Dis and Dat

On Cocktail Party Stocks

A chart of NFLX and some thoughts.

There are good and valid reasons for this 75% drop in 4 months. The stock deserved to have gotten crushed. But this is more than just bad company news. There are a bunch of other “names” that have been slammed to the ground of late (FSLR/MCP etc). Those who listened to the TV hosts, stockbrokers and “smart guy” talk over drinks deserve everything they get. But I have to ask,

“How much of the ‘air’ in NFLX was just a phony push caused by Ben Bernanke’s Fed?”

The answer is that Ben’s contribution to this stockholder debacle is not zero. All the Fed talkers have said again and again they want to force people to buy risk assets. They succeeded. And along the way those that listened to Ben got stepped on.

For sure this will happen again and again. When money has no intrinsic value due to ZIRP it will create froth in prices of stocks, commodities and bonds. I can’t think of a dumber policy than that. I hope that Bernanke followed his own advice and loaded up on NFLX.

On Flat Taxes

So Perry is out with his flat tax. The joke is that under his proposal one could either pay a flat rate or go back to the 1040 and do it the old way. This achieves a worst-case outcome. Less revenue and more paperwork.

I’m in favor of ripping up the tax code. I’m also in favor of a progressive tax code where those with high incomes pay more. The arguments from liberals are that with a flat-tax (or a 999) those in the lower brackets would pay more than they do today.

I don’t think that has to be the case. The critical question when considering an alternative tax plan is what happens to FICA (payroll) taxes. The combined FICA is now 15.3%. In a flat tax world, that would be eliminated. Half would go to the worker via lower taxes. The other half would be retained by the employer. The employer could rebate that amount to the worker with a 7.65% salary increase. There would be no pre or post tax consequence for employers to do that. Their revenues/profits would not be impacted at all.

For a worker who makes $40k who today is subject to FICA AND pays 10% federal tax the numbers are:

Current treatment:

Pre tax = $40,000
Federal Tax = 10%
Take home including FICA (7.65%) = $33,000

With a 20% flat tax:

Old salary = $40,000
New Salary (7.65% increase) = 43,060
Take home = $34,448

A flat tax approach could be structured to achieve a neutral/positive tax result for the average worker. Liberals are fools not to embrace this. It is the most progressive tax approach out there. It would put money in the pockets of those making less than $100k.

On Rage

I got an email from a regular reader. This one is a full professor at a top Ivy League school. He had this to say:

One of my usually staid colleagues said to me the other day, "I am hoping for some violence." How odd.

How odd indeed. It would be a huge mistake to underestimate the level of anger in our society. Could this go from a relatively peaceful OWS to something far more ugly? You bet it could. All that would be required is some more bad economic news and an increase in gas prices……

 

On FX

I’m hearing that many big players have stepped back from the FX market. The devaluation of the CHF a few months ago hurt some of the interbank hitters. Hedge funds have been whacked every which way and have also cut positions. The UBS rogue trader story scared a bunch of the prop traders at the big banks. They’ve scaled back too.

So without the usual dancers adding liquidity the FX market is reverting to good old supply and demand to set prices. As Zero Hedge has been reporting for some time, there has been liquidation of dollar based assets by EU banks. Some of the liquidity is being repatriated back into Euros in an effort to prop up weak balance sheets.

As a result, there has been demand for EURUSD. The strong Euro flies in the face of the crumbling and bumbling of what is actually happening. That does not matter. As long as there is Euro repatriation, the EURUSD will remain overvalued. It’s about day-to-day demand, not the backdrop of the news.

I can’t predict how long this will take to wash out. My guess is under a month. I think the Euro is a big short.

There is also a very big question growing for the Yen crosses. I’m betting we see some action by the BOJ before month end.

This is, net - net, a strong dollar story, the worst news for Obama, Geithner and Bernanke. It's also a strong gold story. I can see EURUSD = 1.3000, Gold = 1900, USDX = 82 by year end


Seatbelts on.