Home > Uncategorized > 2012/11/16: The Petraeus Predicament and bye-bye Ho-Ho’s

2012/11/16: The Petraeus Predicament and bye-bye Ho-Ho’s

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Let’s begin by allowing that some might wonder what the liquidation of Hostess Brands and today’s Congressional testimony on the Benghazi tragedy from General David Petraeus have to do with the markets? While the near term effect will likely be very transitory (if indeed there is any at all), they each provide interesting insights and might exert some influence on American politics and economics. It is especially the case right now that the former might have a very significant influence on the latter.

Maybe this all seems more important because it is a slow economic data day. An spite of that we will also have more to say about the state of the markets at the end of this post as well.

To begin, General Petraeus’ fall is a tragedy of Shakespearian proportions. A true American hero whose commitment to public service even at high personal physical and political risk was a model for others. And yet, feet of clay leave him embarrassed and dismissed from high public office. Not the first, but surely one of the most poignant examples of this. And as most readers who have followed the multiple threads of the Benghazi consulate attack are aware, there is at least one aspect which is now very interesting to all concerned: to what degree did his desire to keep his personal problem under wraps affect his performance as CIA chief during and in the immediate aftermath of that attack?

Conspiracy theories abound…



…not the least of which is the possibility that he was less than candid in his Congressional briefing three days after the attack. At that time he described it as a protest over an anti-Islam film that spun out of control. Basically the Obama administration party line. And it is important that it was very similar to the account given on five high-profile Sunday news shows on September 16th by US UN Ambassador Susan Rice. Rice’s defenders have since insisted her statements were based on the intelligence at the time. 

Yet Petraeus has hinted that in his testimony today he is planning to bring with him the original “talking points” prepared by the CIA. Discreet sources say he is going to say that he has no idea what was provided to Rice, or who was the author of the talking points she used. Along those same lines, he is allegedly going to provide the perspective that he and the CIA were well-aware that it was a terrorist attack within 24 hours.

It’s going to be interesting. And yet, any sharp immediate market response is unlikely, because today’s testimony will be at closed door hearings. We will only know, and the markets will only be influenced by what we hear from the Congressmen and Senators who emerge from their serial closed door hearings. And what we do know is that all of this is inconsistent with the assertion by President Obama at yesterday’s press conference.

While castigating various senators for their sharp criticism of UN Ambassador Rice, he noted that the information she shared was basically provided by the White House!! He was explicit in stating that Ambassador Rice was on a mission for him to share his view of what had occurred. That raises some real questions about her professional standing that we will revisit shortly.

Far more important is whether this is a classic case of the old cliché “pride cometh before the fall”? The President went so far in his defense of Ms. Rice as to say, “If (various congressional leaders) want to go after somebody, they should go after me, and I am happy to have that discussion…” Wow. That wouldn’t be quite so shocking except for the fact that there are more than a few who will be happy to oblige.

At the very least they will want to know the source of the White House effort to promulgate the erroneous riot story for weeks.  Especially as that was after the reality of the Benghazi incident being a terrorist attack was glaringly apparent to all informed observers. There is suspicion is it goes right to the top (i.e. the President himself), driven by philosophical and policy imperatives which the White House did not want to allow work out of touch with reality.

And from a broader political perspective, this also has a tangential market influence that is related to the Fiscal Cliff negotiations and broader fiscal and tax reform. That is because in his rigid adherence to his narrative on the Benghazi situation in Middle East at large, Mr. Obama is seriously considering nominating Susan Rice for Secretary of State. How you do that in the middle of extended investigations into whether she knowingly or incompetently lied to the American people about the situation in which an ambassador three others died in a terrorist attack is a serious question.

And this is where the “pride before the fall” factor comes in. Is it possible that someone as intellectually brilliant as Barack Obama is making the same mistake as his predecessor? Does he really believe that his narrow popular vote victory provides him with a ‘mandate’, and that he has extensive amounts of political capital to burn pursuing his goals?

Good questions, which are even being asked extensively by members of his own party. Far more seasoned politicians than the President understand he is going to need every bit of political capital he can muster for the fiscal reform and tax policy negotiation. They are appalled he would spend even one bit of political capital attempting to get Susan Rice approved this Secretary of State. And needless to say, it is going to take more than just a bit of political capital to get her approved, if that is even possible. And that is in the context of no small number of other senior Democrats who would be highly qualified and easy to get approved.

Of course, it is possible that Mr. Obama is attempting to pull a Bill Clinton rope-a-dope maneuver on the Republicans. Perhaps he believes if he raises enough of a ruckus over the Benghazi affair, it will open up an opportunity for advantage of some sort with which he can ambush the Republicans on the near-term and extended fiscal negotiations. That would be a mistake, because the Republicans are capable of focusing intensely on both of those issues through their control of the powerful Senate committee apparatus.

Yet, that is how the Petraeus testimony today might set the wheels in motion on a broader disparagement of Team Obama for their lack of clarity (i.e. self-serving incompetence) or overt dissembling of the Benghazi situation. And in spite of what the White House might hope, that would likely benefit the Republicans in the budget negotiations as well.

Bye-Bye Ho-Ho’s

And now on to another bit of Americana that might seem less than important to the rest of the world, yet is near and dear to most older Americans: the demise of Hostess Brands. There is a real question as to whether this is a further manifestation of the weakness of the US economy, or a decades-long increase in health consciousness, or both. What we know is that the roughly 1/3 of their workforce comprised of the bakers were out on strike as Hostess was attempting to work its way through bankruptcy. And their refusal to return to work by yesterday’s 5 PM deadline has cost all 18,500 workers their jobs.

That’s right America, no more Suzy-Q’s, Ding Dong’s, Ho-Ho’s, or our beloved Twinkie’s, not to mention those cream-filled cupcakes. Really quite sad, but more so in a nostalgic way than a dietetic one. Let’s face it, those staples of grammar school lunch boxes throughout the 1950s, 60s and 70s are some of the most pernicious items anyone could possibly consume. Junk food junkies and potheads might have found them essential components of their five basic food groups: sugar, fat and chocolate (although no caffeine or nicotine.)  But the rest of us likely gave up any interest in them many years ago, except for the occasional deep-fried Twinkie at the state fair.

But all of that nostalgia and tongue-in-cheek commentary aside, there is a serious lesson here on the state of the US economy and labor market. Unions which are trying to reassert their significant role in driving working people’s earnings need to be very cautionary about their use of labor action against corporate rationalization efforts. Profits at a lot of corporations are weak enough that they just cannot provide the wage increases,and in some cases even the current wage and benefit levels, and remain in business.

The latter was the case with Hostess, as the union ignored repeated warnings that unless workers were willing to provide concessions they would have no jobs at all. And based upon 1/3 of them refusing to believe that the company would actually go into liquidation, 18,500 workers were told to go home today and not come back. While it is a very blunt instrument, this should inform the budget negotiations in Washington DC as well.

While some people distinctly do not like the idea, capital does not have to invest in business unless it has a fairly clear idea the returns will be ample enough to justify the risks. The recent signal from American business that has sat on massive treasury accounts they have refused to release for capital investment and hiring in America is just that: without opportune conditions, capitalists are rich enough to sit back and wait for things to change. In the meantime it is the workers and middle management that suffer. As we have noted more than a few times previous on this entire fiscal reform debate…

…the rich will indeed get richer. The only question is whether they will get relatively richer in a down economy due to the suffering of the middle and lower class, or will they get richer through investing in labor and management that will benefit the other classes of society? While it will be interesting to see whether the folks in Washington DC appreciate this enough to respect it, regardless of what they would like to believe at times, you cannot repeal the Golden Rule:

He or she who has the gold makes the rules.

General Market Observations

There has been more than a bit of weakness in equities of late. The question now is whether the US Congress and administration ride to the (near term) rescue with a compromise that will avoid the worst further problems associated with the Fiscal Cliff. We covered that at length in yesterday’s TrendView BRIEF UPDATE. That included our observations on the degree to which the equity markets are significantly thin as well as the volatile; and of course the former is part and parcel of the latter.

In a nutshell, equities are down to that more major support we suspected would be hit due to the Fiscal Cliff concerns after President Obama’s narrow popular vote election victory. From the December S&P 500 future 1,350 area down to 1,320 there are multiple significant support levels. 1,320 looms large as not just the nominal lowest of them, yet also a significant UP Break out of the March-June correction. If it were violated by any degree, 1,300 area is only nominal support on the way to more major trend support near the early June 1,265 lead contract selloff low.

The counterpoint to the downside potential is that a significant relief rally would undoubtedly occur right after any compromise is reached. That would carry the December S&P 500 future immediately back up to the 1,400 area, and it would likely push higher after that on a typical seasonal Santa Claus Rally. As we have noted around this time of year, that is more rightfully the Santa Portfolio Manager Rally, as the under invested the money back to work. In any event, it likely sees December S&P 500 future push back up to at least 1,430, and dependent on the still problematic news out of Europe possibly even as high as the recent 1,460-65 highs. But the initial rally is a given if a Fiscal Cliff plunge is avoided.


These were also covered in yesterday’s analysis. And we substantially noted the lack of extended strength in the primary government bonds or US Dollar Index in the wake of sustained selloff in the equities. And the ability of the entire market psychology to change quickly noted above is likely the reason behind that.

Take govvies for example. We have noted on many occasions their ability remain firm the face of equities strength when they suspect that the equities can top out and roll over to the downside. And in those instances it is often the case that once the equities cracked, the govvies do not rally all that much further. They had already anticipated the equities activity, so it is substantially ‘priced in’ already.

The current market conditions would seem to be a mirror image of that. While equities are sagging further on almost a day by day basis, they are up to that very significant intermediate term supports own noted above (i.e. December S&P 500 future 1,350-1,320.) There is the potential for the general market psychology to change radically based on what transpires in the Fiscal Cliff negotiations. And without attempting to ascribe too much technical trend influence, the govvies probably sense that unless the low-end of that support is broken, the equities are not convincingly acting like they want to go from bad to worse in a major way.

As such, govvies are not just yet willing to build in the extensive further economic weakness inferences which might be drawn from a further major equities meltdown. While there is somewhat broad appreciation that the primary government bond markets are not a bargain at current levels (as some feel they are dramatically overpriced in the long term), they can still attract ‘haven’ capital conservation flows when equities suffer badly enough.

Yet if indeed equities are going to put in a bottom fairly soon (i.e. prior to Closing below the critical 1,320 area), then it is reasonable that govvies and the US dollar are likely at or near areas where they will be more so inclined to top out than push much higher. We refer you back to yesterday’s TrendView BRIEF UPDATE for more specific levels and psychology, and a couple of very interesting charts on the recently highly active Japanese yen trend.

Thanks for your interest.

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