Don't Be Fooled: Nothing Is Priced In


I’m not a technical analyst or a fundamental analyst or any other type of equity market analyst. What I am is just a guy who likes to think he can spot completely nonsensical propaganda when he reads or hears it.

You know, the type of non-stop propaganda that attempts to manage perceptions/expectations and convince "investors" that, while things are obviously very bad in the real economy, everything is still just hunky dory in the wonderful world of equities.

Case In Point
Some mainstream market analysts chimed in after the serial S&P ratings downgrades of nine Eurozone countries, and specifically the one-notch downgrade of France from AAA to AA+ (ratings outlook still negative), to say that the market had already "priced them in" and therefore they are really no big deal. S&P had put all of these countries on negative watch back in December before the latest and unsurprisingly innocuous EU Summit, so the downgrades were no surprise.

Here are just two examples of a very pervasive and perverse logic, presented by The Telegraph:

S&P cuts ratings of nine eurozone countries: reaction

Fabrice Seiman, head of Lutetia Capital, said:

"S&P is absolutely right. France is paying the price of 30 years of irresponsibility in public finances. French politicians on the right and on the left fell short of the job by not taking measures to reduce  spending."

I think this is already priced in. There should not be any sizable reaction, but there could be a technical reaction on the Franco-German spread. It should be limited to the long-term and if there is a reduction in spending."

Bill O'Grady, chief market strategist at Confluence Investment Management, said:

"If France had been downgraded more than one level it would have precipitated a crisis. This is not good but it was anticipated, baked in. For oil it is probably a neutral event. If it raises concerns about a worsening economic environment it would be bearish."

Ashvin Pandurangi: That logic does sound appealing on the surface and many others like to parrot it, but the first question to pop into my mind was this – how can the market "price in" very significant developments in Euro sovereign credit markets by steadily increasing in valuation since they became aware those developments would occur?? Since the S&P put a bunch of EZ countries on negative watch on December 5, 2011 and the EU Summit on December 9, the S&P500 has risen almost 6%.

chart

That’s a boat load of downgrades the market appears to have priced in over the last month while very little "positive" news has come out of Europe. Now I’m confident that the initial reaction to my question above would be, "that’s a really simple and stupid question to ask!". Fortunately, there are several great analysts out there who have reached similar conclusions about these equity markets, which have allegedly "priced in" everything under the Sun, and have provided us with slightly more nuanced arguments than my own.

The U.S. Dollar (and Treasuries) has been increasing in value alongside U.S. equities, so the pundits should find it very difficult to explain the upwards "pricing in" market action of the last month by saying it is a nominal increase of shares priced in dollars. What we have is a very significant divergence between the dollar index and equities, as Charles Hugh Smith outlines in his piece, A Useful Fiction: Everybody Loves a Melt-Up Stock Market, and one that must close in the near future. The following charts of the dollar index ($DXY) and 5-year Treasuries are from M3 Financial Analysis:

chart

chart

The truth is that the very notion of the market "pricing in" events as the investor collective becomes aware of them is flawed. In the comprehensive TAE classic of 2010, Fractal Adaptive Cycles in Natural and Human Systems, Nicole Foss delves into Robert Prechter's theory of "Socionomics" (among other things) and how it can explain market valuations as a function of endogenous factors, such as the collective mood of investors, rather than exogenous events relayed by "the news".

Bob Prechter's socionomics model combines Elliott's observed fractal patterns with an understanding of human herding behaviour, comprising a comprehensive challenge to prevailing notions such as the Efficient Market Hypothesis by reversing causation and recognizing the role of emotional/irrational behaviour as the prime market driver. While the real economy demonstrates negative feedback loops, finance is thoroughly grounded in positive feedback.

Ashvin Pandurangi: Mish Shedlock also touched on this concept in a post earlier this week. He illustrated that, at best, the market should be viewed as a contrarian indicator for future economic trends due to its function as a gauge of extreme sentiments, and, at worst, it shouldn't be viewed as an indicator of anything at all.

Cherry Picking Timeframes on Alleged Leading Indicators; Big Change In LEI on January 26

"The stock market is not a leading indicator of the economy. Rather, the stock market is a coincident indicator of sentiment towards equities.

...

Far from being a leading indicator, on an absolute basis the S&P has a perfect track record of peaking right before or just as a recession starts. This is just as one might expect from a gauge of equity sentiment which tends to peak right before a downturn in the economy (with everyone extrapolating good times forever into the future).

chart

...

On a percentage change basis, the S&P 500 is not leading, not lagging, and not coincident. Instead it is completely useless mush."

chart

Ashvin Pandurangi: It's not just the "fringe bloggers" drawing these conclusions about the market, but also such "reputable" financial institutions as UBS. Granted, the well-intentioned bankers over there also point out that the French downgrade, among others, was expected and shouldn't affect near-term credit spreads too much. Instead, they choose to focus on the effects it will have on the state of realpolitik in Europe’s core, and how that is certainly not something which is "priced in" at all. Indeed, only market shills and fools can even pretend to separate the two (finance and politics).

UBS Explains Why AAA-Loss Is Actually Relevant

"France has not only lost its AAA status. Critically, France has lost AAA status at a time when Germany has not. France also retains a negative outlook against a stable outlook for Germany, compounding the distinction. The relative decline of France’s credit rating is something that has potential political implications.

There are parallels here to the relative positions of the UK and the US in 1949, in the wake of sterling’s devaluation against the dollar. The devaluation was simply a confirmation of economic reality, but the visible confirmation of that shift in relative economic reality served as a defining moment in the shift of the bilateral relationship in political terms.

Since the foundation of the Coal and Steel Community in 1951, the history of (continental) European politics has been essentially a story of France and Germany holding each other in check. Indeed, this was the explicit aim of the ECSC’s founders. With the downgrading of France relative to Germany, there is now a de jure as well as a de facto inequality between the two states. The ability of France to act as a counterbalance to Germany in economic decision-making has been compromised.

In the wake of the downgrade of the EFSF, it is clear that the actions of S&P have elevated the role of Germany (and perhaps, to a lesser degree, the Netherlands) in any collective economic decisions within the Euro area. Any economic decision that requires money to be spent will require wholehearted German endorsement if rating agency determined credit credibility is to be maintained. The bargaining power of Germany in the economic councils of Europe has been correspondingly increased."

Ashvin Pandurangi: So if the equity markets are "pricing in" anything, it's the pure hope that all of these downgrades of countries, banks and corporations will continue to be glossed over by bond markets, that political/economic imbalances in Europe haven't been exacerbated, that the Greek government and its creditors aren't helplessly struggling to reach a "voluntary" debt reduction deal before a technical default in March becomes inevitable, that China/India aren't facing "hard landings" and that the U.S./U.K. economies will not be dragged down by their own housing markets, corporate [lack of] earnings, unemployment trends or any of the above.

Some people will tell you that the only thing the markets need to keep their manic phase intact is the inevitable QE money printing that the Fed will officially announce, which has conveniently been "just around the corner" for almost a year now. Despite those consistent predictions of QE3, I made clear that I didn’t expect the Fed to relent in 2011, and many of the same financial and political reasons underlying that expectation still stand. The primary reasons being the conundrum reflected by the fact that the S&P is still hovering around 1300 (and oil around $100/bbl), which makes the marginal benefits of QE very slim, and the politically volatile situation in the run-up to November’s elections.

On the other hand, the financial threats from the Euro crisis and a strong dollar (weak euro) have clearly intensified over the last few months, and the ECB is even more constricted from printing than it has ever been (at least for anything other than sub 3-year sovereign paper through its indirect LTRO, which still doesn’t reflect net cash entering EZ bond markets). Perhaps these developments will finally convince the Fed to "pull the trigger" on QE3, but then many questions still remain – how many trillions are needed to boost "risk appetite" for more than a few weeks and what happens when those trillions are perceived as "not enough"?

Like I said at the beginning, I'm not any sort of market analyst, but there do seem to be a whole slew of developments starting to weigh on collective investor sentiment right now, which will only get heavier in the upcoming weeks and months. No one can tell you that any of these negative and ongoing developments herald an imminent market crash or how exactly they will impact shares. What I can say with confidence, though, is that none of them are insignificant bumps in the road. They certainly did not "remove any uncertainty" from the markets and they have in no meaningful way been "priced in" by these markets either.

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WATCH: The Full Video Of Yesterday's Apple Education Event (AAPL)

Ford Finds Growth Around the World

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It was no surprise when Ford (NYSE: F  ) reported solid sales gains in the U.S. in 2011. While its 11% year-over-year growth was slightly ahead of both the market average and analyst expectations, it trailed the more dramatic gains posted by some rivals.

One could argue that such incremental gains represented a bit of a disappointment after a year that saw two of the Blue Oval's biggest rivals, Toyota (NYSE: TM  ) and Honda (NYSE: HMC  ) , suffer major production losses in the wake of natural disasters in Asia. But the result was good enough to put Ford over 2 million vehicles sold in the U.S. for the first time since 2007, and the company's continued profits suggested that Ford's strategy of emphasizing margins over market share is a worthwhile one.

More to the point, Ford's continued focus on improving margins should mean that further incremental sales growth will lead to solid growth in profits over the longer haul. And increasingly, Ford will depend on overseas markets to drive that sales growth.

So how is Ford doing overseas? As we look toward Ford's fourth-quarter earnings report next week, it's worth checking out Ford's 2011 sales results in other key markets around the world.

Incremental gains (mostly) in key markets
For the most part, 2011 was a pretty good year for Ford in its traditional overseas strongholds -- and a year of continued strong growth in regions that are relatively new turf for the Blue Oval:

China. While Ford's sales numbers in the Middle Kingdom are dwarfed by those posted by archrival General Motors (NYSE: GM  ) , a longtime China stalwart, the company is investing heavily to expand its production in the country and hopes to be among the leaders by mid-decade. Ford did manage to move more than half a million vehicles in China in 2011, an increase of 7% over strong 2010 results. That's less than a quarter of GM's sales, but Ford's sales growth outpaced the overall market and puts the Blue Oval on track for a solid year in 2012.

Europe. Long a trouble spot for Ford (and General Motors), Europe brings high fixed costs and economic headwinds that have hammered the company's margins and profits for several quarters. Still, Ford managed to eke out a 2.4% sales gain in the region in 2011, while holding its second-place position in Western Europe and making solid gains in Turkey and Germany, Europe's largest market. Strong sales of the Fiesta, the Focus, and Ford's small commercial Transit vans paced the automaker's efforts in the region.

India. Ford sold 96,270 vehicles in India in 2011, a 15% increase over last year's strong results, and produced over 22,000 more for export (three times 2010's total). While Ford's India sales are dwarfed by those posted by market leaders Maruti Suzuki and Tata Motors (NYSE: TTM  ) -- Tata sold almost 30,000 vehicles in December alone -- its 2011 growth outpaced the overall market's sluggish 4.3% gain. The high point was the strong sales of Ford's Figo small car, which, like Toyota'sEtios, was developed for the India market, and which is now being exported from Ford's Chennai plant to 32 countries.

Russia. While the Russian auto market is "emerging" at a slower pace than China's, Ford has made a big bet on Russia and done well there. Its joint venture with Sollers saw a 30% sales gain in 2011, with almost 120,000 vehicles sold, Ford's best year in Russia since 2007. About two-thirds of those vehicles were copies of Ford's Focus compact, which is produced locally in a large factory near St. Petersburg. The Mondeo, Ford's European midsize sedan, which is also produced locally, accounted for much of the rest.

Brazil. Ford has long had a presence in what has become the world's fourth-biggest car market, but 2011 saw a decline from 2010's record-setting sales levels as the Blue Oval moved to overhaul its product line in the country. Ford sold just over 314,000 vehicles in Brazil in 2011, down from almost 364,000 in 2010, a drop that pushed its market share from more than 10% to 9.2% at year's end.

Of course, sales figures tell only part of the story. We know that margins are likely to be thin in Europe, where an incentives war has been brewing, and that the brunt of Ford's profits will continue to come from the good old U.S. of A., but how profitable are Ford's other regions right now? We'll learn much more during next week's earnings call.

I'll also be listening for details of Ford's upcoming dividend payment during that call, its first payment to shareholders since September 2006. That dividend should arrive in March -- but you don't have to wait to put the power of reinvested dividends to work in your portfolio. In a special new report, Motley Fool analysts have identified "11 Rock-Solid Dividend Stocks," all great additions to a long-term investor's portfolio. This new report is completely free for Fool readers, but only for a limited time, so get instant access now.

The Collapse of the Euro
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Source: http://www.fool.com/investing/general/2012/01/19/ford-finds-growth-around-the-world.aspx

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Hurrying to Refinance Home Loan : the Prices may perhaps Never be this Favorable Once again

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Source: http://www.legaldebthelponline.com/2012/01/18/hurrying-to-refinance-home-loan-the-prices-may-perhaps-never-be-this-favorable-once-again/

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Romanian Riots Reveal A Growing Gloom In Eastern Europe


Protest Romania

BUCHAREST, Romania (AP) — Romanian cities are gripped by the worst street violence in over a decade. Slovaks seem poised to re-elect a confrontational and divisive populist. Hungary alarms the European Union with laws that erode democratic rights.

In former Soviet bloc nations now part of the EU, frustration is mounting due to economic stagnation and worrisome governance, encouraging street protests and unpredictability that could further jeopardize growth and stability in an already troubled part of the continent.

Many of the problems are common far beyond the region: indebted states hiking taxes and slashing state spending to stay solvent. But the added burdens come to a region that was already grappling with much deeper poverty and corruption than in the West before the global financial crisis hit.

In recent days, the situation has played out most dramatically in Romania, where pent-up fury with the government and an eroding standard of living exploded into days of street protests that at times turned violent. In Bucharest over the weekend, 59 people were injured in fighting that saw riot police turn tear gas on protesters who attacked them with stones and firebombs.

"What happened last weekend is only the beginning," commentator Gabriel Bejan wrote in Tuesday's Romania Libera daily paper. "We are in an important electoral year and such confrontations will be frequent. What will they lead to when nobody seems willing to take a step back?"

Much of the frustration goes back to the way Romania transitioned to democracy after its 1989 coup against dictator Nicolae Ceausescu — with many former communists keeping control of power and resources. The results, today, are seen in entrenched cronyism, a huge gap between rich and poor and a lack of government transparency that feeds a widespread sense of injustice.

"The Mafioso government stole everything we had!" protesters declared on banners at several of the rallies that have taken place in more than a dozen Romanian cities since Thursday and appear set to go on.

Hungarians have also been taking to the streets with increased frequency in recent months over a new constitution and a blizzard of new laws that concentrate power for the right-wing Fidesz party of Prime Minister Viktor Orban.

Freedom House, a U.S. group that carries out a yearly global survey of political freedom and civil liberties, has observed "hints of re-emergent illiberalism" across central Europe, said Christopher Walker, the group's vice president for strategy and analysis.

This year's report, which was published Thursday, highlights what it sees as a deteriorating climate for civil liberties in Hungary due to threats to the independence of the press and the judiciary.

"Hungary has shown a bent towards illiberalism which is really inconsistent with the European idea," Walker said.

The EU agrees. On Tuesday the EU Commission launched legal challenges against Budapest over its new constitution and other laws which took effect Jan. 1, saying they undermine the independence of the national central bank and the judiciary and do not respect data privacy principles.

Orban's tightening hold on many institutions comes thanks to an overwhelming 2010 victory for his party on the heels of near economic collapse by the previous, Socialist-led government.

But the mounting EU pressure appeared to have some effect: EU Commission President Jose Manuel Barroso said Wednesday that he received a letter from Orban promising to modify the legislation that raised EU concerns.

In Slovakia, meanwhile, opinion polls predict a probable return to power in March elections for Robert Fico, a former left-wing prime minister who has also worried Western diplomats with a sympathetic approach toward authoritarian states. Fico took Russia's side during its 2008 war with Georgia — bucking a trend across the former Soviet bloc to express concern over Moscow's use of power. He has also celebrated Fidel Castro's Cuban revolution.

In striking contrast to trouble in much of the region, there is one relative oasis: Poland, the largest of the 10 ex-communist states that joined the EU in recent years. Its economy has seen unusual dynamism given the difficult times, thanks in some part to massive infrastructure projects in recent years as Poland prepares to co-host this summer's European football championships with Ukraine.

But economists fear that its economy, too, could lose momentum after the Euro 2012 and with far-ranging austerity measures set to start taking effect this year in an effort to keep state debt from spiraling out of control.

But for now, anger is clearly greater in Hungary and Romania, and in both places the unfolding developments are shaped greatly by the legacy of communist rule.

In Hungary, Orban has justified his upending of the country's laws by arguing that the former communists and their way of thinking were never purged entirely from democratic Hungary.

Romania sees many of its problems exacerbated by the continued rule of some former communists, including President Traian Basescu, 60, who under Ceausescu was a ship captain for the state shipping company Navrom in Antwerp. That was a position of privilege which allowed him to earn coveted hard currency.

Feeding frustration is a sense that there is too little transparency over the doings, past and present, of Romania's leaders.

More than two decades after the overthrow of Ceausescu, authorities have opened only a handful of the files of the former dreaded Securitate secret police, which had 760,000 informers in a nation of 22 million. Former agents are believed to be active in politics, business and the media — though the public has never been given the full picture.

Also, only a handful of senior officials were ever tried for the mass shootings of unarmed civilians in the 1989 revolution, perpetuating a sense that that story, too, is being covered up.

A political analyst who has studied the revolutions of Eastern Europe, Christopher Chivvis with the RAND Corporation, sees many of today's injustices as being rooted in the overly rapid move toward a market economy in the 1990s.

When state-run industries were privatized then, it was generally only the former communist apparatchiks who knew how to maneuver the system to take hold of them and run them.

"Those who had the know-how — the former regime officials — were able to snatch up large amounts of former state property in ways that ultimately entrenched their position in society and in the state," said Chivvis, who is also a professor in European studies at Johns Hopkins University.

Many Romanians express deep frustration over this.

"We still have unanswered questions regarding shady privatization deals made in the 90s," said Cristina, a Romanian woman who asked that her last name not be published because she works for the government and fears retribution.

___

Vanessa Gera reported from Warsaw, Poland. Associated Press writer Karel Janicek contributed from Prague.

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In New Jersey, Tax-Free Breast Implants

Starting in July of 2013, New Jersey residents getting botox injections, breast implants, and other various nips and tucks will be able to get the procedures tax-free thanks to a bill signed today by Governor Chris Christie, New Jersey On-Line reports.

The bill will gradually phase out the "cosmetic medical procedures gross receipt tax," a state tax imposed in 2004 requiring clinics to collect taxes on their procedures.

The bill defines cosmetic surgery as "any medical procedure performed on an individual which is directed at improving the procedure subject?s appearance and which does not meaningfully promote the proper function of the body or prevent or treat illness or disease."

According to Forbes, the 8-year-old tax brings in as much as $10.8 million in annual revenue.

But Christie and the bill's other supporters have said enforcing the tax creates heavy burden on medical offices and those paying for the procedure.

"The phase-out provided by the bill will gradually alleviate the financial and administrative burdens associated with the tax," the bill states. "Since the gross receipts tax was imposed in 2004, the tax has increased overall costs for recipients of cosmetic medical procedures, and imposed an administrative burden on the medical offices billing the procedures and the State agencies charged with the administration and enforcement of the tax."

Controversy over taxes on cosmetic surgery erupted in 2009 when Senator Harry Reid proposed a 5 percent tax on elective procedures like Botox, which opponents quickly named the "Botax."

Facing opposition from the American Medical Association and the manufacturer of Botox, Democrats nixed the tax, which would have helped cover a tiny fraction of the cost of Obama's sweeping 10 year, $871 billion health care legislation, USA Today reported.

Instead, a 10 percent tax on indoor tanning services was added to the healthcare bill. That tax is expected to generate $2.7 billion over the next ten years, according to CNN Money.

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10 Years Ago Today, We All Learned To Hate Tom Brady


tom brady in the tuck rule game

Today is the 10th anniversary of the Tuck Rule Game — the screwy AFC Championship Game that catalyzed the New England dynasty and turned the Patriots into the insufferable cheaters that they are today.

A decade later, the game is still as baffling as it was on that snowy night in Foxborough, when the ball squirted out of Tom Brady's grip and seemingly brought New England's miracle season to an end. Only to have it revived in the form of a little-known, nonsensical rule.

Here's a brief recap of how it went down: The Pats were losing to the Raiders 13-10 with less than two minutes left when Tom Brady was sacked and fumbled. But somehow the fumble wasn't a fumble. It was an incomplete pass because Brady hadn't fully tucked the ball back into his body after pump faking.

The Pats drove down the field, tied the game, and won it 16-13 in overtime.

Two weeks later, the underdog Patriots beat the Greatest Show On Turf in the Super Bowl, and today, ten years later, they're the odds-on favorite to win it all.

It could have been different for Tom Brady.

The unheralded sixth-round pick could have lost to the Raiders in Foxborough Stadium 10 years ago. He could have spent the next year locked in a quarterback controversy with the legendary Drew Bledsoe. He could have, after years of uncertainty, left Boston to prove himself elsewhere.

And what the New England Patriots have since morphed into — a dominant, dispassionate dynasty — could have never formed.

But instead the Patriots won their first Super Bowl of the '00s, rickety old Foxborough Stadium was torn down in lieu of glitzy new Gillette Stadium, and Brady became a model-dating Hall of Famer that any self-respecting non-Patriots fan despises.

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3 Things That Will NOT Happen In Commodities In 2012


TMM note that with the rapidly changing policy mix in Europe from “suicidal” to “Die Hard”, making calls on commodities is first and foremost a question of how much QE there is: if the deflationary environment and crisis risk is kept at bay in Europe it isn’t as if things are going to be peachy in Europe but risk assets will run, not least of all because last time we saw this much of a policy response from November 2008 to March 2009 commodities ripped.

Now, TMM would note that if the US continues to recover with Europe at least stabilized and housing in particular continues to recover we could get to year end and be talking *gasp* rate rises and not just fiscal drag which just might turn the USD from a legally acceptable form of toilet paper to legally acceptable tender. So folks lets be honest: there’s commodity fundamentals and then there’s central banks that can do a lot to make fundamentals not matter in the slightest. So with that caveat (“all non predictions subject to global M3”) we present our Commodity Non-Predictions:

1) Platinum will NOT under-perform Silver.

TMM have covered platinum before – the macro context of the world’s largest producer here and the threat of electric vehicles to Platinum Group Metals seems to be handily suppressed which can mean only one thing – cost push inflation plus a demand recovery = this should go up. Now TMM can’t rule out Eurostupidity so we are going to offset this with Silver which is sitting at ~300%+ of cash costs unlike Platinum which is only about 50% above cash costs and which as previously discussed seems oversupplied if one discounts the tinfoil beanie brigade. Oh, and it’s a really pretty chart from the long term:

The shorter term:

And realises high teens vol versus the hi-ho silver 45% whipsaw show.

2) Copper Is NOT Going Anywhere.

TMM think that copper is in no man’s land. To wit:

  • expanding supply coming online end of 2012 and 2013 (-).
  • China committed to property controls (-).
  • While also loosening credit (+).
  • US building recovery being priced into equities (+).
  • But little follow through in OECD demand yet (-).

To that end we think copper is not going anywhere exciting this year, so buying OTM anything in copper seems rather unappealing to TMM.

3) Oil Vol Will NOT Disappoint.

TMM think Oil is the complete opposite of copper this year. In TMM's minds, there are three things that could happen this year, all of which mean Oil will move a lot:

  • Iran blows up, Oil goes to $150, global growth collapses.
  • ECB-driven reflation, more growth, demand sends Brent back to $120+.
  • ECB-driven deflation, double dip, $90 oil.

To that end while crude vols have ticket up somewhat they still look appealing at ~23% to TMM, right in the historical complacency zone.

And with that, TMM will try and motivate themselves to come up with some Equities & FX Non-Predictions.

This post originally appeared on Macro Man.

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