Archive - Dec 6, 2012

As of the end of November, the Consumer Discretionary sectot was the winner year-to-date with financials close behind (both up around 23%). The clear loser across asset classes is Crude Oil (down around 10%). We suspect at the start of the year that very few 'managers' or strategists would have expected anything like the distribution of outcomes that we see here - with EURUSD unchanged and Hedge Funds up just over 3% on average for the year. Some context for what 'could' happen in the remaining three weeks of the year.

Just one more QE-episode... growth will come in two quarters, we promise... housing has bottomed... stocks 'signal' all is well. We have heard these 'meme's a thousand times and yet still what is borrowed is given to shareholders and animal spirits (judging by the dismal confidence among small business leaders) remain mired in the quagmire of uncertainty and risk aversion. Nowhere is this more evident than the roll-over (and now falling) demand for new loans across global credit markets. This is not large public companies borrowing at ultra-rich spreads, courtesy of Bernanke's financial repression forcing supply into IG and HY markets, to merely charm pension funds with dividends; this is real demand for credit (per loan officer surveys) all turning down as the balance-sheet-recession continues.

"Propaganda is to Democracy, what the bludgeon is to the Totalitarian State."--Noam Chomsky

A “new era”: 48% of the French consider themselves living in poverty or on the way to it.

The Electronic Frontier Foundation (EFF) is one of the most important organizations we have in America today.  While most of the country lays fast asleep to the dangers of the encroaching surveillance state, the EFF is always vigilantly at work on the front lines.  In their latest article, they show that military drones are already flying all over these United States and, using information received from a FOIA lawsuit they provide important details on what is flying and where.  You may be shocked at some of their conclusions.

There are two approaches to being a sell-side, talking-head, strategist when it comes to China. If China is rising, then hey, global growth is recovering and China's transition is going well - so buy US equities levered to China. If, however, China is falling (or out of favor) then US equity markets are the cleanest dirty shirt and decoupling is the new normal. Thus, no matter what, being long US equities is your staple investment advice - heck it's worked for a few decades, why not? Well the truth is that, empirically, the correlation between US Machinery or Tech Hardware stocks and the Chinese market has risen for six years straight. In other words, there is no decoupling (ever); as goes China, so goes US equities - and that sensitivity has never been higher.

Below is a list of the 4 largest Federal Reserve asset category by notional as of today:

• Treasurys:  $1,655,889 million
• Mortgages: $883,627 million
• Other assets: $209,863 million
• Agency debt: $79,283 million

Quietly, the Fed's Other Assets have overtaken Agencies, and are now the Fed's third largest asset category and about four times the total Fed capital of $55 billion. We have written about these "other assets" in the past; we will likely write about them in the future again, for the simple reason that the chart showing the Fed's notional holdings in this category correlates quite clearly with the parabolic Greek unemployment rate.

Here's 'Buck' to explain, in plain English, "one of the most complex 'but effective' institutions in the United States - The Federal Reserve System". Whether you view for the pure irony of it - or pass on to an Econ PhD friend, this animated cartoon from the St. Louis Fed (funded by our cliff-invoked taxpayer money we are sure) takes us from inception around one hundred years ago to the present-day and covers the three divisions (Reserve Bank, FOMC, and Board of Governors) and three responsibilities (providing financial services, conducting monetary policy, and supervising banks). It seems 'Buck' had not been informed of the other and varied roles the Fed plays in the world's populations' lives. How long before this is required viewing for all K-12 schools nationwide?

We have maintained (here and here) for quite some time that the only true "consumer confidence" statistic one should look at is that of gun sales.  The bottom line is, as Mike Krieger so rightly points out, people do not hoard guns when they are confident about the future of the country, and gun sales have never been better.  More evidence emerged as Smith & Wesson just announced record financial results.

Isaac Newton, the father of classical mechanics and progenitor of nearly every technology we use today, was easily one of the top 10 most influential minds in all of human history... Yet as accomplished as he was, Newton credited the brilliant scientists and philosophers who came before him, acknowledging that his insights would not have been remotely possible without the foundations laid by great thinkers– Archimedes, da Vinci, Descartes, etc. No doubt, all great ideas flourish by expanding upon the works of others. Unfortunately, so do terrible ones. And one of the worst ideas in history that continues to play out today is the grand experiment of fiat money. The idea is simple. Rather than allowing money to be scarce and have intrinsic value, our fiat system grants power to a tiny elite to conjure money out of thin air. Presumably, if the ones in control are smart, honest guys, then everything should be fine. Fiat was a total failure right from the beginning... and yet the economic engines deep below are steered by people who worship at the cult of bad ideas.

No politics, no "death crosses" - just simple fundamentals.

As of September 30, the household balance sheet had total assets of $78.2 trillion, of which just $24.6 trillion was in the form of tangible assets (Real Estate, Durable Goods and other), or under one third of total. The balance, or $53.6 trillion, comprising of deposits, corporates, mutual funds, pension funds and other assets, was all in one way or another tied into the stock market and the viability of the financial sector. One can see why with over two thirds of total household assets embedded in the stock market Bernanke will never allow stocks to go down, even if that means monetizing every last one of them (after he is done with all fixed income of course). On the liability side, total debt remained flat with Home Mortgages declining by $0.1 trillion, primarily as a result of discharges, offset by $0.1 trillion increase in Consumer debt. Net result: household net worth at September 30, 2012 for the world's wealthiest nation was $64.8 trillion, or back to where it was in Q4 2006. Somewhere, someone's mouth is watering profusely at the mere though of applying a uniform tax on all household assets...

The antics of the world's most cartoonish CEO, that would be NFLX' Reed Hastings of course, who once upon a time posted on Seeking Alpha telling naysayers not to short him, bro, (only to continue sell his company's stock even as NFLX proceeded to use corporate money to buyback its own stock in the $200+ area), before promptly collapsing to multi-year lows, has finally been called to task by none other than that other most cartoonish of organizations: the SEC, which is now desperate to clean up its image as the bulk of the most coopted personnel are jumping ship, and will likely end up in various Wall Street companies.

Expiring tax and expenditure policies, if not addressed, will likely trigger a US recession in early 2013 that will affect every citizen in the nation. It seems, however, that no matter how much the mainstream media talks about the cliff and its implications, the average-joe is still focused on who will win X-Factor and whether Maria Carey and Nikki Minaj will have a knock-down drag-out fight on American Idol. Into this breach - to educate everyone - steps Bloomberg Briefs' Joe Brusuelas with this excellent primer on the US Fiscal Cliff and its Debt. Notably the senior economist outlines the upcoming risks to the economy, from the pending fiscal shock and why those risks may be greater than policy makers or investors are acknowledging.

The technicals were in charge today as S&P futures coiled around VWAP early on, tested lows, then pushed to highs (coinciding with the 50DMA) - ending the day-session in the green. Low volume and low average trade size suggest this was not the pros filling their boots and the lack of enthusiasm among Treasury traders (despite a very late day ramp higher in yields), FX traders (EUR weakness dragged USD back to Unchanged on the week), and Oil (ending the day -2.9% on the week) didn't fill us with fear of a next leg higher (for now). Gold and stocks traded tick for tick most of the day as the precious metal toyed with $1700 again and HYG (the high-yield bond ETF) also recoupled with SPY (stocks) all day (shifting richer to its fair-value). Of course, AAPL is the name of the day with its death spiral, VWAP save, and VWAP reversion amid gigantic volume - but low average trade size (to close +1.5%). VIX ignored equity strength and closed +0.15 vols at 16.6% (very close to where it opened).