Archive - Apr 18, 2012

The following sentence captures, better than anything, the sheer sociopathology, and the epic unprecedented delusions of a failing central planning bureaucrat:

• Angela Merkel is not happy that financial markets have not made any contribution to resolving the financial crisis -RTRS
  

Yes, this is precisely the same as the dealer complaining that the junkie not only demands more, but refuses to get clean. Here's a hint: "financial markets", crowded out entirely by central planners such as you, now rely exclusively on you, dear Angie, to "solve" the financial crisis. And will do so more and more, the higher this particular chart goes (danke Bundesbank).

We discussed Bob Janjuah's must-read perspective of the market just over a week ago and his appearance on Bloomberg TV this morning reiterates that strongly held view that we are in midst of central bank anarchy and the rules of the game continue to change. While earnestly admitting his miss in Q1, on the back of under-estimation of just how incredibly un-independent central banks are (and will be proved to be in an election year), the bearded bear goes on to confirm his view of short term 10% correction in the S&P 500, a mid-year recovery on Bernanke's bowing to Obama's pressure, and ultimately back to S&P 500 in the 800pt range (and Dow/Gold to hit 1). Dismissing the don't-fight-the-Fed argument with analogies from 2007's 'you have to dance while the music is playing' and the tick-tick-boom carry trades that so many funds and investors follow now, he reminds the interviewer and the audience of how quickly all the trickle of carry gains are lost and then some when the music stops. Must watch to comprehend how smart money is comprehending the ultimate game theory of today's central bank largesse and the clear non-self-sustaining recoveries in global economies.

According to the latest OPEC data, Saudi Arabia, which in its own view, is some endless pool of easily retrievable crude, yet which Phibro's Andy Hall, as well as leaked confidential docs, claim is nothing but one big lie, pumped a record 9.834 million barrels per day, an increase of just 24K barrels from February's total (based on secondary market data, not direct communication). While we salute Saudi's peak production, which has never crossed over the 10 MMBPD level, we wonder, just how and where will Saudi get the 25% extra spare crude capacity needed to fully replace Iran's embargoed oil, which however continues to flow. Or it does at least according to Iran - oil production rose in February and March, if just redirected: India and certainly China (which is currently adding to its strategic reserves as pointed out here some time ago) are delighted to buy excess Iran production. Based on secondary market sources, Iran production has declined from 3.46MM BPD to 3.35MM BPD: hardly much of an "embargo" impact.

It appears that after months of abuse for their water-is-wet economic insights, the San Francisco Fed may have stumbled on to the cold harsh reality that this post-great-recession world finds itself in. The crux of the matter, that will come as no surprise to any of our readers, is credit and "its central role to understanding the business cycle". Oscar Jorda then concludes, in a refreshingly honest and shocking manner that "Any forecast that assumes the recovery from the Great Recession will resemble previous post-World War II recoveries runs the risk of overstating future economic growth, lending activity, interest rates, investment, and inflation." His analysis, which Minsky-ites (and Reinhart and Rogoff) will appreciate - and perhaps our neo-classical brethren will embrace - is that the Great Recession upended the paradigm that modern macro-economic models omitted banks and finance and this time it really is different in that the 'achilles heel' of economic modeling - credit - cannot be considered a secondary effect. His analysis points to considerably slower GDP growth and lower inflation expectations as he compares the current 'recovery' to post-WWII recoveries across 14 advanced economies - a sad picture is painted as he notes "Today employment is about 10% and investment 30% below where they were on average at similar points after other postwar recessions."

Back in early February, long before anyone was too worried that French socialist candidate Hollande may win the French presidential election (after all the market was soaring on the fumes of a still ramping LTRO 1+2 effect, so why worry), UBS George Magnus penned a must read analysis of the macro implications what a Sarkozy loss would mean for Europe in "As Falls Sarkozy, So Falls Europe: The Full Story Behind The Upcoming French Election" which with 4 days to go until the first round of the French presidential election, is certainly worth a refresh (especially for Frau Merkel who will be roundly humiliated after backing the losing horse). And yes, it is only 4 days as UBS is kind enough to remind us. UBS also reminds us that, as strategist Stephane Deo believes Hollande has a 75% chance of winning, the french equity market is at substantial risk, as a Hollande victory is not priced in, even as noted earlier, it is starting to seep into the credit market where French CDS jumped over 200 bps for the first time in 4 months. To wit: "The bond market may force the government’s hand if they don’t start walking the walk on debt  reduction. Plus, while we don’t think that France is as troubled as Spain, it’s not priced for election disruption." But that is the big picture. Below we present a summary matrix which breaks down the various Hollande proposals that may propel him to become the next French president (and think that if it wasn't for a certain hotel maid, DSK would be days away from the French presidency), as well as their implications on various micro items.

Crony capitalism arises when an expansive Central State dominates the economy. The Central State can then protect crony-capitalist perquisites, cartels, quasi-monopolies and financialization skimming operations of the sort which now dominate the U.S. economy's primary profit centers. If we step back, the larger context is the purpose and role of establishing a State to protect its citizens from foreign and domestic predation and exploition. The Central State is granted the sole power of coercion by its membership (citizenry) to protect the membership from the predation of individuals, concentrations of wealth and other subgroups seeking monopoly. They grant the State this extraordinary power to insure that no subgroup or individual can gain enough power to dominate the entire membership for their private gain and to protect freedom of faith, movement, expression, enterprise and association. Granting this power to the State creates a risk that the State itself may become predatory, supplanting the parasitic elements it was designed to limit.

Maybe we can call today bad loan day: earlier today the Bank of Spain announced that Spanish bank loans, already rising in a rather disturbing diagonal fashion, have surpassed 8% of total for the first time since 1994. Now it is Italy's turn, where we find courtesy of ABI, that gross non-performing loans, aka bad-debt, has just reached €107.6 billion, or 6.3% of total, and the highest since 2000, not to mention a doubling of the 3.0% in June 2008. It gets worse: as Reuters reports, while domestic deposits in February rose by a heartening 1.6% in February, it is foreign deposits that confirm that not all is well with the country's financial system, declining a whopping 16% in February y/y, and the 8th consecutive monthly decline, a chart which resembles that of Greek deposit outflows. The reason why Italy, like all the other peripherals, is now a ward of the ECB? Simple: "Net funding from abroad stood at 182 billion euros, down 32.5 percent year-on-year." And if there is no external money, the Central Bank will need to save.

Three rings...count 'em. Or, are those jail cells? New emails show MF's General Counsel Ferber desperate to get Corzine in front of Gensler and keep the zombie Corzine Trade alive.

The Centre for European Policy Studies published their own findings this week and they estimate that the Real Estate accumulated overhang is actually almost $500 billion which equates to 59% of the IMF revised projections for Spain’s GDP. The EU and the ECB may not mandate that the Spanish banks have to mark-to-market in the normal fashion but a quick calculation indicates that the equity of the major Spanish banks is well into the red and past the blood line of any sustainable position. In my opinion, I would state, that the Spanish banks are in fact bankrupt and are only still alive given the financial shenanigans of how Europe allows the numbers to be calculated. I am well aware that many in Europe do not like to be confronted with the truth and that the stock market in the United States is so myopic that they wish to ignore the truth but the numbers are right in front of your nose if you care to look and reality has a funny way of catching up with the markets and reminding them one still equals one in the end. I am an adherent of the Greater Fool Theory and the trick is to let the other guy be the Greater Fool and not one of us. The “when” is unknowable but the “if” is behind us now and I suggest great caution.

DO IT! DO IT!

The campaign of Barack Obama in 2008 was a perfect example of the propaganda pageant, complete with visceral slogans like “Hope” and “Change”.  After eight years of the clownish George Bush Jr., when our country spiraled down into a state of disturbed and vicious adolescence, people were looking for a renewal.  They were looking for a path away from the edge of the abyss.  Instead, they were given a better liar, with a brand new costume.  The American Dream has become harder to sustain since…to say the least. In 2012, what I see is like a lightning bolt in slow motion.  I can sense it branching out across the sky towards the ground and tearing through our surroundings, upending everything we know.  Both the President and Congress have some of the lowest approval ratings in history.  The question of whether anything can be accomplished through government has been answered for most people with a resounding “no”.  The citizenry is on the verge of total fury. I wish I could say that most have abandoned the fleeting hollow satisfaction of choosing the “lesser of two evils”, but that would not be accurate. 

Aubrey McClendon is no amateur when it comes to shady personal transactions involving his company, nat gas giant Chesapeake: Back in October 2008, just after the financial crisis erupted, he was forced to sell more than 31 million Chesapeake shares for $569 million to cover margin calls generated from buying CHK stock just prior on margin. The company’s stock fell nearly 40 percent the week of McClendon’s share sales. McClendon issued an apology but the company’s credibility with many shareholders suffered significantly. It looks lie the story is repeating itself, only this time the margined security is not company stock, but company loans. As Reuters reports in a must read special report "Since he co-founded Chesapeake in 1989, McClendon has frequently borrowed money on a smaller scale by pledging his share of company wells as collateral. Records filed in Oklahoma in 1992 show a $2.9 million loan taken out by Chesapeake Investments, a company that McClendon runs. And in a statement, Chesapeake said McClendon’s securing of  such loans has been “commonplace” during the past 20 years. But in the last three years, the terms and size of the loans have changed  substantially. During that period, he has borrowed as much as $1.1 billion – an amount that coincidentally matches Forbes magazine’s estimate of McClendon’s net worth." Ah yes, net worth calculations, which always focus on the assets, but endlessly ignore the liabilities (as Donald Trump will be first to admit). But ignore that: what is more notable here is the circuitous way that McClendon basically lifted himself by his, or rather CHK's bootstraps: all the loans are collateralized by his 2.5% working interest in new CHK wells drilled every year. In essence a roundabout way of generating "cash" by hypothecation, and levering into an "upside" corporate case. Should CHK however incur asset impairments, and/or if the current price of gas stays at or $2.00, then not only will CHK be gutted but so will the asset quality securing the private loans to the CEO, which on top of everything have no covenants ("There are no covenants or obligations in my loan documents or mortgages that bind Chesapeake in any way," McClendon wrote in an email to Reuters.) and thus no stakeholder protections. Is it any wonder then that CHK is getting creamed as of right now as investors are once again reminded that CHK may not quite play by the rules?

The bailout gravy train is slowing and possibly even stopping right at the time when Spain (a REAL problem) is going to start looking for a bailout. So what do you think happens when the ECB chooses to print more and Germany threatens to pull out the Euro… OR the ECB tells Spain it can’t provide any additional funds?

Nothing dramatic here, but the Chairman of the fermentation committee just has that unique flair in explaining things so simply, even an economics Ph.D., a caveman, or the other kind of 'Chairman', would understand...

One of the more peculiar developments this morning was the odd divergence between the Spanish stock market, which was down over 3% at last check, and Spanish 10 Year bonds (that catalytic instrument to get LTRO 3, as all they have to do is rise to 7.50% and all shall be well), which had been green on the day all day, until now. As of seconds ago, the Spanish benchmark bond just crossed back into red territory with the yield spiking from an intraday low of 5.717% early to 5.89%, finally catching up with Spanish CDS which have been wider for a while, now that CDS is once again more liquid and credible than cash bonds... At least until ISDA is called upon to decide if and when a credit event has (never) occurred with respect to Spain. And since contagion feeds on itself, tomorrow's Spanish auction is starting to look more and more concerning.