Brazil - More of the Right Moves

Brazil is reducing taxes on foreign investments.  As they have specified that private equity and venture capital is the focus of the cut, it ought to help draw funds into these sectors.  Timing is good as investors ate looking for the EM investments and Brazil continues to try to build out early stage investment as well as non-exchange based investments.  These are the two areas the country needs to draw funds into as they typically help the country and its economy more than just exchange based investment.  I believe the currency will continue to strengthen from here given its growth rate and real yield.  This could also help attract investment to assist in the closing of the current account gap.


The investment climate has also been helped by President Dilma Rousseff showing she might be more market friendly than her predecessor.

RIO DE JANEIRO, Jan 3 (Reuters) - Brazil's government reduced taxes on foreign investments in private equity funds and some stock investments in a bid to increase long-term financing in the country.

The government cut to 2 percent from 6 percent the so-called IOF tax on foreign exchange transactions by overseas investors into private equity funds, or FIPs, and venture capital funds, according to a decree published on Friday.

The change also affects currency transactions by overseas investors shifting funds from some types of foreign direct investment into stocks, the decree said. Investors bringing money into the country's stock market after canceling depositary receipts abroad will also pay a tax of 2 percent, down from 6 percent.

The government had raised the IOF tax on some investments twice in October, initially doubling it to 4 percent then hiking it further to 6 percent, to curb foreign exchange inflows that had been blamed for sparking a surge in the national currency, the real BRBY.

Euro Rate and News Don't Jive

Once again, we will try to marry the statements, news and Forex.

First the FX rate (EUR/USD):

Now the News:


PM Zapatero says no chance Spain will need bailout (AP) Asked in an interview if he ruled out financial help from the European Union, Prime Minister Jose Luis Rodriguez Zapatero said "absolutely." He said Spain's plans to reduce its deficit were on track and that its total debt was still 20 percentage points below the European average. Spain's debt at the end of 2009 was euro560 billion ($740 billion), roughly 60 percent of its GDP. "The deficit reduction plan is being fulfilled scrupulously, we have one of the most solid financial systems, the savings banks are restructuring at a good rate and should be consolidated by the end of the year," he said.  Finance Minister Elena Salgado insisted Friday that even if the yield on Spain's 10-year bonds were to rise to 6 percent it would still be manageable.

Portugal adopts austerity, says no bailout needed (AP) Prime Minister Jose Socrates said after Parliament approved the government's 2011 spending plan that the country had "no alternative at all" to the belt-tightening policy. "We must make this effort," Socrates said. He did not take questions. Socrates said Portugal is on track to lower its budget deficit to 7.3 percent of gross domestic product this year. The deficit reached 9.3 percent last year. Finance Minister Fernando Teixeira dos Santos said he reckoned Portugal has six months to show markets it is able to bring its spending under control. The minority Socialist government which managed to pass the plan only after negotiating its content with the main opposition party.

Anyone see a way to marry the two?  Me neither.

What is FX saying About Ireland?

We are all currency traders now.

As we get ready for the open across the world, Europe weighs heavy on everyone's mind.  Is the Irish bailout enough?  Is Portugal next, if so how far behind is Spain?

Is the Irish bailout enough?

 

The Euro touched, and went through Friday's low briefly.  While it is currently up, the answer to our question, as expressed through FX, is no.

Is Portugal (and Spain) next?  Right now, barring some unforeseen intervention, it looks like the vigilantes will move to Portugal.  While Portugal has high deficits and might fundamentally deserve a good whacking (name one country that doesn't - if you could whack the US, wouldn't you?), fundamentals are not forefront here.  The bigger picture is the inherently flawed nature of the union and their ability to remain intact and effect the changes and, importantly, optics that are required.

Sights will turn on Portugal.  Treasuries are the flight to quality.  Don't fight the trend, it will buck, but don't fight it.  The bigger concern is that there is a continued flight from risk.  I am going to stay flat risk and look for opportunities in the events that will follow.

Equities should be under pressure and credit should feel it too - look for a bit of backing up in some new issues and the IG/XO/HY generally.  Breadth has been somewhat negative in credit markets recently, so there is little support here.

Lets be careful out there.

Court Jester Dollar - Debase to Inflate

Just a little US Dollar action this morning to get it started:

Some pairs:

pair pictures:

Bottom line:  This response should not surprise anyone.  The QE announcement (just the thought or concept of QE actually) had a two-pronged goal:  Supersize liquidity in a market that needed none (ie, buy the Treasury product to keep rates low) and to lower the currency to help increase exports.  IMHO neither of these are going to accomplish the stated objective to reduce unemployment.

Monday Market Recap

Monday already.  Market has a mixed tone as Citi beat, Apple guidance disappoints, Rio and BHP call it a day for their JV and Walmart brings a megadebt offering.  Nothing occurring today that changes my outlook on the markets.  Liked the IP number today (for the trend if nothing else), bank mess seems manageable (ugly, but manageable), Europe was quiet (well, Europe ex France) and political market commentary was somewhat muted.  Still long midcap growth (VOT) with a mild small cap exposure (IJR), bonds (AGG) - with a corporate tilt (LQD) and short long treasuries (TBT), own preferred through closed ends (JPS, PFD) and continue to like C$ and A$.

How about a couple numbers:


Equities:

S&P is posting stale data, so lets move to a different source (yep, Google):

Summary:

And a little sector action:

Financials found their legs today with Citi's earnings, Basic materials took it on the chin with the breakup of the BHP/RIO ore JV, healthcare just continues to motor along.

Growth/Value:

Value steeling some of growth's thunder in midcap space (IWS = midcap val, IWP=midcap growth).

Small cap eating up midcap's advantage (IWO= smallcap Growth).  Keep your eye on this.  Combine the two and...

BOOM, smallcap value (IWN=smallcap value) making its move.  I think it is too early for this to stick, but I will be keeping my eye on it.

Fixed Income:

Mr. Rollback borrows $5B from the markets today.  They buy everything cheap.

IG finally had an up breadth day with advancers leading decliners by 1.38x, but with lower volume.  HY barely held on to a positive adv/decl ratio, turning in a 1.01x on lower volume.

Curve steepening brought to you by stronger belly of the curve.  Still like the steepener trade.

Forex:

Uncle sam gains some ground (as of writing after giving some turf earlier.  QE2 is not going to allow for much gain here.




Errata:

Bank of America announced on Monday that it would resume home foreclosures in nearly two dozen states, despite the running controversy over how banks handled tens of thousands of cases of homeowners facing eviction. Bank of America, the nation’s largest bank and the servicer of roughly one in five American mortgages, insisted that it had not found a single example where a foreclosure proceeding was brought in error.
Bank of America said it would resume foreclosures in the 23 states where judicial approval was required after an internal review turned up no evidence that cases were filed in error. However, Bank of America’s suspension will remain in effect in the 27 other states that do not require a judge’s approval to foreclose, as the bank’s paperwork review proceeds state by state. It was the only bank to initiate a nationwide freeze.Not the end of this issue, not at all.


The Journal found that all of the 10 most popular apps on Facebook were transmitting users' IDs to outside companies.  The apps, ranked by research company Inside Network Inc. (based on monthly users), include Zynga Game Network Inc.'s FarmVille, with 59 million users, and Texas HoldEm Poker and FrontierVille. Three of the top 10 apps, including FarmVille, also have been transmitting personal information about a user's friends to outside companies.  The information being transmitted is one of Facebook's basic building blocks: the unique "Facebook ID" number assigned to every user on the site. Since a Facebook user ID is a public part of any Facebook profile, anyone can use an ID number to look up a person's name, using a standard Web browser, even if that person has set all of his or her Facebook information to be private. For other users, the Facebook ID reveals information they have set to share with "everyone," including age, residence, occupation and photos.   You can't be paranoid enough.


Good luck, lets be careful out there.

Thursday Market Recap

Happy Thursday.  Banks got whacked today as the foreclosure mess took center stage and initial jobless claims rose more than expected.  Market played bank-whack-a-mole in both fixed income and equities, with large bank CDS out 5-20bps and shares down 3-6%.  Earnings mixed, but some positive signs within them (see earlier post on JBHT).  How about some numbers:

Equities:

Smack down on financials, but the rest of the market didn't fare too bad, staples, tech and telecom closed positive.  Still decent on the year though.  Growth/value anyone?

Midcap growth outpaced value, widening the spread between the two.

Given the sector divergence we saw today, correlations within the S&P fell:

On that note, here are asset class correlations (using ETFs):

(trying to find a new source of cross asset correlations, would appreciate any thoughts).

Fixed Income:

Decent day today, with JPM leading the market with size in 10s and 30s ($2.75Bln 10yr +180 and $1.25Bln 30yr +165). Dubai Elec & Water (Ba2/NR) tapped for $2B in 6s and 10s.  Secondary action:

IG advance/decline ratio was 0.57x, financials whacked it and took the most active slots - all down.  HY adv/dec ratio was 1.08x (lower, but still positive) - Ally got whacked and Harrahs kept up the good work.

Steepen it up.

Australian iron-ore mining company Fortescue Metals Group Ltd. is looking to raise US$2 billion in the U.S. and European bond markets, according to two people familiar with the matter, as the miner accelerates its expansion plans to capitalize on the currently high price of iron ore.The Perth-based miner, Australia's third-largest listed producer of iron ore behind global giants Bhp Billiton Ltd. (BHP) and Rio Tinto Ltd. (RTP), refinanced another portion of its debt on Oct. 10 in order to give it flexibility to expand.

Forex:

Dollar breather.  Here's an interesting chart:  commodity duel.

Errata:


Seagate Technology Plc, the world’s largest maker of disk drives, is in talks to be purchased by TPG Capital and KKR & Co., according to people with direct knowledge of the discussions.The private-equity firms are considering an offer of about $16 a share, which would value the company at $7.55 billion, said two of the people, who declined to be identified because the discussions are private. The firms are looking to contribute about $4 billion in equity and may seek other private-equity funds as partners, the people said. The new old thing.  Careful, corporate buyers get a strong COC with an "any" agency downgrade provision.


Four private-equity firms are exploring bids for Northrop Grumman Corp.’s shipbuilding unit, which may draw offers for at least $2.5 billion by a deadline next week, said people with knowledge of the matter.Bain Capital LLC, Carlyle Group, KKR & Co. and TPG Capital have been examining the unit’s finances and meeting with its executives, said the people, who spoke on condition of anonymity because the talks are private. The price may range from $2.5 billion to more than $3 billion, the people said.

More than 100,000 U.S. homes were seized by lenders in September, a record number that probably will decline in coming months as major banks halt repossessions and review their foreclosure practices. Lenders took over 102,134 properties last month, RealtyTrac Inc. said in a report today. That was the highest monthly tally since the company began tracking the data in 2005, surpassing the August record of 95,364. Foreclosure filings, including default and auction notices, rose 3 percent from the prior month to 347,420. One out of every 371 households received a notice.Click your heels three times - its getting better, its getting better, its getting better.

U.S. video game industry sales fell in September, painting a potentially grim picture for the crucial holiday shopping season.U.S. sales throughout for video game software, hardware and accessories fell to about $1.2 billion, a drop of 8% from roughly $1.32 billion in the same month a year earlier, according to market research firm NPD Group. Analyst Anita Frazier said the slowdown particularly hit video game hardware makers, whose sales fell 19% from the previous year. ZAP!


Warren Buffett's Berkshire Hathaway Inc. sold 370,146 shares of Moody's Corp. (MCO), as the conglomerate continues to pare down its stake in the credit-rating company. Thursday's share sale is the latest in a series. Berkshire has been shaving its stake in the company in fits and starts for more than a year. Last month, the company sold nearly 2 million shares. With the latest sale, Buffett's company now has 28.5 million shares of Moody's, while its stake remains about 12%. The sale, at a price of $27.65 per share, was worth $10.2 million. Moody's had about 236 million shares outstanding as of June 30.

Reverberations from the economic crisis are continuing to hit oil and gas drilling in the North Sea as companies focus on cash flow and cost control, said a report from consultancy Deloitte Friday. In Norwegian waters, just seven exploration or appraisal wells were drilled in the third quarter, an unusually large decline of 56% from the same period in 2009, the report said. Across the first nine months of 2010, drilling activity was down 30% on year. Twenty-four exploration and appraisal wells were drilled on the U.K. continental shelf in the third quarter, a fall of 20% on year, the report said. Drilling activity across the first nine months of 2010 was 9% lower on year. 

Bottom line:  Trades remain in place with long midcaps, long intermediate treasuries, short long treasuries, long LQD, long Aussie and Loonie.

Wednesday Market Recap

Another day, another dollar (or two).  Equities better, short/intermediate treasuries better, credit better - its all good.

Fixed Income:

Secondary volume increased today in both IG and HY space.  Decliners lead advancers in IG space with a 0.87x ratio and the unstoppable HY advancers lead decliners by 1.55x.  WaMu had a decent gain on the news of the tax payment (see earlier post) and Harrahs had decent returns today as well.  All financials in the most active in the IG arena.

Decent new issue calendar today, with Raytheon leading the charge with $2B across 5s,10s and 30s - personally thought it was kinda tight.   Post Properties priced $150MM of 7yr paper at +300 - Decent value here, a nice steep credit curve.

From Bloomberg: Companies are selling debt that protects bondholders against credit-damaging mergers at a record pace as Blackstone Group LP, Bain Capital LLC and other buyout firms announce takeovers at the fastest rate since 2007.
Forty-five percent of bonds sold in the U.S. and Europe by investment-grade non-financial companies last quarter contained a so-called poison put, compared with 40 percent in the three months ended in June, according to data compiled by Bloomberg. Use of the provision, which lets investors sell debt back to the issuer at a premium in an acquisition, has doubled since 2008.The covenant they are talking about is the change of control covenant which requires the issuer to purchase the debt at $101 if there is a change of control that leads to non-investment grade ratings (gotta watch the verbiage in the COC - any of the agencies vs. each of the agencies for a downgrade below IG).  Funny, but the market doesn't seem to price in a premium for the covenant until the sh#t hits the fan, then look at the difference in Px - example is SLE where COC bonds came to rest around $101 while non-COC bonds got cracked around 20pts.

Story here: Bloomberg COC

Treasuries muted.  Rally still has legs though, IMHO.

Equities:

Energy, Materials and Industrials clear winners in the S&P500.

Interesting fact (from S&P):  Standard & Poor’s, the world’s leading index provider, announced today that of the approximately 7,000 publicly owned companies that report dividend information to Standard & Poor’s, only 35 decreased their dividend payment during the third quarter of 2010 marking a continued, dramatic improvement from the 135 that lowered their dividend payment during the third quarter of 2009.   Dividend increases rose 56.4% during the third quarter to 299 from the 191 recorded during the third quarter of 2009.  Year-to-date, 117 have decreased their dividend payment compared to 730 for the corresponding period last year, representing an 84% decline in negative news. 1033 issues have increased their rate so far this year, a 46% gain over the 707 issues that did so last year.

Howzabout a little growth vs Value?

 

Yeah, didn't surprise me either.

Little market cap action?

Difference between the two narrowed, but not enough to make me want to swap into small caps.

Currencies:

Another day, another kick in the teeth for the dollar (well deserved and policy intended).  The headines today: 

Canadian Dollar Climbs To New Multi-month Highs Against Greenback; 
Australian Dollar Jumps To New Multi-year High Against Greenback 
Dollar Plunges To Fresh 15-year Low Against Yen

Now, have I been saying to get a little loonie?  Go down under?

Errata:

AOL Inc. and several private-equity firms are exploring making an offer to buy Yahoo Inc., according to people familiar with the matter, devising a bold plan to marry two big Internet brands facing steep challenges.
Silver Lake Partners and Blackstone Group LP are among the firms that have expressed interest in teaming up with AOL to buy Yahoo or trying to take it private on their own, these people said. They added that at least two or three other firms could be interested in participating if a formal buyout proposal is drawn up.

The U.S. increased its crude-oil price forecast for 2011 by $1 a barrel on projections that global economic growth will lead to higher demand and that inventories in industrialized nations will decline.
West Texas Intermediate oil, the U.S. benchmark grade, will average $83 a barrel next year, up from a September forecast of $82, according to the Energy Department’s monthly Short-Term Energy Outlook. The estimate includes an assumption that OPEC will boost its output as prices rise, tempering a bigger gain.

Bottom line:  Short long treasuries (TBF), long intermediate treasuries (IEF), long corporate bonds (LQD), long midcap growth (IWP), long A$ (FXA), long loonie (FXC).  You want an equity market neutral strategy?  Short SPY (a long SH position), long IWP.  This is from a long-only viewpoint.  Thought I might want to start trying to put it in action.  THOUGHTS????

 Good luck, lets be careful out there.

QE2 - Dollar Smackdown

Who loves QE2?  Why, anyone short the dollar!

Tuesday Market Recap

Its Tuesday and we are back to watching scrolling/flashing numbers on our monitors (some were doing just that yesterday, but I was winding up a camping trip), as the market waited for FOMC minutes and clues as to the next round of stimulative policy actions (QE2...).  Well, the minutes were released and just what everyone thought would be included was (I'll paraphrase): "Holy cow, its not working like we thought, lets do some more."  On this, bonds rolled over and equities went positive, guess we know what is driving the markets.  This should tell us a lot.  Investing on hoped for policy actions cannot be sustained (as they say, hope is not a strategy) and typically ends up bad.  Thoughts?? (yeah, I keep asking, but to no avail).  Anyway here's some numbers:

Fixed Income:

Lower secondary volume than usual today and decliners lead advancers in IG space (0.84x).  High yield just kept on rolling with an advance/decline ratio of 1.04x.  Citi's bonds lost some ground today, and financials were the most active today (only 2 of 10 that weren't financials were Hess (Baa2/BBB) and Anadarko (Ba1/BBB-) with Hess down and APC up).

The curve:

Treasury 30-year bonds yielded a record 1.39 percentage points more than 10-year notes on speculation the Federal Reserve will buy medium-term debt as it tries to keep down borrowing costs.The longest maturities, those most sensitive to inflation, lagged behind shorter-term notes after the Fed said yesterday is prepared to ease monetary policy to keep costs in the economy from falling. The Treasury is scheduled to sell $21 billion of 10-year notes today and $13 billion of 30-year bonds tomorrow. 

Good day for German Bunds, JGBs rolled over, Britain rallied and AUS steepened as the long end sold off.


Equities:

First the numbers:

Financials lead the pack higher on favorable FOMC minutes:  Here's some intraday:

Financials intraday:

On the growth/value front, no change:

Midcap continuing its lead versus small caps (I still think its too early for small caps, and I am looking for signs of real growth to determine a fundamental and sustainable inflection point):

ForEx:

Apparently, forex traders believe that further quantitative easing will be detrimental to the dollar (ya think?).


Errata:

The FDIC, which had delayed its vote at the request of members of the Financial Stability Oversight Council, today proposed a temporary rule asserting that all creditors must be prepared to absorb losses in an agency-run liquidation. Some may continue to receive payments to maintain system stability or maximize recoveries, the FDIC said. Attempting to assuage banking-industry uncertainty about how creditors would be treated in a resolution, the FDIC included a provision barring shareholders, long-term bondholders and subordinated debt holders from bridge entities formed to manage healthy parts of failed firms. Some short-term creditors might be brought into a bridge entity if they are deemed essential to its operation.


Well, there ya have it - QE2 cementing the administration policy entitled "stocks go up always".

Good luck, lets be careful out there.

King Dollar - The Emporer Has No Clothes

The dollar is “one step nearer” to a crisis and a devaluation may be inevitable, former People's Bank of China advisor Yu Yongding says. “Such a huge amount of debt is terrible. The situation will be worsening day by day. I think we are one step nearer to a U.S. dollar crisis.” 

Once again, court jester dollar getting whacked.  If the deepest market on the planet doesn't like the dollar, does that forecast anything good for the US?