Everything is great!
Well, if you are a corporation, that is and that's all the matters in the United Corporations of America, right? I went through the State of the Union Address last night with my commentary. The Cliff Notes of the Cliff Notes are: A 25-year goal of having 80% of America's electricity come from clean energy (another chance to short FSLR!), A proposal to "redouble" our efforts to rebuild infrastructure (zero has been approved so far, we can double that no problem!), A 25-year goal to give 80% of Americans access to high-speed rail (this will be a neat trick with Amtrack's $2.6Bn in funding), A 5-year plan to get high-speed wireless coverage to 98% of all Americans. That one I WOULD trust to private enterprise.
Blaming lobbyists for "rigging the tax code" (it's not the voting by Congressmen, it's those darned lobbyists!), Obama says we can lower the Corporate Tax Rate without adding to the deficit. This is actually true, Corporations paid $182Bn in taxes last year, just 1.14% of the GDP while US taxpayers paid $2,000Bn – presumably under the same tax code as Corporations. I have long advocated a VAT tax on business sales as profits are too easy to rig, with over 75% of businesses in America paying no tax at all. It's not complicated – add 10% to all goods and services sold and hand the government $1.5Tn – the consumers will then determine who is passing through fair market costs and capitalism triumphs and our deficit is wiped out. That's my first day in office – anything else need looking at?
Obama says worst of recession is over (boosting Global markets) but Government still spending more than it takes in. "That is not sustainable. Every day families sacrifice to live within their means – they deserve a government that does the same." The President calls for a 5-year spending freeze that will reduce deficit by $400Bn over next 10 years ($40Bn a year?). I love these plans – somehow a freeze saves you money because you WOULD have spent $40Bn a year more but now you won't. This is like when Tina comes back from a 25% off sale at the store and tells me she "saved" $500 – somehow it still costs me $1,500!
The President says his military advisors have identified "tens of Billions" of Defense cuts that can be made. Yeah, I think those were identified about $20Tn ago too. While I have no doubt that $10Bn, even $20Bn can be cut from $1,000Bn in annual spending, I would sure feel better if we had a plan that at least saved enough to make a dent in the $400Bn of INTEREST we're already paying on our Debt rather than showing us how we can reduce our additional annual deficit from $1.8Tn to $1.74Tn.
Anyway, there was another few pages of BS and I applaud Paul Ryan for making a respectful rebuttal but, then again, he could afford to be nice as the Tea Party branch of the Republican Party was (literally, I think) foaming at the mouth as she waited to be unleashed. Bachmann had already refused to sit next to a Democrat at Obama's speech, unlike every single other member of Congress – so we kind of knew she wasn't going to be a fan of what he said well before he said it. I'm not going to say anything else about it because I will be accused of picking on her, so watch it yourself – we report, you decide!
See, clearly this entire thing is Obama's fault! She even has charts that prove it! I'll just let Jon Stewart and Steve Colbert have fun with this tonight but the greater economic (and investing) point here is that this is not a Congress that is likely to work hand in hand with the President. We can expect, much like we've seen since November, many compromises made on the part of Obama to cut Government oversight, reduce regulations and enforcement – including tax collections on Big Business – while getting not one penny of all that grand "Building America's Future" stuff he was peddling.
The Global investors were buying it as they don't really understand how powerless a President is when Congress is against him. The Dollar dove to 77.88 last night, the lowest it's been since early November, right before it bounced and knocked the S&P down 5%. Our direction today very much depends on whether or not the volume trading in the US can finally shove the dollar below that 78 line, potentially taking us back to 75.6 for another 5% boost in the markets as our currency collapses – whoopie!
In my morning Alert to Members today, I said I liked shorting the Dow futures off the 11,950 line as I'm still not expecting 12,000 to hold on the main index (we already took up short positions) and we'll see what sticks today. As of 8:30, it looks like we may be able to ride the Nasdaq down as well if it slips below that 2,700 mark. For example, the QQQQ Weekly $58 puts are $1.35 with very little premium and we can use that 2,700 line as an on/off switch in a contract with a two-penny spread.
Of course it's a Fed day but, as I said earlier in the week – What are they going to do – PAY banks to borrow money? When you knock rates down to 0.25%, there isn't a lot of wiggle room although never say never as the BOJ has gone all the way to 0.1% and their debt to GDP ratio is "only" double ours (so far). The Financial Times notes that $1Tn of loose Western "funny money" is flowing into emerging markets and could overwhelm the capacity of their economies, overheating their markets and over-inflating their currencies as Western investors scramble to convert their free money into something less worthless – even Drachmas.
Laszlo Birinyi was the special guest on CNBC at the close and he did a great job of talking up the market despite the earnings misses (DOX, ELY, EWBC, EXAR, NSC, YHOO) that were scrolling along the screen as he said "the party is going to go on a long time." "When you have an 80 percent move off the bottom as we did … it always has resulted in a long-term market because quite frankly so many people miss so much of it and they have to try and catch up," Biryini said. Hey, who can argue that logic? I'm sure CNBC was "surprised" by his bullishness and that the timing of the interview was a coincidence. After all, how could they know he projected a 322% advance in the S&P on Jan 5th? As Laslo said:
The bearish arguments for aren’t any more valid. Many bears expect a recession, which they assume is poison for market performance. Not quite. In the 11 recessions since World War II the market has averaged a 3% gain, despite the inclusion in that data set of the 23% decline in 1974. During 6 of those downturns the S&P went up. If this is a recession year, it is not automatically fated to be bad for stocks.
Oh, silly me! That was what he said in January of 2008. Gosh, how could I have mixed that up? Still, look at that chart! It's the 3rd year of a Presidential Stock Cycle and we're right on track to get back to S&P 1,500 by December – what can go wrong? The Bernank gets to pat himself on the back this afternoon and investors are giving him a 66% approval rating according to 1,000 Bloomberg Readers. What's not to like, this guy has given us (top 1%) $3 Tn in totally free money and it only needs to be paid back by our kids and grandkids WAY down the line and we'll probably be living in the Caymans by then.
Of course, it does pay to keep a little money spread around our favorite tax havens as you never really know how fast it can all hit the fan. Global investors are now predicting that Greece will default within 5 years and that will be the last straw for Ireland. “The problems in Europe have been addressed, but only with a band aid,” said Ted Jarvis, senior vice president at the Indiana Trust Company in Anderson, Indiana, who participated in the survey. “Several euro members have not followed the correct policies and dug themselves a deep hole.”
Brazil's inflation is on track to hit 6.5% in 2011, the worst since 2004, when EWZ fell off 33% in the first half of the year. We've been looking at EWZ as a possible play ahead of Obama's trip to Brazil in March but these are some pretty scary numbers! “Policy tightening will not be enough,” Goldman's Paulo Leme said at a panel held by the Brazilian-American Chamber of Commerce. “Something will have to give. What will give will be inflation.”
China is taking DRASTIC steps top put a lid on 4.6% inflation (that they admit), setting lending rates at some banks 45% higher than the benchmark 5.81%. For ordinary industries, lending rates are about 30 percent higher than the benchmark, though top clients can still access loans at a 5 percent discount to the benchmark rate, it added. The newspaper also cited a separate bank official as saying that overall lending in January cannot exceed 12 percent of the full-year target, which is said to be about 7.5 trillion yuan. Yi Gang, deputy governor of the central bank, said that the effectiveness of Chinese monetary policy was increasingly limited, the China Securities Journal reported in a separate article on Wednesday.
Of course China tightening and The Bernanke (new POMO Explained video here) loosening is doing it's job of ditching the Dollar, which is now down a full 4% since December 10th, when the S&P was at 1,275. Now the S&P is at 1,295 so we are buying 5 S&P points for each 1% decline in the value of our money and all of our dollar-denominated assets. If this trend continues and we make that 1,500 target on the S&P, that should give us a decline in the dollar of another 40% – won't that be special?
In conclusion – you'd better be out there making an assload of money because you'll need it to keep up with rising prices for things you buy and declining values of your US assets. We aren't going to be able to afford to retire/run away to the Caymans if we have to count on US dollars to support us unless we have an obscene amount of them!