Archive - Feb 2010

CIT's gorgeous, bouncer-worthy, and recently bankrupt, 5th Avenue lobby is about to receive some golden commodes and even more taxpayer reverse golden showers if and when the government is forced to bail out John Thain for the nth time. In the meantime Thain will receive $500k and $5.5 million in stock as he prepares to destroy yet another recently bankrupt company. Read all about the latest massacre of change you can drown your sorrows in from Bloomberg. We refuse to touch this filth.

"On the other side of my book, I have discovered something which is close to the Paulson trade in CDOs in US mortgages in 2005 and 2006. Can you believe that a trade with that kind of dynamic exists today. Can you believe if nothing happens and I am just wrong than again I will lose 1.5% but if I am right I will make 75%." Hugh Hendry

We are delighted that the highly sophisticated, technical and proprietary acronym you saw here first, the STUPIDs, has now made the UBS and Art Cashin vernacular, and is set to overtake the extremely politically incorrect acronym of the PIIGS, which seems to insult Barclays, the precursors of ham, and so many more with each passing day. We are confident that our version is much more palatable. A modest suggestion - convert PIIGS to GIPSI - now that is sure to please everyone. Anyway, that, and much more from Art Cashin's Friday note.

Nothing has changed from last week, last month, or even 4 months ago when the market was higher than it is now!!

Remember the proverbial run on the bank? Well, that was the norm (or rather the outlier) before governments decided to backstop entire financial industries  residing within their territory. As a result, the post-Lehman version of "the bank run" will henceforth be referred to as "the country run" and for an example of one in practice, look no further than Greece. The Guardian reports that investors have pulled a stunning €8-10 billion since the Greek crisis commenced in earnest last November. If true, this is the beginning of the end for the troubled EMU-member country.

After a mere $100 billion in projected debt maturities in the 2010-2011 period, the LBO wave of 2005-2007, largely financed with 5-7 year tenor bonds and loans, will set the refi scene on fire in the 2012-2014 period, when $700 billion of debt is set to mature. Should Fed Fund rates, and the yield curve begin to shift higher, the incremental cost of debt capital will destroy tens if not hundreds of billions of equity value over the next 5 years. After peaking at 19.4% in Q4, 2008, and subsequently dropping to 9.5%, Moody's expects HY bond yields to begin increasing in 2011. And while HY companies are rushing to access the current favorable HY refi window, when refi capital is still broadly available, growth capital has been extremely scarce with just 4% of last year's total HY issuance used for M&A activity (78% was for refinancing maturity extension). It would appear High Yield companies have entered "run-off" mode for credit investors, with no consideration for any residual equity value.

Even if some politicians tried to stand up to Wall Street - or even if we "throw out all of the bums" currently in political roles - the U.S. would still be locked into the WTO's scheme for helping the financial giants to grow ever bigger and to take ever-bigger and ever-riskier gambles.
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I take issue with some of Hank Paulson's tell all book "On The Brink". I don't think he told all the story. Parts of the story he told do not jibe with the facts. It was still an interesting book.

The key lesson from the ERM crisis of 1992 and the Asian crisis of 1997 is that contagion can emerge quickly and often in unpredictable ways. Unwinding of leveraged positions by distressed market participants, herding behaviour among investors, and loss of liquidity that gives way to general flight to quality can all lead to heightened correlations between markets and, in extremely circumstances, set off a self-filling crisis on a regional/global scale. There have been clear signs over the past week that the distress in the Greek government bond market is increasingly being felt in other euro area countries such as Spain and Portugal. The most likely explanation of this development is the “demonstration effect” – the Greek crisis is likely to have caused investors to re-evaluate the fundamentals of these countries. Spain and Greece may not have strong financial or economic links, but their fundamentals have a lot in common.

The possibility of contagion of the Greek crisis may not end with Spain. There is a presumption among investors that in the worst case scenario (and we are not there yet) the EU will give Greece financial assistance. If this is an isolated event, the effect on the overall public finances of the EU is unlikely to be substantial. However, a bailout of Greece may make aid to other countries in similar situations more likely (moral hazard). A series of open-ended bailouts would not only undermine the fiscal positions of core euro area countries such as Germany and France but, more dangerously, would weaken their political commitment to the continuation of the euro area project.

“U.S. Stocks Jump in Final Hour, Pushing Up Metal Prices; Dollar Pares Gain U.S. stocks rose in the final hour of trading on speculation the European Union may propose a solution for Greece’s budget deficit, reports Bloomberg.

This end of day soundbite provided the fodder/excuse for a short-covering rally on the Feb 5 NFP report. Traders and investors should recall that the 2009 low was set on the March 6 NFP report, that the 2010 high came on the day following the Jan 8 2010 NFP report and that the crest of June 5 2009 leading to the June swoon of 2009 came on a NFP report. Obviously, the spark for the short covering today had nothing to do whatsoever with the NFP report, but alas, how often do market buying and selling climaxes occur on NFP dates give or take a day? Plenty, and too many for me to recount to you off the top of my head, but longtime clients know to look for and expect equity buying and selling climaxes on key announcement dates such as NFP reports. End of story, period!

Zero Hedge has long been bearish on the prospects for the German Bund, whose yields at 50-year record lows, can only go up. Couple this with German CDS which still inexplicably trades inside of the US, and the fact that the PIIGS fallout is certain to wreak fiscal and/or monetary havoc on the core of the Euro zone, or alternative a favorable resolution is sure to end the Bund flight to safety trade. We have discussed both Bund short and German CDS long positions for those readers who can establish such exposure. Yesterday afternoon, Morgan Stanley's European Interest Rate Strategist came out with a Bund short call along precisely the same fault lines that we have uncovered in Europe's shifting te(c|u)tonic lines.

It's very hard to tell if this increase in employment is real, a temporary bump from stimulus, or a fiction arising from incorrect assumptions used by the BLS. Here's how to read the numbers.

"The “easy” part of the reflex rally is over. The market has a couple of options on where it heads next. They range all the way from resuming the January selloff to resuming the December rally. This window of uncertainty could last until about Tuesday. The market should show its hand by then. For today, the napkins again suggest early resistance at 1102/1105 with critical backup at 1112/1115. Support again looks like 1087/1092. The fall back from there would be 1070/1075. Breaking below 1070 could put the bears back in control." - Art Cashin

With Europe finally regaining its rightful place as the epicenter of the peripheral economic crisis, it is time we shift focus, albeit briefly, from America and its increasing cadre of troubles, to those of the Euro area. Below we present some of the key charts and observations that will frame the imminent [bail out|default] of a whole host of minor EMU and EU countries.

Revolutions happen when broken parts of existing structures reassemble themselves in novel ways. Today’s Japanese carry trade will become something completely new: currency jettison. This coming Yen carry trade is going to fundamentally change Japan. Next time, Miho Maejima won’t be hungry for yield. She has no yen for it: the carry trade will be driven by exchange rate volatility hedging. She’ll handcuff the government to the bedpost and go for full-on dollarization. When she does, shorting yen is the best trick on the planet. Dollarization to control currency volatility happens a lot. It is not even a radically new event in Japan, but it will go viral and mutate into a radically new species of carry trade. The utter abandonment of the yen to de-risk will end any return crash. And the Japanese semi-democracy (that designation applies to all nations, not just Japan) must allow it to happen. Aging pensioners are both creditors and voters: the only possible adjustment they can make to the coming sovereign crisis is by getting entirely out of yen.