stocks and things

2012-02-16T17:11:00.000-08:00

Today's tweet of the day is again from Hedgeye's Keith McCullough: "Evolve or whine."

Housing continues to show signs of recovery as the NAHB confidence index rose to 29 (consensus was 26), the best reading in four and a half years and substantially above the recent six-month average of only 20. This index has risen for six consecutive months, a feat not accomplished in 16 years.

2012-02-16T16:59:00.000-08:00

After the sudden drop in AAPL and an intraday reversal of the indices yesterday, many market players quickly became bearish. After all, the market has been extended and hasn't corrected for quite some time, so didn't it make sense to anticipate more profit-taking in the near term?

What the bears failed to appreciate was that the dip-buyers weren't ready to go away. They have had great success for a very long time, so when we had slightly decent economic numbers and then news that Greece was going to be saved (yet again), they piled in and just kept pushing. The bears, who felt so confident last night, were forced to reverse course suddenly and yet another straight-up move was under way.

It is almost comical that the market keeps responding to news about Greece when everyone knows it's just a matter of time before it defaults. Greece is just a convenient excuse for dip-buyers to do what they are already inclined to do. When the market really does have a change in character, the news will be viewed in a much different way.

So here we are, right back where we were a couple of days ago. We had a brief hiccup that helped to create a little negativity and, in the ironic way the market works, that helped to propel the move to the upside today.

It was a solid day for the bulls, with decent volume and close to-3-to-1 positive breadth. It is amazing how fast we can regain upside momentum.

2012-02-15T16:53:00.000-08:00

The FOMC minutes were a nonevent -- nothing of note regarding QE, inflation, interest rates or the economy.

Dallas Fed head Fisher calls QE3 a 'fantasy of Wall Street.'

High-end and luxury retailers could be excellent shorts in slowing domestic and European economies.

More Greece headlines on tape:

* "Some of Greece's Euro Zone Creditors Mulling Possible Bailout Curtailment"
* "Bridging Loan Possible to Help Greece Pay March Bond Redemption"
* "New Arrangement Would Delay Full Bailout Until After April Greek Elections"
* "Possible New Greek Plan Hasn't Been Proposed or Detailed, Support Uncertain."

The European leaders can't change the fact the Greece is bankrupt.

I continue to believe that the optimism surrounding Greece is misplaced.

Greece is bankrupt, and almost nothing the European leaders can do will change it.

Today the yield on the two-year Greek note rose to above 200% for the first time in history.

From the Financial Times:

Sounds like European governments are moving to delay any decision until March 2, another two weeks beyond Monday's Eurogroup meeting. A working document distributed last week says the governments will try and force through the PSI debt swap (expected to be announced tomorrow) before committing any more money. Both Lazard and Cleary Gottlieb advised the officials that PSI without Troika pushing through the second bail out would mean take up could suffer (forcing CACs?) and that bond holders would have weeks of uncertainty. As the article ends, "In its legal advice, Cleary Gottleib said it would be legal to scupper the debt swap even after the invitation went out, but it warned against it...Each sovereign restructuring is unique and sets a precedent," says the legal note. "The adverse reputational consequences (for [Greece] as well as the rest of the EU) of launching a transaction that fails as a result of their collective failure to meet the conditions should be assessed very carefully."

2012-02-15T16:39:00.000-08:00

The character of the action changed a bit today as the bears put up their best fight in a long time. The dip-buyers spiked us up to recent highs twice during the day but were turned back rather vigorously both times. We even went out at the lows as the market ignored more yammering from the European finance ministers, who are obviously hoping to keep their comedy show running for a few more months.

What was most notable about the action today was that AAPL, the holiest of the holy in the land of dip-buyers, reversed hard and went out at its lows. Apple had been up for 10 straight days and acted like it would never go down again. It has been anointed the greatest stock in the history of mankind, and it is guaranteed to upset the market beast that punishes anyone who gets too cocky.

The big question for us to contemplate now is whether the recent back-and-forth action is a signal that we are building a significant top or just healthy consolidation which will eventually set us up for further upside.

I don't know the answer to that question, but I'm leaning toward the defensive side. Maybe with Apple finally being knocked down, the indices will be more reflective of the action in individual stocks.

2012-02-15T03:32:00.000-08:00

Some I would buy, given they are at certain levels:

* Charming Shoppes (CHRS), under $4.50
* Colgate-Palmolive (CL), under $85
* Clorox (CLX), under $65
* Cohen & Steers (CNS), under $31
* Dell (DELL), under $16
* eBay (EBAY), under $30
* E*Trade (ETFC), under $9.10*
* Ford (F), under $12
* iShares FTSE/Xinhua China 25 Index Fund (FXI), under $37.50
* General Motors (GM), under $24
* Goldman Sachs (GS), under $105
* Hewlett-Packard (HPQ), under $26.50
* International Flavors & Fragrances (IFF), under $57*
* KKR Financial (KFN), under $9.10
* Legg Mason (LM), under $26
* Lincoln National (LNC), under $22.50
* MetLife (MET), under $35
* MGIC Investment (MTG), under $4.10
* Och-Ziff (OZM), under $8.75
* Pitney Bowes (PBI), under $18.50*
* PepsiCo (PEP), under $64*
* Procter & Gamble (PG), under $63
* PNC Financial (PNC), under $55
* Prudential (PRU), under $56
* Schwab (SCHW), under $12
* ProShares UltraShort 20+ Year Treasury (TBT), under $19*
* T. Rowe Price (TROW), under $58
* Waddell & Reed (WDR), under $28
* XL Group (XL), under $18.50
* Exxon Mobil (XOM), under $78

*Eligible to buy at current levels

All Things Digital has tweeted that talks on Yahoo!'s (YHOO) sale of its Alibaba stake have broken down. Stock's getting hit; YHOO's a graveyard.

The sooner Greece declares bankrupcy, the sooner the market can move on fundamentals, not macro risk.

Headlines crossed today, reporting that Greece's Prime Minister says that a Euro Group meeting will take place in Brussels tomorrow.

More mumbo jumbo as Greece is hopelessly bankrupt.

The sooner they declare, the sooner the market can move on fundamentals not macro risk.

In a Q&A session at the 2006 Berkshire Hathaway (BRK.A/BRK.B) annual meeting, Charlie Munger, Berkshire's vice chairman, was asked about Dr. Siegel's theories.

Munger said, "I think Jeremy Siegel is demented."

Buffett, clearly embarrassed, added "Well he's a very nice guy."

Munger continued, "He may well be a very nice guy, but he's comparing apples to elephants in trying to make accurate projections about the future."

"What the wise man does in the beginning, the fool does in the end."

-- Warren Buffett

The combined market capitalization of Google (GOOG) at $200 billion and Microsoft at $257 billion is less than Apple's capitalization at $475 billion.

The combined market capitalization of each of Apple's key vendor rivals -- Samsung, Nokia (NOK) HTC, Motorola Mobility (MMI), Research In Motion (RIMM), Sony (SNE) and LG -- stands at $235 billion (less than half Apple's capitalization).

The 17 brands that make up Apple's smartphone competition have a total market capitalization that falls about $100 billion short of Apple's current equity value.

No one deserves this level of adulation -- no one.

I believe that the stock market will do better in 2008 than it did in 2007, when it chalked up a 5.5% return, the fifth year in a row that the market went up. Year-ahead forecasts for the market are notoriously difficult, but I believe that a 10% to 12% gain is possible, on the heels of a recovering financial sector. Financial stocks plummeted about 20% last year, and this was the reason why the market had a mediocre year. Outside of financials, the S&P 500 Index had double digit returns. A revival of financial stocks would spur good market gains this year.
-- Dr. Jeremy Siegel, "Outlook for 2008"

Over the past few weeks -- in a cover story by Gene Epstein in Barron's ("Enter The Bull"), in flattering words of endorsement from Jim Cramer on "Mad Money" and on Real Money, on CNBC's "Street Signs" and in an appearance on "Fast Money" -- Wharton Professor Dr. Jeremy Siegel has been heralded for his wisdom and forecasts.

History shows that the media has a penchant for untimely anointments -- the names are well known by all of us. Think Dr. Nouriel Roubini and his very incorrect view on stocks and of the economy since the generational low in 2009, or Meredith Whitney's wrong-footed view on municipals over the past 18 months.

I recognize that Roubini correctly forecasted the demise of the world's economy and the consequences of the mushrooming of the derivative market in 2007-08, and Meredith Whitney correctly predicted the demise of the domestic banking industry during the same time frame. And I also recognize that Siegel, along with many other pundits, expressed caution toward the sky-high technology multiples in late 1999 and early 2000.

But quite frankly, the streets of Wall Street are paved with geniuses who have made one great call in a row.

I don't mean this to be an ad hominem attack on Siegel (or on the others), but frankly I don't get the media's adulation, continued preoccupation and almost deification of these wags and their views.

Dr. Siegel comes off as a very nice person, but he is an academic who has been bullish at some very wrong times. Importantly, his theories regarding equities for the long term have been wildly off, as bonds have outperformed stocks for one, five, 10, 30 and 40 years, which, according to his investment thesis, is impossible.

His view on the fixed-income market also has been manifestly incorrect over the last two years. Dr. Siegel's Wall Street Journal op-ed, "The Great American Bond Bubble" was wrong in its conclusion back in August 2010.

In a Wall Street Journal column back in July 2009 -- "Does Stock-Market Data Really Go Back 200 Years?" -- Jason Zweig even questioned whether Dr. Siegel's data were compromised:

There is just one problem with tracing stock performance all the way back to 1802: It isn't really valid. Prof. Siegel based his early numbers on data first gathered decades ago by two economists, Walter Buckingham Smith and Arthur Harrison Cole.

For the years 1802 through 1820, Profs. Smith and Cole collected prices on three dozen banking, insurance, transportation and other stocks — but ended up including only seven, all banks, in their stock-market index. Through 1845, they tracked 19 insurance stocks, but rejected 95% of them, adding only one to their index. For 1834 onward, they added a maximum of 27 railroad stocks.

To be a good measure of stock returns, an index should be comprehensive (by including many stocks) and representative (by including the stocks commonly held by investors). The Smith and Cole indexes are neither, as the professors signaled in their 1935 book, "Fluctuations in American Business." They cherry-picked their indexes by throwing out any stock that didn't survive for the whole period, whose share prices were too hard to find or whose returns seemed "inflexible," "erratic," or "non-typical."

-- Jason Zweig, Wall Street Journal "Does Stock-Market Data Really Go Back 200 Years?"

As The Big Picture's Barry Ritholtz put it (in reaction to the above Wall Street Journal column):

Thus, Siegel's basis for Stocks for the Long Run [2] exclude 97% of all the stocks in the early history of the US market by cherry picking winners, ignoring survivorship bias, and engaging in data smoothing.

Oops.

What did this do to the results? As you would imagine, it juiced them significantly. The era of 1802-1870 ended up with a much bigger dividend yield then it should have had. Siegel originally started at 5.0%, but over ensuing versions, that crept up to 6.4%. The net impact was to raise the average annual real returns during the first half of the 19th century from 5.7% to 7.0%.

If you artificially raise the initial returns in the early part of the data series, then the final annual returns become much higher. As Zweig sardonically notes, "Another emperor of the late bull market, it seems, has turned out to have no clothes.

To summarize, as Bill King has put it, "Permabull Jeremy Siegel, who has been not just wrong but magnificently wrong, is forecasting DJIA 15k."

As it is said, "Beware of false prophets of the past."

2012-02-15T03:14:00.000-08:00

Typically, light-volume pullbacks within an uptrend are healthy. They allow stocks to migrate into stronger hands as short-term holders take profits, and they allow big funds to accumulate at lower prices. As long as the pullbacks are contained, they make it more likely for further upside.

That is what saw today. But a late spike caught the bears leaning the wrong way after several failed intraday bounces. We had a decent recovery and ended up with just mild losses. The perma-bulls love that the bears are so inept, but it makes for dangerous conditions when there is so little fear.

Disinterest is what really kills a market, and you have to wonder what is going on as volume on the NYSE continues to descend to levels not seen in a very long time.

You would think that a market that has been trending up for weeks and is close to its highs would be generating increased interest, but we seem to be going in the opposite direction, which makes the persistent bids seem more manipulative than indicative of real accumulation.

Ultimately, price action is what matters and it is hard to argue with a market that closed the way this one did today. We had a number of failed bounces and looked ripe for the weak finish, but the dip-buyers wouldn't stand for it. I suspect that the computers had something to do with the energetic close, but it just goes to show that you really have to be careful fighting this market.

One To Watch

2012-02-14T03:06:00.000-08:00

TROX manufactures titanium dioxide and is one of five companies with the technology to produce it via the chloride method, which is cost-efficient and environmentally friendly. Tronox recently announced a merger with a division of Exxaro Resources [EXX.South Africa], a South African company that mines titanium dioxide feedstock. This will make Tronox vertically integrated. The acquired business has a 1.5-million-ton stockpile of ilmenite, the feedstock, which is in tight supply.

Tronox hit a high of $165 last year. Shares have backed off due to market turmoil, mixed feelings about the acquisition and uncertainty regarding the economy. Most important, sales of titanium dioxide were slow in the fourth quarter. Investors didn't understand this was a seasonally weak period. Insiders have been buying shares at Kronos Worldwide [KRO], a Tronox competitor, which adds credence to the buy idea on TROX.

Tronox came out of bankruptcy court last year. Why did the company go broke?

It was spun out of Kerr-McGee with a lot of environmental liabilities and debt. Then the financial crisis hit. But there have been positive surprises since 2011. Tronox has tax-loss carryforwards that are worth about $30 a share. And the company has incredible earnings power, in the range of $20 to $30 a share. Analyst had guessed it was around $12 a share. Some think it is overearning because of the tight supply situation, but even using an 11 multiple of the prior estimate and adding the tax assets and the next 12 months' free cash flow gets you a target price of more than $190 a share. If earnings continue to grow at the current rate, they might be sustainably closer to $20, which gives you a $250 stock.

2012-02-14T02:46:00.000-08:00

Moodys, that forward-looking thoughtful ratings agency, has reduced the debt ratings of six European countries including Italy, Spain and Portugal and has revised its outlook on the U.K.'s and France's top Aaa rating to "negative."

A rumor has it that Saudi tanks have approached the Jordanian border, giving a 72-hour ultimatum to Syria.

Today's tweet of the Day is from Hedge Eyes' "Keithy" Keith McCullough: "It appears to me that the old broken glass/economic growth model of Keynes has met its burning buildings #Greece."

The Greece deal is really no deal but rather a slow-motion train wreck to bankruptcy.

Why have all the Cassandras been wrong? Because they ignored the power of central banks to cause credit spreads to narrow. The outcome is reflected in market movements and in certain sectors....

The European Central Bank's ingenious concept of a three-year, 1% loan via LTRO (long-term refinancing operation) worked. It was successful because it allowed the banks to buy their own debt at a higher yield than 1%, book the difference in yield as income, and mark up the value of their own bonds to par. That process functioned as a mechanical way for there to be an addition to the bank's capital. The ECB used a creative way to solve a portion of its eurozone and the Europe-wide banking crisis....

We have replaced meltdown of the type we saw after Lehman/AIG with "melt-up" of the type we have been seeing since March 2009. We have shifted from collapsing leverage and failure at the institutional level to central bank intervention of unprecedented size....

We are going through huge transitional times. Never before have we seen coordinated, global central bank activity of this order or magnitude. By the end of this year, the G4 central banks will have expanded their balance sheets approximately threefold during the financial crisis. The negative and inflationary results of this activity may appear in the future. That remains to be seen. For the present, this is a very bullish construction for asset prices and equities in particular.

-- David Kotok, Cumberland Advisors (Feb. 11, 2012)

2012-02-14T02:19:00.000-08:00

The bears had a good opportunity to build on Friday's weak action by selling the gap-up open, but they failed miserably once again. There was a brief dip in the first hour or so of trading, but the buyers didn't wait long, and they walked us back up the rest of the day.

Not only was the underlying support very impressive, breadth was quite strong, with 4,200 gainers to just 1,400 decliners. Volume was light, but the big-cap momentum favorites were lively, with PCLN, ISRG, AAPL, GOOG, AMZN and BIDU attracting attention. Small-cap oils were the favorite speculative play today, but there was no shortage of green on the screens.

It is extremely tempting to keep trying to call a top in this market, but by now it should be painfully clear that sticking with the trend as long as you can is the way to go.

2012-02-11T04:08:00.000-08:00

It' been a long time coming but today we saw the worst action of 2012. We've had only one other bad day this year, Jan. 26, where we sold off all day and closed near the lows. Despite a last-minute spike, we not only sold off and closed near the lows, but it was the biggest point loss of the year.

The big question is whether this is an indication of a major change in market character and an intermediate top, or long overdue profit-taking that will give us a healthier market as we shake out recent excesses. It's been amazingly one-sided for so long that it was inevitable the streak would end.

While it's probably a good idea to lock in gains after the big run, it's premature to conclude that the uptrend is over and a major breakdown will ensue. In fact, it can be argued that this is merely a return to normality and a little downside is healthy. The market needs to shake out overly exuberant bulls now and then to rebuild skepticism and attract new buyers.

Earnings season is basically over and we are heading into a weaker time of the year seasonally. The issues in Europe are not improving, so the bulls will have some headwinds to contend with going forward.

2012-02-09T20:35:00.000-08:00

The dip-buyers did their thing for a third straight day but they weren't as enthusiastic. Fortunately for the bulls, AAPL kept us in positive territory. Although the bulls managed minor gains, breadth was slightly negative and we closed a little soft.

The market continues to hold up remarkably well, which may be due in part to so many folks looking for a pullback. Every time it looks like we may finally see a little downside momentum, the dip-buyers jump in and put the squeeze back on. Any bear that feels confident isn't paying attention to the action.

Even if you are bullish and don't expect a top to occur soon, it is a challenge to keep chasing higher and higher. Many bulls are rooting for some downside to get a better opportunity to put cash to work.

2012-02-08T16:38:00.000-08:00

The flight to safety continues to buoy fixed income.

The 10-year U.S. note auction came in at 2.02%, 1 basis point below the when-issued yield.

The bid-to-cover at 3.05 was a bit lighter than past auctions, and direct and indirect bidders were in line.

Greece will be resolved (in the fullness of time), but austerity and a lot of heavy lifting lies ahead for the eurozone. This malaise spells weaker-than-expected economic growth ... for years ahead.

2012-02-08T16:12:00.000-08:00

Once again, this market showed why intraday weakness shouldn't be trusted. As soon as we breached Tuesday's low, the dip-buyers jumped in and had us back into positive territory by the close.

Strong action in AAPL, GOOG and other big-cap momentum names helped to fuel the bounce, but it was a broad-based recovery and with solid breadth by the finish.

Like yesterday, the bounce had the feel of being driven in large part by algorithmic trading that took advantage of the many market players who are overanxious for a pullback. The inclination is to press the short side when we finally breach an important intraday level, but those bears are immediately squeezed and that helps propel the very fast bounces.

It is the close that counts, and this was another good one. If you really want to play the dark side, wait for a weak finish and some sort of news catalyst to trigger exits.

What we have is a market that the technicians claim is obviously extended but keeps running because dip-buying is working so well. The market loves to stick with a pattern that works until it is obviously broken, and this pattern still works just fine.

2012-02-07T17:32:00.000-08:00

DIS beat on the bottom line and missed on the top line. I suspect the top-line sales miss will weigh on the shares tomorrow.

So-so three-year auction.

Yield and bid to cover was fine, but direct and indirect buyers were at the lowest level in three years. Tomorrow's 10-year and Thursday's 30-year will be important tells.

KFN, a KKR-sponsored entity, maintains a portfolio of below-investment-grade corporate loans and debt securities, commercial real estate loans and debt securities and special situations.

The company funds its growth through the issuance of match-funded non-recourse debt in the form of collateralized loan obligations and collateralized debt obligations.

KKR Financial enjoys a strong ROI (rising), a 9% dividend yield (rising, expected 50% growth in dividend distributions) over the last 12 months and trades at a slight discount to book value (rising).

KKR Financial reported core investment income of $0.35 per share compared to consensus of $0.32 a share.

Book value increased 3% sequentially, to $9.41 (buoyed by retained earnings and gains on investments), cash earnings rose from $0.35 per share to $0.39 per share, and net interest income advanced by 4% from third quarter 2011.

There was no loan-loss provision, and the company deployed about $200 million in the period. Return on equity exceeded 18%, well above Street forecasts.

The company distributed $0.26, which included a special dividend of $0.08, again above expectations.

The pro-forma 2012 dividend yield is 9%.

According to a Greek official, the government is drafting an agreement on a bailout deal for approval today. Right. And all the Greek tax cheats are announced they are lining up, with cash in hand, at the Greek equivalent of the IRS.....

Investing in the market or in individual securities is always about asking myself the question, What is the risk and reward?

Chasing stocks (in either direction) is not for me, as price is what you pay, and value is what you get.

2012-02-07T17:17:00.000-08:00

After the straight-up run we've had recently, many market players have been anticipating at least a minor pullback. It looked like they might have been right when we started the day, but the dip-buyers jumped in and we ended up closing in positive territory near the highs.

The action felt like it was driven by computerized trading, which took advantage of many market players looking for a pause in the action. When we bounced back from this morning's dip, the machines kept pushing and that helped create a short squeeze. Extremely light volume indicates the absence of buying by major institutions.

Typically, an uptrending market doesn't need a major pullback to set up new opportunities. A couple of days of profit-taking will be sufficient to reset a few things, but we just haven't seen that with this market. We become more extended as the dips are snapped up by hungry, underinvested bulls.

There is an old saying that extended markets can become even more extended. That has certainly been the case. It will end one of these days, but even the fortune-tellers don't have a clue when that might be.

2012-02-07T02:37:00.001-08:00

Once again, the dip-buyers show how tough they can be. We opened slightly soft, but that proved to be the lows of the day as the market inched slowly back up and closed with minor losses.

Breadth was a bit weaker than indicated, but there was enough speculative action in shippers, small biotechs and large oil services to offset pressure on chips, retail and precious metals.

Just about everyone recognizes that this market could use a rest, but as long as it refuses to let up they are going to keep looking to buy. There was strong action for a market that is tired and technically extended.

2012-02-07T02:35:00.000-08:00

I think it is time, again, to expose the BLS' shennanigans to both keep the headline unemployment rate suppressed, and to generate an upward bias in the market courtesy of a "bigger than expected beat" of "expectations." Granted, various semantics experts continue to scratch their heads in attempting to explain a collapsing labor force when even Goldman's Sven Jari Stehn just predicted that it will drop to 63.1% by the end of 2012 (and 62.5% by the end of 2015). Funny, then, that the US will have no unemployment left when the participation rate drops to 58.5%.....And no, the "population soared" argument based on "revised data" doesn't quite cut it when the bulk of said surge not only did not get a job, but was not even counted toward the labor force. The biggest flaw with all these arguments that vainly attempt to defend the US economy - as if it is growing - is that they focus exclusively on the quantity of jobs, doctored or not, and completely ignore the quality.

2012-02-04T19:18:00.000-08:00

KFN at $9???

Regarding today's jobs report, here is the downside to the "strong" labor report (that could constrain, though probably not deny, the upward movement in stock prices):

1. Today's outsized REPORTED jobs "gains" eliminates any chance of QE3, which the bullish cabal has expected.
2. A strong labor market, if it in fact exists/continues, will force the Fed to raise the federal funds rate well before the recently announced date of late 2014.
3. A so-called much improving economy raises re-election odds of President Obama. Most consider a Democratic/Obama win in November's presidential contest as not as market-friendly as a Republican (presumably Romney) win.

According to a Washington Post article, Secretary of Defense Leon Panetta believes there is a growing possibility that Israel might attack Iran as early as April.

The Secretary's remarks are in line with a recent lead article in The New York Times Sunday magazine section two weeks ago.

The real issue for risk markets is how will stocks respond to a successful attack? My guess is down on the news but up, in the fullness of time (once it is digested by the markets), as planet Earth is rid of a nuclear Iran.

From there, the issue likely becomes whether Iran retaliates.

Regardless, I believe the greatest risk to the markets is geopolitical, not economic.

Higher stock prices plus lower bond prices equals an ideal setting for life insurance stocks.

F and GM are uniquely positioned to benefit from unleashed pent-up demand for cars, reflecting in part the record 10.8 years average age of the existing car fleet on the road.

The automobile industry, unlike the housing industry, is not burdened by the supply of unsold home inventory.

On Thursday January light vehicle sales rose to 14.2 million units (SAAR). Expectations were for 13.5 million, in line with December.

January's sales represent the best SAAR in three and a half years and were substantially above the fourth quarter 2011's 13.4 million units and suggest that consumer spending on durables will remain firm in first quarter 2012.

The current sales rate of 14.2 million units is still well below the trend line demand of over 16 million units, so there is a lot of runway left for the industry to recover.

This auto sales release and other recently released high-frequency economic statistics call into question the recessionistas' downbeat views and suggest that a self-sustaining economic recovery is in progress.

2012-02-04T17:59:00.000-08:00

Early in the week, the market looked like it might be in danger of rolling over after a good run in the month of January. But it jumped higher on the first day of the new month and it hasn't looked back.

I suspect that the bears were over anticipating some sort of correction and when the market suddenly turned back up they had to scramble to reposition.

The main catalyst today was the better-than-expected jobs news. Again, I suspect that there were too many folks looking for some "sell the news" action. When that didn't work, they gave up and turned into buyers.

Probably the most impressive thing about this market continues to be how one-sided the action is. There are barely any dips at all and the dip-buyers have been forced to pay up if they want to play.

I find it a bit troubling that complacency seems to be increasing; this one-sided move has made anyone who is fearful feel just plain ridiculous. What is there to worry about when the market never goes down -- despite lots of good reasons why it should?

2012-02-04T17:56:00.000-08:00

Looking at the euphoric jobs "data" from Friday from every angle. Is it credible? The CEO of TrimTabs, who likely knows this data a little better than the average Jim on the street, having collected tax witholdings data for the past 14 years, is modestly apoplectic at the adjustments. In one of his more colorful episodes, and rightfully so, Charles Biderman notes that "Either there is something massively changed in the income tax collection world, or there is something very, very suspicious about today’s BLS hugely positive number," adding, "Actual jobs, not seasonally adjusted, are down 2.9 million over the past two months. It is only after seasonal adjustments – made at the sole discretion of the Bureau of Labor Statistics economists – that 2.9 million fewer jobs gets translated into 446,000 new seasonally adjusted jobs." A 3.3 million "adjustment" solely at the discretion of the BLS? And this from the agency that just admitted it was underestimating the so very critical labor participation rate over the past year? Finally, Biderman wonders whether the BLS is being pressured during an election year to paint an overly optimistic picture by President Obama’s administration in light of these 'real unadjusted job change' facts. Frankly, in light of recent discoveries about the other "impartial" organization, the CBO, I do not think there is any need to wonder at all.

2012-02-02T14:21:00.000-08:00

Once again, takeover chatter has emerged in regards to RIMM.

Kellogg is an example of a low-beta stock that can be rich in rewards.

Today's dominant investor classes -- individual investors, hedge funds and pension funds -- have de-risked and are relatively uncommitted to equities.

A re-allocation into stocks (and out of bonds) represents an underappreciated and potentially massive (and latent) demand that could easily be the catalyst for a move to all-time highs in the S&P 500 in 2012.

Individual Investors

According to the Investment Company Institute, in 2011 retail investors liquidated $130 billion of domestic equity mutual funds, accumulated $1.7 billion of international stock mutual funds, purchased $120 billion of bond funds and bought $8.4 billion of high-yield funds. Since the beginning of 2007 (through 2011), retail investors liquidated over $450 billion of domestic equity funds, accumulated $130 billion of international stock mutual funds and purchased $930 billion of bond funds. The near-$1.4-trillion swing out of domestic equity mutual funds and into bond mutual funds is unprecedented.

Since 2001, as measured by stock holdings as a percentage of total financial assets, individual investors' share of stocks has declined from 25% to only 18%. In the same time frame, stock mutual funds have dipped from 79% of total mutual fund assets (excluding money market funds) to only 65% at year-end 2011.

Hedge Fund Investors

After Wednesday's close the ISI Hedge Fund Survey, which is based on the actual exposure at 36 long/short funds, which have approximately $90 billion in assets, indicated that net hedge fund exposure moved down to 44.3% (while gross exposure dipped to 49.7%). This is close to the lowest level of long exposure in four years and equivalent to the low exposure at the generational low in March 2009.

Large Pension Fund Investors

There is less official data on pension funds than on retail investors and hedge funds, but it is commonly recognized that pension funds are disproportionately exposed to fixed income over equities. This important asset class remains fearful of stocks, preferring the haven of safety available in low- or virtually non-yielding bonds (which provide returns well below actuarial assumptions).

Watch What They Do, Not What They Say

I prefer to watch what investors do, not what they say. That is why I am dismissive of many of the sentiment surveys (AAII, Investors Intelligence, etc.) as well as put/call ratios (which are further rendered relatively meaningless, owing to the proliferation of leveraged ETFs).

The aforementioned de-risking and flight to safety in bonds by all three dominant investor classes help to explain the last five years of action in domestic equities and the contraction in P/E ratios in 2011.

I expect the recent trend of large outflows over the last year (and last five years) to be reversed in 2012. Not only are interest rates at generational lows but many high-quality companies are yielding (at 2.5% or even better) well above the yield on the 10-year U.S. note.

At first, similar to the past two weeks, in which under $1.5 billion has come into stock mutual funds, the pace of inflows will be slow. As it becomes clearer that the domestic economy is self-sustaining, that the European debt crisis is showing continued evidence of stability, that a Republican presidential win in November grows more likely and that corporate profit (and margin) expectations will be achieved, I expect the rotation out of bonds and into stocks to accelerate.

Tactically, I favor the asset management stocks such as OZM, TROW, WDR and LM and the discount brokerage stocks such as ETFC and SCHW as direct beneficiaries of the expected rotation out of bonds and into stocks in 2012.

2012-02-02T14:12:00.000-08:00

While the indices had a very mixed day, very dogged underlying support prevailed again and prevented any real weakness. There was a fair amount of speculative action in individual stocks, which I suspect is a function of underperforming bulls trying to catch up with a market that won't go down.

While the market has been struggling over the past week to make progress, it is still holding and we need to respect the fact that the uptrend is intact. There are plenty of reasons to be wary but, so far, there is no price action to support the bearish bet.

Don't forget we have the monthly jobs news in the morning, and that will be a major market catalyst. I'll be looking for the bears to try to sell any strength the news brings and, of course, I'm sure we can count on the dip-buyers to step up fast if there is a negative reaction.

2012-02-02T02:09:00.000-08:00

The asset management sector has been weak over the past few days based on misses at LM and WDR. Those misses aren't surprising, though, because outflows have been unmerciful during late 2011 and 2012 (32 of the past 34 weeks yielded outflows!). But that is exactly when one should buy a cyclical like an asset managers.

Remember what Roy Neuberger once said: "Buy cyclicals when the factory door is padlocked. Sell cyclicals at the sound of trumpets."

Like discount brokers, traditional asset managers have likely seen the nadir of their fundamentals. Mutual fund inflows are trickling back, but there is a huge potential of a massive rotation out of bonds and into stocks that could materially change the earnings picture for the group.

I would be a buyer of the group now.

Now look at housing-related stocks (particularly the homebuilders) and consider their quick and substantial share price advance, well before the housing markets have improved (in price and turnover activity).

The same should occur in the asset managers, as stocks typically discount news well before there is an inflection point in fundamentals.

This is interesting: ETFC, which has often been rumored to be a potential takeover target of rival AMTD, named Frank Petrilli its new chairman. He replaces Chief Executive Steven Freiberg, who held the role on an interim basis since last spring.

Petrilli, 61, was most recently CEO of Surge Trading. But he also has past ties to TD, a 45% owner of TD Ameritrade. As noted by Dow Jones Newswires, Petrilli held several positions at TD Waterhouse, formerly a U.S. unit of TD Bank Group, from 1995 to 2004. He reported to the Canadian bank's current head, Ed Clark.

"We suspect Mr. Petrilli's relationship with Mr. Clark is strong and can only benefit E-Trade over the longer-term as it looks to potentially unlock the embedded value of the franchise with, in our view, its #1 acquisition/merger candidate, TD Ameritrade," Sandler O'Neill analyst Richard Repetto told clients in a note.
-- Barrons

This Barron's piece yesterday, "E-Trade Names New Chairman With Ties To AMTD: Coincidence?" piqued my interest and raised the specter of a possible takeover.

I have concluded that despite no apparent short-term catalyst, there is little risk in the shares.

Moreover, the recent weak DARTs monthly data likely represents the nadir of the discount brokerage cycle for both ETFC and SCHW.

ISM comes in at 54.1, slightly below expectations.

Fitch says Greece will default. Big surprise!

The ADP report was basically slightly less than consensus -- it should have no impact on risk assets, as it probably reflects some reversal of seasonal adjustments which distorted December's release.

Run, don't walk, to read the monthly commentary from Pimco's Bill Gross, "Life - and Death Proposition."

Stated simply, our monetary policy (coupled with global easing) is inflationary. In the fullness of time, bonds will suffer.

Now the only question is how we define "the fullness of time"!

Fears of hard landing in China eased as China's January manufacturing index rose to 50.5 (expectations were 49.5) vs. 50.3 in December. This is the best print since September 2011. New orders advanced for the first time in three months while shipments rose to best level in more than six months. As a perspective, China's real GDP increased 10.4% in 2010, +9.2% in 2011 and consensus lies at +8% to +8.5% for 2012 (bottoming at +7.5% in the first half). Like the rest of the planet, I expect China to ease in the months ahead (with a bank reserve requirement reduction imminent).

The January Chicago Manufacturing Index came in at 60.2 (expectations were 63) compared to December's 62.2. This was the third consecutive month with a reading over 60. It is important to recognize that 60.2 is indicative of relatively robust growth and compares positively to the long-term average of only 54. Importantly, the production and order components were strong. The equity market flinched, but recovered nicely from this news.

The January conference board's index of consumer confidence came in at 61.1 vs. 64.8 in December and against expectations of 68.The print contradicted the previously released Rasmussen and University of Michigan consumer numbers. Again, the market rebounded from this release.

Case-Shiller's home price index continued to fall. There was a slight reacceleration in home prices' rate of decline. November prices (year over year) were down by 3.7% (previous months' drop was 3.4%). I have written that the aggregate home price indices fail to address the developing bifurcation in the residential real estate market, with areas of the country that are unencumbered by a large shadow inventory of unsold homes doing far better (e.g., the D.C.-to-Boston corridor). Moreover, bank lending standards are easing (based on the most recent survey), the ownership/rental equation is improving, mortgage lending rates are at historic lows and the jobs market is experiencing a slow - very slow - improvement -- all positive factors contributing to a stabilization of the U.S. housing markets. I expect no price degradation within receipt of the 1Q2012 Case-Shiller Index release.

The employment cost index continues to suggest that unit labor costs (and wage inflation) will be tame, likely extending a market-friendly profit/dividend/share buyback cycle. The wage index was +0.4%, in line with consensus. For the year, private wages increased by 1.6%. I want to emphasize that corporate profit margins typically don't contract until unit labor costs increase by greater than 3.5%. We are under 2% now!

2012-02-02T01:56:00.000-08:00

Apparently, this is the market of the never-ending bid.

After the market basically went straight up for the entire month of January, a number of market players were anticipating that the indices might take a rest. We had four straight days of mixed action to end January, and it looked like we might be weakening, but it turned out to be a bear trap, and it was sprung today.

What made today particularly impressive was that the upside move picked up steam even though there really wasn't any real catalyst for the strength. Economic reports were mixed, Greece continued to promise it would have a debt deal any minute, AMZN's earnings were unexpectedly weak, and there wasn't any real positive headline news. In the perverse manner of the market, that probably helped to keep things running, as it increased the fear of being left behind.

Although we have had a number of runs like this in recent years, these markets with the never-ending bids are not as easy as they look unless you just buy and hold and never have an interest in selling an extended stock.

2012-01-31T16:32:00.000-08:00

Over the last eight trading days, the S&P 500 has declined a grand total 0.13%, which is less than 2 points. Strength is being sold and weakness is being bought, and that keeps us pinned down. For four days now we have had negative action but don't quite seem to crack. Last Thursday we had steady selling all day, but in the last three days the dip-buyers have bailed us out just in the nick of time. With window-dressing pressures now over, will those dip-buyers be less zealous?

I'm seeing this is the first January ever in which the S&P500 did not have a day with a loss of more than 0.6%. It just goes to show how the market has not traded in "normal" fashion. When human beings are in control, there usually is some ebb and flow, and emotions shift, but in this market, which is largely machine driven, we never have the excess of emotions overcompensating in one direction then the other.

AMZN earnings are out, and revenue disappointed. That is giving us a little pressure after hours, but this is a market that keeps bending but not breaking. As long as those dip-buyers are out there, we'll be OK, but you have to wonder if they are losing some steam.

2012-01-30T15:46:00.000-08:00

Dallas Fed January manufacturing comes at 15.3, far better than consensus.

The good news is that Europe is running out of bankrupt countries.

The bad news is that concerns now are gravitating toward Portugal.

Yields on Portugal's two-year note are now nearly 21%, up 370 basis points on the day. The 10-year note has risen in yield by almost 200 basis points, to over 17%.

Let's not lose sight of the fact that Portugal is smaller than Greece (as Peter Boockvar noted an economy of $225 billion vs. Greece's $285 billion). More importantly, public debt in Portugal is less than half of Greece's $455 billion.

A strong U.S. dollar is not a prerequisite for a healthy U.S. stock market.

Recently, a number of market observers (most notably Hedgeyes's Keith McCullough and "The Kudlow Report's" Larry Kudlow) have opined that the health of U.S. equities is dependent on a strong U.S. dollar.

Based upon history, however, the notion that a strong U.S. dollar is a prerequisite for a strong U.S. stock market is a myth.

Intrade has Romney's chances of winning the Florida primary at 97% vs.Gingrich's chances at 4%. Intrade has Romney's chances of winning the Nevada caucus at 94.3% vs. Gingrich's chances at 4%. Intrade has Romney's chances of winning the Republican nomination for presidential candidacy at 87.8%. Intrade has Obama's chances of being reelected at 54.4%.

2012-01-30T15:35:00.000-08:00

It looked as if the European sovereign debt issues were going to trigger selling at the open, but the market held up reasonably well given the few positives in the air. The dip-buyers managed two good bounces and breadth managed to improve quite a bit from nearly 4-to-1 negative in the early going.

Although we did manage to close near the highs of the day, there wasn't much aggressive accumulation to be found. AAPL helped the bull cause, but every major sector was in the red and Facebook mania calmed down.

The big question is whether a couple days of soft action is a sufficient correction to help set the stage for more upside. I'd really like to answer with a yes, but there have been very few signs of any real pessimism. We pretty much shrugged off Europe, and the attitude is complacency, even though there are good reasons to believe the selling has not run its course.

My fear is that the dip-buyers have used up a lot of juice recently and don't have much to show for it, which may cause them to be less aggressive on subsequent pullbacks. Dip-buying always sounds great in theory when we are trending up, but it loses its appeal quickly when the bounces don't hold.

2012-01-28T09:16:00.000-08:00

The private mortgage insurers should be beneficiaries of the Fed's largesse and easy policy into 2014.

MTG was weak in the morning, but it has rallied by over 10% from there for no observable reason.....

Asset managers are also beneficiaries of the Fed's largesse and easing; considering TROW, OZM, LM and WDR.

Fitch takes down sovereign debt ratings on Italy, Spain, Belgium, Cyprus and Slovenia.

Fitch's ratings for Italy and Spain are still above Standard & Poor's.

Moody's is the next agency expected to reduce the ratings of these countries.

Since sovereign debt yields already discount the downgrades, risk assets shouldn't flinch much.

"When the facts change, I change my mind. What do you do, sir?"

-- John Maynard Keynes

A pair of important developments will have a positive intermediate-term impact on the markets and on risk assets.

While I continue to expect some short-term market weakness, two important developments occurred over the past few days that will have a positive intermediate-term impact on the markets and on risk assets:

1. Mitt Romney has materially regained his lead in the Florida primary and the likelihood of him winning the Republican nod for presidential candidacy has measurably increased as well (based on this week's Intrade probabilities). A political regime change and Republican presidential win in November must be viewed, in the fullness of time, as market-friendly.

2. The Fed announced its intention to keep interest rates low into 2014. This will have a generally positive impact on equities but will have a mixed impact on financial stocks.

Regime Change

Let's first start with the Romney/Gingrich contest, remembering that a regime change in the November 2012 elections would be considered market-friendly and is an important precondition that I hold for the possibility that the S&P 500 regains new heights in 2012.

This morning's Wall Street Journal features a headline-grabbing poll conducted in tandem with NBC (below) that gives the impression that Gingrich is a clear leader over Romney. But when we read the fine print, we see that the poll was conducted days ago (Jan. 22-24) and only 441 Republican primary voters (a small sampling) responded. I totally dismiss the poll and question why The Wall Street Journal even published this old poll.

By contrast, below are the current Intrade probabilities (Jan. 27), which are more important to me and clearly show that Romney has resurfaced as a frontrunner for the Republican Party's nomination.

Intrade has Romney's chances of winning the Florida primary at 91%. Intrade has Gingrich's chances of winning the Florida primary at 8%. Intrade has Romney's chances of winning the Nevada caucus at 94.5%. Intrade has Gingrich's chances of winning the Nevada caucus at 5%. Intrade has Romney's chances of winning the Republican nomination for presidential candidacy at 87.5%. Intrade has Obama's chances of being reelected at 54%.

I view the reestablishment of a large Romney lead as an important intermediate-term market positive.

Fed Policy Buoys Risk Assets, Hurts Some Financials

The second development -- that is, the Fed's announcement on Tuesday that interest rates will remain low into 2014 (and perhaps longer) -- while also a general market positive, will adversely impact certain sectors of the financial industry. If interest rates remain subdued, equities are now more valuable (in any discounted cash flow/earnings model).

That said, some areas of the financial sector (in particular) will be negatively impacted by Fed monetary policy, as net interest margins and low reinvestment rates will reduce many bank and insurance companies' earnings power and likely yield lower valuations and risk/reward ratios by threatening upside price targets.

It is important to note that I don't think there is much downside risk to financial stocks but I do think upside targets have been reduced and (obviously) industry risk/reward has turned less favorable.

That said, some areas of the financial sector will benefit from lower interest rates in the form of improved capital market activity, continued low mortgage rates and a rotation out of bonds into stocks. These include private mortgage insurers such as MTG; investment brokers such as MS and GS; and asset managers such as TROW, LM, OZM and WDR.

Banks, in particular, including C, JPM and WFC, are negatively exposed to the Fed's Tuesday announcement of policy -- they have balance sheets that are net-asset-sensitive -- as non-trading income and net interest spreads will be compressed.

Life insurance companies such as PRU, MET and LNC face reinvestment issues that will mute profitability and upside price targets.

Discount brokers such as SCHW and ETFC, and investment brokers such as Goldman Sachs and Morgan Stanley face a more mixed picture. While discount brokers' profitability and "earnings power" will be negatively impacted by low interest rates, in theory, a more healthy stock market will draw retail investors back into the market -- and I expect daily average revenue trades to improve at Schwab and E*Trade after a weak fourth quarter 2011. The major investment brokerage industry's future profitability has been enhanced by the likelihood of improving capital market activity and the probability that merger and acquisition volume will accelerate in the months ahead.

Bottom line: I believe that this week's two new developments -- namely, the improved prospects for a Romney presidential election win in November and lower interest rates -- will serve to limit the degree of market consolidation that I previously had expected, and raises the probability that new highs in the S&P 500 will be achieved later in the year. At the same time, the prospects for lower interest rates will negatively impact certain financial companies. Net-net, I still expect a correction (though more shallow than previously thought) and a period of backing and filling ahead -- before a new bull market leg commences.

2012-01-28T08:54:00.000-08:00

The market looked anemic today if you just glanced at the indices.

Volume was light and we drifted lower, but there was some good action under the surface. Breadth was nearly 2-to-1 positive and all major sectors except pharmaceuticals were in the green.

What was most interesting, though, was the relative strength in small-caps and Internet-related names. News that Facebook expects to announce its initial public offering next week ignited a wide range of names -- many of them having nothing at all to do with Facebook -- but this sort of action is more about a positive mood than balance sheets and income statements.

It's always refreshing to see these flurries of speculative action develop, but the big picture is little changed. We continue to hold up extremely well and there is underlying support, but the upside momentum is muted in many cases. We aren't breaking down, but we aren't making much progress, either.

The optimistic scenario is that we continue to churn and consolidate, and that builds a foundation for another leg up. The pessimistic view is that if we don't see more upside soon, folks will grow impatient and start locking in recent profits, which will send us downward.

2012-01-26T16:44:00.000-08:00

It has taken 17 days of trading, but we finally had our first day of real selling in 2012. Apparent euphoria over the Federal Reserve's zero-percent interest-rate announcement continued early on, but we topped out in the first 30 minutes and then traded down the balance of the day. We closed near the lows for only the second time this year.

Even though it was the poorest day of the year, it still wasn't that bad. Breadth was only slightly negative and the point losses were mild. The biggest negative was that we had an intraday reversal to the downside after a strong start, which is a change in character.

Whether or not this turns out to be a short-term top will depend on the dip buyers. They have supported this market diligently and that typically doesn't end swiftly. There usually comes a point, however, when the weakness is bad enough to cause the dip-buyers to lose confidence, and that is when a more severe correction often develops.

2012-01-25T17:23:00.000-08:00

Here's what we're not hearing about the consequences of a zero-interest-rate policy.

The media's peanut gallery is asking the obvious questions of the Fed Chairman in this afternoon's press conference.

The two questions I would like to ask The Bernanke right now are, what is the justification of penalizing the savings class in a multi-year period of zero-interest-rate policy that extends into 2014, and what is the economic and social cost and consequence?

Well?

Even though we saw a decline in pending home sales, the metric continues to show slow improvement.

The pending home sales decline from the highest level achieved since early 2010 was no cause for concern.

Falling by 3.5%, with weakness in Northeast and Southern regions and strength in the Midwest, this continues to show stabilization and slow improvement in the U.S. residential real estate market. I have purchased MTG.

2012-01-25T17:16:00.000-08:00

It's been a while since we've rallied on talk of the Federal Reserve's quantitative easing program, but that is what occurred today. There wasn't any specific plan mentioned for further easing in today's policy statement, but Chairman Ben Bernanke made it clear that the Fed is ready, willing and able to act should the economy falter.

Some might think that it was a negative that the Fed feels the economy is weak enough to justify keeping interest rates low until the end of 2014, but the prospect of endless cheap money had the bulls salivating.

This morning, it looked like the exceptionally strong report from AAPL wasn't going to do much to spark the broader market. In fact, the S&P 500 and the DJIA were trading in negative territory despite the stellar news. But a whiff of quantitative easing from the Fed was all it took to light a fire. Precious metals exploded higher, the U.S. dollar was hit hard, and oil and commodities ran as market players rolled out their QE playbooks.

2012-01-24T22:08:00.000-08:00

Wells Fargo had a bullish note on the automobile industry this morning.

The firm's channel checks indicate that January light vehicle SAAR could be as much as 13.8 million.

MTG

The company's reported quarterly loss was less than what was expected.

MGIC Investment's (MTG) loss, at $0.67 per share, was a bit better than the consensus expectations for a loss of $0.81 per share.

Let's put some perspective on Joseph Granville's call for a 4,000-point drop in Dow.

Speaking of market opinions -- similar to noses everybody has one! -- legendary Joe Granville appeared on Bloomberg Television yesterday afternoon and predicted a 4,000-point drop in the DJIA in 2012.

This morning Arthur Cashin wrote about and put Mr. Granville's record into perspective:

Joseph Granville, whose "sell everything" call in 1981 sparked a decline in U.S. stocks, said the Dow Jones Industrial Average (INDU) will drop toward 8,000 this year because of waning momentum and volume. "Volume precedes prices," Granville, 88, a technical analyst who has been publishing the Granville Market Letter from Kansas City, Missouri for about 50 years, said in an interview on "Street Smart" on Bloomberg Television. "You are seeing much lower volume. That tells you that prices are going to go much lower, much lower than most people think possible and very few people have projected.

The article did a brief review of some of his prior calls:

Trading in U.S. stocks fell to the lowest level since at least 2008 amid mutual fund withdrawals and Wall Street job cuts. An average of 6.69 billion shares changed hands on U.S. exchanges in the 50 days ended Jan. 18, the fewest on record in Bloomberg data starting three years ago that excludes over-the- counter venues. On the New York Stock Exchange, volume has tumbled to the lowest level since 1999, the data show.

Granville told newsletter readers to "Sell Everything" on Jan. 6, 1981. The Dow fell 2.4 percent the next day. He correctly forecast the bear market of 1977-78 and the burst of the Internet bubble that began in 2000. In March 2008, Granville said the Dow would end the year near 9,000, more than 27 percent below its level of 12,392.66 at the time. The gauge finished the year at 8,776.39.

His predictions proved less prescient during some of the previous bull markets. He failed to foresee the rally that started in 1982 and lasted for five years. He also called for losses in 1995 while the S&P 500 rose every year till 2000.

Occasionally spotty, or not, when Granville makes a call, you can be sure it makes a headline or two."

-- Art Cashin

Joe Granville graduated from the Todd School for Boys in Woodstock, Ill., a school made famous by the graduation of another entertainer, Orson Welles, and briefly attended Duke University. Granville's first book, A School Boy's Faith, was a travelogue in poetry.

After enlisting in the Navy, Granville joined E.F. Hutton. He quit six years later to start the Granville Market Letter.

Thirty years ago, Kansas City-based market technician Joe Granville was seen as a Wall Street prophet. He was one of the first market technicians to use on-balance volume as a means of predicting stock prices. Under the sponsorship of an unknown brokerage firm, Arnold Securities, Granville began to tour the world, giving a series of traveling seminars in the late 1970s and early 1980s.

He had a remarkable run of prescient market calls that resulted in international recognition.

His "sell everything" message to subscribers in January 1981 (see Cashin's comments above) made headlines around the world; the Dow fell 2.5% on the next day and 1.5% on the day after that.

Granville's fame and seminars grew in size and sensationalism. Toward the end of his skein, his presentations were staged in huge hotel auditoriums, and attendance was always standing-room only. The crowds were boisterous in response to the circus-like festivities, which typically included belly dancers, a band and often clowns.

Granville made a dramatic entrance in each of these "seminars," dressed in a tuxedo as he walked down a long aisle while the crowds cheered the messiah's next coming. His antics were wild, in marked contrast to the more subtle presentations then seen on Wall Street. Once, on the stage of one of his seminars, Granville dropped his tuxedo pants and pointed to stock symbols printed on his boxer shorts, ending with a delighted cry of, "And here's Hughes Tool!"

Granville is now 88 years old and, similar to the Energizer Bunny, is still ticking with an opinion to go with it.

Last night Romney seemed to have won a split decision in the Florida debate. The two candidates are now in a statistical tie for the run to the Republican presidential candidacy, according to Gallup. On InTrade, Gingrich is a 60% probability to win Florida and Romney is at nearly 40%. Romney is at 63% to be the Republican presidential candidate on Intrade.

Romney revealed his taxes this morning and we learned what we knew -- he is rich.

The Bank of Japan cut its country's projected growth rate.

2012-01-24T21:51:00.000-08:00

The bears keep waiting for the underlying strength in this market to falter, but the dip-buyers aren't backing down. We gapped down to start the day but worked steadily higher and closed at the highs. The indices didn't have much to show for it, but it is impressive that the bears are incapable of building on any weakness.

The reversal in oils was probably the biggest driver of the intraday bounce, but it was mild action without any major leaders or laggards.

AAPL numbers are out and it looks like blowout -- very strong numbers across the board and guiding upward for the second quarter. The stock is going to open up huge and the chase will be on.

AAPL is a major factor in the indices, so look for a gap up open on this news in the morning. We are going to be even more technically extended, but as we all know, trying to fight an uptrending market because it is overbought is extremely dangerous.

2012-01-23T15:31:00.000-08:00

The Republican debate tonight in Tampa should be fascinating, especially after the South Carolina results on Saturday.

He's baaaaaaaaaaaaaaack! Joe Granville was on Bloomberg Television, calling for a 4,000-point drop imminent in the DJIA. Enough said.

The history of tech is littered with companies that failed to reinvent themselves and ultimately succumbed to the weight of legacy and rapidly obsolete businesses.

It is why both the shares of Research In Motion and Yahoo! should be avoided, from both Jim Cramer's and my perches.

Money managers are unhappy because 70% of them are lagging the S&P 500. Economists are unhappy because they do not know what to believe: this month's forecast of a strong economy or last month's forecast of a weak economy. Technicians are unhappy because the market refuses to correct and gets more and more extended. Foreigners are unhappy because due to their underinvested status in the U.S. they have missed a big double play: a big currency move plus a big stock market move. The public is unhappy because they just plain missed out on the party after being scared into cash. It almost seems ungrateful for so many to be unhappy about a market that has done so well. Unhappy people would prefer the market to correct to allow them to buy and feel happy, which is just the reason for a further rise? Frustrating the majority is the market's primary goal.

-- Bob Farrell, September 1989

"He who lives by the crystal ball soon learns to eat ground glass."

-- Edgar R. Fiedler, "The Three R's of Economic Forecasting -- Irrational, Irrelevant and Irreverent"

Deteriorating Presidential Prospects for Republicans

We have entered a new phase, the Republican primary as John Grisham novel. Secret offshore bank accounts, broken love, the testimony of anguished ex-wives: "He wanted an open marriage." A battered old veteran emerges from the background and, in his electoral death throes, provides secret information—"I'm for Newt"—that he hopes will upend a dirty, rotten establishment. A vest-wearing choir boy turns out to have been the unknown winner of that case back in Iowa. And all this against the backdrop of a mysterious firm that moves in and destroys communities—"When Mitt Romney came to town . . ."—while its CEO pays nothing in taxes.

If you are a Republican who hates a mess, or if you are a member of that real but elusive and hydra-headed thing, the GOP establishment, you are beside yourself with anxiety and unhappiness. You think: "They're losing this thing! They're going to limp out of South Carolina, they'll limp through Florida, they're killing each other and killing the party's chances. How will they look by the fall? What are independents going to think of the guy we finally put up? We all know politics ain't beanbag, but it's not supposed to be a clown-car Indy 500 with cars hitting the wall and guys in wigs littering the track!"

There's been a lot of damage. We lose sense of it in the day to day, but in the aggregate it's going to prove considerable....

The bleak thought: Mr. Obama this week blocked Keystone pipeline, a decision that means tens of thousands of jobs lost, new energy possibilities rejected. It is a decision so bad, so political, that it amounts to a scandal. But it just sort of eased through the news, blurrily. All the cameras were focused on the Republicans, who were distracted by their own dramas. They did not, together, in one voice, protest, as they should have. Keystone happened while they were busy looking like the Keystone Kops.

What's happening out there on the trail is a great story. But it's not a good story. And the past few days it didn't feel like a story that was going to end well.

-- Peggy Noonan, "The No-Obama Drama," The Wall Street Journal

Then there are the unpredictable twist and turns (and the investment implications) of political change -- think The Ides of March.

A week ago, Mitt Romney was wrapping up his likely nomination as the Republican presidential candidate.

No more.

The clear winner in South Carolina on Saturday night may not have been Newt Gingrich; it might have been President Obama.

Endorsements from established Republican leaders (Portman, DeMint, Graham, Pawlenty, Haley etc.) are no longer enough after Romney has only succeeded in winning one of the Party's first three state caucuses/primaries. Romney must now retool given the ascendancy of Gingrich's candidacy.

The prospects for regime change (and a new and market-friendly administration in 2013), which was one of my key market catalysts, has taken a turn for the worse, for now, with the newfound popularity of Republican presidential aspirant Newt Gingrich and the growing, heated and divisive conflicts between him and Mitt Romney. This emerging development has likely reduced the assurance of a Romney candidacy and what I had assumed to be a Republican November win. (The Republican Party is generally viewed as the more business- and market-friendly party.)

And Then There Is Europe

Europe's leaders are committed to keeping both the euro and the eurozone as it is. But for it to do so, everything must change, as the wonderful quote from the 1958 Italian novel suggests. This is no easy task, as no one wants a change that will impact them negatively; and there is no change that will allow things to stay the same that does not impact all severely, as we will see. In the third part of a continuing series, we look at the actual options that are available on the menu of choices, or as one group called it, the menu of pain.

-- John Mauldin, "Staring Into the Abyss," Investors' Insight (Jan. 21, 2012)

Over 2,150 years ago, the Roman poet Virgil once said, "I fear the Greeks, even when they bring gifts."

Virgil was ahead of his time!

The sovereign debt crisis saga continues.

While a potentially fatal affliction (and systemic risk) in Europe's ongoing saga has seemingly been taken off the table, morphing instead to a difficult condition that must be monitored closely, the heavy lifting of promised austerity and fiscal responsibility lies ahead, and with it, uneven progress, additional crises and uncertainty.

Some Positives but Future Economic Uncertainty

On the other hand, the market's price momentum is excellent, volatility is on the descent, as the major indices have not had a more-than-1% move on any day during the last 13 trading sessions (an important ingredient to improving investor confidence), and the high-frequency domestic economic statistics are showing continued improvement (albeit there was some deceleration in the rate of growth towards year-end). Regarding the latter point, we have to watch and be mindful that some of the recent improvement in economic growth reflects the consumer eating into his/her savings and 100% capital spending tax credits/benefits were in place -- they halved on Jan. 1, 2012 -- so it would not be surprising if some of the recent strength in fourth-quarter 2011 had been borrowed and pushed forward from early 2012. More squishy economic data in the first half will not likely be greeted well by investors, especially in the context of the recent market rise.

2012-01-23T15:11:00.000-08:00

There's no shortage of reasons why this market should pull back a little, but the bulls remain extremely stubborn. We had a sharp intraday reversal after early strength, but the dip-buyers provided support once again and kept the indices almost exactly flat.

Breadth was positive and strength in financials, precious metals, steel and coal kept the buyers busy, but oil stumbled and technology names were mixed. AAPL helped to cover up some weakness as anticipation for its earnings tomorrow night grew.

The market has substantial technical challenges and the arguments in favor of some sort of pullback continues to grow, but if there is one thing we've learned, the market can be extremely sticky to the upside even when it is obviously extended.

We have a slew of earnings reports hitting the rest of the week and I'm still concerned that the setup for some "sell the news" action is quite high. So far, we have avoided any major profit-taking or a rush to the exits, but there were quite a few reversals today in some stocks that have been squeezing higher, such as SHLD, SBUX and AMZN.

2012-01-21T03:26:00.000-08:00

The Ministry of Economic Affairs reported that Taiwan industrial production dropped over 8% in December.

The question is whether this weakness will find its way to mainland China, as over 40% of Taiwan's exports go to Taiwan and Hong Kong. (The U.S. is the next largest trading partner with almost 12%.)

I believe that the reallocation out of bonds and into equities has now begun.

The 10-year U.S. note is now yielding over 2%.

GE - When one takes into account Shinsei charges, corporate items and a lower tax rate, the company missed by $0.01.

Industrial equipment orders were a touch light. Most segments -- including transportation and GE Capital home/business were strong, but energy, aviation and health care saw sizeable misses.

The news flow was on fire over the last day or so:

1. Last night's earnings at MSFT (good), INTC (good), IBM (good), AXP (weak), COF (bad) and GOOG (awful)
2. ANOTHER Republican debate: Romney (weak), Gingrich (strong)
3. This morning's earnings at GE (weak)
4. Last night was the announcement of the preliminary HSBC PMI manufacturing for China (so so)

Didn't Get The Expected Selling; I'm Thinking It May Come Soon, However

2012-01-21T03:17:00.000-08:00

It was a deceptive day of trading, especially if you just looked at the DJIA, which rose nearly 100 points. The gain was entirely due to strong action in MSFT, IBM and INTC. Both the S&P 500 and Nasdaq were flat, but that was mainly due to big buy programs that hit in the final 15 minutes of trading.

GOOG was mostly ignored, but there was some weakness in key names such as AAPL, ISRG and AXP. Small-caps lagged with oil and gas plays being the worst of the bunch.

Perhaps the "sell the news" play was too obvious, especially with GOOG such a clear disappointment, but it sure looked like there was a concerted rotation into the slow-growth technology names. Perhaps that was driven by option expiration to some degree, but when market players are dumping the more speculative names and loading up on MSFT instead, you have to be at least a little concerned - or perplexed.

There are a number of things I didn't like about today's action, such as the leadership by slow-growth technology, the underperformance of speculative stocks and the highly manipulated close, but fighting the price action isn't the way to make money.

2012-01-19T17:08:00.000-08:00

LNC - I'd be interested again below 20. I have learned today (in a form 8-K SEC filing) that Frederick Crawford, the Executive Vice President of Corporate Development at LNC, has resigned (effective Jan. 20, 2012) and will be joining CNO shortly.

Unfortunately, I have to conclude that Lincoln National will not be sold anytime soon, as Crawford would not likely forego options and/or a golden parachute (on a control change) and leave the company if a deal was imminent or in the works.

"Volatility is fairly common this time of year."

-- Labor Department

Initial jobless claims came in 50,000 lower than the prior week's report at 352,000 (and compared to 384,000 consensus).

Apparently, the Monday holiday forced municipalities to estimate the claims figure.

Smoothing out the four-week average produces 379,000 (probably a better number).

Continuing claims also fell by a greater-than-expected 215,000. By contrast, extended benefits increased by over 105,000.

BAC - One-time items suggest a loss.

A combination of non-recurring items suggest that BAC's core results were in the red, far from the $0.15 a share reported.

Indeed, including a reserve release of 7 cents on top of other non-recurring factors (securities gains, etc.) it suggests that the company, on a recurring basis, had a loss of about 10 cents a share.

Revenues were light. Investment banking and equity activity were especially weak.

Tangible book value per share dropped from $13.22 to $12.92. The stock trades below $7.....

There may be a bustle in the fund-management hedgerow.

"Does anybody remember laughter?" -- Led Zeppelin, "Stairway to Heaven"

There has been no laugher in mutual fund land over the last few years as individual investors have fled equity funds for over five years.

Individual investors have taken out $450 billion from domestic equity funds since 2007 and have added $850 billion into bonds. That swing of $1.3 trillion is unprecedented in history.

Meanwhile hedge funds, according to The ISI Group, are now at their lowest net long exposure since the Generational Low of March 2009. And large pension funds are disproportionately skewed in a flight to safety into fixed income over equities.

It is for the reasons above that I have reasoned poor investor sentiment as a foundation block for the bullish market case this year and why the weekly investor surveys are not a particularly a good gauge for evaluating investor confidence. I prefer to watch what investors do, not what they say.

That said, according to ICI after 20 weeks of consecutive outflows of equity-focused U.S. mutual funds, the latest week showed a modest $1.5 billion of inflows.

This could be the start of something far bigger, like an inflection point after five years of negative fund inflow datapoints.

So, if you are looking for a catalyst for higher stock prices in a slow-growth enivronment, I continue to see a rotation into U.S. stocks and out of bonds (of all types) as a major investment theme in 2012.

I'm looking at TROW, WDR, OZM, LM, SCHW and ETFC, who will be material beneficiaries of a gradual move back into stocks (and out of bonds).

Already, the shares of the aforementioned are starting to outperform as investors seem to be anticipating a bigger reallocation trend that might have already started.

As Zeppelin's Page and Plant went on to write:

"And it's whispered that soon if we all call the tune
Then the piper will lead us to reason.
And a new day will dawn for those who stand long
And the forests will echo with laughter."

Selling Probably Takes Hold Tomorrow

2012-01-19T16:53:00.000-08:00

The earnings reports are coming in and, so far, the big news is that GOOG missed both the top and bottom line and the stock is down sharply in after-hours trading, about 9%.

IBM, INTC, MSFT and ISRG are all trading slightly higher on their reports. There aren't any big upside surprises, but the numbers are good enough to keep the sellers at bay.

Today is particularly important to see if a "sell the news" reaction takes hold. Expectations are fairly high, and we are technically extended and in need of consolidation, so conditions are ripe for selling. But the dip buyers have been in control recently and have not been in a hurry to step aside.

Although the indices went out near their highs today, there were quite a few pullbacks in individual stocks intraday. We are just too extended in places for profit-taking not to occur. The big issue is whether it develops into something more extreme once we pause. The latter part of January has a tendency toward weakness.

2012-01-18T17:47:00.000-08:00

It's often said that said history doesn't repeat but it often rhymes.

My favorite sector to buy is the life insurers, and my favorite sector to short is dental.

Egan-Jones ratings agency has lowered Germany's sovereign debt rating from AA to AA-.

Equity markets didn't flinch as risk is back on today.

MTG under $4 looks very tempting.

Industrial production rose by 0.4%, a slight miss to expectations as the warm weather likely negatively influenced the print.

The results are supportive of at least 3% real GDP in fourth-quarter 2011.

Samsung stated it has no intention of acquiring Research In Motion, according to reports.

The rumor du jour yesterday was that Samsung had approached Research In Motion (RIMM) in a takeover in the mid-$20s.

Goldman Beats - Low compensation levels had a levered bottom-line benefit.

2012-01-18T17:22:00.000-08:00

One of the complaints about this market recently is that we have not seen good sustained momentum intraday. That changed as today was a solid trend day. The dip-buyers jumped in on some very minor weakness and then pushed us higher all day long. Breadth was solid at almost 3-to-1 positive.

Oil, banks, retail and biotechnology all performed well but the star of the show was semiconductors. Good reports from LLTC and ASML caught a lot of folks by surprise and set the sector on fire.

While it good to see some leadership in technology names, the pessimists were mumbling about how strength in chips so often marks a market top. We have seen it happen quite often where a big move in the SMH comes shortly before a market turn. I'm not buying the argument, but it is worth noting as earnings roll out.

We have some earnings hitting tonight, most notably FFIV, but tomorrow afternoon is when the major fireworks start. After the close tomorrow, we have AXP, GOOG, IBM, INTC, ISRG and MSFT. That will be the most important night of earnings this quarter, so look for a lot of jostling around tomorrow as market players move into position.

2012-01-17T17:24:00.000-08:00

Barron's published a negative column on the private mortgage insurers over the weekend that seemed hyperbolic, inconsistent and wrong-footed in areas of (fundamental) substance.

Specifically, the Barron's column suggested that reserves are understated based on the analysis that defaults will rise and cures will come down in the period ahead.This simply is inconsistent with the recent and current data trends that are incorporated in industry reserve policy.

The article failed to identify some positives (e.g., the runoff value of the industry's portfolio) and failed to recognize that the housing markets (pricing, turnover and new orders) are, in general, stabilizing and, in areas not exposed to large shadow inventory for sale, certain regions are actually improving.

Finally, the article didn't incorporate some positive news that came from RDN late last week.

Run, don't walk, to read Jeff Matthews' blog on Sears Holdings today.

SHLD shares are trading much higher this morning after Lampert added to his personal holdings in the shares.

The January New York Manufacturing Survey surprised to the upside, rising to 13.5 (consensus was 11.0) and comparing to 8.2 in December.

This is the best number in seven months.

New orders rose to 13.7 from 6.0, and backlogs were less negative. Employment improved markedly from 2.3 to 12.1.

Domestic and non-U.S. concerns are known, will not likely be discounted again and, importantly, will likely diminish in consequence. Markets typically fall or rise (sharply) on the unexpected. Our fiscal imbalances and those of our counterparts are more appreciated than they were a year ago, when there was almost universal agreement (by the Fed, Wall Street strategists, etc.) of a normal duration (to history) and self-sustaining economic cycle. That optimism was incorporated in a consensus 15%-20% gain for the U.S. stock market and proved incorrect. Good times (late 2010) morphed into worsening times last year, as economic growth expectations failed to be realized and were marked down. With the benefit of hindsight this provided a strong headwind to stock prices in 2011.

Monday's European equity markets closed near their highs; our futures are substantively higher; French, Spanish and Italian bond yields dropped; and the euro has advanced smartly against many currencies (up by nearly 1% against the U.S. dollar at the time of this writing) -- it is not out of the question that the reaction will not be dissimilar to the reaction to the U.S. downgrade during the summer. On the positive side, S&P's (those wonderful folks who brought us AAA subslime ratings back five years ago) European ratings change could serve as a catalyst to hard but coordinated fiscal and political decisions -- the heavy lifting is still ahead -- that will ultimately produce more positive outcomes and stability.

As I have previously written, European "tame and timid" will, in the fullness of time, become "shock and awe," as Europe's leaders and central bankers eventually do what has to be done. February's liquidity add through the long-term refinancing operation facility will likely stabilize the debt crisis in Europe. And the ECB is already thinking more "shock and awe" based on a report in The Wall Street Journal this morning. In the fullness of time, Greece (which all now know is already bankrupt) and its lenders will agree to deeper writedowns of debt, as that country remains in the EU. More is to come.

Negatives have been sufficiently discounted. The S&P 500 now trades at only 12.2x estimated 2012 earnings consensus, 3 multiple points below the last 50 years' average (when the yield on the 10-year U.S. note approached 6.70%) and nearly 7 multiple points below times in history when interest rates and inflationary expectations were similar. The consensus, upbeat 12 months ago, is now downbeat, as vividly illustrated by the interview with Pimco's Bill Gross who, along with many others, ask now whether there will be another economic/debt apocalypse. But how will the apocalypse occur?

With "the new normal" of de-leveraging, re-regulation, de-globalization and slowing economic growth now embraced by consensus, investors' expectations are lowly ebbing, as individuals and institutions have materially de-risked in response to growth assumptions. Economic growth expectations, which surprised to the downside in 2011, have been recast to lower expectations as a baseline view and, as such, have been materially discounted. Surprises could come from the upside in 2012 to that baseline and lowered view. (Last night already saw two surprises, as the German confidence index exhibited the largest one-month rise in history and China's GDP rose better than expectations. The later report resulted in the largest upside move in the Chinese stock market since late 2009.)

A market crescendo will build throughout 2012. I expect that U.S. share prices will slowly climb the wall of worry in the first half of the year as the European crisis stabilizes, owing to a growing commitment by European leaders and central bankers to do whatever is necessary to avoid the unimaginable. At the same time, high-frequency domestic economic statistics will likely continue to gradually improve, led by surprising strength in housing and automobile industry sales.

Prospects for a U.S. political regime change will embolden investors as the year unfolds. A business- and market-friendly Republican leadership will look increasingly likely to replace the current administration as the year progresses. A crescendo-like buildup in consumer and business confidence will likely unfold.

Interest rates remain low, and inflation stays quiescent. A market-friendly Fed (and a worldwide global loosening of the monetary reins), a still-large manufacturing output gap and a "not too hot, not too cold" jobs picture (which will contain wage inflation and protect corporate profit margins) could contribute to a crescendo-like buildup in stock valuations. It is not inconceivable that the contraction (around 15% in valuations in 2011) will be entirely reversed in 2012. This expansion in multiples, coupled with near-10% earnings growth, could produce an outsized and totally unexpected 20%-25% gain the S&P 500 this year.

2012-01-17T17:07:00.000-08:00

Today was one of those days that looks good if you just consider the closing numbers, but much less positive if you consider the intraday action.

The market gapped up and then did absolutely nothing. Breadth deteriorated steadily and the vast majority of stocks closed lower than they opened. We did stay positive, and the Nasdaq led, so give the bulls respect, but they have had a tendency to be very lazy following these big gap-up opens.

The challenge of this market is that we have good underlying support but very little strength other than the gaps that we had three Tuesday mornings in a row. It is much harder to catch the recent strength than many people think. Obviously, the buy-and-holders are happy no matter how the market gains. But for active traders, this environment makes it very hard to have good long exposure at the right time.

One positive for the bulls today was that the poor earnings report from C didn't do more damage. Financials were the primary laggard today, but the pullback was mild and there didn't seem to be any great worry, even with heavyweight GS on deck in the morning. On the other hand, C continues the pattern of weak earnings that we have seen so far this quarter, and you have to wonder if the market can shrug it off for long if the onslaught continues.

Overall, the market action isn't bad but it lacks energy, momentum and leadership.

2012-01-15T18:40:00.000-08:00

Standard & Poor's website confirms that the ratings agency has cut France's debt rating by one notch.

AA is the new AAA

The University of Michigan confidence survey came in at 74, almost 3 points above expectations and up from 69.9 last month.

Outlook and current conditions improved.

This was the fifth straight month of improving prints in confidence.

Here is a good synopsis of the S&P downgrade issue by Miller Tabak's Peter Boockvar:

With the likelihood of an S&P credit downgrade of France, Spain, Italy, Belgium and Portugal, it's important to understand that #1, they are just following what the markets have priced in and #2, Fitch and Moody's in some circumstances have already moved ahead of S&P. With respect to France, they will likely lose their AAA rating at S&P but Fitch specifically said earlier in the week that they will maintain their AAA rating for them thru 2012. On Italy, S&P is currently at A, in line with Moody's and one notch below Fitch. A downgrade will likely take them to A-. With Belgium, S&P is at AA, one notch above Moody's and one below Fitch. Portugal has a BBB- S&P rating, two notches above Moody's and one above Fitch, so catch up is what S&P would be doing with them. With Spain, S&P is already one notch above Moody's at AA-. We'll also see whether Austria loses its AAA rating. Following a French downgrade, the EFSF will also lose its AAA rating but buyers of EFSF bonds have certainly been put on notice that it was a high likelihood. I say this all from a credit perspective because equity markets have behaved with a much more sanguine view of things that doesn't fully square with the reality of a very tenuous global economy.

JPM - investment banking and capital markets activities were worse than expected while credit and compensation ratios were better. A lower tax rate (22% vs. 34% consensus) contributed to the bottom line, which appeared to be about $0.95 a share at its core.

The bank completed its buyback program (nearly $1 billion in fourth quarter 2011).

The commentary indicated an improving commercial and industrial loan picture and continued progress in credit.

As GS mentions in its assessment of this report, it was a relatively low-quality report (after 11 consecutive quarters of beats), which could weigh modestly on the bank sector (after its market-leading performance thus far in 2012).

Every American citizen should be concerned about the Fed's lack of transparency and poor forecasting abilities.

Richmond Fed President Jeffrey Lacker was forecasting 2011 real GDP growth in the U.S. at 3.5%; it came in half that amount.

Lacker admits that he and the other Fed members only recently realized that the structural headwinds (fiscal imbalances, structural unemployment, etc.) in the U.S. will limit and be a governor on domestic growth.

I find this mind-boggling and scary, as, with 150-plus economists on staff, this is not exactly confidence-building and exposes a serious and fundamental flaw in the Fed's forecasting and in the policy based on that errant forecasting.

As a result, it shouldn't be too surprising that many, in support of Ron Paul, are in favor of abolishing the Federal Reserve.

It's embarrassing for the Fed. You see an awareness that the housing market is starting to crumble, and you see a lack of awareness of the connection between the housing market and financial markets. It's also embarrassing for economics. My strong guess is that if we had a transcript of any other economist, there would be at least as much fodder.

-- Justin Wolfers, Economics Professor at the University of Pennsylvania

This morning, the Fed released transcripts from the mid-2000s (covered by both The Wall Street Journal and The New York Times) that revealed an unflagging optimism and provided a profoundly unflattering view of Greenspan, Geithner, Bies, Warsh, Yellin, Bernanke et al. in their ability to foresee the economic collapse and debt crisis in 2007-2009.

Here are some examples of several wrong-footed quotes from some of the Fed's players during the 2006-2007 period, which was the end of the housing boom:

"I think we are unlikely to see growth being derailed by the housing market."

-- Ben Bernanke, Federal Reserve Chairman

"It's fitting for Chairman Greenspan to leave office with the economy in such solid shape. The situation you're handing off to your successor is a lot like a tennis racquet with a gigantic sweet spot."

-- Janet Yellen, Vice Chairman of the Federal Reserve

"I'd like the record to show that I think you're pretty terrific, too (referring to Greenspan). And thinking in terms of probabilities, I think the risk that we decide in the future that you're even better than we think is higher than the alternative."

-- Timothy Geithner, Treasury Secretary (praising Greenspan in Greenspan's final Fed meeting)

"I would say that the capital markets are probably more profitable and more robust at this moment, or at least going into the six-week opportunity, than they have perhaps ever been."

-- Kevin Warsh, Former Federal Reserve Governor

The Fed's lack of transparency and poor forecasting abilities (at nearly every inflection point) should be a concern to every American citizen, as the Fed wields huge power in establishing monetary policy.

Perhaps too much power.

2012-01-15T18:27:00.000-08:00

Weaker-than-expected earnings from JPM and downgrades of European sovereign debt gave the market good excuses for profit-taking, but the dip-buyers refused to give up and closed the indices at the highs of the day once again.

We still had plenty of red on the screens and breadth was around 2-to-1 negative, but the underlying support was impressive, as it has been every day this year.

Apparently, the bulls are more worried about being left behind than about being caught by bad news. In other words, greed over fear. We had some negative economic news this past week and it simply didn't matter. The only news that was positive was that stocks refused to go down.

The big question now is whether earnings season is going to change the character of this market. Expectations, as measured by the action in the indices, are quite high, which creates a danger of a 'sell the news' reaction. But if the dip-buyers stay with us, those pullbacks may just be good buying opportunities.

We shall see how things react as the reports roll out, but I wouldn't be surprised if we see more stocks act like JPM did today, which gapped down and lost 2.5% on the day but bounced well off its early lows.

The dilemma is that while we have very tenacious support and active dip-buying but rather lackluster momentum. We hold up well but don't really gain substantial traction. It is strong enough to frustrate the bears but not energetic enough to attract the hot money.

2012-01-12T16:39:00.000-08:00

Run, don't walk, to read Mark Gongloff's blog in The Wall Street Journal, "Investors Talking Like Bulls, But Investing Like Bears" in the boo-hoo rally.

Stated simply, the 30- year auction didn't receive the good reception that the three- and 10-year notes did earlier in the week.

The market's advance has the potential to get disorderly to the upside.

Never forget that the market inflicts the most pain on the most investors.

So, with hedge funds as underinvested as at March 2009, retail investors uncommitted (2011 was another year of large outflows) and strategists downbeat, I have learned over the years that we should never underestimate the power of the schwartz!

January Philly Fed business conditions come in at 6.8 vs. consensus of 5.0 and December's 3.6.

Spanish 10-year bonds are down 13 basis points in yield, to 5.13%, and Italy's has dropped by 30 basis points, to 6.64%.

As well, the euro is stronger, European stocks are elevated, and the three-month Euribor rates have declined to the lowest level in 10 months.

According to a report, CIT Group will no longer provide financing to suppliers of Sears that are awaiting payment.

SHLD may declare b/k soon. Cash flow has evaporated; (already down $800 million 2011 over 2010). With funding and vendor support evaporating, as paper-thin earnings before interest and taxes margins turn negative and cash flow is insufficient to fund inventory growth, the company may file. If that happens, expect ten to fifteen percent of Sears' 4,000 Kmart and specialty stores to close and more than 35,000 of the company's 317,000 full-time workers laid off. As a major anchor tenant in many of the nation's shopping centers and with no logical store replacement, the REIT industry's shares may suffer through the balance of the year.

Sears dismissed the issues citing that "the payables the firm had financed amounted to only 5% of their inventory." The company went on to say that "Sears Holdings has more than adequate liquidity."

2012-01-12T16:26:00.000-08:00

The two strategies that have worked so far this year are to sell opening strength and to buy the early dip. We were able to do both today. Higher-than-expected unemployment and weak retail sales numbers gave the bears a little ammunition, but it didn't last long against tenacious dip-buyers that jumped in as soon as we tested the prior-day lows. We were able to work steadily higher the rest of the day and even managed to close around where we started.

Once again, there was impressive dip-buying, but it didn't result in any big point gains. The action tends to feel better than it really is when we have moves like this because the intraday recovery to breakeven is substantial.

Even with relatively minor point gains, breadth was solid with about 3350 gainers to 2100 decliners. Unlike yesterday, we didn't have clear pockets of momentum. The movement was much more random, but there was plenty of good trading. Individual stock-picking mattered, and that is always refreshing.

Next week the focus turns to earnings. High expectations are dangerous here, but if you consider that the indices are at multi-month highs, that seems to be exactly what we have.

2012-01-11T16:16:00.000-08:00

Shorting fixed income in the U.S. continues to be a good hedge.

Though Yale's Robert Shiller agrees with me on a possible bond bubble, shorting fixed income in the U.S. continues to be a good hedge against profits as the flight to safety persists.

Today's 10-year U.S. note auction was good, with a strong bid-to-cover ratio of 3.29 -- much better than the average over the last year at around 3.13, and the second-best ratio in 2011. Direct and indirect bidders took 56% of auction, in line with averages last year.

More scary stuff between Iran and Israel.

Lacker admits that he and the other Fed members only recently realized that the structural headwinds (fiscal imbalances, structural unemployment, etc.) in the U.S. will limit and be a governor on domestic growth.

I find this mind-boggling and scary, as, with 150-plus economists on staff, this is not exactly confidence-building and exposes a serious and fundamental flaw in the Fed's forecasting and in the policy based on that errant forecasting.

As a result, it shouldn't be too surprising that many, in support of Ron Paul, are in favor of abolishing the Federal Reserve.

I'm hearing rumors in Europe of a French ratings downgrade this afternoon.

Of note, last night the Goldman Sachs strategy group came out optimistically on the 2012 outlook for Chinese shares, looking for a 17% rise in value.

I suspect they are too low in their price target for the Chinese stock market.

2012-01-11T15:39:00.000-08:00

The market continues its pattern from 2011 of bouncing back from weak opens. We have had early weakness on five of the first seven trading days this year, and closed strong on each of those days. The indices didn't do a lot, but improved nicely through the day.

Most notable was speculative action in low-priced, garbage stocks. Solar energy, homebuilders and China were the most active, with a smattering of biotechs and technology names.

I'm not sure what the catalyst was for this sudden burst of activity in low-priced stocks, but it makes me feel better about the market. Maybe it's a new variation on the January Effect. One thing we have lacked for some time is real excitement about price action. The fact that we had aggressive trading in junk stocks again makes me believe the good old days might not be completely gone.

We have a few more days before earnings next week, and there isn't much news that favors more of this type of trading. I'm concerned that we are going into earnings season with high expectations, which could cause trouble.

2012-01-10T16:48:00.000-08:00

Microsoft says PC sales probably fell short in the fourth quarter.

From HedgeEye's Keith McCullough.

"Volume like this is putting every guy that came into the year net short/neutral in a very uncomfortable position."

I see low volume and retail and hedgehoggers' derisking as a positive and a potential sign of latent market demand down the road.

Moreover, today the aggregate volume is rising -- and, historically, rising volume and better share prices are a benign cocktail and a signal that I might be on the right track.

Volumes today are +44%, +31% and +16% vs. 10-day, 20-day and 30-day averages, respectively.

We have entered the Tim Tebow Stock Market -- low on expectations and high on results.

When Tebow was drafted after graduating from the University of Florida, few expected him to be NFL material. It was generally assumed his passing arm was not good enough -- but he has quieted his critics, some of them, for now. In the longer run, however, Tebow won't make it. But for now he's winning.

As for the market, until individual investors and hedge funds re-risk -- and that process has not even started -- today's breakout can continue for some time to the upside ... well above levels that the consensus sees as "fair value."

The market, I believe, will surprise to the upside in the near term for the following fundamental, technical and sentiment reasons:

1. Poorly positioned market participants: Forget put/call ratios, Investors Intelligence and AAII readings -- investors (of all shapes and sizes) are now negative and could be caught offside. Watch not what they say; watch what they do. And the dominant investors (retail and institutional/hedge funds) are underinvested and/or skewed disproportionately in a "flight to safety" into fixed income over equities. Individual investors have taken out $450 billion from domestic equity funds since 2007 and have added $850 billion into bonds; that swing of $1.3 trillion is unprecedented in history. Hedge funds, according to ISI, are now at their lowest net long exposure since the Generational Low of March 2009.

2. Technical breakout: We closed trading on Monday right at resistance in the major indices. Given the sharp rise in futures overnight (+12 handles), we will easily pierce through resistance at the open and break out of the recent trading range. This action will encourage technically based chasers of market momentum.

3. Big rotation: The rotation from high-octane, high-beta leadership (Priceline (PCLN), Google (GOOG), Baidu (BIDU), etc.) has investors poorly positioned. Google's sudden weakness, in particular, has scared a number of hedgehoggers into materially raising cash in recent days. Meanwhile, financial stocks have been meaningfully outperforming in 2012. Don't market historians tell us that a better tone for the financial sector is a necessary condition and reagent for a better stock market? Yet that turnaround of the financial continues to be treated with skepticism by most. (How many times have you heard that the sources of banking revenues are greatly reduced in "the new era" for banks, and that return on capital is destined to be in the single digits given that the industry is a regulatory piñata in an era of populism?

4. Mispaced preoccupation with Europe: The European situation has improved. Timid policy response is moving toward "shock and awe" -- yet investors are still scared to wake up every morning to rising sovereign bond yields, and that fear is keeping them sidelined. Unicredit's deep discount rights financing (and the specter of more dilutive bank refinancing) have especially scared investors in the last week. But who cares at what price Unicredit and others finance ... as long as they finance! Deep discount capital raises dominated the U.S. banking landscape three years ago, and now our banks are positioned well in terms of liquidity and capital (and most experienced outsized market advances in their shares following their 2008-09 refinancings. As to the weakening euro, a weak euro and a strong U.S. dollar only helps our capital markets as more investors buy American at the expenses of other non-U.S. markets. I see the rotation into U.S. stocks and out of non-U.S. stocks as a dominant theme in 2012.

5. Recent earnings cuts discounted: Memo to negative strategists: The market has likely already discounted (with a 15% decline in price-to-earnings ratios in 2011) a diminished profits outlook.

6. Likely regime change in the U.S.: Though the odds of a Republican presidency have improved, most investors are ignoring this "market friendly" development that could occur within the next 12 months.

7. Better economic data: Consistently ignored have been improving domestic economic releases (PMI, consumer confidence, housing, automobile industry sales). Fourth-quarter real GDP growth should be 3% to 3.5%. But more important is that the prospects of a self-sustaining U.S. economic recovery have been more solidified in the past six weeks.

8. Contained geopolitical risks: Investors remain justifiably fearful of North Korea and Iran. But, geopolitical risk will be a constant risk in our life and in our investments. We should monitor but not let geopolitical issues predominate our investing thinking.

9. Market-friendly rates: Low interest rates around the world in 2012-13 mean that any model based on interest rates results in a very inexpensive market valuation. Risk premiums, for example, hit a 37-year high recently. We have to go all the way back to 1974 to see similar levels -- and in 1975 and 1976 the S&P 500 index returned 35% and 19%, respectively, after a similar spike in risk premiums. (I continue to expect a massive reallocation trade out of bonds and into stocks.)

10. Lower volatility: Crazy market swings scared off and alienated investors over the past year. Shouldn't the recent collapse in volatility help bring back investor confidence?

For these reasons, I continue to take the variant view that the U.S. stock market could surprise people to the upside in the near term.

2012-01-10T16:34:00.000-08:00

The market pattern so far in 2012 is clear: fade the open. If it's weak early, buy. If it opens strong, sell

The market enjoyed a nice move today, but it all came at the open. We had no traction intraday, which is exactly what happened on Jan. 3, when we kicked off the new year with a big early gap.

We are up nearly 3% in a week but it all came overnight. Even though all the gains came at the open, it was an extremely strong day. Breadth was better than 3-to-1 positive, and all major sectors, particularly oil and commodity-related names, did well.

The main thing to keep in mind about action like this is that it creates a lot of underlying bids. Those who get caught underinvested tend to become aggressive dip-buyers, especially since many of them are suffering from underperformance.

Once again, we're in a very familiar place. The indices are acting well, but don't have convincing volume or momentum.

2012-01-09T14:30:00.000-08:00

From my perch, the consensus view is that the markets will move higher in the second half of 2012 but will face headwinds over the first half of the year. By contrast, a contrarian view would be for a near-term move to the upside -- putting offside most who are waiting for summer/early fall to expand market exposure.

To reiterate, I wouldn't be surprised to see AAPL trade over $500 this year, based on continued above-consensus volume growth in the iPhone and iPad. Profit forecasts for 2012 could rise to nearly $50 a share (up about 60%). In the second quarter, I wouldn't be surprised to see Apple pay a $20-a-share special cash dividend, introduce a regular $1.25-a-share quarterly dividend and split its shares 10-1. Jobs is gone. Cook will handle the stock much differently, in my opinion.

The SEC is playing hardball, as several high-level insider trading cases have advanced recently; these cases could reach some of the most prestigious hedge funds around.

As we enter 2012, the optimistic economic and market consensus of a year ago has turned far more subdued. Reflecting more downbeat economic growth and investor expectations, individual investors (taking another $100 billion out of domestic equity funds) and hedge funds (now at their lowest net long exposure since the Generational Bottom in March 2009) have materially de-risked.

Consensus rarely triumphs in the stock market, and I see 2012 as another year in which the consensus will be wrong.

While I fully recognize the world is imperfect, the blemishes are now well known and, arguably, incorporated in current share prices. More importantly, three pressing concerns (high volatility, a mounting European debt crisis, a weakening domestic economy and the division between the Republican and Democratic parties) are moving in the right direction. And, the fourth, our divided leadership incapable of compromise, might now be coming closer to resolution with a country that appears to be leaning toward the Republican party. A close Romney win has been my baseline expectation for over a year, and such a political outcome would be more market-friendly than would occur with another four years under President Obama.

In Europe, political leaders and central bankers are slowly addressing their sovereign debt problems. Very slowly. Though tame and timid in approach at the outset, more "shock and awe" has been employed -- and more is likely on the way. It is my view that the eurozone affliction is moving toward a condition that can be tolerated by the markets (but must always be monitored).

Another market-friendly condition is that central bankers around the world have signaled increasingly accommodative monetary policies. With inflation quiescent, low short-term interest rates are likely to remain for some time.

With better economic growth ahead in the U.S. and the hope for some stability in Europe, a meaningful rotation out of bonds and into stocks is a growing possibility. U.S. stocks have had an average P/E multiple of 15.3x over the past 50 years, while the yield on the 10- year U.S. note has averaged 6.67%. Today, U.S. stocks trade at only 12.5x with the yield on the 10- year U.S. note at around 2%. Moreover, historically U.S. stocks have been valued at 17x-18x when interest rates and inflation (and inflationary expectations) are around current levels.

Risk premiums (the earnings yield less the risk-free cost of capital) are now elevated and back to levels last seen in 1974 as European sovereign debt issues have accentuated the flight to safety. It is important to note that following the last spike in risk premiums 37 years ago, the S&P 500 index returned +35% and +19% in 1975 and 1976, respectively.

These low stock market valuations (mentioned above) will likely serve as a margin of safety for stocks. I also believe strongly that conditions have evolved over the near and intermediate term that have conspired to favor risk assets in the U.S. over many other areas of the world.

To summarize, I believe 2012 will be a surprisingly good year for the U.S. stock market. I anticipate that domestic economic and profit growth will surprise to the upside, and I am of the view that market valuations will expand (after contracting in 2011). If Europe settles down, the flight to safety of 2010-11 should become a thing of the past this year, and fixed-income instruments could take the brunt of the damage in a potentially large reallocation out of bonds and into equities.

I fully recognize that the slow worldwide economic growth exposes economies and markets to exogenous shocks, but I also think much is discounted in current prices.

2012-01-09T14:11:00.000-08:00

Once again, the market saw solid dip-buying after a weak start. Four of the first five trading days of 2012 started slowly and closed well. Strong finishes tend to indicate that market players are trying to add long exposure intraday because they are afraid the market will continue to run without them. It's better than a series of strong opens and weak closes.

On the other hand, volume is mediocre, breadth mixed and we aren't seeing much in the way of point gains on the indices. There are some pockets of momentum, with biotechnology the most notable today, but there also is some troubling action in GOOG, TGT and AMZN.

2012-01-08T23:52:00.000-08:00

Run, don't walk, to read Jim Cramer's more cautious view of Europe's influence on U.S markets.

Sanford Bernstein lowers Goldman Sachs' fourth-quarter 2011 EPS to $0.77 from $3.15.

Don't be surprised if, in the 2nd quarter, AAPL pays a $20-a-share special cash dividend, introduces a regular $1.25-a-share quarterly dividend and splits its shares 10-1. I could easily see it trading well over $500 this year. I think it very well may become the T of a new investing generation, a stock to be owned by this generation's widows and orphans.

2012-01-08T23:41:00.000-08:00

The first week of 2012 is in the books and it wasn't bad. We managed a gain of 1.58% in the S&P 500 but if you bought the SPDR S&P 500 (SPY) at the open Tuesday and sold at the close today, you just about broke even as the majority of the gains came over New Year's weekend.

On the other hand, we did have good intraday trading opportunities as dip buyers jumped in on soft opens three straight days. The bounce was a little less energetic today, but again, we managed a decent recovery and had good support. When the dip buyers are busy, that usually bodes well.

Probably the most notable development this week was that we ignored poor action in Europe. Better-than-expected jobs news was the main reason for that, but I expect it also had something to do with positioning and the various games that occur at the start of a new year. I don't think we've seen the last of Europe, but perhaps we will see a little less sensitivity to it -- unless some new drama develops.

Earnings are coming, so next week will be all about expectations.

2012-01-05T21:14:00.000-08:00

The White House denies the report of a massive home refinancing program.

If the equity market continues its advance and bonds start slipping, THE BIG REALLOCATION TRADE (out of bonds and into stocks) is ever closer at hand.

And that could make for fireworks in the months ahead.

Our equity markets, to use a phrase that is being used more frequently (perhaps too much so!) these days, may have become the best house in a bad neighborhood.

Here are 10 reasons for my optimism:

1. U.S. relative and absolute economic growth is superior to global growth. The U.S. economy, though sluggish in recovery relative to past expansions, is superior to most of the world's economies (with the exception of some emerging markets) in terms of diversity of end markets, quality of global franchises, management expertise, operating execution and financial foundations.
2. U.S. banks are well-capitalized, liquid and deposit-funded. Our banking industry's health, which is the foundation of credit and growth, is far better off than the rest of the world in terms of liquidity and capital. Our largest financial institutions raised capital in 2008-2009, a full three years ahead of the rest of the world. As an example, eurozone banks continue to delay the inevitability of their necessary capital raises. Importantly, our banking system is deposit-funded, while Europe's banking system is wholesale-funded (and far more dependent on confidence).
3. U.S. corporations boast strong balance sheets and healthy margins/profits. Our corporations are better positioned than the rest of the world. Through aggressive cost-cutting, productivity gains, external acquisitions, (internal) capital expenditures and the absence of a reliance on debt markets -- most have opportunistically rolled over their higher-cost debt -- U.S. corporations are rock-solid operationally and financially. Even throughout the 2008-2009 recession, most solidified their global franchises that serve increasingly diverse end markets and geographies.
4. The U.S. consumer is more liquid and stable. An aggressive Fed (through its extended time frame of zero interest rate policy) has resulted in an American consumer that has re-liquefied more than individuals that live in most of the other areas in the world. (Debt service and household debt is down dramatically relative to income.)
5. The U.S. is politically stable. After watching regime after regime fall in Europe in recent weeks (and given the instability of other rulers throughout the Middle East), it should be clear that the U.S. is more secure politically and from a defense standpoint than most other regions of the world. Our democracy, despite all its inadequacies, has resulted in civil discourse, relatively balanced legislation, smooth regime changes and law that has contributed to social stability and a sense of overall order.
6. The U.S. has a solid and transparent corporate reporting system. Our regulatory and reporting standards are among the strongest in the world. Compare, for example, the opaque reporting and absence of regulatory oversight in China vs. the U.S. (It is beyond compare.)
7. The U.S. is rich in resources.
8. The U.S. has a functioning and forward-looking central bank that is aggressive in policy (when necessary!) and capable of acting during crisis.
9. The U.S. dollar is still the world's reserve currency and is far more solid than the euro.
10. The U.S. is a magnet for immigrants seeking a better life. This and other factors have contributed to a better demographic profile in our country that has led to consistent population growth and formation of households. (Demographic trends in the U.S. are particularly more favorable for growth than those population trends in the Far East.)

ISM services index came in at 52.6 vs. consensus at 53 and November at 52.

There were no surprises in the components, though the labor component was weaker than the ADP report.

Risk premiums are back to 1974 ratios -- and that level led to 35% and 19% S&P 500 rebounds in 1975 and 1976, respectively.

2012-01-05T20:48:00.000-08:00

The market did a surprisingly good job of shrugging off weak action in Europe. We gapped down to start the day on the usual negative headlines, but chugged steadily upward the rest of the day and even gained traction after Europe closed in the red across the board.

Have we finally stopped moving in lockstep with each new development in Europe? That would be nice, but those problems are not going to go away quickly or easily, and they are severe enough to be a continuing issue. It's progress when we can have a day without the European pall, but it's premature to believe that we will become completely uncoupled.

The supposedly-strong-but-not-really ADP employment report certainly helped the mood, but it is going to be quickly tested by the government report tomorrow morning. I suspect the bears stood aside this afternoon rather than risk being squeezed on that news in the morning.

After the close, we had another warning in the technology sector and one in the retail group. This is by far the most warnings in quite some, time but we have yet to see much of it reflected in the overall market. Good earnings have been the best thing that market has had going for it since the lows in 2009, and it is going to be interesting to see how we deal with it if we don't see the same level of beats as the past quarter.

2012-01-04T15:31:00.000-08:00

Rumors of dubious QCOM accounting practices; what took them so long?

The last time risk premiums were this high (in 1974) the S&P index rose by 31.5% in 1975 and 19.1% in 1976.

Rising interest rates will accelerate and hasten the almost inevitable rotation out of bonds and into stocks (as losses mount).

Rising interest rates will benefit the savings class, who will have more money to spend.

Market sectors with balance sheets that have an imbalance of rate sensitivity on the asset side -- like banks and insurance stocks -- will thrive as interest rates rise.

Rising interest rates will encourage fence-sitters who plan to make durable purchases (e.g., housing and autos) to take the plunge and buy.

Rising interest rates will signal to many that the economy is advancing.

Run, don't walk, to read monthly commentary from Pimco's Bill Gross, "Towards the Paranormal."

A year ago, I predicted Romney would be the next POTUS. Despite the closeness of the Iowa race, I continue to strongly expect Mitt Romney to be the Republican presidential nominee and to become the next president.

2012-01-04T15:17:00.000-08:00

The market battled back from a poor open and the senior indices even managed to end with minor gains, but it was tired action with a few big-caps, MSFT, AAPL and GOOG, doing most of the heavy lifting.

The big question is whether the market is vulnerable to a pullback as positive seasonality winds down and we enter earnings-warning season. We are still a bit overbought and the action has been a little tired, but we were able to shake off European worries and the struggling euro.

One thing that has plagued this market for a while is the lack of any real leadership. That needs to change for us to have a powerful market move. Strong markets need leadership, and this one doesn't have much. Overall, the market is in OK shape but a bit tired and in need of more energy and leadership.

2012-01-03T16:56:00.000-08:00

The December ISM came in at 53.9 (above expectations of 53.5) and better than 52.7 in the prior reporting month. That's the best print in six months and well above the six-month average and long-term average of about 51.7. In terms of components production and new orders, we're at an eight-month high.

If there is one factor that is beginning to concern me regarding the markets and the economy, it is the rising price of crude oil -- now up by nearly $4 a barrel, to $102.50.

From my perch, the four conditions for a sharp upward turn in equity prices are moving into place:

1. reduced volatility;
2. improving domestic economic statistics;
3. aggressive moves to address/contain the European debt contagion;
4. and a more pro-active movement on the U.S. fiscal imbalances and pro-growth policy (in large measure brought on by a growing likelihood of a Republican presidential win in November).

A soft landing in China and India? China's December PMI was better than expected at 50.3 -- the consensus was at 49.1 -- and the prior month came in at 49.0. China's December non-manufacturing PMI at 56.0 was well above the November print at 49.7. Manufacturing expanded above consensus in India.

German unemployment fell by a better-than-expected 22,000 jobs. U.K. December manufacturing also rose above expectations.

2012-01-03T16:46:00.000-08:00

Of course, the news media is celebrating the fact that the indices kicked off 2012 with a good-sized gain. But for traders, it was awful. Following the gap up to start the day, we traded poorly and closed at the low. All the gains came overnight, and there was no intraday momentum to be found.

Breath was quite good and all major sectors were in the green, but volume was light and few, if any stocks, closed at their highs. It's the same action that has frustrated traders for months because all the movement occurs overnight. Pure day traders, who aren't carrying any inventory, had few chances to match the gains of the indices.

The second day of the new year is generally considered the close of the holiday trading period, and much of the artificiality caused by mark-ups, positioning and tax moves end. That doesn't mean stocks will suddenly start trading on their individual merits, but there should be a bit more focus on stock picking as we head into earnings season.

2011-12-30T14:59:00.000-08:00

Done for the year. The DJIA finishes 2011 up about 5%, the small-caps finish down about 5% and the Nasdaq and S&P 500 are somewhere in between. 2011 was a year when the trading was often dominated by news headlines, particularly about Europe, but the biggest difference this year had to do with the structural changes in the way that things traded. The tight correlation between individual stocks, the dominance of ETFs and computerized trading, the lack of leadership and the soft momentum required plenty of adaptation to stay a step ahead.

2011-12-30T00:37:00.000-08:00

Currency debasement remains an overriding theme in the year ahead.

2011-12-30T00:29:00.000-08:00

After drifting down on low volume yesterday, we drifted back up and recouped most of those losses today.

AMZN and precious metals saw a little panic selling early, but the dip buyers jumped in and had them well off their lows by the close. Leadership by banks was probably the most surprising aspect of the action today, but it's a mistake to draw serious conclusions from this thin, whippy, end-of-year trading.

The most important thing to keep in mind is that just because it's the end of the year, that doesn't mean stocks will necessarily hold up. It isn't unusual to see profit-taking as money managers book gains and position for the new year. Many traders like to start a new year with high levels of cash and will clean the slate on the last day of trading.

2011-12-29T01:34:00.000-08:00

Goldman Sachs lowers SHLD price target to $30 a share today and reiterates its Sell recommendation.

Italy had a reasonably good six-month auction last night, and its 10-year bond yields are down by about 19 basis points, to 6.70% this morning. (Spanish yields are off by 25 basis points, while German and French yields are unchanged.)

A total of 9 billion euros was bought in the auction, in line with consensus, at a yield of 3.25% (the lowest level since October). Bid-to-cover was almost 1.7 v. 1.5 a month ago. Yields at that time were over 6%.

Italy also sold 1.7 billion euros of two-year zero-coupon bonds at an average 4.85% (a month ago it was 7.8%).

Tomorrow's 10-year Italian bond will be more of a test.

The ECB reported a record amount of deposits (452 billion euros vs. 412 billion euros), as market liquidity is still uncertain and raises the specter that the LTRO facility will not materially benefit sovereign debt yields/purchases. This probably offsets the better auction with regard to the impact on risk assets today.

Finally, Japanese industrial production contracted by 2.6% last month. This was worse than expected and represented the first drop in two months.

2011-12-29T01:14:00.000-08:00

Thin holiday trading can be fun when it has a positive bias, but when the sellers dominate like they did today it can be downright dismal. We had an early afternoon bounce attempt that fizzled quickly, and we drifted lower into the close. That wiped out the last two days of gains and put the S&P 500 back in the red for the year.

Although volume was light, it picked up over yesterday and was quite broad. It is a technical distribution day, which puts the S&P 500 back under the 200-day simple moving average and gives us a failed breakout.

We have a variety of agendas at work at the end of the year and stocks aren't moving on their individual merits. It is all about taxes, mark-ups and position. The thin trading allows a good amount of manipulation as well.

2011-12-28T02:34:00.000-08:00

Don't be surprised if -

Sears Holdings declares bankruptcy. In a possible spectacular fall, Sears Holdings shares could be halted this spring at, say, $18, as as vendors turn away from the retailer, owing to a continued and more pronounced deterioration in cash flow (already down $800 million 2011 over 2010), earnings and sales. With funding and vendor support evaporating, as paper-thin earnings before interest and taxes margins turn negative and cash flow is insufficient to fund inventory growth. The number three in the industry has little value -- especially after store improvements were deferred over the past several years. A major hedge fund and a large REIT join forces in taking over the company. Ten to fifteen percent of Sears' 4,000 Kmart and specialty stores are closed. More than 35,000 of the company's 317,000 full-time workers are laid off. As a major anchor tenant in many of the nation's shopping centers and with no logical store replacement, the REIT industry's shares suffer through the balance of the year, and the major market indices suffer their only meaningful correction of the year.

"Never make predictions, especially about the future."

-- Casey Stengel

"I'm astounded by people who want to 'know' the universe when it's hard enough to find your way around Chinatown."

-- Woody Allen

There are five core lessons I have learned over the course of my years -

1. how wrong conventional wisdom can consistently be;
2. that uncertainty will persist;
3. to expect the unexpected;
4. that the occurrence of Black Swan events are growing in frequency; and
5. with rapidly changing conditions, investors can't change the direction of the wind, but we can adjust our sails (and our portfolios) in an attempt to reach our destination of good investment returns.

As a society (and as investors), we are consistently bamboozled by appearance and consensus. Too often, we are played as suckers, as we just accept the trend, momentum and/or the superficial as certain truth without a shred of criticism. Just look at those who bought into the success of Enron, Saddam Hussein's weapons of mass destruction, the heroic home-run production of steroid-laced Major League Baseball players Barry Bonds and Mark McGwire, the financial supermarket concept at what was once the largest money center bank C, the uninterrupted profit growth at FNM and FRE, housing's new paradigm (in the mid-2000s) of noncyclical growth and ever-rising home prices, the uncompromising principles of former New York Governor Eliot Spitzer, the morality of other politicians (e.g., John Edwards, John Ensign and Larry Craig), the consistency of Bernie Madoff's investment returns (and those of other hucksters) and the clean-cut image of Tiger Woods.

"Consensus is what many people say in chorus but do not believe as individuals."

-- Abba Eban (Israeli foreign minister from 1966 to 1974)

In an excellent essay published a year ago, GMO's James Montier made note of the consistent weakness embodied in consensus forecasts. As he puts it, "economists can't forecast for toffee."

They have missed every recession in the last four decades. And it isn't just growth that economists can't forecast; it's also inflation, bond yields, unemployment, stock market price targets and pretty much everything else.... If we add greater uncertainty, as reflected by the distribution of the new normal, to the mix, then the difficulty of investing based upon economic forecasts is likely to be squared!

-- James Montier

"Those who cannot remember the past are condemned to repeat it."

-- George Santayana

Here are Goldman Sachs' forecasts for 2012:

* 2012 U.S. real GDP up 1.8%, and global GDP up 3.2%;
* 2012 S&P 500 operating profits of $100 a share;
* year-end 2012 S&P 500 price target at 1250;
* 2012 inflation of +1.7%; and
* 2012 closing yield on the U.S.10-year Treasury note at 2.50%.

"More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other to total extinction. Let us pray we have the wisdom to choose correctly."

-- Woody Allen

Don't be surprised if -

The U.S. stock market approaches its all-time high in 2012. The beginning of the New Year brings a stable and range-bound market. A confluence of events, however, allows for the S&P 500 to eclipse the 2000 high of 1527.46 during the second half of the year. The rally occurs as a powerful reallocation trade out of bonds and into stocks provides the fuel for the upside breakout. The market rip occurs in a relatively narrow time frame as the S&P 500 records two consecutive months of double-digit returns in summer/early-fall 2012.

Strategy: Buy out-of-the-money SPDR S&P 500 ETF Trust (SPY) calls.

Don't be surprised if -

The growth in the U.S. economy accelerates as the year progresses, particularly in the late summer/early fall. The U.S. economy muddles through in early 2012 through the summer, but, with business, investor and consumer confidence surging in the fall, real GDP accelerates to over 3% in the second half. Unemployment falls very slightly more than consensus, but the slack in the labor market continues to constrain wage growth. Domestic automobile industry sales soar well above expectations, benefiting from pent-up demand and an aging U.S. fleet. Inflation, at least in how it is falsely counted by our government, is contained but begins to be worrisome (and serves as a market headwind) in late 2012. Corporations' top-line growth is better than expected, and wage increases are contained. Operating margins rise modestly as sales growth lifts productivity and capacity utilization rates. Operating leverage surprises to the upside as 2012 S&P profits exceed $105 a share.

A noteworthy surprise could be that the residential real estate market shows surprising strength. The U.S. housing market becomes much bifurcated (in a market of regional haves and have-nots), as areas of the country not impacted adversely by the large shadow inventory of unsold homes enjoy a strong recovery in activity and in pricing. The Washington, D.C., to Boston, Mass., corridor experiences the most vibrant regional growth, while Phoenix, Las Vegas and areas of California remain weak. The New York City market begins to develop a bubbly speculative tone. Florida is the only area of the country that has had large supply imbalances since 2007 that experiences a meaningful recovery, which is led by an unusually strong Miami market.

Strategy: Buy HD, LOW, building materials and homebuilders, and buy auto stocks such as F and GM.

What we desperately need -

1. A broad infrastructure program focused on a massive build-out and improvement of the U.S. infrastructure base -- the restoration of our country's highways, bridges and buildings and an extensive internet bandwidth expansion.
2. The annual increase in government spending is limited to the change in the CPI. It's a start.
3. A comprehensive jobs plan including new training programs -- all veterans are made eligible to tuition subsidies to vocational schools and colleges.
4. A Marshall Plan for housing, highlighted by a nationwide refinancing proposal adopted for all mortgagees (regardless of loan-to-values).
5. Mean test entitlements, freeze entitlement payouts and gradually increase the Social Security retirement age to 70 years old.

Strategy: Sell volatility.

Don't be surprised if -

A sloppy start in arresting the European debt crisis leads to far more forceful and successful policy. The EU remains intact after a brief scare in early 2012 caused by Greece's dissatisfaction (and countrywide riots) with imposed austerity measures. The eurozone experiences only a mild recession, as the ECB introduces large-scale quantitative-easing measures that exceed those introduced by the Fed during our financial crisis in 2008-2009.

Strategy: Buy European shares. Buy iShares MSCI Germany Index Fund (EWG) and iShares MSCI France Index Fund (EWQ).

Don't be surprised if -

The Fed ties monetary policy to the labor market. In order to encourage corporations to invest and to build up consumer and business confidence, the Fed changes its mandate and promises not to tighten monetary policy until the unemployment rate moves below 6.5%, slightly above the level at which wage pressures might emerge (the Non- Accelerating Inflation Rate of Unemployment).

Strategy: Buy high-quality municipal bonds or the iShares S&P National AMT - Free Municipal Bond Fund (MUB).

Don't be surprised if -

Cyberwarfare intensifies. Our country's State Department's defenses may be hacked into and compromised by unknown assailants based outside of the U.S. Our armed forces are place on Defcon Three alert.

Don't be surprised if -

Financial stocks are a leading market sector. After five years of underperformance, the financial stocks may finally rebound dramatically and outperform the markets, as loan demand recovers, multiple takeovers permeate the financial intermediary scene and domestic institutions enjoy market share gains at the expense of flailing European institutions. With profit expectations low, three years of cost-cutting and some revenue upside surprises (from an improving capital markets, a pronounced rise in M&A activity and better loan demand) contribute to better-than-expected industry profits.

Strategy: Buy JPM, C and XLF

Don't be surprised if AAPL pays a $20-a-share special cash dividend in the 2nd quarter, introduces a regular $1.25-a-share quarterly dividend and splits its shares 10-1. Apple becomes the T of a previous investing generation, a stock now owned by this generation's widows and orphans.

Strategy: Long Apple (common and calls).

Don't be surprised if -

We see merger mania. Cheap money, low valuations and rising confidence are the troika of factors that contribute to 2012 becoming one of the biggest years ever for mergers and takeovers. Canadian companies are particularly active in acquiring U.S. assets. Canada's Manulife (MFC) acquires life insurer LNC, two large banks join a bidding war for ETFC, and IFF and K are both acquired by non-U.S. entities. Finally, a Canadian bank acquires STI.

Don't be surprised if -

The ETF bubble explodes. There are currently about 1,400 ETFs. During 2012, numerous ETFs fail to track and one-third of the current ETFs are forced to close. There are several flash crashes of ETFs listed on the exchanges. The ETF landscape is littered by investor litigation as investor losses mount. New stringent maintenance rules and new offering restrictions are imposed upon the ETF business. The formation of leveraged ETFs is materially restricted by the SEC.

Don't be surprised if -

Israel Attacks Iran. The greatest headwind to the world's equity markets is geopolitical, not economic. Israel attacks Iran in the spring, but, at the outset, the U.S. stays out of the conflict. Iran closes the Strait of Hormuz, and oil prices spike to $125 a barrel.

2011-12-28T01:38:00.000-08:00

Volume was by far the lightest for a full day of trading this year and breath was very mixed, but we had typical window-dressing action. Big caps like ISRG, GOOG, AAPL and CMG were walked up on low volume, but tax-loss selling pushed down many of the names that have been lagging this year.

Stocks are not trading much on their individual merits right now. The main driving force is squaring things up and being ready for the start of next year. If there is an opportunity to produce a little relative performance with a high beta big-cap, they will give it a go, but with a finger on the eject button.

It's typical to see at least one very aggressive bout of selling in the waning days of the year. Some folks come to conclude that it is better to lock in profits and pay taxes than defer them to next year and risk a pullback.

2011-12-24T12:03:00.001-08:00

SHLD may have a long ways to go - down.

Global easing continues as more cowbell is delivered in Russia, as the nation's central bank cut interest rates for the first time in 18 months.

The yield on the 10-year Italian bond is now at 7.077%.

November durable goods orders rose by 0.3% (excluding transports), slightly below expectations of +0.4%. October was revised modestly higher.

Non-defense capital goods orders (excluding aircraft) were very disappointing, falling by 1.2% against consensus for a gain of 1.0%. October was also revised higher here.

Shipments fell and inventories rose, so the inventory-to-shipment ratio increased to the highest level in two and a half years.

These capital spending reads should be viewed as a negative to risk assets, as they were recorded into the teeth (and expiration) of the 100% tax credit (which is halved in 2012).

2011-12-24T10:45:00.000-08:00

It took a bit longer than many had expected, but the end-of-the-year rally finally kicked in Tuesday and we've been climbing slowly higher on declining volume since. In retrospect, the selling and negativity we had Tuesday was really the perfect setup for the turn. It assured that folks were out of position and set the stage for some chasing.

As has been the tendency once the turn occurred, we had V-shaped action, so thank you machines and algos. There was a little nervousness following a poor report form ORCL, but it was shrugged off and the bulls kept chugging along. The extremely light volume makes it challenging to jump aboard, but we have seen these sorts of moves so often it really shouldn't be a surprise.

The question now is whether the bulls will keep pushing next week. We have some obvious overhead resistance to contend with at the 200-day simple moving average and are a bit overbought, but these low-volume moves higher always seem to last longer than seems reasonable.

One thing we need to keep in mind next week is that there is often major repositioning as the year comes to end. It is not unusual to have some sharp selling in the last couple days of the year. For example, on the last day of 2009 we were down about 1% and in the last three days of 2007 we dropped more than 2%.

It has not been a good year for many fund managers, and they will be happy to sell losers and start with plenty of cash in 2012.

2011-12-22T20:25:00.000-08:00

An S&P downgrade of France should be imminent.

The yield on the 10-year Italian bond is up now 13 basis points, back up to 6.92%.

Run, don't walk, to read the Boy Genius Report's column on more potential issues at RIM.

The FHFA house price index, which measures a home's purchase price, fell modestly, and previous growth was revised lower. This index has been flat for the past six months.

2011-12-22T20:13:00.000-08:00

We expect extremely slow but positive action around the holidays, and that is exactly what we got today. We gapped up slightly and meandered higher most of the day on about 3:1 positive breadth. Volume was the lightest for a full trading day this year.

Tomorrow the action is going to be even slower and the risk of choppiness even higher. Most folks will probably have better things to do, but if you look to daytrade for pennies, there may be some opportunities.

One theme worth looking into more closely in the next week or so is the "tax-loss-selling bounce." Stocks hitting their lows of the year are likely being sold for tax losses and have the potential to rebound once the pressure subsides.

2011-12-21T16:26:00.000-08:00

Financials are starting to stabilize after the long trip down.

Watch the bond market. If the drop in fixed-income prices accelerates (and yields rise), the reallocation out of bonds and into stocks could occur posthaste and serve as a catalyst for a more sustained market turn.

Spanish 10-year yields are up by about 20 basis points, to 5.27% -- that's the first increase since last Monday and the largest rise in yields since the first week of December.

Italian 10-year yields are up by 16 basis points.

The grand rotation out of bonds and into stocks might have commenced.

How to play it?

Be short bonds, and long TBT, and be long the asset managers BEN, TROW, LM

Upward moves such as yesterday's are not unusual during the Christmas period near year-end.

The tally of the central bank's first offering of longer-term refinancing was far greater than expected.

The ECB has provided a forceful tool in the form of an unlimited three-year loan to European banks.

The results of the first offering -- the second offering will be in late February -- were far larger than expected, at over 480 billion euros.

I suspect that there will continue to be some skepticism in the markets surrounding the notions:

that the longer-term refinancing operation (LTRO) will loosen up credit availability; and

whether the very nature of the LTRO, which is designed to have the banks save themselves by saving the sovereigns, will continue to suppress interest rates on sovereign debt.

The LTRO bazooka diminishes a Lehman moment in Europe, but there will continue to be a lot of heavy lifting (and discord) in the eurozone in the months ahead.

As a result, the volatility over the last few months in the markets here and over there will continue to be the mainstay.

2011-12-21T16:15:00.000-08:00

After a big day like Tuesday, you had to expect some sort of pullback or consolidation as flippers and "stuckholders" made their exits. Some bad news from ORCL helped the process, but we had an impressive recovery this afternoon, and the NYSE even finished with positive breadth of 1830 to 1181.

For a while, it looked like ORCL was going to take down the entire market. But the broader market eventually was able to separate itself from technology names and that helped improve the mood. The Nasdaq and Nasdaq-100, which are heavily weighted with technology names, did poorly but managed decent comebacks this afternoon.

The tricky thing is the light volume and choppy trading. It was easy to take stops this morning that look quite poor in retrospect, but that is the cost of discipline. In thinner trading around the holidays, it is very easy to be jerked around if you play things too tight.

At this point, if the news flow slows, as it generally does at the end of the year, then we have a good opportunity for some pockets of speculative action to develop.

Tuesday

2011-12-20T15:27:00.000-08:00

Look at bond yields today (rising) and stock market prices (also rising).

I am fully aware of the structural problems of a debt-laden European economy (who isn't?) and the disparate interests of the 17 members of the EU that is a headwind to a cohesive policy aimed at stabilization of the crisis. But the underlying problem in the eurozone is well-known by now, and quite frankly should have been a cautionary sign to market strategists a year ago and six and three months ago, as they would have avoided many of the stock market's problems in 2011.

The eurozone Cassandras are out in droves now, supported by an ailing stock market, Draghi's hard line and Lagarde's ominous rhetoric. But so were the U.S. Cassandras out in droves during our domestic bank, debt and financial crisis of 2008-2009, yet much of those threats were overcome with aggressive policy -- and aggressive policy is inevitable in Europe, as the tension is kept on the weaker members of the EU until they respond responsibly in a fiscal sense.

And, already, as measured by lower sovereign debt yields, policy is having a positive impact.

The perma-bears missed the March 2009 generational low (666 in the S&P 500). Throughout the market's ramp over the past two and a half years, observers such as Nouriel Roubini have been in denial, wearing blinders that block out the recovery in stocks, and they have been very wrong in expecting a U.S. double-dip.

Despite the anxiety in the markets and the downside risk to the world's economic growth entwined in the European debt crisis, I remain of the view that a credible plan to stem the debt crisis in Europe has just begun and that European and global leaders and central bankers will all come to their senses and intervene in a massive way.

To me, the chances are awfully good. After all, the alternative is unimaginable for the eurozone's economic health and political stability.

In markets, politics, society and sports, change always come out of extreme conditions.

Peter Boockvar's brief communiqué:

Peanuts, beer, three-year loans here!

Today, European banks tell the ECB how much borrowing they want to do at 1% for three years. Tomorrow we'll hear how much they took and forecasts are about 300 billion euros. While some are still speculating that banks are buying short-term sovereign debt after selling it for the past few months, yields in Spain, Italy, Belgium and others are down again.

Also, another good Spanish sale of short-term bills is helping sentiment. Spain sold three-month debt at a yield of 1.74%, well below the 5.11% paid last month, and they paid 2.44% for six-month bills vs. 5.23% in November. The Spanish two-year yield is falling to a 17-week low, and the 10-year is at a 10-week low. There is confidence in the new Rajoy government's will and ability to get through tough reforms, as it will certainly be easier than for the previous socialist government. Italy's two-year yield is at a seven-week low. Germany's December IFO business confidence number unexpectedly rose to 107.2 from 106.6, led by the expectations component.

Also in Europe, the euro basis swap is narrowing to a two-week low, and Sweden cut interest rates by 25 basis points as expected. The ECB did fully sterilize its 211 billion euros of purchases.

In Asia, the Shanghai and Sensex indices continue to trade poorly, but the Kospi bounced after yesterday's Kim Jong Il-induced selloff.

Change is coming in Europe, and in the fullness of time, the aggressive policy employed in the U.S. three years ago will land on its shores.

In the meantime, unusual value in stocks has developed, and I am exploiting that opportunity even as the stock market's tone is terrible and as most classes of investors run for the hills and de-risk.

Is it painful to watch stocks reverse lower every day over the last week of trading? Of course it is. But no one ever said investing should be easy.

Remember: Bull markets are borne out of poor economic news, uncertainty and dour investor sentiment.

A dispassionate accumulation of stocks is what I believe to be in order now.

Overnight, Spain had a very successful auction of short-term paper, as the country raised its maximum target of 5.6 billion euros. Bid-to-cover was strong and helped to move the 10-year Spanish note yield down by 8 basis points, to 5%. Lateral sovereign debt in Italy dropped; its 10-year yields declined by 16 basis points, to 6.5%.

Monday

2011-12-20T15:17:00.000-08:00

There is an almost universal skeptical view on the ability of leaders to deal with the European debt crisis, on the prospects for U.S. domestic economic growth and with regard to any upside in the U.S. stock market.

December 19th marks one year since Meredith Whitney appeared on the CBS newsmagazine 60 Minutes and sent the municipal bond market into a tailspin from which it took months to recover. To recap that event: Ms. Whitney, a noted bank analyst, appeared on 60 Minutes and forecast "hundreds of billions" in municipal defaults during 2011. The result was a two- to three-month siege on the municipal bond market, which was already in the throes of a supply bulge because the Build America Bonds (BABs) program had expired.

So as we head into the last two weeks of 2011, we can look at how tax-exempt yields stack up against US Treasuries on a relative basis now and in the middle of the Meredith meltdown last January. There is no question that munis are cheaper, on a relative basis, across the whole yield curve, particularly on the front end. But it is extremely important to note that municipal yields have moved in the same direction (down) as Treasuries - just not as much. The Congressional squabble over the debt ceiling, the downgrade of the United States by Standard & Poor's, and the Federal Reserve announcement of its "Operation Twist " in September all led to drops in Treasury yields, and munis – begrudgingly, in some cases – followed along. The muni market fought those events off, along with the Harrisburg and Jefferson County situations, and made the long trip back from the despair of a year ago.

The flight-to-safety trade is still in place, as manifested in a yield on the 10-year U.S. note of 1.83% and continued relative strength in consumer staples.

The only economic news this morning was the National Association of Home Builers Index, which rose by two points, to 21.

Though still weak relative to history, most components of the index were on the mend -- especially traffic, which rose by the most in nearly 3.5 years.

Foreclosures, high unemployment and credit availability continue to plague the residential real estate sector.

After Europe's leaders and central bankers misdiagnosed the magnitude of the continent's debt crisis and after responding in an ineffectual and almost effete manner, the great unraveling of the eurozone is on our doorstep.

The threat of decomposition of the EU has trumped evidence of an improving U.S. economy and has resulted in (historically) low stock market valuations, restricting any upward progress in share prices and (more importantly) raising the specter of frozen credit availability and a deepening recession in Europe that may be exported to the U.S., China and the rest of the world. To many (ratings agencies, investors, etc.), the hopelessness of the European economic situation resembles a Franz Kafka work.

Fitch was particularly cheerless as following the EU Summit on Dec. 9-Dec. 10, the ratings agency concluded that a comprehensive solution to the eurozone crisis is technically and politically beyond reach. Despite positive commitments by EU leaders at the summit, particularly an acceleration in the creation of the European Stability Mechanism and downplaying the role of private-sector involvement, the concerns held by Fitch prior to the summit have not been materially eased. Fitch particularly emphasized the absence of a credible financial backstop and the need for a more active and explicit commitment from the ECB "to mitigate the risk of self-fulfilling liquidity crises for potentially illiquid but solvent members of the EU." While Fitch was upbeat that all 17 EU members have moved toward fiscal consolidation, it remained downbeat on the systemic nature of the crisis's impact on regional economic and financial stability in the short-, intermediate- and long-term time frames.

Last week, the IMF's managing director Christine Lagarde voiced similar concerns that Europe's economic and credit center will not hold.

Despite the anxiety in the markets and the downside risk to the world's economic growth entwined in the European debt crisis, I remain of the view that a credible plan to stem the debt crisis in Europe has just begun and that European and global leaders and central bankers will all come to their senses and intervene in a massive way.

Thus far ignored by the world's stock markets are some positive elements of the EU summit meeting, which, though slow-moving (should have been expected!), appear to have measurably taken tail risk off the table for Europe. The first steps of greater fiscal integration and sanctions against countries that violate agreed-upon debt and deficit rules have been taken and addressed. As a start, each of the 17 countries in the EU will introduce balanced budget amendments coupled with structural deficits capped at 0.5% of GDP (with cyclical deviations to 3% of GDP allowed). Automatic correction mechanisms will be triggered if member countries violate the debt and deficit rules.

Despite the (justified) gloom and doom in Europe, investors have ignored the mildly positive short-term action in sovereign debt yields last week. (At negative sentiment extremes, as was the case of the U.S. stock market in January 2009-February 2009, there is always disbelief at an inflection point of change.)

Ironically, European bond yields (excluding Italy's 10-year note) fell across the board and across the curve last week. Spanish two-year yields move to the lowest level in seven months, and yields have halved since November. France's two-year yield is the lowest in 13 months. According to Miller Tabak's Peter Boockvar, the euro basis swap and Euribor/OIS spread dropped last week. European economic statistics, too, were better than expected as reflected in a modest tick up in Germany's ZEW six-month expectations outlook and a slight improvement in the eurozone's manufacturing and services index (from 47 to 47.9).

One conclusion is becoming evident. The central banks of the world are continuing to coordinate their efforts to meet liquidity requirements under nearly every circumstance. They have determined that they must keep the functioning of the world's financial system unimpaired. To do that, liquidity has to increase, and the manner in which they accomplish this is to expand their balance sheets. A Lehman-type liquidity constraint will not be permitted to occur again if the central banks can avoid it.

In addition, on detailed examination of the balance sheets, you can see how the actions of the central bank on the asset side are balanced by rising reserve deposits on the liability side. In other words, a central bank goes into the market, buys a debt instrument or otherwise acquires an asset, pays for it or lends to a bank, and the bank then pledges it -- in any case, the central bank creates a reserve or cash that within hours is redeposited at the central bank as an excess reserve deposit. There is no credit multiplier in the monetary system when the newly created central bank money is circulated right back to the central bank.

Essentially, the commercial banks within each currency zone have excess reserves. They have excess liquidity, and they are electing to redeposit those reserves back with the safety of the central bank rather than do something else. That behavior reflects the uncertainty that exists throughout the financial system. For example, in the United States, a commercial bank can deposit excess reserves with the Federal Reserve and receive an annualized interest rate of 0.25% or 25 basis points. The commercial bank could do other things as well. In the United States, we see a very large sum reflected in the liabilities side of our chart stack, in a darker green color that shows the huge excess reserve deposit at the Federal Reserve. Banks in the U.S. are not engaged in the expansion of credit. They are redepositing their excess reserves at 25 basis points. The same thing is happening in most of the world. That is now apparent and easy to see in the color coding of the G4 central bank liability side of the balance sheets.

Liquidity, liquidity, liquidity. That is the theme by which the central banks are operating today.

Liquidity and solvency are two different issues. They should not be confused with one another. Greece remains insolvent as a sovereign country. In Europe and in the rest of the world, however, the insolvency is not being allowed to impart a liquidity crunch. The recent use of swaps and other vehicles to enhance liquidity continues to be expanded by the central banks of the world. Santa Claus is coming, and his name is Bernanke, Draghi, Shirakawa or King. Whether or not their noses are red remains to be seen.

In summary, the consensus view is that structurally swollen debt loads and the disparate (legal, political and economic) interests of the 17 members of the EU preclude a near- or intermediate- term resolution of the debt crisis. There is near unanimity that the recent timid-and-tame policy response will never be structurally capable or willing of adopting the necessary shock-and-awe resolution that the U.S. provided (as a template) two to three years ago.

My view is that the consensus might prove to be too pessimistic.

For now, the moves by the EU have not resolved the debt crisis, and the associated uncertainty will constrain the upside to risk markets. Nevertheless, with tail risk in Europe reduced, an improving domestic economic recovery, weak investor sentiment, reasonable valuations, decent corporate profit and dividend growth, a market-friendly Fed (joined by an easing of monetary policy by central bankers around the world), share prices can grind higher until more aggressive European policy is introduced (which I fully expect) in the form of non-EU countries pitching in.

In the fullness of time, I predict more aggressive policy, escalated sovereign debt purchases (see ECB President Mario Draghi's comments yesterday in Financial Times) and a broader country participation in the IMF will be forthcoming in response to the crisis in Europe.

Investors may want to own equities before these steps are implemented. For if the hapless Denver Broncos (of September and October) can launch its Tebow-style turnaround, so can the eurozone excoriate from the debt crisis by adopting more dramatic initiatives.

Friday

2011-12-20T15:05:00.000-08:00

Despite the (justified) gloom and doom in Europe, Spanish and Italian two-year yields are each 50 basis points lower today. Spanish two-year yields are at the lowest level in seven months and yields have halved since November, according to Peter Boockvar at Miller Tabak.

Moreover, the French two-year yield is the lowest in 13 months.

Importantly, the euro basis swap is down 20 basis points and is now at the lowest level in a week or more.

"In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced President. Yet the Dow rose from 66 to 11,497."

-- Warren Buffett

Yesterday, in a piece in Foreign Policy, Pimco's Mohamed El-Erian discusses the unsettling implications for the global economy of a potential unraveling of the EU.

For now, Europe's debt crisis limits the market's upside -- but in my view, it doesn't preclude a somewhat better market (even while policy, within the backdrop of crisis, slowly coalesces into a more U.S.- like quantitative easing).

Tangible progress in drafting a credible plan for the European debt crisis has just started, and though the recent moves don't provide a permanent solution and the path to stabilization may turn ugly, a flawed plan is better than no plan at all. While stress points remain, crucial details are yet to be worked out and the likelihood of a European recession is high, systemic risk has likely been reduced, and the recent decision to lower interest rates by the ECB further supports intermediate-term stability in the region.

I remain confident that, in the fullness of time, a more permanent solution (through more meaningful monetization and leverage) will follow the current meek and ineffectual policy as European and global leaders and central bankers will all come to their senses. After all, the alternative is unimaginable for the eurozone's economy's longer-term health, which could have an adverse spillover effect around the world.

Stocks are extraordinarily undervalued relative to inflation (and inflationary expectations), interest rates, earnings, sales, free cash flow and tangible book value. Indeed, valuation models using interest rates as a key metric produces an S&P 500 index as undervalued as the market was at the generational bottom of March 2009.

Tuesday

2011-12-20T14:57:00.000-08:00

Conditions were developing well, and the big spike reversal had to happen eventually, but the great challenge is in the timing. What makes it even more difficult is that this market has had a tendency toward these very energetic reversals just when it looked its worst. The market looked downright sick yesterday, and even finished at the lows of the day. That assured even greater frustration when we gapped up and ran all day.

The pattern of the market over the last couple of years is a big reversal on light volume that saves us from the brink of disaster, then we continue to run straight up on even lighter volume for a while as poorly positioned market player try to play catch up.

Again, I think conditions are good for V-ish action that drives everyone crazy. The bears get squeezed, the underinvested bulls can't get long enough, and the dip buyers never even see any decent dips.

Look what happened in the market after the big intraday reversal Oct. 4. We were up five of the next six days afterward, and after a brief consolidation we ran up another 6%. Anyone who tried to fight that bounce once it started was crushed.

Seeing that we are at the end of the year and have many underinvested market players in need of relative performance, I think we will see some more of this lopsided action. Of course, we could always be hit by negative news out of Europe, but with the holidays upon us, the news flow should slow.

Monday

2011-12-20T14:54:00.000-08:00

For the sixth day in a row, the market opens near the highs and closes near the lows. During that period of time, we have lost nearly 5% overall, but even more than that on an intraday basis. It has been a very unkind market for daytraders lately unless they have stuck solely to the short side.

Although volume has been quite light lately, the selling pressure has been unrelenting, and it is taking a toll on the optimists who have been looking for some sort of year-end rally. If you have been overly anticipatory in looking for a turn, you have been slaughtered, and even if you are just lightly invested, it has been tough to find any safe havens.

Many are happy to close the books on 2011 and go enjoy the holidays, but that may end up being exactly what we need to finally give us some seasonal upside. I continue to feel we will have a few good days here soon, but you have to wait for the move and not try to anticipate it.

Friday

2011-12-20T14:52:00.000-08:00

We ended the week the same way we started it: with extremely slow action. We had some option-related activity that spiked up volume today, but we dripped lower all week and lost nearly 3% -- though we were oversold and had a decent setup for some sort of bounce. What was particularly unpleasant about the action was that every little bounce attempt fizzled out almost immediately -- there was no momentum, no leadership and no energy. The biggest move we saw this week was an ugly breakdown in gold, silver and commodities.

Many folks have been looking for some positive seasonality to kick in, but there was no sign of it. Despite lots of negativity, plenty of underinvested bulls and the need for relative performance, the bulls never kicked into gear. As the week progressed, many were happy to sell into what little strength we had.

Typically, the biggest and sharpest spikes occur in a market environment like this simple because the strength is unexpected, but for that to work we need some sort of spark to start things running. This market never was able to run enough to draw in buyers and push bears to cover.

Unfortunately, the biggest positive this market has going for it is that everyone seems to hate it. That could be a great contrary indicator but we need something to entice the pessimists to question their views, at least for a little while.

2011-12-15T14:02:00.000-08:00

What happens if nothing occurs?

Or more importantly, what happens if something untoward does occur, and stocks rise after the news? Many times, the reaction to news is more important than the news itself....

Hayman Capital Management's Kyle Bass' negative views have received a lot of exposure. He is bright, thoughtful in analysis and committed of view.

Investor sentiment is far worse than the surveys in my view.

And disgust and distrust, so apparent today, are necessary reagents of a better market.

I continue to believe that 2012 will be a year in which investors rotate out of bonds and into stocks and that U.S. equities rise above the rest of the world.

IMF's Lagarde on the news wires saying that the European situation is escalating and near-term action is now required by countries outside the EU.

Last night there was a successful Spanish auction, selling 6 billion euro, above the expected 3.5 billion. Spanish two-year yields have fallen to a two-month low. Italy's two-year yield is down by 25 basis points. French yields are below 1% for the first time in three months.

LNC -

BofA cites a 50% discount to book value, 9.5% return on equity next year and the manageable impact from low interest rates as rationale. In addition, the analysts expect Lincoln National to distribute more than 40% of net income to shareholders in 2012. Their price target is $38 (more than 100% above today's levels).

I get it. The world is flat. I read Tom Friedman.

I recognize that no nation is an island and we are all economically interconnected, but, seriously? A bunch of Europeans are upsetting a stabilized-to-very slowly improving situation in the United States' economy, creating a real threat of a worldwide economic double-dip and hurting our stock market.

Like I give a rat's you know about a bunch of German leaders who are intransigent and dogmatic in policy and are dangerously bullying the rest of the EU?

As for the French, they are governed by a bunch of socialists in the Senate -- they don't believe in capitalism to begin with.

German and French leaders and central bankers should all be given an ultimatum by our leaders: Immediately reverse your "tame and timid" approach to your debt crisis and replace it with "shock and awe" before the debt contagion spreads to others' shores.

Barton's list regarding US primacy:

* U.S. vs. fractured eurozone: unity, one language, Constitution
* Good demographics: growing population
* Mobility of labor markets
* Cheap energy sources: natural gas fracking
* Undervalued currency
* Entrepreneurial culture: Silicon Valley, availability of funding for startups
* Best universities
* Many of best companies: multinationals
* Deep liquid capital markets: fairest markets, insider trading convictions
* Rule of law in commerce and investment
* America will be biggest oil and gas producer by 2020

2011-12-15T13:45:00.000-08:00

I keep expecting some sort of sharp snapback rally, but the lack of energy in this market is discouraging. What we need is a move that is strong enough to cause the underinvested bulls and the active shorts to think that the Santa Claus rally is on and that they better hurry and jump on board or they will miss out. We need some sort of spark to ignite the upside movement, but instead we continue to hear pessimism out of Europe that overshadows some not-horrible economic news.

One good thing about this action is that it is increasing the level of mis-positioning. People are giving up on this market simply because the action is so dead, so there is a good supply of buyers to push things along if we can build a little momentum.

For the ridiculously short-termers, the big risk in this market is that the very slow action is going to cause market players to just give up and close the books on 2011. It has been a rough year for many, and the desire is strong to take a break and start fresh after the holidays.

2011-12-14T15:51:00.000-08:00

Today's tape was an exclamation point to those who fear slowing growth and the risks of deflation.

The schmeissing in stocks, crude, copper, silver and gold and the rise in bond prices is evidence of a panicky flight to safety in a world that is still deleveraging and is fearful.

We remain in a Euro-centric world.

Last Friday's enthusiasm over the E.U. "solution" has, to state the obvious, evaporated.

It was however, suprrising to me to see stocks off so much, considering that the 10-year soveriegn bond yields were relatively unchanged today. Unfortuantley, investors continue to be skeptical that neither International Monetary Fund, the E.U., the European Central Bank or governments have the will to aggressively address and reverse the debt contagion in Europe.

There's a rumor that a representative of the ECB is saying that the ESFS could be funded with over 1 trillion euros.

"A firewall is needed now to stabilise the markets, bring yields down, allow for sovereign refinancings, reduce stress in the banking sector and provide protection against likely future credit events."

-- John Paulson, "Europe Needs a Firewall to Stabilise Markets," Financial Times

Run, don't walk to read John Paulson's op-ed piece in Financial Times, "Europe Needs a Firewall to Stabilise Markets."

In his editorial, Paulson writes that the sovereigns in Europe are in a "danger zone."

What is needed is a sovereign debt guarantee program similar to the U.S.'s FDIC TLGP, whereby the sales of sovereign debt are wrapped around an ECB insurance policy. This would calm down the markets, lower bond yields and wouldn't be inflationary.

Meredith Whitney's dramatically negative call on the U.S. municipal bond market continues to be wrong-footed.

Gold is now in free fall, down by over $90 an ounce.

It is interesting to note that amidst all the doom and gloom chatter in the various media, the NYSE financial sector is positive.

Europe's economies are moving in reverse -- at best, a deepening recession is in the cards. (Europe used to rule the world, but it no longer dominates.)

The U.S. economy is moving forward, with a 3%-plus real GDP for fourth quarter 2011 expected and growing signs that the domestic recovery will be self-sustaining (albeit, at a moderate pace).

I believe, more than ever, that the events over the past decade have highlighted the likelihood that the U.S. stock market will be favored among most other investment markets in the world.

The U.S. stock market has become the best house in a bad neighborhood.

Below are 10 reasons for my optimism.

1. U.S. relative and absolute economic growth is superior to global growth. The U.S. economy, though sluggish in recovery relative to past expansions, is superior to most of the world's economies (with the exception of some emerging markets) in terms of diversity of end markets, quality of global franchises, management expertise, operating execution and financial foundations.

2. U.S. banks are well-capitalized, liquid and deposit-funded. Our banking industry's health, which is the foundation of credit and growth, is far better off than the rest of the world in terms of liquidity and capital. Our largest financial institutions raised capital in 2008-2009, a full three years ahead of the rest of the world. As an example, eurozone banks continue to delay the inevitability of their necessary capital raises. Importantly, our banking system is deposit-funded, while Europe's banking system is wholesale-funded (and far more dependent on confidence).

3. U.S. corporations boast strong balance sheets and healthy margins/profits. Our corporations are better positioned than the rest of the world. Through aggressive cost-cutting, productivity gains, external acquisitions, (internal) capital expenditures and the absence of a reliance on debt markets -- most have opportunistically rolled over their higher-cost debt -- U.S. corporations are rock-solid operationally and financially. Even throughout the 2008-2009 recession, most solidified their global franchises that serve increasingly diverse end markets and geographies.

4. The U.S. consumer is more liquid and stable. An aggressive Fed (through its extended time frame of zero interest rate policy) has resulted in an American consumer that has re-liquefied more than individuals that live in most of the other areas in the world. (Debt service and household debt is down dramatically relative to income.)

5. The U.S. is politically stable. After watching regime after regime fall in Europe in recent weeks (and given the instability of other rulers throughout the Middle East), it should be clear that the U.S. is more secure politically and from a defense standpoint than most other regions of the world. Our democracy, despite all its inadequacies, has resulted in civil discourse, relatively balanced legislation, smooth regime changes and law that has contributed to social stability and a sense of overall order.

6. The U.S. has a solid and transparent corporate reporting system. Our regulatory and reporting standards are among the strongest in the world. Compare, for example, the opaque reporting and absence of regulatory oversight in China vs. the U.S. (It is beyond compare.)

7. The U.S. is rich in resources.

8. The U.S. has a functioning and forward-looking central bank that is aggressive in policy (when necessary!) and capable of acting during crisis.

9. The U.S. dollar is (still) the world's reserve currency that is far more solid than the euro.

10. The U.S. is a magnet for immigrants seeking a better life. This and other factors have contributed to a better demographic profile in our country that has led to consistent population growth and formation of households. (Demographic trends in the U.S. are particularly more favorable for growth than those population trends in the Far East.)

In summary, conditions that have evolved over the near- and intermediate-term have conspired to favor risk assets in the U.S. over many other areas of the world.

2011-12-14T15:32:00.000-08:00

The S&P 500 has lost more than 3% this week, but what's most troubling to many traders isn't the point loss but the weak bounce attempts. The news flow has been rotten, and perhaps expectations of a year-end rally are too hopeful. But there should be more interest in dip-buying -- especially when we are down as much as we are and the year's end quickly approaches.

Unfortunately, the buyers are barely trying, and when they do manage to produce upticks, they fizzle in minutes. There just isn't much love for this market, and the negativity increased today as gold and commodity names were slammed. We couldn't even manage any upside in the final hour. Of course, today is Wednesday, and it's options expiration week, so that means (usually) a down day. From a contrarian standpoint, this gloomy action is a positive as it means many folks have dumped stocks and aren't well-positioned for a rally.

For contrarian thinking to work, however, we need upside action that causes folks leaning bearish to reassess their positions. If we gain upside traction, then all those underinvested bulls and overly aggressive bears will suddenly find themselves out of position and they will rush to buy. If enough of them are caught by surprise, or if they are worried they will miss out, we can see a pretty strong contrary move.

If we ever make the turn, there is a very good chance we can run a bit, according to the technical folks.

2011-12-13T14:28:00.000-08:00

In reality, the statement should not unsettle markets.

Let's review the FOMC statement.

1. The federal funds rate will be kept between 0% and 0.25% until the middle of 2013.
2. The assessment of the jobs market and of current economic activity was increased slightly.
3. Core inflation will stay below the Fed's target.
4. There remains economic risks chiefly associated with the condition of Europe's economies.

There was one dissenter, Chicago Fed President Charles Evans, who wanted more cowbell.

The flight to safety continues -- the 10-year U.S. note auction was very firm.

The yield was more than 2 basis points below the when-issued yield, the bid-to-cover ratio of 3.53 was well above the average of 3.05 (and the best coverage in 1½ years), and direct/indirect bidders took down the most in 10 months.

The National Transportation Safety Board has recommended that states ban the use of cell phones and other electronic devices by all drivers (except emergencies).

I expect cell phone suppliers like PLT and others to be vulnerable to this news.

This is option expiration week, when December options and futures contracts expire. Over the history of the S&P 500 futures, the week of December option expiration has been positive 83% of the time (24 out of 29 years), averaging +1.4%. The contract has never lost more than -0.9% on the week. If Monday started with a loss of more than -1%, then the rest of the week was positive 3 out of 3 times, averaging +3.2%. If Monday started with a loss of any amount, then the rest of the week was positive 8 out of 8 times, averaging +2.4%.Only once did the futures lose any more than -0.9% at their worst at any point during the rest of the week, but they gained more than +1.3% every time, and more than +2.0% every time but once.

I expect a large asset allocation out of bonds and into stocks sometime in the next six months.

Here is what Merkel said on Friday:

Germany opposes adding to the firepower of Europe's permanent rescue fund.... I've made my position quite clear that it won't be topped up.... [W]e can only move towards our goal when we tackle the root causes of the crisis through budget limits and the fiscal compact.

The world's economies are imperfect, as structural headwinds are governors to growth, and a relatively weak trajectory of growth is exposed to all sorts of exogenous shocks.

Arguably, the stock market has been discounted in reasonable valuations and little, if any, expectation of more positive news. With stocks trading at only 12.5x projected 2012 S&P profits and a 2.05% yield on our 10-year U.S note, this compares favorably to a 50-year average of over 15x during a time in which the yield on the 10-year U.S. note approached 6.70%.

With investors either materially in cash or heavily skewed toward low-yielding fixed income, any market recovery could feed on itself in an environment where individuals are uninvolved and hedge funds have multiyear low (i.e., bear-market low) net long exposure and run the risk of being caught offside.

Low expectations and an underinvested investment community are all conditions that have historically formed the foundation for a better market setting, as bull markets typically emerge out of periods of bad news. (And bear markets typically emerge out of periods of good news.)

2011-12-13T14:16:00.000-08:00

It turned out to be a very disappointing day for the bulls. For once, we were finally free of major headlines out of Europe and started with positive action and a better mood. Unfortunately, we never gained momentum and slowly dripped down into the Fed's Federal Open Market Committee interest-rate announcement, which was very unsurprising.

Rather than buy the lack of bad news, we saw selling on the lack of good news. Once we broke Monday's lows, the selling picked up as technical levels were breached and stops triggered. A little bounce at the end of the day did little to change the overall picture. Volume was light, but you really have to stretch to find positives in this action.

The upside action lacks any real power, and traders are quickly grabbing any profits they have and moving back into cash. There is no chasing, momentum or leadership.

No one seems worried about missing out on upside right now. In fact, they are more worried that they will be clobbered if they hold much of anything long.

So far, the bulls have not been impressive, and if they don't step soon, there is a danger that folks will throw in the towel and call it a year. There really are no signs of any real interest, and that is going to make it tough for a run to have legs. Maybe another sharp dip would help shake things up and set the stage for some buying, and the sooner the better.

2011-12-12T21:05:00.000-08:00

The Shanghai Index has now closed down for the seventh time in the past nine days, and it appears short-term oversold.

Miller Tabak's Peter Boockvar chimes in on Fitch's comments:

After Moody's did earlier today, Fitch is giving its thoughts on Friday's EU summit. "It seems that a 'comprehensive solution' to the current crisis is not on offer." They acknowledged the initiation of an "institutional and policy framework for a more viable eurozone and ultimately greater fiscal union, but taking the gradualist approach imposes additional economic and financial costs compared with an immediate comprehensive solution. It means the crisis will continue at varying levels of intensity throughout 2012 and probably beyond, until the region is able to sustain broad economic recovery." Fitch didn't define what a 'comprehensive solution' would look like however. On the ECB Fitch believes they are "the only truly credible firewall against liquidity and even solvency crisis in Europe." "Hopes that the ECB would step up its actions in support of its sovereign shareholders as a quid pro quo for institutional and legal changes that gave the ECB greater confidence in the long run commitment of eurozone governments to fiscal discipline appear to have been misplaced."

The euro versus the U.S. dollar is now at the lowest level since early October.

I expect interest rates to slowly march higher in 2012, and reinvestment rates for life insurers should improve for the industry.

Trading at low multiples and at discounts to book value.....

Intel cut its forecast - it's a component shortage issue, not a demand issue.

"In times like these, it is helpful to remember that there have always been times like these."

-- Paul Harvey

The Eurozone's Solution (All Hat, No Cattle?)

The European leaders did the minimum amount necessary to stem the debt contagion. We got timid and tame instead of shock and awe. Though the market rejoiced on Friday, the reluctance to mimic the U.S.'s quantitative-easing approach renders the European sovereign debt and bank recapitalization program unresolved and will likely constrain stock market valuations and the prices of other risk assets. The initial plan argues for a deeper recession in 2012-2013 amid the heavy lifting of austerity punctuated (at best) by uncertainty of outcome and (at worst) by the dissolution of the euro. (John Mauldin does a good job in presenting the situation in this week's "Thoughts from the Frontline: A Player to Be Named Later.")

As a result, it is my expectation that, as soon as this week, a hangover will immediately follow the EU's announcement on Friday, with a high probability that sovereign debt yields (in Spain and Italy) begin to climb again. And so will an imminent downgrade of France follow the new but toothless EU fiscal framework that fails to counter the debt crisis with a more aggressive printing strategy.

Furthermore, with the economic outlook for the eurozone weakening (posthaste), investors will likely remain skeptical that the proposed enforcement actions against deficit-ramping sovereigns will be effective. The concept of an EU repo man, frankly, is almost comical. The EU will basically ask fiscally crippled sovereigns that fail to meet their new "stress tests" to escrow monies that they don't have or can't afford. Another question is whether a meaningful escrow will even be demanded.

The new rules seem squishy to me and without substance or much strength to alleviate a deep-rooted contagion and debt crisis.

My guess is that the crisis continues, the initial framework unravels and more aggressive steps are taken, in the fullness of time.

2011-12-12T20:51:00.000-08:00

Today's word is: dismal. We gapped down to start the day on worries that Europe really hasn't resolved anything, which they haven't, and we had nothing but the standard bounce in the final hour of trading on European news. This time it was talk from the German Finance Minister that Commerzbank does not plan to take state aid.

The dip-buyers were completely uninterested for most of the day, breadth was weak and volume was pathetic. We even had an earnings warning from INTC to ensure that the mood was particularly gloomy.

The good news is that sentiment is so poor and the market so frustrating that many folks are likely to be underinvested and now well positioned for upside from here. If we can actually gain some traction, it would likely cause quite a bit of scrambling and chasing as folks tried to add some long exposure. We definitely have conditions for a major wall of worry, but few signs that we are going to climb it.

If there is a little more energy, the desire for some end-of-the-year profits is likely to drive things. The key is that we actually ignore Europe, and that seems to be an impossible task lately.

2011-12-10T22:05:00.000-08:00

The one must-own sector -- that is, if interest rates start to firm up -- might be the life insurers.

Low interest rates have been value-destructive for these companies that boast excellent funds and cheap P/E multiples at large discounts to tangible book value.

GS raises European banks from Underweight to Neutral.

Tony Dwyer at Collins Stewart:

A couple of tactical stats from our pal Jason Goepfert at www.sentimentrader.com should be pointed out and highlight that some of the crisis environment is not historically unique but offers a glimpse to potential market intermediate-term outcomes:

* Over the past three months the median of VIX is 34%. That has been a great intermediate-term buy signal kicking off following the 1987, 1998, 2002 and 2008 lows. The average median gain 9 months out of 13.8% with no negative occurrences.

* Yesterday, the TRIN Index (ARMS Index) was 4. This is extraordinarily unusual for December. It has happened only 4 other times in 60 years (12/29/43, 12/17/45, 12/4/50 and 12/1/08). All four of them marked the exact December low for those years, with the S&P subsequently rebounding over the next week to the tune of +4.0%, +1.4%, +3.8% and +11.5%, respectively.

Imperial Capital puts a $6 price target on SHLD.

When the Street is ruled by the fear of uncertainty and wild daily price moves, isn't that precisely the time one should be seeking long-term investment opportunities?

The world's economic recovery is imperfect, and, with the U.S. economy exhibiting only moderate growth - and negative job "growth," there is little margin of safety from exogenous shocks. But imperfection and vulnerability are now universally recognized (contrasted with the optimism that existed a year, six months and three months ago) and are arguably reflected and more than discounted in reasonable/current valuations.

I continue to see the potential for a vast rotation out of bonds (which have pint-sized yields now) and into stocks (e.g., the S&P 500 yields more than the 10-year U.S. note).

Equally important, the relative economic and profit position of the U.S. and its large corporations over many other regions in the world favor buying American. And, in the fullness of time, I can see a rotation, too, out of nondomestic stocks into large-cap S&P names.

2011-12-10T21:54:00.000-08:00

Thursday's poor reaction to the European Central Bank had market players a bit worried about Friday's European summit meeting, but with expectations so low the fact that nothing much was accomplished turned out to be irrelevant. Frankly, I suspect that market participants are so tired of the constant focus on Europe that they were anxious to just ignore it for a while and focus on stock-picking instead.

While the point gain was quite good and breadth was around 5:1 positive, volume declined after a technical distribution day on Thursday. Overall conditions look good for a Santa Claus rally, and it would be particularly helpful if Europe shut down for vacation and stopped jerking us around constantly. There are a lot of interesting stocks, and if they moved on their individual merits rather than on macroeconomic concerns, it would make for a much more enjoyable market environment.

I continue to feel that there are many underinvested market players, I'm very confident that there is a big group anxious to rack up relative performance in the last few weeks of trading. If we aren't hit with any major negative news flow out of Europe, I expect to see some chasing.

2011-12-09T00:46:00.000-08:00

With rumors abounding, let's get the view of Peter Boockvar, who summarizes the conflicting headlines in Europe:

CNBC and DJ are reporting that EU members have agreed to proposals that have been discussed for weeks, 1)The creation of a fiscal compact that will likely encompass an EC commission that will stand as an oversight of EU budgets and a Court that will be the enforcer, 2)The ESM fully in place by July 2012 that will stand side by side with the EFSF instead of replacing it, 3)EU to follow IMF protocol on private sector involvement in debt restructurings which means voluntary debt exchanges instead of forced, and 4)Euro area central banks will likely provide the IMF with bilateral loans (which then get recycled into loans back to Europe). On the ESM, some want it to be considered a bank and thus be able to access ECB funding but the Germans seem to be dead set against it. With respect to the markets, while the possibility of an agreement was always uncertain, Merkel and Sarkozy shook hands on all of these proposals on Monday so today was just convincing the others in the region. It was the ECB response to the EU summit that markets were looking to and Draghi told us what he thought today. Now will Draghi change his mind next week and say he liked the draft and maybe instead of buying 5-10b euros a week of sovereign debt, he'll buy 10-20b and sterilize (because he doesn't seem to want to print right now)? Maybe or maybe not. Bottom line, the market has become completely untradeable with all that is going on in Europe.

Price is what you pay, value is what you get.

MSFT - Special dividend announcement? Enlarged buyback?

Eurozone banks have to raise about $150 billion in new capital, according to a report.

Bloomberg is reporting that the European Banking Authority has stated that the eurozone banks have to raise about $150 billion in new capital, which is in line with expectations.

Is Draghi a poor communicator? Yes.

Will the eurozone's debt contagion be contained through more aggressive policy? Yes.

The ECB is very slowly moving in the right direction. (Even the bond-buying program will ultimately be increased in size as austerity measures are adopted and as fiscal integration is advanced.)

2011-12-09T00:32:00.000-08:00

Conditions were good for a sell-the-news reaction to highly anticipated news from Europe, but I thought we might see a little better upside before the profit-taking kicked in. A flurry of European rumors at the close added insult to injury and we ended up going out at the lows of the day.

It was an all-around ugly day, but the question now is whether this is a healthy pullback or the beginning of a downtrend. In November, we had a very similar setup and we were pounded when the news flow out of Europe stayed ugly for days. If the European summit over the next few days doesn't give us something to be optimistic about, it is going to be quite challenging.

Market players are already poorly positioned for upside and days like today only make it worse. If we can put a Band-Aid on Europe for a little while, I expect to see the focus shift back to adding long exposure for end-of-year relative performance.

If we have further weakness on the summit, I suspect many traders would be inclined to buy, as I believe there is going to be an endless stream of European solutions and ideas that will prevent the bears from taking hold of the action.

2011-12-08T00:35:00.000-08:00

No big surprise - and this is a huge negative for the market - but the European Union's AAA rating may be cut by Standard & Poor's.

As expected, Standard & Poor's may cut BNP Paribas and Fortis.

Standard & Poor's has placed seven Portuguese banks on negative watch now. Expect more of this in the days ahead.

On this week's latest big summit, GS is looking for:

* further details on sanctions that will be imposed on countries which fail to meet budget deficit rules;
* clarification on private sector involvement;
* ESM to be brought forward by six months;
* a treaty change proposal; and
* more proactive purchases (over time) of sovereign debt (but no capping of spreads).

Germany denies that capacity limits will be raised for ESM and EFSF and denies that there will be a doubling in size of the financial firewall.

Investors will be inundated with a lot of eurozone leaks in the days ahead in front of Friday's meeting.

Reuters has just come out with a denial from Germany that the eurozone will raise the capacity limits of the ESM and EFSF facilities.

Also, the Financial Times has reported that the E.U. is considering a doubling in the size of the financial firewall.

Germany has denied both of these stories, and, personally, I expect the eurozone to live down to expectations on Friday.

The new argument this week is that the S&P downgrade to negative watch of 15 eurozone countries was a warning shot to Europe's leaders that will hasten and steel their resolve to fight the debt contagion.

My view is that we will get a rescue fund (over there) but the U.S. stock market will be relatively nonplussed as the heavy lifting of austerity and bank capital raising remains ahead, in the first half of next year.

We remain in a worldwide balance-sheet recession, and the outcome is an extended period of relatively slow growth. Subpar growth, both here and abroad, exposes the growth trajectory to exogenous shocks (in Europe, China, oil prices, geopolitical, and in U.S. politics).

By my calculation, the S&P Index is approximately 5% undervalued. But multiple economic possibilities render the precision of any valuation model -- including mine -- less certain than in ordinary times!

2011-12-08T00:16:00.000-08:00

Da bearse gave it a decent try, and breadth is still fairly poor, but I suspect the shorts are going to wait for some more headlines to hit from Europe before they give it another go. The bulls are pushing again, and the risk of an upward spike on all or some of the upcoming announcements from the European Central Bank and the summit meeting are quite high. On the other hand, you can bet the bears are thinking "sell the news."

I think there's upside into the end of the year. Some back-and-forth after the big one-way move will help the charts/technicians, and we might actually see the focus shift from Europe, finally, to some individual stock-picking. It probably is bad karma to even contemplate some good old fashioned end-of-the-year momentum action in individual names, but I still have some hope that macro may take a backseat again someday.

2011-12-06T14:50:00.000-08:00

Standard & Poor's has confirmed that it has placed EFSF's long-term AAA ratings on credit watch negative. After review, EFSF ratings "will likely be the same as the lowest issuer rating we assign to the rated EFSF members we currently rate 'AAA', unless there are offsetting credit enhancements in place."

Run, don't walk, to read Jeremy Grantham's quarterly letter, "The Shortest Quarterly Letter Ever."

As the title infers, Grantham's letter is to the point.

And it's free!

The Shanghai Index is now at the lowest level since the third week of October.

China has about 23% of the world's population but only approximately 7% of the world's fresh water supply. Moreover, China's water resources are not distributed proportionately; the 550 million residents in the more industrialized northern area of the country are supported by only one-fifth of the fresh water and the 700 million in the southern region of China have the other 80% of the country's fresh water supply. The shared resources of water supply have been a focal point of conflict between China and India since the 1962 Indo-China War.

2011-12-06T14:32:00.000-08:00

An extremely slow day of trading set us up nicely for a little squeeze on European headlines this afternoon. But it didn't hold and we ended up closing flat. Volume was extremely light and breadth was on the negative side, but we still aren't seeing many signs of profit-taking. Market players continue to be more worried about missing out on further upside than about protecting recent profits.

The bulls have a couple of things working to their advantage right now. Too many folks are trying to play catch-up with the market and there is fear that we'll keep spiking higher as solutions to the European problems continue to roll out. We've had at least a dozen new European solutions celebrated in the past seven days of trading, and market players are expecting even more "good" news in the days ahead. Whether these solutions really are viable is irrelevant, since the buying reaction is reflexive at this point.

There is a quaint notion that markets that are extended on light volume and hitting resistance may be vulnerable to a pullback, but thinking like that has been the death of many bears in the last couple of years. We are right back in that situation and the most dangerous thing you can do is try to be logical about why a pullback would make sense. The setup we have now has tended to produce upside more often than not. Just look at what happened in October, when we had a very similar setup develop on Oct. 20. We gapped up the next day and kept running even more.

However, the biggest challenge is not the perverse technical action; it's that action is so slow and there's so little intraday movement.

2011-12-05T22:12:00.000-08:00

Standard & Poor's confirms that it has placed all 17 eurozone nations on negative watch.

How is the FT getting quotes from S&P on this before an official release? Now a credit watch move on France would not be a surprise and maybe Austria too but Germany on the cusp of losing its AAA rating, according to S&P, would be shocking right now. With this said, if France specifically loses its AAA rating, the EFSF will have problems.

GS observations:

* A significant eurozone recession is the firm's baseline expectation now.
* A negative feedback loop in Europe could occur (similar to the U.S. in 2008-2009) unless the ECB provides a massive backstop.
* U.S. economic news continues to beat very low expectations.
* The November employment report was "better than expected" but not nearly as good as suggested in the drop in the unemployment rate - it was due to workers dropping out of the labor pool.
* U.S. growth will moderate from +2.25% in the second half of 2011 to only 1% in next year's first half, reflecting fiscal tightening and an expiration in emergency unemployment benefits (among other reasons).
* "All roads lead back to Europe these days," and the eurozone poses the greatest risk to domestic growth.
* Not much is expected out of the Fed during December's FOMC meeting (though comunication policies will be "revamped").

Much is dependent upon the ECB providing a huge backstop (which still seems unlikely).

If an important reason for buying is investors' catch-up, remember, price is what you pay, value is what you get.

The November non-manufacturing ISM declined to the lowest print 10 months.

The November non-manufacturing ISM disappointed at 52.0 vs. expectations of 54.0 and 52.9 in the prior month.

This was the lowest print in the index in 10 months. While new orders and backlogs were strong, the employment component dropped from 53 to 49.

Factory orders declined by 0.4%, in line with expectations.

S&P profits should slightly exceed $100 a share given low interest rates, quiescent inflation - at least the way it is officially counted - and restrained wage labor costs.

Overnight, China's HSBC purchasing managers index fell from 54.1 to 52.5, and China's official PMI for nonmanufacturing dropped to 49.7 from 57.7.

Bulls in the China shop see this as hastening monetary ease, which will produce a soft landing.

I am not sure why so many are so certain that preemptive monetary easing guarantees a soft landing.

We will see.

It's either risk-on or risk-off, nothing in between. But, it can increasingly be argued that a lot has been discounted in the massive de-risking (by every investor class) that has reduced the S&P 500's P/E multiple by about 3 multiples below its average over the last half century (12x vs. 15x) despite a near 70% lower yield on the 10-year U.S. note (today) and given the low inflation readings and inflationary expectations. And with interest rates near historic lows, risk premiums are now at multi-decade highs. In fact, the earnings yield of stocks less the risk-free cost of capital places stocks cheaper today statistically than at the generational low in March 2009.

Hedges, low-volatility portfolio management strategies and owning precious metals have replaced the go-go investing of the 1990s, and any sense of generating alpha through individual stock selection (given increasingly correlated assets) has been lost or given up on as ETFs traded funds grow in popularity.

But, imagine if in the eurozone:

* With its back against the wall and taking a lesson out of the U.S. playbook, Europe's tame and timid policy response to the debt contagion becomes one of shock and awe.
* The ECB massively intervenes and stabilizes sovereign debt yields.
* The eurozone's fiscal integration goes smoothly as does the implementation of a massive banking industry recapitalization, as buyers around the world appear.
* The eurozone experiences only a modest economic dip.

And, imagine if in the U.S:

* A resurgence in the popularity of Newt Gingrich (and a coalescence of the Republican Party behind its candidate) causes President Obama to become defensive about the lack of progress made during his past four-year term. The president begins to move to the political center, but it is too late, as it becomes apparent that he will likely be a one-term president.
* The U.S. stock market rejoices with the expectation of a change in the administration and likely Republican control of both the House and Senate.
* Further expanding his lead in the polls, candidate Gingrich introduces a six-point economic plan, a business-like agenda of thoughtful, intelligent and radical pro-growth fiscal policies which includes:

1. engineering a more rapid recovery in the housing markets;
2. addressing our fiscal policies (including but not restricted to setting a specific limitation on the annual gains in spending to be less than the increase in the consumer price index and mean testing entitlements, freezing entitlement payouts and gradually increasing the social security retirement age to 70 years old);
3. denting the structural unemployment problem and mismatch of available jobs to talent (through a comprehensive plan to change and upgrade our educational system);
4. a broad plan for energy self-sufficiency designed to rapidly develop all of our energy resources;
5. repatriation of overseas corporate profits tied directly to job growth earmarks; and
6. an overhaul to the U.S. tax system (which includes a flat tax and repatriation of overseas earnings only if earmarked by a commitment to job growth/hirings).

* With the outlook for top-line growth improving, contained inflation and subdued wage growth serve to sustain profit margins as 2012 S&P earnings expectations rise.
* Consumer and business confidence rebound dramatically, paving the way for pent-up demand for durable products (e.g., housing and autos) and for capital spending to be unleashed.
* M&A activity explodes in an unprecedented manner.
* With a better GDP growth outlook and rising consumer and business confidence, U.S. bond yields rise rapidly, causing a massive reallocation trade out of bonds and into stocks. Underinvested retail investors reverse their disinterest in U.S. equities and begin to reinvest in domestic stock funds, and a de-risked hedge fund community panics and exacerbates a buying stampede.

2011-12-05T21:56:00.000-08:00

For the second straight day, we opened strong and finished weak. We had gains, but they all occurred overnight. The intraday action was poor, but breadth was still healthy at better than 3:1 positive due to gains at the open. Volume was light with little energy, few leaders and no outstanding momentum.

The S&P 500 and Nasdaq are up more than 8.5% in the last six days. That is an extremely rare feat to move that much that quickly, but the lack of love for this market is striking. It was obvious that few were prepared for the first big pop, but after four big gap-up opens in six days we should be seeing strong emotions and bullish celebrations. There is very little frothiness outside of the action in the indices. The irony is that the dour sentiment is what's keeping conditions ripe for continued lopsided action.

What has really helped kill the mood is the hot money players are itchy for action but aren't holding inventory overnight, so they miss out. Very little happens intraday, which only raises frustrations. On the other hand, many are afraid to hold much overnight due to headline risk, especially as we have become more overbought. So every day we start with a bunch of underinvested bulls that need to buy.

Labor Stuff

2011-12-05T21:52:00.000-08:00

The BLS employment number released Friday was "better than expected;" due to the routine fudging of the denominator, or the total labor force. More people than ever are finding the shadow economy a more hospitable place to make money and drop off the BLS rolls forever. According to the monthly Gallup Poll of underemployment, a measure that combines the percentage of workers who are unemployed with the percentage working part time but wanting full time work, is over 18% in November, measured without seasonal adjustment. That is up from 17.8% a month ago and 17.2% a year ago. Stated simply, many employers appear to have chosen to hire part-time rather than full-time employees for this holiday season.