No evidence - part 1

Consider this headline:
GERMAN FINANCIAL WATCHDOG BAFIN SAYS HAS ENDED SHORT-SQUEEZE PROBE INTO VOLKSWAGEN SHARES NO EVIDENCE OF WRONG DOING.

They are all the same, now aren’t they, those watchdogs.
Porsche made a 6.8 bln EUR profit from its options in Volkswagen, lifting its pretax profit to more than twice its revenue. As long no Germans were screwed in this process, Bafin can not discover anything irregular in one of the most amazing trades of the last decennium.

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No evidence - part 2

More amazing stories are popping.
This one is about Semgroup.
We go back in time. To 21st July 2008.
From Reuters:

NEW YORK (Reuters) - Semgroup LP declared bankruptcy on Tuesday after $3.2 billion in oil trading losses torpedoed the formerly 12th-largest private U.S. company.
The Tulsa-based company racked up the massive losses as oil prices ran up record gains, undercutting short crude futures positions Semgroup bought to hedge against its 500,000 barrel-per-day trading business.

And

Semgroup took a $2.4 billion loss on July 16 after it transferred its New York Mercantile Exchange oil futures trading account to Barclays Plc, converting what they called "loss contingencies" into an actual loss.

Included in the NYMEX loss was $290 million owed to Semgroup by a trading company owned by co-founder and former chief executive Thomas Kivisto, who was placed on administrative leave on July 17.

We all remember that right at that time oil peaked at 147 USD/oz. Then this peak momentum turned rather quickly. Is this a coincidence?
SemGroup got themselves in trouble because they sold NYMEX furtures beginning round 70/80 USD as a hedge. Now, these guys were professionals. How come oil went higher to 140 USD/barrel?
Should it be possible that the steep hike of the oil price was orchestrated to bring down Semgroup?
At least that’s what Forbes writes:

But now some of the people involved in cleaning up the financial mess are suggesting that Semgroup’s collapse was more than just bad judgment and worse timing. There is evidence of a malevolent hand at work: oil price manipulation by traders orchestrating a short squeeze to push up the price of West Texas Intermediate crude to the point that it would generate fatal losses in Semgroup’s accounts.

“What transpired at Semgroup was no less than a $500 billion fraud on the people of the world,” says John Catsimatidis, the billionaire grocer turned oil refiner who is attempting to reorganize Semgroup in bankruptcy court. The $500 billion is how much the world would have overpaid for crude had a successful scam pushed up oil prices by $50 a barrel for 100 days.

This article mentions that Citi, Merrill Lynch and especially Goldman Sachs knew the trading book of Semgroup. The biggest counterparty of Semgroup was J. Aron & Co, the commodities trading arm of Goldman.

Forbes continues:

When crude oil peaked in July, Semgroup ran out of cash to meet margin requirements on options contracts it had with Aron, contracts on which it had paper losses of $350 million. Desperate to survive, Semgroup asked Aron to pony up $430 million it owed on physical oil. Aron said no, declared Semgroup in default on its contracts and demanded immediate payment of losses.

Semgroup went out because they couldn’t come up with the margin anymore. A classic if you want to take out somebody.
Then came Barclays:

Shortly before it filed for bankruptcy, Semgroup sold its trading book to Barclays Capital. Barclays’ bold bet was that the price of crude would fall, erasing the losses. It is believed that 30 days later Barclays was sitting on a $1 billion gain as oil indeed fell, to $114 a barrel. Barclays wouldn’t comment other than to confirm it still owns the book. That prices plunged after Semgroup failed is more evidence of manipulation, says Catsimatidis: “With the portfolio in Barclays’ hands they could not squeeze the shorts anymore. The jig was up, and oil collapsed.”

Of course all conspiracy theories are flatly denied.
But how much the world has paid for this game?
And now we pay up again to save these guys…

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Stripping Ireland

We won the 6 nations tournament but we lost an ‘A’.
Ireland was downgraded to AA+ by S&P on Monday from AAA.
Even more: S&P warned Dublin has to arrest the detoriation of Ireland’s public finances and served a gloomy outlook.
Ireland‘s economy shrank by a record 2.3% in 2008 after a 7.5% drop in the fourth quarter.
Rating agencies Moody’s and Fitch still rate Ireland AAA but both gave a negative outlook.
The detoriation of the budget in the mean time proceeds at light speed. The government thought some while ago the deficit would reach 9.5% of GDP. But now estimates are at minus 11% of GDP. Almost 4 times the European’s approved limit and the worst in the euro zone.
Now, how to solve these problems?
By protesting.
At least that’s what the unions are standing for.
But hey, don’t worry: tomorrow we will play Italy.

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Let's walk south

It seems that the run-up of the most important indexes is coming to a halt. Based on the 60-minute renko chart, we are alerted that the upward trend is broken and we are experiencing a kind of consolidation/correction. As we are prudent we are going for the former first, before we switch to the latter if more undoing of the rally becomes clear. We pay attention though: it’s month end. Never a good point to set-up positions if you’re not a daytrader.
As an illustration we show the Dow Jones Transportation index (ticker: TRAN):

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Citi of Sins

If we run a scan based on our renko charts than it’s worth to note that of the 26 names with a sell signal in place 80% are oil producers.

And Citigroup.
The huge rally – due to a short squeeze – seems to be over and out. For the time being. A down trend was established and is taking his toll.

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End of month movements?

What’s happening with the gold price today?
First there was a dip in the NY morning trading from 920 USD/oz towards 907 USD/oz and then suddenly the price rocked skywards to 928 USD/oz.
Somebody is buying because he has a problem or because he wants it.
We heard this weekend a lot of stories.
The IMF would have to sell some gold. The Russians want a new gold standard.
In the mean time we observe that the Toronto Ventures Index, loaded with small goldmine producers is really making a come-back.
Even today is not especially a day to buy, after losing 75% of its value in five months, this index is poised for a rally.

But also elsewhere a break-out can be observed. The Market Vectors Gold Miners ETF (ticker: GDX) staged last week to break through its 200 moving average, while being on the verge of a new six-month high.

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I don't like Mondays

A sell-off in Asia this morning is causing ripples in the European markets as we are closing down the first quarter of 2009. Profit taking before month end.
Reuters reported that GM and Chrysler would not receive more aid, resulting in the ousting of the CEO Rick Wagoner of GM and the warning that Chrysler has to form a partnership with Fiat within 30 days.
UBS has more writedowns and the G20 jamboree motivates some activities in the streets of London not seen for a while.
Part of the leaked G20 communiqué is that the IMF is urged to accelerate their gold sales.
From FT: "Hundreds of Russian banks are likely to go under by the end of the year as the amount of bad loans surges, potentially hitting as much as 20 per cent of credit portfolios, a senior Russian banker has warned. Pyotr Aven, president of Alfa Bank, one of Russia’s largest private banks, called on the government to move swiftly to recapitalize the top 30 banks and name the institutions that will receive assistance to help kick-start the flow of credit, which has almost dried up amid growing fears over bad loans."
A spiral of fear caused by diminished expectations is bringing the economies down. After a full year of a serious banking crisis, the economy is still waiting to experience the full consequences of the shock real estate combined with a financial crisis caused.
It is Paul Kedrosky using the term ‘The New Normal’. And it’s not normal. It’s an economic recalibration which is not going to restore our consumption economy, but bring us down to a new level of more savings, less debt and less spending.
There is an article in the NY Post that Citigroup and Bank of America have been buying toxic securities, paying more than the market price. Could it be possible they gonna sell this stuff in the new PPIP program.
Wait a second: the taxpayer is going to subsidize this plan for hedge funds and bank and these guys are once more screwing up the system.
Was this the intention of Tim Geithner in order to deal with the banks’ toxic debt?
It gets even better: there are plans that banks could take equity stakes in the public-private partnership funds. The banks would pay for these stakes with the loans they are selling to the partnerships. The difference between the market price of this toxic waste and the price these funds are going to pay for is subsidized by the government.

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Asia leads the US

We live in strange times indeed.
The S&P futures are up another 1.5%. On their way to 820, this is a resistance hurdle of some importance.
What is so strange? It seems that US indexes are following the Asia session instead of the other way around.
The Nikkei is leading, not only the regional stock exchanges but also the US, although there are no particular reasons or drivers.
We also want to mention the squeeze in the final hour on Wall Street yesterday.

And than we have some news from Zimbabwe.
We read in an article that the local authorities are shifting away from the dollar and has chosen instead for the South African Rand as the countries reference currency.
Zimbabwe offers a timeless picture what can happen when the debasement of currency is running out of hand

One of the consequences is that the local stock index is not crashing at first but goes higher instead.
A false positive, as it is called

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Interesting information

Did you know that…
The Mortgage Bankers Association lifted its forecast for 2009 home-loan originations by $800 billion to $2.78 trillion (the fourth-highest ever) as "a wave of refinancing and low interest rates spur homeowners to seek out new loans."

And banks will see huge profits, because they're charging more for refinancing, and the spread between fixed-mortgage rates and 10-year Treasuries is nearing a 22-year high.

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Halliburton

After the huge blow-up on Monday we had some pause yesterday and it seems more has to come. But for the moment we think it will be rather a consolidation than a new attack of the bears.
We’re looking for some long set-ups.
If there is a rally coming, will this be a big one? No one knows, but there is a fat chance that some money of the huge sums governments are throwing to banks will find its way to Wall Street.
One picture we like is the chart of Halliburton

This is what we call bottoming…

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PPIP, Goldman Sachs and my bonus

Some news items are catching our attention.
Stress Test + PPIP + CAP = getting banks to recognize losses
In the FT we read:

"The government’s toxic assets plan will force banks such as Citigroup, Bank of America and Wells Fargo to take large writedowns on their loans, requiring them to raise more capital from taxpayers or investors, executives and analysts have warned. Senior bankers say the authorities’ latest drive, announced on Monday, to cleanse financial groups’ balance sheets by encouraging investors to buy troubled residential and commercial mortgages will prompt banks to record losses on those portfolios. “The unspoken fear here is that selling off loan portfolios would lead to more government capital injections into major banks,” said an executive at a large bank."

Goldman Sachs is going to repay 10 bln of funds received from the government’s TARP recapitalization plan. Bonuses are more important than anything else, it seems, for the greedy boys of GS. Some smaller banks have already signaled plans to repay TARP money, citing concern over changes in terms of the scheme and compensation restrictions. Marin Bancorp, IberiaBank, Signature Bank, Sun Bancorp and TCF Financial have all applied to repay a combined $689m of TARP funds.

The rally in equities, fixed income, the $ selloff… all seemed to be losing momentum yesterday, although some deceleration/pullback is to be expected after the 50 bps move in treasuries post-FOMC and the historic rally in US shares on Monday.

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Why the FED better succeed

This a story from ABC news.

It could have been everyone of us.

Hat tip to Trader Mark.

For the first 45 years of Ken Karpman's life, everything was close to perfect. He graduated from UCLA with a bachelor's degree and M.B.A., then got a high-paying job as an institutional equity sales trader. He married his dream girl, had two children and traveled the world on expensive vacations.

Over the span of Karpman's impressive 20-year career as a trader, he climbed the company ladder, reaching a salary of $750,000 a year. "Life was good, we were making a lot of money -- and why wouldn't this just continue on?" Karpman said.

From all appearances, Ken and Stephanie Karpman were living the American dream in Tampa, Fla., nestled in their 4,000-square-foot home that sits on a golf course. "I had no idea what anything cost in a store," he said. "I'd just put it in the cart and buy."

Karpman was so confident in his good fortune and the strong economy that he left his job in 2005 to start his own hedge fund. To pay for the new business and their standard of living, Karpman quickly burned through $500,000 in savings and, like so many Americans, took a line of credit against his house.

But in the reversal of fortune that followed, Karpman was unable to attract investors and was forced to dissolve his hedge fund. He found himself jobless in a job market that had collapsed. After a lengthy and fruitless job search, the Karpmans were shocked to find themselves in financial dire straits, with zero savings, hundreds of thousands of dollars in debt and their home in foreclosure.

Karpman's salary plummeted from six figures to $7.29 an hour -- plus tips -- but it's money that he's grateful to earn, even when it means delivering to neighbors or his old office building. The Karpmans are now on food stamps and a tight budget that doesn't nearly cover their children's $30,000 private school tuition. But thanks to an anonymous donor, the Karpmans children's tuition has been covered through next year and they are deeply appreciative.

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Hibernation

A lot of commodities went down in price in the second half of 2008. But especially natural gas has performed worse than any other. The price fell from a high of 13.5 USD to 3.50 USD or more than 75%.
As a result the industry went in forced hibernation. Last summer more than 1400 rigs were pumping gas, now only 884 are operating.
Supply is going to shrink soon.
Not mentioned here are investments into gas-powered vehicles or industries switching to gas.
Oil has risen 43% since Christmas. Gas has to follow soon.
Even better: in the futures pit we discover that speculators have bet heavily against a rise of prices. Commercials are long.
In a typical cycle the industry shrinks when a commodity is unprofitable, only leaving the most efficient outlets in operation.
There is a natural gas ETF (ticker: UNG). Observe the huge spike from last week.

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But the times, they are a-changing

China is harping on a new theme: the status of the dollar as a reserve currency. China is calling for a new currency to replace the dollar as the world’s standard. Last Monday it was the central bank governor, Zhou Xiaochun, who made some proposal on a time everybody is preparing for the Group 20 gathering next week in London.
We read in the Financial Times:

China’s central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund.
The goal would be to create a reserve currency “that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies,” Zhou Xiaochuan, governor of the People’s Bank of China, said in an essay posted in Chinese and English on the central bank’s website

Without any doubt we can connect this with something else.
From Reuters:

"A U.N. panel will next week recommend that the world ditch the dollar as its reserve currency in favor of a shared basket of currencies, a member of the panel said on Wednesday, adding to pressure on the dollar. Currency specialist Avinash Persaud, a member of the panel of experts, told a Reuters Funds Summit in Luxembourg that the proposal was to create something like the old Ecu, or European currency unit, that was a hard-traded, weighted basket. Persaud, chairman of consultants Intelligence Capital and a former currency chief at JPMorgan, said the recommendation would be one of a number delivered to the United Nations on March 25 by the U.N. Commission of Experts on International Financial Reform."

Don’t get fooled: China is slowly but surely shifting away from the dollar. In 2003 China had 83% of his foreign exchange reserves invested in US assets. This is reduced to 63%. While its net purchase of short-term Treasuries has jumped, the net purchase of all US assets has come down rather dramatically.

Something is changing. And it changes fast.

The Chinese Xinhua/china ETF is a little oversold on a daily basis.

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I see light, I think....

We are looking back and notice that US-equities had their largest rally since 1938. Since 6th March the S&P has rallied 23.7%. In reshaping the financial landscape, equities as an asset class became very cheap. The current valuations are proving this and we found a chart of Goldman Sachs showing the Equity Risk Premium on an all time high.

We are charmed with what’s happening with BRIC and emerging markets. No bonuses have to be repaid there. Neither corporate jets to be sold. And also these markets are performing well. ALthough a little overbought for the moment.

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With Love... from Russia

Everyone knows the story of the wings of the butterfly in Hong Kong causing a storm in the States. The Wall Street Journal had a story which reminds me of this phenomenon.

"A tiny default by a Russian aircraft-leasing company is sending ripples through the much larger market for the country's debt. The default by Finance Leasing Co. on $250 million of bonds is the first by a Russian state-owned company on foreign debt since the country's 1998 financial meltdown. That is rattling foreign investors, who worry that Russia could allow many more companies to renege on billions of dollars of debt while it grapples with an economic and financial crisis. "It's clear that the capacity and willingness of the government to...provide support to a large number of entities is declining," says Ed Parker, head of emerging Europe sovereigns at Fitch Ratings."

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Big in Japan

What’s happening in Japan?
We have an interesting chart from Goldman Sachs showing the Japanese Trade Balance overlaid with the USD/JPY. The trade balance is reversed and is lagging with 18 months to illustrate the correlation between both. It seems that the yen may weaken in the coming months to restore this correlation.

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A new week, a new plan to save the world

Welcome to the Public-Private Investment Program. A new program that will provide funds for making a market in real-estate related loans from banks and securities from broader markets. Banks will have the ability, we read in de Wall Street Journal, to sell pools of loans to dedicated funds and investors will compete to have the ability to participate in those funds and take advantage of the financing provided by the government.
Another 500 bln USD (or more) is coming to the markets.
This plan is causing anger und unbelief from economic watchers.
The American government seems to support the idea that there are no bad assets only misunderstood assets.
Even better: private investors can participate with a small amount of their own money for getting in return large, non-recourse loans from the government to buy these assets.

Bottom line: it’s a lot of nonsense. We all know there is bad debt and bankers overplayed vastly their hand. What to do? Nationalize, wipe out shareholders, write off assets, put some people in jail, tweak rules and start again…
That’s the name of the game, dear friends…

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To FAS or to FAZ

I love this bonus rage in the States.
And the tax of 90%.
Where is it going to stop? Is the mob going to take the streets again?
They drag the CEO before Congress to grill him and chastise him over the bonuses of AIG. This is a guy who came out of retirement to work for 1 USD a year to try and turn this thing around.
The mob hasn’t changed that much over the centuries.
Ok.
Let’s get over it.

And go elsewhere.

Also the FAS (3x Leveraged Financial ETF) is going down. Yesterday it opened 10% higher only to close 5% down. Is the short squeeze over?

The most popular stocks these days are FAZ and FAS. In this all shorting story of financial stocks, these ETF become increasingly popular.
This is the FAZ (thanks Tim). Look how positive momentum is building like a storm after a hot day. The volume is increasing while the price is not going lower anymore. Ready for this ride?

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And the winner is...

From Bespokeinvest we learned this about the rally of last week:
Below we highlight sector performance during the current rally that started last Tuesday. As shown, the Financial sector is up a whopping 50% since the close on March 9th! The S&P 500 as a whole is up 17.4%, and Telecom, Materials, Industrials, and Consumer Discretionary are all outperforming. Consumer Staples, Health Care, Energy, Utilities, and Technology are underperforming the S&P 500.

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Bookkeeping

The FOMC remains very concerned about the economic and financial outlook. The Fed's balance sheet recently has shrunk modestly, but that does not reflect any deliberate actions. The Fed's support of commercial paper has unwound as activity in that market has declined. The Fed's balance sheet should start to grow again as the TALF program ramps up. Moreover, the decision to boost purchases of agency debt and mortgages, and to start directly buying Treasuries, suggests that the Fed's balance sheet will mushroom in the months ahead. The key point is that monetary policy will remain highly accommodative and proactive until there are signs that financial intermediation is working more effectively. The Fed's actions should be positive for both stocks and bonds.

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Citi - part 2

News is running over the tape that Citi considers a reverse stock split. Well, not a bad idea to take the stock again above the treshhold of 10 USD so they can stay in the Dow. In the mean time you burn the shorts even more...

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Hot town, summer in the Citi

There are a lot of rumors from traders that repo desks are continuing to call in shares used to short financials such as Citi and AIG.
This is causing a forced covering of all financial shorts and it’s becoming impossible to put on new short transactions.
Hey folks, look out what you’re doing there…
This is the Volkswagen thing all over again. And even better. Because this move seems to become self feeding.

This is what the Wall Street Journal wrote last week.

Hedge funds rushed in to buy preferred shares of Citigroup after the New York bank announced last month that it would convert preferred shares into common stock. The fast-money crowd hoped to scoop up a quick profit based on the attractive conversion terms being offered by Citigroup to preferred shareholders, including the government.Now, though, the hedge funds are licking their wounds. The reason: Their strategy of buying Citigroup preferred shares while selling short the common stock backfired. Since March 5, the price of Citigroup common shares has tripled, including a 23% jump Wednesday that left the stock at $3.08 in 4 p.m. New York Stock Exchange composite trading.

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The FED and the dollar

Thanks to Tim:

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The FED and gold

Goldman Sachs sends following letter to their clients, after the FED surprised everyone yesterday by announcing another 1 trln USD bail-out exercise

I do not subscribe to the view that the gold market is overtly long as some have suggested. Indeed I think overall positioning is low. The ETF after a flat period has added 1m oz this week to 49m oz. This is mostly held by private wealth and real money accounts and is likely to be a small % of their allocations and at less than $50bn is not a large sum relative to holdings in cash currencies and fixed income. ETF investors are less easily persuaded to sell than their Comex counterparts as the below chart shows.
Meanwhile the real money and sovereign wealth community I believe is seriously considering a weighting from an almost zero starting point. Comex length which tends to be more short term has been reduced by 3m oz which is a good thing as it takes some of the fast money out. It appears that much of this has been taken in by a few macro funds with a more committed view. The announcement by a major fund of an investment in Anglogold could also be pivotal to sentiment in persuading newer players to make an allocation to gold.
Recently I felt there was a risk that gold could slip into the 870 support and to allow room to add to longs should it occur but I think yesterdays dip will prove to be the last decent buying opportunity for some time. The upside opportunity is far in excess of the downside in my view.

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Google

It's not over until it's over.

While we wait for the FOMC stocks opened lower. The bull seems a little tired. But the positive tone is not gone. Far from.

We look to Google (ticker: GOOG) on our renko charts and observe that the rally is still intact.

Let's run...

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Crooks

From the New Yotk Times:

Standard & Poor’s and Moody’s are worthless and should be ignored, argue Jerome S. Fons, former managing director at Moody’s, and Frank Partnoy, a law professor at the University of San Diego.
Investors and regulators should drop rating-related language from contracts. Instead, they should return to good old-fashioned judgment.
Credit ratings can mean the difference between life and death for a company, but the agencies should get F’s for failure, Fons and Partnoy assert in an editorial in The New York Times.
“No one has been more wrong than Moody’s and S&P,” they write.
They gave stellar marks to large but troubled companies such as AIG and Lehman Brothers. Mortgage-backed assets now called toxic got AAA ratings until recently.
Yet many investors opt to buy or sell — are even required to buy or sell — based on rating. Downgrades can trigger sell-offs and panics.
“This has left us in a ratings trap,” the pair write. “As more regulators and institutions rely on ratings, the agencies have become increasingly reluctant to downgrade.”

It's a little late now to close the doors of the barn now the horses have fled

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My travel tip

One of the things I love the most is travelling.
Not only to Galway to team up with Nick L., another fallen angel once upon a time and a lovely fellow to have a drink with, but to other countries, too.
Before I settled down on the Emerald Isle, travelling was a kind of natural habit.
And soon we’re on our way again. Madrid is the destination.
Whenever I go to cities, I book everything myself. Search robots are ok but not for this stuff. Better to look for a 4 or 5 star hotel yourself– if you like a good night sleep without the buzzing street life –. Take the phone and inform if they have no special rates available during the weekends. Normally they have as they are nearly empty because businessmen run for their home turf on Fridays. So rates are very low – almost comparable with hostels or B&B’s.

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Shorters are busy

Data Explores has developed an index – the DESLI 50 – which tracks short interest in the 50 largest companies in the securities lending market.
We read:

The Data Explorers Securities Lending Index (DESLI) series tracks the change in short interest (as a percentage of securities lending to shares outstanding) across large cap names in the US, UK, Europe (ex UK), Japan, and Asia (ex JP). There is also a global index, the DESLI 50 which tracks the short interest for the fifty largest market capitalized companies in the global securities lending market. An increase in the index, which was benchmarked to 100 on 2nd Jan 2009, represents an increase in shorts. Please note that the DESLI methodology is not impacted by changes in price or by changes in trade volume so securities lending activity is not obscured by cash market movements.

On the 6th of January this index hit a low on 88.34 and since then it has increased with 42.76%. Especially the last two weeks the rise was particular steep as global equity markets hit a new low.

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Is the bear coming back...

There is some odd correlation between housing and banking. Or better between the FAZ and the SRS ETF.
FAZ is the Direxion financial Bear 3x Triple-Leveraged ETF designed to yield investment results approximately equivalent to 300% the inverse of the return of an investment in the Russell 1000 Financials Index, which tracks financial related securities in the Russell 1000 Index.
The SRS ETF is the Ultashort Real Estate ETF.
These two seems good buddies, most of the time. And they are loved by day traders and hedgies
But not now as the FAZ was down yesterday while the SRS with a gain of 3 was pointing the direction of housing stocks.

Hat off to Tim

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The next one...

Not so long ago were 6 companies that enjoyed a AAA credit rating from Moody's based on the company's size, stability and ability to pay back debt.
GE was recently stripped of its AAA rating and received a lowered rating of AA+. Below is a list of the AAA rated companies (excluding Berkshire Hathaway BRK/A), their valuation attractiveness, and their Z-scores (likelihood of going bankrupt in the next 2 years). Which of the AAA companies may be the next to join GE in getting a rating downgrade? Automatic Data Processing (ADP) has the lowest Z-score (the least amount of financial strength) and is theoretically the most likely company to have its AAA rating lowered.


De ALT-Z score is a metric that gives insights into the likelihood of a firm going bankrupt in the next 2 years. The model was developed by Professor Edward I. Altman of the NYU’s Stern School of Business and first published in The Journal of FINANCE in September 1968. A common critique to this metric is that it was developed over 40 years ago and is no longer relevant.

In 2001, Professor Joseph D. Piotroski of The University of Chicago Graduate School of Business, published a paper called, Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers. Piotroski showed that value investors were rewarded by looking at a firm’s financial health and he showed that Z-score was a meaningful statistic.

More recently, on December 5, 2008, Dr. Altman was called to testify before a House of Representatives Committee on the condition of U.S. Automakers. In his testimony, he noted that Bloomberg, Inc. reported, “that approximately 1,000 users of their system per day access the Altman Z-Score model.”

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Lá Fhéile Pádraig - Paddy's Day

And off we go
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Titanic

According to Bloomberg: About 45 percent of U.S. rigs have been shut since September, which means fourth-quarter gas production will tumble 5.2 percent, faster than the 1.9 percent decline in use, the Energy Department forecast. Prices will rise to $7 per million British thermal units by January from $3.897 today on the New York Mercantile Exchange, according to a Bloomberg News survey of 20 analysts. The gain would be the largest since the first half of 2008.

But this is Bloomberg.
We become a little prudent as prices are going nowhere.
Last weeks we mentioned natural gas and copper.
All their upward price movements are stalled.
Even de Baltic Dry index is not going higher for the moment. Now be careful with charts where you can click in the box for a log scale of not.
As markets are at the bottom charts without logarithmic scaling are less sexy than with a log scale.

But anyway…

Rapidly deteriorating conditions in the shipping sector are squeezing the ratings on European banks exposed to the shipping industry. Many shipping companies are struggling following a sharp downturn in global trade and challenging funding conditions. We expect these difficulties to result in a material increase in banks’ loan loss provisions. We see pressure on banks coming from an increasing number of loan defaults, rapidly deteriorating shipping company credit quality, and weaker recovery expectations due to falling asset values. In addition, we believe banks’ capital ratios may decline as deteriorating creditworthiness feeds through internal rating models and increases the relative risk-weighting under Basel II.

European banks are especially exposed to drybulk and container shipping, the fundamentals of which are “particularly weak.”
The S&P analysts highlighted seven banks with significant shipping exposures - DnB NO, DVB, KfW IPEX-Bank, NIBC, HSH Nordbank, Norddeutsche Landesbank Girozentrale and Nordea.

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There it is... the FASB has spoken

Another thing passes our desk.
The FASB has finally spoken.
This one is from John Carney

A myth. Which sounds like a fitting description of what the Financial Accounting Standards Board is proposing to introduce onto the books of companies holding "distressed" assets. Today the FASB, which sets U.S. accounting rules, proposed allowing companies to exercise more judgment in determining if a market for an asset is active and if a transaction is "distressed."
At its heart, it's not a crazy idea. If an asset can be fairly expected to spin off more cash than current market values imply, it makes sense to allow for accounting adjustments. It is possible that a bundle of mortgage backed securities, for instance, could suffer from an irrationally low price if a temporarily market dislocation was caused by a liquidity squeeze. Marking these to market could create a false impression of their underlying value.

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This one was a beauty...

A few weeks back we showed you the bullish percent index from energy stocks within the S&P500. Our accompanying note was that more than likely a bottom was in the making. Yes, I hear one say, but all the shares went higher in the mean time.
However - this one was right on the mark

This index displays the percentage of oil stocks trading with bullish technical patterns. Oil stocks are overbought whenever the chart rises above 70, and the sector is oversold when the chart drops below 10.

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Not a black hole after all...

AIG confesses. As the actions of the insurance giant become more and more visible, stakeholders struggle increasingly intense as fish on dry land. You know the bottom line: AIG received 149 billion dollars from the U.S. government and they were using it to scroll to a number of clients. There is lot of outrage. While other colleagues have to pay spicy amounts of interest in exchange of direct government aid, a number of names are escaping on more than a suspicious manner. So hard-pressed, AIG starts to open the books. In a document with a number of annexes, AIG shows what they have paid through various mechanisms to counterparties. High on the list we find Goldman Sachs and SocGen.

Is anybody surprised?

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No more insurance for insurance

FAZ and FAS are the triple leveraged Financial ETF. The long one (FAS) has taken off this week like a rocket.
It is clear that this rally is going too fast even if all rumors about up tick rules and mark-to-market adjustments are true.
Attention: not that much has changed in the real economy. We continue to see an unprecedented plunge in household wealth while the consumer deleveraging continues. Most sources of borrowing are drying up but retail is no longer falling off a cliff. The total pool of unemployment surges en sentiment is at a multidecade low.

And than there are the insurance companies. They are the next shoe to drop if we’re looking to the CDS-markets. The cost of protection for names as Aviva, Aegon and Swiss Re doubled roughly since the start of this month.

Knock -knock - knock...

Who's that

A professor.

Philip Lane, Professor of Economics at Trinity College Dublin, is quoted in the IHT saying, "If a country were to need help, it's not clear if they should go to the European Union, the IMF or the ECB [European Central Bank]. The answer seems to change day to day."

Our advice: Call Bertie. Let him buy dollars, peg the Irish currency to the dollar and quit the euro.

There are the other guys. Time to go to the pub for a Guinness.

Have a good weekend.

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And then they were six

With the downgrade of General Electric (ticker: GE) only six publicly traded US companies are left with a AAA-rating: Automatic Data Processing (ticker: ADP), Berkshire Hathawy (ticker: BRK.A), Exxon Mobil (ticker: XO), Johnson & Johnson (ticker: JNJ), Microsoft (ticker: MSFT) and Pfizer (ticker: PFE).

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The buck stops here

March 13 (Bloomberg) -- China wants the U.S. government to “ensure the safety” of its investments in the world’s largest economy, Premier Wen Jiabao said.

“We have lent a huge amount of money to the United States,” Wen said today at a press conference in Beijing that marked the closure of the annual National People’s Congress meeting. “Of course we are concerned about the safety of our assets. To be honest, I am a little bit worried.”

Well Wen, we’re worried too.

And not a little bit.

So you’re not alone.
Did you see the dollar, Wen?
The daily chart of the dollar index going back shows a notable development.
Not only failed this index to sustain a move above the old top of November 8, but also the 21-day average was broken.
Are we in for a correction?

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GE - part 2

It is David Reilly who writes:

Of the $8.46 trillion in assets held by the 12 largest banks in the KBW Bank Index, only 29 percent is marked to market prices, according to my analysis of company data. General Electric Co., meanwhile, said last week that just 2 percent of assets were marked to market at its General Electric Capital Corp. subsidiary, which is similar in size to the sixth-biggest U.S. bank.

One wonders if the new AA+ is the start of a series of downgradings.
At the other hand: how will American politics handle this problem

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GE - part 1

S&P stripped General Electric (ticker: GE) today of its historic AAA-rating. The conglomerate was downgraded to AA+. The outlook is stable now. This is assuring because we’re living in an instable world.
We quote:

"The main factor in the downgrade was our assessment of the stand-alone credit profile of financial services unit GECC, which we now view as ‘A’, compared to the ‘A+’ we had indicated before.
“We believe that GECC is under increasing earnings pressure, due to the recent sharp deterioration in general economic conditions around the globe,” said Standard & Poor’s credit analyst Robert Schulz.
“This will result, in our opinion, in rising credit losses across key segments of GECC’s finance portfolio. Still, we believe that GE’s industrial-based cash generation capabilities remain fundamentally strong–even in the face of enormous global economic headwinds–and that it will generate growing cash balances from current levels over the next two years. We do not anticipate that GE will benefit from any meaningful earnings or cash flow from GECC through 2010.”

Even better is the renko-chart with a buy signal

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Dancing with the wolves

Tomorrow it’s Friday.
TGIF.
Bur Fridays are always special. Certainly for the gold price.
Huge ups and downs are no exception.
Seems it will be an up Friday, again.

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Copper again

There are more commodities on the move.
Take copper. Already mentioned before here.
Copper fell more than 70% from its peak price. The bottom was in December 2008 around 1.25 USD per pound.
The amount of copper in storage peaked at the same moment at 548.000 metric tons.
But the last two weeks this volume in storage went down. A little more than 5%.
Than there is Freeport McMoRan (ticker: FCX). In May 2008 the share price was 125 USD. Now the shares are trading around 33 USD.
This means that you can buy Freeport’s copper reserves for 13 cents a pound and get all molybdenum, silver, gold and cobalt for free.
Is FCX a good company? Not yet after the disastrous acquisition of Phelps Dodge in 2007, but the tide seems to turn slowly.
Even more important: another commodity turns around.

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On the move

A lot of doubts. Fear.
Many non-believers.
Oil down, gold down, currencies doing nothing…
What about inflation? Yesterday PIMCO joined the chorus predicting higher inflation in the near future?
Are these people right?
We don’t know, as we threw our crystal ball out of the window long time ago.
But we see a couple of things.
First of all: prices of commodities are on the move.
Agriculture prices are slowly rising.
Not a real rally, yet, but the daily renko chart shows us the positive action in this department.

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Running for the hills

What do we read on Bloomberg?

"Investors pulled out a total of $11 billion from hedge funds in February as stocks worldwide tumbled amid signs a global recession is deepening. Redemptions were about a third of the value in January, after the industry lost about $400 billion from its June peak to December through market losses and withdrawals, a preliminary Eurekahedge Pte report showed. The February figures were based on 41 percent of funds that disclosed estimates by March 10 to the Singapore-based research firm."

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The end of the tunnel?

Rally time.
Where did this come from?
Well, from the financials. They’re up with double digits and if we can use Europe as a predictor, more fun will come.
Is something big coming?
Will a change of the rules be suggested when tomorrow the accountants of the SEC make their appearance at the House Financial Services Subcommittee on Capital Markets?
Is this market right to expect any relief of the FAS 157 rules?
Or is it the return of the uptick rule causing all this volatility?
Or is this simply a snap-back rally that will fail anytime soon?
Bespoke invest highlights the fact that yesterday’s gain was the eight one-day gain of 5% or more since the S&P500 peaked in October 2007. None of the previous occasions resulted in a sustained rally.

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Attention: something is brewing

Something is coming up.
Again.
Thanks to Goldman to help us here:

"The recent tightening in financial conditions poses an obvious downside risk to our economic outlook. For example, since early January our Goldman Sachs Financial Conditions Index (GSFCISM) has risen nearly 2½ index points, due largely to the selloff in equities with dollar appreciation and long-term yield increases playing supporting roles. This essentially returns the GSFCISM to its highs of last autumn, indicating extreme tightness in financial conditions. It is difficult to lay out precisely the developments we need to see in financial markets to accompany the anticipated improvement in economic activity, especially given that the index has not captured some key aspects of the current crisis—specifically, the differential effect of tightening in the mortgage market and the seize-up in other markets. Suffice it to say that if financial conditions do not ease materially in coming months we would distrust the stabilization story even if we saw most of the mileposts on the road map."

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Dead man walking

Rating agencies are one of the main culprits of this mess.
However, recently they took up a new job.
They are ‘rating’ companies, instead of ‘selling AAA ratings for cash’
Moody's, which has long been criticized for sleeping through the credit bubble and, by many accounts, causing it in the first place, just came out with an attempt at absolution.
In a quarterly publication called the "Bottom Rung", the rating agency list 283 companies which it believes are the most likely to default.
Among the sectors most represented are media, automotive, retail, manufacturing, gaming and consumer products. Moody's dedication manifests in the 126 new companies added to the "death list" compared to last year's 157.
So in total there are 283 companies doing a dead men walking.
Investors: take your losses and run for the hills.

New on the list are: Eastman Kodak, MGM Mirage, Unisys, Dana Holding Corp and many others.

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The amazing dollar

There is a kind of a conundrum, a paradox in the markets where people are looking for an answer but not finding one.
The dollar.
Why is the dollar strengthening where the mighty currency normally should dive.
Nobody can solve this one, it seems.
A safe haven?
Less vulnerable than his peers?
Well, a currency market – as most other markets – moves with offer and demand.
Not with someone’s best guesses.
This observation comes from Mike O'Rourke of BTIG

The first and most obvious consideration is that the Treasury needs to sell $2 Trillion of Government Securities this year. With low current yields, the currency strength is a key attraction to buyers. Permitting the Dollar to strengthen aids Europe in taking on its economic challenges, which are deemed by many to be more severe than those here in the U.S.


This is one explanation.
A good thing that Mike mentions Europe.
Europe needs dollars. Tons of dollars. To finance their dollar books.
Another thing is that maybe it is not the dollar strengthening but other currencies weakening.

Data released by the Washington-based Commodity Futures Trading Commission on Friday showed that the "net short position" of trades against the euro by hedge funds and speculators almost doubled in the week to March 3 to 19,431 contracts from 10,081 contracts a week earlier.

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Doctor Copper

Copper is breaking out. For some days now. While the longer term trend remains bearish, our renko charts show that the downward trend which took the metal from 4 USD last September 2008 to almost 1,20 USD in January has turned and that prices are slowly grinding upward.

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Another one

There goes Straumur. The last independent Icelandic bank has fallen. This can be read on their website:

In spite of its strong capital position and the support of funding banks Straumur Burdaras Investment bank hf. (Straumur) believes that its liquidity position is no longer strong enough to sustain its activities. The Icelandic Financial Supervisory Authority (IFSA) has therefore decided to assume the powers of a meeting of the shareholders of Straumur and immediately suspend the Board in its entirety. Further, the IFSA hereby appoints a Resolution Committee, which will take over all authority of the Board of Directors.

Too late for those people who need some cash today in Reykjavik

As a result of this Straumur is closed.

The good news is that all deposits are fully secured.

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A good laugh?

Our favorite joke these days ?

What is the difference between Ireland and Iceland?
Answer: One character and six months.

But it is a joke only.
Read this, and you will know why.

Less of a joke is this letter:

I own a small Advisory firm in Texas... and my fiancée happens to live in Simferopol, Crimea. I assure you I talk with her daily and she reports that reality there is in fact much worse than your current assumptions imply. Over the past 6 months... there have been continual shortfalls of water... electricity... bread... and other staples. Crime and general lawlessness has increased and in some districts, internet services have failed.
We have found that the only reliable way to wire transfer funds in this environment is through Western Union and her Export company banks with the country’s largest bank. If I knew of a way to buy puts on Ukraine I would... it is that bad.

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Stuff and penny stocks

I like DBC and DIG. Two ETF’s involved with companies making stuff.
I like stuff.
I like this too.
a recent report by Bridgewater Associates titled, "The Performance of Individual Stocks During the Great Depression."The best 20 performing large companies sailed through the depression relatively unscathed. Their earnings were roughly flat from the peak in 1929 until the bottom in 1933. On the other hand, the earnings of the worst 20 performing large companies fell so much that the losses were nearly as big as the prior profits. Despite this radical difference in earnings performance, the prices of the best 20 and worst 20 earning companies fell by similar amounts, -80% for the best and -96% for the worst.

This is happening. Right in front of our eyes.

This one is from Barry Ritholtz:
Here’s a short list of only the highest quality, bluest of blue chip, penny stocks:
AIG (39 cents), Citigroup (98 cents), E*Trade (66 cents), Fannie Mae (39 cents),
Freddie (39 cents), Unisys (37 cents)
Given the trading volumes, you might think these were real firms or something!
Now, for the not-quite-penny stocks:
Ford ($1.83), GM ($1.83), Las Vegas Sands ($1.97), MGM ($1.99), CIT ($2), Kodak ($2.50), Bank of America ($3.15), New York Times ($4.00), News Corp ($6.15), Xerox ($4.36), International Paper ($4.22), Alcoa ($5.55), GE ($6.75), Dow Chemical ($6.56), Wells Fargo ($7.95), Dell ($8.50).

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My precious...

Winter time and the living is easy. Gold is jumping because the weekend is nigh….

Nothing new here: it’s Friday and the gold price jumps.
How come?
Because shorts cover their positions as they are uncomfortable with the weekend coming.
And right they are.
An other uncertain weekend is staring upon us.
Will it be Ukraine or the ‘discovered’ trading loss of Merrill Lynch?
GM or GE?
The latter has fallen back to levels not seen since 1991, because this company fails to report bad news as it is. Bad.
GE is suffering from the Terminal Confidence Syndrome. When all rational approaches are doomed to failure, maybe Faith and the illusion of control, will carry the day

Back to gold.
Is it time to buy back some precious metals stocks?
We think it’s too early.
Due to leverage these stocks has to perform better than the price of gold itself.
It’s still not the case.
The ratio between both is showing this.

In the mean time: some companies, especially juniors have plunged so deep, that in normal times this would represent a screaming buy. Look to Linear Gold Corp (ticker: LRR.TO). This 22 million gold explorer has 19 million dollar cash in the bank. Ok, these stocks are small and risky. But since a couple of months in an uptrend.

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The game is on....

The Bank of England lowers rates to 0.5%, the ECB cuts to 1.50%...

The game is on.

The inevitable is coming. And it is coming quicker than everybody thinks: financial institutions will fail. At least some of them. Governments should act on the knowledge that is doesn’t makes sense anymore to rescue institutions who are sucking billion after billion after billion.
Take AIG.
This company is a black hole taking the rescuers, who try to save it, into the abyss. Yes, a bankruptcy will cause misery for a couple of years, but what’s the alternative…
As Jim Rogers says:
"I think it's astonishing, they're ruining the US economy, they're ruining the US government, they're ruining the US central bank and they're ruining the US dollar,"

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Digging coal

If you know that hedge funds start the day with 70% cash and finish a trading session with 70% cash than it’s clear why stocks were hammered in the end yesterday on Wall Street.
And it is also understandable why shorting is much more rewarding with this kind of strategy than going long: it takes less effort to push a stock 20% lower than makes it rise with the same percentage.
We saw yesterday on our renko charts the come-back of sector which has his own difficulties. Coal producing companies are not popular for the moment.
But our renko chart offers an buy signal

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More bleeding

Where stock markets are victim of hedge funds and leveraged ETF's, credit markets are less impacted by this kind of manipulations, but both markets go down the same way: deep south.

The cost of protecting European debt becomes more and more expensive. This cost is measured by the iTraxx-indices.
The Markit iTraxx Crossover index of mostly junk-rated corporates widened to 1123 basis points, meaning it costs €1,123,000 annually to purchase five years of protection on a notional amount of €10m. A premium which have to be paid every year.

The iTraxx Europe index of mostly investment grade names - seen as a useful indicator of credit sentiment towards the continent’s banks - widened by 4.2bp to 193bp.

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A silver lining ... for banks

How much are banks earning by collecting FDIC-backed bank bonds in the States? Underwriting these bonds and placing them is done in Europe with a 0,15% fee and in the States 0,30%.
That seems rather small, but once you start to add up the figures considering the size of the FDIC backed market, the amounts become substantial.
Ironic: the TARP recipient banks are the biggest underwriters of these bonds. So they are generating revenues on their own difficulties. And bonuses… of course.

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Fertile grounds?

Shares of fertilizer companies seem to be cheap based on figures of the past. But are they?
Demand is falling. So are prices of potassium, nitrogen and phosphate. Although it’s too early to say, there is a fat chance that margins are coming down. Lower profits will result in lower stock prices for companies as Potash or Mosaic.
After the mother of all (commodity) bubbles we saw already a plunge of more than 70% for these stocks.
Time to pick them up from here?
I am not sure as long as we are in this bearish environment.
Even more: as we look to a price to earnings ratio where we take average earnings over a period of ten year, these companies are still very expensive.
Potash Corp (market value: 23 bln USD), Mosaic (18 bln USD) and Agrium (6.3 bln USD) are traded at multiples of 45, 37 and 27 times earnings.
So there is definitely room for more adjustments.

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The Sage of Omaha speaks

The 2008 Chairman’s Letter from Warren Buffett is a must read for every individual investor. Not only because there is the self-confession, some jokes and the classic aphorisms but also an assessment of the world economy worth contemplating carefully. And there is the proof that even world class investors as Buffett can have it wrong. As the Sage of Omaha admits.
At the end of 2008 Berkshire’s entire equity portfolio had a market value of 49 bln USD and a cost basis of 37 bln USD.
Last Friday the market value has fallen back to 37 bln USD equaling the cost basis.
A sobering observation.
We also retain following muses:

"As we view GEICO's current opportunities, Tony (Nicely) and I feel liketwo hungry mosquitoes in a nudist camp. Juicy targets are everywhere."

And on the financial crisis

"As the year progressed, a series of life-threatening problems within manyof the world's great financial institutions was unveiled. This led to adysfunctional credit market that in important respects soon turnednonfunctional. The watchword throughout the country became the creed I saw onrestaurant walls when I was young: "In God we trust; all others pay cash."

And on 2008
"During 2008 I did some dumb things in investments. I made at least one
major mistake of commission and several lesser ones that also hurt. I will tell
you more about these later. Furthermore, I made some errors of omission,
sucking my thumb when new facts came in that should have caused me to
re-examine my thinking and promptly take action. "Additionally, the market value of the bonds and stocks that we continue to hold suffered a significant decline along with the general market. This does not bother Charlie and me. Indeed, we enjoy such price declines if we have funds available to increase our positions. Long ago, Ben Graham taught me that 'Price is what you pay; value is what you get.' "Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down."

And on derivatives

"Derivatives are dangerous. They have dramatically increased the leverageand risks in our financial system. They have made it almost impossible forinvestors to understand and analyze our largest commercial banks and investmentbanks. They allowed Fannie Mae and Freddie Mac to engage in massivemisstatements of earnings for years. So indecipherable were Freddie and Fanniethat their federal regulator, OFHEO, whose more than 100 employees had no jobexcept the oversight of these two institutions, totally missed their cooking ofthe books."

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Weapons of mass destruction

Why is AIG receiving more support than Citigroup?
Because this insurer is what Brussels is to Europe: the core of the derivative mess?
The big beneficiaries of the AIG rescue are Goldman Sachs, Societe Generale, Deutsche Bank and Merrill Lynch.
Mention how rating agencies maintain their rating for AIG. Based on what?
AIG is the backdoor to funnel money to banks, it seems. Because these are names you never hear off and who can give any reason why they would be different from Citigroup or Bank of America?
This thing is scaring as there is no transparency allowed.

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