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Rosenberg On The Impact Of The Tax Package And How The Gridlock Over The Debt Ceiling Should Be Traded

Tyler Durden's picture




 

As usual, trust Rosie to cut through the chaff regarding the $858 billion tax package, which he views not as stimulative, contrary to what the suddenly bullish sell-side crew claims, but merely as preventing the government becoming a "contractionary economic force" - "How much
of the tax cuts will go into saving and imports remains to be seen. We think the “stimulative” effects are over exaggerated." Specifically, his trade recommendation based on a paralyzed congress and a debt ceiling hike is as follows: "by the time the second quarter rolls around, it will be time to buy volatility, S&P 500 puts, and gold." And in further debunking the perpetually wrong sellside groupthink, Rosenberg looks at bond forecasts from late 2009 and finds that virtually everyone who is now once again calling for a drop in yields was doing the same a year ago...and was wrong. The tangent is that if Morgan Stanley's Jim Caron is completely wrong for the second year in a row, we fail to see how the rates strategist can possibly claim to have credibility should he get this most important call wrong in two consecutive years. Lastly, for those who care about market fair values, Rosie shares his fair value model updates on the S&P, the TSX, Corporate bonds and the CAD.

On the tax package:

The bond bears and equity bulls are placing much of their faith in the $858 billion tax package in the U.S. Most of this “stimulus” only prevented the federal government from acting as a contractionary economic force in 2011. How much of the tax cuts will go into saving and imports remains to be seen. We think the “stimulative” effects are over exaggerated.

What we don’t see discussed that much are the spending cuts coming our way and these indeed will show up directly in GDP. There’s a new Congress in town folks, and a showdown is coming with regard to the debt ceiling file. By the time the second quarter rolls around, it will be time to buy volatility, S&P 500 puts, and gold. Right now the markets are overpopulated with growth bulls, which is why it is essential to practice safe investing.

The front page of the weekend WSJ runs with Budget Brawl Looms in Congress is a must read. The article states:

“Senate Republicans, facing an uproar from tea-party activists, rose up late Thursday to scuttle a 1.1 trillion dollar spending bill ... In the process, they showed the power fiscally conservative activists now hold over even the most seasoned lawmakers.”

Page A5 is also worth a look ? Package Adds Fuel to Fights Over Spending, Tax Policy. To wit:

“Republicans are pushing for more spending cuts as the way to narrow the deficit. The disagreements among the White House, Senate Democrats and Republicans could all converge as the deadline for raising the debt ceiling nears in the first half of next year ... Administration officials say the debt ceiling must be raised so the U.S. can fund its obligations next year. Republicans have said they will demand major spending cuts to back any plan.”

So tell us now ? is gridlock good?

We should add that the Saturday NYT was also on top of this issue ? A Budget Battle Looms Next Year (see the front page). Same conclusion:

“The 2011 spending fight could be complicated by the need to raise the federal debt limit to avoid a federal default ? a vote that many new Republican lawmakers have indicated they would not make. Republicans say the debt limit vote could also present an opportunity, allowing them to tie a package of spending reductions to the debt increase to make it more palatable.”

On the optimists' wrong bond call from last year.

WHEN IN DOUBT …

...go to the year-ahead forecasts this same time in 2009.

Admittedly, we were not bullish enough on equities, but by the end of August, just prior to Ben Bernanke’s attempt at market manipulation, it did look as though our caution was warranted. Alas, we underestimated the Fed’s ability to pull another rabbit out of its hat, and then President Obama’s ability to abandon his left-of-center Democratic base in the aftermath of the mid-term elections. Although curiously, he improved his 2012 re-election prospects by giving the Republicans everything they wanted.

When we seek out solace what we like to do is go to the Barron’s bond outlook in December 2009 ? it was actually titled Steeply Bearish Bond Outlook. We proved to be too optimistic as far as the December 31 point forecasts are concerned, but we had three percent penned in on the 10-year note by mid-2010 and the only ones with both the nerve and verve to call for a move back to a “2-handle” in the second half of the year.

So we missed the bizarre late-year melt-up in yield, but by November the Treasury market had delivered an 8.5% net positive return. Not bad, eh?

But look at the consensus call this time last year and it’s a hall of shame ? 7 of the 11 forecasters had the Fed tightening and two were at 2% on the funds rate (!). And 8 of the 11 were 4% or higher on the 10-year note yield. Yikes!

Okay, enough back-slapping on the bond call. Time to get to work on 2011.

This year’s interest rate outlook for 2011 is on page M12 of Barron's. Once again, we get the last word in and of the 13 economists polled this time around, all but yours truly is bearish on the outlook for bond yields. Seven see 4% or higher for the 10-year note yield by December 2011 and get this ? this crew is populated with the same folks that were calling for roughly 4% or higher this time last year.

To quote Mark Twain ...

“When I find myself on the side of the majority, I know it’s time to find a new place to side.”

Lastly, some thoughts on fair value:

VALUATION UPDATES FROM OUR MODELS

S&P 500: No surprise here, the U.S. market continues to be overvalued. According to our proprietary models, the median fair-value for the S&P 500 is 1,120 (with a range of 1,000 to 1,200) suggesting the market is overvalued by over 10%. The fair-value line has actually been creeping upwards as earnings/revisions have recently improved.

Another metric we watch is the Shiller P/E ratio (uses cyclically-adjusted earnings), which moved up again to 21.9x (the highest since June 2006). Using this metric, the market is overvalued by over 30%.

In terms of sectors, Financials, Materials, Industrials are the most overvalued while Health Care, Technology and Telecommunication offer the most compelling value at the current time.

TSX: There was a big jump in the median fair-value estimate in the last month, owing in large part to upgrades in aggregate forward earnings estimates. Our internal models are now suggesting a fair-value level of 11,200, versus 10,700 last month (this is the highest valuation since June). This still points to an overvaluation of over 15% ? the actual market price continues to outpace the improvement in the fair-value line, hence our caution on the equity market. In Canada, Utilities, Health Care and Materials are the most expensive while Technology, Telecommunication and Industrials are the cheapest.

Corporate Bonds: The aggregate fair-value models suggest that BBB spreads are about 50bps undervalued versus 80bps undervalued last month. BB and B rated product offer the most relative value while AAA and AA are the most expensive. So the lower-quality segment of the corporate universe still appears to offer the best value as the year draws to a close.

Canadian dollar: Fair-value (based on the Bank of Canada model using commodity prices and short-term interest rate spreads) continues to increase. This month, it moved up to 94 cents versus 93.5 on higher commodity prices, which means that with the Canadian dollar, at near parity, remains overvalued by about a nickel. But it is important to see the fair-value line continue to move higher as this underscores our view of the loonie being in a secular bull market.

From Gluskin-Sheff

 

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Mon, 12/20/2010 - 12:36 | 818527 MsCreant
MsCreant's picture

Pms tanking a little.

Edit: Never mind. Gotta get used to the volatility. 

Mon, 12/20/2010 - 11:27 | 818538 Spalding_Smailes
Spalding_Smailes's picture

USD up big. Gold and Silver getting blowtorched ...

Mon, 12/20/2010 - 11:33 | 818542 SheepDog-One
SheepDog-One's picture

'Gold blowtorched', up $2.

Watching which turd will float to the surface next...for now the most bouyant turd seems to be USD, for today.

Mon, 12/20/2010 - 11:32 | 818548 Dapper Dan
Dapper Dan's picture

O.T. Has anyone noticed that the days are shorter?

Who controls the Prime Meridian?

Mon, 12/20/2010 - 11:45 | 818572 Eric The Red
Eric The Red's picture

Must be JPM, ha ha.  Buy Silver, Move the World.

Mon, 12/20/2010 - 12:37 | 818654 MsCreant
MsCreant's picture

Silver and Gold now have magnetic properties.

Mon, 12/20/2010 - 11:36 | 818550 gringo28
gringo28's picture

keep dreaming......politics will trump economics every single time.

Mon, 12/20/2010 - 11:46 | 818573 No Mas
No Mas's picture

Too funny.  Rosie predicting a decline in the S&P.  Well that's new and refreshing, after all it's not like he missed the latest ramp up in the S&P; or did he?

Why don't you wait for this guy to actaully be correct before posting his "predictions?"

Looks like sheeple come in all shapes, sizes and persuasions.  Seeing all the traffic on this site gives me an investment idea in a really PM; I shall try and corner the Tin Foil market.  Then the ZH sheeple will need to come to me for their supply.  I shall rule the dumb side!

Mon, 12/20/2010 - 11:49 | 818580 Crime of the Century
Crime of the Century's picture

I shall rule the dumb side!

A kingdom of one...

Mon, 12/20/2010 - 11:51 | 818583 Uncle Remus
Uncle Remus's picture

These are not the sheeple you are looking for.

Mon, 12/20/2010 - 12:35 | 818643 gringo28
gringo28's picture

he's just an angry, cold Canadian.....

Mon, 12/20/2010 - 11:50 | 818581 Panafrican Funk...
Panafrican Funktron Robot's picture

Weird that he's still relying on his models in spite of the Fed intervention.  As if a constriction in treasury issuance (should it happen) would be a sufficient constraint for the Fed to pull back.  The Fed can buy whatever the fuck it wants and mark it to whatever the fuck it wants, ergo, price the dollar at whatever the fuck it wants.  Literally the only variable is what the rest of the world is going to do about it.  Domestic politics has been rendered completely irrelevant to domestic economic function.

Mon, 12/20/2010 - 12:25 | 818626 walcott
walcott's picture

all paper goes to zero. Paper money, paper T-Bills, paper Gold and Silver.

premiums for silver keep rising. They can sell 100 pieces of paper for every ounce.

Eventually the 100 pieces of paper go to zero. Actual chunk of silver increases 100x.

Mon, 12/20/2010 - 12:27 | 818628 huntergvl
huntergvl's picture

I don't see the debt ceiling being any more of an obstacle to raise, than the tax cuts were to pass. The Republicans spend just as much as the Democrats, and this is mainly because there are no Democrats or Republicans, only Plutocrats or Plutocans. They will all continue to increase the deficit, steal from entitlement programs and maintain the three decade status quo. Gold will continue its rise in 2011, but Silver will do better. A put on the S&P500 will prove as fruitless as it has been for the past two years. Volatility will be muted by continuous POMO continuing well into 2012 and beyond.

I would caution that Gold and Silver remain a TRADE. Took a 30% profit on a 6 week hold recently in Junior miners. I will be looking to buy on the dips and repeat this cycle over and over until it collapses. I am a Gold and Silver Bull, but the hysteria on this board that precedes a PM mania is akin to, "The Bernank's" confession that he is 100% certain he is right in Queasy-ing. Can Gold and Silver prices get crushed for an extended period? Many would be wise to check that 100% certainty that PMs always rise, at the door. The last time I heard so many people sure of an asset class always rising was the housing boom.

Just look at how the JPMorgan short position is working out......Not the short squeeze that was expected is it? The CFTC is still compromised and working for their masters. The Big players still have the commodity exchanges well in hand. Thus, PMs are still a TRADE. I believe you could expand that statement to just about every asset class nowadays. Equities, Bonds, Options, Futures.......What isn't being overtly manipulated? Name one investment class that is subject to fundamental analysis?

My investment themes are trade, hedge, and survive. Whatever you love today, prepare to hate tomorrow and be patient as always.

Mon, 12/20/2010 - 12:32 | 818638 Panafrican Funk...
Panafrican Funktron Robot's picture

If you disagree with the way the market functions, why participate in it?

Mon, 12/20/2010 - 15:50 | 819240 Helix6
Helix6's picture

What is important is not to agree with how the markets function, but to understand how they function.  The sad fact is that US fiscal and monetary policy force savers to put their money at risk, or to watch thier savings erode via inflation.  For most people, this means some kind of investion -- equities, bonds, real estate.  Understanding how the markets are manipulated is absolutely essential to preserving whatever savings one has.

It's a pathetic and corrupt system, but that's what it is.  Keep your ear to the ground.

Mon, 12/20/2010 - 18:09 | 819537 huntergvl
huntergvl's picture

Helix states my view below pretty well. I don't really have the luxury to NOT participate in the markets. For instance I have a substantial stock holding in the company I work for and I cannot access it until I either retire or quit. It is the company's stock and just like all other equities at this time, it is vulnerable to losses. I have to invest in order to hedge potential losses there. And of course, just simply understanding Bernanke's agenda and goals and then frontrunning him (a constant theme from zerohedge) has been highly profitable for me. I hope it has been that way for everyone else. I just think that overall, you have to embrace the new dynamics of the market and be flexible.

Of course risk has increased dramatically as fundamentals have become skewed, and my investment sentiment reflects just that attitude. Every trade and every position carries more risk than pre-'08. I invest and hedge accordingly.

Mon, 12/20/2010 - 12:34 | 818641 MsCreant
MsCreant's picture

Do you honestly think this board you are posting on is representative of mainstream investors? Really? I am not saying you are wrong, of course PMs can tank, short or long term, but it is really unwise to use this board to construct your contrarian sentiment indicator. 

We is da edgy nutjobs, not the main stream. Swim against us and you are swimming WITH the current.

Mon, 12/20/2010 - 17:56 | 819513 huntergvl
huntergvl's picture

Who is 'us?' I kind of thought I was part of 'us.' I read just about everything posted on here and a lot of the comments as well and lately have picked up a sentiment that too many are buying every dip in PMs, but not considering a sell. It is my very contention that this does in fact represent the mainstream.

And, Zerohedge has become quite popular. Your statement that zerohedge is not mainstream still rings true with me, but that doesn't equally imply that views on this board are always contrarian, nutty, and edgy. Sometimes going with the flow is quite profitable. 

Mon, 12/20/2010 - 13:04 | 818713 weinerdog43
weinerdog43's picture

I think you've made some correct observations but are drawing the wrong conclusions.  Yes, the plutocrats and plutocans are completely corrupt, but your conclusions seem to be arguing over timing.  While many people on this board are traders, still more are simply fearful of the future and are doing what they can to preserve what assets they can. 

Mon, 12/20/2010 - 13:05 | 818714 CrashisOptimistic
CrashisOptimistic's picture


Offshore might be a superior alternative to equities, specifically the Swiss Franc.

Personally, I think what will happen is what we saw Friday and so far today.

Namely, people who left bonds . . . will return to them.  There will be no growth.  It is scared money and scared money (the vast majority of money is rightfully scared) will never, EVER go to Gold.  Nor will it go to stocks.

It will go to US bonds, as it always has.  There, it will be protected from default by printing and from inflation by perpetual oil choked zero growth.

Mon, 12/20/2010 - 13:41 | 818815 Andy_Jackson_Jihad
Andy_Jackson_Jihad's picture

You assume that money will rush to US bonds like its driven by some type of reflexive, reptile brain.  What happens when US bonds aren't viewed as a risk free asset?  It throws off all modern finance theory. 

Agree that the next scare might force deleveraging from commodities into bonds like 2008 but it might not.  ZH has already documented that the inverse correlation of dollars/gold is broken. 

IMO, a paradigm shift to view gold as the "safe" asset will cause havoc for anyone trying to make a prediction.  The entire world of MBA knowledge will be thrown out the window.  I don't think anyone can predict what they may look like...esp. if judging by models or past experience.

Mon, 12/20/2010 - 15:23 | 819143 CrashisOptimistic
CrashisOptimistic's picture

It is the people with money that you have to persuade that gold is safe.  That's the over 65 crowd, whose paid for houses have lost value which prevent them from downsizing to more manageable quarters and whose entire lives have been spent being careful and conservative.

I do not think these gray haired wealth holders (the majority of wealth) are going to a non income producer.  They want to spend time with grandchildren, not doing monthly liquidations for living expenses.  They'd rather have the bond funds that flow cash right into their accounts each month.

Mon, 12/20/2010 - 14:42 | 819026 LowProfile
LowProfile's picture

You've been copy-pasting this dipshit remark on all the ZH posts.  Stop it!

Printing is default, you fuckin' troll!  And anyone who would choose the Franc over the Sing Dollar is an idiot.  Oh, and:

...Douche!

Tue, 12/21/2010 - 12:43 | 821124 iota
iota's picture

Is this from the CNBC today? The guy that presents squawkbox stooped to insulting his accent after he run out of counter-arguments for Rosenberg's bearish outlook. It was weak.

 

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