Making Unique Observations in a Very Cluttered World

Saturday, 12 June 2010

Racy lyrics lead Wendy's to pull CD from kid meals - "so horny" - had been marked as safe for 3 years old and up -

Racy lyrics lead Wendy's to pull CD from kid meals - "so horny"  - had been marked as safe for 3 years old and up - 

The fast food-chain Wendy's has pulled a disco CD included in kids' meals because of racy lyrics in one of the songs.
The Atlanta Journal-Constitution reported that one of the songs on the Disco Fever CD was Donna Summer's "Last Dance." The song has two sets of lyrics. One version includes the words "so bad." But some heard the alternative lyrics "so horny" on the CD, which had been marked as safe for 3 years old and up.
The Atlanta-based chain announced on its website Saturday that it would continue to put three other CDs in the kids' meals. Those CDs include the songs "ABC" by Jackson 5 and "Celebration" by Kool & the Gang. The website said Wendy's is "no longer offering" the Disco Fever CD but doesn't mention the reason.

Warren Buffett Predicts the Next Crisis - we're going to see a lot of states and municipalities go broke -

Warren Buffett Predicts the Next Crisis - we're going to see a lot of states and municipalities go broke -

With the stock market finally bouncing back from its double-digit percentage drop, investors want to know: Was that the long anticipated "technical correction"? Is it over, and are we now headed back into a sustained bull market?
According to two of the sharpest minds in investing -- Warren Buffett and George Soros -- the answer is no, the bull is not back. To the contrary, "Financial Crisis, Part II" may be coming soon to a theater near you.
Something wicked this way comes
Testifying before Congress last week, Buffett warned that we could be standing on the brink of the next financial crisis. A brink which begins, as it turns out, right at your city limits.
Congress had asked Mr. Buffett to testify about the role that credit raters Moody's (NYSE:MCO) and Standard & Poor's played in the last financial crisis. But in the course of doing so, lawmakers couldn't resist the urge to pick Buffett's brain. And so it was that Financial Crisis Inquiry Commission chairman Phil Angelides asked: Where's the next big risk to our economy? Buffett's reply:
If you are looking now at something where you could look back later on and say, "These ratings were crazy," [municipal bonds] would be the area. I don't think [Moody's or S&P] or I can come up with anything terribly insightful about the question of the state and municipal finance five or 10 years from now except for the fact there will be a terrible problem and then the question becomes: will the federal government bail them out?
Buffett's backing up his views with actions. In 2009, Berkshire only insured $40 million in new muni bond issues versus a whopping $595 million than in 2008. So if you were wondering why you're hearing how so much state and municipal debt has been "sold short" by way of credit default swaps in recent months, then you have an answer: Investors think munis are going down.
Roadmap to the next bailout
How did the states and municipalities get in their current fix? Take your pick(s): Runaway entitlement spending. Massive unfunded liabilities in public pensions. In short: Debt loads that more resemble a mountain than a molehill. Unless something happens quickly to slow and reverse the tide, we're going to see a lot of states and municipalities go broke. In fact, up in Rhode Island, one town took the unusual step of having a receiver appointed, as an alternative to bankruptcy in a state that doesn't allow towns to file for it.
Of course, the governments that issue muni bonds will tell you this is all just bunk. They'll cite historical statistics showing that municipalities hardly ever default, and argue that their bonds should enjoy high ratings from the raters to reflect that fact.
But here's the thing -- quoting now from Buffett's letter to shareholders in Berkshire's 2008 annual report: "[T]hat record [of low default rates] largely reflects the experience of entities that issued uninsured bonds. Insurance of tax-exempt bonds didn't exist before 1971, and even after that most bonds remained uninsured." Indeed, as recently as 1980, only 3% of new bond issues were insured; by 2007, that number had climbed to 60%. Today, more than half the estimated $2.8 trillion worth of municipal bonds floating around out there carry some form of insurance.
As for who's doing the insuring, the biggest player in the municipal bond insurance industry today is Assured Guaranty, but there are several others. Berkshire Hathaway (NYSE:BRK-B), of course. But also, CIFG AssuranceSyncora Guarantee, and specialized subsidiaries of Ambac Financial (NYSE: ABK)PMI Group  (NYSE: PMI), and MBIA (NYSE:MBI) all play a role here.
Playing with fire
But if you are considering playing in this market, beware: You could get burned. You see, it used to be that default by a state or municipality would mean massive losses for the "citizens and businesses" who had bought those bonds -- "citizens and businesses" who often were the very taxpayers who supported the local community.
When a government's default threatened to ruin its own citizenry, that made for a strong disincentive to do so. But the same doesn't hold true when there's a far-away insurer with (presumed) deep pockets backing the debt. Sure, California might balk at the idea of stiffing its own citizens. But default and let MBIA and Ambac pick up the tab? Why not?
As Buffett explains, the introduction of insurers backstopping government spending excess has changed the game. The "belt-tightening, tax increases, [and] labor concessions" he cites as saving NYC from bankruptcy in 1975, for example, are no longer needed. Today, any city or any state that's forced into bankruptcy, and that's already paid good money to have its debt insured, is going to want payback for their bondholders. The insurers will be forced to, in Buffett's words, "share in the required sacrifices."
Don't sacrifice yourself on the altar of municipal excess
According to Buffett, the cost to repair municipal balance sheets today is "simply staggering." George Soros agrees. Discussing the related issue of massive short-selling of collateral default swaps back in April, Soros warned that: "Going short on bonds by buying a CDS contract carries ... almost unlimited profit potential."
That's great news for the hedge funds that invest in such things. It's pretty good news, too, I suspect, for banks like JPMorgan Chase (NYSE: JPM) and Citigroup (NYSE: C), that have been making a market in selling municipal CDS lately. But for investors in the debt insurers themselves and the taxpayers who may be called upon once again to bail 'em out, it's nothing short of The Next Financial Crisis. And it's coming soon to a town near you.

Japan's New PM Warns Country At "Risk Of Collapse - our public finances have become the worst of any developed country" -

Japan's New PM Warns Country At "Risk Of Collapse - our public finances have become the worst of any developed country" -

A week ago Hungary had the unfortunate mishap of telling the truth when it compared itself to Greece, resulting in a massive selloff of the Forint and leading to fresh lows for the euro. Today, it is Japan which is using the very same strategy in an attempt to devalue its own currency. So far it's working. The BBC reports that Naoto Kan has been a little truthier than the G-20 plenary sessions generally allow. We now look for the PM's reign of truth to be even shorter than that of his thousands of predecessors during the past couple of years: "Naoto Kan, in his first major speech since taking over, said Japan needed a financial restructuring to avert a Greece-style crisis."Our country's outstanding public debt is huge... our public finances have become the worst of any developed country," he said." Obviously, none of this is news. However, the market certainly does not appreciate when it is told that what it sees day after day in the non-mainstream media is actually the truth and nothing but the truth. What next - Tim Geithner coming out to say that a downgrade of the US is actually long overdue?
More from BBC:
After years of borrowing, Japan's debt is twice its gross domestic product.

"It is difficult to continue our fiscal policies by heavily relying on the issuance of government bonds," said Mr Kan, Japan's former finance minister.

"Like the confusion in the eurozone triggered by Greece, there is a risk of collapse if we leave the increase of the public debt untouched and then lose the trust of the bond markets," he said.
Yet, just like with the SNB's CHF intervention, the market did not respond at all to this, at least so far. Do the HFT algos need a realism translator when they are not focusing on ephemeral data such as consumer confidence (the US consumer is confident that after once again cutting spending, they may eventually buy that 5th iPad at some point in the future). Or does nobody even care about any fundamentals anymore? Is the entire market a bubble chamber where one bout of buying or selling is all that's needed to set off the appropriate algo engines?
"Fiscal austerity measures are long overdue," said Chris Scicluna, deputy head of economics at Daiwa Capital Markets in London.

He forecasts that the government's budget deficit will be 8% of GDP this year, a number that Mr Kan has promised to reduce to zero by the end of the decade.

However, Mr Scicluna said the government does not face any immediate fiscal crisis, unlike some European countries, and probably will not start tackling its budget deficit for at least another year or two.

Unlike Greece or Spain, Japan is a net lender to the rest of the world, to the tune of 2.5% of its GDP last year.
Yet just as Albert Edwards has been pointing out for months now, grey clouds may be forming over Japan's so far glitchless selling of trillions in bonds, courtesy of the relentless demographic shift:
Some 95% of the government's debts are held by Japanese investors, and the government can currently borrow for 30 years at a mere 2% interest rate.

But Mr Scicluna says Japan does have serious medium-term problems related to its ageing population.

As more and more Japanese citizens retire in the next few years, they are likely to start selling their government bonds to pay for their retirements.

This means that Japan will need to start borrowing from the rest of the world, and the government may have a hard time convincing foreign lenders to let it borrow at such a low interest rate.
That's ok Japan, we are confident that the ECB will be happy to buy up all your bonds as well. Just look at how well they performed in the past week when they were the bidder of first and last resort for all sorts of toxic Italian, Spanish and Portuguese paper. Better yet, you will soon be able to pledge your JGBs to J-C Trichet, whose balance sheet is increasingly starting to look like a used Charmin' store.