Category Archives: Economy and Meltdown

Fiscal Thursday – Last Ditch Efforts

Fiscal Thursday – Last Ditch Efforts

Courtesy of Phil of Phil’s Stock World 

4 more days!

This is much more exciting than Christmas. So exciting that President Obama and Congress have cut short their winter vacations to give us hope – right before they snatch it away again.  Will it be a bad plan or no plan?  I can hardly wait to find out…

We have a bit of data today with the usual Jobless Claims, Bloomberg’s Consumer (dis)Comfort Index, New Home Sales, Consumer (lack of) Confidence, Oil Inventories and even a look at the Fed’s Balance Sheet and the Money Supply after the markets close.  Tomorrow we get the Chicago PMI and Pending Home Sales but none of it matters compared to whatever rumor comes out of Washington over the next 48 hours.



Meanwhile, we’re focused on our technical levels and, as you can see from the Big Chart (above), we are right on the 50 dma of the Dow (13,083) and the Nasdaq (2,991) and not too far on the S&P (1,413) with the NYSE (8,400) and the Russell (840) testing (and failing, so far), their 5% lines.

See my additional comments to Members in morning chat but, suffice to say, we need to watch these levels very carefully as well as the Dollar – which is right on the 79.50 line as the Euro attempts to get back over $1.33 and the Pound goes for $1.62 while the Yen remains extremely weak (and supportive of the Dollar) at 85.76 to the Dollar. As I said to Members:

Obama and Congress are back today. I don’t expect an announcement this afternoon but, possibly, this evening or tomorrow if they are serious about not looking like they let the economy die. We also hit the mystical debt ceiling on Monday so much silliness over the next couple of days but, if there is a rumor of a solution – the markets could jump very sharply so be careful.



We also have an adjusted TZA spread – just in case those levels don’t hold up. Our HLF play from last week really kicked into gear as the stock has already jumped back from $25 to $27.50.  That trade idea was from last Friday and made for a nice Christmas present as I said in Member Chat:

HLF May $30/40 bull call spread at $3.30, selling 2014 $22.50 puts for $6.40 for a net $3.10 credit for a net $19.40 entry on the $27.18 stock. Not that it means much as they’ve already fallen from $74 in April but I think it’s a fun play and we could make $13.10 on a $3.10 credit with just $2.70 in net margin (according to TOS) for a better than 4x return in 12 months if HLF comes back to $40 by May.

Our aggressive play paid off already with the May $22.50 puts falling to $4.30 and the $30/40 spread holding $2.70 for a quick $1.50 profit off the net $3.10 credit (48%).  As noted yesterday, this is how we trade the news and it looks like we caught a good bottom on that one!


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The Atlantic agrees with me on household formation, calling it “The Most Overlooked Statistic in Economics” and furthers my case that it’s poised for a comeback in 2013.  This chart from that article illustrates the tremendous amount of money that can be pumped into the economy if we do get a strong recovery but, even a mild recovery will be quite a boost (grey dots).

Barry Ritholtz pointed out two good reads this morning – We know nothing because we read newspapers (Fabius Maximus) and The media – a broken component of America’s machinery to observe and understand the world (Fabius Maximus) – both are good reads if you are in the mood to do some thinking.

Be very careful out there as the markets are in no mood for thinking – they are simply reacting (or over-reacting) to whatever the latest rumor is out of Washington.  We should take our levels seriously and hedge if we need to, but cashy and cautious is the watch-word coming into the long weekend as this thing could go either way – sharply!

Click on this link to try Phil’s Stock World! 

Another Bait And Switch: Congress Defeats E-Mail Privacy Legislation… Again

Submitted by Michael Krieger of <a href="”>Liberty Blitzkrieg blog,

This is how the corporate state rolls.  They remove all the important stuff at the last minute, you know, like provisions that might actually protect constitutional rights.  This is exactly what they just did with the NDAA, which I outlined in my post The Section Preventing Indefinite Detention of Americans without Trial Removed from Final NDAA Bill.  Now we find out from Wired that:

The Senate late Thursday forwarded legislation to President Barack Obama granting the public the right to automatically display on their Facebook feeds what they’re watching on Netflix. While lawmakers were caving to special interests, however, they cut from the legislative package language requiring the authorities to get a warrant to read your e-mail or other data stored in the cloud.


But another part of the same Senate package — sweeping digital protections requiring the government, for the first time, to get a probable-cause warrant to obtain e-mail and other content stored in the cloud — was removed at the last minute.


Currently, the government can obtain e-mail or other cloud documents without a warrant as long as the content has been stored on a third-party server for 180 days or more. The authorities only need to demonstrate, often via an administrative subpoena, that it has “reasonable grounds to believe” the information would be useful in an investigation.


Leahy has repeatedly sought to amend the Electronic Communications Act, but he finds little support for it among fellow lawmakers or with the President Barack Obama administration.

Repeat after me: Your Government Loves You.  Now go back to sleep.

Full Wired article <a href="”>here.

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Savings Deposits Soar By Most Since Lehman And First Debt Ceiling Crisis

A month ago, we showed something disturbing: the weekly increase in savings deposits held at Commercial banks soared by a record $132 billion, more than the comparable surge during the Lehman Failure, the First Debt Ceiling Fiasco (not to be confused with the upcoming second one), and the First Greek Insolvency. And while there were certainly macro factors behind the move which usually indicates a spike in risk-aversion (and at least in the old days was accompanied by a plunge in stocks), a large reason for the surge was the unexpected rotation of some $70 billion in savings deposits at Thrift institutions leading to a combined increase in Savings accounts of some $60 billion. Moments ago the Fed released its weekly H.6 update where we find that while the relentless increase in savings accounts at commercial banks has continued, rising by another $70 billion in the past week, this time there was no offsetting drop in Savings deposits at Thrift Institutions, which also increased by $10.0 billion. The end result: an increase of $79.3 billion in total saving deposits at both commercial banks and thrifts, or an amount that is only the third largest weekly jump ever following the $102 billion surge following Lehman and the $92.4 billion rotation into savings following the first US debt ceiling debacle and US downgrade in August 2011.

In total, there has been an increase of $112 billion in deposits in savings accounts in the past month alone, roughly the same as the total non-M1 M2 momey stock in circulation.

Ironically, it was only yesterday that we demonstrated the relentless surge in bank deposits despite the ongoing contraction in total bank loans, and explained how it is possible that using repo and rehypothecation pathways, that banks are abusing the endless influx of deposits into banks and using this money merely as unregulated prop-trading funds, a la JPM’s CIO. In other words the “money on the sidelines” now at all time record highs, is anything but, and is in fact about $2 trillion in dry powder to be used by the banks as they see fit.

But most importantly, we showed how even as those happy few who can still afford to save, are fooling themselves int believing that they are pulling money out of other assets and storing it in what they perceive to be electronic mattreses at their friendly neighborhood JPM, Wells or Citi branch, and thinking this money is safe and sound. Alas, nothing could be further from the truth.

Because by depositing money into banks, ordinary Americans (and companies) are merely providing even more dry powder for the banks to trade on a prop, discretionary basis, either as directly investable capital or as asset collateral, and by handing over their hard earned cash to the banks are assuring that the scramble to bid up any and all risk assets continues indefinitely.

Yes, dear saver: the reason why stocks continue to soar above any fundamentally-driven level, is because you just made that bank deposit.

It also means, that come the New Year, and the unlimited insurance of various deposits comes to an end, and when banks once again represent a counterparty danger to savers (where they will be merely a general unsecured claim over and above any FDIC insured limit, be it $250,000 or less), should said deposits be pulled out of banks (and according to the WSJ there is about $1.5 trillion in deposits that may be impacted), the net result of such capital reallocation would be far more disastrous to stock markets than anything the fiscal cliff and/or debt ceiling theater could possibly do as it would mean unwinding an ungodly amount of trades that have had$1.5 trillion as real assets, with subsequent repo and re-repo leverage applied to them.

Source: H.6, St Louis Fed

Guest Post: No More Industrial Revolutions, No More Growth?

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The common feature of the transformative technologies of the 20th and 21st centuries is that they were one-offs that cannot be duplicated.

What if the engines of global growth that worked for 65 years (since 1945) have not just stalled but broken down? The primary "engines" have been productivity gains from industrialization, real estate development and expansion of consumption based on the continual expansion of debt and leverage–in short-hand, financialization.
The Status Quo around the globe has responded to the obvious endgame of financialization (the 2008 financial crisis) by doing more of what has failed: expanding credit and leverage, flooding the global economy with liquidity (money available for borrowing), credits and subsidies for real estate development and a near-religious belief in "the next industrial revolution" that will spark rapid growth in employment, profits and productivity.
"The usual suspects" for the next engine of growth include nanotechnology, biotechnology, unconventional energy and Digital Fabrication, i.e. 3-D printing and desktop foundries. But are any of these capable of not just replacing jobs and revenues in existing industries, but creating more jobs and expanding revenues and profits?
There is a growing literature on this very topic, as many start questioning the quasi-religious faith that there will "always" be another driver of growth, i.e. the expansion of wealth, profit, employment and assets.
The Status Quo dares not even entertain this question because the only way to service the fast-rising mountain of debt that is sustaining the Status Quo is to "grow our way out of debt," i.e. expand the real economy faster than debt.
The past 250 years has been one long "proof" that we can indeed "grow our way out of debt" because the low-hanging fruit of industrialization and cheap, abundant energy enabled wealth to be created at a faster pace than debt.
Clueless Keynesians mock those questioning the possibility that the low-hanging fruit has been plucked by noting that doomsdayers were actively decrying the ballooning debt of the British Empire in the mid-1700s. We all know how that story ended: what looked like crushingly massive debt in 1780 was reduced to a trivial sum by the rapid expansion of industrialization.
But suppose the end of cheap, abundant energy (replaced by abundant, costly energy) and the Internet spells the end of centralized models of growth? What if all the innovation currently bubbling away only produces marginal returns?
Take biotechnology for example. Those with little actual knowledge of biotech are quick to latch onto the potential for genetic engineered medications, biofuels, etc. What they don't ask is if these technologies can scale up while costs decline, i.e. the computer technology model where everything progressively gets cheaper and more powerful.
Biofuels may have promise, but it still takes "old fashioned" energy to collect the feedstock, and it is a non-trivial task to keep micro-organisms alive on the scale that would be needed to produce a useful amount of liquid fuels, i.e. a few million barrels every day. Some processes may not scale up, and others may not see any significant reduction in fuel costs once the full input costs are calculated.
Genetic engineering also may not scale up–it may be limited by key barriers of individual patient complexity and by intrinsic costs that do not drop enough to make a difference.
Consider the diseases that have almost been eradicated–polio, for example–and the lifestyle diseases such as diabesity. The wave of diseases that were eradicated were caused by bacteria or viruses: a vaccine or agent that disabled or killed the bacteria/virus wiped out the disease.
Diabesity, cancer and heart disease are not caused by a single virus or bacteria. The "one med/vaccine works for all" model has failed and will always fail because diabesity and other lifestyle diseases have multiple, non-linear causes that are beyond the reach of a single "solution." These diseases may well be tied to epigenetic factors, for example, the interaction of "junk DNA" with environmental stresses that extend back into the individual genome.
What we face is the confusion of symptoms and effects with causes. Lowering cholesterol is not the "magic bullet" many hoped for, and neither was hormone therapy.
In the technology sector, it is clear that the Internet is destroying entire sectors of employment. The jobs that have been lost for good have not been replaced by jobs created by the Internet, nor is there any credible evidence to support this hope: automated software continues chewing up one industry after another, and the politically protected fiefdoms of healthcare (sickcare), education and government have yet to taste the whip of real innovation.
Rather than add jobs, we will lose tens of millions of jobs as faster-better-cheaper breaches the walls of these massive politically protected fiefdoms.
Healthcare spending is clearly in terminal marginal return: our collective health continues to decline in key metrics even as spending doubles, triples and quadruples. The same can be said of defense, education and many other industries.
Sectors such as agriculture have already seen employment decline by 98% even as production rose; there are still improvements in agriculture (robotic milking machine, for example) but the low-hanging fruit in agriculture as well as in medicine, education, etc. have all been picked.
The next wave of innovation will destroy protected profit centers and employment; even the Armed Forces are not immune, as the "ships of the future" will have relatively small crews and robotic drones will replace high-cost, high-employment weapons systems.
The semi-magical belief that technological innovation will create wealth in such quantities that all other problems become solvable may well be false. We may have entered an era of marginal returns, where innovations destroy jobs, wealth, assets and debt–the very foundations of "growth."
I have begun to speculate about a future where energy might be abundant but few can afford to consume much: money and income may be scarcer than energy.
The one innovation that might energize an entirely new field of employment is digital fabrication, the decentralization and distribution of production. But this will also creatively destroy jobs dependent on the present supply chain.
National governments have over-promised entitlements to their citizens on a vast scale, and the current "solution" to the mismatch of promises to national surplus is to borrow monumental sums to fund the promises. If innovations actually shrinks employment, incomes and wealth, then the base for taxes and debt will quickly shrink to the point that the debt is unserviceable. The Status Quo will collapse financially, even if energy and labor are both abundant.
Consider END OF GROWTH – six headwinds: demography, education, inequality, globalization, energy/environment, and the overhang of consumer and government debt.(via Zero Hedge)
The point made in this lengthy essay is a powerful one: the common feature of the transformative technologies of the 20th and 21st centuries is that they could only happen once. They are one-offs that cannot be duplicated. Doing more of what has failed will only set up a grander failure as returns on all our debt-based "investments" become ever more marginal and the return on increasing complexity drops into negative territory. Once complexity yields negative returns, the systems that depend on complexity quickly destabilize and implode.
The Collapse of Complex Business Models

This essay was drawn from Musings Report 48. The Musings are sent weekly to subscribers and major financial contributors (those who contribute $50 or more annually).

My new book Why Things Are Falling Apart and What We Can Do About It is now available in print and Kindle editions–10% to 20% discounts.

Reid-Off; Boehner-On; McConnell-Off; Reality-Gone

UPDATE: ES -7 after-hours from closing highs (McConnell-Off)

Equity markets started the day off slowly but with confidence disappointing and Harry Reid’s name-calling, not even the arrival of the chosen one was enough to juice anything but a minimal bounce in stocks. It looked like S&P 500 futures (ES) were going to retest the flash-crash lows from last week but thanks to a well-timed piece of news that Boehner will be in session on Sunday night (though no accompanying notes on exactly what magical book of crap they will sign off – or not – on) was enough to spur Johhny-5 and his friends into algo-asm action. The initial jerk was perfectly to VWAP and the second jerk took AAPL up to yesterday’s closing VWAP. This strength dragged ES higher – reconnecting with a less excited risk-asset market that had remained flat from the day-session open. FX and vol were the main levers to the upside with Treasuries less enamored – though HYG was lifted to fill Monday’s gap. Mitch McConnell spoiled the party a little into the unchanged close.

As the markets ramped there were notable blocks and the large delta appeared to be sellers – which accompanied with VIX compression (big roundtrip today) suggests this strength enabled a few more big players to exit their underlying positions and unwind hedges. Gold rose as late-day USD weakness (and Treasury selling) jerked commodities higher. ES auctioned up to pre-Reid levels but was unable to hold those algo gains.


The S&P magically managed to get green for the month by the close…


The day in the S&P 500 futures market… with Scott Brown’s on-again off-again facebook post impact… ending the UNCH!


Asset classes in general were all over the place with the US Open to EU Close session seeing a big EUR dump (on Reid’s comments) after some more reptraiation strength early on. Gold rallied on that and stayed high all day. Evidently Treasuries (red) were not as excited with the ramp as the US and Oil)…


Equities did actually drop considerably more than risk-assets (upper right) in general today and the last day ramp dragged us back up to a more synchronized view of the world – even if correlations were weak overall. ETFs were relatively better-behaved (upper left) and stayed in close sync up and down – with VXX the major driver – though HYG was abused higher into the close (filling Monday’s gap)… Cross-asset class correlation picked up notably into the close (lower right)



VIX round-tripped from low 19s to almost 21% and back down – and while much was made of VIX’s compression it remains excessively bid relative to stocks – suggesting hedgers remain. Clearly, managers bid protection over the past week or so – knowing they could not sell down their exposures too aggressively; now we see headline-driven ramps that enable puts to be unwound profitably (higher vol and lower underlying price) and also to sell down exposure into the market’s levered excitement (of retail) which then fades after-hours – just as it did after the last time – would not be surprised to see another ES cliff dive tonight.


Apple was heading for a 4 handle slowly but surely but the Boehner Boner enabled an absolute algo-gasm as we tested up to yesterday’s closing VWAP…and stalled there


The problem, of course, as we tweeted an hour before the close, is that:


So market will close unchanged, removing any motivation to get a deal done. Perfect

— zerohedge (@zerohedge) December 27, 2012



Charts: Bloomberg and Capital Context


(h/t Kosherham for Johhny 5 image)