Archive - Jan 2013 - Story

Update: it appears Carl Icahn agrees with our assessment: CARL ICAHN SAYS CHESAPEAKE'S COLLECTION OF ASSETS "ARE THE BEST PORTFOLIO OF ENERGY ASSETS IN THE COUNTRY"

Back in May 2012, when Reuters' all out aggressive campaign against Chesapeake Energy was in full swing and the stock was trading around $14 per share but before Icahn and Loeb were publicly involved, we predicted that contrary to the endless balance sheet bashing there was, in fact, much upside to CHK. We said that the argument rests on one simple fact: its asset base, which ignoring the firm's liabilities - as in a ZIRP environment, even CHK could easily refi its debt at very agreeable terms - and the CEO's lousy industry reputation implied a far higher stock price for the company. To wit: "the company has lots of good assets, as well as quite a few legacy liabilities, combined with an industry environment that is as bad as it has ever been. And sure enough, in betting that the environment might actually improve for a change, there are quite a few big firms which may be happy to onboard the assets and the liabilities, knowing they wouldn't impair the right side of their balance sheet, while acquiring some good real estate and substantial reserves on the left, at a valuation that is the cheapest in the industry. Because in finance, once central planning is (finally) stripped away, valuation is all that matters." And even before that, a far more immediate catalyst we predicted would be a simple succession event "which eventually will culminate with the long overdue termination of the company's head." Or, said simply, the sacking or resignation of the disgraced CEO would unlock material upside value. Moments ago just this happened, as the company just announced a "succession plan" the direct result of which is that the CEO is out as of April 1. The upside value in question: just about 10% as the stock is currently soaring in the after hours session.

Several years after revealing the first one hundred trillion modern-day banknote and seeing its economy implode in a cloud of hyperinflationary smoke, Zimbabwe's problems are back with a vengeance. And this time not even more currency destruction, as Zimbabwe does not actually have its own currency any more having largely shifted to foreign currencies primarily the USD and the ZAR - can help. The problem? The country is officially out of cash. From AFP: "After paying public workers’ salaries last week, the balance in cash-strapped Zimbabwe’s government public account stood at just $217, Finance Minister Tendai Biti said Tuesday. “Last week when we paid civil servants there was $217 (left) in government coffers,” Biti told journalists in the capital Harare, claiming some of them had healthier bank balances than the state. “The government finances are in paralysis state at the present moment. We are failing to meet our targets.”" Sadly not even the projected and quite hilarious 5% GDP growth of the now completely broke country, which can't even create money out of thin air as there is nobody who will lend it even one penny, will do much if anything. (Here we will briefly ignore the fact that Zimbabwe's net cash position is about $120,000,000,000,217.00 greater than that of the US)

The most cartoonish stock of all time just came out with results that can only be characterized as ugly. To wit:

• Q4 revenue of $21.27 billion missed expectations of $22.23 billion
• Q1 EPS of $0.21 missed expectations of $0.27;
• The firm guided top-line lower, seeing Q1 sales of $15-$16 billion, below the estimate of $16.5 billion
• The firm guided operating income much lower, seeing Q1 op income of ($285)-$65 Million on expectations of $261.4 MM
• The firm said the its physical books sales had the lowest growth in 17 years
• Total employees grew by 7,000 in the quarter and 32,200 Y/Y to a record 88,400
• Worldwide net sales Y/Y growth was the slowest in years at 23%, down from 30% in Q3 and 34% a year ago
• And, last and certainly least, LTM Net Income is now officially negative, or ($49) meaning as of this moment the firm with the idiotically high PE has an even more idiotic N/M PE.

... And the stock is soaring in the after hours. Thank you DE Shaw.

The Dow Transports broke its 10-day streak with a very marginal down day today but the Dow Industrials and the S&P 500 all pushed on miraculously running stops and pushing higher. While VIX remains decoupled the two markets traded in a correlated fashion to get the ramp going early and along with Treasury weakness risk-on was well supported. Risk-assets in general are becoming more systemically correlated as USD weakness and oil strength also contemporaneously pulled stocks to highs (led by energy on the week). The afternoon saw VIX decouple from stock's strength and also on the day overall, credit markets were not following along. Volume was above average with some larger block size up near the highs. FX markets reconverged (JPY weakness and GBP strength) to more systemic USD moves as the 10Y tested up near 2.000% but closed just below it. Gold and Silver rose continued their gains from yesterday midday. In general it appears risk is recoupled ahead of tomorrow's FOMC - apart from HY and VIX which appears more hedged.

We are in our sixth year since the US officially went into recession and yet, as CNBC's Rick Santelli notes, we are still in crisis management mode. Some argue that any day now, the Fed will begin to remove its mega liquidity pipe from the market but Rick exclaims in this wonderfully succinct clip that: "there is no expiration date on faulty illogical ideas," as he expects any Fed exit to be "very, very messy." Rick's dilemma is the seemingly paradoxical need for yet moar and bigger monetary policy crisis management by Ben Bernanke when day-after-day we are told by the very guests on his network that "stocks look great." At the end of the day, when the Fed decides to exit, they will not be able to put the liquidity 'toothpaste' back in the tube.

It's been a great 2013 so far for risk-assets right? Wrong. Credit markets have hardly budged (spreads, as opposed to yields) as stocks have surged. We have seen this 'risk' disconnect a couple of times in the last few years and, well, it didn't end well for stocks... but this time is always different.

With the Fed no longer even pretending it is not all about the stock market, where some mysterious trickle down force is supposed to boost the economy the second the S&P hits new all time highs, and injecting billions into stocks via Primary Dealers courtesy of the daily now-unseterilized POMO (today's edition saw another $3.4 billion enter risk assets), there is apparently no reason to worry about anything. Sure enough, institutions don't need a second invitation to BTFD especially if they can do so on margin. According to the latest NYSE margin debt data, the December of margin debt used for various leveraging activities rose for the fifth consecutive month, reaching $331 billion - the highest since February 2008, when the market was declining, and back to the levels from May 2007 when the market was ramping ever higher to its all time highs which would be hit 3 short months later, and just as the subprime bubble popped.

For many the rise of nominal equity prices over the past few years has been remarkable given the back-drop of stagnating growth and joblessness. But it is the last few months that perhaps beggars belief as macro fundamentals plunge to 5-month lows, consumer confidence to 13-month lows, and earnings show considerable weakness (if you look at the data and ignore the anecdotes); and yet, day-after-day, stocks push higher little-by-little, stop-run by stop-run to five-year highs. The chart below suggests, though, that for now the parabola may need a little pullback before gathering steam once again.

"The delinquency rate today on student loans that were originated from 2005-2007 is 12.4 percent. The comparable figure for student loans that were originated from 2010-2012 is 15.1 percent, representing an increase in the delinquency rate by nearly 22 percent....This situation is simply unsustainable and we’re already suffering the consequences,” said Dr. Andrew Jennings, FICO’s chief analytics officer and head of FICO Labs. “When wage growth is slow and jobs are not as plentiful as they once were, it is impossible for individuals to continue taking out ever-larger student loans without greatly increasing the risk of default. There is no way around that harsh reality.”

The sad fact is that it appears completely rational to be ignorant about politics. The cost of being an 'informed' voter - as opposed to a bigotted closed-minded ignoramus - is high, from the time spent following (and interpreting) the news in the paper, online, and on the television. As the following clip notes, "becoming an informed voter is competing with a lot of other needs in your life," from American Idol watching to eating Cheetos in the bath. Of course, the sad truth is that it has never been more important to be 'informed' and so the 'bread-and-circuses' will continue lest we stumble upon the truth - but perhaps this brief clip will sway a few more to the dark side of 'the informed' - though just because 'you' are better-informed does not mean politicians will do a better job - as the probability of your vote changing the outcome of an election is for all practical purposes, zero!

Moments ago the Treasury closed its latest 5 Year bond auction in what was probably the most boring auction of 2013 to date, and perhaps of the last several months. The high yield was 0.889%, just inside of the 0.89 When Issued, with 32.39% allotted at the high, some 12 bps higher than December's 0.769 and the second month in a row of increasing yield. While hardly anything to write home about, this was the highest yield on 5 Year paper since march 2012. The Bid To Cover also rose, at 2.88, it was higher than last auction's 2.72, and right on top of the past 12 month average. The internals were boring too, with last month's record Direct take down of 30.4%, and correspondingly low Indirect 32.4% take down, inverting, with some 16.8% of the auction going to Directs, still the second highest ever, while Indirects ended up with 39.7%, and the remaining 43.5% handed to Dealers. In short- very uneventful, and just like yesterday, not even a trace that someone, anyone, may be losing their appetite for US paper.

In early June 2007, Treasury futures saw their largest-ever put volume traded (821,978 contracts) and within a few days, Treasury yields had peaked at 5.32% and never looked back. Yesterday, according to CME data, Treasury futures put volume hit 758,020 contracts (second only to that 2007 high) as 74% of the entire options trading volume was in puts (and 88% of 5Y futures options were puts!). With the FOMC tomorrow and everyone seemingly convinced that the 'great rotation' is in place, it would appear the crowded trade is being bearish bonds.

Buried deep in the bowels of the much-heralded last-minute fiscal-cliff deal, that saved us from a fate worse than death and raised taxes on 77% of Americans, was a quiet little provision, inserted at the last minute, that sharply slashed Medicare payments to brain-tumor radiation provider Elekta by 58% while leaving its main competitor Varian's payments unchanged. As the WSJ reports, the provision was put through by none other than Harry Reid - who has a 'deep relationship' with Varian (the winner). Whether crony capitalism is alive-and-well is up for debate - as Varian suggests this 'levels the playing field' but it is the fact that Varian beefed up its outside lobbyists to 18 (from 10) and the provision was not added until the last day suggests this stinks. Once again, it appears, our government is picking winners - and losers (with Elekta as a foreign company unable to participate financially in American elections). As the WSJ notes, the insert looks like the kind of provision helping a specific company or industry that lawmakers have repeatedly vowed to halt. Nonetheless, even in the budget bill tackling the so-called fiscal cliff, lawmakers found time to craft such provisions.

A regular feature back in 2010 when we had our first taste of global currency warfare as Brazil's finance minister accurately summarized when he said "a currency war has broken out" (and yes: currency war existed then, and especially in the 1930s which led to the Great Depression, long before the recent eponymous book came out desperate to take credit for this simplistic concept) were the global FX heatmaps which showed how any given currency is doing on any given day. Since currency warfare is now back and more violent than at any time in the past 80 years, it only makes sense to bring back a long-time reader favorite: the currency warfare heatmaps which show who, on any given day, is winning and losing, the global race to debase and in the process beggar all globalized and SWIFT-interlinked neighbors. But don't forget: in a relativistic fiat world, nobody can actually win the global race to debase. Well, not nobody: gold (and other precious metals) can, assuming it is not confiscated as it was the last time the US ended the global currency war with a 50%+ devaluation of the USD relative to gold... and promptly confiscated all gold.

Amid growing concern of yet another liquidity-fueled real estate bubble in the UAE (real estate firms up 92% in the last year in USD terms), the government (via bank regulations) have drastically restricted the proportion of loans that can be provided to foreign investors. However, this has had absolutely no impact as Bloomberg reports that increasingly 'suitcases of cash' are being used to pay for the property. With relatively lax capital controls 'cash is king' as the efforts of the UAE central bank to cap speculation in real estate (which saw property prices crash 65% from their peak in 2009) are failing as one local realtor noted "[the market] is increasingly dominated by cash buyers," and UAE real estate stocks are up over 20% in the last month alone. From Russian diamond dealers to Iranian speculators, Morgan Stanley notes that "property prices ... have continued to rise because of ample liquidity given negative real interest rates and nominal mortgage rates below rental yields," as the world's central banks do what they do best - blow bubbles in unintended places.