It appears that in the 11th hour, Europe is still unable to decide just what the proper approach to rescuing Greece is. The Sunday Times has just released information that a plan to be published by Brussels on Tuesday, titled "Urgent measures to be taken by May 15, 2010" will demand dramatic Greek austerity measures, such as cutting "average nominal wages, including in
central government, local governments, state agencies and other public
institutions" and proposes new luxury goods and self-employed taxes. Yet the kicker is that "Richer eurozone countries such as Germany and France would be expected to bail
out Greece in the worst-case scenario, to prevent a disastrous crash in the
value of the single currency" - not very surprisingly, this is precisely the Plan B that Almunia yesterday swore up and down that the EU was not, repeat not, considering. Moral Hazard has indeed gone global. Yet even with this bureaucratic memorandum on the table, it seems certain that the EU will not actually act before Greek deterioration escalates out of control. Here are the near term catalysts that will likely make the cost of inactivity very high.
This article has two weekend brainteasers. I don’t understand their significance fully. I know that human beings create beautiful delicate architectures to manage risk and they work imperfectly. Whether the motive is extinction avoidance, or to build a heaven out of hell, or eros playing off logos; creativity is the reason for beings. I enjoy studying the archaeology of risk mitigation.
Remember volatility first cracked a smile after October 1987, because sellers of equity puts became more afraid of jumps than they were before. Smiles and skews endure to this day, as classical tribute to persistence.
My point is that there are times when it really is different. This may be one of those times. Further, I’m not sure how to interpret these new things. Here are two open questions for the weekend related to some artifacts I found.
Following on yesterday's RealPoint January update on CMBX delinquencies, here is Lehman's most recent report on January whole loan and CMBX remittances. While CMBX 3 seems to have stopped the bleeding at least temporarily, the other vintages are happy to step in its place. Deterioration is also accelerating in non-CMBS whole loans.
Gold bull markets are unique in that buying becomes driven by both fear and greed. Gold is quickly moving into the hands of those who are unwilling to gamble on fiat currencies or bonds as a store a value. The new owners of gold are unconcerned with its lack of yield but instead are focused on its historic ability to preserve wealth and its unquestionable value. Given the difficulty we have valuing paper money, it becomes extremely difficult to come up with a reasoned price target for gold. Today’s gold market is significantly different from the gold market of the 1970s for two reasons: 1) Central Banks are more likely to be buyers of gold today and 2) They clearly have little ability to dramatically raise interest rates with the massive increases in government issued debt. Thus, it is easy to envision a similar twenty-five fold increase in the gold price that was seen between 1970 and 1980, which would result in a gold price today above $6,000 per ounce. We expect the often quoted “1980 inflation adjusted high” of approximately $2,200 to be achieved in short order. These targets may well prove to be irrelevant, however, as the quality of our lives will be more greatly impacted by the continued evolution of our money and how the general public chooses to value it, or not. - Eric Sprott
January is over, and while the stock market closed at its YTD lows, some corporate bond segments are still on fire. Below we present a complete heatmap for January bond price performance by subsector. Each issue is presented on a size relative basis, with the grayed text giving detailed information about any one specific issue, including corporate ticker, one month change, ISIN, Name, Rating, Outstanding, and last price (compared to Dec 31, 2009, red is lower, blue is higher).
This week's most relevant estimates and charts from Goldman Sachs:
Our top-down EPS forecast of $76 and $90 for 2010 and 2011 reflect +33% and +20% growth, respectively. Our pre-provision and write-down EPS forecasts are $81 for 2010 and $91 for 2011. Bottom-up consensus forecasts a 38% increase in 2010 to $79, and a 21% increase in 2011 to $95.
Top-down, the S&P 500 trades at an NTM P/E of 14.3X (13.4X on pre-provision EPS). Bottom-up, it trades at NTM P/E of 14.1X and LTM P/B of 2.3X
A quantitative perspective on the January effect, courtesy of Innovative Quant Solutions.
"In this IQS Research Brief, we want to find out the answer to the question – does the return for January set the tone for the return for the year? Is this a New January Effect? If January 2010 has a positive (negative) return, will the year have a positive (negative) return? If January turns out to be negative (as it is at the time this was written), will 2010 be a down year?"
After this week's Bernanke reconfirmation vote, which saw a record number of Senators vote against the Fed Chairman, the tenuous relationships between governments and central banks was put on exhibit once again, this time in Argentina, where as we previously reported, the confrontation between the Central Bank President Martin Redrado and president Kirchner had already reached a climax. Today Redrado finally quit, "saying the government has tried to destroy the bank’s independence and that he has sought to follow the law." Here is to hoping that Harry Reid's recent complete politicization of the Fed, in which he provided a Bernanke with a "votes-for-keeping my commercial real estate values high" deal, forces the Princeton economist to take the high road. We are not holding our breath.
Crude oil futures slipped below $73 a barrel for West Texas Intermediate late Friday as a temporary boost from strong GDP figures failed to last and let prices sink to a one-month low. Earlier in the week, China, weak refinery demand and slumping tech stocks all conspired to keep energy prices low, with prices oscillating around $73 a barrel. U.S. gross domestic product grew at a seasonally adjusted 5.7% annual rate in the fourth quarter, the Commerce Department reported on Friday, its fastest pace in six years. The previous quarter had registered growth of 2.2% and the year-ago period saw a downturn of 5.4%. For 2009 as a whole, GDP contracted by 2.4%, the worst record since 1946.
CMBS Delinquencies Surge To $42 Billion, Or 5.2% Of Total; Average Loss Severity Hits All Time High Of 52.7%Submitted by Tyler Durden on 01/29/2010 - 19:22
The most disturbing observation from this month's RealPoint CMBS analysis, aside from the surge in delinquencies to an all time high of $42 billion, is that the average loss severity on CMBS liquidation has just hit a record of 52.7%. That means that on average less than half the loan is recovered in liquidation. Surely, this is not the kind of news that REITs are looking for as they perch from atop 52 week highs.
Whitney Tilson is still extremely bullish on GGP. Whether he is right, or if the stock was simply floating, suspended by a rising beta tide since the beginning of the rally, will soon be determined. Even sooner if the current incipient correction accelerates. And soonest if it turns out Almunia was just buying banks time to offload their GGB holdings and Greece defaults over the next several weeks.
European Union Economic and Monetary Affairs Commissioner Joaquin Almunia speaks to Bloomberg, and says "Greece will not default. In the euro area, default does not exist. There is no bailout problems." Too bad crooked budgets and associated deficits can not be funded with hopes, dreams and bureaucratic pragmatism.
If you want to understand the deals that wiped out AIG, the best place to start is the website of the New York Fed. In the financial statement of Maiden Lane III, published last April, we see the gory details of the three largest CDO investments - Max 2008-1, Max 2007-1, and TRIAXX 2006-2A - acquired from AIG's banks at par. Those deals, which totaled $10.7 billion, offer a template for evaluating the other sham transactions in the portfolio.
"Over the next few days, we are likely to get some combination of Greek and European donor announcements aimed at calming markets, reducing volatility and reducing contagion risk. But the impact on markets is unlikely to be sustained as both sides face multi-round, protracted challenges which contain all the elements of complex game dynamics." - Mohamed El-Erian