8.5%

The epic farce that is the opaque balance sheets of European banks, sovereigns, NCBs, and the ECB, continues to occur under our very eyes. Only when one sniffs below the headlines is the truth exposed with no apology or recognition of 'cheating' anywhere. To wit, following November's farcical over-payment on collateral by the ECB to Spanish banks (that was quietly brushed under the carpet by Draghi et al.), Germany's Die Welt am Sonntag has found that the Bank of France overpaid up to EUR550mm ($720mm) on its short-term paper financing to six French and Italian banks. The reason - incorrect evaluation of the crappy collateral (i.e. the NCB not taking a big enough haircut for risk purposes) on 113 separate occasions. The problem lies in the increasingly poor quality of collateral the CBs are willing to accept (and the illiquidity of the underlying markets) - as higher quality collateral disappears; which leaves the central bankers clearly out of depth when it comes to 'risk management', no matter how many times Draghi tells us this week.

The chapter on robosigning, i.e., Fraudclosure, is now closed with a $10 billion wristslap on US banks, of which a whopping $3.3 billion in the form of direct cash and $5.2 billion in "other assistance." The banks who are now absolved from any and all Linda Green transgressions in the past include: Aurora, Bank of America, Citibank, JPMorgan Chase, MetLife Bank, PNC, Sovereign, SunTrust, U.S. Bank, and Wells Fargo. And so, banks can resume to resell properties with mortgages on which the original lien may or may not have been lost in the sands of time.

2012 is a year most asset managers would like to forget. With the S&P returning 16% and Russell 2000 up 16.3%, on nothing but multiple expansion in a world where risk has been eliminated despite persistently declining revenues and cash flows, a whopping 88% of hedge funds, as well as some 65% of large-cap core, 80% of large cap value, and 67% of small-cap mutual funds underperformed the market, according to Goldman's David Kostin. The ongoing absolute outperformance of mutual funds over their 2 and 20 fee sucking hedge fund peers is notable, as this is the second or perhaps even third year in a row it has happened. And while the usual excuse that hedge funds are not supposed to beat the market but a benchmark, and generally protect capital from downside risk is valid, it is irrelevant if any downside risk (see ongoing rout in VIX and net position in the VIX futures COT update) is now actively managed by central banks both directly and indirectly, their HF LPs no longer see the world in that way. In fact as Bloomberg Market's February issue summarizes, some 635 hedge funds closed in 2012, 8.5% than a year earlier, despite a far stronger year for the general indices. The reason: LPs and MPs have simply had enough of holding on to underperformers and get swept up in the momentum of performance chasing, and the result is redemption requests into funds who may have had a positive benchmark year, but underperform relative to the S&P for two or more years, which nowadays is the vast majority of funds.

Peer-to-Peer Lending and Crowd-Funding Have the Power to Change Finance

In May Of 2010, I published a series of reader contributions on the cruise line industry as well some proprietary research on a particular company in said industry - Royal Caribbean Cruise Lines. The consistent, globally synchronized flood of money totally distorted market pricing and risk in public equities - thus often distorted practically applicability of hard core fundamental and forensic research.

While the market will look with some last trace of hope to Obama's return from Hawaii to D.C. today, the reality is that even the mainstream media, which had so far gotten everything about the cliff spectacularly wrong (proving that sample polling and actual "predicting" are two very different things), is waking up and smelling the coffee. As Politico reports, "nearly all the major players in the fiscal cliff negotiations are starting to agree on one thing: A deal is virtually impossible before the New Year. Unlike the bank bailout in 2008, the tax deal in 2010 and the debt ceiling in 2011, the Senate almost certainly won’t swoop in and help sidestep a potential economic calamity, senior officials in both parties predicted on Wednesday. Hopes of a grand-bargain — to shave trillions of dollars off the deficit by cutting entitlement programs and raising revenue — are shattered. House Republicans already failed to pass their “Plan B” proposal. And now aides and senators say the White House’s smaller, fall-back plan floated last week is a non-starter among Republicans in Senate — much less the House. On top of that, the Treasury Department announced Wednesday that the nation would hit the debt limit on Dec. 31, and would then have to take “extraordinary measures” to avoid exhausting the government’s borrowing limit in the New Year."

What a year 2012 has been!  The mainstream media continues to tell us what a “great job” the Obama administration and the Federal Reserve are doing of managing the economy, but meanwhile things just continue to get even worse for the poor and the middle class. Right now we are living in a bubble of debt-fueled false prosperity that allows us to continue to consume far more wealth than we produce, but when that bubble bursts we are going to experience the most painful economic “adjustment” that America has ever gone through.  We need to be able to explain to our fellow Americans what is coming, why it is coming and what needs to be done.  Hopefully the crazy economic numbers that we have included in this article will be shocking enough to wake some people up.

• Scope of Sandy's devastation widens, death toll spirals (Reuters)
• On Staten Island, cries for help replaced by a loss for words (Reuters)
• China responds to Japan’s provocation (FT)
• Japan governments open to compromise to avoid “fiscal cliff” (Reuters)
• It's Global Warming, Stupid (Businessweek)
• Sharps says there is "Material Doubt" about its ability to survive (Bloomberg)
• Thomson Reuters operating profit slips, trading faces pressure (Reuters)
• Germany's Schaeuble says debt reduction is global task (Reuters)
• The Luxury Repo Men (Businessweek)
• Deutsche Bank Faces Top Surcharge as FSB Shuffles Tiers (Bloomberg)
• Storm over ‘Lagarde list’ intensifies (FT)
• Greek, European Officials Dispute Budget Reprieve (WSJ)
• Rivals part ways over economy (FT)

After an almost uninterrupted period of decline over the last few years, US home prices now have some positive momentum. For one, the S&P/Case-Shiller index of property values in 20 cities has seen its highest increase in more than two years. In addition, JP Morgan CEO Jamie Dimon recently stated that his bank was seeing a surge in mortgage applications. And perhaps most importantly, the National Association of Realtors has reported that the nation’s inventory of homes on the market has dropped to its lowest level since March 2006, while the median home price is 11.3% higher than a year ago. These are definitely good signs for housing. But remember, nothing goes up or down in a straight line. Just like a stock market that suffers a serious crash, housing has been due for an upward correction. But it is a false premise to conflate ‘rebound’ with full blown ‘recovery’. The market could just as easily improve, then decline once again in a few months’ time. Positive data is great, but doesn’t necessarily portend long-term growth.

That's another $190.1 Bn available to spend on IPad Minis and IPhone 5s in the Appleconomy!

Puh… Why don’t we just wait for Apple? They might pitch a maxi iPhone 6? Or so…

Otherwise, rather Bad Karma day.

Flat start, bullish morning, refreshing afternoon. Nothing concrete or fundamental, so it’s a spiritual thing.

Markets were in sleep mode for most of the session, ahead of the BoE monetary policy decision, as well as the ECB’s press conference where the President is unlikely to outline any new measures and instead reiterate that the ECB stands ready to do whatever is necessary. The BoE held both their rates and asset purchase target unchanged, however it is widely expected that the central bank will boost the facility by another GBP 50bln in November. Today’s supply from both Spain and France was easily absorbed by the market, both were supported by the recent decline in bond yields. Going forward, apart from digesting comments from Draghi, market participants will get to see the release of the latest weekly jobs report, durables revisions and the minutes from the FOMC.

Yesterday we brought you the news that US debt quietly soared by $90 billion overnight to celebrate the new fiscal year end, reaching $16.2 trillion and sending total US debt to GDP to 103%. Needless to say, this comes at an exciting time, with the first Wall Street muppet presidential debate in about 12 hours, where the US debt crisis will be a front and center topic because in about 2 months, the US debt ceiling will again be breached adding to the Fiscal Cliff fiasco, resulting in a flashback to August 2011 when the market had to tumble by nearly 20% for Congress to get the hint that first and foremost its job is to make sure the money on Wall Street keeps flowing, all else secondary. And while it has become fashionable to say that US debt rose by this much under that president, the truth is that the Presidency is merely one of three institutions that are responsible for the shape of the US debt-to-GDP line (which is now going from the lower left to the upper right by default). The other two are, of course, Congress and the Senate. Luckily, to simply things substantially, we have a handy graphic from today's Bloomberg Brief which conveniently plots not only the political affiliation of the presidency, but of the House and Senate, in the chronology of the US debt crisis.

If there is one dominant consensus in the financial sphere, it is that the Federal Reserve's $85 billion/month bond-and-mortgage-buying "quantitative easing" will inevitably send stocks higher. The general idea is that the Fed buys the mortgage-backed securities (MBS) and Treasury bonds from the banks, which turn around and dump the cash into "risk on" assets like equities (stocks). This consensus can be summarized in the time-worn phrase, "Don't fight the Fed." This near-universal confidence in a QE-goosed stock market is reflected in the low level of volatility (the VIX) and other signs of complacency such as relatively few buyers of put options, which are viewed as "insurance" against a decline in stocks. The usual sentiment readings are bullish as well.

But what if QE fails to send stocks higher? Is such a thing even possible? Yes, it does seem "impossible" in a market as rigged and centrally managed as this one, but there are a handful of reasons why QE might not unleash a flood of cash into "risk on" assets every month from now until Doomsday