Archive - Aug 2012

Today's MANU fiasco tipped the scale on the dichotomy between the seeming exuberance that occurs on the stock exchange floors (and the incipient media attached to it) and the reality of what an IPO is and what exchanges do. Since the middle of last year - when the impossible was suddenly made possible by the US debt downgrade and markets realized that Keynesian arithmetic was an academic version of three-card-Monti - Bloomberg's IPO index has dramatically diverged in performance from the ever-exuberant S&P 500. This index of post-IPO performance sends an ominous signal. It must be clear by now that IPOs now occur when when MANAGEMENT want to cash out - simply put they are trying to maximize their gain. The divergence between new-money weakness and stuck-money strength highlights more than ever the Muppet-fleecing purpose of 'our markets'.

Iran has been pushed into a corner and is fighting for its life.  The safest weapon in its arsenal is an economic strategy; and it is the one point where the United States is vulnerable. It is no secret that many governments object to the sanctions and are willing to deal outside of normal channels for a reduced price.  If the Iranians should use the new private traders to dump a few million barrels of oil onto the market at a sharply discounted price, they just might encourage one of these governments to openly defy the United States for a bargain. As a persecuted minority, the Shia have learned that the weaker in a conflict must employ cunning rather than muscle. It is the inherent weakness of the alliance that is Iran’s strength.  The unwillingness of Washington to pressure supposed allies and the simple fact that there are buyers willing to defy the sanctions secretly reveals the cracks in the system.

Sometimes, some things are best left unsaid...

UPDATE: MANU below IPO price at $13.90 now....sigh

You know the score by now. Equities stage late day surge to green driven by an irrepressible squeeze lower in short-term volatility but high-yield credit doesn't follow suit as volume remains absolutely amazingly incredibly non-existent. S&P 500 e-mini futures (ES) ended the week nicely higher - closing today at the highs over 1402 (at the day-session close) with VIX at 5 month lows well under 15% (down 0.5 vols on the day which is a big move for a 1.5pt ES gain). HYG (the high-yield bond ETF) ended lower again - basically 5 days in a row - which is very unusual given equity's push to new highs. Risk assets in general did leak higher as stocks pushed up but are notably less bullish (and it appeared from our chats that credit desks left early and the IG and HY indices were simply being reracked higher - as opposed to traded there). Gold outperformed on the day - and it seemed like the EOD ramp in ES was a magnetic pull to Gold - as it disconnected from Treasuries and FX quite handily. The USD ends the week up 0.29% (yes, up), the S&P 500 up 1% while Treasuries limped a little higher in yield today to end the week 5-10bps higher (and steeper) in yield and commodities up the same as stocks (around 1%) aside from oil which managed 2.2% on the week.

Will Germany leave the Euro? I believe so. The country is already  bordering on insolvency due to nearly €1 trillion in backdoor EU bailouts (pushing Germany’s Debt to GDP to 90%). Over 69% of Germans are worried about inflation. Angela Merkel is up for re-election next year (and has gained political points anytime she played hardball with Europe) and Germany has implemented steps to place a firewall around its financial system and passed legislation allowing it to leave the Euro if need be.

Reed Hastings is not a popular man with NFLX shareholders. After taking the stock just shy of $300 last summer, a series of abysmal executive decisions that followed (including buying company stock using corporate cash near the peak) has seen the video streamer plumb news depths, and recently was trading at fresh two year lows. One would think that if indeed the CEO had some extra cash lying around that he could do something, anything to prop up his company, and send some signal of confidence in the now battered one time high-flying DVD-rental company. And would also be right. Partially. Because as the attached From 4 indicates, Reed did indeed just fork over $1 million to buy new shares. Only problem is the stock he bought was not his own but that of... FaceBook. Which he bought at an average price $21. Of course, if one needed glaring evidence that FB is going far lower, this is it. Yet we certainly thank Reed for telling us and his shareholders that NFLX is still not low enough for him to even consider buying some here.

Two months ago, in the aftermath of the "surprising victory" for the Italian PM from the June 29 European summit, which the media mistakenly interpreted as successful for Monti and Rajoy, whose hijacking tactics merely led to even more European animosity and instability in a system that is beyond fragile (i.e., Europe), we proposed an entirely different explanation, namely that "Merkel's Surprising "Defeat" was Merely A Gambit For A German Referendum?" To wit: "it appears that events over the past week may have been merely a gambit for something that Schauble and Weidmann have already hinted at: a popular referendum that decides the fate of Europe once and for all, washing Merkel's hands and letting the people decide if they want the European experiment to continue or not." Turns out we were right.

With 26 million shares traded and two more exhausting market-making hours to go for MANU's underwriters, it is clear that more than double the 16.67 million share float will be 'rotated' at least twice and yet stay in a 10 cent interval (with well over 95% of that within a minute 5c interval). What is perhaps more stunning is the massive bid at exactly $14 - the IPO price - as if they will never learn. Of course there are buyers for every seller and many algos played all day but with a massively dominant bid soaking up any and all offers near $14.00, we suspect the underwriters of the MANU IPO are 'pulling-a-facebook' and onboarding whatever they have to. There has now been 9.5 million shares bid at $14.00 (and none asked) - more than half the float alone! It seems increasingly self-evident that IPOs are simply weath transfer mechanisms - no win-win - and that the value-add from 'stock exchanges' is rapidly converging to zero.

The phrase "Are You Better Off Than You Were Four Years Ago?" and "It’s the Economy, Stupid" have become standards of American election discourse in recent decades. And seemingly for good reason. Although it is rare to unseat an incumbent, poor economic performance seems to play a role. We are less than four months away from the US Presidential election. Financial and economic developments have caused surprise political outcomes around the world from time to time.  UBS took a look back at the first terms of the nine presidents that preceded President Obama to determine if the performance of economic variables had any predictive power in determining the odds of re-election for a second term. The news is not good, from GDP growth to real disposable income, and from unemployment to the Misery Index, it seems the bailer-out-in-chief may just have an uphill battle.

The juggernaut continues as Egan Jones exposes a key issue we have been discussing: namely that in the absence of actual trading, banks, which can no longer rely on Net Interest Margin, will have to get smaller, leaner and more efficient, or else lose some of the competition. Such as Bear. Such as Lehman. Maybe, even, such as Knight.

The last few weeks have not been fun for California. Facebook's face-plant removed a large part of the unbelievably 'expected' tax revenues for the state, Stockton BK'd, and now we find out that San Bernadino - the latest and greatest city to file for municipal bankruptcy (after a $46 million shortfall in its budget was irreconcilable). The reason it's a big deal - unfortunately the state's retirement fund - CalPERS - is the city's largest creditor by far with a wonderful $143.3 million exposure. This is more than half the entire debt load of $281.4 million of the Top 20 creditors alone! The deadline for creditors to challenge bankruptcy eligibility is September 21st and we suspect that until then, the comptrollers should be renamed the Golden State Worriers? What is ironic is the same unions that we suppose are fighting the city over cuts and forcing it to take such drastic action are likely to be entirely beholden to their pension benefits from the very same CalPERS which is about to take a sizable haircut.

I am sickened by the vast sums I see households squandering on hopelessly marginal "investments" in expensive higher education, healthcare and housing. I too am caught in the crony-capitalist/State cartel web of waste, skimming and fraud: we have paid tens of thousands of dollars on no-frills healthcare insurance (no eyewear, no dental, no meds, $50 co-pay) in the past decade, and received perhaps 3% of this sum in care. But to not have health insurance in America is to invite financial ruin should we suffer some serious illness. The same "must-have" argument supports the conventional wisdom about education: a young person "must have" a college degree if they hope to escape a lifetime of poverty. The issue isn't education per se, it's the ever-rising cost of an education that has arguably lost value in a global job market that faces a vast surplus of educated workers and a scarcity of secure, high-paying jobs. Simply put, minting 10,000 PhD chemists (for example) does not magically create 10,000 jobs for PhD chemists. Yes, education and healthcare are necessary, but cartels have leveraged this necessity into vast skimming operations that yield marginal returns even as their costs balloon without limit. Housing is also a necessity, but it does not follow that it is a high-yield investment. Rather, it has become a sinkhole for hard-earned, scarce cash.

What's the point in commenting any more: when two discrete trades manage a nearly 1% cumulative roundtrip move in the entire market, all we can say is "good luck human" - the whale on the other side of "that" trade is far bigger than Bruno Iksil. And good luck when you need liquidity once the selling returns. The discount to the bid will be far, far more than the 5% it cost Knight to unwind its error book to Goldman.

Otherwise… No titbits…

Nada. Rien. Nichts. Nothing.