Archive - Jul 2013

Following Barclays' fine of $453 million by FERC for manipulating electric energy prices in California (and other other Western markets), it seems the price of infamy is weighing heavy on Blythe Masters' overlords at JPMorgan in yet another derivative debacle for the "I invented CDS" queen. As we discussed in great detail here, FERC's investigations into JPMorgan's actions saw them pursuing actions against the firm and Ms. Masters. In recent weeks settlement rumors have been heard and now as the NYTimes reports, it appears - in light of last year's PR and P&L 'London Whale' disaster - the best-CEO-in-the-entire-world-so-there is preparing to settle to the tune of $500 million to keep Blythe out of jail. To settle Ms. Masters' alleged “manipulative schemes” that transformed “money-losing power plants into powerful profit centers,” and then her giving “false and misleading statements” under oath, must mean she has some serious dirt on Jamie (and his fortress balance sheet and best-in-class risk management).

You might think that we have been living in a post-bubble world since the collapse in 2006 of the biggest-ever worldwide real-estate bubble and the end of a major worldwide stock-market bubble the following year. But talk of bubbles keeps reappearing – new or continuing housing bubbles in many countries, a new global stock-market bubble, a long-term bond-market bubble in the United States and other countries, an oil-price bubble, a gold bubble, and so on. Speculative bubbles do not end like a short story, novel, or play. There is no final denouement that brings all the strands of a narrative into an impressive final conclusion. In the real world, we never know when the story is over.

The recent attempt by AT&T to expand into the smartphone leasing business company in order to encourage customers to upgrade their equipment more frequently only confirms something that most industry observers have suspected for a long time: end customers have finally had it with annual (or even biannual) cell phone updates. And now we have proof. According to the WSJ, fewer people are upgrading their smartphones: "The rates at which American cellphone users have traded in their devices for more advanced models have declined over the last few years, according to analysts at UBS. They turned negative last year, when about 68 million people upgraded their phones in the U.S., down more than 9% from a year earlier." That was the first year in the past decade in which the turnover rate was below 0%. Sadly for Apple, Samsung and their competitors, 2013 is not shaping up any better: "UBS predicts upgrades will fall again this year."

Since March 2009, the S&P 500 is up 148% - an excellent performance given the economic unreality occurring under the covers (for example the bounce and fade in real EBITDA for the S&P 500 which is up only 18% from the March 2009 lows). However, to get a sense of just what a fiasco Ben Bernanke and his merry men (and women) have created (and mis-allocated), the performance of firms that are not 'high quality' is up 250% in the same period (massively outperforming the 'excellent' companies' gains of 180%). Based on 'quality' rankings from Barry Bannister's "In Search of Excellence," the un-excellent companies have crushed their 'excellent' peers - what could possibly go wrong?

Lets face it, shysters exist....it's our job to ensure we stay well clear of them. Here are some RED FLAGS to look out for!

It is becoming much more apparent that, as we have seen each year for the past three, the Fed's prediction of stronger economic growth by the end of 2013 will be revised lower from the current level of 2.5%. Either Bernanke was lying back then or is he lying now? The problem is that the Fed is literally caught in a "liquidity trap" from which there is currently no escape.  If they reduce liquidity the markets tank, taking down consumer confidence and negatively impacting the economy.  If they keep the liquidity going they will inflate an asset bubble which will ultimately burst destroying the financial markets and the economy.  The choice is, ultimately, a lose-lose scenario even as the bullish case for equities persists. Of course, as Chuck Schumer stated to Bernanke at the last Humphrey-Hawkins testimony, "You are the only game in town."

Those who have been following the ongoing "revenue recession" will hardly be surprised that in the trifecta of major corporate earnings releases hitting the tape after the close, there were precisely zero revenue beats. To wit:

• INTC: Revenue misses $12.81bn, Exp. $12.89 bn, cuts guidance.
• EBAY: Revenue misses $3.88bn, Exp. $3.89bn, sees earnings and revenue on lower end of guidance.
• IBM: Revenue misses $24.92 bn vs $25.34 bn; But since this is the largest component of the DJIA, leaving it there may lead to unpleasant consequences for tomorrow's Dow, the company had to inject a mega dose of hopium and boosted its forecast.

Since EPS is the most easily fudgable number in existence (just look at BAC's "non MTM" EPS today), all companies beat on the bottom line. Without looking we will assume that at least 2 out of the 3 are trading higher after hours.  And if not, all the three companies need to do to make the algos forget about the top-line non-growth reality is take a page from the YHOO book, hold a very "edgy" video conference call, and see their stocks up 10% tomorrow. Of course, everyone will ignore that the relentless decline in revenues is merely a function of depressed CapEx spending, a tapped out consumer, a crash in EM demand, and major FX headwinds, and blame it all on the [hot|cold] weather.

We suspect few would have expected a relatively quiet kind of day for stocks and bonds today but that is what we got - with all the action taking place at the release of Bernanke's prepared remarks. Thanks to DuPont (Peltz not talking) which added 21 points to the Dow, the Dow ended mildly green. The Nasdaq and S&P had small gains as the Trannies outperformed. Treasuries saw a notable 'hump' compression with the belly dropping 6bps but the long-end and the short-end only -2bps. VIX unwound all of yesterday's relative 'hedge' premium and closed unch to Monday. The USD ended modestly higher as did WTI (back over $106.50) but gold and copper end down 0.75% for the week. It was silver that suffered from apparent sanguineness (sic.) as it slumped 4% from the earlier highs of the day. Of course, tomorrow's another day of Bernanke as the "wait-and-see" market rolls on - closing once again perfectly at VWAP...

Any day now...

McDonalds has created a ridiculously condescending budget (along with Visa) which provides some advice for its staff's planning (beginning with "get a second job"). Critically though, the key factor of all this is that food stamps are corporate welfare. They actually are not welfare for the workers themselves, who undoubtably don’t have wonderful lives. What ends up happening is that because the government comes in and supplements egregiously low wages with benefits like food stamps, the companies don’t have to pay living wages. So in effect, your tax money is being used to support corporate margins.

It is somewhat ironic that a Federal Reserve which is now more committed to "forward guidance", transparency and communication than ever in history, just announced the resignation of Krishna Guha, the head of NY Fed's Communications Group, aka the head PR contact for all media. More importantly, the resignation took place without a handy substitute ready. Our advice to the Fed, if unable to find a worthy replacement: just hire Jon Hilsenrath - after all he already is effectively the Fed's mouthpiece.

For once it might seem just a little better if you have greying temples and are a bit hard of hearing these days rather than young and boisterous, raring to go and hit the career ladder, thinking that you’re going to get to the top in one go.

Jan Hatzius' assessment of Bernanke's first congressional testimony was just released. We assume it was not written while he was having lunch with Bill Dudley at the Pound and Pence.

Stolper: "On July 5, rising EM external funding costs, following a strong Payrolls report in the US, prompted us to express our view of EM FX vulnerability by recommending a long USD against a basket of TRY, ZAR, INR, BRL, CLP. A combination of events has worked against our recommendation; relaxation of Fed tapering fears, unwinding of long dollar positioning and activism by EM authorities to stem depreciation pressures. As a result, at the close of London trading today, the recommended basket closed at 97.8, below the stop-loss of 98."

Projections based on high rates of endless growth are delusional. Those who embrace these projections are equally delusional. Attacking critics who have taken the time to study the data and trends is not going to magically make these programs sustainable or fix what's broken. Placing one's faith in government projections that always forecast high rates of endless growth (because "growth" fixes everything) is embracing delusion. Reality trumps accounting trickery and delusional projections every time. Let's see how accurate all the government agency projections (including the SSA Trustees) turn out in September 2015, at the end of fiscal year 2015.