Fitch’s “Reserve Currency” Loophole: 80-90% Debt/GDP Rule Does Not Apply To You

It would appear that French-owned Fitch, following its rating-watch-negative shift on the US credit rating last week, has got a tap on the shoulder from the powers that be. As Hollande complains about Obama's espionage, Fitch has released a statement explaining how the USA can do whatever it wants and not be downgraded. With only the Chinese ratings agency "able" to openly comment on the creditworthiness of the USA, it is no surprise that Fitch gave itself an "out" on the basis of the USDollar's exorbitant previlege.

 

Via Fitch,

Fitch Ratings says in a new report that even for a sovereign with the strongest credit fundamentals, there will be a gross general government debt (GGGD)/GDP level above which Fitch believes its rating is no longer compatible with 'AAA'.

 

This is usually 80%-90%, but can be higher for sovereigns with exceptional financing flexibility, such as benchmark borrowers with reserve currency status. As we have highlighted before, for France, Germany and the UK, this threshold is currently 90%-100%, and for the US, it is currently 110%, provided debt is then placed on a firm downward path over the medium term.

 

Our 80%-90% threshold recognises that sovereigns with (otherwise) 'AAA' characteristics have high financing flexibility and debt tolerance. Nevertheless, such a high level of debt tends to persist and potentially limits the capacity to respond to future shocks. It can also have a negative impact on growth.

 

Fitch gives a 'AAA' rated sovereign some leeway in allowing a temporary rise in its GGGD/GDP ratio before a downgrade. This stickiness also works in the other direction. The ratio needs to be steadily declining before restoring 'AAA' status, if warranted by other credit factors. Debt dynamics would need to be resilient to shocks to ensure that the 80%-90% level is not breached again. This would imply a fall in the debt ratio (not just a projected fall) of around 10pp of GDP or more from the downgrade level and would likely take several years.

 

A larger fall in the debt ratio would likely be required to restore the 'AAA' if the associated shock that precipitated the sharp increase in the debt ratio and downgrade revealed or triggered other negative credit developments such as weakening in the fiscal policy framework or credibility, a worsening in the structure of government debt, deterioration in economic growth prospects or a weakening in political stability or governance.

 

The 2013 median GGGD/GDP ratio for 'AAA' rated sovereigns is 47%, compared with 42% for all Fitch-rated sovereigns. But other credit strengths are sufficient to outweigh the potential drag on the rating from public debt. They typically have debt denominated in their own currency and can issue at long maturity while low interest rates hold down service costs.

 

The trajectory of GGGD/GDP may, at a particular time, be the key driver of rating actions for 'AAA' or 'AA+' rated sovereigns. However, ratings reflect the strengths and weaknesses of many factors, not just public debt. Thus rating actions can bite at various GGGD/GDP ratios.

So there it is folks… because of the dollar's exorbitant privelege position of world reserve currency, Reinhart and Rogoff's 90% barrier is irrelevant… It seems that Fitch is measuring pure default risk and not a "default and recovery" measure…

Simply put, there ain't no stopping US now…

 


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/-lkpnllo-XM/story01.htm Tyler Durden

Wallowing in Fed-Induced Stock Market Delirium, Even Texas Instruments Admits: Stocks Are Overpriced

Wolf Richter   www.testosteronepit.com   www.amazon.com/author/wolfrichter

Stocks go up, we’re incessantly told, because companies are doing well. Revenues are rising due to ingenious management strategies, irresistible products, or brilliant marketing. Earnings are rising due to, well, if not rising revenues, then cost cutting, moving production to cheaper countries, squeezing suppliers, cutting pay and benefits of the lucky ones who get to work there, and so on. We love that, and given that sales and earnings of these wondrous outfits are ballooning, their shares should be ballooning as well. And they are!

But what if revenues are declining and earnings are plunging, and not just for a bad-hair quarter, but for years, and companies issue earnings guidance that disappoint the wishful thinkers with clockwork regularity, and then even have the temerity to disappoint them again with actual results?

Their shares dip temporarily and might stay down for a week or two. But then the hype machine kicks in, and other metrics are dragged out, such as “free cash flow,” or how much “money” the company “returns to shareholders,” and everyone cherry-picks the data and suddenly remembers that none of this really matters anyway, certainly not such irrelevant facts as years of declining sales and plunging profits.

Because the only thing that really matters is how much money the Fed will print, and for how long; and secondarily, how much money the other central banks will print, because the rising tide of freshly printed money lifts all boats – even that of a company with declining sales and plunging profits. Its shares too gets pushed to new highs, and this happens quarter after quarter. Texas Instruments, for instance.

The list of what ails TI is long: crummy demand for some of its products, inconvenient changes in the semiconductor market, tough competition in the mobile-chip market…. So TI’s revenues have been declining for three years, from $13.97 billion in 2010 to $13.73 billion in 2011 and to $12.82 billion in 2012. This year is turning into another doozie.

Late Monday, as it announced its shriveling earnings for the third quarter, it disappointed wishful thinkers with revenues of $3.24 billion, down 4.3% from a year ago. It also forecast revenues for the fourth quarter of $2.86 billion to $3.1 billion, again disappointing wishful thinkers. Revenues for the whole year, at the midpoint of its estimate, would be 12.12 billion, down 5.5% from 2012, and down 11.7% from 2010.

And the earnings cliff-dive has been stunning. In 2010, TI earned $3.23 billion. In 2011, earnings plunged 31% and in 2012 another 21.3%, to $1.76 billion. This year isn’t shaping up to be pretty either. In Q3, earnings sagged 20%, to $629 million from a year ago.

What is striking is just how consistent this performance has been. TI could have had an up-year in between, either in revenues or in profits, just to liven up the scene, add some humor, and give us hope for a plot twist. But NO!

What is even more striking is the stock price. It started 2010 at $26, and after some major ups and downs along the way, it’s changing hands as I’m writing this at $40.22, down 1.9% for the day, but up over 30% for the year, despite sagging sales and earnings. And just a hair lower than its post-dotcom bubble high. TXN has soared 54% over a period when revenues have dropped 11.7% and earnings were cut nearly in half.

During the earnings call, Ron Slaymaker, VP of Investor Relations, tried to put some lipstick on the thing. Yes, revenue declined, he admitted, but then he went about cherry-picking his revenue data to throw analysts something to rave about. So excluding “legacy wireless revenues,” the remaining revenues actually increased, he said. It was all due to “the strength of our business model.” And since earnings, however much they may have plunged, beat TI’s own lowered projections “with some help from discrete tax items,” everything was hunky-dory.

“The quality of our revenue is much higher today,” explained CFO Kevin March – thanks “to the structural changes that we’ve made at TI over the past few years.” So revenues dropped over the years, but they were “more diverse, more profitable, and less capital intensive,” he said. And earnings – due to these higher quality revenues? – were about cut in half.  

They all hyped TI’s share repurchases. Over the past twelve months, the company spent $2.7 billion on share repurchases. Money that was “returned to shareholders,” they claimed. That’s a lot of moolah. Awesome!

Reality is this: at an average price of $32 per share, the 12-month share repurchases would amount to about 84 million shares. But the actual number of shares outstanding dropped only by 34 million shares to 1.096 billion.

The missing 50 million shares? At the same average share price, only $1.1 billion were returned to shareholders. The remaining $1.6 billion, despite Mr. Slaymaker’s assurances, were used to buy back 50 million shares that had been newly issued for executive compensation and for acquisitions. Money that was not “returned to shareholders.” It was handed to TI executives and owners of acquired companies.

This happened year after year. Despite the many billions “returned to shareholders” via share repurchases since 2010, the actual number of shares outstanding only dropped by 103 million shares, and shareholders never saw most of the money that was supposed to have been “returned” to them. A fact that Wall-Street hype mongers consistently and very conveniently fail to mention.

So would there be more acquisitions? Mr. March responded as if walking on eggs. He didn’t want to come out and say it outright. He chose his words carefully: “Given the valuations that we presently see with many companies out there that might be an attractive addition to our portfolio, it’s difficult for us to look at what we might have to pay for some of those acquisitions and actually get a reasonable return on the investment for our shareholders.”

In other words: the market is overpriced.

And with respect to companies like TI, that suffer from sagging revenues and plunging profits, but whose shares are soaring regardless, there can only be one rational explanation: the market has sunk into a Fed-induced delirium.

Earnings estimates for Q3 have been crashing for a year. On October 1, 2012, our brilliant Wall Street analysts estimated that they’d leap 15.9%. These same brilliant analysts have since chopped their forecasts for the same brilliant quarter down to a measly growth of 2.1%. Stagnation! Now they’re hyping how companies are beating these crummy forecasts! Read…. Another Heap Of Wall-Street Hype and BS.


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/_1TDaGKY5pA/story01.htm testosteronepit

Blast From The Past: "Unemployment Rate With And Without The Recovery Plan"

Putting today’s 7.2% unemployment rate (which is actually over 11% if using an accurate labor participation rate), here is the chart that puts it into perspective courtesy of the an “analysis” by Christina Romer and Jared Bernstein titled “The Job Impact of the American Recovery and Reinvestment Plan” from January 10, 2009. Oh yes, the ARRA did pass.

The chart, and the sheer and recurring economist idiocy, is self-explanatory


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/bmdOG9hFnvI/story01.htm Tyler Durden

Blast From The Past: “Unemployment Rate With And Without The Recovery Plan”

Putting today’s 7.2% unemployment rate (which is actually over 11% if using an accurate labor participation rate), here is the chart that puts it into perspective courtesy of the an “analysis” by Christina Romer and Jared Bernstein titled “The Job Impact of the American Recovery and Reinvestment Plan” from January 10, 2009. Oh yes, the ARRA did pass.

The chart, and the sheer and recurring economist idiocy, is self-explanatory


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/bmdOG9hFnvI/story01.htm Tyler Durden

SAC Shutters London Office; Reduces Capital Allocations

Stevie Cohen’s beleaguered ‘hedge’ fund SAC Capital has decided to shutter its London office:

  • *SAC SAID TO PLAN CLOSING DOWN LONDON OFFICE BY END OF YEAR
  • *SAC SAID TO EMPLOY MORE THAN 50 PEOPLE IN LONDON OFFICE
  • *SAC SAYS IT CUT SIX U.S. PORTFOLIO MANAGER POSITIONS THIS WEEK

But perhaps, even more importantly – and some suggested responsible for the collapses in several major tech/momo names this morning:

  • *SAC SAYS ITS SIMPLIFYING FIRM, REDUCING CAPITAL ALLOCATIONS

With stock prices held up by the marginal levered hedge fund buyer, SAC’s size makes their liquidations as big a threat as anything to this fragile market.

 

Via Bloomberg,

SAC Capital Advisors LP plans to shut down its London office as the $14 billion hedge-fund firm founded by Steven A. Cohen scales back in the face of insider-trading allegations by U.S. prosecutors.

 

 

As our negotiations with the government have unfolded, it has become clear to us that the outcome the government is demanding is likely to have a greater than first anticipated impact on the firm,” Conheeney wrote. “We have concluded that we must operate as a simpler firm and reduce our capital allocations.”


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/FgwpDMuSz-4/story01.htm Tyler Durden

The Legends Vote With Their Feet

 

Stanley Druckenmiller founded his hedge fund Duquesne Capital in 1981. From 1986 onward he maintained average annual returns of 30%. He also managed George Soros’ Quantum Fund from 1988-2000. During that latter period he famously facilitated Soros’ “breaking of the Bank of England” trade: the legendary trade which netted over $1 billion in a single day.

 

Druckenmiller closed Duquesne Capital in 2010, stating that he was no longer able to meet his investment “standard[s]” in the post-2008 climate (he made money in 2008 before the Fed began to alter the risk landscape).

 

Druckenmiller’s key strength has always been macro-economic forecasting. That he would feel the capital markets were not offering him the opportunities he needed says a lot.

 

Seth Klarman is another investment legend who is returning capital to clients. Widely considered to be the Warren Buffett of his generation, Klarman recently cited a lack of “investment opportunities” as the cause for his decision to downsize his legendary Baupost Group hedge funds.

 

Other legends or market outperformers who have returned capital to investors or closed their funds to outside investors are Carl Icahn and Michael Karsch. Indeed, even value legend Warren Buffett is sitting on the single largest amount of cash in the history of his 50+ year career as an investor, stating that stocks are “fully valued” at current levels (Buffett largely does not believe in shorting the market, so his decision to be in cash is a strong indicator of opportunities).

 

These men are masters of the capital markets. They are voting with their feet and pulling their capital out of them. Given that their personal compensation is closely linked to assets under management and profit sharing, this decision is akin to the choice to forego additional wealth that could be made quite easily (none of these individuals would have trouble raising several billion more in capital) rather than trying to find opportunities in a challenging market.

 

This is not a permanent situation. At some point once the great adjustment occurs there will be very compelling opportunities in the markets. However, today I see a dearth of them.

 

·      US-based blue chips and other premium companies are trading at decent valuations, but the macro picture is unattractive (in 2012, 10 companies accounted for 88% of profit growth in the S&P 500).

 

·      Bonds appear to be at the beginning of an environment of rising rates. An entire generation of bond managers have not experienced a bear market in bonds before.

 

·      Emerging markets are increasingly risky from a geopolitical perspective (nationalization of resources, etc.). Moreover, the inflationary pressures created by loose monetary policy at Central Banks make for civil unrest and wage hikes. These in turn shrink the US/ emerging market wage differential (note that Apple, Bridgestone and many others are moving manufacturing facilities from China to the US for this reason).

 

·      Commodities are highly influenced by China and Brazil. I am concerned that there are in fact very serious problems emerging in the shadow banking system in the former would could result in a banking crisis there (I’ll be devoting the majority of next month’s issue to this topic). The latter country is experiencing another bout of inflation that has already brought two million people out on the streets in protest.

 

This is not so say that money will not be made in any of these asset classes. I am merely outlining the risks I see in these asset classes.

 

For a FREE Special Report outlining how to protect your portfolio from a market correction, swing by: http://phoenixcapitalmarketing.com/special-reports.html

 

Best

Phoenix Capital Research

 

 

 

 

 

 


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/_k1bVSv4sfM/story01.htm Phoenix Capital Research

The Fed's Dismal Track Record

Submitted by Simon Black of Sovereign Man blog,

As we’re coming up on the 100th anniversary of the establishment of Federal Reserve, one thing has become abundantly clear– these guys are horrible at their jobs.

According to the popular lie, the Federal Reserve was supposed to have been established to smooth out the economic cycle, thus preventing booms, busts, recessions, and depressions.

It hasn’t really worked out that way.

In the 100 years prior to the establishment of the Federal Reserve, there were 18 distinct recessions or depressions:

1815, 1822, 1825, 1828, 1833, 1836, 1839, 1845, 1847, 1853, 1860, 1865, 1869, 1873, 1887, 1890, 1899, and 1902.

Since the establishment of the Federal Reserve, there have been 18 recessions or depressions:

1918, 1920, 1923, 1926, 1929, 1937, 1945, 1949, 1953, 1958, 1960, 1969, 1973, 1980, 1981, 1990, 2001, 2008.

So in other words, the economy experienced just as many recessions with the ‘expert’ management of the Federal Reserve as without it.

And this doesn’t even begin to capture all the absurd panics (the S&L scare), bailouts (Long-Term Capital Management), and ridiculous asset bubbles that they’ve created.

Hardly an impressive enough track record to justify conjuring trillions of dollars out of thin air, and awarding nearly totalitarian control of the money supply and economy to a tiny banking elite… wouldn’t you say?

 


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/CIP1DFPDap8/story01.htm Tyler Durden

The Fed’s Dismal Track Record

Submitted by Simon Black of Sovereign Man blog,

As we’re coming up on the 100th anniversary of the establishment of Federal Reserve, one thing has become abundantly clear– these guys are horrible at their jobs.

According to the popular lie, the Federal Reserve was supposed to have been established to smooth out the economic cycle, thus preventing booms, busts, recessions, and depressions.

It hasn’t really worked out that way.

In the 100 years prior to the establishment of the Federal Reserve, there were 18 distinct recessions or depressions:

1815, 1822, 1825, 1828, 1833, 1836, 1839, 1845, 1847, 1853, 1860, 1865, 1869, 1873, 1887, 1890, 1899, and 1902.

Since the establishment of the Federal Reserve, there have been 18 recessions or depressions:

1918, 1920, 1923, 1926, 1929, 1937, 1945, 1949, 1953, 1958, 1960, 1969, 1973, 1980, 1981, 1990, 2001, 2008.

So in other words, the economy experienced just as many recessions with the ‘expert’ management of the Federal Reserve as without it.

And this doesn’t even begin to capture all the absurd panics (the S&L scare), bailouts (Long-Term Capital Management), and ridiculous asset bubbles that they’ve created.

Hardly an impressive enough track record to justify conjuring trillions of dollars out of thin air, and awarding nearly totalitarian control of the money supply and economy to a tiny banking elite… wouldn’t you say?

 


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/CIP1DFPDap8/story01.htm Tyler Durden