Archive - May 23, 2011

Call it Eyjafjallajokull part two, or, more pronouncedly, Grimsvotn part one. Just like last year, when the unpronounceable Icelandic volcano erupted and covered Europe in ash, grounding flights for about a week, so the 2011 vintage of Icelandic pyroclastic goodyness, contrary to "expert" predictions, is about to cause widespread havoc within European air traffic control. According to Eurocontrol, The European Organisation for the Safety of Air Navigation, whose twitter account is about to become all the rage all over again, "By 08:00 CET #gromsvotn #ashcloud to cover Scotland." In other words, expect massive plane delays, outright cancellations and another round of completely unexpected losses for airline carriers.

IF this happens, then expect stocks to take a BIG hit. So far they’re held up relatively well although as we all know by now, stocks are ALWAYS the last to “get it.” So the fact that stocks have held up while commodities (especially the economically sensitive ones like copper and oil) have taken a dive could in fact be a BAD thing as it predicts some serious pain for stocks.

Compounded interest is vital to SS. But is that fair?

Answer: Much more than you think...

LinkedIn (LNKD) went public with an absolutely unrealistic valuation that illustrates the dangers of ZIRP policy that has carried on for too long. The marketing machinations of investment banks combined with a total lack of respect for risk and the cost of capital has allowed such to happen – and we all know how this is going to end!. In 2010 LinkedIn generated $15m of PAT (profit after taxes) as quoted by the popular financial media. But that’s PAT. What the media and pop media readers are forgetting is what’s available to common share holders, you know the guys holding that stuff trading on the exchanges.

Following Saturday's eruption of the Grimsvotn volcano, whose ash cloud is expected to hit the British Isles within 24 hours and create havoc for flights, another natural disaster has struck Missouri, after a tornado ravaged Joplin, where according to press reports at least 89 people have died and 75% of the town has been leveled, making it the deadliest tornado storm since 1953 when 90 people were killed in Worcester, MA. Below we present some of the videos of the devastating aftermath which will likely have ramifications on existing municipal bonds and future issuance.

A few weeks ago, the entire world was made aware that nobody in Europe is to be trusted any longer after Jean Claude Jun(c)ker admitted he lied to the media ahead of what Spiegel had leaked earlier was a "secret" meeting to kick Greece out of the eurozone (turned out to be only half true - Greece was not and will not be kicked out... voluntarily). The purpose for the lie: "self-preservation." Today, in a much anticipated showdown between the magazine (which Greece said would sue for spreading salacious, yet true, rumors), and the bureaucrat, we learn that it is not Goldman, but Europe, that is doing God's work by lying on a daily basis about the Greek insolvency: "The most important commandment is not to inflict harm on others. Although it isn't stated quite that way in the Ten Commandments, it follows from them. The finance ministers of several Euro Group nations had agreed to meet on Friday with the president of the European Central Bank (ECB), Jean-Claude Trichet. Because the financial markets in Europe were still open and trading was still underway on Wall Street, we had to deny the existence of the meeting. Otherwise the course of the euro against the dollar, which had already fallen as a result of your report, would have plunged disastrously." Ah yes, doing God's will by focusing on the greater good, which is making sure those EURUSD longs are not impaired. If this is not confirmation that Europe is run by sociopaths, then nothing is. All this, and much more, including such pearls as "If the donkey were a cat it could climb a tree. But it is not a cat" read the full surreal interview below.

Another diffusion contraction confirms the stagflation thesis is playing out just as expected. "Led by declines in production-related indicators, the Chicago Fed National Activity Index fell to –0.45 in April from +0.32 in March. April marked the lowest reading of the index since August 2010. Three of the four broad categories of indicators that make up the index deteriorated from March, but two of those three categories made positive contributions to the index in April." And more truthiness courtesy of a tumbling Japanese economy and European contraction: "The index’s three-month moving average, CFNAI-MA3, declined to –0.12 in April from +0.08 in March, turning negative for the first time since December 2010. April’s CFNAI-MA3 suggests that growth in national economic activity was somewhat below its historical trend. With regard to inflation, the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year." And the admission: "Parts shortages that resulted from the earthquakes in Japan contributed to a decline in motor vehicle and parts production." But no, GM and Ford are both not seeing any impact from Japan...

The latest "Risk Off" CDS rerack on European sovereigns courtesy of CMA. Needless to say, all wider.

The euro, global equities and bonds in peripheral Eurozone countries are all lower this morning on heightened concerns about the debt crisis in the Eurozone. The euro has fallen against all currencies and is now at a record low against gold at EUR 1,080.21/oz. Silver is lower against most currencies but is higher against the Australian dollar and the euro ( EUR 24.80/oz). Greece’s 10 year government debt has surged to 16.98%, Portugal’s to 9.6% and Ireland’s to a new record at 10.76%. The yield on Italian 10-year government debt is up 9bp to 4.85% after S&P cuts its rating outlook on Italy’s sovereign debt to “negative” from “stable”. The Spanish 10 year bond has risen 11 basis points to 5.57%. Besides sovereign debt risk, gold is also being supported by geopolitical risk as seen in the increasingly unstable nuclear armed Pakistan where armed militants attempted to take over Pakistan’s naval air force headquarters. There is increasing tension between the U.S. and Pakistan after what the U.S regards as Pakistan’s failure or collusion regarding Osama Bin Laden. China has increasing economic and military ties and interests in Pakistan and has vowed to standby Pakistan and has called on the world to respect Pakistan’s sovereignty. Separately, in an interview with the Financial Times on Saturday, Henry Kissinger has warned of a world war involving Pakistan and India.

To all Americans complaining about high taxes, better keep your beef on this side of the Atlantic. According to a recent OECD report, captured by the Economist, when it comes to total taxes paid out by both employees and employers, the US doesn't even come close to its just slightly more socialist European cousins. In fact, while total taxation as a % labor costs is about 30% in the US, comparable with Japan and Ireland, in France and Germany this number is nearly half of the total. Which explains why there is no greater threat to these two countries than the perpetuation of the status quo welfare state. Should Greece file Chapter, who knows what will happen to the Bismarckian ideal. Incidentally, on the other end: Chile, which pays out just 7% of labor costs to taxes. Per the article: "The report splits out the tax burden on employment which is paid by employers (in the form of social-security payments) and employees (as income tax and more social security). France and Germany have some of the most costly tax regimes—with people who earn the average wage taking home just over 50% of their total labour cost. The effect of fiscal austerity, particularly across Europe, has meant that the tax burden rose in 22 out of the 34 countries in the OECD from 2009 to 2010. Meanwhile real incomes for average-wages earners fell in 15 OECD countries. As the second chart shows, these reduced earnings caused by the world recession and subsequent inflation tend to have a much larger impact on incomes."

• "There isn't a person outside a mental hospital or an Ivy League faculty who believes the federal government can continue on its current fiscal trajectory, even with tax increases" (Bill Freza)
• Joplin tornado death toll hits 89: officials (Reuters)
• Asian stocks end lower; Shanghai drops 2.9%, biggest drop in more than four months (MarketWatch)
• Vote Jars Spain's Ruling Socialists (WSJ)
• Europeans Focus on Retaining Leadership of I.M.F. (NYT)
• Signs of division between IMF and Europe over bailouts (Reuters)
• U.S. Debt Limit Increase Agreement May Take Until August, Ryan Tells NBC (Bloomberg)
• Next Danger: "Splash Crash" (Barrons)
• As Lenders Hold Homes in Foreclosure, Sales Are Hurt (NYT)
• When Austerity Fails (Krugman)

While America is fascinated by the launch (or cancellation) of various presidential campaigns, the real presidential race news comes from Russia, where former president, current Prime Minister, one time KGB spy and overall wannabe dictator of the Great Russian Empire has just thrown in his card once again in the presidential race, much to the disappointment of figurehead president and Putin protege Dmitry Medvedev, who had some stern words of warning for the country should it choose to embark on the path to virtual dictatorship. This is due to the 45 year old's decision to increasingly disagree with policies proposed from the shadow president, as Putin continues to be in charge in all but name. The Australian reports "Russian Prime Minister Vladimir Putin has decided to run for the presidency next year, raising the possibility of a power struggle with his protege Dmitry Medvedev, the incumbent Kremlin leader, say highly placed sources." As to why this is just modestly a concern: "Under the constitution, Mr Putin's move to reclaim the presidency could
see him rule for two consecutive six-year terms until 2024, when he will
be 72. If so, he would have served as prime minister or president for
24 years in all." And the truth is that with his charismatic figure as popular now as ever, he will likely get it, making him the first non-wartime popularly chosen effective dictator of a "democratic" country. However, as Medvedev noted, this outcome would not be without sizable risks: "Russian history shows that monopolising power leads to stagnation or civil war." And the last thing an energy-strapped world needs is for the largest oil producer to be stricken by civil war...

It is now as if Europe is urging Greece to fail. The EU's Olli Rehn, better known as lord protector of Ireland (and now Portugal), for once said the sensible thing when he commented on Greek prospects to privatize €50 billion worth of assets: the latest condition for the country to procure additional bailout funding. In word (or two) - not good. This obviously could be a major issue because as we noted yesterday, the country now suddenly only has 2 months of cash left. So if even the very entity that imposed this condition is saying it is a moot point (something we observed yesterday), then why engage in the exercise at all? And how long before Europe (and whoever heads the IMF at that time) decides to pull the plug entirely...

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