Where have all the headlines about Apple gone?

Apple shares have soared since they release earnings back in January. Analysts set price targets from $750 per share up to $1000 per share. The charts went parabolic which led some to question the sustainability of the growth. However, the media had a frenzy and got people drinking the punch.

Apple then released its most recent quarterly earnings and once again they rocked it!  Since that day, the stock has steadily declined roughly 80 points. Where are the headlines? Where has all the hype gone? Where were the "responsible" media sources to warn of a pullback?

It is very typical for financial news sources to help inflate a bubble, and often entice people to jump on the bandwagon. It is even more typical for the same sources to dump retail investors off at the top and offer nothing to them as they watch the bubble deflate.

Apple is a great company and they may very well hit the aforementioned price targets. There is no reason to believe otherwise without some unforeseen damage to their model. But the moral of the story is to try and avoid believing that the media is doing anything but "selling" you a story. When you buy stock in a company, someone is selling on the other end. It is always best to take a step back from the headlines before jumping in.

Sean

Economic Surprise Index

The Citigroup Economic Surprise Index just turned negative. Economic data gets released all the time, and the "expected" results get built in before hand. Some analysts make their living tirelessly predicting the forthcoming results. Those efforts go a long way in pricing the market to an expectation. When the actual results are announced, that surprise (positive or negative) is what actually moves the market. I am sure you have seen an otherwise attractive report cause a sell-off in the markets because a good GDP result was less than expected.

Citigroup compiled all of the data that Wall Street cares about into an index that measures the surprise of the actual results from the expectations beforehand. This is an amazing tool to determine market direction, and it doesn't get enough attention....which is probably good for those that know about it. Over the past few years, the surprise index has been a very accurate leading indicator. It has several peaks around the 50 level and vacillates around 0.

Since 2008 the index has crossed 0 and gone negative before or during each major market sell-off. It turned negative at the end of last week.

There is good reason to believe that the European double-dip recession will have its effects over here. We will see how that pans out, but it isn't a bad time to take some of the profits from the 1st quarter.

Sean

You're All Invited...

 The table is being set.  Join the United States Treasury and the Internal Revenue for dinner on January 1, 2014 – P.S. Bring your check book.

FATCA stands for the Foreign Account Tax Compliance Act.  It is a devastating piece of legislation with a hidden agenda.  FACTA was quietly enacted in 2010 by Congress as part of the Hiring Incentives to Restore Employment Act (HIRE).  Under the auspices of taxing Americans on income worldwide, it is really the mechanism by which the United States Govt. can trap capital in the United States.  The Govt. is constructing the barricades now for the anticipated capital flight.  I know, I know….Another conspiracy theory right?  But think about it.  There already exists a withholding mechanism for payments to non-residents (also 30%) on FDAP Income.  The estimated revenue from these new withholding code sections added by FATCA are minimal, so why do it?  More on that below.

FACTA imposes a 30% withholding tax on any foreign financial institution (FFI) that doesn’t comply.  That is 30% withholding.  And get this, it applies to gross proceeds from the sale of securities.  There is already a 30% foreign withholding on interest and dividends code section that has been around forever, but this FACTA withholding is a new framework. And there is a pass through concept.  So if an FFI is compliant but deals with an FFI that isn’t they must withhold on the payments they make to a non-compliant FFI.  Ever play dominoes?

On April 8, 2011, the Internal Revenue Service (“IRS”) and Treasury Department (“Treasury”) issued Notice 2011-34 (the “Notice”) setting forth additional guidance with respect to the reporting and withholding requirements under the Foreign Account Tax Compliance Act (“FATCA”).1 FATCA introduced a new 30% withholding tax on any “withholdable payment” made to either a foreign financial institution (“FFI”) or a non-financial foreign entity (“NFFE”) unless the FFI meets certain reporting obligations or the NFFE discloses certain information regarding substantial U.S. owners. A “withholdable payment” generally includes any payment of interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income from sources within the U.S. It also includes gross proceeds from the sale of property that is of a type that can produce U.S.-source dividends or interest, such as stock or debt issued by domestic corporations. The new 30% withholding tax on any “withholdable payment” made to an FFI (whether or not beneficially owned by such institution) applies unless the FFI agrees, pursuant to an agreement entered into with Treasury (“FFI Agreement”), to provide information with respect to each “financial account” held by “specified U.S. persons” and “U.S.-owned foreign entities.”

To the above most people would think……WTF……What does that even mean?

FATCA will be a major challenge for non-U.S. financial and non-financial entities with U.S. investors or owners. FFIs, including most Qualified Intermediaries (QIs) and Non-qualified Intermediaries (NQIs), have three basic choices: (1) enter into an agreement with the IRS to put procedures in place to identify and disclose U.S. account holders, (2) accept the 30% withholding tax on U.S. payments, or (3) restructure their businesses to stop serving U.S. customers, stop offering (and owning) U.S. investments, or both. 

The US is the power house county in the world economy and facing debts never seen before in the history of the world.  They know full well a day of reckoning is coming.  They know full well that when that day come rich people may want to move their money out of US institutions.  But where?  What if the USA were to impose a tariff, or a tax, or a levy, call it whatever you will, that was so punitive that foreign financial institutions (FFI’s) or Non-Financial Foreign Entities, (NFFE’s) just threw up their hands and said, forget it.  We will not take any more money from US citizens or permanent residents.  Where will all that money go?  Where will all those rich US guys put their money?  I guess they will just leave it here....

Michael

The Inevitable Headline

 The coming headline:

XXXXXXX defaults on debt.  To leave EU and reissue Currency. 

Greece? Spain? Or perhaps Portugal goes first.  The seismic shifts from this first domino will be huge.  The Greek "bailout" was anything but that. A mere band-aid on an open wound. The debt problems still exist, and the austerity measures that are causing riots will surely deepen the recession. Or maybe the people will fight back enough to cause the government to lift the measures. Either way its bad for the world economy.

You know the evil empire guys at Goldman Sachs have worked out the fair market value for all the EU member country’s currencies if they go back to them.  They will not tell anyone, as they want to trade on this information.  The United States Treasury and Federal Reserve have target currency conversion rates too.  But theirs are surely inferior to those of Goldman’s.  So in the confusion and chaos that will follow such an announcement what is likely to happen?  Well – surely such confusion is good for the dollar.  Good for Treasuries. 

Is it possible for Treasury yields to go negative, again?  It has happened already right.  Is it possible the United States of America could start charging for the right to buy a US Treasury?  Why not.  If you want to buy a US Treasury you must pay 1%.  And this might not be a short term phenomenon, but one lasting months, quarters or even years.  Negative interest rates on US Treasuries for extended periods.  Why not?

Now if you can wrap your head around that concept, that buyers will have to pay for the privilege of buying US Treasuries, then try this one.  What happens when all currencies are no longer benched to the dollar.  What happens when US Treasuries are not viewed as the safe haven.  What happens if the sentiment turns so abruptly that instead of paying the US to issue them a T Bill, they avoid us like the plague.  I don’t know….Where in the world will all those dollars go then?

-Michael (from Feb 6th) 

Is Europe drinking the same punch?

Why balance a budget and reign in spending when you can just print your way out of it?  That has been the US motto for years. The "super-committee" was only super at demonstrating how this problem isn't important enough to put politics aside. There are answers, there are solutions, they just aren't worth foregoing political bias because the problem hasn't been fully realized. The US can still borrow at insanely cheap rates, and has been able to print away without negative inflationary effects. Why fix an illness when its symptoms haven't slowed the body down?

All the "turmoil" in Europe is only in focus because they have decided to take the high road and fix their problems rather than hide them under a blanket of freshly fabricated Euros. They are attempting to deal with their debt problems, which are very real, by reigning in spending and imposing strict budgetary constraints. They are facing this head-on. That means that the short term pain will be felt greater than in the US, but the underlying issues are being tackled.

So say for a second that it actually works and in a few horrible years they have cleared the hurdle. That puts them in a long-term fiscally responsible position. Meanwhile, the US has continued to delay the inevitable and drink the punch of the printing press. The difference now is there is an alternative to the mighty dollar. That is when we would realize the follies of our ways. Right now, everyone is in the same sinking boat and we are still captain. But if Europe comes out of this in a righted ship then we go down hard as everyone jumps on board with them.

Most people seem to believe that Europe will have to monetize their way out, and I have been in that camp. The debt seems too large and the people too unwilling to fix it any other way. However, they are being bold and righteous and perhaps we should consider if they do have a chance after all.

Sean

Jon Corzine

I just finished watching the tape of Jon Corzine’s testimony to the Congressional Committee….

For those of you who don’t follow to closely what is going on, he is a former senator, former governor of new Jersey and former CEO of Goldman Sachs.  He was CEO of MF Global - a hedge / investment fund.  MF Global just filed for bankruptcy.  MF Global had customer money and its own money.  When investments in their own account started losing money MF Global stole $1.2B from their clients’ accounts, transferred that money into the firms account, and lost it all.

Not even Bear Stearns or Lehman Brothers did that……So what have we learned since the crisis?

When asked by a panel member if he ever transferred or knew of a transfer from client’s accounts into the firm’s account Corzine replied, “It was not my intent to use segregated customer accounts….” He was asked twice and gave the same answer.  He used the “intent” word 5 times during his testimony.

This is really pissing me off…..Like cutting open an old wound…..The United States of America almost fell into the abyss in 2009, luckily backed away from the edge, but now we are right back there looking down again. Debt is exploding globally, jobs disappearing, middle class shrinking, etc.   And for those of us who think we cannot go the way of a 3’rd world county meaning paper dollars everywhere, civil disobedience, etc.,  I suggest you re-evaluate that belief.

And I am struggling with what to do about it.

Michael

Sneaky Sell-off

The market has had 6 (soon to be 7) down weeks in a row.

-Economic indicators have hinted towards slower growth than anticipated.
-The Fed is ending its QE2 program this month.
-Greece's continued debt problems are creating panic across the globe. 

These concurrent issues have sent the major indexes moderately lower over the last month and a half.  Panic selling is beginning to take hold. Recent 'scary' headlines include "mutual fund outflows and swap spreads are at levels not seen since the end of last November." The catch is November 30th marked the beginning of a 10% rally in the stock market. Then you have corporate profits at high levels and forward P/E ratios indicating attractive valuation. So what should we believe?

The market has been doing very well, and at this point there isn't much reason to panic. A sell-off might even turn out to be a good thing if we can put money to work at cheaper prices. However, the momentum is to the downside right now and it is tough to fight the current. I will be slowly picking my spots from here and protecting with options when possible. Taking short positions as a short-term hedge is a good idea too. This sell-off may have some ways to go, but at some point we should resume the up-trend.

Sean