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4 Contrarian Views


Note: Snowing like crazy 30 miles north of NYC - wind picking up as I write. The forecast for me is 12-18 inches. I'm hoping it pushes three feet.... Some odds and ends:


MS Pumps Japan


Morgan Stanley has a new report on GOOG. Not surprisingly, the folks at MS like the stock. They looked at the variables and concluded the shares could trade 20+% higher; they also have a bear case where the stock could be 16% down on the year. The graph of those expectations:




It's appropriate for MS to have a bull and a bear case, that's the nature of investing. MS does not always present a balanced view. I wrote about the firm's outlook for AAPL on 12/17. Back then, MS thought that AAPL could go no lower than $500 - an assumption that has proven wrong.




I bring this up to make a point about yet another MS pick. The folks wearing the spats are wild crazy in love with Japanese stocks. MS thinks that the TOPIX is a sure bet - no downside at all.




In fairness to MS, they are not alone with their extremely bullish view on Japan. In fact, they are in a monster crowd of folks, all of the whom see only higher stocks and smooth sailing. When was the last time that "everyone" was right?





The following is a pic of the first paragraph of a letter sent to Jeff Zients, the current head of the OMB. The letter was signed by a number of Republican big shots.


letter page one



The letter is an info request. It's a witch hunt headed in the direction of Jack Lew, Obama's candidate for Treasury Secretary. The suggestion is that Lew was derelict on a reporting requirement related to Medicare while he ran OMB. As near as I can tell, this is much ado about nothing. But, then again, there are those heavy hitter Republicans doing the asking.


I take this to be evidence that Lew is in for a hell of a battle with his confirmation hearings. This is going to get dragged out for as long as possible. We will not have a T-Sec for months. Too bad - there are a few issues on the calendar where a T-Sec might come in handy:


* March 1 - Up or down on the Sequestered amounts

* March 27 - Final date for a Continuing Resolution to avoid a government shut-down.

* April 15 -Agreed to date for a budget approved by congress and WH.

* May 27 - The Debt Ceiling must be raised - for real this time.

* The clock is already ticking on the last important issue. The world is going through a currency war. As of now, the USA is coming in third in this three-way war.


I get the sense from the markets and the press that these things are being ignored. Everything is on a smooth glide path - nothing to worry about. The USA doesn't need a T-Sec. Everything will work out fine, even if there is no hand on the rudder. Wait a few weeks on that conclusion.




The most significant financial event of 2012 was Mario Draghi's July speech. He said one word, "Unlimited", and the global markets were off to the races with no looking back. The guy just has to talk and tens of trillions of capital got down on its knees and gave thanks.

With that in mind, it should come as no surprise that Draghi can talk about FX in the vaguest of ways, and the markets quickly adjust to what the Supreme Leader wants. Mario's talking caused a lot of noise and back-filling in FX land this week.


I'm not buying it. I don't think Super Mario can get away with all talk and no action this time. The FX markets are wound very tight, and the players are flush with cash from the gains of the past six months.

If there is to be a test of Draghi, it will come before the end of the month. If the market pushes the EURJPN, USDJPN to new highs and the EURUSD catches a bid in the cross trading fray, then Mario will have to back up his talk with some action. That would be a first, an interesting one at that.

If the FX markets don't "obey" Draghi, what are the EU bond markets going to think? Will they call the Draghi bluff along with the FX guys? One would think so. That would also be interesting, and it ain't on anyone's playbook.




The Congressional Budget Office released a report of the financial status of Social Security this week. The report contained significant revisions from prior year’s estimates. The conclusions by the CBO stand at odds with the forecasts provided by the Trustees of SS in their report to Congress ten months ago.


The key conclusions by the CBO:


- The SS Trust Fund (TF) will reach its highest level in fiscal 2016. (The SS estimate is for 2022)


- The TF will achieve a maximum balance of 2.8T. The SS estimate if for $3.25T)


- The Trust Fund for Disability Insurance will be exhausted by Valentines Day, 2016.



The CBO concludes that the SSTF will top out six-years earlier than is now anticipated. The TF will achieve a maximum balance that is $425B lower than currently projected. In its upcoming report (April), the SSTF will have to make significant revisions to its prior projections. The SSTF can’t release a report that varies significantly from the conclusions by the CBO.


Who cares (Other than wonks like me)? After all, this is just paper - and Social Security doesn't add to the deficit - Right? At least that is what is repeated over and over. But it does add to the debt, and that is rapidly become a critical variable. Jeb Graham at IBD looked at the implications of the CBO report. Look how quickly cash is going out the door at SS. (Link)




The CBO is now confirming (what I have been saying for many years) that SS is going to be rapidly increasing its annual cash deficit. It will hit $75b in 2013. It will be $225 b in a decade. After that it goes ballistic. Every penny of these deficits must be financed by issuing more Debt to the Public.

They say that if something can be anticipated, it is not, by definition, a Black Swan. The unwinding of America's $5T of "Trust Funds" may not be a Black Swan event, but it does create a systemic risk. To my knowledge there is no one "out there" who thinks/writes about SS as a systemic risk. That probably means it is a systemic risk and because it will be a "surprise" to many people, it still could turn out to be a Black Swan.