Archive - Feb 2012 - Story

In what could be the biggest merger news of the year, Bloomberg reports that Glencore and Xstrata could be close to a merger:

• GLENCORE SAID TO BE NEAR AGREEMENT TO COMBINE WITH XSTRATA
• GLENCORE, XSTRATA MAY ANNOUNCE DEAL AS SOON AS THIS WEEK
• COMBINED XSTRATA, GLENCORE MAY BE WORTH $82 BILLION
• GLENCORE INT'L RISES AS MUCH AS 4.6% IN HONG KONG

It is unclear if this merger will suffer the same fate as the NYSE-Deutsche Borse, but if successful it will surely have a significant impact on commodity prices across the world as yet another monopoly is formed and changes the layout of the playing field once again. More interesting will be the response by the investment banks which have recently also gotten aggressively into the commodities space.

Remember when the US hiked its debt ceiling on Friday courtesy of a formulaic 52 affirmative votes in the Senate, giving the Treasury $1.2 trillion in dry debt powder to attempt to grow the economy one more time according to the algorithmic fantasies of voodoo priests with pieces of Ivy League parchment on their walls? Well, two days later, the dry powder is less than $1.1 trillion. In other words, in the past two days, total US debt increased by $120 billion, along the lines of our expectations, as the Treasury filled up all the G-fund cash it had pillaged to continue issuing debt throughout the month of January even though it was formally above the debt ceiling. What is more concerning, is that as the chart below shows, the trendline of US debt since the beginning of 2011 is no longer a straight line, but has slowly transformed into a parabola, the very same word used as the root in such other infamous words as, for example, parabolic.

The most eagerly awaited IPO of the decade has just filed its S-1 statement (link). Some real time observations:

• Symbol: FB
• Proposed maximum aggregate offering price: $5 Billion
• 845 million monthly active users (MAU)
• 483 million daily active users (DAU)
• Users generated on average 2.7 billion Likes and Comments per day in Q4 2011. Er..."liking" is monetizable?
• 100 billion friendships
• 250 million photos uploaded per day
• FB generated $3.7 billion in Revenue in 2011, up from $2 billion in 2010
• FB generated $1 billion in net income in 2011, up from $606 billion in 2010, a 40% growth rate, compared to the 165% growth rate from 2009's $229MM.
• EBIT margin peaked at 52.3% in 2010 ($1MM in EBIT on $2 billion in revenue), has since declined to 47.3% or $1.756Bn on $3.711Bn in Revenue
• $3.9 billion in cash and marketable securities
• Peaked model? - MAU additions peaked in 2010 when FB added 248MM to a total of 608MM; in 2011 it added 237MM to 845MM

And while the bankers (on both sides of the table) haggle about how to best leech Greece even dryer (with a solution due any hour, day, week now), the actual people are starting to wave the white flag of surrender. Because the opportunity cost of every additional coupon payment is having a direct, immediate and increasingly more dire impact on virtually every aspect of the economy. Kathimerini reports that "about 160,000 jobs will be lost this year in the commerce sector, according to the National Confederation of Greek Commerce (ESEE) as the constant decline in disposable income has led to a sharp drop in turnover and a steep rise in the number of enterprises shutting down." Indicatively, the latest Greek employment figures per the IMF, show  that 4.156MM people are employed. So commerce alone is about to lead to a 4% drop in total jobs. As the chart below shows, net of just this sector, Greek jobs are about to go back to 2010 levels. What this means for the Greek unemployment rate, and for GDP we leave to our readers, although the ESEE does a good job of summarizing what to expect: the "ESEE warns that soon Greece will be in a condition of absolute poverty." And that, ladies and gents, is how Europe slowly but surely reentered the Feudal age, and what every other country in the European periphery that has a massive debt load, and no surplus (actually make that every country in the world), has to look forward to: absolute poverty, aka debt slavery.

Whether it was FX majors, the Treasury complex, or the economically-sensitive commodity markets, the 'negative' shift from yesterday's open (USD up, TSY yields down, Commodities down) plateaued overnight and retraced throughout the day today. Equities and credit however managed to make new highs (while all these other risk-related assets did not) as they stayed in sync for the afternoon (double-topping on lower volume) as financials outperformed (MS +5% for example) on what we can only imagine was Greek rumors (which later proved as usual to be completely false). Oil dropped markedly into the close, heading for $97 as Gold remains the week's winner (though Silver and Copper won on the day). The USD is flat (leaking higher in the late day) to yesterday's pre-market after trying and failing at 1.32 against the EUR (which is the underperformer vs USD on the week for now -0.48%). Treasuries sold off, adding 3-7bps across the curve (though still lower yields on the week) and while 30Y underperformed, 2s10s30s did not move much as the rest of the curve pivoted. The last 30 mins of the day saw ES pull back from its lonely highs to test VWAP (and IG and HY credit also fell with it) as open to close, credit underperformed, and cheap hedge IG was moving more negatively than beta would suggest. By the close, ES had pulled back (lower) to converge with CONTEXT (proxy for broad risk assets) and fell below VWAP as once again average trade size picked up significantly to the downside.

As a follow up to today's must read letter from Bill Gross, the PIMCO head explains what was the thinking behind the conclusion that is slowly leading him to become a gold bug, the potentially erroneous assumption that the Fed can not drop rates below zero (not if Goldman and JPM have their way), why Bernanke has no choice but to write checks when the Twist ends in June which will lead to bond buying for the next 12-24-36 months. Nothing new. What is new, and absolutely stunning, is Gross' endorsement for president: 'I'm a little Ron Paulish." (6'24" into the clip)... That's right. The bond king endorses Ron Paul for president, apparently on the realization that very soon he will have to pay Tim Geithner for the privilege of holding hundreds of billions in US paper. And now we've heard it all.

While first day jumps in IPOs make for great TV and everyone is anxiously awaiting their allocation to the 'greatest IPO of all time' this week, we thought it might be useful to look at some of the larger and more recent tech IPOs to get some perspective on how close to the moon we will get when Facebook is released. Looking at eight of the larger and more media-promoted IPOs of the last year or two (GRPN, ZNGA, LNKD, P, YOKU, DANG, AWAY, and FFN) we find, aside from the potential for an average 50% pop from the lucky allocation / untradable IPO price, the man in the street that bought the IPO in the market on Day 1 now faces an average loss of 54% with incredibly only 1 of the 8 names (ZNGA) still holding on to gains (+11%) having managed to rally 15% in the last week. We assume that the underwriters will price FB for a nice pop and given the euphoria we hear from talking head after talking head, it doesn't matter where it actually opens, it will be bid to infinity and stay there as unlike all these other well-hyped IPOs (and paradigm changers of the past eh hem YHOO), this one will be different.

The idiot market soared earlier on news that a Grek deal was coming "in hours" courtesy of some French leak. Now we get reality.

• IIF SEES `VARIOUS ELEMENTS' OF PACKAGE COMING TOGETHER IN DAYS
• IIF SAYS IT EXPECTS GREEK DEAL NEXT WEEK
  

Like we said. Idiot market.

Obama's latest attempt to stimulate the housing sector and inflate home prices "before waiting for them to hit bottom" (which they never will as long as central planning tries to define what clearing prices are) is a noble reincarnation of now an annual, and completely ineffectual, theatrical gambit. There is, unfortunately, one major snag. It is Dead on Arrival (just like every single iteration of the Greek bailout), for the simple reason that it has to get congressional approval. Which it won't. And that's not just the view of biased political pundits. Wall Street agrees.

Just as we thought GM's channel stuffing days may be coming to an end, and the company may finally be normalizing its inventory management, here come January numbers, where we learn that in addition to car sales declining by 6% compared to a year ago, at 167,962 vehicles sold (of note: "Retail deliveries declined 15 percent compared with the same month a year ago and accounted for 70 percent of GM sales"), it was the all critical month end dealer inventory that caught our attention. And unfortunately as the skeptics expected, GM is back to its old tricks, as dealer inventories rose once again, this time by over 36k units, or the second highest in its post-reorg history, to a near record 619,455 vehicles stored with dealers. This is just the second highest ever in fresh start GM history, second only to November's 623,666. The January-end number represents 89 days supply, but more importantly the recent spike in restocking, which was seen with all other major car dealers, explains the ongoing "expansion" in the US economy as measured by indices such as the ISM. Eventually, when the end demand for these dealer parked vehicles does not materialize, the New Orders so diligently tracked by economists everywhere will slip back under 50, but before that we are confident that the administration will come up with some new Cash for Clunkers plan to take demand from the future and to push it into the days leading into the election, probably funded once again by other taxpayers who don't quite see the fascination with owning a GM car.

Borrowing money based on imaginary future surpluses is a higher form of counterfeiting. And that is precisely what the U.S. is doing, borrowing immense sums at every level, private, corporate and State/Federal, all leveraged against phantom future surpluses, even as the economy requires some 10% of its supposed output (GDP) to be borrowed and spent on consumption each and every year just to run in place, i.e. the Red Queen's Race (Bernanke, Goldilocks and The Red Queen January 10, 2011). In other words, the U.S. economy is running a massive deficit, and squandering the vast sums being borrowed on consumption and mal-investments. Once you rely on more borrowing against imaginary future surpluses to fund your current expenses, then eventually the costs of servicing that debt exceeds any possible future surplus. The last-ditch "fix" is to simply print units of money (or borrow it into existence like the Federal Reserve)--counterfeiting, pure and simple-- and deceive the market for a time via the illusion that the freshly printed units of money are actually backed by productive value or surplus. As history has shown, eventually the market discovers the actual value of this counterfeit money, i.e. near-zero, and the system implodes. Once there is no more "free money" to fund consumption and mal-investment, then the reality of systemic insolvency is revealed to all. You cannot counterfeit actual surplus value generated by productive assets, you can only counterfeit proxy claims on future surplus.

It appears from the Treasury's announcements and the Treasury's Borrowing Advisory Committee (TBAC) recommendations that we will shortly see Treasury FRNs. While details remain murky (what maturities, the underlying index, reset frequency, and so on) we would be surprised if they did not after all this analysis and the potential problems they may face. Given the weight of short-dated maturing Treasury debt, if the Treasury were roll/term this debt out at the same pro-rata distribution of maturities as it has currently, then the weighted average maturity of their debt would rise significantly. While avoiding the short-term limit of zero-date issuance that many European sovereigns face is a positive clearly, the problem for the Treasury lies in the non-domestic (read Fed) demand is waning significantly for any longer-dated Treasuries (while bid-to-covers on Bills remain very high and active for foreign buyers). FRNs would implicitly provide the lender with upside coupon on a rise in rates (a potential plus for foreign demand given their angst and the low level of rates priced into the market) and would benefit the Treasury by reducing potential demand issues at the long-end (and potentially offering the Treasury upside if rates stayed low for longer). The bottom line is that the structural decline in the stock of global high-quality government bonds, coupled with an increase in demand for non-volatile liquid assets, should make U.S. government issued FRNs extremely attractive. Of course, the benefits to the Treasury from issuing FRNs also relies significantly on the Fed's monetary policy stance - savings are likely to be greater when the change in the funds rate is negative, and especially when such change is more negative than the expectations priced into forwards (and it seems reasonable to assume that the risk to short-rates is somewhat one-sided against the Treasury FRN).

Listen to the Landlord in Chief lay out his REO to LBO plan live and in stereo. Since everyone will end up paying for it, directly or indirectly, sooner or later it probably is relevant.