Archive - Oct 2009

The global pension crisis is a major concern. The uptrend in equities in Q3 boosted pension returns in Canada and elsewhere, but this will do little to address long-term concerns on the sustainability of pensions. After losing 31% in their last fiscal year, Ohio fund's annual report detailed how long it would now take for its investments to put the fund back on track. Officials simply said: "Infinity."

I want to state that equities are for renting not owning at this juncture.

• Russia economy to shrink 7.5% in 2009 according to President Medvedev (BBC)
• Medvedev: Slump deeper than forecast (WSJ)
• Andy Xie: Why one bubble burst deserves another (Caijing)
• Paranoid theories can't take the shine off gold (FT)
• US States face "unbelievable" revenue shortages (Reuters)
• October surprise from bank earnings? (MarketWatch)
• Employers have fewer jobs to offer (WSJ)

Radio Zero: "We watched 'they live,' last night.  Felt like the comment section on Daily Kos."

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In January, Zero Hedge wrote about the bankruptcy of paperboard and packaging company Smurfit Stone Container Corp. As this occurred at the peak of the post Lehman crunch it was not very surprising. However, what is somewhat surprising is our recent encounter with a case study of the Jefferson Smurfit Group LBO by Morgan Stanley, in which Madison Dearborn acquired JSG for €2.3 billion, and subsequently spun off SSCC to the public. What caught our attention was the fees and expenses that the advisors charged MDP to facilitate a deal which ultimately cashed out the investor group by spinning off the eventual toxic assets of SSCC to a hapless public: Deutsche Bank and Merrill Lynch pocketed a whopping €248.5 million (yes, that's Euros). And for what: presumably for M&A fees, Loan fees, HY Bridge and Bond Fees and FX/Hedging Revenues. What they missed to point out is the primary reason for MD's generosity: extracting all the relevant assets out of a formerly stable and growing, operation, spinning off all the shitty ones (eventually attempting to arrange restructuring fees and/or DIP financing on the remaining SSCC husk), leveraging the company with a massive debt load, and subsequently IPOing into the next bull market.

Genius or madman, at least his thoughts are getting prominence. (Also, another example of stretching a $0 marketing and advertising budget.)

It is no secret that Julian Robertson is not a huge fan of long-dated bonds. In his recent CNBC interview he had some downright nasty words about the back-end of the UST curve, especially if the "downside contingency" case of foreign purchases ceasing, were to pass. However, while many have known about his propensity for the bond steepener trade, his latest trade position is the so called Constant Maturity Swap trade. Moving away from an outright steepener makes sense as it can now only profit from a tail end widening, since the front end of the curve is at zero. Unless Bernanke follows Sweden into negative rates territory, the steepener upside potential has just been mechanically limited by 50%. As for his current preferred iteration of expressing Treasury bearishness, CMS, here is some recent commentary from JR on the topic:

"The insurance policy I would buy is called a CMS Rate Cap, which is the equivalent of buying puts on long-term
Treasuries. If inflation happens the way it could, long-term Treasuries
are just going to explode. Less than 30 years ago, long-term interest
rates got to 20%. I can envision that seeming like a very low interest
rate compared to what might occur in the future."

No surprise then, that Morgan Stanley's Govvy desk has started pimping this trade (including some hedged and Knock Out variants) to anyone who wants to immitate that original Tiger.

Merrill Lynch (excuse me, BofA/ML as they like to put on the lead left side of REIT prospectuses), presents its case for why optimism dominates and all theories voices by perma-bears "have little founding in economic theory or history." What is notable from the below multi-pronged perspective on the definition of the term "recession" is that BofA/ML's entire argument rests on the premise of a fiat currency as taken for granted. Eliminate that, and the construct of imminent recovery from any and every economic cataclysm becomes immediately flawed. Ironically, the only reason there is no mass violence and civil uprisings right now (which would have been the case had RBS and HBOS gone under, an event which according to Bloomberg was mere hours away), is because printing presses the world over went into overdrive with wanton monopoly money (or nightcrawlers as they have been penned elsewhere in the blogosphere) creation (or destruction, depending on your perspective).

Break 'em up.

Any doubt that the Fed is in a box, and has no choice but to remain being the lender of first and last resort to keep the Ponzi scam going???

Rasputin sums it all up, this should eliminate any confusion about the Fed's intentions in the future, despite the relentless jawboning, lecturing, and assurances about the "safety and soundness" of the U.S. Dollar as the global reserve currency.

Who's bought and paid for?

For your consideration, a letter in which Obama does "not feel that [he] deserves to be in the company of so many of the transformative figures who've been honored by this prize." It would appear, many others agree.

Radio Zero: Peace (Prize) Sells... but Who's Buying?  (Hint: Not us).  We'll go live around 8:30 ET.

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Chat up the DJ (send your .mp3 files) here: radiozh.

Or... #radiozh on EFNet (for the real chat nerds).

It is that time again: the latest version of the Goldman LBO model is circulating (the primer is below). The last time this was popular was April of 2007, right before the LBO bubble went "pop." Maybe this is the subliminal way for Goldman to advise their clients that PE deals are back. After all, as disclosed earlier, there is a lot of dry powder out there. Yet what is missing? A catalyst, in the form of Goldman screaming Ready, Steady, Go.

A peculiar escalation developing in Chicago (what is it about that city) was today's development in the Citadel - Teza Technologies lawsuit. As a reminder, Teza is the firm run by former Citadel head of HFT and quantitative trading, Misha Malyshev, who got unmasked when it was made clear that he had recruited Sergey Aleynikov from Goldman, and was preparing to launch a quant trading group despite his non-compete with Citadel (which may very well be the reason for the entire Aleynikov fiasco after all). What was surprising in today's hearing was the proclamation by Citadel lawyers that Teza is a "veritable pirate ship of illegal activity."