Month: April 2016

For the past two weeks, Donald Trump has been on a tear, raging at how rigged the US presidential nominating system is. This is not a surprise to our readers: just two weeks ago we posted an article “The Year Americans Found Out Their Elections Are Rigged” which promptly went viral. And, judging by the Reuters/Ipsos poll, more than half of America agrees with Trump that the system U.S. political parties use to pick their candidates for the White House is “rigged” while more than two-thirds want to see the process changed.

To be sure, the result echoes complaints from not only Donald Trump but also Bernie Sanders that the system is stacked against them in favor of candidates with close ties to their parties “a critique that has triggered a nationwide debate over whether the process is fair.”

For any foreigners reading this or those Americans unfamiliar with the US primary system, the United States is one of just a handful of countries that gives regular voters any say in who should make it onto the presidential ballot. But the state-by-state system of primaries, caucuses and conventions is complex. The contests historically were always party events, and while the popular vote has grown in influence since the mid-20th century, the parties still have considerable sway.

One quirk of the U.S. system – and the area where the parties get to flex their muscle – is the use of delegates, party members who are assigned to support contenders at their respective conventions, usually based on voting results. The parties decide how delegates are awarded in each state, with the Republicans and Democrats having different rules. It is the delegates’ personal opinions that Trump has focused on, because these can come into play at the party conventions if the race is too close to call,  an issue that has become a lightning rod in the current political season.

Another complication is that state governments have different rules about whether voters must be registered as party members to participate. In some states, parties further restrict delegate selection to small committees of party elites, as the Republican Party in Colorado did this year.

Trump has repeatedly railed against the rules, at times calling them undemocratic. After the Colorado Republican Party awarded all its delegates to Ted Cruz, for example, Trump lashed out in a Wall Street Journal opinion piece, charging “the system is being rigged by party operatives with ‘double-agent’ delegates who reject the decision of voters.”

And while Republican National Committee Chairman Reince Priebus has dismissed Trump’s complaints as “rhetoric” and said the rules would not be changed before the Republican convention in July, many agree with Trump: “I’d prefer to see a one-man-one-vote system,” said Royce Young, 76, a resident of Society Hill, South Carolina, who supports Democratic front-runner Hillary Clinton. “The process is so flawed.”

Like Trump, Sanders has taken issue with the Democratics party’s use of superdelegates, the hundreds of elite party members who can support whomever they like at the convention and who this year overwhelmingly back front-runner Hillary Clinton.

While establishment members clearly refuse to change the system which allows much leeway away from the popular vote, independent third parties see potential for improvement: Larry Sabato, director of the University of Virginia Center for Politics, said the U.S. presidential nominating system could probably be improved in a number of areas, but noted that the control wielded by party leadership usually became an issue only during tight races.

“The popular vote overwhelms the rules usually, but in these close elections, everyone pays attention to these arcane rules,” he said.

However, even as Americans finally wake up to just how manipulated the presidential system can be, and is when a candidate who as unpalatable to the establishment as Trump is running, we expect nothing to change for a while: sadly just way too many pockets are greased thanks to the current rigged process, which guarantees that all sides will be reluctant to change it.

Some more results from the poll:

• Some 51 percent of likely voters who responded to the April 21-26 online survey said they believed the primary system was “rigged” against some candidates.
• Some 71 percent of respondents said they would prefer to pick their party’s nominee with a direct vote, cutting out the use of delegates as intermediaries.
• The results also showed 27 percent of likely voters did not understand how the primary process works and 44 percent did not understand why delegates were involved in the first place. The responses were about the same for Republicans and Democrats.
• Overall, nearly half said they would also prefer a single primary day in which all states held their nominating contests together – as opposed to the current system of spreading them out for months.

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I saw this article this morning, and this bit really irked me:

It isn’t the fact he’s been stone cold wrong. Hell, I’ve been wrong countless times. But I don’t make a point of claiming I had a position that I didn’t really have. (To say nothing of trying to deflect one’s foibles by attempting to positively associate oneself with “Lord John Maynard Keynes” whom, incidentally, was a pretty dreadful trader too).

Anyway, what’s stated above is “We had been, on balance and really quite openly, bearish of crude for the past several years, erring always to sell crude’s rallies rather than to buy crude’s weakness’.

This took only 12 seconds of research on my part…….

Of course, now that he’s “changed” to bullish, literally as I was typing this post, the following happened with crude oil:

There’s nothing wrong with being wrong (especially if a Line Producer at CNBC will look past her dad’s track record), but this sort of sleight-of-hand rubs me the wrong way.

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Following last night's surprise inventory draw (1.1m via API), WTI soared above the week's high holding $45 into this morning's DOE data which was dramatically different. Instead of a draw, DOE reported a bigger-than-expected 2.00m build along with a major build at Cushing and Gasoline stocks also rose. Despite a small drop in production, WTI prices are plunging, erasing the hope-driven API ramp.

API

• Crude -1.1m (+1.75m exp)
• Cushing +1.9m
• Gasoline -400k
• Distillates -1.02m

DOE

• Crude  +2.00m (+1.75m exp)
• Cushing +1.746m
• Gasoline +1.61m
• Distillates -1.70m

The biggest build at Cushing since Dec (after the pipeline delay ends) and surprisingly large build overall…

 

Production fell modestly on the week…down 13 of 14 weeks

 

And the reaction in crude…erasing the API exuberance...Of course, as we noted earlier, Gartman's flip-flop to bullish was the signal for oil to crash…

 

And here is the situation for the all important gasoline market which has served as the biggest bullish catalyst in recent weeks, as supposedly the US has had a massive surge in gasoline demand.

Gasoline consumption:

 

And gasoline stocks:

 

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Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The upper middle class is well and truly doomed by self-delusion and the pathology of entitlement.

Two recent articles describe America's entitled (and doomed) upper middle class: the top 5% of households with incomes above $206,500 annually and individuals with incomes of $160,000 or higher annually. (source: Historical Income Tables: Households Census.gov)

The first describes how businesses are responding to the new Gilded Age in which spending by the top 5% has pulled away from the stagnating bottom 95%:

In an Age of Privilege, Not Everyone Is in the Same Boat Companies are becoming adept at identifying wealthy customers and marketing to them, creating a money-based caste system.

With disparities in wealth greater than at any time since the Gilded Age, the gap is widening between the highly affluent — who find themselves behind the velvet ropes of today’s economy — and everyone else.

The Haven’s 95 staterooms were located so high up in the forward part of the ship that even guests in comparatively expensive staterooms might remain unaware of its existence. Depending on the season, a room in the Haven might cost a couple $10,000 for a weeklong cruise vs. $3,000 for an ordinary stateroom elsewhere on the ship.

Since the late 1990s, however, “there has been a huge evolution, maybe a revolution in attitudes,” Mr. Goldstein said. In addition to larger rooms or softer sheets, big spenders want to be coddled nowadays. “They are looking for constant validation that they are a higher-value customer,” he said. For example, room service requests from Royal Suite occupants are automatically routed to a number different from the one used by regular passengers, who get slower, less personalized service.

With a week in a top Royal Suite costing upward of $30,000, compared with $4,000 for an ordinary cabin, the focus is on “very affluent travelers, and we have no trouble filling these rooms,” Mr. Bayley said.

The second article is by an upper middle class writer who bemoans his declining income and status:

The Secret Shame of Middle-Class Americans: Nearly half of Americans would have trouble finding $400 to pay for an emergency. I’m one of them.

We are naturally sympathetic to anyone describing themselves as middle-class who is in such dire financial straits that they don't even have $500 as an emergency fund.

But as we read further, we find the author is hardly a typical middle-class worker-bee: he was a substitute host on a national television program for a few years, received substantial advances for books he wrote (substantial enough for him to complain about the taxes due), got a Hollywood movie deal for another book he wrote, etc.

He was making enough money to suggest his film-producer spouse (yet another not-a-middle-class job) quit working, and to buy a house in the tony Hamptons which he poo-poos as nothing special. (A home in a pricey premier suburb is nothing special? In what circles is it nothing special?)

The solution to his poverty is obvious to the rest of us: sell his Hamptons home and moving to less tony digs. He could buy a house in a Midwest college town for a fraction of the Hamptons house and live happily ever after off the cashed-out equity.

The writer was never middle-class–he was upper middle-class, with upper middle-class income, assets and aspirations.

Then come his complaints: he made too much money for his kids to get financial aid to Stanford (fire up the sad violins of sympathy), so his parents had to pony up the $150,000 for each kid to attend an Ivy league university–oh, and then go on to earn Masters degrees or higher.

His wife, out of the work force for the years he was raking in big bucks, couldn't find a job as a film producer (how awful!)–and then she vanishes from the narrative: did she lower herself to take a "normal" job, or is she still a Hamptons Housewife? Are we not being told because it doesn't fit the "poor me" narrative?

His 401K retirement was sacrificed to pay for one of his daughter's wedding–and how much did that extravganza cost? Was that a wise decision?

The writer confesses he's made poor financial decisions, but he lays the blame on economic ignorance rather than the real cause: his overwhelming sense of entitlement.

This is not simply hubris; it is a pathology that characterizes America's upper middle-class, and those who aspire to membership in that class.

This article expresses the core belief of America's upper middle class: I deserve to make more money every year until I decide to retire. Then I deserve a well-funded retirement in an upper middle-class neighborhood with all the usual upper middle-class trimmings.

The list of entitlements is practically endless: my wife shouldn't have to work, even though writers' incomes are notoriously uneven; my daughters deserve to attend Ivy league colleges without taking on $100,000+ in student loan debt; they deserve lavish weddings that they don't have to pay for; I deserve a recent-vintage auto, numerous nights out to movies and dinner, annual vacations (we can assume overseas vacations, of course; how gauche to travel only in the U.S.), and so on–an endless profusion of entitlements that are completely unmoored from the realities of their chosen careers in writing (insecure) and film production (insecure).

Memo to the author: did you somehow not notice that the money to pay writers is drying up? Did you not notice that book advances are vanishing like rain in Death Valley? How clueless does a writer have to be not to be aware of the structural changes in his industry?

The writer sets out to illuminate the precariousness of middle-class life, using himself as an example: a high-end New York writer/author and his equally high-end New York film producer spouse, who made tons more money than the $50,000-per-year middle class household and managed to buy a home in one of the most desirable suburbs in America.

The writer is aware of the disconnect, and he attempts to mask this by downplaying his previous (high) income and the value of his Hamptons home. (I got the feeling he didn't even want to disclose he owned a home in the Hamptons.)

Given prices in the area, the writer is sitting on hundreds of thousands of dollars in equity–and if he had drained the equity, we can be sure he would have disclosed this poor-me factoid.

Is this a household that is flat-broke, or a house-rich, cash-poor household that spent far beyond its means for years in the belief that the upper middle-class were magically entitled to a high income, regardless of economic realities?

As we look at the economic landscape, we find this class the fantastically entitled bourgeois dominating the technocrat / managerial / professional layers of our economy–the people who pen the editorials and edit the news reports, the people with tenure or high-paying government jobs–the people who claim the mantle of knowing what's what.

The reality is this class of entitled bourgeois is utterly clueless about the financial realities that are about to hit the global economy like a tidal wave. The top 5% aren't prepared to weather a mild storm, much less survive a tsunami. They are well and truly doomed by their self-delusion and their pathology of entitlement.

With this clueless class in positions of leadership, where does that leave the nation?

Meanwhile, the economic realities that the top 5% have evaded (thanks to the "recovery" that benefits the few at the expense of the many) have pushed U.S. Suicide Rate to a 30-Year High.

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Silver “Momentum Building” As “Supply Trouble Brewing”

Silver bullion prices are likely to rise further as there is “supply trouble brewing” as strong industrial and investment demand are confronted by declining supply.

“There are signs that this year could be a pivotal year for the silver market,” New York-based CPM Group said in its “Silver Yearbook 2016.”

“Silver mine supply is forecast to decline for the first time in 2016, since 2011,” CPM said, noting scheduled closures and planned production cutbacks.

More good news for silver bulls: there’s supply trouble brewing.

Output from mines will fall for the first time since 2011, while demand for the metal in uses including industrial products and jewelry is heading for a fourth straight gain, supporting prices, according to CPM Group. The market is entering what is “likely to be a pivotal year,” the New York-based researcher said in its “Silver Yearbook 2016” reported Bloomberg.

Bloomberg said that “momentum is building” as silver mine output is “seen falling for first time since 2011” at the same time that “investor holdings in silver ETFs rise at triple gold’s pace”.

CPM forecast global silver mine production will fall 2.4 percent to 784.8 million ounces in 2016, with output declining in Mexico and Australia but rising in Peru and China. Fabrication demand was seen rising 1.6 percent from 2015 to 889.7 million ounces, with increases in jewelry, silverware, electronic, battery and solar panel manufacturing.

CPM forecast a global deficit of 44.7 million ounces in 2016, much larger than the 11.9-million-ounce deficit in 2015 and the biggest deficit since 2005.

CPM expect demand for silver coins to fall to 142.8 million ounces this year, down from record levels of 145.7 million ounces in 2015. Silver coin demand in China, however, was forecast to rise to 24.5 million ounces from 22.3 million ounces in 2015.

Silver had its biggest quarterly rise in nearly 30 years in the first three months of 2016 as ETF investors, buying of silver coins (now VAT free in UK and EU) and bars and speculators in the futures market pushed prices higher.

Silver prices fell to $13.60 an ounce in December, the lowest in more than six years. Silver has since rallied nearly 20 percent in the first three weeks of April to an 11-month high at $17.70 an ounce and has entered a new bull market.

Recent Market Updates
Cyber Fraud At SWIFT – $81 Million Stolen From Central Bank

Gold In London Vaults Beneath Bank of England Worth $248 Billion – BBC

Silver Prices Up 6% This Week and 25% YTD; Gold Up 1% This Week

Gold Price Set To Push Higher As Inflation Picks Up – RBC

Silver Bullion “Has So Much More to Give” – 5 Must See Charts Show

China Gold Bullion Yuan Trading To Boost Power In Gold and FX Markets

Gold News and Commentary
“We believe the recovery in the U.S. is more fragile than is acknowledged” (GoldCore in Marketwatch)
Silver Supply Trouble Shows Why Rally Momentum Is Building (Bloomberg)
China’s gold imports from Hong Kong rise to 3-month high – (Reuters via Biz Recorder)
China’s Gold Imports Jump on Investment Demand as Price Falters (Bloomberg)
Silver may touch as high as $20 an ounce in near term – Deutsche Bank (Metal.com)

Gold Has “Chart of Decade” – Going to $10,000/oz – Rickards (Boomberg)
Depression, Debasement, & 100 Years Of Monetary Mismanagement (Zero Hedge)
Pimco Economist Has A Stunning Proposal To Save The Economy: The Fed Should Buy Gold (Zero Hedge)
Why a Collapse Is “Practically Unavoidable” (Casey Research)
Do Old Indicators Matter Or Is Physical About To Overrun Paper? (Dollar Collapse)
Read More Here

Gold Prices (LBMA)
27 April: USD 1,244.75, EUR 1,100.79 and GBP 853.58 per ounce
26 April: USD 1,234.50, EUR 1,093.46 and GBP 847.28 per ounce
25 April: USD 1,230.85, EUR 1,094.08 and GBP 853.79 per ounce
22 April: USD 1,245.40, EUR 1,104.34 and GBP 868.73 per ounce
21 April: USD 1,257.65, EUR 1,113.21 and GBP 877.01 per ounce

Silver Prices (LBMA)
27 April: USD 17.34, EUR 15.34 and GBP 11.87 per ounce
26 April: USD 16.95, EUR 15.02 and GBP 11.64 per ounce
25 April: USD 16.86, EUR 14.98 and GBP 11.67 per ounce
22 April: USD 17.19, EUR 15.26 and GBP 11.96 per ounce
21 April: USD 17.32, EUR 15.31 and GBP 12.05 per ounce

 

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Following the weakness in new home sales, starts, and permits, pending home sales modest beat of expectations (+1.4% MoM vs 0.5% exp) provides a glimmer of hope for homebuilders and recovery-narrative-buyers. The decoupling between new- and pending-home sales was also seen at the start of last year, and ended badly for pending home sales…

 

 

The Pending Home Sales Index, a forward-looking indicator based on contract signings, climbed 1.4 percent to 110.5 in March from an downwardly revised 109.0 in February and is now 1.4 percent above March 2015 (109.0). After last month’s slight gain, the index has increased year-over-year for 19 consecutive months and is at its highest reading since May 2015 (111.0).

Lawrence Yun, NAR chief economist, says last month’s pending sales increase signals a solid beginning to the spring buying season.

“Despite supply deficiencies in plenty of areas, contract activity was fairly strong in a majority of markets in March,” he said. “This spring’s surprisingly low mortgage rates are easing some of the affordability pressures potential buyers are experiencing and are taking away some of the sting from home prices that are still rising too fast and above wage growth.”

 

In the short-term, the healthy labor market and favorable borrowing costs should lead to sustained buyer demand and a durable pace of sales. However, Yun says the consequences from a failure to construct more single-family homes in recent years are starting to impact some top job producing markets, where endless supply shortages continue to limit choices for buyers and are driving up prices beyond what a growing share of households can comfortably afford.

 

“Demand is starting to weaken in some areas, particularly in the West, where the median home price has risen an astonishing 38 percent in the past three years,” adds Yun.

 

 

“As a result, pending sales in the region have now declined in four of the last five months and are lower than one year ago for the third month in a row. Closed sales in the region in March were also below last year’s pace.”

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Republican presidential candidate Ted Cruz, and arguably the biggest loser from last night’s “Acela Primary”, said he will make a major announcement at 4 p.m. on Wednesday but gave no other details.

Based on tangential evidence, Cruz will most likely announce that he has picked Carly Fiorina as a vice presidential candidate, even though he no longer has even a mathematical chance of winning enough delegates to be given the nomination.

According to Reuters, speaking to reporters in Indianapolis, Cruz’s comments come amid reports that the U.S. senator from Texas is vetting former business executive Carly Fiorina as a possible vice presidential pick.

Earlier, CNN reported that Carly Fiorina and a handful of other possible vice presidents for Ted Cruz are submitting tax returns, said a source familiar with the process Tuesday, another step in the Texas senator’s vetting process.

Cruz’s campaign has not ruled out naming a vice presidential candidate before he wins the GOP nomination. And Fiorina, a popular Cruz surrogate and a former presidential candidate, quickly emerged this week as someone the Cruz campaign confirmed it was vetting.

Fiorina’s team said Monday that she was being vetted and going through the “standard stuff,” but a Fiorina spokesman on Tuesday did not immediately respond to a request for comment.

Earlier on Tuesday, however, Cruz distanced himself from another possible vice president: Ohio Gov. John Kasich, with whom Cruz has struck an unusual pact in several of the remaining states on the calendar.

“I think that is very, very premature. I respect John Kasich, he is a good and capable man, but I think at this point we’ve made a decision about allocation of resources,” Cruz said to Indiana radio host Tony Katz, pushing back on the idea that the alliance could be a precursor to a ticket. That’s an idea that has been pushed by at least one major Cruz donor.

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Yesterday’s plunge in AAPL, which as we noted is one of the most widely held names by the hedge fund community with some 163 names long the stock, cemented what has already been a terrible start to 2016 for most hedge funds following a comparable blow up in Allergan one month ago, arguably the most popular at the time stock within the hedge fund community.

Overnight, none other than Third Point’s Dan Loeb confirmed as much when he said that hedge funds are in the first stage of a “washout” after “catastrophic” performance this year, to wit:

The result of all of this was one of the most catastrophic periods of hedge fund performance that we can remember since the inception of this fund…There is no doubt that we are in the first innings of a washout in hedge funds and certain strategies.

Loeb adds that the “increasing complexity” – or perhaps simplicity, recall that all one has to do to make money is to successfully frontrun central bankers – in markets over the past few months is here to stay, Bloomberg adds. Most investors were “caught offsides at some or multiple points” since August, Third Point said, when China’s surprise currency devaluation roiled global markets.

The firm said market participants were hurt by bets against the yuan in February and investments in Facebook Inc., Amazon.com Inc., Valeant Pharmaceuticals International Inc. and Pfizer Inc.

“Further exacerbating the carnage was a huge asset rotation into market neutral strategies in late the fourth quarter,” Third Point said. “Unfortunately, many managers lost sight of the fact that low net does not mean low risk and so, when positioning reversed, market neutral became a hedge fund killing field.”

But perhaps the latest, and most amusing fact about Dan Loeb, is what he has changed his BBG MSG header to.

 

Some more excerpts from his Q1 investor letter:

Review and Outlook

 

Volatility across asset classes and a reversal of certain trends that started last summer caught many investors flat-footed in Q1 2016. The market’s sell-off began with the Chinese government’s decision to devalue the Renminbi on August 11, 2015 and ended with the RMB’s bottom on February 15, 2016, as shown in the chart below:

 

 

By early this year, the consensus view that China was on the brink and investors should “brace for impact” was set in stone. In February, many market participants believed China faced a “Trilemma” which left the government with no choice but to devalue the currency if it wished to maintain economic growth and take necessary writedowns on some $25 trillion of SOE (State Owned Enterprise) debt. Based largely on this view, investors (including Third Point) crowded into short trades in the RMB, materials, and companies that were economically sensitive or exposed to Chinese growth.

 

Making matters worse, many hedge funds remained long “FANG” stocks (Facebook, Amazon, Netflix, and Google), which had been some of 2015’s best performing securities. Further exacerbating the carnage was a huge asset rotation into market neutral strategies in late Q4. Unfortunately, many managers lost sight of the fact that low net does not mean low risk and so, when positioning reversed, market neutral became a hedge fund killing field. Finally, the Valeant debacle in mid-March decimated some hedge fund portfolios and the termination of the Pfizer-Allergan deal in early April dealt a further blow to many other investors. The result of all of this was one of the most catastrophic periods of hedge fund performance that we can remember since the inception of this fund.

 

When markets bottom, they don’t ring a bell but they sometimes blow a dog whistle. In mid-February, we started to believe that the Chinese government was unwilling to devalue the RMB and was instead signaling that additional fiscal stimulus was on deck (an option that the bears had ruled out). Nearly simultaneously, the dollar peaked and our analysis also led us to believe that oil had reached a bottom. We preserved capital by quickly moving to cover our trades that were linked to Chinese weakness/USD dominance in areas like commodities, cyclicals, and industrials. We flipped our corporate credit book from net short to net long by covering shorts and aggressively adding to our energy credit positions. However, we failed to get long fast enough in cyclical equities and, while we avoided losses from shorts, we largely missed the rally on the upside. Unfortunately, our concentration in long health care equities and weakness in the structured credit portfolio caused our modest losses in Q1.

 

So where do we go from here? As most investors have been caught offsides at some or multiple points over the past eight months, the impulse to do little is understandable. We are of a contrary view that volatility is bringing excellent opportunities, some of which we discuss below. We believe that the past few months of increasing complexity are here to stay and now is a more important time than ever to employ active portfolio management to take advantage of this volatility. There is no doubt that we are in the first innings of a washout in hedge funds and certain strategies. We believe we are well-positioned to seize the opportunities borne out of this chaos and are pleased to have preserved capital through a period of vicious swings in treacherous markets.

Full letter below:

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