Friday, May 22, 2009

Guest Post: Green Shoots And Glimmers Of Hope Versus Jobless Recovery

Submitted by John Bougearel of Structural Logic

Structural Logic 5.22.09 - Sphere: Related Content

San Francisco Fed Concerned About Consumer Deleveraging

One of the core macroeconomic themes that Zero Hedge has been expounding on since inception, which mirrors some of the major concerns of David Rosenberg, has been the evaporation of consumer wealth, income and equity as a function of both declining stock and real asset values and persistently high consumer debt. In an economic paper, the San Francisco Federal Reserve confirms that these concerns are not unfounded, and could be the very core of the processes that undermine the administration's attempts to restore economic growth.

While the administration is doing all it can through various media conduits to imprint the idea that inflation is all but a guaranteed reality at this point, so that consumers begin borrowing at an expansive pace yet again, consumer leveraging is exactly the process that has commenced unwinding, and the obvious impact on the personal saving rate which has been growing at a dramatic pace, has been visible throughout the economy. And as the consumer deleverages additionally, deflation is a certainty, as the combined impact of asset value decline and associated leverage flow through the economy, further depressed prices of goods and services. The four charts below from the Fed's release strike at the heart of the administration's faulty attempt to relever the US consumer.

Unfortunately for Bernanke and Geithner, the deleveraging process has commenced, and regardless of how many treasuries are issued, and how much additional debt the U.S. incurs, the demand side for credit is just not there, sticking banks with basements full of shrinkwrapped packages of hundred dollar bills, that will sit dusty and unused for years. The only immediate impact is that at some point in the not too distant future, the U.S. will need to print bonds to satisfy just the interest payments on these very bonds, which is an unsustainable state and only has one outcome.

In a very amusing section from the release, the San Fran Fed is discussing the financial behaviour of the consumer, when in fact the very same words are 100% applicable to the U.S. Treasury itself:
More than 20 years ago, economist Hyman Minsky (1986) proposed a “financial instability hypothesis.” He argued that prosperous times can often induce borrowers to accumulate debt beyond their ability to repay out of current income, thus leading to financial crises and severe economic contractions.

Until recently, U.S. households were accumulating debt at a rapid pace, allowing consumption to grow faster than income. An environment of easy credit facilitated this process, fueled further by rising prices of stocks and housing, which provided collateral for even more borrowing.The value of that collateral has since dropped dramatically, leaving many households in a precarious financial position, particularly in light of economic uncertainty that threatens their jobs.

Going forward, it seems probable that many U.S. households will reduce their debt. If accomplished through increased saving, the deleveraging process could result in a substantial and prolonged slowdown in consumer spending relative to pre-recession growth rates. Alternatively, if accomplished through some form of default on existing debt, such as real estate short sales, foreclosures, or bankruptcy, deleveraging could involve significant costs for consumers, including tax liabilities on forgiven debt, legal fees, and lower credit scores. Moreover, this form of deleveraging would simply shift the problem onto banks that hold these loans as assets on their balance sheets. Either way, the process of household deleveraging will not be painless.
The last paragraph is probably the most lucid explanation of the conundrum the Federal Reserve and the Treasury are in currently. And all that Bernanke and Geithner are attempting to do is not just make sure these very banks can survive another day with trillions of worthless loans on their books, but do all they can to relend them once again into private (consumer and hedge fund) hands.

This approach is flawed and as time passes and the consumer savings rate increases, the bifurcation between the Fed's plans and reality will only become more evident, with the cost being increasing deflation, while the U.S. accumulates higher and higher sovereign debt. The combined impact of both processes could end up having a devastating geopolitical impact on the United States.

The full San Fran Fed analysis is below.

San Fran Fed Paper -

Hat tip Michele Riccardini Sphere: Related Content

Ron Paul's Letters From Constituents

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Fed Transparency Petition Update

Barbara Ehrenreich, blogger and author of This Land is Their Land, has added her name to the list of 3,270 people endorsing Ron Paul's and Alan Grayson's campaign to audit the Federal Reserve.

Also adding their names are:

If you have not done so, and if you believe this is a worthy undertaking, you can endorse HR1207 here. Sphere: Related Content

Mass Layoff Events Pick Up, Faciliate EPS Beats

The Bureau Of Labor Statistics' Mass Layoff Events statistic indicates that the wholesale firing by corporations is accelerating once more again after a small respite in the January to March period. The BLS defines a Mass Layoff Event as one that occurs when an establishment has at least 50 initial unemployment compensation claims filed against it within a five-week period and the layoff lasts longer than 30 days. In other words, as the name implies, a mass layoff (and the reason for EPS to be sterling when revenues continue collapsing in all those Q1 earnings calls). This goes hand in hand with initial jobless claims reports. Chart of both are provided below (link to BLS data here). Kinda tough to spot the green shoots through the very deep parasitic undergrowth on these two charts.

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Parallel SPY Channels

And, as always, the VWAP is the low intraday bound.

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2s10s Back to October Levels... Of 2003!

Quantitative Easing is dead and buried. The bond curve just hit a steepness that was last seen in October... not of last year but of 2003. The rush for near duration is accelerating as investors are running away from the 10 year like a herd of rabid buffaloes. If this continues it will destroy any plans for providing cheap 30 year mortgages. The alternative: make near durations unattractive to the point where banks start losing money from the curve flattening.

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Chasing The Diminishing Marginal Buyer

In a flagrant example of chasing the marginal buyer as others offload their shares, Morgan Stanley just came out with a research piece which upgrades the price targets of virtually all banks by 33% on average (better known as stratospheric escape velocity).

It would seem Goldman's upgrades are not sufficient to bring the slowest, marginal buyer into the fray - the effort has now gone viral. Most amusing is the Bank Of America new target price which is increased from $25 to $32: quick, if readers call and buy at least 100 BAC shares in the next 10 minutes, they can lock in a phenomenal, unprecedented, one-time 180% upside to target. In fact, if you buy now, you will also get not one, not two, but 4 Sham-Wows to soak up the tears in 3 months when the upside to the new target will be roughly 1000%.

Among Morgan Stanley's key bullet points which are supposed to bring mom and pop bank stock buyer out of hibernation are:
  • Raising price targets on the large-cap banks by 33%, on average, due to lower betas and a resulting lower cost of equity (lower beta? we hope MS realizes that financial stocks ARE beta these days, as for lower cost of equity, that will likely be better evaluated once State Street and BoNY actually allows shorting in financials to return)

  • TARP: We think most banks will repay TARP by 4Q09 (well, duh - someone has to get paid bonuses without Barney Frank having a say in it)

  • We use 2012 for normalized earnings (phew, most others are pricing in 2049 future earnings: good to see that MS retains credibility and has really good visibility over the next 3 years)
  • Attractive industry view. We believe the risk of the bear case has been significantly reduced (you don't say)
In other news: tomorrow BAC upgrades BAC on the thesis that other banks will upgrade it.

P.S. Amusingly, in the compost heap of vile intentions known formerly as the equity market, BAC now is down while RF (which had the dubious distinction of being the only stock which had its TP lowered by MS) is up.

As for BAC's "low beta", it is indeed true that at Raw Beta of 2.806 (see below) there are only about 400 companies in the S&P 500 that have a lower beta.

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Delphi Hopes To Exit Chapter 11 As GM Enters

In a Detroit Free Press article, long suffering Delphi has been reported to be in active negotiations with the auto task force over its own upcoming June 2 deadline to emerge from bankruptcy.
An attorney for Delphi says talks with members of President Barack Obama's automotive task force continue in hopes of reaching a deal to lift the auto supplier out of bankruptcy protection.

Delphi Corp. Attorney Jack Butler said the talks, which also include Delphi's creditors and its former parent General Motors Corp., will continue over the Memorial Day weekend.
It would be highly ironic if GM's main supplier which has been in bankruptcy for over two trader generations (or 10+ if you work at SAC/Millennium) actually does emerge from chapter just as its parent files the day before. Various flies on the wall are poising themselves for some harsh words over the weekend, as Rattner polishes his negotiating skills. Whatever the outcome, secured lenders (DIP B,C thought Z) will undoubtedly be thrilled. Sphere: Related Content

Premarket Observations

Treasuries tumble (but wait, there was nothing to fear in the rating agency posturing we thought... or maybe there was)

Gold takes off (this is not the hedge fund driven wholesale plundering you are looking for)

Stock market: ? Sphere: Related Content

Fed Transparency Petition Update

As of 1 am last night, the petition in support of the Ron Paul /Alan Grayson / HR1207 initiative had over 2,500 signatories and climbing fast.

The link to endorse the petition is here. Sphere: Related Content

Daily Highlights: 5.22.09

  • Jobless claims fell 12,000 last week, more than expected.
  • Aeropostale's Q1 net rises 81% to $31.7M led by a 21.3% rise in revs at $408M.
  • Autodesk swung to a Q1 loss of $32.1M as revs fell 29% to $425.8M.
  • Barnes & Noble posts Q1 loss but boosts Y09 EPS from $1.10 to $1.40.
  • Brocade Comm swung to a Q2 loss of $63.1M on write-downs, acquisition and stock-compensation related costs.
  • Campbell Soup raised Y09 f'cast, reported Q3 profit that exceeded cons. est.
  • Fluor awarded $268M cryogenic plant project by Pemex Gas.
  • Foot Locker beats by $0.07, posts Q1 EPS of $0.20 ($31M). Revs fell 7.1% to $1.22B.
  • GM reaches cost-cutting pact with UAW on labor and retiree health care benefits.
  • GMAC gets $7.5B from Treasury to fund Chrysler loans, boost capital.
  • Gap Inc.'s Q1 net dropped 14% to $215M as revs slipped 7.4% to $3.13B.
  • GlaxoSmithKline embroiled in a $1.9B battle with the IRS over tax deductions.
  • Hormel's profit rose 3.6% to $80.4M on a gain from a dissolved JV.
  • Investors Bancorp acquires $250M in deposits, 6 Banco Popular branches in New Jersey.
  • J&J to buy Cougar Biotechnology for ~$1B ($43/sh) in a cash tender offer.
  • McClatchy plans to exchange $1.15B in notes at a significant discount.
  • ReneSola sees FY09 revs at $500-550M vs. cons. est. $585.70M.
  • Sears Hldgs Corp. reported an unexpected Q1 profit despite 9% dip in revs to $10.1B, on cost, inventory cutting measures. Secures new $2.4B line of credit.
  • Tech Data's Q1 net jumped a surprising 49% to $31.8M; revs down 18% to $4.99B.
Earnings Calendar: CPB, HRAY, MBT, MDTH, MPR, YGE.

Companies to watch: Aeropostale, Autodesk, Barnes & Noble, Campbell Soup, Foot Locker, GM, Gap Inc., GlaxoSmithKline, J&J, Tech Data.

Recent Egan-Jones Rating Actions


Information provided by Egan Jones Sphere: Related Content

Frontrunning: May 22

  • CRE green shoot data point of the day: Recession turning malls into ghost towns (WSJ)
  • Geithner calls for "very, very substantial" change to Wall Street pay (Bloomberg)
  • Europe's worsening crisis (WaPo)
  • Roger Altman leaves Evercore, BlackRock's Scholsstein takes over (Bloomberg)
  • Weil: Jobs for bankers go begging at off-limits club (Bloomberg)
  • Why a bankrupt GM would be a disaster (BusinessWeek)
  • Luxembourg, Liechtenstein enter talks on tax treaty (Bloomberg)
  • Why PPIP has bankers squirming (FT)
  • Bberg realism provoking headline of the day: Libor has biggest weekly drop this year as banks grow less wary(Bloomberg)
  • AIG's Liddy leaves "terrible job" for successor to complete (Bloomberg) [Although with just $1.5 trillion in gross CDS gifts remaining, it should be a little easier]
  • Salmon: The US AAA rating: nothing to worry about (Reuters) [So does the fact that everying is worrying about it, mean everyone knows it is garbage? Does that mean that 30 year mortgages should be rated AAAA?]
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Goldman Sachs Principal Transactions Update: Asleep At The Wheel

In what is sure to prove a disappointment to EMT and SLP purists, Goldman this week managed to trade a mere 859 million principal PT shares, or just under 6x its combined facilitiation and agency volume. What is this - amateur hour at the New York Plaza? What is more peculiar is the dramatic drop in overall NYSE Program trading: from 3,741 million shares in the prior week to 3,265 million in the most recent week. But as Goldman goes, so does the market, it has been whispered.

Then again, last week's dramatic drop in overall market volume may have something to do with the reduction in NYSE PT. And vice versa.

Sphere: Related Content

Thursday, May 21, 2009

Overallotment: May 21

  • US will steer GM into bankruptcy next week (WaPo)
  • BankUnited fails in year's biggest bust (WSJ)
  • Treasuries rise as Fed's Rosengren says recovery will be slow (Bloomberg)
  • Tech rally in full force: Lenovo shares dive after second straight qtrly loss (MarketWatch)
  • Yen advances after finance minister says bank will not intervene in currency policy (Bloomberg)
  • Goodbye Ed Liddy - you served your purpose (NYT)
  • Geithner claims the permanent TARP revolver is actually not permanent, facts say otherwise (AP)
  • No green shoots here: Gap profit falls as consumers prefer to brave New York naked (Bloomberg)
  • Russia convinces BlackRock stocks can whistle past recession, sells 3 Brooklyn bridges (Bloomberg)

P.S. ZH is happy readers found the Kondratieff chart useful. Sphere: Related Content

The Point Break?

"And with the right kind of eyes you can almost see the high-water mark—that place where the wave finally broke and rolled back."

- Hunter S. Thompson
The Kondratieff Wave chart below, prepared by the Long Wave Group, gives some food for thought.

hat tip Ronin Sphere: Related Content

Daily Credit Market Summary: May 21 - Holiday

Spreads were broadly wider in the US as all the indices deteriorated (despite modest tightening all day from gap wider opening levels). Indices generally outperformed intrinsics with skews mostly narrower as IG underperformed but narrowed the skew, HVOL underperformed but narrowed the skew, ExHVOL outperformed pushing the skew wider, XO's skew increased as the index outperformed, and HY outperformed but narrowed the skew.

The names having the largest impact on IG are CIT Group Inc (-166.23bps) pushing IG 0.93bps tighter, and American International Group, Inc. (+138.19bps) adding 0.61bps to IG. HVOL is more sensitive with CIT Group Inc pushing it 4.18bps tighter, and American International Group, Inc. contributing 2.73bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Devon Energy Corporation (-5bps) pushing the index 0.05bps tighter, and Southwest Airlines Co. (+15.5bps) adding 0.16bps to ExHVOL.

The price of investment grade credit fell 0.14% to around 97.97% of par, while the price of high yield credits fell 0.37% to around 79.63% of par. ABX market prices are lower by 0.09% of par or in absolute terms, 1.87%. Broadly speaking, CMBX market prices are lower by 0.01% of par or in absolute terms, 0.02%. Volatility (VIX) is up 2.32pts to 31.35%, with 10Y TSY selling off (yield rising) 18.4bps to 3.38% and the 2s10s curve steepened by 15.1bps, as the cost of protection on US Treasuries rose 3.25bps to 37.25bps. 2Y swap spreads widened 3.1bps to 38.63bps, as the TED Spread tightened by 6bps to 0.49% and Libor-OIS improved 5.6bps to 45.9bps.

The Dollar weakened with DXY falling 0.82% to 80.504, Oil falling $1.04 to $61 (underperforming the dollar as the value of Oil (rebased to the value of gold) fell by 3.28% today (a 2.5% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $15.55 to $954.2 as the S&P is down (889 -1.21%) underperforming IG credits (147.25bps -0.15%) while IG, which opened wider at 146bps, outperforms HY credits. IG11 and XOver11 are +3.75bps and +26.75bps respectively while ITRX11 is +6.5bps to 127bps.

The majority of credit curves flattened (and we heard rumors of correlation desk protection sellers in mid to longer-dated curves).

Dispersion rose +3.8bps 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.

Only 43% of IG credits are shifting by more than 3bps and 59% of the CDX universe are also shifting significantly (more than the 5 day average of 59%). The number of names wider than the index stayed at 41 as the day's range rose to 12.5bps (one-week average 9.9bps), between low bid at 140 and high offer at 152.5 and higher beta credits (3.34%) underperformed lower beta credits (1.73%).

In IG, wideners outpaced tighteners by around 5-to-1, with 86 credits wider. By sector, CONS saw 73% names wider, ENRGs 50% names wider, FINLs 71% names wider, INDUs 68% names wider, and TMTs 74% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 128.91bps and the latter at 121.74bps.

Cross Market, we are seeing the HY-XOver spread compressing to 361.74bps from 374.48bps, and remains below the short-term average of 366.81bps, with the HY/XOver ratio falling to 1.47x, below its 5-day mean of 1.47x. The IG-Main spread compressed to 20.25bps from 23.25bps, but remains above the short-term average of 19.72bps, with the IG/Main ratio falling to 1.16x, above its 5-day mean of 1.15x.

In the US, non-financials underperformed financials as IG ExFINLs are wider by 3.6bps to 121.7bps, with 19 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 5.32bps to 153.6bps, with Banks (worst) wider by 3.14bps to 190.29bps, Finance names (best) tighter by 18.18bps to 746.78bps, and Brokers tighter by 0.19bps to 191.58bps. Monolines are trading wider on average by 57.66bps (2.15%) to 2451.64bps.

In IG, FINLs outperformed non-FINLs (0.77% wider to 3.05% wider respectively), with the former (IG FINLs) wider by 2.7bps to 359bps, with 3 of the 21 names tighter. The IG CDS market (as per CDX) is 9.9bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (137.3bps), with the bond ETFs outperforming the IG CDS market by around 11.44bps.

In Europe, ITRX Main ex-FINLs (outperforming FINLs) widened 6.16bps to 128.91bps (with ITRX FINLs -trending tighter- weaker by 7.88 to 119.38bps) and is currently trading in the middle of the week's range at 42.11%, between 137.38 to 122.75bps, and is trending tighter. Main LoVOL (trend tighter) is currently trading in the middle of the week's range at 41.99%, between 92.88 to 82.29bps. ExHVOL outperformed LoVOL as the differential compressed to -1.43bps from 1.38bps, but remains above the short-term average of -1.86bps. The Main exFINLS to IG ExHVOL differential decompressed to 43.6bps from 39.08bps, but remains below the short-term average of 44.35bps.

Commentary compliments of

Index/Intrinsics Changes

CDR LQD 50 NAIG091 +3.04bps to 180.34 (35 wider - 9 tighter <> 11 steeper - 38 flatter).

CDX12 IG +3.5bps to 147.25 ($-0.14 to $97.97) (FV +3.47bps to 159.31) (86 wider - 22 tighter <> 38 steeper - 87 flatter) - Trend Tighter.

CDX12 HVOL +9.4bps to 343.4 (FV +9.32bps to 402.16) (25 wider - 2 tighter <> 8 steeper - 22 flatter) - Trend Tighter.

CDX12 ExHVOL +1.64bps to 85.31 (FV +1.84bps to 91.04) (61 wider - 34 tighter <> 65 steeper - 30 flatter).

CDX11 XO +5.1bps to 352.5 (FV +10.38bps to 426.89) (28 wider - 3 tighter <> 10 steeper - 24 flatter) - No Trend.

CDX12 HY (30% recovery) Px $-0.37 to $79.63 / +14bps to 1128.2 (FV +37.36bps to 1008.94) (83 wider - 11 tighter <> 22 steeper - 76 flatter) - Trend Tighter.

LCDX12 (65% recovery) Px $-0.89 to $80.05 / +55.41bps to 1033.16 - Trend Tighter.

MCDX12 +5bps to 175bps. - Trend Tighter.

CDR Counterparty Risk Index rose 5.39bps (3.64%) to 153.67bps (14 wider - 1 tighter).

CDR Government Risk Index rose 5.07bps (9.45%) to 58.71bps.

DXY weakened 0.82% to 80.5.

Oil fell $1.04 to $61.

Gold rose $15.55 to $954.2.

VIX increased 2.32pts to 31.35%.

10Y US Treasury yields rose 17.7bps to 3.37%.

S&P500 Futures lost 1.21% to 889. Sphere: Related Content

BankUnited Closed, FDIC Named Receiver, Sold To Ross, Carlyle, Blackstone

In an early precedent of Bank Failure Friday (and a LOT of work for the CNBC green shoot spin doctors for early Friday am consumption) BankUnited just expired, in the largest blow up of a bank to date in 2009. The bank will be "sold" to Carlyle, Blackstone and WL Ross. But why should Carlyle et al "pay up" for the asset when they can get Sheila Bair to use taxpayer money to backstop the entire sale for them. And when we are talking $12.8 billion in assets, it surely is much better to get Joe Q. Sixpack to make sure you (Wilbur Ross et al) don't have any risk exposure. After all, it worked so well for WaMu and JPM. The immediate cost to the FDIC will be $4.9 billion (and up to $10.7 billion based on the loss-sharing arrangement), which means that at this point the FDIC's DIF is negative with almost 100% certainty. Robbing from poor Peter to pay rich Paul continues.

And most curiously, just how does it work out that a bank with $10.7 billion in deposits has its loans assumed for $4.9 billion, or a 54% haircut on the loan book?
On Thursday, May 21, 2009, BankUnited, FSB, Coral Gables, FL was closed by the Office of Thrift Supervision (OTS) and the Federal Deposit Insurance Corporation (FDIC) was named Receiver. Subsequent to the closure, BankUnited, a newly chartered federal savings bank, acquired the assets and most of the liabilities of BankUnited, FSB from the FDIC as Receiver for BankUnited, FSB. No advance notice is given to the public when a financial institution is closed.

Bank United, FSB had assets of $12.80 billion and deposits of $8.6 billion as of May 2, 2009. The new BankUnited will assume $12.7 billion in assets and $8.3 billion in nonbrokered deposits. The FDIC and BankUnited entered into a loss-share transaction and will share in the losses on approximately $10.7 billion in assets covered under the agreement. The loss-sharing arrangement is projected to maximize returns on the covered assets by keeping them in the private sector. The agreement also is expected to minimize disruptions for loan customers as they will maintain a banking relationship. BankUnited will recapitalize the institution with $900 million in new capital.

The FDIC facilitated the transaction with John Kanas and a consortium of investors after BankUnited, FSB, was closed today by the Office of Thrift Supervision, which appointed the FDIC as receiver. The FDIC estimates that the cost to its Deposit Insurance Fund will be $4.9 billion. BankUnited's acquisition of all the deposits and assets of BankUnited, FSB was the "least costly" resolution for the DIF compared to alternatives.

In addition to the management team led by John Kanas, ownership includes WL Ross & Co. LLC; Carlyle Investment Management L.L.C.; Blackstone Capital Partners V L.P.; Centerbridge Capital Partners, L.P. LeFrak Organization, Inc; The Wellcome Trust; Greenaap Investments Ltd.; and East Rock Endowment Fund.
Here for the full press release. Sphere: Related Content

The Mysterious Case Of The Vanishing Bull Volume

Some volumetric observations: the chart below demonstrates a "cumulative volume divergence from average" histogram. Recently, on up days, the volume has been significantly below average, and yet accelerates above average on down days. Another observation: on down days, the VWAP for the SPY is the magical barrier that simply refuses to be breached. Today for example, the ramp into the close occurred despite that the volume pushing the SPY higher was again below average toward the end of the day.

Sphere: Related Content

"Chasing Returns Regardless Of Valuation" And The Kneecapping Of CMBS Lockboxes

Some very fitting words from Mike Cembalest of JPM, putting the Green Shoots theory, and the irrational exuberance of the past 2 months, in perspective (highlights added).
People are now just beginning to grasp that monetary and fiscal expansion that is 10x what was done during the 1970s should give them pause to reflect about unintended consequences. The way investment advisory firms have been latching onto "Green Shoots" is astounding. Its not that Green Shoots evidence is non-existent. It's how they are ascribing almost a 0% chance to a negative reversal in activity or sentiment (e.g., April retail sales or Chinese exports), and have ruled out entirely that the bounce may just be a replenishment of a depleted supply chain, and not much more. Maybe they are simply tired of a bear market after 2 years, and just want it to go away. I am beginning to see counterfactual evidence (e.g., rising credit card losses, weakness in Chinese retail demand once you strip out government owned enterprises) selectively ignored by Green Shoots advocates (just like the old Pravda newspaper). And I read this today from an independent research shop: "Investors might have to chase returns over the next several months to stay ahead of their benchmark – a potentially bullish scenario for stocks, regardless of what the valuation picture looks like". Regardless of the valuation picture; gee, that was a great strategy for the LBO industry at 11x EBITDA.
More importantly, Mike provides some much needed color on the latest developments in the GGP bankruptcy.
As for the legal industry, they're on the soapbox as well. The following commentary was sent out by Cadwalader on GGP:
"Impact of the Final Orders. The final cash management and cash collateral arrangements in effect turn the Project-Level Subsidiaries into debtor-in-possession lenders secured by administrative claims and first liens on the Main Operating Account. In comparison with the CMBS lenders’ prepetition collateral, the post-petition position of the CMBS lenders ironically represents an improvement in situations where the excess prepetition cash flow was not being trapped.

The final cash collateral order characterizes the upstreaming of cash as loans rather than a capital distributions and gives the CMBS lenders a replacement lien on the administrative claims arising from the intercompany loans."
My personal interpretation: for clients who had no lockbox protections in the first place, they are now better off. Yes, a newspaper over your head is better in the rain than nothing. But the legal industry just spent the last 20 years creating an intricate web of procedures and waterfall arrangements that were supposed to protect secured lenders. Many of the GGP secured lenders WERE supposed to have cash flows trapped at the SPE in case of bankruptcy, either by the parent or at the sub. And here, at the first stress test of thousands of billable hours or work, a judge throws the lockbox protections out, declaring that advances to GGP being loans and not capital distributions is "adequate protection". The final orders could equally be interpreted as a repudiation of part of the underpinning of the entire structured finance business, but I would not expect to read that from any of the white shoe firms.
In other words, the entire CMBS legal framework is now undone and each bankruptcy will have to be resolved on a case by case basis, with case law interpretation provided by assorted Judges, some of who may not agree with Ropper's generosity. Sphere: Related Content

These Are Not The Futures Buying Droids You Are Looking For

Ah, the 3:30 PM Volume Spike. Like a well wound Patek Philippe. 2.1 million SPYs traded to the dot.

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Fed Transparency Petition Update

I am happy to report that up to this point, over 1,400 signatories have endorsed the Fed Transparency petition.

Importantly, earlier Rep. Raul Grijalva (D-AZ) has signed on to cosponsor H.R. 1207. Rep. Grijalva brings the total of Democratic cosponsors to 30. There are 136 Republican House members already cosponsoring the bill, and 218 votes are needed in the House for passage.

If readers have not done so, they can endorse the bill and Rep. Grayson's letter here. Sphere: Related Content

Ahrrrrnold Is Running For The Choppa

California is on its own. At least that is the conclusion based on Tm Geithner's earlier statement that TARP cash can not be used to bail out the Golden (or any other) state.
The law “does not appear to us to provide a viable way of responding to that challenge,” Geithner told a House Appropriations subcommittee in Washington today. Among the hurdles: Money from the Troubled Asset Relief Program is reserved for financial companies, he said.

The Treasury chief said he will work with Congress to help states such as California that have been battered by the credit crunch and are struggling to arrange backing for municipal bonds and short-term debt.

The municipal bond markets are “starting to find some new balance and equilibrium,” Geithner said.

Three observations: i) when did "the law" ever stop T^3 before; ii) If by new equilibrium Geithner means 0 then he is right, iii) isn't Barney Frank all over the task of providing US guarantees to munis for ever and ever, after extensive discussions with T3 and Dick Bove have revealed that there really is no other way to prevent the complete collapse of the world's fifth largest economy (which if the miles of empty containers at Long Beach harbor is any indication, then the world must be is in some serious trouble).

Wisconsin Democrat David Obey sums it best "We don’t want Uncle Sam to be Uncle Sucker." Of course, there is nothing that T3 and Barney would like more. Unfortunately for California, it may be too late. While its CDS has tightened recently, nothing fundamentally has changed from the time when its CDS hit well over 450 in late 2008. It is merely a matter of time before the state's risk goes back to those levels again from its current 200bps tighter price.

disclosure: no California CDS exposure.

Sphere: Related Content

30 Year Mortgage - The Real Riskless Investment

The spread between the 10 Yr UST and the 30 Year current coupon mortgage index has collapsed to the tightest level in 2009. If the selloff in 10 Year bonds continues for another 68 bps (at this rate that would be achieved in about 3 hours), it will be cheaper to finance a mortgage compliments of bankrupt Fannie and Freddie, than to issue US Sovereign debt.

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Goldman Expects Large Drop In Rents; REITs Impacted

In a research piece titled "REITs Cutting Residential Rents, Setting Stage for Further CPI Disinflation" Goldman Sachs analysts conclude that based on recent declining rent trends from residential REITs, the impact on price levels in the housing market (especially in major metropolitan centers where rent are only just now starting to unravel) will get progressively adverse, but will also feed ongoing general asset deflationary pressures, and by implication, added weakness to REIT cash flow. From Goldman:
With unemployment approaching double-digit levels, housing vacancies hovering near all-time highs, and industrial capacity utilization plumbing record lows, pricing power is nowhere in sight. And if our forecast of a sluggish economic recovery is correct, pricing power is unlikely to return soon in most industries.

Disinflation seems particularly likely for rental prices given the large overhang of available housing. Vacancy rates in the owner-occupied housing sector and the rental housing sector are both near all-time highs, so any “output gap” model of inflation points strongly towards disinflation in this sector. Furthermore, rent and owners’ equivalent rent (imputed rent for owner-occupied households) make up 39% of the core Consumer Price Index and 18% of the core price index for personal consumption expenditures. Thus, not only does a further decline in rental inflation look likely, but it is near-essential in order for overall core inflation to drift down towards zero as we expect.
This brings up the ongoing question of just why are REITs of all shapes and sizes, across all verticals (office, industrial, multi-apartment, etc), clamoring to be raising cash in order to "buy distressed properties?" If anything, SPG et al should be buying wrecking balls instead of bankrupt malls. The wave of overcapacity, coupled with rents which are only now starting to turn, will force REITs to be hit with the double whammy of i) increased interest expense from higher cap rates once they discovered that absent TALF version 29938.444, any refinancing is impossible, and ii) lower rent income... all leading to the conclusion that the current wave of equity follow on offering will be a great benefit to all REITs... when they seek to satisfy 2-3 quarters of cash burn at best. Sphere: Related Content

"Sell Everything: Focus On Stocks And Bonds... Don't Forget Dollars... Oh Yeah, Buy Gold"

Not only is the stock market getting hammered, but 10 Years today, and especially in the last 20 minutes have gotten the biggest beat down in months. Only the dollar is barely holding on to the green, and that is just because people are shocked, SHOCKED, that the UK may not actually be a AAA-rated credit. And the 2s10s.... fugghedaboutit - everyone is piling in short durations.

Update: So much for the dollar catching a break. Even soon-to-be-triple hooked United Kingdom is winning at the halftime commercial break. Now all the UK fear has moved squarely on Uncle Sam's shoulders.

Oh, and our hedge fund friends (and enemies) who have moved all their cash to gold are having a very nice day.

Sphere: Related Content

Time To Make The Federal Reserve Accountable For Its Actions

And so it begins. Rep. Alan Grayson has distributed the letter below to all Democrats in the House and will use it to generate Democratic co-sponsorship for the HR1207 Bill, aka The Federal Reserve Transparency Act, allowing the GAO to audit the Federal Reserve, and also require a Fed report to Congress by the end of 2010.

This is the critical first step for U.S. Taxpayers to regain some semblance of control over the insanity that happens each and every day over at the Federal Reserve. The status quo must change.

Zero Hedge recommends all readers who believe in transparency and accountability join Glenn Greenwald, Naomi Klein, James K. Galbraith, Dean Baker, Bill Black, Tyler Durden, Yves Smith, US PIRG, Public Citizen, Mike Farrell, Digby, Rob Kuttner, Ian Welsh, Bill Greider, Stirling Newberry, ANWF, Les Leopold, Mike Lux and others in supporting Alan Grayson and asking Democratic members of Congress to cosponsor the Federal Reserve Transparency Act. Endorse your approval of the proposal and go to this site to sign the petition.

Tell your friends, tell your newspapers, make it viral. Let's bring accountability back.

Again, the petition link is here.


Alan Grayson's letter to colleagues:

Bring Some Accountability to the Federal Reserve

Dear Colleague,

I write to ask you to co-sponsor HR 1207, the Federal Reserve Transparency Act, which would give the Government Accountability Office the authority to audit the Federal Reserve and its member components and require a report to Congress by the end of 2010.

The Federal Reserve System operates as the central bank for the United States, managing the economy’s money supply and overseeing the banking system. Until recently, the Fed has not picked winners and losers when distributing money, nor has it brought credit risk onto its balance sheet. It has slowed or stimulated the economy by raising or lowering interest rates. Since March 2008, the Fed has resorted to using its emergency powers to pick winners and losers, and to take massive credit risk onto its books. Since last September, the Fed’s balance sheet has expanded from around $800 billion to over $2 trillion, not including off-balance sheet liabilities it has guaranteed for Citigroup, AIG, and Bank of America, among others. The bank is also ‘monetizing’ the debt of the United States Government by purchasing massive amounts of agency and Treasury bonds. An audit is the first step in bringing this unaccountable system under the control of the public, whose money it prints and disseminates at will.

The Federal Reserve is an odd entity, a public-private chimera that controls the US monetary system and supervises the banking system. The system is governed by a Board of Governors, with twelve regional reserve banks that serve a supporting role. While the Governors are appointed by the President with confirmation by the Senate, the regional Reserve Banks have boards of directors chosen primarily by private banking institutions. Right now, for instance, the CEO of JP Morgan, Jamie Dimon, serves on the Board of Directors of the New York Federal Reserve Bank, as did Goldman Sachs Director Stephen Friedman.

This creates striking conflicts of interest and unseemly appearances in the management of what is ultimately the public’s money.

  • JP Morgan’s CEO was a board member of the New York Fed even as he negotiated on behalf of JP Morgan with the New York Fed for a $29 billion bridge loan to allow his company to take over Bear Stearns.
  • New York Fed and Goldman Sachs board member Stephen Friedman purchased 37,300 shares of Goldman Sachs stock in December at the same time as Goldman received permission to convert to a bank holding company regulated by the Federal Reserve. Friedman at the time was also overseeing the selection of a New York Federal Reserve President to replace Tim Geithner, and the New York Fed ended up hiring another alumni from Goldman Sachs.
  • According to the bank’s website, the two “class B” directorships of the New York Fed that are supposed to represent the public are vacant.
  • Enron’s Jeff Skilling was on the board of the Dallas Federal Reserve Bank.
Criticism of banker influence and control of our monetary system is not new. However, the urgency of the financial crisis and the actions of the Fed picking investment bank winners and losers have changed the nature of the criticism. The Senate just passed a non-binding resolution requiring more transparency at the Federal Reserve in its Budget Resolution.

Still, neither the GAO nor the Federal Reserve Inspector General has audited the books of the Federal Reserve or its regional banks. The Federal Reserve has refused multiple inquiries from both the House and the Senate to disclose who is receiving trillions of dollars from the central banking system. The Federal Reserve has redacted the central terms of the no-bid contracts it has issued to Wall Street firms like Blackrock and PIMCO, without disclosure required of the Treasury, and is participating in new and exotic programs like the trillion-dollar TALF to leverage the Treasury’s balance sheet. With discussions of allocating even more power to the Federal Reserve as the ‘systemic risk regulator’ of the credit markets, more oversight over the central bank’s operations is clearly necessary.

The net effect of recent actions has been to isolate financial policy-making entirely from democratic input, and allow the Treasury Department to leverage the Federal Reserve’s balance sheet to spend money it cannot get appropriated from Congress. The public does not know where trillions of its dollars are going, and so has no meaningful control over the currency or this unappropriated “budget”. The extraordinary size of these lending facilities combined, the extreme secrecy, and the private influence is a dangerous seizure of Congress’s constitutional prerogative to appropriate public monies and control the currency.

An audit of the Federal Reserve may not be sufficient to control this sprawling system or bring it back into balance, but it is a start. The public has a right to know to whom the US government is lending trillions of dollars. Dancing around this issue with technocratic terms like ‘increasing liquidity’ and ‘private financial intermediation’ is preventing a full and long overdue public debate on the role of the Federal Reserve and the influence of private banking interests in the governing of our economy.

I encourage my colleagues to support H.R. 1207, so that we can bring some transparency to our banking system and allow the public to have a real debate over the fundamental direction of our nation’s political economy. Sphere: Related Content

S&P: U.K.Outlook Revised To Negative

The sovereign downgrade monster is back on the rampage. Earlier today, S&P fired a blank shell straight at the heart of the usurper formerly known as the developed world, when it put UK's credit outlook on negative. The premise: debt/GDP will soon pass 100%. In that case the US should be afraid, very afraid with some estimates for the comparable ratio in the United Printing Presses of America at over 370% (including the kitchen sink).
  • Standard & Poor's has revised the outlook on the United Kingdom to negative from stable.
  • The 'AAA' long-term and 'A-1+' short-term sovereign credit ratings were affirmed.
  • The outlook revision is based on our view that, even factoring in further fiscal tightening, the U.K.'s net general government debt burden may approach 100% of GDP and remain near that level in the medium term.

The negative outlook reflects Standard & Poor's view that, in light of the challenges to strengthen the tax base and contain public expenditures, the U.K. government debt burden could approach 100% of GDP by 2013 and remain near that level thereafter. The rating could be lowered if we conclude that, following the election, the next government's fiscal consolidation plans are unlikely to put the U.K. debt burden on a secure downward trajectory over the medium term. Conversely, the outlook could be revised back to stable if comprehensive measures are implemented to place the public finances on a sustainable footing, or if fiscal outturns are more benign than we currently anticipate.
First Japan, now the U.K., the pattern is pretty obvious. Load up on U.S. CDS at 38 bps anyone? Sphere: Related Content

Daily Highlights: 5.21.09

  • UAE ditched plans to join the proposed Gulf Cooperation Council monetary union.
  • Oil drops below $62 in Asia as big rally pauses.
  • Singapore economy shrinks 14.6 percent in 1Q.
  • World markets fall after Fed sees deeper slowdown.
  • Advance Auto beats by $0.10, posts Q1 EPS of $1.02 as revs rise 10.3% to $1.68B.
  • AnnTaylor Stores swung to a Q1 loss of $2.3M; revs down 28% to $426.7M.
  • Britain’s debt outlook lowered to negative.
  • BJ's Wholesale Club's Q1 net rises 41% to $24.3M; revs up 0.2% at $2.26B.
  • Cable & Wireless full-year profit drops 13 percent on restructuring costs.
  • China shares down on renewed concerns over economic recovery.
  • Computer Sciences reports Q4 EPS of $1.53 (cons $1.47); revs down 8.3% to $4.11B. Sees FY10 EPS of $4.20-4.30 (cons $4.08).
  • Deere & Co.'s Q2 net fell 38% on weak equipment sales. Sees Y09 net at $1.1B (prev $1.5B).
  • Eaton Vance beats by $0.01, posts Q2 EPS of $0.22. Revs fell 5.3% to $198.4M.
  • Forest Oil prices a 12.5M share common stock offering at $18.25/sh.
  • Treasury poised to inject more than $7B into GMAC, the first instalment of a new aid package that could reach $14B.
  • GMAC to receive $7+B from the federal government.
  • Limited beats by $0.04, posts Q1 EPS of $0.01. Revs fell 10.4% to $1.73B.
  • NetApp to acquire fellow data-storage company Data Domain Inc. for $1.5B.
  • Regions Financial plans to offer $1B in common shares, $250M in new convertible preferred shares.
  • Southwest Airlines warned that May revenues "are quite soft".
  • Target's Q1 earnings decline 13% to $522M but beat expectations. Revs up 0.2% at $14.83B.
  • Tween Brands beats by $0.13, Q1 loss of $0.06. Revs fell 18.5% to $205.2M.
Economic Calendar: Data on Initial Claims, Leading Indicators, Philadelphia Fed to be released today.

Recent Egan-Jones Rating Actions

GMAC LLC (GM1) [Upgrade from D to B-! on "too important to fail" sentiment]

Provided by Sphere: Related Content

Frontrunning: May 21

  • Continuing jobless claims hit new record high at 6.7 million (AP)
  • U.K. may lose AAA rating as debt/GDP passes 100% (Bloomberg)
  • Chrysler says dealers face elimination if sale isn't approved (WSJ)
  • Dark pool market-share battle intensifies (WSJ)
  • Necessity or luxury? Please redefine (WaPo)
  • Thought provoking Bloomberg headline: LIBOR drops by most in more than two months as recession eases (Bloomberg)
  • And compare to this one: Stock futures drop on recovery and UK jitters (Reuters)
  • Can we end the recession simply by trading higher? (Newsweek)
  • McClatchy plans debt exchange at deep discount (WSJ)
  • Why not negative interest rates? (The American)
  • Can Ken Lewis keep his job? (BusinessWeek)
  • David Rosenberg interview on BTV (Bloomberg, hat tip Root)
Sphere: Related Content

The S&P's Weight In Gold

Looking at the supercycle of how many ounces of gold it costs to buy the S&P, and projecting into the future, indicates that hedging by being short the index and long gold should pay off very handsomely... at some point in the 2015-2017 period. Chart 2 superimposes the current cycle with the past cycle - similarities?

Hat tip Credit Trader Sphere: Related Content

Wednesday, May 20, 2009

Overallotment: May 20

  • Locked out Chrysler pension fund lenders bypass Bankruptcy court, go straight to District court. Next stop: Supreme Court (Bloomberg)
  • Former head of massively underfunded PBGC takes the 5th (AP)
  • Grandpa Greenspan forgot he was shooting up green a few days ago (Bloomberg)
  • Fed officials raised prospect of more bond purchases (Bloomberg)
  • US investors get to nominate boards (FT)
  • Lehman brothers questions over securities sale (Reuters)
  • U.S. Cities with the most underwater mortgages (CNBC)
  • Sexual harassment cases plague the UN (WSJ)
  • Cali deficit now set to reach $21 billion (FT)
Sphere: Related Content

Cramer Master Class

Some people really have a lot of free time on their hands. In this case Paul Bolster and Emery Trahan of Northeastern, who have done a full blown academic paper on the effectiveness of Cramer's stockpicking.

For those who would prefer not waste their time (with either Mad Money or the paper), here is the punchline: "Cramer's stockpicking was in line with the market. One could replicate Cramer's performance by constructing an index composed of 18% Russell 1000 Growth, 29% Russell 1000 Value, and 53% Russell 2000 Growth."

In other words, for all his histrionics, Cramer is about as effective as your standard, two-sided coin.

Hat Tip Clusterstock Sphere: Related Content

FX market finally believes in the resolve of the Fed

During the last bout of QE back in March, the FX markets spasmed as USD got clobbered across every major. As we noted at the time, the market did not seem to be pricing in any action on the Fed's part despite some pretty clear signals from the big guy on his internal policy decision tree. 

However, this time around it seems that they have gotten the message and will not be underestimating Mr. Bernanke & Co. this time around. Of course, this also represents a great hidden buying opportunity for USD - assuming of course risk appetite takes a nose dive if and when the economy breaks down. As always, read the disclaimer at the bottom, but market watchers are in for some interesting price action on news release time.
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SEC Now Targetting Dark Pools, Indications Of Interests

Zero Hedge has been the subject of much (welcome) ridicule both retail and institutional, for continuing the barrage of Indication Of Interest screens (also: IOIA tag) and information for the benefit of our readers, which I have been showing consistently over the past month, ever since I had a feeling there is something peculiar in the advertised trade flow pipes. It never hurts to be proven right.

Today, the top trading chief of the Securities and Exchange Commission, James Brigagliano, announced that not only will dark liquidity pools (another topic Zero Hedge has discussed skeptically in the past specifically in the context of liquidity) become the focus of a much broader SEC focus (about time), but also automated Indication of Interest notifications have become "a potential source of concern for regulators."

The plot thickens

From the article:
James Brigagliano, co-acting director of the SEC's Division of Trading and Markets, said dark pools could impair price discovery by drawing valuable order flow away from the public quoting markets. "To the extent that desirable order flow is diverted from the public markets, it potentially could adversely affect the execution quality of those market participants who display their orders in the public markets," he said. Brigagliano added that anything that "significantly detracts from the incentives to display liquidity in the public markets could decrease that liquidity and, in turn, harm price discovery and worsen short-term volatility."

Brigagliano also took aim at dark-pool volume-reporting practices. "I'd like to give you specific statistics on the trading volume [of dark pools]," he told the crowd, "but there's very little reliable public information on dark-pool trading activity."

The SEC exec noted that some dark pools publish monthly volume figures, but that the lack of uniform reporting standards makes those figures less reliable. Some pools, he said, count both the buy and sell sides of a trade while others single-count their volume. In addition, some pools include "touched" orders in their volume stats rather than just matched trades.


In addition to concerns about price discovery and accurate trade reporting, Brigagliano targeted indications of interest sent between dark pools as another potential concern for regulators. These automated IOI messages, which usually are executable and for small size, are sent to seek liquidity from other dark pools to increase the original pool's executions. The widespread use of these "actionable order messages could create the potential for significant private markets to develop that exclude public investors," Brigagliano said. He added that these actionable order messages could affect competition among trading centers and contribute to market fragmentation by making consolidation efforts among dark pools less likely.
While the Indications of Interest screens Zero Hedge provides focus on regular markets, not dark pools, they still serve a critical purpose of providing an insider network the same "liquidity needed" signals that dark pool IOIs represent. As such, the represent an unfair advantage to buysiders who possess the advantage of seeing who may or may not be advertising a need or is in the process of accumulating abnormal amounts of stock. And the follow up is that those who keep track of IOIs in index ETFs where lately the bulk of the hedging action has focused due to the persisting HTB nature of numerous financial stocks, savvy buysiders can now extrapolate not only which hedge/quant fund is levering/delevering, but how to generate abnormal profit by further forcing the potential unwind, thereby exacerbating market illiquidity (despite the attempts by SLP providers such as Goldman Sachs to restore it).

Another question arises: which major quant funds tend to trade significantly in the dark pool realm, potentially generating significant price distortions, and why have some of them also recently become the focal point of targeted SEC scrutiny. Is this merely a coincidence?

Just as in the AIG case, Zero Hedge was happy to provide the initial information that led to much additional disclosure (and cable TV melodrama) on the AIG counterparty fiasco, so I hope in this case regulators are catching on to this potentially abusive practice of market efficiency and liquidity. However, even in a world where dark pools and covert IOIs are eliminated (and ITG's business model is destroyed), there is still much more needed before one can even presume we have anything resembling a transparent market. And as long as that is the case, those with the upper informational hand will benefit at the expense of the without. Sphere: Related Content

Letter From A Dodge Dealer

Reposted without commentary from American Thinker

letter to the editor

My name is George C. Joseph. I am the sole owner of Sunshine Dodge-Isuzu, a family owned and operated business in Melbourne, Florida. My family bought and paid for this automobile franchise 35 years ago in 1974. I am the second generation to manage this business.

We currently employ 50+ people and before the economic slowdown we employed over 70 local people. We are active in the community and the local chamber of commerce. We deal with several dozen local vendors on a day to day basis and many more during a month. All depend on our business for part of their livelihood. We are financially strong with great respect in the market place and community. We have strong local presence and stability.

I work every day the store is open, nine to ten hours a day. I know most of our customers and all our employees. Sunshine Dodge is my life.

On Thursday, May 14, 2009 I was notified that my Dodge franchise, that we purchased, will be taken away from my family on June 9, 2009 without compensation and given to another dealer at no cost to them. My new vehicle inventory consists of 125 vehicles with a financed balance of 3 million dollars. This inventory becomes impossible to sell with no factory incentives beyond June 9, 2009. Without the Dodge franchise we can no longer sell a new Dodge as "new," nor will we be able to do any warranty service work. Additionally, my Dodge parts inventory, (approximately $300,000.) is virtually worthless without the ability to perform warranty service. There is no offer from Chrysler to buy back the vehicles or parts inventory.

Our facility was recently totally renovated at Chrysler's insistence, incurring a multi-million dollar debt in the form of a mortgage at Sun Trust Bank.



This is beyond imagination! My business is being stolen from me through NO FAULT OF OUR OWN. We did NOTHING wrong.

This atrocity will most likely force my family into bankruptcy. This will also cause our 50+ employees to be unemployed. How will they provide for their families? This is a total economic disaster.


I beseech your help, and look forward to your reply. Thank you.


George C. Joseph
President & Owner
Sunshine Dodge-Isuzu

hat tip Dartmont
Sphere: Related Content

Daily Credit Market Summary: May 20 - Anything But Unch.

Spreads were mixed in the US with IG worse, HVOL improving, ExHVOL weaker, XO wider, and HY selling off (but while moves were marginal close-to-close, the sentiment was wider all day off a gap tight opening). Indices typically underperformed single-names (as single-names caught up with the rally close last night) with skews mostly narrower as IG underperformed but narrowed the skew, HVOL underperformed but narrowed the skew, ExHVOL intrinsics beat and narrowed the skew, XO underperformed but compressed the skew, and HY's skew widened as it underperformed.

The names having the largest impact on IG are Boston Properties L.P. (-40bps) pushing IG 0.3bps tighter, and Viacom Inc. (+5bps) adding 0.04bps to IG. HVOL is more sensitive with Boston Properties L.P. pushing it 1.34bps tighter, and Whirlpool Corp. contributing 0.1bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Constellation Energy Group Inc. (-20bps) pushing the index 0.2bps tighter, and Viacom Inc. (+5bps) adding 0.05bps to ExHVOL.

The price of investment grade credit fell 0.01% to around 98.09% of par, while the price of high yield credits fell 0.155% to around 79.88% of par. ABX market prices are higher (improving) by 0.11% of par or in absolute terms, 0.47%. Broadly speaking, CMBX market prices are higher (improving) by 0.19% of par or in absolute terms, 0.61%. Volatility (VIX) is up 0.23pts to 29.03%, with 10Y TSY rallying (yield falling) 5.9bps to 3.19% and the 2s10s curve flattened by 1bps, as the cost of protection on US Treasuries fell 1bps to 34bps. 2Y swap spreads tightened 1bps to 35.5bps, as the TED Spread tightened by 2.8bps to 0.55% and Libor-OIS improved 3bps to 51.7bps.

The Dollar weakened (again) with DXY falling 1.17% to 81.139, Oil rising $2.14 to $61.79 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 2.12% today (a 2.42% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $13.3 to $938.35 as the S&P is down (899.1 -0.82%) underperforming IG credits (144.25bps -0.01%) while IG, which opened tighter at 141.5bps (and saw tights not seen since 05/08 gap tights), outperforms HY credits. IG11 and XOver11 are +0.25bps and -17.25bps respectively while ITRX11 is -6bps to 120.5bps.

The majority of credit curves steepened 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 -3.8bps 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.

61% of IG credits are shifting by more than 3bps and 61% of the CDX universe are also shifting significantly (more than the 5 day average of 59%). The number of names wider than the index decreased by 4 to 42 as the day's range fell to 7.5bps (one-week average 8.63bps), between low bid at 137 and high offer at 144.5 and higher beta credits (-4.89%) outperformed lower beta credits (-3.71%).

In IG, tighteners outpaced wideners by around 15-to-1, with 8 credits wider. By sector, CONS saw 5% names wider, ENRGs 6% names wider, FINLs 10% names wider, INDUs 7% names wider, and TMTs 4% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG12 exFINLs) with the former trading at 122.75bps and the latter at 118.12bps.

Cross Market, we are seeing the HY-XOver spread decompressing to 376.86bps from 353.7bps, and remains above the short-term average of 357.53bps, with the HY/XOver ratio rising to 1.51x, above its 5-day mean of 1.46x. The IG-Main spread decompressed to 23.75bps from 17.5bps, and remains above the short-term average of 19.59bps, with the IG/Main ratio rising to 1.2x, above its 5-day mean of 1.15x.

In the US, non-financials underperformed financials as IG ExFINLs are tighter by 5.3bps to 118.1bps, with 89 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 8.61bps to 147.94bps, with Finance names (worst) tighter by 23.65bps to 763.16bps, Brokers (best) tighter by 8.13bps to 190.83bps, and Banks tighter by 6.29bps to 186.76bps. Monolines are trading tighter on average by -112.32bps (4.43%) to 2383.51bps. Notably, FINLs credits outperformed stocks as we hear investors reloading on CSA trades across senior debt and common stock.

In IG, FINLs outperformed non-FINLs (3.99% tighter to 3.3% tighter respectively), with the former (IG FINLs) tighter by 14.8bps to 355.4bps, with 18 of the 21 names tighter. The IG CDS market (as per CDX) is -1bps rich (we'd expect LQD to outperform TLH) to the LQD-TLH-implied valuation of investment grade credit (145.24bps), with the bond ETFs underperforming the IG CDS market by around 3.54bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) rallied 5.88bps to 122.75bps (with ITRX FINLs -trending tighter- better by 6.5 to 111.5bps) and is currently trading tight to its week's range at 0%, between 137.38 to 122.75bps, and is trending tighter. Main LoVOL (trend tighter) is currently trading tight to its week's range at 0%, between 93.74 to 82.29bps. ExHVOL underperformed LoVOL as the differential decompressed to 2.04bps from -4.61bps, and remains above the short-term average of -1.87bps. The Main exFINLS to IG ExHVOL differential compressed to 38.42bps from 46.52bps, and remains below the short-term average of 44.24bps.

Commentary compliments of

Index/Intrinsics Changes

CDR LQD 50 NAIG091 -7.07bps to 176.93 (3 wider - 43 tighter <> 39 steeper - 7 flatter).

CDX12 IG +0.25bps to 144.25 ($-0.01 to $98.09) (FV -6.8bps to 155.67) (8 wider - 107 tighter <> 89 steeper - 28 flatter) - Trend Tighter.

CDX12 HVOL -6bps to 334 (FV -18.11bps to 391.1) (1 wider - 26 tighter <> 22 steeper - 6 flatter) - Trend Tighter.

CDX12 ExHVOL +2.22bps to 84.33 (FV -3.54bps to 89.2) (7 wider - 88 tighter <> 28 steeper - 67 flatter).

CDX11 XO 0bps to 347.4 (FV -11.45bps to 416.13) (2 wider - 28 tighter <> 27 steeper - 4 flatter) - No Trend.

CDX12 HY (30% recovery) Px $-0.16 to $79.875 / +5.9bps to 1116.6 (FV -31.46bps to 980.31) (5 wider - 75 tighter <> 65 steeper - 18 flatter) - Trend Tighter.

LCDX12 (65% recovery) Px $+0.93 to $80.95 / -58.36bps to 984.62 - Trend Tighter.

MCDX12 -4bps to 166bps. - Trend Tighter.

CDR Counterparty Risk Index fell 8.61bps (-5.5%) to 147.94bps (1 wider - 14 tighter).

CDR Government Risk Index fell 2.29bps (-4.09%) to 53.64bps.

DXY weakened 1.17% to 81.14.

Oil rose $2.14 to $61.79.

Gold rose $13.3 to $938.35.

VIX increased 0.23pts to 29.03%.

10Y US Treasury yields fell 5.6bps to 3.19%.

S&P500 Futures lost 0.82% to 899.1. Sphere: Related Content

Indiana Chrysler 363 Objection Promptly Rejected

Barely did the Indiana pension funds submit the objection to the Chrysler asset sale yesterday, before the ever more Peck-esque Judge Gonzalez totally confirmed his brand new nickname "Speedy." In the filing below, S.G. outright denied Indiana's claims for a delay and halt in the process proceedings:
The movant’s papers do not address the fundamental issue of whether they have standing to challenge any governmental action. There are substantial issues and disputes concerning the movant’s standing both under the Collateral Trust Agreement as well as the Supreme Court’s standing jurisprudence. Without having addressed these issues, the Court cannot say that the movant has clearly demonstrated that they have a substantial likelihood of succeeding on the withdrawal motion.

For the reasons provided above and those articulated by the objectors at the hearing, the Court finds, after weighing the harm to the movant and the harm to the estate, that the movant has not established their burden to impose a stay on the proceedings pursuant to Bankruptcy Rule 5011(c).
Boy, that denial came in less than 24 hours. Do those Jones Day lawyers realize they are charging US taxpayers by the hour: at this rate we will never get the chance to really pay them the $900/hour they deserve. What efficiency... And again, what a way to prevent inquiring into contractual rights, yet again. Seems like White & Case is cursed to not make any headway in this case ever.

Most interestingly, however, was the response of Indiana Treasurer Richard Murdoch, who swore not to invest any more capital in the debt of companies receiving federal aid... Maybe that's the only remaining way to stick it to the administration... Then again, it would likely take Geithner's Heidelberg Specials roughly 30 seconds to print enough cash to replace all the pension funds' cash contributions to the TARP alliance.

Sphere: Related Content