Umm yeah...close-to-close, equity indices were mixed (Dow small red - HP/IBM, NDX/SPX small green on closing rampfest) amid dismal volumes but for anyone that paid attention to the debacle in the markets today, this was another odd one. Thanks to EUR strength's correlated power (retracing last night's France loss), stocks trickled up all morning into the European close; Bernanke suggested he was not omnipotent and stocks dumped 13 S&P points (~1%) to yesterday's day-session open; and then on no news - as Greece remains unfixed and cease-fire deadlines come and go, we pumped ingloriously on small lots and stupid volume up to VWAP/unch - paused for thought - and then ran to the day's highs just after the close day-session close in S&P futures. Treasuries suffered - yields up 5-6bps on the day as our broad risk-asset proxy lifted along with modest moves in FX carry pairs and USD weakness into the close. Oil was headline-maker (away from BBY and HPQ that is) - down almost 4% from the highs yesterday but closing still green on the week just above $87 as Israel re-flared. Credit was less noisy and VIX compressed a little more to 15.11% at the close (lowest in 5 weeks).
Tax policy really tells you a lot about a government... what politicians’ values and priorities are. People can SAY anything, but in a way, tax policy is putting their money where their mouths are. For example, politicians like to talk about technology, efficiency and transparency. US tax code is so massive, in fact, that the Government Printing Office charges $1,028 just to print a copy of it! And for most taxpayers, it’s still virtually impossible to file online. Then there are the rates themselves. Again, the message they’re sending is quite clear– citizens, even in death, are dairy cows for the government to milk. Ironically, the new government of the People’s Republic of China has decided the REDUCE their tax on dividends. Years ago it was 20%, then dropped to 10% in 2005. Effective January 1st, though, the dividend tax rate in China will drop to a mere 5%.
Today's speech by Bernanke should not have come as much of a surprise to any market realist; aside from his somewhat more truthy than we expected admission that growth potential may have become impacted long-term by the crisis. Most people believe they know the Fed's plan. Five of the Six 'Deflation-Fighting' steps have been extensively discussed in the media, and Bernanke has been very vocal about their use (and even expanded their scope repeatedly). The only one he has been shy to mention is the purchase of foreign bonds. A mere nine months ago we first exposed the fact that the Fed did indeed hold foreign bonds (courtesy of Dudley's slip perhaps) and while he suggests there is a 'high bar' for additional purchases; in our extraordinary world of experimental monetary policy, this absolutely means a non-zero chance (or perhaps the Fed's 'other assets' is Europe's little piggy-bank? and its already started to 'diversify').
We are now averaging more than one suicide per day for active duty military. This is an absolute national disgrace. We are living in a sick society that is getting sicker and sicker each day. We must turn this around and the only way to do so is to get the facts to people and shake them out of their apathy.
With a little luck, U.S. GDP growth (even after an increasing squeeze from rising resource costs and environmental damage) should remain modestly positive, even out to 2030 and 2050, in the range of 1% at the high down to a few basis points at worst. Increasingly, the growth will be qualitative. Qualitatively, growth is likely to be limited to services as manufactured goods will bear the brunt of the rising input costs. It would certainly help a lot if considerable changes were made in how GDP is measured. It needs to be closer to what we all apparently think it is already: a reasonable measure of the utility of useful goods and services. The key issue will be how much unnecessary pain we inflict on ourselves by defending the status quo, mainly by denying the unpleasant parts of the puzzle and moving very slowly to address real problems. This, unfortunately, is our current mode. We need to move aggressively with capital – while we still have it – and brain power to completely re-tool energy, farming, and resource efficiency. We need to do all of this to buy time for our global population to gracefully decline. It can certainly be done.
For the third time in a row, a speaker from the Fed has opened their mouth and the market has fallen in. This time, unlike Yellen's silliness, Bernanke admitted a few ugly truths by removing hopes for an IOER cut and bluntly explaining that the Fed 'will not go back to work' to help Schumer and his fiscal cliff buddies:
- *BERNANKE SAYS FED ABILITY TO OFFSET HEADWINDS `NOT INFINITE'
- *BERNANKE SAYS FED DOESN'T HAVE TOOLS TO PREVENT GOING OFF CLIFF
- *BERNANKE SAYS HIS FISCAL ADVICE IS `DO NO HARM'
- *BERNANKE: WRONG TO THINK INTEREST ON EXCESS RESERVES MAJOR TOOL
S&P futures fell around 8 points as he uttered these words but was rescued by some anxious BIS scrambling in EURUSD, before falling back to reality (along with AAPL).
Over two years ago, on November 5, 2010, weeks before news broke out that the SEC had caught hedge funds in a massive insider trading scheme involving expert networks, and before the phrase expert network was even mentioned in places away from hedge funds, we wrote an article, titled "Is The SEC's Insider Trading Case Implicating FrontPoint A Sting Operation Aimed At S.A.C. Capital?" that predicted everything that has transpired with SAC since then: we said expert networks would be exposed as the root of virtually all "information arbitrage" alpha by Steve Cohen, more importantly, we exposed various biotech stock trading patterns, where the informational benefits from easily bribable doctors would result in immediate profits courtesy of advance knowledge of Phase 2, 3 and NDA results. Today, we discover not just how deep the SAC insider trading schemes went, but that the profit from such information abuse amounted to hundreds of millions in standalone cases. Adding these together and one can see why Steve Cohen - whose knowledge of these epic inside trading scheme is of course never implied by us: after all, that's what the DOJ, the SEC and the various DA offices are for - was generating 20% returns year after year and able to pocket 3% and 50%.
The week's most anticipated speech (given Obama's absence from DC) is here. Bernanke's Economic Club of New York extravaganza - where he has previously hinted at new or further policy - is upon us. Sure enough, it's a smorgasbord of we'll do whatever-it-takes (but won't bailout Congress) easing-to-infinity, housing's recovering but we want moar, simply re-iterating his comments from last week...
- *BERNANKE SAYS FISCAL CLIFF WOULD POSE `SUBSTANTIAL THREAT'
- *BERNANKE SAYS CONGRESS, WHITE HOUSE NEED TO AVERT FISCAL CLIFF
- *BERNANKE SAYS FED TO ENSURE RECOVERY IS SECURE BEFORE RATE RISE
- *BERNANKE SAYS HOUSING RECOVERY `LIKELY TO REMAIN MODERATE'
- *BERNANKE SAYS CRISIS REDUCED ECONOMY'S POTENTIAL GROWTH RATE
However, as we have noted previously, once you've gone QE-Eternity, you never go back... and we would this is the 3rd time in a row that someone from the Fed has spoken and stocks have sold off.
After plunging 50 pips or so on the France downgrade news, EURUSD trickled back up to yesterday's highs just before the US open and is going out at the EU close unchanged from yesterday as French bond spreads are now 1bp tighter on the week (yes tighter). European stocks extended their gains on the day - playing catch up to yesterday afternoon's US equity ebullience but this time corporate and financial credit are not playing along with the exuberance (though sovereigns are better). The Israel ceasefire prompted some modest risk-off interestingly in stocks (though Shekel strengthened) as Oil plunged (Brent relatively underperformed WTI as they both fell). More squeeze... or basis traders 'arb'ing the 130bps spread between Spain bonds and CDS? In an illiquid market, who knows...
You don’t have to be an economic genius to understand that the perpetual uncertainty over the Eurozone’s future has led to a widespread freeze on industrial investment and development. Industrial production is collapsing at an accelerating rate, falling 7% year-on-year in Spain and Greece, 4.8% in Italy, and 2.1% in France. Since the answer to the question of Who will ultimately pick up the tab? when a Eurozone member defaults or leaves is not at all clear, every player there is eyeing the others suspiciously. In fact, the "stability" of Europe right now hinges completely on no one making a move. What odds do you give that Mexican standoff of lasting? Time is working against all countries in the Eurozone because the good are being dragged down by the bad.
Just following the motions here:
- ISRAEL AND GAZA MILITANTS AGREE TO EGYPTIAN-BROKERED CEASEFIRE - HAMAS OFFICIAL AYMAN TAHA - RTRS
- GAZA TRUCE TO BE ANNOUNCED IN CAIRO AT 9 P.M., CHANNEL 2 SAYS - BBG
- GAZA TRUCE WILL BE DECLARED AT 1900 GMT AND GO INTO EFFECT AT 2200 GMT - HAMAS OFFICIAL SAYS
So who breaches the ceasefire first?
HP is about to throw Deloitte under the bus for its epic bungling and lack of auditing of Autonomy, which if HP's allegations are true, and there is no reason to believe they aren't, has been cooking its books for years. But don't weep for Deloitte. It will retain that other, far more lucrative client, the Federal Reserve System of the United States. Surely those numbers could never be cooked. Forget about "Audit the Fed" - it is time to start thinking about "Auditing the Auditors of the Fed."
Despite the hope of the last day or two, policymakers remain, we suggest, as far apart as they ever have, with 'no news' simply that. An oversold bounce does not a fiscal cliff fix, and as BofAML's Michael Hanson suggests in his 'brief history of brinksmanship': "one lesson from the recent past is that market reaction has been an important mechanism to reaching compromise and forcing action." Unfortunately, he adds, as we have been quite vociferous about, that "history also shows that the equity markets have to sell off sharply before policy makers listen to the 'stock market vigilantes'." With some politicians still thinking going over the cliff might be their best strategy, it could once again take a sharp market sell-off to focus the minds of the negotiating parties. If we actually manage to go over the cliff, even if only for a brief period of time, a repeat of the TARP sell-off seems only too probable.