Morning Metrics!

Our typical jaunt round the globe begins in Japan, where last night at 6:50 PM EST their Merchandise Trade figures were released. This is more or less the same thing as the US Trade Balance figures, and looks at the trade deficit or surplus on tangible goods and services. The consensus estimate was for a surplus of ¥450 billion in December (up substantially from November's ¥151.1 billion). Analysts were also looking for annual imports to hit a 9.5% increase, while imports were expected to increase 12.3%. In actuality, the December trade surplus was ¥727.7 billion (whupping estimates), while 2010 exports finished up 13.0% and imports finished up 10.5%.

The Japanese markets would be far happier about this if Standard & Poor's hadn't cut their long-term sovereign debt rating to AA-.S&P's reasoning is that "In our opinion, the Democratic Party of Japan-led government lacks a coherent strategy to address these negative aspects of the country's debt dynamics, in part due to the coalition having lost its majority in the upper house of parliament last summer." The yen dropped and credit default swaps widened on the news.

In further Asia-related news, Representatives Sander Levin, Tim Ryan and Tim Murphy are planning to reintroduce the Currency Reform for Fair Trade Act when the House returns in February. This act would allow the Commerce Department to treat undervalued currency[1] as a subsidy under US trade law. This would allow companies to seek higher duties against imports from the nation with the undervalued currency[2] if those imports compete with US production.

In addition, the China Securities Regulatory Commission has drafted a consultation paper outlining rules that will allow qualified foreign institutional investors to invest in the Chinese stock index futures market. The investments can only be used as a tool for hedging, not for arbitrage or speculation, and the QFIIs will not be allowed to issue derivative products on the stock index futures.

Turning to Europe, German CPI was released at 8:00 AM EST. For January 2011 the consensus expectation was to see CPI fall 0.4%, and it beat expectations by falling 0.5%.

[1] coughcoughyuancoughcough, at least as far as the authors of the bill are concerned.

[2] coughcoughChinacoughcough, at least as far as the authors of the bill are concerned.

The Futures Are Up!

And what are they up on? The tax cut compromise, that's what they're up on!

"What compromise?" you ask. Well, let me tell you...

At 6:32 PM last night, President Obama announced the details of the compromise between the Democrats and the Republicans on the subject of whether or not the Bush tax cuts will expire. As a reminder, the Democrats wanted to extend the tax cuts for anyone making less than $200,000 (about 96.9% of the populace, according to my calculations from IRS figures[1]) while the Republicans wanted to extend the tax cuts for everyone (about 100% of the populace, according to IRS figures).

How did the compromise work out? In the words of the President, "we have arrived at a framework for a bipartisan agreement. For the next two years, every American family will keep their tax cuts -- not just the Bush tax cuts, but those that have been put in place over the last couple of years that are helping parents and students and other folks manage their bills.... Now, under this agreement, unemployment insurance will also be extended for another 13 months, which will be welcome relief for 2 million Americans who are facing the prospect of having this lifeline yanked away from them right in the middle of the holiday season."

In other words, the compromise boils down to "the Republicans get everything they want, and the Democrats give it to them." An interesting definition of compromise, don't you think?

But surely that's not it? What else is driving futures?

Well, Reuters is reporting that China's central bank is getting ready to tighten the yuan by raising interest rates. Their CPI has hit a 27-month record high of 4.7% and this, combined with fears driven by US market concerns about the Fed possibly buying more than $600 billion in Treasuries, has China concerned about inflation. Rising interest rates are the universally-accepted cure for inflation, so get ready. Asian markets were down initially on the news, but recovered somewhat (mostly because the markets have already priced in more tightening).

And, of course, there's the Treasury announcing an underwritten public offering of it's remaining 2.4 billion shares of Citigroup common stock, at $4.35 per share. Once these are sold, that will eliminate the Treasury's full position of Citigroup common stock, although it will continue to hold warrants for more common stock as well as $800 million in TruPS[2].

[1] The President puts it at 98% in his speech, but what's 1.1% between friends?
[2] TruPS? Investopedia (http://www.investopedia.com/terms/t/trustpreferredsecurity.asp) defines them as "trust preferred securities), securities similar to debentures and preferreds that are generally longer term, have early redemption features, make quarterly fixed interest payments, and mature at face value. They also maintain the appearance of equities in a company's accounting statements, which sounds to me like an accounting trick to make the company look like it has less liabilities than it really does, but it is in accordance with GAAP. So it's legal.

Statement by the President on Tax Cuts and Unemployment Benefits (http://www.whitehouse.gov/the-press-office/2010/12/06/statement-president-tax-cuts-and-unemployment-benefits)
China rate rise talk builds as loans and inflation rise (http://www.reuters.com/article/idUSTRE6B60XG20101207)
Treasury Announces Public Offering of Citigroup Common Stock (http://www.treasury.gov/press-center/press-releases/Pages/TG994.aspx)

Super Diplomatic Ministerial Ninja Team, Sanjo!

So. What seems like it's going to push the markets around tomorrow?

First off, we have a compromise on the expiring "Bush tax cuts". Let's see here. The Republicans get an across-the-board two-year renewal of the tax cuts, a 2% employee payroll tax cut, extended breaks on dividend and capital gains taxes, and a 35% estate tax with a $5 million personal exemption. The Democrats get... well, they get a 13-month extension on unemployment benefits. And I guess they get to not be presented as the grinch that raised taxes on 96.9% of the American people for Christmas.[1]

I think we have to call this a win for the Republicans.

The European Central Bank still isn't bowing to pressure to conform to rumors and rain euros from the heavens. Or, as the Prime Minister of Luxembourg put it, "We don't have any new decision to announce to you."

European markets are expected to collectively throw themselves on the floor, kick their feet, cry and scream "I hate you ECB" until the bank gives in.

The Super Diplomatic Ministerial Ninja Team, consisting of Secretary of State Clinton, Foreign Minister Maehara, and Foreign Minister Sung-hwan, have officially urged China to "shape North Korea's behavior". There is no word on when the People's Glorious Revolutionary Atomic Mushroom Brigade will issue an official response.

There's the massive PR storm called "Operation Broken Trust" going on right now. I doubt that this will have any significant impact on the markets, though. It'll result in a few sexy show trials, a lot of trials that nobody will care about unless they were directly involved, and the remaining frauds remembering to cover their trails better.

[1] No matter which way you lean politically, you have to acknowledge that the Republicans were going to filibuster to death any bill that didn't extend the Bush tax cuts for everyone, and then blame the Democrats for "making them do it". Where did I get the 96.9% figure? IRS data. In 2008 (the most recently compiled year), there were 142,450,569 individual tax returns filed. 138,074,910 of those returns were for adjusted gross incomes below $200,000. The rest is simple math.

Interestingly enough, the same simple math reveals that this 96.9% of the income tax filing households paid 72.7% of the total income taxes that were actually collected by the IRS. The remaining 3.1% paid 27.3% of the total. That's a topic for a different time, but it's something to consider the next time someone says the rich (i.e. those making more than $200,000) aren't "paying their fair share".

Wrapping Up A Miserable Day In The Market

As of right now, I'm sitting here looking at

• A Dow down 178.47 (1.59%)
• A NASDAQ down 43.98 (1.75%)
• A S&P 500 down 19.41 (1.62%)

That's pretty sad. What drove it? Funny as it would be to blame Apple's partnership with the Beatles, that's not really it. So what is? Well, here's some highlights from today's news:

• Ireland, one of the PIIGS, is unwilling to accept a bailout for it's financial system.
• In comedic counterpoint to the above, some EU members are unwilling to give a bailout.

(And does anyone else hear the dynamics of an elementary school in this? "I don't wanna bailout!" "Yeah, well we don't wanna give you a bailout!" "Yeah? Well I didn't want it first!" "Did not!" "Did too!")

• Austria is threatening to withhold the next tranche of bailout funds from Greece, unless Greece gets back to following it's deficit-cutting plan.

(Accountability. The horror!)

• China is requiring banks to increase their capital reserves, and is tightening up it's lending policies.

So yeah, the pain is all about the financial sector. Still. That seems an ill omen for tomorrow's CPI and housing starts figures (analysts are already looking for a 0.4% month-over-month increase in CPI, and a 20k drop in housing starts). Brace yourself.