Oct 31, 2011

MF Global-Another Failed Corzine Venture

October 31, 2011

Happy Halloween.

Equity markets are opening weak this morning on the last day of October as concerns about MF Global weigh on the financial shares, concerns about the European plan emerge, and a wicked storm pounds the Northeast, leading to Halloween being ‘postponed’ in some cities.

MF Global, the futures broker run by Jon Corzine has been suspended from trading on the CME and from doing business with the New York Fed. The stock has also been halted. Rumors have abounded about the firms holdings and wrong way bets, including those on European sovereign-debt. There have been discussions with potential purchasers, however, domestic banks seem to be frozen out of the transaction due to regulatory concerns, leaving private equity and other non-bank investors to sort through the assets. The company’s bonds have soared, and are now yielding 35.2%. Corzine, who took over the firm in march 2010, famously increased the firm’s risk position and used proprietary capital provided by JC Flowers to trade on the firm’s behalf. It seems a bankruptcy filing is imminent.

Food prices are up 8% year over year, putting pressure on restaurant chain margins. Recent surveys show that chains have raised prices by an average of 2.5%, less than the increase in food costs, but certainly significant. If the price hikes hold, it could negate margin pressure on the companies and help comps. If consumers reject the price hikes, then comps could face significant pressures. McDonald’s (MCD) and Chipotle (CMG) will be two companies to monitor, although casual dining chains could face greater pressure as discretionary income continues to lag.

From Peter Boockvar—“In the category that nothing is for free, in response to the push on the part of US Gov’t officials to expand the HARP program to allow more home owners with underwater mortgages to refinance, the Norway sovereign wealth fund said they sold all of their FNM and FRE MBS securities due to the heightened pre-payment risks.”

The Super Committee for deficit reduction meets this week, and the early consensus is that the group is set to fail given the highly partisan makeup of the teams and the restrictive mandate and time frame they have been given. Some are calling this new budget battle a Generational War, pitting older Americans against younger Americans. This moniker has arisen since items such as Title I funding for low-income students, the Head Start health and nutrition program, Child Welfare Services, and vaccines could be all be hit by the automatic cuts while the $1 trillion Medicare and Social Security programs are exempt from the automatic cuts. It should be entertaining theater over the next few weeks as the news shifts back to the US.

Japan intervened in the currency markets last week as the value of the Yen moved to its highest level since the end of World War II. Unilateral currency interventions rarely work. The move put pressure on APAC markets last night.

The Federal Reserve policy committee is scheduled to meet this week, and the meetings could result in some interesting commentary. Five of the boards members have been outspoken against the position of Chairman Bernanke. Two of the five fell the bank hasn’t done enough to support the recovery, while three argue the bank has gone too far.

Mario Draghi has taken the reigns at the ECB in the midst of an unbelievable crisis. Jean-Claude Trichet, the former president, was French, and thus came from a country of relative stability. Draghi comes from the troubled Italy, and observers are questioning his ability to remain neutral in spite of the issues it may cause his home country.

The SEC chided and fined FINRA for doctoring records before an SEC inspection. According to the SEC, this is the third time in eight years that FINRA has given the commission “misleading or altered documents.” Remember that FINRA is the successor to the National Association of Securities Dealers (NASD).

A great weekend of sports as the Cardinals won the world series, the Eagles pounded the Cowboys, and the Trojans beat the Cardinal (at least in my narrow world).

Have a great Halloween.


Oct 28, 2011

Quotes of the Week

October 28, 2011

I was just going to be lazy this morning and use quotes for this morning’s note, but given the activity out of the EU in the past couple of days, I decided to write a quick summary of the deal coming out of the meetings, which lit a fire under global markets yesterday.

In essence, the holders of Greek debt agreed to take a 50% haircut. Because of the “voluntary” nature of the cut, if anyone voluntarily loses money, the default provisions of the Greek CDS weren’t triggered. The EU, through the EFSF, will provide up to 1 trillion Euro in support for European sovereign debt. Although it is unclear at this point where the 1 trillion Euro will come from, it will consist of existing assets (roughly 350 billion euro), leverage, and possibly sovereign wealth funds or other investors.

The risk are obvious. First, what if they can’t get the assets required to make the leverage manageable? Second, what if, in spite of the added liquidity, the sovereign debt issues don’t go away? A 3:1 or 4:1 leveraged fund could quickly have its collateral wiped out if the global economy doesn’t recover, creating an even bigger problem down the line. The upside is that if global growth reaccelerates, the plan may buy the EU time to catch the tailwinds of the recovery and the economic growth bails them out. Come on recovery!

OK, on to some quotes.

“It's not that liberals aren't smart, it's just that so much of
what they know isn't so." ~ Ronald Reagan

“It’s weird protesting on Bay Street. You get there at 9 AM and the rich bankers who you want to hurl insults at and change their world view have been at work for two hours already. And then when it’s time to go, they’re still there! I guess that’s why they call them the 1%. I mean, who wants to work those kinds of hours? That’s the power of greed.”-Jeremy, 38, Occupy Wall Street Protestor.

“Simple Math:
The total overall cap [of the ESM] is 500 billion Euros
160 billion Euros has been spent
340 billion Euros remains
340 billion Euros + zero Euros = 940 billion Euros“
- Mike Shedlock, on the latest European ‘Masterplan’ to merge the EFSF + ESM

“The trouble with quotes on the internet is that it’s difficult to determine whether or not they are genuine” – Abraham Lincoln

“The economy needs balance-sheet repair, but very low interest rates together with ample central bank funding and asset purchases delay the recognition of losses and the repayment of debt. Too much capital has been accumulated in the wrong sectors, but the easing tends to favor investment in the very long-lived assets in excess supply (eg construction). The bloated financial sector needs to shrink, but the easing numbs the incentives to do so and may even encourage punting. The financial sector needs to generate healthy earnings, but as short-term interest rates approach zero and the yield curve flattens, they compress banks’ interest margins unless banks take on more interest-rate and, possibly, sovereign risk; and as long-term rates decline, they can generate strains in the insurance and pension fund sectors. Thus, as the easing continues, it raises the risk of perpetuating the very conditions that make eventual exit harder. A vicious circle can develop. Put differently, when dealing with major financial busts monetary policy addresses the symptoms rather than the underlying causes of the slow recovery. It alleviates the pain, but masks the illness. It gains time, but makes it easier for policymakers to waste it.”—Claudio Borio, BIS

“I remember sitting in his back yard in his garden one day, and he started talking about God. He said, "Sometimes I don't. It's 50-50. But ever since I've had cancer I've been thinking about it more, and I find myself believing a bit more. Maybe that's because I want to believe in an afterlife, that when you die it doesn't just all disappear. The wisdom you've accumulated, somehow it just lives on." But then he paused for a second and he said, "Yeah but sometimes I think it's like an on-off switch. Click, and you're gone," he said. Paused again and said, "And that's why I don't put on-off switches on Apple devices."—Walter Issacson, Steve Jobs’ Biographer

After observing Occupy Wall Street protestors in front of a bank in New Haven, CT last Sunday, seventeen year-old high school senior Justin asked his father “do you think they know that the bank is closed today?”

Game 7 tonight!

Have a great weekend


Oct 26, 2011

Europe-Still Twisting in the Wind

October 26, 2011

Equity futures are up this morning in spite of shaky earnings, mixed but improving economic data, and solid but less than expected data coming from Europe. After being stuck in a trading range from early August until last week, the market has now broken above the range and is trying to hold its gains (see chart below).

It’s often said that a correction isn’t complete until the market leaders get taken down. Both Apple (AAPL) and Amazon (AMZN) would qualify as market leaders as both stocks seemed to be performing in their own world, each rising while the markets struggled. That divergence is over as both companies have reported less than stellar calendar Q3 results. AMZN reported last night, missing estimates and guiding down for the 4th quarter (AAPL reported last week). AMZN has successfully navigated through these “investment periods” in the past, and I don’t see any reason why they won’t do so again, however, the stock has corrected by at least 50% each time. The company is saying that 2012 will be an investment year as the company expands markets and leads their razor/razorblade strategy with the Kindle Fire, which they expect to lose money on every unit.

Other companies reporting include Ford (F) reporting in line but disappointing investors regarding the reestablishment of a dividend; Boeing (BA), which beat and may be entering a period of better orders after multi-year delays from their Dreamliner; and WellPoint, which expects better enrollment gains for 2012.

The Eurozone’s proposal for a voluntary write-off of 60% or more of Greek debt was rejected by banks and investors. Rumors that 50% may be the number have been refuted as well, however, the meetings are ongoing. Similar to the failed discussions in July, assurances of a “final package” are beginning to turn into more failed promises. Stay tuned, this situation is very fluid.

US economic data has been slightly better over the past few weeks, with the exception of Consumer Confidence (chart below), which plunged last month. This morning’s Durable Goods Orders report came in better than expected at -0.8% vs. expectations of a 1.0% decline. Ex-transports the measure rose by 1.7% vs. an expected increase of 0.4%.

APAC markets rose last night as rumors began circulating that the Chinese government may begin economic stimulus measures. After months of restrictive monetary policy and signs of an economy that has slowed significantly, it is instructive that the government now feels it’s time to become simulative. Their need to manipulate their economic growth so frequently could be avoided if they were to let their currency float. The biggest beneficiary from the rumored stimulus is oil, which is back up to $93 per barrel.

President Obama issued an executive order yesterday to reduce student-loan payments. The payments will now be capped at 10% of discretionary income. Chalk up a victory to the Occupy Wall Street protestors.

US Treasury Secretary Timothy Geithner said that “I don’t think there’s good evidence in support of the proposition that it’s regulatory burden or uncertainty that’s causing the economy to grow more slowly than any of us would like.” A life-time bureaucrat, Mr. Geithner obviously hasn’t tried to start, fund or operate a small business. I can tell you both from experience and from hundreds of meetings with small companies that both existing and pending regulations create an enormous burden on businesses, especially small ones, that restrict their ability to expand and hire. A recent Gallup poll of small business owners concluded that 70% of small businesses would hire if they were confident about access to capital.

The World Series resumes tonight in St. Louis with the Rangers now leading the series 3-2. I heard a rumor that the NBA season has been postponed, but can’t confirm whether it’s true or not.

Have a great day


Oct 24, 2011

Europe, Earnings, Economy and Traffic

October 24, 2011

This week marks the 13th emergency summit regarding the European debt crisis in the past 27 months. As opposed to the twelve prior meetings, this one should be gangbusters as the market is expecting a Grand Bargain, yet is partially resigned to the inability of the ECB to come to any viable conclusion. While the numbers leaked out last week seem to be closer to what will be needed to address the problem, 1 trillion Euro, the devil will be in the details. An announcement is expected mid-week.

The Fed’s Beige Book last week concluded that the US economy is expanding very slowly in all 12 Fed districts. Consumer spending is increasing in most districts, with autos the biggest driver as household spending was flat ex-autos. Labor conditions remain bleak, and forward hiring plans are weaker than last quarter. The report also cited subdued inflationary pressure. The economy continues to be weak, unfortunately not strong enough to generate the job growth required to offset high unemployment.

This will be a busy week of earnings as 40% of the S&P 500 will report. Caterpillar (CAT) started off the earnings week with a strong quarter and gave positive economic guidance for 2012.

Has anyone else noticed a dramatic increase in traffic since Columbus Day?

Oracle (ORCL) announced that they will be acquiring CRM provider Right Now (RNOW) for $1.5 billion. This deal turns up the heat on the rivalry between Larry Ellison’s ORCL and Marc Benioff’s Salesforce.com (CRM). Google (GOOG) and Microsoft (MSFT) are rumored to be separately looking at the assets of Yahoo (YHOO) along with private equity partners. My guess is that the only interest GOOG has is in forcing MSFT to pay more to acquire the struggling search maker.

In one of those instances where I have to scratch my head, US solar-panel manufacturers have filed a complaint with the Commerce Department accusing the Chinese of violating trade rules by giving its companies subsidies. The makers are asking the US to impose tariffs of 100% on panels imported from China. Wasn’t Solyndra a solar panel maker? Didn’t we heap billions into panel makers ourselves? China’s response included comments about ‘having our heads in the sand’ regarding subsidies and criticizing us for attempting to start a trade war instead of addressing our economic woes.

President Obama announced that all troops in Iraq would be home before the holidays. Safe trip to all and thank you!

The long awaited Groupon IPO appears ready to hit the market. Originally filed at $30 billion last spring, the deal looks like it will be valued around $11.5 billion and may come in early November. This one reminds me of Webvan, which lost $1 billion before going out of business. Groupon doesn’t seem to have the same type of cash burn or high fixed costs, so they will be able to leverage their IPO proceeds for much longer than Webvan. The real issue is that there are no barriers to entry for Groupon. Being first doesn’t always guarantee success-do you remember the first online computer retailer?

Are we wondering why California has the second highest jobless rate in the country? Occidental Petroleum announced that their oil and natural gas output may fall this year because they can’t get the permits needed for new drilling projects in the state. The Division of Oil, Gas and Geothermal Resources has granted permits for 14 new projects this year, out of 199 received. That 7% approval rate compares to a 27% rate in 2010 and 71% in 2009. A report by the Los Angeles County Economic Development Corporation estimates delays in drilling have cost the state $1 billion in investments and 6,000 jobs. The US Energy Information Administration estimates that the Monterey shale formation in Southern California, of which Oxy owns almost 1400 square miles, contains over 15 billion barrels of oil, enough for two years of US consumption.

In sports, the World Series is now tied at 2 games apiece, the Saints pounded the Colts 62-7, and the Fighting Irish had better take three weeks off before next year’s game at the Coliseum and stop thinking because they schedule teams like Navy and South Florida that they are ready for the Trojans!

Have a great day


Oct 19, 2011

Apple Earnings Miss

October 19, 2011

Today is all about earnings, the economy and Europe. Equity markets are opening with a slightly downward bias after weak earnings from Apple (AAPL) has put pressure on the NASDAQ. Both bonds and commodities are unchanged this morning while oil is sitting at its highest level in over a month.

A slew of economic data has come in over the past couple of days. PPI and core PPI were ahead of expectations while CPI was in line and core CPI was below expectations. In a rare bit of good news for the housing market, housing starts were well above consensus this morning, while building permits came in slightly light. Tomorrow we get the Thursday jobless data as well as the Philadelphia Fed, Leading Economic Indicators, and Existing Home Sales.

Inflation in the UK jumped a surprising 5.2% in September. Some economists say it wasn’t “real inflation” because there isn’t an associated wage-price spiral. The Economist said “However, that is of small comfort to normal people who have to pay a lot more for basic necessities but whose wages aren’t rising to compensate. They may not regard this as a policy triumph.”

Apple (AAPL) missed their fiscal Q4 sales and EPS estimates last night on weaker than expected iPhone sales. New CEO Tim Cook commented that iPad supply/demand was now in balance. Intel (INTC) bucked the trend in PC related stocks by beating numbers, citing big iron (i.e. servers) as the key demand driver. Additionally, it appears that AMD is swooning once again, helping INTC gain share. Bank of America (BAC), Morgan Stanley (MS), and Goldman Sachs (GS) all reported with BAC and MS beating on reported numbers, while GS missed. I thought the interesting dichotomy was the strength at BAC’s wealth management business (i.e. Merrill Lynch) versus the marked weakness at the GS wealth management business.

An unsubstantiated rumor that the European bailout fund may be 2 trillion Euro vs. a prior discussed 440 billion Euro helped the market surge in late trading yesterday. The rumor was later repudiated by Dow Jones. Most likely it was a trial balloon in advance of Sunday’s meeting.

After being rejected by the CBO as financially unviable, the CLASS Act, a major provision in the Affordable Healthcare Act, has been scrapped. The Act would have paid for long-term care for America’s elderly middle class, and was a long-standing priority of Edward Kennedy. The plan was supposed to be self-sustaining, however, it couldn’t withstand actuarial analysis. The program was also a big reason the Healthcare Act was able to pass Congress given it’s stated “savings” of $86 billion in the first decade.

Let's face it, despite the Obama Administration's insistence that adding 45 million to the government dole for health insurance would actually save us money, the reality is what we all knew, it's a budget buster. As much as Obama would like it to be true, he can't "will" away the basic laws of supply and demand. He has tried it in alternative energy, finance, and health care, all with miserable results.

Somali pirates have attacked 199 ships this year with a total impact to the global economy of $12 billion. Protection is expensive as Protection Vessels International (PVI), which charges $50K to protect a ship on a typical eight day trip. Similar to the Pittsburg Pirates, their batting average is down this year as their rate of successful hijackings has declined 28% from last hijacking season.

I stole the table below from the Wall Street Journal, which lifted the data from the CBO. What the information demonstrates is that all the banter about tax rates is nothing more than politicians trying to garner points with dissatisfied voters. Even with “low” tax rates in 2007, the budget deficit as a percentage of GDP was 1.2%. In my view this shows that tax rate manipulation is no substitute for solid fiscal policy that promotes growth, which helps tax revenues to grow. A bit of government restraint in spending might help as well given 2011, a year of “austerity” in government, resulted in a record $3.6 trillion in government spending, a 32% increase from four years ago.

Taxes Collected

Government Spending


Deficit as % of GDP


























The World Series kicks off tonight between the St. Louis Cardinals and the Texas Rangers.

Have a great day