Archive - Oct 29, 2013 - Story

Following the humiliation of having a US ambassador summoned so he would explain the spying conducted by the US government, in liberated Paris of all places (because while the NSA spying on your own citizens is an absolute travesty and trampling of basic human rights and smacks of Stalingrad circa 1960, spying abroad is permitted, accepted and largely forgiven by all the developed nations - after all everyone does it) the US has struck back in the most poetic way imaginable: it said that whatever phone records the NSA acquired were passed on to it by the local spy agencies of none other than France and Spain. The implication is simple: the local people understandably furious at the US and screaming blood, have just been given a far more convenient target at which to fume: their own governments.

There is a fear stalking the corridors of European politics. It is not the surging unemployment in France, or record delinquencies in Spain, or all-time low credit creation across the region; it is the growing concern that the powers that be have from the rise of Euroskepticism. As UKIP's Nigel Farage exclaims to Barroso and his brood, "years ago, you were less worried... but now we are "evil", "populists", we are "dangerous" and are going to bring down Western Civilization." As the outspoken Brit implores in this brief clip, there is nothing extreme in his views. "The real European debate is about identity," he notes, "what we are saying, large numbers of us from every single EU member state is: we don't want that flag, we don't want the anthem that you all stood so ram-rod straight for yesterday, we don't want EU passports, we don't want political union." As Greece faces down its 3rd bailout and deflationary threats loom across the region, we suspect top-down and bottom-up angst will bubble back to the surface soon enough.

You know the old rule of thumb about laws - the more high-sounding the legislation, the more destructive its consequences. Case in point, HR 3293 - the recently introduced Debt Limit Reform Act. Sounds great, right? After all, reforming the debt seems like a terrific idea. Except that’s not what the bill really does. They’re not reforming anything. HR 3293?s real purpose is to authorize the government to simply stop counting a massive portion of the US national debt.

We recently noted that, despite all the hot money flows and self-congratulatory extrapolation, European macro data is collapsing (as opposed to supporting ideas of recovery). In fact, it is falling at the fastest pace in over a year as the prospect of the euro area falling into deflation may be increasing; as Bloomberg's Niraj Shah notes the single currency rises, growth loses momentum, money-supply expansion slows and bank lending stagnates. As Shah fears, that may push the region into a debt spiral as the real value of debt increases, marking a new phase in the crisis.

As the Detroit bankruptcy hearing heats up following news that the city's unsecured creditors, among them pensioners, are set to recover pennies on the dollar, 16 to be precise, the question of which are the next cities to follow in the footsteps of bankrupt Motown, becomes relevant once again. Courtesy of the WSJ, and the second part of its series on "U.S. Cities Grapple With Finances", here is a list of the US cities that when push comes to shove metaphorically, and when the money runs out literally, will have no choice but to knock on the door of the local regional bankruptcy court and submit that long-prepared bankruptcy petition. Specifically, here are the cities that have 10 days or less in cash on hand available. Because, unless one is the Fed, cash and lack thereof is all that matters.

JPMorgan shares have dropped modestly (though any drop is notable in the new normal) as the WSJ reports that the $13bn deal with the Department of Justuice may be at risk:

*JPMORGAN FALLS 0.6% AS DOW JONES SAYS DOJ DEAL AT RISK
*JPMORGAN, JUSTICE DEPT SAID TO DISAGREE ON FDIC REIMBURSEMENT
*JPMORGAN PROPOSED SETTLEMENT SAID TO FACE U.S. RESISTANCE

It appears the 'breakdown' is over JPMorgan's demands that they offset payments to the DoJ from the FDIC fund (i.e. they wanted to use FDIC to fund this penalty on the basis of som epossible indemnification from the WaMu deal). DoJ lawyers are not amused (for now)...

Having recently pointed out Draghi's worst nightmare, we thought the anti-thesis of hope over reality that is occurring in European "markets" was worth pointing out. Spanish sovereign bond spreads have collapsed this week to their lowest (least risky) in 30 months at a mere 229bps. The total and utter disconnect of this supposed 'free market' based measure in the face of nothing but terrible Spanish data is entirely without precedent...

As the investing public looks around for reasons why US equities are rallying, the harsh reality is highlighted in the following chart... all that matters is what JPY carry is doing. While correlation is not causation, we suspect you'd be hard-pressed to suggest we are not on to something here...

Update: The NASDAQ OMX PHLX and NOM will resume trading in NDX, SOX, OSX, and HGX. PHLX will resume trading as of 12:55 PM .  NOM will resume trading as of 1:00 PM . Please contact Market Operations at (215) 496-1571 if you have any further questions.

JPMorgan, Pimco, and now BlackRock, the world's largest asset manager, all join the bubble warning chorus. From Bloomberg:

• FINK SAYS IT'S "IMPERATIVE" THAT THE FED BEGIN TO TAPER
• FINK CALLS MARKET `OVER-ZEALOUS' 
• FINK SAYS THERE ARE "REAL BUBBLE-LIKE MARKETS AGAIN"

So... when the three largest banks/asset managers in the US say that Ben Bernanke has blown the largest asset bubble in history and that the time to taper has come, will Janet Yellen once again turn a blind ear to warnings that come not just from the "tinfoil" blogosphere but the "respected" legacy financial institutions made up of serious people, and after the cataclysm admit that, just like last time, she "never saw it coming?"

Gross: All risk asset prices artificially high. When won’t they be? When they don’t produce growth in real economy. Is 2% GDP enough?

— PIMCO (@PIMCO) October 29, 2013

Resets occur when the price of everything that has been repressed, manipulated or obscured is repriced. The greater the manipulation and financial repression, the more violent the reset. What been manipulated, obscured or repressed? Virtually everything: risk, credit, assets, labor, currency, you name it. Everything that has been manipulated by central banks and central states will be repriced. Trust is difficult to price. Every reset erodes trust in the capacity of the centralized status quo to manipulate/repress price to its liking. Once trust in the system is lost, it cannot be purchased at any cost.

If the investing school of "Ackman-Tilson" is correct, in which nobody actually cares about the content, just the number of pages in a given "investing presentation" slideshow, then recently troubled Chinese mobile internet provider NQ just got the upper hand over Muddy Waters. Recall that on Thursday, with a "Strong Sell" report bashing NQ, alleging the company is a fraud, Muddy Waters managed to cut the price of the company in question by over 50%. The size of that presentation: 81 pages. Moments ago NQ came out with its point by point rebuttal to Muddy Waters. The size of NQ's presentation: a whopping 97 pages.  Game, set, match to NQ, duh.

Aside from the fact that this morning's dismal confidence data likely inspired more Fed-inspiration, the fact of the matter is that US equities remain beholden to the ebb and flow of JPY-carry trades. This morning's surge in the latter (EURJPY) can be attributed to ECB's Nowotny, who dropped this little tape-bomb earlier:

*ECB'S NOWOTNY SAYS 'NO REALISTIC PROSPECT' OF RATE CUT: MNI
*NOWOTNY SAYS ECB UNLIKELY TO CUT BENCHMARK OR DEPOSIT RATE: MNI
*NOWOTNY SAYS POLICY MAKERS 'HAVE TO LIVE WITH' STRONG EURO: MNI

Which strengthened the EUR (against the JPY) and thus - in the new normal interconnected world (disconnected from fundamentals) - US equities spike.

As we pointed out a month ago (and initially over a year ago) in this completely broken, levered-beta, mad dash for yield market, the only alpha-generating strategy that even remotely works, is to be long the most shorted stocks. This was confirmed based on the return of the S&P vs the "most shorted sotcks" - a trade we first suggested in September 2012 - demonstrated by the chart below. Amusingly, as part of the trading basket of only stocks worth owning, i.e., the most shorted ones on the Russell 2000, where the beta is by far the highest, the top stock listed, the one with the highest short interest as a percentage of the total float, was none other than Blyth, Inc., as per the chart from one month ago.  According to the latest Bloomberg data, since then the short interest only rose even more, hitting an unprecedented 82.79% of all shares in the float held short. Well, overnight a lot of shorts suddenly screamed out in terror and were suddenly silenced, not to mention carted out feet first, when none other than the most shorted Rusell 2000 stock received an unsolicited takeover proposal valuing the stock at $16.75/share.