Archive - Mar 4, 2012

Analysts are questioning the "double-down effect" the ECB's LTRO exercises are creating in eurozone sovereign spreads. Citi notes a spike in the purchase of government securities since the initial take-up in December.

When it comes to reporting the news, Reuters ability to get the scoop first may only be rivaled by its ability to "spin" analysis in a way that will make a normal thinking person's head spin.  Such as the following piece of unrivaled headscrathing titled "The good news behind oil prices" whose conclusion, as some may have already guessed, is that "the surge in crude oil is looking more like a harbinger of better days." Let's go through the arguments.

On January 30, a skeleton fell out of the closet in the Netherlands. Het Financiele Dagblad reported that Vestia, the biggest Public Housing Corporation in the Netherlands with 79 thousand rental units, had had a margin call of 1.6 billion euros on its interest rate derivative portfolio. Vestia had doubled its derivative contracts to 10 billion dollars (in notional value) in 2010 on a loan portfolio of 6 billion euros. They say they had arranged the extra “coverage” already for potential future loans.

The loan to cover the shortfall had secretly been provided by the fund guaranteeing Public Housing Corporations, the Warborgfonds, since September 2011. Recently Vestia was able to secure a replacement loan from the De NederlandseWaterschapsbank.

According to RTLZ, Vestia's Contract Support Annexes will have to be examined in detail to figure out exactly what the conditions are. The Interior Minister has been promised the results of this examination sometime in March.

Twenty Woningcorporaties are preparing to guarantee Vestia liquidity of another billion euros. They will demand strict conditions on this sum according to NRC. They want assurances that they will not have to contribute to the Centraal Fonds Volkshuisvesting (CNV) so-called reorganization support if any other corporations get into trouble.

It is not entirely clear how many Woningcorporaties have derivative contracts but newspaper Trouw estimates there to be 148 of them. A fall in interest rates of one percent would require 24 to seek additional funding, according to Interior Minister Spies in NOS news. Another 24 on the other hand have been rumoured to be able to withstand this scenario. RTLZ reports that 20 of them have already had margin calls on their derivative products.

It could all lead to a viscous spiral downwards in the sector according to NRC Handelsblad. In fact, four directors of other Woningcorporations anonymously state in Trouw that Public Housing corporations are too lax in offering guarantees to each other through the Waarborgfonds. If the government or the CNV intervenes, it could alarm bankers who will call in all outstanding Vestia loans (NRC). This is not likely according to Vestia mouthpiece Ronald Florisson because the corporation now has enough funding on hand thanks to the winding down of the derivative contracts. Florisson is “very thankful” for the arranged backstop.

Vestia has jacked up the rents for new renters by 9 percent. Several opposition parties are not amused and are going to protest in Parliament this week.

Director Eric Staal left Vestia with a rather unusual golden handshake of 3.5 million euros, allegedly to secure his pension requirements. He had earned 500 thousand euros a year, two or three times the norm for directors of public and semi-public institutions. However this is all being investigated. The PVV (Partij Voor de Vrijheid) is demanding the seizure Staal's Caribbean villa.

Vestia's Advisory Board has recently confirmed that the current director is being paid according to the “Balkenende norm” set by government for the sector. These semi-public servants are allowed to earn 130 percent of a Government Minister's salary, which was 187 340 euros in 2011, plus expenses of 7560 euros. Despite the fact that the salaries of these directors of semi-public institutions have to be published, there are regular scandals in which they have been found to receive much more.

Another noteworthy example of things coming unhinged in the Public Housing sector involves a management company working for one of the corporations. These companies stand between buyers and renters of Woningcorporatie properties and do investment and development work in the sector.

It was reported on 23 February that management concern Redema had had the Owners' Associations savings accounts put into bank accounts in its own name and went bankrupt. It will cost 'hundreds' of families at least 1.5 million dollars. Since more and more public housing is being sold off instead of rented, the whole phenomenon of Owners' Associations is relatively new for many people.

So there is lots of uncertainty in Public Housing these days. The entire Public Housing Corporation sector has loans (I don't believe they issue bonds) outstanding of around 85 billion euros, ultimately guaranteed by government. According to writer Peter Verhaar at nuzakelijk.nl, Standard and Poors rates the sector “extremely strong”. Verhuur argues that the problems are largely due to Public Housing having undergone a fake privatization.

Undertheradar's goal is to give an impression of the state of economics, finance and politics in the Netherlands and compare it to its partners in the eurozone.

It was only sugar water anyway. 

Inflation, Dollar devaluation, and war with Iran -- Happy Monday

Gang of Four against François Hollande. The Eurozone is becoming brittle.

Beverages not recommended near this post... 

The pyramid is the strongest structure known to Man. The weakest structure is the inverted pyramid. There is an economic theory called the Exter Pyramid to describe the financial system. It is an inverted pyramid ranking assets by risk. Gold, the safest asset, holds its place at the tip of the pyramid. Riskier assets, such as cash, deposits, bonds, stocks, real estate, non-monetary commodities, etc., take their respective place above gold. When the pyramid gets top-heavy, it has to re-adjust itself by reducing the value of the riskier assets and increasing the value of gold and other less risky assets. Although finding the true value of the total Exter Pyramid for a country is extremely difficult, we can use readily available data from a few asset classes to understand a basic structure.America's basic Exter Pyramid was worth USD 28.4 trillion (CNY 178.92 trillion), including gold. China's basic Exter Pyramid was worth CNY 126.1 trillion (USD 20.02 trillion) including gold. (In the charts above, gold was shown as a negative number for visual effect. The value of gold is based on the official holdings at that time multiplied by the current market price.) If you factor in GDP, the closeness of those numbers seems very odd.

I ask myself everyday: if I am buyer today will I be able to get out of this market safely and without a parachute?

On Friday, we quantified the biggest losers in the case of a sustained oil price shock, and were not surprised to find that the US leads the way with about a 0.9% hit to GDP for every $10 rise in crude prices (compared to about 0.4% for the entire world). Today, via Goldman we look at the flipside and while acknowledging that in absolute terms the world will suffer should crude prices sustain their move higher, there will be relative winners. From GS' David Kostin: "Our oil convergence monitor tracks the relative performance of the Energy sector vs. S&P 500 against the price of oil (measured by the 2-year oil swap). Currently, Energy equities are about 1.5 standard deviations cheaper then the oil price would suggest (based the relationship over the past three years (see Exhibit 4). The divergence has remained stable during the last two weeks although the Energy sector outpaced the S&P 500 by 160 bp during February (5.9% vs. 4.3%). Outside Energy, the Metals & Mining and Engineering & Construction industries show the highest sensitivity to oil prices." What is strange is that the biggest loser by far to an oil shock is the Consumer Discretionary sector, which continues to plough on, completely oblivious of absolutely everything, even as the Dow Transports have decoupled from the broader market, purely in hope that the iRally will continue and lift all boats with it, when in reality every incremental dollar spent for iTrinkets saps the already tapped out US iConsumer even more, with less marginal purchasing power left for other discretionary purchases. Then again, good luck trying to talk any sense into the central bank playground known as the stock market, which will do whatever it wants for as long as it wants, until it doesn't.

With April 15 rapidly approaching, it is time to start thinking taxes once again. Yet do people actually stop to think about what the US tax system really is? And, as shown yesterday, does it even matter any more? After all as was just demonstrated based on cold, hard numbers, the US government has in fiscal 2012 funded deficit spending with 15% more debt (which will sooner or later be monetized by the Fed, as China just sold $100 billion TSYs in December in a harbinger of things to come) than with net tax revenues: should it not just drop the pretense of taxes altogether and fund the entire deficit with debt? After all it is not like it will slow down debt issuance any time in the next 4 years (when it will have $24.1 trillion in debt). For a 90 minute review of all that we take for granted as we sit down with our tax accountants, or with that copy of TurboTax (and in the case of Tim Geithner, push F1 repeatedly), various economists, politicians and industrialists weigh in on the U.S. income tax system in this hour and a half documentary showing how the tax code has grown and changed in response to military conflicts, economic changes and an ever-evolving political climate.

Following up on Peter's summary of the if-then conditional analyses to be conducted concurrently by various classes of Greek bondholders ahead of Thursday's PSI deadline (even as Bingham is rapidly organizing a Greek ad hoc 'holdout' committee to stop the PSI), here is some news that may obviate pretty much everything, and goes back to our warning from January, namely that despite all the sturm und drang, media fanfare, and threats from former Goldman-cum-JPM bankers, the hedge funds will 'just say no' and courtesy of basis packages (yes, the fact that Greek CDS soared to a record 76 pts upfront on Friday indicates more buyers than sellers) hold out for par recoveries in court: they would be idiots (or have a gun at their head) not to do so. To wit from Bloomberg: "Greece may fail to garner enough investors to participate in a voluntary writedown of its debt, Der Spiegel magazine reported, citing unnamed officials at the European Central Bank. A second Greek bailout is partly tied to investors’ agreeing to the writedown by a March 8 deadline." Remember that Germany has made it very, very, very explicit that if the PSI fails, the bailout is off... just as they have planned from the get go.

The situation in Greece should create some big headlines this week. The bond exchange “invitation” is set to expire at 3pm EST on Thursday March 8th. This is the so-called Private Sector Involvement or PSI. Greece has other steps to take during the week, and ultimately the Troika will determine how to proceed with the bailout, but not until the results of the PSI are known. It could be a week of confusing, misleading, and market moving headlines. Figuring out the “proper” reaction to each bit of news will require understanding the terms, and hoping the headlines are accurate – which given how confusing the situation is, cannot be fully counted on. Remember, the original “invitation” from the Greek government was for an amortizing bond, which was then changed to a series of 20 “bullet” bonds, so the level of confusion remains high.

I believe the EUR/USD is going to approach parity within the next year. All the nonsense we've seen in Europe over the past couple of years is going to start giving way to reality, and even with Helicopter Ben's efforts to devalue the US dollar, the Euro is going to do a better job pushing its way down.

There are those who say that while they agree completely with Ron Paul's economic policy of fixing the #1 issue that ails America (as a reminder, total US debt/GDP would only decline under a Ron Paul presidency) they disagree with Paul on his foreign policy. We wonder why when all he does is instead of appealing to the jingoism of warmongers and patronizing the basest of herd instincts, he simply tells the truth. Such as on Today's State of the Union show on CNN when asked if Obama has done "enough" to force Iran to stop its nuclear development via sanctions and others, his reply was spot on: "I think he gets too much involved. I think sanctions gives the motivation for them to want a nuclear weapon. We have 45 bases around them, we can demolish them within hours. And the worst thing the sanctions do, and Republicans and Democrats both support it and the other GOP candidates want war even more, the whole thing is there is a lot of dissension in Iran and we should encourage it by not interfering, once we get involve and threaten to bomb them, it becomes nationalistic - everyone joins the Ayataollah and Ahmedinejad. So there is a blowback - unusual circumstances and unintended consequences. So yes, our people are well-intended, but they don't realize how much damage they do by not accomplishing what they want and causing more harm to us. So our military personnel right now are very adamant not to be involved in a bombing of Iran, it makes no sense whatsoever to our military personnel, to the CIA, even though they are much more interventionist than I am."