Archive - May 2012 - Story

Bankia is done: at this point the only questions left are i) what will be the final bailout cost  ii) who will pay for these costs, and iii) whether the bank has enough beach towels to satisfy the onslaught of manic Spaniards desperate to hand over their €300 euros to the insolvent bank in exchange for some Spiderman-embossed linen. Oh, there is one more question: who is next. Now, as we showed earlier today, in the aggregate the answer is simple: everyone. But, in a very Stalinesque sense, where everyone is merely a statistic, that is essentially the same as saying no one.  It is also certainly not helpful to any Spanish readers who may be worried about their deposits (and investments) which in a world of total disinformation, will first be lost before the government advises caution and safety. So instead we go to Goldman Sachs which has conveniently constructed the following analysis, which replicated the loss provision calculation of Bankia, and applies it to the other listed banks. The result: in addition to the €19 billion in bail out costs for Bankia, Spain will need to spend at least another €25 in bailout funding for six other listed banks which include CaixaBank SA, Banco Santander, Banco Popular Espanol, BBVA, Banco Espanol de Credito SA, Bankinter SA.

Between headlines of Bankia's demise and the growing deposit outflows from Spanish banks, perhaps the market is doing its job. According to the EC's Stability Report, via UBS, one measure of bank sector capacity and efficiency (population per bank branch) shows Spain in a dismal worst place with the least efficiency (or highest over-capacity). Of course, we would suspect that whatever state-funded reach-around bailout the Spanish government comes up with next will not contain a 'revert staff/branch levels to European norms' provision - better to pay up for mis-allocation of capital. Nonetheless, the large number of local bank branches in countries like Germany, France, Italy and Portugal indicates a potential for further consolidation and restructuring there also.

We know the U.S. is a big and liquid (though not really very transparent) market. We know that the rest of the world — led by Europe’s myriad issues, and China’s bursting housing bubble — is teetering on the edge of a precipice, and without a miracle will fall (perhaps sooner, rather than later). But we also know that America is inextricably interconnected to this mess. If Europe (or China or both) disintegrates, triggering (another) global default cascade, America will be stung by its European banking exposures, its exposures to global energy markets and global trade flows. Simply, there cannot be financial decoupling, not in this hyper-connected, hyper-leveraged world.

All of this suggests a global crash or proto-crash will be followed by a huge global money printing operation, probably spearheaded by the Fed. Don’t let the Europeans fool anyone, either — Germany will not let the Euro crumble for fear of money printing. When push comes to shove they will print and fiscally consolidate to save their pet project (though perhaps demanding gold as collateral, and perhaps kicking out some delinquents). China will spew trillions of stimulus money into more and deeper malinvestment (why have ten ghost cities when you can have fifty? Good news for aggregate demand!).

Last time we looked at Denmark it it was in the context of Luxor Capital which had some very ugly things to say about the Scandinavian country in "Rotten Contagion To Make Landfall In Denmark: CDS Set To Soar As Hedge Funds Target Country." Now, 6 months later, Moody's has finally gotten the memo: "Moody's Investors Service has today downgraded the ratings for nine Danish financial institutions and for one foreign subsidiary of a Danish group by one to three notches. The short-term ratings declined by one notch for six of these institutions. The rating outlooks for five banks affected by today's rating actions are stable, whereas the rating outlooks for two banks and for all three specialised lenders affected by today's rating actions are negative  The magnitude of some of today's downgrades reflects a range of concerns, including the risk that some institutions' concentrated loan books deteriorate amidst difficult domestic and European conditions, with adverse consequences on their ability to refinance maturing debt. The latter concern is exacerbated by structural changes in the terms of Danish covered bonds and the mix of underlying assets that lead to increased refinancing risk. While Moody's central scenario remains that financial institutions show some resilience to what will likely be a prolonged difficult environment - and the revised rating levels for most Danish financial institutions continue to reflect low risks to creditors - today's rating actions reflect the view that these risks have increased."

If we had a penny for every equity rally away from credit reality that converged back to credit's less-hopiness, we would now have made 5 pennies in the last 6 trading days. We pointed out last night that equities surged into the close on small average trade size as credit remained far less sanguine and the now-ubiquitous open in Europe started the reversion as stocks fell rapidly, below Friday's close - tracking back with high-yield credit's deterioration. HYG gave up yesterday's gains and pops back under fair-value but rather notably, investment grade credit (IG) underperformed significantly today - which is unusual in a sell-off day and signals either more fallout from JPM reaching for hedges (IG9 10Y 166bps offered +5bps) or investors grabbing the cheapest macro overlay from a carry perspective. Gold and Silver outperformed admirably on the day, however the upward move appears to be more of a reaction back to equity, treasury, and USD reality as the afternoon saw the 4 markets recouple and trade together (after disconnecting notable yesterday). Treasury yields dropped the most in 7 months to new record lows in 10Y and close for 30Y. Both implied correlation (systemic risk) and VIX (normal vol) jumped higher today as the latter moved almost 3 vols to close above 24% (its biggest pop in almost 3 months). A heavier volume open at highs, close at lows day for stocks with little to signal capitulation in terms of trade size - and across broader risk-assets, stocks appear to have room to fall - even after ES suffered its worst loss of the year today.

While it may come as no surprise to market-watchers, the market for over-priced internet IPOs seems to have become a little soft. Bloomberg is reporting that Kayak, which first filed to go public in November 2010 and put its plans on hold earlier this year because of choppy market conditions, is delaying its IPO. The online-travel service roadshow was just postponed and guess who the lead bank on Kayak's IPO was - yep, Morgan Stanley.

A $27 handle... that is all. Just two brief (billionaire-list-demoting) weeks ago, Mark Zuckerberg passed 28 years old, any guesses where the FB stock price will be when he passes 29?

Three weeks ago, when the hit campaign on Chesapeake was in full swing, we made a simple prediction: hate the company for whatever reasons but not because of the balance sheet. We explained that "under ZIRP, when every basis point of debt return over 0% is praised, and an epic scramble ensues among hedge for any yielding paper no matter how worthless, the balance sheets of companies just do not matter. In other words, for companies that have massive leverage, high interest rates, negative cash flow, which all were corporate death knells as recently as 2008, the capitalization structure is completely irrelevant." Alternatively, some other, far bigger, company with a pristine balance sheet and lower quality assets could swoop in and do a full management purge, removing the Mclendon overhang, firing the disgraced Board and commingling liabilities while boosting the quality of its assets. Think the TBTF putches from September 2008. Because at the end of the day, it is all about the quality of the assets. And the reality is that CHK has some quality assets, which, however, are burdened by many legacy issues. There is of course the issue of near all time record gas prices. But there in lies the rub: the prices are already at near all time lows. They could continue sliding, or in a world in which hard assets (and even gaseous) are becoming more and more precious by the day, they could go up. In which case CHK would be a very interesting bet. Needless to say, two weeks after our preliminary CHK assessment, Carl Icahn put his money, or rather $775 million of it to be precise, to essentially confirm what we had said previously. Which brings us to the next question: is CHK really worth more? Well, in keeping with the tradition of keeping it simple, we have decided to present one delightfully simple chart from Bloomberg, which shows where the biggest downside in the stock comes from - it's well-known leverage - as well as where the upside is hiding - its asset base - which has the lowest valuation of its peers.

With Europe now seemingly in exile from even the bravest knife-catcher value-manager, and, despite media protestation, US equities facing weak macro data and a fiscal cliff of epic proportions; it is no surprise that everyone and their mom thinks emerging markets are the place to be. However, as UBS notes today, not all EM balance sheets (whether government, corporate, or private) are the same and they break down the low, medium, and high risk balance sheets across Asia, LatAm, and EMEA. As is evident in Europe, high debt levels are detrimental to economic growth and equity returns. Solid government accounts generally reward policymakers in such markets with valuable policy flexibility, while healthy consumer balance sheets allow credit growth to be a strong domestic growth driver. In a slow and uncertain global growth environment, pillars to support growth are crucial and are market differentiators - especially if global contagion spreads as we suspect

What is it about IMF heads and inserting foot, or some other appendage, in mouth, or some other orifice?

A quick glance at today's cross asset class market moves shows a clear standout. The massive outperformance of Gold (relative to USD strength, Stock weakness, and Treasury yields tumbling). However, focusing on a slightly longer-term context shows that it appears you can't keep a good gold market down as it has merely recovered from its over-zealous selling pressure of earlier in the week - to resync with FX, stocks, and bonds. Most importantly, as we pointed out yesterday, it is now clear once again that 'sexy, smart' stocks knew nothing then (for the fourth time this week) - but keep on believing, as we will focus on 'other' asset classes as a signal.

While we can argue over which exact position Iksil and his crew had on, the widening in IG9 10Y spreads post-Dimon signals an unwind of epic proportions continues. It seems the mainstream media has grown tired of discussing skews, basis, curves, tranches, and tail-risk but for those who care about the reality that JPMorgan faces - we note that the credit index most closely tied to the CIO's office debacle continues to push wider. Today sees the spread at six-month wides (up a hulking 33% since Dimon's mea crapa). Perhaps this helps explain why JPM just can't get a bid (or hold onto one even after last week's ECB/Fed print rumors) as its stock's price hovers just in the red YTD (with a $32 handle).

First it was Nigeria cutting back its European exposure, now it is South Africa's turn:

• S. AFRICA'S MARCUS: SCALE OF GLOBAL CRISIS IS `HUGE'
• MARCUS: WORLD IN WORST POSITION NOW THAN BEFORE CRISIS
• MARCUS: CENBANK MONITORING POSSIBILITY OF CONTAGION
  

Who is next? Kalahari Bushmen pulling their coke bottles on deposit in Murcia cajas? Mail tribesmen wiring their funds from Zurich to Singapore? Somalian pirates watching the VaR models of their Spanish bond portfolios #Ref! out and give up in sheer disgust?

Who???

We are constantly told all our problems are too complex to be addressed with simple "big idea" solutions. Complex problems require complex solutions, we are assured, and so the "solutions" conjured by the Central State/Cartel Status Quo are so convoluted and complex (for example, the 2,319-page Dodd-Frank Wall Street Reform and Consumer Protection Act or the 2,074-page Obamacare bill) that legislators say they must "pass the bill to see what's in it." The real "solution" is to see that complexity itself is the roadblock to radical reformation of failed systems. Complexity is the subterfuge the Status Quo uses to erect simulacra "reforms" while further consolidating their power behind the artificial moat of complexity. Over the next three days, I will present three "big idea" solutions that cut through the self-serving thicket of complexity. Nature is complex, but it operates according to a set of relatively simple rules. The interactions can be complex but the guiding principles can be, and indeed, must be, simple. Big Idea One: Radically lower the cost basis of the entire U.S. economy. The cost basis of any activity is self-evident: what are the total costs of the production of a good or service? The surplus produced is the net profit which can be spent on consumption or invested in productive assets (or squandered in mal-investments).