January 20th, 2011
Blackberries Lost More Market Share Than We Bearishly Anticipated While RIMM's Share Price Spikes: Is It Time To Revisit the Bear Thesis?Submitted by Reggie Middleton on 01/20/2011 14:13 -0500
Research in Motion's market share has actually eroded far more than even my bearish estimates, yet it's share price has spiked nearly 30%. This was a profitable short in 2010 and the bear story has not changed. If anything, it has been affirmed and is stronger than ever. Let's take a closer look at the 3rd quarter market share metrics.
Marc Faber appeared yesterday on CNBC and explained why he is the latest adherent of the "reverse decoupling" theory, whereby the emerging markets are to underperform the developed countries. Of course, anyone who has seen the action in the Shanghai Composite in the past 3 months does not need to be convinced of this. Faber, then proceeds to share some perspectives on Chinese geopolitical ambitions in light of the Hu visit (thank you $19 billion China-US Boeing arrangement which has already cost 1,000 US jobs), and evaluates the impact of rampant money printing on the cost of living in developing countries. To the latter recent riots, and occasional revolutions, across Africa and the Middle East probably frame the issue best. Here is Faber's take: "My concern is this - we have money printing around he world, and in particular in the US, and that has led to very high inflation around the world, and in very low income countries, energy and food account for a much larger portion of disposable income than in the United States. So these countries are suffering from high inflation and that reduces the purchasing power of people, so I think that monetary authorities in emerging economies will have to tighten, or they will have to let inflation to accelerate, both of which are not particularly good for equities." Well, yes, but who cares: after all it is only a matter of time before someone on CNBC pitches the tremendous stock market return in such stunning examples of monetary prudence as Zimbabwe and Weimar Germany.
At the Sanford Bernstein conference several years ago Joseph Stiglitz spoke and said a good and healthy financial system is a small financial system. I couldn’t agree more. This is especially the case in a purely fiat money system. Money is too important to allow greedy children in expensive suits on Wall Street and dangerous academics at the Fed to play around with. I do not claim to know what the ideal money system is but I want to be very clear on this point. If we have a fiat system like today the banks should be the most regulated industry on the planet and operate like utilities. They are supposed to help the productive economy innovate and create wealth. They are not supposed to be parasites that suck the lifeblood out of the real economy and compose 16% of the weight in the S&P500 (only technology is bigger at 17%). Something is VERY, VERY wrong here.
"just borrow money at this ridiculous low interest rate and just buy the f'ing dip."
The biggest American distraction of the past decade may be losing its grip over the minds of your average Joe Sixpack. Bloomberg reports that American Idol averaged 26.1 million viewers to the two-hour opening of the 10th season on News Corp.’s Fox TV, a drop from past years that may jeopardize the network’s ratings dominance. The audience shrank 13 percent from the 29.9 million who watched last year’s debut, according to initial Nielsen Co. data released by the networks. And while the show is likely not threatened by this not all that surprising drop, as Americans seem to have gotten bored with electing their pop stars (after all Cramer is still on air... and has anyone seen his Nielsen ratings), it probably is quite concerning to other power and money interests, who like nothing more than seeing the middle class in front of its TV during peak hours, instead of actually looking behind the DJIA's glossy facade, and learning just how insolvent their country has become.
Something dramatic happened in the past 2 days: fundamentals came back with a thud, quite literally, for those momo traders who believe that they can always top tick a stock and sell just before it. Instead now they are caught in a toxic spiral of doubt when to take profits, hoping for a return to previous highs, even as stocks continue to descend ever lower. Of course, it is preposterous to assume that the Fed will allow a return to full normalcy: as we have written since oil passed $90, this is merely the Fed's ploy to kill the surge in commodity prices. Soon enough, WTI will get back to levels that are acceptable to the Fed, at which point the whole reflation trade will start grinding higher again one more time. In the meantime, the "normalcy return" could last one day, one month, or more. Additionally, keep in mind that the Fed will have to create an "unexpected event" ahead of June, which will be the trigger for QE2+, which leads us to believe that there will be at least two pronounced major distribution events: the current correction, and the next, and far more potent one, before the end of Q2. As such, we will once again commence looking at securities in a way that makes sense from a fundamental basis (as opposed to buy because it is green). Below, in our first foray back into normalcy after a long absence, we present the most hated stock in the world: these are the 28 names on the Fed favorite Russell 2000 which have a short interest as a percentage of float of more than 30%. They are hated with a passion, and for good reason. That said, in times when the Fed steps back from the limelight, these are the companies that should likely trade alongside a dropping market. Alternatively, due to their high beta nature, they will likely surge as soon as the Fed decides the break from executing its third mandate (and the populations of developing nations) is over.
RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 20/01/11
Abigail Doolittle, of Peak Theories Research, shares her latest updated short-term outlook on the price of gold. Doolittle's conclusion: "Caution is advised around gold in the near- to intermediate-term due to this potential near- to intermediate-term reversal. In the long-term, however, gold’s primary and bullish uptrend appears to remain very much in place." Of course, for those who day trade gold, the broken upward channel we pointed out some time ago was the indicator to watch in taking profits. For everyone else, who believes that the past two weeks' weakness is merely a blip in an otherwise relentless march by the world's central banks to reflate their problems through currency printing and devaluation, the long-term outlook is certainly far more important.
Late in October, before QE2 was fully launched we penned a post, with the help of John Lohman, titled "The POMO Submitted-To-Accepted Ratio: A Tell On How To Frontrun The Frontrunning Primary Dealers" whose topic was the Submitted-to-Accepted ratio in any given POMO operation. While by now everyone is aware that POMO days (at least historically) have had a huge positive impact on stock returns (since they have been virtually daily since the beginning of the market meltup), and created their own self-fulfilling prophecy, it is the nuances in POMO that still catch people unaware. Namely, we claimed 3 months ago that the Submitted-To-Accepted ratio is a critical tell in how the market will perform through close, finding that "generic market effect on POMO days (i.e. stocks and yields up relative to non-POMO days) should be pronounced when the submitted-to-accepted ratio is relatively low (“meets expectations”) and muted when the ratio is high (“a negative surprise”, particularly if said Dealers had already positioned themselves in pre-POMO trading, based on a set of expectations regarding the outcome)." Following the surge in the S/A ratio in yestedrday's POMO, which effectively predicted the market rout, we decided to rerun the analysis. We found that recent incremental data merely reinforces the original conclusion: namely, watch out for days that have a substantially above average Submitted to Accepted ratio.
With increasing confusion over the cash muni bond market, very little has so far been said about the even more confusing muni CDS market. However, as municipal bankruptcies are likely about to take the country by storm, it is really the synthetic market that should be occupying investors' attentions. This is especially true with yesterday's disclosure that the bankrupt city of Vallejo is offering recoveries of only 5-20 cents to its sub creditors: it means that muni insolvencies will be not only a "survival" issue but one of recovery as well, considering assumptions embedded in cumulative loss forecasts that predict 80% recoveries by default. Below we present the most comprehensive report we have read so far on the matter of muni CDS, which should serve as a primer to anyone who wishes to be abreast not only of events in the muni cash space (where cash outflows are now comparable to what happened to equities following the flash crash), but in the wonderful world of synthetic paper.
A month after the Philly Fed surged and trouncing expectations to print at 24.3, only to be subsequently revised lower to 20.8, the Philly Fed Business Outlook survey once again took a dip down, missing expectations of 20.8 and coming at 19.3. And as usual the story is behind the headline, where one number continues to scream, namely the Prices Paid data, which rose from 47.9 to 54.3, the highest Priced Paid since July of 2008. Look for margin pressure to force companies to finally follow in Tiffany's example and start passing through costs to consumers broadly any minute. From the report: "Price increases for inputs as well as firms' own manufactured goods are more widespread this month. Fifty-four percent of the firms reported higher prices for inputs, compared with 52 percent in the previous month. The prices paid index, which increased 6 points in January, has increased 42 points over the past four months. On balance, firms also reported a rise in prices for manufactured goods."
To all who thought that the FASB gives leeway only to banks when fudging their numbers, and boosting their equity capital in ways previously unheard of, we have a surprise. The latest entrant in the "accounting gimmickry" club is none other than the Fed. And since the Fed is not auditable by anyone, it gives itself permission to change and bend the rules in any way it desires. Following on recent speculation that the Fed could in theory have a equity capital deficiency due to its massive asset book, and its tiny equity buffer, both discussed many times previously on Zero Hedge (here and here), the Fed recently announced as part of its January 6 H.4.1 release "an important accounting policy change with the release of its weekly H.4.1 report on January 6 that effectively prevents it from facing a negative capital position even in the event that it incurs substantial losses." Here is how Bank of America's Priya Misra explains this curious, and most certainly politically-motivated development: "The Fed remits most of its net earnings on a weekly basis. Prior to this accounting change, any unremitted earnings due to the Treasury would accrue in the "Other capital" account, but will now be shown in a separate liability line item called "Interest on Federal Reserve notes due to the Treasury.” As a result, any future losses the Fed may incur will now show up as a negative liability (negative interest due to Treasury) as opposed to a reduction in Fed capital, thereby making a negative capital situation technically impossible regardless of the size of the Fed’s balance sheet or how the FOMC chooses to tighten policy." And there you have it: instead of reducing the left side of the balance sheet upon the incurrence of losses, the Fed has decided to fudge the right side. And presto. No more possibility of insolvency ever again. Which only means that the Fed's now ridiculous DV01 of just under $2 billion will in no way prevent the world's biggest hedge fund from taking proactive steps to actually mitigate rate risk, and in fact will likely encourage it to gamble even more with taxpayer capital.
No one knows exactly what events will transpire over the next 15 to 20 years as this Fourth Turning morphs from regeneracy to climax and finally to resolution. The mainstream media, most politicians, and self proclaimed progressives are blind to the cyclicality of history. They believe history proceeds in a linear upwards path. These are the people you see on TV talking about toning down the rhetoric, false gestures of bipartisanship, and soothing words about the financial crisis being a thing of the past. They fail to understand that once the mood of the country is catalyzed by a trigger event or events, there is no turning back the clock. Winter must be dealt with head on. Very few, if any, “financial experts” anticipated a housing collapse, followed by a deep recession, a 50% stock market crash, and a financial system which came within hours of total implosion on September 18, 2008 (as detailed in the documentary Generation Zero). Absolutely no one anticipated the extreme measures taken by the U.S. government and Federal Reserve to “Save” the country from a 2nd Great Depression. These measures have added $5 trillion to the National Debt in the last 40 months. It took 205 years to accumulate the 1st $5 trillion of debt.
It must suck to be a banker at Morgan Stanley these days. While their colleagues at Goldman make a not too shabby $430k, MS' workers are forced to toil over a measly quarter of a million. The company today reported total year end compensation of 'just' $16,048 million which amounts to $256,627 per person, or 40% less than Goldman. Granted, the number is a whopping 50.8% of LTM revenues, and it is a 7.5% increase from last year's $238,652 average... but there is a catch: in 2010 employees employee comp subject to deferral increased by 50% from 2009, from 40% to 60%, and a whopping 80% for operating committee members. So not only are they getting paid less, but they are not going to get it at all for many years. No wonder MS is now the administration's favorite insolvent company IPOing bank (except, of course, for the case of AIG, whose nationalization saved Goldman Sachs. It is only natural that that one is IPOed by... Goldman Sachs).
As noted yesterday, David Tepper is coming back to CNBC this Friday, in what many expect will be a reprise of his September appearance which was one of many events to unleash the buying spirits and save the year for so many Hodge funds loaded with financial stocks (we eagerly await February 15 to get the latest round of 13F and uncover just how many of the biggest financial "bulls" used the Q4 rally to dump). It appears, however, that this time around Tepper will not be dispensing with his usual POMO-inspired exuberance. In an interview with the Post, Tepper, who from media shy has become just a "little" overexposed, says that 2011 will be "harder and not without risk." Will this be the top-tick event of the market's recent and relentless bear market melt up?