Archive - Sep 17, 2013

Those aged 18-34 are overwhelmingly in support of the whistle-blowers and hacktivists that are exposing the corruption, illegal activities and cover ups that are rocking our perceptions of "good" and "evil" within our society.

The chart below tells a story. Do you think the fiscal and monetary policies implemented by Bernanke and Obama since 2008 were designed to benefit you? If you believe in regression to the mean and a world based on reality, then you should be prepared for corporate profits to decline by 14% to 20% over the next four years. What do you think that will do to a stock market where the PE ratio is already at valuation levels of 1929, 2000, and 2007?

Why Treasuries will likely rally and the dollar sell-off in response to the FOMC.  

If there was one deal that epitomized the last credit bubble, aside from the Blackstone IPO of course, it was the ginormous, $45 billion 2007 LBO of TXU, now Energy Future Holdings. And while the tide for the New Abnormal credit bubble has yet to expose its megalevered monoliths swimming fully naked, as for now corporations have opted for graduated semi-MBOs in the form of ever larger stock buybacks (although as rates rise this too day of reckoning is coming), the time to pay the piper for the last credit-fuelled binge has arrived and inevitable bankruptcy of this landmark deal is now just days away. From the WSJ: "Energy Future Holdings Corp. has begun sounding out banks for financing to help it operate during expected bankruptcy proceedings, which could come as soon as November for the Texas power producer."

While stocks were a one-way street higher today, with the S&P pulling back to yesterday's cash opening levels; the rest of markets did not seem so excited about the prospects for tomorrow. The USD was down (no-Taper), Gold, silver, and oil were all down notably (Taper), Bonds flatlined with the long-end modestly lower in yield (Taper/no-Taper), and stocks rallied (on dismally low volume) in Taper-is-good-news mode. It was all pandas and kittens though as VIX was heavily bid relative to stocks as at least some 'investors' sought protection ahead of tomorrow's big day. This is the 12th up-day of the last 14 days for the S&P 500 - sure, why not?

In mathematics, the term ‘linearity’ describes a relationship in which the rate of change for a variable is constant. However, just like the erosion of civil liberties, the destruction of financial privacy, the growth in world population, the expansion of the money supply, and the demand/depletion of natural resources, debt is an exponential challenge. The danger with exponential problems is that they can really sneak up on you. The numbers do not lie. Debt grows exponentially. Tax revenue grows linearly. So the only question is – what time would you leave?

In a long and proud tradition started by Solyndra and A123, and going through such Tesla ancestors as the Fisker Karma and Coda, the US government continues to demonstrate that when it comes to misallocating capital, albeit in (or due to) the pursuit of noble "green" causes, it has no peer. Fast forward to today, when we find that the latest casualty of a world in which ridiculous business models and lack of cash flows does not result in an Amazon-esque happy ending, is Eco(fa)tality, a maker of batteries and Blink charging stations for electric cars, which overnight filed for bankruptcy. If fact, do not pass go, do not pretend to have anything even remotely close to a sustainable business mode, and go straight to a liquidation auction.

BANZAI7 FOOD AND BEVERAGE WARNING LEVEL 8

"Exceptional..."

The Federal Reserve is in a classic double-bind: as its policies to boost growth bear fruit, interest rates rise, threatening the very recovery the Fed has lavished trillions of dollars of quantitative easing (QE) to generate. Put another way: if growth is needed to boost corporate sales and profits, but growth leads to higher interest rates and reduced central-bank suppport of markets, this is a double-bind with no exit.

Over the past year, India has unleashed the most unprecedented series of gold "capital controls" ever seen in a modern nation, shy of confiscation (and even that may be imminent). Today, India added yet another more measure to its list of prohibitions that seek to minimize the size of the gold market available to citizens, yet which will only result in even more interest and demand in the yellow metal. As Reuters reports, India increased its import duty on gold jewellery from 10 percent to 15 percent, setting it higher than the duty on raw gold in a move to protect the domestic jewellery industry. Why is the government doing this? Simple: "To protect the interests of small artisans, the customs duty on articles of jewellery ... is being increased," the ministry said.

While the White House is trying to play this down currently in the press conference, Brazil's President Rousseff has issued a statement postponing her trip to the US due to the illegal espionage of the Americans:

• *BRAZIL SAYS U.S. HASN'T PROVIDED ADEQUATE EXPLANATION ON SPYING
• *BRAZIL'S SAYS IT NEEDS U.S. EXPLANATION BEFORE STATE VISIT
• *BRAZIL SAYS U.S. ILLEGAL MONITORING OF GOVT, COS. IS 'SERIOUS'
• *BRAZIL PRESIDENT ROUSSEFF POSTPONES STATE VISIT TO THE U.S.

According to AP, Obama spoke to Rouseff on the phone but that didn't do it as the Brazilian President demanded a full public apology.

Today's TIC data showed something disturbing: for the fourth month in a row, foreigners were net sellers of US Treasury paper in July , as total foreign holdings declined from $5.600 trillion to $5.590 trillion which represents 49% of total marketable debt (including the debt owned by the Fed of course). In other words, since peaking at $5.724 trillion in March, foreign-held debt has declined by $134 billion, at a time when yields have surged on fears the Fed's tapering of its own purchases of bonds will mean less Fed frontrunning opportunities. However, it is only when broken down by gross purchaser, that we see just who is to thank for this surge in buying of Treasury paper in the month of July. One look at the chart below should explain it...

Plowed $2 trillion of their Japanese deposit base into investments overseas then wondered why the economy at home languished

Equity markets were quietly confident that no matter what the mortgage market did, the Fed would save them in 2007. Bond markets had already got a little nervous as collateral squeezes and forced liquidations had led to a large jump in bond risk relative to equity risk - but again this was eschewed by any number of equity long-only managers and their non-money-managing partners-in-crime - the sell-side strategist - who confirmed that any dip should be bought and the increased risk in bonds was exactly the catalyst to rotate to stocks for the long-term. Fast-forward $8 trillion and five years and the patterns of bond and equity risk look awfully similar - as does the echo chamber of status quo opinion at the 'events' facing the market. History may not repeat, but we suspect it will at least rhyme here...