Archive - Apr 2013

Goldman Sachs, pillar of ethical honesty in the lead up to the last market top and crisis, appears to be so bullish on leveraged loan and high-yield debt that it prefers to create an entirely separate holding company (that requires less transparency and avoids the Volcker Rule), raise external equity capital, lever up, and use a management team with "no experience managing a business development company (BDC)."  As the WSJ reports, Goldman plans to offer shares in a new unit, Goldman Sachs Liberty Harbor Capital LLC "as soon as is practicable," in a BDC that means it is exempt from the so-called Volcker Rule. The entity also enables Goldman to report less transparently since it qualifies as an emerging growth company under the JOBS Act. Given the richness of credit, and the 'frothiness' in high-yield, is this an implicit option on credit (if credit rallies, profits go up to parent entity; if credit tanks, entity implodes and eats 'remotely' the new equity capital without affecting the bank itself)? Or maybe we are being too negative?

Last week saw a full court press in defense of the current money printing exercise. As we have frequently pointed out, modern-day economic policy is evidently in the hands of utter quacks. It matters little to them that their prescriptions have failed time and again for hundreds of years – they do the same thing over and over again, as though they were escapees from an insane asylum.

We are unsure whether this is the best produced April Fool's Day joke or a real 'new normal' business-plan sprouting from the entrepreneurial ashes of trust-forlorn Europe. No matter which (Monday Humor or sad reflection on the inevitability of a fractional-reserve-banking model gone rogue) - this 120 seconds is worth the price of admission.

If the suffering, yet docile, Cypriot serfs thought deposit confiscation would be the end of their problems under the European feudal system, they are about to be shocked. Because as part of their banking sector bailout, the country is set to get a "loan" from the Troika, a loan which comes with a Memorandum of Understanding, aka a "blueprint for austerity", with dictates terms for government revenue increases and spending cuts (of the variety that nearly caused America's leader to blow a gasket when he was describing the untold devastation that would result if the rate of acceleration in US budget spending dared to be slowed down even by a tiny bit). Today, a draft of the revised Cypriot MOU being prepared by the head of the IMF mission to the island nation, Delia Velculescu, leaked and can be found in its 24 page entirety here. However, for the benefit of our Cypriot readers, here is the important part: the listing of the anticipated austerity tsunami coming, not to mention healthcare system, "pension reform" changes and other proposals the ECB and the IMF are imposing on Cyprus as part of their generosity to keep the recently insolvent country as a well-behaving serf in the Eurozone.

It would appear that between the historical revisions of over-optimistic initial prints in macro data in the last few months and the reality of the weakness in Europe; the global economy is in Slowdown. Goldman's Swirlogram has now seen its Global Leading Indicator in the 'slowdown' phase for two months as momentum fades rapidly and seven of the ten major factors in the index declining with Global (Aggregate) PMI, and Global New Orders-less-Inventories worsening. Quite comically, the three factors providing some positivity are the Baltic Dry Index (which we are told is irrelevant when it drops), Japanese Inventory/Sales (which improved but remains at depression-era levels), and US initial jobless claims (which have become a farce statistically from what we can tell). Of course, none of this macro reality matters for now - until it does that is.

Buy-and-hold is alive and well and living (ubiquitously) in the Vanguard funds, courtesy of Jack Bogle. Invest for the long-term, stay the course, stocks beat bonds over the long-term; he trotted them all out in a recent CNBC clip but then left the permabull host speechless when he noted:

*JACK BOGLE SEES 2 DECLINES UP TO 50% OVER NEXT DECADE

Of course, investors should not wait for these dips to buy (he suggests), as no one can time the markets. Better to hold your nose, feel lucky, and drip-feed your money-on-the-sidelines into something that he suggests will drop by half twice in a decade. It seems someone went a little off script.

For the start of a quarter, volume was very weak today (but to be somewhat expected given the holiday) and despite two valiant algo-driven attempts to save the day, the S&P and Nasdaq ended back below its pre-Cyprus levels. The 'magical' Dow ended only a smidge lower on the day as the 'real' markets were all weak. Builders led the drop today but financials (especially the majors) continue to be monkey-hammered (Citi and MS now down 8% post-Cyprus). AAPL also stood out with its biggest drop in 10 weeks as the 50DMA breakout appears to have foxed many fast-money types. The USD faded on the day but provided no juice for stocks as the JPY strength hurt FX carry. VIX made higher highs on the day - hitting 14% as Treasury yields in general slipped 1-2bps. Gold ended unch, Silver down1.6% and Oil's afternoon strength supported some algos under the S&P. Today's equity weakness appears as much a catch-down from last week's disconnects as a possible reflection of the fact that US macro data has seen its worst 3-day run in 9 months.

Presented with little comment, but for all those calling for multiple expansion to save us from dismal earnings - take a look at this...

A mere nine months after we first discussed the inevitability of Stockton, CA.'s bankruptcy, a judge has ordered today that the city will now become the most populous in the US to be declared bankrupt.

• *STOCKTON CREDITORS DIDN'T NEGOTIATE IN GOOD FAITH, JUDGE SAYS

Creditors are pushing to get the city out of bankruptcy but the judge states that "by any measure" the city was insolvent. So, in summary, yeah, it was broke years ago, it still is broke - despite the best efforts by the Central Planning Reserve to reflate the same housing bubble that was the primary reason for the city's insolvency in the first place. Only this time, it's official!

While most of the western developed economies become more and more centrally planned and creative destruction is avoided at all costs (for fear it will be the straw that breaks the fractionally-reserved, rehypothecated camel's back of the financial system - and therefore sovereign financing); it appears ironic that Russia is playing capitalist hardball with the losers from the Cyprus 'solution'. Russia's First Deputy Prime Minister Igor Shuvalov, announced this weekend, that "if someone gets stuck and loses money in those two biggest banks, that’s really too bad, but the Russian government isn’t planning to do anything in this case." As Bloomberg reports, Shuvalov told reporters last month that Russia may ultimately benefit from Europe’s decision to target deposit holders. By setting that precedent, Europe has cast doubt on the reliability of its banks and makes Russia’s financial system look comparatively more attractive - but is "closely monitoring"  the situation around Russian Commercial Bank, a Cypriot unit of state-run lender VTB Group, adding that VTB's exposure in Cyprus is "absolutely manageable." So, in the new normal, the USA socializes losses but the ex-USSR sticks to its new capitalist roots?

The key point here is that European Crisis is now accelerating right as Germany becomes increasingly uninterested in funding additional bailouts.

In late 2010, in a superficially stunning move, Bank of America was sued by, among many others, the New York Fed over the biggest bogeyman for the bank's balance sheet - its legacy portfolio of super toxic Countrywide mortgages it inherited in the worst M&A deal of all time (its purchase of CFC) and the inheritance of woefully inadequate mortgage issuance standards which ever since then (recall our prediction on this issue) has cost the bank billions in litigiation payments and reserves.  Obviously, the Fed had no concerns about collecting the money it itself creates, and it certainly doesn't care about legality and criminal financial impropriety, so why was it among the list of plaintiffs? Simple: as we suggested back then, and as has since been proven correct, it was simply so that Bill Dudley's henchmen have a first row view of everything going on in the putback litigation that has been the primary concern for BofA, but with a few of keeping the damage to a minimum. Sure enough, Ever since then the Fed has done everything in its power to mitigate potential losses to BofA as a result of Agent Orange selling hundreds of billions in biohazardous mortgages to anyone and anything with a pulse. It has gotten so bad that the Fed was last week caught lying under testimony, forcing the Fed to take back testimony in a parallel lawsuit between AIG and BofA, which has also involved the New York Fed, as a indirect guardian of BAC's cash hoard.

The $13 billion bailout in Cyprus is small (in 2011, France and Germany made $80 billion of loans and grants to developing countries) and as JPMorgan's CIO, Michael Cembalest, notes the situation is in many ways unique. However, he warns, the latest melodrama reinforces the inconsistent and chaotic nature of EU policy-making. Bondholders, equity investors, bank depositors and citizens of Europe are at risk of unpredictable outcomes as they play Eurozone Roulette. Here’s where they might land on any given spin...

As the furor over gun control fades from the front pages - and therefore from politicians need to actively participate en masse - it appears there is a rather large loophole that could change things considerably. As this clip shows, Cody R Wilson, a 25 year old University of Texas Law student, has figured out how to print a semi-automatic rifle from the comfort of his own home. Wilson is an advocate for the open source production of firearms using 3D printing technology and it is forcing the US legal system to catch up and control this new technology. From the constitution to the legal system and from the manufacture and test-firing of 3D-printed gun, this clip is intriguing to say the least.

Update:  Arkansas Hit with Nuclear Accident AND Major Oil Spill