Archive - Oct 2012

October 31st

Guest Post: The Tremendous Economic Benefits Of Superstorm Sandy

The public relations propaganda campaign to convince the ignorant masses that Sandy’s impact on our economy will be minor and ultimately positive, as rebuilding boosts GDP, has begun. I’ve been hearing it on the corporate radio, seeing it on corporate TV and reading it in the corporate newspapers. There are stories in the press that this storm won’t hurt the  earnings of insurers. The only way this can be true is if the insurance companies figure out a way to not pay claims. They wouldn’t do that. Would they? It seems all the stories use unnamed economists as the background experts for their contention that this storm will not cause any big problems for the country. These are the same economists who never see a recession coming, never see a housing collapse, and are indoctrinated in Keynesian claptrap theory.

Elliott Management Vs Argentina Round 2: Now It's Personal

When it comes to international bondholder process, work out and restructuring (and litigation), on the one hand there is Europe, and specifically the ongoing Greek reorganization into an ever tinier balance sheet by way of cramming down weak-covenant, local-law bondholders (who are "encouraged" to participate in ever more coercive principal recovery events, as defection would result in wipeouts of recoveries in other cross-held bonds of the impaired class should a Grexit-type event occur, which then would lead to massive losses on all European bond holdings for the same creditors: a true Mutually-Assured Destruction scenario, as the IIF's Jacques Dallara understood quite well), and on the other hand there is Argentina. But whereas the European fiasco is still (relatively) structured (at least until Spain et al join the cram down fray, something none other than Lee Buchheit predicted would happen courtesy of the prevalence of local-law bonds in PIIGS outstanding inventory), if getting more complicated with incremental subordination of various junior classes of sovereign debt either due to legal reasons - i.e., local-law vs international-law bonds, structural reasons: the presence of Collective Action Clauses in consent solicitations and "indenture-stripping" thresholds for a holdout class (think perpetual fly-in-the-ointment Elliott), or due to the far more abstract "unimpairability" and primacy of the bondholder - i.e. the IMF, the ECB, or another Official Sector entity (all of which was previously explained here), in Argentina it is a totally chaotic free-for-all, where a distressed creditor holdout is now unilaterally pursuing "incremental recovery" of par in local and international courts of law.

Guest Post: China’s J-31 Stealth Aircraft Takes Flight

Well, the Chinese aviation industry sure isn’t wasting any time: From the first glimpse of the tarp-covered fuselage being hauled in the first official pictures released by Shenyang Aircraft Corp (SAC) in September, China’s second fifth-generation stealth aircraft, the J-31, has now taken its maiden flight. Interesting timing given we are all focused on Sandy and the election... one thing is sure: Defense analysts have underestimated China’s ability to overcome technological hurdles before. While the sky isn’t falling in East Asia, the skies over China are well worth paying close attention to.

Deciphering The Dismal Reality In Europe From The Hopeful Green Shoots

European corporates continue to report considerably more negative surprises in production than expectations a mere three months ago - with the divide now at extreme levels. As Morgan Stanley notes though, there remains a 'hope' for green shoots in the euro area on the back of the ECB's OMT announcement and an apparently more robust China. Unfortunately, as these ywo simple charts indicate, the reality is that business surveys are pointing to a continued slide and that recent resilience is unlikely to last. In fact, in Morgan Stanley's view, incoming data and anecdotal evidence would suggest Q4 could be even worse than had been expected and the recessionary envionment will drag well into next year.

The Ethics Of Halloween

Every Halloween people are engaging in free-market anarchism whether they like it or not. To the economist, it’s clear that the child values receiving candy, even if it means dressing up in a funny or scary costume and going door-to-door, sometimes for hours, saying “trick or treat”. It’s clear that for the adults, joining in for the festive evening is valued more-so than the monetary value of the candy, or else they wouldn’t be giving it away. And some don’t. Some people, adults and children alike, shy away from Halloween night neither tricking nor treating nor allowing their homes to be used as candy repositories. To the free-market anarchist, Halloween is a perfect example of a non-coercive display of voluntary goodwill. Here is a spontaneous order of people partaking in a festive holiday without any expectation of monetary gain.

Real Economy Still Sliding As 'Eating Out' Continues to Go Down

While real consumer spending growth remains perilously close to recessionary levels for another year, one of our favorite indicators of real consumer sentiment (as opposed to the anchoring bias-driven surveys we are force-fed a few times per month) is the growth in spending on eating meals out. As Bloomberg Briefs notes, spending on dining out has fallen from 4.5% growth at the beginning of the year to under 1.8% growth currently (the lowest since May 2010). Add to this the slowdown in jewelry spending and the drag on discretionary spending likely from Sandy and we suspect the modicum of estimate revisions that have started to be published by sell-side analysts will need a little more adjustment.

France's Fiasco In One Fine Chart

Scanning the world, France ranks at or near the top in government transfers to households, vacation times and labor market rigidity, and at or near the bottom in hours worked per week, labor force participation rates and retirement age as a % of life expectancy. As JPMorgan's Michael Cembalest notes, France is a workers's utopia - which is expensive to maintain - and sure enough four out of four of its main economic indicators are accelerating lower since Hollande's 'Deluge' began.

The Case Against Corzine

As the one year anniversary of the MF Global Bankruptcy is upon us, the WSJ has now joined the NY Times in writing a ‘woe is me’ piece on behalf of Jon Corzine. The WSJ continues bemoaning the pitiable situation of “restlessness and frustration” of the former CEO of Goldman Sachs, former Governor of New Jersey, and former Senator from New Jersey who apparently isn’t content with being “confident about the likelihood that he will avoid any criminal charges related to MF Global.” Corzine is still estimated to be worth several hundred million dollars despite presiding over the failure of the largest non-bank commodity broker where $1.6 billion in customer money was stolen. I cry for him, I really do... Trying to portray Corzine as being focused on mundane things like finding a job rather than worried about doing jail time for his obvious crimes appears to be another prong of Corzine’s attorneys’ use of the Chewbacca Defense, along with saying that the fraud charges “Make No Sense,” because the money “Vaporized” and he had no motive since he had a de minimis portion of his net worth invested in MF Global stock. However, proving Corzine committed fraud and perjury would be relatively simple for any motivated prosecutor. Since the Department of Justice clearly is not motivated to prosecute Corzine after he bundled $500,000+ in campaign contributions to their boss, I provide this quick and easy guide for any ambitious state prosecutor to bring charges themselves:

Stocks Slump Back To Draghi's Elbow

While everyone is loudly patting themselves on the back for getting the electronic exchanges open and enabling a few proud men to wriggle out of positions (or into them) into month-end, we can't help but notice the overall weak tone of equities. The S&P 500 cash markets proclaim a very small green close but after-hours futures are getting hammered. The Dow is only -10pts (but with IBM and HD alone accounting for 25 points of gain!), The Nasdaq is leaking painfully as AAPL traded down exactly as we thought - inched back above VWAP and tumbled into the close -1.5%. Broad risk-assets, which had been indicating a lower move in US equities, kept on sliding and stocks stayed with them all day as correlations picked back up. Treasury yields are 4-6bps lower than Friday's close, the USD is down around -0.12%, but Gold and Silver are up 0.6% on the week now. Oil slipped (after a European close spike and dike) and Copper slid from the US open. The main story of today is the crash in S&P 500 futures after-hours to the lows of the day (down 8 points from its cash close).

HFT Caught-Red Handed In FX Trading

After decimating equity and commodity markets, the HiFreqs have boldly gone and broken another market - FX. But that is not news: we reported over two years ago, that while HFT accounting for all of the churn - not liquidity - in stocks, bonds, and commodities, HFT had moved on to the final frontier, FX, where even the smallest moves now are catalysts for avalanche-like surges and plunges on the most meaningless of newslfow. What is news it that finally it has been caught in the act. From Reuters, which is also an involuntary accomplice in this latest HFT unmasking, courtesy of its institutional FX trading platform: "Thomson Reuters Corp is investigating whether one of its currency trading customers gained an unfair advantage when making high speed foreign exchange trades on its platform. Lucid Markets, a privately held electronic trading firm registered in Great Britain, may have benefited from trades using several connections on the Thomson Reuters Matching platform."