Archive - Mar 2013

Remember when greed-stricken Capitalist eBay'ers bid a single-Twinkie up to $8000.00? It appears our rather prescient note that they may regret not comprehending the US bankruptcy process was spot on as NBC News reports that the new owners of the Hostess Brand "look forward to having America's favorite snacks back on the shelf by this summer." The buying group, led by private equity shop Apollo Global, got news of their $410 million winning bid late last night. We suspect the re-establishment of these brands on store-shelves may cut the price a little from $8000 (or perhaps the all-knowing 'market' price signals that demand is there at that price?) - the question is - does eBay have a CFTC-equivalent that the winning Twinkie bidder can cry fat-finger to? Meanwhile, we wonder how long will it be before CNBC gets a visit from the friendly local bakers' union once again?

A Wall Street Journal analysis of 60 big U.S. companies found that, together, they parked a total of $166 billion offshore last year. That shielded more than 40% of their annual profits from U.S. taxes, though it left the money off-limits for paying dividends, buying back shares or making investments in the U.S. The 60 companies were chosen for the analysis because each of them had held at least $5 billion offshore in 2011. Within the group of 60 companies, WSJ found 10 that parked more earnings offshore last year than they generated for their bottom lines. The trend was most pronounced among the 26 technology and health-care companies. Not all of the earnings parked offshore are in cash. Some of the money is used to build plants and buy equipment overseas. Why? Apple said it held $40.4 billion in untaxed earnings outside the U.S. and estimated that it would owe $13.8 billion in tax if it brought that money back to the U.S. That is a 34% tax rate. Since foreign income taxes are creditable on U.S. taxes, that means Apple has paid less than 5% tax on those earnings to date.

Despite the hopes and greed of the marginal greater fool algo lifting equity markets to highs, Goldman's business cycle 'swirlogram' has dropped notably into the 'Slowdown' phase after a brief 6-month trip into 'Expansion'. China growth risks remain the largest weight on investors' angst (Chinese IP growth and retail sales for the January/February period were sequentially weaker, and overall disappointing) as Euro and US risks have 'apparently' fallen in the last week or two.

The American spirit is rooted in the belief of a better tomorrow. Its success has been due to generations of men and women who toiled, through both hardship and boom times, to make that dream a reality. But at some point over the past several decades, that hope for a better tomorrow became an expectation. Or perhaps a perceived entitlement is more accurate. It became assumed that the future would be more prosperous than today, irrespective of the actual steps being taken in the here and now. And for a prolonged time – characterized by plentiful and cheap energy, accelerating globalization, technical innovation, and the financialization of the economy – it seemed like this assumption was a certain bet. But these wonderful tailwinds that America has been enjoying for so many decades are sputtering out. The forces of resource scarcity, debt saturation, price inflation, and physical limits will impact our way of life dramatically more going forward than living generations have experienced to date. And Americans, who had the luxury of abandoning savings and sacrifice for consumerism and credit financing, are on a collision course with that reality.

Because all that matters is the Dow, as one intellectual giant noted - whether we close red or green "psychologically, we closed positive." Unfortunately, AAPL closed at its lows, Nasdaq -11 points, S&P 500 futures in the red perfectly balanced at their VWAP (which saw nothing but selling all day) for the fifth lowest volume day of the year (following yesterday's lowest volume day). The S&P stayed in its uptrend channel as the USD-Stocks correlation algos gave up today - as did the Treasury-Stocks algos. 10Y closed -3bps on the week (-6bps today). HY credit closed at its lows, VIX rose 0.75 vols today at 12.3% - leading stocks south, and while commodities pulled back off early spike highs, they are all in the green on the week (with gold just shy of $1600 intraday). While it is of little import as the sixth consecutive all-time Dow highs is all that counts for the headlines this evening, we would note that we haven't seen such weakness in AAPL and selling pressure at VWAP in S&P 500 futures for a while (and that was with a 19/30, $650 to the sell side MOC in the DJIA).

"...we've had volatile times and I think while the world has on balance, poured a lot more into equities; the reality is that the underlying situation in the world has probably not changed as much as the equity markets reflect."

Marius J. Kloppers, CEO BHP Billiton

The key point being made in The Global Endgame is that the entire global economy is in the final stages of the "winter" cycle of credit destruction and collapse of phantom collateral. The key dynamics here are debt saturation and diminishing returns: piling on more debt (i.e. borrowing more money) to stimulate spending only leads to fantastic excesses of speculation and mal-investment: $70,000 biopsies, $200 million fighter aircraft, $200,000 bachelor's degrees, McMansions in the middle of nowhere, and so on. The central banks are attempting to nullify the cycle of credit expansion and destruction by buying much of the sovereign debt being issued by profligate, hopelessly insolvent governments. Is pushing consequence forward the same as eliminating consequence? We will find out at some point in the near future.

Leverage, as measured by NYSE Margin Debt, rose a huge 31.6% year-on-year (YOY) and 10.2% month-over-month (MOM) to $364bn in January, compared to the July 2007 peak of $381bn. Net Free Credits at -$77.2mm (essentially cash balances in margin accounts) have plunged to levels (and at a rate) that BofAML believes generates a sell signal and typically result in market correction. The last time a (2-standard-deviation) sell signal like this was generated was on April 2010 and the S&P 500 subsequently corrected by 16% in two months. While the US equity market has not responded to at or near overbought or contrarian bearish sentiment levels very recently (remaining overbought for weeks) BofAML also notes a tactical sell signal was just triggered that is similar to those from September 14 and April 27, 2012 – both preceded market pullbacks.

On the first day of Conclave, we got no Pope decision as moments ago the Sistine Chapel chimney released black smoke. This is what happens when Goldman does not have a technocratic pope candidate who is, naturally, an immediate unelected shoo-in, guaranteeing the endless printing of diluted indulgences and Nominal Self-Flagellation Targeting.

First it was 900, then 1200, then 3000, and now the latest tally of dead pigs floating in the in Shanghai water supply nearly 6000. AP has the latest number: " The number of dead pigs found floating in a river flowing into Shanghai has reached nearly 6,000. The Shanghai municipal government said in an online announcement that 5,916 swine carcasses had been retrieved from Huangpu River by 3 p.m. Tuesday, but added that municipal water remains safe." At what point will the dead pigs begin to pose a health challenge? 10,000? 100,000? What is the maximum Chinese Surgeon General RDA of dead pig in one's drinking water? And whatever it is, how long until, pulling a page from Fukushima, it is quickly doubled? But perhaps the biggest question is what is causing this mass death phenomenon, and what does it mean for the quality and safety of other pigs in circulation?

It’s a pretty sad state of affairs in the Land of the Free when, in the last week alone, the political elite gave us bills which:

1. ensure the government cannot assassinate its own citizens with drones
2. impose price controls with insurance premiums
3. award the government with more power to initiate biosurveillance operations
4. create a quota system in the labor market

It really makes me wonder… how much more will it take for people to notice how rapidly they’re losing freedom, or how destructive the political leadership is?

Some have attributed the resurrection of the financial markets (or more appropriately the banks) from the March 2009 lows to the IASB/FASB changes to factual to fantasy accounting. The Telegraph reports today that from PIRC's and the Bank of England's Financial Policy Committee that while banker bonuses continue to rise (for now), 'hidden' losses among UK banks could total GBP60 Billion (USD 90 Billion). HSBC topped the list with GBP10.4 Billion in bad debts that have yet to be written off and while the 'accounting' bodies are suggesting they will address criticism of this farce, as one analyst notes, they "can still make unprofitable lending appear profitable." Regulators expect to hear plans from lenders on how they intend to fill these holes before the end of the month to coincide either with the FPC’s meeting on March 19 or a statement scheduled for March 27. While outright recaps are unlikely, banks are expected to restructure and set out plans to raise their capital levels over the next couple of years. More fantasy...

The Republican jerks have squandered an opportunity to come up with anything that is even remotely feasible.

“We’ve become more concerned recently”