Archive - Oct 2013 - Story

The debut of Healthcare.gov has been probably the worst launch of a major website in history, millions of Americans are having their current health insurance policies canceled, millions of others are seeing the size of their health insurance premiums absolutely explode, and this new law is going to result in massive numbers of jobs being lost.  It is almost as if Obamacare was specifically designed to wreck the U.S. economy. Americans are going to pay far more for health care, the quality of that care is going to go down, they are going to have to deal with far more medical red tape, and thousands upon thousands of U.S. employers are considering getting rid of the health plans that they offer to employees altogether due to Obamacare.  If the U.S. health care system was a separate nation, it would be the 6th largest economy on the entire planet, and now Obamacare is going to absolutely cripple it.  To say that Obamacare is an "economic catastrophe" would be a massive understatement. Of course we were assured that it wouldn't turn out this way.

The Bank of Japan's governor Kuroda proudly told the world "long-term yields are bound to rise at some point, but we can curb it when it happens," and on a grand scale - that is what they have done (for now). But market participants are growing increasingly concerned. As we have warned numerous times, the suppression of 'normal' volatility in teh short-term can only lead to larger uncontrollable moves in the future. As The FT reports, some worry, too, that the BoJ has pushed up JGB prices to the point where interest rates no longer bear any relation to the government’s creditworthiness - "effectively we have removed the light from the lighthouse." Some say the transition has been unsettling as many analysts talk more openly of the risks inherent in what the BoJ is trying to pull off. For one thing, liquidity has evaporated... "volatility looks low now, but if some investors start selling, the impact on the market could be much bigger than expected. That is a big risk."

While the White House spied on Frau Merkel and Obamacare developed into a slow-moving train wreck, while Syria was saved from all-out war by the Russian bell and the Republicrats fought bitterly about the debt ceiling… something monumental happened that went unnoticed by most of the globe. The US quietly surpassed Saudi Arabia as the biggest oil producer in the world. You read that correctly: "The jump in output from shale plays has led to the second biggest oil boom in history," stated Reuters on October 15. "U.S. output, which includes natural gas liquids and biofuels, has swelled 3.2 million barrels per day (bpd) since 2009, the fastest expansion in production over a four-year period since a surge in Saudi Arabia's output from 1970-1974." After the initial moment of awe, pragmatic readers will surely wonder: Then why isn't gasoline dirt-cheap in the US?

While nearly three years after the Fukushima disaster the world is finally focused, rightfully so, on the epic ecological and radioactive clusterfuck unfolding in Japan, where in a desperate effort to distract the population from what is going on in its back yard, the Premier has launched the most ridiculous monetary experiment doomed to failure, the reality is that the US itself harbors a veritable waste land of radioactive fallout, much of it hidden in plain sight. As the following interactive map from the WSJ shows, of the 517 active sites in the continental US, found on the Department of Energy's listing of facilities "considered" for radioactive cleanup through its Formerly Utilized Sites Remedial Action Program, some 43 have a "potential for significant radioactive contamination" through the time of the study. Find out if your state, city, or town is located next to a potential dormant and largely secret Fukushima, using the following handy interactive map.

"The recent trading environment has felt something like walking into a place and having a sense that something is wrong and dangerous but not knowing exactly what will happen or when. “QE Infinity” has so distorted the prices of stocks and bonds that nobody can possibly determine what the investing landscape would look like, or what the condition of the economy and financial system would be, in the absence of Fed bond-buying."

-Paul Singer, Elliott Management

The big question is whether it will function as intended and survive permanently. There is a serious risk that it will not. The potentially fatal flaw in Obamacare is the very same feature that appeals most to its supporters: the ability of even those with a serious preexisting health condition to buy insurance at the standard premium. The biggest danger to Obamacare’s survival is that many individuals who do not receive insurance from their employer will choose not to insure themselves and will instead pay the fine of just 1% of income (rising permanently after 2015 to 2.5%). The preferred alternative for these individuals is to wait to buy insurance until they are ill and are facing large medical bills. The “wait-to-insure” option could cause the number of insured individuals to decline rapidly as premiums rise for those who remain insured. In this scenario, the unraveling of Obamacare could lead to renewed political pressure from the left for a European-style single-payer health-care system.

Recent surveys and research studies by sources from the UN to streetRx.com put the size of the illegal drug market in the U.S. at anywhere from $200 to $750 billion. The market is notoriously hard to track by design, and it is constantly evolving as prices and usage fluctuates; but as ConvergEx's Nick Colas notes, there’s a plethora of data on the topic: formal surveys by the CDC and user-submitted blog posted on websites like Hightimes.com trace price, usage, and traffic stats for marijuana, powder and crack cocaine, d-methamphetamine, and heroin. Legalized dispensaries now allow us to estimate potential tax revenue from marijuana sales, while incarceration rates for drug offenders reveal the economic impact of the illegal drug trade. In short, while the illegal drug market might be hard to track – if only by virtue of its illegality – Colas points out that we can learn a lot about its size and scope by aggregating these formal and informal data. Most surprising of them all: illicit drug use is no longer the realm of just the youth.

Surprised why FB stock is soaring higher by 15% after hours on results that were a beat but nothing all that spectacular, with $2.02 billion in revenues ($1.91 billion expected), and EPS of $0.25 ($0.19 expected)? Because according to the company, it will soon need to colonize a new planet as it will promptly run out of real, bot-based, imaginary and potential users on planet earth following a ridiculous 25% increase Y/Y in daily active users to 728 million, and a mindblowing 18% increase in Monthly Active Users to 1.19 billion (however look at the charts below to see just where the bulk of the growth comes from).  Putting Facebook's numbers in perspective: it has 199 million Monthly Active Users in the US, where the average revenue per user is highest. This is 44 million more than the entire labor force, and 63 million more than the number of employed people in the US.

But, but, but... was the common refrain heard across mainstream media - perplexed that i) stocks could close anything but green, and ii) stocks could close green after the FOMC kept the dream alive. Markets broke everywhere (stock and options) and VIX saw flash-smashes a number of times as the great rotation from stocks to levered stocks (i.e. options) continued (in what smells a lot like the 'what could go wrong' 'portfolio insurance' days of yore). Stocks slid lower into the FOMC, knee-jerked up to VWAP, then skidded to 2-day lows, bounced towards VWAP once again then slumped into the close for the worst day in 3 weeks (down a measly 0.6%). Treasury yields had fallen notably into the FOMC statement and snapped higher after (30Y +4bps on the week). The USD had been rising all week and was smashed higher on the FOMC news (+0.7% on the week). Gold and silver kneejerked lower but bounced back (-0.5% and +0.75% respectively) on the week. Bear in mind that credit markets are now at the worst levels in 2 week as stocks hover just below all-time highs.

The most succinct post-mortem summary of the FOMC announcement comes from Citi's Stephen Englander.

Following Tavenner and Sebelius self-sacrifice in the last two days - despite the grossly partisan questioning (and congratulating) - it seems its time for the Presidential pitchman to take the stand once again. We are sure we'll be told that you can keep your plans (kinda sorta), that it's not about the website, and just how great it is for a few hand-picked kids with diabetes, moms with cancer, and veterans that the rest of Americans should be happy to pay up for. We will also be keeping an eagle eye open for any feinting...

"A liquidity trap is a situation described in Keynesian economics in which injections of cash into the private banking system by a central bank fail to lower interest rates and hence fail to stimulate economic growth. A liquidity trap is caused when people hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war. Signature characteristics of a liquidity trap are short-term interest rates that are near zero and fluctuations in the monetary base that fail to translate into fluctuations in the general price levels." Importantly, this evidence is mounting that the Federal Reserve has now become trapped within this dynamic. The important point is that, for the first time that we are aware of, someone (of apparent note to the status quo) has verbally stated that we are indeed caught within a liquidity trap.  This has been a point that has been vigorously opposed by supporters of the Federal Reserve actions.

In an NSA presentation slide on “Google Cloud Exploitation,” however, a sketch shows where the “Public Internet” meets the internal “Google Cloud” where their data resides. In hand-printed letters, the drawing notes that encryption is “added and removed here!” The artist adds a smiley face, a cheeky celebration of victory over Google security.

In line with what we discussed last night, once cajillionaire Eike Batista's net wealth has now collapsed to less than -$746.5 Million according to Bloomberg as Veja notes, his "take over the world" company OGX has declared bankruptcy following the breakdown of restructuring talks with bondholders:

• *OGX FILES FOR BANKRUPTCY PROTECTION IN RIO, BATISTA LAWYER SAYS
• *BATISTA'S OGX EXTENDS DECLINE TO 30% AFTER BANKRUPTCY FILING
• *BATISTA LAWYER BERMUDES COMMENTS ON FILING BY PHONE FROM RIO

The filing puts $3.6 billion of bonds into default - the largest corporate debt debacle on record for Latin America.

The USD surged and Treasury bond prices and precious metals tumbled instantly on the FOMC's statement but stocks decide it was time to ramp to VWAP (and VIX was hammered lower). After the initial knee-jerk, stocks caught back down to the reality of the other markets as it appears the investing public chooses to "sell the news" on the basis that the Fed removed the 'tightening conditions' language. The only question now is just how much of November, December, and January's seasonal hope has been pulled forward into the last few days.