CLUELESS

Well, once again the news is out and spreading. The economy in 4Q showed up with a bad case of mononucleosis if one can believe the data released today. The WSJ reported:

Gross domestic product, a broad measure of economic output,expanded at a 0.7% seasonally adjusted annualized rate in the fourth quarter, the Commerce Department said Friday. The economy had advanced 2% in the third quarter and 3.9% in the second quarter.

Economists surveyed by The Wall Street Journal had expected GDP to grow at a 0.8% pace in the October-to-December span.

Despite weak first and fourth quarters to bookend the year, growth for 2015 as a whole was steady. For the full year, GDP expanded 2.4%, the same as in 2014 and a little better than the 2.1% average since 2010, the first full year after the recession.

The thing you need to remember about these reports is to separate the pessimists from the cheerleaders. The commentators and interpreters about such come in both sizes.  One will find the seemingly good or hopeful, the other the dark side. Chalk it up to human nature. About the best thing,  and the most honest, we can say about this one is what we wrote recently in what-hells-going-on.
The Fed is clueless.

Your weakness is believing that someday everyone will finally discover or needs to discover this fact to validate it.

OVERNIGHT

The stun this time wasn't a gun. It was below zero interest rates and the perpetrator was the Bank of Japan as they unexpectedly cut a benchmark interest rate below zero Friday. It was a move supposedly to protect to protect it's already weak economy from all the recent concern about a global recession and the volatility we've seen since the beginning of the year.

Taking a page from ECB President Mario Draghi, the BOJ essentially played the we-are-prepared-to-do-whatever-it-takes card. As we've said before markets love put options and this is exactly what this move is. As you might expect Asian shares rallied on the news, the yen weakened and bonds moved higher.

What made the bold move so stunning is just last week BOJ Governor said no plan to adopt negative interest rates was in the agenda. the bank's policy board in a 5-4 vote opted to charge a 0.1percent interest on institutional funds held at the BOJ. The Nikkei rallied 2.8%.

In setting negative interest rates, the BOJ is not alone. The WSJ reports: .The central bank is now the second of the world’s major central banks to set negative interest rates, joining the European Central Bank, which first did so in 2014. The central banks of Sweden, Denmark and Switzerland also have negative interest-rate policies.

The Hong Kong Hand Send fishes he'd up 2%, Aussie shares rallied 0.8% and Sourh Korea's Kospi 0.2%.

WHAT THE HELLL'S GOING ON?

People love options, especially if they think they're free.

The options the market loves best, you guessed it, is put options. So yesterday when the Fed failed to give a hint about its future interest rate intentions, many are saying the stock market sold off.

Central bank put options are akin to free lunches. They're quite attractive, but in reality hardly free. Expectations being what they are some will say the Fed failed the economy or is it the economy failed the Fed? That's why we have horse races, football, basketball, baseball games and bookies, at least until they are over-regulated to the bone yard heap.

A Fed that depended on questionable-at-best data for nine years is now being called uncertain, accused  of uncertainty. That's a funny thought. It implies that the Fed actually knows something the rest of us don't. They don't.

The Fed are simply archaic bookkeepers without the green shades.They pour over data, most of it inaccurate to begin with. That's a fool's game, starting with inaccurate data and expecting it somehow to be accurate when one's finished.

Silence is golden, it's been said.The Fed's loud silence, many are now saying, is damning. So where is the Fed today?

An acquaintance of ours loved to tell the story about his attempt to become a major league baseball pitcher. A highly touted rookie, in his first start after giving up five runs and 10 hits in the first inning, his manager finally waddled to the mound, looked him directly in the eye and, his slow southern drawl, said:

"What the hellllll's goin' on?"

UPSET PEOPLE

If you're looking for weak banks, look no further than Europe. Once there, look no further than Italy or Spain, or Greece, or.....

A recent WSJ article, "Banking Troubles Simmer In Italy," notes: "One banker there has gone from respected leader to pariah heckled at church." Can pubic lynchings be far behind?

The article continues about a bank there, a firm nearly 150 years old, was set to open its 1,000th branch this year, instead will close 150 and is likely to be swallowed up by a stronger competitor." That's a 15% if it happens. If the citizens of the globe could get a 15% reduction in the size, waste and corruption of their governments, this whole world financial mess would blow over in the time it takes to utter: "It's about time!"

The Italian proposed solution, the usual one bureaucrats conjure up, comes under the deal-making label. That phraseology alone ought to scare you. The idea of buying assets near market rates that are guaranteed by the government is a dangerous slope. The term government guarantees should frighten you more than the price of oil or China's economic funk.

BRUSSELS—Italy and Brussels struck an agreement Tuesday over a mechanism to deal with the high level of bad loans in the country’s banks, that aims to end uncertainty over the lenders’ health and give a boost Italy’s economic recovery.

However, the lack of detail left it unclear whether the deal would succeed in addressing a problem that has helped provoke a collapse in Italian banking stocks this month.

The Italian government had submitted plans to help banks bundle bad loans in bonds, or securitize them, by being able to sell guarantees to banks that will make some tranches of bad loans less risky.

This would help banks sell them at higher prices and free up their balance sheets, allowing them to make new loans.

Six years after the sovereign-debt crisis first gripped the eurozone, Italy’s banking system is choking. An index of Italian bank shares slumped nearly 25% at the start of this year, during a period when European bank stocks were down 17%, although it partly rebounded last week.

Italian banks are among the Continent’s least profitable, and their books are clogged with €276 billion ($299 billion) of bad loans, more than any other European country, according to the European Banking Authority. Many banks don’t make enough money to write off the poor loans, so they fester—prolonging the mess and making it harder for banks to make loans.

Italy’s struggles underscore the glacial pace of banking overhaul across Europe. Despite years of restructuring, bankers and investors still point to pockets of undercapitalized European banks, which could need to raise up to $35 billion of equity this year, according to Citigroup analysts. Deutsche Bank AG and Austria’s Raiffeisen Bank are among those that bankers and analysts suspect might have to raise capital. A Raiffeisen spokesman said the bank has no plans to do so. A Deutsche Bank spokesman declined to comment.

So just how bad is it for the 78-year-old former respected bank chairman who resigned last November, he has been banned from a half-dozen restaurants and accosted on the street of the small northern Italian community.

We want to remind you again of the recent comment by the billionaire CEO of BlackRock not understanding why people are so upset.

wsj.com/articles/italy-scrambles-to-resuscitate-banks 

OVERNIGHT

Here's the latest overnight from China as the PBOC dumped a brunch of money into the market, the largest amount in almost three years, the WSJ is reporting.

SHANGHAI—China’s central bank is putting the largest amount of cash into the financial system in nearly three years, using a weekly market operation to pre-empt a holiday-induced funding squeeze and offset rapid capital outflows.

The People’s Bank of China offered 340 billion yuan ($51.89 billion) of short-term loans, known as reverse repurchase agreements, to commercial banks in a routine money market operation Thursday.

The central bank provided 440 billion yuan via similar tools Tuesday, the first leg of its twice-a-week liquidity-management exercises.

Given the maturity of 190 billion yuan of previously issued loans, the PBOC’s net cash injection this week totals 590 billion yuan, the biggest of its kind since early February 2013, when it reached 662 billion yuan.

The move follows an aggressive pump-priming exercise by the PBOC last week, when the central bank offered more than 1.5 trillion yuan in gross short- and medium-term lending to banks.

Capital flight has been on the rise as the negative news put investor confidence on the wane. Some of this huge injection no doubt is aimed at slowing down that capital flight. The DJIA ended Wednesday down 1.38%, the Nasdaq fell nearly 2.2% and the S&P 500 dropped 1.09% in what many said was a negative reaction to the Fed action to take no action.

Asian shares for the most rallied Thursday as oil became less of a concern for the moment following  Russia's mention of a possible deal with OPEC that might rectify the over supply situation. The dollar closed slightly higher against a basket of currencies, the Nikkei eked out a small gain of 0.3%, U.S. Crude oil fell 21 cents.

MADE UP YOUR MIND YET?

For those who love economic indicators, here's another one--informal or no--you need to pay attention to--bond rating firms. Are they lagging or leading indicators. You decide.

These are the boys and girls now warning (reminding is the kinder, more gentle term) us that there are "some troubling trends in the bond market."  Note: most of these warnings are coming out after the recent junk bond crisis hit the news.

Moody's tracks something they call "probability-of-default" for lower-rated debt. Though as you would surmise, oil and gas are the first two words out of the computers of these firms these days. And as you might guess, there's an average number seen in usual times--9%--for energy and gas. The current one: 25%. The total number on the list for all sectors is 248 firms, the highest in six years.

As you might also guess a lot of this paper is buried smewhere on the balance sheets of banks.

Over at Standard & Poor they use a ratio of junk debt trading at much higher yields relative to other higher rated bonds, a distress ratio. The last time it's been as high as it's now, 29.6%, according to the WSJ, was 2009 when it hit nearly 36%. That's to remind you unlike that old Frank Sinatra standard, 2009 wasn't a very good year.

At Fitch it's more of the same, where they expect 2016 to end with a higher rate of defaults, 4.5%, than 2015's 3.4%. But here's the good news. Like those fund managers in down years who love to  point out their funds against their chosen benchmark lost only 10% after dividends while comparable competitors did much worse:"Last years rate and this year's forecast are well below the 13.7% rate in the financial crisis.," notes the WSJ.

There's the good-news-bad-news tale about a guy who visits his doctor and the doctor informs him  he's got some good news and bad news and ask which he would prefer first to which the patient replies,  "Give me the good news."

"You have cancer and you only have one week to live," the doctor says.

"Jeez! What's the bad news?"

"I've been trying to get a hold of you to tell you for six days."

Have you decided yet about whether these firms are leading or lagging indicators?

OVERNIGHT

Except for Chinese shares most of the Asian markets overnight were up.

In Hong Kong the Hang Send rallied 0.6%, the Nikkei 1.2%. The Nikkei rebound apporached a near two-week high.

 Some concern among investors about Beijing possibly withdrawing support for its markets didn't help things as The Shanghai Index dropped for the second day in a row, down 2.8% on Wednesday following a 6.4% fall on Tuesday.

MarketWatch reports oil prices overnight backed off as signs of any cutbacks from producers apparently dissipated.

Crude oil prices pared earlier gains in Asia trade Wednesday as anxiety over an expanding global glut outweighed market speculation that large producers might be more willing to trim output to support prices. 

Prices rose overnight by around 4% after Iraq’s oil minister said at an energy conference that he sees signs that Saudi Arabia and Russia are more “flexible” on supply cuts. But doubts over the likelihood of a collective cut happening anytime soon.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in March CLH6, -1.43%   traded at $30.85 a barrel, down $0.38, or 1.2%, in the Globex electronic session. March Brent crude LCOH6, -0.69%  on London’s ICE Futures exchange fell $0.19, or 0.6%, to $31.61 a barrel. 

For almost two years, oil prices have been depressed as large oil producers, both in and outside of the Organization of the Petroleum Exporting Countries, have refused to cut output to maintain market share. OPEC officials have said they are unwilling to curb production unless their non-OPEC rivals, such as Russia, Mexico, and U.S were also on board. 

“We consider the likelihood of any agreement between these parties as extremely low,” ANZ Research said in a note.