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.