Archive - Jun 10, 2013

UPDATE: Nikkei futures now -500 from US day-session highs

In what must be quite a surprise to Goldman (as we discussed here), the BoJ has decided not to give in to the market's demands:

*BOJ REFRAINS FROM EXPANDING J-REIT, ETF PURCHASES (expected lifting of cap)
*BOJ LEAVES FUNDING TERMS UNCHANGED AFTER JGB YIELD VOLATILITY (expected extension from 1Y to 2Y)

The market's angry reaction... NKY -400 from US day-session highs, USDJPY gapped down 80 pips to 98.00, JGB Futs closed, JGBs unch. Full statement to follow:

"A brave new Huxley-world of the unlimited debt,” a world where “money is no longer earned but printed”

It seems the question on many people's minds, as scandal after scandal crashes on the shores of Obama's White House is best summed up by The Telegraph's Damian Thompson. Yet another non-US paper asks, will Obama last the duration of his second term in a surveillance context where what has been revealed is said to be worse than Watergate.

All the news recently about the U.S. government’s telephone and online surveillance programs got ConvergEx's Nick Colas thinking about a rich academic field: the psychology of observation.  How do observers differ from actual actors in their explanations of events they either witness or in which they actually participate?  Scores of academic studies point to a key difference.  Actors tend to attribute their decisions to situation-specific inputs.  Those observing these actions, by contrast, tend to ascribe their ultimate cause as tied to the personality of the actors involved.  Same destination, but radically different interpretations of the journey.  Even the process of being watched can change human behavior.  Bottom line – observers and actors are rarely on the same planet, let alone the same page, when it comes to explaining a given event.  Keep that in mind as you try to understand Fed policy, or a company’s management, or even your own family.

The short but profitable tale of how 483,000 private individual have "top secret" access to the nation's most non-public information begins in 2001. "After 9/11, intelligence budgets were increased, new people needed to be hired, it was a lot easier to go to the private sector and get people off the shelf," and sure enough firms like Booz Allen Hamilton - still two-thirds owned by the deeply-tied-to-international-governments investment firm The Carlyle Group - took full advantage of Congress' desire to shrink federal agencies and their budgets by enabling outside consultants (already primed with their $4,000 cost 'security clearances') to fulfill the needs of an ever-more-encroaching-on-privacy administration.

The list of egregious offenses by current governments reads like a modern day version of the Declaration of Independence, in which Thomas Jefferson so eloquently lists the British King's "long train of abuses", including:

• He has erected a multitude of New Offices, and sent hither swarms of Officers to harrass our people, and eat out their substance.
• He has obstructed the Administration of Justice
• He is at this time transporting large Armies of foreign Mercenaries to compleat the works of death, desolation and tyranny
• For taking away our Charters, abolishing our most valuable Laws, and altering fundamentally the Forms of our Governments

Sound familiar? History shows that desperate, insolvent nations almost INVARIABLY resort to vain attempts at despotic control - capital controls, wage and price controls, border controls, people controls. And the worse things get, the more destructive the tactics become.

As Mike Tyson once ominously noted, "everyone has a plan until they get punched in the face," and it seems the rampage of equity bulls have some plan that many more prosaic fundamental analysis-based investors are unaware of (as we showed here). The 'punch' in the face will come; but in the meantime the following chart may be just the 'jab' that softens them up. As ThomsonReuters notes, of the 116 second-quarter earnings pre-announcements given by S&P 500 companies, 93 of them have been negative, while only 14 have been positive. The resulting 6.6 negative to positive guidance ratio is the most negative since the first quarter of 2001. Nothing to see here, move along.

• S&P Revises U.S. Credit Outlook To "Stable" From Negative

• Fed's Bullard Details How QE Can Be Cut

• Fed Retreat From Bond Buying Expected By Fourth Quarter - Poll

• U.S., Japan Leading Recovery In Major Economies - OECD

The New Deal social insurance philosophers thus struck a Faustian bargain... To get government funded pensions and unemployment benefits for the most needy, they eschewed a means test and, instead, agreed to generous wage replacement on a universal basis. To fund the massive cost of these universal benefits they agreed to a regressive payroll tax by disguising it as an insurance premium. Yet the long run results could not have been more perverse. The payroll tax has become an anti-jobs monster, but under the banner of a universal entitlement organized labor tenaciously defends what should be its nemesis. The puzzling thing is that 75 years later - with all the terrible facts fully known - the doctrinaire conviction abides on the Left that social insurance is the New Deal’s crowning achievement. In fact, it is its costliest mistake.

From the inside of the Federal Reserve's gold vault (where we are told one quarter of the world's bullion resides) to NYC's diamond district and the gold-dealers on the streets, this NatGeo documentary is a fascinating walk through the reality of trust, money, and gold. As the narrator notes, "the Fed's discretion is so trusted that few depositors have ever asked to see if their gold is still here," except of course Germany now that is, adding (from the exact opposite perspective to the man that runs the building) that, "for thousands of years people used gold as money... it's the perfect recyclable money...." The must-watch video then progresses to the reality of our financial world where he explains, the trillions in money that is transacted every day "used to be backed gold, but is now supported by the promise of our government... The fact that it all works based on trust alone is simply taken for granted," leaving the ominous question of "who is in charge" of that 'trust'? Cue Ben Bernanke - who answers the question of what the world would look like without a Fed... bank runs, stock market crashes, and financial chaos.

When you just have to laugh...

In what is likely the most disappointing, if not unexpected, news of the day, we find that according to a just released Pew Research study, a substantial majority, or 56% of Americans, "say the National Security Agency’s (NSA) program tracking the telephone records of millions of Americans is an acceptable way for the government to investigate terrorism." Only 41% object to having every phone conversation intercepted, investigated, analyzed, and recorded for posterity. Sorry Edward Snowden: you just threw your life away for nothing. The sheep have been properly and thoroughly conditioned and brainwashed, which is why they continue to get precisely the government they so rightfully deserve.

Think only coked up and hyper hedgefund traders pose a systemic risk? As this AFP story reveals, somnolent, undercaffeinated tellers can be just as threatening to the global flow of funds. A "German bank employee fell asleep on his keyboard and accidentally transformed a minor transfer into a 222 million euro ($293 million) order, a court heard Monday. The Hessen labour court heard that the man was supposed to transfer just 62.40 euros from a bank account belonging to a retiree, but instead "fell asleep for an instant, while pushing onto the number 2 key on the keyboard" -- making it a huge 222,222,222.22 euro order." Nearly a third of a billion mistake blamed on a "sleepy finger?" That's a new one...

A funny thing happens when there is only one driver of economic market growth, any chance of intelligent fact-based, logic-induced, fundamental-biased investing becomes reduced to the rubble of momentum-chasing leveraged beta. No matter how much your 2-and-20 taking manager explains his 'process', the charts below show that the thundering herd of 'dumb' money that used to be so useful in identifying the extremes of market hubris and dysphoria appear to have overwhelmed the world of 'smart' money. Hedge funds have never been more net long US equities; hedge fund returns have never been more correlated to the market; hedge funds have never produced so little alpha; and hedge funds are as leveraged to this beta as they were at the top in 2007. This will not end well...

The cluster of Omens is starting to build - now 3 in the last 7 trading days. This cluster is now the most frequent since the 2007 highs - more 'clustery' than the 2010 signals. Volume today was dismal - among the lowest of the year in both futures and cash. Equity markets were bid out of the gate on the back of Japanese exuberance - and JPY carry - which oddly hadn't helped European risk markets. Credit markets, which decoupled from equity's reality around lunchtime Friday - were on a one-way street wider today - entirely ignoring equity's efforts at exuberance. The USD saw earlier (JPY weakness-driven) gains entirely unwound by the close and ended unchanged but gold (small gain) and silver (+1.1%) outperformed as WTI limped modestly lower. Treasuries added 3-4bps in yield (up around 16bps from Friday's low yields). VIX also didn't play along with equity's general lack of direction and rose 0.5 vols to 15.5%. Homebuilders are underperforming once again but financials remain the best performers off Friday's lows (for now). Nikkei futures did nothing all day - hovering at last week's dead-cat-bounce highs.