Archive - Feb 2011 - Story

Remember when in December, to much fanfare, the Irish bail out was announced, which included a package of €85 billion financed by everyone, up to an including the country's Pension fund (the NPRF)? Well, less than two months later, it has become clear that the funded component is woefully low as the true extent of losses is starting to be appreciated. According to the Irish National Asset Management Agenc, the country's two key insolvent banks will need a fresh infusion of €12 billion. What this means is that as a result of current estimate of full pay outs by NAMA, the property loans underwritten by the banks, are now being discounted by a ridiculous 58%! For the captcha challenged, this means a more than half write down on loans. And Ireland is solvent how again? At least the country's pension funds are being depleted to fund a good cause: banker (read senior bondholder) well-being...

Something curious was noted this morning on CNBC Europe: namely a reference to an article in the Shanghai Financial News, according to which China is quietly (or not so quietly) trying to orchestrate a 30% drop in real estate prices, in the form of a "Thunder attack" which combines increased purchase costs, property taxes as well as the rise in interest rates. If proven true, this is a major flashing red sign of just how out of control inflation, especially property and real estate, is in China, and that future CPI readings (not the official Politburo number, but that which people actually have to live with) will be getting progressively worse. Also, for the government to step in with such a drastic measure, it must mean that the discontent on the ground must be approaching a fever pitch.

Futures appear sluggish this AM, bucking the trend from the recent sessions. US rail shipping data (AAR) reporting that intermodal traffic up 7.4% over 2010. Confidence numbers for small businesses and economic optimism printed better than expected yesterday while the weekly consumer confidence number disappointed. The market's shrugged off the PBOC rate hike initially, but with more speculation of actions to come and further price rises in commodities, it appears time for a breather. 11.3% gain last week. Fed Chairman Ben Bernanke will speak today at the House Budget Committee at 10AM. Expect comments focused on fiscal policy rather than on monetary concerns as he presented last week. We look ahead to tomorrow for initial jobless claims which may add a new perspective on last week's unemployment numbers.

It's all Fedspeak after this morning's news of a drop in mortgage applications...Today is the last POMO of the current schedule in which $6-8 billion of bonds due 02/15/2015 – 07/31/2016 will be monetized. Tomorrow, the new monthly POMO schedule will be released at 2:00pm. Look to see if the Fed will be buying more than the usual fare of 17-30 bonds due to ongoing massacre at the long-end or if, instead, Bernanke is happy with letting the 30 Year plunge.

One of the bigger news this morning is the so far unconfirmed report that Bundesbank President Axel Weber, who has been in the running to replace Jean Claude Trichet, has decided against an ECB future, and instead wants to make money at Deutsche Bank. The sudden about turn in the process has left many wondering why so late in the process, and just what about the ECB is it that makes Weber leery of affixing his fate to the central bank without a unified bond printing facility. From BusinessWeek: "Deutsche Bundesbank President Axel Weber will step down and wants to join Deutsche Bank AG, Deutsche Presse-Agentur reported today, without saying where it obtained the information."

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 09/02/11

With a hike discounted and real yields still in very negative territory, I expected a fade of any initially bearish reaction, which is what the market provided today.

We all know by now that Meredith is a witch: an unpatriotic, racist bitch, who eats kittens for breakfast, who deserves to be grilled by Joe McCarthy's exhumated corpse for telling communist truths, pardon, lies (just a Freudian slip dear Department of Central Planning and Internet supervision), and who will soon be accused of having unprotected (yet arguably consensual) sex with a Swedish man. But just in case she is on to something, here comes the president's plan to bail out the (otherwise perfectly solvent and all, we promise) states. The NYT reports that "President Obama is proposing to ride to the rescue of states that have borrowed billions of dollars from the federal government to continue paying unemployment benefits during the economic downturn. His plan would give the states a two-year breather before automatic tax increases would hit employers, and before states would have to start paying interest on the loans." But where are the details you may ask? Patience grasshopper: they will be included in the latest budget proposal which has been delayed for nearly half a year now as the printer ran out of zeroes. "The proposal, which administration officials said would be included in
the 2012 budget that the president is scheduled to unveil next week, was
greeted coolly by Republicans on Capitol Hill, who warned that the plan
would ultimately force many states to raise their unemployment taxes in
the years to come." Ah yes, the Republicans - those paragons of sound financial judgment and sounder virtue. After all who can forget whole "Tea Party thing" which did so much to prevent the incurrence of a few hundred billion in additional debt over the next decade to pay for the latest Russell 2000 at 36,000 hairbrained ponzi scheme concocted by Rudolph von Bernankestein.

Danish bank Amagerbanken A/S has just made history. The bank (which together with all other Danish, and not to mention Irish banks passed last year's European stress farce test) failed yesterday, this time for good, after its previous near death experience in the summer of 2010, when it only continued to exist in a zombi state courtesy of $2 billion in financial guarantees by the government. That guarantee, which was subject to "Amagerbanken strengthening its
capital base and solvency by 750 million crowns in the form of
equity or subordinated loan capital by Sept. 15" has ultimately been wiped out and on Monday, the Danish equivalent of the FDIC, the Finansiel Stabilitet A/S, announced that administrators would close the bank. And while the failure itself is not surprising (it was roughly the same size as the
mid-2008 collapse of Roskilde Bank, previously the biggest
Danish bank failure), nor is the reason for the failure, the bank said fourth-quarter writedowns wiped out its
equity, attributing a large part to failed property investors (but we thought European real estate  was doing so much better?), what is unique about this failure is that it is the first one to proceed according to new new regulations designed to ensure
senior bondholders suffer losses in a bailout. And suffer they will. According to Bloomberg, bondholders of senior debt, including bonds formerly guaranteed by the government, will face write-offs of about 41%. "The bank estimates its assets
amount to about 59 percent of liabilities." Another loser: depositors, who just happen to be pari passu with senior bondholders. To put this failure in context, recall that every Failure Friday the FDIC bail outs numerous banks, with the tab in most cases running up into the hundreds of millions if not billions. What Europe has done, is instead of getting a deposit insurer to guarantee the loses (at the expense of more taxpayer capital), is it has allowed bond bondholders and depositors to be impaired to the point where pro forma assets equal liabilities. Something, which in bankruptcy is known as Fresh Start, and is the most apt way to make sure that in addition to unlimited upside, bank bondholders actually also incur risk. Which is why this brilliant approach to zombi bank resurrection with NEVER materialize in the US. After all, how can we possibly ask the banksters to dare accept the possibility of loss on even one penny of their investments...

Still confused about some of the key, shall we say, "dynamics" and "motives" prevalent during the build up phase to the housing bubble peak? The latest xtranormal cartoon explains it all.

In what can be the "Holy Grail" moment for the peak oil movement, Wikileaks has just released 4 cables that may confirm that as broadly speculated by the peak oil "fringe", the theories about an imminent crude crunch may be in fact true. As the Guardian reports on 4 just declassified cables, "The US fears that Saudi Arabia, the world's largest crude oil exporter, may not have enough reserves to prevent oil prices escalating, confidential cables from its embassy in Riyadh show. The cables, released by WikiLeaks, urge Washington to take seriously a warning from a senior Saudi government oil executive that the kingdom's crude oil reserves may have been overstated by as much as 300bn barrels – nearly 40%." Could the OPEC cartel's capacity for virtually unlimited supply expansion to keep up with demand have been nothing but a bluff? That is the case according to Sadad al-Husseini, a geologist and former head of exploration at the Saudi oil monopoly Aramco, who met with the US consul general in Riyadh in November 2007 and "told the US diplomat that Aramco's 12.5m barrel-a-day capacity needed to keep a lid on prices could not be reached." And yes, that conspiracy concept of peak oil is specifically referenced: "According to the cables, which date between 2007-09, Husseini said Saudi Arabia might reach an output of 12m barrels a day in 10 years but before then – possibly as early as 2012 – global oil production would have hit its highest point. This crunch point is known as "peak oil"." And it gets worse: "Husseini said that at that point Aramco would not be able to stop the rise of global oil prices because the Saudi energy industry had overstated its recoverable reserves to spur foreign investment. He argued that Aramco had badly underestimated the time needed to bring new oil on tap." Look for Saudi Arabia to go into full damage control mode, alleging that these cables reference nothing but lies. In the meantime, look for China to continue quietly stockpiling the one asset which as was just pointed out is the key one to hold, for both bulls and bears, according to Marc Faber.

Last year's Russia Forum was one of the must see events of the year, pitting such high powered independent thinkers as Marc Faber, Hugh Hendry, Nassim Taleb in a free for all. While the cliffhanger back then was the suggestion by Hendry that he had recreated the Paulson ABX trade with "1.5% downside and 75% upside" (which has since not been fully revealed aside from some occasional snippets in the periodic letters that it is a synthetic China short trade), the true brilliance was in the debate between the Treasury skeptics and the fan (Hendry). That said, with the entire curve surging wider, we hope Hendry took profits on his short as we are now virtually exactly where we were a year ago. This year's forum was just as entertaining, and while it didn't have quite a distinguished audience, it did feature Marc Faber and Nassim Taleb in a discussion of whether Russia is the best or worst BRIC. That said, trust both Faber and Taleb not to stick to the script and go off on wild tangents. Sure enough, the line of the night as usual belonged to Faber: "We have a big debate in the world whether we will have a deflationary collapse or an inflationary boom...usually after a period of very heavy money printing war follows." That is the philosophical gist of it. As for Faber's recommendation, it is precisely the asset which has become a short-seller's nightmare in the current geopolitically fragile environment: oil. "Whether you are very bullish or very bearish you should invest in oil."

The St. Joe Company has just announced it has engaged Morgan Stanley to pursue "strategic alternatives to enhance shareholder value." Of course, since every bank has a bankruptcy advisory team as well, there is a very off chance this could be good news for the Greenlighter. However judging by the 10k $32.88 print in AH, we are leaning toward the former. As we warned back in October when Einhorn was recirculating his noted short thesis for the second time after a 3 year hiatus (which everyone somehow had forgotten), there is a very high probability that the short thesis, which was merely a regurgitation of the original one, could end up crashing and burning. To all who followed Einhorn into what, with 27 million shares short, is about to become a massive short covering squeeze inferno (not to say that Greenlight has not had its share of good ideas over the year), our condolences.

I have tried hard to not have strong views in market recently given what seems to be possible tectonic shifts. Despite this, I feel as though there was alot of pent up energy at recent range lows and is now being released, to say the least. We had weeks of very defined range that broke and the damn broke. After a tepid 3yr auction, I think players extrapolate the increased level of difficulty of having to increase the DV01 of a 10yr and 30yr to follow, particularly in light of trying to repair wounds from December rinsing, November rinsing.......Adult swim.

Once again the ABC Consumer Comfort index indicates that it is leaps and bounds more relevant than the ADP Private Payroll number. With increasingly less relevant confidence indicators out of UMichigan and the Conference Board, which lately only seem to "poll" 20 people with a $1MM+ Schwab trading account, it is worth noting what a true polling index says about the economy. And it isn't pretty: "Soaring gasoline prices slammed consumer sentiment into reverse this
week, threatening the slow recovery in economic views that’s been under
way. With gas now at record high for a February in Energy Department data
back to 1990, the weekly Consumer Comfort Index dropped by an unusually
steep 5 points to -46 on its scale of -100 to +100. It’s dropped that
far only 36 times in more than 1,300 weeks of ongoing polling since late
1985; this shift erases an equally unusual 5-point gain in early
January...After reaching -40 Jan. 9, the CCI is now at its low for the year, and
its lowest since Nov. 21. It averaged -46 in 2010 and -48 in 2009; those
compare with a lifetime average of -14 and a best-year +29 in 2000. Its
single best week was +38 in January 2000; its worst, -54 in December
2008 and again in January 2009." So strange: unlike with stocks, where inflation is somehow supposed to raise confidence, inflation for the people somehow leads to a near record plunge in confidence. But who are we to believe in this centrally planned economy when every single data point is now fit to be discarded as nothing more than evidence of propaganda.