With short-term Treasury Bills starting to price in a missed payment possibility and USA CDS surging (though still low), the debt ceiling (and implicit chance of a technical default) is nigh. As we approach yet another debt ceiling showdown (especially in light of the seeming congruence of a CR and debt ceiling debate in an entirely divided Washington), market attention will turn towards a possible US sovereign rating downgrade. In this article, we provide an outline of the likely actions by the three rating agencies (S&P, Moody’s and Fitch).
It just keeps getting worse and worse for Bill Ackman. A few weeks after the epic humiliation, not to mention even more epic losses, he suffered on his now defunct JCP long position (despite ample warnings by the likes of Zero Hedge who said long ago JCP is merely a melting icecube and fast-track Chapter 11/7 candidate) all those who predicted (such as Zero Hedge back in January) that an epic HLF short squeeze would result in the aftermath of Ackman's Herbalife short announcement leading to Ackman's ultimate capitulation, have been proven correct. Moments ago, in a letter to investors, Bill Ackman just announced that he has covered over 40% of his Herbalife short position, with his forced buy-in explaining the endless move higher in Herbalife stock in recent weeks. The explanation of being forced out of nearly half of his position is amusing: "we minimize the risk of so-called short squeezes or other technical attempts by market manipulators to force us to cover our position." So Ackman is forced out by his Prime Brokers so as not to be forced out by market manipulators? That's an interesting explanation for what is a far simple situation: booking your paper losses.
Crashing luxury sales in China is a hard-to-swallow concept for the industry.
Even though there is no technical link between the two main fiscal issues – the continuing resolution (CR) and the debt ceiling bill - there is a link in the minds of market participants because prompt resolution of the CR could spell a favorable outcome for the debt limit. On the other hand, a government shutdown tonight could lead the market to be more pessimistic on the chances of a debt default. As BofAML notes, the link between the two issues is fairly complex but the shutdown battle is just the beginning - and, as the suspect "the fight could get ugly."
Don't Blame Free Market Capitalism ... We Haven't Had It for a While
Two weeks ago we first pointed out that as a result of the quiet creep in high grade leverage to fresh record high levels, the resurgence in PIK Toggle debt for LBOs and otherwise, means that the credit bubble is now worse than ever and that the next credit crisis will make 2007 seem like one big joke. Recall that nearly 80% of PIK issuers made a PIK election during the last downturn, "paying" by incurring even more debt and in the process resulting in huge impairments to those yield chasing "investors" who knew they were going to lose money but had no choice - after all, the "career risk." Subsequently, we quantified the explosion in covenant-lite loans - another indicator of a peak credit bubble market - as nearly double when compared to the last credit bubble of 2007 (whose aftermath the Fed, with a $3 trillion larger balance sheet, is still struggling to contain).
Following yesterday's modest bounce in equities punctuated by the traditional last minute spike, sentiment has reverted lower once again, driven by the uncertainty surrounding debt ceiling talks in the US, where lawmakers have until next Tuesday to agree to a spending bill, or much of the government will shut down. The Senate will vote on a spending bill later today, which will then be sent back to the House putting republicans in a quandary (Politico explains the complications surrounding the GOP's "Plan C"). It was reported that US House leaders are considering postponing action on a bill to extend the US government's borrowing power, with the leadership discussing a change of strategy to complete action on the stopgap spending bill before debating the debt-limit debate. In FX, GBP strengthened across the board this morning after BoE’s Carney said he does not see a case for more quantitative easing.
There's growing speculation that China will soon announce an overhaul of its financial system to address increasing risks from escalating debt.
Frequent readers will recall that in the past, on several occasions, we expected that MBIA would rise due to two key catalysts: a massive short interest and the expectation that a BAC settlement would provide the company with much needed liquidity. That thesis played out earlier this year resulting in a stock price surge that also happened to be the company's 52 week high. However, now that we have moved away from the technicals and litigation catalysts, and looking purely at the fundamentals, it appears that MBIA has a new problem. One involving Zombies. These freshly-surfacing problems stem from a particular pair of Zombie CLO’s – Zombie-I and Zombie-II (along with Zombie-III, illiquid/black box middle-market CLO’s). While information is difficult to gather, we have heard that MBIA would be lucky to recover much more than $400 million from the underlying insured Zombie assets over the next three years, which would leave them with a nearly $600 million loss on their $1 billion of exposure which would materially and adversely impact the company's liquidity. And as it may take them a while to liquidate assets in a sure-to-be contentious intercreditor fight – their very own World War Z – MBIA may well have to part with the vast majority of the $1 billion in cash, before gathering some of the potential recovery.
Everything was proceeding according to central-plan with a gradual rise in risk and a decline in the USD until 4 am Eastern, when the German IFO Business Climate data was released and missed across the board (107.7 vs Exp. 108.0; Current assessment 111.4 vs Exp. 112.5; Expectations 104.2 Exp.104.0), reminding everyone now that Merkel is cemented for the near future, the immediate prerogative for Europe is to get the EUR lower, one way or another. A returning bid to the dollar also has pushed 10 Year yields under 2.70%, while once again sending various EM currencies sliding, and bringing back cross asset volatility to a world whose Sharpe ratio over the past several months has plummeted into negative territory. Increasing concerns about a government shutdown (misplaced) will likely prevent a solid bid from developing under markets.
Men have had their stab at making the world into what they wanted and they made a pretty poor show of it all we might say when we look at the economy.
Still Laundering Terrorism and Drug Money ...
- JPMorgan Guilty Admission a Win for SEC’s Policy Shift (BBG)
- Pricing Glitch Afflicts Rollout of Online Health Exchanges (WSJ)
- This will end well: Japan LDP Considers Draft Bill to Put Government in Control of Fukushima Cleanup (WSJ)
- How a German tech giant trims its U.S. tax bill (Reuters)
- Despite Merkel's Popularity, Angst Creeps In (WSJ)
- Hank Paulson warns of regulatory conflict (FT)
- Rajan Surprises With India Rate Rise to Quell Inflation (BBG)
- Apple Begins Selling New iPhones (WSJ)
- Pope Says Church Should Stop Obsessing Over Gays, Abortion (BBG)
Are you ready for Janet Yellen? Wall Street wants her, the mainstream media wants her and it appears that her confirmation would be a slam dunk. She would be the first woman ever to chair the Federal Reserve, and her philosophy is that a little bit of inflation is actually good for an economy. She was reportedly the architect for many of the unprecedented monetary decisions that Ben Bernanke made during his tenure, and that has many on Wall Street and in the media very excited. Noting that we "already know that Yellen is on board with Bernanke's easy money policies", CNN recently even went so far as to publish a rabidly pro-Yellen article with this stunning headline: "Dear Mr. President: Name Yellen now!" But after watching what a disaster Bernanke has been, do we really want more of the same? It doesn't really matter whether she is a woman, a man, a giant lizard or a robot, the question is whether or not she is going to continue to take us down the path to ruin that Bernanke has taken us.
It is undeniable that America is thoroughly addicted to fiat stimulus. Every aspect of our economy, from stocks, to bonds, to banks, and by indirect extension main street, is now utterly dependent on the continued 24/7 currency creation bonanza. The stock market no longer rallies to the tune of increased retail sales, growing export markets or improved employment expectations. In fact, “good” economic news today is met with panic and market sell-offs! Why? Because investors and banks still playing equities understand full well that any sign of fiscal improvement might mean the end of the private Federal Reserve’s QE pajama party. They know that without the Fed’s opiate-laced lifeline, the economy dies a fast and painful death. All mainstream economic news currently revolves around the Fed, as pundits clamor to divine whether the latest signals mean the free money will flow, trickle, or dry up. At the edge of the Federal Reserve’s 100th anniversary, it is vital that we see the current developments for what they really are – history changing, in a fashion so violent they are apt to scar America forever.