Archive - Nov 7, 2012

Memo to the Arab World: Good news and bad news with the re-election of Barack Obama to the White House. The good news is that a victory by the Republican candidate Mitt Romney would have given Israel and its current leadership a free hand at continuing a policy of arrogance that will lead the region towards greater mayhem. On the other hand, with Obama in the Oval Office, don’t expect anything drastically different to happen in the Middle East in so far as US involvement goes. And if Obama’s acceptance speech is anything to judge by, where his only mention of anything related to foreign affairs was a reference to "freeing ourselves from foreign oil," it seems obvious that the Obama administration will want to focus on solving domestic issues. At the end of the day these are issues that matters most to the average American who would rather not have to worry about the Middle East and terrorism – that is until they come knocking at our doors as they did on September 11, 2001.

Against the backdrop of a tepid US recovery, Eurozone recession and stuttering growth across emerging markets, investors are beginning to focus on how the 'status quo' outcome impacts the odds of cliff-avoidance; which after all, if there is one thing economists agree on, it is that a US and global recession will ensue if the legislated tax increases and spending cuts worth roughly 3.5% of US GDP take effect next year. UBS believes that if the US economy dips into recession, operating earnings -which are near peak levels - could easily plunge by a fifth. Risk premia would climb, particularly because the US and the world have run out of policies that could lift their economies out of recession. Those factors point to significant downside risk (at least 30%) for global equity markets if the US falls off the 'cliff'. Yet the S&P500 remains within a few percentage points of its cyclical highs. Accordingly, as we have previously concluded, investors assign a very low probability to the ‘cliff’ and a 2013 US recession, which UBS finds 'darn surprising' that this much faith in common sense prevailing in Washington amidst such divisive politics. But for all the attention the ‘cliff’ deserves, UBS notes the fundamental challenge for the US (and many other countries) is to address fiscal stability as a long-term necessity, not a short-term fix.

A six state silver lining..

Causing “unprecedented concerns” in the industry

There was one election outcome yesterday that few noticed, judging by mainstream media. We are referring to Colorado’s Amendment 64, which regulates marijuana in a similar manner to alcohol.  It is basically full legalization of pot for adults over 21. It’s interesting that the two states to legalize marijuana both voted for Obama in this election.  Will he now betray all these faithful voters?  Based on his first term performance, you can count on it.  Your move Mr. Holder.

The Dow plunged 313 points yesterday, but don’t believe news media reports that it was the nearness of the “fiscal cliff” that caused the selloff. What spooked investors is a bigger picture that recognizes the economically catastrophic implications of a second Obama term.  To be clear, there is nothing Romney could have done to avoid the deflationary Depression that lies ahead.  However, a Romney presidency might have at least served as a reality check on malfeasant fiscal practices, delaying the onslaught of hard times for perhaps long enough to allow Americans to put their financial houses in better order before austerity is imposed on us with the force of an earthquake, as it has been on Europe.

The Fed Is the Real Winner

Credit markets have been bleeding wider recently but based on Credit Suisse's 'Risk Appetite Index', they remain high in Euphoria territory in the US. This is worryingly crowded on its own but the key point that they note is the divergence between US exuberance and the rest-of-the-world's far less sanguine view of credit. The risk-appetite spread between the two has been this wide two times before in recent years - July/August 2011 (which saw a major sell-off - debt ceiling) and April/May 2010 (another major sell-off - end of QE and flash-crash). As we noted earlier, equity market valuations are very much pinned to risky credit now and so this indicator is yet another canary-in-the-coalmine...

Trish Regan and Adam Johnson do their best to hold themselves together in this sublime rant by 'Gloom, Boom & Doom's Marc Faber on Bloomberg TV as he sees Obama's re-election as "very negative for the economy". From his view that the market should be down at least 20% - and maybe 50%, to the implied ignorance of both of the candidates, he believes fervently that the "standards of living of people in the western hemisphere will continue to decline." Faber views Obama's re-election as one of many unintended consequences of market manipulation (since Democrat attacks on the wealthy were 'enabled' by their profiteering from Bernanke's money printing) and sees the need to protect one's assets "with a gun, a machine gun... or perhaps a tank." He concludes with a stunner as he exclaims his view doubting Obama will make it through the whole four-year term because "there will be so many scandals" since "there is so much smoke, there must be some fire!"

Just in case someone thought Greece would voluntarily vote to cut out the funding - any funding - of free money from the ECB, via ELA or otherwise, regardless if only 10% of said money actually makes it into Greek society, we have some bad news: the Greek parliament once again voted to impose austerity upon itself. This includes numerous Yay votes by deputes who had said previously they would vote against the measure.

• SAMARAS HAS VOTES FOR GREEK AUSTERITY BILL
• FINAL VOTE: 153 FOR, 128 AGAINST, 18 ABSTAIN
• PASOK EXPEL 6 MEMBERS; ND EXPELS 1 MEMBER FOR VOTING AGAINST PARTY LINE

And yes, this time will certainly be different unlike all those other times. Or maybe not. In the meantime, the rioting, and daily strikes by everyone, most certainly the tax collectors, will continue indefinitely, until even more spending has to be cut to match the decline in revenues, and so on, until finally the singularity of no more revenues and no more spending is hit.

The US government will be bankrupt after another four years of the same Obama we had for the past four. Fitch as much as confirmed this when it suggested a downgrade is coming. TrimTabs' Charles Biderman takes us succinctly through the painful math of just what has happened in the last four years: since Obama has been president after-tax take-home pay for everyone who pays taxes is still down by about 5% nominally and more than 10% after inflation. Dismissing GDP as anything but a misguided and misused spreadsheet output, the bombastic Biderman is concerned - and rightly so - as he sums up: "My guess is that Mr. Obama and his close buddies have no idea what they are doing, or else they would not be doing what they have been doing. The most dangerous are those people who think they are smarter than they are."

As the Romney bounce was removed last night, German (and European) growth is lowered, AAPL's dominance is questioned, and the 'fiscal cliff' (oh yeah that) comes into focus, is it any wonder equity markets dumped today. Depending on which index you looked at, equities fell the most in a year (or a month) with the Dow and Nasdaq closing below their 200DMA. Gold and Bonds outperformed and S&P futures plunged further after-hours closing below its 100DMA for the first time in over 3 months (as VIX closed at 19% - its highest in 3 months)

The house always wins...

It is not going to be a new government that necessarily ushers in a whole new era of growth, prosperity and confidence. Even under the revered Ronald Reagan, the period of secular growth and bull market activity took two years to unfold — it didn't happen right away. It took the inflationary excesses to be wrung out of the system and concrete signs that the executive and legislative branches could work together to usher in true fiscal reform — and to get blue Democrats on board with reduced top marginal tax rates.  Hope isn't generally a very useful strategy, but there is reason to be hopeful nonetheless. The critical issue is going to be how we get Washington to move back to the middle where it belongs. This requires bipartisanship which in turn requires leadership. Reagan's whole eight-year tenure in the 1980s occurred with the House being in Democrat hands the whole way through. Bill Clinton's second term coincided with both the House and Senate controlled by the Republicans.

It can be done! 

With this in mind, the best that can happen is a Reaganesque and Clintonesque return to compromise on the road to fiscal reform.  It will be painful. We all know it will be painful.

Lots of reading between the lines and inference we are sure... standard political protocol surely means he will toe the line on TV... or will he?