Courtesy of Win Thin

“Portugal remains in the market spotlight as its 10-year yield remains above 7% for the 10^th straight day. Furthermore, today Portugal’s 5-year yield broke above 7% for the first time and continues the pattern that we saw with Greece and Ireland. In both those cases, the 10-year yield was the first to break above 7%, with the 5-year and then the 2-year yields breaking above that level in the ensuing days. It is noteworthy is that the rescue packages for those countries have done nothing to substantially lower their borrowing costs, with 10-year yields still substantially above 7% for both. With contagion showing no signs of abating, we think Portugal is doomed to the same fate.

What about the next likely victim? Spain 10-year yields are the next highest in the periphery and now around 5.39%. But note that Ireland 10-year yields were around 4.6% right after the Greece rescue package was announced, and that Portugal 10-year yields were just above 5.9% right after the Ireland rescue package was announced. The timeline between rescues appears to have shortened, with close to 7 months between Greece and Ireland but likely down to 3-4 months between Ireland and Portugal if current trends continue.

Portuguese press reported today that Germany is pushing the country to take a rescue package as soon as possible, and before European leaders unveil long-awaited changes to its rescue fund in March. We had thought that Portugal might wait to tap the rescue fund at the same time that the changes are announced next month, but the timing is not that crucial. Rather, bond markets are signaling that a rescue for Portugal is seen as pretty much inevitable. Note that Portugal central bank Governor Costa yesterday admitted that the economy is already in recession and will remain so in 2011. Portugal contracted q/q in Q4, so it appears that Costa is looking for continued contraction in Q1 and beyond. High borrowing costs plus economic contraction means that the debt dynamics will continue to unravel. Indeed, that is why Greece and Ireland debt ratios are going to get worse for several years still ”

Harsh March is here…

As recent developments out of Libya have demonstrated, when geopolitics and oil production mix, the resultant product is quite explosive. And as more protests are sure to spread to other countries in the region (with Saudi of course being the key domino whose potential fall would send crude well over $200), below we present a summary atlas of the key production capacities in both crude and gas, as well as proven reserves of all the countries in the MENA region. At this point, with Libya largely priced in, all attention should once again shift to developments in Bahrain, which contrary to the media black out, have not been put under control even remotely.

Morocco
Population:	31.6 million
GDP per capita	$2,868
Proven crude reserves:	100 million barrels
Gas reserves:	1.5 billion cubic meters
Crude production:	4,053 b/d (ie, 0.004 mil b/d)
Gas production:	60 million cubic meters/year
Algeria
Population:	35.4 million
GDP per capita	$4,478
Proven crude reserves:	12.2 billion barrels
Gas reserves:	4.5 trillion cubic meters
Crude production:	1.26 million b/d
Gas production:	81.43 billion cubic meters/year
Tunisia
Population:	10.6 million
GDP per capita	$4,160
Proven crude reserves:	0.6 billion barrels
Gas reserves:	2.97 billion cubic meters
Crude production:	86,000 b/d
Gas production:	65.13 billion cubic meters/year
Libya
Population:	6.41 million
GDP per capita	$12,062
Proven crude reserves:	46.42 billion barrels
Gas reserves:	1.55 trillion cubic meters
Crude production:	1.58 million b/d
Gas production:	15.9 billion cubic meters/year
Egypt
Population:	80.5 million
GDP per capita	$2,771
Proven crude reserves:	4.4 billion barrels
Gas reserves:
Crude production:	742,000 b/d
Gas production:	62.7 billion cubic meters/year
Jordan:
Population:	6.4 million
GDP per capita	$4,434
Gas reserves:	2.97 billion cubic meters
Gas production:	250 cubic meters/year
Syria
Population:	22.2 million
GDP per capita	$2,892
Proven crude reserves:	2.5 billion barrels
Gas reserves:
Crude production:	376,000 b/d
Gas production:	5.8 billion cubic meters/year
Saudi Arabia
Population:	25.4 million
GDP per capita	$16,641
Proven crude reserves:	264.59 billion barrels
Gas reserves:	7.9 trillion cubic meters
Crude production:	8.4 million b/d
Gas production:	78.45 billion cubic meters/year
Yemen
Population:	23.5 million
GDP per capita	$1,231
Proven crude reserves:	2.7 billion barrels
Gas reserves:	0.49 trillion cubic meters
Crude production:	298,000 b/d
Gas production:	454,700 cubic meters/year
Oman
Population:	2.97 million
GDP per capita	$18,041
Proven crude reserves:	5.6 billion barrels
Gas reserves:
Crude production:	810,000 b/d
Gas production:	24.8 billion cubic meters/year
UAE
Population:	4.62 million
GDP per capita	$47,407
Proven crude reserves:	97.8 billion barrels
Gas reserves:
Crude production:	2.34 million b/d
Gas production:	48.84 billion cubic meters/year
Qatar
Population:	1.64 million
GDP per capita	$74,423
Proven crude reserves:	25.38 billion barrels
Gas reserves:	25.4 trillion cubic meters
Crude production:	820,000 b/d
Gas production:	89.3 billion cubic meters/year
Bahrain
Population:	38,004
GDP per capita	$19,641
Proven crude r
Gas reserves:	0.09 trillion cubic meters
Crude production:	48,560 b/d
Gas production:	12.8 billion cubic meters/year
Kuwait
Population:	3.48 million
GDP per capita	$32,530
Proven crude reserves:	101.5 billion barrels
Gas reserves:
Crude production:	2.31 million b/d
Gas production:	11.49 billion cubic meters/year
Iraq
Population:	31.23 million
GDP per capita	$2,626
Proven crude reserves:	115 billion barrels
Gas reserves:
Crude production:	2.66 million b/d
Gas production:	1.15 billion cubic meters/year
Iran
Population:	74.1 million
GDP per capita	$4,484
Proven crude reserves:	137 billion barrels
Gas reserves:
Crude production:	3.66 million b/d
Gas production:	175.7 billion cubic meters/year

Courtesy of ZERO HEDGE

(via Platts)

Portuguese 10 Year bonds just hit another all time high as $120 Brent apparently is not very stimulatory… And tomorrow we will have IRISH elections…

Courtesy of John Taylor

Some Thoughts on the Equity Endgame

February 17, 2011
By John R. Taylor, CIO
FX Concepts

In the financial markets, the ‘new normal’ is beginning to look just like the old normal: junk bond spreads are approaching the lows of the last decade, ‘covenant lite’ deals are back in vogue, equity valuations are sky high, and financial gearing is headed to the stratosphere. Although this bubble-like activity is a sign that those rational men and women who wished to reform and fortify the institutions so critical to global well-being failed, this reversal to the madcap form of the mid-2000′s has allowed growth to accelerate toward the levels of the mid-1990′s. The recent good news, everywhere outside of the European periphery, seems to be enough to lock the financial cycles into the general form that has dominated since the end of World War II. We had seen the financial wreckage and losses from the events of 2007 and 2008 as too severe to allow this growth cycle to continue. We were wrong — or at least 75% wrong. What makes us still 25% right is that the next recession, coming sooner than most pundits think, will be precipitated without a significant increase in interest rates, which is totally different than any other post-war cycle. Despite decent economic growth and extreme market optimism, this cycle is crippled as the banking and government issues supporting the monetary expansion necessary for GDP growth have either no capital base or no taxing ability and no further deficit spending power.

The world owes Ben Bernanke for this reversion to form. Last summer our leading indicators and cycles pointed to the start of a new financial decline, probably associated with an economic one as well, but the Jackson Hole speech at the end of August stopped that decline dead in its tracks. Late last July, I wrote (The Rally Is Ending, July 29) that the world economies would be entering a new recession in the next few months and they were ill-prepared for this event. As the QE2 strategy, plus the December Obama-Republican agreement to extend the Bush tax cuts, expand unemployment benefits, give tax credits to business, pumped money into the economy and added roughly a quarter trillion dollars to the already bloated government deficit, the economy perked up, not only in the US but everywhere else as well. Now the long-term cycles look to be exactly on track. Commodity prices are climbing, inflation is a troubling factor in many countries, and bottlenecks are appearing. Although it does not look as though the US will raise rates in this economic cycle — the end of QE2 should be enough to do the trick — the endgame is approaching. The government curve beyond the first year or so is being priced for higher rates, (the yen is weakening as a result) raising the hurdle for equity prices, investment projects, and house prices as well. Commodity prices and labor costs have impacted the emerging exporters and will threaten their growth. If this cycle has some similarity with the one in 1994, as we mentioned last week, commodity prices should continue to climb even though the equity market is declining and the bond market is in shambles. Back then gold peaked many months before equities, as it has now, and did not surpass that high for more than 2% years. Because this cycle is now passing so many of the same signposts that the previous ones did, we feel comfortable about the future. Gold peaked in December, but silver and the other commodities won’t top this year unless the next recession starts quickly — and aggressively. Equities look as though they will see two tops, just like they did in 2007. The first of them is likely in March with the second in June, but it is not clear which countries will peak when, or what the intermediate months will looks like. The strong commodity markets and continuing QE2 should keep the dollar under pressure into June, except possibly in Europe where the shorter cycles are arguing for a euro high in March. As the Republican House of Representatives and the fiscal gridlock in Washington will keep Bernanke and Obama in check, an extension of equity and economic strength beyond June looks very unlikely.

Courtesy of David Rosenberg :

“So this is what we would be looking for 2011 in terms of chronology (it may be too late to sell in May this year).

• March: Irish elections. Default back on the table. Euro weakens. Flows into front end of the Treasury curve.
• April: Debt ceiling is hit. Political gridlock in vogue. Market volatility ensues. Gold and silver firm.
• June: End of QE2. Stock market wobbles like it did last year under similar conditions. Bonds and the U.S. dollar rally. High-beta stocks slip.
• July: Start of fiscal year for state and local governments. Big retrenchment begins and takes a bite out of economic activity.
• October: End of fiscal year for the federal government. Fiscal restraint replaces three years of radical fiscal expansion. Big rally in bonds. U.S. dollar should firm up too.
• December: The payroll tax cut and the bonus depreciation allowance both expire, creating a huge air pocket for first quarter growth in 2012. Talk of recession accelerates. Bull flattener in Treasuries likely to ensue. Equities will still be in corrective mode as double-dip risks re-enter the market mindset.

And keep in mind, recessions and near-recessions do occur in election years:
1960, 1964, 1972, 1976, 1980, 1992, 2000, and 2008 are examples.”

According to Reuters : “Time magazine’s intelligence columnist reported on Tuesday that Libyan leader Muammar Gaddafi has ordered his security forces to sabotage the country’s oil facilities, citing a source close to the government.”

In a column posted on Time’s website, Robert Baer said the sabotage would begin by blowing up pipelines to the Mediterranean.

Should the dictator indeed proceed and destroy the country’s oil infrastructure, which as we noted earlier exports over 1.5 million barrels of crude a day, mostly to Italy, WTI COULD skyrocket !!!

RISK OFF STRATEGIES ARE BACK…

Courtesy of Mike “Mish” Shedlock

“The ECB and EU want everyone to believe there will not be haircuts on sovereign government debt. The market refuses to believe that and so do I.

If there was no risk of default, then government bond yields would all be the same. Instead, please follow this progression of current yields on 10-year government debt.

Germany 3.237%

France 3.615%

Belgium 4.23%

Italy 4.731%

Spain 5.455%

Portugal 7.41%

Ireland 9.148%

Greece 11.859%

In spite of all the yapping by ECB president Jean-Claude Trichet and others, the European sovereign debt crisis remains near its most stressed levels, and the above set of charts proves it. “

March will be a difficult month for Europe…

Irish national election 25/2 and 7 regional elections in Germany. We wonder what will be the mood of the populace towards our “great financial arquitects” !!!

PORTUGUESE 10 YEAR BONDS

The Portuguese 10 year hit a fresh lifetime high yield at 7,36. Let´s remember that the Market considers  more than 7 % unacceptable and ready to bail out. Meanwhile Europe ( Germany ) continues to procrastinate on the one decision that has any hope of being at least a stop-gap interim solution, namely a united bond issuance authority. Instead, Europe continues to go all in !!!

“People only see what they are prepared to see.” Ralph Waldo Emerson

Courtesy of Stratfort Intelligence

January 27, 2011

• The Egypt Unrest: Full Coverage

“Let’s use the Iranian rising of 1979 as a model. It had many elements involved, from Communists, to liberals to moderate Muslims, and of course the radicals. All of them were united in hating the Shah, but not in anything else.

The Western press did not understand the mixture and had its closest ties with the liberals, for the simple reason that they were the most Western and spoke English. For a very long time they thought these liberals were in control of the revolution.

For its part, the intelligence community did not have good sources among the revolutionaries but relied on SAVAK, the Shah’s security service, for intelligence. SAVAK neither understood what was happening, nor was it prepared to tell the CIA. The CIA suspected the major agent was the small Communist Party, because that was the great fear at that time — namely, that the Soviets were engineering a plot to seize Iran and control the Persian Gulf.

Meanwhile, Western human rights groups painted the Shah as a monster and saw this as a popular democratic rising. Western human rights and democracy groups, funded by the U.S. government and others, were standing by to teach people like Bani Sadr to create a representative democracy.

Bani Sadr was the first post-Shah president. He was a moderate Islamist and democrat; he also had no power whatsoever. The people who were controlling the revolution were those around Ayatollah Khomeini, who were used by the liberals as a screen to keep the United States quiet until the final moment came and they seized control. ”

Egypt is for sure a conundrum. Global affairs are not as calm as they seem.