Renaissance

The strength of the Japanese stock market over the past few weeks has been at once heralded as anticipation of Abe's policies and the renaissance of this island nation's faltering reality. However, as Bloomberg's chart of the day points out, this performance trend (just as we saw in sentiment and market performance in the US) is absolutely normal heading into an election. As the chart below shows, the election day (on average) has marked a significant short-term top in the market 12 of the last 13 previous cycles. So while Jeff Gundlach is short JPY and long NKY, we suspect there will be a better entry point for the latter 'lomg' leg just a few days after the election landslide. As Daiwa's Soichiro Monji noted "Investors buy on promises and ideals up until the election. When the parliament starts a normal session, they will start trading on reality."

#000000;">Own Physical Gold Now - While You Still Can!

#000000;">“Farther from care than danger…”

#000000;">The title above is a quote from Sir Thomas More’s classic, Utopia, describing a people’s overconfidence in their capacity for navigation given the compass for the first time.

As predicted in our overnight summary piece titled, "Sentiment Shaken By Concerns Of Political Circus Returning To Italy" Europe appears set to be gripped by yet another political crisis, this time by the country that most forgot in 2012, with the attention focusing primarily on Spain and Greece. The reason is what some may call Berlusconi's revenge, who after being eliminated by the ECB in November 2011 when Draghi sent Italian bond spreads soaring, and made Berlusconi's departure a condition to returning normalcy in exchange for planting yet another Goldman tentacle in Italy, Mario Monti, has now shaken the credibility of his successor by having his party PDL abstain from a vote of confidence in favor of Monti's growth measures. The result, as Il Giornale reported moments ago, is that the "the government is increasingly hanging by a thread". It continues: 'Now Prime Minister Mario Monti is likely to no longer have the numbers in parliament. The majority creaks." Is this the end of the technocratic quiet in the austerity regimes? And if the people have said Basta to Goldman and its appointees, does this open the door wide for the likes of Berlusconi to retake the power and force Goldman to scramble to regain status quo "normalcy" for another several months just as every sellside firm has bet the ranch on a global renaissance in 2013?

We warned last night of the spike in average trade size yesterday in AAPL's trading - just as we also saw on 9/21 - and the fading VWAP ramps; and today we see AAPL -3% (-6.7% from its highs on Monday) as volume picks up and the renaissance appears to be ending. WWJTD?

Just under two months ago we noted, somewhat comedically, that the Fed's researchers were 'confused' that its models (the wonderful DSGE) pointed to 'explosive inflation' given its current ZIRP regime. Perhaps those same PhDs will also be surprised to note that, based on the 44 month average length 'out of recession', that the next recession (as proffered by the NBER) is due to begin March 2013 (though of course, the resolution of the fiscal cliff and a renaissance in Europe will hold off the next recession forever, right?)...

It was only appropriate that on a day in which our chart of the day confirmed that the US consumer is getting increasingly more broke, we got an update of Personal Income and Personal Spending, both of which missed expectations and declined substantially. October income printed at 0.0%, down from 0.4% in September, and below expectations of 0.2%, while spending plunged from 0.8% all the way into negative territory at -0.2%, missing expectations of an unchanged print. Counterintuitively, the spin is that this miss was due to Sandy, when this makes absolutely zero sense: as a reminder Sandy only hit in the last 4 days of October, which means it had no time to impact income, and if anything it prompted an increase in spending as consumers stockpiled ahead of the landfall. But that's why they call it spin. Of course, none of this should come as a surprise: the implied savings rate in September hit a multi-year low of 3.3%, which means going forward the blend of spending and savings will be unpleasant for stocks as consumers have no choice but to rebuild savings once more. And finally, the most disturbing metric, and one which is a red flashing light for all those predicting yet another economic renaissance in 2013, is that real Disposable Income declined by 0.1%: the third decrease in 3 months, confirming that on an inflation adjusted basis the consumer peaked in the summer, and it is all downhill from here.

Got me thinking about hedge fund cheaters and too-good-to-be-true results.

It is not going to be a new government that necessarily ushers in a whole new era of growth, prosperity and confidence. Even under the revered Ronald Reagan, the period of secular growth and bull market activity took two years to unfold — it didn't happen right away. It took the inflationary excesses to be wrung out of the system and concrete signs that the executive and legislative branches could work together to usher in true fiscal reform — and to get blue Democrats on board with reduced top marginal tax rates.  Hope isn't generally a very useful strategy, but there is reason to be hopeful nonetheless. The critical issue is going to be how we get Washington to move back to the middle where it belongs. This requires bipartisanship which in turn requires leadership. Reagan's whole eight-year tenure in the 1980s occurred with the House being in Democrat hands the whole way through. Bill Clinton's second term coincided with both the House and Senate controlled by the Republicans.

It can be done! 

With this in mind, the best that can happen is a Reaganesque and Clintonesque return to compromise on the road to fiscal reform.  It will be painful. We all know it will be painful.

Given emerging data in 2012, it's becoming increasingly clear that the post-war automobile era in the United States is now in well-articulated decline. Accordingly, it makes sense to note the beginning of a long-term supertrend that is just getting started: the resurrection of America’s rail system. At Seattle’s historic King Street Station (a classic example of early 20th Century railroad architecture), a nasty looking dropped-tile ceiling – which hung above travellers for decades – was removed late last year to reveal ornate plasterwork as the building undergoes extensive renovation. These cosmetic (and structural) alterations are part of a wide-ranging upgrade to the entire Cascades passenger rail service that runs from Vancouver, British Columbia, to Eugene, Oregon. In Tacoma, for example, a new station will either be built or renovated, and part of the Cascades line will be re-routed from its current shoreline path more directly through that city. Elsewhere, bridges are being rebuilt, track is being upgraded, and other infrastructure improvements are underway as part of the $500 million program to resurrect more efficient, faster inter-city rail in the 466-mile Amtrak route through this part of the Pacific Northwest. These changes will not bring European-style high-speed rail to the United States. Indeed, in many similar projects across the country, top speeds of 125 mph will characterize new system capability, rather than the average speed actually maintained from city to city. However, the incremental improvements now underway will become the platform for the next phase of investment, as Americans are increasingly persuaded to limit their car ownership and make rail transport part of their lives once again.

UPDATE: Icahn did NOT purchase shares at all - he mostly bought ITM Calls (he only purchased 500K shares, the rest of the disclosed 5.541MM stake is from call-option equivalents). It would appear someone is trying to make their year in one super-leveraged pump!

Thanks to Mr. 'Blockbuster' Icahn, who just announced a 10% stake in the company (for reasons that seem to a pure punt on it being bought out), NFLX is trading up 15% on the day and has filled its Q2 miss gap. He has been building a stake since early September (according to filings) and we suspect was pissed when Q3 earnings stumbled the stock back to below his average fill (allegedly). Of course hundreds of knife-catching hedge funds are thanking the great investor for giving them their exit from Q2 earnings' miss - it seems that you do indeed get a second chance to sell... cue CNBC M&A renaissance chatter...

Since the 2008 financial crisis the foundations of the global economy have been in repair, translating into a prolonged period of economic frailty. Against this backdrop, social and political tensions have increased between citizens and government, international institutions and governments, and individual nation states. The European debt crisis remains the largest challenge facing the global economy. A negative resolution emanating from the world’s largest economic bloc would cause harmful ripple effects worldwide in global trade flows. More importantly, it could also mark a paradigm shift in international relations, dealing a critical blow to what has been a relentless trend towards liberalism since the end of World War II, while providing fecund ground for a resurgence in realist ideology. Interestingly though, constructivism may be at the forefront in explaining the current dilemma between the European core and its periphery. It would also be wise to ponder the idea of whether a supranational government could exist. Proceeding down a path with a likely dead end would consume precious resources and lead to widespread suffering among every day citizens.

The last time we checked on the (funding) status of America's real presidential race - the one where America's uber-wealthy try to outspend each other in hopes of purchasing the best president money can buy - the totals were substantially lower. With November 6 rapidly approaching, however, the scramble to lock in those record political lobbying IRRs is in its final lap. And thanks to the unlimited nature of PAC spending, look for the spending to really go into overdrive in the next 2 weeks as the spending frenzy on the world's greatest tragicomedy hits previously unseen heights.

The BOJ pioneered QE in March 2001, with two objectives. The first was to eliminate deflation, which took hold in the mid-1990s; and the second was to shore up Japan’s fragile financial system. Did it work? Yes, for the second objective - the BOJ arguably bought time for banks tied up in NPL disposal; but, unfortunately, QE was not successful in combating deflation. The BOJ’s intended policy transmission mechanism was so-called portfolio rebalancing. Ideally, the buildup in banks’ deposits at the BOJ that earned no return (but carried zero risk) should have prompted banks to seek higher returns (with higher risk) and thus increase their lending. But portfolio rebalancing did not kick in for several reasons; most of which are the same as are occurring in the US currently. More fundamentally, however, Japan's demographics hindered any hopes of a capex-driven recovery - and policy can do little to affect that. While the US faces a less dismal demographic picture, the Japanese experience highlights that other policies (as Bernanke himself admits) are required for any sustained benefit in the real economy.

By now much has been written about the joke that was the collapse in the labor force participation rate. Perhaps too much, especially for a topic which as we predicted back in early 2011, would be the primary fudge factor allowing mainstream media headlines to blast America's economic renaissance. Remember: it is all about "confidence." Little, however, has been said about the constituents of this dramatic plunge to a 31 year low, namely the simplest distinction: that between genders. As the chart below shows, when one spreads the labor force by sex, the Friday data is particularly sad for one class of workers: Men. Because as the seasonally adjusted data shows, the labor force participation rate for men just printed at 69.8%. It has never been lower.

With a price hovering around $1,600 an ounce and the prospect of "additional monetary accommodation" hinted to in the latest meeting of the FOMC, gold is once again becoming a hot topic of discussion. Krugman, praising 'The Atlantic's recent blustering anti-Gold-standard riff, points to gold's volatility, its relationship with interest rates (and general levels of asset prices - which we discussed here), and the number of 'financial panics' that occurred during gold-standards. These criticisms, while containing empirical data, are grossly deceptive.  The information provided doesn’t support Krugman’s assertions whatsoever.  Instead of utilizing sound economic theory as an interpreter of the data, Krugman and his Keynesian colleagues use it to prove their claims.  Their methodological positivism has lead them to fallacious conclusions which just so happen to support their favored policies of state domination over money.  The reality is that not only has gold held its value over time, those panics which Krugman refers to occurred because of government intervention; not the gold standard. Keynes himself was contemptuous of the middle class throughout his professional career.  This is perhaps why he held such disdain for gold.