Archive - Mar 25, 2010 - Story

They gave us the “Minsky Moment.” Its sequel was “Shaking Hands with the Government,” followed by “the New Normal.” As you may know, these are Pimco’s pithy phrases used to describe the investing world as they view it. The first two were notably accurate narratives of what was occurring and how investors should respond. The jury remains out on “The New Normal” since it is a longer term prognostication. Why are we focusing on the etymology employed at Pimco? Unbeknownst to us, in his March commentary, Bill Gross unveiled the latest catch phrase, “Unicredit Bond Market.” Gross explained that “If core sovereigns such as the U.S., Germany, U.K., and Japan ’absorb’ more and more credit risk, then the credit spreads and yields of these sovereigns should look more and more like the markets that they guarantee.” Anyone who has been paying attention in any financial market the past two days will recognize that this trend, which has been developing around the globe over the past several months, has come home to roost in the United States as the 10 year swap spread has inverted. - Mike O'Rourke, BTIG

The 30 Year is yielding 4.76, the highest yield since June 2009, after spiking by 16 bps in the last two days.4.77% is a resistance level, which may be broken as soon as today's 7 Year auction is completed in 15 minutes.

Headlines - awaiting confirmation of US bailout of Greece

FRANCE, GERMANY GREECE DEAL SUBMITTED TO EU PRES. VAN ROMPUY

FRANCE SAYS HAS REACHED ACCORD WITH GERMANY ON GREECE AID: AFP

GREECE 10-YEAR SPREAD 15BP TIGHTER VS BUNDS AT +314BPS

GREECE 10-YEAR SPREADS TIGHTEN ON REPORTS FRANCO-GERMAN AID

In the recent multiple expansion run up, one of the largely ignored factors has been the dramatic rise in corporate margins, be they Gross Profit, EBITDA, Net Income or unlevered Free Cash Flow. Of course, all this has been a function of massive cuts in corporate overhead as most companies have laid off the bulk of their workers, resulting in a seemingly stronger bottom line. In the meantime, assorted stimulus programs by the government have prevented revenues from crashing, thus boosting EPS, on both a historical and a projected basis. We demonstrate the dramatic surge in margins by scouring through the S&P 500 companies over the past 3 years, and question just how sustainable this margin pick up is. As more and more analysts predict that future margin expansion is sure to drive the market higher, we can't help but wonder 1) with stimulus benefits expiring and excess liquidity approaching an inflection point (especially in China) who will keep the top line strong, 2) as companies are forced, as a result, to hire more workers in order to drive sales, how will operating margins maintain their stellar performance, and 3) how will a decline in margins be justified from a multiple expansion standpoint. Lastly, we parse through the thoughts of William Hester of Hussman funds, who has some very critical observations on this very relevant topic.

As always terrific trading insight from one of those refusing to drink the Kool-Aid Art Cashin

When historians sort through the rubble of the Fed (and capitalism in general), Thomas Hoenig's dissent to Ben Bernanke's lunacy will stand as the only strand of rationality that could have prevented the collapse. Too bad he is, as he himself points out, all alone. Some critical, and mostly ignored by the Fed, comments by Kansas City's Fed Thomas Hoenig, from an interview the Kansas City Fed President gave to Fox Business News yesterday.

Disclosure from Bernanke in cross by Ron Paul. We are now at $2.3 trillion. The withdrawal of excess $1.3 trillion in reserves will kill the pursuit of risky assets.

Big sell-off yesterday in Treasuries had a lot of people puzzled about whether this is the start of more or just a one off. At the start of the year my call was for higher rates, but stressing that we would not move massively higher an instead just test the high end of the range in yield (low end of the range in futures). Here are the key levels to watch as we approach. - Nic Lenoir

Overnight the dollar weakened materially across all major pairs. Over the past hour, the dollar has surged, going back to virtually unchanged against the euro despite Greek rumors reaching a crescendo. In the meantime, stock correlations have once again broken down, with FX vol leading to no trends whatsoever in the broader equity market, causing increasing headaches for momentum traders.

"A good friend, and long-time reader, was kind enough to pass along these thoughts yesterday. Basically, the stars are starting to align for something really big to happen...Bottom line: Stronger U.S. dollar. Rising bond yields. Lower commodity prices. Slower growth. And the stock market is flirting at post-crisis highs. Bond yields are rising temporarily and this will very likely prove to be a good buying opportunity; however, over the near-term, higher yield activity may well persist and the question is how the equity market is going to handle this backup in market rates. Recall that the 10-year yield had a March to June 2007 spike of 90bps before the rate and credit collapse took hold in the back half of 2007! Could it be that history is rhyming again? The March-June period has been seasonally weak for the Treasury market in five of the past six years." - David Rosenberg

The ECB is finally realizing that Greece will be a major issue for years if not decades to come. Which is why Jean-Claude Trichet finally put the debate of whether his bank will accept BBB- rated collateral beyond 2010 to rest. The answer is yes. This also takes out Moody's ridiculous A2 Greek rating out of the equation: finally Moody's can vote with its conscience. "It is the intention of the ECB's Governing Council to keep the minimum credit threshold in the collateral framework at investment grade level (BBB-) beyond the end of 2010. In parallel, we would introduce, as of January 2011, a graded haircut schedule, which will continue to adequately protect the Eurosystem." Considering how well the Eurosystem has been protected to date, we can't wait to see just how well this experiment will play out.

"In sum, in response to severe threats to our economy, the Federal Reserve created a series of special lending facilities to stabilize the financial system and encourage the resumption of private credit flows to American families and businesses. As market conditions and the economic outlook have improved, these programs have been terminated or are being phased out. The Federal Reserve also promoted economic recovery through sharp reductions in its target for the federal funds rate and through large-scale purchases of securities. The economy continues to require the support of accommodative monetary policies. However, we have been working to ensure that we have the tools to reverse, at the appropriate time, the currently very high degree of monetary stimulus. We have full confidence that, when the time comes, we will be ready to do so." Ben Bernanke. Too bad the Chairman will not add that time will not come until the US finally implodes.

So far the commingling between financial and political forces has passed without many glitches both domestically and globally. This is starting to change. We read in Newser that the "Indonesian's parliament called for a criminal investigation into a $715 million government bank bailout." In addition to Indonesia president Suslio Bambang Yudhoyono, others implicated include Vice President Boediono, a former central bank governor who goes by a single name, and Finance Minister Sri Mulayani Indrawati. Something tells us that the miraculous market recovery in Indonesia has not proceeded quite as effortlessly as the one in the US. Which also explains why the Fed and its cohorts are so set on reflating the market as they are well aware of the opportunity cost. Once the market takes the inevitable leg lower, we expect that the general public hatred against the multi trillion bailout of the US financial system may finally yield comparable criminal prosecution in America as well.

“The Board has worked diligently over the past two years to forge the best possible outcome for Ambac and its various stakeholders. In light of OCI’s determination to take some sort of rehabilitative action with respect to Ambac Assurance, the Board has determined, after thoughtful and careful consideration, that compliance with the direction of OCI to establish the segregated account of Ambac Assurance and to consent to the terms of the proposed settlement agreement of our CDO of ABS portfolio is the best alternative available. The actions taken today, together with the proposed settlement if effected, commute substantially all of our CDO of ABS exposure at a substantial discount to the expected present value of potential claims. While certain structured finance asset classes and other credits have been segregated for rehabilitation, virtually the entire insured municipal portfolio remains outside the rehabilitation proceedings. The Ambac Board and management team are committed to continuing to work hard to manage our resources effectively in the service of all constituents.” - Michael Callen, Chairman of the Board of Directors

Eclectica February performance and position update. Hugh still likes them cancer sticks.