STOCKS RALLY, GOLD TUMBLES AGAIN: Here’s What You Need To Know (DIA, SPY, QQQ, HLF, GLD)

Trader Wall Street Computer Screen Bloomberg Terminal Staring Intently Focus

Despite the lack of a fiscal cliff deal, stocks are holding up remarkably well.  Meanwhile, we got a ton of great economic data.

First the scoreboard:

Dow: 13,311, +59.7, +0.4 percent
S&P 500: 1,443, +7.8, +0.5 percent
NASDAQ: 3,050, +6.0, +0.2 percent

And now the top stories:

  • Q3 GDP was revised way up to 3.1 percent, which was much higher than the 2.8 percent economists were looking for.  Personal consumption was up 1.6 percent, versus the expectation fro 1.4 percent.
  • Weekly initial jobless claims came in line with expectations, climbing to 361k.  This was a tad higher than the 360k expected.
  • The closely followed Philly Fed Business Outlook Survey crushed expectations, surging to 8.1 from last month’s reading of -10.7.  Economists were only expecting a reading of -3.0.  This is a welcome development following  a slew of disappointing regional manufacturing surveys in recent weeks.  The idea that fiscal cliff uncertainty is stopping business activity appears to be reversing.
  • Existing home sales jumped 5.9 percent to 5.04 million in November.  This to was higher than the expectations, which were at 4.90 million. “Momentum continues to build in the housing market from growing jobs and a bursting out of household formation,” said NAR chief economist Lawrence Yun. “With lower rental vacancy rates and rising rents, combined with still historically favorable affordability conditions, more people are buying homes.”
  • Gold prices got slammed again today, falling below $1,650 per ounce.  Commodities guru Jim Rogers thinks prices could fall even further from here.  With U.S. economic data coming out bullish, there’s growing speculation that the Federal Reserve will be able to tighten monetary policy sooner than later.  Currently, the Fed expects to keep monetary policy easy through 2015.
  • Meanwhile, shares of Herbalife got pummeled again today as hedge fund giant Bill Ackman presented a devastating 342-slide presentation slamming the company. “This is a pyramid scheme,” said Ackman.
  • Don’t Miss: Wall Street’s Biggest Geniuses Reveal Their Favorite Charts Of 2012 >

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There’s A Smart Way And A Dumb Way To Cut The Federal Debt

obama

At last check, President Obama is offering $1.3 trillion in revenue increases and $930 billion in spending cuts, not including saved interest expense, in his fiscal cliff negotiations with House Speaker Boehner.

To the president, this is a “balanced” offer.

But he’s going it all wrong. What needs to be balanced is not tax hikes and spending cuts, but debt vs. growth.

You want to cut the debt in a way that does the least possible damage to economic growth in the short term.

Economist Alberto Alesina:

In 2011, the IMF identified episodes from 1980 to 2005 in which 17 developed countries had aggressively reduced deficits. The IMF classified each episode as either ‘expenditure-based’ or ‘tax-based’, depending on whether the government had mainly cut spending or hiked taxes.

When Carlo Favero, Francesco Giavazzi, and I studied the results (2012), it turned out that the two kinds of deficit reduction had starkly different effects; cutting spending resulted in very small, short-lived recessions (if any), and raising taxes resulted in prolonged recessions.

Why did austerity heavy on spending cuts outperform austerity heavy on tax hikes? One reason is that private investment rose after spending-cut deficit reduction but dropped after the tax-hike deficit reductions.

Alesina speculates that “when governments cut spending, they may signal that tax rates won’t have to rise in the future, thus spurring investors (and possibly consumers) to be more active.”

A second reason is that that governments combined spending cuts with pro-growth measures such as “deregulation, the liberalization of labor markets, and tax reforms that increase labor participation.”

I would also add that easy monetary policy can help no matter which course of austerity is chosen. Given the Fed’s evolving stance on quantitative easing, even Obama’s tax-hike austerity might not be as harmful as it would be otherwise. But it could be less painful by easing up on the tax hikes, particularly those on capital income.

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CHART OF THE DAY: How Treasuries Fell In Only 3 Of The Last 33 Years

“Since 1980, the Treasury market has posted a calendar year negative total return on three occasions,” writes Matthew Hornbach, Morgan Stanley’s top interest rate strategist. “Only three. In over thirty years.”

This chart of Treasury security returns from Hornbach is a bit tough to look at.  Fortunately, it comes with a table.

treasury returns

Hornbach offers some additional commentary on the last time returns were negative:

The 2009 episode is worth investigating further because the next year of negative returns in the Treasury market is likely to occur while monetary policy remains accommodative. In February 2009, the President signed into law the large fiscal stimulus package known as the American Recovery and Reinvestment Act of 2009. In March, the Fed added to their unconventional easing program by agreeing to purchase $300bn in Treasuries, $750bn in agency MBS and $100bn in agency debentures. Easier monetary policy combined with easier fiscal policy took Treasury yields off their lowest levels in decades by pumping up growth and inflation expectations. The result was the worst calendar year for Treasury returns since 1980.

The Fed intends to keep monetary policy loose through 2015.  Given this, Hornbach doesn’t expect tight monetary policy to contribute to the next year of negative Treasury returns.

The 2009 episode suggests that, without tighter monetary policy, higher growth and inflation expectations must contribute to negative total returns for nominal Treasuries. Whether rising inflation expectations played a part in each year of negative returns is difficult to say, given that TIPS began trading in 1997. We can only say for sure that dramatic rises in market-based inflation expectations were a part of the 1999 and 2009 negative total return episodes. Still, it seems reasonable to assume that inflation expectations also rose in 1994 along with growth expectations.

Then some believe that tighter monetary policy could come sooner than later.

SEE ALSO: MORGAN STANLEY PRESENTS: 17 Big Surprises That Could Rock Markets In 2013 >

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Bank of England offers glum outlook for 2013

Busses pass the Bank of England in the city of LondonLONDON (Reuters) – The economy is likely to remain stagnant in the near term but inflation will probably exceed 2 percent in the next year and also faces further risks from higher food prices, Bank of England policymakers said on Wednesday. After its December 5-6 meeting, the BoE's Monetary Policy Committee decided to keep its main interest rate at a record-low 0.5 percent and its bond purchases at 375 billion pounds as expected, with stubborn inflation trumping worries about a sluggish economy. …

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Bank of England offers glum outlook for 2013 – minutes

Busses pass the Bank of England in the city of LondonLONDON (Reuters) – Britain's economy is likely to remain stagnant in the near term but inflation will probably exceed 2 percent in the next year and also faces further risks from higher food prices, Bank of England policymakers said on Wednesday. After its December 5-6 meeting, the BoE's Monetary Policy Committee decided to keep its main interest rate at a record-low 0.5 percent and its bond purchases at 375 billion pounds as expected, with stubborn inflation trumping worries about a sluggish economy. …

Read more from source:“Yahoo”

David Rosenberg’s 7 Phases Of Fed Policy

In this morning’s note David Rosenberg touched on the 7 phases of Fed policy.

Phase 1: Attempting to stabilize the mortgage market (August 2006 – January 2007)

Phase 2:  Responding to the financial crisis (February – September 2008)

Phase 3:  Containing the Great Recession (September 2008 – January 2009)

Phase 4:  Saving the banks (January – March 2009)

Phase 5:  Responding to the weak recovery/boosting the housing market (March 2009 – September 2012)

Phase 6:  Debt monetization/wealth effect pursuit (September – December 2012)

Phase 7:  Reviving the Phillips Curve – in search of BOTH higher inflation and lower unemployment (December 2012 … )

I think he should have added a few….Namely:

Phase 8: Pushing on a string

Phase 9:  More pushing on strings

Phase 10:  Whispering sweet nothings to the market through cheerful rhetoric

Phase 11:  Ben Bernanke exit stage right, 2014 without having fully revived the economy during the greatest expansion of monetary policy known to man….

Source: Gluskin Sheff

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BoE offers glum outlook for 2013 – minutes

LONDON (Reuters) – Britain’s economy is likely to remain stagnant in the near term but inflation will probably exceed 2 percent in the next year and also faces further risks from higher food prices, Bank of England policymakers said on Wednesday. After its December 5-6 meeting, the BoE’s Monetary Policy Committee decided to keep its main interest rate at a record-low 0.5 percent and its bond purchases at 375 billion pounds as expected, with stubborn inflation trumping worries about a sluggish economy. …
Read more from source:“Yahoo”

Stock index futures trade flat to higher

Traders work on the floor of the New York Stock Exchange at the opening of the trading session in New YorkLONDON (Reuters) – Stock index futures pointed to a flat-to-higher open on Wall Street on Wednesday, consolidating gains after the S&P 500's best two-day run in a month. * Futures for the S&P 500 were unchanged, while Dow Jones and Nasdaq 100 contracts rose 0.2 percent and 0.3 percent, respectively, at 0924 GMT. * Japan's Nikkei jumped 2.4 percent to end above 10,000 for the first time in more than eight months on Wednesday on growing expectations of easier monetary policy under a new government. …

Read more from source:“Yahoo”

Bank of England sees flat output, above-target inflation in 2013 – minutes

Busses pass the Bank of England in the city of LondonLONDON (Reuters) – The economy is likely to remain broadly flat in the near term but inflation would probably exceed 2 percent in the next year or so, minutes to the BoE's December 5-6 meeting showed on Wednesday. The Monetary Policy Committee's decision this month to keep its main interest rate at a record-low 0.5 percent and its bond purchases at 375 billion pounds had been widely expected, as stubborn inflation trumped worries about a sluggish economy. …

Read more from source:“Yahoo”

DEUTSCHE BANK: 13 Outlier Events For 2013

black swan

Investment strategists have been busy putting together their 2013 outlooks over the past few weeks, detailing their thoughts on how the year ahead will look from a market perspective.

A few, like Deutsche Bank’s currency strategy team, have also gone outside the box to consider the types of events that could actually surprise markets next year.

The Deutsche Bank team sums up the point of the exercise succinctly:

When thinking about the year ahead, it is tempting to extrapolate the recent past whether looking at risks or one’s base case. Moreover, there is a tendency not to deviate too far from consensus, perhaps seeing safety in being part of the herd. From a statistical perspective, this is very similar to assuming markets follow a normal or Gaussian distribution. That is, markets are well behaved and extreme outcomes are rare. The financial crisis of 2008 taught us otherwise, yet it is very difficult to shrug off the bias to assume normality in markets.

With this in mind, they offer a list of big “outlier” events that would surprise us.

The Federal Reserve begins buying stocks as an unconventional monetary policy measure

“With the US housing sector apparently turning the corner, stronger equities may be the necessary tonic to further increase household wealth, and also to boost investment…While the Fed does have restrictions on what assets it can buy, it can invoke Section 13(3) of the Federal Reserve Act that allows more extreme actions in ‘unusual and exigent circumstances.'”

Source: Deutsche Bank

Greece discovers gas reserves worth more than all of the debt it owes

“Greece has sizeable undersea terrain in the Mediterranean, and several Mediterranean countries have already discovered and are exploiting undersea natural resources, most notably the Levantine gas field between Israel and Cyprus. A number of studies that have looked at similar gas finds in the Mediterranean as a basis of comparison put the potential size of gas fields to the South of Crete as high as $600bn.”

Source: Deutsche Bank

Sweden, Turkey, and Brazil bring peace to the Middle East

“Carl Bildt of Sweden, Ahmet Davutoglu of Turkey and Antonio Patriota of Brazil have talked about their interest in helping solve challenges facing the international community based on their common values of dialogue, multilateralism and democracy. In the past, Brazil and Turkey have attempted to resolve the nuclear issues in Iran, while Turkey and Sweden have worked together on issues in the Balkans…their attention could once again turn to the Middle East.”

Source: Deutsche Bank

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