Called on Account of Global Warming

Drying up already?

Tapped on Valentine's Day.

Done by St. Patrick's Day.

Welcome to the New Normal.

Time to reschedule Maine Maple Sunday?

Quote for the Week, Mar. 11-17, 2012

When plunder becomes a way of life for a group of men living together in a society, they create for themselves in the course of time a legal system that authorizes it and a moral code that glorifies it.
--Frederic Bastiat

Follow the Money

Hoffman and Redford as Watergate sleuths Bernstein and Woodward,

All the President's Men

The advice of Deep Throat, the legendary Watergate informant, to "follow the money" is useful in any era and particularly at this time, when European financial ministers ("fin mins" in insider parlance) are loudly proclaiming that the region's sovereign debt crisis is under control. Earlier this morning, officials in debt-strapped Greece announced that government bonds maturing later this month--bonds with zero chance of face-value redemption--will be swapped for long-dated bonds and warrants in a kick-the-can restructuring. Losses finally will be taken. Private creditors are looking at a haircut of about 70%, which would send €100 billion to money heaven.

But that may not be the end of the destruction. The new Greek bonds have no more chance of paying interest than the old ones did, and in the grey market this morning they are bid at 20 percent of face value. Moreover, the warrants, or "sweeteners," attached to the new bonds will add value only if Greece can return to GDP growth. But how likely is that? The Greek economy has been shrinking for the past five years and shows no sign of a turnaround. Capital flight has afflicted all the PIIGS, as the chart below shows:

Money is leaving the periphery.

Today's debt swap is a precondition for a second bailout of Greece. But most of that bailout dough will pass GO (Greece does not collect the $200) and proceed directly to senior holders of the maturing sovereign debt. Meanwhile, the short-dated debt next in line is still priced for default. Stuck with this crapola, European banks have engaged in a different kind of swap--call it trash-for-cash--as part of a Long Term Refinancing Operation (LTRO). The distressed debt gets posted as collateral with the European Central Bank, which lends cash to the banks, which use some of it to roll over their own corporate debt. Any remainder appears to be getting redeposited back to the ECB:

Money is being parked here.

The lending facility is not being used for investment in the regional economy, which bodes ill both for Eurozone GDP growth and Greece's ultimate rescue. In fact, the lendable "remainder" is getting called back by the ECB as collateral continues to lose value. ZeroHedge, which has been all over this story, describes it this way:

"The rapid deterioration in collateral asset quality is extremely worrisome...as it forces the banks who took the collateralized loans to come up with more 'precious' cash or assets (unwind existing profitable trades such as sovereign carry, delever further by selling assets, or subordinate more of the capital structure via pledging more assets - to cover these collateral shortfalls) or pay-down the loan in part. This could very quickly become a self-fulfilling vicious circle...."

Money is needed for margin calls.

Where is the money going exactly? How about around and around, then down. Flush job.

[update, 03-12-12--]

Barclays has a research note out (via ZeroHedge) explaining how the ECB's lending liquidity facilities are merely a short-term fix for Europe's banking system. By cannibalizing available collateral and subordinating other bondholders, they drive up the banks' borrowing costs:

"Bondholders face increasing subordination from this balance sheet encumbrance, reinforced by depositor preference laws (in some countries) and imminent legislation on bail-in bonds. Combining these factors suggests that unsecured funding cost for banks will remain high – potentially too high for some business models to make economic sense."

[update, 03-15-12--]

Bloomberg explains in a story today how the serial bailouts of Greece have gradually (and, shall we say, insidiously) shifted exposure from private-sector banks and insurers to European taxpayers. As one economist is quoted, "the longer we wait for these restructurings, the worse the deal gets for the public." The reckless lenders who should be taking the losses use the delay to wriggle off the hook--extend and escape, if you will. Minyanville's Peter Atwater calls it the re-syndication of risk.

Quote for the Week, Mar. 4-10, 2012

Unfortunately, I do not expect the partisanship of recent years in the Senate to change over the short term...I see a vital need for the political center in order for our democracy to flourish and to find solutions that unite rather than divide us. It is time for a change in the way we govern.
--U.S. Senator Olympia Snowe (R-ME)

"Going Down"

I am old enough to remember when an elevator was typically operated by a real person--the lift man--who rode the car up and down all day and opened and closed the door manually. If you were waiting for an elevator, a soft "ding" would signal that the elevator had just arrived at your floor. Then the door would slide open. Getting on depended on whether the lift man behind the door said "going up" or "going down."

Numbers cruncher David Trainer is saying "Going down," and it's not an elevator that he is talking about. It is Bank of America's common stock (ticker symbol: BAC). BAC has had a doozer of a Dow Dog rally, levitating by 60% since the December doldrums. The stock has spent most of February flatlining at $8 a share. As explained here, Trainer expects a return trip to $5, and maybe all the way to the basement. He is telling investors to get off now.

Trainer has developed a construct called economic book value (EBV), "which measures the equity value of the business based on its actual operating cash flow after tax net of all liabilities," including off-balance-sheet debt, pensions, preferred stock, and outstanding stock options. He considers EBV a more useful indicator than reported earnings, which are massively massaged by clever accountants. According to Trainer, Bank of America's EBV is negative (and, you guessed it, going down).

Sources: New Con­structs, LLC and com­pany filings

Last we checked, the MainePERS portfolio was holding steady at 2.6 million shares of BAC and seemingly intent on checking out the basement. BAC used to be a top-ten holding, but no more, thanks to the erosion in share price. Now appearing in the Top Ten (as of 12-31-11) are Johnson & Johnson and Pfizer, amounting to $90 million worth of high-priced pharmaceuticals. Once considered among the bluest of blue chips, Big Pharma stocks will soon be subjected to earnings risks of their own. According to Casey Research, several blockbuster drugs are coming off patent in 2012. Combined, these babies add up to $35 billion in annual sales. New competition from generics will certainly eat into those revenues. 58% of J & J's revenues will be at risk, 66% of Pfizer's. MainePERS portfolio managers are reaching for Tums as we speak.

Back to Bank of America. Not only is the company going down; it is leaving town altogether. Mainers found that out Monday when BofA announced that it was closing a call center in Orono and shedding as many as 200 employees. The company may be shedding customers as well. The Wall Street Journal this morning reports that BofA is contemplating new service fees for basic checking accounts. Must do something about that negative EBV.

[update, 03-05-12--]

John Hussman's weekly commentary highlights the biggest reason not to own bank stocks:

"A good amount of bad debt has been written down, but the remaining bad debt still needs restructuring. Notably, non-current assets and bank-owned non-foreclosed property ("other real estate owned" or OREO) is actually a larger percentage of bank assets today than in 2008. Restructuring generally means reducing the interest spread or writing down a portion of the principal, and this process is likely to siphon off earnings in the financial sector for years. Despite their preferred status as 'risk on' speculative assets, I continue to view financials as a minefield."

"Grandchildren Do Have Value"

Jeremy Grantham's quarterly investment letter:

[excerpts:]

"Capitalism has gone through a Darwinistic series of trails and errors, which still continues. For the time being, capitalism has tuned itself to rapid growth at almost any cost. Circumstances such as the hydrocarbon revolution and the ensuing population explosion have allowed for both high growth and high profit margins to sustain the growth. Sustained high margins have in turn trained capitalists--or corporate executives if you prefer--to set high hurdles for all investments....

"Of all the technical weakness in capitalism, though, probably the most immediately dangerous is its absolute inability to process the finiteness of resources and the mathematical impossibility of maintaining rapid growth in physical output. You can have steady increases in the quality of goods and services and, I hope, the quality of life, but you can't have sustainable growth in physical output. You can have 'growth'--for now--or you can have 'sustainable' forever, but not both. This is a message brought to you by the laws of compound interest and the laws of nature."

Complete commentary here.

Quote for the Week, Feb. 26-Mar. 3, 2012

The world owes all its onward impulses to men ill at ease. The happy man inevitably confines himself within ancient limits.
--Nathaniel Hawthorne