Archive - May 2012

From around two minutes into this CNBC clip, Marc Faber brings the conversation back into sharp focus. Noting that "whenever everybody focuses on just one thing - Greece and Europe in this case - there are other things that are far more important - such as a meaningful slowdown in India and China - going on that are being ignored". But remaining on the topic of Europe, Faber consistently opines that the next event risk will be the Greek exit - even though Faber suspects strongly that Germany will cave to Eurobonds eventually - as he comments that the longer the delay of a restructuring/default/exit/euro-bonds takes the higher the probability of a gigantic systemic failure. This subject brings up (at around 3:30) an interesting perspective that the European market would be oddly relieved (not plunging 50%) if Greek exited the Euro as there would be some clarity (though Faber adds that bank and insurance stocks would likely be crushed). At five minutes in though, Faber ramps up the rhetoric noting that while stock indices are not performing terribly, there are many economically sensitive (and luxury) stocks that are down very significantly - which suggests to him that the huge asset price run of the last decades in come to an end prompting the question of the day from CNBC's Cramer-stand-in "You're not looking for a recession in the US are you?" Faber, in his calm, thoughtful way responds, "I think we will have a global recession late this year, early next year", to which a stunned Wapner asks for odds (surely 30%, 50%?) of this recession - "100% certainty" comes the reply to leave Wapner throwing in the towel on any positive spin as Faber suggests the only 'investment' in this case is 'Cash USD' and investors must own some gold.

Best if read in the context of the "Nigeria gets out of Dodge" post from earlier.

If according to S&P recently nationalized Bankia is junk, what does that imply about Spain?

Whether it was Captain America's roadshow or Uncle-Sam 'wanting' your help, the US always seemed to maintain some semblance of class when propagandizing its citizens into buying its government bonds. Whether for patriotic or xenophobic reasons, it appeared to work. Japan, though, with its increasingly desperate demographic situation, deficits, downgrades, and well, general malaise of Koo/Keynesian-stuffed economic stagnation has turned to the next best thing - the all-girl band AKB48. As The Telegraph notes today, the all-female pop group will headline a summer campaign for "reconstruction bonds" aimed at financing projects in regions hammered by last year's quake-tsunami disaster. The debt campaign will see AKB48 - comprising about 90 performers, ranging in age from early teens to mid-20s - joined by sumo wrestling's champion Hakuho and female football star Homare Sawa, Japan's Jiji press agency reported. The group's bubblegum pop and synchronized dancing has proved a huge hit with young girls. Perhaps more disturbingly (and why Japan chose them maybe?) - running the gamut from girl-next-door to sultry temptress, the band also has a substantial male following - many of whom are older - who support a vast merchandising industry. Japan has the industrialized world's worst public debt, amounting to more than twice its gross domestic product - topping hard-hit eurozone countries including Greece, which have drawn fire from foreign investors over their fiscal management. All of this makes us wonder - Forget AKB48, how long until AK47 in musical, or primarily otherwise, format is used to encourage lending to sovereigns all around the "developed" world?

Aside from Spain (-0.3%) and Greece (-11.8%), European equity markets are ending the week green - albeit marginally - as we can only assume the hopes and prayers of every banker are being discounted into the price of corporate liabilities (an 'event' will happen but don't worry as the ECB/Germany will cave). Corporate and financial credit markets also ended the week tighter - with financials the high beta players on the week, hugely outperforming on Tuesday but fading into today's close. Today was not a pretty end to the week in credit though as both sovereigns, corporates, financials, all peaked early in the day and pushed to near their lows by the close. Senior financial bond spreads actually closed wider on the day - at their wides - and Spanish sovereign bond spreads exploded over 35bps wider from earlier tights to end at theu widest since April 1995. Italian bond spreads also jumped 32bps wider from their morning tights but end the week -9bps and France gave back almost half its sovereign bond gains of the week today. EURUSD remains the story, breaking below 1.2500 for the first time since early July 2010 as it seems the FX markets remain much less sanguine of the endgame here than do equity markets (with sovereign credit getting closer to FX's world view and corporate credit closer to equities but fading today). Europe's VIX remains above 30% (though our VIX-V2X compression trade is performing well as US VIX elevates).

Yesterday, when looking at recent naval developments in the Arabian Sea, we suggested that things involving Iran had gotten quiet. Too quiet. It appears that it may indeed have been the lull before the storm. Just out from Bloomberg and Reuters:

• IAEA SAYS URANIUM PARTICLES ENRICHED UP TO 27% AT FORDOW SITE, HIGHER THAN REPORTED LEVEL
• IRAN DOUBLED 20% URANIUM OUTPUT IN QUARTER, IAEA SAYS
• IAEA INSPECTORS SAY NO GUARANTEE ALL NUCLEAR MATERIAL PEACEFUL
• IRAN TELLS INSPECTORS THAT 27% URANIUM A TECHNICAL GLITCH

As a reminder, Uranium enriched over 20% is considered "Highly Enriched." The only question we have is whether the enrichment level will increase the closer we get to the November presidential election, and whether there is a threshold rating in someone's popularity, pardon, in the enrichment level, which will trigger the Iranian invasion by one or more powers, now that WTI is safely in 9X handle territory and sliding.

That much of the "news" is artifice and propaganda is a given. How can a society make good decisions about its future when the "facts" such as the unemployment rate are massaged and manipulated, and so many of the "reforms" are simulacra designed by the very wolves supposedly being tamed? Answer: it can't. The same question can be asked of a society in which the "editorial" side of the mainstream media is dominated by an "Argument Industry" that pours gasoline on every conflict and avoids solutions like a vampire avoids the Cross and garlic. Finding solutions would decimate the "Argument Industry" and slash profits. That leaves us with the same question: How can a society make good decisions about its future when every challenge is conflated into extremes that cannot abide compromise or even recognize "outside the box" solutions? Answer: it can't.

It seems the clarion call for central bank intervention to save us all is growing louder as following Citigroup's imploring letter earlier in the week, SocGen has done its homework on the impact of a Greek exit from the Euro and finds Euro Stoxx could drop by 50% under a contagion scenario. They believe the reason why the eurozone market is holding up relatively well - despite the rising risk of a Greek exit - is that contagion has not really spread yet, which is then 'discounted' away based on expectations of a central bank put to save the world. In the case of a disorderly break-up (the only kind there can be realistically in our view), they expect eurozone profits to decline for two years, a rise in bond yields (raising cost of funds), a rising equity risk premium, and the implicit drop in P/E multiples. A Greek exit alone (with no contagion) would likely knock 10% off Euro Stoxx but the significant rise in correlations across the euro-zone suggests the idiosyncratic becomes systemic very rapidly.

When Nigeria, yes "spam email Nigeria", is getting out of Dodge, it's game over. From Bloomberg: Nigeria May Reduce Euro Holding to Minimize European Risk.

We have nothing to add.

Remember when Jamie Dimon told the world the CIO stories were a "tempest in a teapot" during the firm's Q1 conference call the very same day we accused the CIO of being the world's biggest prop desk (aside from the Fed of course) and that the JP Morgan was merely "hedging" its positions? It appears that just like Vegas, it's the lie that keeps on giving. Because as it turns out in addition to being a massive undisclosed loss leader courtesy of 'unlimited downside' CDS pair trades (anyone remember DB employee Boaz Weinstein?) which have yet to be unwound, and which may have a total book loss of up to or over $31.5 billion as explained before, that was merely the tip of the prop-trading iceberg. The WSJ reports: "The JPM unit whose wrong-way bets on corporate credit cost the bank more than $2 billion includes a group that has invested in financially challenged companies, including LightSquared Inc., the wireless broadband provider that this month filed for Chapter 11 bankruptcy protection. The group within the CIO doing the distressed equity investing is known as the Special Investments Group. Whether it should be part of the CIO in the future is something that Matt Zames, who was put in charge of the CIO this month after the losses were disclosed, is evaluating, according to a person familiar with the bank. He is also examining whether the bank should keep some of these investments, the person said... The Special Investments Group last year took a $150 million stake in closely held LightSquared, in a deal that J.P. Morgan lost money on, according to a person familiar with the bank." But, but, surely they were hedging their offsetting position in er, uhm, non-satellite, telegraph stocks? In yet other words, an SIO within the CIO... once again Wall Street's only value added shines through - baffle them with acronym-based bullshit. And of course, everyone is busy hedging, hedging, the firm's other positions... Or not: as these are pure play directional prop bets. And all are funded by, you guessed it, your deposit dollars. Which one day will go boom, when JPM suffers a loss so large that not even the Fed bails them out any more (Jon Corzine anyone?).

No comment necessary, but a reminder that for a market pricing in LTRO, QE, China Easing (or Cheasing), good news is truly horrible news.

We will only learn about currency risk exposures as and when the creditors disclose same to investors.  In the meantime, we’ll have lots of fun watching media spin their wheels over the game of “find the risk”

There's been a lot of hand-wringing about busted Initial Public Offerings of late, but the process itself is hardly rocket science.  Like Tolstoy's comment about families, every "Happy" IPO is essentially the same, while every miserable one is different in its own way.  There are rules to the successful IPO, and today we offer up ConvergEx's Nic Colas' manual, a step-by-step checklist for investors to assess if an offering is on track.  From maintaining the illusion of scarcity to managing company and investor expectations, the road from salesforce "teach-in" to final pricing is narrow but well-marked.