Investment Grade

Yesterday afternoon Viacom revealed that as part of its "Strategic Realignment to Create Efficiencies and Drive Long-Term Growth" it would do something which the market loathes: it would stop its buybacks. Specifically it said that "Viacom will temporarily pause share purchases under its current $20 billion stock repurchase program in order to stay within its target leverage ratio." What Viacom meant was that just like IBM, its net debt ratio had likewise soared in the past several years, and had reached a level where the Baa2/BBB-rated company was on the verge of being cut to junk status. So is Viacom a harbinger for the broader market, a market which as we reported previously only, had a tremendous month of February only because of a record $100 billion in announced stock buybacks? The answer: a resounding yes.

This morning I had left the TV mistakenly tuned to CNBC with the sound on - and unavoidably caught another bullish strategist jawing about the US economy’s awesome strength. This one was peddling as exhibit #1 the recent surge in C&I loans, arguing that it is a sure sign that business is gearing up for a post-winter boom. In this case, like most of the blizzard of bullish factoids spewed out each day on bubble vision, the purported business lending boom is not all that.

Either Greece will stop trying to save the failed past and look into the future, treating the crisis and the adjustment program as opportunities to finally implement urgently needed reforms, or the country will be eventually forced to exit the euro, in our view.  Economics 101 teaches us that an economy can survive within a monetary union only if it has fiscal policy room and structural flexibility to respond to asymmetric shocks. In our view, Greece had none and has none. We see no solution for Greece within the Eurozone without reforms.

Another day, another mega-M&A deal taking advantage of abnormally low bond rates, this time however not involving biotechs or a specialty pharma seeking to purchase a debt-free balance sheet, but one involving the Oracle of Omaha himself, and his Heinz investment, which will merge with Kraft Foods whose market cap was over $40 billion this morning on the news of the merger, and create the third largest food and beverage company in the US, and 5th largest in  the world.  And while the resulting company will certainly be a food giant, here is the rationale behind the deal and the punchline for American workers: "significant synergy opportunities." Translation: thousands of layoffs imminent.

"The debt borne by the oil and gas sector has increased two and a half times over, from roughly $1 trillion in 2006 to around $2.5 trillion in 2014. As the price of oil is a proxy for the value of the underlying assets that underpin that debt, its recent decline may have caused significant financial strains and induced retrenchment by the sector as a whole. If the adjustment takes the form of increased current or future sales of oil, it may amplify the fall in the oil price.

Borrowing in USD was risk-on; buying USD is risk-off. As the real global economy slips into recession, risk-on trades in USD-denominated debt are blowing up and those seeking risk-off liquidity and safe yields are scrambling for USD-denominated assets. Add all this up and we have to conclude that, in terms of demand for USD--you ain't seen nuthin' yet.

An epic decoupling in the cost of put protection and S&P earnings multiples may be a bad omen for stocks as Goldman suggests a "substantial market correction may be on the horizon." 

Doubting if the growth ahead of GM is now over, and the great post-bankruptcy "success story" is rapidly fading as the company has been pushed to resort to the kind of financial engineering which has pushed the S&P higher for all of 2014, and follows a record month of stock buyback announcements? Then doubt no more: moments ago GM announced it is authorizing an immediate $5 billion stock buyback, and plans to return all cash above a $20 billion floor to shareholders.

Austria’s decision to wind down Heta Asset Resolution AG sent ripples through the financial system, causing credit rating downgrades in Austria and bank losses in Germany: "It’s a mini-Greece going off in the heartlands of Europe." Here are some of the consequences, and delightful ironies, of a completely unexpected black swan landing in the south of Austria.

If not the economy or fundamentals, and if not the Fed, which as we know is still on sabbatical after its massive QE1-2-Twist-3 $3 trillion liquidity injection, just what has pushed stocks up to jawdropping all time highs? Here, courtesy of Deutsche Bank, is the answer...

Having put Russia on review in mid-January, Moody's has decided (somewhat unsurprisingly) to downgrade Russia's sovereign debt rating to Ba1 (from Baa3) with continuing negative outlook. The reasons:

*MOODY'S SAYS RUSSIA EXPECTED TO HAVE DEEP RECESSION IN '15, CONTINUED CONTRACTION IN '16
*MOODY'S SEE RUSSIA DEBT METRICS LIKELY DETERIORATING COMING YRS

We assume the low external debt, considerable reserves, lack of exposure to US Treasuries, and major gold backing were not considered useful? Moody's concludes the full statement (below) by noting that they are unlikely to raise Russian sovereign debt rating in the near-term.

• Greece will do 'whatever it can' to reach deal with EU (Reuters)
• ECB Urges Greek Political Deal as Emergency Cash Is Tight (BBG)
• Fighting rages in run-up to Ukraine ceasefire (Reuters)
• Eurozone GDP Picks Up, Thanks to Germany (WSJ)
• Two J. P. Morgan Executives Connected to Asia Hiring Probe Pushed Out (WSJ)
• Putin's High Tolerance for Pain and Europe's Reluctance to Inflict It (BBG)
• Indigestion Hits Top U.S. Food Firms (WSJ)
• Alibaba's Jack Ma seeks to reassure employees over U.S. lawsuits (Reuters)

The Russian economy continues to suffer. The absolute desolation of the oil market effectively destroyed the economy in Russia, which is incredibly dependent on the commodity. Job’s have been lost, the standard of living has collapsed and now the once proud Russian bond, is being attacked.

Standard and Poors, what some call, “the international credit watchdog” slashed Russian debt to BB+, one step below what the markets consider investment grade.

How to trade through the Greek crisis negotiations and the post-crisis world? This flow chart explains it.

Well, actually, we have seen this bubble before haven't we? Is GM really doing that well? In 2007, they did well too. In 2008 their finance arm= .gov bailout, 2009 GM Bankrupt! It's amazing what mainstream media will report, and even more amazing how many "smart" people (including analysts) will go along with it. Reggie's truth laid bare...