Archive - May 28, 2011

That insider trading in Washignton occurs with a greater frequency than at Galleon is no secret. Courtesy of various loopholes, members of both the House and Senate have long been allowed to trade on inside information, something that grabbed the media's attention when back in November 2005 someone, somewhere sent the stock of USG Corp., W.R. Grace & Co., and Crown Holdings higher even though there was no public information. Only later would it become known that then-Senate Majority Leader Bill Frist would deliver a speech announcing new legislation to relieve companies of asbestos litigation. Subsequent studies (such as Ziobrowski et al's 2004 paper “Abnormal Returns from the Common Stock Investments of the United States Senate.”) confirmed substantial market outperformance by members of Senate. A few days ago, Ziobrowski et al, have released a follow up study "Abnormal Returns From the Common Stock Investments of Members of the U.S. House of Representatives" which confirms that not only do congressional critters consistently outperform the market, but does a granular analysis of just who it is in congress that should consider leaving the public arena, and raising capital to start their own hedge fund: simply said, junior, democratic congressmen beat the market by roughly the same amount, with the same consistency (and probably with the same Sharpe ratio) that allows SAC to charge 3% and 35%.

While we have recently seen various fundamentally driven predictions for the S&P going back to its 1994 level of ~400 (most recently from Albert Edwards and Russell Napier), few charts predict a comparable major retracement in the key equity index. And while it is not quite a variant of the Kondratieff Wave chart familiar to most, this chart courtesy of Sean Corrigan shows the historical 33 year peak to trough frequency of the S&P, emphasizing the cyclical periodicity observed in market cycles. The chart predicts the next 33 year low to occur some time in late 2015, taking the S&P to the proverbial 400 level. As Corrigan observes: "A third, post-94 Bubble-era decline of -50% would unwind all of that move and half the log rise of the Great Bull Market (something the '49-'68 move did) and return to both the mid-1960's highs and Fib retrace the whole post - WWII move. Doing this by late 2015 would preserve the 33 year span."

Debt is slavery… or at least indentured servitude of the worst kind. That looming mortgage, the high interest credit card debt, the short-term car loan– these are the forces that keep people from breaking free and taking action. Ironically, debt begets more debt. According to FinAid, the average US student loan debt for a four-year private university graduate is nearly $36,000, and $24,000 for public. Throw in that first car loan and maybe a mortgage, and suddenly you’re staring at hundreds of thousands of dollars in demoralizing claims on your future income. At this point, most people figure… ‘hey, I’m already in debt up to my nose, might as well get in up to my eyeballs and buy a new plasma screen on credit.’ Debt is an enormous psychological burden that influences life’s major decisions. It’s why so many people stay committed to jobs that are unfulfilling in cities they detest under conditions they find disheartening. Nobody wants to rock the boat too much… take too many risks and you could lose your job, and hence the ability to make those monthly payments. This familiar story has been playing out across the developed world for years. This is not an ill, however, that exclusively affects individuals and families. Even at the macro level, debt has the power to subjugate entire nations to the whims of their creditors. Enter the IMF.

Public Relation people at Goldman Sachs can not be too happy about this, but we just can't resist the party that Fadel Gheit started earlier this week.

Germany's Der Spiegel seems hell bent on getting sued to hell and back by Greece. After a few weeks ago it "broke" the news of a secret meeting that would consider the expulsion of the country from the Eurozone, it is once again stirring passions with an article claiming that Greece has missed all fiscal targets agreed under its bailout plan, according to a mission from an international inspection team, putting further funding for Athens at risk, Reuters summarizes. "The troika (aka the International Monetary Fund, the European Commission and the European Central Bank) asserts in its report to be presented next week that Greece had missed all its agreed fiscal targets," weekly Spiegel magazine reported in a prerelease. In other words, this could be the political game over for Greece, whose fate as has been disclosed recently, is intimately tied with the perception that it is following the troika's demands for fiscal change. If the three key bailout institutions are already leaking that Greece is done, next week could well be the beginning of the end for the €. In about 48 hours, even as America is enjoying a Monday off (or precisely because to that, to avoid a market panic), the European market could be digesting a very bitter pill of testing just how well pre-provisioned all those German, French and Dutch banks really are.

You read his weekly articles on Zero Hedge, now here if your chance to listen to Mike Krieger interviewed by Future Money Trends. Among the now topical issues discussed are the debt ceiling, QE3, geopolitical instability, US and global economies, $100 silver (as well as the recenty take down of the metal), market manipulation and much more, as well s Krieger's several proposed scenarios for the future.

The name Judd Gregg is not new to Zero Hedge readers. Back in the 2009-2010 battle for Fed transparency, which continues to be only fractionally on the way to being won, Gregg, who then served as the top Republican on the Budget Committee and a member of the Banking Committee, said that "opponents of Federal Reserve Chairman Ben Bernanke's second term are
guilty of "pandering populism"." Odd that these populism panderers, of which Zero Hedge was a proud member, ultimately succeeded in not only getting a one time Fed audit, but also won the legal case initiated by Mark Pittman to expose the Fed's dirty laundry, without which we would not know that not only did the Fed bail out primarily foreign investment banks during the financial crisis, but also that the biggest user of the Fed's somewhat secret Short Term Open Market Operations facility, also known as a 0.01% subsidy, was none other than Goldman Sachs, contrary to the firm's sworn statements that it did not really need bailing out. Gregg continued: "There's a lot of populism going on in this country right now, and I'm tired of it." Gregg warned that the growing tide of populism would threaten some of the most central institutions to the economy's recovery. "What it's going to do is burn down some of the institutions which are critical to us as a nation and as an economy to recover and create jobs," he warned." It was therefore only a matter of time that Gregg, following the end of his political career, has decided to step down, and work for one of these "central institutions to the economy's recovery" - Goldman Sachs. As such we present the list of companies that courtesy of their "top contributor" status with the senator over the years, are about to get preferential treatment from Goldman's sell side analysts, and see a prompt upgrade to Buy and/or Conviction Buy list in the near term. After all there is no such thing as squid-pro-zero in a world controlled by Wall Street's institutions "central to the economy's recovery."

The latest observations the spread of gold's popularity comes from none other than BRIC expert, Goldman's Jim O'Neill, who advises clients in his latest letter that it may be prudent that in addition to China and India as a source of ever increasing demand for gold, it may be time to also add the Middle East to the ever increasing list of investors (typically quite wealthy) who believe in the yellow metal. "Not because of this particular anecdote, but the Middle East being what it is, my meetings involved more discussion about Gold prices than is usually the case in other parts of the world. While the gold bar machine anecdote adds to all the other colourful stories I pick up, the recent remarkable resilience of gold, despite what has happened to silver and other commodities, is rather impressive. This gold price strength may perhaps be just a simple function of both the extremely low level of G7 real interest rates and the prospect that they might not rise anytime soon. I got the impression that there a quite a few bulls of Gold in the Middle East."

The mechanics of social proof, while somewhat complex, are pretty easy to understand. Simplistically, we humans have a strong tendency to glance over at other members of the herd in an attempt to gauge the correct action or reaction to take in any given circumstance. While this tendency can be useful in identifying the right bread plate to use at a fancy dinner party, it can also have devastating consequences. In one of the most notorious examples of the downside of social proof, in 1964 Kitty Genovese was slowly murdered on a New York sidewalk over the course of about 30 minutes, despite 40 or so witnesses, none of whom took action. They figured someone else would. In any event, understanding the concept of social proof – and its close cousin “social convention” – seems to me to be of fundamental importance to us as members of the human race, and as investors. As far as the former is concerned, if you ever find yourself doing the same thing as everyone else, it should concern you. Stop and ask whether you are doing the thing because you want to or because you think it is the right thing to do – or are you doing it just because it’s what everyone else does? As for the latter, if you rely on the cues coming from the mainstream financial media and officialdom, you would likely believe the country has exited the latest economic crisis and will now steadily make progress towards a return to normalcy. The seeming disconnect between the true state of the world’s economy and the public reaction is actually not a particularly bad thing for those who have their eyes open. After all, anyone who can see what’s coming, while the masses do not, has the opportunity to get positioned in investments that will do well when the truth of the situation becomes evident to all. But there are matters much more important in this life than money-making.

Two days ago, we presented Dylan Grice's latest thoughts on the substantial futility of trading the news cycle. Yet as Grice readily pointed out, and as even Taleb would glumly admit, what humans lose in the noise factor by avoiding the constant blasting of news, they make up for in entertainment value. And therein lies the rub: more than anything, people (or at least the vast majority)want to be entertained, ostensibly even more than the desire to make money on actionable, and properly filtered, ideas. The human brain has gotten accustomed to an information barrage of 140 letter updates, often times on a second by second basis, which in turn has crippled the ability to filter out the important from the irrelevant. Grant Williams of "Things that make you go hmmm" takes the idea one step further, and makes the claim that ever since the emergence of the 24 Hour newscycle, from its inception by CNN (also known as the CNN Effect), and currently peaking with each and every major news network having its own business new channel, accompanied by dramatic "breaking news" music, the net effect has been the substantial stupefaction of the broader global population: "Somewhere between the early 1990s and today, however, the 24-hour news cycle has, in your humble scribe’s opinion at least, become largely responsible for the ‘dumbing-down’ of the masses." Elsewhere this is also known as the "keep your eyes off the ball" effect, so well manipulated by those in control to mask what is really important with the repeated blasting of that which is truly irrelevant. Yet in another example of self-referential, deprecating and allegoric prose fit for TS Eliot (who pushed the premise of contextual and voluntary hyperlinking 70 years before the invention of the Internet), Williams makes his piece "entertaining" by presenting that number one construct of modern media: Captain Obvious. "In the investment world, this tear in the headspace/time continuum has meant that investors are unable to focus on all the issues brought to their attention and consequently they tend to suffer bouts of panic or euphoria over a certain subject before being distracted by the next piece of  news and moving on (remember Fukushima? It’s still not completely under control in case you were wondering). This strange situation in turn led to the spectacular resurgence in recent years of a Superhero – a man who, for years, has been omniscient in playgrounds the world over but has now become a fixture in more adult environs. Ladies and gentlemen, I give you Captain Obvious." In case it is not obvious where this is headed, read on...

It only took Goldman less than 5 months to roundtrip on its latest S&P 500 forecast (from January 7, "We are raising both our 2011 and 2012 S&P 500 earnings estimates by $2 per share to $96 and $106...we are raising our year-end 2011 price-target to 1500") - much better than the 3 weeks it took the firm to flip flop on oil. Just out from Goldman's David Kostin, who has finally started his retreat, which we believe will end at 1,250 before QE3 is formally announced: "We have reduced our S&P 500 2012 EPS estimate to $104 from $106 and lowered our 2011 year-end price target to 1450 from 1500. We now expect S&P margins to peak in 2011 and decline slightly in 2012. Those changes reflect forecast revisions for lower global GDP growth, higher oil prices and more inflation. At the sector level we recommend overweight positions in Energy and Consumer Staples and underweight in Consumer Discretionary and Utilities. We expect stocks with strong revenue growth to outperform those relying on margin expansion to grow earnings and recommend buying our High Revenue Growth basket."

I confess to be more than a little surprised when yesterday's morning reading turned up the following headline, from Bloomberg's Bob Ivry: "Fed Gave Banks Crisis Gains on Secretive Loans Low as 0.01%"