Archive - Feb 14, 2013

Until last night, United which combined with Continental in 2010, was the nation's largest airline (surpassing Delta which had merged with Northwest some two years earlier). This morning this changed when the previously disclosed merger between US Airways and bankrupt American Airlines, was formally announced. The resulting airline, with some 26% of the market share is now the nation's largest legacy carrier, bigger than United at 19.3%, Delta with 19.2%, and discounted Southwest with 18.2%. Below are some of the key highlights of this brand new airline behemoth. And just like that, taxpayers now eagerly await the bailout of United South-American Deltawest Airlines in 2-3 years: the first Too Big To Take Off airline.

It seems the massive gains and obvious pre-deal trades that we highlighted earlier nudged the SEC off their kiddy-pr0n sites and into action. Via Bloomberg:

• *SEC SAID TO REVIEW POSSIBLE INSIDER TRADING IN HJ HEINZ :HNZ US

But, of course, this is the SEC...

• *SEC HEINZ REVIEW MAY NOT LEAD TO INVESTIGATION, THE PERSON SAID

We await their justification that because no downgrade of the US was conducted by the perpetrator of this glaring insider trade, no charges will be forthcoming.

Starting at around 10amET this morning, the 'markets' began to get a little more odd than normal. The glimpses we got overnight are playing out in FX, Treasury, and credit markets - i.e. they are trading in a notably risk-off mode, recognizing the doubt over economic recovery and perhaps even concerns at the sequester. However, while it may not come as a huge surprise to many, equities have no fear and as bond yields test the day's lows, S&P 500 futures test the day's highs... recoupling on the week. All is well...

The game is called “Name That Insolvent Banking System.” The way you play the game is by trying to guess which the countries whose Bank Assets to GDP ratios are in the below chart. There are only seven countries and I’ll tell you that they’re all western economies in the developed world.

With central banks sponsoring their own (and each other's) bond markets, and every financial entity owning its own and each other's bonds, Santelli pops his lid over the Pollyanna business leaders (like Bob Lutz - proclaiming GM's European business is troughing because Goldman Sachs is buying European bonds) are pointing to market-based bond prices as indicative of optimism and that economically the worst (must) be over. "Forget the wall of worry, this is the wall of weakness", Rick rants, and the interconnectedness of global markets now means if Goldman is right (as we noted yesterday) that Treasuries are 200bps rich then how does that reconcile with growth that is just bumbling along as evidenced with today's GDP prints from around the world (and surging unemployment). Just what is the Fed going to do to save the world this time? - buy $160bn more per month if we see global weakness restart? How do traders react to slowing global growth? Buy Treasuries? Indeed, the good is bad but bad is better meme seems back and being a trader is, as Rick notes, nigh on impossible.

The series of tragic European self-immolations continues, this time from Rome airport in front of hundreds of people, where moments ago Sky News reports, a 19-year-old man from the Ivory Coast, due for deportation, set himself on fire. From Sky: " The 19-year-old man, from the Ivory Coast, doused himself in petrol and set himself on fire in front of dozens of travellers and workers at Fiumicino airport, 10 miles west of the Italian capital. Police said he arrived at the departures area of the airport's terminal three with a deportation order, and had been due to leave Italy. But as he spoke to police he suddenly pulled out a plastic bottle of petrol, tipped it over himself and ran off through the terminal. Officers gave chase, but he then used a lighter to ignite the fuel in front of stunned passengers.... A spokesman for the Italian Refugee Council confirmed that the man had arrived in Italy from Holland earlier this week and had tried to claim asylum but had been denied and was ordered out of the country. He had been due to board a flight to Amsterdam when he set fire to himself. The spokesman added: "One can only imagine the desperation and frustration he must have faced to carry out such an act." He had been due to board a flight to Amsterdam when he set fire to himself. The spokesman added: "One can only imagine the desperation and frustration he must have faced to carry out such an act."

Many were looking at today's $16 billion 30 Year bond auction to see if the same weakness that was exhibited by yesterday's tailing 10 Year would repeat. This did not happen, and in fact today's auction, concluding this week's offering of paper, was probably the tamest of the lot. With a When Issued trading at some 3.185% at 1 pm, the high yield of the auction came inside the WI, at 3.18% with 85.2% allotted at the high. The Bid To Cover also did not indicate any particular weakness, as the 2.74 B/C, just a fraction below January's 2.77, was well above the 12 month trailing average of 2.61. More importantly, unlike the Indirect weakness seen in this week's prior auctions, Indirects took down 36.4% of the offering: nothing to write home about, but also better than the 12 TTM of 34%. Directs were responsible for 14.5%, which left 51.2% for the dealer. Finally, while the pricing yield was the highest since the 3.23% seen in April of 2012, at this point what happens at the long end is largely meaningless, as the marginal buyer is virtually non-existent. Recall that as the Treasury itself said, "In Feb 2013, Fed Will Buy 75% Of New 30y Treasury Supply." And that is all that matters to quell concerns of any great rotation in or out of bonds.

Because “there’s no difference in the taste”

As always happens when central planning is involved, when one tries to stop a leak here, two new leaks appear elsewhere. Because while the Homeowners Bill of Rights managed to grind foreclosure activity to a halt in California, what is happening elsewhere is the dreaded Boomerang Foreclosure phenomenon, or, said simply, redefaults. In other words, those homeowners who tried to take advantage of the most recent housing bubble mania created over the past year by the unholy trinity of the Fed (open-ended liquidity, REO-to-Rent programs, and $40 billion in monthly purchases of MBS), foreign buyers (who launder illicit money courtesy of the NAR's anti-money laundering exemption and park it in ultra luxury US real estate, usually sight-unseen) and of course, the banks, who with the aid of the robosigning fiasco and the Homeowner Bill of Rights, have over the past year subsidized the housing market by keeping non-cash flow generating mortgages on their books in exchange for a wholesale subsidizied rise in housing prices, ran out of cash before they could flip the "hot potato" that is the house they just bought, to a greater fool, and since they had no actual cash to pay the mortgage with, and with no fear of retribution, handed it right back to the bank. As the chart below shows, while California foreclosure activity is collapsing, things in other places are starting to indicate that the second housing bubble blown by Bernanke in 5 years, is finally starting to crack:

Optimism it seems is all that matters (or is all that is allowed) as we are battered by dismal data left, right, and center. Of course, a reflection on the markets tells any 'smart' person that it all must get better - or why would stocks or sovereigns, or EURUSD be where it is? However, the 6 out of 10 15-24 year olds in Greece (61.7% to be exact) would beg to differ with that view of the world (as their economy grinds to a halt) - and with Spain reaching new highs at 55.6% (as well as the Euro-zone over 24%), all the bureaucratic lip-service in the world won't stop the revolt that is coming we fear.

It’s Valentine’s Day – a unique combination of Hallmark Holiday, celebration of romantic love, and source of self-loathing angst, all depending on your personal situation.  And in that Rorschach test located in the local drugstore’s greeting card aisle, ConvergEx's Nick Colas finds some useful lessons about investing and economic development.  Most divorced Americans remarry, for example, within four years of the end of their first marriage.  Any surprise that investors are looking to hitch up with stocks again, some six years after that messy divorce in 2007?  More scientifically, the brain functions of people in love use the same bits of the cranium as we all light up when assessing the pros and cons of a given investment.  “Don’t fall in love with your positions” is good advice. A central observation to a lot of Nick's work: investing isn’t any different from many of the other decisions we make in our lives.  Love, heartache, winning investments, losing positions – it matters not.  Our decisions in life all filter through the same personality. There’s an old saying: “What does every bad relationship you’ve ever had share in common? You.”  More optimistically, all the good ones have the same feature.

It seems the mere opening of the US equity markets is enough to spark renewed excitement over the fact that Europe's GDP data must be troughing right - or Japan's? Whatever it is, Silver (and gold) is getting monkey-hammered as Stocks surge on negligible volume... FX markets not so much; Treasuries not so much; credit not so much; Oil not so much...

When even a "bond king" says the stock market is broken, is it not time for "the retail investor is coming back" cheerleaders to finally throw in the towel?

Gross: After open, stock mkt doesn’t move ‘til close. Very strange. Fast trades clipping .01’s but little risk taking. New form capitalism

— PIMCO (@PIMCO) February 14, 2013

The ongoing message from the mainstream media, analysts and most economists is that the economy has turned the corner and we are set for substantially stronger growth in the coming year.  While that sounds great on the surface the economic data has yet to hint at such a robust recovery.  What is worrisome is that CNBC has started using the term "Goldilocks economy" again which is what we were hearing as we approached the peak of the market in early 2008.  As David Rosenberg pointed out in his morning missive: "Maybe, it's just this:  so long as there is a positive sign in front of any economic metric, no matter how microscopic, all is good.  After all, you can't be 'sort of in recession' - it's like being pregnant... either you are or you are not." The bottom line is that ex-artificial stimulus, and other fiscal supports, there is little in the way of an economic recovery currently going on.  In order for the economy to reach "escape velocity" it will be on the back of sharply rising employment and wages which are needed to prime consumer spending.  This is not happening as the the gap between wages and rising cost of living continues to drive the consumer to shore up that shortfall with more debt.  

The European Commission formally endorsed the financial transaction tax agreed to by eleven of the 27 members. The tax will be set at 0.1% for stocks and bonds and 0.01% for derivatives. The tax will go into effect at the start of 2014, by which time the participating countries will give it formal approval.

There seems to be two purposes of the tax. The first is to raise revenue. The EC projects the tax will raise 30-35 bln euros annually where ever and whenever an instrument from eleven is traded. This would seem to block the ability to avoid the tax by moving transactions out of the eleven countries. It reinforces the "residence principle". This essentially means that if some one is a resident of the eleven countries, or acting on behalf of a resident, the transaction will be taxed anywhere it takes place. The other purpose is to deter the high frequency trading, which some officials see as largely unnecessary and potentially destabilizing.