Thursday, July 14, 2011

Moody's has warned that it may downgrade U.S. debt if the debt ceiling is not raised. I'm hearing many are covering shorts; Buy the news?



As the market grew more narrow and lopsided, an illogical rally based on the hope of more quantitative easing had a rather predictable reversal. Again, for emphasis, this is an ideal trading market for opportunistic traders but a real lousy one for investors.



The 10-year U.S. note auction, similar to yeseterday's three-year, went well. A couple of points below the when-issued yield, strong bid to cover at 3.17 and direct bidders in line. I suppose Bernanke's testimony helped the auction.



The cost of the necessities of life has gone up dramatically.

In response to Ron Paul's question, Bernanke has said in his testimony that quantitative easing did not cost the government anything.

But it did cost the world's consumers -- they were screwed -- as the cost of the necessities of life rose dramatically.



Why will the same Fed policies work when they haven't before?



The cost of 2008-2011 policy is a mushrooming and outsized deficit.

"I don't make jokes. I just watch the government and report the facts."

-- Will Rogers

You can day trade, trying to predict every tiny little shift of weight and attempting to profit from it, but I think that's too hard, and I used to be a hedge fund manager, specializing in these short-term moves. Or, better, you can step away from the day to day seesaw, which is what this device really amounts to, and focus on the fundamentals of great individual companies, while tempering that conviction with the discipline of recognizing that the one piece of bad macro news can pull down the entire market, giving you a chance to put your convictions to work buying high-quality stocks.

-- Jim Cramer, "Mad Money" (episode aired July 12, 2011)

I couldn't agree more.

While recent economic releases suggest an anemic trajectory of economic growth, an economic double-dip still seems unlikely. Nevertheless, the recovery's sluggish pace exposes it to mistaken policy.

As Jim expressed last evening, there are clearly other contributing factors at work that have dulled investors' appetites for stocks and have resulted in sub-historic valuation levels.

My view continues to be that a contagion in confidence is the proximate cause for the recent market weakness and falling valuations. More specifically, my vote for the reason behind that loss in confidence is the increased recognition of the ineptitude and partisanship of our politicians.

This isn't the government we are watching, it's junior high school.... We're governed by self-absorbed, reckless children.... The budget war reflects inanity, incompetence and cowardice that are sadly inexplicable.

-- Nicholas Kristoff, The New York Times

Our impatient and undisciplined politicians have opted for the expediency of reflation to counter a decade-plus-long accumulation and egregious use of debt. In turn, a more painful adjustment period seems possible in the not-too-distant future unless fiscal discipline is imposed in the near term.

The cost of 2008-2011 policy is a mushrooming and outsized deficit. Since the generational low in March 2009, the U.S. dollar has dropped by about 15% against the euro, as market participants have dismissed the notion that the hard decisions to reduce the deficit will be implemented. At the opposite side of our plunging currency is the message of ever-higher gold prices. (Warning: Dismissing the meaning of $1,570-per-ounce gold might be hazardous to your financial and investment well-being.)

It is no wonder that investors, small businesses and consumers have all lost their collective confidence. These performances by our representatives underscore my view that the general perception that our politicians are inept and partisan has possibly eclipsed fundamental economic concerns, on one hand and, on the other hand, what Jim describes as positive microeconomic conditions.....

"A fool and his money are soon elected."

-- Will Rogers

Make no mistake, investors' rage and contempt against our politicians' lack of judgment (that borders on foolishness) runs deep -- and is bipartisan. It originally surfaced in the Democratic tsunami in the November 2008 elections, then in the formation of the Tea Party and ultimately morphed into a repudiation of many incumbents (Republicans and Democrats) in subsequent elections.



Chinese inflation prints over 6% almost always lead to lower stock prices in our country, and it is interesting to note that the 2007 high in the S&P 500 correlated precisely with such an elevated inflationary reading.

Don't believe the Chinese doves, more tightening lies ahead -- and this could serve as a headwind to our equity market.