Archive - Apr 2010

William K. Black, a regulator during the dark days of the Savings & Loan Crisis, gave the most sensible testimony about the financial crisis heard in Washington so far.* Fraud thrives and spreads in a regulatory free, highly paid, criminogenic environment. Cheaters prosper driving honesty out of the market. It's time to bring back Black and resolute regulators like him. Our proposed "financial reform" bill is a sham, and the health of our society and our economy is at stake.

Caterpillar had what was perceived as a blowout quarter even though its Q1 2010 earnings were well below Q1 2009. As Karl Denninger summarizes: "Machinery sales were down 1% from a year ago - but I thought a year ago was the depths of the recession and we have been recovering since?  So how do we get a negative year-over-year  comparison? Worse, in North America (that's here!) machinery sales were down 15% with dealer inventories half of year ago levels.  That is, not only is heavy equipment not selling, dealers don't think it will be in the near future either.  So how did we get big increases?  Asia, up 40%.  Yep, that matters, and it's what drove the results. Engine sales were even worse, off 28%, and even in Asia they were down, in that case 15%." Yet what everyone is focusing on is the projected future so bright, all the sell-side analysts (note, they are called "sell" side) gotta wear shades. One caveat: as CAT itself points out, the future will be so bright only if the Fed and foreign Central banks continue their monetary lunacy. The WSJ recaps the earnings call: "The company raised it outlook for 2010, though revenue declined on
continued weakness in developed economies, especially the U.S. and
Europe. It cited concerns about central banks withdrawing stimulus too
soon." So let's get this straight: the company's actual top line results were worse than a year ago (and after firing everyone, the firm was hard pressed not to report better EPS), and its entire bet on the future, which is what is causing its stock to spike, is purely a function of Ben Bernanke's mood on any given day, or what "Firm Directive" his GS masters may have slipped him that morning. That sounds like a brilliant investment thesis. We will buy two big earth excavators right now and a whole lot of CAT calls to go with that.

Here's a list of companies whose share prices have shot up at the same time that their fundamental and macro outlooks have collapsed - at least in our opinion. I present some (retail) food for thought.

With half of Europe broke, and the IMF more than ready to disburse US taxpayer funding with the largesse of Tim Geithner (is $100 billion in increased IMF aid a TurboTax recognized tax deduction?), it is no surprise that the rescue aid recipients are lining up. First up after Greece is the Ukraine, which has announced it is seeking $20 billion from the IMF according to Deputy Prime Minister Serhiy Tigipko. As Business Week reports: “Having a program with the IMF will help us lower the price of future Eurobonds, because such a program gives investors more confidence,” Tigipko said. “It will also help sustain economic growth.” Looking at Greek record spreads and CDS levels, we can't help but wonder just how investor confidence is supposed to be buoyed by yet another bail out. And confirming that our own Alice in Wonderland capital markets have gone global, the reason why the Ukraine needs rescue financing is greater than anticipated growth. "Output may grow between 5 percent and 6 percent this year, compared with an earlier estimate of 3.7 percent, Tigipko said. The acceleration will be triggered by higher prices for Ukraine’s key exports such as metals and lower fuel prices, including Russian gas, he said."

Society doesn’t self organize for the benefit of the many but rather society is organized for the benefit of the few as the most effective way to rape, rob and pillage the many. Who needs war when the process of abuse can be institutionalized and glorified?

Moody's Investors Service has taken the following rating actions on covered bonds issued by Greek banks:
 
- Mortgage covered bonds issued by National Bank of Greece S.A. ("NBG"): Downgraded to Aa2 and placed on review for further downgrade; previously on 31 March 2010 downgraded to Aa1;
 
- Mortgage covered bonds issued by Alpha Bank S.A. ("Alpha"): Aa2 placed on review for possible downgrade;  Previously on 31 March 2010 downgraded to Aa2;
 
- Mortgage covered bonds issued by EFG Eurobank Ergasias S.A. ("EFG Eurobank"): Aa2 placed on review for possible downgrade; previously on 31 March 2010 confirmed at Aa2.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 26/04/10

Hellenic Air Force is conducting a go-slow strike, affecting exercise and routine flights ; the Ministry of Defense has issued a statement today. Payments of amounts owed to health service providers [6 billion euros of debt], public sector construction [1.2 billion], ICT [200 million] and media-advertising [100 million] have ceased, according to Kathimerini.

The just completed 3 Month Bill and 6 Month Bill auctions were interesting: the BTC on the 3 month came in at 4.69, a multi year high, and well above the 2010 average of 4.27%. Also the high rate has started leaking higher again, coming at 0.15%, compared to last week's 0.145%. Primary Dealers made sure there was no hiccup and they would be able to take down as much of the $24 billion auction as possible just so they can immediately turn around and repo the money, thus buying even more Whirlpool in large blocks, spooking the HFT algos in believing the stock is the next Google. After all - can't have a down Monday. It is verboten. Curiously the Direct take down surged to 19.2%, and almost surpassed the Indirect Take Down of 20.9%. The Direct (cough Bernanke cough) Bidders just refuse to go away. The 2009-2010 average on Directs is 7.81%, while that over the past 4 auctions is exactly double that 15.66%. Primary Dealers have taken down $51 billion of all 3 Month Bills so far in 2010.

Today's FX action is pretty simple: EUR poundage as the european currency is doing hard to prevent the 1.32 stops. On the funding side, EURJPY continues to provide the fumes needed to gun the market to new highs. The dollar continues being the conduit. Without the carry, the money to ramp markets higher. However, with the just completed T-Bill auction, look for PDs to have another $50 billion in cash from repoes, and blast market higher. After all Europe is about to close, and it is a Monday (19 out of 20 positive closes coming).

The full blown curve inversion that is taking the PIIGS by storm is slowly coming to a TBTF near you. As the chart below shows, the 5s/10s in CDS curves for the most prominent banks are now inverted, while the bulk of them are flat at best. Should the ongoing pounding in GS stock continue, look for flatness to slowly creep to the 4, 3, 2 and 1 Year marks.

Here comes the next witchhunt: The Atlantic, citing two Deutsche Bank traders, reports that the German bank is guilty of an identical transgression that Goldman (and to a much lesser extent, John Paulson) is in hot water for currently: i.e., DB arranged a deal for IKB designed by JP. Look for DB's stock to drop as expectations for a Wells Notice hit fever pitch. The reason one has not come yet is because, as we reported this weekend, Robert Khuzami has recused himself from investigating Deutsche due to his long tenure there as a lawyer (presumably supervising CDO issuance). The reason one most likely is in the making, is that, as we also reported, Greg Lippmann, or the head Deutsche CDO trader mysteriously departed last week. Look for much more weakness in fins over the next few days.

The Abacus deal stunk. But there were other deals that were even worse. This train wreck for investors could have been avoided. Instead, everyone just closed their eyes.

The latest very much provocative letter from former Goldmanite and current AQRite, Cliff Asness. "All derivative contracts are side bets. They serve a useful economic purpose and our base case should be to let free people who want to make contracts with each other do so. The reviled Goldman transactions did not cause, or even inflate, the real estate bubble, it just made one financial institutional (Paulson) a bigger winner, and another a bigger loser. It was a bet each wanted to make, and was by definition considered a fair one by each party at the time. How do we know this? Easy, it was voluntary. Now government wants to rewrite history and say that this type of fair bet caused all our problems, and they’ll never bother us again if we just give them much more power, again. Do you believe them?"

Traders were a bit puzzled by how the markets responded to Greece’s requesting the implementation of the proposed aid package. Prior to the request, Greek debt was in full panic mode. Yields on Greek bonds spiked to over 12% and appeared ready to explode. After the request, Greek bonds rallied enough to bring the yield to just under 10%. That was understandable since a potential package might insure that you would actually get your money back. What was confusing was the bounce in the Euro and the resultant rally in stocks, oil and gold. That reaction seemed to imply that the rescue package was “a given”. Yet there were no details on what kind of austerity program Greece would implement in exchange for an aid package. Lacking clear austerity, it is hard to believe Germany would put up any funds. To do so would put the German government at risk of failing. (It is a coalition government.) Conversely, a strict austerity program would certainly bring social unrest to the streets of Athens. That, in turn, might likely bring down the Greek government. So, traders were puzzled by the pundit response that the request equaled a solution. The devil is in the details. - Art Cashin