The price of gold finished down by $5.20 to close the comex session at $1604.20. Silver was higher most of the day yesterday but succumbed to finish only 5 cents higher at $29.05.
In the access markets, here are the closing prices for gold and silver:
Europe and USA are printing their currencies with reckless abandon. Emerging countries are witnessing this as they are now using gold as official reserves. Gold is leaving London to satisfy their needs.
We will go into this in the body of the commentary, but first let us head over to the comex and assess trading, inventory movements and delivery notices. I will also bring to you the COT report which will give position levels of the parties with respect to gold and silver.
The total gold comex OI rose by 3922 contracts on Friday with the closing reading of 424,964. Please remember that OI is always 1 day back so we are really looking at the official closing of OI on Thursday night. It sure looks like the Jim Willie's discussion is correct where outside authorities are controlling the price of gold to levitate at around 1600 dollars where big interests are accumulating the metal and taking physical delivery at various loci around the world. The game plan is that these interests will sell their physical gold to sovereigns at 1900.00 dollars per oz as this is probably the real price of gold today. All eyes are on the front delivery month of December and we were quite surprised to see the open interest rise from 199 to 737 for a gain of 540 contracts. We had 31 delivery notices filed on Thursday so we gained a massive 571 contracts of gold standing. When you witness this near the end of the delivery process you could bet the farm that some entity needed physical gold in a hurry and raided the comex for that metal. Sure enough, the deliveries for Friday gold came in at 577 contracts. The next big delivery month is February and here the OI rose by a little under 2000 contracts to close out the week at 245,010. The estimated volume at the gold comex was extremely low at 45,360. The confirmed volume on Thursday was 103,882.
The total silver comex OI registered a slight gain of 795 contracts finishing the session at 102,225. The front delivery month of December saw its OI fall from 50 to 27 for a loss of 23 contracts. We had 21 delivery notices filed on Friday so we again lost 2 contracts or 10,000 oz of silver standing. It looks like silver is out of supply and Blythe must be offering lots of fiat to settle upon silver. She is having no luck in gold due to the huge interests in obtaining physical gold and no interest in receiving paper fiat. The next big delivery month is March and here the OI rose by about 400 contracts to 56,128. The estimated volume at the silver comex was as anemic as you can go: 10,263. The confirmed volume on Thursday was also extremely low a 22,636. It seems that everyone went home for Christmas and nobody wished to trade.
Inventory Movements and Delivery Notices for Gold: Dec. 24 2011:
Withdrawals from Dealers Inventory in oz
did not report
Withdrawals from Customer Inventory in oz
did not report
Deposits to the Dealer Inventory in oz
did not report
Deposits to the Customer Inventory, in oz
did not report
No of oz served (contracts) today
No of oz to be served (notices)
160 (16,000 oz)
Total monthly oz gold served (contracts) so far this month
Total accumulative withdrawal of gold from the Dealers inventory this month
100 exact oz.
Total accumulative withdrawal of gold from the Customer inventory this month
The comex folk must have given the boys off for Christmas as they did not report any gold or silver inventory movements. They also gave the boys off as there were no recorded bank failures.
The CME notified us that we had a massive 577 delivery notices filed early Friday morning for 57700 oz of gold. As I explained above, this gold will be used to put out fires in other jurisdictions. The total number of gold notices filed so far this month is a record at 22,005 for 2,2005,000 oz. To obtain what is left to be filed, I take the OI standing for December (737) and subtract out Friday deliveries (577) which leaves us with 160 notices or 16,000 oz left to be served upon. These must be served by Dec 31.2011.
Thus the total number of gold oz standing in this delivery month is as follows:
2,200,500 oz (served) + 16,000 (oz to be served upon) = 2,216,500 oz or 68.94 tonnes of gold.
If we add the 1.77 tonnes of deliveries in the "non delivery" month of November we get 70.71 tonnes of gold deliveries.
The total registered or dealer gold at all comex sites sits at 90.04 tonnes of gold
Thus the total deliveries are 78.53% of the dealer gold.
It is extremely surprising to see no gold enter the dealer vaults to settle these huge delivery notices. It looks to me like the only way settling is occurring is the use of GLD paper for gold settlement and SLV for silver settlement and of course, cash.
And now for silver
We did not get any report on silver inventory movements.
The CME reported that we had 4 delivery notices for 20,000 oz. The total number of notices
filed so far this month total 1001 for 5,005,000 oz. To obtain what is left to be served upon, I take the OI standing (27) and subtract out Friday deliveries (4) which leaves us with 23 notices or 115,000 oz left to be served upon.
Thus the total number of silver oz standing in this delivery month of December is as follows:
5,005,000 oz (served) + 115,000 oz (to be served) = 5,120,000 oz
we lost 10,000 oz to cash settlements.
And now for the COT report. Let's do gold first: The COT report is from Tuesday, Dec 13.2011 to Dec 20.2011
Gold COT Report - Futures
Change from Prior Reporting Period
non reportable positions
Change from the previous reporting period
COT Gold Report - Positions as of
Tuesday, December 20, 2011
The large specs that have been long in gold somehow got their signals confused as they liquidated a huge 11,495 contracts from their longs.
The large specs that have been short added a huge 5,072 contracts to their shorts.
Our spec longs thought the bankers were behind the raids, maybe not (refer to Jim Willie's paper)
The commercials who have been long in gold surprisingly added a huge 7426 contracts to their long side.
And our commercials who have been short in gold from the beginning, covered a huge 14,237 contracts.
They saw the light. It looks more and more likely that Jim Willie is correct.
Our small specs:
The small specs that have been long in gold covered a rather large 4,641 contracts from their long side.
The small specs that have been short in gold added a tiny 455 contracts to their shorts.
Conclusion; extremely bullish as the commercials are covering and it is the large specs that are supplying the paper. If you have not read the Willie commentary please read it especially the last few paragraphs were he describes in detail what he has learned about who is buying gold.
Now for our silver COT report:
Silver COT Report - Futures
non reportable positions
Change from the previous reporting period
COT Silver Report - Positions as of
Tuesday, December 20, 2011
Here our large specs that have been long in silver covered 1270 contracts from their long side.
Our large specs that have been short in silver added a huge 4969 contracts to their short side.
The commercials who have been long in silver added a huge 4388 contracts to their long side.
And our commercials who have been short in silver for a long time and are subject to the CFTC probe,
covered a smallish 1,092 contracts from their short side.
Our small specs:
The small specs who have been long in silver pitched 1067 contracts from their long side
The small specs who have been short in silver covered 1826 contracts from their short side.
Conclusion: again it was not the banks that supplied the paper silver contracts. It was the large specs.
This is extremely bullish for silver.
Here are some big stories that influence the price of gold and silver. The first big story has the Iranians
buying gold due to increased sanctions by the west. It is interesting that the Iranian rial is now 15,300 rials
to the dollar where a few weeks ago it was approximately 13,000 rials to the dollar. To show you how inflation grips that country, in 1971 the Shah of Iran introduced a beautiful gold coin equal to 3/4 of an oz of gold having a nominal value of 2,000 rials. It looks to me like the entire globe will undergo huge inflationary pressures like this.
Iranians Rush to Buy Gold, Dollars as Sanctions Tighten Grip
December 22, 2011, 10:06 AM EST
Dec. 22 (Bloomberg) -- Iranians are rushing to buy gold and dollars, sending the national currency plunging, on concern the government may be unable to maintain economic stability as international sanctions tighten.
The average rate offered at currency exchange bureaus was about 15,300 rials per dollar, meaning the currency has lost about 15 percent of its value in a month, the Donya-e-Eqtesad newspaper said yesterday. The official rate yesterday was 11,030 rials per dollar, according to the Central Bank’s website. No rates were available for today, when Iran’s weekend began.
State television this week showed lines of people camped out overnight in front of state banks, with sleeping bags and blankets, saying they were waiting to buy gold coins. The central bank cut off their supply as of Dec. 20 and said it’s imposing a more "just distribution" system. Under the new rules, gold paid for now will be delivered four months later, according to the state-run Mehr news agency.
The U.S. and European Union are pushing to tighten sanctions already imposed on Iran, by limiting crude purchases from the world’s third-biggest exporter in order to halt its nuclear program. The U.S. and Israel haven’t ruled out military attacks. Iran denies allegations that it is seeking to build atomic weapons.
The rial’s plunge has widened the gap between official and market rates to a record, and shows Iranians don’t trust assurances by politicians and financial officials that the economy is safe, said Hossein Raghfar, an economics professor at Al Zahra University in Tehran. The restriction of access to gold has diverted demand to foreign currency, the most "liquid" option, he said in a phone interview yesterday.
Accelerating inflation is also eroding the value of savings in rials. The inflation rate rose to 19.8 percent in the 12 months through Nov. 21. The government expects it to reach 21.6 percent by the end of the Iranian calendar year on March 19 if the country doesn’t experience an "economic shock," Deputy Economy Minister Mohammad-Reza Farzin said two days ago.
The second big story is the big increase in the official reserves of Turkey to 179 tonnes (5.758 million oz)
Turkey added this month a massive 41 tonnes whereas last month they added 21 tonnes.
Turkey is generally the conduit for gold purchases by rich Arabs. This is private gold purchases.
Now for the first time we are witnessing official purchases by the sovereign country of Turkey as they sell their lira to buy gold as official reserves. In this Dow Jones report, you will note that Russia intended to buy 100 tonnes this year. Russia's total reserves are now 870 tonnes of gold up 95.7 tonnes of gold this year. They will fulfill their promise as we have one more reporting for the month of December.
Also note the countries buying gold. Included in this list is Greece.
"Macedonia, Belarus, Mauritius, and Greece also reported small additions to their reserves for November,"
Total central bank gold purchases this quarter registered 148.4 tonnes. At this rate their annual purchases will approximate 600 tonnes or 25% of worldly gold production. With private gold purchases at record levels (the Mints etc ,) how on earth will the comex and LBMA receive metal to consummate purchases on the futures exchanges and forward markets? One country that has been purchasing gold metal but not reporting on it, is China. They have reported massive imports of gold and you can bet the farm that many of those oz are heading for official status.
(courtesy Wall Street Journal)
DECEMBER 23, 2011, 5:40 A.M. ETTurkey Boosts Gold Reserves
The Wall Street JournalLONDON -- Turkey lifted its gold reserves by a hefty 1.328 million troy ounces, or 30 percent, last month as central banks around the world maintained their positions as net buyers of the precious metal.
Friday, December 23, 2011
Friday, December 23, 2011
According to data from the International Monetary Fund, the Turkish central bank increased its gold reserves to 5.758 million ounces in November, from 4.429 million ounces the month prior. This followed a rise of 697,000 ounces in October, the latest IMF figures show.
While the Turkish central bank wasn't available for immediate comment Friday regarding its recent reserve increases, it announced in November that it had begun to accept gold in its reserve requirements from commercial banks. Under the policy change, banks are allowed to hold a maximum 10 percent of their Turkish lira reserve requirements in gold, which it said would free up around 5.5 billion lira ($2.91 billion) in liquidity to the market.
Prior to the purchases, Turkey had the 30th-largest official holding of gold in the world, at around 7 percent of its foreign reserves, according to the World Gold Council, an industry body. It is now likely to have the 22nd-largest official holdings following the additions.
Meanwhile, Russia also continued its program of gold accumulation in November, lifting its holdings a further 81,000 ounces to 28.086 million ounces. Russia's reserves, having been added to every month so far in 2011, are now up 11 percent on the start of the year.
In January the Central Bank of Russia's press service said the bank planned to buy 100 metric tons, or around 3.2 million ounces, of gold per year from domestic banks in order to bolster reserves. Russia is the world's eighth-largest official holder of the precious metal, which accounts for around 9 percent of its foreign reserves.
Emerging market central banks have been buying gold in reaction to the sovereign-debt crises affecting the U.S. dollar and the euro, analysts say. Demand has also risen strongly in recent quarters as some seek to diversify foreign-exchange reserves that have grown along with emerging market export industries.
Tajikistan last month added 10,000 ounces of gold to its reserves, counterbalancing a reduction of 12,000 ounces reported the prior month. Its reserves now stand at 150,000 ounces, according to IMF data.
Macedonia, Belarus, Mauritius, and Greece also reported small additions to their reserves for November, while Mexico and Slovenia recorded minor reductions.
Metals consultancy GFMS recently forecast that central banks could buy nearly 500 metric tons, or around 16 million ounces, of gold this year.
Total central bank gold purchases in the third quarter were more than double the level in the second quarter and almost seven times higher than the same period of last year, at 148.4 metric tons, or 4.8 million ounces, according to a report last month from the WGC. The body said it expects central banks to continue to be net buyers of gold in the fourth quarter, as well as next year.
Purchases by the official sector have helped to drive the price of gold higher this year, not only by absorbing supply but through the positive boost they have given to market sentiment.
Now let us head over to the paper side of things. I found this Seeking Alpha paper by Avery Goodman terrific for you. Goodman differs from Zero hedge by claiming that the banks will engage in this massive LTRO quantitative easing despite the fact that this will add to their insolvency risk. Goodman thinks that they are already insolvent and you cannot go more insolvent.
Regardless of how the banks utilize this new found cash, gold will rise in price as many euros are printed over on that side of the pond and dollars are printed on this side:
(courtesy, Avery Goodman/Seeking Alpha)
The 10 yr bond yield of Italy zoomed past the 7% level. So much for help at the LTRO level as the banks are again underwater and need to supply margin money in euros to maintain their positions:
(courtesy Bloomberg and zero hedge)
Above 7% Again - Any Italian Bank That Bought BTPs With LTRO Cash Is Now Underwater
Submitted by Tyler Durden on 12/23/2011 09:26 -0500
Presented with little comment...10Y BTP yields just broke above 7% once again. It would appear the MtM on those LTRO-funded BTP purchases is hurting already. Cue LCH margin hikes...
Today's move above...and the week below - 60bps off the pre-LTRO (green box) low yields from Wednesday...
Here is the closing Italian 10 yr bond closing a touch below the magic 7% level:
Here is the Spanish 10 yr bond yield: (up 2 basis points)
Peter Tchir describes in detail how the Italian banks engaged in its first LTRO.
Italy's largest bank UNICREDIT printed 40 billion euros worth of bonds. (Please note that they were just printed up and not sold to anyone. These bonds are guaranteed by the Central Bank of Italy. This is a contingency liability and thus they are not on the Italian central banks books yet. ) The banks then tender these 40 billion euros of bonds to the European Central bank who take this as collateral and sends UNICredit 40 billion euros for a charge of 1% per annum. At the end of 3 years, these must be re swapped.
This whole transaction certainly bothers Mr Tchir. Is there no other collateral that the banks can give the ECB? It smells pretty bad. Gold will skyrocket in 2012:
(courtesy Peter Tchir of TF Market Advisors)
Italy Goes The Full Monti
Submitted by Tyler Durden on 12/23/2011 07:48 -0500
Via Peter Tchir, of TF Market Advisors,
It was just a little footnote to the LTRO announcement. Just a little statement that 40 billion of the collateral received by the ECB was newly issued, newly guaranteed Italian debt. The more I think about it, the more uncomfortable I get.
The ECB claims they have 40 billion of Italian government bonds on their books from the LTRO. The banks say they pledged 40 billion of Italian government debt. The Italian government doesn't acknowledge it as debt. Maybe it will show up in a footnote somewhere, but that is about it.
So while approving some new austerity measures that are unlikely to work, the government added 40 billion of contingent liabilities. The rating agencies can't be happy about that. Investors shouldn't be happy with that. Rather than being a new source of funds for Italian debt (the most optimistic view of LTRO) it created new debt! It is adding to Italy's debt problem.
And I can't even figure out why they did this. Didn't banks have other eligible collateral? Have they already pledged anything decent they own to the ECB or private lenders to get funds? Given the size of the balance sheets that is unbelievable but yet there is no explanation of why they didn't have more 'normal' assets to pledge.
Is this just a ploy to inextricably link the Italian banks to the government. The banks could have borrowed direct from the ECB. Bizarrely enough they may have even been able to post their own non government guaranteed debt directly but that was too obviously Enronesque?
Everything about this deal makes me squirm. The LTRO seemed like a decent idea to me. It wasn't solving anything and was unlikely to help create new sovereign debt demand, but it would relieve funding pressure on banks. For the most part that is probably how it is being used, but this ploy by the Italians feels all wrong. It feels like a dirty game and scares me that I can't figure out the angle behind the dirty game. Creating such a large new contingent liability for Italy seems both unnecessary and downright stupid. How will the market gain confidence in Italy and buy their debt when you don't know how much debt is outstanding. These banks aren't in great shape, so the guarantees could be called on.
I think the market will grow more negative on Italy as it digests what it has done and loses faith in the technocrats. If Italian debt slides again it will drag the market down. This little "scam" was ill advised in my opinion and sadly is the sort of thing a technocrat may actually believe in. They are fans of form over substance and tend to thing of credit in vague and unrealistic ways. They like to pretend guarantees aren't real. They view short dated risk as, ummm, un risky - which may explain the 3 month term.
I am scared that as these contingent liabilities hit the spotlight we will find that the sovereign debt problem is far far bigger than we have realized.
Earlier in my commentary we discussed Avery Goodman's position that the LTRO repo money will be used by the banks in a carry trade. Strangely the money was only partly used on the first go around, and almost half was placed back with the ECB:
And This Is Where The LTRO Money Went
Submitted by Tyler Durden on 12/23/2011 08:08 -0500
On the day of the 3 Year European LTRO, in a whim of fancy we wondered if contrary to all expectations, the European banks would not instead of using the money for any real releveraging (carry Trade) or deleveraging (switching out of expensive into cheaper debt) purposes, just park it with the ECB's deposit facility, an outcome which would be the worst possible case as it simply recycles ECB cash from on pocket into another without any incremental velocity. As it turns out, we were only half kidding: as of yesterday, the day after the LTRO,European banks parked almost half of the free €210 billion (recall that while gross LTRO proceeds were €489 billion,only €210 billion was net), or €82 billion, with the ECB's deposit facility, which incidentally brought the cumulative total to a new 2011 record of €347 billion, from €265 the day before. And that is what monetary policy failure is all about.
Daily ECB deposit facility usage change (negative numbers have been removed as they only occur during monthly deposit facility usage resets when banks park cash with various MROs for regulatory purposes):
And total ECB deposit facility usage:
This is a great article from Zero Hedge as we now compare both major central banks:
the ECB and the Federal Reserve as to how much junk they have on their expanding balance sheets:
(courtesy Tyler Durden/Zero Hedge)
The Fed vs The ECB - Presenting "The Correlation Of 2012" And What It Means For Gold
Submitted by Tyler Durden on 12/22/2011 21:40 -0500
If there is one cross asset correlation that defined 2011 (and the greater part of 2010), it was that of the Euro-Dollar (EURUSD) currency pair and the S&P 500, which have correlated with near unison nearly all of the time. And yet, the stability of this correlation may be getting unglued, because as Goldman insinuated in its market roundup note from yesterday, it is "reasonable to think that the ... reflexive relationship between EURUSD and SPX...will take some time to break, but this correlation should start to fray." Why? Because, "like the FED before them, the ECB is aggressively expanding their balance sheet." Which brings us to the point of this article: much to the dismay of the armies of disgruntled bankers and investors demanding that the ECB print right now, the ECB has in fact been printing, as shown the other day. Only it has not done so in the conventional sense where it assumes an "asset" on its balance sheet while expanding a monetary liability, but indirectly through shadow conduits, such as repo and other liquidity backstops, also as shown yesterday, where no new currency actually enters the system, yet whereby the balance sheet expands just as efficiently (and in doing so, dilutes the underlying currency). It is well known that it has been our contention that in this centrally planned world the only thing that matters is the global provisioning of liquidity by the monetary authority, as the ultimate marginal determinant of Risk On behavior (and inversely Risk Off), is how much ZIRPy cash do speculators (and more importantly Prime Brokers) have at their possession (for outright and (re)hypothecated purchasing purposes). So here we would like to make a distinction: it is not so much how much cash one global monetary central planner will provide to markets, but how much the various standalone central banks will inject, in whole or in part. We contend that for 2012 the key qualifier will be "in part" with the ECB and the Fed printing (either outright or via repo) in staggered regimes,and thus the primary determinant of "risk", the EURUSD,will be the relative ratio of the two balance sheets. This can be seen on the charts below, the first of which shows just how dramatic the ECB expansion has been in the past 6 months, and the second showing the correlation between the EURUSD and the ratio of the Fed to the ECB.
First, the balance sheet of the ECB vs the Fed:
And second, the correlation of EURUSD vs the relative central bank sizes: i.e "The correlation of 2012"
And where the EURUSD goes, broad risk will follow as all it indicates is a willingness of the respective monetary authority to increase liquidity. It also explains why the EURUSD is likely to trade in the 1.20-1.50 corridor for a long time, as any time the EUR currency plunges, the US economy experiences a dramatic slow down, and inversely, whenever the EURUSD approaches 1.50, Europe, and specifically Germany, sees a substantial slow down in economic output. As such, this range will specify the probable willingness of either central bank to engage in aggressive monetary easing. It is no surprise that since the ECB started "printing" in all but name in July, the EUR has seen a gradual and consistent decline.
There is another corollary: while gold has been stagnant and dropping since peaking in September on disappointment that the Fed did not proceed with outright unsterilized printing and instead engaged in offsetting LSAP-LSAS QE3 under the guise of "Operation Twist 2", gold has completely failed to notice that while the Fed has been net silent, another bank has injected a whopping €500 billion in the past 6 months, or more than the Fed did in all of QE2! Ironically, the broader "risk on" crew has not missed this, and while gold continues to be stuck in the old paradigm, it refuses to comprehend that explicit guarantees of trillions in debt (such as the LTRO repo operations), is an equivalent operation to printing money.
We fully expect the correlation arbs, which usually need someone to point out the glaringly obvious to them before they encode given relationships and correlation pairs into buy and sell signals, will very soon comprehend why the one most underpriced asset at this point, by orders of magnitude, is gold. For the simple reason that currency debasement has been going on feverishly, if behind the scenes, for the past 6 months, and gold is nothing more, or less, than a hedge against monetary dilution. By anyone. That most certainly includes the ECB as well.
We, also, for one, hope to be fully prepared for the instant when the "Eureka" moment strikes.
And here, for the benefit of said slowish arbs, to explain just why liquidity provisioning is the same as bond buying, is SocGen with an expanded narrative on how Draghi took away the bazook and replaced it with a thousand just as effective slighshots.
There continues to be an expectation that the moves to a more disciplined fiscal union will clear the way for a significant increase in the scale of the ECB’s support for the bond market. However, at December’s press conference, ECB President Mario Draghi, emphasised that the Lisbon Treaty forbids the monetary financing of sovereign debt. We also believe that the ECB wants to avoid the moral hazard implicit in large scale bond purchases since this would potentially reduce the pressure on national governments to undertake the necessary reforms. Jens Weidmann, the Bundesbank Chairman for example, has repeatedly argued that Italy “can live with interest rates over 7% for years.” This is a reference to the yield curve simulations included in the latest BIS quarterly review for example, which demonstrate that even if the yields reached on 9 November were sustained, the relatively long maturity of Italy’s debt stock (around 7 years) means that it would take years for the debt service costs to snowball significantly. This is a clear indication, that in the Bundesbank’s view at least, the ECB will not be intervening to set a ceiling for bond yields.
In our view therefore, any increase in ECB bond buying is likely to come in the form of greater longevity rather than an increase in size, although the ECB may not acknowledge this explicitly. Even so, we envisage the ECB’s SMP continuing at roughly its current volume throughout 2012 and potentially into 2013. This probably implies a further €200-250bn of bond purchases over the next twelve months which would mean the ECB is effectively absorbing the new gross supply from Spain and Italy. This implies roughly a doubling of the SMP to the €500bn mark over the next 12 months. Overall, when one takes into account all of the ECB’s policy initiatives then amounts involved are indeed adding up. Taken together with the relaxation of reserve ratios, which we think is worth about €100bn, the roughly €300bn of excess liquidity the ECB and the ECB’s covered bond purchase programme (currently just over €60bn but planed to increase by another €40bn), then the ECB’s interventions are actually very sizeable. The extension of the ECB’s money market operations to 3 years may also prove to be significant since this will provide banks with additional funds that are in turn likely to be invested in sovereign bonds up to a similar duration – something that the French Central Bank Governor, Christian Noyer has described as “our bazooka”.
I will leave you with this zero hedge story on why Morgan Stanley predicts 2012 will be a difficult year financially:
Morgan Stanley On Why 2012 Will Be The "Payback" For Three Years Of "Miracles" And A US Earnings Recession
Submitted by Tyler Durden on 12/23/2011 15:26 -0500
Yesterday, we breached the topic of the real decoupling that is going on: that between the macro and the micro (not some ridiculous geographic distribution of the US versus the world), bypresenting David Rosenberg's thoughts on why Q4 GDP has peaked and why going forward it is energy prices that are likely to be a far greater drag on incremental growth than the preservation (not the addition as it is not incremental) of $10 per week in payroll taxes (which only affects those who are already employed), even as company earnings and profit margins have likely peaked. Today, following up on why the micro is about to return with a bang, and why fundamentals are about to become front and center all over again, albeit not in a good way, is, surprisingly, Morgan Stanley's Mike Wilson, who has issued his loudest warning again bleary eyed optimism for the next year: "Think of 2012 as the “payback” year….when many of the extraordinary things that happened over the past 3 years go in reverse. I am talking about incremental fiscal stimulus, a weaker US dollar, positive labor productivity, and accelerated capital spending." Said otherwise, 2012 is the year when everything that can go wrong in the micro arena, will go wrong. And this is why Morgan Stanley being bullish on the macro picture! As Wilson says, his pessimistic musing "tells the story for what to expect in 2012 assuming the situation in Europe doesn’t implode. In other words, this is not the macro bear case." If one adds a full blown European collapse to the mix, then the perfect storm of a macro and micro recoupling in a deleveraging vortex will prove everyone who believes that 2012 will be merely a groundhog year (in same including us) fatally wrong.
Lastly, when it comes to predictions Morgan Stanley (which called the EURUSD short the hour Goldman put it on as a long) should be taken far more seriously than Goldman, which merely wants to be on the other side of its clients.
The complete very troubling forecast from Morgan Stanley:
With thin markets at year end, changes at the margin can have maximum impact on asset prices. This includes policies like the LTRO as well as the Taiwanese government directly buying stocks! Knowing this, many pundits are keeping the dream alive for a Santa Claus rally. Unfortunately, I think time has run out in 2011 and the best we can hope for at this point is to limp across the finish line without breaking any bones. Having said that, I think there is one more positive catalyst for 2011 that could lead to a final surge. The headline would read something like this: “Merry Christmas! Congress delivers gifts by passing full year payroll tax cut and unemployment benefits extension.” No doubt, this would be good news for stocks since there is enough skepticism on Washington’s ability to get anything done before year end. Of course, it could be bittersweet because it would also likely be the perfect rally to sell into and short.
Whatever the next few weeks brings, I think it’s safe to say that everyone is sick and tired of trading headlines and trying to decipher the next statement/rumor surrounding Merkozy, central bank policies, Washington politics, etc. Whatever happened to getting paid for channel checks or betting on a unique product cycle that isn’t appreciated by the market? Ironically, while all this meddling by the authorities has helped prop up asset prices, it has also made it harder to trade and invest. In my view, this is one reason why volatility remains so elevated. According to our Quantitative and Derivative Strategies team, 5, 10, 22, and 60 day realized volatilities are all in the 26-29% range. This is unusual historically, as realized vol has typically fallen by this point in the year. It’s quite possible this higher volatility has compressed multiples and raised correlations, both of which are counterproductive to central banks’ objectives.
The good news is that the fundamentals are about to take front and center stage once again. The bad news is that it is likely to be negative.Specifically, there has been a distinct increase in negative earnings results, preannouncements and/or guidance…..ORCL, RHT, GIS, BBY, WAG, ACN, TIF, ANF, DRI, NTAP, TXN, XLNX, ALTR, AMZN, CRM just to name a few. This is very much in line with my thesis for 2012 that we are likely to avoid an economic recession in the U.S., but we are also very likely to experience an earnings recession. Importantly, consensus estimates do not reflect this reality with bottoms up forecasts still modeling 10% EPS growth for the S&P500 next year and top down consensus in the +4-5% range. While it is a rare outcome to experience positive GDP and negative earnings growth in the same year, it is also just as rare to experience record margins in a world of 9% unemployment and lackluster organic revenue growth. Think of 2012 as the “payback” year….when many of the extraordinary things that happened over the past 3 years go in reverse. I am talking about incremental fiscal stimulus, a weaker US dollar, positive labor productivity, and accelerated capital spending. Exhibit 7 tells the story for what to expect in 2012 assuming the situation in Europe doesn’t implode. In other words, this is not the macro bear case.
The first chart in Exhibit 7 (top left) graphically shows the real deterioration we are now seeing in earnings. I have discussed the rollover in earnings revision breadth many times in prior notes and now we are seeing it meaningfully hit the numbers. We looked at the 20-25 companies that that typically report prior to Alcoa (the official kick off to earnings season) and as you can see in the chart, the trend is disturbing and is now showing outright misses in aggregate. For more details on this, see our Trading Insights out this morning. Second (top right) is just a simple leading indicator for the US ISM mfg index.
It is the y/y change in the S. Korean stocks market (KOSPI). As you can see, while US economic data has persistently surprised to the upside in 2H2011, this trend is likely coming to an end and will begin to rollover again in the new year, perhaps driven by the anniversary of last year’s significant payroll tax cuts. God forbid if Congress doesn’t pass the extension next week. Third (bottom left) is a chart showing the y/y change in the US dollar (DXY) and then a “projected” y/y change assuming various scenarios for DXY over the next 6 months. As discussed here many times, the US dollar has been one of the biggest (if not THE biggest) drivers of SPX earnings growth. For the next 6 months we are potentially facing a much different currency environment that could shave as much as 5-10% off SPX earnings growth on its own. Finally, the last chart shows the relative strength of semiconductors (SOX Index) versus the absolute performance of the SPX. I like this because the SOX/SPX tends to lead the SPX by about 3 months and it suggests the next 3 months is likely to remain rough for US stocks broadly. Since Semis are ultra sensitive to growth, it really suggests that growth is going to struggle in the near term at least from a rate of change standpoint and versus expectations.All of this lines up with my conclusion that while everyone is feeling a bit relieved about the tail risk in Europe being taken off the table, we are about to get a reality check from the micro.