Archive - Sep 2013

There's growing speculation that China will soon announce an overhaul of its financial system to address increasing risks from escalating debt.

It’s often argued that they don’t a bell at the top. I would argue that we numerous bells ringing in the financial markets today.

Despite three attempts to defend the company this morning ( 1) forecast, 2) no equity raise, and 3) still paying vendors), JCP shares are fading back from their squeeze highs as the credit markets dismiss all the hope in stocks. With CDS near record wides (implying at least a 60% probability of default), the bottom line remains that cash outflows are as strong as always and now there are no plans to replenish it. The price action does suggest though, as opposed to what management has said, that JCP will attempt a 2nd lien offering (instead of the equity raise) - which would (of course) leave investors questioning management veracity among other things.

Almost 3 years ago we noted the oddly hubris-full confidence of Ben Bernanke of his ability to "exit" from the experimental extreme monetary policies:

"You have what degree of confidence in your ability to control this?" Bernanke: One hundred percent.

But last night we got the truth from Fed's Dudley, who more realistically stated:

Dudley: "Exit from these unconventional set of policies is certainly feasible... But we do have to be a bit humble about what we don’t know."

So which is it? Who do you believe?

First the House passed a spending bill that would avert a September 30 government shutdown, and extending government funding to November 15, however with an Obamacare defunding provision. Naturally, the Senate struck it down, and would propose a clean funding bill ex-any Obamacare defunding provisions, with a funding provision for an additional month. Moments ago, Boehner made it clear that the House is unlikely to accept a clean spending bill from the Senate, increasing the chances of a government shutdown after Sept. 30. "I don’t see that happening," Boehner told reporters at a Capitol press conference. So back to square zero, with Congress nowhere closer to a compromise, a continuing resolution just as unlikely as it was before the latest episode of grandstanding began, and five days left until government shuts itself down.

A few days ago we noted a major Senate demand of the Treasury Secretary that foreign nations' currency manipulations should be punished (supported by American Manufacturers Associations). Today we find out that Eric Holder and his DoJ crew have found that nine Japanese car parts makers have colluded to raise prices. As part of the scheme, more than $5 billion in auto parts were sold to U.S. car manufacturers and installed in cars sold in the United States and elsewhere. The companies will pay more than $1.6bn in criminal fines. Seems like a small price to pay for the Japan being allowed to devalue its currency boosting its own car exports?

Frequent readers will recall that in the past, on several occasions, we expected that MBIA would rise due to two key catalysts: a massive short interest and the expectation that a BAC settlement would provide the company with much needed liquidity. That thesis played out earlier this year resulting in a stock price surge that also happened to be the company's 52 week high. However, now that we have moved away from the technicals and litigation catalysts, and looking purely at the fundamentals, it appears that MBIA has a new problem. One involving Zombies. These freshly-surfacing problems stem from a particular pair of Zombie CLO’s – Zombie-I and Zombie-II (along with Zombie-III, illiquid/black box middle-market CLO’s).  While information is  difficult to gather, we have heard that MBIA would be lucky to recover much more than $400 million from the underlying insured Zombie assets over the next three years, which would leave them with a nearly $600 million loss on their $1 billion of exposure which would materially and adversely impact the company's liquidity.  And as it may take them a while to liquidate assets in a sure-to-be contentious intercreditor fight – their very own World War Z – MBIA may well have to part with the vast majority of the $1 billion in cash, before gathering some of the potential recovery.

When markets break, nobody cares: after all central banks are there to protect everyone and remove all risk. But... what happens when a central bank fail? Just relesed by the BOE: "News Release – Statement from the Bank of England. The Bank has been experiencing some technical IT problems today. There is no impact on critical payment and settlement services. Alternative procedures are in place where necessary. The Bank is acting to resolve these problems as soon as possible."

Is the Syrian electronic army finally getting amibitious and how long until FedLine/FedWire are in danger?

With mere days to go until he unveils the "exchanges", the President is in Largo, MD to explain how great it's going to be... This won't help him:

*DEMOCRAT MANCHIN BREAKS RANKS TO BACK INDIVIDUAL-MANDATE DELAY

Beggars once again have become choosers it would appear. As Bloomberg reports, a Detroit city union is demanding that the bankruptcy judge reinstate a policy that enables a "13th" monthly check to be cut for pensioners every year. The policy, which was ended in 2001, cost the city $1.92 billion, according to a reporty commissioned by the city. We are just not sure whether this an "Onion" headline or real.

For the 3rd day in a row, precious metals have been monkey-hammered lower in the first hour of trading on the US markets... no news, no headlines, no technicals - just good old-fashioned $10 cliff-dives in gold...

4 days to go... and so it begins...

*REID SAYS IT'S UP TO REPUBLICANS TO SPEED BILL, SEND TO HOUSE

US HOUSE SPEAKER JOHN BOEHNER PLEADS WITH REPUBLICAN CAUCUS TO 'BE FLEXIBLE'

Silver’s fundamentals remain very sound, with a very small finite supply of above ground, investment grade silver coins and bars and robust and increasing industrial and store of value demand - particularly in Asia.

We continue to believe silver will rise to its real record high or inflation adjusted high of $140/oz in the coming years.

UPDATE: BATS Halted trading

• *BATS Y HALTED TRADING AT 9:44 A.M., COMPANY SPOKESMAN SAYS
• *BATS Y EXCHANGE EXPERIENCING 'INTERNAL NETWORKING ISSUE'
  

Just 12 hours after NYSE and NASDAQ agree to collude on fixing the "glitches", we get another broken market...

Being bullish on the market in the short term is fine... The expansion of the Fed's balance sheet will continue to push stocks higher as long as no other crisis presents itself. However, the problem is that a crisis, which is 'always' unexpected, inevitably will trigger a reversion back to the fundamentals. The market will eventually correct as it always does - it is part of the market cycle. The reality is that the stock market is extremely vulnerable to a sharp correction. Currently, complacency is near record levels and no one sees a severe market retracement as a possibility. The common belief is that there is 'no bubble' in assets and the Federal Reserve has everything under control.