Archive - Dec 5, 2012 - Story

It’s estimated that the pound sterling made up around 64% of the world’s official FX reserves in 1899. It had fallen to about 48% by 1913.  As you'll likely glean from the graphic below, Addogram notes that historic recurrence seems to like operating in base-100 when it comes to reserve currencies. The dollar's share of global (official allocated) FX reserves has fallen from 72% in 1999 to 62% at present. As we have pointed out before - reserve currency status doesn't last forever...

On December 4th, 2012 at 47 minutes and 13.1 seconds after midnight, 2,035 February Gold Futures contracts GCG3 took the market down $10 as fast as the exchange could execute the order. This invisible hand that decided that that was the perfect time to execute a trade for over 200,000 ounces and $345mm notional of gold is exposed in oh-so-visible a manner by Nanex's eagle-eyed millisecond-by-millisecond charts below. As the day wore on, there were more of these sudden 'unexplained' price moves. Cue 'Twilight Zone' music...

Sluggish global economic growth means many public companies will have to rely on mergers and acquisitions to generate earnings growth in 2013 and beyond (FCX aside that is).  ConvergEx's Nick Colas notes that the academic discussion of whether such a strategy adds “Real” value to shareholders has shifted in recent years.  From an unequivocal “No, never…” to a more qualified, “It really depends,” this discussion will grow more critical as industries from financial services to manufacturing to commodity producers evaluate their long term prospects.  The key to this question, at least to Colas' thinking, is in the analysis of barriers to entry/exit and true economies of scale.  The right answer to the “Does M&A add value” question is much more about business strategy and competitive analysis than any blanket statement about the merits of buying or selling assets. In summary, M&A is now simply much more important to corporate strategy than at any point in the last 30 years; over the next 5-10 years M&A activity will be increasingly necessary to keep the tailwind of growth in almost every sector of the economy and capital markets. There’s just no other way to grow (though shareholders increasingly want that 'cash' in dividends or buybacks - and not growth!)

Sweeping changes are taking place at the state level as pension trustees and legislatures push for higher monthly contributions to pension plans, a later retirement age and lower annual cost-of-living adjustments for current and retired workers. Unions (those that don't make Twinkles, in any event), are making the concessions because they can see the future absent shared sacrifice — the termination of defined benefit plans in favour of defined contribution plans. Be that as it may, employee contributions are going up — a de facto tax hike. And this will work directly against any upturn in consumer spending when you consider that the state and local government sector employ nearly 20 million people or 15% of the national job pie. So we will have less government, fewer entitlements and more whisperings that it isn't just the $250,000+ high-income households that are going to experience tax increases and diminished disposable income growth. This is shared sacrifice. To think that the nation could have ever gone to war in Iraq and in Afghanistan under the Bush regime, putting our troops at great risk not to mention the emotional scars on their families, while here at home civilians would be allowed to enjoy tax cuts and a debt-financed consumption binge.... One has to wonder what events could provide positive momentum to GDP growth, push corporate earnings to record highs as the consensus predicts as early as next year, or generate any lasting inflation, for that matter.  It's the people that make these pricing decisions. Businesses can only price up to what consumers are willing to pay. It is households that determine whether or not we have inflation, not some bureaucrat in Washington who believes he has control over some printing press.

Citi's Robert Buckland explains: If policymakers really do want to encourage stronger economic growth (and especially higher employment) then we would suggest that they take a closer look at the equity market's part in driving corporate behaviour. Despite high profitability, strong balance sheets and ultra-low interest rates, any stock market observer can see daily evidence of why the listed sector is unlikely to kick-start a meaningful acceleration in the global economy. A recent Reuters headline says it all: "P&G Plans to Cut More Jobs, Repurchasing More Shares". If anything, low interest rates are increasingly part of the problem rather than the solution. Perversely, they may be turning the world's largest companies into capital distributors rather than investors.

Forget the perfectly anticipated Greek (selective) default. This is the real deal. The FT just released a blockbuster that Europe's most important and significant bank, Deutsche Bank, hid $12 billion in losses during the financial crisis, helping the bank avoid a government bail-out, according to three former bank employees who filed complaints to US regulators. US regulators, whose chief of enforcement currently was none other than the General Counsel of Deutsche Bank at the time!

What a ridonculous day. We nearly dragged the deer out - or even Donkey Kong - but the epic awesomeness of the swings in stocks today (most notably the S&P 500 - since AAPL/NASDAQ tracked lower and more consistently all day) was simply remarkable. AAPL broke all kinds of records today (losing more market cap today than 80% of the S&P 500 companies in total h/t Peter Tchir). Despite the rapid collapse on the S&P 500 into the close (as HYG pulled off its lows in a failed convergence trade) amid heavy volume, saw the S&P manage a gain on the day but down on the month (while the Dow Industrials and Transports are basically unchanged since 11/30). Rates fell and stayed near their lows for the day; commodities chopped around (as usual) but ended marginally lower from yesterday's day-session close; financials were the winners on the day but led by just great companies as BofA and Citi which staged a tick-for-tick algo liftathon odyssey of idiocy (now up around 6% on the month!!). All-in-all, the S&P remains rich to risk assets but the overflow from AAPL's collapse has likely not played out yet as taps-on-the-shoulder will be everywhere tonight.

On October 22, we alone asked a very relevant question, which apparently nobody was able to answer:

Does anyone in Europe realize that a Greek distressed debt buyback is yet another event of default?

— zerohedge (@zerohedge) October 22, 2012

Well, one entity did. S&P.

• GREECE CUT TO SD FROM CCC BY S&P
• S&P CUTS GREECE'S LONG-TERM DEBT RATING TO 'SELECTIVE DEFAULT'

It seems like it was only yesterday when we were praising the miraculous 4 sigma move in AAPL stock, when it soared by nearly $40 in one trading session. It wasn't: it was November 19. Which is why it probably shouldn't be surprising that two short weeks later AAPL stock has just seen its biggest dollar fall in absolute terms in history, down $37 dollars or nearly 7%, its biggest one-day percentage drop since September 2008. Why? Nobody really knows, but when the world's biggest company by market cap trades increasingly like a penny stock, does anyone really care? In absolute terms, AAPL has lost nearly $35 billion in market cap in several hours today: more than the market cap of BlackRock, Morgan Stanley or Wal-Green, with no real material news except for the occasional weak order hearsay (which one didn't really need considering the US and global consumer is totally tapped out), and various other rumors. One thing is certain: the 240+ hedge funds who owned the stock as of September 30, and which did their best to paint the tape for November, are now at a complete loss what to do to delay what was certainly going to be a redemption avalanche for the second month in a row.

Sixteen years ago today, Alan Greenspan spoke the now infamous words "irrational exuberance" during an annual dinner speech at The American Enterprise Institute for Public Policy Research. Much has changed in the ensuing years (and oddly, his speech is worth a read as he draws attention time and again to the tension between the central bank and the government). Most critically, Greenspan was not wrong, just early. And the result of the market's delay in appreciating his warning has resulted in an epic shift away from those same asset classes that were most groomed and loved by Greenspan - Stocks, to those most hated and shunned by the Fed - Precious Metals. While those two words were his most famous, perhaps the following sentences are most prescient: "A democratic society requires a stable and effectively functioning economy. I trust that we and our successors at the Federal Reserve will be important contributors to that end."

Last night, the NASDAQ announced that Facebook (FB) will replace Infosys (INFY) in the NASDAQ-100 index. This change will become effective next Tuesday, December 11, after market close. This is merely the first swap in what is an annual Index reconstitution tradition for the tech-heavy, IPO-error prone index: next Friday, December 14, the NASDAQ will announce the official full list of new entrants and exit-ants from the index, which will take place on December 21, which usually serves as a technical buying boost for the new members, while those companies kicked out see substantial selling pressure as index funds no longer have to own the names. Below we present an analysis by Deutsche Bank's Bo Huang who lists, in order of conviction the names most likely to benefit (additions), and be punished (removals), from the reconstitution.  The names likely most likely to benefit: Kraft Foods, Regeneron, Libery Media, Analog Devices, Catamaran and Equinix. On the other hand, those holding Netflix, Apollo Group, Warner Chilcott, Green Mountain Coffee, Electronic Arts, Flextronics, or the recent Lazarus, until a month ago left for dead, Research in Motion, may want to quietly sell their holdings. They will likely have a better re-entry point after next Friday's announcement and prompt reallocation.

Is this really the reason why markets are rallying today? (or is it front-running the potential 'cone of silence' from a long-weekend in DC) We suspect neither, but Mike Krieger, having written extensively on the two-party political sham, notes the issue is that both the Democratic Party and the Republican Party are at their core the same on the big issues most affect these United States at this time.  This past election should have been a wakeup call to the Republican establishment, but based on John Boehner’s recent actions, they have learned absolutely nothing.  The Republican Party is imploding from within since its leaders don’t actually stand for anything.  Here is how Mr. Boehner treats those within his party that do stand for something.

Presented with no comment...

There are almost as many theories about why obesity has exploded in America and the world since the 1980s as there are researchers compiling data. The rise in Body Mass Index (BMI) appears to correlate with the rise of high-fructose corn syrup (HFCS), a simple carbohydrate. Unfortunatley, obesity and well-being are not just a matter of carbs/no-carbs; the causal chain is just not that simple.

If the beginning of the end started two years ago as we predicted, is this end of the end?

• CITIGROUP PRIVATE BANK SAID TO PUT SAC CAPITAL ON `WATCH' LIST
• CITIGROUP SAID TO ADVISE CLIENTS AGAINST ADDING MONEY TO SAC
• CITIGROUP PRIVATE BANK ALLOCATES CLIENT MONEY TO HEDGE FUNDS

Next up: all other private wealth groups halt capital allocations to SAC? Redemptions of all non-employee funds and liquidations? FBI raids, but only after orderly winddowns? It sure gets interesting...

And without Stevie Cohen running stops 24/7 in ES and every other stock that is still widely traded, what then? Will GETCO run the entire market?