Archive - May 2012

In a four-part series, on the premise that a picture paints a thousand words, we present, via The Heritage Foundation, everything you wanted to know about the Federal Budget - In Charts. We start with Federal Spending - which is at record levels and is still growing, threatening economic freedom.

Munch's "The Scream" may be all the rage today, but to Jim Grant, in his latest interview on Bloomberg TV, the record price paid for the painting is not so much a manifestation of modern art as one of modern currency: "This is the flight into things from paper" . Thus begins the latest polemic by the Grant's Interest Rate Observer author whose topic is as so often happens, the Federal Reserve (for his latest definitive expostulatin on why the Fed should be disbanded and why a gold standard should return, delivered from the heart of Liberty 33 itself, read here). The world in which we invest is a world of immense wall to wall manipulations by our friends in Washington. And people get off on Goldman Sachs because it has done this and this, it is pulling wires... The Federal Reserve is the giant squid of squids, it is the vampire squid of vampire squids."

If the greatest trick the devil ever pulled was convincing the world he didn’t exist, the greatest trick our central bank ever pulled was convincing the world we couldn’t live without it. For most of that past twenty years, that PR campaign has been centered on the Great “Moderation”, so called because it apparently represented the full embodiment of economic management – a period of unparalleled prosperity, a Golden Age of soft economic central planning. Give the central bank enough “flexibility” and it will produce unmatched economic and financial satisfaction.

WTI Crude dropped its most in almost five months today, losing around 2.5%, beginning its descent after Draghi somewhat disappointed a hungry markets this morning (after better-than-expected claims data). Silver (which recoupled with Gold today) and Copper also started their drops at that point and extended the losses after the ISM Services miss. Gold leaked lower (though not as much as the rest of the commodity complex) even as the USD (which had been following its typical path of strengthening through the EU day session) dropped as an expectant EUR popped on no rate cuts. Stocks started their slide at the same time but broad risk-assets were in general leading equities lower (more carry FX and commodities than Treasuries today). We had a little bounce in stocks into the European close (up to VWAP) but that quickly fell back, lost today's lows, then broke yesterday's lows heading for one-week lows and the S&P 500's 50DMA. AAPL lost its 50DMA and closed there for the first time since earnings. After some noise around the macro data (and Draghi) this morning, Treasuries were extremely flat - trading in a very narrow range all afternoon - as did FX in general but AUD kept leaking lower (down 2% on the week now) and JPY stable on the week. Equities and credit re-converged today and late in the afternoon as ES (the S&P 500 e-mini futures) caught up to the downside of broad risk assets and stabilized in the late day ahead of tomorrow's noisy and meaningless NFP print. ES volume was average as it traded closest to its 50DMA in a week (and dropped the most in 8 days today closing near its lows of the day) and VIX, while off its highs of the day, closed above 17.5% - its highest close in over a week. While stocks are short-term in line with risk-assets, over the medium-term they remain notably expensive (especially to Treasuries since last week).

One of the best definitions of fascism – the one used by Mussolini himself – is the “merger of state and corporate power“. We’re pretty much there …

Facebook has just released a revised S-1 filing (link) which list additional information on the IPO. Among the details:

• The IPO would value the company at as much as $74.8 billion, based on a total of 2.138 billion Class A and B shares outstanding after the offering, assuming a $35 share price. Wasn't this supposed to be $100 billion?
• Total shares offered wil be 337,415,352 at a proposed price range of $28-$35 (mid point of the range is $31.50)
  • Primary shares (proceeds going to company) will be 180 million
  • Selling stockholders shares will be 157.4 million: these proceeds will not go to the company
• Facebook estimates: "We estimate that our net proceeds from the sale of the Class A common stock that we are offering will be approximately $5.6 billion, assuming an initial public offering price of $31.50 per share, which is the midpoint of the price range on the cover page of this prospectus"

While much of the panel's discussion is the somewhat typical growth, recovery, global diversification mantra of a homogenized investment community, The Milken Institute's 'Reading The Tea-Leaves' panel was dominated by some deeper thoughts from John Rutledge of Safanad SA. John sees the world not as a series of equilibria like any and every mainstream economist but the exact opposite with earthquakes and tsunamis capable of occurring at any time. In three-and-a-half minutes, Rutledge analogizes investing today as "living on the crust of a molten marshmallow" and notes that 'investing' to him now is "trying to figure out situations in which some stupid policy has created a big wedge between returns on different assets that causes people to redeploy capital" and that is what moves prices. Claiming that the two most destructive inventions of the twentieth century were Modern Macroeconomics and Modern Portfolio Theory (which have caused more loss of wealth than anything else he knows), the optimistic father-of-six goes on to discuss the three storm systems that must be navigated in the world currently: 1) Europe; 2) China's growth; 3) the extraordinary growth of Central Bank balance sheets. He concludes with some insights into why not to own bonds and what bonds say about scarcity of future cash-flows, and sees the greatest risk today is that "investors are mentally unprepared for the world we invest in"

"Either someone likes buying high and selling low, or they have figured out how to significantly increase the volatility in a stock." On May 2, 2012 beginning right at market close (16:00 Eastern) and continuing for about 54 seconds, an HFT algo ran that significantly increased volatility and impacted at least 34 stocks. We think this was either a test of an algorithm someone is getting ready to deploy during market hours, or that this algo already runs during market hours, but is much harder to detect amidst the huge volume of market data noise.

UPDATE: Sell-off stalled for now as S&P caught up with risk-asset's early warning for now.

S&P 500 Futures are picking up speed to the downside on rising volume which takes it back to its 50DMA (as we note AAPL has also broken its 50DMA intraday now). Has the market finally grasped that in order for the Fed to greenlight QE stocks have.to.drop and that frontrunning QE by constantly buying stocks ahead of the ramp simply will not work? We'll know soon enough.

Likely glowing from his glorious victory (h/t Trish Regan) over Krugman in Bloomberg's recent Paul vs Paul debate, Rep. Ron Paul destroys the central-planning arrogance of Bernanke and his ilk in an Op-Ed released by the FT today.

Control of the world’s economy has been placed in the hands of a banking cartel, which holds great danger for all of us. True prosperity requires sound money, increased productivity, and increased savings and investment. The world is awash in US dollars, and a currency crisis involving the world’s reserve currency would be an unprecedented catastrophe. No amount of monetary expansion can solve our current financial problems, but it can make those problems much worse.

In celebration of the one-year anniversary of the Corzining of Osama, a stash of letters uncovered during the raid that killed the Al Qaeda mastermind uncover a truly terrifying 'grand plan'. As the NY Daily News reports, Bin Laden planned to target more airplanes at Petraeus and President Obama with the cunning plan that a successful assassination would propel an "utterly unprepared" Vice President Biden into the Oval Office - and send the US spiraling into chaos." In the aftermath of Solyndra and the realization that Biden's key economic advisor was Jon Corzine this actually sounds like a brilliant plan. The full list of 17 Bin Laden letters can be found here with English translations and the Combating Terrorism Center's report is embedded below. Luckily for all of us, it appears the weakened Al Qaeda had no means to pull off such high profile attacks and Osama even reflected on his frustration with the inability of spinoff terror groups to inflict real damage on the West. Oorah!

While much has been written on the revisions, adjustments, and just-plain-guesses that make up the BLS' non-farm-payroll data, the frustration levels are building in the Bay Area as Charles Biderman provides the most in-depth discussion of why we need a better press corps. The simple truth, as Charles notes, is that even the BLS doesn't believe its own hype (in its footnotes) and while mainstream media and talking heads will quote the unemployment rate or NFP change as if it was transcribed by the hand of God, it is in fact an extremely ill-formed, very narrow survey with such huge statistical noise as to be entirely useless. However, while every human should watch this brief clip before buying that 100-lot ES milliseconds after the release tomorrow, we suspect, as usual, it will be algos-gone-wild no matter how many sigma we beat or miss.

"I would very much like to learn your thoughts on what careers may be viable for our children. With the future likely to change our lives so dramatically, where do you see opportunities for some form of career growth and some form of stability?"

Answer:

1.  Let go of old models of financial security. Do not assume a government job means 30 years of security and a fat pension thereafter. That's the past, not the future.
2. Assume monopolies and cartels imposed by the State will be disrupted and implode. The key example here is the sickcare system imposed by the State. For decades people have seen sickcare expand year after year, and so it seems sensible to assume that joining healthcare a.k.a. sickcare was a path to security.
3. The best career strategy going forward is to assemble multiple skillsets. What we know is that current models will be disrupted, but we cannot know the future. Thus we cannot know which skillsets will be demand. That may change constantly; "security" will flow not from clinging to failing institutions for 30 years but by being flexible and adaptive.