Too Hard To Short A Levitating Bond Market

I respect Jim Rogers for his contrarian bent and his focus on finding value in Asia and commodities.  I do differ with his penchant for trying to make market timing calls.  He wants to short U.S. Treasuries.  Oooooookaaaaay.  The difficulty in working a big short bet into an investment strategy is that no matter how sound the thesis may be, it can take forever to play out given unpredictable events. 

The U.S. bond market is strong thanks to ZIRP and QE, nothing else.  Those things are the result of political decisions that can be reversed in an afternoon.  Taking a short position in an artificially manipulated environment is an easy way to lose one's shorts in the short term even if the reasons for the trade are proven sound in the long term. 

This week's European action is telling.  I had thought Greek politics were too intractable to pass austerity programs, but lo and behold they did pass some and they'll probably get their bailout after all.  I would have been on the losing side if I had bet against a resolution to this crisis.  Some hedge funds undoubtedly did bid up the CDS spreads on Greek debt.  We'll see which ones made that call by the end of the summer if some funds have to close shop. 

Shorting an entire market is hard.  Shorting an individual stock, with far fewer unknowns, is a bit easier but no less nerve-wracking if you're unprepared to lose big. 

Memo To Lagarde: Lay The Smackdown On Greece

From: Anthony Alfidi, CEO, Alfidi Capital
To: Mme. Christine Lagarde, Managing Director, IMF
Subject: Greece Talking Points

Congratulations upon your selection as Managing Director of the International Monetary Fund. Please do your best to stay out of trouble. We don't want any surprises like the one we all recently got from your predecessor.

Your first order of business is to address this whole unpleasant Greek situation. Maintaining order in the international financial markets is a precondition for the United States' continued debt financing of its unsustainable lifestyle. A Greek default would set a dangerous precedent for larger, nuclear-armed nations to start living within their internally financed means. Here are some suggested talking points you should emphasize when scolding those unruly folks in Athens (written in your voice).

- No one is allowed to leave the eurozone. It is an inviolable, nonnegotiable compact of infinite duration, just like Jehovah's covenant with the Israelites but with more money.

- Banks in my home country of France hold much of your debt. I cannot allow you to rob their CEOs of their annual bonuses by threatening to default.

- German government officials have informed me that they are willing to fund your bailout if I arrange for France to give back Alsace-Lorraine. I told them they can just walk right in and make themselves at home. Done deal! Plus cha change!

- I need you to play ball because I really like my new job at the IMF. The views from my office are great and I don't want to go back to my old job at Baker & McKenzie. Those guys were always cracking jokes about my French accent and whether I was related to Pepe Le Pew and Inspector Clouseau.

- You really must stop all of these ugly protests and riots. You did not seek proper approval for this street theatre at the last Bilderberg conference and you did not recruit the agitators from our pre-approved lists of agent provocateurs / retired intelligence operatives.

- I expect your Parliament to pass its austerity measures forthwith, like sometime this week. Do not stop at the gyro stand on the way in to work. Do not pass GO. Do not collect $200.

- In the unlikely event that you are unable to pass your austerity package, I expect you to surrender unencumbered ownership of the Acropolis to the People's Bank of China. Please ensure the title deed is legible in both Greek and Chinese, and that it is delivered to the Chinese embassy in Washington, D.C. If you can't find the embassy right away, rest assured that it will relocate to 1600 Pennsylvania Ave. soon after the effects of your default are felt across the Atlantic.

- Whatever you do, don't you dare call me a cheese-eating surrender monkey. I do not eat nearly as much cheese as the typical Francophone.

Nota bene: The above "memo" is a satire of all the key players in the Greek debt drama. It has about as much chance of being taken seriously as any Fed pronouncement that economic recovery is underway in the U.S.

The Haiku of Finance for 06/28/11

Greek rollover plan
Lagarde will need to handle
French banks and their debt

China Buying Into Europe May Be Attempt To Push Dollar Down

The big news this week is China's continuing big move into European debt, giving the EU a little bit more wiggle room as it makes contingency plans for Greece's probable departure.  China doesn't take actions this big without attempting to hit several targets at once.

Target one is diversification.  China has been making noise for at least a year about diversifying its foreign exchange holdings away from Treasuries.  Telegraphing such an intent for so long without following through would have harmed China's credibility in capital markets. 

Target two is the U.S. dollar's reserve status.  Buying euros must precede buying European debt.  This props the value of the euro against the U.S. dollar; indirectly, a weaker dollar makes the renminbi stronger with no need for a forced revaluation. 

Target three is U.S. foreign influence.  Forcing Europe to become beholden to Chinese capital will make Brussels think twice before committing to U.S. pet projects like expanding NATO, increasing European defense spending, or funding economic development projects in emerging markets that would otherwise compete with China's drive for resources.

China is playing its weakening hand well.  Domestic inflation is forcing it to chase yield abroad, and euro-denominated debt is the new risky trade.  Buying European debt will give it some cushion against insolvent banks and real estate projects at home, for at least as long as the European experiment in unity lasts. 

The Haiku of Finance for 06/27/11

Defense cuts looming
Still want to buy defense stocks?
Think dual-use tech

Williams Fights Energy Transfer Equity For Southern Union

Energy Transfer Equity's (ETE) bid for Southern Union (SUG) should have been a done deal when it was announced.  Some acquisition targets are just too juicy to ignore.  Now Williams (WMB) is jumping into the fray with an all-cash $39/share bid for SUG.  Merger fights make life interesting.  The benefit to SUG investors is the enhanced price discovery from competing bids.  The problem is that the boards of both ETE and SUG have already approved their merger, so now a costly proxy fight among SUG shareholders is likely. 

This action might make for a good merger arbitrage play as long as Williams doesn't withdraw its bid.  I might have more to say in a few days once I have a chance to compare all three companies' financial statements. 

The Limerick of Finance for 06/26/11

Situation in Europe is grave
Now China comes in for the save
They'll buy bailout debt
On recovery they've bet
Europe will become China's debt slave

Financial Brands That Should Disappear

The folks at 24/7 Wall St do a great job stirring up controversy with their annual list of familiar brands that are in danger of disappearing.  It takes guts to go out on a limb and claim that some venerable companies are on their way down the tubes.  In the spirit of the moment, let's think about why some financial brands that should have disappeared are still around. 

Merrill Lynch.  These guys were spiraling down pretty hard in late 2008 until Bank of America agreed to buy them out.  The deal made little sense for BofA; they already had a presence in wealth management and investment banking and would have been stronger had they just stayed away from Merrill Lynch.  This is where ego trumps business sense.  CEOs who want to be known for closing the biggest possible deals retain the prerogative of throwing due diligence out the window.  Way to go, BofA.  Grabbing Mother Merrill did nothing but make your TARP bailout needs grow. 

Goldman Sachs.  Do a web search on this firm and you'll see its tentacles in every business sector on the planet.  The firm is insanely profitable but the way they do business raises questions about whether the firm has a conscience.  "Vampire squid" pretty much nails it.  Warren Buffett considers GS to be a good investment precisely because its amorality enables it to be so dominant in the financial markets.  Amorality is not necessarily a recipe for immortality.  Someday their enemies list will reach a critical mass and their moles at Treasury and the SEC won't be able to save them. 

AIG.  The continued existence of this firm is a strong argument that U.S. financial markets are rigged by the government.  The firm's credit default swaps in 2008 were so radioactive that they almost single-handedly took down the economy.  Hundreds of billions in TARP assistance later and taxpayers still hasn't received a decent return on their "investment." 

Compiling this list is depressing.  These firms will probably be around for a while.  That doesn't mean I have to do business with them. 

The Haiku of Finance for 06/24/11

Release oil? How dumb
Don't play games with the market
You can't control price

Fed Confirms Structural Problems But Ignores Bank Exposure

Leave it to the Fed to be last to the party.  Recall the past pronouncements of Helicopter Ben wherein he claimed things were getting better.  Well, they're not.  The Fed says the economy is slowing down and the near future will not offer improvements.  I knew this months ago.  Read my past blog posts and you'll see how far ahead I was of the Fed's own analysts. 

Given the Fed's track record of inaccurate prognostications, one must wonder whether any predictions it makes are accurate.  Right now the Fed Chairman claims a Greek default won't harm U.S. banks.  He said pretty much the same thing about the subprime mortgage crisis in 2007 and how its effects were contained from the rest of the economy.  The European Central Bank has a much more sober view of how dangerous the Greek crisis can get for banks.  U.S. money market funds heed the warning signs and scale back their exposure to European debt.  They must not be paying much attention to the Fed. 

The credit crisis is back.  It's not pretty or exciting. 

State Pension Plans And Hedge Funds Make Us All Miserable

Well, my evening is hereby ruined.  I was planning to have some fun watching videos of dancing cats or some such aimless baloney, but I had to go scanning financial headlines first.  It's a habit I just can't break.  Today I scanned some headlines that indicated I would be just miserable if I kept on reading.  Now I can share my misery with my readers.   

Let's read about desperate state pension fund managers drastically increasing their bets on hedge funds.  They feel compelled to roll the dice, swing for the fences, and do whatever it takes to increase their chances of meeting impossibly high discount rates that will fund future payout liabilities.  I stopped rolling my eyes long ago whenever I heard hedge fund managers spout their sales mantras of "equity returns with bond risk."  That kind of nonsense unwound many a hedge fund in the liquidity crunch of 2007-2009 and only the Fed's easy money policies saved the remainder. 

If reading about stupidity in finance doesn't make you miserable, paying higher taxes to fund it certainly will.  State and local government pension funds are so underfunded that the tax increases needed to save them will destroy taxpayers.  Let this sink in.  The extra taxes needed to maintain upper middle class lifestyles for municipal employees will eliminate the rest of the middle class within one generation. 

The easy fix is to eliminate defined benefit plans for government workers and pay out pensions that funds can support today, at sustainable levels, until they can be phased out in favor of defined contribution plans.  Nothing in government is that easy.  That means we'll do things the hard way with municipal bankruptcies, shutdowns of vital public services, and/or confiscatory levels of taxation. 

There you have it.  Now I hope you're all as miserable as I am for seeing once again just how much pain America is about to take thanks to its legions of useless professional money managers.  Misery loves company.  I also love keeping company with attractive women but there aren't any within arm's length right now.  That makes me even more miserable. 

The Haiku of Finance for 06/21/11

Hard choice for Europe
Let Greece and euro go bust
Or make more bad loans

Natural Gas Lights The Way To North America's Future Export Dominance

Hold your horses there, Peak Oilers.  There's plenty of hydrocarbons to go around this here North American landmass.  Record volumes of natural gas are heading to market.  Hedge funds playing this trade will get killed as long as technology makes fields easy to crack open.  Oh yeah, BTW, the abundance of cheap gas makes it a compelling opportunity for export to energy-hungry emerging markets.  The high price of oil makes this stuff look good.  Americans need to quickly get over their NIMBY bias against LNG terminals if we want to make seruous money. 

Remember when the U.S. led the world in petroleum exploration before Saudi Arabia learned how to pump?  We can have that era of dominance again with natural gas, which means we can keep the dollar as the world's reserve currency if we don't have to recycle petrodollars into U.S. Treasuries. 

Find a good pipeline play that covers Eagle Ford and other gas-rich areas.  Then watch the cash roll in while the gas flows out.  It all sounds so easy until you try it. 

Greece, Oil, And Stuff In The Headlines for 06/20/11

This week is off to a really great start.  European ministers can't agree on how to structure the next iteration of wasted money for a bankrupt Greece.  At least they provided enough breathing room for a very important no-confidence vote to take place in the Greek parliament.  That will give Germany the pretext to say "told ya so" and refuse to back a bailout.  The Group of Seven wants to get in on the action if only to go on record with bold assertions that yes, we all really must do something about this whole dreadful Greek crisis thing.  The growing danger to the world economy of daisy-chained bank implosions from a Greek default hasn't gone unnoticed by the IMF.  Nothing gets by those wily IMF wizards, except of course a massive cyberattack on its databases from an adversary with deep resources. 

The IMF isn't the only acronymic organ of nascent global governance that's suddenly gone impotent.  The IEA is asking the world's oil producers to pretty-please raise their oil output so prices can come down and the developed world can start spending its way to prosperity again.  Nice try.  Better luck next millennium.  Russia isn't about to fall in line just to save the West from insolvency.  It's too busy consolidating its stock exchanges and preventing capital flight prior to elections to take requests right now. 

The IEA can start to relax with oil futures headed down anyway thanks to decelerating GDP growth in the developed world.  The free market takes care of these things without jawboning. 

The world is in for a new golden age provided it avoids financial implosion in Europe, stagflation in the U.S., and North vs. South resource wars.  Fun times ahead!  Life just keeps getting better for everyone. 

The Limerick of Finance for 06/19/11

Spanish workers are out on the street
Anger boils while they can't make ends meet
But the debt binge must end
Creditors aren't your friend
Europe's leaders are feeling the heat