Saturday, May 9, 2009

Will The Real Chryslergate Fallout Please Stand Up

Now that the issue of those pesky first lien hold outs has been dealt with once and for all, the Chrysler saga audience can turn their attention to the more relevant question of how the bankruptcy will actually affect not only upstream suppliers' production and their employment levels, but the overall domestic and global economy. In order for readers to grasp the magnitude of the 2nd and 3rd derivatives of this implosion, I republish the most recent docket notification list, which demonstrates just how many entities have an immediate vested interest in this case.

More relevantly, the question arises of just what all the Chrysler posturing will imply for the process of the inevitable GM bankruptcy, which as of today is a mere 3 weeks away. If the Chrysler case study is any indication, the administration will once again put the blame solidly on any and all investment fiduciaries (i.e. ad hoc bondholder committee) who are unwilling to relinquish absolute priority, which is not surprising. What is paradoxical, as was in the Chrysler case, is that the administration needs bankruptcy in order to cancel and amend existing contracts, full stop. If Rattner can scapegoat someone in the process of filing GM, so much the better - he would thus accomplish his operational mission of fixing a terminally faulty contractual system and take the political pressure off his master with his core UAW constituency. Of course, the derivative of the latter is that one may very well expect a million man march, fully equipped with tar and feathers, on Wall Street from Detroit come June 1st when the bankruptcy is official.

Thereby the politics of the problem, as Homer Simpson would say, are "wrapped in a neat, little package." And after all, Obama has thus far been a master of the depoliticizing of any economically disastrous issue, and removing any potential blame from D.C. and associated lobby group interests and redirecting to the populist path of least resistance. What would be a curious detour is if the ad hoc creditor committee were to relinquish any claims against their paltry 10% equity in the pro forma company, and thus call Obama's bluff, who would still need to pursue the bankruptcy court route, however this time with no "straw man" scapegoat available.

But the real question remains, now that we are set on the course of epic bankruptcy fall out, bizarro market moves notwithstanding, what really happens to the U.S. economy?

For an attempted answer, I turn my attention to a series of articles by none other than Moody's, which in all fairness, has actually been providing some rather admirable primary research as of late. Moody's focuses on the problem from several angles, the first of which is the question of containment and the fate of GM.
Despite the Obama administration’s assertion that Chrysler’s filing will be “a quick and surgical” reorganization under section 363 of the Bankruptcy code, the process could be more complicated, contentious and protracted than the government anticipates. In addition, it is uncertain whether various government initiatives will be effective, such as those to contain the collateral damage of the Chrysler filing on the rest of the U.S. automotive sector, and the government’s commitment to supporting Chrysler through the bankruptcy process.

It is clear that the Chrysler bankruptcy filing will help define the path that a GM bankruptcy filing might take. However, because of the complex, highly fluid, and largely uncharted nature of many of the legal and operational issues surrounding the bankruptcy of a U.S. auto manufacturer, it is unclear how that path will evolve. It is also unclear whether the bankruptcy filing of Chrysler will materially increase or decrease the likelihood that GM will follow Chrysler down that path. We continue to believe that the probability of a GM bankruptcy is very high, as reflected in the company’s Ca Corporate Family and Probability of Default Ratings.

The ongoing resolution of the Chrysler bankruptcy process will have an important impact on the behavior of GM’s constituents including creditors, the UAW, suppliers, dealers, and the U.S. government, and on their respective willingness to make concessions necessary to avoid a bankruptcy filing. GM has until May 31 to resubmit a viable restructuring plan to the government or it may be forced to file for bankruptcy. To date, the company has not been able to accomplish the three key targets identified by the government as being essential to a viable plan: eliminating two-thirds of its unsecured debt; achieving UAW wage and benefit parity with transplants; and, reaching an agreement with the UAW allowing the company to fund up to half of its future VEBA contributions with company stock.

The legal issues that will be addressed by the court hearing the Chrysler proceedings include: collateral valuation, the potential sale of assets, determinations of adequate protection for secured lenders, the priming of secured lenders’ interest by the government as debtor-in-possession lender, priority of claim of unsecured creditors, and the rejection of burdensome contracts. The court’s determinations in these matters, and the time frame necessary to conclude the proceedings, could well determine the degree to which GM’s various constituents, including the government, view bankruptcy as an effective path for GM.

In addition to the legal issues that the bankruptcy path poses for Chrysler and potentially for GM, this path also poses a number of operational risks. All of the Detroit-3 OEMs have maintained that there are considerable operations risks associated with a bankruptcy filing by any of them. These risks include: 1) a rapid and severe decline in shipments as consumers retreat from the products of a manufacturer that has filed for bankruptcy; 2) a resulting decline in the retail price of vehicles sold by the filing OEM; 3) wide-spread bankruptcies among that OEM’s already stressed supply base; and, 4) increased stress upon other OEMs due to price pressure within the new car market, and the mutual dependence upon suppliers.

The Obama administration and its Automotive Task Force recognize these risks, and have taken a number of relatively aggressive steps to contain the collateral damage and disruption that could potentially result from an OEM’s bankruptcy filing. These initiatives include:
  • Providing government guarantees for new-car warranties of Chrysler and GM vehicles;

  • Providing government guarantees for approximately $5 billion in Chrysler and GM payables due to suppliers.
In addition to these initiatives, which were put in place prior to the Chrysler filing, the government has taken two critical steps intended to support a successful reorganization of Chrysler and limit the disruption within the U.S. automotive sector. These steps are:
  • Providing debtor in possession financing for Chrysler;

  • Arranging for GMAC to provide retail and wholesale financing in support of Chrysler’s operations.
Since December 2008, when GM and Chrysler accepted government bailout loans, consumer anxiety about the ongoing viability of each company has taken a toll on their U.S. shipment levels and contributed to a loss of market share. In contrast, Ford, which has consistently maintained that it does not need government loans, has picked up share. Consumer willingness to purchase Chrysler’s products now that it has filed will be a critical near-term development that will be closely watched for indications of the revenue pressure that GM might face in the event of a filing. We expect that despite government support there would be an initially high degree of consumer reluctance to purchase a vehicle from GM were it to file for bankruptcy. This would exacerbate the pace of cash burn, and increase the level of government loans that would be needed. Nevertheless, we believe that the government will continue to view bankruptcy as an option if GM is unable to formulate an acceptable restructuring plan.

Although suppliers to Chrysler and the other domestic OEMs are vulnerable to an OEM bankruptcy, their greatest risk comes from the production cutbacks that will occur irrespective of whether an OEM restructures in or outside of bankruptcy. Consequently, additional government support for suppliers may be necessary in order to insure the viability of the Detroit-3.
Moody's then goes on to consider the likelihood of just how surgical this bankruptcy could be.
Section 363 provides the basis for major asset sales, rejection of burdensome contracts and the use of secured creditors’ collateral for a company’s “fresh start” envisioned by the code. But it is also structured to ensure procedural fairness for all creditors with an interest in the bankruptcy estate. Property of the bankruptcy estate under section 363 can only be used over the objections of a party with an interest in that property after the issues have been fully litigated in formal hearings. A 363 proceeding would likely include hearings on collateral valuation, among other things, with expert witnesses from each side.

Section 363 mandates that any party with an interest in property to be used in a reorganization receive “adequate protection” in order not to violate the U.S. constitution’s “takings clause.” A security interest is a property interest. In this respect, the U.S. and Canadian governments’ $4.5 billion DIP loan ironically could further prolong the bankruptcy process. The code allows first lienholders’ interest to be primed or superseded (in exchange for a replacement lien) by debtor-in-possession (DIP) lenders provided the “adequate protection” standard is satisfied. “Adequate protection” hearings involve complex issues such as whether secured lenders have a comparable equity cushion in any substituted collateral. In this respect, the holdout lenders also could contest a proposed sale of “good assets” to Fiat under section 363 as not affording them “adequate protection.”

Furthermore, secured creditors contesting a reorganization plan can argue that the value of the collateral in which they have a security interest is well in excess of that proposed that they receive by the plan’s proponents. The bankruptcy code includes a “best interest” test under which each interest holder will receive at least as much under a Chapter 11 plan as it would in a Chapter 7 liquidation. If the holdout lenders prevail in such an argument, they could seek to convert the proceeding to a Chapter 7 liquidation. Alternatively, the reorganization plan would need to be renegotiated so as not to violate the “best interest” test.

All these issues need to be resolved before any vote on a reorganization plan – even if the plan’s proponents have the necessary votes. And given the continuing decline in the fortunes of the auto industry, the plan’s “feasibility” – which they must demonstrate to the court – may become a real issue, particularly if the proceedings become protracted.

Whatever scenario eventually unfolds, the Chrysler bankruptcy is historic and may become either a template or a warning sign for future bankruptcies, such as that of General Motors. At this point, it is difficult to make any predictions other than that the process is likely to take considerably longer than the 30 to 60 days projected by the administration.
Now that the lender hold out issue has been resolved, this might indeed streamline the process somewhat, however in the odd chance that some overbidder to Fiat's stalking horse bid does emerge out of left field, the process is likely to be detoured into a lengthy, burdensome and expensive process: just what all the various lawyers are currently hoping for.

But back to the law of unintended consequences. It has long been Zero Hedge's contention that the ultimate impact on the upstream suppliers to the D-3 is where the pain will be most acute. Moody's agrees.
Chrysler LLC’s bankruptcy will likely lead to further financial and operating disruption within the automotive supplier sector. The ratings of issuers within the sector that are most exposed to Chrysler’s bankruptcy have been adjusted in anticipation of a filing; many have Corporate Family ratings in the Caa category, reflecting an elevated risk that they too may need to seek bankruptcy protection. However, a potential liquidation of Chrysler under Chapter 7 of the bankruptcy code would have a more severe impact on expected loss assumptions for certain automotive suppliers. In such a scenario, further downward adjustments of ratings could be necessary.

In December 2008, we estimated that there was a 70% likelihood that one or more of the Detroit-3 auto manufactures would file for bankruptcy. Since that time, the Obama administration and its Automotive Task Force have taken steps to help mitigate the potentially disruptive effect that an uncontrolled, free-fall bankruptcy could have for the domestic automotive supplier sector. These steps include providing a guarantee of selected automotive supplier receivables through the Auto Supplier Support Program, and actions to support GM and Chrysler vehicle warranties. Details of these programs are developing.

The administration will likely continue to take steps to contain the disruption that might be caused by Chrysler’s bankruptcy. However, given the high level of interconnection among automotive manufacturers, automotive suppliers, and other constituents, uncertainty remains as to how successful these programs will be in providing support for the auto supplier industry.

...Automotive manufactures are continuing to adjust manufacturing capacity to the lower level of consumer demand, while announcing the elimination of certain underperforming models and brands. The radical changes occurring at the automakers will necessitate restructurings of a similar scope among the parts suppliers, and could give rise to more bankruptcies in the industry.
Additionally, the impact on domestic auto retailers should also not be ignored. This is especially relevant as this is a sector that has seen an impressive short squeeze recently, and current shareholders would be well-advised to consider all potential implications from the slow death of the D-3.
We expect the initial impact on rated auto retailers from the Chrysler’s bankruptcy to not be material. As the rated dealers generate a limited portion of their sales from Chrysler products, we expect this event will be manageable, absent contagion spreading to the industry as a whole. Our primary focus for auto retailers from this event will be on liquidity, and assessing whether or not weaker operating performance will reduce headroom under financial covenants for any of the auto retailers’ committed credit facilities.

The larger auto retailers that we rate, listed below, have been reducing their exposure to the Detroit-3 for some years. The exhibit shows the rated universe and their disclosed contributions to total new unit sales from all Chrysler brands (including Dodge, Jeep and Chrysler).

It is important to note that while new car sales are a large driver of an auto dealer’s revenue, profitability is driven primarily by parts and service (particularly servicing cars that remain under manufacturer warranty) and finance and insurance sales. Used car sales are an important, and less volatile, contributor as well.

We have taken a number of negative rating actions in the auto retailing sector in 2009, primarily as credit metrics weakened as consumers deferred purchases of new and used cars and ancillary services. The deteriorating positions of Chrysler and General Motors, specifically, have not been significant drivers of these recent rating actions.

The framework agreed to by Fiat, Chrysler, the UAW and the U.S. and Canadian governments as part of the Chapter 11 filing contains certain elements that will limit disruption for rated auto dealers:

The U.S. Treasury will make available the Warranty Support Program to Chrysler, which will provide a U.S. Treasury backstop on the orderly payment of warranties for cars sold during the restructuring period. This program should help support values of new cars held and to be acquired by auto dealers and facilitate sales to the end consumers.

Chrysler will enter into an agreement with General Motors Acceptance Corp (GMAC) to provide dealer and customer financing. The U.S. Government will support GMAC in its support of the Chrysler business, including liquidity and capitalization.

Chrysler will seek “first day” hearings to honor customer warranties and dealer incentives for those dealers who are expected to be part of Chrysler’s distribution network going forward. Certain higher risk dealers have been identified by Chrysler and GMAC and will not continue with Chrysler. To date, the names of these dealers have not been made public. However, in view of the overall standing of the rated auto retailers, we would expect few, if any, of their individual Chrysler dealerships to be on the list for anticipated wind down.

We do not rule out some level of modest short-term disruption to rated auto retailers as some dealerships are closed and their inventories liquidated and also due to consumer uncertainty in the initial stages of the bankruptcy. We will monitor developments with Chrysler, noting these developments may also create some precedent in the event there is a similar restructuring or otherwise by General Motors in the near term.
Lastly, and perhaps most importantly, is the consideration of the impact on U.S. financial institutions that have numerous and branched interests in both auto producers through direct and indirect exposure.
The bankruptcy of Chrysler and, possibly, of other manufacturers/suppliers will surely affect some banks, although in a limited way. Most directly, the exposures they do have will become impaired. However, the long timeline associated with domestic auto manufacturers’ decline is a primary reason that the rated U.S. banks have relatively limited direct exposures to the Detroit-3. Over a period of several years, banks exited or otherwise reduced their exposures. Those who are still exposed have significantly marked down their assets.

A number of U.S. banks, particularly those with lending concentrations in the industrial Midwest, also have exposure to primary suppliers of the domestic manufacturers. Nonetheless, many banks that remain exposed to the industry have been able to shift from unsecured credit facilities into secured exposures, where possible, and they have been provisioning for possible losses. Therefore, for rated U.S. banks, direct exposure to domestic auto manufacturers and suppliers is largely secured and not a major concentration risk. As a result, we do not consider auto manufacturer or supplier exposure to be a rating driver for any U.S. bank and the developing situation at both Chrysler and General Motors should not have material rating implications for the banks.

Although auto supplier exposures are a risk, the U.S. Treasury’s Automotive Supplier Support Program will likely enhance the viability of the supplier network by supporting payment of a bankrupt manufacturer’s receivables. That, in turn, will support the repayment of credit that the banks have extended to those suppliers. Other ripple affects from a possible bankruptcy will be felt, including those that impact small businesses and consumers in the local communities where manufacturing is concentrated. Local housing markets, already under pressure, will be further strained as unemployment remains elevated. Finally, future business volumes in those communities, potentially both deposits and loans, will suffer.

Despite these obvious challenges, the direct rating impact from any manufacturer bankruptcies will also be limited by the fact that the majority of rated U.S. banks tend to operate in multiple markets and have diversified portfolios. As an example, Comerica (rated B- for bank financial strength and A1 for deposits with a negative outlook) has disclosed a 46% drop in auto manufacturer/supplier outstandings since year-end 2005, to $1.5 billion at February 28, 2009. In addition, Comerica, which until recently was headquartered in Detroit, reported no direct exposure to Chrysler and less than $100 million in combined exposure to GM and Ford.

These balances compare with roughly $6 billion in tangible common equity (including hybrid equity credit). As a result, although Comerica is comparatively more exposed to the auto sector than many of its peers, its overall exposures have been reduced and are manageable within the context of its capital base. We believe that is the case throughout the rated banking universe.

Another potential concern is exposure to auto dealers, either through floor plan lending or through lending against a dealership’s real estate assets. Even if some or all of the auto manufacturers do not go bankrupt, the number of dealers is widely expected to decline significantly. However, the impact on most rated U.S. banks in this scenario is also limited.

This is so because the rated banks have, for the most part, focused on large dealer groups, which are those dealers with multiple locations and multiple franchises, both foreign and domestic. In contrast, smaller dealers that are exposed to only one domestic manufacturer are often financed by that manufacturer’s captive finance company or by a local community bank. Nonetheless, the bankruptcy of one or more domestic manufacturers could result in some credit losses from this business for the rated U.S. banks.
While there are no definitive conclusions to be drawn at this point, the bankrtupcy of Chrysler and, in short order, General Motors, will, just like the bankruptcy of Lehman Brothers, almost definitely comprise a core case study in business schools on the law of unintended consquences. Unlike the Lehman chapter 11, which was at the heart of the financial system and thus its impact was felt instantaneously, the D-3 fallout will be gradual, more pervasive, and as inhibitory measures take much longer to be enforced, likely have a much more adverse and far-reaching impact on both the U.S. and global economy.

The administration has started down a path from which there is no return, and while for the time being everyday cheerful TV appearances can mollify and suspend disbelief in what is happening due to the phenomenally orchestrated bull market now in its 10th week, the instant rationality returns (again, not if but when) to the market and cooler heads prevail, we will see the same market response as was witnessed in the days and months after September 15th, only this time, there will be no quick acronym-alphabet soup fix. Sphere: Related Content

Friday, May 8, 2009

Bizarro Market: End Of Week Edition

A frail attempt to explain some of the stranger performance reported previously on Zero Hedge.

SPY heatmap
: New (financial) trash leads the way, inflation up, deflation down.

Quantology: Faster moving quants replaced old trashy shorts with new financial and REIT trash long positions and won the game of competitive re-leveraging. Obviously, widely-held household name consumer staples (you know, companies with solid fundamentals) replaced old trash on the short side of the quant books. Aggressive, agile smaller, faster quants kept on sucking away their larger brethrens' p&l.

Dead Presidents: The Spot Dollar index sliced through 200 DMA and the weaker, err crushed, dollar should have benefited international powerhouses of consumer staples but unfortunately that would be only far too logical. Doing what makes sense has been a sure way to loose valuable capital in the very short term (yet well backtested in the past) and those strategies have been promptly depreciated for good.

NYSE volume: Chunky NYSE volume was again dominated by quants and punters in financial stocks and ETFs. Individual names in anything financial were chased with reckless abandon. Who needs the safety of index ETFs? SPY had volume inline with its 20 day average.

Boiler rooms: TARP-o-matic quantitative SLP boiler rooms provided 'liquidity' for quality PG sellers all the way down almost 2% at ever lower bids just to cover shorts into the close. PG closed up paltry 0.45% on short covering strength underperforming the S&P 500 by almost 2%, while FITB was up 59% on a rocket fuel trail mix of moral hazard, short covering and unlimited intraday leverage of institutional punters. Boiler room prop quants enhanced their winning day by loading up into FAS longs and FAZ short. FAS closed up over 20% and FAZ down about 21%.

Advertised SPY Vol: Looks like the nation of Swiss domination continues, although our MS friends are stealthily creeping back over the horizon, yet not shiftily enough to avoid radar detection.

Sphere: Related Content

FDIC Failure Friday: Casualty #33, And More On The Stress Test

Just like a Swiss watch, bank failure #33 for the year is Westsound Bank, of Bremerton, Washington. The bank's assets will be assumed by Kitsap Bank of Port Orchard.
As of March 31, 2009, Westsound Bank had total assets of $334.6 million and total deposits of $304.5 million. Kitsap will not assume the approximately $9.4 million in brokered deposits. The FDIC will pay the brokers directly. Customers who placed money with brokers should contact them directly for more information about the status of their deposits.
So aside from the weekly collapse of the peripheral banking system and the gamed stress test, everything is ok.

And speaking of gaming the stress tests, the WSJ is out with this article which even a few weeks ago would have been (marginally) shocking, but at this point draws only sighs of resignation.
The Federal Reserve at the last minute significantly scaled back the size of the capital hole facing some of the nation's biggest banks, following days of intense bargaining over the stringency of the stress tests.

When the Fed last month informed banks of its preliminary stress-test findings, executives at banks including Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. were furious... At Fifth Third, the Fed was preparing to tell the Cincinnati- based bank to find $2.6 billion in capital, but the final tally dropped to $1.1 billion.
Luckily there is such a thing known as regulatory supervision of massive financial impropriety, known as the Securities & Exchange Commission, which will imminently investigate these allegations of political manipulations within the "stress" test, which has somehow ended up being merely a means of suckering yet more naive investors' cash to hurt the few brave souls still short, under the guise that everything with our banking system is ok. After all, on the charter page of the SEC, one finds the following fairy tale:
The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.
At this point one gets tired of even being indignant. Sphere: Related Content

RIEF/B Underperforms S&P By 8.3% In First Week Of May

Combined with the 18.7% underperformance for the month of April, RenTec's external fund is
now down 27% versus the S&P since April 1.

Sphere: Related Content

Green Shoots Or Rose-Colored Glasses

Just like yet another posthumous multi-platinum Tupac record, David Rosenberg resurfaces on Zero Hedge... Although, unlike Tupac, this is almost guaranteed the last incarnation of Rosie while a Merrill employee, doing what he does best - talking about employment trends and the consumer.

This is a boom compared to the post-Lehman collapse

Only the most ardent optimist would lay claim that the employment report today was a green shoot. Yes, yes, the -539,000 was broadly in line with ‘whispered’ estimates and certainly is less negative than the -707,000 average over the prior three months. If the benchmark for economic revival is the aftermath of the Lehman collapse when the credit market froze, suppliers went AWOL and consumers became comatose, then indeed, this looks like a virtual boom.

Nothing in today’s jobs report gives us that much comfort

But, in fact, all that has changed is the slope of the line when it comes to employment, output, spending or income. It is no longer pointing straight down in Wile E. Coyote fashion, but the fundamental trend is still down. Green shoot advocates miss the point. Recessions only end when the improvement in the second derivative morphs into something less fragile and more agile like improvement in the first derivative. Real cyclical bull markets only start once we are within 4-5 months of that improvement in the first derivative. Nothing in today’s jobs report gives us that much comfort.

January’s 741K decline was likely the worst we will see

At the risk of shooting the green shooters, let’s really assess the situation. Barring a catastrophe, it certainly looks as though the -741,000 print we saw in January was very likely the worst decline we will see in this recession. We won’t dispute that. But when you look at other cycles in the post-war era, what we see is that four months after the largest payroll decline, the losses are either negligible or we are actually swinging to positive job growth.

Employment has never been this weak before at this stage

So, the most appropriate way to examine the data is to see what the labor market looks like at this stage – four months after the biggest monthly collapse – and we have news for you: We are losing 539,000 jobs, or 0.4% of the workforce. In fact, employment has never been this weak before at this stage – a full four months after the worst figure. Not once. This post-credit collapse/asset-bubble burst cycle remains an enigma, and we strongly believe that investors today who are buying stocks and selling bonds in anticipation of a sustained reflation trade are going to end up as disappointed as they were under similar conditions in 2002.

Headline was actually worse than revised forecasts

As for the payroll report, the headline data was flattered by the addition of federal Census workers, which bolstered government payrolls by 72,000. The BLS birthdeath adjustment, when properly adjusted, also ‘skewed’ the number by nearly 60,000. So basically, adjusting for the Census workers and the Alice in Wonderland B-D adjustment, the headline payroll figure was really closer to -670,000. This means that the number was actually quite a bit worse than the post-ADP revised forecasts were calling for (shhh …don’t tell Mr. Market).

Widespread declines in private sector payrolls

Private sector payrolls actually sank 611,000 in April. The declines remain remarkably widespread with the diffusion index at 28%, which means we still have nearly four industries shedding their labor requirements for every industry that is bulking up on staffing (though admittedly a moderate improvement from the prior few months). Moreover, the data just do not square with the conventional wisdom permeating the investment landscape at the present time.
To wit:

You couldn’t tell we are in the midst of a commodity boom from this report, with employment in natural resources down 11,000.

And, we can see what an exciting 34.4 print on the ISM employment index brought manufacturing workers last month – 149,000 additional pink slips.

If the tech sector is back in revival mode, as we are told, then someone forgot to tell the HR departments at the firms that dominate this space because payrolls were cut 12,000. This was even worse than the 8,000 decline in March.

We keep hearing about how the real estate market is nearing some sort of bottom, and yet construction payrolls fell 110,000 and there were also 15,000 fewer real estate agents putting up ‘For Sale’ signs.

The leisure/hospitality stocks have been really hot of late. Here, we see that this industry laid-off 44,000 busboys, bell captains and bartenders last month in one of the worst numbers this sector has turned in during this down-cycle.

We would only have to assume that retailers were not fooled by the late timing of Easter in artificially underpinning their April sales results because they shed 47,000 workers on top of the 167,000 folks who were let go in the first three months of the year.

We keep hearing about how global exports and trade flows are now on a renewed uptrend, but again, there was no evidence of this in the payroll report considering that transportation services/warehousing employment tumbled 38,000. This was the very worst showing since right after 9-11. Green shoots for some economists, perhaps, but yellow weeds for any rational observer of what is really going on in the most crucial market of all for the economy – the labor market.

Even sectors that had been solid growth performers are now feeling the
spreading impact of this new world of frugality. Job gains of 15,000 apiece in education and health care are but a fraction of what were seeing before the credit collapse.

Amount of labor market slack is growing by the month

What is important about the employment data is that it provides us with so many clues as to what the inflation backdrop really looks like. So many market pundits draw their conclusions from the CRB index but there is no commodity that is any match for the labor market when it comes to determining the sustainability of any inflation pressure in the system. Even though the headline employment data are becoming “less negative”, if that is what turns you on, the reality is that the amount of slack in the labor market is growing by the month.

The unemployment rate jumped from 8.5% in March to a 26-year high of 8.9% last month – hard to believe it was sitting at 5% on the nose just this same time last year. Even here, the ‘official’ jobless rate grossly underestimates the degree of excess capacity in the labor market. The U-6 unemployment rate, which includes all forms of resource slack in the jobs sphere, edged up to a new lifetime high of 15.8% April from 15.6% in March.

Slack in labor market filtering into wages

This growing slack in the labor market is filtering through into wages. We see that average hourly earnings barely eked out any increase at all in April. This suggests that in real terms, personal income fell at least 0.1% during the month. That would make it four declines in a row for this critical 90% chunk of the economy. Not only that, but the steep slide in manufacturing payrolls – even with a pickup in overtime – spells for another 1.2% decline in industrial production for April. This, in turn, would take the capacity utilization rate – the ‘unemployment rate’ for industrialists – down to a record low 68.5% from 69.3% in March.

We maintain our constructive stance on Treasuries

As economists relying on data back to 1950, we have to admit that at no time have we ever seen the broad unemployment rate so high and the CAPU rate so low, and to think that any worker has any bargaining power or that any business has any pricing power given the massive amount of spare capacity in the labor and product markets is truly unfathomable. So it is against this deflationary backdrop that we maintain our constructive stance on safety and income and at a reasonable price, acknowledging that the Treasury market has moved aggressively against our view over the near-term. We are not swayed.

The duration of unemployment is surging

We can also see the strains from other pieces of the report. The male unemployment rate hit the 10% mark for the first time since June 1983. For both genders, the average length of time it is taking the ranks of the unemployed to find a new job has risen to 21.4 weeks from 20.1 weeks in March and 19.8 in both January and February – this is the highest level on record. The share of the unemployed who have been out of work for at least 15 weeks jumped 43.5% in March to 45.9% in April. The comparable figures for those who have been out of work at least a half-a-year jumped to 27.2% from 24.2% and up 5 percentage points since the turn of the year.

Job openings are practically non-existent

So, beneath the headline, what is so painfully obvious is how hard it is to find a new job – openings are practically non-existent. And what is truly grim is that the longer someone is out of work, the more discouraged they become, and over time, completely disengaged. For example, the number of permanent job losses has now approached almost six million for the first time on record and is up 176% over the past twelve months.

Most of these jobs lost will not be coming back

So, sadly enough, not only have we lost 5.6 million payrolls this cycle, shrinking the workforce by more than 4%, but the fact that there are so few opportunities as businesses adjust their production schedules to a new and permanently lower sales trendline, the data within the data reveal that most of these jobs are not going to come back anytime soon. While it is part of human nature to be hopeful, we can’t imagine that anyone can really put any sort of positive ‘spin’ on this report, but whoever does ostensibly didn’t get to Table A-8 on the complete unemployment picture.

We’re out of the hurricane, but it is still raining

There may be a growing sense that because the stock market has enjoyed a nice bounce, credit spreads have come in and new issue activity has perked up, that somehow things are going to get better in the real economy. Not so fast. We may be out of the hurricane, but it’s still raining outside. The economy bottomed in the summer of 1932 but the Depression did not end for another nine years and as a reminder, by the end of that decade, after seven years of grandiose New Deal stimulus, the unemployment rate was still at 15%, consumer prices were deflating at a 2% rate and we still had yet to reach the pre-Depression peak in GDP.

We must brace ourselves for a much more frugal future

Better does not mean good, and we must all brace ourselves for a much more frugal future. This does not mean the world falls apart. It means that lifestyles are going to change: frugality replaces frivolity, the family budget plan includes more savings for retirement and education, attitudes towards credit and discretionary spending shift, and owning the largest home on the block and the flashiest car is no longer going to be fashionable.

Focus on high-quality securities

For investors, this means focusing on high-quality securities – not the ‘junk’ that has led the way in this impressive but, in our view, still-vulnerable rally in risky assets. For those that missed the big nine-week move, don’t worry. Be patient. The story was right – the tortoise always wins the race.

Another 550,000 payroll plunge in May

As for the near-term employment outlook, some believe that the jobs data are about to look better because the markets have enjoyed a nice two-month rally. We will forecast the data on the tried, tested and true leading indicators on the ground. The still record-low workweek, at 33.2 hours, the 66,000 downward revisions to the back data (which tends to feed on itself) and the 63,000 slide in temp agency employment, coupled with the levels of both initial and continuing jobless claims, are foreshadowing a further 550,000 payroll plunge when the May data roll out in early June. That green shoot just turned into a dandelion!

Needles in the proverbial haystack

We don’t want to finish up on such a dour note. As with every report, there were some needles in the proverbial haystack. For example, the Household survey showed a 120,000 employment pickup but in reality, it was only a modest retracement from the 861,000 slide in March, not to mention the cumulative 2.5 million jobs lost in the first four months of the year. Even here, there is less than meets the eye, because three-quarters of the gain in the Household survey was people taking on a second job. Again, as we peel off the layers of this onion, we learn that whatever good news there may have been wasn’t so good. Best to stop there … and smell the weeds! Sphere: Related Content

Daily Credit Market Summary: May 8 - All Not Rosy

Spreads were mixed in the US with IG tighter, HVOL improving, ExHVOL weaker, XO wider, and HY rallying (although IG decompressed most of the day). Indices generally outperformed intrinsics with skews widening in general as IG's skew decompressed as the index beat intrinsics, HVOL outperformed but widened the skew (seems like single-name shorts being placed with HVOL hedge), ExHVOL's skew widened as it underperformed, XO's skew increased as the index outperformed, and HY outperformed but narrowed the skew.

32% of names in IG moved more than their historical vol would imply as higher vol names outperformed lower vol names by 0.68% to 1.86%. IG's vol is around 4.38% per 1 day period, which leaves 98 names higher vol and 27 lower vol than the index.

The names having the largest impact on IG are Textron Financial Corp (-57.13bps) pushing IG 0.43bps tighter, and Macy's, Inc. (+35bps) adding 0.27bps to IG. HVOL is more sensitive with Textron Financial Corp pushing it 1.93bps tighter, and Macy's, Inc. contributing 1.19bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Wells Fargo & Company (-32.5bps) pushing the index 0.34bps tighter, and Kohl's Corporation (+11bps) adding 0.11bps to ExHVOL.

The price of investment grade credit rose 0.14% to around 98.14% of par, while the price of high yield credits rose 0.62% to around 82.25% of par. ABX market prices are higher (improving) by 0.24% of par or in absolute terms, 0.35%. Broadly speaking, CMBX market prices are lower by 1.43% of par. Volatility (VIX) is down 1.49pts to 31.92%, with 10Y TSY rallying (yield falling) 5.2bps to 3.29% and the 2s10s curve flattened by 2.8bps, as the cost of protection on US Treasuries fell 2bps to 27bps. 2Y swap spreads widened 1.3bps to 46.25bps, as the TED Spread tightened by 1bps to 0.77% and Libor-OIS improved 0.7bps to 74bps.

The Dollar weakened with DXY falling 1.68% to 82.529, Oil rising $1.81 to $58.52 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 2.67% today (a 1.51% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $4.65 to $915.35 as the S&P rallies (922.8 1.74%) outperforming IG credits (143bps 0.14%) while IG, which opened tighter at 140.5bps, underperforms HY credits. IG11 and XOver11 are -2.25bps and +5.5bps respectively while ITRX11 is -0.5bps to 124bps.

The majority of credit curves flattened as the vol term structure steepened with VIX/VIXV decreasing implying a more bearish/more volatile short-term outlook (normally indicative of short-term spread decompression expectations).

Dispersion fell 10.2bps in IG. Broad market dispersion is a little greater than historically expected given current spread levels, indicating more general discrimination among credits than on average over the past year, and dispersion decreasing more than expected today indicating a less systemic and more idiosyncratic narrowing of the distribution of spreads.

49% of IG credits are shifting by more than 3bps and 40% of the CDX universe are also shifting significantly (less than the 5 day average of 57%). The number of names wider than the index stayed at 39 as the day's range fell to 12.25bps (one-week average 11.85bps), between low bid at 135 and high offer at 147.25 and higher beta credits (0.21%) outperformed lower beta credits (1.29%).

In IG, wideners outpaced tighteners by around 3-to-2, with 60 credits wider. By sector, CONS saw 78% names wider, ENRGs 19% names wider, FINLs 10% names wider, INDUs 46% names wider, and TMTs 57% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG12 exFINLs) with the former trading at 124.94bps and the latter at 114.57bps.

Cross Market, we are seeing the HY-XOver spread compressing to 291.21bps from 319.03bps, and remains below the short-term average of 316.26bps, with the HY/XOver ratio falling to 1.39x, below its 5-day mean of 1.41x. The IG-Main spread compressed to 19bps from 21.63bps, but remains above the short-term average of 18.26bps, with the IG/Main ratio falling to 1.15x, above its 5-day mean of 1.14x.

In the US, non-financials underperformed financials as IG ExFINLs are wider by 1bps to 114.6bps, with 30 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 17.82bps to 159.82bps, with Finance names (worst) tighter by 24.08bps to 774.69bps, Brokers (best) tighter by 25bps to 207.08bps, and Banks tighter by 20.93bps to 196.37bps. Monolines are trading tighter on average by -94.24bps (3.31%) to 2295.75bps.

In IG, FINLs outperformed non-FINLs (3.3% tighter to 0.88% wider respectively), with the former (IG FINLs) tighter by 12.3bps to 359.9bps, with 13 of the 21 names tighter. The IG CDS market (as per CDX) is 0.7bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (142.3bps), with the bond ETFs underperforming the IG CDS market by around 0.32bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) rallied 0.03bps to 124.94bps (with ITRX FINLs -trending tighter- better by 2.38 to 120.25bps) and is currently trading tight to its week's range at 0%, between 143.04 to 124.94bps, and is trending tighter. Main LoVOL (trend tighter) is currently trading tight to its week's range at 0.01%, between 102.21 to 91.63bps. ExHVOL underperformed LoVOL as the differential decompressed to -2.16bps from -5.8bps, but remains above the short-term average of -7.71bps.

The Main exFINLS to IG ExHVOL differential compressed to 35.47bps from 38.8bps, but remains below the short-term average of 44.56bps.

Commentary compliments of

Index/Intrinsics Changes

CDR LQD 50 NAIG091 -6.28bps to 179.72 (27 wider - 18 tighter <> 17 steeper - 29 flatter).
CDX12 IG -3.13bps to 143 ($0.14 to $98.14) (FV -1.1bps to 153.32) (60 wider - 43 tighter <> 49 steeper - 58 flatter) - Trend Tighter.
CDX12 HVOL -23.5bps to 312.5 (FV -7.66bps to 384.24) (10 wider - 17 tighter <> 13 steeper - 15 flatter) - Trend Tighter.
CDX12 ExHVOL +3.3bps to 89.47 (FV +0.79bps to 87.38) (50 wider - 45 tighter <> 59 steeper - 36 flatter).
CDX11 XO 0bps to 343.9 (FV +5.55bps to 397.08) (19 wider - 8 tighter <> 8 steeper - 20 flatter) - Trend Tighter.
CDX12 HY (30% recovery) Px $+0.62 to $82.25 / -22.3bps to 1032.2 (FV +7.91bps to 948.19) (59 wider - 27 tighter <> 34 steeper - 53 flatter) - Trend Tighter.
LCDX12 (65% recovery) Px $+0.55 to $80.4 / -32.62bps to 948.38 - Trend Tighter.
MCDX12 -4bps to 160bps. - Trend Tighter.
CDR Counterparty Risk Index fell 17.82bps (-10.03%) to 159.82bps (0 wider - 15 tighter).
CDR Government Risk Index fell 4.86bps (-9.45%) to 46.54bps.
DXY weakened 1.68% to 82.53.
Oil rose $1.81 to $58.52.
Gold rose $4.65 to $915.35. VIX fell 1.39pts to 31.92%.
10Y US Treasury yields fell 5.6bps to 3.29%.
S&P500 Futures gained 1.74% to 922.8.

Sphere: Related Content

The Upcoming High Yield "Stress Test" Day

Every now and then the general public gets a chance to see just how valid the green shoots theory really is. Next Friday may prove to be just such a case. On this date, 20 of some of the gnarliest and most troubled stressed and distressed high yield credits have a simultaneous IOU due to their respective lenders, either in the form of an interest payment or outright maturity. Zero Hedge has compiled the list of the 20 most interesting suspects to watch carefully.

At the end of the day fund flows talk and TV propaganda walks (and both have a 30 day grace period).

Sphere: Related Content

The Rattner Doctrine Has Won

Dealbook has announced that the Chrysler dissident group will likely disband after Stairway Capital and Oppenheimer Funds folded under pressure.

A group of Chrysler creditors opposing the carmaker’s reorganization is likely to disband after two more investment firms withdrew from its membership, a person briefed on the matter told DealBook on Friday.

The withdrawals of OppenheimerFunds and Stairway Capital Management will likely drop the group, calling itself the Committee of Non-TARP Lenders, below 5 percent of Chrysler’s $6.9 billion in secured debt, this person said. That would almost certainly eliminate the group’s standing in federal bankruptcy court.

Ever since the group made public last week, its membership has shrunken by the day as it faced public criticism from President Obama and others. That continued withdrawal of firms led Oppenheimer and Stairway to conclude that they could not succeed in opposing the Chrysler reorganization plan in court, the two firms said in separate statements.

By Tuesday, the group’s holdings had fallen to about $300 million. And by ednesday, when the committee made a court-mandated disclosure of its roster, that figure had fallen to $295 million.

Oppenheimer said Friday that “senior creditors can no longer reasonably expect to increase the recovery rate on the debt they hold by opposing the Taskforce’s restructuring plan.”

Stairway also cited the shrinking roster of the dissident creditors as a reason to publicly withdraw its opposition to the Chrysler reorganization plan through the court process. “The fact simply is, however, our group has become too small to have a voice within the bankruptcy,” the firm said in its own statement.

Congratulation, Steve. Threats, together with forced public disclosure have worked like a charm.
As secured creditors have now set a precedent for acquiescing to demands for giving up on Absolute Priority, not to mention a recovery of whatever a stalking horse bidder and Rattner deem appropriate, secured lenders in any other companies that have a UAW presence will now not be able to get one night's sleep and will likely sell their holdings far in advance of even a whiff of bankruptcy.

As to whether this impacts the prospect of a GM bankruptcy is not know. The dynamics there are more troubling, although the very same strongarming tactics will likely prevail in the end.

This is merely yet another milestone in the collapse of contractual rights in the American system. Sphere: Related Content

The Annihiliation Of The Dollar's Purchasing Power

This is the chart they don't want you to see: the purchasing power of the dollar over the past 76 years has declined by 94%. And based on current monetary and fiscal policy, we have at least another 94% to go. The only question is whether this will be achieved in 76 months this time.

Hat tip Teddy Sphere: Related Content

Hawker Latest Casualty Of S&P Distressed Bond Tender Spec Default Crusade

Textron private-jet competitor Hawker Beechcraft was the latest casualty of S&P's ongoing foray into subjective default proclamations, when the rating agency decided to monkeyhammer the company from a B- to a CC rating as a result of Hawker's recent tender offer for its own debt at distressed prices. Furthermore, as in the case of Hovnanian which Zero Hedge discussed previously, S&P will downgrade the company to Speculative Default as soon as the tender clears on May 18. In other words, more bad news for companies who are planning on pursuing distressed debt tenders despite tax benefits afforded to them.

S&P had this to say about the 2007 Goldman Sachs and Onex Partners LBO:
Hawker Beechcraft announced a tender offer to purchase a portion of its
unsecured notes at values substantially below par.

- Under our criteria, this is a distressed buyback which we view as a
partial restructuring and, accordingly, tantamount to a default.

- We are lowering our corporate credit rating to "CC" from "B-" and placing
it on CreditWatch with negative.

- We expect to lower the corporate credit rating to SD (Selective Default)
and the issue-level rating on the notes to "D" on May 18, 2009, the early tender

"The downgrades follow the company's announcement that it is offering to
purchase for cash a portion of its senior fixed-rate notes due 2015, senior PIK
election notes due 2015, and subordinated notes due 2007 at values substantially
below par for an aggregate purchase price of up to $100 million," said Standard
& Poor's credit analyst Roman Szuper. The secured debt is not affected by
the tender offer, which expires on 2 June, 2009.

With rolling SD downgrades becoming the norm, the impact on the holdings of whatever remaining CDOs are left will only get more pronounced as forced selling picks up again per the ratings agencies' methodology of putting virtually any company that attempts a coercive subpar debt exchange. Sphere: Related Content

Of Mice And Men

Stress Tests are over, loan loss provisions will be spread over years, accounting treatment has been relaxed, and nationalization will be left to the Swedes. While Bank of America and Wells Fargo capital needs are larger than expected, they fit within the Treasury's paradigm: earnings, asset sales, private sector capital raises and convertible TARP preferred stock will re-capitalize U.S. banks to deal with what lay ahead.

"Mission Accomplished"? Let's see; there are $11.3 trillion of U.S. bank liabilities. Between FDIC deposit guarantees (including $1.4 trillion that the FDIC describes as "Temporary"), guarantees for buyers of short-term bank paper, guarantees covering 93% of long-term debt issued since last November, and PBGC guarantees on pension liabilities, there's not that much bank risk left. The best measure of the Fed's success will be when these programs are scaled back without incident. Until then, the Libor rally is less a reflection of improving bank solvency, and more a function of government backstops.

There's also something unsettling about the Fed having free license to print money (or Switzerland, whose monetary base is up 118% y/y). Conventional wisdom is that inflation cannot co-exist with excess manufacturing and labor capacity. Sounds reasonable, except for fall 1974, when inflation hit 12% in spite of excess capacity of both. Yes, it was the end of the gold standard, the oil crisis was monetized, etc. But should we really rely on economic theory after the largest/fastest expansion of the World's reserve currency in 100 years? On the fiscal side, private sector de-leveraging is partly achieved through wartime levels of public sector leverage; some risks go away, but others appear. We already see how it will be paid for: in addition to higher taxes on individuals, tax reform also targets U.S. multinationals, as the U.S. is among the last countries left that subject companies to worldwide rather than territorial taxation. There is no road map for the consequences of unfunded guarantees, money-printing and stimulus this large.

In searching for one, I thought of Richard Nixon, who in 1972 wanted to bring unemployment down to the 3.5% levels which prevailed at the end of the 1960's. He found a co-conspirator in Fed Chairman Arthur Burns[1], who resisted FOMC calls for a higher discount rate, supported wage and price controls, and oversaw an 11% expansion in the money supply (the fastest since WWII, until today's episode which is 10x larger). It ended in higher unemployment, inflation and a decade of 0% real returns on both stocks and bonds. I don't doubt that the Fed has a more coherent exit strategy for this monetary expansion; but it will need to be 10x better, and not collide with the needs of a massive fiscal deficit.

As for other unintended policy consequences, consider Chrysler and General Motors. One day a book will be written about what's going on between the government, the creditors, the unions, Section 363 sales and the bankruptcy court (it's ugly). Throwing creditors on the pyre in the broader interest of employment and economic stability may be a sound strategy in the short term, and fits with a full-court press approach to combating a deep recession. But what about other companies with large retiree populations or large unionized work forces; how will bondholders and banks now lend on a secured basis to them? The leapfrogging of employee VEBA plans over senior and pari-passu creditors may have consequences not-so-far down the road. This should be of particular concern to an administration that intends to enact "Card Check Legislation", which could increase unionization rates by 10%, right back to 1970s levels. Lenders to such companies may be wary, and for good reason. Whether its mega-deficit spending, a 250% increase in the monetary base or a suspension of bankruptcy norms, the Administration should remember its Robert Burns...."the best laid plans of mice and men often go awry..."

[1] Burns’ assent was under duress. When Burns resisted pressure to guarantee full employment, the White House planted negative stories about him in the press. Nixon’s people also floated stories about diluting the Fed Chairman’s power by doubling the Board’s members. Nixon wrote to Burns: “There is no doubt in my mind that if the Fed continues to keep the lid on with regard to increases in money supply and if the economy does not expand, the blame will be placed squarely on the Fed.” In 1971, H.R. Haldeman spoke about the effectiveness of Nixon’s strategy: “We have Arthur Burns by the [expletive deleted] on the money supply".

Big Hat Tip Mike and JPM. Sphere: Related Content

The Real Memo Out Of The Bureau Of Lies And Statistics

"We're leveling off! We're leveling off!"—so is the hope of TTT, Helicopter Ben, Larry the Wall Street Lackey and the rest of Team Obama. "This recession is leveling off!"

No it's not: The unemployment figures just released by the Bureau of Labor Statistics are totally cosmetic: We lost a whole lot more than 531,000 unemployed.

First, the "seasonal adjustment", which is a black box that can tweek me into looking like Dumbo the flying elephant. They're knocking off ±65,000 workers for no clearly discernible reason.
Second, notice that the Census Bureau hired 60,000 people last month. Those workers (by definition) are temporary, and are a net cost to the economy, as they will not be adding marginal utility to any economic sector, the census being merely a social expenditure.

Those two items alone turn 530,000 new unemployed into 655,000.

Now notice how, once again, previous months' figures have been readjusted. This time, the readjustments weren't so bad—a mere 30,000 more unemployed in February, turning that month's official totals to 681,000, and another 30,000 for March, making that month's official number 699,000, just shy of that magic 700,000 monthly number (BTW, remember back in the good old days when 300,000 monthly unemployed was"shocking"?)

But notice too: When those more realistic numbers were released, the markets were more or less copacetic—at least they weren't nervously contemplating another suicidal round of cliff-diving, as we currently are. Ever since the October '08 release of Sept. '08 unemployment, when arguably the BLS numbers had a role in triggering the sell-off of that very nasty month, the unemployment numbers have been generally rosy whenever there's been general nervousness in the markets around the time of the number's release. I know this sounds crazy-man paranoid, but bear with me: Every time the markets have been nervous,the BLS numbers look pretty good, or at least not that bad, relatively speaking—and then the next month the figures are very quietly revised, sometimes by as much as 35% on the upward side.

I will bet one double Quarter Pounder with cheese and bacon that next month, the revisions of the April numbers will be on the order of an additional 85,000 unemployed. My guess is that, discounting the Census Bureau hirings, April saw 680,000 newly unemployed workers.

That would mean that unemployment isn't accelerating—but it's still growing fast enough to scare the hell out of anyone sane. And anyway, what industry or sector of the economy will be able to absorb all of those unemployed workers in the near-term future?

Now wait for May and especially June numbers, when 2 million new college grads can't find steady work.

This baby ain't over yet.

Ruminations compliments of Gonzalo Sphere: Related Content

Frontrunning: May 8

  • Morgan Stanley raises $7.5 billion through stock and bond sale (Bloomberg)
  • Fannie Mae requests $19 billion from treasury after $23 biollion loss (Yahoo)
  • Fannie loss swells as government support doulbes to $200 billion (WSJ)
  • Cooking the +226K death rate adjusted non-farm number after major prior revisions (Reuters, Miller Tabak via BP)
  • RBS CEO Hester sees no sign of green shoots as impairments soar to £3bn (FT)
  • VIX futures show traders betting stock rally to end (Bloomberg)
  • Some thoughts on the upcoming bond bear market (Ritholtz)
Sphere: Related Content

BAC up $2.5 in pre-market trading

Ken Lewis is on CNBC touting the "BoA story", sees the market bottoming out and is generally sunny across most business lines. When asked about the Merrill business lines, apparently "trading is fine" and "investment banking is doing ok... some equity underwritings!"

Walter: Has the whole world gone crazy? Am I the only one around here who gives a s*** about the rules? Mark it zero!
Sphere: Related Content

Goldman Sachs Principal Transactions Update: 25% Drop

According to the most recent data out of the NYSE, Goldman's principal program trading dropped an astonishing 25%, hitting a many week low absolute number. Not only that, but the portion of Goldman's principal PT trades as a percentage of total, and as a multiple of agency and customer facilitation also dropped substantially. Now, if Goldman is indeed, in the words of Ed Canaday, merely providing market liquidity under the guise of the SLP program, did the NYSE all of a sudden just feel the need for much less liquidity last week? This is unlikely, as total NYSE PT dropped by a much smaller fraction than Goldman's portion, and all brokers' ex Goldman portion of PT was virtually flat at 1 billion shares week over week.

Did Goldman merely trade down on Friday, unknowing what the final resolution on the SLP program extension is? As Zero Hedge pointed out previously, market volume on May 1 was abnormally low. Did the NYSE not have a replacement Plan B for what would happen if Goldman can not be an SLP (if indeed that fully explains its high PT volume on the NYSE). Could any of these factors explain the dramatic drop? Inquiring minds still want to know (especially in the context of the disappearance of MS' bunker-busting SPY advertised volume since we started posting updates on it).

Curiously Morgan Stanley stepped in valiantly to pick up the slack in principal PT, trading 216 million shares, up from 160 million the week before.

Sphere: Related Content

Thursday, May 7, 2009

Goodbye David Rosenberg

One of the few sane voices in the desert has left the (Merrill Lynch) building. David Rosenberg, on his way out, leaves everyone with an economist's dozen of rules to remember.

David, so long, and thanks for all the fish.

Rosie's rules to remember:

1) In order for an economic forecast to be relevant, it must be combined with a market call.

2) Never be a slave to the data – they are no substitute for astute observation of the big picture.

3) The consensus rarely gets it right and almost always errs on the side of optimism – except at the bottom.

4) Fall in love with your partner, not your forecast.

5) No two cycles are ever the same.

6) Never hide behind your model.

7) Always seek out corroborating evidence.

8) Have respect for what the markets are telling you.

9) Be constantly aware with your forecast horizon – many clients live in the short run.

10) Of all the market forecasters, Mr. Bond gets it right most often.

11) Highlight the risks to your forecasts.

12) Get the US consumer right and everything else will take care of itself.

13) Expansions are more fun than recessions (straight from Bob Farrell's quiver!). Sphere: Related Content

Overallotment: May 7

  • Huge decision for commercial-mortgage investors tomorrow in bankruptcy court (WSJ)
  • Hong Kong chairman says rally overdone, won't buy stocks (Bloomberg)
  • Market fear rising bond yields (FT)
  • Euro declines on speculation ECB official will signal rate cut (Bloomberg)
  • Swine flu cases widen reach with "epidemic reach" (Bloomberg)
  • AIG loss narrows, no new bailout plan (Reuters)
  • AIG blames market for loss (FT)
  • Wells Fargo, Morgan Stanley to sell stock into the rally (Bloomberg)
  • Wal Mart will stop reporting monthly sales data (FT)
Sphere: Related Content

Bizarro Market, Stress Test Edition

Quant and heat mapping: inflation up, deflation down, quality marginally up, garbage pillaged. Marginal quant leveraging.

NYSE volume: Big day, but 50% was in financials and derivatives. Bank trading prop desks traded their heads off in individual names. Most of the volume is punters punting against other punters. If speculation is a way to increase confidence in the financial system then mission accomplished.

SPY Advertisements: 4th day in a row without league table worthy SPY volume by our dear friends Morgan Stanley. Alas the bank can no longer tout its "phenomenal big pipe service" to its clients. Curiously UBS has stepped in to fill the void.

Sphere: Related Content

Investors Throwing Money At Junk Now

AMG Data Services just announced that US junk bond funds saw an $822 million inflow this past week, a doubling of the $435 million inflow from a week earlier. Looks like the powers that be have created a literal junk vortex and institutions are jettisoning treasuries (look at clearing 30 Yr Yield for an indication of appetite) and gobbling up the bottom of the risk pile just as hedge funds are dumping. And, of course, everyone is ignoring that 20% of these names will be bankrupt by year end, unless Obama and TTT nationalize everything, in which case look for the first 5 year plenary session some time in December, complete with parades by the 91st and 341 Missile Wings showing off their Minuteman III arsenals (reduced to single warhead delivery to comply with START I). Sphere: Related Content

Daily Credit Market Summary: May 7 - Swing Day

Spreads were mixed in the US with IG wider (after a 10bps gap tighter opening), HVOL improving, ExHVOL weaker, XO wider, and HY rallying (HY-IG decompression came on later in the day). Indices typically underperformed single-names (as talk of major prop desk short-covering were rife) with skews widening in general as IG underperformed but narrowed the skew, HVOL outperformed but widened the skew, ExHVOL's skew widened as it underperformed, XO underperformed but compressed the skew, and HY's skew widened as it underperformed.

The names having the largest impact on IG are American International Group, Inc. (-255.68bps) pushing IG 1.23bps tighter, and Metlife, Inc. (+80.55bps) adding 0.61bps to IG. HVOL is more sensitive with American International Group, Inc. pushing it 5.49bps tighter, and Metlife, Inc. contributing 2.74bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both National Rural Utilities Cooperative Finance Corporation (-40bps) pushing the index 0.39bps tighter, and Staples Inc. (+10bps) adding 0.1bps to ExHVOL.

The price of investment grade credit fell 0.12% to around 97.97% of par, while the price of high yield credits rose 0.37% to around 81.5% of par. ABX market prices are higher (improving) by 0.21% of par or in absolute terms, 0%. Broadly speaking, CMBX market prices are higher (improving) by 1.32% of par. Volatility (VIX) is up 0.99pts to 33.45%, with 10Y TSY selling off (yield rising) 17.1bps to 3.34% and the 2s10s curve steepened by 13.9bps, as the cost of protection on US Treasuries fell 3.5bps to 29bps. 2Y swap spreads tightened 1.8bps to 44.75bps, as the TED Spread tightened by 1.6bps to 0.78% and Libor-OIS improved 1.8bps to 75bps.

The Dollar strengthened with DXY rising 0.16% to 83.941, Oil falling $0 to $56.34 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 0.07% today (a 0.16% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $0.67 to $910.55 as the S&P is down (906.7 -1.14%) underperforming IG credits (147bps -0.13%) while IG, which opened tighter at 140bps, underperforms HY credits. IG11 and XOver11 are +0.25bps and -35.75bps respectively while ITRX11 is -6bps to 124.5bps.

The majority of credit curves steepened as the vol term structure flattened with VIX/VIXV rising implying a more bullish/less volatile short-term outlook (normally indicative of short-term spread compression expectations).

Dispersion fell -20.5bps in IG. Broad market dispersion is a little greater than historically expected given current spread levels, indicating more general discrimination among credits than on average over the past year, and dispersion increasing more than expected today indicating a less systemic and more idiosyncratic spread widening/tightening at the tails.

60% of IG credits are shifting by more than 3bps and 46% of the CDX universe are also shifting significantly (less than the 5 day average of 58%). The number of names wider than the index decreased by 3 to 39 as the day's range fell to 15.5bps (one-week average 11.4bps), between low bid at 132.5 and high offer at 148 and higher beta credits (-2.56%) underperformed lower beta credits (-2.99%).

In IG, wideners were outpaced by tighteners by around 3-to-1, with 29 credits wider. By sector, CONS saw 46% names wider, ENRGs 0% names wider, FINLs 10% names wider, INDUs 21% names wider, and TMTs 17% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 124.97bps and the latter at 111.84bps.

Cross Market, we are seeing the HY-XOver spread decompressing to 324.08bps from 301.87bps, but remains below the short-term average of 324.91bps, with the HY/XOver ratio rising to 1.44x, above its 5-day mean of 1.41x. The IG-Main spread decompressed to 22.5bps from 13.5bps, and remains above the short-term average of 19.39bps, with the IG/Main ratio rising to 1.18x, above its 5-day mean of 1.14x.

In the US, non-financials underperformed financials as IG ExFINLs are tighter by 4bps to 111.8bps, with 65 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 11.43bps to 178.39bps, with Brokers (worst) tighter by 4.31bps to 234.01bps, Finance names (best) tighter by 42.81bps to 799.57bps, and Banks tighter by 12.11bps to 217.44bps. Monolines are trading tighter on average by -34.77bps (2.27%) to 2391.31bps.

In IG, FINLs outperformed non-FINLs (4.32% tighter to 3.49% tighter respectively), with the former (IG FINLs) tighter by 16.8bps to 370.9bps, with 16 of the 21 names tighter. The IG CDS market (as per CDX) is 1.9bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (145.1bps), with the bond ETFs outperforming the IG CDS market by around 4.71bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) rallied 4.09bps to 124.97bps (with ITRX FINLs -trending tighter- better by 13.62 to 122.63bps) and is currently trading tight to its week's range at 0%, between 143.04 to 124.97bps, and is trending tighter. Main LoVOL (trend tighter) is currently trading tight to its week's range at 0.04%, between 102.21 to 91.97bps. ExHVOL underperformed LoVOL as the differential decompressed to -4.66bps from -17.61bps, and remains above the short-term average of -7.2bps. The Main exFINLS to IG ExHVOL differential compressed to 37.65bps from 52.32bps, and remains below the short-term average of 45.25bps.

Commentary compliments of

Index/Intrinsics Changes

CDR LQD 50 NAIG091 -7.22bps to 185.27 (15 wider - 31 tighter <> 22 steeper - 25 flatter).

CDX12 IG +3bps to 147 ($-0.12 to $97.97) (FV -6bps to 152.61) (29 wider - 81 tighter <> 61 steeper - 53 flatter) - Trend Tighter.

CDX12 HVOL -21bps to 336 (FV -13.57bps to 386.17) (9 wider - 17 tighter <> 11 steeper - 16 flatter) - Trend Tighter.

CDX12 ExHVOL +10.58bps to 87.32 (FV -3.82bps to 86.11) (20 wider - 75 tighter <> 45 steeper - 50 flatter).

CDX11 XO 0bps to 343.9 (FV -13.41bps to 392.48) (11 wider - 18 tighter <> 17 steeper - 15 flatter) - Trend Tighter.

CDX12 HY (30% recovery) Px $+0.43 to $81.56 / -15.7bps to 1057.4 (FV -65.55bps to 938.74) (20 wider - 65 tighter <> 66 steeper - 21 flatter) - Trend Tighter.

LCDX12 (65% recovery) Px $+0.25 to $80.65 / -15.35bps to 981.38 - Trend Tighter.

MCDX12 -1bps to 164bps. - Trend Tighter.

CDR Counterparty Risk Index fell 11.43bps (-6.02%) to 178.39bps (2 wider - 13 tighter).

CDR Government Risk Index fell 7.22bps (-12.28%) to 51.61bps.

DXY strengthened 0.16% to 83.94.

Oil is unchanged at $56.34.

Gold fell $0.67 to $910.55.

VIX increased 0.99pts to 33.45% (Risk moving from Sovereigns back to Corporates).

10Y US Treasury yields rose 17.7bps to 3.34%.
S&P500 Futures lost 1.14% to 906.7. Sphere: Related Content

NY Fed Chairman Stephen Friedman Resigns

The highly unconflicted NY Fed Chairman, who was buying boatloads of Goldman shares as the bank was getting taxpayer bailouts, has just resigned.

NEW YORK—The Federal Reserve Bank of New York announced today that Stephen Friedman, chairman of the board of directors of the New York Fed, has informed William C. Dudley, president and chief executive officer of the New York Fed, and the Board of Governors of his decision to resign effective immediately. Consistent with the Federal Reserve Act, Denis M. Hughes, deputy chair of the board, will exercise the powers and duties of the chair. “My colleagues and I appreciate Steve’s vital service to the Bank during this time of great economic stress,” said Mr. Hughes. “We value his contributions and I know the Bank’s leadership acknowledges his unique perspectives on the economy and his financial market expertise. We all join in thanking him for his service and leadership.” Mr. Hughes added, “This is a remarkable organization at the center of helping the nation through the most difficult economic period since the 1930s. I have watched as the people of the Fed managed the unprecedented financial storms with creativity, energy and integrity.” Thomas C. Baxter, Jr., executive vice president and general counsel, said, “There is no doubt that 2008 was one of the most challenging years in the New York Fed’s history. We were fortunate to have Steve as our chairman during that time, especially in view of Mr. Geithner’s decision to accept President Obama’s nomination to become Secretary of the Treasury. When the President announced his decision to nominate now-Secretary Geithner on November 24, 2008, Steve immediately stepped into action and formed a search committee of the New York Fed’s board of directors. During the committee’s often intense deliberations over the next two months, I was privileged to observe closely Steve’s dedication, professionalism and work ethic. He was extraordinary. And, with respect to Steve’s purchases of Goldman shares in December of 2008 and January of 2009, which have been the object of some attention lately, it is my view that these purchases did not violate any Federal Reserve statute, rule or policy. I enjoyed working with Steve, and will miss his contributions in the boardroom.” “I would like to thank Steve Friedman and his fellow directors on the New York Fed’s board for their service,” said Donald L. Kohn, vice chairman of the Board of Governors of the Federal Reserve System. “I particularly appreciate the very rigorous process Steve established to select the new president of the New York Fed.” Sphere: Related Content

Full Stress Test Results

The product of the great spin is out! Everything flying after hours. State Street and BONY now pulling the borrow in State Street and BONY, kinda poetic. And, of course, all leaks were right on the money. Over under on the leakers actually getting prosecuted?

Sphere: Related Content

More false hope from economic numbers - productivity edition

We are starting to think that beating markets in this environment is starting to devolve into a reading comprehension exercise. In the latest edition, the green shoots crowd are jumping on the release of productivity numbers by the BLS today - nonfarm productivity is up 0.8%, above consensus numbers at 0.6% after going down 0.4% the previous quarter. However, it's a bad picture when the main driver is due to hours worked dropping 9% and output only dropping 8.2% (poof, productivity gains!).

There are many ways to read this; some may view this as a necessary purge of the fat in our labor economy while others are likely to be alarmed at the increasing weakness of business demand. None of these views are going to be new findings to our readers but we do want to highlight one point when taking a macro view of these productivity numbers.

Much can be said about the tech bubble and even now, "eyeballs" is a phrase that is likely to generate smirks and laughs at the madness of the markets at the time. However, underneath all the fluff and dot com mania there were real productivity gains being experienced in the economy and it laid the groundwork (both literally and figuratively) for huge gains in the internet economy over the coming years. The stepbrother of that story was the rise in real wages; since then however, the increase in household wealth has not been driven by wages but by assets (houses, etc.). Wage growth has been somewhat anemic, bounded by a relatively tight band for the past 8 years or so. With the deleveraging of the US economy and consequently the American household as a major burden, we have to wonder what this bodes for the story of American wealth over the next 10 years or so. The government burden has long been publicized but the quieter enemy is the consumer burden - remember, a decrease in wages is practically no different than an increase in an interest burden. These productivity numbers are somewhat sobering with regards to the hidden story in terms of demand for American labor and wage growth for individual families.
Sphere: Related Content

California Cash Flow Crisis Update

In the giddy smoke from all the green shoots, people kinda forgot that the largest U.S. state is on the verge of bankruptcy. Zero Hedge is happy to remind them.

Publish at Scribd or explore others: Business & Economics Research california debt

Hat tip Credit Trader
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