Archive - Dec 2011

A few hours ago the Des Moines Register threw its support behind the Bain Capital founder, and the man now known to have actively destroyed any trace of his public "service" before his 2007 Massachusettes office handover (with a pending response to a Reuters FOIA, which will disclose just what it was that Romney was so tenuously shredding). Because according to the Iowan newspaper, Mitt Romney "is the best to lead" America, although into what, is not quite clear - perhaps the biggest Fed funded LBO (with a Bain Capital $1 mezz piece) of all time, that of America? We don't know. And neither does the Register's editorial board. What they do know are hollow adjectives, such as "sobriety", "wisdom" and "judgment" which somehow are applicable to Romney, if not so much "betting" and "shredding." Those looking for a late night laugh can read the OpEd below (link to tomorrow's front page here). And ironically, while likely set to provide a very short-term boost to Romney's chances, it is the baseless ongoing accusations against Ron Paul that will likely solidify the groundswell behind the Texan, with such desperate platitudes as "Ron Paul's libertarian ideology would lead to economic chaos and isolationism, neither of which this nation can afford." Because what America certainly needs is more of that old ideology of doing everything just the same and hoping for the best, because if there is anything Romney's would be predecessors have taught us is that hope apparently is a credible strategy. But perhaps most relevant is the reminder that the Des Moines Register is a Gannett company whose Chairman just happens to be one Marjorie Magner, whose bio reads: 'Ms. Magner, 61, is Managing Partner of Brysam Global Partners, a private equity firm investing in financial services firms with a focus on consumer opportunities in emerging markets founded in January 2007. She was Chairman and CEO of Citigroup's Global Consumer Group from 2003 to 2005. She served in various roles at Citigroup, and a predecessor company, CitiFinancial (previously Commercial Credit), since 1987. Ms. Magner currently serves as a director of Accenture Ltd. and Ally Financial Inc. and served as a director of The Charles Schwab Corporation from February 2006 to May 2008. Ms. Magner has broad business experience and financial expertise from the various senior management roles she held with Citigroup."

More shock and awe, in case you're not mad enough yet. 

But ballet is beset by serious ailments that threaten its future in this country... 

It isn't over yet, but it will be. 

As we wind down 2011, the time for predictions for what is to come as nigh. Having posted what UBS believes their biggest list of surprises for 2012 will be earlier, we next proceed with out long-term favorite - Saxobank's list of "Outrageous Predictions" for what the bank has dubbed "2012: the Perfect Storm." Mostly proposed tongue in cheek (unlike predictions by other pundits who actually believe their own delusions), the list of 10 suggestions represents nothing less than an attempt to force people "out of the box" and look at the world with a set of "what if" eyes. Because if there is anything 2011 taught is, it is not to discount any one event from happening. As Saxo says: "Should one, two or three of our Outrageous Predictions come to pass, it would make 2012 a year of tremendous change. This may not necessarily be a negative thing either - and given the  structure and uncertainties in the marketplace here at the end of 2011, we would suggest that even if none of our predictions come to pass, equally important and totally unanticipated events will. Sometimes we need to get to a new starting point before we can gain the right perspective. We hope 2012 will be the year where we start on the long march towards re-establishing jobs, growth and confidence." Naturally, the best outcome for 2012 would be the end of the broken status quo model, and a global fresh reset... but not even we are that deluded to believe that the quadrillions in credit money (real or synthetic) will allow such a revolutionary event to occur in such a brief period of time. At least not before everything is thrown at the intractable problem unfortunately has just one possible long-term outcome. In the meantime, here, to help readers expand their minds, is Saxo Bank's list of "Outrageous Predictions" for 2012.

Traders in the market (what little is left of them) always seek out the investment thesis with the highest upside/downside ratio to a delta in any fundamental forecast. In other words, what derivative play to a secular trend generates the higher IRR? A good example is the ABX which allowed contrarians in 2006 and early 2007 to bet on a collapse in subprime and put on a "short" at next to now cost of carry, with practically no downside if the thesis ended up being wrong, and unlimited upside (just ask Paolo Pellegrini and Kyle Bass). Well, as we just learned, one of UBS "surprises" for 2012 is that oil could drop below $70/barrell. Is this possible? Absolutely - should the Eurozone collapse, and/or China experience the long-overdue hard landing, a deflationary shock (which will naturally only precipitate the central banks into an even more rapid devaluation of legacy paper currencies) can and likely will send crude tumbling (Iran geopolitical concerns aside) as happened back in early 2009 when crude collapsed to around $30/barrel however briefly. So is there a better option to play crude downside than merely shorting CL? Perhaps one idea with better "upside" in case of a deflationary collapse in crude is to get bearish on Boeing instead. As the following chart from Goldman shows, 3 of the 4 biggest widebody (and thus most profitable) aircraft orders are from Gulf airline companies - Emirates, Qatar and Etihad. Together, they amount to about 450 profitable future orders... which could well be cancelled if Gulf states revert to their panicked state last seen so vividly in the spring of 2009 when they were cancelling orders left and right. 

Unlike other, more humorous instances, such as Byron Wein and his 10 endlessly entertaining year end forecasts, some banks take the smarter approach not of predicting what will happen, because only idiots think they have any clue what tomorrow may bring with any sense of certainty, especially under global central planning - a regime that is by definition irrational, but instead of stating what would be a surprise to a base case forecast. And with "surprise" now the new normal, it would be prudent to anticipate what to the status quo may represent as fat tails in the coming year. Especially since even UBS now mocks the Wall Street consensus, and the traditional upside biad: "Let’s face it: Bottom-up consensus earnings forecasts have a miserable track record. The traditional bias is well known. And even when analysts, as a group, rein in their enthusiasm, they are typically the last ones to anticipate swings in margins." Which is why, with that advance mea culpa in hand, we bring to readers the Ten Surprises for 2012 from UBS' Larry Hatheway: "At the end of each year, in our final strategy note, the global asset allocation and global equity strategy teams join up to consider possible surprises for investors in the year ahead. Inside, we briefly describe ten such outcomes, and also provide a review of how last year’s surprise candidates fared." For those pressed for time, here is the full list: i) The consensus of bottom-up earnings estimates is right; ii) Financials outperform; iii) The euro rallies; iv) Oil prices fall below $70/barrel; v) Sovereign default outside the Eurozone; vi) Rising Treasury yields; vii) An Italian sovereign upgrade; viii) EU or EMU disintegration; ix) Fewer than five governments switch hands and, last but not least, x) Britain does Great at next summer’s Olympics. Let's dig in.

The gloves are off! As the French prepare for the loss of their AAA status, the governor of the Bank of France, Christian Noyer, suggests that the UK should be first in the firing line as the data for inflation, real GDP growth and government deficit to GDP are worse across la Manche from where he sits. A month ago French 10 year yields were 3.8%. Today they are just above 3%, so maybe the markets are giving him the benefit of the doubt, but let us not forget that the maturity timeline of French bonds is considerably shorter than the UK. They are about to have a funding problem and that is one of the many issues that the much maligned ratings agencies are concerned about.

If there is one data point that Charles Biderman, of TrimTabs, relies upon, it is the series of salary and wage growth (or real-time tax with-holdings) that his firm keeps an extra special eye on. Critically, in our opinion, he notes the very recent shift from positive growth in income growth (after inflation) to negative for the first time since Q1 2010. The picture is particularly worrying since he notes that this is right before the all important holiday sales period which he suspects will significantly disappoint (as we are already seeing in data post Black Friday). Of course, we have long held that the decoupling of the US with Europe (and Asia for that matter) is more a lag than a simple decoupling, and given Biderman's insight on income growth (after inflation) we tend to agree with the Bay Area brain-box that the slowing economic outlook of Q1 2012 will herald the FOMC's push to QE3. Also noteworthy is that the last time they enacted LSAP (QE2) saw the peak in income growth (after inflation) and so their hope that this printing of money will juice a pre-election-cycle economy and while Obama may hope this brings him back from the edge, we suspect, like Charles, that it will not be enough.

Over the past month we have been closely documenting a major funding squeeze in the all important shadow economy - the "synthetic liquidity" conduit which far more than traditional sources of cash, has become all important for proper bank functioning over the past decade. Courtesy of adverse development in Europe, one by one various components of this unregulated funding scheme have become frozen necessitating the first of many central bank interventions on November 30 to provide liquidity to global banks, primarily to offset such shadow conduits as locked up commercial paper, repo and money markets. Logically, as noted over a week ago, European banks scrambled to obtain cheap dollars by borrowing over $50 billion from the Fed, and plug dollar shortfalls. Yet as all band aid measures designed to offset a broken liquidity equilibrium fail eventually, it was only a matter of time before we saw a direct bail out by the Fed of one or more banks in the aftermath of the November 30 global "bail out." Sure enough, we have our first clue that "something" happened in the week ending Wednesday December 14 that involved an upgrade of the Fed's indirect (and thus untargeted) bailout of global banks, to a focused, and very much targeted rescue of one (or more) banks. And with some additional diligence, it may be possible to narrow down the date of an actual bank bailout: Tuesday, December 13.

Today it seemed that the market latched on to the idea of the Corzine trade as being the new bazooka. banks would borrow lots of money from the ECB to buy sovereign. It certainly seemed to be the case this morning when 3 year and in PIIGS bonds rallied hard.  There are several flaws with this as a plan to save the euro.  Banks can already buy virtually unlimited amounts of Spitalian bonds. The repo market for these remains orderly so they could finance themselves without the ECB. Maybe the ECB terms are more favorable but the reality is banks could already buy as much sovereign debt as they wanted.  The issue is that they already have more than they want. As banks use ECB funds to buy more PIIGS bonds, private investors will be squeezed out. The banks will have concentrated risk that private investors may not be comfortable with.  As banks rely on the ECB to fund themselves and to put on disproportionately large positions who will lend to them?  Who will buy the shares? At first it may seem good, but they will be at the mercy of the ECB and the politicians. With Greece the politicians have already shown a willingness to try and dictate policy for banks. The on again off again rumor of a financial transaction tax will come back.  MF didn't have unlimited central bank backing but it is a bit strange to believe that the trade that brought them down will be the salvation of Europe.

To put US household debt levels into a historical perspective, in order for US households to return to their long-term average for leverage ratios and their historic relationship to GDP growth we’d need to write off between $4-4.5 TRILLION in household debt (an amount equal to about 30% of total household debt outstanding).

The ever-eloquent populist-in-chief has just turned an important corner.  It seems that the clear class warfare escapades he has been engaging in recently have backfired as, according to a poll by Associated Press-GfK, a majority of adults, 52 percent, said Obama should be voted out of office while 43 percent said he deserves another term. This confirms the report from the previous Gallup poll, that our President heads into election year with a significant problem: "Heading into his re-election campaign, the president faces a conflicted public. It does not support his steering of the economy, the most dominant issue for Americans, or his overhaul of health care, one of his signature accomplishments..." While understandably the party preferences bias for and against, it is the Independents that must be the greater concern as "The president's standing among independents is worse: Thirty-eight percent approve while 59 percent disapprove." Given the fact that its-the-economy-stupid, we wonder just how long the entirely independent and sacrosanct Federal Reserve will remain on the sidelines, or is QE3 coming Jan 1st?

A roller-coaster week ended on a negative note as equities and credit ended the day only modestly lower but having sold off relatively decently from the highs just after the open. Equities spurted out of the gate in the day session, not followed by credit (or HYG) or broad risk assets (CONTEXT), only to revert quite quickly and then push notably lower as the Fitch news broke. Equities overshot to the downside relative to broad risk assets - though we note that TSYs were bid all day long, ending the day at their lowest yield and flattest curve levels. The afternoon then saw HYG (the high yield bond ETF) pull higher and higher as equities and credit spreads stagnated, with a weak close in stocks and strong high volume close in HYG (well above VWAP) as credit flat-lined. Gold and Silver managed solid gains on the day, extending the recovery but closing under the psychologically important $1600 and $30 respectively. FX 'wiggled' around today but ended with a small bearish USD bias by the close as the pre-European close action dominated once again ( as we note the $20bn in custodial bonds sold this week in more repatriation flows). It seems attention has shifted back from FX to bonds and stocks as the week rolled on and that sentiment is less than positive despite some technicals (from the forthcoming CDS roll) - even as HYG remains in a world of its own. One final note of caution, implied correlation is once again bearishly diverging from index vol (VIX) the last two days suggesting dealers happy to buy systemic protection - in a similar vein to credit.

It appears Moodys is not having server issues.

• BELGIUM'S CREDIT RATINGS CUT 2 LEVELS TO Aa3 BY MOODY'S