Tuesday, December 18, 2012 - Blame It On Whatever You Want

Blame It On Whatever You Want

by Sinclair Noe

DOW + 115 = 13,350
SPX + 16 = 1446
NAS + 43 = 3054
10 YR YLD +.06 = 1.83%
OIL + .79 = 87.99
GOLD – 27.20 = 1671.90
SILV - .64 = 31.74

The markets rallied on news the fiscal cliff negotiations are closer to a resolution. No, no, wait a minute; the markets experienced a Santa Claus Rally. No, no, wait a minute; just make up whatever excuse you want.

No, no, wait a minute; the Federal Reserve announced QE4 last week, even though we're not supposed to call it QE4, and they are just printing money like banshees, although I'm not sure banshees know how to print money, but the point is they are juicing the economy to the tune of $85 billion a month, and you know that has to have some sort of effect.

Why sure; all this money just has to end up in the stock market eventually. You might also expect the dollar to fall. You might also have expected additional strength in the government bond market, because $85 billion pretty much covers all of the expected new issuance going forward, plus many entities still need to buy U.S. bonds for a variety of fiduciary reasons. With little product for sale and lots of bids by various players; one of which, the Fed, has their own printing press and so money is no object in the move to drive prices higher and yields lower; that's a recipe for rising prices. Then you might expect sharply rising commodity markets because nothing correlates quite so well with loosey-goosey monetary policy as commodities.

Last week, when the Fed made it's announcement, stocks initially climbed but then closed red. Gold was mysteriously sold in the overnight markets and again right after the announcement in big HFT blocks. Treasury bonds actually sold off on the news and yields have continued to inch higher. The dollar hardly budged. Commodities were mixed across the board but more or less flat on the day, with the exception of the metals, and especially the precious metals, which were sold vigorously. And since the announcement, stocks have started to climb, but it doesn't seem to correlate to the Fed's announcement.

Go figure.

Maybe QE4 really is a different beast. The Fed tied their monetary policy to specific targets for the unemployment rate (6.5%) and the inflation rate (2.5%). So, in a way, the monetary policy is also fiscal stimulus, meant to keep stock prices moving higher and residential homes sales climbing at a robust pace. The goal is certainly to drive economic activity, and we can expect it to continue for at least a couple of years, depending upon targets and who knows what.

We know the unemployment target will be tough to hit because as the labor market gets better, all those people who disappeared from the government statistics are likely to re-emerge; they'll jump back into the labor pool and try to find a job. A lot of people have vanished from the official statistics. So, it looks like we are going to have a long run of Fed stimulus.

Meanwhile, the fiscal stimulus gang can't seem to shoot straight. Obama made a concession to Republicans by offering to limit tax increases to incomes exceeding $400,000 per household. That is a higher threshold than the $250,000 he had sought earlier. Boehner, the top Republican in Congress, said he planned to move a "Plan B" bill to the House floor, possibly this week, but there is no clear indication he has his party's support. The Obama-Boehner talks have largely overcome stark ideological differences and are focused increasingly on narrower disagreements over numbers. It might happen, but don't count your chickens until ...

The December reading of Morgan Stanley's proprietary Business Conditions Index is out and the results are a bit counter-intuitive, but overall they appear to be bullish. The headline index jumped 15 points to 51% in December, which makes up for much of the 20 point slide over the past two months. The tumble in October and November had been attributed to elevated uncertainty caused by the fiscal cliff. Morgan Stanley's economic team says, "reports of uncertainty created by the fiscal cliff jumped dramatically in December to another new high.

Given that fiscal cliff uncertainty is up and hiring plans deteriorated, it’s unclear what drove the year’s largest increase in expectations."

I assume this is big business confidence, since small business confidence plunged last month. The hiring plans index particularly suggests that (as in it points to an improvement in hiring plans, when the small businesses, who drive employment, said the reverse).

Businesses are apparently shrugging off the fiscal cliff and they believe a deal will get done. What is difficult to understand is how these businessmen think a contraction in the Federal deficit, which is what a budget deal will presumably produce for 2013, will lead to better business conditions. But I guess we’ll have to go a few months into 2013 for the delusion to wear off.

One element of the coming budget pact that is not getting the attention it warrants is a quiet and slightly sneaky effort to gut military benefits by privatizing them. Privatization has rarely delivered on its promise of delivering better performance and/or lower costs.

The manufactured fiscal cliff crisis means that more profiteering is coming to the military. The cash flow bonanza for privatizers is the healthcare and pension budgets: Instead of using the current government-contracted HMO/PPO model, called TriCare, military personnel and their families would receive health care vouchers allowing them to either purchase whatever health care plan they chose from an array of private sector providers. Instead of earning defined retirement benefits, also known as pensions; soldiers, sailors, airmen and marines would each pay into privately held 401K programs, or simply take a lump sum of cash.

In a win-win for corporate advocates, cuts to what they call the “excessive” and “burdensome” human side of the military will simultaneously fund greater spending on expensive weapons and communications systems. And under the pretext of providing “choice” to military personnel, the programs decrease total benefits and increase private sector access to government funds and the money of military personnel.

On the healthcare side, this is simply an excuse for the medical industrial complex to get its blood suckers into the huge military budgets, for the VA system is vastly more efficient than private sector providers.

Government health care is often characterized as wasteful and inefficient. But here too the VA’s experience suggests otherwise. In 2007, the nonpartisan Congressional Budget Office (CBO) released a report that concluded that the VA is doing a much better job of controlling health care costs than the private sector. After adjusting for a changing case mix as younger veterans return from Iraq and Afghanistan, the CBO calculated that the VA’s average health care cost per enrollee grew by roughly 1.7% from 1999 to 2005, an annual growth rate of 0.3%. During the same time period, Medicare’s per capita costs grew by 29.4 %, an annual growth rate of 4.4 %. In the private insurance market, premiums for family coverage jumped by more than 70%, according to the Kaiser Family Foundation.

The VA delivers high quality medical care at a more favorable cost than the private sector, meaning veterans will get a double whammy if the privatizers succeed: lower health care allotments by virtue of spending reductions, with the impact made more severe by the use of vouchers rather than relying on the established, effective VA system.

The national average pump price of regular gasoline fell 9.2 cents a gallon last week to $3.248 a gallon today, the lowest price since December 2011. Prices have fallen each day this month and are down 16% since mid-September. Missouri posts the lowest average price in the country at $2.955. Hawaii has the nation’s highest price at $3.979. All 50 states have gas below $4 for the first time this year.

Declining oil prices, coupled with a series of encouraging economic figures, have helped ease prices at the pump for American drivers in time for the busy holiday season. This year saw seasonal anomalies brought on by hurricanes, refinery outages and geopolitical issues. The Christmas miracle of cheap gasoline, however, was anticipated by the U.S. Energy Department early last month, suggesting it’s no miracle at all.

Factory output in the United States remains below rates from early this year, though November figures suggest there's been a sharp increase as the east coast recovers from Hurricane Sandy. The Federal Reserve said the manufacturing sector saw its biggest gain in about a year with a 1.1 increase in November. While characterized as modest, the U.S. Labor Department said the consumer price index dropped 0.3 percent.

The SEC has approved plans for JPMorgan Chase to offer the first US exchange-traded fund backed by physical copper. BlackRock and ETF Securities Ltd. also have said they plan to start physically backed ETFs for industrial metals in the US. Some industrial users of copper are concerned because they fear the ETFs will disrupt the market. The SEC dismissed worries that the ETFs would result in all available copper being scooped up and warehoused, pushing civilization back into the Stone Age.

Private-equity firm Cerberus Capital Management LP said it is seeking to sell the company that manufactures a gun used in last week’s shooting at Sandy Hook Elementary School in Newtown, Conn. “We have determined to immediately engage in a formal process to sell our investment in Freedom Group…We believe that this decision allows us to meet our obligations to the investors whose interests we are entrusted to protect without being drawn into the national debate that is more properly pursued by those with the formal charter and public responsibility to do so,” No official word on the asking price, but there is speculation that it could sell for as little as 30 pieces of silver.