Archive - May 14, 2013 - Story

Back in 2008, Volkswagen briefly became the most expensive stock in the world on what would become the case study of an epic short squeeze when following some (malicious) capital structure drama, the short interest became greater than the total outstanding float, sending the stock up 500% in a few short weeks. German billionaire Adolf Merckle committed suicide as a result. We may be in for a redux, courtesy of yet another car company: Tesla, whose most recent short interest as of 41.5%, has led to a surge in the stock price of nearly 300% in the past few weeks, and which covering rampage shows no signs of abating. Will Volkstesla be the new Volkswagen?

It is just a few hours old, and already the Department of Justice's (legal) AP phone spying scandal has generated unintended consequences, by alienating and confronting Obama with his traditionally strongest constituency: labor unions, in this case the Newspaper Guild. From the Guild's shocked statement: "There could be no justification or explanation for this broad, over-reaching investigation. It appears officials are twisting legislation designed to protect public safety as a means to muzzle those concerned with the public’s right to know." They sound legitimately surprised.

• Controversies give Obama new governing headaches (Reuters)
• About that Capex... BHP to Rein In Investment, Chief Says (WSJ), considers returning cash to shareholders (FT)
• Bloomberg users’ messages leaked online (FT)
• Japanese mayor sparks China outrage with sex-slave remarks (Reuters)
• Economists Cut China Forecasts (WSJ)
• U.S. oil boom leaves OPEC sidelined from demand growth (Reuters)
• U.S. banks push back on change in loan loss accounting (Reuters)
• Fed’s Plosser Says Slowing Inflation No Concern for Policy (BBG)
• Watchdog probes 1m US swap contracts (FT)
• Used Gold Supply Heads for ’08 Low as Sellers Balk (BBG)
• Ex-BlackRock Manager Said to Be Arrested in U.K. Probe (BBG)

Can Sony repeat the magic of the Walkman, the Playstation and the Trinitron? Maybe, maybe not not, and judging by the stock price, soaring recently due to the plunge in the Yen which to many implies a ramp in future profitability (the jury is still out on that), it may not have to. However, activist investor Dan Loeb is not waiting. In a letter filed overnight, Third Point announced it has accumulated 64 million shares in the one time electronics and entertainment giant, making it the largest single shareholder of Sony. As a result, Loeb has a suggestion which is to partially (15-20%) spin off Sony Entertainment, in which Third Point would backstop a $1.5-$2 billion rights offering, with the resulting liquidity could go to boost Sony Electronics, as well as push off debt into the newly-created entity, reducing leverage at the parent company. Following this, the company could focus on restructuring Sony Eletronics, where Loeb believes there is untapped value, which could be as large as ¥725/share when factoring in for EURJPY moves. End result, Loeb sees 60% upside in Sony stock. We wish him the best of luck: other firms, such as Warren Lichtenstein's Steel Partners attempts to go activist in Japan in the past decade have largely crashed and burned. Perhaps for Loeb, the time of Abenomics will be different.

There was a time three months ago, when "beating" German confidence served as an upward stock and EURUSD catalyst not once but twice in the same week. One would therefore assume a German confidence miss, such as with today's German ZEW, which barely budged from 36.3 to 36.4 on expectations of a rise to 40.0, with the current situtation dropping from 9.2 to 8.9, on expectations of a rise to 9.8, should be risk negative. Well, it wasn't: it is the new normal after all, and in fact the EURUSD jumped in a kneejerk reaction at 5 am, rising over 1.3000, albeit briefly, assisted by ZEW members saying that respondents do not see a further ECB rate cut - well, of course not - they are Germans, and Draghi isn't. Perhaps the news of a better than expected Eurozone Industrial Production print, which rose from 0.3% to 1.0%, on expectations of a more modest increase to 0.5%, is what catalyzed the subsequent drop in both the EUR, and US stock futures. The IP strength was driven by Germany, Spain and Netherlands offset be decline in France and Italy. 

JGB Futures avoid a third halt in three days by 1 tick (drop 0.99 vs 1.00 handle limit) but two words spring to mind - not orderly. It seems the pendulum of 'inflation repricing channel through the JPY' has begun to swing back towards the JGB market - not what Abe and his cohorts would have hoped for given the deluge of monetization they are up to. As we originally discussed here, the inflation expectations can be spread across bonds or FX and just as we saw in 2007, 2008, and 2011, the initial burst takes place in one market and the normalizes as the other catches up. In this case it was a massive devaluation of the JPY that is now being 'caught up' to by the JGB yields rising. 5Y JGB yields just topped 40bps (from a 9.9bps low on March 5th!!) and their highest since July 2011. Of course, the problem with rising rates is the burden it puts on the government as cost-of-debt accelerates beyond tax revenues with negative trade balances; and if the JGB channel is now 'inflation security of choice' then JPY devaluation will take a back seat (and so will JPY carry trades driving risk-on around the world - as we noted here). And as if that wasn't all exciting enough, Japanese Machine Tool Orders re-accelerated to the downside -24.1% YoY (worst since January).