Archive - Feb 2010 - Story

In this interview with the BBC's Andrew Marr, Greek Prime Minister George Papandreou makes it clear that Greece has enough cash to get it through another 30 days (and likely less), or to last it thought "Mid-March." While this statement was likely supposed to remove pressure from expectations that Greece will auction off another €5 billion this week, which as we disclosed previously will most likely not happen, this revelation will likely not achieve the required goal. It has been well known for a long-time that Greek bond maturities culminate with €16.7 billion over April and May. Specifically, there is €8.22 billion maturing on April 20. The fact that there is a lag time of at least a month between when Greece should be rolling maturities and actually in need of funding, will likely be taken as a sign of additional weakness, as spending apparently has not moderated by one bit. This means that Greece will now have to raise double the amount as it approaches the funding deadline when taking into account the natural deficit generated between mid-March and April 20. How happy the EU, and Germany in particular, will be with this disclosure will be seen in tomorrow's Greek CDS market.

Ambrose Evans-Pritchard is outstanding in his expose on Europe's increasingly more evident deflationist cul-de-sac, and the ever more obvious L-shaped "recovery" facing Europe. While it has taken fans of the euro currency a mere two short months to not just diametrically change their exposure vis-a-vis the "long" currency of choice, but to allow speculators to build record euro short positions, the question of how America (and China by virtue of its dollar peg) will deal with euro currency that has no choice but to go lower, becomes an increasingly thorny issue. And to further confound deficit worries, recent overtures by the Fed in the form a discount rate hike make it all too obvious that the bond market will likely soon demand a much more substantial "pound of flesh" to fund America's burgeoning deficit. In this context, the threat of increasing rates, coupled with a euro that could reach $1.25 according to Morgan Stanley, and hit a low of $1.10 according to Albert Edwards, makes the policy prospects before the Federal Reserve so much more daunting.

As we head into a new week, one of the bigger development expected out of Europe will be "imminent" launch of a €5 billion Greek bond issue, to prefund some of the nearly €20 billion in maturities expected over the next 3 months. However, bulls who expect this "good news" to force short covering may have to put the champagne on ice. Dow Jones previously quoted the former Public Debt Management Agency head Spiros Papanikolaou (who was replaced by former Goldman operative Petros Christodoulou), "There will be another syndication, most likely 10 years. We will go for EUR3 billion to EUR5 billion and depending on the market reaction it could be more, although a 10-year bond is a bit more difficult" to make their case that the new auction is imminent. Yet it is this very same Papanikolaou, who when quoted by Debtwire, pours cold water all over the bulls plans: "Reports about us imminent issuing a ten-year bond auction are totally inaccurate - there is no truth in it at all." And so the great Greek disinformation sopa opera continues.

A must read paper by Redburn Partners, "Gold War - Gold is money and nothing else", written in November 2007, which due to its extreme prescience on not only the shift of the economy following the bursting of the credit bubble, but being virtually spot on in its prediction on the price of gold, can serve as an sufficiently comprehensive introduction to anyone wishing to get up to speed with the primary forces determining the price of gold and its implications in a fiat-money world (and especially the prevailing current variant in which competitive devaluations galore).

There are several strong arguments within the European Union for NOT bailing out Greece, as well as to do so. One alternative is probably just as likely as the other. But the case for letting Greece default on their debt is gaining traction among European politicians.

Much has been said about the 25 basis point Discount Rate rate hike announced on Thursday. Some suggest that this was fully expected, priced in, and that to the Fed this is merely a technicality which will not impact the Fed Funds rate in the least. Others, such as Macro-Man, take a decidedly more pragmatic approach, and ask the simple question: if it really means nothing, why do it? "He" also goes on to suggest some possible trade ideas as a result of this action: we suggest checking out his post for further information. Instead of speculating what the Fed may or may not do (we doubt even the Fed knows - as Krugman points out, the Fed's action could be a function simply of what political party is currently in charge), we have decided to show a simple comparison of the Discount Rate and the Fed Fund rate over the past 10 years (chart below).

Much has been said lately about the record cash balance on the books of S&P 500 companies (ex. financials- those are a different story altogether). Bullish pundits claim that this money will be used for all sorts of M&A, stock buybacks, expansions, etc., to make the point that companies can't wait to go out spending, so we should all front run them and buy whatever public companies may one day be on the auction block. We decided to take the inverse approach - by looking at the balance sheet and the cash flow statement of the S&P 500 companies (again, ex fins), we have attempted to understand just what the source of all this excess cash is. Listening to any of the permabulls on CNBC, one could easily get the impression that all this newly record cash comes simply from excess revenue which, courtesy of massive layoffs and a collapsing SG&A line, feeds an ever increasing retained earnings line, which in turn goes straight to cash. While this is certainly possible, our analysis indicates that the primary source of cash over the past year has really been a very generous cash "rotating" adjustment in some critical CapEx and Net Working Capital items. Our findings demonstrate that of the nearly $130 billion in additional cash on the books of S&P 500 companies from June 2008, through September 2009, two key sources, net working capital and a reduced capex spend, have generated over $150 billion, meaning organic operations have accounted for a whopping -$20 billion (yes, negative) of incremental cash.

The interest rate swap market is freaking huge and somewhat new (the first interest rate swap was in 1981 between the World Bank and IBM). It is also a weird animal in that its value derives from an offer rate and a bond yield, not an underlying asset. In this sense, they are more like an asset (bondish) than a derivative. The most elemental parts of the economy—government debt and inter-bank markets—converge in interest rate swaps.

A. Joseph Cohen's replacement as Goldman's bullish headpiece, David Kostin, shares the highlights from the Q&A at the GS Global Macro Conference. And also a lot of charts, updated to the prior week.

Presenting a heatmapped performance update of the key issues in the North American CDS universe. While on a week to date basis the vast majority of names turned tighter (blue), for the month of February the majority of names are still wider (red), with the notable exceptions of AIG, TWC, FO, KFT, JWN, WHR, MOT and NWL. The sectors most impacted by derisking are Materials, Utilities and Energy.

The greatest mystery in finance is and always will be what the fair value of gold is. Unlike stocks, where fair valuations are usually based on some multiple of cash income, earnings, or dividends, gold has no inherent dividend, nor a positive carry, and thus value is confined the realm of the intangible. Some pundits have considered the fair value for gold a price which covers the currency in circulation in a given country on a dollar for dollar basis. Others attribute a floating valuation to gold such that is convertible to any asset at a specific ratio, to account for inflation over the ages. Yet others dismiss any valuation attempts outright as hogwash, claiming that gold has any value to it solely due to insane and deluded gold bugs manipulating the gold market ever higher, contrary to the earnest attempts of shorters such as a JP Morgan and Sempra who are merely trying to keep gold priced as fairly (i.e., closely to zero) as possible. Due to the various (and numerous) conflicting opinions, we read the following paper from University of Albany professors Faugère and Van Erlach "The price of gold: a global required yield theory" closely. In it the authors observe that gold is priced to yield a constant after-tax real return related to long-term productivity as defined by real long-term GDP/capita growth.

One aspect of the capital markets that has not seen a comparable pick up in risk and pricing levels as the broader market, has been trading for secondary hedge fund LP interests. Web site, Hedgebay, which is a primary and secondary hedge fund interest auction marketplace, and tracks the prevailing price of LP interest clearance, has released its January data set. After hitting an all time low in December at 79.78% of NAV, average trade prices have picked up substantially and hit 87.93% in January. Yet this is materially below the long-term average in the upper 90s. As Hedgebay says: "While some stability has returned to these markets, most believe the underlying fundamentals have not changed all that much and that the “concept” of credit is still quite fragile." Indeed, the smartest money is still very much tepid when purchasing pieces of one another other. Luckily, with robots, vacuum tubes, and retail momos still precluded from participating in this market, this could be one of the very few truly transparent price discovery mechanisms left. And with the top two strategies trade being the very liquid Relative Value, and Credit sectors, and over half a billion in open interest, it is not possible to make the argument that illiquidity is a major gating factor to getting transactions done.

After a record net speculative short euro (futures) build up in the prior week, with bearish bets hitting -57,152 for the week of February 9 (increasing by -13,411 from the prior week), there were expectations that some of the more timid elements would run for cover. So much for that. The CFTC just released its February 16 COT detail, which showed that net euro shorts climbed once again, hitting a new record "high" of-59,422. This is -30.30% of the open interest. The record net long exposure from May 15, 2007 of +119,538 is a distant memory. The increasing bearishness on the euro was countered with some profit taking on net long yen positions. Net speculative yen longs declined from +22,396 to+13,912 (11.6 of OI).

Yet another blowout day for Goldman Sachs. How much did they make this week? $150 million? $250 million? Puts were blown out 5 days in a row, and even the weak longs in the futures market were chased out with surprise rate hikes, PIIG disasters, and other assorted "convulsions" that sent the ES futures tanking.

Not too surprisingly, now that the old man is loose, he just refuses to keep his mouth shut about the true state of the economy. Also, unlike his interview with Maria Bartiromo, this time he doesn't just walk off the set. Some of the soundbites: "The mortgage market in the US is in trouble. It's totally dependent, heavily dependent on the government participation. It shouldn't be that way. That's going to have to be reconstructed." Another modest proposal from the former Fed chairman - raising the retirement age: "Social Security program should raise the retirement age by maybe a year or so." On the greatest blunder in the U.S. housing market: "Fannie Mae and Freddie Mac were not a good idea in the first place. This hybrid public/private thing sooner or later was going to get you in trouble and it sure got us in trouble big time! So I hope we don't go back to that model." And, lastly, on the most relevant issue at hand - the Volcker rule and defining commercial bank activities: ""The criteria in my mind is, are you meeting a customer demand or are you trading in your own interest? Or are you responding to your customer's demand to sell or buy?"