Archive - Apr 13, 2011 - Story

Even though US companies have yet to step up and indicate just how badly they have been affected by the Japanese quake (which could take a while: one of the benefits of massive inventory stockpiling), Japan is not that lucky. According to a Reuters poll the March 11 catastrophe has negatively affected nearly 60 percent of Japanese companies, disrupting production and supply chains."The special survey of 400 large firms was taken between March 25 and April 11 in tandem with the monthly Reuters Tankan, a poll of corporate sentiment... While Japanese companies are likely to be squeezed by production disruptions in northern Japan, as well as power shortages and supply woes, they may not feel the same pain as after the collapse of Lehman Brothers, when lending markets froze. "The impact of this earthquake will not be on the same scale as the Lehman crisis," said Soichiro Monji, chief strategist at Daiwa SB Investments, a Japanese asset management firm." Considering money markets froze up, stock plunged 40% and the world virtually ended in the months following Lehman, that's probably good news. As for the bad news: "Nearly 70 percent of respondents said difficulty in acquiring materials or parts was the single biggest problem in righting their businesses, a sign that supply chains remained hampered." And considering the bulk of Japanese production is export oriented, it is only a matter of time before these disruptions spread globally.

Nothing is cheap in today’s investment world. Because of the trillions of currency units that governments all over the world have created – and are continuing to create – financial assets are grossly overpriced. Stocks, bonds, property, commodities and cash are no bargains. Meanwhile, real wages are slipping rapidly among those who are working, and a large portion of the population is unemployed or underemployed. The next chapter in this sad drama will include a rapid rise in consumer prices. At the beginning of this year, we saw the grains – wheat, corn, soybeans and oats – go up an average of 36% within one month. In the same time frame, hogs were up 30.7%. Copper was up 29.1%. Oil was up 14%. Cotton was up 118%. Raw commodities are the first things to move in an inflationary boom, largely because they’re essential to everything. Retail prices are generally the last to move, partly because the labor market will remain soft and keep that component down, and partly because retailers cut their margins to retain customers and market share. There are several alternatives to dealing with the question “What should I do with my money now?” – active business, entrepreneurialism, innovation, “hoarding” and agriculture. There’s obviously some degree of overlap with these things, but they are essentially different in nature.

Yesterday JPMorgan, today Goldman (again) and Deutsche Bank. Following the completion of a two-year report by the Senate Permanent Subcommittee of Investigations into the role of Goldman and other banks in the housing collapse, the FT reports that  "US Senate investigators probing the financial crisis will refer evidence about Wall Street institutions including Goldman Sachs and Deutsche Bank to the justice department for possible criminal investigations, officials said on Wednesday." According to Carl "Shitty Deal" Levin, head of the subcommittee, "banks mis-sold mortgage-backed securities and misled investors and lawmakers. “We will be referring this matter to the justice department and to the SEC [Securities and Exchange Commission],” he said. “In my judgment, Goldman clearly misled their clients and they misled Congress.” Bloomberg further clarifies: "At a briefing today, Levin said he believed Goldman Sachs executives weren’t truthful about the company’s transactions in testimony before the subcommittee at an April 2010 hearing. He said he would refer the testimony to the Justice Department for possible perjury charges...In my judgment, Goldman clearly misled their clients and they misled the Congress.” Levin said. And Deutsche Bank's Greg "I am short your house" Lippmann was not spared either: "Republicans and Democrats signed off on the report, which said Greg Lippmann, Deutsche’s top CDO trader, referred to assets underlying the securities as “crap” and “pigs” at the same time as his bank was selling them to clients. Prior to the crisis, Mr Lippmann built a short position in CDOs, betting that they would fall in value, even though Deutsche had a large long position on the securities." Just more smoke and mirrors? Or are we getting to a critical mass where even the very corrupt judicial system will have to respond?

It had been a while since we had a factual update (as opposed to just lies and spin) from Fukushima. Courtesy of Kyodo, we now know that what was speculated by some as true, and rebutted by most as mere scaremongering, is in fact, fact. "Some of the spent nuclear fuel rods stored in the No. 4 reactor building
of the crisis-hit Fukushima Daiichi power plant were confirmed to be
damaged, but most of them are believed to be in sound condition, plant
operator Tokyo Electric Power Co. said Wednesday." Naturally, in one month we will learn that most of them are damaged, and in two months, that each and every one has been demolished. "The firm known as TEPCO said its analysis of a 400-milliliter water
sample taken Tuesday from the No. 4 unit's spent nuclear fuel pool
revealed the damage to some fuel rods in such a pool for the first time,
as it detected higher-than-usual levels of radioactive iodine-131,
cesium-134 and cesium-137." These confirm an ongoing fission reaction. In a tremendously ironic development, the No. 4 reactor, halted for a regular inspection before last month's
earthquake and tsunami disaster, had all of its 1,331 spent fuel rods
and 204 unused fuel rods stored in the pool for the maintenance work. Unfortunately, the entire pool ended up being damaged following the quake and the subsequent explosion, in essence nullifying any protection that the containment dome would have provided. As the picture from the Asahi Shimbun below shows, the damage from overhanging structures which have subsequently fallen into the fuel pool likely means that there could well be an uncontrolled, if weak, fission reaction currently going on in the reactor 4 SFP (where the water temperature is currently 90 degrees) unprotected by the elements due to the complete destruction of the Reactor 4 shell.

The same themes remain in place (equity to credit preference, up-in-quality credit, and rising dispersion or idiosyncratic risk), all of which warrant concern over equity levels. While earnings are supposedly the mother’s milk of stock prices (someone really smart told me that every day this year?), we are reminded that free cash flow is the real driver and profits are a levered result of GDP growth which is being downgraded lemming-like as we speak. While credit availability remains good for IG issuers, the potential for relevering (shareholder-friendliness) may be tainted if US CEOs continue to behave like Japanese CEO did in the 80s/90s – expecting lower than trend growth they hoarded and burned through cash. We like IG-HY decompression, HY 3s5s flatteners, Financials underperforming non-financials, and would remain fully hedged in The A-List for now. Our ETF Arb is stable and has more room for upside.

Some time ago Ben Bernanke's right hand man (and it certainly goes both ways), better known as the guy who is the gatekeeper to the entire shadow banking system, Jamie Dimon railed against debit interchange fees, claiming they are "counterproductive", represent "price fixing at its worst" and are "downright idiotic." Dick Durbin, who introduced the interchange fees amendment responds in kind.  "I recognize that Chase will likely see decreased revenue from interchange reform, but I urge you to keep some perspective. Last year Chase had $17.4 billion in profits — up 48 percent from the previous year - and a 15 percent profit margin. Your own personal compensation "jumped nearly 1,500 percent to $20.8 million in 2010" according to Reuters. In contrast, middle-class American families are struggling to get by in a tough economy — an economy that went south because of the banking industry's unregulated excesses. There is no need for you to threaten your customers with higher fees
when you and your bank are already making money hand-over-fist. And
there is no need to make such threats in response to reform that simply
tries to spare consumers from bearing the cost of interchange fees that
are anticompetitive and unreasonably high...In the coming weeks I am confident the Fed will produce a reasonable set of reforms that will enhance the efficiency, competitiveness and fairness of the debit system. This will neither be "counterproductive" nor "idiotic." It will be good news for all Americans." Poor Dick apparently does not know that you don't call out Jamie's BS - it only leads to exponential escalation in the M.A.D. doctrine until Jamie finally blows his top and threatens the world with an extinction level event if the ROI for his "shareholders" does not grow by at least 100% Y/Y? But at least this response does set the precedent that someone voicing an opinion contrary to that of JP Morgan does not lead to a horde of satanic demons flying out of a hole in the ground and dragging the offender deep into the bosom of Hades.

Two days ago John Paulson had an extended interview with Les Echos which however received little coverage in the US, supposedly since the interview was in French, and also because it was behind a paywall. Since the interview does provide some incremental perspectives by Paulson, it is useful to recreate it in its entirety. Specifically, Paulson is now far more bearish on US housing, blaming it on FrankenDodd, and he continues to be as bullish as ever on gold. To wit: "Over time, the price of gold will rise in proportion to the creation of paper dollars. In an inflationary environment where the demand for protection increases, the price of gold can rise even further. Historically, gold has always been a safe haven against inflation and a safe haven in times of political instability. Today we face both risks." As for whether or not we will have QE3: Paulson is not the guy to ask. He is as confused as the Fed presidents.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 13/04/11

Remember when back on December 1, Goldman's Jan Hatzius issued its "revolutionary" bullish economy report which contained the following line "This outlook represents a fundamental shift in the thinking that has governed our forecast for at least the last five years" (and which was appropriately ridiculed by ZH :"This is unfortunate. Jan Hatzius used to have credibility"), starting a frenzy across Wall Street when one after another the econolemmings confirmed that bubble mania is alive and well, desperate to hike their own irrelevant GDP numbers as quickly as possible? After all Goldman had just given them the green light to do so. That the hike was based on something as transitory as a payroll tax fiscal stimulus and an ongoing (and allegedly soon ending) monetary stimulus in the form of QE2 was irrelevant: the Russell 2000 was up, meaning the economy was improving. Well, Jan redeemed himself realizing once again first, ahead of the crowd of idiots, that everything is about to go to hell, by downgrading Q1 GDP ahead of everyone else (naturally to be followed by the stampeding herd of lemmings - here's looking at you Joe LaVorgna and whoever the Barclays economist is, if they can even afford one - once again). But anyway since the first sentence was a question, if the answer is no, below we recreate the history of Q1 GDP forecasts by Wall Street's intellectual brigade. We will not point out the roundtrip, or put into question the relevance of the "economist" occupation on Wall Street. It is rather self-explanatory.

Warning: people on blood pressure medication are urged not to read this.

Yesterday the media had a field day when it was uncovered that the hard fought $38 billion in budget "cuts" which almost caused America to shut down were in reality $14 billion. We, thus, can't wait to find out what the response will be when it is uncovered that the actual cuts were... $353 million. Yes: the ongoing functioning of the government was a pawn in a soap opera whose benefit to the US debt is $353 million, or about what Goldman's trading desk makes in less than one day.

The president has released a budget proposal that goes beyond his budget proposal for fiscal year (FY) 2012. The most important new items are a “debt trigger” that would result in across-the-board cuts in spending and tax credits/deductions if debt/GDP goals are not reached, additional reduction in defense and non-defense discretionary spending and an endorsement of additional entitlement reductions. In most cases, the proposal outlines savings only at a high level.

Following the just completed teleprompted preaching of concentrated, yet inverse, truthiness, we find that yet another bankrupt country has in fact been lying about its economic prospects. Following the recent stunning disclosure out of Portugal that contrary to constat promises to the contrary the country was in fact, broke, now we get another admission, this time from a country already bankrupt. Per the FT: "Greece needs time to convince international investors about its reform programme and may not be able to return to financial markets next year as planned, its finance minister has admitted. Greece’s budget plans are fully funded this year but Athens will have to raise between €25bn-€30bn on financial markets in 2012 – a step that would mark the first stage of its international rehabilitation. But Mr Papaconstantinou suggested that goal was in doubt and the timetable would not become clearer until an EU-IMF agreement had been struck for Portugal, the latest victim in the eurozone debt crisis. “A judgment cannot be made before the summer and before Portugal closes its deal,” he said." So now it is trendy for one broke country to bash another broke country? In retrospect Greece should have a right of first refusal of bailout funding: after all it first (was forced to) disclose its bankruptcy. Surely there should be some brownie points for that. But all this may well be moot: Germany is now openly saying the need for a Greek restructuring is coming. Which means that senior creditor haircuts (supposedly up to 50-60%) are imminent.

Two years after Obama promised to cut the budget in half by the end of his first term (it appears he was confused by math symbols: he meant divide by half), here he is again, reading from the teleprompter, and making a bunch of senseless promises that have no chance in hell of coming true. Most notably, Obama will promise to cut $4 trillion over the next decade. Of course since by $2020 the budget deficit will be measured in quadrillions, a $4 trillion cut out of $X quadrillion is actually perfectly feasible. Which is why we take back everything we said: Obama will absolutely come through on his promise.

We haven't read the whole thing. We probably won't. In essence banks promise to never engage in robosigning. Atualy monetary penalty - none! With every bank signing this form of agreement, the administration can again say all is well, and people can go back to purchasing mortgages whose notes are forever lost in the black hole that is multi-trillion bank fraud. But don't worry: they promise to never do it again.

The Treasury just sold $21 billion in a 10 Year reopening (9 year 10 months), at a high yield of 3.494%, just below last month's 3.499%. Overall the auction turned out weak pricing outside of the when issued, confirming that the butterfly-ES correlation (which is primarily driven by the 10 Year) is working. And just as the market dipped into the auction the natural response would be a pick up following the placement. The internals were weak: Primary Dealers were forced to take down more than half (51.7%) of the auction (with every intention to flip to the Fed in a week or so), the highest Primary Dealer takedown since February 2010. In return, Indirect Bidder interest slumped to 42.4%, the weakest showing since October of last year, and the balance, or 5.9% was filled by Directs. The low Bid To Cover completed the weak picture, coming at 3.13, the lowest since December, but in line with a one year average. More importantly, with this $21 billion and yesterday's $32 billion, US debt is now $53 billion higher than the unsettled total disclosed yesterday of $14.268, or $14.321. This is far above the debt limit. It also means that the debt actually subject to the limit is now $14.269 billion, or $25 billion below the ceiling.
And keep in mind there is another $13 billion in 30 Years to be
auctioned off tomorrow (granted offset by $19.2) billion in maturities.
Will the Treasury last through July without a debt ceiling increase at a
rate of issuing $125 billion in net debt per month? Not a chance in
hell.