Archive - Jul 2012

In a recent BBC News article, philosopher John Gray asks the quaint but otherwise vain question of what would John Maynard Keynes do in today’s economic slump.  We call the question vain because practically every Western government has followed Keynes’ prescribed remedy for the so-called Great Recession.  Following the financial crisis of 2008, governments around the world engaged in deficit spending while central banks pushed interest rates to unprecedented lows.  Nearly four years later, unemployment remains stubbornly high in most major countries. Even now in the face of the come-down that inevitably follows any stimulus-induced feelings of euphoria, certain central banks have taken to further monetary easing. The question of interest shouldn’t be “what would Keynes do” but rather “why even listen to someone so pompous and nihilistic to begin with?”  Just as Keynes missed the Great Depression, modern day Keynesians missed the housing bubble and financial crash.  From his contempt for moral principles to his enthusiastic support for eugenics, Keynes saw the world as something separate from the bubble of his fellow elitists. Outside of that we guess he was a great guy!

Sayonara internal funding. In what we suspect will become a major issue (and warned in April of last year), Bloomberg reports that Japan’s public pension fund, the world’s largest, said it has been selling domestic government bonds as the number of people eligible for retirement payments increases. "Payouts are getting bigger than insurance revenue, so we need to sell Japanese government bonds to raise cash." It would appear the Ponzi has reached it's Tipping Point. Japan’s population is aging, and baby boomers born in the wake of World War II are beginning to reach 65 and eligible for pensions. That’s putting GPIF under pressure to sell JGBs so it can cover the increase in payouts. The fund needs to raise about 8.87 trillion yen this fiscal year. GPIF is historically one of the biggest buyers of Japanese debt and held 71.9 trillion yen, or 63 percent of its assets, in domestic bonds as of March.

Economic and business growth is a complex and multi-dimensional thing, driven by the complex relationship between both supply and demand. To claim that those who put the legwork into building a business - whether that is the owners, or workers - “didn’t build” the business is totally false and absurd. And even if Obama was talking about infrastructure and the wider economic system (which I suspect was the case) it is taxpayers who fund infrastructure creation, and the overwhelming majority of businesses and business owners (other than the bailed-out financial institutions and similar) contribute heavily to tax revenue.

There's Hope. There's Faith. And then there is Q4 Consensus Earnings Expectations...

Presenting ZNGA's sellside coverage as of this afternoon. Pick the odd guy out.

For some time now we have been warning about the danger to portfolios given the deteriorating fundamental, economic and technical backdrop in the markets.  Our warnings, for the most part, have been ignored as individuals continue to chase stocks in hopes that "this time will be different", and somehow, stocks will continue to ramp higher even though all three support legs are weakening.  Currently, it is the imminent arrival of the next round of Quantitative Easing (QE) that keeps "hope" elevated but further Central Bank intervention is unlikely in the near term leaving the markets at risk of a further correction. The technical and fundamental setup is currently a negatively trending market.  It is very likely that, in the current environment, we will retest the May lows, if not ultimately set new lows, in August.  Those lows will likely coincide with further weakness in the economy which should be the perfect setup for the Fed to launch a third round of Quantitative Easing.

UPDATE: ZNGA is down 40% now, trading with a $2 handle

They said it could never happen. They said it was social, mobile, everything... Well, oops... It seems the drought conditions around the world have hit the virtual farms too. Let it 'Virtual Rain'

• *ZYNGA 2Q REV. $322.5M, EST. $343.1M           
  
• *ZYNGA 2Q ADJ. EPS 1C, EST. 6C                      
  
• *ZNGA SEES YR EPS ADJ 4C-9C, SAW 23C-29C, EST. 27C

and with that 33% of market cap is wiped away... and the derivative play - Facebook is down 7% after-hours and EURUSD is dipping as all that virtual cash is vaporized (yes seriously EURUSD is dropping!). We assume that very soon, congressmen around the country will be calling for a government intervention as the hand-of-god impacts these poor virtual farmers. FYI - Margin Stanley is the largest ZNGA holder at 13.84%.

With GDP on Friday, FOMC around the corner, month-end T-3 ahead of that, and a market so ultra-sensitive to any and every word uttered from EU leaders, it is perhaps little wonder that volume was lack-luster (and so was commitment with the lowest average trade size of the year) today. What is perhaps most notable about a day when Treasuries ended unch to +1bps and stocks marginally higher is the weakness of the USD (pulling back to unch on the week) and strength in Gold (and Silver). What also surprises is the dramatic rise in correlation across asset classes - suggesting a high degree of systemic preparedness for some 'event'. 

The US drought, which as previously noted, is the worst in decades, has already caused corn prices to hit a record, and soy to soar. And as we first reported last week, and subsequently Bloomberg also caught, Asia could well be next to suffer soaring food prices next as "the monsoon season, which is critical for that country’s agricultural production, is 22% below normal conditions for the year." In fact, if there is one thing preventing the PBOC from engaging in full blown easing, it is precisely the threat that just as it floods the market with excess CNY, that the supply of food will collapse causing widespread riots and chaos a la Arab Spring 2011. And now, just to make sure that the threat of full out global food crisis is complete, and the deep fried black swan has truly gone global, we find that a heat wave in Southern Europe is causing the corn crops to wither in a region that is responsible for 16% of global exports.

A giant celebration idolizing the globalist ideals of corporatism, consumerism and leverage

Why a new LIBOR based on Fed Funds (OIS) is determined by back door dealings between government sponsored failures (Fannie/Freddie) and a handful of compromised TBTF banks

When Paul first introduced his bill a decade ago, it was written off as another piece of his far-flung libertarian worldview is how Politico juxtaposes today's (now successful) vote on Ron Paul's Fed Transparency Bill. "I want to appreciate and congratulate Dr. Ron Paul for his tireless pursuit of openness and transparency," said Rep. Jason Chaffetz (R-Utah). "Without his leadership, we wouldn’t be at this point today." Via Bloomberg:

• *FED AUDIT BILL OPPOSED BY BERNANKE GAINS APPROVAL BY U.S. HOUSE
• *FED AUDIT BILL NEEDS SENATE APPROVAL, PRESIDENT'S SIGNATURE
• *FED AUDIT BILL SPONSORED BY REPRESENTATIVE RON PAUL OF TEXAS

"I’m pleased. It’s something I’ve worked on for a long time, and it’s a good first step," Paul told POLITICO. "It’s coming to the floor as a response to the American people, because I don’t have a whole lot of clout around here." Never mind that the Fed audit is dead in the Senate — Majority Leader Harry Reid’s office has said he won’t bring it up.

Even Sandy Weill Says We've Got to Restore Separation Between Banking and Financial Gambling

Ron Paul's Bill Passes ...