California Is Not Spain, Uganda, Or Greece; But Stockton Sure Is: Largest US City Bankruptcy Is Now OfficialSubmitted by Tyler Durden on 06/28/2012 20:42 -0400
The longest foreplay, well except what they have going on over in Europe these days, is now over:
- STOCKTON, CALIFORNIA, FILES FOR BANKRUPTCY COURT PROTECTION
Let's see: this week we have had official insolvency filings from Spain's banks, Cyprus, now Stockton, and rumors that Slovenia is next. It also appears that Spain and Italy do not want to be "fake" bailed out unless they are "for real" bailed out. Things are certainly picking up speed. What next: Stoxit? And what is the Bloomberg text symbol for the Confederate dollar?
Nothing exemplifies the ghetto status of the U.S. economy more than the success of Wal-Mart in the face of the ongoing destruction of what was once a vibrant and strong middle class. In case you missed it, Marion Nestle, Professor in the Department of Nutrition, Food Studies, and Public Health at NYU, came out with some interesting tidbits regarding the food stamp program. One of them is extraordinarily disturbing. She shows that Wal-Mart’s gets as much as 25% to 40% of revenue at some stores from food stamp dollars. This says it all folks. Food stamps are or course the perfect business for Wal-Mart and JP Morgan, which as I pointed out previously makes a lot of money running the program and keeping the populace in perpetual serfdom. Meanwhile, guess what another of the best performing stocks this year is? Corrections Corp of America, ticker CXW, up 41% YTD! Guess what they do? Yep, you guessed it. They lock up the serfs that get out of line.
UPDATE: ES has lost over 60% of its late-day spike gains...
France's 'happy' Hollande is out, apres-dejeuner, opining on what occurred today and where he stands. The critical items appear to be the growing divide between his immediate need for 'debt stability' measures versus his disagreement over the assumptive 'fiscal pact' that Merkel will require before any money leaves that nation's shores in its transfer-of-wealth way. Headlines via Bloomberg:
- HOLLANDE WITHHOLDS ENDORSEMENT OF EU FISCAL PACT
- HOLLANDE SAYS MUST FIND ALTERNATIVE TO ECB IN CUTTING YIELDS
- DEBT STABILITY MEASURES NEED TO COME FIRST, HOLLANDE SAYS
- HOLLANDE SAYS GROWTH MEASURES `AREN'T ENOUGH'
and the piece-de-resistance:
- EUROPE SHOULD HAVE MORE THAN MARKET ECONOMY, HOLLANDE SAYS
- WE WILL RENEGOTIATE COUNTRY SPECIFIC RECOMMENDATIONS AND WILL ONLY IMPLEMENT WHAT WE AGREE WITH
When we said that the Spanish bailout inspired Syriza to push on with renegotiating all the Greek pacts, little did we know that Syriza itself would inspire all of Europe to gang up on Merkel. Problem is: Syriza failed as Germany sadly still has all the leverage aka money. The other beggars will be no more successful.
Earlier, we presented a slightly more idealistic, slightly less gray, slightly less mathematically challenged version of the president talking to ABC's George Stephanopolous on the topic of whether or not the Affordable Care Act should be treated as tax. Obama said "I absolutely reject that notion". The Supreme Court, however, whether with a last minute change of heart by Chief Justice Roberts for whatever reasons, or not, disagreed in what ended up being a shocking hail mary effort, and essentially said that Obama's entire spin campaign of Obamacare as 'not a tax' is wrong, in the process making Obamacare constitutional but also making it the largest tax increase in the history of the US. We are eagerly looking for the CBO's scoring of how the ACA will impact the parabolic charts of projected future US deficit and debt. In the meantime, once again looking back in time, we present an even younger version of the president, all the way back in 2008, sharing his thoughts on the now so very crucial topic of mandates. To wit: "If a mandate was the solution, we could try that to solve homelessness by mandating everybody buy a house. The reason they don't have a house is they don't have the money." He is right. Hopefully, this rather insightful allegory into cause and effect from 4 years ago is not a preamble into what the SCOTUS may have just unleashed with the imminent arrival of the Affordable Housing Act.
Today's release of the final estimate of 1st Quarter GDP came in unchanged at 1.9% at the headline which was sharply lower than the 3% growth rate in the 4th quarter of 2011. However, what was masked by the headline, was the impact of the unseasonably warm winter that boosted construction spending while the rest of the economy deteriorated. The chart shows the changes between the second and final estimates of GDP. As you will see the consumer was weaker than originally estimated along with all the areas that the consumer directly effects - goods and services. The warmest winter over the last 65 years helped to boost construction spending and investment more than originally estimated which provided the offset from the drag in virtually every other category. Had it not been for this higher estimation in construction spending our estimate of 1.7% would have been obtained.
- GERMANY WON'T ACCEPT NEW ANTI-CRISIS INSTRUMENTS - GERMAN SOURCE *DJ
Maybe the Italian football team should have bent over just a little.
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Today's edition of the Eurosummit is over. There was some news, however, as always happens, there is a twist:
- EU LEADERS HAVE AGREED A GROWTH PACKAGE OF 120 BLN EUROS BUT ITALY AND SPAIN NOT PREPARED TO SIGN OFF ON IT - EU OFFICIALS - *DJ
- ITALY WON'T SIGN ONTO GROWTH PACT UNTIL BOND BUYING DEAL
In other words, beggars continue to be choosers, as Italy and Spain will not agree on getting aid (!) until Germany relents on buying their bonds. There was a reason why in the summer of 2011 we said that as the Game Theory equilibrium shifts to defection, he who defects first, defects best. Well, Greece is now leaps and bounds ahead of everyone as the global ponzi unravels. And so the posturing for second place is now on. We can't wait for the official German response, to both this, and to the loss by Italy in Euro2012.
We recently commented in detail on (and often discuss) the extreme high correlations across not just asset-classes but across all individual stocks. As Goldman notes today correlations across equities reached new record high levels during the financial crisis and remain extremely elevated compared to long-run averages. There are both structural (for instance, the dramatic rise in popularity of ETFs) and cyclical drivers (for instance, the severity of the great recession and the ongoing deleveraging in developed economies which maintains a high risk of another recession given the lack of fiscal and monetary flexibility) that are causing this shift. This high level of equity correlations has huge implications for the investment community as opportunities for diversification are significantly reduced and adding value by stock-picking is reduced (as evidenced by the notable drift lower in long/short hedge fund performance). This introduces a chicken-and-egg problem with regards to the growth in index investing and trading - while it has likely contributed, it is more likely a symptom than the cause of higher correlations. With currently elevated macro risks investors have a better chance to generate alpha by focusing on 'trading' and picking equity indices rather than stock-picking. Only with a sustained improvement in macro conditions are equity risk premia and correlations likely to decrease.
In a day full of political news, here is the latest fixture to the soap opera to keep the electorate happy with water cooler talk.
HOUSE HAS ENOUGH VOTES FOR HOLDER CITATION; VOTE CONTINUES
House votes 255-67 to hold AG Eric Holder in criminal contempt of Congress for withholding documents in the Fast and Furious probe
Now, if only someone, somewhere can tell us the answer to the only question that matters in a world that just happens to have run out of money: who will pay for everything in this increasingly insane world, we would be very grateful. Or is everyone too distracted by meaningless flashing headlines, and ideological agenda to actually care?
UPDATE: RIMM just opened at $7.5 from its $9 after-hours close before the halt - a mere 17% drop.
For any RIMM shareholders expecting a miraculous deus ex, somewhat like Europe's broker beggars who still are choosers, to come out of left field in today's earnings reports, there was nothing but epic disappointment.
- Revenues came in at $2.81 billion on expectations of $3.1 billion, and down from $4.91 billion a year prior
- EPS were $(0.37) on expectations of just a 7 cent miss.
- The outlook is just as horrible, with RIMM announcing it expects a Q2 operating loss
- It also see lower shipment volumes, and delayed the launch of Blackberry 10 to Q1 2013
- Finally, the firm will cut 5,000 jobs
If the stock isn't moving much it is because it has been halted since pre announcement. It will reopen at 4:40pm, probably between 10 and 20% lower.
Equities did it again - and no matter what narrative a mainstream media channel needs to comprehend the monkey-hammering that occurs every second in our 'market', it seems a fat-finger 50k block of S&P 500 e-mini futures (or around $3.3bn notional equivalent) was enough drive the nominal price index up 1% to close the day-session almost green (and rather notably right at yesterday's closing VWAP). All the highly correlated sectors of the equity market surged with them (led by Energy and leaving financials just in the red) and while Treasury yields did leak higher and EURUSD did rally, the moves were miniscule in comparison to someone's desire to own $3.3bn equivalent equity market risk into the close. Silver and Oil plunged early but recovered some into the close as stocks surged but tracked each other tick for tick for tick in general. Equities end the day modestly lower with VIX modestly higher as they saw average volume (thanks to the surge) but a drop in average trade size (algo tickler). Financials were saved by this as most recovered some of their losses with JPM limping up to close at Tuesday's closing VWAP. Credit and equity closed generally in line as IG/HY were very quiet and just being reracked along with stocks as opposed to seeing heavy flow.
STEPHANOPOULOS: [The individual mandate] is still a tax increase.
OBAMA: No. That’s not true, George. The — for us to say that you’ve got to take a responsibility to get health insurance is absolutely not a tax increase. What it’s saying is, is that we’re not going to have other people carrying your burdens for you anymore than the fact that right now everybody in America, just about, has to get auto insurance. Nobody considers that a tax increase. People say to themselves, that is a fair way to make sure that if you hit my car, that I’m not covering all the costs.
STEPHANOPOULOS: But it may be fair, it may be good public policy…
OBAMA: No, but — but, George, you — you can’t just make up that language and decide that that’s called a tax increase. Any…
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Nobody, except for the Supreme Court that is...
Stocks just surged over 1% off their lows on absolutely no news whatsoever. The Merkel news was minutes ago (and how is that in any way positive) and the JPM news is old and irrelevant... This is simply ridiculous... they are on their own from a cross-asset perspective and just touched yesterday's closing VWAP which feels very algo-exit-driven...
No, we are not making this up:
- MERKEL CANCELS SUMMIT PRESS CONFERENCE TONIGHT
- MERKEL SPOKESMAN SAYS TALKS ON GROWTH ACCORD ONGOING
In other news, Germany is down 0:2 to Italy right now.
"Mistakes are what superior investing is all about" is how Oaktree's Howard Marks begins his latest treatise, adding that for a trade to turn out to be a major success, the other side has to have been a big mistake. In any trade it is generally safe to say that one side has to be wrong (since win/win transactions are far less common than win/lose) leaving the buyer and seller unequally happy. Marks believes it is highly desirable to focus on the topic of investing mistakes. First, it serves as a reminder that the potential for error is ever-present, and thus of the importance of mistake minimization as a key goal. Second, if one side of every transaction is wrong, we have to ponder why we should think it’s not us. Third, then, it causes us to consider how to minimize the probability of being the one making the mistake. From the real-world 'issues' with the efficient market hypothesis, to behavioral sources of investment error, Marks concludes: "In the end, superior investing is all about mistakes... and about being the person who profits from them, not the one who commits them."
While no-one knows exactly what the 'whale' trade was (we suspect a senior tranche trade tail-risk hedge whose risk-management hedging went pear-shaped), how much was done ($150bn notional seems consensus), and what the losses are likely to be (approximately $4bn is easy to see given the moves in IG9 10Y alone; though $9bn seems a stretch - albeit the kitchen-sink nature and perhaps inclusion of the losses from the long-book that this was supposed to be hedging - and the other positions that were used to hedge - may push it up to $6bn plus); we prefer to fall back to what has been a tested and true arbiter of JPM's underlying value (ex equity exuberance) - the CDS market. Given the current moves in prices, CDS appear to be looking for another 5-10% downside here before JPM's equity price is back in line with the credit market (of course this could also mean CDS needs to tighten aggressively or both). In the meantime, this message was brought to you by the acronyms DVA, LLP, and DV01; the number '9'; and the word 'book-value'.