Archive - Jan 24, 2012

While Paulson's star was finally setting in 2011, that of mega macro fund Brevan Howard was rising, and has been rising for years by never posting a negative return since 2003. The $34.2 billion fund, now about double the size of John Paulson's, returned 12.12% in a year marked by abysmal hedge fund performance. But how did it make money? Simple - by taking advantage of the same permabullish market myopia that marked the beginning of 2011, and that has gripped the market once again. "The Fund’s large gains during the third quarter were due predominantly to pressing the thematic view that markets were ignoring clear signs of economic slowdown and were not correctly pricing the probability of central bank accommodation, particularly the reversal of the ECB rate hikes in April and July." Not to mention the €800 billion ECB liquidity accommodation that started in July and has continued since. So yes: those betting again that the market correction is overdue, will once again be proven right Why? Because "we are about to witness an unprecedented policy move. In the US, Eurozone and UK, fiscal austerity is being prescribed as the cure following the bursting of the credit bubble and to overcome the malaise following a balance-sheet recession. Unfortunately, there is no historical example of when this approach has been successful." As for looking into the future, "we continue to believe that markets remain at risk of  substantial dislocation."

Former member of the Bundesbank and the ECB: The case of Greece is hopeless, a fiscal union won’t work, and they all know it.

SOTU Post Mortem:

The best news possible: "Nothing will get done this year, or next year, or maybe even the year after that." Barack Hussein Obama
The worst news: Everything else.

Here is the text of President Barack Obama’s State of the Union Address as prepared for delivery at 9 p.m. ET. "Jobs" 33 vs. "Fat Cats" 0, Rich 3 vs Poor 1, Hope 2 vs Unicorns 0, Change 9 vs Tooth-Fairy 0, Mortgages 5 vs Apple 0, Main Street 1 vs Wall Street 3, China 4 vs Europe 1; DEBT CEILING 0

While watching the live-stream of Obama's third State Of The Union speech here, why not enjoy the 'p(o)ints game'? Thanks to BNP's Bricklin Dwyer for the 'game' and for noting that Obama's approval rating is 44% (approval has tracked the stock market/GDP higher since October's sub-40% trough) versus a disapproval rating of 47%.

Humans are a flawed species. Our minds are easily manipulated. We don’t like pain. We prefer instant gratification. We are susceptible to mass delusion. We will often choose hope over critical thought. Those with higher IQs will regularly attempt to take advantage of those with lower IQs. Fear and greed are the two motivations used by the minority in power to control and manipulate the majority. The American people have been led astray by a small group of powerful men. We were herded through a door in the wall of perception that promised an American dream of material goods, entitlements and pleasure with no obligations or responsibility to future generations. There is only one choice that can save this country from ruin. Each individual must make a choice to either to continue supporting the manipulative, corrupt status quo or coming back through the Door in the Wall.

“The man who comes back through the Door in the Wall will never be quite the same as the man who went out. He will be wiser but less sure, happier but less self-satisfied, humbler in acknowledging his ignorance yet better equipped to understand the relationship of words to things, of systematic reasoning to the unfathomable mystery which it tries, forever vainly, to comprehend” – Aldous Huxley

Without trying to take away from Apple's blow out earnings, a quick look at the Apple data sheet breaking down revenue and unit sales by geography points to something rather curious. While unit sales in Q4 were fine, with a modest drop in the US, even as European sales posted the biggest sequential increase on record at 306K (from 1,176K to 1,482K), one wonders just how sustainable this in itself is, now that Europe has officially entered a recession, especially since the incremental revenue in Europe in Q4 was also a record $3.9 billion (of the total $18 billion sequential increase). Yet nowhere was this quarterly surge more evident than in the US: the increase in American sales was a unprecedented $8.1 billion sequentially, from $9.7 billion to $17.7 billion (which means margins are blowing out: how long until FoxConn has something to say about this?). While most of this is to be attributed to the iPhone 4S launch in the quarter, the question then is just how sustainable is the new trendline growth if one normalizes for product cadence (yes, we hate that word too), or the ability of the company to reinvent itself quarter after quarter. With the iPad 3 expected this quarter, and the iPhone 5 the next, will Apple be a "product to product" company going forward, and what happens with baseline revenue growth ex-new product innovation? Or how about self-cannibalization? Not like we are saying anything new here, but the value of Apple is in product innovation, which is nowhere better seen than in the sequential Q4 revenue. Will this innovation ability stay with the new management? And how much of the Q4 sales surge was, sad to say it, the Steve Jobs death factor? Finally, the fact that in Q4 AsiaPac revenues were less than a year prior, does this mean that even with the 4S release, Apple has now lost the Asian market to cheaper, pirated, or Google-based competition? Finally, in a tried and true tradition of instant gratification (credit funded naturally), how much of the explosion in the December 31 quarter sales is simply a "cash for clunker"-like forward shifted of purchases that would have otherwise happened in the first quarter of 2012?

After generating $37.9 billion in cash, short and long-term equivalents in 2011, and a record $16 billion in Q4 alone (of which $11.8 billion in Long-Term Marketable Securities: Treasurys? Pretty soon Apple will be a bigger monetization force than the Fed), the company's total cash and equivalents horde is now just shy of $100 billion, or $97.6 billion. And with cash growing at 20% in the quarter, extrapolating into the future, means that the company will hit $1 trillion in cash by Q1 2015. Looked at otherwise, if Apple were a country, and its cash was equivalent to GDP, it would rank as the world's 58th largest economy, above such countries as Slovakia, Iraq, Luxembourg, and Syria. At least now we know where all that money that is not going to pay mortgages, is going. Next question: how long until uncle Sam demands windfall tax, or until the FoxConn workers learn to read press releases and politely request a pay raise or they all jump?

At some point, the market will force the issue of whether or not the ECB is going to be monetizing everything or not. Germany, having already seen the ultimate outcome of monetization (Weimar) has already made it clear that it will not tolerate this.

The suspense can now end

• Revenues of $46.33 billion, expected at $38.99 billion
• EPS of $13.87, expected at $10.14
• APPLE SEES 2Q REV. ABOUT $32.5B, EST. $31.87B
• APPLE SEES 2Q EPS ABOUT $8.50, EST. $7.96
• APPLE 1Q IPAD UNITS SOLD 15.43MLN , UP 111%
• APPLE 1Q GROSS MARGIN 44.7%, EST. 40.8%             
• APPLE SOLD 5.2 MILLION MACS DURING QTR, EST. 5.1M
• APPLE SOLD 15.4 MILLION IPODS IN QTR, EST. 13.9M
• APPLE SOLD 37.04 MILLION IPHONES IN THE QUARTER, REPRESENTING 128 PERCENT UNIT GROWTH
• APPLE GENERATES $17.5 BILLION IN CASH FLOW IN THE QUARTER

With quarter-to-date volumes at the NYSE 20% below Q4's average, we wonder just how much bank's earnings will be impacted as today saw the credit derivative index market 'disappear' this afternoon also. IG and HY traded (or at least were quoted) in an extremely narrow range post the European close (as ES also traded in a 2pt range for two hours post Europe before making a slightly bigger move). Stocks (and HYG) outperformed IG/HY today but ES has not been levitating as much as credit post OPEX. EURUSD rallied post the Europe close (as for the 4th day in a row, European equity and credit markets reversed direction pre- and post-US day session and then EUR reversed direction on Europe's close). The EUR-implied USD weakness did nothing to drive risk assets too much though HYG (the high-yield ETF) was active and positive on the day as we see HY credit and stocks as close in 'value' as they have been in almost 8 months. It seems obvious that between AAPL earnings (down today), the SOTU, and a Greek fiasco any moment that most 'traders' are either fully positioned and biting their nails or simply in wait-and-see mode. Copper outperformed on the day as Oil, Gold, and Silver all fell on the day (with Silver in a frenzy last evening). Gold and Silver are lower from Friday now and while TSY yields did drop into the close, they remain3-4bps higher on the week. The modest rally to almost unch in ES into the close was not supported by broad risk assets which were stable to modestly lower after holding high correlations all day.

Yes we scam...

The markets follow the money. 

Much has been said about the secretive vault situated 80 feet below ground level at 33 Liberty street, which contains over 20% of the world's gold (allegedly*), currently estimated at over $350 billion. Some have even robbed it: with the barrier between fantasy and reality a blur, courtesy of the total farce we live in which has rendered the IPO of TheOnion impossible, there is nothing wrong with actually believing Die Hard With A Vengeance did in fact happen. But if your knowledge of the vault is limited to the perspective of one John McClane, you are missing our on a lot. Which is why the new York Fed, in those rare occasions when it is not monetizing debt, and/or telling Citadel which securities to buy, has been courteous enough to put together "The Key To The Gold Vault" - the official brochure of the warehouse where more gold is stored than at any other place in the world.

No, there is no desperation in Spanish PM's Rajoy statement at all. The head of the economy, whose unemployment rate just soared to a ridiculous 23% in the past quarter, registering the largest drop since the Lehman collapse, pretty much made it clear that without European (read German) fiscal aid viagra, the unemployment rate may soon reach that of Chicago, only without the typo. Reuters reports that Spain favours the creation of the largest possible European financial rescue fund to prevent future crises, Prime Minister Mariano Rajoy said on Tuesday, adding that his government will meet its budget deficit target this year. "We support a rescue mechanism, the bigger the better, for it to act as a dissuading element for certain things that we've been going through lately," Rajoy told reporters after meeting his Portuguese counterpart, Pedro Passos Coelho. He said Spain will meet its budget gap goal of 4.4 percent of GDP this year. Judging by the Spanish (un)employment chart, and specifically recent trends therein, we will take the under. And the over on the Enzyte jokes.