Archive - Jan 2013 - Story

Israeli PM Benjamin Netanyahu says his nation must prepare for the threat of a chemical attack from Syria, amid concern at enemy efforts to test a post-election coalition Israel, and has deployed its new Iron Dome anti-missile system near the border with its northern neighbor. Along with this concern, as many have perhaps suspected, the Israeli Defense Minister confirmed yesterday that the US has prepared plans for a 'surgical' military operation to delay Iran's nuclear program. As The Jerusalem Post reports, Ehud Barak, added that in the past the US has been heavy-handed but that under Barack Obama, the United States has "prepared quite sophisticated, fine, extremely fine, scalpels," if the worse comes to the worst - even though the Israeli preference would be to end the nuclear threat diplomatically, calling for tougher sanctions (though he expressed doubt that diplomacy would lead to success). Just another geopolitical hotspot that the world's markets choose to ignore in deference to the one true leader - central bankers.

Everyone knows that for the better part of the past year Apple was the world's biggest company by market cap. Most also know that AAPL aggressively uses all legal tax loopholes to pay as little State and Federal tax as possible, despite being one of the world's most profitable companies. Many know, courtesy of our exclusive from September, that Apple also is the holding company for Braeburn Capital: a firm which with a few exceptions, also happens to be among the world's largest hedge funds, whose function is to manage Apple's massive cash hoard with virtually zero reporting requirements, and whose obligation is to make sure that AAPL's cash gets laundered legally and efficiently in a way that complies with prerogative #1: avoid paying taxes. What few if any know, is that as part of its cash management obligations, Braeburn, and AAPL by extension, has conducted a mindboggling $600 billion worth of gross notional trades in just the past four years, consisting of buying and selling assorted unknown securities, or some $250 billion in 2012 alone: a grand total which represents some $1 billion per working day on average, and which puts the net turnover of some 99% of all hedge funds to shame! Finally, what nobody knows, except for the recipients of course, is just how much in trade commissions AAPL has paid on these hundreds of billions in trades to the brokering banks, many (or maybe all) of which may have found this commission revenue facilitating AAPL having a "Buy" recommendation: a rating shared by 52, or 83% of the raters, despite the company's wiping out of one year in capital gains in a few short months.

Employment is dead in the water because opportunities for organic expansion are few and the cost basis of doing business in the U.S. keep rising. That vise forces businesses large and small to reduce labor costs while boosting productivity. There is no other way to stay solvent in a post-bubble, over-capacity, over-indebted consumerist economy awash in too much of everything but energy, common sense and fiscal prudence.

Go to ussc.gov...  hit: UP, UP, DOWN, DOWN, LEFT, RIGHT, LEFT, RIGHT, B,A [ENTER] have fun

Egypt appears to be coming unhinged once again. Egyptian President Mohamed Morsy has imposed a 30-day curfew (from 9pm to 6am) on several of the nation's largest cities as tensions rise from several perspectives. The most glaring 'flare' in riots is due to the death-sentences handed out this week to 21 people involved in a Port Said soccer riot - where fans bashed each other with rocks and chairs) about a year ago (where 73 people died and more than 1000 were injured). CNN reports that there are 38 deaths and 415 injuries so far in Port Said - and so the 'Morsy Moment' has occurred imposing curfews. However, while 'blame' has been apportioned to a population started by relatives of the sentenced, it seems there is more at the core of this as clashes between anti-government protesters and security forces enter their third day near Cairo's infamous Tahrir Square. The former Muslim Brotherhood leader, who became Egypt's first democratically elected leader last year, has come under fire by some who compared him to Mubarak and said he has amassed power for himself and his Islamist allies. The protests in Cairo, Alexandria, Suez and elsewhere in recent days have focused their anger at Morsy.

When the Republican party agreed last week to a push back on the debt ceiling discussion by three months to May 19, virtually without a fight in a move that may presage what is set to become a quarterly can kicking exercise on the US credit card max, some were curious what the quo to this particular quid may be. Earlier today on Meet the press Paul Ryan explained: the pound of spending flesh demanded by the GOP in exchange for caving on yet another key GOP hurdle is, as our readers have known for over two weeks, the Sequester, which is set to hit on March 1 and possibly the stop-gap government funding on March 27, after which various government agencies will start shutting down. Both programs are set to kick in automatically as incremental spending cuts, chopping away even more basis points from the 2013 US GDP, unless the GOP votes affirmatively to extend them in what would then be seen as a move that destroys any last trace of leverage and credibility that GOP may have had.

As we recently noted, the US Macro picture is considerably less sanguine than every talking head would have you believe. Not only are earnings for Q4 coming in notably weak, but the top-down macro picture is its worst in almost five months - and turned negative this week. Of course, the fact that our 'market' is dislocated from any sense of reality will come as no surprise to anyone; but, the chart below provides some, perhaps useful, insight into how to trade this disconnect (and its inevitable convergence). To add a little more impetus to this decision, the past two weeks have seen the US macro picture drop at its fastest rate since June 2011 - right before the last debt-ceiling debate, which was followed by a quite notable decline in stocks.

One of the first axioms of analysis is: "Garbage In, Garbage Out"! If your data is flawed, everything you do with it and the decisions stemming from it are flawed and dangerous to your financial health. Experienced analysts will often be found relentlessly checking, rechecking and validating their inputs and assumptions. If only our economists and the sell side analyst community were this diligent. But then it isn't their money. Only a year-end bonus for the 'extras' in their life is at risk. If economic practitioners were held to higher standards of accountability, they simply wouldn't accept the raft of fundamental data points that are the pillars of most economic assessment. Markets have become so dysfunctional with so much cheap money chasing so few real opportunities, that collateral values within the rehypothecation process are now in jeopardy and exposed to collateral contagion. The question is - what would things look like if the Fed wasn't engaged in Monetary Malpractice?

Nearly two years ago, the hacktivist group Anonymous made waves around the fringes of financial media by announcing "Operation Empire State Rebelion" whose goal was to "engage in a relentless campaign of non-violent, peaceful, civil disobedience until Ben Bernanke steps down and the Primary Dealers within the Federal Reserve banking system be broken up and held accountable for rigging markets and destroying the global economy effective immediately." Needless to say nothing came out of it, and OperationESR was promptly forgotten as Anonymous had apparently met its match in the face of the Fed and the Primary Dealers. Now, in the aftermath of the Aaron Swartz suicide which has put the entire hacking community on high alert, Anonymous is back with yet another campaign, this one titled "Operation Last Resort", which was revealed to the public when Anonymous took control of the website for the the US Sentencing Commission for nearly one full day from Friday afternoon until Saturday evening, using it as a venue from which to distribute a massive 1.3 GB encrypted file titled Warhead-US-DOJ-LEA-2013.AES256 which may contain secret information sourced from the Department of Justice (hence the files contained are named after SCOTUS justices) and which Anonymous threatens to release unless massive reforms take place at the DOJ - reforms which will certainly never see the light of day, meaning Anonymous will have no choice but to make the contents of said file public.

The 2008 crash resulted from the bursting of the biggest bubble in financial history, a ‘credit super-cycle’ that spanned more than three decades. How did this happen? Some might draw comfort from the observation that bubbles are a long established aberration, arguing that the boom-and-bust cycle of recent years is nothing abnormal. Any such comfort would be misplaced, for two main reasons. First, the excesses of recent years have reached a scale which exceeds anything that has been experienced before. Second, and more disturbing still, the developments which led to the financial crisis of 2008 amounted to a process of sequential bubbles, a process in which the bursting of each bubble was followed by the immediate creation of another. Though the sequential nature of the pre-2008 process marks this as something that really is different, in order to put the 'credit cuper-cycle' in context, we must understand the vast folly of globalization, the undermining of official economic and fiscal data, and the fundamental misunderstanding of the dynamic which really drives the economy.

It was rumored that the 2008 crisis hit the Queen of England particularly hard – over USD 40 million in stock market losses. This experience must have jilted something, as when The Queen was visiting the esteemed London School of Economics she asked the professor a rather “un-queen” like question – why did economists fail to predict the biggest global recession since the Great Depression? Speaking on behalf of economists, investment managers and mutual fund sales people everywhere, the professor responded that “at every stage, someone was relying on somebody else and everyone thought they were doing the right thing.“ In short, no one could have predicted the 2008 crash. Meanwhile, in the parallel universe called America, Ben Bernanke January 2013 The Queen was selling everyone the exact same story. If the famed London School of Economics and the Chairman and full committee of the US Federal Reserve were unable to predict the crisis, what hope does the World have with predicting future crises? In actual truth, and despite claims by the US Federal Reserve and the London School of Economics, many people accurately predicted the collapse of the US housing market and the subsequent collapse of the stock market. Fortunately, it doesn’t have to be that way. Accepting, understanding, and embracing the fact that today there are plenty of investment professionals who are willing to view the World objectively should be comforting.

"Why do we consider banks to be like holy churches?" is the rhetorical question that Iceland's President Olafur Ragnar Grimson asks (and answers) in this truly epic three minutes of truthiness from the farce that is the World Economic Forum in Davos. Amid a week of back-slapping and self-congratulatory party-outdoing, as John Aziz notes, the Icelandic President explains why his nation is growing strongly, why unemployment is negligible, and how they moved from the world's poster-child for banking crisis 5 years ago to a thriving nation once again. Simply put, he says, "we didn't follow the prevailing orthodoxies of the last 30 years in the Western world." There are lessons here for everyone - as Grimson explains the process of creative destruction that remains much needed in Western economies - though we suspect his holographic pass for next year's Swiss fun will be reneged...

The economy as we know it is facing a lethal confluence of four critical factors - the fall-out from the biggest debt bubble in history; a disastrous experiment with globalisation; the massaging of data to the point where economic trends are obscured; and, most important of all, the approach of an energy-returns cliff-edge. Through technology, through culture and through economic and political change, society is more short-term in nature now than at any time in recorded history. This acceleration towards ever-greater immediacy has blinded society to a series of fundamental economic trends which, if not anticipated and tackled well in advance, could have devastating effects. The relentless shortening of media, social and political horizons has resulted in the establishment of self-destructive economic patterns which now threaten to undermine economic viability.

The past and present bailouts of each and every bank (and 'important' industry) will, one day, be seen as a generational offense is how MEP Daniel Hannan begins this thoroughly British demolition of the three critical myths surrounding the crisis, that despite market optics, we are still living through. From the idea that capitalism has failed (it has not in his view, it has been ravaged by political pandering), to the crisis being caused by lack of regulation, and that greed is the single-driver of the mess that we remain in; Hannan suggests in a brief but extremely eloquent debate that there is a world of difference between being pro business and pro market as he destroys any semblance of credibility that the political (and elite) class has echoing a young Ron Paul in his thoroughly libertarian free-market sensibilities.