Carl Icahn

As we have discussed numerous times, the dash-for-trash in US equities has been insatiable as any and every consequence of screwing up is slowly removed from capitalism (and capital markets). As Goldman's David Kostin notes, companies with weak balance sheets have outperformed peers with strong balance sheets by 49 percentage points during the past two years (89% vs. 40%) with realized volatility of just 7%. Although the trend is daunting - to say the least - Goldman believes it will continue for three reasons...

I never thought a visit to Omaha would trigger an appreciation of the role Icahn and other activist investors play in corporate America.

From 110 slides of Ackman-inspired Fannie Mae bullishness to Tudor-Jones "Central Bank Viagra", and from Jim Grant's "Buy Gazprom because it's the worst-managed company in the world" to Jeff Gundlach's housing recovery bearishness and "never seeing 1.5 million home starts ever again"... there was a little here for every bull, dick, and harry at the Ira Sohn conference. Perhaps noted behavioral psychologist said its best though: "be careful about the quality of advice you get."

Carl Icahn's brilliant "activist" plan revealed in all its glory.

"I will pursue Herbalife to the end of the earth," is the threat Bill Ackman made and the hedge fund manager acknowledges spending more than $20 million in a lobbying and media campaign against the health product company. But on the heels of his non-front-running non-insider-trading transactions in the Allergan deal, details about the Herbalife whistleblower's "deal" raise more questions about ethics. Giovanni Bohorquez has now been named as Ackman's inside-man and the $3.6 million secret deal he will receive for spilling inside information about Herbalife's actions is raising significant questions about conflicts of interest. Having flatly denied being paid, "I'm not getting any benefit," during an on-camera ABC interview, ABC now reveals that Ackman agreed to the deal after Bohorquez balked at going public because he feared his disclosures could make it difficult for him to find work at an executive level. It seems $3.6 million promptly relieved any fears of not being able to get a job.

"The current levels of investor complacency are more usually associated with late stage bull markets rather than the beginning of new ones. Of course, if you think about it, this only makes sense if you refer back to the investor psychology chart above. The point here is simple. The combined levels of bullish optimism, lack of concern about a possible market correction (don't worry the Fed has the markets back), and rising levels of leverage in markets provide the "ingredients" for a more severe market correction. However, it is important to understand that these ingredients by themselves are inert. It is because they are inert that they are quickly dismissed under the guise that 'this time is different.' Like a thermite reaction, when these relatively inert ingredients are ignited by a catalyst they will burn extremely hot. Unfortunately, there is no way to know exactly what that catalyst will be or when it will occur. The problem for individuals is that they are trapped by the combustion an unable to extract themselves in time."

The Herbalife drama - perhaps the biggest billionaire pissing contest of 2013 - just got excting again, following FT news that a criminal probe has been launched into Herbalife. "The US Department of Justice and the Federal Bureau of Investigation are investigating Herbalife, the multi-level marketing company that hedge fund manager Bill Ackman has alleged is a pyramid scheme, according to people familiar with the matter. The criminal investigation by the FBI and US attorney’s office in Manhattan raises the stakes for Herbalife, which is already facing civil inquiries from multiple government agencies that are looking into the Los Angeles-based company and its associated network of independent distributors."

• Sensitive Market Data Leaked After Government Phone Call (WSJ)
• This is a actual Bloomberg headline: China Fake Data to Skew More Export Numbers (BBG)
• This is another actual BBG headline: U.S. as Global Growth Engine Putt-Putts Instead of Purring (BBG)
• Ukraine wants to buy European gas to boost energy security (Reuters)
• JPMorgan Profit Falls 19% on Trading, Mortgage Declines (BBG)
• Record Europe Dividends Keep $2.8 Trillion From Factories (BBG)
• Why is Goldman shutting down Sigma X: SEC eyes test that may lead to shift away from 'dark pools' (Reuters)
• Ebola Outbreak Empties Hotels as West Africa Borders Closed (BBG)
• Australian PM says searchers confident of position of MH370's black boxes (Reuters)
• Gross Says El-Erian Should Explain Reason for Exit (BBG)

"Everybody loves this market," jokes a hursuit Carl Icahn fresh from his eBay exigencies, "everybody is buying this and buying that... we have a lot of hedges on." However, Icahn - who knows better than most just how one can financially engineer a company - says "there is reason to be cautious... a lot of the earnings are sort of artificial." While proclaiming that the Fed "did a great job in saving the economy," Icahn laughs that "with these low interest rates it's easy to fake earnings... and I don't think that can continue forever." Simply put, the billionaire activist investors concludes, you can't print money forever and "that there will be a major correction."

Citi's credit strategy team warns, for non-financial corporations - fundamentals have turned. Low interest rates hae helped keep debt service burdens low but, as they suggest, releveraging tends to sneak up on you. Leverage is as high as its ever been outside recession. This may not be a problem today, or tomorrow, but the leverage clock is ticking... and credit markets have no room for downside surprises (and, as we have vociferously explains, if credit spreads rise as the credit cycle 'cycles' then the underpinning for the entire buyback/dividend driven 'fudge' for stock valuations is removed)... and risks seem far higher in the US (than Europe) going forward. In the end we know this is unsustainable - the question is when (in 2007 it lasted 10 months or so...) but things change very quickly once collateral chains start to shrink. Perhaps this is why Carl iCahn called the top - because he knows the ability to re-leverage (his bread and butter trade) is over...

We all know what will eventually unfold: another collapse, this one even worse than that of 2008. Until then, the fraud and fiction will continue. Everyone with a vested interest in stocks moving up will do everything they can to perpetuate this.

• Putin Threatened With More Sanctions as Russia Out of G-8 (BBG)
• China Faces ‘Mini Crisis’ on Debt Defaults, Ex-PBOC Adviser Says (BBG)
• Don't laugh too hard: Obama to propose ending NSA bulk collection of phone records (Reuters)
• SEC Is Probing Dealings by Banks and Companies in Loan Securities (WSJ)
• Japan GPIF asset review not aimed at supporting domestic stocks (Reuters)
• Chinese families clash with police, slam Malaysia over lost plane (Reuters)
• Russian Capital Flight Surges in First Quarter, Fueled by Ukraine Crisis (WSJ)
• Democrats ditch Nate Silver after data whiz predicts dismal midterm outcome (DN)
• China’s Urbanization Loses Momentum as Growth Slows (BBG)

Sprinkled in between Herbalife promotion and eBay board decimation, CNBC's favorite crowd-pleaser Carl Icahn offered a few pearls of wisdom that the TV anchors were un-prepared for:

• *ICAHN SEES MAJOR SELL DOWN OF MARKET COMING
• *ICAHN CALLS MARKET ARTIFICIAL BECAUSE OF FED POLICY

Of course, Icahn did not specify the timing which provided just enough cover for the talking heads to confirm their "but stocks are a buy" perspective. We wonder whether the "sell-down" is as big a "no-brainer" as many of Carl's other ideas.

For the answer of which firm is responsible, and has the largest number of current and former tenants occupying the building located at 15 CPW which we profiled before, and which Bloomberg TV defines as the "world's most powerful address" - a location whose residents control nearly half a trillion in assets under management - fast forward to 3:20 in the clip below. Hint: listen for the "dog whistle."

• Possible debris off Australia a 'credible lead' for missing Malaysia jet (Reuters)
• Maldives and Afghanistan: Theories Blossom for Airliner (BBG)
• Ukraine Military Concedes on Crimea as Russia Takes Hold (BBG)
• Asia Stocks Drop on Fed; H-Share Index Enters Bear Market (BBG)
• Scientists say destructive solar blasts narrowly missed Earth in 2012 (Reuters)
• GM’s Ignition Victims Need Help From Bankruptcy Judge (BBG)
• U.S. Alleges Inside Traders Used Spycraft, Ate Evidence (WSJ)
• God Meets Profit in Obama Contraceptive Rule Court Case (BBG)