Reality

If there was one analogy for the failing artificial Eurozone system we had not heard so far, was one comparing it to Hogwarts (thank you Harry Potter). Now, courtesy of Tullet Prebon that is no longer the case: "Albus Mario Dumbledore and Harry Constancio Potter are due to assemble next Thursday for the next episode of the sovereign Voldemort saga. It is foretold that during the press conference the headmaster will unveil his wand and deliver an almighty spell, ‘Expelliarmus Debtus’, whereupon the dreaded Troika Dementors will be vaporised disappearing into the austerity vortex, leaving the Muggles to live happily ever after."

When we presented the news about yesterday's UniCredit rights offering we said that "a UniCredit €7.5 billion new stock issue pricing at a whopping 43% discount to market price shows that fair value of actual demand for European banks is about half of where the artificially propped up price is." Sure enough the market appears to have taken testing this assumption to task, and in the past two days 30% of the entire market cap of UniCredit has been destroyed. And what makes this otherwise sad development for many people, who had previously been fooled by various governments in believing that asset values are fair and could thus rise when in reality everything has been distorted and manipulated beyond comprehension, simply hilarious is that not even a month ago UniCredit did a one for ten reverse stock split. At this rate another reverse stock split is imminent before next week is over. Which is to be expected: after all prices are determined on the margin and are a function of systemic liquidity, which in Europe no longer exists in free form. US readers be advised: discoveries such as this one are coming to the US very soon.

"I hold a deeply held view of Ron Paul as an honorable, genuine and trustworthy American statesman. In fact, I cannot really think of anyone else in the tepid cesspool of American politics today whom I could even remotely categorize as a statesman as opposed to a run of the mill politician (or ideologue as Mr. Lucas puts it). Mr. Lucas moves on to explain that to an ideologue it is current ideas that matter, while to a statesman it is certain principles that matter. He states that an ideologue’s view of the world and its inhabitants is political, while to a statesman it is historical. These simple sentences are what I believe inherently separate Ron Paul at his very core from everyone else currently running for president. This is merely what separates the man’s character from the others. This is reason enough to consider him, but not reason enough to vote for him. His ideas about liberty, war and economics also separate him from the pack and it is his strongly held principles on these subjects that in my view make him the only one capable and with enough conviction to help heal this country’s wounds, get us back on the right and moral path and foster real change as opposed to a campaign slogan."

Those attempting to pressure Iran by increasing "tensions" and thus the price of oil have it precisely backwards. The one sure way to fatally destabilize the Iranian theocracy is to adjust the demand and supply of oil so the price plummets (as it did in December 2008) to $25/barrel, and stays there for at least six months. It has been estimated that the Iranian theocracy cannot fund its bloated bureaucracies, military and its welfare state if oil falls below around $40-$45/barrel. Drop oil to $25/barrel and keep it there, and the Iranian regime will implode, along with the Chavez regime in Venezuela. Saber-rattling actually aids the Iranian regime by artificially injecting a "disruptive war" premium into the price of oil: they can make the same profits from fewer barrels of oil. The way to put them out of business is drop the price of oil and restrict their sales by whatever means are available. They will be selling fewer barrels and getting less than production costs for those barrels. With no income, the regime will face the wrath of a people who have become dependent on the State for their sustenance and subsidized fuel. How do you drop oil to $25/barrel? Easy: stop saber-rattling in the mideast and engineer a massive global recession with a side order of low-level trade war. Though you wouldn't know it from the high price of oil, the world is awash in oil; storage facilities are full, and production has actually increased a bit in North America.

There is literally no difference between Obama and a moderate Republican when it comes to the truly important policies governing the nation's insolvent finances, its predatory financial sector, its corrupt and fraudulent sickcare system or its sprawling Empire. Obama's policies have all aided and abetted existing Status Quo cartels and fiefdoms. He has changed absolutely nothing of import except further eroding civil liberties. President Obama can be charitably characterized as an ineffectual Demopublican. From those demanding more, then he can be accurately described as a well-meaning puppet of Wall Street and the rest of the Status Quo cartels and fiefdoms.

Those waiting on edge for HSBC hedge fund report #53, aka the year end edition, can now relax: here is the full list of winner and losers. Keep in mind, the Paulson HF update is as of November 30, which explains why Advantage Plus (or is that Minus) still shows it down only 48% when in reality it closed the year more than half down according to preliminary reports. Also, momo superstar JAT Capital is nowhere to be found. That said, the carnage of the year is more than evident. And to think everyone could have just bought gold and gone on a long vacation...

In his latest letter, Bill Gross, obviously for his own reasons, essentially channels Zero Hedge, and repeats everything we have been saying over the past 3 years. We'll take that as a compliment. Next thing you know he will convert the TRF into a gold-only physical fund in anticipation of the wrong-end of the "fat tail" hitting reality head on at full speed, and sending the entire house of centrally planned cards crashing down. "How many ways can you say “it’s different this time?” There’s “abnormal,” “subnormal,” “paranormal” and of course “new normal.” Mohamed El-Erian’s awakening phrase of several years past has virtually been adopted into the lexicon these days, but now it has an almost antiquated vapor to it that reflected calmer seas in 2011 as opposed to the possibility of a perfect storm in 2012. The New Normal as PIMCO and other economists would describe it was a world of muted western growth, high unemployment and relatively orderly delevering. Now we appear to be morphing into a world with much fatter tails, bordering on bimodal. It’s as if the Earth now has two moons instead of one and both are growing in size like a cancerous tumor that may threaten the financial tides, oceans and economic life as we have known it for the past half century. Welcome to 2012...For 2012, in the face of a delevering zero-bound interest rate world, investors must lower return expectations. 2–5% for stocks, bonds and commodities are expected long term returns for global financial markets that have been pushed to the zero bound, a world where substantial real price appreciation is getting close to mathematically improbable. Adjust your expectations, prepare for bimodal outcomes. It is different this time and will continue to be for a number of years. The New Normal is “Sub,” “Ab,” “Para” and then some. The financial markets and global economies are at great risk."

Is idiosyncracy the substitute for a fledgling Sovereign Bond Market?  Including our recommendations for 2012

We are always amused by technicians trying to predict what the market will do based on something that may have happened some time in the past, when in reality the only thing that matters is the distinction: "Pre-Central Planning" and "Post-Central Planning" or PCP (for both) - in other words, anything prior to 2009 is completely irrelevant when it comes to analyzing the market. Yet people continue doing it. And while the predictive pattern of such formerly "self-fulfilling prophecies" is now gone, courtesy of whatever side the Chairman wakes up on, traders habits die slowly. Here is Art Cashin with his summary of what trading patterns are relevant for the new year. That said, we remind readers that the first trading day of 2011 saw the S&P rise from 1257 and close at 1272, something which #CarbonCopy2012 seems dead set on imitating. After all, with central planning, why recreate the wheel - Brian Sack can just hit the "repeat 2011" program button and all shall be well. All the way up to a 2012 year end close at 1257.

"They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety."

When it comes to the fabled President's Working Group on Capital Markets, also known as the Plunge Protection Team, the myths about the subject are certainly far greater than any underlying reality. To be sure, vast amounts of popular folkflore has been expounded into the public arena, with most of it being shot down simply due to it assuming conspiracy theories of such vast scale that the human mind is unable to grasp the complexity, and ultimately the inverse Gordian Knot makes an appearance with the claim that vast conspiracies are largely untenable simply because it is impossible to keep a secret from so many people for so long. Yet what if the secret is not a secret at all but is fully out in the open, and is only a matter of interpretation, and contextualizing? Why just 3 years ago it would appear preposterous to allege the capital markets are a ponzi and that the Fed does everything in its power to keep stocks higher. Well, what a difference three years make: now the Chairman himself in a Washington Post OpEd has admitted that the sole gauge of Fed success is the loftiness of the Russell 2000, neither unemployment nor inflation really matter now that the Fed's third mandate has been fully whipped out. Furthermore, Keynesian economics, and the entire top echelon of the educational system have also been accurately represented as a paradigm which merely perpetuates the status quo as the alternative is the realization that the whole system is a house of cards. As for the global capital markets being nothing short of a ponzi, we merely point you to the general direction of Europe, the ECB and the continent's banks, where the monetary interplay is nothing short of the world's biggest pyramid scheme. Yet the PPT, or whatever it is informally called, does not exist? Consider further that only recently did it become known that the former SecTres Hank Paulson himself was exposed as presenting material non-public information to a bevy of Goldman arb desk diaspora hedge funds, headed by with none other than the head of the President's Working Group on Capital Markets Asset Managers committee David Mindich. So, if contrary to all the evidence that there is some vast underlying pattern, if not a conspiracy per se, one were to take the leap of faith and take the next step, where would one end up? Well, most likely looking at the Exchange Stabilization Fund, or ESF, which Eric deCarbonnel has spent so much time trying to unmask. Is it possible that the ESF, located conveniently at the nexus between US monetary policy, foreign policy and last but not least, a promoter of the interests of the US military-industrial complex, is precisely the  organization that so many have been trying to expose for years? Watch and decide for yourself.

It is always amsuing to listen to market narratives, however goal seeked they may be, when presented by market veterans such as Art Cashin, who in this case deconstructs the violent clash between reality and post-summit hype as represented by yesterday's amusing market action.

ES tumbled back down to its VWAP at the close of the day session after mounting a run back towards 1200 in the afternoon. This equity move was the second total disconnect from credit markets of the afternoon and reverted back to credit's sanity though HYG was clearly the instrument of choice (once again) for credit hedgers looking for lower cost shorts or liquid hedges. The USD was modestly higher from Friday's close and Oil rallied back this afternoon to almost perfectly match the USD shift. Gold, Silver, and Copper all lost significant ground (around 2.5%) though all were well off their early European-close-liquidation lows. TSYs rather interestingly closed near the high yields of the US day-session - though well down on the day - as 2s10s30s and Oil were the main drivers of broad risk-asset strength. CONTEXT remained notably below ES all day - maintained by the weakness in Gold, 10Y, and AUDJPY as the EURJPY ripfest into the EU close helped the risk-on crowd modestly. It was a muddled day with correlations breaking down and dramatically illiquid-looking moves as the late-day drop on very large volume suggests some sense of sanity with the uncertainty we face was priced in.

Last night we discussed the repeated regime that has occurred in equity markets over the last few days where we ramp in ES away from any other asset class (FX, credit, TSY, commodity) only to fade overnight. This morning's abrupt diminution of hope has once again caused ES to revert back to its CONTEXTual reality - trading more in line with broad risk assets for now. It appears that again and again we are seeing the buy-the-dips beta-chasing that Art Cashin so eloquently pointed out this morning - and that is not working as the overwhelming macro/systemic conditions favor risk-off.

As the market marinades in the latest confusing Bernanke Q&A aftermath, we get two very disturbing headlines. The first:

• China’s Zhu Says ‘Too Soon’ to Discuss Further EFSF Purchases
  
• While there are proposals to revamp the European Financial Stability Facility, “there’s no concrete plans yet so it’s too early to talk about further investments in these tools,” Zhu Guangyao, Vice Finance Minister, told reporters in Cannes today.

This goes hand in hand with the disaster that was the overnight news on the EFSF pulling a meager €3 billion bond auction. If you gave us Jefferies' rolodex, we could probably raise more for a bankrupt MF Global in ten minutes (kinda like what they did). Oh well, so much for Europe.

And in other news, and confirming what we have been saying over the past two weeks, namely that foreigners are dumping US bonds to shore up emergency balance sheet capital, we get the following confirmation from Dow Jones:

• IIF Sees Euro-Zone Banks Selling Govt Bonds To Meet Capital Targets

That's right: government.