Archive - Jul 23, 2010

This week the S&P 500 was up 7.3% for the month, corporate earnings have been looking good, retail sales inched up last week, the CPI is low, interest rates are low, Dr. Bernanke is ready to pump money into the economy if things go awry, most European banks passed their stress test, and we've got a new financial markets regulation bill which will save us from economic collapse. What's to worry?

For all you pension buffs, a comparison of CPPIB and PSPIB FY 2010 results...

Here's the scary part ...

China is not a black swan, because a black swan is a rare, significant, and unpredictable event. However, the consequences of what is transpiring in China and Japan are for the most part predictable (especially if I am writing about it). We don’t know when they will play out, but they are predictable.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 23/07/10

So, a bank that is insolvent nearly two times over is found to have passed the European bank stress tests. Exactly what does it take to fail!!! Let's dig in and find out, shall we.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 23/07/10

Due to an intensive travel schedule over the next 24 hours, posting will be limited (and if prior travel experience is any indication, Greece riots over the next week may be anticipated). Please consider this thread open to mock, ridicule, debase and taunt the now completed Stress Farce, as well as to brainstorm anything and everything else that may be of interest.

Also Europe finds that :

• Full GoM clean up will be around 2 bucks
• The cost of the Large Hadron Collider was reduced to a couple of dimes
• The US budget "deficit" is estimated to actually be a $100 quadrillion budget surplus
• Merrill's expense tab at Hustler Club is only $19.95
• etc.

Yes. You're being hoodwinked, Bamboozled, and Lied to. Let's take a common sense look at the parameters and criteria published concerning these (no) stress tests...

And we uncover that the German Landesbanks (the equivalent of the bankrupt Spanish cajas) did their own stress tests. Time for the PPT to step in with this pretext and soak up all offers. Totally pathetic BS.

Update 1: Somehow Bank of Ireland "passes" the test but needs over €2 billion in extra equity... uhm... WTF??? This is the point where the audience rushes the stage and burns the theater down.

Update 2: 5 Spanish cajas, 1 German and 1 Greek banks are eliminated on their quest to marry the US taxpayer. 84 other banks will soon be the recipients of far more US taxpayer generosity. And with that the season finale of the farce comes to a close.

The Cleveland Fed has spent another boatload of taxpayer money analyzing a topic so simplistic even a 5 year old would know the answer in advance, to wit: "Is debt overhang causing firms to underinvest?" Let's see here... Uh yeah. And you can keep the $1,000,000 "research" cost. While the paper is sufficiently entertaining courtesy of a few graphs, flow charts and general widgets, the conclusion is startlingly absurd. In essence the authors conclude (in less than definitive terms) that debt forgiveness may be the best outcome for highly leveraged companies: "The debt-overhang problem may be so severe that creditors can actually benefit from forgiving a portion of the debt. With excessively high levels of debt, the risk of default is large and the market value of debt is well below its face value. If the creditors forgive part of the debt in this situation, the lower debt burden helps realign the interests of the equity holders and the creditors. The firm’s effort and investment will rise, increasing the total value of the firm and the market value of the remaining debt. If this effect is strong enough, the market value of the remaining debt may be even higher than the market value of the total debt in the absence of debt forgiveness, in which case debt relief will ultimately benefit the creditors themselves." Well, now we know the reason for the financial cram up, in which stockholders were spared while preferred and sub debt was being raped back in 2008. Yet if this thinking is indicative of prevailing Fed ideology, the move for a wide-reaching, Federally-mandated debt repudiation may be just steps away. And just in case you note that the Chapter 11 process, in which existing underwater debt is converted into post reorg equity, is a perfectly logical, viable and working alternative, the authors will have none of such dogma: "A creditor takeover of the firm after it defaults is another potential solution to the debt-overhang problem. Creditors would have an incentive to undertake all profitable investment
opportunities. However, this solution is not satisfactory either, since
most investment opportunities depend on business continuity and
disappear or lose substantial value when default occurs and the equity
holders lose control of the firm." Because creditors obviously have no idea how to preserve business continuity if they end up being the equityholders....And in case you were wondering, author Filippo Occhino does have a Ph.D from a (semi) respectable institution.

Whereas Alphaville presents several statutory observations by David Rosenberg as to a variety of reasons over which one "could" be bullishly inclined based on a goal seeked read of the data (if one so chose), his daily letter is once again capped with yet another bearish summation: the bad news more than drowns out all the positivity, even if that means that another double dip is practically priced in.

A lot of talk about what the “New Normal” means. Here’s a contribution.
There are three essential ingredients to the one we have.

1. Higher, less stable volatility
2. Lower returns
3. Unstable inflation expectations

All three of these contribute to the risk?on/risk?off mentality markets exhibit. The focus here is inflation expectations. Not only is it the fuel for the inflation?deflation debate, it is a leading indicator for the shape of the next normal coming up. The next step is a settling down of expectations.

This is turning into a year when the world’s least liquid, most untradeable countries offering minimal amounts of public information and disclosure, are bringing in the best returns, shutting most of us out. The mainstream BRIC countries are becoming increasingly crowded. “Frontier” or “pre-emerging” markets are the place to be.