Submitted by Bill Bonner via Acting-Man blog,

The King of Lydia

“Count no man happy until he be dead,” said Athenian statesman and poet Solon.

The man to whom Solon gave the advice was the richest man alive at the time (the 6th century B.C.) – the king of Lydia, Croesus.

Croesus considered himself to be the happiest man alive. But he discovered that fortune could turn against you, no matter how rich and powerful you were. His son died in an accident. His wife committed suicide. And he was captured and burned alive by Cyrus, king of Persia.

And now, poor Warren Buffett must be feeling the heat. He’s 84 years old and the most successful investor of all time. Respected. Admired. Beloved, especially by the thousands of people he has made into millionaires. And “as rich as Croesus” himself. Buffett celebrated the golden anniversary of his investment conglomerate, Berkshire Hathaway, last week. And what a success!

Croesus and Solon , painting by Gerard van Honthorst,  1624

He turned every dollar invested in 1965 into $182,616 today. For 30 years, he never had a 10-year compound annual gain of less than 20%. Over 50 years his compound annual gain has been 21% – or just over twice that of the S&P 500, including dividends.

And now, Berkshire is worth $367 billion and has $195 billion in annual revenues.

If money were what really matters, Warren Buffett would have no peer. He has had unparalleled success in this world; surely he has a first-class ticket to the next. And if his good fortune were of his own making, what would he have to fear?

Skill or Luck?

But what if fortune, which smiled on him so broadly for so many years, begins to frown? That idea was raised back in 1984 on another 50th anniversary – the half-century mark following the publication of Benjamin Graham and David Dodd’s classic book on value investing, Security Analysis.

The occasion was used for a debate. On one side was Michael Jensen of the University of Rochester, a leading proponent of the Efficient Market Hypothesis (EMH). (In a nutshell the EMH states that investors can’t get above-average returns without taking above-average risk.)

Jensen argued that Buffett’s success was a matter of chance. On the other side was Buffett… who argued that skill, not luck, was behind his, and a select group of value investors’, impressive track records. Jensen began by pointing out that when you have a nation of coin flippers, a few – by sheer dumb luck – are going to get a long string of heads… and therefore be viewed as “winners.”

Yes, said Buffett, but if all of those who were getting heads were all using the same technique (value investing) it should make you wonder. It would be as though there were a town where no one ever got cancer: You’d want to know what they were having for dinner.

Buffett – who had been a student of Graham at Columbia Business School – attributed his early success to the aforementioned Security Analysis as well as Graham’s 1949 book, The Intelligent Investor. The Intelligent Investor was at least the Old Testament part of Buffett’s investment bible. He was to write the New Testament himself, fulfilling the prophecy laid out by his mentor.

“He who comes after me comes before me,” Graham might have said… had he realized what his young acolyte from Omaha would achieve.

Meet professor Jensen, who insists that Warren Buffett just got lucky. It is only marginally surprising that he is a professional economist rather than an investor or an entrepreneur, but one cannot dismiss his ideas out of hand.

Screenshot via georgetown.edu

Dating or Marriage?

As Buffett explains in his 50th letter to Berkshire Hathaway shareholders, Graham taught him “cigar butt” investing. The idea was to find troubled companies (with declining margins, an obsolete business model or overhanging litigation)… buy them ultra cheap… and have “one puff” on them as they rose back to fair value. That worked beautifully, for many years.

But then Buffett went beyond Graham. He started to buy the whole cigar company. Instead of just looking at price, as Graham had, Buffett started to look for businesses that had a sustainable competitive advantage.

As Buffett put it, he would rather own a comfortable business at a questionable price than a questionable business at a comfortable price. Crucially, this allowed him to hold his investments for the ultra-long term. As he put it in the recent shareholder letter:

[T]hough marginal businesses purchased at cheap prices may be attractive as short-term investments, they are the wrong foundation on which to build a large and enduring enterprise. Selecting a marriage partner clearly requires more demanding criteria than does dating.

This focus on quality over price is what turned Berkshire Hathaway into such a money machine for Buffett and his partner, Charlie Munger. For 36 years, the duo tossed their coins and got heads every year.

The lucky coin tossers! Getting heads for 36 years in a row. Somehow, it always seemed their activity was a not-so-random walk down Wall Street. However, things got more difficult for them when the secular bull market was no longer providing a tailwind.

Photo credit: Nati Harnik / AP

Moving the Goalposts

But in 2000, the tails began to appear. You may say that Buffett and Munger “changed their strategy.” Or they “made a mistake.” But if their success were based on skill, why would they suddenly forget how to make money?

“Berkshire’s investment portfolio performance has been extremely poor for at least the last 14 years,” writes colleague Porter Stansberry. Between 1970 and 2000, the lowest 10-year annualized return on Berkshire’s investment portfolio was 20.5%.

Starting in 2000, however, the wheels come off. Between 2000 and 2010, the annualized return was 6.6%. And, after never recording an annual decrease in book value, Buffett lost money twice in the 10-year period (2001 and 2008). Relative to the S&P 500, these numbers haven’t gotten better since 2010.

In 2011, Berkshire’s portfolio return was 4%. (The S&P 500 was up 2.1%.)

In 2012, Berkshire’s portfolio return was 15.7%. (The S&P 500 was up 16%.)

In 2013, Berkshire’s portfolio was up 13.6%. (The S&P 500 was up 32.4%.)

In 2014, Berkshire’s portfolio was up 8.4%. (The S&P 500 was up 13.7%.)

Last week, Buffett moved the goalposts. Instead of reporting Berkshire’s results in terms of book value only, he showed how well the company did in terms of share price. Why he did this is a matter of some controversy. Did he do it, as he claimed, because book value no longer gives an accurate picture of the value of his “sprawling conglomerate”?

Or did he do it because the gods have turned against him; his book value increases have underperformed the S&P 500 for the last 14 years and it is becoming embarrassing? Barron’s offers an opinion:

“Buffett probably can be faulted for not being forthright in the letter about the disappointing performance of the Berkshire equity portfolio that he oversees. Of the company’s big four holdings, American Express, IBM, Coca-Cola and Wells Fargo, only Wells Fargo has been a notable winner in recent years. […]

Buffett tends to manage the portfolio’s largest and longest-standing investments. Two managers who help run the rest, Todd Combs and Ted Weschler, have outperformed Buffett in the past few years.”

Is that Mr. Jensen we hear laughing?

Berkshire Hathaway A over the past 20 years. Warren Buffett had a golden touch, but he was certainly helped by the fact that he started out just as the biggest and longest stock market mania in history commenced. Even so, he did beat the market handsomely for quite a long period of time. As Berkshire became bigger, it presumably became harder to achieve the same growth rates as before. The stock trades at a significant premium to NAV, which can probably be ascribed to “widespread faith in Warren” – via StockCharts, click to enlarge.

• ECB Starts Buying German, Italian Government Bonds Under QE Plan (BBG)
• Creditors Reject Greece's Reform Proposals (BBG)
• Is Apple Watch the Timex digital watch of the Internet era? (Reuters)
• Tesla shedding jobs in China as sales target missed (Reuters)
• Malaysia Airlines says expired battery on MH370 did not hinder search (Reuters)
• Gunmen kill more than 12 Islamic State militants in eastern Syria (Reuters)
• GM Plans Share Buyback, Averting Proxy Fight (WSJ)
• Wisconsin capital marked by third day of protests after police shooting (Reuters)
• Hedge Funds Are Losing Faith in Oil Rally While Inventory Swells (BBG)
• German exports post biggest drop in five months in January (Reuters)
• Whiting Petroleum Seeks Buyer Amid Plunge in Crude Prices (WSJ)
• Birinyi Says Six-Year Bull Run Won’t End Until Skeptics Muzzled (BBG)
• Goldman Says $40 Oil Call May Be Too Low as Demand Surprises (BBG)

Overnight Media Summary

WSJ

* Under an agreement set to be announced Monday with New York, Equifax Information Services LLC, Experian Information Solutions Inc and TransUnion LLC, the three biggest companies that collect and disseminate credit information on more than 200 million Americans, will change the way they handle errors and list unpaid medical bills as part of the broadest industry overhaul in more than a decade. (http://on.wsj.com/1GwASHR)

* In a string of recent oil train derailments in the United States and Canada, new and sturdier railroad tanker cars being built to carry a rising tide of crude oil across the continent have failed to prevent ruptures. (http://on.wsj.com/1BXiyoF)

* Federal investigators suspect potential brake problems caused a Delta Air Lines jet to skid off a snowy runway last week at New York's La Guardia Airport, according to people familiar with the probe. (http://on.wsj.com/1A6cLI2)

* Facebook, Snapchat and streaming-startup Vessel are promising large TV-channel owners better terms for their video programming than Google's YouTube, hoping to capitalize on mounting frustration with the Web giant. (http://on.wsj.com/1KIZyjr)

* General Motors Co as soon as Monday will disclose plans to return billions of dollars to shareholders, a move that is expected to avoid a potential proxy fight with investor Harry J. Wilson, said people familiar with the matter. (http://on.wsj.com/1Hk8uX6)

* Vivendi's chairman and largest shareholder, Vincent Bollore, is sitting on a multibillion-dollar reserve that is swelling from asset sales. Now a question is swirling: What will he do with the company's cash? (http://on.wsj.com/1Hk8uX6)

* Many Swiss banks are saddled with a batch of accounts by clients who have refused to declare them. Now, they must soon be disclosed to the IRS thanks to recently implemented U.S. law. (http://on.wsj.com/1A9shUg)

* With its Apple Watch, set to be released next month, Apple Inc is crossing into high-end fashion, with a device that blurs the lines between jewelry and gadgetry. (http://on.wsj.com/1wSGEkn)

* Turbulence is in store for municipal-bond investors following a record run, as a gathering U.S. economic recovery pushes interest rates higher and issuance grows. (http://on.wsj.com/1NyN0Ks)

* OPEC's top official said Sunday that the cartel's decision to continue pumping crude in the face of collapsing prices is hurting the U.S. shale-oil industry and that a global pullback on investment could lead to a shortage that will push the market upward again. (http://on.wsj.com/1NyN0Ks)

FT

Britain's Serious Fraud Office is calling former traders of Barclays Plc and Deutsche Bank for interviews as part of its investigation of whether the Euribor benchmark interest rate was rigged.

Margrethe Vestager, Europe's new antitrust chief, warned the telecom sector, that mergers should not affect the "affordable prices" for consumers.

In a statement filed with a court in Parana, a former Petrobras executive said that he laundered about $100 million in bribes partly through a web of accounts in several Swiss banks.

According to a report by Open Europe, banks, insurers and other financial services would be most affected if Britain leaves the European Union.

NYT

* Analysts and investors are worried about the prospect of Goldman Sachs getting barred by regulators from buying back its own stock or increasing dividends after performing poorly in the Federal Reserve stress tests last week.(http://nyti.ms/1x7YSZF)

* Among all the major racial and ethnic groups in the United States, only Hispanics, as of late last year, had returned to their unemployment levels before the recession, according to the recent Economic Report of the President. (http://nyti.ms/1CTetmS)

* Companies like Ford Motor Co, Procter & Gamble , Under Armour and the Spanish bank BBVA are working to outmaneuver start-ups for dominance on mobile devices. (http://nyti.ms/1BnmgGx)

* Payment start-up Square has gone beyond its credit card reader and introduced new products in the last year. On Monday, it will introduce two services that it says will help small businesses. (http://nyti.ms/1BnmgGx)

* Yik Yak, a social media app that serves as a local bulletin board, has proved popular especially on college campuses, but the cover of anonymity it offers allows for some unfettered nastiness. (http://nyti.ms/1A8ICsw)

* Black Mask Studios does not have the name recognition of DC or Marvel Comics, but officials at the company hope that will soon change. The publishing and media company will unveil a series of YouTube channels devoted to comics on Monday, and release "Godkiller," its first animated movie, this summer. Black Mask also is developing several television series and its comics. (http://nyti.ms/1GwCjpL)

China

CHINA DAILY

- Japan's attendance in China's military parade this year to mark the victory in the anti-fascist war would be a good opportunity for Tokyo to throw away the burden of the war by facing up to its past, the official newspaper said in an editorial.

CHINA SECURITIES JOURNAL

- State-owned companies in Shanghai have stepped up efforts to securitise their assets as part of the country's state sector reforms, sources told this newspaper.

SHANGHAI SECURITIES NEWS

- China is considering amending rules on stock margin trading to tighten supervision after a surge in the business since the second half of last year, propelled by a recovery in the domestic stock market, Xiao Gang, Chairman of the China Securities Regulatory Commission, said.

NATIONAL BUSINESS DAILY

- Sinopec Marketing Co Ltd, a subsidiary to be set up by Chinese oil giant Sinopec, will seek regulatory approval to go public after conditions are mature, spokesman Lu Dapeng told this newspaper.

PEOPLE'S DAILY

- China has pledged to continue the search for a Malaysian Airlines flight which vanished a year ago.

Britain

The Times

TAXPAYER FOOTS THE BILL FOR RISKY BUSINESS LOANS

The government has admitted that 20.2 percent of enterprise finance guarantee (EFG) loans went sour, raising fresh questions about a scheme that is the subject of an internal investigation by Royal Bank of Scotland. The default rates - about 15 percent higher than would be expected under normal commercial lending - will heighten concerns that banks abused the scheme to pass risky small business liabilities on to the taxpayer.(http://thetim.es/1EtUyvj)

FORMER MORRISONS BOSS IS IN THE MONEY

WM Morrison Supermarket PLC's former boss, Dalton Philips, is set to pocket about 3 million pounds ($4.52 million) as the chain reveals its latest slump in annual profits this week. (http://thetim.es/18tgqc3)

The Guardian

GREECE THREATENS NEW ELECTIONS IF EUROZONE REJECTS PLANNED REFORMS

Greece's anti-austerity government has raised the spectre of further political strife in the crisis-plagued country by saying it will consider calling a referendum, or fresh elections, if its eurozone partners reject proposed reforms from Athens.(http://bit.ly/1BheK10)

EX-BP BOSS AIMS TO BUILD MAJOR ENERGY INDUSTRY PLAYER FROM SCRATCH

Lord Browne, the former BP PLC chief executive, plans to exploit the collapse in oil prices to build a major new company using $10 billion of Russian cash.(http://bit.ly/18tjTYa)

The Telegraph

TESCO BOSS IN CHARGE OF HARRIS+HOOLE AND GIRAFFE LEAVES

Michael Holmes, the chief executive of new food experiences at Tesco PLC, has left the company in a clear sign that one of former boss Philip Clarke's key initiatives has failed. Holmes is understood to have fallen victim to new boss Dave Lewis's brutal clear-out at the company. (http://bit.ly/1C0F5CC)

MARKS & SPENCER TO OFFER GIFT CARD TO SHAREHOLDERS INSTEAD OF DIVIDEND

Long-suffering Marks and Spencer Group shareholders are to be offered a discounted gift card instead of a dividend payment as part of an overhaul of the perks the high street retailer offers to its investors. These investors will now be able to exchange the cash they receive from their annual dividend payment for an in-store gift card. (http://bit.ly/1wShG4v)

Sky News

TUNGSTEN BANKING ARM UNVEILS DEPOSITS DRIVE

Tungsten Corp PLC, which is headed by Edi Truell, the former chief executive of private equity group Duke Street Capital, will say Monday that it is to start taking deposits. (http://bit.ly/192OP2P)

The Independent

ED DAVEY REJECTS BAN ON STANDARD ENERGY TARIFFS

Calls for variable energy tariffs to be cut to reduce the number of people overpaying for gas and electricity have been rejected by the Energy and Climate Change Secretary, Ed Davey, on competition grounds.(http://ind.pn/18tgWXI)

CITY IS STILL VULNERABLE TO SUDDEN FINANCIAL SHOCK, MPS WARN TREASURY

Politicians have called on the Treasury to undertake a series of war games with regulators and the Bank of England to combat a "surprising and urgent gap" in its readiness for another financial crisis. (http://ind.pn/18thsVF)

Fly On The Wall Pre-Market Buzz

ECONOMIC REPORTS

Domestic economic reports scheduled for today include:
Labor market conditions index for February at 10:00--prior 4.9

ANALYST RESEARCH

Upgrades

Aveo Pharmaceuticals (AVEO) upgraded to Sector Perform at RBC Capital
D.R. Horton (DHI) upgraded to Outperform from Market Perform at JMP Securities
DiamondRock (DRH) upgraded to Outperform from Neutral at RW Baird
Eni SpA (E) upgraded to Buy from Neutral at UBS
Gigamon (GIMO) upgraded to Overweight from Equal Weight at Barclays
Juniper (JNPR) upgraded to Buy from Neutral at Goldman
KB Home (KBH) upgraded to Outperform from Market Perform at JMP Securities
Netgear (NTGR) upgraded to Neutral from Sell at Goldman
Oasis Petroleum (OAS) upgraded to Neutral from Reduce at SunTrust
Reckitt Benckiser (RBGLY) upgraded to Buy from Hold at Jefferies
Ryland Group (RYL) upgraded to Outperform from Market Perform at JMP Securities
Statoil (STO) upgraded to Buy from Neutral at UBS
UTi Worldwide (UTIW) upgraded to Outperform from Market Perform at FBR Capital

Downgrades

Amazon.com (AMZN) downgraded to Neutral from Buy at SunTrust
Arrow Electronics (ARW) downgraded to Neutral from Buy at Longbow
Avnet (AVT) downgraded to Neutral from Buy at Longbow
BlackBerry (BBRY) downgraded to Sell from Neutral at Goldman
F5 Networks (FFIV) downgraded to Underweight from Equal Weight at Barclays
Quality Systems (QSII) downgraded to Underperform from Sector Perform at RBC Capital
Royal Dutch Shell (RDS.A) downgraded to Neutral from Buy at UBS
TSMC (TSM) downgraded to Underperform from Sector Perform at Pacific Crest
The Fresh Market (TFM) downgraded to Neutral from Buy at BofA/Merrill
WESCO (WCC) downgraded to Hold from Buy at BB&T

Initiations

AtriCure (ATRC) initiated with a Buy at Needham
Inovalon (INOV)  initiated with a Neutral at Piper Jaffray
Inovalon (INOV) initiated with a Buy at UBS
Inovalon (INOV) initiated with a Neutral at BofA/Merrill
Inovalon (INOV) initiated with a Neutral at Citigroup
Inovalon (INOV) initiated with a Neutral at Goldman
Inovalon (INOV) initiated with an Outperform at RW Baird
Invitae (NVTA) initiated with an Outperform at Cowen
Invitae (NVTA) initiated with an Overweight at JPMorgan
Lion Biotechnologies (LBIO) initiated with an Overweight at Piper Jaffray
Vanda (VNDA) initiated with a Buy at Jefferies

COMPANY NEWS

Intuit (INTU) confirmed information requests from U.S. government
T. Boone Pickens resigned from board of EXCO Resources (XCO)
Kate Spade (KATE), Lucky Brand entered transfer and settlement agreement
News Corp. (NWSA) acquired VCCircle, terms not disclosed

EARNINGS

Companies that beat consensus earnings expectations last night and today include:
LightInTheBox (LITB), 58.com (WUBA)

LightInTheBox (LITB) sees Q1 revenue $89M-$91M, consensus $114.93M
Alkermes (ALKS) cuts FY15 non-GAAP EPS to (37c)-(50c) from (27c)-(40c), consensus (32c)
Sky-mobi (MOBI) reports Q4 EPS 2, one estimate 7c
58.com (WUBA) sees Q1 revenue $82M-$84M, consensus $78.50M

NEWSPAPERS/WEBSITES

GM (GM) expected to announce large share buyback, WSJ reports
Whiting Petroleum (WLL) in midst of auction process, sources say, WSJ reports
Novartis (NVS) expects to lead way for big pharma efficiency, Financial Times says
Apple Watch (AAPL) shipments expected to reach 4.8M in Q1, DigiTimes reports
Honeywell (HON) looks for deals, targets $10B in acquisitions by 2018, Bloomberg reports
Netflix (NFLX) looks to launch in Spain in 2015, Variety reports
Google (GOOG) to create version of Android to run virtual reality apps, WSJ reports
BNY Mellon (BK) could rise 20%, Barron's says
Foot Locker (FL) could return 20% more, Barron's says
Berkshire Hathaway (BRK.A), Wells Fargo (WFC) could be next in DJIA, Barron's says

SYNDICATE

Capstead Mortgage (CMO) files to sell 15M shares of common stock shelf
Eagle Pharmaceuticals (EGRX) files to sell 1.5M shares for holders
Gyrodyne (GYRO) files to sell $5.56M of common stock
Ladder Capital (LADR) files to sell 80.96M shares of Class A common stock for holders
Sanchez Production (SPP) files $500M mixed securities shelf
Ventas (VTR) files automatic mixed securities shelf

With the auto loan securitization machine humming right along (pace of new issuance is up 30% compared to this time last year at nearly $24 billion YTD) and with the attendant $1 trillion pile of auto loan debt growing by the day as lenders scramble to turn ineligible borrowers into eligible borrowers by extending loan terms and ignoring small details like whether or not the buyer is employed, just about everyone is looking to get a piece of the pie including Warren Buffett’s Berkshire Hathaway. 

Via WSJ: 

Billionaire Warren Buffett has closed a deal to buy the nation’s largest privately-held dealership chain, renaming it Berkshire Hathaway Automotive and paving the way for a major new player in the car-retailing business.

 

Berkshire Hathaway Inc. announced in October it would buy the Van Tuyl Group, America’s fifth-largest retailer with 81 stores in 10 states, and use it as a launch point to acquire more dealerships. The deal was targeted to close at the end of the first quarter this year.

 

Van Tuyl Group, a closely held business that was founded in Kansas City nearly 60 years ago, had previously sold about 240,000 cars a year through its dealerships.

 

The move comes as the car-retailing sector undergoes significant changes. With U.S. auto sales booming, smaller, family-run dealerships are getting snapped up by larger chains looking to provide better efficiencies.

Yes, “better efficiencies” which, if the underwriting practices that prevailed just before the housing bubble collapsed are any guide, likely means figuring out how to make more loans, faster because when an unprecedented global yield hunt leads to new auto ABS deals being upsized by 35% (as one Santander Consumer offering was in January), “inefficiency” (read: prudence) simply isn’t something that can be tolerated.  

As Fortune noted when the deal was first announced last October, Buffett will be competing with the likes of AutoNation, whose CEO Mike Jackson recently suggested on live television that worries about subprime auto were likely exaggerated. In any event, Berkshire appears to be entering the market at a rather precarious time for as we have noted on a number of occasions (and as Goldman recently confirmed), growth in US auto sales is (or, after February’s data, “was”) entirely dependent on loans to subprime borrowers, a trend which, thanks to rising delinquencies and government scrutiny, is about to come to a screeching halt: 

We were shocked — shocked — when February auto sales turned out to be a BNSF-style trainwreck (even AutoNation CEO Mike Jackson’s “trucks, trucks, trucks” couldn’t save the day as Ford F-Series sales fell 1.2%). Of course to let the media tell it, February’s disastrous numbers were due to weather (snow in the winter) but we had our doubts and so were not surprised when a new note from Goldman confirmed, by way of an avalanche of data and charts, precisely what we’ve been saying all along which is that the risks inherent in subprime lending are materializing and that at the margin, growth has all been created by lowering credit standards and extending terms to a whole load of 'new' auto buyers...

 

In the end, Goldman comes to exactly the same conclusion as we did months ago, namely that despite the financial media’s parroting about snow in the winter, the simple fact is that as soaring delinquencies and government probes conspire to cut the least-creditworthy Americans off from debt servitude, bad things will happen in US car sales.

For his part, Buffett says he understands that the business is cyclical, but notes this really isn’t an issue because Berkshire’s investment horizon is, well, forever: 

“This is the beginning of a journey that will have no end.”

The only question now is how many retail investors will take this as an opportunity to execute CNBC’s car-stock arbitrage by taking out a 7-year car loan from Berkshire Hathaway Automotive in order to finance the purchase of a few Berkshire Hathaway B shares from their Etrade account. 

As HFT shops begin to turn on each other, it seems appropriate to reflect on the impact that Michael Lewis' Flash Boys book had on exposing the ugly truth that many have been discussing for years in US (and international) equity (and non-equity) markets. As Lewis concludes, after explaining the attacks he has suffered from the HFT industry, "If I didn't do more to distinguish 'good' H.F.T. from 'bad' H.F.T., it was because I saw, early on, that there was no practical way for me or anyone else... to do it. ...  The big banks and the exchanges [have] been paid to compromise investors’ interests while pretending to guard those interests. I was surprised more people weren’t angry with them."

Authored by Michael Lewis, originally posted at Vanity Fair,

When I sat down to write Flash Boys, in 2013, I didn’t intend to see just how angry I could make the richest people on Wall Street. I was far more interested in the characters and the situation in which they found themselves. Led by an obscure 35-year-old trader at the Royal Bank of Canada named Brad Katsuyama, they were all well-regarded professionals in the U.S. stock market. The situation was that they no longer understood that market. And their ignorance was forgivable. It would have been difficult to find anyone, circa 2009, able to give you an honest account of the inner workings of the American stock market—by then fully automated, spectacularly fragmented, and complicated beyond belief by possibly well-intentioned regulators and less well-intentioned insiders. That the American stock market had become a mystery struck me as interesting. How does that happen? And who benefits?

By the time I met my characters they’d already spent several years trying to answer those questions. In the end they figured out that the complexity, though it may have arisen innocently enough, served the interest of financial intermediaries rather than the investors and corporations the market is meant to serve. It had enabled a massive amount of predatory trading and had institutionalized a systemic and totally unnecessary unfairness in the market and, in the bargain, rendered it less stable and more prone to flash crashes and outages and other unhappy events. Having understood the problems, Katsuyama and his colleagues had set out not to exploit them but to repair them. That, too, I thought was interesting: some people on Wall Street wanted to fix something, even if it meant less money for Wall Street, and for them personally.

Of course, by trying to fix the stock market they also threatened the profits of the people who were busy exploiting its willful inefficiencies. Here is where it became inevitable that Flash Boys would seriously piss off a few important people: anyone in an established industry who stands up and says “The way things are being done here is totally insane; here is why it is insane; and here is a better way to do them” is bound to incur the wrath of established insiders, who now stand accused of creating the insanity. The closest thing in my writing life to the response of Wall Street to Brad Katsuyama was the response of Major League Baseball to Billy Beane after Moneyball was published, in 2003, and it became clear that Beane had made his industry look foolish. But the Moneyball story put in jeopardy only the jobs and prestige of the baseball establishment. The Flash Boys story put in jeopardy billions of dollars of Wall Street profits and a way of financial life.

Two weeks before the book’s publication, Eric Schneiderman, the New York attorney general, announced an investigation into the relationship between high-frequency traders, who trade with computer algorithms at nearly light speed, and the 60 or so public and private stock exchanges in the United States. In the days after Flash Boys came out, the Justice Department announced its own investigation, and it was reported that the F.B.I. had another. The S.E.C., responsible in the first place for the market rules, known as Reg NMS, that led to the mess, remained fairly quiet, though its enforcement director let it be known that the commission was investigating exactly what unseemly advantages high-frequency traders were getting for their money when they paid retail brokers like Schwab and TD Ameritrade for the right to execute the stock-market orders of small investors. (Good question!) The initial explosion was soon followed by a steady fallout of fines and lawsuits and complaints, which, I assume, has really only just begun. The Financial Industry Regulatory Authority announced it had opened 170 cases into “abusive algorithms,” and also filed a complaint against a brokerage firm called Wedbush Securities for allowing its high-frequency-trading customers from January 2008 through August 2013 “to flood U.S. exchanges with thousands of potentially manipulative wash trades and other potentially manipulative trades, including manipulative layering and spoofing.” (In a “wash trade,” a trader acts as both buyer and seller of a stock, to create the illusion of volume. “Layering” and “spoofing” are off-market orders designed to trick the rest of the market into thinking there are buyers or sellers of a stock waiting in the wings, in an attempt to nudge the stock price one way or the other.) In 2009, Wedbush traded on average 13 percent of all shares on NASDAQ. The S.E.C. eventually fined the firm for the violations, and Wedbush admitted wrongdoing. The S.E.C. also fined a high-frequency-trading firm called Athena Capital Research for using “a sophisticated algorithm” by which “Athena manipulated the closing prices of thousands of NASDAQ-listed stocks over a six-month period” (an offense which, if committed by human beings on a trading floor instead of by computers in a data center, would have gotten those human beings banned from the industry, at the very least).

On it went. The well-named BATS group, the second-largest stock-exchange operator in the U.S., with more than 20 percent of the total market, paid a fine to settle another S.E.C. charge, that two of its exchanges had created order types (i.e., instructions that accompany a stock-market order) for high-frequency traders without informing ordinary investors. The S.E.C. charged the Swiss bank UBS with creating illegal, secret order types for high-frequency traders so they might more easily exploit investors inside the UBS dark pool—the private stock market run by UBS. Schneiderman filed an even more shocking lawsuit against Barclays, charging the bank with lying to investors about the presence of high-frequency traders in its dark pool, to make it easier for the high-frequency traders to have the pleasure of trading against the investors. Somewhere in the middle of it all a lawyer—oddly, named Michael Lewis—who had devised the successful legal strategy for going after Big Tobacco, helped file a class-action suit on behalf of investors against the 13 public U.S. stock exchanges, accusing them of, among other things, cheating ordinary investors by selling special access to high-frequency traders. One big bank, Bank of America, shuttered its high-frequency-trading operation, and two others, Citigroup and Wells Fargo, closed their dark pools. Norway’s sovereign-wealth fund, the world’s largest, announced that it would do what it needed to avoid high-frequency traders. One enterprising U.S. brokerage firm, Interactive Brokers, announced that, unlike its competitors, it did not sell retail stock-market orders to high-frequency traders, and even installed a button that enabled investors to route their orders directly to IEX, a new alternative stock exchange opened in October 2013 by Brad Katsuyama and his team, which uses technology to block predatory high-frequency traders from getting the millisecond advantages they need.

On October 15, 2014, in a related development, there was a flash crash in the market for U.S. Treasury bonds. All of a sudden the structure of the U.S. stock market, which had been aped by other markets, seemed to implicate more than just the market for U.S. stocks.

Another day, another mega-M&A deal taking advantage of abnormally low bond rates, this time however not involving biotechs or a specialty pharma seeking to purchase a debt-free balance sheet, but one involving the Oracle of Omaha himself, and his Heinz investment, which will merge with Kraft Foods whose market cap was over $40 billion this morning on the news of the merger, and create the third largest food and beverage company in the US, and 5th largest in  the world. 

And while the resulting company will certainly be an unprecedented food giant, one which leaves the US food industry even more concentrated, here is the rationale behind the deal and the punchline for American workers: "significant synergy opportunities." Translation: thousands of layoffs imminent.

Details from the press release:

H.J. Heinz Company And Kraft Foods Group Sign Definitive Merger Agreement To Form The Kraft Heinz Company Combination Creates Unparalleled Portfolio of Powerful and Iconic Brands

• Merger will create the 3rd largest food and beverage company in North America and the 5th largest food and beverage company in the world.
• Combined company to be named The Kraft Heinz Company and to be co-headquartered in Pittsburgh and the Chicago area.
• The new company will have revenues of approximately $28 billion with eight $1+ billion brands and five brands between $500 million-$1 billion.
• Stock and cash transaction, with Kraft shareholders to receive a special cash dividend of $16.50 per share upon closing and stock in the combined company representing a 49% stake in the new company.
• Berkshire Hathaway and 3G Capital will invest an additional $10 billion in The Kraft Heinz Company; existing Heinz shareholders will collectively own 51% of the new company.
• Significant synergy opportunities with strong platform for organic growth in North America, as well as global expansion, by combining Kraft's brands with Heinz's international platform.
• The Kraft Heinz Company is fully committed to maintaining an investment grade rating; Company plans to maintain Kraft's current dividend per share, which is expected to increase over time

Full press release:

-- H.J. Heinz Company and Kraft Foods Group, Inc. (NASDAQ: KRFT) today announced that they have entered into a definitive merger agreement to create The Kraft Heinz Company, forming the third largest food and beverage company in North America with an unparalleled portfolio of iconic brands.

Under the terms of the agreement, which has been unanimously approved by both Heinz and Kraft's Boards of Directors, Kraft shareholders will own a 49% stake in the combined company, and current Heinz shareholders will own 51% on a fully diluted basis. Kraft shareholders will receive stock in the combined company and a special cash dividend of $16.50 per share. The aggregate special dividend payment of approximately $10 billion is being fully funded by an equity contribution by Berkshire Hathaway and 3G Capital.

The proposed merger creates substantial value for Kraft shareholders. The special cash dividend payment represents 27% of Kraft's closing price as of March 24, 2015. Also, by continuing to own shares of the new combined company, Kraft shareholders will have the opportunity to participate in the new company's long-term value creation potential.

Global Brand Portfolio Powerhouse

The combination of these iconic food companies joins together two portfolios of beloved brands, including Heinz, Kraft, Oscar Mayer, Ore-Ida and Philadelphia. Together the new company will have eight $1+ billion brands and five brands between $500 million and $1 billion. The complementary nature of the two brand portfolios presents substantial opportunity for synergies, which will result in increased investments in marketing and innovation.

Alex Behring, Chairman of Heinz and the Managing Partner at 3G Capital, said, "By bringing together these two iconic companies through this transaction, we are creating a strong platform for both U.S. and international growth. Our combined brands and businesses mean increased scale and relevance both in the U.S. and internationally. We have the utmost respect for the Kraft business and its employees, and greatly look forward to working together as we integrate the two companies."

Warren Buffett, Chairman and CEO of Berkshire Hathaway said, "I am delighted to play a part in bringing these two winning companies and their iconic brands together. This is my kind of transaction, uniting two world-class organizations and delivering shareholder value. I'm excited by the opportunities for what this new combined organization will achieve."

"Together we will have some of the most respected, recognized and storied brands in the global food industry, and together we will create an even brighter future," said John Cahill, Kraft Chairman and Chief Executive Officer. "This combination offers significant cash value to our shareholders and the opportunity to be investors in a company very well positioned for growth, especially outside the United States, as we bring Kraft's iconic brands to international markets. We look forward to uniting with Heinz in what will be an exciting new chapter ahead."

"We are thrilled about the unique opportunities this merger will create for our consumers worldwide, as well as our employees and business partners. Together, Heinz and Kraft will be able to achieve rapid expansion while delivering the quality, brands and products that our consumers love," said Bernardo Hees, Heinz Chief Executive Officer. "Over the past two years, we have transformed Heinz into one of the most efficient and profitable food companies in the world while reinvesting behind our key brands and continuing our relentless commitment to quality and innovation."

Management and Governance

When the transaction closes, Alex Behring, Chairman of Heinz and the Managing Partner at 3G Capital, will become the Chairman of The Kraft Heinz Company. John Cahill, Kraft Chairman and Chief Executive Officer, will become Vice Chairman and chair of a newly formed operations and strategy committee of the Board of Directors.

Bernardo Hees, Chief Executive Officer of Heinz, will be appointed Chief Executive Officer of The Kraft Heinz Company. The new executive team for the combined global company will be announced during the transition period, but no later than transaction closing.

The Board of Directors of the combined company will consist of five members appointed by the current Kraft Board, as well as the current Heinz Board, including three members from Berkshire Hathaway and three members from 3G Capital.

Long-Term Ownership

3G Capital and its principals have a proven track record of investing in and growing iconic brands. In previous transactions over the years, 3G has partnered with other long-term investors to build significant shareholder value by driving innovation and growth and expanding the international reach of its companies and brands.

Berkshire Hathaway and 3G Capital have a history of successful partnerships and are committed to long-term ownership of The Kraft Heinz Company as it strengthens its leadership position in the industry.

Commitment to Communities

The Kraft Heinz Company will be co-headquartered in Pittsburgh and the Chicago area.

Understanding the need to preserve both Heinz and Kraft's heritage in their respective hometowns of Pittsburgh and the Chicago area, the new company is committed to supporting local charities and community relationships in the communities in which they operate.

Structure, Terms and Synergies

Existing Heinz shareholders will have a 51% ownership stake in the combined company, and existing Kraft shareholders will have a 49% ownership stake on a fully diluted basis. Each share of Kraft will be converted into one share of The Kraft Heinz Company.

The significant synergy potential includes an estimated $1.5 billion in annual cost savings implemented by the end of 2017. Synergies will come from the increased scale of the new organization, the sharing of best practices and cost reductions.

The transaction is expected to be EPS accretive by 2017. Once the transaction is complete, The Kraft Heinz Company plans to maintain Kraft's current dividend per share, which is expected to increase over time. Kraft has no plans to change its dividend prior to closing.

The special cash dividend of $10 billion in the aggregate to existing Kraft shareholders will be paid upon closing and will be funded by an equity investment by Berkshire Hathaway and 3G Capital. Shares of the company will continue to be publicly traded.

As the cash consideration is fully funded by common equity from Berkshire Hathaway and 3G Capital, the merger is not expected to increase the debt levels of The Kraft Heinz Company. The Company is fully committed to deleveraging in a timely manner and to maintaining an investment grade rating going forward.

Approvals

The transaction is subject to approval by Kraft shareholders, receipt of regulatory approvals and other customary closing conditions and is expected to close in the second half of 2015.

Advisors

Lazard served as exclusive financial advisor for Heinz, and Cravath, Swaine & Moore and Kirkland and Ellis acted as legal advisors.

Centerview Partners LLC served as exclusive financial advisor for Kraft, and Sullivan & Cromwell acted as legal advisor.

• ECB Tells Greek Banks Not to Boost Exposure to Athens Government’s Debt (WSJ)
• Search teams probe wreckage of jet in French Alps (Reuters)
• Flight Recorders Offer Best Hope of Explaining Jet’s Fatal Drop (BBG)
• Yemen Houthi militia sweeps toward Aden in threat to president (Reuters)
• In Nigeria, Oil Price’s Slide Deters Theft (WSJ)
• Saudi Arabia building up military near Yemen border (Reuters)
• Quant Who Shook the Financial World Tries More Humble Approach (BBG)
• Executive Pensions Are Swelling at Top Companies (WSJ)
• Carney’s Revamp Chief Drives BOE Shakeup as Staff Say ‘Gosh’ (BBG)
• Biotech’s Rally Fuels Bubble Fears (WSJ)
• Rising Rents Are Finally Forcing Millennials to Buy Houses (BBG) - If by that you mean move back with their parents...
• Kraft, Heinz deal to form North America's No.3 food company (Reuters)
• A New Rule Could End Up Punishing the Wrong Banks (BBG)

Overnight Media Digest

WSJ

* Top U.S. executives get paid a lot to do their jobs. Now many are also getting a big boost in what they will be paid after they stop working. Executive pensions are swelling at such companies as General Electric Co, United Technologies Corp and Coca-Cola Co. (http://on.wsj.com/1EQRVBu)

* As the federal government was wrapping up its antitrust investigation of Google Inc, company executives had a flurry of meetings with top officials at the White House and Federal Trade Commission, the agency running the probe. (http://on.wsj.com/1CX0Qny)

* With Morgan Stanley's current finance chief Ruth Porat announcing Tuesday that she was leaving for Google Inc, chief executive James Gorman selected as her successor Jonathan Pruzan, a 46-year-old investment banker who once reported to Porat and later co-led the team that advises banks and other financial-services companies. (http://on.wsj.com/1CoAvfX)

* The most anticipated energy deal of the year is off the table. Whiting Petroleum said Tuesday it isn't "pursuing any significant strategic transaction" and that it would issue more equity and take on more debt. (http://on.wsj.com/1xxgLXD)

* A former Federal Reserve governor who expressed concern that central bank policies could spark financial instability is headed for the world of hedge funds. Jeremy Stein signed up as a paid consultant to BlueMountain Capital Management LLC, the New York hedge-fund firm confirmed. (http://on.wsj.com/1y4d4Dn)

FT

Renault has offered to double pay of its Chief Executive Officer Carlos Ghosn despite opposition by the French state, which voted against the decision. Ghosn is set to receive 7.2 million euros ($7.86 million) in cash and shares for 2014. (http://on.ft.com/1FTYAMK)

HSBC Plc is to base its "ring-fenced" British retail and business banking operations in Birmingham, England, shifting about 1,000 staff there from its London headquarters.

British inflation fell to zero last month, official figures showed on Tuesday driven by lower prices for food, cost of transport, food and non-alcoholic beverages. The news hit sterling, which was down 0.4 percent against the euro.

Finnish mobile game maker Supercell tripled sales last year on the back of hit titles Clash of Clans, Hay Day and Boom Beach, the company said on Tuesday. With just 150 employees, the Finnish company made 1.55 billion euros in revenues in 2014, up from 519 million euros a year earlier.

NYT

* Brazilian investment firm 3G Capital - through the ketchup maker H.J. Heinz, which it owns with the billionaire Warren Buffett - is in talks to buy Kraft Foods, a source familiar with the matter said on Tuesday, in a deal that could exceed $40 billion. (http://nyti.ms/19Oc6px)

* Wynn Resorts in a letter on Tuesday urged its stockholders to reject co-founder Elaine Wynn's bid to remain on the board of the casino-resort giant she built with her ex-husband and the company's chairman and chief executive, Stephen Wynn. The letter came as Elaine Wynn, 72, began a week of meetings to woo Wall Street institutional investors, whose support she will need to win re-election to the board. (http://nyti.ms/1C9rW7q)

* Greece will present a detailed list of proposed overhauls to its eurozone partners by Monday, a government spokesman said, as Prime Minister Alexis Tsipras met supporters and leading government ministers on his first official visit to Germany. (http://nyti.ms/1C9sSbG)

* Lyle Gramley, who served as a White House economic adviser and a Federal Reserve governor in the late 1970s and early 1980s, died on Sunday at his home in Potomac, Maryland. He was 88. (http://nyti.ms/1C9sKsZ)

Canada

THE GLOBE AND MAIL

** Canada's automotive trade deficit topped C$10 billion ($8.00 billion) last year and threatens to deepen as more assembly plant closings loom and free-trade agreements with the European Union and South Korea take effect. (http://bit.ly/1bswGwe)

** The Ontario Provincial Police force has identified a number of security gaps, including a lack of cameras inside Parliament, as part of its review of the police response to the Ottawa shooting of Oct. 22, sources say. (http://bit.ly/19OW5zH)

** Ontario Premier Kathleen Wynne is leaving the door open to allowing new brewer-owned craft beer specialty shops, a major challenge to The Beer Store's current monopoly on most beer sales in the province. (http://bit.ly/1Iu0P9j)

NATIONAL POST

** Just ahead of Thursday's belt-tightening budget, Alberta Premier Jim Prentice announced a new way of managing the oil-rich province's finances as it struggles with a revenue gap that could exceed C$7 billion. (http://bit.ly/1OyJ4ty)

** Seven years ago, with the Olympics fast approaching, newly elected Vancouver Mayor Gregor Robertson vowed to marshal the city's "brightest minds" and end homelessness once and for all by 2015. On Tuesday, Robertson acknowledged that the pledge was an obvious failure, but provided an explanation: Vancouver is too balmy. (http://bit.ly/1BlG3nB)

** Prime Minister Stephen Harper said on Tuesday that Canada intends to fight the Islamic State of Iraq and Al-Sham for as long as the militant group poses a threat. (http://bit.ly/1xg7faL)

China

 SECURITIES JOURNAL

- Heilongjiang, Shandong, Guangxi, Chongqing, Shaanxi and Qingdao will be pilot regions for rolling out reforms to car insurance, the China Insurance Regulatory Commission said.

SECURITIES TIMES

- China Vanke said in an announcement it planned to issue 9 billion yuan ($1.45 billion) medium-term notes in the interbank market.

SHANGHAI SECURITIES NEWS

- Sixty percent of listed companies performed very well in 2014, according to data gathered by the newspaper from companies' 2014 annual reports, with electrical equipment and textiles as the standout sectors.

CHINA DAILY

- The Asian Infrastructure Investment Bank (AIIB) will be "reciprocal, efficient and inclusive", a contrast to the World Bank which is dominated by the United States and its veto power, an editorial in the newspaper said.

For Hong Kong and South China newspapers see....

Britain

The Times

RAIL STRIKE LOOMS IN WEEKS AFTER UNION REJECTS NEW PAY DEAL

The first national rail strike in 20 years could be called within weeks after workers rejected a four-year pay deal. Members of the Rail, Maritime and Transport union could down tools by the end of April causing chaos on the railways in the run-up to the general election in early May. (http://thetim.es/1N61LmR)

TAXPAYERS WILL PROVIDE A 499 POUNDS IPAD FOR EVERY MP

MPs will be handed new iPads after the general election, at a cost of 1 million pounds ($1.48 million) to the taxpayer. The House of Commons Commission says that offering each of the 650 members an iPad Air 2, costing 499 pounds each, will save money. (http://thetim.es/1BLjCqO)

The Guardian

UK INFLATION HITS ZERO FOR THE FIRST TIME ON RECORD

Inflation has fallen to zero for the first time on record in Britain, boosting incomes in real terms and handing the chancellor a pre-election advantage. The consumer prices index dropped in February from 0.3 percent in January, bringing the United Kingdom to the brink of a spell of deflation that is expected in the coming months. (http://bit.ly/1HyprA1)

GREECE PLEDGES FULL LIST OF REFORMS WITHIN THE WEEK

Greece has pledged to pull together a comprehensive list of reforms by the start of next week, in an attempt to unlock fresh funds before Athens runs out of cash in April. Government spokesman Gabriel Sakellaridis said that the programme demanded by Greece's increasingly impatient creditors would be finished within days. (http://bit.ly/1BjiZ8O)

The Telegraph

JEREMY CLARKSON TO BE SACKED BY THE BBC

Jeremy Clarkson is to be sacked as Top Gear presenter after a BBC investigation concluded he did attack a producer on the programme. Lord Hall, the director general of the BBC, is expected to announce his decision on Wednesday after considering the findings of an internal investigation. (http://bit.ly/1CWjFXT)

TELEFONICA AGREES 10.25 BILLION POUNDS SALE OF O2 TO HUTCHISON WHAMPOA

O2, Britain's second-largest mobile operator, has been sold to Hutchison Whampoa Ltd, the owner of rival operator Three, for 10.25 billion pounds, to create a giant that will control 40 percent of the market. Telefonica, the Spanish parent of O2, said it had agreed final terms with Hong Kong conglomerate after two months of exclusive negotiations and due diligence. (http://bit.ly/1HxKdfF)

Sky News

BANKS TO CARRY ON CLOSING DESPITE CABLE DEAL

Britain's banks will pledge this week to continue investing in their branch networks "for decades to come" despite signing an agreement enabling them to close outlets even when they are the final one in a local community. (http://bit.ly/1HBuYFU)

BRITISH NATIONALS 'LIKELY' ON CRASHED PLANE

A number of British nationals are thought to have been on board the Germanwings aircraft which crashed in the French Alps, says Foreign Secretary Philip Hammond. Recovery teams have been flown in by helicopter and one of the black box flight recorders, crucial in piecing together what happened, has been found.(http://bit.ly/19NASGb)

The Independent

TESCO SHAREHOLDERS TAKE ACTION OVER OVERSTATED PROFITS

Tesco Plc has another battle on its hands after a group of shareholders has emerged seeking compensation for overstated profits. The group is a non-profit organisation under the name Tesco Shareholders Claims Limited. (http://ind.pn/1FTZw3D)

McDonald's UK boss Jill McDonald to take the wheel at Halfords

Halfords has appointed McDonald's UK boss Jill McDonald as the new chief executive of the bike to car parts business. Jill McDonald replaces former boss Matt Davies, who left earlier this year to join Tesco Plc as head of the UK business after his predecessor, Chris Bush, left in the wake of the accounting scandal that hit the supermarket. (http://ind.pn/1EF2hBO)

Fly On The Wall Pre-Market Buzz

ECONOMIC REPORTS

Domestic economic reports scheduled for today include:
Durable goods orders for February at 8:30--consensus up 0.2%
DOE petroleum inventory reports for week of March 20 at 10:30

ANALYST RESEARCH

Upgrades

Alliant Energy (LNT) upgraded to Outperform from Neutral at RW Baird
American Water (AWK) upgraded to Outperform from Neutral at RW Baird
Aqua America (WTR) upgraded to Outperform from Neutral at RW Baird
Artesian Resources (ARTNA) upgraded to Outperform from Neutral at RW Baird
Estee Lauder (EL) upgraded to Overweight from Neutral at Piper Jaffray
General Dynamics (GD) upgraded to Outperform from Sector Perform at RBC Capital
Hawaiian Holdings (HA) upgraded to Outperform from In-Line at Imperial Capital
Middlesex Water (MSEX) upgraded to Outperform from Neutral at RW Baird
Otter Tail (OTTR) upgraded to Outperform from Neutral at RW Baird
PNM Resources (PNM) upgraded to Outperform from Neutral at RW Baird
Xcel Energy (XEL) upgraded to Outperform from Neutral at RW Baird

Downgrades

AB InBev (BUD) downgraded to Reduce from Overweight at HSBC
BreitBurn Energy (BBEP) downgraded to Sell from Neutral at UBS
Finish Line (FINL) downgraded to Neutral from Buy at B. Riley
iDreamSky (DSKY) downgraded to Neutral from Overweight at JPMorgan
ING Groep (ING) downgraded to Neutral from Buy at Goldman
Informatica (INFA) downgraded to Neutral from Buy at Mizuho
Kofax (KFX) downgraded to Hold from Buy at Canaccord
LRR Energy (LRE) downgraded to Sell from Neutral at UBS
Orbital ATK (OA) downgraded to Market Perform from Outperform at Wells Fargo
PCTEL, Inc. (PCTI) downgraded to Neutral from Buy at B. Riley
SJW Corp. (SJW) downgraded to Neutral from Outperform at RW Baird
Sonus (SONS) downgraded to Hold from Buy at Wunderlich
Tesla (TSLA) downgraded to Underperform from Outperform at CLSA

Initiations

Aerie Pharmaceuticals (AERI) initiated with a Buy at Brean Capital
Brunswick (BC) initiated with a Buy at Stifel
Fox Factory (FOXF) initiated with a Buy at DA Davidson
Harley-Davidson (HOG) initiated with a Buy at Stifel
Jason Industries (JASN) initiated with a Buy at Stifel
Micron (MU) initiated with a Neutral at MKM Partners
Neff (NEFF) initiated with a Market Perform at Wells Fargo
Polaris Industries (PII) initiated with a Buy at Stifel
Stericycle (SRCL) initiated with an In-Line at Imperial Capital
Ultragenyx (RARE) initiated with a Buy at CRT Capital
United Rentals (URI) initiated with an Outperform at Wells Fargo

COMPANY NEWS

Kraft Foods (KRFT), H.J. Heinz announce definitive merger agreement. Under the terms of the agreement, which has been unanimously approved by both Heinz and Kraft's boards, Kraft shareholders will own a 49% stake in the combined company and  shareholders will receive stock in the combined company and a special cash dividend of $16.50 per share. The aggregate special dividend payment of approximately $10B is being fully funded by an equity contribution by Berkshire Hathaway (BRK.A) and 3G Capital
Lexmark (LXK) to acquire Kofax (KFX) for $11 per share in cash, or a total enterprise value of approximately $1B
Great Wolf Resorts, which is currently controlled by funds affiliated with Apollo Global (APO), to be acquired by affiliate of Centerbridge Partners
Stamps.com (STMP) said it intends to acquire Endicia from Newell Rubbermaid (NWL) for $215M in cash
Rocket Fuel (FUEL) appointed Monte Zweben as interim CEO and reiterated Q1 non-GAAP revenue guidance
Achillion Pharmaceuticals (ACHN) said Chief Regulatory Officer Dr. Gautam Shah is departing company
Lpath (LPTN) said Phase 2a Asonep study did not meet primary endpoint
Merck (MRK) announced new $10B share repurchase program

EARNINGS

Companies that beat consensus earnings expectations last night and today include:
Leidos (LDOS), Sonic (SONC), Christopher & Banks (CBK), HealthEquity (HQY), Christopher & Banks (CBK), Sonic (SONC), Steelcase (SCS)

Companies that missed consensus earnings expectations include:
Yingli Green reports Q4 adjusted EPS (49c)

Companies that matched consensus earnings expectations include:
Turquoise Hill (TRQ), EXFO Inc. (EXFO)

Sonic (SONC) sees 25%-27% EPS growth in FY15
Christopher & Banks (CBK) sees Q1 revenue $90M-$94M, consensus $108.18M, sees FY15 revenue $422M-$432M, consensus $438.56M
HealthEquity (HQY) sees FY16 EPS 28c-30c, consensus 32c
Leidos (LDOS) sees FY15 EPS $2.20-$2.45, consensus $2.53
Steelcase (SCS) sees Q1 adj. EPS 13c-17c, consensus 15c

NEWSPAPERS/WEBSITES

Google (GOOG) working on project to add bill pay function to Gmail, Re/code reports
Apple Watch (AAPL) has faced yield, manufacturing issues "at every stage of the development," AppleInsider reports
YouTube (GOOG) to relaunch livestreaming platform, Daily Dot says (AMZN)
Nielsen says to unveil way to measure Netflix viewing by midyear, Bloomberg reports
Facebook (FB) leaks announcements from F8 conference, including Parse for IoT, Messenger as a platform, Business Insider reports

SYNDICATE

Cellectis (CLLS) 5.5M share Secondary priced at $41.50
EnLink Midstream (ENLK) files to sell 22.8M common units representing limited partners
La Quinta (LQ) 20.75M share Secondary priced at $23.71
Mast Therapeutics (MSTX) files $150M mixed securities shelf
Nationstar (NSM) files to sell 17.5M shares of common stock
Novavax (NVAX) files to sell $175M in common stock
Southern Missouri Bancorp (SMBC) files $75M mixed securities shelf
Unit Corp. (UNT) files automatic mixed securities shelf
ZS Pharma (ZSPH) 4.01M share Secondary priced at $46.25

"Valuations are on the high side," warned Janet Yellen last week... "but not outside historical norms." It appears the range of her norms needs to be adjusted... As The Treasury's Office of Financial Research warns, stocks appear more costly than P/E ratios and other basic indicators would suggest.

As David Stockman exclaimed yesterday, forward P/Es are useless in judging valuation as Wall Street plays the EPS game. As OFR explains, other fundamental valuation metrics tell a different story than the forward PE. This brief focuses on a few — the CAPE ratio, the Q-ratio, and the Buffett Indicator — that are approaching two-standard deviation (two-sigma) thresholds.

Why is two-sigma relevant? Valuations approached or surpassed two-sigma in each major stock market bubble of the past century. And the bursting of asset bubbles has at times had important implications for financial stability. The two-sigma threshold is useful for identifying these extreme valuation outliers. Assuming a normal distribution in a time series, two-sigma events should occur once every 40-plus years; in equity markets, they occur more frequently due to fat-tail distributions.

click image for large legible version

CAPE Ratio. If one-year earnings assumptions based on peak profit margins are potentially misleading, then it seems logical to consider valuation metrics based on normalized (long-run average) profit margins. In 1934, Graham and Dodd argued average earnings should cover a period of at least 5 years, and preferably 7 to 10 years, on the basis that current earnings rarely reflect a company’s sustainable earnings capacity. They noted that longer periods are “useful for ironing out the frequent ups and downs of the business cycle” and provide a better measure of a company’s earnings power than a single year. Shiller enhanced this concept with CAPE, which is the ratio of the S&P 500 index to trailing 10-year average earnings (earnings are based on generally accepted accounting principles, or GAAP, and are inflation-adjusted). Although CAPE’s 10-year timeframe is somewhat arbitrary, it captures earnings over one or two business cycles rather than over a single year, better reflecting sustainable earnings.

The historical CAPE average based on a 133-year data series is approximately 17 times, and its two-standard-deviation upper band is 30 times. The highest market peaks (1929, 1999, and 2007) either surpassed or approached this two-sigma level (1999 exceeded four sigma). Each of these peaks was followed by a sharp decline in stock prices and adverse consequences for the real economy. At the end of 2014, the CAPE ratio (27 times) was in the 94th percentile of historical observations and was approaching its two-sigma threshold.

Q-Ratio. The Q-ratio, defined here as the market value of nonfinancial corporate equities outstanding divided by net worth, suggests a similar message of equity valuations approaching critical levels. Instead of using a traditional accounting-based (historical cost) measure of net worth, the Q-ratio incorporates market value and replacement cost estimates. The Q-ratio also includes a much broader universe of nonfinancial companies (private and public) than CAPE.

Buffett Indicator. The ratio of corporate market value to gross national product (GNP) is at its highest level since 2000 and approaching the two-sigma threshold. This indicator is informally referred to as the Buffett Indicator, because it is reportedly Berkshire Hathaway Chairman Warren Buffett’s preferred measure to assess overall market valuation. Historically, this indicator’s message is consistent with CAPE, particularly in identifying periods of extreme valuation before the Great Recession and the 1990s technology stock bubble.

*  *  *

Of course, what really explains why Janet can't/won't see this ugly reality...

*  *  *

As OFR concludes,

These readings illustrate the potential for “quicksilver markets,” in which prices shift rapidly and unpredictably, the Washington-based analyst wrote. All three gauges are “nearing extreme highs.”

• Saudi Arabia, allies launch air strikes in Yemen against Houthi fighters (Reuters)
• Pilot on Crashed Jet Was Locked Out of Cockpit, NY Times Says (BBG)
• Why Bombing This Tiny Oil Producer Is Roiling the Energy Market (BBG)
• U.S.-led coalition, Iraqis pound Islamic State in Tikrit (Reuters)
• Munger Says Prepare for Harder World as Buying Power Slides (BBG),Mocks Greek ‘Idiotic Idea’ You Can Vote Yourself Rich (BBG)
• The Central Banker Who Saved the Russian Economy From the Abyss (BBG)
• Bank of Canada says foreign buyers complicate housing market (Reuters)
• Investors Scoop Up Companies’ Bonds (WSJ)
• Espirito Santo Probe Turns Mariana Mortagua Into Portuguese Star (BBG)
• Draghi in Rome Faces Queries on Home Turf From Divided Crowd (BBG)
• The High Cost of Saving a Failing Business (WSJ)
• Wells Fargo will close its home lending servicing office in Milwaukee and eliminate 1,000 jobs (CBS)
• Putin Plays Wildcard as Ukraine Bond Restructuring Talks Begin (BBG)
• Nutritionists warn diners to be wary of Warren Buffett's 'junk-food' portfolio (Reuters)
• Petrobras Bonds, After Slump, Find Takers (WSJ)

Overnight Media Digest

WSJ

* Oilfield services provider Schlumberger NV has agreed to pay $232.7 million for violating U.S. sanctions in Iran and Sudan, ending a six-year Justice Department investigation. (http://on.wsj.com/1Gq2vRZ)

* Morgan Stanley Chairman and Chief Executive James Gorman plans more changes to his management team in the coming months, in addition to several unveiled earlier this month. (http://on.wsj.com/1HJDCip)

* Royal Bank of Scotland Group PLC sold 135 million shares of Citizens Financial Group Inc in an offering that priced at $23.75 a share late Wednesday, according to people familiar with the deal. (http://on.wsj.com/1D0ly5P)

* Carlsberg, Heineken, InBev, SABMiller and others soon will add nutritional labels to their drinks to aid customers making food and drinks choices by calorie count, a European brewers group said. (http://on.wsj.com/1FJzHoq)

* French investigators probing the cause of Flight 9525's crash said they had a breakthrough with the recovery of an audio file from the Airbus jet's black box. (http://on.wsj.com/1CQE52V) (Compiled by Rishika Sadam in Bengaluru)

NYT

* An unmanned vehicle, which has about the wingspan of a Boeing 767 but weighs less than a small car, is the centerpiece of social-networking company Facebook Inc's plans to connect with the five billion or so people it has yet to reach.(http://nyti.ms/1Ni7cx7)

* Almost a year after agreeing to pay $3 billion for Beats, a maker of hip headphones and a streaming music service, Apple Inc is working with Beats engineers and executives to introduce its own subscription streaming service to compete directly with streaming upstarts like Spotify. (http://nyti.ms/1Ni8Zm5)

* Brazilian private investment firm 3G capital said it struck a deal to take control of Kraft Foods Group Inc. Working with the billionaire investor Warren Buffett's Berkshire Hathaway Inc, 3G said on Wednesday it would merge Kraft Foods with H.J. Heinz Co, the canned foods giant it acquired with Buffett in 2013. Once combined, the Kraft Heinz Company will be one of the largest food and beverage conglomerates in the world, with nearly $28 billion in annual sales, and an expected market value of more than $80 billion. (http://nyti.ms/1NiaYH1)

* The Consumer Product Safety Commission formally announced on Wednesday that it was investigating whether Lumber Liquidators Holdings Inc, one of the largest discount flooring retailers in the United States, sold products with dangerous levels of formaldehyde. (http://nyti.ms/1xhP7NK)

* Ford Motor Co issued three safety recalls on Wednesday morning, the largest aimed at about 213,000 Ford Explorers and its law enforcement sibling, the Ford Police Interceptor utility vehicle. The recall covers about 194,000 vehicles in the United States, and more than 18,000 in Canada and Mexico. (http://nyti.ms/1xhPmsh) * An unmanned vehicle, which has about the wingspan of a Boeing 767 but weighs less than a small car, is the centerpiece of social-networking company Facebook Inc's plans to connect with the five billion or so people it has yet to reach.(http://nyti.ms/1Ni7cx7)

* Almost a year after agreeing to pay $3 billion for Beats, a maker of hip headphones and a streaming music service, Apple Inc is working with Beats engineers and executives to introduce its own subscription streaming service to compete directly with streaming upstarts like Spotify. (http://nyti.ms/1Ni8Zm5)

* Brazilian private investment firm 3G capital said it struck a deal to take control of Kraft Foods Group Inc. Working with the billionaire investor Warren Buffett's Berkshire Hathaway Inc, 3G said on Wednesday it would merge Kraft Foods with H.J. Heinz Co, the canned foods giant it acquired with Buffett in 2013. Once combined, the Kraft Heinz Company will be one of the largest food and beverage conglomerates in the world, with nearly $28 billion in annual sales, and an expected market value of more than $80 billion. (http://nyti.ms/1NiaYH1)

* The Consumer Product Safety Commission formally announced on Wednesday that it was investigating whether Lumber Liquidators Holdings Inc, one of the largest discount flooring retailers in the United States, sold products with dangerous levels of formaldehyde. (http://nyti.ms/1xhP7NK)

* Ford Motor Co issued three safety recalls on Wednesday morning, the largest aimed at about 213,000 Ford Explorers and its law enforcement sibling, the Ford Police Interceptor utility vehicle. The recall covers about 194,000 vehicles in the United States, and more than 18,000 in Canada and Mexico. (http://nyti.ms/1xhPmsh)

China

 SECURITIES JOURNAL

- China saw a net outflow of 508.3 billion yuan ($81.8 billion) in transaction settlements from its stock markets last week, snapping three weeks of net inflows, according to a fund industry association.

- China will continue to take more financial measures to support agriculture, farmers and rural areas, the central bank said in a report released on Wednesday.

- Total assets at Chinese banks in China increased 12.5 percent year-on-year to hit a total of 170.84 trillion yuan as of the end of February, while total liabilities rose 12 percent to 158.16 trillion yuan, the China Banking Regulatory Commission said on Wednesday.

SECURITIES TIMES

- China will push forward the "Made in China 2025" strategy to upgrade its manufacturing sector, Premier Li Keqiang said at an executive meeting of the State Council on Wednesday.

CHINA DAILY

- Xi Jinping said that the integrity of the justice system has been eroded by problems such as unfair law enforcement, incorrect verdicts and corruption, at a meeting of the Central Committee Politburo on Wednesday. China will borrow ideas and experience from other nations that have developed the rule of law, he said, although it does not need to directly copy overseas systems.

- CCB and Commerzbank listed the first yuan denominated ETF on the London Stock Exchange Wednesday.

PEOPLE'S DAILY

- The State Council discussed the merging of the two high-speed rail manufacturers -- China North Railway and China South Railway. The merger should follow market rules and the enterprises will ensure stable company operation and improve performances, the statement said.

SHANGHAI DAILY

- A Hong Kong company became the first overseas-invested company in Shanghai to be fined for foreign exchange violations, the Shanghai Pudong People's Court said. Yuji International Trading Co Ltd, an IT firm, was fined 980,000 yuan ($157,769) for breaching foreign exchange rules to buy an office in Shanghai

Britain

The Times

DANGER OF GREXIT HAS RISEN, OSBORNE WARNS

The risk of an accidental but devastating Greek exit from the eurozone has increased in recent days because of the "palpable ill-will" between the two sides, British finance minister George Osborne warned. (http://thetim.es/1Na3JCT)

CBI BOSS DEMANDS QUICKFIRE TRANSATLANTIC TRADE DEAL

The head of the CBI has urged negotiators of what could be a game-changing trade deal between Europe and the United States to get the treaty signed before a possible British referendum on European Union membership scuppers the whole idea. (http://thetim.es/1Ca0Pce)

The Guardian

JEREMY CLARKSON COULD FACE POLICE INVESTIGATION AFTER BBC DISMISSAL

Jeremy Clarkson could face a police investigation into the unprovoked attack that left a colleague bleeding and cost the Top Gear presenter his job, bringing an end to a BBC career that spanned four decades. The BBC director general, Tony Hall, said "with great regret" he decided not to renew Clarkson's contract, saying the presenter had "crossed a line" which left him with no alternative. (http://bit.ly/1EGbMAE)

CAMERON APOLOGISES TO THOSE INFECTED WITH HEPATITIS C AND HIV 30 YEARS AGO

Ministers from the UK and Scottish governments have apologised and pledged extra funding after it emerged that more than 3,000 people were infected by hepatitis C and HIV via contaminated blood more than 30 years ago. The prime minister promised to release 25 million pounds ($37.19 million) in financial support for the victims immediately, and to increase that after the election. (http://bit.ly/1xzlbgu)

The Telegraph

BRITAIN'S MOTOR INDUSTRY GETS 650 MILLION POUNDS BOOST

Britain's motor industry is to receive a 650 million pounds boost as a pair of foreign investors pump money into the UK's booming automotive sector. Jaguar Land Rover is to invest 400 million pounds in a new engine plant, equipment and the expansion of its design centre and China's Zhejiang Geely Group is to spend 250 million pounds on a new factory for the London Taxi Company. (http://bit.ly/1HHW0M6)

HEINZ TO MERGE WITH KRAFT TO CREATE U.S. FOOD GIANT

Kraft Foods Group Ltd has agreed a $100 billion merger with H.J. Heinz Co to create the fifth-biggest food company in the world. The deal has been masterminded by Heinz's wealthy owners, Brazilian private equity firm 3G Capital and Warren Buffett's Berkshire Hathaway. (http://bit.ly/1xgb9k4)

Sky News

EX-CENTRICA CHIEF TO HAND BONUS TO CHARITY

The former boss of Centrica Plc, Britain's biggest energy supplier, is to hand "a substantial portion" of his annual bonus to charity for the second successive year. Sam Laidlaw, who stepped down as chief executive of the parent company of British Gas at the end of December, has decided to donate part of an award of approximately 500,000 pounds to voluntary causes. (http://bit.ly/1CbLM1V)

HAVERSHAM DRIVES OFF WITH 1.2 BILLION POUNDS CAR DEALER

Britain's biggest seller of secondhand cars is to reverse onto the London stock market in a 1.2 billion pounds deal that could be announced within hours. British Car Auctions Ltd is in the final stages of talks about an agreement to be acquired by Haversham Holdings Plc, a vehicle set up to buy companies in the automotive sector. (http://bit.ly/1HHYiuB)

The Independent

B&Q OWNER KINGFISHER NOT QUITE MANAGING TO DO IT FOR ITSELF AS MR BRICOLAGE TAKEOVER STALLS

Kingfisher Plc, the DIY company behind B&Q, is struggling to complete its takeover of French rival Mr Bricolage SA after bosses admitted the current owners may not want to sell. Kingfisher already trades in France under the Castorama brand and has been in talks to buy its rival since April 2014, but the deal could fall apart after the majority of the Mr Bricolage said they had "reservations". (http://ind.pn/18Yyrzz)

LABOUR WOULD END INDEFINITE DETENTION OF REFUGEES

The indefinite detention of asylum-seekers and migrants would be ended by a Labour government, the party will announce today. Yvette Cooper, the shadow Home Secretary, will say that Labour would fix a time limit following criticism that people in the asylum and immigration system have been locked up for up to four years. (http://ind.pn/1CQbsmx)

Fly On The Wall Pre-Market Buzz

ECONOMIC REPORTS

Domestic economic reports scheduled for today include:
Weekly jobless claims at 8:30, consensus 293,000
PMI Services Flash at 9:45, consensus 57.0
Kansas City Fed manufacturing index at 11:00, consensus 0

ANALYST RESEARCH

Upgrades

Alere (ALR) upgraded to Neutral from Sell at Goldman
Canadian National (CNI) upgraded to Outperform from Market Perform at Cowen
Charles Schwab (SCHW) upgraded to Overweight from Underweight at Barclays
Con-way (CNW) upgraded to Buy from Hold at Stifel
Dr Pepper Snapple (DPS) upgraded to Buy from Hold at Stifel
Francesca's (FRAN) upgraded to Neutral from Sell at Goldman
GoPro (GPRO) upgraded to Outperform from Neutral at RW Baird
PartnerRe (PRE) upgraded to Outperform from Market Perform at BMO Capital
Saia, Inc. (SAIA) upgraded to Buy from Hold at Stifel
Sibanye Gold (SBGL) upgraded to Outperformer from Sector Performer at CIBC

Downgrades

ASML (ASML) downgraded to Sell from Hold at Deutsche Bank
Charles River Labs (CRL) downgraded to Neutral from Buy at SunTrust
Coty (COTY) downgraded to Sell from Neutral at B. Riley
Exact Sciences (EXAS) downgraded to Neutral from Buy at Goldman
Kofax (KFX) downgraded to Neutral from Buy at B. Riley
LifePoint (LPNT) downgraded to Neutral from Buy at Mizuho
Myriad Genetics (MYGN) downgraded to Sell from Neutral at Goldman
Quintiles (Q) downgraded to Neutral from Buy at SunTrust
Royal Dutch Shell (RDS.A) downgraded to Reduce from Neutral at HSBC
Ubiquiti Networks (UBNT) downgraded to Neutral from Outperform at Macquarie
Union Pacific (UNP) downgraded to Market Perform from Outperform at Cowen
Vantage Drilling (VTG) downgraded to Sector Perform from Outperform at Iberia

Initiations

HFF Inc. (HF) initiated with a Buy at Goldman
HomeAway (AWAY) initiated with an Outperform at Oppenheimer
Marcus & Millichap (MMI) initiated with a Neutral at Goldman
MobileIron (MOBL) initiated with an Outperform at RBC Capital
OPKO Health (OPK) assumed with an Outperform at Barrington
Pernix Therapeutics (PTX) initiated with an Outperform at Oppenheimer
Southern Copper (SCCO) initiated with a Hold at Brean Capital
Sunoco (SUN) initiated with a Buy at Goldman
Triangle Petroleum (TPLM) initiated with a Neutral at Macquarie
U.S. Physical Therapy (USPH) initiated with a Market Perform at Barrington

COMPANY NEWS

Expedia (EXPE), Orbitz (OWW) receive second information request from DOJ
American Apparel (APP) said SEC issued formal order of investigation in February
FutureFuel (FF) to see adverse impact from early termination of P&G (PG) purchase pact
Kraft Foods (KRFT) to pay Heinz termination fee of $1.2B if proposed merger fails
Brown-Forman (BF.A, BFA, BFB) increased share repurchase authorization by $1B
Red Hat (RHT) announced $500M stock repurchase program

EARNINGS

Companies that beat consensus earnings expectations last night and today include:
lululemon (LULU), Dermira (DERM), Inovalon (INOV), Red Hat (RHT), Verint Systems (VRNT), Ultragenyx (RARE), PVH Corp. (PVH), Five Below (FIVE), Pacific Sunwear (PSUN)

Companies that missed consensus earnings expectations include:
H.B. Fuller (FUL), Worthington (WOR), Franco-Nevada (FNV), Kingstone Companies (KINS)

SanDisk (SNDK) lowers Q1 revenue guidance to $1.3B from $1.4B-$1.45B, consensus $1.44B
lululemon (LULU) sees Q1 EPS 31c-33c, consensus 39c, sees FY15 EPS $1.85-$1.90, consensus $2.06
Red Hat (RHT) sees Q1 EPS approximately 41c, consensus 41c, sees FY16 EPS $1.79-$1.82, consensus $1.85
H.B. Fuller (FUL) backs FY15 adjusted EPS view $2.60, consensus 2.59
PVH Corp. (PVH) sees FY15 EPS $6.75-$6.90, consensus $7.37
Five Below (FIVE) sees Q1 EPS 6c-7c, consensus 8c, sees FY15 EPS $1.02-$1.05, consensus $1.08

NEWSPAPERS/WEBSITES

Apple (AAPL), Beats working on streaming music service to rival Spotify, NY Times reports
Wells Fargo (WFC) to close Milwaukee office, cut 1,000 jobs, AP reports
PayPal (EBAY) agrees to $7.7M settlement over sanction violations, AP reports
Twitter (TWTR) launches Periscope livestreaming app, Business Insider reports
Apple (AAPL) expected to release 3 new iPhone models in 2H15, DigiTimes reports
GE (GE) now expects to cut 575 jobs at Lufkin vs. previous view of 330, Bloomberg reports

SYNDICATE

Citizens Financial (CFG) 135M share Secondary priced at $23.75
Diplomat Pharmacy (DPLO) 8.54M share Secondary priced at $29.00
Franklin Financial Network (FSB) 2.64M share IPO priced at $21.00
Gray Television (GTN) 12M share Secondary priced at $13.00
Novavax (NVAX) 24.14M share Secondary priced at $7.25
Sucampo (SCMP) files to sell Class A common stock for holders, no amount given

Submitted by Mike Krieger via Liberty Blitzkrieg blog,

While several exceptionally wealthy and successful people have admirably come out and spoken passionately of the broken nature of financial markets and the political system, as well as the threat this poses to society in general (think Paul Tudor Jones and Nick Hanauer), there have been several examples of oligarchs coming out and conversely demonstrating their complete disconnect from reality, as well as a disdain for the masses within a framework of incredible arrogance.

I’ve commented on such figures in the past, with the two most popular posts on the subject being:

A Billionaire Lectures Serfs in Davos – Claims “America’s Lifestyle Expectations are Far Too High”

An Open Letter to Sam Zell: Why Your Statements are Delusional and Dangerous

The latest example comes from Charlie Munger, Warren Buffett’s right hand man, who tends to demonstrate an incredible capacity for verbal diarrhea. Recall his commentary on gold: “gold is a great thing to sew onto your garments if you’re a Jewish family in Vienna in 1939.”  

Moving along, Mr. Munger provided some typically insensitive commentary at an event yesterday in Los Angeles. Bloomberg reports that:

(Bloomberg) — Charles Munger, who became a billionaire while helping Warren Buffett build Berkshire Hathaway Inc., predicted it’s going to get tougher for consumers to maintain their standard of living in coming decades.

 

“We should all be prepared for adjusting to a world that is harder,” Munger, 91, said Wednesday at an event in Los Angeles, in response to a question about the increase in the size of the Federal Reserve’s balance sheet since the 2008 financial crisis. “You can count on the purchasing power of money to go down over time. And you can almost count that you’ll have more trouble in the next 50 years than the last.”

 

“Somebody my age has lived through the best and easiest period that ever happened in the history of the world — the lowest death rates, the highest investment production, biggest increases in most people’s standards of living,” Munger said. “If you’re unhappy with what you’ve had over the last 50 years, you have an unfortunate misappraisal of life.”

There’s a staggering amount of offensiveness in such few words. First off, he says that: “We should all be prepared for adjusting to a world that is harder.” Who is included in the word “all” here. Certainly not his fellow oligarchs, who already bailed themselves out in incredible fashion and have been spending the years since protecting themselves from the horrible future they’ve created. No, he is speaking to the masses, the plebs, the serfs, the peasants, the ruled. He is telling them tough luck, just try to avoid cannibalism in the future. Meanwhile, if you get close to my castle I’ll have you shot down like a dog.

He then shows his cards once again with the statement: “If you’re unhappy with what you’ve had over the last 50 years, you have an unfortunate misappraisal of life.”

50 years of life? What about those us who haven’t had the pleasure of being alive so long. What about the millennials, the teenagers, and the babies being born right now? He couldn’t give a shit, which is exactly why he and his buddies went out of their way to protect the wealthy, older generations with their bailouts in 2008/09. Conveniently, this is the exact demographic he belongs to.

His comments are particularity striking when you take them in context of yesterday’s article from the Wall Street Journal: Executive Pensions Are Swelling at Top Companies. If you think these guys are going to be dealing with the “hard times” ahead like everyone else, think again.

From the WSJ:

Top U.S. executives get paid a lot to do their jobs. Now many are also getting a big boost in what they will be paid after they stop working.

 

Executive pensions are swelling at such companies as General Electric Co., United Technologies Corp. and Coca-Cola Co. While a significant chunk of the increase is the result of arcane pension accounting around issues like low interest rates and longer lifespans, the rest reflects very real improvements in the executives’ retirement prospects.

 

New mortality tables released last fall by the American Society of Actuaries extended life expectancies by about two years. That, as well as low year-end interest rates, helped push pension gains higher than many companies had expected. The result is much higher current values for plans with terms like guaranteed annual payouts, which are no longer offered to most rank-and-file workers.

Note that these guaranteed annual payouts are no longer offered to most rank-and-file workers. There are peasants and there are oligarchs. The peasants are the ones Munger speaks to.

 GE Chief Executive Jeff Immelt’s compensation rose 88% last year to $37.3 million. Meanwhile, excluding $18.4 million in pension gains, his pay actually fell slightly to $18.9 million.

 

In all, Mr. Immelt’s pension is valued at about $4.8 million a year for life. The company puts its current value at about $70 million, up from around $52 million a year ago.

 

At Lockheed Martin Corp., CEO Marillyn Hewson’s total pay rose 34% to $33.7 million last year, with $15.8 million of that stemming from pension gains. An extra column in the proxy statement’s compensation table strips out those gains, showing her pay up about 13% to $17.9 million.

 

Executive pensions generally don’t consume the attention that pensions for the rank and file do. For years, as costs of traditional pension plans have risen amid low interest rates and longer lifespans, big companies have been closing them to new employees or even freezing benefits in place, often continuing with only a 401(k) plan for all but the oldest workers.

 

Last June, Lockheed Martin told its nonunion employees that it would stop reflecting salary increases in their pension benefits starting next year, and that the benefits would stop growing with additional years of work starting in 2020.

Just in case you needed further evidence of how all “public” policy, especially the actions of the Federal Reserve, are specifically designed to enrich the 0.01% at the expense of everyone else, let’s take a look at some excerpts from a CNBC article published today: Fed Policies Have Cost Savers $470 Billion:

The Federal Reserve’s efforts to stimulate the U.S. economy after the financial crisis ended up costing savers nearly half a trillion dollars in interest income, according to report released Thursday.

 

Since the central bank dropped interest rates to near zero at the end of 2008, savers have labored under plain-vanilla bank accounts and money market funds that have yielded close to nothing. Critics have long said the Fed’s quantitative easing efforts have boosted asset prices, particularly in the stock market, but exacted severe costs across other parts of the economy.

If QE really helps everyone, then why has income inequality exploded? The answer, of course, is that QE picked winners and losers. Naturally, the winners have been the oligarchs, and the losers have been everyone else.

Thanks for playing.

*  *  *

For related articles, see:

As the Middle Class Evaporates, Global Oligarchs Plan Their Escape from the Impoverished Pleb Masses

Just Another Tale from the Oligarch Recovery – $100 Million Homes Being Built on Spec

The Pitchforks are Coming…– A Dire Warning from a Member of the 0.01%

A Billionaire Lectures Serfs in Davos – Claims “America’s Lifestyle Expectations are Far Too High”

An Open Letter to Sam Zell: Why Your Statements are Delusional and Dangerous

Submitted by Simon Black via Sovereign Man blog,

Several months ago, the government of Australia proposed to tax bank deposits up to $250,000 at a rate of 0.05% (5 basis points).

Their idea was for the money to be invested in a rainy day Financial Stabilization Fund to insure against in the unlikely event of a banking crisis… or all-out collapse.

And as of this morning, it looks like the levy might just pass and become law in Australia. All parties support the idea. Which means that Australia might just have a tax on bank deposits starting January 1, 2016.

To be clear, the proposal seems to plan on taxing the banks based on the amount of deposits they’re holding—but it’s pretty obvious this will be passed on to consumers in the form of lower interest rates.

Let’s look at what this means:

1. Taxes on bank deposits are generally the same as negative interest rates.

Australia is a rare exception.

Interest rates on bank deposits in most developed nations are practically zero… if not already negative.

So charging a tax above and beyond this would clearly push rates (further) into negative territory.

I have, for example, a small bank account in the United States that pays me about .03% interest (three basis points). If the government imposes a tax of 5bp on interest of 3bp, I’m left with negative interest.

Australia (along with New Zealand) is a rare exception since interest rates are actually positive. You can get 2-3% on a savings account. So a 5bp tax still results in positive interest.

2. Taxes always start small… then increase over time.

Of course, the proposal on the table right now is a 5bp tax. There’s nothing that says this can’t increase to 50bp over time.

When the United States government first imposed the modern federal income tax a century ago, the top tax rate was just 7%. These days that would qualify the US as a tax haven.

Over time, tax rates rose to as high as 92%. Tax rates can (and do) rise. And once they’re passed, they’re almost never abolished.

3. Taxes are rarely used for their stated purpose

Politicians create and raise taxes all the time for special purposes. And again, over time, they are often diverted away from those purposes.

In 1936 after a devastating flood in Johnstown, Pennsylvania, the state government passed a ‘temporary’ 10% tax on all alcohol sold in the state in order to help pay for disaster relief.

Six years later the work was complete. But the tax is still on the books (now at 18%), with all the revenue going to whatever the state lawmakers want to blow it on.

FICA is another great example. Though payroll taxes in the US were initially established to fund Social Security and Medicare, the federal government steals this revenue every year to haplessly try and plug budget deficits.

So a tax to build a financial stabilization fund might sound comforting in theory… but will all the revenue actually be allocated for that purpose? Doubtful.

4. If this can happen in Australia, is anyone foolish enough to think it can’t happen in the US or Europe?

Australia has a sound and sturdy banking system.

Banks in Australia are actually, you know, solvent. Capital ratios and liquidity rates are solid. Australia’s is a well-capitalized banking system—far more than in the US and Europe.

The numbers tell a very clear story. Banking systems across Europe in particular have had to be routinely bailed out over the past few years—Slovenia, Spain, Greece, Cyprus, etc.

In the United States it is perhaps even more absurd. Based on their own numbers, US banks are highly illiquid, still gambling away customer funds in trendy investment fads that will likely suffer an epic meltdown.

Backing up this little scam is the FDIC, which itself is pitifully undercapitalized to support any significant problem in the banking system.

Backing up the FDIC is the US federal government, which is already drowning in more than $60 trillion in liabilities (based on the most recent GAO report).

And supplying crack to the crack head is the US Federal Reserve, America’s central bank.

With net capital just 1.26% of total assets, the Fed is so pitifully capitalized they make Lehman Brothers look like Berkshire Hathaway.

So if the government of Australia is concerned that their well-capitalized banking system needs a safety net and wants to tax deposits for such purpose, how in the world can we possibly expect the US and Europe, with all of their banking system risk, won’t do the same?

From Bloomberg: Kraft a Menu at the Buffett Buffet With Warren’s Latest Deal

* * *

And here is "Warren Buffett Is Everything That's Wrong With America" submitted by Raul Ilargi Meijer via The Automatic Earth blog,

I think I’ve never understood the American – and international – fascination with money, with gathering wealth as the no. 1 priority in one’s life. What looks even stranger to me is the idolization of people who have a lot of money. Like these people are per definition smarter or better than others. It seems obvious that most of them are probably just more ruthless, that they have less scruples, and that their conscience is less likely to get in the way of their money and power goals.

America may idolize no-one more than Warren Buffett, the man who has propelled his fund, Berkshire Hathaway, into riches once deemed unimaginable. For most people, Buffett symbolizes what is great about American society and its economic system. For me, he’s the symbol of everything that’s going wrong.

Last week, Buffett announced a plan to merge a number of ‘food’ companies in a deal he set up with Brazilian 3G Capital. For some reason, they all have German names (I’m not sure why that is or what it means, if anything): Heinz, Kraft, Oscar Mayer. Reuters last week summed up a few of the ‘foods’ involved:

His move on Wednesday to inject Velveeta cheese, Jell-O, Lunchables, Oscar Mayer wieners, and Kool-Aid into his portfolio, stuffs an already amply supplied larder. The additions came from the acquisition of Kraft Foods Group Inc by H.J. Heinz Co, which is controlled by 3G Capital and Buffett’s Berkshire Hathaway. His larder already included everything from Burger King’s Triple Whopper burgers, Coca-Cola soft drinks and Tim Horton donuts to See’s Candies and Dairy Queen icecream Blizzards, as well as such Heinz brands as Tomato Ketchup, Ore-Ida fries, bagel bites and T.G.I. Friday’s mozzarella sticks.

Isn’t it curious to see that once people have more than enough to eat, they sort of make up for that by drastically lowering the quality of their food, like there’s some sort of balance that needs to be found? Give them more than plenty, and they’ll start using it to poison themselves.

The key term here, the one that tells you where this goes awry, is what in economics is called ‘externalities’. Something large industries are very good at circumventing. The larger the are, the better they get at it. Mostly this has to do with environmental destruction as a result of resource extraction, but the razing of large swaths of natural habitat for the construction of highways and suburbs that make people use more products provided by the oil industry, is a good example too. That and the direct effect these products have on people’s physical health.

Buffett, the supposed genius, can only do these deals because nobody demands anybody to pay for the externalities that arise as a result of Warren pushing crap posing as food upon the American people. And then when he’s done getting even richer off of poisoning your kids, he’ll donate billions to their well-being.

But in a better and wiser world, Warren should pay into the health care system right now, he should pay for the obesity and diabetes costs his ventures and investments are going to cause. And he should do so in advance, not just after the fact in some warped and distorted kind of philanthropy. Warren Buffett kills American kids for profit. Huge profits.

The ballooning waistlines of America can be traced back, in a very simple and straight line, to the sorts of ‘food’ that Buffett’s new conglomerate produces. That’s where type 2 diabetes comes from. This is not some vague future scare scenario, it’s here and it’s now. As someone in a poor black community said a few years back: ‘we’re raising a generation of blind amputees’.

And it’s of course not just Buffett, the poisoning and degradation of America’s food runs across and through industries, both vertically and horizontally. The insanity of corn syrup and processed food ranges from Monsanto to Cargill to McDo’s to a zillion other companies and products. Who, as an industry, have managed to keep any responsibility, let alone litigation, at bay.

Who would even dream of taking McDonald’s to court for poisoning American kids? In the present set-up, it would be an impossible and unwinnable case. But that’s not because the accusation is absurd or even far-fetched. It’s because the narrative is that, even if it could be proven, people still have the right to choose to eat what they want.

The companies get the profits, society at large gets the damage. It’s the ultimate form of the Tragedy of the Commons. If you allow people – and companies – to dump the negative consequences, and the costs, of their undertakings on the public, they will, and they can get very rich off of that.

Yeah, Warren has Coke and Utz Potato Stix for breakfast. What a great story… But does that mean he is too thick to understand what happens in America? Does he not see the bulging waistlines? Or is his own bottom line simply that much more important? Does Warren Buffett consider his own profits way more important than the future of America’s children?

You could be forgiven for thinking so, couldn’t you? Warren Buffett is revered all over the place, but in reality, he’s the schoolbook example of everything that’s wrong with America. That whole money before and over anything else (including people’s health and well-being) mentality.

It makes people stupid, and it makes for stupid people. And sick ones, too. It’s their own choice, though, and their own responsibility, advocates of the model will say. All the industry does is help them make that choice by bombarding them with endless feel-good ads. But is that really a good idea if and when it means the world’s health care systems threaten to implode because of it?

Like many other industries, Buffett’s crap-for-food enterprise would not nearly be as profitable (probably not even viable) if it were to be charged for the damage it does to society and the people living in it. That’s what’s wrong with the current American economic model, and Warren epitomizes this.

This Tragedy of the Commons abuse is so ingrained in the economy that it’s hard to see how it can be changed. And that does not bode well for anyone except the Warren Buffetts profiteering from it.

* * *

And then there's this: The mobile-home trap: How a Warren Buffett empire preys on the poor

Submitted by Mike Krieger via Liberty Blitzkrieg blog,

The disastrous deal ruined their finances and nearly their marriage. But until informed recently by a reporter, they didn’t realize that the homebuilder (Golden West), the dealer (Oakwood Homes) and the lender (21st Mortgage) were all part of a single company: Clayton Homes, the nation’s biggest homebuilder, which is controlled by its second-richest man — Warren Buffett.

 

Buffett’s mobile-home empire promises low-income Americans the dream of homeownership. But Clayton relies on predatory sales practices, exorbitant fees, and interest rates that can exceed 15 percent, trapping many buyers in loans they can’t afford and in homes that are almost impossible to sell or refinance, an investigation by The Seattle Times and Center for Public Integrity has found.

 

Berkshire Hathaway, the investment conglomerate Buffett leads, bought Clayton in 2003 and spent billions building it into the mobile-home industry’s biggest manufacturer and lender. Today, Clayton is a many-headed hydra with companies operating under at least 18 names, constructing nearly half of the industry’s new homes and selling them through its own retailers. It finances more mobile-home purchases than any other lender by a factor of six. It also sells property insurance on them and repossesses them when borrowers fail to pay.

 

Former dealers said the company encouraged them to steer buyers to finance with Clayton’s own high-interest lenders.

 

Buyers told of Clayton collection agents urging them to cut back on food and medical care or seek handouts in order to make house payments.

 

To maintain its down-to-earth image, Clayton has hired the stars of the reality-TV show “Duck Dynasty” to appear in ads…

 

- From the excellent Seattle Times article: The Mobile-Home Trap: How a Warren Buffett Empire Preys on the Poor

In so many ways, Warren Buffett and modern America are the same thing. An idea packaged and marketed so brilliantly, most of humanity unquestionably believes the myth. Warren Buffett and the U.S. both sell themselves as encompassing the very best of human qualities; highly successful, extraordinarily intelligent, yet at the same time, extremely ethical. It’s that last part that’s actually most important to the continued power and prestige of both the man and the nation-state. However, when you look beneath the surface, it becomes increasingly clear that neither of them actually come close to what’s printed on the package.

Incredibly, Mr. Buffett has proven far more successful in maintaining and nurturing his own personal myth, than America itself has during these post crisis years. While more and more people domestically, and especially internationally, have come to acknowledge the hypocrisy of U.S. foreign and economic policy, it continues to be something marginally short of cultural blasphemy to harshly criticize Warren Buffett. This provides a fertile environment for him to continue to doggedly and ruthlessly expand his ubiquitous economic and political empire.

This is not an empire built simply on cheeseburgers, cherry coke and ice cream cones. As you will see in the following article, his empire is also dependent on predatory lending to the poor, kickbacks, market domination, lobbying and opacity, via Berkshire Hathaway’s mobile home company, Clayton Homes.

Clayton Homes was previously mentioned here at Liberty Blitzkrieg a year ago in the post, With 1 in 3 Homes Unaffordable, Freddie Mac Prepares to Enter the Trailer Home Loan Market, but an excellent deep-dive article recently published by the Seattle Times provides a great deal of additional and extremely disturbing information.

Here are some excerpts, but I strongly suggest reading the entire article:

Billionaire philanthropist Warren Buffett controls a mobile-home empire that promises low-income borrowers affordable houses. But all too often, it traps those owners in high-interest loans and rapidly depreciating homes.

 

EPHRATA, Grant County — After years of living in a 1963 travel trailer, Kirk and Patricia Ackley found a permanent house with enough space to host grandkids and care for her aging father suffering from dementia.

 

So, as the pilot cars prepared to guide the factory-built home up from Oregon in May 2006, the Ackleys were elated to finalize paperwork waiting for them at their loan broker’s kitchen table.

 

But the closing documents he set before them held a surprise: The promised 7 percent interest rate was now 12.5 percent, with monthly payments of $1,100, up from $700.

 

The terms were too extreme for the Ackleys. But they’d already spent $11,000, at the dealer’s urging, for a concrete foundation to accommodate this specific home.

 

Kirk’s construction job and Patricia’s Wal-Mart job together weren’t enough to afford the new monthly payment. But, they said, the broker was willing to inflate their income in order to qualify them for the loan.

 

The disastrous deal ruined their finances and nearly their marriage. But until informed recently by a reporter, they didn’t realize that the homebuilder (Golden West), the dealer (Oakwood Homes) and the lender (21st Mortgage) were all part of a single company: Clayton Homes, the nation’s biggest homebuilder, which is controlled by its second-richest man — Warren Buffett.

 

Buffett’s mobile-home empire promises low-income Americans the dream of homeownership. But Clayton relies on predatory sales practices, exorbitant fees, and interest rates that can exceed 15 percent, trapping many buyers in loans they can’t afford and in homes that are almost impossible to sell or refinance, an investigation by The Seattle Times and Center for Public Integrity has found.

 

Berkshire Hathaway, the investment conglomerate Buffett leads, bought Clayton in 2003 and spent billions building it into the mobile-home industry’s biggest manufacturer and lender. Today, Clayton is a many-headed hydra with companies operating under at least 18 names, constructing nearly half of the industry’s new homes and selling them through its own retailers. It finances more mobile-home purchases than any other lender by a factor of six. It also sells property insurance on them and repossesses them when borrowers fail to pay.

 

Berkshire extracts value at every stage of the process. Clayton even builds the homes with materials — such as paint and carpeting — supplied by other Berkshire subsidiaries.

 

Former dealers said the company encouraged them to steer buyers to finance with Clayton’s own high-interest lenders.

 

Buyers told of Clayton collection agents urging them to cut back on food and medical care or seek handouts in order to make house payments. And when homes got hauled off to be resold, some consumers already had paid so much in fees and interest that the company still came out ahead. Even through the Great Recession and housing crisis, Clayton was profitable every year, generating $558 million in pre-tax earnings in 2014.

 

The company’s tactics contrast with Buffett’s public profile as a financial sage who values responsible lending and helping poor Americans keep their homes.

This is the key to Buffett’s continued success. A public profile that is basically a myth compared with reality.

Berkshire Hathaway spokeswoman Carrie Sova and Clayton spokeswoman Audrey Saunders ignored more than a dozen requests by phone, email and in person to discuss Clayton’s policies and treatment of consumers. In an emailed statement, Saunders said Clayton helps customers find homes within their budgets and has a “purpose of opening doors to a better life, one home at a time.”

 

In 2013, Clayton provided 39 percent of new mobile-home loans, according to a Times/CPI analysis of federal data that 7,000 home lenders are required to submit. The next biggest lender was Wells Fargo, with just 6 percent of the loans.

Of course, Warren Buffett’s Berkshire Hathaway is the largest shareholder in Wells Fargo.

Clayton provided more than half of new mobile-home loans in eight states. In Texas, the number exceeds 70 percent. Clayton has more than 90 percent of the market in Odessa, one of the most expensive places in the country to finance a mobile home.

 

To maintain its down-to-earth image, Clayton has hired the stars of the reality-TV show “Duck Dynasty” to appear in ads.

It’s all just a show, yet Americans remain completely awestruck by this clever oligarch.

“Home purchases should involve an honest-to-God down payment of at least 10% and monthly payments that can be comfortably handled by the borrower’s income,” Buffett later wrote. “That income should be carefully verified.”

 

But in examining more than 100 Clayton home sales through interviews and reviews of loan documents from 41 states, reporters found that the company’s loans routinely violated the lending standards laid out by Buffett.

 

Clayton dealers often sold homes with no cash down payment. Numerous borrowers said they were persuaded to take on outsized payments by dealers promising that they could later refinance. And the average loan term actually increased from 21 years in 2007 to more than 23 years in 2009, the last time Berkshire disclosed that detail.

 

Many borrowers interviewed for this investigation described being steered by Clayton dealers into Clayton financing without realizing the companies were one and the same. Sometimes, buyers said, the dealer described the financing as the best deal available. Other times, the Clayton dealer said it was the only financing option.

 

Kevin Carroll, former owner of a Clayton-affiliated dealership in Indiana, said in an interview that he used business loans from a Clayton lender to finance inventory for his lot. If he also guided homebuyers to work with the same lender, 21st Mortgage, the company would give him a discount on his business loans — a “kickback,” in his words.

 

During the most recent four-year period, 93 percent of Clayton’s mobile-home loans had such costly terms that they required extra disclosure under federal rules. Among all other mobile-home lenders, fewer than half of their loans met that threshold.

 

A couple of years after moving into their new mobile home, Kirk Ackley was injured in a backhoe rollover. Unable to work, he and his wife urgently needed to refinance the costly 21st Mortgage loan they regretted signing.

 

They pleaded with the lender several times for the better terms that they originally were promised, but were denied, they said. The Ackleys tried to explain the options to a 21st supervisor: If they refinanced to lower payments, they could stay in the home and 21st would get years of steady returns. Otherwise, the company would have to come out to their rural property, pull the house from its foundation and haul it away, possibly damaging it during the repossession.

 

They both recall being baffled by his reply: “We don’t care. We’ll come take a chainsaw to it — cut it up and haul it out in boxes.”

 

Nine Clayton consumers interviewed for this story said they were promised a chance to refinance. In reality, Clayton almost never refinances loans and accounts for well under 1 percent of mobile-home refinancings reported in government data from 2010 to 2013. It made more than one-third of the purchase loans during that period.

 

Carroll has since sold belongings, borrowed money from relatives and cut back on groceries to make payments. When she was late, she spoke frequently to Clayton’s phone agents, whom she described as “the rudest, most condescending people I have ever dealt with.” It’s a characterization echoed by almost every borrower interviewed for this story.

 

Consumers say the company’s response to pleas for help is an invasive interrogation about their family budgets, including how much they spend on food, toiletries and utilities.

 

Denise Pitts, of Knoxville, Tenn., said Vanderbilt collectors have called her multiple times a day, with one suggesting that she cancel her Internet service, even though she home-schools her son. They have called her relatives and neighbors, a tactic other borrowers reported.

 

After Pitts’ husband, Kirk, was diagnosed with aggressive cancer, she said, a Vanderbilt agent told her she should make the house payment her “first priority” and let medical bills go unpaid. She said the company has threatened to seize her property immediately, even though the legal process to do so would take at least several months.

 

Practices like contacting neighbors, calling repeatedly and making false threats can violate consumer-protection laws in Washington, Tennessee and other states.

 

The government has known for years about concerns that mobile-home buyers are treated unfairly. Little has been done.

 

MHI spent $4.5 million since 2003 lobbying the federal government. Those efforts have helped the company escape much scrutiny, as has Buffett’s persona as a man of the people, analysts say.

 

“There is a Teflon aspect to Warren Buffett,” said James McRitchie, who runs a widely read blog, Corporate Governance.

Personally, I never thought twice about the Warren Buffett myth until I noticed how much he pandered to the government for Wall Street bailouts. Bailouts, which clearly in retrospect, funneled enormous wealth to the super rich, while leaving everyone else out to dry.

My most popular post on the subject of Mr. Buffett was published all the way back in 2011, and titled, A Wolf in Sheep’s Clothing. Here’s the opening paragraph:

Anyone that has read these pieces for a while knows where I stand on Warren Buffett.  Namely I can’t stand him.  It has nothing to do with the fact that he has so much money.  I am not an envious person and moreover I think having wealth anywhere near his is more of a curse than a blessing.  The reason I can’t stand him is because he is a fraud.  While he may have been a great investor at one point, he is more of a great actor than anything else.  Here is one of the richest people in the world.  He sits there in Nebraska, chuckling, drinking his cherry coke and eating hamburgers in this pathetically obvious attempt to convince the masses he is “just like us.”  The term wolf in sheep’s clothing was invented for guys like this.  Like most people out there I don’t like bad guys.  The trick; however, is that the most dangerous bad guys don’t come out and tell you they are bad guys and how they are going to fleece you.  What they do is pretend they are the good guys.  Pretend that they are on the side of the little guy or working for the “collective good,” which is a preposterous statement because there is no such thing.  Human desires and notions of what is a good life are as varied as the stars in the sky.  Once we start allowing officials or rich people to define “collective good” you can be sure we are finished.

With all of that in mind, take a look at one of the pictures used in the Seattle Times article:

The man to the left is Kevin Clayton, CEO of Clayton Homes, and the man to the right is, of course, “Uncle” Warren Buffett, clutching his characteristic ice cream pop. Take a close look at the expression on the face of Kevin Clayton. This isn’t a look of admiration, respect, or even love. It’s a look of worship, of undying cultish fervor. The only thing missing is a tongue hanging out of his mouth and a blob of drool on his tie. If you ever see me looking at anyone with this sort of expression, immediately put me out of my misery.

One thing that’s crystal clear, is there’s no doubt regarding the intelligence of Warren Buffett. We don’t need to discuss it, or express admiration for that here. On the other hand, many questions need to be asked about his supposedly ethical business practices. To me, he seems to represent the consummate personification of the saying “do as I say, not as I do.” At the end of the day, I think the secret to his continuing success is more about his acting skills than his intelligence.

As I noted on Twitter recently:

The best actor I've ever seen in my life: pic.twitter.com/EZ263Ly1LT

— Michael Krieger (@LibertyBlitz) February 28, 2015

That, more than anything else, is the Oracle of Omaha’s secret weapon.

If you thought currency-wars were a problem, just wait until crony-wars begin. In a stunning show of disagreement among the omnipotent, The FT reports that a Freedom of Information Act request has confirmed The Bank of England wrote to US authorities seeking clarity about Berkshire’s absence from a provisional list of "systemically import" (Too Big To Fail) financial institutions (SIFIs). The US Treasury declined to comment...

With MetLife suing the US government to try to escape being deemed systemically important by Washington (which means the firm may need to hold more capital to cover unexpected losses and could face a requirement to draw up “living wills” to make them easier to wind down in a crisis), The FT reports on questions over Berkshire Hathaway's status...

British regulators have challenged their US peers over their apparent reluctance to subject Warren Buffett’s Berkshire Hathaway to tougher scrutiny as part of a worldwide push to make the financial system safer.

 

The Bank of England has written to the US Treasury asking why Berkshire’s reinsurance operation — among the world’s most powerful — was left off a provisional list of “too big to fail” institutions drawn up by the Financial Stability Board.

Regulators have already deemed nine primary insurance companies — including AIG of the US, Germany’s Allianz and UK-based Prudential — globally “systemically important”, a designation that could lead to higher capital requirements.

The failure to designate reinsurers has angered insurance companies, which argue reinsurers are more important to the financial system.

 

The Basel-based FSB was expected to make the reinsurance list public last year. But in November, following consultation with national authorities, it postponed the decision “pending further development of the methodology”.

 

In a sign that disagreement between global regulators may be holding up the process, it has emerged that Bank of England officials wrote to US authorities in October seeking clarity about Berkshire’s absence from a provisional list.

 

The Bank confirmed the existence of the letter in response to a request under UK Freedom of Information legislation from the trade publication Risk.net. However, it declined to disclose the letter’s contents.

And here's the punchline...

In the parallel US process, Berkshire crosses thresholds that would allow it to be designated, with more than $50bn in assets and more than $3.5bn of derivatives liabilities.

 

However, the final decision is made by a council of US regulators which has not yet opted to subject Mr Buffett’s company to increased oversight.

So - the bottom line is that you can be a big to fail as you like but if you have the government in your pocket, you are untouchable... and it seems international regulators are none too pleased at this 'one rule for you, another rule for us' plan...

*  *  *

While no comment was received from Warren Buffett, Berkshire Hathaway, The US Treasury, we suspect the following explains why Buffett's business is not being treated as a SIFI...

BOE ASKS US WHY BERKSHIRE ABSENT FROM TOO BIG TO FAIL LIST: FT. Here's why pic.twitter.com/pQS0brillY

— zerohedge (@zerohedge) April 20, 2015

• Police enforce curfew in Baltimore, disperse protesters (Reuters)
• Saudi king resets succession to cope with turbulent times (Reuters)
• Euro-Area Bank Lending Increases for First Time Since 2012 (BBG)
• Riksbank Increases Bond Purchases as Key Rate Left Unchanged (BBG)
• Greek Banks Get More Funds as ECB Weighs Collateral Discount (BBG)
• Greek bank deposits drop 1.36 pct in March for sixth month in a row (Reuters)
• Sarao Remains in Jail After Failing to Pay Bail at Hearing (BBG)
• Barclays Boosts Expected Bill for Foreign-Exchange Fines to More Than $3 Billion (WSJ)
• Thailand Unexpectedly Cuts Rate After Growth Forecast Cut (BBG)
• Berlusconi to meet Thai businessman over Milan stake sale (Reuters)
• European Bond Rally Set to Stall (WSJ)
• Indonesia executes drug convicts, sparks anger from Australia, Brazil (Reuters)
• Fewer Parents Are Saving for College (WSJ)
• Europe Unseats U.S. as Best Place to Invest in Bloomberg Poll (BBG)

Overnight Media Digest

WSJ

* Saudi Arabia said Wednesday that King Salman bin Abdulaziz had replaced his crown prince and foreign minister, in a dramatic shuffling of his top officials. (http://on.wsj.com/1bSejRZ)

* Twitter got a taste of its own broadcasting power today when Selerity, a New Jersey firm that crawls the Web for financial data, found and shared its earnings on the social-media service nearly an hour before its intended release.(http://on.wsj.com/1bSeixp)

* The Indonesian government executed eight people - seven of them foreigners - for their roles in drug crimes, after 11th-hour appeals for clemency by families, heads of state, and international organizations failed to sway President Joko Widodo.(http://on.wsj.com/1bSgzbU)

* The Securities and Exchange Commission is set to propose long-awaited rules that would force thousands of companies to tell investors how the pay of top management tracked the firm's financial results. (http://on.wsj.com/1bSeuN5)

* Fewer than half of American parents with children under age 18 are saving for college this year, and the average balance in savers' accounts for college has declined, according to a study by lender Sallie Mae and researcher Ipsos Public Affairs.(http://on.wsj.com/1bShyIT)

NYT

* AOL Inc and NBC Universal will share content and develop programming together as part of a licensing and distribution agreement that the two companies announced on Tuesday. (http://nyti.ms/1zbRD97)

* Takeda Pharmaceutical Co Ltd has agreed to pay $2.4 billion to settle thousands of lawsuits from patients and their family members who said that the company's diabetes drug Actos caused bladder cancer, it announced on Tuesday. (http://nyti.ms/1DzRd7Y)

* U.S. agriculture officials say it is "highly probable" that the virulent avian flu viruses that have hit U.S. poultry operations hard in recent weeks will return next fall when wild bird populations migrate south, potentially spreading the viruses into new regions of the country. (http://nyti.ms/1FwcTaV)

* Tyson Foods Inc, one of the country's largest meat producers, said on Tuesday that it planned to eliminate the use of human antibiotics in its chicken production by 2017. The company had been working toward that goal for some time, ceasing the use of antibiotics in its hatcheries last year and adopting feed free of antibiotics this year. (http://nyti.ms/1EmextJ)

Hong Kong

SOUTH CHINA MORNING POST

- Cathay Pacific's biggest cabin crew union is threatening to follow the airline's pilots in taking industrial action over pay and working conditions. The Cathay Pacific Airways Flight Attendants Union is demanding talks with management over what it says are unfair changes to staff contracts and is warning of a summer showdown unless bosses relent. (bit.ly/1Dzl40k)

- Fewer than half of respondents interviewed by three universities support the government proposal for the 2017 chief executive election. The latest poll, commissioned by Now TV and conducted by the three institutions, found that 47 percent support the government proposal, while 38 percent oppose it. The remaining said they were undecided. (bit.ly/1EBhR5F)

- California's Long Beach Transit will buy up to 60 electric buses this year from China's BYD, the company's biggest overseas order to date. BYD, partly owned by Warren Buffett's Berkshire Hathaway, won the bid at a public hearing in Los Angeles on Monday, according to Sherry Li, marketing director of BYD's overseas group. (bit.ly/1JzcE19)

THE STANDARD

- Eight Hongkongers remain missing four days after the Nepal earthquake, with another one has been confirmed dead and 33 others safe. The overall death toll in the quake rose above 5,100. (bit.ly/1OBFhyq)

- Drinking bottled water is more prevalent among men, youngsters and the more educated, a survey found. The study by the Civic Exchange think-tank found that those drinking bottled water were not likely to switch to tap water. It estimated that 1,826 tonnes of plastic waste is generated every day in the city. (bit.ly/1JzdT0u)

- The Travel Industry Council estimates that the number of mainland tours to Hong Kong for the Labor Day holiday will drop by 10 percent year on year. The Retail Management Association expects retail sales during the holiday will post a single-digit decline for the second year in a row. (bit.ly/1bBzUwZ)

HONG KONG ECONOMIC JOURNAL

- Huatai Securities is set to raise up to $5 billion in its public offering of H-shares in Hong Kong, surpassing GF Securities to become the city's biggest IPO in terms of funds to be raised by a Chinese enterprise in the city, according to market sources.

Britain

The Times

* Sainsbury's chief caught up in Egypt court drama

Mike Coupe, the chief executive of J Sainsbury, was forced to fly to Giza on Sunday to appeal against his conviction last September. (http://thetim.es/1HPiauF)

* UK economy slows sharply ahead of election

Britain started the year with the weakest economic growth since the country faced risks of a triple-dip recession, dealing the Conservatives a damaging blow just nine days before the general election. (http://thetim.es/1Gu1V1L)

The Guardian

* Greek finance minister denies being sidelined from debt talks

The Greek finance minister has denied that he has been sidelined from talks with Greece's creditors as he resumed outspoken attacks on the country's eurozone partners. (http://bit.ly/1bQKAsB)

* Alliance Trust strikes deal with Elliott Advisors

Alliance Trust, one of the UK's oldest investment firms, has reached an 11th-hour compromise with its rebel investor Elliott Advisors, which had been pushing for change at the company. (http://bit.ly/1zlW1my)

The Telegraph

* Gatwick oil project suspended amid permit confusion

Drilling for oil at Horse Hill near Gatwick will not be allowed to proceed because its backers, including entrepreneur David Lenigas, do not have the necessary approvals from government agencies. (http://bit.ly/1HPjeP6)

* Louis Vuitton's chequered pattern under threat from EU

Louis Vuitton's signature chequered squares are not distinctive enough to deserve a trademark, a European Court has ruled, following a challenge from German retailer Nanu-Nana. The European General Court has cancelled two community trademarks registered by Louis Vuitton for its leather products. (http://bit.ly/1AdoV2T)

Sky News

* BP profits fall 39 pct on oil price collapse

BP Plc has confirmed a drop of almost 40 percent in first quarter profits, blaming oil price weakness and its actions to address the issue. The company said its replacement cost profit in the first quarter came in at $2.1 billion - a decline of 39 percent over the same period a year ago. (http://bit.ly/1Krx21V)

The Independent

* Struggling Morrisons pays out 3 mln pounds to sacked boss Dalton Philips - with more to come

Dalton Philips, the former Morrisons boss, has walked away from the supermarket with nearly 3 million pounds ($4.60 million) and could get a further 1.6 million pounds in payouts over the next two years, despite presiding over a collapse in the company's profits. (http://ind.pn/1Ii2gJG)

Following a volatile end to April, on whose last day many decided to frontrun "selling in May before going away", the world has taken a breather and overnight China was closed to celebrate May day, unable to celebrate the "beat" of the official Chinese Manufacturing PMI which printed unchanged from last month, at 50.1, goalseeked to beat the consensus expectation of 50.0 by the smallest of possible increments. After tumbling by 2.7% on Thursday, the negative sentiment in Japan following the BOJ's unwillingness to ease further persisted, with the Nikkei closing barely unchanged following a last minute surge to end the day up 0.06%.

Asian equities saw a subdued session amid thinned trading, after taking the lead from a negative Wall Street close. Nikkei 225 (+0.06%) reversed its earlier weakness heading into the close, with participants continued to fret about the lack of further easing from the BoJ. ASX 200 (+0.36%) rose led by basic materials, after Vale, the world’s 3rd largest miner, suggested slowing down its iron ore exports. Sentiment was further lifted by a better than Exp. Official Chinese Manufacturing PMI (50.1 vs. Exp. 50.0 (Prev. 50.1). JGB’s fell in tandem with yesterday’s continued global sell-off across fixed income, with the long-end better bid following today’s enhanced liquidity auction of old 20s/30s/40s. Markets in China, Taiwan, India and Singapore were closed for public holidays.

As expected the session has been relatively subdued, the FTSE traded flat despite strength in the basic materials sector ?bolstered by reports that Vale, the world’s 3rd largest miner, suggested slowing down its iron ore exports causing UK Miners to outperform. In addition, the negative UK PMI Manufacturing SA (Mar) M/M 51.9 vs. Exp. 54.6 lifted Gilts following the release, however remains to be supported as uncertainty looms leading up to the May 7th Election.

The weak UK Manufacturing data dragged GBP/USD into negative territory with the weaker headline number being attributed to the relative strength in GBP. In holiday related thin conditions EUR ticked higher against all crosses with demand for EUR/JPY helping the cross to test 135.00 while EUR/GBP broke the 0.7300 handle. Furthermore, Greek asset classes are closed however, the market await any developments with Greece as they are expected to make their delayed EUR 200mln payment to the IMF on Wednesday due to the holiday.

In Summary: U.K., Irish shares fall, with Stoxx 600 down for fourth day, on track for its worst week of the year. Most European stock markets closed for holiday, volume is 30% of the 10 day average. Brent crude, gold decline, silver rises. U.K. April manufacturing PMI below ests. U.S. manufacturing PMI, ISM manufacturing, construction spending, vehicle sales, Michigan confidence due later.

Market Wrap

• S&P 500 futures up 0.3% to 2084.5
• Stoxx 600 down 0.2% to 395
• US 10Yr yield up 2bps to 2.05%
• German 10Yr yield little changed 0.37%
• MSCI Asia Pacific down 0.1% to 153.1
• Gold spot down 0.1% to $1183.2/oz
• Euro up 0.25% to $1.1252
• Dollar Index up 0.03% to 94.63
• Italian 10Yr yield up 2bps to 1.52%
• Spanish 10Yr yield up 2bps to 1.48%
• French 10Yr yield little changed at 0.64%
• S&P GSCI Index down 0.1% to 445.2
• Brent Futures down 0.3% to $66.6/bbl, WTI Futures down 0.1% to $59.6/bbl
• LME 3m Copper down 0.2% to $6324.5/MT
• LME 3m Nickel down 0.4% to $13900/MT
• Wheat futures up 0.2% to 474.8 USd/bu

Bulletin headline news summary from Bloomberg and RanSquawk

• With China away from market, overnight trade was relatively subdued, although the Nikkei 225 was weighed upon by yesterdayís decision by the BoJ to refrain from additional easing
• Further dovish rhetoric from New Zealand weighed on NZD with AUD also weakening in sympathy
• EUREX and Euronext will be closed today due to a European market holiday
• Gilts (+41 ticks) have edged higher throughout the session supported by lacklustre UK Manufacturing PMI and ongoing political uncertainty
• A subdued session so far, given the widespread EU market closures with the exception of the UK.
• Looking ahead, sees the of release Canadian & US Manufacturing PMI, ISM Manufacturing, Univ. of Michigan, Fed’s Mester, Fed’s Williams and earnings from Chevron.
• Trading likely to be quiet as Hong Kong, Europe closed for May Day holiday; U.K. closed on Monday
• The U.S. Navy has begun accompanying U.S.-flagged ships through the Strait of Hormuz in response to Iran’s seizure of a cargo ship flying the flag of the Marshall Islands, American defense officials said
• U.K.’s manufacturing PMI fell to 7-month low of 51.9 from 54 in March, median est. 54.6; new export orders shrank for fifth time in seven months
• China’s official manufacturing PMI was at 50.1 in April vs 50.0 median forecast in a Bloomberg survey
• Apple Inc. may sell its first yen bonds, in a move that would further diversify its fundraising currencies after making debut offerings in euros and the Swiss franc
• $1.5b IG priced yesterday, $900m high yield. BofAML
• Sovereign bond yields higher.  U.K. stocks little changed,
• U.S. equity-index futures higher. Crude oil, gold and copper decline

US Event Calendar

• 9:45am: Markit US Manufacturing PMI, April final, est. 54.2 (prior 54.2)
• 10:00am: Construction Spending m/m, March, est. 0.5% (prior -0.1%)
• 10:00am: ISM Manufacturing, April, est. 52 (prior 51.5)
  • ISM Prices Paid, April, est. 42 (prior 39)
• 10:00am: U. of Mich. Sentiment, April final, est. 96 (prior 95.9)
  • U. of Mich. Current Conditions, April final (prior 108.2)
  • U. of Mich. Expectations, April final (prior 88)
  • U. of Mich. 1 Yr Inflation, April final (prior 2.5%)
  • U. of Mich. 5-10 Yr Inflation, April final (prior 2.6%)
• TBA: Wards Domestic Vehicle Sales, April, est. 13.4m (prior 13.35m)
• Wards Total Vehicle Sales, April, est. 16.9m (prior 17.05m)

DB's Jim Reid concludes the overnight recap

April was actually a pretty positive month for most assets but with some sharp declines over the last few days for European equities and Government bonds creating a nervous end to the month. We'll review April and YTD performance at the end today with graphs and tables in the pdf.

Yesterday the Atlanta Fed came out with their first GDPNow forecast for Q2 which came in at 0.9% - well below the consensus which is still broadly around 3% (DB 2.5%). After their long standing prediction of a soft Q1 print, way before the consensus and the eventual accurate final number, their views will be closely tracked from here. If they're right we probably don't need to worry about the recent government bond sell-off.

Talking of the sell-off it was a bad end to the month for the core bond markets. In Europe the German 10yr yield ended the day +8bps higher at 0.37% (back nearly to where QE started from), the French 10yr rose +7bps but with the Italian and Spanish 10yr outperforming to be basically flat on the day. There was a bit of a shock for some as 5 year bunds ended the day in positive yield territory (+0.005bps) for the first time since January 27th. The Greek 10yr yield fell another -80bps as sentiment around Greece remained positive (more later). Over in the US the 10yr ended the day broadly flat with a late rally after having been 6bp higher as Europe closed. The USD broke its recent downward slide, rising against most G10 currencies (although not the EUR which climbed into the 1.12 handle range). The VIX rose another half point to 14.

The month didn't end well in US equities with a late sell-off which saw the S&P 500 -1.01% with no particular single catalyst for it. There was some chatter about the Nasdaq BioTech index falling -9.3% over the past 5 days and Apple having its worst 3-day slide (-5.7%) for 15 months. Month-ends are always a bit unpredictable so it'll be interesting if the trends of the last few days continue into early May. In Europe equities were mixed whilst credit managed to eke out a small gain. Although most of the main equity bourses were slightly higher, the Stoxx 600 fell -0.4%. iTraxx Crossover tightened -1bp whilst in the US CDX HY widened +5bps.

Overnight in Asia, markets are trading in negative territory with the Nikkei down -0.2% although a number of markets in the region are closed for Labour Day. Asian credit markets are trading broadly flat. Some of the weakness in the Japanese markets is being driven by comments made by BoJ Governor Kuroda after markets closed on Thursday saying that no further policy easing was needed for now even though inflation won't return to 2% within their 2 year timeframe. After stripping out the impact of last yearís tax change and the volatile fresh food components CPI came in at +0.2 YoY today for April. Elsewhere the headline CPI came in slightly ahead of expectations at +2.3% YoY (vs +2.2% expected and prior). The core read also rose slightly, to +2.1% YoY.

We also saw April manufacturing PMI updates from Japan and China with the former edging up to 49.9 (from 49.7) and the latter holding steady at 50.1 (vs consensus fall to 50). The alternative China PMI from HSBC/Markit slipped to a one-year low of 49.2 though. China is closed today.

Looking to yesterday's news, in Europe we saw German March retail sales (which fell -2.3% MoM vs an expected rise of +0.5%) and April unemployment (which came in-line with expectations at 6.4%). We also saw Spanish Q1 GDP which surprised to the upside rising +0.9% QoQ (vs consensus expectation of +0.8%) and April CPI which came in broadly in-line at +0.7% MoM. Finally in Europe we also had the Italian and Eurozone April CPI both of which came in in-line with expectations (both at 0% YoY change) as the eurozone number rose from a negative -0.1% YoY last time around.

Over in the US it was another day of market sensitive releases as we got the Q1 employment cost index (which rose to +0.7% exceeding consensus estimates of +0.6%) as well as the March personal income, spending and PCE all of which marginally disappointed. Initial jobless claims came in much lower than expected at 262k although it seems there may have been some seasonal factors in play. Finally in terms of data we had the Milwaukee April ISM which disappointed (48 vs 53 expected) whilst the April Chicago PMI surprised to the upside (at 52).

Returning to the positive Greek sentiment yesterday, this seemed to be driven by headlines that both sides had agreed to actively pursue negotiations starting Thursday with the target of getting a preliminary deal done by May 3rd with the idea being for the finance ministers to sign off on the accord at the May 11th meeting (Bloomberg News). This seems too good to be true at the moment but there does seem to be a better tone to negotiations at the moment although Eurogroup chief Dijsselbloem kept the pressure on by suggesting that the Greek government should spend less time on interviews and more on avoiding abyss. The stakes remain high.

Looking to the day ahead it looks set to be a slightly quieter day compared to the past couple especially with many countries celebrating May or Labour Day. In the UK we have the April manufacturing PMI which is expected to rise to 54.6. In the US we will get the final read on US April PMI, March construction spending (expected to rise to +0.5% MoM), the April ISM (expected to rise to 52) and the latest UoM sentiment. On the earnings front we will hear from Smurfit Kappa and Lloyds in Europe and the likes of Chevron and Berkshire Hathaway in the US.

On a day full of exultation for The Oracle of Omaha, we could not help but see the irony of Warren Buffett losing yet another bet and not paying up...

The two richest men in the world face off. Buffett doesn't pay up. pic.twitter.com/m0PMUZpWWU

— Chris Dignam (@Chris_Dignam) May 2, 2015

Now where have seen this before?Rolfe Winkler explains... Buffett's Betrayal... (from 2009)

When I was 14, Warren Buffett wrote me a letter.

 

It was a response to one I’d sent him, pitching an investment idea.  For a kid interested in learning stocks, Buffett was a great role model.  His investing style — diligent security analysis, finding competent management, patience — was immediately appealing.

 

Buffett was kind enough to respond to my letter, thanking me for it and inviting me to his company’s annual meeting.  I was hooked.  Today, Buffett remains famous for investing The Right Way.  He even has a television cartoon in the works, which will groom the next generation of acolytes.

 

But it turns out much of the story is fiction.  A good chunk of his fortune is dependent on taxpayer largess. Were it not for government bailouts, for which Buffett lobbied hard, many of his company’s stock holdings would have been wiped out.

 

Berkshire Hathaway, in which Buffett owns 27 percent, according to a recent proxy filing, has more than $26 billion invested in eight financial companies that have received bailout money.  The TARP at one point had nearly $100 billion invested in these companies and, according to new data released by Thomson Reuters, FDIC backs more than $130 billion of their debt.

 

To put that in perspective, 75 percent of the debt these companies have issued since late November has come with a federal guarantee. (Click chart to enlarge in new window)

 

America, F##k Yeah!!

If yesterday's laughable lack of volume (helped by the closure of Japan and the UK) coupled with hopes that the end of the buyback blackout period was enough to send stocks surging if only to end with a whimper below all time highs despite what is now looking like three consecutive quarters of Y/Y EPS declines according to Factset, today's ramp will be more difficult for the NY Fed and Citadel to engineer, not least of all due to the headwind of the overnight "incident" by China's stock bubble which saw the Shanghai Composite tumble by 4%, the most since January. 

In fact, if volume is anything but abysmal, it may be tough to push stocks higher at all, now that the only signal that matters is: if volume low then buy, if volume high then sell.

Asian stocks finished the session in the red despite the positive Wall Street close as the S&P 500 extended Friday’s gains, the biggest in more than a month. Shanghai Comp (-4%) was the session’s laggard amid liquidity concerns, with around CNY 2.34trl worth of IPO subscriptions officially opening today, as approved by the CSRC on April 23rd which will divert liquidity away from the stock market into new offerings.

In Europe, in an attempt to accelerate negotiations, the IMF threatened to cut off the lifeline it has been lending to Greece unless European partners write off large volumes of the country's sovereign debt. Consequently, Bunds (+22 ticks) have been supported from the get-go as it continues to retrace last week’s sharp losses, although German 10y yields are still above 0.4% which is the level not seen since the start of ECB QE programme.

Speaking of bonds, USTs have taken a “crushing blow” from European govt bond selloff because of liquidity, not fundamentals, according to Tom di Galoma, head of rates and credit trading at ED&F Man. "The capitulation trade on European debt will soon come to an end and place U.S. Treasuries on more stable footing." The only question is when.

Furthermore, the GR/GE spread is significantly wider than its European counterparts with Greek 10Y bonds wider by 67bps German 10Ys and Greek 2Y yields rose over 100bps.

Of note, Greece are set to pay the IMF EUR 200mln in interest payments tomorrow and a further EUR 780mln on May 12th. In addition, the ECB are holding a non-monetary policy meeting and may discuss the ELA. Meanwhile UST’s are unchanged on the day amid little fundamental news specifically driving US Treasuries.

Despite opening lower European equities (Eurostoxx50 +0.4%) reversed coursed after being lifted by a stellar earnings report from UK banking giant HSBC (-1.9%), although later retraced all of its upside. The UK bank holds a 7% weighting in the FTSE and boasts a GBP125bln market cap. This consequently resulted in European stocks shrugging off negative closes in China due to the CSRS tightening its grip on margin trading and investors booking profits and switch money into a flood of IPOs.

In FX markets, the USD-index (+0.2%) has continued this week’s trend and is firmer against the major pairs, with the EUR exhibiting broad-based weakness and EUR/USD maintaining a downward trend since Friday after finding resistance at its 100DMA at 1.1283. Elsewhere, the RBA cut its Cash Rate Target by 25bps to a record low 2%, as expected. AUD/USD initially came under selling pressure, falling by 65 pips, as the central bank further jawboned the currency. Nonetheless, the weakness was short-lived as the RBA hinted at a future neutral bias, saying that it views inflation consistent with its target over the forthcoming 1-2yrs which strengthened AUD. Moreover, the central bank failed to offer any form of forward guidance on monetary policy, with focus now turning to Friday's quarterly SOMP release.

Heading into the North American open, WTI and Brent crude futures trade in the green with WTI continuing to eye the USD 60/bbl level to the upside. Despite the strength in the USD, prices have been bolstered by ongoing conflict in Libya which has subsequently led to the halting of flows to the nation’s Zeutina port. Meanwhile spot gold (-0.08%) has traded in a relatively tight range in the session so far.

Bulletin headline summary from Bloomberg and RanSquawk

• Strong earnings from HSBC offer support to European equities shrugging off the negative closures in Asia
• Greek concerns weigh on the EUR and help Bunds (+16 ticks) retrace some of its recent correction
• Looking ahead sees the release of US Trade Balance, Service PMI, ISM Non-Manf. Composite, API crude oil inventories, New Zealand Employment Change, Milk Dairy Trade Auction, BoC Deputy Governor Wilkins and notable large cap earnings from Disney and DirecTV
• Treasuries steady overnight, 30Y yields retreat from highest since December as EGBs stabilize; focus on Friday’s nonfarm payrolls report, est. +230k, unemployment rate to 5.4%.
• “The Treasury market has taken a crushing blow from the European government bond sell-off due to liquidity rather than fundamentals. The capitulation trade on European debt will soon come to end and place US Treasuries on more stable footing,” ED&F Man head of U.S. rates Tom di Galoma writes
• European Commission said that impasse over Greece’s fiscal crisis is strangling the economy, a forecast that will make it harder to meet bailout goals as talks to ease its liquidity squeeze drag on
• IMF has warned eurozone creditors that it may cut off support to Greece unless European lenders write off “significant” amount of its sovereign debt, FT reported yesterday
• Australia cut interest rates to a fresh record low and said there are signs of improving household spending, sending the currency and bond yields higher as markets bet policy makers won’t ease further
• Two years of client withdrawals at Pimco’s Total Return Fund have cost it the title of the world’s biggest bond mutual fund, which now belongs to Vanguard’s Total Bond Market Index Fund
• DoubleLine Capital’s Jeffrey Gundlach sees the same investment potential in the municipal debt of Puerto Rico as he did in mortgage markets in 2008 -- so he’s buying
• Texas and other states suing to overturn Obama’s immigration initiative asked an appeals court to keep in place a judge’s order blocking the program until a final decision on whether it’s legal
• Sovereign bond yields mixed.  Asian stocks mostly lower, European stocks gain; U.S. equity-index futures fall. Crude oil and copper higher, gold unchanged

US Event Calendar

• 8:30am: Trade Balance, March, est. -$40.1b (prior - $35.4b)
• 9:45am: Markit US Composite PMI, April final (prior 57.4)
• Markit US Services PMI, April final, est. 57.8 (prior 57.8)
• 10:00am: IBD/TIPP Economic Optimism, May, est. 50.3 (prior 51.3)
• 10:00am: ISM Non-Mfg Composite, April, est. 56.2 (prior 56.5

DB's Jim Reid concludes the overnight recap

If we carry on the recent price action by the time we get to next month's conference we may have to encourage core European Government bond treasurers to speak as yields continue to go higher and higher. Yesterday saw another +8.4bp added to 10 year bunds after Friday's holiday with 30yr Bund yields +10.9bps higher at 0.994% - back to levels not seen since early March. It wasn’t just Bunds which finished weaker. Both developed and peripheral markets sold-off as 10yr yields in France (+8.0bps), Netherlands, (+8.8bps), Switzerland (+3.7bps), Spain (+4.8bps), Italy (+3.4bps) and Portugal (+1.9bps) all closed wider. Greece was the lone outperformer as the 10yr yield finished 9.4bps tighter. It was a better day for European equity investors however as the Stoxx 600 (+0.55%), DAX (+1.44%) and CAC (+0.70%) all closed higher.

The S&P 500 (+0.29%) and Dow (+0.26%) both also closed higher after better than expected macro data and constructive earnings reports helped support a better tone. On the latter, results from Berkshire Hathaway (post Friday close), Comcast and Cablevision in particular beat on both the earnings and revenue front while Anadarko Petroleum (after market close) became the latest oil company to fall victim to the downturn in prices, reporting its biggest quarterly loss in more than a decade, lowering capex further and reporting an eye-watering $3.7bn write-down on a single field in Utah.

Markets in Asia this morning are generally weaker with the Hang Seng (-1.00%) and Shanghai Comp (-1.84%) in particular trading lower. Equity markets in Japan are still closed while credit is largely unchanged. The main news this morning is in Australia where the RBA has cut rates by 25bps to 2% as expected, with the central bank commenting that further Aussie Dollar depreciation seems likely and necessary. The Aussie Dollar has been volatile post the move, immediately declining -0.5% before then recovering and now trading +0.5% higher on the day.

In terms of the data yesterday, markets appeared to be buoyed by a better than expected factory orders print (+2.1% vs. +2.0% expected), while the ISM NY print for April bounced 8.1pts to 58.1. Treasuries were better offered yesterday and extended their recent decline with the 10y and 30y part of the curve finishing +3bps and +4.9bps wider on the day. The 30y yield is in fact now at its highest yield (2.877%) since December 8th last year although Fed Funds contracts were little changed with the Dec15, Dec16 and Dec17 contracts 0bps, -0.1bps and -0.1bps respectively.

Comments from the Chicago Fed’s Evans yesterday lent support to the doves camp after the more hawkish comments from Williams and Mester on Friday. Despite tending to believe that most of what we saw in the first quarter was transitory, Evans noted that ‘I see significant risks, but few benefits, to increasing rates prematurely’, focusing on the need for more wage growth in particular to support a change in his view to lifting rates sooner. Meanwhile San Francisco Fed President Williams reiterated his views on Friday saying that he is optimistic over the US economy and that ‘we’re finally coming into the light at the end of the proverbial tunnel’.

In Europe the final April manufacturing PMI readings were mixed. The Euro-area print was revised up one-tenth of a point to 52, while regionally we saw Germany (+0.2pts to 52) revised up but the France reading (-0.4pts to 48) revised down. Elsewhere, the Italian reading was revised up 0.5pts to 53.8 and the Spanish reading was revised down modestly (-0.1pts to 54.2). Finally the Sentix investor confidence reading for the Euro area came in higher than expected (19.6 vs. 19.1 expected).

Away from the data, Greek headlines yesterday were focused on an article published in the FT which suggested that the IMF may cut off its support to Greece unless European lenders write down significant amounts of its sovereign debt. The article suggests that the IMF may hold back its portion (around half) of the €7.2bn tranche of bailout aid that Greece is in talks over. The article does appear to be somewhat backdated however, with the note referring to data arising from the eurozone finance ministers meeting in Riga last month which showed Greece would post a primary deficit of up to 1.5% of GDP, well below the 3% primary surplus target. More importantly however, a Reuters article yesterday reported that the ECB is unlikely to change the collateral policy this week and emergency liquidity assistance is set to be extended for another week. The article probably helps support some of the better performance in Greek assets as well as the moves wider in core rates after earlier worries that an increase to haircuts on Greek collateral was a possibility this week.

With negotiations between Greece and its creditors continuing today, Deputy Finance Minister Dragasakis is due to meet with Draghi today in Frankfurt while Finance Minister Varoufakis is due to meet French Finance Minister Sapin in Paris.

Wrapping up yesterday’s news, the Fed’s quarterly bank loan survey showed little change in lending standards for loans in the commercial and industrial sector and little change in demand for these loans. There were however some reports of easing on lending terms for a number of types of residential mortgages while demand for autos and credit cards rose. Perhaps more interestingly, there was also a special question on exposure to loans offered in the oil and natural gas drilling or extraction sector. The report commented that banks are expecting more delinquencies and charge-offs from the sector over the remainder of the year, however the report also noted that ‘exposures were small, and that they were undertaking a number of actions to mitigate the risk of loan losses’. The report showed the institutions are taking measures to protect themselves, ‘including restructuring outstanding loans, reducing the size of existing credit lines, requiring additional collateral, tightening underwriting policies on new loans or lines of credit, and enforcing material adverse change clauses or other covenants’.

Looking ahead to today’s calendar now, the European Commission economic forecasts will likely be closely watched this morning, while data wise its fairly quiet in the European timezone with just Euro-area PPI expected. It’s busier in the US this afternoon however with trade data, the final April composite and services PMI’s, the IBD/TIPP economic optimism survey and also the ISM non-manufacturing reading all expected today.

Last week, we highlighted the latest example of billionaire hypocrisy, as Bloomberg suggested that George Soros — who ostensibly believes higher taxes on the wealthy would be good for society and for the economy — may owe nearly $7 billion in taxes. Soros, Bloomberg said, has for years exploited a loophole that allows him to delay paying taxes on management fees which, when reinvested tax free, have helped his fund grow to six-and-a-half times what it would have grown to had taxes been paid on the fees when earned. On Wednesday, another billionaire was called out for being a hypocrite and this time it was a fellow billionaire doing the finger pointing. 

In an interview at the SkyBridge Alternatives Conference yesterday, Dan Loeb — who no one ever accused of mincing words — committed what to many hero worshippers will likely be seen as financial market heresy by accusing Omaha’s favorite octogenarian of habitual hypocrisy both in word and in deed. Here’s more from NY Times:

Mr. Loeb, who runs the $17.4 billion hedge fund Third Point, told an audience of hedge fund faithful on Wednesday that Mr. Buffett “has a lot of wisdom, but I think we need to be aware of the disconnect between his wisdom and how he behaves.”

 

He was taking aim at a public bet that Mr. Buffett made against the hedge fund industry, which Mr. Buffett believes cannot outperform the broader market and, specifically, the Standard & Poor’s 500-stock index.

 

Speaking to shareholders at an annual gathering for his company Berkshire Hathaway over the weekend, Mr. Buffett pointed out that the S.&P. 500 had gained 63.5 percent since 2008, while an index of hedge funds had increased by 19.6 percent over the same period.

 

On Wednesday, Mr. Loeb used his one-on-one interview at the SkyBridge Alternatives Conference, or SALT, to retaliate.

 

“I love reading Warren Buffett’s letters and I love contrasting his words with his actions,” he began. Lest anyone think it was a put-down, he quickly added, “He’s a very wise guy.”

 

But wise or not, Mr. Loeb had a few critical things to say about Mr. Buffett.“I love how he criticizes hedge funds, yet he had the first hedge fund,” Mr. Loeb said. “He criticizes activists, he was the first activist. He criticizes financial services companies, yet he loves to invest in them. He thinks that we should all pay taxes, yet he avoids them himself.”

 

To this, the audience erupted in laughter.

Hilariously, the comments came on the same day that saw yet another Buffett-owned, BNSF "bomb train"derail and erupt in flames, proving once again that transporting explosive liquids at high speeds poses a far larger threat to the environment than any pipeline, and suggesting once more that the perpetual White House Keystone XL veto has nothing to do with the environment and everything to do with preserving the Oracle's oil transit business, meaning Buffett-related hypocrisy is now transmitted through the words and actions of the most powerful man on the planet. 

Billionaire hypocrisy has been in the news of late and it turns out the world’s ultra-rich don’t always practice what they preach. Take George Soros for instance, who publicly states that the wealthy should pay more taxes in order to promote a more stable society via the equitable distribution of wealth but who has for years used a tax loophole that allows him to avoid paying taxes on management fees, a practice that Bloomberg says has magnified his AUM exponentially and may ultimately mean Soros owes more than $6 billion in back taxes. 

Then there’s Warren Buffett, the affable Omaha octogenarian whose railroad holdings and close ties with the President make the White House’s position on the Keystone Pipeline seem rather convenient, and who Dan Loeb recently blasted for being a habitual hypocrite on everything from taxes to hedge funds. As a reminder, here’s what Loeb said at the SALT conference earlier this month:

“I love reading Warren Buffett’s letters and I love contrasting his words with his actions. I love how he criticizes hedge funds, yet he had the first hedge fund,” Mr. Loeb said. “He criticizes activists, he was the first activist. He criticizes financial services companies, yet he loves to invest in them. He thinks that we should all pay taxes, yet he avoids them himself.”

Today, we get another example of what appears to be egregious Buffett belief bifurcation, this time in the form of green energy policy because as Bloomberg reports, when it comes to saving the environment, it’s a great idea — unless it eats into profit margins. Here’s more:

Warren Buffett highlights how his Berkshire Hathaway Inc. utilities make massive investments in renewable energy. Meanwhile, in Nevada, the company is fighting a plan that would encourage more residents to use green power.

 

Berkshire’s NV Energy, the state’s dominant utility, opposes the proposal to increase a cap on the amount of energy that can be generated with solar panels by residents who sell power back to the grid in a practice known as net metering.

 

While the billionaire’s famed holding company has reaped tax credits from investing in wind farms and solar arrays, net metering is often seen by utilities as a threat. Buffett wants his managers to protect competitive advantages, said Jeff Matthews, an investor and author of books about Berkshire…

 

In an April presentation to investors, NV Energy laid out its strategy for addressing the growth of home solar. The utility said it would “lobby to hold the subsidized net-metering cap at current 3 percent of peak demand"...

 

Sellers of rooftop-solar panels are pushing Nevada legislators to raise the cap, and one plan called for the ceiling to be lifted to 10 percent. Nevada State Senator Patricia Farleysaid she is proposing that Nevada’s utility regulator study the issue before lawmakers act.

 

“Across the country the utility industry is pressuring regulators and elected officials to limit solar energy’s growth, and the same thing is happening in Nevada,” said Gabe Elsner, executive director of the Energy & Policy Institute, a Washington, D.C.-based clean energy think tank.“NV Energy is trying to protect their monopoly by squashing competitors.”

That’s a pretty unequivocal assessment and it also comes as no surprise that NV’s Energy lobbyist advised Nevada Governor Brian Sandova on two campaigns:

The Republican governor is “a confidant of the big lobbyist on this,” said Bryan Miller, vice president of public policy and power markets at Sunrun, a San Francisco-based solar-leasing company. “Berkshire and the governor could not be closer.”

*  *  *

The bottom line: it’s all about the bottom line for Buffett.

“It always comes down to money,” Matthews says.

A state's economy is nothing without the businesses that call it home. However, these companies are not created equally - bigger businesses naturally have outsized influence, generating more revenue, employing more people and (at least theoretically) paying more taxes. So given that corporations are now 'people', who really runs your state in this crony-capitalist land of the free?

Some may be surprising: Chevron (not Apple) runs California, Costco (not Microsoft) runs Washington, and Sands run Nevada.

Some are less so: Berkshire Hathaway runs Nebraska, GM runs Michigan, and ExxonMobil runs Texas.

As Broadview Networks explains,

Using Hoover’s, a D&B Company, we searched through each state’s list of companies to find which had the largest revenue in the last fiscal year.  It was interesting to see how each company’s revenues have changed over the year (for better or worse) and to see if a new largest company had emerged.

 

At first glance, you may ask, “Where are Apple and Microsoft?”  Yes, these are huge companies but this map is specifically looking at total revenue from the last fiscal year.  If we look at California with Apple vs. Chevron, there is a large discrepancy between market value and total revenues.  Apple’s market value as of March 31, 2015 was $724 billion while Chevron’s was only (and we use “only” lightly) $197 billion.  In terms of revenue, Chevron comes out on top with $203 billion in the last fiscal year while Apple had revenues of $182 billion.

Source: Broadview Networks VoIP Blog