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Following the news of Carl Icahn’s stake in Family Dollar (NYSE: FDO), it would be worth wild to consider the value added to retailers that have activist investors.  The case has been for the surge in Merger & Acquisition activity being driven by low rates, tax incentives, and an appetite from the big money for alternative assets.  CLO pricing through the month of May buoyed leveraged loan prices to a 10-week high. 

Aside from making headlines and being Wall Street Cowboys, what real benefit does a concentration of activists who stand on soap-boxes and state their actions are merely designed to increase shareholder value?  Apparently only 50 bps in 2014 when focusing upon the retail sector.

Looking across retailers with at least $1B in market cap, the top 20 of those with the highest concentration of activist investors has under-performed a leading retail composite index.  The S&P 500 Retail Composite Index has lost 4.71 percent since the start of 2014 while the 20 leading retailers basket lost 4.21 percent, a spread of 50 bps.  This performance is another shining example that the misunderstood hedge funds are being squeeze for performance ever since volatility fell to recent lows. 

Using Family Dollar since it is the most recent headline, let us look at it’s institutional holders. 

Taking the number one stock when organized by Activist Investor Ownership percentages, Family Dollar leads the pack with 25.48 percent.  Of the company’s top five institutional holders, three of them are activist investors:

1. Icahn Enterprises (NASDAQ: IEP) – 9.393%
2. Trian Fund Management LP – 7.35%
3. Paulson & Co – 5.68%

Participants and observers will continue to be exposed to content covering how Icahn and his buddies are doing everything for the shareholders even though the benefits of these guys, specifically in the retail sector, is negligible overall.  45% or 9 of the 20 retailers with at least $1B in market cap & a high concentration of activist investor holdings have posted positive performance for the year.

via Zero Hedge http://ift.tt/1uUtMEJ CalibratedConfidence

Submitted by Michael Snyder of The Economic Collapse blog,

Why have we turned our backs on the principles that this nation was founded upon?  Many of those that founded this nation bled and died so that we could experience "life, liberty and the pursuit of happiness".  And yet we have tossed their ideals aside as if they were so much rubbish.  Our founders had experienced the tyranny of big government (the monarchy) and the tyranny of the big banks and feudal lords, and they wanted something very different for the citizens of the new republic that they were forming.  They wanted a country where private property was respected and hard work was rewarded.  They wanted a country where the individual was empowered, and where everyone could own land and start businesses.  They wanted a country where there were severe restrictions on all large collections of power (government, banks and corporations all included).  They wanted a country where freedom and liberty were maximized and where ordinary people had the power to pursue their dreams and build better lives for their families.  And you know what?  While no system is ever perfect, the experiment that our founders originally set up worked beyond their wildest dreams.  But now we are killing it.  Why in the world would we want to do that?

Most people are under the illusion that the United States has a "capitalist economy" today, but that simply is not accurate.  At best, we have a "mixed economy" that is becoming a little bit more socialist with each passing day.  We pay dozens of different types of taxes each year, and some Americans actually end up giving more of their earnings to the government than they keep themselves.  But that is still not enough, and so our state governments have accumulated astounding amounts of debt, and our federal government has amassed the largest single debt that the world has ever seen.  If future generations of Americans get the chance, they will curse us for the chains of debt that we have placed upon their shoulders.

So what do our government officials do with all of this money?

Well, today approximately 70 percent of all federal government activity involves taking money from some Americans and giving it to other Americans.

Despite this unprecedented wealth-redistribution program, poverty is absolutely exploding in this country and 49 million Americans are dealing with food insecurity.

Meanwhile, the bankers have been getting fabulously wealthy from all of this debt.  The Federal Reserve system was designed to trap the U.S. government in an endless spiral of debt from which it could never possibly escape, and that mission has been accomplished.  In fact, the U.S. national debt is now more than 5000 times larger than it was when the Federal Reserve was first created a little more than 100 years ago.

Most people like to think of big banks as "capitalist" institutions, but that is not really accurate.  In the end, giant corporate banks like we have in the United States are actually collectivist institutions.  They tend to greatly concentrate wealth and power, and socialists find those kinds of banks very useful.

In fact, Vladimir Lenin once said that "without big banks, socialism would be impossible."

While there may be a bit of animosity between big government and big banks once in a while, the truth is that they are usually very closely tied to one another.  We saw this close relationship very clearly during the financial crisis of 2008, and it is no secret that there is a revolving door between the boardrooms of Wall Street and the halls of power in Washington.  The elite dominate both spheres, and it is not for the benefit of the rest of us.

In America today, government just keeps getting bigger and the banks just keep getting bigger.  Meanwhile, the percentage of self-employed Americans is at an all-time low and the middle class is steadily dying.

What we are doing right now is clearly not working.

So why don't we go back and do the things that we were doing when we were extremely successful as a nation?

In case you don't know what those things were, here are some clues…

#1 "A wise and frugal government… shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government." — Thomas Jefferson, First Inaugural Address, March 4, 1801

#2 "A people… who are possessed of the spirit of commerce, who see and who will pursue their advantages may achieve almost anything." – George Washington

#3 "Government is instituted to protect property of every sort; as well that which lies in the various rights of individuals, as that which the term particularly expresses. This being the end of government, that alone is a just government which impartially secures to every man whatever is his own." – James Madison, Essay on Property, 1792

#4 "Banks have done more injury to the religion, morality, tranquility, prosperity, and even wealth of the nation than they can have done or ever will do good." – John Adams

#5 "To take from one, because it is thought his own industry and that of his fathers has acquired too much, in order to spare to others, who, or whose fathers, have not exercised equal industry and skill, is to violate arbitrarily the first principle of association, the guarantee to everyone the free exercise of his industry and the fruits acquired by it." — Thomas Jefferson, letter to Joseph Milligan, April 6, 1816

#6 "The moment the idea is admitted into society that property is not as sacred as the laws of God, and that there is not a force of law and public justice to protect it, anarchy and tyranny commence. If ‘Thou shalt not covet’ and ‘Thou shalt not steal’ were not commandments of Heaven, they must be made inviolable precepts in every society before it can be civilized or made free." — John Adams, A Defense of the Constitutions of Government of the United States of America, 1787

#7 "I place economy among the first and most important virtues, and public debt as the greatest of dangers to be feared. To preserve our independence, we must not let our rulers load us with perpetual debt. If we run into such debts, we must be taxed in our meat and drink, in our necessities and in our comforts, in our labor and in our amusements." – Thomas Jefferson

#8 "Beware the greedy hand of government thrusting itself into every corner and crevice of industry." – Thomas Paine

#9 "If we can but prevent the government from wasting the labours of the people, under the pretence of taking care of them, they must become happy." – Thomas Jefferson to Thomas Cooper, November 29, 1802

#10 "All the perplexities, confusion and distress in America arise not from defects in the Constitution or Confederation, not from a want of honor or virtue so much as from downright ignorance of the nature of coin, credit and circulation." – John Adams, at the Constitutional Convention (1787)

#11 "The principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale." – Thomas Jefferson

#12 "Liberty must at all hazards be supported. We have a right to it, derived from our Maker. But if we had not, our fathers have earned and bought it for us, at the expense of their ease, their estates, their pleasure, and their blood." – John Adams, 1765

#13 "If ever again our nation stumbles upon unfunded paper, it shall surely be like death to our body politic. This country will crash." – George Washington

#14 "I wish it were possible to obtain a single amendment to our Constitution. I would be willing to depend on that alone for the reduction of the administration of our government to the genuine principles of its Constitution; I mean an additional article, taking from the federal government the power of borrowing." – Thomas Jefferson

#15 "When the people find that they can vote themselves money, that will herald the end of the republic." — Benjamin Franklin

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

While The Tea Party had been relatively aggressive in the race, it is still quite shocking to the establishment that the second-highest House Republican just got unseated (despite outspending Brat by a ratio of 5-to-1) by a local tea-party-backed economics professor:

• *HOUSE MAJORITY LEADER CANTOR LOSES VIRGINIA REPUBLICAN PRIMARY
• *DAVID BRAT BEATS CANTOR IN VIRGINIA PRIMARY, AP REPORTS
• *TEA PARTY CHALLENGER BEATS SECOND-HIGHEST HOUSE REPUBLICAN: AP

Echoing Europe’s dissatisfaction with the status quo, it appears the announcement of the death of the Tea Party was a little premature. Cantor was elected to Congress in 2000… looks like we have to add one to initial jobless claims this week.

 

 

Meet The Man Who Just Crushed Eric Cantor (via ABC)

Brat, who admits that he has supported several Cantor candidacies over the years, says he mounted his improbable primary campaign because the House GOP’s No. 2 leader has lost touch with his constituents, “veering from the Republican creed.”

“Years ago he had a good conservative track record, but now he’s veered off,” Brat told ABC News during an interview on Capitol Hill. “If you go to Heritage and look at their score, I think he’s at about a 53 right now. I mean, that’s an F-minus.”

Heritage Action’s scorecard tracks Republican votes, co-sponsorships and other legislative activity to gauge how conservative members of Congress are performing. Cantor actually receives a 52 percent, which ranks seventh among eight Virginia House Republicans.

While a recent profile of the race in the Washington Post characterized Brat as “a potential threat,” the quirky challenger knows he has a tough road to victory in the June 10 primary.

“Most of these [primary] races don’t kick in until about 30 days prior,” he said. “Now everyone’s looking, what’s the race? It’s an open primary and it’s just Eric and I on the ticket.”

Brat, 49, isn’t the first primary challenger Cantor has faced. The Richmond Republican smoked primary challenger Floyd Bayne in 2012 by nearly 60 percentage points before cruising to a 17-point victory in the general election.

But with low primary turnout (just 47,000 voters turned out in the primary two years ago) and anti-incumbency fervor at an all-time high, Cantor’s team says they aren’t overlooking Brat, although they “don’t see him getting a great deal of traction.”

“We’re on the ground, running the campaign,” Cantor campaign spokesman and senior strategist Ray Allen said in a phone interview. “We take every figure seriously and do our own due diligence. It is what it is.”

Brat claims “the money is flowing in right now,” expanding an underwhelming campaign war chest that he last reported contained just $40,000.

“The race was once viewed as a long-shot, [but] it’s tightening now,” Brat said. “We’re well over double, triple what we had on the books just a month ago and so now we’re getting the national attention I always hoped.”

Brat complained that Cantor, 50, has a “crony-capitalist mentality” to take care of the corporate sector ahead of the interests of small businesses.

“On the conservative scorecard, on the free market votes, he’s doing everything wrong,” Brat said. “He’s not following what folks in his district want him to do and it’s hurting the country.”

Allen described Brat as “a weird duck” and criticized him for serving on then-Democratic Gov. Tim Kaine’s Joint Advisory Board of Economists.

“Eric Cantor is a conservative leader,” Allen, who has advised Cantor’s campaigns since 1991, said. “[Brat] doesn’t like being called a liberal college professor, but that’s what he is and what he’s always been. Tea Party conservatives don’t serve as an economic adviser to Tim Kaine.”

Brat calls himself as a “free market guy,” and says he wants to repeal the Affordable Care Act. He also pledged never to increase taxes and to stick to a five-year promise not to vote to increase the debt limit.

“This isn’t a personal race. I’m not running against Eric,” he stressed. “I’m just running on the founding principles that Adam Smith and free markets – they made us the greatest nation on the Earth. All right? It’s no mystery. Our rights, tradition, along with free markets and the Judeo-Christian tradition all together made us the greatest nation on the face of the Earth. I think we’re veering off course a little bit there and I want to get us back on that course that brought us to greatness.”

If Brat ultimately wins the primary and is seated in the 114 th Congress, he would not commit his vote for speaker to House Speaker John Boehner, but offered his support to any contender who’s “more free market and more fiscally responsible.”

“I’d have to take a good look at what they’re doing but I support people who follow the Republican creed, and so it doesn’t look like the leadership is doing a good job on that right now,” Brat said.

“They’re not free market at all, right? They do not take free market seriously and they’re off on fiscal responsibility.”

via Zero Hedge http://ift.tt/1kk1pYU Tyler Durden

Just when one thought US foreign policy couldn’t sink any deeper into the hole of its embarrassment, it takes out a shovel and starts digging. Overnight, in what AP describes as a stunning assault that exposed Iraq’s eroding central authority, Al Qaida-inspired militants from ISIS, or the Islamic State of Iraq and al-Sham, overran much of Mosul on Tuesday, seizing government buildings, pushing out security forces and capturing military vehicles as thousands of residents fled the second-largest city.

For those who may have forgotten, Iraq was one of those countries “liberated” by the the United States, which unlike Afghanistan where the opium trade is still important, did pull out its troops two and a half years ago.

Ths shocking takeover of Mosul took place months after Al Qaeda-linked fighers took over another Iraqi town, Fallujah, earlier in the year and which they have successfully defended against government attempts to reclaim it. 

That however, was just the appetizer: Mosul is a much bigger, more strategic prize. The city and surrounding Ninevah province, which is on the doorstep of Iraq’s relatively prosperous Kurdish region, are a major export route for Iraqi oil and a gateway to Syria.

“This isn’t Fallujah. This isn’t a place you can just cordon off and forget about,” said Michael Knights, a regional security analyst at the Washington Institute for Near East Policy, cited by AP. “It’s essential to Iraq.”

The WSJ adds that hours after government forces fled Mosul in disarray following four days of fighting, Prime Minister Nouri al-Maliki declared a nationwide “state of maximum preparedness” but didn’t indicate whether government forces were mobilizing to retake the Iraqi city, 220 miles north of the capital Baghdad.

The capture of Mosul by rebels linked to the Islamic State of Iraq and al-Sham, or ISIS, is the latest evidence of the weakness and disorganization that have beset Iraq’s security forces since the U.S. forces withdrew from the country in December 2011.

Residents of Mosul said they were shocked at the ease of the rebel takeover of government buildings, television stations and military installations where U.S.-supplied fighter airplanes, helicopters and other heavy weaponry are based.

“The whole of Mosul collapsed today. We’ve fled our homes and neighborhoods, and we’re looking for God’s mercy,” said Mahmoud Al Taie, a dentist. “We are waiting to die.”

Videos showed victorious insurgents waving black flags emblazoned with an Islamic script—the standard brandished by al Qaeda militants world-wide.

The biggest irony here is that while the US is arming “rebels” in neighboring Syria, among which numerous Al-Qaeda rebels, the weapons and the trained “fighters” then promptly make their way across the border and continue fighting the US-blessed government in Iraq!

Jessica Lewis, a former U.S. Army intelligence officer, said ISIS fighters won a notable victory in Mosul.

“ISIS is designing its campaign around the state that it believes it has already created,” said Ms. Lewis, currently research director for the Institute for the Study of War in Washington, D.C.

“I think that means that Iraq is going to start to look more like Syria. It’s a gauge of the severity of the conflict and the trajectory that it’s on. That’s a very bad sign.”

The ISIS-controlled areas of Iraq.

And to think none of this could have been accomplished without the assistance of the US state department.

The Obama administration, responding to the fall of Mosul, said ISIS “is not only a threat to the stability of Iraq but a threat to the entire region.”

 

State Department spokeswoman Jen Psaki said the group has drawn strength from the Syrian civil war, where it can acquire recruits, weapons and other resources for its fight in Iraq.

Perhaps miss Psaki should have answered questions about where the ISIS force was getting its weapons. The U.S.-trained and equipped Iraqi security forces, which have floundered since the U.S. pullout, haven’t succeeded in thwarting ISIS’s emergence as a formidable paramilitary force.

Below is a detailed narrative of just how Al-Qaeda managed to take over yet another garrison in the middle east:

Despite the security precautions, ISIS fighters raided the western half of Mosul early Friday, forcing military personnel and federal police forces to retreat over bridges to the eastern bank of the Tigris River, which divides the city.

 

For three days, residents in the eastern half of the city huddled in their houses and parceled out their ever-dwindling supply of food and other staples, as authorities tried to secure the city.

 

Mosul governor Atheel Nujaifi, appearing Monday evening on national television, made a desperate call for city residents to form ad hoc committees to defend themselves. But he fled on Monday night.

 

In the early-morning darkness of Tuesday, local resistance dissolved, as insurgents poured across the bridges separating east from west. According to witnesses, government soldiers fled on foot, leaving the streets littered with abandoned army vehicles, weapons and uniforms.

 

The vanquished soldiers knocked on doors and begged for civilian clothes, so they could escape without being identified, said Ahmed Khaza’al, a cosmetic dealer.

 

The victory by ISIS and its allies means they control sizable regions in at least three of Iraq’s 18 provinces. Upon news of Mosul’s fall, fears of more fighting rippled across the country.

The US has pledged to help Iraqi leaders “push back against this aggression” as the government of Prime Minister Nuri al-Maliki asked parliament to declare a state of emergency that would give him extraordinary powers to tackle the crisis. The rampage by the black banner-waving insurgents was a heavy defeat for Prime Minister Nouri al-Maliki as he tries to hold onto power, and highlighted the growing strength of the Islamic State of Iraq and the Levant. The group has been advancing in both Iraq and neighboring Syria, capturing territory in a campaign to set up a militant enclave straddling the border.

But the battle, for the time being, seemed to be over. Some police were discarding uniforms and weapons and fleeing a city where the black flag of ISIL now flew over government buildings.

“We have lost Mosul this morning,” said a colonel at a local military command center. “Army and police forces left their positions and ISIL terrorists are in full control.

“It’s a total collapse of the security forces.”

This is the aftermath in clips and images:

 

 

 

Assyrian church set ablaze…

 

Iraqi troop uniforms left behind…

 

Smoke everywhere…

 

As the roads are full amid the mass exodus…

 

* * *

But the worst news by far for the US is that as a result of the takeover of Mosul by ISIS forces, an unknown number, and at least one, US ultramodern Blackhawk and Kiowa helicopters parked at the Mosul airport, are now in, you guessed it, Al Qaeda hands.

#Mosul airport is normally crowded with #Blackhawk and #Kiowa helis.
Let’s see how many ended up in #ISIS hands… http://ift.tt/1l68roU

— ConflictReporter (@MiddleEast_BRK) June 10, 2014

Black Hawk, one of ghaneemas taken by #ISIS. #Mosul #Iraq http://ift.tt/1l68pgW

— ?? ????? #????? (@Ghareeba_7) June 10, 2014

Guys, a base of these was captured by Dawla in Mosul… Imagine what could be done with them. Black Hawk choppers. http://ift.tt/1hE42df

— Ghazi (@ghazishami) June 10, 2014

So Mosul has fallen and the ISIS jihadists now have blackhawks and humvees and guns,courtesy of Uncle Sam

— Hemil (@cravingHedonist) June 10, 2014

PT: Worth noting that ISIS has captured parts of #Mosul airport, where #Iraq forces maintain a fleet of UH-60 Blackhawk helicopters.

— Charles Lister (@Charles_Lister) June 10, 2014

Mosul airport viewed through Google maps: grounded helicopters can be easily seen just east of the main airstrip:

 

Thank you US State Department: once again, this smashing Al-Qaeda success could not have been achieved without your help.

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

The recent decline in US yields appears to have run its course and given Citi’s outlook for a better employment dynamic in the US, they expect yields to trend higher at this point. Citi’s FX Technicals group remain of the bias that the normalization of labor markets (and the economy) will lead to a normalization in monetary policy and as a result significantly higher yields in the long run. Might the shock be that the Fed could be grudgingly tightening by late 2014/early 2015 (an equal time line to the 1994-2004 gap would suggest end November 2014) just as it was grudgingly easing by late 2007 despite being quite hawkish earlier that year? However, given the “treacherous market conditions” we suspect Citi’s hoped-for normalization won’t go quite as smoothly as The Fed hopes.

Via Citi’s FX Technicals Group,

The decline in the US 10 year yield which began in April appears to be coming to an end after pivotal support held around the 2.40% area (converging 200 week moving average and the October 2011 and the 2012 highs)

US 10s bouncing off pivotal support

Since then we saw a bounce higher leading to a failure to close below the neckline of a potential double top at 2.47%. Rather the 10 year yield continued to push up this week.

Weekly momentum has also turned higher from historically stretched levels (turns from similarly stretched levels occurred in April 2013 and October 2013 and in both cases higher yields followed)

Resistance around 2.56%-2.58% is currently being tested and a break through there, which is our bias, opens the way towards the 2.80% area (top of the recent trading range) initially and then the trend highs around 3%

Ultimately we remain of the view that as the US economy (and Fed policy) normalizes, even higher levels in yields across the curve will continue to be seen.

US 30 year yield approaching key resistance

The US 30 year yield has also seen a strong bounce after failing to push below supports around the 3.30% area. There is also positive momentum divergence (not triple) on the weekly chart just as there was in Summer 2012 when the long-term low was put in (left chart). Positive triple momentum divergence has been confirmed on the daily chart (right chart) suggesting the move lower in yields as run out of steam.

There are now significant resistance levels converging around the 3.45%-3.50% area including 55 day and 200 week moving averages, the downward sloping trend line and the highs from October 2011, 2012 and mid-May. A break above there opens the way back up to the trend highs around 3.94%-3.97%….

30 year yield monthly chart

That area also holds the top of the long-term downward sloping trend line, a break of which suggests the 20+ year trend is over and higher levels are likely, initially towards 4.85%.

A decisive break above there, if seen, confirms a major double bottom which would then target 7.25%

US 5 year yield consolidating for now

While the back end of the US yield curve has seen a strong move lower in the last few months, the 5 year yield has managed to remain in a consolidation pattern

Support is around 1.46%-1.49% with a move below there opening the way towards the 1.21%-1.25% area, though we are not currently expecting such a development

Our bias is for a break out of the consolidation top around 1.80% which would then suggest a move towards 2.41%, the 2011 high

The normalization of Fed policy should result in the sharpest initial rise in yields to continue to take place in the 5 year space, in our opinion, as the US economic recovery continues to take hold and monetary policy remains on track to end QE

This should result in a steeper 2s-5s curve….

US 2s-5s: “The best interest rate chart in the world”

On 3 occasions in the last quarter century we have seen this chart go to +161 basis points and on 3 occasions we have seen it move to the area around -20 basis points. In 5 of those 6 periods we have seen this being a precursor to a shift in Fed policy.

The exception to this rule was when we turned off the +161 level seen in 2009/2010. In the prior 2 occasions the flattening off this level was a “bear-flattening” as the market anticipated that we were moving to a tightening in Fed policy (Just as the rises from inversion were bull steepening’s as the market anticipated an easing of Fed policy.)

The flattening we saw from the 2009/2010 peak was NOT a bear flattening and it was NOT the market anticipating a Fed tightening but quite the contrary. The flattening was “interference”, more commonly known as QE. This caused the curve to bull flatten as Fed monetary policy moved to the long end of the curve….so it really was “different this time”

In our weekly of 20th March titled “QE is dead-Long live normalization” we articulated the view that as we now head for what we believe will be a normalization / a more traditional monetary policy approach that this curve can once again be a strong indicator of what is to come.

So what do we expect now?

• We still expect the curve above to further steepen initially as 5 year yields head higher more aggressively than 2 year yields. That is because at this point Fed policy is changing at the longer end of the curve but not YET at the Fed funds level.
• We would not be surprised if we see this curve head right back to 161 basis points again as Fed interference becomes less and less.(As tapering continues to wind down new purchases by the Fed down to zero before the end of 2014)
• At that point, looking at the historical perspective, we would expect the bear steepening to then “morph” into a bear flattening as the market begins to realize that the timeline for a move by the Fed on the Fed funds rate is not going to be as long as they thought.
• At that point 2 year yields are likely to head sharply higher and rise at a pace greater than 5 year yields causing the curve to bear-flatten in a more traditional way

A point worth noting- We would argue that the 161 basis point peak seen in June 2009/Jan 2010 was an “aberration” caused by aggressive short-term/long-term monetary policy and in particular because we subsequently saw a bull flattening (Unlike the bear flattening of 1992 and 2003).

As noted above we expect that level to be reached again as 5 year yields “normalize” now that tapering to ZERO appears to be a “done deal” for later this year.(After which we expect a bear flattening as the perception grows of a move to “Fed funds normalization”)

The first peak on this chart occurred in the summer of 1992 and the second 11 years later in the summer of 2003 (The points at which the worst was behind us and things were improving again). A similar timeframe would suggest a “real” 161 basis point peak (As interference known as QE exits the market) would be the summer of 2014 (July in fact if it was to be a 10 year and 11 month timeframe like before)

There was quite a long lag after the Sept 1992 peak before the Fed raised rates (17 months) but much less after the August 2003 peak (After we went to extraordinarily low rates of 1% in Fed funds) of 10 months.

Given the even more “extraordinary” accommodation this time we would not be surprised if that timeframe was even shorter again (End 2014-early 2015 if we peak at 161 basis points in the summer?). The 2 year yield may serve as a strong guide as to just when the hiking cycle will begin…

US 2 year yield

Following the recent 76.4% pullback the 2 year yield moved higher again and posted a second 76.4% pullback. A break through the retracement pivot at 47 basis points would open the way towards the channel top at 61 basis points.

89 basis points, though, may be the pivotal number to watch. Ever since the financial/housing crisis began the 2 year yield has had a consistent path of lower lows and lower highs.

A break back above 89 basis points (weekly close) would change that pattern and be the “icing on the cake” in suggesting that much higher yields are in prospect going forward.

The next major level above the 89 basis point level would be the June 2009 peak at 1.43%

US 2 year yield minus Fed Funds rate

Going back to the start of the Fed PUT era (beginning with Alan Greenspan, then Ben Bernanke and now Janet Yellen) all policy changes from the cycle low/high in the Fed funds rate have been preceded by a large gap opening up between the 2 year yield and the Fed funds rate ). This gap has regularly been in excess of 100 basis points before the Fed capitulates and moves short-term rates. (Including in Sept. 2007)

This may well suggest that we are going to have to see that break of 89 basis points on the 2 year yield and a move towards that 1.43% level before the Fed capitulates on the Fed funds rate (That normally happens earlier than they would guide) and raises short term rates.

If we look at the present Fed funds rate (Zero-25 basis points) this suggests that once we start heading into the 1.20-1.50% range in 2 year yields that a Fed hike is likely pretty imminent. As we mentioned above, we believe that a break of 89 basis points on the 2 year yield may well be the early warning sign that this development is materializing.

1994, 2004, 2014????. Might the shock be that the Fed could be grudgingly tightening by late 2014/early 2015 (An equal time line to the 1994-2004 gap would suggest end November 2014) just as it was grudgingly easing by late 2007 despite being quite hawkish earlier that year?

We remain convinced that monetary policy normalization and economic normalization come “hand in hand” and that the coming months are going to show a backdrop that validates the move in yields that we are anticipating throughout the rest of this year and beyond. This will be supportive of our view of a strong USD going forward…

*  *  *

We wish them luck in this trade… Howver, as we discussed in detail here and here (Treacherous Market Conditions), we suspect things won’t “normalize” quite as the Fed plans…

via Zero Hedge http://ift.tt/SwRDMp Tyler Durden

Day in, day out, we hear it… It's "the most unloved rally"; Stocks are in "the Rodney Dangerfield rally"; there's still all the "money on the sidelines." Well, it seems, judging by Investors Intelligence surveys of those "not bullish" (bearish or expecting a correction), that investors have never (ever) been more lovingly, respectfully, all-in with this rally… (but that's just the facts speaking – not the asset-gethering soundbites).

 

Investors have never been less bearish or expectant of a correction.

Via Cliff Asness,

Every time someone says, “There is a lot of cash on the sidelines,” a tiny part of my soul dies. There are no sidelines. Those saying this seem to envision a seller of stocks moving her money to cash and awaiting a chance to return. But they always ignore that this seller sold to somebody, who presumably moved a precisely equal amount of cash off the sidelines.

If you want to save those who say this, I can think of two ways.

 

 

First, they really just mean that sentiment is negative but people are waiting to buy. If sentiment turns, it won’t move any cash off the sidelines because, again, that just can’t happen, but it can mean prices will rise because more people will be trying to get off the nonexistent sidelines than on.

 

Second, over the long term, there really are sidelines in the sense that new shares can be created or destroyed (net issuance), and that may well be a function of investor sentiment.

 

But even though I’ve thrown people who use this phrase a lifeline, I believe that they really do think there are sidelines.

There aren’t. Like any equilibrium concept (a powerful way of thinking that is amazingly underused), there can be a sideline for any subset of investors, but someone else has to be doing the opposite.

Add us all up and there are no sidelines.

 

h/t @Not_Jim_Cramer

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By: Chris Tell at: http://ift.tt/146186R

Mark, have you LOST your mind? 500 Startups rocks! They help a ton of young companies get over the hurdle and launch to greatness. Dave McClure is a renaissance man, a hero, an advocate for all things startup… a giant among men!

Well, he certainly is all those things in his mind, if you take his public persona at face value. Look, this isn’t going to be a rant against Dave, I’ve never even met the guy. He seems like he’d be “interesting” to have a beer with. But, do I want to invest my money with him? I’m not so sure.

Here’s a great quote from Sam Biddle over at Valley Wag:

McClure has long prided himself on being a bad boy, in-your-face venture capitalist, which only works when you’re really a bad boy, and anyone wants you to be in their face. If the only x-treme truth you have to offer is the persona of an insecure 9th-grade boy at a Rage Against The Machine show, we all ought to start to question why this man is in charge of investing large sums of money on a regular basis.

500 Startups is all about investing small sums into a ton of startups. The name says it all. What does that guarantee? Industry average returns. In effect, Dave is running a startup index fund.

That’s not the problem, and it’s not necessarily a flawed model. I agree that less is more when it comes to high-risk investing, but there’s a bigger issue.

The issue is valuations. The message that McClure and his team (and to be fair, a LOT of other VCs) are sending to these young startups is, in my opinion, dangerous to their future success. That message is that valuations don’t matter.

We know a few of the companies that have made their way through the program. They say it’s great, and I’m sure it is. Being mentored by those who have “been there and done that” is very valuable.

However, I’m sorry, valuations DO matter. The next startup with zero revenue, a product in alpha, no customers, no real business plan and a team that has had no past successes, that approaches me with a $5mm pre-money valuation… I’m going to go spider monkey on your ass! Just sayin’.

Look, valuing a startup properly is hard. Because they are inherently high risk and often have little or no revenues, traditional quantitative valuation methods won’t work. Startup valuations are largely qualitative.

We’ve screwed up plenty in this area, which is why I’m writing this missive. Learn from your mistakes!

The valuations were seeing right now are, in general, just too high! Companies have little, if any, margin for error. When you raise a pre-seed round at $5mm, or God forbid, $10mm (yep, we’ve seen it!) where do you go from there?

Setting too high a valuation early on sets expectations for later rounds of funding which may be difficult to achieve. Come the next round you might not have “grown into” the valuation set in earlier rounds and may find it difficult to exceed your initial valuation, which could result in the next round being a flat or a down round. That’s not desirable. Chris wrote about one way to solve the valuation conundrum HERE and further explained a real life situation of a poor financing involving convertible debt HERE.

When I invest early I want a good return. You have to manage my, and other investor’s expectations. Investors that come along after an inflated seed or early round may think the company’s value is unreasonable, especially if important milestones are not being hit on plan.

Right now we’re talking to a company that has developed a massively promising SaaS big data platform. The guys running it are 40+ years old, veterans of the tech industry. They said, “We need $3-$5mm to scale quickly.” It’s the first outside capital they are taking, so in effect it’s a seed round, as they’ve “pre-seeded” with their own capital to date.

We told them to consider reducing the capital they take in this seed round, place a reasonable valuation on the company, and then use those funds to hit some key milestones quickly. After that they can go out for a larger round, at an increased valuation. This can happen quickly if they execute properly.

Coming full-circle… I hear Dave McClure is actually a decent guy, and his outrageous antics are just for show. A friend of mine just had lunch with him a few weeks back and enjoyed the discourse. Hey, any PR is good PR, right? He has his method and we have ours. I’m just not sure I want invest my capital with him.

We’re in a raging bull market for startups. Bull markets make heroes out of everyone… until they don’t. Usually I advise companies to take the money when it’s available, but that doesn’t mean you shoot yourself in the foot. PLAN AHEAD.

– Mark

 

“I figured maybe I had some talent as an investor… since it seemed like I was only a half-assed entrepreneur.” – Dave McClure

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