With the Dell LBO potentially heralding the renaissance of re-leveraging risk transfer from equity-holders to credit-holders, Goldman's screen among investment grade and high-yield companies attempts to uncover the names most likely to engage in shareholder-friendly (or more specifically bond-holder unfriendly) events. From quantitative screens on cashflow, leverage, and cash to stock 'cheapness', industry suitablity, and management reputation, the following 47 names warrant further attention (in both CDS and equity markets).
Stock market performance during bull markets is mainly (89%) explained by the duration of the bull market (defined as an uptrendwithout any pull-backs of 20% or more). The conclusion: As long as no shock rocks the boat, the expected market return is +22% per annum. The current bull market (+117%) is a tad ahead of the expected performance. Time-dependency matters more in bull markets. In bear markets, fundamentals (or initial conditions) matter most. What does this mean for current market environment? Valuation is, depending on what you look at, either cheap (P/E ratio) or expensive (P/E 10,Tobin's Q, regression etc). Hence, all eyes have to be on the look-out for any external shocks.
A week ago, when Wells Fargo unleashed the so far quite disappointing earnings season for commercial banks (connected hedge funds like Goldman Sachs excluded) we reported that the bank's deposits had risen to a record $176 billion over loans on its books. Today we conduct the same analysis for the other big two commercial banks: Wells Fargo and JPMorgan (we ignore Citi as it is still a partially nationalized disaster). The results are presented below, together with a rather stunning observation.
Absolutely "nobody" could have possibly anticipated that the week old French incursion into Mali could already have such disastrous consequences: a botched hostage rescue attempt by French commandos while leaving behind one of their team, a downed pilot on the first day of the confrontation, rebels that succeeded in capturing a strategic village and military post, and today, yet another hostage crisis in Algeria that has seen tens of hostages killed, potentially including Americans, following another botched rescue operation. Yet, in some ways, perhaps the stars have aligned just right for the US, which as Bloomberg reports, has wasted no time in sending not only drones in the air, but also boots on the ground.
The newly elected Japanese Prime Minister, Shinz? Abe, has caused quite a stir. The leader of the Liberal Democratic Party, which scored a landslide victory in 2012’s election, he’s promised to restart the Japanese economy, whatever it takes. How will he do this? By “bold monetary policy”, what he means—and what he has said—is to end the independence of the Bank of Japan, and have the government dictate monetary policy directly. The perception is, the Bank of Japan will not only print yens and buy government bonds à la Quantitative Easing of old - it is also generally thought that Mr. Abe and the incoming Japanese government fully intend to target the yen against foreign currencies, like Switzerland has been doing with the euro. This perception is what has been driving the Nikkei 225 index higher, and driven the yen lower. But why was this decision triggered?
Stocks surged (apart from AAPL) gloriously out of their super-narrow recent range, driven by recycled JPY rumors and some potential 'give' by the Republicans, and the rest of the risk-on complex tracked higher with it. Treasury yields pinged back to higher on the week as the S&P took out recent highs amid a very large surge in average trade size - something that often marks a climax in trend. It seems the selling of vol has hit its short-term limit (as VIX flatlined in general today) and so FX and credit were the levers today. Gold and Silver also surged on the day as Oil popped on the growing tensions in Algeria. In a premature release, Intel exposed an EPS beat, revenue miss, and weak guidance which sent algos scurrying and the share price snapping up and down into the close (and falling after). The bottom-line seems to be that the BoJ joining the infinite print brigade (and some very mixed US macro data) was enough to break us out of a narrow range - but the VWAP reversion into the close appears anything but follow through for the next leg up - as trade size suggests short-term trend change.
When one thinks of open-ended, "inflation targeting" one usually thinks of soaring markets, at least in nominal terms, exploding central bank balance sheet, and happy central planners. What one usually does not think of, is, well, inflation targeting. Because while the shadow banking financial system, perfectly devoid of deposits, has for now provided a sufficient buffer from trillions of reserve injections from spreading into the broader economy of the US and Europe, and has primarily impacted stock markets as unsterilized liquidity injections are used by banks to bid stocks, Japan has been far less lucky in this regard. As it turns out, the massive slide in the Japanese Yen in the past 2 months on nothing but ongoing promises of open-ended action, something Europe has perfected, and the US most recently enacted, may have already achieved its goal of pushing inflation. only not to the desired 2% level, but about 50% higher. Luckily, it is for such trivial things that nobody really every needs, such as fuel and consumer products - just ask the BLS.
Following Part 1 (History), and Part 2 (Interventionism), Part 3 provides a more technical look at the key features of the unadulterated gold standard. It could be briefly stated as a free market in money, credit, interest, discount, and banking. Another way of saying it is that there would be no confusion of money (i.e. gold) and credit (i.e. paper). Both play their role, and neither is banished from the monetary system. There would be no central bank with its “experts” to dictate the rate of interest and no “lender of last resort”. There would be no Securities Act, no deposit insurance, no armies of banking regulators, and definitely no bailouts or “too big to fail banks”. The government would have little role in the monetary system, save to catch criminals and enforce contracts.
In what is sure to be a complete non-starter with the Obama administration, WSJ reports that Paul Ryan said that "Republicans are discussing whether to support a short-term increase in the nation's borrowing authority, possibly linking the debt ceiling to future talks aimed at reaching a major deficit deal....Mr. Ryan said no decisions have been made about how to approach the debt and spending negotiations, but that leaders hope House Republicans will reach consensus on a strategy by the end of the week. The former vice-presidential candidate said "we're discussing the possible virtue of a short-term debt limit" increase that would lead to broader deficit talks with Senate Democrats and the White House. "We hope to achieve consensus on a plan to proceed so we can make progress on controlling spending and deficits and debt," Mr. Ryan said." The logical question immediately arose, and promptly received a non-answer "Mr. Ryan wouldn't say what he meant by a temporary debt-ceiling increase, declining to give a specific increase figure or timeframe for an extension."
One of the questions emerging from the latest batterygate affair, this time not involving A123 or any other government subsidized lithium batter maker, is whether customers who have already preordered Dreamliners, some as far back as 2004, may end up just saying no over concerns how long it will take Boeing to resolve its problems, and opting for other airplanes from the company, or even choosing some of Airbus' offerings. Because it may come as a surprise to some that while a whopping 848 airplanes have been ordered, only some 49 have been delivered, virtually all of which are now grounded. What else may be surprising? The charts below summarize where Boeing is on the delivery vs preorders picture.
Well, that, and guns too.
Queens: 5-31 Briar Place NYPD on scene with a a 7 year old Boy that brought a loaded gun to school Investigation in progress.
— NY Scanner (@NYScanner) January 17, 2013
While Brent closed 2012 at around its average closing price for the year, suggesting some stability, rolling a front-month contract garnered returns over 10% underscoring Jeff Currie's (Goldman's chief commodity strategist) note that money can still be made in a low volatility environment. However, he does note the incredible divergence between near-record-high geopolitical risks and near record-low Brent crude volatility relative to stocks. The key is that while Currie expects the global oil to remain cyclically tight (inventories low in 2013-14), with a $105.50 average for WTI; in an interview earlier today in Frankfurt, he said he wouldn't be surprised "if we woke up in summer and [Brent] oil cost $150" per barrel.
Over a year ago we noted that when it comes to Bank of America "earnings", items which traditionally are classified as non-recurring, one-time: primarily litigation and mortgage related charges, have now become recurring, and all the time, courtesy of the worst M&A transaction of all time - the purchase of Countrywide and its horrifying mortgage book. Today, this is finally being appreciated by the market where even the pompom carriers have said that it is time to start ignoring the endless addbacks and focus on actual earnings. The same cheerleaders have also, finally, understood that the primary source of "profitability" at this lawsuit magnet of a company, is nothing other than the accounting trick known as loan loss reserve releases - not actual profits but merely bottom line adjustments whose purpose is to mitigate the impact of quarterly charge offs on loans gone horrible bad. Remember that Bank of America has some $908 billion in total consumer loans and leases, and every day hundreds of millions of these go 'bad' and ultimately have to be discharged, offset by "hopes" that the future will improve. This hits both the balance sheet and the P&L. So, if one steps back and ignores the non-recurring, one-time noise, what emerges? A truly frightening picture.
Just as some do not believe in Santa, Christine Lagarde appeared to comment that she does not believe in currency wars (or competitive devaluation) this morning but sure enough, just a few hours later, Reuters rumors that the BoJ is about to join the Fed and ECB on the open-ended infinite print train. Sure enough, JPY is dumping (breaking recent highs on a stop-run), stocks are responding in their correlated carry way, and precious metals are surging (Silver +4.6% on the week) as fiat floods the world. It appears 2013 is the years of last last resort as the G-20 meme seems to be "if we can't reflate now, then it's all over." What is perhaps remarkable about the equity response is that everyone has known for two months that Japan plans on implementing a 2% inflation target. The only question has been "how" - and that it is only logical that the BOJ would use 'whatever means everyone else has used' - today merely confirmed this - knee-jerk algo response or sell-the-news?