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Britain - Israel - and Prince Charles

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Yom Hashoa = NEVER AGAIN!

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Yet Another Mid-East Crisis

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Tears to Wash Away Our Fears

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At the open 5-20-11

May 2011 series equity options expire

Equity Markets – Asia was mixed with only Korea and India having decent % moves on the day…the resource driven Australian index was lower by 0.42%...European indices are off of their highs and now mostly lower on the session…domestic futures indicate a lower opening.

European Credit – spreads are modestly wider this morning as the market awaits a decision on who will replace DSK at the IMF…most of the trading is in the index (wider) and Spain (buyers of protection driving that spread wider as well…overall reporting light volume.

Oil Markets – NYMEX crude futures are up slightly as a bit of contango creeps back into the market (crude in 12 months is higher than next month’s contract by $1.56/barrel)…

Economic Releases – no releases today

Earnings Releases – none today

News –

• With DSK out it looks as if the EU is prepared to throw all of their support behind Christine Legarde…the emerging market economies want to have the leadership in the hands of one of their representatives but they apparently can’t come to an agreement on a single individual to put forward as a candidate. Consequently the West can hide behind the expectation that the leadership void will be a very negative signal to the markets (they could be right here) and this belief allows them to push forward Legarde who is clearly in the camp of Greece shouldn’t restructure which will keep the European banks from taking a loss on their Greek debt. So it looks as if the IMF stands to get its first female leader.
• 5th/3rd Bancorp decided to repay a series of Trust Preferred (TruPS) “hybrid” debt early to reduce interest costs and the action is impacting the high coupon portion of the TruPS market. These securities at one point in time represented the best of both worlds to the banks as they could deduct the interest paid from their taxes but a portion of the security principal amounted counted as regulatory capital. Alas, in a post Dodd/Frank financial reform world this is no longer true, other than for those securities that can be converted into permanent equity capital (usually perpetual preferred stock paying a floating rate dividend). This is the first “call” event to happen before a scheduled call date. Note that all of the TruPS securities either banks or non-bank issued allow for the issuer to call them if the tax laws change (meaning the interest would no longer be deductible) or regulatory framework changes (meaning that the securities will no longer have an “countable” equity component). However, almost all of these securities contain a clause requiring that the call be exercised no than within 90-days of the actual change in rules taking effect. The component of the Dodd/Frank rule impacting TruPS doesn’t take effect until 2013 and in this case the 5th /3rd bank debt didn’t contain the so-called “90-day window” clause. This wouldn’t create a stir if the bonds were trading below par as the calls are at par but these were trading above par and counting on having until 2013 to amortize the premium to zero…oops. So bottom line, if you own high coupon TruPS paper it would be wise to be certain that your paper contains the “window” clause. Otherwise, the market has a nasty habit of throwing the baby out with the bath water so there could be opportunities here to buy other TruPS debt at attractive prices.
• Larry Summers says that there’s a concern that technology stocks are forming a “bubble”…hey Larry, let’s look at your premise. Technology stocks forming a bubble…ok when you think of technology stocks how about Intel (INTC) : -7.3% return since 2005 / Microsoft (MSFT): +0.7% return since 2005 / Cisco (CSCO): +15.01% since 2005 / Oracle (ORCL): +69.9% / Apple (AAPL): +676% / Google (GOOG): +142.7%. So clearly, all “tech” stocks are not created equally and what Larry is really talking about here are the SOCIAL NETWORK stocks particularly Linked-In which went public yesterday at $45 and promptly traded to $122.70 before settling at $94.25.
• The Bundesbank released a statement this morning indicating concern that Europe’s largest economy will likely lose some growth momentum and that the economic growth of 1.5% in Q1 “considerably overstates the underlying economic momentum…”
• Some power companies (that receive coal shipped on the Burlington Northern Railway) are complaining that Berkshire Hathaway is trying to convince regulators to allow them to include a portion of the goodwill paid for in the acquisition of Burlington Northern to be included in the “rate base” or the costs that regulators include when they consider setting prices to determine a fair return on capital. The power companies point out that nothing has changed except the premium paid for the book value of the assets and thus should not be included in the rate base calculation.
• Dr. John strikes again…Liberty Media has offered around $1 billion for the Barnes & Noble chain…the offer of $17 / share is a 20% premium to yesterday’s close.
• Goldman Sachs stock dropped to its lowest level since last August yesterday as the Justice Department is considering the April 13th US Senate panel report that claims Goldman misled clients about securities structured around risky mortgages.
• Given the run in crude prices, the number of oil rigs operating in the US outnumbered those drilling for natural gas for the first time since 1995.
• Chalk this one up to “interesting timing”…the US President gave a public address yesterday in which he said that the negotiation over the disputed territories should start with the 1967 boundaries before the 6-day war changed the face of the Middle East. I find this interesting on several fronts but let’s just look at 3…(1). Syria one of the primary drivers behind the 6-day war is in the process of killing protesters at last count 1,000 and likely more…they get a denunciation but unlike Libya, no all out push for Assad to go; (2). Mubarak who for his years of rule in Egypt had been at least non-aggressive towards Israel…his resignation was called publicly on several occasions by the US President when there were protests in Cairo, not the mass killings that the world has seen in Syria; (3). Netanyahu visits the US Capitol today and will speak in front of Congress…he said yesterday that moving the borders back to the 1967 locations would make the country indefensible from terrorist attack and clearly Israel is the target of numerous terrorist organizations…it’s no wonder people are confused by the foreign policy of this administration it appears to lack a cohesive strategy or else there’s another strategy there that I don’t even want to contemplate.
• Some of the sheen is off Meredith Whitney’s previously burnished reputation after she made the big splash on 60-minutes saying that there could be 50+large muni defaults totaling hundreds of billions within the next 12 months…now she’s contradicting here previous statements on Bloomberg Radio saying that she didn’t say what she said on 60-minutes…unfortunately for her the camera was on…I guess “I was wrong” is just not an option.

Phillip Pennell, CFA
Turnberry Capital Management
(203) 861-2708 (Direct)
(203) 861-2700 (Trading)
(203) 917-2255 (Mobile)

The contents of this posting do not constitute recommendations to buy or sell specific securities. Any individual wishing to buy or sell securities for their investment account or that of others should consult with their investment advisor prior to entering into any securities related transaction

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