Money & Finance - Coming back in the Market

Before getting into this week’s note, we wanted to express our sincerest sympathies to the families affected by the Sandy Hook elementary school shooting. As a father of two young children, my heart and prayers go out to them.

Fiscal Policy

The latest on the fiscal cliff appears to be that both parties are moving closer to a deal. Speaker Boehner has acquiesced to President Obama’s call for higher tax rates on the wealthy. While the concept has been accepted, they are still negotiating the high water mark for these tax rate increases. The Speaker thinks the appropriate threshold is at those making over $1,000,000 per year. The President seems to have come up to $400,000.

As far as spending cuts are concerned, the House wants to see a one-for-one ratio per increase in taxes. The Speaker is calling for one trillion in cuts vs. 800 billion that the President seeks. 

They are also getting closer in their agreement about extending the debt ceiling. The President asking for two years of extensions, while the House is willing to give one year.

That said, the market has turned significantly higher on the news. 

Our new market stance

While we are somewhat confused by the market reaction to these details, given the inherent risks to the economy through bad policy, we are always a student of the market and shift gears when necessary. We were unsuccessful in our trade, taking our cash and/or short positions as it seems the Santa Clause rally trumps economic uncertainty.

This morning our behavioral model turned higher signaling a buying opportunity. We have abided by the model and have adjusted our portfolio accordingly as the market is starting to break out.

We have purchased ETF’s that track the S&P 500, the Nasdaq 100, the Russell 2000 as well as the Dow Jones Industrial Average. We also lightened our positions in investment grade corporate bonds in our enhanced yield portfolio.

Monetary Policy

We are also seeing strength in the market supported by monetary policy as Ben Bernanke held a press conference last week expanding the likelihood of a full on monetary press until the unemployment rate falls to 6.5% or inflation rises to 2.5%. As the Fed goes deeper into uncharted territory, there have been new concerns on the actual unwinding of these unconventional measures.

This past weekend, the Wall Street Journal interviewed Leszek Balcerowicz, who is given a great amount of credit for saving Poland’s economy and setting in place an age of prosperity. Poland was the only country in the European Union to avoid recession in 2009 and has been the fastest-growing EU economy since. In the interview, when asked about our monetary policy in place the WSJ writes, “As a former central banker, Mr. Balcerowicz struggles to find the appropriate word for Fed Chairman Ben Bernanke's latest invention: "Unprecedented," "a complete anathema," "more uncharted waters." He says such "unconventional" measures trap economies in an unvirtuous cycle. Bankers expect lower interest rates to spur growth. When that fails, as in Japan, they have no choice but to stick with easing.

"While the benefits of non-conventional [monetary] policies are short lived, the costs grow with time," he says. "The longer you practice these sorts of policies, the more difficult it is to exit it. Japan is trapped." Anemic Japan is the prime example, but now the U.S., Britain and potentially the European Central Bank are on the same road.”

This is an excellent interview and I suggest everyone take a look at it.

http://online.wsj.com/article/SB10001424127887323981504578179310418828782.html.

Robin Harding and the Financial Times opined as well questioning the success of our unorthodox monetary policy. “The past five years have led central banks to a revolutionary situation. When the crisis hit, they played their best moves, but to modest effect. Quantitative easing – the ugly term for buying long-term assets in order to drive down long-term interest rates – looks radical thanks to the many-zeroed numbers involved. In reality it is just another way to cut interest rates.

Monetary policy, and every other kind of policy, failed to engineer a strong recovery in advanced economies. Dissatisfaction with that outcome has led central bankers, spurred on by a healthy dose of external criticism, towards ideas that have been percolating in academia since Japan’s bubble burst in 1990.”

http://www.ft.com/intl/cms/s/0/cbfae4f4-45e0-11e2-b7ba-00144feabdc0.html#axzz2FQk8DRwP

My “I can’t believe I just read that moment”

From time to time I come across articles that blow my mind.  Here is one of them.  In a Washington Post opinion, Steven Mufson set forth his solution to our fiscal problems that wouldn’t require raising taxes or cutting spending.

“The prospect of once again hitting the federal debt ceiling has provoked the ritual round of hand-wringing about the intractable nature of this $16 trillion conundrum. But there is a simple, elegant option that involves no tax increases, no spending cuts and just a bit of imagination.

Sell Alaska.

That’s right. Put the entire state — from Juneau to Deadhorse, from the Bering Strait to the Beaufort Sea — on the auction block.”

When asked on his thoughts about the idea, Lt. Governor Mead Treadwell (R) was reported to say, “He proposed that Alaskans themselves try to buy their state. I thought it sounded like an employee buyout; Treadwell said he preferred to think of it as a “citizens’ buyout.” He said, “I don’t think we want to leave the country to help save it, but if it comes to that, I’m sure we’d bid.””

Joseph S. Kalinowski, CFA

Twitter: @jskalinowski

References

http://www.forbes.com/sites/rexsinquefield/2012/12/13/the-feds-black-out-adam-smiths-invisble-hand-of-migration/

http://finance.townhall.com/columnists/mikeshedlock/2012/12/17/is-boehner-capitulating-on-tax-hike-boost-blame-game-posturing-n1468338

http://www.businessinsider.com/boehner-offers-to-push-back-debt-ceiling-for-a-year-2012-12

http://dailycaller.com/2012/12/16/ap-source-boehner-offers-millionaire-tax-hike/

http://thehill.com/business-a-lobbying/272915-steps-to-fiscal-responsibility-

http://www.businessinsider.com/qe-4-folks-this-aint-normal-2012-12

http://www.traderplanet.com/commentaries/view/162880-the-fomc-event-was-entertaining-next-up-cliff-diving/

http://www.foxbusiness.com/economy/2012/12/13/federal-reserve-zombie-economy/

http://www.businessinsider.com/the-fiscal-cliff-chart-thats-making-the-media-look-like-fools-2012-12

http://www.businessinsider.com/credit-suisse-fiscal-cliff-charts-2012-11#president-obama-proposes-that-only-the-highest-income-earners-see-their-marginal-tax-rates-rise-3

http://www.businessinsider.com/chart-of-the-day-the-fiscal-cliff-2012-11

http://www.businessinsider.com/is-the-decline-in-core-capital-expenditures-growth-a-worrisome-recession-indicator-2012-11

 

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