Archive - May 2012 - Story

Sometimes, the greatest deeds are done by those who are just doing their jobs, like Judge Katherine Forrest who last week struck down the indefinite detention provision (§1021) of the National Defense Authorization Act (NDAA). It would be all too easy in this age of ever-encroaching authoritarianism in America for a judge ruling on a matter like this to just go with the government line and throw water over the plaintiffs. After all, telling truth to power has consequences. Forrest was appointed by Obama, but after this ruling one wonders whether she is about to meet a career dead-end. Power — especially narcissistic power — does not like being told uncomfortable truths. Everything about this case is shameful; it should be obvious to anyone who can read the Constitution that indefinite detention without trial (just like assassination without trial — something else that Obama and his goons have no problem practicing and defending) is hideously and cruelly unconstitutional. It defecates upon both the words and the spirit of the document.

How does one get a Harvard Business School case study made after them? Why by being constantly ahead of the curve, with the right trade, and being mocked by the same "access journalism and excel free" mainstream media which pushed subprime toxic grenades to anyone who listened, only to be proven correct time after time. In other words, by being Kyle Bass: the same Kyle Bass who lost money month after month on his Subprime short (full slide deck here), only to see it all made back, and then some... quite a bit of some. Because it is not by following the herd that one makes the killer trades: it is by standing against it and by waiting for conventional wisdom (in this case that Japan's debt load is somehow sustainable - it isn't, but the kneejerk response still is one to treat JGB's as a flight to safety - this only works until it no longer does and the same math that had doomed the euro over a decade ago is finally grasped by all). Yes: he has lost 60% on his Japanese short fund since inception: so what? All it takes is one millisecond of Malcom Gladwellian insight and the formerly offerless market goes bidless. And that -60% is transformed to +XXXX.YY. Either way, below is the complete Harvard Business School presentation on Kyle Bass, on Heyman Capital and on the Japan Short ber, which we hope will put to rest some of the prevalent disinformation floating around.

This week we bring back Alasdair Macleod, publisher of Finance and economics.org, because, as he puts it "every horror that we discussed last time we spoke is coming about". Especially scary since our previous conversation with him was less than three weeks ago... Today's interview continues building on his excellent synopsis from last month that detailed the origins of the Eurozone crisis. The fundamental shortcomings warned of at the Euro's creation in 1997, combined with the excessive sovereign debts run up since then, have finally expressed themselves at a scale too large to be contained any longer. Today, Alasdair details in-depth the huge and serious challenges facing Greece and the major Eurozone countries, and the likely impacts of the fast-dwindling options left remaining.  He sees no happy ending to this story, no outcome in which serious pain and permanent behavior change can be avoided. And for those looking for shelter from the unfolding economic storm, he sees few options besides the precious metals (which he believes are severely under priced at the moment):

Today, the G8 came, saw, and wrote down a bunch of meaningless promises on paper as it does every several months (spoiler alert: more printing). They also posed for photos, such as this one. We leave it up to readers to provide the context.

The big banks are getting restless. Nowhere is this more evident than in the latest just released letter from Citi's European Credit Strategy, literally a letter to Europe's trio of leading politicians, which follows hot on the heels of yet another recent Citigroup missive from Willem Buiter, which was largely ignored in the noise, yet which made it all too clear that when all else fails, it is the Chairman's sworn duty to paradrop money. Because if anyone, it is the banks that know that if things aren't fixed (they aren't), it is up to the central banks to do something to prevent the vigilantes from forcing the politicians hands, as they did in the summer and fall of 2011 (which will not provide a long-term fix, but at least allow bankers to hope that the next collapse won't take place before bonus season). As Citi says, "Until the gravity of the situation is made clear, until the self-reinforcing mechanisms that already seem to be in motion are understood, we don't see how the solutions, the answers, and the certainty that market craves can be brought to the table." Which simply means that things are about to get much, much worse as it will be up to the markets to bring the world to the edge of collapse once again, just so Europe, with the help of the Fed of course, once again is forced to get over the political bickering and prop up risk assets, in yet another iteration of "this time it's different", even though it isn't. Sure enough: "Our impression is that markets will need to act as the proverbial 'attack dog', forcing the issue on the political agenda. We can't escape the sense that it is probably politically easier to let the markets run loose for the time being to make it apparent that further intervention is needed. But 1000bp on Crossover is much closer than you imagine." In other words, Citi just gave the green light for the bottom to fall from the market just so Europe's increasingly impotent political elite does something, anything. Look for many more banks to sign off on the same letter.

The problem with self-reported economic data by various countries, especially those which are supposed to be at the forefront of economic growth, now that the "developed" world is groaning under consolidated debt/GDP ratios which will soon be the 4 digits, is just that - that they are self-reported: a main reason for the development of such governmental offshoot programs as the "Ministry of Truth." Which means that when the investing public hears of an updated Chinese GDP, or Brazilian inflation, or Russian industrial production, most roll their eyes but go with it, as this is the data that the greater fool down the street will also be using for investment decisions. Luckily, there are secondary indicators which present a much more realistic picture of what is truly happening in this fringe growth markets. A few days ago, we presented the "stock" view of the world's two biggest housing bubbles: China and Saudi Arabia, when demonstrating the epic outlier nature of these two countries in the context of cement consumption relative to GDP per capita: a snapshot which showed just how unsustainable the regional construction bubble in these two countries is. But since this is a snapshot in time, and hence "stock", how about the "flow", or the perspective of the economy from a continuous basis. For that we once again go to Goldman, which has conveniently compiled two alternative yet very critical data sets which go to the core of the BRIC economies: Chinese electricity consumption, as well as Brazilian toll road traffic. The picture(s) is (are) not pretty.

From the BBC: "Facebook has started testing a system that lets users pay to highlight or promote posts.  Facebook said the goal was to see if users were interested in paying to flag up their information." That’s their plan? That’s Zuckerberg’s big idea? Get users to pay to post premium content!? Did the well-circulated hoax that Facebook planned to get users to pay for use just turn out to be true? If they proceed with this (unlikely) it seems fairly obvious the world would say goodbye Facebook, hello free alternatives. The truth is that Facebook is a toy, a dreamworld, a figment of the imagination. Zuckerberg wanted to make the world a more connected place (and build a huge database of personal preferences), and he succeeded thanks to a huge slathering of venture capital. That’s an accomplishment, but it’s not a business. While the angel investors and college-dorm engineers will feel gratified at paper gains, it is becoming hard to ignore that there is no great profit engine under the venture. In fact, the big money coming into Facebook just seems to be money from new investors — they raised eighteen times as much in their flotation yesterday as they did in a whole year of advertising revenue. For an established company with such huge market penetration, they’re veering dangerously close to Bernie Madoff’s business model.

The last time the body language (and ex-intelligence) experts from Business Intelligence Advisors appeared on these pages, their target was Ben Bernanke, and specifically his first ever post-FOMC press conference. This time around, BIA has chosen the analyze what has been left unsaid by none other than the head of JP Morgan in the context of his $2 billion (and soon to be far larger) loss which is still sending shockwaves around the financial world. As a reminder, "Using techniques developed at the Central Intelligence Agency, BIA analysts pore over management communications for answers that are evasive, incomplete, overly specific or defensive, potentially signaling anything from discomfort with certain subjects,  purposeful obfuscation, or a lack of knowledge." So what would the CIA conclude if they were cross-examining Jamie Dimon?

While much has already been written on the topic of peak valuation, social bubbles popping, and the ethical social utility of yesterday's historically overhyped IPO, nobody has done an analysis of the actual stock trading dynamics as in-depth as the following complete forensic post-mortem by Nanex. Because more than anything, those tense 30 minutes between the scheduled open and the actual one (which just happened to coincide with the European close), showed just how reliant any form of public capital raising is on technology and electronic trading. And to think there was a time when an IPO simply allowed a company to raise cash: sadly it has devolved to the point where a public offering is a policy statement in support of a broken capital market, which however is fully in the hands of SkyNet, as yesterday's chain of events, so very humiliating for the Nasdaq, showed. From a delayed opening, to 2 hour trade confirmation delays, virtually everyone was in the dark about what was really happening behind the scenes! As the analysis below shows, what happened was at times sheer chaos, where everything was hanging by a thread, because if FB had gotten the BATS treatment, it was lights out for the stock market. Well, the D-Day was avoided for now, but at what cost? And how much over the greenshoe FaceBook stock overallotment did MS have to buy to prevent it from tumbling below $30 because as Reuters reminds us, "had Morgan Stanley bought all of the shares traded around $38 in the final 20 minutes of the day, it would have spent nearly $2 billion." What about the first defense of $38?  In other words: in order to make some $67 million for its Investment Banking unit, was MS forced to eat a several hundred million loss in its sales and trading division just to avoid looking like the world's worst underwriter ever? We won't know for a while, but in the meantime, here is a visual summary of the key events during yesterday's far less than historic IPO.

Until this point virtually every pundit and financial journalist and blogger has opined on JPM, its prop trading operation (as first exposed by Zero Hedge), and its massive loss which due to its pair trade nature has potentially unlimited upside, but likely will top out at $5 billion (as also first explained by Zero Hedge over a week ago and subsequently by the WSJ). The one person who has kept silent so far was the man whose entire philosophy predicted just this epic flare out, by revolving around the assumption that humans operate under the illusion that they understand rare events: they don't (for more details read his books The Black Swan and Fooled by Randomness which by now have been read by all traders in the world, but apparently not those formerly in charge of JPM's CIO unit). Courtesy of this BBC Newsnight interview, he breaks his silence and shares his opinion, which as one may expect are far from laudatory: "JPM has 10-15 times the risk of a regular hedge fund... They should not be using my to play in something that is way too dangerous and too complicated for them... What I want [for JPM] is the following - skin in the game. People when they make money should get the upside, should get the upside; and people should be harmed when they have the downside. Hedge funds have that."... Finally Taleb loses it by comparing Wall Street to the mafia: "I am not an idealist. I am someone who doesn't want to be paying the $14 million dollars for this lady Ina Drew, which is more than John Gotti the mafioso got." Well, neither does anyone else. But, sadly, even Nassim now realizes that it is the financial mafia who owns this country and calls all the shots.

This time is different?

Some look at today's FaceBook IPO flop, the ongoing market rout, and the situation in Europe with disenchantment and disappointment. We, on the other hand, view it with hope: because more than anything, the events of the past few days show that the truth is getting out - the truth that capital markets simply can not exist under the authoritarian rule of central planners, the truth that the stock market is a casino in which the best one can hope for a quick flip, and finally the truth that our entire socio-economic regime, whose existence has been predicated by borrowing from the uncreated wealth of the future, and where accumulated debt could be wiped out at the flip of a switch if things go wrong in the process obliterating the welfare of billions (of less than 1%ers), is one big lie.

Just when we though that nobody would take advantage of the cover provided by the epic flame out of the FaceBomb IPO and the ongoing market crash, here comes Spain. Because there is nothing quite like a little Friday night action following a market drubbing and an "IPO for the people" shock in which to sneak the news that, oops, sorry, we were lying about all that austerity. Because while it came as a surprise to the market back in December when Spain announced it would post a 2011 budget deficit of 8.5% instead of the previously promised 6%, the market will hardly be impressed that Spain actually overspent by another €4.2 billion, to a brand new total of €95.5 billion of 8.9% of GDP. So Monday now has two things to look forward to: the Spanish bond margin hike on one hand courtesy of LCH.Clearnet earlier, and the fact that despite spending even more than expected, GDP growth has disappointed and the country is now officially in a double dip. Hardly what the country with the record wide CDS needs right now.

In an interview with Louis James, John Hathaway discusses the US's economic outlook and why he's delighted by the current bearish sentiment toward gold. "I think we're at the end of a correction that resulted from the peak last summer. It was overcooked, kind of hyperventilated hysteria over the debt-ceiling talks, the rating downgrade of the US sovereign debt, and I think basically the stocks and the metal had been working off that boiled down to what we now have is a simmer. I think we are at a position where there's not a lot of downside, and I would not be surprised by revisiting the previous highs of $1,900 and maybe even new highs over $2,000 this year."

Forget that S&P 500 e-mini futures plunged to four-month lows at 1290; or Treasury yields crashed back to their record lows; or Gold and Silver's surge today; or WTI's plummet to almost a $90 handle; or Citi joining Morgan Stanley in the red year-to-date; or credit markets continuing into the red for the year; or IG9 10Y soaring further to 160bps - widest in 6 months; or VIX closing above 25% for the first time in 5 months (and decompressing to Europe's pain). Today was all about one thing - the disaster that was/is/and will be Facebook - between late openings, overwhelmed systems, a dump to the syndicate bid and almost 600mm shares traded with the syndicate just soaking it all up at $38.00 early and into the close. Is it any wonder that every other social media stock plunged and how do they expect to ever get another internet IPO off again (at anything but a massive discount). No matter what correlation trick was tried to juice markets today - for the tenth day-in-a-row markets saw a BTFD turn into a STFR. Not a pretty end to the ugliest week in six month for the S&P 500 as it nears its 200DMA into the close.