Category: zerohedge

Another day, another criminal Fed employee admits to being just that.

Recall that just yesterday we wrote about former NY Fed employee Jason Gross who somehow managed to avoid a prison sentence, but was slapped on the wrist with a $2,000 fine after he admitted to stealing confidential NY Fed data and handing it over to his former supervisor in his new role working for Goldman Sachs.

As it turns out he wasn’t the only “cockroach” – moments ago the DOJ Office in Illinois announced that another former senior analyst at the Chicago Fed, Jeffrey Cho, 35, has pled guilty to stealing “sensitive financial data” which he took with him days before resigning from the Fed and moving to a different employer. The conviction carries a maximum sentence of one year in federal prison.  A sentencing hearing has been scheduled for June 21, 2016, at which point we can only expect Cho will get the Jason Gross treatment and get away with merely a fine.

In the charge, the DOJ states that in his role as a Senior Supervision Analyst, Cho had access to sensitive, proprietary and valuable information belonging to the bank.  The information included financial data and materials relating to the bank’s responsibility to monitor the health of certain financial institutions in the United States.

According to a written plea agreement, Cho was in discussions in May 2015 to take a new job outside of the bank.  Less than a week before accepting the outside company’s employment offer, Cho printed a confidential Federal Reserve document from his work computer and took it home with him.  After accepting the offer on May 12, 2015, Cho printed an additional 31 confidential Federal Reserve documents from his work computer and brought those home as well.  On the same day he resigned from the bank on May 26, 2015, Cho printed 3 more proprietary Federal Reserve documents from his work computer and brought them home.

When confronted by FBI agents, Cho initially denied taking home the confidential documents, according to the plea agreement.  However, after a second interview with FBI agents the following month, Cho turned over four of the documents.  Cho told agents that he had shredded the remaining documents after his first interview with the FBI, according to the plea agreement.  On June 6, 2015, Cho turned over a bag full of shredded documents to the FBI, the plea agreement states.

Cho further admitted in the plea agreement that he printed confidential Federal Reserve documents while he was interviewing for another position with a different company in March 2015.  Those documents were also sensitive materials concerning the financial health of certain U.S. financial institutions.

The conviction prohibits Cho from directly or indirectly participating in the affairs of any United States financial institution for at least ten years.

* * *

Which probably means in ten years and one day, Cho will be the latest employee of Goldman Sachs.

via Zero Hedge http://ift.tt/1nRYW0I Tyler Durden

Submitted by Pater Tenebrarum via Acting-Man.com,

A Useful Leading Indicator?

We often see charts comparing the S&P 500 to the growth in the Federal Reserve’s balance sheet, or more specifically, to assets held by the Fed. There is undeniably a close correlation between the two, but it has struck us as not very useful as a “timing device”, or an early warning device if you will.

Recently we have come across a video of a presentation by Bob Murphy, in which he uses a slightly different comparison that might prove more useful in this respect. Instead of merely looking at Fed assets, he uses the total monetary base. Here is a chart comparing the monetary base to the S&P 500 Index since 2009:

 

The monetary base (red line) vs. the S&P 500 (blue line) – as can be seen, sometimes one or the other series leads, but in recent years the monetary base has been a leading indicator. It probably lagged the market in 2010/11 due to the fact that traders at the time bought stocks in anticipation of more monetary pumping – whereas nowadays the market appears to be reacting with a slight lag to changes in base money – click to enlarge.

 

Below is a chart that shows consolidated assets held by the Federal Reserve system for comparison. Since the Fed is currently reinvesting funds from MBS and treasuries that mature, its total asset base is basically flat-lining since the end of QE3. Obviously, all that can be gleaned from this fact is that the central bank is currently not actively pumping up the money supply. Currently money supply growth is therefore largely the result of commercial bank credit growth.

 

Assets held by the Federal Reserve – flat-lining since the end of QE3. Interesting, but not useful as a short term leading indicator of the stock market – click to enlarge.

A Different Regime

The post 2008 monetary regime differs from the previous state of affairs due to the vast growth in central bank balance sheets and the associated growth in bank reserves. This has created a technical problem for central banks if they want to tighten monetary policy, as the Fed is planning to do.

In times past the Fed would either add or withdraw liquidity from the system by means of asset purchases, resp. sales, both of the temporary and occasionally the permanent variety (i.e., via repos and coupon passes), so as to keep the effective Fed Funds rate on target. It can no longer do this if it wants to keep the stock of assets it holds unchanged. Since selling off enough assets to return to the previous regime would collapse the money supply, it isn’t going to happen.

The Fed is primarily keeping control over the FF rate target by paying interest on bank reserves. This keeps the currently almost non-existent interbank lending market in catatonia, since there is no point in lending out excess reserves for less than one can get safely from the Fed. However, ever larger short term reverse repo operations are undertaken as well (we have previously discussed the vast surge in these transactions at year-end).

These reverse repos usually swell near month-end and especially near the end of a quarter. This seems to serve various purposes. Among these is apparently the desire to relieve collateral shortages/ delivery fails (which have increased due to QE removing a great many securities from the marketplace), but the Fed is presumably also employing these reverse repos as another way of exerting control over short term interest rates.

While the amount of assets held by the Fed doesn’t change on account of such operations (since the assets are only lent out, but continue to belong to the Fed), it seems the effect is reflected in monetary base statistics. This is illustrated by the chart below, which compares outstanding reverse repos to the monetary base. Spikes in reverse repos align quite closely with short term declines in the monetary base, even if the correlation is not perfect (as these are not the only factors influencing the base).

 

The monetary base vs. Fed reverse repos outstanding – click to enlarge.

 

Demand for Stocks Declines Around Quarter-End

One thing is clear: during the brief time periods when large reverse repo operations are undertaken, liquidity in the system temporarily decreases. The lead-lag relationship between the monetary base and the S&P 500 shown in the first chart seems to suggest that this does have an impact on the stock market.

How big an influence it really represents is however not certain, as there is another important reason why the demand for stocks tends to decline around the end of the quarter. As has recently been discussed at Bloomberg,  earnings season begins at the time as well, which forces companies to suspend stock buybacks for a few weeks.

Given the enormous size of buybacks in recent years (another new record high will likely be achieved this quarter), it is probably no surprise that the period during which buybacks are suspended also aligns closely with market weakness of late. Here is a chart derived from a Goldman Sachs research report illustrating this point:

 

Stocks have been especially weak last quarter around the peak of the earnings season – click to enlarge.

 

According to GS analyst David Kostin, the influence of the “blackout period” is especially large at the moment, as other important groups of potential buyers are currently out of the picture:

“Corporate buybacks are the sole demand for corporate equities in this market,” David Kostin, the chief U.S. equity strategist at Goldman Sachs Group Inc., said in a Feb. 23 Bloomberg Television interview. “It’s been a very challenging market this year in terms of some of the macro rotations, concerns about China and oil, which have encouraged fund managers to reduce their exposure.”

 

[…]

 

Kostin said companies tend to enact a blackout period and restrict share repurchases in the month following the end of a calendar quarter, and come back once they’ve reported results. In a market where everyone else is selling, the ebb and flow of corporate actions have amplified volatility.”

We’re not so sure that corporate buybacks are the “sole demand for equities”, but it is probably true that buybacks or the lack thereof have more effect on short term volatility in times when other market participants are uncertain and less inclined to buy.

 

Conclusion

Regardless of which source ultimately proves more important, the above suggests that market liquidity tends to become more scarce around the end of the quarter at present. We have already seen this effect play out twice in row and it could well be that there will be another replay this quarter.

Considering what happened in 2010, much also depends on perceptions about upcoming Fed policy, but it seems unlikely that yesterday’s FOMC statement will do much to alter expectations. We can take the buyback blackout period as a given, which leaves us with watching the monetary base for clues.

It will be interesting to see whether the next decline in the monetary base – which should be expected to occur around quarter-end based on previous observations – will once again precipitate stock market weakness. It is definitely possible that this indicator is useful for short term trading purposes – at least for the time being.

Stay tuned for a more general look at developments in the US monetary backdrop to be posted shortly.

via Zero Hedge http://ift.tt/1pqZE6l Tyler Durden

JPM’s head quant, Marko Kolanovic, who turned somehwat gloomy in the past few months, has seen some hits and misses in his recent forecasts. On one hand he did accurately predict the surge in gold one month ago, as well as the rebound in oil and Emerging Markets; however on the other he suggested that being long VIX and cash would be a good place to wait out the upcoming market volatility.

Most recently, when looking at the market’s fundamentals which as we pointed out in late February are massively stretched, he also noted that “EPS recoveries that follow 2 consecutive EPS contractions (~20% of times) were typically triggered by some form of stimulus (fiscal, monetary or exogenous). We expect market volatility to stay elevated and investors to remain focused on macro developments such as the Fed’s rates path, developments in China, and releases of US Macro data. Elevated volatility and EPS downside revisions will provide a headwind for the S&P 500 to move significantly higher (via multiple expansion).”

Perhaps Kolanovic failed to anticipate the “animal spirits” response to first a stimulative PBOC, then a dovish BOJ, followed by an even more dovish ECB and topping it off, yesterday’s dovish FOMC, which was clearly sufficient to boost both the  Dow Jones and the S&P500 into the green for the year. He is correct, however, that in the absence of a major stimulus, EPS will likely remain subdued: after all the only “stimulus” from the ECB was a greenlighting for European companies to buyback their stock with ECB-backstopped debt issuance, while the Fed merely slowed down the pace of its rate hikes, confirming that the global economy is quite weaker than it had originally expected.

This is how Kolanovic explains this new period of central bank convergence:

Despite the negative rates and recently expanded stimulus by both the ECB and BOJ, EUR and JPY are trading stronger against USD. The USD trend was reinforced with a dovish turn from the Fed yesterday (which we advocated in our previous reports). We think these are early signs of the Central Bank Convergence trend. We think this convergence was one of the catalysts that led to the dramatic outperformance of Value over Momentum assets in the first quarter of this year. Figure below (left) shows returns of Gold (left axis) and USD (right axis, inverted) on the Fed announcement dates since 2009. During the period of Quantitative Easing 2009- 2013, gold kept surprising to the upside and USD to the downside on most of the announcements. The trend was sharply reversed after the end of QE3  and the beginning of the Fed’s removal of stimulus in 2013-2015. We have noticed that over the past several months, USD is underperforming and Gold is outperforming on both Fed and ECB meetings. Figure below shows USD and Gold moves on ECB dates since the start of Fed’s taper speculation in 2013, also showing signs of central bank convergence over the past 6 months. In our view, central Banks are on a convergence path which would stop the USD rally and be supportive of value assets – to the benefit of both the US and global economy.

 

 

Given the recent moves, USD momentum turned negative on 3M and 12M time horizons, and is vulnerable to turning negative across the term structure. Even if the USD stays at these levels, momentum would turn negative across all maturities over the next few days. This could put further pressure on USD as CTAs reverse their favorite long position into a short. Lower USD would further boost commodities, EM assets, Gold and Value stocks. Gold momentum is now positive across the term structure (CTAs long) and will likely stay so. Figure below (right) shows our ‘CTA signals’ for main asset classes.

 

So what does Kolanovic think happens to the market now? Here is his latest take:

As we wrote in our last report, a significant part of the S&P 500 rally the past month was due to systematic investors covering their short positions. Over the past few days, dealers’ option imbalance was tilted towards calls (long gamma) which forced the market to trade in a tight range. This has reduced realized volatility and attracted some inflows from volatility based allocators such as Volatility Targeting and Risk Parity funds. The exposure of systematic investors to Equities is not very high and further inflows could materialize if the S&P 500 were to get into a 2050-2100 range, where S&P 500 momentum would turn solidly positive across term structure. The downside/selling triggers are placed a bit lower (which is marginally positive for equities) as momentum turns negative around ~1950. However, in the next week, we could see some downward pressure as the impact of option hedging is reversed. Historically, we have found that the market develops positive momentum during the 3rd week of the month (when there is a call imbalance), and this often reverses during the 4th week of the month.

Finally, an interesting tangent by Kolanovic on none other than Donald Trump, regarding whom he says “we think the chance of Trump winning the presidential elections is significantly higher than what is suggested by various surveys.” Would that be “we”, as in including Jamie Dimon, or the editorial “we”, because if even the big banks are onboard, then it’s about to get interesting.

via Zero Hedge http://ift.tt/1R6zNbb Tyler Durden

Submitted by Salil Mehta of Statistical Ideas

High-Risk Regime’s 6-Month Anniversary

We are more than 1/2 a year since the August stock market crash, sometimes known as China’s Black Monday.  And in our “flipping volatility regimes” article last month, we argued that the risk regime was statistically higher and endured that way, after the August tumult then snapback.  During this past 6 months, the volatility index has averaged ~20%.  Nearly four percentage points greater than its average during the 6 months before that!  Today the market’s volatility has dropped to a close below 15%, something seen only 10 times in the past 125 trading days (6 months). 

As shown in grey on the chart below, these 10 trading days were mostly at the end of October, but a couple were in early December.  So about 4-5 month ago, and we show the astonishing and marvelous performance in a prior article we stated that one would get if they had endured one of the volatility ETF/ETN products for this entire period, since the volatility was last at this sub-15% level.

We notice that despite volatility happening to be exactly where it was during these 10 low days from October 19, through December 4, the XIV (inverse risk and shown in blue) ETN has fallen 24% on average (and with a 4% standard deviation about that estimate depending on when in that period it was bought) if it were bought at any point during that 34-day period.  This isn’t simply a matter of the product aggressively decaying, but rather real heightened changes in risk that we’ve noticed in stocks and bonds (but still bushwhacked Wall Street strategists). 

If the VXX ETN (shown in red) was instead purchased at any point over this period, it would have instead averaged a rise of 5% (with a 5% standard deviation).  From October 19, through December 14, the VIX averaged 16% (or 1 percentage point more than today).  And despite this drop in VIX if one blindly bought VXX and shorted XIV (shown in yellow), at any point during this 34-day period , then today they would have enjoyed a typical profit of 40% (with a standard deviation of 13%).  One would have a similar superb profit, as well, even if they rewound to the start of this high-risk regime precisely 6 months ago!

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

Despite its 98% crash from 2008 highs, and its plunge to record (35 year-plus) lows, the recent rally (off sub-300 lows) sparked a wave of exuberance with such luminaries as Jim Cramer proclaiming this a sign that everything is fixed again in China. Having risen non-stop since Feb 10th, coincidentally the same time that the entire world suddenly and unexplainedly went full risk-on short-squeeze buy-buy-buy, The Baltic Dry Index dropped today – which should not surprise many as China's Containerized Freight Index crashes to record lows…

 

The Baltic Dry drops for the first time since Feb 10th…

 

It appears BDIY gets over-excited relative to CCFI's lead…

 

And tthis won't help…

With Iron Ore prices down 6 days in a row, the entire hope-strewn short-squeeze has been erased.

via Zero Hedge http://ift.tt/1S6Hlgd Tyler Durden

On Monday, in “JPM Looks At Draghi’s ‘Package,’ Finds It ‘Solid’ But Underwhelming,” we noted that according to Mislav Matejka, investors would do well to fade the ECB’s latest attempt to jumpstart inflation, growth, and of course asset prices with Draghi’s version of a Keynesian kitchen sink.

“Overall, we believe the latest package is far from a game changer,” Matejka opined.

What was especially interesting about that particular note was the following graph and set of tables which show just how “effective” NIRP has been for the five central banks that have tried it so far.

As you can see, once you go NIRP, it’s pretty much all downhill from there whether you’re talking inflation, the economy, or even equities.

Given that, and given that the entire idea is absurd on its face for a whole laundry list of reasons, one wonders why any central banker would chase down this rabbit hole only to find themselves the protagonist in the latest retelling of “Krugman in Wonderland”.

In any event, for those wondering whether the Fed will join the ECB, the BoJ, the Riksbank, the SNB, and the NationalBank in this increasingly insane monetary experiment, below, courtesy of Bloomberg, find a chronological history of Fed and analyst commentary on NIRP in America.

FED COMMENTARY

• March 16: Yellen said during post-FOMC press conference Fed isn’t actively considering negative rates, studying effects in other nations
• March 2: San Francisco President Williams said “we’re not doing negative interest rates”; Williams Feb. 25 said negative rates are “potentially in the toolbox” but may have “unintended consequences”
• March 1: Former Fed Chairman Alan Greenspan said on Bloomberg Radio and TV negative interest rates, if pursued for an extended period of time, will eventually distort saving and investment
• Feb. 26: Fed Governor Brainard said negative rates not relevant to current U.S. policy
• Feb. 24: Dallas Fed President Kaplan said he sees negative repercussions to negative rates in U.S.; said central bankers never want to rule out any policy tool
• Feb. 24: Fed Vice Chairman Fischer said after speech Fed has no plans at present to use negative rates
• Feb. 23: Kansas City Fed President George said in Bloomberg Radio interview she doesn’t think negative rates is a question for the U.S.
• Feb. 19: Cleveland Fed President Mester said after speech she wants to stay away from negative interest rates; said central banks have other tools besides negative rates
• Feb. 18: Former Treasury Secretary Larry Summers said during Bloomberg TV interview loose policy and negative rates are stimulative
• Feb. 17: St. Louis Fed President Bullard said during Q&A U.S. isn’t remotely close to need for negative rates
• Feb. 16: Philadelphia Fed President Harker said during Q&A Fed needs to study legality of negative rates
• Feb. 12: Dudley said during press briefing they’re not spending much time on negative rate discussion
• Feb. 10-11: Chair Yellen said during testimony Fed should look at negative rates for prudent planning
  • Said not aware of legal ban on negative rates
• Feb. 9: Former St. Louis Fed President William Poole said in WSJ op-ed negative central bank rates won’t create growth any more than Fed’s near-zero rates
• Feb. 9: Former Minneapolis Fed President Kocherlakota said on his website “going negative is daring, but appropriate monetary policy”
• Feb. 1: Fed Vice Chair Stanley Fischer said negative rates are working “more than I expected”
• Jan. 29: Former Fed Chairman Ben Bernanke said in interview with MarketWatch the central bank “will and probably should consider if the situation arises”; also said there’s limits to how negative rates could go
• Jan. 15: NY Fed President Dudley said would consider negative rates if economy weakened
• Jan. 12: Fischer said negative rates would be difficult to do quickly in U.S., citing risk money funds break the buck or shut down
• Nov. 4: Yellen said during Q&A before House Committee on Financial Services no need now for negative rates, yet won’t rule it out
• Oct. 8, 2015: Former Minneapolis Fed President Kocherlakota said Fed should consider ways to make monetary policy more accommodative, including negative interest rates
• Sept. 16-17, 2015: FOMC’s policy assessment included one forecast of negative fed funds rate in 2015 and 2016 (Dec. 16, 2015 policy assessment included only positive forecasts)
• Dec. 14, 2010: FOMC transcript (p. 97) shows Kocherlakota said eventual expansion of UST holdings to $2t would push fed funds down 250bps and combined with 25bp IOER, getting a “policy stance right now of negative 225 basis points”
• Aug. 10, 2010: FOMC transcript (p. 106) shows Chicago Fed President Evans discussed conducting a “thought experiment” that allowed negative interest rates
  • NOTE: Fed announced QE2 at Nov. 2-3 meeting
• Aug. 5, 2010: Fed discussed negative IOER cuts in memo, said there were “several potentially substantial legal and practical constraints” to implementing a negative IOER rate regime; also said it wasn’t clear that Federal Reserve Act permitted negative IOER

STRATEGIST COMMENTARY

• March 16: Negative Rates an ‘Alice in Wonderland’ Policy, Zandi Says
• March 11: NIRP May Increase Risk of ‘Breaking the Buck’ in U.S. Funds: SG
• Feb. 16: Markets Perceive Negative Rates as ‘Shockingly Flawed,’ WFS Says
• Feb. 8: U.S. Neg Rates Would Have Money Funds Emulating Europe, JPM Says
• Feb. 8: U.S. Needs ‘Recession-Like’ Conditions Before Negative Rates: JPM
• Feb. 4: Fed May Consider Negative Rates After Exhausting Options: BofAML
• Feb. 3: Negative Rates Path a ‘Prisoners’ Dilemma’ for Fed, Scotia Says
• Jan. 28: Negative Rates May Displace QE as First Policy of Choice: Oxford Economics
• Oct. 19, 2015: U.S. Money Mkts Would Complicate a Fed Negative Rates Plan: Citi
• Feb. 13, 2015: Money Funds More Important Issue for Fed, Not Negative Rates: GS
• Dec. 13, 2013: IOER Cut, Reverse Repo, Tapering Too Much ‘Fine Tuning’: Barclays
• Dec. 11, 2013: Blinder Negative IOER May ‘Wreak Havoc,’ Barclays Says
• Nov. 20, 2013: Fed May Not Cut IOER Without Full Operation of RRP, RBS Says
• Sept. 4, 2012: IOER Cut ‘Non-Starter’ For Policy Makers: BofAML
• July 23, 2012: Risk of Fed IOER Cut ‘Will Always Remain’: CS * July 10, 2012: Fed IOER Cut May Destroy U.S. Money Market Industry: DB
• Sept. 14, 2011: 50% Chance Fed May Cut IOER Rate at Sept. FOMC Meeting: GS

Bonus: Complete NIRP table from Goldman

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

On the heels of Trannies and The Dow, The S&P 500 just crossed into green for the first time in 2016. This technical melt-up occurs as the "average" stock reaches a key intersection of recent trendlines…

S&P 2016 Green for St.Paddy's Day… 2043.94 taken out

 

Note the VIX tails as the market lurched higher… VIX slammed to a 13 handle…

 

But as Dana Lyons' notes, the "average" stock is hitting key resistance…

Many of the major averages are facing areas of key resistance in their post-February rallies – including the Value Line Arithmetic Index.

 

About a week ago, the theme of much of our market dialogue and posts began to focus on the approaching ubiquitous chart resistance facing most of the major stock averages. In other words, after quickly bouncing some 10% or so (or 30%) off of the February lows, the global stock rally was likely about to get more difficult. This scenario has played out, not surprisingly given the significant levels of resistance near present levels on most charts. That includes, among many others, the Global Dow which we mentioned yesterday, and the Value Line Arithmetic Index (VLA).

 

Once again, the VLA is a useful barometer of the health of the overall market as it is an unweighted average of about 1700 stocks. We do slightly prefer its sister “Geometric” index, which measures the median performance of the universe, versus the Arithmetic index which measures the average performance. But they are both useful in their own right.

 

Case in point, on December 18, we pointed out that, ominously, the VLA was breaking below its post-2009 Up trendline. This suggested a loss of some key support and a vulnerability to more downside, and in short order. Indeed, after briefly attempting to stabilize back above the trendline, the VLA succumbed to the weakness we feared, dropping an additional roughly 12% over the next month.

 

Since then (and a February re-test), however, the VLA has rallied back impressively, as have many indices. In fact, the VLA has recovered all of the losses incurred following its post-2009 trendline break. Reclaiming that trendline now becomes the challenge.

 

 

 

 

Converging in the same area as that post-2009 Up trendline now is the Down trendline connecting the peaks from last summer’s top. That makes the nearby level a double challenge for the VLA (although, we have seen many times where a trendline convergence acts almost like a portal and price jumps through it).

 

The larger, recent theme remains, though. That is, multiple potential resistance levels are converging near present prices on the charts of most major indices. Thus, the sledding should get tougher from here for the stock market rally as it works out whether it’s going to make another run at new highs – or whether it’s just an average bear market rally.

But, there is only thing that matters…

It's Not Earnings, Stupid – It's The Central Banks

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As if the historic collapse of Valeant and his hedge fund crashing by 26% YTD was not enough, moments ago S&P added insult to injury when it warned it may downgrade Pershing Square, because “Pershing Square Holdings’ net asset value has dropped substantially, largely because of a precipitous decline in the market value of Valeant  Pharmaceuticals”  and “as a result, Pershing Square’s debt-to-total assets ratio increased to  above 20% as of March 15, 2016, from 15% at the end of October 2015. We are placing our ‘BBB’ issuer credit and senior unsecured debt ratings  on the company on CreditWatch with negative implications.”

It concludes that “the CreditWatch negative reflects the fund’s weak investment performance,  which has resulted in higher leverage.”

Full note below:

Standard & Poor’s Ratings Services  today said it placed its ‘BBB’ issuer credit and senior unsecured issue  ratings on Pershing Square Holdings Ltd. (PSH) on CreditWatch with negative implications.

“We placed the ratings on CreditWatch negative to reflect the substantial drop in PSH’s NAV over the past five months as a result of very weak investment performance,” said Standard & Poor’s credit analyst Trevor Martin. NAV was $5.3 billion at the end of October 2015 and $3.8 billion on March 15, 2016, primarily because of the steep drop in Valeant Pharmaceuticals’ stock price. The Valeant stock price fell about 50% on March 15. As a result of the weakness in the portfolio since October, PSH’s debt to total assets has increased from about 15% to above 20%.

While debt as a percentage of total assets has increased materially beyond our original expectations, liquidity (as measured by free cash) has strengthened, and we believe management has taken proactive steps to respond to the turmoil. PSH’s investors were informed that the fund completed a block sale of Mondelez International shares on March 16, raising substantial free cash. Subsequent to the sale, the level of cash held in the fund exceeded total debt.

Valeant’s stock price fell dramatically as the company again revised its earnings guidance for the next 12 months on March 15. Furthermore, the company has not reported its 10-K in time and is now seeking a waiver from banks on its credit agreements, introducing incremental risk of a bankruptcy to Valeant (although it has until the end of April to resolve the covenants in the credit agreement to avoid acceleration). In the event of bankruptcy, we would likely lower the rating.

“We aim to resolve the CreditWatch once we have more clarity on the situation regarding Valeant and we have reassessed the fund’s investment performance and leverage,” said Mr. Martin. “We expect to have the information to resolve the CreditWatch in the next 90 days, but we could extend the CreditWatch period if that is not the case.”

We could lower the rating if Valeant files for bankruptcy or if PSH materially reduces free cash before Valeant’s stock price has substantially recovered. Even if the position were to stabilize, we could still downgrade PSH if the investment performance of the portfolio as a whole deteriorates further.

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

When last we checked in on our favorite socialist paradise, Venezuela, President Nicolas Maduro’s opponents “had gone crazy.”

Or at least that’s how Maduro described the situation in a “thundering” speech to supporters at what he called an “anti-imperialist” rally in Caracas last Sunday.

Meanwhile, thousands of demonstrators held counter-rallies calling for the President’s ouster. Maduro angered the opposition – which dealt Hugo Chavez’s leftist movement its worst defeat at the ballot box in history in December – last month when he used a stacked Supreme Court to give himself emergency powers he says will help him deal with the country’s worsening economic crisis.

“Now that the economic emergency decree has validity, in the next few days I will activate a series of measures I had been working on,” he said, following Congress’s declaration of a “food emergency.”

Needless to say, Maduro’s “measures” didn’t do much to help the situation on the ground, where Venezuelans must queue in front of grocery stores and where 90% of medicine is scarce.

Venezuela is the world’s worst performing economy and barring a sudden (not to mention large) spike in crude prices, the country will in all likelihood default this year as 90% of oil revenue at current prices must go towards debt service payments.

But that hasn’t deterred Maduro, who has vowed to remain defiant in the face of (loud) calls for his exit. “Let them come for me,” he bellowed on Sunday. “I will hang on to power until the final day.”

Maybe so, but one place that’s not “hanging onto power” is the Guri Dam, which supplies more than two-thirds of the country’s electricity. As The Latin American Herald Tribune writes, the dam “is less than four meters from reaching the level where power generation will be impossible.”

“Water levels at the hydroelectric dam are 3.56 meters from the start of a ‘collapse’ of the national electric system,’” The Tribune continues, adding that “Guri water levels are at their lowest levels since 2003, when the a nationwide strike against Hugo Chavez reduced the need for power, masking the problem.”

(arrow shows where the water shoud be if the dam were operating at capacity)

“It is not Guri that is in disarray, it is the whole system. Rates frozen, companies nationalized, capacity that was supposed to be installed was never installed and maintenance not carried out”, Miguel Lara, an engineer who worked in the industry for three decades said.

Not so says Maduro. The problem isn’t mismanagement, it’s El Nino. 

“The emergency decision we took is due to El Nino,” he said. “We will save more than 40% from these measures.” 

The “emergency measures” the Tribune references amount to a shutdown of the country. “Venezuela is shutting down for a week as the government struggles with a deepening electricity crisis,” Bloomberg writes. “President Nicolas Maduro gave everyone an extra three days off work next week, extending the two-day Easter holiday, according to a statement in the Official Gazette published late Tuesday.”

“We’re hoping, God willing, rains will come,” Maduro told the country on Saturday.

Yesterday, Venezuela’s energy minister took back his warning that water levels at Guri were set to plunge the country into an electricity crisis, but did ask the public to do as Maduro asks. “It’s a matter of cooperating,” he said.

Right. But as The Tribune points out, “Venezuela is now seeing three street protests a day, according to NGO Observatorio de Conflictividad Social [and] on any given day, one of those protests has to do with blackouts — even though rates have been frozen since 1982.” 

It would certainly appear that Venezuelans are sick of “cooperating.” 

And that’s bad news for Latin America’s “best” leader…

via Zero Hedge http://ift.tt/1pOo5eq Tyler Durden

Yesterday morning, after reading the latest Gartman letter, we reported that in what may have been the worst possible news for vol longs, Gartman said he had become a “buyer of the VIX.” As a reminder this is what he said:

NEW RECOMMENDATION: we are taking a “punt” on the short side of the equity market, but this time we shall do so by buying volatility; that is, we shall buy the VXX volatility index ETF listed on the NYSE and we shall do so upon receipt of this commentary and the market’s opening. We’ll have a stop in tomorrow’s TGL, but for now we do not wish to risk more than 5% on this trade… a rather large stop to be certain for our purposes in the past but we’ll tighten that up measurably over the course of the next day or two. This is unusual action on our part ahead of an FOMC meeting given the historical tendency of equities to rise after these meetings; but call it trader’s intuition or call it what you will we think a “one unit” punt is warranted and reasonable.

To which we responded:

We must admit that we pray that for once Gartman’s “trader intuition” is correct because we tend to agree: we have gotten to a point where complacency is fully back courtesy of the central bankers, where the market is substantially overvalued as even Goldman admits, where the earnings picture continues to deteriorate (Q1 EPS is expected to plunge by over 8%) and where none of the world’s problems have been “fixed” in the past few months yet where central banks have once again merely “kicked the can” with even more stimulus and more negative rates, while China’s debt bubble and proposed “debt for equity” swaps are now beyond rational comprehension.

That said, we were resigned: “Then again, it is Gartman…”

That proved to be indeed sufficient, because not only was the equity “tendency to rise” after the FOMC confirmed as the S&P bounced yesterday and again today, but since Gartman’s recommendation, the VIX has undergone a quick 15% freefall lower, and recently was trading below 14.

 

That said, we were eagerly looking for today’s Gartman Letter to find out what the “stops” on his VIX long position are, just so we can know when it is safe to, well, go long VIX again and short the market. Here is the answer:

Short One Unit of the US stock market via the VIX: Yesterday… Wednesday, March 17th… we “punted” on the short side of the equity market, but this time doing so by buying volatility; that is, we bought the VXX volatility index ETF listed on the NYSE upon the market’s opening. We’re giving this a rather wide birth and are willing to allow the equity market to move 5% against us before exiting the trade and that means a move by the S&P to and through 2118, but we intend to move that stop down sharply in the next day or two.

In other words, Gartman has basically doomed the market to soar back to its all time highs. Sorry bears.

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