Archive - Mar 2013 - Story

When you get into too much debt, eventually really bad things start to happen.  This is a very painful lesson that southern Europe is learning right now, and it is a lesson that the United States will soon learn as well.  It simply is not possible to live way beyond your means forever.  You can do it for a while though, and politicians in the U.S. and in Europe keep trying to kick the can down the road and extend the party, but the truth is that debt is a very cruel master and at some point it inevitably catches up with you.  And when it catches up with you, the results can be absolutely devastating. Greece, Italy, Spain and Portugal all tried to just slow down the rate at which their government debts were increasing, and look at what happened to their economies. I have always said that the next wave of the economic collapse would start in Europe and that is exactly what is happening.  So keep watching Europe.  What is happening to them will eventually happen to us.

It seems an obvious question but from the top down, based on the great and good leaders of the United States of America, it appears from their State of the Union speeches that 'War' indeed trumps 'Peace'. Of course, whether this is a reflection of the ultimate in Keynesian policy dreams of manufacturing ammunition just to be thrown away in non-inflationary ways (or to drive energy demand) is still in discussion.

Earlier in the week, we wrote about an Argentine car rental agency that had started accepting Bitcoins as a means to bypass local capital controls. We received a lot of questions about the article, the most common of which was "What in the world is a Bitcoin?" Let’s start by looking at our current monetary system. In most countries, a small tiny banking elite exercises total control over that nation’s money supply. And we’re just supposed to trust them to be good guys. Yet central bankers around the world have conjured trillions of dollars out of thin air, debasing the money’s value. It’s a concept any six-year old can understand. If money grew on trees, it wouldn’t be worth very much. This is one of the key reasons why people buy gold. You can’t just conjure gold out of thin air. It takes years of exploration and investment to pull it out of the ground. In the information age, though, we have an alternative. Bitcoin is digital currency. It doesn’t actually exist in our physical world... only in computers...

There is one problem with relentlessly ramping markets (whether due to four years of liquidity injections by the Fed, or due to four years of liquidity injections by the Fed) - they make all those who by definition have to be hedged, seem stupid by comparison. In this case, this means that for the fifth year in a row, the vast majority of brand name hedge funds are once again underperforming the S&P, even though most of them have shifted to the highest net long exposure in history, while charging their increasingly more angry investors 2 and 20 for the privilege of underperforming the most micromanaged asset of all - the S&P500, and its unpaid portfolio manager, Ben Bernanke. And while there are three certain things in life: death, taxes and Paulson being one of the worst performers in the world (perhaps he is moving to Puerto Rico not to avoid paying taxes but to escape furious LPs), as he indeed is for the third year running what is most surprising is that through the middle of March, according to HSBC, every single brand name hedge funds is once again underperforming the S&P.

Despite the all-knowing Alan Greenspan confirming there is no irrational exuberance currently, Oaktree Capital's Howard Marks is less convinced. Though he is not bearish, he lays out rather succinctly the current pros and cons for equities - based on the various 'valuation' arguments, discusses the folly of the equity risk premia, and highlights the dangers of extrapolation and what history can teach us... "appreciation at a rate in excess of the cash flow growth accelerates into the present some appreciation that otherwise might have happened in the future... it isn't just a windfall but also a warning sign."

The streak is dead - long live the streak - for the first losing Friday of the year. A sad day among the media though Maria B did proclaim "today was a victory even though we were down," so we can rest assured that all is well. While equities ending off their highs, the week was still positive 1-2% - especially for the Trannies - but rather oddly (well not really anymore) Treasuries are going out at the low yields of the week - down 7bps. The USD lost 0.7% with AUD and GBP strength weighing most and a decent surge higher in JPY today's day session. Oil prices jumped 1.7% on the week back over $93.50 (as RBOB and retail prices start to rise once again). Gold and Silver diverged with the former up 0.8% and the latter -0.7%. Volume today was very heavy (and it was a down day) but the quad-witching is to blame as opening an closing trading was huge as S&P 500 futures tagged new highs overnight but couldn't escape the lows of VWAP at the close. So far 2013 has been a perfect replay of 2012 - Is this it?

We have one simple question - does the following small drop (which we happen to have seen before) in Gold ETFs, which at least according to the mainstream media, has been responsible for the recent slide in the price of gold, appear to justify the absolute surge in gold futures and options short exposure as per the Commitment of Traders report, which for yet another week, saw the biggest net short positioning since 1999. And no, we are not really confused - as we said "according to the mainstream media"...

The short answer, despite the pleadings of an over-stuffed body of ex-students facing inexorable debt loads, is "no". However, as Professor Daniel Lin notes in this brief clip, debt forgiveness does not resolve the underlying causes of rising student debt, and therefore cannot prevent future debt problems. Instead of debt forgiveness, he suggests making student loans like other types of loans: dischargeable in bankruptcy. This places the burden on lenders to ensure that students are not taking on more debt than they can handle. While it would lead to a reduction in the amount of loan dollars awarded and theoretically increase interest rates (as 'risk' is priced in from the current no collateral, no underwriting, no credit check idiocy currently), these are good things - naturally incentivizing borrowers to be more careful right now, and in the future, which puts pressure on colleges and universities to control their costs.

Curious why Treasury yields have ground lower this morning, considerably more than would perhaps be expected given the consumer sentiment data, and in the process have prevented the intraday "rotation" out of bonds into stocks, pushing the DJIA higher for the 11th consecutive day? The answer comes from the Fed which tipped its hand earlier and scared a few big bond shorts by issuing a Large Positions Reports from those entities which own more than $2 billion of the 2% of February 2023 (CUSIP: 912828UN8 auctioned off in February and reopened on Wednesday). In an unexpected request, and on the back of a surge in fails to deliver earlier in the week and the huge apparent buyside demand in the latest 10Y auction (Primary Dealers getting only 22.3% of the takedown in the UN8 vs typical 40-60%) which settles today, MNI reports that the Fed is now inquiring who has large chunks of the bond: something it has not done since February 2012.

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The stock market has now been up for ten straight days. Many on Wall Street are singing “Happy Days Are Here Again.” For them, that is probably the case. They finally have something to sell that will bring the rubes back into the markets. We are not in Kansas anymore. Fear is ebbing and greed is coming back. Those on the outside looking in are rounding up cash so that they don’t get left behind. The shills assist them with their pictures of economic recovery, new era crap and whatever other nonsense they can peddle successfully. So the cycle goes, as it has since the New York Stock Exchange came into existence. We are in another game of musical chairs where the music is playing joyfully. As in all such events, there are too few chairs to accommodate the participants when the music stops. And it always does!

Over a decade ago, it was moms and pops downing tools and picking up mice to day-trade the latest and greatest dot-com wunder-stock from their home-office/kitchen table. Now, as equities perch atop a pile of rotten Federal Reserve effluent, it is tweens and below that are sought for their stock market prowess. Forget Rachel Fox - the 16 year old actress-cum-Jesse-Livermore, now we have 11-year-old Rachel Kelly from Naperville who is touted as an example of the greatness of our education system by CNBC because, "because people are going to need to trade stocks long after we're gone... it's inspiration for other 11-year-olds out there." Indeed we are.

The Securities and Exchange Commission today announced that Stamford, Conn.-based hedge fund advisory firm CR Intrinsic Investors has agreed to pay more than $600 million to settle SEC charges that it participated in an insider trading scheme involving a clinical trial for an Alzheimer’s drug being jointly developed by two pharmaceutical companies.   The settlement filed today in federal court in Manhattan is the largest ever in an insider trading case, requiring CR Intrinsic – an affiliate of S.A.C. Capital Advisors – to pay $274,972,541 in disgorgement, $51,802,381.22 in prejudgment interest, and a $274,972,541 penalty. “The historic monetary sanctions against CR Intrinsic and its affiliates are sharp warning that the SEC will hold hedge fund advisory firms and their funds accountable when employees break the law to benefit the firm,” said George S. Canellos, Acting Director of the SEC’s Division of Enforcement. The settlement is subject to the approval of Judge Victor Marrero of the U.S. District Court for the Southern District of New York. The settlement would resolve the SEC’s charges against CR Intrinsic and the relief defendants relating to the trades in the securities of Elan and Wyeth between July 21 and July 30, 2008. The settling parties neither admit nor deny the charges

On April 13, 2012 Jamie Dimon described the situation at the CIO as massively overblown and said it was just "a tempest in a teapot." A few days later, the head CIO trader, Javier Martin-Artajo, when speaking to the former JPM Chief Investment Officer, Ina Drew, had a less sanguine description: "and, and, you know, things like this, it's like the twin towers falling down." Let's agree to disagree and just compromise on "tempest in a towering inferno." But that's not the point of this post. The point is in the same transcript we learn that it was none other than Ina Drew who told Artejo that "it would be helpful, if appropriate, to get, to start getting a little bit of that mark back" and instructed the Spaniard to go ahead and "tweak" the daily P&L on the CIO portfolio by "an extra basis point." Nothing like your supervisor telling you to fudge marks just to demonstrate that the "curve is starting to trend."

EURUSD - which was active around the US day session all week and dead otherwise - popped up to take out stops at 1.31 today before fading to end the wek marginally higher. Broadly speaking the European 'Dow' was higher on the week but the individual nation stock indices faded quite notably today with Spain and Italy the worst. European credit markets did not play along at all - with financials especially weak. It does seem like European financial stocks are playin catch down to European credit but the pump remains. In other news, the market's 'old' fulcrum security (and perhaps renewed again) - Spanish bond spreads - had their worst week in the last 4 and surged 23bps (when the rest of the market was practically unchanged). Their is a lot simmering under the surface in Europe, but for now, stocks remain cognitively dissonant thanks to the 'promise' even as Italian and Spanish debt levels push top new all-time highs (ahh the austerity of it all).