The Stunning Magic Of "New Normal" Hedge Fund Leverage 11-08-13 Balyasny Asset Management via ZH

The following chart, from the Balyasny Asset Management Q3 letter to investors, show just that: the magic of hedge fund leverage in the New Normal.

Specifically, it shows that while BAM's AUM from 2010 until Q3 2013 has increased only modestly (light blue), it is the dark blue bar portion that shows just how much "purchasing power", i.e., allocation, has been deployed by the fund, thanks to the good graces of its Prime Brokers, who have allowed it expand its leverage from 100% to nearly 500%! Compare this to the peak leverage in the old normal which was roughly half: yes, that was at a time when the so-called credit bubble exploded. It has now doubled.

From BAM:

During our soft-close period over the last two years, we have doubled the size of our allocations and our balance sheet while keeping AUM roughly the same. Our plan is to accept only enough new capital to allow us to keep our assets / notional dollars allocated ratio at 1 to 5.

We find that portfolio managers on average utilize about 70-80% of their maximum allocations – so $1 of assets to $5 in notional allocated dollars typically results in our target gross leverage of 3.5-4x. We will be very disciplined with this so please let us know as early as possible if you are interested in increasing your allocation next year.

Of course, when one is levered nearly 5x, being "very disciplined" is usually a good idea.

But who would be on the hook should things turn south, and the massive leverage blows up in the face of Balyasny and its LPs? Not Balyasny of course, but the Prime Brokers who provided the fund with 5x leverage. Prime Brokers who just happen to be the same TBTF banks that were bailed out last time around, and which will have to be bailed out once again as soon as the Bernanke levitation finally ends.

But most importantly, the chart shows quite clearly that without any new equity injections in the market, the one and only source of incremental "capital" injected into risk assets is, you guessed it, debt.

TREASURIES - Finding Price Support, Yield Resistance

BofAML Warns "Treasury Bears Beware" BoAML via ZH

The reaction to the non-farm payrolls report in the US Treasury complex has the bond bears out en masse this morning. A 10-12bps jerk higher in yield is nothing to sneeze at and certainly flushed more than a few uncomfortable longs out - but BofAML's MacNeil Curry warns "treasury bears beware." The completing 5 wave advance and confluence of support between 2.738%/2.759% says further yield upside is limited. Don't be max short into these levels. There should be better levels to sell in the days ahead.

CRACK-UP BOOM - More Countries Being Forced to Resort to Printing Money

Czechs Play Koruna Hardball With Unlimited Interventions 11-08-13 Bloomberg

The Czech central bank’s return to currency interventions after 11 years heralds a push for a weaker koruna to ward off deflation and kick-start the economy.

The koruna sank 4.4 percent to 26.975 per euro yesterday, its biggest-ever drop, after the central bank sold the currency in the market. Governor Miroslav Singer pledged to keep intervening “for as long as needed” to spur inflation, setting a target of “near” 27 per euro, a level last seen in 2009. The koruna was little changed today, while its implied volatility fell to the world’s lowest, along with the Swiss franc.

Central banks from the U.S. Federal Reserve to the Bank of Japan have expanded monetary stimulus beyond interest-rate cuts as the global economy struggles to pick up five years after the onset of the global credit crisis. The Czech National Bank, which has kept interest rates at 0.05 percent for a year, is fighting off an inflation slowdown that’s followed 18 months of recession, the longest on record.

“The central bank signaled willingness to play hardball in its foreign-exchange policy,” Luis Costa, an emerging-market strategist at Citigroup Inc., said by e-mail from London. “For the moment, I believe the ‘ideal level of 27’ will be met.”

Koruna traded at 26.966 per euro by 3:59 p.m. in Prague. Investor bets on the size of the koruna’s swings against the euro in the next three months tumbled to 3.60% today from 4.97% yesterday. That is on par with the Swiss franc and the lowest among 34 currencies whose volatility is tracked by Bloomberg.

The European Central Bank lowered its benchmark rate to a record 0.25 percent yesterday, driving the euro down by the most in two years versus the dollar, and President Mario Draghi said the region risked a “prolonged period” of low inflation.

Czech consumer prices, which rose 1 percent in the 12 months through September, may decline at the beginning of 2014, according to Komercni Banka AS forecasts.

That’s worried policy makers, with some raising concerns “about the economy slipping into deflation, which the central bank should be proactive in preventing,” according to the minutes of their last rate-setting meeting.

“It’s clear to us that we are in this for a long time,” Singer told reporters about central bank koruna sales yesterday. “The question is not whether we will end it in 2014, but rather whether it’s going to be enough.”

Unlike interventions aimed at strengthening the exchange rate, which require sales of foreign currencies that can deplete foreign reserves, the Czech central bank is printing more koruna to drive down its value. The money supply increase may lead to the higher inflation rates that Singer is pursuing.

The CNB probably bought 3 billion euros ($4 billion) to 3.5 billion euros yesterday, David Sykora, chief foreign-exchange trader at CSOB AS in Prague, said in an interview with Mlada Fronta Dnes newspaper published today.

“The power is unlimited,” Guillaume Tresca, a Paris-based strategist at Credit Agricole SA, wrote by e-mail yesterday. “They can theoretically print as much koruna as they want.”

The Swiss National Bank (SNBN) set a cap of 1.20 per euro on the franc in September 2011 to curb inflows and avoid unwanted currency appreciation. The koruna has become the main topic of Czech policy deliberations because its weakening makes imports more expensive and boosts the competitiveness of exports.

The koruna has lost 9 percent against the euro since Sept. 17, 2012, the day before Singer first signaled the possibility of currency sales. This compares with a 2.3 percent loss for the Polish zloty and 4.6 percent decline for Hungary’s forint.

“It will be a fairly strict target,” Mohammed Kazmi, a London-based analyst at Royal Bank of Scotland Group Plc, wrote by e-mail yesterday. “Given the credibility of the central bank, I think the level will be respected and I don’t expect it to change in the near term.”

The central bank’s board, whose mandate is price stability, voted against the use of interventions in August and September as some members were concerned that rising import prices would further curb domestic demand after three years of government austerity policies. Singer rejected such concerns, saying a weaker currency “will obviously strengthen gross domestic product in a short period.”

With koruna sales, consumer prices will rise 2.2 percent by the fourth quarter of 2014, compared with the 1.2 percent inflation that policy makers envisaged without the currency interventions, central bank forecasts published yesterday show.

The depreciation of the koruna achieved by the central bank will boost Czech exports in koruna terms by 2 percent to 3 percent in six months, CTK newswire reported yesterday, citing Jiri Grund, head of the country’s Association of Exporters.

“The CNB decision came at the right time,” Grund told CTK. “It’s a forceful and bold step that should help Czech exporters and the whole economy.”

Speculation that a weaker koruna will boost the economy and help improve corporate earnings sent the Prague’s PX equity index up 1.3 percent yesterday, the third-best performance among 94 major indexes tracked by Bloomberg. The gauge fell 2.1 percent today, retreating from its highest since Jan. 18.

Gross domestic product will shrink 0.9 percent this year, less than the 1.5 percent contraction previously predicted, the central bank said yesterday. The economy will grow 1.5 percent in 2014, compared with an earlier 2.1 percent projection, according to its forecasts.

“This is a good buying opportunity for Czech stocks as the lower koruna should help Czech exports and therefore improve GDP growth,” Carsten Hesse and Mateusz Zawada, London-based analysts at Wood & Co., wrote in a report to clients yesterday.

CRACK-UP BOOM - Czech Republic Enters Currency Debasement Club

Czech Republic Enters Currency Debasement Club; Koruna Intervention Triggers Record Drop; "Hardball" in Pictures 11-07-13 Mish

Currency madness has spread to the Czech Republic. Central bank intervention triggered a record plunge in the Koruna vs. the Euro.

Hardball in Pictures - Koruna vs. Euro

It seems the "ideal" level of 27 was reached in a day. Of course it is preposterous to propose that anyone, especially central banks have any notion of what the "ideal" level is.

From a consumer standpoint, the more European goods Czech citizens can buy with the Koruna the better. But central banks will have none of that.

About That Eurozone Entry

Wikipedia comments on the Czech Republic Plans to Join the Eurozone.

The Czech Republic planned to adopt the euro in 2012, but its government suspended that plan in 2007. Although the country is economically well positioned to adopt the euro, there is considerable opposition to the move within the Czech Republic. According to a survey conducted in January 2011, only 22% of the Czech population was in favour of replacing the koruna with euro.

• The euro monetarists want a weaker euro vs. the dollar, the yen, and the koruna.
• The koruna monetarists want a weaker koruna vs. the euro, the dollar and the yen.
• The dollar monetarists don't much care about the euro, but they do want a lower dollar vs. the euro and the yen.

STATISM - Why Socialism and Statism ALWAYS Eventually Fail

Obama's 'Socialism' Experiment Brought Home 11-08-13 Martin Armstrong via Armstrong Economics via ZH

An economics professor at a local college made a statement that he had never failed a single student before, but had recently failed an entire class. That class had insisted that Obama’s socialism worked and that no one would be poor and no one would be rich, a great equalizer.

The professor then said, “OK, we will have an experiment in this class on Obama’s plan”.. All grades will be averaged and everyone will receive the same grade so no one will fail and no one will receive an A…. (substituting grades for dollars – something closer to home and more readily understood by all).

After the first test, the grades were averaged and everyone got a B. The students who studied hard were upset and the students who studied little were happy. As the second test rolled around, the students who studied little had studied even less and the ones who studied hard decided they wanted a free ride too so they studied little.

The second test average was a D! No one was happy. When the 3rd test rolled around, the average was an F.

As the tests proceeded, the scores never increased as bickering, blame and name-calling all resulted in hard feelings and no one would study for the benefit of anyone else.

To their great surprise, ALL FAILED and the professor told them that socialism would also ultimately fail because when the reward is great, the effort to succeed is great, but when government takes all the reward away, no one will try or want to succeed. Could not be any simpler than that.

Here are possibly the 5 key points about such an experiment:

1. You cannot legislate the poor into prosperity by legislating the wealthy out of prosperity.

2. What one person receives without working for, another person must work for without receiving.

3. The government cannot give to anybody anything that the government does not first take from somebody else.

4. You cannot multiply wealth by dividing it!

5. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that is the beginning of the end of any nation.

Or in graphical format...

CREDIT - As We Warned - Equity Follows Credit

EXCERPTED FROM: S&P Futures Plunge Most In Over 4 Months Intraday 11-07-13 Zero Hedge

Equity markets FOLLOW credit...

While attention was focused on the twitter... the fact is that the S&P 500 futures market saw its largest collapse from high to low intraday since June 24th.

While the told-you-so dance seems so inappropriate, equity markets' dump

- seemingly triggered by more than one levered JPY carry trader getting a tap on the shoulder after Draghi's surprise -

.. merely catches down to credit market's lack of exberance for the last 2 weeks (though there is still more room to drop).

• Stocks are at 12-day lows by the close
• VIX broke back above 14.00% (highest close in over 3 weeks).
• FX markets were insanely volatile with early USD strength obliterated by JPY and EUR strength in the afternoon.
• Commodities slid lower on the day
• Bonds rallied - with 30Y outperformance unwinding some of the week's steepening.
• Stocks closed on their lows with the best volume in a month.

SENTIMENT - At 3.5 Bulls to Bears is a Historic Extreme

Cognitive Dissonance For 5 Year Olds 11-06-13 Zero Hedge

CHRISTMAS SALES - May Be a Major Disappointment Accrding to VICE Index

Vice Index Suggests Limp Holiday Sales Growth 11-06-13 Zero Hedge

If ever there was a symptom of the instant gratification meme of the new normal (why wait when you can have it all now?), it is 'vice'. That is why Southbay Research's Vice Index (composed of prices paid, volume, and frequency of sales in liquor sales, gambling, and prostitution) is so worrisome, as WSJ reports, "it's signalling that consumer spending growth is about to drop and stay subdued for a few months." Southbay's Zatlin notes that measuring this kind of discretionary spending provides a window into the true state of the economy - which fits with recent macro data on retail sales (and forecasts for the holiday season as hope of the 'second-half' recovery fade quietly into next year.

Via WSJ,

Looks like it’s not going to be such a hot holiday season for liquor companies, casinos, and prostitutes – at least according to the latest reading of the “Vice Index.”

The index – a concoction from SouthBay Research’s Andrew Zatlin measures actual spending levels – yes, on vices – and uses the numbers to show where the economy is headed.

...

“It’s signalling that consumer spending growth is about to drop and stay subdued for a few months,” he wrote in a note to clients.

The index measures spending on things like prostitution, liquor sales, and gambling; it measures prices paid, the volume and frequency of sales (Mr. Zatlin doesn’t disclose exactly how he tracks these). Measuring this kind of discretionary spending, he says, provides a window into the true state of the economy.

...

The vice index seems to jibe with recent government data. The September retail sales report from the Census Bureau showed spending had slipped from August, and was up about 3% from a year ago. Along with recent reports on business spending, it all points to a pretty languid economy, and certainly not the “second-half recovery” that had been bandied about back in the spring.

CENTRAL PLANNING - Expectation of continued Monetary Accommodation has trumped Economic Fundamentals

Bernanke Has Officially Created The Bizarro Market 11-06-13 Zero Hedge

Over the past year there has been some confusion about whether Ben Bernanke has managed to not only completely break the stock market (which, if one harkens back to hallowed antiquity used to discount good or bad news in the future, and "trade" accordingly), but also invert it fully. The chart below from Guggenheim will once and for all put any such confusion to rest.

As Guggenheim's Scott Minderd points out "The 52-week correlation between S&P 500 returns and the change in the Citigroup Economic Surprise Index has plunged from 0.45 to -0.13 over the past 12 months. A negative correlation indicates that weak U.S. economic data tends to push equity prices higher, while strong economic data tends to send them lower."

What's the explanation?

In a similar manner to 2005, when the Federal Reserve raised interest rates by 200 basis points in a year, the current plunge in this correlation indicates that the expectation of continued monetary accommodation has trumped economic fundamentals to become the main factor determining the near-term outlook for U.S. equities.

In short: a broken, inverted market, driven purely and entirely by hopes of an even bigger liquidity bubble, and even more greater fools to offload to.

And that, in a nutshell, is your "market."

RISK - Markets Frothy Even to Sell-Side Bank of America

Bank Of America: "It's Getting Frothy, Man" 11-01-13 From Bank of America via ZH

When even Bank of America's Michael Hartnett has a note titled "It's getting frothy, man", and joins such other bubble-warners as JPM, Bill Gross, Larry Fink, and David Einhorn, one can be absolutely positive that the Fed will do... absolutely nothing.

From Bank of America:

It's Getting Frothy, Man!

Equity funds: 3rd straight week of big inflows ($12.4bn); YTD, equities have seen $231bn inflows versus a mere $16bn inflows to bond funds (Chart 1)

Global Flow Trading Rule: another $8-9bn of inflows to long-only equity funds over next 2 weeks would trigger a contrarian “sell” signal (Chart 2). Bullish investor flows dovetails with our Bull & Bear Index, which is on course to trigger a cautionary riskoff signal in mid-November

Crowded trades: this week investors continue to funnel money into Europe, Japan, HY and Floating-rate debt.

EVENT RISK - Volatility Ahead

Event Risk: Down But Not Out 11-03-13 Zero Hedge

The German election is over and the confrontation over the US debt ceiling has ended, so event risk should be minimal, right? Not so fast, UBS' Mike Schumacher warns - plenty of pitfalls could trip markets. Forward-looking measures of 'risk' are beginning to show some signs of less-than-exuberance reflected in all-time-highs across all US equity indices and if previous episodes of 'low-vol' are any guide, the current complacency is long in the tooth... no matter how 'top-heavy' stocks become; bloated by the flow of heads-bulls-win-tails-bears-lose ambivalence...

As @Not_Jim_Cramer recently pointed out, the VIX decline appears on borrowed time... (we recently noted, suppressing 'normal' volatility leads to "problems" down the line)

And credit markets have already begun to show 'doubts' in the short-term...

and longer-term...

As event risks remain across the globe...

Via UBS' Global Investment Research,

One caveat before we go further. We are bond guys, which means that we naturally look for blue skies to become gray. Even so, risks abound.

We begin with Europe, where news flow should continue to accelerate. The Greek debt burden remains a problem. Furthermore, Ireland probably will seek a precautionary credit line. We expect Portugal to get and use an Enhanced Conditions Credit Line. The May 2014 elections for the European Parliament could pose a test for markets. This statement may seem wild, since the Parliament has only a very indirect effect on financial markets. However, the new Parliament may well contain a significant proportion of members who are "eurosceptic". If this turns out to be the case, further steps in banking union, and toward greater European integration, could become much more difficult. It is also possible that national governments could reflect the same sentiment and become more populist, thereby hindering these processes even more.

In addition, European markets will be looking for the German Constitutional Court's blessing on the ECB's Outright Monetary Transaction policy. The Court is likely to rule in favor. However, there are risks around whether it imposes restrictions on executing the program and what form they might take.

Japan has become a major source of volatility. Its latest event risk is the consumption tax increase, which is due to occur in April. This is a “known unknown.” Still, we worry that the economy could be derailed, leaving the Bank of Japan to increase its already stupendous purchases of Japanese government bonds. Yields probably would fall, even though the 10yr rate of about 0.60% already is near an all-time low and has plunged 30bp since June 30. Although this Japan risk is quite troubling, the good news is that an economic slowdown likely will not become evident until at least June.

While Europe and Japan have challenges, we consider the US the biggest source of event risk over the next three months. We are particularly concerned about a “hat trick” of issues in late January / early February:

Fed transition. Assuming that Janet Yellen’s confirmation proceeds smoothly, the transition at the Federal Reserve will occur on February 1. US economist Drew Matus points out that a new Fed Chair typically has to deal with a bout of market volatility early in his/her tenure.

Debt ceiling. We hate to mention this horrid topic, but cannot avoid it. The ceiling has been suspended through February 7. The UBS public policy team opines that a “grand bargain” on the US budget is very unlikely, thereby making for acrimony over the debt ceiling. We suspect that virtually everyone reading this publication shares our hope that the discussions proceed more smoothly than they did this month. Nonetheless, we expect the debate to heat up in late January.

Fed tapering. Finally, the market should be abuzz over potential Fed tapering. The UBS economics team continues to look for tapering to be announced in January and begin in February. We share this view. The consensus appears to be for tapering to start in March. Regardless, by late January the market should be abuzz with speculation and repositioning around tapering.

How to play it

Our main conclusion from the discussion of risks is that implied volatility should rise over the next three months, particularly on USD assets. Investors who can transact in options have numerous alternatives. Our top choice is to buy vol on a forward basis. For instance, the investor could purchase options that expire in six months and sell two month options on the same underlying asset, such as a USD 10yr interest rate swap. A client who can only go long options should consider buying 4-6 month expiries.

Fixed income investors who do not use options still can gird themselves for rising vol. For example, we recommend avoiding bonds that are callable in three to six months. Furthermore, they should consider selling agency mortgage-backed securities. We have been negative on this sector for several months, and the potential increase in vol gives us one more reason to be skittish.

GDP GROWTH - Economic Recoveries Don't Look LIke This!

Hope(less) 11-05-13 Zero Hedge

FEDERAL RESERVE - The Policy Options Available to the Fed

Figuring Out The Fed 11-03-13 Lighthouse Investment Management's Alex Gloy,via ZH

Since 2008, the Federal Reserve has been trying one program after the other in order to kick-start the US economy. It culminated in currently buying around $1 trillion of bonds a year. But economic growth remains weak. Why does the Fed continue its ultra-lax monetary policy despite evidence it doesn't help much? The people at the Fed are not stupid, so there must be a rational explanation. This is an attempt to figure out their 'game plan'.

Via Lighthouse Investment Management's Alex Gloy,

In a debt-based economy (like ours), GDP grows only if the overall pile of debt is growing. As long debt doesn't grow faster than GDP, the system is stable. You may grow debt faster than GDP for a while (depending on your starting point), but eventually you reach a point where the whole thing becomes unstable. There is no magic number, but anything north of 100% debt-to-GDP probably makes you prone to mayhem. The US is at 100%.

Here's how debt and GDP have been growing over past periods.

From 1950-2000, GDP grew slightly faster than debt, so smooth sailing. In the 13 years since the millennium, debt grew more than twice as fast than nominal GDP. And over the past six years, the fork opened even wider. It doesn't take a genius to see the problem with the current situation.

Two elements make up nominal GDP growth: real growth (volume, green bars) and inflation (price, red bars).

For debt purposes it doesn't matter how the growth is achieved. If real growth is insufficient, you could, theoretically, make up the difference via inflation. We would currently 'need' around 10% inflation. Of course, in that case, yields on 10-year bonds wouldn't remain at under 3%. Unless the Fed declares a 'yield cap'. It could, for example, promise to buy any bonds yielding more than 3% (they have done so in the past). But that would imply a negative real return of 7% for holders of those bonds, and the Chinese and Japanese probably wouldn't keep their trillions of bonds in that case. The Fed would simply have to purchase all outstanding Treasury bonds. So this plan would probably not work.

So...

The Fed tries and tries. It might seem as if it ran out of tricks, but there are a few cards up the sleeve...

Full Lighthouse letter below...

Lighthouse - Letter to investors - 2013-11.pdf by Alexander Gloy

VALUATIONS - CAPE at PE of 24

How to Stockpick in an Overvalued Market 11-06-13 Phoenix Capital Research

The market is overpriced, to be sure. I’m gauging this on the single most important valuation metric in finance: the cyclically adjusted price-to-earnings ratio or CAPE ratio.

Generally speaking, most investors price a company based on its current Price to Earnings or P/E ratio. Essentially what you’re doing is comparing the price of the company today to its ability to produce earnings (cash).

However, corporate earnings are heavily influenced by the business cycle.

Typically the US experiences a boom and bust once every ten years or so. As such, companies will naturally have higher P/E’s at some points and lower P/E’s at other. This is based solely on the business cycle and nothing else.

CAPE adjusts for this by measuring the price of stocks against the average of ten years’ worth of earnings, adjusted for inflation. By doing this, it presents you with a clearer, more objective picture of a company’s ability to produce cash in any economic environment.

I mentioned before that CAPE is the single most important metric for long-term investors. I wasn’t saying that for impact.

Based on a study completed Vanguard, CAPE was the single best metric for measuring future stock returns. Indeed, CAPE outperformed

1. P/E ratios
2. Government Debt/ GDP
3. Dividend yield
4. The Fed Model,

…and many other metrics used by investors to predict market value.

So what is CAPE telling us today?

Today the S&P 500 has a CAPE of over 24.  This means the market as a whole is trading at 24 times its average earnings of the last ten years.

Put another way, if you bought the entire stock market today, it would take you roughly 24 years to make your money back.

That’s expensive. Indeed, the market has only been this expensive a handful of times in the last 100+ years. Every time we’ve been closer to a market top than a new bull market run.

CURRENCIES - Draghi Unintentionally Destabilizes Currency Markets

Draghi introduced still-more-easing into Europe this morning as his surprise cut created turmoil in markets. What this means tomorrow or next week is anyone's guess. What it means in a larger context is not...

Via Monty Pelerin's World blog,

1. Europe is not in good shape. Anyone who believed they were, should be disabused of such notions.

2. The forcing down of interest rates once again further exacerbates the longer-term mis-allocation of resources. Such actions may buy time, but only at the cost of greater problems down the road.

3. Macro-economics is failed witchcraft which should be apparent to anyone paying attention. Yet it will continue to be used to justify “remedial” actions out of desperation.

4. Governments around the world have only this hammer (liquidity/stimulus). They will hammer away even though that cannot solve the problem(s).

5. Liquidity and stimulus will not end in the US or Europe until markets end it. The market ending will be either an implosion or a crack-up boom. Either is possible at this stage.

6. Governments are in full pretend mode. They have no control over the situation other than to fool people into believing that things are getting better.

7. The policies employed by governments ensure the destruction of economies and themselves. Governments spiral downward toward defaults and bankruptcy that will take economies with them.

8. Currencies are being destroyed in terms of purchasing power.

9. Nothing is being done to correct economic problems. Politics has deemed true remedies too severe. They are off the table, replaced by extend and pretend actions.

10. The shelf-life of this government fraud is limited. Economic Armageddon is coming.

Charts from Bloomberg via Zero Hedge

No one has any good answers but it seems carry is being unwound in a hurry as US momos are hammered. Whether Draghi's move shocked EURJPY riders enough to spark some major anxiety is unclear but Japanese stocks are now down over 440 points from early highs (to one month lows), US equities at their lows, and USDJPY blown back below 98.00.

GORDONTLONG.COM ANNOTATIONS BELOW

Chart as of business close 11/07/13 after Draghi announced an ECB 0.25 crate cut

 

YEN INDEX

Chart as of business close 11/07/13 after Draghi announced an ECB 0.25 crate cut

Larger Picture

IPO SURGE - Fed Balance Sheet Correlation

How High Will TWTR Stock Go? Ask Mr. Fed Chair(wo)man 11-07-13 Zero Hedge

Because it's not about valuations.. and it's not about rational expectations... we present the only metric necessary to project TWTR's price into the oh-so-predictable future...

Correlation does not imply causation, but it sure as hell provides a hint.

AN OXYMORON

BUBBLE - The Current Internet Stock Bubble

14 Crazy Facts About The Current Internet Stock Bubble 11-06-13- Michael Snyder of The Economic Collapse blog,

Shouldn't Internet companies actually "make a profit" at some point before being considered worth billions of dollars?  A lot of investors laugh when they look back at the foolishness of the "Dotcom bubble" of the late 1990s, but the tech bubble that is inflating right in front of our eyes today is actually far worse. 

For example, what would you say if I told you that a seven-year-old company that has a long history of not being profitable and that actually lost 64 million dollars last quarter is worth more than 13 billion dollars? 

You would probably say that I was insane, but the company that I have just described is Twitter and Wall Street is going crazy for it right now.  Please don't get me wrong - I actually love Twitter.  On my Twitter account I have sent out thousands of "tweets".  Twitter is a lot of fun, and it has had a huge impact on the entire planet.  But is it worth 13 billion dollars?  Of course not.

When it comes to the Internet, what is hot today will probably not be hot tomorrow.

Do you remember MySpace?

At one time, MySpace was considered to be the undisputed king of social media.  But then something better came along (Facebook) and killed it.

It is important to keep in mind that Facebook did not even exist ten years ago.  Yes, almost everybody is using it today, but will everybody still be using it a decade from now?

Maybe.

But the way that the financial markets are valuing these firms can only be justified if they are going to make absolutely massive profits for many decades to come.

Will Twitter eventually make a little bit of money?

Probably, as long as they get their act together.

In fact, Twitter should be making significant amounts of money right now if it was being run correctly.

But will Twitter ever make 13 billion dollars?

No, that simply is not going to happen.  But that is what Wall Street says that Twitter is worth.

The utter foolishness that we are witnessing on Wall Street right now is so similar to what we saw back in the late 1990s.  It is almost as if we have learned nothing from our past mistakes.

These days I keep having flashbacks of the Pets.com sock puppet.  For those too young to remember, the following is a brief summary from Investopedia about what happened to Pets.com...

It's impossible to think of the first Internet era without thinking of the Pets.com sock puppet. He was everywhere and was nearly as well-known as the Geico gecko is today.

That familiarity, in part, persuaded many investors to lay down money in the company's February 2000 IPO (which was backed by Amazon.com). Pets.com raised $82.5 million – but nine months later it folded, due to major recurring losses. Part of the reason for that was aggressive advertising, but the company also lost money on virtually every item it sold. In the third quarter of 2000, Pets.com reported negative gross margins of $277,000. (The second quarter had seen a $1.7 million margin loss.) That same quarter (its last full quarter as an operating entity), the company lost $21.7 million on $9.4 million in revenue.

As for the puppet, he went on to shill for BarNone, which helps people with bad credit histories get car loans. He's still there today, front and center on that website.

Everyone loves to laugh at the poor little sock puppet, but the truth is that the tech bubble that is inflating right now is far worse than the Dotcom bubble of the late 1990s.  The following are 14 facts about the current tech bubble that will blow your mind...

#1 In just a few days, the Twitter IPO is expected to raise close to 2 billion dollars even though Twitter actually lost 64.6 million dollars last quarter and has a long history of not being profitable.

#2 It is being projected that after the IPO Twitter could have a market valuation of more than 13 billion dollars.

#3 Twitter is not expected to make a profit until 2015 at the earliest.

#4 According to CNBC, Pinterest is currently valued at 3.8 billion dollars even though it has never earned a profit.

#5 Yahoo paid more than a billion dollars for Tumblr even though Tumblr's revenues are so small that Yahoo is not even required to report them on financial statements.

#6 Snapchat, an Internet service that allows people to send out messages that "self-destruct", is supposedly worth 4 billion dollars.  But it actually has zero revenue coming in, and many believe that it is essentially worthless as a money making enterprise.  For one extensive analysis by a tech blogger, please see this article.

#7 The stock of Rocket Fuel, an online advertising company, is trading at about 60 dollars a share and it has a market valuation of about 2 billion dollars even though it has never made a profit.

#8 The stock of local business review website Yelp is up 241 percent this year even though it has never earned a quarterly profit.

#9 Fab.com just raised 165 million dollars from investors even though it recently laid off 44o employees.

#10 LinkedIn stock has risen in price by 136 percent since the 2011 IPO, and it is now supposedly worth more than 18 billion dollars.

#11 The head of engineering at Twitter, Chris Fry, got a 10.3 million dollar pay package when he joined Twitter last year.

#12 Facebook's VP of engineering, Mike Schroepfer, earned 24.4 million dollars in 2011.

#13 Office rents in San Francisco (where many of these tech companies are based) are now 23 percent higher than they were at the peak of the real estate market in 2008.

#14 Facebook stock is up close to 140 percent over the past 12 months and the company is now worth more than 120 billion dollars.

And I am certainly not the only one that is concerned that we are repeating the mistakes of the late 1990s...

“When you look at valuations and look at the lack of earnings and revenue, it seems to me much like the dot-com bubble,” said Matt McCormick, a money manager at Cincinnati-based Bahl & Gaynor Inc. who helps oversee $10.2 billion. “This market looks a little frothy and Twitter is the personification of a risky trade.”

In fact, as the Wall Street Journal recently noted, we have seen some of these tech stocks crash more than once during the Internet age...

"It's fascinating to me that today's mini-mania includes shares of Amazon, Netflix and Priceline that have previously peaked and crashed before—in some cases they've peaked and crashed twice before," says Darren Pollock, portfolio manager at Cheviot Value Management. "Stocks like these have again captured the imagination of speculators. We're skeptical that there is enough underlying intrinsic value to many of the highfliers to support today's prices."

So how long will it be until the current tech bubble implodes?

RISK - Europe, China & US Housing All Showing Worrying Technical Signs

The Three Trends Investors Need to Be Aware Of 11-05-13 Phoenix Capital Research

1)   EUROPE is not fixed. The EU just announced record high unemployment with unemployment numbers rising nearly one million thus far in 2013. Greece, which was hoping to increase taxes or grow its way out its debt problems has just revealed that over 500,000 companies cannot pay their taxes (up from 182,000 last month). So much for the “Europe is fixed” theme.

We believe the crisis will re-emerge later in 2013 or early 2014. The key item to watch is the German Dax. Whenever it comes back to test the upper trendline in the chart below, things will start getting messy again.

2)   CHINA is engaging in the same taper/no-taper verbal interventions as the US. The Chinese premiere warned against loose monetary policy last night and China’s market dropped.

The People’s has a major problem on its hands (several actually). The primary one pertains to inflation. China has flooded its financial system with credit and easy money in ways that Ben Bernanke never dreamed of.

As a result of this inflation is rising, which leads to wage strikes, which erases profit differentials between China and other manufacturing centers, which leads to manufacturers pulling out of China, which results in a weaker Chinese economy, which results in the need for more credit to sustain growth and finance more projects.

This has resulted in a sideways Chinese stock market with every new flood of liquidity kicking off rallies and every talk or taper or tightening causing corrections. At some point this will break and we’ll either collapse or skyrocket depending on whether we see a debt deflationary collapse or a debt deflationary collapse accommodated by rampant monetization which would result in a  Zimbabwe-esque stock market rally.

3)  RESIDENTIAL REAL ESTATE: In the US, the housing market is definitively in a bubble. And it is once again popping.

Over 50% of all home purchases are cash only. In California, the amount of median income needed to buy a home is virtually identical to the Bubble Years of 2005-2006.

Mortgage applications are plunging and sales are stalling (we’ve been flat for two months but are down 27% since June). Be aware of this. Homebuilder stocks seem to be sensing something is amiss. We’ve been moving sideways since the peak in May 2013.

These are the trends to be away of.

CREDIT MARKETS

Continue to Send Warning Signals

EARNINGS - Can Historically Be Expected to Grow at a 2 1/4% CAGR on an Inflation Adjusted Basis

Chart of the Day 11-06-13

With third-quarter earnings largely in the books (over 78% of S&P 500 corporations have reported), today's chart provides some long-term perspective to the current earnings environment by focusing on 12-month, as reported S&P 500 earnings. Today's chart illustrates how earnings declined over 92% from its Q3 2007 peak to Q1 2009 low which brought inflation-adjusted earnings to near Great Depression lows. Since its Q1 2009 low, S&P 500 earnings have surged to a level that was not that far below its credit bubble peak. After the surge ended in Q4 2011, inflation-adjusted earnings stagnated. Over the past two quarters, however, corporate earnings have picked up significantly enough to where inflation-adjusted S&P 500 earnings are now beginning to challenge all-time record highs.

Annotations by GordonTLong.com

CASHFLOW - Leads Earnings Reductions

Show Me The Lack Of Money: Global Corporate Cash Flow Slides To 2009 Levels 11-03-13 Zero Hedge

The last time we looked at global corporate cash flow and capex as a percentage of G4 (US, UK, Europe and Japan) things were bad. Two quarters later, things have gotten much worse, with that purest proxy of true growth, or lack thereof, corporate cash flow (and not fudged, adjusted, normalized, pro forma earnings), sliding yet again tracking the ongoing collapse in capex, and now down to levels last seen during 2009, and what's worse going further back, all the way back to 2003 levels. In other words, even when taking into account the tens of trillions of liquidity injections by global central banks to prop up capital markets, the flow through to actual corporate cash flow has been non-existent, and the entire past decade is now a scratch despite the global asset price bubble rising to unprecedented new heights.

As for global CapEx which may (or may not) have bottomed at a % of GDP level not seen since 2002-2004, who needs organic growth when you have stock buybacks and dividends?

And just like last time, as we explained in early 2012, it is still the Fed's fault.

GordonTLong.com Annotations

INTRINSIC ENTERPRISE VALUE

= Discounted Free Cash Flow = In Trouble

STATISM - Stand Together Now Or You Will End Up Facing the Police State Alone

Stand Together Now Or You Will End Up Facing the Police State Alone …11-04-13 George Washington via ZH

Preface: German pastor Martin Niemöller initially supported Hitler. But he later opposed him, and was imprisoned in the Dachau concentration camp for years.

Niemöller learned the hard way that keep your head down doesn’t keep one out of trouble … in the long run, it increases the danger to all of us.

Niemöller wrote a brilliant poem – First They Came – about the manner in which Germans allowed Nazi abuses by failing to protest the abuse of “others” … first gypsies, gays, communists, and Jews, then Catholics … and eventually everyone.

This is my modern interpretation of Niemöller’s poem …

First they tortured a U.S. citizen and gang member …
I remained silent;
I wasn’t a criminal

Then they tortured a U.S. citizen, whistleblower and navy veteran …
I remained silent;
I wasn’t a whistleblower

Then they locked up an attorney for representing accused criminals …
I remained silent;
I wasn’t a defense attorney

Then they arrested a young father walking with his son simply because he told Dick Cheney that he disagreed with his policies …
I remained silent;
I’ve never talked to an important politician

Then they said an entertainer should be killed because she questioned the government’s version of an important historical event …
I remained silent;
I wasn’t an entertainer

Then they arrested people for demanding that Congress hold the President to the Constitution …
I did not speak out;
I’ve never protested in Washington

Then they arrested a man for holding a sign …
I held my tongue;
I’ve never held that kind of sign

Then they broke a minister’s leg because he wanted to speak at a public event …
I said nothing;
I wasn’t a religious leader

Then they shot a student with a taser gun and arrested him for asking a question of a politician at a public event …
I remained silent;
I wasn’t a student

Then they started labeling virtually every innocent and normal behavior as marking Americans as “potential terrorists” …
I remained silent;
I didn’t want to be called a terrorist

Then they threw political dissenters in psychiatric wards …
I remained silent;
I didn’t want to be seen as crazy

Then they declared that they could label U.S. citizens living on U.S. soil as “unlawful enemy combatants” and imprison them indefinitely without access to any attorney …
I remained silent;
I didn’t want to be labeled an enemy

Then they assassinated an American citizen without any court trial
And they killed his son because he should have had a “far more responsible father” …
I remained silent;
I live on American soil

Then they declared that they could assassinate U.S. citizens living on U.S. soil without any due process of law (update) …
I remained silent;
I didn’t want to be on the list

Then they forced down the airplane carrying the president of a sovereign nation, because they were looking for a whistleblower
I remained silent;
I’m not a foreign leader

Then they called for the founder of an independent publisher to be killed by drone
I remained silent;
I don’t want to worry about drone strikes against me

Then they started spying on all Americans, even though top experts say that doesn’t protect us from terrorism
I remained silent;
I didn’t want to call even more attention to myself from the spies

Then they charged the partner of an investigative journalist with terrorism for transporting whistleblowing documents to the journalist regarding illegal NSA spying
I remained silent;
My wife isn’t a journalist

When they came for me,
Everyone was silent;
there was no one left to speak out.

Postscript: I originally wrote this poem in 2007. I have updated it with additional verses as current events have unfolded.

Bonus: 

Legal Expert: “Under [the Government's] Definition, The Pentagon Papers Could Be Treated As The Same Act As The 9-11 Bombings”