At the end of October, as the Tristate Area was being flooded by Hurricane Sandy, one after another Wall Street firm tried to position Sandy virtually as a non-event, with total damage "forecasts" by such "reputable" firms as Goldman Sachs and Bank of America forecasting a total bill between $10 and $20 billion (as anything above that and the Q3 damage to GDP would be far more substantial than their recently bullish forecasts had accounted for, and would also imply a substantial spillover effect into Q1 2013), the same as various insurance companies who had other far more obvious reasons to undershoot on the total damages. We said the opposite, and based on historic damage forecasts, predicted the damage would likely be between $50 and $100 billion. Once again the sellside consensus was wrong and a fringe blog was accurate, as the CBO has just released the Obama administration's full aid request. Bottom line: $60.4 billion, or roughly what one year of what the ultimate tax hike compromise will bring into the government's treasury. Furthermore, if fully funded by debt today, this amount would send the US (which has a $57 billion debt buffer as of this moment) over the debt ceiling immediately.
Warren Buffett is one of America’s biggest bailout beneficiaries, having profited hugely from buying into firms whose assets were subsequently bailed out. Shortly after the crisis began in 2008, Warren Buffett loaned money to, and bought options from, Goldman Sachs, seemingly with the knowledge the bailout of AIG — a counterparty to which Goldman had massive, massive exposure — would take place. Dimon as Treasury Secretary would intend more of the same. Dimon and Buffett and others like them believe in having their cake and eating it. Buffett and Dimon surely have in mind more cronyism, bailouts and free lunches, but the reality of the next four years and beyond may be very different indeed.
The upcoming week is comparatively less loaded with policy events, though the ongoing fiscal cliff negotiations in the US remain one of the key developments to follow. Important is also the FOMC meeting on Wednesday, where Goldman and everyone else now expect the Fed to increase their monthly asset purchase target under the QE3 program to $85bn per month, up from $45bn per month; this will keep the pace of asset purchases constant after the Operation Twist expires at the end of December, as Zero Hedge predicted the day QE3 was announced. There are is a handful of other central bank meetings in emerging economies (Russia, Indonesia, South-Korea, Philippines, Chile) although consensus expects no change to the base-rate in most cases. On the data front industrial production numbers for October will be released around the world including in the Euro-area, US and China. We also get the US retail sales number and December flash PMIs for the Euro-area and China.
In what is the day's most overhyped piece of non-news, we go to Italy to learn what many already knew on Thursday, namely that with the loss of support of Berlusconi's PDL party, Mario Monti's technocratic government, which correctly "feels" it lost its parliamentary support, is coming to an end and after a two hour meeting between the former Goldman advisor and Italian president Napolitano, Monti announced he "intends to resign after checking to see if parliament can pass next year's budget law, President Giorgio Napolitano's office said on Saturday... If the budget law can be passed "quickly", Monti said he would immediately confirm his resignation. Monti's announcement came after a two-hour meeting with Napolitano, who has the power to dissolve parliament." The reason this is non-news is that Monti government's tenure is ending in a few months anyway, and general elections are coming in Q1 regardless. In other words, it may take weeks or months for the budget law to pass, or not, at which point it will be time for new elections anyway.
The market continues to track the same pattern it performed going into the failed debt ceiling talks of July 2011. As you’ll recall, then as is the case now, US politicians failed to reach a credible solution to the US’s debt problems. What followed was a credit rating downgrade and a market collapse.
UBS and Nomura have suggested that gold could rise next week as the Federal Reserve may announce further easing at the FOMC meeting – on Tuesday (11/12/12) and Wednesday (12/12/12). Nomura said it is worth considering whether the FOMC will announce further easing to replace so called ‘Operation Twist’. The research house noted that gold remains at the same level as during the October meeting, which suggests gold has not yet priced in any move by the FOMC – creating an opportunity for gold bullion buyers. Regardless of whether the FOMC actually eases at this point – Nomura thinks there is a non-negligible probability – gold is likely to rise. Therefore, Nomura expects gold to rise and prices in this probability as the December meeting approaches, just as gold rose when the September meeting was approaching.
- Bundesbank cuts growth outlook as crisis bites (Reuters)
- Strong quake hits off Japan near Fukushima disaster zone (Reuters)
- Greece to Buy Debt It Already Owns to Reach Target (BBG)
- Draghi’s Go-to ECB Seen Risking Credibility Through Overload (BBG)
- Judge urges Apple and Samsung ‘peace’ (FT) ... Alas only the US government has a Magic Money Tree; others need profit
- Fed Exit Plan May Be Redrawn as Assets Near $3 Trillion (BBG)... make that $5 trillion this time in 2014
- Level Global, SAC Fund Managers Ruled Co-Conspirators (BBG)
- Egypt demonstrators reject Mursi call for dialogue (Reuters)
- Japanese Dealerships in China Retrench in Wake of Dispute (BBG)
- Apparel factory fire reveals big brands' shadowy supply chainsa (Reuters)
- Republican Defectors Weigh Deal on Tax-Rate Increase (BBG)
As of the end of November, the Consumer Discretionary sectot was the winner year-to-date with financials close behind (both up around 23%). The clear loser across asset classes is Crude Oil (down around 10%). We suspect at the start of the year that very few 'managers' or strategists would have expected anything like the distribution of outcomes that we see here - with EURUSD unchanged and Hedge Funds up just over 3% on average for the year. Some context for what 'could' happen in the remaining three weeks of the year.
Just yesterday, Goldman Sachs suggested its clients should sell their gold (to them?) as the precious metal cycle had turned. It seems Morgan Stanley disagrees; the firm's preferred fundamental metal exposure for 20913 is Gold. Expecting Silver to outperform also (given its 'cheaper' store of value), MS believes nothing has changed on the fundamental thesis for owning gold as the adoption of QE 3 (and 4...) and the ECB's commitments (and BoJ) remain the most important factors for a continuation of weakness in the TWI trend for the US Dollar. They also add that low nominal and negative real interest rates, ongoing geopolitical risk in the Middle East and continued mine supply issues are also supportive. From India and ETF demand to central bank buying and USD weakness - MS seems to be buying what GS is selling (or is less about muppet-mauling).
As we have discussed a number of times (most recently here), the infiltration of Goldman Sachs alumni into the highest ranks of political and monetary policy 'running the world' ranks is becoming pandemic. What is perhaps even more surprising is the fact that during the ECB's press conference this morning, the head of the world's 'almost' most powerful entity had to defend himself from such crackpot, tin-foil-hat-wearing, digital-dickweed-esque conspiracy theories that Draghi's affiliation to the Mother Squid is of greater importance than his current professional position. The sadly ironic aspect is that Draghi's membership of the Goldman Sachs-sponsored G-30 warranted more discussion during the press conference than that of Italy's Monti debacle (or Greece's "killer medicine").
Gold fell $3.10 or 0.18% in New York yesterday and closed at $1,693.60/oz. Silver climbed to $33.24 then slid to $32.51, but finished after an afternoon rally with a loss of 0.33%.
Gold inched down on Thursday, near the monthly low reached in the prior session under pressure from a stronger greenback as players await the European Central Bank rate decision at 1245 GMT and US Initial Jobless Claims at 1330 GMT.
Physical buying of gold bullion has increased on the dip, particularly in Asia, and many are seeing these levels as a floor for prices.
It's around that time of day again - when precious metals are sold hard for whatever reason you care to come up with (collateral requirements, margin calls, alchemy perfected). However, today there is a more mundane reason: Goldman Sachs has suggested its clients sell Gold on the basis that the gold cycle will turn in 2013 thanks to improving US growth offsetting the need for further Fed easing. Of course, Goldman telling its clients to 'sell gold' means Goldman is...
- Stay short AUD/NOK, opened at 5.90 on 03 Dec 2012, with a target of 5.00 and a stop on a close above 6.35, currently at 5.88.
- Stay long risk (sell protection) on the CDX High Yield on-the-run index, opened at 506bp on 04 Dec 2012, with a spread target of 450 and a stop on a close above 550, currently at 516.
- Go long the Commodity Carry Basket (Crude, Corn and Base), opened at 100 on 05 Dec 2012, with a target of 112 and a stop on a close below 94, currently at 100.
- LA port workers to return Wednesday (AP)
- Iran says extracts data from U.S. spy drone (Reuters)
- Obama to stress need to raise debt limit "without drama" (Reuters)
- Big Lots Chief Probed by SEC (WSJ)
- NATO missiles to be sent to Turkey, Syria clashes rage (Reuters)
- GOP Deficit Plan Irks Conservatives (WSJ)
- Japan Can End Deflation in Months, Shirakawa Professor Says (BBG) ... almost as good as Bernanke ending inflation in 15 minutes.
- Osborne Prepares to Breach Fiscal Rules Amid U.K. Growth Slump (BBG)
- Global Banking Under Siege as Regulators Guard National Interest (BBG)
- Freeport plans return to energy (FT)
- Serbian NATO envoy jumps to death at Brussels airport (Reuters)
- Tide Turns After a Flood of Chinese Listings (WSJ)
- Australian economy loses steam (FT)
- Euro Crisis Feeds Corruption as Greece Slides in Rankings (BBG)
- Two weeks ago here: The Latest Greek "Bailout" In A Nutshell: AAA-Rated Euro Countries To Fund Massive Hedge Fund Profits... and now on Bloomberg: "Hedge Funds Win as Europe Will Pay More for Greek Bonds" (BBG)
- Oracle sends shareholders cash as tax uncertainty looms (Reuters)
- GOP Makes Counteroffer In Cliff Talks (WSJ)
- Iran says captures U.S. drone in its airspace (Reuters)
- IMF drops opposition to capital controls (FT)
- Vogue Editor Wintour Said to Be Possible Appointee as U.K. Envoy (BBG)
- Juncker Stepping Down French Finance Minister to Head Euro Group? (Spiegel)
- Australia cuts rates to three-year low (FT)
- Europe’s banking union ambitions under strain (Reuters)
- EU Nations Eye New ECB Bank Supervisor Amid German Doubts (BBG)
- Frankfurt's Ambitions Get Cut Back (WSJ)
- House Republicans Propose $2.2 Trillion Fiscal-Cliff Plan (BBG)