Archive - Nov 2011

The demand for credit and debt is driven by generational values, historical habits, and psychological desires. These in turn are premised on evolving notions of the good life. If someone thinks material consumption equates with the good life, then chances are that person will get much farther into debt than another person that values non-material staples as supporting the good life— i.e. family, community, and friendship. Where you put your energy and money communicates something strong about the person you are and the way you will interact with the world. American baby boomers were born into a world of cheap oil, plentiful jobs, and expansionary foreign policy and were raised by Depression-era parents that wanted to give them the amenities that they never had the chance to enjoy. This engrained an historical sense that physical growth was unlimited and that the “world was there for me”. Today’s so-called Millennials (children of baby boomers) are growing up in a starkly different world of peak oil, global warming, shrinking jobs, and diminished material standard of living, but one with unprecedented interconnection. Material opportunities are contracting, but social opportunities are expanding. The new motto emerging is more like: “We are in the world and for each other.” A collapse of material prosperity has given way to the increasing possibility of experiential and social richness. Consequently, there has been a huge shift in attitudes about the “good life” between generations, largely unnoticed and unreported in traditional media. Only the symptoms of this shift are being reported—social media revolutions, Arab Spring, the Occupy Wall Street movement, young popular dissident authors in China, and pop-driven musical critique of conservative fundamentalism in Pakistan.

You cannot build a financial system on lies. It simply doesn’t work. All it does is breed distrust and resentment. And as any businessperson can tell you, without trust business cannot work.

The Muddy Waters boys continue their fight with their latest fraud target: "FMCN’s partial response to our 80-page November 21, 2011 report reinforces our Strong Sell rating.  FMCN’s response admitted that our estimate of fewer than 120,000 LCD screens showing full motion video advertisements is correct.  Despite this admission, FMCN denied that it was fraudulently overstating the number of displays in its network because the 178,382 displays it discloses include 62,656 digital picture frames.  FMCN’s response stated that it does not also count these digital picture frames in its poster segment.  There is strong evidence that FMCN does in fact double count these digital frames.  However, in response to our report and in contrast to previous 20-F filings, FMCN has expanded the definition of its LCD commercial display network beyond full motion video, which makes a clear and final resolution of this point unlikely.  Therefore, FMCN at best prompted investors to think it had more motion displays than it does, and at worst fraudulently overstated the size of its LCD commercial display network.  Both possibilities raise concerns about the health of this business line." We maintain our Strong Sell rating on FMCN mainly because our concerns regarding the viability of FMCN’s core LCD commercial location network remain.  This issue, combined with FMCN’s additional misrepresentations about the size of the network, FMCN’s opaque business model (on both the revenue and cost sides), and insiders’ penchant for self-dealing, render FMCN shares un-investable."

One can listen to Eurocrats promising the moon and the stars, and that the zEUR0.PK will survive come hell or high water, or one can trade the probability of the Eurozone's breakup based on reality. For those who opt for the latter, they should head over to Intrade where the contract pricing the possibility of "Any country currently using the Euro to announce their intention to drop it midnight ET 31 Dec 2012" is now trading at perfectly even odds or 50%. In other words, the "upside benefit" of the EFSF, the ECB, the IMF and ultimately the Fed have been reduced to coin toss odds. Naturally, if there is a break up in the Eurozone the fallout will be massive and will likely lead to a far worse outcome than the freezing of money markets in the aftermath of the Lehman bankruptcy. In other words, the odds of capitalism surviving for just over a year form now are exactly fifty/fifty.

Here is our best attempt at a flow chart for the EFSF that tries to capture everything it does.  If it looks complicated, that is because it is complicated.

Today, BusinessWeek's Michael Serrill and Jonathan Neumann have released a blockbuster report based on a FOIA response by the Treasury, which proves that in America rules are only for little people, that this country has been a banana republic for years, that Animal Farm was spot on, and gives excruciating detail of how Hank Paulson tipped off a select group of Goldman diaspora hedge fund managers about the eventual failure of Fannie and Freddie 7 weeks ahead of this information becoming public knowledge. The report basically is a summary of a meeting that took place at the offices of Eton Mindich's Eton Park headquarters on July 21, 2008, 7 days after his famous '“If you have a bazooka, and people know you have it, you're not likely to take it out," speech and 7 weeks before both GSEs effectively filed for bankruptcy and were put into conservatorship. Now if it only ended there it would have been fine - a case of potential criminal collusion between the government (although nothing specific against Paulson as he didn't actually trade: he just made sure his former Goldman colleagues made money), and the 0.00001% in the face of a few multi-billionaires who most certainly did trade on material non-public information sourced by Hank. Where it however gets worse is when one considers the actual role of one Eric Mindich in the hierarchy of the Asset Managers' committee of the President's Working Group on Capital Markets, better known of course as the PPT: a topic we discussed first back in September 2009 when we asked "What Is Goldman Alum Eric Mindich's Role As Chair Of The Asset Managers' Committee Of The President's Working Group?" Back then we did not get an answer. Luckily, courtesy of a few answered FOIA requests, some real investigative journalism, and not reporting for the sake of brown-nosing just so one can get soundbites for their next name dropping "blockbuster" and straight to HBO movie, we are starting to get the full picture of just how high in US government the Goldman Sachs controlled "crony capitalist" adminsitration truly runs.

The somewhat incredible rise in consumer confidence this morning is the largest absolute jump since April 2003 from prior revised 40.9 to 56. On a percentage basis, only the April 2009 reversion was higher as this represents a 4 standard deviation elevation from its long-term mean. Of course, its all about expectations, as the sub-index jumped from 50 to 67.8 - which is still only back to July 2011 levels.

The bottom-calling will continue of course but for the fifth month in a row, September's Case-Shiller home price index fell year-over-year as the Non-seasonally adjusted price index fell for the first time month-over-month since February. The overall index dropped 3.9% YoY, compared to expectations of a 3.1% drop. The more narrowly focused 20 City Index also missed expectations, falling 3.59% (relative to expectations of -3.00%) and saw its biggest drop in six months. The seasonally adjusted version of the index fell to a new low for the cycle, and prices are now at their lowest level since April 2003. Prices fell sharply in Atlanta (-4.1% mom, seasonally adjusted), and declined in 15 of the 20 cities in the index.

Way off topic today......

Even more mysterious update #2:

• IRANIAN CENTRAL TV CONFIRMS THAT EIGHT UK EMBASSY STAFF TAKEN HOSTAGE

Mysterious update confirming that something very fishy is going on here:

• IRAN'S MEHR NEWS AGENCY REMOVES REPORT OF HOSTAGE TAKING FROM ITS WEBSITE - NO EXPLANATION GIVEN

Today's developments are rapidly turning into a repeat of Iran-Contra:

• SIX UK EMBASSY STAFF TAKEN HOSTAGE BY PROTESTERS IN NORTHERN COMPOUND OF TEHRAN EMBASSY - MEHR NEWS AGENCY

Expect a very formal, and very forceful UK response imminently.

Once again this morning, credit markets are deteriorating with financials the notable laggards and yet equities in US and Europe are beating to their own 'Birinyi'drum. European sub financials are the worst performers, which makes sense post the Moody's downgrade concerns, but the scale of recovery this week is incredible in terms of equities post Friday rally relative to credit market's perception of reality. At the same time, Italian all-in cost of funding - yields - are near record highs post auction, even if spreads are flat and off the highs.

Bill Gross continues with his rational Keynes bashing with the following statement from his latest monthly piece just released: "What has become obvious in the last few years is that debt-driven growth is a flawed business model when financial markets and society no longer have an appetite for it. In addition to initial conditions of debt to gross domestic product and related metrics, the ability of a sovereign to snatch more than its fair share of growth from an anorexic global economy has become the defining condition of creditworthiness – and very few nations are equal to the challenge." In addition he also meaks it all too clear why the sudden reappearance of the Federal states of German-funded Europe proposal is a dead end: "On the fiscal side the EU’s solution has been to “clean up your act,” throw out the scoundrels and scofflaws (eight governments have fallen) and balance your budgets. Such a process, however, almost necessarily involves several years of recessionary growth and deflationary wage pressures on labor markets in the offending countries." Gross picturesque analogies never fail to amuse (maybe not the French though): "The ultimate vote of the working men and women in these countries will always hang over the markets like a Damocles sword or perhaps a French/German guillotine. If the axe falls, then bond defaults may follow no matter what current policies may promise in the short term." That's right. He went there. As for his conclusion, he is spot on: "Investors and investment markets will likely be supported or even heartened by recent days’ policy proposals. The problem of Euroland is twofold however. First of all, they will remain a dysfunctional family no matter what the outcome. You can’t tell a German much, and while they can issue what appear to be constructive orders and solutions to the southern peripherals, there is little doubt that none of them will “like it very much.”....Secondly, and perhaps more importantly however, investors should recognize that Euroland’s problems are global and secular in nature, reflecting worldwide delevering and growth dynamics that began in 2008." And that's it folks: Europe will never submit to a federalist union controlled by Germany. And even if it does, it is not just Europe that is broken. It is the entire world.  Speaking of broken marriages, we wonder just how many CDS Gross is long parent risk-soaring Allianz?

House prices, consumer confidence and comments from a whopping five Fed officials.

Things getting ugly fast.

• IRANIAN PROTESTERS THROW PETROL BOMBS INSIDE BRITISH EMBASSY COMPOUND IN TEHRAN, ONE SMALL BUILDING SET ON FIRE -STATE BROADCASTER IRIB - RTRS
• IRANIAN PROTESTER ENTERS U.K. EMBASSY COMPOUND IN TEHRAN -BBG
• IRANIAN STUDENTS BROKE INTO BRITISH EMBASSY IN TEHRAN: AP
• U.K. FOREIGN OFFICE AWARE OF REPORT EMBASSY IN IRAN BROKEN INTO -BBG

Time for the CVN 77 to head back to the Straits of Hormuz yet?