Forecast Is for "Bad Craziness"

That's right. We're having one of those news days that cries out for the mad prose stylings of Hunter S. Thompson himself.

Unfortunately, you'll have to settle for me.

So let's get this party started right by inviting in the Crown Prince of Crazy himself, the Dear Leader Kim Jong Il and the People's Glorious Revolutionary Atomic Mushroom Brigade! South Korea has announced that they will be conducting a live fire artillery drill on Yeonpyeong Island from December 18-21. The response from North Korea Crazy? A neopolitan ice cream of insanity, offering three distinct flavors for the price of one. They are now accusing the south of attempting to "kick up hysteria of war of aggression against the DPRK"[1], they have put forward the claim that the reason the south is doing this is to undermine "the progress made in the June 15 era of reunification" and to derail "the dialogue and cooperation between the north and the south", and they are warning[2] that the live-fire exercise "will play out a more serious situation than on November 23 in terms of the strength and scope of the strike"[3].

There is some speculation that all of this is just a way to improve the north's position when negotiations begin again. Rather like the way a small child attempts to improve his position regarding the acquisition of a toy by pitching a tantrum. Only with high explosives. And death.

China, which is no doubt banging its collective head on its collective desk over the antics of its crazy eastern neighbor, has hit a 28-month high for consumer inflation. It's up 5.1% from November 2009 (mostly on food prices), about 210 bps higher than the 3% target they had for 2010 and 110 bps higher than their 2011 goal. This, of course, is considered an omen of rising reserve requirements and interest rates[4].

Spinning the globe around to Europe, Moody's has cut Ireland's credit rating from Aa2 to Baa1, putting them on the same level as Russia and Lithuania. That's still investment grade, but you almost have to throw the air quotes when you say that. Meanwhile, on day two of the EU summit to create a permanent financial safety net for the euro zone, leaders refused temporary steps such as increasing the size of the EU bailout fund or using the bailout fund to buy bonds. European traders pouted and demanded that the summit offer more short term guarantees, and possibly milk and cookies before bed.

On the positive side for Europe - or, at, for the two-time would be rulers of Europe - the Ifo Business Climate Germany is out. The business climate index, the business situation index, and the business expectations index are all showing an across-the-board 60 bps improvement. So, overall, businesses are doing well and expecting to continue to do well in Germany.

Closer to home, the House passed the tax "compromise" on a 277-148 vote. The IMF Managing Director is pleased, although I'm not certain why Reuters felt the need to bring his opinion into the article[5]. In possibly unrelated news, Senate Democrats also threw in the towel on passing a budget, and agreed to a temporary funding measure.

So that's some of what's driving the markets around. Fear and madness and bad craziness. And four witches.

[1] No, really. That's the official English translation.

[2] "Warning" as the word is defined in North Korea, means "kicking someone in the teeth out of nowhere, and then threatening them with a switchblade if they try to punch back".

[3] For good measure, they also threw a diplomatic bone to the US: "The state of armistice is persisting on the Korean Peninsula and danger of war is not defused there because of the U.S. hostile policy toward the DPRL and its wild ambition for aggression."

[4] And you don't even need to visit Delphi on the seventh of the month for that one.

[5] Although the CIA World Factbook confirms that our public debt as a percentage of GDP is actually 30 bps higher than Spain's, so maybe we should be courting the IMF's good graces now...

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".

That Was An Unexpected Rally

"Rally?" I can hear you all asking. "Have you lost your mind?"

No, not really. Hear me out. At one point, the Dow was down 109.51, or nearly 1% (0.99%, if you want to get technical). It closed only 46.47 (0.42%) down. That's not a great rally, but it is a rally.

Now, what drove it? Part of it was the unexpectedly good consumer confidence figures. Part of it was President Obama and Republican congressional Leaders agreeing to seek a compromise on the expiring Bush tax cuts (says the AP)[1]. Still, despite the guarded optimism and weak rally, it was a sad, sad ending to a sad, sad month.

Still, Pyongyang hasn't unleashed the People's Glorious Revolutionary Atomic Mushroom Brigade, so things are looking up. For the moment.

[1] Yes, the markets were mildly happy about a promise to try and reach a compromise. Expectations have been lowered for your convenience.

Articles cited:
Stocks pare losses on optimism over tax cuts (http://hosted.ap.org/dynamic/stories/U/US_WALL_STREET?SITE=SCAND&SECTION=HOME&TEMPLATE=DEFAULT)
Obama, GOP promise to work on differences on taxes (http://hosted.ap.org/dynamic/stories/U/US_OBAMA_CONGRESS?SITE=SCAND&SECTION=HOME&TEMPLATE=DEFAULT)

S&P Case-Shiller HPI

After the revelations of the DPRK's mad plan to breed an army of giant radioactive mushroom men to conquer the free world [1], the S&P Case-Shiller HPI will be both slightly boring and a welcome return to humdrum sanity.

The S&P Case-Shiller Home Price Indices are, of course, a series of indices tracking changes in home prices nationally (the US National Index), in a 20-city region (the 20-city composite index), a 10-city region (the 10-city composite index), and then twenty individual metro area indices. It is normalized to have a value of 100 in Q1 2000. Data is released with a two month lag.

While the Street is interested this index, most analysts don't really spend any time trying to predict the results. Still, they like to see rising home values because this tends to spur new home construction. And, as we know, new home construction spurs GDP-enhancing economic activity. Also, since the single most valuable investment most everyone in the US has is their home, improving home values are seen as a signal of increasing personal wealth.

Speaking of results, you can read the press release right here. The highlights are:
* The US National Index has declined 2.0% from Q2 to Q3 2010, and is down 1.5% from Q3 2009 to Q3 2010, with the Q3 2010 level coming in at 135.48.
*The Composite-20 index is down 0.7% from August to September, but is up 0.6% from September 2009 to September 2010. The Level comes in at 147.49.
* The Composite-10 is down 0.5% from August to September, but is up 1.6% from September 2009 to September 2010. The Level comes in at 161.25.

Obviously, the results really aren't that good. Sure, the Composite-20 and Composite-10 look good, but almost all of the positive numbers come out of California. Everywhere else is either barely improving (Boston) or is watching their home values hurl themselves from a cliff like a mob of lemmings [2]. It is possible that some market analysts will declare the results positive (off the strength of the Composite-20 and Composite-10), but those analysts will most likely reside in California.

[1] You have to read between the lines, but why else would the DPRK announce both a uranium enrichment plant and new mushroom cultivation technologies on the same day?
[2] A mob of lemmings stampeded towards a cliff by filmmakers from the Walt Disney Corporation, that is. Lemmings don't actually hurl themselves from cliffs as a general rule. They have to be very depressed first.