Massive QE is weakening their currency-by design by the BOJ. Falling Yen increases the costs of imports, currently growing faster than exports, and the closing of nuclear plants has caused a surge in energy imports. As a consequence, Japan's trade deficit (2013) was $113 billion, double 2012's deficit-after running surpluses for decades. Why is this important? Debt as a % of GDP is 250%. When Japan ran surpluses, they could self finance their budget deficits and debt with domestic savings and trade surpluses. Now that they are running trade deficits, there will come a time when they will need foreign capital to finance budget deficits. Well, foreign capital will not come in if the currency is in constant decline as it puts the principal as risk.
If foreign capital doesn't come in, then the BOJ will have to be the buyer of last resort-more QE. Too much QE, coupled with a falling currency is a self-reinforcing loop of higher inflation and a falling currency.
Rick Santelli of CNBC has an interview with a well traveled guy this morning. One of his stops was Mexico. Mexican officials told him that Japan Inc. is buying all it can in Mexico because they want to diversify out of their Yen risk. This is the start of the negative loop as capital leaves the country instead of staying in the county to invest to build export capacity.
At some point in time, when the market cares and wants to test Japan, there will be a tipping point. The gentleman Santelli interviewed thought the Yen could go to 200-300 to the $. If that happens, Japan blows up financially as interest rates will rise, making the debt unserviceable.
Putting these posts in bite size in case YHOO has continuing problems. So why is the ECB unable to sterilize?
1)Euro-zone banks have stress tests later this year, they are building cash in order to pass those tests
2)Euro-zone banks have been loading up on sovereign debt since the crisis. As a group think they may think they have enough and don't want to overwhelmingly own sovereign bonds
3)EZ banks may think, lack of progress on the solvency issues for many Eur-zone countries is becoming a credit risk
4)Maybe the ECB, knowing the capital shortage EZ banks have, stress tests coming up, negative private sector loan growth y/y since 6/12 is purposely being a buyer of sovereign bonds to re-liquify EZ banks to keep a financial crisis from happening.
Given my views that "liquidity" is not solvency, I think the markets will "test" the Euro-zone, just as it is testing the EMs. If I am correct, there will be another leg down in US stocks as a stronger $ will hurt corporate profits that come out of the Euro-zone and questions arise that some EZ sovereign bonds are not good credit risks.
If there is Euro-zone trouble, then the FED will have to ramp up QE, so it doesn't become contagion for the US. Just before the FED ups QE and just after, will be the time to buy stocks again. Until then, we may rally for a few days/weeks here and there, but those are rallies to raise cash.
4th attempt to post-YHOO having lots of problems. First of all the title should have been, "Which central bank will blink first?". I already have the answer. In addition, in all my reading/research etc, I have not read what I am about to post.
The ECB, in the 10 Tuesday's since and including 11/26/13 has failed to sterilize 6 of those 10 weeks-I have no data for today's (2/4) activity. Failing to sterilize is a back door way to increase Euro-zone bank reserves by accounting book entries-QE by another method and name. How much since 11/26? Approx, 223 billion Euro or about 22.3 billion Euro/week. So while the FED is tapering, the ECB is making up the difference and then some. Implications: Given the relative scarcity of $s in the future, by $20 billion/month, and the ECB's backdoor QE, if they continue at the current pace of 20+ billion Euro/month-the Euro should fall vs the $. For Euro-zone exporters that would be good news. On the other hand, for a foreign investor in periphery Euro-zone sovereign bonds, a falling currency puts principal at risk. Currency weakness is what started the sell-off of EM bonds/stocks flight of capital. Back in early/mid December the Euro hit $1.38/Euro, today is closed near 1.3515 a decline of about 2%.
So how will the "market" react when it learns and cares that the ECB is doing QE? The Euro-zone needs a weaker currency (strengthen exports) and inflation-at least if it increases nominal GDP to help service the increasing debt of its weakest members. But will a weaker currency #$%$ bond inventors first, forcing a sell-off of those weaker member sovereign bonds? If bonds start selling off, then EM events of January will hit the Euro-zone.
Which is having problems. Did some more research on my own question, Which central bank is going to blink? The answer is easy. The ECB. Unnoticed by the markets, and anything that I have read, the ECB has not sterilized its sovereign bond purchases 6 times, out of ten Tuesdays since 11/26/2013, since late Nov-to the tune of over 200 billion Euro or a rate of more than 20 billion Euro/week. Not sterilizing constitutes QE is a back door sort of way. In essence, with an accounting entry, the ECB has increased Euro-zone banks reserves by 200 billion Euro plus. Implications:
1)With the relative scarcity of $s, as a result of FED taper, and a huge increase in Euros-the Euro is going down. If the ECB keeps doing same at current rate, the Euro is going down hard
2)What is also shows is that Euro-zone banks don't want those sovereign bonds on their balance sheets even though they would pay interest vs cash. If EZ banks are getting liquid, loan growth will continue to be negative y/y and/or maybe they are worried about credit risk. EZ banks do have stress tests coming up later in the year.
That begs the question, if EZ banks are lightening up on sovereign debt, while the Euro is falling, who is going to buy those bonds? The ECB becomes the only buyer of size as US buyers shy away and perhaps become net sellers, because the principal is at risk do to a falling Euro. What happened to EM markets, in Jan, happens to the Euro-zone sometime later this year-my guess is the 2nd Q.
Strong $ vs the Euro means lower earnings from Euro ops for US companies. Lower oil prices, especially if the troubled countries in the Euro-zone bonds sell off. Then we get to the issue of, "liquidity vs solvency" and sets up a "deflationary financial event".
US stocks may rally for a couple weeks, but another leg lower is coming. When the FED fears contagion from Europe, then the FED will be forced to increase QE and the ECB will have to double its efforts. Then OK to buy
Today, 2/4, in a 8:01 AM article on Thompson Reuters, came a report that Draghi is seeking Bundesbank(German) approval to end sterilization. By the way the ECB meets later this week. If this report is true and the German's give there approval, then this is "backdoor" QE in the Euro-zone.
Two questions come to mind:
1)Will the ECB do this quietly, without fanfare to increase liquidity gradually-hoping it will increase loans to the private sector and "solve" solvency issues in many Euro-zone countries?
2)Will the ECB wait until a negative financial event to and/or will the Germans not approve until an financial event so QE implementation is without question and bold steps announced to the markets?
We will have to live into the answer. My take on the Germans, they will allow small doses, in coming weeks/months to "test" the process of implementation.
Other relevant news: Euro-zone banks have approx $3 trillion exposure to EM markets-about 12% of assets. US banks have 1/4 that amount. So, EM problems are big problems to Euro-zone banks-which are already capital short. Producer prices for the Euro-zone (Dec) came out today-down .8% y/y. With the CPI at .7%(Jan), several Euro-zone countries do not have sufficient nominal GDP to service their debt.
In summation, EM markets have been in the news. I believe Europe news(negative) will cause the 2nd leg down in US stocks-pullback greater than 10% in the broader averages. It will be time to buy, when the ECB goes big with QE or in their language-the end of sterilization.
Depending on how big the financial shock (deflationary event) is, the FED will have to taper their taper as well.
In recent days, I have read several articles, FED Reserve Bank of Atlanta one of them, identifying the issue I have been writing about for months. Many Euro-zone countries have not made progress on their solvency issues.
I firmly believe I'm ahead of the curve on this issue-just as I am on the slow down of the US economy. When the "market" picks up on the solvency issues of many Euro-zone countries-then the 2nd leg down of the market occurs.
Obviously, the markets are concerned with the very soft ISM(mfg) number today-51.3 vs expectations of 56. Also weak was construction spending up only .1% vs expectations of up .4%. Within the construction spending was non-residential down .7%, but more importantly down 1.7% vs Dec 2012. The market consensus was for this sector of construction to get stronger. Well not just yet.
In addition, all the housing data was weak last week-with Dec numbers down y/y greater than November's number down y/y. That suggests housing is accelerating its decline.
I agree she will and so will the ECB. I'm expecting, perhaps several months of "negative" news before both get dragged in to more easing-whether it be greater QE or some other programs. In the meantime, stocks headed lower.
The problem customer is SMT which was their largest. It is my conclusion that they are the one that dropped from $30 million in the year ago Dec Q to only $13 million for the just reported customer. Unfortunately for KTCC, in order to replace that business, they have had to add many smaller product lines. More customers with more products takes more people to service. That is why OpX is going from $4.15 million/Q to $4.6 million or so. Given that higher OpX, it will take about $90 million in Qtely revenue to get EPS to $.20+. As a consequence, KTCC may be dead money-unless they get bought out-until Aug when they report June Q results and give Sept Q guidance.
I look here once in a while. As far as KTCC, my view is similar to the recent past. I'm a buyer under $10 and a buyer of more under $9.50.
Spain, as an example of the issue between, "liquidity vs solvency". Today, Spain bonds are getting a bid because:
1)Money flowing out of EM markets back into Euro-zone and the US
2)Euro-zone inflation is trending lower
3)There has been some good news on the macro-econ in recent weeks
So, Spain's bonds are getting a bid-lots of liquidity
However, the underlying fundamentals are getting worse. Budget deficit, as a % of GDP, 2012=10.6%, 2013(est)=6.5%, 2014(est)5.5%. Debt outstanding in increasing.
What about the ability to pay? 2013 CPI up .3%, GDP for 2013 down 1.2%. So nominal GDP is -.9%. Interest costs, across the whole maturity spectrum is 3-4%. For a country to be able to afford its debt, nominal GDP has to be greater than interest costs-sustained. Spain is not even close. So, when the market decided to care-perhaps after it "feels" the effects of the next taper-should start by mid to late Feb-the issue of "liquidity vs solvency" will arise again for many Euro-zone countries.
Money that has been finding its way into the Euro-zone, in recent weeks, will come back to the US. US $ gets a bid, as do treasuries and stocks will sell off as earnings come into question.
Until central banks decide to re-accelerate QE or like programs, then general direction of stocks and GDP growth are down.
Personal income the last three months: Oct, Nov, Dec were -.1, .2 and flat. Where has the consumer gotten the money to spend? From reductions in saving, Dec was the 2nd lowest savings rate since 2007.
Bottom line, "robust" consumer spending of the 4th Q is not sustainable. In addition, top 1%'s will not feel as flush with the market going down, 20 and 30 somethings will be paying health insurance premiums for the first time and just about everybody will be paying higher utility bills.
The 1stH of 2014 is going to slow down from the 2ndH of 2013-S&P 500 earnings estimates will not be reached. In addition, there will be $110 billion less QE money in the financial markets as the FED tapered $10 billion in Jan. and is expected to taper, at least $100 billion for the 5 months Feb-June.
Money is coming out of the EM markets and coming back to the US and the Euro-zone. Once we see the reversal of the recent "good" news within the Euro-zone, that money will be exiting the Euro-zone and back to the US-forcing investors to question the "liquidity vs solvency" issue of many Euro-zone countries and banks. That will be the 2nd leg lower of US stock markets.
CL operating income down 5% y/y, yet the stock sells for 20X earnings. Just another example of a stock that is way over-valued. Should sell for 10-12X PE.
Forgot to mention.
Mike Jackson, CEO of AN, said today inventories of F, GM, and CHY on dealer lots are over 100 days-60 days is considered ideal
So, I would expect auto production will be lower in the 1st Q vs the 4th Q-to draw down those inventories. As mentioned before, housing is rolling over. Both industries, at the margin were responsible for job and GDP growth in 2013. I expect that to reverse in the 1st half of 2014.
Why is this "stuff" so important? Because the "consensus" opinion is to buy stocks because the economy is getting stronger. My observations are the exact opposite-1stH GDP is going to be weaker than expected. Today's buyers of stocks, along with the most optimistic of buyers in the recent past, will be sellers when their expectations are dashed.
Beware the "happy talk" about today's macro-econ #'s.
1)Headline GDP up 3.2%. However, when you look at the internals: inventories were way up $127.2 billion even more than the 3rd Q's up $115.7 billion
2)Reduced trade deficit was greatly helped by less import of oil and export of refined products-good for refiners but not a big net job creator. There is a measure of GDP called "final sales" and Final sales to domestic buyers. For the 3rd Q they were 2.5% and 2.3%. For the 4th Q they were 2.8% and 1.4%. So final sales to domestic buyers weakened in the 4th Q
3)GDP growth was boosted by a lower inflation assumption-PCE was .7 for the 4th Q much lower than the 3rd Q's 1.9%
4)Consumer spending was strong at 3.3% vs the 3rd Q's 2.0%, but at 3.3% is greater than income growth so not sustainable
5)Pending home sales down for the 7 month in a row and at a 2 year low. MBA buyer index (Wednesday stats) was down 12% y/y
6)UnClaims up 19,000 to 348,000 vs expectations of 330,000
MY conclusion is consistent with my prediction-there is a developing "inventory overhang" that will hurt 1st and 2nd Q GDP. In addition, job growth #'s will be lower than expected for the next few months, so Dec's #'s was not an fluke.
Stocks still way over-valued based on inflated earnings estimates that won't come to pass. Back in Oct, the expectation for 4thQ S&P 500 earnings was up 11.1%. Reports to date, 1/2 half that growth.
No, because central banks will be forced to ease sometime later this year. My guess is in the 2nd Q or early the 3rd Q. That will restore "order" but inflation will become a problem 12-18 months after that. It will be after that, when central banks will be forced to stop QE programs because of rising inflation, that the world will start to implode.
Why? Counties, companies and the consumer majority will be use to excess liquidity and artificially lower interest rates. As a consequence, they all took out debt. For all the #$%$ you hear about corporations having record amounts of cash, well net debt is up 15% since 2009. Countries have still been running large budget deficits and individuals are re-leveraging.
As central banks are forced to cut QE because of inflation, interest rates will rise, GDP will slow, defaults will increase-leading to a self-reinforcing negative loop. Eventually the US and other western countries will default on their debt, print money or cut spending by 10-20% per year over several years Unemployment will get above 20% in the US and the S&P 500 will go to 1/3 its high of this cycle.
Lower liquidity (FED and other QE programs) leads to higher interest rates, leads to slower econ growth, leads to previously good credits-under a high liquidity low interest rate environment-to turn bad and become non-performing loans. That will lead to a self reinforcing loop of lower GDP and more loan defaults.
These higher rates will be in countries that were the last in getting the excess liquidity that was provided by the FED. Four countries in the last week have had to raise rates:Brazil, India, South Africa and Turkey. We will soon see the weakest of the Euro-zone countries interest rates rise:Italy, Spain, Greece, Portugal, France, perhaps others-with the "lesson" that liquidity is not solvency.
The US will be the beneficiary of money flowing back to the US-the 10 year could get down to 2.40-2.50%. So, expect more of the same, once the emerging market "mess" hits Euro-zone countries, then the ECB and the FED will be forced to act by easing. Massive easing-more QE or the like- will restore order but it will:
1)Gold shoot up
2)Inflation will become a problem in 12-18 months
3)stocks should sell off until just before the massive easing
4)I expect the pain will go on until the 2ndQ or early the 3rd Q before central banks are forced to act
Asia, for the most part and US futures are rallying on Turkey's interest rate hikes. Fear of contagion over?
I don't think a sustained rally is the correct response. Western banks, mostly Euro-zone, have approx $350 billion loans in Turkey. Just how well are those credits going to perform with interest costs up 200-400 BPS overnight, coupled with slowing econ growth as a result of the higher interest rates.
Euro-zone banks are already in need of $100 billion Euro in capital. They aren't in financial positions to take huge losses. So, there maybe a relief rally, but the financial pain will come later in the year as non performing loans jump in Turkey. Ironically, of the Euro-zone banks, Greek banks have the biggest % exposure.
Turkey will be the "model" for the western world, in the next few years, as lower liquidity leads to higher rates, slower econ growth and increased non-performing loans. Credits that were once good, under low interest rate assumptions and decent GDP growth, will become bad-starting a negative feedback look into world depression.
W/R to ECA, going back to late Nov, the stock was $19.50+ and at that time very few industry analysts were expecting NG to get to $4.00. Now with NG around $5.00 and been above $4, just about every day since the 1st week of Dec, yet ECA trades about $2.00 or 10% lower. Same company, yet cash flow and EPS should be much stronger than expectations since late Nov.
Conclusion, ECA is getting stronger as they take advantage of spot sales and can sell forward at much higher prices than was thought of just two months ago. All the assets they owned two months ago, they own now. However, at today's NG prices those assets are worth more and cash flows are stronger. It is a sleeper.
Catalyst? Perhaps, if they get the correct price, ECA sells its Deep Panuke property for $1-2 billion. 1/2 the proceeds retires debt, 1/2 added to capX-accelerating production and EPS.