Archive - Jan 14, 2013

“The American people do not support raising the debt ceiling without reducing government spending at the same time. The consequences of failing to increase the debt ceiling are real, but so too are the consequences of allowing our spending problem to go unresolved. Without meaningful action, the debt will continue to act as an anchor on our economy, costing American jobs and endangering our children's future. The House will do its job and pass responsible legislation that controls spending, meets our nation's obligations and keeps the government running, and we will insist that the Democratic majority in Washington do the same.”

Nobody tell JPM's Tom Lee that JPM just fired 529 bankers from its Brooklyn-based Mortgage Bank ("independent foreclosure review" division) for "economic reasons." He might have some trouble reconciling it with his view on both the market and the economy which sees nothing but smooth sailing ahead. More to the point, with this mass layoff in the foreclosure review group, does this mean that JPM will simpy proceed with debt forgiveness for those millions who have been in foreclosure for about 3 years on average in New York state, and during which time they have not made one mortgage payment?

Curious why the teleprompter will grace the president, and the US public, with its presence in a few short minutes? Politico explains: "President Obama will hold a news conference at 11:30 a.m. Monday in the East Room, the White House announced. It will be the final one of his first term. Deputy Press Secretary Josh Earnest said he will discuss the need for Congress to raise the debt ceiling?" Shot every time Obama says "not negotiate", "cut spending", "raise taxes", and "fair." Drink everything, including from the deodorant bottle, if he or a member of the press mentions "trillion dollar coin" or, even better, "build the death star."

In the last days of 2012 we penned an article describing the current situation of the market as follows: "Margin Debt Soars To 2008 Levels As Everyone Is "All In", Levered, And Selling Vol." Today, Bloomberg catches up with this rather critical topic, and confirms that the buying power of the biggest marginal traders left in the market who do not recycled deposits into stocks - hedge funds - is nothing more than debt piled upon debt, as "Leverage among managers who speculate on rising and falling shares climbed to the highest level to start any year since at least 2004, according to data compiled by Morgan Stanley." BBG also recaps what our readers already know: "Margin debt at NYSE firms rose in November to the most since February 2008, data from NYSE Euronext show." In other words: everyone is all in and levered. And soon, in about two weeks, Bloomberg will figure out that everyone, or at least a central bank here or there, is, indeed, "selling vol."

Because in a world in which markets no longer are affected by fundamentals, and reflect nothing more than what politicians (and their Wall Street lobbies) believe the "fair value" of risk assets should be, it is likely that any fat-tail events will emerge not out of the markets, but out of politics (and perhaps out of central banks, although it is a safe bet that the world's central planners will merely do much more of the same). The chart below summarizes the geopolitical hotspots of the coming 12 months, which together with everything else are no longer reflected in asset prices courtesy of the central banks completely destroying the market's discounting function.

It is a “fraudulent transfer” to transfer assets with intent to leave the transferor with inadequate capital... Thus every bank “sale” done for the purpose of reducing regulatory capital is, by definition, fraud – a form of bank theft. 

If the Status Quo is ultimately a distribution system, as correspondent Simon H. proposes, then we should focus our attention on the inordinate share of the system's profits being distributed to the financial sector. Frequent contributor B.C. has ably captured this perfection of Neoliberal economic order in five charts.  The essence of neoliberalism is that a liberalized financial sector will efficiently regulate itself via market mechanisms and make more profitable use of capital than either the State or the non-financial sectors of the economy. This is the classic theory, but in practice the Neoliberal financial sector is the ultimate perfection of cronyism and political corruption, as the Central Bank and State protect the financial sector's vast skim of the national income with a combination of toothless regulations and regulations that are only enforced for purposes of percetpion management (see Soviet Show Trials). When the aforementioned benign neglect is insufficient to divert the national income to the parasitic finance-rentier sector, then the Central Bank and State actively transfer taxpayer monies to the financial sector via tax breaks, loopholes, and massive direct and indirect subsidies.

The investment world is slowly emerging from its Central Bank policy induced stupor to realize two of our long-standing themes.

A world of klepto-crony-fraudocratic-ponzi-plutopianists...

While the furious defense of $500 the second AAPL crossed under the psychological barrier - the first time it did so in regular trading since February 15, 2012 - was promptly launched as otherwise the hedge fund community, which as we reported two weeks ago, and as Bloomberg caught on today, is more levered and long than at any moment in the past 9 years and is mostly invested in AAPL, we expect this intervention to eventually succumb to the inevitable French military campaign conclusion, as not even every HFT algo programmed to lift every offer under $500 can delay the inevitable arrival of a very sad cashflow reality. As for the Bank of Israel which is now about 5% underwater on its AAPL cost basis: don't worry - Ben will bail you out too.

As reported over the weekend, late on Friday French forces launched a military campaign, consisting primarily of airforce incursions, designed to crush the "Islamic extremists" in the country in order to protect "European interests" (it is unclear what these may be). Parallel with this came the first humiliation for French military forces as a French helicopter pilot was killed nearly at the same time as the offensive was launched. But even more embarrassing was the bungled attempt to rescue a hostage in Somalia, in which the hostage is said to have died (by France at least, not his captors), while at least one French commando is also reported to have been left behind. Moments ago, AP reported on the latest French military developments in Mali, which confirm that when it comes to the words "French military" and "success" will hardly ever be seen side by side. To wit: "Despite intensive aerial bombardments by French warplanes, Islamist insurgents grabbed more territory in Mali on Monday and got much closer to the capital, French and Malian authorities said. In the latest setback, the al-Qaida-linked extremists overran the garrison village of Diabaly in central Mali, France's defense minister said in Paris. Jean-Yves Le Drian said Monday the rebels "took Diabaly after fierce fighting and resistance from the Malian army that couldn't hold them back." In other words, "before France sent its forces in on Friday, the closest known spot the Islamists were to the capital was 680 kilometers (420 miles) away"... while "by now sweeping in from the west, they are now only 400 kilometers (250 miles) from Mali's capital, Bamako, in southern Mali." Yet another French military campaign stupendously executed.

What a long and wild ride it has been since then and the forks in the road have been marked with turmoil, disdain and an ever increasing amount of debt for this small nation. The solution for each and every problem has been more money appended by more taxes and more austerity measures and the Greeks keep lining up and will keep lining up until the cash dries up and then other conclusions will be found. You may think it is a never ending story and that the current act will go on forever but that would not be my bet nor do I think it is a likely conclusion. Whether it is the German Parliament or the IMF or some other nation in Europe under the guise of nationalism and prudence who has had enough and rightly says, “That is enough;” there is an ultimate endpoint to this game.

There are some people who are very confused by last week's news of the "second highest inflow into equity funds on history." First and foremost, this is not "retail" capital reallocation, as EFSF/Lipper compile primarily institutional and ETF flow data. And indeed, as we reported earlier last week, the injection into the market, which also includes allocation to such vehicles as equity funds and ETFs by institutions, was driven primarily by a $220 billion surge in deposits in December, subsequently used by banks to reinvest said capital (most of which, ironically, coming from equity sales by retail investors as banks simply take the proceeds and reinvest into stocks). At the same time, retail investors [sic] continued to solidly pull money out of equity mutual funds. But while the source of funds was wrong, the use of funds was indeed accurate, and in the first week of the year there was a massive, $22 billion allocation to equities, second only to the $23 billion dumped into equity funds in the third week of September 2007. What happened the first time we such such an epic injection (whether it is from deposits, or from levered funding, or who knows what)? Brad Wishak of Newedge shows very clearly what happened then.

The Chairman of China Securities Regulatory Commission (similar to the US SEC) said that China can increase by 10-fold the size of the two main channels by which foreign investors buy mainland financial assets. It can, Guo Shuqing said, increase quotas under the Qualified Foreign Institutional Investors and the Renminbi Qualified Foreign Institutional Investors. The latter would make it easier for the yuan in Hong Kong (CNH) to be used to purchase Chinese securities. This hint helped lift China shares by over 3%, their largest gain in a month. The Shanghai Composite's 3% rise brings the gain to 19% off the multi-year low near 1949 (the year of China's Revolution) in early December.

The Central Bank of Ireland continues to be queried about the status of the Irish gold reserves. It has been reluctant to release information and said that it is “not obliged” to release information due to certain “rules and regulations”.  Ireland's finance minister, Michael Noonan, has also been asked about the country's gold vaulted at the Bank of England, such as whether the gold is held in allocated form with a bar list available and whether the gold is leased out into international markets. Answers are as of yet not forthcoming. The Sunday Independent, Ireland’s best selling Sunday broadsheet covered the story yesterday in an article (see news) published yesterday which is being widely shared on the internet and commented upon: Bankrupt Ireland owns six tonnes of gold, the bulk of which is held at the Bank of England, it has been revealed. The Central Bank of Ireland said the value of its gold holdings was €235m last time it checked. This represents just over 1 per cent of its total investments. A spokeswoman said the Central Bank was a party to the Washington Agreement on Gold, which recognised gold as an important element of global monetary reserves. She said the Central Bank had not entered into any lease arrangements regarding any of its gold but would not provide specific details of its storage arrangements with the Bank of England.