Inflation Destruction Accelerates Turning Stocks Lower As Sentiment In Germany Turns Against The Periphery Countries In Advance Of The Competitiveness Pact Summit As Greece Gets Downgraded

Financial market report for Monday March 7, 2011

1 … Inflation destruction accelerates turning stocks lower
Seigniorage, that is moneyness, failed February 22, 2011, as the US Federal Reserve’s Quantitative Easing exhausted, as seen in the value of distressed securities held by the US Federal Reserve, exemplified in Mutual Fund, FAGIX, falling lower, causing world stocks, ACWI, to fall lower.  It was at this time Volatility, VXX, rose; volatility rose again today.  

Seigniorage continued to fail today, as exhaustion of quantitative easing accelerated, deleveraging  investment out of Manufactured Housing, CVCO, Uranium Miners, URA,  Semiconductors, XSD, Steel, SLX, Copper Mining, COPX, Gaming, BJK, Metal manufacturing, XME, Solar, KWT, Small Cap Information Technology, XLKS, Networking, IGN, Nasdaq 100, QTEC, Design and Build, PKB, and Agriculture, MOO. The fall in all of these ETFs documents that a bear market commenced February 22, 2011 in World Stocks, ACWI, the S&P, SPY, Dow, DIA, the New York Composite, NYC, the Russell 2000, IWM, and the Morgan Stanley Cyclical Index, $CYC.

The inflation trade leader, Hard Asset Producers, HAP, a last hold out of Federal Reserve seigniorage, manifested bearish engulfing, at the top of an ascending wedge giving evidence that the age of US Federal Reserve and European Central Bank seigniorage is over.

A new age of oil commodity moneyness has commenced, with the rise in West Texas Intermediate Crude, $WTIC, to over $100.    

The fall lower in Morgan Stanley Cyclical Consumer Goods Component, Ford, F, -3.0%, reflects that the world has passed through an inflection point, specifically passed from an age of investment expansion and into an age of investment contraction. And the fall lower in Morgan Stanley Cyclical Packaging Component, Temple Inland, TIN, and Paper Component, IP, gives further credence to the concept that the age of investment expansion is now over.

The chart of Hard Asset Producers, HAP, the Russell 2000, IWO, the Too Big To Fail Banks, RWW, the European Shares, VGK, the European Financials, EUFN, and Banco Santender, STD  …. HAP, IWO, RWW, VGK, EUFN, STD shows the beginnings of the loss of seigniorage coming to fiat assets.  Banco Santander, STD, has lost six percent over the last three days in front of the upcoming Competitiveness Pact Summit.

Morgan Stanley Cyclical Mining Component, Freeport McMoran Copper and Gold, FCX, broke down today.

Semiconductors, XSD, have entered an Elliott Wave 3 Decline.

Agriculture, MOO, entered an Elliott Wave 3 Decline.

Solar Stocks, KWT, -2.2%, are leading the world stock markets lower; these include GT Solar, SOLR, SunPower Corp, SPWRA, Trina Solar, TSL, LKD Solar, LDK,

The fall in DRAM manufacturer, Micron Technology, MU, communicates an end to profitable investing in chip manufacturing; some 52,601,798 shares traded today.

Semiconductor Equipment Manufacturers falling lower included Kulicke and Soffa Industries, KLIC, and Teradyne, TER.  

The fall in Allot Communications ALLT, suggests an end to profitable investing opportunities in networking and communications stocks.

The fall in a whole host semiconductors suggests an end to the seigniorage, that is the moneyness of the Apple Ecosystem; fallers today include Applied Materials, AMAT, Cirrus Logic, CRUS, and Atmel, ATML,

The chart of Taiwan Semiconductors, TSM, shows a fall lower in an Elliott Wave 3 Decline. The seigniorage of QE 1 came first to the Asian Tigers; it stands to reason they they and their electronic manufacturers would fall before their US counterparts. The fall lower in Taiwan Semiconductors, is a leading factor in driving the Taiwan, EWT, lower.

A broad spectrum of stocks traded lower today including:
Airline Supplier and Rehabilitator, BE Aerospace, BEAV; fell lower in an Elliott Wave 3 of 3 Down. It suffered inflation destruction in mid December together with the airlines.    
Nanotechnology Leader, FEI Co, FEI, fell from its rally high.
Iron Ore Producer, Cliffs Natural Resources, CLF, fell from its rally high.
Petroleum Refiner, Western Refining, WNR, commenced an Elliott Wave 3 Down.
Asset Management Company, Blackstone Group, BX, traded lower from its rally high.
Retailer, Abercrombie & Fitch, ANF, traded lower from its rally high.
Asset Management Company, Blackrock, BLK, traded lower from its rally high.
Consumer Discretionary Leader, Shutterfly, SFLY, entered an Elliott Wave 3 Down.
Copper Miner, Southern Peru Copper,  SCCO, sold terrifically off.
Semiconductor Equipment Manufacturer, Teradyne, TER, traded lower from its rally high.
Entertainment Stock Disney, DIS, traded lower from its rally high
Business Services, True Blue Inc, TBI, provider of manual labor help, entered an Elliott Wave 3 Down.
Retailer, Bed Bath & Beyond, BBBY, entered an Elliott Wave 3 Down
Automobile Dealer, Sonic Automotive, SAH, traded lower from its rally high.
Alpha Natural Resources, ANR, manifested bearish engulfing.
World Real Estate Excluding US, WPS, traded lower from its rally high
US Steel, X, entered an Elliott Wave 3 Down.
Potash Corp, POT, entered an Elliott Wave 3 down.
Russia, RSX, manifested bearish harami.
China All Caps, YAO, manifested bearish engulfing.
Diodes, DIOD, manifested bearish engulfing.

The small cap emerging market stocks, EWX, and many of those countries which served as stellar examples for quantative easing, that is poster investments of QE 1, fell lower today, witnessing the exhaustion of the quantitative easing stimulus and ongoing inflation destruction.

The turn lower in the Optimized Carry ETN, ICI, documents that risk appetite is completely gone; and risk aversion is now operating to deleverage investment out of formerly hot stocks. Some of that former money went into oil, USO, today.  

Silver, SLV, and Oil, USO, both manifested dark filled candlesticks, at the top of an ascending wedge; does this mean a temporary high is in for these?  

Turkey, TUR, perhaps the world’s former premier carry trade investment destination, traded 2.6% lower. I am not given to Schadenfreude. I genuinely fell sorry for the young and well educated people of this country as investment dollars are quickly departing this magnet of growth investing; they probably have little concept of what is happening and what is to come.  

Brazil Small Caps, BRF, Brazil Financials, BRAF, and Brazil, EWZ, traded lower today.

The Asian Tigers, South Korea, EWY, and Taiwan, EWT, entered an Elliott Wave 3 Down.

Japan, EWJ, and Japan Small Caps, JSC, fell from an Elliott Wave 5 high.

The fall in these stocks and countries is not debt deflation, rather it is inflation destruction.  Debt deflation is seen quite well in the 30 Year US Government Bonds, EDV, and the 10 Year US Government Note, TLT. When the US central bank announced that it is going to print money out of thin air and then actually did so, the bond vigilantes went to work, calling the interest rate on the 30 Year bond, $TYX, and the interest rate on the 10 Year US Government Note, $TNX, higher, resulting in a steeping 10 30 Yield Curve, and a flattening 30 10 Leverage Curve.

The US Federal Reserve’s monetization of debt has resulted in a tremendous loss of value in government bonds, as is seen in the chart of the Flattner ETF, FLAT together with EDV, and TLT …. FLAT, and EDV, and TLT.  The Feds actions have resulted in debasing the US Dollar, $USD, which in turn gave an explosive seigniorage and birth to oil, USO, as a premier currency, along with gold, GLD, and silver, SLV.

Another poster investment for QE 1 is India, INDY, its 2.3% fall today gives stark testimony to the exhaustion of Quantitative Easing. India Bank, HDB, is the poster investment for QE2. When charted with India, INDY, its fast fall since the announcement of stimulus, documents inflation destruction in this once hot investment … INDY and HDB.  India’s financial stocks are now taking the nation as a whole down.

The exhaustion of quantitative easing has been more severe on India Small Stocks, SCIN, than on India, INDY as is seen in the chart of INDY and SCIN.

The turn lower in Base Metals, DBB, reflects the death of the old seigniorage, that is the moneyness that came via Neoliberalism and the Milton Friedman Free To Choose Floating Currency Regime. Please notice the intensity of fall is greater in Material, XLB, then less in US Basic Materials, IYM, and now just picking up in the base metals, DBB. Speculators, that is the hedge funds, could hold on longer in the commodities than the investors in commodity stocks, before being dislodged by inflation destruction. The question now arises, will the rate of fall in the base metal commodities exceed the rate of fall in the stocks?      

The world small cap stocks, excluding the US, VSS, manifested bearish engulfing, at the top of an ascending wedge, giving a farewell to the age of fiat prosperity. The world is passing from ….. The Age of Leverage characterised by debt expansion, credit liquidity, stability, economic growth and expansion and prosperity …. and into  ….. The Age of Deleveraging characterised by inflation destruction, debt deflation, credit ill-liquidity, instability, economic contraction and austerity.

The failure of seigniorage and leverage is seen in the turning lower of world stocks relative to world government bonds, VT:BWX, and the turning lower of US stocks relative to the 10 Year Bond, VTI:TLT.  

Australian Miner BHP Billiton, BHP, manifested bearish engulfing. Will its fall mean a fall in the Australian Dollar, FXA, and a bounce up in the US Dollar, $USD? Possibly so.

The chart of the emerging market currencies, CEW, looks quadruple topped out; yes its chart clearly shows four highs.

It is most interesting that the emerging market currencies have traded so strongly, while the emerging market stocks, EEM, may have entered an Elliott Wave 3 Down today. The reason why the emerging market currencies have been strong is that the US Dollar, $USD, has been debased by Ben Bernanke’s QE 2. Emerging market bonds, EMB, rose to strong resistance at 105.98

Is the world now going to see a sell off in currencies other that the US Dollar, $USD, and the New Zealand Dollar, BNZ?  Perhaps so, as the Russian Ruble, XRU, the Mexico Peso, FXM, and the British Pound Sterling, FXB, traded lower today. Yes we are likely to see competitive currency deflation, that is competitive currency devaluation come to other currencies at this time as the FX currency traders expand their global currency war against the world central banks for control of the world’s people and resources.

One can create track these currencies FXA, FXE, FXM, FXC, ICN, FXB, FXS, SZR, FXF, CYB, BZF, XRU, FXY, BNZ, DBV, and CEW, using this Finviz Screener.

The Euro, FXE, closed at 139 today having risen from 119 in June with the announcement of the EFSF Authority. Might the EFSF Monetary Authority Rally be over? Possibly so.  

Given falling basic material stock prices, XLB, and given falling base metal prices, DBB, it would be reasonable to start to see BHP Billiton, BHP, fall and thus the Australian Dollar, FXA fall..  

Bloomberg reports: “The US dollar, $USD, (traded by the 200% ETF, UUP), may reverse declines that have seen the currency drop 3.5% this year after bets on its depreciation against its major counterparts climbed to the most on record, according to UBS AG. Bets on the dollar weakening, so-called net shorts, surged in the week ended March 1 to the highest since the CFTC began publishing the data in 2003. “Investors should prepare for possible unwinding of these negative bets against the dollar, which are extreme at the moment.”

This reversal in the US Dollar, $USD, seems consistent with the fact that the Currency Leverage Curve Daily, RZV:RZG, is now falling lower in its channel again; and that the Currency Leverage Curve Weekly, RZV:RZG Weekly, is now turning lower again for the second week.  

Beginning on February 22, 2011, and even more so today March 7, 2011, the paradigm, construct and matrix of Neoliberalism and the seigniorage, that is moneyness of the Milton Friedman Free to Choose currency regime has passed away; these are gone; they are history; and they stand as white washed tombs of a bygone era of credit liquidity and prosperity. Welcome to the age of austerity.

The world is living in a totally new construct characterised by monetary disorder and financial deleveraging, as the Seigniorage System of US Federal Reserve Central Bank Easing and Bank of Japan Carry Trade Lending of the last forty years has failed.

Leaders are quietly announcing Framework Agreements for both political order and state corporate prosperity. For example on February 4, 2011, The Prime Minister of Canada website released the Declaration by the Prime Minister of Canada and the President of the United States of America of a framework agreement for Perimeter Security and Economic Competitiveness. And also on February 4, 2011, The Prime Minister of Canada website released the the announcement of another framework agreement establishing The Bilateral Regulatory Cooperation Council, RCC. And Ireland was forced to take the EU and IMF bail-out package on November 22, 2010.

In announcing these Framework Agreements, the Leaders are waiving national sovereignty and establishing themselves as sovereign authorities; one is no longer a citizen of a sovereign nation state, rather one is a resident living in a region of global economic governance. The word, will and way of the leaders is sovereign replacing constitutional law as well as the traditional rule of law.

2) … Sentiment in Germany turns against the accommodating policies of the ECB in advance of the Competitiveness Pact Summit as Greece gets severely downgraded
EuroIntelligence reports in subscription daily briefing news affecting Europe, VGK, Italy, EWI and Spain, EWP:
“Germany is digging in on its opposition to allowing the EFSF to buy bonds on primary and secondary markets (This means that German wants the EFSF to buy bonds from the European Central Banks and not from banks or insurance companies)

“George Papandreou’s poll lead over the opposition is melting away, as Greeks turn hostile to austerity”

“ Colm McCarthy says Barroso’s and van Rompuy’s Competitiveness Pact fails to recognise the true origins of this crisis.”

“The business community has joined Germany’s academics in its total opposition to fiscal transfers, and in particular to bond purchases by the EFSF. The German business lobbies, including the powerful BDI industrial lobby, are also calling for an orderly state insolvency procedure. Frankfurter Allgemeine, which has the story, says the intent is to strengthen Angela Merkel’s negotiating position in this month’s European summits.”

“According to Reuters, Moody’s yesterday cited uncertainty about financial support under the ESM after 2013 and its implications for bondholders as a reason to cut its rating on Greek sovereign bonds by three notches to B1with a negative outlook. We are getting close to the bottom within the Moody’s junk debt scale, with Greek debt now considered as highly speculative. A further downgrade would bring Greece into the C-group of ratings – at which point the rating agency treats the country effectively in or close to default. Moody’s said yesterday in a press release that the likelihood of a debt default or a distressed exchange of bonds had risen since the last downgrade. “The fiscal consolidation measures and structural reforms that are needed to stabilise the country’s debt metrics remain very ambitious and are subject to significant implementation risks.” The Financial Times quotes Moody’s lead analyst as saying that the expectations for anti-tax evasion measures had already been quite low, and yet Greece managed to undershoot even those low expectations. Moody’s now has the lowest Greek ratings of all agencies. S&P’s rating is BB+, but warned last week that this rating, too, could be cut further.”

“FT Deutschland noted that the Greek rating was now below that of Egypt, and on the same level as that of Angola. The downgrade was a testimony how dangerous the euro crisis can still be at a time when political leaders had become more relaxed.”

“Frankfurter Allgemeine writes in a comment that Greece was a clear-cut case for a debt restructuring. Even if the Greek adjustment strategy went to plan, the country would be straddled with an extremely high burden of debt. But Athens, Berlin, and Brussels, in cohorts with the ECB, are serving the interests of the banks, by refusing to accept this.”

“El Pais notes that the European financial crisis is returning with full force as the markets have taken in the bad news of the ECB’s foretold rate increase, the downgrading of Greece, and Germany’s inflexibility. They quoted Daniel Gros as saying that the eurozone crisis was a slow-motion train wreck.”

“The Greek reaction to the decision was furious, and predictable. George Papandreou called the decision unjustified, and failed to take account of the Greek government’s programme of reforms, according to Kathimerini. The Greek finance ministry warned of self-fulfilling prophecies (but is that not something that people who are in such a process need to take account of?), and demanded that rating agencies need to be regulated. Reuters quotes Antonio Borges, the IMF’s European director, as saying that the IMF was confident about Greek debt sustainability, and urged more patience. It would take time for such programme to bear fruit.”

“After the downgrade, 5-year CDS on Greek sovereigns debt broke through 1000bp, while CDS for Spain and Portugal also increased, the latter now close to 500bp.”

Bloomberg reports Greek Debt Rating Cut Three Steps to B1 by Moody’s on Rising Default Risk.
“The cost of insuring Greek debt against default rose to a record after Moody’s Investors Service cut the country’s credit rating by three notches. The Finance Ministry in Athens called the move, which sent its rating to B1 from Ba1, “completely unjustified.” Moody’s said lagging tax collection and “implementation risks” would make it more difficult to reach budget-cutting targets in a 110 billion-euro ($154 billion) bailout. “The risk has materially increased of a default event,” said Sarah Carlson, Moody’s senior analyst for Greece, said in a telephone interview today from London. “Our central view is that the Greek government will achieve its objectives and it won’t need to impose losses on credits, but there are material risks to that outcome.” Credit-default swaps on Greece jumped 50 basis points to a record 1,036, according to CMA. The yield on 10-year Greek notes rose 11 basis points to 12.36 percent, the most in the euro region. The premium that investors demand to hold the bonds instead of benchmark German bunds widened 9 basis points to 907 basis points, the highest since Jan. 10. The outcome of EU summits this month won’t significantly affect Greece’s long-term prospects, Carlson said. “We did consider a range of likely outcomes, but really our concern is much more long term,” she said. “Whatever decisions are taken at the end of the month are not something that would change our long-term outlook.” The Moody’s decision “was hardly a surprise, but it did remind the market of Greece’s deteriorating finances, the high interest-rate burden they face along with the roll-over risk and potential need for restructuring,” said Charles Diebel, head of market strategy at Lloyds Bank Corporate Markets in London. “Greece at this point in time is in considerable trouble.” (Hat Tip to Gary of Between The Hedges)

Open Europe reports in daily email briefing reports Portuguese borrowing costs reach a new record high ahead of bond auction.
“Fallout from the downgrading of Greek debt continues with Portuguese borrowing costs reaching a record high of 7.65%.”

“With a crucial bond auction planned for tomorrow, this represents bad timing for Portugal. The Greek Finance Ministry reacted angrily yesterday, saying that Moody’s had focused “exclusively on the downside risks” while ignoring recent progress with fiscal consolidation. “Decisions such as Moody’s today can initiate damaging self-fulfilling prophecies”, it said. A leader in FAZ argues that Greece is in need of restructuring and with 3yr bond interest rates at 16%, the financial markets priced this in a long time ago.”

“The FT Alphaville blog covers a report by Credit Suisse which suggests that the correct ECB real interest rate for Germany would be 4.5% while in peripheral countries it would be -4.6%. The report also shows that Portugal, Spain and Ireland are most susceptible to a rate rise due to massive levels of private sector debt, much of which takes the form of variable rate mortgages.”

“The FT reports that in a speech on Monday, former Irish Prime Minister, John Bruton, accused British, German, Belgian and French banks of “irresponsible lending” which helped fuel the property bubble in Ireland. He added that the ECB “seemingly raised no objection to this lending” but that final responsibility still falls on Irish authorities.”

“FAZ reports that four major German business associations BDI, BDA, ZDH and DIH are worried that the permanent eurozone bailout fund could lead to “common debt through the back door”.” (This is termed collectivization of debt; also termed a back door debt union)

“The WSJ features contributions from four leading economists on the future of the euro, with the majority arguing for strong reforms and a focus on the banking sector.”
FT FT 2 WSJ Guardian El Pais El Pais 2 FT Money Supply FAZ Leader FT 3 EUobserver FAZ FT Alphaville Irish Times The Independent El Pais: editorial WSJ WSJ: Future of the Euro

3) Thoughts on gold
I believe that through out this week and at the end of this week counterparty risk will increase exponentially and liquidity will be sought everywhere. Some say this will cause a sell off even in gold, GLD. If there be a sell off in gold, I believe it will be minimal. I have recommended for years that one own and invest in gold bullion, and now I recommend silver bullion as well.

Martin Sibileau of a A View From The Trenches, relates: “In summary, we think there is no buying opportunity here and we even fear that gold may soon no longer resist the deleveraging forces at play, if Greece’s default becomes imminent, once the EU Council meeting of March 24-25 ends without clear resolution on the future of the EFSF. Indeed, if the situation deteriorates, counterparty risk will increase exponentially and liquidity will be sought everywhere. Gold would also be a victim.”

“We have already dealt here with counterparty risk in sovereign default swaps. This is something regulators have not addressed at all and is in fact the weakest link. Will we see it escalate in 2011? We have no idea, but we must be prepared and therefore, we briefly elaborate on it below/”

“When a bank sells a credit default swap on a sovereign within the Euro zone, say Greece, it promises to pay, if default occurs, par on the protected notional under the contract. But that notional is denominated in US dollars. As you can imagine, even if that default is caused by a strong Euro, at default, there will be a rush to USD liquidity, as those financial institutions that sold protection on Greece’s sovereign risk need to buy US dollars to deliver on their promise to pay. Therefore, the strength in the Euro that we currently see can swiftly turn into weakness, because in the presence of jump-to-default risk (i.e. right before the actual default.”

“Could this actually happen? It all depends on what the EU Council decides on March 24-25. Until then, in our personal accounts, we want to hold cash and gold. No stocks or bonds. Not even energy stocks or gold mining stocks, for they end with the word “stocks” and that will be enough for margin clerks to sell them (the case was made yesterday, as both gold and oil managed to make intraday highs and yet, the respective energy and mining stock ETFs sold off).”

“Lastly, it will be very useful to understand that for this to happen, it is not even necessary that the ECB actually hikes rates. In fact, we think there is a chance they won’t. However, with last week’s threat, the technical damage has been done.”

“Now, at this point, it should be clear that this counterparty risk will violently transform into systemic risk. Funding in US dollars, within the Euro zone will be limited, pushing Libor higher and leaving the Fed without a choice. The Fed will need to extend currency swaps to the European Central Bank. Why? Because at the end of the day, the ECB will have de facto renounced its monetary authority. The funds that Trichet refused to print on March 3 would eventually be lent, in multiples, by the Fed to European (and non-European) banks. Will Congress allow this? Until this point, gold would be under a lot of pressure. But it would soon become clear that the Fed cannot bail out the entire world and gold would then reach unthinkable highs.”

4)  In Today’s News
The New York Times reports rising costs threaten the future of the Nabucco gas pipeline project, intended to reduce the EU’s dependence on Russian energy supplies. “The part EU funded Nabucco project was originally budgeted at €7.9bn, but now could reach €14bn, according to estimates by BP, threatening to make the venture unprofitable.”

Handelsblatt Editor Thomas Hanke criticises the EU’s biofuel directive arguing “The use of wheat and corn for the production of biofuels has, according to a 2008 World Bank report, raised their prices by 75%, with fatal effects for the food situation in poorer countries.” …. Chart of Biofuels Weekly, FUE Weekly

Zero Hedge reports February $233 Billion Budget Deficit Largest Ever.

The Independent reports  Saudis mobilise thousands of troops to quell growing revolt

Election 2101 reports: Tea Party Candidates announce their campaign for the Presidency: “Herman Cain, a former chief executive at Godfather’s Pizza, and former Gov. Buddy Roemer of Louisiana made their debuts on the 2012 campaign stage in an evening that was broadcast live on C-Span. Herman Cain communicated his platform: “The United States of America is not going to become the United States of Europe — not on our watch.” And Mr. Roemer vowed to cap his campaign contributions at $100. He introduced himself as a “fighting outsider.”

The Times reports that more than 60 businesses in Galicia established Peseta seigniorage enabling pesetas to be legal tender again, in the hope of boosting the local economy.

Your article writer is not given to any sovereign individual philosophy; he has not received an invitation, and will not be attending the Austrian Scholars Conference, at the Ludwig Von Mises Institute, in the USA.

Keywords, Seigniorage, Moneyness, Framework Agreements, Failure of Seigniorage, Sovereign Default Counter Party Risk, Sovereign Crisis, Sovereign Debt Crisis, Inflation Destruction, Competitive Currency Deflation, Competitive Currency Devaluation, Global Currency War, Morgan Stanley Cyclical Index, Monetization of Debt,  Currency Debasement, Neoliberalism, Collectivization to Debt, Debt Union, Greek Sovereign Debt Default, Greece Debt Restructuring.