Requiem for a Twinkie

November 15, 2012
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A few weeks back we asked, “What if Recovery is Actually Bearish?” The note led off with Seth Klarman’s definition of a “Twinkie” market — a government manipulated, blatantly unnatural concoction stuffed with artificial ingredients.

So now, as the Twinkie market fades away, this seemed a touch ironic:

Hostess Brands Inc said it will ask a U.S. bankruptcy judge for permission to liquidate if enough striking workers do not return to work by the end of Thursday to let the maker of Twinkies and Wonder Bread resume normal operations.

Wednesday’s announcement escalates a bitter dispute between the 82-year-old company and the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union, whose members constitute about one-third of Hostess’ nearly 18,000 employees.

A union spokeswoman said the union would have no immediate comment…

- Twilight for Twinkies? Hostess Says it May Close

More evidence for the Twinkie fade: The Fed threw out a juicy rumor and no one cared. 

Normally — at least in keeping with the twinkie version of “normal” — a tidbit like the below would get pulses racing:

The US Federal Reserve may launch a new bond-buying stimulus programme at the start of next year, released minutes have revealed.

The minutes showed that “a number” of the Fed’s senior officials want to see a current bond-buying scheme, dubbed Operation Twist, replaced.

Under Twist, which expires in December, the central bank has been selling short-term Treasury bonds and using the proceeds to buy longer-term bonds.

The aim is to cut long-term loan rates…

- Fed hints at new bond-buying scheme

Today, though, there is more focus on the fiscal cliff fist-fight, and stuff like this:

US President Obama has reiterated his call for high earners in the US to pay more in taxes, in his first news conference since winning re-election.

He called for quick legislation to rule out tax rises on the first $250,000 (£158,000) of income, but refused to extend cuts for the wealthiest 2%.

“We should not hold the middle class hostage while we debate tax cuts for the wealthy,” Mr Obama said.

The US faces an end-of-year “fiscal cliff” of spending cuts and tax rises…

-  Barack Obama: Wealthiest must pay more tax

Not to mention the growing prospect of war in the Middle East — a constant presence, but now more serious than ever with Hamas killing Israelis as the Palestinian death toll rises.

Wall Street has been conditioned to ignore the Middle East after countless isntances of “boy who cried wolf” syndrome. There is always some drama on the brink of escalating over there. Thomas Friedman wonders aloud, however, if “the big one” could be coming:

For George W. Bush, it was Iraq and Afghanistan. For Barack Obama’s first term, it was Iran and Afghanistan, again. And for Obama’s second term, I fear that it could be the full nightmare — all of them at once. The whole Middle East erupts in one giant sound and light show of civil wars, states collapsing and refugee dislocations, as the keystone of the entire region — Syria — gets pulled asunder and the disorder spills across the neighborhood.

And you were worried about the “fiscal cliff.”…

- Thomas Friedman, Obama’s Nightmare

Marc Faber isn’t worried about the fiscal cliff, or Europe, or the Middle East. He is just straight up bearish on earnings and global growth. As Faber says in a recent CNBC interview:

“I don’t think markets are going down because of Greece, I don’t think markets are going down because of the ‘fiscal cliff’ — because there won’t be a ‘fiscal cliff… the market is going down because corporate profits will begin to disappoint, the global economy will hardly grow next year or even contract, and that is the reason why stocks, from the highs of September of 1,470 on the S&P, will drop at least 20 percent, in my view.”

Our general perception is that, after an extended period of “twinkie” style government manipulation, with hopes attached to central bank stimulus and corporate profits born of cost-cutting, the possibility of resuming a secular bear market is high. Consider:

The shift in outlook can most clearly be seen on the weekly charts. The major indices have “rolled over,” from a weekly perspective, and there are no clear support levels in sight. 

What about fundamental reasons to maintain optimism? Again, this goes back to the “twinkie” problem:

  • US economic recovery facilitates central bank stimulus withdrawal
  • Central banks have a “diminishing returns” problem even if stimulus continues
  • Corporate profit trends born of cost-cutting may be tapped out either way
  • Global growth slowdown means the “sugar high” of post-2008 is fading

There are (at least) two ways to look at markets — as a sporting event or a big picture narrative. 

Those who look at the markets as a sporting event are typically wedded to one side — the bullish side – and tend to “root for their team” under all circumstances and conditions. (Some root for the bear team at all times — ahem, Zero Hedge cough cough — but they are far fewer in number in terms of actual market particpants). 

Those who look at markets as a narrative, however, can see larger developments unfolding that are not necessarily favorable to one side or the other. 

And thus, if you step back and look at what is happening now from a multi-year perspective, a plausible narrative goes something like this:

In the aftermath of the 2008 financial crisis, the greatest globally coordinated stimulus push of all time was conducted.

At the same time, epic levels of corporate down-sizing and cost-cutting were implemented. 

Meanwhile, weak to nonexistent recovery and crisis threats from Europe provided cover for even more central bank stimulus.

Markets rose powerfully for a multi-year stretch on bolstered corporate profits and near zero interest rates.

At the same time, China rose mightily in 2009 and took on a seeming role as the new “engine of growth to the world.”

Also against this backdrop, Apple (AAPL) became the most beloved company of all time on a consumer tech tablet / smartphone tidal wave…

And Silicon Valley again turned white hot on a powerful social media / venture capital boom.

The entire chapter of the story as just described is coming to a close now

Like the Bush tax cuts, all of the above drivers are threatening to either STALL, EXPIRE or REVERSE.

R.I.P. Twinkie Market: March 2009 – Nov 2012???

JS (jack@mercenarytrader.com)

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