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The MH-17 tragedy could mark a pivotal moment in the worst crisis between Russia and the West since the Cold War.

Geopolitical risk is extremely high and yet it is not appreciated by experts and the majority of the public . The same was true in 1914.

With the U.S. seeking to impose tough new sanctions on Russia, we appear to be on the verge of a new and more intense phase of currency wars and indeed of an economic war.

Very few thought that the assassination of Archduke Ferdinand would be a spark that ignited the  brutal war that was World War I and the attendant economic depression. Indeed, as the Financial Times front page from the day after the assassination shows, stock markets were “scarcely affected by the assassination of the heir to the Austrian throne… there’s no evidence that stock holders took fright.”


Financial Times, 30th June, 1914 via Financial Times

Complacency reigned about the geopolitical risks. Six months later the Dow Jones Industrial Average was 35% lower and World War I was in its first year.

There is always a catalyst in the form of an event in history which people look back on as the start of tremendous global turmoil. Usually, there are significant pre-existing political, military and economic tensions which are the real factors leading to war.

The butterfly can flap its wings and create a hurricance on the other side of the world. A tragic event such as the airline tragedy can be the spark that ignites the conflagration.

The tragic events in Ukraine and in Gaza today are momentous. The fog of war could lead to an incident, such as the tragic airline crash yesterday or an act of terrorism, which could be the spark of a much greater conflict.

There have been many potential butterfly events in recent weeks, any one of which could lead to the hurricane of war.

The problem with war is that no matter how well the plans are made, strange things happen in war and there are many tragic unintended consequences.

Political and financial complacency reigns today as it did in 1914 …

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I recall watching a documentary years ago about the tragedy of 911 in which a Wall Street banker was interviewed about what he was thinking when he heard that two planes had crashed into World Trade Centers 1 and 2, and without hesitation, he said something to the effect of, First, I thought gold was going to up in price, and second, I thought how can I make money from this? I am paraphrasing what he said because I can’t find that exact clip, but my paraphrasing contains the essence of his response. I also recall at the time, that my friend with whom I was watching this documentary, turned to me and said, “Thank God not all bankers are like that jerk”. And while this is very likely true that the majority of bankers probably do not actively think about ways to profit from death and tragedy, it is also true that unfortunately, the ones that possess the most power, do share this mentality.

 

On July 14, the pro-USD banking cartel started a gold and silver puke that took silver from high to low in 2 days $0.86 lower, or just a tad under 4% lower in two days, and gold $48.30 lower, or a whopping 3.6% lower in just two days. From the data I extracted from the 5-minute charts that day of the GCQ14 (August 14) for gold and SIU14 (September 14) for silver below, you can easily see that the whole “puke” was artificially engineered as the cartel respectively sold more than 10.8MM and 43.85MM paper ounces of gold and silver in just minutes to start the price slide. Furthermore, those numbers don’t even represent the total selling for the day as they only represent the three largest 5 minute-clusters of selling for that day. In the last video on my YouTube channel “smartknowledgeu”, I discuss these numbers in terms of the ridiculous percentages of annual physical gold and silver mining production they represent, because such selling of real physical gold and silver quantities in such a small amount of time would be incredibly unlikely. But of course, when you can sell imaginary paper ounces backed by very small fractional amounts of real precious metals and virtually nothing, this is the kind of fraud of which bankers are capable and willing.

 

 

However, for those that fail to understand that the small exclusive banking cabal that controls market prices is comprised of the most opportunistic, immoral creatures on planet earth, all we need to do is inspect the below charts to view their actions when Malaysia Airlines MH17 crashed during their ongoing gold and silver raid. On the chart I’ve posted immediately below, we see that the first huge spike in buying of the gold futures GCQ14 contract started at precisely the exact moment that Malaysian airlines announced that MH17 was missing. Malaysia Airlines said Ukraine’s air traffic control lost contact with flight MH17 officially at 2.15pm GMT (10:15AM NY time), approximately 30 miles from the Russia-Ukraine border. This was followed by two additional spikes of buying at 10:35 AM and 10:50 AM that amounted to 138.5 paper tonnes of gold purchased to force the price of gold about $24 an ounce higher from $1302 to $1326 within a matter of minutes. What is the purpose of buying 138.5 tonnes of paper gold within minutes just 3 days after selling 115.7 tonnes of gold to knock the price down? To profit from tragedy of 298 dead on Malaysia Airline MH 17 – plain and simple. Since the initial margin to purchase one 100 paper ounce gold futures contract is a fraction of the notional amount of the contract and is leveraged nearly 22:1 at current spot prices, a bullion bank that participated on this manufactured ride could have gone long only $10MM of gold futures to make $4.04MM of profit in just minutes.

 

  

 

 

Now let’s look at silver futures SIU14 contracts that same day below. Again, we can clearly see that SIU14 buying spiked precisely at the time Malaysian Airlines announced that MH17 had gone missing and that bankers artificially moved the price of September silver futures contracts higher very quickly on this tragedy

 

  

 

Of course, one can keep one’s head buried in the sand and think that all the data I’ve presented above is just mere coincidence, but if one truly understands how bankers think, then one is more apt to accept that the above is no coincidence. Anyone that has spent any time studying the Great Depression in the 1920s also knows that the same bankers operating above (i.e. JP Morgan and others) artificially manufactured that crisis as well by calling all loans after encouraging months of speculation by setting interest rates at unsustainable artificially-low rates. So when the next financial/capital markets crisis that the mainstream media falsely reports as “being unforeseeable” occurs, please understand that it was indeed 100% foreseeable. In fact, it’s very likely that the same banking cabal will be manufacturing said “crisis, under the same modus operandus they’ve operated for centuries, to strictly engineer huge profits for themselves to the detriment of all of humanity.

 

About the author: JS Kim is the Managing Director of SmartKnowledgeU, a fiercely independent consulting firm that specializes in helping Main Street avoid the scams of Wall Street and in helping people learn the best ways to preserve wealth. Visit us at http://ift.tt/QNk7ZR to sign up for our free newsletter, follow us on twitter here, and follow our videos here. Bookmark our blog here to keep track of all of our articles.

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Ron Paul writes:

While western media outlets rush to repeat government propaganda on the [plane crash in Ukraine], there are a few things they will not report.

 

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The media has reported that the plane must have been shot down by Russian forces or Russian-backed separatists, because the missile that reportedly brought down the plane was Russian made. But they will not report that the Ukrainian government also uses the exact same Russian-made weapons.

He's right …

The American government and media are loudly proclaiming that it must have been the Russian loyalists within Ukraine who shot down the plane because they possessed the type of missile used in the attack: SA-11 missiles fired from a Buk missile system.

Of course, the Ukrainians possess them as well.

As the Council on Foreign Relations notes:

All three regional actors—Russia, pro-Russian rebels of the “Donetsk People’s Republic,” and the Ukrainian government—had access or potential access to this weapons platform.

Reuters points out:

As Russia and Ukraine trade blame over the apparent shooting down of a Malaysian airliner, they appear to agree on one thing: the type of Soviet-era missile that brought it down.

 

But if an SA-11 Buk missile, known as “Gadfly” in NATO, struck the aircraft and killed all 298 on board, that won’t solve the mystery of who did it: Russia, Ukraine and Russian-speaking rebels have all claimed the missile in their arsenals.

Former Associated Press and Newsweek reporter Robert Parry explains:

Ukraine, after all, was part of the Soviet Union until 1991 and has continued to use mostly Russian military equipment.

For example, here’s a Ukrainian state company BOASTING about their Buk systems and SA-11s … complete with pictures:

(Click here and here to see big, clear images.)

The Ukrainian military also admits – after denying it for 8 days – that it accidentally shot down a Russian airliner in 2001, killing all 78 passengers, using a different missile system.

But – say American talking heads – it came from “rebel-controlled territory”.

Maybe … but last time we heard that kind of claim, it turned out to be totally false.

 

via Zero Hedge http://ift.tt/1p0HnWa George Washington

As WSJ reports, last week’s geopolitical chaos and distraction was ideal for a news dump, and the White House didn’t disappoint: On no legal basis, all 4.5 million residents of the five U.S. territories were quietly released from ObamaCare. It seems the costs of healthcare soared in these five territories due to uneconomic mandates – which woul dhave been a disaster PR-wise for the administration and so, under cover of catastrophe, WSJ reports all of a sudden last week HHS discovered new powers after “a careful review of this situation and the relevant statutory language,” that enabled them to ‘selectively exempt’ American Samoa, Guam, Puerto Rico, Northern Mariana Islands, and Virgin Islands from Obamacare. And all while vacationing…

As WSJ reports,

The original House and Senate bills that became the Affordable Care Act included funding for insurance exchanges in these territories, as President Obama promised when as a Senator he campaigned in Puerto Rico, the Virgin Islands and other 2008 Democratic primaries. But the $14.5 billion in subsidies for the territories were dumped in 2010 as ballast when Democrats needed to claim the law reduced the deficit.

 

As a consolation, Democrats opened several public-health programs to the territories and bestowed most of ObamaCare’s insurance regulations, which liberals euphemize as “consumer protections,” such as requiring insurers to accept all comers and charge the same premiums regardless of patient health.

However, costs soared as no insurer would touch them…

These uneconomic mandates promptly caused insurance rates to soar and many insurers to flee the territorial markets. You can’t buy any policy at any price in the Mariana Islands. So the territories have spent the last two years beseeching HHS for a regulatory exemption.

So time to change the rules… from this…

As recently as last year, HHS instructed the territories that they “have enjoyed the benefits of the applicable consumer protections” and HHS “has no legal authority to exclude the territories” from ObamaCare.

To this…

Laws are made by Congress, but all of a sudden last week HHS discovered new powers after “a careful review of this situation and the relevant statutory language.”

And thus 4.5 million people in the following 5 territories are now free of the tyrannical demands of Obamacare…

American Samoa, Guam, Puerto Rico, Northern Mariana Islands, and Virgin Islands.

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Which leaves only one question… where does everybody else apply for their ‘uneconomic’ exemption?

via Zero Hedge http://ift.tt/1rCAPAG Tyler Durden

Submitted by David Stockman of Contra Corner blog,

Furious money printing by the world’s major central banks is not generating real growth and prosperity—–but professional economists never seem to get the word. As shown below, the 2014 outlook for global real growth has been marked down sharply since early 2013. Back then, of course, Abenomics and massive QE by the BOJ was supposed to cause the Japanese economy to soar; Draghi’s “anything it takes” bromide was going to jolt Europe out of its slump; and the elixir of QE3 was certain to finally cause the US economy to attain “escape velocity”.

Its not working out that way. In Japan, import inflation is soaring, real wages are still falling and the economy is entering a new slump in Q2 owing to a tax increase that was unavoidably necessary to pay for its runaway fiscal largesse. In Europe, the Bank Of Italy, Draghi’s home base, has now marked its forecast of 2014 real GDP growth to essentially zero. And in the US after the disastrous first quarter, along with what is shaping up to be a tepid second quarter, real growth will not achieve any kind of velocity, “escape” or otherwise; in fact, consensus real GDP has already been marked down to 1.7%—the lowest rate of expansion since the financial crisis. Accordingly, it is only a matter of time before the global forecast for 2014 shown below below is marked down even further.

 

 

It is no mystery as to where all the central bank “stimulus” is going. Since early 2013 fully fourth-fifths of the 40% rise in the S&P 500 is due to multiple expansion, not earnings growth from a tepid economy. This is clearly the effect of massive central bank injections of cash into Wall Street and other financial markets, yet it is especially perverse under current circumstances. Given the massive instabilities and headwinds afflicting the global economy—from the house of cards in China, to the failing retirement colony in Japan, the welfare state fiscal crunch in Europe and the faltering growth of breadwinner jobs and real investment in productive assets in the US—-the capitalization rate of future earnings should be down-rated. That is, future corporate earnings are now worth far less than the historical PE norm, not more. Accordingly, the massive expansion of PEs shown below is yet another expression of the vast financial deformations being caused by monetary central planning.

 

In any event, the “financialization” brought on by the central banks has had a truly perverse effect. Stock markets and corporate profits are at all time highs. Yet the true measure of main street economic health—-the share of adults who are employed—is at a modern low. It is said by traditionalist believers in sound money that we can not print our way to prosperity.

 

These charts of the week provide some pretty stunning evidence of that truth.

via Zero Hedge http://ift.tt/1jQK5B5 Tyler Durden

 

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RJ Reynolds has been ordered by a Florida jury this Friday to pay a total of $23.6 billion to the widow of a chain-smoker that had filed a suit against the company. It’s possibly the largest single plaintiff payout in history for a tobacco manufacturer to date.

Cynthia Robinson of Pensacola began the long process of suing the company in 2008. Her husband had died in 1996 of lung cancer after smoking between two and three packets of cigarettes per day for 18 years. It was claimed that her husband had become addicted to cigarettes and despite attempts had failed to manage to quit. She claimed that RJ Reynolds had conspired to conceal the addictive nature of cigarettes and had failed to highlight the dangers of smoking. Robinson’s lawyers also accused RJ Reynolds of being negligent in informing customers of the dangers pf the consumption of tobacco.

• The jury deliberated for 11 hours on Friday 18th July 2014 and the verdict returned granted compensation of $7.3 million to the plaintiff as well as $9.6 million to her husband’s child from a previous marriage. 
• The jury went on to deliberate for a further 7 hours before it then awarded Robinson the punitive sum of$23.6 billion. 
• Robinson’s lawyer stated: “RJ Reynolds took a calculated risk by manufacturing cigarettes and selling them to consumers without properly informing them of the hazards”. 
• RJ Reynolds issued a statement calling the verdict “far beyond the realm of reasonableness and fairness”. 
• The company also stated that the company is “confident that the court will follow the law and not allow this runaway verdict to stand,” adding that the damages were “grossly excessive and impermissible under state and constitutional law”.
• In the USA today there are still half a million people that die from cigarette-related illnesses every year.
• But, only 18% of US citizens actually smoke these days, which is a huge drop from the 42% of the 1960s.

Robinson argued that the verdict was not as RJ Reynolds states “a runaway verdict” but rather that the jury was courageous to take the decision. The jury refused to accept the argument used by RJ Reynolds that the victim had in fact smoked out of choice rather than addiction.

Originally Robinson had filed a lawsuit against the company as part of a class-action litigation that opened in1994 against tobacco firms. It became known as the “Engle Case”. At the time the verdict given in 2000 was also in favor of the plaintiffs and they were awarded $145 billion in punitive damages. But, it was overturned in2006 when the Florida Supreme Court decided that each of the plaintiffs involved in the class-action litigation had in fact smoked for very personal, individual and different reasons. They were told that they could file lawsuits individually, which is what Robinson did. What was upheld by the Florida court was that the jury’s findings that cigarettes and tobacco in general lead to diseases and that they are defective as well as labelling tobacco companies as negligent. These issues are now standing and they do not need to be re-litigated in any future lawsuit that takes place. The Supreme Court in Florida also refused just a few weeks ago the request by RJ Reynolds (amongst others) to hear their appeals regarding other court judgments in Florida which come to a total of $70 million.

Just a few days ago RJ Reynolds announced the decision to take over Lorillard in order to conquer the electronic cigarette market and hopefully compensate the falling sales in the industry. The US tobacco industry is worth an estimated $120.7 billion (2013) in sales according to research carried out by Euromonitor.

It was just 50 years ago that the US Department of Health first published a report recognizing that tobacco could cause cancer. Since that date, 13 different types of cancer as well as other illness have been recognized as having a link with the substance.

RJ Reynolds manufactures Camel, Kool and Pall Mall cigarettes amongst others. The tobacco company founded in 1875 is the 2nd largest in the USA and it holds 33% of the tobacco market. For the first quarter of2014 it posted net sales to the value of $1, 563 million, with an operating income of $482 million.

Originally posted: RJ Reynolds Fined $23.6 Billion

 

 

via Zero Hedge http://ift.tt/1sCbp95 Pivotfarm

In a world in which there is no longer any risk, in which the Fed itself is the Chief Risk Officer of the S&P 500 itself (because either the Fed and central banks will keep on injecting “modest” liquidity and keep rates at zero or below for the indefinite future, or jump right back in with another massive, $1 trillion + liquidity dump the second the S&P dares to suffer a 10% correction), there is no longer any need to hedge as we have shown for the past two years. In fact, the best strategty for the past two years has been to actively go long the most shorted stocks. But as GMO’s Ben Inker shows, there may be one other strategy for the new “Free Lunch” new normal that avoids buying stock altogether and which has less volatility, a lower beta and a higher Sharpe ratio than merely buying stocks, while generating the same return: namely constantly selling 1 month ATM puts, rolling, and then selling again. Then again, judging by the ridiculous low VIX, perhaps everyone has already figured this out…

From GMO’s Ben Inker:

Free Lunches and the Food Truck Revolution

Over the past year or so, there has been a welcome change to the culinary landscape of the Boston financial district. After two decades of wandering to largely the same old haunts for lunch, I am now faced with a whole new set of inexpensive and tasty choices literally outside our door, changing daily as the food trucks perform their mysterious nightly dance. And while part of me may worry about the general advisability of having a burning wood-fired oven built into a small truck and another part may worry about the long-term impact to my weight and arteries from eating the pizza that comes out of said oven, my taste buds are thrilled, and my wallet has no complaints either. We at GMO have been accused at times of believing that either the world never changes or that when it does change, those changes are generally bad. Well, it may just be the dumplings talking (available on Fridays on the Greenway by Rowes Wharf, $8 for four dumplings along with fried rice and homemade Asian slaw, $1 more if you want to add a spring roll with ginger soy sauce), but the world has indeed changed, and it is good! Food trucks seem to be a genuinely disruptive innovation, lowering the cost of entry for the restaurant business, fighting the tyranny of location, taking advantage of other innovations – every food truck I’ve been to accepts credit cards via Square – and encouraging experimentation, new ideas, and most importantly, better lunches for me and others who work in culinarily challenged areas.

While I’m sure you are happy for me and my newfound culinary contentment, you may well be wondering whether this has any relevance for investing. I believe it does, and the relevance is this: investors spend far too much of their time looking for a free lunch, when they should be looking for the investing equivalent of an inexpensive and tasty food truck meal instead. Tasty food truck meals are far easier to find, and you are much less likely to discover that they come with strings attached that you didn’t think of until it was too late. So what are investing free lunches? Arbitrage opportunities, sources of high returns uncorrelated with the important risks to investors, portfolio construction techniques that reduce those risks without reducing returns, exploitable market inefficiencies that other investors are strangely willing to share the existence of with you. In common parlance, Alpha. I have used the capital A there as a signifier that there is something special about this particular Greek letter that gives it a fascination for investors well beyond what is ascribed to beta, gamma, delta, or the other symbols that finance has appropriated. My colleague Edmund Bellord suggested in a recent team meeting that we replace the term “Alpha” with “Magic Beans” in our conversations to add the proper element of skepticism when the term comes up. This is not to say that Alpha doesn’t exist. There are indeed occasional arbitrage opportunities, the markets do sometimes offer up sources of return uncorrelated to risks we should all care about, and we would be among the last to claim that markets are efficient. But finding Alpha is hard, everybody is on the lookout for it, and as all diligent analysts can tell you, most of the time that an opportunity starts out looking like Alpha, it winds up seeming more mundane as you do more research.

Put Selling and Merger Arbitrage – No Free Lunches Here

Just because an opportunity isn’t a free lunch, however, doesn’t mean it isn’t a tasty food truck meal, and such a meal can easily be an important part of your balanced diet … er, portfolio. So what do I mean by this? To some degree, the difference between a free lunch and a tasty food truck meal is a matter of mind-set. I’ll take the example of put selling, even though some of you may be bored of reading my musing on that particular topic by now. Some investors and strategists have suggested that put selling is a free lunch, and on the face of it, they seem to have a point, as you can see in Table 1, which compares holding the S&P 500 with selling one-month at-the-money (ATM) puts on the S&P 500 since 1983:

One-month puts have provided basically the same return after our estimated transaction costs as a buy and hold of the S&P 500, with a beta of about 0.5, volatility two-thirds that of the index, a Sharpe ratio 50% higher, and a CAPM alpha of 2.6%. To explain these, some strategists have invoked behavioral factors – irrational dislike of the limited upside of the strategy or other investor foibles. To our minds, no such explanations are necessary. Beta and standard deviation are lousy risk measures for a put selling strategy, because almost all of the volatility of the strategy is “bad” volatility. At the end of the day, an investor selling puts on the S&P 500 is taking the same risk as the investor who buys the S&P 500 – both lose money at more or less the same rate when the S&P 500 goes down. If the reason why the stock market has a long-term return above cash is the nature and timing of the losses that periodically befall investors who own it, put selling has all of the same downside, and therefore should offer the same basic upside. It happens to do that in a different manner – through the collection of option premiums instead of participating in the gains of the stock market – but as my colleague Sam Wilderman points out, it is dangerous to confuse the manner investors get paid with the reason why they get paid. Purveyors of option strategies are apt to talk about the “variance risk premium” and “capturing short-term  mean reversion” when analyzing put selling returns. But while these two factors do explain how put selling delivers its returns to investors, they arguably do little to help anyone understand why the returns exist. Variance risk premium (VRP) is a term used to explain the observation that implied volatilities on the S&P 500 and other equity indices are generally higher than the realized volatility of those markets. You can put together strategies that are designed to specifically try to capture the VRP and structure them in a way so that, most of the time, they have little stock market beta. But if you stop and think a bit about why the VRP exists, it starts to become clear that those strategies might not be a good idea. If implied volatilities were an unbiased estimate of future realized volatility for the market, puts and calls would have similar expected returns. We know from put-call parity that being short a put option and long a call option should give the same return above cash as a long investment in the market. If implied volatilities were “fair,” the call and put would each be expected to give half the return of the market. Because the put embodies the ugly risk of stocks and the call embodies the pleasant upside, this would be a strange outcome. Why would you expect to get paid half as much as the stock market, in buying a call, while taking none of the downside? The way to shift the returns to the put, where they belong, requires implied volatility to be higher than an unbiased expectation of future volatility, and that gap creates the variance risk premium. Selling volatility therefore should make money over time, but stock markets tend to show much more downside volatility than upside. If you are short volatility, you will find that most of the time you make a little money and periodically you lose a bunch as volatility spikes, and those spikes will almost invariably come when the market is falling. Your VRP trade therefore looks a lot like being short a put, although in this case an out-of-the-money put instead of an at-the-money. Selling out-of-the-money (OTM) puts often seems like a wonderful strategy, chugging away making money consistently with little volatility until, suddenly, it doesn’t. Table 2 shows the characteristics of a 5% OTM put selling strategy.

It works until it doesn’t.

It looks wonderful! Beta and volatility are basically half that of ATM puts, and the strategy has an even higher Sharpe ratio than ATM puts, one that most hedge fund managers would be very happy to achieve. It looks, on the face of it, like exactly the sort of strategy that one should be levering up instead of owning dumb old equities. The trouble is, while the strategy seldom loses money, when it does lose is exactly when you’d prefer it didn’t. Table 3 shows you a month and day that most people peddling option selling strategies won’t talk to you about. In part, this is because the main options database that most people use for their analyses only goes back to 1996. But it is quite possible to get options data on S&P 500 futures going back to 1983, so ignoring October 19, 1987 is also about hiding an unpleasant truth.

The 27.8% loss for the day of October 19, 1987 is a 76 standard deviation event for the OTM put selling strategy. While everyone “knows” that put selling does not have normally distributed returns, you can also bet that no one looking at the statistics of a strategy would say to themselves, “You know, I’d really better stress test my portfolio against a 76 standard deviation event just to be on the safe side.” But the simple truth is that plenty of strategies that look low-risk much of the time have the potential for profoundly larger losses if something odd, but possible, happens in the financial markets. You would never want to lever such a strategy based on its historical return characteristics, because you cannot be confident you understand the risks based on that limited sample. There are plenty of downturns in which a 5% OTM put selling strategy winds up losing far less than a long equity strategy, but there are some where it is worse, so treating it as one-third the “risk” of a long equity strategy is potentially deadly to your financial well-being.

This is all a long-winded way of saying that put selling is not a free lunch, and something to be levered only by the exceptionally brave, foolhardy, or those who take very seriously the incentives created by a 1 and 20% fee structure. But we still think put selling, in an unlevered form, can at times be a tasty food truck meal. Once you recognize that the reason you are getting paid for selling puts is because you are taking equity downside risk, but the manner in which you get paid is different from owning the market, there may well be some times when the payment for equity downside is better from put selling than owning the stock market. While it would be odd if put selling always gave a better return per unit of “risk” than owning the market, the different return pattern means that some of the time it almost certainly will, and we would contend that a situation in which valuations are higher than normal but not at nosebleed levels may well be such a time.

In a similar vein, merger arbitrage turns out not to be a true arbitrage and therefore not a free lunch, either. Like OTM puts, merger arbitrage looks to have a low correlation with the stock market in normal times, but the correlation rises uncomfortably in times of market stress, which is when you really wish it wouldn’t. Merger arbitrage professionals will talk about getting paid for taking the risk of deals falling through, and that their skill is in better handicapping the likelihood of the deal completing or completing at a higher price than the original offer. The gap between the current price and deal price is indeed the manner in which investors are paid in merger arbitrage, and the skill that a manager has does come from his/her ability to better analyze the probabilities and prices than the other guy. But we would argue that the reason why there is a decent return to the activity of merger arbitrage is that the circumstances in which lots of deals are likely to fail at the same time is one of significant market stress – when credit markets freeze up, equity markets are falling, and acquirers either find themselves unable to raise the money they need to complete a deal or have simply changed their priorities from empire building to survival. But this still leaves merger arbitrage a potentially tasty food truck meal, because of the timing of when it is attractively priced. There are a fair number of hedge funds out there pursuing merger arbitrage strategies, but their capital is finite, and the size and number of deals changes over time. Merger arbitrage is likely to be priced to give interesting returns when the size of the deal pool is large relative to the capital devoted to the activity, which is likely to be when stocks have been rising for a while and executives and investors are feeling confident about the future. This is probably a time when the expected return to owning stocks has fallen, and may well also be a time when investor confidence is reducing the expected return to selling puts directly.

via Zero Hedge http://ift.tt/1sCbnOx Tyler Durden

Since The Fed’s extension of Operation Twist (and subsequent unveiling of QE3) in 2012, the stocks of “weak balance sheet” companies are up over 100%. In that same period, the stock prices of “strong balance sheet” companies are up a mere 43%.

 

The “dash-for-trash” that the Fed’s financial repression forced upon an investing public has enabled the worst companies to not only survive (creating yet another mal-investment boom) but squeezed their share prices to thrive. The reason we bring this up is simple…

 

This last week of exuberant equity market performance in the face of unimaginable geopolitical possibilities saw “weak balance sheet” stocks outperform “strong balance sheet” stocks by their most in 17 months. In other words, amidst all the chaos and uncertainty ‘investors’ drove the biggest dash for trash since March 2013.

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Because what’s the first thing you do when the world pushes towards the edge of World War III… buy the junkiest stocks and sell the best quality ones… Of Course!!

And the reasons Goldman say it will continue… well we discussed them before – what a farce.

via Zero Hedge http://ift.tt/1k7mvR4 Tyler Durden