(By Darrel Whitten) PMI Declines in Europe and Asia are "Frightening" Pacific Investment Management Co.'s Mohamed El-Erian called recent declines in purchasing manager indexes in Europe and Asia "frightening" and said the world economy is suffering its severest slowdown since the global recession ended in 2009. "This is a serious, synchronized slowdown," said El-Erian.
Why be so alarmist? The Markit announcement of the July JPMorgan Global Manufacturing PMI gives the blow-by-blow commentary..."the global manufacturing sector slid further into contraction, (posting) its lowest level since June 2009. Manufacturing PMIs for the Eurozone and the UK sank to their lowest levels in over three years. The ISM US PMI posted a sub 50.0 reading for the second consecutive month. Rates of contraction accelerated in Japan, South Korea, Taiwan and Vietnam."
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| Source: MarKit |
Central Bankers Raise Expectations, Then Disappoint
The ECB's Mario Draghi first generated a lot of positive buzz with his "the ECB will do whatever it takes" speech, raising expectations for some specific action. But he merely announced that he ECB "is working on" a plan to re-enter bond markets and took the unusual step of naming Weidmann as the only policy maker to object to the proposal. Draghi cautioned that "it was not a decision, it was guidance." While the move would ratchet up the ECB's response to Europe's debt crisis, it still needs to be ratified by the governments, and it risks isolating the German central bank, potentially undermining the effectiveness of the new measures. Thus so far, its just more talk with no concrete action.
Ben Bernanke also disappointed in that the Fed took no action at the end of a two-day policy meeting. While the Fed has retained the option of further monetary easing and still has the freedom of action that the ECB does not, traders and investors are being overly optimistic if they think there is a silver bullet coming out of the central banks anytime soon.
Meanwhile, Spanish 10-year bonds saw their ‘worst sell-off since records began in 1993,'the Euro plummeted below €1.22USD, the Madrid IBEX stock index dropped 5.2% while the Milan MIB fell 4.6%.
Wall Street the Most Bearish on Equities in 27 Years Bank of America Merrill Lynch's "Wall Street bullishness indicator43.9, the lowest level in the history of our data going back to 1985, suggesting that sell side strategists are now more bearish on equities than they were at any point in the last 27 years. That's supposed to be good news according to the "contrarian" ML view. It could also be a reflection of the steady stream of scandals emanating from the investment banking sector, the latest being the computer glitch at n">at Knight Capital Group that cost $440 million in just 45 minutes and may very well slam-dunk the company, in addition to the pink slips that have been flying fast and furious on Wall Street, the City in the UK, in Tokyo and just about every other financial center.
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| Hat Tip: FT Alphaville |
Fund Managers Again Heavily Risk-Adverse
Bank of America Merrill Lynch also released their June Survey of Fund Managers, showing that asset allocations are getting heavily risk-averse. This is also viewed as classic late-stage downtrend behavior, and ostensibly implies the rally will be sharp and fast when it does materialize. The net percentage of global fund mangers overweight equities fell to 27% from 41% percent in May. Those underweight Euroland equities rose to a net 15% from a net 1%. The proportion of investors overweight commodities fell to a net 6% from a net 12%. A net 18%of asset allocators are now overweight cash, and the proportion taking lower-than-average risk across their portfolios has risen to a net 26% from a net 15% in May.
Germany Would Do it the Bank deutscher Länder Way
The following published in the staff magazine of the Bundesbank on 27 July 2012 is very illustrative of how the Bundesbank would approach the Eurocrisis. Rather than the current ponzi schemes being tried to prop up failing sovereigns and bonds, "independence and the objective of price stability were already enshrined in the Bundesbank Act of 1957, as the earlier establishment of the Bank deutscher Länder earlier helped the stability culture to develop. According to Helmut Schlesinger, former Bundesbank President, Bank deutscher Länder did something that seems absolutely inconceivable nowadays:
it set a limit for credit expansion in order to attempt to scale back the volume of money. This enabled the Bank deutscher Länder to stabilize the D-Mark over the course of 1951 and restore confidence in the value of the currency. This lay the proper groundwork – for the success of the currency reform, the abolition of rationing and price controls, and the stability of the currency...
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| Source: Yahoo.com |
...All of which EUR is not, and if Mario does manage an end run around his Bundesbank nemesis and get what investors/traders are hoping for, i.e., full-fledged QE, EUR could get a lot weaker.
Sure, the BoA Merrill survey indicates that global investor caution sets up market sentiment for a positive surprise, but we suspect any such surprise will be very much of the "two minute wonder", as traders scramble to clear overly aggressive short positions, but in the end do not change the underlying trend, which is from the upper left hand corner to the lower right hand corner.
Japan Bank Stocks Outperforming by Simply Not Falling as Much
Like their US and Eurozone peers, Japanese bank stocks are on the surface cheap, with the creme-de-la-creme, Mitsubishi UFJ Financial Group (ADR:MTU) selling at a 45% discount to book value. Looking at the international equity portfolios of many well-known asset managers, more than a few are actually overweight the Japanese banking sector. But banking conglomerates worldwide are all now cheap to stated book, Goldman (GS) is selling at a 26% discount, JP Morgan Chase (JPM) at a 25% discount, and Deutsche Bank selling at a 59% discount--because investors remain unsure what unexploded grenades are still lingering on bank balance sheets.
While Japanese bank balance sheets should be cleaner than their overseas peers because of all the house-cleaning done on bank balance sheets during Japan's malaise and the fact that they largely dodged the US housing debacle bullet, Depending on your currency, you also get a nice kicker of JPY appreciation, which has added another 12% or so over the past two years.
Mitsubishi UFJ nevertheless in April 2011 reported a $1.7 billion hit on its Mitsubishi UFJ Morgan Stanley brokerage J-V from trading derivatives for the house account. Thus one never knows these days when the next mole will pop up in what has become a "whack the mole" game of discovering which firm is next to report losses on trades gone haywire. Further, considering the hundreds of billions of yen in shareholder capital the Japanese megabanks have destroyed over the past years, call me skeptical.
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| Source: Yahoo.com |
European Business Exposure a Major Negative, and China will Also Give You a Discounted Stock Price
Japan's major exporters continue to get pounded as EUR collapses. In trading the day after the Draghi non-announcement Sharp (6753.T) plunged 27% to 40-year lows after widening its full-year loss forecast, Sony slid (6758.T, SNE) 7.2% after cutting its profit outlook, and power tool maker Makita (6586,T) fell over 1% because it 42% from Europe. Japan's Topix has slid 17% since this year's peak on March 27 on a darkening macro environment of a spreading Eurozone debt crisis, and slowing growth in the U.S. and China. Remember, this was supposed to be the year of a Japan come-back supported by a more aggressive BOJ. About half of the 227 companies on the Topix that have reported quarterly earnings since the start of last month and for which forecasts are available have missed expectations.
As it stands now, foreign investors continue to be net sellers, and we see little to get excited about despite the fact that the Nikkei 225 and other benchmark indices are again selling below stated book value.
Investment Banks Trimming Tokyo Staff, Shifting to Cheaper Asian Financial Centers
The exodus of investment bankers from Tokyo continues, with Goldman, Credit Suisse, Barclays, Deutsche Bank, BNP Paribas, Morgan Stanley,JPMorgan and others all trimming their Tokyo ranks and sending those they want to retain to Singapore or Hong Kong, as these cities rank way down in the 30s as the most expensive cities for expatriates, while Tokyo is the most expensive.