Today's Market Action Does Not Accurately Reflect The Real World Difficulties

April 2nd, 2012
in Gary's blogging, midday post


Today's market certainly does not accurately reflect the real world financial aspects in my opinion. For one, Greece has returned to the spotlight with more talk that another restructuring is on the way.

Greece Set To Default On Foreign-Law Bonds On May 15

Back in January, when we wrote "Subordination 101: A Walk Thru For Sovereign Bond Markets In A Post-Greek Default World", we said that "because while the bulk of the bonds, or what is now becoming obvious is the junior class, can be impaired with impunity (pardon the pun), it is the UK-law, or the non-domestic indenture, bonds, which are the de facto fulcrum security." In other words, from the very beginning the ball game was all about the non-Greek law bonds, whose indentures make it impossible for a non-makewhole take out settlement. Alas, we underestimated the stupidity of the European authorities who in their pursuit of a prompt if messy conclusion to the Greek restructuring, which ended up with a CDS trigger, were left with a tranching of the Greek balance sheet into a ridiculous seven classes, which crammed down the Greek law bonds into yet another separate class, an outcome which will shortly bite the European pre-petition sovereign market (i.e., Portugal, Spain and Italy) in the ass.

Follow up:


@telegraph: “The Greek economy will wither by 5pc this year and unemployment will hit 20pc, warns the think-tank IOBE. "We believe recession will be quite intense this year as well," IOBE head Yannis Stournaras told Reuters. “


For another there are bigger troubles that can come from Spain, which is currently struggling with a fierce recession. 

@telegraph: “Speaking on the eurozone unemployment data, Ranvir Singh, chief executive of market analysts RANsquawk, said:

The eurozone is being skewered by stubbornly high inflation and rising unemployment. Even ignoring the small matter of the debt crisis, the eurozone's fundamentals are once again looking increasingly sketchy.

In many of the 17, the numbers are conspiring to make economic output stagnate or contract. The increase in unemployment had been expected, and there was a sense of grim inevitability about these numbers. Unemployment in Spain has risen once again, even as the government in Madrid unleashed the most savage austerity cuts seen in a generation.

While in Spain there is a growing danger of unrest as popular frustration boils over at the new conservative government, even in buoyant eurozone economies, inflation is eating away at purchasing power. Any hope of consumers spending their way out of the dip has just faded further.

Italian unemployment figures are now out: unemployment rose to 9.3pc in February, from 9.1pc in January. That's the highest level since 2004. “

Simon Denham, chief executive of Capital Spreads, has commented on 2012 so far, and where he sees things heading from Q2 onwards:

There’s a high probability that the next European nation might become embroiled in the crisis with either Portugal needing another bailout or Spain and Italy, far bigger economies that those bailed out so far, suddenly fall off their tightrope.

The markets are being tempered by the fact that last week European leaders (sorry I meant Germany) have agreed to increase the bailout facility with a few extra hundred billion euros and that confidence surveys have not yet fallen off a cliff. China remains a crucial piece in the whole jigsaw and their PMI numbers overnight have given the market a little boost as we commence this second quarter.”

Lastly the US, cautious optimism remains the main theme of the recovery, which is “blamed” for good weather. Econintersect's Senior analysts have taken a closer look at this mornings ISM data on Construction and it isn't what it seems. General Mills say that YOY inflation input costs were actually higher by 2% 3% 5% 8% … 10%-11% (Read Here) and not what Dr. Ben claims is 2.9%.

February 2012 Construction Spending Is Up, Not Down

Media and Government sources say construction spending is down in February 2012.  This is a New Normal, and using seasonal adjustment methodology which includes the distortion of the recession will make you stupid.

US Census Analysis:

  • Down 0.1% month-over-month and Up 7.1% year-over-year

  • Market expected Up 0.5% to 1.0% month-over-month

Econintersect analysis:

  • Up 1.0% month-over-month and Up 7.9% year-over-year

  • Inflation adjusted construction spending Up 1.1% month-over-month – and up 3.4% year-over-year.

Construction spending (unadjusted data) was declining year-over-year for 47 straight months until October 2011. That was almost four years of headwinds for GDP. February 2012 is the fifth month of year-over-year construction spending expansion.


Here is another analysis from our esteemed crew.

ISM Manufacturing March 2012 Is Not Rosy

The headlines say ISM Manufacturing survey is up, yet the trends in the economic intuitive elements of the survey continue to show a “less good” trend.

The ISM Manufacturing survey index (PMI) improved from 52.4 to 53.4 in March 2012 (50 separates manufacturing contraction and expansion). This was above expectations to the market which expected between 52.0 and 53.0.

Econintersect's sees the new orders sub-index as having a higher and more precise correlation to recessions and the economy then the PMI overall. Although this subindex declined for the third month in a row, it remains solidly in expansion territory.

The three month trend shows the rate-of-growth is unchanged. Even the noisy Backlog of Orders -which also declined- remains solidly in expansion territory (backlog growth is an indicator of improving conditions).”

Written by Gary



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