Archive - May 2011 - Story

All the talk about a dollar currency crisis is getting ahead of itself. Quoting Mises won’t make it happen overnight. It takes years, even decades for a reserve currency to dissipate. Instead of wholesale collapse, the most likely outcome is a steady decline in the dollar over an extended period of time. Of course there is a tail possibility of a collapse, and that is why hedges exist. But the high likelihood trend is persistent policy action to drive the dollar lower with respect the United States trading partners’ currencies, combined with a decline in the dollar’s use as a vehicle currency. This means serious dollar weakness for the next three years (or more), but not collapse.

Confirming our ongoing observations that the pursuit of leveraged beta is the only game in town ("Levered Beta Uber Alles: NYSE Borse Margin Debt Jumps To Three Year Highs, Investor Net Worth Remains At Record Lows") is this surprising confession by hedge fund titan Carl Icahn, who not only warns that the levels of leverage achieved in the current centrally planned regime is as bad as it ever was, and that some form of Glass-Steagall should return, but that, stated simply, the entire "system is not working properly." His warning, stated in a very politically correct fashion, is that "there could be another major problem" either next week, or next year. Which is not surprising: after all not only has anything changed, but the very same drivers of risk that nearly crashed capitalism in Q3 2008, are back and arguably stronger than ever. That the Fed is the last recourse mechanism preventing an all out systemic wipe out probably should not be a source of comfort to anyone. In the end, the Fed, as any other authoritarian institution promoting central planning, will always lose.

While it may not be Duquesne or Shumway or even Icahn, it is merely the latest in a string of hedge fund closures, in this case market neutral, thus without a long or short bias, that was just put ouf of business by the ongoing streak of market surreality courtesy of $5+ billion in daily average POMOs, and the complete dominance of momentum driven, algo sponsored and robot implemented market strategies. The pioneer James Advantage Market Neutral Fund is now closing. "We have some important news to pass along on the James Advantage Market Neutral Fund (JAMNX). We have decided to close the Fund before June 30, 2011. While it was one of the first Market Neutral mutual funds to come out in 1998, times have changed and the investment approach has not been accomplishing what we originally intended." Chalk one for robot assisted central planning. And confirming that the "market" no longer rewards "quality" companies and merely encourages failure (thank you Uncle Fed) are the latest observations from Barclays's Matt Rothman: "Despite the retrenchment last week, in quant land the euphoria gripping
the market has manifested itself in a continuing struggle for High
Quality companies. Our long/short Quality index last month turned in
notable underperformance, returning -1.64%. As this index generally runs
at approximately 1/3rd the volatility of broader market indices such as
the SPX, this underperformance is eye-opening to us. We were hoping that earnings season and the ensuing news by just a
few companies might have been responsible for the strong
underperformance of Quality – that it was a few outlier stocks, a few
big names that drove our index down. Unfortunately, this is not the
case. Quality as style just failed...This is the second worst monthly stock picking performance for Quality since we launched our model in July 2007... To see large stable companies, with solid profit margins, strong
balance sheets and repeatable earnings underperform in this manner month
after month now is distressing." Someone please inform the Chairsatan that he has flipped the core premise of the stock market 180 degrees upside down...

Lately analysts have been stumbling all over themselves to raise estimates for earnings growth over the coming quarters based on recent earnings announcements by various companies. However, one of the things that should be paid attention to, besides rising input prices and weakening economic variables, is the Year Over Year Change (YOY %) in corporate profit margins...The evidence is mounting that corporate profits are under attack due to rising input costs through high commodity prices, weakening support from the consumer and an overall weakening state of manufacturing and employment completing the feedback loop into the domestic economy. While economists are still predicting just a slowdown in the economy before a reacceleration - my thoughts, as stated before, is that we will either see close to zero economic growth by the end of the summer or QE 3.

Greece hasn't even filed for bankruptcy yet and the "unexpected" consequences are already coming. In comments to The Sunday Times newspaper, Irish Transport Minister Leo Varadkar said the country will likely need another "unexpected" loan from the troica, after he became the first cabinet member to cast doubt in public on Ireland's ability to raise cash. In other words once on the temporary bailout wagon, always on the temporary bailout gain. Reuters reports: "I think it's very unlikely we'll be able to go back next year. I think it might take a bit longer ... 2013 might be possible but who knows?" Varadkar was quoted as saying. "It would mean a second program (of loans from the EU/IMF)," he said. "Either an extension of the existing program or a second program. I think that would generally be most people's view." We wonder how German taxpayers will fell now that they realize they have not one, not two, but three (and soon 5 or more) heroin addicts they need to clean, wash, scrub, and feed on a monthly basis (with their, and US money, but Americans continue to not care that the biggest source of capital for the IMF is them). And speaking of ground zero, Greece is now scrambling after the Independent said that even Sarkozy is now prepared to let the Greek chips falls where they may. Following earlier news that the troika believes that the privatization plan it itself set up is not ambitious enough, Greece which now realizes that Germany, the EU, IMF, and Franch all are prepared to let it go, the country is now coming up with last ditch ideas faster than a speeding bullet: according to Reuters: "A Greek paper reported on Sunday that the government was considering setting up a Spanish-style "bad bank" to clean up its lenders' accounts from "toxic" Greek bonds and make them more attractive to potential buyers." Of course since it is toxic Greek sovereign bonds we are talking about, this implies that the country will somehow be split into a "good" and "bad" version of itself. And who thought financial innovation only comes out of the US.

That insider trading in Washignton occurs with a greater frequency than at Galleon is no secret. Courtesy of various loopholes, members of both the House and Senate have long been allowed to trade on inside information, something that grabbed the media's attention when back in November 2005 someone, somewhere sent the stock of USG Corp., W.R. Grace & Co., and Crown Holdings higher even though there was no public information. Only later would it become known that then-Senate Majority Leader Bill Frist would deliver a speech announcing new legislation to relieve companies of asbestos litigation. Subsequent studies (such as Ziobrowski et al's 2004 paper “Abnormal Returns from the Common Stock Investments of the United States Senate.”) confirmed substantial market outperformance by members of Senate. A few days ago, Ziobrowski et al, have released a follow up study "Abnormal Returns From the Common Stock Investments of Members of the U.S. House of Representatives" which confirms that not only do congressional critters consistently outperform the market, but does a granular analysis of just who it is in congress that should consider leaving the public arena, and raising capital to start their own hedge fund: simply said, junior, democratic congressmen beat the market by roughly the same amount, with the same consistency (and probably with the same Sharpe ratio) that allows SAC to charge 3% and 35%.

While we have recently seen various fundamentally driven predictions for the S&P going back to its 1994 level of ~400 (most recently from Albert Edwards and Russell Napier), few charts predict a comparable major retracement in the key equity index. And while it is not quite a variant of the Kondratieff Wave chart familiar to most, this chart courtesy of Sean Corrigan shows the historical 33 year peak to trough frequency of the S&P, emphasizing the cyclical periodicity observed in market cycles. The chart predicts the next 33 year low to occur some time in late 2015, taking the S&P to the proverbial 400 level. As Corrigan observes: "A third, post-94 Bubble-era decline of -50% would unwind all of that move and half the log rise of the Great Bull Market (something the '49-'68 move did) and return to both the mid-1960's highs and Fib retrace the whole post - WWII move. Doing this by late 2015 would preserve the 33 year span."

Debt is slavery… or at least indentured servitude of the worst kind. That looming mortgage, the high interest credit card debt, the short-term car loan– these are the forces that keep people from breaking free and taking action. Ironically, debt begets more debt. According to FinAid, the average US student loan debt for a four-year private university graduate is nearly $36,000, and $24,000 for public. Throw in that first car loan and maybe a mortgage, and suddenly you’re staring at hundreds of thousands of dollars in demoralizing claims on your future income. At this point, most people figure… ‘hey, I’m already in debt up to my nose, might as well get in up to my eyeballs and buy a new plasma screen on credit.’ Debt is an enormous psychological burden that influences life’s major decisions. It’s why so many people stay committed to jobs that are unfulfilling in cities they detest under conditions they find disheartening. Nobody wants to rock the boat too much… take too many risks and you could lose your job, and hence the ability to make those monthly payments. This familiar story has been playing out across the developed world for years. This is not an ill, however, that exclusively affects individuals and families. Even at the macro level, debt has the power to subjugate entire nations to the whims of their creditors. Enter the IMF.

Germany's Der Spiegel seems hell bent on getting sued to hell and back by Greece. After a few weeks ago it "broke" the news of a secret meeting that would consider the expulsion of the country from the Eurozone, it is once again stirring passions with an article claiming that Greece has missed all fiscal targets agreed under its bailout plan, according to a mission from an international inspection team, putting further funding for Athens at risk, Reuters summarizes. "The troika (aka the International Monetary Fund, the European Commission and the European Central Bank) asserts in its report to be presented next week that Greece had missed all its agreed fiscal targets," weekly Spiegel magazine reported in a prerelease. In other words, this could be the political game over for Greece, whose fate as has been disclosed recently, is intimately tied with the perception that it is following the troika's demands for fiscal change. If the three key bailout institutions are already leaking that Greece is done, next week could well be the beginning of the end for the €. In about 48 hours, even as America is enjoying a Monday off (or precisely because to that, to avoid a market panic), the European market could be digesting a very bitter pill of testing just how well pre-provisioned all those German, French and Dutch banks really are.

You read his weekly articles on Zero Hedge, now here if your chance to listen to Mike Krieger interviewed by Future Money Trends. Among the now topical issues discussed are the debt ceiling, QE3, geopolitical instability, US and global economies, $100 silver (as well as the recenty take down of the metal), market manipulation and much more, as well s Krieger's several proposed scenarios for the future.

The name Judd Gregg is not new to Zero Hedge readers. Back in the 2009-2010 battle for Fed transparency, which continues to be only fractionally on the way to being won, Gregg, who then served as the top Republican on the Budget Committee and a member of the Banking Committee, said that "opponents of Federal Reserve Chairman Ben Bernanke's second term are
guilty of "pandering populism"." Odd that these populism panderers, of which Zero Hedge was a proud member, ultimately succeeded in not only getting a one time Fed audit, but also won the legal case initiated by Mark Pittman to expose the Fed's dirty laundry, without which we would not know that not only did the Fed bail out primarily foreign investment banks during the financial crisis, but also that the biggest user of the Fed's somewhat secret Short Term Open Market Operations facility, also known as a 0.01% subsidy, was none other than Goldman Sachs, contrary to the firm's sworn statements that it did not really need bailing out. Gregg continued: "There's a lot of populism going on in this country right now, and I'm tired of it." Gregg warned that the growing tide of populism would threaten some of the most central institutions to the economy's recovery. "What it's going to do is burn down some of the institutions which are critical to us as a nation and as an economy to recover and create jobs," he warned." It was therefore only a matter of time that Gregg, following the end of his political career, has decided to step down, and work for one of these "central institutions to the economy's recovery" - Goldman Sachs. As such we present the list of companies that courtesy of their "top contributor" status with the senator over the years, are about to get preferential treatment from Goldman's sell side analysts, and see a prompt upgrade to Buy and/or Conviction Buy list in the near term. After all there is no such thing as squid-pro-zero in a world controlled by Wall Street's institutions "central to the economy's recovery."

The latest observations the spread of gold's popularity comes from none other than BRIC expert, Goldman's Jim O'Neill, who advises clients in his latest letter that it may be prudent that in addition to China and India as a source of ever increasing demand for gold, it may be time to also add the Middle East to the ever increasing list of investors (typically quite wealthy) who believe in the yellow metal. "Not because of this particular anecdote, but the Middle East being what it is, my meetings involved more discussion about Gold prices than is usually the case in other parts of the world. While the gold bar machine anecdote adds to all the other colourful stories I pick up, the recent remarkable resilience of gold, despite what has happened to silver and other commodities, is rather impressive. This gold price strength may perhaps be just a simple function of both the extremely low level of G7 real interest rates and the prospect that they might not rise anytime soon. I got the impression that there a quite a few bulls of Gold in the Middle East."

The mechanics of social proof, while somewhat complex, are pretty easy to understand. Simplistically, we humans have a strong tendency to glance over at other members of the herd in an attempt to gauge the correct action or reaction to take in any given circumstance. While this tendency can be useful in identifying the right bread plate to use at a fancy dinner party, it can also have devastating consequences. In one of the most notorious examples of the downside of social proof, in 1964 Kitty Genovese was slowly murdered on a New York sidewalk over the course of about 30 minutes, despite 40 or so witnesses, none of whom took action. They figured someone else would. In any event, understanding the concept of social proof – and its close cousin “social convention” – seems to me to be of fundamental importance to us as members of the human race, and as investors. As far as the former is concerned, if you ever find yourself doing the same thing as everyone else, it should concern you. Stop and ask whether you are doing the thing because you want to or because you think it is the right thing to do – or are you doing it just because it’s what everyone else does? As for the latter, if you rely on the cues coming from the mainstream financial media and officialdom, you would likely believe the country has exited the latest economic crisis and will now steadily make progress towards a return to normalcy. The seeming disconnect between the true state of the world’s economy and the public reaction is actually not a particularly bad thing for those who have their eyes open. After all, anyone who can see what’s coming, while the masses do not, has the opportunity to get positioned in investments that will do well when the truth of the situation becomes evident to all. But there are matters much more important in this life than money-making.

Two days ago, we presented Dylan Grice's latest thoughts on the substantial futility of trading the news cycle. Yet as Grice readily pointed out, and as even Taleb would glumly admit, what humans lose in the noise factor by avoiding the constant blasting of news, they make up for in entertainment value. And therein lies the rub: more than anything, people (or at least the vast majority)want to be entertained, ostensibly even more than the desire to make money on actionable, and properly filtered, ideas. The human brain has gotten accustomed to an information barrage of 140 letter updates, often times on a second by second basis, which in turn has crippled the ability to filter out the important from the irrelevant. Grant Williams of "Things that make you go hmmm" takes the idea one step further, and makes the claim that ever since the emergence of the 24 Hour newscycle, from its inception by CNN (also known as the CNN Effect), and currently peaking with each and every major news network having its own business new channel, accompanied by dramatic "breaking news" music, the net effect has been the substantial stupefaction of the broader global population: "Somewhere between the early 1990s and today, however, the 24-hour news cycle has, in your humble scribe’s opinion at least, become largely responsible for the ‘dumbing-down’ of the masses." Elsewhere this is also known as the "keep your eyes off the ball" effect, so well manipulated by those in control to mask what is really important with the repeated blasting of that which is truly irrelevant. Yet in another example of self-referential, deprecating and allegoric prose fit for TS Eliot (who pushed the premise of contextual and voluntary hyperlinking 70 years before the invention of the Internet), Williams makes his piece "entertaining" by presenting that number one construct of modern media: Captain Obvious. "In the investment world, this tear in the headspace/time continuum has meant that investors are unable to focus on all the issues brought to their attention and consequently they tend to suffer bouts of panic or euphoria over a certain subject before being distracted by the next piece of  news and moving on (remember Fukushima? It’s still not completely under control in case you were wondering). This strange situation in turn led to the spectacular resurgence in recent years of a Superhero – a man who, for years, has been omniscient in playgrounds the world over but has now become a fixture in more adult environs. Ladies and gentlemen, I give you Captain Obvious." In case it is not obvious where this is headed, read on...

It only took Goldman less than 5 months to roundtrip on its latest S&P 500 forecast (from January 7, "We are raising both our 2011 and 2012 S&P 500 earnings estimates by $2 per share to $96 and $106...we are raising our year-end 2011 price-target to 1500") - much better than the 3 weeks it took the firm to flip flop on oil. Just out from Goldman's David Kostin, who has finally started his retreat, which we believe will end at 1,250 before QE3 is formally announced: "We have reduced our S&P 500 2012 EPS estimate to $104 from $106 and lowered our 2011 year-end price target to 1450 from 1500. We now expect S&P margins to peak in 2011 and decline slightly in 2012. Those changes reflect forecast revisions for lower global GDP growth, higher oil prices and more inflation. At the sector level we recommend overweight positions in Energy and Consumer Staples and underweight in Consumer Discretionary and Utilities. We expect stocks with strong revenue growth to outperform those relying on margin expansion to grow earnings and recommend buying our High Revenue Growth basket."