Rating Agencies

With home prices rising at near-record paces in SoCal, corporate debt yields at record-lows, equity markets surging at near-record rates, and high quality assets dwindling by the minute under the heel of a central bank jack boot; it is perhaps no surprise that investors have switched from finding leverage through the balance sheet (i.e. crappy quality firms) to finding leverage through the instrument (i.e. structured credit). The trouble this time is that yields (and spreads) being so low, the creators of the new-normal ABS, CDOs, and CLOs have to stoop to the old tricks to make their money (as we noted here). As Bloomberg reports, bond issuers are once again exploiting the credit rating agency pay-for-performance business model to create "high-quality" collateralizable assets from utter garbage - such as auto loans.

Apple is out with Q2 results which are hardly inspiring. Revenue and sales beat, but margins missed and guidance is weak:

• The good news: Q2 Revenue: $43.6 billion, Exp. $42.3 billion
• Q2 EPS: $10.09, Exp $9.98
• And the not so good news:  Q2 margin weaker than expected 37.5%, Exp. 38.5%
• And Q3 revenue seen at $33.5-$35.5 billion far below the estimate consensus $38.4. Remember: AAPL no longer sandbags the future

For those looking for a special dividend you won't see it, instead will have to be satisfied with a buyback expansion by $50 billion (eventually), and an increase of 15% in the dividend. Ironically, cash cow AAPL just announced it will raise debt (and got rated by various rating agencies) in order to fund its cash outflow. In other words, it is slowly but surely becoming a utility. So much for the near infinite growth projections.

Is the dollar trending or is it moving broadly sideways?

Two days in Washington D.C. kept caterers busy but produced a 2,126 word communique long on slogans and short on anything actionable. The G-20 statement (below) can be boiled down simply, as we tweeted,

G-20 statement: "if we all lie, same as nobody lying"

— zerohedge (@zerohedge) April 19, 2013

And just to add one more embarrassing detail for them, while section 4 discusses "Japan's recent policy actions," not only does Canada's finance minister James Flaherty believe they "didn't discuss the Japanese Yen," but Japan's Kuroda believes, comments on 'misalignments', "were not meant for the BoJ."

MERS: The Center of the Mortgage Scam

It was May in 2010 that Greece suffered its first bailout by its Eurozone peers. At that moment it effectively went bankrupt, however it took nearly three years for reality to set in. Yet it wasn't until months later that Greece's smaller (as we are constantly reminded) neighbor was first downgraded from its legacy "pristine" status, by the jokes that are the "Big 3" credit rating agencies. That downgrade unleashed an "waterfall of reality", shown exquisitely on the chart below culminating with yesterday's S&P cut of the island nation to CCC from CCC+, which is only comparable to the boom to bust ratings of CDS issued in early 2007 only to see full loss a few months later. How long until one or more agencies push the country to the dreaded "D" line?

The likely outcome of the Cyprus crisis now looks to be even worse for the average Cypriot that appeared likely over the weekend. Those who think countries would be better off outside EMU rather than in, just might be able to test their hypothesis. We suspect they will be sadly surprised to learn that the only thing worse of getting in is getting out.

If you don’t collapse the system, the system will collapse you.

While this kind of 'wealth tax' has been predicted, as we noted yesterday, this stunning move in Cyprus is likely only the beginning of this process (which seems only stoppable by social unrest now). To get a sense of both what just happened and what its implications are, RBS has put together an excellent summary of everything you need to know about what the Europeans did, why they did it, what the short- and medium-term market reaction is likely to be, and the big picture of this "toxic policy error." As RBS summarizes, "the deal to effectively haircut Cypriot deposits is an unprecedented move in the Euro crisis and highlights the limits of solidarity and the raw economics that somebody has to pay. It is also the most dangerous gambit that EMU leaders have made to date." And so we await Europe's open and what to expect as the rest of the PIIGSy Banks get plundered.

Thirty cities at the center of the nation’s most populous metropolitan areas faced more than $192 billion in unpaid commitments for pensions and other retiree benefits, primarily health care, as of fiscal 2009. Pew notes that these cities had 74 percent of the money needed to fully fund their pension plans but only 7.4 percent of what was necessary to cover their retiree health care liabilities. Cities typically count on investment earnings from their pension funds to cover two-thirds of benefits. During the Great Recession, though, returns were lower than expected, and unfunded pension liabilities grew in nearly all of the cities. Even cities with well-funded systems struggled to keep up their yearly contributions as local tax revenue plummeted during the recession, and while pension assets have largely returned to pre-recession levels, they still must make up for years of lost growth, as liabilities continue to rise. So pressure for reforms is not expected to lessen. New York and Philadelphia may have the largest unfunded liability per household, but it is Chicago and Pittsburgh that have the lowest funding levels for pensions and the lowest retiree health care funding levels - while Washington D.C. tops the list in both. Benefits down, taxes up.

While risk-on has been a successful strategy since September, UBS' Stephane Deo is growing more cautious. The positives of activity improvement, reduction of political risks, and positioning are now considerably less convincing, and Deo is worried about a potential 'pocket of air' in the market in the near future. They lay out five reasons to be concerned from sentiment and valuation to political concerns in the US and Europe along with fundamental macro deterioration.

The 2011 changes by the FDIC to the safe harbor for "true sales" may have been the end of "Too Big To Fail."

Here are ten things that out to be on your radar screens this week and a view on their importance.

See why Moody's downgrade of the UK credit rating is unlikely to impact the financial markets or UK policy.   One of the sub-arguments is that the divergence between the US and UK monetary policy in recent months cannot explain sterling's slide in the foreign exchange market.  Moreover, the UK's exports seem more inelastic to UK exports that the currency warriors would suggest.  

If it ain't broke, how do you fix it? Here are a variety of solutions from practictioners, academics and investors.