Archive - Apr 2010 - Story

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.

Today's 4 week $26 billion auction closed at a 0.145% high rate, which, just like yesterday's 3 and 6 month Bills, was a lower rate than the preceding auctions, indicating that flattening pressures are once again receding. The auction bid to cover was a solid 4.35 a big jump from prior week's 2010 low of 3.56. Indirect bidders dropped to a one month low at just 22.2%, as direct bidders once again came in to save the day, taking down 17.2% of the auction. The hit rate on the Primary Dealer take down of 60.6%, was 17.2%. One thing is certain- direct bidders now play a just as important role in short-end auctions as indirect bidders.

You have all seen the Chanos interview snippets made available last week. Now watch the full interview by Charlie Rose in which Jim Chanos deconstructs China. Goldman's (make that Jim O'Neill) response: "BRIC BRIC decoupling BRIC baltic dry BRIC Goldman Nepal office BRIC." Chanos destroys the Friedman defense to never short countries with $2 trillion in foreign currency reserves: he points out that the last two countries that had similar foreign currency reserves relative to the size of their economy was Japan in 1989 and the US in 1929. I will let that be the end of that discussion. It has no bearing on whether there is a domestic credit bubble. Countries embark on domestic credit bubbles often tend to accumulate foreign currency reserves." After listening to the full 26 minute interview, we are confident that the Dow will hit 36,000 in anticipation of the Chinese collapse, as the IMF is forced to expand its just amended $550 billion bailout facility to a cool quadrillion. Full transcript attached.

RANsquawk 13th April US Afternoon Briefing - Stocks, Bonds, FX etc.

Gary Shilling is now firmly in the anti-China contrarian bandwagon. In this interview with Bloomberg's Erik Schtazker the legendary investor, who called Japan's lost decade when everyone was just as bullish on Japan as Goldman is now on China, Shilling shares the same view on Chinese record excess capacity as Hugh Hendry did some months ago: "You can't trust the [Chinese] numbers... They have kickstarted their economy in the last year - it's a stop go economy, they can do it fast, they don't have to worry about EPA audits, they just let the bulldozers roll when they want to build a new road or whatever. The point is they build an awful lot of excess capacity and the question is how are they going to use it because American consumers aren't buying their exports the way they used to and their domestic economy isn't that strong... Chinese consumer spending is 36% of GDP and is a declining share over the last two decades. They don't have a a big enough middle class. In China there were 110 million people with over $5k per capita income, enough to give them discretionary spending but that was only 8% of the population. In this country it is 80% of the population." And on the yuan: "If they took off all the controls and Chinese could invest abroad, the yuan would probably go down because people would want to diversify... I think the political leaders are aware of that possibility they sure don't want to be pushed around, and Obama made a huge in trying to push them again. Remember China was dominated by European in the last century and they want to run their own country." While we completely agree with Schilling, we believe that the current transformation in US society, which is in the last throws of contract abrogation, in not paying mortgage and credit card bills, we may well see a last push in Chinese imports, after which any disposable income in the US middle class will plunge and will take the US economy down with it as well. The problem, as we have repeatedly pointed out, the cash return on such "assets" as iPads and Kindles is zero, not nearly enough to pay down 39.95% APR credit cards.

Well that particular bailout lasted all of 24 hours: that's what happens when the markets habituate to endless non-bailout bailouts. The half life of each successive one is now half the previous. The Athens Stock Exchange is once again seeing deep red (-2% at last check), and now the ever critical 10 Year bonds are starting to get dumped. This follows a massive move in the EURUSD from up 100 bps to now down 15 or so. The 10 Year has now blown back out to 368 bps over Bunds. NBG, Alpha and Piraeus are all trading down 5%. In the meantime, nothing, nothing can touch the US stock market. Computers are now fully sentient and realize that Ben Bernanke will never in his lifetime allow a downtick.

A month ago we discussed the imposition of virtual capital/tax controls when it comes to the avoidance of taxes by high net worth individuals in the US who park their money abroad. Yesterday, we also discussed that the only practical way for the administration to reduce its massive budget deficit is to target the richest 1% in America with tax rates that could potentially spike to as much as 91% according to Brookings. Sure enough, also yesterday, the IRS took the next step to create what is slowly becoming a global capital outflow prevention system, by establishing the "globalization of tax administration" in anticipation of other countries' attempts to lure America's richest. As CNSNews reports, IRS commission Doug Shulman had this to say to the National Press Club on Monday: "Through our new global high wealth operating unit we are taking a unified look at the entire web of business and economic entities controlled by high wealth individuals so we can better assess the risk such arrangements pose to tax compliance. The IRS is using our robust and evolving enforcement program that ensures that everyone pays what they owe." It is near certainty that once the system is in place, the hammer will fall on not just the uber-wealthy but middle class expats who no longer reside in the US. And since the entire world is bankrupt, all other countries will be happy to apply a game theory construct to this development so that all can share from the money extracted by those who attempt to evade what is rapidly becoming an oppressive US tax climate.

The hearing by the Permanent Subcommittee on Investigations is starting its grilling of WaMu executives on "The Role of High Risk Home Loans." Watch the hearing live and commercial free here.

Below are the scheduled appearances and testimonies. The full 666 page exhibit list can be found here.

And here we were thinking that a $2 billion successful Bills auction, (not really) backstopped by everyone and the kitchen sink would sound the all clear on the country with the 16% budget deficit. Alas, with the 10 Year still at 350 bps over Bunds nothing at all has changed for Greece. And here comes Deutsche Bank, which has billions at risk among the PIIGS, saying Greece will very likely be forced to protect its creditors asap, or within the next month, whatever comes first if it has no market access. Alas, as real Greek bonds are still trading just south of 7%, this pretty much means the market doesn't care about the country's long-term prospects, which in our books is equivalent to "absent market access" to anything more than oilve oil and Ouzo. And the cherry on top: several European governments will be forced to have a parliament vote to approve the bail out. It appears the market still has not figured this virtually certain collapse trigger to the rescue package. When it does, the end game for Greece will truly be there.

Obama's plan to spur US exports sure is starting with a bang. After reporting a $40 billion trade deficit in January, the US once again was a net importer (no surprise there) to the tune of $39.7 billion. This is worse than the $38.5 billion consensus. Both import and export prices increased by 0.7% (with an import price consensus of +1.0%). The largest deficit increase was in the consumer goods category, which increased by a sizzling 3.1% as everyone is stockpiling Kindles and iPads for that moment when the irresistible force of the US budget deficit finally meets the immovable object of reality (which lately has been quite movable). The next question: with China now also a net importer, and joining such illustrious peers as the US and EU, just who is exporting?

Here are the key observations on the number via Goldman, which now anticipates the need for a GDP estimate reduction as a result. That's ok, we are sure the administration will promote legislation to the GDP equation that will make net imports actually a GDP positive.