An Upside-Down World

Earlier this week the market flashed-crashed on a fake tweet from a hacked AP account.  When the word got out that the tweet was a fake, the market bounced back to its pre-tweet level.  During the round-trip the market moved a total of $400 billion.  A couple of things…

·          When did we start trading on tweets?  I must have missed that meeting.

·          Why do we continue to allow the high frequency traders to remove all liquidity from the market in a matter of seconds? (Check out for a great pictorial.)

·          How did it come to pass in such a short period of time that social media is actually being relied upon for ANYTHING?  Do the words “Manti Te’o” ring a bell?  Or how about that girl in NJ who faked her own kidnapping causing 34, 000 people to retweet her “tweet for help?”

Earlier today it was released that numerous central banks around the world are stepping up their purchases of equities using their reserves.  This was generally received as a good idea.   The Fed is prohibited from buying stocks, but Japan’s central bank isn’t.  So…  a wink and a nod to Abe about the JPY devaluation and voila’ – the JCB is down for doubling its ETF exposure to 3.5 trillion yen.  Israel has been in the game since last fall.

·         This is a good thing?  Banks diversifying their reserves into a stock market that is now up more than 100% since March 2009?  That seems as crazy as yelling “Movie!” in a crowded Firehouse.

It was reported this morning that Spain’s youth unemployment has risen to 57%.  The European Stoxx 600 closed the day up 0.76%

And now for the clincher.

I received an email today from a marketer who was trying to sell me on his firm’s option trading acumen.  Yesterday, I rejected the idea.  He is now requesting that I send him $500/hour for each of the four hours he spent trying to get our business. As one of my partners said, “we should charge them for wasting the last month of our lives with them and receiving no value.”

You just can’t make this stuff up.  – LL


I Still Can’t Get No Satisfaction

As a follow-up to my previous blog post (and in keeping with the theme of questions asked by my clients), I was recently queried the following:

“Why do you seem consistently filled with doom and gloom?”

I would have felt a little better if the question ended with “doom and gloom in the financial markets.”  I’ll assume that was the context of the question; if for no other reason than to soothe my ego!    Notwithstanding that, the short answer is that, against the backdrop of facts, I try my best to use reason instead of hope.

Let me take a few minutes to share our macro view, and it may help explain why our investment process has led us to where we are today.

In the big picture, the banking crisis of 2008 was never resolved.  The crisis was, as Kyle Bass put it, “smothered by the full faith and credit of rich Western Governments.”  What was already dangerously high public debt became even higher as bank debt was transferred to the public.  Compound that with the fact that debt accumulation was accelerating in reaction to the financial crisis and you are left with what we’re now seeing in Europe and potentially here in the US.

Anyone watching the European crisis has to be getting the sense that pain can only be delayed; not avoided.  Austerity cuts reduce public deficits, but they also crimp economic growth.  As we watch the race between increasing stimulus and debt, and that stimulus ultimately translating into meaningful economic growth, we are doubtful that growth will arrive quickly and materially enough before most of Europe’s debt reaches a tipping point.

On Monday, Spain was forced into a state bailout of its third largest bank, Bankia.  This represents a 180 degree reversal of Spanish policy and will cost between 7 and 10 billion Euros.  For those keeping track of post-crisis acronyms (TARP, LTRO, etc.) it will provide you the opportunity to add another to your list:  “COCO” — meaning contingent convertible bonds – the vehicle that will be used to inject capital into Bankia.

But Europe may not be the initial catalyst for Crisis Part II.  Hugh Hendry lays out a pretty cogent argument about why China may be the epicenter of the next pullback.  Briefly (and I’m happy to forward the full article to anyone who would like a copy), the argument goes like this:

  •  China’s massive currency manipulation punished its bank savers, so the citizens went on a home-buying spree figuring that homes were an appreciating asset.
  • The scale of China’s housing bubble dwarfs that of the pre-crisis US bubble
  • There are trillions of dollars of loans from underground creditors, who do not have rigorous (or any) underwriting standards.
  • China is aware of this, and to curtail the activity has been handing out death sentences to some of the underground lenders.  If this sounds too unbelievable (as I am occasionally prone to hyperbole), Google “Wu Ying.”
  • China’s government has spent so much money boondoggling unnecessary infrastructure under the assumption that exports will cover the costs; a global economic slowdown will crush their balance sheet.

Then Japan…

Japan has its own set of problems from awful corporate balance sheets to unbelievably dilutive corporate actions, to lousy demographics, to linkage to China’s growth.  We see no reprieve for the beleaguered Japanese stock market.

As for the US, reasons for optimism include the economic growth likely to be brought on by new oil and gas development projects.  You only have to look at North Dakota to get a sense of how powerful this can be.  The US is also experiencing record corporate profitability.  Earnings, driven by productivity gains, have been nothing short of stunning.  Yet, you can only increase productivity and maintain record margins for so long.  As the belt-tightening reaches its peak, earnings growth will no longer have that tailwind.  Further, top line growth will likely be hampered by a contracting global economy.  We also have a Presidential election coming up that will have significant tax and healthcare implications.  At best, we rate US stocks as a neutral.  But, its stocks are being treated like a strong buy on a relative basis when compared to bonds, cash, Europe, etc.

Finally, across the globe we are witnessing social unrest of varying degrees.  From the Arab Spring, to Greece’s anti-austerity riots, to the UK’s tuition protests, to Occupy Wall Street, the populous is becoming increasingly agitated.    Socialist and far right political ideology is gaining strength in Europe – France and Greece in particular.  The French just elected only their second socialist president since Mitterrand, and Greece’s neo-Nazi (Golden Dawn) party won 20 seats in Parliament by garnering 7% of the popular vote in last Sunday’s election.  Wealth disparity in the US is at record levels.  Unemployment in Spain exceeds 24%.  The list could go on and on, but you get the gist.

In an environment characterized by global fiscal distress, dangerous global monetary expansion, social unrest, and political upheaval, I find it difficult to hit the street with bullish optimism.

I look forward to the day when these blog posts are about how bright the future looks.  And I’m sure that day will come.  But right now, every developed country in the world has their pedal to the monetary metal yet has only managed to slow the bleeding.  If that is the best result that all out, globally-coordinated government action can deliver, it begs the question as to just how bad the underlying problem is.

Friday’s Random Thoughts

Re-visiting the Robots

Yesterday I tweeted (or twittered, or whatever) an article from the Financial Times titled “Real Investors Eclipsed by Fast Trading.”  It was later pointed out to me (by both or our followers!) that the article could only be opened by those who were registered with the Financial Times.  So, in order to right that wrong, I thought I’d put a couple of bullet points from the article in the blog:

  • Trading by “real” investors (defined as buy and sell orders from mutual funds, hedge funds, pensions and brokerages) is taking up the smallest share of US stock market volumes in over a decade.  Source:  Morgan Stanley’s Quantitative and Derivative Strategies group.
  • “Real money” trades account for only 16% of buying volume and 13% of selling volume
  • The takeaway, by the authors of the study, is this:  “Matching of ‘real’ buyers and sellers is more challenging in a market where there are fewer of them.”

 Let’s just hope the bots don’t begin to gain a sense of self.  From what I’ve heard, that would be bad.


I really don’t have anything to say about Apple.  It’s just that there is a new law stating that if you’re going to publish, speak, or give hand signals regarding anything about investing, you have to mention Apple.  I think this puts me in compliance.


With the European crisis taking up the bulk of the international headlines, the Bank of Japan has quietly decided to add another 5 – 10 trillion Yen to their asset-purchasing program.  This is in addition to the 65 trillion Yen already in the program.  With this round of quantitative easing, the BOJ re-asserts itself as the central bank with the biggest balance sheet as a percentage of GDP in the world.  Congratulations guys!

With the horrible demographics in Japan, growing their way out of the crisis seems unlikely.  This is something worth watching.


  • Spain’s unemployment rate is now at 24.4%.
  • S&P has cut Spain’s credit rating by two notches on Thursday, setting it at BBB+
  • Spain’s foreign minister Jose’ Garcia-Margallo says, “Spain is undergoing a crisis of enormous proportions.”
  • In France, it appears that socialist Presidential candidate Francois Hollande has a pretty good shot at winning the run-off elections next Sunday.    His platform includes dumping the austerity program, increasing government spending and not ratifying the new European fiscal treaty.  That should do wonders in reducing France’s debt strain.
  • For the second time in two months, Romania’s government has fallen.  This morning, in the wake of the continued collapse of their currency (leu), a vote of no confidence meant that Mihai Ungureanu was getting the boot.  Austerity takes another victim.  As a result, the IMF has decided to not send Romania it’s expected 5 billion Euro aid package until a new government is in place.
  • In the Netherlands, the government quit on April 23, only to pull a “Never Mind” later in the week.  The reason…  the opposition Freedom Party refused to support the proposed austerity and tax hike program.  Later, they agreed to it and are now back in business.  I guess for a few days, you could say they were “In Dutch.”

United States

  • So far in this earnings season, 200 of the S&P 500 companies have reported.  75% have beaten their estimates, 10% have matched, and 15% have missed.
  • Across the S&P 500, the average earnings surprise was +12.1% (just for yucks, that number is 7.5% if you take out Apple).
  •  Apple.
  • Year-to-date, the S&P 500 is up over 11%

While the global scene certainly looks glum, the US remains profitable and growing at an ever-so-slight rate (this morning’s GDP came in at 2.2% versus and expected 2.5%).  $7 trillion in newly created global money, the Bernanke Put, and Apple seem to be buoying the US stock market.

It makes me wonder if we may just be the prettiest horse in the glue factory.