Archive - May 2011

Bottom-up saw equity underperform credit but the S&P seemed to have a mind of its own into the last hour (as credit closed near its wides and stocks at their highs). Low beta outperformed in stocks and credit. Most notable was the huge jump in USA protection costs in the last two days!

This essay does not question whether Bin Laden and Al Qaeda attacked us on September 11, 2001, or whether Iran, Saudi Arabia or another nation-state had a hand in the attacks. It focuses solely on a peripheral issue regarding the third building which fell on that terrible day

Utilizing The Applied Finance Group’s backtest system, we ran a strategy of investing only in companies with a market capitalization of greater than US$ 1 Billion and a dividend yield above 3%. The strategy has worked fairly well with the annualized returns over the last 12 years beating the overall universe. While the dividend paying strategy worked well, a strategy based on AFG’s valuation metric performed better.

We have long claimed that 2011 is playing out in a manner virtually identical to 2010, almost to the tic. And as we approach the end of QE2 in 6 weeks, a quick glance at what happened with stocks following the end of QE1 in March of 2010, will be illustrative of what to expect this time around, because contrary to what Comcast's business channel would want its ever declining viewers to believe, it never really is "different this time." To help with that comparison, here is a David Rosenberg summarizing what happened between the end of QE1 and Bernanke's August 27 announcement of QE2. If this is all it takes, then as we (and Scott Minerd earlier) have predicted, get ready for not only QE3, but 4, 5 and so forth. And not only that, but Rosie joins the likes of Zero Hedge, Minerd, Koo, Janjuah and all other pragmatics who realize that the Fed will never, never, allow deflation to run its course even if that means collateralizing the dollar with sewer bonds and physical housing, which incidentally is what Rosenberg predicts: "the day the QE programs run their full course, the Fed will have
likely added physical housing units to its balance sheet as opposed to
just mortgage paper. Ben Bernanke will be the biggest landlord in the
country at that time."

Here is DSK's never before seen Linkedin Profile...HaPPY IP dOpes!

Last year video of Greek protests turning violent was enough to force Waddell & Reed to sell several thousand ES contracts which crashed the market. Will this year's catalyst be Spain (which may just be too big for the CDO known as the EFSF to bail out)? While the gatherings in Spain have been getting bigger (and judging by this live feed, the one tonight is the biggest yet), they have so far been peaceful. Yet with 21% unemployment, and according to some over half of youth without a job, just how long until someone decides to send a flaming Molotov cocktail at the riot police? Watch a live webcast from Spain below.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 19/05/11

Oops. Just out from The Gap: "As stated earlier in the year, the company expects business performance during fiscal year 2011 to be heavily impacted by pressure from sourcing cost inflation, particularly in its value channels. While the company anticipated that the cost of goods would increase during the back half of the year, costs are actualizing above the initial estimates. The company now expects product costs per unit to be up about 20 percent in the back half of the year, which will more than outweigh retail price increases. As a result, the company has revised guidance for fiscal year 2011 diluted earnings per share to be in the range of $1.40 to $1.50." The problem is that previously the company had seen an EPS range of $1.88-$1.93, with a consensus of $1.84. To all those who were wondering why nobody was guiding lower ahead of the Q1 earnings season, the answer is... the waited until it was over. As for how the company plans to mitigate its plunge in earnings: "The company now expects net openings of about 75 stores, including
franchise stores, during fiscal year 2011. This figure is up from the
company’s previous guidance of about 65 stores, driven primarily by
additional Outlet store openings in North America." When you can't control price, you can at least control volume... Even if that means inventory liquidation sales within a month or so of opening the new stores: "The company reported that inventory per store was up 9.9 percent at the
end of the first quarter of fiscal year 2011 compared with last year,
slightly higher than expected driven by decreased sales associated with
the events in Japan." So much for the consumer stepping up. And time to go very short consumer discretionary stocks, just as we suggested three days ago.

Hide you kids, hide you wives. DSK has just been granted bail pending the sexual assault trial. Terms of the bail agreement include a $1 million bail, $5 million insurance bond, the surrender of his diplomatic passport, 24 hour home monitoring including a constant webcam live feed, an armed guard to be posted outside a rented apartment, and all the usual electronic appliances attached to DSK's body. We reiterate our suggestion that DSK's webcam should be opened to the public at a monthly subscription charge with the proceeds going to the PIIGS (sinking) bailout fund.

This situation is too far gone, the energy industry has it's hooks too deeply in our politicians and they have WAY too much control over our daily lives. That means the logical thing to do, when faced with an out-of-control vital service that is gouging consumers and damaging our economy, our environment, and working against our national interests - is to NATIONALIZE THEM.

With just 45 minutes of trading left, NYSE volume will once again need to come up with an appropriate adjective to describe just how bad it is. The 2.6 billion shares traded so far are 56% of the YTD average and just under two-thirds of the Q2 average. Also explains why the levitation algo is hard at work to close the market well into the green on a day when the US economy virtually jumped the shark into contractionary mode. At this point we would once again go so far as to predict that flow and even prop-based revenue for the major hedge funds, also known as primary dealers, will come in materially below expectations, following continuing share trading weakness now that even the robots have left stock markets and much prefer to trade things like Lagarde succession odds, CME margin hike ETFs and the ZARJPY.

Following an earlier report by Handelsblatt which made it seem that Christine Lallouette Lagarde's (henceforth CLL) ascent to the head of the IMF was a fait accompli, here comes Reuters to spoil the party. As was disclosed deep in the footnote area of the German article, Christine has a bit of a legal cloud of her own to deal with. To wit: "Her prospects could be undermined by a legal row, unlikely to be resolved before June at the earliest, over her decision to settle a dispute between the state and businessman Bernard Tapie, a personal friend of President Nicolas Sarkozy. Lagarde denies any misconduct, and there is no suggestion of personal profit. But legal trouble could delay her appointment or even make her unacceptable to the IMF as it tries to polish its image after Strauss-Kahn's dramatic fall from grace." And once again nothing is ever easy for Europe: the continent which would be very glad to never again see a male figurehead atop the IMF following the latest humiliation (even though technically the IMF has the US as its key source of capital, European countries add up to well over the US stake) will likely not be willing to risk a court defeat which would likely come only after the critical decision will have to be made. Perhaps it is time to buy some puts on CLL white smoke chances after all.

There was a time when a young Mujahideen commander named Osama bin Laden was a core ally of the US in the fight against Soviet communism and central planning. Well, that particular affair did not end too well for either Osama, nor for the USSR (although one may argue that "communism and central planning" are experiencing a second renaissance courtesy of capitalist central banking). Along the same lines, Pakistan which as recently as 3 weeks ago was considered a core US ally, has very promptly fallen out of favor following the death of that other abovementioned former ally. Yet Pakistan is not wasting time. Two days after Pakistani PM Yousuf Raza Gilani took a direct stab at deteriorating US-Paki relations by saying that China is now his country's "best friend",  China has retorted in kind by announcing it will provide another 50 JF-17 fighter jets to Pakistan on an "expedited" basis. The WSJ reports that "the agreement to accelerate supply of the jointly developed jets, the first 50 of which are being assembled in Pakistan, came as Pakistan's Prime Minister Yusuf Raza Gilani held talks in Beijing during a visit that he has used to portray China as an alternative source of military and civilian aid. "We're getting the 50 jets, on top of the ones we already have. Something has been agreed in Beijing, so they'll be expedited" he said." In other words: step aside US, here comes China. As for those billions in USD aid which somehow never ended up being used to buy US Treasurys (Pakistan is nowhere in the listing of US Treasury holders) , it is now clear into whose pocket they are going (at $15 million a pop, those are big pockets). Lastly, this is more than just posturing by China: the country is clearly indicating its latest and greatest sphere of influence. As a reminder, "It was reported in 2008 that Azerbaijan and Zimbabwe had placed orders for the aircraft and nine other countries, including Bangladesh, Myanmar, Egypt, Iran, Lebanon, Malaysia, Morocco, Nigeria, Sri Lanka and Algeria were showing interest."

The similarities between the US today and Weimar pre-hyperinflation are striking. As in Weimar, US fiscal authorities are not taking any steps to rein in their loose money policies. Similarly, the US Fed, like Germany’s financial elites believes that currency depreciation is a good thing.

We all know by now that the centrals planners believe the tail wags the dog. So the economy doesn’t lead to higher stock prices but higher stock prices will lead to a better economy. Insane? Absolutely. Is it their religion? 100%. The other important thing for investors to be aware of now when they are comparing the current state of affairs to what many lived through in the 1970’s is that the central planners have learned some lessons. What we must always remember about central planners is that they will never renege on their core philosophy which is that an elite academic and political class in their wisdom are better stewards than free humans interacting in a marketplace. That said, most people do not share their worldview for obvious reasons (who wants their lives micromanaged) so the trick of the central planners is to micromanage your life while you think you are in charge. As Goethe said “None are more hopelessly enslaved than those who falsely believe they are free.” He didn’t just make up this clever quote, it is a tried a true method of the most successful control systems throughout history. So even the brainwashed masses out there understand that price controls were tried in the 1970’s and failed. We also know why. Therefore, the last thing the current group of central planners will want to do is announce price controls. That doesn’t mean they don’t attempt them anyway. They have been rigging stocks in the United States consistently for the past two years and most people get this and accept it as a part of the current state of disunion we are in. However, as I wrote last week we have now entered Phase 2. This was represented by the raid on commodities.