Archive - Dec 2012

Over the last few years, and at an increasing pace as of more recently, unions have become more and more confident of their ability to effect change and taken much more aggressive activist positions against the capitalist oppressors. The most recent examples range from California cities to Twinkies-maker Hostess Brands, and each time the stance from the unions appears to have been far more aggressive (and M.A.D. prone) than in the past. The question is why? Perhaps, as we tweeted following Hostess' liquidation:

Will the broke PBGC step in and fund Hostess' 18,000 workers suddenly vaporized pensions?

— zerohedge (@zerohedge) November 16, 2012

...It is the confidence of an all-powerful government at their back with the US Pension Benefit Guarantee Corporation, which is the backstop for private sector plans, providing cover. The problem is, as UBS explains, the PBGC has a huge deficit and is cashflow negative. This leads us to the uncomfortable expectation of further USD government support (bailout) or a more direct monetization by the Fed. PBGC could be impacted severely if a few large firms terminate their pensions. In this case, UBS expects PBGC to sell equities and buy long duration fixed income.

Slowly but surely, USDJPY has moved back above 85.50 to its highest (weakest JPY) in 27 months as the threat promise of central bank intervention has once again created more front-running. With the market attempting to price in Abe's extravagance, we wonder just how much bang for the buck his 'actions' will create when words are not enough. Will Abe 2.0 be the same as OMT, QE3, and QE4 with the event actually constituting the 'top' or peak impact? Critically though, once Japan actually formalizes what it will do, which will be limited by how much rates can rise on bonds before all government revenue is used to fund cash interest, JPY will spike again, facilitated by the record short-interest (per CoT data). More curious is which Goldman alum will be appointed as the head of the BoJ once Shirakawa's term expires in March. As Bloomberg noted this morning, Japan’s Chief Cabinet Secretary Yoshihide Suga said, during a speech in Tokyo this morning, the "next BoJ Governor will be a person who shares Abe’s views."

By the Deceptive means of Misinformation and Manipulation of economic data the Federal Reserve has set the stage for broad based moral hazard. Through Distortions caused by Malpractice and Malfeasance, a raft of Unintended Consequences have now changed the economic and financial fabric of America likely forever. The Federal Reserve policies of Quantitative Easing and Negative real interest rates, across the entire yield curve, have been allowed to go on so long that Mispricing and Malinvestment has reached the level that markets are effectively Delusional. Markets have become Dysfunctional concerning the pricing of risk and risk adjusted valuations. Fund Managers can no longer use even the Fed's own Valuation Model which is openly acknowledged to be broken.

UPDATE: ES tumbling (down 12 from opening highs) through post-crash lows.

In early trading the USD is being sold in favor of the Euro and real assets such as Oil (Middle-East tensions) and Gold are bid. Stocks are tailing lower - stable at around unchanged for now - but following the slow risk-off leak of Treasury yields. Volume is what you would expect on Boxing Day but EURUSD wins the craziest market of the day award for behaving like a gap-heavy penny stock when its the largest currency pair in the world... though USDJPY is starting to push higher (JPY weaker). In stocks, AAPL -1.5% and HLF +6%.

You can now get gold ingots at ATMs, and physcially trade physical gold through brokerage accounts, but is it too little too late? Let's look browse through the facts...

The fiscal cliff dominates the mainstream news, but it is more like a bump on the pathway to the real cliff. In essence, the path has turned down and we're picking up momentum, gaining speed as we head for the cliff. The real cliff is the gap between what has been promised and what can plausibly be collected in tax revenues: $86 trillion but one recent estimate, over $120 trillion by other guestimates.  Understood in this way, we can see that raising taxes by $200 billion or cutting expenditures by $200 billion is not going to keep us from hurtling off the real fiscal cliff in a few years. The fiscal cliff is only one edge we're racing toward; there are others.

Three and a half years after the worst recession since the Great Depression, the earnings and employment gap between those in the under-35 population and their parents and grandparents threatens to unravel the American dream of each generation doing better than the last. We have noted a number of times that these divides are growing and warned of the social tension this could create and, as Bloomberg notes, it does not appear to be getting any better, Generation Y professionals entering the workforce are finding careers that once were gateways to high pay and upwardly mobile lives turning into detours and dead ends. "This generation will be permanently depressed and will be on a lower path of income for probably all of their life - and at least the next 10 years," as middle-income jobs are disappearing. A 2009 law school graduate sums it up rather succinctly: "I had a lot of faith in the system, the mythology that if you work really hard you can achieve anything, and the stock market always goes up. It was pretty naïve on my part."

In Late 2006, the S&P 500 futures market traded around 1435 and the commitment of traders was at an extreme net long position. The market fell shortly after only to manage a miraculous rise in the face of hedge funds going bust and an exploding and over-leveraged credit market. In mid-2008, the S&P 500 futures also traded around these levels, from where the epic collapse really began. Six years later, the S&P 500 futures traders are the most bullishly positioned they have been since those heady over-confident days. Still believe the talking heads that there is money on the sidelines waiting to be put to work? Still convinced that there will be some epic rally if the 'fiscal cliff' fallacy is resolved? Positioning (real money) trumps Sentiment (AAII surveys etc.) every day in our book. The Bernank will be pleased at his success.

As was expected, the October Case Shiller data showed that the recent transitory pick up in the housing sector, now that both REO-to-Rent and Foreclosure Stuffing, not to mention unparalleled debt forgiveness by virtually every bank has been thrown at the housing problem, continues with a ninth consecutive month in Top 20 Composite Index increases, rising 4.3% in October. On the other hand, based on the NSA data, the 4th consecutive dead cat bounce may be coming to a much expected end with October NSA data posting the first sequential decline since March. What drove the pick up in Seasonally Adjusted data? Nothing short of yet another housing bubble in the much beloved speculative areas such as Phoenix and Detroit, where home prices rose by 21.8% and... 9.9%. Yes: apparently one can pay for mortgages with foodstamps now. Other places such as Chicago and New York were not quite so lucky, with the average price declining by 1.3% and 1.2% in the past 12 months. What remains unsaid - very much on purpose - is that the shadow inventory problem is only getting worse, as we reported a week ago, when we showed that nearly half the market cap of Bank of America is in 6 month + delinquent mortgages, or mortgages that are not yet in foreclosure but virtually certainly will be, and will also be discharged.

Just hours after Ackman announced his joining Einhorn's alleged Herbalife short, we jokingly tweeted our expectation of bandwagon-following 'value' investors imminent herding...

Ackman joins Einhorn in the HLF short. Next up: Titney Wilson

— zerohedge (@zerohedge) December 19, 2012

And sure enough, with the holidays providing just enough time to read the 300 pages and to form his own "blindingly obvious" conclusion, Whitney Tilson has jumped in short HLF. We can only imagine the cost of borrow and wonder on the post-OPEX timing of a short squeeze given the huge short interest and the fact that HLF has recently hired Boies, Schiller, and Flexner to defend its business model. HLF is trading up 2% in pre-market.

With various "gun control" proposals flying fast and furious (precisely the reactionary kneejerk reaction Ron Paul warned would happen), some of which as brilliant as RFIDing every gun in existence, supposedly including the tens of millions of illegal and unregistered ones, it is perhaps appropriate to see how another authoritarian government - China - deals with its own equivalent of the touchy Second Amendment, its "First", or the right to free speech in a society which for decades has had none, and where the internet makes free speech regulation impossible (very much any gun control in a nation in which there is one gun for every person is impossible). China's solution, according to Reuters, the requirement of a real name registration for internet access for every person, "extending a policy already in force with microblogs in a bid to curb what officials call rumors and vulgarity...A law being discussed this week would mean people would have to present their government-issued identity cards when signing contracts for fixed line and mobile internet access, state-run newspapers said."

Still the slosh of new money is there. The compression in the bond markets will continue for a time. America will join Europe in her recession and the Continent will be buoyed by the sharing of the misery. It will certainly not be the best of times and most probably not the worst of times but it will be a time that is not marked by much joy or good fortune either. I predict that anger will swell, that people will feel betrayed and that the social conscience of the nation will be frayed by what has been promised and cannot be delivered. The spirit of the season may well call; “Rest Ye Merry Gentleman” but it will neither be “rest” nor “merry” as the New Year begins.

• Grand Bargain Shrinks as Congress Nearing U.S. Budget Deadline (BBG)
• Budget Talks Cloud Outlook (WSJ)
• Obama to cut vacation short to deal with fiscal crisis (Reuters)
• Stop-gap fix most likely outcome of "fiscal cliff" talks (Reuters)
• Aso Named Japan’s Next Finance Chief as Abe Primes Fiscal Pump (BBG)
• Aluminum Glut No Bar to Gains as Barclays Says Sell (BBG)
• Morsi signs controversial charter into law  (FT)
• Children, many ill, would be victims of Russia ban on U.S. adoption (Reuters)
• Turkey Central Bank Unveils New Tool to Limit Bank Debt Risk (BBG)
• Refi Program Expansion Eyed (WSJ)
• India Joins Indonesia Facing Heightened Policy Dilemma (BBG)

The market grudgingly comes back to work today, overdosed on caffeine and other alkaloid derivatives, a day when traditionally everyone calls in sick, as absolutely nothing has been resolved over the Fiscal Cliff with just 3 real trading sessions left in the year. And the likelihood that no real trading will take place is very high as both the House and Obama are still out of town, although the latter will take a late night AF-1 trip back to D.C. to rekindle rumors of an imminent 11th hour deal. It is increasingly looking as though the E-bay market, when all real trading take places  at 3:59:59 pm, will manifest itself at the calendar level too, with either a market surge or plunge in what appears to be the last trading day of the year. One can only hope if the news is negative that it has a hard limit like the ES limit down plunge last Thursday.