Three weeks ago, when the hit campaign on Chesapeake was in full swing, we made a simple prediction: hate the company for whatever reasons but not because of the balance sheet. We explained that "under ZIRP, when every basis point of debt return over 0% is praised, and an epic scramble ensues among hedge for any yielding paper no matter how worthless, the balance sheets of companies just do not matter. In other words, for companies that have massive leverage, high interest rates, negative cash flow, which all were corporate death knells as recently as 2008, the capitalization structure is completely irrelevant." Alternatively, some other, far bigger, company with a pristine balance sheet and lower quality assets could swoop in and do a full management purge, removing the Mclendon overhang, firing the disgraced Board and commingling liabilities while boosting the quality of its assets. Think the TBTF putches from September 2008. Because at the end of the day, it is all about the quality of the assets. And the reality is that CHK has some quality assets, which, however, are burdened by many legacy issues. There is of course the issue of near all time record gas prices. But there in lies the rub: the prices are already at near all time lows. They could continue sliding, or in a world in which hard assets (and even gaseous) are becoming more and more precious by the day, they could go up. In which case CHK would be a very interesting bet. Needless to say, two weeks after our preliminary CHK assessment, Carl Icahn put his money, or rather $775 million of it to be precise, to essentially confirm what we had said previously. Which brings us to the next question: is CHK really worth more? Well, in keeping with the tradition of keeping it simple, we have decided to present one delightfully simple chart from Bloomberg, which shows where the biggest downside in the stock comes from - it's well-known leverage - as well as where the upside is hiding - its asset base - which has the lowest valuation of its peers.
With Europe now seemingly in exile from even the bravest knife-catcher value-manager, and, despite media protestation, US equities facing weak macro data and a fiscal cliff of epic proportions; it is no surprise that everyone and their mom thinks emerging markets are the place to be. However, as UBS notes today, not all EM balance sheets (whether government, corporate, or private) are the same and they break down the low, medium, and high risk balance sheets across Asia, LatAm, and EMEA. As is evident in Europe, high debt levels are detrimental to economic growth and equity returns. Solid government accounts generally reward policymakers in such markets with valuable policy flexibility, while healthy consumer balance sheets allow credit growth to be a strong domestic growth driver. In a slow and uncertain global growth environment, pillars to support growth are crucial and are market differentiators - especially if global contagion spreads as we suspect
A quick glance at today's cross asset class market moves shows a clear standout. The massive outperformance of Gold (relative to USD strength, Stock weakness, and Treasury yields tumbling). However, focusing on a slightly longer-term context shows that it appears you can't keep a good gold market down as it has merely recovered from its over-zealous selling pressure of earlier in the week - to resync with FX, stocks, and bonds. Most importantly, as we pointed out yesterday, it is now clear once again that 'sexy, smart' stocks knew nothing then (for the fourth time this week) - but keep on believing, as we will focus on 'other' asset classes as a signal.
While we can argue over which exact position Iksil and his crew had on, the widening in IG9 10Y spreads post-Dimon signals an unwind of epic proportions continues. It seems the mainstream media has grown tired of discussing skews, basis, curves, tranches, and tail-risk but for those who care about the reality that JPMorgan faces - we note that the credit index most closely tied to the CIO's office debacle continues to push wider. Today sees the spread at six-month wides (up a hulking 33% since Dimon's mea crapa). Perhaps this helps explain why JPM just can't get a bid (or hold onto one even after last week's ECB/Fed print rumors) as its stock's price hovers just in the red YTD (with a $32 handle).
First it was Nigeria cutting back its European exposure, now it is South Africa's turn:
- S. AFRICA'S MARCUS: SCALE OF GLOBAL CRISIS IS `HUGE'
- MARCUS: WORLD IN WORST POSITION NOW THAN BEFORE CRISIS
- MARCUS: CENBANK MONITORING POSSIBILITY OF CONTAGION
Who is next? Kalahari Bushmen pulling their coke bottles on deposit in Murcia cajas? Mail tribesmen wiring their funds from Zurich to Singapore? Somalian pirates watching the VaR models of their Spanish bond portfolios #Ref! out and give up in sheer disgust?
We are constantly told all our problems are too complex to be addressed with simple "big idea" solutions. Complex problems require complex solutions, we are assured, and so the "solutions" conjured by the Central State/Cartel Status Quo are so convoluted and complex (for example, the 2,319-page Dodd-Frank Wall Street Reform and Consumer Protection Act or the 2,074-page Obamacare bill) that legislators say they must "pass the bill to see what's in it." The real "solution" is to see that complexity itself is the roadblock to radical reformation of failed systems. Complexity is the subterfuge the Status Quo uses to erect simulacra "reforms" while further consolidating their power behind the artificial moat of complexity. Over the next three days, I will present three "big idea" solutions that cut through the self-serving thicket of complexity. Nature is complex, but it operates according to a set of relatively simple rules. The interactions can be complex but the guiding principles can be, and indeed, must be, simple. Big Idea One: Radically lower the cost basis of the entire U.S. economy. The cost basis of any activity is self-evident: what are the total costs of the production of a good or service? The surplus produced is the net profit which can be spent on consumption or invested in productive assets (or squandered in mal-investments).
Europe was a sea of red (apart from Bund prices) today. With yesterday's window-dressing done and overnight dismissal of Spain's hopeful ECB-workaround, European equity and credit markets were dismal, EURUSD ended under 1.2400, and 2Y Bunds at 0.00% yield. Financials underperformed in stocks and credit with senior bank spreads back up to 300bps and LTRO Stigma jumping 12bps to 177.5bps (near record wides). Spain and Italy dominated both single-name banking and non-banking credit and equity moves as well as sovereigns with Spanish 10Y now +45bps on the week and Italy +37bps (with Belgium, France, and Austria all around 9bps wider). All European equity indices are down for the week with Spain down almost 8%. EUR-USD 3Y basis swaps turned back lower (worse) back to -70bps - not a good sign for funding (especially in light of the drop in LTRO we noted yesterday). On a final note of despair, Spanish 2s10s is now flatter than at any time since LTRO1 - implying that any LTRO debt used to fund a real carry trade is now a loser.
A week ago we tweeted, jokingly, or so we thought, the following:
Rumor Europe has run out of toasters to hand out with new checking accounts
— zerohedge (@zerohedge) May 24, 2012
As it turns out it was no joke. Because instead ot the Generally Accepted Depositor Principles bauble generically handed out to witless investors, what Bankia is now resorting to is... a Spiderman Beach Towel in exchange for a €300 deposit.
UPDATE: An hour later - BofA has tumbled over 2%, reverting rapidly from unreality...
From last Wednesday's ECB rumor that ramped stocks higher and financials more than anything else, Goldman and JPMorgan have retraced it all and the rest are reverting rapidly on the total refutation of any rumors. There is one financial however that is still up 6%...
Einhorn Eviscerates Buffet: "If You Wrap Up All $100 Bills In Circulation, It Would Form A Cube 74 Feet Per Side"Submitted by Tyler Durden on 05/30/2012 - 10:00
In Greenlight's latest letter we learn that "At quarter end, the largest disclosed long positions in the Partnerships were Apple, Arkema, General Motors, gold and Seagate Technology. The Partnerships had an average exposure of 98% long and 62% short." Also, we find a spirited defense of AAPL (if one which breaks no real new ground with the ever louder recent criticisms of the company), some thoughts on STX, a discussion on the Yen, some of the firm's profitable shorts, including DMND, GMCR, and JOE, but most delightful is this scathing attack on old crony capitalist, TBTF money bags himself...
We have explained in the recent past just why the rotation from a professional European bond-run to a retail bank-run is critical to the euro-zone banking system - with deposit losses creating even more encumbered asset levels among European banks, which would then exaggerate contagion problems as funding pressures mount. The problem is existing deposit guarantee schemes are implemented at the national level and are not currently funded to handle a systemic crisis - this is why there has been so much chatter of a pan-Europe guarantee scheme. However, not only does a euro-wide guarantee rely on credible commitments from core European governments but it misses the redenomination risk - as unlike the US FDIC, it would need to explicitly guarantee the euro-value of deposits. Barclays shares our doubts on the implementation (short- and long-term) of such a solution, noting that Eurozone deposits are greater than eurozone GDP (as opposed to US deposits at ~68% of US GDP). Between operational difficulties, the size of redenomination losses, moral hazard, and the massive (deposit/GDP) contingent liability dependent on actual exit of a member state, we would urge any exuberance over 'talk' of a guarantee to be stymied once again by the dismal reality of implementation and agreement.
EURUSD just broke below 1.2400 - back to July 2010 levels
Just when talks of Accelerated Kinetic Action In Close Proximity To Cash Dispensing MachinesTM in Spain were quieting down, here comes Goldman to reminds us that nothing is fixed. "The ECB released April deposit data today. Italian deposits in April were stable, with a moderate increase in retail (+€7 bn) more than offsetting a small reduction in corporate deposits. In Spain, April saw €31 bn (or 1.9%) deposit outflow from banks. Within this only half is attributable to corporate (down €7 bn or -3.4%) and retail balances (down €8 bn, or -1.1%). The residual outflow is attributable to deposit reductions by others (financial institutions / pension funds / etc)."