Archive - May 27, 2011

I remember the first time I saw someone us the terms “risk on” and “risk off” as a way to describe the flow of capital into and out of certain baskets of assets that are supposedly “risky” or “safe.” The terms got under my skin back then and they continue to do so until this day. Wall Street and the media just love coming up with trite and untruthful statements as a way to condition investor behavior and ultimately separate you from your money. First of all, the world and the successful deployment of capital is much more complicated over any serious investment horizon than the simplification of everything into “risk on” and “risk off.” This way of thinking is even more dangerous when conventional wisdom allocates to the “risky” category many items that are in reality the true safe havens and to the “safe” category those that are guaranteed to destroy your financial well being... As long as the central planners have some degree of control of the markets, which they still do at the moment, if you are playing the game and managing money in this world of investment horizons of weeks if not days you have no choice but to trade the market you are given. Nevertheless, as I have said countless times before, in the final equation there will be no other asset that will lose investors more money that U.S. government bonds and nothing that will protect wealth more than gold. Moreover, when the central planners do lose control of the markets (and they most certainly will) the fact that they have spent so much time manipulating them as well as pushing investors into the worst types of capital allocation decisions they could make, guarantees the total wreckage of the life’s savings of most of this nation.

It is important to understand that even a much-followed stock like Cisco will suffer from inefficiency (which as a value investor I welcome), due to investors confusing the lousy stock with the company’s fundamental performance. That is how you find high-quality companies at bargain-basement prices.

My big fat Greek.. oh whatever.

• GREECE'S SAMARAS SAYS EU BAILOUT MUST BE RENEGOTIATED
• GREECE'S SAMARAS SAYS GOVERNMENT PLAN IS WRONG
• GREECE'S SAMARAS SAYS WON'T ACCEPT BEING BLACKMAILED
• GREECE'S SAMARAS SAYS NEED TAX RATE REDUCTION FOR GROWTH

Next up: Linda Green signs the Greek agreement to hand over all its assets to the world banker cartel.

Traveling through Vietnam provided a few valuable lessons for life. You arrive, armed only with a copy of the Lonely Planet. Any map turns out to be pretty useless, as street names are frequently changed or the street layout completely altered (this is mid-1990?s). You are being inundated with offers from “cyclo-” (bicycle rickshaw) drivers. Rule number one: negotiate the fare before hopping on the seat. The Vietnamese being excellent sales people expect further price negotiations while you are riding (“Okay, price was per person” “Sir, luggage is extra”). One particular cyclo driver left me with a memorable experience. Once given his destination he claimed the hotel was closed (“I know much better hotel”). Over the entire ride he insisted my hotel was said to be either under construction, on fire or simply full. And I insisted, too, so we actually ended up at the hotel. The pure existence of the hotel should have refuted most of his statements, but did not lead to any signs of embarrassment or repentance on his part. To my surprise he followed me into my room, still trying to lure me into changing hotels (“This room not good”). Later, I found him haggling with the hotel owner over a “finder’s fee” (which was customary for cyclo drivers bringing in hotel guests). Lessons learned: (A) When you are standing inside a hotel it does exist, no matter what someone else might say. Accordingly, when a country is burdened with a debt level approaching 160% of GDP it does need a restructuring.

A week ago we disclosed that the second Egyptian revolution (because the first one apparently was a dud) was scheduled for May 27. As expected, this is precisely what has happened: "Thousands of Egyptians packed Cairo's Tahrir Square on Friday in what organisers called a "second revolution" to push for faster reforms and a speedy trial for ousted President Hosni Mubarak and his former aides. Activists complain of delays in putting Mubarak, his family and members of his ousted regime on trial and that the army has not restored order quickly enough to the country of 80 million. Egyptians are also demanding an end to endemic graft, one of the main grievances that drove thousands of protesters onto the streets in the uprising that began on Jan. 25. "After some 1,000 martyrs ... people do not see any change," said Mustafa Ali Menshawi, a 38-year-old accountant, who was helping marshal crowds flooding into the square." Granted there has been some change: "The only change we see is that the Mubarak metro station has been changed to the Martyrs station," he said." This is happening even as deposed president Hosni Mubarak could face the death penalty as he prepares to face charges of "pre-meditated killing" of protesters during the uprising that ousted him on Feb. 11. Yet the revolution was not a failure for all: in continuation of the tried and true "economic hitman" practice, whereby MNCs land in a country and generously provide it credit, merely to extract its resources, take control of its infrastructure, and subjugate people with unmanageable credit card interest payments, the IMF just announced it will lend $35 billion to Arab countries to "stabilize their economies." Oddly there was no reference to "humanitarian" intervention or doing god's work.

We just had two completely irrelevant and largely fabricated numbers come out and offset each other: on one hand the UMichigan confidence number printed at 74.3 on expectations of 72.4, courtesy of declining inflation expectations (who would think that a shallow one week drop in gas prices could do so much), as respondents, all 10 Wall Street CEOs of them, saw 1 year inflation expectations drop from 4.4% to 4.1%, the first drop since September 2010. Ignore the fact that the Billion Price Project, when it was still updating its index, indicated a 10% annualized inflation rate in the US. Regardless, the confidence number was promptly offset by a horrible number from the now completely discredited, conflicted and irrelevant National Association of Realtors, whose press releases should have absolutely no bearing on the market, and yet they do, which showed that April Pending Home sales plunged 11.6% on expectations of a mild 1% decline (from a revised +3.5% previously). Bottom line: homeless people are confident that only 100% of their paycheck (and not 200%) will go to covering gas costs.

LNKD options have broken for trading and it is a rather wide market: some indicative markets: July $100 calls: $0.05 bid; $4.70 ask, June $77.50 puts $1.50 by $4.50. Implied vol for ATM calls is about 50 while for puts roughly double, or 100. The most actively traded options early on: $80 June puts, and July $92.50 calls. Everyone should be grateful we have Citadel's HFT team to make markets and add option liquidity.

Reuters reports that following the anticipated meeting of Greek political leaders, absolutely nothing has been achieved, and, dramatic pause, no consensus was reached on the debt crisis. Expect more protests, more violence, more boosts to GDP expectations following Keynesian logic that the greater the destruction the higher the bounce, etc.

When is the best time to attack a woman if you are a Spanish policeman?

a) When she is non-threatening

b) When she is defenseless

c) When you are caught on tape

d) Anytime really

e) All of the above

This Spanish upholder of the law has just passed with flying colors: fast forward to 30 seconds in.

Today's Personal Income and Outlays data confirmed that the plight of the US consumer is deteriorating: while Personal Income increased at a 0.4% M/M rate, in line with expectations and flat adjusted for inflation (under 0.1%), Spending missed consensus of 0.5%, instead rising at 0.4%, the same number as predicted by Goldman previously. What is notable is that the "rental income" which as was discussed previously is not remotely based on "rents" but to a big part comes from "squatters rent" or pseudo income as a result of not paying one's mortgage continues to have an increasingly mitigating impact, rising just $3.1 billion in April, following $8.4 billion in March. As expected, the economic "benefits" arising from those who don't pay their mortgage are starting to have an increasingly lesser impact. This is very bad news for the economy, as sooner or later those living rent and mortgage free (even in New York where the average foreclosure process takes 900 days, meaning  2.5 year of mortgage free living) will have to start paying for the roof over their head, which will have a massive impact on disposable income, and will result in a wipeout of one of the best performing sectors to date: consumer discretionary. Lastly, as expected, courtesy of a ramp in Spending in recent months, not offset by Income, the savings rate, which was at 4.9% in April, the same as March, is at the lowest level since October 2010. In other words, even as consumers continue to deleverage as presented in the latest Flow Of Funds report, they are still eating away at whatever savings they have.

Goldman sold somewhere around $428,672,680 worth of Apple stock into Apple loving, Apple can do no wrong, Apple has superior user experience, Apple will never face margin compression, Apple has shiny new products on tap, Google Android phones are cheap, I don’t care if the competition is taking over the world, Apple juice sucking, Goldman Conviction Buy List client purchases. Diehard Apple fans, the Goldman bonus pool (Manhattan Motorcars & the Hamptons local Azimmut dealer) simply luvs y'all!

A few weeks ago some rather disturbing scenes of police brutality were caught on tape following that particular day's austerity protest (now a daily occurrence). It now appears that Spain police has learned a thing or two from Greek Policemen especially when it comes to dispersing protesters. Expect these videos showing a violent smackdown of protesters on Barcelona's main Plaça Catalunya, to go viral shortly.

While globalization has generated immense wealth over the last 30 years, it has accrued only to those who were in position to take advantage of it. Those would be multinationals, technology firms, and emerging nations. If you are not one of those, or a shareholder in them, then you have been basically screwed by globalization. Champaign with former Secretary of Labor, Robert Reich.

After peaking in Q1, retail investment in equity instruments courtesy of ongoing disenchanment with performance continues and as Lipper reports, "for the third week in a row equity fund investors were net redeemers from their accounts, taking out approximately $5.6 billion for the week ended May 25, 2011. The three-week total now stands at -$12.7 billion, the worst figure for this group since August 2010." This follows the latest ICI weekly report which saw a 4th consecutive outflow from domestic equity mutual funds. Which llikely means that as margin account cash continues to drop, margin debt has to offset it. As we disclosed recently, April margin debt grew to a fresh multi year high. Expect this number to grow even more in May, then June, and so forth until the levered beta chase ends in tears. More observations on what Goldman dubs "declining risk apetite" below.

• Former ECB chief economist Otmar Issing: Greece "Cheated" to join Euro (Bloomberg)
• Fitch cuts Japan credit rating outlook to negative (Reuters)
• Japan ends 25 months of deflation (Bloomberg)
• Basel III break for banks in EU (FT)
• China holds eight percent of US debt (China Daily)
• Obama, GOP unveil competing plans for job growth (WaPo)
• Ebay and PayPal sue Google over trade secrets (Reuters)
• Greek leaders meet to resolve crisis (WSJ)
• Lagarde offers bigger voice to emerging nations (FT)
• G-8: Faster growth to spur faster debt cutting (Bloomberg)