Archive - Jan 2015

That markets are rigged, at both the macro level, through central banks, and micro, through HFTs, dark pools and purposeful market fragmentation, should be painfully obvious to everyone by now. But when even the regulators engage in "jury rigging", or in this case blocking prominent HFT-critic Joseph Stiglitz, a Nobel prize winning economist (a prize which doesn't count for much on these pages but should - at least on paper - impress such statist cronies as the SEC), has been blocked from a government panel that will advise regulators on issues facing U.S. equity markets, it becomes clear as day that the rigging is not just in the markets: worse, it is openly involves the market's "regulator" and "enforcer."

The practice of sensible investment becomes difficult when our secondary information sources (“fundamentals”) are inherently subjective. We are coming to appreciate the counsel of a friend who suggested that the merit of gold lies not in its price so much as in its ownership. What matters is that you own it.

The biggest hurdle is too much debt, not the need for more cheap money.   QE may also have sizable unintended consequences through rampant market speculation, herd-like investor behavior, and the creation of asset bubbles.  Those potential ramifications have yet to be realized. ... The best investments or trades usually entail envisioning markets going to previously unforeseen levels and tying it to a coherent story line. Given the simple scenario outlined above, investors should become open minded to the potential for long-dated Treasuries continuing to rally.  I can envision the 10-year note trading to a new low yield (below 1.38%) and even below 1%.  I expect the yield curve to flatten viciously this year.   I remain a bond bull and believe the 30-year yield will trade with a ‘one handle’ (i.e.; below 2%) in 2015.

Not satisfied with merely "nailing the number", Goldman Sachs' David Kostin forecasts the S&P 500's trajectory through 2015. Recognizing, as we did, that Bullish Sentiment is as highs as it gets, Kostin expects short-term weakness during the next month (the drop), earnings growth thanks to lower oil prices into mid-year (the pop), but multiple compression after rate hikes into year-end (the slop)...

Einstein advised “We cannot solve our problems with the same level of thinking that created them”. Yet that’s mostly what I see happening today on many levels.

For all the endless media buzz pitching the bullish spin of plunging gas prices, namely that while crude capex spending and energy company earnings are both crashing, high-paying shale jobs are about to suffer pervasive layoffs and energy HY bonds are entering mass default territory leading to who knows what unexpected downstream effects, the average US consumer will spend substantially more to offset all the adverse side-effects of the plunging oil price. Or rather, was supposed to spend more. Because as Gallup finds, this did not happen. Here is what did happen.

Blackfield Capital CJSC was one of Moscow’s hottest hedge funds, hosting glitzy parties and embarking on ambitious plans to expand to the U.S. The firm’s founder in 2013 even rented a Manhattan apartment for a record-setting price, and bought a $300,000 sports car; but now, as WSJ reports, 29-year-old Kim Karapetyan "just disappeared" leaving the staff of 50 stunned and making off with some $20 million in investor cash...

"It’s difficult to entertain both current 'realities' at once. One must simultaneously hold in mind reckless yield-seeking speculation, hypervaluation that rivals the 1929 and 2000 equity market peaks (see Yes, This is an Equity Bubble), zero interest rates, low prospective long-term returns all around, and persistent malinvestment that poses increasing systemic risks for the entire global economy, plus one fact that encourages us to forget it all: prices have been going up. Cognitive dissonance tempts us to reconcile this tension by ignoring one part of the story or another."

Just as T.Boone Pickens warned, watching the US Rig Count is key to comprehending the looming crisis in oil. The last 4 weeks alone have seen a drop of over 100 rigs - the 2nd fastest slide since 2001 in percentage terms. This is the worst December to January since 2008/9. As Pickens noted, "demand is down" - "lower demand is the main driver" - "rig count is gonna fall - drop 500 rigs in next 6-9 months"

The Dow Industrials Index is down over 600 points from its 18,051 (futures) intraday record high on Boxing Day (12/26/14). Today's 275 point drop below 17,450 is now over 500 points lower than the New Year's Eve highs as energy (oil plunge gravity) and financial (oil exposure, low rates, counterparty risk) names catch back to gravity.

What is the number one thing you want to do in the next three weeks?

While the predictions of Blackstone's Byron Wien (born in 1933) have been all over the place in the last few years, they nevertheless provide some color on just what the mainstream does not believe... This is the 30th year Byron has given his views on a number of economic, financial market and political surprises for the coming year. From "our luck running out on cyberterrorism" to "shock and awe no longer working in Japan", Wien's non-predictions range from The Fed to China and from Oil to Hillary Clinton...

"Sixty-four unskilled workers will report to new jobs in Washington, D.C. on Tuesday as part of a federal jobs program that provides employment for people unable to find productive work elsewhere... The new hires, who have no talents or abilities that would make them employable in most workplaces, will be earning a first-year salary of $174,000...Expensive as this program is, it is much better to have these people in jobs than out on the street."