Archive - Jan 2013

The recent fiscal cliff negotiations were almost a textbook case of the game theory's Prisoner's Dilemma... resulting in the same sub-optimal outcome. All the posturing and political strutting were more about trying to obtain personal advantage over the other players, not actually fixing anything. The fiscal cliff, in fact, stopped being about the US economy a long, long time ago. The uncomfortable truth that nobody in officialdom wants to admit (save outgoing Congressman Ron Paul) is that the fiscal situation is unfixable. Meanwhile, the debt ceiling has already been breached, and the Obama administration is scurrying to seize federal pensions as a temporary fix. Seriously, how long will it be before they start seizing private pensions, IRAs, etc.? How long before mutual funds and banks are required to hold a percentage of their assets in the 'safety and security' of US Treasuries? How long until everyone is involuntarily financing Uncle Sam?

While the predictions of Blackstone's Byron Wien (born in 1933), who may not be in the senate or "sleep-deprived", but this year will become an octogenarian, may have been all over the place in the past 10 years, some correct, but most miserably wrong (with a recent hit rate of about 25%), he always does provide entertainment value. Which is the only value in the latest release of his 10 forecasts for 2013. Naturally, take all of these with a salt mine.

In May Of 2010, I published a series of reader contributions on the cruise line industry as well some proprietary research on a particular company in said industry - Royal Caribbean Cruise Lines. The consistent, globally synchronized flood of money totally distorted market pricing and risk in public equities - thus often distorted practically applicability of hard core fundamental and forensic research.

2013 has begun just as 2012 progressed as Granite Construction just plunged 12.6% in under one second. As Nanex shows below, it is simply ludicrous. Of course, the algos (like every entity that comes close to 'failing' in the new normal) will never learn since, as usual, NASDAQ has decided to cancel the trades... *NASDAQ TO CANCEL SOME TRADES IN 'GVA' FROM 11:45-11:46ET AT/BELOW $32.72 11:45AM-11:46AM S.S.D.Y.

A Fiscal Cliff "deal" that reduces GDP and squeezes the consumers; a Fed whose policies have forced massive capital misallocation away from growth investment and are leading to an unprecedented corporate "revenue cliff"; and now, in the aftermath of the government response to the Newtown massacre which threatened to curb the second amendment, we get this via Reuters:

• BACKGROUND CHECKS FOR US GUN SALES REACHED RECORD IN DECEMBER AT 2.8 MLN CHECKS - FBI

Because when everything is an unintended consequence, nobody has to take any responsibility for anything. And so the New Normal marches on.

The Limerick King and Banzai7 look at the cliff farce and the road ahead...

We have become used to the whining of Chuck Schumer but when a House Republican blasts his own, it seems the dysfunction runs deep (or the fair did not quite meet the balanced). NY Rep. Peter King lashes out at the pork-laden 'deal' we all just witnessed (and the market cliff-gasm'd over) as the failure to vote on the relief measure for Superstorm Sandy prompted him to exclaim the GOP leadership has "turned its back on those people" who continue to suffer. As CNN reports, King said he was "chasing [Boehner] all over the House," and reminded House Republicans that they seem to "have no problem finding New York when they want money," and the frustrated Congressman added, "I would not give one penny to [The Republicans] based on what they did to us last night." Simply put, King proclaims that a number of Republicans may "kiss their seats goodbye...because if you can't provide the most basic assistance for your district, who needs you in Congress?"

The 'deal' didn't surprise CNBC's Rick Santelli as he notes the administration did the "easy thing" once again. However, he does think the coming battle in 6-8 weeks regarding the debt ceiling will be surprising to many and believes "there has to be an endgame to insanity." Rick's rightly cynical perspective on the euphoric opening gap today in stocks and bonds (and questioning the veracity of manipulated 'market' prices) appears as frustrating to him as "watching politicians all slap each other on the back while the country slips into a Grecian like formula."

It seems our premonition of Europe's year-end desperate need for Euros to prop up their ailing and illiquid books has indeed come to an end. EURUSD is heartily disagreeing with US equity exuberance and, more importantly, the all-important carry driver EURJPY is pointing to a decided risk-off aspect as Europe closes its first trading day of the year.

For those bored with watching how much higher Getco and Citadel's algos can take the market on a resolution that is adverse for the US economy, that cuts consumer spending and cash flow, that does not address the real issue: government drunken sailor spending, and that means America will now labor for the next two months without being able to incur one additional dollar in net debt courtesy of breaching the debt ceiling on the last day of 2012 - in other words your typical kick-the-can-for-two-more-months non deal, we have good news: Jim Grant of Grant's Interest Rate Observer has released a compilation of his best articles from the past year for free to anyone who still cares about what actually may be happening in the US economy, besides the obvious - endless fiscal and monetary stimuli from both the Fed and Congress, which like, any lunch, are never free, even if the final invoice may take a while to arrive.

The fundamental Keynesian project is that the Central State and Central Bank should manage market forces whenever the market turns down. In other words, the market only "works" when everything is expanding: credit, profits, GDP and employment. Once any of those turn down, the State and Central Bank "should" intervene to force the market back into "growth."  The sharper the downturn, the greater the State/Central Bank intervention. This accounts for the martial analogies of State/CB responses: "bazookas," "nuclear option," etc., as the market is overwhelmed with ever greater fiscal/monetary firepower. After basically voiding the market's ability to price risk and assets, the Keynesians believe the market will naturally resume pricing risk and assets at "acceptable to Central Planning" levels once fiscal and monetary stimulus is dialed back. Keynesian policy is to punish capital accumulation and reward leveraged debt expansion. Rather than enforce the market's discipline and transparent pricing of risk, debt and assets, Keynesians have explicitly set out to re-inflate destructive, massively unproductive credit bubbles. The entire Keynesian Project, however, has numerous blindspots.

The first two economic indicators of 2013 are in and are a beat and a miss. The beat was in the December ISM Manufacturing printed at 50.7, higher than the 50.5 expected, and up from November's 49.5. This is happening even as 7 of the 18 manufacturing industries in December report growth while 9 reported contraction: go figure. Looking at the component data, New Orders remained flat at 50.3. The index was driven higher by Backlog of Orders +7.5, Exports +4.5, Supplier Deliveries +4.4, Employment +4.3, and Prices + 3.0. The declines were in Inventories and Production, down -2.0 and -1.1 respectively. The miss was in November Construction Spending, which printed at -0.3%, down from a downward revised October 0.7% (from 1.4%), and well below expectations of a 0.6% print: this was the biggest miss in 10 months, and the first negative print in 10 months, which however will likely be blamed on Sandy.

JPM's Michael Feroli, who already quantified the impact of the 2% payroll tax cut expiration at $125 billion, has estimated the impact of the Fiscal Cliff on the US economy for 2012. The verdict: 1%. This is just on the Obama tax [cut|hike]. If and when any spending cuts are actually announced or enacted, this number will only go up, as will apparently the market.

Presented with little comment as the Russell 2000 reaches up to its all-time (nominal) record highs...

As we wondered out loud yesterday, many have questioned the disconnect between increasingly burgeoning central bank balance sheets and money printing and the range-bound trading in Gold. It seems the first real hint of why is peeking through as the Economic Times reports the Indian government are growing increasingly concerned at the rate of gold imports. As the India Finance minister stated: "Demand for gold must be moderated... We may be left with no choice but to make it more expensive to import gold. The matter is under government consideration." Gold imports are playing a major part in India's record high current-account deficit (at $20.2bn for the period April to September), down 30.3% YoY thanks to a doubling of the customs duty on standard gold bars (to 4%). It seems the Indian powers-that-be are learning from their US and European leaders that if something is happening in a free-market that threatens the status quo even modestly - crush it with regulation and centrally-planned control. As the article goes on to note, currently, the government is also making efforts to channelise investor money into equities and other financial instruments to reduce demand for the yellow metal.