Archive - Feb 23, 2012

While the headline-chasers will allocate cause to effect for every twitch and ditch in asset prices, JPMorgan's Michael Cembalest appears to agree with us that nothing else matters but central bank balance sheet expansion. As we discussed earlier in the week, major central banks have injected nearly $7tn into world markets since 2007 and while the obscene rise in gas prices should somewhat self-limit the print-fest, it appears not before another bubble has burst as central bankers feel safe on this path given their microscopic focus on their own inflation-measures. Whether it be asset-reflation, boosting bank capital, pulling forward consumer demand, or government-reacharound financing, Cembalest sums up: super-easy monetary policy supports markets right now, prompting his question: "Who knew that unlimited money printing would be such a clean and simple solution to the world’s problems? I would love to read a book called “Reliable Central Bank Exit Strategies”, but I don’t think it has been written yet. Enjoy the ride."

We have only one question: "If a 20% rise in global stocks required a $2 trillion expansion in aggregate assets, which also took EUR-Brent to all-time record highs and WTI to over $107 $108, where will the next 20% come from, and how will the economy fare with $150 WTI?"

The financial world is awash with theories as to how significant the Second Greek Bailout is. I’m far less concerned with this (the Bailout accomplishes nothing of import and only puts off the coming Greek default by a short period). Instead, I think it much more important to ascertain the true exposure to Greek sovereign debt. And what better place to start than the banking system of the one country that is playing hardball with Greece during this latest round of negotiations: Germany.

The war parties in Israel and Iran are in full ascendancy.

"I felt a great disturbance in the Bourse, as if 216 hedge funds suddenly cried out in terror and were suddenly silenced. I fear something terrible has happened."

We need to look to Europe now to see what TPTB have in store for us. This is the consummate problem, reaction, solution game being played for all the marbles. First, you get the problem “spiking interest rates for the peripheral countries.” Then the “reaction,” financial panic and fear. Finally the “solution.” The placement of unelected technocrats as the leaders of Greece and Italy with ties to all the power structure’s institution such as the Trilateral Commission, the Bilderberg group and of course Goldman Sachs. It is like a coup that takes the shadow government from the shadows and puts them in your face. The reason that this is so key is because we are next. They don’t want to roll up everything at once. If they can get Europe safely consolidated then they will move here. That is when interest rates in the U.S. will spike (problem), and we get panic (reaction) and then the solution (bankster technocratic committees in charge and the IMF to the rescue, ie loss of sovereignty). This is the plan and I see it as clear as day.

While this week's two previous auctions were uneventful and very much unimpressive, today's 7 Year $29 billion issue continues to show that the bulk of the curve action continues to be at the belly. Unlike January's spotty 7 Year auction which saw a massive 56.64% in Primary Dealer take down, today's was the opposite, with the auction pricing a whopping 3 bps inside of the When Issued at 1.418%, with Dealers taking down just 38.89%, well below the TTM average 47.46%. This was the lowest Dealer take down since December 2010.  The Indirect Bid was well higher than in January when as we already noted previously foreign investors were dumping US paper, yet at 41.85% was just in line with the TTM average of 41.54%. The big outlier however was the Direct Bid take down which soared from 11.59% to a massive 19.27% take down - a low 44% hit rate on the Direct Bid. Why the huge shift in sentiment toward US paper? It hardly has anything to do with the yield rising from a meager 1.36% to a just barely higher 1.42%. And yet, there was a tangible change in Direct interest - is it merely PIMCO buying up more paper? Most likely - this is perfectly aligned with the fund's recent average effective duration so we would not be surprised if Bill Gross is now loading up on the belly. The result of the super strong auction is the entire treasury curve sliding in yield, as it indicates that the wholesale expectation of a shift away from Treasurys and pushing into stocks, is nowhere to be seen. And stepping back from the tree, the forest now stands at just under 101.5% debt/to US GDP. Many more auctions coming.

The scale, speed, and time of the equity rally of the last five months or so echoes loudly the post-Jackson Hole rally in 2010 (from AUG10 to FEB11) and while the aggregate money pumpers of the world have done their best to keep the pedal to the metal (gold?), we worry that just as before we are running out of greater fools to buy assets at the margin in the hope that they will be first through the gates when the spigot gets turned off (or at minimum turned down). Sentiment is peaking, the number of bulls in the AAII survey is rolling over (just like in DEC10/JAN11), the number of bearish respondents is troughing (just like in DEC10) and the ratio of Bulls to Bears (having approached record highs) is now rolling over (just like in DEC10/JAN11).  With energy prices surging (as they did in Q4 2010/ Q1 2011) and expectations high for the next round of gross money-printing (forget supposedly better US fundamentals, QE3 is here any minute apparently and LTRO 2 will be enough to build a real Death Star), we fear once again that hope has exceeded its credibility and with financials showing some cracks in their armor (in credit for sure and now in stocks too), perhaps the less-than-greatest fools are leaving the building early.

Too bad not every hedge fund can be long Apple (even if as Goldman points out, they sure are trying - "One out of five hedge funds has AAPL among its ten largest long positions" - a truly stunning observation and one which means that if Apple, which is priced to absolute perfection, has even one hiccup, we would see an absolutely epic bloodbath in the market). Because if 2011 was a horrible year for hedge funds which closed the year well below, or -10%, their respective benchmark - the S&P (unch for the year), the last thing hedge fund LPs can afford is another year in which they pay 2 and 20 to generate a return lower than the S&P. Yet to their horror, this is precisely what is happening. According to Goldman's latest Hedge Fund Tracker, "The typical hedge fund generated a 2012 YTD return of 3% through February 10th compared with 7% gains for both the S&P 500 and the average large-cap core mutual fund." Yes, there are outliers, but far and wide this means that even more redemptions are about to hit the hedge funds space, where jittery investors will no longer show any restraint before sending in that redemption letter. It gets worse: "The 60-fund Dow Jones Credit Suisse Blue Chip Hedge Fund IndexSM has returned 3% YTD, in line with our sample average.... The distribution of YTD performance indicates that 50% of hedge funds have  generated returns between -2% and +2%." And the absolute kicker: "Only 10% have returned more than 7%, outperforming the S&P 500." Another way of saying that is that 90% of hedge funds are generating negative alpha! If that is not the signed, sealed and delivered notice of death of the hedge fund industry courtesy of not ubiquitous central planning, we don't know what is.

Americans participating in a recent Gallup poll showed the highest level of confidence in an economic recovery in a year.  Sounds great, but you can’t ignore the nearly 13 million unemployed, the 46 million people on food stamps and the roughly 29% of the country’s homeowners whose mortgages are under water. They would find it hard to subscribe to the poll’s sunny conclusion. On the other hand, there’s no getting away from a bevy of seemingly increasingly favorable economic data, which, more recently, includes falling weekly jobless claims, four consecutive monthly gains in the leading economic indicators, somewhat perkier retail sales and a pickup in housing starts and business permits. Pounding home this cheerful view is the media’s growing drumbeat of increased economic vigor....Confused? How can you not be?

An explicit contagion path chart, since you probably won't get info like this anywhere else... 

Yesterday we pointed out that the number of companies in Europe losing money jumped for the first time in 2 years, doubling from 5% to 10% (even as the matched metric for US peers continues to improve). Unfortunately, we can now say with absolutely certainty that this number will shortly soar courtesy of surging input costs which eat even further into what little is left of corporate profits, not to mention the demand destruction which comes from having to pay a price at the pump which would lead the average American to get a stroke on the spot. The culprit - Brent, whose price in euros has now risen to a new all time high, surpassing the peaks seen in 2008. In fact, EUR brent is now up 293% from its 2008 lows, putting the returns of the S&P and even gold to shame! And all along the market keeps on happily chugging higher completely oblivious of the tens of billions in corporate profits that new are eaten away courtesy of this latest and greatest side effect of massive central bank liquidity tsunamization. But hey - there's always Apple's latest gizmo which somehow is never quite "priced in" by the market.

The surreal keeps getting surrealer. One could probably think that after being forced to pay for the privilege of having a job, to fund European bank solvency out of their pocket as part of the Greek "bailout", and finally to hand over their gold, the Greeks would have at least put up a fight. One would be wrong: instead of doing anything else than the occasional store front looting by marauding gangs, what Greeks are doing instead... is lining up for German lessons. Well, if you can't beat them, may as well learn their language. Athens News reports: "Ruediger Bolz has 350 students coming through the doors of his German language institute in central Athens each day - 20 percent up on a year ago. The rush among Greeks to learn German may seem odd after the war of words between the two countries, with Greeks fuming at German accusations of financial mismanagement and some media playing on Nazi caricatures of Berlin politicians. Yet for Bolz, who has run the Goethe Institute for the last six years, there is no mystery: his pupils are happy to side-step politics and face up to harsh economic realities by acquiring new skills." So years of debt slavery induced misery may be in store, and the sheep are delighted to get the electric cattle prod, but at least they get to beg their employers to take their money with the proper umlaut usage.

It is just getting plain silly: with a record 216 hedge funds holding Apple at the end of 2011, why does anyone pay the 2 and 20 any more? Just buy Apple. As a reminder, at the end of Q3 209 hedge funds owned Apple, at the end of Q2 it was 181, at the end of Q1 it was 173 and so on. The paterns is clear. What is also clear is that as Apple goes, so goes the entire hedge fund space. "30% of  fundamentally-driven hedge funds hold at least one share of AAPL. One out of five hedge funds has AAPL among its ten largest long positions. When among the top ten holdings, AAPL represents an average of 8% of total single-stock long equity exposure. In aggregate, hedge funds own only 4% of AAPL market cap with 1.6% average position across all funds."

While hardly discussed broadly in the mainstream media, the top news of the past 24 hours without doubt is that in addition to losing its fiscal sovereignty, and numerous other things, the Greek population is about to lose its gold in a perfectly legitimate fashion, following amendments to the country's constitution by unelected banker technocrats, who will make it legal for Greek creditors - read insolvent European banks - to plunder the Greek gold which at last check amounts to 111.6 tonnes according to the WGC. And so we come full circle to what the ultimate goal of banker intervention in the European periphery is - nothing short of full gold confiscation. So just how much gold will be pillaged by the banker oligarchy (it is amusing how many websites believe said gold is sacrosanct by regional national banks, and thus the EUR is such a stronger currency as it has all this 'gold backing' - hint: it doesn't, as all the gold is about to be transferred to non-extradition countries)? As the World Gold Council shows in its latest update, between all the PIIGS, who will with 100% certainty suffer the same fate as Greece (which has shown that unlike during World War 2, it is perfectly willing to turn over and do nothing) there is 3234 tonnes of gold to be plundered. And likely more as further constitutional amendments will likely make the confiscation of private gold the next big step. how much does this amount to? At today's prices this is just shy of $185 billion. Of course by the time the market grasps what is going on the spot price of the yellow metal will be far, far higher. Or, potentially far, far lower and totally fixed as the open gold market is eventually done away with entirely in a reversion to FDR gold confiscation and price fixing days.