Stock futures dropped more than 1 percent on Friday after a Republican proposal for averting the "fiscal cliff" failed to pass, dissipating hopes that a deal would be reached soon in Washington.It's another one of those freaky Fridays. But don't worry folks, the world isn't coming to end today. Just another cliffhanger in a year of endless cliffhangers where everyone gets their panties tied up in a knot worried about the latest macro event that isn't.
Trading is expected to be volatile as investors view a fiscal agreement between the White House and Republicans before the year-end as increasingly unlikely. With trading thin ahead of the holidays, market swings will probably be amplified. CBOE VIX front-month futures, a measure of volatility, rose 5.7 percent.
Late on Thursday, Republican House Speaker John Boehner conceded there were insufficient votes from his party to pass a tax bill, dubbed "Plan B," to help avert the cliff, tax hikes and spending cuts due to start in January that could tip the economy into recession.
Boehner said he would hold a press conference at 10:00 a.m. ET (1500 GMT), during which he is expected to discuss the vote.
Plan B had called for tax increases on those who earn $1 million a more a year, a far smaller slice of taxpayers than President Barack Obama had asked for.
The bill's failure suggested it would be difficult to get Republican support for the more expansive tax increases Obama has urged, making it less likely an agreement will be reached before the end of the year.
"We had been moving in the right direction, but now we need a different deal, and if this radical group of Republicans is so intransigent that they won't do any deal, it will be very difficult," said Wayne Kaufman, chief market analyst at John Thomas Financial in New York.
Investors had previously considered such an outcome unlikely. The decline implied by futures on Friday would wipe out most of the week's equity gains, which buoyed the S&P 500 close to two-month highs.
Banking and energy shares, which outperform in times of economic expansion and have led the market on signs of progress with the fiscal impasse, could be the most vulnerable to any setback. February crude futures dropped 1.3 percent in early trading on Friday.
S&P 500 futures sank 20.9 points, or 1.5 percent, and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures lost 184 points and Nasdaq 100 futures slid 43.25 points.
The S&P 500 is up about 1.8 percent this week, boosted by signs of progress in the fiscal negotiations between Obama and Boehner earlier in the week.
So far in 2012, the index has gained 14.8 percent, though uncertainty over the cliff may prompt many traders to lock in gains as the year draws to a close.
Orders for durable goods rose 0.7 percent in November, more than expected, while personal income and spending were also higher than forecast.
However, mirroring trading on Thursday, when strong economic growth and home sales figures failed to excite investors who were focused on the budget negotiations, futures didn't react to the data.
The Thomson Reuters/University of Michigan's final December consumer sentiment survey is due at 9:55 a.m., and is expected to come in at 74.7, compared with a prior reading of 74.5.
Nike Inc (NKE.N) rose 3.5 percent to $102.50 in premarket trading after reporting second-quarter earnings that handily beat expectations Thursday on strong demand in North America. Software distributor Red Hat Inc (RHT.N) posted third-quarter revenue that beat expectations.
U.S.-listed shares of Research in Motion (RIMM.O) slumped 14 percent to $12.20 in premarket trading. The company reported its first-ever decline in its subscriber numbers Thursday and outlined plans to transform the way it charges for its BlackBerry services.
So take out your popcorn as another bad movie plays out, the latest in a series that we have endured all year as incompetent and spineless politicians across the Atlantic make complete asses of themselves.
Just remember what I've been telling you all year, something which I referred to in a recent comment on market timing, there is always noise in the background. This cacophony serves no purpose whatsoever but to feed the insatiable appetite of the financial news media, as well as that of short-selling gold shills on blogs like Zero Edge.
Tyler Turden woke up with an erection this morning as futures plummeted, posting his usual garbage like "The Party is Just Beginning," "Iraq Quadruples Gold reserves in two Months," "Quad Witching Cliff-Faller," "Is the Short Squeeze Over?" and my two favorites, "The Last Christmas in America?" and "RIMMberrrr."
Jesus Tyler, give it up already, you've reached a new level of lows typically reserved for the most asinine douchebags in the financial world. But I'm hardly surprised that so many people are attracted to such cataclysmic nonsense, fearing the end of the world, stocking up on "gold, guns and ammo."
Luckily, most investors ignore the nonsense on Zero Edge. Aaron Pressman of Reuters reports, Vanguard sets record with customer inflows of $130 billion:
Vanguard Group said customers had invested $130.4 billion in its mutual and exchange-traded funds during the first 11 months of 2012, beating the fund industry's previous annual inflow record.Not surprisingly, Reuters also reports that hedge fund redemptions rose to their highest level in more than three years in December, at the end of a year that has left many investors disappointed with performance:
The flows into Vanguard funds, mostly into equities, exceeded the previous annual record of $129.6 billion set by JPMorgan Chase & Co in 2008, according to fund research firm Strategic Insight. Vanguard's previous high was $104 billion, achieved in 2007, Vanguard said in a statement on Wednesday.
Investors and financial advisers have favored low-priced, passively managed index funds in 2012, playing to Vanguard's historic strengths. The trend has also benefited BlackRock Inc's iShares ETF unit, while hurting more traditional managers like American Funds, Dodge & Cox and Janus Capital Group Inc.
Vanguard's success is also due to its efforts to offer more products catering to self-directed retail investors, particularly ETFs, said Avi Nachmany, research director of Strategic Insight in New York.
"In the last few years, Vanguard has established a broader footprint," he said. "They have become a participant in virtually every part of the investment landscape."
Inflows remain "strong" in December, Vanguard spokesman John Woerth said. He declined to give a dollar total for the month.
Contrary to much of the fund industry, Vanguard said the majority of the flows, $72.3 billion, went into stock funds. Another $54.4 billion went to bond funds and $6.3 billion into balanced funds.
"Investors have flocked to low-cost index funds when investing in equities and we can see Vanguard provided both," said Tom Roseen, head of research services at Lipper, a unit of Thomson Reuters. Vanguard's actively managed stock funds actually had net customer withdrawals, Roseen noted.
Customers withdrew a net $2.5 billion from money market funds, Vanguard said. JPMorgan's 2008 record was fed largely by investors seeking the safety of money market funds.
Vanguard might have had even greater customer inflows - at least in the short term - if not for its decision to change benchmark indexes for some of its largest ETFs. In October, Vanguard said it was switching 22 funds away from benchmarks provided by MSCI Inc to cut costs.
As a result of the change, some institutional investors that were required to use funds tracking MSCI benchmarks had to switch to competitors, said Dave Nadig, director of research at ETF information firm IndexUniverse.
For example, investors pulled a net $900 million in November from the Vanguard MSCI Emerging Markets ETF, which is shifting to an index created by FTSE Group, while adding $2.3 billion to BlackRock's iShares MSCI Emerging Markets Index, according to data from Morningstar.
"The switch definitely slowed down or reversed their ETF flows in those products," Nadig said. Still, setting a new inflow record "is an enormous achievement and a vindication of Vanguard's core value proposition," he said.
Vanguard, based in Valley Forge, Pennsylvania, had total assets under management of $1.95 trillion at the end of November and is the largest U.S. mutual fund manager and third-largest ETF manager.
Hedge fund administrator SS&C GlobeOp's forward redemption indicator, a monthly snapshot of clients giving notice to withdraw their cash as a percentage of assets under administration, measured 6.19 percent in December.The increase in redemptions has nothing to do with the fiscal cliff. Most hedge funds were on the ropes last year and just couldn't survive another annus horribilis. Even hedge fund "titans" are feeling the sting of hedge fund Darwinism. According to Reuters, Morgan Stanley is recommending that its financial advisers pull client money out of the Paulson Disadvantage Minus Fund.
This was the highest level since September 2009 and almost double the level just two months ago. A year ago, the index measured 4.58 percent.
After a tough time during the credit crisis, hedge funds have managed to avoid a third year of losses in five in 2012, but their gains have lagged stock market indexes.
The average hedge fund was up 4.89 percent in the first 11 months, according to Hedge Fund Research's HFRI index, compared with a 14.94 percent total return from the S&P 500.
Bill Stone, chairman and chief executive of SS&C Technologies, said fears that gains from hedge fund portfolios could be taxed at higher rates in the United States may have driven the increase.
"December is ... the final chance to change your tax liability. People are generating the cash to be able to make their quarterly estimated tax payment. A lot of people are going to make tax-influenced decisions," he said in an interview.
But while many are struggling, a few top hedge funds thrived in 2012. Sam Jones and Dan McCrum of the FT wrote an excellent article on hedge fund trades that made top grade, my favorite one being Dan Loeb's Third Point hedge fund making $500m profit from Greek bonds. Mr. Loeb was right on the money looking beyond 'Grexit'.
And while everyone is worried about the fiscal cliff, have a look at the chart below that comes from Business Insider's David Schawel, posted by Cullen Roche on Pragmatic Capitalism showing the yield spread between junk bonds and stocks (click on image to enlarge):
David comments:
“The chart below shows the spread between the yield on junk bonds and the yield received from holding stocks. The spread recently turned negative for the first time ever, showing just how much the yields on high-risk bonds have come down as central banks keep benchmark borrowing rates depressed and investors search further out on the risk spectrum for yield.”
If there was ever a chart warning us that the bond party is over, that one may be it. Going into the new year, still favor stocks over bonds and remain long US financials, energy, tech and paying particular attention to cyclical sectors like coal, copper and steel (remember the acronym CCS) as China's economy surprises to the upside.
Below, one of my favorite hedge fund managers, David Tepper, president & founder of Appaloosa Management, told CNBC earlier this week that there is limited downside to the market. He also said the President needs to do "common-sense stuff" to push legislation to deal with the fiscal cliff (not just the President but everyone!).
Finally, want to take the time to wish everyone a Happy Holiday Season. Don't get wrapped up in the fiscal cliff drama. It's just another cliffhanger that should be ignored, playing out like a real bad movie.