Presidential Election Preview 2: Where They Stand And Why It Matters

The 2012 US presidential election is perhaps one of the most unique and important elections in recent history from an economic perspective (with the time-line rapidly approaching). In choosing its leader for the next four years (for which we provide a handy ‘where-do-they-stand’ cheatsheet), we agree with Goldman that the country will likely be determining the path for near-term economic growth, medium-to-longer term fiscal stability and monetary policy at a time when the stakes are exceptionally high – whether or not the US economy returns to recessionary conditions in 2013, the US sovereign debt rating and the broader credibility of the US government to Americans and foreigners alike all hang in the balance. Goldman sees three factors that set the 2012 election apart.



Via Alec Phillips, US Political Economist at Goldman Sachs:

Legislative inaction now a greater risk than legislative action


The potential for legislative inaction may pose a greater risk and more uncertainty than legislative action, suggesting that the one almost foregone outcome of the current election – divided government – poses greater challenges than in the past. Typically, divided government is viewed as a constructive political outcome by markets as it (normally) reduces the likelihood of major policy change and hence policy uncertainty.


But in the current environment the opposite may be true, as Congress must take action (by year-end in many instances) to avoid large (and mostly undesired) shifts in policy. This is because policy has become more temporary, mainly owing to the congressional budget process, which measures the cost of legislation over ten years and thus makes temporary legislation appear less expensive than longer-lasting policies.


The glaring risk in front of Congress is the “fiscal cliff” – roughly 3.5% of GDP in tax increases and spending cuts set to occur at year-end. This makes the 2012 election one of only a few contests in which such a large fiscal policy shift was on the table so soon after the election took place (2008 is arguably another example, when the election represented, in part, a referendum on the size and composition of a stimulus package expected to be passed early in the following year). Our base case is that Congress will just barely reach an agreement before the end of the year, averting most of this fiscal restraint, but it is quite possible that Congress could fail to address the issue by that deadline, leading to a substantial fiscal drag on growth, at least temporarily.


A status quo political outcome raises the risk of a game of fiscal “chicken” at year end, in which policy goes “off the cliff” unless one party reverses their long-held position on the upper income portion of the 2001/2003 tax cut (luckily for the US economy—and unlike the real game of “chicken”—a retroactive extension is possible in early 2013). A Romney win seems more likely to lead to a short-term extension of the 2001/2003 tax cuts and some aspects of the fiscal cliff. In either scenario, it is imperative that Congress act, which is a unique and important difference from typical elections, with the economic consequences of them failing to do so potentially recessionary.


The fiscal stakes are higher than they have been in decades


Beyond the fiscal cliff, the winner in November will face a potentially frustrating fiscal landscape: on one hand, the elevated level of debt—around 75% of GDP and rising—limits the fiscal room to maneuver. On the other hand, the Treasury’s exceptionally cheap interest expense—around 1.4% of GDP, less than half the level that prompted deficit reduction efforts in the late 1980s and 1990s—has dulled the pressure on lawmakers to tackle these issues. This should be a recipe for inaction. But two issues will likely raise the stakes in reaching a longer-term fiscal agreement early on in the next administration:


(1) the need to once again increase the debt ceiling which congressional Republicans would like to match with deficit reduction (over ten years) of an equal amount, and

(2) the renewed threat of a sovereign downgrade by the ratings agencies, who have signaled as much if the US doesn’t stabilize its debt ratio by mid-decade.


A deficit reduction agreement of $2 trillion over ten years could resolve both issues, but with the easy cuts already made in last year’s debt limit agreement, only the most difficult aspects of a fiscal “grand bargain” remain.


Monetary policy in (political) focus


Elected officials have hardly been indifferent to monetary policy in the past, but there have been few elections where Fed policy was as widely debated as it is today. Compounding this is the expiration of Chairman Bernanke’s term in January 2014; Romney has already indicated that he will not nominate Chairman Bernanke for another term. While Romney is not alone in making his intentions to replace the chairman clear, what makes this situation unique is that it comes at a time when the Fed is pursuing unconventional policy that depends much more than usual on a forward commitment that occurs mostly past the end of the current Chairman’s tenure.



Any of these issues would make the upcoming election an important one for the economic outlook, but the combination of a near-term risk in the fiscal cliff, increasingly problematic medium-term fiscal dynamics, and election-driven uncertainty on monetary policy at a time when the credibility of future commitments is necessary for its success make this a unique election, with potentially substantial and far-reaching economic impacts.

Apple Cash Balance Rises At Slowest Pace In 30 Months

For a company that recently had a $600 billion market cap, for which scale is everything, and for which every sentence begins with “if you exclude its cash, its multiple is” two things have to be consistent: it has to keep growing its cash, and said growth has to be proportional to the firm’s scale. For Apple, in Q3 the first condition was satisfied… but just barely. Total cash and equivalents did rise from $117.2 billion to $121.3 billion, but the rate of sequential increase, which was only $4.1 billion, was the slowest increase in cash and equivalents since March 2010, when Apple’s total cash load was a far more modest $41.7 billion, as was its market cap. While AAPL continues to be a growth juggernaut, in its pursuit to appease Wall Street with dividends and other guimmicks, is it starting to lose the big picture, which is and always has been about generating cash flow? And how long until the organic growth to cash generation is not even enough to cover the dividend outflow? What happens if and when AAPL actually has cash decline in one quarter? Finally, is it time for the infamous Braeburn Capital to show Simon Potter who truly is boss?

Total cash:

Sequential change:

After Retracing All After Hour Losses, AAPL And AMZN Resume Downward Direction

After some significantly volatile after-hours action, the wunderkinds of the Nasdaq have reverted back up to their VWAPs as all is well once again and the media narrative can play out… AAPL volume is not heavy (remember we said option-skews were near-record levels – implying everyone and their mum owns downside protection and will be unloading into the open tomorrow). QQQs are suffering more than AAPL for now – implying that’s where the hedges went. AMZN’s move was even more impressive wrigging back up to VWAP. Who is the marginal buyer here? As we post, both are leaking back from VWAP’s safe harbor…


AAPL return to VWAP and fade…


AMZN return to VWAP and fade…

It's Been A Wild Ride

The last few years have been a wild ride in the world’s equity markets. None wilder than the US equity markets. The only fly in the ointment is that we’ve seen this kind of ‘wild ride’ before, the kind of unbridled nothing-can-stop-us-now, its-all-priced-in, Central-Bank-sponsored rallies that have been the bread-and-butter of every BTFD’er since March 2009. Presented with little comment – this time it’s different, we really hope…



and if that wasn’t enough – here is the last six months…


and as we noted here recently – this is not just a price pattern, this is a valuation boost pattern too: post-QE Peak P/E appears to have hit us once again…


(h/t @Not_Jim_Cramer)

Taxman Strips Exotic Dancers' Write-Down

In what will likely cause riots on the streets of New York City, the Court of Appeals has upheld that strip clubs could not longer claim a tax exemption as its stage and couch dances did not merit a ‘musical arts performance’ exemption. As Bloomberg BusinessWeek reports: “It is not irrational for the tax tribunal to decline to extend a tax exemption to every act that declares itself a ‘dance performance,’” the Court of Appeals said in a 4-3 decision. The sticking point, apparently, was the fact that the ‘private dances’ were the same as those supposedly ‘choreographed’ on stage (which doesn’t seem such a bad thing to us?) but like the Tax Tribunal we haven’t observed them or have personal knowledge of such VIP-room activity entertainment. The majority said qualifying the dances as artistic performances would “allow the exemption to swallow the general tax” and one judge added “I find this particular form of dance unedifying — indeed, I am stuffy enough to find it distasteful; perhaps, for similar reasons I do not read Hustler magazine; I would rather read the New Yorker,” noting that the former was insufficiently ‘cultural and artistic’.


Indeed, a club presenting performances by women gyrating on a pole to music, however athletic or artistic, seems quite irrational; oh wait.


Seems quite highbrow, athletic, and artistic to us?


Via Bloomberg BusinessWeek:

A New York strip club can’t claim a tax exemption on entrance and performance fees on the grounds that it presents “musical arts performances,” the state’s highest court ruled.

The New York Court of Appeals in Albany today upheld a lower court’s ruling that Nite Moves, an adult “juice bar” in Latham, New York, didn’t prove to tax authorities that its stage and couch dances merited the exemption granted to artistic performances.


“It is not irrational for the tax tribunal to decline to extend a tax exemption to every act that declares itself a ‘dance performance,’” the Court of Appeals said in a 4-3 decision.

While the state imposes a sales tax on any admission charge greater than 10 cents for the use of a “place of amusement,” the Legislature created an exemption for “dramatic or musical arts performances,” according to the ruling.


Nite Moves, which calls itself an “upscale non-alcoholic juice bar,” argued its performances entitled the adult- entertainment business to the exemption, according to the ruling.

The club, which was required to show that its fees were admission charges for choreographed dance routines, failed to prove that performances on either the main stage or in private rooms qualified for the tax break, the Court of Appeals said.


Private Dances


The state’s Tax Appeal Tribunal discredited an expert presented by the club who said the performances were choreographed, finding that her testimony was compromised by her opinion that private dances were the same as those on the main stage although she didn’t observe them or have personal knowledge, according to the ruling.


The tribunal is a panel of three commissioners appointed by the governor that heads the state’s Division of Tax Appeals, created by the legislature in 1986 to resolve tax and licensing disputes, according to its website.


Court of Appeals Judge Robert S. Smith disagreed with the majority, saying the tribunal’s ruling “makes a distinction between highbrow dance and lowbrow dance that is not to be found in the governing statute and raises significant constitutional problems.”


Hustler Tax


“Like the majority and the tribunal, I find this particular form of dance unedifying — indeed, I am stuffy enough to find it distasteful,” Smith wrote in his dissent. “Perhaps, for similar reasons I do not read Hustler magazine; I would rather read the New Yorker. I would be appalled, however, if the state were to exact from Hustler a tax that the New Yorker did not have to pay, on the ground that what appears in Hustler is insufficiently ‘cultural and artistic.’”


The majority said qualifying the dances as artistic performances would “allow the exemption to swallow the general tax” since other forms of entertainment not specified by the Legislature would ask to be spared from the levy.


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