Archive - Dec 12, 2010

Great Atlantic And Pacific Supermarket Chain Files Chapter 11, Cites Excess Leverage And Margin Pressures Among Bankruptcy Causes

And another one bites the dust. Montvale, NJ based grocery chain Great Atlantic and Pacific has filed for bankruptcy, pretty much as had been expected for the past week. The 101-year-old operator of 395 supermarkets and other stores, filed for bankruptcy after failing to turn around its business amid increased competition from wholesale clubs and drugstores. A&P, based in Montvale, New Jersey, listed assets of $2.5 billion and debts of $3.2 billion in its Chapter 11 filing today in U.S. Bankruptcy Court in White Plains, New York. The company has 41,000 employees, 95 percent of whom are covered by union agreements, according to the filing. And among the reasons for the filing, most notably ridiculous leverage incurred with the stupid purchase of Pathmark 3 years prior, is, you guess it: margin pressure. "Margin pressure imposed by declining operating cashflow has amplified the bottom line effects of the Debtors’ leveraged balance sheet and significant legacy costs....A&P, like many supermarket operators, continues to cope with the recent economic decline and reduced customer spending while running on narrow profit margins and facing intense competition." What? Reduced consumer spending? Margin pressure? Huh? Not according to the Chairman, who says inflation and margin collapse is merely in the eye of the beholder: the economic central planners would never allow this, and any bankruptcies that prove the contrary should be ignored and promptly forgotten.

Weekly Review And Upcoming Events Calendar

The Senate votes on the fiscal package Monday at 3:00 pm. Assuming it passes, the House of Representatives is likely to vote later in the week. Congress plans to adjourn for the year December 17. Fiscal policy remains very important for the medium term USD outlook due to the building tension between stronger demand and potentially widening twin deficits. There will also be some focus on the Philly Fed and Empire surveys next week, which sent a very divergent message on US manufacturing activity last month. Also next week, there will be $24 worth of Fed-given liquidity courtesy of 4 POMOs on every day except Tuesday.

Who's Buying Corporate Bonds, And Why Did The Household Sector, Contrary To Expectations, End Up Dumping $130 Billion In Bonds In Q3?

That is the question BofA's Hans Mikkelsen tries to answer looking at last week's Z.1 statement. It is well known by now that the biggest beneficiary of the persistent equity outflows have been inflows into corporate bonds, primarily of the Investment Grade variety, as investors continue to distrust the equity markets. Yet to its surprise, BofA finds that the biggest source of capital for corporate and foreign bonds was not the household sector, but rather commercial banks, and specifically foreign banking offices. As to the "household" sector, which is the key place where retail is traditionally hidden, due to its status as a placeholder plug: it was the biggest seller of corporate bonds selling an annualized $541 billion of paper in Q3. How this number makes any sense in light of all the other data we have been getting recently is yet to be explained. Yet was is even more surprising is that corporate stocks, which ended Q3 about 10% higher than at the start of the quarter, saw net sales of over $80 billion annualized... How that led to an increase in prevailing prices is a riddle, wrapped in mystery, contained inside the Fed's ES/SPY purchasing JV with Citadel.

Weekly Perma-Rosiness From Erik Nielsen

Below is Erik Nielsen's latest dose of European permabullishness. At this point it is pretty much pointless to keep track of who is who at Goldman - the last attempt to reignite "The Ponz" is going gull blast, and every single person has forsaken their credibility in order to pitch the propaganda line. How Goldman's strategists pretend to be even remotely relevant any more is a mystery to anyone. The bottom line, and cutting through all the bullshit, is that Germany will do almost everything to keep the Euro, and thus import the periphery's monetary weakness, keeping its exports cheep, absent a fiscal union, no matter what the petrified bureaucrat Schauble says. Luckily Angela Merkel gets it... for now. Which is why all those who were expecting the WSJ interview with the German finance minister to push the EURUSD higher in Monday trading are in for a disappointment judging by the early action in the pair.

Charting The US Fiscal Catastrophe

With little fanfare, the November budget deficit of $150.4 billion was reported, which happened to be the worst fiscal November in the history of the US, and just out of the top 10 of worst deficit months ever, including the traditionally weak seasonal months of December, April and September (indicatively, the worst deficit month was the February 2010 $221 billion). The deficit was a major surprise to all those who had expected a pick up in income tax revenues. And as the charts below demonstrate, while there was indeed a modest pick up in tax collections, it was nowhere near enough to offset the surge in government outlays (even with interest payments still at near record low levels). What was also not broadly appreciated is that the cumulative debt issuance over deficit funding has hit a new all time high of $1,735 billion since our October 2006 starting point (4 fiscal years ago). And what is a bigger concern, is that the debt issuance continues to remain at almost exactly 50% over the deficit. Additionally we know that courtesy of Obama's latest stimulus for the wealthy (and everyone else) the latest projection for the 2011 budget deficit will hit $1.5 trillion (after it was just $1.1 trillion a few months prior). What this means is that should the US Treasury continue to issue 50% more debt than total deficit needs, by the end of fiscal 2011, the US will have issued another roughly $2.25 trillion in net debt. Granted this is a rule of thumb. But what it means is that the $900 billion in notional (not market) value of bonds to be bought back by the Fed through June will be woefully insufficient, and that as a result we expect that Ben Bernanke will be forced to monetize another $1.2 trillion in debt to continue with his course of monetizing every dollar of deficit spending, as he has been doing since the advent of QE2. It also means that unless something dramatically changes, through October 31, 2011, total US debt will be $15.9 trillion, up from the $13.9 trillion as of the end of last month, and will mean that the debt ceiling will have to be raised not only once, but likely twice in the next 12 months. We are now truly a banana republic you can believe in.

Charting A Ridiculously Extreme Market, In Which The Dumb Money Is The Most Confident It Has Been In 5 Years

One of the sad side-effects of taking away investment risk, as Ben Bernanke has done with his "global put" doctrine, is that the old maxim of the market staying irrational far longer than anyone can possible imagine, can now be exponented to some irrational infinite number (to throw some wacky number theory into the equation). Whether Bernanke can also succeed in defying nature and mathematics in broad terms remains to be seen: we have yet to see a system that can diverge from equilibrium in perpetuity without some very unfortunate unanticipated side-effects somewhere. Yet with the bulk of day-trading systems now primed to do nothing but chase momentum, this divergence could lead to unseen previously deviations. We are confident that while printing a reserve currency (whose reserve status is rapidly diminishing) is one prerogative that Ben has, changing the laws of thermodynamics is one field where Bernanke will fail. Nonetheless, in its attempt to destroy all bears, only to be followed by the annihilation of all bulls (as the TBTFs pocket all the margins, and capital gains) the market continues to be nothing less than a casino primed with far greater house odds than even the worst slot machines in Atlatnic City. And just like in AC, accrued profits are not real, until taken. And if taken one second too late, they merely become deferred losses. That said, we would like to present some very factual representations to just what extreme level the market has been overbought in this latest year end push to make hedge fund managers richer (who are the only ones who get to be paid at year end without booking profits, of course assuming they beat the S&P, which means about 33% of them). Courtesy of we can observe just how irrational the market has become... As to how much longer it can sustain this, feel free to address your questions to the Chairman.