Archive - Nov 2012

Following yesterday's news that the Hostess mediation with its workers has collapsed, formalized earlier today, we get the next update which will likely make for a less than happy thankgsiving for a whole lot of former workers:

• HOSTESS CEO SAYS MUST TERMINATE 15,000 EMPLOYEES TODAY

We wonder if this surge in initial claims reported next week will also be attributed to Sandy?

A funny thing happened in the fall of 2010. Global equity markets went from the relatively 'normal' reflection of fundamental trends in earnings to an entirely disconnected 'keep equity valuations high at all costs' centrally-planned environment divorced of fundamental support (no matter how many times we are told 'stocks are cheap'). What happened and who broke the markets 'saved the world'?

And the Israeli update: ISRAEL HAS AGREED TO TRUCE IN GAZA, BUT WILL NOT LIFT BLOCKADE -ISRAELI SOURCES

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This is not the first time we have had rumor of a ceasfire between Hamas and Israel, but this one may be for real. If only briefly. From Reuters:

• CEASEFIRE BETWEEN HAMAS AND ISRAEL AGREED -PALESTINIAN OFFICIAL WITH KNOWLEDGE OF TALKS

Oil appears unwilling to wait for any confirmation from the Israeli side and promptly slides.

Greece? Sorry, what’s with Greece? French downgrade. Unexpected, but then again not that much. So what? Fiscal Cliff? As no one speaks about it, it can be ignored. Risk? If it doesn’t fall, it has to rise.

"Rise To The Occasion" (Bunds 1,43% +2; Spain 5,7% -9; Stoxx 2518 +0,4%; EUR 1,282 +10)

What does the Fed's QE 3, a Spanish default, the systemic crisis in the EU and Lehman all have in common?

Forget for one moment that the region is mired in a recession-to-depression state; wipe from memory the faltering capital base of the EFSF/ESM mechanisms; dismiss the overnight failure of a Greece agreement; ignore Schaeuble's dismissal of any joint-and-several liability; all you need to do is buy in Europe. Buy dips, buy rips, buy bad news, buy good news - s'all good. Sovereign debt spreads continue to compress on the week - Portugal -99bps and Spain -26bps for example (and GGBs soared on buyback hope). Equity and credit markets have just gone 'Birinyi-rule'-like from lower left to upper right this week without pause or contemplation. Whether EURUSD dips or rips, whether oil prices dip or rip; you buy risky stuff with both hands and feet. Meanwhile LTRO-encumbered bank spreads are underperforming and Swiss 2Y rates deteriorated today.

We have long been pounding the table on what in our view is the biggest detriment to any future growth for not only corporate America, but the entire US (where, sadly, government investment IRRs just happen to be negative - a fact that most won't understand until it is too late, especially not self-anointed economic wisemen whose only solution to everything is "do more of the same" yet who thought the utility of the Internet would be eclipsed by that of the fax machine): the complete lack of capital expenditures at the corporate level, and lack of (re)investment spending. It turns out that, however, that there is more to the story, and as the following chart from SocGen's Albert Edwards shows, not only are companies using up what actual free cash flows they have for such stupid stock boosting gimmicks such as harebrained M&A (just look at the recent fiasco between HP and Autonomy to see how rushed M&A always ends), and of course buybacks, but they are now levering to the hilt to do even more of this. The last time they did this? The golden days of the credit bubble.

"How many more times?"

We know it may appear unduly harsh to discuss America's self-destructive dietary "monster Id" right before the Thanksgiving day feasting, but when is it more appropriate? There are a great many disconnects between reality and what Americans believe out of convenience ("no snowflake feels responsible for the avalanche") or propaganda, but perhaps none is more visible than the disconnect between what we're collectively doing to our health with the food we consume. The Chinese have an apt saying" "Disease comes through the mouth," meaning disease comes from what we eat. There are several parts to the food-illness disconnect.

If you aren't thoroughly confused, confounded and outright disgusted by the newsflow supposed to represent the US economy, you aren't paying attention. Because two weeks after the preliminary UMich print was supposed to come at 82.2, instead soaring to 84.9, or the biggest beat of expectations in 5 years, we get the final UMich number, which missed expectations of a 84.5 read and plunged to 82.7, the biggest miss of expectations in 4 years. Of course, this makes sense: two weeks ago we had the euphoria associated with a new old president, and hope that 4 more years may fix this country. Two weeks, and the biggest market drop in one year later, enthusiasm has been doused just a tad. And adding insult to injury, 1 Year inflation expectations rose from 3.0% to 3.1% - just as the spectre of declining asset prices has reared its ugly head, yet this is well below the 2.8% expected for 5 year inflation -  as a reminder, in 5 years the Fed's balance sheet will be between $6 and 10 trillion. Boy is everyone in for a surprise...

Presented with little comment except to note that the implied volatility of the S&P 500 has collapsed back to its realized volatility - it would seem markets have become highly complacent, once again, about the short-term future.

HP said that more than $5bn of yesterday's gargantuan write-down was due to "serious accounting improprieties" but as Bloomberg's Jonathan Weil states "the numbers don't make sense". With only $3.5bn of total assets on their balance sheet as Q2 2011, a $5bn 'fraud' would seem tough to swallow - and HP has far from forthcoming on any details. Perhaps the fault lies within (as opposed to without) as Weil notes HP recorded $6.6bn of goodwill (the plug between market price and the above-market price HP paid) - which was later revised to $6.9bn; now HP is writing down that goodwill - and blaming it on financial fraud from Autonomy. "HP didn't record the goodwill because it was lied to by Autonomy. HP recorded the goodwill because it knew Autonomy's identifiable assets were worth much less than it paid." It seems to Weil (and to us) that HP's management want the 'obvious-to-the-world write-downs required for goodwill and intangibles' post such a huge 'over-pay' to appear to be someone else's fault.

10.7% bank NPAs, youth unemployment over 50%, Banks stuffed with levered devalued bonds carried as RISK FREE & RE going for half off during a recession: What could go wrong?

No, really. The LDP, as most know by now, will take over at the December 16th elections as the next party in charge of Japan, at least until the early elections 3-6 months later, when power will shift once more, as the great Keynesian basket case experiment proves ungovernable yet again.  But in the meantime, there will be much humor, such as this...

Run! The tank is going to blow!