Archive - Sep 17, 2013 - Story

If there was one deal that epitomized the last credit bubble, aside from the Blackstone IPO of course, it was the ginormous, $45 billion 2007 LBO of TXU, now Energy Future Holdings. And while the tide for the New Abnormal credit bubble has yet to expose its megalevered monoliths swimming fully naked, as for now corporations have opted for graduated semi-MBOs in the form of ever larger stock buybacks (although as rates rise this too day of reckoning is coming), the time to pay the piper for the last credit-fuelled binge has arrived and inevitable bankruptcy of this landmark deal is now just days away. From the WSJ: "Energy Future Holdings Corp. has begun sounding out banks for financing to help it operate during expected bankruptcy proceedings, which could come as soon as November for the Texas power producer."

While stocks were a one-way street higher today, with the S&P pulling back to yesterday's cash opening levels; the rest of markets did not seem so excited about the prospects for tomorrow. The USD was down (no-Taper), Gold, silver, and oil were all down notably (Taper), Bonds flatlined with the long-end modestly lower in yield (Taper/no-Taper), and stocks rallied (on dismally low volume) in Taper-is-good-news mode. It was all pandas and kittens though as VIX was heavily bid relative to stocks as at least some 'investors' sought protection ahead of tomorrow's big day. This is the 12th up-day of the last 14 days for the S&P 500 - sure, why not?

In mathematics, the term ‘linearity’ describes a relationship in which the rate of change for a variable is constant. However, just like the erosion of civil liberties, the destruction of financial privacy, the growth in world population, the expansion of the money supply, and the demand/depletion of natural resources, debt is an exponential challenge. The danger with exponential problems is that they can really sneak up on you. The numbers do not lie. Debt grows exponentially. Tax revenue grows linearly. So the only question is – what time would you leave?

In a long and proud tradition started by Solyndra and A123, and going through such Tesla ancestors as the Fisker Karma and Coda, the US government continues to demonstrate that when it comes to misallocating capital, albeit in (or due to) the pursuit of noble "green" causes, it has no peer. Fast forward to today, when we find that the latest casualty of a world in which ridiculous business models and lack of cash flows does not result in an Amazon-esque happy ending, is Eco(fa)tality, a maker of batteries and Blink charging stations for electric cars, which overnight filed for bankruptcy. If fact, do not pass go, do not pretend to have anything even remotely close to a sustainable business mode, and go straight to a liquidation auction.

"Exceptional..."

The Federal Reserve is in a classic double-bind: as its policies to boost growth bear fruit, interest rates rise, threatening the very recovery the Fed has lavished trillions of dollars of quantitative easing (QE) to generate. Put another way: if growth is needed to boost corporate sales and profits, but growth leads to higher interest rates and reduced central-bank suppport of markets, this is a double-bind with no exit.

Over the past year, India has unleashed the most unprecedented series of gold "capital controls" ever seen in a modern nation, shy of confiscation (and even that may be imminent). Today, India added yet another more measure to its list of prohibitions that seek to minimize the size of the gold market available to citizens, yet which will only result in even more interest and demand in the yellow metal. As Reuters reports, India increased its import duty on gold jewellery from 10 percent to 15 percent, setting it higher than the duty on raw gold in a move to protect the domestic jewellery industry. Why is the government doing this? Simple: "To protect the interests of small artisans, the customs duty on articles of jewellery ... is being increased," the ministry said.

While the White House is trying to play this down currently in the press conference, Brazil's President Rousseff has issued a statement postponing her trip to the US due to the illegal espionage of the Americans:

• *BRAZIL SAYS U.S. HASN'T PROVIDED ADEQUATE EXPLANATION ON SPYING
• *BRAZIL'S SAYS IT NEEDS U.S. EXPLANATION BEFORE STATE VISIT
• *BRAZIL SAYS U.S. ILLEGAL MONITORING OF GOVT, COS. IS 'SERIOUS'
• *BRAZIL PRESIDENT ROUSSEFF POSTPONES STATE VISIT TO THE U.S.

According to AP, Obama spoke to Rouseff on the phone but that didn't do it as the Brazilian President demanded a full public apology.

Today's TIC data showed something disturbing: for the fourth month in a row, foreigners were net sellers of US Treasury paper in July , as total foreign holdings declined from $5.600 trillion to $5.590 trillion which represents 49% of total marketable debt (including the debt owned by the Fed of course). In other words, since peaking at $5.724 trillion in March, foreign-held debt has declined by $134 billion, at a time when yields have surged on fears the Fed's tapering of its own purchases of bonds will mean less Fed frontrunning opportunities. However, it is only when broken down by gross purchaser, that we see just who is to thank for this surge in buying of Treasury paper in the month of July. One look at the chart below should explain it...

Equity markets were quietly confident that no matter what the mortgage market did, the Fed would save them in 2007. Bond markets had already got a little nervous as collateral squeezes and forced liquidations had led to a large jump in bond risk relative to equity risk - but again this was eschewed by any number of equity long-only managers and their non-money-managing partners-in-crime - the sell-side strategist - who confirmed that any dip should be bought and the increased risk in bonds was exactly the catalyst to rotate to stocks for the long-term. Fast-forward $8 trillion and five years and the patterns of bond and equity risk look awfully similar - as does the echo chamber of status quo opinion at the 'events' facing the market. History may not repeat, but we suspect it will at least rhyme here...

With spending habits waning amid soaring interestrates and rising gas prices, it is perhaps useful to note the trends in the stickiest of spending habits - tobacco, alcohol, and fast food...

Volume is worst (pro rata) than yesterday in equities; AAPL is up though (but gold is down oddly). In fact US equities are on their own heading into tomorrow's angst... the USD is lower, Treasuries are flat, oil, gold, and silver are all down, VIX is staying signficantly higher and HY credit spreads are notably wider...

While the issue of whether they will or won't taper is certainly still not clear, the WSJ's John Hilsenrath notes that the other dilemma facing the Fed is whether to reduce their purchases of Treasurys, mortgage-backed securities or both. According to officials, Hilsenrath notes, there were two lines of thinking at the Fed on how to structure a pullback from the bond programs and the issue would be discussed at the meeting. Goldman's Jan Hatzius has posited that "Fed leadership probably views MBS purchases as more effective in boosting economic activity than Treasury purchases," but as Hilsenrath notes, some Fed officials prefer a simpler-to-communicate strategy of proportional cutbacks to both MBS and Treasuries. The fact that Hilsy is reporting this suggests that a Taper is somewhat inevitable - as we have noted since the Fed remains cornered. On average, the market expects a $6bn taper on Treasuries and $3 billion for MBS.

A very soon tomorrow will bring the decision of the Fed concerning tapering into focus. Ok, a kind of fuzzy, hard to see and wispy focus. The one thing that we can assure you of is that whatever is to come our way it will not be a singular event. You will hear from the imbibers of Cool Aid and other mischievous reality altering drinks that it could be a one-off event. Tomorrow a process will be started, it will probably go in fits and starts but do not blind yourself; it will be the beginning of the journey to cut back on the propping up of the markets by the Fed.

The U.S. Census Bureau announced today that in 2012, real median household income and the poverty rate were not statistically different from the previous year.  The 88-page report (found here) contains a plethora of statistical data, slicing and dicing income and poverty data by race, gender, and so on but in order to see through the haze, the following three charts sum it all up perfectly (sadly). The poverty rate in the US is stable at 15% - practically the highest since the mid 1960s and real household incomes are stagnant at 1997 levels. Spot the cyclical recovery...