Archive - Feb 2013

It appears that the authorities have finally caught up with the infamous LAPD vigilante, who is now engaged in a shoot out with the police in the Big Bear area. Follow his last stand at the following CBS newsfeed live. A separate stream from the inland CHP can be found here.

Another low volume, low range, low average trade size day in stocks as recent high (stops) were run again with FX markets ruling the day in terms of volatility. The G-7's initial statement fell on deaf ears , after Draghi's early comments (on a higher EUR implying a stable Europe) pushed the USD lower against EUR, then the restatement rallied JPY and that USD weakness provided further support for US equities. New highs in the S&P (though not in the Nasdaq as AAPL slumped 2.5% because Tim Cook didn't unload all his cash into shareholders high beta pockets). Homebuilders saw their biggest gain in almost 8 months before pulling back a little in the afternoon. Oil prices continue to rise and Treasury yields bled higher (though 10Y remained below 2.00%). Gold and silver limped higher (along with the USD) after Europe's close. Credit markets (CDX) jumped tighter today (especially IG) after dislocating for the last few days - and HYG outperformed - as we suspect the credit-equity arb has become too tempting. Will SOTU be a catalyst for a pullback - VIX sure didn't think so as it dropped 0.3 vols to 12.6 - its lowest close in 3 weeks.

Those who traded credit in the frothy days of 2007 will recall that virtually every piece of new paper, including LBO debt, would come to market with the skimpiest of creditor protections, i.e., "covenant lite" which to many was an indication that money was literally being thrown without any discrimination in the last epic chase for yield, just as many were preparing for the imminent market backlash. Which they got shortly thereafter. Judging by the amount of covenant lite loans issued in 2012 as a percentage of total and compiled by Brandywine Management, which just surpassed the credit bubble frenzy of 2007 at more than 30% of total issuance, the bubble in credit is now well and truly back - a job well done Federal Reserve, just 5 years after the last credit bubble.

Count alongside Spain's economy minister as the IMF instructs him how many trillion in bonds the Spanish pension fund will have to buy before the IMF finally bails out the country.

Moments ago, and a few hours ahead of the president's State of the Union speech, the FMS announced (with a 20 minutes early leak), that in January the deficit of the US government was in fact a surplus of some $2.883 billion, better than the expected $2 billion deficit. This was the first January surplus since 2008, and was an improvement on the already impressive $1.191 billion deficit from December, which in turn brings the total fiscal year to date deficit to $290 billion. On the surface this would be great news as it indicates that tax hikes are having an impact on the US budget surplus, but of course, a quick glance below the surface reminds us that January was the month during which the Treasury was forced to raid the various government retirement funds to fund operations, and otherwise operate under the debt ceiling, which was only hiked in the last days of the month. And another glance indicates something fishier: while December and January combined resulted in a surplus of some $1.7 billion on the book, a quick glance at the total US debt over the period, shows an increase of some $137 billion in the same time period (or at least through February 4, when the accurate debt picture was once again revealed). In other words, while the US government was arguably generating funds from operations over the past two months and thus did not need a single penny in outside funding, debt soared.

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.