Archive - Dec 4, 2012

This is the only chart the retail investor needs to remember when bombarded day after day by the media with regard to how 'cheap' stocks are...

Forget the Fiscal Cliff: it is merely a much needed economic distraction for the next 3-4 months (distracting from what? Why Europe of course). Yes, it will be resolved, and yes taxes will go up, and yes, debates over it will most likely be carried over into 2013 and nothing will be compromised until the ultimate debt ceiling deadline (because it is really a Fiscal Cliff-Debt Ceiling package deal) is hit some time in March 2013, but eventually one or both parties will cave, right after the market plunges to put it all into the proper perspective as it did around the time of TARP and the August 2011 debt ceiling debate, and a resolution will materialize. The bigger issue has nothing to do with the Fiscal Cliff, which is indeed a sideshow. The bigger issue, as Art Cashin explains, has everything to do with a secular decline in the US economy, where a 1% growth rate will soon be the "New Killing It", where millions more (in part-time workers) will soon be let go, and where businesses no longer generate the cash flows needed to stay open. Art Cashin explains.

Europe may be fixed for the next week or two (until someone once again figures out that by manipulating the market, the ECB is merely making it easier for peripheral governments to do nothing to fix their unprecedented intra-Eurozone imbalances, as has been the case all along with the only strategy Europe has deployed to date namely kicking the can), but that doesn't mean all event and newsflow ends. Here is what to expect out of the insolvent continent as it attempts to put a very volatile (and violent) 2012 to bed with just one more month. Of particular note: €123 billion in Euro coupon payments in the month of December, which serves as a timely reminder that in 2013 European banks better be ready to buy up the record gross and net issuance of their sovereigns with gusto, or else Europe may promptly become "unfixed" all over again.

We have all said it. Anecdotally, it feels like when oil prices rise, gas prices at the pump rise; but when turmoil pauses in global geo-politics - or some entity decides that high oil prices just will not do for the world's economy - gas prices at the pump seem not to drop so quickly. Yes there are pipeline, inventory (and even tax) issues but the following chart suggests 'gouging' on a national level...

It's that time of day again. For no good reason (aside from arguably a stronger EUR as BIS fills its boots) - and with stocks up - Gold and Silver have once again been Baumgartnered this morning down to three-week lows (and Gold under $1700 again - breaking below its 100DMA for the first time since 8/16).

The graphic below, which presents an unvarnished picture of Europe's true economic state, needs no explanation:

Many people, and erroneously, think that all of the purchasing by the Fed will go to both markets in equal amounts but this is not the case. More money for the stock markets would have to come from asset reallocations by money management firms, insurance companies, pension funds and the like and this is not going to happen anytime soon given the 2008/2009 experience. Consequently the greatest flows generated by the Fed’s recent and forward actions will affect the bond markets much more than the equity markets. Between the MBS purchases and the next upcoming stimulus push, the Fed would account for 90% of all new debt issuance and leading to a demand imbalance between $400 billion to almost $2 Trillion depending upon the actual Fed announcements. The Fed currently holds about 18% of the U.S. GDP on its books and it could bulge to 23-28% a few years out. This all works, by the way, only because all of the world’s central banks are working in concert so that there is no imbalance and money cannot be invested off-world. Yields will not make sense empirically because of the actions of the Fed but it will make no difference, because their intentions and goals are vastly different from investors.

Confused by the recent surge of capital into Europe (which somehow is supposed to indicate that all is well because local stock and bond markets are faring better)? Don't be: it is merely the latest and greatest manifestation of that most prevalent of New Normal investment strategies: hope. Hope that this time it is different, and that the latest injection of capital from the Fed via QE3 coupled with the OMT perpetual backstop of liquidity via the ECB (still merely at the beta stage: expansion to actual gold/production phase TBD) will kick start the European economies. Alas, it won't, at least not until Europe actually undergoes the inevitable internal devaluation which we described over the weekend (since an external one is impossible) and crushes local wages of the PIIGS, which in turn would lead to revolution, and thus will never happen. That, or somehow discharges about 40% of consolidated Eurozone debt/GDP, which it also won't as it would wipe out the global banking system. So what does this mean? Well, as Deutsche Bank explains looking simply at manufacturing output in the developed world, global markets are now overvalued anywhere between 15% and 35%. This is the hope premium now embedded in stock prices.

Warren Buffett’s General Re-New England Asset Management has warned that until central bank monetary policies around the world change “there will be a tendency to higher gold prices.”  General Re-New England Asset Management, a unit of Warren Buffett’s Berkshire Hathaway Inc., said gold may advance as businesses temper spending and central- bank stimulus measures fall short. Gold’s climb last year to more than $1,900 an ounce was fuelled by the expectation that government spending cuts in Europe would reduce demand for goods and services, GR-NEAM Chief Investment Officer John Gilbert wrote in a newsletter posted on the unit’s website today, as reported by Bloomberg. “There is growing evidence that the rising price of gold is a statement about the discouraging prospects for returns on productive investments,” Gilbert said.  “We hope that this analysis is wrong. We fear that it is not.”

• Two weeks ago here: The Latest Greek "Bailout" In A Nutshell: AAA-Rated Euro Countries To Fund Massive Hedge Fund Profits... and now on Bloomberg: "Hedge Funds Win as Europe Will Pay More for Greek Bonds" (BBG)
• Oracle sends shareholders cash as tax uncertainty looms (Reuters)
• GOP Makes Counteroffer In Cliff Talks (WSJ)
• Iran says captures U.S. drone in its airspace (Reuters)
• IMF drops opposition to capital controls (FT)
• Vogue Editor Wintour Said to Be Possible Appointee as U.K. Envoy (BBG)
• Juncker Stepping Down French Finance Minister to Head Euro Group? (Spiegel)
• Australia cuts rates to three-year low (FT)
• Europe’s banking union ambitions under strain (Reuters)
• EU Nations Eye New ECB Bank Supervisor Amid German Doubts (BBG)
• Frankfurt's Ambitions Get Cut Back (WSJ)
• House Republicans Propose $2.2 Trillion Fiscal-Cliff Plan (BBG)

Bill Gross' latest monthly missive begins with some political commentary on the latest presidential election, pointing out the obvious: after the euphoria comes the hangover, completely irrelevant of what happens to the Fiscal Cliff: 'whoever succeeds President Obama, the next four years will likely face structural economic headwinds that will frustrate the American public. “Happy days are here again” was the refrain of FDR in the Depression, but the theme song from 2012 and beyond may more closely resemble Strawberry Fields Forever, as Lennon laments “It’s getting hard to be someone but it all works out.” Why is it so hard to be someone these days, to pay for college, get a good-paying job and retire comfortably?" And while political campaigns were just that, the truth is that nobody has the trump card to a perfect quadrangle of problems which will mire the US economy for years to come, among which i) debt/deleveraging; ii) globalization, iii) technology, and iv) demographics. Gross' outlook is thus hardly as optimistic as all those sellside reports we have been drowned by in the past 2 weeks, hoping to stir the animal spirits one more time: 'We may need at least a decade for the healing.... it is getting harder to maintain the economic growth that investors have become accustomed to. The New Normal, like Strawberry Fields will “take you down” and lower your expectation of future asset returns. It may not last “forever” but it will be with us for a long, long time." Sad: looks like it won't be different this time after all...

Quiet session so far, with a notable move higher in the last block of trading in China pushing the SHCOMP for its first gain in 6 days, and off post-2008 lows. What precipitated the buying is irrelevant, although we got a good glimpse into the state of the Chinese economy thanks to Australia prior where the RBA cut rates by 25 bps to a historic low 3.00% (a move that sent the AUD higher), a level last seen during the financial crisis, and confirming that not all is well for the Chinese derivative economy despite loud promises from the Chinese politburo that growth is back. Bypassing the bullish propaganda were Renault Nissan's Chinese car sales for November which fell by 29.8% Y/Y. Some "recovery" there too. In Europe, the status quo continues, with chatter out of Germany's Merkel who begins her 2013 election campaign today, that Germany wants a strong Eurozone (it doesn't), and a strong Euro (it doesn't), but that nobody can predict when the Eurozone crisis will end (not even Hollande or Monti who did just that yesterday?). Otherwise sentiment there is still driven by the formal Spanish re-request of aid (and imminent receipt of €39.5bn in bank recap funds) from the EU by mid-December. As a reminder Spain did this originally in June but the algos were so confused yesterday they thought this was an official sovereign bail out request sending risk soaring only to tumble later (only in the New Normal is admission of sovereign insolvency a "good thing"). Nonetheless, despite the massive overvaluation of European markets (more on that later), the EURUSD continues to the upward momentum (in the process further curbing German exports and assuring the German recession), and was last seen trading up to 1.3075, about 30 pips higher.