If anyone is wondering why the darling stock of Bill Ackman and Whitney Tilson, for whom every collapse of JCP is a buying gift from god, namely JCPenney, is plunging after hours, it is because the company's president, Michael Francis, hired October 4, 2011, has just quit. To wit: "J. C. Penney Company, Inc. ("jcpenney") (JCP) today announced that Michael Francis will be leaving the Company, effective today. Chief Executive Officer Ron Johnson will assume direct responsibility and oversight of the company's marketing and merchandising functions." And to think that just 9 months ago the company CEO Ron Johnson announced, that "I am thrilled to welcome Michael to our team... He is an extremely talented executive with the vision and courage to re-imagine the department store experience. His ability to innovate and deep understanding of the industry will be invaluable as we set out to transform J.C. Penney into America's favorite store." And while his ability to do anything else appears to have been a dud, his ability to read the fine print in his contract, especially where it talks about his perks, was second to none. Because despite leaving just 9 months after his hiring, Francis is entitled to collect a whopping $9 million in pro-rated signing bonus (alongside $100,000/month in salary): all in all - a tidy package of $10 million for shooting the breeze while observing a sinking retail ship. Not bad for a company whose stock has just plunged to September 2010 levels.
Echo. In a slightly less aggressive replay of last Sunday/Monday's reaction to news from Europe, equity futures (and FX markets) opened gap-up and faded significantly to end modestly green after touching the 50DMA briefly. A 20pt drop from its open last night in S&P 500 e-mini futures on the less-than-Armageddon-but-more-of-the-same-disaster scenario played out, which then retraced around 50% of its drop during the day session. Equities diverged strongly from a notably decompressing IG and HY credit market (and significant weakness in HYG - the high-yield bond ETF). Treasuries and FX markets also remain disconnected (implying weaker levels in US stocks) as broadly speaking risk-assets did not feel the same love as stocks today. It would appear that, given the heavy volatility action, drop in Short-term vol (VIX), and recent divergence from stocks, that there was heavy vol selling today which supported a higher equity market in a virtuous manner until later in the afternoon when VIX and SPX had recoupled and stocks then limped lower to VWAP. Treasuries ended the day relatively unchanged from Friday's close after opening 6bps higher in yield, rallying 10bps from there as equities and FX plunged, and recovering higher in yield as the US day session progressed. EURUSD held under 1.26, diverging lower from equity strength from just before the US open leaving the USD higher by 0.45% from Friday's close - even as AUD strengthened notably. Commodities generally ignored USD strength with Copper, Gold, and Silver practically unch from Friday's close while WTI dropped over 1% to around $83 by the close. Financials underperformed as a sector (as Tech and Discretionary gained) but the majors were the worst hit having given up all their gains from Friday's MS lost 3.4%, Citi -2.6% and BofA & GS -2% with JPM close behind.
The full results of the Egyptian election will not be 'released' until the 21st but as Stratfor's Reva Bhalla notes, the Muslim Brotherhood is already claiming a narrow victory over the military's preferred candidate. Rather sadly, she opines, "the Presidency itself may not even matter much as the military has taken a series of moves in recent days to overtly reassert its authority over the Egyptian political system", further reinforcing Stratfor's historical position that Egypt's political future will be dictated (ironic choice of words) by the military and not by protesters in Tahrir Square. In a succinct 4 minutes, Reva explains why the possibility of a Brotherhood victory remains somewhat impotent given the implicit understandings with the military (via the constitution) but worries that the changes in the clamp-down efforts (more aggressive) of political protests will affect political affiliates in the Palestinian border-lands with Israel - where this weekend's 'suspiciously timed' renewed spate of attacks into Israel raises questions of who was responsible (and for what end?). The bottom-line is that tensions remain and the Brotherhood's links to Hamas are a political foil for the military (or even Israel's Netanyahu) to declare them unfit to rule.
After about an hour’s worth of air traffic congestion delays around JFK airport, I finally departed New York City yesterday evening en route for Vilnius, Lithuania… one of my favorite inconspicuous corners of Europe. The route took me through Helsinki, Finland for a brief connection, and I was on the ground long enough to witness something truly bizarre: a complete and utter lack of people. I could practically count on two hands the number of passengers milling around the airport this morning during peak business hours… it was almost something out of a zombie movie. Ordinarily I would have seen hundreds, thousands of people… and I have in the past as I’ve traversed this route many times before. And no, today was not a holiday.
That Italy is now at most days away from technical insolvency is not news: after all we reported on just this a week ago, citing not some fringe lunatics but Bloomberg economist David Powell who said that "Italy would probably be forced into receiving a bailout if it were to face another two weeks like the last seven days." This was a week ago... so one more week left, and things have not only not gotten better, they have gotten much worse. Which is why we were not very surprised to read the following just released news from Reuters: "Italy will push this week at a meeting of euro zone finance ministers for a semi-automatic mechanism involving the European Central Bank or the permanent bailout fund ESM to reduce spreads of euro zone bonds over Germany, Italy's European Affairs Minister Enzo Moavero said on Monday." Having done this for a while, we can tell Italy what the bond market, having perused the above sentence, just read: "semi-bailout." Because if Italy is implicitly demanding assistance from the ECB, and the Spanish bailout vehicle, the ESM, then things are about to hit the country with the €1.25 trillion in debt. It is all downhill from there. Oh, and here is what the bond market reads when they see ESM: "not so semi-subordination." Because if in Europe the idiotic plan to avoid a bank run is to announce preparations for one, followed by furious back pedaling, it is only logical (and we use the term loosely) that an attempt to avert a bailout will be pursued by requesting a semi version. Instead, that action always and only leads to one thing: waving the sellers right in.
While every long-only manager and jobbing stockbroker is hard at work twisting the simple logic of 'but, but Central Banks will print and save the world' into a much more appetizing 'US decoupling, cleanest-shirt, ignore Europe, earnings, profits, money-on-the-sidelines' euphemism, we note that the following three charts from UBS suggest that things are not quite as rosy as one might believe - whether or not Ben speaks monetarily this week. Between consensus growth expectations rolling over, the analyst upgrade/downgrade ratio turning negative once again, and recent changes in US growth remain positively ecstatic relative to global/regional changes; it would appear hope is a powerful (and hallucinatory) drug (as is QE kool-aid).
While we discussed the definitive new world geography last week, it appears the CDS market has decided to add a new parallel for us, Germany is now Chile (in terms of 10Y restructuring and devaluation risk). As a reminder, Germany's credit risk has risen by almost 50% in the last 3 months to record highs, and has converged higher towards Europe's GDP-weighted average sovereign risk in the last 2-3 weeks.
One of the biggest caveats from yesterday's Greek election result was that Pasok announced it would only participate in a broad coalition government that includes Syriza. Obviously Syriza promptly turned down the offer, which has now put the ball back in the court of the Pasok leader - Venizeloz. Being a career politicians, and knowing quite well what the final outcome of the Greek fiasco would be, it was only a matter of time before the former minister of defense, finance, and yes, sport, would flip flop, and hint that a government of just ND and Pasok would also work, as the alternative is just too harsh to even consider. In other words, we may shortly get a repeat of the precisely same leadership that brought Greece to 23% unemployment and a completely destroyed financial and economic system, with Veni back in the role of finance minister once again.
Everything you need to know about the success of austerity, but were afraid to ask. In a little under 90 seconds, this Borat-inspired cartoon explains "Why so many central bankers, politicians, and pundits admiring 'austerity wonderfulness'?" The answer, perhaps tongue-in-cheek, is because of "Great Latvia Success Story".
In spite of the fact that 85% of Greeks want to stay in the Eurozone, I was reasonably confident that Greeks would support Syriza to a first-place finish, and elect a new government willing to play chicken with the Germans. However Greeks — predominantly the elderly — rejected change (and possible imminent Drachmatization) in favour of the fundamentally broken status quo. But although Syriza finished second, the anti-bailout parties still commanded a majority of the votes. And New Democracy may still face a lot of trouble building a coalition to try to keep Greece in the bailout, and in the Euro . There has long been a rumour that Tsipras wanted to lose, so as to (rightly) blame the coming crush on the status quo parties. What fewer of us counted on was that the status quo parties wouldn’t want to win the election either. The pro-bailout socialists Pasok have thrown a monkey wrench into coalition-building by claiming they won’t take part in any coalition that doesn’t also include Syriza. This seems rational; when the tsunami hits, all parties in government will surely take a lot of long-term political damage. Pasok have already been marginalised by the younger and fierier Syriza, and Pasok presiding over an economic collapse (for that is undoubtedly what Greece now faces) would surely have driven Pasok into an abyss. The economy is such a poisoned chalice that parties seem willing to fight to keep themselves out of power.
Treasury yields disconnected (lower) late last week from the ebullience of stocks and while EURUSD managed to spike on the Greek hope (in a perfect reflection of last week's Spanish bailout market reaction), it is now also disconnecting (lower) from equity exuberance in the US (having totally round-tripped from its opening spike lows on the 1st exit polls last night). European stocks are ending near their lows, credit markets notably underperforming (in another almost perfect echo of last week's early market reaction), and while Spanish sovereign bonds are performing the worst, the rest of Europe is also pulling wider in spread and higher in yield. Swiss 2Y rates are down 3bps more at 34bps (and 5Y rates are down 2bps to -3bps - lowest ever on record!). Italian and Spanish stock indices are down over 3% led by financials (which leaves them both lower from pre-Spanish bailout), with only the Swiss and German indices managing modest gains on the day.
Any hopes that Germany may bend and allow Greece a little leeway in its bailout negotiations, buying at least a little goodwill with its people have just been dashed. Not only that, but readers may recall last week's Die Zeit article that a third Greek bailout may be in the workd. Well, forget it. From Reuters:
- GERMANY'S MERKEL SAYS CANNOT ACCEPT ANY LOOSENING OF AGREED REFORM PLEDGES IN GREECE AFTER ELECTION
- MERKEL SAYS DOES NOT SEE ANY REASON TO SPEAK ABOUT A NEW AID PACKAGE FOR GREECE ON TOP OF THE TWO ALREADY AGREED
- GERMANY'S MERKEL EXPECTS QUICK FORMATION OF NEW AND STABLE GOVERNMENT IN GREECE
Good luck with that, and good luck to everyone whose entire investing strategy is based on the assumption that Germany will blink when it comes to Greece.
With the majority of young (and middle-aged for that matter) voters in Greece moving away from the mainstream parties as they become disillusioned about their futures, today brings together two sides of the potential reaction (one of hope and one of despair). In an 80-second clip, we hear the truth that "leaving the country is a real prospect for a lot of young people unfortunately right now" as they are left with the difficult choice of whether to "Leave Greece or stay here and try to live on EUR300-400 per month". Perhaps it is the comment that "Austerity is not the solution, Austerity is the problem" that best summarizes their feelings and perhaps leads to the other 'extreme' side of the Greek youth reaction. As neo-Nazi party, Golden Dawn, celebrated their consolidating election performance yesterday with another attack on an immigrant. A Pakistan national was stabbed last night at Attiki train station. A video, taken from a mobile phone, shows a number of youths, confirmed by eye witnesses as Golden Dawn supporters, kicking someone on the floor. As the video ends, two of the youths can clearly be heard talking, with one asking the other if he used his knife, with the assailant confirming this by saying "it went all the way in". Whether it is the cuts of budgets via austerity or the cuts of the Golden Dawn supporters' attacks, it is clear that Greece is on a knife's edge and this election merely delays the inevitable exit (or further raises the potential - as we have been concerned about for over a year - of real civil unrest and chaos ensuing).
Following the nationalization of YPF several months ago, Argentina's recent anti-private industry overtures largely fell off the map. Until the last few days, when bondholders of Spanish gambling company Company have seen their holdings seemingly disappear in a big Greece vortex (modern parlance for infinite drain of wealth): the reason - bonds plunged on speculation the Argentina gaming industry may be next to go under sovereign control. From Bloomberg: "Bonds from Codere, the Spanish gambling company that depends on Argentina for more than half its earnings, are the world’s worst-performing euro-denominated notes on speculation President Cristina Fernandez de Kirchner may seize the South American country’s gaming industry. Yields on the company’s 660 million euros of bonds due 2015 climbed 496 basis points last week to 18.97 percent. The performance was the worst among more than 2,000 securities tracked by BAML’s Euro High Yield and EMU Corporate indexes." The problem: should already highly leveraged Codere's Argentina operations be indeed nationalized, the bond will almost likely be Corzined, with recoveries which we expect will be comparable to those of Sino Forest.