01/03/13 - Happy New Year........

I am angry and am writing only to take my frustration out on those folks in Washington and what they have done to our economy. Doesn't matter who or when it started, in the end it is the tax paying inhabitants of the US that will have to pay the bill. Just a matter of time. By then our "leaders" will be of enjoying their tax payer funded, self appointed Gucci retirements. My anger has to do with the fact that I complied analysis on more than 20 individual stocks this weekend only to have the January 2, market rally make my work useless. Problem is that the folks in Washington only kicked the can down the road but made it seem like the recreated the world. They were rewarded by a rally that was unjustified. The US is beginning to look a lot like a BBB rated country. Read on...... All good things must end one way or another, except the mess in Washington. Seems the "Fiscal Cliff" was just barely a speed bump on the path to kicking the can down the road. The US balance sheet is not too attractive and if not for the power of fiat and taxation as an investment should be somewhere in the non-investment grade sphere. Debt to top line income is more than 100% with Q3 GDP at $13.7T and debt as of 9/28/2012 16,066,241,407,385.89 (Debt held by the public 11,269,585,800,039.32 Intergovernmental holdings 4,796,655,607,346.57). That seems to be a 118% debt/GDP. What is concerning is the GDP number. Our GDP is not too good when you look closely at the numbers. 3rd Quarter GDP was a dead cat bounce - from the BEA: "The acceleration in real GDP in the third quarter primarily reflected upturns in private inventory investment and in federal government spending, a downturn in imports, an upturn in state and local government spending, and an acceleration in residential fixed investment that were partly offset by a downturn in nonresidential fixed investment and a deceleration in exports." The Federal Gov't expenditures were up 23% to $1.5 T or nearly 10% of GDP. Total Gov't spending was up 23.7% to 2.5T or 16% of GDP.

OUCH! It doesn't get much better when we looked at global debt to GDP ratios: What is a country to do?
The table below may not appear too easy to read so I ave included the links to the table: debt to GDP link: http://www.oecd-ilibrary.org/economics/government-debt-2012-2_gov-debt-table-2012-2-en
The US is now # 7 in this list only behind: Greece, Iceland, Ireland, Italy, Japan and Portugal.

It seems that the US is gaining in the category of highest debt to GDP. Perhaps not an event as prestigious as the decathlon but competitive none the less. Anyway, my conclusion is that we are headed for inflation in a big way to solve the debt problem. Inflation is a tried and true method of repaying debts, remember the 1980's? However, we are constrained to investing in the US for the most part as our liabilities are all domestic and diversification as great as it is does not help us out. But this rant does make me feel better although I will need to update all that work to enter into the markets for the benefit of my clients.

This was cathartic for me and I hope helpful for you as well.


POSTSCRIPT:

Two things I want to write about, a sort of "pick me up" after the events of the 2nd.

1) Der Spiegel wrote a thoughtful article on Japanese Debt/GDP - clearly after taking the lead from our post above, and
2) We had one victory to begin the New Year.

1) Der Spiegel Article - well worth a read

(Link to Article in English: http://www.spiegel.de/international/world/massive-japanese-sovereign-debt-could-become-global-problem-a-875641.html )

Excerpts: "...In recent decades, Japanese governments have piled up debts worth some €11 trillion ($14.6 trillion). This corresponds to 230 percent of annual gross domestic product, a debt level that is far higher than Greece's 165 percent."  One key difference of the Japaneses situation to the others in the over 100% club is that the Japanese debt is mostly held by domestic investors, banks and individuals.  The claim, ans we agree, is these debt holders are very unlikely to sell.  For the others in the 100+ club the same is not true.
  The US in our opinion benefits from its "gold standard" status, however, keep in mind at AAA it has fallen a notch and is under a negative outlook.  Should world tensions ease and others in the 100+ club begin to move in decidedly responsible directions the desire to hold US debt may wane very quickly.  The second threat is that the economic basket cases of the previous 30 years are beginning to demonstrate fiscal and monetary discipline.  South and Latin America have either make credible reforms (I think so) or look so good on a comparative basis to the rest of the crowd, those folks like the US who lectured them for decades about being responsible but failed to take their own advice.


2) New Year's Victory:
We had some solace in knowing that we did cover some of our open or "naked" holdings at a VIX of around 15.  Keep in mind that the VIX closed on 12/31 at 18.  The index opened on the 2nd at 15.24 before closing at 14.68.  Fortunately for us there was a blip to nearly 16, where we sold calls to cover.

Small victories are to be celebrated where there are none to be found.........

HAPPY NEW YEARS!