Archive - Mar 26, 2010

Julius started out as a populist too, you know.

Radio Zero returns in a fit of old school (think 50 BC) republicanism.

Join us (or die?).  10(ish) pm EST.

http://radio.cl.zerohedge.com

Chat up the DJ (and Roman Senate) via Mibbit.

Before delving into an ECB speech chock full of insight, a deflationist rant 'Through the Looking-Glass' of social mood as per:

[1] the management of inflation expectations;

[2] the implications within central bank (CB) exit strategery; and

[3] 'what Alice is likely to find' in Mr. Market's immediate future. If you think Bernanke an idiot and see hyperinflation-a-coming, you probably don't wanna read this.

The Ontario Teachers' Pension Plan's £389 million deal for Britain's lottery company is a sign that private equity firms should watch out, The Wall Street Journal says. Noting that Teachers won out in a race against Europe's CVC Capital Partners, the newspaper's Heard on the Street column says it could be the beginning of a broader trend. I have my doubts...

The latest stunner from the CIA and the Obama administration via Wikileaks. To wit: "This classified CIA analysis from March, outlines possible PR-strategies to shore up public support in Germany and France for a continued war in Afghanistan. After the Dutch government fell on the issue of dutch troops in Afghanistan last month, the CIA became worried that similar events could happen in the countries that post the third and fourth largest troop contingents to the ISAF-mission. The proposed PR strategies focus on pressure points that have been identified within these countries. For France it is the sympathy of the public for Afghan refugees and women. For Germany it is the fear of the consequences of defeat (drugs, more refugees, terrorism) as well as for Germany’s standing in the NATO. The memo is a recipe for the targeted manipulation of public opinion in two NATO ally countries, written by the CIA. It is classified as Confidential / No Foreign Nationals."

The CFTC's latest weekly Commitment of Traders report shows that after a brief respite, potentially dictated by Goldman's very temporary euro bullishness, the euro is back to having a record number of non-commercial futures-only positions at -74,917. This is a more than 50% increase from last week's -46,341. As a reminder the prior euro net short record was -74,551 two weeks ago. Curiously, even as traders went bearish on the euro, this was not coupled by a carry offset with the JPY: net long spec yen positions dropped from 15,197 to 10,161. Another currency that saw an increase in bearish interest was the cable, which saw a 7,637 contract decrease to -71,624. On the bullish side, the AUD was the preferred contra-carry currency, as contracts increased by 10,161 to 74,339. In other commodities, both oil and gold saw speculative positions declines by -12,224 and -16,474, respectively, to 111,919 and 183,872. The number is relevant for gold as this represents 37% of the open interest.

Housing is still in trouble, CRE is in worse shape, low inflation is the result of deflationary factors, and at the ground level where most loans are made, credit is still stuck. It's pretty hard to spin the data into a positive.

With each day bringing new and more ridiculous M&A, and now LBO rumors, we thought it would be a good idea to highlight the public companies that have at least a fighting chance of going private. Using a simplistic template from UBS, we present the thirty companies which would generate the highest stock return should they get acquired, assuming a 4.5x Debt/EBITDA pro forma leverage (as much as TPG would like, 10x leverage is not coming back...Unless Joe Cassano is hired to run Chrysler's take private group), and also assuming a 40% equity portion in the transaction. In other words, these are the companies that at least on paper have the highest equity expansion potential in a 7.5x EV/EBITDA. While this analysis ignores whether or not any of these companies actually generate substantial cash flow to cover pro forma interest, or are a logical fit for any financial acquiror, any company not on this list is likely already equity heavy and as a result even if acquired will not result in material upside. As the chart below shows, the maximum stock upside ranges between over 200% in the case of R, to just over 22% in the case of BBY. This below list by no means suggests that any of these companies on it will be LBOed: it should merely be used a benchmark for modeling purposes.

Taleb, FTW...

• Recommendation: underweight energy
• Time horizon: 3-6 months
• Thesis:
  • Oil contango trade unwind
  • USD strength
  • General market headwinds
• Underlying theme: a substantial portion of recent energy demand originates from speculative and/or indirect sources, rather than organic, sustainable drivers, and the inflection point for the former to unwind has finally arrived

Following our focus yesterday on key supports in Fixed income, we feel that the risk is that on a rally here the curve could flatten. Indeed 2Y yields even though they rose recently, remain very low, and we feel that if the next leg is up in fixed income then the long end should outperform. We have attached a chart of 2/10 for US treasuries, as can be seen we just retested the 50-dma. - Nic Lenoir

Next week is the much heralded "quarter end" where thousands of fund manager's jobs are on the line. Any and all efforts were made to keep the tape in check this week in order to prepare for the usual marking up ceremonies. Greek debt implosions, N. Korean torpedoes, and horrid housing data failed to send the tape lower.

Lots of confused chatter in the bond community as to why the negative swap spread story (anywhere between 7Y and 30Y) is being largely ignored by the media. After all, the associated market, which according to the BIS was roughly $154 TRillion in June 30 makes the Greek bond debacle and various sovereign CDS discussions in the media pale in comparison. As several bond traders pointed out, the likelihood of negative spreads having been modelled out by the TBTFs is very low, if any, meaning that unhedged bank IR-swap exposure is suffering massively, and is likely to surpass all record past prop desk losses. In fact, rumors abound that a few of the desks having placed leveraged bets on spread divergence over the past months and years are currently in critical condition, yet nobody is discussing this for fear of another round of bank run concerns among the TBTF banks. What is odd, is that the Primary Credit borrowings are now at almost financial crisis lows of just under $9 billion, leading many to speculate that banks now satisfy all of their short-term funding needs via the fungibility of excess reserves (and indicating once again that the Fed's discount rate hike was the most irrelevant action in a history of irrelevant actions). And just in case there is still confusion as to what negative swap spreads mean, here is a useful primer.

This might mean something. I think so.

But the technicals have me rethinking these relationships. Is it possible that we could have higher yields and lower equities?

The U.S. economy’s recent growth has been underpinned
significantly by government policy, yet this short-term cyclical
support will likely fade in the second half of 2010. As a result,
investors should take advantage of the tighter credit spreads and focus
on de-risking their portfolios in order to prepare for the increasing
long-term secular headwinds stemming from the growing deterioration in
public sector balance sheets in many developed economies.

Mark Kiesel, PIMCO Managing Director