Archive - Nov 29, 2011

We doubt many will be surprised by the latest presidential polling update from Gallup, and certainly not the record nearly 50 million Americans on foodstamps, but here it is nonetheless, from US News: "President Obama's slow ride down Gallup's daily presidential job approval index has finally passed below Jimmy Carter, earning Obama the worst job approval rating of any president at this stage of his term in modern political history. Since March, Obama's job approval rating has hovered above Carter's, considered among the 20th century's worst presidents, but today Obama's punctured Carter's dismal job approval line. On their comparison chart, Gallup put Obama's job approval rating at 43 percent compared to Carter's 51 percent." One can only imagine what would happen to Obama's ratings if indeed the Iranian hostage situation escalated and the president was forced to get involved, in addition to oil spiking to "doomsday" levels of course as Pimco's worst case predicts: "Back in 1979, Carter was far below Obama until the Iran hostage crisis, eerily being duplicated in Tehran today with Iranian protesters storming the British embassy. The early days of the crisis helped Carter's ratings, though his failure to win the release of captured Americans, coupled with a bad economy, led to his defeat by Ronald Reagan in 1980." And while some may say this is merely a one time blip, a longer-term average shows otherwise: "Gallup finds that Obama's overall job approval rating so far has averaged 49 percent. Only three former presidents have had a worse average rating at this stage: Carter, Ford, and Harry S. Truman. Only Truman won re-election in an anti-Congress campaign that Obama's team is using as a model." On the other hand, neither Ford nor Carter has such erudite opponents as Herman "I did not sleep with those 999 women" Cain.

... how many of the top 50 holders presented below, will be forced to sell once we get a 4 handle?

Keep thy smooth words and juggling homilies for those who know thee not.--Lord Byron

The "Grand Plan" on October 27th had 3 prongs - IIF-led PSI for Greece, Bank Recaps, and the levered EFSF. They have failed on each of their major initiatives, but now the market is comfortable that they will get ECB to "print" and that some form of "policy changes" will be fast tracked. Virtually all the analysis ends with print and treaties and we will be fine. We doubt that we get those yet, and we remain dubious that they will work and won't unleash new and bigger problems.

The Man. The Myth. The Womanizing Legend.

• BERLUSCONI SAYS HE WON'T LEAVE ITALY IN THE HANDS OF THE `LEFT'

Last Wednesday we put up the following blurb: "Five months ago, when Italian yields were still tame in the 3% ballpark, and not 7% where they are today, we suggested that based on trading patterns and overall volume in Goldman's dark pool, Italy may be about to experience a "Greek episode." Days later we were proven right as Italian yields and spreads started their relentless move wider, with only those who had access to Sigma X being able to get an advance whiff of what was about to happen. Well today we are happy to report that the German diversion may have worked: the truth is that nobody appears to care about Germany. Instead what everyone does seem to care about, is the nation with the greatest combined debt (government, corporate and household) to GDP in the world. Yup. The UK." Following that, a quick Twitter update from this morning indicated something was again going on with the UK from the perspective of the world's most connected insiders: "UK's LLOYDS and RBS top of most active on Sigma X this morning." Sure enough, here's Fitch with what may well be a precursor to the bond vigilantes finally focusing their attention on the last, latest and greatest AAA credit.

• FITCH: UK GOVT MAY BE MOST INDEBTED OF AAA SOVEREIGNS EX U.S. -BBG
  
• FITCH: NEW UK FISCAL VIEWS 'SIGNIFICANT DETERIORATION' VS MARCH - BBG
  
• And the punchline: "the capacity of UK public finances to absorb adverse economic and financial shocks that would result in yet higher public debt while retaining its 'AAA' status has largely been exhausted"

And cue the imminent downgrade rumors - and ensuing safe-haven outflows to TSYs.

FX Concepts' John Taylor has not had a good year. A month ago, talking to Bloomberg he admitted that "What’s really frustrating is that we’re supposed to do well in a lousy world market,” said John Taylor, the founder of New York-based FX Concepts LLC, the world’s largest currency hedge fund. Taylor said in an Oct. 19 interview in London that he has lost 12 percent this year and assets under management fell to $5 billion from as much as $8 billion. "We’re doing very badly." Naturally that is to be expected: after his banner year last year, and doing what is logical in 2011, it is not surprising that he did not anticipate the level of central bank involvement, and the resulting surge of the EURUSD in the past month. Either way, he very bearish stance on the EUR will soon be vindicated. In a brand news interview with Bloomberg he says that the the Euro has entered a "death struggle" and that it is "really worse than I could have dreamed it being." Logically, to every seller there is a buyer. To wit: "What’s stupid is that the ECB is holding it up.  Why are they holding up the euro? One of the problems, besides the ECB, is the banks are shrinking, and the banks are selling all of their offshore assets and bringing them back to Europe.  That means in fact there is a persistent buyer of euros and it’s their own financial institutions." All this, and more in the full interview below with transcript.

It is not only Europe who has perfected the art of baffling everyone with intolerable and relentless bullshit. Fed members have it down pat too. Case in point, just presented prepared remarks by Fed uber-dove and vice chair Janet Yellen and hawk and Atlanta Fed president (who becomes eligible to vote in 2012) Dennis Lockhart. Here are the money quotes via Bloomberg:

• YELLEN SAYS `SCOPE REMAINS' FOR ADDITIONAL FED EASING
• YELLEN SEES `STRONG CASE' FOR POLICIES TO BOOST U.S. HOUSING

And minutes later:

• FED'S LOCKHART `SKEPTICAL' MORE BOND-BUYING WILL HELP ECONOMY
• LOCKHART SAYS ASSET PURCHASES NOT A `POTENT POLICY OPTION'

Mmmk.

Pimco's Greg Sharenow has released a white paper on what the Newport Beach company believes are the 4 possible outcomes should Iranian nuclear facilities be struck as increasingly more believe will happen given enough time. The conclusion is sensible enough "Whenever the global economy is in a fragile state, as it is today, geopolitical concerns such as the possibility of a strike on Iran’s nuclear facilities become much more exaggerated. Although we cannot (and will not) predict whether an attack is imminent, or even likely, our experience and research tells us that any major disruption in the supply of oil from Iran could have either subtle or profound global repercussions – especially as excess capacity is virtually exhausted and we doubt that other OPEC nations would be able to compensate for a reduction in Iranian oil production." As for those looking for numbers associated with the 4 scenarios presented by PIMCO here they are: "i) Scenario 1: Exports minimally effected. Concerns would drive initial price response; Oil could spike initially to $130 to $140 per barrel and then settle in a higher range, around $120 to $125; ii) Scenario 2: Iranian exports cut off for one month. In this case, we would expect prices could reach previous all-time highs of $145/bbl or even higher depending on issues with shipping; iii) Scenario 3: Iranian exports are lost for half a year. We think oil prices could probably rally and average $150 for the six months, with notable spikes above that level; iv) Scenario 4: Greater loss of production from around the region, either through subsequent Iranian response or due to lack of ability to move oil through Straits of Hormuz. This is the Armageddon scenario in which oil prices could soar, significantly constraining global growth. Forecasting prices in the prior scenarios is dangerous enough. So, we won’t even begin to forecast a cap or target price in this final Doomsday scenario." Needless to say, even the modest Scenario 1 is enough to collapse global economic growth by several percentage points to the point where not even coordinated global printing will do much.

We have long discussed the relative changes in the bond, CDS, and equity markets and attempted to infer market sentiment from them. The last few weeks have seen financial stocks for instance sell-off and converge back to their CDS-inferred levels - after much poo-pooing of CDS in general. We have also pointed to the worrying drop in the basis (spread) between bonds and CDS. While there are a number of drivers for this basis, the current level (of basis) for investment grade bonds is akin to 2008 crisis levels and implies both inventory deleveraging and funding stresses in the markets. Bonds are underperforming CDS - the basis is dropping - as dealers are forced to unwind inventory impacting secondary prices in general (not just on risk aversion but wholesale deleveraging).

The demand for credit and debt is driven by generational values, historical habits, and psychological desires. These in turn are premised on evolving notions of the good life. If someone thinks material consumption equates with the good life, then chances are that person will get much farther into debt than another person that values non-material staples as supporting the good life— i.e. family, community, and friendship. Where you put your energy and money communicates something strong about the person you are and the way you will interact with the world. American baby boomers were born into a world of cheap oil, plentiful jobs, and expansionary foreign policy and were raised by Depression-era parents that wanted to give them the amenities that they never had the chance to enjoy. This engrained an historical sense that physical growth was unlimited and that the “world was there for me”. Today’s so-called Millennials (children of baby boomers) are growing up in a starkly different world of peak oil, global warming, shrinking jobs, and diminished material standard of living, but one with unprecedented interconnection. Material opportunities are contracting, but social opportunities are expanding. The new motto emerging is more like: “We are in the world and for each other.” A collapse of material prosperity has given way to the increasing possibility of experiential and social richness. Consequently, there has been a huge shift in attitudes about the “good life” between generations, largely unnoticed and unreported in traditional media. Only the symptoms of this shift are being reported—social media revolutions, Arab Spring, the Occupy Wall Street movement, young popular dissident authors in China, and pop-driven musical critique of conservative fundamentalism in Pakistan.

You cannot build a financial system on lies. It simply doesn’t work. All it does is breed distrust and resentment. And as any businessperson can tell you, without trust business cannot work.

The Muddy Waters boys continue their fight with their latest fraud target: "FMCN’s partial response to our 80-page November 21, 2011 report reinforces our Strong Sell rating.  FMCN’s response admitted that our estimate of fewer than 120,000 LCD screens showing full motion video advertisements is correct.  Despite this admission, FMCN denied that it was fraudulently overstating the number of displays in its network because the 178,382 displays it discloses include 62,656 digital picture frames.  FMCN’s response stated that it does not also count these digital picture frames in its poster segment.  There is strong evidence that FMCN does in fact double count these digital frames.  However, in response to our report and in contrast to previous 20-F filings, FMCN has expanded the definition of its LCD commercial display network beyond full motion video, which makes a clear and final resolution of this point unlikely.  Therefore, FMCN at best prompted investors to think it had more motion displays than it does, and at worst fraudulently overstated the size of its LCD commercial display network.  Both possibilities raise concerns about the health of this business line." We maintain our Strong Sell rating on FMCN mainly because our concerns regarding the viability of FMCN’s core LCD commercial location network remain.  This issue, combined with FMCN’s additional misrepresentations about the size of the network, FMCN’s opaque business model (on both the revenue and cost sides), and insiders’ penchant for self-dealing, render FMCN shares un-investable."

One can listen to Eurocrats promising the moon and the stars, and that the zEUR0.PK will survive come hell or high water, or one can trade the probability of the Eurozone's breakup based on reality. For those who opt for the latter, they should head over to Intrade where the contract pricing the possibility of "Any country currently using the Euro to announce their intention to drop it midnight ET 31 Dec 2012" is now trading at perfectly even odds or 50%. In other words, the "upside benefit" of the EFSF, the ECB, the IMF and ultimately the Fed have been reduced to coin toss odds. Naturally, if there is a break up in the Eurozone the fallout will be massive and will likely lead to a far worse outcome than the freezing of money markets in the aftermath of the Lehman bankruptcy. In other words, the odds of capitalism surviving for just over a year form now are exactly fifty/fifty.

Here is our best attempt at a flow chart for the EFSF that tries to capture everything it does.  If it looks complicated, that is because it is complicated.