Hint (…not ISIS…)

 

Source: Investors

via Zero Hedge http://ift.tt/1ByXsL5 Tyler Durden

The high-yield credit market remains stressed. An active week ended poorly as a heavy pipeline saw Vistaprint pull its deal citing "market conditions" as perhaps both a re-awakening of liquidity fears (Fed hawkishness concerns), price/spread moves, potential downgrades soar, and outflows signal the flashing red light that HY markets are shining is as red as ever. With buybacks having dwindled already – removing a significant leg from the equity rally – it seems CFOs are realizing that maybe they should have used some of that easy money to build as opposed to buy as they face weak growth, a lack of liquidity, and a wall of maturing debt in the next few years that will have to be refinanced at higher yields and spreads.

 

More outflows again this week… (despite the noise from talking-heads that professionals were buying as retail sold)

 

U.S. high yield bond funds posted outflows of $765.8m for the week ended Sept. 10 vs $198.1m the previous week, the second consecutive week of outflows, according to Lipper data.

• Loans posted outflows of $342m vs $435m the previous week, the ninth consecutive week of outflows
• Loans have posted outflows in 20 of previous 23 weeks
• HY ETFs posted outflows of $447m after outflows of $74m last week
• Largest week of outflows in HY ETFs since week ended Aug. 6
• Loan ETFs posted outflows of $39.3m, according to Bloomberg data

And potential downgrades rise to the highest level year-to-date…

Potential issuer downgrades increased to 532 as of Aug. 29 vs 506 as of July 31, highest since Dec. 2013, S&P’s Global Fixed Income Research head Diane Vazza writes in client note.

• Financial institutions (26.3%) had the greatest number of potential downgrades, followed by consumer products (7.7%), oil and gas (7.7)
• Financial institutions, sovereigns, oil and gas, and metals and mining risk of downgrade potential exceeds historical avg
• Total number of entities with negative outlooks rose to 469 as of Aug. 29 vs 445 as of July 31; entities with ratings on CreditWatch with negative implications rose to 63 vs 61
• Entities poised for upgrades dropped to 303 as of Aug. 29 vs 320 a month earlier
• 32 issuers were removed from the list of potential upgrades while 15 were added
• Greatest concentration of issuers removed from last month’s report came from the media and entertainment sector
• Largest number of issuers added to the report came the oil and gas and utilities sector

As HY spreads continue to flash red!!

 

Forcing at least one name to pull a deal this week

Vistaprint Postpones its $250m 7NC3 Inaugural Bond Offering

 

Postpones sr notes offering due to current market conditions. “We will potentially revisit in the future if market conditions become more favorable,” CFO Ernst Teunissen said in the statement.

Perhaps it is time to worry about this…

*  *  *

You were warned:

High-Yield Bonds "Extremely Overvalued" For Longest Period Ever

 

High Yield Credit Market Flashing Red As Outflows Surge

 

Is This The Chart That Has High-Yield Investors Running For The Hills?

*  *  *

Remember all that bullshit about pristine corporate balance sheets and cash on the sidelines… well as a gentle reminder we only warned that it was a mirage twenty times as firms added debt while they could… instead of cleaning up, they levered up… debt was not delevered, it was rolled and raised…

Mark Spitznagel's words are clear – scale the cash on the balance sheet against debt and we are as bad as we were in 2008.

The fallacy of cash piles on the balance sheet meaning strong balance sheets…

 

 

US companies are carrying far more net debt than in 2007

 

Another curiosity is this notion that US companies have substantially reduced their debt pile and are therefore cash rich. The latter is indeed true. Cash and equivalents are at historically high levels, but rarely do those who mention the mountains of corporate cash also discuss the massive increase in debt seen over the last couple of years.

 

In fact, debt levels have been growing to such an extent that net debt (i.e. excluding the massive cash pile) is 15% higher than it was prior to the financial crisis.

*  *  *

As we noted previously, this is why 'equity' investors should care

The last few years' gains in stocks have been thanks massively to record amounts of buybacks (juicing EPS and also providing a non-economic bid to the market no matter what happens). This financial engineering – for even the worst of the worst credit –  has been enabled by massive inflows into high-yield and leveraged loan funds, lowering funding costs and allowing CFOs to destroy/releverage their firms all in the goal of raising the share price.

 

Simply put – equity prices cannot rally for long without the support of high-yield credit markets – never have, never will – as they are both 'arbitrageable' bets on the same capital structure. There can be a divergence at the end of a cycle as managers get over their skis with leverage and the high yield credit market decides it has had enough risk-taking… but it only ends with equity and credit weakening together. That is the credit cycle… it cycles.

Charts: BofA, DB, Bloomberg

via Zero Hedge http://ift.tt/1oDn1Ta Tyler Durden

Recent comments from FOMC participants on the forward guidance and the appropriate timing of the first hike of the fed funds rate suggest, Goldman warns, a greater clustering of FOMC participants’ views around a mid-2015 ‘liftoff’ in rates. Similarly, private sector forecasts for the first hike are becoming more centered on mid-2015 rather than August to September.

Via Goldman Sachs,

In today’s note, we review recent comments from FOMC participants on the forward guidance and the appropriate timing of the first hike of the funds rate in advance of next week’s September meeting.

With respect to the forward guidance, both Cleveland Fed President Loretta Mester and Boston Fed President Eric Rosengren expressed discomfort with the FOMC’s current calendar guidance last week. President Mester expressed concern with the FOMC statement’s guidance “that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends,” which Philadelphia Fed President Charles Plosser dissented against at the July meeting. She argued that the forward guidance should instead be calibrated to distance from the Fed’s goals and the speed at which progress is being achieved. President Rosengren likewise argued that as the economy approaches full employment, the Fed should stop providing calendar guidance.

With respect to the appropriate timing of the first hike of the funds rate, recent comments point to a greater clustering of FOMC participants’ views around mid-2015. In particular, one or two FOMC participants (namely, Presidents Lockhart and Rosengren) have likely pulled forward their views on the most appropriate date for liftoff; there is nothing to indicate that those previously expecting a mid-2015 hike have moved; and the more hawkish participants have also likely stayed in place. Exhibit 1 lists participants’ recent comments that are most relevant to the outlook for the funds rate.

We highlight the views of some participants below:

Atlanta Fed President Dennis Lockhart seems to have pulled forward his view somewhat from the “second half” of 2015 to “mid-2015.” While it is possible that he did not intend this change of wording as a deliberate sign of a shift in view, it follows a similar transition made earlier in the year by San Francisco Fed President John Williams.

 

Boston Fed President Eric Rosengren, a likely 2016 dot in June, has consistently maintained the view since April that the first hike should come when the Fed is about one year from achieving its employment and inflation targets. However, the improvement in the data has likely been somewhat faster than he initially expected, and his recent comments suggest he is likely to move forward to 2015.

 

Chicago Fed President Charles Evans identified himself in July as one of the 2016 dots in the June Summary of Economic Projections. He seemed to indicate that he had maintained that view, although this might have changed in the last two months.

 

Presidents Lockhart and Williams have both said that their mid-2015 timing puts them in agreement with Fed Chair Janet Yellen.

 

Among more hawkish participants, President James Bullard prefers March 2015 and President Richard Fisher has mentioned “early next year.” While President Charles Plosser has argued that the funds rate should have already increased and President Esther George has expressed at least partial agreement, President Jeffrey Lacker has said he does not think the Fed is “behind the curve.”

 

While not indicative of any recent change of view, comments from last week by Governor Jerome Powell and April comments by Governor Daniel Tarullo suggest both might hold somewhat more dovish views than is usually assumed.

 

Governor Lael Brainard will submit projections for the first time, which could slightly reduce the average and median dot if her policy views are similar to those of the leadership.

Similarly, private sector forecasts for the first hike–recorded in a monthly Wall Street Journal poll–became more centered on mid-2015 from August to September, as shown in Exhibit 2.

While strong data likely led some forecasters to shift their expectations to Q1 of 2015 in the August poll, the weaker-than-expected August employment report likely caused a shift back in the September poll.

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

Thanks to the Fed’s 6 years of ZIRP, activism, i.e., loud, brash billionaires who come in and tell a company’s management they need to use cheap debt to repurchase stock, engage in reckless M&A or spin off profitable units or they will become even louder and brasher has become one of the only profitable hedge fund strategies. Of course, this will cease the moments rates show even the smallest hint of rising but until then it is paradise for all activist hedge funds. In fact, the scramble for activist strategies is so big that WSJ reported earlier today that “funds under management by these activists and others grew by $9.4 billion in the first half of the year to $111 billion, gaining more in that period than in the previous two years combined, according to industry researcher HFR. Mr. Loeb and some other activists have described the current environment as the best they have seen for raising cash.” Thanks Fed.

But how do you know when hedge fund activism has gone too far? Well, a good example is the 300-slide presentation (because more slides is always better than less when pitching quantity over quality) which Starboard Fund filed yesterday as “advice” to the management of Darden Restaurants, owner of Oliver Garden, on how to boost shareholder value and also steps the hedge fund would take to generate returns if it wins control of the entire board. Because while in addition to comping up with fleeting and imaginary valuations based on EBITDA projections and multiples, this is the first time that a hedge fund actually tells a restaurant company how to, drumroll, cook.

As the WSJ reported earlier, among the moves Starboard detailed in its never-ending presentation, in addition to using salt when cooking pasta, and going easy on the breadsticks, Starboard also had suggestions how to improve “food quality and alcohol sales, introduce technology to reduce waiting times at restaurants and cut millions in costs. And Starboard is sticking with its suggestion, which Darden has rejected as value-destroying, of separating the company’s brands apart and putting its real estate into a third public company.”

Needless to say Darden wasn’t very impressed with this overture, and said it would review Starboard’s plan, but added after its initial review it believed many of the changes were already being made under management’s ongoing turnaround, which it says is working. “We remain open minded toward all ideas that support long-term value creation for our shareholders and improve the dining experience for our guests,” Gene Lee, the company’s chief operating officer, said in a statement.

So does cheap credit mean hedge funds know how to cook? Take a look at the following hilarious slide and decide:

Menu innovation is a top priority and is among our nominees’ biggest strengths

 

The entire experience of food, service, and environment must be authentic and provide a joyful and genuine Italian dining experience.

• The food will be fresh whenever possible, with simple choices.
• Menu items will be designed to help facilitate operational excellence and consistency by the restaurant staff.
• We will embrace authenticity, especially as it pertains to the absence of preservatives, stabilizers, gums, additives, artificial colorings, and flavorings.
• We will no longer disregard sound nutrition. Nutrition will not be the driving force, but it will now be carefully considered while greatly improving the taste and appeal of every dish.
• Some parts of the menu can be flavor-forward with fresh ingredients: extra virgin olive oil. lemons, ripe tomatoes, an array of colorful vegetables, lean meats, and fresh fish.
• Portion sizes may be gradually reduced, as guests will begin to equate Olive Garden’s value proposition more with quality and excellence at fair prices, than with massive quantities of barely edible fried items, excessive cheeses, and heavy cream sauces.
• Olive Garden’s breadsticks are part of the brand equity, as they come to every table. The breadsticks need to be of the highest quality, with a better taste and a frimer texture, and each table must receive hot breadsticks.
• The pasta at Olive Garden must be significantly improved. It must be prepared at the proper water temperature, boiled in salted water, precisely timed to not overcook, and tossed with sauces for each dish instead of the current practice of ladling sauce on top of heaps of coagulated pasta.
• We must rethink the amount of items from the flyer. Most fried foods are not authentically Italian and it slows service.
• We will explore a few gluten-free options, as many consumers prefer gluten-free dishes (1) Based on extensive research and discussions with culinary experts and suppliers, we believe we can accomplish these goals at Olive Garden’s current price points without hurting margins

Based on extensive research and discussions with culinary experts and suppliers, we believe we can  accomplish these goals at Olive Garden’s current price points without hurting margins

 

Source: Czar gluten free data.

(1) “Gluten” and “Gluten free” are now among the top searches related to Oliver Garden, per Czar Metrics

Bottom line: thanks Ben and Janet’s ruinous monetary policies we present unintended consequences number X+1: hedge funds, armed with cheap debt, tell a restaurant company how to cook. The New Normal truly never ceases to amaz…

Full presentation below:

 

via Zero Hedge http://ift.tt/YE28RZ Tyler Durden

Investors pulled $27 billion out of UK financial assets last month – the biggest capital outflow since the Lehman crisis in 2008 – as concern mounted about the economic and financial consequences if Scotland left the UK, according to Reuters. Furthermore, Morgan Stanley said daily equity flow data pointed to "some of the largest UK equity selling on record."

 

As Reuters notes,

Data compiled by London-based consultancy CrossBorder Capital said financial outflows from the UK totaled $27 billion in August, compared with inflows of $8.9 billion the same month last year.

 

That's the biggest monthly outflow since the white heat of the financial crisis in 2008, when giant U.S. bank Lehman Brothers went bust. It exceeded the selling of UK assets seen around the 2010 general election, when an inconclusive result led to several days of uncertainty.

 

"Sterling outflows have been an issue since the end of June, but they really gathered pace in August and now look like intensifying again with the possibility of Scottish independence coming to the front of investors' minds,", said Michael Howell, the managing director of CrossBorder Capital, which compiles the index.

 

The UK outflow was more than double the combined outflow from Germany and Australia. France, the United States, Canada and Japan all attracted net inflows.

 

Also on Friday, Morgan Stanley said daily equity flow data pointed to "some of the largest UK equity selling on record, demonstrating investor concerns ahead of the Scottish referendum next week."

 

Concern over the financial, economic and political effects if the UK breaks up has also weighed on sterling, triggering a surge in exchange rate volatility to its highest since the 2010 general election. In addition, selling pressure has mounted as speculation grew that the Bank of England would soon raise interest rates.

 

…

 

"The sterling index has effectively collapsed and the UK is second only to Japan in terms of financial market outflows," Howell said.

 

So far this year, there has been a net $206 billion outflow from the UK. Last year, there was a net annual inflow of $63 billion, Howell said.

While some respite in GBP-selling has occurred in thge last few days as boisy polls show a slight bias to a "no" vote, as we warned previously – With a “no” vote, the UK would still face rising political uncertainties.

The UK political landscape is in a state of extreme flux, with the enduring Scottish independence movement, the rise of UKIP as a political force and resultant change in UK party political dynamics, the moderate-to-high probability of a change of government in the 2015 elections and uncertainties over post-election fiscal policy, plus the non-negligible risk of a referendum on UK exit from the EU in 2017-18 or so. Even if the “no” camp prevails in September, we do not foresee a return to the pre-referendum political status quo in the UK. In our view, the outlook for UK political risks will remain elevated well beyond the referendum, and we suspect these UK political risks are underpriced in markets.

via Zero Hedge http://ift.tt/YE2bgE Tyler Durden

Lebanon’s Daily Star reports that so-called “moderate” Syrian rebels support ISIS terrorists:

“We are collaborating with the Islamic State and the Nusra Front [another extremist and hard-line Islamic terrorist group] by attacking the Syrian Army’s gatherings in … Qalamoun,” said Bassel Idriss, the commander of an FSA-aligned rebel brigade.

 

***

 

“A very large number of FSA members [in Arsal] have joined ISIS and Nusra,” Abu Fidaa [a retired Colonel in the Syrian army who is now the head of the Revolutionary Council in Qalamoun] said

The New York Times writes:

President Obama’s determination to train Syrian rebels to serve as ground troops against the Islamic State in Iraq and Syria leaves the United States dependent on a diverse group riven by infighting, with no shared leadership and with hard-line Islamists as its most effective fighters.

 

After more than three years of civil war, there are hundreds of militias fighting President Bashar al-Assad — and one another. Among them, even the more secular forces have turned to Islamists for support and weapons over the years, and the remaining moderate rebels often fight alongside extremists like the Nusra Front, Al Qaeda’s affiliate in Syria.

 

***

 

Analysts who track the rebel movement say that the concept of the Free Syrian Army as a unified force with an effective command structure is a myth.

 

***

 

The Syrian rebels are a scattered archipelago of mostly local forces with ideologies that range from nationalist to jihadist. Their rank-and-file fighters are largely from the rural underclass, with few having clear political visions beyond a general interest in greater rights or the dream of an Islamic state.

 

***

 

Some European allies remain skeptical about the efficacy of arming the Syrian rebels. Germany, for instance, has been arming and training Kurdish pesh merga forces in Iraq, but has resisted doing the same for any groups in Syria — partly out of fear that the weapons could end up in the hands of ISIS or other radical groups.

 

“We can’t really control the final destination of these arms,” said Peter Wittig, the German ambassador to the United States.

 

***

 

The fluidity of battlefield alliances in Syria means that even mainline rebels often end up fighting alongside the Nusra Front, whose suicide bombers are relied on by other groups to soften up government targets.

 

“Even the groups that the U.S. has trained tend to show up in the same trenches as the Nusra Front eventually, because they need them and they are fighting the same battles,” Mr. Lund said.

***

Current and former American officials acknowledge the government’s lack of deep knowledge about the rebels. “We need to do everything we can to figure out who the non-ISIS opposition is,” said Ryan C. Crocker, a former United States ambassador to Iraq and Syria. “Frankly, we don’t have a clue.”

This is – of course – another example of the “facts being fixed around the policy”,  just as in Iraq. In Iraq, we wanted regime change, so we made up the “weapons of mass destruction” and “Saddam backed Al Qaeda” myths.

Similarly, Washington wants regime change in Syria, so it’s making up a myth of the “moderate Syrian rebel” who hates Assad and ISIS.   But they “don’t have a clue” as to such a mythical unicorn actually exists (spoiler alert: it doesn’t).

The New York Times reported over a year ago that virtually all of the rebel fighters in Syria are hardline Islamic terrorists.  Things have gotten much worse since then … as the few remaining moderates have been lured away by ISIS’ arms, cash and influence.

Saudi Arabia – one of the main sources of Islamic terrorism, and one of ISIS’ main backers – is also going to train “moderate” Syrian rebels.

Of course, arming the “moderate” Syrian rebels is what created ISIS – and was the source of their weapons – in the first place.  And our prior policy of arming “moderate Syrian rebels is what allowed ISIS to take over much of Iraq.

The U.S. and our closest allies in the region – like Jordan – have also been training Islamic jihadists in Syria for years. And see this, this, this and this.  (And – underneath the partisan hackery – arming the Syrian rebels is what Benghazi was really about.)

Brilliant …

Michael Shank – Adjunct Faculty and Board Member at George Mason University’s School for Conflict Analysis and Resolution, and director of foreign policy at the Friends Committee on National Legislation – warned a year ago:

The Senate and House Intelligence committees’ about-face decision last week to arm the rebels in Syria is dangerous and disconcerting. The weapons will assuredly end up in the wrong hands and will only escalate the slaughter in Syria. Regardless of the vetting procedures in place, the sheer factionalized nature of the opposition guarantees that the arms will end up in some unsavory hands. The same militant fighters who have committed gross atrocities are among the best-positioned of the rebel groups to seize the weapons that the United States sends to Syria.

 

***

Arming one side of Syria’s multi-sided and bloody civil war will come back to haunt us. Past decisions by the U.S. to arm

insurgencies in Libya, Angola, Central America and Afghanistan helped sustain brutal conflicts in those regions for decades. In the case of Afghanistan, arming the mujahideen in the 1980s created the instability that emboldened extreme militant groups and gave rise to the Taliban, which ultimately created an environment for al Qaeda to thrive.

 

***

 

Arming the enemies of our enemies hasn’t made the U.S. more friends; it has made the U.S. more enemies.

 

***

 

Some armed opposition factions, including powerful Islamist coalitions, reject negotiation altogether. Yet these are the same groups that will likely seize control of U.S.-supplied weapons, just as they’ve already seized control of the bulk of the rebels’ weaponry.

 

***

 

When you lift the curtain on the armed groups with the most formidable military presence on the ground in Syria, you find the Al Nusra Front and Al Farough Brigades. Both groups are closely aligned with Al Qaeda and have directly perpetrated barbaric atrocities. The Al Nusra Front has been charged with beheadings of civilians, while a commander from the Al Farough Brigades reportedly ate the heart of a pro-Assad soldier.

Shank’s warning was ignored, and his worst fears came to pass.  And since the Obama administration is doubling-down on the same moronic policy, it will happen again …

Obama’s policy is like throwing weapons into a crowd of enemies … and hoping some good comes out of it.

It’s like throwing the ball to a midget surrounded by an entire team of 7-foot basketball players.

Who do you think will end up with the ball?

via Zero Hedge http://ift.tt/YE28Bs George Washington