In the aftermath of last night's Dell cataclysm, we would like to cheer up any remaining bulls - below we present at least one bullish perspective from the inimitable Whitney Tilson who has a $21-$29 price target (and owned 768K shares of stock). Ignore that the stock is down 20% since the reco, and 33% from recent highs: it takes special skill to discover "pent up value."
We are always on the look-out for low-cost long-vol trades with lots of convexity (large upside, low downside). We think we've found the 'ultimate' black-swan trade. Warren Buffett's Berkshire Hathaway bought Burlington Northern and implicitly assumed its debt which caused the company's CDS to collapse (risk to plunge dramatically as one would expect) to extremely low levels of insurance cost of only 15bps (or only $15,000 per year to protect $10,000,000 of debt - while gaining or losing ~$5,000 per bps shift in BNI's risk). However, as risk has picked up in the last week or so, BNI's CDS has risen by 7bps (just under 50%) to 22bps and looks set to go even wider if Buffett's Big Bullish 'Bernanke' Bet doesn't pay off. Buying BNI protection at 22bps seems like the ultimate cheap expression of the "All aboard the 'I wrote billions of naked puts just before 2008 market crash' train" trade.
While hard information is scarce, concerns about deposit flight from Greek banks have increased since the 6 May elections. To the extent that such flight arises from liquidity concerns, the ECB can contain it (or its impact) via its various monetary policy and ELA operations. But, as Goldman Sachs notes in its Focus today, the ECB cannot deal with concerns about bank solvency and/or deposit currency redenomination. That requires a pan-Euro area guarantee of the Euro value of bank deposits by the fiscal authorities. Politically, it will not be domestically popular in Germany (inter alia) to extend such guarantees, however much Germany may benefit from arresting the financial instability deposit runs may cause. And institutionally, in order to contain the threat of free-riding on the guarantee of others, entering into a pan-Euro area deposit guarantee would need to be associated with a deepening of the pan-Euro area system of financial supervision and regulation. This would involve substantial loss of sovereignty relative to the status quo and require significant institutional innovation. However, attractive in principle, even Goldman agrees with our skeptical perspective that it is unlikely that such a guarantee can be implemented credibly in short order. So, what would you do with your hard-earned deposits? Demand them or leave them at the bank on the basis that the EU leaders will do what they promise - this time is different.
The current financial crisis, may progress to a phase where people demand and hoard dollar bills but take electronic deposit credits only at a discount which increases until electronic deposit credits are repudiated entirely. The Federal Reserve would be powerless to solve the problem, because while they can create unlimited electronic deposit credits they can’t create unlimited paper dollar bills, “money you can fold” as Professor Antal Fekete calls it. There would be a glut of electronic deposits, but a shortage of dollar bills. Before the financial crisis metastasized in 2008, Fekete wrote a paper that I think is underappreciated and under-discussed: "Can We Have Inflation and Deflation at the Same Time?" In his paper, he discussed the “tectonic rift” between paper Federal Reserve Notes (i.e. dollar bills) and electronic deposits. By statute, the Federal Reserve cannot print dollar bills without collateral (e.g. Treasury bonds). Also, they have limited printing press capacity that is insufficient to keep up with a catastrophic crisis.
"The next big financial crisis we will face will not come from Europe", Charles Biderman of TrimTabs notes, "but rather from China." In a brief but thought-provoking clip, Charles takes on the corruption in the 'manufactured' GDP data and outlines three more critical real-time (hard-to-fake) data points (electricity consumption, railcar-loadings, and bank-loans) that suggest China is potentially already in a recession. "Most investors do not even think this is possible", he adds, as China is the hope that so many market participants hold on to as the engine of global growth. Add to this the collapsing real-estate bubble, on which the TrimTabs-Truthsayer provides some interesting color - relating to private-public relationships and demand (and prices) are dropping rapidly. This dismal (and somewhat shocking) conclusion that China could already be in recession only stokes the fires of money-printing-expectations of course - though Charles does add (and in keeping with our 'there's no such thing as decoupling' meme) - "What a mess this world is becoming as Europe and now China is contracting - leaving very little to justify global stock prices to be as high as they currently are" and while collapse may not be imminent, Biderman ends by stating that "The Central Banks cannot levitate asset prices forever" - leaving the question of when not if the drop occurs.
It may not be quite the 0% coupon which Germany got yesterday for its 2 year bonds (soon realistically going negative if the demand is there), but lending $35 billion to Uncle Sam at a cash interest of 0.625% and a record low yield of 0.748% is still quite remarkable. Because with this auction, total US debt/GDP is now almost 103% (rounded up). But who cares: when one needs to parks cash in a hurry, one will do just what the herd is doing, consequences of groupthink be damned. The internals: 2.99 Bid To Cover, higher than the TTM average of 2.924%, but of note was the slide in Indirect Bidders which bought "only" 42.6% of the auction, and Directs, who only purchased 6.5% of the total. This means that for the first since June 2011, Primary Dealers, who promptly take the proceeds and flip it for cash into the limbo that is the custodial repo market, amounted to over half of the total takedown, or 50.9%: hardly a ringing endorsement when one strips away the ponzi apparatus that is the PD bid. That said: Uncle Sam will take it, and will certainly take another $29 billion in 7 year bonds tomorrow, which will also likely price at an all time low yield.
We have laid out in great detail over the past few months the contagious paths, game-theoretical endgames, and transmission channels that would occur should a nation (Greece for example) leave the Euro. Yet the covered matter is not simple, which is why sometimes the best representation is the visual one. The Financial Times has outdone themselves with the best graphical (and audio walkthrough) representation of this process. From the collapse of the domestic banking system (and its possible social implications) to the creation of a new 'local' currency absent foreign capital aid, to the obvious 'who's next?' question that leads inevitably to exaggerated bank runs across other weak European nations and ultimately more pressure on already weak economies to exit the Euro - hastening a wholesale Euro-breakup. Eurocalypse now indeed.
Earlier today we were delighted to predict precisely what the script of the European headline flow would be now that the only thing that matters is instilling the fear of Chairsatan in the Greek people, who are so confused that 75% of them wish to keep the Euro, but 80% wish for austerity to end - two mutually exclusive events. We outlined the daily event flow for the next month as follows:
- Europe releases definitive rumor that everyone is preparing for a Greek exit full of bombastic jargon and details of how Greece will be annihilated if it does exit the EMU;
- Immediate election polls are taken;
- If "anti-memorandum" Syriza support is not materially lower, rumor is promptly withdrawn for the day, only to be unleashed the next day with even more bombastic end of world adjectives describing the 9th circle of hell Greece will enter unless the Greek people vote "for" the pro-bailout parties, "for" the Euro, and "for" a perpetuation of the status quo;
We got the first confirmation of precisely this a few short hours later.
With Europe hitting the skids, EURUSD at multi-year lows, and the US equity market down a whopping (and terrifying) 9% from its March highs, it seems the market remains increasingly hopeful that this time will not be different in that the Central Banks of the world will print and save us once more. As a reminder we suspect the ECB can't (collateral is non-existent for the most needy sovereigns/banks) and won't (Germany and the AAA-Club vehemently opposed to losing this game of chicken), China won't (inflationary concerns), and the BoJ won't (after checking to the Fed post-downgrade last night as it appears they recognize the limit). This means, the world has pretty much checked to The Fed - but with TIPS yields a good distance from his precognitive threshold for deflation-avoidance and with the S&P 500 at 1300 still, we suspect the hope is premature. And if performance anxiety is affecting all those long-only managers who are are just now unwinding their P.A. over-allotment to Facebook, we estimate (based on QE1 and QE2) that the S&P could trade down to 1100-1150 before we see Ben step in to save the world - which by the way is only early December 2011 lows. How quickly we lose perspective and anchoring bias takes over when a market rises magically for months without any looking back.
Our entire society is in a downward social and economic spiral. We are just at different levels of decay (Dante’s circles of hell). At the current pace it won’t be long before I’m writing about the 50 States of Squalor. It is virtually impossible to reverse a decline that has been underway for the last three decades. We sold our souls to Wall Street and chose a debt financed illusion of wealth over productive savings and investment which would have led to real wealth. Our choices are reflected in the continued deterioration and decay along West Chester Pike and the squalor that is West Philly. Grey and decay will carry the day. The words on the Statue of Liberty should be revised from, ”Give me your tired, your poor, Your huddled masses yearning to breathe free”, to “we have become your indebted, materialistic, obese, aging masses yearning for the government to protect and sustain us as our once great nation decays.”
As a nation, we have chosen this path. We made the choices and now we will suffer the consequences.
PIMCO vs GARY SHILLING - ROUND 1
As we noted last week, the EURUSD cross-currency basis-swap - or European bank's most desperate way to fund itself in the absence of any further ECB aid, a lack of collateral, and no interbank-lending (trust #fail) - is flashing a warning light. Today that light went ultraviolet. For maturities beyond the LTRO (greater than 3Y or so) the current level of stress is greater than at the end of November last year which was the trigger for the globally coordinated central bank response. 3Y basis swaps are now back above 70bps (below -70bps) and near record lows - signaling a real desperation for term funding among European banks - as we explained here. Translated: central bankers are now calling each other and planning; the only question is what they can do this time: last time the FX swap margin was cut from OIS+100 to OIS+50 bps. Now what: interbank lending at no cost? - Thank you Uncle Ben.
UPDATE: EURUSD at 1.2578 - back to July 2010 levels
EURUSD just broke back below 1.2600 (1.2597 lows) which takes it back to August 2010 lows and well on its way to the 1.20 levels that the current Fed and ECB balance sheets would imply - as we pointed out just two weeks ago. EURUSD remains notably below the swap-spread implied valuation as once again liquidity and credit risks get priced into the cross.