B+

A few days ago, before the definitive Greek PSI term sheet was available, we presented the complete preliminary BNP PariBas decision which despite having some assumptions was almost spot on in its flow chartness of Greek next steps. Today, to avoid any confusion on the matter, here is Bank of America with its take on the finalized Greek PSI Terms and the final final (until changed yet again) Greek decision tree.

Every time we see oil prices go up we hear that it will cause inflation and/or the economy will go into the tank. The premise is wrong because that has never happened.

Large IPOs often mark tops within sectors and within stock markets as a whole. In June 2007, shortly after the s*** had begun to hit the fan in the financial stocks, the Blackstone Group (BX) was able to get a multi-billion dollar IPO in. About a year and a half later, BX was down about as much as the Dow Jones fell between its 1929 peak and its mid-1932 nadir--almost 90%. Major IPOs and runs of hot IPOs in a single sector do not happen in a vacuum. They are not the result of a philanthropic attitude amongst corporate insiders or the financial community. Last year, memories of the crash had finally faded enough that it became time for U.S. investors to become the quacking ducks that, as always, Wall Street had food for. And of course, tech was there as the most palatable food. If they wanted, Facebook could raise every penny it needs, and more, from private sources. So ...

But coincidentally, the ECB’s next Long Term Refinancing Operation (LTRO) is set for February 29...

Will Germany go “all in” on the Euro experiment? I doubt it. In fact I’ve found the “smoking gun” the little known act that Germany has recently implemented that proves the country has a Plan B that involves leaving the Euro with minimal damage.

I'm not a very good hedonist, I guess.

Here I am in Las Vegas, and to my way of thinking, everything I hate about the human race is conveniently compressed into one tidy package.

And I ask myself: what's my problem? Why do I let places like this get to me so much? I mean, after all, why should I care what other people do with their time and their lives? What business is it of mine?

"if you don't ask the most fortunate Americans to bear a slightly larger burden of the privilege of being American, then the only way to achieve fiscal sustainabilty is through unacceptably deep cuts"

The authors identify two "externalities" to the triggers for default cascades: 1) variability of financial robustness of all of the interconnected financial entities; and 2) the average financial robustness of the interconnected entities. If all parties have similar financial robustness (variability is low), then increasing connectivity makes the system more robust. Stability is even likely through diversification if the individual parties are not very robust. It was only when the initial robustness was highly variable across agents (i.e., some agents are weak and others strong) that increasing interconnectedness tended to stimulate systemic defaults.... The lesson here is diversification is not always a good idea. If you diversify across financial entities with wide risk profiles (i.e., some are weak and some are strong) you actually increase the likelihood of a financial calamity.  We don't have to confine ourselves to financial institutions. If we consider our agents to be sovereign, we expect the same problem. Creating a financial superpower out of a group of Germanys would be perfect--even a group of Greeces might be okay. But creating one out of Germanys and Greeces tends to encourage a financial catastrophe. Who could have predicted that? The authors suggest that the "fix" for this situation is to concentrate risk rather than diversify it. I wonder--in whose hands will the risk be concentrated? Perhaps if you hold gold, the risk won't find its way into yours.

While mostly a regurgitation of old, very trite, and quite meandering thoughts, there are some tidbits of information in the latest just released 2011 Berkshire Letter to shareholders such as that Buffett has chosen a successor to the 81 year old increasingly more confused head (unclear who), that Buffett is on the prowl for large acquisitions, that he hopes IBM shares languish for the next five years (frankly we can't wait until Buffett opens a stake in Apple so he can control the two stocks that between them account for about half of the moves in the DJIA and the NASDAPPLE - after all "economies of scale" is all about how Nominal Buffett exudes 'success'), that he once again sees a housing bottom (he adds: "Last year, I told you that “a housing recovery will probably begin within a year or so.” I was dead wrong" - this admission is far more than we will ever hear from James Cramer who has been calling a housing bottom since 2009), and "Housing will come back – you can be sure of that" - sure, just not in your lifetime, and probably not in ours either, but most importantly, is the discovery not that BRK's profit declined by 30% (to $3.08 billion from $4.38 billion) on a smaller gain on derivatives, but that since he actually will have to post collateral on new derivatives, "we will not be initiating any major derivatives positions." The reason: "We shun contracts of any type that could require the instant posting of collateral. The possibility of some sudden and huge posting requirement – arising from an out-of-the-blue event such as a worldwide financial panic or massive terrorist attack – is inconsistent with our primary objectives of redundant liquidity and unquestioned financial strength." So his warning that derivatives are WMDs years ago was only appropriate if there was money to be lost, such as is the case for 99.9999% of other investors? Ah, there goes the good old hypocritical, crony Warren we have all grown to known and love. And finally what would be a recent Buffett missive without the obligatory gold bashing section: after all, how will the Ponzi scheme inflate if people have realized it is a ... well, Ponzi, championed by none other than the person everyone once thought was actually an investing genius. Fast forward to Buffett's 2020 Letter (when Greek debt/GDP is precisely 120.5%) his main message will be: "I told you to run away from gold. I was dead wrong."

Yes, the Federal government can cover up the damage by borrowing 10% of GDP each and every year ($1.5 trillion, and don't forget to add in the off-budget "supplementary appropriations"), and the Federal Reserve can add trillions in quantitative easing stimulus, but even adding $8 trillion of borrowed/printed money to the economy over the past four years has had remarkably little effect on the private-sector economy. That does not bode well for the "recovery."

Too bad not every hedge fund can be long Apple (even if as Goldman points out, they sure are trying - "One out of five hedge funds has AAPL among its ten largest long positions" - a truly stunning observation and one which means that if Apple, which is priced to absolute perfection, has even one hiccup, we would see an absolutely epic bloodbath in the market). Because if 2011 was a horrible year for hedge funds which closed the year well below, or -10%, their respective benchmark - the S&P (unch for the year), the last thing hedge fund LPs can afford is another year in which they pay 2 and 20 to generate a return lower than the S&P. Yet to their horror, this is precisely what is happening. According to Goldman's latest Hedge Fund Tracker, "The typical hedge fund generated a 2012 YTD return of 3% through February 10th compared with 7% gains for both the S&P 500 and the average large-cap core mutual fund." Yes, there are outliers, but far and wide this means that even more redemptions are about to hit the hedge funds space, where jittery investors will no longer show any restraint before sending in that redemption letter. It gets worse: "The 60-fund Dow Jones Credit Suisse Blue Chip Hedge Fund IndexSM has returned 3% YTD, in line with our sample average.... The distribution of YTD performance indicates that 50% of hedge funds have  generated returns between -2% and +2%." And the absolute kicker: "Only 10% have returned more than 7%, outperforming the S&P 500." Another way of saying that is that 90% of hedge funds are generating negative alpha! If that is not the signed, sealed and delivered notice of death of the hedge fund industry courtesy of not ubiquitous central planning, we don't know what is.

An explicit contagion path chart, since you probably won't get info like this anywhere else... 

Goldman's David Greely is no Tom Stolper. In fact his recommendations have been correct more often than not. Which is why we believe that when the market learns that the Goldman commodities strategist just opened a long September WTI position at $107.55, it will merely provide that extra oomph to send WTI up, up and away. Or maybe not: this could be another one of the "fade Goldman" calls. Alas, with the real impact of the recent $2 trillion balance sheet expansion becomes truly felt we have a distinct feeling Goldman is quite right on this one. Evil, evil speculators.

• Obama Administration Said Set to Release Corporate Tax-Rate Plan Today (Bloomberg, WSJ)
• Greece races to meet bail-out demands (FT)
• IAEA ‘disappointed’ in Iran nuclear talks (FT)
• Hilsenrath: Fed Writes Sweeping Rules From Behind Closed Doors (WSJ)
• Fannie-Freddie Plan, Sweden FSA, Trader Suspects, CDO Lawsuit: Compliance (Bloomberg)
• Bank of England’s Bean Says Greek Deal Doesn’t End Disorderly Outcome Risk (Bloomberg)
• Greece Second Bailout Plan an ‘Important Step,’ Treasury’s Brainard Says (Bloomberg)
• Shanghai Eases Home Purchase Restrictions (Bloomberg)

Highly paid shills for the status quo on Wall Street have recently been wheeled out to observe the fundamental ugliness of western government bonds. They are correct. This is an asset class that has managed to defy the laws of economics in becoming ever more expensive even as its supply swells. Their response has been to recommend piling into stocks instead. The logic here is not so pristine. If Napier's thesis is correct, the West faces a period of outright deflation, which will be deeply traumatic for exactly the sort of speculative stocks that have lately done so well. Admittedly, the picture is confused, and prone to all sorts of political horseplay, as observers of the long-running euro zone farce can attest. Nevertheless, when faced with a) huge underlying uncertainties; b) structurally unsound banking and government finances; and c) central banks determinedly priming the monetary pumps, we conclude that the last free lunch in investment markets remains diversification. G7 government bond markets are a waste of time (though you may end up being cattle-prodded into them regardless). But there are still investment grade sovereign markets offering positive real yields. Stock markets are partying like 1999. Which, in many cases, it probably is. We would normally advise to enjoy the party but dance near the door.