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Scotland FOMC

The market had another wee-scare this week, which was the Scottish independence vote. As this is being written, the people of Scotland are deciding if they should be a free people or a vassal state of England; or of London more pointedly.

Despite the fact that the vote is not complete while I type this, I will gladly go out on the proverbial limb and declare that the referendum will be an epic fail. I wish such declarations wouldn’t be so easy to make; however, when it comes to the global banking mafia, you just have to accept defeat – forever.

Some of you may be wondering why I would make such a pithy prediction, and the answer lies in the “fear” of an actual secession. Let me ask you a question: If you were a senior corporate officer in a global corporation that was taking on unimaginable amounts of debt and had the opportunity of a fresh start – what would you do? Would you start the spin-off with a portion of the crushing debt that your firm had no control over, or would you demand a debt-free beginning?

Of course we know the answer – you would start the new firm with no debt if possible.

And therein lies the anxiety: the market is once again afraid that its obscene levels of prior debt may catch up with it. If the new upstart, Scotland, repudiated its portion of the UK debt, all hell will break loose on the banking mafia across the globe.

And since that is NEVER allowed, the fix was in: Scotland, from the beginning, would never be allowed independence!

If I am wrong, I will revel in my error for days!

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The market waited a few days on pins-and-needles for the FOMC, or Janet Yellen, to announce no change in the Fed’s rate policy. The economy is “so great” that the Fed must continue its Zero Interest Rate Policy: ZIRP.

The following headlines sum up the Fed’s action: no change.

•*FED TO END QE PROGRAM AT NEXT MEETING IF OUTLOOK HOLDS, RELEASES EXIT STRATEGY GUIDELINES

•*FED WILL USE IOER RATE TO MOVE FED FUNDS INTO TARGET RANGE

•*FED TO USE OVERNIGHT-REVERSE REPO `AS NEEDED’ IN EXIT

•*FIRST RATE RISE SEEN IN 2015 BY 14 FED OFFICIALS VS 12 IN JUNE

•*FED KEEPS ‘CONSIDERABLE TIME’ PLEDGE FOR LOW RATES POST-QE

•*FED SEES MEDIAN FED FUNDS RATE AT 1.375% AT END OF 2015

•*FED SAYS TIMING OF REINVESTMENT PHASE-OUT IS ECONOMY-DEPENDENT

•*FED SAYS INFLATION `RUNNING BELOW’ FOMC’S LONG-RUN GOAL

•*FED REPEATS SIGNIFICANT UNDERUTILIZATION IN LABOR MARKETS

•*FED SAYS ECONOMY EXPANDING AT MODERATE PACE, LABOR MKT IMPROVED

•*FISHER, PLOSSER DISSENT ON FOMC VOTE ON FORWARD GUIDANCE

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In a glaring better late than never move, CalPERS (The California Public Employees’ Retirement System–the largest pension fund in the U.S.) intends to divest all of the $4 billion it has invested in hedge funds.

And in a glaring ode to the obvious, the reasons CalPERS gave are that the hedge funds are too expensive and complicated and basically more trouble than they’re worth.

With the stock market climbing to liquidity infused higher highs, the performance of most hedge funds have looked terrible by comparison, especially in light of the fees that they charge–generally 2 percent of assets and 20 percent of profits.

In addition, hedge fund performance has lagged. CalPERS hedge funds returned just 7.1% in the latest fiscal year and they paid over $135 million in hedge fund fees. According to the Barclay Hedge Fund Index, hedge funds overall returned only 11% in 2013, while the S&P 500 gained 30%. They’re up 4.5% so far this year, compared to the S&P 500′s 8% advance.

Generally, as hedge funds have evolved from innovative little operations into slick multi-billion dollar firms, generating returns has become much more difficult. Yet the fund managers earn hundreds of millions of dollars in fees just for managing the money. Still, as interest rates have remained low, investors have continued to pile into hedge funds, which now hold a record $2.8 trillion in assets. Hedge funds were never designed to outperform the stock market, of course, but does that justify the exorbitant fees.

The hedgies have grown accustomed to a culture of expensive living and excess. Without the massive capital contributions from the pension funds, this may come to an end. While there are plenty of wealthy individuals willing to pay their exorbitant fees, they can’t provide the sheer dollars of the pension funds.

The Hamptons may be less crowded this summer and you can probably get a used Ferrari on the cheap.

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How often do you see just one bubble existing on its own? Not in a bath, not in a bottle of champagne, and definitely not in a frothy stock market environment.

I have written about the student loan bubble and the sub-prime auto loan bubbles in this column before. Add to the list of bubbly worries, the second coming of the tech bubble.

Bill Gurley, a prominent venture capitalist, believes that Silicon Valley is taking on an excessive amount of risk right now that is unprecedented since 1999.

From the Wall Street Journal:

WSJ: I want to read you something from your blog. You quoted Warren Buffett’s famous quote, “Be fearful when others are greedy and greedy when others are fearful.” And then you wrote: “Although we may have not reached the level of observing obvious greediness, there is most certainly an absence of fear. Those that managed companies in 2008, or 13 years ago in 2001, know exactly how fear feels. And this is not it.” What did you mean by that?

Mr. Gurley: Every incremental day that goes past I have this feeling a little bit more. I think that Silicon Valley as a whole or that the venture-capital community or startup community is taking on an excessive amount of risk right now. Unprecedented since ’99. In some ways less silly than ’99 and in other ways more silly than in ’99. I love the Buffett quote because it lays it out. No one’s fearful, everyone’s greedy, and it will eventually end. And there are reasons, which might take all night to explain, why this business is cyclical over time, and the more chance you have to see different cycles and to see how it slips away, you can see it.

There’s a phrase that I love: “discounted risk.” Do people discount risk? Right now you’ve got private companies raising $200, $400, $500 million. If you’re in a competitive ecosystem and you raise that amount of money, the only way you use it—because these companies are all human-based, they’re not like building stores—is to take your burn up.

And I guarantee you two things: One, the average burn rate at the average venture-backed company in Silicon Valley is at an all-time high since ’99 and maybe in many industries higher than in ’99. And two, more humans in Silicon Valley are working for money-losing companies than have been in 15 years, and that’s a form of discounted risk.

In ’01 or ’09, you just wouldn’t go take a job at a company that’s burning $4 million a month. Today everyone does it without thinking.

WSJ: Because the equity looks so valuable?

Mr. Gurley: Yeah, it’s a whole bunch of things. But you just slowly forget, and half of the entrepreneurs today, or maybe more—60% or 70%—weren’t around in ’99, so they have no muscle memory whatsoever.

So risk just keeps going higher, higher and higher. The problem is that because you get there slowly the correcting is really hard and catastrophic. Right now, the cost of capital is super low here. If the environment were to change dramatically, the types of gymnastics that it would require companies to readjust their spend is massive. So I worry about it constantly.

I am with you Bill. I worry about these bubbles too!!

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If I was speaking in my politician voice, I would employ not only optimism, but obfuscation and call most government data “occasionally unintentionally skewed to reflect an overly positive outlook.”

Thankfully, I don’t and you know that in this newsletter I repeatedly call into question any and all government reports because I believe they are manufactured, massaged and manipulated to achieve a desired end. Friday, the government produced retail sales numbers for August that were supposedly positive according to the mainstream media..

But I am not the only person crying foul. According to the Burning Platform.

• The unadjusted retail sales were only 3.2% higher than last August. Considering government reported inflation of 2%, that is a pretty sh$%ty result. But have no fear. The “ADJUSTED” retail sales for August were 5.0% higher than last August. WTF? Guess which number gets reported to the sheep?

• Hysterically, your government drones consider lending deadbeats $40,000 for seven years with no money down to drive away with a GM deathtrap SUV as a retail sale. The billions in subprime auto loans led to an 8.8% YoY surge in “ADJUSTED” auto sales. It seems the unadjusted number only went up 5.3%.

• When you back out the Federal Reserve/Wall Street pumped auto sales, which will ultimately result in billions of written off bad debt (you’ll pick up the tab), unadjusted retail sales were only 2.7% higher than last August. With real inflation of 5% or more, real retail sales are negative on a year over year basis.

• Despite financing deals of 4 years with no interest, furniture and electronics retail sales were flat versus last August. If there really is a housing recovery and 2.1 million more Americans are employed versus last August how could these discretionary sales be flat, and negative on an inflation adjusted basis?

• Grocery store sales were up only 2.1% over last year. Even the government is reporting 2.7% food inflation in the last year. We all know it is closer to 10%, so people are actually reducing the amount of food they are buying. That is a sure sign of an economic recovery.

• Clothing store sales were flat and department store sales were negative versus last August. So much for the back to school storyline. I do believe August is back to school time. The Sears and JC Penney Bataan Death March trudges toward bankruptcy.

• What did surge was sales at restaurants and bars. They soared by 6.8% versus last August. We already know Darden, Yum Brands and McDonalds have reported dreadful results, so either the government is lying, soaring food prices are being passed on to customers, or people are so depressed by this awesome economic recovery they are drinking themselves into a stupor.

But at the same time, we hear about countless major chains struggling to keep their doors open. When you see the headlines touting strong retail sales, you need to consider what you are actually seeing in the real world. While it may be comforting to listen to government happy talk, it rarely reflects the truth.

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Million-Dollar NYC Parking Spots

It has often been said that a market top can be marked, in hindsight of course, by some crazy human events involving money. The “biggest skyscraper” in the world has been to at certain tops; cabbies giving stock tips topped a market; and massive homes being purchased by the unemployed were all crazy and all involved too much money in the markets.

Is the following story another “peak” indicator?

The NYT reports …

What will $1 million buy in New York City? A diamond-encrusted Cartier men’s watch. A small fleet of 2014 Bentley Continentals. Or maybe your very own parking spot in SoHo.

A new development, 42 Crosby Street, is pushing the limits of New York City real estate to new heights with 10 underground parking spots that will cost more per square foot than the apartments being sold upstairs.

The million-dollar parking spots will be offered on a first-come-first-served basis to buyers at the 10-unit luxury apartment building being developed by Atlas Capital Group at Broome and Crosby Streets, itself the former site of a parking lot. At $250,000 a tire, the parking spaces in the underground garage cost more than four times the national median sales price for a home, which is $217,800, according to Zillow.

“Most ultrahigh-net-worth individuals have car collections as well as service vehicles for their staff,” Mr. Hannah said. “Parking is in serious demand and has proven an excellent investment with no sign of a decline.”

No sign of a decline? Maybe not now, but I bet if asked during a decline the same person would say that there was no decline and you better by NOW.

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Next Monday, September 15th, may be a very interesting day if the CME actually follows through on the new rules it has recently announced. It has, shockingly, finally decided to make bogus (read: illegal) HFT manipulative orders and market rigging against the CME rules.

As you will read at the end, the new rules take effect in a few short days. Before that, however, I am reprinting a very well received missive of mine on this exact subject.

I want to state that I am not against algorithmic trading or HFT in general; however, there are several extremely borderline-illegal “techniques” that I am indeed against. If you are faster than I am and make a profit earlier than I do, or more of it because of the speed, that’s OK. But what I am against is using this speed, which incidentally is about as close to the speed of light as you can get over cable/fiber lines, for illicit gains.

As we have recently found out, I am not crazy; these “special techniques” are not special at all, but illegal as we have said all along. A specific type of trading that we have discussed is “spoofing,” which employs fake orders – those that are never intended to be filled – in order to entice others to trade based on this false information.

In this type of “trade” an aggressive HFT manipulator will (for example) place enormous buys under the current price, after they have sold short. The enormous bids under the current market are fake of course, which is how this scam works. The purpose of this scam is to entice other people, and other algorithms, to buy because they can see the huge bids under the current price. The thought buy people and the code of algorithms are to buy NOW before the lower bids creep higher or “go to the market” and it races higher without them. They don’t want to be left behind. Specifically, they trade because of those big orders below the market, but unbeknownst to them – they are all spurious.

What happens when these huge orders, which many have specifically traded on, have disappeared? When they are cancelled, the exact reason for the other people and algorithms that caused their purchases, are gone! They will then exit their longs by selling, which creates an instant profit for the original illegal HFT program.

Canceling the intentional fake orders creates a vacuum and the market quickly drops. Once there were thousands of buy orders under the market and a microsecond later they have vanished, which makes it easy for the market to drop.

Two firms were (surprisingly) recently busted for this exact illegal activity. It only took the regulators about SIX YEARS to catch on.

And it has taken the CME even longer to make new rules, but new rules have indeed been made. Hold on to your hats – the CME “claims” that it is taking away the ability of HFT to be manipulators, which it calls “Disruptive market practices.”

Examples of Prohibited Activity – The following is a non-exhaustive list of various examples of conduct that may be found to violate Rule 575:

Single asset class manipulation: The market participant places orders to induce or trick other market participants. (This is SPOOFING!)

Cross Asset Manipulation: A market participant enters one or more orders in a particular market (Market A) to identify algorithmic activity in a related market (Market B). Knowing how the algorithm will react to order activity in Market A, the participant first enters an order or orders in Market B that he anticipates would be filled opposite the algorithm when ignited. The participant then enters an order or orders in Market A for the purpose of igniting the algorithm and creating momentum in Market B.

Price manipulation at the open: During the pre-opening period on CME Globex, a market participant enters a large order priced through the IOP (a bid higher than the existing best bid or an offer lower than the existing best offer) and continues to systematically enter successive orders priced further through the IOP until he causes a movement in the IOP, which prompts him to cancel all of his orders.

More tricking around closing and opening prices: A market participant places large quantity orders at the beginning of the pre-opening period in an effort to artificially increase or decrease the IOP with the intent to attract other market participants. Once others join the market participant’s bid or offer, the market participant cancels his orders shortly before the no-cancel period.

Arbitrage on demand: A market participant enters a large number of orders and/or cancellations/updates for the purpose of overloading the quotation systems of other market participants with excessive market data messages to create “information arbitrage.”

Quote Stuffing: A market participant enters order(s) or other messages for the purpose of creating latencies in the market or in information dissemination by the Exchanges for the purpose of disrupting the orderly functioning of the market. (This is just like a DNS attack on the internet that shuts down websites (denial of service)).

Using Self Match Prevention mechanisms to aid in price manipulation: A market participant enters a large aggressor buy (sell) order at the best offer (bid) price, trading opposite the resting sell (buy) orders in the book, which results in the remainder of the original aggressor order resting first in the queue at the new best bid (offer). As the market participant anticipated and intended, other participants join his best bid (offer) behind him in the queue. The market participant then enters a large aggressor sell (buy) order into his now resting buy (sell) order at the top of the book. The market participant’s use of CME Group’s Self-Match Prevention functionality or other wash blocking functionality cancels the market participant’s resting buy (sell) order, such that market participant’s aggressor sell (buy) order then trades opposite the orders that joined and were behind the market participant’s best bid (offer) in the book. (This is queue jumping!!)

Question: As of this writing and for many YEARS now, hasn’t the very same exchange actually not only tolerated but turned a blind eye to such disruptive market practices? Moreover, hasn’t the CME also compensated said “disruptive practices” by calling them “liquidity providers” and them rebating them? And with this rule, the CME is admitting that DNS attacks, spoofing, and QUEUE JUMPING are happening, or this wouldn’t be happening.

One more thing; read the list above and try to wrap your mind around what’s actually happening in the markets by these huge firms. They do not use “magical indicators” to make their money; the good firms use excessively complicated mathematics and statistics, while the bad actors simply cheat.

Will Rule 575 also apply to the central banks that the CME finally admitted were trading (buying only) the ES and other markets, like (selling only) Gold & Silver?

Oh well, until Monday – let the rigging continue!

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Coming as a surprise to nobody that a war-torn country will require financial help, we learned earlier this month that the Ukraine is facing a $3.5 billion funding gap and could need additional financing worth $19 billion next year.

The continuing conflict between Kiev’s forces and pro-Russian separatists in the eastern region of Ukraine, where the country’s manufacturing is centered, is forcing the economy deeper into recession and raising rescue costs. The IMF late last week approved the latest tranche of the fund’s $17 billion bailout, part of a larger, $30 billion international financing package.

Of course the IMF came to the rescue under heavy pressure from the United States.

Michael Hdson, a research professor of Economics at University of Missouri, Kansas City, writes on the Naked Capitalism blog

In April 2014, fresh from riots against the kleptocrats in Maidan Square and the February 22 coup, and less than a month before the May 2 massacre in Odessa, the IMF approved a $17 billion loan program to Ukraine’s junta. Normal IMF practice is to lend only up to twice a country’s quota in one year. This was eight times as high.

Four months later, on August 29, just as Kiev began losing its attempt at ethnic cleansing against the eastern Donbas region, the IMF signed off on the first loan ever to a side engaged in a civil war, not to mention being rife with insider capital flight and a collapsing balance of payments. Based on fictitiously trouble-free projections of the ability to pay, the loan supported Ukraine’s currency, the hryvnia, long enough to enable the oligarchs’ banks to move the money quickly into Western hard-currency accounts before the hryvnia plunged further and was worth even fewer euros and dollars.

This loan demonstrates the degree to which the IMF is an arm of U.S. Cold War politics. The loan terms imposed the usual budget austerity, as if this would stabilize the war-torn country’s finances. The financings obviously were devoted mainly to rebuilding the army. The war-torn East can expect to receive nothing even nothing even though its basic infrastructure has been destroyed for power generation water, and hospitals. Civilian housing areas that bore the brunt of the attack are also unlikely to profit from the IMF’s uncharacteristic generosity.

Now the IMF is claiming that other lenders, such as the U.S. and Europe, may need to provide additional financial support to prevent a collapse of the Ukrainian economy if hostilities endure.

It’s looking like another case of back door financing to further a political agenda. Don’t think for a second the US taxpayers will somehow get off and not have to shoulder another country’s financial burden. We’ve seen this situation play out before.

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Well, he may be stand only slightly over five feet tall, but if all goes according to plan, Alibaba’s founder, CEO and de facto emperor Jack Ma will shortly become the most powerful man in eCommerce on earth. His net worth will balloon to somewhere around $15 billion and he’ll become bigger than Amazon’s Jeff Bezos.

When the Alibaba Group goes public later this month in an offering that could value the company at about $160 billion, investors will have little doubt about who is in control of the company. Mr. Ma, 49, is the public face. He is the chief negotiator. He is the top strategist. He is the biggest individual investor, with a 9 percent stake.

On Monday we got our first real glimpse of Alibaba mania stateside.

From Bloomberg:

Hundreds of hedge funds, mutual funds and other institutional investors lined up on Monday to hear Alibaba Group Holding Ltd’s (IPO-BABA.N) management pitch the company’s shares, as the Chinese e-commerce giant kicked off a two-week IPO marketing blitz.

The line for people waiting to take the elevators at the Waldorf Astoria hotel in New York snaked down to the basement, in one of the clearest signs yet of the company’s appeal to investors. Among the investors attending the event was Mario Gabelli, CEO of Gabelli Asset Management.

Alibaba is seeking to raise more than $21 billion in an initial public offering that will value the company at up to $163 billion and rank as the largest-ever technology debut in the United States. Alibaba expects to price the IPO at $60 to $66 per American Depository Share. It will list shares on the New York Stock Exchange and start trading later this month.

Alibaba accounts for about 80 percent of all online retail sales in China, where rising Internet usage and an expanding middle class helped the company generate gross merchandise volume of $296 billion in the 12 months ended June 30.

Revenue in the June quarter increased 46 percent to $2.54 billion from a year earlier, faster than the 38.7 percent growth in the previous quarter.

The company has attracted its share of controversy, which has kept some investors on the sidelines. Some have said they were cautious about conflicts of interest between founder Jack Ma’s role as a steward of the company and his investment interests elsewhere.

Whatever the issues, keep your eyes on Jack Ma.

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Last Friday’s monthly payroll data was awful. In fact, it was so bad that all of the so-called experts said we should ignore it. The market sure ignored it – all indices closed higher despite the terrible news.

From the Bureau of Labor Statistics (BLS) July 2014 Employment Report.

Total non-farm payroll employment increased by 142,000 in August, and the unemployment rate was little changed at 6.1 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in professional and business services and in health care.

Over 100% of the decline in unemployment in the past year is due to people dropping out of the labor force, rather than strength in the economy!

The table below is from the BLS and shows alternate measures of unemployment and the one that is closest to reality is U6. As you can see, the actual unemployment rate is closer to 12%.

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Maybe if people dropping out of the labor force increases even further, the S&P500 will trade to 3,000.00.