Archive - Jan 7, 2012 - Story

A REAL “black swan event” - an event that deviates by 180 degrees from what is “normally expected” - would be a political debate over root causes and basic principles. The great merit of Ron Paul - and the great service he is giving to his own and every other nation - is the fact that he is doing everything he can to raise the debate to that level. That makes Dr Paul a unique politician, a man who tells people what most of them DON’T want to hear or understand. Or at least they don’t think they want to understand it. Dr Paul’s great and merited attractiveness to a growing number of admirers has a very simple source. He is that rarest of creatures - a FREE man. He is beholden to nobody. He has developed his ideas and his convictions over a long and fruitful life of independent thinking. He does not compromise. He homes in on the fundamental issue and principle of any political issue and serves it up without salt or other “seasoning”. He says what he means and he means what he says. He is the living embodiment of the “dream” that most Americans have long since given up on as they saw it slip further and further beyond their grasp.

Because it beats a Saturday night lobotomy.... Right? Also, Bachmann is gone.

UBS, which has been issuing ever gloomier forecasts over the past few months, with the sole intent of getting someone to bail out the European financial system, which despite the current stay of execution is increasingly more brittle (because solvency crises only get worse with time, never better), has just come out with its magnum opus. In a report released overnight, the firm's Global Rates Team has just jumped the shark, with a prediction that things in Europe are literally about to implode: "we anticipate that the crisis will deteriorate further than the stressed levels of late November. We do not believe that Greek PSI will take place in a “voluntary” fashion but instead expect coercive restructuring of Greek debt either before or soon after the March redemption, triggering CDS contracts. Greece is not likely to decide to leave the euro area in 2012, though the risks of that happening have certainly increased." And as we well know from previous UBS reports, a departure of a country from the Eurozone would lead to a mass splurge in purchases of guns, spam and gold. So is this merely a last ditch call for a bailout from someone, anyone: either Fed or ECB will do? Most likely. Because if while the general market continues to ignore Europe, and European banks are out there literally screaming the end is nigh, then the truth is surely somewhere inbetween. Especially, if as Reuters reports, Greece is just the beginning. "One of Portugal's most prominent business leaders has moved his family holding company to Holland partly because of uncertainty over whether the country will remain in the euro, Alexandre Soares dos Santos said in a newspaper interview on Saturday. Soares dos Santos, who is chairman of the board of Jeronimo Martins, caused a stir in Portugal this week when it emerged that his family holding company that controls the country's second largest retailer had moved to Holland...."I also don't know if Portugal will stay in the euro. And if it leaves, it will be to the escudo," Soares dos Santos told Expresso, referring to the escudo currency used by Portugal before it adopted the euro. "I have a right to defend my property."" So while everyone continues to expect the best, those who really matter are planning for the worst.

The Keynesians and Monetarists have fooled people with a clever sleight of hand. They have convinced people to look at prices (especially consumer prices) to understand what’s happening in the monetary system. Anyone who has ever been at a magic act performance is familiar with how sleight of hand often works. With a huge flourish of the cape, often accompanied by a loud sound, the right hand attracts all eyes in the audience. The left hand of the illusionist then quickly and subtly takes a rabbit out of a hat, or a dove out of someone’s pocket. Watching a performer is just harmless entertainment, and everyone knows that it’s just a series of clever tricks. In contrast, the monetary illusions created by central banks, and the evil acts they conceal, can cause serious pain and suffering. This is a topic that needs more exposure.

The folks at Religare Capital Markets have put together one of the better cheat sheets on a region that most of the big banks largely ignore: the Middle East, where day after day we get new and more troubling headlines of escalation, usually involving Iran and Israel. And since at the end of the day, in a resource-strapped world, the bottom line is always about energy, and oil, what happens in the MENA region is arguably far more important at the end of the day than who prints how much electronic paper/linen. But most important is probably the following analysis charting the probability of an attack of Iran by either Israel or the US. We were quite surprised to find that in Religare's opinion the probability of an Israeli-sourced attack on Iran hits a high of 50% sometime in early February, with the US contributing about 20% with a peak in May and just before the presidential elections. This is how they explain it: "The probability of an attack on Iran is now higher than ever. The only solution to the current crisis, diplomacy, is off the table due to politics and the focus is now shifting to regime change. We see the probability dropping mid-year, although US elections could increase the probability of a US attack significantly (unless Ron Paul steams ahead), as will Iran’s likely decision to move their centrifuges to reinforced facilities in Qom if not handled correctly (likely mid-year). We reiterate our view that the fallout may not be as bad as expected from an Israeli strike, horrendous from a US one." And if they are right, what happens to oil will likely be the biggest catalyst of events in 2012 - a topic PIMCO has already had some extended observations on.

Back in mid-May just after the market had topped for the year, in a post titled "The Great QE Unwind Compression Trade(s)" we told readers to "focus purely on Utilities and Consumer Staples as the long leg in a compression trade, while shorting Industrials and Consumer Discretionary, leaving Financials alone (John Paulson's projections of Bank of America hitting $30/share by the end of 2011 notwithstanding)." Granted Financials were by far the worst performing trade of the year although with the possibility of a Fed bailout around every corner, it was imprudent to be short the sector (rather going long various unique opportunities such as MBIA proved to be a 100% return in months if not weeks). Instead, we referred to precious metals, namely gold, as a natural hedge against any potential Fed (and global central planner) stupidity. So how did anyone who followed our 2011 advice do? Well - the above three suggestions represented three of the five best performing sectors in the year (with the shorts not offsetting any gains). As can be seen below. Which we merely bring up to those who, counterfactualy, desire to brand this site as some fringe lunatic goldbug asylum. Which we are not saying it isn't: we urge most people to stay out of stocks entirely: the possibility of another flash crash is always present. For those for whom capital preservation is of paramount importance, precious metals are the way to go. But we realize there are those for whom career risk means being involved in stocks, and we realize that they represent a substantial portion of our readership. Which is why we try to be of use to everyone who comes here.

In this twofer of a chartology packet, we take a look at Goldman's target for 2012, which David Kostin has as unchanged for the time being (unlike Morgan Stanley which went bearish off the bat), as well as what one should expected from dividend stocks. First, regarding Goldman's 2012 target of 1250 on the S&P, or unchanged from last year, "S&P 500 finished 2011 flat in price terms and outperformed most global indices. We see similar returns in 2012 with a 12-month target of 1250. Recent strength in US economic data and less negative news from the Eurozone and Washington, DC is unlikely to be sustained, implying near-term multiple risk as investor confidence falters. During 4Q, analysts cut 2012 EPS estimates in all sectors. We forecast downside to US equities during 1H." So where should cash be parked according to Goldie? Why in the ever bigger dividend bubble: "Dividends accounted for 20% of the 7.2% annualized total return to US stocks since 1950, 40% of the 1.6% average total return during the past decade, and 100% of the total return last year. We forecast 2012 S&P 500 dividends per share will establish a new record high of $29.20, exceeding the prior peak reached in 2008. Dividend swap market implies similar dividend growth in 2012 compared with our forecast, but lower growth from 2013 through 2021. We expect 23% and 15% dividend growth for Information Technology and Financials, respectively." Incidentally, dividend parking makes sense in this environment of devaluing global cash: as capital appreciation becomes next to impossible with multiples contracting ever more and with earnings rolling over, the only way to generate an ROI is to extract as much cash from companies as possible...Of course assuming management will be willing to part with its cash buffer in light of increasing uncertainty. Net net this also means a decline in stock prices (ex-dividend) but who's counting.

While the aftermath of the first 10 day Iranian wargame in the Straits of Hormuz is still lingering, especially in the price of oil, and the world is bracing itself for parallel exercises between a joint US-Israel operation and a concurrent Iranian effort in the weeks ahead, Iran is not waiting and has already started a brand new military exercise, this time inland and far closer to a key US strategic asset - Afghanistan (and its poppies). From Reuters: "Iran launched a military manoeuvre near its border with Afghanistan on Saturday, the semi-official Fars news agency reported, days after naval exercises in the Gulf increased tensions with the West and pushed up oil prices. Mohammad Pakpour, commander of the Revolutionary Guards' ground forces, said the "Martyrs of Unity" exercises near Khvat, 60 km (40 miles) from Afghanistan, were "aimed at boosting security along the Iranian borders," Fars reported." Naturally, this "reason" is bogus. That said, at this point we are at a loss as to which country it is that is desiring a military escalation more, because both sides appear hell bent on moving past the foreplay stage. Regardless, the whole situation is starting to smell more and more like the summer of 2008 when crude would move up in $5 increments on flaring tensions between Israel and Iran, coupled with Goldman predictions of near-quadruple digit Brent, only to have the entire energy complex implode in the aftermath of Lehman. The recent decoupling of oil from all other risk indicators (oil higher is not a good thing for the economy) is vaguely reminiscent...