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FISCAL CLIFF: What Lies Ahead

Now that Congress has come to an agreement on how to solve the crisis surrounding the fiscal cliff, let’s look at what the bill means for the American taxpayer. 


First, the good: 99% of Americans will not experience the bulk of the tax increases scheduled for 2013. The Bush Tax Cuts are here to stay save for individuals and families making 400k and 450k, respectively. There is also a delay for scheduled cuts in Medicare payments to doctors. Additionally, unemployment benefits have been extended for two years.


Now, the bad: Capital gains and dividend taxes will increase from 15% to 20% on the top 1% of Americans. A temporary 2% cut in payroll taxes was not renewed, meaning there will be a nominal increase in taxes for many Americans. 


There’s also the two-month delay on sequestration and raising the debt ceiling. This time of uncertainty will put pressure on corporations trying to factor it into earnings. Overall, the bill isn’t the best outcome but it’s far from lousy. The extension of Bush Tax Cuts will bring a sigh of relief to many.

PODCAST: New Year, New Risk


On this morning’s investment call held for Hedgeye subscribers, Hedgeye CEO KEith McCullough discuss how we’ll be managing risk in 2013. One of the moves we've made thus far is taking our asset allocation in fixed-income down to 0% and shorting commodities as growth stabilizes.


Keep in mind that growth helps drive gold and bonds down. As far as equities go, it’s a bullish market and a good time to take off shorts. You can listen to the full call above.


Takeaway: Kicking the can down the cliff is good – for now.

As quickly as the quantitative RISK MANAGEMENT signals told us to get defensive last Thursday, they were telling us to get offensive as of this Monday. Back in a Bullish Formation, the US equity market (SPX), likes what it sees with regards to this latest #KeynesianCliff compromise. Highlights include:


  • The marginal tax rates for the wealthiest ~2% of Americans (i.e. individuals making more than $400k per year and households making more than $450k per year) have reverted back to the Clinton-era peak of 39.6%;
  • These income thresholds will also be applied to an increase of the capital gains and dividend tax rates to 20% from 15%;
  • The estate tax rate will rise +500bps to 40% while maintaining the existing threshold of $5 million;
  • The AMT will be permanently fixed;
  • Unemployment benefits will be extended by one full year; and
  • The $110 billion sequester of spending cuts will be delayed for two months – just in time to be used as political leverage during pending debt ceiling “negotiations”.


Regarding the aforementioned “negotiations”, President Obama has repeatedly stated that he refuses to negotiate with Congressional Republicans on meaningful entitlement reform amid debt ceiling talks. Moreover, he continues to stress that further deficit reduction must come via his politically-compromised definition of a “balanced” approach. Having caved to some degree already, we highly doubt the GOP brass sees eye-to-eye with Obama on either stance.


As a result, you are officially invited to look forward to more political theater in t-minus ~8 weeks (on the off chance you didn’t get your fill this past holiday season). Only this time, the stakes are much, much higher – an unlikely, but potential US sovereign default.


Looking deeper into the latest fundamental RESEARCH signals, this deal to avert the full plunge of the Fiscal Cliff is positive for the US and global economy on an immediate-term TRADE and intermediate-term TREND basis – particularly relative to the now-moot fiscal doomsday scenario. This morning's sequential acceleration in the ISM Manufacturing PMI to 50.7 in DEC (from 49.5 prior) is also positive and supportive of our directionally-positive views on global growth.


On a long-term TAIL basis, however, this deal is likely to be viewed by many as explicitly bearish for the US dollar – particularly relative to expectations of meaningful fiscal reform. By some estimates, this latest deal is good for only $600 billion of deficit reduction over the next 10 years – a sharp decline from previous negotiations in the area code of $4 trillion.


As we have said time and time again, what’s bad for the US dollar is also bad for sustainable economic development, as well as the long-term prosperity of the US economy. Two critical factors that continue to register near-perfect inverse correlations to USD debauchery in our model are current POLICY volatility and uncertainty regarding future POLICY. The confluence of those factors tends to get manifested in two very distinct ways:


  1. Shortened economic cycles; and
  2. Amplified financial market volatility.


Prepare your proverbial “anchor” for both in about a couple of months. For now, enjoy the melt-up as we kick off what is sure to be an eventful 2013. Best of luck out there!


Darius Dale

Senior Analyst



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GOLD: Pressure On Pawns

As commodity prices continue to deflate as growth stabilizes, we think that gold is likely to continue to fall in price and that will act as a headwind for pawn operators like EZ CORP (EZPW) and Cash America (CSH). It’s not just falling gold prices that will create problems for pawns going forward; gold volume also plays a significant role in the equation. Consider the “Cash 4 Gold” craze thats occurred over the past few years. With fewer customers coming in to sell gold, pawns that rely on gold and jewelry as a substantial part of their revenue will feel the pressure immediately. It’s important to keep an eye on the first quarter of 2013 as companies like CSH and EZPW are likely to feel the pain.


GOLD: Pressure On Pawns - image001

Macau Hits It Big

Macau closed 2012 out with a bang, with monthly gross gaming revenue up 20% year-over-year to HK$27.4 billion. Our estimates were that December would be up a strong 12% and that was before the month started; clearly our estimates were conservative. The killer growth can be attributed to higher VIP hold as well as other factors. 


There is now a serious issue regarding the smoking restrictions for casinos in Macau that has now taken effect. It appears the government is taking this very seriously and has already issued a number of fines on the first day of the ban. We expect that this will have an impact on hold percentage over time; if people have to go to a designated area or outside to smoke, that takes them away from the tables.


Macau Hits It Big - macauhold

HedgeyeRetail: SSS & ICR Pre-announcement Scoreboard

With the turn of the New Year so to comes ‘Pre-announcement Season’ with Sales Day and the annual ICR XChange conference set to take place over the next two-weeks – tomorrow and January 16-17th respectively. Historical context provides an interesting picture and precedent of pre-announcements over this period. As such, we’ve updated our pre-announcement scoreboard reflecting the more notable retail companies that will be present in Miami.

Companies that have issued positive releases are highlighted in green while those with less positive news are highlighted in red and reaffirmations of prior outlooks in grey. It’s worth noting that last year marked a significant increase in the number of pre-announcements from the sample set below jumping to 26 compared to a typical range of 12-18 between 2008-2011. The incremental delta came primarily from companies not participating in Sales Day more than doubling to 16 compared to ~7.5 on average during the prior four years. We expect this year’s pre-announcement activity like last year to be at least as active as we’ve seen in recent years.

If history is any indication, PVH, GCO, NWY, BGFV, and ASNA are most likely to pre-announce results over the next two weeks. The following are the only companies to never issue guidance: CAB, OXM, SHOO.

Other notable new additions and departures relative to last year’s ICR schedule include the additions of KORS, TUMI, TJX, and exclusions of FINL, BWS, SKX, MW.



HedgeyeRetail: SSS & ICR Pre-announcement Scoreboard   - ICR Preann 1 2 13



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