Archive - May 2012 - Story

Just because few have captured the essence of Wall Street quite like the following "Straight talk with Global Century" SNL skit from the recent past, which reminds us that the more things change, the more they stay the same: a timely reminder in the aftermath of the FB bloodbath.

All models of non-linear complex systems are crude because they attempt to model millions of interactions with a handful of variables. When it comes to global weather or global markets, our ability to predict non-linear complex systems with what amounts to mathematical tricks (algorithms, etc.) is proscribed by the fundamental limits of the tricks.  Projecting current trends is also an erratic and inaccurate method of prediction. The current trend may continue or it may weaken or reverse. "The Way of the Tao is reversal," but gaming life's propensity for reversal with contrarian thinking is not sure-fire, either. If it was that easy to predict the future of markets, we'd all be millionaires. Part of the intrinsic uncertainty of the future is visible in unintended consequences. The Federal Reserve, for example, predicted that lowering interest rates to zero and paying banks interest on their deposits at the Federal Reserve would rebuild bank reserves by slight-of-hand. Banks would then start lending to qualified borrowers, and the economy would recover strongly as a result.

They were wrong on every count.

The latest gambit used by the Eurocrats is that should Greece dare to not follow their sage advice, and leave the EMU, it will burn in hell for perpetuity, where famine and pestilence will join in making Greeks regret they ever dared to not listen to their Keynesian overlords. The only problem is that despite what econo-pundits everywhere claim, the Argentina case study (as well as the Iceland and the Southeast Asian) is a rather optimistic one of what Greece can expect to occur after it finally "just says no" to the biggest vanity experiment in European history. And as JPM's Michael Cembalest shows without any doubt, "there is a morning after." The far bigger problem is that there will be a "mourning after" for all those who are threatening Greece will hell and damnation right about now. Which brings us to a very critical question: why is the IMF not doing what it should be doing, and promising to assist the Greek decision, even if it means exiting the Euro. As JPM's Cembalest says "If the IMF did what it is supposed to do and lend into a devaluation/ structural adjustment (instead of financing a German and French bank rescue), Greece just might have a shot. Within the Euro, they don’t." Which begs the question: just how many pieces of silver did it take for the IMF to join the bandwagon of sell out and rehypothecate its soul, and charter, to the highest bidder?

As we noted last week, the level that would represent the same size drop as triggered globally coordinated central bank easing in November of last year, is around 1285 and sure enough we got close (1287) in futures before today's rally began...is it really this easy?

The catastrophe that is Greece that has spawned the term 'Grexit' for its likely self-abdication (or dismissal) from the Euro remains a long way from being solved. Should the next elections go the way the opinion polls suggest, it seems highly likely that a government vehemently opposed to its own bailout terms and further austerity will stretch the patience of its 'core'-supporters to a breaking point - even though they know the gun they hold is squarely pointed at their own forehead. However, Deutsche Bank's economics team see the potential for a third path - that of running a Greek parallel currency to the Euro (which they dub "GEURO") to represent government issued IoUs to meet current payment obligations. This would enable, in DB's view, Greece to engineer an exchange rate devaluation without formally exiting the EMU. With Greece unlikely to meet primary budget surplus targets envisaged by the TROIKA, and political will inside Greece hardly making an effort to do so - perhaps this is the 'compromise' that meets everyone's needs (in a strange way). Initially there would be a large depreciation (which Germany could use politically to claim - see 'they suffered' - and maintain circular support for the financial system implications of GREXIT) but at the same time Greek authorities would reclaim some semblance of control to stabilize or even strengthen (over time) their own GEURO against the EURO - leaving the door open to a return to the Euro at some point.

Lately there has been a flurry of media reports focusing on America's obesity epidemic, and how costs associated with America's gradual shift to a fat society will inundate the already strapped budget in the form of shadow taxation and other direct and indirect costs, which are, to put it simply, unsustainable. As the first chart below shows, the primary cost center associated with the obese conditions - diabetes - has certainly gripped a substantial portion of the US population, at last count affecting at least 10% of the population. Yet as chart #2 shows, America, with its $23.7 million diabetes cases, actually has it good. Because when compared to countries without a social safety net, such as China and India, the US diabetes problem is child's play. With 90 million diabetes cases in China, and 61.3 million in India, or nearly half of the total 346 million worldwide diabetes cases, perhaps it is time for the developing world to worry how they plan on funding the billions of associated costs, as they assimilate more and more of the worst American habits. Because as the International Diabetes Foundation says, "In developing countries, the looming costs in human lives, healthcare expenditure and lost productivity threatens to undo recent economic gains." However since all of this is in "the future" what's the point of worrying about it now...

Ten months ago, as the latest Grand Plan was being announced, we wrote in detail on just how angry Zee German people might get once they realized what was going on. With the weight of the world increasingly burdened on their shoulders, Michael Cembalest of JPMorgan asks "will Germany spend its accumulated national wealth to save the Eurozone (at least temporarily), and how much might it cost them?" Notably, for the better part of a century, the tendency for conflicts in Europe to coincide with Germany's relative economic might is astonishing, but between backstopping the Periphery, a non-inflationary ECB solution, and five years of support to finance the departure of foreign capital - avoiding social collapse in Greece for example - Cembalest estimates the cost to be around 1 trillion Euros. What is more astounding is that he then goes on to compare this cost to re-unification (over the past 20 years) and notes that even if Germany had to pick up half the trillion-euro tab, its debt-to-GDP ratio would rise above 100% (well over the 90% 'This Time It's Different' tipping point). Just how much does this mean to Germany and Europe? IMF Managing Director Lagarde gave a speech last week in which she highlighted the historical importance of Europe and how the concept of the Euro dates back to Charlemagne in the 800s. True, perhaps; but that has not prevented other European monetary unions from failing in the interim. You can ignore economics, but it will not ignore you.

One can come up with massively complicated explanations for why the Chinese commodity bubble is popping including inventory of various colors, repos, etc, but when all is said and done, the explanation is quite simple, and is reminiscent of what happened in the US with housing back in 2007: everyone was convinced prices would only go up, and underlying assets was pledged as debt collateral at > 100 LTV... and then everything blew up. Precisely the same thing is happening in China right now, where buyers of commodities thought prices could only go up, up, up and instead got a nasty surprise: prices went down. Big. As a result, many are not even waiting for their orders to come in, but are defaulting on orders with shipments en route.

Facebook has officially entered bear market territory - down over 20% from its high print at $45 now with lows now at $33.05 today and 63mm shares trade so far today...

Remember when Jamie Dimon showed the Fed who's boss and preannounced it was starting a share repurchase program? Turns out the Chairsatan will have the final laugh:

• DIMON SAYS JPM IS SUSPENDING SHARE REPURCHASES
• DIMON SAYS SUSPENDING REPURCHASE PROGRAM ISN'T RELATED TO LOSS
• DIMON SAYS SUSPENDING REPURCHASE PROGRAM ISN'T RELATED TO LOSS
• JPM'S DIMON SAYS THERE'S UNREALIZED $8B IN PROFIT FROM CIO
• JPM'S DIMON: DOESN'T SEE INVESTIGATION TO UNVEIL BIG SUPRISES
• DIMON SAYS LOSS IS AN ISOLATED EVENT

And the joke of the day:

• DIMON SAYS FORTRESS BALANCE SHEET REMAINS

When it comes to clear, concise, comprehensive forecasts of the future, nothing beats Art Cashin... even when his crystal ball is admitted a little cloudy.

Three years ago, the government in all its glory and sound central-planning decided to provide a fully-FDIC-backed facility to allow banks to raise capital at ultra-cheap cost of funds in the middle of the crisis. The Term-Loan-Guarantee-Program (TLGP) has not been far from our thoughts but the next month or so is going to be increasingly anxiety-inducing for the banks that took advantage of that bailout. By the end of June 2012 (i.e. the next six weeks) there is almost $60 billion of TLGP debt that matures for US banks (and will need to be refinanced we assume). This $60 billion has an average cost of funds of 0.3% (that is yield NOT spread) which when compared to the 3.5% - 4% cost of funds for mid-dated US financial debt currently (average CDS around 230bps) means a more than 10x increase in funding costs for this segment of their debt. Of course there are yield-hungry ETF-buyers to be satisfied (note LQD can soak this up and few retail investors realize just how exposed LQD - the investment-grade ETF - is to US financials) and so we expect them to get this off but it can only pressure spreads wider as supply dominates demand in this risk-averse market environment.

The Spanish government has promised to reform the public sector to make it thinner and more efficient. In practice, however, the political machinery based on spoils is being kept intact while some very critical public functions are coming apart at the seams. This results, for example, in overcrowded courts with insufficient staff and resources that bear no resemblance to a developed nation's judiciary. Angry and less motivated public employees feel robbed of their dignity and pockets while the general population’s dissatisfaction with tax-draining, yet increasingly inefficient, public services grows. Public workers fear a new wave of cuts in their salaries as a result of the debt-laden regional governments’ asking for more "solidarity" from those who have a secure job. Naturally, in a nation with almost 6 million unemployed, public servants will not find much support from society if they opt to go on strikes to protest additional salary cutbacks. Just how far is the government willing to make itself redundant, especially in a time of economic crisis? Does Spain need state-journalists working for state-owned radio and television stations (there are 48 public television stations across the country)? How about the double, triple and sometimes quadruple existence of government officials and agencies due to layers and layers of local, regional and central government institutions? Unions and political parties sustained with taxpayers' money? As far as public servants are concerned, more and more are realizing that a false concept of merit astutely devised by mediocre politicians secured them not a job for life, but a lifetime of serfdom.

The policy responses and hints of policy responses are starting to come out.  What will they be, how big will they be, and what will they accomplish remains to be seen, but the market is due to rally on almost anything. We expect some announcements out of Europe.  A policy shift towards “growth” and some new ECB plans. We don’t think they will work well, especially if they don’t address the root of depositor fear in Spain, Ireland, Portugal, and Italy, but with so many indicators pointing to oversold conditions, the markets could snap back, and that is the way Peter Tchir of TF Market Advisors is leaning.

Up until 26 minutes ago, $38.00 was the most important number for Facebook. That is no longer the case. Below, courtesy of Grant Stevens and Things That Make You Go Hmm are a few more numbers that readers may be interested in.