Archive - Feb 12, 2013

If you have not already taken steps to prepare for systemic failure, you NEED to do so NOW. We're literally at most a few months, and very likely just a few weeks from Europe's banks imploding, potentially taking down the financial system with them. Think I'm joking? The Fed is pumping hundreds of BILLIONS of dollars into EU banks right now trying to stop this from happening.

While stocks suggest all is well, and anecdotal macro data (seasonally slandered by fiscal cliff drag-forwards and 'weather') might offer hope that green shoots are back; one glance at the following chart of US, Europe, and Asia (ex-Japan) EBITDA tells a very different story. With cashflow clearly barely budging, is it any wonder that companies are creating conservative balance sheets? It sure feels like a recessionary environment...

By bailing out banks and targeting equity prices, the central banks are exacerbating the misallocation of savings/financial capital to historically overvalued corporate equity. What happens when central banks make credit cheap and abundant? All that cheap money chases scarce productive assets. The yields on assets drop, and speculative "risk-on" assets are boosted into bubbles. Even as corporate profits have skyrocketed (does the trajectory look sustainable? up almost 300% in four years?), equity valuations have risen apace, keeping yields at historically low levels. Anyone who claims "stocks are cheap" would do well to study these charts...

It appears the pope did not provide the higher power with an advance notice of his resignation notice as hours after his shocking announcement yesterday this happened to the Vatican.

While on the surface today's $32 billion 3 Year auction was uneventful, pricing at the ZIRP normal of 0.411% (31.53% allotted at the high), just inside the 0.415% When Issued, which means that few if any expect any major pick up in short-term rates above zero for the next three years at least, and at a 3.587 Bid To Cover, just shy of January's 3.623 and right on top of the last twelve auction average, it was the internals that the move was once again apparent, with Direct Bidders (red) once more rising their take down to some 26.9% - the highest on record, or at least going back to 2003, while Indirects ran away taking down just 18% of the auction, likewise a record low in the past decade of the 3 Year's history. The rest, as usual, belongs to the Primary Dealers, who will promptly transform said collateral, and what they don't see back to Bernanke, will be used as dry powder to expand the S&P multiple even more, and buy what ES they don't already own. Because, for now at least, in the immortal words of Chuck Prince, the music is still playing...

Four good reasons to move all food and beverages away from the computer right now! 

It is now clear that Abe and his pals are all-in on the reflation strategy - albeit scorned in their unilateralism by the G-7. Stocks (and oil prices) have surged as the JPY plunged - but things are getting even more critical in the land of the rising sun. The retail investor is all-in too; individual investors’ share (cash transactions only) has risen sharply to 34% - the highest level since June 2009; the combined trading value of the seven major internet brokerages expanding 86% MoM to ¥19.5tn in January, marking the highest level since April 2006; and aggregate margin trading at the seven online brokerage firms has doubled from ¥7.3tn in December 2012 to ¥14.3tn in January 2013. Retail, according to Goldman, tend to focus on low price, small cap stocks - as if the markets' relative beta was not enough. If the BoJ was hoping for a M.A.D. situation - it appears they have it as retail is now fully (and levered) exposed to Abe's endgame (let's just hope energy costs don't crush that dream).

Now that Enterprise Products Partners LLP has let the cat out of the bag that less than a month after expanding the Seaway pipeline capacity to 400,000 barrels per day, The Jones Creek terminal has storage capacity of 2.6 million barrels, and it is basically maxed out in available storage. 

We have long held the machinations of The National Association of Realtors (NAR) up to some ridicule. As many will note, we ignore every NAR data release due to the fact that it is certified guesswork (at best) as per the massive periodic revisions that just so happen wipe out all prior year gains. We also suspect a darker side, as the NAR, courtesy of its anti money-laundering exemption, is simply a middleman allowed to close its eyes as dirty money is ferried into the US and specifically its real estate market. But former Fannie Mae chief credit officer Ed Pinto digs a little deeper into the real driver behind the NAR. For 90 years the NAR (and its predecessor organization) has supported expanding the government’s role in housing finance. Today, the government guarantees upwards of 90 percent of all new mortgages. It is easy to reconcile the NAR’s interest in home ownership and its support for the expansion of the government’s role in housing finance. In Ed's research he has not come across a single instance where the NAR has stated that lending standards should be tightened. To the contrary the NAR has almost always called for loosened lending standards and continued or increased government involvement, no matter the market conditions.

As debate about currency wars heats up, there's been little talk about which currencies will prove safe havens. We think the Singapore dollar tops the list.

Just under a year ago, when JPMorgan's London Whale trading fiasco was exposed as much more than just the proverbial "tempest in a teapot", Morgan watchers were left scratching their heads over another very curious development: the dramatic surge in the company's reported VaR, which as we showed last June nearly doubled, rising by some 93% year over year. Specifically we said that "in the 10-Q filing, the bank reported a VaR of $170 million for the three months ending March 31, 2012. This compared to a tiny $88 million for the previous year." JPM, which was desperate to cover up this modelling snafu, kept mum and shed as little light on the issue as possible. In its own words from the Q1 2012 10-Q filing: "the increase in average VaR was primarily driven by an increase in CIO VaR and a decrease in diversification benefit across the Firm." And furthermore: "CIO VaR averaged $129 million for the three months ended March 31, 2012, compared with $60 million for the comparable 2011 period. The increase in CIO average VaR was due to changes in the synthetic credit portfolio held by CIO as part of its management of structural and other risks arising from the Firm's on-going business activities." Keep the bolded sentence in mind, because as it turns out it is nothing but a euphemism for, drumroll, epic, amateur Excel error!

Selling snake oil and issuing unbacked paper currency are not so different. They're both wildly successful ploys for the guys pulling the strings. And they're both complete scams that depend solely on the confidence of a willing, ignorant public. But once the confidence begins to erode, the fraud unravels very, very quickly, and the perpetrators resort to desperate measures in order to keep the party going. In the case of fiat currency, governments in terminal decline resort to a very limited, highly predictable playbook in which they try to control... everything... imposing capital controls, exchange controls, wage controls, price controls, trade controls, border controls, and sometimes even people controls. These tactics have been used since the ancient Sumerians. This time is not different.

Concerns about the devaluations and the growing risk of a severe bout of inflation have led to calls for a return to fixed exchange rates and a gold standard. Bloomberg’s Trish Regan and Adam Johnson interviewed TCW Group’s Komal Sri-Kumar and Bank of New York Mellon's Michael Woolfolk about the risks from currency wars on Bloomberg Television's "Street Smart." Trish Regan asks whether there is a danger that “we have massive inflation worldwide for years to come?” The answer is yes and both agree that inflation is a real risk as is a loss of credibility by central banks.

Just when you thought you had heard it all - from Spanish politicians to Italian bankers - along comes the CEO of Italy's Finmeccanica. Giuseppe Orsi has been arrested for his alleged involvement in a bribery to ensure the Italian aerospace company got the order for Indian military helicopters in 2010. The $750 million deal, as reported by the WSJ, is now under investigation by the Indian defense minister but is not the first such 'bribery scandal' for Finmeccanica - whose CEO generously offered to step down if the Italian government (which owns 30.2% of the firm) asks him to. The share price plunged over 8% and was halted as analysts suggested - rather remarkably - that this might make it harder for Finmeccanica to compete for contracts in an already difficult market in which governments are cutting back on military spending. The sad truth appears to be that, whether pandemic or recently driven by a tougher economic environment, fraud runs deep - and its just a matter of time before it comes out, especially with the election so close.

Just because Europe is such a vast and open democracy, where nobody keeps secrets from anyone, it is only logical that Mario Draghi's visit to Spain, where he spoke to domestic lawmakers in the Congress, would be shrouded in secrecy so stringent and oppressive, that all forms of electronic communication were purposefully killed ahead of the speech.