Archive - Apr 2013

Moments ago Goldman reported its Q1 earnings which were strong enough to beat the highest Wall Street estimate, printing at $4.29 on an estimate range of $3.33 to $4.27/share. Revenue was $10.09 billion on estimates of $9.65 billion. What is notable is that while the bank is eating the lunch of its competitors, as it tends to do, in virtually all revenue categories (IB at $1.41 billion, FICC $3.22 bn, Equities: $1.92 bn, Investment Management $1.32 bn, and Prop trading $2.07 bn), it still was unable to match its prior year revenue in the key "client flow" categories of FICC and equities, which dropped from $3.46 billion to $3.22 bn, and $2.25 bn to $1.92 bn, respectively. How did Goldman offset the secular decline in market participation by everyone else? By doing what it does best: prop trading - in Q1 the firm's "Investing and lending" group, aka its Prop group, reported revenue of $2.068 billion (highlighted in the chart below) well higher than the $1.973 billion in Q4 and $1.911 a year earlier. This was the highest prop trading revenue reported by Goldman since Q1 2011 when, as we reported in February, the world was on the verge of being fixed. It wasn't, and the result was a collapse in Goldman prop trading in Q2 2011. Will this year repeat? This remains to be seen. However, for now, Goldman's employees are happy: in Q1 compensation benefits were $4.34 billion, or 43% of revenue. And with Goldman reporting "only" 32,000 total staff at period end, or the lowest since the great financial crisis, the average compensation per employee is once again above the "psychological" $400K barrier, or $403,281 on a trailing 12 month basis to be exact. Bollinger time, boys.

It was only a week ago that Iran was shaken by a major 6.1 earthquake, striking just 100 km away from the Busher nuclear power plant: a location so "opportune" some, so inclined, saw in this phenomenon anoter demonstration of the HAARP's capabilities. Those same people will then hardly be surprised to learn that moments ago the entire middle east, from Dubai to Delhi, shook in the aftermath of yet another massive earthquake, this time measuring 7.8 on the Richter scale, which once again was located as the USGS reports, some 86 km East South East of Khash, Iran. According to preliminary reports, the USGS says there is possibility of heavy damage in area of epicenter, and an estimated 359,000 people felt very strong to severe shaking. USGS also estimates that 16K may have felt 'severe' shaking, 343K 'very strong' shaking, 1.7M 'strong' shaking; 1.1M 'moderate' shaking. An Iranian official was promptly on the tape saying hundreds of dead expected from quake in southeast of country, even as the Russian company that built the Busher NPP saying there was no damage from the quake. How much more shaking can either the existing Iranian nuclear power plant, or the much maligned nuclear facility in Fordow, sustain before they go off in a big glowing mushroom cloud: that is the

• Investigators hunt for clues in marathon bombing (Reuters)
• Investigators scour video, photos for Boston Marathon bomb clues (Reuters)
• 'Act of Terror' Kills at Least Three, Injures About 140 as Bombs Wreak Carnage on Marathon Crowd (WSJ)
• Brent Crude Below $100 (WSJ)
• Slower China Growth Signals Days of Miracles Are Waning (WSJ)
• Central Banks at Ease Limit Risk Political Backlash (BBG)
• Merkel plans to quit midterm, says author (FT)
• Monte Paschi Prosecutors Seize $2.3 Billion of Nomura Assets (Businessweek)
• Treasuries back on investors’ buy lists (FT)
• J.C. Penney Said to Seek Ways to Separate Real Estate for Cash (BBG)
• Climate scientists struggle to explain warming slowdown (Reuters)
• Putin Calls for Stimulus Plan After Recession Alarm (BBG)
• TIPS in Longest Selloff Since ’08 as U.S. Bancorp Cuts (BBG)

Yes, there was economic news overnight, such as a Eurozone and UK CPI, both of which came in line with expectations (1.7% and 0.4% respectively), and a German ZEW which confirmed Europe's accelerating deterioration, tumbling from 48.5 to 36.3, far below expectations of a 41.0 print (somehow the huge miss has managed to push the EURUSD up by 60 pips to an overnight high of 1.31 but this is merely the pre-US open manipulation to ramp US equities higher), just as there was news that Angela Merkel's support for a Cyprus bailout is growing (was there an alternative?), and that as part of their ongoing investigation into Italy's repeatedly insolvent Monte Paschi, investigators had seized €1.8 billion worth of assets from Nomura Holdings, and that Spain as usual sold more Bills than expected, driven by oversize Japanese and Pension Fund purchases, but what everyone has been looking for is whether the relentless and record rout in gold is over. For now, it appears that is the case, with gold printing an overnight low of just over $1320 and ramping higher ever since, up 3% so far and rising.

"In this world nothing can be said to be certain, except death and taxes.”

– Benjamin Franklin

In most cases, Mr. Franklin's statement would be correct. However, as you will see below, there are some countries in the world where you can be certain you won't pay taxes. With the year 2013 marking the 100th anniversary of the income tax and the Federal Reserve in the US (two of the most powerful tools the government uses to extract wealth), we thought it would be useful to look at when Tax Freedom Day occurs across the world to gain some perspective. Tax Freedom Day (TFD) is the day of the year that the average person has in theory earned enough money to pay his or her annual tax bill.

Official projections put Portugal's debt to GDP at more than 124% by the end of this year. Utilizing Europe's continuing fantasy accounting; this is the number that Portugal and the EU posts for general consumption. However by counting liabilities and using American addition, subtraction and division I come up with a number of about 236%. In May 2011 Portugal did bite the dust and received $101 billion in bailout funds. Since then it has bobbed up, devastated its citizens with trying to meet the demands of the European Union and been hailed by both Brussels and Berlin for its imposition of the mandated austerity measures. Today we can assure you; Portugal is going down again. Former Portuguese PM Alberto Soares warns, "In its eagerness to do the bidding of Senhora Merkel, they have sold everything and ruined this country. In two years this government has destroyed Portugal." A careful reading of what the EU is now demanding reveals an actual shortfall of about $6 billion and where Portugal is going to come up with that is a good question (gold anyone?)

In 2012, Washington collected $2.4 trillion in taxes, more than $20,000 for every American household...and spent $3.5 trillion...

UPDATE: *AT LEAST 3 PEOPLE HAVE DIED IN MARATHON BLASTS: BOSTON POLICE

In the aftermath of the Boston Marathon explosions, the WSJ is reporting that counterterrorism officials have found what they believe to be five additional, undetonated explosive devices around the Boston area. The devices - which are in addition to the two that exploded near the finish line of the marathon - were discovered over the course of a frantic inspection of suspicious packages. Each had been rendered inoperative or was in the process of being rendered inoperative. A White House official said: "Any event with multiple explosive devices - as this appears to be - is clearly an act of terror."

When news hit the tape in February of 2007 that TXU would be acquired by a consortium of PE firms including KKR, TPG and Goldman, for the mind-boggling price of $45 billion, to this day the biggest LBO in history, there were those who were morbidly excited about the future as money was flowing freely, bonuses would hit a record, and there was only upside, and then there were those who knew this was the can't miss top-tick indicator of the beginning of the end. The latters ones turned out to be right. And not only because a year later the entire financial system imploded and only a $25 trillion global coordinated bailout prevented the collapse of the western way of life as we know it, but because now six years later, in the worst kept secret of Wall Street of the past month, TXU, now known as Energy Futures Holdings, is on the verge of the ultimate humiliation for private equity investors: Chapter 11, and a complete wipe out of not only the equity but major impairment of the debt holders as well.

JPY was its strongest at the start of October - and then the new Abenomics plan began. Very quickly the "long of gold in JPY terms" trade became extremely popular. After an impressive 16.4% rise into mid-February, gold-in-JPY corrected modestly; but the BoJ-inspired action smashed gold-in-JPY back up to its recent highs (helped by the seeming capitulation is JPY longs on the bigger-than-expected QQE). This appears to be the last straw on this trade. With JPY shorts so extremely positioned, the small rally on Thursday/Friday in JPY sent many scrambling to cover and, along with the need to unwind any and every asset to cover cash needs for JGB volatility, the avalanche began in gold-in-JPY. In 2 days, the entire Abe-inspired 'rally' in gold-in-JPY has been undone and all post-Abe buyers are now underwater. Whether this marks a short-term capitulation of these positions is unclear but CTFC CoT this week will be intriguing - and further JGB vol will not help. The rally in JPY of the last two days is the largest in 35 months - so someone clearly broke something...

A month ago we discussed the rising anti-Euro sentiment in the core of Europe and the "Alternative for Germany" party appears to be growing in strength. As the NYTimes reports, this is a party driven a collection of elites (not a groundswell from the streets) tired of Merkel's "flagrant breach of democratic, legal, and economic principles." While we warned that the forthcoming 'wealth tax' will raise the ire of the southern-European elites (and thus increase the likelihood of a euro breakup), it appears this small-but-growing party in Germany is pushing in the same direction, as one member noted, "we keep giving out more and more money when we have so many problems at home." Polls show as many as 1-in-4 would consider voting for the new party, and "they don't need more than 5% to make things very tight for [Merkel]." The increasing tension in Europe (and rising anti-Germany sentiment) is helping raise membership as "every swastika on the streets of Athens" reduces Merkel's support, and, as members note, "if the euro fails, Europe will not fail," amid nostalgia for the former German Mark.

Did you know that the greatest period of economic growth in American history was during a time when there was absolutely no federal income tax?  Between the end of the Civil War and 1913, there was an explosion of economic activity in the United States unlike anything ever seen before or since.  Unfortunately, a federal income tax was instituted in 1913, and this year it turned 100 years old.  But there was no fanfare, was there?  There was no celebration because the federal income tax is universally hated.  This year, the American people will shell out approximately $4.22 trillion in state and federal income taxes.  That amount is equivalent to approximately 29.4 percent of all income that Americans will bring in this year, and that does not even take into account the dozens of other taxes that Americans pay each year.  At this point, the U.S. tax code is about 13 miles long, and those that are honest and pay their taxes every year are being absolutely shredded by this system.

Anyone surprised, please raise your hands. And yes, it was fun when margin were hiked only on surges in the various futures contracts. Now, dumps works just as well. The logic, of course, is that gold shorts are also margined. However, judging by the immediate $15 drop in gold upon the announcement, those who are short the metals certainly have a much, much bigger balance sheet and cash hoard to satisfy any collateral requirements than those long. Next: expect the Shanghai Gold Exchange to hike margins in a few short hours once China wakes up and looks at overnight PM prices in horror.

Remember when the last time a cluster of Hindenburg Omens nearly toppled the market in August 2010 and the only saving grace was Ben Bernanke's QE2 announcement at Jackson Hole which sent risk soaring? Today, nearly three years later, we got the first instance of the Omen again. Will it be a one-off fluke, or a cluster, which is needed to confirm this dreaded technical formation? Stay tuned in the coming days to find out...