Wednesday, May 2, 2012

Today's links

1---Euro crisis;  PMIs Collapse, Unemployment Surges To Record, zero hedge

Excerpt:   April Eurozone Manufacturing PMI which printed at 45.9 vs an initial print of 46.0, a 9 month low with a core breakdown is as follows: Italian manufacturing PMI 43.8 at a 6 month low, est 47.1 (prior 47.9), German manufacturing PMI at a 33 month low 46.2 vs initial 46.3 (prior 48.4), France manufacturing PMI 46.9 vs initial 47.3 (prior 46.7), which also followed Italy by recording sharpest drop in manufacturing new orders in 3 yrs in April, and so on as can be seen in the chart below. As every sellsider who has opined so far this morning, these numbers are all "hugely disappointing."

This was the 11th successive monthly rise in euro zone unemployment, and brought the cumulative rise to 1.739 million since April 2011."

"Most countries saw unemployment increase in March although the increase was generally moderate in the core northern euro zone economies. Worryingly but unsurprisingly, unemployment continued to move sharply higher in the struggling southern periphery countries - Spain, Italy and Portugal. Greek unemployment is also rising sharply although there was no data for March.

"With the euro zone almost certainly having suffered a second successive GDP decline in the first quarter of 2012 and seemingly headed for further contraction in the second quarter, and with overall euro zone business confidence taking a renewed appreciable downward lurch in April, the likelihood is that the euro zone unemployment rate will move significantly higher, although the situation is likely to vary appreciably across countries.

"Indeed, it now looks odds-on that the euro zone unemployment rate will move appreciably above 11.0 percent over the coming months with an ever growing danger that it will reach 11.5 percent

2---PMI misses in Europe, but ECB to remain obstinate, IFR

Excerpt:   European PMI numbers did not make pretty reading, especially in the second tier of the periphery. Spanish PMI for April just missed consensus by coming in at 43.5 versus expectations of 43.6. It was, however, the lowest print since June 2009 and meant that the country has now registered sub-50 readings for 12 consecutive months.

If Spain narrowly missed admittedly low expectations, Italy had a shocker, with April PMI coming in at 43.8 versus expectations of 47.0. These are the manufacturing PMI data and the service sector for these economies is much more important, but it is likely that these downside surprises will be repeated when the service data is released on Friday.

In the core, both Germany and France ticked down from their disappointing flash readings last week. German PMI came in at 46.2 versus the flash at 46.3, while France came in at 46.9 versus a flash of 47.3.

The area-wide reading of 45.9 was also lower than last week’s flash estimate of 46.0. In addition, there was a jump in German unemployment by 19k (a reduction of 10k was expected) highlighting that the core is not immune from the cliff diving nature of growth in the peripheral countries.

Therefore downside risks to eurozone growth remain elevated, but we are unlikely to see this transfer to any immediate ECB action at Super Mario’s press conference tomorrow, with the central bank looking for a more pro-active stance from individual governments.

3---The vicious cycle of Europe's credit crunch, IFR

Excerpt:  Europe looks to be entering a credit crunch, with loans harder to get and those that are made coming on tougher terms. Strikingly, banks are being tight despite falling demand for credit, pointing to a nasty interaction between the economy, its banking system and the choices of wary and indebted households and companies. That this is all happening despite the massive efforts of the European Central Bank, which twice recently has made extraordinary amounts of nearly free money available to the banks, tells the grimmest tale of all.

As for the future, European banks still have hundreds of billions of capital to raise, implying that even when demand for credit returns, the unbalanced recession in the euro zone might be extended by continued tough loan market conditions

Bank lending to euro-area companies in the real economy fell again in March, declining by 5 billion euros, an increase on February’s 2-billion-euro contraction, according to data released by the ECB on Monday. Banks instead took some of the inexpensive 3-year money they accessed from the ECB and increased their loans to governments by 29 billion.

That’s a decent, if painfully slow, way to allow banks to rebuild capital and nations to stay afloat, but it won’t work very well if economies contract in the meantime, as Spain’s dwindling GDP demonstrates.

If the bank loan drought was happening in the U.S., with its highly developed capital markets and ample cash sloshing around, this would be poor news; that it is happening in Europe, which remains highly dependent on bank funding for job growth and capital investment, is all the more concerning.

Interestingly this is not simply a story about timid banks which need to rebuild capital levels; there seems to be a bit of a turning away from credit by borrowers, doubtless because they see weak growth for their goods and services.

An April survey of bank lending conditions by the ECB showed falling demand for loans even as banks made them harder to get and sometimes more expensive.

Demand for loans to both households and businesses fell sharply in the month, driven by lower desire for fixed investment and, presumably, nervousness about house purchases due to the poor job market in many euro zone countries. Terms and margins both tightened for loans to households and businesses.

None of this, on either side, is terribly surprising. Many European banks are hugely overextended and uncapitalised and, outside of perhaps Germany, most firms and households are operating in uncertain and difficult conditions. This is how a balance-sheet recession works: there is a self-reinforcing cycle of people and businesses extinguishing debt rather than taking it on. Monetary policy and easy central bank loans are simply not terribly effective in breaking the cycle.

Small business loan hunger

Somewhat in contrast, a separate survey of small and medium-sized eurozone companies showed that they were, if anything, more reliant on bank loans than before and more keen to take them out. This was due to a combination of generating less money internally and also partly as a precaution.

More small and medium-sized companies are being turned down and loan conditions, while not as bad as in the aftermath of the failure of Lehman Brothers, have tightened.

This doesn’t make the ECB’s LTRO a failure, but it does show how little of the more than 1 trillion euros in three-year loans the ECB doled out is actually hitting the real economy. One easy conclusion: we’ve not seen the last extraordinary attempt to hose out the banking stables. It might be another LTRO, or it might be another “bad bank” to eat the sins of the “good” banks, but the current trajectory really can’t be allowed to continue.

At least on the credit supply side, none of this is going to improve any time soon. An April report from the Bank for International Settlements gave a broad and sobering indication of roughly how much capital banks globally need to raise.

Large, internationally active banks, about one fifth of which are European, would need to raise almost a half a trillion dollars to meet recommended new capital targets under the Basel III plan. That’s nearly one and a half times their annual profits, so no easy task. While the study did not break down the results by country, it’s reasonable to assume many euro zone banks are among those with big capital needs.

As it will be very difficult to raise the required amount of capital, especially in the midst of a slow-moving but profound crisis, banks are likely to try to dispose of assets. That will put even more pressure on credit availability.

It is unclear what will break the self-reinforcing cycle between Europe’s credit crunch and its recession

4--European banking – A perfect storm?, Re-define

Excerpt:  he future of the Euro area banking system hangs in balance. It would not be an exaggeration to say that, were it not for more than a trillion Euros of implicit and explicit public support in the form of capital injections and funding guarantees from Member States and liquidity support from the European Central Bank, the Euro area banking system could well collapse.

While some may think that, four years after Lehman’s collapse, the biggest problems of European banks are now over, that may not be true. All things considered, the biggest challenges for Euro area banks still lie ahead. In particular, the combination of largely unreformed banking models, large scale regulatory changes and uncertainties around their final shape as well as the worsening Eurocrisis mean that Euro area banks face very large, potentially insurmountable challenges........

The LTRO allowed banks to borrow unlimited amounts of money at a paltry 1% rate of interest for three years against a wide variety of collateral. This has addressed the funding needs of many Euro area banks for the short to medium term, but at the same time potentially built up even more serious problems for the longer term.

But ECB support makes Euro banks a less attractive investment for bondholders

Pre-crisis, the senior unsecured bond holders of Euro area banks lent to banks in the confidence that were things to go wrong they would be high up in the creditor queue to collect at least part of what they had lent from the proceeds of the sale of banks assets that had not been pledged against particular borrowings. The stock of these so called ‘unencumbered’ assets was large. Post LTRO, most Euro area banks now have a much smaller stock of ‘unencumbered’ assets. What’s worse, the quality of this residual portfolio is worse than the average quality of the banks’ asset portfolio given that the good quality assets have been pledged to the ECB against LTRO borrowing. Asset encumbrance makes lending to Euro area banks which have borrowed LTRO funds more risky.

Euro area banks face massive funding challenges and it’s not obvious where and how they will get the funds to replace legacy borrowing and the ECB LTRO funds when they fall due...

Particularly in Spain, but also to a lesser extent in other countries such as Italy, the collapse of growth will lead to a sharp increase in the amount of impaired assets and have a large negative impact on profitability as sources of earnings shrink and losses multiply. As the real economy deteriorates, the losses at EU banks will multiply and exert further pressure on already stretched sovereign finances.

The strengthening links between banks & sovereigns reinforce problems...

banks in the EU have benefited from and continue to enjoy a massive public subsidy. As we highlighted at the beginning of this note, without the current and recent public support that has been provided by EU sovereigns and the ECB, the Euro area banking system would almost certainly have crumbled since the collapse of Lehman.

Undoubtedly, without public support, the shareholders and bondholders of EU banks would have lost hundreds of billions in the crisis. So, the existence of both the implicit and explicit public support has provided massive benefits to the shareholders and bondholders of EU banks...

EU banks face a perfect storm in the coming years and the only thing that can be predicted with some confidence about the future of the banking system is that it would need to look very different. No wonder then, that EU banks, Euro area banks in particular, are trading at average market values that are a third of their book values.

5---EU tips into recession, zero hedge  (see chart)

6--Why U.S. house prices won’t recover, Marketwatchwill U.S. house prices recover? Likely never. But that’s no reason not to buy.

Excerpt:  When

The latest S&P/Case-Shiller numbers, reported last week, show that prices in 20 major markets declined 3.5% over the year through February. They’re now back to 2002 levels. If we subtract for inflation, they’re back to 1998 levels.

But consider: After subtracting for inflation, prices are also back to 1986 levels. And 1955 levels. And 1895 levels.

7---Ability-to-Repay Rule for Mortgages Nears CFPB Approval, Bloomberg

Excerpt:  Richard Cordray wants lenders to adhere to the most basic tenet of banking: making sure borrowers can repay. Getting them to agree on how is proving tougher.

The director of the Consumer Financial Protection Bureau is aiming to discourage lenders from making home loans with risky features and outlining steps they must take to verify borrowers’ finances, as part of the “qualified mortgage” or QM regulation. Banks that follow the guidelines will gain legal protection against borrower defaults.

Here’s what should be the least surprising lending advice you’ve ever heard: If you are going to lend money, you should probably care about getting paid back,” Raj Date, the agency’s deputy director, said in a speech April 20 in Los Angeles.

The rule, which may be released as soon as next month, is dividing the banking industry with the largest mortgage firms such as Wells Fargo & Co. and Bank of America Corp. siding with some consumer groups that the provision should allow certain lawsuits. Trade groups whose members include smaller lenders are holding out for a version that would protect bankers entirely from being sued, arguing that without the provision, home loans will be costlier and harder to obtain....

To obtain legal protection, a lender would have to meet underwriting standards such as verifying a borrower’s income and assets. Qualifying loans also couldn’t have features such as interest-only payments or include fees and points totaling more than 3 percent of the loan amount.

Cordray has called the regulation, required by the 2010 Dodd-Frank Act “one of our most important rulemakings,” four years after home loans triggered the worst financial crisis since the Great Depression. It’s part of a broad overhaul of housing finance by multiple federal agencies, that will eventually include legislation overseeing mortgage servicing, securitization and restructuring the government role.

After the release of the qualified mortgage rule, regulators say they will work on legislation requiring lenders keep a stake in some securitized mortgages, known as the “qualified residential mortgage” regulation....

In the years leading up to the financial crisis, banks increasingly made loans with high fees and adjustable terms that borrowers wouldn’t be able to repay, requiring them to refinance after a few years. When housing prices dropped, many defaulted instead....

Frank Keating, head of the American Bankers Association, said that the proposed compromise “lacks any real protections and opens banks up to wide litigation risk.”

“This uncertainty will make borrowing more expensive and credit less available,” Keating said in an e-mailed statement. “Some lenders may leave the market altogether.”

8--Study finds that analytical thinking reduces religious belief, Raw Story

Excerpt:  A study carried out by psychologists at the University of British Columbia has concluded that tests which promote analytical thinking simultaneously reduce the level of religious belief in skeptics and devout believers alike.

Psychologists have long believed that humans rely on two different cognitive systems, one “intuitive” and the other “analytical,” and previous research has pointed to a link between intuitive thinking and religious belief.

“Our findings suggest that activating the ‘analytic’ cognitive system in the brain can undermine the ‘intuitive’ support for religious belief, at least temporarily,” study co-author Ara Norenzayan explained.

9--Biggest Weekly Stock Outflow Of 2012, zero hedge

Excerpt:  For the 7th consecutive week retail investors not only refuse to chase the bouncing ball, but to listen to former titans of finance, such as Goldman Sachs who on March 21 told everyone to get out of bonds and into stocks (a trade which has since been unwound for all practical aspects). Since then, as well as before then, we have seen relentless outflows from equities to the tune of $10 billion, while allocating cash precisely to bonds, as taxable bond funds saw $20 billion in inflows over the same time period. What is more notable is that despite the liquidity driven rally, one which everyone now understands is 100% fake and central bank driven, retail never got fooled and refused to be the dumb money for the duration of the "rally" - and now that the rally topped, and stocks are sliding back down, retail investors pulled out the biggest one week amount, or $4.3 billion, in the week ended April 4, from domestic equity funds per ICI.




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