Archive - Nov 2011

The middle of the week appeared to be the storm before the quiet of today before the potential storm of next week with aggressive action by the ECB this morning seeming to calm fears (and raise hopes of more) as risk assets were generally calmer today. Amid dismally low volumes, ES ended the day very marginally lower (led by Tech and Energy), commodities were mixed, IG credit outperformed TSYs and HY credit, and FX vacillated back to unchanged in general capping another week of strengthening USD vs the Majors (except JPY). US equities shrugged off a broad risk-off shift early in the day (driven by Oil and TSYs mainly) as OPEX seemed the focus of controlling intraday vol with CONTEXT and ES closing the week in almost perfect agreement (leaving cash S&P -3.3% YTD vs Gold +21.3% YTD).

As the hopes and prayers of every European central banker (and long-only manager) rest on age old battles; 'good vs evil', 'woman vs man', 'Germans vs the-rest-of-us', we found today's helpful note from The House Of Squid very amusing. Goldman, in their puppet-masterly way, suggest (in an ever so logical manner) that perhaps Mrs. Merkel should allow for the print-fest and provide their right-hand man Draghi with the ammo he needs to have that discussion.

"There are no easy choices and it would have been, no doubt, better if the ECB had never got in the position it is in now. But the current situation demands a careful weighing of the risk involved with any decision taken. The inflationary risk thereby seems to be getting an unduly high weight in the consideration of German policy makers."

We have been getting MAJOR warning signs of a collapse for months now. No less than the Bank of England, the IMF, and legendary asset management firm Franklin Templeton have warned that we are facing an epic, hellish crisis. We got the first taste of this in August when the S&P 500 literally wiped out a year's worth of gains in two weeks The only thing that brought us back from the brink at that time was the belief that the EU mess might be solvable and a coordinated intervention from the world Central Banks.

As the super-committee seems more and more likely to hit a brick-wall, we present with no comment, Senator Tom Coburn of Oklahoma's 'helpful' prose.

Americans are generous and do not want to see their fellow citizens go without basic necessities. Likewise, we expect everyone to contribute and to demonstrate personal responsibility. Government policies intended to mainstream wealth redistribution are undermining these principles. The tragic irony is the wealth in these cases is trickling up rather than down the economic ladder. The cost of this largess will thus be shared by those struggling today and the next generation who will inherit $15 trillion of debt that threatens the future of the American Dream. These consequences are the results of shortsighted spending and tax policies like those outlined in this report that should be eliminated.

Imagine you are Ben Bernanke, or on the Board of Governors of the Federal Reserve. The time frame is July and August of 2011 and the price of gold is on a tear. Commodities inflation has been persistent and is breaking out everywhere. Your prediction that inflation “is contained” and is a “temporary phenomena” are beginning to look absurd. What do you do? Simple. Hint that QE3, the primary drive of inflation, is coming and then fail to deliver at the September FOMC meeting. That takes care of the price of gold and the gold stocks. Ah, but those pesky commodities speculators keep making money and trading against what you want the markets to do. So what is to be done there? Hey Jon Corzine, how about you tank the largest broker for the small commodities punters in the world, and we let them twist in the wind? That will serve them right. Teach them to bet against the government approved scenario.

CLWR faces $474mm in interest expense for the next 4 years so 'skipping' this interest payment shouldn't be a problem, right? $7.93bn in principal and interest and a $1.5bn market cap (well before today that is) - all is well in the HY wireless broadband market. Paging ISDA...

Not only is Germany at the epicentre of the Italian-Spanish-French save-us 'discussion', they have now managed to add Ireland to their 'Uber Alles'. Reuters is reporting the leak of confidential Irish budget information by German lawmakers and Irish parliamentarians are seething - viewing the leak as 'incredible' and 'unprecedented'. Given the new laws, Germany now has the right to be fully informed about bailout countries' progress before new tranches of funds are paid out. As the Irish Daily Mirror put it perfectly "Germany is ourt new master." It is evidently clear that sovereignty is indeed blurring at the edges - cue Nigel Farage.

Dramamine market got you down? You are not alone. David Rosenberg explains: "Yesterday's trade was rather telling. The Nasdaq dropped 2% and not only did volume rise but the breadth was awful with losers beating winners by a 5-to-2 margin (9-to-2 on the NYSE). The fact that the Nasdaq sliced below support of 2,600 and dipped below its 50-day moving average for the first time in six weeks is a bit ominous to say the least; while the S&P 500 undercut its lows of the past four weeks (even though it has managed to hold above the 50-day m.a. of 1,205). But between the slide in equities, commodities, oil and gold, coupled with the rally in Treasuries, yesterday had a certain eerie 2008 feel to it. And did you see the huge 70 point rally in the Dow just in the last couple of minutes? The volatility is incredible. Look at the charts below — they look the same, but one is the Dow's closing level each day this year and the other is the minute to minute ticker on any random session (we chose October 7th out of the hat). The new normal is seeing a year's worth of volatility bunched into 6 ½ hours!"

The more unequal countries are doing worse on all these kinds of social problems. It's an extraordinarily close correlation.

It is no surprise that everyone's attention, hopes and dreams, are now on the shoulders of a principled and sensible Bundesbank as they fight-the-good-fight against a torrent of seemingly-sensible print-baby-print commentators (and politicians). Of course, if they did the equity markets would rally (despite the circular EUR weakness, correlated equity weakness, equity strength on we-are-all-saved, EUR strength game theory response) and the trade would be equity to outperform credit (as we've seen before). The pragmatist might argue that this is not a solution, but interestingly Dylan Grice of SocGen, suggests that as opposed to prospectively common-knowledge (and Germany's anti-Weimar reputation), the notion to devalue first, does best and maybe it is time for the ECB to take that plunge. This is somewhat opposed to his previous views on the path to hyperinflation (as akin to being half-pregnant) and our perspective remains that once the ECB starts, how will they ever stop?

Let's begin by positioning the sector. Investing in a pipeline company is similar to investing in a utility: Like electricity providers, pipeline companies operate in heavily regulated environments, and once they are up and running, pipeline operators enjoy stable cash flows from long-term contracts. In an economy where uncertainty is the new norm and speculation is a more dangerous game than usual, investors are gravitating toward income-generating investments. However, it's not only the current economy that's pushing investors toward defensive stocks. As US baby boomers retire, they tend to reduce the risk levels in their investments and move toward steady-as-she-goes, income-generating stocks. Unfortunately, those two forces also mean that many of these defensive stocks are trading between 14 to 20 times forward earnings, putting them at the higher end of their historical range. More on that in a bit.

Who would have thought that doing away with your prop trading unit would have consequences? Surely not Goldman spokesman Lucas van Praag or anyone who read his response to Zero Hedge from December 2009 in which he made the argument that Goldman's prop trading unit is largely irrelevant to the firm. Alas, as the last quarter showed, it was. A lot. $2.5 billion worth. Net result: GS stock is now trading at imminent MBO levels, and more importantly, there is no joy in bankerville:

• GOLDMAN NAMES SMALLEST CLASS OF MANAGING DIRECTORS SINCE 2008
• GOLDMAN SACHS PROMOTES 261 EMPLOYEES TO MANAGING DIRECTOR

However as the video below proves, it still does, and always will, feel good to be a banker.

Some version of the following BIS-sourced chart from the BBC appears every week somewhere, and by now the default Pavlovian reaction to seeing it should be to think of the Klein bottle. Yet this one may be the prettiest so far. In case anyone was still wondering what happens in a world in which every financial asset is someone else's liability, and that same liability is a third bank's asset (and so on), and where the amounts involved are in the tens of trillions, and when even the smallest debt haircut starts an avalanche of remarking to market, here is the explanation. Oh, and whatever you do, don't click on the US. Because the "US is fine."

General Maritime filed for bankruptcy yesterday.  So far it has been treated as a non event, but it may actually be start of another wave of bank write-downs (given the loan status and the fact that many of the banks will have held this loan and other shipping loans at par). The default isn’t in itself a big issue, but if it forces write-offs or provisions against other shipping loans at the weaker banks, it could add to the banking crisis more than people currently think.