Archive - Feb 2014 - Story

Today, under the disguise of a promise of physical security, governments treat each of us as if we were suspected criminals and not free citizens with rights: they record our conversations, intercept our mails, take our fingerprints and as many pictures as they deem necessary, do body searches and leave us half naked when we travel as if it were business as usual, and ruthlessly hunt down as traitors those who uncover these practices. We must understand once and forever more that security is not only liberty’s enemy, but an impediment to prosperity. In fact, security and prosperity are antonyms.

As an increasing number of FX traders are disappearing from bulge bracket banks (for "entirely unrelated to the FX probe" reasons), the WSJ reports that European and US regulators are expanding the scope of the manipulation probe. In the course of sifting through mountains of documentation, banks have found an array of apparent misconduct, according to people involved with the investigations and now the FX options market has come under scrutiny. "It's the banks saying, 'oh God, look what we've uncovered, there's a whole lot of issues'," a person familiar with the investigation said.

Shadow banks in China come in a variety of forms and guises. The term is applied to everything from trust companies and wealth management products to pawnshops and underground lenders. What surprising is that China’s biggest shadow bank is actually a creation of the central government and receives billions in financing directly from the banks.  Even more interesting, this shadow bank recently pulled off a successful international IPO where it raised billions of dollars...

1. Inside advice, legal in those days, from friends in the company is a particularly dangerous basis for decisions; you know little how limited their knowledge really is and you are overexposed to sustained enthusiasm;
2. Always diversify, particularly for your pension fund;
3. Fraud, near-fraud, or colossal incompetence can always strike;
4. Don’t buy stocks yourself if you’re an amateur: invest with a relatively rare expert or in a low-cost index;
5. Investing when young will start your brain turning on things financial;
6. Painful errors teach you more than success does;
7. Luck helps; and finally,
8. Have a convenient mother to be the fall guy.

Over the last year, investors have been lulled to sleep wrapped in the warmth of complacency as the Federal Reserve stoked the fires of the market with $85 billion a month in liquidity injections.  I have written many times in the past that investors were likely to be rudely awakened by an unexpected event of which was likely not even on the majority of mainstream analysts radars.  That occurred this past week as a revulsion in emerging markets sent the "carry trade" running in reverse. What we will need to ponder this weekend is whether the current correction is simply just a dip within an ongoing uptrend OR have the "bears" finally awakened from their winter hibernation?

The ugly rash of financial services executive suicides appears to have spread once again. Following the jumping deaths of 2 London bankers and a former-Fed economist in the US, The Denver Post reports Richard Talley, founder and CEO of American Title, was found dead in his home from self-inflicted wounds - from a nail-gun. Talley's company was under investigation from insurance regulators.

As everyone knows, AAPL is still a cash cow, and in the last quarter following the release of its latest iPhone and iPad, it generated a bumper $12 billion in cash. The only problem is that this is global cash, and as the company's 10-Q indicates, $13.1 billion of this cash was generated and held offshore, which means that AAPL's domestic cash declined by $1.1 billion. In fact, as the chart below shows, this was the 4th consecutive quarter in which AAPL's domestic cash has declined offset by a massive cash build offshore. And a reminder, "Amounts held by foreign subsidiaries are generally subject to U.S. income taxation on repatriation to the U.S." This also means that unless AAPL repatriates some of its offshore cash, and unless it issues even more debt, its stock buybacks and dividends are limited to the declining cash amounts held in the US. So if one were to extrapolate AAPL's Q1 domestic cash simply by subtracting the reported $14 billion used in the stock buyback from its December 31 US cash holdings, as of today, all else equal, AAPL now has "only" $20.4 billion in cash held domestically - an amount that matches its domestic cash holdings last seen in September 2010.

Following the 2nd dismal jobs print in a row, it would appear the market's new "common knowledge" is that the Fed will be forced to un-taper - despite Hilsenrath's "Fed stays the course" perspective. Everything is up today (apart from the USD). The disconnects from recent correlations were extreme as stocks lost the plot against FX carry, commodities, and bonds. The best 2 days in a row for stocks in 4 months sent most indices to critical technical levels and dragged all but Trannies and the Russell back into the green on the week. Oil prices surged back above $100. Bonds rallied (and bull steepened). Gold, silver, and copper all gained notably (with silver's best week in 6 months). Buy, buy it all... apart from VIX which was monkey-hammered back to 15% (down over 2 vols). So with FX carry left in the dust, what was the ammunition for the move? a 6.3% rip squeeze in the "most shorted" stocks.

Today, the pundits are a-buzz making sense of the latest jobs report. But most of us care more about the state of one particular job: our own. How relevant is this latest bit of data to that? Not very. So, to better understand the trends in the work environment most likely impact our own paychecks, it will help to look at another bellwether similar to our fuzzy groundhog friend: AOL. AOL, a once-important pioneer in the transition to the 'digital economy', is once again showing us where the future of work is headed. Unfortunately, like the health of AOL's business over the past decade, it's not a pretty picture. As we've transitioned to an economy in which corporate profitability -- and thereby, stock prices -- is THE metric for success, the employer-employee relationship has become much more superficial than in past generations; and the encroachment of automation remove income options for those temporarily out of work, but it's increasingly limiting the options for the large pool of unskilled labor with few other alternatives

Plain vanilla bank runs are as old as fractional reserve banking itself, and usually happen just before or during an economic and financial collapse, when all trust (i.e. credit) in counterparties disappears and it is every man, woman and child, and what meager savings they may have, for themselves. However, when it comes to shadow bank runs, which take place when institutions are so mismatched in interest, credit and/or maturity exposure that something just snaps as it did in the hours after the Lehman collapse, that due to the sheer size of their funding exposure that they promptly grind the system to a halt even before conventional banks can open their doors to the general public, the conventional wisdom is that this is a novel development (and one which is largely misunderstood). It isn't.

Today, we got the credit side of the "savings debit" ledger with the December consumer credit report, in which we learned that in addition to the now traditional draw of Car and Student loans, which came out to $13.8 billion, or exactly in line with the 12 month average draw, sending the total notional to a record $2.24 trillion, it was revolving credit, i.e., credit cards, which saw a substantial $5 billion increase in outstandings - the most since May 2013 - bringing total revolving credit to $862 billion if still far below the nearly $1.1 trillion in student loans outstanding. So just as the US consumer was tapped out, and saw their personal income remain unchanged from November and real disposable income cratered, as a result having to draw down on their savings, the remainder of all purchases was funded through the use of credit cards, which may or may not be repaid in 2014. There is always hope that this time will be different and incomes finally pick up.

Whether driven by real supply-demand issues, concerns over terrorism (sparked by the Sochi plane debacle), or hopes a renewed un-tapered QE on the basis of 2 piss-poor jobs reports in a row is unclear. What is clear is that WTI crude is having its best day in over 2 months - now at its highest in 2014, back above $100 a barrel and its most expensive in history for this time of year.

As natural gas prices climb, reaching over $5/mcf again on 4 February, and with an unseasonably cold winter, local utilities say that natural gas customers’ bills are 30-40% higher now than last winter.

Is it any wonder Mario Draghi didn't lift a quantitative-easing finger this week? Despite record unemployment, record (and disastrous youth unemployment), record suicide rates, record non-performing loans, and an inextricably-linked banking system facing $3 trillion in exposure to emerging markets... Spanish bond yields have collapsed to their lowest since 2006 (and Italian close behind). With an entirely broken transmission mechanism of monetary policy, it seems the "market" for European bonds knows no bounds as spreads on the riskiest sovereigns drop to pre-crisis levels and 10Y Spain yields are now lower than 30Y US Treasuries.

Three days ago it was S&P that opened the can of Puerto Rico junk worms. Moments ago it was Moody's turn to downgrade the General Obligation rating of the Commonwealth from Baa3 to Ba2, aka junk status. We note this just in case someone is confused what the catalyst was that just sent stock to a new intraday high in the aftermath of today's disappointing jobs number which until this moment barely managed to push the S&P higher by 1%. From the report: "While some economic indicators point to a preliminary stabilization, we do not see evidence of economic growth sufficient to reverse the commonwealth's negative financial trends. Without an economic revival, the commonwealth will face difficult decisions in coming years, as its debt and pension costs rise. The negative outlook signals the remaining challenges facing the commonwealth."