Archive - Sep 26, 2012

Lately, it has become particularly fashionable to bash private equity, especially among those workers in the employ of the state. The argument, in as much as capitalism can be summarized in one sentence, is that PE firms issue excess leverage, making bankruptcy inevitable (apparently those who buy the debt are unaware they will never get their money back), all the while cutting headcount to maximize cash flow (apparently the same PE firms don't realize that their investment will have the greatest terminal value to buyer if it has the highest possible growth potential, which means revenue and cashflow, which means proper CapEx investment, which means streamlined income statement, which means more efficient workers generating more profits, not less). The narrative ultimately culminates with some variation on a the theme that PE firms are responsible for offshoring jobs. While any of the above may be debated, and usually is especially by those who have absolutely no understanding of finance, one thing is certain: when it comes to bashing PE, America's public workers should be the last to have anything negative to say about Private Equity, and the capital markets in general. Why? Because when it comes to fulfilling those promises of a comfortable retirement with pensions and benefits paying out in perpetuity, always indexed for inflation, and otherwise fulfilling impossible dreams, who do America's public pension fund administrators go to? The very same private equity firms that have suddenly become outcast number 1.

Indeed, it is now clear, via QE 3, that the Fed has gone “all in” in its commitment to money printing. QE 2 put food prices to record highs… what do you think QE 3 (which is unlimited) will do to the cost of living?

Yes, it did feel kinda rainy already yesterday with “Purple Rain”.

Total Risk Off close today.

Bad Rain. Bad, Bad Rain...

As the NFL torments it players, coaches, and viewers by playing hardball over 'real' referee earnings, the truth of Monday's blown call is coming out. Courtesy of American Banker, we now know that the referee at the center of the most controversial call of the season so far is in fact a vice president for small-business banking at Bank of America in California. Lance Easley - previously at Wells Fargo, has worked at BofA since June 2011 - (we assume) moonlighting as a referee in the Santa Barbara area (officiating high school and junior college football and basketball games). Well done Lance, you have managed to move from the most-hated occupation (bankster) to the most-hated individual (outside of Seattle) in one weekend. Is it any wonder Small Business confidence and uncertainty is so high?

We warned yesterday that European credit markets were sending very different signals to the equity markets and sure enough today saw a bloodbath across European equity, credit, and sovereign bond markets. Portugal and Spain 10Y spreads are now +46bps wider on the week (and Italy +30bps) with Spain back over 6% yield (460bps spread) and at more than three-week wides. While plenty will say 'but look where we came from' when today's dumpfest is put in context, but the critical aspect is the velocity and severity of today's 3-4% drop in Italy and Spain's equity markets and European banks now down over 9% from their post-FOMC peak (retraced more than 60% of the post-ECB rally). Europe's VIX jumped to over 22% as credit spreads (most notably subordinated financials - thanks to the 'AAA'nxiety over the banking union) were smashed wider. It seems Ben's all-in move was the catalyst to bring a realization that things may indeed be worse than we thought - as sovereigns have blown wider since.

The EU assembly just voted affirmatively to impose a spate of rules to control 'high-frequency-trading that, as the WSJ reports, was advanced by Germany following their concerns that speedy traders have brought instability to markets. It is somehow reassuring that three-years after we first brought HFT to the mainstream's agenda, at least one nation is taking it seriously, doing something about it, instead of being filibustered into the 'liquidity-providing' meme. The rules will initially require registration, collect fees on excessive use of HFT methods, and install circuit breakers with the goals to "limit the risks associated with high-frequency trading" per a senior German FinMin; but the more stringent rules to come will have the greatest impact as they intend to include requirements for orders to rest on the exchange book for at least half-a-second, and potentially order-to-trade ratio caps. Not surprisingly, the HFTs believe a "one-size-fits-all approach would be very harmful." Indeed - to their profits.

Greece is about to default on the investors that funded the bonds that replace the first set of investors that they defaulted on just a few months ago. Get it? Every dollar thrown into Greek bonds at par is akin to flushing money down the toilet.

Just because there may be a word or two out of place here...

What is interesting about this discussion by the Washington Institute For Near East Policy, a Neocon (Globalist) think-tank, is that its primary purpose is not necessarily to debate the current political elements of the Iranian question.  They aren't contemplating the viability or morality of a war with Iran.  Instead, they are attempting to devise strategies by which the government could CONVINCE the American public and the world that a war with Iran is the "right thing to do", even if it means fabricating their own justification.  For them, the war is a forgone conclusion, and they will do anything to make it a reality.

Whether Atwater, California will join the prodigious ranks of Stockton, San Bernardino, and Mammoth Lakes to become the 4th Muni bankruptcy is up for vote on October 3rd (before a $2mm bond payment in November). As Bloomberg notes, the 28,000-strong Merced county town is suffering under the same weight of public employee costs, lost revenue, and a stagnant economy leaving it with a $3.3 million budget deficit. While some put their hope in the FB IPO, perhaps Bernanke should have mandated investment in AAPL for all these municipal comptrollers? The median income is 19% below the national average as the foreclosure crisis - which saw Atwater's median home price drop by more than half - has depleted property-tax revenues dramatically. "We just started negotiating with our unions and they are going to have to take a major cut," Mayor Joan Faul said. "We hope that once we declare a fiscal emergency, that they will realize that we are definitely in an emergency. If they want to save all the jobs, everyone is going to have to take a cut,"

Moments ago, the Census Bureau released the August new single-family house sales number: at 373,000 on an annualized basis, it missed expectations of a rise to 380,000, and was down from a revised 374,000. This is only the second miss in 2012, and confirms that all talk of a housing recovery is misguided, and merely represents one particular segment of the housing market: that of existing home sales where buyers have all cash, are price indiscriminate, and are willing to take advantage of the NAR's exemptions from anti-money laundering provisions. I.e., US real estate is merely a place to park cash for those who have obtained it using questionable means. Looking at the number on a non-SAAR basis reveals that only 31,000 actual houses sold in August, of which 3,000 in the Northeast: surely a reason to keep on bidding up the builders into the stratosphere: fear not, actual sales will come. Eventually. Finally, and demonstrating that rich buyers focus primarily on dumping money into existing mansions, was the distribution of purchases by price bucket, which showed a (Z), or under 500 houses sold, in the $750,000+ category. This was the first time there was a (Z) in this bucket since February.

That high school students, even those who are borderline-failing their SATs, have a better understand of economics and job growth than Washington bureaucrats.

8 days after the rapturous calls of all-in 'Ben's got yer back' so buy-everything (coz retail will support you now and don't forget the beta chase?), the S&P futures have fully retraced the 40 points of S&P spikeworthiness that Ben's FOMC QEternity statement provided. Treasury yields are already notably below pre-FOMC levels, as is Oil; and the USD is higher - as Gold holds gains too but is fading.

The consensus view of China is that the country is imploding due to the collapse of the export sector.  Such arguments make sense.  But they may also be dead wrong. 

Spain’s ten-year bond yield has broken back above 6%. To see Spain’s sovereign bond yields rising like this after the ECB announced it would essentially provide “unlimited” buying as support is simply stunning. And it indicates in plain terms that the ECB’s program was in fact a dud.