Newspaper

• Apple, China Mobile sign long-awaited deal to sell iPhones (Reuters)
• U.S. growth hopes help shares shrug off China money market jitters (Reuters)
• Rule Change on Health Insurance Rattles Industry (WSJ), Obamacare's signup deadline on Monday has its exceptions (Reuters)
• Tale of Two Polish Mines Shows Biggest EU Producer’s Woes (BBG)
• Probes See U.K. Market Manipulation Reports Rise 43% (BBG)
• Shoppers Grab Sweeter Deals in Last-Minute Holiday Dash (BBG)
• Banks Mostly Avoid Providing Bitcoin Services (WSJ)
• Secret Handshakes Greet Frat Brothers on Wall Street (BBG)

The notion that individual conviction and bravery is a #MassiveFail when compared to a machine gun nest seems obvious and trite to us today. Strangely enough, though, when it comes to prevalent notions of market behavior it feels like we’re still in 1936. What I mean is that there is still a dominant belief in individual decision-making as the most effective route to successful investing, that if we could just learn a little bit more about Company X or Sector Y we will win the day. Is your individual knowledge and conviction level in Company X important for investing success? Absolutely, in exactly the same way that physical and psychological bravery is important for war-fighting success. Still more important, though, is the strength and cohesion of the groups that share your investment philosophy. Not your specific investment opinions, any more than one soldier has the same amount and type of instantiated bravery as another soldier in his unit, but the coherence of investment goals and operational practices across your fellow market participants in a particular market segment.

"Step right up and try your luck...spin the wheel and watch where she lands...everybody's a winner" - sometimes if you listen hard enough you can almost hear the Carney coaxing unwary investors to step up and try their luck in a game that has been rigged against them. During the last two decades, we have been amazed to watch as individuals strolled through the doors of the Wall Street casino to try their luck by betting "against the house" for a dream of riches. Just as with anyone who has ever gone to Vegas - you will win sometimes but the "house" wins most of the time. However, there are always the "professional gamblers" that can do better than the average most of the time. Why? Because they understand "risk" in its various forms...

Official White House Spying Panel Implies that It Might Be …

Last Friday we reported of a freak near-incident in the South China Sea, when a US warship nearly collided with a Chinese navy vessel, operating in close proximity to China's only aircraft carrier, the Liaoning, although details were scarce. Today, with the usual several day delay, China reported what was already widely know, admitting that "an incident between a Chinese naval vessel and a U.S. warship in the South China Sea, after Washington said a U.S. guided missile cruiser had avoided a collision with a Chinese warship maneuvering nearby." According to experts this was the most significant U.S.-China maritime incident in the disputed South China Sea since 2009. Which naturally warranted the question: whose actions nearly provoked a potential military escalation between the world's two superpowers. Not surprisingly, China's version is that it was all the US' fault.

There’s a lot of chatter out there that the Fed will hold off on a taper announcement, but will put some sort of limit on the overall size of this latest round of QE launched in September 2012. In other words, monthly purchases will continue at the current rate, but this will no longer be a QE-forever program. From a CK game perspective, placing a limit on the QE program is a more market-negative statement than a taper. This is what I’m going to be watching for tomorrow, along with whatever dovish (market-positive) language is inserted around forward guidance on rates. And then the battle for meaning and interpretation will be joined …

• Presidential Task Force Recommends Overhaul of NSA Surveillance Tactics (WSJ)
• Monte Paschi's Largest Shareholder Says It Will Vote Against $4.1 Billion Capital Increase (WSJ)
• SAC Reconsiders Industry Relationships—and Its Name (WSJ)
• Icahn’s Apple Push Criticized by Calpers as ‘Johnny Come Lately’  (BBG)
• In Yemen, al Qaeda gains sympathy amid U.S. drone strikes (Reuters)
• Missing American in Iran was on unapproved mission (AP)
• In China, Western Companies Cut Jobs as Growth Ebbs (WSJ)
• U.S. lays out steps to smooth Obamacare coverage for January (Reuters)
• Las Vegas Sands Said to Drop $35 Billion Spanish Casino Proposal (BBG)
• Twitter Reverts Changes To Blocking Functionality After Strong Negative User Feedback (TechCrunch)

The bombs are going to drop – increased forward guidance on rates and decreased direct bond purchases – but these policies in and of themselves are just tactical. What’s really at stake is the strategic meaning of these policies, the belief system that takes hold (or doesn’t) around the power of the Fed to create market outcomes.  Over the next three or four months we’re going to see quite a battle for the hearts and minds of investors, with both “sides” employing the Narrative of Don’t Fight the Fed. On the one hand you will have the Fed, with their Jericho Trumpet of Hilsenrath et al shrieking at you a new interpretation of the Narrative: ZIRP is the source of the Fed’s power, not QE, so tapering is no big deal. On the other hand you also have the Fed, but the Fed of the past several years and the way it has trained the market to believe that the portfolio rebalancing effect … i.e., the behavioral impact of QE that Bernanke has directly credited with driving up the stock market … is what really matters. And if that’s your reality, then tapering is a big deal, indeed. I’ll be monitoring all this closely at Epsilon Theory in the weeks ahead.

Although the U.S. stock market continues to hit new nominal highs on a nearly daily basis, the U.S. economy bumps along at a lackluster pace. This disconnect has been achieved by a massive Fed experiment in monetary stimulation. Through the combination of seemingly endless maintenance of zero interest rates and the injection of some $1trillion a year of synthetic money into fixed-income markets, the Fed is hoping that the boom it is creating on Wall Street will lead to a boom on Main Street. In reality, this a very dangerous economic gamble of enormously high stakes.  As we have seen in the recent past, financial bubbles can leave catastrophe in their wake.

• Glass-Steagall Fans Plan New Assault If Volcker Rule Deemed Weak (BBG) ... "if"? The banks control the legislators and regulators...
• Cellphone data spying: It's not just the NSA (USA Today)
• Major tech companies push for limits on government surveillance (Reuters)
• Shanghai Warns Kids to Stay Indoors for Seventh Day on Smog (BBG)
• Protesters fell Lenin statue, tell Ukraine's president 'you're next' (Reuters)
• Everyone must be flying private these days: EADS to cut 5000-6000 jobs, close Paris HQ in restructuring (FT)
• Big Players Trade 'Upstairs' (WSJ)
• There’s no way to tell how many people who think they’ve signed up for health insurance through the U.S. exchange actually have (BBG)
• Slower China inflation reduces worries of tighter policy (Reuters)

• America’s Role as Consumer of Last Resort Goes Missing (BBG)
• Holiday sales sag despite blitz of deals (WSJ)
• Abe Support Falls Below 50% for First Time Amid Secrecy Drive (BBG)
• U.S. airlines give China flight plans for defense zone (Reuters), while Japan: no change to airlines' notification policy when flying in East China Sea zone (Reuters)
• Thai protesters seek to topple PM after clashes (Reuters)
• Hilton Seeks as Much as $2.4 Billion in Biggest Hotel IPO (BBG)
• Biden on delicate mission to defuse tensions in East Asia (Reuters)
• Fed eyes financial system weak link (WSJ)
• Pentagon in line of fire in US budget war (FT)
• China’s monetary squeeze collides with housing bubble (FT)

Following the to-ing and fro-ing of the last 2 days with US and Japan "testing" China's new Air Defense Zone (ADIZ), China has not only escalated (as we noted earlier) but as the day begins in Asia is stepping up the rhetoric significantly. Official media said that Japan is the "prime target" and it is an "urgent task for China to further train its air force to make full preparation for potential conflicts." Japanese lawmakers, meanwhile, are pushing for a bill "demanding an immediate withdrawal of China's ADIZ." While the Western world goes on its merry way buying S&P futures, China's concluding message rings its most defint so far, "We are willing to engage in a protracted confrontation with Japan. Our ultimate goal is to beat its willpower and ambition to instigate strategic confrontation against China."

Happy Hank'sgiving!

A zombie government armed with accounting tricks has bailed out a zombie banking industry using even more financial phoniness. A few numbers pushed here and there, and the industry is earning record profits. But out in the real world where people live and work, things aren't so rosy. Zombies make negligent landlords and dangerous neighbors.

Japan – Like the U.S. – Turns to Censorship