In continuing my data intense, hardcore, uber-objective dissection of the stuff that is proffered through the mainstream media (MSM), I bring you:

Payrolls in U.S. Climb Less Than Estimated as Confidence in Recovery Wanes

June 4 (Bloomberg) -- Employers in the U.S. hired fewer workers in May than forecast and Americans dropped out of the labor force, showing a lack of confidence in the recovery that may lead to slower economic growth.

Payrolls rose by 431,000 last month, including a 411,000 jump in government hiring of temporary workers for the 2010 census, Labor Department figures in Washington showed today. Economists projected a 536,000 gain, according to the median forecast in a Bloomberg News survey. Private payrolls rose a less-than-forecast 41,000. The jobless rate fell to 9.7 percent.

This was not hard to see coming if you studied the numbers with an objective eye. If we dig up last year's BoomBustBlog article on the topic, we'll ponder... "Are the Effects of Unemployment About To Shoot Through the Roof?" as excerpted below.

A recent zero-hedge article rightly questioned the reliability of the reported unemployment figures by comparing the reported increase in the unemployment benefits paid with the reported increase in the number of insured unemployed. According to the figures reported by Department of Labor (DOL), the total number of insured unemployed in the US has risen by nearly 400% since September 2007 and has reached nearly 10.5 million as of Dec 19, 2009. However, if we look at the monthly withdrawals on the unemployment insurance account (according to the Daily Treasury Statement prepared by the Financial Management Service), the expenditure has risen by nearly 550%. The difference has been widening since April 2009 (coincidentally, right about the time the S&P 500 rocketed skywards, and the housing market made several month to month gains [see If Anybody Bothered to Take a Close Look at the Latest Housing Numbers..."]) and has increased substantially in Dec 2009.

Published in BoomBustBlog

For those who have been following me in the Asset Securitization and Pan-European Sovereign Debt Crisis series this may be old news, but let's go through the exercise anyway. It looks as if we are back to those non-sense games being played by those that manipulate the market. Taking a look at Bloomberg.com's front page, you'll see "Stocks, U.S. Futures Rally on Economic Outlook; Yen Weakens, Bonds Decline" (hey, good times are here again) followed directly by "Banks Deposit Record $394 Billion With ECB, Avoiding Loans to One Another"(hey, isn't this the exact same environment wherein Bear Stearns, then Lehman Brothers collapsed leading the Treasury Secretary Hank Paulson to proclaim the end of the financial world was coming?). Then there's "Covered Bond Sales Surge; Transocean Tumbles: Credit Markets": Sales of covered bonds are accelerating as investors seek debt backed by collateral amid concern about the creditworthiness of governments and banks.

Okay, let's take this by the numbers....

Published in BoomBustBlog

For those who feel that the simple application of arithmetic and math amounts to "Doomsday Scenarios", Fear-mongering, and vultures in the market place, I present to you BoomBustBlog's scenario analysis of the Portuguese Haircut.

You think those are ugly? You ain't seen nothing yet!

The Mathematical Truth Concerning Portugal's Debt Situation

Before I start, any individual or entity that disagrees with the information below is quite welcome to dispute it. I simply ask that you com with facts and analysis and have them grounded in reality so I cannot right another "Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!". In other words, come with the truth, or at lease your closest simulacrum of it.

Published in BoomBustBlog
Tuesday, 01 June 2010 06:44

Quick Newscan for Tuesday, June 1st 2010

In the news this morning:

  1. Stocks, U.S. Futures Tumble on China Growth Concern, BP Spill; Oil Plunges: We discussed the topic of China's unsustainable growth and the knock on effects its slowdown would have on other economies in detail just last week. How timely...
    1. The Narrowing Chinese Trade Surplus
    2. In Australia, Tax as a Contagion
    3. Australia: The Land Down Under(water in mortgage debt)
    4. BoomBustBlog China Focus: Inflation?
    5. BoomBustBlog China Focus: Interest Rates
    6. My China Ruminations Have Come to Pass As the Country Enters a Bear Market
    7. Chubble (The Unmistakeable, Yet Thoroughly Argued Chinese Bubble), Unemployed/Deleveraging Shopaholics Pushing Retail Stocks & Other News
  2. Euro Weakens Against Dollar on Speculation Crisis Hurting Region's Economy: Nothing new here. BoomBustBlog newcomers, see the Pan-European Debt Crisis here.
  3. BP Tumbles Most in 18 Years After Abandoning Attempt to Plug Leaking Well: The company's future doesn't look to bright!
  4. Paulson Drops 6.9% as Hedge Funds Post Biggest Monthly Losses Since Lehman (HNWs and institutional investors should take the time to read this article and my summaries): Many funds, including Paulson's, made hard bullish bets on the financial sector recovering, in direct contravention to my positions and research. Yes, the financial sector took off like a bat out of hell the last 3 quarters of 2009, but one shouldn't confuse sharp market price movements with fundamentals. Many, if not most are in bad shape, and it ain't lookin' much better in the near term either. See The Next Step in the Bank Implosion Cycle???. Most importantly, many (if not most) professional money managers and analysts totally underestimated the extent of the damage being done Europe. I have was weary of Europe since 2008, put short research and positions on in 2009 (with mixed results due to the bear market rally) and went full blown GRIZZLY BEAR in 2010 (reference the Pan-European Debt Crisis which publicly documents and details it all). Back to the news clip:
    1. (Bloomberg) -- John Paulson, Louis Bacon and Andreas Halvorsen navigated the global market turmoil of 2008 with little or no damage. They weren’t as successful last month as the Dow Jones Industrial average had its worst May since 1940. Hedge funds lost an average of 2.7 percent through May 27, according to the HFRX Global Hedge Fund Index, as the sovereign debt crisis in Europe triggered declines in stocks, the euro and commodities, and the gap in yields between U.S. short-term and long-term debt narrowed. It was the biggest decline since November 2008, when hedge funds lost 3 percent in the wake of Lehman Brothers Holdings Inc.’s bankruptcy two months earlier. Almost every strategy lost money in May, according to Hedge Fund Research Inc. in Chicago, as the Dow index of 30 big stocks sank 7.6 percent including dividends amid speculation that Greece’s debt problems would spread to nations such as Spain and Portugal. Some of the best-known funds saw their gains for this year erased. “Attempting to manage risk in an environment where everything that could go wrong does go wrong seems like a fruitless endeavor,” said Brad Balter, who runs Balter Capital Management LLC, a Boston firm that invests in hedge funds for clients. “The only defense that seems to work in months like these is being in cash.”

    "SAC Capital Advisors LLC, the hedge-fund firm run by Steven Cohen in Stamford, Connecticut, with about $12 billion under management, lost 2.9 percent last month through May 21 with its SAC Capital International fund, trimming this year’s gain to about 4 percent, according to people familiar with the firm.

    Citadel Investment Group LLC, the $12 billion hedge-fund firm run by Ken Griffin, lost about 2 percent with its biggest funds last month through May 21, said people familiar with the Chicago firm. The funds soared as much as 62 percent last year as markets rebounded after losing as much as 55 percent in 2008.

    Brevan Howard Asset Management LLP in London, Europe’s largest hedge-fund firm, lost 0.1 percent for the month through May 21 with its Brevan Howard Fund Ltd., leaving it with a decline of 0.3 percent this year, according to an investor.

    1. I will gladly compare the performance of BoomBustBlog research to any bank, fund or asset manager that charges big commissions or 2 and 20! Reference Updated 2008 performance and the 2009 Year End Note to BoomBustBlog Readers and Subscribers for rough performance numbers covering 2007, 2008 and 2009.
  5. Analysts Boosting Forecasts See 25% Stock Gain Defying El-Erian New Normal: Yeah, but aren't analysts mostly wrong unless we're in  a bull  market? Stocks always go up, Right????!!!! Reference Blog vs Broker, Who Do You Trust?
  6. Cameron Bull Market in Gilts Beating Merkel Bonds as U.K. Keeps AAA Rating: For now, at least. Subscribers, see 
    File Icon UK Public Finances March 2010

Published in BoomBustBlog

In order to assess the impact of sovereign debt restructuring on the market prices of the sovereign bonds that undergo restructuring (haircut in the principal amount or maturity extension), we retrieved price data of the Argentinean bonds that underwent restructuring in 2005. The sovereign debt restructuring in case of Argentina was a combination of maturity extension and principal haircut. Argentina defaulted on its international debt in November 2001 after a failed attempt to restructure the debt. The markets priced in the risk of a substantial haircut around this time and the bond prices plummeted sharply. We at BoomBustBlog are in the habit of taking market prices seriously, and have factored historical market reactions into our analysis in calculating prospective price action in distressed and soon to be Sovereign debt. Before moving on, it is highly recommended that readers review our haircut analysis for Greece (“With the Euro Disintegrating, You Can Calculate Your Haircuts Here”) and our more likely to occur restructuring analysis for the same (What is the Most Likely Scenario in the Greek Debt Fiasco? Restructuring Via Extension of Maturity Dates).

The restructuring of the Argentina debt in default was occurred in 2005 when the government offered new bonds in exchange of old securities. The government gave the option of either accepting A) a par bond with no haircut in the principal amount but substantially lower coupon and longer maturity or accept B) a discount bond with a haircut in principal amount to the extent of 66.3% but relatively better coupon rate and shorter maturity than in case of Par bond. If the bondholder accepted A), for each unit of bond, one unit of Par bond will be allotted. If the bondholder accepted B), for each unit of bond, 0.33 unit of Discount Bond will be allotted. The loss to the creditor, which is decline in the NPV of the cash flows, was nearly the same in both cases as the lower principal amount in Option B was offset by better coupon rate and shorter maturity. The price of the par bond in the market and the price of the discount bond multiplied by the exchange ratio (real price to the bond holder) were largely the same when they were listed in the market in 2005.

Published in BoomBustBlog

In "With the Euro Disintegrating, You Can Calculate Your Haircuts Here",  I explicitly illustrated the likely loss to principal of sovereign debt investors who would be forced to take haircuts "for the cause". While we fully stand behind the calculations and the logic, chances are several sovereigns may attempt to undergo sleight of hand in order to placate investors as best they can. We suspect we will soon be hearing of significant restructuring plans in the Eurozone, starting with Greece. The piece below expands on these thoughts and offers subscribers live spreadsheets that illustrate the potential repercussions. It is recommended that these scenarios be taken into consideration in light of the info offered in the post "Introducing The BoomBustBlog Sovereign Contagion Model: Thus far, it has been right on the money for 5 months straight!" and compared to the haircut analysis as well.

Greek Restructuring Scenarios

There are several precedents of sovereign debt restructuring through maturity extension without taking an explicit  haircut on the principal amount, and many analysts are predicting something of a similar order for Greece. This form of restructuring is usually followed as a preemptive step in order to avoid a country from technically defaulting on its debt obligation due to lack of funds available from the market. It primarily aims to ease the liquidity pressures by deferring the immediate funding requirements to later periods and by spreading the debt obligations over a longer period of time. It also helps in moderating the increase in interest expenditure due to refinancing if the rates are expected to remain high in the near-to medium term but decline over the long term.

Published in BoomBustBlog

As of 6:40 am, US futures are down 15 points, with the MSM blaming the nationalization of the Spanish bank CajaSur.

The Bank of Spain seized troubled CajaSur with 500 million euro ($624 million) in funding to keep it solvent. The move pushed the Euro lower and left investors concerned about the country’s fiscal health.

The nationalization comes at a time of rising concerns over Spanish credit-worthiness, despite the European Union's decision earlier this month to put together a safety net for distressed European economies.

On Sunday, Spanish Prime Minister Jose Luis Rodriquez Zapatero told a group of socialist mayors, "No one can doubt at any time that Spain is a strong country and an economic power that will meet its obligations and pay debts." CajaSur's failure is the second in Spain since the start of the global financial crisis.

The bank -- based in the southern city of Cordoba -- has 13 billion euros ($16.35 billion) in loans and holds 0.6 percent of the total assets in the Spanish financial system.

I have made our position on Spain clear through a complete forensic review of the state's finances for subscribers:

File Icon Spain public finances projections_033010. An excerpt from this subscription document (subscribers, reference page 2) shows the euphoric, yet highly unrealistic optimism upon which Spain has built its fiscal austerity projections.

There has been a lot of price activity in a certain German bank recently, all negative. I have recently released research that shows this bank to take a virtually guaranteed multi-billion dollar loss due to a complex situation. It is likely they have understated their exposure to the Pan-European Sovereign Debt Crisis, and they are highly leveraged.

I urge all paying subscribers to review the recently released research and to reference this quick off-the-cuff relative valuation (via live spreadsheet) to gauge potential downside. Please be aware that significant price movement has already occurred.

Published in BoomBustBlog
Wednesday, 19 May 2010 12:21

Eurozone Highlights of the Past Week

In the Eurozone gossip and news for the week past...

Roubini Warns of Greek Exodus, Chinese Slowdown: Bloomberg

All should reference:

  1. Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter
  2. Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire!
  3. Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!
  4. With the Euro Disintegrating, You Can Calculate Your Haircuts Here
Published in BoomBustBlog

Taking into consideration Merkel's ill-conceived ban on financial company shorts, I feel this is a good time to review alternate exposures to concentrations of European sovereign debt exposure. Before we go, please reference the effects of this ban announcement as expressed in the mainstream media:

Keep in mind that all investors are speculators since no return is a "sure thing" and furthermore prudent speculators don't short healthy nor strong prospects. The ban on financial company shorts is akin to a ban on calling a horrible smelling person stinky, it really doesn't make them smell any better. As a matter of fact, it very well may draw additional and more detrimental attention to the odor. The best way to deal with both legal (at least what used to be) shorting and being called stinky is to address to address the root causes of the problem. Personal hygiene in the case of "stinky" and fiscal hygiene (ex. fixing those balance sheet and transparency issues) in the case of financial companies.

With that being said, I would like to offer an excerpt of a recently released subscriber report that may be of interest to those following the European crisis. Subscribers may access this document here File Icon Sovereign Debt Exposure of European Insurers and Reinsurers and professional and institutional subscribers may access the live spreadsheet behind the document by clicking here.

Published in BoomBustBlog