Earlier today, Fox Business' Charlie Gasparino broke the news (which was really surprising only for anyone who had not seen the JEF stock slide in the past several months) that the firm has fired a substantial number of people just after the bank's fiscal year end: "People inside the firm say the cuts are occurring most heavily in Jefferies' equities division, and according to traders inside the firm, they could total as much as 11% of the entire firm when the job cutting is complete". We now have some additional, and more disturbing information: the actual number of people is roughly 65 or so, but the worst news is that Rich Handler will demand a 1 year clawback from the departees, in the form of bonus refunds for both cash and stuck. While this has been isolated to Jefferies for the time being (which has other liquidity concerns of its own, most of which are quite well known), we are certain that now that this practice has a "case study" other banks, especially of the B-grade variety, will implement comparable clawback strategies. This approach, once adopted broadly, will likely cause a substantial dent in banker spending patterns, as rarely if ever before have termination without cause been accompanied by demand for money back. In effect, this activity will force even greater spending retrenchment, and could cause a flight of the ultra high net worth retail customer who will suddenly be forced to think twice about spending not the upcoming bonus, but even the previous one, heretofore considered safe and sound, in some Cayman bank account.
Unlike some of the more noteworthy fund managers who appear on our TV screens all too often, Hugh Hendry seems to have been head-down hard at work. The appropriately named Eclectica fund that he manages has had a stupendous year as The FT reports his 'China Short' fund is up over 52% for the year. We discussed his already-solid performance back in September, when he was up a mere 40% YTD following an exceptional month in September. Given the difficulties of shorting Chinese firms directly, the deeply contrarian manager who makes no apologies for his view of a 1920's Japan-like crash in China is clearly doing something right. His positions in Japanese entities with large Chinese exposures makes great sense and the fact that he has kept outperforming this quarter even as Japanese credit has rallied back quite impressively, from spike wides in September and October, seems testament to our TV-Appearance-to-Performance anti-correlation thesis.
Following the auction of the latest $32 billion in 3 year bonds, the market is expected to relax as based on the optic the auction was a stunning success, with a High Yield of 0.352%, higher than just the 0.334% hit in September when the market was collapsing. Yet the Bid To Cover of 3.624 was the highest ever in the series of the bond. Now the bad news: Primary Dealers once again accounted for well over 53.9% of the auction: or about $17 billion, which will be promptly repo'ed back to the Fed with the proceeds used for various other purposes. In other words, the clear demand for $15 billion came in the form of Indirects taking down 39.1% and Directs with 7.0%. Nonetheless, with the When Issued trading at 0.36%, there is no doubt that the auction was a smashing success, under the parameters of the US bond issuance regime. In the meantime, we await to see what happens to German Bund auctions in the next few days if the yield once again collapses, and there is just not enough demand at auction.
On Friday, following the announcement from Goldman that the firm's had just turned more bullish on European financials raising banks from Underweight to Neutral, we said: "Goldman has just started selling European bank stocks to its clients, whom it is telling to buy European bank stocks. Said otherwise, the Stolpering of clients gullible enough to do what Goldman says and not does, has recommenced. Our advice, as always, do what Goldman's flow desk is doing as it begins to unload inventory of bank stocks. Translation: run from European bank exposure." Sure enough: European banks (as per BEBANKS) are now down 3.84% today alone, or -1.5% from the Thursday close, while the general MSCI Euro Fin sector, EUFN, is down 6% today. While not quite a slam dunk trade as a Stolper FX anti-reco, nobody has ever filed for bankruptcy by making money. Thank you Goldman.
First Moody's and now Fitch are coming out with negative comments about the summit. That provides mores more air cover for S&P to downgrade France 1 notch. The EU and EIB may also get notched in that case, further hurting the reputation of the EU and their plans. Political pressure may stay the hand of S&P but if not, this should spark a steep decline in risk asset prices. It may even make it more difficult for the ECB to print as one of its strongest members stumbles.
It’s no secret that housing and employment are correlated, and the causation is intuitive. If more people have jobs, then more people have incomes that support the purchase of a home. In the other direction, the more houses that are built to meet rising demand, the more jobs will be created in construction and real estate. We can see the correlation in this chart from the St. Louis Federal Reserve displaying one measure of employment for workers age 45-54 and the index of home prices. As employment of those in their peak earning years rose, so did home prices. This is partly a function of basic supply and demand: Rising demand pushes prices higher. As employment fell, demand declined, and so did home prices. The Federal Reserve famously has a dual mandate: to maintain stable inflation and employment. The Fed attempts to pursue these goals with monetary tools such as setting interest rate targets, while the Federal government supports housing by subsidizing mortgage interest via tax policy and guaranteeing mortgages via the housing-lending agencies of Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA). The Fed’s primary tool for stimulating demand for housing has been to lower mortgage interest rates, by buying the US Treasuries that set the baseline cost of long-term debt and also mortgage securities. Indeed, the Fed’s first quantitative easing (QE) program was to buy about $1 trillion in distressed mortgage debt outright. This removed the impaired debt from banks’ balance sheets and also served to lower mortgage rates.
But fear not: the arrested are not the firm's "god's work-ing" employees; more of the OWS persuasion. From PressTV: "US police have arrested 17 members of the Occupy movement in New York as the nationwide crackdown on the anti-corporatism protesters continues." When we get additional confirmation of this arrest from US sources, and not-Iranian media, we will update. Luckily, since none of the protesters can close a Goldman (which is still a Bank Holding Company) checking account, we are confident the story will end here.
Just because credit agency downgrade risk uncertainty is not enough, FAZ now advises there is electoral risk to add to the mix. Because if Sarkozy were to lose the presidential election, his competitor, the socialist-backed Francois Hollande has said that he would not accept the decisions of the Euro-summit, and will try to renegotiate the outcome, in effect unwinding any "progress" made so far in stabilizing the European currency. "Should he win the presidential elections, France would not ratify the treaty. "If I am elected President of the Republic, I will negotiating a new agreement," Hollande announced on the radio station RTL." Why is this concerning? Because as a recent poll indicates Hollande has a commanding lead over Sarkozy as of mid-November. "The proportion of French voters who have confidence in Sarkozy to deal effectively with the country’s problems expanded to 40 percent, according to the poll published in the French newspaper today. While Socialist Francois Hollande topped popularity ratings in the poll, he lost 5 points in the period. About 51 percent of voters said they had a “positive image” of Hollande." In other words, it is likely to quite likely that Sarko will not be reelected. Which also means that suddenly all bets are off for Europe.
Have you noticed that all the "hot" initial public offerings (IPOs) being hyped by Wall Street are all marketing companies? The big IPO that has everyone on the Street salivating is of course Facebook in 2012--the ultimate "social media" marketing machine. What's striking about these heavily hyped Social Media companies is that they make nothing, and their service is either free (Facebook, Twitter, etc.) or a "free" marketing mechanism (Groupon). When was the last time a company went public in the U.S. that actually manufactured a good? When was the last time a "hot" company went public selling a service that had nothing to do with marketing and that actually performed a valuable function? Wall Street has nothing left to sell except marketing schemes aimed at increasingly insolvent consumers. With a hollowed-out manufacturing base and leveraged financialization finally running out of steam as the engine of "growth" (see debt saturation chart below), then chumming the waters thrashing with marketing piranhas is Wall Street's last refuge of staggering profits. In other words, marketing to increasingly insolvent consumers is a Darwinian zero-sum game. Sales can't actually increase as consumer credit and incomes both decline; sales are simply brought forward in time or ripped from the desperate grasp of a competitor. The only "hot industry" left in America that Wall Street can hype is the one promising to get to the consumer before the other marketing piranhas can strip the last shreds of cash and credit from their bones.
Last week's biggest political shock was David Cameron telling Europe to shove its authoritarian ambitions and breaking away from the Group of 27, in effect killing any chance of a favorable summit outcome. Watch him live now as he explains why he did what he did.
There were only two questions that mattered, going into the EU summit.
- Would leaders at the summit come up with any actions of their own to help end the immediate crisis?
- Falling short of this, would any of their actions give enough confidence to the European Central Bank to allow it step up its role and be a lender of last resort to all troubled eurozone countries, but especially to wobbly Italy? In other words, could the conservative ECB now give itself the greenlight to print euros and buy up bonds from the world’s third largest issuer?
The answer to the first question is very clear: NO. The answer to the second question is, unfortunately, another question. “Who the heck knows?” Time to consider plan B.
Following the release of its November fund statistics, Pimco's Total Return Fund has once again reaffirmed it is betting on imminent QE by the Fed in the form of MBS monetization, a trend it started two months ago as we pointed out. And with a record $60 billion short cash position, or 25% of the entire fund $242 billion AUM, they better be right this time (he did the same thing in Jan-Feb... that did not work out too well). It is amazing to consider that back in April, Gross was long $90 billion in cash: a $150 billion swing! The TRF's 43% holdings of MBS is an increase of 5% compared to October, the most since December 2010, but still just half of the 86% held in February 2009 in expectation sof MBS monetizations by the Fed as part of QE 1. Just as notable is the near record effective fund duration, which at 7.46 was the second highest ever, just a modest drop from the 7.58 in October. What is most curious is that Gross, for the first time as far as our records go, is completely out of the 0-3 year maturity range. Which makes sense: after all the Fed has telegraphed there will be no money made in that band of rates until mid-2013, a deadline which will likely soon be extended.
Maybe, but not in the way everyone seems to think. Haven't we already decoupled? Sure, but maybe we will just finally catch up to the rest of the world. The US stock market has outperformed the world this year. It seems just as easy that we decouple by other markets outperforming - especially since most people talk about the opposite occurring. We have decoupled, so I would be worried about re-coupling, or that we decouple in a bad way. The "decoupling" theory seems very priced in global stock markets so be careful using this as a reason to get too bullish.