Archive - Feb 2015 - Story

As we detailed earlier, the Nobel peace prize-winning president has been busy today: not only did he already petition Congress earlier to declare war on the Islamic State, a non-country which technically doesn't exist, but now he plans to expand his "war powers" to any other place in the world. We look forward to hearing his explanation for how his "promise" not to put boots on the ground jibes with today's request to deploy boots on the ground... somewhere... anywhere... against ISIS.

The nascent global political awakening against corrupt politicians, large corporations and central banks is growing louder. In the last few years we have seen the rise of Syriza in Greece, Podemos in Spain and even Bepe Grillo’s Five Star Movement in Italy. And now an upstart anti-corruption party won a smashing victory in elections to install a state government in India’s capital, dealing a huge blow to Prime Minister Narendra Modi’s Hindu nationalist party.

It looks reasonable that investors would not ask for an additional compensation for a source of risk that has limited direct economic bearing for other asset classes.... Such a conclusion would cease to hold, in our view, if Greece were to leave the common currency. Indeed, ‘Grexit’ would constitute a non-diversifiable event, affecting all financial assets. This is because, upon the departure of one of its members, EMU would likely be seen as a fixed exchange rate arrangement between countries which can elect to adhere or leave. Convertibility risk would resurface, exposing the possibility of a collapse of the entire project.

Well that didn't take long. Just an hour or so after Merkel, Hollande, Poroshenko, and Putin got together to drink tea in Minsk, they have a 'deal':

*RUSSIA, UKRAINE, GERMANY, FRANCE LEADERS READY DECLARATION TO REAFFIRM MINSK CEASE-FIRE DEAL: IFX
*JOINT DECLARATION IN SUPPORT OF UKRAINE'S TERRITORIAL SOVEREIGNTY

So - to summarize - they agree to a cease-fire (which saw 1000s killed and shelling continue last time) and to support Ukraine's territorial sovereignty (except of course Eastern Ukraine?) Face-saving headline-maker comes to mind. Stocks don't care though - they are buying it.

The ongoing conflict in Ukraine has fueled a resurgence in totalitarianism. Capital controls. Exchange controls. Wage and price controls... and now Border controls and people controls. As of this morning, the government of Ukraine started... “reinforcing”... the defenses of Kiev with eight barricaded checkpoints. Walls are never, ever erected to keep people out. They’re built to trap people inside.

While stocks dipped a little into the 10Y Treasury auction, it appears the blistering demand was enough to shatter the illusion of awesomeness and spark a plunge in stocks and crude oil. One thing of note, AAPL bonds have been whacked today (newly issued 2025s down 2 points today to $97.50) and as the auction closed, AAPL also rolled over - which appears the catalyst for the broad weakness.

As expected following yesterday's scorching 3 Year bond auction in which Indirect, aka official foreign, demand soared to the highest in 5 years, today the trend of relentless demand from abroad for US yields continued, when the Treasury sold $21 billion in 10 Year paper, which not only priced 1.4 bps though the When Issued 2.014%, hitting the high yield precisely at 2.000%, but saw the highest Indirect Bid, of 59.5%, since December of 2011.

The Nobel peace prize-winning president has been busy today: not only did he already petition Congress earlier to declare war on the Islamic State, a non-country which technically doesn't exist, but now he plans to expands his "war powers" to any other place in the world. From Reuters:

• MILITARY AUTHORIZATION BILL WOULD PRESERVE PRESIDENT'S ABILITY TO ORDER OPERATIONS AGAINST ISLAMIC STATE IN COUNTRIES OTHER THAN IRAQ, SYRIA - WHITE HOUSE SPOKESMAN
• WHITE HOUSE SAYS COMBAT BOOTS ON THE GROUND MAY BE USED FOR HOSTAGE RESCUE OPERATIONS
• OBAMA NOT RULING OUT DEPLOYING COMBAT TROOPS ON GROUND TO ASSIST AIR STRIKES AGAINST ISLAMIC STATE, IF PENTAGON RECOMMENDS IT -WHITE HOUSE

And not only that: also according to Reuters, Obama is considering a request from Afghan President Ashraf Ghani to slow the pace of the withdrawal of U.S. troops in Afghanistan, a senior administration official said on Wednesday.

There have been ZERO times that the Federal Reserve has entered into a rate hiking campaign that did not have a negative consequence...

While US equities suggest all is well and Greece is contained, the less mainstream-news indicators of European stress are starting to flash orangey/red as the surge in spreads across European peripheral bonds since the Greek election suggests Q€ is being over-run. Italian, Spanish, and Portuguese bond spreads are all wider on the year now and up 25-30bps from ther Greek Election (fastest rise in months). Greek bank bonds and stocks remain near record lows and even broad European stock indices are struggling to hold gains post-election.

We previously noted the extreme spike in S&P Energy sector stock valuations (and the fact that energy sector earnings will have to surge by 70% in order for this exuberant to be 'discounted' correctly). Now Deutsche Bank has run the numbers and warns that in order for S&P Energy to now be trading at what we would consider a fair ~15x normalized EPS, $70/bbl oil must return and be sustained by 2H15.

As the WSJ noted, the "world’s top finance leaders on Tuesday in effect backed currency depreciation as a tool for promoting growth by signaling strong support for aggressive easy-money policies aimed at boosting the fragile global economy." Spot the person who just realized it's not going to work.

A current Bank of America employee has made a number of whistleblower submissions to the U.S. Securities and Exchange Commission about the role played by the U.S. banking subsidiary in financing dividend-arbitrage trades: trades which used taxpayer-backed funds to allow hedge funds to avoid paying taxes. The employee’s submissions allege that Bank of America’s London-based Merrill Lynch International unit has extended “extreme levels of BANA leverage” to fund “increasingly aggressive and reckless” tax-avoidance trades. The submissions said the practices risked causing the bank “serious financial and reputational damage.”

The so-called "Normandy Quartet" of Merkel, Hollande, Poroshenko, and Putin are arriving for the latest/final round of Ukraine peace talks... Poroshenko warns "things in east Ukraine will "go haywire" if Minsk talks fall through."