Archive - Jul 19, 2013

And in the category of most made up charges by the SEC against a hedge fund billionaire we have:

SEC SUES STEVE COHEN FOR FAILING TO PREVENT INSIDER TRADING
SEC SUES SAC’S STEVEN COHEN WITH FAILING TO SUPERVISE MANAGERS
SEC CHARGES STEVEN COHEN WITH FAILING TO SUPERVISE PORTFOLIO
SEC SEEKS TO BAR COHEN FROM OVERSEEING INVESTOR FUNDS
ALLEGES COHEN RECEIVED INFO THAT SHOULD HAVE LED TO PROBE

All of the above was known to our readers since December 2010. Thus Steve Cohen's forced conversion to a "friends and family" office is now complete. And since hedge funds make money not on portfolio upside (and certainly not downside) but on the management fees, the chapter of Blue Eyes' information arbitrage glory days are now over.

Presented with little comment aside to note that no matter how much free money is mis-allocated to a problem, the can-kicking eventually runs out of road and reality bites.

Last week: “A culture of dangerous greed and excessive risk-taking has taken root in the banking world.” Now: a quixotic moment for those senators from both sides of the aisle

As the nations of Europe argue over and over that France is not Greece, Portugal is not Ireland, and reality is not fantasy, Bloomberg has in fact quantified just where each of these troubled nations stands for the next five years. The bad news for the Spanish - facing demands for Rajoy's resignation over the graft - is that they have the worst five-year outlook of all European nations. Worse than Portugal, notably worse than Greece, and dismally worse than Bulgaria. On the bright side, Norway - with the best outlook by far over the next five years - looks attractive (or closer still Luxembourg.)

As part of the Appendixed disclosures in the aftermath of JPM's London Whale fiasco, we learned the source of funding that Bruno Iksil and company at the firm's Chief Investment Office used to rig and corner the IG and HY market, making billions in profits in what, on paper, were supposed to be safe, hedging investments until it all went to hell and resulted in the most humiliating episode of Jamie Dimon's career and huge losses: it was excess customer customer deposits arising from a $400+ billion gap between loans and deposits. After JPM's fiasco went public, the firm hunkered down and promptly unwound (or is still in the process of doing so) its existing CIO positions at a huge loss. However, that meant that suddenly the firm found itself with nearly $400 billion billion in inert, nonmargined cash: something that was unacceptable to the CEO and the firm's shareholders. In other words, it was time to get to work, Mr. Dimon, and put that cash to good, or bad as the case almost always is, use. So what has JPM allocated all those billions in excess deposits over loans? Courtesy of Fortune magazine we now know the answer - CLOs.

This earnings season is much worse as almost every single company is missing on the revenue side which is not as easily to "fix" as the EPS.... 

Oil and gas exploration is getting bigger, deeper, faster and more efficient, with new technology chipping away at “peak oil” concerns. While hydraulic fracturing has been the most visible revolutionary advancement, other high-tech developments are keeping the ball rolling - from the next generation of ultra-deepwater drillships, subsea oil and gas infrastructure and multi-well-pad drilling to M2M networking, floating LNG facilities, new dimensions in seismic imagery and supercomputing for analog exploration.

The broad Bloomberg 500 European index is up for the 4th week in a row (+6.9% over that time) showing a strikingly similar move to the pre-May collapse run. European stocks remain well off their YTD highs (unlike the US exuberance though) and there is an increasing dispersion across various countries (and asset classes). It appears that the rising tide of global liquidity is not floating all boats the same anymore. Italian and Portuguese stocks had their best week in almost 3 months at +4.3% (and Greece best in 2 months) but Italy's bonds only managed a meager 5bps compression in spreads. Spanish stocks gained only 1% on the week, much more in line with its 6bps spread compression. Portuguese bond spreads collapsed 64bps on the week - the best week in over 4 months as it's all fixed again eh? Europe's VIX is back below 17.5% and has seen its biggest 2-week drop in almost five months.

Last year, Senator Schumer (Democrat, N.Y.) famously told Fed chairman Ben Bernanke "You are the only game in town." Really, Senator? What about the real economy? Bernanke and the Fed's machinations are indeed the only game in town for the parasitic financiers, but unnoticed by the Senator, America's real economy is innovating away from the dead hand of the Fed and its toxic spew of free money to the predatory class. There's actually three games in town: the financier game the Fed is playing that will end in collapse, the Federal government's borrow-and-blow trillions of dollars game that will also end badly, and the real economy, where millions of people don't give a rat's rear-end about Bernanke's latest attempt to placate the financial Monster Id he has created.

In testimony yesterday on Capitol Hill before the Senate Banking Committee, Federal Reserve Chairman Bernanke remarked:

“Gold is an unusual asset. It's an asset that people hold as disaster insurance. A lot of people hold gold as an inflation hedge.  But movements of gold prices don't predict inflation very well, actually. But anyway, the perception is that by holding gold you have a hard asset that will protect you in case of some kind of major problem.

Bottomline: the Chairman went rogue and did it at the precise time when stocks were in need of a major boost. This is not coincidence. And now that this is over we have to wonder what’s next.

"For years, the City has spent more than it takes in and has borrowed and deferred paying certain obligations to make ends meet. The City is insolvent" - Kevin Orr

Markit has released its global business confidence survey, and it makes for sobering reading. Due to sharp declines in business confidence in both the US and China, a new post crisis low has been reached in June. Only the UK was a notable exception, as business confidence there jumped. We would submit that this is no coincidence, as the pace of money supply growth is increasing sharply in the UK, while it it slowing down in both the US and China. The culprit for the slowdown in money supply growth in the US is lending by commercial banks, which is decelerating sharply even as monetary pumping by the central bank continues at full blast.

The current regime of extreme monetary policy that has become the new normal - to which we have become entirely desensitized and addicted - remains the biggest (and most dangerous) experiment in central planning in the 100 year history of the Fed. Trusting the beard and his band of PhDs to get this right may be a stretch though, as UBS' Art Cashin notes, their track record has not been stellar and as he notes from the 10th Annual Report of the Fed: "the Fed was supposed to extend credit only for 'productive' and not for 'speculative' purposes."