Archive - Apr 2010 - Story

Ben is a lying sack of shit, but there is a rationale for what he is doing. Maybe it’s only because he is trapped in Goodfellas, but he is going to follow the policy—if I understand it right—to the bitter end. So it is good to understand this rationale. Understanding it gives you a new view on hedge construction. Here is a set of simple positions; this book can be refined based on your sophistication. For example, instead of a long bond, a flattener trade is surely better but also more complicated.

Erik Nielsen must have gotten quite a beat down from the Goldman Greek PR corps. Earlier, as we disclosed, the firm's European strategist, suggested that something nasty this way comes courtesy of an emergency ECB meeting. Later, he backtracked not only on that statement, but also on all the media hoopla over the country with the inverted curve, saying (independent) media is now the functional equivalent of CDS traders - vile, smelly, scheming bastards. Amusingly, this is very much reminiscent to Erik faux pas in early February when he had the temerity to point out (rightfully so) that the Greek GDP deficit is actually 16%, not 12.2% as was widely believed (and with every passing week it is becoming clear that Nielsen was completely right, as 2009 GDP is now at 12.9%, and probably will be 14% in another month, yet post another smack down had to reissue his note saying it was all his fault for stirring the speculative elements). Too bad Erik does his best to report the truth as he sees it, only to receive the prop desk's Greek trading axis after the fact, which today apparently was in direct opposition with his earlier bearish tone.

Anyone notice that Michelle C-Squared has been gradually dolling up for the inevitable Dow 11,000? Hate to sound like a broken record, but it appears that each day we have another round of breakouts in the retail and REIT sector, as if fund managers are giddy at the prospect of Michelle losing a few buttons on her blouse on Monday.

In the hubbub over the Greek default and the resultant market melt up, one thing was promptly forgotten - the IPO of a company that one year ago was on the verge of bankruptcy. PE firms are smelling the market top and are bailing out in droves from portfolio holdings, selling shares to those who can't get enough of this downtickless rally. Metals USA, a service center, went public at $21.00, coming to market above the indicated range of $18-20. Good thing lead underwriter Goldman did not tell the orderbook it was coming out with a Conviction Buy on the stock potentially as soon as yesterday (although certainly not today... at least not yet). Alas, not even the squid's soothing words of discounted comfort were enough to save this public offering from bombing, as the midline of this range is precisely where the stock closed - at $19.20, or over 8% down from the offering price. Some overzealous basic industries "experts" are now drinking their newly discovered deposits of unemployment courtesy of $3 happy hour pints.

In what can hardly be described as a travesty of efficient markets, the Dow closed at the perfectly normal level of 10,997.35 after the complete lack of a concerted effort by the primary dealers to reroute recently acquired capital into stocks that are now trading at triple digit forward multiples. Fear not - the resilient U.S. consumer who now realizes that no contracts have to be honored (courtesy of a unrepentant skeleton) and instead all money must be rerouted into shares of Pets.com, will make sure that the market is and always will be a leading indicator to a 400% debt/GDP economy. Also ignore that the Dow hit 11100.98 as if possessed by a mysterious GETCO DMMon, that was also perfectly explainable. After all, over the weekend, as Morgan Stanley whisper expectations indicate, Greece will default. That, together with an imminent meteor impact that is set to wipe out humanity and leave SkyNet in charge of trading stocks, should be sufficient for newly crowned Supreme Justice 80286 to make offers of any securities not only illegal but punishable by lethal and prompt use of Norton Antivirus software and/or H2O.

We apologize for the two hour detour. Good news - it was not due to some malicious attack on the server (that we can isolate). Bad news (well, good news in a way) - it was due to unprecedented record traffic. We had well over 2,000 information addicts on at any given moment. For our sole server this is about 4 times sustainable load. We hope that we will soon have the capacity to expand our infrastructure and have a much more seamless process - we have done a reverse inquiry with several major LBO firms and are hoping for ultra high yield financing to be arranged by one of the TBTFs (we have specifically stated the yield will have to be at least 100% as we want to make sure we don't pay even one coupon payment and instead default promptly and be bailed out by America) - preliminary results are favorable. In the meantime, we will have to monitor traffic and when things get heated redirect our readers (in an internet first) to other much more wholesome activities such as getting a cup of coffee, browsing through slideshows, watching CNBC, and restocking on various essentials.

Forget the earlier disclosure about low Greek bailout rates. According to more recent headlines, the loan will be 6% for three years, 7% if longer. This means there is no bailout as Greece can not sustain those kinds of rates, and the EU is merely buying itself time to prepare for the imminent unwind of the EMU.

It's one thing to hear fringe bloggers raving breathlessly against the collision course that the US economy is on. It is something else to see the Bank of International Settlements call for the baseline projection for US debt/GDP to hit over 400% by 2040. And this excludes the bankrupt GSEs, bankrupt Social Security, and the soon to be bankrupt Medicare. In a must read report, the BIS (of the central bankers' central bank) provides the much needed segue to the work of Reinhart and Rogoff, and in not so many words confirms that the entire developed world is now bankrupt on a discounted basis. With Debt/GDP ratios for virtually everyone expected to jump to over 400% in the bank's baseline scenario, it is no surprise why the Dow may well hit 1 quadrillion on nothing but Weimar and Zimbabwean ponzification, before it crashes instantaneously to zero. We exaggerate about the quadrillion, we do not exaggerate about the sovereign default. The current and previous administrations have doomed this country, just as all other administrations of the developed world have done the same, in order to bail out the banking system, in the greatest fatally flawed private-public risk transfer experiment ever attempted. Those who will walk out of it with virtually infinite wealth are about 0.1% of the US population (the same people who tell you now that all is well, and that their bonuses are fully justified). Those who won't, and will end up doing bad things to the aforementioned cohort, is everyone else. And the "everyone else" is getting angrier by the day, as they realize just how massive the wealth transfer scam truly is... if only they could tear themselves away from the iCrap, watching Tiger Woods' nonsensical Nike ads, or glower in schadenfreude as Simon Cowell rips another wanna be singer from head to toe.

Reuters confirms that ECB is refusing to comment on any details on the size or shape of Greek loans, or the role for the ECB in general. ECB also refutes Erik Nielsen's information we posted earlier that it would hold a conference call to discuss to latest developments.

Recently we posted a terrific interview of Kathryn Welling with LTCM's former General Counsel, James Rickards. The lawyer turned economist, who is now a director of Omnis, posts the following stunner on the implications of the endless sovereign debt glut and the Keynsen abortion that every developed economy has undertaken. As the man who survived (and, well, created) the original market "systemic" event, Rickards should certainly be heard by all those who believe the government can sustain the latest, and by all measures, last iteration of the global reflation Ponzi. Not surprisingly, Rickards is the latest to jump on the fiat alternative bandwagon, seeing gold at $5,500 as a fair price for the precious metal.

Observe the exponential volume spike at 10:30 when news of the Fitch downgrade hit. And, as always happens, there was smoke coming out of the windows of Liberty 33 following the much necessary stick save. And after that, as volume plunged, the algos took over. Because as everyone knows, If Volume Crap Then Buy, Buy, Buy. At this point if you are in this market, you are on your own and soon to go broke.

Many have asked why all the consternation about the IMF bailing out Greece. After all, as Bob Pisani claims, it is headed by some woman called Dominique Strauss-Kahn? That name sure doesn't sound like it came from Alabama. So what is the big deal?

According to Bloomberg, the ECB has called an extra-ordinary GC meeting tonight to “discuss latest developments”.

I don’t have any concrete information, but in my opinion there are two possibilities:

1.       A Greek package will be sorted this weekend.  I’ll give this less than 5% probability.  I have spoken with people in Athens this afternoon (I am all over the papers there today with my note from yesterday that they’ll have to go to the IMF) – and the message continues to be that there is a huge hurdle to climb before they’ll ask the IMF for help.  Also, the key IMF people are still in Washington at this time.

2.       A serious banking problem is about to emerge and a safety net has to be provided before Monday morning.  This could relate to Greece – or it could be another of these cross-country unclear cases, like Alpe Hypo, where Trichet had to step in. 

Stay tuned – will be back if and when we learn more

 
Erik F. Nielsen

The IMF, realizing it had a catastrophe on its hands, has caved in and according to Reuters will provide US taxpayer money to Greece at vastly below market rates of the SDR rate plus 300 bps plus a 50 bps service charge. With the SDR rate at 0.26%, this comes out to a ridiculous 376 bps, or massively below where Greece could possibly borrow at market. And guess who takes the first loss risk on a pro rata basis? That's right US taxpayers - you. At least when Greece bankrupts eventually, which it will, and the debt is equitized, the US, well more like Lloyd Blankfein, will become owner of the Cyclades at zero cost. Win win for everyone except 99.5% of America.

RANsquawk 9th April US Afternoon Briefing - Stocks, Bonds, FX etc.