s going to be more fireworks,” Merk says.

The country can no longer finance its massive debt – more than 200 percent of GDP – internally, he says. So, “Japan is going to be at the mercy of the markets,” he states.

“The policymakers don’t get that. They don’t understand it. So they’ll do their saber rattling, they’ll print a great deal of money.”

Put that all together, and “the dynamics for the yen have changed,” Merk says. “That’s why we think this [yen weakness] isn’t just a trend. Sure, there will be rallies. There might be violent rallies. But, in our view, there’s no way that the yen can survive this.”

Looking at the global currency war, governments should realize, “it’s not a path to prosperity when you debase your currency,” Merk says…..”

Full article and video


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Vanguard: Fundamentals Useless for Predicting Stock Returns

“Fundamentals — corporate earnings, profit margins and gross domestic product (GDP) growth — are supposed to be the ultimate guide for judging stock values and predicting the stock market’s direction.

But those fundamentals are useless when it comes to forecasting stock market trends, a Vanguard study concludes.

“We’re not saying fundamental factors don’t matter,” Roger Aliaga-Diaz, a study co-author and Vanguard senior economist, told CNNMoney.

The problem is that there are many other factors influencing stocks.

Vanguard economists examined the stock market going back to 1926 to reach their conclusion. Even the recent past shows the disconnection. Stocks jumped 16 percent last year, while corporate profits were up just 3 percent. European stocks surged 20 percent, while Europe was stuck a deep recession.

Earnings forecasts aren’t much help either, CNNMoney noted. Analysts are generally too optimistic, and their predictions are already priced into stocks anyway. Plus, they exhibit herd-like behavior, not wanting to be different from their forecasting peers.

Vanguard determined that the Shiller price-earnings (P/E) ratio, which uses average earnings over 10 years, is the best fundamental yardstick for predicting stocks, according to CNNMoney. That measurement currently predicts modest returns.

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Existing Home Sales Beat Expectations

“Existing home sales for February were up 0.8 percent month-over-month in February, to an annual rate of 4.98 million.

This missed expectations for a 1.6 percent rise to an annual rate of 5 million.

January’s reading was revised up to reflect a 0.8 percent rise in sales to an annual rate of 4.94 million….”

Full report

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Just How Bad Is Income Inequality ? America Likened to Cyprus

“Over the weekend the European Union agreed to a 10 Billion euro bailout of member country Cyprus’ banking sector, but imposed as a condition of the bailout a 9.9% tax on all bank deposits above 100K Euros.[1]

On its face and in the abstract, this proposal is a horrible way to bail out a bank and an ailing economy, as it violates rule #1 of financial bailouts, namely “avoid bank runs.”

Not only does the proposal guarantee every Cypriot bank will suffer a run by all its depositors as soon as they open on Thursday, but every bank in Southern/peripheral/wobbly Europe – Spain, Portugal, Greece – has to wonder whether their depositors will do the same in anticipation of future similar bailout terms imposed by the European Union, and Germany in particular.

The fastest way to achieve a run on banks in weak countries is to suddenly punish depositors for leaving their money in the bank.  Even to threaten to do so can create a self-fulfilling fear, one that leads quickly to bank runs.

The proposal also violates rule #1 of dealing with distressed banks, which is that depositors get treated better than bondholders. The European Union’s proposal to punish depositors – while bondholders suffer no losses – upends the traditional order of payment priority of bank liabilities.

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A Look at the Disaster That is Plaguing Europe

“The crisis in Cyprus is a good opportunity to take a step back and remind ourselves how incredibly broken the Eurozone remains.

For one thing, the whole reason the Eurozone has these sovereign debt crises is because while the countries share a common currency, they don’t share a common Treasury. So it is literally possible for a country to just run out of cash. That can’t happen in a country like the U.S. or the U.K., which are capable of creating their own money.

And then even beyond that, the single monetary policy isn’t helpful. The periphery needs much more stimulus, whereas Germany is worried (perhaps fairly) about bubbles, as everyone rushes cash into its borders. Plus, Germany has virtually no unemployment, so it sees no need for stimulative measures.

Economist and professor David Beckworth looked at the big picture on Monday, pointing out how the system needs some serious structural reforms to function properly.

One reform is to alter ECB policy so that it actually tries to stabilize nominal spending for the entire Eurozone, not just Germany. Since it inception, ECB monetary policy has been biased toward Germany at the cost of destabilizing the Eurozone periphery. This could be fixed by having the ECB abandoned its flexible inflation target and adopt a NGDP level target. Another complementary reform, would be to create meaningful fiscal transfers in the Eurozone similar in scale and scope to the United States. Both of these options, however, would face stiff opposition from Germany. For the former would require temporarily higher inflation than Germany desires and the former would require large fiscal commitments for the Eurozone from Germany. Neither is likely to happen.

The Eurozone made its first step towards a true structural reform last summer, when the ECB announced its “OMT” program, which begins to establish the central bank as a lender of last resort, backstopping governments that get into trouble.

That’s cooled the crisis a lot (reducing government borrowing costs) but the catch is that to be eligible, countries have to put on handcuffs (reforms, austerity, etc.) and that’s sent the economies of various countries right into the toilet.

Here, for example, is the unemployment rate in Italy.



That’s hardly an unusual looking chart.

Outside of Germany, pretty much every economic indicator in the Eurozone just gets worse and worse….”

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Gapping Up and Down This Morning



Symb Last Change Chg %
ASGN.N 25.66 +1.67 +6.96
WAC.N 35.00 +2.02 +6.12
AXLL.N 64.65 +2.56 +4.12
TPH.N 20.51 +0.78 +3.95
BFAM.N 34.76 +1.09 +3.24


Symb Last Change Chg %
SBGL.N 5.48 -0.36 -6.16
AGI.N 14.10 -0.53 -3.62
RH.N 34.75 -1.04 -2.91
RIOM.N 4.45 -0.09 -1.98
MODN.N 19.98 -0.32 -1.58



Symb Last Change Chg %
DGICB.OQ 28.01 +6.94 +32.94
OMPI.OQ 19.73 +4.34 +28.20
EGLE.OQ 3.15 +0.43 +15.81
STRS.OQ 16.53 +2.03 +14.00
DSKX.OQ 2.91 +0.30 +11.49


Symb Last Change Chg %
MXWL.OQ 5.91 -1.53 -20.56
LIVE.OQ 2.55 -0.60 -19.05
ATOS.OQ 10.58 -1.79 -14.47
EFUT.OQ 3.60 -0.59 -14.08
SPMD.OQ 4.32 -0.68 -13.60



Symb Last Change Chg %
FU.A 4.01 +0.29 +7.80
BXE.A 6.12 +0.35 +6.07
ALTV.A 10.32 +0.08 +0.78
ORC.A 14.30 +0.10 +0.70


Symb Last Change Chg %
SVLC.A 2.50 -0.06 -2.34
REED.A 4.39 -0.04 -0.90
AKG.A 3.52 -0.03 -0.85
MHR_pe.A 24.40 -0.19 -0.77
EOX.A 7.02 -0.04 -0.57

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