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Monday, December 17, 2012

This and That

 

MS All In

There is a big crowd of analysts that seem to be stuck with overly optimistic forecasts for Apple. For example, Citi did a bearish story on America’s favorite stock today, but even with the bad news, Citi still thinks the stock should be $75 higher.

Morgan Stanley (MS) is behind on what’s looking like a bad call; the folks with the white spats doubled down today. The one-year outlook for AAPL is to trade at $714 (with a potential upside as high as $980). That’s a big call for a stock that has lost $187B of market cap the past few months (equivalent to 3 Goldman Sachs, 5 Starbucks or 10 Dells)

Who knows? Maybe all these bulls are right. That rarely happens. What bothers me with the MS update on AAPL is that the firm sees the downside in the stock at close to zero (no lower than $495). That’s never true. Talk to those who have been saying it has been a screaming buy the last $200.

 

 

 

 

Me and JA

I’ve been a member of JA most of my adult life. This important turning point came after I became addicted to the most powerful narcotic on earth. Like most addicts, I lost everything that I had. Were it not for JA, I probably would not be around writing blogs.

 

Today, I’m somewhat of elder statesman for this very private group. The grey hair and the decades without re-addiction have provided me some status. I keep in contact with senior JA members around the world. I do my own ‘self-help’ sessions with those who have recently fallen prey to this poison. Using this global network, I can observe the trends of those who become newly addicted, and also those poor souls who fall off the wagon, and make the fateful call to their favorite dealer.

 

I have distressing news to report. The JA “Help” lines have been ringing off the hook. Tens of thousands of JA members, many of whom have been ‘living clean’ for more than a decade, have started abusing the drug again. Worse still, is the explosive increase in first time users. (85% first time users become hopelessly addicted – 10Xs greater then heroin).

 

The full name for what is familiarly known as JA is, Japan Short Anonymous (JSA, or just JA). The group is patterned off of Alcoholics Anonymous  (many JA members are also in AA). The only qualifications for joining JA are the loss of a great deal of money, and the willingness to (privately) admit to being a self-destructive Yen shorter.

 

 

Okay, I’m kidding, again. But I’m not kidding about the betting against Japan. It’s huge, both in the currency and debt markets. For the past few months, money has been making money on the short side of Japan. Nothing fans the short trade more than success.

 

This is the most seductive trade in the world, that’s why folks get addicted to it. I’m not going to re-iterate the dozen odd reasons why Japan Inc. is a screaming short. And I agree with the conventional wisdom that Abe is going to print to oblivion, and that, by itself, is good reason to rev up the short engines.

 

It’s possible that Short Japan is the trade of the next decade; a perpetual short that fuels the carry trade. But then again, this trade has killed tens of thousands over the past thirty years.

 

 

PS – I wasn’t kidding about swearing off of the short yen trade 30 odd years ago. And I must admit, even I’ve had that old “itch” of late…

 

 

A Great Deal?

This is an update on an old story. This is about Munis and leverage.

Towson MD did a deal recently where it borrowed $256m for 30-years at a very sweet 3.43%. The money raised went into the Towson municipal employees’ retirement fund. Some details.

 

Last summer the financial deep thinkers in Towson re-calibrated their investment returns on their $2b investment fund. The assumed rate of return had been a ridiculously high 7.875%, it was changed to a much more “conservative” assumption of 7.25% (It should be 5%). The drop in the benchmark return produced a whopping $760m hole in the Fund (Vs. the $2.4B it would be at 5%). The net present value of that hole comes to a much more manageable $250m.

Rather than raise taxes on the citizens, or cut future benefits for employees, Towson took the “bold” action of just borrowing the money and hoping like hell that it all sorts out over the next twenty odd years.

I don’t get it, and I don’t like it. Think of this from the perspective of the taxpayers. They are borrowing money at 3.43% in the hope that they can earn a much higher return. I think Towson is gambling. Consider the investment portfolio:

 

 

Note that 27% is fixed income. Towson is a high-grade yield buyer:

 

The “stuff”that Towson invests in has a yield today that is less than the cost of the new debt. This means that the results on the the other 73% of the portfolio has to be that much higher in order for Towson to achieve its new hurdle rate of 7.25%. I look at the 15-year chart of the S&P and wonder what happens if stocks don’t go up a steady 8%+ for the next many years.

 

 

Anyway, Mr. Kamentz, the County Exec. for Towson, had this to say when his borrowing deal got inked:

 

“Funding the pension fund in this manner protects employee benefits and shows taxpayers that we are serious about managing our budget

(Egad)

 

Wall Street loves pension obligation deals. The Street makes money in every direction. WS gets paid to issue and place the debt, it makes money trading the debt after it’s issued, it makes more money selling the stocks and bonds that Towson buys with the debt, it earns custodial fees for all the paper that is created and it gets nice advisory fees. Towson spent $14m in 2011 on fees, that number will go up every year for the next 30.

 

 

I don’t have a list of the munis that have done Pension Obligation bond deals, nor the gross amount of this swill that is now outstanding (does anyone?) I do know that many munis have done this, the amounts are big. It’s a time bomb.

 

 

Comments

  1. Dave from California says:

    Wall Street loves desperate people, and pension funds who borrow to cover the size of the hole in their budget is the very definition of desperation.

  2. But What Do I Know? says:

    Love the story on Towson MD–check out the county website’s press release, which crows about the $343 million that the taxpayers “saved” in this deal. What a load of hooey. . .

    • This is only funny until you realize that our country is using the exact same strategy of wisely saving trillions per year through its own borrowing. Of course in our countries place there’s no problem as nimble Ben stands ready to produce more little pieces of green paper to exchange for our obligations.

  3. Bruce, wasn’t the yen/USD rate set at something like 5 or 10x undervalued after WWII? And now it’s just getting back towards reasonable value? IMO, all the shorts are just due to recency bias.

    Towson is amazing. Now I have to see if my own town is doing the same thing.

  4. Serious question about “JA”:
    The chart you present shows JPY in a secular (40 +year) move to greater value agains the USD. If that is the case, why does everyone always refer to the yen as a “weak” currency, and why does everyone short it, when, clearly the secular direction is up? Wouldn’t the crowded trade be long the yen?

    • Japan has had ZIRP for decades. So is has been the funding currency. This is called the carry trade.

      To carry other assets with Yen funding you have to be short the Yen.

      For years, people have been trying to find the bottom of the puzzle. The fall of 2012 is just another example of folks jumping on a great short. We shall see if history repeats, it often does….

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