Archive - Mar 2010 - Story

The latest stunner from the CIA and the Obama administration via Wikileaks. To wit: "This classified CIA analysis from March, outlines possible PR-strategies to shore up public support in Germany and France for a continued war in Afghanistan. After the Dutch government fell on the issue of dutch troops in Afghanistan last month, the CIA became worried that similar events could happen in the countries that post the third and fourth largest troop contingents to the ISAF-mission. The proposed PR strategies focus on pressure points that have been identified within these countries. For France it is the sympathy of the public for Afghan refugees and women. For Germany it is the fear of the consequences of defeat (drugs, more refugees, terrorism) as well as for Germany’s standing in the NATO. The memo is a recipe for the targeted manipulation of public opinion in two NATO ally countries, written by the CIA. It is classified as Confidential / No Foreign Nationals."

The CFTC's latest weekly Commitment of Traders report shows that after a brief respite, potentially dictated by Goldman's very temporary euro bullishness, the euro is back to having a record number of non-commercial futures-only positions at -74,917. This is a more than 50% increase from last week's -46,341. As a reminder the prior euro net short record was -74,551 two weeks ago. Curiously, even as traders went bearish on the euro, this was not coupled by a carry offset with the JPY: net long spec yen positions dropped from 15,197 to 10,161. Another currency that saw an increase in bearish interest was the cable, which saw a 7,637 contract decrease to -71,624. On the bullish side, the AUD was the preferred contra-carry currency, as contracts increased by 10,161 to 74,339. In other commodities, both oil and gold saw speculative positions declines by -12,224 and -16,474, respectively, to 111,919 and 183,872. The number is relevant for gold as this represents 37% of the open interest.

With each day bringing new and more ridiculous M&A, and now LBO rumors, we thought it would be a good idea to highlight the public companies that have at least a fighting chance of going private. Using a simplistic template from UBS, we present the thirty companies which would generate the highest stock return should they get acquired, assuming a 4.5x Debt/EBITDA pro forma leverage (as much as TPG would like, 10x leverage is not coming back...Unless Joe Cassano is hired to run Chrysler's take private group), and also assuming a 40% equity portion in the transaction. In other words, these are the companies that at least on paper have the highest equity expansion potential in a 7.5x EV/EBITDA. While this analysis ignores whether or not any of these companies actually generate substantial cash flow to cover pro forma interest, or are a logical fit for any financial acquiror, any company not on this list is likely already equity heavy and as a result even if acquired will not result in material upside. As the chart below shows, the maximum stock upside ranges between over 200% in the case of R, to just over 22% in the case of BBY. This below list by no means suggests that any of these companies on it will be LBOed: it should merely be used a benchmark for modeling purposes.

• Recommendation: underweight energy
• Time horizon: 3-6 months
• Thesis:
  • Oil contango trade unwind
  • USD strength
  • General market headwinds
• Underlying theme: a substantial portion of recent energy demand originates from speculative and/or indirect sources, rather than organic, sustainable drivers, and the inflection point for the former to unwind has finally arrived

Following our focus yesterday on key supports in Fixed income, we feel that the risk is that on a rally here the curve could flatten. Indeed 2Y yields even though they rose recently, remain very low, and we feel that if the next leg is up in fixed income then the long end should outperform. We have attached a chart of 2/10 for US treasuries, as can be seen we just retested the 50-dma. - Nic Lenoir

Next week is the much heralded "quarter end" where thousands of fund manager's jobs are on the line. Any and all efforts were made to keep the tape in check this week in order to prepare for the usual marking up ceremonies. Greek debt implosions, N. Korean torpedoes, and horrid housing data failed to send the tape lower.

Lots of confused chatter in the bond community as to why the negative swap spread story (anywhere between 7Y and 30Y) is being largely ignored by the media. After all, the associated market, which according to the BIS was roughly $154 TRillion in June 30 makes the Greek bond debacle and various sovereign CDS discussions in the media pale in comparison. As several bond traders pointed out, the likelihood of negative spreads having been modelled out by the TBTFs is very low, if any, meaning that unhedged bank IR-swap exposure is suffering massively, and is likely to surpass all record past prop desk losses. In fact, rumors abound that a few of the desks having placed leveraged bets on spread divergence over the past months and years are currently in critical condition, yet nobody is discussing this for fear of another round of bank run concerns among the TBTF banks. What is odd, is that the Primary Credit borrowings are now at almost financial crisis lows of just under $9 billion, leading many to speculate that banks now satisfy all of their short-term funding needs via the fungibility of excess reserves (and indicating once again that the Fed's discount rate hike was the most irrelevant action in a history of irrelevant actions). And just in case there is still confusion as to what negative swap spreads mean, here is a useful primer.

The U.S. economy’s recent growth has been underpinned
significantly by government policy, yet this short-term cyclical
support will likely fade in the second half of 2010. As a result,
investors should take advantage of the tighter credit spreads and focus
on de-risking their portfolios in order to prepare for the increasing
long-term secular headwinds stemming from the growing deterioration in
public sector balance sheets in many developed economies.

Mark Kiesel, PIMCO Managing Director

Charlie Gasparino has just broken the story that Larry Summers may leave the Obama administration, presumably after the elections, based on the former DE Shaw man's disclosures to various Wall Street execs. This is not a very surprising move for Obama, who has bet his entire mid-term election campaign on his counter-Wall Street rhetoric, if not actions. Too bad that by this point, due to over a year of purposeful inactivity, the TBTF are Too Infinitely Big To Fail. With Summers a horrendous legacy of the administration's extensive ties to Wall Street, it was only a matter of time before he and Obama quietly parted ways. Following this development (and not a second too soon), everyone's attention shifts to Tim Geithner who has overstayed his welcome in the "public" scene for just about his entire tenure, and is way overdue in checking in to his reserved Goldman Sachs cubicle.

In an exclusive report, Kitco has just released yet another stunner in the world of precious metals. It turns out that Eric Sprott has attempted to purchase gold from the IMF, according to information provided to Kitco by Frank Holmes, CEO of US Global Investors. "I just spoke with Eric Sprott, who bid to buy [the IMF's remaining gold on the block] and they refuse to sell it." As Kitco points out, "the IMF might be holding out for a bigger buyer or a central bank or for higher prices. But Holmes argues the IMF's rejection of Sprott's bid means markets are being manipulated." Back to Holmes: "I think there is a lot of manipulation done by governments around the world in the currency markets which affect the bond markets so to me it's just normal course." Holmes concludes "with an election year there may be a gold rally that could be two standard deviations, or $300 dollars, to the upside. So you could see gold run to $1300 to $1500 quite easily." This all isoccurring as ever more pundits finally realize that as fiats are discredited across the world, the only safe, non- dilutable resource is gold.

RANsquawk 26th March US Afternoon Briefing - Stocks, Bonds, FX etc.

And you thought we were joking when we said the various exchanges will start breaking when the selling volume intensifies.

From an internal email:

"One of the exchanges to which we submit order flow is experiencing a system outage affecting some Listed and OTC orders"

Awaiting official information from the NYSE if it is in fact the impacted exchange.

You see it wasn't North Korean torpedoes, it was the South Korea Sovereign Destabilization Fund, LLC. Its principals are all about to be exiled by the SEC to St. Helena for life.

We have long said that Delaware Senator Kaufman is probably one of the very few unbought, objective and honest politicians in D.C. His latest speech, "Ending Too Big To Fail" proves this yet again. It is unfortunate that even as the Dodd "reform" bill is about to pass, which incidentally has nothing to do with reform (once again - the only" financial reform" we have gotten since the advent of the Obama administration have been short selling curbs - can't have stocks going down now, can we), and all to do with placating Wall Street interests, who have paid handsomely to the authors of the bill to pretend as if reform is being done, that true activist reforms like Kaufman are being largely ignored. Hopefully after the mid-term elections, politicians from both side of the spectrum, who now blatantly ignore their voters, will finally realize you can avoid the long-forgotten concept of democracy only for so long.

Several South Korean sailors were killed and one of its naval ships with more than 100 aboard was sinking on Friday after possibly being hit by a North Korean torpedo, South Korean media reported.

A South Korean vessel fired at an unidentified vessel towards the north and the South's presidential Blue House was holding an emergency security meeting, Yonhap news agency said.