Archive - Jul 23, 2013 - Story

We are number 1 right? USA! USA! No one can beat our wealth creation machine, our economic dynamism, our level playing field and our bastions of higher education. We have a middle class that is the envy of the world, right? Well, like so much of the “American dream” we have been force fed for a generation or more, this perception is not based in reality whatsoever.

It would appear the camel's back of the career of Steve Cohen and his firm SAC Capital has received its last straw. As the WSJ reports, Federal prosecutors plan to bring criminal charges against the firm as early as this week. This spells trouble for SAC which, while still reeling from the SEC's attempt to effectively shut it down, will now have to fight a two front war; defending its key executives against criminal charges as well, including the risk of jail time for what is most likely going to be a securities fraud charge. While a disgraced Steve Cohen may, in theory, run his or whatever employees' he has left, money as a "family office", it would take a very strong wi-fi signal to do that from even a minimum security prison should he finally suffer Martha Stewart's fate.

Missing expectations badly, HSBC's Flash China PMI for July printed at its lowest in 11 months (a dismal 47.7) making this the worst 4-month collapse in the manufacturing indicator in three years (and diverging dramatically from the fence-sitting unreality of the Chinese government's own PMI index). Under the surface things were even worse. The employment sub-index plunged to 47.3 - its lowest in 52 months. Weaker new orders confirm the "continuous slowdown" in China's manufacturing sector, and as HSBC's chief China economist Hongbin Qu, said: "the flash PMI reinforces the need to introduce additional fine-tuning measures to stabilise growth." 'Fine-tuning' seems like a major understatement given this reality. One wonders whether the recent outperformance of gold prices has been front-running the coming shift from 'fine-tuning' to outright RRR cuts - bringing with it that 2011 deja vu that sent gold to an all time high - domestic inflation.

The words of central bankers have for a very long time been poured over by those believing their utterances to have mystic qualities, but we now live in an era where their fallibility is coming into question. The Governor of the San Francisco Fed has written a paper debunking the effectiveness of quantitative easing where monetary policy is "uncertain", a state of affairs that has been with us since QE was started and reinforced by Bernanke's two recent press conferences. To taper or not to taper; will he or won't he? Your guess is as good as mine.  “No pain no gain”, is what my fitness trainer tells me with irritating relish and frequency, but you know what? He's right! So what should our central banks and politicians be doing? Debt is the problem so deleveraging has to be the answer.

Lately, the parasitic, price manipulative "Office Space"-inspired HFT practice known as "spoofing" has been consistently in the news: a week ago, it was the third largest futures broker, Newedge, who made headlines following a "record" FINRA handslap. Then yesterday, a Red Bank, NJ-based HFT shop called Panther Energy Trading, and its sole owner Michael Coscia were fined $4.5 million and got a 1 year ban from the industry for engaging in the same activity. "Panther, based in Red Bank, New Jersey, and Coscia used a computer algorithm that placed and quickly canceled bids and offers in futures contracts for commodities including oil, metals, interest rates and foreign currencies. Panther and Coscia engaged in spoofing from August 8, 2011, to October 18, 2011, related to 18 futures contracts. The firm accumulated $1.4 million in profits by using the algorithm." While none of this is fundamentally new to any of our readers, we are happy to report that in conjunction with Nanex, we can now present documentary evidence of the Panther algo in action.

The on-again-off-again 'great rotation' from bonds to money-markets to stocks has (so far) seen retail flood into stocks as the BTFATH mentality is rife. As BofAML notes, through soothing "word of mouth" intervention, Bernanke's most important accomplishment over the past few weeks has been to significantly reduce the market's perception of upside tail risk for longer term interest rates. But, they remain very concerned in the short term about the scenario of a more disorderly rotation out of high grade funds, where credit spreads widen in response to further increases in interest rates. In this case, institutional investors will 'leave' risk markets en masse (with no rotation to stocks) as unwinds occur en masse. For now, it appears a 3.5% 10Y rate is the line-in-the-sand for a 'disordely' rotation.

Facts are treasonous and dangerous in an empire of lies, fraud and propaganda. It is maddening to watch the country spiral downward, driven to ruin by a psychotic predator class, while the plebs choose to remain willfully ignorant of reality and distracted by their lust for cheap Chinese crap and addicted to the cult of techno-narcissism. We are a country running on heaping doses of cognitive dissonance and normalcy bias, an irrational belief in our national exceptionalism, an absurd trust in the same banking class that destroyed the finances of the country, and a delusionary belief that with just another trillion dollars of debt we’ll be back on the exponential growth track. The American empire has been built on a foundation of cheap easily accessible oil, cheap easily accessible credit, the most powerful military machine in human history, and the purposeful transformation of citizens into consumers through the use of relentless media propaganda and a persistent decades long dumbing down of the masses through the government education system. This national insanity is not a new phenomenon. Friedrich Nietzsche observed the same spectacle in the 19th century: “In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule.”

With the Singapore Dollar (NEER) continuing its surge higher (+6% against the USD in 2012), the Monetary Authority of Singapore (MAS) saw a S$10.6 billion loss this year as the "FX impact exceeded the interest, dividend income and other gains from the foreign assets held." This is the 3rd loss in the last 4 years and 2nd largest on record, but of course the central bank notes, "this is not a cause for concern." As if this wasn't enough, the MAS' annual report also details 22 fixed income firms that have been fined and 7 that have been restricted for failure to comply with anti-money-laundering and terrorism-financing rules. The MAS suggested firms 'improve' their screening of customer names and sources of wealth in order to prevent the financial system from being used to harbor or act as conduit for illegal funds. It seems to us like they may be a little late.

How far has the global economy come in its recovery from the financial crisis? Citi's ten-chart tour highlights that even now, six years after the financial crisis first erupted, the global recovery continues to face some very powerful headwinds. Among the most notable are drag associated with ongoing efforts to consolidate private-sector balance sheets, challenges with managing high levels of public debt and the eventual unwinding of central bank balance sheets, the still-incomplete pattern of adjustment in Europe, and deteriorating demographics across the advanced economies. We see these challenges as being mainly lodged in the advanced economies, where the global financial crisis raged most intensively. But the resulting softness of advanced-economy demand has become an increasing obstacle for growth in the emerging markets. The bottom line is that investors, central planners, and politicians alike are frustrated by the slow pace of global recovery.

Typically we wouldn't note such tabloid gutter trash as the pilot episode to the upcoming reality show "In The Carlos Danger Zone with the Weiners", but since what is going on in the farce that is NYC's mayoral race is just another analogy for America's broken market, broken politics, broken morals and, ultimately, broken society, this deserves at least a few words, so here they are. Anthony Weiner resigned from Congress after being exposed for having a "sexting problem." As it turns out the Democratic mayoral candidate's sexting problem never went away, and continued well after said resignation with at least one young female, with whom he used the alias "Carlos Danger" and likely more. We learn all this because despite simple logic, Weiner decided to not only run for mayor but following today's revelations, will continue his run for mayor as he announced at a just concluded press conference. And the most inexplicable twist in all this: his wife was there beside him, supporting him and urging him on in the mayoral race.

The gorilla in the room may sleep soundly for the rest of July and August, but expect a foul temper when he wakes up in September. At that time, Congress once again haggles over our debt ceiling.

Presented with no comment...

Here are the highlights:

• Q3 Revenue of $35.32 billion beats expectations of $35.04 billion; This compares to $35.0 billion a year ago, or the firm barely posted a revenue increase this quarter - the first time in years
  • sees Q4 revenue of $34-37 billion, Exp. $36.97 billion;
• Q3 EPS of $7.47, Exp. $7.31
• Q3 Gross margin of 36.9%, Exp. 36.7%; Sees Q4 margin of 36%-37%
• iPhone sales of 31.2 million, Expected 26.1 million
• iPad sales of 14.6 million, Expected 17.4 million
• And since margin did not reflect a pick up in iPhone sales, sure enough the Q3 iPhone ASP was $581, vs Expectations of $597
• AAPL total cash and investment rose to a record $146.6 billion up from $144.7 billion, however the sequential growth of "only" $1.9 billion was the lowest since March 2010

And on those news the stock is up some $15 after hours: hardly indicative of the epic moves in days gone by.

The S&P 500 - after failing once again to take out the 1,700 magic line - closed the day just 'off the lows' with its worst day in a week (down a modest 0.1%). Stocks saw their best levels in the overnight session (echoing yesterday's move) and faded from the European open bouncing modestly at the European close. But unlike yesterday, we were unable to hold the bounce and dropped back to the lows of the day. Materials popped (shorts cover) at the open and dumped all day (a pattern seen in every sector). The USD rose in the early morning as the EUR faded but once the US opened the USD slid lower all day as JPY was well bid (back to its highs of the week). Gold (and less-so silver initially) lurched back up to pre-Taper talk FOMC levels (as did the USD) - its best 4-day run in 20 months. WTI held steady around $107 (and the Brent spread ebbed and flowed). Treasuries saw modest weakness on the day (+1 to 2bps) but ended well off the day's worst levels. VIX rose 0.3 vols on the day (more than expected given the equity move). Volume (once again) was entirely abysmal.

Days after Cyprus banks were bailed out (or, rather, in) in March, even if it meant the complete collapse of the local economy just to keep the country in the Eurozone and potentially the sale of the country's gold to provide its own funding toward the "common cause", the Eurogroup came out with a "Debt Sustainability Analysis" which predicted some hard times for the country but its eventual recovery. About a week later it emerged that the funding needs of the tiny island nation would be far greater than previously imagined, but for the time being, since the liquidity (if not solvency) situation had stabilized, all was well and that was one bridge that would be crossed when Europe came to it. That time may be coming fast. As Reuters reports, the Cypriot banking collapse has finally spilled over into the economy and resulted in a record collapse in local real estate values, which ranged from a 12.6% price drop in the valuation of an apartment to a 23.3% fall for office space in just the second quarter, which were the "sharpest recorded since RICS started collecting data in 2009, Loizou told Reuters."