While it won't say much new to those "stupid enough" to exist in the intersection of the "Retired" and "Alive" Venn circles under the Bernanke central planning regime, we suggest any pensioners who hope to see their life savings generate some...any... return (on capital, or of capital) in their lifetime, to simply skip this article and read some of our cheerier fare. So here is the punchline for pension fund managers which now predict an utterly insane 11% equity return which is the only thing that would make their Pension Plans whole: "In the early nineties, plan sponsors, if biased in their forecast, were generally biased toward conservatism. From 1997 through 2007, expectations, although a bit rosy at times, were largely within the realm of reasonableness. In our view, a long-run equity risk premium of 11% is pure jibber-jabber. It is wishful thinking. I dare not predict the level of the S&P 500 ten years out, but an ERP this high suggests the S&P would have to reach unprecedented levels. If this is what plan sponsors are counting on, I, like Clubber Lang, predict Pain." And "Hope is neither a training plan nor an investment strategy." Uh, wrong. Have you seen the EURUSD these days?
Wonder why China just bailed out its banks, preemptively, on Monday? Here's why. In a report issued by Credit Suisse's Sanjay Jain, the China strategist, who joins such now infamous skeptics as Bank of Countrywide Lynch's David Cui, has revised his base case Non Performing Loan ratio forecast from 4.5%-5.0% to 8.0%-12.0%: a unprecedented doubling in cumulative losses. Why unprecedented? Because as he explains, this could "would work out to 65–100% of banks’ equity." Crickets? Yes, Credit Suisse just singlehandedly said the equity value of the entire Chinese banking system is between 66% and 100% overvalued (with a downside case of $0.00). So for those putting two and two together, on one hand we have the four horsemen of the Chinese apocalypse, already presented visually before by Bank of America, consisting of i) a surge in underground lending, ii) a property downturn, iii) bad bank debt and iv) and "hot money" outflows, and on the other we have the vicious loop of what this means in terms of a central planning reaction. Simply said look for China to scramble to undo all the signals that it had been trying to spark while it was fighting with the Fed-inspired inflation bubble. Only problem is that like in the US and Europe, finding the Goldilocks point where all 4 are in equilibrium will be next to impossible, especially if investors in the country's banks realize the equity they hold is worthless and scramble to get the hell out of Dalian. Then the fears over a parliamentary vote in Slovakia will seem like a pleasant walk in the park.
Jim Chanos Mocks Latest Chinese Attempt To Support Its Stock Market, Sees It As Confirmation Of DeteriorationSubmitted by Tyler Durden on 10/11/2011 11:22 -0400
Yesterday we presented our cynical perspective on the latest Chinese intervention in its stock market, whose sole intention was to prop up the stock market, and create the illusion that the economy is stronger (following in the Chairman's footsteps, it appears that now the SHCOMP is the best proxy for economic prosperity) now that bank speculation of a Chinese hard landing has grown significantly louder (see here and here). Today, it is Jim Chanos' turn to jump on the, pardon the pun, cynical bandwagon, who, as Bloomberg reports "said a rally spurred by government purchases of the shares hasn’t changed his bearish outlook. The MSCI China Financials Index surged 6 percent today after state-run Central Huijin Investment Ltd. started buying shares in the four biggest Chinese lenders. The gauge of banks, insurers and developers had tumbled as much as 43 percent in 2011 through Oct. 4, sending its price-to-earnings ratio to a record low of 5.6 on concern that slowing economic growth will spur bad debts after a three-year credit boom. “The fact that people are even talking about the government stepping in to shore up the banks, when two months ago people thought there was nothing wrong with the Chinese banks, should tell you just how seriously this situation is deteriorating,” Chanos, founder of New York-based hedge fund Kynikos Associates, said in a Bloomberg Television interview." Needless to say this is glaringly obvious, which is why it will have no adverse impact and the only thing the markets will care about is how many trillions in additional government liquidity/purchases will come down the line to prop up the illusion that is the global economy.
Update: For those curious to learn more about this phenomenon, here is ZeroHedge's first take on this paradox from April 2009!
Stocks added to their rally today when Gasparino leaked news that MS was going to have a "solid" quarter and they were going to beat GS. Morgan Stanley has $187 billion of public debt according to Bloomberg. Just eyeballing it, the average maturity looks close to 4 years, but let's be conservative and assume it is 3 years. So MS 3 year bonds widened by over 300 bps during the quarter. 3 year MS CDS widened by 380 bps (from 113 to 493), so the move in bonds actually outperformed the move in CDS. Is MS planning on taking a massive gain on marking their own bonds? There were stories of MS buying back their own bonds - a great move if they though they were cheap, but a critical move if they were planning on taking a gain and didn't want to have to give it back in the future if their credit spreads tightened. Goldman has slightly less debt at $178 billion, but the spread widened far less. Is this why the MS CEO is so confident they will have a good quarter and beat GS? I honestly hope not. If the CEO of MS is playing accounting games (totally legal, but stupid) on their own spreads and thinks the markets will respect that, than I am very nervous about what is going on there.
Synopsis: Questions about MS's French bank exposure and level of derivatives exposure. While June results were good, MS' French bank exposure (all asset and off balance sheet classes except derivatives) is estimated at $39B (57% of equity of $68B and 150% of market cap of $26B) of which interbank placements is believed to be a small component. These exposures are significant and unusually large as a percentage of capital. Of equal concern is the estimated $1.78T in notional value of CDS' on MS' books although EJR does acknowledge the netting effect (the net estimated exposure is $457M). The US is likely to provide MS additional support if needed, despite wind-down procedures contained in Dodd Frank. We are downgrading with a neg outlook.
Indian Silver Demand Leads to Supply Issues, Capacity Stretched, Higher Premiums - Asian Bullion Demand Remains StrongSubmitted by Tyler Durden on 10/04/2011 07:40 -0400
Those continuing to be bearish on gold and misdiagnosing a gold bubble (for a variety of simplistic and ill thought out reasons – see Commentary) are ignoring the deeply held belief in gold as a store of value of some 3 billion people in Asia. They also ignore the small but growing number of buyers in the western world who are diversifying into gold leading to an increase in allocations to gold from a miniscule base. These buyers include hedge funds, banks, pension funds and most importantly central banks. These buyers continue to rightly focus on gold’s value rather than its price. Physical demand for silver remains high and is being reflected in a slight uptick in premiums. GoldCore have seen continuing coin and bar demand and physical buyers are not being deterred by the latest sell off on the COMEX market. Those buying silver continue to expect silver to rise to $50/oz and many expect silver to rise to over $140/oz which is the real record (CPI inflation adjusted) high from 1980. Demand from western buyers remains minimal as buyers remain a contrarian few with the majority of investors and savers having no allocation to silver whatsoever. However, this is not the case in Asia where both gold and silver are held in far higher esteem and appreciated for their wealth preservation qualities. Indian demand has been very significant in months and has accelerated in recent days after the sell off and tentative signs of a bottoming.
Mitsubishi UFJ Releases Rescue Attempt Of Morgan Stanley: Time For Orkimedes Of Omaha To Take Another Bath?Submitted by Tyler Durden on 10/03/2011 17:33 -0400
Just because outright denials by Dick Bove, Alliance Bernstein, Credit Suisse, Jim Cramer and Wells Fargo were not enough to prevent a rout of Morgan Stanley stock after someone dared to point out one simple observation, here comes the 2008 deja vu when the Asians had to step up and protect their "strategic alliance" partners, also known as deeply underwater investments. We expect another Eureka moment from the Orkimedes Of Omaha (and grand tax vizier) shortly.
Credit Suisse and Goldman Sachs have two indices that track the most shorted (highest short interest) stocks in the S&P500 and Russell 3000 respectively. This afternoon's action shows a considerable outperformance by the Russell 3000 most-short index over the Russell 3000 while the S&P 500 most-short index has stayed relatively well-behaved relative to the S&P 500. It seems smaller cap shorts have had the stuff squeezed out of them today.
The unerring belief that powers greater than mere mortals will vanquish the enemy of lack-of-bank-capital this weekend was enough to spur a significant turnaround in European stocks and spreads as they headed towards the close. While optically, the strength in senior financials spreads appears wondrous, we note that subordinated spreads are underperforming seniors significantly (when one would expect them to be outperforming if all was really well) and broad equity indices (and credit indices) only managed to get back to marginally unchanged. Sovereign risk remains notably wider still - which has the smell of a bailout/nationalization risk-transfer to it in our ever so humble opinion.
Yesterday's last minute short covering rally has been all but eliminated and then some, on fresh European concerns following a Deutsche Bank report that the agreed writedown of 21% from the July 21 second Greek bailout agreement could be executed, and that instead an orderly default with an up to 50% haircut is being considered. Generally, broad concerns that Greece can and will go bankrupt any minute once again dominate and have undone any favorable market sentiment from yesterday's G20, also known as the Full Tilt Ponzi Group, announcement, which was also followed up by an ECB statement that the central bank would do everything to prevent further contagion. Judging by the risk waterfall this morning, and the liquidations in gold (driven by a vague but ever stronger rumor of a winddown at a GLD-heavy hedge fund that is now down 50% YTD), virtually nobody believes anything coming out of any European institution. Alas, this is what two years of relentless accrued lying will do to your reputation. Adding fuel to the fire is a report from Credit Suisse that the chance of a "general European break up" is about 10% and that European banks would fall by about 40% on a disorderly Euro breakup and that peripheral European banks' net foreign liabilities would rise by €800 billion. In other words, European banks would blow up, which is nothing really new. Next, we hear from Dexia which yesterday got annihilated and today is down another 2.5% despite promises from the Belgian central bank governor Luc Coene that the bank is not in trouble and has not sought dollars from the ECB in a long time: obviously an attempt to prevent an all out attack on the insolvent bank, which as is well known bypasses the ECB and goes straight to the Fed for emergency funding. Overall, there is a very distinct sense that it's the end of the world as we know it, and the market does not feel all that fine anymore.
Earlier today some blog pulled up some factual data that suggested that Morgan Stanley had $39 billion in total exposure against French banks at the end of 2010, up $30 billion from the year prior, and enough to wipe out its entire market cap and then some should French banks be pulled under. Sure enough, the stock tanked even though as CNBC pointed out "there was absolutely no news." Since then, first Credit Suisse defended Morgan Stanley for its "European exposure" (we wonder how long before Morgan Stanley returns the favor and has to defend Credit Suisse for its US exposure: judging by Credit Suisse's maximum outlier 3M USD Libor rate, not too long). And now it is bank #2's turn, in this case Alliance Bernstein, whose conclusion is that "we estimate that total risk to France and its banks is less than $2 billion net of collateral and hedges." Ah yes, collateral and hedges, which, lest we recall incorrectly, did miracles when Lehman blew up and the very fabric of net hedging offset was threatened when the viability of the initiator in the "gross" CDS chain was put into question (thank you AIG). Naturally, if and when the 3 Big French banks go down, everyone will be perfectly normal and have no problem netting of hedges. Naturally. As for the coup de grace in the AB report, it is this piece of rhetorical brilliance: "Over the last six months, there have been 5,600+ articles published by the press on the subject of "French Banks" and "Credit Risk". We believe Morgan Stanley's risk management staff and its trading units are fully aware of the highly publicized risks emanating from Europe and warnings about the firm's potential exposure to a European Sovereign crisis." And there you have it: just because everyone is aware the bank is doomed, means the bank is ok. See, this is nothing like the logic that comedy entertainment icons such as Cramer and Dick Bove used to endorse Bear and Lehman days before both imploded. Then again, the downside for AB to actually tell the truth is substantially higher (as in contagion which takes down the entire banking system, AB included), than the upside from, well, prevaricating. As for abovementioned blog, we are just waiting for the third bank to come to Morgan Stanley's defense to know it was 100% correct.
In the past week, any and every move higher in the market, which is a direct consequence of the EURUSD seeing an uptick, has been as a consequence of rumor or statement or outright innuendo that China may either buy European bonds or European assets, but generally bail out the now ridiculously insolvent continent (and with Greek 1 Years at 150%, it is pretty clear what will happen). Yet, once again the conventional wisdom leaves much to be desired. Such as the answer to one very simple question: China just may buy up a whole lot of Greek and Italian bonds, and even EFSF issuance, but... who will bailout China. Wait, China is in trouble? Why yes: from Marketwatch: " China’s real-estate market may face an escalating credit crisis, with industry data for August providing clues that big developers are running short of cash, according to Credit Suisse analysts. The unfolding situation heralds a perfect storm for China’s home-building industry, and China’s deteriorating credit backdrop should be viewed by investors with alarm, the Credit Suisse analysts said." That's ok, by the time China is insolvent, Chinese stabilization of Europe will be complete, and Europe can boldly step up and rescue China in turn. And so on... And so on... In the wacky, wonderful, ponzi world of ours.