Straight-forward discussion about the investment climate and the week ahead. Light on hyperbole, heavy on analysis.
The market is extremely tired and the systemic risks underlying the Financial Crisis are in no way resolved. With investor complacency (as measured by the VIX) at record lows, the Fed withdrawing several of its more significant market props, and low participation coming from the larger institutions, this market is ripe for a serious correction.
Having admitted that the banking system problems in Portugal could be systemic, the President has a bigger problem now as the 3rd (and final) Holdco of the Banco Espirito Santo capital structure fiasco just filed for bankruptcy:
*ESPIRITO SANTO FINANCIAL GROUP SEEKS PROTECTION FROM CREDITORS
First it was ESI (storm in a teacup), then RioForte ("contained"), and now ESFG ("systemic"), and given the CEO's recent "detention" for money-laundering, we wonder how long before Banco Espirito Santo is forced to liquidate?
Banco Espirito Santo stocks and bonds are up notably this morning following comments from the Portuguese Central Bank that shareholders are interested in injecting more capital into the failed bank. This has - for now - reassured investors that a bail-in won't be necessary but, as Jefferies notes, "it's hearsay for the moment but it’s helpful." Chatter that "someone" is willing to throw another EUR 2 Billion at this "troubled" financial entity was enough to spur risk-on buying in most of European stocks with Portugal PSI20 surging almost 4%. The question is - after all this additional capital (at what will likely be a major haircut to current equity prices), who will do business with this bank (and why?) after already suffering through the fear of deposit confiscation or debt haircuts?
This clown parade of clueless opinions (did we mention Goldman had BES at a buy until this morning?), stretched all the way to the very top with Bank of Portugal itself issuing the following pearl:
- BANK OF PORTUGAL SAYS BES DEPOSITORS CAN STAY CALM
Uhhh, what else would the Portugal central bank say? Panic and withdraw your deposits from a bank whose exposures to insolvent entities have been largely unknown until today (and even now).
Brussels, we have a problem. As we warned 6 weeks ago, Espirito Santo International SA - is in a "serious financial condition" according to a central bank driven external audit by KPMG identified "irregularities in its accounts." Sure enough, the 'ponzi-like' maneuvers have left the bank unable to pay its bonds as Bloomberg reports bonds plunged to record lows after a parent company delayed payments on short-term notes. More importantly, given the divisively dependent nature of the domestic sovereign bond market (and hence the health of the EU) and its banking system, it is noteworthy that Portuguese bond risk has surged to 4 month highs with the biggest 2-day spike in a year. As one analyst noted, “The bigger question is whether the government will have to get involved,” leaving the EU taxpayer on the hook once again (for fear of M.A.D. threats) as most critically, it "will have to step in to prevent systemic repercussions?"
One hundred years ago today the world was shook loose of its moorings. Every school boy knows that the assassination of the archduke of Austria at Sarajevo was the trigger that incited the bloody, destructive conflagration of the world’s nations known as the Great War. But this senseless eruption of unprecedented industrial state violence did not end with the armistice four years later. In fact, 1914 is the fulcrum of modern history. It is the year the Fed opened-up for business just as the carnage in northern France closed-down the prior magnificent half-century era of liberal internationalism and honest gold-backed money. So it was the Great War’s terrible aftermath - a century of drift toward statism, militarism and fiat money - that was actually triggered by the events at Sarajevo.
You can smell this one coming a mile away... the ECB is now energetically trying to revive the a market for asset-backed commercial paper (ABCP) - the very kind of “toxic-waste” that allegedly nearly took down the financial system during the panic of September 2008. The ECB would have you believe that getting more “liquidity” into the bank loan market for such things as credit card advances, auto paper and small business loans will somehow cause Europe’s debt-besotted businesses and consumers to start borrowing again - thereby reversing the mild (and constructive) trend toward debt reduction that has caused euro area bank loans to decline by about 3% over the past year. What they are really up to, however, is money-printing and snookering the German sound money camp.
As Its Domestic Cash Plunges By Record To Early 2010 Levels, Apple Prepares Massive $17 Billion Bond OfferingSubmitted by Tyler Durden on 04/28/2014 11:17 -0400
While Apple's earnings report last week left little to be desired, one of the more notable observations was that the company's cash hoard, relentlessly rising until now, had seen its first quarterly dip since Lehman, declining by $8 billion from $158.8 billion to $150.6 billion. Which was to be expected: since the technological company has not had much success with "growthy" innovation since the arrival of Tim Cook, it has been forced to become an activist investor's favorite piggybank, buying back and dividending record amounts of cash. In fact, perhaps the most notable feature of its earnings release was that AAPL would boost its buyback plan by 50% to $90 billion. One small problem: as everyone knows, when it comes to shareholder friendly actions, Apple can only rely on its domestic cash hoard. What this simply means is that after making the history books with the biggest ever, $17 billion bond offering 12 months ago, Apple is about to issue a whole lot more of debt.
"The global financial landscape was evolving. Ever since World War II, US bankers hadn’t worried too much about their supremacy being challenged by other international banks, which were still playing catch-up in terms of deposits, loans, and global customers. But by now the international banks had moved beyond postwar reconstructive pain and gained significant ground by trading with Cold War enemies of the United States. They were, in short, cutting into the global market that the US bankers had dominated by extending themselves into areas in which the US bankers were absent for US policy reasons. There was no such thing as “enough” of a market share in this game. As a result, US bankers had to take a longer, harder look at the “shackles” hampering their growth. To remain globally competitive, among other things, bankers sought to shatter post-Depression legislative barriers like Glass-Steagall. They wielded fear coated in shades of nationalism as a weapon: if US bankers became less competitive, then by extension the United States would become less powerful. The competition argument would remain dominant on Wall Street and in Washington for nearly three decades, until the separation of speculative and commercial banking that had been invoked by the Glass-Steagall Act would be no more."
As the cost of living increases around the globe, wage protests and strikes have become commonplace, particularly in the emerging market space:
Simply ending the corporate lives of Fannie Mae and Freddie Mac as the Johnson-Crapo proposal envisions is not sufficient
UPDATE: It's happened - China has suffered its first domestic corporate bond default as Chaori fails to meet interest payments on schedule and rather more surprisingly failed to receive a last-minute mysterious or otherwise bailout...
*CITIC BANK WON'T HELP CHAORI MAKE INTEREST PAYMENT: 21ST HERALD
Ever since the specter of the first real domestic default on a Chinese corporate bond hovered over the markets, the Chinese credit markets have been leaking lower. The last 3 days have seen the biggest drop in Chinese credit markets in almost 4 months. That situation, wistfully occurring half way around the world while US equity markets press on to ever more exuberant (and ignorant) heights, meant at least 3 other Chinese firms pulled their bond issues today and, as Reuters reports, has "triggered widespread upheaval in the bond market." Banks are awash with liquidity (as indicated by low repo/SHIBOR rates) but clearly unwilling to lend and external investors are now running scared.
There’s good propaganda and bad propaganda. Bad propaganda is generally crude, amateurish Judy Miller “mobile weapons lab-type” nonsense that figures that people are so stupid they’ll believe anything that appears in “the paper of record.” Good propaganda, on the other hand, uses factual, sometimes documented material in a coordinated campaign with the other major media to cobble-together a narrative that is credible, but false. The so called Fed’s transcripts, which were released last week, fall into the latter category... But while the conversations between the members are accurately recorded, they don’t tell the gist of the story or provide the context that’s needed to grasp the bigger picture. Instead, they’re used to portray the members of the Fed as affable, well-meaning bunglers who did the best they could in ‘very trying circumstances’. While this is effective propaganda, it’s basically a lie, mainly because it diverts attention from the Fed’s role in crashing the financial system, preventing the remedies that were needed from being implemented (nationalizing the giant Wall Street banks), and coercing Congress into approving gigantic, economy-killing bailouts which shifted trillions of dollars to insolvent financial institutions that should have been euthanized. What I’m saying is that the Fed’s transcripts are, perhaps, the greatest propaganda coup of our time.
When Arthur Levitt's SEC adopted Rule 2a-7 in 1998, it handed the TBTF banks and GSEs a mortgage monopoly on a silver platter.