AIG

With Paulson's star long gone down, there are few remaining "new generation" hedge fund wunderkinds, especially in a world in which the best performing hedge fund is Federal Reserve Capital LLC - Onshore Fund. One among them is Third Point's Dan Loeb, who continues to be one of the best performing hedge fund managers for the 4th year in a row. He just filed his Q1 13F, amounting to $5.3 billion in disclosed long equity positions, which are summarized below. Of note are the following changes:

• New stakes in Virgin Media ($538MM), Tiffany ($188MM), Anadarko ($105MM), Thermo Fisher ($99MM), Cabot Oil and Gas ($84MM), Hess ($72MM) and others. Some of these overlap with the initiations of David Tepper and David Einhorn especially Hess: did some "idea dinners" take place in Q1 we were not aware of?
• Fully exited stakes in Tesoro, Morgan Stanley, Nexen, Symantec, Herbalife, Illumina, Coke, PVH, Abbott Labs and others.
• Reduced positions in Yahoo, AIG, New Corp, Murphy Oil, Delphi, Lyondell and others
• Added to stakes in International Paper, Abbvie, Dollar General, Constellation, and Ariad

Back in September 2010, following David Tepper's first "balls to the wall" appearance on CNBC, we were not very surprised to learn that the seemingly permabullish hedge fund manager had taken the opportunity to follow up on the brief euphoria his speech generated then to cut 20% of his positions in assorted financial stocks - just the stocks he was praising loud and clear to the financial station with the plunging viewership.  Moments ago, Tepper's Appaloosa filed its 13F for the quarter ended March 31, so yes, before his most recent appearance yesterday. Yet we were somewhat confused by why the manager, once again so bullish he could see no scenario that could send stocks lower, and who estimated a war in the middle east could lead to a mindblowing 5% drop in the market, decided to trim his core holdings.

• Hilsenrath: A Top Contender at the Fed Faces Test Over Easy Money (WSJ)
• Yen drops further as G7 avoids criticizing Japan (Reuters)
• Markets missed Flaherty’s clues on next Bank of Canada chief (G&M)
• Republicans turn screws over Tea Party tax probes (FT)
• Dual-track Libor replacement lined up (FT)
• Risks to China recovery seen as factory output underwhelms (Reuters)
• Barack Obama’s goal of universal healthcare could be set back significantly by Texas Governor Rick Perry (FT)
• Gold Bears Pull $20.8 Billion as BlackRock Says Buy (BBG)
• Mexico sets shelters as volcano shakes, spews ash (AP)
• Europe Eases Corporate Tax Dodge as Worker Burdens Rise (BBG)
• IPOs Set to Raise Most Cash Since Crisis (WSJ)
• Melting Ice Opens Fight Over Sea Routes for Arctic Debate (BBG)
• Top hedge funds bet on Greek banks (FT)
• Icahn Asks Investors to Make Big Bet on a Debt-Laden Dell (BBG)

• Microsoft prepares U-turn on Windows 8 (FT), Microsoft admits failure on Windows 8 (MW), After Bumpy Start, Microsoft Rethinks Windows 8 (NYT)
• China reports four more bird flu deaths, toll rises to 31 (Reuters)
• Republicans shift stance on US budget (FT)
• NYC Tallest Condo Corridor Gets New Entrant With Steinway (BBG)
• U.S. Says China's Government, Military Used Cyberespionage (WSJ)
• China rejects Pentagon charges of military espionage (Reuters)
• Bank of China Cuts Off North Korean Bank (WSJ)
• Libya defense minister quits over siege of ministries by gunmen (Reuters)
• London Recruiter Says City Job Vacancies Rose 19% (BBG)
• Colleges Cut Prices by Providing More Financial Aid (WSJ)  or, said otherwise, loans
• Jeweler agrees to plead guilty in KPMG insider-trading case (LA Times)

With macro data becoming worse and worse (more and more bullish for Fed free money) and stocks off to the races (despite earnings that are abysmal), we thought a litle reminder of just what is driving this un-reality in nominal price moves. As the following chart, inspired by UBS, shows, each time the S&P 500 shows any sign of weakness, US money grows dramatically (money defined as the sum of M2 and foreign custody repo-able holdings at the Fed). Simply put, this is the reaction function of the Bernanke Put and explains why any weakness in Europe causes problems for the US - as the foreign banks repatriate and impact this 'growth' support. Correlation is not causation, but it is a strong hint.

• U.S. Bulks Up to Combat Iran (WSJ)
• Taking sides in Syria is hard choice for Israel (Reuters)
• Gold Traders Most Bearish in Three Years After Drop (BBG)
• It's a Hard Job Predicting Payrolls Number  (WSJ)
• EU economies to breach deficit limits as economic picture darkens (FT)
• IBM Says U.S. Justice Investigating Bribery Allegations (BBG)
• At Texas fertilizer plant, a history of theft, tampering (Reuters)
• SAC Sets Plan to Dock Pay in Cases of Wrongdoing (WSJ) - "in case of"?
• EU to propose duties on Chinese solar panels (Reuters)
• Billionaire Kaiser Exploiting Charity Loophole With Boats (BBG)
• SEC Zeroing In on 'Prime' Funds (WSJ)
• Apple Avoids $9.2 Billion in Taxes With Debt Deal (BBG)
• China April official services PMI at 54.5 vs 55.6 in March (Reuters)

While everyone's attention this morning will be focused on the sheer, seasonally-adjusted noise that is the monthly NFP report (keep in mind that any number +/- 200,000 of the actual, is entirely in the seasonal adjustments and is thus entirely in the eye of the Arima X 13 beholder), which is expected to print at 140,000, resulting in an unemployment rate of 7.6%, there were some events overnight worth noting. First, the China non-manufacturing PMI printed at 54.5 in April, down from 55.6, and tied with the lowest such print in two years. The biggest red flag was that New Orders dropped below 50, with the price index also declining sharply, indicating that either the Chinese slowdown is for real, and the national bank will have no choice but to ease unleashing inflation, or that the politburo wishes to telegraph to the world that China is slowing, because what goes on in China, and what data is released out of China are never the same thing. Elsewhere, in Europe Mario Draghi's henchmen were stuck in damage control mode, and Ewald Nowotny said markets over-interpreted a signal yesterday that the ECB would consider a deposit rate below zero. Policy makers have “no plan in this direction,” Nowotny said in an interview with CNBC today. This helped boost the EUR from its languishing levels in the mid 1.30s higher by some 50 pips following his statement.

“Recovery” has become the shibboleth constantly invoked by people running things after the crisis of 2008. Unfortunately, no such recovery was underway. It was papered over by the twin Federal Reserve policies of quantitative easing and financial repression – a combination of the nation’s central bank loaning vast new amounts of money into existence at ultra-low interest rates (hardly any interest to pay back) and creating steady monetary inflation to reduce the burden of existing debt by shrinking the dollar value of the debt. The program was a racket in the sense that it was fundamentally dishonest. The presumed purpose of these shenanigans from the point of view of the Federal Reserve and the White House was to keep the financial system stable and afloat, and therefore to keep “normal” American daily life going. Unfortunately, it was based on the unreal assumption that the financial norms of, say, 2006 could be ginned back up again, and this premise was just inconsistent with the reality of a post-Peak-Cheap-Oil world. Unfortunately, there was no organized counter-view to this wishful thinking anywhere within the boundaries of the political establishment.

• Apple reportedly stops placing Mac component orders (DigiTimes)
• Apple Ordered to Remove Obscene Content From China Store (BBG)
• Texas Ammonia-Plant Blast Kills as Many as 15 People (Reuters)
• Boston Probe Said Focused on Person Dropping Bag at Site (BBG)
• The Chinese cold trade war comes come to roost: US becomes Japan’s top export market (FT)
• Berlusconi, Bersani back Marini in presidential vote (Ansa)
• German parliament backs Cyprus bailout (Reuters)
• China Vows Wider Yuan Movement (WSJ)
• Morgan Stanley Sees Core Earnings Weaken (WSJ)
• Gold Miners Lose $169 Billion as Price Slump Adds ETF Pain (BBG)
• G-20 Draft Affirms Pledge to Avoid Competitive Devaluations (BBG)
• IMF warns on risks of excessive easing (FT)
• The battle for the Swiss soul (Reuters)

The lesson from the events of 2007-2008 should have been clear: Boosting GDP with loose money can only lead to short term booms followed by severe busts. A policy of artificially cheapened credit cannot but cause mispricing of risk, misallocation of capital and a deeply dislocated financial infrastructure, all of which will ultimately conspire to bring the fake boom to a screeching halt. The ‘good times’ of the cheap money expansion, largely characterized by windfall profits for the financial industry and the faux prosperity of propped-up financial assets and real estate (largely to be enjoyed by the ‘1 percent’), necessarily end in an almighty hangover. The crisis that commenced in 2007 was therefore a massive opportunity: An opportunity to allow the market to liquidate the accumulated dislocations and to bring the economy back into balance. That opportunity was not taken and is now lost – maybe until the next crisis comes along, which won’t be long. It has become clear in recent years – and even more so in recent months and weeks – that we are moving with increasing speed in the opposite direction: ever more money, cheaper credit, and manipulated markets (there is one notable exception to which I come later). Policy makers have learned nothing. The same mistakes are being repeated and the consequences are going to make 2007/8 look like a picnic.

Despite the mainstream analysts' calls for a "great rotation" by investors from bonds to stocks - the reality has been quite the opposite.  While the 10-year treasury rate rose from the recessionary lows signaling some economic recovery in 2009; the decline in rates coincided with the evident peak in economic growth for the current cycle that begin in earnest in 2012 - "With rates plunging in recent weeks the indictment from the bond market concurs with the longer term data that the economy remains at risk." Despite the calls for the end of the "bond bubble" the current decline in interest rates are suggesting that the real risk is to the economy.  The aggressive monetary intervention programs by the Federal Reserve, along with the ECB and BOJ, continue to support the financial markets but are gaining little traction within the real economy. Of course, this is likely why the current quantitative easing program is "open-ended" because the Fed has finally realized that there is no escape.   The next economic crisis is coming - the only questions are "when" and "what causes it?"  The problem is that next time - monetary policy might not save investors.

Since the Financial Crisis erupted in 2007, the US Federal Reserve has engaged in dozens of interventions/ bailouts to try and prop up the financial system. Now, I realize that everyone knows the Fed is “printing money.” However, when you look at the list of bailouts/ money pumps it’s absolutely staggering how much money the Fed has thrown around.

What is the meaning of the markets hitting new all-time highs.  The general consensus of the analysts and economists is that the rise in capital markets, given weak current economic data and a resurgence of the Eurozone crisis, is clearly a sign of economic strength; and, combined with rising corporate profitability, makes stocks the only investment worth having. There is, however, a more pragmatic perspective. Suppressed wage growth, layoffs, cost-cutting, productivity increases, accounting gimmickry and stock buybacks have been the primary factors in surging profitability.  However, these actions are finite in nature and inevitably it will come down to topline revenue growth.  However, since consumer incomes have been cannibalized by suppressed wages and interest rates - there is nowhere left to generate further sales gains from in excess of population growth. The reality is that all the stimulus and financial support available from the Fed, and the government, can't put a broken financial transmission system back together again.  Eventually, the current disconnect between the economy and the markets will merge.  Our bet is that such a convergence is not likely to be a pleasant one.

In late 2010, in a superficially stunning move, Bank of America was sued by, among many others, the New York Fed over the biggest bogeyman for the bank's balance sheet - its legacy portfolio of super toxic Countrywide mortgages it inherited in the worst M&A deal of all time (its purchase of CFC) and the inheritance of woefully inadequate mortgage issuance standards which ever since then (recall our prediction on this issue) has cost the bank billions in litigiation payments and reserves.  Obviously, the Fed had no concerns about collecting the money it itself creates, and it certainly doesn't care about legality and criminal financial impropriety, so why was it among the list of plaintiffs? Simple: as we suggested back then, and as has since been proven correct, it was simply so that Bill Dudley's henchmen have a first row view of everything going on in the putback litigation that has been the primary concern for BofA, but with a few of keeping the damage to a minimum. Sure enough, Ever since then the Fed has done everything in its power to mitigate potential losses to BofA as a result of Agent Orange selling hundreds of billions in biohazardous mortgages to anyone and anything with a pulse. It has gotten so bad that the Fed was last week caught lying under testimony, forcing the Fed to take back testimony in a parallel lawsuit between AIG and BofA, which has also involved the New York Fed, as a indirect guardian of BAC's cash hoard.

David Stockman’s New York Times Op-Ed has ruffled a lot of feathers. Paul Krugman dislikes it, saying Stockman sounds like a cranky old man, and criticising Stockman for throwing out a load of meaningless numbers that sound kind of scary, but are less scary in context. What Krugman overlooks is Stockman’s excellent criticism of crony capitalism, financialisation, systemic rot and Wall Street corruption of Washington, something Stockman has seen from the inside as part of the Reagan administration. There are plenty of other writers who have pointed to this problem of propping up casino finance, including myself. But very few of them are doing so on the pages of the New York Times. In the long run, I think it will become patently clear that throwing liquidity at the financial system won’t solve anything other than immediate liquidity concerns. The rot was too deep. The financial sector needed real reform in 2008. It still needs it today.