Archive - Apr 13, 2010 - Story

And why not - after all it's all the rage among those waiting in line for iPads so they can be first to buy "The Steve Jobs Guide for Deadbeat Dummies Trying To Learn To Read Good." Now that Obama has given his blessing to an entire generation of Americans to tear up contracts (very appropriate coming from a contract law professor), the follow up to moral hazard is resulting in not just individuals and companies, but entire nations simply opting out of paying their dues. Evans-Pritchard reports that after today's ludicrous rates on 3 and 6 month Bills the tide may be turning in Greece, with both parties in the country finally realizing its creditors will do everything in their power to bleed it dry, at "usurious" rates. With economic growth negative for a decade and debt interests quite certainly positive, the marginal difference will destroy not only economic output, but sink Greece ever more in debt, as existing creditors fund capital shortfalls at maturity (or default) by ever increasing interest rates. Greece has the option to stop funneling domestic capital to Germany later (inevitable) or sooner (if it finally makes the right decision).

"The government's debt cannot grow indefinitely at a rate much faster than the economy itself grows, so ultimately, something has got to change — either taxes are raised, spending is reduced, or the real value of the debt is eroded through an increase in inflation, an outcome the Federal Reserve is committed to preventing." - Jeffrey Lacker, Richmond Fed

The following article is the first of three examining the recent unrest in Kyrgyzstan and its implications. Part 2 tomorrow will deal with the regional fallout from the “Tulip Revolution V2.0” and Part 3 will examine in detail Washington’s highest priority in Kyrgyzstan - its ongoing access to the Manas Transit Center airbase. The extraordinary events of last week in Kyrgyzstan, which saw the overthrow of President Kurmanbek Bakiyev’s administration by a popular uprising and its replacement by a provisional government have been portrayed by many in the "Beltway-istan" (Washington DC) as the latest tussle betwixt Russia and the U.S. in the ‘Great Game” for influence in the post-Soviet space. The truth is considerably more complex, however, and like a set of Russian matruishka nesting dolls, the further one digs, the more the complex realities of the situation emerge. While Moscow and Washington’s rivalry for influence with the interim leader, 59-year-old former diplomat Rosa Otambaeyva’s administration is indeed paramount, there are other players watching the debacle, from local superpowers China and India to neighboring “Stans” Tajikistan, Kazakhstan and Uzbekistan. Any final disposition of the problems emerging from the “Tulip Revolution - Part Two” will have to include consideration of these factors beyond the U.S.-Russian struggle for influence in the post-Soviet space.

A second whistleblower speaks. As the topic of physical delivery has gained prominent attention recently, it is crucial to complete the circle and show how this weakest link in the PM market is (ab)used by the big boys: Phibro and Warren Buffet. Pay particular attention to the analogues between the methods employed in the 90's commodity market and how the PM (and equity) market is being gamed currently. And to think that each new generation of traders believes it has discovered something new...

G-Pap, in an interview with Greek TV has just gone all in on his bluff, and has said that 'no EU state will block Greece's potential tapping an EU/IMF aid deal if the European Commission and European Central Bank issue a positive recommendation that it should be used." This leads us to believe that European opposition is mounting and that G-Pap is merely trying to preempt the vote down on Greek aid now that it has been revealed that several countries will need to hold "referendums" on whether this aid is in fact permitted (here's looking at Italy and Germany). What is more critical is that the PM has said "that Athens would never announce a "red line" at which it would decide to invoke the mechanism." That's perfectly understandable as not only is Greece way beyond the red line as is, but in the game of sovereign chicken, it will be the bondvigilantes who will always have the upper hand in calling Greece's bluff. And with statements like these we wouldn't be at all surprised to see another blow out in GGB spreads tomorrow, to continue the widening we started to see late in the day today.

A month ago Goldman told its clients to go long the EURUSD with a 1.35 stop. The stop was triggered within a week. Then the firm flipflopped and followed up with a diametrically opposite call. That call was also stopped within a few days. Goldman learned its lesson. But not Citi: the nationalized firm, whose stock, together with that of bankrupt Ambac, has just issued a long EURUSD call at 1.359. The call by technical analyst Aron Gera, proposes a stop at 1.349. In other words it is now Citi's turn to offload its EUR book. Gera's recommendation is based on technical analysis, which, in the form of momentum chasing, is all that seems to work these days. Aron thinks the EUR could surge to an 11-week high, even as the GBPUSD could jump as high as 1.5966 alongside EUR strength.

RANsquawk 13th April Market Wrap Up - Stocks, Bonds, FX etc.

Another day where the problems of the PIIGS, gyrating interest rates, skyrocketing unemployment and vacancies, imploding housing starts, and other assorted ills are totally shucked off by the favored "must own" sectors: REITs, retail, and financials.

Worthless Ambac is now the most actively traded stock in the market. The other 4 stocks the complete the quintfecta of most active stocks: C, FNM, BPOP and BAC. The liquidity rebate collecting computers and momentum algos are just having a field day, toying with daytraders. In case you still haven't figured out how to trade this market, find the most bankrupt companies and load up. You can't go wrong. Obama and Bernanke said so. 25x P/E (50x if you take out the stimulus)? Who cares. Not the computers. And certainly not Jim Cramer: "The purists out there have spurned these points. I could care less about purity. I could care less that someone might be able to say Cramer likes worthlessness. But the !@#$% animal spirits have it going, and a worthless stock can be worth something if it moves up that much and starts offering equity or bonds against it."

Fox Business reports that the investigation around Lehman is intensifying. Surely the SEC, now generically equated with objects that float around in sewers in formal conversation, has realized it has to do something, anything, to find at least one scapegoat for the financial collapse. Which is why we read with little surprise Gasparino's report that "thee SEC has ramped up its inquiry into Lehman’s fall, particularly after court-appointed bankruptcy examiner Anton Valukas issued a lengthy report stating that Lehman’s top executives were “grossly negligent” in possibly hiding the risky nature of the firm’s finances during its final day." What we find much more interesting is that "yet another investigative agency, the Public Accounting Oversight Board
-- created under the 1992 Sarbanes-Oxley law to investigate and
discipline public accounting firms -- has launched an inquiry into the
role of Lehman’s auditor, Ernst & Young, following the examiner’s
report, which accused the big accounting firm of “professional
malpractice,” for its work in approving accountings techniques Lehman
used during its dying days in the summer of 2008." In the absence of any Wall Street villains, which it is now all too clear have endless diplomatic immunity from prosecution by the corrupt regulators, will the auditor, together with Dick Fuld, be made into the sacrificial lambs? Or will we continue the farce that anything even remotely related to capital markets integrity and reporting is real and valid? Judging by the nearly 60 days of no S&P downticks, the market has answered that question for us.

Days into the latest round of European bailouts we finally start to get a glimpse of the scrambling within the EU's top ranks over the past week to avoid the imminent Greek collapse this Monday. According to Handelsblatt, France and Italy had worked out a deal with Trichet first and subsequently advised Merkel that they would go ahead on their own. Merkel who had held out for a 6% interest rate on European subsidy loans was consequently forced to participate in the "syndicate" as Germany has the most to lose from a Greek situation spiralling out of control due to its banking system exposure, yet whose population is the one most vocal against a full blown bailout. The next questions: what are the actual details of the subsidy debt's role in the capital structure, as well as the actual cash disbursement mechanism remain unanswered. Here are some thoughts.

...And judging by the record volume in the worthless stock, which has now overtaken Citi as the churn stock du jour, you likely are, you may want to read the following JPM Report: "We have asserted for some time that ABK equity has no value, and our position following 4Q results and the release of its 10-K affirms our thesis. In the 10-K, ABK stated that although it will have sufficient liquidity to pay debt at the HoldCo through 2Q11, it may decide prior to 3Q10 to not pay interest on its debt. This would cause a default on the HoldCo debt, and thus likely lead to a complete loss for all shareholders. We believe any investment in ABK shares at this time is highly speculative, although we still believe a short in ABK equity will generate attractive long-term returns. Basically, we feel the near-term volatility may not be worth the eventual long-term pay-off from a short."

Roubini, who recently made headlines by discussing his grim outlook for "the barbarous relic", discusses the trade deficit, the Fed's (lack of an) exit strategy, China, and, once again, gold, about which he says: "“In my view, gold is not going to rise to the levels $1,500, $2,000 the gold bugs argue because gold tends to sharply rise only under two conditions. Either there's a significant increase in inflation - and in US, Europe, Japan, we worry more about deflation than inflation. Or gold rises when there is really risk aversion like after the collapse of Lehman or a year ago when the banks US looked like borderline insolvent. So we have avoided the tail risk of a near depression. So gold prices shouldn't go higher. And for now, there is more deflation than inflation. So for the time being, I see gold in a very narrow range, not shooting up much higher than current levels."

Are things between Israel and Egypt about to get really heated?

From BNO News:

JERUSALEM (BNO NEWS) -- Israel's anti-terror bureau warned on Tuesday that a terror attack in Egypt's Sinai Peninsula is imminent and all Israelis must leave the region. The warning message said, quoting intelligence sources, that a terror attack in which Israelis could be kidnapped is imminent, Israeli media reported.  "We call on all Israelis now in Sinai to leave at once and return to Israel," the warning said. "Families of Israelis now in Sinai are requested to make contact and update them of this travel warning."

The experiment by Spirit airlines to have flyers pay not only for uncomfortable, crammed cabins but for the first piece of carry one baggage has been closely followed by the legacies and the LCCs, which have all been chomping at the bits to see if this proposal would fly. It appears that public outcry has been vocal enough that the practice is about to be banned. Two democratic senators have introduced legislation prohibiting airlines from charging fees for carry on baggage. It is now time to see if the airline lobby will stretch its wings and do everything in its power to make sure this proposal is killed in its tracks. Judging by how effective Congress and the Senate have been at allowing Wall Street to suicide itself once the next credit bubble implosion occurs, we wouldn't put too much confidence in this bill, especially if some Wall Street firm manages to get involved in the ongoing latest roll up round in the airline industry.