The Eurogroup statement on Spain: "The loan will be scaled to provide an effective backstop covering for all possible capital requirements ... with an additional margin of safety up to €100B in total ... the Fund for Orderly Restructuring (FROB), acting as agent of the Spanish government, could receive the funds and channel them to the financial institutions concerned." [View news story]
Actually, Erik, you are wrong in saying that ORIG sold off shares. The recent share sales were of shares held by DRYS. This resulted in no dilution to investors directly invested in ORIG. You need to check your facts. ORIG has in fact authorized a $500 million repurchase of shares and debt.
This article is lame. DRYS is in no danger of going under. Ocean Rig has a contract backlog of $2.9 billion. That's more than the market value of DRYS and ORIG combined! DRYS is also cash flow positive. The "losses" that it suffered last quarter on the drybulk side were accounting losses, resulting from depreciation. The losses on the ORIG side were the result of drillship deployment and repositioning, and are to be expected as a result of the newly inked deals. In fact, ORIG has no uncontracted drillships left for 2012. As to drybulk, rates are highly volatile and will recover. Chinese and other Asian shipyards are hurting for business, as few new ships have been ordered for many months already. The ships coming out of the shipyards now largely were ordered back in pre-2009. I would not have bought DRYS at $123, its peak price in 2007, but I think only a sucker would short DRYS at $2. I just don't see the upside, but Erik for a long time already has been obsessed with shorting DRYS, as if there were no other more promising candidates for shorting that Erik could focus on. He treats DRYS as if it were a rival baseball team, and not a business.
6 Reasons Stocks Have Likely Entered A Bear Market [View article]
I don't agree that we have entered a bear market. A lot of money has left the stock market and gone into "safe haven" government bonds. However, these bonds are now ridiculously expensive. Never in history have they been so expensive. The US 10yr. T-bond is now trading at a yield of 1.45%. The UK 10yr bond is trading at 1.53% per year. The German 10-yr is trading at 1.17%!!!! These yields are well below the rate of inflation for these economies. For some bonds, such as the 2-yr German bond and US Tips the yields are NOMINALLY negative (i.e., negative without factoring future inflation). In other words, panicky investors are PAYING these governments for the "privilege" of lending to them for an extended period of time.
There are huge risks to these instruments. Interest rate risk is of course the most immediate concern. Imagine what would happen to the value of the US 10-yr if yields jumped to the more historically normal range of 4%-6%. The losses on the mark-to-market for these instruments would be large.
Then there is the solvency risk, which applies particularly to the US. With a federal debt approaching 100% of GDP in the US (compared to 67% in Spain), would the US be able to sustain Spain's interest payments of 6.5%? Interest on the federal debt would then eat up all of tax revenues!
So, I don't think there's room for the bond market to get more expensive. In fact, quite the opposite. The "safe haven" bond market bubble is not sustainable. Money will flow back to stocks, and you will therefore not see a bear market in stocks for the time being.
Long-time bond bull Robert Kessler takes a victory lap and says there's plenty of room for yields to fall further. That's bad news for stocks, he says, as low yields are forecasting lower profits. How to make money with these yields? Banks can conservatively lever 20-to-1, borrowing for nothing to make 15% returns. It's a casino, but the House (the Fed) is paying everybody to play and win. [View news story]
There is a fear-driven bubble in government bonds. The tiny yields these instruments offer simply do not make sense. Investors appear to be intentionally losing money, paying the governments of certain countries (Germany, the U.S.) for the privilege of lending money to them for extended periods of time. I assume that many purchasers of these bonds are aware of this, but perhaps are motivated by the intention of unloading these instruments at even higher prices on other investors, instead of holding them to maturity (i.e., the "greater fool" theory). If interest rates spike, the value of the longer duration bonds would be CRUSHED (and not just because the US in particular would then find it next to impossible to service its debts!!).
As to the issue of "deflation", ok deflation is possible, for maybe one or two quarters. Over the 10 year maturity of a 10-yr T-bond or the 30 year maturity of a 30-yr T-bond, deflation is highly unlikely. An investor who holds the longer term "safe haven" bonds to maturity would be eaten alive by inflation coupled with a subpar yield.
It will be interesting to see how this all develops.Like all bubbles, the ending will not be pretty.
Yield Curve Review And Interest Rate Outlook [View article]
I don't see a recession, particularly here in the US. I am not particularly political, but I think that your party politics are clouding your vision of the economy. You may wish there was a recession, because your preferred candidate would then have a higher chance of getting elected. However, the data indicates a slow but steady recovery in the US right now, and corporate profits are on a roll. The job numbers are weak, but that may just be because there has been a structural change in the economy. Companies are simply more productive, and they make do with less people. As for interest rates, my own forecast is that they will spike. I don't think that deflation is realistic. The fed has given no indication that it intends to skrink its balance sheet, and its policy is currently to keep short term interest rates well below its inflation outlook. This stance has been the same for a few years already, and it is of course inflationary, triggering a possible spike on long-term interest rates once all the brouhaha about the eurozone quiets down.
Bankia hurtles 24.5% lower in Madrid following news that Spain's government will provide €19B to the lender. Shares had been suspended on Friday ahead of the announcement by Bankia of its recapitalization requirements. The developments are pressuring other bank stocks, with Bankinter (BKNIY.PK) -4.1% and Santander (STD) -1.1%. [View news story]
I don't know if the actions of the ECB will lead to runaway inflation. Maybe. It depends on aggregate credit growth. Be that as it may, the problems of certain Spanish banks, of Greece, etc. appear very manageable. I don't understand all the hysterics surrounding the Eurozone. Same tired story for over three years, and yet it seems that some people forget about the fundamentals of specific companies and trade solely around these so-called "macro issues". Does not make a lot of sense to me. The ECB has powerful tools in place to address these problems. I don't understand why some folk insist on placing their bets against the central banks. Seems to me like a trade destined to lose money, maybe not tomorrow but the day after tomorrow for sure.
The London Whale was hooked by a NYC "monster." The tale of how Boaz Weinstein and other hedge fund managers took JPMorgan for billions. Now running his own money, Weinstein was once a whale himself on the wrong side of a trade, he and his team at Deutsche Bank losing $1.8B in 2008. [View news story]
People seem to forget that Boaz Weinstein lost $2 billion for Deutsche Bank not so many years ago. Now, his luck has turned and he is making a killing (for himself - losses are always somebody else's problem in hedge fund-world). It doesn't mean Weinstein is a genuis. It only means he's a gambler who gambles with other people's money and uses jaw-dropping amounts of leverage. If the so-called euro crisis does not play out as planned, his trades will turn against him, he will be taken to the cleaners, and he will essentially be harpooned by the London Whale. Should be entertaining to just sit and watch by the sidelines.
Bankia hurtles 24.5% lower in Madrid following news that Spain's government will provide €19B to the lender. Shares had been suspended on Friday ahead of the announcement by Bankia of its recapitalization requirements. The developments are pressuring other bank stocks, with Bankinter (BKNIY.PK) -4.1% and Santander (STD) -1.1%. [View news story]
The Bankia bailout will be financed by the ECB. In other words, the bank's debts essentially will be monetized. The mechanics probably will be as follows. Spanish government issues bonds to finance the bailout, Bankia acquires those bonds, Bankia pledges those bonds to the ECB, the ECB gives the bank freshly minted euros, Bankia keeps the difference between the yield on the Spanish bonds and the very low interest it pays on the ECB's euros. Essentially, the same strategy that the fed used during the US financial crisis. Debts are simply wiped out by printing money. All the hysterics out there who are concerned about the end of capitalism and a cataclysm resulting from euro debts, the end of the euro, Greece, or whatever, should keep in mind how downright EASY it is for the central banks to remedy these problems. Print, print, print.
S&P futures, +0.8%, are off their best levels, but remain higher as most of Europe puts in a marginal rally today. Stoxx 50 +0.4%, Germany +0.6%. Spain -0.7% as the debts of its banks begin to move onto the government balance sheet. Spanish 10-year notes +15 bps to 6.46% - starting to close in on the panicky November peak of 6.70%. [View news story]
These days, German bonds are inversely related to Spanish bonds. The Euros that leave Spanish govt bonds bid up German govt bonds. However, yields on German govt bonds are as low as they can go. 10-yrs. are at a historically low yield of 1.36%. This is a negative real yield - in other words, purchasers of these instruments are intentionally destroying part of the capital that they invest into these instruments over the 10-yr. term of the bond, when inflation is taken into account. Why would they do this? Fear, I suppose. However, yields on German government bonds are unlikely to go lower, simply because there is hardly any space for them to move down. Also, at these low yield levels the bonds are ridiculously expensive and are starting to encounter investor resistance. This bodes well for Spanish, Italian, and other peripheral country government bonds. It also bodes well for Euro equities.
Staying Committed To Europe - Even If It Is In Cash [View article]
The market is in a near-panic right now, but not sure about what. Greece? Spain? U.S. jobs? Corporate profits rolled in at a good clip last quarter. The "uncertainties" that some people are so concerned about are nothing but fear about living in a world where there are no (and have never been) any "certainties".
Take Greece, for example. By itself, Greece does not matter (except to the Greeks, of course!) It is just too small; a tiny country. If it leaves the EU, the economic consequences will be limited, although the Greeks will have a hard time as they get used to their devalued drachmas. The theory though is that there could be "contagion". Greece could trigger a Spanish exit, a Portugal exit, an Italy exit, etc., etc. But, even if Greece were to leave the Eurozone, the theory of "contagion" (a term right out of a horror movie!) will not necessarily become reality. It's just a theory. One could come up with alternative theories: that the money printing by the Fed will lead to runaway inflation, that California fiscal problems will lead to a string of municipal banrkuptcies in the US, that US interest rates will spike and the US government will find it difficult to finance its deficits, etc., etc. The difference is that these "theories" are not played over and over again in the financial media. So, nobody pays attention to these possibilities, even though they are not less or more probable. We live, after all, in a world of uncertainties.
Meanwhile, positive US macro data is widely ignored...
So, where are we right now? Equities are dirt cheap - not because the "trillions" of dollars that have left the equity markets around the world have truly disappeared. They have simply moved to bonds, mainly of to those issued by the German, UK, Japanese, and US governments, making long-term bonds ridiculously expensive (as in tiny, tiny yields, even for the longest bonds), as the fear trade seeks its so-called "safe havens".
The fear trade is not sustainable in the long term. Bonds are offering negative real returns (1.36% on the German 10-yr., well below the rate of inflation!) The yields on equities currently offer not only positive returns, but very attractive returns. Money will move out of bonds, and then we'll see a rally in equities (and those who favor the fear trade will panic in reverse, stampeding out of government bonds; should be interesting to watch that unfold.)
Long-Term Treasuries: How Low Can Yields Go? [View article]
Hi, Eric. I don't agree with your analysis.
Current high prices for the long T-bonds are not supported by fundamentals. The yield for the 10-yr. T-bond is currently 1.7%. This is below the rate of inflation, per US govt statistics. Would you commit yourself to lend to the US government for 10 years below the rate of inflation? Not unless you are essentially panic-driven (Greece, blah, blah, blah).
Also, there are very large interest rate risks to these instruments. If yields on the 10-yr. bond crept back to 3.4% (which historically is not high at all), the yields would be 100% higher than today. The market value of your bond WOULD CRATER. However, if the yield went down to 1.5% and then up to 3.4%, the yield would then be 127% above its low point. In other words, the lower the yield goes, the more risky these instruments become. Also, the lower the yields go, the less you are compensated for the risk. Is a yield of 1.7% sufficient to compensate you solely for the interest rate risks inherent in these instruments? Not in my view - unless, of course, you are panic-driven.
Right now the market for long T-bonds stands on two legs: 1. fear, and 2. Fed purchases. The Fed will stop its purchases next month, as Operation Twist winds down. As for the fear-trade, it is not sustainable over the long term, and certainly not over the 10 to 30 yr. maturity of a long govt bond. Fundamentals eventually will prevail.
For All The Shouting, This Is Still A Normal Correction [View article]
10-yr T-bonds at 1.72% when annual CPI inflation (even using the government's own statistics!) is at 2.1% do not make economic sense and indicate irrational, fear-driven behavior. (Let's not even talk about German long bonds!) Why would you commit yourself to lend money to the government for 10 years at an interest rate which - right now, let's not even think about the future! - is negative? Why would you purchase that "safe haven" bond when interest rates could spike any time (say to even as low as 3.4%, which is a yield 100% higher than now), causing the market value of your bond to crater? Simple - because you have been watching too much television, reading too many headlines about Greece, you are scared about all the "uncertainties", and have not really stopped to think things through. In other words, you are in a panic, and are therefore acting irrationally.
For All The Shouting, This Is Still A Normal Correction [View article]
The market is in panic mode. Investors are dumping equities in favor of perceived safe havens. T-bonds, German debt, UK bonds trade at yields well below inflation. So, there's a built-in loss and yet people lap them up. At these prices, there are also huge interest rate risks to these instruments, but these risks are ignored. You put Greece on a headline right now, and the Dow Jones goes down 100 points. It's fear driven-behavior. Folks don't really know what they should be afraid of, but that's no excuse not to sell.
The flip side is that you can get some equities at valuations that are grotesquely cheap. The markets are always driven by a mix of emotions and fundamentals. Right now, emotions dominate. This will reverse itself, but this is where we're at right now.
Greek Worries Again Take Over Markets [View article]
So, basically instead of looking at the fundamentals of companies and their profitability and likelihood for future profitability the market should focus obsessively on the political developments coming out of a tiny country with a tiny economy, as if the future of the world economy and of capitalism itself depended on what some Greek politicians nobody has heard about before have to say. That's the Greek story for you. Or rather, the non-story. Greece should be allowed to leave the euro, if that is what its citizens want. Greeks will in the short term face an economic shock; in the long-run, as the Greek economy adjusts to the drachma and regains competitiveness, Greece should be ok. The rest of the world... well, the rest of the world can just yawn. Nothing will happen. Greece is just too small to matter, the Greece headline-fed mass hysteria notwithstanding.
The Eurogroup statement on Spain: "The loan will be scaled to provide an effective backstop covering for all possible capital requirements ... with an additional margin of safety up to €100B in total ... the Fund for Orderly Restructuring (FROB), acting as agent of the Spanish government, could receive the funds and channel them to the financial institutions concerned." [View news story]
The Only Way DryShips Can Survive [View article]
The Only Way DryShips Can Survive [View article]
6 Reasons Stocks Have Likely Entered A Bear Market [View article]
There are huge risks to these instruments. Interest rate risk is of course the most immediate concern. Imagine what would happen to the value of the US 10-yr if yields jumped to the more historically normal range of 4%-6%. The losses on the mark-to-market for these instruments would be large.
Then there is the solvency risk, which applies particularly to the US. With a federal debt approaching 100% of GDP in the US (compared to 67% in Spain), would the US be able to sustain Spain's interest payments of 6.5%? Interest on the federal debt would then eat up all of tax revenues!
So, I don't think there's room for the bond market to get more expensive. In fact, quite the opposite. The "safe haven" bond market bubble is not sustainable. Money will flow back to stocks, and you will therefore not see a bear market in stocks for the time being.
Long-time bond bull Robert Kessler takes a victory lap and says there's plenty of room for yields to fall further. That's bad news for stocks, he says, as low yields are forecasting lower profits. How to make money with these yields? Banks can conservatively lever 20-to-1, borrowing for nothing to make 15% returns. It's a casino, but the House (the Fed) is paying everybody to play and win. [View news story]
As to the issue of "deflation", ok deflation is possible, for maybe one or two quarters. Over the 10 year maturity of a 10-yr T-bond or the 30 year maturity of a 30-yr T-bond, deflation is highly unlikely. An investor who holds the longer term "safe haven" bonds to maturity would be eaten alive by inflation coupled with a subpar yield.
It will be interesting to see how this all develops.Like all bubbles, the ending will not be pretty.
Yield Curve Review And Interest Rate Outlook [View article]
Bankia hurtles 24.5% lower in Madrid following news that Spain's government will provide €19B to the lender. Shares had been suspended on Friday ahead of the announcement by Bankia of its recapitalization requirements. The developments are pressuring other bank stocks, with Bankinter (BKNIY.PK) -4.1% and Santander (STD) -1.1%. [View news story]
The London Whale was hooked by a NYC "monster." The tale of how Boaz Weinstein and other hedge fund managers took JPMorgan for billions. Now running his own money, Weinstein was once a whale himself on the wrong side of a trade, he and his team at Deutsche Bank losing $1.8B in 2008. [View news story]
Bankia hurtles 24.5% lower in Madrid following news that Spain's government will provide €19B to the lender. Shares had been suspended on Friday ahead of the announcement by Bankia of its recapitalization requirements. The developments are pressuring other bank stocks, with Bankinter (BKNIY.PK) -4.1% and Santander (STD) -1.1%. [View news story]
S&P futures, +0.8%, are off their best levels, but remain higher as most of Europe puts in a marginal rally today. Stoxx 50 +0.4%, Germany +0.6%. Spain -0.7% as the debts of its banks begin to move onto the government balance sheet. Spanish 10-year notes +15 bps to 6.46% - starting to close in on the panicky November peak of 6.70%. [View news story]
Staying Committed To Europe - Even If It Is In Cash [View article]
Take Greece, for example. By itself, Greece does not matter (except to the Greeks, of course!) It is just too small; a tiny country. If it leaves the EU, the economic consequences will be limited, although the Greeks will have a hard time as they get used to their devalued drachmas. The theory though is that there could be "contagion". Greece could trigger a Spanish exit, a Portugal exit, an Italy exit, etc., etc. But, even if Greece were to leave the Eurozone, the theory of "contagion" (a term right out of a horror movie!) will not necessarily become reality. It's just a theory. One could come up with alternative theories: that the money printing by the Fed will lead to runaway inflation, that California fiscal problems will lead to a string of municipal banrkuptcies in the US, that US interest rates will spike and the US government will find it difficult to finance its deficits, etc., etc. The difference is that these "theories" are not played over and over again in the financial media. So, nobody pays attention to these possibilities, even though they are not less or more probable. We live, after all, in a world of uncertainties.
Meanwhile, positive US macro data is widely ignored...
So, where are we right now? Equities are dirt cheap - not because the "trillions" of dollars that have left the equity markets around the world have truly disappeared. They have simply moved to bonds, mainly of to those issued by the German, UK, Japanese, and US governments, making long-term bonds ridiculously expensive (as in tiny, tiny yields, even for the longest bonds), as the fear trade seeks its so-called "safe havens".
The fear trade is not sustainable in the long term. Bonds are offering negative real returns (1.36% on the German 10-yr., well below the rate of inflation!) The yields on equities currently offer not only positive returns, but very attractive returns. Money will move out of bonds, and then we'll see a rally in equities (and those who favor the fear trade will panic in reverse, stampeding out of government bonds; should be interesting to watch that unfold.)
Long-Term Treasuries: How Low Can Yields Go? [View article]
Current high prices for the long T-bonds are not supported by fundamentals. The yield for the 10-yr. T-bond is currently 1.7%. This is below the rate of inflation, per US govt statistics. Would you commit yourself to lend to the US government for 10 years below the rate of inflation? Not unless you are essentially panic-driven (Greece, blah, blah, blah).
Also, there are very large interest rate risks to these instruments.
If yields on the 10-yr. bond crept back to 3.4% (which historically is not high at all), the yields would be 100% higher than today. The market value of your bond WOULD CRATER. However, if the yield went down to 1.5% and then up to 3.4%, the yield would then be 127% above its low point. In other words, the lower the yield goes, the more risky these instruments become. Also, the lower the yields go, the less you are compensated for the risk. Is a yield of 1.7% sufficient to compensate you solely for the interest rate risks inherent in these instruments? Not in my view - unless, of course, you are panic-driven.
Right now the market for long T-bonds stands on two legs: 1. fear, and 2. Fed purchases. The Fed will stop its purchases next month, as Operation Twist winds down. As for the fear-trade, it is not sustainable over the long term, and certainly not over the 10 to 30 yr. maturity of a long govt bond. Fundamentals eventually will prevail.
For All The Shouting, This Is Still A Normal Correction [View article]
For All The Shouting, This Is Still A Normal Correction [View article]
The flip side is that you can get some equities at valuations that are grotesquely cheap. The markets are always driven by a mix of emotions and fundamentals. Right now, emotions dominate. This will reverse itself, but this is where we're at right now.
Greek Worries Again Take Over Markets [View article]