Sometimes you just have to step back and laugh. Three times in the last two years, global stock markets have lurched higher four times (fed by a hosepipe full of central bank largesse) only to fall rapidly back to the fundamentally weak reality of the global economy. If ever there was a chart that summed it all up - and highlighted the inexorable optimism that this time it really is different - the current chasm between Global Manufacturing PMI and MSCI World suggests either stocks are off in fairy-land again or there is about to be the biggest surge in the global economy since 2009 (right as currency wars escalate and the debt-ceiling debate in the US threatens more fiscal drag).
Looking at the trading action over the past three days we had a certain sense of deja vu... and then we placed it: the start to 2013 is merely a repeat of the Draghi and Bernanke "bailout" preventing the market from crossing the seemingly all too critical 1380 support, beyond which there may well be tigers...
We are sad to bring you the tragic news that Tim "TuboTax" Geithner, who has long made clear his plans to leave some time in early 2012, will be out before March, and in fact before the end of January as it turns out. From Bloomberg:
- GEITHNER SAID TO PLAN DEPARTURE BEFORE DEBT CEILING RECKONING
We are also confident readers will somehow be able to overcome the unprecedented sadness at this particular rat's departure from the Titanic, metaphorically speaking of course.
The Cliff is dead; long live the Cliff. Yesterday’s impressive market rally was a great way to kick off the New Year, but (as ConvergEx's Nicholas Colas notes) we do have 251 trading days to go before we can lock in those gains and dance a celebratory jig. The market’s psychological pendulum swings between extremes of “Macro” and “micro” focus, and we shouldn’t take it for granted that the stock market’s positive take on the Fiscal Cliff negotiations portend a better economy, a stronger financial picture for the U.S., or any of the actual nuts-and-bolts which hold together the framework of corporate earnings and cash flows. Colas' prime concern is that the increase in Social Security tax withholding by 2 percentage points – back to its pre-2011 12.4% - will take a chunk out of the spending power for tens of millions of households. In the abstract, the amounts involved are not huge – perhaps 50 basis points of GDP. But everything counts when GDP growth remains stubbornly subpar.
What are the core characteristics of the spoiled teenager? The conventional view is that the spoiled teen "gets everything they want." In my view, the key characteristic of Spoiled Teenager Syndrome is that risk, cost and consequence have been masked. This is a systemic point of view, meaning that the masking of risk, cost and consequence help us understand not just the eventual failure of spoiled teenagers but the eventual failure of every group or enterprise that masks risk, cost and consequence as a strategy to paper over an unsustainable Status Quo. This includes families, companies, states and nations. Masking risk, cost and consequence creates an illusory world that eventually crashes on the unforgiving rocks of reality. What is the Central Planning strategy being pursued by our Central State and the Federal Reserve? Masking risk, cost and consequence.
If ever there was a clarifying vision for what the world's most important fulcrum securities were - and perhaps highest beta - it is the Spanish and Italian equity markets (now that the Spanish and Italian bond markets are almost entirely under implicit control). What is perhaps most interesting about 2012's roller-coaster ride, driven by on-again-off-again angst from Europe, is that Spain and Italy closed the year with the biggest rises off their lows of the year; and in a fascinating twist, close the year with the biggest losses off their highs of the year - of any global stock market. So, depending on your timing as an investor, you either had the best 2012 or the worst 2012. We suspect 2013 will just intensify that beta.
You know it: our old friend the BLS's very own Arima X-12 makes a very unexpected appearance. Why a private entity, the ADP, which has no links to the Bureau of Labor Statistics is using the same adjustment process used by the government agency, to divine its final, seasonally adjusted number, especially when it refuses to disclose its unadjusted data, is anyone's guess. Or is the ADP number now nothing but a reinforcing surrogate to double the credibility of the BLS data, whose credibility in recent months has also hit unseen lows? It certainly would explain the recent revision in ADP methodology, and the fact that administration sycophant, Moody's Mark Zandi is now the "brains" behind this meaningless number (not to mention the resulting humiliation for all those who had though that ADP data, like that from the NAR, is even remotely credible).
Today's market moving news (or at least what should be market moving news) comes from hyper discounter extraordinaire, Family Dollar, whose stock is getting clobbered on what is merely the latest downward outlook revision (because as much as the Fed would like, reality, and cash flows, still do matter). Yet, while earnings not only for the $0.99 store but for the entire S&P will be atrocious something that apparently only selling copious amounts of VIX and buying up the ES in hopes of lifting all sinking boats can fix, it is the comments on the conference call that are most disturbing. To wit...
I left yesterday for the bobbling heads - to the artists of verbiage that weave arguments of their own accomplishments much as the artists of Three Card Monty hide the truth behind their shells. Yesterday we had a nice rally in the equity markets. No surprise; the sigh of relief was palpable that Congress did something, anything to address our fall over the cliff. I would not get too excited however. We raised taxes, we penalized those succeeding and we did it in a meaningful manner. We did not cut the national debt as sung by the chorus across the airwaves. In fact, according to the Congressional Budget Office we decreased revenues by $3.6 trillion over ten years. We did not protect the middle class, but because of the expiration of the payroll tax decrease, Federal taxes will rise for 77% of all working Americans. Thus we rewarded non-working Americans at the expense of those with jobs. The game was the continuation of postponement and avoidance and reckless governance of the nation.
Bill Gross On Bernanke's Latest Helicopter Flyover, "Money For Nothing, Debt For Free" And The End Of Ponzi SchemesSubmitted by Tyler Durden on 01/03/2013 08:53 -0400
Back in April 2012, in "How The Fed's Visible Hand Is Forcing Corporate Cash Mismanagement" we first explained how despite its best intentions (to boost the Russell 2000 to new all time highs, a goal it achieved), the Fed's now constant intervention in capital markets has achieved one thing when it comes to the real economy: an unprecedented capital mismanagemenet, where as a result of ZIRP, corporate executives will always opt for short-term, low IRR, myopic cash allocation decisions such as dividend, buyback and, sometimes, M&A, seeking to satisfy shareholders and ignoring real long-term growth opportunities such as R&D spending, efficiency improvements, capital reinvestment, retention and hiring of employees, and generally all those things that determine success for anyone whose investment horizon is longer than the nearest lockup gate. Today, one calendar year later, none other than Bill Gross, in his first investment letter of 2013, admits we were correct: "Zero-bound interest rates, QE maneuvering, and “essentially costless” check writing destroy financial business models and stunt investment decisions which offer increasingly lower ROIs and ROEs. Purchases of “paper” shares as opposed to investments in tangible productive investment assets become the likely preferred corporate choice." It is this that should be the focus of economists, and not what the level of the S&P is, as it is no longer indicative of any underlying market fundamentals, but merely how large, in nominal terms, the global balance sheet is. And as long as the impact of peak central-planning on "business models" is ignored, there can be no hope of economic stabilization, let alone improvement. All this and much more, especially his admissions that yes, it is flow, and not stock, that dominates the Fed market impact (think great white shark - must always be moving), if not calculus, in Bill Gross' latest letter.
Presenting two covers to commemorate what may be the most dysfunctional Congress in the history of the US: the 112th, whose final official day is today. The only Congress that will be worse is the 113th, then the 114th and so on.
Having passed the 'easy-do-nothing' bill that created a 5% uplift in US equities, D.C. have left the most difficult set of issues for last: entitlement reform, which Republicans have said they will insist upon in return for raising the debt limit, and tax reform, which the President has said he will insist on in return for entitlement reform. The upshot is that reaching an agreement on the next debt limit increase could be at least as difficult as the last increase in August 2011. As Goldman notes, the next debate on the debt limit will be the fifth "showdown" on fiscal policy in the last two years. Adding further angst, in the summer of 2011 politicians had started the debate some three months prior to the real deadline. This time it appears that nothing serious will happen until the 11th hour as usual, meaning far more last minute volatility. However, one new twist to this now familiar routine may come from the rating agencies, which look likely to be more active in 2013 than they have been since 2011.
Thirty years ago, the USSR was better known as the "Evil Empire." Fast forward to today, when its successor Russia, is apparently the "Tax Free Empire", and less socialist than France, at least to infamous millionaire expatriate Gerard Depardieu, who as reported previously has paid €145 million in taxes over 45 years, and who demonstratively decided to give up his French passport in the wake of France's socialist 75% millionaire tax (subsequently ruled unconstitutional), and as of today, has just been granted Russian citizenship.
It would seem initial claims can be summed for 2012 in one word, 'average'. This last print of 2012 was almost perfectly at 2012's average of 372, the biggest miss since the first week of November and the Sandy disturbance. Notably, last week's print was revised higher (after 19 states failed to report and were 'guessed at) by 12k jobs to 362k having now risen for 3 weeks in a row (on a seasonally adjusted basis). When we scratch below the surface at non-seasonally-adjusted the numbers are much more concerning than a rampaging equity market would care to note, NSA initial claims rose 40,459 to 495,588 on the week. Ohio, Michigan, and Pennsylvania saw the biggest rises in claims while California dominated the drop in claims (by state) down 11,789. 73k Americans lost Extended Unemployment Benefits in the week ended December 15th.
ADP Private Payrolls Spike To 215K, Above Expectations On Spike In Construction Jobs - Now With InfographicSubmitted by Tyler Durden on 01/03/2013 09:32 -0400
Yet another headscratcher in the endless litany of Baffle with BS data, this time from the ADP Private Payrolls report, traditionally a laughing stock when it comes to its NFP forecasting powers (we will spare readers the correlation scatterplot which shows a 0 correlation), which not only revised its November print from 118K to 148K (just so it mysteriously coincides with the November NFP number of 146K), but saw the December private jobs number surge to 215K on expectations of a 140K print. The primary reason for the spike, a +39K surge in construction jobs, supposedly in the aftermath of Sandy, as well as some +53 job additions in trade, transportation and utilities. Also, how ADP gets +14K financial jobs in the peak financial layoffs month (to avoid year end bonuses of course), is anyone's guess. And while we should worry about that unemployment rate rapidly approaching the 6.5% Bernanke QE4EVA threshold end (don't worry, tomorrow we will find that the labor participation rate mysteriously has started to grow again to actually push the unemployment rate higher now that the Obama re-election is no longer an issue), we definitely should not worry about America's manufacturing renaissance, as the country lost yet another 11,000 manufacturing jobs - the 6th month in a row with mfg job declines (sorry Ohio, better luck next time).