Thoughts

We are not Japan.

Technical analyst Charles Nenner is on with Bob Pisani and Ron Insana on CNBC comparing the U.S. to Japan.

They're wrong.

There is a very high degree of stress being priced into the equity market despite the euphoria in the credit markets. In my view, if the economy was on the verge of a recession of any kind, we would expect the widely followed interbank lending rates to be showing increased stress, which they are not. In addition, the fear of falling back into recession has created demand for credit that has led to near historic lows for Conventional and Adjustable Rate Mortgages. While it is clear there isn't any equity to take out from a refinance boom as was the case earlier in the decade, lower interest expense has positive implications for both consumption and further debt reduction. In my view, to be bullish at this point of pessimism and valuation, all we need to do is not see a negative period of growth. The bottom line is that an economic boom is not likely on the horizon, but at this point, the typical signs (including this past May-June) are not there for a shut down in economic activity either.

Libor is back toward the historic low, two-year U.S. dollar swap spreads have trended toward the historic low and the TED spread is trending back toward its low.

Meanwhile "the drive into credit has caused a historic drop in the long end of the yield curve which has some very important implications" -- conventional and adjustable mortgage rates are seeing sharp DECLINES to near-historic lows, which has led to a refi boom at a time when commercial banks are easing up on their lending standards.

It is hard to see material economic weakness in the second half of 2010 and in 2011.

Many bears are expanding their long books into this morning's swoosh lower.

What is missed by the bearish double-dip camp is that cyclical areas of the economy -- such as residential investment and capex, inventories and autos -- are now so low relative to GDP and so low relative to their long-term relationship to GDP that it is hard to see material economic weakness in the second half of 2010 and in 2011.

The beat goes on in fixed income.

This particular market downturn runs deeper than all-too-familiar malaise that has accompanied the market during late August. This is precisely the sort of desultory setting in which a recovery in stock prices can emerge.

There is a big market chill that runs deeper than the normal and all-too-familiar malaise that typically has accompanied the market during late August.

The market's fan base has been depleted by 10 years of underperformance, both relative to bonds and in an absolute sense. The 2008 investment shock also turned off a generation of investors, and whatever stragglers remained have been paralyzed by the flash crash in the spring of this year.

It is almost as if the causal relationships (of interest rates, valuation, etc.) have lost their relevance in a market in which investors are so downtrodden.

But, to this contrarian, this is precisely the sort of desultory setting in which a recovery in stock prices can emerge......