Wednesday, March 23, 2016

Bond Yield a predictor

This graph tells a hard story; bond yields 30y UST Bonds are on there way down again:

This is not the first drop, and looking at the yield compression between the 30y and 2y you get the following graph; and if you overlay the US Financial index...well the trend is not great for owning financial stocks, just saying

This diagram would seem to indicate that the trend is ugly for financials.

BTW my discussion about the the perfect hedge that turns out to be a disaster... Peabody is apparently thinking bankruptcy; on Wednesday it filed an SEC notice that it was at risk of filing for bankruptcy.  Well my friend's hedge fund could not hold till the end, they had to liquidate their position at a massive loss.

Turns out that the killer for my friend was the excessive amount of short positioning (with the same trade -- long the debt short equity) that led to a massive squeeze on the stock and an unwind of the debt position -- the impact price on equity doubled and price on debt fell to nothing...

Crowed trades are trades for morons (sorry Steve)

The voice of doom -- the bust that never happens

Reading the financial press over the past few months the overall view is that the markets are overstretched, ready for an implosion.  Yet over the past 12 months the S&P is largely unchanged -- from 2060 to 2040 -- in 12 months, in the US at least unemployment, at 5.1% is at a historical low -- labour participation is not rising, leading analyst to assume that the reduction in the American labour force is a systemic and not economic events (the percentage of the population that is over 55 is growing -- that impacts participation rates).

The US dollar is more or less unchanged, interest rates are still hovering in the low single digits -- despite the US Feds desire to tighten the screw -- in a sense, an that's probably where the unease arises, there is a sentiment that the economy has not really recovered from the 2008 crisis.  

Of course that's America's story -- Canada story is different, but then as soon as the commodity complex improves, Canada's fortune will improve (although the recent $20 billion federal government deficit would suggest that the road ahead is long and difficult).  The fundamentals elswehere are equally interesting.  Europe seem to be in standby mode -- Dragi's unable to find new ways to stimulate the European economies.  

A few weeks ago a French friend was discussing the state of the CAC40 (equivalent to DJ Industrial) where nearly 85% of the ownership of French listed companies was in the hands of foreign capital -- the French government was not very happy with the situation...however, over the past 4 years has gone out of its way to increase taxes (of all kinds).  My friend a banker earns a very very attractive salary package, yet has seen its taxes nearly double over the past 4 years.  His take home pay has nearly halfed over that time; not entirely surprising his "disposable income for investment" has shrunk somewhat.  Lets be clear, he's very well paid, he's seen some nice bonus' over the past few years -- granted a lot is differed but he's actually cut back on expenses.  But he's got no real money for investing, and what he does he's certainly not putting at work in France! So the explanation of the foreign ownership of the CAC40 is simple to explain.  

I still think that the overall growth of western economies is also largely tempered by the demographic shift.  I've been told otherwise, that the stats don't support such conclusions but it remains that shrinking wages (median) and "hidden inflation" reduce purchasing power cannot explain the general economic weakness.  Even America's vaunted  strength is really hiding weakness; corporate core earnings have been static for some time now, the growth in "other income" and accounting games has been the main source of growth.

Anyway, this ranting is just to show that things are no so much difficult as strange!  The old joke that if government just got out of the way things would be better -- it would seem that American's drinking water problem is showing this to be a falsehood.   America -- visit but don't drink the water. BTW, and this must be pissing off the conservatives something bad, Congress (Republican) pushed legislation removing the EPA's right to inspect water quality -- because the States were better equipped to do the job.  Imagine how pissed the GOP was when the summoned the EPA after the Flint water debacle -- so that they could gloat at the EPA's incompetence, when the EPA politely pointed out that for the past 4 years they have zero right to supervise the water quality in the US, as such they have no idea what happened in Flint....  


Tuesday, March 22, 2016

Belgium, France and Quebec

I would be remissed if I didn't address the terrorist bombing in Belgium earlier today.  The coordinated act (in three separate events it turns out) is simply a continuation of what a bunch of barbarian would do, the reason seems to be that the guy who planned the terrorist attacks in Paris was caught in Belgium -- that's all these guys need as an excuse.  What is amazing is that it has been known for some time that many terrorist cells have been using Belgium as their home away from home, now the Belgian government has declared martial law...  France has left in place a substantial percentage of martial law system in place since last summer's attack.  Its starting to look like a political ploy by President Holland.  Now two European countries have suspended basic rights...I guess to protect their citizen's right?

As for the France/Quebec thing, it is truly amazing that Mme LePen came to Montreal/Quebec for meetings with the political class -- but had not organised a single meeting before flying out.  Unsurprisingly, not a single politician here would consider meeting with France's leader of the National Front -- Quebec has no lessons to learn from integration of minorities from France that created the "Cite" as a mean of keeping that "Foreign riffraff" away from "good and decent white French people".  That these areas have become largely unmanageable is hardly surprising.  

Since she's been rebuff by Quebec's entire political class Mme LePen's vitriol vis-a-vis us has been rather out of control.  At first, I though this was al orchestrated to obtain "something" now Mme LePen looks like a disorganised and mean politician -- in a place that doesn't give a rat's ass about her opinion.  Now we care for her and her movement even less.

Goes to show, even Holland looks better than her now -- that takes some effort! 

On another "economic" note, things are going slow in the world.  There seems to be increased desperation as to how to prime the pump.  I'm confident that China will let the Yuan drop against the dollar -- exporting deflation, as a tool to revive the economy (don't think it will work...) Oil price are playing the $40/bbl game -- we shall see.

Tuesday, March 8, 2016

Why hedging is so difficult

I am often asked why I say that hedging your position is so difficult (Ok not that often -- still) one thing for sure it can be a challenge to understand.  This week I was handed the perfect example; Peabody Energy -- which has a large HY debt exposure and is a publicly listed company with a sizable float (e.g. large percentage of shares widely owned).  Peabody is a coal company -- not exactly the market darling, in fact, its a bit of a dog.  At this current burn rate its tangible net worth will be negative within 6 months -- I'm speaking trend her -- it has $900 MM in TNW and is losing about $800 MM per quarter.  In 2014 it has more than $2.5 billion in TNW...

The debt market had been pricing Peabody in the dumpster, but there was still a bit of play, and so the obvious trade was go long the debt  and go short the equity.  In other words the price of equity will drop much more than the price of the debt (this relates to the fact that debt is more senior than equity and if there are failure the equity will be killed -- so will the debt, but far less).  So the trade here is buy the debt at 25 (25 for a instrument that is paying interest against 100...) and short the stock -- as you sell the stock (and borrow the stock) its price over time will fall, and you will make more money.  This is a close to cannot lose trade -- except when it doesn't work. 

It appears that the debt and equity markets have a very different perception about Peabody Energy's future [NYSE:BTU].  The debt is now priced at 3 -- giving investors a coupon of 269%, and the equity is up 40% at 4.51 (Tuesday).  

The hedge fund that put this position (about a month ago) is gone!  He has lost on the entire trade on the upside (the debt; 25 to 3) and on the equity from 2.21 to 4.51.  Just goes to show -- you know nothing!

Monday, March 7, 2016

New banker rules in the UK -- will it migrate?

I cannot think of a better reason not to be a banker but this latest is certain to ensure that lots of talented (and scruples-free) bankers take a long look at their future career.  I knew my industry was broken when I noticed how many of my then colleagues considered their employers (aka the bank) rental cars as opposed to their own.

You know the old joke: "What's the world's fast car! a rental car"  

Over the past decade more and more of bankers have been following this mantra, not that they've been so great before, nevertheless it's worse now.  Bankers will routinely adopt high risk solutions because if they win they get big bonus and if the lose --  well the bank eats it!  It would seem the UK authorities have had enough of this.  As of today, March 7th new rules have been introduced.  What we find here is a situation where the senior managers of UK banks will be personally responsible for their errors -- 

I wonder if that's going to work, there's even the possibility of jail time.


Thursday, March 3, 2016

Canada's Gold Reserves: Zero

This morning the Bank of Canada and the Federal Ministry of Finance confirmed that over the past 5 years, Canada had been selling off its gold reserves.  As of close last night, Canada's total gold reserves stood at zero.

For the Gold Bugs this is entirely incomprehensible, for them, gold is money (its not).  It is a store of value, but so is copper and zinc.  There is no particular reason for a government to hold gold as reserves, since its meaningless -- Nixon removed the gold standard, whereby gold was sold at US$35/oz.

Personally, I think that gold is a terrible store of value -- take a gold coin out of its protective envelope and watch its value plummet.  One of my closest friend worked in a Swiss private bank for many years.  Having purchased gold bars on behalf of clients they were disappointed to find several "counterfeit" bars in their vaults.  Moral of the story; don't buy African gold!  

Canada has decided to '86 its gold reserves because it no longer saw a reason to hold on to this asset class (plus Canada is one of the world's ten largest source of gold), and that they may well hold on to other assets instead (more liquid and cheaper to store).  Canada has never made a big fuss about its gold reserves.  During the war most Britain's gold was stored in Canada (in vaults below the Sunlife building in Montreal), but the reality is that gold is a lot of trouble.  It is expensive to store and to "use".  Canada has decided that the private sector saw more value to Canada's gold they they did, and so now its gone.

For the Gold Bugs it has to be a major disappointment.  The government without making a fuss got out of the gold hoarding business.  You just have to read the comments on Zero Hedge to see the craziness; Canada's been selling gold for 5 years... and the decision was taken by the Minister of Finance -- a Conservative and the policy was supported by the new minister -- a liberal.  Comments as to "who had the authority" and "what did they do with the money" and "is Canada in a criss", make for amusing reading.

Anyway, Canada's gold is gone