Market Talk

The Mad Hedge Fund Trader has an idea:

I have a very simple solution to the country’s budget deficit problem. Hit the reset button. Eliminate the Internal Revenue Code. Just set it on fire. Keep the existing progressive, hockey stick tax rates on income, but eliminate all deductions. And I mean everything; deductions for dependents, home mortgage interest, medical expenses, the works. There are no sacred cows. My revised Form 1040 would have only three lines on it:

Income
Tax Rate
Tax Due

The budget deficit would disappear overnight. Government spending would shrink dramatically, because you could ditch most of the 100,000 who work for the IRS. Some 1.3 million auditors and CPA’s would have to hit the road in search of new work too. The amount of money that is wasted on tax collection in this country is truly staggering. This is not some pie in the sky concept. This is how taxation already works in most countries, and they seem to get along just fine.

In fact, the whole scheme might even pay for itself.

It reminds me of what David Cay Johnston said on the John Batchelor show when I co-hosted back in November: that there’s $1 trillion worth of tax-breaks given out every year to corporations. Reforming the tax code in some form or other should actually be a major focus of any reform movement; it was included in the President’s deficit committee plan that never made it out of the committee, but hey, it was there.

It’s not really a new idea; remember Jerry Brown back in 1992? But it never seems to get much traction, this notion of flattening out the rates and throwing out the deductions and loopholes, mainly because the people most threatened by it have the most “input” into Congress; think the oil industry, for example. But scrapping and reforming the tax code should be a major plank of any efforts to fix the government’s books.

I’ll tell you, though, you’ll be like one of those sad sacks in Waiting for Godot hanging on for that one.

What's got these guys all jazzed up, huh?

The stock market has been recording pretty strong gains so far in September, all the more notable since September is historically such a lousy month. The proverbial double-dip fears are receding – on the Street, at least (if you’re on that other street, Main Street, it doesn’t matter whether or not it’s called a double-dip. It’s lousy and it’s been lousy.)

Okay, so what’s doing it, right? That’s the question. Have the economic tea leaves shifted that significantly? We could write a 1,000-word post deconstructing the various data points, the ISM, the August jobs report, the weekly jobless claims, the housing numbers, the GDP report. But there’s not much point. We’ve been over that ground before. I think losing 54,000 jobs overall in August – the third consecutive losing month – is more significant than the 67,000 private sector jobs that were added. You agree or you don’t.

But make no mistake, the Street has seized on the “better-than-expected” data points to help it climb from the bottom of the trading range it was about to break through in August. But the numbers haven’t been good enough to take the market above the trading range, either (and we’re broadly calling this range between 1040 and 1130 on the S&P 500.)

Then there’s this notion floating around that the Republicans are definitely going to take back either one or both chambers of Congress in the mid-terms, and since the GOP is perceived as more business-friendly, that’s good for business and the stock market. That is definitely a second cause.

But, once again, we have to wonder if it’s the Fed again, trying to goose the wealth effect.

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You might want to be careful here.

The market survived the jobs report, even if it didn’t thrive in its wake, but it’s having a harder time with another economic indicator this morning: The Weekly Leading Index from the ECRI, the Economic Cycle Research Institute.

Stocks had been broadly flat in early trading, flitting in and out of positive and negative territory. But they started sliding after the 10:30 a.m. release of the index. DJIA fell about 100 points, and is lately down around 73 points.

The index is exactly what its name describes, a weekly reading of a combination of leading indicators. The market loves leading indicators, and it attributes almost Oracle at Delphi powers to this one. When it was rising last year, bulls were all over it. So its recent plunge, and that’s what it is, a plunge, is making people very nervous.

The index fell to a negative 7.7% reading this week, further down from 6.9% a week ago. It fell into negative territory less than a month ago, so this is a very fast decline. As Gluskin Sheff’s David Rosenberg has warned, a reading of negative 10% has a 100% correlation with a recession.

So this thing is flashing a manic red light just about now. “Just the freefall itself is vertigo inducing, and the number’s release at 10:30 Eastern is what pushed the market even further lower as bullish indicator after indicator collapse,” the casual anarchists over Zero Hedge wrote this morning.

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Unemployed? Heck, no, I'm not unemployed; I'm not even looking for a job.

Imagine how the December jobs report would have looked if another 400,000 or 500,000 had been added the rolls of the unemployed. Or a million.

It’s important to remember that the jobs report produced by the Bureau of Labor Statistics, as well as ones published by ADP and others, is not a definitive document, but a large-scale research project that in the end produces what is a relatively refined but still only educated guess. That’s why it is subject to continuous and often large revisions.

And as disappointing as December’s report was, there were assumptions that helped minimize the pain.

The first got a fair amount of notice: 660,000 were counted as “discouraged” workers, the kind that aren’t even looking for work anymore. Since it’s extremely doubtful the BLS actually spoke to all 660,000 of them (a task that would take a disproportionate amount of time to complete in a month,) the agency estimated the number was 660,000.

“If those discouraged (but still unemployed) had been still counted, the unemployment rate would have jumped to 10.4%,” UBS’ Art Cashin notes in his daily commentary. “In fact, if you left in all the ‘discouraged’ that have been removed since August, the unemployment rate would be 11%.”

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Trying to predict what’s going to happen in 2010 is like throwing darts with a blindfold. There’s absolutely no way of knowing what’s going to occur over the next 12 months. It’s no different than playing the ponies, really. Both are fun, but both involve guesswork and faith.

A more profitable use of your time is looking at probabilities, and looking for potentialities, and positioning yourself against the risks and for the upside. And there are still, despite an historic stock market rally, significant risks out there.

“We have to get through the next 5-6 months, which is where we will at least begin to see the extent to which ‘second wave’ credit risks materialize,” John Hussman of Hussman Funds writes. “We emphatically don’t need to work through all of the economy’s problems. What we do need, however, is for the latent problems to hatch, so we can have more clarity about what we’re dealing with.”

“We don’t have to deal with and correct all of these problems, but until it is clear that the markets are more aware of them, the range of potential market outcomes will be extremely wide – and in my estimation, tilted toward the downside.”

One downside risk is that the general thesis for growth — government stimulus spurring demand, which sparks an inventory rebound, which sparks a hiring spree, which sparks wage growth, which drives the economy forward — may get shot to pieces by midyear.

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- Still too early for backslaps and handshakes. “I will be convinced that the crisis has been resolved at a profit when the Fed disgorges the $1.5T in Fannie Mae and Freddie Mac securities it has bought for us, and if the U.S. government does not end up having to bail those securities out because the cash flows from the underlying mortgages prove inadequate,” John Hussman says.

- Large caps have lagged amid broader sideways trade.

- Corporate insiders continue to show little faith in this rally.

- Goldman Sachs (GS) takes damage control to the Zero Hedge blog. Firm defends its actions on prop trading operations and risk, but more telling is the fact that Goldman took time to respond in detail to these questions and criticisms. Perhaps it realizes its image has taken a beating and needs to be repaired.

- GM gets a new, high-powered CFO.

- ‘Arrogance’ behind Blackfein, Mack and Parsons’ no-shows at last week’s banker meeting? “They do not see the need to show deference or even respect,” former IMF chief economist Simon Johnson says. “They won big from the crisis and that is now behind them.” That “arrogance will eventually prove their undoing.”

- Twitter’s profitability may be short-lived.

- Labor data show surge in hiring of temp workers.

- Morgan Stanley’s new CEO exemplifies change. The rise of James Gorman shows how the firm is trying to change the restless, swing-for-the-fences culture personified by John Mack.

Don't cry, this isn't 2008 all over again.

An interesting, although not necessarily disconcerting, phenomenon is taking place in the Treasury market. Some short-term Treasury bill rates have turned negative today after inching below zero yesterday, meaning investors are effectively paying the government to hold their money.

The last time this occurred was in late 2008 when people were worried about the impending doom of the financial system. Those fears have prompted some to wonder if another devastating event is on the horizon.

“Could there be something more pressing and/or catalytic? We have not heard peep from any of the big banks in a while,” Tyler Durden writes at Zero Hedge.

But the consensus seems to believe that negative short-term T-bill yields are merely “a technical phenomenon” and not reason to start panicking again, John Jansen writes at Across The Curve.

“There is a massive wall of liquidity, a pile of cash which needs a home,” he says, which is helping drive yields lower. “Typically as the year end approaches clients tend to unwind profitable trades and reduce balance sheets. I think that some of that deleveraging process has created new piles of cash and that money needs a place to park.”

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