Category: zerohedge

Three days ago it was S&P that opened the can of Puerto Rico junk worms. Moments ago it was Moody’s turn to downgrade the General Obligation rating of the Commonwealth from Baa3 to Ba2, aka junk status. We note this just in case someone is confused what the catalyst was that just sent stock to a new intraday high in the aftermath of today’s disappointing jobs number which until this moment barely managed to push the S&P higher by 1%.

 

Muni bonds, having shrugged off the initial downgrade, are starting to crack as the looming fear of forced (mandate-driven) sales rise rapidly… the 2017s tumbled over 4 points today!

 

 

Full release:

Moody’s downgrades Puerto Rico GO and related bonds to Ba2, notched bonds to Ba3 and COFINA bonds to Baa1, Baa2; outlook negative

 Approximately $55B of rated debt affected

New York, February 07, 2014 — Moody’s Investors Service has downgraded the general obligation (GO) rating of the Commonwealth of Puerto Rico to Ba2 from Baa3. Ratings that are capped by or linked to the commonwealth’s GO rating were also downgraded two notches, with the exception of the Puerto Rico Aqueduct and Sewer Authority (PRASA) Revenue Bonds, which were downgraded to Ba2 from Ba1. At the same time, Moody’s downgraded the Puerto Rico Sales Tax Financing Corporation’s (COFINA’s) senior-lien bonds to Baa1 from A2 and its junior-lien bonds to Baa2 from A3. The outlooks for ratings on the GO and the related bonds, as well as the COFINA bonds, are negative. For the ratings affected by this action, all of which were placed on review on December 11, 2013, see the list at the end of this report.

SUMMARY RATING RATIONALE

The problems that confront the commonwealth are many years in the making, and include years of deficit financing, pension underfunding, and budgetary imbalance, along with seven years of economic recession. These factors have now put the commonwealth in a position where its debt load and fixed costs are high, its liquidity is narrow, and its market access has become constrained. In the face of these problems, the administration has taken strong and aggressive actions to control spending, reform the retirement systems, reduce debt issuance, and promote economic development. Despite these accomplishments, however, in our view the commonwealth’s credit profile is no longer consistent with investment grade characteristics.

While some economic indicators point to a preliminary stabilization, we do not see evidence of economic growth sufficient to reverse the commonwealth’s negative financial trends. Without an economic revival, the commonwealth will face difficult decisions in coming years, as its debt and pension costs rise. The negative outlook signals the remaining challenges facing the commonwealth.

The commonwealth’s general obligation bonds and all the notched and related ratings were downgraded by two notches, with the exception of the Puerto Rico Aqueduct and Sewer Authority (PRASA) Revenue Bonds, which were downgraded one notch, to Ba2. This brings them to the same rating as the commonwealth general obligation rating, which reflects recent rate increases enacted by the legislature that will improve net revenues and are expected to reduce the authority’s reliance on commonwealth support.

CREDIT STRENGTHS

• Politically and economically linked to the US, with benefit of the nation’s strong financial, legal, and regulatory systems
• Large economy, with gross product exceeding that of 15 US states and population exceeding that of 22 US states
• Broad legal powers to raise revenues, adjust spending programs, and borrow to maintain fiscal solvency
• Major actions taken to stabilize commonwealth finances, including significant reform to main pension system, and tax increases to reduce budget deficit

CREDIT CHALLENGES

• Ongoing economic weakness due to long-term decline in dominant manufacturing sector, decreased competitiveness as a result of expired federal tax benefits, and high energy costs
• Dependence on capital markets financing to fund operating expenses and debt service during period of increased risk of reduced market access
• Very large unfunded pension liabilities relative to revenues, even after major reforms to two main plans that helped reduce cash-flow pressure
• Very high government debt, equal to more than 50% of gross domestic product
• Multi-year trend of large general fund operating deficits relative to revenues, financed by deficit borrowing

ACTION AFFECTS MULTIPLE CREDITS

The downgrade and negative outlook affect general obligation bonds of the commonwealth and of related entities listed below.

DOWNGRADED TO Ba2 FROM Baa3

• General obligation bonds
• Public Building Authority Bonds
• Pension funding bonds
• Puerto Rico Infrastructure Finance Authority (PRIFA) Special Tax Revenue Bonds
• Convention Center District Authority Hotel Occupancy Tax Revenue Bonds
• Government Development Bank (GDB) Senior Notes
• Municipal Finance Authority (MFA) Bonds
• Puerto Rico Highway and Transportation Authority (PRHTA) Transportation Revenue Bonds
• Puerto Rico Aqueduct and Sewer Authority (PRASA) Commonwealth Guaranteed Bonds

DOWNGRADED TO Ba2 from Ba1

• Puerto Rico Aqueduct and Sewer Authority (PRASA) Revenue Bonds

DOWNGRADED TO Baa1 from A2

• Commonwealth of Puerto Rico Sales Tax Financing Corporation Senior Lien Bonds

DOWNGRADED TO Baa2 from A3

• Commonwealth of Puerto Rico Sales Tax Financing Corporation Junior Lien Bonds

DOWNGRADED TO Ba1 FROM Baa2

• Puerto Rico Highway and Transportation Authority (PRHTA) Highway Revenue Bonds

DOWNGRADED TO Ba3 FROM Ba1

• Puerto Rico Public Finance Corporation (PRPFC) Commonwealth Appropriation Bonds
• Puerto Rico Highway and Transportation Authority (PRHTA) Subordinate Transportation Revenue Bonds

OUTLOOK

The rating outlook is negative, based on our expectation of continued economic stagnation or decline. The outlook also incorporates continuing demands on liquidity, increased refinancing risk and constrained market access.

WHAT COULD MAKE THE RATING GO UP

• Strong rebound in economic growth leading to improved and sustained financial performance
• A trend of declining debt

WHAT COULD MAKE THE RATING GO DOWN

• Evidence of further constraints on market access or significant further weakening of GDB liquidity
• Indication that total fixed costs, including pension contributions and debt service on bonded debt, have become unaffordable
• Steep growth in structural budget gap and an increase in GAAP deficits, solved with non-recurring solutions
• Economic weakness resulting in declining revenues and continued out-migration
• Reacceleration of growth in government debt

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Trinkets and Ads trump global energy provision…

 

 

Google, which became the world’s largest online advertiser through its dominant search engine, has a market capitalization of $393.5 billion while oil company Exxon is valued at $392.6 billion, according to data compiled by Bloomberg. Apple has a market value of $465.5 billion. Software company Microsoft Corp. is No. 4 with $302.1 billion.

 

Chart: Bloomberg

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Submitted by Simon Black of Sovereign Man blog,

Last week in his State of the Union address, the President of the United States laid the groundwork for a new government program he calls “MyRA”.

As he explained to the American people, this program will allow US taxpayers the ability to loan their retirement savings to the federal government (which, according to POTUS, carries ZERO risk).

Given that US Treasury yields fall far below the rate of inflation, this is a big win for the government, and a big loser for the poor suckers who loan them the money.

The President then hit the road, touting his one-of-a-kind program. The Treasury Secretary hit the newspapers, encouraging Americans to enroll.

I can see this unfolding like a War Bonds campaign, appealing to Americans’ love of country to get them to loan their money to the government at sub-inflation yields.

In Italy they’ve already used football stars in patriotic appeals to get Italians to buy government bonds. In Japan they use teenage girl bands to entice wealthy Japanese businessmen to open their wallets for government bonds.

So let’s see how long it takes for George Clooney and Matt Damon to make the pitch for the MyRA program… and how long after that it becomes mandatory for all Americans.

Meanwhile, the IRS is doing its part.

One of the best solutions that we’ve discussed in the past to liberate your IRA from this destructive trend is to set up a particular type of self-directed IRA.

But the IRS has been intentionally making it more difficult to set up these structures over the past year. Now there’s even more roadblocks.

In order to set up this type of structure, it’s imperative to first obtain a tax ID number. But due to agency budget cuts, the IRS is no longer issuing tax ID numbers for domestic entities through its call center. They’re saying that now you HAVE to use the online system.

This is one website that the government actually got right. The tax ID application website is fairly straightforward, and it works great. EXCEPT if you are trying to set up this type of IRA.

So if you’re an individual trying to obtain a tax ID number for your new company, no problem. The online system works great.

But if you punch in that you are setting up a company to be owned by your IRA (or some other entity), then suddeny the system crashes and times out.

I had my staff ring up the IRS yesterday to demand an answer. After two phone calls, each with a 30+ minute wait time to reach a human being, we finally got an answer. Confirmation, actually.

The agent told us that yes, in fact, the online system has been programmed to intentionally reject tax ID number applications for companies that are owned by entities like an IRA.

So they have essentially eliminated the option to apply online. But they won’t let you apply over the phone either.

You can apply through the mail, but that will take 30-days, according to the agent. Or by fax, provided that you first cough up all sorts of other documentation.

It certainly begs the question– at a time when the President of the United States is whipping up excitement over this new program to loan the government your retirement savings, why is their tax agency putting up huge roadblocks for Americans who don’t want to become victims?

via Zero Hedge http://ift.tt/1f1VQfu Tyler Durden

Last week in Institutional Investor article I’ve shared some important but quite boring topics that include the Fed Model, the price-to-earnings ratio, and profit margins. I imagine for most civilians (people who don’t do investing for a living) reading about these topics is as exciting as watching a live debate between two paleontologists about how the size of tyrannosaurus’ front teeth relates to the length of spinosaurus’ tail. (I have no idea what I just wrote.)

I will have you know, however, that the Fed Model is extremely important, because I vividly remember how low interest rates and the Fed Model were used as propaganda tool in the late ’90s to justify the stock market’s “this time is different” sky-high valuation. Low interest rates have been pushing investors into riskier assets and have thus resulted in higher valuations, but just as you would expect a finite boost of energy from 5-Hour Energy drink, low interest rates will not bring permanently higher valuations in stocks.

I see an army of experts on business TV – and non-experts in day-to-day dealings – justify holding otherwise overvalued stocks by comparing their yields of 2% or 3% to the yields of bonds. Stocks and bonds are competing assets, so a low yield in bonds in the short term (a key distinction) will drive higher P/Es (lower earnings yields) in stocks. But today, rather than a race to the top we have a race to the bottom. As bonds yields rise (or not – if they don’t it means we’re in deflation, which is even worse) stock valuations will return to their rightful place – lower. Of course there is a caveat: they may go a lot higher before they do that. But that’s investing for you.

I have written the topic of profit margins half to death; I even penned a scribble for Barron’s, discussing them back in 2008. All you have to do is look at the historical charts (see this chart) – profits always mean-revert. Mean reversion of profits is so banal it should be taught in finance classes just as Newton’s law of gravitation is taught in physics. Earnings have never grown at a faster rate than GDP (sales of the economy) for a substantial period of time. This time is not different. I’d buy an argument that the long-term mean of profit margins may have shifted upwards over the last two decades as we have become more of a service and less of a manufacturing economy. So instead of being at 8% – or maybe it should be closer to 9% – we are in the mid-teens.

Vitaliy N. Katsenelson, CFA, is CIO at Investment Management Associates in Denver, Colo. He is the author of The Little Book of Sideways Markets (Wiley, December 2010). To receive Vitaliy’s future articles by email or read his articles click here.

Investment Management Associates Inc. is a value investing firm based in Denver, Colorado. Its main focus is on growing and preserving wealth for private investors and institutions while adhering to a disciplined value investment process, as detailed in Vitaliy’s book Active Value Investing (Wiley, 2007).

via Zero Hedge http://ift.tt/1f1VPYM Vitaliy Katsenelson

One look at the chart below from the NYT, and a pattern emerges.

However, we are not sure which is the correct pattern:

1. Either SAC, or whatever it will be called soon, has some truly impressive hiring hurdles and an even more impressive background check company , or
2. Slowly but surely the investigation around Steve Cohen – just as we first suggested in November 2010 when nobody dared to mention in print that the invincible “information arbitrageur” was merely a two-bit insider trading hack who used “expert networks” and got lucky for so long he had an “economic war chest of scale” and an army of lawyers- is closing.

If 2, our question is who will play Stevie in the inevitable upcoming (Oscar-nominated) Martin Scorsese tragicomedy about the excesses of the 3 and 50 hedge fund bubble.

via Zero Hedge http://ift.tt/1o1pNE6 Tyler Durden

One look at the chart below from the NYT, and a pattern emerges.

However, we are not sure which is the correct pattern:

1. Either SAC, or whatever it will be called soon, has some truly impressive hiring hurdles and an even more impressive background check company , or
2. Slowly but surely the investigation around Steve Cohen – just as we first suggested in November 2010 when nobody dared to mention in print that the invincible “information arbitrageur” was merely a two-bit insider trading hack who used “expert networks” and got lucky for so long he had an “economic war chest of scale” and an army of lawyers- is closing.

If 2, our question is who will play Stevie in the inevitable upcoming (Oscar-nominated) Martin Scorsese tragicomedy about the excesses of the 3 and 50 hedge fund bubble.

via Zero Hedge http://ift.tt/1o1pNE6 Tyler Durden

Turkey scrambled an F-16 fighter jet following a bomb-threat aboard a Ukraine-outbound plane. A passenger, among 110 on the plane, made a bomb threat and demanded the plane be diverted to Sochi. The plane eventually landed in Istanbul – after crew calmed down the man who had reportedly been drinking. This threat follows the US’ warning of “toothpaste” bombs.

Via Reuters,

Turkey scrambled an F-16 fighter jet to accompany a passenger plane arriving in Istanbul from Ukraine on Friday after a bomb threat was made by a passenger demanding to go to the Winter Olympics venue of Sochi, Turkish officials said.

 

Television footage showed the Pegasus Airlines flight from the Ukrainian city of Kharkov arriving in Istanbul’s Sabiha Gokcen airport.

 

“A Pegasus Airlines plane flying from Kharkov to Sabiha Gokcen landed at Sabiha Gokcen safely after receiving a bomb threat while in the air,” the Turkish civil aviation authority said in a statement.

 

“People are still inside but the pilot called security and gave them a signal that they can enter the plane. There is a translator – a Turkish man near the Ukrainian to calm him down,” an airport official said.

The passenger was believed to have drunk alcohol and was calmed down by the crew and persuaded to let the plane, a Boeing 737-800, land in Istanbul at 6:02 pm (1602 GMT), according to Dogan news agency.

An official from Turkey’s transport ministry said there were 110 passengers on board and confirmed that a bomb threat had been made but said the plane had landed safely.

via Zero Hedge http://ift.tt/1o1pN71 Tyler Durden

Having benefited from the earlier QE-un-taper hope, the Turkish Lira is dropping rapidly following the move by S&P to put Turky on negative outlook:

• *TURKEY’S OUTLOOK TO NEGATIVE FROM STABLE BY S&P
• *S&P SEES RISKS OF HARD ECONOMIC LANDING IN TURKEY

Furthermore, the ratings agency raising questions over the Central Bank:

• *TURKEY SUFFERING EROSION OF GOVERNANCE STANDARDS, S&P SAYS
• *TURKEY SUFFERING EROSION OF CHECKS AND BALANCES, S&P SAYS
• *CONSTRAINTS ON TURKEY CENBANK INDEPENDENCE: S&P.

EM Un-fixed.

 

via Zero Hedge http://ift.tt/1gTVsXk Tyler Durden

Having benefited from the earlier QE-un-taper hope, the Turkish Lira is dropping rapidly following the move by S&P to put Turky on negative outlook:

• *TURKEY’S OUTLOOK TO NEGATIVE FROM STABLE BY S&P
• *S&P SEES RISKS OF HARD ECONOMIC LANDING IN TURKEY

Furthermore, the ratings agency raising questions over the Central Bank:

• *TURKEY SUFFERING EROSION OF GOVERNANCE STANDARDS, S&P SAYS
• *TURKEY SUFFERING EROSION OF CHECKS AND BALANCES, S&P SAYS
• *CONSTRAINTS ON TURKEY CENBANK INDEPENDENCE: S&P.

EM Un-fixed.

 

via Zero Hedge http://ift.tt/1gTVsXk Tyler Durden

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

"Phantom economies tend to give rise to gray and black markets in proportion to the deviance of the phantom economy from reality."

College graduates around the world are discovering that getting a university diploma no longer guarantees the conventional success story of a secure job and a life of ever-rising consumption. Doing all the things that the Status Quo said would lead to success no longer yields success, for the simple reason that the Status Quo is failing on a structural/systemic level.

The system is rigged to protect the Status Quo mafia from competition. As noted in The Mafia State of Mind (February 6, 2014), the Status Quo is a set of overlapping monopolies/extortion rackets. The system needs a trickle of new technocrats and apparatchiks to manage the rackets, but there is no place for the tens of millions of college graduates who are flooding into the job market every year around the world.

New conventional enterprises face essentially impossible barriers: sky-high rents, absurdly lengthy and costly permitting processes, onerous fees and reporting requirements, and a host of other barriers reputedly imposed to "protect the public" but whose real purpose is to eliminate small-enterprise competition to corporate dominance.

Which organizations have the cash flow, financing, legal expertise and political influence to meet all the requirements and pay the insanely overpriced leases? Global corporations and the state–two sides of the same kleptocratic coin.

The high costs of launching and operating a legitimate Status Quo business serves two other primary purposes: maintaining high returns on capital for crony-capitalist financiers and funding the state's enormous cadre of functionaries at above-market-rate salaries, benefits and pensions. Recall that median personal income in the U.S. is about $40,000 for full-time workers, and compensation above $82,500 annually puts one in thetop 10% of all wage earners.
 

The California Public Policy Center has just posted its own searchable site of state and local employee wages and pension benefits,TransparentCalifornia.com. Some of the results were rather revealing – and should be shocking to taxpayers: There are 31,527 retired public workers in the "$100,000 pension club" and 582 who are receiving pensions of at least $200,000 a year. Including wages and benefits, there are 227,059 state and local workers earning total compensation of at least $100,000 a year.

Some may argue that these large figures apply to a relatively small portion of public employees, and that the average public employee receives modest compensation. However, a CPPC analysis revealed that even average compensation is startlingly high. Average compensation for full-time state employees was $93,851 for public safety employees and $68,282 for all other employees. Adding benefits boosted these totals to $129,388 and $90,402, respectively. The figures for city and county employees were even higher.
Source: Public sector's growing $100K club

Two forces are disrupting this cozy interlocking mafia of financiers, corporate cartels and state functionaries: the End of (Middle-Class) Work and the rise of the peer-to-peer, self-organizing business models such as AirBnB, car-sharing, ride-sharing, farmers markets, etc.

Russ in Redding: The Human Face of The End of Work (September 2, 2011)

America's Social Recession: Five Years and Counting (August 28, 2013)

The Ten Best Employers To Work For (Peak Employment) (March 28, 2013)

The Python That Ate Your Job (December 11, 2013)

The high costs of legitimate business (needed to keep rentier/financial profits and state functionary pay/pensions high) are effectively destroying middle-class jobs and pay scales: the only organization that can afford to pay high salaries and benefits, regardless of costs or the business climate, is the state.

Even the financial sector and global corporations can only pay middle-class salaries for technocrats and managers in what are effectively quasi-state agencies (sickcare, workers compensation insurance, the defense industry, etc.)

So what are the tens of millions of college graduates supposed to do for a livelihood if there are only a few slots open in the moated mafias of financiers, corporate cartels and the state? To answer, let's start with this obvious statement: that which cannot be paid will not be paid.

All the infrastructure of consumption depends on tens of millions of college graduates making enough money to pay high taxes, service their student loans, buy homes, autos, particle-board furniture, electronic gadgets, dozens of pairs of shoes, etc. etc. etc. If they can't make enough money to buy and own all that stuff, then they won't be buying and owning all that stuff.

And if they can't earn a living within the Status Quo mafia, they will do so outside the mafia in the gray and black markets.

This destruction of consumption is supposed to be a disaster, but it's only a disaster for the moated mafias of financiers, corporate cartels and the state that depend on tens of millions of workers voluntarily becoming debt serfs and tax donkeys. If young workers cannot make their student loan payments, those loans become worthless. As the old saying has it, You can't get blood from a stone.(Alternatively: You can't get blood from a turnip.)

If young workers can't make enough to buy autos, homes, etc., the market for those goods and services implodes. And if all the financial/debt churn generated by consumption goes away, so do the fees and taxes the state depends on to pay its armies of functionaries.

Rather than a disaster, this wholesale loss of middle-class incomes and aspirations is enormously liberating. Instead of the yoke of debt-based ownership, young people are finding sharing to be better than owning: one shared car can provide transport for 10 people. Ten people no longer need to own 10 cars to get around.

One way to grasp how deeply the mafia state of mind has taken hold is to ask: how many middlemen have to be paid to produce/buy a good or service? In Greece, liberation starts by eliminating the middleman, which of course includes the voraciously corrupt state: After Crisis, Greeks Work to Promote ‘Social’ Economy.

The state is naturally in full freakout mode, as self-organizing sharing/no-middleman enterprises are outside the debt-serf/tax donkey system that funds the state. In response, the state is frantically trying to impose the same fee structure that has crushed conventional small businesses on the sharing/no-middleman organizations.

The problem for the state is that its success in imposing exorbitant fees and taxes will simply drive low-income people scratching out a minimal living in the gray market to other networks that do not even have a corporate structure to tax. To wit: "The more you tighten your grip, the more systems will slip through your fingers."

If making a living in the gray market becomes untenable, then people will be forced into the black market, which is whatever trade can be done outside the reach of the state. As noted previously, that which cannot be paid will not be paid.

As correspondent Peter D. recently observed: "Phantom economies tend to give rise to gray and black markets in proportion to the deviance of the phantom economy from reality." If we believe that phantom economies of moated fiefdoms, mafias and cartels are "reality," then the rise of liberating degrowth networks is distressing and confusing.

But if we look past the propaganda and see the debt-serf/tax donkey system for what it really is, a predatory system of oppression and exploitation, then we can see how degrowth, de-consumption, de-debt, etc. is liberating.

TEDx Tokyo: The "De" Generation (8 minutes) (de-ownership, de-materialism, de-corporatism)

Degrowth, Anti-Consumerism and Peak Consumption (May 9, 2013)

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