>>>They whispered…

“Our trust in US Treasuries is absolutely unshakeable”said the Japanese Finance Minister Mr Yosano-san from Lecce

“I am hinting at this now so that nobody asks in half a year or so whether I was blind and whether that wasn’t an issue in international discussions”said the German Finance Minister Mr Steinbruck from Lecce, on whether some European countries may have their sovereign rating cut

“In good shape” found the US $ the Russian Finance Minister Alexei Kudrin, always from Lecce

“We are rocking and rolling” teased the BRICS their established counterparts, commenting on the fact that all important macro-economic indicators point that they are the first to recover from the crisis

“100 percent sure that U.S. prices may increase at rates close to Zimbabwe’s gains, and the U.S. economy will enter hyperinflation (because the Federal Reserve will be reluctant to raise interest rates)” is investor Marc Faber; Zimbabwe’s inflation rate reached 231m% in July ‘08

“Wall Street seems to maybe have a shorter memory about how close we were to the abyss than I would have expected” said President Obama while announcing the brave new world of financial regulation and oversight

“The panic’s hasty retreat should not be confused with robust recovery” said Fed’s Warsh

“It is an abuse of power because (Prince Charles) is not willing to debate…anyone but he would have been shown the door. We should examine the ethics of this situation. Someone who is unelected, will not debate but will use the power bestowed by his birth-right must be questioned” Architect (Lord) Richard Rogers said following the private royal correspondence between the Prince of Wales and the Qatari prime minister (commissioner of Lord Roger’s Chelsea project) that torpedoed the project

>>>Figures of the week…..

$767.9 billion, the amount of U.S. debt that China holds

$68 billion, the amount of TARP money that JP Morgan ($25 billion), Goldman Sachs ($10 billion), Morgan Stanley ($10 billion) and 7 other Banks repaid to the US Treasury; ‘thanks for the help but with all due respect do back off now’

15, the percentage of Europe’s power needs that will be supplied by the planned Sahara desert solar plant super-farm that Siemens/RWE/E.ON/Munich Re & Deutsche Bank are proposing to build

-17% p.a., the slide in Russian industrial output -the seventh consecutive decrease- during the country’s worst economic crisis in a decade

2.2% p.a., the rise in UK consumer prices, showing that UK inflation slowed less than forecast in May due to higher taxes and the weakness of the pound

234%, the 2008 profit for the Black Swan Fund of 36 South Investment Managers Ltd; the company is now raising money for a new hedge fund , betting that government efforts to pump money into economies will result in hyperinflation

>>>We whispered…..

With the summer poised for a dramatic come-back in London after a few years of absence and a devilishly well-timed gardening leave about to start, CapitalWhispers will more often sport sunglasses and be spotted in parks and beaches rather than trawl through the markets and the weekly developments. Nevertheless we won’t be completely lazy. Maybe in a bit lighter mood, so don’t be shy to check for updates!

Until next time, we leave you with a few questions:

1. Will we have dismissed the traumatic events of the last 12 months before the end of this year?
2. Is Oil heading to breach $100 before winter, or will it plateau at $70, as the markets seem to be suffering a post-rally hang-over?
3. Will VW taste  sweetest revenge and take-over Porsche?
4. When does recession end and hyperinflation begin?
5. Will F1 be broken up?
6. Will Andy Murray be the first Briton (Scot) to win Wimbledon?

nikosgi

They whispered…..

“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth. In recent weeks, yields on longer-term Treasury securities and fixed-rate mortgages have risen. These increases appear to reflect concerns about large federal deficits but also other causes, including greater optimism about the economic outlook, a reversal of flight-to-quality flows and technical factors related to the hedging of mortgage holdings” Ben Bernanke testifies before the House of Representatives

“Today, I pledge to cut the deficit we inherited in half by the end of my first term in office” President Obama setting himself a very ambitious target (24/02/09)

“What other central banks have been doing must be reversed. I am very sceptical about the extent of the Fed’s actions and the way the Bank of England has carved its own little line in Europe. Even the European Central Bank has somewhat bowed to international pressure with its purchase of covered bonds. We must return to independent and sensible monetary policies, otherwise we will be back to where we are now in 10 years’ time” Angela Merkel being uncharacteristically critical towards central banks in Berlin

“What we did with all these bailout billions is that we bought ourselves a rally” Rick ‘Chicago Tea Party’ Santelli

CapitalWhispers

The US budget deficit this year is projected to reach $1.85trillion, that is 13% of the economy. This gigantic -not just in percentage but also in dollar terms- figure, in conjunction with the anything-but-benign macro-economic environment gives President Obama’s pledge Herculean dimensions

What is more -and probably for the first time since the crisis began- Mr Bernanke is shifting his focus to fiscal discipline. The glut of Treasuries issued to fund the deficit are starting to: (1) spook investors (Mr Geithner travelling to China this week to appease the -very serious (in both meanings of the word)- Chinese investors), (2) raise creditworthiness fears -especially since the UK’s outlook has been downgraded to negative and (3) spoils the effort of kick-starting the economy by bringing down the long-end of the yield curve -traders are pushing the 10y+ higher and the curve keeps steepening (not very helpful for mortgages & lending in general)

The past couple of months have produced a spectacular, logic-defying rally that has spilled over almost all asset classes. Credit is rallying ruthlessly, enhanced by the predictable herd capitulation, and now implies defaulkt probabilities in line with historical recession levels (but not fully realised yet – watch this space in the next 12 months). Oil & the basic metals are rallying, aided by a seemingly unstoppable China and macro-indicators showing a distinct improvement from a few months back. In fact oil and dry freights (Baltic Xchange) have doubled from their lows and it feels like the rollercoaster has started again. Equities..the the rally momentum has been almost unprecedented in its smoothness and strength. Many -CW included- have been waiting for the downward correction that never comes (to ride the next wave).

We are increasingly of the view that the rally has nearly exhausted itself (in equities more so, with credit possibly having another 10-20% to go). That said, we believe that revisitng the lows will be rather improbable; instead, we expect a long +-5/10% range-bound market for the next 6-12 months. (Still, when the long overdue correction comes, there should be a brief spike given that so many investors are waiting to jump in).

Keep your ears open, do not follow the herd … and let’s hope that we won’t get overly spooked by the default (personal & corporate) wave that is swelling.

nikosgi

What a week for Europe.

The PIGS are so passé nowadays. Well, almost. Ireland CDS is still trading at near record levels, Spain is widening ominously, Portugal & Greece are waking up to the fact that crisis is global and particularly unforgiving for bloated and lethargic states. Italy? well, there is always the Beckham-Milan- LA Galaxy love triangle/drama.

But the real party is in the centre of the continent!

The Austrians have always been a nation looking eastwards, trying to expand its sphere of influence to the former eastern bloc countries. A good startegy, during the boom times. Nowadays though, being exposed to these same countries is not regarded kindly by investors (and speculators alike). The credit of Austria and anything austrian has plummeted this week. Some fast money are in play here, but there are legitimate worries too. And if Austria is being ‘punished’, you can easily guess -if you haven’t noticed- what is happening to european emerging/converging assets, currencies...you name it. Speculating on the depreciation of the eastern european currencies feels like the next bubble.

There is high drama in the heart of Europe.

Beware though!

Nasty as things may look, do not place all your bets without sizeing up the Euroland response first. Monsieur Trichet and the ECB may at times appear un peu mal a la tete, so to speak, Frau Merkel may pretend to be a hard nut on the outside (she’s a Barbie really as we know now), but in the end we would bet that no-one (good, bad or aspiring member) in old Europa will be allowed to fall, not without a big fight from Brussels/Berlin/Paris.

(the eagle-eyed among you have noticed the absence of the United Kingdom-this is not because GB is free of issues- FAR from it. But the Brits like to play alone; And since I have vested interests in London avoiding a return to Dickensian misery, may a miracle happen before it is too late)

So, where do we go from here? I leave you with a pertinent, colourful, albeit a tad pessimistic view:

‘Don’t you want to know how we keep starting fires?
It’s my desire, It’s my desire, It’s my desire

Fire in the disco
Fire in the disco
Fire in the taco bell
Fire in the disco
Fire in the disco
Fire in the gates of Hell

The Gates of Hell’

(Electric Six)

We three loans of Orient are/ Vainly trying to get back to par/ Haircuts rising, forced unwinding/ More sellers than buyers by far

.

Oh, par of wonder, par of light/ From par to here was such a fright!/ Seldom trading, cov’nants straining/ Who will save us from our plight?

.

A hedge fund was the first to invest/ High recoveries left him impressed/ Long at inception, long protection/ But margin calls made him divest

.

Next we were bought by a cash CLO/ An unlikely rescuer, yes, we know./ But firm financing looked entrancing/ Till downgrades then made us go

.

Europe’s banks to us then were nice/ Under IAS, who cares about price?/ Assets inflating, but low risk weighting/ Tier one capital should suffice

.

To Basel then we made our way/ A committee of wise men had their say/ “This buy-and hold looks uncontrolled -/They’re levered like Fannie Mae!”

.

Leverage limits then were imposed/ To liquidity risk they were overexposed/ BWICs singing, prices stinging/ (Proportion cleared undisclosed)

.

A hero then arrived from afar/ E’en as we worried for our EBITDA/ The ultimate claimant made repayment/ A buyback by KKR!

.

While hedge funds watched…/ While hedge funds watched their stocks by night/ All falling to the ground/ An agent from their broker rang:/ “These haircuts are unsound”/ “Be scared,” said he, for mighty dread/ Had seized their troubled mind/ “Redemptions too are on their way/ For you and all your kind”

.

“But, sir!” they said, “this is not fair/ Just look at this report!/ Our fund has only profits made/ We’ve not been long, we’re short”

.

“That’s no excuse,” the broker said,/ “At this unhappy time/ The credit crunch affects much more/ Than banks which hold subprime”/ “Your leverage is way too high/ For your liquidity/ Besides, we need to recalc VaR/ Given volatility”

.

The fund then had no other choice/ But to exit its position/ And the thing that really drove them mad/ Was the need to pay commission

.

From that day on, redemptions soared/ Just as the chap had warned/ Performance mattered even less/ The asset class was scorned

.

The lesson of this sorry tale/ Of asset allocation?/ That prior performance may not stop/ Your fund’s annihilation

Good King Wenceslas/ Ben Bernanke last looked out/ On the Feast of Stephen/ Credit markets lay in rout/ Deep and crisp and even/ Paulson called up late that night/ “The markets are so cruel!/ Goldman’s profit’s down again:/ my bailouts need more fuel”/ “GS!” said Ben, “that’s no surprise/ Their funding model’s shattered/ Now had it been dear JPM/ It really would have mattered”/ “But Ben!” growled Hank, his usual croak/ O’erlaid with suppressed fury,/ “The world is going up in smoke/ You can’t play judge and jury!”/ “But Hank!” said Ben, “I’ve no resource/ To save the market’s debtors/ TSLF, PDCF -/ I’m running out of letters!/ The brokers’ model always stank/ Of insecurity:/ More repo funding than a bank/ In short maturity!”

…

“But Ben,” said Hank, “you do forget/ Just how their model’s altered/ They’re guaranteed with public debt/ We cannot let them falter/ When Lehman failed, we thought the TARP/ Would bring stability/ But Libor’s steady rise demands/ A new facility”

.

Ben furrowed then his wrinkled pate/ How could they fund a bailout?/ They’d need Congressional debate/ The funds from TARP had run out/ “Why don’t banks just start to lend?/ We’ve given them our support/ Maybe we should just suspend/ The ban on selling short”

.

“Now Ben,” rasped Hank, “that wouldn’t work/ They’re overlent already/ With undrawn lines they went berserk/ It’s worse than Fannie and Freddie/ Six trillion still could be drawn down/ How awful that would be!/ The average spread would make them drown:/ Just twenty-four bp!/ With that, I fear, they’ll never lend/ We need to find more dollars/ And yet the Treasury just can’t spend/ According to the scholars”

…

“But wait!” said Ben, “I’ve got a plan/ That may be our salvation/ The US cannot be Japan/ That way just lies deflation/ If you can only keep your nerve,/ We’ll clear up all this mess/ We’ll make the Federal Reserve/ A giant printing press!”

.

“Yes”, cried Hank, in great delight,/ “We’d bring down credit spreads/ The old refrain once more is right:/ ‘Never fight the Fed!’”

We love officials here ar CapitalWhispers. They have a knack for making profound, timely & pertinent statements that promote the well-being of the public. Take for example yesterday’s official announcement from the National Bureau of Economic Research (NBER) that the US economy entered a recession in December 2007. It may be stating the obvious, it may have arrived with 12 months delay, it may have come at precisely the right time to spook those who were still celebrating last week’s (sucker) rally but it was thoroughly researched.   

But noone does it better than Latvia, a country with one bank for every 85k citizens. They go further; officials there don’t just state the obvious, but they provide solutions to the problems. They think outside the box. You may have your views regarding the sources of the worldwide economic woes -well, unless you are JC Trichet who does not think Europe experiences a credit crunch in the first place- but we doubt you include sabotage among them.

Hammered by deep economic problems the Baltic state shows it has answers to its problems and it is not one to be messed with. Its counterespionage agency busted a doom-and-gloom economist. The ’saboteur’, economist Dmitrijs Smirnovs maintains that “All I did was say what everyone knows“. That didn’t deter authorities to question him for two days of questioning, being under suspicion of spreading “untruthful information”, order him not to leave the country and seize his computer.

Bizarre? Extreme ways, you tink? “It is a form of deterrence,” says Martins Bicevskis, Finance Ministry state secretary. There is a strong chance though that there are no problems in Latvia and there are much more pedestrian explanations to the incident: According to the Security Police’s Ms. Apse-Krumina :”He was in a drunk condition when he spread the rumor”.

Excuse me, someone is knocking on the door. Will be back in a sec. Unless…

Another week, another sell-off, another round of scare-mongering headlines.

Friday the 24th promised to be the Day of the 2008 Crash; up until the US open, that is. The panic that swept the Asian and primarily European markets on Friday am had spilled over the US futures and it looked like we were heading for utter capitulation. You could smell and touch the panic and it wasn’t pleasant.

The Japanese had initiated a raid on the EUR and the GBP with the JPY crosses performing spectacular multi-month moves within hours. Mr and Mrs Tanaka have been frantically offloading western assets, big time. The carry trade, or whatever was left of it, was brutally unwound. At some point the cable hit 1.52 (it was flirting with 2.00 a few months ago). The relay was passed to the Europeans who got busy liquidating portfolios. I learned of enormous losses being realised, a preferred alternative to facing margin calls. In short it was a classic panic-fuelled sell-off. For a moment it looked like we would hit the bottom HARD as the US futures were pointing to mayhem when the markets opened there. Eventually the S&P & Dow futures limit-down -a new-found term for many a scaremonger- proved to be more Eurotrash than Wall Street. New York and Chicago were more resilient and the Euro-panic was eventually contained. The final tally was a cushioned 300 point Dow drop with limited volumes and some recovery in the fx front (from end-of-the-world to crisis levels).

What’s next? What’s my take on life, the universe and everything?

• we are very close to a bottom in the stock exchanges, as not many players are left standing
• the US is closer to it with Europe doing a catch-up on Friday (a rude awakening of sorts)

Before you order paper hats and firecrackers and throw a party, let me spoil the mood, by continuing in a more somber tone. In no particular order:

• this is not a V-shaped recovery story, probably not even a U-shaped one; I’m bracing for a lengthy volume-less correction era
• emerging markets (and associated funds) will keep suffering; actually things will turn worse with mushrooming sovereign solvency issues (Hungary, Ukraine, Iceland, Pakistan, Venezuela and counting)
• Credit card debt and other consumer loans are the next credit bubble to burst; Banks in the UK (bear in mind that they are almost all nationalised) are strong-arming customers who have credit card/loan debts in arrears and threaten them with house repossessions. The latter have grown 10x over the last 12 months
• Unemployment is rising and feeding the recessionary vicious cycle
• Oil and commodities in general look unlikely to rebound in the short term-sorry OPEC but nowadays you don’t matter much unless you altogether turn off production
• Corporates feeling the pain of declining growth projections in a contracting world economy and refinancing difficulties
• Hedge funds are still in a precarious position, with worried investors who have suffered considerable losses redeeming their investments and overall profitability and credit availability very low

Enough of these roubini-esque predictions though. (a small parenthesis: Nouriel Roubini, a favorite economist of the site has become the most sought-after panelist as more schadenfreude-hungry reporters and audiences ask for his thoughts. I hope that he actually acted on his predictions 2y ago and is flying to this interviews in his own private jet ‘Doom ONE’).

What can you do? First of all, keep calm. There is enough panic around and it just exacerbates the problem. Depending on your personal circumstances (i.e. available cash, leverage etc) you should:

• maintain a cash warchest to be able to react to opportunities as they arise
• deleverage yourself if you are still too leveraged, i.e. reduce your mortgage, pay off your cards and forget about taking new consumer loans
• explore industries that have been beaten to a pulp but have good prospects for a future bounce (e.g. tech, pharma, good financials); ETFs are an interesting alternative
• Call options are the best way to go about it. They will give you higher returns on your investment. Go for the longest-dated ones to maximise your time value. Go out-of-the-money to keep it cheaper if you want
• it is not always a crime to short certain sectors/markets (there is an emerging markets ETF that I like to hate)
• keep an eye on residential property investment opportunities (now in the US, in a couple of years in Europe)
• did i mention to keep calm?

I leave you so that I can enjoy my somewhat late afternoon coffee and homemade pear and plum tart with Friday’s Bloomberg’s chart of the day , showing the global nature of the crisis we live in and focusing on the BIFFEX (fwd freight rates index) collapse, that featured in our last weekly.

On a lighter note, I have just learned that all hotel rooms and fares were booked-out in Greece for this long weekend (Tuesday is a national holiday and as is customary most Greeks ‘annex’ Monday as a day off one way or another). Παγκοσμια κριση? Ποια κριση? (=’Global crisis? What global crisis?’). Beware of Greeks…

•nikosgi

P.S. I would like to make this weekly more interactive, so any suggestions and comments to nikosgi@capitalwhispers.com are very welcome.

‘The mind is its own place, and in itself

Can make a Heav’n of Hell, a Hell of Heav’n.’

-MILTON, Paradise Lost

Confidence, or lack thereof. Consternation among investors small and large. It was refreshing putting it all behind for a few days.

I suppose everyone now knows about the recession now since politicians made it official by using the word more and more openly in public. No surprises there.

In any case, that is what economic cycles are all about. There is nothing growing indefinitely -like cold fusion it is physically impossible.

It looks like it is going to be hard-ish, long-winded and painful. It is not the end of the world though -unless you make it to be (read Milton’s wisdom above). Plenty of opportunities for wealth creation will pop up here and there:

• Property (in one (US) or more (Europe))
• The GE’s, Pfizer’s of this world (cheap as chips)
• Miners, who now suffer from luck of demand, due to a decelerating China et al.
• Precious metals in the meantime
• For the less risk-averse financial stock. I don’t think we will have another LEH. If we do -that is it is not prevented by the government(s)- it would mean that the governments exhausted all their arsenal. But one way or another (hyperinflation) it won’t happen.

Anywhere you look it’s bad. I mean really BAD.

Instead of bottoming out a few days ago, we’re drilling to the core still…At that rate we’ll hit magma pretty soon – and then everyone burns (including the shorters who bathe in Shadenfreude champagne right now). Shorting is a generally good and essential, don’t get me wrong, it is a force promoting market efficiency. But I invite any comments that what shorting now does is making the market efficient. Pruning is good, maiming the plant kills it.

Now, where do all the billions that CBs throw into the bottomless liquidity pit go? They sure don’t go into reducing the Libor. And unless that happens there will be no respite until there is noman standing.

There will definitely be some sort of government intervention today. But we no longer believe it can achieve much. It looks like closing the stock exchanges is the next step. In which case we can revert to Monopoly board games with our monopoly money.

On another subject, today is a big test for the CDS market, with an auction to determine recovery on Lehman obligations, probably below 20% (compare it with contract standards of 40%). The sellers will be put to the test. The notional is big, the recovery may be a bad shock…a lot of the sellers are HFs and insurers who thought that either it would never default or if it did there would be some govt guarantee pushing recovery close to 100%. So…all good, basically.

Things are grim, I will not mess around with you. Those who read our last 2 weekly specials know that we were bracing for this (and worse). The bailout (TARP) is pretty much dead in the water in its current form and there is pain, panic & confusion in the markets around the world. EUR/JPY and global exchanges on freefall, corporates are hurting, commodities tank, a couple of % points of growth are estimated to perish around the world.

The shift of the focus this morning is in Europe, where the reality of the contagion (never in doubt by the practicioners) hit Banks, corporates, governments and investors hard. Russia routinely suspends trading in its 2 exchanges to cushion the fall, EU leaders are running scared, trying to prop up their country financial defences creating dangerous precedents for the future of the Union. HRE, Fortis, Unicredit, HBOS, Iceland (the whole country)…there are many fronts.

War-style economic cabinets are set up and extreme measures (recapitalisation of banks, rate cuts, blanket bank deposit guarantees, loans to corporates) are mulled over. I believe many of these have to happen and will happen. This is a huge crisis and no-one, anywhere in the world is going to adhere to strict peacetime rules.

The news run fast, the vol is spiking and the markets are not exactly perfect (and will become significantly less so). Act accordingly.

Over and out (for now)

What a week! In Hollywood terms it was a blockbuster:

• Drama-packed (Fortis, HRE, B&B, Glintnir but also HBOS, WaMu, Wachovia)
• Oh-so-many unexpected twists and turns (Congress passes bailout, House rejects it, Congress redrafts and passes it, House finally passes it)
• Superstars making cameo appearances (Warren Buffett, Wilbur Ross Jr, Bill Gross, GW Bush, Obama, McCain, Paulson, Bernanke, Sarkozy, Brown, Merkel, Berlusconi)*
• Comedy elements to relieve the tension (TV coverage of the House sessions on the bailout, tax-cuts on wooden arrows, puerto-rican rum and others)
• Critical acclaim by specialist and non-specialist publications & broadcasts (‘Fox and Hounds’*, ‘Taxicab Gazette’*, etc)
• An ending paving the way for a sequel (the closing scene, i.e. the close of the NYSE session, shows the Terminator’s* fingers -presumed killed- twitching and the red light coming back in its eye)

Posted in Weekend SpecialComments (1)