Archive - Jan 2013

"The scaled-down deal passed in the Senate addressed the fiscal cliff but did nothing to address longer term fiscal health of the nation. This puts the US rating at risk for a downgrade. However, credit rating agencies may decide to wait and see what emerges from the subsequent talks. There is an implicit new cliff at the end of February related to the sequester and to the expected exhaustion of extraordinary measures related to the debt ceiling. This date is expected to be used by Republicans as leverage for spending cuts. President Obama has already signaled that a new round of spending cuts – those related to the sequester as well as entitlement spending – will have to be matched by additional revenue increases. Therefore entitlement and tax reform are likely to be at the center of discussions over the next two months."

A week ago, on December 26, when Whitney Tilson announced he was piggybacking on the Einhorn-Ackman Herbalife trade, we asked if a short squeeze was imminent "as Tilson jumps on the Herbalife bandwagon." The stock was trading in the mid-$20s. This morning it will open just shy of $35, a 30% gain in one week, which more or less answers our rhetorical question. As a reminder, the Herbalife as a "ponzi scheme" thesis has been around since 2009 (check valueinvestorclub.com, not to be confused with the aforementioned Tilson's VIC) and anyone who assumes this is a valuation catalyst is very much wrong. Which is why the recent surge in the stock may just be the beginning: as was reported late last week, Short Interest in the stock has soared ever since HLF came to the forefront of newsflow to a whopping 26.22 million shares, an increase of 5 million shares short in the past week alone, and amounting to 24% short interest of the total % of shares outstanding.

Curious how Europe's insolvent peripheral countries, where the government is increasingly the only source of demand (if not funding), have managed to avoid falling into a primary budget deficit abyss? Simple: instead of paying their outstanding bills, Europe's insolvent nations are simply not paying them. And with the entire European bond market now a central bank controlled policy mechanism, meaning there are no longer any checks and balances to keep governments honest, there is no pressure on said countries to actually pay. Hopefully those companies on the other end of these unpaid invoices have as generous a benefactor as the ECB to fund their now persistent and growing undercapitalization.

• Senate-Passed Deal Means Higher Tax on 77% of Households (BBG)
• Bipartisan House Backs Tax Deal Vote as Next Fight Looms (BBG)
• Fresh stand-off looms after US cliff deal (FT)
• Congress Deal Averting Tax Increase Curbs Risk to States (BBG)
• How Colombian drug traffickers used HSBC to launder money (Reuters)
• Danes Face New Reality in Struggle to End Crisis, PM Says (BBG)
• Ban on demanding Facebook passwords among new 2013 state laws (Reuters)
• Oil Climbs to Three-Month High as U.S. House Passes Budget Bill (BBG)
• Cameron seeks bold steps from G8 leaders (FT)
• China to outstrip Europe car production (FT)
• North Korea Picks Stronger Economy, South Ties as Top 2013 Tasks (BBG)

And so after much pomp and posturing over the past 48 hours, much of which will likely reshape the layout of the GOP in both chambers, both the Senate and the House passed the first concurrent tax hike and permanent tax cuts in about two decades. The net result of this will be a roughly 1% drag on GDP, even as the US budget deficit increases relative to the CBO's old baseline, and the beneficial impact from the tax hikes offsets roughly two weeks of spending. In other words, while addressing the tax part of the equation, politicians delayed the spending part of the problem for exactly 60 days by punting on the expiration of the sequester, or the government spending cuts. They also delayed addressing the debt ceiling, perhaps the most integral part of the Fiscal Cliff, which has now been breached and which as of this moment means the US can't incur one additional dollar in additional debt. So looking forward it means the US now has about 4 separate cliffs: the debt ceiling cliff in February/March, the sequester cliff in March, the farm bill cliff in September and the expiration of jobless benefits on December.But that's all in the future, and it will all be a function of just how quickly the GOP rolls over to once again confirm that when it comes to the stock market, America has just one political party. The party of up at all costs, which in turn is manifested right now in the first futures print of the New Year, with both the S&P and the DJIA futures up nearly 2%, and with the E-Mini up some 50 points, or half a turn of S&P multiple expansion in two trading sessions: a nice rally to show just who Washington truly works for.

Moments ago, Boehner voted to enact "Obama's tax cuts", which is the new de facto Bush tax cuts (which expired yesterday), and which will raise the budget deficit over the next decade by $4 trillion, yet which at the same time paradoxically also hiked taxes on nearly three quarters of Americans with an emphasis on the wealthiest 1%. Now, Boehner also issues a statement to advise his constituency just what issue he will cave on next: spending.

They came; they spoke; they voted...

• *HOUSE BEGINS VOTE ON AVERTING TAX INCREASES FOR MOST WORKERS
• *HOUSE HAS ENOUGH VOTES TO PASS BUDGET BILL; VOTE CONTINUING
• *CANTOR VOTES NO ON BUDGET BILL
• *PAUL RYAN VOTES YES ON BUDGET BILL
• *BOEHNER VOTES YES ON SENATE BILL
• Republicans: Yea 85 - 151 Nay
• Democrats: Yea 172 - 16 Nay

'Cliff'-Off (for now)...'Debt-Ceiling'-on. Time to start buying March vol steepeners? But the bottom line is simple: the Bush tax cuts are dead. Long live the Obama tax cuts.

 On May 10, 2000 a GATA delegation consisting of Reg Howe, Frank Veneroso, Chris Powell and Bill Murphy met with Denny Hastert, The Speaker of the House in the United States Congress; Spencer Bachus, the Chairman of the House Subcommittee on Domestic and International Monetary Policy; and Dr. John Silvia, the Chief Economist of the Senate Banking Committee. We presented each of them our 100 page "Gold Derivative Banking Crisis" document and personally delivered it to the staff of every House and Senate Banking Committee member.

Presented with little comment (via Bloomberg):

• *HOUSE REPUBLICANS ABANDON EFFORT TO ADD SPENDING CUTS TO BILL

It appears everyone grows tired of the pantomime, even the main actors. Well that was fun while it lasted...

UPDATE: Sure enough - *COLE SAYS MAJORITY OF REPUBLICANS TO VOTE FOR SENATE BILL ... and the market is rallying

Following Monday's fiscal-cliff-gasm in markets in the US, the Australian stock market is the first indication of the post-cliff on-again-off-again reaction to the reality that is a stymied House and stubborn Senate. Some are noting the fact that it is 'up' as a signal of confidence - however, given its 'catch-up' nature, it is actually signalling considerably less confidence than US stocks showed at their close. Why is this important? Because all that matters is the market...

"Everyone knows once the markets open tomorrow our courage drops in direct proportion to the market fall," said one Republican lawmaker

Of course, this could all change based on the next flashing red headline.

"Are the key governments and their leaders able to maintain confidence in this fragile system?" "Are 'they' going to do the 'right' things?"

Ironically, the very success of stock market manipulation only thins the market of legitimate participants and thus increases the probability that risk that has been suppressed for years will erupt uncontrollably. That the stock market is manipulated is no longer in question. One explicit goal in the Fed's zero-interest rate policy (ZIRP) is to drive capital into risk assets such as stocks. That is a first-order, transparent policy of manipulation, i.e. a centrally managed policy aimed at managing markets to meet a key central-planning goal: creating an illusion of prosperity via an elevated stock market and the resultant "wealth effect" for the 10% who own enough stocks to matter. Indirect manipulation is hidden from public view lest the rigging of the market taint the perception that a rising market is "proof" that Federal Reserve and Administration policies are "succeeding." Indirect manipulation is achieved via Federal Reserve quantitative easing operations, unlimited liquidity and lines of credit to fund bank speculations and masked buying of market futures. This multilevel manipulation creates a Boolean either/or for any Bear market: either it is a planned "panic" that profits the banks or a systemic failure of the orchestrated campaign of market manipulation.

From 9/11 on, Gold and the world's central bank balance sheets were as correlated as over-consumption and a hangover (and linked just as causally we suggest). Then a funny thing happened in 2008 - gold slid as the central banks went extreme. Of course, as this divergence occurred, the world's stock markets imploded almost as if the central banks knew their status quo was about to go entirely pear-shaped. From 2008 until November of 2011 (when the world's central banks began their coordinated ease-fest) the correlation went limit up once again. Since then, Gold and CB largesse once again decoupled as liquidity is flushed around the world's markets to suspend reality just a little longer. While this divergence is not as extreme as in 2008, something is afoot.

We can’t predict the future – if it was actually possible fortune tellers would all win the lottery.  They don’t, we can’t and we aren’t going to try to.  However, we can analyze what has happened in the past, weed through the noise of the present and try to discern the possible outcomes of the future. For every almost every positive tailwind there is an opposing headwind, and in the coming year, the political and economic decisions domestically, and globally, will define the coming landscape.