Archive - Sep 2012 - Story

Most people know that during this year's Coachella festival, Tupac made a surprising appearance, if not in the flesh for obvious reasons, then in hologram form. What fewer people know is that the firm that created Holo-Tupac is special effects producer Digital Domain Media, which after years of failed attempts to do so, finally went public in November with Roth Capital as underwriter (there is now an Urban Dictionary definition for 'Rothed') at a price of $8.50 (well below the preliminary range of $10-12/share) and at a time when its burn rate was well above 50% of revenues, and which filed for bankruptcy hours ago. In other words, the company destroyed over $400 million in market cap in under 10 months. What is known by very few is that this is yet another public equity disaster of this administration: as filed in the bankruptcy Affidavit, "the Company has worked closely with State and local government authorities in Florida to execute economic stimulus contracts designed to create jobs and stimulate Florida’s economy. As of the Petition Date, the Company had contracted to receive a total of approximately $135 million in such government stimulus financing, including $19.9 million in tax credits. This financing consists of cash grants, land grants, low-interest financing, and tax incentives." In other words, in addition to the government's remarkable track record in the alternative energy field, public equity is now in the digital movie studio subsidization business. End result: bankruptcy, of a publicly funded company, shortly after IPO and sadly the realization that US capital markets are now so broken that the combination of private and public funding can sustain a company for less than one year.

Presented for your viewing pleasure are ten of the most prescient indicators of the resilience of the consumer and his largest asset (liability) since the 'supposed' end of the recession. We thought the subtle hint at which of these trends is not like the others would help; but, just in case you missed it, it's the part of the economy that is government-backed, subprime-funded, over-inventoried, and entirely channel-stuffed. Aside from all that, entirely sustainable, we are sure.

'He' has spoken; and the stock hath obeyeth - for now. Thanks to a transcript from Forbes we can now quantify the hidden message of Mr. Zuckerberg's interview. The results (from the 1400 words or so): Mobile 22; Money 6; Search 4; Stock 4; Spend 3; Time 3; IPO 1; Profit 0;

Double-Line's Jeff Gundlach presented 66 pages of chart-pr0n covering everything from Government Spending to Consumer Spending; from eating-out costs to food inflation; from future economic growth slowdown indicators to housing recovery hopes and reality; and from foreign stocks to Treasuries, MBS, and metals. Between a lack of surprise if 10Y rates were 100bps higher by year-end; and his call to 'sell the S&P 500 against a long in the Shanghai Composite', there's a little here for everyone (and his funds are killing it).

Preapre for an onslaught of social media buzzwords: we will have a word cloud after the speech. That said, here is a suggestion: less "disrupt" ... more "cash flow"

Retirement must be on again as the Dow creeps up to close at its highest since 12/28/2007 - no more reassuring sign that we need QE stat!! The high-yield bond ETF (HYG) also pushed to new highs - amid heavy volume - as it left its credit-spread and equity risk reality in the dust (as well as its intrinsic value) but who cares - QE/ESM/OMT/WTF - it's on like donkey kong. At least VIX kept some sense of rationality as it closed near its highs on the day, pricing in somewhat the binary concerns of the next 24-36 hours. Volume was nothing to write home about - nor was average trade size - as S&P futures rolled well off their highs to fall back below VWAP into the close and after-hours (when volume picked up). Commodities were mixed with Oil and Copper up, Gold flat and Silver down as the USD dropped (down 0.3% on the week) and stabilized after Europe's close. Treasuries leaked higher in yield (despite a record-breaking 3Y) but remain below Friday's peak-yield levels.

Between Boehner and Reid's comments today, the dial on the politicization-of-the-fiscal-cliff amplifier just got turned to 11. This is no surprise to regular ZH readers who know the record levels of polarization that remain among our politicians (and citizens). While some (cough Insana cough) believe the magical faeries are at work behind the scenes to solve the fiscal-cliff; we present, via Citi, the best visualization of the changing face of hands-across-the-aisle compromise 'change' in the last 45 years is presented below. Sigh...

On the anniversary of the most emotional day in our collective memory,  here are some key statistics in the interest of truth, justice and the American way:

While it appears the mainstream media has forgotten about the ongoing drama in South Africa, the tensions are rising rather dramatically around the Marikana mines (owned by LonMin mining). As Al Jazeera reports, thousands of miners (along with wives and supporters) have defied an extended deadline (brokered by the government) and decide to remain on strike. The following clip provides some rather concerning color on what is occurring as Julius Malema, the expelled ANC leader, has already been charged with inciting violence - and is "playing a rather dangerous game." He is calling for a national strike as he addresses the people: "they have been stealing this gold from you. Now it is your turn, you want your piece of the gold." The tough reality is that as extraction costs rise (energy/depth) and now miners' costs rise, then the end-product's cost must rise, or - as Melema suggests - supply goes offline.  Must see clip.

The conundra continue to mount up around the world as central planning efforts dislocate asset-values from reality wherever one looks. Nowhere is the juxtaposition of hope-and-fear more evident than in the industrial metals. We have discussed the reality of Iron Ore, and the unreality of China stimulus (funded or unfunded) bringing the excess inventory back from the edge ad nauseum but, as the WSJ notes, the stacks of copper slabs inside the warehouses of Shanghai last month grew by 20% since July. In fact, so much copper has been sent into storage that it is being lined up outside some buildings as "there's much more metal than we'd expected," and some would see this huge inventory growth as a signal of "people's uneasiness about Chinese growth." However, sure enough, copper prices are soaring - on the back of expectations that inventories are so high that the PBoC will step in with some stimulus and all will be well in the world again. While Deutsche Bank opines "any rally in copper prices based on expectations will likely not be sustainable," the alternate perspective, based on hope and dreams is that "just a couple of months of better demand - it will quickly change the perception of surplus to tightness." Meanwhile, the effervescence of central-bank-driven exuberance in prices has driven the 'value' of a good-old-US-Nickel up to 5.2 cents (its highest in four months).

It happened in September 2011, again in April 2012, and now its starting again. Despite the launch tomorrow of Apple's iPhone 5 (rumored to include the happy-ending-hand-extension), AAPL has notably underperformed in the last few days. Whether this is to do with the 20%-plus weighting in the NASDAQ-100 or whether, as we show below, the market's wise-men see AAPL's P/E ratio approaching that of the exuberant market and capping their attention, we do not know. What we do know is that each time, AAPL has notably underperformed the broad market for the next month (whether an up-market or down-market).

Three months ago, the Muslim Bortherhood supported, US-endorsed and recommended candidate, Mohammed Mursi won the Egyptian presidential election. Fast forward to today, when we learn from Al Jazeera that the grateful Egyptian population has decided to conduct a little Arab Spring repeat rehearsal in the fall, as Egyptian protesters scaled the walls of the U.S. embassy in Cairo on Tuesday and some pulled down the American flag during a protest over what they said was a film being produced in the United States that was insulting to the Prophet Mohammad, witnesses said.

I have often identified Keynesian economists and the Federal Reserve as cargo cults. After the U.S. won World War II in the Pacific Theater, its forces left huge stockpiles of goods behind on remote South Pacific islands because it wasn’t worth taking it all back to America. After the Americans left, some islanders, nostalgic for the seemingly endless fleet of ships loaded with technological goodies, started Cargo Cults that believed magical rituals and incantations would bring the ships of “free” wealth back. Some mimicked technology by painting radio dials on rocks and using the phantom radio to “call back” the “free wealth” ships. The Keynesians are like deluded members of a Cargo Cult. They ignore the reality of debt, rising interest payments and the resulting debt-serfdom in their belief that money spent indiscriminately on friction, fraud, speculation and malinvestment will magically call back the fleet of rapid growth. To the Keynesian, a Bridge to Nowhere is equally worthy of borrowed money as a high-tech factory. They are unable to distinguish between sterile sand and fertilizer, and unable to grasp the fact that ever-rising debt leaves America a nation of wealthy banks and increasingly impoverished debt-serfs.

There was a time when the short end of the curve was not very loved, as all bonds 3 years and shorter were sold by none other than the Fed. Today, that is no longer the case, driven primarily by ever louder whispers that because the Fed is very much limited in its long-dated purchases as we first calculated last Friday, it may give up on sterilization entirely (since nobody really knows what the Fed will do, but 101% of traders are now certain it will do something), and proceed to monetize all maturities as all Stock considerations are thrown away, and everyone focuses solely on the Flow. Sure enough, the $32 billion 3 year auction just priced at the second lowest yield ever of 0.337%, with only the Sept 2011 yield of 0.334% lower. This was well inside the WI yield of 0.34% at 1 pm. Offsetting the yield "disappointment" was the spike in the Bid To Cover which rose from 3.51 to 3.936, the highest ever. Finally, looking at the internals, for the first time November, Dealers took down less than half of the auction, or 49.8%, with 36.8% going to Indirects, and 13.4% to the PIMCOs of the world, and other Direct bidders such as China. Of course, if there is disappointment on Thursday, and if Dealers have no choice but to keep buying the short-end as a result of the continuation of Twist, as sterilization continues, expect to see some disappointed buyers of today's auction, which incidentally together with the rest of this week's issuance will bring total US debt to a new record of just over $16.07 trillion, and rising very rapidly.