Apple

What happens to your market when competitors are selling 61 million units of your product at 1% margin and growing revenues by 135% and shipments by over 220%? Margin compression, baby!

Hugh Hendry's Eclectica Fund has had a great Q4 (up 3.3%, 4.0%, and 5.0% in the last 3 months) despite portfolio risk being quadruple his 'old normal'. How did he achieve this? He begins... "There are times when an investor has no choice but to behave as though he believes in things that don't necessarily exist. For us, that means being willing to be long risk assets in the full knowledge of two things: that those assets may have no qualitative support; and second, that this is all going to end painfully. The good news is that mankind clearly has the ability to suspend rational judgment long and often... He who hangs on to truth has lost. The economic truth of today no longer offers me much solace; I am taking the blue pills now."

• Behind the Scenes at Sony as Hacking Crisis Unfolded (WSJ)
• Oil Set for Biggest Slump Since 2008 as OPEC Battles U.S. Shale (BBG)
• Praet Warning of Oil Effects Signals Higher Chance of ECB QE (BBG)
• U.S. Opening Door to More Oil Exports Seen Foiling OPEC Strategy (BBG)
• Venezuela confirms recession, inflation hits 63.6 percent in Nov (Reuters)
• U.S. to station 150 armored vehicles in Europe (Reuters)
• China Stocks Rise to Finish Off Big Year (WSJ)
• RBS Suspends Bonuses of 18 Traders Amid FX Rigging Fine (BBG)

First, NYC's cops turned their back on Bill de Blasio, best known for first rushing to side with New York's "oppressed" minorities "threatened" by the local police, and then, when two weeks later 2 NYPD cops were executed in cold blood and in broad daylight in what some hinted was an unintended consequence of the mayor's bashing of the police, scrambling to undo his previous populism and to show his affection for New York's cops. Now, those tasked to protect and to serve the Big Apple, appear to have decided to turn their back on their job entirely, and in what is shaping up to be a long vendetta with the mayor, have succumbed to what the NY Post calls "a virtual work stoppage." This implicit strike by the NYPD is manifesting as follows: "traffic tickets and summonses for minor offenses have dropped off by a staggering 94 percent following the execution of two cops — as officers feel betrayed by the mayor and fear for their safety."

Should I buy a house in 2015? No one can answer that question for anyone else, but it seems prudent to ask the question in the context of an Echo Bubble in valuations that appears to be deflating and household income that is potentially at risk of declining further in a global recession that eventually impacts the U.S. economy.

• European Stocks Drop as Greece’s ASE Tumbles After Vote Results (BBG)
• AirAsia Stock Drops Most Since 2011 After Flight Vanishes (BBG)
• Libya's NOC says firefighters had managed to extinguish the blaze at three of 6 burning oil tanks (BBG)
• Bomber kills 11 Shi'ite pilgrims north of Baghdad (Reuters)
• Hillary Clinton Faces Uphill Fight for White, Rural Vote (WSJ)
• Yen’s Slump Seen Longest Since Gold Standard Ended (BBG)
• The 94% Plunge That Shows Abenomics Losing Global Investors (BBG)
• Sony's 'The Interview' makes $18 million in opening weekend (Reuters)

• Russia says NATO turning Ukraine into 'frontline of confrontation' (Reuters)
• Oil Drillers Under Pressure to Scrap Rigs to Cope With Downturn (BBG)
• Demonstrators Defy NYC Mayor's Call to Suspend Police Protests (BBG)
• U.S. to send more private contractors to Iraq (Reuters)
• ISIS Shoots Down Jet From U.S.-Led Coalition, Syrian Monitors Say (NYT)
• Russians Race to Secure Mortgages Before Costs Spiral (BBG)
• Abe Brings in Former Soldier Nakatani as Defense Minister (BBG)
• At Coke, Newest Flavor Is Austerity (WSJ)
• Fear and retribution in Xi's corruption purge (Reuters)
• UBS Raises Flag on China’s $1 Trillion Overseas Debt Pile (BBG)

Every year, David Collum writes a detailed "Year in Review" synopsis full of keen perspective and plenty of wit. This year's is no exception. "I have not seen a year in which so many risks - some truly existential - piled up so quickly. Each risk has its own, often unknown, probability of morphing into a destructive force. It feels like we’re in the final throes of a geopolitical Game of Tetris as financial and political authorities race to place the pieces correctly. But the acceleration is palpable. The proximate trigger for pain and ultimately a collapse can be small, as anyone who’s ever stepped barefoot on a Lego knows..."

"Most investors go about their job trying to identify ‘winners’. But more often than not, investing is about avoiding losers. Like successful gamblers at the racing track, an investor’s starting point should be to eliminate the assets that do not stand a chance, and then spread the rest of one’s capital amongst the remainder." So as the year draws to a close, it may be helpful if we recap the main questions confronting investors and the themes we strongly believe in, region by region.

"At the end of the day, the Fed is confused and confusing, so if you spend too much time addressing their comments you end up confusing as well." The FOMC meeting was, simply put, slightly hawkish. Unfortunately, the markets’ outsized and illogical reactions are signs and symptoms that financial markets are broken. The FOMC’s meddling in financial market behavior could easily catch up to them in an ugly fashion.

Through the overly-complex verbiage riddled with a copious number of contingencies, a simple message was actually able to surface.  The net result is modestly hawkish and one consistent with our "Sooner but Slower" rate cycle perspective. Markets are being driven more by fear of missing the upside, and fear of under-performing peers and benchmarks, than by any other factor.  This Pavlovian response has worked well in recent years and encouraged by the Fed.  However, this pattern is in the 9th inning.  Moreover, such herd-like behavior will run into great difficult due to dreadful market liquidity that is the result of regulatory over-reach; indications that were evident in markets over the past few weeks.

As the Fed continues to rely on seasonally-adjusted survey data to validate its belief that the time to hike rates is coming, even as market-implied inflation swap rates are back to 2008 levels, the one thing that continues to happen everywhere but in the US is precisely what the Fed wishes for the US (as we reported yesterday): devaluaing currencies and spiking inflation (and expectations), without any accompanying rise in wages, have lead consumers to a buying frenzy in Russia, and to a far lesser extent Japan. As a result, providers of products and services in these countries have been scrambling to match prices to demand, especially since the demand is purely the result demand brought forward due to plunging currencies, not the result of some magical source of widespread wealth. Case in point, Cartier, the luxury jewelery maker, raised its Russian prices by as much as 50 percent after the ruble plunged to a record low.

Regardless what happens with the U.S. Shale, the Cartel is always going to be worse off by not agreeing to production cuts.

• Citigroup is pleased: Obama signs $1.1 trillion government spending bill (Reuters)
• Oil holds below $60 as OPEC, Russia keep pumping (Reuters)
• 5 Things to watch at the December Fed Meeting (WSJ)
• Russia Tries Emergency Steps for 2nd Day to Stem Ruble Rout (BBG)
• Ruble crisis could shake Putin's grip on power (Reuters)
• Apple Curbs Russia Sales as McDonald’s Lifts Prices (BBG)
• Traders Betting Russia’s Next Move Will Be to Sell Gold (BBG)
• China Warms to a More Flexible Yuan (WSJ)