Thursday, July 7, 2011


Another black swan - A magnitude 7.8 earthquake has hit about 130 miles east of New Zealand's Kermadec Islands.

The financials are stinking up the joint. In this world of algorthims, momentum investing and performance-chasing, the group takes a back seat.

"What we have learned from history is that we have not learned from history."
-- Benjamin Disraeli

BAC is leading the most hated sector on the way down ... and it's about to hit a yearly low.

It used to be that financial stocks were leading economic and stock market indicators -- they foretold the future health of the consumer and of residential and nonresidential real estate. But in this world of algorithms, momentum investing and performance-chasing, the group takes a back seat.

We need demand to recover in the second half. Why am I thinking that's an ominous thought? From Bill King:

He points out, "The divergence between ISM 'new orders' and 'inventories' is starting to resemble July 2008." In other words, demand better come back in this year's second half.

Algorithms are no doubt occupying an important role in the market's rise as they exacerbate the advance.

Tough to fight it. Tough to trade it.

The four-week Treasury bill yields zero today.

Spaulding Smails (John F. Barmon, Jr.): I want a hamburger. No, cheeseburger. I want a hot dog. I want a milkshake. I want potato chips--

Judge Smails (Ted Knight): "You'll get nothing, and like it!

-- Caddyshack

Repeating - the four-week Treasury bill yields zero today.

Speaking of slowing growth and growing investment/banking risks, run, don't walk, to read Vitaliy Katsenelson's "The Chinese Black Swan."

Tepid worldwide economic growth may put us back in the economic and stock market soup.

China raised benchmark interest rates for the third time this year in order to counter accelerated inflation of +5.5% (to the highest level in three years). I remain less certain than most that China is engineering a "soft landing," especially after last week's China June manufacturing index dropped to the lowest level in 28 months on weaker growth in orders and output.

Things are slowing down in the eurozone. Duh. The bullish cabal told us two years ago not to be concerned with contagion, but the spread of sovereign debt risks has continued apace.

The newest challenge in Europe is to prevent more contagion -- now from Greece into Portugal. This will likely be accomplished only if the IMF and others accept that a private solution has to take a backseat to greater government participation, which would serve to reduce investor concerns that Portuguese debt holders would take more haircuts.

The optimists think kicking the can down the road is a market-friendly solution and that the overhang of sovereign debt risk is fully discounted in lower-than-historical P/E multiple valuations, and last week they were right. But will they continue to be spot on in their analysis?

I'm not sure. At all.

I'm thinking that the aftermath of the fiscal imbalances over there (in the eurozone) and over here (in our local, state and federal levels) is a period of growth-deflating austerity that will produce more volatile and less predictable economic and profit growth.

One doesn't have to look further domestically than the structural issues facing the jobs market. Toward that end, the Challenger Gray labor market survey disappointed. According to the firm, job cuts expanded by over 5% -- the first rise in four or five months and indicative of little improvement in the ranks of the employed.

Bottom line: Tepid worldwide economic growth exposes the cycle to external shocks that may put us back in the economic and stock market soup.

However, incessant and perma-style bearishness can be harmful to your investment health over longer time frames. Even in the worst stock market backdrops, long opportunities can always be found....