Financial market report for Monday April 30, 2012
Introduction: The roro trade, that is the risk on, risk off trade, terminated today, as risk appetite turned to risk avoidance, as investment worries arose over, contagion from the Spanish banking system downgrade, the level of sovereign debt at Spain’s banks, and reports showing that Spain has entered a severe recession.
Stocks trade lower …. momentum investing is an activity of a bygone era.
Mike Mish Shedlock writes Spain’s latest bad-bank, non-bank, shell-game proposal
And New Economic Perspectives relates Spain is the new Greece
Bloomberg reports ECB Loans Plant Seeds of European Disintegration. European Central Bank measures to stem the region’s debt crisis threaten instead to undermine the euro. ECB loans worth more than $1.3 trillion have been recycled into government bonds, capping borrowing costs. As Italy’s reliance on its local institutions increases and Spanish banks accelerate purchases of domestic government securities, however, the economic ties that bind the fate of euro members to each other loosen, weakening the incentives for cross-border support to defend the currency union. “As the local bond markets have become owned only by domestic institutions, there is less and less incentive for the other countries to support and bailout one of those,” said Stephane Monier, who helps manage more than $150 billion as head of fixed income and currencies at Lombard Odier Investment Managers. “Basically you’re planting the seeds for the disintegration of the euro zone.” (Hat Tip to Between The Hedges)
I comment that I have written extensively on this subject and rather than being a force for European disintegration, it is actually a force for integration as all debt is subordinated to the ECB, and soon the country banks will be integrated into each nation, for example Santender Bank, STD, will be known as Bank Spain or the government bank in Spain, and all banks will be unified, that is regionalized, by regional framework agreements announced by EU state leaders. Soon there will be a One Euro Government providing monetary policy and credit, and a One Euro Bank unifying economic transactions, and a One Euro Fiscal Union providing austerity.
The most toxic of bonds traded up to new highs, or up near their recent highs; these include Junk Bonds, JNK, Michigan Municipal Bonds, MIW, and World Treasury Bonds, BWX, as the US Dollar traded lower to 78.7. Bloomberg reports Bonds Prove Only Winners for First Time Since 2008 on Contagion Fears. For the first time since the start of 2008, bonds were the only investments to provide positive returns amid renewed concern the global economy is slowing and as widening deficits in Europe threaten contagion. Fixed-income assets — from Australian government debt to U.S. Treasuries to global junk bonds — gained 0.57 percent last month through April 27 including reinvested interest, according to Bank of America Merrill Lynch index data. The MSCI All Country World Index of stocks lost 1.1 percent including dividends while the Standard & Poor’s GSCI Total Return Index of metals, fuels and agricultural products fell 0.5 percent. The U.S. Dollar Index dropped 0.29 percent. “Concerns of an economic slowdown and renewed risks over Europe are the biggest drivers,” Anthony Valeri, a market strategist in San Diego at LPL Financial, which oversees $330 billion, said April 26 in a telephone interview. “There’s renewed concerns about Europe, and Spain in particular.” (Hat Tip to Between The Hedges)
Today, April 30, 2012, was the investor’s Waterloo, as stock buying momentum failed across the board, as the risk on trade, turned to a risk off trade, as investment angst rose over contagion spreading from the downgrade of Spanish banks, the load of Spanish sovereign debt at those banks, and on economic reports documenting that Spain has entered a severe recession.
Santender Bank, STD, -2.1%, led Spain, EWP, -.1.5%, Italy, EWI, -1.0%, and the European Financials, EUFN, -1.7%, lower; which turned the Too Big To Fail Banks, RWW, -1.3%, such as Bank of America, BAC, -1.7%, and Citigroup, C, -1.4%, lower, as well as turned the US Regional Banks, KRE, -1.6%, such as Regions Financial, RF, -2.0%, lower. World Financials, IXG, traded 0.5% lower. Brazil Bank, BSBR, traded 1.9% lower, turning Brazil, EWZ, 0.9% lower.
World Stocks, VT, -0.4%, the US Stocks, VTI, -0.5%, the BRICS, EEB, -0.5%, all traded lower.
Here is a Finviz screener of leading momentum stocks; these traded 1.1%, lower today.
Stocks fell as follows today:
China Materials, CHIM, -1.9%
Home Building, ITB, -1.7%
Small Cap Pure Value, RZV, -1.6%
Copper Mining, COPX, -1.2%
Steel, SLX, -1.0%
Health Care Stocks, IHF, -1.4%, seen in this Finviz Screener.
Banks, KRE, -1.2%
Value Stocks, IWN, -1.2%, seen in this Finviz Screener.
Retailers, XRT, -1.1%, seen in this Finviz Screener.
Biotechnology, XBI, -1.0%.
US Infrastructure, PKB, -0.8%, seen in this Finviz Screener.
Small Cap Technology, PSCT, -0.8%, seen in this Finviz Screener.
Large Cap, JKE, -0.7%, seen in this Finviz Screener.
Conclusion: Today April 30, 2012, was an inflection point lower in stock market value. Stock values will forever be falling lower. Wealth can not be preserved by investing in stocks. I recommend that one dollar cost average into and take possession of gold bullion, as well as a small amount of silver bullion for bartering.
The fiat money system has died on the inability of the world central banks’ monetary authority to sustain economic growth and trade, and now on the sovereign implosion of Spain and the implosion of the Spanish banking system, as investors divinest out of risk assets.
Spain is a vassal state in a fiscal union established by debt brakes affirmed by EU leaders; and Spain is a vassal state in a regional monetary union, where the ECB’s monetary policies have established itself as a regional sovereign authority.
The only thing that remains is for Euro zone leaders to announce regional framework agreements to establish a Federal political union for a fully coordinated region of global governance to emerge. Consent of the people will not be required. Spain’s fiscal spending cannot continue, even at the reduced levels called for by the government in its most recent announcements.
It is reasonable to expect a bank holiday and government holiday in Spain when Financial Armageddon, that is a credit bust and financial breakdown comes. There will be no Spanish Pesetas, no German D Marks, no Greek Drachmas, as there will be no Euro zone disintegration.
The fiat money system is history. It is reasonable to believe that the diktat money system will rise in Spain, just as it did in Greece. Soon, diktat will serve as both credit and money, in Spain and in all of the EU.
The Austrian Economics dream of a free market economy, one based on a standard that cannot be easily manipulated, is not going to happen. The diktat economy, with monetary cardinals acting under a monetary pope, and a budget commissioner, is the EU’s future. European financial institutions will be merged into the government and be known as the Government Bank or Gov Bank for short. The Euro zone will become a totalitarian collective; totalitarian collectivism is the EU’s future. Keynesian economic policies have pave the road to serfdom. Euroland will be a gulag of debt servitude.
European Socialism is going to the guillotine, and structural reforms, abolishing national wage contracts, will be announced by regional leaders, who will also announce a common economic and monetary policy, where monetary cardinals will provide diktat, for credit and oversight of economic production. European Socialism was a product of the Euro common currency and the global debt trade. Now regional global government will be the product of disinvestment out of stocks caused by the excessive use of credit of all types.
CNBC provided a debate between Paul Krugman, high priest of Keynesian economic policy and Ron Paul, bedrock of Austrian economic policy. Mr Krugman related that an “unmanaged economy” is subject to extreme volatility. Intervention has led to crony capitalism, and speculative investment in gold and silver mining stocks, GDX, which have suffered a tremendous disinvestment, with Hecla Mining, HL, being a case in point; this silver mining stock might actually be a good investment now that it has experienced great loss of value. And a 200% silver ETF, or a 300% sliver ETF, might be a good investment as well. In any event I recommend that one buy silver bullion for bartering; bartering will become common as fiat money has died.
Investors have taken flight from other natural resource investments, such as the wildcat energy companies, WCAT, and Canadian energy companies, ENY, and Canadian small companies, CNDA. Disinvestment out of copper mining companies, COPX, steel production companies, SLX, and semiconductor manufacturers, XSD, communicates that investors have forsaken growth stocks; and there has been a strong divestment out of India Infrastructure, INXX, and growth export trade dependent Sweden, EWD, and small cap South Korean companies, SKOR.
Keynesian intervention coming by Fed policy, US Government policy, and encourage of lenders, has led to the creation of unsustainable credit of all types, sovereign debt, housing debt, state and municipal debt, student loans, junk bond, automobile loans, revolving credit, etc, etc. The business cycle is finally complete. Economic expansion is turning to economic contraction, with increasing chaos being the order of the day.
For the last 41 years, 2012-1971, the interventionist monetary policies of John Maynard Kenes have governed the world through Milton Friedman providing the Free To Choose platform of floating currencies, which has debased the US Dollar, and stimulated inflationism through the policies of Fed Chairmen Alan Greenspan and Paul Volker.
The global debt trade trade, based upon the sovereign authority of stable and solvent sovereign nation states, created global growth and trade.
The global economic tectonic plates have shifted, with the first and second Greek bailout, as well as the market place becoming aware that Spain is an insolvent sovereign, and that its banks, are insolvent banks. The result is that roro momentum investing has stopped dead in its tracks. Inflationism is giving way to destructionism of every type: political, economic and investment.
The dynamos of growth and profit that powered capitalism and its fiat money system are winding down and the dynamos of regional security, stability, and sustainability, are powering up both regional global government and the diktat money system, where diktat will underwrite everything including credit and money.
Debt was used to create growth. But now the debt load is too great for government to cover and the economies to sustain. Unsustainable debt of all types in Spain, EWP, that is sovereign debt, the highly leveraged debt issued and held by Santander Bank, STD, the debt of independent regional governments, the debt of municipalities, household debt, business debt, student loan debt, has reached the point where it cannot be sustained.
Spain’s debts have pushed debt globally to the tipping point, where debt has become toxic to investors, causing derisking and delveraging out of every type of stock investment. The debt trade has turned to become the disinvesting and delveraging trade. Risk on has turned to risk off.
Momentum investing, practiced by the leveraged speculative investment community of hedge funds and investment banks is now an epitaph on the tombstone of a bygone era. The age of leveraging and risk investing, is history, and the age of delveraging and derisking has commenced.
Carry trade investing and margin investing, that came via the expectation of ongoing and helpful central bank monetary easing, is over.
Now disinvesting is causing political and economic tremors, that will result in Financial Armageddon, that is a credit collapse and financial system breakdown, where the new order of diktat, not democracy, will provide new governance and seigniorage, that is moneyness. Nneoliberalism is giving way to Neoauthoritarianism. The former featured wildcat finance, a Doug Noland term; the latter features wildcat governance, where leaders bite, rip and tear at one another, so only the most fierce top dogs rise to the top.
The seigniorage, that is the moneyness of the fiat money system, is failing as reflected in today’s market downturn. The seigniorage of the diktat money system is increasing as there are numerous reports from EU leaders for continued austerity. Moneyness, has been coming from the diktat of the EU ECB and IMF Troika, and the LTRO1, and LTRO2 tenders of the ECB. Moneyness from diktat will be ever-increasing. Diktat will be underwriting regional global governance.
The prophet Daniel foretold of this day, in Daniel 2:31-33, where he saw that the iron mastery of UK and US hegemony, will give way through creative destruction, to form a ten toed kingdom of regional global governance.
Regional framework agreements will produce regionalization, specifically ten world regions, that is ten toes of iron diktat and clay democracy, to govern mankind’s economic and political activity; such is the foreordained plan of God from eternity past. If you have a problem with that, then talk to the hand, that is the sovereign hand of God. His Son, Jesus Christ, has unraveled the first of the seven seals, Revelation 6:1-2, and has sent the first of four horsemen of the Apocalypse, to effect and install regional global governance, and to support the rise of the Beast regime of Neoauthoritarianism, Revelation 13:1-4, with its seven heads, symbolic of mankind’s seven institutions, and ten horns, symbolic of the world ten regions, to occupy and rule globally.
Bloomberg reports Economy face off: Ron Paul vs. Paul Krugman
Azizonomics writes in Zero Hedge Krugman, Diocletian & Neofeudalism
Graham Summers writes The Market Calls BS on Spain’s Efforts to Cover Its Toxic Banking Debt. In a previous article I began delving into the toxic sewer that is the Spanish banking system. At the root of the problem is the previously unregulated Spanish cajas or regional/ local banks which own as much as 56% of all Spanish mortgages.
To give you an idea of how bad things are with the cajas, consider that in February 2011 the Spanish Government implemented legislation demanding all Spanish banks have equity equal to 8% of their “risk-weighted assets.” Those banks that failed to meet this requirement had to either merge with larger banks or face partial nationalization.
The deadline for meeting this capital request was September 2011. Between February 2011 and September 2011, the number of cajas has in Spain has dropped from 45 to 17.
Put another way, over 60% of cajas could not meet the capital requirements of having equity equal to just 8% of their risk-weighted assets. As a result, 28 toxic caja balance sheets have been merged with other (likely equally troubled) banks or have been shifted onto the public’s balance sheet via partial nationalization.
The markets are well aware that this policy has only spread the toxic garbage, not fixed it. Case in point, take a look at the chart for Banco Sabadell which was merged with toxic Caja de Ahorros del Mediterráneo or CAM for short.
The merger increased Banco Sabadell’s size by 75% … and the market saw this as a good thing for a total of two weeks: shares are now down 30% from their merger levels.
Banco Popular, which acquired failing caja Banco Pastor, has experienced a similar fate, falling to a new low soon after the merger.
My point with all of this is that merging one garbage bank with another larger slightly less garbage bank doesn’t solve anything. The market knows this, which is why we see these banks continuing to collapse despite being merged.
Having addressed all of this, I firmly believe that no one, not even the Spanish Government has a clue how much toxic garbage debt exists in the Spanish banking system.
Moreover, it’s not as though the Spanish Government is heavily incentivized to come clean about the true nature of the Spanish banking system even if it did know the facts.
Case in point, the Government just admitted that Spanish banks will need another €29 billion in loan loss provisions yesterday, before revealing that “problem loans” for the Spanish banking system are now at an 18-year high of 8.15% (€140 billion of the total €1.7 trillion in loans within the Spanish Banking System).
Put another way, by the Spanish Government’s own admission (read extremely conservative estimate) nearly one out of every €10 leant out by Spanish banks is probably not going to be paid back.
And things are only going to get worse. Spanish citizens (at least those that have money) have been pulling their money out of Spain en masse: €65 billion left the Spanish banking system in March 2011 alone.
This flight of capital will result in higher leverage levels for Spanish banks (already leveraged at 20 to 1) and smaller capital buffers with which to address future losses.
Put another way, capital is leaving Spain at the very time when Spanish banks need it the most. Indeed, things have gotten so bad that the Spanish Government has limited cash transactions over €2,500.
Simply put, Spain’s banking system is an absolute sewer of toxic debts that no one, likely not even the Spanish Government or Spanish Central Bank, truly has a grip on.
The few facts that we do know are, 1) Total Spanish banking loans are equal to 170% of Spanish GDP, 2) Troubled loans at Spanish Banks just hit an 18-year high, 3) Spanish Banks are drawing a record €316.3 billion from the ECB (up from €169.2 billion in February), 4) The share prices of Spanish banks that were merged with cajas have broken to new lows.
None of this is good news at all. Especially when you also consider that … Spanish banks need to roll over 20% of their debt this year.
That’s correct, one fifth of all Spanish bank bonds need to be paid off or renegotiated in 2012. And this is happening at a time in which Spanish interest rates are rising. Indeed, the Spanish ten-year is approaching the dreaded 7%: the level at which Greece and other PIIGS sought bailouts.
The only problem is: Spain is far too big to be bailed out.
The short URL for this article ….. Stocks Trade Lower As Investment Angst Rises Over Spain’s Bank Debt And Economic Report … is