Archive - Nov 2012

Dominoes are lined up. Next in line: one of the world’s largest (but dying) shipyards.

After recently selling the most expensive per-square-foot residential property in the world recently, the liquidity slooshing around the world has been modestly stymied by Hong Kong's curbs on home-buying in the world's most expensive market. But there is always a greater fool to sell to, right? So, that Fed-sponsored liquidity has found a new yield-grabbing spot - parking spaces! Average HK parking space prices have started to surge (up 6.7% in Q3) to its second highest on record and as Bloomberg Businessweek notes, a parking space in the exclusive Repulse Bay are sold for $387,000 (yes, that's a place to park your car; and no, it doesn't come with a happy ending) - double the average US home price! "There's just too much liquidity in the market," said Simon Lo, Hong Kong-based executive director of research and advisory at property broker Colliers International. "The government has set up a firewall for residential properties, but all this money still needs to find a place." Once again we are reminded of the Fed mantra - repeat in monotone: 'there is no inflation and money-printing has no adverse effect'.

After examining data from all public, private, and government sponsored companies, research shows there are 439 undeveloped deposits or producing mines in the world. Visual Capitalist provides the following infographic showing that there are 113.9 billion tonnes of in-situ gold on earth, where it is located, and how rare are the largest gold deposits.

The good news this morning is that the 2nd estimate of the third quarter (3Q) GDP was revised up from 2.0% initially to 2.7%.  This is up sharply from the 2Q print of 1.3%. However, the combination of rising levels of unsold goods (inventory), slowing sales growth and declining incomes all point to weaker GDP growth in Q4 and into the early quarters of 2013.  Look for GDP growth in the 4Q to decelerate to 1.5% to 1.7%. While there is currently not an official recession in the U.S. economy, as of yet, the details of the current economic growth are not ones of robust strength. If we are correct in my assumptions the economic underpinnings will continue to negatively impact fundamental valuations as profit margins continue to be compressed. While most of the media, and mainstream analysts, continue to focus on the state of the economy from one quarter to the next - the trend of the data clearly shows the need for concern.  Of course, this also why Bernanke is already considering QE4.  As we stated previously, while economic growth did pick up this quarter it is the makeup, and more importantly the sustainability, of that growth is what we need to continue to focus on.

Got me thinking about hedge fund cheaters and too-good-to-be-true results.

Credit and equity markets (should they avoid a catalcysmic year-end slump back to reality) are heading for much better results that one might have expected. As JPMorgan's Michael Cembalest somewhat passive aggressively notes, this year looks to be a reward to those who stuck to normal investment allocations despite the macro issues in play, and despite low global economic growth. One way to visualize 2012: the red dot in the chart, which shows global GDP growth and equity market returns each year since 1970. There’s normally a connection between growth and equity returns, with the exception of the dots in the box, which are low-growth equity rallies. If we remove post-recession rallies and rallies based on significant interest-rate declines; what we are left with is the conclusion that 2012 is kind of unique: a low-growth year with double-digit global equity returns not based on a recession rebound or a bond market rally. The only other was 1998. Of course, a huge factor this year was the European rescue. What about 2013?

Salma Hayek is beautiful, rich and famous. Friedrich Hayek is a deceased Austrian economist. He wasn’t very good looking, certainly not wealthy but he did become famous – but only 20 years after his death and then only within the make believe world of nerdy economists. Fortunately for the World today, if we are lucky, Friedrich Hayek may become the most famous Hayek of them all. Until then, the World remains firmly trapped in an economic hell created by Friedrich’s (and therefore Salma’s) arch enemy – John Maynard Keynes. IceCap's Keith Dicker points out that, as most politicians and central bankers view the World in very short time frames, to truly understand the devastation wreaked by Keynesian economics, one has to take a step back and see how the financial destruction accumulated over time. It is true that these policies initially provided sugar highs for the economy – but the 3 step cycle of cutting interest rates, cutting taxes and borrowing money to create growth has finally reached its end point. If Mr. Keynes was alive today, we are confident he would be embarrassed that his lifelong work had been so severely distorted.

Imagine scanning lines and lines of code looking for a specific error which was causing a constant hemorrhage of money through bad trading executions.  Now imagine having a cocktail at a party and discovering through the aid of a napkin drawing exactly what type of order was causing your firm to destroy its Alpha over a consistent 6 month period.  That's the reason we're hammering the table, because it's not merely about reading the information wrong, its about inside connections to the exchanges.  These connections have helped many firms skirt the REG-NMS rules and Rule 610 as exchanges cater to the HFT in effort to garner the most fee's possible. 

Markets sold off earlier today when Boehner commented that "no substantive progress had been made" in the last two weeks, only to recover quite rapidly. The 'rejection' is now in full context as the WSJ has just reported the terms have not changed (or compromised) at all since we first discussed them two weeks ago. A $1.6tn tax increase (upfront), $50 billion economic stimulus, and most importantly (we suspect guided by the miscreant hand of Geithner) the removal of the need for congressional approval to raise the debt ceiling. Overnight futures are down 5-6 points pushing towards Boehner's intraday lows. This should throw a little light on exactly where the negotiations stand (nowhere) and how willing each party is to change and bring hope to the table for compromise (not at all). With DC this far apart still, the game for the next few weeks is not to solve the fiscal cliff but to avoid getting the blame for the cliff-dive.

Regardless if the Fiscal Cliff is resolved tomorrow (impossible), on December 31 (unlikely), or in tandem with the debt ceiling hike some time in March 2013, after all the government fund buffers have been soaked dry as they were back in August 2011 (most likely), one thing is certain: America's wealthiest are about to see their taxes soar - that's more or less a given. The question is what happens then. Will, the wealthiest - those who have access to and can buy banking, incorporation, citizenship and legal services in any global jurisdiction in a world that has never been this decentralized and this , take it all quietly up until that point on the Laffer curve says they will commit mass suicide, or maybe, just maybe, because they don't feel like being force to pay uncle Sam even more than they currently do with the proceeds not used for something constructive like paying down debt, but instead to fund government corruption and inefficiency, they will pick up and leave without saying goodbye or even looking back, and in the process crush future US government tax revenues even more and send the deficit soaring more. "No risk in that", many will say - after all where can they go? Well, apparently many places. Because if the UK, where as the Telegraph reports a stunning two-thirds of domestic millionaires opted to leave the country than pay a "punitive" 50% tax, is any indication it is possible that the imminent tax hike on America's wealthiest is going to be one of the most destructive things that can happen to America's already unsustainable budget deficit.

Generally bullish, sitting back and enjoying the show while it lasts.

Early macro data that was mixed (retail sales, Kansas Fed, Claims, some GDP ugly) saw stocks limp a little off the overnight hope highs but once the day-session opened in the US we were off to the races with stop-runs galore triggered by Boehner (down), Reid (up and down), Schumer (up) as the fiscal cliff idiocy hangs Damocles-like over every algos trigger finger. Treasuries largely ignore the afternoon schizophrenia - trending lower in yields as once Europe closed the USD drifted lower and bonds and stocks were bought in a 'we-heart-USA' style. High-yield credit had outperformed in the mid-afternoon but stumbled a little - notably after news of the SVU PE deal failed to fund. Commodities had a good day in general though we note that Gold/Silver is at its lowest level in nearly nine months as Silver has significantly bounced off its spike lows this week. Gold and stocks continue to recouple with the latter more volatile but the anchoring on VWAP and spike-to-stop-run swings are making the intraday behavior of equity indices become a little more farcical by the day.

In a recent article at the NYT entitled 'Incredible Credibility', Paul Krugman once again takes aim at those who believe it may not be a good idea to let the government's debt rise without limit. In order to understand the backdrop to this, Krugman is a Keynesian who thinks that recessions should be fought by increasing the government deficit spending and printing gobs of money. Moreover, he is a past master at presenting whatever evidence appears to support his case, while ignoring or disparaging evidence that seems to contradict his beliefs. Krugman compounds his error by asserting that there is an 'absence of default risk' in the rest of the developed world (on the basis of low interest rates and completely missing point of a 'default' by devaluation). We are generally of the opinion that it is in any case impossible to decide or prove points of economic theory with the help of economic history – the method Krugman seems to regularly employ, but then again it is a well-known flaw of Keynesian thinking in general that it tends to put the cart before the horse (e.g. the idea that one can consume oneself to economic wealth).

Whiting Petroleum just experienced a 'fat-finger' as we are sure Pisani and his ilk will describe it. What clearly happened was the headline/story scraping algos were tripped up by a sentence containing a bullish start and a bearish finish...

Whiting Petroleum Corp. explored selling itself [BULLISH buy buy buy] earlier this year but decided not to proceed after buyers balked over the oil producer’s asking price [BEARISH sell sell sell], according to people familiar with the sale efforts.

By the time the algos had read that first sentence of a WSJ Deal Journal blog post, the stock had pumped-and-dumped over 8% in 250 milliseconds - at which point humans entered the party (and sold). Efficient liquidity providers indeed.

When Warren Buffett claimed that a lot of secretaries pay higher tax rates than the super-wealthy, JPMorgan's Michael Cembalest wanted to take a closer look, and sure enough Buffett’s assertion is only the case in a minority of situations (like his own). We would therefore not expect to see large revenue estimates from an analysis of the fiscal impact of the proposals in the Fair-Share Act of 2012, since there are not that many people that would be impacted by a minimum 30% effective tax rate. Sure enough, the incremental revenue raised by the Fair-Share Tax Act is around $8 billion per year. This is real money and may be sound public policy, but in the context of a $1 trillion budget deficit expected for FY2013, it’s a rounding error. To convey this zoologically, we show two animals whose volume is proportionally the same (125 to 1): a hippopotamus, and its symbiotic companion, the yellow-billed oxpecker. We would like to think that elected officials and political commentators would avoid grandstanding and not mislead anyone on the fiscal impact of their proposals, but right now, there are some people who need help distinguishing between birds and hippos.