That the IMF believed banks would ever take a proper write down - reduce what they expect to be paid - is comical because the IIF proposal from the start was made to sound like a write-down even though it never was one. So now, as a massive bailout is about to be announced and the fear of a Credit Event at the EU and IMF is at epic proportions, the banks expect they will get taken care of. Sadly it is probably good for bank share prices short term if they win but the regulatory animosity may grow and the occupy movement will get a more recent and specific event to focus on. Since by now the EU should know where every single sovereign CDS trade is (because they must have asked the banks for that level of disclosure by now) they can go ahead and allow a good old fashioned default and kill some weak institutions and rebuild the system with healthier banks.
President Obama is taking credit for a new government plan to "save homeowners." That is of course pure propaganda to mask the plan's true goal: the perfection of debt-serfdom. The basic thrust of the plan is straightforward: encourage "underwater" homeowners whose mortgages exceed the value of their homes to re-finance at lower rates. The stated incentive (i.e. the PR pitch) is to lower homeowners' monthly payments via lower interest rates. This is the Federal Reserve's entire game plan in a nutshell: don't write off any debt, as that would reveal the banking sector's insolvency, but play extend-and-pretend with crushing debtloads by lowering the cost of servicing the debt. The key purpose of this "plan" is to leave the principle owed to banks on their books at full value while ensnaring the hapless debt-serf (the "homeowner") into permanent servitude to the banks. If the net worth of your home is a negative number, then what exactly do you own? You have the right to occupy the shelter, and you own the debt. So how is this any different from a lease? There is no equity, and no equity being built: there is a monthly payment in return for the right to occupy the dwelling.
While the immensity of both fiscal and monetary stimulus in the US has been exponentially covered by any and all with some suggesting too much and some suggesting too little, we remain somewhat nonplussed by the disconnects we see from what seem 'sensible' and intuitive relationships of days gone by. We noted yesterday the retail sales vs confidence/sentiment disconnects continue to amaze but today's piece-de-resistance is the Inventory-to-Shipments ratio which continues to rise back towards Mar09 peak levels as GDP growth disconnects entirely. The 'if-we-build-it' mentality seems to have created nothing in terms of real demand and as we noted earlier this morning, absolute inventories continue to rise rapidly. Given, the empirical relationship between Inventories-to-Shipments and GDP growth, we would expect significantly weak economic performance (but we guess government-sponsored student lending or GM channel stuffing will continue to create the illusion of growth required for equity managers to pump)
The farcial tragicomedy that is today's European summit, which not even the combined minds of Beckett, Camus and Kierkegaard could come up with on their own, is about to begin. Watch it live here in all its frontal lobe liquefying glory. Popcorn not optional.
We all know the news by now: "MF reported its biggest quarterly loss ever yesterday, after having its credit ratings cut a day earlier by Moody’s Investors Service on concern that the broker won’t meet earnings targets and may not be able to manage investments in European sovereign debt. The company’s shares fell 48 percent. “It’s aggregated risk,” said Richard Repetto, an analyst at Sandler O’Neill & Partners LP. The positions in Europe, the further downgrade potential and the quarterly loss, combined to discourage investors, he said." Here is where it gets worse: "Analysts at KBW Inc., led by Niamh Alexander, wrote in a note yesterday that the Moody’s downgrade and lower earnings could cause a ripple effect on the company, raising borrowing costs and triggering collateral calls. “It also exposes MF to collateral calls of up to $5 million,” the note said. “We believe it could also prompt lenders to reduce financing, clients to withdraw assets and trigger the need to recognize losses on certain bilateral over- the-counter and off-balance sheet transactions." Well, judging by the bond yield chart below, MF is done (further confirmed by WSJ reporting that the company has hired restructuring expert Evercore Partners). The only question is whether that ever so handy uber collateral puller, Goldman Sachs, so critical in the extinction of Dexia and of course AIG, will be the party responsible for the death of MF Global? Considering who the current head of MF is, and his "key man status" in the prospectus of the company's recently bonds (which are plummeting today), we somehow doubt it.
The market is shocked, shocked, that the "groundbreaking" resolution (in Barroso's words) due for today is now nothing but a mirage:
- EU Official Says Bank Heads Won’t Be at Summit Table Tonight
- EU leaders may frame agenda for more bank talks on bondholder losses in 2nd bailout
pkg for Greece.
- Says IIF doesn’t entirely represent private banks
And the kicker:
- Says Greek debt swap would take several weeks
EURUSD now at the lows; its second derivative - stocks - will soon likely follow.
There is only one notable data point in today's release of new home sales, which, and this should not come as a surprise to anyone, continue to crawl along the floor with just 313,000 houses sold. The datapoint is the median home price, which tumbled from $210,900 to $204,400. This is certainly the lowest number in 2011, and is just modestly off the decade low record in October 2010. And it gets worse: the 3 month drop in median home prices is the biggest ever. Regardless: we are confident this will force the Comcast-based, housing "bottom-callers" to call yet another bottom shortly.
As the euphoria of a Bundestag vote begins to fade and the reality of the need to reduce Greek debt by more than 21% (or whatever the ridiculous number the entirely independent think-tank called the IIF is pushing now), we note that almost perfectly tick-for-tick the price of EFSF bonds today are inversely correlated with the EURUSD. It seems evident that our fears (oft discussed here) over the actual increased contagion and concentration risk that EFSF will withstand should it be more levered are clearly being gradually priced in - despite what every other correlation-driven momentum junkie asset class is saying. Perhaps buying EFSF protection (we are sure it will be quoted soon) is the new EUR hedge for all those stuck short?
Well, that surge lasted all of 10 minutes.
- EU TALKS WITH BANKS ON GREEK BOND LOSSES SAID TO BE DEADLOCKED
- EU TALKS 'PAUSED' ON A DISPUTE ON INSURING RISKS OF NEW BONDS
- EU official says dispute centers on insuring risk of new bonds.
- Involuntary Greek haircuts can’t be ruled out
- EU Said to Consider Limits on EU-IMF Loans in 2nd Greek Rescue
At some point the algos now trading the EURUSD exclusively will run out of money chasing each and every headline, a strategy that has empirically worked precisely 0% of the time.
Amazon's business model is quite fascinating: it is a retailers' retailer, and an online micropayment-based bookstore. That's it. Yet, as is well known, the key problem with retailers is margins. So take a retailer squared and the margin becomes a problemsquared. And the one problem with online bookstores is that they compete dollar for dollar with Apple's ap store, so one must constantly spend for "innovation", if not actually innovate. Which explains the only two truly relevant charts from the AMZN earnings release: their operating income profit, and their R&D spend. One, to confirm that you can remove the retailer from the retailer, but you can never remove the margins; and the no matter how hard you try, you will always have to compete with Apple, and spend accordingly. And we throw in one bonus chart for good measure.
- PARLIAMENTARY SOURCE SAYS GERMANY'S BUNDESTAG LOWER HOUSE OF PARLIAMENT APPROVES MOTION TO STRENGTHEN EFSF VIA LEVERAGE
- 503 vote in favor of the measure; 89 voted against, while four abstained in Berlin today - so this is a surprise we take it?
EURUSD promptly soars despite this having been priced in days ago and despite the addition by the parliament that the SMP program is now effectively over: "Motion states that EFSF cannot be financed via the ECB and that the ECB will no longer need to buy bonds in the secondary market." In the meantime, the latest batch of weak hand shorts, covers.
The only real question remains, is whether Merkel and Sarkozy will hold hands to add emphasis to their "we saved the world" announcement. We will get an announcement and it will sound positive. Unless they did a lot of work in the past 24 hours, it seems unlikely that any details will come out. We will hear about grand plans to leverage EFSF, how it has more than enough money to accomplish its goal (of pushing default to next year) and how countries are committed to making it work, and how bank recapitalizations will be done to ensure the safety and soundness of the Eurozone banks, and how with private sector involvement, not only will Greece have the opportunity to grow its way out of the crisis, but other countries too will be given the chance to grow and be successful - austerity is now a dirty word.
The stockpiling continues. While today's durable goods number on the surface was good, declining less than expected at the top-line level, down 0.8%, or $1.5 billion, to $200.3 billion, better than the -1.0% expected, and compared to the -0.1% decline in August. What was better than expected is that durables ex transportation came at 1.7% on expectations of 0.4% (previous adjusted to -0.4%). What however negates all the good data is one simple fact: shipments of manufactured durable goods, declined substantially to $200.1 billion, or 0.7%. So what is the reason for this continuing beat? Why inventories of course: "Inventories of manufactured durable goods in September, up twenty one consecutive months, increased $0.4 billion or 0.1 percent to $365.6 billion. This was at the highest level since the series was first published on a NAICS basis in 1992 and followed a 0.9 percent August increase. Transportation equipment, also up twenty one consecutive months, had the largest increase, $0.5 billion or 0.5 percent to $112.7 billion." Not only that, but the annualized growth rate just hit the highest ever (see chart below)! And as would be expected, the Inventory-to-Shipments ratio increased from 1.81 to 1.83. Said otherwise, we are back to the old model where economic "growth" is only due to stockpiling as producers hope that tomorrow, and tomorrow, and tomorrow someone will actually buy record inventory stockpiles at market value instead of LIFO liquidation prices. Oddly, this reminds us of European thinking too.
- German Chancellor Merkel said that all models that involve the ECB are not on the agenda tonight, however both leverage models are going to be discussed
- According to a senior EU source, IMF thinks 60% Greek debt write-down is not enough, and it should be 65% or more
- Widening was observed in the Greek/German 10-year government bond yield spread ahead of the EU leaders' summit today
- According to a draft statement from the EU heads of state, banks would need guarantees on liabilities for more direct support for access to funding. It further said that there is broad agreement on requiring banks to have capital ratio of 9%, to be attained by June 30th 2010
- There were reports that the Italian PM Berlusconi may resign
It appears yesterday's FSLR CEO "departure" was no fluke. The company just came out with earnings which in addition to being a current quarter disaster with EPS coming in at $2.25, on expectations of $2.67, also added disastrous guidance to the mix. To wit: First Solar now sees year EPS $6.50-$7.50, compared to $9-$9.50 previously, and is now forecasting net sales of $3 billion - $3.3 billion, compared to $3.6 billion -$3.7 billion previously. And combining the worst of both the Netflix and Amazon press releases, the company has also announced it is cutting its CapEx, and is further exploring options to reallocate overhead expenses. We hope Whitney Tilson wasn't buying this one on the way down too as the company may be headed for $0.00 soon to quite soon. Of course, if his plan, like in NFLX, is to keep adding more on the way down and averaging lower, he will be more than content.