Uruguay has the second most expensive per capita Legislative branch and also as a percentage of the government’s overall expenditure, although Uruguayan lawmakers earn half their best paid neighbours in Brazil, according to reports in the Montevideo press.

A new generation of 37.000-tons tankers has been ordered for the Royal Navy fleet, the MoD announced Wednesday. The new Military Afloat Reach and Sustainability (MARS) tankers will maintain the Royal Navy’s ability to refuel at sea and will provide fuel to warships and task groups.

Argentine Health Minister Juan Manzur confirmed Wednesday morning that the situation on the MSC Armonía cruise ship, which lost a crew member last Friday to a possible flu virus, “was under control” and “normal” after it arrived to Buenos Aires port to be inspected by customs and health authorities.

Britain will not negotiate with Spain on the question of sovereignty over Gibraltar without the approval of the colony's residents, Premier David Cameron said this week during a visit by Spanish Prime Minister Mariano Rajoy.

Pumping has been halted at Colombia's second-longest pipeline, the Caño Limon, after several bombings by leftist guerrillas in recent days, according to an official at national oil company Ecopetrol.

From Peter Tchir of TF Market Advisors

A Breather And Some Time To Sort Through Some Greek Details

Details continue to leak out, making it somewhat easier to analyze what is coming out of Europe.

It looks like the ECB and National Central Banks will get preferential treatment.  The ECB has already allegedly exchanged their bonds for new ones, though I don’t see a reduction in notional of existing bonds – which could be a fact that they haven’t settled yet.  It will be interesting to know definitively what the ECB owned.  And then the NCB’s since they were kind enough to do the swaps (whether legal or not, particularly in the case of English law bonds) on different days.

Greece did take the time to announce that the budget deficit will be 6.7% of GDP instead of the 5.4% that had been projected. With a real GDP of €225 billion in 2010 that would have been about €3 billion, but with GDP dropping so quickly, it is less additional money needed than you might think (positive thinking).  The fact that they cobbled together this whole deal based on a base case that is unattainable and worse than anyone expected just 3 months ago shows the power of being locked into a negotiating stance.  Even Germany must feel a bit guilty that they put a puppet in charge of Greece whose sole function was to negotiate this deal and didn’t actually spend any time to see if there was a better alternative for Greece than more austerity and decreased sovereignty.  Killing with kindness.  Also on the European economic data front, European PMI was below 50 for the composite, services, and manufacturing.

The European Investment Bank said that Greece needs a Marshal Plan.   They kicked in €2 billion last year and seem prepared to kick in more this year.  That is reassuring that someone is focused on growth, and thankfully we live in a world where entities like the EIB can exist and issue as much debt as they want based on guarantees and promises, without impacting the credit of the guarantor.

Speaking of that, how much is the EFSF going to come up with for the Greek bailout?  It is hard to tell where all the money is coming from (at this stage – though I assume we will get more clarity any day), but Germany in particular just added a lot of debt.  If you want to assume that Italy is really participating, then Italy is on the hook for about 20% of the money coming from the EFSF (and I assume from the EU).  In that case Germany is only on the hook for 30% of the money.  If the money is really coming from those countries still mostly AAA (including France) then Germany is on the hook for 50% of the EFSF/EU money, and Italy is not burdened. I’m sure Sarkozy is quietly hoping no one in France, or the rating agencies, notice just how much more debt France has committed themselves to.  He has been awfully quiet during this process.  The Dutch seem to be getting more involved, but seem to be leaning more towards the Finnish view, than the save Europe at all costs view.  The benefit of the current structure is that it is hard to pin the specific obligation of any one country, but in some real world of finance (that is no longer seems to exist), some countries just saw their debt burden rise.  Fortunately in the world of unlimited central bank liquidity it may not matter how much debt anyone takes on (until the day it does).

After months (it seems like years) of trying to avoid a CDS Credit Event, it looks like one is inevitable.  The Greek 5 year CDS is at least 70 bid which may be the highest ever.  The game plan seems to be that Greece will put in retroactive CAC laws.  The PSI will come in below 100%.  Greece will trigger the CAC clauses on the Greek bonds, and we will get 100% participation in all those bonds, and we will get a Credit Event.  The interesting part is that depending on what they manage to do with English law bonds, the only bonds outstanding (not in the hands of the central bank only bonds, and troika loans) will be the new bonds.  If they start CAC’ing each bond, it is possible that there will be no existing bonds outstanding left. Settlement would be based on the new bond (yes, ISDA has a Sovereign Restructured Deliverable Obligation clause – Section 2.16 of the definitions).  With the amortization schedule in place (and not including any value attributable to the GDP strippable warrants), I get that the new bonds would trade at 30% of par with a yield of just over 13%.  I would be careful paying up for CDS here, because settlement will be against these new bonds, not existing bonds if every old bond is CAC’d.  And given the attitude out of Greece late yesterday, and harsh IMF demands, we may well see that.

The ECB’s secondary market purchases have slowed to a trickle. Without a doubt, the fact that the market is trading so well has played a role.  They haven’t needed to buy bonds.  That is good, but will they resume their buying if markets show any weakness?  With everything that is going on with their holdings of Greek debt, they may not be so eager to return to active SMP.  They have given the banks the ability to buy whatever they want (with LTRO) and maybe that will be enough?  Draghi’s responses to questions about their Greek bond holdings have lacked for any finesse.  He seems annoyed with the situation and being caught in the middle.  For the “integrity” of the ECB’s core mandate (and yes I’m laughing as I type) they may shy away from building a balance sheet of direct holdings of sovereign debt (as collateral for loans to banks, they have no problem).  I don’t think they like being caught in the middle as a direct lender, have felt like they are being ordered around by a bunch of politicians, and at this stage he can still largely blame the whole mess on Trichet in his memoirs.  I still think they will do SMP, but I think they will be a little more reluctant than in the past, and will use bank lending tools to try and calm markets, rather than direct intervention in sovereign debt markets.  Besides, that is the EFSF’s responsibility, if the EFSF still has any money left.

Some noise about this being the last LTRO?  I’m sure it won’t be the last LTRO if or when we get another round of fear, but makes sense with things so calm to start ratcheting down expectations.  We will see what the demand is for the February 29th one, and how much LTRO money is used to add assets as opposed to just managing funding risk.

In the meantime, I’m not sure how central banks solve the deteriorating situation in Iran, and since they are the only ones who seem to be able to accomplish anything we should continue to watch developments there.  And although less exciting, probably more important, is figuring out if China can really manufacture a soft landing.  Expectations that things are under control there seem high, relative to evidence that all is not good.

Pretty good explanation here by Jim Bianco on what the term “money printing” is and what the Federal Reserve does when this term is used.

“The ability of the Fed to increase the amount of money in banks’ reserve accounts; that’s what most people mean when they talk about money printing and that’s under the direction of the Fed,” Bianco says.

The Fed can try to stimulate or restrict bank lending by either raising or lowering the amount of money banks are required to keep on reserve, respectively. This seems pretty straightforward. But “the Fed has the ability to go in and just change the number on [banks'] reserve accounts” — literally creating money electronically by changing the amount of money in reserve accounts, Bianco notes.

“If you or I did that it would be fraud, it would be counterfeiting and we’d go to jail,” he quips. “But when the Fed does it, it’s sophisticated monetary policy.”

5 minute video – email readers will need to come to site to view

Disclosure Notice

Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog

Other than that rally last Thursday that caught a lot of technicians flat footed (i.e. post the Apple reversal) the breadth in this market has been relatively poor the past 5 sessions or so.  The Russell 2000 has been lagging the major indexes dominated by large caps, and my watch lists have contained far more red than green.   Some people have been calling it the NBA market (“Nothing but Apple”) but it’s been a bit broader than that – i.e. Microsoft has acted well, and some groups are still working.

A bearish take on this is of course what I cited above – breadth is narrowing which usually happens near tops.  Fewer and fewer stocks are pushing the market forward; many more are faltering.  The bullish take is “a correction is happening under the surface while the indexes hold in.”  Obviously this market has not rewarded a bearish take in a very long time.  So until we see at least a break of the 20 day moving average on a few major indexes it is difficult to continue to ride the bear, since he runs into a buzz saw every few days.

That said the transports I cited this morning continue to suck wind; the index is down another 1.6% and now sits right at its 50 day moving average.  Oil continues to go up (at what point does that stop being “bullish”?).

While the action in some of the giants, especially tech, remains impressive – the market has become much more difficult the past month under the surface.  A lot of stocks rally a few days and then give much/all of it back in 1 session.  They churn while the big boys rally and take the indexes with them upward.   To put it in perspective the NASDAQ contains about 3000 stocks but 10 of them are 35% of the weighting.  It’s a different story than the first three weeks of January where just about anything that was not a leadership stock of late 2011 (i.e. utilities, boring healthcare, consumer staples) was rallying together.

Showcasing the lack of breadth, we are actually lower on the Russell 2000 than we were on jobs report Friday….

…. but you wouldn’t know it as long as you piled into big cap tech

Disclosure Notice

Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog

The PBoC’s announcement of a 0.5% cut in the reserve requirement rate (RRR) of Chinese banks has significant consequences not only for the Chinese economy but also for China’s stock market. The cut to 20.5% for large banks follows a similar cut in December last year after hikes since January 2010 that saw the RRR increasing in 12 increments from 15.5% to 21.5%. It is estimated that one half percent change in the RRR amounts to a change of approximately 400 billion yuan or roughly US$60 billion in liquidity. It therefore means that the jump in the RRR since January 2010 has effectively drained overall liquidity by approximately US$720 billion. That is equal to approximately 6% of China’s GDP in 2010 and 2011 combined.

Although the PBoC cited weak external demand as the main reason for the drop in the RRR, liquidity became very tight in recent weeks and forced interbank rates significantly higher. The CFLP Manufacturing PMI that I seasonally adjust continues to indicate lackluster growth in China’s manufacturing sector largely as a result of weak export orders. As in 2008 the PBoC held off on further increases in the RRR in 2011 when weakness in the manufacturing PMI became apparent. The first cut in the RRR last year was announced when the manufacturing PMI contracted – again similar to what happened in 2008. The latest cut therefore indicates that the manufacturing PMI for February is likely to again show abysmal growth.

Sources: CFLP; Li & Fung; BIS; Plexus Asset Management

The weakness of China’s economy is not only confined to the manufacturing sector, though. While still signaling growth, my seasonally adjusted CFLP Non-manufacturing PMI indicates that growth has slowed to about half of the average since the recovery after the 2008/2009 crisis.

Sources: CFLP; Li & Fung; BIS; Plexus Holdings.

The weakness in the non-manufacturing sector is driven by weak consumer confidence.

Sources: CFLP; Li & Fung; NBSC; Plexus Holdings.

My GDP-weighted seasonally adjusted CFLP PMI indicates that China’s year-on-year GDP growth has slowed to approximately 8 – 8.5% from 8.9% in the fourth quarter last year.

Sources: CFLP; Li & Fung; NBSC; Plexus Holdings.

The cut in the RRR is consistent with what happened in 2008 when GDP growth fell below 9%.

Sources: NBSC; BIS; Plexus Holdings.

Assuming that a 0.5% change in the RRR equaled US$60 billion throughout, I calculated the cumulative liquidity drain. It is evident that changes in liquidity lead GDP growth by approximately two quarters and the seasonally adjusted manufacturing PMI by three months.

Sources: NBSC; BIS; Plexus Holdings.

Sources: CFLP; Li & Fung; BIS; Plexus Holdings.

I view the cut in the RRR as very bullish for Chinese stocks. Changes in the direction of the RRR had a major impact on the Shanghai Composite Index (SSEC 2403.59 ↑0.00%) in the recent past. In 2008 the first cut in the RRR coincided with the bottom in the Shanghai Composite Index, while the hike in January 2010 coincided with the start of the slide in equity prices.

Sources: CFLP; Li & Fung; BIS; Plexus Holdings.

The market is currently not out of sync with the underlying economy and is discounting a not seasonally adjusted CFLP Manufacturing PMI of approximately 50 for February. March and April are normally exceptionally strong months from a seasonal perspective and are likely to be supportive of stock prices. Together with the likely impact of the increase in liquidity I think the next strong bull market in Chinese stocks is underway. I stick to my view that the Chinese stock market will be the best performing equity market globally in 2012.

Sources: CFLP; Li & Fung; Plexus Holdings.