“…..The continuing loud cautions of “Don’t Tread On My Entitlements”, and the imminence of a majority of voters not paying any taxes, recalls yet again the rather prophetic but apparently fictitious quote of Alexander Tytler.  According to many internet sources, Tytler is reputed to have published this stunning quote in a book called “The Decline and Fall of the Athenian Republic” (ironically said to have been published in 1776 when something interesting was happening across the pond).

“A democracy cannot exist as a permanent form of government.  It can only exist until the voters discover they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising them the most benefits from the public treasury, with the result that a democracy always collapses over a loss of fiscal responsibility, always followed by a dictatorship. The average of the world’s great civilizations before they decline has been 200 years. These nations have progressed in this sequence: From bondage to spiritual faith; from spiritual faith to great courage; from courage to liberty; from liberty to abundance; from abundance to selfishness; from selfishness to complacency; from complacency to apathy; from apathy to dependency; from dependency back again to bondage.” …”

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“Here’s an interesting point via SocGen that I haven’t seen many people discuss.  Notice in the chart below how commodities have stopped responding to the QE effect while equities have not:

“The effect of QE on commodities (if any) vanished earlier than for equity markets. During each of the first
two quantitative easing phases carried out by the Fed, commodities appreciated by over 25%. However, following the announcement of QE3 in Sept. 2012, commodity prices declined (-7% for the CRB index), a reminder that they remain largely driven by economic cycles rather than central bank actions (Gold being the notable exception). In fact, equity markets now seem to be the only asset which benefits from abundant central bank liquidity.

Conclusion: The all-time high reached by US equity markets last week can be attributed to the fact that the only major asset class which benefits from the current “risk-on” mood of investors is equities in developed market.” …”

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Interesting commentary from David Rosenberg here regarding negative real rates and the tendency for excess to occur.  I’d say this time is slightly different in that the low real rates of the past tend to coincide with better credit conditions, but this time might find a different enabler in QE’s supposed “wealth effect”.  Here’s Fed Governor Jeremy Stein first:

“For example, a prolonged period of low interest rates, of the sort we are experiencing today, can create incentives for agents to take on greater duration or credit risks, or to employ additional financial leverage, in an effort to “reach for yield.” An insurance company that has offered guaranteed minimum rates of return on some of its products might find its solvency threatened by a long stretch of low rates and feel compelled to take on added risk. A similar logic applies to a bank whose net interest margins are under pressure because low rates erode the profitability of its deposit-taking franchise….”

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“Today a former Assistant Secretary of the US Treasury told King World News, “… the dollar is the vulnerable spot in the Fed’s policy management, and the popping of the bubble is likely to come from the dollar.”  Former Assistant of the US Treasury, Dr. Paul Craig Roberts, also warned King World News that a financial collapse is coming, and the Fed is desperately manipulating the gold price in an attempt to avoid the collapse.

 

Here is what Dr. Roberts had to say in this extraordinary and exclusive interview:  “A lot of people just can’t imagine that the government would fix the gold price.  And yet, in full view, the government fixes the bond price, and the banks fix the LIBOR rate.  So why is it people can’t comprehend that the government would fix the price of gold (laughter ensues)?”

Dr. Paul Craig Roberts continues…

 

“And you have to ask yourself, who would short gold in a rising gold market?  In the physical gold market the demand for gold rises consistently.  Investors would ride the rise in gold.  Do investors go in and short a bull market in stocks?  Not unless they want to get wiped out.  So why would they short a rising gold market unless the purpose is to stop the rise?

 

So it’s obvious that they are fixing the price of gold because we hear every day that there is more physical demand for people who actually want the metal.

“We hear reports that central banks are starting to acquire and accumulate gold using their dollars, and lightening their dollar load.

 

So if the demand for physical possession is strong, why would you short gold in the paper market, unless you are trying to hold down the rise of its price?  When the price of gold hit $1,900 a year or two ago it told the Fed that they can’t fix the price of bonds if the world perceives the dollar deteriorating at such a rapid rate in terms of the price of precious metals.

 

If the dollar is deteriorating there (against gold), people also know that the value of assets denominated in dollars are also deteriorating.  So the Fed was worried that they would lose control of the bond price and interest rates because of the erosion in the dollar price of gold.  That is the origin of this policy.  The (heavy) shorting appeared then, and they broke up what was a very consistent and strong rise for over a decade.

 

If you look at the chart you see there is a very sharp increase, and then it drops down a little bit and is kind of capped.  So it’s an obvious manipulation.” …”

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“While Spain’s economy minister Luis De Guindos proclaimed in the Senate today that bank deposits under EUR100,000 are “sacred”and that“Spanish savers should stay calm,” Spain, it would appear, has changed constitutional rules to enable a so-called ‘moderate’ levy on deposits – as under previous Spanish law this was prohibited. For now, they claim the ‘levy’ will be “not much higher than 0%” and is mainly aimed at regions in Spain that have “made no effort to collect taxes” based on new revenue expectations. As El Pais reports, the minister of finance and public administration, Cristobal Montoro, defends the need for such a ‘levy’ in their constitution on the basis of standardizing taxes across regions (and is preparing a proposal on the amounts to be paid) and although it would appear that while the European Commission could previously argue that such a ‘tax’ would violate the free movement of capital in Europe, it now leaves the door open to eventually effectively taxing the deposits. We can’t help but remember the Tequila crisis and the constant reassurances from Zedillo up until even the night before Mexico devalued…”

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[youtube://http://www.youtube.com/watch?v=JMf_KwQ2Xlk 450 300]

Link for iPhone users: http://www.youtube.com/watch?v=JMf_KwQ2Xlk

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You can’t have a bank holiday forever….

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“Fox Business’ Charles Gasparino reported that Herbalife Ltd. (HLF) executives are apparently becoming a bit uncomfortable with Carl Icahn’s interest in their company. He has a history of being involved in corporate shakeups, and a source has apparently told Gasparino that the company’s executives are worrying and wondering about what he might do.

Herbalife Ltd. (NYSE:HLF) executives are apparently starting to become concerned about what activist investor Carl Icahn’s intentions are in sticking up for the company. Fox Business’ Charles Gasparino had the exclusive new details.

Icahn initiated a long position in Herbalife Ltd. (NYSE:HLF) in January, going head to head with fellow activist investor Bill Ackman, who gave an extensive short thesis on the stock in December and called the company a pyramid scheme. Icahn now has a 15 percent stake in the controversial nutritional supplement company and is able to appoint two directors to the company’s board and also increase his stake in the company to 25 percent…..”

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“Investment banks were rolling out those opinions on whether Cyprus really matters on Tuesday. Among these, J.P. Morgan Cazenove warns we’re all getting a little too relaxed, too soon.

(Markets are looking a hair calmer Tuesday – the Nikkei nearly recouped all of its prior-day losses, U.S. stock futures rose a bit, though Europe stocks were lower. That’s after Monday’s chaos, triggered thoseplans to levy deposit holders in Cyprus. )

J.P. Morgan Cazenove says Cyprus is between a rock and a hard place and predicts its parliament will refuse to pass the deposit levy/bailout package in current terms. The analysts give Cyprus three options, none of them great:

1. Insured depositors pay nothing, uninsured pay 15.4%. This isn’t workable because the bulk of that would fall on Russia, who would then likely play hardball with its existing €2.5 billion loan to Cyprus. And Cyprus needs that money.
2. Ask for more Troika support. But J.P. Morgan says it’s unlikely Cyprus is going to get much tweaking on the deal hammered out.
3. Tweak the deal so that less pain falls on insured depositors, such as those with less than €100,000 pay 3%, those with less than €500,000 pay 10% and more than €500,000 pay 14%.  J.P. Morgan says this looks like “shifting deckchairs,” and Cypriots are likely to stay angry no matter what….”

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“China is flashing warning signs that a financial crisis may be approaching, say two Nomura economists.

Those signs include a sharp rise of leverage, a slowdown in economic growth and skyrocketing property prices, assert Nomura economists Zhiwei Zhang and Wendy Chen in a research note obtained by CNBC.

Ominously, those were the same factors behind the 2008 financial crisis in the United States.

“China faces rising risks of a systemic financial crisis and the government needs to take action quickly to contain such risks. We believe the true extent of financial risks in China is not fully appreciated by investors,” they state.

However, China may be able to avoid a crisis by tightening its monetary policy, they say. “This is clearly a dangerous choice, but we cannot rule it out given political pressures to maintain strong growth.”

Leverage, defined as the ratio of domestic credit to gross domestic product (GDP), has increased from 121 percent in 2008 to 155 percent in 2012. That’s the highest since record keeping began in 1978.

“China’s leverage rose by 34 percent of GDP in five years — a worrying sign given its history,” they write, according to CNBC. By comparison, leverage in the United States increased by about 30 percent of GDP in the five years preceding the financial crisis.

Economic growth in China slowed to 7.8 percent last year, the lowest rate in 13 years, due to falling productivity and population growth….”

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“……now he’s sounding even more nervous.

The die is cast. There is no going back for the Cypriots or the Eurozone leaders. As soon as the banks open in Cyprus there will be billions in withdrawals. The question of course is – “where will the money come from?”. Well, if the parliament votes YES, then the Euros will have to come from the Eurosystem. But there is a glitch. The Cypriots have already borrowed 10b euro via the ELA and Target2. How can Mario just wire over 20 billion more (less the 10 to 15 percent haircut) for the Russians, and another 20 to 30 billion for the wealthy Greeks. What collateral will an economy with 20b in GDP post to get this cash? Unless Mario violates every collateral rule at the ECB, the Cypriot financial system will collapse even with a YES vote. Its a wonderful life – Cyprus style….”

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“Euro-area finance ministers told Cyprus to raise 5.8 billion euros ($7.5 billion) from bank depositors to unlock emergency loans, maintaining the revenue target while suggesting sparing small-scale savers.

The finance chiefs from the 17 euro countries kept the pressure on Cyprus as they signaled flexibility in applying the tax announced three days ago. The levy sparked outrage in the island nation and concern among investors about setting a precedent by breaking the taboo against raiding bank accounts.

“Cypriot authorities will introduce more progressivity in the one-off levy compared to what was agreed on March 16, provided that it continues yielding the targeted reduction of the financing envelope and, hence, not impact the overall amount of financial assistance,” the ministers said in a statement following a teleconference late yesterday.

With Cypriot lawmakers voting today on how to spread the burden among account-holders and the proposed bank tax roiling markets, the U.S. called for a “responsible and fair” resolution to the financial crisis in Cyprus, the fifth euro country to seek a bailout since 2010. The euro slipped in early European trading on concern that Parliament will reject the deal.

Euro Slips

The euro traded at $1.2942 as of 8:40 a.m. Frankfurt time, falling from as high as $1.2970. Futures on the Euro Stoxx 50 Index fell 0.4 percent….”

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“Cyprus’s passage of an unprecedented levy on bank deposits was in doubt as euro-area finance ministers responded to criticism of the measure by loosening their stance on how the money is raised.

Cypriot President Nicos Anastasiades warned German Chancellor Angela Merkel in a call yesterday that he may not be able to win passage, said a Cypriot government official. Finance chiefs from the 17-member euro area meanwhile urged Cyprus to spare small-scale savers, while maintaining their demand that 5.8 billion euros ($7.5 billion) be drawn from bank accounts in exchange for a 10 billion-euro bailout.

“I don’t think about plan Bs,” French Finance Minister Pierre Moscovici said in Paris today. “We’re in a plan A. Everyone has to assume his responsibilities.”

The Mediterranean island nation’s banks and stock exchange will remain closed at least until March 21 amid speculation lawmakers may postpone the vote that’s planned for later today. The raid on bank accounts sparked outrage when Cypriots woke March 16 after the marathon talks in Brussels to find bank transfers blocked.

Finance ministers backtracked on the levy’s structure, which initially called for a 6.75 percent tax on deposits under 100,000 euros and 9.9 percent over that amount. The levy should now be more progressive, though must yield the same amount.

“Things were confused” after the measures was announced, Moscovici said. “The perception was confused. Once this confusion was born, we had to revisit the decision.”

The euro, which tumbled 0.9 percent yesterday, traded little changed today at $1.2930 as of 10:50 a.m. Frankfurt time. European stocks fell for a third day, while Spanish bond yields rose.

Merkel’s Advice…”

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“Author’s note: Back in July, my firm, Mischler Financial, featured “The Smartest Man in Global Capital Markets” for the first time. We were not able to identify him by name, nor can we now, but we can tell you that he is a respected international banker at one of the world’s largest financial institutions. We can also tell you that he has been spot-on since the summer, both in time frame and levels. (See the end of this article for a reprint of his July commentary, which you can judge against the current market situation.)

Our access to the “The Smartest Man in Global Capital Markets” is through Ron Quigley, Mischler’s Head of Fixed Income Syndicate and Primary Sales. Ron had a chance to speak to his source recently about where the markets are going now and over the next few months, looking into 2014. What follows is quoted directly from that conversation. Enjoy! (With thanks to Ron!) 

The Outlook 

So, it’s mid-March 2013 and, the S&P 500 (INDEXSP:.INX) is at 1550, right where I said it would be nine months ago. Allow me to update my thoughts as to where we go from here; vastly more relevant than where we have come from:

The three major drivers of equity index valuations have been:

1. The generational low ownership structure of the asset class.
The major brokerages went into the end of FY 2012 with about 38-40% of total assets in equity-related securities; that has crept up to about 43% in the year-to-date move we have seen to the upside.  This remains meaningfully below the norm for the 1980-1990s, which was estimated around 65-70%.  Of course, if one subscribes to the PIMCO mantra that the equity culture is effectively “dead”: (they have been wrong), then maybe nothing changes.  If, however, Washington can be functional, the equity culture will continue to resurface as that’s what the Fed wants.

2. The historically overvalued nature of just about all the alternatives asset classes (i.e. fixed income).
Just about every aspect of the fixed income asset class is overvalued.  From IG bonds to HY, from EM to REITs, and from MLPs to Preferreds, et al; the excessive liquidity situation has effectively arbitraged yield-to-maturity to historically low levels across all these product lines.  It is quite possible, arguably likely, that this situation will persist a bit longer as the Fed maintains its QE stance and effectively provides a “backstop” to valuation deterioration. One day, this will end. We will get to that.

3. Expectations of continued upward revisions to US corporate earnings that may result in more multiple expansions, so long as Fed policy remains so accommodative…..”

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” ‘A cesspit’: Libor scandal may be going on elsewhere

The market for determining one of the world’s key interest rates was a “cesspit” and banks cannot be trusted to be honest in several other major markets, the deputy governor of the Bank of England has warned.

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“Apple Inc. is poised to boost its dividend by more than a half, according to analysts surveyed by Bloomberg, providing investors hit by a share slump with one of the highest yields in the U.S. technology industry.

Apple will probably lift its quarterly dividend 56 percent to $4.14 a share, for an annual payout of $15.7 billion, according to the average estimate from six analysts. The resulting yield of 3.7 percent would be higher than 86 percent of the companies in the Standard & Poor’s 500 Index paying dividends. Apple could fund a payout with existing cash flow without using profit from overseas, which can be subject to extra taxes, said Gene Munster, an analyst at Piper Jaffray Cos.

Chief Executive Officer Tim Cook, who a year ago this month reinstated a dividend and announced a $10 billion buyback, faces mounting pressure to take bolder steps to pay out more of Apple’s $137.1 billion in cash and investments. Investors including David Einhorn’s Greenlight Capital Inc. are pushing for more money as growth slows and competition from rivals such as Samsung Electronics Co. intensifies.

“The accumulation of cash has become excessive,” Brian White, an analyst at New York-based Topeka Capital Markets Inc., said in an interview. He rates the shares a buy, with an $888 price target. “It doesn’t matter which bearish scenario you forecast, they’re never going to need this much cash.”

Apple shares rose 2.6 percent to $443.66 at the close on March 15. The stock has declined 37 percent from a peak on Sept. 19, compared with a 6.8 percent gain for the Standard & Poor’s 500 Index in the same period.

Returning Cash…”
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“The restructuring of the financial services industry, which has ranged from 30,000 layoffs at Bank of America Corp. (NYSE: BAC) to cuts at Citigroup Inc. (NYSE: C) and Barclays PLC (NYSE: BCS), has reached multinational HSBC Holdings PLC (NYSE: HBC). According to the Financial Times:

Stuart Gulliver, HSBC’s chief executive, said when he announced annual results last week that he would “fixate on costs” over the coming year and promised to find a further $1 billion of annual savings in 2013….”

 

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