Archive - Jan 10, 2013

We already posted Howard Marks' most recent letter in its entirety previously, but it bears reposting a section from Art Cashin's daily letter which focuses on one segment of Marks' thoughts, which is especially relevant in light of today's most recent comment from one Warren Buffett - a person who very directly benefited from the government/Fed's bailout of the banking sector in 2008 - who said that "Bank Risk No Longer Threatens U.S. Economy." The same banks, incidentally, who are TBerTFer than ever. An objective assessment or merely yet another example of the "handcuff volunteerism" (not to mention crony hubris) Marks touches on? Readers can decide on their own.

Have you ever felt powerless?  That no matter what you do it just won't make ANY difference.  You cast your vote for people to represent your best wishes but are repeatedly let down.   What can you possibly do? This is a great video from Larken Rose that clarifies the problem that we face today in our economy. It is a situation that is just too weird for 99.99% of the people to adequately explain. No commentary is needed.

The credit markets this week already look very different to how they ended last year. As BofAML's Barnaby Martin notes, beta-compression, flatter curves and credit outperformance versus equity have all been abundant themes of late. Relative value is still there, when one looks closely, but is unfortunately not what it used to be. He adds that "things in credit have started to feel a lot like 2007 again," and while he believes the trend is set to continue (though slower) and the liquidity-flooded fundamentals in the high-yield bond market have been holding up well, it is trends in the leveraged loan market, that continue to deteriorate, that are perhaps the only canary in the coal-mine worth watching as global central bank liquidity merely slooshes to the highest spread product in developed markets (until that is exhausted). The rolling 12m bond default rate among European high-yield issuers fell to 1.8% in December, whereas loan default rates rose to 8.5%. With leverage rising, the hope for ever more greater fools continues, even as everyone is forced into the risky assets.

The market has completely forgotten about the cliff (i.e., sequester and other, if any, spending cuts), about the debt ceiling, about the drag on the economy from the payroll tax increase, about central bank currency warfare, and is now fully engrossed by the hedge fund war between Ackman (and possibly Chanos, certainly Tilson) vs Loeb (and possibly Icahn) over the valuation of Herbalife: $0 or $60. Which is why today's HLF "analyst day" investor presentation - whose sole purpose is to refute Ackman's 300+ page monster accusing HLF of being a pyramid scheme - may be the most discussed event by carbon-based traders.

At the height of the financial crisis in 2008, Deutsche Bank made some extraordinarily large bets. As the WSJ reports, documents uncovered from the Libor rate manipulation investigation show huge outsized bets that would swing EUR68 million on a 1bps shift in the Libor rate that they have since been charged with manipulating. Sure enough, with regards the risk (which was large enough to be brought to management's attention), officials "dismissed those concerns because the bank could influence the rates they were betting on."

Initial claims came, saw and missed for the 4th week in a row, printing at 371K, on expectations of a decline from 372K to 365K. As happens at the end of every year when employers turn on the pink sheet machine, the not seasonally adjusted number soared from 490K to 552K in the week ending January 5, a difference to the seasonally adjusted print of 181K. This is to be expected. What was unexpected is that the last week print saw its first downward adjustment in what seems years (it actually is years), with the December 29 week claims number declining from 372K to 367K, probably as a result of all the year end guessing that goes on to assist the other guessing that goes into the seasonal adjustment guessing. In short: everyone is guessing. States that saw a surge in layoffs in the week ended December 29 were MI (+15K) and PA (+12K) due to "Layoffs in the manufacturing industry", and  "Layoffs in the transportation, construction, food and beverage manufacturing, and metals industries." Finally those claiming extended benefits plunged by 76K in the last week of 2012, putting further pressure on the strength of the US consumer. Overall a report that confirms that 6 years after the start of the Depression, propped by some $15 trillion in central bank reserve liquidity injections the bulk of which has been used to prop stock markets, there is still no actual improvement in the economy.

Last time around, Draghi hinted at a fresh round of rate cuts. Nothing happened. In today's press conference, he will likely hint at it again, and nothing will happen once more: for now the ongoing threat of a Spanish bailout (now in its 6th month) has pushed Spanish 2 year yields to the lowest level since 2010, which means the ECB is safely out of the picture for a while, or at least until the Spanish social security funds runs out of all cash to buy Spanish bonds. Only then, will the ECB be forced out of hibernation.

Judging by ongoing momentum moves in various European stock and bond market indicators, one could be left with the impression that something in the continent is actually improving. And while hope of improvement is certainly be high, the reality is vastly different as confirmed by the just released Greek unemployment data, which saw the broad unemployment rate soar to a fresh record high of 26.8% in October (24.1% males, 30.4% females - that's nearly one in three), up from a pre-revision 26.0% in September, and up from 19.7% a year ago, the youth (15-24 age group) unemployment rising again to a new all time high of 56.6% (up from 56.4%), and the ratio of those employed (3.68MM) to unemployed (1.34MM) plunging to a record low 2.75x. At this rate it may well hit 1.00x quite soon. But even sooner, perhaps in a few months, the total number of inactive workers (3.34MM) will surpass all those who are working. In short, the Greek collapse is just getting worse and worse.

No change from the ECB as expected, and despite a hint by Draghi last time that the governing council may cut rates, it did not. The boredom continues until 8:30 am Eastern when Draghi takes the podium and resumes his rendition of Greenspan.

• Obama Picking Lew for Treasury Fuels Fight on Budget (BBG)
• Deutsche Bank Bank Made Huge Bet, and Profit, on Libor (WSJ)
• Spain Beats Maximum Target in First 2013 Debt Sale (BBG) - In other news, the social security fund is now running on negative?
• "Icahn is also believed to have taken a long position in Herbalife" (NYPost) - HLF +5% premarket
• Lew-for-Geithner Switch Closes Era of Tight Fed-Treasury Ties (BBG)
• Turkey Beating Norway as Biggest Regional Oil Driller (BBG)
• Greek State Firms are Facing Closure (WSJ)
• Draghi Spared as Confidence Swing Quells Rate-Cut Talk (BBG)
• China’s Yuan Loans Trail Estimates (BBG)
• SEC enforcement chief steps down (WSJ)
• CFPB releases new mortgage rules in bid to reduce risky lending (WaPo)
• Japan Bond Investors Expect Extra Sales From February (BBG)

The main macro event today will be the interest rate announcement by the ECB due out at 7:45 am (with the Bank of England reporting earlier on its rate and QE plan, both of which remained unchanged as expected, which will remain the case until Carney comes on board) which is expected to be a continuation of the policy, with no rate cut despite some clamoring by pundits that Draghi should cut rates even more. Overnight, we got Chinese December trade (better than expected) and loan (slightly worse than expected) data, coming in precisely as a country which has a new communist politburo leadership implied they would. Of particular note was that the US has now replaced the EU as the largest Chinese export market: what happens when the euro weakens even further? But at least the net benefit to European GDP as a result of declining imports will, paradoxically, help. Elsewhere, Spain auctioned off more than than the expected €4-5 billion in its first 2013 auctions of 2015, 2018 and 2026 bonds, sending the 10 year SPGB yield to under 5%, or the lowest since 2010, a process driven by expectations of a Spanish bailout. Thus the incredible odyssey of Schrodinger Spain continues, whose interest rates are improving on hopes it is insolvent. Fundamentally, things got better nowhere, with Greek unemployment rising to 26.8% in October from 26.0% previously, while bad loans in Italy soared by 16.7% Y/Y to €121.8 billion, while loans to businesses dropped at the fastest pace ever. And so the scramble to offset the trade and economic collapse of Europe using central bank tools continues.

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