Archive - Nov 2010 - Story

A must read paper from George Selgin and the Cato Institute, which confirms what Zero Hedge has been saying since inception: the Fed must be abolished immediately: "The Federal Reserve System has not lived up to its original promise. Early in its career, it presided over both the most severe inflation and the most severe (demand-induced) deflations in post-Civil War U.S. history. Since then, it has tended to err on the side of inflation, allowing the purchasing power of the U.S. dollar to deteriorate considerably. That deterioration has not been compensated for, to any substantial degree, by enhanced stability of real output... A genuine improvement did occur during the sub-period known as the "Great Moderation." But that improvement, besides having been temporary, appears to have been due mainly to factors other than improved monetary policy. Finally, the Fed cannot be credited with having reduced the frequency of banking panics or with having wielded its last-resort lending powers responsibly. Its record strongly suggests that the Federal Reserve‘s problems go well beyond those of having lacked good administrators. Although it has manifested itself in different ways during different decades, the Fed‘s failure has been chronic. The problems appear to reside with the institution, and not with particular personalities who have been placed in charge of it. Hence the record would not be likely to improve substantially even with complete turnover in the Board of Governors. The only real hope for a better monetary system lies in regime change."

The one-two punch is complete: first Goldman pulls it capital, now the SEC and the US Attorney's office are investigating Harbinger. Is this the proverbial curtains call for Phil Falcone? Accusations are one thing. Accusations accompanied by major LPs pulling capital are usually the last thing.

While reading 13D.com's latest newsletter (one of the best, but Kiril you have a mistake in point 1 w/r/t QE2 - the POMO 17-30 schedule is not 9%, it is 4%), we stumbled across this terrific excerpt from "Memoirs of David Rockefeller", which highlights the exploits of John D. Rockefeller, Sr., the man who out of nothing went on to create the world's biggest and most important company in the history of the world - Standard Oil, and in doing so effectively created the US corporation in its modern form, as well as defining the concept of the monopoly. That he is also the patriarch of the Rockefeller legacy, which has since shaped the face of modern capitalism, is secondary. It is no surprise that during his time, he was viewed in diametrical opposites by the general public - he was either loved or hated, pretty much like all men of relevance. While we will ignore any ethical claims, what we find most fascinating from the below excerpt, is the purported approach which Rockefeller took when creating the Standard Oil monopoly, one which was premised upon "elastic demand" or the same razor-razorblade model of vertical integration that is exhibited best by none other than the company which comes closest to an Std Oil type of monopoly-presence: Apple (and just so there is no confusion, we refer of course to the distributed content, commission-based revenue stream model). Which leads us to a few tangential thoughts, chief among them - is Apple planting the seeds of its own destruction courtesy of its unmitigated success? The 1911 decision to break up the Standard Oil monopoly was as much driven out of economic principles, as one of populist retaliation. It is no wonder that Apple is now the second largest company in the US by market cap... just behind Standard Oil offspring Exxon.

As if the fact that the world economy has once again taken a turn for the worse (rising inflation in China, sinking everything in Europe, endless QE in the US) wasn't enough, that pesky problem of robosigning and fraudclosure just refuses to go away. And even though the major banks are doing their best to remove any reference of this problem, which will eventually be the final nail in the coffin sealing the first truly global great depression, from the mainstream media, here is a sampling of some of the choicest admissions by robosigners, which will continue to serve as the basis for thousands of lawsuits (both RICO and otherwise) to come. While we know that BofA's Reps & Warrantees reserve is woefully underfunded (with everyone and their grandmother now seeking to putback RMBS to BofA, anything less than 'infinity' is underfunded), we hope Bank of America has set up a sufficiently large legal expenses reserve. It will need it.

We have previously discussed how due to the inability to know at what price (par or market) the Fed is buying back bonds from the Primary Dealers, there is a distinct possibility that due to the par-market difference, especially with many CUSIPs trading near record prices over par, the Fed may be implicitly letting PDs pocket the market-to-notional difference. The total, as shown below, could amount to over $40 billion. Furthermore, by avoiding the tight spread of on the run bonds, the Fed is effectively allowing PDs to pocket a huge bid/offer spread, which assuming a total size of ~$800 billion (low estimate) of all USTs bought over the (initial) life of QE2, aka QE2.5 and higher pre-extensions, amounts to $50 billion over the next 8 months. Since the money paid out is certainly not that of Brian Sack, but of the US taxpayers, to which the FRBNY has repeatedly demonstrated it has no fiduciary obligation, one can see why it is prudent to ask just how much leakage is occurring as the Fed is monetizing. Surely the Chairman can see why at a time when Wall Street is about to pocket $150 billion in bonuses, America can be a little concerned with the possibility that QE2 in addition to being a blatant debt monetization scheme, is also a direct taxpayer funding mechanism to the Primary Dealers. We hope Congressman Paul will demand an answer to the these questions at first opportunity.

And now for some late night amusement from head CNBC entertainer Cramer: "I lost my temper on Twitter this morning. The chatter was that I had put people in the market at the top and taken them out at the bottom. I have done a bunch of things wrong in my life and in my trading career, but that combination is not one of them. There were also the attacks on me about buying gold at the top. What am I supposed to do about this one?"...As Cramer is nothing more than a (tragi)comedian, we applaud his collapse to the level of one Dennis Kneale, whose last gimmick before ending his CNBC career, was engaging the blogo/twittersphere. We are delighted that Mr. Cramer has finally "succumbed" to the same terminal level.

Guess who, after on September 24 David Tepper almost screamed that he was "balls to the wall long" and EVERYTHING was about to go up on QE2, you were very likely buying shares Bank of America and Citigroup from? Why, David Tepper, that's who. In Tepper's just released Q3 13F, the Appaloosa fund manager disclosed that in the quarter ended September 30, one week after his pompous, self-serving speech on CNBC served as a reason to pump the market up by almost 2%, he sold 18% of his BofA holdings (his largest holding both at June 30 and September 30), 11% of Citi, 19% of Wells Fargo, 19% of Fifth Third, 19% of Capital One, 75% of his then $157 million Hartford Financial position, and lighten up on pretty much all of his other financial positions. And congratulations to CNBC for serving as the medium which David Tepper manipulated to his advantage and dump about 20% of his financial stake, which as of June 30 was his biggest, at 56% of total holdings.

There were some very odd occurrences in the world's largest silver ETF, the iShares SLV. After the exponential increase of the price of silver in the spot market, almost hitting $30/share on November 9, the SLV ETF, which like GLD purports to holding the underlying precious metal, saw a massive basket creation demand, amounting to a whopping 523 tonnes of actual silver added to the fund's holdings (equivalent to 16.8 million ounces, at a cost of about $456 million) for the week ending November 12, currently at a record 10,718 tonnes. While we don't purport to knowing how much free silver is available in the open market, the possibility that any one entity could have manged to purchase such a massive amount of actual silver, of which 352 tonnes was supposedly acquired on November 10, without completely destabilizing the actual supply and demand mechanics, and creating a vicious loop where basket creation leads to a further surge in prices, is just slightly mind boggling. As we have speculated earlier, we expect comparable activity in the GLD ETF to follow suit. Additionally, we will shortly look at this week's CFTC COT data to determine just how massively JPM's silver short has impacted the firm's P&L.

The mainstream media attacks on precious metals were so extreme last year that they began to border on the bizarre. The “cult of fiat” was relentless in their attempts to slander gold investors and it seemed as though no matter how well the yellow stuff did, or how dismal the dollar’s performance was, they would never get tired of the disinformation game. Fast forward a year later, however, and they have been utterly silenced. What a difference twelve short months can make…

With everyone's attention focused squarely on Ireland and whether or not the country would be finally put out of its misery, one thing that most missed is that after today's release of subpar economic data, Europe has now entered a double dip. While this is not news to Zero Hedge readers, as we were confident this would happen when the EURUSD passed 1.30 for the first time several months ago, it may take others by surprise. Unfortunately Europe's troubles are only going to get worse. The only way to stimulate organic growth now, read create another export-led bounce, requires the devaluation of the euro. However, that would mean that the ECB would have to not only launch a comparable program to QE, which would paradoxically anger an inflation-weary Germany (whose economy would benefit the most from an export boom) but far more importantly, anger the New York Fed. And this Europe can not afford - keep in mind that in Europe's rickety financial structure in which a whole lot of countries are kept on life support, the ECB is only the second to last (and far less reliable) provider of resuscitation services. The last one is the New York Fed, which courtesy of its FX swap lines, now has infinite leverage over what happens in Europe. Should there be another crisis, and there will be, the Fed's generosity will be tested again. As will the IMF... to whose various credit lines America just happens to be the biggest sole contributor. There is a word for this type of arrangement: total leverage.

Unbelievable...

With the QE2 announcement now out of the way, Mr. Bernanke’s game plan is as follows: 1. Lower interest rates for “everybody“ and “everything”; 2. Stocks & Bonds will then increase in value making “everybody” and “everything” feel wealthier; 3. “Everybody” will then start to buy “everything”; 4. Pray that the price of “everything” doesn’t increase too much and therefore cause “everybody” not to buy “everything”; 5. If steps 1 to 4 are successful, businesses will begin to create jobs for “everybody” because they will once again be buying “everything”; 6. Ignore the housing market problem; 7. Ignore the debt problem; 8. Ignore the effect of numbers 6 & 7 on the banks; Pray that foreigners continue to buy newly issued American debt Simple enough. But wait, this is where it becomes interesting.

There is a reason why groupthink is often the most dangerous concept in the financial industry. When it works: it makes everybody richer. When it fails, it results in the premature end of many asset managers. Nowhere is this better seen today than in the top holders of Apple stock, which according to CapIQ, is held by 1,933 institutions that have at least one share holding in the name, and 402, which have at least 100,000 shares. Cross-referencing the top 100 holders of AAPL stock with the top 100 holders of a recent tech casualty, Cisco, shows that the of the top 100 Apple holders (one of them being Steve Jobs), 93 are also present in Cisco. And a result of the past two-days' drubbing in these two names, these massively cross-correlated top holders in the two stocks have seen over $18 billion worth of P&L losses in the past two days alone. Now many will respond that these firms have also experienced massive profits on the upside, which of course would be correct. However, what many will also conveniently ignore, is that these very firms will all too often leverage unrealized profits and use these as margin to purchase additional stocks, in essence re-creating a new cost basis with every single remargining of the stock. Therefore, should there be a sell of in Cisco, or heaven forbid, Apple, it will pull the rug from the entire market. It also explains why mysterious buying will often materialize: the last thing the market can afford is a massive domino-style sell off due to the plunge in one single name. So far today, Apple dodged the bullet. Cisco still has not. At some point these mutual and hedge funds, however, will receive margin calls to fund over $18 billion in cash collateral, especially since mutual free fund cash is currently at all time lows just over 3%. When that happens, not even Brian Sack will save the market.

Max Keiser shares his brilliantly simple plan to bring down the precious metal manipulation cartel (those two terrific guys, JPM and HSBC who have recently been implicated in an avalanche of lawsuits involving silver price manipulation): "if everyone in America buys a silver coin" (which today costs much less then yesterday courtesy of Jim Cramer's wholehearted, and about 2 years overdue, endorsement of gold last night - a far better contrarian signal than even Goldman's FX desk ever could be), a plan originally proposed by ZH contributor Mike Krieger, "it would crash JP Morgan" presumably as the margin calls result in a cash collateral requirement in the billions of dollars. The premise, of course, is that since there is not nearly enough silver to satisfy demand, it would by definition, result in an explosion in the price of the precious metal.

Is the game theory defection dump of the world's biggest hedge fund hotel starting? In a just released 13F filing, Ken Heebner's Capital Growth Management has disclosed that he has reduced his holdings in Apple almost to zero. After holding 1.15 million AAPL shares as of June 30 (which made him holder #100 in the name sorted by size), Ken Heebner who is a regular guest on CNBC courtesy of his bullish tendencies, sold virtually his entire stake, leaving him with just 111,000 shares. One can only speculate about the causes, although it is notable that the last time Heebner did a comparable dump was in late 2008, when after the Lehman bankruptcy he liquidated half his million share stake. Is Heebner sensing something comparable to what happened in late 2008 on the horizon? Or was he satisfying margin calls? Or, most innocently, did he just sell what is probably his most profitable position, "just because" - inquiring minds want to know. We will keep an eye out on who else dumped Apple as the barrage of Q3 13F issuance begins today and ends on Monday.