Archive - Nov 20, 2012

Earlier today Hewlett Packard stunned investors by announcing that its had effectively bungled a massive acquisition, that of Autonomy plc, despite extensive prior warnings about the accounting practices of the UK firm (for which it appears Deloitte will now have to take the blame), by paying over $10 billion for a transaction that is now clear will provide zero income statement benefit. The one problem, however, is that HP incurred a massive debt load to fund EBITDA and Cash Flow which will never materialize. The result: a capital structure that is now appropriate of a B1/B+ rated company, i.e., one whose debt needs would be serviced by a firm like Jefcadia, and therefore whose time to default in years can be counted on the fingers of one hand. The chart below explains it all: why shareholders should just get out while they can, and also explains why despite, or rather due to, endless central bank mingling, cash flows still, oddly enough, matter. Oh, and those hoping the HPQ dividend continues uninterrupted in perpetuity, hope again.

Those living in the dust bowl responded by doing more of what had failed rather than doing something different. Ours is a dust bowl economy.  In our economy, debt is the marginal field that has been plowed up for brief exploitation and profit. In response to the drought of income and collateral that supports debt, the Federal Reserve, Congress and the Obama administration have actively made the crisis worse by doing more of what failed spectacularly: encouraging more debt with zero-interest rate policy (ZIRP), massive "socialized" subsidies of housing and mortgages, and so on. When the present path cannot possibly lead to success, regardless of the labor and treasure poured into the effort, then risking the unknown by trying something different is the only way forward.

Remember Kweku Adoboli: the 32 year old rogue trader who was solely responsible for UBS' massive $2.3 billion trading loss, and cost the firm's then CEO his job?

• ADOBOLI SENTENCED TO 7 YEARS IN PRISON BY LONDON JUDGE
• JUDGE SAYS ADOBOLI MUST SERVE AT LEAST HALF OF HIS TERM

So the trade off: 3.5 years in exchange for several million in hush money. Where does one sign up?

As investors' and traders' attention spans diminish at ever-increasing speed, it is perhaps useful to step back and survey a landscape of global economic growth from a longer-term panorama in order to grasp the real trend and the real unusualness of our current environment. UBS' Art Cashin, while not 800 years old, reflects on such a long-term cycle providing some perspective on our belief that "economic growth be regarded as a continuous process that will persist forever," opining that perhaps, based on the study below (Is US Economic Growth Over?), we "could well be a unique episode in human history rather than a guarantee of endless future advance at the same rate." Of course, that would never fit with the current meme that growth is credit is life, but nevertheless well worth some introspection as we give thanks this week.

For those of us that still do not fully understand how bankers have seized absolute power in all governments worldwide and the ploys that they use to keep us dependent upon their largesses, the video "The Story of Your Enslavement" is for you.

As we approach the end of the year and the various cliffs, bungee jumps and political idiocy that is in front of us you might want to take some time and pay attention to some friendly advice.  Yes, of course you know everything, yes of course there is nothing that escapes your attention and you are personally plugged in to the inter-galactic computer that provides not only financial answers and but divine indulgences but still; keeping an open ear might be a novel experience. Take some profits. You and I have no idea what these “detached retinas” might do in Washington. If you are betting for a living then I would say that the craps table is now safer than Europe. These people have flown over the cuckoo’s nest and have become disoriented by the flight. Parties such as this are funny things; the jesters jest, the Kings lord, the Palace of Versailles is abuzz and it all goes along until someone switches off the lights. Keep your eyes on the switches!

With everyone throwing the kitchen sink into creating the illusion that this time housing has bottomed, seriously, this morning's report on housing starts and permits was set to be quite awkward: on one hand, realistic data accounting for weakness due to Sandy would have broken the housing momentum - many were expecting a far weaker than expected print precisely due to the Hurricane. On the other, the Census Bureau could have gone hog wild and completely ignored the same reality that apparently is impacting all other data points, and said housing starts soared to their highest number in 4 years, or a seasonally adjusted 894,000 in October, up 3.6% from a downward revised 863,000 in September, and well above expectations of a Sandy-driven decline of 3.7% to 840K. The CB opted for the latter, while adding a solid pinch of seasonal adjustment to the data, which not annualized and not seasonally adjusted rose from 77.8K to 77.9K sales. In this number was the drop in Northeast housing starts from 4K to 3.5K, the lowest since February. The mystery boost came in the West, where annualized starts rose from 198K to 232K, even as they dropped in the South and Northeast. Finally, and more irrelevant, housing permits dropped from 890K to 866K seasonally adjusted, even as the NSA number rose from 71.4K to 75.0K.

For your Arthur Andersen nostaglia pleasure, we present Deloitte's February 2011 sign off on the firm's 2011 full year results. And to avoid the Twinkie Tsunami and beat the rush, be sure to buy your soon to be collectible, pre-petition HP-12C now before the imminent price surge occurs.

That Hewlett Packard would miss results (it did, with revenues coming at $30.0 billion on expectations of $30.4 billion, guiding Q1 ESP $0.68-$0.71 on expectations of $0.85) is no surprise to anyone who had followed the stock, and/or seen the recent dump of half of Seth Klarman's stake in the name (as was pointed out here previously). What was not only surprising, but shocking is that as part of its earnings announcement, HPQ took a $8.8 billion impairment charge to intangibles and earnings, primarily as a result of what it said was "serious accounting improprieties, disclosure failures and outright misrepresentations at Autonomy Corporation plc that occurred prior to HP's acquisition of Autonomy and the associated impact of those improprieties, failures and misrepresentations on the expected future financial performance of the Autonomy business over the long-term." As a reminder, HPQ bought Autonomy plc for $10.3 billion in August 2011. We now learn that anywhere between 50% and 80% of this purchase price was based on meaningless numbers and fraud. $10.3 billion is also about 40% of what HPQ's market cap will be when the stock opens down at least 10%. And this is how one destroys shareholder value. One in this case being the company's former CEO Leo Apotheker, whose executive decisions and lack of diligence have left the company in a state of complete disaster. What was Leo's punishment for his brief tenure on top of HPQ and swath of absolute value destruction? $25,000,000 in all in comp.

• More QE could distort rather than deliver (FT)
• Soros Buying Gold as Record Prices Seen on Stimulus (BBG)
• EU Leaders Face Greek Aid Gap in Brinkmanship With IMF (BBG)
• Weak data point to bigger economic drag from Sandy (Reuters)
• Shirakawa Pushes Back With Criticism of Abe Unlimited Easing (BBG) But... but... Bernanke??
• French Downgrade Widens Gulf With Germany as Talks Loom (BBG)
• Japanese Poll Shows LDP Advantage Ahead of Election (WSJ)
• BOJ in the Balance as Next Government Picks Top Posts (BBG)
• Exchanges Get Closer Inspection (WSJ)
• Greece edges closer to €44bn bailout (FT)
• Japan Government to Spend 1 Trillion Yen on Next Stimulus (BBG)
• China’s Richest Woman Divorces Husband, Fortune Declines (BBG)

Another day, another melt up overnight wiping out all the post-Moody's weakness, this time coming courtesy of Europe, where following the French downgrade, the EURUSD filled its entire gap down and then some in the span of minutes following the European open, when it moved from 1.2775 to 1.2820 as if on command. And with the ES inextricably linked to the most active and levered pair in the world, it is is no surprise to see futures unchanged. It appears that the primary catalyst in the centrally planned market has become the opening of said "market" itself, as all other news flow is now largely irrelevant: after all the central planners have it all under control.

From buy French bonds and the EUR, to sell French bonds and the EUR, every possible opinion is included in the list below.

The French banking problem is woefully unrecognized, although I'm sure the rating agencies will pick up on it this time next year, after the collapse and/or bank run.