Private Equity

• Spot the pattern: Senate Leaders Nearing a Deal (Politico), Senators say debt, shutdown deal is near (USA Today), Senate Leaders in Striking Distance of a Deal (WSJ), U.S. senators hint at possible fiscal deal on Tuesday (Reuters), Senate Debt-Limit Deal Emerging (BBG)
• U.S. debt ceiling crisis would start quiet, go downhill fast (Reuters)
• Uneasy Investors Sell Billions in Treasurys (WSJ)
• BOE’s Cunliffe Says U.K. Is Not in Grip of Housing-Market Bubble (BBG)
• Letta Mixes Tax Cut With Rigor in Post-Berlusconi Italian Budget (BBG)
• Japan Seeks to Export More High-End Food  (WSJ)
• Burberry names Bailey CEO as Ahrendts quits for Apple (Reuters)
• China’s Biggest Reserves Jump Since 2011 Shows Inflow (BBG)

It may seem counter-intuitive but the US dollar appreciated last week, despite the partial closure of the Federal government, the heightened risk of default and the nomination of Yellen.  The dollar can move higher next week too.  

• The ice breaks; fiscal talks set (The Hill); Ryan steps up to shape a deal (The Hill), as predicted here yesterday
• Republicans consider short-term U.S. debt ceiling increase (Reuters)
• Shutdown Standoff Shows Signs of a Thaw (WSJ)
• JPMorgan Clients in Cash as Schwab’s Options Hedge Default (BBG)
• Mitch McConnell, Senate GOP search for way out (Politico)
• Meredith Whitney Winds Down Brokerage Unit After Setting Up Fund (BBG)
• Washington Budget Chaos Keeps Fed Rates Low for Longer (BBG)
• Chinese Premier Outlines US Debt Concerns (FT)
• Saudis brace for 'nightmare' of U.S.-Iran rapprochement (Reuters)
• Obama Urges Action on Yellen’s Fed Nomination (Reuters)
• Libyan Prime Minister Ali Zidan Freed After Kidnap (WSJ)

We identify the six investment themes that look likely to generate alpha over the coming decade.

The standard wisdom on gold is that it does well in times of economic bad news such as in the 1970s, a period of stagflation and recessions, when the yellow metal rose from $35/oz to peak at $850/oz in 1980. But this time, Don Coxe, a portfolio adviser to BMO Asset Management, believes, things are different. In this interview with The Gold Report, Coxe explains why gold will rise when the economy improves.

• Mounting Wall Street fears of US default (FT)
• This is what the US government does when it is "shut down" - CIA ramping up covert training program for moderate Syrian rebels (WaPo)
• SEC Weighs Overhaul of Exchanges’ Self-Regulatory System (WSJ) - just let Goldman and JPM do all the policing; not like anyone cares anymore
• Reid Sets Tone for Democrats in Shutdown Fight (WSJ)
• No Movement in Shutdown Standoff (WSJ)
• Shutdown will not slow Fed nomination, says Obama (FT)
• Syrian Regime Chokes Off Food to Town That Was Gassed (WSJ)
• Tesla Says Car Fire Began in Battery (AP)
• China Services Index Increases in Sign of Sustained Rebound (BBG) or sustained data manipulation

With mortgage applications down around 60% from their peak in April, the last best hope for sustained "recovery" in housing 'was' the cash-only bid from private equity and hedge capital in the REO-to-rent or flip-dat-house trades. As we have noted previously, that last pillar was starting to falter and as Bloomberg reports, it seems is now in full crack mode as Carlyle Group switches from marginal buyer to marginal seller in its $2.3 billion real estate funds. "Our capital was useful at the front edge of the recovery," the firm notes - implying the big gains are over as rent growth fades (as employment and income growth slows). Crucially, they add, "investors really want the new Class A properties so we’re selling into that demand." We assume that by "investors" they mean greater-fool bag-holders.

• U.S. Government Shut Down With No Quick Resolution Seen (BBG)
• 12 House Republicans now say they’d back a ‘clean’ CR (WaPo)
• Republicans’ 2014 Senate Edge Muddied by Shutdown Message (BBG)
• Obama Shortens Asia Trip Due to Government Shutdown (WSJ)
• Fed Said to Review Commodities at Goldman, Morgan Stanley (BBG)
• Foreign Firms Tap U.S. Gas Bonanza (WSJ)
• Behind Standoff, a Broken Process in Need of a Broker (WSJ)
• Japan Awaits Abe’s Third Arrow as Companies Urged to Invest (BBG)
• Microsoft investors push for chairman Gates to step down (Reuters)

"We are in the middle of an epic credit bubble, in my opinion, the likes of which I haven’t seen in my career in private equity."

- Joseph Baratta, Global Head of Private Equity at the Blackstone Group

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).

Another signal for investors around the world to buckle their seatbelts.

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.

Are too many of our most talented people choosing careers in finance - and, more specifically, in trading, speculating, and other allegedly “unproductive” activities?

• JPMorgan eyes $4bn ‘pay for peace’ deal (FT)
• Prosecutors Pursue Big SAC Settlement (WSJ) - in the US if you are rich enough, no crime is bad enough
• Cruz's Defiant Stand Is Also a Lonely One (WSJ); Texas senator speaks for more than 14 hours (FT)
• Iran Applies Brakes to U.S. Mideast Plans (WSJ)
• Americans in Poll Doubt Economy Rebound in Defiance of Forecasts (BBG)
• Big Banks Cut Basel III Shortfall by $112 Billion at End of 2012 (BBG) - the equivalent of 10 bridges to the Kalahari desert
• Obama’s Jabs at Russia on Syria Shows Diplomacy Tensions (BBG)
• ICAP Staff Face Criminal Charges Tied to Libor  (WSJ)
• Alibaba Is Said to Shift Target for I.P.O. to U.S. From Hong Kong (NYT)
• Home gold rush is over (Reuters)
• Conoco in landmark Alaska drone flight (FT)

Och-Ziff were perhaps a little early but used the last 10 months to unwind their real estate and exit the landlord business as the hedge-fund sponsored echo-bubble in housing rolled over into the mainstream. "American-Homes-4-Rent"'s IPO suggested a scramble to exit. With 60% of home purchases now being cash-only (explains the ongoing and massive layoffs in the mortgage business not just due to rate-driven weakening of demand), it is therefore a concern when one of the biggest funds playing in this space - OakTree Capital - announces plan to exit the buy-to-rent trade - selling roughly 500 fully-leased homes. As Reuters notes, it is yet another indication that early investors are looking to cash-out on the "recovery" in U.S. housing prices. Who will be left holding the bag this time?