Who's on First?

March 7, 2012

After the first three day decline of the year, markets are getting a bid this morning, partially in response to an inline ADP employment report (216K jobs added in the private sector) and investors seemingly going along with the cram-down in Greece. So far investors holding roughly 40% of the Greek bonds eligible for the debt swap have signed on. The Greek government will use collective action causes (CAC) to compel bondholders to accept the restructuring if they can’t get enough acceptance. I need to comment here: bondholders are being “compelled” to accept a lower return than they expected, yet this isn’t being deemed a default by ISDA. I think we can say goodbye to the sovereign debt CDO market.

Why did the markets get hit so hard, besides being overdue for a correction? How about slow GDP growth in Europe, which came in at -0.3%. I’m not sure why that would have been a surprise, but OK. A bigger surprise was GDP in Brazil posting at 2.7%, a big whiff versus expectations. The country now has the world’s sixth largest economy, passing the UK on the strength of the world’s largest commercial cattle heard and is a leading producer of coffee, sugarcane, and tropical fruits.

Greek officials have finally disclosed the details of the secret loan they received from Goldman Sachs (GS) in 2001. The loan, which was disguised as a derivative, was used to hide the fact that Greece’s debt was exploding. In the deal, Greece borrowed 2.8 billion euro, but actually owed at least 600 million euro more.

Just in case you were wondering, the ECB balance sheet is now almost 4 trillion euro.

Check out the gas prices in the picture below.

Pandora (P) reported earnings last night and missed on both the top and bottom line. The stock is down 24% this morning. Telecommunications manufacturer Ciena (CIEN) beat earnings last night and is up 8% on the news. Apple (AAPL) is expected to release the iPad 3 this afternoon.

The former Prime Minister of Iceland is facing charges of gross negligence for FAILING to prevent the 2008 financial crisis. During the meltdown in 2008 the country’s top three banks collapsed, and the country came to a screeching halt as the government couldn’t even pay the English based printing company which prints their currency. Could you imagine the long list of characters who would be doing perp walks if we charged every official in this country who could have halted or slowed the crisis? Summers, Greenspan, Bush, Paulson, Obama, Rubin, Frank, Gramm, Bernanke, Geithner....

Cotton, which has been declining after last year’s run up, spiked Monday after India imposed a ban on all cotton exports. Futures jumped 4.5%, the daily limit. Sugar got hit hard yesterday on soaring global supply which may exceed demand by 7.7 million metric tons by year end. Iron futures have also been weak as demand from China continues to wane.

According to the Economist, The World Bank’s Development Research Group is reporting that global poverty, defined as people living on less than $1.25 per day, decreased from 2005-2008. This was the first drop since the World Bank began gathering the data in 1981.

Repeating the mistakes of the past seems to be the American way. Congress passed a bill last night imposing trade tariffs on China and Vietnam. The measure was already passed by the Senate, and the President is expected to sign it.

There has been an enormous debate going on right now over whether the decline in unemployment is primarily due to people dropping out of the work force or new hiring. To find the answer, I’ve gone to the history books to query Abbott and Costello, who have a knack of clarifying confusing situations:

Abbott & Costello on the Unemployment Rate

COSTELLO: I want to talk about the unemployment rate in America.

ABBOTT: Good Subject. Terrible Times. It's 9%.

COSTELLO: That many people are out of work?

ABBOTT: No, that's 16%.

COSTELLO: You just said 9%.

ABBOTT: 9% Unemployed.

COSTELLO: Right 9% out of work.

ABBOTT: No, that's 16%.

COSTELLO: Okay, so it's 16% unemployed.

ABBOTT: No, that's 9%...

COSTELLO: WAIT A MINUTE. Is it 9% or 16%?

ABBOTT: 9% are unemployed. 16% are out of work.

COSTELLO: IF you are out of work you are unemployed.

ABBOTT: No, you can't count the "Out of Work" as the unemployed. You have to look for work to be unemployed.

COSTELLO: BUT THEY ARE OUT OF WORK!!!

ABBOTT: No, you miss my point.

COSTELLO: What point?

ABBOTT: Someone who doesn't look for work, can't be counted with those who look for work. It wouldn't be fair.

COSTELLO: To who?

ABBOTT: The unemployed.

COSTELLO: But they are ALL out of work.

ABBOTT: No, the unemployed are actively looking for work. Those who are out of work stopped looking. They gave up. And, if you give up, you are no longer in the ranks of the unemployed.

COSTELLO: So if you're off the unemployment rolls, that would count as less unemployment?

ABBOTT: Unemployment would go down. Absolutely!

COSTELLO: The unemployment rate goes down just because you don't look for work?

ABBOTT: Absolutely it goes down. That's how you get to 9%. Otherwise it would be 16%. You don't want to read about 16% unemployment do you?

COSTELLO: That would be frightening.

ABBOTT: Absolutely.

COSTELLO: Wait, I got a question for you. That means there are two ways to bring down the unemployment number?

ABBOTT: Two ways is correct.

COSTELLO: Unemployment can go down if someone gets a job?

ABBOTT: Correct.

COSTELLO: And unemployment can also go down if you stop looking for a job?

ABBOTT: Bingo.

COSTELLO: So there are two ways to bring unemployment down, and the easier of the two is to just stop looking for work?

ABBOTT: Now you're thinking like an economist.

COSTELLO: I don't even know what the hell I just said!

Have a great day

Ned