Thursday, November 11, 2010


DIS prematurely released its results, and they appear to have disappointed.

The Great Unwind

Look for money to pour out of bonds and bank time deposits and into stocks and commodities in the years ahead.

I think the markets now and in the months (and maybe years) to come can be analyzed as a multiple-choice SAT question. You need to eliminate the bad choices to arrive at the answer, rather than guess at the right choice.

If you have cash today, you should invest in

1. Bonds
2. Bank time deposits
3. Commodities
4. Stocks

You have to eliminate "A.) Bonds," because rates are so low and are likely to rise. Also eliminate "B.) Bank time deposits," because with inflation likely to move higher, your real returns will be negative.

That leaves you with "C.) Commodities" and "D.) Stocks." In this case, one or both would be the correct answer.

We are witnessing the unwinding of a generational or multigenerational hoarding of bonds and time deposits. The unwinding started when paper issued by many tried-and-true companies went worthless or near worthless in the 2008 credit crisis. That upheaval was followed by the last gasp of the nearly-30-year bond bull market as the FOMC pushed interest rates to historic lows. This action is being viewed as a credit bull market; in the fullness of time it will be viewed as another artificial propping up of an asset class.

Liquidity drives all markets. Liquidity will be coming out of bonds and time deposits at record levels over the next several years. It will go into commodities and stocks. Stock bears consider this to be buying on dips. Unfortunately, the "buying on dips, selling on rallies" mentality was a complacent condition created by the near-decade-long stock bear market, which in my opinion is likely coning to an end.

Given the relative amount of money invested in bonds and time deposits vs. that of stocks and commodities, it will not take much of a movement from the former into the latter to make a significant difference. In other words, the multiplier effect of the unwinding and asset reallocation will be great.

Cisco the Kid Is All Grown Up

Cisco was an important growth stock in the 1990s, and its best days as such are behind it.

The first hour of trading today was pretty much as I expected it would be. Bad sellers dominated the open.

Market participants have to let go of the romanticized notion that CSCO matters. We had to realize the same thing when it came to IBM in the '80s and MSFT in the 2000s. Cisco needs to right-size itself, cut costs and issue an above-market dividend to make it relevant to investors again.

If you want to know relevance, look at AAPL, which gapped lower on the open as the bad sellers tried to extrapolate Cisco to the rest of tech. Apple fought back and briefly went green.

One day, Apple will be like IBM, Microsoft and Cisco, but that day is long in the future -- maybe come the 2020s.

Misery in Munis

The muni space is getting slammed.

Take a look at some of the closed-end funds like NQU or just the MUB.

I have often seen the muni market as the most one-sided market out there. Unless you intend to hold bonds to maturity, you will get your face ripped off when you go to sell.

On a fundamental basis, the problems facing states, cities and municipalities are so great that munis -- once seen as the least risky of asset classes next to U.S. Governments -- now has to be considered a higher-risk class.

If there were one market that the FOMC should be putting its quantitative easing into, it should be the muni market.

Frankly, Veteran's Day should be the second Monday in November and all markets, exchanges and schools in the U.S. should be closed.

Is QE2 All Bark and No Bite?

Bernanke has been communicating his QE2 intentions for months without taking much action.

And his WORDS have had a beneficial effect upon the economy.

So will the market be scared into economic growth and inflationary pressures without the Fed having to take much action?

What has more impact for the financial market -- quantitative easing or the mere threat of quantitative easing?

So far, it appears to me that quantitative easing is just a recirculation of money in the system. I do not expect the next round to be any different.

QE2, however, could really have its full impact not by the action of monetary easing (whether or not that takes) but by the mere anticipation and communication of the easing itself. We'll see.

Ben Bernanke has been on a mission to clearly communicate his intentions of quantitative easing for the past several months without really taking much, if any, action. His plans, intentions or threats (however you might deem them) have had a beneficial effect upon the economy. Most economic data points have improved dramatically since August, when the notion of QE2 was first being floated in earnest.

In essence, Bernanke has allowed the economy and financial markets to front run his anticipated actions. Please note that this is all being accomplished during the period leading up to the holiday shopping season, which so far has gotten little or no attention. I don't think QE2, if it's actually done, will work. But maybe it was never intentioned to even be started. This is why Ben Bernanke has done a masterful job, so far.

Echo Chambers

Last quarter, CEO John Chambers guided lower after Cisco reported better-than-expected results. Lather, rinse, repeat.

The company reported a slightly better-than-expected quarter. Recall last quarter that CEO John Chambers guided lower after Cisco reported better-than-expected results.

Lather, rinse, repeat. Now Cisco has done it once again -- bettered estimates (which were guided down in the prior quarter) and then slashed forward guidance.

Maybe John Chambers is an excellent technologist and business manager. His credibility on earnings calls, however, has to be questioned at best. At worst, it has already been destroyed.

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