Notes From Underground

As the news came out on Friday morning, the headline reported that the unemployment rate dropped to 8.6% from 9%–at first glance, the rate looked like 98.6 on the economic thermometer. The analysts are still arguing over the meaning of this data, but for traders and investors the real outcome is meaningless. It may lead to foreign investors purchasing U.S. equities as America is seen to be a relatively stronger economy, especially when compared with the EUROPEAN CREDIT-STRESSED environment.

The headline number is fraught with all types of data pollution as the bean counters strive to figure out how many workers have dropped out of the JOB POOL to create such a significant drop in the RATE when the net NONFARM PAYROLL GREW AT A TEPID NUMBER OF 120,000.

Prior to the U.S. release, the Canadian unemployment was disappointing but not nearly as weak as the headline suggested. The Canadian rate rose to 7.4% and there was 18,000 jobs lost versus the predicted  increase of 18,000. Upon further review, the Canadians lost many part-time jobs but gained 36,000 full-time workers and many of the job losses were in services while the production workers performed relatively well. All in all, not a bad report and at 98.6 it seems the economic body is operating at a mild temperature.

The unemployment news was originally met with an EQUITY RALLY but by the close the rally in the U.S. was erased by weekend fears about Europe. There are still many contradictory statements emanating out of the European policy centers as Chancellor Merkel continues to press for a full-blown fiscal union, or what Mario Draghi refers to as a new “fiscal compact.” In a New York Times article by Jack Ewing, Draghi said,”What I believe our economic and monetary union needs is a new fiscal compact. It is time to adapt the euro area design with a set of institutions, rules and processes that is commensurate with the requirements of monetary union.”

It seems that Draghi has bought the German position of a promise for a real fiscal union must be agreed to before Merkel will allow the ECB to step up its role as LENDER OF LAST RESORT. Sarkozy and Merkel are meeting again on Monday to try to iron out any discrepancies between France and Germany over the next steps in “FIREWALLING” Spain, Italy and France from any further economic contagion.

Pressure is growing on Berlin as over the weekend there are rumors that COMMERZBANK, Germany’s second largest banks, will have to be nationalized. Again, it’s rumors but it means the GERMAN banks’ solvency is being challenged. If COMMERZBANK fails then one of the most levered bank in Europe, DEUTSCHE BANK, will move to center stage.

It seems that if Merkel and Sarkozy can create some sense of agreement, then Draghi will be willing to push the ECB into a larger rate cut at Thursday’s meeting, a day before the EU holds another one of its crisis conferences. Before Friday’s European ECONOMIC SUMMIT, Treasury Secretary Geithner is heading to visit European Capitals ostensibly to remind the EUROCRATS that the Obama administration is adamant that Sarkozy/Merkel not fail to secure a significant bailout plan. The U.S. has been trying to get the EUROPEANS to understand the global significance of European muddling. It is no accident that the FED orchestrated Wednesday’s action to push DOLLAR SWAP RATE LOWER. Also of paramount importance was that China and Brazil both added to the global efforts to create the image of liquidity enhancement and back off of their previous moves of austerity.

MONDAY NIGHT WE WILL HEAR FROM THE AUSTRALIAN CENTRAL BANK (RBA).It is expected that the Aussies will cut the overnight rate from 4.5 to 4.25%. It is important to see if the RBA actually goes further and cuts to 4% so as to stay in the “SPIRIT OF THE SEASON.”

Adding even more pressure to the European bailout plan, it has been reported that IMF MANAGING DIRECTOR Christine Lagarde has been in Latin America trying to secure support from the South American nations for a large role for the IMF in any global action. It seems that Geithner and Lagarde are stressing the urgency of the situation because it is important to act before the anti-IMF forces that is the U.S. CONGRESS can block the use of IMF funds.

Remember that Christine Lagarde is an international lawyer who previously working for Baker McKenzie in Chicago. So for Ms. Lagarde, turning the international laws into a “world of grey” is an art form. Many pundits are dismissing the IMF‘s ability to act because of codified legal guarantees. Watch how an international lawyer moves to soften the intent of IMF laws. As it has been said, “FOR OUR FRIENDS WE INTERPRET THE LAW, FOR OUR ENEMIES WE ENFORCE IT.”

***In another footnote to the EUROPEAN DRAMA THAT CONTINUES TO IMPACT THE MARKETS, THERE WAS A VERY POWERFUL EDITORIAL IN THE NEW YORK SUN yesterday titled, “Bernanke’s Forgotten Footnote.” It picks up from last week’s cited Ambrose Evans-Pritchard piece. In Bernanke’s famous speech on November 21, 2002, “Deflation: Making Sure ‘IT’ DOESN’T HAPPEN HERE,” the famous helicopter reference speech, Bernanke stated that the FED,” has the authority to buy foreign government debt as well as domestic government debt. Potentially, this class of assets offers huge scope for FED operations as the foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt.”

The SUN editorial makes that the FED‘s publication of the speech has a footnote (#16) that the FED committed to Congress not to use this tool to bail out foreign nations. As Simon/Garfunkel might have advised, “ALL MY WORDS COME BACK TO ME IN SHADES OF MEDIOCRITY.”

***One blog site is always quick to point out when the CME raises margin requirements and its potential detrimental impact on markets. The author raises the possibility of a selloff in the Canadian dollar, Australian dollar and Chinese RMB as margins were raised 18%. As a long-time member of the CME, I can say that the automated SPAN system is a very good tool at keeping the markets traded at the CME secure. (OTC ISSUES LIKE EUROPEAN DEBT ARE ANOTHER ISSUE.) It seems by using the headline-grabbing 18% margin increase, it makes the impact severe. For example, the Canadian margins increase to $2300 from $2000 for maintenance of an open position. The Aussie margin for maintenance increased to $3200 from $2600. These are not significant and they are the same for long and short positions.

IF YOU ARE AN INVESTOR AND CANNOT MEET THE MARGIN INCREASE, YOU ARE EITHER TRADING TOO BIG FOR YOUR CAPITAL OR SIMPLY SHOULD NOT BE CARRYING OVERNIGHT OPEN POSITIONS. This idea that margin increases will dramatically affect open positions is to my mind ludicrous, especially in a ZERO INTEREST RATE ENVIRONMENT. IT SEEMS THAT THE EARLY TRADING CENTERS IN ASIA PROMOTE THIS HOGWASH TO GET VOLATILITY–CAVEAT EMPTOR. The ability to control a $102,000 AUSTRALIAN DOLLAR CONTRACT will not be bothered by a $600 margin increase. The CME should be applauded and not vilified by its margining system.

Tags: Ben Bernanke, Canadian unemployment, Christine Lagarde, CME, Commerzbank, Deutsche Bank, dollar swap rate, ECB, equity rally, Fed, IMF, Mario Draghi, Merkel, New York Sun, Nonfarm Payroll, RBA, Sarkozy, unemployment

This entry was posted on December 4, 2011 at 4:20 pm and is filed under Debt Market, ECB, Europe, Fed, Germany, unemployment, United States. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.