Archive - May 2014

Rube Goldberg, eat your heart out...

It was a scene just like out of the Wild West. 18-year-old David Moreyra had stolen a purse. And an angry mob gathered in broad daylight in Rosario, Argentina to lynch him. It’s a rather unfortunate regression for a society. Civilized people don’t form angry mobs to act as judge, jury, and executioner. As I’ve long-written, there are consequences to destructive economic policy. Central bankers cannot conjure infinite quantities of currency out of thin air, nor can politicians borrow more money just to pay interest on what they’ve already borrowed, all without consequence. This is one of those consequences - a complete breakdown of the social contract, giving rise to something so Medieval as lynch gangs and mob justice. Can it happen where you live? Maybe. No nation is immune to the social effects of economic decay (think Detroit, or even New Orleans after Hurricane Katrina...).

It was not a Tuesday, and it was not a Fed day - so stocks closed red. Volume was dismal. The Russell 2000 tested its 200DMA once again (and bounced) but was unable to sustain that strength. Once again the biggest news was the continued collapse in Treasury yields as a combination of massive spec positioning short "because rates have to go up" and the ugly reality of macro weakness combined to send rates to 2014 lows (and 11-month lows for 30Y yields). This is the biggest year-to-date drop in 30Y yields since 2000. The Dow's weakness meant it lost its gains for 2014. Despite ongoing USD weakness (driven by GBP and EUR strength), commodities traded lower with silver worst today (red for 2014), copper weak, and gold and oil flat to modestly lower. VIX was pummeled down to almost 13 midday (which makes perfect sense ahead of NFP - why would anyone hedge that?) but leaked higher as bond market reality set in during the afternoon. The ubiquitous very-late-day VIX slam pulled stocks higher in a buying panic but failed to get the S&P, Dow, or Russell green on the day.

Fascism has been a term applied to the manner of organizing a society in which a government ruled by a dictator/bureaucracy that is unelected or a republic with pretend “lifetime” politicians, controls the lives of the people and in which people are not allowed to disagree with the government. Such systems have always placed the “good” of the state before the worth of an individual. Government has abused its power and looks upon the people as a herd of unwashed wild animals for them to drive in whatever direction they desire for their own self-interest. They retain that power by preaching to the ignorant that they are never the problem, it is always the “rich” who refuse to turnover everything they own so politicians can live high and mighty. This is why Thomas Jefferson, Madison, Adams, Washington, and Franklin, just to mention a few, forbid direct taxation. They experienced that the power to directly tax the people destroys the liberty of the people for once a direct tax is imposed, you must account for whatever you do, earn, and have. The future of the present and younger generations is being systemically wiped out and therein we will discover the seeds of revolution.

Overnight, RealtyTrac released its latest home-flipping report. What it found is that while the latest housing bubble may have indeed popped, manifesting itself not only in a decline in flipping prices but also a tumble in flipping activity across the US as a percentage of all sales from 6.5% a year ago to just 3.7% in Q1, and down from 4.1% last quarter, flipping, where a home is purchased and subsequently sold again within six months, can still be massively profitable, leading to returns that would make the pimpliest 25-year-old, math PhD HFT-firm owner green with envy.  Among the core findings was that the average sales price of single family homes flipped in the first quarter was $55,574 higher than the average original purchase price. That gross profit provided flippers with an unadjusted ROI (return on investment) of 30 percent of the average original purchase price averaged out across the US. The average gross profit per flip a year ago was $51,805 for an unadjusted ROI of 28 percent. However, it is the range that is notable: the flip ROI ranged from -8%, or a loss of $10k on the property, to a gain of 80%, a whopping $144K!

"Everybody knows interest rates are going to rise." Whether you agree with this premise, or not, is largely irrelevant to this discussion. The current "bullish" mantra is the "great bond bull market is dead, long live the stock market bull." However, is that really the case? When the bond bubble ends this means that bonds will begin to decline, potentially rapidly, in price driving interest rates higher. This is the worst thing that could possible happen.

Reflecting on the divergence between equities at all time-highs and drastically sliding bond yields, CNBC's Rick Santelli reminds that it seems bonds recognize that business cycles work in "fits and starts" and not in straight-lines as some (equity bulls) would believe and reminds (as we noted previously) that with revisions, Q1 GDP could be negative. His discussion moves from US Treasury 'cheapness' relative to global bonds and the 'weather' effect's over-exuberant expectations; but it is his final topic that raised an eyebrow or two. Santelli doesn't buy into the meme that "the reason the Fed is doing all this is because Congress does nothing;" in fact, he exhorts, it's the opposite, if the Fed wasn't hunkered down supporting the stock market - and stocks started throwing little hissy fits (a la TARP), it would send signals... and things would get done!"

The Mobile Creative credo: trust the network, not the corporation or the state.

The Mobile Creative class operates outside these two states of dependency. It also operates outside the conventional labor-management divide of Marxism and socialism. Since global capital is mobile, and the state enforces central banking and cartel pricing, the class of "owners" and the state are one entity. You either resist the entire state-cartel system or your resistance is nothing but meaningless gestures aimed at chimera.

Unless one has been living under a rock for the past several months, one knows that the latest manifestation of the global stock bubble is that US pharmaceutical companies, using their overvalued stock prices as currency, have engaged in an unprecedented M&A phrenzy (sic), buying up targets either to redomicile themselves abroad and thus avoid paying US corporate taxes, or simply to buy up assets before someone else snatches potential targets, in a classic case of FOMO (Fear Of Missing Out). And while this acquisition spree is a boon for shareholders, with the euphoric market rewarding both target and acquiror by sending their stock prices immediately higher, there is one group that is getting the shaft: employees.

It is somewhat ironic, actually make that criminal, that two days after new SEC head Mary Jo White (whose conflict of interest list is so vast courtesy of her prior position as defending every Wall Street from their criminal acts she now has to recuse herself from virtually every enforcement action) solemnly promised Congress under oath that the "markets are not rigged", the SEC comes out swinging and slaps the wrist of the NYSE with an intolerable $4.5 million fine for allowing market rigging "for a period of time from 2008 to 2012."

Back in December of 2012, the Fed, after two and a half failed attempts to stimulate the economy (via QE1, QE2 and Operation Twist), announced Open-Ended QE of an indefinite injection of $85 billion per month (which it currently is tapering at a pace of $10 billion per month on the realization that it has soaked up virtually all high quality collateral). Since then the Fed's balance sheet has grown from $2.9 trillion to $4.3 trillion: a direct injection of $1.4 trillion in liquidity into the stock market, if not so much the economy, which as Wall Street is suddenly busy telling us following the latest disappointing construction spending data (the same Wall Street which initially expected Q1 GDP to be 2.75%), probably contracted for the first time in three years!

The Central Bank intervention fiasco continues to unravel before our eyes.

IMF approved the $17bn tranched loan to Ukraine last night, Gazprom gets paid; Ukraine gets its cash; and the door's wide open for the US and EU to pour more 'controlling influence' into the divided nation... Except there's one thing:

• IF UKRAINE GOVERNMENT LOSES EFFECTIVE CONTROL OVER EAST OF COUNTRY, $17 BLN IMF BAILOUT WOULD NEED TO BE REDESIGNED

Which, roughly translated, appears to mean go to war with pro-Russian forces (and thus Russia itself if Putin sees his apparent countrymen in trouble) or you don't get your money!

You can't keep a rigged market down... despite weak GDP, weak jobs data, weaker PMI sub-indices, and weak construction spending, US equity markets are making new highs led by the ever-squeezable Nasdaq playing catch-up (and the Trannies). All of this stands in stark contrast to the continuing collapse in bond yields as macro fundamentals are reflected in only one side of the capital markets. 30Y yields - at 4.42% - are near their lowest in 10 months, and the rest of the complex hovers near 2014 lows.