Archive - Sep 26, 2013 - Story

The last 4 days have seen the price of protection against a default on US Treasuries spike by the most in 4 years. While USA CDS trade on both a default and devaluation basis (as well as technical issues related to which Treasury is cheapest to deliver) this spike to 5-month highs (from what was extremely high levels of complacency) is very notable in light of today's Kocherlakota "whatever it takes" speech. While still well off 2011's debt ceiling debacle panic highs, this move does suggest more than just the politicians are worried about a technical default occurring on US debt. By way of comparison, Germany trades at 23bps and Japan at 61bps against USA's 32bps. But there is a way to trade the debt-ceiling debacle that doesn't invlove leveraged speculation in credit derivatives...

Taper or no Taper. Tapering is not tightening but flow is more important than stock. Doves being hawkish and hawks fearfully dovish... We have seen it all in the last few weeks. In order to keep it all in perspective, Credit Suisse have created this simple cheat-sheet of their informal determination of the Fed official's policy biases based on each official’s voting history and public comments.

Rising income disparity in the U.S. troubles many of us, for a number of reasons. If more of the national income is flowing to the top 1/2 of 1% and less to those earning income from their labor, the foundations of both a vibrant economy and stable democracy are undermined. Many observers identify education as one solution for rising income disparity, as those with higher education (college) have more skills and knowledge and tend to earn more. Statistically, the connection between getting a college degree and higher incomes is weakening as those with college degrees are now in surplus. "More education" of the current sort is not a panacea to wealth inequality, as the widening gaps in education, employment and income are all reflections of a much larger set of forces at work.

While everyone knows that there is a profound ideological schism when it comes to those for and against the Affordable Care Act, aka Obamacare, what may not be appreciated is that Obamacare was, and still is, the most contentious and polarizing legislation in the history of Congress. At least, it is according to JPMorgan. In the chart below, JPM's Michael Cembalest shows that the "disagreement gap" between Republicans and Democrats in the House and Senate, over 100 years of impactful legislation, has never been greater than with Obamacare.

As expected...

No deal. WH rejects latest GOP proposals for raising Debt Limit.

— Mark Knoller (@markknoller) September 26, 2013

If yesterday's 5 Year auction was largely unremarkable, today's issuance of $29 billion in 7 Year paper was downright weak. Of note: the high yield of 2.058% tailing well above, or nearly 1 basis point wider, compared to the When Issued which was trading at 2.049%. This was the largest tail since June 2012 according to SMRA calculation. Additionally while the 2.46 Bid To Cover was not a new four year low, it was the second lowest since May 2009, and only better compared to last month's 2.43 BTC in the August revulsion of an auction. The internals were less exciting with Directs taking down 17.8%, Indirects 42%, and the balance, or 40.21% going to Dealers. Over all, a very weak auction and the Bid to Cover rate is most certainly continuing its downward trajectory now that the future of Fed TSY backstops in perpetuity is in question.

As we warned two weeks ago in "Bernanke's Helicopter is Warming Up", it seems (from the Fed's once uberhawk and now superduperdove Kocherlakota's speech this morning) that the Fed is catching on as to what it needs to do. And what it has no choice but to do. Borrowing from the Europeans, Kocherlakota uttered those three special words: KOCHERLAKOTA SAYS FED MUST DO "WHATEVER IT TAKES" TO AID GROWTH.

Despite three attempts to defend the company this morning ( 1) forecast, 2) no equity raise, and 3) still paying vendors), JCP shares are fading back from their squeeze highs as the credit markets dismiss all the hope in stocks. With CDS near record wides (implying at least a 60% probability of default), the bottom line remains that cash outflows are as strong as always and now there are no plans to replenish it. The price action does suggest though, as opposed to what management has said, that JCP will attempt a 2nd lien offering (instead of the equity raise) - which would (of course) leave investors questioning management veracity among other things.

Almost 3 years ago we noted the oddly hubris-full confidence of Ben Bernanke of his ability to "exit" from the experimental extreme monetary policies:

"You have what degree of confidence in your ability to control this?" Bernanke: One hundred percent.

But last night we got the truth from Fed's Dudley, who more realistically stated:

Dudley: "Exit from these unconventional set of policies is certainly feasible... But we do have to be a bit humble about what we don’t know."

So which is it? Who do you believe?

First the House passed a spending bill that would avert a September 30 government shutdown, and extending government funding to November 15, however with an Obamacare defunding provision. Naturally, the Senate struck it down, and would propose a clean funding bill ex-any Obamacare defunding provisions, with a funding provision for an additional month. Moments ago, Boehner made it clear that the House is unlikely to accept a clean spending bill from the Senate, increasing the chances of a government shutdown after Sept. 30. "I don’t see that happening," Boehner told reporters at a Capitol press conference. So back to square zero, with Congress nowhere closer to a compromise, a continuing resolution just as unlikely as it was before the latest episode of grandstanding began, and five days left until government shuts itself down.

A few days ago we noted a major Senate demand of the Treasury Secretary that foreign nations' currency manipulations should be punished (supported by American Manufacturers Associations). Today we find out that Eric Holder and his DoJ crew have found that nine Japanese car parts makers have colluded to raise prices. As part of the scheme, more than $5 billion in auto parts were sold to U.S. car manufacturers and installed in cars sold in the United States and elsewhere. The companies will pay more than $1.6bn in criminal fines. Seems like a small price to pay for the Japan being allowed to devalue its currency boosting its own car exports?

Frequent readers will recall that in the past, on several occasions, we expected that MBIA would rise due to two key catalysts: a massive short interest and the expectation that a BAC settlement would provide the company with much needed liquidity. That thesis played out earlier this year resulting in a stock price surge that also happened to be the company's 52 week high. However, now that we have moved away from the technicals and litigation catalysts, and looking purely at the fundamentals, it appears that MBIA has a new problem. One involving Zombies. These freshly-surfacing problems stem from a particular pair of Zombie CLO’s – Zombie-I and Zombie-II (along with Zombie-III, illiquid/black box middle-market CLO’s).  While information is  difficult to gather, we have heard that MBIA would be lucky to recover much more than $400 million from the underlying insured Zombie assets over the next three years, which would leave them with a nearly $600 million loss on their $1 billion of exposure which would materially and adversely impact the company's liquidity.  And as it may take them a while to liquidate assets in a sure-to-be contentious intercreditor fight – their very own World War Z – MBIA may well have to part with the vast majority of the $1 billion in cash, before gathering some of the potential recovery.

When markets break, nobody cares: after all central banks are there to protect everyone and remove all risk. But... what happens when a central bank fail? Just relesed by the BOE: "News Release – Statement from the Bank of England. The Bank has been experiencing some technical IT problems today. There is no impact on critical payment and settlement services. Alternative procedures are in place where necessary. The Bank is acting to resolve these problems as soon as possible."

Is the Syrian electronic army finally getting amibitious and how long until FedLine/FedWire are in danger?

With mere days to go until he unveils the "exchanges", the President is in Largo, MD to explain how great it's going to be... This won't help him:

*DEMOCRAT MANCHIN BREAKS RANKS TO BACK INDIVIDUAL-MANDATE DELAY

Beggars once again have become choosers it would appear. As Bloomberg reports, a Detroit city union is demanding that the bankruptcy judge reinstate a policy that enables a "13th" monthly check to be cut for pensioners every year. The policy, which was ended in 2001, cost the city $1.92 billion, according to a reporty commissioned by the city. We are just not sure whether this an "Onion" headline or real.