Recap 11-14-12: A Possible Playbook


This fiscal issue is hard to model, so from a macro trading perspective, the information edge is limited. At times like these, we’re all political pundits, and it becomes increasingly hard to discern signal from noise. Everyone becomes a poker player at a game most don’t want to play. Are you going to call the politicians’ bluff of other politicians?

At the current juncture, the playbook looks like this to me:

  1. Through Thanksgiving: Both sides posture, lots of press conferences, but nothing serious gets done.
  2. Through December: Some attempts are made for a compromise, but it increasingly becomes a game of chicken as both sides wait for the other side to blink.
  3. First weeks of January: Crap hits the fan, and there will be a lot of alarmist talk. New congressional members start their terms on January 3rd. There will be some quasi-legal trick used to get around some votes, but a compromise gets done by mid month.
  4. Stocks hit their lows early in the month, then recover and head back toward the highs as the impact of going over the ‘cliff’ for a couple weeks turns out to be fairly small. Additional QE will help a bit. The removal of regulatory and tax uncertainty + pent up capex demand will be especially good for Tech.

That’s a guess by someone who is not well connected to DC. All I’ve got going for me at the moment is that I’ve been on a hot streak – having called for a market top on 9/12, and remaining bearish since. (I reiterated that view on 10/18, 10/23, 11/7, 11/9 for those who are checking. Full disclosure though – I also called the spring sell off on 3/20, but was embarrassingly late on calling the recovery, missing the low by 2 months. Hopefully that was a learning experience, but I’m not sure yet if I’ve learned the right lesson)


  • FOMC Minutes:
  1. Participants generally favored the use of economic variables, in place of or in conjunction with a calendar date, in the Committee’s forward guidance, but they offered different views on whether quantitative or qualitative thresholds would be most effective
  2. [Quantitative] thresholds could increase the probability that market reactions to economic developments would move longer-term interest rates in a manner consistent with the Committee’s view regarding the likely future path of short-term rates.
  3. Participants generally agreed that the Committee would need to resolve a number of practical issues before deciding whether to adopt quantitative thresholds to communicate its thinking about the timing of the initial increase in the federal funds rate. These issues included whether to specify such thresholds in terms of realized or projected values of inflation and the unemployment rate and, in either case, what values for those thresholds would best balance the Committee’s objectives of promoting maximum employment and price stability. Another open question was whether to supplement thresholds expressed in terms of the unemployment rate and inflation with additional indicators of economic and financial conditions that might signal a need either to raise the federal funds rate before a threshold is crossed or to delay until well afterward.
  4. Looking ahead, a number of participants indicated that additional asset purchases would likely be appropriate next year after the conclusion of the maturity extension program in order to achieve a substantial improvement in the labor market.

The Journal reported that Obama will begin budget negotiations with congressional leaders calling for $1.6bn in additional tax revenue over the next decade, double the $800bn discussed in talks with GOP leaders during the summer of 2011 and more than Republicans are likely to accept.

US Retail Sales declined -0.3% in Oct vs -0.2% exp and 1.1% prev. The control group, however, declined -0.1% vs 0.4% exp and 0.9% prev. The impacts of Hurricane Sandy was probably not a large factor.

Yellen: a hypothetically "optimal policy" would keep the funds rate near zero "until early 2016."

Japan’s main opposition leader and its likely next PM, Shinzo Abe "The BOJ must set a (new) inflation target and print unlimited yen to achieve it. That’s something similar to what the Fed and the ECB are doing. Only then would BOJ steps have a big impact on markets," He has recently called on the BOJ to establish a 3% inflation target.

UK Jobless Claims increased 10.1k in Oct vs 0 exp and -4k prev. ILO Unemployment declined to 7.8% vs 7.9% expand prev

US Auto loans were up 5.5 percent in the second quarter from the same time last year, with riskier buyers accounting for 43.9 percent of the total, up from 42 percent in 2008

Japan’s Ministry of Finance intends to begin levying a 5% consumption tax on music and books distributed online from overseas to consumers in Japan by introducing a mandatory registration system for foreign firms

Upcoming Data:

  • Wed: UK Jobless Claims, BoE Inflation Report, US PPI, Retail Sales, FOMC minutes
  • Thu: UK Retail Sales, EU CPI, US CPI, Empire Mfg, Jobless Claims, Philly Fed, China will unveil the new leadership slate
  • Fri: EU Trade Balance
  • Mon: NAHB Survey, US Existing Home Sales, BoJ

2 thoughts on “Recap 11-14-12: A Possible Playbook

  1. In equities staples & discretionary have finally begun to underperform. Thus equity across the board is trending downwards – with a few exceptions as always. However we are not seeing the the same in fixed income. Only high yield and cmbs have seen slight widening. There is now a disparity between the two asset classes – I keep hearing that fixed income I.e. credit is holding in because of the buying technical which is a rather weakly supported reason. It would be strange indeed if the correlations between credit and equities continue to break down.

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