Thoughts

Massachusetts Ruling Good for Private Mortgage Insurers

The Massachusetts ruling against the banks should be positive for the private mortgage insurers.

The Massachusetts court decision ruling against WFC and USB should be interpreted positively for the private mortgage insurers.

Big Win for the Bulls

The continued strength in General Motors, Apple, Baidu, Google and Amazon is very impressive.

First Boston Defends Big Banks

First Boston is out defending the large-cap banks and saying that the Massachusetts ruling will be reversed on appeal.

Swiss National Bank Bans Portuguese Bonds

The eurozone crisis continues.

The Swiss National Bank refuses to accept Portuguese bonds as security.

Concern No. 1: Fiscal Policy and Imbalances

There are consequences to our profligate spending and to our monetary and fiscal policies. That has been the message of the rising price of gold over the past several years. As we move closer to the 2012 election, the risk is that neither the Democrats nor Republicans have the political will to move on reducing the deficit. I fully expect partisanship to replace what now appears to be a move to the center by the Obama administration and its opponents. Our fiscal imbalances at the local, state and federal levels are out of control. Aggregate federal debt is now above 90% of GDP now. In This Time Is Different, authors Carmen Reinhart and Kenneth Rogoff point out that once you get to the 85%-90% threshold of excessive debt/GDP levels, there is a secular erosion in country growth rates.

Concern No. 2: Structural Unemployment

While the job picture has brightened, the large roster of unemployed is structural and will remain with us in the new year, owing to a bunch of "mega trends" such as rising globalization, gains in technology and temporary employment becoming a permanent feature to the jobs market.

Concern No. 3: The Rapid Rise in Interest Rates

Not only do higher rates compete with equities but they represent a serious challenge to the already weak residential real estate market. Home prices may not have bottomed. Refinancings are already evaporating, and the S&P/Case-Shiller Home Prices Index has turned down in the last three months (and will likely worsen as foreclosures delayed by the robo-signing scandals come back into the marketplace for sale).

Concern No. 4: Screwflation

The struggling middle class faces wage deflation and rising costs of living -- it is being screwed. Moreover, 10 years of flat stock prices and three years of declining home prices provide a weak foundation for the U.S. consumer, an important contributor to economic growth. We don't have to look much past TGT's weak December same-store sales to see that corporations will fall victim to screwflation. From my perch, Target's poor sales are not a one-off event. If I am correct that a relatively large component of the October-November improvement in retail sales was simply recession fatigue, personal consumption expenditures could flatten out in the months ahead.

Valuations could contract somewhat (a variant view) this year based on:

1. a deceleration in the rate of earnings growth;

2. rising inflation and interest rates;

3. an uneven and lumpy economic setting would produce lower and more volatile than consensus corporate profits; and

4. the continued tail risk in credit from the last cycle (e.g., the difference between the yields on Spanish and German 10-year bond yields indicates that the eurozone crisis remains intense).