A New Market Scare Emerges: Flattening Yield Curve

We all need scapegoats and things to keep us up late at night, cowering under the sheets in this chimerical world we live in. Don’t look now, but recession is right around the corner and very soon we will begin to see the fissures in this fallacious global economic hazard.

Yesterday’s Fed hike is going to expedite crisis in the high yield space. We’re aware of that. But what many people aren’t watching just yet is the yield curve. When short term rates creep higher, while long term rates edge lower, the economy is in trouble. Have a look at government bond yields and durations to see what’s been happening.

At a very minimum, the profit margins at banks are going to shrink. They make money by borrowing short and lending long, via the spread. If present conditions persist, every talking head on teevee and print will start to use buzz words such as “inverted yield curve” and how it portends to recession. This will serve as a self fulfilling prophecy, scaring the shit out of CIOs, who will enact conservative measures to shore up balance sheets and viola: RECESSION WILL HIT.

The Fed wants to hike rates 4-5 times next year. If they do not get rates to 1.5%, it will be because the market said no.

Best short ideas into an inverted yield curve are banks, both regional and Snl, and of course commodities, since the dollar will likely keep driving higher as people plow into long duration treasuries.

Yesterday was the part of the horror story when the people rejoiced over defeating the evil killer. The sun was shining and an eery calm presided over their quaint little existence, as they thanked each other and discussed plans for the future.

Then, out of nowhere, the maniacal killer returned to devour them whole, plunge them back into the hell they so desperately seeked to escape.

One day removed from the dumbest monetary decision since 1967, markets are careening lower, led by commodity stocks. The dollar is up 1% v the euro and the mood is decidedly glum.

Santa Claus isn’t coming this year. Prepare to have your faces peeled off and fresh lemon juice tossed into the open wounds.

Today’s death in a box action is indicative of 2015. If you think you’re having a rough go at it now, wait until you have to contend with the Fed hiking rates every quarter.

All of the manipulation and fraud has left a stench that cannot be washed out. Stocks cannot trade higher for more than a few days. Breadth is always narrow and the weak and vulnerable are readily picked off.

I ran this stat out on Twitter the other day. No one wanted to believe it; but it’s true. The median return for stocks with market caps under $1 billion is -49%.

You cannot diversify out systematic risk; but you can hedge it, which is why I am emphatic when I say “get short for 2016.”

SCTY was up 34% yesterday, alongside a slew of solar stocks, after congress hooked the industry up with another 5 years of tax breaks. This is especially suprising, given the current cheapness of crude and natty. I suppose they’re all just doing their duty, trying to help save the planet from melting icebergs.

In a surprise move, U.S. lawmakers agreed to extend tax credits for solar and wind for another five years. This will give an unprecedented boost to the industry and change the course of deployment in the U.S.

The extension will add an extra 20 gigawatts of solar power—more than every panel ever installed in the U.S. prior to 2015, according to Bloomberg New Energy Finance (BNEF). The U.S. was already one of the world’s biggest clean-energy investors. This deal is like adding another America of solar power into the mix.

“This is massive,” said Ethan Zindler, head of U.S. policy analysis at BNEF. In the short term, the deal will speed up the shift from fossil fuels more than the global climate deal struck this month in Paris, and more than Barack Obama’s Clean Power Plan that regulates coal plants, Zindler said.

This is exactly the sort of bridge the industry needed. The costs of installing wind and solar power have dropped precipitously—by more than 90 percent since the original tax credits took effect—but in most places coal and natural gas are still cheaper than unsubsidized renewables. By the time the new tax credit expires, solar and wind will be the cheapest forms of new electricity in many states across the U.S.

The tax credits, valued at about $25 billion over five years, will drive $38 billion of investment in solar and $35 billion in wind through 2021, according to BNEF. The scale of the new projects will help push costs down further and will stimulate new investment that lasts beyond the extension of the credits.

Few people in the industry expected a five-year extension. Stocks soared. SolarCity Corp., the biggest rooftop installer, surged 34 percent yesterday. SunEdison Inc., the largest renewable-energy developer, climbed 25 percent, and panelmaker SunPower Corp. increased 14 percent.

The 30 percent solar tax credit was set to expire next year and will now extend through 2019 before tapering to 10 percent in 2022. The wind credit had expired at the end of 2014, and the extension will be retroactively applied from the start of 2015 through 2019, declining in value each year.

I’m not one to chase crazy rallies; but I bet the solar stocks continue higher on this news. Best way to play it is through TAN, or by owning a basket of them.

Here are some of the top solar names in Exodus.

How a little jerk, who feasted off the lives of people with aids, came into prominence in 2015, is beyond me. This whole saga seemed like a cartoon, with the whole livestream videos of him floating around his office in his hoverboard to playing video games like an overgrown juvenile idiot, live for the world to see.

This, coming after he decided to buy a soon to be bankrupt biotech company, KBIO, at $1.50, pushing it to the sbsurd heights of $40 in a short squeeze bonanza, is almost too much for me to bear. The story I wrote last night about him claiming to be a rapper and offering warnings shots to the Wu Tang Clan, highlighting his hardcore Albanian background as a cause for his enemies to be concerned, was the icing on the cake.

Am I supposed to dedicate inane amounts of valuable site space talking about this clown, discussing his mental fraility and bizaare actions?

Judging by the traffic stats, the answer is a resounding yes. Truth is, people like Martin, sociopaths, blow themselves to smithereens every day. He just made a public spectacle of it.

Is he done?

I seriously doubt we’ve heard the last of the Albanian rapper from Sheepshead Bay. But, I think the storyline has arc’d and it’s all downhill from here, as far as comedic value is concerned.

The story of Martin Shkreli is filled with metaphors, parables and lots of cool punch lines, rather apropos for a year in which the market did nothing but disappoint investors. I am not suprised to see this story play out in a similar vein.

Oh well, that didn’t last very long. The less than a month old CEO of KBIO, asshole in Chief, Martin Shkreli, was arrested this morning for being an asshole–and also committing securities fraud.

Here’s the scoop.

Complex financial maneuvers were used to conceal the payments, Retrophin said. For example, the company accused its former CEO of fraudulently reclassifying a $900,000 equity investment that MSMB made in Retrophin as a loan. He then allegedly had Retrophin pay off that loan to settle another unrelated legal dispute.

The Securities and Exchange Commission, which according to court documents opened an investigation into Shkreli in 2012, is expected to file a parallel civil complaint against him, according to people familiar with the matter.

Shkreli spoke cavalierly of the company’s lawsuit, saying, “The $65 million Retrophin wants from me would not dent me. I feel great. I’m licking my chops over the suits I’m going to file against them.”

Earlier, he had denied wrongdoing in a post on InvestorsHub after Retrophin disclosed it had received a subpoena from federal prosecutors and the preliminary findings from its own investigation of Shkreli. He called the company’s allegations “completely false, untrue at best and defamatory at worst.”

“Every transaction I’ve ever made at Retrophin was done with outside counsel’s blessing,” he said on the investment blog in February, without identifying the lawyers.

Shkreli started his career interning for “Mad Money” host Jim Cramer while still a teenager. After recommending successful trades, Shkreli eventually set up his own hedge fund, quickly developing a reputation for trashing biotechnology stocks in online chatrooms and shorting them, to enormous profit.

Widely admired for his intellect and sharp eye, he pored over medical journals and self-trained in biology. He set up Retrophin to develop drugs and acquire older pharmaceuticals that could be sold for higher profits.

Turing, which is less than a year old and has raised $90 million in financing, has followed a similar strategy with the purchase of drug patents, including Daraprim.

Shkreli recently bought a majority stake in KaloBios Pharmaceuticals Inc. after Turing received a warning from the New York attorney general that the distribution network for Daraprim may violate antitrust laws. State officials made their concerns known to Turing and Shkreli in an Oct. 12 letter obtained by Bloomberg.

KaloBios recently acquired the license for benznidazole, a standard treatment for Chagas, a deadly parasitic infection most common in South and Central America. The firm announced plans to increase the cost from a couple hundred dollars for two months to a pricing structure like that for hepatitis-C drugs, which can run to nearly $100,000 for 12 weeks.

“Some of these companies seem to act more like hedge funds than traditional pharmaceutical companies”
With the onslaught of federal charges and looming regulatory actions, Shkreli could be banned from running a public company, which could put the future of KaloBios into question. Shares of the firm fell 50 percent in pre-market trading. It’s less clear what the impact could be on Turing, which is privately held.

The charges also show that a small group of health care firms—ones that acquire the rights to drugs and significantly increase their prices—is drawing the scrutiny of regulators and prosecutors, with a possible chilling effect on aggressive drug-pricing strategies.

Legislators are already paying attention. A hearing of the Senate Special Committee on Aging on Dec. 9 scrutinized such tactics.

Before Shkreli started Turing, Retrophin raised the price of Thiola, used to treat a rare condition causing debilitating recurrences of kidney stones, from $1.50 a pill to $30.

“Some of these companies seem to act more like hedge funds than traditional pharmaceutical companies,” said Senator Susan Collins, a Maine Republican who ran the recent hearing.

George Scangos, CEO of biotechnology giant Biogen Inc., went further, saying in an interview, “Turing is to a research-based company like a loan shark is to a legitimate bank.”

Who knows what the fuck is going on here? Fact is Marty made an absurd amount of enemies over the past month, including the Wu Tang Clan.

Son, Wu Tang Clan ain’t nothing to fuck with. Too funny.

And to answer your question, pal, no I did not attend the catamite infested StockTwits nerdfest in NYC, despite one of their janitors posting a picture of someone who was supposed to be me on Twitter. I am not that man and if I ever see you in private quarters, I am going to split your person, 2 for 1.

Heading into the final trading days of 2015, with Le Fly rebounding from the heinous losses he endured in 2014, he’s opening up to the public, the reader class, permitting them to ask questions, make requests, etc.

I have an exceedingly busy schedule in the days, weeks and months to come. So take this as your opportune moment to enter into the mind of a person much greater than you.

Plans for 2016?

Yes, I have many.

Do I have picks for 2016?

Several.

Is Le Fly going to win the grande prize and take home the trophy?

Always.

NOTE: Jeff Macke is going to be a special guest in the hallowed halls of Exodus for the month of January, providing exclusive content, and the like.

This is the craziest interview I’ve ever read for a publicly traded CEO to give.

First, Shkreli is planning to bail out a rapper who is being accused of all sorts of fucked up stuff, from shootings to drugs to murder. The gang he’s in is widely known in Brooklyn to be chockful of knucklehead trouble makers. Why would Martin want to bail him out is beyond me.

Second, he’s responding to RZA from Wu-Tang in a way that unfuckingbelievable to me, with regards to the $2 million album he just bought from the Wu.

Check out some of his choice words. You’re not gonna believe this shit.

Regarding bailing out Bobby Shmurda:

Every concert I go to, people yell “Free Shmurda.” He reminds me of me, quite frankly. The guy’s totally irreverent. He doesn’t give a damn what people think. Totally irreverent. Totally I don’t give a fuck. I love him. I just love that style. He’s from not far from where I’m from in Brooklyn. I’d love to help him out. I wish someone would have helped me out when I needed help. He doesn’t have much money, I know that. He’s definitely hurting for money. He needs a bailout, basically. I’d like to help him out. No big promises, but I’ll see what I can do. Like I said, if I can post the $2 million, I’d do it tomorrow. I’m working on it and hopefully, we’ll see him free soon.

Back to Wu-Tang, talking shit and what not

I bought the album. [There’s a ] big fucking check in RZA and Cilvaringz’ pocket now, but if they’re starting to turn up on me… The Albanian community is a very weird community. We’re some of the most tight-knit kind-of kill for each other, die for each other motherfuckers there are. People say it’s one of the craziest ethnicities there is in terms of their loyalty and bloodlines and shit like that. This thing [Wu-Tang thing] is starting to get pretty tense. You probably see that increasingly. I’m getting pretty frustrated by it. I bought the most expensive album in the history of mankind and fucking RZA is talking shit behind my back and online in plain sight. I’m just getting pissed off. That’s not the way I do business. If I hand you $2 million, fucking show me some respect. At least have the decency to say nothing or “no comment.” The guy says “…before his business practices came to light.” What the fuck does that mean? I fucking make money. That’s what I do. That’s why I can fucking afford a fucking $2 million album. What do you think I do, make cookies? No, motherfucker. I sell drugs. [Laughs] I felt insulted.

He continues…

I’m staring at a Picasso in my living room right now that’s no different from the Wu-Tang box except it’s about 20 times more expensive. It is what it is. If you sell me some shit, then sell me some shit. If you don’t want to sell it to me then don’t sell it to me. You’ve got to research Albanians, it’s the most hot tempered culture there is. I have a crazy temper myself. He’s from the streets. The guy hasn’t been in the hustle in 20 years. He doesn’t want to get me angry and I’m getting angry. Again, what Ghostface said to Bronson was 100 hundred times worse than me and RZA. This is starting to get into some weird Albanian shit. There are similarities, very similar. I’m just getting fed up. If he doesn’t think I have the resources to do something, he fucking doesn’t know me. If Ghostface can make people disappear, what the fuck do you think I can do? I’ll fucking snap the CD on fucking TV and not even listen to it if that’s what he fucking wants.

And I stopped reading after this:

I’ve written some rhymes. They’re alright. Teams or not, it still has to come from the [artist]. I think I’m a creative guy. I’ve got a pretty deep knowledge of Hip Hop. I’ve got a good vocabulary, a decent sense of humor and enough material to last a fucking lifetime. I’ve got enough material to write five autobiographies. At 32 years old, I’ve seen and done more shit than just about anyone. That should help. Sometimes it’s just that magic that makes one of these guys different from another. I’m not counting on that, that’s for sure. I’m counting on how I have a lot of money. Can I be the next Suge Knight or Puff Daddy or whatever in this game? Probably. Birdman? Probably. What does Birdman do? He fucking rubs his hands and fucking every now and then maybe he’ll say something. But he’ll try hard to look cool and bullshit.

Should I even editorialize? I mean, most of us have seen and heard crazy before. This is off the rocking chair, bat shit, unprofessional, crazy.

Are Albanians nuts?

In my experience, growing up in a much harder part of Brooklyn than Mr. Shkreli’s gentrified Sheepshead Bay, absolutely. Some of the Albanians I knew in Brooklyn were psychopaths. But were they as tough as the lads from Shaolin?

You’ve got to be fucking kidding me.

Oh, there is one small addendum to this charming story. Recently he gave an interview and was asked about the scandal of him raising the price on that aids drug. You know the story, yes? Well, he’s no longer hiding the fact that he’s a supreme asshole, of monumental proportions, exclaiming that if left to his own devices, he’d probably raise the prices even higher.

Business is dwindling. This is the consequence of 7 years of manipulation. A quarter to a third chance of the economy heading into recession. He cites action in junk bond market and transports as warning signals for the overall economy.

Ultimately, the Fed will have to cut rates back to zero–because the economy isn’t lifting off.

Lots of cocaine was being tossed around the trading desk today, as investors kicked each other in the chests to get shares of anything but SHAK (huge piece of shit). Whether 4% rates by 2018 is attainable, bullish or bearish, traders took the news and ran with it. Short sellers were waiting for a sell the news event, and when that didn’t happen, they got fucking steam rolled.

For me, it was a very joyous occasion, having my largest position (PAH) up over 20%, followed by a massive move in another top position of mine yesterday (VRX).

For the session, I gained more than 3%, making it 5.5% to the good over the past two days. I cannot recall the last time that occurred. Nevertheless, I will be reducing risk heading into the post Fed hike latter days of 2015, attempting to lock in my 20% gain for the year.

Oh, yeah, Exodus wins again.