@ the open 2-21-12

739 days later – yes, it’s a zombie movie but this one, similar to Roubini’s “zombie banks” is about “zombie states”…Greece gets its 2nd bailout, 2 years and 9 days after this crisis began with the news that Greece was in trouble and yet we’re no closer to an end to the crisis…here are some of the bullet points surrounding the deal after 13 ½ hours of negotiations yesterday in Brussels. Admittedly, the details at this point are scant:
• EFSF will provide (with the help of the IMF) up to €130 billion until 2014
• Private sector investors will exchange €100 billion of “old” Greek bonds for “new” Greek bonds taking a “haircut” of 53.5%..so the PSI will receive €46.5 billion of “new” Greek paper…the amount of financial assistance provided (previously the number was €30 billion) remains up in the air and it sounds as if the PSI won’t know the amount until after the results of the exchange are known…this sounds like a non-starter to me.
• The Greek government agrees to trim €325 million from its 2012 budget to close the gap and the interim PM agrees to make sure that the program is implemented after the April general election…this is a real stretch
• Greek rates get lowered to 2.5% for borrowed funds…this is current as it’s ECB rate + 1.5%
• The ECB will “sell” their Greek paper to member state central banks at cost (there’s another wealth transfer) and the central banks will hold the paper and if it appreciates, those profits will go toward the Greek bailout funds pledged…just another way to funnel funds to the bailout without using EFSF/ESM funds…of course this assumes that Greece will remain solvent so that the funds will flow back to the member state central banks at bond maturity…this is taking money from the right pocket and putting it in the left pocket since the source of the funds to pay bonds at maturity will likely come from the EFSF/ESM and/or IMF.
• Speaking of the IMF, Legarde indicated that the support will be “significant” but there was no pledge that the fund would contribute their standard 1/3 of the bailout funds…the details of the IMF contribution won’t be known until after the March 1-2 EU summit in which the EU leadership is now talking about upsizing the EFSF/ESM to around €750 billion (part of this is combining the two funds side-by-side)…apparently the Germans are no longer against this idea. This is the IMF’s lever to get the EMU to upsize the bailout fund so that the IMF can then go to its member states for more money to upsize the IMF as the ever increasing EMU bailouts create a drag on other IMF needs around the globe.
• The EU will have a “permanent” presence in Athens to “manage” the funds and the funds will be in an escrow that goes first to maintain Greece solvency (here’s the right pocket to left pocket deal)…after maintaining solvency (read this as making debt maturity payments) then monies can be used to deal with Greek budget deficits…so the Greek government will have to come “hat in hand” to the EU commission presence in Athens to get money each and every time they need it…nice.
At this point it remains unclear what individual state votes will be necessary (a vote on the lower interest rate is one for sure) to clear the way for the funds to flow so I regard this as just one more “announcement” from a meeting of finance ministers that still needs the I’s dotted and the t’s crossed.

Equity Markets – in a modest display of “sell the news”, European indices are lower across the board this morning following the announcement of “Greece II”…the realization is that this was fully expected to get done by the market and that the ultimate realization of the “plan” clearly indicates that the worst is likely yet to come and that there remain many unanswered questions and omitted details…US futures are following suit and are lower than earlier this morning, paring gains by more than ½ on the DJIA and actually going negative on the NDX….I expect a choppy day in the market after the long holiday weekend here.

Macro, News & Events –

Economic Releases

• January Chicago Federal Reserve Bank National Activity Index…0.22 v. 0.17

Events – none scheduled for today

Earnings – Retail and Energy day…Wal-Mart, Macy’s and Home Depot with Chesapeake (largest natural gas reserve independent E&P) thrown in for good measure…we’ll also get a read on food stuffs from Kraft and the “Win-tel” retail computer business from Dell.

Asia, Europe & USA

• EMU finance ministers agree to “Greece II” bailout (see above)
• Spain auctions €2.5 billion of 3 month bills to yield 0.4%
• The UK posted its largest budget surplus in four years in January, £7.75 billion, as Osborne’s austerity measures appear to be working for the UK…the forecast by economists had been for a surplus of £6.3 billion. This is one step toward warding off a downgrade by Moody’s which had put the country’s ratings on outlook negative as of 2/13.
• Vulcan Materials plans to fight the hostile takeover offer from rival Martin Marietta by selling assets to pay down debt…VMC indicated that it plans to sell real estate and some businesses (cement and concrete operations in certain areas) in order to reduce their debt load. MLM has said that there are $250 mm of synergies in the deal and that they will boost dividends that VMC trimmed by 96% last year. Clearly, with 8x EBITDA in leverage, VMC doesn’t think that it can raise sufficient debt to counter Martin’s offer to shareholders so they’re trying a different tactic…odds that it works? Low
• LNG tanker rates continue to rise as Japanese consumption of LNG moves higher in the aftermath of last years’ nuclear disaster that has the island nation contemplating the elimination of nuclear fuel generated power…already a consumer of 30% of global LNG supplies it looks like that percentage is set to ramp higher as US interests rush to build out liquefaction facilities to take advantage of low natural gas prices here in the US. As an example of the demand, LNG from Nigeria (the largest Atlantic Ocean exporter) sold at prices 93% higher in Japan than similar cargoes in the UK…as a result, much of the traffic is being routed to Japan to take advantage of the price differential.
• The Iranians are reportedly offering India more oil on revised terms after the UK and France are cut off from Iranian supplies (around 3% of total daily exports)…India has yet to announce if they will accept the new crude supplies.
• Canada is threatening to become a “two speed” economy with the resource rich western part of the country booming while the manufacturing heavy east suffers due to the rise in the Canadian dollar…

Credit Markets –

• Auto loan receivable asset backed securities issuance has reached $15 billion this year, roughly double the amounts printed over the same time frame in each of the last three years…the extra yield and reasonably secure status (cars routinely sell for between 35 to 40% of loan amount at auction) combined with the short average life make these attractive investments
• Bailouts and excess ECB liquidity via the LTRO are distorting inflationary signals in the EMU as fundamental economic activity continues to lag behind the excess liquidity in the system
• Goldman Sachs sells their first “Samurai” bond in four years to beat US tax law changes that will eliminate the tax exemption for American issuers in Japan…the rules change go into effect on March 18th

Sovereign CDS – spreads are mostly wider this morning as the market processes the bigger Greek “haircut” for PSI and the rest of the “Greece II” plan as proposed by the finance ministers. Focus will quickly reset to how much will be taken up by the European banks at the next LTRO auction in 8 days.

Energy Markets – WTI / Brent spread is coming in as prices here are higher this morning while some of the Iranian premium seems to have come out of the Brent price after Iran offers additional oil to India (no response from India as yet)…of course this situation remains fluid.

Futures – futures continue to move higher but the shifts are parallel and the strip isn’t steepening which means that the crude storage arb gets worse, not better (due to the fact that the purchase cost is higher making the financing “drag” higher) and that means that tanker rates continue to create a drag on shipping companies leveraged to VLCCs…the equivalence ratio (strip average based) remains around 5.6x.

Phillip Pennell, CFA
Turnberry Capital Management
(203) 861-2708 (Direct)
(203) 861-2700 (Trading)
(203) 917-2255 (Mobile)

The information included in the above discussion is not intended to be used as a basis for making investment decisions nor should it be construed as a recommendation by the author to buy or sell any specific security. Individuals should consult their investment advisor prior to making any investment decisions.