Archive - Jul 2011 - Story

S&P, bored with taking the axe to various insolvent European governments, just went after the man, the myth himself. Next steps: News Corp. expands it media empire by purchasing McGraw Hill (soon to be followed by a tack on acqusition of former-Buffett darling MCO)? "The CreditWatch action reflects, in our opinion, the increased business and reputation risks associated with broadening legal inquiries. Since our last research update on July 13, the U.K. legal process has expanded and pressure from U.S. lawmakers has increased for an FBI probe. In an interview with Bloomberg Businessweek in reference to phone-hacking allegations at "News of The World," an FBI official for the agency's New York office said, "We're aware of certain allegations pertaining to possible phone hacking by News Corp. personnel and we're looking into those charges." In our opinion this and other recent developments materially increase the reputational, management, litigation, and other risks currently faced by News Corp. and its subsidiaries. The last several days have been marked by the resignations of the chief executives of News International and Dow Jones, the issuing of summonses to key company executives to appear before Parliament on July 19, the arrest of a former senior company official, and a weakening of the company's executive bench strength."

As part of its most recent issue the New Yorker has released a must read interview with Ray Dalio - head of the world's biggest hedge fund, Bridgewater. Dalio's fund, which according to some may now be as large as $80 billion, continues to outperform even in this problematic environment, indicating that unlike various other managers who shall remain nameless, and whose wealth is built up almost exclusively on one trade (and that belonging to someone else in the first place), Dalio, despite rumors that he is preparing to leave his current position and is actively seeking a replacement, is still keenly able to adapt to changing macro conditions. Which is why his warning about future rounds of QE, which he sees as a certainty, should be heeded. Especially since it conforms 100% with the warnings of Zero Hedge - Dalio believes that future inevitable money printing will "lead to a collapse in currencies and bond markets." Dalio is even kind enough to give a time frame. "I think late 2012 or
early 2013 is going to be another very difficult period." He is, to say the least, quite diplomatic.

No, really.

Here it comes again, courtesy of Google Trends. We will shortly start taking bets how many hours will pass before the CME hikes silver margins by another 100%, despite not lowering them once in the spot price drop from $50 to $32 over the past two months.

The barrage of political statements on the debt ceiling is reaching a crescendo. Following Eric Cantor, here is Ron Paul: "The debt ceiling debate is providing plenty of opportunity for political theater in Washington. Proponents of raising the debt ceiling are throwing around the usual scare tactics and misinformation in order to intimidate opponents into accepting more debt and taxes. It is important to distinguish the truth from the propaganda...Perhaps the most abhorrent bit of chicanery has been the threat that if a deal is not reached to increase the debt by August 2nd, social security checks may not go out. In reality, the Chief Actuary of Social Security confirmed last week that current Social Security tax receipts are more than enough to cover current outlays. The only reason those checks would not go out would be if the administration decided to spend those designated funds elsewhere. It is very telling that the administration would rather frighten seniors dependent on social security checks than alarm their big banking friends, who have already received $5.3 trillion in bailouts, stimulus and quantitative easing...We are headed for rough economic times either way, but the longer we put it off, the greater the pain will be when the system implodes...We need to stop allowing secretive banking cartels to endlessly enslave us through monetary policy trickery.

Just out from Eric Cantor: "Tomorrow, the House will vote on Cut, Cap and Balance, a common sense proposal that will cut and cap federal spending to ensure that Washington begins to live within its means and put in place a Constitutional balanced budget amendment that will make balancing our budget the rule, not the exception. No one wants to default on our debt, and that is why House Republicans are bringing forth this plan to meet the President’s request for a debt limit increase with the necessary safeguards to make sure that we don’t continue to kick the can down the road. With millions of Americans out of work, we need to get the economy growing again and control spending here in Washington, and Cut, Cap and Balance is a path forward to do just that. As President Obama has not put forth a plan that can garner 218 votes in the House, I’d caution him against so hastily dismissing Cut, Cap and Balance.”

While we politely disagree with David Rosenberg on what is the ultimate flight to safety "security" (in our insolvent day and age perhaps the very word at the heart of capital markets needs to be changed), with him believing in bonds, predicated by a fear of an eventual deflationary crunch, while we ignore any instrument that is used a policy tool by the central planners and instead prefer precious metals, we always are impressed by his ability to synthesize reality in a few succinct bullet points (even if according to Eni's Recchi itself is irrelevant after saying that "Italy’s bond yields don’t reflect reality"). That is most certainly the case today when in his latest Breakfast with Dave letter to clients, Rosie summarizes the 7 reasons why "we should be worried."

The Guardian reveals a stunning development in the NOTW phone hacking aka MurdochGate case: "News of the World phone hacking whistleblower found dead: Sean Hoare, the former News of the World showbiz reporter who was the first named journalist to allege Andy Coulson was aware of phone hacking by his staff, has been found dead, the Guardian has learned. Hoare, who worked on the Sun and the News of the World with Coulson before being dismissed for drink and drugs problems, is said to have been found dead at his Watford home." For now there appears to be no evidence of foul play... for now: "The death is currently being treated as unexplained, but not thought to be suspicious. Police investigations into this incident are ongoing." Alas, as the full scale of this scandal unravels we are worried that this may be just the first of many tragic conclusions to what is rapidly becoming the biggest media scandal of the 21st century.

Just because someone is dead set on making Apple the only flight to safety in the world (and Gold of course, but unlike the iPad one can't really eat this particular tradition), around the time (10 minutes ago) Obama threatened he would veto the Republican proposed vote to raise the debt ceiling coupled with a cap on spending and balanced budget amendment to the constitution, the selling off spilled over to Treasurys, which as the chart below demonstrates are broadly lower across the curve, but most emphasized at the 30 Year spot, which as Russ Certo says (see below) is being "dragged to the slaughter house." Alas, judging by bank trading today the 2s30s steepening is completely irrelevant for bank stocks, for the simple reason that i) nobody needs any new mortgages and ii) nobody actually pays their mortgages. This is the second day since last week in which there is coordinated selling in stocks and bonds. Expect much more bond weakness with each day there is no bond deal.

Here are the Status Quo's most important investment "stories:"

1) China will continue booming for decades
2) U.S. equities will continue soaring as profits continue rising
3) The U.S. dollar will continue heading down because Bernanke wills it to do so

I would love to believe these magical tales, but the charts cast a skeptical pall on the happy stories. Beauty and uptrends alike are in the eye of the beholder, so maybe you see uptrends in equities here; I don't.

A snapshot of the US Afternoon Briefing covering Stocks, Bonds, FX, etc.

A few days ago when we demonstrated the most recent bond issuance by Bank of America in which the firm issued $2.5 billion in new bonds, we said "BAC is largely underreserved for a settlement of this size which means its Tier 1 capital ratio will likely be impacted due to a major outflow of cash." Obviously the implication was that a capital raise is imminent. And while we were not exactly expecting the bank to access the equity capital markets (immediately), we knew cash would have to come from somewhere. Sure enough, Bank of America just issued $2.5 billion in 5 year bonds. So just when does the equity raise come? Two questions: is this funding simply to replenish the cash to have a decent Tier 1 ratio, or is the bank merely preparing for a waterfall of litigation now that the seal has been broken?" Well, the reason why the bank's stock just tumbled to fresh multi-year lows, and just on top of John Paulson's cost basis is a report from Bloomberg's Hugh Son which confirms our worst fears about the bank: "Bank of America Corp. (BAC) may have to build its capital cushion by $50 billion and renege again on Chief Executive Officer Brian T. Moynihan’s pledge to raise the firm’s dividend as mortgage losses drain funds." Next up, after investors balk to buy bonds from the firm at preferential rates, is Bank of America coming to market with another equity raise in full confirmation that the emperor is indeed naked... and Moynihan is about to be sacked.

Over 3 weeks ago, before Italian treasury spreads blew out by several hundred basis points, and before Italian bank stock trading halts became a daily occurrence, we suggested that the European contagion was shifting to Italy based on Goldman dark pool Sigma X trading. To wit: "Today's most active names are Banca Monte dei Paschi di Siena, Unicredit and Intesa Sanpaolo. Translation: someone is actively positioning for serious action in Italy shortly." That someone sure was right, and it is precisely this trifecta of stocks that at last check was halted on the Borsa. Well, based on today's action at Sigma X, the next, and probably biggest domino may be about to fall: the UK itself, because coming in at position #2, just behind UniCredit, we see Lloyds Banking. And if Lloyds goes, the ones that will follow are Barclays and RBS. At that point, the financial crisis goes global.

This must be another one of those things that accompany the American economy one year into the recovery (Tim Geithner^©).

It's getting very scary out there. First there has been an unsubstantiated rumor that Spanish PM has resigned based on an El Pais editorial, and then we have the fact that Greek 2 year bonds have just collapsed by another 2% to an all time record 35.19%. The cherry on top are reports that Intesa Sanpaolo and some other volatile bank shares are suspended after continuing their last week plunge. One day soon the entire European stock market will just shut down and not reopen (which will naturally simply be an excuse for the US HFT lobby, which now feels unfairly attacked for being a malicious parasite, to levitate the Russell 2000 to unseen levels).