B+

• Jefferies to be bought by Ian Cumming's Leucadia in an all-stock deal for $3.59 billion or about $17/share (WSJ)
• FBI Scrutinized on Petraeus (WSJ)
• Identity of second woman emerges in Petraeus' downfall (Reuters)
• SEC staffers used government computers for personal use (Reuters)
• Japan edges towards fifth recession in 15 years  (FT)
• Europe Finance Chiefs Seek Greek Pact as Economy Gloom Grows (BBG)
• Americans Say Europe Lesson Means Act Now as Austerity Will Fail (BBG) - of course it would be great if Europe had ever implemented austerity...
• Greece battles to avert €5bn default  (FT)
• You don't bail out the US government for nothing: No Individual Charges In Probe of J.P. Morgan (WSJ)
• Israel Warns of Painful Response to Fire From Gaza, Syria (BBG)
• Greece's far-right party goes on the offensive (Reuters)
• Don’t fear fiscal cliff, says Democrat  (FT)
• Apple Settles HTC Patent Suits Shifting From Jobs’ War (BBG)
• Man Set on Fire in Argentina Over Debt (EFE)
• Iraq cancels $4.2-billion weapons deal with Russia over corruption concerns (Globe and Mail)
• An Honest Guy on Wall Street (Bloomberg)

On October 21^st, 2012, Ambrose Evans-Pritchard wrote a note titled “IMF’s epic plan to conjure away debt and dethrone bankers”, on UK’s The Telegraph. The article presented the International Monetary Fund’s working paper 12/202, also titled “The Chicago Plan revisited“. I will begin the discussion on this working paper with two disclosures: a) my personal portfolio would profit immensely if the Chicago Plan, as presented by the IMF’s working paper 12/202, was effectively carried out in the US. The reason I write today, however, is that to me, it is more important to ensure that my children live and grow in a free and prosperous world, and b) I have not read the so called Chicago Plan, as originally proposed by H. Simmons and supported by I. Fisher. My comments are on what the IMF working paper tells us that the Chicago Plan proposed, without making any claim on the original plan.

Get ready for a failure in these negotiations

"Recently, Johnson Matthey have put 172 “bad delivery” U.S. Assay Office bars into good delivery form for account of the Deutsche Bundesbank. These bars formed part of recent shipments by the Federal Reserve Bank to provide gold in London in repayment of swaps with the Bundesbank. The out-turn of the re-melting showed a loss in fine ounces terms four times greater than the gross weight loss... No indication should, of course, be given to the Bundesbank, or any other central bank holder of U.S. bars, as to the refiner’s views on them."

May 1968

A six state silver lining..

Stocks tend to experience very long periods (5-20 years) of either anemic or exceptional returns, which UBS calls Investment Regimes. Somewhat surprisingly (to some), they note that returns during these periods are not driven by divergences in economic or earnings growth. Rather, Investment Regimes are defined by secular multiple expansion or contraction - and it is critical to understand this dynamic as over the past 40 years (and four regimes) investors have tended to focus on only one dynamic at a time. From the 'Disco' regime to the 'Hangover II', UBS explains in a few simple charts why all eyes should be focused on high-yield credit - as we have noted time and again. Inflation signals are gone, the 'Fed model' is broken, and investment grade credit is too repressed to matter (until it does!)...

The early day surge in stocks and commodities (and sell-off in bonds) managed to get S&P 500 futures up to their 50DMA and the pre-NFP levels (which coincides with Bernanke's Bottom). Volume surged on the way up there and once hit we faded all the way back to VWAP (surprise!) retracing the knee-jerk spike as no news was discounted back out (and equities reverted to where risk-assets in general had been waiting). Commodities followed a similar path up but held on to their gains - especially Gold. Somewhat worryingly (given their dominance in fund holdings) for the market, GOOG and AAPL were both red. Today seemed much more about algos and technicals than about election bets - especially given the somewhat anti-consensus moves early on - and on the basis of that, the fade into the close suggests risk-reduction was the game plan for the big boys, even though we end the day in the green in the major indices (with Financials unch from QE3). The USD is practically unchanged on the week with stocks and commodities up and TSYs down.

Countries that have the luxury of their own exchange rate are able to eliminate any loss in competitiveness through an exchange rate depreciation, but (as is broadly recognized by now) UBS reminds that in a single currency area the only route available is an adjustment in relative wages. "Integrate or die" is how they describe it as the impact of even a Greek exit is now well-known as the start of the end for the euro as bank runs would instantaneously begin. Instead of instantaneous devaluation (exit) - akin to tearing the (admittedly big) band-aid off, the devaluation will be undertaken over time to restore competitiveness, with the brunt of the adjustment taking place through wages and inflation. This equilibrium 'devaluation' is impossible to know with certainty, but UBS estimates it is over 20% for Greece and 15% for Spain. How patient will the market be in waiting for the promise of integration to cover this slow and steady competitive devaluation; or alternatively how patient will Greece's poverty-stricken population put up with it? The reflexive nature of the market will accelerate any perceived move in this direction... a 'painless' 15-20% devaluation in Greece and Spain backed by the ECB's promises seems to us the stuff of hopes and dreams and unicorn farts.

It would appear, based on the latest war games from Israel's Institute of National Security Studies, that we should all go back to sleep and not worry about the impact of an Israeli strike on Iran's nuclear infrastructure. The reason not to worry is simple - either it ignites World War III (which we presume means it will be all over very rapidly and we will be blissfully unaware until its too late to be capable of achieving anything) or - as they suspect (and gamed out) - there will be a focus on 'containment and restraint' with Iran unable to ignite the Middle East. The result is predicated on 'actors' motivated by rational considerations; which seems entirely irrational. All the gory details below...

China Quietly Becoming Gold Superpower

Mario Draghi has reassured the world that no matter how much 'crap' collateral is taken on to the ECB's balance sheet, their risk management process is rigorous and ensures the safety of the entity's capital thanks to well-devised haircuts and collateral. Once again, it appears from a report in Die Welt (via Bloomberg), Draghi lied, as the ECB is now checking terms on some lending to Spanish banks that may have already contravened the ECB's mandate allowing overly generous terms to be offered on the Spanish banks' collateral. As Bloomberg notes, the issue surrounds EUR80bn relatively short-dated T-Bills which were wrongly classified as rated 'A' instead of the 'B' that agencies - except DBRS! - had assigned (a vast difference) - which would imply (if the ECB re-assigns the correct rating) the affected Spanish banks would have to produce up to EUR16.6bn in additional collateral (cash or quality collateral that is non-existent in Europe). This of course "casts doubt on the quality of the ECB's risk management" and merely serves to confirm the Juncker-ian lies we have come to expect from Europe's leaders (economic and political). As Die Welt notes: "Critical observers ask: who actually controls the ECB?"

Whitney Tilson, who needs no introduction given his omnipresence on the business media and anti-omniscience (e.g. the Anti-Tilson ETF here) when it comes to stock-picking, may just have put the final nail in the coffin of Obama's chances of winning the election. Via the quill of the man that top-ticked NFLX, "Why I'm Voting for Obama Again":

In virtually every area – the economy, jobs, social issues, foreign affairs, etc. – I think Obama has done well in his first term (and am optimistic that he’ll be even better in his second term), and going forward I believe Obama and the Democrats have a more clearly defined, realistic, better plan for our country than Romney and the Republicans.

The NYSE has just released a statement clarifying its hours tomorrow - due to the storm:

*NYSE TRADING FLOOR TO CLOSE TOMORROW; ALL TRADING TO BE ON ARCA

So, hold tight as all those low-lying humans will have left the building in the calm thoughtful hands of Johnny-5 and his friends.

First it was governor Cuomo, now it is Mike Bloomberg holding a press conference discussing advance preparations for Sandy, and just like last year, the first thing to be done, is the order of a mandatory evacuation of all low-lying areas, where some 375,000 New Yorkers live, contained in Zone A - those who don't voluntarily evacuate will not be arrested, but are being "selfish" according to Mayor Mike (it is unclear what happens if the non-evacuatees are also found to be in possession of a highly illegal 32 Oz coke container... that may be a felony offense). Depending on the storm surge, if any, it is likely that Zones B and C will also be evacuated. To find if you live in a zone to be evacuated, go to this website, alternatively the full hurricane evacuation preparedness map is presented below. And remember: if packing a go bag: no sugar... anything but sugar, or else Nurse Sam will be very angry.

If it wasn’t because the government sponsorship doping Q3 US GDP, we wouldn’t have much on the bright side.

European equities still desperate to shoot up. Feels like too many fickle shorts and too many uncomfortable longs at the same time.

Markets uneasy after round-tripping back to OMT / QE unleash levels and no follow-up stimuli to be seen.