I had several conversations over the last days with distinguished financial professionals. What I find intriguing about all of them is the unanimous feeling and need to take a gamble on market potential that depends solely on the action of a central bank, a government or a traditional attempt to take a gamble in a knowingly unstable environment simply because that's what feels like the appropriate action is. A simple approach would be just do nothing or the safe thing - right? But, regardless of that, why not bet on stimulus, emerging markets, china, sovereign debt, corporates or junk bonds...Just look at our Tepper character at Appaloosa Capital Mis-management - that clearly is his approach.
The reality, in my opinion, is very simple.
Interest rates are at or near record lows
Lending is primarily occurring between banks and the Treasury not small business or in real estate
Stocks are pricing in perfection
Mutual Funds have spend nearly all their cash
Hedgefunds are shutting down or blowing up due to de-leveraging activity
Cash flows do not support debts being repaid
Interest rates are at or near record lows.
Lets discuss point number one. Interest rates are at record lows and what does that mean? Well just like the prices of merchandise that has not been sold, and are lying in inventory within a very limited market - prices must come down as a mechanism of incentivizing transaction. The facts are, if some one does not want something prices have become cheaper for that thing in order to encourage them to find a reason to make a decision. In this case, rates have been brought very very low in order to try to sell a product that no viable candidate wants or needs. The people who think they need it are not viable clients since they can not afford it. It is important to understand that low prices equal low demand and urgency to sell by market participants. This translates to central banks and other financial market participants desperately attempting to sell debt money at nearly any price since there is little demand for their product - money made out of debt.
Low interest rates are occurring at precisely the most dangerous time to be handing out loans. At the time that real-estate is nearly as overvalued by my analysis as in 2005 and 2006 we are selling credit at the cheapest price available. If there is ever a recipe for disaster this is it. In nearly every case, quality of credit and mark-ing has aggressively deteriorated since 2009 and additionally, most collateral/asset prices have not reflected inflation, with the exception of stocks, bonds and a select few commodities.
Lets talk about bonds. People seem to think that because the Fed can QE anything they want, even if its not in their charter, then bonds, especially MUNI's are safe, safe, safe. Well, do you remember auction rate securities - I believe that they were marketed as safe, safe, safe way back when - and the obligations did not add up for them just as they don't add up for MUNI's now. There are not enough tax receipts or accruing investments owned by municipalities to pay the obligations on these bonds. The result will be a light switch. When people finally realize that they have been sold on tax free income and the illusion of safe, safe, safe...at prices that absolutely reflect a panic rush into that illusionary safety at pricing that reflects extremely low risk, the door will no longer be open and there will be no bid. Not even one bid...just like auction rate securities.
Muni's are part of the ponzi scheme to push ever increasing debt into the system at low interest rates...this is not dissimilar to the the derivatives markets or other money inflation tools that the fed has used in the past. The requirement for our system to stay afloat is to create new debt money without creating interest or as little of it as possible. Given the mechanisms in place that is a very hard job.
The statistic and ironically question that many experts pose, is: "There is real buying and demand out there!?". Well, my answer is simple, there isn't demand. It's not real and one of the issues with myopically looking at markets is that, as with any thing you stare at all day, you can see things that are not there. There is no demand, and if QE was soo good at doing anything other than blowing bubbles in the bond and stock markets, how come the Fed has been unable to move any economic metric in any significant way without deliberately falsifying and optimistic promoting contrived and trumped up numbers that only get revised lower. They just can not demonstrate real improvement on the scale that one would expect from QE when debt destruction is not factored in. QE is not increasing the volume of money. That's why its not having an effect. However, it is having a side effect and that's called - bubbles. Bubbles are the only thing the fed is good at, the sad thing is that the taxpayer will get the bill, tax roles and municipal revenues will decline dramatically when this bubble starts to burst.
Contraction in the volume of money (Total Money plus Credit) results in a shortage of cash. The fed is not creating nearly enough cash to deal with the credit destruction that is occurring via insolvency embedded and masked deep within our system. It will not fly. The bankruptcies are already there and what's more, just like long-term capital, people with assets know they are there and will force them out in the open. The FDIC, FHLN, SIPC and other assorted government complacency schemes will not be able to mask the fake accounting hiding insolvency deep within our financial system. JP Morgan, BAC, Goldman Tax, Morgan Stanley and many other institutions are hiding huge losses using mechanisms that no individual would be allowed to use without going to jail. But all this is simply cronyism and regulated fraud.
Lending is primarily occurring between banks and the Treasury
Now lets take a look at point two. Banks are borrowing at 0% and lending to the treasury at 2 to 3%. I don't really care what the percent number, so I am not interested in being precise...the concept is the essence of what I described above. Additionally to that, a setup like that is representative of a bubble, faulty financial regulations and structure - it does not usually end well.
Additionally, due to these contrived dynamics, the yield curves are making it treaterous and expensive to hedge market exposure in many types of lending activity, therefore, it may appear on the surface that banks are making nothing but money with this strategy but the reality, as usual does not connect directly with our perceptions of it nor the media's generally trivial and optimistic portrayals.
Small business is not getting lending activity nor are individuals. The irony is not for the interests trying their level best to incent people to borrow. But that qualified businesses and individuals see no reason to borrow. What's the upside - more liabilities and risk. People are risk adverse and see an unstable future, so even if they can afford and are qualified to borrow the extent of their activity will likely be to refinance existing obligations not to establish new ones.
Stocks are pricing in perfection, cash reserves, de-leveraging and cashflow
Stocks reflect both optimistic assumptions and market dislocation. Stocks have been heavily shorted via false breakouts and just as they are fairly strongly covered and longed at false upside breakouts like the one that we are potentially having right now. Liquidity is constrained, alpha is hard to generate and people are getting more and more desperate. To this end, mutual funds have very little cash left and additionally the shorts have been separated from most of theirs. These conditions setup a wonderful environment for that Fatfinger guy at Citibank pumped by CNBS to reappear. Who will be a buyer of inflation assets when there is limited real cash to buy and Muni's and other debt instruments are imploding?
Ironically, the de-leveraging process is not obvious. One would normally associate de-leveraging with deflating prices and forced selling. However, the reality is the highly correlated and specifically de-correlated activities in the markets are causing disruptions in arb market activity that has traditionally been active with highly leveraged risk taking due to its lower perceived risks. Therefore, de-leveraging is occurring as prices are actually going up in many markets. Arb is not working, just as most risk avoidance schemes are failing aswell. I suspect there will be a lot of body-bags required in the not too distant future.
On the subject of cashflow, there are 22 million unemployed (though probably higher) and a lot of under employed people in the US, that's a lot of pressure on unions, wages and incentive for business to lower costs with less expensive resources. These cycles tend to be self fulfilling, lowering the costs creates more unemployment which creates less demand which ultimately depletes cash and lowers asset values due to continued contraction in the volume of money. The results effect tax receipts, sales and cash reserves. Additionally, many of the US corporations touted as having huge cash stores have that cash held tax free offshore. if they need that cash to operate they will have to give 30+% to uncle sam...that creates a very different looking balance-sheet - one that most people are not factoring in.
Most of all people are paying a hefty price for risk with a rather low potential for return in almost all markets. This creates a dynamic that Fatfinger would just love to revisit. Sugar plum fairies and Ben Bernake fantasies may offer some restful nights at this point, but sleeplessness lurks right around the corner when fraudulent and regulated insolvency is no longer viably masqueradable as solvency.
David Tepper runs Appaloosa Management launched in 1993. He is described as reclusive, a jackel, the master - a titan, a "How do you do it?" type of guy. If there is any example of Joe Kernan eclipsing, even just a little bit, his previous career peddling the stocks of ready to implode Biotech securities - this is it. Kernan talks to this Tepper guy like he's god. Moreover, CNBC produces graphics deliberately designed to deceive. They trump up his performance like a pot-roast attracting a meal. The result is pure deceit - and whats more they end up using this guy as a shill to pump up bullish stock scenarios. So, its a double whammy. This is an example of regulated and deliberate fraud and why I do not watch TV.
Clearly, Tepper is not trying to run money well, though he supposedly did get paid 2.5 billion apparently last year - which I do not believe BTW. He, however, clearly is trying to raise assets well and charge his management fee. So lets review:
Below is a chart of Tepper's AUM as presented by CNBS (kinda looks like they may have been making money right?):
Below is a chart of some undefined method of computing annualized performance (Again as presented by CNBS, it really looks like this guy is on to something now doesn't it):
Below is a chart of what Tepper's performance numbers represented in the charts above actually look like (Now we know why the fund has a ridiculous name like Appaloosa and we can clearly understand why this chart only flashes on the screen without fanfare as opposed to the others):
The guy took nearly a 50% loss on principle in 98 and several drawdowns that were much bigger. Also, keep in mind that if you were unlucky enough to invest in this mismanaged fee generation machine at one of those peaks you lost anywhere from 75% to 95% of your principle on more than a few occasions. The fact that he can sell this piece of crap fund at all is a miracle. Apparently, the guy does not use leverage, yet generates the beautiful PL picture shown above. Just imagine if he really traded or invested actively, or better yet, used a little bit of leverage.
What I would like to understand is: What difference it makes for me to see Assets Under Management (AUM) in a nice smooth curve and annualized performance, again, in a nice smooth curve. These are derivative values without an explanation of methodology and additionally misleading in reference to quantifying returns. Kernan talks about his annualized performance as if its legendary when apparently, these guys have to be using the peak high watermark performance shown in mid 2010 on the PL chart above to generate those false and deceptive numbers. The reality is that Tepper has no idea what he is talking about, runs a crappy fund and is pumping stocks...get ready to see another 100% swing in PL volatility on this chart.
The reason I am posting this is because people are getting all bullish again given Friday's action, especially shills and amateurs like Tepper. My systems covered their shorts on Thursday afternoon and we closed a respectable week. Personally, I was favoring a consolidation up day on friday though the potential for a larger move would not have been surprising. The fact is that this was a much bigger move than I and most people were expecting simply squeezes the shorts further to the wall and pumps idiots like Tepper so that they can raise assets for trash heaps called Titan's of Hedgefunds. The media is obviously in full regalia pumping the Bernake and Obama re-inflation wealth transfer agenda.
I do not change my view that we stand a the precipice of a substantial decline. My trading activity does not use opinion to make decisions but does use it to make allocation decisions. i.e.: how many percent of assets are we allocating long or short. Right now that view is imparting a bias towards assets allocated biased short if the models choose to go short. I believe that this will be another example of a false breakout, despite the deformed bullish inverse head and shoulders breakout that we have on our hands. One of the other reasons that I believe that is the downright parabolic topping behavior in momentum names that have been highly shorted like NFLX, BIDU, AAPL, AMZN, PCLN. The charts of these securities can not match any optimistic expectation of reality no matter how generous and positive a scenario can be painted. Shorts are being taken down in bodybags - these are the signs of a bubble and a top. What's more the shorts will not be there to buy the market when it actually begins its now obligatory implosion.
I use Multicharts Charting and Backtesting Software.
I post high resolution charts made with Multicharts and Adobe Illustrator. Click on chart for a more detailled view.
If you do wish to contact me or have any questions you can do so at email@example.com
Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.