Archive - Nov 2012

You've probably noticed the cookie-cutter format of most financial media "news": a few key "buzz words" (fiscal cliff, Bush tax cuts, etc.) are inserted into conventional contexts, and this is passed off as either "reporting" or "commentary" depending on the number of pundits sourced. Correspondent Frank M. kindly passed along a template that is "officially deny its existence" secret within the mainstream media. With this template, you could launch your own financial media channel, ready to compete with the big boys. Heck, you could hire some cheap overseas labor to make a few Skype calls to "the usual suspects," for-hire academics, hedge fund gurus, etc. and actually attribute the fluff to a real person.

Great timing. The ubiquitous post-European close trend-reversal was extended by some 'nothing' comments from Boehner that every media outlet is inferring means everything's fixed and compromise is close.  Boehner says talks with Obama were constructive. Outlined a framework with Obama; Will accept revenue if spending cuts.  It's not - what did we expect him to say?AAPL jumped up to VWAP and S&P 500 futures coincidentally reached overnight highs/stops. Now let's see if anyone really believes...

I was a super bull of long-term bonds. I stated my case over 3 years ago with a yield target on 30-year maturities of 2.5%. Back then, the timing and structure looked right for another run to new highs. Discussions about hyperinflation were premature.

"A popular revolt will happen" is how Kyle Bass sums up the endgame from kicking the can in Europe. Dismissing the headline-making 'But, Blackrock is buying European bonds', Bass reminds Bloomberg's Stephanie Ruhle that very few ever get the crises correct and that the herd will keep buying things until it blows apart. With massively over-leveraged banks and a Greek dependency, Bass notes that investing in Europe now is like picking up a dime in front of a bulldozer and expects Germany will eventualy leave the Euro (within 3-4 years) as the 'joint-and-several' liabilities will never happen. 150 well-spent seconds to summarise just what is going in Europe, as he concludes with Milton Friedman's quote on Europe: "when they hit a bump in the road, it will tear them apart at the core."

Everything that has happened since 2007, every Central Bank move, ever major political decision regarding the big banks, every trend, have all been focused solely on one issue.

Mere hours after BP settles, the US Coast Guard confirms there is an offshore (shallow water) platform burning in the Gulf of Mexico in the area of West Delta Block 32 (near West Cote Blanche Bay). Local TV says that two people are dead and two people are missing after an explosion at the platform. More to come...

UPDATE:Gulf rig fire was result of rig explosion at oil/gas platform "West Delta 32"owned by Black Elk Oil, ac. to Coast Guard

While we have yet to go through the thousands of files that hacker collective Anonymous has just released as a result of its hack of the Greek Finance Ministry, an exploit it described as follows: "We gained full access to the Greek Ministry of Finance. Those funky IBM servers don't look so safe now, do they... We have new guns in our arsenal. A sweet 0day SAP exploit is in our hands and oh boy we're gonna sploit the hell out of it. Respectz to izl the dog for that perl candy," what we find even more amusing, if not surprising, is that of the 136 username accounts Anonymous hacked, the password of precisely 50 of them, or some 37% of all workers, is .... 123456 (full list here).

Whether it is leveraged AAPL traders forced to sell winning collateral to meet margin calls, correlation-driven algos running stops down and up, or simply the whims of worried custodians managing risk for their clients' holdings; one thing is sure - someone (or more than one) has been a size seller of precious metals in the US-day-session-open to Europe-close period for four days in a row now...

Dear Buenos Aires: we have three words of advice - "hide yo' catamarans" (before Paul Singer comes and collects them all once you default again in what the market now deems is inevitable to occur in the next few weeks). 5Y CDS on Argentina just reverse-Baumgartnered to over 3000bps (49/53% upfront) and short-dated CDS imply a 60% probability of default (assuming a 25% recovery).

Twinkies may gve us the runs, Bernanke has just ordered tons...

Given the deterioration left, right, and center in Europe's core and peripheral economies, some question the sustained 'strength' of EURUSD. An under-the-table peg around 1.27 is the conspiracy chatter but we fall back to a tried-and-true recipe for comprehending what the market is thinking - the central banks are in charge and the EURUSD exchange rate merely reflects (as a main trend) the relationship between those two balance sheets (as monetary policy escalates downwards and they battle each other to 'defend' their own currencies' demise). To wit, given the current ratio of the Fed and ECB balance sheets, we would expect EURUSD to be trading around 1.21. The current EURUSD rate implies a balance-sheet ratio of 1.08x - which therefore means the market expects the ECB to expand its balance sheet by EUR740bn; this just happens to be the sum-total of Spanish sovereign debt (according to Bloomberg - while our estimate is considerably higher). So it seems, the market knows that once the ECB starts, it will not be able to stop and will end up taking the entire Spanish debt load onto its books. Spain can perhaps deal with its existing debt in this way - but this appears to us merely incremental sustainability - and like in the US where the Fed is monetizing all long-dated Gross issuance, so the ECB will have no choice but to do the same with Spain in 2013 and 2014 - Treaty or no Treaty!!.

Perhaps one of the most interesting aspects of the just announced Hostess liquidation, one that will be largely debated and discussed in the media, or maybe not at all, is the curious cast of characters and the peculiar history of this particular bankruptcy. Some may not be aware that the company's Chapter 11 (or colloquially known as 22) bankruptcy filing this January, which today became a Chapter 7 liquidation, was the second one in the company's recent history, with Hostess, previously Interstate Bakeries, emerging from its previous protracted multi-year bankruptcy in 2009. What is curious is that its emergence had all the drama of a anti-Mitt Romney PAC funded thriller, with a PE firm, in this case Ripplewood holdings, injecting $130 million in order to obtain equity control of Hostess as it was emerging last time. There were also more hedge funds, investment banks, strategic buyers, politicians involved in this particular story than one can shake a deep fried numismatic value Twinkie at. More importantly, however, as America has been habituated following the last season of the reality TV show known as the presidential election, if Private Equity then "bad." Only this time there is a twist: because it wasn't really PE that was the pure evil in the Obama long-term campaign, it was associating PE with Republicans, and thus: with jobs outsourcing. And here comes the Hostess twist: because Tim Collins of Ripplewood, was a prominent Democrat, a position which allowed him to get involved in the first bankruptcy process in the first place, due to his proximity with the Teamsters' long-term heartthrob Dick Gephardt (whose consulting group just happens to also be an equity owner of Hostess). In other words, the traditional republican-cum-PE scapegoating strategy here will be a tough one to pull off since the narrative collapses when considering that it was a Democrat who rescued the firm, only to see it implode in a trainwreck that has resulted in the liquidation of a legendary brand, and 18,500 layoffs.

Markets have come to their senses a little and are selling off as news breaks of a plethora of concerning headlines from Israel:

• *AIR RAID SIRENS HEARD OVER JERUSALEM
• *HAMAS CLAIMS FIRED ROCKET TOWARD JERUSALEM AREA, CHANNEL 2 SAYS
• *HAMAS CLAIMS IT HIT ISRAELI JET OVER GAZA STRIP
• *HAMAS SAYS FIRED AT ISRAELI PARLIAMENT IN JERUSALEM
• *FLASH: EXPLOSION HEARD IN JERUSALEM AREA: LOCAL MEDIA

Not good at all...

In a word, this weekend, next week, we are facing what the boys in the South call “chicken fried.” This is the moment when the ingredients lounging in your kitchen get tossed in the frying pan and are cooked up with grease (perhaps Greece) splattering everywhere and some concoction that is decidedly unhealthy for you is tossed upon your plate. A week ago the menu consisted of the Capitol Grill of America’s Fiscal Cliff, the red wine (perhaps whine) of Spain and the seemingly never ending fried in olive oil mess provided by both Athens and Brussels. That would have been enough “Opa” for anyone as plates get smashed and people whirl around on some table like dervishes but now we have a new option on the menu, a special provided by the Great Chef in the sky. We get to throw in the latkes of Israel and the hummus provided by Hamas. Any of these menu selections could provide severe heartburn all by themselves but eaten together; a hospital stay may be required or a plot at the cemetery.