Archive - Apr 15, 2010

The risks To Blockbuster are well publicized today. The company is fighting off competitors on all fronts with Netflix, Redbox, and OnDemand steadily eroding share from brick and mortar competitors. But Blockbuster’s senior subordinated notes maturing May 2012 are trading below twenty five cents on the dollar today. Investors with an above-average level of risk tolerance may want to give these bonds a closer look. If management can simply execute on its strategic plan, investors stand to make a substantial profit in a very short amount of time. We note that the days of Blockbuster Domination are clearly over, but investors only need a few quarters of stabilization and a briefly extended survival timeline to earn outsized returns.

At this rate the only metric to gauge the stock market will be how big the L2 order book is. Any time, any time, there is a pick up in volume, over the past 3 months, the market has dropped. Plain and simple. Consolidation to the downside will be very entertaining.

Dennis Lockhart leads the doves on parade today, by saying that there "is risk associated with starting a process of tightening too soon.." Too bad neither he nor the other dove, Bullard, sees the same bubble risks that George Soros is believes will lead to the greatest market crash ever. Indeed, St. Louis Fed's James Bullard, speaking at the Levy Economics Institute, said the economy is not having a “super strong recovery,” but called it “robust” and “very reasonable.” When the time comes, Bullard suggested he would not want the Fed to raise rates as slowly and incrementally as it did earlier in the decade. But he said the pace will need to be “state contingent,” or data-dependent. "I would love to tell you a particular date but I can’t" because "I haven’t seen how the economy is going to perform." Brillliant. We can't wait to see when the government massaged data indicates the tightening time has come: Dow 36,000, Dow 36,000,000, or Dow 3.6E36?

Derivatives will remain a murky swamp unless we break up the too big to fails ...

When it comes to energy, there is an incoherence to President Barack Obama’s policies. This incoherence is embedded in his administration in the person of Carol Browner. She is largely regarded as the agent of a kind of reactionary environmentalism that once haunted the Democratic Party. Browner, administrator of the Environmental Protection Agency under President Bill Clinton, is a special assistant to Obama for energy and environment. To a wide variety of industries, though, she is the agent of regressive, just-say-no environmentalism. Browner’s background–from environmental jobs in Florida to working with Al Gore–dooms her to suspicion of zealotry, which is probably unjustified. Her defenders (just about all in the environmental movement), see her as a great public servant and standard-bearer. But she is largely out of sight these days; her writ and her influence unknown.

Here are some images of the volcanic cloud which is causing airspace shutdowns over most of Europe.

George Soros, speaking at a meeting organized by The Economist, warns all those who are throwing their money into the equity pit, that "the financial world is on the wrong track and that we may be hurtling towards an even bigger boom and bust than in the credit crisis." Advice from Soros or from CNBC. You decide. Reuters reports that Soros said "the same strategy of borrowing and spending that had got us out of the Asian crisis could shunt us towards another crisis unless tough lessons are learned." We hope all those who are buying stocks have very tight stop loss triggers.

Hmmm! Greek bonds and banks are getting battered after the Greek rescue package was announced. To think, some actually thought this would help. Giving a highly indebted country more debt at a rate that it can't afford while everybody lies about the state of its indebtedness does absolutely nothing to aid said country. See, I encapsulated this entire post in 1 sentence...

Albert Edwards is out with an interesting twist on inflation/deflation. In his latest letter he notes "I have stated openly that I expect the UK 1970s experience of almost 30% inflation to be repeated in my lifetime. I also expect this to be reached in countries that got nowhere near this 30% rate in the 1970s (e.g. the US and Europe, which both peaked around 15% ? somewhat surprisingly Japan also hit almost 30% in the 1970s)." Yet he counters: "But despite my belief that we will see a paradigm change over the next decade or so, I continue to retain our heavy overweight for government bonds. Recent inflation and monetary data continues to make me feel we are now only one cyclical failure from falling into outright deflation." So for the time being, Edwards is long bonds. The question is when will the secular inflation thesis become dominant and when will "rapid nominal GDP growth [appear] dragging bond yields higher." Yet at the core of any debate is the ongoing paradox of market schizophrenia: bonds continue pressing lower arguing for accelerating deflation even as stock surge higher in anticipation of inflation and the reduction of debt through surging prices and excess liquidity. Are bonds and stocks right in principle, yet disagree in terms of timing? And if so, why do stock (which tend to have a much shorter investment horizon ) price in inflation first, and bonds second? Is Albert right, or is the market simply reacting to unprecedented Fed intervention without any guidance on how to make proper asset allocation decisions? If, as we expect, Greece collapses soon, that may be the tipping point that accelerates the resolution of that fundamental quandary.

Prepaid legal gets an SEC update and offers a sneak peek at its quarterly results, most likely to help support its stock through more corporate buybacks.

RANsquawk 15th April US Afternoon Briefing - Stocks, Bonds, FX

Rather simple day in FX land: in a word (or two) - risk off. The Yen is surging against all currencies, the Euro is weaker against pretty much everything (thanks Greece), with the USD one again a conduit between the JPY and the EUR carry. An interesting observation on currency trading via an email in our tip box:

• Hedge funds and props of all stripes switched to FX trading en masse aka going long USD vs. anything else and shorting EUR against everything.   That includes "not quite so smart" money -- insurance companies and bond investment outfits.
• HFTs and stat arb quants run arb strats on DXY, int rates, equities against FX moves creating totally surreal enviroment where short term histrorical correlations mean more vs. anything.

The entire stock market is now one big liquidity/carry trade.

Yesterday we observed that the SEC has finally decided to start collecting data on the one segment of the market most misunderstood by the SEC (by their own admissions), that of High Frequency Trading, and we demanded that instead of merely collecting data and throwing it into the shredder, this data has to be released for thorough public analysis and investigation, as the SEC has proven time after time that it is hopelessly inadequate when it comes to matters dealing with simple cognitive processes and determination of cause and effect (we are certain that a few well trained lab rats could do the entire job of the SEC, and have none of the billion dollar taxpayer cost attendant with feeding this bloated monster of disregulation and corruption). Today, Senator Ted Kaufman joins our pleas for full and transparent disclosure of all tagged HFT data. Alas, we are convinced that as long as the market is not allowed a down day by the primary dealers, any push for the SEC to do its job properly will be drowned out in the typical chorus of bullshit that the market is doing oh so well, and look just how much liquidity in Ambac and Citi there is... After all, that is all anybody trades these days.

As we reported a few days ago, the IMF massively expanded its last resort bailout facility (NAB) by half a trillion dollars, in which the US was given the lead role in bailing out every country that has recourse to IMF funding. Yesterday, Ron Paul grilled Bernanke precisely on the nature of the expansion of the US role to the NAB: "The IMF has announced that they are going to open up the NAB which coincides with the crisis in Greece and Europe and how they are going to bailed out. The irony of this promise is that in the new arrangement Greece is going to put in $2.5 billion in. I think only a fiat monetary system worldwide can come up and have Greece help bail out Greece and be prepared to bail out even other countries. But we are going from $10 to $105 billion... We are committing $105 billion to bailing out the various countries of the world, this does two thing I want to get your comments on one why does it coincide with Greece, what are they anticipating, why do they need $560 billion, do we have a lot more trouble, and when it comes to that time when we have to make this commitment, who pays for this, where does it come from? Will this all come out of the printing press once again, as we are expected to bail out the world? Are you in favor of this increase in the IMF funding and our additional commitment to $105 billion?" Bernanke, of course, washes his hands of any imminent dollar devaluation - it is all someone else's responsibility to bail out life, the universe and everything else. Bernanke pushes on "I think in general having the IMF available to try to avoid crises is a good idea." Yet Paul pushes on "Where will this money come from? We are bankrupt too." Indeed we are, but nobody cares - that is simply some other poor shumck's problem.

As was widely expected, four German professors are preparing to ask for a constitutional court injunction to block the transfer of German funds, claiming the EU-IMF rescue for Greece violates the "no-bail-out" clause of the EU Treaties. Furthermore, as the Telegraph reports, this is occurring "as fresh details emerge on the scale of the bailout - "Germany's Handelsbatt cited sources in Berlin warning that the bill may be three times as high as thought, pushing the EU share to €90bn (£79bn) - with an extra €15bn from the IMF." We are confident that the US-controlled IMF will have no problems with taking on the entire load of the bailout package, thereby forcing Americans to be the only party responsible for making sure European creditors are made whole, but that the next target of currency debasement becomes, once again, the dollar. Cause after all, there is that little bit about the several trillion in toxic CRE debt that has to be inflated away before 2012.