Archive - Oct 2012

Easy come, easier go. After yesterday's last hour ramp driven by a MarketWatch article that said absolutely nothing new about the Fed's monetization plans and an AAPL surge which saw the firm add $22 billion in market cap in one day (or more than the market cap of CBS Corp) sent stocks green, the overnight session has taken it all away and then some, with futures now trading roughly 12 ticks lower or at yesterday's lowest levels. The catalyst is, once again, Spain where Moody's downgraded five Spanish regions including Catalonia after the market close (for the reason, see our piece from the weekend "Spanish Regional Bailout Fund Runs Out Of Money"), coupled with news from Confidencial that Spain's budget deficit will overshoot the EU target of 6.3% and hit at least 7.3%, driven by a €10.5 billion deficit in the social security system, trashing the promises from last month's Spain's "reform" package, and as BNP said (confirming what we warned weeks ago), making the conditionality hurdle suddenly that much higher for Spain. And just as the world was getting comfortable that Spain will get away with using the OMP with virtually no conditions. The cherry on top came from France where the business conditions index slid to a 3 year low on expectations a trough had been put in place. The result is a tumble in the EURUSD to below the 1.3000 barrier, dragging stock futures, commodities, and of course Europe with it, sending the Spanish bond curve yield higher, and generally giving a very sour mood to the day as traders walk in.

ExxonMobil, for one, appears to have had enough, announcing recently that it may pull up stakes in Iraq’s south and stick to the Kurdish north, where the business arrangements are more flexible and the security situation more manageable, at least outside of Kirkuk. So is Iraq too risky an investment? It depends how far ahead you want to look. For the next two years, we will probably see more of the political status quo, largely thanks to Iranian intervention, which is the only thing keeping things from falling apart at the seams right now. Further down the road, in the absence of a major increase in foreign investment and socio-economic improvement, we are likely to see the start of a failed state, a renewed civil war as more and more provinces jump on the autonomy bandwagon creating tensions among Sunnis and Shi’ites, and a bloody conflict over Kurdish independence.

Whether you believe "your vote doesn't count" or taking productive time out of your day to be a part of selecting the next 'change' agent for the nation is worthwhile, Doug Casey - as ever - has strong views:

"a rational man, which is to say, an ethical man, would almost certainly not vote in this election, or in any other – at least above a local level, where you personally know most of both your neighbors and the candidates."

Don't expect anything that results from this US election to do any real, lasting good. And if, by some miracle, it did, the short-term implications would be very hard economic times. More important, however, is to have a healthy and useful psychological attitude. For that, you need to stop thinking politically, stop wasting time on elections, entitlements, and such nonsense. You've got to use all of your time and brain power to think economically.

Was it just us - or was that a bit of a snoozer? Some fascinating 'off-topic' debates that dragged us from Mali to Massachusetts 1st grade math scores, and from Bayonets to Obamacare. Some reasonable amount of agreement between the two on foreign policy punctuated by flip-flopper and weakling name-calling. Ironically, given our boxing-match meme - the counterpunches were incessant though Romney seemed to play defense more and Obama appeared to more urgently change the discussion (with little impact). Lots of braggadocio on naming multi-syllabic foreign towns and leaders. Obama won the drinking-game challenge by a long-way 53:34. Obama also won the 'time-spoken' challenge (by the narrowest margin of the 3 debates) 41:42 to 41:07. Obama's odds of an election win levitated modestly from the beginning (from around 59.5% to 61.5%). Of course, Wal-Mart got very, very quiet when the cheap China import bashing started, but luckily it too was based on generic 10 second attention span talking points, and led nowhere, so the Waltons can get back to doing what they do best. So far an Obama clean-sweep on our scientific study, which of course was highly irrelevant: all the truly important foreign issues (EU, China economic ascendancy, Japanese decline) were ignored. Why? The "Mr. Chairman will get to work" of course, showing once again who is truly in charge.

Surging demand, but drilling is still not a survivable activity

Even though The Powers That Be pushed the market higher at the close, I was pretty pleased with how the day went. My portfolio was profitable for most of the day - - although a lovely five-figure profit dwindled to a two-figure profit (!) by day's end - - but the point is that my portfolio hugely outperformed the market (on an inverse basis since, as you've probably guessed, I was so short I could jump off a nickel). I remain positioned for a fall.

This evening's main event (well aside from the baseball and the football), taking place in beautiful Boca Raton, Florida will be fought over six rounds focused on the 'never-a-dull-moment' topic of Foreign Policy. After last week's STFU stare on the Benghanzi bungle, we expect the incumbent from the blue corner to come out swinging (on his experience). The challenger from the red corner, will likely keep his distance early on as general items such as 'America's role in the world' are discussed but once his jab has been measured, and the debate switches to 'The changing face of the Middle East', we would expect the haymakers to start to be thrown. Let's get ready to deeeeebbbaaaatttteeeee! And may the first person to point out where the Straits of Hormuz are on a map, win!

The nation is facing an extremely difficult decision; the outcomes of which could well be career-defining for the protagonists. We are of course talking about the dilemma that the nation faces in choosing Monday Night Football, NLCS Game 7, or the third Presidential Debate. In order to help focus public opinion, we offer the debate drinking game, live-stream scoring, and suggest readers invest in Picture-in-Picture (or have their edible iPad on their lap as the sports get under way this evening). For those who prefer to 'hedge': Obama is 67% likely to win the debate, Detroit are just favored to beat Chicago, and the Giants are favored (on momentum) to beat Arizona - so it seems like the debate is the most one-sided affair (though we suspect will be more contentious).

A mere nine years ago, California's governator uttered his now infamous words that his opponent's income tax loophole was wide enough to drive his Hummer through. Now in 2012, Bloomberg's Chart of the Day has found another glaringly wide 'loophole' in common financial wisdom. As Sebastian Boyd and Ye Xie note, Ireland and Kazakhstan both belong to the same BBB-rated S&P cohort and yet have debt/GDP loads of 106% and 11% respectively. While debt/GDP is not the sole arbiter of credit quality (ask the Americans) it seems the market is more than willing to effectively differentiate based on this as is clear from CDS levels; but the growing pile up of sovereign nations in this edge-of-the-cliff rating bucket suggests two things to us: 1) "The entire rating system is flawed" as Bloomberg notes; and 2) The self-destroying (or reflexive) nature of a non-investment grade rating shift is now seemingly totally politically motivated (as opposed to quantitatively defined) - perhaps nowhere better signaled than an unwillingness to downgrade Spain yet willingness to downgrade its regions. For your risk comprehending pleasure, we present - the BBBs!

Almost exactly a month ago, the BOJ surprised most analysts with an unexpected increase in its asset purchase agreement by JPY10 trillion bringing the total to JPY80 trillion. There was one small problem though: the entire impact of the additional easing fizzled in under half a day, or 9 hours to be precise. This was, as Art Cashin summarized the following day, Japan's failed QE 8. It is now a month later, and with nothing changed in the global race to debase status quo, the time has come for the BOJ to attempt QE 9. Or that's the case at least according to the toothless Japanese government, which has formally demanded that Shirakawa do a nine-peat of what has been a flawed policy response for over 30 years now, this time with another JPY 20 trillion, or double the last month's intervention. Because according to Japanese Senkei, it is now Japan's turn to pull a Chuck Schumer and demand even mor-er eternity-er QE out of monetary authority of the endlessly deflating country. In reverting to the Moore's law of failed monetarism, we expect that a QE 9 out of Japan will have the same halflife as QE 8, if indeed the program size is double the last. At which point it will again fizzle.

While our highly sophisticated scoring methodology - based on length-of-time speaking, words-spoken, and drinking-game-based buzzword bingo scores - has produced a result skewed to the Republican candidates, it seems the real world of intelligent voters sees things more tied with the last debate having been won by the incumbent. However, in order to settle the tie, Jimmy Kimmel decided to ask members of the voting public who they thought won the 'First Lady' Debate; the results will not surprise you - though clarification of stereotypes, biases, and why none of it matters (we refer readers to our earlier post on Deer Crossings for clarification) will be helpful we are sure...

Brilliant ...

Or to put in another way, by Christmas we may very well see Case-Shiller and other indicators of home prices headed back down, erasing the gains made in housing during 1H 2012.  

Mr NeoCon USA...