U.S. ANALYST RATINGS: Upgrades, Downgrades, Initiations

UPGRADES:
  * American Science & Engineering (ASEI) to buy: Benchmark Co.
  * Coventry Health Care (CVH) to hold: Deutsche Bank
  * Hudson City Bancorp (HCBK) to outperform: RBC Capital
  * Lilly (LLY) to overweight: Atlantic Equities
  * Minerals Technologies (MTX) to overweight: First Analysis
  * Seadrill (SDRL) to neutral: Natixis


DOWNGRADES:
  * ASML Holding (ASML) to sell: Deutsche Bank
  * Amphenol (APH) to neutral: BofA Merrill
  * GlaxoSmithKline (GSK) to neutral: UBS
  * Hudson City Bancorp (HCBK) to neutral: Guggenheim
  * Immunomedics (IMMU) to neutral: Wedbush
  * KLA-Tencor (KLAC) to sell: Deutsche Bank
  * Kenexa (KNXA) to neutral: Credit Suisse
  * Pharmacyclics (PCYC) to sector perform: RBC Capital
  * PetroLogistics (PDH) to neutral: Citigroup
  * Seadrill (SDRL) to hold: Carnegie


INITIATIONS:
  * Assured Guaranty (AGO) market perform: Keefe Bruyette
  * Bank of Montreal (BMO) hold: Stifel Nicolaus
  * Bank of Nova Scotia (BNS) hold: Stifel Nicolaus
  * Boyd Gaming (BYD) hold: Brean Murray
  * CIBC (CM) hold: Stifel Nicolaus
  * CU Bancorp (CUNB) neutral: DA Davidson
  * Del Frisco’s (DFRG) outperform: Raymond James
  * Ford (F) outperform: CLSA
  * Freescale Semiconductor (FSL) neutral: UBS
  * Full House Resorts (FLL) buy: Brean Murray
  * General Motors (GM) underperform: CLSA
  * Globus Medical (GMED) overweight: Piper Jaffray
  * Globus Medical (GMED) outperform: Oppenheimer
  * Kosmos Energy (KOS) outperform: Raymond James

From Businessinsider:

The US Garbage Indicator Is Telling Us Q3 GDP Stinks

People have been making a big stink about the garbage indicator since we featured it in July.

It's AAR rail waste carloads, a coincident indicator that has a pretty strong correlation with U.S. GDP.

And based on the most recent readings, it's telling us that GDP growth is slumping in Q3.  Unfortunately, we won't start getting Q3 GDP readings until October.

Bloomberg BRIEF economist Michael McDonough follows the indicator closely.  Here's his chart:

@M_McDonough

Here's another chart from McDonough taking a looking at the monthly measure on a historical basis:

@M_McDonough

Europe's Average Asset Age at Record Highs

It older post from Zerohedge which explains why trying to treat a solvency problem with liquidity doesn't work.  The old "extend and pretend" mantra of the banking sector seems to be closer to the edge.  The chart from Goldman would suggest the need for a Capex cycle in Europe to begin.  With the huge amount of economic uncertainty it is no wonder why we're not seeing a huge pick up in investment.

From Zerohedge:

"No Continent For Young Assets" - Charting The Root Of Europe's Problems: Record Old Asset Age

Submitted by Tyler Durden on 02/17/2012 10:22 -0400

• Central Banks
 
• default
 
• European Central Bank
 
• fixed
 
• Monetary Policy

It is no secret to those who follow the daily nuances of global monetary policy that the primary reason for Europe's deplorable fate has little to do with liquidity, and everything to do with an ever diminishing base of money-good assets, which in turn is a solvency problem when run through the cash flow statement and balance sheet. Need an explanation for the ever declining collateral thresholds by the ECB? There it is: assets in Europe are generating ever lower returns, which means that an ever lower inverse LTV has to be applied to them by monetary authorities in order for the asset holder to get some return. And with trillions in incremental cash needs, before all is said and done, the ECB (and various regional central banks, as was discussed last week), will be forced to accept virtually anything that is not nailed down as collateral for 100 cents on par (not amortized) value. Yet while observing the symptom is simple, the diagnosis is much more difficult. In other words, why is Europe's asset base getting progressively worse. Courtesy of Goldman we may have found the answer. As the following chart shows, the average age of assets in years in Europe, has just hit a record high. The implications of this are substantial, and explain so very much about the core problem at the heart of the European quandary.

it will come as no surprise that the return on an aged assets gets progressively lower the further it depreciates and amortizes. Further, the less cash available for capex, the lower the rate of asset replacement, and the older the prevailing asset base becomes. This all ends up in a toxic spiral in the context of continent deleveraging, where old assets create lower returns, leading to less cash, leading to less capex spending, all the while the liability side of the balance sheet stays fixed.

So as ever more cash is spent on interest outflows and debt maturities, the average asset age continues to get progressively higher, the PPE base of Europe gets even older, finally resulting in the situation Europe is in right now: a decrepit bed of Property, Plant and Equipment, amortizing ever faster, not being replaced, generating ever less cash.

Unfortunately, until a virtuous cycle begins where European (and soon American) firms start spending more on CapEx which more than offsets annual depreciation and amortization, everything else is irrelevant, yet the ongoing confusion of a liquidity with a solvency problem (because unlike Assets, liabilities do not "amortize" on their own absent a default of course) will continue.

U.S. ANALYST RATINGS: Upgrades, Downgrades, Initiations

UPGRADES:
  * Marten Transport (MRTN) to buy: Wunderlich
  * Rue21 (RUE) to buy: Jefferies
  * Treehouse Foods (THS) to buy: Citigroup


DOWNGRADES:
  * ASM International (ASMI) to hold: Kepler
  * Biomarin Pharmaceutical (BMRN) to hold: Deutsche Bank
  * Public Service (PEG) to underperform: FBR Capital
  * Novartis (NVS) to reduce: Vontobel
  * Yanzhou Coal (YZC) to underperform: CIMB


INITIATIONS:
  * Bonanza Creek Energy (BCEI) sector perform: RBC Capital
  * Eloqua (ELOQ) overweight: JPMorgan
  * Eloqua (ELOQ) market outperform: JMP Securities
  * Jazz Pharmaceuticals (JAZZ) buy: WallachBeth Capital

U.S. ANALYST RATINGS: Upgrades, Downgrades, Initiations

UPGRADES:
  * Centerpoint Energy (CNP) to outperform: Wells Fargo
  * Cemex (CX) to outperform: Credit Suisse
  * Canadian Solar (CSIQ) to neutral: Lazard


DOWNGRADES:
  * Best Buy (BBY) to underperform: Wedbush
  * Cnooc (CEO) to hold: Deutsche Bank
  * Clearwire (CLWR) to underperform: RBC Capital
  * Equinix (EQIX) to equalweight: Stephens
  * Ferrellgas Partners (FGP) to sell: UBS
  * Group 1 Automotive (GPI) to hold: KeyBanc
  * Republic Airways (RJET) to equalweight: Evercore Partners
  * Statoil (STO) to hold: DNB Markets
  * Trina Solar (TSL) to neutral: Lazard


INITIATIONS:
  * Caesars Entertainment (CZR) underweight: Barclays
  * Del Frisco’s (DFRG) outperform: Wells Fargo
  * Headwaters (HW) hold: KeyBanc
  * iGate (IGTE) neutral: Janney Capital
  * Immunogen (IMGN) outperform: Cowen
  * SLM Corp. (SLM) no rating, PT $20: Telsey Advisory Group
  * Stewart Enterprises (STEI) hold: BOE Securities
  * Targa Resources (TRGP) buy: UBS
  * Yelp (YELP) market perform: JMP Securities
  * Zynga (ZNGA) market outperform: JMP Securities

Very Good Chart on Historic US Tax Rates

Source: VisualizingEconomics

Buffett Unwinds Muni CDS Exposure Prematurely

From Zerohedge

Buffett Joins Team Whitney; Sees Muni Pain Ahead As He Unwinds Half Of His Bullish CDS Exposure Prematurely

Submitted by Tyler Durden on 08/20/2012 21:42 -0400

• Bond
 
• CDS
 
• default
 
• Florida
 
• Greece
 
• Illinois
 
• Lehman
 
• Lehman Brothers
 
• Meredith Whitney
 
• None
 
• Warren Buffett

Just under two years ago, Meredith Whitney made a much maligned, if very vocal call, that hundreds of US municipalities will file for bankruptcy. She also put a timestamp on the call, which in retrospect was her downfall, because while she will ultimately proven 100% correct about the actual event, the fact that she was off temporally (making it seem like a trading call instead of a fundamental observation) merely had a dilutive impact of the statement. As a result she was initially taken seriously, causing a big hit to the muni market, only to be largely ignored subsequently even following several prominent California bankruptcies. This is all about to change as none other than Warren Buffett has slashed half of his entire municipal exposure, in what the WSJ has dubbed a "red flag" for the municipal-bond market. Perhaps another way of calling it is the second coming of Meredith Whitney's muni call, this time however from an institutionalized permabull.

In bad news for the bullish muni community, the Octogenarian of Omaha has terminated $8.25 billion worth of sold municipal insurance (or half of his total, the balance of which he is unable to terminate, or technically, novate, due to timing limitations), a move which the WSJ says "indicates that one of the world's savviest investors has doubts about the state of municipal finances. If so, the move could be a warning to investors who have purchased such debt. In canceling the contracts early, Mr. Buffett probably "doesn't want this exposure anymore and is getting out while he can," said Jeff Matthews, a hedge-fund manager who personally owns Berkshire shares."

In what is worse news for the bullish muni community, the fact that Buffett closed the position at substantial losses indicates that the once deified investor is willing to swallow his pride, and despite his massive balance sheet, refuses to wait out the expiration of the insurance, implying he sees not only major shockwaves ahead, but turbulence that is imminent (if only M-Dub had waited until now). What is worst, is that Buffett's bearish move comes at a very fragile time for the muni market: weeks after three consecutive bankruptcies shook California, and just as various other cities are contemplating strategies to impair bondholders (a la Greece and Belize) to avoid all out Chapter 9.

From the WSJ:

The insurance-like contracts, which required Berkshire to pay in the event of bond defaults, were originally purchased by Lehman Brothers Holdings Inc. in 2007, more than a year before the Wall Street firm filed for bankruptcy, the person said.

Details of the termination, with the Lehman Brothers estate, weren't disclosed. It isn't clear whether Berkshire's move will leave the company with a profit or loss on the wager. Mr. Buffett, Berkshire's 81-year-old chairman and chief executive, declined to comment.

Actually, assuming the following chart from the WSJ is correct, it is fairly safe to assume that Buffett will close out with a substantial loss. Having sold over $8 billion in insurance on what appears to be 10 year duration CDS at 20 bps, the fact that he is unwinding at a spread four times wider, at a massive DV01, means that there is no way the roll alone would have offset the blow out in spread. As a result it is fair to assume that hundreds of millions in P&L were lost as a result of this trade.

But while traders with huge balance sheets carry paper losses for weeks, months, and years (see JPM's whale) as there is no fear of margin calls, the fact that Buffett closed out of this position, well ahead of its maturity, on his own is grounds for major concern.

"There is a need for concern,'' said Bill Brandt, chairman of the Illinois Finance Authority and chief executive of Development Specialists Inc., which advises troubled cities and companies. "Many of these municipal leaders appear ready to sacrifice bondholders on the altar of the taxpayers rather than the other way around, which has historically been the case."

Bonds issued by cities generally haven't affected debt sold by states, but some states have seen credit-rating downgrades in the past five years due to budget problems or economic weakness.

In July 2007, Lehman bought default insurance from Berkshire on bonds from 14 states, including Texas, Florida, Illinois and California, according to a copy of an agreement between the two companies. Lehman paid $162 million to Berkshire, which agreed to pay Lehman if any of the states defaulted on their debt over 10 years. Berkshire essentially bet that total payouts, if any, would be less than the money it received upfront.

Some investors still see municipal bonds as attractive at the right price. Garey Fuqua, who heads distressed municipal-bond investments at Spring Mountain Capital, said he has been increasing the New York-based investment firm's cash position in anticipation of municipal-bond prices falling.

"We do believe there will be a selloff because of increased interest rates or because of widening of credit spreads," Mr. Fuqua said.

And while the termination itself is bad, it could be worse if Buffett had unwound his entire municipal stake. Luckily for what's left of the US muni market which continues to trade on a hope and a prayer even as local muni and state coffers run dry, Buffett will retain half of his exposure. Not because he wants to, but because he has to.

Berkshire still has swaps tied to roughly $8 billion in debt issued by hundreds of cities, states and municipalities. Those contracts can't be terminated before the underlying bonds mature between 2019 and 2054, according to the company. Berkshire also was paid upfront for providing this protection, which was purchased by other financial institutions.

Buffett is also quite aware that by selling half of his position, the resulting sell off as piggyback traders jump on the trade, will impair the balance of his positions. And still he has proceeded with the sale. All of which leads us to believe that not only did Buffett just join team Whitney, he has in fact doubled down.