12 days Before Christmas My Boss Said To Me.....

12 days before Christmas my boss said to me 
HITC Business


On the first day of Christmas,
my boss said I'm key
So he's got a great bonus for me.

On the second day of Christmas,
my boss winked at me
Two regulators a-probing,
But there's still a great bonus for me.

On the third day of Christmas,
my boss said to me
Three staff a-resigning,
Two regulators a-probing,
But there's still a very decent bonus for me.

On the fourth day of Christmas,
my boss said to me
Four subpoenas arriving,
Three staff a-resigning,
Two regulators a-probing,
And there's still a decent bonus for me.

On the fifth day of Christmas,
my boss said to me
Five Goldman stings,
Four subpoenas arriving,
Three staff a-resigning,
Two regulators a-probing,
And there's probably a decent bonus for me.

On the sixth day of Christmas,
my boss said to me
Six board members a-praying,
Five Goldman stings,
Four subpoenas arriving,
Three staff a-resigning,
Two regulators a-probing,
And there might be a decent bonus for me.

On the seventh day of Christmas,
my boss said to me
Seven clients a-suing,
Six board members a-praying,
Five Goldman stings,
Four subpoenas arriving
Three staff a-resigning,
Two regulators a-probing,
So there might not be a decent bonus for me.

On the eighth day of Christmas,
my boss said to me
Eight Feds a-raiding,
Seven clients a-suing,
Six board members a-praying,
Five Goldman stings,
Four subpoenas arriving
Three staff a-resigning,
Two regulators a-probing,
So there's probably not a decent bonus for me.

On the ninth day of Christmas,
my boss said to me
Nine shareholders a-complaining,
Eight Feds a-raiding,
Seven clients a-suing,
Six board members a-praying,
Five Goldman stings,
Four subpoenas arriving
Three staff a-resigning,
Two regulators a-probing,
So there's hardly any bonus for me.

On the tenth day of Christmas,
my boss said to me
Ten traders arrested,
Nine lawmakers a-complaining,
Eight Feds a-raiding,
Seven clients a-suing,
Six board members praying,
Five Goldman stings,
Four subpoenas arriving
Three staff a-resigning,
Two regulators a-probing,
So there's probably not much bonus for me.

On the eleventh day of Christmas,
my boss said to me
Eleven lawyers a-worrying,
Ten traders arrested,
Nine lawmakers a-complaining,
Eight Feds a-raiding,
Seven clients a-suing,
Six board members a-praying,
Five Goldman stings,
Four subpoenas arriving
Three staff a-resigning,
Two regulators a-probing,
And there's probably no bonus for me.

On the twelfth day of Christmas,
my boss said to me
Twelve jurors a-deciding,
Eleven lawyers a-worrying,
Ten traders arrested,
Nine lawmakers a-complaining,
Eight Feds a-raiding,
Seven clients a-suing,
Six board members a-praying,
Five Goldman stings,
Four subpoenas arriving
Three staff a-resigning,
Two regulators a-probing....
Now there's no bloody bonus for me!

And the very next day, my boss got fired.

Did This Guy (David Tepper of Appaloosa) Moved the Market Yesterday?

Time to Short SPY?

No one can dispute the fact that the S&P500 has had an amazing run since November 2012. Once the President and the Congress signed a deal to avert the Fiscal Cliff at the beginning of this year, investors have piled into US equities. Any weakness have been bought notwithstanding macro or corporate news.

SPY, the S&P500 ETF, is now at the top end of its channel and looks tired. Case in point, yesterday's price action. What should have been a good news for equities - April retail sales beating estimates handily and the ensuing sell-off in bond - did not end up being so - S&P500 managed to eke out a small gain. Moreover, the gains came from defensive sectors rather than cyclical names.

Bottom line, it looks like equities are in search of marginal buyers to drive them higher. Sure the big trend is still up, with the S&P500 breaking above its 2000 and 2007 highs, but looks like we are heading into  a short-term consolidation. I would short SPY at these levels with a very tight stop loss.

Corn Crop Planting At Third Slowest Pace in Three Decades

Corn Crop Planting At Third Slowest Pace in Three Decades
CNBC, 13-May-13
By: Patti Domm

Less than a third of the corn crop in key planting states is in the ground, the third lowest level for this time of year since 1980.

The U.S. Department of Agriculture Monday reported that 28 percent of the expected corn crop has been planted, and in key farm belt states, like Iowa and Illinois, the levels are even lower.

"Obviously, we have significant problems," said Rich Nelson, director of research at Allendale. "The trade after this week will begin dropping by both acreage and yield expectations. That's the message right here."

The cold, wet spring has wreaked havoc with farmers' efforts to plant, but even so, analysts and the government still expect a bumper crop. <Click Here for More>

Did China "Cook" the April Trade Data?

Program Videos From Milken Institute 2013 Global Conference

Cramer's Game Plan for Week of April 29

Fortune Interviews StatWiz Nate Silver

Can people use data or analytics to accurately predict the stock market in any way?
The problem is the stock market is this whole contest where you're competing against other creators. So the question is: Are there some traders that are better than others? I think the answer is probably, Yes. I'm not a pure markets guy, I played poker long enough which I think has parallel skills to trading in many respects where you know that some people are better over the long-term and better at accounting for uncertainty and so forth. But there's a lot of volatility and a lot of luck where a market cycle can last for months or years. There are a lot of perverse incentives that get in the way. So while I think there are some good traders, in the near term, even over a period of five or 10 years, it will mostly be dictated by luck, so it's tricky.

Have you ever applied your model to dating?
I did one little analysis with OkCupid for a New York Times Magazine piece a couple of years ago where we were trying to figure out the best night of the week to go out and get laid basically. So OkCupid collected the data of some status reports of people who were out and about using their mobile application. And we looked at the ratio of people who wanted a long-term relationship vs. people who wanted just something for [that night]. On Wednesday apparently you get the highest ratio of people who are just looking for something quick and dirty. <Click Here for More>

Vexing Over the VIX

I am a short-term bear on the US market. Given the performance thus far, there is more downside than upside. Case in point, the S&P500 is up 9% YTD. At this clip, the S&P500 will be up over 36% for the year. This will occur on the back of 13.41% gain in 2012. Inconceivable as the Sicilian from Princess Bride would say. If the US and the global economy were roaring like in the pre-2008 era, it would be conceivable but they are not. The US economy will barely grow at 2% (vs 4%+ pre-2008). Global GDP will be lucky to pull in 3.3% (vs 5%+ in the heydays) growth rate given the obvious slowdown in BRIC countries.

One of the measures of investor sentiment is VIX. Using range of out of the money call and put options, the CBOE estimates the likely movement in the S&P500 index over 1 month period. Today VIX is at 13.36, meaning that the options market forecasts the S&P500 to move 3.86% in the next 30 days (13.36%/√12). That is not a lot considering that the S&P500 can move that amount in couple of sessions. There are VIX future contracts (Bloomberg: UXJ3) where investors bet on the future path of VIX. The VIX future for the end of November is 19.40 suggesting that the investors expect volatility to increase as we head into the dog days of summer.

My hunch is that the S&P500 will test 1,500 in the next month or so. That's not an outlandish prediction because it is just 3.35% from current level and entirely within the range implied by current VIX.

Todays Reads - Cyprus, Bill Gross, Robert Shiller

Today's Reads
Interesting readings from today

Cyprus is the new epicenter of the European financial crisis. In return for Eu10 billion bailout, the EU imposed 9.9% tax on deposits greater than Eu100K and 6.7% on less than that amount. If approved by the parliament (vote postponed), this is will raise Eu6 billion. This is quite an unprecedented move and will likely impact market tomorrow especially given that everyone is looking for an excuse to sell. Forbes even compares this to Lehman debacle. Note that banking system in Cyprus is 8x larger than the economy, so bailing them out is bailing out foreigners especially the Russians, not a politically palatable solution for Euro politicians.

Pimco's Bill Gross, in his March think piece "Rational Temperance" attempts to answer somewhat un-answerable question, when would we know when there is irrational asset bubble. My view is that you don't. But he does make an interesting point in that HY debt market is a better indicator than equity market because it is set by institutional investors or better informed people. Basically says look at the issuance, which is inversely correlated with future returns, that'll give you the probability of irrational bubble - currently 6/10 in his view and moving higher.

One of the points Bill Gross makes is that he found the close relationship between HY spread and equity interesting. Duh! That comes directly from Black-Shoals option pricing model. Basically, equity and debt are joined at the hip; no wonder they act in a similar fashion.

Talking about market peaks, Prof Robert Shiller attempts to put that in perspective in a NYT oped, Yes, We’re Confident, but Who Knows Why. His answer to whether we are in a stock market peak now is typical of an academic, we don't know. He uses two measures to take the gauge of the market (1) valuation confidence i.e. % of institutional investors and individual investors who think market is not overvalued (2) cyclically adjusted price-earnings ratio (CAPE), which is real, or inflation-adjusted, Standard & Poor’s 500 index divided by a 10-year average of real S.& P. earnings. Currently, both confidence and CAPE are at relatively high levels but based on 2000 and 2007 experiences, they don't tell anything about the future.

The Big Short War on Herbalife

The Big Short War
Vanity Fair, April 2013
By William D. Cohan

Hedge-fund titan Bill Ackman has vowed to bring down Herbalife, the 33-year-old nutritional-supplement company, which he views as a pyramid scheme. With his massive shorting of Herbalife stock, the price plummeted, prompting two fellow billionaires—Ackman’s former friend Dan Loeb and activist investor Carl Icahn—to take the opposing bet on Herbalife. As the public brawl rivets Wall Street, William D. Cohan learns why, this time, it’s personal.

The supremely confident billionaire hedge-fund manager Bill Ackman has never been afraid to bet the farm that he’s right.

In 1984, when he was a junior at Horace Greeley High School, in affluent Chappaqua, New York, he wagered his father $2,000 that he would score a perfect 800 on the verbal section of the S.A.T. The gamble was everything Ackman had saved up from his Bar Mitzvah gift money and his allowance for doing household chores. “I was a little bit of a cocky kid,” he admits, with uncharacteristic understatement.

Tall, athletic, handsome with cerulean eyes, he was the kind of hyper-ambitious kid other kids loved to hate and just the type to make a big wager with no margin for error. But on the night before the S.A.T., his father took pity on him and canceled the bet. “I would’ve lost it,” Ackman concedes. He got a 780 on the verbal and a 750 on the math. “One wrong on the verbal, three wrong on the math,” he muses. “I’m still convinced some of the questions were wrong.” <Click Here for More>


Icahn verus Ackman (25-Jan-2013)

Google-Apple Valuation Gap Widest Since 2005 on Ads

Google-Apple Valuation Gap Widest Since 2005 on Ads

Bloomberg, 6-Mar-13

By Brian Womack

Google Inc. (GOOG)’s prospects haven’t looked so promising to investors relative to Apple Inc. (AAPL) since before the iPhone was introduced.

Google’s shares, which climbed to a record yesterday, are now trading at 25 times profit, compared with a price-to- earnings ratio of less than 10 for Apple, according to data compiled by Bloomberg. That gap is at its widest since June 2005, two years before competition between the two companies in mobile devices began to intensify.

Investors are willing to pay more for each dollar of Google’s earnings relative to Apple amid optimism that Google, with more than 40 percent of the U.S. online-advertising market, will command even more of the $37.3 billion that businesses spend each year to reach Web audiences. Google also has used an alliance with Samsung Electronics Co. (005930) to gain share in mobile software, feeding the competitive threat weighing on Apple as investors await the next big product from the iPhone maker.

“There’s only one company benefiting from all the growth areas of the Internet -- be it video, mobile, local, social, display advertising,” said Sameet Sinha, an analyst at B Riley & Co. “Apple has just done well in devices, nothing else.”

Google fell less than 1 percent to $831.38 in New York, while Apple declined 1.3 percent to $425.66. Google’s U.S. shares have added 35 percent in the past 12 months. Apple has dropped 20 percent in the same period, though its market capitalization is still more than $100 billion higher than Google’s. Apple remains the world’s most-valuable company, followed by Exxon Mobil Corp. (XOM) and Google. <Click Here for More>

Interview with Jeremy Siegel

Though stock market volatility continues to rattle investors' nerves, the future looks bright for equities in the U.S. and many emerging markets, according to Wharton finance professor Jeremy Siegel. That's not so for bonds, which could become money-losing investments as rising interest rates drive bond prices down. In an interview with Knowledge@Wharton, Siegel says that investors should think about reducing their bond holdings, buying more stocks and keeping just enough cash for a rainy day and other liquidity needs, since interest rates on cash are near zero. With the housing market -- so critical to the U.S. economy -- clearly improving, anyone who has held off buying a home should think about buying now while prices and mortgage rates are low, Siegel adds.

Q4 GDP revised to +0.1% (from -0.1%)

The BEA revised Q4 GDP to +0.1% (from -0.1% reported on January 30). The revision was not a surprise. Nobody believed that Q4 GDP was negative. What was surprising was that the revision was so minute.

Much of the upward revisions came from trade sector. Exports added 0.3 ppt more while imports added another 0.2 ppt. This suggests that global economy was more resilient than thought. Another 0.2 ppt up revision came from non-residential structure. Not a surprise again, given that real estate has gotten a boost from the Fed's accommodative policy.

What contributed less to Q4 GDP were Equipment & Software Investment (0.1 ppt), State & Local Government (0.1 ppt) and Inventory (0.3 ppt). Inventory subtracted 1.6 ppt from GDP vs 1.3 ppt in the prior reading. It appears that inventory stuffing at JCP and KSS, which reported yesterday were exceptions rather than a rule.

Subtraction to GDP from inventory is a very bullish sign. Inventory cycle could easily add 1 ppt to GDP in a future quarter.

The Onion's Take on Sequestration

Obama, Congress Must Reach Deal On Budget By March 1, And Then April 1, And Then April 20, And Then April 28, And Then May 1 And Then Twice A Week For Next Four Years

The Onion, 27-Feb-13

With the dramatic, across-the-board sequestration scheduled to occur this week, the nation’s leading economists have warned that President Obama and Congress must come to a compromise on the budget by Mar. 1, and then again by Apr. 1, and then Apr. 20, Apr. 28, and—after Congress is once again unable to come to a comprehensive agreement to fully stabilize the economy—May 1, along with agreements twice a week, every week, for the next four years.

Experts say that without reaching a deal this Friday, the automatic $85 billion reduction in government spending will immediately slow the U.S. economy and impact thousands of middle-class citizens. Officials said the same exact thing will happen next month, the month after that, and the month after that if Obama and Congress fail to meet deadlines created by the preceding, incomplete deals.

“If the president and Congress are unable to reach a grand bargain by Mar. 1, what they will likely do is reach a set of 100 or so smaller bargains, all with their own deadlines, and all of which could potentially plunge the U.S. economy into a recession,” said Princeton economics professor Marshall Kahn. “So, the Mar. 1 deadline is absolutely crucial. Just like the one next month will be. And the 12 deadlines in May. And the bi-daily deadlines that will kick in during the summer.” <Click Here for More>

Right and Wrong on Natural Gas on the Same Day

Yesterday, I was right and wrong on my call on natural gas price, which I made just the day before. I said the price is trending higher, and it did. Then later price fell.

Natural gas had a massive move yesterday. It was up 3% by noon and by the end of the day was down almost a percent, a massive reversal  Looking at the UNG (natural gas ETF) trade, someone put big trades around 2:00pm that caused price to crater. There is no news on natural gas around that time. One plausible reason could be the expiration of natural gas future contracts but that event was the day before (Feb 26).

If you don't know whom to blame, blame the weather. That's exactly what the WJS did (Natural Gas Prices Reverse Gains As Forecasts Turn Warmer). But weather did not turn warmer. According to more credible source, AccuWeather, they put out a story yesterday morning that said the opposite (Winter to Continue: March to Yield Snowstorms).

Time to Go Long UNG

If you had tried to put on a seasonal trade on natural gas at the beginning of this winter, you'd have lost a bucket of dough. Natural gas price slumped this winter owing to demand-supply imbalance.

Demand was curtailed by above average temperature in the continental U.S. Supposedly, February 2012 to January 2013 was the warmest February-to-January period since at least 1880, when the NOAA started keeping records.

On the supply side, natural gas continued to pour out Shale formations in the mid-continental U.S. The U.S. produces more natural gas than even coal.

This demand-supply imbalance resulted in bloated inventories. Natural gas in the underground storage during this winter was at the high end of 5-year average. This situation is about to change. We could see a late winter cold snap in early March, which could pull the temperature in the eastern seaboard to below average, and increase demand for natural gas, the source of home heating for more than 50 percent of US households.

From a technical standpoint, the UNG (natural gas ETF) chart looks interesting. It has decisively broken above the "winter" downtrend and is comfortably resting above both (1) 50-day moving average and (2) 50% Fibonacci retracement level. The weekly EIA inventory data this Thursday will be pivotal. If natural gas price holds up after the release of the data, we might be seeing a short-term upswing in UNG price. I'm betting on that outcome. I'd say it's time to go long UNG.

Italian Election Results - 2013 (Final)

Source: Interior Ministry

Paper: Fiscal Crises and the Role of Monetary

Crunch Time: Fiscal Crises and the Role of Monetary

By David Greenlaw, James D. Hamilton, Peter Hooper, Frederic S. Mishkin

February 22, 2013

ABSTRACT

Countries with high debt loads are vulnerable to an adverse feedback loop in which doubts by lenders lead to higher sovereign interest rates which in turn make the debt problems more severe. We analyze the recent experience of advanced economies using both econometric methods and case studies and conclude that countries with debt above 80% of GDP and persistent current-account deficits are vulnerable to a rapid fiscal deterioration as a result of these tipping-point dynamics. Such feedback is left out of current long-term U.S. budget projections and could make it much more difficult for the U.S. to maintain a sustainable budget course. A potential fiscal crunch also puts fundamental limits on what monetary policy is able to achieve. In simulations of the Federal Reserve’s balance sheet, we find that under our baseline assumptions, in 2017-18 the Fed will be running sizable income losses on its portfolio net of operating and other expenses and therefore for a time will be unable to make remittances to the U.S. Treasury. Under alternative scenarios that allow for an emergence of fiscal concerns, the Fed’s net losses would be more substantial.

[Full Paper]

Cramer's Game Plan for Week of February 25

Italian Election 101

Italians are going to vote this weekend to elect a new government. Polls close on Monday at 3:00pm local time or 9:00am EST. Exit polls start coming out soon after that. Final results are made available probably late Monday or early Tuesday. For the market, the best outcome is a clear win by center-left coalition led by Bersani. But given a late surge by populist Grillo, the outcome is anything but certain. Investors do not seem worried. The yield on 10-year Italian government bond has hardly budged in the past week (see the Chart). For political buffs, the key to the Italian PM chair is the Senate seats, and the key regions to watch are Lombardy, Campania, Sicily and Venetto. 

Italian Election 2013
The February 24-25 election is for 630-seat Chamber of Deputies and 315-seat Senate. To form a government, a party or a coalition must have a majority in both chambers, also called perfect bicameralism. 

In Italy, voters do not vote for a candidate but for a party. A citizen must be at least 18 years old to be allowed to vote for the Chamber of Deputies and at least 25 years old to be allowed to vote for the Senate. For a party to secure a seat in the parliament, it must cross a threshold (table). 

Seat Assignment in the Chamber of Deputies
Getting a majority in the 630-seat Chamber of Deputies is easy. The pre-election coalition that wins the largest share of national vote will automatically get 340 seats (54%). Within a coalition, seats are allocated to parties in proportion to their vote shares after they meet the threshold. The losing coalition/party is assigned the remaining seats on proportional basis after they meet the threshold

Seat Assignment in the Senate

Getting a majority in the Senate is more difficult and where all the complication of electoral politics come into play. Italy is divided into 20 regions, each with different number of senate seats based on size and population. In 17 of 20 regions, the pre-election coalition that wins the majority of votes in the region automatically get 55% of seats assigned to that region. So Senate election is the key to forming an Italian government. The key provinces to watch out for are, Lombardy, Campania, Sicily and Venetto. 

There are 6 pre-election coalitions,

1. Center-right coalition led by Silvio Berlusconi

2. Center-left coalition led by Pier Luigi Bersani

3. Centrist coalition led by Mario Monti

4. Left-wing coalition led by Antonio Ingroia

5. Populist party led by Beppe Grillo

6. Libertarian party led by Oscar Giannino

 
References

2013 Italian Parliamentary Election Pre-Election Report

How Italy's election works

Prof Jonathan Schlefer Calls for Capital Control...

The False Promise of Free Capital Flows
By Jonathan Schlefer, 19-Feb-2013

The economic orthodoxy that swept the world in the 1990s and 2000s attests to the terrifying power of ideas. Economists built "general equilibrium" models that, underneath all the fancy math, just assumed markets are stable and optimal. The models concluded — in a sort of "divine coincidence," as the MIT economist Olivier Blanchard and a colleague quipped — that if central banks merely maintained steady, low inflation, they would achieve economic stability and the best growth possible. Washington and London espoused this orthodoxy. The Treaty on European Union practically inscribed it in law.

In the Wake of the Crisis: Leading Economists Reassess Economic Policy collects essays by economists who are, indeed, leading — and are reassessing that orthodoxy. Never quite a true believer in it, Blanchard, now chief economist of the International Monetary Fund (IMF), acknowledges the terrible damage it caused. The macroeconomist David Romer concedes that the performance of pre-crisis state-of-the art models — some of which he developed — was "dismal." The editors frankly admit they have no clear idea how to replace them.

However, major Asian and Latin American nations offer pragmatic financial and economic guidance. Policymakers there deferred to orthodoxy in their words but not in their deeds — and avoided crisis. None of those nations' principal banks got in trouble, and growth there suffered far less than in the advanced nations. In fact, it wasn't a global financial crisis; it was a North Atlantic financial crisis. <Click Here for More>

The Day of Reckoning

The S&P500's unimpeded march towards all time high (1,576.09) came to a sudden halt today. Or did it? That's the question.

The technical set-up does not look good but it all depends on how the S&P500 performs for the next 10 days. There is potential for a Bearish Engulfing Pattern forming on a weekly basis (the key level is 1,513.61 close on Friday) or a Gravestone Doji forming on a monthly basis (the key level is 1,495.02 close next Thursday). We'll see.

I have been wrong on my prediction for a reversal in the S&P500 from a technical standpoint. And I have been wrong despite all the "Walls of Worries" - sequestration, rising gasoline price, higher payroll taxes etc. While materials index and particularly miners have been creamed in the past few days by bad news from China, the rest of the market have not. Even disappointing sales from a cyclical heavyweight CAT today only affected the company's share price, not the market, at least during the morning session.

The reason for the optimism was the confidence amongst investors that the Fed was still in play. They believes that the Fed will continue to pump $85 billion a month of fiat money into the economy no matter what. With today's FOMC Minutes, that belief has been questioned. Basically the Fed said, the $85 billion purchase of securities a month for the rest of the year is not a done deal.

This could be the start of something new, something like Draghi's comments on July 26, that started the bull market in the euro and the European markets, or Bernanke's speech at the Jackson Hole that first gave a hint of QE, and that started an 8 month long rally in the S&P500.

Of course, there are market gurus like Jim Cramer, who think this sell-off is an excellent buying opportunity.

The Week Ahead - Traders Are Watching to See If the Consumer Stumbles

Traders Are Watching to See If the Consumer Stumbles
CNBC
By: Patti Domm

Stocks could stay in low gear in the week ahead, as traders look for clarity on the Federal Reserve's policy, the housing recovery and especially — the consumer.

Merger activity could also be a factor as reports of talks between two retailers carry last week's merger boomlet into this week. The Wall Street Journal reports that Office Depot and Office Maxare in discussions to merge.

Homebuilder sentiment Tuesday, housing starts Wednesday and existing-home sales Thursday could provide a good look at how the housing market is faring. The Fed also releases minutes of its last meeting Wednesday, and there is much interest in what officials will say about their extraordinary easing policies.

At the December meeting, several Fed members said they wanted to stop quantitative easing by the end of this year but the Fed is still expected to continue the program into next year. The Fed is currently buying $85 billion in Treasurys and mortgage-backed securities monthly, under the program. But since the December meeting minutes were released in January, Treasury rates have risen and the 10-year note yield has moved to a higher range around 2 percent.

"I can't imagine that conversation got any less pertinent since December, given the fact we avoided the 'fiscal cliff' and the economic numbers got better," said Deutsche Bank chief U.S. economist Joseph LaVorgna. The makeup of the Fed changed in January, with new voting members, but it is still not expected to take on a more hawkish tone. <Click Here for More>

Is Wal-Mart the Grinch that's going to end this rally?

While a 55-foot meteorite with a power of 30 Hiroshima A-bomb shook Russian Siberia on Friday morning, it did not shake the resilience of the US market.  The S&P500 kept marching higher on early Friday morning trade on its way to achieving a 7th consecutive weekly gain. The nonchalant reaction of US markets to a far off event was not surprising. It has been ignoring even bad economic news, whether it was a weak US industrial production (Friday) or terribly European GDP (Thursday). Even CSCO's rather tepid guidance on Wednesday, usually a market moving event, turned out to be a non-event.

Then at 2:00pm Friday, an internal Wal-Mart e-mail leaked. Jerry Murray, Wal-Mart’s vice president of finance and logistics, said in a February 12 e-mail to other executive, “In case you haven’t seen a sales report these days, February MTD sales are a total disaster. The worst start to a month I have seen in my ~7 years with the company.” Boom, Wal-Mart stock started to slide immediately and it took the whole market with it. Again, the market showed its unbelievable resilience as it steadily pared losses into the close. The S&P500 was down on the day but was up for the week, the 7th consecutive weekly gain, the first since 21-January-11.

Wal-Mart reports earnings pre-market on Thursday February 21. It will be interesting to hear what they have to say in the conference call especially about their sales trend. The dollar stores (DG, DLTR, FDO) have been hit hard since late last year on worries about the impact on their low-end customers from the rise in the payroll tax starting January 1. Wal-Mart e-mail seems to suggest that the tax "hike" is having an impact. An additional factor that might be impacting low-middle income consumers is the delay in tax refunds from the IRS. As of February 3rd, only $4 billion refund had been mailed, down from $27 billion mailed at this point last year - that's down a whopping $23 billion.

A Perma-bear becomes a Bull... Is this an ominous sign!!!

How long can the market ignore bad news? That’s the question!

The much talked about sequestration is upon us. It is going to go into effect on March 1 unless the President and Congress agree to an alternative plan. The market is betting that they will “kick the can” down the road again, and such, are ignoring the political rhetoric that is slowing building up in Washington DC.

How did we get here? It started with debt ceiling negotiation in the summer of 2011, which culminated in the Budget Control Act (BCA) of 2011. BCA created a Super-Committee, and the failure of that committee led to the sequester.

On April 4, 2011, the Treasury Secretary wrote a letter to Congress saying that $14.294 trillion debt limit had been reached. On May 16, 2011, the Treasury suspended debt issuance and took extraordinary measures to  meet government obligations. The Treasury notified Congress that such measures could only last until August 2, 2011, at which time the US will run out of money to pay its bills. After much wrangling, Congress and the President agreed to a plan, which was incorporated in the Budget Control Act (BCA) of 2011. The President signed BCA on August 2, 2011. BCA raised debt ceiling by $900 billion. Another $1.2 trillion could be raised but that required equal amount of spending cuts. It created a super-committee to help decide the $1.2 trillion of cuts. If the super-committee failed, automatic cut or sequestration will kick in on January 2, 2013. The super-committee failed. Just before the sequestration was supposed to kick in, Congress and the President agreed to another deal (American Taxpayer Relief Act of 2012), which delayed the implementation by 3 more months. That’s how we got here.

The sequester will cut $1.2 trillion over 10 years, or ~120 billion a year – around half comes from defense and the other half from non-defense including Medicare. According to the Bipartisan Policy Center, the impact of the cut to 2013 GDP is ~0.5% and around 1 million jobs during 2013-14.

My own feeling is that if the sequester were to hit fully, the impact will be significantly larger because of secondary/tertiary impact as well as the impact on consumer/business sentiment.  Always remember that the Fed Chairman Bernanke said the impact of sub-prime mortgage is only ~100 billion in July 2007; the real impact was more like ~15x that.

Is Gold Heading South?

GLD, the gold ETF has decisively moved to the downside today. Since the 2008 financial crisis, GLD has held the 100-week moving average. Even during the "dark days" of Jun-Aug 2012, it did not break that line. Today it gapped down below that line, an ominous sign. I have not read any specific news or reason for today's move. It could just be that bulls have finally given up and bears are in control.

Note that Credit Suisse came out with a bearish call on the gold market last week (click here for story) (click here for video). They argue that the reasons for buying gold vis-a-vis (a) protection against "tail risk" and (b) inflation hedge are no longer valid because (1) central bank actions have removed risk of (a), and (2) TIPs do not suggest (b) happening anytime soon. Also gold in $2007 is at the highest level since 1841 (yes, 1841).

The commodity guru Dennis Gartman agrees with Credit Suisse although Jim Rogers takes the opposite side of the trade.

Is the 6 Week Streak Going to Freak Out on the 7th?

The S&P500 rose 8.4 points on Friday and closed the week up 0.3%. More importantly, it was the 6th consecutive weekly gain for the index. Note, the index has not registered a weekly loss in 2013. The question in everyone's mind is whether this winning streak is going to continue or come to an abrupt end. Despite my earlier prediction that the S&P500 is set-up for a correction, I am betting my money that the S&P500 will close lower this coming Friday. Two reasons (1) lack of news and (2) statistics.

The economic calendar in the US is pretty light. The most watched data will likely be Retail Sales (Jan) on Wednesday, weekly Jobless Claims on Thursday and Michigan Sentiment (Feb) on Friday. Retail sales should not surprise anyone given that January comps from retailers last Thursday already surprised to the upside. Weekly claims do not move a needle unless it moves by a lot, which is not likely. Michigan sentiment, if anything, should surprise to the downside (remember the gas price). The corporate news is also light. There are bunch of earnings but they are not likely to impact the market. Also most of Asia is closed for the Chinese New Year. Given a dearth of news, or more specifically positive news, market will likely focus on negative news (sequestration, high oil/gasoline price, currency war, tired bull market, insider sell-off, noise from the Fed, European headlines including election in Italy and political turmoil in Spain) because investors are looking for an excuse to sell.

Regarding the statistics, since 1974, there have been only 10 instances when the S&P500 has registered 7 or more weeks of gains (7 weeks: 25-Aug-78, 18-May-07, 14-Jan-11; 8 weeks: 30-Jan-76, 10-Sep-93, 20-Jun-97, 20-Mar-98; 9 weeks: 1-Sep-89, 23-Jan-04; 12 weeks: 20-Dec-85). That's just 0.49% of the total. The last time, the 7th consecutive weekly gain happened was the week ending January 14 2011. That occurred on the backdrop of QE2, which was a huge surprise to the market.

Cramer's Game Plan for Week of February 11, 2013

AIG - Finally Free

AIG - America's Improved Giant

2-Feb-13, Economist

The insurer has done a good job of rehabilitating itself. Can it stand on its own feet?

AMERICANS are often asked by politicians if they are better off now than they were four years ago. Anyone involved with American International Group (AIG), an insurance company felled by the financial crisis, can safely answer “yes” to that question. In just four years it has freed itself from a $182 billion bail-out; gone from being publicly owned back to the private sector (the Treasury sold the last of its stake in December); and turned itself into a leaner, simpler business. Now that it has successfully shaken off government ownership, AIG’s next task is to prove its worth as a stand-alone, listed company.

That AIG is around at all is remarkable. By piling into what would emerge as the most rotten part of the financial system (insuring investors against losses on securities linked to American subprime mortgages) during the credit bubble, it ended up owing billions of dollars to those holding the other side of its bets. Ben Bernanke, the Federal Reserve’s chairman, famously derided AIG as a hedge-fund attached to a large and stable insurance company. <Click Here For More>

Let's Become a REIT

With US companies struggling to create shareholder value in the "old fashioned way" i.e. through steady growth in revenue and income, they are resorting to financial engineering/machination. It is the world where 2+2>4.

No, I am not talking about LBO (leveraged buyout) or MBO (Management buyout). That's so 80s. I am talking about REIT, Real Estate Investment Trust.

Companies left and right are trying to turn themselves into a REIT.

• Just this week, the solar industry got a big boost (FSLR is up 11% in 5 days) from a report that said one of them is trying to get permission from the IRS to set itself up as a REIT. As Bloomberg reported, A San Francisco startup may win approval as soon as this month to become the first firm allowed to raise money for solar-power projects as a REIT, the financing vehicle used in $640 billion of U.S. property ventures. (Full Story).
• Last week, it was waste management companies that caught the fancy of REIT-crowd. Again, as Bloomberg reported, Waste Management Inc. (WM) rose the most in 17 months after analysts at Credit Suisse Group AG said investors would benefit if the biggest U.S. trash hauler was converted into a real estate investment trust. (Full Story).
• Some non-traditional companies have already turned themselves into REITs such as timber companies,  a casino company (PENN), and a retail company (DDS). I am sure there will be more in the next 12 months.

Investors can benefit, sometime mightily, if they can identify a company that could turn into a REIT before the Wall Street crowd do. PENN jumped over 30 percent on November 16, 2012 after it announced plans to split into a REIT. Good luck!

Read Also:

  Clear Channel Outdoor CEO says no current plan to become REIT (Morningstar, Jan 2013)

  The Rise–and Complications–of “the REIT Conversion” (OpEd, Dec 2012)

  REITs Boom As More Industries Discover This Tax-Friendly Structure (Forbes, Nov 2012)

  Here's a Way to Cut Business Taxes: Tech Firms Become Real Estate Trusts (WSJ, Oct 2012)

  Gabelli investors to oppose Gaylord's proposed REIT conversion (Reuters, Sep 2012)

  Crown Castle, A High-Growth Story That Could Convert To A REIT (SeekingAlpha, Sep 2012)

  REITs demonstrate real appeal in more sectors (The Deal, Aug 2012)

  Firms Restructure as REITs (WSJ, Aug 2012)

  The Risks and Rewards of Becoming a REIT (CFO Magazine, June 2012)

  The Lure of Converting to a REIT (Barrons, May 2012)

  Will CyrusOne Become a REIT? (Data Center Knowledge, Feb 2012)

  REIT Renaissance (NYSE Magazine, Jan 2011)

  Firms see REITs as right move (Pension & Investment, Jan 2011)

  More Institutions Barking Up the REIT Tree (National Real Estate Investor, Aug 2010)

  REITs Spread to Timber Industry (Street Sleuth, Nov 2005)

  Host Marriott Finds Trade-Offs In REIT Conversion (Hotel Interactive, July 1999)

  Tax Benefits of Creating a Real Estate Investment Trust (PDF)

  FAQ: REIT (PDF)

 

  Corrections Corporation of America will convert to REIT in 2013 (Feb 2013)

  CBS converting advertising unit to REIT (Jan 2013)

  Equinix Board Approves Plan to Pursue REIT Conversion (Sep 2012)

  Iron Mountain Rips Higher On REIT Conversion Plan (Jun 2012)

  Gaylord to Convert to REIT, Sell Management Business (May 2012)

  Weyerhaeuser declares record $5.6 billion dividend in conversion to REIT (Jul 2010)

  Host Marriott to announce it's a REIT (Dec 1998)

Goldman, the Image Makerover Guru..... uh!

In the US, the reputation of investment banking giant, Goldman Sachs has taken a nose-dive since the financial crisis on the heels of drip-drip revelations of its internal workings/machination, most recently by a mid-level executive by the name of Mr. Smith. Some even blame it for the Greek crisis.

Now the Russian government has asked the same Goldman to soar up its reputation amongst investment community. Is this ironic or what? Goldman, the image makeover guru!!

Goldman Sachs Group has been hired by the Russian government to burnish the nation’s image overseas and attract more institutional investors.

The bank has signed a three-year agreement with the Economy Ministry and the Russian Direct Investment Fund to advise on issues such as communicating government decisions and setting up meetings with investors, according to Sergei Arsenyev, Goldman Sachs’s managing director of investment banking in Moscow. >>>