Archive - Jul 25, 2013 - Story

First we had Schordinger markets in which value is either zero or whatever the Fed says it is; then we got Schrodinger economies when China was both expanding and contracting at the same time; now we have Schrodinger military coups which are both a coup and not a coup, at least as far as the US is concerned. According to AP: "The Obama administration will tell lawmakers Thursday that it won't declare Egypt's government overthrow a coup, U.S. officials said." So why will the US claim the obvious military overthrow of Morsi and his Muslim Brotherhood was a "democratic" process? Simple: it will allow the United States "to continue providing $1.5 billion in annual military and economic aid to the Arab world's most populous country." And why will the US continue providing Egypt with $1.5 billion in annual military aid? Simple: so Egypt can continue buying more Made In Lockheed Martin F-16 fighter jets to spread the Nobel Peace Prize winner's diplomatic agenda in the middle east. Because one must always think of the children GDP.

Following that press conference, it seems the sinking ship has had a few more rats quietly slink out through the back door... SAC Capital is a sea of red and grey Bloomberg Terminals that appears to confirm our earlier image of Mr. Cohen among his friends and colleagues.

"QE in my view is less efficacious for the real economy than most people suppose," may just be the sentence that ends Larry Summers' run at becoming the next 'most powerful person in the world'. As the FT reports, the chubby ex-chief economist for Obama made these, and other, somewhat hawkish comments (entirely unacceptable for a Federal Reserve chairman) at a conference in Santa Monica in April. 

The US Attorney for the Southern District of New York, Preet Bharara, is about to do what so many iterations of prosecutors have dreamed of doing in the past three decades: announce criminal charges against SAC Capital, if not against its chief Steve Cohen (at least not yet). Watch him do it live at the following webcast.

While the conventional way of looking at hedge fund assets has traditionally been to simply add up the assets under management to estimate gross exposure, as so often happens conventional wisdom is wrong. Because what the "traditional" approach simplistically looks at is merely a fund's equity and ignores all leverage through assorted generic and "shadow" conduits such as repo, loans, rehypothecation, "hedging" and others. Luckily, as a result of Dodd-Frank, hedge funds were required to present their full market exposure when netting leverage as per an annual SEC form known as Form PF. It is here that we learn that SAC's market exposure, something very relevant now that the firm is facing an imminent or eventual winddown, is likely orders of magnitude above what the market believes.

If we analyze inflation by these two metrics (purchasing power - which declines as real income stagnates and prices rise - and by exposure to real costs), we find the middle class is increasingly exposed to skyrocketing real-world prices. Pundits in the top 5% have the luxury of pontificating on the accuracy of the CPI while those protected by government subsidies and coverage have the luxury of wondering what all the fuss is about. Only those 100% exposed to the real costs experience the full fury of actual inflation.

With capital controls like these who needs bank runs.

Following the criminal indictment, Stevie Cohen suddenly finds himself surrounded by all of his newfound friends at Cummings Point Road 72...

Homebuilder stocks are down 4% on the week (and -6.3% from the FOMC) as D.R.Horton's CEO dares to utter some ugly truths on his earnings call. Despite any and every talking-heads reassurance that rising mortgage rates won't impact the awesomeness of the housing recovery, it seems the actual homebuilders have a different view:

• *HOMEBUYERS 'SHOCKED AND DISTURBED' BY RATE JUMP, TOMNITZ SAYS
• *D.R. HORTON CEO SAYS 'DISAPPOINTED' RATES ROSE SO 'VIOLENTLY'
• *D.R. HORTON CEO SAYS TRAFFIC COUNT HAS SLOWED SINCE RATE RISE

What? No? Un-Possible. With home prices collapsing (despite headlines trying their best to proclaim victory), it seems the fragile 'recovery' in an inventory-less housing market is about to pop once again (as we note, mortgage rates have not tracked lower as Treasuries un-Tapered).

With the posturing in full swing - and Hilsenrath's pontifications making front-pages - we thought we would look at who the 'market' believes is most likely to become the next Chair(wo)man of the Federal Reserve. While the headlines proclaim two front-runners, there is a clear leader at the moment...

Goodbye sweet blue-eyed prince. It's been bittersweet. Just out from Bloomberg and Reuters:

• SAC CAPITAL ADVISORS INDICTED BY FEDERAL GRAND JURY IN NEW YORK
  
• COHEN'S HEDGE FUND, SUBORDINATES SUBJECT OF CRIMINAL INQUIRY
  
• U.S. SEEKS TO FORCE SAC TO FORFEIT ILLEGAL PROFITS STEMMING FROM FRAUD 
  
• U.S. SAYS THAT FROM ROUGHLY 1999 TO 2010, SAC OBTAINED AND TRADED ON INSIDE INFORMATION TO BOOST RETURNS, FEES

Perhaps now is a good time to retreat to the hockey rink behind 9 feet of electrified fence, before the TV newsvans arrive at 72 Cummings Point road. As for what happens to the 5-10% of daily NYSE volume traditionally associated with the SAC, we will find out soon enough.

Whenever the annual change in core capex, also known as Non-Defense Capital Goods excluding Aircraft shipments goes negative, the US has traditionally entered a recession. Where is this number now: +0.8%, and declining fast. Feeling lucky?

One look at the June headline Durable Goods number today would have been enough to send algos into a buying spasm: printing at 4.2% it was three times greater than the forecast 1.4%, and followed an upward revised 5.2% (previously 3.6%). However, as always, there was a footnote: the entire Durable goods number was due to one thing: Boeing aircraft orders and other transportation equipment which have risen by a whopping $20 billion in the past two months, from $67 to $87 billion, or growth rates of 14.8% and 12.8%. Put another way, of the $21 billion increase in overall Durable Goods since April (from $223 billion to $244 billion), $20 billion is due to transportation equipment (from $67 billion to $87 billion). Sure enough, the June Durable Goods order ex-transports missed expectations of a 0.5% increase and was flat compared to May.

Another week, another prior revision down and rise week-over-week in the initial claims data but the print was a modest beat. The smoother 4-week average has now hovered around 345k for 9 weeks as the down-trend of the year-to-date appears to have stalled (for now). Continuing claims dropped back from its July 4th aberration. We worry that with top-line revenues missing significantly in the most recent earnings season, firms will be left once again with only one option to meet Wall Street's EPS demands and wonder if the flat trend in claims for over 2 months now reflects that wait-and-see mode for layoffs (or hirings).

Yesterday, ahead of the monthly update from the ECB, we posted "What Keeps Mario Draghi Up At Night, And Why The European Depression Has A Ways To Go" in which we showed that not only has M3 in Europe terminally broken apart from bank lending to the Euroarea private sector, but that lending to European banks was growing at the slowest annual pace on record. Today, the ECB showed that Draghi's unpleasant dream is becoming a full-blown nightmare with M3 sliding from a 2.9% growth rate in May to just 2.3% in June, suggesting that whatever the ECB is (not) doing is not working and yet another stimulus round is imminent. However, putting into question whether even such a stimulus would do anything, is the fact that actual private sector lending contracted even more, and in June declined from a previous record pace of -1.1% to a new record low of -1.6%. In other words, not only is Europe's Keynesian debt trap getting bigger by the month, but the European monetary plumbing system is completely and perhaps permanently fractured.