Archive - 2012

Is idiosyncracy the substitute for a fledgling Sovereign Bond Market?  Including our recommendations for 2012

The once proud masters of the universe are going, going, gone, not with a bang, but a Billy Joel cover:

All I want to do is retire
Cause we're slowly fading
The machines are trading

All I want to do is retire
It's tough to be a broker
When the game is over

Simply put, "it does not last for ever" should be ringing in the ears of every investor in the world with more than a few millisecond return horizon. And neither do any and all chartalist conventions which rely on the articial construct of reserve permanence, for one simple reason - being artificial, means the theory is flawed from the beginning. But it is JPMorgan's Michael Cembalest who frames it the best, "I am reminded of the following remark from late MIT economist Rudiger Dornbusch: 'Crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.'"

Today, at one point in the afternoon, CNBC's Michelle Caruso Cabrera "broke" the new that according to the IIF and its always amusing chairman Charles Dallara, Greece is about a month away from a final, conclusive and this time definitive resolution with its creditors. He punctuated the news by saying "progress has been made." Naturally, a minor detail was overlooked, namely whether the haircut would be 50% as per the Second Bailout, First Amendment, or 75% as Germany is rumored to have demanded recently. Also ignored is any update on whether hedge fund Vega is proceeding to sue Greece or anyone else for cramming the fund down in what ISDA defined as a "consensual bankruptcy." But the main reason why we ignored this news completely, is that as the annotated chart below of Greek bond prices show, this is not the first time Dallara has had encouraging "news" to say about the bankruptcy process. In fact, if bondholders had merely sold the first time the Frenchman had opened his mouth, they would have saved about 70% of their money. Frankly at this point it no longer matter. The only catalyst now is March, by when Europe needs to finalize and fund the Greek bailout's €130 billion or else it is game over for the Eurozone.

Construction trends may be good for incumbents, but for homeowners, banks, and taxpayers, they're costly....

The buck stops here and the votes begin: starting at 7 pm CST, more than 100,000 voters - only a small percentage of the state's electorate - are expected to gather across the state at more than 800 public spots, and cast their votes for their GOP candidate with only three: Paul, Romney and for some unknown reason, Santorum expected to have a fighting changes. Results should begin coming in within a few hours. For those following the caucus for the only important reason: to see how Ron Paul does, or is allowed to do, we have the following live feeds for our readers' disposal.

2011 was an abysmal year for the global insurance industry, which had to cover yet another enormous increase in damages from natural disasters. Unknown to most casual observers is the fact that during the past few decades the frequency of weather-related disasters (floods, fires, storms) has been growing at a much faster pace than geological disasters (such as earthquakes). This spread between the two types of insurable losses has moved so strongly that it prompted Munich Re to note in a late 2010 letter that weather-related disasters due to wind have doubled and flooding events have tripled in frequency since 1980. The world now has to contend with a much higher degree of risk from weather and climate volatility, and this has broad-reaching implications. And critically, it has a particular impact on food.

While not news to Zero Hedge readers who knew about the final debt settlement of US debt about 10 days ahead of schedule, it is now official: according to the US Treasury, America has closed the books on 2011 with debt at an all time record $15,222,940,045,451.09. And, as was observed here first in all of the press, US debt to GDP is now officially over 100%, or 100.3% to be specific, a fact which the US government decided to delay exposing until the very end of the calendar year. We wonder, rhetorically, just how prominent of a talking point this historic event will be in any upcoming GOP primary debates. And yes, technically this number is greater than the debt ceiling but it excludes various accounting gimmicks. When accounting for those, the US has a debt ceiling buffer of... $14 billion, or one third the size of a typical bond auction.

The issue of Germany and its approach to ameliorating the overleveraged balance sheets of its southern neighbors will dictate the direction of sovereign spreads in 2012. The direction of sovereign spreads will also determine the direction of risk premium spreads in the leveraged finance markets— both bonds and loans. Defaults in the leveraged finance market will and should be an afterthought to the systemic risk factors inherent in sovereign and next-of-kin bank credit spreads. Therefore, forecasting default rates should take a backseat to a better understanding of German Kultur and thought that will shape the euro-zone sovereign finance structure in 2012 and beyond. The most recent European Union summit highlighted that we are left with some of the same issues that confronted the great empires prior to World War I—the battle between “English liberalism with its emphasis on individual freedom and self-determination and Prussian socialism with its emphasis on order and authority.”

The catalyst so many have been waiting for, and the nearly 30 million shorts dreading, has arrived. From Judge Eileen Bransten: "ORDERED that MBIA Insurance Corporation’s motion for partial summary judgment is granted to the extent that MBIA Insurance Corporation (“MBIA”) must establish for its claim of fraud that misrepresentations by the defendant(s) induced MBIA to issue insurance policies on terms to which it otherwise would not have agreed and that MBIA is not required to establish a direct causal link between defendant(s) misrepresentations and MBIA’s claims payments made pursuant to the insurance policies at issue; and it is further ordered that MBIA's motion for partial summary judgment is granted to the extent that MBIA must establish for its claim for breach of the Insurance Agreement against Countrywide Home Loans that CHL's breach of warranties in the issued insurance policies' transaction documents increased the risk profile of the issued insurance policies and MBIA is not required to establish a direct causal connection between proven warranty breaches by CHL and MBIA's claims payments made pursuant to the insurance policies at issue, and it is further Ordered that MBIA's motion for partial summary judgment is granted to the extent that MBIA may seek rescissory damages upon proving all elements of its claims for fraud and breach of representation and/or warranty." In short, this is core catalyst that Manal Mehta expected and which BTIG envisioned to justify its $22.50 price target. It is also the judgment that will make Bank of America's case law life a living nightmare going forward (naturally following repeated failed attempts at appealing). Lastly, any and all shorts in the name may have their work cut out for them.

As households are supposedly deleveraging and European nations face austerity, one might suspect that global debt levels were stabilizing or even dropping. Think again. It will likely come as no surprise when we point out that the G-7 nations alone face a massive $7.3 Trillion (with a T) of sovereign-only maturities (and a further $566 Billion in interest payments) in 2012 alone. This incomprehensible number is worsened only in historical comparison as it's current level is 125% higher than was 'expected' at the end of 2010 (and 238% higher than was expected for 2012 at the end of 2009). As Bloomberg points out, Japan tops the list with $3.05tn (equivalent) followed the US at $2.76tn for 2012 as the former peaks in March 2012 (with $678bn due in that month alone) and the latter peaks in this month with January 2012 seeing over $480bn due to mature (and be rolled). But it gets worse for supply - global corporations (dominated by Financials relative to non-Financials), as noted by S&P today, have used the low interest rate environment to modestly relever and face almost $1 Trillion (again with a T) of maturing debt that will need to be rolled in 2012 (with January and March also topping the list) and over $3.1Tn in the next four years. So in the next four years, amid a slowing demand picture thanks to European worries, global corporate debt combined with G-7 sovereign debt maturing is an incredible $18.48 Trillion that will need to be rolled, rehypothecated, and have capital allocated to it (or not).

Writing as someone who was strongly stock-oriented for most of a long investing career, I can assert that at today's low dividend yields, it is difficult to see stocks as strong trees on which to rely. The Smithers parameters provide cautionary evidence for the bulls who point to current "low" price-earnings ratios and "sunny skies almost forever" views of corporate profits and predict stock market returns well above bond yields for years to come.

The biggest FOMC news released today was not the December minutes - there was absolutely no surprise there. The biggest news, by far, is that as we wrote a few weeks ago, the composition of the FOMC voting members changes drastically as of January 1, with Hawks Fisher, Kocherlakota and Plosser now out of the voting rotation, and replacing them will be the gaggle of ferocious doves Pianalto, Lockhart and Williams. In fact the only hawk left in the Fed as of today through the end of the year is Richmond Fed's Jeffrey Lacker who has shown substantial dovishness in the past. In other words, from a rotation of 7 and 3, the Fed is now uber-dovish by a 9 to 1 majority. So does this mean that printing is imminent? Stay tuned and find out in 3 short weeks: the January FOMC statement comes out on January 25. The only good news: Charles "the fire hydrant" Evans is finally out.