Reflecting on yesterday's monetary-policy-hope-driven rally, UBS' Art Cashin prefers to focus on Richard Fisher's very frank (and succinct) speech on the limits of monetary policy and the importance of fiscal policy. Urging everyone to read it, and send it to your Congressman and Senators, he reminds us that Fisher is the only Fed policymaker to have been a banker and a money manager, and in the words of Richard Fisher, he worries that: "there is a growing sense that we are unwittingly, or worse, deliberately, monetizing the wayward ways of Congress."
To the bloody end.
The absence of the UK from today’s trade is particularly evident, with volumes remaining particularly light across all asset classes. Nonetheless, European equities are largely seen drifting higher with the exception of the DAX index, which is yet to move over into positive territory. News flow remains light with the highlight of the day so far being comments from the Troika, confirming that Portugal remains on track with its bailout program, and have confirmed that the country will receive the next EUR 4.1bln tranche in July. FX moves remain in a tight range, with EUR/USD looking relatively unchanged, with the USD index slightly weaker as the US comes to market. Looking ahead in the session, participants can look forward to US ISM New York and Factory Orders data as the next risk events of the session.
And Greece is the model for Spain and Italy.
The precautionary principle is typically defined as “if an action or policy has a suspected risk of causing harm to the public or to the environment, in the absence of scientific evidence that the action or policy is harmful, the burden of proof that it is not harmful falls on those taking the action.” In practice, the principle is utilized by government policy makers to ensure technological advances don’t pose too dire of an effect on the surrounding environment. This may appear a noble goal if one accepts the premise that the prime function of government is the protection of life and property. History proves otherwise as easily corruptible politicians have tended to grant exceptions to wealthy business interests which look to dump their waste in public-owned natural resources such as waterways. It is also clear judging by historical cases that socialization often results in environmental degradation. One look at the pollution in once-communist nations such as China or the former Soviet Union reveals that a lack of private property results in a type of moral hazard en masse as there is little incentive to preserve what you don’t officially own.
Despite - or because of - years of ineffectual gyrations by the Fed
Just in case someone did not get the earlier BLS-doctored message, the final two economic indicators of the day just printed and were... drumroll... misses. Because remember: not only the 1%ers but the 99ers have to be begging Bernanke to print. And so he will: ISM Manufacturing prints at 53.5, down from 54.8, and expectations of 53.8. Prices Paid plunge by 13.5, but the kicker: 5 out of the ISM's 10 sub indices are now in contraction territory.. And the cherry on top: Construction Spending unchanged from an upward revised 0.3 to 0.3, obviously, missing expectations of a jump to 0.4. Looking forward to the Tim Geithner Op-Ed: "Welcome to the recession."
Maybe the electrician-in-chief can send them some of those unused Solyndra solar panels?
Just about an hour before the US non-farm payroll number is expected to print, and finally resolve the lingering question whether the Chairman will print in 3 weeks, things in Europe have gone from horrible to zombie. A series of horrendous economic reports out of Europe including record Eurozone unemployment, a confirmation of the final European PMI plunge including the second largest monthly decline on record in UK manufacturing, and various soundbites from Syriza's Tsipras, have pushed the EUR to fresh two year lows, Spanish CDS to new all time wides German 2 Year bonds joining Switzerland in negative terriroty, and finally, Bloomberg, as noted earlier, to be "testing" a placeholder for a post-Euro Drachma. As BBG summarizes: "European markets fall, led by consumer & tech stocks with the German market underperforming. The euro falls against the dollar and German 2-yr yields drop into negative territory. Chinese manufacturing PMI data below expectations, though above the 50 level; European manufacturing PMI in line with expectations, below 50. Euro-zone unemployment met expectations and seems likely Irish voters endorsed the EU fiscal treaty. Commodities fall, led by oil & natural gas. U.S. nonfarm payrolls, unemployment data due later." In summary - all data today fits with Raoul Pal's less than optimistic presentation from yesterday.
Three weeks ago, when the hit campaign on Chesapeake was in full swing, we made a simple prediction: hate the company for whatever reasons but not because of the balance sheet. We explained that "under ZIRP, when every basis point of debt return over 0% is praised, and an epic scramble ensues among hedge for any yielding paper no matter how worthless, the balance sheets of companies just do not matter. In other words, for companies that have massive leverage, high interest rates, negative cash flow, which all were corporate death knells as recently as 2008, the capitalization structure is completely irrelevant." Alternatively, some other, far bigger, company with a pristine balance sheet and lower quality assets could swoop in and do a full management purge, removing the Mclendon overhang, firing the disgraced Board and commingling liabilities while boosting the quality of its assets. Think the TBTF putches from September 2008. Because at the end of the day, it is all about the quality of the assets. And the reality is that CHK has some quality assets, which, however, are burdened by many legacy issues. There is of course the issue of near all time record gas prices. But there in lies the rub: the prices are already at near all time lows. They could continue sliding, or in a world in which hard assets (and even gaseous) are becoming more and more precious by the day, they could go up. In which case CHK would be a very interesting bet. Needless to say, two weeks after our preliminary CHK assessment, Carl Icahn put his money, or rather $775 million of it to be precise, to essentially confirm what we had said previously. Which brings us to the next question: is CHK really worth more? Well, in keeping with the tradition of keeping it simple, we have decided to present one delightfully simple chart from Bloomberg, which shows where the biggest downside in the stock comes from - it's well-known leverage - as well as where the upside is hiding - its asset base - which has the lowest valuation of its peers.
Risk-averse sentiment dominated the session yet again as market participants continued to focus on Spain and speculated whether the country will soon be forced to seek some sort of monetary assistance. As a result, credit markets continued to deteriorate, with the EURUSD cross-currency basis-swaps under pressure, while the spread between Spanish and German benchmark bonds widened to a fresh Euro-era wide level. Less than impressive demand for the latest Italian debt issuance where 2017 was underbid by EUR 0.20, while the 2022 issue was underbid by EUR 0.30 also resulted in aggressive bond yield spread widening. However, as we head into the North American open, reports that the EU is willing to envisage direct ESM bank recapitalizations saw Bunds spike lower by around 33ticks and EUR/USD by 44pips to the upside. EU stocks made an impressive recovery, but remain in negative territory. Going forward, the second half of the session will see the release of latest housing data (pending home sales), as well as the weekly API report.
For the drillers, but....