Halftime Report 2.13.2012

Should this rally be sold into? We need some selling pressure to relieve overbought conditions in my opinion.
We saw some unusual option activity in a few names:
– One customer bought 9800 HSNI March 35 Calls for $2.10, those Calls are $2.30 now (185 times usual volume)
– customer bought 9577 LYV April 10 Puts for $.70, (21 times usual volume) in the Jeremy Lin fade as Live Nation is the biggest competition to Madison Square Garden. MSG is up around 12% in the last week. Is MSG overvalued? Is Lin the new NY savior?


These behemoths, whose word is almost holy to bond investors, grossly overrated bundled mortgages (CMO’s) and other questionable products. They checked their integrity at the door in order to invite in more business, and they have never regained their prior creditability and reliance. That is, until now. Over the last few months, rating agencies have taken on the world in order to rebuild their creditability. First, S&P downgraded US Treasuries below AAA, an almost unthinkable action in years past. President Obama did everything possible to discourage this action, as did Secretary Geithner. Yet S&P took on “the man”, and did the downgrade. The ratings agencies also downgraded France below AAA, and downgraded a number of other European countries and banks. Many American banks have also been downgraded. In sum, downgrades have been about as common as high priced commercials in the Super Bowl. One security downgraded with impunity has been the bundled CMO’s. Some CMO’s rated AAA on 2008 are now rated CCC or lower. Various other securities have been equally harshly downgraded. Indeed, the ratings agencies seem to have drunk the cool aid. They have a new morality in trying to accurately rate fixed income investments. More importantly, this new morality will play a major role as the current Greek tragedy enters its final act.

Here’s where Greece’s private bondholders stand now: A deal is on the table where they would take a 70% haircut by exchanging their old bonds for new ones. If all bondholders agree to this deal, there will not be a “default” on Greek government bonds. However, if some bondholders do not agree to the deal, they will likely be forced into it by Greek legislative action or otherwise. This forced action could well be deemed a “default” on the bonds. As such, it would give effect to credit default swaps written on the Greek bonds. And once this occurs, nobody can accurately predict the interbank and other ramifications that could possibly threaten the world financial system. That’s why it is important for there NOT to be a default. Moreover, whether the ratings agencies call a certain event a default will largely determine whether a default has indeed occurred. That’s why the ratings agencies are incredibly crucial players in this Grecian drama. It will be very interesting to watch how the ratings agencies play the cards they have been dealt. Will they objectively call a default by its name. Or will they play financial shenanigans, like they did in 2008. Clearly, Prime Ministers, Finance Ministers, Presidents, and Central Bankers will come up with hundreds of complex reasons why there has been no default. But a Duck by any other name is still a Duck. In my opinion, the ratings agencies will conclude that there has been a Greek default. They will be objective and correct. They will not do so because of ethics or morals. They will do so in the best interest of their businesses. Ratings agencies deal in creditability. It is their stock in trade. Once gone, it is very tough to regain. Moreover, once gone completely, these companies have nothing left to sell to their customers. That is why S&P downgraded US Treasuries. They made one grand gesture to reclaim their creditability. In my opinion, they and the other agencies will continue down this road. They will not call a default a daisy or a bluebird or a polar bear with feathers. A default is a default and they will call one when they see one.

As indicated above, such an action could wreck havoc with credit default swaps, but Dr. Helicopter Bernanke and his fellow central bankers will know it is coming. They will do LTRO II or QE 3.789. They will allow the world economy to shake a bit, but not to freefall. They are far smarter than I am. They know a “default” is coming and they hopefully have a plan already in place to deal with it. All of which will hopefully lead to a brighter financial environment in the future. The world needs highly respected, creditable ratings agencies. We need ratings that fixed income investors can rely on. It is far better to live in a world where US Treasuries are AA+ (and this rating can be relied on), than in a world where private bankers and central bankers manipulate the ratings agencies, so that CCC CMO’s are rated AAA, and the ratings are about as useful as high heel shoes on an elephant. The world will survive the Greek crisis. And hopefully we will have involved creditable, reliable, honest rating agencies who will never repeat their mistakes of 2008.

By Floyd at KOTM follow me on Twitter @ USKOTM

Morning Rage 2.13.2012

Italian/French banks are seeing a relief rally in the Euro markets as financials are trading higher. Monday, all eyes will be watching Japan GDP and Mexico IP numbers for the month of December. In US equities, Masco and Nordic American Tanker are preparing to report. Masco, the Street is looking for a loss of $.03 a share, analysts are forecasting total revenue of $7.58 billion for the year. We will see if Nordic American Tanker can beat on its estimated EPS of $.31 and revenue estimates of $7.6 Billion.

Cam at the Close 2.10.12

Apple made new all-time highs today when it reached $497.62. U.S. consumer confidence slid more than consensus for February, as concerns about job prospects are still very relevant for consumers. Stocks also dropped over concerns that Greece’s plans to avoid a default were in jeopardy. The whole Greece situation is becoming quite comical at this point. On a more Macro level, China’s exports and imports declined for the month of January. This is the first time in over two years where that has happened. Oil took a beating today and closed down 0.90% to $98.94 due to ongoing Greece concerns and the Euro also declined from a two month high. Electronic Arts (EA) and Game Stop (GME) both were down over 3.5% due to a NPD Group Inc. report stating that retails sales for video games were down 34% for the month of January. Amtech Systems (ASYS) plummeted 20% to $9.01 due to lower guidance. Cobalt International Energy (CIE) surged 35% after test results from an Angola well were positive. Goldman Sachs is the company’s biggest investor….go figure. LinkedIn (LNKD) rose 14.84% to $87.72 after the company reported strong profit numbers.

Halftime Report for 2.10.2012

Bill Gross is bullish on the treasury market in 2012. However, he did miss credits biggest move in 2011.  Should we fade Bill Gross’s trade? Fighting the Fed has not been profitable as they continue to print money at zero cents on the dollar. 

In US equities, there seems to be a shift into high flying tech names such as Dell and IBM. Apple is one of those names that can play both sides of the fence, risk on and risk off. Apple is a safe haven name that investors flee when we are in a risk off environment. Cooperman raises its stake in Rimm thinking there is limited downside.

LinkedIn’s volume exploded to the upside as the stock is trading up 17%. LNKD earnings were good, but not great. Their guidance seemed conservative. The new product outlook is encouraging. LNKD reported that it earned $13.3 million, or 12 cents per share on revenue of $167.7 million for its fiscal fourth quarter and we think it could be a possible short squeeze.