Archive - Nov 2012

No, this is not a clip from the latest Call of Duty showing what happens when one gets a 9+ killstreak. It is the IAF taking out the head of the Hamas military wing, which has set the region ablaze (even if the central bank manipulated VIX and EURUSD refuse to budge in response).

it was only a matter of time before today's Israeli offensive ran into a snag. The complication: Egypt, which has long been treading the fence being both a pro-US regional power (someone has to provide those joint guarantees on Egyptian bonds, and to supply the local tear gas canisters in exchange for a friendly Suez Canal administrator), as well as a pro-Muslim presence. Today, the government was taken to task by the ruling Islamist Muslim Brotherhood which felt the need to be true to its name and express disgust at the Israeli action in Gaza. From AFP: "Egypt’s Islamist Freedom and Justice Party, formerly headed by President Mohammed Mursi, said on Wednesday Egypt would no longer stand by as Israel attacked Palestinians after air strikes killed a Hamas leader. The FJP, the political arm of the powerful Muslim Brotherhood movement, said Israeli air strikes that killed top militant Ahmed al-Jaabari in Gaza earlier on Wednesday required “swift Arab and international action to stop the massacres.” The party, which fielded Mursi in a June election to replace toppled president Hosni Mubarak, said Israel “must take into account the changes in the Arab region and especially Egypt.” Egypt “will not allow the Palestinians to be subjected to Israeli aggression, as in the past,” the party statement said."

"Way Down" (Bunds 1,34% unch; Spain 5,92% +9; Stoxx 2475% -0,8%; EUR 1,274 +20)

Between the escalation in the Middle East and Olli Rehn pouring cold-water on the hopes and prayers of an imminent Spanish rescue-request, sovereign bond risk rose notably today. A late-day rampapalooza in EURUSD (another round of end-of-day repatriation?) signaled risk-on in the correlated monkeys and sure enough (in the US and Europe) stocks rose into the European close. The USD is remarkably unchanged on the week - despite the volatility in risk assets in general (zee stabilitee at the 1.27 peg seems the new normal) - as the Fed/ECB 'agreement' appears to have crushed the life out of yet another market-based signal - as EURUSD implied vol crashes to five-year lows.

The mainstream media still doesn't understand the financial system... or why the Fed has done what it did.

It would appear that Americans are in general an optimistic bunch. The slightest green shoot of economic growth, or market trend-reversal, or Tigers' home run in the World Series and it is instantly extrapolated into "what could be". The US housing market (among others around the world) is just such a glimmer of hope (and homebuilder stock prices surely provide all the proof you need... just like JCP's 12% jump on 9/19? followed by its 46% decline since...). The trouble is, no matter how much you want something to happen; sometimes, there really is no way it's ever gonna happen. To wit, the young/old dependency ratios in the following six major economies of the world suggest whatever 'Eastman Kodak' bounce some housing markets are experiencing will inevitably be short-lived (no matter how much foreign cash is driven back into these advanced economies).

As expected, the escalation out of Gaza has been fast and furious with Al Arabiya reporting that the Hamas response to the operation that Israel has code named "Operation Pillar Of Cloud", which an IDF spokesperson has clarified Israel is ready to escalate into a ground operation into Gaza if needed, is that "Hamas is now in open war" with Israel. Moments later the organization Islamic Jihad has unsurprisingly, chimed in: "Israel has declared war on Gaza and they will bear the responsibility for the consequences." Stay tuned folks cause this may get very messy quickly. Now if only the US military wasn't currently the functional equivalent of a grotesque reality gong show.

Will Congress go over the fiscal cliff?  Yes, we've been going for decades, really since the social unrest of the 1970s. 

"War (escalation) is good" appears to have been the idiot algos immediate knee-jerk reaction to the post-Israel news jump in oil prices - as correlations rule the world. But once the reality of Gaza being 'the start' of an apparent escalation, and opened up the third Israeli front after Iran and Syria, risk was decidedly off and US equities reverted to their lows of yesterday...and back to early August levels (pre-Draghi).

28 million taxpayers would be faced with a very large, unexpected tax liability for the current tax year (2012).

Update: Israel CDS 145/155, +6 bps

In a move that is certain to aggravate the already frayed relations between Israel and the Palestine, not to mention send Brent spiking, moments ago the IAF, in a precision airstrike, assassinated Ahmed Jaabari, the head of Hamas' armed wing - a position that is equivalent to Chief of Staff - together with his son, who were travelling in a car at the moment of the strike. And, as expected, the furious Hamas response has already been logged and promises much more death and escalation in the near term.

We have discussed the fiscal cliff from many angles: timeline, the potential impact, the scenarios, whether its impact is priced in, why a bounce on success is unlikely, the endgame 'solution', and the long-term fiscal probity of the USA. As it appears everyone is becoming more aware of this pending reality, we note USA Today's great one-stop-shop infographic which simplifies the fiscal cliff impact for the rest of us: A raft of tax and spending changes scheduled to take effect in January will sharply reduce the federal budget deficit, but will also send the economy back into recession if they all happen at once.

As we head into the last of this year and we confront various cliffs; fiscal and European, the threat of rising taxes for individuals and perhaps corporations should not be minimized. My best advice of today is to stop and look at your portfolios and take some profits and re-invest the proceeds or take profits and keep cash to be re-invested after the first of the year when we have either bumbled our way out of our predicament or behaved badly and find ourselves in a morass with all of the markets rolling about on their backside. It makes no difference as to your viewpoint and it takes no socially charged adjectives to reach a correct opinion; our President wants more and increased social programs and he wants those with the money to pay for them. Now you have one and one-half months to make preparations.

Here we go with the "but, but, Sandy" excuses. The just announced October retail sales tumbled, with their worst miss of expectations since May 2010, and the first sequential decline since June: printing at -0.3% for both the headline and the 'ex autos and gas', on expectations of a -0.2% and +0.4% rise. Ignoring for a second that the Commerce Department said that Hurricane Sandy had both positive (remember those massive lines in various stores ahead of Sandy) and negative impacts on retail sales, it would be truly inconceivable for the sellside Wall Street consensus of diploma'ed PhDs, which knew about Sandy's impact on retail sales well in advance, and thus could adjust its numbers, to actually, you know, adjust its numbers. Either way there is no way to spin the longer term major store sales trend (last chart), which shows that the US consumer, out of money, out of credit, and out of savings is entering the holiday season with little to zero disposable spending power.