Archive - Feb 2010 - Story

Read the following from Goldman's Jim O'Neill, take two tablets of hopium, and first thing tomorrow use REDI to buy 10 times your net worth in BRIC stocks - buy indiscriminately - they are all going up, up, up. Also don't forget to buy some Man U leaps. After all with a hundred years of momentum behind you (and billions of dollars spent in lobbying to preserve the status quo) it is not as if something new can ever come out of left field (both literally and metaphorically). At least Goldman's permabullish analyst has had the chance to read the Goldman Monthly FX Analyst report, which substantially dropped its $/BRL 3/6/9 month targets from R$1.60, R$1.65 and R$1.75 to R$1.75, R$1.85 and R$1.90. O'Neill notes: "it does appear [theReal is] overvalued" Needless to say, we were looking forward to this happening for quite some time. And as much as Goldman touts the BRICs, we are confident that our own creation, the STUPIDs, will be getting much more airtime over the next decade.

The bond deal that was so very much rumored was going to get done in mid (and at most late) February, never really took off. The reason: with each passing day, investors (what little is left of them) are demanding a greater and greater premium, as the country now has less than 3 weeks of cash left at the current cash burn rate. And this is before even counting for €16 billion in maturities coming up through May. According to BusinessWeek the most recent expected benchmark pricing is in the 7%+ range: anything below that likely will not price.

It is not often that one finds smoking gun reports which refute all claims, such as those by EuroStat and Angela Merkel, in which the offended parties plead ignorance of the fiscal inferno raging around them, kindled by lies, deceit, and blatant mutually-endorsed fraud, and instead, now facing themselves in the spotlight of public fury, put the blame solely on related party participants, such as, in a recent case, Greece and Goldman Sachs. Yet a 2001 report prepared by Gustavo Piga, in collaboration with the Council on Foreign Relations and the International Securities Market Association, not only fits that particular smoking gun description, but the report itself was damning enough of another country, a country which used precisely the same off-market swap arrangement to end up with an interest expense of LIBOR minus 16.77% (in essence the counteparty was paying Italy 16.77% of notional each year as a function of the swap mechanics), in that long ago year of 1995. The country - Italy (for confidentiality reasons referred to in the report as Country M), was at the time panned as the Enron of the European Union due to precisely this kind of off-balance sheet arrangement by the Counsel of Foreign Relations. The counterparty bank: unknown (at least in theory, since the swap was highly confidential, and was referred to as Counterpart N), but considering the critical similarities in the structuring of the swap contract to that used by Greece in 2001, and that ISMA cancelled Piga's press conference discussing his findings out of fear for the academic's life, we can easily venture some guesses as to which banks value their recurring counterparty arrangements more than human life.

I would suggest that the long-term interests of the Eurozone are better served by denying Greece a bailout, even if it means that Greece withdraws from the Eurozone and, in the process, weakens the euro significantly, say, from the recent $1.35 – 1.36 level to
$1.20. A weaker euro would actually be quite popular in export-oriented Germany, and be generally welcomed in the entire Eurozone as enhancing the competitiveness of the region. Also, inflation is currently well below the ECB’s preferred level of around 2% allowing room for any inflationary consequences of a euro depreciation to be manageable. Second, absence of a Greek bailout would lower the
risk of moral hazard inherent in Portugal and / or Spain following in the same path if Greece does receive a bailout. Despite the temporary weakening of the euro that might result from, say, Greece’s departure from the Eurozone, the emphasis on fiscal health
would have a beneficial impact on the medium-term course of Eurozone inflation and of the euro itself. - TCW

Those banana-hugging Germans strike back, and by doing so, throw the rotten apple of the imminent Greek collapse straight into America's back yard: in today's edition of Handelsblatt, German politicians have said that only the International Monetary Fund is the right institution to save Greece from going bankrupt. While the increasingly irrelevant Greek rumor-spreader has been very busy over the past few days, getting Greek newspaper Ta Nea to announce that now Caisse des Depots has entered the KfW bailout syndicate, in an interview with German TV station ARD, Merkel said that not only is this yet more gibberish but that there is no legal basis for any of the rumored actions. So what will happen to Greece? Well, if former ECB Chief economist Otmar Issing has his way, Greece's dirty laundry will end up being washed by American taxpayers, because you see Greece is just as much a member of the IMF as it is of the EU, or so the Germans claim.

Portfolio has prepared a useful interactive map highlighting America's increasing split between the haves and the have nots based on city of residence. Case in point: the wealthiest city in the US according to Portfolio, Newport Beach, has more than a quarter of its residents making over $200,000. On the other end of the spectrum is Reading, PA, whose 80,000 residents have an average per capita income of $14,120 (of half the national average), and none makes over $200,000. And a stab at New Yorkers - with a median household income of just $31,245, and "just" 6.9% of households making $200,000, Mike Bloomberg's city ranks a distant 60th in the list of wealthiest cities.

With February over, and the equity market just slightly down MTD, the January weakness in equities has finally spilled over to High Yield, where we are flowing in a see of red. This was to be expected considering the two nearly $2 billion HY fund outflows experienced in February. Below is the complete heatmap for February HY bond price performance by subsector. Each issue is presented on a size relative basis, with the grayed text giving detailed information about any one specific issue, including corporate ticker, one month change, ISIN, Name, Rating, Outstanding, and last price (compared to January 31, 2010, red is lower, blue is higher).

Rep. Paul Ryan slams Obama's healthcare reform in one of the most concise critiques of the proposed plan. Furthermore, he observes some of the critical flaws in the Obama plan, which contrary to the President's frequent appearances on TV discussing the "lies" promulgated about his proposal (and even misguidedly allowing citizens to temporarily rat each other out in witch hunts straight out of the Stazi or Sekuritate playbook), is in fact itself full of - inconsistencies, for lack of a better word.

The NOAA's National Weather Service has provided the following analysis to estimate the anticipated hit times from the time of impact of the Chilean earthquake (3:34 am local Chile time, 2:34 am Eastern). According to this estimate, California will feel any residual Tsunami waves within the next 2 hours, Hawaii has about 4 hours to prepare, while New Zealand - a little less. For those seeking frequent updates, we recommend the following Hawaii Tsunami Information website.

Concerned that some of you might be backsliding into pure nihilism, it is good to keep the mind open to possibility and responsive to opportunity. Here is a attempt to grasp what the world is really like: evolving, unpredictable, full of data that requires constant translation but instantaneously changes context. My thesis is simple: in the age of electrons as trillion dollar transactions, the printing press is irrelevant.

We will never become dependent on the kindness of strangers. Too-big-to-fail is not a fallback position at Berkshire. Instead, we will always arrange our affairs so that any requirements for cash we may conceivably have will be dwarfed by our own liquidity. Moreover, that liquidity will be constantly refreshed by a gusher of earnings from our many and diverse businesses. When the financial system went into cardiac arrest in September 2008, Berkshire was a supplier of liquidity and capital to the system, not a supplicant. At the very peak of the crisis, we poured $15.5 billion into a business world that could otherwise look only to the federal government for help. Of that, $9 billion went to bolster capital at three highly-regarded and previously-secure American businesses that needed – without delay – our tangible vote of confidence. The remaining $6.5 billion satisfied our commitment to help fund the purchase of Wrigley, a deal that was completed without pause while, elsewhere, panic reigned. We pay a steep price to maintain our premier financial strength. The $20 billion-plus of cash equivalent assets that we customarily hold is earning a pittance at present. But we sleep well. - Warren Buffett

Even Goldman's clients are increasingly challenging the firm's unrelenting bullish outlook: David Kostin says: "Our view that S&P 500 earnings will approach prior peak levels in 2011 represents a key argument supporting our bullish view on US equities. However, it remains the single most contentious point in our recent meetings with both the micro and macro investors. Separately, 10% of S&P 500 sales originate in Europe. Stocks with high revenue exposure face headwinds and should lag the broader market."

Crude oil broke through the $80 a barrel ceiling repeatedly during the week but kept falling back as hedge funds placed big bets on the Euro’s decline. The fiscal drama in Greece held global markets hostage much of the week as worries about the impact of the Greek crisis on the euro outweighed comments from Federal Reserve chairman Ben Bernanke about continued low interest rates in the U.S., pushing the euro down against the dollar and damping crude prices. The euro recovered some ground on Friday amid new reports of European aid for Greece after falling to a nine-month low of $1.3440 on Thursday. Germany’s state-owned bank KfW may take part in a planned Greek bond offering next week, according to market reports.

I've been under the weather for the last few days. So last night I went to sleep early, around 11pm. Around 3:15am, I suddenly woke up, even though I usually sleep straight through until the dawn. There was no obvious reason to wake up at such an odd hour. Claire, my dog, was sound asleep. Out my window on the 15th floor of my building, all the buildings across from the Los Leones golf course were quiet. But I was wide awake. So finally, I decided to make the best of it—I got my laptop and surfed the net, wide awake, reading (of all things) about what the iPad might mean to newspaper publishing—when the earthquake hit. - Gonzalo Lira

Despite expectations elsewhere that speculators may be unwind their Euro short exposure, the CFTC's Commitments of Traders report indicated that for the week ended February 23, futures only speculative shorts hit an absolute all time record of -71, 623, an increase in net short exposure of over 12k compared to the Feb 16 position of -59,422, a massive 20% week over week increase. Another observation: the fans of the JPY are declining materially, with net longs collapsing by 12,195 positions, to just above breakeven, at 1,717. The GBP was the second most hated currency in the past week, with a net positioning of -64,647, an increase in net shorts of 5,409 weekly. The only currencies, which saw net long positions were the AUD (+11,989 to 38,992 and the CAD 4,996 to 28,421), and, of course, the dollar, whose aggregate positioning in nominal terms increased by 20%: from $8.14 billion to $10.28 billion.