Mar 12

Today’s News 12th March 2016

  • Democracy, Be Damned – The "Sea Island" Conspiracy Reveals The Deep State

    Submitted by Patrick Buchanan via Buchanan.org,

    Over the long weekend before the Mississippi and Michigan primaries, the sky above Sea Island was black with corporate jets.

    Apple’s Tim Cook, Google’s Larry Page and Eric Schmidt, Napster’s Sean Parker, Tesla Motors’ Elon Musk, and other members of the super-rich were jetting in to the exclusive Georgia resort, ostensibly to participate in the annual World Forum of the American Enterprise Institute.

    Among the advertised topics of discussion: “Millennials: How Much Do They Matter and What Do They Want?”

    That was the cover story.

    As revealed by the Huffington Post, Sea Island last weekend was host to a secret conclave at the Cloisters where oligarchs colluded with Beltway elites to reverse the democratic decisions of millions of voters and abort the candidacy of Donald Trump.

    Among the journalists at Sea Island were Rich Lowry of National Review, which just devoted an entire issue to the topic: “Against Trump,” and Arthur Sulzberger, publisher of the Trumphobic New York Times.

    Bush guru Karl Rove of FOX News was on hand, as were Speaker Paul Ryan, Majority Leader Mitch McConnell and Sen. Lindsey Graham, dispatched by Trump in New Hampshire and a berserker on the subject of the Donald.

    So, too, was William Kristol, editor of the rabidly anti-Trump Weekly Standard, who reported back to comrades: “The key task now, to … paraphrase Karl Marx, is less to understand Trump than to stop him.”

    Kristol earlier tweeted that the Sea Island conclave is “off the record, so please do consider my tweets from there off the record.”

    Redeeming itself for relegating Trump to its entertainment pages, the Huffington Post did the nation a service in lifting the rug on “something rotten in the state.”

    What we see at Sea Island is that, despite all their babble about bringing the blessings of “democracy” to the world’s benighted, AEI, Neocon Central, believes less in democracy than in perpetual control of the American nation by the ruling Beltway elites.

    If an outsider like Trump imperils that control, democracy be damned. The elites will come together to bring him down, because, behind party ties, they are soul brothers in the pursuit of power.

    Something else was revealed by the Huffington Post — a deeply embedded corruption that permeates this capital city.

    The American Enterprise Institute for Public Policy Research is a 501(c)(3) under IRS rules, an organization exempt from U.S. taxation.

    Million-dollar corporate contributions to AEI are tax-deductible.

    This special privilege, this freedom from taxation, is accorded to organizations established for purposes such as “religious, educational, charitable, scientific, literary … or the prevention of cruelty to children or animals.”

    What the co-conspirators of Sea Island were up at the Cloisters was about as religious as what the Bolsheviks at that girls school known as the Smolny Institute were up to in Petrograd in 1917.

    From what has been reported, it would not be extreme to say this was a conspiracy of oligarchs, War Party neocons, and face-card Republicans to reverse the results of the primaries and impose upon the party, against its expressed will, a nominee responsive to the elites’ agenda.

    And this taxpayer-subsidized “Dump Trump” camarilla raises even larger issues.

    Now America is not Russia or Egypt or China.

    But all those countries are now moving purposefully to expose U.S. ties to nongovernmental organizations set up and operating in their capital cities.

    Many of those NGOs have had funds funneled to them from U.S. agencies such as the National Endowment for Democracy, which has backed “color-coded revolutions” credited with dumping over regimes in Serbia, Ukraine and Georgia.

    In the early 1950s, in Iran and Guatemala, the CIA of the Dulles brothers did this work.

    Whatever ones thinks of Vladimir Putin, can anyone blame him for not wanting U.S. agencies backing NGOs in Moscow, whose unstated goal is to see him and his regime overthrown?

    And whatever one thinks of NED and its subsidiaries, it is time Americans took a hard look at the tax-exempt foundations, think tanks and public policy institutes operating in our capital city.

    How many are like AEI, scheming to predetermine the outcome of presidential elections while enjoying tax exemptions and posturing as benign assemblages of disinterested scholars and seekers of truth?

    How many of these tax-exempt think tanks are fronts and propaganda organs of transnational corporations that are sustained with tax-deductible dollars, until their “resident scholars” can move into government offices and do the work for which they have been paid handsomely in advance?

    How many of these think tanks take foreign money to advance the interests of foreign regimes in America’s capital?

    We talk about the “deep state” in Turkey and Egypt, the unseen regimes that exist beneath the public regime and rule the nation no matter the president or prime minister.

    What about the “deep state” that rules us, of which we caught a glimpse at Sea Island?

    A diligent legislature of a democratic republic would have long since dragged America’s deep state out into the sunlight.

  • What The Average Zhou Thinks Of China's Housing Bubble: "Only After War Breaks Out, We'll Be Able To Afford It"

    Chinese home prices are soaring. In fact, according to the latest data, the bubble among China's top, or "Tier 1" cities has never been bigger entirely at the expense of all other cities.

     

     

    And while this appears at first glance a positive, for central-planners and leveraged speculators, we wondered what the man on the street of Beijing thought of it.

    Policies by Chinese authorities to stimulate the country’s housing market have contributed to sky-high prices in some big cities such as Beijing, Shanghai and Shenzhen – with developers and real estate agents adding to the craze. What do Beijing residents make of the current market? Do they fear that a property bubble might be on the horizon?

    The Wall Street Journal hit the streets to find out, and discovered the average Zhou is not happy…

    Hu Xiaolin, 56, retired worker from Beijing

    Do you currently own a house? If not, do you plan to buy one in the future?

    No, I don't own a house. I don't plan to buy one; I can't afford it. My parents had a house, but my brother and sister live in it now. I just saw the news today about a "school district house:" an 11-square-meter bungalow was sold at 460,000 yuan ($71,000) per square meter. In total it's 5 million yuan ($770,000). It's just a game for the rich!

    Why do you think real estate prices are so high? Do you expect them to decline or keep rising?

    A few years ago the high prices were due to real demand. Gradually there was speculation, and now even regular people know that real estate is more valuable than stocks; the value just keeps rising. A house originally worth 4-500,000 yuan ($62-$77,000) might now be worth 2-3 million yuan ($300-$460,000). You can survey how many houses have owners living in them by counting the lights at night. Why so many empty houses? They belong to the real estate speculators, the hoarders and the corrupt officials.

    Have you ever used a housing agent in Beijing? What was your experience like?

    Yes. They're unreliable. Most talk rubbish, especially those working for small agencies. They always go back on their word and the staff are low quality; all they think about is selling houses and drawing a commission.

    With “destocking” one of this year’s economic targets, what kind of change do you hope to see? What is the role of the housing market in China’s economy, in your opinion?

    I hope the bubble can be eliminated more or less. What worries me is that if there are no purchasing requirements for outsiders and the rich flood into Beijing, the pressure will be overwhelming. The home-purchase policy isn't implemented strictly. Beijing isn't a livable city at all.

    Liu Na, 32, garment trader from Shandong

    "Chinese people want a house after they get money. It’s a fixed asset and can be passed to their descendants. But I have no plan or fantasy to buy one. The price makes it off-limits. It’s also a food chain: Only the richest and most capable people can live here."

    Anna Zhuo, 33, ad industry worker from Heilongjiang

    "I hope the prices can be stabilized. The government can release regulations on housing replacement, sparing the ownership transfer fees. The housing market is a pillar (of the economy). If it's ruined, our economy will be, too. It’s also a visible bubble. Everybody knows it will burst, but they still touch it."

    Martin Lee, 34, business manager from Beijing

    "Housing is the most direct way to exploit people. The prices will rise steadily and fall dramatically after they've reached a certain point."

     

    "It's a means for the privileged and interest groups to make a profit. 1,000 years ago, the ancient poet Du Fu said, "Where can I get a big broad shelter a thousand, ten thousand spans wide, a huge roof that all the world's poor people can share with smiling faces?" Now, nothing has changed. The housing market is part of the bubble economy. In 5 years or so, after a war has broken out, then the middle class will be able to afford a home."

    *  *  *

    And finally, there is Shi Ji, 24, housing agent from Jilin

    "The Chinese housing market started in the 1990s and is still in an initial stage. It’s a backbone of the economy. The Beijing real estate industry pays tens of billions of yuan in taxes annually. Many say they can’t afford to buy a house, which is not exactly right. Most consumers are seeking to upgrade their homes. If you can’t buy a big house, buy a small one. If you can’t buy in Beijing, buy in second-tier…"

    So buy, buy, buy!

     

  • FBI Morale "Very Good" As 'Immune' Hillary IT-Staffer Reportedly A "Devastating Witness"

    Despite the arrogance of Hillary's campaign claiming to be "pleased" that the Justice Department granted immunity to an IT specialist who worked on Hillary's private email server, Fox News reports Bryan Pagliano has told the FBI key details, about how and what devices she used, citing an intelligence source who called him a "devastating witness." Having been warned that she should be "terrified" since "they would not be immunizing him and thereby inducing him to spill his guts unless they wanted to indict someone," Pagliano has reportedly provided information allowing investigators to knit together the emails with other evidence, including images of Clinton on the road as secretary of state.

    Watch the latest video at video.foxnews.com

    FOX News reports that the intelligence source said Pagliano told the FBI who had access to the former secretary of state’s system – as well as when – and what devices were used, amounting to a roadmap for investigators.

    "Bryan Pagliano is a devastating witness and, as the webmaster, knows exactly who had access to [Clinton's] computer and devices at specific times. His importance to this case cannot be over-emphasized," the intelligence source said.

     

    The cross-referencing of evidence could help investigators pinpoint potential gaps in the email record. "Don't forget all those photos with her using various devices and it is easy to track the whereabouts of her phone," the source said. "It is still boils down to a paper case. Did you email at this time from your home or elsewhere using this device? And here is a picture of you and your aides holding the devices." 

    At a Democratic debate Wednesday evening, Clinton brushed off the question when asked by the moderator whether she would withdraw from the presidential race if faced with criminal charges.

    Univision’s Jorge Ramos asked, "If you get indicted, will you drop out?" Clinton responded, "My goodness. That is not going to happen. I'm not even answering that question."

    She then added her now standard explanation that nothing she sent or received was marked classified at the time. While technically correct, the distinction appears misleading. The January 2009 classified information non-disclosure agreement signed by Clinton says she understood that classified information could be marked and unmarked, as well as verbal communications. Classification is based on content, not markings.

    The intelligence source said the FBI is "extremely focused" on the 22 “top secret” emails deemed too damaging to national security to publicly release under any circumstances, with agents reviewing those sent by Clinton as well her subordinates including former chief of staff Cheryl Mills.

    "Mrs. Clinton sending them in this instance would show her intent much more than would receiving [them],” the source said. "Hillary Clinton was at a minimum grossly negligent in her handling of NDI [National Defense Information] materials merely by her insisting that she utilize a private server versus a [U.S. government] server. Remember, NDI does not have to be classified."

     

    According to the Congressional Research Service, NDI is broadly defined to include “information that they have reason to know could be used to harm the national security.”

     

    It was emphasized to Fox News that Clinton’s deliberate “creation” and “control” of the private server used for her official government business is the subject of intense scrutiny. Pagliano knows key details as to how the private server was installed and maintained in her home.

     

    The 22 “top secret” emails are not public, but in a Jan. 14 unclassified letter, first reported by Fox News,  Intelligence Community Inspector General I. Charles McCullough III notified Congress of the findings of a recent comprehensive review by intelligence agencies identifying "several dozen" additional classified emails — including specific intelligence known as "special access programs" (SAP).

     

    That indicates a level of classification beyond even "top secret," the label previously given to other emails found on her server, and brings even more scrutiny to the presidential candidate's handling of the government's closely held secrets.

    The intelligence source described the morale of agents as "very good and nobody is moping around which is the first sign a big case is going south."

    *  *  *

    Keep on running…

  • Trump Cancels Chicago Speech After Violent "Make America Hate Again" Protests Erupt – Live Feed

    Update:

    Cruz chimed in:

    • *CRUZ SAYS TRUMP CAMPAIGN BEARS RESPONSIBILITY IN CHICAGO
    • *RESPONSIBILITY STARTS AT THE TOP, TED CRUZ SAYS

    And then Trump responded:

    • *DONALD TRUMP COMMENTS IN CALL-IN INTERVIEW ON FOX NEWS
    • *TRUMP SAYS CHICAGO PROTESTERS WERE 'ORGANIZED GROUP'
    • *TRUMP: `I THINK WE DID THE RIGHT THING' CANCELLING RALLY

    As we detailed earlier:

    Following his appearance in St.Louis in front of 1000s, which was interrupted six times by protesters, Donald Trump has been forced to cancel his appearance in Chicago "due to security concerns" as a crowd waiting for him to arrive erupted into violence.

    The GOP front-runner was scheduled to speak at the school’s pavilion at 6 p.m., with doors opening at 3 p.m. The first person in line to wait for a spot at the free event arrived at 3 a.m. The arena seats 9,500, though it's not clear how many are set to attend the rally.

    Protesters lined up across the street from the pavilion, carrying signs that read "Build a wall around Trump and I'll pay for it!" and yelling to supporters in line for the rally.

    As NBC Chicago reports, a crowd waiting for Donald Trump to speak Friday erupted after the presidential front-runner postponed his rally at the University of Illinois-Chicago Pavilion over safety concerns.

    "Mr. Trump just arrived in Chicago and after meeting with law enforcement has determined that for the safety of tens of thousands of people that have gathered in and around the arena, tonight's rally will be postponed until another date," an announcer said. "Thank you very much for your attendance and please go in peace."

     

     

    The crowd burst into shouts and cheers, and some scuffles broke out in the crowd, in the minutes after the announcement was made.

     

     

    An hour before the rally was scheduled to begin, protesters were seen being escorted out of the venue.

    Three attendees wearing shirts that read "Muslims United Against Trump" and "Make America Hate Again" were removed from the venue as protesters gathered inside and outside the pavilion.

     

     

     

    Crowds shouted as the protesters were escorted out before several people in the audience began repeatedly chanting "U-S-A." It was not immediately clear why the three were removed from the event.

    Trump supporters were disappointed. “It is an assault on liberty. I think everyone should have a right to have a rally,” said Corey Bartkus, who recently graduated from college.

    Live Feed:

  • Fukushima Five Years Later: "The Fuel Rods Melted Through Containment And Nobody Knows Where They Are Now"

    Today, Japan marks the fifth anniversary of the tragic and catastrophic meltdown of the Fukushima nuclear plant. On March 11, 2011, a massive earthquake and tsunami hit the northeast coast of Japan, killing 20,000 people. Another 160,000 then fled the radiation in Fukushima. It was the world’s worst nuclear disaster since Chernobyl, and according to some it would be far worse, if the Japanese government did not cover up the true severity of the devastation.

    At least 100,000 people from the region have not yet returned to their homes. A full cleanup of the site is expected to take at least 40 years. Representative of the families of the victims spoke during Friday’s memorial ceremony in Tokyo. This is what Kuniyuki Sakuma, a former resident of Fukushima Province said:

    For those who remain, we are seized with anxieties and uncertainties that are beyond words. We spend life away from our homes. Families are divided and scattered. As our experiences continue into another year, we wonder: ‘When will we be able to return to our homes? Will a day come when our families are united again?’

     

    There are many problems in areas affected by the disaster, such as high radiation levels in parts of Fukushima Prefecture that need to be overcome. Even so, as a representative of the families that survived the disaster, I make a vow once more to the souls and spirits of the victims of the great disaster; I vow that we will make the utmost efforts to continue to promote the recovery and reconstruction of our hometowns.

    Sadly, the 2011 disaster will be repeated. After the Fukushima nuclear meltdown, Japan was flooded with massive anti-nuclear protests which led to a four-year nationwide moratorium on nuclear plants. The moratorium was lifted, despite sweeping opposition, last August and nuclear plants are being restarted.

    Meanwhile, while we await more tragedy out of the demographically-doomed nation, this is what Fukushima’s ground zero looks like five years later. As Reuters sums it up best,  “no place for man, or robot.“

    The robots sent in to find highly radioactive fuel at Fukushima’s nuclear reactors have “died”; a subterranean “ice wall” around the crippled plant meant to stop groundwater from becoming contaminated has yet to be finished. And authorities still don’t know how to dispose of highly radioactive water stored in an ever mounting number of tanks around the site.

    Five years ago, one of the worst earthquakes in history triggered a 10-metre high tsunami that crashed into the Fukushima Daiichi nuclear power station causing multiple meltdowns. Nearly 19,000 people were killed or left missing and 160,000 lost their homes and livelihoods.

    Today, the radiation at the Fukushima plant is still so powerful it has proven impossible to get into its bowels to find and remove the extremely dangerous blobs of melted fuel rods.

    The plant’s operator, Tokyo Electric Power has made some progress, such as removing hundreds of spent fuel roads in one damaged building. But the technology needed to establish the location of the melted fuel rods in the other three reactors at the plant has not been developed.

    “It is extremely difficult to access the inside of the nuclear plant,” Naohiro Masuda, Tepco’s head of decommissioning said in an interview. “The biggest obstacle is the radiation.”

    The fuel rods melted through their containment vessels in the reactors, and no one knows exactly where they are now. This part of the plant is so dangerous to humans, Tepco has been developing robots, which can swim under water and negotiate obstacles in damaged tunnels and piping to search for the melted fuel rods.

    But as soon as they get close to the reactors, the radiation destroys their wiring and renders them useless, causing long delays, Masuda said. 

    Each robot has to be custom-built for each building.“It takes two years to develop a single-function robot,” Masuda said. 

    IRRADIATED WATER

    Tepco, which was fiercely criticized for its handling of the disaster, says conditions at the Fukushima power station, site of the worst nuclear disaster since Chernobyl in Ukraine 30 years ago, have improved dramatically. Radiation levels in many places at the site are now as low as those in Tokyo.

    More than 8,000 workers are at the plant at any one time, according to officials on a recent tour. Traffic is constant as they spread across the site, removing debris, building storage tanks, laying piping and preparing to dismantle parts of the plant.

    Much of the work involves pumping a steady torrent of water into the wrecked and highly radiated reactors to cool them down. Afterward, the radiated water is then pumped out of the plant and stored in tanks that are proliferating around the site.

    What to do with the nearly million tonnes of radioactive water is one of the biggest challenges, said Akira Ono, the site manager. Ono said he is “deeply worried” the storage tanks will leak radioactive water in the sea – as they have done several times before – prompting strong criticism for the government.

    The utility has so far failed to get the backing of local fishermen to release water it has treated into the ocean.

    Ono estimates that Tepco has completed around 10 percent of the work to clear the site up – the decommissioning process could take 30 to 40 years. But until the company locates the fuel, it won’t be able to assess progress and final costs, experts say.

    The much touted use of X-ray like muon rays has yielded little information about the location of the melted fuel and the last robot inserted into one of the reactors sent only grainy images before breaking down.

    ICE WALL

    Tepco is building the world’s biggest ice wall to keep  groundwater from flowing into the basements of the damaged reactors and getting contaminated.

    First suggested in 2013 and strongly backed by the government, the wall was completed in February, after months of delays and questions surrounding its effectiveness. Later this year, Tepco plans to pump water into the wall – which looks a bit like the piping behind a refrigerator – to start the freezing process.

    Stopping the ground water intrusion into the plant is critical, said Arnie Gunderson, a former nuclear engineer.

    “The reactors continue to bleed radiation into the ground water and thence into the Pacific Ocean,” Gunderson said. “When Tepco finally stops the groundwater, that will be the end of the beginning.”

    While he would not rule out the possibility that small amounts of radiation are reaching the ocean, Masuda, the head of decommissioning, said the leaks have ended after the company built a wall along the shoreline near the reactors whose depth goes to below the seabed.

    “I am not about to say that it is absolutely zero, but because of this wall the amount of release has dramatically dropped,” he said.

  • Two Charts To Consider Before The Monday Open

    Deja-vu all over again…

     

     

     

    And what happened next?

     

    Trade accordingly…

  • Meanwhile, In Front Of A Trump Rally In St. Louis

    As Trymaine Lee notes, “literally the longest line I’ve ever seen…”

     

    And then this:

     

    And here is Trump himself in St. Louis being interrupted for 14 straight minutes:

  • Hillary On Life Under President Trump: "I Will Not Move To Canada"

    While Google searches for "how can i move to Canada" are surging, there is one American that will not be leaving the nation when (or if) Donald Trump is crowned President. Speaking to MSNBC's Rachel Maddow, Hillary Clinton said if The Donald was elected, "I would never leave our country, but I would certainly be spending a lot of time yelling at the TV set."

     

    Some might be disappointed…

     

    Or is it because she will be behind bars?

  • Why Negative Rates Can't Stop the Coming Depression

    Submitted by Bill Bonner via InternationalMan.com,

    Are you ready to pay to save?

     

    Agora founder Bill Bonner explains why “negative interest rates” are spreading around the world…and could soon come to the U.S.

     

    Like Doug Casey, Bill believes the worst is yet to come.

     

    Bill says the coming financial collapse will be worse than the market crashes in 1987, 2000, and 2008. But this time, he says, it will affect everything from your portfolio…to your bank account…to the cash in your wallet.

    About $7 trillion of sovereign bonds now yield less than nothing. Lenders give their money to governments…who swear up and down, no fingers crossed, that they’ll give them back less money sometime in the future.

    Is that weird or what?

    Into the Unknown

    At least one reader didn’t think it was so odd. “You pay someone to store your boat or even to park your car,” he declared. “Why not pay someone to look out for your money?”

    Ah…we thought he had a point. But then, we realized that the borrower isn’t looking out for your money; he’s taking it…and using it as he sees fit.

    It is as though you gave a valet the keys to your car. Then he drove it to Vegas or sold it on eBay.

    A borrower takes your money and uses it. He doesn’t just store it for you; that is what safe deposit boxes are for.

    When you deposit your money in a bank, it’s the same thing. You are making a loan to the bank. The bank doesn’t store your money in a safe on your behalf; it uses it to balance its books.

    If something goes wrong and you want your money back, you can just get in line behind the other creditors.

    The future is always unknown. The bird in the bush could fly away. Or someone else could get him.

    So, when you lend money, you need a little something to compensate you for the risk that the bird might get away.

    A New Level of Absurdity

    That’s why bonds pay income – to compensate you for that uncertainty.

    Inflation, defaults, depression, war, and revolution all raise bond yields because all increase the odds that you won’t get your money back.

    That’s why countries with much uncertainty – such as Venezuela – have higher interest rates than countries, such as Switzerland, where the future is probably going to be a lot like the past.

    Venezuelan 10-year government bonds yield 11%. The Swiss 10-year government bond yields negative 0.3%.

    The interest you earn on a bond is there to compensate you for the risk that you won’t get your money back. Or that the money you do get back when the bond matures will have less purchasing power than the money you used to buy the bond in the first place.

    You never know. Maybe the company or government that issued the bond will go broke. Or maybe the Fed will cause hyperinflation. In that case, even if you get your money back, it won’t buy much.

    With interest rates at zero, lenders must believe that the future carries neither risk. The bird in the bush isn’t going anywhere; they’re sure of it.

    As unlikely as that is, negative interest rates take the absurdity to a new level.

    A person who lends at a negative rate must believe that the future is more certain than the present.

    In other words, he believes there will always be MORE birds in the bush.

    Boneheaded Logic

    The logic of lowering rates below zero is so boneheaded that only a PhD could believe it.

    Economic growth rates are falling toward zero. And at zero, it normally doesn’t make sense for the business community – as a whole – to borrow. The growth it expects will be less than the interest it will have to pay.

    That’s a big problem…

    Because the Fed only has direct control over the roughly 20% of the overall money supply. This takes the form of cash in circulation and bank reserves. The other roughly 80% of the money supply comes from bank lending.

    If people don’t borrow, money doesn’t appear. And if money doesn’t appear – or worse, if it disappears – people have less of it. They stop spending…the slowdown gets worse…prices fall…and pretty soon, you have a depression on your hands.

    How to prevent it?

    If you believe the myth that the feds can create real demand for bank lending by dropping interest below economic growth rates, then you, too, might believe in NIRP.

    It’s all relative, you see. It’s like standing on a train platform. The train next to you backs up…and you feel you’re moving ahead.

    Negative interest rates are like backing up. They give borrowers the illusion of forward motion…even if the economy is standing still.

    Or something like that.

  • Oil Market Commentary 3 11 2016 (Video)

    By EconMatters

    A sleepy Friday where we touched $39 a barrel briefly before profit taking into the European close. We have near term support for WTI at $37.22 for the April contract, with the next level of stronger support at the $36.12 area on the charts. If we break $36 a barrel this will signal weakness as we will be breaking back down from where we recently broke out of from a trading range.

    Strong Uptrending Week

     

    © EconMatters All Rights Reserved | Facebook | Twitter | YouTube | Email Digest | Kindle   

  • Why Companies Don't Want You To Look At GAAP Earnings

    Two weeks ago, when we did our latest analysis of GAAP and non-GAAP earnings, we were stunned by several findings:

    First, consensus Q1 2016 non-GAAP earnings, the kind that even Warren Buffett openly rails against, have imploded from +5% to -8.3% (this was “only” -7.4% two weeks ago), and more than double the -3.4% plunge in Q4 2015 EPS.

    Keep in mind that all of the above is on a non-GAAP basis, and if one looks at GAAP earnings, the picture goes from dire to absolutely disastrous. 

    Second, we said that if one uses I/B/E/S GAAP earnings, which exclude the barrage of pro-forma write offs, addbacks, “non-recurring items” and countless other “misleading numbers that can deceive investors”, what one gets is a true shocker: instead of 118 in LTM EPS for the S&P 500 (shown in red in the chart below) the true, Warren Buffett-approved number (shown in blue in the chart bellow) is a paltry 91.5! This is also the lowest S&P500 GAAP earnings per share since 2010, and translates into a 21.2 GAAP PE. 

    Two weeks later, after the market’s recent surge, the market’s GAAP PE is now over to 22x.

    We then explained what is taking place with the following chart showing the amount of EPS
    “writeoffs” and pro-forma adjustments should explain it. “In 2015, 26.5 of the total non-GAAP in S&P earnings, is the result of accounting gimmicks. The addbacks to the S&P’s EPS are now the highest since the 2008 financial crisis, and in nominal dollar terms, are already an all time high”

     

    Today, we are delighted to find that Factset itself has taken on this critical distinction between GAAP and Non-GAAP earnings as the core topic of its weekly earnings insight report.

    It’s finding confirms everything we warned about two weeks ago, and explains why every single company is desperate for investors to look only at its non-GAAP myth, and to stay as far away from the GAAP reality as possible.

    Did DJIA Companies Report Higher Non-GAAP EPS in FY 2015?

     

    While all US companies report EPS on a GAAP (generally accepted accounting principles) basis, many US companies also choose to report EPS on a non-GAAP basis. There are mixed opinions in the market about the reporting of non-GAAP EPS by US corporations. Supporters of the practice argue that it provides the market with a more accurate picture of earnings from the day-to-day operations of companies, as items that the companies deem to be one-time events or non-operating in nature are typically excluded from the non-GAAP EPS numbers.Critics argue that there is no industry-standard definition of non-GAAP EPS, and companies can take advantage of the lack of standards to (more often than not) exclude items that have a negative impact on earnings in order to boost non-GAAP EPS.

     

     

     

    As of today, all of the companies in the Dow Jones Industrial Average (DJIA) have reported EPS for FY 2015. What percentage of these companies reported non-GAAP EPS for FY 2015? What was the average difference between non-GAAP EPS and GAAP EPS for companies in the DJIA for FY 2015? How did this difference compare to last year?

     

     

    For FY 2015, 20 of the 30 companies in the DJIA (or 67%) reported non-GAAP EPS in addition to GAAP EPS for the fiscal year. For 18 of these 20 companies, non-GAAP EPS was higher than GAAP EPS. On average, non-GAAP EPS exceeded GAAP EPS by 30.7% for these 20 companies. For FY 2014, 19 of the 30 companies in the DJIA (or 63%) reported non-GAAP EPS in addition to GAAP EPS for the fiscal year. For 15 these 19 companies, non-GAAP EPS was higher than GAAP EPS. On average, non-GAAP EPS exceeded GAAP EPS by 11.8% for these 19 companies. Thus, there was a wider gap on average between non-GAAP EPS and GAAP EPS in FY 2015 compared to FY 2014 for companies in the DJIA.

     

     

    Due in part to this wider gap between non-GAAP EPS and GAAP EPS, companies in the DJIA on average reported a much smaller year-over-year decline in year-over-year EPS on a non-GAAP basis than on a GAAP basis for the year. For FY 2015, the 20 companies in the DJIA that reported non-GAAP EPS reported an average year-over-year decline in non-GAAP EPS of -4.8%. These same 20 companies reported an average year-over-year decline in GAAP EPS of -12.3%.

    So now that we know our math was right, perhaps our punchline from two weeks is correct as well, and it ias follows: “if using GAAP earnings, and applying the market’s already generous 16.5x non-GAAP P/E, one gets a fair value of the S&P 500 of 1,500, or over 25% lower than the recent prints in the S&P 500.”

    Which may explain the unprecedented scramble to pump up both the market, and P/E multiples as high as possible before the trapdoor is opened once again.

  • It's Not Just The Republican Party; The Corrupt, Cronyist Democratic Party Is Imploding Too

    Submitted by Charles Hugh-Smith of OfTwoMinds blog,

    Anyone who thinks the Democratic Party isn't imploding for the exact same reasons the Republican party is imploding is purposefully ignoring reality.

    Legions of pundits are crawling out of the woodwork to gloat over the implosion of the Republican Party. Corrupt, crony-capitalist, Imperial over-reach–good riddance.

    But far fewer pundits dare declare that the other corrupt, crony-capitalist party of Imperial over-reach–yes, the Democratic Party–is imploding, too, for the same reason: it too is rotten to the core and exists solely to protect the privileges of the few at the expense of the many.

    Democrats need to ask themselves: if Hillary Clinton is the shining epitome of what the Democratic Party stands for and represents, then what does the Democratic party stand for other than corruption, greed, pay-to-play, Imperial over-reach, elites who are above the law, and a permanent war state overseen by a corporatocracy bent on protecting the unearned privileges of the few at the expense of the many?

    Two Clintons. 41 years. $3 Billion.

    How about the Clintons' $153 million in speaking fees? Just good ole democracy in action?

    How about Hillary's "super-delegates"–you know, the delegate system that makes the old Soviet Politburo look democratic by comparison. Hillary has rigged the media coverage, a fact that is painfully obvious to anyone who is non-partisan. The New York Times, for example, couldn't wait to announce in blaring headlines that Hillary regains the momentum after she rigged a couple-hundred vote caucus in Nevada–and barely won that.

    The mainstream media fell all over themselves to declare Hillary the clear winner in the Michigan debate, and were delighted to run story after story of Hillary's commanding 21-point lead– all designed, of course, to discourage Sanders supporters from even going to the polls.

    It was obvious to non-partisan observers that Sanders won the debate–no question. And he went on to trounce Clinton despite her "commanding 21-point lead", which was quickly finessed away by a servile corporate media.

    How many pundits are commenting on the fact that Democratic voters are staying away in droves? Or that–according to one zany poll–venereal disease is more popular than Hillary among young quasi-Democratic voters?

    Every American knows the system is rigged to guarantee the skim of the protected classes. Insider Peggy Noonan recently penned an essay calling out the protected class, which can only be protected by stripmining the unprotected: Trump and the Rise of the Unprotected.

    The only difference between the two parties' protected class is the Democrats protect public union employees from any market or fiscal realities, until their unaffordable pay and health/pension benefits bankrupt local governments. At that point, the party bosses will come crying to Washington, D.C. to bail out benefit and payroll costs that were never fiscally viable in the first place.

    The protected classes love the Status Quo, because it exists to protect their privileges. The unprotected classes loathe the Status Quo for the same reason.

    Anyone who thinks the Democratic Party isn't imploding for the exact same reasons the Republican party is imploding is purposefully ignoring reality–a reality that threaten the protected classes' lock on wealth and power.

  • Everything Was Working Great… And Then Today's ECB Blog Post Left JPMorgan "Dazed And Confused"

    In a historic first, earlier today ECB vice president Vitor Constancio (the same one who in October 2014 explained that the European stress tests refuse to consider a scenario with deflation  “because indeed we don’t consider that deflation is going to happen” just a few months before Europe got its first deflationary print since the crisis) penned an official ECB opinion piece, some might call it a blog post, titled “In Defense of Monetary Policy” just hours after the ECB’s historic “all in” gamble which included the first ever monetization of corporate bonds.

    In it he tried to do two things:

    • To explain why, despite repeated rumblings that monetary policy is longer relevant, it is in fact essential, or as he says “not only is it wrong to start talking down monetary policy – it’s actually dangerous“, and to do this he attempts to prove a counterfactual saying that without QE, European deflation would be far worse than it is now, and that structural reforms, while critical “it is difficult to see how they could spur growth significantly in the next two years, especially when the current problem is lack of global demand.”  In other words, yes, we should no longer stimulate, but we can’t stop as governments are too inefficient, and take too long to do what they have to, so we will keep stimulating.
    • The second one is both a justification for negative rates, in which far from the now accepeted reason that the ECB no longer wants to impair bank profitability, what Constancio suggests is that the only gating factor is fears about a flight to cash should rates go even more negative (and hence why the ECB has been so aggressively moving to eliminate the €500 bill).

    The problem with these two points, and especially the second one, is that it runs completely counter to the entire narrative that was sloppily errected overnight as justification for today’s rally, which as a reminder was that the ECB will no longer cut rates to support European banks, and that the ECB is explicitly no longer targeting a weaker Euro but instead will do everything in its power to promote credit creation (as it did with LTRO1-4, as it did with QE1 and so on).

    We were not the only ones who wre left scratching our heads. In a note by JPM’s Malcolm Barr, he admits that JPM is likewise “thoroughloy confused” by Constancio’s blog, and says that “it is disappointing to us to see the ECB without a clear and convincing explanation for why it perceives a bound on rates at -0.4% at this point.“

    The explanation is simple: the ECB not only has gone all but is now grappling and adjusting the narrative to fit to whetver the market wants to hear at any given moment just to go higher. This is precisely what happened on December 4th after the ECB’s last “policy failure.” The problem is that Draghi’s attempt to jawbone markets higher lasted only a few days.

    The risk, as JPM implies, is that once Friday’s buying rally fizzles not only in the US but in Europe, and all attentions turns back to the ECB for “more”… there will be nothing there, and Draghi will have to revert back to even more negative rates, to banning cash, and to reminding markets that absolutely nothing has changed.

    What is most ironic, is that everything was working out great – the market was soaring for whatever reason, and the narrative had shifted to make it seem that the ECB actually knew what it was doing… and then Constancio once again spoke up and demonstrated that the ECB really has no idea what is going on!

    Here is JPM’s note on the topic, authored by Malcom Barr

    ECB’s Constancio: Dazed and confused?

    ECB Vice-President Constancio has taken the unusual step up of publishing an “Opinion piece” on the ECB website (link), entitled “In Defence of Monetary Policy”. We can’t recall any instances of senior ECB officials putting pen to paper (as opposed to giving interviews) so soon after an ECB decision. In our view, two things in this piece stand out. One we would welcome, the other we find thoroughly confusing.

    • A reality check on fiscal policy and structural reform. Constancio points out that there are significant legal and political constraints on the ability of countries to use fiscal policy to stimulate growth. In his words “countries that could use fiscal space, won’t; and many that would use it, shouldn’t”. The hint that these constraints may be at least a little unhelpful reflects the drift of opinion on this issue we have been seen of late from the leadership of the ECB. What Constancio has to say about structural reform, however, cuts somewhat against the grain. Pointing out that structural reforms tend to be deflationary in the first instance, he states: “Structural reforms are essential for long-term potential growth, but it is difficult to see how they could spur growth significantly in the next two years, especially when the current problem is lack of global demand”. We agree, and it is refreshing to see the ECB acknowledge this so openly.
    • Why the bound at -0.4%? Having argued that monetary policy has had to step into the void left by other policies, Constancio argues that monetary policy has boosted growth by around two-thirds of a percentage point over the last two years. But “all policies have limits. In the case of the instruments, we are now using, this is particularly true of negative interest rates on our deposit facility. The reasons are more fundamental than just the effect on banks”. At this point Constancio cites a recent blog by Cecchetti and Schoenholtz (link), before pointing out that bank returns on equity in the Euro area went up in 2015 despite negative rates. But if it is not the impact on bank profitability that sets a limit to the usefulness of negative rates, then what is the “more fundamental” reason?

    The Cecchetti and Schoenholtz blog discusses the experience in Europe to date, and notes that rates have been moved further below zero than was thought possible without beginning to trigger flight to cash by banks. They suggest that the floor on rates may be higher in large jurisdictions than in smaller, owing to economies of scale in cash holding. And they also point out that the limit may change dependent on how long rates are expected to be below zero. But they do not conclude that we have, by now, clearly reached the limits of how low negative rates could go. Moreover, the piece almost completely ignores the impact that the specific design of tiering regimes can have on the marginal incentive to hold cash (where the exemption on negative rates is withdrawn as banks’ holdings of cash rise).

    So this leaves us thoroughly confused. We had thought that the ECB was turning away from further moves into negative territory because of the impact on bank profitability and, hence, on credit availability. Constancio appears to say this is not the key reason, and that the constraint from possible flight to cash is coming into view. In our view, it is not clear that either argument is convincing. But the argument for stopping at -0.4% based on impacts on bank profitability is more convincing than any suggestion that rates simply will not stick much below -0.4% because of flight to cash. It is disappointing to us to see the ECB without a clear and convincing explanation for why it perceives a bound on rates at -0.4% at this point.  

    * * *

    It’s ok Malcolm, the ECB will just make it up as it goes along, quite literally day by day now.

  • Draghi-Dip-Buyers Send Stocks, Crude To 2016 Highs; Gold Slammed

    Was there ever any doubt…

     

    So this happened…

     

    Yes it is all very exciting, but year-to-date, Gold is outperforming The Dow by 20ppt…

     

    For the best year since 1974…

     

    And since The Fed hiked rates…

     

    And before we start, remember how excited everyone was in mid-September (before The Fed folded)…

    h/t @NorthmanTrader

     

    Let's look at markets post-ECB…

     

    And post-Draghi's "no more" comments, It looks like someone was desperate to make sure Gold (the anti-centrally-planned world asset) was outperforming…

     

    Trannies and Small Caps ripped over 2% today…

     

    On the week, it's all green for the 4th week in a row, led by The Dow (rather unusually)

     

    But futures show the real craziness…

     

    S&P 500 broke above its 200DMA for the first time this year…

     

    And just look at the vol in Financials and Energy this week…

     

    HYG (deluged with institutional cash looking for a home amid a barren primary issuance market) soared today to its best 4 week gain since Oct 2011 – which marked the top of that bounce…

     

    One quick question – if everything is awesome, then why is financials' credit risk so extreme high still?

     

    Treasury yields were all higher today (and on the week) with 30Y outperforming (pushing the 2s30s spread to Dec08 lows – 2nd biggest cirve flattening this year)

     

    5Y Yields broke back to the middle of the range (up 25bps in 2 weeks – the most in 4 months)

     

     

    The USD Index was smacked lower for the 2nd week in a row, near 5 month lows…

     

    This is the biggest 6-week drop in USD Index since May 2015…

     

    USDJPY rallied back but not like stocks…

     

    But EURUSD didn't give any back…

     

    Gold and silver closed modestly lower on the week (slammed in the last hour of the day), copper dropped and oil popped…

     

    Gold futures aretrading like a penny stock!!

     

    Oil rallied for the 4th week in a row (for the first time since May 2015)…

     

    The biggest 4-week run (30.8%) since March 2009…

     

     

    Charts: Bloomberg

  • Pentagon Admits It 'Kinda Sorta' Deployed Spy Drones Over America

    In what will likely not surprise too many, The Pentagon has admitted it has deployed drones to spy over U.S. territory for non-military missions over the past decade. Confirming yet another conspiracy theory is conspiracy fact, FBI director Robert Mueller testified before Congress that the bureau employed spy drones to aid investigations, but in a "very,very minimal way, very seldom." The report concludes, "the appetite to use spy drones in the domestic environment to collect airborne imagery continues to grow."

    As USA Today reports, the report by a Pentagon inspector general, made public under a Freedom of Information Act request, said spy drones on non-military missions have occurred fewer than 20 times between 2006 and 2015 and always in compliance with existing law.

    The report, which did not provide details on any of the domestic spying missions,  said the Pentagon takes the issue of military drones used on American soil "very seriously."

     

    A senior policy analyst for the ACLU, Jay Stanley, said it is good news no legal violations were found, yet the technology is so advanced that it's possible laws may require revision.

     

    "Sometimes, new technology changes so rapidly that existing law no longer fit what people think are appropriate," Stanley said. "It's important to remember that the American people do find this to be a very, very sensitive topic."

     

    The use of unmanned aerial surveillance (UAS) drones over U.S. surfaced in 2013 when then-FBI director Robert Mueller testified before Congress that the bureau employed spy drones to aid investigations, but in a "very,very minimal way, very seldom."

    The inspector general analysis was completed March 20, 2015, but not released publicly until last Friday.

    It said that with advancements in drone technology along with widespread military use overseas, the Pentagon established interim guidance in 2006 governing when and whether the unmanned aircraft could be used domestically. The interim policy allowed spy drones to be used for homeland defense purposes in the U.S. and to assist civil authorities.

     

    But the policy said that any use of military drones for civil authorities had to be approved by the Secretary of Defense or someone delegated by the secretary. The report found that defense secretaries have never delegated that responsibility.

    The report quoted a military law review article that said "the appetite to use them (spy drones) in the domestic environment to collect airborne imagery continues to grow, as does Congressional and media interest in their deployment."
    *  *  *
    Shortly before the inspector general report was completed a year ago, the Pentagon issued a new policy governing the use of spy drones. It requires the defense secretary to approve all domestic spy drone operations. It says that unless permitted by law and approved by the secretary, drones "may not conduct surveillance on U.S. persons." It also bans the use of armed drones over the United States for anything other training and testing.

    Given the lies that were told about Obama's secret drone assassination project, who knows what the reality is if they are admitting "we droned some American folks on American soil."

  • Weekend Reading: The Bull/Bear Struggle Continues

    Submitted by Lance Roberts via RealInvestmentAdvice.com,

    The standoff between the “bulls” and “bears” continued this week as prices struggled to rise. The “bulls” continue to “hope” that the recent turmoil that started at the beginning of this year has come to an end. The “bears” continue to point out silly things like an ongoing earnings recession, weakening economic data, and deteriorating technicals to make their case.

    Silly “bears”.

    Interestingly, on Thursday, the ECB launched its biggest “bazooka” yet pushing further into negative interest rates, increasing their already failed QE program and crossing every finger and toe for “good luck.”  Via the ECB:

    “At today’s meeting the Governing Council of the ECB took the following monetary policy decisions:

    (1) The interest rate on the main refinancing operations of the Eurosystem will be decreased by 5 basis points to 0.00%, starting from the operation to be settled on 16 March 2016.

    (2) The interest rate on the marginal lending facility will be decreased by 5 basis points to 0.25%, with effect from 16 March 2016.

    (3) The interest rate on the deposit facility will be decreased by 10 basis points to -0.40%, with effect from 16 March 2016.

    (4) The monthly purchases under the asset purchase programme will be expanded to €80 billion starting in April.

    (5) Investment grade euro-denominated bonds issued by non-bank corporations established in the euro area will be included in the list of assets that are eligible for regular purchases.”

    Question:

    “What happens during the next global economic recession when these unsecured corporate bonds go bankrupt?” 

    If you remember, Lehman bonds were IG unsecured corporate bonds the DAY BEFORE they went into bankruptcy. That event sparked the global financial crisis. But this time will be different, right?

    I’m only asking the question.

    Anyway, I digress. This week’s reading list takes a look at various views on the market, the latest jobs report, oil prices and other interesting reads.

    1) Do Any Of The Recent Rallies Pass The Sniff Test by Charles Hugh Smith via OfTwoMinds

    “As Chris Martenson and many others have noted, “price discovery” is a joke now, as markets are either propped up by central bank “we got your back” guarantees or outright asset purchases, or driven up and down by speculative hot money flows.

     

    This is not capitalism, or a functioning market: this is the end-game of legalized looting and financialization. What’s the value of real estate? If interest rates are pushed negative, then that gooses housing demand, as the cost of interest on a mortgage declines to near-zero in real terms.”

    smith-stockrally-031016

    2)  The Markets Are Stretched, So I’m “All-In” Short by Doug Kass via Real Clear Markets

    “My recent column Not So Super Tuesday highlights why I believe markets are tipping over to short-term bearish, while my Top 10 Reasons to Sell Stocks Now piece incorporates most of my intermediate-term concerns.

     

    That’s why I moved to “all-in short” on Friday during the market’s post-jobs-report ramp-up. I believe stocks’ recent rally from their mid-February low has stretched valuations and drastically altered the risk-vs.-reward ratio.

     

    I‘d also note that Friday’s seemingly good February U.S. jobs report wasn’t quite as “clean” as the strong headline number of 242,000 non-farm job gains suggests. For instance, average wages dropped by 0.1%, while average hours worked fell by 0.2 — a decline usually seen in recessions. (Previous similar drops occurred in February 2010 and December 2013.)”

    3) The Wall Street Profits Illusion by Sam Ro via Yahoo Finance

    “Wall Street gurus like Societe Generale’s Andrew Lapthorne, have been tracking the discrepancy between GAAP and non-GAAP reported profits for years.

     

    But last fall, more experts like Deutsche Bank’s David Bianco grew increasingly concerned with what was becoming a growing divide between GAAP and non-GAAP profits.

     

    ‘Blended [non-GAAP] 4Q earnings per share is $29.49 with GAAP EPS of $19.92,’ Bianco said of S&P 500 profits on Monday. He further noted that this 67% ratio of GAAP to non-GAAP EPS is ‘well below the normal ~90% ex. recessions.'”

    Earnings-GAAP-Illusion-031016

    4) February Jobs Report A Little Misleading by John Crudele via New York Post

    “Labor trumpeted that 242,000 new jobs were created in February, although wages declined 0.1 percent, the average workweek dropped by 0.2 hours and aggregate hours worked fell 0.4 percent. And part-time work soared in February while full-time job growth was mediocre.

     

    Even the 242,000 job growth looked hokey. Retailing, for instance, saw an unbelievable (as in “not to be believed”) jump of 55,000 jobs despite the fact that February isn’t exactly the month when stores hire people to handle a swarm of shoppers.

     

    As I said last Thursday and in a special Saturday column, the February job report was helped by rogue statistics — untrustworthy seasonal adjustments (especially in retailing) and giddy assumptions made by Labor that will probably have to be corrected later.“

    5) Oil Prices Should Fall, Possibly Hard by Art Berman via Forbes

    “Oil prices should fall, possibly hard, in coming weeks. That is because fundamentals do not support the present price.

     

    Prices should fall to around $30 once the empty nature of an OPEC-plus-Russia production freeze is understood. A return to the grim reality of over-supply and the weakness of the world economy could push prices well into the $20s.“

    OIl-Supply-Demand-030916

    OTHER GOOD READS

    “When the paddy wagon rolls up, they take the good girls with the bad” – Old Wall Street Bear Market Axiom

  • "Stay Angry My Friends"

    The last decade or two has been a failure…

     

    For everyone apart from the elites…

     

     

    Which created this…

    Source: Townhall.com

    Which is leading to this…

     

    So stay angry my friends…

    Source: Townhall.com

    As we noted earlier, it seems more than a few are “angry”…

  • What Does Nasdaq Know?

    Nasdaq risk is dramatically higher than S&P risk at current levels. Despite the exuberant ramp of the last few weeks, the ratio of Nasdaq VIX to S&P VIX is at its highest in over 6 months.

     

    This is worrisome since the last time Nasdaq traders were this much more concerned about future risk than S&P traders, was right before the August flash-crash collapse…

    And if that wasn’t enough, look where we are…

    h/t @NorthmanTrader

  • A Top Performing Hedge Fund Just Went Record Short: Here's Why

    When we last looked at the $2.9 billion Horseman Capital, we reported that not only has the fund which many have called the “most bearish in the world” generated tremendous returns almost every single year since inception (except for a 25% drop in 2009 after returning 31% during the cataclysmic 2008), but more notably, it has achieved that return while been net short – and quite bearish on – stocks ever since 2012.

    In that period it has consistently generated low double-digit returns, a feat virtually none of its competitors have managed to replicate. Its performance has put it in the top percentile of all hedge funds in recent years.

    Furthermore, in a year most other hedge funds would love to forget, the fund “crushed it”, with a 20.45% return for 2015 and 5.6% in the tumultuous month of December. 

    Today, we received Horseman’s latest February numbers and the fund’s outperformance has continued: in a very volatile month, in which many hedge funds were stopped out in both directions, Horseman returned a respectable 1.5%, after 8% the month before, and with a 9.6% YTD tally, it remains in the 99%+ percentile of returns for the year.

    Outperforming the market is hardly new to Horseman: it has been doing so for four years in a row, and not surprisingly, 2015 was its best year since 2008. 2016 is starting off just as good as the prior year.

    What was the source of Horseman’s February outperformance? Recall that in January it was all about short Chinese exposure. This is what the fund was shorting in February:

    This month both the long and short equity portfolios incurred small losses while gains came from the long positions in government bonds and the currency positions. Losses came primarily from the small remaining long positions in European banks and from the short positions in the automobile sector. Gains were made in discount retailers in the long portfolio and in financials in the short portfolio.

     

    In the airline industry, the decision to operate a new or an old aircraft has nothing to do with safety or reliability as routinely airliners fly 100,000 hours or more before they are retired out of service. According to Aviation Consultants 360, the Federal Aviation Administration does not disqualify an aircraft based on its chronological age when determining a jet aircraft’s condition or safety. What counts is the aircraft’s current maintenance status, its maintenance history, current required upgrades and engines.

     

    Manufacturers have made significant improvements in engine efficiency, but it only matters when fuel prices are high. Improvements have been made in avionics and communication but these are separate safety issues beyond the safety and reliability of the aircraft’s airframe, and the equipment can be updated. Consequently, for all practical purposes, a well maintained 30 year old aircraft with 10,000 hours on its airframe is as safe and dependable as any new aircraft but costs only a fraction. According to Aviation Consultants 360, in many ways, the older aircraft is safer; it has history and is known to be safe, a huge benefit.

     

    Although Boeing and Airbus revealed record production figures for 2015, net new orders fell by almost half at Boeing and a third at Airbus. An analyst at Citigroup recently pointed that in the aviation cycle before 2008, around 70% of demand for new airplanes was from airlines and leasing companies planning to add capacity, and that since then, demand from customers seeking to replace old planes with new more fuel efficient ones has risen to more than half of deliveries. In our opinion, as fuel prices have fallen, the replacement market is likely to shrink as fuel efficiency is no longer a top priority.

     

    A large part of Boeing and Airbus’ order books has been driven by demand from emerging countries’ low cost airlines (sources: Boeing; Airbus), who in our opinion, may cancel orders in the event of further emerging markets currency devaluations versus the US dollar. During the month we built a short position to aircraft manufacturers and aircraft leasing companies of about 10%.

    So while being bearish China was the flavor of last month, this time it is all about shorting airplane manufacturers.

    This is what Horseman’s sector allocation looks like as of this moment:

    However, what remains most remarakable about Horseman Capital is that even as it modestly boosted its gross exposure to 59%, as of February the fund’s net short exposure has risen from what was a previous record of 76%, to a whopping -88%, an unprecedented record even for one of the world’s most bearish hedge funds!

    Finally or those seeking to glean some wisdom from the Horseman’s inimitable Chief Investment Manager, Russell Clark, here is his latest letter.

    * * *

    Your fund made 1.47% net last month mainly on the back of its Japan related positions.

    The fund has had a good move from its last drawdown in October of last year, and is probably overdue for a pullback. The first few days of March are bearing this out. However in many ways the drawdown in the fund began in February, as consensus short positions in the market began to rally furiously. Good examples are stocks such as Glencore, which the market was pricing for bankruptcy in January, has now seen its stock price rise 58% year to date. The 10 best performing stocks in the S&P this year, were down last year on average 40%. The reality is no one likes it when loser stocks rally. It makes everyone look bad. Short sellers get crushed, best performing long managers from last year start underperforming the market, and investors wonder why they even bother with active managers!

    Sadly, I am all too familiar with markets like these. A significant and surprising move in the market, for example yen strength in February, can cause significant losses in a large macro fund. This macro fund will then seek to reduce risk, and will sell long positions and buy back short positions. This can cause a short counter trend rally, which is painfully, but usually short lived.

    My view is that when indices have broken down and are trading as a bear market the best thing to do is to try and reduce the long book as much as possible. There is a strong temptation to find “safe” long positions to own that will reduce the net short position of your fund. I have found this to be the worst possible thing to do as almost every other market participant is trying to crowd into these same safe positions. When the inevitable redemptions come, long positions get sold and short positions get covered, and your “safe” longs end up causing as much damage as your short book.

    For that reason over the last year as the bear market has become more and more apparent, I have been continually adding to the short book and selling the long book. I have also been moving the fund to less consensual bearish ideas, such as long yen and short Japanese and European exporters. This strategy has paid dividends in February, which was a very tough month for many other short sellers. The big rally in the yen, helped our currency book, bond book (our JGBs have had a significant move) and short Japanese stocks positions.

    I have always felt that having these type of non-consensual trades on are very important as they give you time to observe the market before making a change to the strategy. The equity and commodity markets are sending signals that perhaps the bear market in commodities and the related bear market in emerging markets is over. This however seems very unlikely to me, as many of the indicators for commodity supply are still flashing red, and the issue of excessive capacity has not really been adequately addressed. Big moves in commodity prices could be suggestive of government policies finally becoming effective in creating inflation and above trend growth. However what we are also seeing is a strong yen and falling bond yields, which is not consistent with accelerating growth or inflation.

    More likely the yen rally in February has been extremely painful for a number of large macro funds, and has caused these funds to cut risk from the long and short book, which given consensual positioning in markets is causing a great deal more pain. If history is a guide, I would assume that we are nearly through this mean reversion trade.

    Your fund remains short equities, long bonds.

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