Black Thursday
Translated by Alexander Vasiliev
Russian version
The last week has seen a lot of news beyond the markets and economy. The Russian Moscow University tanker, heading for China, was hijacked by Somali pirates – it was freed soon by the Russian marines, though the pirates were for some reasons released. The President of Nigeria Musa Yar’Adua died of a heart disease. A 6.4 magnitude earthquake hit the border region of Chile and Peru – the consequences are so far unclear. The Icelandic volcano intensified again – the erupted ash clouds made the authorities to cancel flights over Scotland and Ireland. North Korean leader Kim Jong-Il took his private train to China – to seek for help, seemingly. Long-awaited parliamentary elections took place in Britain – Conservatives have won, but… lost, for they did not manage to get an absolute majority: the pound crumbled with the notice of a not very able-bodied parliament, but subsequently took back the considerable part of its losses in expectation of a possible coalition. In other respects, the markets were moving for other reasons.
Source: SmartTrade
On the harm of optimistic flurry
The most of markets’ attention was of course pointed on Greece – and the situation was rather well at that: last weekend (at the 11th hour, as usual) the EU and the IMF agreed on the plan to allocate a 3-years loan of €110 billion to Athens, and payment for each year would not exceed €45 billion at that. The respective optimism lived, however, for only a couple of the hours of darkness at Monday – thereupon the markets fell into a reverie and rushed down after that: it became clear to everyone that only an appearance of the problems’ solution was made, while the problems themselves continued to deteriorate. First of all, the allocation of funds was accompanied with the standard demands of the so-called “Washington consensus” headed with an unholy trinity “liberalization, deregulation, privatization”. However, the conditions are rather peculiar nowadays, for the crisis has not been defeated, thus the implementation of the described demands would mean the collapse of aggregate demand (reduction of government spending, fall of private incomes, surge of layoffs and so on), and as a consequence – country’s immediate fall into a new recession. That alone would be manageable, if the matter had been concerning only Greece – in the meantime, the problems began to affect Ireland, Portugal, Spain and Italy – that is 40% of the whole euro zone’s population by the way. Further, the real debt liabilities of Greece exceed by far those €110 billion – it was assumed that these funds would only help the Hellenes to cut some corners of the market, but Greece is actually unable to lend on the market as such, for every potential buyer of its bonds has already scattered in fear. Minister of Finance Papakonstantinou has confirmed that the payments would be only made out of the bailout funds, and that it would not be possible to enter the market before 2011 (that is still optimistic!). The acuteness of the situation is denoted by the fact that on the moment the Greeks do not have €8 billion, needed to repay the bonds due to May, 19. Finally, the announced plans of draconian cuts stirred up the violence in the country – by Wednesday, at least three have been killed. As soon as that became known, the markets were terrified – it is clear what a horror would happen in Athens as “the austerity measures”, approved by the parliament, advance! News of the possible restrictions of the cash circulation finished off the markets – and here it came.
Yields for the Greek bonds have not been lower than 12-15% yearly; at the same time, the 10-years bonds of Ireland and Portugal started to bring over 5% - but, the 2-years German treasuries, which investors considered to be the most secure assets, achieved a historic minimum around 0.5% yearly. Degradation of the Greek ratings made the ECB to revoke its own limits for rating of the bonds, assumed as security for a credit – but this reduces the whole procedure of securities redemption to an absurdity. Faced with desperation, the Greek authorities addressed to the Lazard investment bank for an advice on the debt rescheduling – in other words, the government per se asked the bank to consult it on the sovereign debt’s default. On the height of the general fear, completely odd rumours began to circulate: for example, it was said that Spain asks the IMF to issue it with €280 billion – Prime Minister Zapatero ranted and raved, extorting the most eloquent Iberian curses to the scaremongers’ address, but that did not help a lot. The Moody’s agency stated fundamentally ill conditions of the Portuguese finances in its annual report, explaining that just stabilization is the best option, but degradation is more probable and that would compel to cut the country’s ratings. Another agency, S&P, is rumoured to consider lowering the Italy’s rating – blows are coming in a row. At such circumstances even the countries not so affected by the panic have to watch carefully – in this sense, the US Treasury, fearing of the yields surge for its bonds, decided to decrease the predesigned flotation volume for the next week: such did not happen since May, 2007. Euro of course tumbled down – while it opened the week at $1.3360, by the Thursday’s evening it reached $1.2520, thereby crumbling by 6.3% in four days short. The Canadian and Australian dollars lost approximately the same in a couple of days – but the major winner was not even buck, but yen. Only at Tuesday the dollar gave 95 yen in exchange, while by the Thursday’s evening the rate fell to 88 – more than 7% in two days! The rates of Euro, Aussie and Loonie were the record breakers, losing 12-13% in two days – nothing similar has happened since the memorable panic of the beginning of September, 2008. At Friday, the situation normalized a bit thanks to the decision of the Bank of Japan to inject 2 trillion yen of fresh liquidity ($22 billion) into the financial system – but it has to be remembered that all such falls and the consequent V-turns are fraught with at least a return to the lows reached earlier.
Source: SmartTrade
Stock markets have also awakened – and how! We wrote in the previous review that the prolonged and immoderate optimism is fraught with a sharp collapse in case of the serious negative information coming out – however, we did not think the threat would become a reality so soon. Let us try to examine the mechanics of such events, for they happen not for the first time. Let’s imagine that the favourable financial and economic background begot optimism, shown in the growth of a given market. Speculators buy assets, and fix profits in the course of their growth – for they know that the optimism is not everlasting; on such market there are always the ones wishing to sell and the ones wishing to buy – participants, who have closed their bids, are ready, in the case of a worthy rollback of the price, to return into buying again. Such conditions create the situation of a constant “carrying on” – even local negative news, which provokes a reflexive sells, does not reverse the trend: after recovering itself, the public decides “so what? Routine troubles were and always would be there, but in general the macroeconomic background is still good: thus, everything bad has already happened and we could fearlessly return” – and a new wave of buying lifts the market to the new highs. Such situation is familiar to professionals – during the strong and wealthy trend the local failures of price, created by the short-term negative information, are reversing upwards before one’s eyes: the price dynamics looks on the graphs as a stable growth, interrupted occasionally with short sharp falls, but switching over to rise again.
An absolutely different picture arises in the situation of a total schizophrenic optimism, mostly evoked by propaganda and not the fundamental health of the economy. Permanent noise of agitation creates an atmosphere of flurry, drawing “dummies” in the speculations (recall the famous legend of the shoeblack of J. P. Morgan in 1929) – the latter are usually cautious and enter the market when that has already grew up substantially, unable to stand the sight of easy money melting away, especially when the official fanfares are blowing around. Just that happened at this time – the major growth from the lows of 2009 was created by the rare institutional speculators and only when the Dow grew by more than 1.5 times and passed 10,000 points, the public at large finally ceased to contain itself and began to buy – especially active the process was at around 11,000. But the atmosphere of a massive craze alongside with an amateurism of the new buyers begets the dangerous dominant of greed – tormenting with a “too late” entry on the market and a “vast unreceived income” at the beginning of the growth, the public almost not fixing incomes for their positions. It is only buying, buying and buying, striving to make up leeway – but in such case everyone is sitting in buying up to their ears: in other words, in such state of affairs, there are very few future buyers, lying in ambush and waiting for the price to rollback – and hence, in the case of such rollback, the massive “carrying on” is absent. Because of this, a sharp correction looks like a fire: “dummies” panic, randomly fixing the losses or (if they were in time) the minor profits, which brings the prices even lower – and, if a number of participants had leveraged positions, in the case of a serious decline they would be facing the deficit of cover funds (so-called “margin call”): brokers force closures of their positions, i.e. they enter the market with a big selling bids, turning the market’s fall into a vertical collapse. At these developments, public is playing the role of a greedy rajah from the Soviet cartoon “Golden antelope”: deprived of reason on the wave of insane buying fever, it demands “more, more and more!” until founds itself buried under the pile of virtual profit – then it cries “enough!” and the gold instantly turns into the crocks. Just that has happened on May, 6, when the market was overridden with panic – Dow Jones index at 22.50 (Moscow time) collapsed by 1,000 points; and despite that after that many banks and funds had their automatic buying programmes enacted, which quickly knocked-off the indexes from their lows, the spectacle of collapse in general looks impressive – in 3 days the market recouped the half-year’s growth!
Source: SmartTrade
Attempts to justify what happened (how is that: in the height of optimism – and such a turn-up!) occurred at once, the more so because a real mess was surely happening on the market: shares of the major firms Procter & Gamble and 3M crumbled to the numbers inappropriate for these, while the big consulting company Accenture depreciated in a flash from $40 plus per share to 1 cent! However, the investigation has shown that no technical failure has occurred with the NYSE or NASDAQ systems – although the latter still decided to voluntarily cancel all transactions, which led to the price collapse of certain stocks by 60% and more. There has been some talk about the mistake of a Citigroup’s trader, who allegedly confused a million with a billion – but all that could not explain the simultaneous fall of all shares, but not the certain ones or at least certain market’s segments. Thus, the matter is seemingly just about the massive margin call, which happened to be the scourge of markets for the last 10 years: in the April, 2000 the first of such events has occurred, which brought with it the start of the stocks’ downfall after the insane growth of dotcoms in the end of 1990s – now, the “black Thursday” accrued to the list of such occasions. The latter, of course, affected the commodities exchanges: if at the beginning of the week the Brent oil grew to almost $90 per barrel due to the general pressure of monetary emission and the explosion of a BP oil platform in the Gulf of Mexico, than by Thursday it fell to $77; the American grade WTI collapsed from $88 to $75. Industrial metals declined by 15-20%, nickel – by even 25%. However, the gold, which initially also toppled down to $1,155 per ounce, surged sharply after that and reached $1,211 – the precious metal was taken by the market as the best asylum-asset. Somehow in the shadow of these events stood the central banks: the Norwegian and the Australian ones lifted the interest rates by 0.25% (to 2.00% and 4.50% correspondingly), while the Chinese increased for the third time in this year its reservation rate, now accounting for 17.0% for major banks and 15.5% for medium and minor ones. The ECB left the rate unchanged, and the Czech central bank decreased the rate by 0.25% to 0.75%. The New Zealand Reserve Bank gave to understand that it will begin to tighten its monetary policy in June.
Source: SmartTrade
Pirates and Goldman
Passions on the markets surely moved the economic news to the periphery – however, the latter are not changing much recently. Retail sales in Australia in March grew by 0.3% versus February, which does not gladden much after the decrease by 1.2% in the previous month; on the contrary, building permits surged by 15.3% after the previous fall by 2.7%. Activity in the industrial and service sectors rose – but the trade balance deficit swelled too. Inflation advances across the fronts – aside from the usual price indexes, analysts were astonished by the house prices’ report: as the result of the first quarter it grew by 4.8% versus October-December and by 20% (!) versus January-March, 2009. Increase in prices (especially of the primary products) made the government of Australia to propose the enactment of a new tax on excessive incomes of the mining companies of a 40% size. Officials of the Indian Ministry of Finance informed that the GDP report for the first quarter (it should be published at May, 31) would probably show the growth by 8.6% y/y (that is the maximum since the end of 2007), which would urge the government to tackle the overheat and inflation. April’s business activity data in China was controversial – according to the government, the growth is registered, while the report of HSBC and Markit Economics, on the contrary, stated the index’s fall to the half-year minimum. However, the officials do not cherish an illusion – former Vice Speaker of the Chinese Parliament informed that it is unreal to keep inflation in the central bank’s limit of 3%: it would have been great not to exceed 5%, but even that would be difficult. Other Chinese officials expressed the outmost dissatisfaction with the growing real estate prices – all told, the anxiety is more than obvious there. Problems of the Japanese car-makers are also continuing – now the Honda recalls 167 thousand Acura TSX cars in the USA: including the previously recalled in this year Fit, Jazz, City, Odyssey and Element, the sum of 1.2 million is gathering – it is far from Toyota on the moment, but with such pace it could be caught up easily.
Numbers in Europe were generally good – the German retail became an exception, it sagged in March by 2.4% versus February; in general, during January-March the sales fell by 0.9% versus October-December – however, the growth of 2.7% is registered for the last year. In Switzerland it reached 4.5% at all – however, the most part has been eaten by inflation. Unemployment in April shrank in Switzerland and also in Spain – though the level of unemployment is still enormous in the latter (20%). Activity in the construction sector of Britain rose in April, but the number of jobs still shrinks. The number of approved mortgage applications in Britain in March increased for the first time since November, but did not reach the forecasts and was 2.5 times smaller than the pre-crisis peak of 2006; net mortgage lending volume was very weak (five times worse of the forecasts) – benefits program for the house-buyers finished, hence comes the dull dynamics. House prices stopped recently – the market is undecided; though other prices are rocketing. Producers prices of the Euro zone went into green in the annual dynamics; much more vigorously rising are the prices in Britain – annual growth of the final goods in April reached 5.7%, while the primary goods went up in price by 13.1%. Retail sales in Britain are also accelerating sharply – British Retail Consortium, among the other things, complains of the VAT’s increase in the beginning of the year. Cancellation of benefits for car purchases has considerably deteriorated the sales dynamics in this sector – only the Germans are still holding their own at the expense of exports to other countries, where the benefits are still in place (especially in China). Industrial sector livens up after the cold winter in Germany: the number of orders in March grew by 5.0% versus February, and the output – by 4.0%: but in general the growth of January-March was 0.9% q/q – the deceleration is obvious, comparing with +1.1% in October-December and +3.4% in July-September. Among the corporate reports for the first quarter we would mark out rather good numbers from the UBS – at last there was a profit after the series of losses; operational income has almost doubled, while the clients assets withdrawal decelerated by three times. The figures of the Societe General and the Royal Bank of Scotland are also good. The real sector’s matters are worse – and despite the numbers of BMW has improved, Deutsche Lufthansa has only increased its losses. Also the story stood out about the intention of the British insurer Prudential to sell its European (which is 160 years old, by the way) and American businesses for the sake of buying an Asian one – some observers think that the company’s headquarters would also move to Asia soon. A tendency, though...
Pic: Artyom Popov, ITinvest
Building permits in Canada in March surged by 12.2% m/m; employment in April grew by the 35-years of observation’s record breaking 108.7 thousand people. The increase in the United States was of 290 thousand jobs after 230 thousand in March, but, contrary with the logic, the unemployment level has not decreased at that, but grew from 9.7% to 9.9%. The solution lays in the exoticism of the US Bureau of Labour Statistics’ methodology – it juggles the workforce size, increasing and decreasing it by considerable values: thereupon the strange fluctuations. The report on working places has a number of doubtful moments – for example, there included a rather big number of those, which “should” be created according to the mathematical models of the Labour Ministry; the actual validity of the models is discovered later – for example, in 2009 they overrated the real numbers by 1.5 million, so there is no reason to believe the official numbers. In the meantime, the real indicators are sad: average and median duration of staying in the unemployed status grew to their new highs in April; the same has happened with the part of unemployed, who could not find job for 6 months – those are now 45.9%, i.e. almost every second. The number of initial applications for the unemployment benefits decreased a bit, but the overall number of benefits is rising, and not for the main classes at that: nowadays there are 4.6 million of regular-plans-beneficiaries versus 6.2 million a year ago, while the number of the ones on extended and special plans is 5.5 million versus 2.3 million: in a sum, we get the growth from 8.5 million to 10.1 million people – the latter value is by the way the highest since December, i.e. the trend of unemployment growth is trying to recommence. By the way, another consequence of the massive treatment of the general consciousness with the positive agitation, aside from the public’s inflow on the stock market, was also the surge of private expenditure by the stagnation of revenue – rate of savings fell to 2.7%, promising the repetition of 2008-09 troubles (sharp collapse of the private demand) with the first signs of people’s sobering. Construction expenditures of the Americans are low despite the finishing benefits for house purchases: the latter sharply increased the market’s activity, but obviously not for long, which is agreed by the US National Association of Realtors. Industry is enjoying the Chinese demand and internal purchases for the sake of replenishing the impoverished backlogs – orders added up 1.3% for 2 months in a row, and the business activity in the sector reached its maximum since June, 2004. Car sales in April were lower than the March’s ones by 5% - producers decreased benefits and gifts and that happened to be sufficient. There were not a lot of reports – and those did not gladden: income of the Pfizer shrank by a quarter and the 2010 forecast did not meet the market’s expectations; Freddie Mac again has an $8 billion loss – and again the agency asks the Treasury to bring up $10.6 billion. United Airlines and Continental Airlines agreed to merge into a unified firm, which would be the world’s biggest air carrier. The pressure on the Goldman Sachs continues – Fitch agency threatens to cut its rating and the clients put the squeeze too; Goldman’s bosses considered for good to ask for an extrajudicial settlement of government’s accusations. Speculation is rife that the opportunity is wanted to be taken by the former Minister of Finance Henry Paulson, who tries to intrigue against Lloyd Blankfein and to retrieve his former job as a CEO of the Goldman Sachs. Blows are hailing down a storm, though sometimes those are quite anecdotal – even the Somali pirates quickly understood how the wind blows and stated in the American court that they are also working for the Goldman’s “fat cats” and hijack only those ships, on which the bank “takes the shorts”.
Source: US Department of Labour
Not a lot of news in Russia. Consumers’ prices grew in April by 0.3% versus March, by 3.5% versus the beginning of the year and by 6.0% versus April, 2009; utilities’ prices rise up by 16.5% during the year, including the gas rising up by 26.6% (even in the last month it manage to add 7.8% to its price). Gold and foreign currency reserves at the end of April swelled by $6.0 billion, accounting for $460.7 billion. However, the Reserve fund shrank during April by 360 billion roubles at that (from $52.9 to $40.6 billion) – where had that gone is unclear at the moment: this sum is considerably smaller than the expected budget deficit but let us wait for the official report of the MinFin. The number of real estate purchase contracts in Moscow in April exceeded the pre-crisis April, 2008 – the public, as it seems, run wild again: one should think that the result would be the same as last time. US Senate’s Foreign Affairs Committee supported an idea to forbid entry into the country for more than 60 honoured Russian officials, involved in the corruption, of which has been learned from the scandal case of the deceased Sergey Magnitskiy – however, that is not a very effective measure from our point of view, for the officialdom has been rather laying up their humble houses in Europe than in the US. For example, the eminent businesswoman Yelena Baturina earned something around a billion dollars in 2009 (that is 4000 times more than her no less eminent spouse, Moscow’s mayor Yuri Lujkov, did). As follows from the declaration, aside from four parcels of land of the overall area of 115 hectares, two houses, flat and seven cars in Russia, the high couple also owns houses in Australia, Britain and Spain, but nothing in America. Thus let us rejoice with the foresight of the powerful men of the dear Russia, who are not afraid of either the US Justice or of the black Thursdays.
Pic: Artyom Popov, ITinvest
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