Goldman Sachs

Guest Post: 2008 Again?

The so-called recovery is built on sand, and as stock markets climb and climb, and more traders and investors turn bullish, we come ever-closer to a new 2008-style collapse. Soaring markets, and soaring speculation. Big finance using loopholes to speculate bigger and harder. Mainstream financial journalists becoming more and more complacent about the “recovery”. We’ve been here before. Isn’t repeating the same behaviour and hoping for different results the very definition of insanity?

So Much For That "Record Inflow" Into Equity Funds - Domestic Equities See $4.2 Billion Outflow In Most Recent Week

The most talked about story of the last week was undoubtedly the relentless chatter about that massive $18 billion in equity fund inflows as reported by Lipper (not ICI), which tracks primarily institutional and ETF flow of funds, and which, as we explained even before the Lipper data came out, was driven exclusively by a surge in bank deposits into the year end, to be recycled for risk investment purposes by the commercial banks' own prop desks. The details, however, were largely ignored by the mainstream media which took that inflow as an indication that the tide has finally turned and that the great rotation out of bonds into stocks is on. Turns out that just as we expected it was a year end calendar asset rebalancing. As Lipper reported earlier, the enthusiasm for US stocks appears to have abruptly ended, with a whopping $4.2 billion pumped out of domestic equities, offset by some $4.5 billion invested in non-domestic equities. The blended flow? Just $286 million going into equities. Now our math may be a little rusty, but $18 billion followed by $0.2 is not really indicative of an ongoing rotation out of bonds and into stocks, and is more indicative of a one-time, non-recurring event, just the opposite of all the Bank of America addbacks.

Goldman's Most 'Event-Risk-Prone' US Equities

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).

The "Big Three" Banks Are Gambling With $860 Billion In Deposits

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.

Frontrunning: January 17

  • Obama's Gun Curbs Face a Slog in Congress (BBG)
  • Euro Area Seen Stalling as Draghi’s Pessimism Shared (BBG)
  • China Begins to Lose Edge as World's Factory Floor (WSJ)
  • EU Car Sales Slump (WSJ)
  • Fed Concerned About Overheated Markets Amid Record Bond-Buying (BBG)
  • Australia Posts Worst Back-to-Back Job Growth Since ’97 (BBG)
  • Abe Currency Policy Stokes Gaffe Risk as Amari Roils Yen (BBG)
  • Japan Opposition Party Won’t Back BOJ Officials for Governor (BBG)
  • Fed Reports Point to Subdued Economic Growth (WSJ)
  • China Set to Exit Slowdown by Boosting Infrastructure (BBG)
  • Greece not out of woods, must stick to reforms: finance minister (Reuters)
  • Russian Rate Debate Flares Up as Cabinet Seeks Growth (BBG)

Futures Refuse To Remain Grounded, Unlike Global Boeing Fleet

Same overnight pattern, different day. After a late day ramp in the US market, followed by a selloff in the futures after hours, taking the ES to trading session lows, we get the European trading crew which day after day sends the EURUSD soaring as Europe opens, pushing futures to unchanged or even green and easily negating the key news event of the day, in this case the full grounding of the entire global Boeing fleet which will once again weigh on the stock and DJIA. In the meantime, the big rotation behind the scenes in FX land continues, with the ongoing and very sudden pounding of the Swiss Franc taking the EURCHF to 1.2450, or the highest, since 2011. Same with the USDJPY which after another attempt to fall, rallies on more of the same regurgitated rumors. Not to mention the EURUSD of course, which as mentioned above has surged some 100 pips since the European open. In other words the overnight beating of the USD is enough to push the US stock market high enough in nominal terms, avoiding that there is no incremental cash flow. Then again, who needs cash flow when you have "multiple expansion."

Two 787 Fleets Grounded, As Well As Overnight Optimism

Those who went long Boeing in the last few days on hopes the "smoking battery" issue had been resolved, especially following Ray LaHood comment's he would fly the Dreamliner, which is rapidly becoming the Nightmareliner for Boeing, anytime anywhere, are about to be grounded, as is the entire 787 fleet of All Nippon Airlines and Japan Airlines following yet another incident forcing an emergency Dreamliner landing. This happened after ANA "alarms indicated smoke in the forward area of the plane, which houses batteries and other equipment, the airline said, and there was a "burning-like smell" in the cockpit and parts of the cabin. The plane landed at Takamatsu airport in western Japan, where the 129 passengers were evacuated using the plane's emergency chutes. The plane also carried eight crew members. ANA said that the exact cause was still undetermined. The event was designated as a "serious incident" by Japan's transport ministry, setting off an immediate investigation by the Japan Transport Safety Board, which dispatched a team to the scene." The result - a 4% drop in the stock so far premarket, and if any more airlines are to ground their fleet the implications for the backlog could be devastating, it will only get far worse for both the company and the Dow Jones average, of which it is part.

Frontrunning: January 15

  • White House delays 2014 budget after "fiscal cliff" standoff (Reuters) - And Senate will pass this... never?
  • Amari Signals Limits to Abe’s Campaign to Weaken Yen (BBG)
  • Draghi’s Bond Rally Masks Debt Doom Loop Trapping Spain (BBG)
  • Obama backs gun limits, concedes tough fight ahead (AP)
  • Bernanke to Weigh QE Costs as Fed Assets Approach Record (BBG)
  • Japan to Sell Debt Worth 7.8 Trillion Yen to Pay for Stimulus (BBG)
  • France more than doubles forces in Mali (FT) and yet...
  • Malian Rebels Take Town and Vow to Avenge French Attack (NYT)
  • China’s Li Calls for Patience as Government Works to Reduce Smog (BBG)
  • EU berates China over steel subsidies (BBG)
  • Number of working poor families grows as wealth gap widens (Reuters)

Dell Supposedly In LBO Talks, Stock Soars

Moments ago Bloomberg broke news that $19 billion market cap Dell may be in talks to go public. The result was a 10% surge in the stock that halted the stock as a circuit was triggered. Of course, there was a headline caveat that "LBO TALKS MAY NOT LEAD TO A DEAL." Which is not improbable: at $19 billion market cap, the equity check would be substantial for any consortium of buyers, not to mention the debt. Then again this must be the New Normal LBO announcement, where PE firms "leak" news of a going private deal just so they get to pay an even higher 20% premium to a closing stock price.  But the truly hilarious part is that the entire multi-trillion market jumped as if stung following the news. And that is what passes for efficient markets these days. Unless, of course, the "here come the LBOs" thesis is now in play.

Frontrunning: January 14

  • Guess who doesn't believe in the "great rotation out of bonds and into stocks": Abe Aids Bernanke as Japan Seen Buying Foreign Debt (BBG)
  • AIG Sues Federal Reserve Vehicle in Dispute Over Lawsuit Rights (WSJ)
  • JPMorgan Said to Weigh Disclosing Whale Report Faulting Dimon (BBG)
  • Ugly Choices Loom Over Debt Clash (WSJ)
  • Credit Suisse to cut bonus pool by 20 percent (Reuters)
  • Brazilian Bikini Waxes Make Crab Lice Endangered Species (BBG)
  • EU redrafts plan for bank rescue funding (FT)
  • JCPenney stock plunges after bad holiday (NY Post)
  • Regulator Comments Buoy Shanghai Stocks (WSJ)
  • Japan voters back PM Abe's efforts to spur growth, beat deflation (Reuters)
  • Cameron averts row over Europe speech (FT)
  • Swatch Buys Harry Winston Jewelry Brand for $1 Billion (BBG)