Archive - Aug 2013

Catch of the day...

"Efficient" markets in action...

The most financially savvy country and western crooner in America, Merle Hazard, returns with the must-watch release of a new economics chart-topper: "The Great Unwind." As Warren Buffett previously noted, "all over the world, everybody that manages money is waiting to catch the signal that the Fed will reverse course," and this two-minutes of country-music magnificence should concentrate the mind as "we've never had the degree of disgorgement that might be called for down the line, and who knows how it'll play out."

CNBC reports that Ackman, apparently disgusted with the performance of JCP stock, has just sacked the interim CEO, Mike Ullman, he appointed in April and has sent a letter to JCP that a new CEO should be in place in 30-45 days, and also that former CEO Questerom has agreed been approached to return as Chairman. That's all great but we have two questions:

• Shouldn't the next CEO of JCP be really the Chief Restructuring Officer, and as such be appointed by the ad hoc or official, committee of unsecured creditors (aka the post-petition equity)? After all everyone knows how this story ends. And in that regard, we are confident Alix Partners has quite a few retail Chief Restructuring Officers in its rolodex.
• Has Ackman sued Ullman? Considering the petulant hedge fund manager's recent M.O., this would be the logical move.
• Finally, if Ackman is so confident in the retailer, instead of diluting others perhaps he should just invest his entire net worth and prefund the company's cash burn for one more year. After all, what's the risk, right?

That said, providing shorts with a higher point from which to reshort JCP is always a welcome development.

As US equity markets slide notably from overnight highs on the back of JPY carry unwinds, the USD weakness is the EUR's gain and the EURUSD pair pushing up towards 2 month highs near 1.3400. As the pool of global liquidity sloshes away (briefly) from Japan and the US, the dash-for-trash of what is working drives it into the highest-beta European assets. Banks and insurers rallied on the day across Europe. The best 4 equity markets across the EU were Greece (+2.5%), Portugal, Italy, and Spain with UK unch (as investors remain undecided on Carney's new deal) and all this amid a disappointing German data print. Spanish and Italian bond spreads compressed (of course) and notably US Treasuries are outperforming Bunds by around 4bps on the day.

One of the more surprising news to hit the tape yesterday was that Saudi Arabia, exasperated and desperate by Russia's relentless support of the Syrian regime and refusal to abandon the Syrian army thus facilitating the Qatari plan to pass its natgas pipeline to Europe under Syria, had quietly approached Putin with a proposal for a huge arms deal and a pledge to boost Russian influence in the Arab world if only Putin would abandon Syria's Assad. It will hardly come as a surprise to anyone that in the aftermath of yesterday's dilettante mistake by Obama which alienated Putin from the western world (and its subservient states such as Saudi Arabia of course), has just said no. It will certainly come as no surprise because as we explained previously, the biggest loser from Russia abandoning Syria (something we predicted would never happen) would be none other than Russia's most important company - Gazprom - which would lose its energy grip over Europe as Qatar replaced it as a nat gas vendor. What is shocking in all of this is that Saudi Arabia was so stupid and/or naive to believe that Putin would voluntarily cede geopolitical control over the insolvent Eurozone, where he has more influence according to some than even the ECB, or Bernanke. Especially in the winter.

As the Greek Prime Minister, Antonis Samaras, visits the US to promote his nation as a "bastion of stability" in the eastern Mediterranean, things appear to be going from worst to worster in his nation. While 65% youth unemployment is a large and scary enough data point, and Greeks are in open revolt against tax collectors, the uproar over Troika's current demands to lift a ban prohibiting banks from confiscating homes is growing. From the people to the politicians, anger is brewing over the lifting of the ban but the banks (already mired in 27% default rates) are behind the decision to help recapitalize themselves (and are refusing to restructure loans). However, given that Greece has already used 75% of its bank bailout fund and that repossessing and auctioning homes (potentially based on 'social criteria') could cut home prices 12 to 21%... not exactly going to help bank balance sheets; and it would seem Greece will need more caves.

The confused looks on traders faces is the "Taper-On" reaction in stocks (after celeberating last night's false Chinese trade data) as the USD loses steam. Critically, the USD weakness (more usually associated with Taper-off (print-moar-on) is indicative of the ongoing collapse in the JPY-carry trade once again that is gaining momentum as data (and technicals) prompt a Taper sooner than later. US equities are starting to catch down to foreign stocks (and domestic credit), Treasuries are bid (but the Taper?) on safe-haven buying, and gold and silver are spiking as the USD comes under attack.

There is literally no evidence that printing money creates jobs. Look at Japan, they have and continue to maintain QE efforts equal to 40+% of their GDP and unemployment hasn’t budged in 20 years. The UK has engaged in QE equal to over 20% of GDP with no success.

For 50 years, equity markets exuberantly rose relative to Federal Reserve Assets. As post-WWII 'monopoly' production and credit expansion started to ebb (and bubbles were blown) so equity markets began to oscillate at 15 to 20 times their relative value from 1950. However, as the chart below shows, the entire 60 years of history preceding the 2008/9 collapse has been erased as a regime with the very clear picture that the Federal Reserve and the so-called 'US Equity Market' now tied at the hip. No matter how cognitively dissonant one remains that correlation is not causation; and no matter how many BTFATH newsletters one has to sell; after 60 years of moving from the lower-left-to-the-upper-right, something 'changed' when the Fed started printing money.

There is a reason why Italy keeps bailing out Monte Paschi, Italy's third largest, most scandal-ridden and most insolvent bank not to mention the oldest in the world, again and again and again, and which is currently demanding yet another bailout. The reason is presented in the chart below which shows the amount of Italian bonds held by the Italian bank. According to yesterday's earnings release, BMPS' Italian bond holdings just hit an all time high with Monte Paschi buying over €3 billion in Italian sovereign bonds in Q2 alone.

President Obama recently stopped in Phoenix to deliver his latest diatribe on how he is going to fix the economy.  Yes, that is correct, another round of "campaign speeches" that, as has been the hallmark of this Administration to date, have generally wound up mired in an abyss of a broken congressional system.  What really struck me, however, was his comprehensive plan designed to further boost the housing market. Another housing bailout program is the last thing we need. It's time to stop trying to fix what is broken by trying to cure the symptoms rather than the disease.

While the likes of PIMCO, BlackRock, DoubleLine, and Wells Fargo are major RMBS holders, their reasons for seeking a court order to block Richmond, California's Eminent Domain seizure of mortgages are applicable (and should be worrisome) for all US citizens. As we have noted previously, the asset managers warn that the Mortgage Resolution Partners actions will "seriously harm average Americans, including pension members, other retirees and individual savers through a brazen scheme to abuse government powers for its own profit." While the Richmond Mayor stands by her decision, the investors argue that this plan is unconstitutional and discriminatory - sounds just about right in our new normal.

While the utility of initial claims data in a regime dominated by 70% retention of part-time workers and in which even the Fed says the distortion of the labor force participation rate makes unemployment numbers skewed to the downside, those who follow the weekly claims number will be happy (or maybe sad) to learn that there were 333K new initial claims filed in the week ended August 3, just 2K below expectations and 5K above last week's upward revised 328K (from 326K). No states claims were estimated in the past week the DOL reported. The good news: the four-week average fell to the lowest since November 2007. The bad news: this number is hardly horrible enough to send futures soaring.

RIP Greekovery.