Thoughts

Run, don't walk, to read an informative column by Real Money's Dan Dicker on West Texas grade crude oil.

Cisco's At a Nice Level

You can't get killed falling off of a curb. In light of that wisdom, I believe that CSCO has moved to a level where the risk/reward is favorable.

The Meredith Whitney Debate Is a Sideshow

It is a distraction from the growth-deflating impact of our local, state and federal fiscal imbalances.

Of late, much has been made of Meredith Whitney's municipal bond call.

Some of the criticism leveled at Meredith is likely based on a solid and thoughtful rejection of her dire analysis. But some of the criticism might also be schadenfreude, jealousy regarding some of her prior prescient bank calls and an attack against her popularity.

From my perch the Whitney debate is a sideshow that has deflected investors from the true fundamental debate as to the growth-deflating impact of our local, state and federal fiscal imbalances.

While we will not know for some time to come whether her analysis will prove accurate, I do believe strongly that too little has been made of the local and state imbalances, the ensuing austerity and its impact on domestic economic growth and the unemployment and higher taxes that follow.

Run, don't walk, to read an excellent post on Zero Hedge on plunging labor force participation.

Run, don't walk, to read an excellent post on Zero Hedge on plunging labor force participation -- "the biggest scandal of the last decade."

As usual, very good stuff from Zero Hedge's Tyler Durden.

It seems as if the U.S. stock market is interpreting the outcome of almost every world political development and domestic economic release as market-friendly, no matter how uncertain the immediate outlook for the regime changes are or how fundamentally weak certain important domestic economic sectors remain (e.g., structural unemployment, a weakening residential real estate market, and an apparent reluctance to address fiscal imbalances and elevated deficits).

The market is a freight train, but with its intensity and unrelenting drive higher, coupled with the increased predictability of a now too-regular pattern of lower futures in the morning followed by a persistent strength throughout the afternoon, we have to be on the watch to see if the freight train is going to run off the tracks.

After eight consecutive up weeks, it is official: The markets are virtually impervious to any concerns. Arguably, the ranks of the bulls has expanded dramatically, and even many that were so wrong three years ago have become glib and self-assured and even defiant towards the bears.

From my perch, looking at the market's doubling since the 2009 generational low with such confidence, certainty and even ebullience is walking a slippery slope.

Threats:

1. Interest rates: The rate of increase in bond yields might be approaching a tipping point. This month, for only the third time in 50 years, we have experienced the juxtaposition of the following three events:

1. a greater than 5% rise in the yield of the 10-year U.S. note;
2. a six-month high in the yield of that 10-year note; and
3. a six-month high in the S&P 500.

In the two previous periods, February 1980 and June 2009, the S&P corrected by 17% and 7%, respectively.

2. Submerging markets: We are seeing a clear breakdown in certain important emerging stock markets -- for example, Brazil's market is down 5% year-to-date while the Indian Sensex is 13% lower. Historically, a breakdown in the iShares MSCI Emerging Markets Index Fund (EEM) typically presages weakness in our market.

3. Geopolitical: The markets are obviously ignoring a very messy geopolitical picture (especially in Egypt). I don't see any easy resolution to the spread of riots by the international middle class that has been victimized by screwflation, which I define as limited wage growth accompanied by higher food costs and higher prices for most necessities of life. Thus far, there have been limited adverse economic consequences to the rioting and protests, but a contagion to other parts of the world (such as Algiers experienced over the weekend) could be disruptive and destabilizing to world trade and to world markets. (Tom Friedman issued the following warning that rough days lie ahead in Egypt in his Sunday New York Times editorial:

That's why today Egypt has before it only two paths, and both are unstable. One is where this democracy movement falters and Egypt turns into an angry Pakistan, as it was under the generals. And the other is the necessarily unstable, up-and-down transition to democracy, which ends stably with Egypt looking like Indonesia or South Africa.

And Cumberland Chief Global Economist Bill Witherell writes, "The path ahead for Egypt will be a difficult one, with various interest groups sparring for power or to protect benefits they had under the previous regime."

4. Corporate profit margins are extended and exposed: Investors are ignoring the potential impact of raw materials price increases on industrial profit margins. During this past week, numerous companies, including PEP and KFT, issued profit-margin warnings. Those who think that rising input costs can be materially passed on might be too optimistic. Rising raw materials (especially of an energy and agricultural kind) are certainly part of the recovery cycle story, but it also means that corporate profit margins, which are now elevated to 57-year highs, might be in jeopardy.