Friday, April 30, 2010

"Bevy of Questions Await Buffett at Berkshire Meeting" (BRK.B; BRK.A)

Long time readers know we are fans of Warren.
From MarketBeat:

Shareholders heading to Omaha, Neb. for the Berkshire Hathaway annual meeting this weekend should be spoiled for choice in terms of juicy questions to throw at Warren Buffett, perhaps the world’s most celebrated stock picker.

Here are some of the things to watch for at this year’s meeting. See full coverage Saturday on

Goldman Sachs:

Warren Buffett is expected to comment at length on Goldman Sachs Group Inc., the embattled bank charged with fraud by the Securities and Exchange Commission and the subject of a criminal investigation by the Department of Justice. Several Goldman executives, including CEO Lloyd Blankfein, were grilled before a Congressional panel this week for their actions related to shaky mortgage securities the bank peddled before the credit crisis. Goldman denies the charges, but outraged Congressman seemed unconvinced. Berkshire Vice Chairman Charlie Munger recently told the Wall Street Journal that Goldman was engaged in “socially undesirable” activities. Look to see whether Mr. Buffett agrees with his cantankerous sidekick or offers up a defense of Goldman. See this WSJ story for more.


At last year’s meeting, Mr. Buffett had to defend several huge derivative contracts that had plunged in value during the credit crisis. The deals, essentially insurance contracts on several stock indexes around the world, helped cause Berkshire’s book-value per share decline in 2008. This year, Mr. Buffett is facing a new headache tied to derivatives: A Congressional proposal that would retroactively force Berkshire and other companies to put up collateral against the contracts....MORE
A Google search of our site returns 6000 hits, feel free to browse.
One of my favorites:
"Living La Vida Cocoa: Warren Buffett, Berkshire Hathaway and the Chocolate Wars (BRK.A; BRK.B; CBY; KFT; HSY)"
Or, trying to stir up some trouble, "Oh Berkshire Hathaway Fans: "'Black Swan' Author Nassim Taleb: Warren Buffett May Just Be Lucky" (BRK.B; BRK.A)"

See also:
MarketBeat's "Gartman: ‘Warren Buffett Is an Idiot’" was followed by "Gartman: Warren Buffett Isn't An "Idiot" .. But He Allowed "Inexcusable" Losses (BRK.A)"

And many, many more.

"Potash Trying to Fend Off Bear Market" (POT)

I ended the post immediately below, "PotashCorp gives analyst deja vu" (POT), saying "But a nice chart". Here's more from Option News Network:

Holding the line at 200-day moving average during record harvest, plantings

What was looking like a bold recovery in Potash (NYSE: POT) shares this year has turned into a cliff-hanger for investors as the stock has made its way all the way back down near its 200-day moving average, which sits just below $105. While other big agricultural names like Archer Daniels Midland (NYSE: ADM) and Monsanto (NYSE: MON), and even fellow fertilizer specialist Mosaic Company (NYSE: MOS), are already deep in their own bear markets, it’s a good time to look at the fundamental and technical pivots that may make POT move one way or the other from the 200-day moving average cliff.

The downgrades of POT and MOS by Goldman Sachs last week had several points about grain fundamentals in their rationale. According to Jared Levy’s article on April 14th, Goldman analysts cited “weak volumes, weather-related planting delays, rising input costs, and lower corn prices. They lowered their 12-month price target on POT from $131 down to $123.69 and targeted it at a 16x p/e multiple.”

Levy wrote, “GS goes further to say in the report that they believe potash prices have bottomed both in the U.S. and international markets. So they see slowing pricing momentum, but robust fertilizer demand? I have to question that logic, but I think I see what they are getting at – steady demand (maybe), and flat to moderate prices. Brazil seems to be the potential catalyst for a move higher in potash prices; they typically buy most of their volume in the second and third quarters.”

If I put some value on Goldman’s analysis (and I usually do when it comes to commodities), I would use their slight downgrade as a buying opportunity and a trading opportunity, looking for POT to hold the line at the 200-day moving average once again—even though this logic defies what I see on the charts. POT has been down here now at least four times since last July and stocks—or any instrument, for that matter—that flirt that much with their 200-day are just dying to go through it. Here’s a look at the volatility—and the trading opportunities—this name has given us for the past year.

Daily chart of Potash (POT) since April 2009

Bumper Harvest, Incredible Plantings

Most analysts, myself included, talk about Chinese demand for commodities—in this case soybeans and fertilizer—when we make the fundamental arguments for a owning a stock like POT. But in the shorter-term, you also have to look at seasonal drivers in the grain markets themselves. And this year has two unique elements to watch.

First, South America is in the middle of a record harvest for soybeans, with production forecast at a record 54.5 million metric tons (mt) according to the Buenos Aires Cereals Exchange. That’s well over the previous record of 48.8 mt set in 2006-07. To date, only 44% of the bumper crop has been harvested and corn is also registering record yields with only 55% of the crop in. Wet or otherwise inclement weather is the major obstacle to realizing these harvests fully and that is why the prices of corn and soybeans on the CME Group grain floor will twitch accordingly as new ideas and estimates about supply get factored in and out.

Second, the North American planting season is believed to be one of the best in decades. With a “Goldilocks” amount of precipitation and warmth so far this year, farmers have been out in the fields early. This is another supply weight on both grain prices and fertilizer, as these markets tend to look out several quarters into the middle and end of growing seasons for what stocks and demand will look like....MORE

UPDATED: "PotashCorp gives analyst deja vu" (POT)

UPDATE: "Potash Trying to Fend Off Bear Market" (POT)
Original post:
The stock is trading up 1.4% at $112.15.
From the Financial Post:

Much like the last quarter, Potash Corporation of Saskatchewan beat expectations in its first quarter results while providing more conservative guidance. The whole thing has left Fai Lee, analyst with RBC Dominion Securities, with a sense of deja vu.

For the first quarter, PotashCorp reported earnings-per-share of $1.55, better than Mr. Lee's $1.36 forecast. The company's guidance had been between 70¢ and $1 at the time it reported its fourth quarter results, but raised them to between $1.30 and $1.50 six weeks later.

"The transitional nature of this year does make forecasting quite difficult and adopting a conservative approach is prudent in our view," he said in a note.

As a result, Mr. Lee has cut his 2010 EPS forecast to $5 from $6.21, reflecting a slower pace of potash price appreciation through the year, along with higher phosphate production costs and lower nitrogen pricing. He is however maintaining his 2011 EPS estimate of $8.51....MORE

Yesterday Schaeffer's Research noted:

...Traders seem less than thrilled with POT's guidance, as the shares have shed about 1% in pre-market trading. The equity is poised to continue a short-term slump beneath pressure from its 10-day and 20-day moving averages, which haven't been bested on a daily closing basis since March 22.

However, a number of options players already seemed to have low expectations for today's earnings report. The largest overnight open interest change for POT was at the out-of-the-money May 120 call, which added 1,284 contracts as a result of Wednesday's trading. The majority of these calls changed hands at the bid price, suggesting they were sold to open....

But a good looking chart:


Foreign Exchange: "Debt crisis mystery: What's holding up the euro?"

From MarketWatch:

It's a mystery that has currency experts scrambling for answers.

Given the breath-taking carnage in euro-zone bond markets, why is the euro still trading in the $1.30s versus the U.S. dollar?

After all, Greek government bonds collapsed this week, building on the rout that had already forced Greece to request the activation of the joint European Union-International Monetary Fund aid package.

The spread between 10-year Greek and German bond yields stretched to more than 10 percentage points at one point while sharply rising Portuguese and Spanish yields signaled that investors were beginning to get really nervous over the idea Greece could be forced to restructure or default on its debt, triggering a run on debt-strapped members of the offensively-acronymed PIIGS fraternity, made up of Portugal, Italy, Ireland, Greece and Spain.

But while the yield premium demanded by investors to hold peripheral euro-zone bonds rather than German bunds soared over the past month to levels unseen since the single currency's debut, the euro is down just 1.8% versus the dollar over the same period, noted strategists at RBC Capital Markets.

The euro (CUR_EURUSD 1.3280, +0.0040, +0.3021%) first came under pressure late last year as worries about Greece's fiscal position began to mount. The single currency has lost nearly 20 cents versus the U.S. dollar since trading above the $1.50 level in December. On Thursday it notched a new one-year low at $1.3112.

But the roughly five-cent drop seen since the euro's April 12 high has been about on par with the slide seen in the first two weeks of December or the last two weeks of January. Given the intensification of the credit market rout, "should euro/U.S. dollar be 10 big figures lower?" asked the RBC strategists, Elsa Lignos and Adam Cole, in a research note....MORE

"S&P on Goldman Stock: ‘Sell’" (GS)

The stock is trading at $147.18 down $13.06.
From MarketBeat:

Following up on BofA Merrill’s downgrade from “buy” to neutral, S&P equity analysts cut the gold-plated investment bank to “sell” from “hold.” They write:

The Wall Street Journal published an unconfirmed report suggesting that federal prosecutors are investigating whether the firm or its employees committed securities fraud in its mortgage trading business....MORE

"Spain Pricks Solar Power Bubble as Greek Fate Looms"

First rule of ecology: Everything is connected. This came out an hour ago:
After Downgrade, Spain Hit by Unemployment Report
Over 20%.
From Bloomberg:
Spain is lancing an 18 billion-euro ($24 billion) investment bubble in solar energy that has boosted public liabilities, choking off new projects as it works to cut power prices and insulate itself from Greece’s debt crisis.

Industry Minister Miguel Sebastian is negotiating reductions in subsidies for solar plants that would curb energy costs, a ministry spokesman said this week. Grupo T-Solar Global SA, the world’s biggest photovoltaic plant owner, shelved its Spanish stock offering three days ago. Solar Opportunities SL postponed a 130 million-euro deal due to be signed today.

“They’ve put the fear of god into all these investors,” said Paul Turney, chief executive officer of Madrid-based Solar Opportunities. “By the time they’ve finished dithering around, they’ll have hurt their credibility so badly that no one will want to invest.”

Spain is battling on several fronts to revive its economy and convince government bondholders it can avoid getting dragged into a Greek-style debt spiral after Standard & Poor’s cut its credit rating April 28. Solar-plant owners including General Electric Co. earn about 12 times what’s paid for power from fossil fuels. Most of that is a subsidy charged to customers.

Prime Minister Jose Luis Rodriguez Zapatero’s government last cut solar rates in 2008, hitting plants not built at the time. Now it’s weighing reductions for the thousands of installations already making power from the sun, wind and biomass.

‘Excessive Subsidy’

“This is necessary,” said Leon Benelbas, chairman of Atlas Capital Close Brothers investment bank in Madrid. “It’s an excessive subsidy at a time Spain has to gain competitiveness, and the cost of energy is a determining factor.”

Spain’s fixed-price system for renewable power, which attracted more investment in solar panels in 2008 than the rest of the world put together, boosts the state’s liabilities even though they don’t show up on its balance sheet....MORE

"White House halts all new domestic offshore drilling"

From the Houston Chronicle's NewsWatch: Energy blog:

There will be no no new exploration drilling off the U.S. coast until there is a full investigation into the spill in the Gulf of Mexico, which has reached the Louisiana coastline, White House senior advisor David Axelrod announced this morning on ABC News' "Good Morning America."

"No additional drilling has been authorized and none will until we find out what happened here and whether there was something unique and preventable here," Axelrod said.

He emphasized that President Obama has said he will not continue the moratorium on offshore drilling, which he recently lifted as part of a new five-year offshore plan. But new drilling has been stalled.

Al Gore, Score!: InterContinental Exchange, Inc. Buying Climate Exchange PLC (CLE.L; ICE; GS)

CLE is trading up 54% at 743.50. ICE is also up in early premarket action.
Mr. Gore's Generation Investment Management owns just under 3% of CLE.
At one point Goldman owned 19% of CLE. I don't know why they aren't listed, more later.
Here's the list of the top ten holders:

Shares in Issue - 47,592,023 Shares not in public hands is 64.42%

Top 10 Shareholders

as at 29 January 2010

Invesco Asset Management Limited 29.75%
Directors and Related 15.70%
BlackRock Advisors 8.64%
Intercontinental Exchange 4.79%
Generation Investment Management LLP 2.98%
Fidelity (Institutional Group) 2.63%
William Blair & Company, LLC 2.45%
Deutsche Wertpapierservice Bank Ag - Custodian 2.33%
Ontario Teachers' Pension Plan Board 2.11%
Jupiter Asset Management Ltd 1.29%

We'll have more on who benefits from the transaction later today. For now here are some of our posts on CLE and it's subsidiary, Chicago Climate Exchange:

Richard Sandor, Barack Obama and the Founding of the Chicago Climate Exchange (CLE.L)
Meet The Energy and Environmental Markets Advisory Committee (EEMAC)

Carbon Trading: How to (Maybe) Make Money Out of Thin Air: And One of my Favorite Carbon Cowboy Quotes

From the Financial Times:

ICE snaps up Climate Exchange for £395m

Climate Exchange, the UK-listed operator of US and European carbon emissions trading platforms, was on Friday set to be snapped up by IntercontinentalExchange after its board recommended a cash offer from the US exchange operator valuing the group at £395m ($604m).

The move puts the spotlight on a company that has grown from modest beginnings as the Chicago Climate Exchange (CCE) to become the world’s largest operator of carbon emissions with a UK listing.

For IntercontinentalExchange, also known as ICE, the purchase marks a bold move into emissions trading after a string of acquisitions that have built the business into one of the world’s largest energy and commodity trading business in only a decade since the company was formed.

ICE’s last strike on a London-based business was in 2001, when it bought the International Petroleum Exchange, home to the world’s trading in Brent crude oil.

ICE also operates regulated exchanges, over-the-counter (OTC) trading platforms and clearing houses that handle markets for agricultural, credit, currency, emissions, energy and equity index markets.

The purchase of Climate Exchange comes almost a year after ICE bought a 4.8 per cent stake in the business at 644p a share. Friday’s offer was at 750p a share. Analysts at KBC Peel Hunt said: “It has long been obvious that CLE would fit attractively into ICE’s portfolio.”

Climate Exchange has three main businesses: European Climate Exchange, which trades certificates for mandatory European Emissions Trading Scheme; Chicago Climate Exchange (CCX), which operates the world’s first voluntary cap-and-trade system for greenhouse gas emissions reductions; and the Chicago Climate Futures Exchange, a regulated exchange in the US for environmental futures contracts.

CCX was founded in 2001 by Richard Sandor, a former economist at the Chicago Board of Trade credited with pioneering the cap-and-trade business in the US and later abroad.

Jeff Sprecher, ICE chief executive and founder, said: “The combination of Climate Exchange’s emissions markets and ICE’s futures and OTC energy markets is an important and logical strategic combination for our customers and shareholders.

“The leadership that Climate Exchange has shown in establishing market standards in Europe, and increasingly the US and Asia, has driven its success and we see continued growth opportunities within these nascent markets globally,” Mr Sprecher said.

KBC Peel Hunt said ICE had “timed its deal cleverly”.

“Carbon trading volumes in Europe have hit a new monthly high on carbon prices at last on the move. Sentiment over the US introducing cap-and-trade had just been hit,” the broker said.

Thursday, April 29, 2010

"Mount Vesuvius Eruption Could Cause 21,000 Casualties, Economic Losses of $24 Billion" (WSH)

From Willis:
A major eruption of Italy's Mount Vesuvius could result in 8,000 fatalities, 13,000 serious injuries and total economic losses of more than $24 billion, according to a new study supported by the Willis Research Network (WRN) that puts Vesuvius at the top of the list of Europe’s 10 most dangerous volcanoes....

...The WRN European volcano risk ranking below shows the number of people living in the area that could be affected by 25 cm of ash fall in the assumed greatest eruption. It also shows the total residential property value exposed to severe damage or destruction in that eruption, taking into account the total number of dwellings within possible reach of pyroclastic flows or 25 cm ash fall and their full current reconstruction cost. While the Caribbean volcano of Soufrière Saint Vincent is not on European soil, it has been included in the top 10 due to the significant impact that an eruption would have on European territory....MORE

VolcanoCountryAffected populationValues of residences at
risk (US $ billion)
1.VesuviusItaly 1,651,95066.1
2.Campi FlegreiItaly144,1447.8
3.La Soufrière GuadeloupeGuadeloupe, France94,0373.8
5.Agua de PauAzores, Portugal34,3071.4
6.Saint VincentSaint Vincent, Caribbean24,4931.0
7.FurnasAzores Portugal19,8620.8
8.Sete CidadesAzores Portugal17,889 0.7
10. Mt PeléeMartinique, France10,0020.4
The press release juxtaposed this bit:
Willis In History

Did you know Willis was the broker for the first “project finance” coal fired power project to be constructed in China?

Thoughts on Facebook's Valuation: "Facebook is a Ponzi Scheme" (off-topic)

We do have interests outside of energy, macro, fat cats and erupting volcanoes.
Such as this Bloomberg headline from last month:
"Facebook Valued at $11.5 Billion in SharesPost Index".
We looked at the "Private-market exchanges" a few times last year. In "Nasdaq Progressing On New Private-Market Exchange" I said:
The WSJ's Venture Capital Dispatch blog has been on top of what I think will be a big story in the next couple years. Any time you have a business that occupies a space at the interstices of regulation you have the opportunity for outsize returns on equity for the creators and all kinds of interesting effects for the end user....
More on SharesPost at "Private Equity, Venture Capital: "SharesPost Enables Trading of Green Startups"'.

The other thing about the headline is that valuation figure.
Holy Hannah!.

Here's one possible explanation from Joseph Javier Perla:

Now that you know what a Ponzi scheme is, I will tell you how and why
Facebook is a Ponzi Scheme.

Facebook posts huge revenues. In fact, they recently asserted that
they are EBITDA profitable. This boosts both their respect in the
world and their valuation. However, these returns, while real, are
unsustainable. They exist and are sustained in the same manner that
Ponzi schemes are. Facebook is a Ponzi Scheme.

Have you ever bought a Facebook ad? I have. I have talked to many,
many people who have. We have spent hundreds, many have spent
thousands or even more, experimenting with Facebook ads. They are
worthless. Nobody ever looks at them, and nobody ever clicks on them.
I just talked to someone who was trying to promote a book. He found
it cost him over $100 in ads to sell one book. Moreover, as you
increase your ad spending, people get used to the ads and just ignore
them. So, your already low click-through rate goes down even further.

People go to Facebook to interact with their friends. It is
fundamentally different from the ad platform that is Google. People
go to Google to find something they need, which a good percentage of
the time can in fact be solved by someone's ad. Facebook ads, on the
other hand, annoy users. They yield no real profits.

But, then, how is Facebook so profitable? Are they lying? No. They
are growing. More and more people get on Facebook, and more and more
businesses hear about how many people are on Facebook. It seems like
a huge opportunity. So each business individually and in turn
experiments with Facebook ads. They spend hundreds or thousands or
more on Facebook ads. At the end of the first run, they see bad ROIs.
They tweak the ads and spend more money and try again. Nothing. So
they stop, understanding that Facebook ads are worthless. Everyone
I've talked to who has actually bought Facebook ads knows this. But,
not everyone has bought Facebook ads yet. There are still more and
more new businesses finding out about Facebook ads. As they grow,
even more businesses give their money to experiment in destined

Eventually, though, and this might take a long time, but it is finite,
everyone will have tried Facebook ads and know that they are useless.
Eventually, after 10 million businesses have invested $1000 each, and
Facebook has earned $10 billion in revenue in total, then they will
have run out of new customers and their revenue will dry up. A
useless product is never sustainable. I wish I could short Facebook....MORE

Treasuries: "Size Buyer now a Size Seller"

From Bruce Krasting:
The Social Security Trust Fund released some data today. There are some conclusions and observations to be drawn. But first, for the history buffs, I want to show you a “Tipping Point”. I think the exact date was March 3rd or 4th. It was sometime in the 1st Q of 2010 that the SSTF went negative since Greenspan fixed things in 1983.

In March the CBO came up with a forecast for the fiscal year at a $29B deficit. I look at things on a calendar year basis. My number for the year is -$50 billion in cash flow (excludes interest). The components:

Payroll Tax: $640b
Tax on Income: $24b
Total in: $664b

Benefits: $703b
R.R. Ex.: $5b
Adm: $6b
Total out: $714b

Net Decrease in Cash: $50 billion

The significance of this is that the US Treasury will have to fund this shortfall. They will have to sell an additional $50b of debt into the public market. This $50b has nothing to do with what we call the deficit. This is money we have to borrow in addition to the deficit.

In prior years the SSTF has generated big cash surpluses. This cash was invested in Treasury securities that had an average life of 8 years and maturities ranging out to fifteen years. The TF was a great place to sell bonds. Their big appetite for long duration securities helped fund our deficits and extend the average life of our debt profile. But not any longer. That ‘tipping point’ is the first step on the way to a very steep staircase....MORE

"MEMC Q1 Revs Beat Street View; But Reports Unexpected Loss" (WFR)

In late after-hours trade the stock is down 6.66% at $14.88.
From Tech Trader Daily:
MEMC Electronic Materials (WFR) this afternoon reported Q1 revenue of $437.7 million, up 23% from Q4, and 105% from a year ago. Excluding the company’s acquisition of SunEdison, revenue was up 7% sequentially and 76% from a year ago. The company posted a loss for the quarter of 4 cents a share; the Street had expected a profit of 4 cents....MORE
From Reuters:

MEMC Electronic Materials, Inc. Reaffirms FY 2010 EPS Guidance; May Exceed High End Of Prior FY 2010 Revenue Guidance

MEMC Electronic Materials, Inc. announced that after considering the first quarter results the Company still believes that its fiscal 2010 guidance for revenue, earnings per share (EPS) are appropriate, however, its current outlook does suggest that fiscal 2010 revenue may exceed the high end of the previously guided range. According to Reuters Estimates, analysts were expecting the Company to report EPS of $0.77 on revenues of $1.844 billion for fiscal 2010.
From Schaeffer's Research (Prior to the announcement):

MEMC Electronic Materials (WFR) is slated to release its quarterly earnings report after the close tonight, with analysts looking for a profit of 4 cents per share. During the same quarter last year, the company earned a penny per share. Historically, WFR has missed Wall Street's expectations twice, matched once, and beat once, resulting in an average downside surprise of 12.5%.

Options traders have favored calls heavily leading up to the event, according to data from the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE). Specifically, the stock's 10-day ISE/CBOE call/put volume ratio of 6.26 indicates that calls bought to open have outstripped puts purchased by more than six to one. However, this ratio rests in the 43rd percentile of its annual range, indicating that there is plenty of room on the bullish bandwagon.

But this swell in call buying may not be related to bullish option positions at all. During the past month, the number of WFR shares sold short spiked by 36.7%, resulting in nearly 11% of the stock's float being sold short. Given that short interest and call buying are rising in tandem, we could be witnessing bearish investors hedging their positions ahead of the company's quarterly report.

Technically, WFR appears to be in the process of rolling over after losing out to overhead resistance in the 17 region. The shares have pulled their 10-day and 20-day moving averages into a bearish cross, and are currently being squeezed into support at the 15 level.

WFR chart

"With Aid to Bolivia, Japan Locks in Lithium" ooops "Bolivia slams Japan mining firm for 'plundering' resources" (PKX)

Butch Cassidy:

Kid, the next time I say, "Let's go someplace like Bolivia," let's go someplace like Bolivia.
- Butch Cassidy & the Sundance Kid (1969)

I've been on the Bolivia beat for a while. A Google search of the site comes up with 1110 hits. Can't be right, I can still type.

I've come to believe that dealing with Mr. Morales yields results akin to those of the Molotov/Ribbentrop pact.*
First up, MatterNetwork, April 6, 2010:

In the quest to secure the raw materials that are required to build next generation automobile batteries and motors, Japan seems to have grasped the importance of locking down supplies now.

A report in the Japanese Nikkei newspaper says that Japan will loan tens of billions of yen to Bolivia this summer to help them build modern power plants and put solar panels on a hospital. In exchange, Japan will get guaranteed access to Bolivia’s vast supplies of lithium. Sometimes the difference between “bribery” and “help” can be so blurry....MORE

From Agence France-Presse April 18:
Bolivia's foreign minister accused a Japanese mining subsidiary Sunday of "plundering" natural resources in the South American country while exploiting lead and silver, amid a dispute between the firm and local farmers.

Foreign Minister David Choquehuanca told local media that San Cristobal, a company owned by Japanese trading giant Sumitomo, "doesn't pay a cent" for its consumption of some 600 liters (158 gallons) of water per second for its metal mining operations....MORE

From TradingMarkets, April 22:

S. Korean companies to help Bolivia develop lithium industries

South Korean companies will conduct research for Bolivia to help the South American nation develop its lithium resources and related industries, the government said Tuesday.

The Ministry of Knowledge Economy said 13 companies including GS Caltex Corp., POSCO and state-run Korea Resources Corp. will conduct joint research projects to determine the ideal infrastructure needed to make best use of the material by August. The Korea Institute for Industrial Economics and Trade will also take part in the evaluation effort....MORE

Finally, from New Straits Times, April 26:

Japan to search seafloors for rare metals

apan plans to scour the seafloors in its exclusive economic zone for rare metals needed in high-tech products in a drive that may irritate Asian rival China.

Prime Minister Yukio Hatoyama’s cabinet is expected to approve as early as June the national strategy on securing undersea resources, the Kyodo News agency reported, citing a copy of the government document.

Japan and its Asian rivals are scrambling to secure rare metals needed for a range of products from fuel-efficient hybrid cars and batteries to cellphones and liquid crystal display televisions.

Last year the Japan Agency for Marine-Earth Science and Technology announced plans to send robotic submarines to study areas near seabed volcanos, where so-called hydrothermal vents belch out minerals.

Experts believe exploiting those remote and hard-to-reach deposits will become feasible despite the huge technical challenges and expense, as certain minerals become more scarce worldwide.

Under the new strategy, resource-poor Japan eyes exploring the seabed within its exclusive economic zone (EEZ), an area which extends 200 nautical miles (370 kilometres) offshore or to the half-way points to neighbouring countries.

The areas to be explored cover 340,000 square kilometres (136,000 square miles) of the East China Sea and the Pacific, Kyodo said....MORE
*The pact was the non-aggression treaty between Hitler and Stalin, signed on August 24, 1939.

Eight days later the Nazis invaded Poland.
On June 22, 1941 Hitler invaded the Soviet Union, thus terminating the agreement.

See also the German–Soviet Commercial Agreement of 1940 and the German–Soviet Border and Commercial Agreement of 1941.

Warren Buffet through BRK owned 3,947,554 shares of Posco (PKX), 5.2%, as of Dec. 31, 2009. His $768Mil. investment was worth $2.1Bil. in the last annual report.

"Put Speculators Storm SunPower Corporation" (SPWRA; SPWRB)

The stock is trading at $16.86 up 48 cents.
Back in our Dec. 1 post "Pacific Crest's Bachman on SunPower - Buy Equal Parts SPWRA and Antacid (SPWRA)" I said:
Although it popped yesterday and is up another dollar today, Sunpower has been a miserable performer the last few months, what with the accounting issues. I don't think it has washed out quite yet and see no reason to chase it. Last trade $21.68, up $1.01....
The stock hit an all-time low on Tuesday.
If the market were to head south Sunpower could double the market's loss, there are better plays.
From Schaeffer's Research:

Put players pounced on SunPower Corporation (SPWRA) on Wednesday, as the shares of the solar concern tumbled to a record low. The equity was likely responding to rival First Solar's (FSLR) pending $285 million acquisition of NextLight Renewable Power LLC, which includes a 1,100 MW project pipeline expected to "complement [the company's] project portfolio," according to Chief Executive Rob Gillette.

By the closing bell, SPWRA saw roughly 7,900 puts cross the tape, more than quadrupling its expected daily volume of fewer than 1,900 puts. However, digging deeper into the data indicates that a healthy portion of yesterday's put traders weren't necessarily bearishly biased toward the stock.

The security's now-near-the-money June 16 put was most active, with close to 3,300 contracts exchanged. Put open interest at the back-month strike swelled by almost 3,000 contracts overnight, confirming our suspicions of newly added positions. However, 96% of the puts changed hands at the bid price, suggesting they were likely sold.

By selling to open the June 16 puts, the writers are expecting the shares of SPWRA to remain north of the $16 level through June options expiration. In this best-case scenario, the sold puts will expire worthless, allowing the traders to pocket the premium received at initiation, which represents the maximum potential reward on the play....MORE

Cowen's Stone, Auriga's Bachman Comment on First Solar (FSLR)

The stock gapped up and is currently trading at $148.35, up $20.22.
I can't recall a single instance where FSLR gapped and didn't (eventually) fill the gap.

These are two of the better analysts covering the solars.
Two from SmallCapPulse:

Cowen’s Stone Comments on First Solar Results - Reiterates Outperform

Analyst Comments – Cowen’s Rob Stone commented on First Solar’s (Nasdaq:FSLR) results this morning, which he noted were better than 23% higher than Street estimates and P&L which “was better on every line.” Stone reiterated his OUTPERFORM rating, raised 2010-13E EPS and sees 30%+ upside for the stock vs. the market in 12 months.
Bachman Comments on First Solar (Nasdaq:FSLR) Results - Raises Price Target, Maintains HOLD
Analyst Comments – Mark Bachman commented on First Solar’s (Nasdaq:FSLR) Q1 results, noting that “Our call to be short into the Q1 earnings call was terrible as we were caught by three surprises yesterday.” He maintains a HOLD recommendation and a $147 price target.

Cape Wind Approved, Kennedy Family on Board, Patriarch Joe Wasn't a Bootlegger!

I was tempted to add "Dogs stop chasing cats".

First some history. Here's some on-the-ground reporting of the issues:

The Daily Show With Jon StewartMon - Thurs 11p / 10c
Jason Jones 180 - Nantucket

The Kennedy clan vehemently opposed Cape Wind with such cogent arguments as:

But don't you realize, that's where I sail
-Ted Kennedy, quoted in "Cape Wind:..."
The sight of them bothers me

Ted's nephew, Robert Kennedy, Jr. argued in a 2005 New York Times Op-ed:
...These turbines are less than six miles from shore and would be seen from Cape Cod, Martha's Vineyard and Nantucket...
Now, in a 180-degree change of position, the Kennedys, in solidarity with the project, have embarked on a major transformation of the house that Joe bought with his Wall Street winnings* in 1928:

Here's the eco-friendly Kennedy family's Compound, from the water

That's not all.
In a major revelation Matt Welch directs us to a Michael Okrent Daily Beast article by saying:
So, as Radley Balko pointed out this morning, Joe Kennedy may not have a bootlegger after all. Instead, he was an incredibly well-connected transatlantic political insider and business partner with the president's son who obtained exclusive liquor-import contracts from abroad (while noshing with various current and future prime ministers) and medicinal liquor permits at home, using both to make a bundle selling alcohol during Prohibition. Which is just so much better....
Here's the New York Times on the official okey-dokey:
Big Wind Farm Off Cape Cod Gets Approval
*As I explained in 2007's "Robert Kennedy Jr., Global Warming and Wall Street", Joe Kennedy was involved in some of the largest stock manipulations of the late '20's:
Already a wealthy man Joe Kennedy had another Wall Street trick up his sleeve, a classic pump-and dump. In 1929 he and some other rascals got together to run the .com of the day, Radio Corporation of America.

What a run it was! The pool picked up $5 million in ten days. My BLS inflation calculator says that's a bit over $60 million today (although the PBS special linked below says $100 million).

When the question arose as to who should manage the pool the answer was easy. Who better than the specialist in the stock, Michael J. Meehan! PBS did a good job on their show "The Crash of 1929", even interviewing Meehan's grandson. Here are some of my links, Senate Hearings (4 page PDF), 1948 SEC chief counsel memo on the Act of '33 (5 page PDF), Colliers story on the early SEC.

One of Joe Kennedy's most quoted comments:
"It's easy to make money in this market," said Kennedy, famously, to an associate. "We'd better get in before they pass a law against it."
It must run in the family "We got ours, now you, git..."

Wednesday, April 28, 2010

"First Solar to add 4 new production lines: sold out through 2010" (FSLR)

Following "First Solar Preview: It's About the Outlook" (FSLR)'.
From PV-tech:
Although quarterly net sales were down US$73.3 million from the previous quarter due to a shift from turnkey system sales to module sales, demand for First Solar’s thin film modules remains strong and the company is adding a further 4 production lines with a capacity of 220MW. The location of the new lines will be disclosed as soon as legal procedures have been completed. The plant is expected to begin production in the fourth quarter of 2011. Production for the first quarter reached 322MW, up slightly from 311MW in the previous quarter. Quarterly net sales for the first quarter of 2010 were reported as US$568.0 million. For 2010, First Solar forecasts net sales of between US$2.6 and US$2.7 billion, up from US$2,066.2 million in 2009.

Annualized capacity per line continued to increase as the company is running a full capacity at existing production lines. In the first quarter each line was able to reach an output of 55.7MW, up from 53.4MW in the previous quarter. This is another new record output level for the company.

Interestingly, the company is shifting module supply to meet demand from distributors and other customers primarily from Germany and are having to move some utility-scale projects into 2011 to accommodate.


"How to Invest in Caterpillar" (CAT; ETN; PH; TKR)

This is a couple days old but worth a bookmark. CAT led the market up when they reported earnings (I think it was 2/3 of the move in the DJIA) and led the market down yesterday.
From Barron's:

Investors should invest in the companies that supply components to the heavy machinery maker.

CATERPILLAR'S (CAT) STOCK price performance, in the past year, resembles the earth-moving machinery that the company sells -- massive and powerful.

The company beat analyst estimates for the first quarter, earning 50 cents per share versus expectations of 39 cents, and it raised its 2010 guidance. Comments from top executives painted a bullish picture of the global economy.

"Industry activity and orders are significantly higher than last year and are at record levels in some areas," said Chairman and Chief Executive Officer Jim Owens.

Strong results sent shares 5% higher, to $71.95, in midday trading on Monday. The stock, which reached a 52-week high of $72.83 during the session, has more than doubled in the past year.

Though the results were admirable, if you're looking for a way to play growth in construction and mining, there are smaller and more nimble companies for the job (more on that below)....

...It would make more sense to buy components companies like Timken (TKR), electrical component maker Eaton (ETN) and Parker-Hannifin (PH), Lustgarten says.

"They're all supplying components to Caterpillar and other companies," he says. "They're as cheap or cheaper than Caterpillar. The valuations are much more attractive."

Caterpillar also stressed the strength of their mining business, which could bode well for other companies that profit off of mining, like equipment maker Bucyrus International (BUCY), says Michael Jaffe, a Standard & Poor's equity analyst who rates Caterpillar's shares at Buy. One of Jaffe's colleagues rates Bucyrus at Strong Buy.

Bucyrus is trading at a more reasonable multiple of 14 times 2011 earnings.

"If Caterpillar is enthused about mining markets, certainly a company like Bucyrus which has more of a focus on mining should get a lift too," Jaffe says....MORE

On the other hand I first thought this MSNBC story was about CAT analysts (Mr. Jaffe excluded, of course):

Civilized caterpillars talk with their butts

"First Solar Posts Surprise Profit Growth On Strong Demand" (FSLR)

The Dow Jones headline seemed to say it best.
The stock is trading up $8.37 at $136.50.
From The Wall Street Journal:

First Solar Inc. (FSLR) posted a surprise jump in its first-quarter profit, mainly due to higher sales of the manufacturer's low-cost photovoltaic modules and increased production, which offset lower margins.

The company lifted its full-year earnings target but lowered its revenue expectation, citing a reallocation of module capacity from the company's systems business to meet stronger demand in Europe.

It now sees earnings of $6.80 to $7.30 on revenue of $2.6 billion to $2.7 billion, compared with the company's March view of a profit of $6.05 to $6.85 on sales of $2.7 billion to $2.9 billion.

Shares rose 4.4% to $133.95 in after-hours trading.

Solar companies are expected to report mostly stronger first-quarter results, after many fell into the red a year ago when sales plummeted on tighter credit conditions and an oversupply of its products, which lowered prices.

First Solar, however, has posted surging revenue during the economic downturn as demand remains high for its products, which are less efficient than silicon-based panels but also less expensive. Lazard Capital Markets said First Solar was "ideally positioned to leverage and potentially facilitate the long-term growth of the solar industry."

On Wednesday, First Solar posted a profit of $172.3 million, or $2 a share, up from $164.6 million, or $1.99 a share, a year earlier. Year-earlier results included a 14-cent benefit related to the company's Malaysian tax holiday. Revenue climbed 36% to $568 million.

Analysts surveyed by Thomson Reuters projected a profit of $1.63 on revenue of $541 million.

Gross margin slid to 49.7% from 56.3%.>>>MORE

"First Solar Preview: It's About the Outlook" (FSLR)

UPDATE III: "Cowen's Stone, Auriga's Bachman Comment on First Solar (FSLR)"
"First Solar to add 4 new production lines: sold out through 2010" (FSLR)
"First Solar Posts Surprise Profit Growth On Strong Demand" (FSLR)
Original post:
Following up on yesterday's "Auriga Sees First Solar Entry Point Coming" (FSLR)"'.
From The
First Solar(FSLR) bears took aim at the U.S. solar bellwether's latest acquisition on Wednesday morning, and the skepticism goes right to the heart of concerns from the Street headed into First Solar's earnings report, scheduled for after the market close on Wednesday. How does the large-scale solar project development business play out in the second half of 2010?

The expectations for First Solar's earnings report are consistent with the general notion that solar companies will have a strong first quarter, with shipment levels buoyed by the ridiculous levels of demand in Germany ahead of the feed-in tariff cuts in solar's largest market.

There are analysts, like Mark Bachman of Auriga Securities, who believe that consensus expectations for First Solar are setting up the U.S. solar company for an earnings headline miss after the market close on Wednesday.

Yet for the most part, analysts seem more concerned about the outlook for the second half of the year, when the insatiable appetite in Germany for solar modules wanes and First Solar has to focus on the still unproven, lower margin utility-scale solar business .

Case in point: even Wedbush Securities analyst Christine Hersey, who has been a bear on First Solar shares for some time already, is slightly ahead of the Street consensus estimate for first quarter earnings per share from First Solar.

The Street is expecting $1.61 to $1.65 per share earnings from First Solar.

The criticism from Wedbush's Hersey and other skeptical analysts about the First Solar outlook was triggered again on Wednesday morning when First Solar announced a $285 million purchaseof a southwestern U.S. project pipeline of 1.1 gigawatts.

The Street is concerned about the changing nature of the First Solar profile, as more of its business -- by its own previous guidance -- shifts to the lower margin, large-scale solar project market in the second half of the year. Even the analysts who remain convinced of the First Solar strategy remain unsure of how to model the shift to the lower margin systems business.

Steven O'Rourke, an analyst at Deutsche Bank Securities, said investors are focused on how the project development business plays out throughout 2010. "Investors want clarity and detail on when projects will land and how to layer the project development business into the financial model," the Deutsche Bank analyst said. "What will hit and when it will hit is the unknown," O'Rourke said....MORE


Two old trader sayings come to mind:
a) As soon as you think you've found the key, they go and change the lock.
b) You can connect any two points. It takes three to make a fence line.
That said, here's Pragmatic Capitalist:

Great note this morning from the always informative David Rosenberg. Mr. Rosenberg notes something that we have highlighted in the past – China as a leading indicator. In this case, Mr. Rosenberg highlights China’s high leading correlation with commodities. Is China forecasting a decline in commodity prices? Rosenberg elaborates:

“To very little fanfare, the Chinese stock market — the first index to turn around in late 2008 — has slipped into a bear market. It is down 15 % from the nearby high and 20% from last year’s interim peak. Why this is important is because the Shanghai index leads the CRB commodity spot price index by four months with a 72% correlation (and over an 80% correlation with the oil price). Don’t get us wrong — we are long-term secular commodity bulls; however, we have been agnostic this year from a tactical standpoint — never hurts to take profits after a double!”


Source: Gluskin Sheff

Regular readers know we haven't been all that impressed with Mr. Rosenberg these last thirteen months but every dog has his day and besides, this possible correlation is just between him, us, and the internet.

"Venezuela's Hugo Chavez takes to Twitter"

From the Washington Post:
Hugo Chavez is starting to use Twitter to counter his opponents online, forcing a president who often talks for hours to sum up each thought in 140 characters or less.

Chavez urged Venezuelans to watch his newly created account - chavezcandanga - after midnight Tuesday, saying "at that point is when I let loose."

His first tweet in Spanish popped up at 14 minutes after midnight: "Hey how's it going? I appeared like I said I would: at midnight. I'm off to Brazil. And very happy to work for Venezuela. We will be victorious!!"

By late Tuesday, the socialist leader had more than 18,000 followers before posting a single tweet, and that increased to more than 23,000 early Wednesday....MORE


Fidel: "Cool, More Time to Blog!"

Breaking: "Chavez to join the blogosphere"
That's what the world needs, more goofy-assed dictator bloggers.
Mugabe anyone?
Just think what Mussolini could have done with the medium.*...
...*He did have stuff to bitch about:

From Drexel University's Smart Set:

Scent of a Führer
Hitler wanted to control the world. But he couldn't even control his flatulence.

Guests at the Berghof, Hitler’s private chalet in the Bavarian Alps, must have endured some unpleasant odors in the otherwise healthful mountain air....

Mussolini and Hitler
The dictator who smelt it, dealt it.

"Fannie Mae owns patent on residential 'cap and trade' exchange" (FNM)

Seeing what a fine job the GSE's did with their core businesses, what the hell, let's have at it.
Why am I reminded of the monoline insurers.
From the Washington Examiner:

When he wasn't busy helping create a $127 billion mess for taxpayers to clean up, former Fannie Mae Chief Executive Officer Franklin Raines, two of his top underlings and select individuals in the "green" movement were inventing a patented system to trade residential carbon credits.

Patent No. 6904336 was approved by the U.S. Patent and Trade Office on Nov. 7, 2006 -- the day after Democrats took control of Congress. Former Sen. John Sununu, R-N.H., criticized the award at the time, pointing out that it had "nothing to do with Fannie Mae's charter, nothing to do with making mortgages more affordable."

It wasn't about mortgages. It was about greenbacks. The patent, which Fannie Mae confirmed it still owns with Cantor Fitzgerald subsidiary, gives the mortgage giant a lock on the fledgling carbon trading market, thus also giving it a major financial stake in the success of cap-and-trade legislation.

Besides Raines, the other "inventors" are:

* Former Fannie Vice President and Deputy General Counsel G. Scott Lesmes, who provided legal advice on Fannie Mae's debt and equity offerings;

* Former Fannie Vice President Robert Sahadi, who now runs GreenSpace Investment Financial Services out of his 5,002-square-foot Clarksburg home;

* 2008 Barack Obama fundraiser Kenneth Berlin, an environmental law partner at Skadden Arps;

* Michelle Desiderio, director of the National Green Building Certification program, which trains "green" monitors;

* Former Cantor Fitzgerald employee Elizabeth Arner Cavey, wife of Democratic donor Brian Cavey of the Stanton Park Group, which received $200,000 last year to lobby on climate change legislation; and

* Jane Bartels, widow of former CEO Carlton Bartels. Three weeks before Carlton Bartels was killed in the Sept. 11 attacks, he filed for another patent on the software used in 2003 to set up the Chicago Climate Exchange.

The patent, which covers both the "cap" and "trade" parts of Obama's top domestic energy initiation, gives Fannie Mae proprietary control over an automated trading system that pools and sells credits for hard-to-quantify residential carbon reduction efforts (such as solar panels and high-efficiency appliances) to companies and utilities that don't meet emission reduction targets. Depending on where the Environmental Protection Agency sets arbitrary CO2 standards, that could be every company in America.

The patent summary describes how carbon "and other pollutants yet to be determined" would be "combined into a single emissions pool" and traded -- just as Fannie's toxic portfolio of subprime mortgages were.

"Fannie Mae earns no money on this patent," communications director Amy Bonitatibus told the Washington Examiner. "We can't conjecture as to the cap-and-trade legislation."....MORE

Greece: "Exposure fears weigh on French, German banks"

From MarketWatch:

Banks with local subsidiaries, government-lending exposure most at risk

Banks in France and Germany have the biggest exposure to Greece of non-Greek lenders are also heavily exposed to other potentially at-risk countries, with those firms that operate local subsidiaries or with big local-authority funding activities likely to face the heaviest losses, analysts said.

The latest figures from the Bank for International Settlements show French banks have $75.2 billion of exposure to Greek borrowers, while the industry in Germany has an exposure of $45 billion. The U.K. trails a relatively distant third, with exposure of $15.1 billion.

Shares fell heavily across the European banking sector Wednesday as fears over a potential sovereign debt default escalated, with essentially untradeable two-year Greek debt indicating yields north of 30%. Also see Europe Markets.

"The sell-off in Greek bonds is likely to make banks at least consider the valuations of these assets, in our view, so write-downs are potentially possible," said analysts at Nomura in a note to clients.

As major holders of sovereign debt, banks would suffer in any default or debt restructure, but Nomura said it believes Greek exposure is unlikely to be material to valuation for most banks.

"Where there is potential for bigger losses, in our view, are banks that firstly have significant local businesses in affected markets, and secondly banks that undertake local authority funding activities," the broker added.

Among banks with local businesses in Greece are Credit Agricole (FR:ACA 11.07, -0.41, -3.54%) , which dropped 3.7% on the Paris market Wednesday, and Societe Generale (FR:GLE 40.88, -0.18, -0.44%) , which fell 1.1%.

Major local authority lenders include Germany's Commerzbank (DE:CBK 5.99, -0.08, -1.30%) and Belgium's Dexia (BE:DEXB 4.16, -0.08, -1.89%) , which both declined around 2%, though neither has disclosed their exposure, if any, to either Greece or Portugal....MORE

I saw something cross the wire that BNP said their exposure was minimal.

UPDATED: "Greece Bondholders May Lose $265 Billion in Default" and "Which countries are exposed to Greece?"

UPDATE: From FT Alphaville: "Who’s exposed to Greece? (II)"
Original post:
First up, Bloomberg:
Holders of Greek bonds may lose as much as 200 billion euros ($265 billion) should the government default, according to Standard & Poor’s.

The ratings firm yesterday cut Greece three steps to BB+, or below investment grade, and said bondholders may recover only 30 percent to 50 percent of their investments if the nation fails to make debt payments. Europe’s most-indebted country relative to the size of its economy has about 296 billion euros of bonds outstanding, according to data compiled by Bloomberg.

The downgrade to junk status led investors to dump Greece’s bonds, driving yields on two-year notes above 25 percent today from 4.6 percent a month ago as concern deepened the nation will delay or reduce debt payments. Prime Minister George Papandreou is grappling with a budget deficit of almost 14 percent of gross domestic product.

“It’s now not just market sentiment, but a top rating agency sees Greek paper as junk,” said Padhraic Garvey, head of investment-grade strategy at ING Groep NV in Amsterdam.

The yield on Greece’s 4.3 percent security due March 2012 surged 531 basis points, or 5.31 percentage points, to 24.3 percent as of 10:50 a.m. in London, after earlier climbing to a record 25.38 percent. Before yesterday, Greece’s bonds had lost about 17 percent this year, according to Bloomberg/EFFAS indexes. Yields move inversely to bond prices....MORE

And from FT Alphaville:

Readers wondering which countries stand to lose the most from a Greek default can turn to Germany’s Spiegel, which provided the following graphic on Wednesday:

(H/T Marc Ostwald, Monument Securities).


Just curious.
They ran the 200,000 options trade on Thursday.
Good Timing.

Tuesday, April 27, 2010

"Eurozone Contagion: Here’s What’s At Stake"

Two from MarketBeat:

As Greece fears continue to roil the markets – along with a dose of concern about Portugal and other euro zone nations – we thought we’d dig a bit deeper into what exactly is at stake.

Markets clearly are pushing for a solution on Greece. Yet all that seems to be emanating from European capitals are more words. In the meantime, real concerns about the fate of European banks are piling up.

“The bailout cost is growing by the minute like some rigged meter in a NYC taxi cab or the U.S. debt clock in Union Square,” writes David Gilmore, a partner at Foreign Exchange Analytics. Gilmore penned a piece that that caught our attention here at Marketbeat, laying out the high stakes on the table now:

“For some in the market the Greek debt crisis has always been about the European banking system…collateralized by ‘risk-free’ sovereign paper from some less than ‘risk-free’ sovereign credits. Tons of debt issued by Greece, Spain, Portugal (not too different from AAA rates subprime MBS) and yes Italy support the banking system in the Euro Zone as collateral for borrowing from the ECB and from other banks, as well as a place to capture yield. Well when markets discern that ‘risk-free’ sovereign debt is not really “risk-free” the inevitable run on weak credits starts. And like the subprime-driven run on banks in 2008, officials only add to downside risk as they assume the problem is contained.”

Gilmore says financial markets – which pushed the euro to a 12-month low Tuesday afternoon below $1.32 after S&P slashed Greece’s credit rating to junk and sliced Portugal two notches – are agitating for an extreme solution to the problems surrounding the “Club Med” countries....MORE


Everett Digital

Contagion. It seems to be the word of the moment judging from some of the market notes we’ve been getting here at MarketBeat central.

Just as a refresher, contagion is what we’re seeing over in Europe today. It describes a sort of like a domino theory of how market fear spreads. And it seems to be gathering strength from ongoing uncertainty over exactly when and how Greece would be bailed out by its more affluent neighbors. Here are some of the thoughts we’ve been reading lately.

Ticonderoga Securities: “Fear of peripheral contagion today is taking back equity gains earned in Europe yesterday when the travails of the bond market related to failure of arriving at agreement by authorities with a defined mechanism to help resolve the Greek fiscal and debt crisis was little felt by the bourses of Europe.”

Nomura Securities: “The Greek situation [is] now looking like it is morphing into some sort of contagion risk.”>>>MORE

"European Central Bank may have to turn to 'nuclear option' to prevent Southern European debt collapse" (20% haircuts?)

Gather round kids while Uncle Ambrose tells us about the spring of 2010. From the Telegraph:

The European Central Bank may soon have to invoke emergency powers to prevent the disintegration of Southern European bond markets, with ominous signs of investor flight from Spain and Italy.

Greece’s fortunes were dealt yet another blow as Standard & Poor’s slashed its credit rating to junk status - BB-plus - the first time that has happened to a euro member since the euro currency was created, pushing yields on 10-year Greek bonds up to a record 9.73pc.

The credit rating agency also cut Portugal’s sovereign debt ratings by two notches to A-minus, as the swirling storm hit the country with full force. Yields on 10-year Portuguese bonds spiked 48 basis points to 5.67pc, replicating the pattern seen in the onset of the Greek crisis.

“This feels like the banking crisis in late 2008 post-Lehman, though it has not yet spread to other asset classes. I think the ECB will have to act it if does,” said Jacques Cailloux, chief Europe economist at the Royal bank of Scotland.

Portugal’s public debt will be just 84pc of GDP by the end of this year, far lower than that of Greece at 124pc. However, its private debt is much higher and data from the IMF shows that its external debt position is worse. Interest payments on foreign debt will be 8pc of GDP this year. Portugal’s net international investment position is minus 100pc of GDP, the worst in the eurozone.

“We have gone past the point of no return: there is a complete loss of confidence,” said Mr Cailloux. “The bond markets are in disintegration and it is getting worse every day. The ECB has been side-lined in the Greek crisis so far, but do you allow a bond crash in your region if you are the lender-of-last resort?” he asked.

“They may have to act as contagion spreads to larger countries such as Italy, and we started to see the first glimpse of that today,” he said. The interest rate on a €9.5bn (£8,2bn) issue of Italian notes jumped to 0.814pc, up from 0.568pc in March. The bid-to-cover ratio was wafer-thin, falling to 1.02. Italy has the world’s third biggest debt in absolute terms.

Mr Cailloux said the ECB should resort to its “nuclear option” of intervening directly in the markets to purchase government bonds. This is prohibited in normal times under the EU Treaties but the bank can buy a wide range of assets under its “structural operations” mandate in times of systemic crisis, theoretically in unlimited quantities.

The issue is a political minefield. Any such action would inevitably be viewed in Germany as form of printing money to bail out Club Med debtors, and the start of a slippery slope towards in an “inflation union”. But the ECB may no longer have any choice. There is a growing view that nothing short of a monetary blitz - or 'shock and awe’ on the bonds markets - can halt the infernal spiral underway.

The markets are already looking beyond the €40bn to €45bn joint rescue for Greece by the IMF and the EU, questioning whether some form of debt restructuring or managed default can be avoided over the next year or two, or even whether the rescue plan can work at all in a country trapped in debt deflation with no way out through devaluation.

Professor Willem Buiter, a former member of Britain’s Monetary Policy Committee and now global economist for Citigroup, said there may need to be a “voluntary restructuring” of debt. “It is quite likely that a haircut of, say, 20pc to 25pc will be imposed on creditor as parts of the deal....MORE