- A close vote before 6PM – Asian markets open up, catching up to the Monday S&P move; S&P futures probably have priced in most of the benefit of the fiscal cliff resolution. EUR CAD, and AUD have a bit of catching up to do with the S&P, but there should be little drama
- A rancorous debate that extends into the night – again the key will be whether the votes are there, however, reluctantly, but if it looks as if support is waning we will see sharp moves in markets. With brinkmanship the new normal, the sell-off will be partial on the view that a last minute rabbit will be pulled from a hat.
- Amendments or rejection – markets will sell off sharply. If it turns out that the House can’t vote ‘yes’ on an acceptable, yet inelegant fix, the confidence that has emerged in 11th hour fixes will dissipate and tail risk scenarios will shift into baseline outcomes. This would be USDJPY negative, but risk-correlated currencies now price in 80-90% probably of a successful fix in our view, so the downside pressures will be large.
On The New Definition Of "Rich", A $620 Billion Tax Hike Offset By $15 Billion In Spending Cuts, And Much MoreSubmitted by Tyler Durden on 01/01/2013 - 09:49
We greet the new year with an America that has a Fiscal Cliff deal. Actually no, it doesn't - not even close. What it does have is an agreement, so far only at the Senate level which voted a little after 2 AM eastern in an 89-8 vote (Nays from Democrats Bennet, Cardin, Harkin, and Republicans - Lee, Paul, Grassley, Rubio and Shelby), to delay the all-important spending side of the Fiscal Cliff "deal" which "can is kicked" in the form of a 60 day extension to the sequester, to be taken up "eventually", but hopefully not on day 59 at the 11th hour, the same as fate of the all important US debt ceiling, which remains in limbo, and which now effectively prohibits America from incurring any new gross debt as the $16.4 trillion debt ceiling was breached yesterday... What did happen last night was merely the legislating of the inevitable tax hike on the 1%, which was assured the night Obama won the presidential election, something not even the most rabid Norquist pledge signatories had hope of avoiding. This was the first income tax hike in nearly two decades. A tax hike which, regardless of how it is spun, will result in a drag in consumption. It was also the brand new definition of rich, with the "$250,000" income threshold now left in the dust, and $400,000 for individuals ($450,000 for joint filers) taking its place. Who knew that New Normal would also bring us the New Rich definition. What is generally known is that the Senate bill boils down to the folllowing: $620 billion in tax hikes over the next decade offset by $15 billion in spending cuts now. Hardly "fair and balanced." Anyone who, therefore, thinks this bill is a slam dunk in the House is a brave gambling man.
Well, we appear to be nearing a mini 'delay' deal of some sort. The agglomeration of headlines continues with Senate deals on and off, Biden proclaiming victory yet Senate Democrats are said not have consented (yet).
- *WHITE HOUSE SAID TO REACH BUDGET DEAL WITH REPUBLICANS
- *SENATE FISCAL CLIFF VOTE POSSIBLE BY 10:30 P.M.: REID SPOKESMAN
- *SENATE DEMOCRATS SAID NOT TO HAVE CONSENTED TO DEAL
State of the idiocy appears to be: The 2-month sequester delay: cuts would come half from defense & half-non-defense. 2 month window to give all sides time for bigger deal. No debt ceiling resolution. Tax rises for 400/450k, Cap Gains/Dividend up to 20%, small rise in estate tax and restrictions on personal tax deductions. Simple - as we have said for a while - assuming this passes seamlessly, this is nothing but a can-kicking delay to the 'extraordinary' debt ceiling date - two words - Stop.Gap. And in two months, it's not just the sequester but the debt ceiling too. Enjoy your night.
It's 815ET on New Year's Eve and China PMI just printed below expectations at 50.6 - very marginally in expansion. The trouble is this is now the most divergent from the HSBC China PMI since January 2011 indicating once again that nothing matters and yet at the same time - the PBOC ain't coming to the rescue anytime soon. Meanwhile, in another epic realm of imaginary finance, Japan just increased its growth expectation to 2% for next year - whilst we are at it, we 'expect' rainbow-pooping unicorns for everyone next year (we just 'hope' noone is disappointed).
Update: U.S. Senate will attempt to vote on fiscal cliff Monday night, but still work to be done - Sen. Kyl. So the deal is done, but there is "hope" it passes. Should be good for another 10 ES points.
* * *
Everyone's worst nightmare has come true: the endless Greek bailout has now shifted to D.C., where deals are leaked, rumored, preannounced, and priced in, long before they are discovered to never have been there in the first place. The winners, as in Europe: hedge funds, and caterers. Everyone else is a bystanding loser.
S&P 500 futures staged a 3% rally off their overnight lows - taking them back to 3-day highs as headline after headline triggered another round of stop-runs. VIX compression led the way as hedges were pushed off to March and higher levels enabled better exits above Friday's plunge VWAP levels. The year ends with the Dow beating Gold for the first time in nine years (just). The USD fell 0.5% on the year (and the JPY -12.8%!!). European stocks beat US stocks (EuroStoxx50 almost doubling the Dow's performance). US Treasuries and US stocks both rallied. Financials gained 26% on the year. The Treasury curve flattened with the front-end selling off modestly and the belly rallying 10-15bps. VIX was unchanged from the start of the year at the open today - but thanks to the epic compression and steepening we have fallen back (VIX lower on the year). Of course, today's epic ramp really dislocated from risk-asset reality as soon as Bonds closed...
As we forecast back in November, it is now official that the House will not vote on any deal out of the Senate, assuming there is one, later today, which means America will officially slide off the Fiscal Cliff. And now cue everyone being very hopeful and optimistic a deal will get done momentarily, if not sooner, in 2013. Of course, we all know just how far optimism takes America's dysfunctional Congress. The biggest irony in all of this is that the only winners today were the much hated "1%"-ers, whose taxes may or may not go up, who just got to book major year end profits on this last minute ramp. The remainder of America's population can quietly look forward to 2013 with "hope" and "optimism" that in 2013 Congress will finally stop being dysfunctional. Good luck. Oh, and before we forget, America just breached its debt ceiling: now the pillaging of various government retirement funds begins.
When it comes to the decisions made by a group of academics behind closed doors to keep the stock market in nominal terms up at all costs (nevermind such trivial matters as the jobless rate, inflation, i.e., those things they are tasked with), one would think they are based on the bubblicious ramblings of one Ben Bernanke, or Charles Evans, or even one Janet Yellen. One would be very wrong. As it turns out the real decisions that determine the value of paper money (laughable as it is), and thus billions of people in the world, are all in the virtual hands of the following three entities: Ferbus, Edo and Sigma. These are "computer-modeling programs the central bank uses to make predictions about how various policies and events will play out across the economy....The Fed's main economic model, launched in 1995, is called FRB/US, pronounced "Ferbus." It uses hundreds of different mathematical equations to describe how the economy works. " Brilliant. And as Hilsenrath himself adds further on, "The models are deeply flawed. They failed to foresee the financial crisis in 2008 and have tended to overestimate the strength of the economy for several years." Hilsenrath then goes on to pose a very rhetorical question: "Could they fail the Fed again?" The answer is painfully obvious to anyone who has been on the receiving end of the Fed's endless attempts to blow a credit bubble always and forever. And just in case it is not obvious, let's just remind everyone that "subprime is contained."
Right on cue.
- NYSE: ISSUE AFFECTING ORDER PROCESSING IN 26 SYMBOLS
- NASDAQ HAS DECLARED SELF-HELP AGAINST NYSE AS OF 15:18:16 ET
- NYSE ANNOUNCES ISSUE AFFECTING ONE MATCHING ENGINE
Perhaps now is a good time to close the market when there are still gains on the day.
Just when one thought the posturing couldn't hit more ridiculous levels, here comes GOP Senator Mitch McConnell refuting what the president said, refuting the supposed GOP revulsion to the president's prior statement, and stating that there is actually a deal, although if there actually was a deal, there would be voting going on right now, and passing it, instead of endless useless speeches meant simply to ramp headline scanning algos higher:
- MCCONNELL SAYS AGREEMENT REACHED ON ALL TAX ISSUES
- MCCONNELL SAYS `WE'RE VERY, VERY CLOSE TO AN AGREEMENT'
- MCCONNELL SAYS HE REACHED OUT TO BIDEN TO SOLVE FISCAL CLIFF
- SEN. MCCONNELL SAYS `LET'S PASS THE TAX RELIEF PORTION NOW'
So if agreement on tax issues, what is there disagreement on? Oh yes, there is no agreement on the spending side, but who needs details.
And while everyone follows their talking points, and is taking the charade to unseen before heights, nobody has voted on anything yet, and nothing has actually passed Congress. But once again, the algos seem to like it, for now, and are taking the market on yet another stop run higher.
With the cash bond market closed, futures and ETFs are on their algo-driven own and sure enough VIX compression is driving the show. Despite a HY credit market that seems a little less exuberant, it appears the powers that be have unleashed the 'Henry' once again... but rest assured those hedges are not being lifted - merely rolled out past the February debt-ceiling deadline.
It’s obvious that, for many reasons, the size of the global economy is far greater than it was decades ago. We learn in any basic economics course that, over the long run, enhanced productivity and increased technology drive long-term production gains. Certainly, an economy can produce more widgets if you’re a lean, mean, automated machine... as opposed to a blacksmith with a hammer and forge. But there are other factors as well. Population growth. Accounting standards. And of course, the continued inflation of the currency. $1 today buys a whole lot less today than it did a century ago, so when comparing, it’s important to find a better standard of measurement. There are a number of pricing yardsticks we could use... like the cost of a New York City cinema ticket (25 cents in 1935, $20 today). But it would be awkard to calculate GDP in terms of billions of cinema tickets. Gold is a much more appropriate (though still imperfect) long-term standard of pricing, with its history as a store of value dating back to the ancients. Right now, the largest economy in the world is producing as much as it did in 1931, almost at the peak of the Great Depression. And no matter what the talking heads and politicians say, the data show that the trend is getting worse.
No, it isn't the first time Obama has spoken on the Fiscal Cliff, and more importantly, the debt ceiling, which no matter what happens today appears set to remain unresolved as part of today's 60 day stopgap deal, if indeed one materializes. It won't be the last. There will be, however, much hope, optimism, and scapegoating, as always.