Archive - 2014

Just over a year ago, in one simple graphic, we showed why Bridgewater, which currently manages around $150 billion, is the world's biggest hedge fund. Quite simply, its flagship $80 billion Pure Alpha strategy had generated a 16% annualized return since inception in 1991, with a modest 11% standard deviation - returns that even Bernie Madoff would be proud of.  And, true to form, according to various media reports, Pure Alpha's winning ways continued in 2013, when it generated a 5.25% return: certainly underperfoming the market but a respectable return nonetheless. However, Pure Alpha's smaller cousin, the $70 billion All Weather "beta" fund was a different matter in the past year. The fund, which touts itself as "the foundation of the "Risk Parity" movement", showed that in a centrally-planned market, even the best asset managers are hardly equipped to deal with what has largely become an irrational market, and ended the year down -3.9%.

Chinese borrowers are facing rising pressures for loan repayments in an environment of overcapacity and unprofitable investments. Unable to generate cash to service their loans, they have to turn to the shadow-banking sector for credit and avoid default. The result is an explosive growth of the size of the shadow-banking sector. The PBOC thought it could control this by limiting liquidity but underestimated the effects of its measure. Largely because Chinese borrowers tend to cross-guarantee each other’s debt, squeezing even a relatively small number of borrowers could produce a cascade of default. The reaction in the credit market was thus almost instant and frightening. Borrowers facing imminent default are willing to borrow at any rate while banks with money are unwilling to loan it out no matter how attractive the terms are. Should this situation continue, China’s real economy would suffer a nasty shock.

BANZAI7 FOOD AND BEVERAGE WARNING APPLIES!

If one listens to Goldman's chief economist Jan Hatzius these days, it is all roses for the global economy in 2014... much like it was for Goldman at the end of 2010, a case of optimism which went stupendously wrong. Goldman's Dominic Wilson admits as much in a brand new note in which he says, "Our economic and market views for 2014 are quite upbeat." However, unlike the blind faith Goldman had in a recovery that was promptly dashed, this time it is hedging, and as a result has just released the following not titled "Where we worry: Risks to our outlook", where Wilson notes: "After significant equity gains in 2013 and with more of a consensus that US growth will improve, it is important to think about the risks to that view. There are two main ways in which our market outlook could be wrong. The first is that our economic forecasts could be wrong. The second is that our economic forecasts could be right but our view of the market implications of those forecasts could be wrong. We highlight five key risks on each front here." In short: these are the ten things that keep Goldman up at night: the following five economic risks, and five market view risks.

With "keg-standing bros" and "easy women" having been tempted already (unsuccessfully from what we know) to participate in the government's 'affordable' care act, Politico reports the Obama administration today unveiled its plans for an Olympic-size ad blitz during the winter games next month. No comments yet on which images will be used (it's too soon for any Schumacher references) but we suggest 'skeleton' will provide the right 'stimulation' to get insured.

Sometimes being 'exceptional' and #1 is not all it's cracked up to be...

If party politics are weak, muddled, and contradictory, the divisions between Americans are starkly clear: wealth in America has never been so unevenly distributed — the fabled one percent versus everyone else. Despite the election of a mixed-race president, and the wish-fulfillment fantasies of Hollywood, race relations in the USA remain tense. Divisions between men and women are tragically compounded by the dangerous dynamics of work in America that leave many men (especially men) in a vacuum of purpose, meaning, and potency. It is almost impossible these days for low-skilled men to support a family. The indignity of this thunders through broken communities and the penitentiary cellblocks. The ongoing national culture war pits the “traditional values” faction against the sexual libertarians; the red states against the blue states; urban against the conflated suburban and rural; the Christian fundamentalists against an array of other positions and belief groups; the entitlement “socialists” against the “free market” conservatives. Perhaps most divisive of all will be the schism between the young and the old over the table scraps of the dying industrial economy.

As the following chart shows, investors can worry no more of over-exuberance, uber-complacency, and super-confidence as the AAII bull-bear survey saw bulls drop to a mere 60.6% this week... panic over... Not!

Nearly a year ago, we predicted that the party for bond traders was over. The reason: MBS bond trader Jesse Litvak, formerly of mid-tier, perpetual aspirational bulge bracket, and the place where every fired UBS banker has a safety cubicle, Jefferies, got not only too greedy (that's ok, everyone on Wall Street is), but what's worse, got caught, and as we said at the time, ended the party for Wall Street's bond trading cash bonanza. Little did we know how correct we would be, because not only did the former MBS trader, who "proceeded to rip virtually all of his clients on seemingly every single trade he executed for the three years he was employed at Jefferies, lying to everyone in the process: both clients and in house colleagues, generating some $2.7 million in additional revenue for Jefferies for the duration of his tenure, and who knows how much in personal bonuses", end the party, but it appears he unleashed the next big regulatory crack down on Wall Street. And one which may just cost perennial Department of Justice favorite JPMorgan another several billion in "litigation reserves."

New Jersey Governor Chris Christie is rapidly trying to distance himself from the 'deputy chief of staff plotting to create traffic problems' bridge controversy... his full statement (below) can be summed up: ...

"This behavior is not representative of me or my Administration in any way, and people will be held responsible for their actions."

People will indeed be held responsible, with one very prominent exception.

We are quietly confident that the gentleman selling the 'radiation-free' snow will be inundated with offers from Japanese winter sports enthusiasts (or perhaps even Sochi-ites)...

Just out from Macy's, which first said the following: "The 2013 holiday season was successful for Macy’s and Bloomingdale’s as we offered fresh and distinctive merchandise, delivered great value to the customer and provided a robust omnichannel shopping experience... Even in a questionable macroeconomic environment with challenging weather in multiple states, the positive response from our customers during the holiday season is yet another vote of confidence that our well-established strategies continue to work for us." What well-established strategies one may ask? Why the following of course, which was also just disclosed in a separate news release "outlining cost reduction initiatives to support continued profitable sales growth": "Approximately 2,500 employees are expected to be laid off and are eligible for severance as a result of these organizational changes. Other associates are being reassigned with new duties or transferred; some open positions will not be filled."

Credit markets had been nervous for the last 48 hours heading into today's Fed minutes and reflective of the FOMC's worries over small-cap forward multiple and covenant-lite loan issuance (both of which we have discussed in great detail as excessive) sparked weakness in the Russell and credit spreads. Yesterday's bounce gave way to selling after the minutes (and on a "good" data day). But a late-day no-JPY-supported melt-up saved the day but stocks are still down after first 5 days of the year - still worst since 2008. Treasury yields leaked higher into the minutes then flattened dramatically with 10s and 30s rallying and 5s and below weakening. 5s30s dropped 7bps on the day - biggest flattening since Taper. 10y did not close above 3%. Gold and silver slipped lower after 2pm then recovered into the close, but WTI crude slid all day - holding losses after the Fed ($92.50). The USD limped lower after the Fed with EURUSD unch on the week before tomorrow's ECB statement.

The evidence here is clear. QE does not generate jobs in the broad economy.

With December's "fat finger" in US Treasury Futures proved as nothing but an HFT algo gone wild, Nanex has turned its deep-thought to the recent halt in gold futures markets. Their conclusion, this was not the result of a fat finger, but rather the work of a high frequency trading algorithm that would pause, and (probably) test the market before continuing. A fat finger would not have had such distinguishing features.