Archive - May 17, 2012 - Story

It seems so bizarre that a country once regarded as the freest, most economically enviable in the world would treat its productive citizens with such hostility. This is where Eduardo Saverin comes in. The Facebook co-founder, who finds himself a few billion dollars richer this week, recently renounced his US citizenship. And, to the intelligentsia, it’s not ‘fair’. ‘Saverin needs to pay his fair share! He owes America more,’ they whine, completely ignorant that the 30-year old is already forking over a $500+ million exit tax (which may end up in the billions). Apparently it’s not good enough that the company Saverin co-founded has created tens of thousands of jobs, spawned entire industries, and produced oodles of new millionaires. Oh yeah, it’s also made things damn easy for the CIA, NSA, and FBI. You’d think Uncle Sam would pin a medal on his chest. But no. Saverin left behind a lot of value and decided to move on to greener pastures in Singapore. Now the do-gooders in Congress are cooking up new legislation (the EX-PATRIOT Act) designed to permanently bar ‘renunciants’ like Saverin from re-entering the United States.

As many already know, earlier today Senator Schumer announced the cleverly named Ex-PATRIOT act, which seeks nothing short of exile for anyone who effectively declines their US citizenship for tax avoidance purposes. So far so good. We have, however, one simple question. In light of recent media reports of rampant abuse of various international tax loopholes by US corporations (recall the Double Irish with a Dutch Sandwich), but much more importantly, the glaring abuse of offshore tax shelters by hedge funds - organization such as Paulson & Co., RenTec, York Capital, etc., and financial institutions, such as Lazard, Blackstone, and Credit Suisse, can Senator Schumer please rep, warrant and guarantee that none of his corporate sponsors, i.e., his Top 100 Contributors, have ever engaged in any form of explicit or implicit tax avoidance, tax offshoring, and tax shelter. To facilitate his checklisting, we have presented his top 100 contributors below. Because if he can't, one may be left with the impression that his whole anti-tax tirade and legislation is, you know, hypocritical.

The business cycle ought to be thought of as a series of discrete phases, each one quite distinct from the other, rather than as a smooth and uninterrupted process through time. This is how Goldman Sachs describes what is a compelling view of the dynamics of macro acceleration-and-deceleration and expansion-and-contraction and how these separate phases of their so-called 'swirlogram' can be mapped into asset class performance. This means that unlike traditional business cycle momentum jockeys and the extrapolating 'rulers' of the world, trade positioning should depend not only on the current state of the cycle but also on the near-term phase transition. As the cycle turns, so do assets; economic acceleration serves as an early indicator of looming shifts. Hence, vigilance in monitoring the business cycle with an eye towards identifying cyclical turning points is instrumental to a disciplined investment process. These lessons are timely too. Back in March, the business cycle peaked. The GLI shifted from the Expansion phase to the Slowdown phase; growth remained positive but acceleration turned negative. More ominously, April GLI growth was quite modest, with downward revisions to the last few months of data too. If the current downbeat data trajectory is extended, current GLI readings may prove to be overly optimistic. And should acceleration remains negative (which today's Philly Fed will drive), there is not much of a growth buffer to prevent the cycle from slipping into the Contraction phase, where the message for asset markets is clear and sobering.

And.... roundtrip.

• From March 13: Fitch upgraded Greece's credit rating by one notch to B- following a successful debt swap finalised this week that erased some €100 billion from the country's crippling debt
• From May 17: Fitch Ratings-London-17 May 2012: Fitch Ratings has downgraded Greece's Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'CCC' from 'B-'. The Short-term foreign currency IDR has also been downgraded to 'C' from 'B'. At the same time, the agency has revised the Country Ceiling to 'B-'. The downgrade of Greece's sovereign ratings reflects the heightened risk that Greece may not be able to sustain its membership of Economic and Monetary Union (EMU). The strong showing of 'anti-austerity' parties in the 6 May parliamentary elections and subsequent failure to form a government underscores the lack of public and political support for the EU-IMF EUR173bn programme.

It would be laughable if it wasn't so... nevermind, it is laughable.

John Maynard Keynes, Charlie Munger and Warren Buffett all said or implied that gold was a barbarous relic. But what’s the barbarous relic? The precious metal that shows prices without a veneer of manipulation, or the paper currency that smudges the true state of supply and demand through money printing, thus misleading markets and society? Charlie Munger says gold is not for civilised people, but in reality gold may be the most civilised currency of all — because it allows civilised people to purchase insurance against the risk of civilisation failing.

'Don't Fight The Fed' is the mantra that is repeated day-in and day-out by so-called investment professionals around the world. In this world of extreme monetary policy and a market hungry for its next fix of fiat liquidity, this may well be the case - though even then, the actions are having less and less effect on both the real economy and market each time they roll the dice. However, it does seem that the ECB's approach to encumbrance as opposed to just unlimited printing is absolutely what should be faded. As we noted earlier, equity and credit markets have turned negative for 2012 now, but without doubt the cleanest and best performing trade of the first half of 2012 (and likely the git that will keep on giving) is the LTRO Stigma. With the spread between banks that took LTRO loans and those that did not now more than triple its early-February tights (and very close to record wides - with little or no excess collateral to revive LTRO3 hopes for those that need it), our recommendation back in early February to initiate this decompression strategy, calling out Draghi as a liar for disingenuous comments on the implicit encumbrance of the ECB's actions, has performed admirably (and we expect it to continue - though taking some profits up here and leaving a runner may well be warranted).

On Monday, May 14, something happened that hasn’t happened since Dec of 2008. Two successive near-month precious metals futures contracts were in backwardation at the same time. To oversimplify, backwardation is when the price of a futures contract is lower than the price in the spot market. It should not be possible for it to happen in gold and silver.... Because the next successive contracts are not in backwardation (in silver, all contracts from Jul 2015 on are backwardated), it is not a collapse of trust. I think that it is a lack of unencumbered metal. The markets for precious metals, silver more than gold, have become quite tight.

European financials dropped for the 12th day in a row today on heavy volume with its biggest 5-day drop in six months and plunging back to their worst levels in over five months (just 5% off last November's swing lows which would take us back to March 2009 lows). European equity and credit markets are all negative now YTD having given up all their gains and heading back to pre-LTRO levels. Sovereigns continue to bleed wider - especially Spain and Italy, with the former getting closer to the 450bps LCH Margin Hike level by the day. Spanish bond spreads are 165bps wider year-to-date - well done Draghi - and while Italy and Portugal are still tighter on the year, they have decompressed significantly in the last few weeks as we also note the all-saving EFSF is also a dramatic 14bps wider on the year. Europe's VIX jumped even higher near 35% - remaining very high relative to US VIX.

With CDX and credit indices being such a topic of conversation, we took a look at the 1 month changes as of May 12th.  We selected U.S. and European Credit Indices that had NET position changes of $1 billion during that 4 week period.  We also included some with smaller changes where it made sense to me as either part of “normal” roll flows or the now legendary “whale” trade. The overall reduction in HY and XOVER is interesting.  Also, even in financials, the riskier sub index experienced a net decrease.  I’m not sure what it means.  Complacency?  Increased volatility forcing smaller position sizes?  JPM cutting HY short and shorting IG18 against IG9? The off-the-run data is a bit more interesting, especially in light of all the “whale” questions. IG9 tranche net actually increased in the period, though outright index dropped off.  Is that a sign that it was hard to get out of tranches? IG9 with that special place in everyone’s heart, does seem strange. It looks like positions in European indices got reduced pretty dramatically. In any case, all these products need to be moved to an exchange.  Look at the huge differential between the gross and the net?  That would go down.  Yes, banks would have to unwind offsetting trades, but who cares?  Banks would have to post collateral, possibly on longs and shorts, but again who cares?

Something funny happened in the aftermath of the US fraudclosure settlement, in which millions of backlogged housing units were supposed to enter the foreclosure process and begin the clearing of the nearly 9 million housing units in shadow inventory: nothing. Because as RealtyTrac disclosed overnight, in April the US saw a mere 188,780 foreclosures events of various type (NOD, auction, REO) take place. Why is this number significant? Because it is the lowest in 5 years, despite shadow inventory in the US now being virtually the highest ever. But, but, "this is precisely what the foreclosure settlement was supposed to prevent" one may ask... That would be correct. Next question. In other words, not only did banks get away scott free from being litigated to the 7th circle of hell, but for them the "profitable" business model continues to be one where house lending is largely irrelevant. And why not: with NIMs are record lows, banks couldn't care less if the houses and marked down loans against them in the asset pool go up or down. The real money is made elsewhere: like hedging the IG9. In the meantime for everyone else hoping to get a true clearing price on housing and millions in units in shadow inventory being finally absorbed by the market: good luck. Not only has the foreclosure process in America ground to a complete halt but as the second chart below shows, the time to liquidation once a property enters 60 day-delinquent status just hit an all time high: that's right, the average time during which a deadbeat can occupy a home without payment if they so choose is 31 months. Thank you central planning politburo and USSA.

The dollar was a median step towards a newer and more corrupt ideal.  Its time is nearly over.  This is open, it is admitted, and it is being activated as you read this.  The speed at which this disaster occurs is really dependent on the speed at which our government along with our central bank decides to expedite doubt.  Doubt in a currency is a furious omen, costing not just investors, but an entire society.  America is at the very edge of such a moment.  The naysayers can scratch and bark all they like, but the financial life of a country serves no person’s emphatic hope.  It burns like a fire.  Left unwatched and unchecked, it grows uncontrollable and wild, until finally, there is nothing left to fuel its hunger, and it finally chokes in a haze of confusion and dread…

It seems every critical-to-stay-relevant talking head and blogger is trying to make sense of, and gain as much airtime discussing, how JPMorgan's CIO unit could have been so 'stupid'. The answer is - they weren't. As we described first here and here - and has now been accepted by the mainstream media as fact (of course we are flattered by the mimicry) - the reason that the hedge got out of control was the massive amount of delta-hedging that Iksil had to do to manage the position as the Fed and ECB crushed the systemic risk out of the system and blew up the correlation assumptions in his models. This is complex to explain but, by way of example, we show a chart of the implied delta of a proxy for the JPM hedge. The lower the delta, the more and more index protection that needs to be sold to maintain a stable hedge - and as is clear, not only did the delta collapse (almost halving in 4 months) but it reached pre-crisis levels which would have been generally unthinkable in the risk scenarios - given the backdrop of reality. Whether Iksil arrogantly enjoyed ignored the cornering of the IG9 index market and the momentum and P&L he was relishing in is a different matter but to comprehend the forced selling protection pressure he was under, this chart is all you need to understand...

Two years after bringing us the beginning of the end in Acropolis Now, the Economist has closed the loop with the end of the end courtesy of "The Greek Run."

After days and weeks and months of pounding, gold reacted like a stung dog, soaring over $20 upon the realization that following the Philly Fed confirmation that the "recovery" is now officially dead that, gasp, the Fed really has no other choice than to CTRL+P.

Remember the surge in the Empire Fed which was the straw so desperately clutched by all those who still held on to hope the US economy was still kinda sorta growing? Oops. The May Philly Fed just came out and was a disaster, printing at -5.8, down from 8.5 and crashing expectations for an increase to 10.0. This was the first contractionary print since September 2011 and the biggest miss since August 2011, but the worst news is that the Number of Employmees indicator was in absolute freefall, plummeting from 17.9 to -1.3. And now come the downward NFP revisions, and NEW QE (because courtesy of AAPL it is no longer QE [X] anymore) whispers.