Archive - May 15, 2012 - Story

From the 2008 financial crisis to Bernie Madoff, federal regulators have consistency proven too incompetent or too in-the-pocket to actually catch big disasters before they happen.  Their interests, like all government employees, are politically based.  State bureaucracies seek more funding no matter performance because their success is impossible to determine without having to account for profit.  There is never an objective way to determine if the public sector uses its resources effectively. The news of JP Morgan’s loss has reignited the discussion over whether the financial sector is regulated enough.  The answer is that regulation and the moral hazard-ridden business environment it produces is the sole reason why a bank’s loss is a hot topic of discussion to begin with.  Without the Fed, the FDIC, and the government’s nasty history of bailing out its top campaign contributors, JP Morgan would be just another bank beholden to market forces.  Instead it, along with most of Wall Street, has become, to use former Kansas City Fed President Thomas Hoenig’s label, a virtual “public utility.” Take away the implied safety net and “too big to fail” disappears.  It’s as simple that.

India is known for its historically high per capita demand for gold, particularly before festivals and the wedding season, which peaks in the months of October to December. With more than ¼ of the entire global world market for the metal, the country has long been leading world demand, though fellow BRIC member China is catching up. But recent developments in India have gold bugs stirring – protests, boycotts, and a proposal for a tax on the sale on gold jewelry has severely dampened demand ahead of one of the most lucrative festivals in the country. And with global gold prices down more than 10% since their February high of $1,787.75, there seems to be good reason to worry. While acceleration in gold prices and Indian GDP seem to link up as do Indian demand and global GDP growth, increases in demand have little correlation to gold price growth. Similarly, rampant inflation has almost no role in stifling demand for the metal. If these correlations - and the seasonal performance patterns - hold true in 2012, gold investors might be able to sleep a little easier. While none of this guarantees that gold will experience some kind of meteoric rise to $2k, especially given all the other factors that contribute to prices, Nic Colas, of ConvergEx, thinks it’s safe to say that the supposed softening demand in India shouldn’t be too concerning. The US has bought 42% less gold than it did in 2006. So when it comes to declining gold prices, don’t jump to blame India. After all, it isn’t even wedding season yet...

No really, WTF!?

Today, for the first time since the advent of the JPM prop trading fiasco last Thursday, the IG9-10 Year skew has diverged, dipping from -3 bps to -5 bps as the index remained flattish while the intrinsics widened by about 2 bps. While hardly earthshattering, this move likely means that either JPM's CIO trading desk is playing possum and is no longer unwinding its original pair trade exposure (either because it no longer has anything to unwind, or because it can't take the pain any more and is out of the market entirely), or the hedge fund consortium has had enough of pushing IG 9 wider in hopes that max pain would force JPM to cover its synthetic leg. As a reminder, this is where last Thursday we said the time to push JPM would likely end. As for the question of how much additional P&L loss JPM has sustained from Friday through today is a different matter entirely, and we are confident the next announcement from JPM will come momentarily, coupled with the announcement that Bruno Iksil, the last remnant of the CIO desk, and now having completed his duty of unwinding the trade that brought so much pain for Jamie Dimon, has been retired.

Yesterday we saw the first part of the HBO Documentary "The Weight Of The Nation" focusing on America's Obesity Epidemic which could be summarized as follows: "68.8% of Americans are overweight or obese - what are the consequences?" Today, the premium cable channel has released the next episodes in the series, titled Choices. The second film poses a question that almost anyone who’s struggled with excess weight has asked, if only in jest: For all the remarkable high-tech tools available to medicine, for all the billions of dollars in drug research, there’s still no highly effective medication to prevent or reverse obesity – why?

Back in March, on the back of the last gasp of yet another central bank-induced sugar high (in this case mostly LTRO 1+2), as well as economic data skewed by record warmth, a plethora of housing bottom callers (we would call them analysts but they are anything but) emerged from their hibernation and did what they do like clockwork every year: called a housing in bottom. Sadly, now that the market has topped out, at least for the current easing iteration, it appears that the housing triple dip as measured by Case Shiller will shortly be a quadruple dip. And so on, and so on, until the question becomes: will America ever recover from the housing crisis. We don't know, but we do know one thing - fixing an excess debt problem with more debt won't work. Period. Yet that is what continues to be the only "policy" in resolving the aftermath of the Great Financial Crisis. For everyone else seeking a more nuanced answer we suggest perusing the infographic below which provides a less jaded perspective and even has a Hollywood conclusion: "The end is on the horizon"... well, a Tarantino-esque conclusion: "...The distant horizon."

We thought that Jeremy Siegel, Laszlo "the Ruler" Birinyi and Jim Altucher were optimistic with their stock market targets. Sadly, with their equal to or less than 20,000 Dow Jones predictions, the three merely come off as rank amateurs, especially when compared to the forecast of BNP's head of fixed income Philippe Gijesels, who sees the stock market at 100,000 at some point over the next 25 years. However, unlike the previous trio who bases its forecasts on misguided expectations of economic growth, Gijesels may actually end up being right, because his estimate is predicated on one simple thing: hyperinflation, or specifically 12.2% inflation each year, which for a country like America is tantamount to the dreaded H-word. The other premise used by Gijesels: too much debt which has to be inflated. And actually, he is spot on. The only problem is that when the Dow hits 100,000 due to money printing, which is his underlying thesis, one will needed scientific notation to express the price of any hard asset (and most certainly gold), because if America falls in a two-decade long Weimar republic phase, the Dow may well be 100,000 or 100 googol - the truth is it won't matter as the money this number translated to would be absolutely meaningless. Just ask the Weimar Germans, who may have had some tremendous monthly increases in their 401(k) statements, but all they really cared about is whether they had the latest and most fashionable wheelbarrow model.

In a somewhat stunning revelation, especially after our earlier note on the Golden Dawn leader's 'position' on the issues of the day, GreekReporter notes via the news paper To Vima, that more than half of all police officers in Greece voted for pro-Nazi party Golden Dawn in the elections of May 6th. It's not really for us to judge (well maybe it is) but when some polling stations report Golden Dawn receiving 19-24% of the votes, things are going from the dismal to the horrific (and potentially chaotic) very fast.

Sometimes, when one desperately chases alpha at any cost, all one needs to see is a somewhat credible asset manager, in this case Bill Ackman's Pershing Square, invest a massive amount of cash in a given company, to decide to invest alongside. In this case the company is JCPenney, and the amount in question invested by Ackman being $1.3 billion (at last check his third biggest positions after GGP and CP). Usually this strategy, elsewhere known as herding, 13F chasing, or alphacloning, works, until it doesn't. In the case of JCPenney it just didn't, after the company just blew up in real time dropping a tape bomb, missing on the top and the bottom, cutting the forecast, and for good measure also eliminating the dividend. End result: Ackman just lost nearly $200 million after the stock imploded by nearly 15% after hours, and all those who blindly piggybacked along without doing their homework (such as Whtiney Tilson whose 4th largest cash position is JCP), went for the ride.

Today was special - full-retard kind of special - as the S&P 500 e-mini futures (ES) did a double-dip deja vu move extending the series to seven days in row of early buying and late selling as ES closed at new cycle lows and a plethora of other asset classes all dropped aggressively to multi-month records. Credit markets remain the indicator for weakness and while JPM's exaggerated the moves, bear in mind that IG credit is only correcting back to where its underlying names have been trading (forced rich - too high - by JPM's previous actions) and the late-day sell-off dragged stocks down near to convergence. Some early stability in IG9 provided a quiet rally in financials but as the afternoon began the selling restarted in the credit index (which pushed to new cycle wides - despite the skew collapsing - as momentum is in charge now). Commodities slid on USD strength and liquidation pressures as we note Gold held in well (better than its peers) until the last hour or so (which has the smell of margin/collateral calls). Equities recoupled with Treasuries today after 3 days of exuberance (again).

For all the totally inexplicable facetime T2's Whitney Tilson gets on prime time financial comedy air, one would imagine that the man runs billions and billions. Instead, as per the just released 13F, Tilson's fund has a grand total of $345MM in long AUM as of March 31. So far so good, however that does not explain why the manager has a Sharpe ratio of roughly 0.00 in the past 3 years. Well, now we know: of the $345 MM total, a ridiculous $104 Million is in call options! In other words, not only is Tilson nothing but a bullish bet that copycats various other select hedge fund portfolios, it is a mega-levered one at that, with what appears ridiculously high theta! It get's worse: as it turns out, another $24MM or so is... in Warrants. Yup: all levered products without actually owning the underlying, leading to massive monthly swings in actual P&L. In other words, real assets held by Tilson amount to $217 Million. And one wonders why the fund can be up 20% one month and down 30% the next... or how Tilson can spend hours a day on TV.

Presented without comment as the iconic tech firm of our time loses the somewhat satanic $555 lows of pre-earnings taking the firm back to two-month lows and dragging the rest of the market with it...

Most informed people are familiar with the concept of Peak Oil, but fewer are aware that we’re also entering the era of Peak Government. The central misconception of Peak Oil -- that it’s not about “running out of oil,” it’s about running out of cheap, easy-to-access oil -- can also be applied to Peak Government: It’s not about government disappearing, it’s about government shrinking. Central government -- the Central State -- has been in the expansion mode for so long that the process of contracting government is completely alien to the nation, to those who work for the State, and to those who are dependent on the State. Thus we have little recent historical experience of Peak Government and few if any conceptual guideposts to help us understand this contraction. Peak Government is not a reflection of government services or the millions of individuals who work in government; it is a reflection of four key systemic forces that drove State expansion are now either declining or reversing.

Now that the market (and by market we mean AAPL of course) suddenly feels like it could have far less bid-side support, and hedge fundies, up until this point relishing that definitely certain year end bonus, are once again getting very nervous that the comp situtation could be a replay of 2011, we bring them some respite: because the only thing that can bring a smile to a PM with a red P&L is known that the guy down the street is redder. Below is that latest full breakdown of monthly and YTD performance courtesy of HSBC. And yes, as pointed out yesterday, it does seem that David Tepper, did Topper-tick the market...