Archive - Mar 2012

This would ordinarily qualify for the weekly piece of Friday humor, if only it wasn't too real. Bloomberg reports that everyone's favorite Federal Reserve overseer - JPMorgan Chase - is being sued by a trader who says he accepted a contract from the investment bank because a typographical error made him believe he would be paid 10 times what was actually offered. "Kai Herbert, a Switzerland-based currency trader, is suing JPMorgan for about 580,000 pounds ($920,000), his lawyers said at a trial in London this week. The original contract said Herbert’s annual pay would be 24 million rand ($3.1 million). JPMorgan blamed the mistake on a typographical error and said the figure should have been 2.4 million rand, according to court documents." Ok, so the guy is an idiot and somehow never understood what he was getting paid until after he looked at the contract. What people really want to know is if he pulled an Alex Hope and spent more than his entire post-typo  paycheck on a bottle of champagne at Zurich's douchiest night club. In other news, bankers everywhere are trying to track down their employment contracts to see if they are "owed" far more than they are getting due to confusion between decimal and '000s commas.

• More HFT Posturing: SEC Probes Rapid Trading (WSJ)
• Fed’s Bullard Says Monetary Policy May Be at Turning Point (Bloomberg)
• Hilsenrath: Fed Hosts Global Gathering on Easy Money (WSJ)
• Dublin ‘hopeful’ ECB will approve bond deal (FT)
• EU Proposes a Beefed-Up Permanent Bailout Fund (WSJ)
• Portugal Town Halls Face Default Amid $12 Billion Debt (Bloomberg)
• Hidden Fund Fees Means U.K. Investors Pay Double US Rates (Bloomberg)
• Europe Weighs Trade Probes Amid Beijing Threats (WSJ)
• Bank of Japan Stimulus Row Fueled by Kono’s Nomination (Bloomberg)

Buying gold is not just a way to resist the tyranny of banksters, but if bankster-run governments call for citizens to turn over their gold, as has now happened in Turkey, citizens should respond not by acquiescing to these suicidal calls, but by converting more of their fiat currency into gold. 

Dressed in the ominous black of his alter ego (Lewis), Charles reflects on his recent trip to NYC with the same incredulity as we do with our many and varied conversations with equity fund managers - they're long and terrified. The recognition of total dependency on Central Bank manipulation leaves an investing public seemingly believing in miracles. From Europe, where the consensus (media) belief is that 'all-is-now-fixed' or at minimum the can is a long way down the road (though the velocity of deterioration in Spanish spreads this week - largest 2-day widening in over 3 months - has many funds we know greatly concerned) when the reality is a dis-union declining into recession relying on more and greater money printing (while disparaging the Greek bailout and offering some crazy facts on the Greek population); to the US as incomes (and the economy) is growing modestly (very modestly) but the impact of earnings dropping (as margins/profits mean-revert) implied far less buybacks to fund the continued expansion of equities; to Asia where China (and EM implicitly) appears to be slowing. The reality is that in an election year he believes Central Banks will do all they can though warning that at some point in time even Wile.E.Coyote has to fall back to Earth.

For those curious why it is that the TVIX experienced a 50% plunge earlier today, as described here, perhaps the question should be directed to the SEC who may be better suited to answer just who, when and why had advance knowledge of Credit Suisse's announcement, after the close, that it would "reopen issuance of the TVIX." And since this is a rhetorical question, perhaps a better one is why does one participate in a market in which the fine print is always ignored, and is always used against the retail investor. Not that there is anything wrong with that of course - after all caveat emptor. Especially when none other than one of Ben Bernanke's favorite scholars on shadow banking (i.e., forced complexity) Gary Gorton said the following: "Liquidity requires symmetric information, which is easiest to achieve when everyone is ignorant. This determines the design of many securities..." Alas, when it comes to novel instruments such as levered ETFs that work as a closed end mutual fund hybrid, except when they don't, the only one ignorant is you, dear retail investor. Cost to your P&L: 50% in one day. Finally if for some inconceivable reason that doesn't work, just call the Credit Suisse ETN desk at 212 538 7333.

And the US fell to second place. Nothing is gradual in modern China.

Back in early 2011, even as the global economy was at best flatlining, the one goalseeked explanation to justify a levitating stock market (which was rising solely due to the short-term effect of transitory QE2 liquidity), was soaring corporate profitability (which only lasted as long as companies could trim some residual SG&A fat; they have now cut into the bone in terms of layoffs). This time around, with corporate margins having peaked, there had to be some other validation to explain away the "narrative" of the latest bout of central bank infused stock market levitation: it just happened that this time it was once again that old faithful, and always wrong, justification - decoupling. After all one just has to listen to 5 minutes of CNBC to hear it taken for granted that the US economy is doing oh so swimmingly. Here is a newsflash for all the permabulls out there. It isn't. Not only that, but as David Rosenberg highlights, 11 of the 13 most recent economic indicators have missed consensus expectations, and one can demonstrate that the other 2 - car sales and jobs - have been simplistically manipulated into a favorable outcome. So now that the market is turning over, with Europe and China both solidly into contractionary territory, with Corporate profit margins turning over, and with US data missing virtually every print, how long until the permabullish validations all go up in smoke, and the one true source of stock market "nirvana" - cheap money - is once again in high demand from the central planning cabal. In turn, the Chairsatans of the world will do as requested, as they always do, however not with crude (the real one - Brent, not that Cushing-buffered substitate) at $125, and with the risk that Israel may attack Iran any day now, with or without the blessing of the Fed's Class A director.

FRB Propaganda educational countermeasures brought to you by the Banzai7 Institute...

For the third day in a row (equal most for the year), stocks fell, led by the broad high-beta sectors (as one would expect) with energy (suffering as WTI lost almost 2%), materials, industrials, and financials all down notably (with the majors dominating weakness in the financials - though still up significantly post-JPM-divi). Futures and cash volumes picked up from yesterday - nearing their average year-to-date but average trade size fell further equaling the lowest year-to-date. With the China news (and then Europe), it was AUD and JPY that dominated price action as JPY strengthened and AUD weakened leaving the USD tracking the EUR and ending very modestly higher on the day. Commodities faced another day of torment with Silver underperforming. Gold outperformed but was down on the day still as from mid-afternoon, the commodity complex crept higher as the USD stabilized.  Broadly speaking risk assets (CONTEXT) led the equity market lower into lunch and then stabilized this afternoon - holding stocks off from further deterioration. An up-day for HYG (the high-yield bond ETF) - seemingly on the back of HY-HYG arbitrage more than asset rotation - and the craziness in the vol complex (VXX vs TVIX) somewhat supported SPY on the day but we note that ES (the S&P 500 e-mini futures contract) was unable to break above its VWAP meaningfully the entire day. Treasuries sold off from early in the US day session but only very marginally as 30Y remains -4bps on the week while the rest of the curve is unch to 1bps lower in yield only.

While T.Boone talks sense and gets to vent his frustration regularly on air, the sad reality is that although the obstacles for substitution to NatGas are not insurmountable, as Michael Cembalest notes we do not get the sense that an NGV fleet is imminent, even with very high gasoline prices. The best shale gas plays are the ones that involve finding liquids in addtion to (or instead of) dry gas. Given the price for coal, natural gas and crude oil per unit of heat/energy humans would stop using oil and gasoline and use more natural gas instead. But in the real world, in which Michael and you and I live oil and natural gas are not frictionless substitutes. As the EIA shows, oil is primarily used for transportation whereas natural gas is used mostly by industry and to create electricity. As a result, there is no substitution effect pulling up natural gas prices, particularly as more natural gas is being found in shale plays. But for shale investors, there are liquids that can be found in shale plays that are worth a lot more than dry gas: shale oil, and natural gas liquids. Shale oil obviously is valued based on oil prices, and natural gas liquids are valued close to oil prices as well. Whether over time natural gas can displace coal or be exported successfully to 'correct' the demand-supply equation is the question that remains but for now it seems a long way off and along with the normal operating risks, there is of course a broader issues of fracking - and what operation safeguards will need to be put in place to allay concerns in the future. The point is that demand possibilities are there but seem far off and while broadly the energy sector has been on a positive ride the last few years, we remember the lost two decades of underperformance during the 80s and 90s but it would seem should we 'dip' again in the global economy that integrated oils, drilling/services will underperform from their elevated levels.

The word 'inflation' dominated the words and thoughts of the propagandist-in-chief as he described the Fed's role in the global economy post World War II this afternoon. The 11,400 word speech contained a record-breaking 79 uses of the term 'Inflation' and exactly Zero uses of the word' Deflation'. Subliminally, we notice that the word 'might' is randomized in between the words 'Prices' and 'Inflation' and the words 'War' and 'Risks' are uncommonly tangential. We know in our hearts that the 8 uses of the word 'Paul' was Volcker-related but its proximity to the word ' bit' and 'inflation' leaves us questioning the deus-ex-machina that is Wordle and Bernanke. 'Monetary policy' and 'crisis' pop up a lot and it is evident that we have a 'financial economy' with the word 'Stable' only appearing 0.0015% during the speech.

UPDATE: TVIX has now perfectly recoupled with its underlying index (TVIXIV) after a week of HTB dislocation.

With the double-levered long Vol ETF TVIX down 30% in the face of a falling equity market and rising VIX, reality appears to have been suspended. The crushing divide seems driven by the fact that Credit Suisse halted share creation forcing the ETF to behave more like a closed-end fund and with its massive premium to NAV (thanks to extreme hard-to-borrow-ness), this compression makes some 'technical' sense. While the Vol ETFs are designed to track VIX futures not spot, we remain skeptical of these instruments (or the options on them in their wonderfully compound manner) and although CS has said this cessation of share creation is temporary, it definitely brings up significant operational risks for anyone considering trading these vol plays. The TVIX premium to NAV was huge at over 80% as it became hard-to-borrow and with today's action that premium is cut in half (and we assume NAV will rise given the pop in risk).