Archive - Oct 2012

The period from 2003 to 2008 has been nicknamed 'The Great Moderation' as credit spreads collapsed close to zero, free-wheeling securitizations flooded the market with liquidity which repressed every credit instrument and forced investors to reach down in quality and out the curve for every extra tick of yield or carry. The period from the lows in 2009 could well be nicknamed 'The Great WTF' as credit spreads collapsed back down, and free-wheeling central banks flooded the market with liquidity which repressed every credit instrument and forced investors...blah blah blah... It would appear from the analog below that while markets do not repeat, they sure like to echo. We just remind those bulls looking for the next 18% lift that the analog period is when reality started to come out from behind the curtain - beginning in 2007...The Great Realization.

The muni market is not yet fully pricing in potential negative outcomes around tax reform, for which both candidates propose reforming tax rates and treatment of investment income, including muni interest, in a demand-negative fashion. Morgan Stanley summarizes the muni credit outcomes of competing reform proposals for healthcare, defense, and entitlement spending, among others. The tax treatment of munis would be at risk under either an Obama or Romney administration. In aggregate, both policy sets are likely negative for munis’ tax value and a headwind for performance, though it is difficult to state if one set is definitively better than the other. However, we believe the muni market may need to reach yields equivalent to other credit options, at least temporarily, given that both proposals include the possibility of impairment of munis’ absolute or relative tax value.

As UBS reported said, in both the Republican primary and the general election campaigns in 2012, various Presidential candidates in discussing taxes have recommended that voters "do the math" in evaluating various tax change proposals. The following preliminary 2010 data from the Internal Revenue Service (IRS) should be helpful for performing such calculations. We present a variety of self-explanatory exhibits sourced directly from the IRS, which include all the DIY math on income distribution, tax rate schedules, who is affected if Bush taxes cuts for high-income taxpayers expire, sources of itemized deductions and higher incomes, the size distribution of businesses paying individual income taxes, and everything else that may and likely will be thrown out, if incorrectly, by one or both candidates tonight, in an attempt to rally any one group of people behind the cause (what cause exactly remains to be seen).

Entering the final quarter of the year, Lacy Hunt and Van Hoisington (H&H) describe domestic and global economic conditions as extremely fragile. New government initiatives have been announced, particularly by central banks, in an attempt to counteract deteriorating economic conditions. These latest programs in the U.S. and Europe are similar to previous efforts. While prices for risk assets have improved, governments have not been able to address underlying debt imbalances. Thus, nothing suggests that these latest actions do anything to change the extreme over-indebtedness of major global economies. To avoid recession in the U.S., the Federal Reserve embarked on open-ended quantitative easing (QE3). Importantly, in their view, the enactment of QE3 is a tacit admission by the Fed that earlier efforts failed, but this action will also fail to bring about stronger economic growth. H&H go on to break down every branch that Bernanke rests his QE hat on from the Fed's inability to create demand, to the de minimus wealth effect, and most importantly the numerous unintended consequences of the Fed's actions.

For those who are curious why Tim Geithner has been invisible in the past 2 months, the answer is he has been manning the phones like a true patriot, and making sure nobody dares to rock the European boat ahead of the US election (as was already disclosed), in this case exemplified by Moody's just released announcement that the rating agency will not downgrade Spain to junk, soaring debt, collapsing GDP and laughable unemployment rate notwithstanding (unless of course the ECB fails in its mission to scare all shorts from approaching within 10 miles of an SPGB, and Spain loses private market access again, in which case Moody's would proceed with a "multiple notch downgrade"). At least not until the US election that is. After that... well, with the fiscal cliff, debt ceiling, Greece vs Troika, etc, etc, buy VIX.

The head of industrial and precious metals trading at Barclays, Cengiz Belentepe, has told Bloomberg that investors are selling their investments in gold ETFs and opting for the safety of allocated physical gold.

Barlcay’s Belentepe said “the question is whether the pace of buying has slowed, or whether the people have become a bit more sophisticated in recognizing the costs and liabilities.”

No clowning around!

UPDATE: IBM -3% after-hours (equiv. 50 Dow Points)

Citi was the headline-maker of the day and is now (somehow) up 12.4% from QEtc. AAPL's low average-trade-size but reasonable volume rip (+2.3%) just failed to fill the gap-down from 10/5 but provided just the excuse the market needed to rip on a debate-day. Tech remains the only sector in the red post-QEtc. The last two days we have seen the same pattern play out as in the last few weeks, a plunge-plunge-linear-ramp with the opposite scale on volume during these moves. Today's equity market levitation was predicated on rumors of a pending credit line with Spain - which was denied by everyone involved but by then correlations were high and momentum was in charge. FX markets are highly dispersed with JPY weakness and EUR strength leaving the USD -0.44% on the week. Commodities recovered a little on the day with Oil/Copper +0.25% on the week and gold/silver still lagging. Treasuries bear-steepened with 30Y +8.5bps. VIX dropped marginally to 15.22%. Credit was dead after Europe closed, underperforming equities push.

The departure of Vikram Pandit as CEO of Citigroup (C) should come as a relief to the markets, regulators and customers – indeed, just about everybody besides the volatility junkies who like to trade this very liquid, very unstable stock.

While earlier we reported that the under Vikram Pandit the stock price of Citi, net of reverse stock splits, has collapsed by 90%, some have inquired how it is possible that the market cap under Pandit has declined by far, far less, or from about $150 billion when Vikram was appointed to CEO, to a little over $100 billion today. The answer is simple: shares outstanding.

The erstwhile 'developed' market of the Athens Stock Exchange has just suffered a major blow. Coca-Cola Hellenic Bottling Co (CCHBC), the world's second largest Coca-Cola bottler, will quit the exchange for London next year, cutting the value of equities listed in Athens to a mere $31bn - smaller than Vietnam's $35.2bn. CCHBC is Greece's largest company by market value and sets a rather ugly precedent in leaving the troubled nation. Accounting for 23% of the benchmark index weight, it is 50% larger than all four of Greece's major banks combined. A new company, headquartered in Switzerland, will make a share-exchange offer for CCHBC and seek a primary listing on the London Stock Exchange - which will mean around 10% of all trading volume on the Athens Stock Exchange will be lost. The decision to leave Greece was prompted by concerns over political and economic stability - so for the Greeks, Coke Is not It.

A report from German news magazine Der Spiegel states that Iran's latest effort to disrupt key shipping lanes through the Strait of Hormuz may be to cause a massive oil spill. Code-named Murky Water, the operation may serve to force a temporary respite from sanctions targeting the country's energy sector. Iraqi leader Saddam Hussein tried a similar tactic during the first Gulf War to deter invading U.S. forces. If the German report is true, the Iranian operation could be a sign of Tehran's dwindling options.

In addition to the mysterious volley of recent economic data points that have blown even the most optimistic expectations out of the water, it is perhaps notable that not only is the economy in agreement with the status quo in the month before the election, but so is the market, and as can be seen below, on presidential (and vice) debate days, the market has posted some truly six sigma returns. For the month of October, the S&P 500 futures have risen a cumulative 20 points on the days of the debate; and fallen a cumulative 4.75pts on the non-debate days. Forget needing moar QE, we need moar debates! While we leave up to our readers to divine the implications of such outlier moves on debate days, our only suggestion for those who have missed their opportunity to buy the central bank policy vehicle, formerly known as the S&P 500, with both hands and feet, is to wait until the next presidential debate and go all in. After all, "it's only fair" that the market will soar hours ahead of the two teleprompter-less candidates debating highly irrelevant stuff.

If the US government cut all government services except Social Security, Medicare, Medicaid, and interest payments, federal spending would still outpace revenues. As we noted here, these four mandatory items dominate costs. All the arguing over sequestration and the fiscal cliff are moot since as Professor Antony Davis notes in this brief clip, there are no specific cust that will enable government to balance the budget; in fact "nothing less than a complete redesign will solve the problem." That redesign begins with determing the proper role of government.