Viernes 13/03/15 precios de los productores

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Una bomba de tiempo en la economía china

Viernes, 13 de Marzo del 2015 - 14:34:00

La gente está empezando a hablar de un nuevo peligro en el sistema financiero chino: los valores respaldados por activos (ABS). Un ABS es básicamente un bono que puede estar garantizado por una serie de activos como préstamos, deudas de tarjetas de crédito, o cuentas por cobrar de una empresa.

Muchos expertos dijeron en su momento que el auge del mercado ABS ayudó a inflar la burbuja de crédito, ya que convirtió rápidamente pasivos en dinero en efectivo, mientras que ofrecía a los inversores lo que parecía ser un activo de alto rendimiento con un riesgo relativamente bajo.

Las sociedades fiduciarias de China han comenzado a comprar ABS a una velocidad impresionante, y con el mismo vigor con el que una vez compraron los productos de gestión de patrimonio extremadamente peligrosos (WMP), que ahora están en declive, señala Linette Lopez en un artículo en BI.

“Un informe reciente de la Reserva China (CRR) proyecta que las firmas financieras podrían emitir 127.000 millones de dólares en ABS este año, frente a los 44.000 millones del año pasado.

"Mostrando una flexibilidad para reinventarse a sí mismas, las sociedades fiduciarias que impulsaron el auge de los WMP, ahora en decaída, se están convirtiendo en empaquetadores de ABS", escribió el analista de CLSA Christoper Wood en una nota reciente.

A medida que China ha tratado de limpiar su sector bancario, los WMP parecen haber pasado de moda, y por una buena razón. Hace años, a los inversores se les dijo que estos productos ofrecerían rendimientos libres de riesgo del 2% y aún mayores. Pero ese no era el caso muy a menudo, y los enojados inversores a veces salían a las calles para expresar su frustración.


Pero eso no significa que los inversores dejen de perseguir el rendimiento, por supuesto.

Si nos fijamos en los ABS, un análisis CRR de 60 productos ABS emitidos en 2014 encontró que la mayoría de ellos se centraron en los préstamos a empresas... con un rendimiento medio del 5,7% y vencimiento medio del producto de 22 meses. Un inversor en un ABS no tiene que esperar hasta que el producto madura para recibir el pago en el sentido de que pueden vender en cualquier momento y estos ABS ahora están cotizados en el mercado interbancario.

La preocupación reside en la parte de la deuda corporativa. Los créditos corporativos representan casi el 92% de lo que les sucede a estos ABS, pero los analistas han argumentado durante mucho tiempo que los mayores problemas de la deuda de China se encuentran en su sector empresarial. Ellos son los mayores prestatarios del país, y por desgracia ahora están también bajo una intensa presión.

A medida que la economía china se mueve de un modelo basado en la inversión a otro basada en el consumo, los márgenes empresariales se han recortado. El índice de precios al productor de China está en su nivel más bajo desde octubre de 2009. Este año ya hemos visto como un gran promotor inmobiliario chino, Kaisa, entraba en un default en el pago de sus bonos.

Ahora parece que la deuda está siendo empaquetada y vendida a los inversores en el peor momento posible.”

Fuentes: Linette Lopez
Carlos Montero
Lacartadelabolsa

[Fenix]

El mercado descuenta dos subidas de tipos en EEUU en 2015

Y cuatro en 2016
Viernes, 13 de Marzo del 2015 - 14:58:00

De acuerdo a los futuros de los Fondos de la Fed, el mercado espera actualmente unas dos subidas de tipos hasta diciembre de 2015 (suponiendo que la Fed suba las tasas en 25 puntos básicos cada vez).

Los futuros de los Fondos de la Fed están descontando que la tasa de fondos federales estará en los 54 puntos básicos en diciembre de 2015 (ver gráfico adjunto vía GaveKal Capital). El mercado era más optimista con respecto a retrasar las subidas a mediados de enero, cuando el mercado estaba descontando solamente una subida y media en 2015.

Sin embargo, es interesante señalar que en los primeros 10 meses de 2014 el mercado estaba esperando aproximadamente tres alzas en 2015 por lo que las expectativas todavía están un poco por debajo que en aquel momento.


El mercado está descontando una tasa de fondos federales de 141 puntos básicos para finales de 2016. Las expectativas de mayores tasas en 2016 han aumentado considerablemente desde principios de febrero. El 2 de febrero, el mercado estaba descontando una tasa de fondos federales de sólo 104 puntos básicos en diciembre 2016

[Fenix]

El mercado inmobiliario y las subidas de tipos

Viernes, 13 de Marzo del 2015 - 15:27:00

Jeffrey Kleintop, de Charles Schwab, observa que desde el inicio de la Gran Recesión ninguno de los principales bancos centrales elevó las tasas de interés hasta que sus mercados inmobiliarios se recuperaron completamente tras las pérdidas sufridas durante la crisis.

Kleintop señala la subida de tipos apresurada en Australia y Noruega en 2009, Canadá en 2010, y el Banco Central Europeo en 2011. Por supuesto, las subidas de los tipos causaron que algunas de esas economías se debilitaran, y que finalmente giraran su tendencia de recuperación.

¿Ocurrirá lo mismo con la subida de tasas de la Reserva Federal? Kleintop cree que "puede parecer prematuro que la Fed suba las tasas, dada la falta de una recuperación completa de los precios de viviendas en Estados Unidos y el riesgo de una reacción negativa en el mercado de valores", pero también señala que "otros factores, tales como el sólido mercado de trabajo y el fortalecimiento económico parece estar teniendo prioridad sobre los precios de la vivienda para la Fed".

[Fenix]

A menos de dos meses para las elecciones

Viernes, 13 de Marzo del 2015 - 15:52:00

No teman: no hablo de los mercados del EUR. Pero, sí de un mercado europeo. Me refiero al británico. Antes de nada, observen la fortaleza mostrada por la moneda británica frente al EUR.

La pregunta es obligada: ¿tienen los inversores asimilado el riesgo que presentan las elecciones generales del 7 de mayo?.

Menos de dos meses para las elecciones; apenas dos semanas para que realmente comience la campaña electoral como tal, con debates entre los principales candidatos ya fijados para abril. Y con un electorado aún dividido, al menos en el caso de su posición con respecto a los dos grandes partidos.

Con todo, más de la mitad de la disposición de voto aún no lo han decidido. Y esto no sólo matiza la fiabilidad de los sondeos como también supone mayor riesgo derivado de la incertidumbre en las próximas semanas.

¿Qué cuáles son las principales propuestas de los partidos? Aquí las tienen resumidas:


- Conservadores

Superávit en las cuentas públicas en 2020, Referéndum sobre la EU (2017), recorte de impuestos, reducir la inmigración

- Laboristas

Subida del salario mínimo, congelación precios de la electricidad, incremento gasto social, subida de impuestos bonus e impuesto a los bancos

¿Una visión muy simple? La victoria conservadora sería en principio positiva para los mercados al mantener el mismo momentum de crecimiento actual. Por el contrario, la de los laboristas podría suponer mayores riesgos (déficit, inflación) y probablemente tendría una lectura más negativa. De entrada.

Pero, una victoria por mayoría de alguno de los dos partidos parece un escenario ciertamente complicado de materializarse.

¿Coaliciones de gobierno? Bueno, veremos de que tipo. Pero parece más probable un gobierno en minoría, factibles para ser nombrado y ciertamente complicado que puedan gobernar. ¿Con una lectura negativa por el mercado? me temo que este tipo de gobiernos será más habitual de lo que podría parecer en el futuro próximo. Y quizás una de las mejores opciones para los mercados, siempre y cuando, la evolución económica siga siendo positiva. En UK lo es, cuando las dudas del BOE parecen alejar el momento para iniciar la normalización monetaria.


José Luis Martínez Campuzano
Estratega de Citi en España

[Fenix]

A Black Swan Lands In Southern Austria: The Ripple Effects Of "Mini-Greece Going Off In The Heartland Of Europe"
Tyler D.
03/08/2015

By far the most notable news of the past week, which has still gone largely unnoticed by the greater investing community whose focus instead was on whether algos would ramp the Nasdaq to 5000, and keep the S&P above 2100, even before Mario Draghi finally began buying bonds that nobody wants to sell, was the "Spectacular Development" In Austria, whereby the "bad bank" of failed Hypo Alpe Adria - the Heta Asset Resolution AG - itself went from good to bad, with its creditors forced into an involuntary "bail-in" following the "discovery" of a $8.5 billion capital hole in its balance sheet primarily related to ongoing deterioration in central and eastern European economies.

This shocking announcement promptly sent the price of Heta bonds crashing as creditors, no longer enjoying the explicit guarantee of the state, scrambled to get out of "northern Europe's" first Lehman moment.

But while the acute pain came and went for Heta bondholders who have seen a nearly 50% loss in just a few short months, the bigger and far more diffuse pain is only just starting, or as Bloomberg put it, "Austria’s decision to wind down Heta Asset Resolution AG sent ripples through the financial system, causing credit rating downgrades in Austria and bank losses in Germany."

The first casualty: the beautifully picturesque southern Austrian province of Carinthia.

Why and how was one of the 9 Austrian provinces just sacrificed? Telegraph explains:

[The Heta] bonds are notionally guaranteed by the Austrian state of Carinthia, which now theoretically becomes liable for the bail-in. It’s an echo of the mess Ireland got itself into at the height of the banking crisis, when it foolishly attempted to stem the panic by underwriting all Irish banking liabilities; the move very nearly ended up bankrupting the entire country. Hypo will bankrupt Carinthia.

Essentially, what the Austrian government is doing is cutting loose an entire region, rather in the way the federal authorities in the US allowed Detroit to go bust a number of years ago.

It’s a mini-Greece going off in the heartlands of Europe.

Specifically, to quantify the Carinthian exposure vis-a-vis its guarantee which will now be put in play: Carinthia provides deficiency guarantee on Heta's senior debt: the total is equivalent to €10.2 billion, or nearly five times the state's 2014 operating revenue. Carinthia's budgeted revenue in 2015 is just €2.36 billion, and as such the southern province of 556,000 would be unable to honor the guarantees if they came due now or in a year’s time, Governor Peter Kaiser told Austrian radio ORF on Tuesday.

In other words, we now have a waterfall bailout chain whereby the state guaranteeing the debt of the insolvent entity that guaranteed yet another insolvent entity, will itself need to be bailed out by the sovereign, Austria! Or perhaps not: Finance Minister Hans Joerg Schelling has said repeatedly that the Austrian government isn’t liable to cover Carinthia’s guarantees.

This is also why late on Friday, Moody's downgrades the State of Carinthia's rating to Baa3 from A2 (outlook to negative from stable). This is what the rating agency said:

The rating action follows the decision of the Austrian Financial Market Authority (FMA) on 1 March 2015 to initiate resolution measures on Heta Asset Resolution AG (wind-down entity of former Hypo-Alpe-Adria), in accordance with the Federal Banking Restructuring and Resolution Act (BaSAG). BaSAG is the national implementation law of the European Bank Recovery and Resolution Directive (BRRD), effective since 1 January 2015. The FMA also imposed a temporary payment moratorium on Heta's liabilities until 31 May 2016. This follows the disclosure of Heta's recent asset review by external auditors, which indicated an additional shortfall of assets of up to EUR7.6 billion, compared to the EUR4 billion expected before.

Carinthia provides a statutory deficiency guarantee on a very high portion of Heta's senior debt; the total guarantees are equivalent to nearly EUR10.2 billion, or nearly five times the state's 2014 operating revenue. In addition, Carinthia provides a statutory deficiency guarantee to Pfandbriefbank (Oesterreich) AG (A2, RUR) of which about EUR1.2 billion is related to Heta as of year-end 2014.

The downgrade reflects an increased susceptibility to event risks, including litigation from Heta's bondholders and further actions by the FMA, and greater than anticipated shortfalls of Heta's assets. All these factors could lead to a crystallization of a significant portion of Carinthia's guaranteed debt. This amount could exceed Carinthia's liquidity resources, likely lead to increased financial leverage and could require some form of extraordinary central government support.

We understand that there is a likelihood that the deficiency guarantee could not be enforced upon a full or partial cancellation of bailed-in debt under BaSAG, because of the guarantee's accessory nature. However, we see an increased uncertainty regarding further resolution actions. Additionally, uncertainty could result from the legal risk associated with different contractual provisions of Heta-bonds.

Whether or not the Telegraph is right remains to be seen, and the otherwise beautiful province of Carinthia is now insolvent remains to be seen, but the bigger problem is that the Heta fallout does not stop there.

As Bloomberg reports, "among Heta’s liabilities affected by the moratorium and a future bail-in are 1.24 billion euros Heta owes to Pfandbriefbank Oesterreich AG, which issues bonds on behalf of Austrian provincial banks."

Moody’s said it may cut Pfandbriefbank’s A2 rating as well as the ratings of two of its biggest member banks, Hypo Tirol Bank AG and Vorarlberger Landes- und Hypothekenbank AG, owned by the western Austrian provinces of Tyrol and Vorarlberg, respectively. A2 is the sixth-lowest investment grade rating at Moody’s.

Below are all the Pfandbriefbank members, all of which will now suffer and require further capital injections in some capacity:

Some additional color from Barclays:

The main purpose of the exclusion of secured liabilities from the application of the bail-in tool is to prevent contagion. Indeed, there are a number of contagion channels when treating the guaranteed liabilities of HETAR not as secured liabilities.

First, the securities benefiting from the deficiency guarantee of Carinthia are also regarded as eligible collateral for a wide range of public sector covered bonds across the EU, including Austria, Germany, Luxembourg and France. As of 30 September 2014, Austrian banks had a total of €2.7bn of exposure to Carinthia, which partially consisted of exposure to HETAR. Furthermore, Pfandbriefbank (Österreich) AG (PFBKOS), the universal legal successor of Pfandbriefstelle der österreichischen Landes-Hypothekenbanken, has €1.2bn of Carinthia guaranteed claims against HETAR. These claims were explicitly made subject to the moratorium. According to article 2 of the Austrian Pfandbriefstelle law, the member banks of PFBKOS are jointly and severally liable for the debt of PFBKOS. Thus, irrespective of the future of PFBKOS, there is an incentive for the member banks to jointly step in for missing payments from HETAR, as otherwise debt holders of PFBKOS bonds could claim payment from any of the member banks individually. Notably, the FMA decided to exclude public sector Pfandbriefe issued by HETAR from the moratorium, indicating a degree of concern about contagion risk. We believe that the inclusion of guaranteed HETAR securities in the application of the bail-in measures adds to contagion risk, as demonstrated by the PFBKOS example.

Second, a number of Austrian banks, including HYPO NOE Gruppe Bank AG and Vorarlberger Landes- und Hypothekenbank AG reported in their annual accounts for 2013 that they had direct exposure to HAA. At this point in time no write-downs were made as reference was made to the “value of the guarantee given by the state of Carinthia”, as well as the fact that there has been no “statutory procedure allowing a territorial authority to declare insolvency”. When announcing the moratorium, FMA explicitly expressed doubts about the value of the respective guarantees. Furthermore, this week Austrian Finance Minister Schilling, in an interview with Austrian state radio, ORF, was quoted as saying that “many have been saying that one should have known that a province like Carinthia can’t guarantee for debts of that size”. Thus, it appears very likely that Austrian banks will have to provision for claims they hold against HETAR and which were now made subject to the moratorium.

Third, according to article 115(2) of the EU’s Capital Requirements Regulation (CRR), claims benefiting from the deficiency guarantee of an Austrian sub-sovereign can be treated as an exposure to the central government. The respective list of the European Banking Authority contains all nine Austrian regional governments, as well as more than 2,300 local authorities. Based on this rule, EU banks are allowed to apply a 0% risk-weighting to these exposures. In combination with article 10 of the EU’s delegated act on the Liquidity Coverage Ratio, they are also allowed to treat these assets as “extremely high quality liquid assets” under the level 1 bucket of their liquidity buffer portfolios. Finally, solvency 2 rules foresee that debt issued by Austrian regions could be treated by EU based insurance companies and pension funds similarly to debt issued by the Austrian central government with a 0% capital charge.

Irony #1: the very same bonds that are about to lead to a waterfall in impairments are the ones that were, according to EU regulations, "riskless." One can only imagine how much latent risk Europe's bank have as a result of the supremely idiotic decision to keep a major subsection of European debt as 0% RWA. That may work as long as the ECB backstops everything, but the second Mario Draghi ends QE, does everything implode under its own weight?

And then there is the question, how much more maximum pain could there be in Austria. Barclays responds again"

As of year-end 2013, there were about €60bn of claims guaranteed by Austrian regions. We estimate about €50-55bn of such claims were still outstanding as of year-end 2014. In particular, we note that as of year-end 2012, the guarantee commitments of six out of nine Austrian regions exceeded the total annual income.

The full breakdown of who guarantees what in Austria:

And then, once the impairment wave of the latest European insolvency shocker is done with Austria - a wave which nobody expected at all, and it thus a legitimate Black Swan - it will flow over into Germany. From Bloomberg:

German banks yesterday also emerged as major Heta bondholders. Dexia’s Dexia Kommunalbank Deutschland AG said it owns 395 million euros of Heta bonds and will take an unspecified charge in the first quarter. Deutsche Pfandbriefbank AG also owns 395 million euros of Heta bonds and said it will write them down by 120 million euros, cutting its expected pretax profit by two-thirds.

NRW Bank confirmed it owned Heta bonds, declining to specify the size of its exposure. WDR TV station reported the bank owns 276 million euros of them.

Irony #2, and the biggest one of all: while German banks had spent the past 3 years preparing for the inevitable Grexit and offloading all their exposure to the now insolvent Greek state, it was a waterfall chain of events which started in Germany's own "back yard", courtesy of auditors who decided it was unnecessary to mark losses to market until it was far too late, and the immediate outcome is that one ninth of until recently Aaa/AAA-rated Austria is now also insolvent. And that is just the beginning.

One can only imagine how many such other "0% risk-weighted" Pandora boxes lie in wait across what are otherwise considered Europe's safest banks, provinces and nations.

[Fenix]

GM Authorizes $5 Billion Stock Buyback, Will Return All Cash Over $20 Billion To Shareholders
Tyler D.
03/09/2015

Doubting if the growth ahead of GM is now over, and the great post-bankruptcy "success story" is rapidly fading as the company has been pushed to resort to the kind of financial engineering which has pushed the S&P higher for all of 2014, and follows a record month of stock buyback announcements? Then doubt no more: moments ago GM announced it is authorizing an immediate $5 billion stock buyback, and plans to return all cash above a $20 billion floor to shareholders.

From the Press Release:

General Motors Co. (GM) today announced a comprehensive capital allocation framework, as improving business performance and strong capital discipline enable increased returns to shareholders. GM said a foundational element of its approach will be to return all available free cash flow to shareholders while it maintains an investment-grade balance sheet underpinned by a target cash balance of $20 billion.

GM also announced that its Board of Directors authorized the initial repurchase of $5 billion in GM shares to begin immediately and conclude before the end of 2016. GM in February announced its intent to increase its quarterly stock dividend to $0.36 per share effective in the second quarter of 2015 as part of the Board's regularly scheduled second quarter 2015 dividend declaration process, which would result in an expected dividend payout of approximately $5 billion through year-end 2016.

"As we continue to execute on our plan to become the most valued automotive company, our track record of improved operating performance, strong earnings momentum, and disciplined capital investments provide the foundation for a comprehensive capital allocation framework," said GM CEO Mary Barra. "We will continue to invest in innovative technologies and world-class vehicles that will deliver sustained profitable growth and maximize returns to shareholders."

GM's capital allocation framework encompasses three core principles:

* High-Return Investment in the Business – GM previously stated it expects capital expenditures in 2015 of $9 billion to invest in future growth, including a more aggressive vehicle launch cadence in the coming years. GM will reinvest in its business with the objective of driving 20 percent or higher return on invested capital (ROIC) through investments in world-class vehicles and leading technology. The company plans to disclose its ROIC performance each quarter beginning with its first quarter 2015 report. The company expects this disciplined capital deployment will strengthen and grow GM's brands and drive improved financial performance and will result in capital spending in the range of 5–5.5 percent of its annual revenue in the future.
* Maintain an Investment-Grade Balance Sheet – GM intends to maintain an investment-grade balance sheet, including a target cash balance of $20 billion. GM believes maintaining an investment-grade balance sheet is critical to support long-term growth and increased earnings at GM Financial, which is a catalyst for improved automotive sales and profitability.
* Return Capital to Shareholders – Beyond reinvesting in the business and maintaining an investment grade balance sheet, the company expects to return all available free cash flow to shareholders. Starting in January 2016, GM will develop its annual capital return plans and communicate them to the market during the first quarter of each year.

In 2014, the company established an executive compensation program that aligns management incentives with ROIC and total shareholder return. GM said it is committed to providing greater clarity around its compensation program and will continue to evaluate the program to ensure that strong linkage.

GM reaffirmed that in 2015 it expects its total earnings before interest and tax (EBIT) adjusted and EBIT-adjusted margin to increase, compared to 2014, after adjusting 2014 for the impact of recall costs. The company reiterated that it is on track to meet its 2016 financial targets to achieve EBIT-adjusted margins in North America of 10 percent; to return to profitability in Europe; and to maintain strong margins in China. It also reaffirmed its long-term strategic plan to achieve 9–10 percent EBIT-adjusted margins by early next decade.

Why is GM doing this? Because as Goldman's David Kostin announced over the weekend, the only stocks worth buying left are those in which investors frontrun management's own price-indiscriminate purchases of its own corporate shares (and in the case of tech stocks, management is selling while the company is buying).

And just like that March is off on a solid footing to topple February as the record month of stock buyback announcements, which in a world in which S&P 500 revenue growth is now expected to post its first annual decline since Lehman, is the only deus ex to boost earnings per share left.

[Fenix]

Goldman Blames Weather For Stronger Oil Prices, Sees WTI Sliding Back To $40
Tyler D.
03/09/2015

As we noted over the weekend when we showed a simple contango math calculation by SocGen according to which storage costs imply another 20% drop in Brent prices, now none other than Goldman - which has been oddly bearish on oil over the past few weeks - says that its Brent forecast remains at $40/bbl for two simple reasons: i) the global inventory glut is set to resume and ii) it's the weather's fault there has been a slowdown in the crude build-up.

From Goldman's Damien Courvalin:

Clear skies after a perfect storm?

The global build in crude inventories has stalled: OPEC disruptions have returned, demand has been strong, refining margins are stellar and product markets are backwardated. And while the build in US inventories has surprised to the upside, E&Ps are exhibiting a faster focus on financial discipline than we had expected. Net, the past month has featured a reversal of the late 2014 perfect storm of bearish catalysts: weak demand, low disruptions and profligate spending. And while this reversal is consistent with a rational and efficient market response to the collapse in oil prices, the contribution of weather and the premature rally keep us expecting that prices will remain below the current forward curve in 2015.

Rather, a sunny spell soon to end

Weather has played a great part in keeping crude off the market, disrupting Iraqi exports (sandstorms) with cold weather in the US and drought in Brazil supporting demand. And while we reiterate our out-of-consensus view that demand growth will be strong in 2015, on the back of better economic growth and low oil prices, we did not expect demand to be so strong this soon with recent leading economic indicators suggesting that the activity pull is sequentially weakening. Our expectation going forward is therefore for the global crude inventory build to resume. As a result and absent further unexpected OPEC disruptions, we expect Brent oil prices and timespreads to reverse their recent strength although the lack of a meaningful build in the past few months leaves risk to our forecast for oil prices remaining at $40/bbl for two quarters skewed to the upside.

Goldman's longer-term, 2015-2016 forecast: "still overcast"

While E&Ps’ focus on financial discipline has occurred faster than we expected, US producers are already preparing to ramp up activity later this year by successfully raising equity, reducing debt and building an uncompleted well war chest. Coupled with the large availability of external capital, this leaves risk to our $65/bbl 2016 forecast skewed to the downside as these assets will quickly be redeployed in a lower cost environment. Net, we reiterate our view that prices need to decline relative to the current forward curve, on a resumption of the crude stock build and on our expectation that low prices are required in order for the capex and rig cuts to materialize into sustainably lower production growth.

As usual, the only question is whether Goldman is actively loading up on oil as it is telling its clients to position for weaker oil in the months ahead.

[Fenix]

ECB Confused How To Mask Losses On Negative Yield Bond Purchases
Tyler D.
03/09/2015

As we noted last week, Mario Draghi’s move to purchase €1.1 trillion in EGBs at 124% of par may have mitigated market jitters regarding the ECB’s ability to source enough bonds to meet PSPP monthly asset purchase targets, but it also virtually guarantees that the central bank (and perhaps some eurozone NCBs) will be forced to operate from a negative equity position should sovereign spreads blow out.

We also pointed out that due to the ECB’s explicit willingness to buy bonds with negative yields, the usual “we’ll hold them to maturity” excuse won’t work when it comes to explaining away accounting insolvency. Fortunately, the central bank’s governing council has a plan to deal with the increasing amount of EMU bonds trading with negative yields: “Try to avoid them.”

Via Bloomberg:

* ECB said to lack QE Accord on losses from negative-yield bonds
* ECB Governing Council hasn’t agreed on how to treat losses incurred on bonds with negative yields, according to three euro-zone central bank officials.
* National central banks might try to avoid buying such securities for now, one of the people says

This of course begs the following question: what happens when PSPP purchases drive yields on all EMU debt into negative territory?

Charts: Citi, WSJ

[Fenix]

"Motivated" Seller Whiting Petroleum Jumps Despite 1043x Forward P/E
Tyler D.
03/09/2015

Whiting Petroleum - the largest oil producer in the Bakken shale formation - has caught some investors' (and TV talking heads) eyes this morning as it has jumped over 11% on speculation that its decision to put itself up for sale - as a "motivated" seller - somehow means the collapse in the share price will be reversed by some greater fool who sees "synergies." We wonder though... who exactly is going to buy this company that trades at a 1043x Forward P/E?

as Bloomberg noted Friday,

Whiting Petroleum Corp., the largest oil producer in the Bakken shale formation, has hired a bank to pursue a possible sale, people familiar with the matter said.

The Denver-based company, which has a market value of $5.7 billion, has reached out to potential buyers including Norway’s Statoil ASA, one of the people said, asking not to be identified as the information is private.

Whiting, which acquired Kodiak Oil & Gas Corp. for $3.8 billion last year, is searching for a buyer as the price of crude oil has fallen by half since July to about $50 a barrel. The company has been exploring the sale of its oil and gas processing assets in North Dakota, people with knowledge of the matter said last month.

And today the stock jumps... because who doesn't wnat to buy a company whose valuation is a mere 1043x Fwd P/E...

One quick question - what happens if no one wants to buy them? Two words... "massive repricing" of the entire sector. And do not forget, all of these companies have massivley exaggerated oil reserve valuation levels on their balance sheets.


If Everything's So Rosy, Why Is This Happening?
Tyler D.
03/09/2015

New Orders are in recessionary territory.
The financial news is astonishingly rosy: record trade surpluses in China, positive surprises in Europe, the best run of new jobs added to the U.S. economy since the go-go 1990s, and the gift that keeps on giving to consumers everywhere, low oil prices.

So if everything is so fantastic, why are new orders cratering? New orders are a snapshot of future demand, as opposed to current retail sales or orders that have been delivered.

Like most other economic data, the series is noisy, meaning there are plenty of spikes up and down. To cut through the clutter, we look for trends and patterns, i.e. what did the series do prior to past recessions?

The answer is of course that new orders declined sharply. Take a look at this chart of new orders for consumer goods:new orders has reached levels below those recorded in the 2000-2002 recession.

New orders have spiked down briefly in non-recessionary periods, for example during the Asian Contagion of 1997 and a spot of weakness in 2006. But the current readings are significantly lower than these weak patches.

New orders for capital goods (excluding defense and aircraft orders) are not quite in recession territory, but the trendline is definitely weakening. Such weakening trends characterize pre-recessionary periods.


If we combine the two data series, we find New Orders are obviously in recessionary territory. Now maybe this is a temporary spike down that will be reversed next month, but if it is not reversed quickly, it is clearly divergent from the happy story of more jobs, global growth is picking up, etc.


New Orders is one side of the story; the other is real (inflation-adjusted) household income. Without more income, households must borrow more to consume more, and debt-dependent consumption eventually leads to households that can no longer borrow more, and an increasing number of households at risk of defaulting on their loans for vehicles, college, homes, credit card debt, etc.

In a period of strong global expansion, we'd expect to see median income rise not just in nominal terms but in real purchasing-power terms. But median income is still below levels reached in 2000. Courtesy of Doug Short:



In nominal terms, median household income is up a third from 2000--a strong showing indeed. But adjusted for official inflation (which understates inflation in key sectors such as healthcare and higher education), income has risen off the bottom (9.6% beneath 2000 levels) and is now only 3.9% below 2000 levels, but this is dismayingly at odds with the happy story of nominal gains.

This broad measure of household income doesn't tell us how much of the gains have been captured by the top 10%; the top layer may have gained much more than the 90% below.

This also doesn't reflect other potentially negative factors such as higher healthcare deductibles that lower actual take-home pay.

While "recovery" cheerleaders are busy predicting strong growth in wages going forward, they conveniently ignore that it will take another 4% of real gains just to get back to the levels of 15 years ago.

[Fenix]

This Was Not Supposed To Happen
Tyler D.
03/09/2015

As Mario Draghi unleashes his trillion euro bond buying program - aimed from what we are told, at lowering risk premia in credit markets to stimulate the eurozone's economy from utter stagnation - things are not going according to plan. Away from Greece, peripheral bond spreads are all up 8bps on the day and stock indices are mixed on this first day of DOMO (Draghi Open Market Operations) Of course, the other reason for Q€ is to implicitly (because one would never explicitly admit to joining the currency wars) devalue the currency - thus improving competitiveness and exports for the EU; but that's not working out so well as Germany's exports dropped and missed by the most since August... this was not supposed to happen.

European Sovereign Bond risk surges...

None of this should be a surprise - remember what happened the last time the ECB bought sovereign bonds...

Spanish and Italian bond yields (upper pane) blew wider as the volume of ECB bond buying (lower pane) picked up...

and then there is Q€ will lower the Euro and improve EU competitiveness... Nope!!

None of this was supposed to happen... the textbooks said...


New Yorkers Consider Secession After Cuomo's Permanent Ban On Fracking
Tyler D.
03/09/2015

One could argue America was conceived from intense frustration that ultimately led to separation. Fed up with what they perceived as excessive control by the Crown, colonists to the “New England”, in essence, seceded in 1776, and thus the United States was born.

Now, there is a renewed and growing secession conversation brewing in the New England region, this time fueled by a commodity: Natural gas. Infuriated by Governor Andrew Cuomo’s December decision to permanently instill a ban against hydraulic fracture stimulation, or fracking, residents in 15 communities in the Southern Tier of New York are discussing the possibility of redrawing the border between New York and Pennsylvania.

Most affected are communities that lie along the east-west line between the Empire and Keystone states. Dairy farms dot the landscape, and in Pennsylvania, where fracking is encouraged, farmers are building new barns, buying new equipment and communities are adding schools and hospitals. In contrast, only a few miles to the north, farms that have been in families for generations lie dilapidated. Equipment is old, and there are few signs of construction.

Karen Moreau is the Executive Director of the New York State Petroleum Council and is passionate about the plight of these residents. “He (Governor Cuomo) wiped out the hopes, the dreams, the opportunity for economic salvation for thousands and thousands of struggling farm families, rural communities and others who have stood by, civilly waiting, expecting the government to do the right thing, to do the honest thing, and instead this is what they were given,” she said.

Moreau characterizes the stark difference on either side of the state line as “East Berlin and West Berlin,” citing added burdens of excessive property taxes and some of the most expensive natural gas in the country. “For a 200 acre dairy farm with a modest home and buildings that aren’t so great, the property taxes are $20,000 a year,” she says. “Even though they have all this natural gas in the ground, they really don’t have any infrastructure, so their energy costs are among the highest in the nation as well,” Moreau added, saying it’s not unusual for families to burn wood to provide heat.

Cuomo instilled the permanent ban on December 17, 2014 following comments by acting health commissioner, Dr. Howard Zucker who said, “I consider the people of the state of New York as my patients. We cannot afford to make a mistake. The potential risks are too great, in fact they are not fully known.”

A recent Quinnipiac University poll indicated most New York voters agree with the Governor’s decision by a 55-25 percent margin.

In a double-blow to Southern Tier residents, on the same day Cuomo instilled the permanent fracking ban, the state also shot down two applications for casinos in the region.

Although acknowledged as a long shot, state legislator, Republican Tom Libous of Binghamton, mailed a survey to his constituents asking if they were interested in secession. Realigning state lines would require coordinated efforts from both state legislatures and the federal government. Meanwhile, these New Yorkers will continue to look across the border and will observe continued economic prosperity through the years, realizing the only thing separating them are a few very long miles.

[Fenix]

American "Nightmare" Shocker: The Real US Homeownership Rate Has Never Been Lower
Tyler D.
03/09/2015

The transformation of the American Dream, most broadly manifested in popular folklore as the aspiration of the US middle-class to own a home (even if it means agreeing to a 30-year loan with one's friendly neighborhood TBTF bank), into the American Nightmare, in which an entire generation (the Millennials) is locked out of purchashing a home due to over $1 trillion in student loans hanging over every financial decision, an abysmal jobs market (for everyone but college educated "waiters and bartenders" whose hiring is on a tear), and banks' unwillingness to lend money to anyone that can fog a mirror, and forcing millions of Americans to rent instead of buy, has been duly documented here before.

As we showed most recently in October, the officlally reported US homeownership rate, after peaking during the first housing/credit bubble, has been plunging in a straight line and is now the lowest since 1994..

The offset: soaring, record high rents, because since few can afford the debt to purchase a still massively overpriced housing market, the only option is renting at which point the laws of supply ande demand kick in.

We have also shown in the past why the "American Dream" is now anything but. The answer in one word: Millennials.

All of the above is well-known.

What however not at all known, is that just like the unemployment rate's major methodological revision several decades ago, so too the homeownership calculation has been "adjusted" in recent years with the consequence of making it appear better than it is.

To normalize for this revision, Bank of America ran a simulation on the US Homeownership rate, in which it "derived a homeownership rate assuming household weights by age group as of 1994. In other words, we only allow for the change in the homeownership rates over time to matter, holding the household age weights constant. Under this methodology, the homeownership rate would have declined to 62.1% last year."

In other words, instead of the most recently announced 63.9% homeownership rate, which was already the lowest since either 1983 or 1994 depending on how one looks at it, when stripping away the adjustment "fudge" which added some 2.3% to the homeownership rate simply because US households have aged, the real homeownership rate is far worse than what everyone believes.

As Bank of America summarizes, "this suggests that the decline in the homeownership rate thus far has been even more dramatic than the published data suggest."

It does indeed, and as the chart below shows, when stripping away the now traditional assumption fudges which have flooded every single data set and made virtually all the New Paranormal data meangingless due to its reliance on pre-Lehman crash demographic and labor participation assumptions, the reality is that not only is the American Dream now completely over, but that the American Nightmare has never been worse, because as BofA just calculated, the real US homeownership rate has never been lower!


Presenting The Buyers Of More Than 100% Of New German And Japanese Bond Issuance
Tyler D.
03/09/2015

Back in December, when the total amount of annual ECB Q€ was still up in the air and and consensus expected a lowly €500 billion annual monetization number, we calculated that based on Germany's capital key contribution of about 26%, the ECB would monetize some €130 billion of German gross Bund issuance, or about 90% of the total scheduled issuance for 2015. Subsequently, the ECB announced that the actual amount across all ECB asset purchasing programs, will be some 44% higher, or €720 billion per year (€60 billion per month).

So what does that mean for the revised bond supply and demand across two of the most important developed markets?

Well, we already know that the Bank of Japan will monetize 100% or just over of all Japanese gross sovereign bond issuance (source).

As for Germany, on a run-rate basis, and assuming allocation based on the abovementioned capital key, it means that for the next 12 month period, assuming no major funding changes in Germany, the ECB will swallow more than a whopping 140% of gross German issuance!

Or, said otherwise, the entities who will buy more than all gross German and Japanese issuance for the next 12 months, are the ECB and the Bank of Japan, respectively.

This also means that to fulfill its monthly purchase mandate, the ECB will have to push the price to truly unprecedented levels (such as the -0.20% yield across the curve discussed previously, or even lower) to find willing sellers.

That said, please don't tell your average Hinz and Kunz that more than all German bond issuance in 2015 will be monetized. It will bring back some very unpleasant memories.

[Fenix]

Ranking This Bull Market Rally
Tyler D.
03/09/2015

I thought I would post a rather simple analysis using Prof. Robert Shiller's stock market data to understand the current stock market rally in relation to previous "bull" market rallies. Each rally is measured following either cyclical or secular bear market correction. I have also analyzed the data using both nominal and real (inflation-adjusted) prices.

If we look at nominal market prices going back to 1900, we find that the current rally of 173.57% (as of the end of February close) ranks as the 6th longest rally in history. As shown in the chart below the current rally ranks behind the 1920-29 market bubble, the post-WWII bull market and the "tech boom" of the 90's.

SP500-HistoricalRallies-Nominal-030815

However, when looking at inflation-adjusted data the picture changes slightly.

SP500-HistoricalRallies-Real-030815

The current rally of 154.08% is also the 6th longest in history and very close to becoming the 5th if it surpases the rally from 1982 through the 1987 crash of 156.62%.

This data alone doesn't mean much in isolation. It would be relatively easy to argue, according to the charts above, that the markets could go significantly higher from current levels. However, price data must be aligned to valuations.

While the promise of a continued bull market is very enticing, it should be remembered that, as investors, we have only one job: "Buy Low/Sell High." It is a simple rule that is forgotten more often than not as "greed" replaces "logic." However, it is also that simple emotion of greed that tends to lead to devastating losses.

The chart below shows Dr. Robert Shiller's cyclically adjusted P/E ratio. The problem is that current valuations only appear cheap when compared to the peak in 2000. In order to put valuations into perspective, I have capped P/E's at 30x trailing earnings. The dashed orange line measures 23x earnings which has been the level where secular bull markets have previously ended. I have noted the peak valuations in periods that have exceeded that 30x earnings.

SP500-PE-Valuations-030815

At 27.85x current earning the markets are currently at valuation levels where previous bull markets have ended rather than continued. Furthermore, the markets have exceeded the pre-financial crisis peak of 27.65x earnings. If earnings continue to deteriorate, market valuations could rise rapidly even if prices remain stagnant.

I previously suggested that we are most likely repeating the secular bear market of the 70's :

"Despite much hope that the current breakout of the markets is the beginning of a new secular 'bull' market - the economic and fundamental variables suggest otherwise. Valuations and sentiment are at very elevated levels which is the opposite of what has been seen previously. Interest rates, inflation, wages and savings rates are all at historically low levels that are normally seen at the end of secular bull market periods.



Lastly, the consumer, the main driver of the economy, will not be able to become a significantly larger chunk of the economy than they are today as the fundamental capacity to releverage to similar extremes is no longer available."

While stock prices can certainly be driven much higher through global Central Bank's ongoing interventions, the inability for the economic variables to "replay the tape" of the 80's and 90's is not likely. This dramatically increases the potential of a rather nasty mean reversion at some point in the future. It is precisely that reversion that will likely create the "set up" necessary to start the next great secular bull market.

As I have discussed many times in the past, as a money manager, I am currently invested in the stock market. I must be, or I potentially suffer career risk. However, my job is not only to make money for my clients, but also to preserve their gains, and investment capital, as much as possible. Understanding the bullish arguments that support the market's rise is important, but the real risk to investors is the eventual and inevitable "reversion to the mean." In other words, what comprises that "light at the end of the tunnel" is critically important to the future of your investment success.

[Fenix]

Dear Mr. Market, "It's Not Different This Time"
Tyler D.
03/09/2015

Dear Mr. Market,

I’m writing to you about the sharp lift in equity valuations over the past month (Exhibit 1).

I know you sometimes move in ways to cause maximum pain to investors, but I’m not sure that’s the case now. Investors may not have expected the sharp rally, but sentiment surveys suggest that most investors are long stocks. Most, in fact, dislike bonds a lot even if they don’t love equities.

I know you are forward-looking, so perhaps the PE expansion is anticipating a sharp lift in earnings. That would be brave. In any case, it’s unusual for equity markets to rally when earnings are being downgraded as sharply as they are now (Exhibit 2).

Trying to forecast valuation changes is always difficult. I remember my old colleague, Adam Parker, Morgan Stanley’s US equity strategist, did a lot of work on how to forecast PE changes and concluded there was no reliable model. (Your MS contact can forward Forecasting the Forward Multiple: A Hubristic Statistic? 29 October 2012.)

Despite Adam’s warning, I had expected that valuations would stop rising this year, so equity gains would depend on earnings growth. I was relying on correlations that had, in the recent past, given some guidance on PE changes. But those correlations seem to be breaking down. First, equity valuations have risen even as credit spreads have widened (Exhibit 3).

Second, equity valuations have risen even as implied volatility has modestly risen (Exhibit 4).

Third, equity valuations have risen even though macro data are not surprising on the upside (Exhibit 5). To be fair, the correlation between macro data and valuations broke down after Mr. Draghi promised ‘whatever it takes’. But the valuation rise seemed to peter out last year.

So what’s up, Mr. Market? Many investors think you aren’t your usual self because you’ve imbibed too much central bank hooch. My own view is that interest rates matter – they always do – but that the central bankers’ new brew, QE, hasn’t had a huge effect on equities. There’s been no sustained link between QE and equity valuations (Exhibit 6).

But that still suggests that exceptionally low interest rates may be pushing equity valuations higher. However, while equity valuations usually rise as rates fall, history suggests that when rates fall to low levels investors demand a higher equity risk premium (ERP – the extra reward expected for holding equities versus a safe asset).

Exhibit 7 shows an estimate of the ERP for MSCI developed market equities, versus the real G7 10 year bond yield. The risk premium is above its long-run average. But that is to be expected with bond yields low. In fact, the ERP is around 2% lower than the best fit line suggests it should be with real yield as low as they are now. That’s a big deal: a ‘normal’ low yield ERP implies a prospective PE now of around 12½, rather than the current PE of 16½. Put another way, equity prices should be 25% lower than they are now.

It’s the same story for the US (Exhibit 8, where the ERP is based on a cycle-adjusted trailing earnings yield). The US equity risk premium is now very low, given the low real bond yield.

So here’s why I’m writing, Mr Market, I want to know if this time is different. If, unlike in the past, equity investors now no longer worry about the message that exceptionally low bond yields are sending, then we could see further equity valuation gains. On the other hand, Mr. Market, you have got form whenever people think this time is different. You then show them that it’s not.

Yours,
Mr. Perplexed.


"Size Matters" For ECB Which Runs Into Unexpected Monetization Problem
Tyler D.
03/09/2015

Mario Draghi’s PSPP is just barely off the ground and we’re already beginning to get answers to some of the tough questions the ECB faced regarding the program’s implementation. For instance, we wondered how the central bank intended to treat the losses it was bound to incur as a result of purchasing billions in EMU debt carrying a negative yield. The answer: try to avoid that paper for the time being.

Another issue raised here (and elsewhere) revolves around the ECB’s ability to source willing EGB sellers. EMU banks — which hold some 20% of PSPP-eligible paper — are the most likely participants according to Goldman:

Our view remains that the main sellers of EMU bonds to the ECB will be the commercial banks. These institutions, which in the major EMU countries own about one-fifth of the stock of government bonds outstanding, tent to care more about their intermediation margins rather than about beating a hurdle rate they have promised policy holders. Furthermore, they will face regulatory pressures to reduce the concentration of risk towards the sovereign in the country of residence. Over time, their allocation to government bonds should converge to the ECB’s portfolio composition – roughly corresponding to the GDP weights of EMU constituents.

Nevertheless, sourcing €1.1 trillion in purchasable assets isn’t easy, especially when sellers have limited options for where to park their proceeds (pay the ECB 20bps or reinvest at rock-bottom yields). Here’s Nomura via Bloomberg:

Because new bond supply “is not enough to fulfill the ECB’s targets, a substantial portion of the €1 trillion [the ECB] intends to buy over 2 years will need to come from a reduction in current investor holdings.


Overall we see €25-50 billion coming directly from euro-area investors seeking higher yields abroad while the lion’s share call it €125-150 billion will come from foreign sellers.

Of course, as Goldman notes, it’s “hard to tell” what price non-euro area holders will charge, meaning the ECB may well have to pay even more of a premium than they already plan to pay, putting their balance sheet in an even more precarious state.

This is compounded by the fact that thanks to central bank largesse, high quality collateral is becoming more scarce by the day:

How much depth has the market lost? A year ago, you could trade about $280 million of Treasuries without causing prices to move, according to JPMorgan Chase & Co. Now, it’s $80 million.

But as it turns out, Mario Draghi may have a solution to the supply issue: buy “small” amounts.

Via Bloomberg:

* Rates trader in London says Eurosystem is purchasing bonds in trades of EU25m-EU50m.
* Another trader in London says QE purchases of EU15m- EU25m are going through.
* NCBs are buying govt bonds in “small clips,” Sunrise Brokers strategist Gianluca Ziglio says in e-mailed comments, citing market contacts.

Needless to say, if the ECB is unable to meet its monthly asset purchase targets (which, at €15-50 million dribs and drabs, looks likely), expect chaos, as the market has spent the last several months front running PSPP and would be absolutely horrified if DOMO (Draghi-open-market-operations) has to be downsized. Not to worry though, says Soc Gen's European rates strategy chief Ciaran O’Hagan:

Via Bloomberg:

“...the amount bought may be small to start with, but this will be like a pressure cooker. They've just switched on the heat and we will need some time for the pressure to mount.”

* * *

For reference, below is a list of EMU sovereign bonds that were eligible for purchase just before Draghi unveiled the details of DOMO (note that Citi thought to create a list of 2- to 30-year EGBs yielding -0.20 and above a week before the details of the program were announced).

[Fenix]

The Bubble Is Complete: 'Smart Money' Buys Into Bespoke Tranche "Opportunity" (Again)
Tyler D.
03/09/2015

Last month we noted that Goldman’s “hawking” (to use Bloomberg’s rather derisive terminology) of an “opportunity” in synthetic CDOs symbolizes the culmination of central bankers’ and Wall Street’s collective effort to return the financial world to the pre-crisis glory days of Dr. Frankenstein-like financial engineering. To truly understand how we’ve come full circle since the collapse, we need to look at exactly what it is Goldman is pushing (and what Citi is still, as of last Friday, pitching as a good opportunity for 2015).

Goldman is marketing what the bank calls a “bespoke tranche opportunity”, which is in many ways financial engineering taken to its logical extreme, as it allows the customer (or, as banks will call him/her, the “investor”) to actually participate in the creation of Frankenstein by choosing the credits that are included in the tranche on which protection is being bought/sold. Why would anyone want to do this? Well, there are a few reasons, but it basically comes down to whether you, the investor, think you either have a particularly good read on the outlook for a specific set of credits, or believe that a customized basket of credits offers a better risk/reward profile than standardized IG/HY indices, or both. As Citi notes, if you can find a mix of credits you’re comfortable with, you can juice the yield well above what you’d be getting on a pure IG portfolio and still be happy with the level of risk. If you’re in the equity tranches and you’re good at selecting credits that hold up, you can take advantage of structural leverage.

So, in a nutshell, this is the synthetic CDO equivalent of a Build-A-Bear Workshop.

The problem for the investor here is that this hinges almost entirely on the ability to select credits, which, like picking stocks, isn’t always easy. Don’t worry though, today’s investors (who have learned their lesson post-crisis), are focused on fundamentals, not on maximizing yield (i.e. no one is greedy anymore).

Here’s Citi:

In the pre-crisis era, bespoke tranche investors cared less about the underlying names in the portfolio, and more about the spread pickup for a given rating and/or relative value across tranches…

Pre-crisis investors were focused less on the credit quality of the underlying portfolio so long as their objectives (spread pickup for rating or relative value) could be satisfied. In contrast, bespoke tranche investors today are more focused on credit fundamentals.

Another problem here is that these deals are almost impossible for banks to hedge.

Here’s Citi again:

Dealer correlation books in the pre-crisis era were risk managed using a combination of index tranches, index, and single name CDS. Dealers typically tried to close the “holes” in the capital structure for each bespoke portfolio using index tranches followed by selling protection on a combination of single names (for the bespoke portfolios) and index (for the index tranches) to zero out delta risk. However, during the crisis, as markets turned more volatile, the single name deltas changed significantly on a day-to-day basis, and the wide bid/ask spreads in the single name market resulted in very punitive hedging costs. Furthermore, as the synthetic structured credit market shut down, there was not enough “day one” P&L (a combination of fees and wide bid/ask spreads) to mask the losses from high hedging costs, which further exacerbated the situation.

So basically, these structures created systemic risk which was realized during the crisis. Of course this time is always different and we can of course trust that banks who do these deals will definitely place the rest of the capital structure after designing a customized equity tranche.

As one might imagine, investors’ appetite for this type of instrument is being fueled by the now ubiquitous “hunt for yield,” brought to you by NIRP (formerly ZIRP), and sponsored by your favorite central bank. In terms of growth, demand for synthetic CDOs doubled to $20 billion in 2014, and as FT notes, Q€ is set to drive further gains in structured credit:

Yield-starved European investors are helping to drive a resurgence of structured credit securities that were blamed for worsening the global financial crisis six years ago…

“It’s still below the radar screen of most investors, but [QE] could pop up volumes,” said [one] structured credit banker.

Indeed, we’re already seeing the effects of the re-emergence of bespoke tranches. Have a look at the following chart which shows that Citi and Goldman’s marketing eforts appear to have had a dramatic effect on individual name CDS:

But at the end of the day, no one should worry because as one commentator told FT, the bad name synthetic CDOs have gotten since the crisis is “regrettable [as they] are a fairly simple and straightforward way of hedging credit exposure.”

We’re reminded of Jamie Dimon: "It wasn’t a bet, it was a hedge."


Why Greek Shipping Billionaires Are Sweating
Submitted by Tyler D.
03/09/2015

It may come as a surprise to some that across from the stark Greek economic calamity is an industry that has swam, so to say, while everything else has sunk, because while virtually every other aspect of the Greek economy is in shambles, its shipping industry is not only the pride of the nation, but has created more Greek billionaires than any other aspect of the economy. As Bloomberg recounts, Greeks have long dominated the shipping business. The nation’s fleet, numbering 3,669 vessels in 2013, is the largest in the world, according to the annual report of the Union of Greek Shipowners, making up more than 7 percent of the Greek economy and providing 192,000 jobs in 2013. And, perhaps most relevant, Greek shipping has also made billionaires of the country’s four largest ship owners by tonnage: John Angelicoussis, George Prokopiou, Peter Livanos and George Economou. The quartet control a combined fortune of $7.6 billion. It is these billionaires that are now suddenly sweating...


The New Normal Of "Anything Goes" And "Nothing Matters" Is Turning Lethal
Tyler D.
03/09/2015

Nothing is stable, nothing is straightforward, everything is fixed, and nothing is fixed. O nation of busboys and WalMart greeters, awake and sing!

Can an empire founder on sheer credulousness? After last Friday’s jobs report, I think so. For a culture that luxuriates in statistical analysis (and the false idea that if you measure enough things, you can control them), it is rather amazing that we absolutely don’t care whether the measurements are truthful or not. Hence, an economist (sic) such as Paul Krugman of The New York Times might ask himself how it is that Zero Interest Rate Policy only trickles down to places where hamburgers are sold. PK was at it again in his Monday column, yammering about “rapid job growth,” “partying like it was 1995.” Wise men like him are pounding this country down a rat hole faster than you can say Romulus Augustulus.

Apparently the US Bureau of Labor Statistics missed the job bloodbath in the oil industry, especially over in Frackville where the latest western phenomenon is the ghost man-camp (along with ghost pole dancing parlors). It’s a veritable hemorrhagic fever of job layoff announcements: 9,000 here, 7,000, there, thousands of thousands everywhere — Halliburton, Schlumberger, Baker Hughes — like an Ebola ward in the oil services sector. Not to mention the cliff-drop of capital expenditure, meaning even steeper job losses ahead, Casey Jones. But nobody notices, I guess because they’re out at Ruby Tuesdays eating things bigger than their heads. Are the portions getting smaller, or are their heads shrinking?

Finance is complicated, but not as complex as the wizards employed in it would have you believe. They would have you think it is an order of magnitude more abstruse and recondite than particle physics, when, in fact, it is often not much more than a Three Card Monte switcheroo. The whole ZIRP and QE game, for instance, can be boiled down to a basic wish to get something for nothing, that is, prosperity where nothing of value created. Now, that’s not so hard to understand, is it? Until the economics wardrobe team comes in and dresses it up in martingales and bumrolls of metaphysics and you end up in a contango of mystification.

More galling and worrisome, though, is the failure of anyone even remotely in authority to stand up and publically object to the tidal wave of lies washing over this dying polity, actually killing it softly with truthinesslessness. The code of anything goes and nothing matters is turning lethal and the more it is kept swaddled in lies, the more perverse, surprising, and destructive the damage will be. The more our leaders lie about misbehavior in banking — including especially the actions of the Federal Reserve — the worse will be the instability in currencies. The more central bankers intervene in price discovery mechanisms, the more unable to reflect reality all markets will become. The more that the US BLS lies about the employment picture in America, the worse will be the eventual wrath of citizens who can’t get paid enough to heat their houses and feed their children.

An economist (sic) named Richard Duncan last week proposed the interesting theory that Quantitative Easing can go on virtually forever in an endless chain of self-canceling debt. Government spends money it doesn’t have and cannot raise, issues bonds to “investors,” buys its own bonds and stashes them in a storage vault so deep that the sun will not shine on them until it becomes a blue dwarf — long after the cockroaches have taken charge of Earthly affairs. Duncan forgets one detail: consequences. The consequence of this behavior will not be eternal virtual prosperity, but rather a wrecked accounting system for the operations of civilized human life. We’ve stepped across the event horizon of that consequence, but we just don’t know it yet. My bet is that we start feeling the effects sooner rather than later and when it is finally felt, all the Kardashian videos in this universe and a trillion universes like it will not avail to distract us from the flow of our own blood.

[Fenix]

epeat Foreclosures Triple Since Crisis
Tyler D.
03/09/2015

As delinquencies rise to worrisome levels in the now $1 trillion market for auto loans and as the two biggest players in the consumer loan space prepare to merge into a multi-billion dollar ABS machine, January data on foreclosures suggests there may be trouble in the real estate world as well.

According to Black Knight Financial, both new and repeat foreclosures hit a 12-month high during the first month of the year with repeats (i.e. the borrower was rescued but has since entered the foreclosure process again) jumping 11% M/M. More troubling is the trend in repeat foreclosures which accounted for only 15% of total foreclosures during the crisis but now make up a startling 51%.

Trouble in HAMP-land anyone?


Real-Time Q1 GDP Update : 1.2%
Tyler D.
03/09/2015

Last week, first Goldman and then JPMorgan cut their GDP forecasts, in the case of the latter by 0.5% to 2.0% from 2.5%. The JPM report cited the Atlanta Fed GDPNow model we first exposed earlier last week. And unfortunately for the Wall Street consensus, which is still hoping for some dramatic surge in US "growth" in the 3 remaining weeks of the first quarter, things are looking bad, because according to the most recent update to the Atlanta Fed model which mimics the methodology used by the BEA to estimate real GDP growth and which will be revealed in less than 2 months when the preliminary Q1 GDP number is revealed, the economy in the first quarter is tracking at just 1.2%, smashing any recent momentum, and the lowest since the Polar Vortex. "Here we go again" indeed.

Here is the latest from thbe Atlanta Fed, whose revised GDP forecast has not budged from a week ago.

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2015 was 1.2 percent on March 6, unchanged from its March 2 reading. The nowcast for the contribution of net exports to first-quarter real GDP growth fell from -0.5 percentage point to -0.8 percentage point following this morning's international trade report from the U.S. Census Bureau. This was offset by increases in the nowcasts of equipment investment and inventory investment.

So about that rate hike...


Greeks Face First Product Shortages As Cash Runs Out, "It's Worse Than In 2012"
Submitted by Tyler D.
03/09/2015

Just when you thought it was getting better (or so you would believe if you listened to the mainstream media's punditry) Greece faces what ekathimerini reports is a "situation worse than in 2012." From well-known Belgian beer to electronics equipment, the first occurrences of shortages in imported goods and raw materials have arisen as a result of Greek enterprises’ inability to pay with cash in advance. But Greece is not Venezuela... yet.


Bridgewater's Ray Dalio Simple Advice For Success: "Think Independently, Stay Humble"
Tyler D.
03/09/2015

To make money in the markets, you have to think independently and be humble. You have to be an independent thinker because you can’t make money agreeing with the consensus view, which is already embedded in the price. Yet whenever you’re betting against the consensus, there’s a significant probability you’re going to be wrong, so you have to be humble.

Early in my career I learned this lesson the hard way — through some very painful bad bets. The biggest of these mistakes occurred in 1981–’82, when I became convinced that the U.S. economy was about to fall into a depression. My research had led me to believe that, with the Federal Reserve’s tight money policy and lots of debt outstanding, there would be a global wave of debt defaults, and if the Fed tried to handle it by printing money, inflation would accelerate. I was so certain that a depression was coming that I proclaimed it in newspaper columns, on TV, even in testimony to Congress. When Mexico defaulted on its debt in August 1982, I was sure I was right. Boy, was I wrong. What I’d considered improbable was exactly what happened: Fed chairman Paul Volcker’s move to lower interest rates and make money and credit available helped jump-start a bull market in stocks and the U.S. economy’s greatest ever noninflationary growth period.

This episode taught me the importance of always fearing being wrong, no matter how confident I am that I’m right. As a result, I began seeking out the smartest people I could find who disagreed with me so that I could understand their reasoning. Only after I fully grasped their points of view could I decide to reject or accept them. By doing this again and again over the years, not only have I increased my chances of being right, but I have also learned a huge amount.

There’s an art to this process of seeking out thoughtful disagreement. People who are successful at it realize that there is always some probability they might be wrong and that it’s worth the effort to consider what others are saying — not simply the others’ conclusions, but the reasoning behind them — to be assured that they aren’t making a mistake themselves. They approach disagreement with curiosity, not antagonism, and are what I call “open-minded and assertive at the same time.” This means that they possess the ability to calmly take in what other people are thinking rather than block it out, and to clearly lay out the reasons why they haven’t reached the same conclusion. They are able to listen carefully and objectively to the reasoning behind differing opinions.

When most people hear me describe this approach, they typically say, “No problem, I’m open-minded!” But what they really mean is that they’re open to being wrong. True open-mindedness is an entirely different mind-set. It is a process of being intensely worried about being wrong and asking questions instead of defending a position. It demands that you get over your ego-driven desire to have whatever answer you happen to have in your head be right. Instead, you need to actively question all of your opinions and seek out the reasoning behind alternative points of view.

This approach comes to life at Bridgewater in our weekly research meetings, in which our experts on various areas openly disagree with one another and explore the pros and cons of alternative views. This is the fastest way to get a good education and enhance decision-making. When everyone agrees and their reasoning makes sense to me, I’m usually in good shape to make a decision. When people continue to disagree and I can’t make sense of their reasoning, I know I need to ask more probing questions or get more triangulation from other experts before deciding.

I want to emphasize that following this process doesn’t mean blindly accepting the conclusions of others or adopting rule by referendum. Our CIOs are ultimately responsible for our investment decision-making. But we all make better decisions by maintaining an independent view and the conflicting possibilities in our minds simultaneously, and then trying to resolve the differences. We’re always in the place of holding an opinion and simultaneously stress-testing the hell out of it.

Operating this way just seems like common sense to me. After all, when two people disagree, logic demands that one of them must be wrong. Why wouldn’t you want to make sure that that person isn’t you?