Archive - Aug 15, 2011

We were a little torn as to who should receive today's captain obvious award of the day. For a while Atlanta Fed's Lockhart was in the lead, who in a speech to the Rotary Club of Atlanta came up with this pearl of wisdom: "the stock market may not tell the economy's direction." Does this mean that the efficient market hypothesis is now dead and that the Chicago School of Voodoo should hand out refunds for decades of indoctrinated lies? Nonetheless, the winner was sealed when we read about an actual paper writtedn by BCA Research's Dhaval Joshi, which found that "Quantitative Easing is good for the rich, and bad for the poor." And there you have it: all those scrathcing their heads, confused, wondering how it is possible that QE which was supposed to make everyone richer, did not do so, have an explanation. And nobody could have possibly come up with this conclusion before: it is a true blessing that BCA decided to invest the capital and manpower into cracking this indecipherable quandary (which truth be told apparently stumped the geniuses at the Fed not once, but twice, and will continue to do so them every single time the S&P drops below 1000).

Happy days are here again... 

In the aftermath of the first of may town hall meetings (there is a second one tonight), it is only fitting to present this chart courtesy of Real Clear Politics which summarizes data across all the different polling services indicating Obama's approval and more importantly disapproval rating. The message is clear: all time low. Time to resurrect and kill Osama for the 3rd time? Or maybe Obama can spend another day spamming his vastly reduced Twitter followers?

As if hedge funds did not have enough to worry about with redemption requests galore after last week's epic rout and vol surge, today's Google stunner acquisition of MMI caught a near record number of them with their pant down. The company, which had over the past year, ever since its spin off, become one of the most despised public companies, saw a 250% increase in its short interest since December, peaking at 25 million shares short, dropped to just under 20 million shares, or essentially the second highest to date. These are precisely the institutional shorts who are hating their live right now as they are sitting on a $260 million paper loss, enough to wipe out several mid-size hedge funds. Speaking of, following rampant rumors spread by CNBC's strategy session last week that various funds were blowing up left and right (in addition to perennial bete noire Paulson & Co of course), we have yet to hear of even one casualty. Just how tight of a lid are prime brokers keeping on their hedge fund client casualties if not one peep has been uttered about who blew up? Following today's trouncing in MMI, we doubt this secret will be such a secret for much longer.

...Courtesy of the teleprompter:

OBAMA SAYS SOLVING DEFICIT IS `NOT THAT COMPLICATED'

Translated: "My fellow Americans, I forgot my antipsychosis medications this morning, and god bless. Thank you." Watch the town hall webcast below.

In today's most underreported news of the day, which could potentially have the biggest impact on the future of America, none other than America's CEOs, or at least one of them: Starbucks' Howard Schultz, has mass blasted an email to fellow CEOs asking for a consensual boycott on donating to political campaigns in order to encourage the nation's muppets, elsewhere idiotically called "leaders", to solve America's budget and debt impasse. Bloomberg quotes from the CEO's e-mail to business leaders:"I am asking that all of us forego political contributions until the Congress and the President return to Washington and deliver a fiscally disciplined long-term debt and deficit plan to the American people." Cue panic, terror, homicidal and suicidal screeching, and overall sheer existential angst in D.C., whose critters suddenly face the nightmare scenario of having no corporate bribes, period, until they get to do their job.

If history is any indicator, Google may be poised to hit the ball out of the park with the Motorola Acquisition. Remember Moto has more patents than all phone manufacturers (nearly combined - Nokia, RIM, Apple). Motorola made 1st mobile phone - that briefcase-like device - as well as the first 2nd generation banana phone, then early flip phones. Assume the possibility to break many other vendor strategies, revenue streams and business models with their patents.

They can strike... Or they can create post-modernist art. They appear to have taken the latter approach for now. Once they realize that artistically beheading fictitious clowns (whose burgers cost over $17 in Zurich, thank you stable dollar policy) does not pay the entitlement benefits, the former is next in the queue.

Citigroup makes the circular argument credible! Well.. Sort of.

Forgive us while we take another quick and gratuitous look at today's disastrous Empire Index, but we wanted to bring a very important point highlighted by Stone McCarthy: "You usually don't get three straight months of negative results unless you are in a recession (Note: NY Fed historical data only started in July 2001)." SMRA continues: "If that's not bad enough for you, the forward-looking new orders index fell to -7.8 in August, after posting -5.5 in July and -3.6 in June. Not only is the latest reading a new low in the recent string of negative results, it's also the third straight month of contraction." In other words when the NBER finally sits down to look at the disaster that the US economy has been over the past several years, the start of the next re-recession will likely be given as June 2011, oddly enough in a year when every sell side bank predicted that the economy would grow by at least 3.5% by Q4. As for what to expect next, look for the Philly Fed to be the next major leading indicator disappointment, which based on the NY Fed result, will miss Wall Street expectations of a +2.0% increase yet once gain, and which SMRA believes will drop from 3.2 in July to -3.4 in August.

A snapshot of the US Afternoon Briefing covering Stocks, Bonds, FX, etc.

There is always an element of price action driving investment decisions, but today it seems to have hit unprecedented levels. The relief is palpable. People are getting bullish again, but so many of the bullish comments seem to start with the fact that stocks are up today. There were some investors who were happily long coming into this week, there were even some who were short at the start of last week and turned into bulls at some time last week (hats off to them). What is bizarre is how many people who were nervous longs last week, suddenly feel comfortable. If stocks were down 5% would they still be so bullish? What is driving the bullishness? Stock prices being up, really does seem to be the biggest driver. We are seeing short squeezes in the most liquid asset classes, particularly those used as hedges - CDX indices, BAC CDS, Gold, beaten down ETF's like XLF. Italian and Spanish bond yields are unchanged to a tiny bit higher. That should be watched. Some IG new issues are in the market and are being priced at a large concession to existing bonds. That will put pressure on the real market. With some core real markets not responding as well as some of the hedge markets, I am not convinced the rally will remain persistent, and since so much of bullish sentiment is coming from the rally, that could turn negative quickly.

Today's two, and two only, upside catalysts for this recent nano-volume breakout rally are the expectations of a Eurobond announcement following tomorrow's n^th Merkel+Sark summit. Another expectation is that the SNB will announce any.second.now that it will peg the SNB, an event made virtually impossible as the whole purpose of the recent media PR campaign was to telegraph to the market what the SNB would like to happen, but what will actually not happen in reality (contrary to popular opinion, central banks, when actually doing instead of manipulating, act in total surprise, not in confirmation of leaked rumors). After all why be on the hook for more billions in losses when just spreading rumors achieves the same effect... however briefly. So for those just waiting for tomorrow's headlines which will have no mention of a Eurobond (at least until the next EUR rout), and for the imminent resurgence in the CHF once the market tires of being manipulated by a still completely helpless Philipp Hildebrand, here is Citi's take on both the very much improbable peg and the Eurobond news, which we believe will not happen until the Eurozone is officially on the verge of collapse as that is the very last round in the ECB's bazooka.

In 2011, so far gold has been the champion investment above and beyond any contender, including stocks and equities. At the announcement of the S&P downgrade of America’s credit rating, only gold showcased immunity. In fact, gold has thrived (as we predicted) in the face of any potential economic threat, from deflation in stocks, to inflation of fiat currencies. Some may wonder, though, where silver has been while its big brother is flexing its investment muscle? While traditionally, silver tends to follow market surges in gold, the past eight months have been rather confusing for the cheaper metal. Admittedly, silver has performed far beyond the predictions of slow witted mainstream skeptics, but it still has not come anywhere near its true potential, especially in light of gold’s incredible strides. Many may be wondering how it was possible for gold to stampede into the $1800 an ounce range after the downgrade while silver stayed completely static at around $40 an ounce. The behavior of commodities markets has been, indeed, very strange…