Archive - Sep 20, 2013

As we wrap up a most interesting, and volatile, week there are some things that we have discussed previously that are now brewing, interesting points to consider and risks to be aware of.  In this regard we thought we would share a few things that caught our attention:

1) Angela Merkel Election No So Assured
2) The Debt Ceiling Debate
3) The "Taper" Indecision Is Back
4) In The "Economy Is Improving" Camp
5) Syria Already Set To Miss A Deadline
6) Everything Else...

Simply put, complacency is not an option; Stocks are overvalued, rates are rising, earnings are deteriorating and despite signs of short term economic improvements the data trends remain within negative downtrends.   Investors, however, have disregarded fundamentals as irrelevant as long as the Federal Reserve remains committed to its accommodative policies.  The problem is that no one really knows has this will turn out and the current assumptions are based upon past performance.

Given Bullard's earlier comments on 'bubbles' being so obvious to spot in the prior two examples he noted, we thought the following chart was instructive. As Global Financial Data's Ralph Dillon notes, They often say that the past is a mirror of the future. This has rung true a few times in our markets' history and this chart demonstrates that precisely. Except for one thing...

"This is the United States of America, we’re not some banana republic. This is not a deadbeat nation. We don’t run out on our tab. We're the world's bedrock investment, the entire world looks to us to make sure the world economy is stable. We can’t just not pay our bills."

- Barack H. Obama

So much for the money-on-the-sideliness bullshit. Inflows into US equity funds rose to $23.1bn. This from an already strong $13.2bn inflow last week. As BofAML notes, this is the second largest weekly inflow since at least 2000 - which, coincidentally, was the last time a bubble of this magnitude (cough Fireeye IPO +100% on open today) occured (though don't tell Jim Bullard). As BofAML notes, "a rising market lifts all flows..." and global equity flows this week are the highest ever - yeah that always ends well.

Who do da Healthcare Voodoo!!! Who do da Vichy DC Doodoo? 

One week after we released the following damning evidence (below) of fraud in the "markets", CNBC has now claimed their scoop. Crucially, it seems, after reading Nanex's concise explanation of the proof of fraud, the Fed has now launched a probe into the release of its own FOMC statements. ... Our question then is, unless Nanex and ZeroHedge had pointed out this obvious cheat, would the fraudsters still be considered too big to care about special relativity, and if a fallen HFT tree collapses its wave function in the forest, and nobody reports, did an HFT tree just fall?

One of Einstein's great contributions to mankind was the theory of relativity, which is based on the fact that there is a real limit on the speed of light. Too bad that the bad guys on Wall Street who pulled off The Great Fed Robbery didn't pay attention in science class. Because, as Nanex shows below, hard evidence, along with the speed of light, proves that someone got the Fed announcement news before everyone else. There is simply no way for Wall Street to squirm its way out of this one...

Investors may be trapped in a ‘greater fool theory’ in thinking they can all unwind risk at the same time. Over-regulation, shrinking bank balance sheets, and fewer market makers mean that market liquidity is challenged. Retracting Fed dollars is always far more difficult than creating them, particularly in the current environment.  The FOMC scientists have been working in their lab tweaking models to assess marginal benefits, but it is blinding them from seeing the underlying risks that are building. They openly ask what signs of troubles are evident, but the morphine drip has been in use for so long that they can’t see that the current calm may be replaced with an uncontrollable monster unleashed when the sedation fades.

In the following 100-second clip, David Stockman explains succinctly to Bloomberg TV how America is "stumbling into the endgame." Having explained in the past, Bernanke's born-again jobs scam, Stockman is anxious as we transition from "Bubbles-Ben" to "Calamity Janet" because she has "no clue how to wean Wall Street from its pathetic addiction to easy money."

Unfortunately for the machines... the VIX-slammer algo failed today... 3rd time was not the charm...

This objective report concisely summarizes important macro events over the past week. It is not geared to push an agenda. Impartiality is necessary to avoid costly psychological traps, which all investors are prone to, such as confirmation, conservatism, and endowment biases.

Trannies didn't move much today but the Dow tumbled notably - its biggest drop in over 3 weeks - and erased all of the post-FOMC gains. The S&P and NASDAQ also fell but remain up from the FOMC. Only Healthcare, Discretionary, and Builders remain positive post-Fed as Financials and the rest have given all their gains back - on the heaviest volume day in over 2 years. While arguing whether today's equity weakness was Bullard/George chatter reigniting Taper fears, bonds acted in their old normal way - and rallied modestly as stocks dumped ( with yields down 2-3bps). Gold and Silver were slammed lower on the day (ending unch and -2% on the week). The USD lost 1.35% on the week with JPY unch and EUR +1.7%. AAPL tumbled into the close on the rebalancing.

With enough real and electronic ink spilled over the past two weeks to describe every nuance of the Lehman crisis (as if anyone can ever forget those vivid days) that nearly 3 months worth of Treasury issuance could be monetized, we decided to go further back, some 140 years back in fact, to this day in 1873 which just happens to be day the first Great market Panic gripped the US, and resulted in the first ever shutdown of the New York Stock Exchange. Granted, these days the NYSE or N-ICE as it is currently known, and the NASDARK shut down on a daily basis courtesy of a billion collocated vacuum tubes and the rigged casino formerly known as the stock market, on a virtually daily basis. But back then, when the general population was still largely clueless just how broken and corrupt the ideal of market efficiency would become when commingled with political and corporate interests, it was quite a shock.

UPDATE: BBRY opens and trades down to $8.06 - all-time lows -21%

Having risen phoenix-like off the lows in July, it seems Blackberry is echoing the Eastman Kodaks of the world. Releasing its earnings early, the results are dramatically worse than expected:

BLACKBERRY 2Q PRELIM. REV. $1.6B, EST. $3.03B
BLACKBERRY CUTTING 4,500 JOBS
BLACKBERRY TO CUT OPER EXPENDITURES BY ABOUT 50% BY END 1Q '15

The last bullet point is great news: think of all the cash that will go toward dividends and stock buybacks...

Unfortunately for the bubble-blowing central banks, asset bubbles are a double-bind: you cannot inflate assets forever. At some unpredictable point, the risk and moral hazard that are part and parcel of all asset bubbles trigger an avalanche of selling that pops the bubble. This is another facet of The Fed's Double-Bind: if you stop pumping asset bubbles, they pop as participants realize the music has stopped, and if you keep pumping them, they expand to super-nova criticality and implode.

In the past, the Fed has been the fuel for bubbles. This time around, the Fed IS the bubble itself, with its balance sheet expansion driving ALL assets higher.