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Saudi Arabia Is An ISIS That "Made It": "The West Wages War On One, And Shakes Hands With The Other"

One interesting thing about Washington's strategy in the Middle East is the extent to which the US persists in its support of Saudi Arabia and steadfastly refuses to make meaningful strides towards reconciliation with Iran. 

It's not so much that anyone realistically expects Tehran to turn a corner on things like expanding press freedom or implementing judicial reform and everyone knows that regardless of how friendly Rouhani tries to be, the Ayatollah casts a long shadow. But at the risk of coming across as crass and/or short on nuance, Saudi Arabia still executes people in the streets with swords and promotes the same hardline ideology as that espoused by ISIS, al-Qaeda, and other Sunni extremists. Tehran and its Shiite crescent are the regional counterbalance to this and yet The House of Saud is welcomed with open arms at The White House, while Iran is forever branded a pariah state even as Riyadh and Doha funnel money to the very same militants who carry out attacks on Western targets. 

With that in mind, we present the following Op-Ed by Kamel Daoud, a columnist for Quotidien d’Oran, and the author of “The Meursault Investigation.” 

Originally published in The New York Times

Saudi Arabia, an ISIS That Has Made It

Black Daesh, white Daesh. The former slits throats, kills, stones, cuts off hands, destroys humanity’s common heritage and despises archaeology, women and non-Muslims. The latter is better dressed and neater but does the same things. The Islamic State; Saudi Arabia. In its struggle against terrorism, the West wages war on one, but shakes hands with the other. This is a mechanism of denial, and denial has a price: preserving the famous strategic alliance with Saudi Arabia at the risk of forgetting that the kingdom also relies on an alliance with a religious clergy that produces, legitimizes, spreads, preaches and defends Wahhabism, the ultra-puritanical form of Islam that Daesh feeds on.

Wahhabism, a messianic radicalism that arose in the 18th century, hopes to restore a fantasized caliphate centered on a desert, a sacred book, and two holy sites, Mecca and Medina. Born in massacre and blood, it manifests itself in a surreal relationship with women, a prohibition against non-Muslims treading on sacred territory, and ferocious religious laws. That translates into an obsessive hatred of imagery and representation and therefore art, but also of the body, nakedness and freedom. Saudi Arabia is a Daesh that has made it.

The West’s denial regarding Saudi Arabia is striking: It salutes the theocracy as its ally but pretends not to notice that it is the world’s chief ideological sponsor of Islamist culture. The younger generations of radicals in the so-called Arab world were not born jihadists. They were suckled in the bosom of Fatwa Valley, a kind of Islamist Vatican with a vast industry that produces theologians, religious laws, books, and aggressive editorial policies and media campaigns.

One might counter: Isn’t Saudi Arabia itself a possible target of Daesh? Yes, but to focus on that would be to overlook the strength of the ties between the reigning family and the clergy that accounts for its stability — and also, increasingly, for its precariousness. The Saudi royals are caught in a perfect trap: Weakened by succession laws that encourage turnover, they cling to ancestral ties between king and preacher. The Saudi clergy produces Islamism, which both threatens the country and gives legitimacy to the regime.

One has to live in the Muslim world to understand the immense transformative influence of religious television channels on society by accessing its weak links: households, women, rural areas. Islamist culture is widespread in many countries — Algeria, Morocco, Tunisia, Libya, Egypt, Mali, Mauritania. There are thousands of Islamist newspapers and clergies that impose a unitary vision of the world, tradition and clothing on the public space, on the wording of the government’s laws and on the rituals of a society they deem to be contaminated.

It is worth reading certain Islamist newspapers to see their reactions to the attacks in Paris. The West is cast as a land of “infidels.” The attacks were the result of the onslaught against Islam. Muslims and Arabs have become the enemies of the secular and the Jews. The Palestinian question is invoked along with the rape of Iraq and the memory of colonial trauma, and packaged into a messianic discourse meant to seduce the masses. Such talk spreads in the social spaces below, while up above, political leaders send their condolences to France and denounce a crime against humanity. This totally schizophrenic situation parallels the West’s denial regarding Saudi Arabia.

All of which leaves one skeptical of Western democracies’ thunderous declarations regarding the necessity of fighting terrorism. Their war can only be myopic, for it targets the effect rather than the cause. Since ISIS is first and foremost a culture, not a militia, how do you prevent future generations from turning to jihadism when the influence of Fatwa Valley and its clerics and its culture and its immense editorial industry remains intact?

Is curing the disease therefore a simple matter? Hardly. Saudi Arabia remains an ally of the West in the many chess games playing out in the Middle East. It is preferred to Iran, that gray Daesh. And there’s the trap. Denial creates the illusion of equilibrium. Jihadism is denounced as the scourge of the century but no consideration is given to what created it or supports it. This may allow saving face, but not saving lives.

Daesh has a mother: the invasion of Iraq. But it also has a father: Saudi Arabia and its religious-industrial complex. Until that point is understood, battles may be won, but the war will be lost. Jihadists will be killed, only to be reborn again in future generations and raised on the same books.

The attacks in Paris have exposed this contradiction again, but as happened after 9/11, it risks being erased from our analyses and our consciences.

Japan To Unleash Inflation... By Fabricating Data

The great thing about statistics is that you can make them say pretty much whatever you want them to say. 

Although good statisticians generally try to build in all kinds of safeguards to ensure that when they’re trying to draw conclusions based on data analysis, those conclusions are free of biases, that’s no good if you’re a government agency hell bent on conveying a very specific message to the general public (or to the market). 

You see, goalseeked data is a key tool in the fight to “prove” that seven years of unconventional monetary policy hasn’t been for naught. After all, both Europe and Japan recently slipped back into deflation despite printing trillions in fiat money…

...and earlier this week, Tokyo was forced to admit that despite all of the “Abenomics is working” rhetoric, the country has just entered its fifth recession in five years. 

Clearly, some statistical "massaging" is in order. 

China has long been the undisputed king of manipulated economic data and earlier this year, the BEA decided it was time to take a page out of the NBS playbook. With the help of Janet Yellen's old friends at the San Francisco Fed and after an on air assist from Steve Liesman, the US government introduced the market to "residual seasonality" or, double adjusted GDP data.

In simpler terms, after seeing it work so well for years in China, the US Department of Commerce's Bureau of Economic Statistics simply replaced all of its Excel models with just one function. The following:

And visually:

The moral of the story is that sometimes, when it's a choice between everyone realizing that the emperor has no clothes and just making up the numbers, you should just make up the numbers because if you don't, well, people may start to wonder what the point of printing trillions in fiat currency was other than to inflate the assets of the rich and exacerbate the gap between the haves and the have nots. 

Sure enough, it now looks like Japan is set to follow in the footsteps of the BEA because as Reuters reports, when you're stuck in deflation, sometimes the best thing to do is simply omit all the things for which prices are falling from your calculations. Here's more:

The Bank of Japan will release a new set of price indicators this month that reconfigures the way price trends are measured as the central bank seeks to show the country's below-target inflation rate is due to volatile items such as energy.

Importantly, a new consumer price index (CPI) will exclude energy costs, which have been falling, but include the costs of items such as processed and imported foods, which have been rising.

See there? Eliminating Japan's dreaded "deflationary mindset" is as simple as only including those items in the CPI that are getting more expensive. Back to Reuters: 

The BOJ currently uses the government's core CPI, which excludes fresh food but includes energy costs, as its key price measurement in guiding monetary policy.

With core CPI now slipping due largely to slumping oil prices, the central bank began internally calculating a new index that conveniently shows inflation exceeding 1 percent in the past few months. That index strips away volatile fresh food and energy costs, but includes processed and imported food prices, which are rising.


The BOJ said on Friday it will start publishing this month the new CPI, as well as other indicators such as one showing the ratio of goods seeing prices rise versus those that are falling, on a regular basis each month.

Obviously, this is completely ridiculous and speaks to just how desperate Japan truly is now that the time clock on failed state status is about to tick under two years. 

Of course you can manipulate the numbers all you like, but you can't manipulate the underlying reality and eventually, papering over the problem with artifically inflated data will cease to be a viable option once things get bad enough and Excel simply crashes under the sheer ridiculousness of what it's being asked to do.

Over-Reaching Government "Enables" Culture Warriors

Submitted by Roger Barris via,

Dispensing More “Free Stuff”

I  have just finished reading an opinion entitled “A Birth-Control Morality Play Comes to Supreme Court” by Megan McArdle, the lonely voice of libertarianism over at Bloomberg View.

The thrust of the article is to use philosophical hypotheticals to explain the violent reaction of some religious groups to the seemingly minor certifications required to escape the contraception mandate in the Affordable Care Act.  But the article makes another point, albeit in an oblique manner, which is more important.   In the “culture wars,” an overreaching government often fires the first shot.


Cradle-to-grave nannying by the State has certain small drawbacks, but you’ll get used to them, serf.


As McArdle says “My own intuition is that the Obama administration chose this fight….For one thing, contraception is an inexpensive routine purchase that is exactly the sort of thing that insurance shouldn’t cover (for the same reason your car insurance doesn’t cover routine service: you’d just end up pre-paying the service in the form of higher insurance premiums.)”  Here, McArdle is making the same point and in fact using the same example – great minds thinking alike, and all that – I used in my 2012 blog entitled “Contraceptive ‘Coverage.’

As I pointed out earlier, contraception fails any reasonable definition of an insurable risk, being a “random undesirable event, usually of significant consequences.”  Since having sex is neither random nor (typically) undesirable, nor are the costs of contraception that significant, it cannot be “insured.”

Frankly, using the language of insurance in this context is a transparent attempt to hide the political belief that the government should be dispensing, or forcing others to dispense, more “free stuff” behind a smokescreen of science and health care.  But as the old saying goes, in war, cultural or otherwise, truth is the first casualty.


But there is! Gimme!


The Road to Serfdom

In addition to being economic and linguistic nonsense, contraceptive “coverage” also perfectly illustrates why libertarians like McArdle and me do not want the government engaging in these kinds of activities.  It is a reason advanced at length by Friedrich von Hayek, the Nobel Prize winning economist and social thinker, in his book The Road to Serfdom.  This was written a long time ago, but in today’s environment of heated partisanship, the argument is well worth repeating.


In the early 1940s, Hayek became disenchanted with the direction economics had taken after Keynes. As a result, he never penned the definitive book on capital theory he had planned as a follow-up to his initial effort, the “Pure Theory of Capital”. This is a pity, but on the other hand, Hayek then focused on political theory and questions of knowledge, bequeathing us a great many influential and interesting works, inter alia “The Road to Serfdom”, an eloquent attack on the tyranny of the socialist welfare state, social engineering and central planning.


Hayek argues that it is relatively easy to reach societal consensus on the basic functions of government.  A legal system and the police to enforce it.  A national defense.  Roads and other services that can be provided most efficiently by a monopoly.  Even, more controversially (at least among libertarians), support for basic education and some form of social “safety net” for the small portion of society that is truly unable to help itself.  And a relatively modest level of taxation to support all of this.

However, there is no reason to believe that this consensus can be maintained when government pushes well beyond these bounds.  And this is precisely what we are observing with the contraception mandate, the funding of Planned Parenthood, and many other facets of the “culture wars.”

Now I personally have no problem with contraception and abortion, but I have to recognize that there are other people who do.  In a libertarian world, people with these differing opinions and values can live side by side in reasonable harmony, each side following the famous Voltairian advice to disapprove of what someone says (or does), but defend to the death his right to say (or do) it.

But this harmony breaks down when one group or the other seeks to put the heavy finger of government on their side of the scales.  In addition to all the utilitarian arguments for why the government should avoid this type of micro-managed social engineering, we libertarians believe that this is an independent reason for setting a high bar for these practices.

Those who advocate for policies such as contraception mandates and the funding of Planned Parenthood, which almost certainly don’t belong in the government sphere on purely economic grounds, should also be required to justify the “culture wars” they will inevitably unleash.


Home from the war …


This is particularly true when, as in all wars, “tit for tat” quickly becomes the standard.  The left shoves Planned Parenthood and a contraception mandate down the throat of the right.  Then the right feels doubly justified in trying to impose their views on abortion and “intelligent design.”  The end result is a reduced sphere of freedom for everyone, including us innocent bystanders caught in the crossfires of their battles.

For Hayek, the attempt to expand the sphere of government action, with the inevitable discord it produced, was a major factor behind the rise of anti-democratic politics in Weimar Germany.


July 1931: Thousands are queuing at the branch offices of the Post Office Bank in Berlin to withdraw their savings. The Weimar Republic had long ceased to be fun, and both communist and nationalist groups were actively working to bring about its downfall and replace it with a dictatorship. Hitler’s party won this particular contest two years after this photograph was made.


It was a major factor in The Road to Serfdom that led, in the case of Germany, to fascism.  However, we don’t have to go this far.  We only have to look at the gridlock in Washington and the rise of anti-Washington political candidates to realize that the same dynamic is at work in modern-day America.  Although thankfully for now in a less virulent form.

Average Annual Cost Of Specialty Drugs Now Exceeds US Median Household Income

Earlier this month, we reported that Senators Susan Collins (R-Maine) and Claire McCaskill (D-Mo.), who together lead the Senate Special Committee on Aging, have opened a bipartisan investigation into pharmaceutical drug pricing. 

In the crosshairs are Valeant, Turing, Retrophin, and Rodelis. 

News of the investigation came after Turing CEO Martin Shkreli (who also founded Retrophin) decided to boost the price of a toxoplasmosis drug he bought by some 5000%. Valeant - also known for jacking up prices on acquired drugs - was thrust into the spotlight after a series of reports prompted scrutiny of the company’s apparently less-than-“limited” relationship with pharmacy Philidor.

Whether Shkreli - who, you might have noticed, made a few moves this week in KaloBios that cost the E-trading Joe Campbells of the world a small fortune - realized it or not, his decision to raise the price of Daraprim from $13.50 to $750/pill may have been the tipping point for a market that has until now borne the rising cost of prescription drugs.


— Martin Shkreli (@MartinShkreli) September 16, 2015

Of course patients with insurance don’t foot the whole bill, but insurance companies aren’t running charity operations so ultimately, higher costs are passed on to consumers in the form of steeper premiums. 

It’s against this backdrop that AARP has released a new study which shows that incredibly, the average annual cost of specialty drugs now exceeds the median US household income. As The Washington Post notes, “the study of 115 specialty drugs found that a year's worth of prescriptions for a single drug retailed at $53,384 per year, on average, in 2013 -- more than the median U.S. household income, double the median income of Medicare beneficiaries, and more than three times as much as the average Social Security benefit in the same year.”

From the report:

  • The average cost of therapy was more than $53,000 per drug per year for specialty prescription drugs at the end-payer (retail) level in 2013. — This average annual cost ($53,384) is more than double the average annual cost ($25,857) for a specialty drug in 2006, the year Medicare implemented Part D
  • The average annual cost of therapy for one specialty drug in 2013 ($53,384) was greater than the median US household income ($52,250), more than twice the median income for a Medicare beneficiary ($23,500), and over 40 times higher than the average Social Security retirement benefit ($1,294) over the same time period.

The report also notes that "retail prices for widely used specialty prescription drugs increased substantially faster than general inflation in every year from 2006 to 2013." For instance, AARP points out that "in 2013, retail prices for 115 specialty prescription drugs widely used by older Americans, including Medicare beneficiaries, increased by an average of 10.6 percent. In contrast, the general inflation rate was 1.5 percent over the same period."

Holly Campbell, a spokeswoman for PhRMA, the trade group that represents the pharmaceutical industry, isn't buying it. Campbell "called the report misleading and inaccurate because it fails to take into account the discounts and rebates that are applied to drugs through the negotiations between drug manufacturers, insurers and pharmacy benefit companies," WaPo notes, adding that "she also critiqued the study's methodology and pointed out that specialty medicines are used by a small number of people and account for a small share of total healthcare spending."

But that's about to change, and Campbell probably knows it. Here's AARP again: 

Until recently, relatively few patients used specialty drugs. However, the US population is steadily aging and older adults typically use more specialty medications than younger populations. In addition, specialty drugs are increasingly being used to treat common chronic conditions that affect millions of Americans. Drug manufacturers are also developing more specialty drugs, which now represent 42 percent of the late stage research and development pipeline. Overall, these trends indicate that a much larger share of the population will use specialty prescription drugs in the future


 Experts have projected that specialty drug spending will increase by more than 16 percent annually between 2015 and 2018, and will comprise more than 50 percent ($235 billion) of total drug spending by 2018.

And here's a look at price increases in 2013 for widely used specialty drugs by company:


Of course the industry will continue to insist that prices are generally indicative of how much has been invested during development, but what seems clear from the above and from stepped up lawmaker scrutiny, is that in many cases patients are simply being gouged which leads directly to, as AARP puts it, "increased health care premiums, deductibles, and other forms of cost sharing." On top of that, "prescription drug price growth also increases spending for taxpayer-funded health programs like Medicare and Medicaid, which will eventually affect all Americans in the form of higher taxes."

Yes, "increased health care premiums, deductibles, and higher taxes," but that's fine because we're all happy to subsidize the luxurious lifestyles of the world's Martin Shkrelis, right?

Meanwhile, the Manhattan U.S. Attorney's office announced a $390 million civil fraud settlement with Novartis on Friday and just to drive home how underhanded this industry has truly become, we'll leave you with a few passages from the press release announcing the settlement: 

Preet Bharara, the United States Attorney for the Southern District of New York,announced a $390 million settlement against NOVARTIS Pharmaceuticals Corp. (“NOVARTIS”) in a civil fraud lawsuit based on claims that NOVARTIS gave kickbacks to specialty pharmacies in return for recommending two of its drugs, Exjade and Myfortic. 


Starting in early 2007, NOVARTIS saw Exjade sales were far below internal targets because of low refill rates due, in significant part, to side effects that were more frequent and more severe than initially expected.  To increase Exjade refills and hit its sales targets, NOVARTIS leveraged its control over patient referrals to pressure BioScrip, Accredo, and US Bioservices to hire or assign nurses to call Exjade patients and, under the guise of education or clinical counseling, encourage patients to order more refills. 


More specifically, as the Government contended, NOVARTIS knew that, when the pharmacies called patients, they emphasized the benefits of taking Exjade – for example, by telling patients that not taking Exjade would cause damage to their organs or lead to infertility – while understating the serious, potentially life-threatening risks of taking Exjade – for example, by not mentioning potential side effects like kidney and liver failure.  Indeed, NOVARTIS encouraged the pharmacies to promote Exjade refills in these ways even though FDA had characterized claims about Exjade preventing organ damage as “unsubstantiated.”


In addition, the Government contended that, to incentivize the pharmacies to intensify their efforts to promote Exjade refills, NOVARTIS devised a scheme under which it allocated more patient referrals and gave higher rebates to pharmacies that obtained higher refill rates.  Indeed, NOVARTIS went forward with this scheme – which operated from 2008 to 2012 – even though it knew that the scheme presented risks of violating the Anti-Kickback Statute.

Incidentally, WSJ reported this evening that Turing is now set to generously cut the price of Daraprim in half for hospitals, which we suppose means it will "only" cost $325 now as opposed to $13.50 before.

*  *  *

Full AARP report

Price Watch Trends in Retail Prices of Specialty Prescription Drugs 2006 to 2013 Nov

Guest Post: The End Of Obamaworld

Submitted by Patrick Buchanan via,

In denouncing Republicans as “scared of widows and orphans,” and castigating those who prefer Christian refugees to Muslims coming to America, Barack Obama has come off as petulant and unpresidential.

Clearly, he is upset. And with good reason.

He grossly, transparently underestimated the ability of ISIS, the “JV” team, to strike outside the caliphate into the heart of the West, and has egg all over his face. More critically, the liberal world order he has been preaching and predicting is receding before our eyes.

Suddenly, his rhetoric is discordantly out of touch with reality. And, for his time on the global stage, the phrase “failed president” comes to mind.

What happened in Paris, said President Obama, “was an attack on all of humanity and the universal values that we share.”

And just what might those “universal values” be?

At a soccer game between Turkey and Greece in Istanbul, Turks booed during the moment of silence for the Paris dead and chanted “Allahu Akbar.” Among 1.6 billion Muslims, hundreds of millions do not share our values regarding women’s rights, abortion, homosexuality, free speech, or the equality of all religious faiths.

Set aside the fanatics of ISIS. Does Saudi Arabia share Obama’s views and values regarding sexual freedom and the equality of Christianity, Judaism and Islam? Is anything like the First Amendment operative across the Sunni or Shiite world, or in China?

In their belief in the innate superiority of their Islamic faith and the culture and civilization it created, Muslims have more in common with our confident Christian ancestors who conquered them than with gauzy global egalitarians like Barack Obama.

“Liberté, egalité, fraternité” the values of secular France, are no more shared by the Islamic world than is France’s affection for Charlie Hebdo.

Across both Europe and the United States, the lurch away from liberalism, on immigration, borders and security, fairly astonishes.

But again, understandably so.

Many of the Muslim immigrants in Britain, France and Germany have never assimilated. Within these countries are huge enclaves of the alienated and their militant offspring.

Consider the Belgium capital of Brussels. Belgium’s home affairs minister Jan Jambon said his government does not “have control of the situation in Molenbeek.”

Brice De Ruyver, a security adviser to a former Belgian prime minister says, “We don’t officially have no-go zones in Brussels, but in reality, there are, and they are in Molenbeek.”

According to The Wall Street Journal, after the Paris attacks, “French security forces … conducted hundreds of antiterror raids and placed more than 100 suspects under arrest. … France has some 11,500 names on government watch lists.”

How many of those 11,500 are of Arab descent or the Muslim faith?

The nations of the EU are beginning to look again at their borders, and who is crossing them, who is coming in, and who is already there.

And the world is reawakening to truths long suppressed. Race and religion matter. To some they are life-and-death matters. Not all creeds, cultures and tribes are equally or easily assimilated into a Western nation. And First World nations have a right to preserve their own unique identity and character.

When Obama says that to prefer Christian to Muslim refugees is “un-American,” he is saying that all the U.S. immigration laws enacted before 1965 were un-American. And, so, too, were presidents like Calvin Coolidge who signed laws that virtually restricted immigration to Europeans.

Barack Obama may be our president, but who is this man of the left to dictate to us what is “un-American”?

Were presidents Harry Truman and Woodrow Wilson, who called ours a “Christian nation,” un-American? Did the Supreme Court uphold our “universal values” with Roe v. Wade in 1973 and the Obergefell decision on same-sex marriage last June?

The race issue, too, has returned to divide us.

Half a century after Selma bridge, we have “Black Lives Matter!” on college campuses claiming that universities like Missouri, Princeton, Yale and Dartmouth are riddled with institutional racism.

Attention must be paid, and reparations made, by white America. And a new generation of academic appeasers advances to grovel and ask how the university might make amends.

In Europe, tribalism and nationalism are on the march. Peoples and nations wish to preserve who they are. Some have begun to establish checkpoints and ignore the Schengen Agreement mandating open borders. Eastern Europeans have had all the diversity they can stand.

With Syrian passports missing, with ISIS besieged in its Syria-Iraq laager and urging suicide attacks in New York and Washington, we may be witness to more terrorist massacres and murders in the States.

The time may be at hand for a moratorium on all immigration, and a rewriting of the immigration laws to reflect the views and values of Middle Americans, rather than those of a morally arrogant multicultural elite.

Obamaworld is gone. We live again in an us-versus-them country in an us-versus-them world. And we shall likely never know another.

Stocks Soar Most In 13 Months After Worst European Terrorist Attack In Over A Decade

Quite a week eh? "I don't care... I want to trade size and be a big swinging dick... I'm gonna make it rain!!"


A quick summary of the week...

  • Paris Population Down 130 people  - worst European terrorist attack since Madrid (190 people) in 2004
  • S&P Up 3.3% - best week since Bullard Bounce Oct 2014
  • EM Stocks Up 4.5% - best week in 2 months
  • Gold Down 0.4% - 5th weekly drop in a row, lowest since Oct 09
  • Silver Down 0.7% - 5th weekly drop in a row, lowest since July 09
  • Crude Down 0.5% - 5th drop in last 6 weeks, lowest since August
  • Copper Down 5.3% - worst week sicne Dec 2014, down 6 weeks in a row to lowest since April 2009

*  *  *

Let's start with stocks... From worst week of the year last week to best week since October 2014's Bullard Bounce...


Futures show the real exuberance though... Sunday night's open marked the low after 100-plus people had been killed, and Paris was under martial law...Nasdaq +5% off Sunday night lows!!


Which roundtripped stocks perfectly to the October Payrolls print...


*  *  *

The Devil's in the Divergences...

Bonds and stocks...


Credit and stocks...

Trannies and oil...


Credit and equity risk... (note the roll)


Credit (cash) and equity risk...


Stocks and the yield curve...


And finally FX carry and stocks...


A few individual stocks mattered today...

Chipotle poisoned some folks...


Hope is high that Valeant is fixed (thanks to a Citi debt upgrade)


And then there's Netflix!!! Up almost 20% this week!!!! An $8.6bn rise in market cap in one week... the most ever.


Tresury yields were extremely mixed - following FOMC Minutes - with 2Y up 8bps and 30Y -3bps on the week... 2Y highest weekly close since April 2010, 30Y yields lower for 2 straight weeks first time since August...


For the biggest flattening in 4 months - 2s30s fell 12bps this week - almost to 7 month flats...


Credit markets have now fallen 14 days in a row...


The USDollar gained on the week - Draghi's whatever it takes today trumping odd post-FOMC weakness yesterday in the USD - AUD shot up this week...


Commodities were all lower this week - as The USD gained - but copper was really ugly...


Copper Carnage...



Charts: Bloomberg

Bonus Chart: Retail Deja Vu...


Bonus Bonus Chart: Ponzinormous...

Weekend Reading: Differing Diatribes

Submitted by Lance Roberts via STA Wealth Management,

As expected, the market rallied from short-term support levels as the year-end rush to chase returns has started in full swing. To wit:

"With the markets NOW oversold, it will be critically important that support at 2020 is not broken. The next critical level of support is the short-term moving average (dashed blue line) at 2010, and then 1990 at previous support levels from early this year. It will be important for the market to hold these current levels of support without violating it over the next few trading days to set up a more tradeable short-term rally.


As shown in the chart below, the markets did not disappoint. Even with Japan slipping into its fifth recession in the last 5-years, despite massive infusions of capital, and the devastating attacks in Paris over the weekend, the market rallied strongly off of support as expected."

"As we progress through the last two months of the year, historical tendencies suggest a bias to the upside. This is particularly the case given the weakness this past summer which has left many mutual and hedge funds trailing their benchmarks. The need to play "catch-up" will likely create a push into larger capitalization stocks as portfolios are "window dressed" for year-end reporting.


This traditional "Santa Claus" rally, however, does not guarantee the resumption of the ongoing "bull market" into 2016."

Importantly, while the "bias" of the market is to the upside, primarily due to the psychological momentum that "stocks are the only game in town," the mounting risks are clearly evident. From economic to earnings-related weakness, the "bullish underpinnings" are slowly being chipped away.

While the Federal Reserve (Fed)'s most recent statement acknowledged continuing concerns around international developments, it left the door open to a December rate hike. With a renewed prospect for monetary policy divergence between the Fed and other central banks is once again pushing the dollar higher.

Should the trend continue, a stronger dollar would represent a headwind for U.S. inflation, precious metals, and U.S. earnings growth, as discussed yesterday. Furthermore, a stronger dollar combined with a tightening of monetary policy will further impede earnings growth. The problem is that investors are overlooking this fact to their own peril

But, that is just my opinion. This weekend's reading list is a compilation of interesting diatribes, both bullish and bearish, on the markets, Fed and the economy. 


Don't Fear Rate Hikes Or Rising Dollar by Anatole Kaletsky via Project Syndicate

“The US Federal Reserve is almost certain to start raising interest rates when the policy-setting Federal Open Markets Committee next meets, on December 16.


Under these conditions, the direct economic effects of the Fed's move should be minimal. It is hard to imagine many businesses, consumers, or homeowners changing their behavior because of a quarter-point change in short-term interest rates, especially if long-term rates hardly move."

Easy In, Hard Out  David Merkel via Aleph Blog 

"Ugh. The conclusions of my last two pieces were nuanced. This one is not. My main point is this: even with the great powers that a central bank has, the next tightening cycle has ample reason for large negative surprises, leading to a premature end of the tightening cycle, and more muddling thereafter, or possibly, some scenario that the Treasury and Fed can't control. Be ready, and take some risk off the table."

Did Goldman Sachs Find The Smoking Gun by Tyler Durden via ZeroHedge

"The staff attributed the lower long-run equilibrium rate to a slower rate of potential growth, a consequence of slower population growth and weak productivity growth. These comments might foreshadow another reduction in the median "longer-run" funds rate projection in the Summary of Economic Projections (SEP) in December.


Participants also noted that the lower long-run equilibrium rate implies that the near-zero effective lower bound could become binding more frequently. As a result, "several" participants indicated that it would be "prudent" to consider "options for providing additional monetary policy accommodation" should the economic recovery falter."

Gundlach - The Psychology Of A Rate Hike by Robert Huebscher via Advisor Perspectives

Gundlach - Fed Hike "No Go" A Real Possibility by Jennifer Ablan via Reuters

"'Certainly No-Go more likely than most people think. These markets are falling apart.' Los Angeles-based DoubleLine oversees $80 billion in assets under management.


Gundlach cited a number of asset classes that are signaling deteriorating conditions: The S&P Leveraged Loan Index, which is at a four-year low, the SPDR Barclays High Yield Bond Exchange-Traded Fund "very near a four-year low" and the CRB Commodity Index at a 13-year low. 'You also have the Eurozone doubling down on stimulus. Fed raising rates? Really?'"


(Chart courtesy of ZeroHedge)


Something Strange Is Happening With Rates by Daniel Kruger, Liz McCormick via Bloomberg


Market Timing Is Back In The Hunt by Cliff Asness via Institutional Investor

"Market timing, considered by many an investing sin, can be a virtue if employed modestly, using a combination of contrarian and trend-following strategies."

A Pair Of Popular Stock Market Analogs? by Jesse Felder via The Felder Report

An Earnings Inflection Point by Sam Ro via Business Insider

"In a new note to clients, Morgan Stanley's Andrew Sheets writes that the trend in earnings growth is a 'key inflection' that he is watching.


'Are earnings rolling over? We don't think so. Earnings growth has been weak in the US, EM and Europe. Yet on our forecasts, 3Q15 should be the nadir in EPS trends, as the drag from the commodity sector subsides.'"

Without Buy Backs There Has Been NO EPS Growth by Bob Bryan via Business Insider

The Stock Market Enters Its Final Bull-Market Stage by Simon Maierhofer via MarketWatch


Models, Hemlines & Hamburgers As Economic Indicators by Sue Chang via MarketWatch

“Since ancient times when Babylonians monitored monthly commodities prices as an economic barometer, mankind has sought to divine the health of the economy from an array of sources. Today, swimsuit models, hemlines, and even Twitter all have something to say about the economy — if we know what to look for.


Some, like the coupon redemption rate, are intuitive. Others are more entertainment than economics: During recessions, for instance, Playboy centerfolds tend to be heavier, taller and older. And something as mundane as a new pair of underwear — particularly if you are a man — could indicate that good times are here."

If The Economy Is Fine, Why Are So Many Imploding by Michael Snyder via Economic Collapse Blog

Is The 1% Rolling Over? by John Rubino via


The Total Cluelessness Of Student Protesters via Neil Cavuto via Fox News

EY: Global Economy Uncertain, Fragile & Fragmented via CNBC



“If you have large cap, mid cap, and small cap, and the market declines - you are going to have less cap.” – Martin Traux 

Have a great weekend.

Is This How The Next Global Financial Meltdown Will Unfold?

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

In effect, a currency crisis is simply the abrupt revaluation of the currency to reflect new realities.

I have long maintained that the structural imbalances of debt and risk that triggered the Global Financial Meltdown of 2008-2009 have effectively been transferred to the foreign exchange (FX) markets.

This creates a problem for the central banks that have orchestrated the "recovery" by goosing asset bubbles in stocks, real estate and bonds: unlike these markets, the currency-FX market is too big for even the Federal Reserve to manipulate for long.

The FX market trades roughly the entire Fed balance sheet of $4.5 trillion every day or two.

Currencies are in the midst of multi-year revaluations that will destabilize the tottering towers of debt, leverage and risk that have propped up global growth since 2009.

Though the relative value of currencies is discovered in the global FX market, there are four fundamental factors that influence the value of any currency:

1. Capital flows into and out of the currency (and the nation that issues the currency).

2. Perceived risk, specifically, will this currency preserve my global purchasing power (i.e. capital) or erode it?

3. The yield or interest rate paid on bonds denominated in this currency.

4. The scarcity or over-abundance of the currency.

If we dig even deeper, we find that currencies reflect the income streams and assets of the issuing nation. Consider the currency of an oil exporting nation that has seen both its income from selling oil and the underlying value of its oil in the ground fall by more than 50%.

Why shouldn't that nation's currency decline in parallel with the erosion of income and asset valuation? As a nation's income and asset base decline, there is less national income to pay interest on sovereign bonds, less private income to tax, and a reduced asset base for additional borrowing.

This is especially true if the nation issued debt and/or currency profligately in good times. Recall that debt and currency are one in the same: if someone trades euros for a U.S. Treasury bond, they don't just own a bit of sovereign debt--they own the currency of the nation that issued the bond (in this case, the U.S. dollar).

This is equally true of corporate bonds--all the debt is denominated in a specific currency, and owners of the bonds are not just betting that the interest will be paid and the bond redeemed at maturity, but that the underlying currency will not lose much of its global purchasing power.

One proxy for the absolute destruction of commodity-based income streams and assets is the CRB Index. No wonder emerging economies that depend heavily on the export of commodities are cratering, along with the currencies they issue.

Once participants become aware of the rising risk of holding a depreciating currency, the trickle out of a currency quickly becomes a torrent of fleeing capital.

Once the perceived risk switches from risk-on to risk-off, the only way to prop up the currency is to raise the interest rates that bonds denominated in that currency yield.

But raising interest rates has a brutally negative effect on the domestic economy, as higher rates choke off domestic lending, which then pushes the economy into recession.

It's a no-win double bind, though, for doing nothing and letting one's currency implode drains the nation of capital and makes imports unaffordable. That matters when the imports are energy and/or food.

When those become scarce and unaffordable, social disorder soon follows.

The currency that has benefited from this reversal of capital flows is the U.S. dollar (USD):

Debt/currency crises tend to trigger defaults and weakness in other currencies. We have a recent example of such a crisis: the Asian Contagion of 1997-98:

Though that crisis was linked to Thailand's failed bid to support its currency's peg to the U.S. dollar, the current situation is actually far more fragile as the destruction of commodity income and valuation raises the risk of sovereign defaults, corporate bond defaults, and capital flight that deepens already severe emerging-market recessions.

The bone-dry half-dead forest awaiting an igniting lightning strike is the global mountain of debt--debt which is no longer supported by current valuations of commodities and risk.

In effect, a currency crisis is simply the abrupt revaluation of the currency to reflect new realities. That revaluation then raises the risk premium on debt denominated in that currency or owed in other currencies.

As emerging market currencies decline, the income streams needed to service all the debt denominated in U.S. dollars declines, a self-reinforcing dynamic: as income and valuations fall, capital flees, pushing the relative value of the currency down even more, which further raises the risk premium that then triggers even more capital flight.

The sums in play are so staggering (an estimated $11 trillion in emerging market debts denominated in other currencies) that even the Fed won't be able to stop the meltdown.

Puerto Rico Faces "Public Unrest" As Cash Crunch May Leave Government Workers Unpaid

Heavily indebted Puerto Rico was due to meet with representatives of its creditors on Friday in a desperate attempt to forge ahead with a plan to restructure some $72 billion in debt. No offer is expected to be made at the meetings in New York, but the commonwealth’s Government Development Bank says it hopes to provide creditors’ advisors with greater clarity on "the proposed restructuring process,” which GDB says “is a comprehensive plan that will benefit all parties while supporting the creation of a sustainable path forward.” 

As Reuters notes, “creditors have been resistant to cuts to their repayment, insisting that Governor Alejandro Garcia Padilla's administration do more to curb spending, boost government efficiency and promote economic growth.” 

The GDB is facing a $354 million principal and interest payment on December 1 - some $270 million of that is GO debt guaranteed by the National Public Finance Guarantee Corp. Defaulting on that is bad news and as Moody’s warned earlier this month, a missed payment on the commonwealth’s highest priority obligations “would likely trigger legal action from creditors, commencing a potentially drawn-out process absent swift federal intervention.” 

Another $303 million comes due one month later on January 1. 

GDB called Friday’s meeting with consultants and advisers “part of our continued effort to maintain a constructive and open dialog with our key stakeholders" while a spokesperson for the governor promised Puerto Rico is doing everything in its power to make the December 1 payment although Padilla has repeatedly made clear that if it comes down to defaulting or cutting off services to the people, bondholders will be out of luck.

Here's a bullet point summary of recent developments from BofAML:

  • On 6 November, Puerto Rico released its unaudited quarterly financial and operating report. In the report, Puerto Rico makes plain that it faces a near-term liquidity crisis, has too much debt, limited ability to raise revenues, and a near-decade-long recessionary economy. As a result, it is our opinion that it will likely need to restructure its debt and, absent a voluntary restructuring, will prioritize essential government services at the expense of debt-service payments.
  • Moody’s believes Puerto Rico is likely to default on at least a portion of its scheduled debt-service payments due 1 December, which include roughly $273mn of GDB debt guaranteed by the commonwealth.
  • Moody’s Analytics opines that, without near-term Congressional action, Puerto Rico may very well suffer an economic depression.
  • The US Senate Judiciary Committee scheduled a hearing on Puerto Rico’s financial crisis for 1 December. The Committee’s Chairman stated that allowing a debt restructuring without requiring structural and fiscal reform would be throwing away taxpayer money.
  • The Puerto Rican House and Senate approved significantly amended local control board bills from the one the Governor submitted, turning the proposed “control” board into an “advisory” board. The two bills will need to be reconciled.
  • The Puerto Rico Highway & Transportation Authority (HTA) cancelled $228.5mn of Ambac-insured bonds, a positive for Ambac-insured bondholders, as the insurer will have more claims-paying ability should Puerto Rico or its public corporations default

And here's BofA summing up:

In a nutshell, the commonwealth warns: it is facing a liquidity crisis, set to run out of cash this month, and revenues are coming in lower than expected; debt is too high, and needs to be restructured; the economy has been mired in a nearly decade-long recession, and economic factors limit Puerto Rico’s ability to raise revenues; healthcare and retiree costs, along with other essential government services are more important than paying debt service; and, with a lack of access to the capital markets and little room under the constitutional debt cap, it is unlikely that Puerto Rico will be able to borrow to finance its operations. 

Speaking of running out of cash, Height Securities analyst Daniel Hanson now says the acute liquidity strain may well mean that Padilla can't pay government employees and you know what that means: social unrest.

"Puerto Rico’s liquidity strains are 'serious' and will likely create 'greater levels of public unrest' into year-end," Hanson said this week in a note, adding that the "island’s Treasury Single Account likely has negative cash balance, will make it 'nearly impossible' to meet all government payroll obligations over the next six weeks."

As for whether any of this can be avoided, a Senate judiciary committee headed by Iowa Republican Charles Grassley will meet on December 1 to discuss a legislative proposal to assist Padilla. As Bloomberg notes, "Republicans would prefer that Puerto Ricans solve the crisis on their own, but if they can’t, lawmakers will probably seek to impose 'something like' a federal control board."

But this will likely be too little too late. Expect a partial default and if the government can't make payroll, they'll be trouble in paradise. 

We close with a quote and a table from Moody's Analytics (via BofA). As you'll note, under the "pessimistic scenario," Puerto Rico is in for a long and painful ride.

According to MA, under this scenario, “[t]he government would have no choice but to severely cut spending and jobs, pushing the economy deeper into recession, and further undermining revenues and the government’s fiscal situation. This vicious cycle currently plaguing Puerto Rico will only intensify. Moreover, the territory’s standing in capital markets would be irreparably harmed."

Presenting BofA's "Number One Black Swan Event For The Global Oil Market In 2016"

We’ve spent quite a bit of time this year talking about Saudi Arabia’s rather precarious financial situation. 

To be sure, the move to artificially suppress crude prices has at least partly served the kingdom’s interests in terms of market share and geopolitics. The US shale space has felt the screws tighten and even as wide open capital markets have helped even the weakest players stay in business, production is falling and for the most uneconomic producers, it does indeed appear that the music may finally be about to stop.

As for the “ancillary diplomatic benefits” (i.e. the geopolitical angle) of collapsing crude, the Russians have undoubtedly felt the squeeze and when considered in tandem with Western economic sanctions, one has to believe that the pain from low energy prices has been very real indeed for Moscow.

On balance though, it looks like this was a bad gamble for Riyadh. ZIRP has kept the US shale space in business far longer than the Saudis probably imagined would be possible and instead of forcing Putin to give up Assad, Russia instead built an air base at Latakia and plunged headlong into Syria’s civil war on behalf of the President. 

Meanwhile, the fallout from “lower for longer” has been a disaster for the kingdom’s finances. Saudi Arabia’s budget deficit is expected to come in between 16% and 20% and for the first time in ages, the country faces a deficit on the current account as well.

The pressure is exacerbated by the necessity of preserving the societal status quo. Put  Here's what we mean (via Deutsche Bank): 

The largest energy subsidy beneficiary is the end-consumer in the form of fuel (petrol) subsidies. Bringing up the price of petrol to levels in the UAE, which earlier this year eliminated the petrol subsidy, could provide the government with USD27bn incremental revenues, or 20% of the budget deficit. However, this is a highly unlikely scenario given the demographic differential between KSA and UAE and the socio-economic impact that such an outcome (blended prices rising from USD0.11/l to USD0.5/l) could have within the country.

The Saudi government could look to increase electricity tariffs. This would be a challenge for residential consumption (51% of aggregate consumption) given the political/social impact, though it would present the highest incremental revenue benefit. Bringing up the electricity rates for industrial/commercial consumers to UAE levels could raise incremental revenues of USD3bn, which, while higher than those from the chemical sector feedstock impact, is still only 2.3% of the budget deficit. 


Water is another area where the government could raise more revenues. Currently consumers pay only SAR0.1/cu meter for consumption of 50 cu.m per month, which is one of the lowest in the world.

But bribing the public to ensure that an Arab Spring-type event doesn't come to Riyadh is just part of the story. There's also the cost of preserving the riyal peg. You'll recall that back in August, the market was rife with speculation that with its FX reserves falling, the kingdom would ultimately be forced to abandon the peg. That speculation has not abated:

On Friday, BofAML is out with a new note discussing just that and calling a Saudi de-peg the "number one black swan event for the oil market in 2016." Here's more:

For oil, however, the most crucial point is what happens to Middle East currencies and in particular to the Saudi Riyal. In fact, Saudi Arabia’s FX reserves are still high and point to an ample buffer for now, but they have been falling at a relatively fast rate (Chart 21). However, should China allow for significantly faster FX depreciation than is currently priced in by markets, we believe oil prices could fall further. Naturally, the FX reserve drain on Saudi could accelerate to $18bn per month if Brent crude oil prices average $30/bbl (Chart 22), sharply reducing the Kingdom’s ability to retain its currency peg. 



Saudi has been forcing prices lower by increasing production into an oversupplied market so far (Chart 23), and it also rushed to issue debt in its local market to fill a soaring budget gap. We have previously argued that Saudi Arabia’s surging output is responsible for almost half of the 520 million barrel global petroleum inventory build in the last 7 quarters. Can the government maintain this strategy of flooding the oil market? In our view, it is unlikely that Saudi leaders would want to exacerbate its ongoing reserve drain by pushing prices below $40/bbl. After all, pressure will quickly build on the riyal’s 30 year peg to the USD (Chart 24) if Brent crude oil prices keep falling. And frankly, it is a lot easier politically to implement a modest supply cut at first than allow for a full-blown currency devaluation. But a CNY meltdown could ultimately force Saudi’s hand.



In short, a depeg of the Saudi riyal is our number one black-swan event for the global oil market in 2016, a highly unlikely but highly impactful. 


However, if Saudi cannot resist the gravitational forces created by a persistently strong USD and depegs the SAR to follow Russia or Brazil, oil prices could collapse to $25/bbl. Weaker commodity prices would in turn add more downward pressure on EMs (Chart 26). Thus, even if micro supply and demand dynamics are improving, the path for oil prices in 2016 will heavily depend on how the USD moves against the CNY and the SAR. Or on a Saudi supply cut.

And there you have it. It's either stop it with the whole flooding an oversupplied market strategy, or let the peg fall before SAMA runs dry. Bear in mind that it's not just falling crude, the peg, and generous subsidies that are weighing on the Saudis. There's also the war in Yemen and the prospect of a stepped up role in Syria.  

Riyadh apparently intends to use the debt market as a kind of pressure valve but it's not clear how far they'll ultimately want to push that given that projections already have the country's debt-to-GDP ratio climbing from basically zero to more than 33% by 2020:

Finally, note that October saw investors pull nearly $300 million out of Saudi equities - that's the largest outflow of the year.

As Deutsche Bank notes, "given the growing macro pressures confronting Saudi Arabia (fiscal deficit at 20% of GDP this year) and disappointing Q3 reporting season, foreign investors pulled out funds worth USD287m." 

So there you have it. The consequences of keeping the world flooded with "lower for longer" crude in an effort to preserve market share and cripple a geopolitical rival while simultaneously maintaining i) subsidies for the oppressed masses, ii) a currency peg, and iii) a proxy war. BofA's contention is that this ultimately is not sustainable.

The only question now, is whether BofA's black swan thesis does indeed play out, because if the Saudis relinquish the peg and crude plunges to a 20 handle, you're going to see a veritable EM meltdown. 

Chipotle Plunges To 17-Month Lows After CDC Report Exposes 3 New States With E.Coli Infections

After a strong bounce this week, Chipotle is tumbling back to June 2014 lows after The CDC issues a report that states:


CDC says 3 additional states have reported people infected with the
strain of E.Coli linked to Chipotle restaurants since last update.

Reported illnesses: California (2), Minnesota (2), New York (1), Ohio (1), Oregon (13), Washington (26)

says epidemiologic evidence at this time suggest source of outbreak is
common meal item or ingredient served at CMG restaurants in several

*  *  *


And the result...

Congress Wants To Seize Your Passport For Unpaid Taxes

Submitted by Simon Black via,

Sometimes you just have to stand in awe at the level of corruption and incompetence in government.

Case in point, the new highway bill in the Land of the Free. And, trust me, you’ll love this.

The latest version of the highway bill is called the “Developing a Reliable and Innovative Vision for the Economy Act.”

And yes, they abbreviate it as the DRIVE Act.

I cannot even begin to imagine how large the team of monkeys is that works on these silly acronyms. And as is typical for legislation, the more high sounding the name of the law, the more destructive its consequences.

On the surface, the DRIVE Act aims to fund the federal transportation network and investments in highway infrastructure for the next several years, as well as recapitalize the Highway Trust Fund.

Federal trust funds are supposed to responsibly and conservatively manage money that has been set aside for a specific purpose to benefit taxpayers.

There are so many of these trust funds. There are the big ones like Social Security’s “Old Age Survivor’s Insurance” and “Disability Insurance” (which is literally days away from running out of money).

And there are many more you’ve probably never heard about, like the “Black Lung” trust fund and the “Leaking Underground Storage Tank” trust fund.

Most of these funds are insolvent, or at least pitifully undercapitalized, clearly proving the government to be one of the worst asset managers in history.

The Highway Trust Fund is no exception: it has completely run out of money, and at this point literally has a ZERO account balance. The DRIVE Act intends to fix that.

And even though it has nothing to do with funding highways, the bill also aims to re-authorize the Export-Import Bank.

The Ex-Im Bank was created during the Great Depression and is designed to facilitate trade. That’s code for ‘boost the profits of Boeing and General Electric.’

Even the government’s own Congressional Research Service found that “more than 60% of Ex-Im Bank’s loan guarantees, by dollar value, supported the sale of Boeing airplanes in foreign countries”.

Ex-Im is essentially a gift on a golden platter from the taxpayers of the United States to a handful of mega-companies.

The Bank’s charter lapsed earlier this year. But rather than let it die, they’re jumpstarting Ex-Im with even more taxpayer money.

Clearly the government needs cash. They need to fund Ex-Im, the Highway Trust Fund, and all the improvements for America’s dilapidated infrastructure.

And their solutions to address this cash crunch are nothing short of remarkable.

For example, they plan to steal $300 million from the Leaking Underground Storage Tank trust fund (LUST… yes, that’s really what they call it), and transfer that money to the Highway Fund.

The only problem is that LUST is insolvent. So they’re stealing from one insolvent trust to fund another insolvent trust. It’s genius!

One of my favorite sections in the bill is a directive to sell off 100+ million barrels of oil from the Strategic Petroleum Reserve.

Only a politician could think to sell off oil supplies at a time when oil price is at multi-year lows.

(It also really gives you a sense of how broke the government really is that they’re driven raise cash by selling off strategic assets.)

Another gem buried in the 864 pages of the bill is a provision that allows the government to revoke your passport if they believe that you owe more than $50,000 in federal tax.

There will be no judicial review, and no due process. You don’t get to go in front of a judge first to have a fair and impartial hearing over whether or not the government’s tax allegations are accurate.

The language in the law is very clear: they can simply revoke your passport if you owe them money in their sole discretion.

Once the law is passed, this would go into effect on January 1, 2016, and they claim it will generate $40 million per year in tax revenue.

There was one more provision that proposed raising revenue from the biggest banks in America by reducing the dividend they receive from the Federal Reserve.

Curiously, though, this specific provision was defeated yesterday after a heated committee meeting in Congress.

So while the banks’ profits are off-limits, and the government will spend billions of taxpayer dollars to boost profits at Boeing, American citizens are threatened with having their passports revoked in order to raise money.

It couldn’t be any more obvious how much the system is stacked against the little guy.

They treat you like a dairy cow that exists only to be milked dry… like a medieval serf tied to the land and forced to serve his overlords.

It’s revolting. But it doesn’t have to be this way.

You can take sensible, rational steps to divorce yourself from this madness, or at least have a Plan B to protect yourself from it.

If the government is threatening to take away your passport, for example, there are countless ways you can obtain another one from a country that will roll out the red carpet for you.

If you’re sick and tired of having your income confiscated so that you can bail out big companies, there are completely legal steps you can take to reduce what you owe.

It’s hard to imagine you’ll be worse off being more free and having more control over your life and finances.

What Will Happen To Corporate Profits If The Fed Hikes In December

Q3 will be the first quarter in which the US officially suffers an earnings recession: two consecutive quarters of declining annual EPS growth despite hundreds of billions in stock buybacks reducing the per share denominator in the EPS calculation. Q4 will not be any better and while EPS are expected to decline one again, it will be the fourth consecutive decline in revenues in the S&P that will be the highlight.

The reasons for this slowdown in both sales and profits are well-known: the surge in the dollar, the slowdown in global trade, the collapse in commodity prices, and the suddenly weak consumer (just look at retail stocks in the past month).

Furthermore, and contrary to conventional wisdom, net income is declining both with and without energy companies. As Socgen notes, Net
reported income is declining not just in energy, but in a variety of other sectors and those who do not yet have negative EPS growth have very low single digit growth numbers.

For now the market is oblivious, and has more than made up for the decline in earnings by boosting P/E multiples, but how much longer can this tradeoff continue especially in an environment of rising rates (as Goldman warned earlier).

And, even more importantly, what happens to revenues and profits in 2016? That is the question posed by SocGen's Andrew Lapthorne who notes that "profits are weaker and largely negative, but can they get worse still?"

His answer, "in many ways yes."

He notes that not only have historical numbers come in weaker than expected but 2016 forecasts have been cut extensively over the last 12 months. The biggest downgrades have of course been in the Energy and Industrial Metals & Mining sectors. However even beyond these sectors forecasts for next year have been reined in aggressively. There is the odd exception such as Retail (largely down to Amazon) and Health Care, but overall the message is that 2016 is shaping up to be a year of profit decline even excluding the energy sector.


What are the main reasons for the ongoing slide in profitability? Lapthorne explains that, "the strong US dollar and competitive devaluations elsewhere are exerting a mighty toll on US profitability. [Albert Edwards] has been highlighting the downward pressure on US import prices, firstly courtesy of Japan and then the Eurozone and we assume soon the Chinese. Weak US import prices are a killer of US industrial profitability as volumes simply drop off a cliff if you are priced out of a global market and become uncompetitive at home; there is a clear correlation between the relative performance of industrial versus consumer services and US import prices.


Indeed, as Albert Edwards noted earlier, importing deflation form other devaluing countries is precisely why the world is not only stuck in a "currency war" regime, but one where soon central banks will have to engage in the next step of currency warfare: direct currency intervention.

What is surprising to most is why the Fed has been so slow to notice the impact of plunging import prices and appreciated the recessionary-risk its tightening policies have unleashed. The reason is simple: there is a 1 year lag between declining import prices and profitability.

Back to Lapthorne:

Changes in US import prices lead profitability by about 12 months, and to that extent without a reversal in the fortunes in the US dollar, a US industrial profit recession looks baked in the cake for 2016. The question is then how much will the US authorities be willing to import everyone else’s deflation (via US dollar strength) and let others steal its sales? Japan of course made the same mistake in the 1990’s and is now desperately trying to reverse the process.

This means that all else equal, even with the benefit of another record year of buybacks, profits should decline as much as 10% in the coming quarters.

But wait, it gets worse: while many have been pointing to the increasing similarities between Europe and Japan, the real alarming comparison is between the US in 2015 and what Japan experienced in the 1990s when the Yen soared from 1990 to 1995, when the USDJPY was cut in half from 160 to 80. Lapthrone again:

As Gerard Minack points out in his really useful “Downunder Daily”, the appreciation in the trade-weighted US real exchange rate in the last couple of years is already similar to what Japan experienced in the 1990s and the resultant collapse in Japanese revenues was a key part of its lost decade.


What can potentially sink this theory? Lapthorne notes one curious observation, namely that while the USD rises in the three months preceding a rate hike, the rally then continues for about another 30 days before fizzling out as the market realizes that the Fed's action sows the seeds of its own destruction and unleashes the very forces that will demand a rate cut in the not very distant future (and if other central banks of the New Normal are any indication, in the immediate future). For a good primer on this look no further than the dramatic pancaking in the Yield curve in recent days, where the drop in long-term yields reeks of Fed "policy error" and suggests the Fed's attempt to boost inflation will backfire and in fact lead to even more deflation despite rising short-term rates.

How does the dollar react to this? Here is Lapthorne one last time: "historically the US trade-weighted dollar tended to rise in the three months prior to the first rate rise only to fall in the three months thereafter.

"This historical rule of thumb, courtesy of the Kit Jukes our FX strategist, comes with of course a whole disclaimers' worth of caveats. The interest rate cycle and the economic cycle have been disconnected for some time. Interesting acronyms such as QE and ZIRP were not invented and around and rate rise cycles have been so rare in the last quarter of a decade that the bulk of our analysis refers back to when Kit was probably doing this kind of analysis on a slide rule. But given the historical evidence and the already damaging impact of a strong US dollar on US profits, is a softer US dollar such an unlikely outcome? US industrials must be hoping so..."

And certainly the Fed, because if what the Fed is about to engage in is a major policy error as the flattening yield curve suggests, with Yellen forced to promptly cut rates in 2016 and perhaps even go negative, that may be the last error the Fed, as a central bank with credibility among "serious economists", will ever make before it has no choice but to unleash the monetary helicopters.

Transparency At The Fed - Why Is Janet Panicked About The House's FORM Act?

Via The New York Sun,

Janet Yellen’s astonishing letter to the Speaker of the House, Paul Ryan, is a sign that the central bank is panicking over the fact that Congress is unhappy with the job the central bank has been doing. Mrs. Yellen’s letter, sent also to the minority leader, Nancy Pelosi, is a protest against a bill known as the Fed Oversight Modernization and Reform Act, which passed a vote in the House and would require the Fed to choose a rules for the formation of monetary policy and let the Congress and the public know what they are.

That has got to be one of the most gentle, democratic, transparent reforms in the history of democracy. It doesn’t require the Fed to stick to its monetary rules, just develop a set of guidelines and let the Congress know what they are. Yet Mrs. Yellen suggests that this mild measure would breach the Fed’s independence from the Congress that created it. Her letter is whiny, inaccurate, and threatening all at once, evincing an “it’s my ball and you can’t play with it” attitude.

One would think the FORM Act would be a lead pipe cinch in a democracy. Mrs. Yellen’s letter is particularly shocking given that it is precisely to the Congress that the Constitution grants the monetary powers. These include the power to borrow money on the credit of the United States, to coin money and regulate the value thereof, to provide for punishment of counterfeiting, to regulate commerce, and to fix the standard of weights and measures.

Congress could, if it wanted, dismantle the Federal Reserve entirely. It could refuse to confirm its governors. It could require that dollars be redeemed in gold. If the Fed doesn’t want to establish a voluntary, non-binding monetary guideline, the Congress could turn around and legislate a binding one. The Congress hasn’t — at least not yet — done any of those things. It is merely considering a bill requiring the Fed to establish its own rules and let the rest of us know what it is doing.

This, incidentally, has already passed the House Financial Services Committee, albeit on a party line vote, the way, say, Obamacare passed the Congress. Support for more oversight of the Fed, though, is far more bipartisan than Obamacare and the reforms are relatively mild. Audit the Fed, which would give Congress an on-going look at what the Fed is doing on monetary policy and is now a part of this bill, passed the House in September 2014 by a vote of 333 to 92, with something like 109 Democrats voting for the measure.

Why is Congress itching for more oversight of the Fed? The reason is that the Fed was culpable in the crisis of 2008. And there is a growing sense that errors by the Fed itself — with quantitative easing and zero interest rates — have retarded the recovery, turning the crisis into the Great Recession. The recession became a cruel jobs drought; the unemployment rate is still above the average through the whole generation of Bretton Woods; the employment participation rate is at a decades long low.

Mrs. Yellen’s predecessor, Ben Bernanke, may have written a memoir about his own courage to act, but Congress’s admiration of Mr. Bernanke’s courage isn’t as unalloyed as Mr. Bernanke’s admiration for his own courage (a federal court found he violated the Fifth Amendment in the AIG case). Given all this — and the fact that the Federal Reserve is beginning its second century — it is only natural that Congress start stepping up, a view supported by an array of distinguished figures.

A number of them — including Secretary of State George Shultz and Stanford economist John Taylor — were quoted last week in a press release of the House Financial Services Committee as supporting the measure and denying it would compromise the Fed’s position. But the most newsworthy quote was the one from a former Fed chairman, Paul Volcker, who doesn’t support the bill but nonetheless articulates the logic of it.

“By now I think we can agree that the absence of an official, rules-based cooperatively managed, monetary policy system has not been a great success,” the committee quotes the sage as saying (he made the remark in 2014). If the Fed does not want to reform itself — which is what the Congress is asking it to do — the result will eventually be less voluntary. Or maybe the Congress will start looking at the most logical and radical reform, the gold standard. Mrs. Yellen’s letter on that should be quite something.

"Desperate" Novice Trader May Be Suicidal If He Didn't Cover: KBIO Short Squeeze Goes "Full Volkswagen"

Our post yesterday about the "devastated" novice E-trader Joe Campbell, who went to bed on Wednesday night with a $18K short position in the biotech pennystock KaleBios, only to wake up with a $106K margin call when overnight insolvent KaleBios announced it would get a last minute rescue by the infamous Martin Shkreli, promptly went viral.


And, as was to be expected, many were curious just how Joe - who swore he would never again short low float stocks again - had done in his GoFundMe campaign. The answer - not bad: in the span of 24 hours, with the aid of massive media coverage, he had managed to raise over $5,3100, or more than he had hoped.


At least one part of Joe's plan worked out. However, the real question is whether he was also successful with the other, far more difficult part of this plight, namely paying off the E-trade margin call. Because, while yesterday the stock of KBIO drifted lower all day to close just above $10, overnight KBIO went 2 for 2, when the company announced it would name Martin Shkreli as its new CEO.

The press release also said that Shkreli and other investors have committed to an equity investment of at least $3 million in KaloBios and additionally to a $10 million equity financing facility, the company said in a statement late Thursday.

In other words, Shkreli's consortium had acquired 70% of the company, and should they decide to pull the borrow, on the odd chance that the short interest had soared to above 30%, KBIO - which until a few days ago - suddenly has the potential to become the next Volkswagen: a company which has more shares short than there is float available to cover them.

As a reminder, this is what Volkswagen was sued for by numerous hedge funds in 2009, who alleged the company management had devised a massive manipulation scheme to destroy shorts, only for the lawsuit to die down eventually without the company being found guilty.

However, the infamous VOW squeeze did lead to the suicide of German billionaire Adolf Merckle who committed suicide on 5 January 2009 by throwing himself in front a train.

Well, a quick look at KBIO stock reveals that while not the +400% juggernaut from yesterday, the stock is up another 80% this morning on the latest news and has led to another short-squeeze bloodbath as countless more "novice" traders get hammered.


Which brings us back to Joe Campbell and his now famous margin call: did he liquidate enough other assets to cover the margin call? What about the hundreds of other shorts who piggybacked and shorted at the close yesterday only to wake up with comparable massive margin calls?

And what happens if Shkreli's plan is indeed to rerun the "Volkswagen" scenario and unleash an epic short squeeze that sends the price of the company into the stratosphere, unlinked from any fundamentals, but merely soaring ever higher as desperate shorts pay any price just to get out.

We hope to find out as suddenly this until recently bankrupt company whose price has exploded in the past two days, has become not only a poster child for everything broken and manipulated with the market (think 2014's CYNK one year forward) but has the market following with morbid to find out how the tragicomedy of "Shkreli vs the Shorters" concludes.

These Are The Year-End Pain Trades

With just over a month left in the trading year, and the S&P 500 on pace to experience its best week of the year, morbidly enough in the aftermath of the Paris bombings, hedge funds, traders, banks and everyone else are once again commiting the cardinal sin of investing and the reason why so many "marquee" hedge funds blew up together over the summer: herding, and rushing into the handful of trades that have worked recently, which work until the blow up spectacularly.

But then again, with year-end bonuses on the table, few will dare to move against the herd, and while another eventual hedge fund hotel implosion is again assured, for now the clustering is imminent.

So what are the consensus trades as we approach the year end? They also happen to be the year-end "pain trades" because in a year full of flash crashes, close calls, dramatic reversals and international risk flaring, the Fed's ability to maintain the illusion of the rigged market is highly suspect, and if any of these "groupthink" positions blows up, that's precisely what will follow. Pain.

Here they are courtesy of Bank of America's Michael Hartnett.

  • US dollar sell-off: Nov’15 Global FMS shows “long dollar” most crowded trade; investors are unambiguously OW strong-$ plays (consumer, banks, Eurozone, Japan), UW weak-$ plays (EM, resources, commodities); positioning based on expectations of Fed hike, ECB cut, China deval; expect big profit-taking starting early Dec post-payroll.
  • EM rally: China deval complicates rally but humiliated EM ripe for bounce as Fed hike expectations peak; EM debt fund outflows 23 out of past 26 weeks; EM equity fund outflows 16 out of past 19 weeks; YTD $86bn outflows from EM funds = worst year of redemptions since 2008 (Chart 2).

  • Positioning less "bearish": BofAML B&B Index on upswing (@ 2.5 – Chart 1), retraced >60% of May-Aug collapse; should Fed hike coincide with weaker dollar = risk has potential to rally further; note risk rally is "narrow" and vulnerable to quick profit-taking in event-rich December: deteriorating RSP/SPY ratio (market breadth – Chart 3), deteriorating HYG/LQD ratio (risk appetite – Chart 4), US HY distress ratio (spreads >1000bps) on the rise.

WTI Crude Spikes After Renewed Tumble In US Oil Rig Count

Between contract roll liquidity and a renewed tumble in the US Oil Rig Count, WTI Crude (Jan 16) has surged above $42.50 (Dec 15 to $41). After last week's very modest rise, the streak of rig count declines continues (11th week of last 12) with a 10 rig drop to 564 - the lowest since June 2010.


Rig count drops for the 11th week of the last 12...


Texas added 4 rigs to 342 but Oklahoma (down 4 to 81), Colorado (down 3 to 29) and Wyoming (down 3 to 21) all saw rig count declines.


The reaction...


But then again... why?


Charts: Bloomberg

5 Myths Regarding the Paris Terror Attacks

As usual, the politicos and talking heads are all talking their own book, using the Paris terror attacks to push their own agendas.

As shown below, they’re spouting nonsense.

Mass Surveillance Won’t Help

The NSA and other spy agencies are pretending that the Paris attacks show that we need more mass surveillance.

But the New York Times correctly points out in a scathing editorial that mass surveillance won’t help to prevent terrorism:

As one French counterterrorism expert and former defense official said, this shows that “our intelligence is actually pretty good, but our ability to act on it is limited by the sheer numbers.” In other words, the problem in this case was not a lack of data, but a failure to act on information authorities already had.


In fact, indiscriminate bulk data sweeps have not been useful. In the more than two years since the N.S.A.’s data collection programs became known to the public, the intelligence community has failed to show that the phone program has thwarted a terrorist attack. Yet for years intelligence officials and members of Congress repeatedly misled the public by claiming that it was effective.

In reality, top security experts agree that mass surveillance makes us MORE vulnerable to terrorists.

Indeed, even the NSA has previously admitted that it’s collecting too MUCH information to stop terror attacks.

Encryption Isn’t What Made Us Vulnerable

The spy agencies are also pretending that encryption made it impossible to stop the attacks.

But Tech Dirt notes:

Most of the communications between the attackers was conducted via unencrypted vanilla SMS:

“…News emerging from Paris — as well as evidence from a Belgian ISIS raid in January — suggests that the ISIS terror networks involved were communicating in the clear, and that the data on their smartphones was not encrypted.


European media outlets are reporting that the location of a raid conducted on a suspected safe house Wednesday morning was extracted from a cellphone, apparently belonging to one of the attackers, found in the trash outside the Bataclan concert hall massacre. Le Monde reported that investigators were able to access the data on the phone, including a detailed map of the concert hall and an SMS messaging saying “we’re off; we’re starting.” Police were also able to trace the phone’s movements.

The reports note that Abdelhamid Abaaoud, the “mastermind” of both the Paris attacks and a thwarted Belgium attack ten months ago, failed to use any encryption whatsoever (read: existing capabilities stopped the Belgium attacks and could have stopped the Paris attacks, but didn’t). That’s of course not to say batshit religious cults like ISIS don’t use encryption, and won’t do so going forward. Everybody uses encryption. But the point remains that to use a tragedy to vilify encryption, push for surveillance expansion, and pass backdoor laws that will make everybody less safe — is nearly as gruesome as the attacks themselves.

7 of the 8 Terrorists Were Known to U.S. or French Intelligence Agencies

Just as with 9/11, the Boston marathon bombings, and other recent attacks, governments are pretending “it wasn’t foreseeable”.

But CBS reports that law enforcement sources say that 7 of the 8 terrorists were known in advance to U.S. or French intelligence services.

The New York Times confirms:

Most of the men who carried out the Paris attacks were already on the radar of intelligence officials in France and Belgium, where several of the attackers lived only hundreds of yards from the main police station, in a neighborhood known as a haven for extremists.

Escalating War Against ISIS Is Not the Only Option

I’m all for killing members of ISIS.

But given that the U.S. and its close allies – Saudi Arabia, Turkey, Qatar and Bahrain – are massively supporting ISIS, stopping the arming, feeding and logistical support is even more important if we want to stop these crazies.

None of the Terrorists Were Syrian

None of the Paris terrorists were Syrian. All of them were European nationals.

The German Interior Minister suggests that the Syrian passport found at the scene of the terror attacks was a “false flag” by ISIS meant to force countries to seal their borders against further refugees.

Why would they do this? Numerous security experts suggest that refugees fleeing ISIS’ “Caliphate” is a PR disaster for ISIS. After all, happy fundamentalist Muslims wouldn’t flee utopia, would they?

But we do take the risk of infiltration of refugee groups by terrorists very seriously. Indeed, the Telegraph reports today:

The mastermind of the Paris attacks was able to slip into Europe among Syrian migrants, it emerged last night, as police on the continent admitted they are unable to monitor thousands of suspected jihadists.




It has emerged that Abaaoud, and at least two of the Paris terrorists took the migrant route via Greece, intensifying fears that terrorists are able easily to exploit the refugee crisis to get to Europe.

Specifically, many of the Paris terrorists were European nationals who went to fight for ISIS in Syria, and then they slipped in with the refugees coming from Syria to get back into Europe.

So those saying that the civilians fleeing war and mayham in Syria are all terrorists are wrong … but so are those saying that the massive refugee flow poses no danger.