The T Report: ‘Tis The Season to be Bullish

Posted by on Nov 19, 2012 in The T-Report | No Comments

‘Tis The Season

The start of an almost 2 month long holiday period starts in the U.S. For many, particularly those affected by hurricane Sandy, the season has snuck up on us, but it is here.

Maybe it is the holiday spirit, but I’m feeling very bullish this morning. I started getting bullish too early after the election but last Thursday felt like we had set the Obottom for this sell-off.

Fiscal Cliff

Finally on Friday we had the sort of press conference we have been waiting for. The Democrats, Republicans, and even a soon to be former Treasury Secretary all had good things to say about the fiscal cliff. Maybe they finally realize that they just need to get through this. A quick, simple, and early solution is what the economy and the markets need. Maybe the politicians have decided it is in their best interest to do something right away. Maybe we will get another “compromise” like in 2010 when taxes weren’t really decreased and spending actually increased.

For the first time ever, I might be happy not to be in the proverbial “1%”. Heck, I would still rather be in that group, but if any tax hikes go through, likely to be ones that hit that group. Republicans may finally be doing some math and decided that losing 100% of the 1% vote is worth it if they could get 10% of the 47%. I don’t necessarily agree with it, but I you can see the wheel’s churning behind the Republican machine as they start looking to appeal to bigger groups.

What gets chopped will make a difference, but if it is marginal tax rate above certain thresholds and carried interest, while other forms of capital gains and particularly dividends are left alone, we could see a strong rebound.

$125 Billion of Santa Fed Bucks

At $85 billion a month, by January 7th, there should be about $125 billion more sloshing around the economy. As we have argued for awhile, QE does not ensure the “risk-on” trade, but it does ensure that there is more capital to chase risk once the market decides to go “risk-on”.

The Credit Market Scare

Credit had grown too complacent, U.S. corporate credit in particular. The closed end fund sell-off may have been a blessing in disguise. Credit needed to be shaken up a little, and it had been too complacent in the face of other risk off trades coming into the election. Well, after last week that corrected to a large degree. The general selling accelerated as stories of closed end funds being down 10% in a day circulated. The size of outflows from ETF’s and mutual funds became the talk of fixed income trading desks everywhere. As we mentioned, we liked the opportunity created by the confusion.

After the sell-off investors will be left scurrying for yield, wondering where the new issue calendar is (almost non-existent after Thanksgiving). They can also ponder why CLO’s continue to get done, and why banks and the Fed are growing their balance sheet.

Credit should be strong.

Black Friday, Scarlet Thursday, Cyber Monday

So stores are opening on Thursday. About the only day in America where people really actually spent their day with family – travelling with immediate family to see larger family, they can now shop. I don’t really get it, nor do I care to get it.

We will be inundated with “channel” checks and progress updates. No amount of screaming until you are blue in the face that all this does is pull sales forwards will stop the steamroller of mall shots. If people don’t actually shop on thanksgiving, no amount of saying “I told you so” will stop the hand wringing that holiday sales will be a disaster.

In the end, all that really probably matters for this market is stories of Apple products selling. It won’t matter what their market share is, if analysts can get the twinkle in some investor’s eye that Apple is going to have an eye popping quarter, the stock can bounce from these oversold prices (looking at RSI). That drags the entire market up. While Apple may no longer be the best, they are a long way from having dismal sales this holiday shopping season.


So many like to point at the VIX as a “fear indicator”. Well, seasonality is strong here and for real reasons. You get fewer trading days for every option purchased. That dampens the price of the option, so all else being equal, the implied volatility (which goes into VIX) drops. It is simple why this trend appears at this time of the year, yet with the overwhelming amount of sound-bites we get at this time of year, lower VIX is likely to be one, and is likely to be viewed as positive. I would NOT own VIX here. Buying some options for directionality is one thing, I expect a lower VIX.

Greece and Spain

The holding pattern remains in place, but at least in Greece, there seems to be growing acceptance that the “official” sector – Troika – needs to take some losses. The economy will not improve, and privatizations at good prices will never occur with constant Troika check-ups and the second Greek default looming. Get the default over with, clean up the “debt” side of the balance sheet, and then focus on the “income” side.

Rajoy is working hard to bring the character of Don Quixote to life as he tilts at the windmills of bailouts. The banks need the bailouts – NOW! That is the lesson every single policy maker should know. For all the talk about austerity and moral hazard, an economy will struggle if its banks are in dire straits. Fix the banks. Then negotiate with the IMF to get decent terms on some form of backstop from the ECB/ESM. Get the IMF to agree that if you just implement what you already say you will do, that there is a bailout plan. Let the OMT details get finalized. Any amount of certainty would bring risk on.

My finger has reached to press the buy Spain button about 3 times already today. I haven’t done it yet, but am very close.

The Draghiman

If the Boogeyman was used to scare children in Europe, the Draghiman is there to scare shorts. I do not believe that it is co-incidence that he tries to unleash plans in quiet times. LTRO came out first last December, and his famous “whatever it takes” speech was right before the month long vacation period in Europe that Americans still refer to as August.

If you are going to launch a program to scare the heck out of the shorts, thin markets tend to help – especially if you don’t have real money backing you. Don’t Fight the Fed is an overused phrase, but don’t fight the central bank when there is no one around to help you, is pretty applicable. With so much “performance chasing” into year-end, it wouldn’t take much to spark a rally that no one will fight.