Capital Markets

• Vocal billionaire activist IRR - 150x: Icahn bought $1 billion of AAPL stock, seeks $150 billion buyback (BBG)
• BlackBerry Said to Have Sought Buyers Since 2012 (BBG) - for a phone or the entire company?
• IPhone Fingerprint Reader Talk Boosting Biometric Stocks (BBG) - also, the NSA will need to grow its Utah data center
• UPS Jet Crashes in Birmingham, Ala. (WSJ)
• America's Farm-Labor Pool Is Graying (WSJ)
• Hong Kong Lowers Storm Signal as Typhoon Closes on China (BBG)
• Indian submarine explodes in Mumbai port (FT)
• BofA Banker Sued by Regulator Later Joined Fannie Mae (BBG)
• Software that hijacks visits to YouTube uncovered (FT)
• Chinese Billionaire Huang Readies Iceland Bid on Power Shift (BBG)
• China to launch fresh pharmaceutical bribery probe (Reuters)
• Defeat at J.C. Penney Hurts Ackman as Performance Trails (BBG)

If you are a stock picker, then it’s basically now or never for whatever investment discipline you might follow.  Asset class and industry correlations have taken a surprising nosedive in recent weeks, which - as ConvergEx's Nick Colas notes. should allow your strategy/blend of magic to (hopefully) shine versus the benchmarks.  Average industry sector correlations to the S&P 500 have dropped to 69.9%, by far the lowest observation for over two years.  High yield bonds now show just 16% correlation to U.S. stocks, and the numbers for Emerging Markets (58%), EAFE stocks (76%), and currencies like the Australian dollar (11%) are also plumbing new lows.  Why the sudden return to a ‘Normal’ world? Expectations that the Federal Reserve will begin to ‘Taper’ its bond buying help, to be sure.  As do actual inflows (some $8 billion last month) into actively managed mutual funds.  We’ll have to wait and see if current trends continue, but for now we welcome the return of the ‘Stock picker’s market’.  Let the dart-throwing begin...

Back in 2010, when few still dared to question that the entire move in the market is predicated on the Fed's daily POMO (then still on QE2), we laid out, in a way so easy even a caveman could grasp it, how every tiny move in the stock market is nothing but a function of the Fed's daily POMO on those days in which Bernanke would be directly injecting liquidity into the capital markets using his Primary Dealer frontmen. Since then nearly three years have passed, and thousands of POMO days. All of which brings us to this quarter's Treasury refunding presentation, and specifically the section "Effects of policy and market structure" from the Presentation to the Treasury Borrowing Advisory Committee, in which we learn that we had in fact been right all along, and that perhaps for the first time ever, the Treasury admitted that not only "no one dares fight the Fed" but that, as expected, it is "all POMO."

• U.S. Regulator Subpoenas Banks Over Long Warehouse Queues (BBG)
• Apple Said to Prepare Holiday Refresh of IPhones to IPads (BBG)
• Fed's Yellen Says Stance on Banks Hardened (WSJ)
• Mexico opens up its energy sector (FT)
• Spin: Greek GDP marks gradual deceleration of recession (FT) ... spin aside, it dropped 4.6%, and in reality, probably over 10%
• Made-in-Canada Solution For BlackBerry Avoids Nortel Fate (BBG)
• America's Farm-Labor Pool Is Graying (WSJ)
• Video of 'lame' cattle stirs new concern over growth drugs (Reuters)
• Paulson Bid for Steinway Trumps Kohlberg Offer (WSJ)
• Egyptian government yet to decide on pro-Mursi vigils (Reuters)

As David Stockman, Reagan's infamous Budget Director, writes in his bestseller, The Great Deformation: The Corruption Of Capitalism In America – "the last thing hedge funds do is hedge."  The hedge fund complex is "not so much a conventional industry as it is a giant moveable trade": Wall Street trading desks frequently morph into independent hedge fund partnerships, and senior hedge funds often sire “cubs” and then sons of cubs. The protean ability of this arrangement to spawn, fund, and replicate successful momentum trades cannot be overstated, and has "generated trillions of permanent momentum-chasing capital." Ultimately, he warns, "apologists for the Fed’s evisceration of the capital markets could not see... they had unleashed the financial furies in the violent momentum trading modus operandi of the hedge fund casino."

A bearish take on U.S. stocks is about as fashionable as a beehive hairdo at the moment, which makes it a decent time to think like a contrarian.  Sell-side strategists with a sense of reality are few and far-between but as ConvergEx's Nick Colas warns, the most important reason for caution currently is, obviously, valuation and complacency.  U.S. stocks currently reflect, both in price level (16x current year earnings) and implied volatility (an 11 handle VIX), an economic acceleration which has yet to fully flower.  In addition, Colas adds, domestic equities look good in part simply because everything else – Europe, Japan, emerging markets, etc... - look so bad.  Wouldn't an accelerating U.S. economy spill over to other regions?  So what is lurking around the corner for the next lucky Fed head? And what about the three main memes for why the 'bull' can keep running?

This insane world was created through decades of bad decisions, believing in false prophets, choosing current consumption over sustainable long-term savings based growth, electing corruptible men who promised voters entitlements that were mathematically impossible to deliver, the disintegration of a sense of civic and community obligation and a gradual degradation of the national intelligence and character. There is a common denominator in all the bubbles created over the last century – Wall Street bankers and their puppets at the Federal Reserve. Fractional reserve banking, control of a fiat currency by a privately owned central bank, and an economy dependent upon ever increasing levels of debt are nothing more than ingredients of a Ponzi scheme that will ultimately implode and destroy the worldwide financial system. Since 1913 we have been enduring the largest fraud and embezzlement scheme in world history, but the law of diminishing returns is revealing the plot and illuminating the culprits. Bernanke and his cronies have proven themselves to be highly educated one trick pony protectors of the status quo. Bernanke will eventually roll craps. When he does, the collapse will be epic and 2008 will seem like a walk in the park.

We do not inhabit a “normal” economy. We live in a financialised world in which our banks cannot be trusted, our politicians cannot be trusted, our money cannot be trusted, and – not least thanks to ongoing spasms of QE and expectations of much more of the same – our markets cannot be trusted. At some point (though the timing is impossible to predict), asset markets that cannot be pumped artificially any higher will start moving, under the forces of inevitable gravitation, lower.

Today's broad "rewriting of history" GDP revision is set to "boost" US GDP by about 3% cumulatively (or about the size of Belgium's economy) and shave off 1-2% from US GDP. That's great. For the sake of the world, however, we hope that the rest of the developed (and less than developed) world's countries promptly follow in America's footsteps and fudge their own numbers post haste because things are rapidly getting out of hand, as the following chart conveniently reminds. Nowhere is this more so than in Japan, where as has been the case now for almost a year, Goldman Sachs, the central bank and local government (in order of decisionmaking importance) have all doubled down on their "all in" bet that the only thing that fixes recorder debt is moar recordest debt.

Earlier today, when we reported that median asking rents in the US had just hit an all time high, we had a thought: how long until the hedge funds that also double down as landlords decide to bypass the simple collection the rental cash flows, and instead collateralize the actual underlying "securities"? One look at the chart below - which compares the median asking "for sale" price in black and the median rent in red - shows why. The last time there was a great divergence (to the benefit of housing), Wall Street spawned an entire Residential Mortgage-Backed Securities industry where Paulson, Goldman willing sellers would package mortgages, often-times synthetically, slice them up in tranches of assorted riskiness, and sell them to willing idiots yield-starved buyers. As everyone knows, that particular securitization bubble ended with the bankruptcy of Lehman, the bailout of AIG and the near collapse of the financial system. As it turns out, the answer to our original question was "a few hours" because securitizations are back, baby, and this time they are scarier and riskier than ever.

Munis are the most decentralized and still the most "good old boy" part of the Capital Markets. Relationships are paramount in the municipal markets, and in non-competitive situations, who you know often trumps what you know in doing business. Municipals are a unique space. For many years people and institutions paid less attention than they should to the financial statements of municipalities. Detroit is now teaching us several lessons and you can feel the sand shifting yet again. General Obligation bonds no longer have the first call on assets. The psychology of the Municipal market is also shifting in the sand. It was once a widely held belief that the State would stand behind any large Municipal credit in its domain. Detroit is proving this to be an inaccurate observation. There was even the notion that if the Municipal credit was large and systemic enough that the Federal government might step in to help. Detroit is exemplifying that this was a second mistake in thinking. We are now learning that each Municipal credit is a stand-alone situation which is a break from the traditional thinking of days past.

While everyone's attention is focused on the Detroit bankruptcy, and just what assets the city will sell in lieu of raising a DIP loan, perhaps it is time to refocus attention to the city 300 miles west: Chicago. According to the Chicago Sun Times, Obama's former right hand man, Rahm Emanuel, closed the books on 2012 with $33.4 million in unallocated cash on hand — down from $167 million the year before — while adding to the mountain of debt piled on Chicago taxpayers, citing year-end audits. In addition to a liquidity problem, Chicago may also be quite insolvent as the city's total long-term debt soared to nearly $29 billion. That’s $10,780 for every one of the city’s nearly 2.69 million residents. More than a decade ago, the debt load was $9.6 billion or $3,338 per resident. Of course, in a world in which debt is "wealth", this is great news... at least until debt becomes "bankruptcy."

"At all times, ultimate collateral and ultimate money remain crucial reference points in modern financial markets, but the actual instruments are important only in times of crisis when promises to pay are cashed rather than offset with other promises to pay.... Our world is organized as a network of promises to buy in the event that someone else doesn’t buy. The key reason is that in today’s world so many promised payments lie in the distant future, or in another currency. As a consequence, mere guarantee of eventual par payment at maturity doesn’t do much good. On any given day, only a very small fraction of outstanding primary debt is coming due, and in a crisis the need for current cash can easily exceed it. In such a circumstance, the only way to get cash is to sell an asset, or to use the asset as collateral for borrowing."

When is the last time you got a stock tip from a cab driver or chatty not-in-the-business neighbor?  It’s probably been the better part of a decade, if not longer.  Yes, that’s probably the most bullish argument for owning stocks just now, but, as ConvergEx's Nick Colas notes, it also raises a question.  What investments are retail investors considering, exactly?  Various online tools and resources provide some answers.  From Yahoo! Finance’s analysis of number of requested price quotes last week: AAPL, BAC, TSLA, INTC and CALL.  From Google Trends: AAPL, GOOG, and YHOO.  And from one very popular online brokerage for today’s volume: AAPL, F, BRCM, BAC, and NUGT.  Whether this interest indicates a top or a crowded momentum trade is in the eye of the beholder, of course.  But in a light volume period like summer, Nick notes, tracking individual investor attention can be an important piece of the day-to-day trading puzzle.

• The Citadel-SAC connection (BBG) - just wait until the Citadel-FRBNY connection emerges
• Letter backs Yellen for Federal Reserve role (FT) - or said otherwise, the Democrats would like the Fed to rule (and monetize deficits) for ever
• Obama, Republicans gear up for bruising U.S. budget fight (Reuters)
• Up for Debate at Fed: A Sharper Easy-Money Message (WSJ)
• UBS to Pay $885 Million to Settle U.S. Mortgage Suit (BBG), Banks shiver as UBS swallows $885 million U.S. fine (Reuters)
• Japan finmin Aso: CPI shows gradual shift to inflation from deflation (Reuters)
• Japan's PM calls for high-level talks with China (Reuters)
• Holder Targets Texas in New Voting-Rights Push (WSJ)
• Another Nightmareliner incident: Probe opened as Air India Boeing Dreamliner oven overheats midair (Reuters)
• Samsung Boosts Capital Spending as High-End Phone Demand Slows (BBG)