Archive - Oct 2012 - Story

The primary reason the U.S. economy is stagnating is that it is dominated by an increasingly dysfunctional Central State and the private cartels it protects. The solutions, therefore, cannot come from State central-planning or from global corporate cartels. The solution is to develop alternative models that reinvigorate the local, community-based economy and that leverage the new tools of productivity: the Internet, freely available software tools and new technologies such as desktop fabrication. One sure way to improve the local economy is to keep more of the community's income in the community itself rather than send it to distant corporate cartel headquarters. Guilds can play a dynamic role in that relocalization movement.

What happens if all the "ifs" become "whens"?...

We cannot escape the conclusion that things remain hopelessly off track.  Whatever form of 'recovery' is being sought here simply will not arrive. The core of our views is shaped by the idea that the very thing being sought, more economic growth (and exponential growth, at that), is exactly the root of the problem.  We suppose we would take a similarly dim view of an alcoholic trying to drink their way back to health as we do the increasingly interventionist central bank and associated political policies the world over. We are losing hope that we will navigate towards anything other than a hard landing at some point because even with copious amounts of data accumulating suggesting that the old ways are not working, we cannot detect even the slightest hint of original thinking or new thoughts coming out of the marbled halls of power. Business-as-usual and more-of-the-same seem to be the only operative ideas right now. But what is a bit startling to me is the number of individuals that have not yet caught onto the idea that things have permanently and irrevocably changed.

One of the zanier proposals floated in the past few weeks, yet sufficient to send Greek bonds soaring to post-restructuring highs on hopes of a take out, was the suggestion that Greece would repurchase its fresh-start bonds in the open market, which recently traded in the teens, and have since virtually doubled, at a price ~25 cents of par. Obviously since the price of the bonds had been much lower, even the mere possibility of what is termed in the industry as a distressed buyback, sent everyone scurrying to purchase the paper, as if it had any intrinsic economic value (it did not), instead of mere hopes that Greece would throw even more good money after bad (especially since the fresh start bonds have a meaningless cash coupon and nobody expects them to be repaid at maturity). There is also the detail that a distressed buyback is, for the rating agencies, equivalent to an Event of Default, but knowledge of that small fact would be demanding too much out of those who scrambled in the latest chase for yield. Anyway, with all that said, it now appears that the whole idea is over, with Greek Kathimerini reporting moments ago that Greece has scuttled the proposal for a bond buyback.

Everyone's favorite Whitney Tilson repeat-endorsed, slow motion trainwreck, NetFlix, has reported results after hours. They are, as expected,  terrible with lots of cash burn, declining margins and excuses, and as a result the short squeeze is over and the stock is imploding after hours. Among the details:

• Q3 Gross profit declined to 26.8% from 27.6% in Q2 and 34.7% in Q3 2011.
• Total cash declined by $32 million
• Free cash flow was -$20 million, despite positive "net income"
• Q3 Streaming content obligations were flat at a whopping $5 billion. $2.1 billion is due in the next year. The brilliance strikes here first. These obligations "not include obligations that we cannot quantify but could be significant." Uh... What?

And while the firm forecasts a net income loss in Q4 of ($13)MM to $2MM as seen in the table below, which means a far worse free cash flow loss in Q4, the absolute pearl was the following:

"The biggest issue holding back much stronger growth is payments."

Priceless.

UPDATE: NFLX Tilson'd -14% AH

Yesterday's late-day rampapalooza seemed like just the confidence-inspiring rally that was needed to enable sellers out at better prices. The absolute schizophrenia (debate-day shenanigans?) remains remarkable - and today the silver-lining appears to be the Dow Transports - which end green. But as always context is key - the rest of the US equity market is converging down to the Trannies measly 0.8% YTD gain in a hurry. Stocks and broad risk-assets were once again highly correlated as systemic weakness dragged an exuberant overnight equity market back down to reality. Today's higher-beta weakness was widespread but AAPL's crashtastic 3.25% plunge on an underwhelming sales and over-expensive product seems as good a catalyst as any (and if anyone on TV tells you its all the shorts driving it - just think about the dominance of this stock in all those long-only manager's books that are now underperforming - long sales at VWAP!!!). USD strength dragged commodities lower - Oil underperforming, Gold outperforming (though lower); Treasury yields cracked lower (down 6-7bps from high to low); and credit modestly underperformed as VIX also rose more than implied by stocks as protection was bid. The S&P has lost the Bernanke Floor and thanks to some late VWAP support is holding at Draghi's Dike.

That former Goldman, New Jersey and MF Global head Jon Corzine is absolutely convinced he is innocent of any client money vaporization or wrongdoing, and that the definition of the phrase "to Corzine (verb- to trust your money to a prominent individual and to find it has mysteriously disappeared)" is absolutely arbitrary, is not news to anyone. And if not convinced then at least at a complete loss to what actually happened. One just had to recall all the "I don't recalls" the Honorable Corzine told congress during the makeshift kangaroo court hearing on MF Global's collapse (even if the final outcome was less than desired).   So it's only logical that the Honorable Corzine asked a federal judge to "toss a civil fraud lawsuit accusing him of misleading investors about the risky bets the futures firm was taking before its collapse a year ago." The WSJ reports that "Corzine's lawyers blasted the investors' suit as a "jumble of assertions and accusations" that makes "no sense" that should be dismissed in a filing Friday in U.S. District Court in New York." But here is the kicker: MF Global may have mismanaged trades, Corzine's lawyers admit, but he sure didn't hide the risks or mislead investors about the firm's risk appetite or liquidity. Why? Because he was so convinced in the profitability of MFG he bought a whopping 50,000 MF Global shares in the open market two months before the firm collapsed. So let's get this straight: Corzine invested a whopping $225,000 (as a reminder, Corzine was CEO of Goldman Sachs for years) because he believed in the firm and not to give the impression that the firm was "safe" in order to avoid a full blown panic once the realization its was insolvent could no longer be hidden, and be wiped out on all of his stock, option and other MFG holdings? And this is what sophisticated lawyers use as evidence of his innocence? Seriously?

The most important alliance within the EU, the one that has ultimately defined the union's course over the past few decades, is the French-German axis. It appears that this is no longer the case. The once so strong friendship is in danger of fraying ever since the socialist Francois Hollande has become president of France. Not only was he elected on an 'anti austerity' platform (disguised as a 'pro growth' agenda, which is of course one of the most laughable misrepresentations ever),  it has turned out that his big-brother, anti-free market socialist agenda wasn't merely an electoral ploy to differentiate himself from Sarkozy. He actually means it. One thing is certain: the markets have not yet fully assimilated what is going on here.

Forget black swans, Nigel Farage is rapidly turning himself into the black sheep of the EU Parliament with his constant stream of truthiness and honest pragmatism. It seems the broadly nodding-donkeys that fill the chamber remain cognitively dissonant to any and everything in the real world - hanging instead on the next soundbite from Van Rompuy or Barroso on how well things are going, or how the crisis is 'almost' over. If only the Germans would bless them all with their money. In one his plainest-speaking rants, Farage provides clarity to his 'peers' on just exactly what the bailouts of Greece, Portugal, Ireland, and soon to be Spain and Italy are actually about - the "total subjugation of the states to a completely undemocratic structure in Brussels." Is it any wonder Samaras and crew - while happy to accept cash and make promises - are pulling away from yet another (this time is the last time) Troika-driven austerity push? "The euro-zone is in a very dark place; economically, socially, and politically."

UPDATE: AAPL Stock -2.5% - below Friday's Closing VWAP

Below is a picture of the product that Steve Jobs never wanted launched, and which Apple has been forced to release due to competitors which are suddenly beating it in its own game. And the price: $329. The Nexus starting price is $199 which is also Kindle Fire territory. Anyway, the 8 inch iPad is here (which upon measurement actually turns out to be 5"... particularly the white version). So when is the iPad 36C coming? Finally: will there be an iDiscount for those with over $100,000 in student debt?

They may yield nothing (technically 0.295% nominal yield), and they may be still sold by the Fed, but today's 2 Year bond auction had a blistering metric that showed that something is very much unwell with the market. Coming at a Bid to Cover of 4.02, broad demand for today's $35 billion in 2 years was the second highest only below November 2011's 4.07. What happened on November 21, 2011? Well, the world was ending for one, or if not the entire world, then certainly Europe which for those who remember, had to be rescued one short week later courtesy of a coordinated global central bank intervention when the Fed and Europe not only renewed their FX swaps, but lowered the rate paid to OIS+50. So do the bondholders know something about today's market plunge that is not being said? We will find out soon.

In recent months there has been a lot of incorrect speculation that because Iran has been shut off from the petrodollar, SWIFT-mediated regime, its economy will implode as the country has no access to the all important greenback and can thus not conduct international trade - the driving factor behind the international sanctions that seek to topple the local government as Iran dies an economic death. And while there have been bouts of substantial inflation, which so far the local government appears to have managed to put a lid on by curbing gray market speculation, Iran continues to more or less operate on its merry ways with international trade most certainly taking place, especially with China, Russia and India as main trading partners. "How is this possible" those who support the Western-led embargo of all Iranian trade will ask? Simple - gold. Because while Iran may have no access to dollars, it has ample access to gold. This in itself is not new - we have reported in the past that Iran has imported substantial amounts of gold from Turkey, despite the Turkish government's stern denials. Today, courtesy of Reuters, we learn precisely what the 21st century equivalent of the Great Silk Road looks like, and just how effective Iran has been as a lab rat in escaping the great petrodollar experiment, from which conventional wisdom tells us there is no escape. Presenting: petrogold.

While many are blaming today's weakness on DuPont and a final awakening that earnings might not hockey-stick as consensus believes, CNBC's Gary Kaminsky has an interesting angle that is gaining ground among desks. We can argue all day long that central bank actions have driven a 'wedge' between fundamentals and market prices (as we did here) and as Gary himself notes "printing money around the world does not help corporate profits" but Kaminsky's view of today's weakness is more nuanced to the outcomes of the election. Critically, he makes the case that the market is starting to realize that whoever wins in two weeks, there is a more negative bias post-election. From Obama's higher taxes and more-of-the-same sluggish economy to Romney's potential China-Trade-war, an implied strong-USD-policy, and potentially the end of the 'Bernanke-Put'; Kaminsky says "the easy money days are gone" and warns of a 1000 point correction being possible.

Debt.  There isn't a day that passes as of late that the issue of debt doesn't arise.  Federal debt and consumer debt (including mortgages) are of the most concern due to its impact on the domestic economy.   Debt is, by its very nature, a cancer on economic growth.  As debt levels rise it consumes more capital by diverting it from productive investments into debt service.  As debt levels spread through the system it consumes greater amounts of capital until it eventually kills the host. The problem is that during a “balance sheet” recession the consumer is forced to pay off debt which detracts from their ability to consume.   This is the one facet that Keynesian economics doesn’t factor in. It’s time for our leaders to wake up and smell the burning of the dollar – we are at war with ourselves and the games being played out by Washington to maintain the status quo is slowing creating the next crisis that won’t be fixed with monetary bailout.

No matter what you are told by the mainstream media, peripheral government bonds have seen the worst 2-day sell-off in over a month with Spanish 10Y spreads +27bps this week so far and 2Y breaking back above 3% yield in a hurry. Just as we warned - this rally is not capital flowing back into 'tail-risk- removed govvies, it is simply fast money front-running actions and now momentum gains for the exits. Swiss 2Y rates fell their most in a month to -20bps as safety was sought. Europe's equity markets dropped for the third day in a row (hhmm more profit-taking we are expected to believe?) with the broadest BE500 index down 1.65% today and almost 3% off its recent high (the biggest 3-day drop in three months) and now at critical support once again. Equities are underperforming credit - as credit suffered the epic short-squeeze last week and we suspect remains a little gun-shy. EURUSD cracked back below 1.30 (down over 100pips to 1.2950 as Europe closes) and Europe's VIX jumped notably back above 23% - its highest in 6 weeks. GGBs lost their most in 3 months...