Public Sector Unions - Is the End Near?

Reuters:

Ohio's legislature on Wednesday passed a Republican measure to curb the collective bargaining rights of about 350,000 state employees, and Governor John Kasich said he will sign it into law.

The bill, which also bans strikes by unions for public employees, was approved in the Ohio Senate late on Wednesday following its passage in the state House of Representatives earlier in the day.

The amended bill removed jail time as a possible penalty for workers who strike. But it is in some ways tougher on unions -- it prevents nonunion employees affected by contracts from paying fees to unions and makes it easier to decertify a union.

While Wisconsin has gained more national attention, Ohio is far more important to unions. It has the sixth largest number of public sector union members among all the 50 states, twice the number of Wisconsin. With many auto and steel and manufacturing plants, Ohio is also a union bellwether.

 Full story:  Reuters - Ohio Unions


And in Idaho:

Idaho's Republican governor on Thursday signed into law a measure that strips public school teachers of some major collective bargaining rights and does away with teacher tenure.

Butch Otter is the second governor to sign such a measure this year, after Wisconsin Governor Scott Walker signed legislation curbing that state's public workers union last Friday.

The Idaho law limits collective bargaining by the 12,000 teachers represented by the Idaho Education Association, the state teachers union, to salaries and benefits.

That means educators can no longer negotiate such issues as teacher workload and class sizes. It also does away with teacher tenure and limits contracts to one year.

This is a true movement going on.  I fully expect more states to follow.  AFSCME must be pulling out their hair. Ultimately, I believe that this will be good for public sector financials and strengthen the attractiveness of municipal bonds and BABs.

US Tops Equity Issuance

From Reuters comes an equity issuance story.  Given all the tension in the world, I am amazed at the markets appetite for new risk,

The United States drove global equity issuance in the first three months of the year, stealing Asia's crown, after a spate of blockbuster U.S. IPOs backed by private equity firms.

Despite a tumultuous final few weeks which saw unrest in the Middle East and a nuclear crisis in Japan rock worldwide stock markets, global equity issuance rose 12 percent to $189 billion in the first quarter, compared with the same period in 2010.

U.S. issuance accounted for $66.5 billion, or 35 percent, of the capital raised, according to Thomson Reuters data.

Asia in recent years has dominated equity fundraising. In the first quarter,China, excluding Hong Kong, was only the second most-active issuer, making up 15 percent of activity.

"What we are seeing is a decoupling, whereby the U.S. seems to be breaking out and surging ahead, leaving Europe in its wake," said Viswas Raghavan, head of international capital markets at JPMorgan Chase & Co in London.

"There seems to be greater confidence in the U.S. amid an emerging belief that the worst is behind them whereas in EMEA there are a lot of macro issues ... weighing on the market."

Four of the top 10 IPOs globally were the buyout-backed U.S. share floats of measurement firm Nielsen Holdings, Florida lender BankUnited Inc, pipeline company Kinder Morgan Inc and hospital operator HCA Holdings Inc. The U.S. also had large follow-on share sales by MetLife Inc and Fifth Third Bancorp

Private equity is monetizing their investments while the getting is good.  This should shorten the runway for exit strategies as long as the market remains accommodative. 

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Portugal - Getting Worse

From Bloomberg:

A bailout for Portugal may total as much as 70 billion euros ($99 billion), said two European officials with direct knowledge of the matter.

A financial lifeline would be between 50 billion euros and 70 billion euros, said the officials who declined to be named because the issue is confidential. Portugal has not yet asked for a bailout. The figures remain preliminary, the officials said. Royal Bank of Scotland Group Plc estimates the cost of a rescue at about 80 billion euros.

Portugal moved closer to external aid after Prime Minister Jose Socrates’s offer to resign left his government in limbo on the eve of today’s European Union summit to address the region’s debt crisis. Two-year Portuguese bond yields reached the highest since 1999. The government retains its powers for now before President Anibal Cavaco Silva meets tomorrow with the main parties to resolve the political crisis or call elections. 

Opposition parties united to reject additional cuts that were the equivalent of 4.5 percent of gross domestic product over three years. The government said the measures were needed to trim the deficit to 4.6 percent of GDP this year and within the EU’s 3 percent limit in 2012.

The spread between Portuguese and German 10-year bond yields widened 15 basis points to 439 basis points yesterday after reaching a euro-era record of 484 on Nov. 11. It was at 444 basis points today. 

Full article here:  BBRG on Portugal Bailout 


This obviously does not bode well for Portugal.  Look for the rating agencies to come out and pontificate and possibly take action.  The PIIGS issue is not dead.

Random Thoughts and Opinions on Market Stories

Just some stories I wanted to share and my thoughts on them.  Bottom line is I don't see much optimism in many of the stories or data out there.  The recovery is still nascent and, I believe, on the edge of stagnating.  As I have stated, I am not a huge fan of risk, which keeps me from putting on meaningful positions.  I still do not believe that the market has factored in the risks - geopolitical or financial.




Saw the following on Bloomberg today:

Swiss regulators, spooked by the near collapse of UBS in 2008, may require the two Zurich-based lenders to sell the securities, known as CoCos, to avoid future bailouts. Gruebel has called the debt, which turns into equity when a bank’s capital drops below a certain level, “dangerous.” Dougan, who runs the firm Gruebel once led, sold the first CoCos last month.

Credit Suisse is using the bonds to replace so-called hybrid debt, which will no longer count as the highest-quality capital under rules approved last year by the Basel Committee on Banking Supervision. For UBS, which has less such debt to replace, CoCos may prove a more expensive way to fatten capital cushions. Simon Maughan, co-head of European equities at MF Global Ltd., estimated that selling the securities may shave 10 percent from UBS’s annual net income after 2012.

The disagreement over CoCos may play out around the world if the Basel committee approves the use of CoCos to fulfill added capital requirements for systemically important financial firms and governments force lenders to sell them. Banks globally may need to issue $1 trillion of CoCos over the next decade to meet tougher rules designed to prevent another crisis, Standard & Poor’s said in December. 

The market for CoCos is going to be big.  But, as stated, it will be contentious depending on which bank is being looked at.  Given the implications on hybrids of Basel III, I believe that hybrid issues are still somewhat attractive.  As the story would suggest, look for those issuers that have a large amount of capital derived from hybrids as they will be the first to try a call of those issues.   


From the Atlantic today:

The Fed has rejected Bank of America's bid to modestly increase its dividend.  The problem isn't the loss of the dividend itself, of course--even major investors aren't really going to miss a cent a share.  Rather, the problem is what this herald's for Bank of America's financial condition.  Other banks have been allowed to increase their dividends, which suggests that the Fed thinks BofA is still unusually weak. 

I don't see any positive to this.  While the dividend increase might have been nominal, the Fed saying a further increase isn't going to happen does not bring comfort.


BAC 5.875 01/15/21  +185/181/10YR   bonds out 3bps today
BAC equity closed at $13.65, down $0.23 or 1.66% on230MM shares (avg volume is 166MM shares).


On BusinessWeek:

A nearly 50 percent increase in vegetable prices should ease in coming weeks as farmers deliver more tomatoes, lettuce and other crops to grocers.

Prices shot up last month after cold weather destroyed winter vegetables in the southern U.S. and Mexico. From tomatoes in Florida to lettuce in Arizona, fruit and vegetables became frostbitten, and prices rose.

Grocers and farmers say they expect crops planted after winter freezes to reach stores in the next few weeks. That's expected to bring prices down.

Once again, does the Fed eat their veggies?  50% price increases - even if they fall somewhat, don't think they will fall much.  What is this then?  Oh yeah, inflation.

From the WSJ:

Best Buy Co.'s fourth-quarter earnings fell 16% as declining domestic same-store sales masked margin growth.

The largest U.S. consumer electronics retailer has struggled in recent months, losing market share to online retailers such as Amazon.com Inc. and big-box and discounters such as Wal-Mart Stores Inc. and Costco Wholesale Corp. The electronics seller was one of the few major retailers that reported an outright sales decline in December, following a dismal third quarter dragged down by weak domestic revenue.

In the U.S., same-store sales of TVs and other consumer-electronics products fell 6.5%, while home-office sales rose 2.5%. Domestic same-store sales of entertainment software and hardware dropped 14%. 

With fuel and food costs up, consumers are backing off discretionary purchases. 

From the BBC:

The southern Syrian city of Deraa has been hit by daily protests for the past week against the government of President Bashar al-Assad, posing the greatest challenge to his rule since he took office in 2000 on the death of his father, Hafiz.

Located 120km (75 miles) south of Damascus, just a few miles from the Jordanian border, it has long been Syria's gateway to the south.

But the main challenge to the Assad government would be the loss of control over the Jordanian border.

Jordan's Islamic Action Front has a significant following in the nearby city of Irbid. 

Unrest continues, and Syria leads to Jordan.  There are also fundamentalist factions in the south which have to be considered.


From Reuters:

Capitalism may be to blame for the lack of life on the planet Mars, Venezuela's socialist President Hugo Chavez said on Tuesday.

"I have always said, heard, that it would not be strange that there had been civilization on Mars, but maybe capitalism arrived there, imperialism arrived and finished off the planet," Chavez said in speech to mark World Water Day.

Thank you Hugo, it is now crystal clear to me.

Risk - Is it Being Priced In?

After an interesting afternoon in the hospital, I am going to attempt a recap of the days affairs and attach some opinions to them.


First off, equities took a breather today as they have been grinding higher.  I look at this action as rational and fully expect the market to trade down.  Snapshot of the equity market over the last week:

So, why do I think that the market should be headed lower?  Risk friends, its all about the risk.  Consider:

1. Libya is going to be anything but easy.  What to do after enforcing the UN no-fly zone?  Wait for the power vacuum if Gadhafi is removed.  This is long haul stuff that the US and Europe (and some Arab states) find themselves embroiled in.
2. Bahrain - Saudi forces in the country point to Saudi concerns about the country and the wider region - especially as Iranian influence is being seen behind the scenes.
3. Yemen - Saleh has resisted stepping down as calls for his resignation increase.  He has asked the Saudi's for help within his country as the Saudis play a role in the country and have ties to tribal leaders.
4. Increasing number of protests in Saudi Arabia itself.
5. Still uncertain outcome in Japan with their nuclear issues.  Power has been delivered, but do the generators work and can they cool the systems?  Will be days or weeks until we know.  
6. Irish stress tests - are we gonna see the $35B that was not going to be used get used?  How bad is it really?
7. Housing data came in bad - yeah, I know there is point to point volatility, but the bigger picture is not good.  At some point FNM and FRE are going to have to be dealt with.  Will banks step in?

Bottom line, I don't like the risk profile and I don't like how the market is somewhat shrugging off the risk.  I like (and am long) oil, think silver is still interesting, still like credit products (bonds and preferred) although they are getting heady as well.  New issue calendar has been robust as there are willing buyers - points to some upside (but not much from here).

Friday Morning Update

Couple of things pushing the risk on trade today which is evidenced through the rise in equities and the sell-off in bonds.  What is moving us this morning?  Well:


The yen rally on thoughts of cash repatriation by Japanese banks and insurers drove the yen to highs vs USD,  The G7 followed Japans intervention in the currency markets for the first time in 10 years.  The result was significant:

 As well, Libya said it is ceasing all military action and will start talks with rebels, reacting the day after a United Nations vote cleared the way for strikes against leader Muammar Qaddafi’s regime.  Libyan Foreign Minister Moussa Koussa made the announcement in a televised news conference carried by Al Arabiya TV today, adding that the UN resolution authorizing a no-fly zone violates the UN’s charter.  British and French leaders began preparing for possible air strikes against Libya after a United Nations vote cleared the way for the first Western military action against an Arab country since the 2003 invasion of Iraq.


Treasuries are being swapped into risk:

But, not all is peachy in Japan:

Engineers plan to work into the night to restore power to two of the crippled reactors at Japan’s damaged Fukushima Dai-Ichi power plant, while Prime Minister Naoto Kan described the crisis as “very grave.”  Tokyo Electric Power Co. said it may finish reconnecting a power line to the No. 1 and No. 2 reactors by tomorrow morning. The electrical link would be used to restart pumps needed to protect fuel rods from overheating. However, the company said it’s possible the water pumps, damaged in the March 11 tsunami, might not work even with power, Hikaru Kuroda, chief of Tepco’s nuclear facility management department said tonight in a Tokyo news conference.  

As we head into the weekend, we must be aware of the factors that have driven the risk-on trade for any changes.

Wednesday Market Wrap

Another day of uncertainty and volatility.  The risks I listed yesterday were only compounded today leading to more risk shedding.  Until we see some resolution in Japan (and to a lesser extent the middle east), I don't see much of a rebound in risk.  That said, we might see some dip buying at some point.


Some economic and news review:


Home construction plunged 22.5% in February from January to a seasonally adjusted 479,000 homes. It was the lowest level since April 2009 and the second-lowest on records dating back more than a half-century.  Single-family homes fell 11.8% in February. Apartment and condominium construction dropped 47%.  Building permits fell 8.1% last month to the lowest level on records dating back to 1960. Permit requests for single-family homes saw the biggest decline. Apartments and condos remained flat.  This, when piled on the MBA data suggest housing isn't posting a sharp rebound (at least last month as the numbers are volatile).


The Labor Department on Wednesday said the producer price index jumped 1.6% last month, following increases of 0.8% in January and 0.9% in December. Producer prices have risen an unadjusted 5.6% over the past 12 months.  Core producer prices rose a much smaller 0.2%, but it was still the third straight monthly increase. Core prices have risen a much slower 1.8% over the past year. Economists surveyed by MarketWatch had predicted a 0.7 % increase in overall producer prices and a 0.2% increase in the core rate.  Inflation in the pipeline.  Stay close to home on the duration front and watch manufacturers for their ability to pass on price increases.

Reuters reported Wednesday that Patrick Parkinson, the director of the Federal's Division of Banking Supervision and Regulation, that although asset quality was "stabilizing," the banking system was "still in the repair and recovery stage." "Around 30 percent of all banks have less than satisfactory supervisory ratings," he is quoted as saying at the American Bankers Association annual government relations summit Washington, according to Reuters.  Great.
The Federal Reserve Bank of New York bought $6.58 billion in Treasury debt on Wednesday, the latest operation of the Fed's second round of quantitative easing to support lending and spending. Dealers offered to sell the Fed $26.46 billion in debt maturing from 2015 to 2016.  $26B offered, $6.5B bought.  Gotta keep those rates down.

Fixed Income:

Another interesting day in the fixed income markets.  Housing numbers and increased risk overwhelmed the wholesale inflation numbers.

"Risk free" had another strong day as investors shed risk and bought govvies.  Seriously, Look at the long end.  Bets against the long end (like my TBT) are getting crushed.  Curve is flattening though.

Credit markets had a tough day (although trace hi/lo data would suggest otherwise).  Market traded down a bit with CDS ending at HV15 126/136 +5   IG15 91½/92 +3   HY15 101 9/16/101¾.

Cliffs, AGL and Teva were in the market.  Teva broke better, Cliffs broke wider and AGL broke tighter.


While CDS was wider, credit was up on the day using LQD as a proxy:

Equities:


Risk off!  Selloff continued.  Equities tanked mid-day but rebounded somewhat as conditions in Japan seemed to get better (debatable at best, but optimistic).

Not pretty for risk here in the states.

The sell-off was broad based, but conglomerates and tech got an extra bit of beating.  Personally think the drop in GE is overdone, but then again, I am long the name.

Global markets fared no better.


Commodities:


Commodities were mixed, but mostly down.  Gold came back as did silver and cotton got spanked.  I Don't expect much of a rebound in commodities until the damage in Japan is known and we start to get a feel for the global demand impact.

Currencies:


A decent spike in the Yen after a pretty dramatic sell-off.  Greenback is at a 15yr low vs the yen.

While the euro fell versus the dollar, it rebounded a bit late in the day.

Tuesday Fixed Income Brief

Interesting day today to say the least.  Risk came off in torrential form as Asia got pounded and Europe followed suit.  What I see as the primary sources of risk right now:

1. A total meltdown at one or more reactor in Fukushima.  The typhoon has already constrained capacity - which will no doubt be felt by nearly all manufacturers, but a total meltdown will shutter more factories and further reduce capacity.  The hit will obviously be felt more in Japan, but the global markets will roll.  As I am aware as of this writing, it does not look likely, but cracks in the containment units and hydrogen build-up can go bad fast.
2. Continued - and increasing - unrest in the middle east.  With the Saudis in Bahrain, Iran will be pressed to react in some way - either in Bahrain or opening up a new front somewhere else to spread Saudi (and/or coalition) forces thin.  The Saudis are also facing discontent at home, but this move helps keep an opposition movement down with the show of force.  Japan of course has averted the worlds eye from the middle east for the time being.

I am also concerned about the effect of the European Financial Stability Facility ( euro440 billion  - $606 billion) which allows it to buy government bonds (from the governments if austerity measures are agreed to) instead of on the secondary markets - which means the ECB is still the buyer of last resort.

With that said, lets look at some fixed income:

Treasuries obviously had a good day as risk came off the books.

Corporates were mixed, but hi/low ratio for IG and HY continued to be strong:

Quack, quack  AFLAC (75% sales as a % of 2010 revenue from Japan) was a solid 50 bps wider - and fired Gilbert Gottfried. Other bank/finance names out 7-10bps.   EXC, SO, PCG and EIX feeling pressure due to concerns about effect on nuclear power (Germany is taking 7 older units down for inspection over the next few months).  

Oh yeah, lets not forget that Moody's pinged Portugal from A1 to A3:  "The cost of market funding is likely to remain high until the deficit has been reduced to a sustainable level and the prospects for economic growth have improved," it said in a statement.

Kinda tired, gonna close with that.

Fukushima - Some Background and Intra-day Markets

Just some information I found interesting and/or useful in assessing the impact of japan's nuclear problems.









From Stratfor:

The nuclear reactor situation in Japan has deteriorated significantly. Two more explosions occurred at the Fukushima Daiichi nuclear power plant on March 15.

The first occurred at 6:10 a.m. local time at reactor No. 2, which had seen nuclear fuel rods exposed for several hours after dropping water levels due to mishaps in the emergency cooling efforts. Within three hours the amount of radiation at the plant rose to 163 times the previously recorded level, according to Japan’s Nuclear and Industrial Safety Agency.

Elsewhere, radiation levels were said to have reached 400 times the “annual legal limit” at reactor No. 3. Authorities differed on whether the reactor pressure vessel at reactor No. 2 was damaged after the explosion, but said the reactor’s pressure-suppression system may have been damaged possibly allowing a radiation leak. After this, a fire erupted at reactor No. 4 and was subsequently extinguished, according to Kyodo. Kyodo also reported the government has ordered a no-fly zone 30 kilometers around the reactor, and Prime Minister Naoto Kan has expanded to 30 kilometers the range within which citizens should remain indoors and warned that further leaks are possible.

Chiba prefecture, to the east of Tokyo and connected to the metropolitan area, saw levels reportedly two to four times above the “normal” level. Utsunomiya, Tochigi prefecture, north of Tokyo, reported radiation at 33 times the normal level measured there. Kanagawa prefecture, south of Tokyo, reported radiation at up to nine times the normal level. Finally, a higher than normal amount was reported in Tokyo. The government says radiation levels have reached levels hazardous to human health. Wind direction, temperature, and topography all play a crucial factor in the spread of radioactive materials as well as their diffusion, and wind direction is not easily predictable and constantly shifting, with reports saying it could shift west and then back eastward to sea within the next day. It is impossible to know how reliable these preliminary readings are but they suggest a dramatic worsening as well as a wider spread than at any time since the emergency began.

Full post here:  Red Alert: Radiation Rising and Heading South in Japan | STRATFOR

Fukushima vs Chernobyl:

The Chernobyl accident was the product of human error when a test was poorly executed, while the Japanese failure was triggered by an earthquake and tsunami.

Most importantly, thick containment walls at the Fukushima Daini plant shield the reactor cores so that even if there was a meltdown of the nuclear fuel it's unlikely to lead to a major escape of dangerous radioactive clouds into the atmosphere.

At Chernobyl, there was no containment structure. "When it blew, it blew everything straight out into the atmosphere," said Murray Jennex of San Diego State University.

The most severe contamination occurred within the so-called Exclusion Zone, a circular area around the power plant with a radius of 30 kilometers (19 miles) that has been deemed unsuitable for living and is closed to unsanctioned visitors. 

Fukushima vs Three Mile Island:

Three Mile Island:  About half the reactor core in one unit at the Three Mile Island plant in Pennsylvania melted due to the loss of coolant. The other unit suffered no damage and still operates today.  The plant did vent a small amount of radiation to release pressure but nuclear experts said that release did not result in radiation levels beyond what environmental regulations allow.  Operators at Three Mile Island stopped the meltdown by restoring cooling water to the reactor core.

Looking at all three nuclear accidents, thus far Fukushima is more closely related to Three Mile Island than Chernobyl, but the situation continues to deteriorate.  The situation is now deemed more dangerous than Three Mile Island (a 6 out of 7 versus 3MI's 5).


Known radiation levels:

(Reuters) The International Atomic Energy Agency (IAEA), citing information it had received from Japanese authorities at 0350 GMT, said on Tuesday dose rates of up to 400 millisievert per hour have been reported at the Fukushima power plant site. It did not give details or comparisons on the radiation level but exposure to over 100 millisieverts a year is a level which can lead to cancer, according to the World Nuclear Association. The Vienna-based IAEA uses the unit to measure doses of radiation received by people.

Okay, now the money part (of course, in no way minimizing the impact of this tragedy):

 So, what are the markets doing on this:  puking risk!

iShares MSCI Japan Index (EWJ):

SPY:

The Yen:  The yen rose against all of its major counterparts as risk inJapan of radiation leaks from crippled nuclear power stations boosted speculation that insurers will repatriate assets to pay for earthquake damages.

Risk off means risk free (in theory - not mine) rallies:

7s and 10s are enjoying some popularity here.  I would love to short tens here, but stepping in front of freight trains can, at times, lead to severely adverse consequences.

Is this overdone?  It is anyones guess.  The broad based sell-off of just about anything (except, of course, Netflix) may present opportunities, but a full scale meltdown will kick the market in the chops.  I am sidelined for now.

Saudi Arabia - Unrest in the Cards?

As readers realize, I have been warning to watch Saudi Arabia (the house of Saud) for the spread of the civil unrest sweeping the area.  While the US (and others) might drag their feet on Libya, any outbreak of unrest/violence in Saudi Arabia will be treated differently (as we only get a miniscule amount of oil from Libya).  Keep an eye on this - and oil.


This from Stratfor:


Saudi police have reportedly opened gunfire on and launched stun grenades at several hundred protesters March 10 rallying in the heavily Shiite-populated city of Qatif in Saudi Arabia’s oil-rich Eastern Province.

The decision to employ violence in this latest crackdown comes a day before Friday prayers, after which various Saudi opposition groups were planning to rally in the streets. Unrest has been simmering in the Saudi kingdom over the past couple weeks, with mostly Sunni youth, human rights activists and intellectuals in Riyadh and Jeddah campaigning for greater political freedoms, including the call for a constitutional monarchy. A so-called “Day of Rage” of protests across the country has been called for March 11 by Facebook groups Hanyn (Nostalgia) Revolution and the Free Youth Coalition following Friday prayers.

What is most critical to Saudi Arabia, however, is Shiite-driven unrest in the country’s Eastern Province. Shiite activists and clerics have become more vocal in recent weeks in expressing their dissent and have been attempting to dodge Saudi security forces. The Saudi regime has been cautious thus far, not wanting to inflame the protests with a violent crackdown but at the same time facing a growing need to demonstrate firm control.

Yet in watching Shiite unrest continue to simmer in the nearby island of Bahrain, the Saudi royals are growing increasingly concerned about the prospect of Shiite uprisings cascading throughout the Persian Gulf region, playing directly into the Iranian strategic interest of destabilizing its U.S.-allied Arab neighbors. By showing a willingness to use force early, the Saudi authorities are likely hoping they will be able to deter people from joining the protests, but such actions could just as easily embolden the protesters.

There is a strong potential for clashes to break out March 11 between Saudi security forces and protesters, particularly in the vital Eastern Province. Saudi authorities have taken tough security measures in the Shiite areas of the country by deploying about 15,000 national guardsmen to thwart the planned demonstrations by attempting to impose a curfew in critical areas. Energy speculators are already reacting to the heightened tensions in the Persian Gulf region, but unrest in cities like Qatif cuts directly to the source of the threat that is fueling market speculation: The major oil transit pipelines that supply the major oil port of Ras Tanura — the world’s largest, with a capacity of 5 million barrels per day — go directly through Qatif.

March 8th News and Thoughts

Some news items that caught my eye today:


March 8 (Bloomberg) -- Dynegy Inc., the third-largest U.S. independent power producer, likely won’t be able to comply with debt covenants this year, which may trigger a default, the company said in a regulatory filing. The company’s auditor, Ernst & Young LLP, raised “substantial doubt” that the company can continue as a going concern as the power producer said it may violate a credit facility covenant in the third and fourth quarters, according to a filing today with the U.S. Securities and Exchange Commission. Dynegy said in its filing it may need to amend or replace its credit facility or secure additional capital to continue as “a going concern over the next twelve months” as its cash flow has been reduced by low power prices. The company may also seek additional sources of liquidity through assets sales, public or private issuances of debt, equity or other securities. Its been a long road down for Dynegy. Some of their gas fired CCGT assets look attractive (at least at current prices) although coal must be causing pain.  I will have to do some additional work on this name to see if it presents any opportunities.


WASHINGTON – The number of Americans who owe more on their mortgages than their homes are worth rose at the end of last year, preventing many people from selling their homes in an already weak housing market.  About 11.1 million households, or 23.1 percent of all mortgaged homes, were underwater in the October-December quarter, according to report released Tuesday by housing data firm CoreLogic. That's up from 22.5 percent, or 10.8 million households, in the July-September quarter.  In addition to the more than 11 million households that are underwater, another 2.4 million homeowners are nearing that point. This obviously does not bode well for the housing market or, for that matter, the banks. Jingle mail, jingle mail.... What this might help is the building materials sectors as people cant sell their house to do the American "trade up" dream and are "forced" to renovate their homes on much smaller budgets due to lack of equity loans.

ANCHORAGE, Alaska – Exxon Mobil Corp. has won a round in a dispute with environmentalists who want more money to clean up oil left on the shoreline of Prince William Sound from the 1989 Exxon Valdez tanker spill.
U.S. District Judge H. Russel Holland ruled Monday against a request from former University of Alaska marine science professor Rick Steiner. Steiner had filed a motion trying to force the oil company to pay a $92 million claim failed in 2006 by the state and federal governments.
Government lawyers are waiting for studies on the remaining oil and the effectiveness of cleanup techniques before pursuing the claim, the Anchorage Daily News reported Tuesday.  "The court urges the governments and their trustees to proceed with all possible speed to complete studies that are under way and any necessary evaluation which they may require," Holland wrote.
Exxon says it doesn't have any obligation to pay more. The Irving, Texas, company paid $900 million in restitution in a 1991 settlement. But the settlement also had a "reopener" clause allowing the state and federal governments to later claim up to $100 million more from Exxon if there were unforeseen damages.
$100MM to XOM is nothing, but it is better in their pockets than in someone elses (from a credit and equity point of view).  Moral of this story is that the effect - and cost - of environmental disasters does not go away quickly.

Today's $32 billion 3 Year auction closed at a 1.298% high yield: a slight decline from last month's 1.349%, which coupled with the pick up in the Bid To Cover from 3.013 to 3.219, explains why the auction prices inside of the WI at around 1.305%. Overall, Primary Dealers and Directs once again were responsible for two thirds of the auction, with just 34.4% going to Indirects, which nonetheless was an improvement from February's 27.6% which was the lowest since 2006. Look for the primaries to flip 'em to the Fed. Nonetheless, the auction went well.


American International Group Inc. (AIG)’s jet-leasing unit said it will buy 100 Airbus SAS aircraft and 33 Boeing Co. (BA) 737s, $11.8 billion in planes at list prices, as airlines refresh their fleets amid rising travel demand.
International Lease Finance Corp. said its deal with Airbus consists of 75 A320neo narrow-body jets, as the model fitted with new, more fuel-efficient engines is called, and 25 A321neo planes. That replaces a plan to buy 10 A380 superjumbo jets, which list for about $375 million each, ILFC said today.   ILFC chose Pratt & Whitney’s geared turbofan engine to power 60 of the twin-engine Airbus planes, giving the unit of Hartford, Connecticut-based United Technologies Corp. (UTX) its biggest order to date for the technology.

Good win for EADS and a decent day for BA and UTX. ILFC being back in the market for planes also says something about the nature of the business from AIG's point of view. I would not think that the company would place $12B in orders if it were getting ready to get sold or spun. Also bodes well for other plane lessors. Look for a good amount of EETC deals when delivery dates near. I still think there is value in select EETC deals with a majority of narrowbody planes. The new deals have attractive LTVs as well.

Deutsche Telekom AG (DTE) has held talks to sell its T-Mobile USA unit to Sprint Nextel Corp. (S) in exchange for a major stake in the combined entity, said people with knowledge of the matter.  Talks have been on and off, and a deal may not be reached, said the people, who spoke on the condition of anonymity because the talks are private. The companies haven’t been able to agree on the valuation of T-Mobile USA, which reported a drop in profit in the fourth quarter, the people said. Sprint and Deutsche Telekom shares jumped.
A merger of Sprint and T-Mobile USA would combine the third- and fourth-largest U.S. wireless providers behind Verizon Wireless and AT&T Inc. (T) T-Mobile USA may be worth $15 billion to $20 billion, according to Michael Kovacocy, an analyst at Evolution Securities in London. Sprint’s market value was $13.6 billion as of yesterday’s close.
T-Mobile USA is also discussing buying wireless spectrum from Clearwire Corp. (CLWR) as an alternative to a merger with Sprint, two people said. Deutsche Telekom’s Hoettges said last month that buying U.S. wireless spectrum from Clearwire is only one option for the German phone company. He ruled out an outright sale of T-Mobile in the U.S. Okay, think about this - Deutsche paid what $45B for T-Mobile (was Voicestream) in 2000, now it is being valued at $25B. Remember the good old tech/telecom boom - bet DT wishes they didn't. I think the combination of the two carriers would be attractive and would allow S to reduce wholesale revenues and increase ARPU as well as helping the two companies to compete with T and VZ. Even without a deal, if T-Mobile buys spectrum from Clearwire, it would certainly help Clearwire and therefore, to a smaller degree, Sprint.

Sprint bonds and equity were up over 4% on the news.

From BusinessWeek: "Laurent Gbagbo has announced on state TV that the government will now be the only entity authorized to buy or sell coffee and cocoa, the country's two main exports. The move to nationalize the country's lucrative cocoa and coffee sectors comes as financial sanctions begin to take effect against the rogue leader who has refused to leave office. International pressure has resulted in a ban on cocoa exports and Gbagbo has also been frozen out of the state's accounts at the regional central bank. The decree made public late Monday states: "The purchase and sale of coffee and cocoa will be undertaken exclusively by the state." 

Don't understand why the nationalization as exports have been crushed by his refusal to leave office. That said, it will only help provide upward pressure on Cocoa and coffee - even if just for the optics of the news.

Cocoa prices:

Coffee Prices:

Yeah, no inflationary pressures here - apparently FOMC offcials and other government officials only drink water and tea.

NEW YORK—PepsiCo Inc. is raising prices for its Tropicana juice line by as much as 8% after record cold temperatures slashed this season's orange crop, the company said Tuesday.
"After evaluating the increased pressures on our business, which include a smaller-than-expected crop for the second year in a row, two extreme freezes and the coldest December on record, we've made the difficult decision to implement a price increase in the 4-to-8% range," Ok, add Pepsi to the list of things that don't spell inflation - FOMC must be caffeine free.


KUANTAN, Malaysia — A colossal construction project here could help determine whether the world can break China’s chokehold on the strategic metals crucial to products as diverse as Apple’s iPhone, Toyota’s Prius and Boeing’s smart bombs.  The site of the rare earth refinery Lynas is building at the Gebeng industrial area, Kuantan, Malaysia. As many as 2,500 construction workers will soon be racing to finish the world’s largest refinery for so-called rare earth metals — the first rare earth ore processing plant to be built outside China in nearly three decades.
All of this helps explain why a giant Australian mining company, Lynas, is hurrying to finish a $230 million rare earth refinery here, on the northern outskirts of Malaysia’s industrial port of Kuantan. The plant will refine slightly radioactive ore from the Mount Weld mine deep in the Australian desert, 2,500 miles away. The ore will be trucked to the Australian port of Fremantle and transported by container ship from there.  Within two years, Lynas says, the refinery will be able to meet nearly a third of the world’s demand for rare earth materials — not counting China, which has its own abundant supplies.  Nicholas Curtis, Lynas’s executive chairman, said it would cost four times as much to build and operate such a refinery in Australia, which has much higher labor and construction costs. Ok, those who know me, know I follow rare earth markets and companies. Malaysia is setting itself up to be the new China as China has reduced exports AGAIN because of "environmental" concerns. This story follows on a story I saw yesterday about Molycorp potentially looking for acquisitions to help increase its heavy rare earth production. Personally, I like Lynas and great Western more than Molycorp. (disclosure: I am long Great Western)

NEW YORK—Oil prices should average $105 a barrel in 2011, the U.S. Department of Energy said, raising its forecast for this year due to the disruption of crude exports from Libya.
The DOE also said there is a 25% chance that gasoline prices would average $4 a gallon or more during the summer driving season.
The DOE's Energy Information Administration last month said it expected the price of oil—West Texas Intermediate as well as other crudes—to average $91 a barrel in 2011. That was before a wave of popular unrest swept the Arab world, deposing Egyptian President Hosni Mubarak and threatening the rule of Libyan dictator Moammar Gadhafi.
"Continuing unrest in Libya as well as other North African and Middle Eastern countries has led to the highest crude oil prices since 2008," the EIA said in its monthly Short-Term Energy Outlook. The EIA said it expects crude prices to continue rising in 2012, averaging $106 a barrel. West Texas Intermediate crude, the main oil contract traded on the New York Mercantile Exchange and the primary price benchmark used in the U.S., will cost an average of $102 a barrel this year, the EIA said, raising its forecast by $9 a barrel. In 2012, WTI will average $104 a barrel.

Really? I got long oil a while ago expecting per barrel prices to average $105-115 as the tension in the middle east is only going to increase. Watch Iran and the house of Saud.

Light crude:

TOKYO—Japanese core machinery orders rose a stronger-than-expected 4.2% in January from the previous month, the government said, as orders from manufacturers were strong on the back of fast-rising overseas demand. The figures released Wednesday by the Cabinet Office add to a recent run of data showing that Japan's economy is again growing after a contraction in the fourth quarter of 2010, when the country's gross domestic product fell 1.1% at an annual rate. The core machinery figure, fueled by a 7.2% gain in demand from manufacturers, was larger than the 3% increase expected by economists surveyed by Dow Jones Newswires and the Nikkei. Core orders had risen 1.7% in December. Overall orders, which include more volatile data for big-ticket items such as orders for new ships or electric power equipment, jumped 19.4%, the data showed. If Japan can just continue showing positive growth data, it would be encouraging. Rock in a hard place.