Risk-On Trade To Top

With exuberance and peak confidence in the abilities of politicians and central banks — the two most inept and incompetent type of people — risk markets have jumped quite a lot over the past month or two, and with it investors sentiment as well.

Markets are soon to be disappointed, and getting into September with such a valuations and such sentiment levels will be very risky.

It's time to get ready to short equities across the board — including AAPL will peak the day before or after the iPhone 5 release. US and European equities might peak on Friday with the Fed announcement that there will be no QE3 at this time — and why would there be one? Rates on US treasuries are close to their all time lows and equities are close to a multi-year high!

On the short list is also the bubble economy currencies: CAD and AUD on the top of the list. And in commodities, while I expect weakness across the board Gold, Silver, Oil and the rest of the commodities complex — including ags and grains, no matter what rationalisation about drought etc. you see on the news.

Peak Over-Confidence and Denial in Australia Confirms Economic Collapse Has Begun

Here are a couple of Bloomberg reports showing just how much Australian policy makers are in denial and plain incompetents (or liars?). From a contrarian perspective, this confirms to me that their bubble-economy has already began its bust is now confirmed. It will soon be time to short their equities and the infamous AUD, THE bubble currency.

Ironically, the public is not a fool, because they feel the pain in their wallets, and hence cannot believe the massaged numbers coming out of the government, nor the lies.

Finally, something I haven't picked up lately, but my forecast from about 2 years ago now, where I predicted rates would go down and not up in complete disagreement with ALL the economists, has been proven wrong.

• Australia’s Strong Economy Proves ‘Doomsayers’ Wrong, Swan Says
• Stevens Praises Australian Economy, Warns on Asset Bubbles

(Bloomberg) June 10, 2012 — Australia’s economic performance is proving the “doomsayers” wrong, Treasurer Wayne Swan said ahead of a government conference this week to address challenges including an elevated currency and uneven growth. 

[...] Public support for Gillard’s government isn’t getting a lift from one of the fastest-growing economies in the developed world, led by the resource-rich regions in the north and west. Consumer confidence is subdued and her governing Labor Party trails in opinion polls as tourism, manufacturing and retail industries across the south and east struggle with the sustained strength of the local currency.

“There are always those who are all too ready to talk down our nation’s prospects,” Swan said. “Over the past week, the doomsayers have been proved to be completely and absolutely wrong.” 

[...] Still, consumer confidence in May was near the lowest level this year
[...] Australia’s central bank cut interest rates by 50 basis points late last year and a further 75 points in the past two meetings. At 3.5 percent, the overnight cash rate target is still the highest among major developed economies.

(Bloomberg) June 10, 2012 — Reserve Bank of Australia Governor Glenn Stevens expressed optimism about the nation’s economy and cautioned against monetary policy settings that could reignite asset bubbles, the risk of which he said was low. 

[...] Stevens’s speech, titled “The Glass Half Full,” urged Australians to embrace more subdued spending and borrowing, and steadier asset prices, as a path to sustainable economic expansion and wealth. Employment growth this year and a gross domestic product report showing the economy grew 1.3 percent last quarter, more than twice the level forecast, underscore the nation’s resource-fueled strength.

Oil Recap — Oil Heads for Longest Run of Weekly Losses in More Than 13 Years — Venezuela Overtakes Saudis for Largest Oil Reserves — Why Oil Is Probably Finding a Short Term Bottom Here

Oil peaked at $147 in 2008 and then again in the $110 range in 2011 and 2012. Peak Oil theorists and hyper-inflationists do not understand why the price has fallen so low, in the low $80s... Moreover, Peak-Oil or not, it seems like supply is actually increasing for the time being, and not being constrained by the so called peak-oil theory. The US are almost at the point of drowning under their oil inventories. Last argument: oil demand is not as inelastic as the bulls pretend. Demand actually declines with price increases, and also in economic downturns. Finally, it's interesting to note that according to BP, known reserves have increased in 2012 compared to 2010, while all the producers have been pumping like there is no tomorrow.

So, first, I do not believe that oil has been driven by anything but speculation in the past 5 years. Peak oil or not, the current price reflects not the usage demand by end consumers, but demand by speculators. Yes, speculators do affect prices, as they are part of the demand and supply side in the futures markets.

Second, the massive flow of negative news after a long decline and very negative sentiment is leading me to believe that oil is scratching bottom and is ready for a temporary bounce, before resuming the downtrend of the Greater Depression.

There's a massive flow of extremely bearish news about oil these days. See for yourself, in the past 3 days, on Bloomberg:

• Oil Falls in New York as IEA Says Global Supplies Have Improved
• Oil Drops Before OPEC Meeting, U.S. Crude Stockpile Data
• Oil Drops a Fourth Day on Naimi Comments, Iran Exemptions
• OPEC Set to Break 10-Year Habit of Supply Cuts During Routs
• Venezuela Overtakes Saudis for Largest Oil Reserves
• Venezuela’s Chavez Plans to Double Oil-Output Capacity by 2019
• Oil Heads for Longest Run of Weekly Losses in More Than 13 Years

Below are quotes from the respective articles (in the order above):

(Bloomberg) June 13, 2012 — Crude oil declined in New York as the International Energy Agency said global markets are better supplied than earlier this year and U.S. retail sales dropped. 

Futures slid as much as 1.2 percent. The Paris-based IEA said in a monthly report today that global supplies increased by 200,000 barrels to 91.1 million barrels a day in May. U.S. crude inventories, which rose to the highest since 1990 at the end of May, may drop this week, according to a Bloomberg News survey before a government report. [...] 

“There’s still an overhang in crude inventories in the U.S. and stocks have built globally in the first half of the year,” Gareth Lewis-Davies, an analyst at BNP Paribas SA in London, said by phone.  [...] 

The IEA said the oil market is better supplied amid concern that slowing economic growth will curb crude demand. The agency cut its forecast for 2012 crude consumption to 89.9 million barrels a day, down by 100,000 barrels from May and reflects an increase of 820,000 barrels from last year. 

The Organization of Petroleum Exporting Countries, which meets tomorrow in Vienna, cut production last month, ending seven months of increases, as Saudi Arabia and Iraq lowered supplies, the IEA said. [...]

Abdalla El-Badri, OPEC’s secretary-general, said today in Vienna that “there is some oversupply in the market” for oil. 

Saudi Arabia, Kuwait, Qatar and the United Arab Emirates would like to raise the output ceiling by 500,000 barrels a day, an OPEC delegate said yesterday, declining to be identified because member countries are still in talks. Iran, facing a European Union embargo on its oil exports from July 1, and Venezuela have been joined by Iraq and Angola in warning that supplies are excessive. 

OPEC will keep the production ceiling at 30 million barrels a day, according to all 20 traders and analysts surveyed by Bloomberg News last week. 

Retail sales in the U.S. fell as slower employment and subdued wage gains damped demand. The 0.2 percent decrease followed a similar decline in April that was previously reported as a gain, Commerce Department figures showed today in Washington. Sales excluding automobiles slumped by the most in two years. 

[...] The South American country’s deposits were at 296.5 billion barrels at the end of last year, surpassing Saudi Arabia’s 265.4 billion barrels, BP said today in its annual Statistical Review of World Energy. The 2010 estimate for Venezuela was revised to the same amount, up from 211.2 billion in the previous report. 

Global reserves advanced to 1.65 trillion barrels at the end of last year, a 1.9% percent increase from a revised 1.62 trillion in 2010, BP said.


(Bloomberg) June 13, 2012 — Oil fluctuated in New York amid speculation the Organization of Petroleum Exporting Countries will keep output quotas unchanged even after a slide in prices. 

[...] “OPEC’s output is a very significant feature of the oil market and has the potential to make quite significant changes to supply and impact prices,” said Ric Spooner, a chief market analyst at CMC Markets in Sydney. “The consensus view is that at current prices it’s not too likely that we’ll get any public announcement on production-quota cuts.”
[...] 

“Demand has been incredibly weak,” said Dominic Schnider, the global head of commodity research at UBS AG’s wealth- management unit in Singapore. Boosting supply “will really be the wrong signal.” 

Oil in New York fell after a bearish “death cross” formed on the daily technical chart, according to data compiled by Bloomberg. The 50-day moving average, at $96 a barrel today, dropped below the 200-day mean at $96.41 for the first time since December. Investors typically sell contracts when the moving average for a shorter period falls below a longer one.
[...]


(Bloomberg) June 13, 2012 — Oil traded near an eight-month low after Saudi Arabia’s oil minister said OPEC may need a higher output limit and the U.S. issued more exemptions from sanctions on buying Iran’s crude, cutting the risk of supply disruption. 

Futures slid as much as 2 percent after the Organization of Petroleum Exporting Countries said the market is “amply supplied.” The U.S. added six countries and Taiwan to its list of exemptions, saying they “significantly reduced” their purchases of Iranian crude. U.S. gasoline stockpiles probably climbed to a five-week high, a Bloomberg News survey showed.

“The comments from yesterday are surprising and suggest Saudi Arabia isn’t willing to reduce production,” Carsten Fritsch, an analyst at Commerzbank AG in Frankfurt, said by phone. “Without a production cut, there will be considerable oversupply in the market in the second half, which will put further pressure on prices.”
[...]
Persian Gulf Arab members of OPEC want to raise the group’s output limit by 500,000 barrels a day, a person familiar with the situation said today.
[...] The U.S. added India, Malaysia, South Korea, South Africa, Sri Lanka, Turkey and Taiwan to the list of exemptions from sanctions, Secretary of State Hillary Clinton said yesterday in an e-mailed statement. Clinton announced in March that Japan and 10 European Union nations had qualified for an exemption for a renewable period of 180 days. 

India and South Korea were the third- and fourth-largest buyers of Iran’s crude in the first half of last year, according to the U.S. Department of Energy. China, the Persian Gulf nation’s biggest customer, wasn’t exempted from the sanctions, which are targeted at curbing Iran’s nuclear program. 

Countries have until June 28 to demonstrate they have “significantly reduced” purchases from the Islamic Republic, OPEC’s second-biggest producer, or their banks that settle the oil trades may be cut off from the U.S. financial system. [...]

(Bloomberg) June 13, 2012 — For the first time in a decade, OPEC will maintain oil-output quotas while prices plunge as Europe’s debt crisis and China’s slowing growth curb fuel demand. 

[...] Crude has fallen 22 percent in London since March 13 on mounting concern that Europe’s debt crisis will derail global growth and curb demand for energy. Saudi Arabia, the biggest OPEC member, is pumping the most in 33 years to bring prices below $100, a target set by its Oil Minister Ali al-Naimi. The group exceeded its official output level by 6 percent in April, according to the International Energy Agency. 

“They’re not going to want to rock the boat,” said Mike Wittner, head of oil research for the Americas at Societe Generale SA in New York. “This is a very fragile time for the global economy so I don’t think they’re going to take any action. There’s no way that OPEC is going to announce any cut or even say that very strongly.”

This is one of silliest comment I've ever heard. Not surprising that it's coming from a banking analyst... Does Mike Wittner really believe that OPEC cares at all of the global economy? They care about themselves only. And if the producers are pumping, including the Saudis, is because they need the cash. Why do they need the cash? To keep their people out of the streets and avoid protests by giving away subsidies and cash handouts. That's it!

[...] “It is very clear that there are tremendous surplus quantities that led to this severe decline in the prices,” Iraqi Oil Minister Abdul Kareem al-Luaibi said today in Vienna. “This would not serve anyone.”
[...]

(Bloomberg) June 13, 2012 — Venezuela now holds the largest proven oil reserves in the world, overtaking Saudi Arabia, according to BP Plc. 

The South American country’s deposits were at 296.5 billion barrels at the end of last year, surpassing Saudi Arabia’s 265.4 billion barrels, BP said today in its annual Statistical Review of World Energy. The 2010 estimate for Venezuela was revised to the same amount, up from 211.2 billion in the previous report. 

Global reserves advanced to 1.65 trillion barrels at the end of last year, a 1.9 percent increase from a revised 1.62 trillion in 2010, BP said. North Sea Brent crude, a benchmark for more than half of the world’s oil, averaged $107.38 a barrel in 2011, according to data compiled by Bloomberg. 

[...] BP said the estimates in today’s report are a combination of official sources, OPEC data and other third-party estimates. Deposits include gas condensates and natural-gas liquids, as well as crude.

(Bloomberg) June 13, 2012 — Venezuelan President Hugo Chavez will more than double the country’s oil-production capacity to 6 million barrels a day by 2019 if re-elected on Oct. 7, according to a government plan released today on his website. 

Chavez wants to increase domestic refining capacity to 1.8 million barrels a day from 1.3 million barrels a day in 2013, according to the plan. No details on funding were given in the plan, which stated that the nation would “intensify efforts to obtain the financing needed.”  [...]

(Bloomberg) June 10, 2012 — Oil fell a second day in New York, heading for the longest run of weekly losses in more than 13 years, on speculation the economies of the U.S. and China, the world’s biggest crude consumers, will slow and curb fuel demand. [...] 

Contrarians Beware, This Might Be A Bull Trap: Gold $5,000 and AAPL $1,111 Forecasts Hit the Wires

Overbullishness is still very much ingrained, as you can see from the forecasts being at multiples of the current price and the superlatives used (biggest in history, largest ever). See Apple $1,100 Prediction on CNBC:

Quotes from the transcript:

apple is going to nearly double. we're already at 561 and change. we're talking 1,111 price target. in the next 12 months, bill? that's right but our next guest says there's no chance. 

[...] 

i think this will be the biggest iphone in the history, one of the largest technology ramps ever.

Same for gold and the $5,000 forecast from BofA, still on CNBC:

Facebook IPO — Share Price Slides as Much as 14% As The Rats Jump of the Boat

For those who expected to make a fortune by participating in the Facebook IPO, it seems like you were on the wrong side of the bet, and that only the banks underwriting the IPO, and the insiders who were selling the shares, made a fortune: on the second day of trading, and following a lackluster first day, Facebook is sliding 14% to about $33, where the IPO price was $38.

Those who bought cannot say I didn't warn them.

Finally, there's a great interview of Francine McKenna on Capital Account going deep into the financial shenanigans at Facebook, and the way the company managed to overstate massively their profits, among many other valuable insights. The interview starts at about 3min in the show:

WWF Jumps in the Bandwagon of Commodities Über-Bulls

Markets have peaked, commodities are way down, and it's not anything to do with so-called fundamentals. It's all had to do with speculation, and always will have.

Now, since all forecaster only seem to be able to forecast linear or exponential growth extrapolation, and never seem to realize that everything that rise can also fall and collapse, many are set for quite a painful moment.

Today, WWF jumps in the bandwagon of the exponential growth extrapolation and state that Another Earth Needed to Meet Humans’ Demand for Resources

(Bloomberg) May 14, 2012 — Humans are using resources at such a pace they need another world to meet demand for land to grow crops and forests and raise animals, WWF International said. 

People required 18.2 billion hectares (45 billion acres) of land by 2008, with 12 billion productive hectares available, WWF said today in its biennial Living Planet report. About 55 percent of land needed was for forest to absorb carbon dioxide emissions. The Earth takes one and a half years to regenerate natural resources used annually by human inhabitants, WWF said.
“We are living as if we have an extra planet at our disposal,” WWF International Director General Jim Leape said in the report. “We are using 50 percent more resources than the Earth can provide, and unless we change course that number will grow very fast. By 2030, even two planets will not be enough.”

That's the main take away: there's no two planets in 2030, and there's no "unless": we will see a dramatic change in the course of the next few years, and the global Greater Depression will take its toll on everything you can imagine: consumption will fall, governments will fall — both have already started — and population will decrease as well — this has already started as well, and Japan is yet again the leader in this area, but China, Europe and even the US (excluding immigration) already have aging and declining populations.

The report, which urges humanity to cut waste and use food, energy and water more sustainably, is published before a United Nations conference in Rio de Janeiro next month where leaders from around the world will debate how governments can eradicate poverty while also halting the degradation of the environment. 

The average person required 2.7 so-called global hectares, or biologically productive hectares, to produce the resources they consumed in 2008, the most recent data available, according to the report. That compares with the Earth’s so-called bio- capacity of 1.8 hectares per person, it said. The UN has said the world’s human population passed 7 billion in October.

BNP Paribas Forecasts Dow 100,000!

Just a couple of days, I wrote a post titled Markets Decline Yet Over-Bullishness Remains. Well, maybe I should have waited until this completely crazy forecast was made: Dow 100,000 on CNBC.

Quotes from the transcript:

[...] our next guest says watch out, world. the dow could be headed for 100,000 

[...] i think we still have a couple of rough years ahead of us. after that if you still believe in united states and they will still have a dominant role to play in the world, which i believe, i still thinks stocks could go massively higher. you're giving yourself a very big window in terms of time frame. you're looking at 100,000 in 25 years.

Thanks to my friend SS for sending me the link 

More Denial and Madness from Spain: Santander CEO Derides Surge in Spain Defaults and Spain Rules Out Bailout as De Guindos Says Banks Funded

This is a follow up to the post I wrote just a couple of days. Just listen to the completely unbelievable statements made from the CEO of Santander, one of the biggest banks in the world, which also happen to be a Spanish and most likely highly distressed one. He also makes the statement that "this place is different", one of the most dangerous sentences of the investment world:

April 27 (Bloomberg) — JPMorgan Chase & Co., the world’s largest bond underwriter, predicts that Spanish mortgage arrears will surge as unemployment rises. That’s also the view from the international debt market, which has driven up yields on Spain’s bonds in a bet the country will have to bail out banks. 

In Spain, Banco Santander SA Chief Executive Officer Alfredo Saenz said yesterday that’s nonsense. “Mortgages get paid in good times and in bad,” he said in a news conference at the bank’s headquarters outside Madrid. “Anyone raising this problem as one of the issues for the Spanish financial system is saying something stupid.”
[...] 

“There does seem to be a strange contrast between the high level of unemployment and the surprisingly low level of delinquencies on mortgages,” said Georg Grodzki, who helps oversee $515 billion as head of credit research at Legal & General Plc in London. “This raises the issue of whether loans have been amended to make them look current when in fact they are distressed.” 

The more than 600 billion euros ($792 billion) of outstanding home loans on the books of lenders may be the “next elephant” for Spain as unemployment spurs defaults, JPMorgan analysts including Roberto Henriques and Gareth Davies wrote in a report published April 26. Spain’s jobless rate rose to 24.4 percent in the first quarter, the highest level in 18 years, from 22.9 percent in the previous three months, the National Statistics Institute said today.
[...] 

Saenz said Spanish culture is part of the reason why default rates remain low.
[...]
“It’s a sociological thing and that’s how it is,” said Saenz.
Santander had 59.4 billion euros of loans made to Spanish households to buy homes at the end of 2011 out of a total loan book in Spain of about 200 billion euros. The default ratio was 2.6 percent in March, down from 2.7 percent at the end of 2011, the bank said. 

“The data is good so let’s not start debating the quality of the information,” said Saenz. “Mortgage arrears are not a problem and are not going to be a problem.”

Santander isn’t the only Spanish bank defending its mortgage loan quality.
People “tend to look at the negative side, the unemployed that we have here,” said Manuel Gonzalez Cid, chief financial officer of Banco Bilbao Vizcaya Argentaria SA, Spain’s second- biggest lender, in an April 25 webcast for analysts. “But we don’t look at all the people who are working, who are paying their mortgages and paying their loans in a very normal fashion.” 

Of BBVA’s 79 billion euros of residential mortgage loans in Spain, 2.37 billion euros, or 3 percent, were impaired at the end of 2011, according to the bank’s annual report.
[...] Based on Irish default levels, a similar trend in Spain would lead to losses of 59 billion euros for the banks there, according to the JPMorgan analysts. 

The picture is clouded by the increasing willingness of banks to change the terms of loans to help customers keep up loan payments. Bankia SA, Spain’s third-biggest bank, said April 24 that it’s making 110 changes to loan terms a day and that mortgages made up 45 percent of the 7,300 term adjustments it carried out in the first quarter. 

“Mortgages for individuals in all markets, including the U.S. and the U.K., normally are very resilient and resistant when the situation changes,” said Saenz. “That’s because mortgages get paid.” 

Has Saenz been living in a cave for the past 5 years?

And also: Spain Rules Out Bailout as De Guindos Says Banks Funded

April 27 (Bloomberg) -- Spanish Economy Minister Luis de Guindos ruled out seeking a bailout hours before Standard & Poor’s cut the country’s credit rating to three levels above junk and a report showed unemployment jumped close to a record. 

“Nobody has asked Spain, either officially or unofficially” to turn to Europe’s bailout mechanisms, he said in an interview in Madrid late yesterday. “We don’t need it.”

Markets Decline Yet Over-Bullishness Remains

The US markets seem to have finally peaked on the 1st April, the very day where Harry S. Dent turned bullish, and I wrote that very day about this and said that it was the contrarian signal, the last bear to turn to bull, that would mark the peak for equities.

Here are few headlines:

• Bernanke Gets 75% Approval From Investors in Global Poll
• Junk Overtakes Stocks as Cash Inundates Funds
• Birinyi Bullish as Bears With Deja Vu Can’t Wait to Sell
• Greenspan Says U.S. Stocks ‘Very Cheap’

Followed by the actual reports:

(Bloomberg) May 9, 2012 — Global investors give Federal Reserve Chairman Ben S. Bernanke his highest approval rating since 2009 and expect him to take further action this year to accelerate a revival in the U.S. economy and financial markets.

(Bloomberg) May 9, 2012 — Junk bonds are beating stocks by the most since September, with speculative-grade debt building on last month’s gains while losses deepen in equities, as investors seek a haven amid signs the economic recovery is slowing. 

Junk bonds have returned 8.3 percent this year through yesterday, exceeding the 7.2 percent gain for stocks. [...] Funds that buy speculative-grade debt reported $1.84 billion of inflows in the week ended May 2, with more than 85 percent of the cash going toward U.S. high yield, data compiled by Cambridge, Massachusetts-based EPFR show. That’s the most since the week ended Feb. 15, when the funds recorded $2.25 billion. 

Junk bond returns of 107 percent since the end of 2008 are double the 53 percent gain in stocks worldwide. 

“Look at the alternatives,” said Gershon Distenfeld, who oversees high-yield credit investments at AllianceBernstein LP (AB) in New York. “People are scared of equities. They’re very volatile. High yield looks pretty good on a risk-adjusted basis.”

(Bloomberg) May 5, 2012 — U.S. stock investors, battered by losses in May for two straight years, have never been so sure that history will repeat itself, a sign to Birinyi Associates Inc. that it’s time to buy. 

Equity mutual funds tracked by the Investment Company Institute recorded $16 billion of outflows with less than a week to go last month, on pace for the worst April since at least 1984. More than 34 percent of forecasters surveyed by Investors Intelligence said stocks will fall 10 percent, the highest proportion at this time of year since Bloomberg began tracking the data in 1989. Options that protect against losses in the Standard & Poor’s 500 Index traded at the most expensive level in five years. 

The S&P 500’s 1.9 percent slump through yesterday from a four-year high on April 2 has spurred bears to predict the gauge will mirror retreats of at least 15 percent from April peaks in 2010 and 2011 as economic growth slows. Birinyi, Northern Trust Corp. and Wells Capital Management say increasing investor anxiety is a contrarian sign that will give way to a rally after record profits left shares 10 percent cheaper than a year earlier. 

“Don’t get shaken out by the stories about possible corrections, the similarity to previous years,” Laszlo Birinyi, the founder of Westport, Connecticut-based research and money- management firm Birinyi Associates, who was among the first to suggest buying stocks as the market reached its lows in 2009, said in a phone interview yesterday. “They are just nice background music. My attitude has been this market will continue to surprise you on the upside.”

(Bloomberg) May 1, 2012 — Former Federal Reserve Chairman Alan Greenspan said U.S. stocks offer good value and are likely to rise as corporate earnings increase over time.

“Stocks are very cheap,” Greenspan said today at the Bloomberg Washington Summit hosted by Bloomberg Link, citing “very low price-earnings ratios.”

“There is no place for earnings to grow except into stock prices,” said Greenspan, who served as Fed chairman from August 1987 to January 2006.          

Madness and Denial in Spain Lingers

Below are some quotes from a couple of interesting Bloomberg report. The key points I would like to highlight, in addition to the madness of the crowds is how the government and central planning crated the bubble. In a free market, the bubble would never reach such levels, and would bust naturally due to the lack of funding:

• Credit wasn’t a problem, the banks were throwing money at people. Comment: Yes, this is due to the fact that the Governments have created Central Banks which control the availability of credit, and they have also made it lawful for banks to create money out of nothing, with the fractional reserve banking, which allows banks to lend as much as 30, 40, or 50 times as much as they could without this law.
• More obviously: Both booms also were fueled by incentives. In Ireland, the government gave investors tax breaks to build in certain areas, and granted homeowners breaks on their interest payments. In Spain, there were incentives for municipalities to approve land for development because they could keep 10 percent of all the land they reclassified.
• The former Irish Minister couldn't say it better: “You could say the government was drunk on the revenue that was coming from all the construction taxes.”
• The regulators failed at their job, including every single Central Bank. Yet, pro-Central Planning people will say they need more power and more staff. 

(Bloomberg) May 10, 2012 — Spain is underestimating potential losses by its banks, ignoring the cost of souring residential mortgages, as it seeks to avoid an international rescue like the one Ireland needed to shore up its financial system. 

The government has asked lenders to increase provisions for bad debt by 54 billion euros ($70 billion) to 166 billion euros. That’s enough to cover losses of about 50 percent on loans to property developers and construction firms, according to the Bank of Spain. There wouldn’t be anything left for defaults on more than 1.4 trillion euros of home loans and corporate debt. 

Taking those into account, banks would need to increase provisions by as much as five times what the government says, or 270 billion euros, according to estimates by the Centre for European Policy Studies, a Brussels-based research group. Plugging that hole would increase Spain’s public debt by almost 50 percent or force it to seek a bailout, following in the footsteps of Ireland, Greece and Portugal. 

“How can you only talk about one type of real estate lending when more and more loans are going bad everywhere in the economy?” said Patrick Lee, a London-based analyst covering Spanish banks for Royal Bank of Canada. “Ireland managed to turn its situation around after recognizing losses much more aggressively and thus needed a bailout. I don’t see how Spain can do it without outside support.” 

Spain, which yesterday took over Bankia SA, the nation’s third-largest lender, is mired in a double-dip recession that has driven unemployment above 24 percent and government borrowing costs to the highest level since the country adopted the euro. Investors are concerned that the Mediterranean nation, Europe’s fifth-largest economy with a banking system six times bigger than Ireland’s, may be too big to save. 

[...] Spain’s banks face bigger risks than the government has acknowledged, even with lower default rates than Ireland experienced. If losses reach 5 percent of mortgages held by Spanish lenders, 8 percent of loans to small companies, 1.5 percent of those to larger firms and half the debt to developers, the cost will be about 250 billion euros. That’s three times the 86 billion euros Irish domestic banks bailed out by their government have lost as real estate prices tumbled. 

Moody’s Investors Service, a credit-ratings firm, said it expects Spanish bank losses of as much as 306 billion euros. The Centre for European Policy Studies said the figure could be as high as 380 billion euros. 

At the Bankia group, the lender formed in 2010 from a merger of seven savings banks, about half the 38 billion euros of real estate development loans held at the end of last year were classified as “doubtful” or at risk of becoming so, according to the company’s annual report. Bad loans across the Valencia-based group, which has the biggest Spanish asset base, reached 8.7 percent in December, and the firm renegotiated almost 10 billion euros of assets in 2011, about 5 percent of its loan book, to prevent them from defaulting. 

The government, which came to power in December, announced yesterday that it will take control of Bankia with a 45 percent stake by converting 4.5 billion euros of preferred shares into ordinary stock. The central bank said the lender needs to present a stronger cleanup plan and “consider the contribution of public funds” to help with that.

The Bank of Spain has lost its prestige for failing to supervise banks sufficiently, said Josep Duran i Lleida, leader of Catalan party Convergencia i Unio, which often backs Prime Minister Mariano Rajoy’s government. Governor Miguel Angel Fernandez Ordonez doesn’t need to resign at this point because his term expires in July, Duran said. 

Spanish banks have “a 1.7 trillion-euro loan book, one of the world’s largest, and they haven’t even started marking it,” Hesse said. “The housing bubble was twice the size of the U.S. in terms of peak prices versus 1990 prices. It’s huge. And there’s no way out for Spain.”
[...] The losses of bailed-out domestic banks in Ireland have reached 21 percent of their total loans. Spanish banks have reserved for 6 percent of their lending books. 

[...] Developers are still building new houses around the country, even with 2 million vacant homes.[...] In Spain, a bank can go after other assets of the borrower, who remains on the hook for the debt no matter what the price of the house when sold. Still, the same extended liability didn’t stop the Irish from defaulting on home loans as the economy contracted, incomes fell and unemployment rose to 14 percent.

(Bloomberg) May 2, 2012 — From atop the stone walls of Avila, Spain, a medieval city an hour’s drive northwest of Madrid, beyond the parking lots and empty playgrounds and thousands of vacant new apartments, a construction crane can be seen moving on the horizon as building continues. 

“Avila isn’t an exception,” said Jesus Encinar, co- founder of Madrid-based Idealista, Spain’s largest property website, and an Avila native. “It’s a small-scale example of the madness that gripped the whole real estate industry.” 

In the stages of death of a real estate boom, Spain is still in denial. [...] Spain, Europe’s fifth-largest economy, is the current focus of attempts to contain the region’s sovereign debt crisis, as Prime Minister Mariano Rajoy struggles to quell speculation it will need a bailout. Developers are showing similar optimism. They continue to build even with 2 million homes vacant around the country, new airports that never saw a single flight being mothballed, and property appraisers and banks reporting values have fallen only about 22 percent, said Encinar, who estimates the real decline is probably at least twice that. 

[...] On the plain below the central walled city of Avila, a world heritage site and a popular tourist destination, the province with a population of 171,680 has about 19,000 apartments and villas empty or unfinished, according to Borja Mateo, the author of “The Truth About the Spanish Real Estate Market.” 

Ministry of Infrastructure figures show 23,419 homes were constructed in the decade through 2007, with another 11,000 homes built there since 2008. The sprawling developments are dotted with thousands of empty parking spaces, while streets have makeshift barriers where the money has run out, others simply end in fields. 

Miguel Angel Garcia Nieto, mayor of Avila for the past decade, disagrees that his city has been overbuilt. 

“When we approved the first urban plan back in 1998 there was an unprecedented demand for homes,” Nieto said in a telephone interview on April 19. “Yes, there is oversupply at the moment because of the financial crisis and everyone’s gone back home to live with their parents, but it’s not because there is lack of demand. When the economy gets back on track I am confident the supply will be absorbed.” 

That may take decades, said Encinar, after Spain’s jobless rate rose to 24.4 percent in the first quarter, the highest in almost two decades and the economy is mired in a recession that the International Monetary Fund predicts will cause it to shrink by 1.8 percent in 2012. 

The Spanish real estate bust is the biggest test to date for European authorities with Spain’s economy almost twice that of Greece, Portugal and Ireland combined. Yields on Spain’s 10- year bonds climbed nine basis points to 5.86 percent from April, approaching the level of those countries when they had to be bailed out. 

[...] In 2009, Ireland created the National Asset Management Agency, or NAMA, a so-called bad bank. It used bonds to buy commercial real estate loans from the banks with a face value of 74 billion euros for 32 billion euros. That left banks needing capital, leading the state to pour in cash and nationalize five of the six biggest lenders. 

[...] “The big knock to the domestic economy was the fact that building and construction totally collapsed and that was over 20 percent of the economy and it was bang, gone completely,’” Finance Minister Michael Noonan said in a speech to a Parliamentary committee on April 25.[...] In the 1970s and 1980s, Spain and Ireland were among the poorest countries in Europe. Following the creation of the euro, both tapped into international money to fuel the growth in their real estate markets. 

Prices doubled in Spain in the decade through 2007. Irish house prices more than quadrupled from 1995 to 2005 to an average of 303,247 euros, the fastest growth among 18 countries surveyed by the Paris-based Organization for Economic Cooperation and Development. 

“It was avarice,” said James Nugent, managing director of Dublin-based real-estate broker Lisney. “You just had to get as much of it as you could possibly get your hands on. Credit wasn’t a problem, the banks were throwing money at people.”

Former Irish Minister Tom Parlon recalls putting a 2.1 acre site of the state’s veterinary college in Dublin’s embassy belt of Ballsbridge up for sale in 2005. “We thought in our wildest dreams that maybe it might make 100 million euros, which was a crazy price,” he said. “When the bids were opened there was a bid of 171 million euros and the developer was backed up by one of our main banks. That was just a flavor of the madness.” 

The site is currently being used by a local luxury car dealer, MSL Ballsbridge Motors, to store vehicles, mainly Daimler AG’s Mercedes-Benz models. 

On the northern outskirts of Madrid, near Barajas airport and the Real Madrid soccer team’s training ground, is Valdebebas, a development project under construction covering more than 10.6 million square meters of space. About 5,400 of the planned 12,500 homes have been built and another 2,100 are under construction, according to a spokesman for the project who declined to be identified by name, citing company policy. The development, which belongs to private land owners who pooled their property, is backed by banks including Banco Bilbao Vizcaya Argentaria SA and Aareal Bank AG. (ARL) There are bus tours on Saturday for potential buyers, and an open house of the model homes every Sunday. 

“In Spain, there seemed to be an effort to smooth out the pace of activity rather than face the shock, as Ireland did,” said Alcidi. “That means the adjustment is going to take much longer in Spain.” 

At the height of their respective real estate booms, construction accounted for more than 20 percent of the economies of both Spain and Ireland. In Spain, the figure is now about 14 percent, according to Alcidi. In Ireland, the figure is just 5 percent. 

Both booms also were fueled by [Government] incentives. In Ireland, the government gave investors tax breaks to build in certain areas, and granted homeowners breaks on their interest payments. In Spain, there were incentives for municipalities to approve land for development because they could keep 10 percent of all the land they reclassified. The towns would get revenue from the developments and they could use the land they acquired as collateral for loans, said Encinar. 

About 230,000, or about two-thirds, of Irish construction jobs have gone since 2007. Home building will hit an all time low this year, with just 1 house per 1,000 people being built, compared with 15 in the 2000s, according to the Society of Chartered Surveyors Ireland. 

“It was a mania,” said Parlon, the former Irish government minister who now heads the Construction Industry Federation. “You could say the government was drunk on the revenue that was coming from all the construction taxes.” 

[...] In all, about 15 percent of Irish homes were vacant in 2011, the country’s statistics office. About 20 percent of office space in Dublin is vacant. 

[...] “It took 20 centuries for the center of Avila to be developed, and in the last 10 years they’ve developed twice that amount,” said Natalio Encinar, a brother of Jesus Encinar who still lives in Avila. Until demand collapsed, “the main industry here was building houses. And plumbers made more than engineers.”

And a few links from Mish, in chronological order:

• Hopeless Situation in Spain: New Wave of Defaults as Home Prices Crash; Bad Loans Highest Since Oct '94
• Eight of Ten Largest Stocks in Spanish Ibex Index Below Liquidation Value; Madrid Rejects Regional Budgets Representing 32.5% of GDP; Treasury Warns of "Immediate" Intervention
• Spain Long-Term Debt Lowered to BBB+ from A, With Negative Outlook; 100% Certain Conditions in Spain Worsen
• Depression in Spain: Unemployment Rate Up .5 Percentage Points to 23.6%; Expect Much Higher Rates Later This Year; When is the Breaking Point?
• Bank of Spain Confirms Foreigners Dump Spanish Bonds; Spanish Banks Foolishly Load Up
• Spain to Spend €7bn-€10bn (It Doesn't Have), Bailing Out Bankia, the Nation's 3rd Largest Bank
• Top Tweet in Spain "Do as Iceland Did"
• Audit Shows Spain's Bankia Short 3.5 Billion Euros; PP says "We Must Help Bankia, It Has Deposits for 10% of GDP"
• Spain Nationalizes BFA and 45% of Bankia; No Bid for CatalunyaCaixa, Bank Worth Less Than Zero; Der Spiegel: Germany Fears "Bottomless Pit"

Hollande Must Betray His Supporters to Save Them — Entrepreneurs in France Flee From Hollande’s Rejection of Wealth

This is a follow-up on the post I wrote on the 7th of May: Holland Elected the First President to Never Have Held A Real Elected Position Previously While Sarkozy Becomes First French President in 30 Years to Be Ousted

After all the non-sense I read in French newspapers — remember, France is close to be communist country as possible, and even Sarkozy qualifies as a far-left candidate in the whole range of political ideas, even though he considers himself to be in the right wing, he's in the right wing of the far left — here are quotes from a couple of sensible reports, courtesy of Bloomberg.

(Bloomberg) May 9, 2012 — French voters are deluding themselves if they think the man they just elected president offers a viable alternative to the departing Nicolas Sarkozy. 

Francois Hollande’s socialist program is inoperable. Let’s hope he understands that. If he doesn’t already, he soon will. 

Hollande’s campaign was a throwback to Francois Mitterrand’s failed socialist experiment of the early 1980s. The new president doesn’t oppose Europe’s fiscal pact because it needlessly imposes too much austerity too soon -- which is true. He opposes the very idea of structural reform. In France the government already spends 56 percent of gross domestic product. Hollande now promises, among other things, to hire tens of thousands of extra civil servants and roll back Sarkozy’s increase in the retirement age from 60 to 62. 

He can’t think of a public spending program he doesn’t like. His rhetoric is stridently anti-capitalist. And he proposes to pay for this further expansion of government with higher taxes -- including a new top income tax rate of 75 percent. 

France isn’t starting from a position of fiscal or financial strength. Capital markets were already nervous about its prospects. They will stamp on any conscientious attempt by Hollande to keep his crazy promises -- and if that happens, the wider crisis in the euro area will flare again. The question isn’t whether the crowds in Paris celebrating the return of good old-fashioned socialism will get what they want -- they won’t. The question is whether Hollande will row back from his campaign pledges quickly enough to avert disaster. 

The mood of jubilation among France’s unreconstructed leftists will make it difficult. And Hollande doesn’t have much time. Mitterrand took from 1981 to 1983 to discover that his policies constituted the alternative that Margaret Thatcher had in mind when she said, “There is no alternative.” Hollande may have just days to come to the same revelation. Looming parliamentary elections complicate the tactical judgment. Hollande needs voters to give him the majority in next month’s vote for the legislature. He can’t betray his supporters before then. 

Whether it’s sooner or later, Hollande will be forced to acknowledge reality, and the disillusionment of the French left will be terrible. 

[...] Wisely, Hollande’s campaign was more about posture than specifics. We know he’s against austerity and for taxing the rich -- but he hasn’t drawn up a budget. That must wait, he says, until auditors have checked the government’s books. This could give the new president cover to rethink his position on longer-term fiscal control and structural reform. If he does that and insists on short-term fiscal moderation, whether this is deemed a renegotiation of the fiscal pact or merely a supplement to it, his election might help Europe.
But Hollande can’t be a good thing without letting his supporters down. That’s a hard truth to contemplate in your first week in office. 

And, the following one. I couldn't agree more with Jeremie Le Febvre.

Jeremie Le Febvre, the 30-year-old founder of private equity marketing-services firm TBG Capital Advisors, plans to move to Singapore from Paris this year. 

Not because of President-elect Francois Hollande’s pledge to boost taxes; rather for what Hollande’s victory says about how wealth is viewed in France, the entrepreneur said. 

“What’s really driving my departure is the fact that I don’t share the values that emerged during the election, the rejection of ambition and success,” he said in an interview. “It’s part of France’s difficult relationship with money, but it has reached a new level. Even if it’s utopian, I need to believe for me and my descendents that the sky is the limit.” 

France, the fifth-richest country and home to some of world’s wealthiest, including LVMH Moet Hennessy Louis Vuitton SA Chief Executive Officer Bernard Arnault, doesn’t celebrate its affluent. Hollande, a Socialist who once said “I don’t like the rich,” and who plans to slap a 75 percent tax on income of more than 1 million euros ($1.29 million), reinforces the sentiment that in France to be rich is not glorious. 

“Hollande is using the 75 percent tax as a symbol to convey certain values through stigmatization,” Le Febvre said. 

Hollande’s rhetoric against wealth and finance is prompting some in France to consider leaving, and European rivals are welcoming them. “Bienvenue a Londres,” or welcome to London, Mayor Boris Johnson quipped in January. Switzerland and Belgium have been just as warm. 

Julien Berckmans, a real estate agent at Brussels-based Best Home Consult, took five calls from French citizens seeking to buy property in the Belgian capital after Hollande defeated President Nicolas Sarkozy on May 6. 

“They had come and visited houses in the previous weeks, telling us their decision depended on the outcome of the presidential election,” Berckmans said. “They called on the morning after to say they were serious about moving.” 

Berckmans said there’s been a steady flow of house hunters in areas such as Ixelles and Uccle -- near the French school. 

Abdallah Chatila, a Geneva-based realtor who specializes in properties worth more than 3 million euros, said he received several enquiries from lawyers on behalf of French clients. 

“It’s difficult to determine, but we’ll know in the next three months how many are willing to confirm,” he said. 

Hollande’s millionaire tax announcement during this year’s election campaign triggered a 30 percent spike in searches from France for prime properties in wealthy London neighborhoods such as South Kensington and Chelsea, according to real estate agent Knight Frank LLP.

“Seen from abroad, France is the last country where an entrepreneur wants to go,” Marc Simoncini, the founder of French dating site Meetic.com, said in an interview on BFM TV yesterday. “I don’t know of any British person who’s come to set up a business in France. But I know plenty of young French people who’ve gone to London to do that.” 

The attacks on the moneyed class intensified during the presidential race, leaving entrepreneurs and other wealth creators feeling like pariahs, said Michel Collet, a tax lawyer at Paris-based law firm CMS Bureau Francis Lefebvre. 

“The rich are fed up with being stigmatized,” he said. “Beyond the expectation of higher taxes, another important reason why our clients say they want to move abroad is that the negative perception of wealth has mounted in the past weeks.” 

The attitude toward business and wealth creators is driving people away, said Diane Segalen, founder of Segalen & Associes, an executive search firm specializing in top management and board members. 

“It’s not only for people who don’t want to be taxed 75 percent, but people who want to be in a country where they think they can do business,” she said. “They want to be in a country where there’s stability in taxes and labor laws, and where they aren’t at risk when they try to set up a business.” 

Talent and skills will go where they are welcome, she said. 

[...] Collet said he noticed increasing expatriation-related queries about a year ago, when Sarkozy started increasing taxes and ended a concession that capped all taxes at 50 percent of income. The so-called tax shield had been one of Sarkozy’s first measures after being elected president in 2007. 

About 1.6 million French citizens were registered in French consulates abroad as of Dec. 31, a 6 percent increase from 2010, beating both the 2.3 percent rise the previous year and the 3 percent average annual increase in the French population living overseas, according to the Ministry of International Affairs. 

The U.K. had an 8.5 percent jump, while Switzerland and Belgium recorded 7.3 percent and 8.1 percent respectively. The surge is partly explained by the 2012 vote, which generally boosts registrations, the ministry said. 

Still, although most of the people aren’t tax exiles, for those fleeing stifling fiscal rules, the decision to move is disruptive and not taken lightly, Collet said. The destination depends on what phase of their lives they are in, he said.
[...] 
Hollande’s millionaire levy would hit between 10,000 and 20,000 households, according to estimates by the tax-collectors’ union, SNUI. It needs to be approved by France’s constitutional council, which may find it confiscatory, according to Collet.
Meetic founder Simoncini, who, with 16 other high earners, signed a letter vowing to pay more taxes, was among the few people in France to openly criticize Hollande’s plan.
“I don’t approve of this measure,” Simoncini wrote in a column published by weekly magazine Nouvel Observateur on March 5. “It would affect only a few dozen chief executive officers with unusual compensation while sending a calamitous signal to the world. How could we possibly attract people to set up businesses, create, invest and succeed in a country that would be in effect the most taxed in the world?” 

Simoncini wrote that his wealth tax would amount to 100 times his current salary because most of his fortune is invested in small businesses that don’t yet generate income for him.
On the other side of the Channel, Conservative London Mayor Johnson laid out the welcome carpet. 

“This is the global capital of finance,” he said. “It’s on your doorstep and if your own president does not want the jobs, the opportunities and the economic growth that you generate, we do.” 

Australian billionaire to build Titanic II

As a sign of peak irrational exuberance in the bubble economies of Australia and China, the BBC reports that Clive Palmer, one of Australia's richest men, has commissioned a Chinese state-owned company to build a 21st Century version of the Titanic.

"It will be every bit as luxurious as the original Titanic but of course it will have state-of-the-art 21st Century technology and the latest navigation and safety systems," he said in a statement.

Japanese Academic Economist Suggests Beauty-Tax

Courtesy of Courrier International and Google Translate, I can share the completely insane idea of this Japanese academic economist: The idea is to tax beautiful people more than ugly people, in order to make them look more attractive to japanese women, and hence allow them to start a family and bring kids to a society that is shrinking.

Of course, only academics leaving in their economic dreamland and ivory tower can come up with such irrational and surreal ideas.

To begin with, I can say as irrational as the idea is, it is nonetheless insulting to women, degrading them to greedy people only interested in the bottom line of their husband...

The idea is so silly, I cannot believe I have to spend time debunking it...

• Who would be in charge of deciding how "handsome" or "ugly" you are? Whoever will be given this role would receive such a massive power that it would only create a massive amount of corruption the Japanese society. 
• Even if it were to be objectively decided who is handsome and who is not, this creates a massive incentive for people to make themselves look ugly in public, and on the contrary could achieve the exact opposite of the silly idea.
• It's been time and again concluded that beyond a certain level, raising taxes only incentivizes people to hide their income. Only in economic dreamland can a tax rate of 80 or 90% be considered.

The Japanese government, after having completely destroyed the lives of 2 generations of Japanese people, and also having now made the whole planet a nuclear wasteland should just Harakiri and leave the japanese people and the world population alone.

Takuro MORINAGA This is sort of single men in four categories - beautiful kids, normal, moderately ugly and the ugly - and increase of 100% tax rate applicable to the fine, which would double their tax income. The moderately ugly, however, benefit from a reduction of 10% and 20% of ugly. Currently, the income tax is a progressive tax rates that increase with six depending on the income bracket: 5%, 10%, 20%, 23%, 33% and 40%.In the case of a hunk enjoying comfortable incomes located in the top, the tax rate would be 80%. If we add local taxes, which levy 10%, a handsome and rich would leave in addition 90% of its income in taxes.  

How do you think this can it be used to check the increase in the number of single people in our country and the phenomenon of marriage later and later? What shocked me the most during the last census [in 2010], is to see that almost 50% of Japanese men aged 30 to 35 were still single. Why is that? The system of lifetime employment collapsed in our country [since the bursting of the bubble economy in the early 1990s] and the practice of marriage for life, which was supported by the latter collapsed in his tower. In the past, neighbors who interfere with all or the wife of a superior is spontaneously offered to play matchmaker for young men, even for those with unattractive. These were "enquiquineuses" handing opportunities for meetings by holding out with young people. At the time, they could afford to move young women of marriageable age in the following argument: "Although it is not very attractive, he works in a good company. With it, you'll be alone all your life! "But today, with the end of the system of lifetime employment, work and income are based on merit. In addition, we are currently witnessing the bankruptcy of the national pension system. Now, only a handful of men have both the job security, income stability and stability of the old days, once that compensated the lack of physical attractiveness. These matchmakers around us, no matter how well intentioned they may no longer play their role in being sure of their making.  

Women unable to judge men in a long term perspective, they focus on those that they like the first glance.Hence the emergence of ikemen [equivalent of "pretty boy", ikemen is a neologism formed from Iketeru, "cool, attractive", and English men, men]. It's terrible! Today, the fact that so handsome with two or three women at once no longer shocks anyone, whereas previously it would have been accused of being a runner and double game play! Currently, in Japan and the United States, the economic gap between the 1% of winners and losers of 99% is problematic, but there is a much greater disparity between men based on their ability to seduce women. I believe money alone can reduce this gap. Based on the results of a survey on the structure of employment, a think tank has calculated the number of married men in the 25-30 years depending on income levels. It showed that over 70% of men with annual incomes of more than 10 million yen [about 95 000 euros] were married. However, the more income fell, the number of marriages decreased and, as we approach the one million yen [9,500 euros], only one in six men were married. I asked the following question to my students at Dokkyo University [in the suburbs of Tokyo]: "Between a handsome rich poor and ugly, which would you choose for a husband?" To my surprise, the two options have won the same number of votes. 

S&P 2850 Target Announced by Birinyi

Signs of euphoria and over bullishness have been everywhere since January, and after two months, chances are, we've topped. At least temporarily, but chances are, we've topped for good.

(Bloomberg) -- Mar 1, 2012 -- The Standard & Poor’s 500 Index (SPX) has the potential to reach a record high of 1,700 this year should economic growth surprise investors the same way falling bond rates did in 1995, Birinyi Associates Inc. said
[...] 

In January 2011, Birinyi said the average length and size of bull markets suggested the S&P 500 would rally to 2,854 on Sept. 4, 2013. 

“That number hasn’t gone away,” Jeffrey Yale Rubin, director of research at Birinyi Associates, said during a phone interview today. “It’s not like Birinyi is lowering the target, because that’s way out there, almost to 2014.”

ZeroHedge has a nice chart showing the irrationality of Birinyi's target:

Over Bullishness Illustrated

Since January, the froth in the market and over bullishness has not been compensated by any meaningful decline. Any decline has been retraced the next day. The major rally that started in October 2011 has been, in my opinion, much overdone, and has a very high risk of severe correction, if not finally a capitulation of the bulls.

Here are some quotes from the news flow since January — I'm sorry, I won't have time to comment on them as they are too numerous, but anybody with their reality lenses on should see that big trouble is ahead. You will also notice the rationalisation, and the denial of economic reality, explaining why the market will keep on going up.


Bull Market Defying Strategists Seen Continuing by Birinyi

Jan. 10 (Bloomberg) -- Laszlo Birinyi, whose prediction the bull market would weather a five-month retreat came true in October when the Standard & Poor’s 500 Index rallied 11 percent, says stocks will keep climbing in 2012. 

Equities will gain at least 8 percent as improving corporate profits force bears to capitulate, according to Birinyi, who manages $400 million in Westport, Connecticut. Forecasts for declines from economists Gary Shilling and Nouriel Roubini were repudiated in 2011 as the benchmark gauge for American equities erased a 13 percent drop.

Speculators Increase Bullish Wagers Most Since ‘10

Jan. 9 (Bloomberg) -- Hedge funds raised their wagers on higher commodity prices by the most since July 2010 after signs of accelerating U.S. growth bolstered optimism that demand for raw materials will strengthen. 

Money managers expanded their combined net-long positions across 18 U.S. futures and options by 25 percent to 671,915 contracts in the week ended Jan. 3, Commodity Futures Trading Commission data show. Bullish bets on cotton rose the most since April 2009 and those on coffee doubled. Crude-oil holdings reached a three-week high.[...] 

“The economy is back,” Chris Rupkey, the chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd., wrote in a report Jan. 6. “Despite some evidence of slowing in places like Canada, Brazil, China, and of course Europe, the prospect for continued growth in the U.S. is a bright one.”

Market Shrinks First Time Since '09 on U.S. Buybacks, Sales

Jan. 17 (Bloomberg) -- Stocks are getting scarcer in the U.S. for the first time since the bull market began as companies cut share sales to the lowest level since 2006 and buy back equity at the fastest pace in four years. 

Amgen Inc., Hewlett-Packard Co. and 1,971 other U.S. companies repurchased $397 billion of stock last year, while they issued $169 billion of new equity, data compiled by Birinyi Associates Inc. and Bloomberg show. The combination reduced the Standard & Poor’s 500 Index divisor, a measure of outstanding shares, by 0.6 percent last quarter, the first drop since March 2009. 

Shrinking supply supports prices and shows valuations are so low that executives would rather buy back shares than spend the cash to expand, according to Columbia Management Investment Advisers LLC and USAA Investment Management Co. Bears say dwindling growth prospects will limit gains and deter investors who pulled money from stock funds for eight straight months through December, the longest stretch in at least two decades. 

“Having that equity base shrink and starting from a relatively pessimistic point usually sets up pretty well in the long term,” Laton Spahr, who helps oversee $325 billion as a money manager at Columbia Management, said in a Jan. 11 phone interview from Minneapolis. “It gives you some hope that valuations have perhaps bottomed.”

Speculators Raise Metals Wagers by Most Since July: Commodities

Jan. 23 (Bloomberg) -- Speculators raised bets on higher metal prices by the most since July, turning bullish on copper for the first time in four months on signs of growth in U.S., increasing demand in China and more confidence in Europe. 

Money managers expanded combined net-long positions in five industrial and precious metals by 13 percent to 152,665 futures and options in the week ended Jan. 17, Commodity Futures Trading Commission data show. They are now the most bullish on copper since August. Traders increased holdings in silver, the precious metal most used in industry, to the highest since November. Wagers on rising gold prices advanced the most in two months.  

[...]“It’s a play on a possible demand recovery,” said Spencer Patton, the Chicago-based chief investment officer for Steel Vine Investments LLC. “People are now accepting gradually that the Europe situation is not that terrible, and China will probably have a soft landing. And the icing on the cake is the growth in the U.S.”

Gold Bulls Ascendant Amid Biggest Rally Since 1980: Commodities

Jan. 27 (Bloomberg) -- Gold traders are bullish for a fourth consecutive week, betting that the Federal Reserve’s pledge to keep interest rates low until late 2014 will extend the metal’s best start to a year in more than three decades. 

Nine of 15 surveyed by Bloomberg expect prices to gain next week. The value of gold held in exchange-traded products jumped $3.9 billion on Jan. 25, the most since October, as the central bank laid the groundwork for a possible third round of asset purchases, data compiled by Bloomberg show. Lower interest rates increase the appeal of bullion because it generally earns investors returns only through price gains. 

Hedge-Fund Bulls Add to Bets as Rally Accelerates: Commodities

Jan. 30 (Bloomberg) -- Hedge funds increased wagers on rising commodity prices to the most in two months and the rally in raw materials accelerated as the Federal Reserve pledged to keep borrowing costs low for three more years. 

Money managers raised combined bullish positions across 18 U.S. futures and options by 13 percent to 742,902 contracts in the week ended Jan. 24, Commodity Futures Trading Commission data show. The so-called net-long position in copper jumped 53 percent to the highest since August and in silver by 22 percent to the most since September. Speculators also expanded bullish bets in sugar, soybeans, cotton, gold, gasoline and crude oil. 

Facebook Files to Raise $5 Billion in Biggest Internet IPO

Feb. 1 (Bloomberg) -- Facebook Inc., the social-networking website that began about eight years ago in a Harvard University dorm, filed to raise $5 billion in an initial public offering in what would be the largest Internet IPO on record. 

Facebook, which now boasts more than 800 million users, didn’t specify the number or price of shares it will offer in a regulatory filing today. The $5 billion amount is a placeholder used to calculate fees and may change. The Menlo Park, California-based company hired Morgan Stanley, JPMorgan Chase & Co., Goldman Sachs Group Inc., Bank of America Corp., Barclays Plc and Allen & Co. to manage the IPO. 

Co-founded in 2004 by then 19-year-old Mark Zuckerberg, Facebook has grown into the dominant social-networking company, squelching competitors such as MySpace Inc. Revenue in 2011 surged 88 percent to $3.71 billion, with about 85 percent coming from advertising, according to the filing. 

“Investors are still very much willing to pay up for growth,” Paul Bard, director of research at the investment- advisory firm Renaissance Capital LLC in Greenwich, Connecticut, said before the filing. “There’s just phenomenal interest in this company and its potential.”
Facebook is considering a valuation of $75 billion to $100 billion, two people with knowledge of the matter said last week. At the high end of the range, that would value Facebook at 26.9 times trailing 12-month sales, more than double Google Inc.’s valuation when the search-engine operator went public in 2004.
[...] 

Net income last year surged by almost two-thirds to $1 billion, the filing showed. Last year, Facebook said it expects U.S. regulators to require that it disclose financial results by April 30, 2012, if the company hasn’t gone public by then. Facebook decided to wait until 2012 for its IPO to give Zuckerberg more time to gain users and boost sales, people familiar with the matter said in 2010. 

Carry Trade Rallies Like '09 as Volatility Ebbs Amid Threats

Feb. 13 (Bloomberg) -- In the $4 trillion-a-day currency market, traders calmed by a flood of central bank money are leaving safety for riskier bets against a background of Greece’s potential default and threats of nuclear weapons in Iran. 

Borrowing in dollars or yen to buy high-yielding Brazilian reais and Mexican pesos has returned 5.5 percent this year, the best start on record, and reversing last year’s 15 percent loss, the UBS AG V24 Carry Index shows. Market volatility dropped last week to the lowest since August 2008, as measured by a JPMorgan Chase & Co. index. 

Increasing trades that depend on stability underscores growing confidence that the global economy and financial system will withstand shocks as central bankers blanket the world with cash. It’s also proving a challenge for emerging markets such as Brazil, where policy makers renewed purchases of dollars to keep the real from strengthening too fast and damaging growth. 

“There’s less nervousness in the market in general,” Jose Wynne, the head of North America foreign-exchange research at the investment banking unit of Barclays Plc, said in a Feb. 7 telephone interview. “Now that the central banks are pumping on one side of the system, you have people jumping on carry trades everywhere.”

Speculators Lift Wagers to Highest Since September: Commodities

Feb. 13 (Bloomberg) -- Hedge funds increased bets on rising commodity prices to the highest since September on mounting confidence that growth in the U.S. will strengthen demand. 

Money managers boosted their combined net-long positions across 18 U.S. futures and options by 13 percent to 929,199 contracts in the week ended Feb. 7, Commodity Futures Trading Commission data show. That’s the highest since Sept. 20. Bullish wagers on copper rose to a six-month high, and soybean holdings jumped by the most this year. 

The Standard & Poor’s GSCI Spot Index of 24 commodities rose to a six-month high on Feb. 9, a day after the MSCI All- Country World Index entered a bull market, as indicators signaled accelerating growth. Fewer Americans than forecast filed claims for jobless benefits in the week to Feb. 4, and consumer confidence rose to a one-year high. Investments in commodities expanded for a seventh week, the longest streak since February 2009, data compiled by Bloomberg show. 

“The improving economic data, not just in the U.S., we’ve seen better data in Europe as well, has put recession fears on the back burner,” said Anthony Valeri, a market strategist with LPL Financial in San Diego, which oversees $330 billion of assets. “That augers well for commodity demand.” 

David Bianco Hired By Deutsche Bank To Complete Trinity Of Perma Bull

Gold Bulls Expand as Billionaire Paulson Says Buy: Commodities

Feb. 17 (Bloomberg) -- Gold traders are getting more bullish after billionaire hedge-fund manager John Paulson told investors it’s time to buy the metal as protection against inflation caused by government spending.          

S&P 500 Cheapest to Bonds as Zero Rates Boost Spending

Feb. 21 (Bloomberg) -- The Standard & Poor’s 500 Index is approaching the cheapest level ever compared with bonds as Federal Reserve Chairman Ben S. Bernanke’s zero-percent interest rates drive investors and companies from cash. 

Profits that doubled since 2009 pushed the index’s so- called earnings yield to 7.1 percent, close to the highest on record when compared with the 10-year Treasury rate, according to data compiled by Bloomberg since 1962. American companies have boosted capital spending 35 percent over six quarters, the most since 2006. 

“Conditions are almost ideal for equity investors relative to all other investments,” Keith Wirtz, who oversees $14.6 billion as chief investment officer for Fifth Third Asset Management in Cincinnati, said in a Feb. 14 telephone interview. “The Fed’s keeping rates low for the foreseeable future to try to stimulate the environment for employee hiring and business activity. What does that mean for capital markets? Savers are not being rewarded.”        

S&P 500 Gets Cheaper as Record Profit Restores Trillions

Feb. 23 (Bloomberg) -- Profits in the Standard & Poor’s 500 Index are rising faster than its price, leaving the gauge 9 percent cheaper than it was in April even after American equities climbed within 0.1 percent of last year’s high. 

The S&P 500 rose 0.4 percent to 1,363.46 today following a rally since October that added as much as $3.2 trillion to share values, according to data compiled by Bloomberg. While the index is just shy of its 2011 peak of 1,363.61, expanding income has pushed the price-earnings ratio to 14.1 from 15.4 in April. 

Economic growth that has been slower than any post- recession period since at least the 1940s is keeping investors from paying more for earnings even after stocks doubled in three years. The best January for the S&P 500 in 15 years has coincided with a decline in New York Stock Exchange trading volume to the lowest level since 1999 and record deposits with investment-grade bond funds. 

“The world is profoundly underinvested in U.S. equities,” Jeffrey Saut, chief investment strategist at Raymond James & Associates in St. Petersburg, Florida, said in a phone interview on Feb. 21. His firm manages $300 billion. “The public is bombarded with all these negatives. Greece this, Portugal that, dysfunctional governments. The retail investor is frozen.”

Bullish Futures Exceed One Million Contracts: Commodities

Feb. 27 (Bloomberg) -- Bullish commodities futures rose above 1 million contracts for the first time in five months as U.S. growth prospects improved and Goldman Sachs Group Inc. predicted further price gains. 

Hedge funds and money managers boosted combined net-long positions across 18 U.S. futures and options by 7.3 percent to 1.03 million contracts in the week ended Feb. 21, Commodity Futures Trading Commission data show. That’s the highest since Sept. 13. Bullish wagers on gold climbed to a five-month high, and bets on crude oil rose to the most since May. 

The Standard & Poor’s GSCI Spot Index of 24 commodities capped its biggest weekly increase of the year last week, touching a nine-month high on Feb. 24. U.S. consumer confidence rose more than forecast in February, and new-home sales topped estimates. Goldman reiterated an “overweight” recommendation on raw materials on Feb. 22.
“The U.S. is showing better signs of self-sustaining economic activity,” said Michael Strauss, who helps oversee about $27 billion of assets as chief investment strategist at Commonfund in Wilton, Connecticut. “What we see is reasonable global growth this year, which should be supportive of gains in overall commodities.”

And, to conclude with the icing on the cake:

 (thanks to my friend SS for sending me the Barron's cover)