Traditional legal principles are seemingly pretty clear and straightforward on how a good faith acquisition of stolen goods is to be treated: the buyer, even though he is not criminally liable, can not acquire title to stolen property. The failed futures brokerage Sentinel Management Group lost the money of its clients in when it went into bankruptcy in 2007. According to the SEC, the firm misappropriated the funds belonging to its clients. Since then, creditors of the company have been fighting over who has title to certain assets. On the one side are the customers of Sentinel, whose funds and accounts were supposed to have been segregated from the company's assets. On the other side there is New York Mellon Bank, which lent Sentinel $312 million that were secured with collateral mainly consisting of said – allegedly 'segregated' – customer funds. The result: 'Banks that received what were essentially misappropriated goods as collateral do not have to return them to their original owners as long as they are deemed to have acted in good faith'. Legal questions aside, one thing is already certain: customers of futures brokerages can no longer have faith that their assets are in any way segregated or protected. This is yet another chink in the 'confidence armor' that has propped up the financial system to date.
With the Fed lowering interest rates and flattening the curve in an effort to squeeze any- and every-one into risk-assets and mal-investment; the sad truth of this action is that it forces a drastic unintended consequence on the growing population of people that actually care about the future. Critically, as Citi points out, lower yields require much higher rates of saving (both corporates and households) and while 10% of salary allocated to 'retirement savings' will meet its goals with a 4% return hurdle, at current low yields, the average-joe in the street will need to 'save' 25% of his income - cutting heavily into his current consumptive and discretionary iPad needs.
No commentary necessary.
Paint is drying, so what is the best way to break the monotony? Why with renewed Iran war speculation of course. Sure enough, here comes Saudi Arabia to the rescue. From Reuters: "Saudi Arabia has ordered its citizens to leave Lebanon “immediately”, the state news agency reported in an SMS alert on Wednesday. “The Saudi Arabian embassy in Lebanon calls all Saudi citizens to leave Lebanon immediately,” the alert said, without elaborating." Making an imminent Iran attack far less likely, however, is an article in Bloomberg titled "Israel Plans Iran Strike; Citizens Say Government Serious." Of course anyone expecting Israel to launch a strike with every paper in the world blasting the above title as a headline may as well buy some Las Vegas 10,000 square foot haciendas because housing has "bottomed." For now however Brent is leaning on the side of caution, and is back to all time highs in EUR terms.
Muppets only complain when the prop jobs and skimming fail to deliver fat gains to their accounts. But being a muppet is being a mark: it's the muppets who are being milked and skimmed. Being a participant in a hopelessly compromised, rigged market makes us marks because we're ultimately providing liquidity and capital for the players to skim. When the officially sanctioned intervention finally fails and the market leaks 40% of its current value, the muppets will finally understand the "outsized returns" were just a con used to entice them into playing digital 3-card monte. The game is rigged, but the greed of the player overrides his skepticism and caution. The same can be said for pension funds and all the other institutional players. Desperate for yield, they've foolishly ponied up hundreds of billions of dollars to play 3-card monte with crooked dealers and a crooked house.
Two weeks ago, PIMCO's Bill Gross stirred up a few ivory-tower academics, permabull sell-side commission-makers, and bloggers pressured by Series [X] investors to generate maximum page views when he called for the death of the cult of equities. His main point was the apparent paradox that the total return on equities can outpace GDP growth over long periods. While there has been much gnashing of teeth over this comment, Morgan Stanley has very succinctly clarified and confirmed that this is not so much a paradox as a Catch-22. The key point is that, in aggregate, investors do not typically reinvest their dividends (or coupons); and akin to Keynes' paradox of thrift, if investors actually tried this en masse then the historical returns reported in total return indices would be unachievable. So here’s the Catch-22: over the long run theoretical total returns can exceed GDP so long as investors don’t actually try to capture those returns. But if ever investors try to achieve such GDP-plus total returns, it will be impossible for returns to stay above GDP growth. Hence, equities for the short- and long-term, are essentially a Ponzi scheme - as long as everyone buys-and-holds - but if 'someone' decides (or is forced) to take-profits, equity ROE will rapidly game-theoretically collapse to GDP growth.
Nigel Farage, looking tanned and refreshed, is back and as he tells FOX Business in this brief clip "nothing has changed" from his views of Europe as the Titanic and its unelected officials dragging it down to the depths of the ocean. Citing Mario Monti specifically with his concerns over allowing politicians to 'decide' anything he notes the leader's demeanor is "We must not let democracy interfere with our great Grand Project." With European GDP negative, and group-hugs all around as Europeans are herded towards a European social state, Farage analogizes that "we are living in Noddyland" where economic reality and day-to-day life are as distant as they could be as he warns that they are becoming part of something that is increasingly resembling Communism. He dismisses the growing belief that "the state and government creates jobs" noting that "it doesn't, it destroys them!" With two wrongs (Spain ad Italy) not making a right; Farage is clear that breaking up the EU is necessary now and it is critical to recognize that "you don't get something for nothing" as Europe is increasingly de-industrialized.
The National Association of Home Builders just released it latest monthly housing market index, which rose from 35 to 37. As headlines proudly blast, this is the highest level of confidence since February 2007. The NAHB chairman was positively giddy: "From the builder’s perspective, current sales conditions, sales prospects for the next six months and traffic of prospective buyers are all better than they have been in more than five years,” said Barry Rutenberg, chairman of the National Association of Home Builders (NAHB) and a home builder from Gainesville, Fla. “While there is still much room for improvement, we have come a long way from the depths of the recession and the outlook appears to be brightening." Sadly, as the chart below proves, it doesn't take much to get the NAHB confident these days. We present the fudge free data on housing completions: not starts, not permits, completions, which is what you get on the other side of the homebuilding process once all i and t's have been dotted and crossed, because one can fudge both the start and permit metric more than Bank of Spain's X-13-ARIMA seasonal "models" can make MS' IPO track record successful. We leave it up to readers to decide just what homebuilders are so very confident about. Residual record hopium sloshing in the system notwithstanding.
Each and every day we hear, stocks are cheap - P/Es are low, money-on-the-sidelines, sentiment is contrarian-wise weak, 'it's an election year', and many other anecdotal BTFD-driving broker-based sound-bites. The truth will perhaps set you free. On both a valuation (trailing P/E and market-cap/GDP) basis and cyclical (long-term sideways trends, percentage holdings of stocks, historical election/decennial patterns, coincident-to-lagging indicators, and financials leading) basis, the fact is - the only drivers of bullish reasoning here is recent momentum, an implicit 'rationality/Bernanke put', and an implicit bias towards self-sustaining behavior by an entirely-dependent marketplace of professional commission-takers.
When one thinks US Treasurys, and demand thereof, two entities pop into mind: the Federal Reserve, which over the past 3 years has been the biggest institutional buyer of US paper, and China, which is the largest foreign holder of US TSYs. Yet over the past year something curious happened: when it comes to setting marginal demand for US Treasurys, it was neither the Fed, whose sterilized Operation Twist has kept its holdings of US Tsys relatively flat, nor China, which has actually been a major seller of US paper, that has been the dominant source of marginal demand for Uncle Sam's never to be repaid obligations. Japan.
Structural problems in state and local budgets were exacerbated by the recession and are likely to further restrain the sector’s growth for years to come. As the NY Fed notes, the last couple of years have witnessed threatened or actual defaults in a diversity of places, ranging from Jefferson County, Alabama, to Harrisburg, Pennsylvania, to Stockton, California. But do these events point to a wave of future defaults by municipal borrowers? History - at least the history that most of us know - would seem to say no. But the municipal bond market is complex and defaults happen much more frequently than most casual observers are aware. As the NY Fed points out "the untold story of municipal bonds is that default frequencies are far greater than reported by the major rating agencies" but, until recently, investors could take some comfort from the fact that many municipal bonds - both rated and unrated - carried insurance that paid investors in the event of a default. But now that bond insurers have lost their AAA ratings, they no longer play a significant role in the municipal bond market, increasing the risks associated with certain classes and certain issuers of municipal debt.
In June Foreigners Bought Fewest US Securities Since December 2011; Biggest Corporate Bond Outflow Since January 2010Submitted by Tyler Durden on 08/15/2012 09:21 -0400
The June TIC data is out, in which we find that June was not a good month for non-US Treasury purchases by foreigners. While foreign private and public sources of buying did splurge on US Treasurys in June, purchasing a total of $32.4 billion of US paper, every other category experienced a sell off, with Agencies down $604MM, Corp Equities down $4.3 billion and Corporate bonds down a whopping $22 billion: this is the second biggest corporate bond outflow on record, topped only by the $25 billion in January 2010. Overall, June saw only $5.5 billion of net inflows into US securities, the lowest of 2012, and higher only than the big December 2011 outflow of ($17.6) billion. Still despite the big repositioning out of corporates and into Treasurys in the month in which the wheels seemed set to fall off the cart, there was little impact on the corporate market. The historical purchases and sales of US securities by foreigners can be found below.
And The Downtrend Returns: Inflation Disappoints As Empire Manufacturing Posts First Sub-Zero Print Since October 2011Submitted by Tyler Durden on 08/15/2012 08:44 -0400
The X-12/13-ARIMA seasonal adjustments on today's data were not quite up to snuff as both the CPI, printing at 0.0% (or 1.4% Y/Y) on expectations of 0.2%, the biggest CPI miss since January and the Empire Manufacturing index, at -5.85 on expectations of a +7.00 print, posting the biggest miss in 14 months. Notably, the number of employees declined in August from 18.52 to 16.47, while margins got crushed as Priced Paid soared from 7.41 to 16.47 as Prices Received slide from 3.70 to 2.35. And so baffle with bullshit returns, as following several weeks of better than expected, if largely seasonally adjusted, the speculation that NEW QE may be coming back is here again. In other words, yesterdays scorching retail data was good, but today's horrible NY manufacturing miss is better. At least to the complete idiocy that the market, and its "discounting mechanism" have become. Sure enough both EURUSD and gold spike on the weak news as the ghost of Bernanke's printing press is back in the room. Finally, how CPI could be unchanged when crude alone posted a 20% increase in July, and gas prices are back to doing their vertical thing, will always remain a mystery.
Mark Grant stated yesterday on CNBC that Europe will have a “Lehman Moment” and likely a number of them. The construct is a failing enterprise as the available European capital cannot support the combined debts and as real money investors pull their capital and stop lending because of the continuing deceit. You may be able to “fool some of the people some of the time” as Abraham Lincoln so succinctly put it but you cannot fool all of the people all of the time as he humbly nod to his sage wisdom.
George Soros more than doubled his shares in the SPDR gold trust ETF. He increased his position in SPDR Gold to $137.3 million in the second quarter from $52 million previously. SEC filing for the second quarter showed Soros Fund Management more than doubled its investment in the SPDR Gold Trust from 319,550 shares to 884,400 shares at the end of June. In September 2010 (see chart), Soros called gold "the ultimate bubble" and largely dumped his stake in the ETF before gold recorded annual gains in 2010 and 2011 and rose to a nominal high of $1,920.30 per ounce in September. There was speculation at the time that he may have sold the SPDR trust in order to own far safer allocated gold bars. Another billionaire investor respected for his financial acumen is John Paulson and Paulson & Co increased its holdings by 26% by purchasing an additional 4.53 million shares of the SPDR Gold Trust to bring entire holding to 21.8 million shares. It was the first time Paulson & Co had increased its position in the SPDR Gold Trust since the first quarter of 2009, when the investment firm initially acquired 31.5 million shares. It means that Paulson's $21 billion hedge fund now has more than 44% of the company's assets allocated to gold.