Capital Markets

An overview of the technical condition of the major currencies. See why we anticipate a heavier US dollar in the week ahead.

It may be that a larger correction is in order given that some important global powers are struggling. Money printing by itself isn’t cure-all for what ails us.

Friday not much is happening beyond Cyprus tensions—how fun! 

Let’s see what happens.

A dispassionate review of yesterday's developments and today's.

February marks the first three-months of consecutive declines in restaurant sales in almost three years as Bloomberg reports consumers caught in "an emotional moment" spooked by higher payroll taxes, surging healthcare premia, and spiking energy costs. "February was pretty ugly" for many chains after January delivered an initial blow." Malcolm Knapp notes that "it's important to keep in mind that companies also are facing unusually tough comparable sales because of favorable weather in 2012," so the result is an industry that’s been "a lot softer so far this year." "People are acting fearfully, or you could almost say rationally in a way,” because it’s not surprising they change their dining habits when they feel less confident; as once again it's the middle class that appears under pressure. Casual dining is "definitely being squeezed" because "it's not food on-the-go and it's not high-end food for people trying to treat themselves."

"Having faith in policymakers' ability to provide a perpetual put may yet prove to be a serious error; and, with interest rates stuck at zero, investors' ability to easily earn back losses remains severely impaired," is the not so subtle manner in which, Reuters reports, Brevan Howard, which manages $40 billion (and has never had a losing year) describes the current shambles of a market. "Tail risks, which have haunted the markets for the last five years, appear to have receded for the time being, but have by no means disappeared," they go on to say, noting that while policymakers promise to do "whatever it takes," investors betting that actions by policymakers will prop up financial markets indefinitely will face problems as "policy hyperactivity coupled with investor apathy could lead to significant and persistent price moves in multiple capital markets." But that's just an absolute return $40bn fund manager's view as opposed to a day-trading fast money trend masher or asset-gathering index-tracker.

Given the relatively calm market reaction to yesterday's vote by the Cyprus Parliament, the UK budget and the US FOMC meeting will be vying for attention today. Got Milk? Milk prices have soared again in New Zealand to distribute the drought induced scarcity. Whole powder milk prices jumped 21% in the latest fortnightly auction, while volumes fell 28%.

There was a time when pervasive financial crimes would if not shock and appall people, then at least make them think for a minute or two. Sadly, now that even the biggest bank by assets is found to have misled regulators, shareholders and the broad public and its CEO is proven to have perjured himself before Congress, and absolutely nothing happens, not even one of those token SEC wristslap settlements, we are way past the point of even pretending to care. Which is why there is little we can comment on the news that Federico Buenrostro Jr., 62, the former CEO of the nation's largest pension fund, California's Calpers, has been indicted by a federal grand jury in a scheme to defraud Apollo Management, one of the biggest private equity firms in the nation, of $20 million. How is one supposed to have any faith, or worse, any hope that there is something more than mere criminality pushing the US capital markets to "new highs", and why is anyone surprised the retail investor has given up on the Fed-backstopped US "wealth creation mechanism" long ago.

An update on Cyprus and what else the week has in store.

A dispassionate discussion of developments in Cyprus and a few broader implications.

In addition to the phenomenon of "foreclosure stuffing" described here extensively before, one of the main reasons for the artificial drop in housing supply has been the ongoing government-subsidized, GSE/FHFA endorsed REO-to-Rent initiative, through which large asset managers have been encouraged to take advantage of government funded, risk-free financing and purchase foreclosed properties in bulk, with the intention of converting them into rental properties. The REO-To-Rent has traditionally been open to the biggest of financial companies, or at least those who don't have the stigma of legacy mortgage origination resulting in billions in litigation reserves, which means mostly hedge funds and PE firms. One of the main players in the space, Och-Ziff, decided to pull out of the landlord business in October of last year because, as Reuters reported, "the returns it is generating from rental income are less than expected and it is looking to take advantage of a recent rebound in home prices in northern California." In other words, selling while the selling is good. Of course, there is another, far more traditional way to offload risk while preserving some of the upside: dump the balance sheet exposure to others while giving them a fraction of the potential upside yield. This is precisely what the big banks were doing during the last housing bubble when massive residential mortgage-backed security portfolios were packaged, spliced, securitized (sometime without the feedback of firms like Paulson pre-shorting the MBS courtesy of firms like Goldman) and sold off to other yield-starved investors. Everyone knows how that ended. So fast forward to today, when this final missing link from the credit and housing bubble is finally here too, following news that mega-PE firm Blackstone is pushing forward with the first ever REO-To-Rental securitization.

Meetings between public company managements and investors are the bedrock of the fundamental investment process.  The reason for that, however, is often lost in translation.  It is not, for example, because most investors or analysts are systematically better at reading “Body language” about the quarter or new products.  Seriously – they aren’t.  No – the reason that management meetings are useful is because, over time, managements let down their guards and act like regular people.  And in those moments, truth – about character, about wisdom, about judgment – comes rolling out.  Today we offer up a personal highlight reel of examples from +20 years of management meetings. Between the earnings forecast and the actual results sit only two things: time and management.  Time is uniform; management quality is not. 

The markets have begun to wonder whether the Fed (and other central banks) will ever be able to exit from its Quantitative Easing policy. We believe there is only one reasonable exit the Fed can take. Rather than sell its portfolio of bonds or allow them to mature naturally, we believe the Fed’s only practical exit will be to increase the size of all other balance sheets in relation to its own. This “exit” will be part of a larger three-part strategy for resetting the over-leveraged global economy, already underway...

A 2-minute read on developments in the global capital markets. Equity markets are heavy, bonds little changed as is the dollar. Sterling is the big winner on short covering and bottom picking.

Kyle Bass, addressing Chicago Booth's Initiative on Global Markets last week, clarified his thesis on Japan in great detail, but it was the Q&A that has roused great concern. "The AIG of the world is back - I have 27 year old kids selling me one-year jump risk on Japan for less than 1bp - $5bn at a time... and it is happening in size." As he explains, the regulatory capital hit for the bank is zero (hence as great a return on capital as one can imagine) and "if the bell tolls at the end of the year, the 27-year-old kid gets a bonus... and if he blows the bank to smithereens, ugh, he got a paycheck all year." Critically, the bank that he bought the 'cheap options' from recently called to ask if he would close the position - "that happened to me before," he warns, "in 2007 right before mortgages cracked." His single best investment idea for the next ten years is, "Sell JPY, Buy Gold, and go to sleep," as he warns of the current situation in markets, "we are right back there! The brevity of financial memory is about two years."

The topic of Illinois' various insolvent pension systems is not news to regular Zero Hedge readers. One needs but to recall our articles from mid/late 2010: "61% Underfunded Illinois Teachers Pension Fund Goes For Broke, Becomes Next AIG-In-Waiting By Selling Billions In CDS", "Illinois' Pension Fund Death Spiral Revisited: "10 Years Of Money Left" or "Illinois Teachers' Retirement System Enters The Death Spiral: AIG Wannabe's Go-For-Broke Strategy Fails As Pension Fund Begins Liquidations" in which we clearly explained how the state's teachers pension fund was systematically doing everything in its power to mask its massive underfunding, and the fact that it was rapidly running out of money. The retiremnet fund, in turn, took things very personally, prompting Dave Urbanek, Public Information Officer at the Teachers’ Retirement System of the State of Illinois (TRS), to write an impassioned response to Zero Hedge denying all allegations. Today, over two years after the above news, the SEC finally concluded their analysis of one part of the massively underfunded Illinois Pension system and found the Illinois failed to inform investors about the impact of problems with its pension funding schedule as the state offered and sold more than $2.2 billion worth of municipal bonds from 2005 to early 2009. The SEC also said Illinois failed to disclose that it had underfunded the state's pension obligations, increasing the risk to its overall financial condition.