Archive - Jul 2013 - Story

The US government is essentially unique - and not in a good way - in how it treats its citizens living and working in foreign countries. No other country in the developed world imposes and effectively enforces as many burdens on its citizens abroad (and those who would do business with them) as does the US government. It is not likely to change in the foreseeable future. In fact, we would bet that the burdens will actually increase as the US government becomes more financially desperate. That is a significant incentive to act sooner than later... or before it is too late altogether. However unpleasant this reality is, it does not negate the need to internationalize. Quite the contrary. As spending on welfare/warfare related programs continues to rise, it is clear that US government will sink deeper into fiscal and moral bankruptcy, with political risk increasing in tandem. It is far better to deal with the burdens associated with internationalization than to leave your savings, your income, and yourself in range of a desperate government's wrecking ball.

Municipal finance is in sharp focus after Detroit filed the largest municipal bankruptcy in history. Detroit’s filing is arguably an isolated case and its fiscal problems are not indicative of the broader municipal credit landscape; but, the outcome of the bankruptcy process will dictate whether the value of the full faith and credit pledge backing GO bonds will be diminished going forward. The global hunt for yield has probably chased new investors into the Muni market who may not fully understand that in recent years it has become an ‘ownership not rental’ market.  In other words, it is unlikely holders of Munis can sell what they own, as liquidity in the secondary market is almost non-existent.

Parents old and rich? Eying that new Veyron as the stock market lifts your family wealth to all-time heights? Don't get carried away quite yet! As estates rise in size, most families give a greater percentage to charity rather than their heirs. As JPMorgan's CIO, Michael Cembalest notes, taxes as a % of the estate disposition remain roughly constant for estates greater than $5 million. What this suggests: wealthy families have in mind a baseline level of support for their heirs, and once it is met, they channel more assets to charities. On the bright side, bequests (parental transfers to children through their estates) are generally divided equally by child, irrespective of the child’s income, proximity to parents or behavioral differences vs. siblings (i.e. a suck up or drug-taking outcast). Various studies estimate that the “equal treatment of siblings” approach applies to 88%-92% of all estates.

Following our initial uncovering of the manipulation and monopolization of the metals warehousing business two years ago, the last few days have seen the public's attention grabbed by the reality of what the banks are actually doing. Following this week's hearing, as the Fed reconsiders banks roles in non-banking businesses (and the 'societal benefit'), it seems the CFTC has woken up. As the WSJ reports, the Department of Justice has opened an initial probe into the metals warehousing industry and the Commodity Futures Trading Commission has also sent letters to some firms telling them to preserve documents, in what is likely the beginning stages of an investigation.

In a brief but perfectly succinct interview on CNBC yesterday, Ron Paul shared his opinion on the need to own gold (and the physical demand for the manipulated metal) and the Detroit bankruptcy ("we're going to see more Detroits"). He concludes that "long term, you can expect governments not to change" and that they’ll keep taking on more debt and printing more money until people lose confidence in both the U.S. dollar and the U.S. military, both of which will be shake the foundation of a fiat/dollar system.

The company which has made missing and guiding lower into an artform did not disappoint, when moments ago AMZN missed and guided lower.

• Q2 Revenue of $15.7 billion missed expectations of $15.73 billion
• EPS of -$0.02 missed expectations of $0.06
• Firm guides to Q3 revenue of $15.4-$17.15 billion on consensus estimates of $16.99 billion
• Firm sees Q3 operating loss between $65-$440MM, on consensus profit of $84.5 million

But this data on its own is hardly enough to do the company justice. Here is this quarter in its full glorious context.

Stocks ended the day at the highs of the day with small gains as the internal anxiety implied (highs vs lows, adv vs dec) by the re-appearance of the Hindenburg Omen battled (Icahn vs Ackman-like) with the one-way-street predictability of a Hilsenrath-inspired 330RAMP Capital appearance. Hilsy's "no July Taper" un-surprise-note added 7 points to the S&P lifting it comfortably green (and knocked 5bps off Treasury yields). Trannies bounced hard after dropping to unchanged from the 6/19 FOMC levels (+1.4% from the lows) and along with the Dow ended the day practically unchanged. The Russell just kept on rising (+1%) as stocks ended the day at their highs. Despite the volatility (and close-to-close stability) in stocks, FX markets were the main movers today (and high-yield bonds) as EURUSD pushed back up to pre-FOMC 'Taper' levels from 6/19.

Following the debacle of free-and-easy mortgage money to anyone who could fog a mirror in the run-up to the last housing bubble (remember that was just 6 years ago), regulators proposed 'skin-in-the-game' rules which forced banks to hold certain amounts of the loans they made (as opposed to securitizing and selling off that yieldy risk to the next greater fool). Makes sense. However, in a major U-turn, with interest rates rising, mortgage rates spiking, and home prices now collapsing once again, it would appear the very same congress has folded. As the WSJ reports, more stringent lending standards on top of the market environment leave the watchdogs, which include the Fed and the FDIC, wanting to loosen a proposed requirement that banks retain a portion of the mortgage securities they sell to investors (representing a victory for an unusual alliance of banks and consumer advocates that opposed the new rules). Undermining the initial goal of imposing market discipline, former FDIC Chair Sheil Bair noted, "My sense is that Washington has lost its political will for serious reform of the securitization market." Indeed it has, Sheila.

"I worry about the effects on the long-run stability and efficiency of our financial system if the Fed attempts to substitute its judgments for those of the market. Such a regime would only increase the unhealthy tendency of investors to pay more attention to rumors about policymakers' attitudes than to the economic fundamentals that by rights should determine the allocation of capital." - Ben Bernanke, October 15, 2002

The Obama "Better Bargain for the Middle Class" roadshow continues. We can only assume in it he desperately tries to find a representative of said class, so far without success. We will spare readers the repetitive oratory streamed by the teleprompter which is a carbon copy from yesterday and cut straight to the money shots.

Thanks to the revelations this week of more sexts, Anthony Weiner's lead has evaporated in the mayoral race. As WSJ reports, among registered Democrats, 25% support City Council Speaker Christine Quinn and 16% support Mr. Weiner, a 14 percentage point swing in Ms. Quinn's favor compared with a poll taken several weeks ago. Mr. Weiner's unfavorability rating surged to 55% in the poll with only 30% still viewing him favorably (from 52% last month). But perhaps more for the ongoing humor of it than his policies and prowess, a stunning 69% of 18-29 year-olds believe he should continue to run for Mayor (and 61% of Bronx residents). Mr. Weiner "needs to get voters to give him a third chance," said one analyst, adding that "his negatives are at an all-time high. There's been a significant erosion in people's willingness to say he deserves another chance. They are more reluctant to grant that."

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.