July 11th, 2010
Soccer is a beautiful game; unfortunately, World Cup finals usually are not (today’s in particular) and for an obvious reason: the stakes are just too high. And that is the problem with the world of finance.
Ben Bernanke and Alan Greenspan are in denial, still don’t understand the Fed’s role in creating the credit bubble, and until they do, investors have no reason to trust in paper currencies. You should be restructuring your portfolio to reflect the ongoing economic decline of the West and the rise of the East. Central banks have cut their holdings of the greenback from 70% to 65%, and we could be on our way to 50% or lower. An exclusive Hedge Fund Radio interview with Adrian Day of Adrian Day Asset Management. (UDN), (CYB), (EWZ), (GFA), (EWS), (FCX), (CORN), (POT), (PHO), (AINV), (ARCC).
Tomorrow the Q2 earnings season kicks off, with Alcoa as usual leading the parade. The chart below shows all the S&P stocks that report in the coming week. The key day will be Friday when GE, BofA and Citi all report together. With earnings still expected to post healthy gains over Q2 of last year, it will become increasingly difficult for companies to report the same type of blow out bottom line outperformance that was seen earlier in the year on continuing cost cutting, which is still accompanied by merely tepid revenue growth. If anyone is so confused as to why corporations continue to hoard cash, the record high margins may be a good place to start. CEO are not stupid and know all about the reversion to the mean phenomenon, and are stockpiling cash precisely for that, and for the imminent increase in corporate taxes, whose recent collapse has been a primary reason for the cash stockpile (a topic we discussed first about 3 months ago). Tangentially, for readers who trade across asset classes, in addition to the recurring FX-risk decoupling seen between the carry pair of choice, another notable observation is the recent decoupling between stocks and IG bonds, as represented by the on the run IG CDS index.
Last week’s market rally, in which the prior week’s carnage was reversed, occurred without any major economic or market news and blunted talk of a double-dip recession. What will occur over the next several weeks, however, is a string of major earnings releases with little margin of error, owing to a consistent ratcheting up of expectations in 2010.
China's first trade deficit in many years of ($7.2) billion recorded in March is now a distant memory. The Chinese General Administration of Customs has released June trade data, which confirms that no matter what China does with the yuan, and no matter the amount of posturing coming out of the US and Europe, in their attempts to 'stimulate' an export economy at least in words, the Chinese export juggernaut marches on: the June trade deficit came in at an even $20 billion, on relatively flat imports, and relentlessly growing exports. In fact, after surging by $32 billion in March, imports have remained flat each month at just under $120 billion, while exports have been increasing consistently as month after month of fiscal stimulus has been pushing the domestic export industry to the redline. Indeed, in the midst of a CNY reval, and a complete collapse in the Baltic Dry as excess supply, especially in capesize vessels is causing shipping rates to rapidly hit unsustainable levels, exports to the US and the Europe hit multi year records - the EU came in at $27.2 billion, the highest since the summer of 2008, while the US saw a record number of Chinese exports in the month at $25.5 billion, as well as the biggest trade deficit with China in history (at least according to China) at ($17.7) billion- something tells us Chuck Schumer will not be too happy with this number. Most importantly, total Chinese June exports of $137.4 were, paging Chuck Schumer again, an all time record.
Joe Cassano is a very good liar, which is why it would be so hard to prosecute him for perjury. When testifying before The Financial Crisis Inquiry Commission, the former head of AIG Financial Products kept blending in half-truths with his audaciously dishonest claims, so that the overall effect was nonsensical. For instance, to justify his outrageous claim that, "the books were generally considered fully hedged," he explained that "we were using it basically in actuarial basis ...[so] it's not hedged in the conventional sense." (Translation: The book was never hedged in any sense. Nor was there any actuarial analysis, only a reliance on triple-A credit ratings.) These rhetorical tricks were designed to throw sand in everyone's face. But his tactics seem to have worked. The staunchly unregenerate Cassano framed a media narrative that deflected away from his dishonesty and gross incompetence. Here's a reality check on some of his more ridiculous claims, in order of appearance.
As part of its Commercial Real Estate Project, PIMCO has conducted an extensive overview of opportunities in the U.S. CRE market. In this most perplexing of markets, where if one follows REIT stock prices, a V-shaped recovery is all but guaranteed, PIMCO has a notably less optimistic outlook. Based on the framework of its well-documented "new normal" paradigm, the Newport Beach asset manager is far less sanguine about investment opportunities in the market - in evaluating prospects for the most relevant CRE valuation metric, PIMCO sees a gradual return to 8% capitalization rates. "the market can expect long term cap rates near or above 8%. In this case, even if properties with floating rate debt can successfully avoid defaults in the short term, rising longer term rates will create a floor for cap rates and limit recoveries." On the other hand, extrapolating from current CMBS spreads, the prevailing market expectation is for a current and future cap rate up to 150 bps lower. Which means that as securities backed by existing assets see their cash flows dry out, as all valuable assets get extinguished, the repricing in assorted CRE fixed income securities, and their equity counterpartes in the REIT realm, will likely have a very dramatic downward repricing event in the future.
BP Rumormill Update: Sunday Times Reports Exxon And Chevron Receive Green Light From Obama To Plot TakeoverSubmitted by Tyler Durden on 07/11/2010 18:13 -0400
You know someone is losing (a lot of) money when the heavy artillery of the rumormill department goes into overdrive. According to the Sunday Times, the Obama administration has given its blessing to Exxon and Chevron to consider takeover bids of the troubled major unimpeded. Because obviously any deal in the current environment must first and foremost get the Obama stamp of approval or else the Steve Rattners of the world will be sic-ed on your sorry derriere, and before you know it your equity will be trading above your vendor payables in right of guarantee. It is refreshing to know that the other majors can somehow handicap the outcome of the tens if not hundreds of billions in liabilities that will tie down BP in random lawsuits for decades, and that will make WR Grace et al seem like a PG-13 dress rehearsal for Scores when Lindsay Lohan is in town.
Do you think this will work? I am not sure, but willing to try.
Bank of America Admits To Repo 105-Like Fraud, Even As End Of Quarter Window Dressing Continues UnabatedSubmitted by Tyler Durden on 07/11/2010 11:52 -0400
In what will come as a complete lack of surprise to everyone, Bank of America has officially confirmed it "mistakenly" used Repo 105-type transactions on $10.7 billion in assets, which had been misclassified as sales rather than borrowings, or repos, in the period between 2007 and 2009. As Bloomberg reports, the bank used the excuse that a $10+ billion fraud is simply an rounding error so you must acquit: "Bank of America said the inaccuracies aren’t material and
“don’t stem from any intentional misstatement of the
Corporation’s financial statements and was not related to any
fraud or deliberate error.” We are sure that late night comedians can come with enough material in which a $10.7 billion "mistake" is not material so we will leave it to them, and instead we will ask another question as pertains to the whole end of quarter window dressing theme: namely - why does it continue to this day? As per the FRBNY's public disclosure of Primary Dealer holdings, the week ended June 30 once again saw the traditional balance sheet collapse, with total PD assets as of June 30 closing once again at the lowest level of the entire quarter. This marks the 7th consecutive quarter in which primary dealer assets finished the quarter at or near the lowest exposure during the quarter, and 9 out of the last 10. But it's all fine - according to the SEC mangled rules of corrupt statistics (soon taught at a Princeton University near you), an event that occurs 90% of the time is not at all significant or notable.
Sometimes, when chasing the bouncing ball of fraud and corruption on a daily basis, it is easy to lose sight of the forest for the millions of trees (all of which have a 150% LTV fourth-lien on them, underwritten by Goldman Sachs, which is short the shrubbery tranche). Luckily, Charles Hugh Smith, of oftwominds.com has taken the time to put it all into such simple and compelling terms, even corrupt North Carolina congressmen will not have the chance to plead stupidity after reading this.
As the whole world prepares for years of austerity, now that virtually everyone is aware that sovereign debt levels are unsustainable and the drive to push public sector deficits down has reached a crescendo, one question remains open: what will happen to the private sector deleveraging commenced the world over in the aftermath of the Lehman bankruptcy. Goldman's Jan Hatzius takes a look at this question, and reaches some very unpleasant conclusions. Looking at the closed system of the financial balances of the private sector, the public sector and the rest of the world (i.e., private balance + public balance = current account balance), in which the push for deleveraging in the private sector, the rush to ramp up exports, and the imminent Age of Austerity all signal an upcoming unprecedented "demand shortfall for the economy as a whole", Hatzius concludes gloomily that "given the forces of retrenchment and balance sheet repair, the risks to the growth of aggregate demand?as well as risk-free interest rates?over the medium term are tilted to the downside. Policymakers can provide some relief, but realistically will find it hard to neutralize the headwinds altogether" The economist also looks at what realist fiscal and monetary rabbits are left in the hat of the administration/Fed, and realizes that there is little that can be done to prevent what he dubs a "slowdown" and what everyone else whose bonus isn't tied in with perpetual growth assumptions, a new wave of the Second Great Depression.
A little-known fact which is key to the entire oil spill story ...
Government Trying to Sweep Size of Oil Spill Under the Rug, Just As It Has Tried to Sweep the Economic Crisis, 9/11 and All Other Crises Under the RugSubmitted by George Washington on 07/10/2010 17:21 -0400
Cover it up boys, so no one knows how badly we scr*w!d up...
Another day, another executive forced to refute rumors of his organization's imminent bankruptcy, fueling further speculation that observations of fire may soon follow those of smoke. The head of Portugese Banco Comercial Portugues, the largest private bank in Portugal, Carlos Santos Ferreira, sent an email to his employees saying that text messages by "unscrupulous authors" "claiming the bank is on the verge of bankruptcy, are merely attempting to "undermine the confidence" of the bank and are groundless, and have been reported to the Portguese version of the SEC. Amusingly, Ferreira noted that ordinarily he does not comment on "rumors and hearsay, because this will give them credibility." As Portguese banks have been shut out of the interbank funding market for months, and rely exclusively on the ECB, we can see why the CEO of the BCP may be a little concerned about people being abnormally truthy these days.