S&P 500 futures staged a 3% rally off their overnight lows - taking them back to 3-day highs as headline after headline triggered another round of stop-runs. VIX compression led the way as hedges were pushed off to March and higher levels enabled better exits above Friday's plunge VWAP levels. The year ends with the Dow beating Gold for the first time in nine years (just). The USD fell 0.5% on the year (and the JPY -12.8%!!). European stocks beat US stocks (EuroStoxx50 almost doubling the Dow's performance). US Treasuries and US stocks both rallied. Financials gained 26% on the year. The Treasury curve flattened with the front-end selling off modestly and the belly rallying 10-15bps. VIX was unchanged from the start of the year at the open today - but thanks to the epic compression and steepening we have fallen back (VIX lower on the year). Of course, today's epic ramp really dislocated from risk-asset reality as soon as Bonds closed...
As we forecast back in November, it is now official that the House will not vote on any deal out of the Senate, assuming there is one, later today, which means America will officially slide off the Fiscal Cliff. And now cue everyone being very hopeful and optimistic a deal will get done momentarily, if not sooner, in 2013. Of course, we all know just how far optimism takes America's dysfunctional Congress. The biggest irony in all of this is that the only winners today were the much hated "1%"-ers, whose taxes may or may not go up, who just got to book major year end profits on this last minute ramp. The remainder of America's population can quietly look forward to 2013 with "hope" and "optimism" that in 2013 Congress will finally stop being dysfunctional. Good luck. Oh, and before we forget, America just breached its debt ceiling: now the pillaging of various government retirement funds begins.
No, it isn't the first time Obama has spoken on the Fiscal Cliff, and more importantly, the debt ceiling, which no matter what happens today appears set to remain unresolved as part of today's 60 day stopgap deal, if indeed one materializes. It won't be the last. There will be, however, much hope, optimism, and scapegoating, as always.
The crowds are slowly starting to fill up Times Square, and despite the imminent countdown to New Year’s, Washington still has not conjured up a resolution to avoid the fiscal cliff. Over the prior two months we have leveraged game theory, Venn diagrams, option “greeks,” and basic investor psychology as tools to decipher the ultimate path of the crisis and subsequent market reaction. Alas, regardless of all the analysis we and countless others have supplied; the short, intermediate, and long term prospects for stocks rest exclusively on headlines. More poignantly, the fate of the U.S. economy, global equities, and net incomes for hundreds of millions now depend upon the decision making of a group so small, its numbers can be counted with one hand.
With just 3 hours left in the trading day, why not up the stakes a little in the soap opera and take it straight to the star character:
- OBAMA MAKING STATEMENT ON BUDGET TALKS AT 1:30 P.M.
What will he disclose? Perhaps this, from the AP...
Time is running out. The cliff negotiations have devolved into two unpalatable options: (1) extend just the middle income tax cuts and extended unemployment benefits and allow about two-thirds of the cliff to happen, or (2) go over the cliff in the entirety. In BofAML's view, given the short time frame and legislative hurdles, the latter appears much more likely. Stock market vigilantes have replaced bond vigilantes as the potential good, bad, and ugly scenarios are devoured flashing red headline by flashing red headline. They, like us, believe that going over the cliff is not a benign “slope” as some suggest. Rather, it accelerates the already-building damage to the economy and markets. The latest evidence is the plunge in consumer confidence. Indeed, this could mark the beginning of the rotation in the uncertainty shock from businesses to consumers. Going over the cliff has many secondary, largely ignored, negative impacts, including tax changes that could damage the housing recovery, as well as negatively impact education and alternative energy, among many others.
It's the last trading day of the year, nothing has been resolved on the Cliff, the perpetually wrong media has now decided to change its tune and is spin the Wile E. Coyote plunge as a "good thing" (just as we expected), Congress is nowhere, the Senate failed to reach any resolution last night and is resuming the "negotiations" farce at the bright and early hour of 11 am, and yet somehow, in spite of everything, the strong bid under the futures refuses to go away (thank you Kevin Henry). This despite what is becoming clear to even this broken market (InTrade odds of a debt ceiling deal by the end of today are still a substantial 2.3%) that there will likely be no deal until some time in February or March when the debt ceiling extensions expire by which point the only question is how deep the US recession will be. And still everyone will be shocked, shocked, when nothing is done today either. Why? Because the market continues to price in an outcome which demands that it crash for it to be achieved. That so few grasp this is frankly, disturbing. Also, everything else is perfectly enjoyable theatrical noise. And just to keep the excitement factor really high, most rates and FX markets close early today, with rates and FX futures markets close at 1pm New York time while cash bond trading at 2pm.
The divergence between consumers and producers within the real economy that has stumped economists for the better part of 2012 can, at least in part, be attributed to the Fiscal Cliff; but the anticipatory effects of the Fiscal Cliff on the United States of America evidently began with American politicians, and probably for the worse, that is where it will end. The division that has plagued Washington has grown starker in recent years, and the divergence between consumers and producers as a result of divided leadership stands as a testament to the irresponsibility of those sent to Washington D.C. to serve their country. These divergences cannot last forever, and depending on the events of the next couple weeks, the United States is due for a reversion to the mean. The direction of that reversion - either production up to meet consumption or consumption down to meet production and confirm a recession within the United States - is wholly on the shoulders of the politicians in Washington D.C.
It will be natural to sing the praises of our elected leadership after they have hammered out their deal to raise taxes in order to avert the crisis. To recall that raising taxes is ever always the solution will be just as easy as to forget to honor the unsung heroes of the fiscal cliff - the software people that maintain America's payroll systems.
Talks on the fiscal cliff have resumed, but as of this writing there is not yet an agreement. The current negotiations focus on the income threshold under which tax cuts should be extended, among other topics. As we have noted, the sides seem as far apart as ever, and as Goldman notes, while it is still possible that an agreement will be reached by year end, a retroactive deal in January looks more likely. The eventual resolution still looks likely to be a scaled down agreement that addresses only the policy changes scheduled for year-end and omits other issues, such as an increase in the debt limit or longer-term fiscal reforms. The greatest area of uncertainty is whether the spending cuts scheduled under the sequester will be addressed. The fiscal policy timeline below shows how we are rapidly approaching the more ominous debt ceiling debate and Goldman's Q&A asks and answers provides context for where we are from both an economic and ratings agency impact basis.
While EURUSD is flat, there is one market open (free of manipulation - perhaps) that offers some insights into traders' perceptions of reality - however 'cautiously', 'modestly', 'surreally' optimistic the powers that be proclaim. InTrade's "debt ceiling by Dec. 31st" odds have plunged to around 2%. A week ago, when we continued to urge readers to short the contract, it was at 10% (and at 30% when we initialy said on Novermber 13th no deal would occur) - even as everyone and their pet rabbit was convinced a deal was going to be cobbled together. The 'debt ceiling' odds are implicitly the 'fiscal cliff' odds given Harry Reid's insistence of the 'bundling' to remove every possible point of leverage from the Republicans:
“We would be somewhat foolish to work out something on stopping us from going over the cliff and then a month or six weeks later Republicans pull the same game they did before and say, 'We're not going to do anything — unless this happens, we're not going to agree to increasing the debt ceiling,’ ” Reid said.
“I agree with the president, it has to be a package deal,” he added.
At around 2% odds, this still seems like money good for shorts...
Reid "Unable To Come Up With Counteroffer... Apart On Some Pretty Big Issues", Hands Over Negotiations To BidenSubmitted by Tyler Durden on 12/30/2012 14:20 -0500
The second update of the day is here, and this one is far less jovial and optimistic than that coming from the seemingly quite cluless Lindsey Graham:
- REID SAYS HAVE BEEN UNABLE TO COME UP WITH COUNTEROFFER
- REID SAYS `WE'RE APART ON SOME PRETTY BIG ISSUES'
- REID SAYS `I WISH THEM WELL' REGARDING MCCONNELL-BIDEN TALKS
- MCCONNELL SAYS HE CALLED BIDEN TO TRY TO `JUMP START' TALKS
Nothing like the fate of the nation in the hands of Joe Biden, who may or may not still be laughing.
As largely expected, Sunday would be a day marked by rumors, anti-rumors, denials, counter-denials, and much more groundless speculation if zero facts, however without an open market reacting to every single headline like a collocated stung dog. Sure enough, in the first such rumor of the day, we just had Republican Senator - a long time opponent of the Norquist tax pledge - Lindsey Graham, pushing for his agenda in the same way that the Greek finance ministry would unleash perfectly wrong rumors to the FT and Reuters, who said on Sunday that chances for a small "fiscal Cliff" deal in the next 48 hours were "exceedingly good" and that President Barack Obama had won: i.e., taking an opinion and making it fact - something seen so often in the European negotiating tactics. "I think people don't want to go over the cliff if we can avoid it," Graham said on Fox News Sunday. Of course, how Graham views the world, and how potentially filibustering Senators do, not to mention the majority of Congress do, is a totally separate matter.
Surprise! As we all wait on tenterhooks for tomorrow's messianic 'Meet the Press' appearance, The Hill reports that a Senate aid with knowledge of the talks said late Saturday afternoon there is "no major progress." The rare weekend negotiations continue with the sticking point still taxes - which will come as no surprise to any who read/listened to Ron Paul's clear analysis of the idiocy taking place - but differences on other issues, including spending cuts, linger. Reid has scheduled a Democratic caucus meeting for Sunday afternoon to give his colleagues a chance to weigh in on a potential deal. McConnell has said he would do the same. "I believe such a proposal could pass both houses with bipartisan majorities – as long as these leaders allow it to come to a vote," Obama said in his weekly address. "If they still want to vote no, and let this tax hike hit the middle class, that’s their prerogative – but they should let everyone vote. That’s the way this is supposed to work." If the Senate passes the legislation, it would then force the House to take up the bill on the eve of the looming deadline - leaving the 'blame' at the foot of Boehner's Republicans should they not support it. The games continue... but in the meantime, consider what the debate would have looked like (literally) if Elizabeth Hasleth was still in the Senate.
The holiday week saw the dollar consolidate against most of the major currencies. The yen was the main exception as its losses were extended under the aggressive signals coming from the new Japanese government.
At the end of the week, the other key consideration, the US fiscal cliff made its presence felt. The recent pattern remained intact. News that gives the participants a sense that the cliff may be averted encourages risk taking, which means in the foreign exchange market, the sale of dollars and yen.
News that makes participants more fearful that the political dysfunction failed to avert the cliff and send the world's largest economy into recession, generally see the dollar and yen recover. This is what happened in very thin markets just ahead of the weekend as Obama's ling last ditch negotiating stance seemed to reflect a retreat from his earlier compromises.