The Good News

Despite all the doom and gloom over the global economy, the US continues to show steady improvement. Nov non-farm payrolls were +120k. Not spectacular, but not bad. Again, previous months were revised upward. Oct went from +80k to +100k [= +20k], but Sep was revised up from +158k to +210k [= +52k], and that's after Sep's initial release of +103k.


Look at it another way: The Nov employment report showed an increase of +120k +20k +52k = +192,000 jobs!


Also, the Nov Institute of Supply Management manufacturing index rose to 52.7 from Oct’s 50.8.


And what about the tapped out US consumer? On Thanksgiving Friday (not ‘Black Friday’, as the cynics call it), foot traffic in stores was up 5.1% over 2010 and total sales were up an estimated 6.6% to a record $11.4bn (source: ShopperTrak). Online sales on the same day were up 26% (source: comScore).


Meanwhile, US banks have been aggressively deleveraging. See below.


The Bad News

During the past few weeks Libor, the London inter-bank dollar loan rate, was getting squeezed just as it was during the banking crisis of 2008-2009. Libor is the fear gauge, or VIX, of the banking industry. A Libor squeeze means that the banks won’t loan to each other because they are loosing confidence in each other.

As an indicator of how the EU dollar market has dried up, the Sunday Times (041211)  reported Fitch as saying that since May, US money market funds have cut their exposure to Eurozone banks by 42%. And if they do loan, in many cases they want their money back within seven days.

So enter the Fed last Wednesday. It cut the rate it would loan dollars to the ECB, which in turn cut the rate it would loan to EU commercial banks. Stock markets duly soared.

So why the bad news? Because this is only a temporary solution. There’s no quick fix to the problem of lack of confidence in EU sovereign debt. The EU needs structural reform in the form of fiscal unity, and that means FISCAL DISCIPLINE.

One columnist compared the Fed/ECB intervention to digging trenches before an advancing tank battalion.

So are Europe’s public sector workers going to give up their gold-plated pensions? Will governments be able to pass reform legislation? 

(For example, the UK tax payer spends appx £15bil per year on pensions for public sector workers. Then he needs to save for his own retirement. Can this gross unfairness be unstructured?)

Anyway, the EU – meaning France and Germany - is expected to come to a muddle-through solution this week. Let’s hope that the peripheral EU counties are willing to concede a bit of sovereignty. If not, then Europe as we know it will revert to the bickering factions that it has been for the past 1,000 years.

Gold is still in a precarious state: near-term it could go either way. The fundamentals are bullish, because the central banks will continue to print money in order to get us out of this mess.

The technicals however indicate that we have come a long way in a short time, meaning that we are overbought. The triangle formation in the chart below tells that we are at a short-term crossroads.(See chart below. Imagine an upward trendline from 1500 and a downward trendline from 1900.) If we break out on the upside then gold needs to stage a convincing rally above 1800 for the bull market to continue. A downside break needs to follow through below 1600 to set up a retracement  to 1400-1300. 

Trade Idea: Stocks

Want a wild idea? Buy bank stocks. Hey - no kidding. So what if the banks burned investors by overstating earnings because they didn’t declare off-balance sheet losses. So what if they abused or misunderstood derivatives. Every guy deserves a break, right?

But according to the latest Federal Reserve statistics, as reported by Jeff Cox of CNBC (28Nov11), US banks’ leverage is at a near  record low. Formerly banks had debt ratios of 30, 40 or 50 times their assets, but in October they were down to 7 to 1. All you contrarians, have a look.

Bad Banking, Bad Regulating

But if you’re in Europe, as ever, it’s a different story. Dexia, the Franco-Belgian bank that was recently bailed out with €90bil of EU government guarantees, had been assigned an acceptable Tier 1 capital ratio of 10.4 by the European Banking Authority at the end of 2010. So how did it go bust? It was subsequently revealed that the bank’s leverage ratio was 60 to 1! (The Times, 021211)

Any more skeletons in there?