Archive - Mar 28, 2014

While it is easy to blame western sanctions for the recent tribulations at the world's largest aluminum company, Oleg Deripaska's Rusal, the reality is that the industry specific issues plaguing aluminum makers, certainly including former Dow Jones Industrial Average member Alcoa, which involve a fair share of manipulation of physical inventories at assorted global warehouses are much more responsible than some theatrical rhetoric flaring up between the West and East in the past month. Regardless of the cause, as FT reports, Rusal just announced it is on the verge of insolvency after it warned of "material uncertainty" about its future, and that it has asked its creditors to delay repayment on a maturity from its $10 billion debt pile due next month.

"They can't make up facts," Governor Christie blasts in his press conference, "read the report!" It seems the chairman of the Port Authority of New York and New Jersey, David Samson, did not need to read it all and gave his resignation to Christie before the ongoing news conference - effective immediately. Mr. Samson, as WSJ reports, was a strong ally of Christie and had been under intense scrutiny for weeks, after investigations into the lane closures led the media, legislators and federal prosecutors to examine the intersection of Mr. Samson's private business interests and his leadership of the bistate authority. Fall guy?

French auctioneers are disappointed (but the elites may not be). Having sold for 193,000 Euros in 2011 (but unable to be shipped to its Russian buyer due to export license issues) this 'slightly used' Second Empire guillotine failed to reach its minimum bid of 40,000 Euros in an auction today in Nantes, France. Perhaps one glance at the glaring divergence in the following chart... will raise the demand for guillotines once again.

Nowhere is the 'get-rich-quick', 'fundamentals-are-for-suckers', new normal 'idiot' market more apparent than in the "mistakes" investors have made in Twitter's IPO (TWTRQ), Google's NEST acquisition (NEST), and now Facebook's Oculus purchase (OCLS & OVZT). Peak stupidity?

We recently noted the soaring cost of US foodstuffs this quarter (handily outperforming stocks) but without a doubt it is lean hogs that are the best performer - up a stunning 51% in Q1. As Bloomberg reports, the reasons are varied and, fair warning, sometimes disgusting: The same Ukraine story that is helping to keep a lid on equities is fueling a rally in wheat on concerns about Russian crops; the pigs in China are gobbling up U.S. soy, while the hog supply in the U.S. is being hurt by a nasty case of “porcine epidemic diarrhea virus.” The bottom line - Q1 has been the quarter of food inflation and financial asset deflation.

Should we be surprised?

U.S. stocks are like a duck, floating on a quiet pond – calm above the surface, but lots of furious churning invisible to the naked eye.  The S&P 500 looks like it will end the first quarter within a hair of the 1848 level where it started the year, but that doesn’t mean everything else is all stasis and light.  Today we offer up a quick ‘Top 10’ list of surprises from the last 90 days.  Gold, for example, is back from the grave, up 7.3%.  So is an imperial Russia, with the biggest land grab since the building of the Berlin Wall.  Mutual fund flows are ahead of exchange traded funds by a factor of 5:1.  And most of those ETF inflows are into bond funds, not the “Great Rotation” we all expected into stocks.  The 10-year U.S. Treasury yields all of 2.67%, and bonds have bested U.S. stocks consistently in 2014.  First quarter 2014 may not have been a long trip, but it certainly has been strange.

Gold is a tangible commodity. It's a material good that can be held in the hand, bought and sold--and warehoused. You have to understand warehousing to understand the gold market.

Yesterday's late bounce and this morning's opening follow-thrugh were heralded by many talking-heads this morning as the end of the sell-off and a great buying opportunity. Well, on the bright side, those stocks are now at least 3% cheaper having plunged from the opening highs - even as the broader indices hold in. The Momos, also considered to have seen the worst, are re-collapsing...

If there is one thing that unites trade unionists, Keynesian Cargo Cultists, free-market fans and believers in American exceptionalism, it's a misty-eyed nostalgia for the Golden Era of the 1950s and 60s, when one wage-earner earned enough to buy all the goodies of a middle-class lifestyle because everything was cheap. Food was cheap, land was cheap, houses were cheap, college was cheap and most importantly, oil was cheap. The nostalgic punditry quite naturally think of this full-employment golden age of their youth as the default setting, i.e. the economy of the 1950s/60s was "normal." But it wasn't normal--it was a one-off anomaly, never to be repeated.

Once upon a time, Tesla's Model S was supposedly the world's safest car. Then a few of them spontaneously combusted either in the comfort of their own garage, or while doing the unthinkable, i.e., driving over pieces of debris on the road, and questions emerged just how much money was used to bribe the NHTSA which had rushed to proclaim the Model S the safest car it has ever tested without apparently doing any actual testing. Today questions of NHTSA bribes re-emerged louder than ever after NHTSA reported earlier it had "closed an investigation into fires involving electric sports car maker Tesla Motors Inc's popular Model S sedans after finding no "defect trend." Obviously a forced recall by Tesla would have promptly shifted the spontaneous combustion from merely its cars to its all important for marketing purposes stock price.

You know it's bad when... Italy's new prime minister Matteo Renzi has decided that around 1,500 non-essential government official cars will be sold off (via eBay). As La Repubblica reports, the cars (among them dozens of BMWs, Alfa Romeos, Lancias, nine Maseratis and a couple of Jaguars) have come to be a symbol of wasteful government spending. Renzi noted, via Twitter, "Why should an under-secretary have an official car? The undersecretary should go by foot."

This week just happens to be the 160th anniversary of Britain and France’s declaration of war on Russia in what would eventually become known as the Crimean War. Part 1. At the time, Russia was a rising power. Other nations in the region– particularly France and the Ottoman Empire, were in obvious decline.  All of this should sound familiar. As Mark Twain said, history might not necessarily repeat, but it certainly rhymes. By dropping Russia from the G-8, they’re proving beyond a doubt that the G8 has no power... and practically shoving Russia into bed with China. This is a classic example of how formerly great powers accelerate their own decline. And Mr. Obama and his colleagues seem to be following this playbook to a T.

And the hits just keep on coming for new CEO Mary Barra. By now she must be suspecting Dan Akerson threw her under the bus as he left the sinking ship. On the heels of all-time record high inventories (over-built amid a frenzy of mal-investment last year), massive recalls (amid ignition switch problems linked to 12 deaths), and potential bankruptcy fraud, GM announced today that it has instructed dealers to stop selling 2013 and 2014 Chevrolet Cruzes but gave no reason for the halt.

Since the beginning of 2013, the market has been seen as invulnerable.  Despite issues in the Eurozone, rising turmoil in the Mideast, riots and political clashes, rising oil prices and weak economic data - these issues bounced off the markets will little effect.  The markets craved "bad news" as it provided insurance that the Federal Reserve would continue its "liquidity drip." It is important to note in the first chart above, that some of the biggest negative annual returns eventually followed 30% up years.  The current levels of margin debt, bullish sentiment, and institutional activity are indicative of an extremely optimistic view of the market. Regardless, it is important to understand that it is always just a function of "when" a mean reverting event will occur.  Unfortunately for many investors who fail to understand the "risk" they have undertaken within their portfolios, when that time comes it will matter "a lot."