NOT MUCH

I signed off last week with the thought of waiting to see what Monday was to bring.  Monday didn't bring much except for some stinko manufacturing numbers out of Chicago which really didn't have much of an effect, and mood changes in commodities (read, oil--that's all that counts) which means the equities were up and down all day ending slightly lower.

However, one of the things we talked about last week was the anticipated assault on world-wide currencies, particularly those in Asia.  Over the weekend into today a really strange scenario began playing out which I confess in all the years I have been around this business was new to me.

Traders are a paranoid bunch; everybody is out to get them...or at least learn their positions.  In the good old days, no one would speak as to one's plans other than the occasional "I own and therefore recommend" hyping of one's position, but for the most part secrecy reigned.  Not today; this is a whole, new breed out there, in-your-face people who could care less and are happy to brag about their positions.  It got to the point today where you wanted to ask, "If there is anybody long the Yuan out there, would you please hold up your hand!"  Had you done so I suspect nary a hand would have risen.  To listen to these guys, one would think the entire world is short the Yuan and that may be the case.

Now to be sure, China has problems reflected in the tremendous out-pouring of currency about which we have spoken which is going to continue for a bit as we approach the lunar New Year which is when every Chinese where ever located takes to the road with all the cash they can carry.  I don't think that even this band of thugs running things would dare mess with that.  But that will be over in a couple of weeks and then, after a reassessment of the reserve position, it will be interesting to see what stance is taken by the Bank of China, if any.

Shorting a nation's currency is always a bit risky; shorting it with one way traffic in the trade is even more risky.  Shorting it when there is only one real source of the currency which in this case is Hong Kong, is downright scary as we discussed last week.  The BOC still has around $3 trillion to play with which is a hell of a lot of money with which to go to war.

This is all hedge fund action.  As far as I can tell the banks, whilst probably short as well, are hardly so in size.  The guys that run these funds are very, very smart guys and very, very big risk takers.  The Chinese think they run the world or will so shortly.  It is a classic match-up and one whilst being written about is seemingly being ignored to a great extent.  The stage--unless these guys are simply making open boasts--is set for one of the great financial battles of all time..or not.  It's China after all and who knows what's really going on.  An emerging crisis or a rather clever way to devalue without getting jumped on by the rest of the world?  Do they have a firm or firms working on the "inside" or will they go after one of the shorts rather than setting up a broad defense simply to create an example in the hope of ending this once and for all?  Can they do that in this new age or have the rules of the game been changed forever by new strategies and new instruments?  This could make the Super Bowl look like the Pop Warner League.  Is there an over/under on this one?

SAVED BY THE GRAY LADY

No, not Janet Yellen, the New York Times for Pete sakes!

First page, financial section, but below the fold.  Mary Williams Walsh (not as good as Mary Kate Danaher, aka Maureen O'Hara who I would have followed anywhere and who left us last week...but a pretty name) wrote about the Puerto Rico debt crisis almost on cue.  Thank you Mary Walsh!  Copy!!

Now I know nothing about Puerto Rico.  Nor do I know anything about its debt which apparently totals some $65 Billion.  Finally, I know very little about Muni Bonds which was made abundantly clear a few years back when, with Mary Meeker (I should have known better), I thought we were in for a bad time involving those things.  But I do know a bit about how markets tend to work and a bit about commercial law and a good deal about Bull Manure of which in my life I have seen a great deal.  Ms. Walsh may as well, but of this knowledge there is no indication in her article.  Then again, I love the name and given that she works for the New York Times which is less and less interested in fact, truth or reality unless it conforms to their political and philosophical view of the world, I'm prepared to give her a pass.  Hey! A girl's gotta eat!

Anyway, being the latest dead beat in the Western Hemisphere, P.R. has come up with a novel approach in explaining how all this happened that's right out of a Freddie Prinz, the late and extremely funny comedian of Puerto Rican heritage..."Is not my Yob..."script:  It's the fault of the Federal Government because Congress, citing Constitutional separation-of-powers doctrine and acting through the Tower Amendment (he was a Republican Senator from Texas by the way, which made him a Spawn of the Devil in the eyes of the NYT)  refused to allow the SEC to oversee the offerings in the muni bond sector which allowed the Commonwealth to lie to it's investors as to its financial condition..  Now if you are thinking, "How's that again?" so was I when I first read it.  It's right up there with, "I robbed the bank because my tough life growing up as an orphan after I murdered my parents, so I should be acquitted."  No kidding, that's the argument, but wait, it gets better.

It seems that Congresswoman Nydia Velazquez of--surprise!--New York, has introduced a bill aimed at those creatures which were born into the financial world, mid-wived by my ol' pal Chuck Schumer and his "carried interest" idea (wonder if she checked with him, the Hedge Funds.  She is apparently REALLY mad that the Hedgies, seeing an opportunity to make a huge profit with little down-side if things go right, went out and bought up a whole lot of the Munis in question at I suspect a tad less than par, financed no doubt at a pittance as a result of the Fed's no interest for no-bod-ee policy of the last 10 years.  "If things go right" is an euphemism for "bail out" to which the Gentle Lady has of course no objection; her objection is to somebody making a profit out of the use of tax payer funds...especially hedge funds which are a political pinata and therefore fair game.  "They should be working to resolve Puerto Rico's finances in a fair and orderly manner," says Ms Velazquez.  I mean, how can one not agree?

Funny.  The first thing that went through my mind was "How come nobody's in jail?  But that's just me.  I keep forgetting that to expect a modicum of honest an integrity in today's society is terribly old fashion.  Then again, when I was a kid we had the expression, "Never buy a pig in a poke" and while to this day I have no idea as to what is a poke, I suspect in had something to do with doing your homework before spending money.  One would think that an investor or an investment manager might do that especially since the latter gets paid for investment decisions.  I guess I'm too old and therefore just can't understand this stuff.  I mean, I never really understood why some guy in Iceland would invest in a bunch of securities backed by a pile of mortgages located in places in the United States that he never heard of much less visited.  Silly me.  Go figure.

The other thing I'm having trouble with is this concept that's been kicking around inside my head relation to negotiable instruments--you know, like a cheque or a bond or a letter of credit.  It kinda forms the basis for all of banking, most of commerce and how one gets paid in the sale of transfer of goods.  It goes back a loooong way in English Common Law which forms the basis for all of our laws...like, a 1000 years.  It also IS the basis for the capital markets and the purchase and sale of financial instruments and obligations.  It's no little thing: willing seller, willing buyer.  Buying a bond is just like buying a house: I have a bid and you have an offer.  You will sell at a price and I want to buy at another.  We meet in the middle...willingly.  I get what I want and you get...LIQUIDITY.  Quite frankly, it's no one else's business as to the nature of those negotiations.

BUT, what about the poor starving people of Puerto Rico?  They are being forced to pay interest on 100 cents when a holder in due course--the Hedgie--only paid 50 cents for their obligation?  Terrible...unless you look at it from the standpoint of why, having lied to the original purchaser of their obligation, Puerto Rico doesn't offer to make up the loss to that person on the difference of what he original paid and the price he received from the Hedgie.  I mean if we are talking morality, why not?  Forget about throwing out the window 1000 years of jurisprudence.  Or the fact that at the outset  Puerto Rico KNEW that their obligations would trade AT THE MARKET from the moment of closing.  But they had no choice say you.  They needed the money.  Well, in the extreme you only need if if you intend to spend it but is it too much to ask that the truth be told in the negotiations leading up to the borrowing.  If the money is then unavailable, fix the problem.  If still available--but at a price--pay the price.  And, in the next election it might not be a bad idea for the poor starving people to fire their politicians, demand honesty of the next bunch and demand prison for those who failed deliberately in their duty to represent the people.  If we focus on what caused the problem and punish those who caused it, perhaps it wouldn't happen again.  Then again, we have representatives like Congresspeople Nydia Velazquez and Barnie Frank and Senators like Christopher Dodd.  And the New York Times.  Don't hold your breath.

My birthday tomorrow.  I'm taking the day off unless the world needs saving.

THE FED SPEAKS!

...and says nothing.  Oh yeah,  while proclaiming no rate hike, they mentioned that the economic picture was clearer (brighter?) and there might be a better chance for a rise in December.  Of course, nobody believed them and the equity markets, after a brief down-turn roared upward once again with the DOW closing up 190.  By the way, whatever economic news that was released today was stinko and after-bell earnings were the same.  The only thing that looked good was oil which, in case you haven't noticed is beginning to feel the effects of a U.S. production drop of some 500,000-700,000 barrels a day since April.  If thou seekest a bubble, look at shale.    The word from my buds in the West Texas town of El Paso is "Ponzi Scheme."  Seems there are no recoverable reserves--you gotta keep drilling new wells to get new production and unless you are at $100 a barrel, it's just too expensive to do that.  Occidental just announced that they are pulling out of the Bakken and Midland c. 2015 is beginning to resemble Midland, c.1988.  If true, there goes a big portion of the new job creation of the past few years which means no rate rise for sure from this politicized Fed.  I wish my buds would tell me what REAL price of WTI should be but I have little hope for that.

Now, The REAL story of the day comes out of D.C.  You've heard of the Carlyle Group, probably the most politically connected financial-whatever-group in the country?  Sure, everyone has.  Carlyle also runs a bunch of Hedge funds and has made, by all reports a ton of money over the years; but not this year, at least at one of the funds.

Claren Road Asset Management, in which I believe Carlyle has a majority and management position, has slipped a bit to the point where it's investors were advised by some to get out while the getting was good.  Of the some $4 billion in managed funds, apparently $2 billion headed for the door.  Ooops, not so fast said Carlyle, we'll let some of you out now ($700 million?) but the rest will have to wait until next year.  Consternation.

Now in some cases with the hedgies if you want in, you have to agree that it may not be in the fund's best interest to let you out in the period when you want to get out (that's invariably when the performance stinks, boys and girls) because EVERYONE will want out at the same time.  This leads to what in the trade is known as "unsettled conditions" which to the less sophisticated means, "We don't have the cash and if we start selling stuff to get liquid we are going to get killed."  Apparently, Claren Road didn't have this type of agreement and just decided that, bugger it, we're not paying until we're ready.  Oh, about the 2% annual fee they charge for the the management of the clients' money?  Well they are going to keep charging that even though the clients don't want their money managed any more.

Let's forget about the ethics of that position for a moment or the speculation on how pis...ah...upset you might be if you were an investor and simply focus on what is happening.

I would think that Claren (Carlyle), like others of their ilk, might have liquidity facilities in place to cover eventualities such as this from established lenders familiar with this business.  This is a big-time, power-broker, super important denizen of D.C.  I find it hard to believe that liquidity facilities were not available to them in size.  But what if they were not?  What does that say?  Were none made available?  Or were they too confident of their own abilities to protect against large redemptions or were the facilities not available?  Or were the terms of usage too harsh as to point of repayment which speaks to the management's assessment of the near-term state of the markets?  Or, was the liquidity of the market so poor that an attempt to get liquid--which surely they must have tested--proved impossible at any price (defined as that which would tank the fund)?   I must say, I'm fascinated by this because I've been waiting for something like this to happen while watching far smaller and far less important funds quietly (and in some cases, not so quietly) close up shop.  This doesn't do the overall market any good; I hope it is not a preview of things to come.   One thing it does point out, however, like the "oil bidnez" as my buds would say, in this environment things can turn on a dime.

THE END OF THE END?

It was last week I guess when the Head of the Banque de France announced that the crisis of the Euro and of Euroland was at an end.  I think at the time I expressed some skepticism.

I have been watching the close of the stock market and the commentary of the talking heads.  It hasn't been a good week, that's for sure made worse by the deepening morass that the standoff between the Ukraine and Russia is becoming.  It seems that after weeks of attempting to downplay the global nature of these goings-on--especially by the Euros who absolutely do not want to know--people suddenly took notice today when the Ukraines began to fight back and killed a few people.  Russia of course reacted and started flying jets and moving tanks all over the place but what really got people's attention was VISA's announcement that its quarterly earnings were going to be hurt because of a sharp down turn in Russian revenue.  My reaction was you have got to be kidding me.

About 10 years ago I got into a discussion with a very, very smart guy with whom my son worked. Despite the fact that he holds a Ph.D in Political Science from one of the world's great universities, I ventured to warn him that Russia needed watching.  Nah, said he, a has-been power, never to be a real threat.  In every aspect he was correct and I acknowledged such except that I suggested that they were armed to the teeth with strategic weapons and their leader was a nut.  Putin is still a nut, but a corrupt, criminal nut as well.  It is always about the people, never the metrics in whatever business or political clime one finds oneself.

I bring this up only to point out that risk is where one finds it but you have to look for it for it to be found.  The risk of Putin has been ignored simply because it was convenient and profitable to ignore it and only now when the threat has become apparent to a five-year old, has the world become concerned.  Make no mistake, if this thing escalates, there is going to be dramatic economic repercussions as yet unidentified.  Oh, I'm not talking about theater hostilities because if that happens, the point of discussion is over, but economic sanctions in which even the Euros will have to participate leading to a huge global recession.  I mean, VISA?  Who would have thunk it.

No doubt, Russia is the risk de jour but, keeping in mind the session I attended in New York, what else is out there that for which we are not really not looking?

On a global political front, The Leader is wandering around Asia seeking to define what his "pivot" means and getting the Chinese God-awful pissed off when he clearly backed Japan's play over a bunch of rocks in the middle of no where.  We are bound by treaty you understand which is a bit more than drawing a red line but one must ask if we had an administration that had any foreign policy in place for six years, would it have come to this.  Had we understood that the trade-off in China was the ability to consolidate power which meant an even more powerful positioning of the PLA now with highly sophisticated toys with which the heads of this mob are just dying to play, maybe the present and the future of that part of the world might be different.  Let's hope this turns out for the better.

To the seeming mundane, people who know about these things keep telling me that the hedge fund guys are in a bit of a panic because everybody is under water and nobody can get out of the pool.  Of course, one can simply sit still and not do anything, but then questions start getting asked about why am I paying you 2 1/2% a year to underperform and the meal ticket heads south.  Unfortunately, the solution in times like this is to take the exact opposite tack and increase the risk to increase the returns. We create "bubbles" in things like real estate…can one say, "London"…or high-yielding assets like Greek bonds (is 5% really high-yielding given past history?), or mortgages.  The geniuses at Wells Fargo (hey! that's what the Street thinks they are) announced the other day that they are back in the sub-prime market which is just fine I guess as the FHA seems to be willing to guarantee everything in sight.  Now here's how this thing goes:  somebody looks up and says, "Hey, look what Wells is doing and everybody knows they are the smartest guys in the room.  Shouldn't we be doing some of that?"  If the guy asking the question is sufficiently senior, the answer will invariably be yes, but as the returns are good the "some" will become "a lot."  How do I know this?  It's an old movie.  I've seen it once or twice.

Of course, all of this is greatly enhanced with free money and there appears to be no end to that phenomenon.  Janet & Co. are all in with the belief that the Fed can really manage this economy to the upside and oh, if you can supply the same to a government that appears to be absolutely in no way inhibited in spending more money on stuff that hasn't worked yet, that's fine too.  Problem is, when one side of the equation written by the hedgies hits a wall and the rich aren't getting richer, problems emerge.  Same thing is the nuts of the world begin to be found out as being nuts.  When happens then is all the Risk management guys discover risks about which they had no clue and decide that they must be mitigated.  They all decide this at once, you see, and they all head for the door at once.  It is a narrow door.

Have a great weekend.

YO, JAMIE! HOW'S EUROPE TREATIN' YA?

J. P. Morgan & Co. released their results for the fourth quarter this morning; they stank.  No surprise there but what was a real surprise was that their chairman, Jamie Dimon blamed it all on Europe.  Now remember a few months back when The World's Greatest Banker since some Medici proclaimed that Europe was a problem for the Europeans and not us, a view that was greated as pure insightful genius by none other than Jim Kramer?  Well, Jamie, if you liked how that worked out for ya you should just love what may be coming down the road as a result of today's events in Euroland.

The sun rose to reports that S & P was going to downgrade everybody except Germany.  As of this writing nothing official has been released but the French have admitted to a downgrade as have the Italians but no one is sure as to whether the downgrades are one or two (or more) notches.  A drop to AA+ for France would be one thing; to AA quite another as double drops at that level are quite unusual.  One thing that is sure is that the price of poker just went up for everybody and the size of the Euro bail-out fund certainly got more expensive on a greatly reduced amount.  However, if Massimo is correct and everything now has been placed on the shoulders of the ECB, the actual effect going forward my well be less than what had been assumed just a few short months ago.  I don't know.

While markets were absorbing this piece of news, came word out of Athens--from the creditor side of all places--that talks on the Greek restructuring had been suspended and no date for resumption had been agreed.  The spokesperson was very open on the reason.  No agreement had yet been reached as to the pricing of the restructured debt which is another way of saying the cost to he creditors was too great for them to agree to a "voluntary" restructuring or as they are now calling it, an orderly default.  As we have often mentioned, this round of sovereign restructurings is a good deal different than those of the past inasmuch as the creditors, a diffuse lot, whose goals are different and who are not easily subjected to pressure from official sources as were the banks in times past.   Call them by their real names:  HEDGE FUNDS.  Now they can be forced into a restructuring by, as we have explained before, the Greek Parliament changing the law and imposing a collateral action clause on the debt agreements enabling the Greeks to force a restructuring with any percentage of the creditors agreeing that is needed.  Just count noses boys and pass the law inserting the number!  This little jewel was dreamed up some time ago by the afore-mention Cleery, Gottleib and used successfully against creditors who were stupid enough to lend money subject to local law and jurisdiction...which is just about everybody today.  As I told you, Cleery is very good.  


Not that the Hedge Funds will care mind you.  You see, if this happens, you are faced with a real, honest-to-God default and that triggers all of the insurance policies or credit default swaps--remember those little guys--that are out there, and---yep, you guessed it--nobody has a real handle on how many, how much, or for that matter issued by whom  there are.  One thing for sure, however, the Hedge guys own them and will expect to be paid.  Now as these items are generally not on the balance sheet it may turn out that institutions with a direct exposure may have indirect exposure as well.  If Oliver Hardy were still around he might be heard to say, "Now isn't this a fine kettle of fish you got us into, Stanley!"   Greek fish stew Jamie, you should know about that.  Hey, have a GREAT weekend!