Recap 11-15-12: Thoughts


  • There may need to be a split in the Republican votes in the House in order to get a deal passed. The Tea Party Caucus may not want to compromise, but the more moderate members have a better view of reality. The political calculus is that, with control of only the House after the election, if no deal gets done because of grid lock, blame will likely fall on the Republican Party. The mandate is to compromise, and the natural expectation is that the minority party gives up a bit more. A Pew survey shows that if lawmakers fail to reach a deal, 53 percent said Republicans in Congress will bear responsibility. Amidst the Republican’s soul searching following the election, there is probably sufficient support within the party for Boehner to move towards the center.
  • If this view is accurate, the time to get long risk assets will probably be when we start getting headlines hinting of such a split. Watch for headlines involving Boehner and Eric Kantor, the current House Minority Leader.
  • It looks like economists will underestimate the effects of Sandy. The jobless claims estimate miss today was massive. We may get a string of economic misses over the next few weeks. In conjunction with weak data in Europe, we may see a run of negative economic surprises globally. That will probably drive move QE…
  • Gold Council Quarterly Report showed an 11% drop in demand, driven almost entirely by a decline in bar and coin demand. By region, most of the decline was driven by Europe.
  • Equities could bounce next week. Reasons:
  • Triple witching tomorrow. There’s a bunch of 1350 puts expiring tomorrow morning.
  • Valuations are cheap enough to entice value buyers
  • Sentiment is quite bearish. Historically, when the AAII survey’s Bullish – Bearish response differential hits -20, the S&P has stabilized, unless we are near a recession. (1st Chart. Note that historically it takes a couple weeks before a positive bias becomes evident)
  • Bernanke speaks next Tuesday. The Beard is usually good for some equity upside!
  • Further out, there is a seasonal bias for stocks to rally the week after Thanksgiving through early Dec. (2nd Chart)


  • US Initial Jobless Claims jumped to 439k last week vs 375k exp and 355k prev.
  • Philly Fed Dropped to -10.7 in Nov vs +2 exp and +5.7 prev
  • Empire Mfg improved to -5.22 in Nov vs -8 exp and -6.16 prev
  • The Chinese Communist party appears to have chosen a conservative team to lead the country for the next five years. But aside from Mr Xi and Mr Li, the rest of the new Politburo Standing Committee represent a more conservative line-up than many had hoped for. The one surprise was incoming president Xi Jinping assuming control of the powerful Central Military Commission (it had been expected that outgoing party chief Hu Jintao would retain this position). In addition, the new leadership didn’t include those two figures w/the strongest track record on political reform. The Politburo Standing Committee (PSC), China’s highest governing body, has shrunk from 9 members to 7 members, likely reflecting a desire to enhance the efficiency and unity of the committee. –FT, WSJ
  • Goldman said there is the “potential for unprecedented political pressure on the BOJ from the December election.” “In a scenario where LDP regains its position as the party with the greatest number of seats, with Abe becoming prime minister, and with the economy visibly weakening, we expect the government would call on the BOJ for further easing based on the joint government-BOJ statement issued on October 30. Shinzo Abe has spoken of possible reform of the Bank of Japan Law, with a policy accord between the government and the BOJ, an official annual inflation target of up to 3%, and BOJ governor accountability if the target is not reached in the long term. The situation is compounded by the expiration of the governor’s and deputy governors’ terms of office in April, which may expose the BOJ to even greater political pressures. Against this backdrop of structurally increasing political pressure, our outlook for the December and January MPM is as follows.”

Upcoming Data:

  • Fri: EU Trade Balance
  • Mon: NAHB Survey, US Existing Home Sales, BoJ
  • Tues: US Housing Starts, Bernanke Speech
  • Wed: BoE Minutes, US Jobless Claims, Markit Preliminary PMI
  • Thu: EU PMI , Canada Retail Sales