Sunday, February 19, 2012

Regarding Monday's Greek 'decision.' The yield on one-year paper in Greece now yields nearly 630%. The rise in yield today was the largest on record. Greece is obviously already bankrupt.

On Bloomberg: "Workplace auditor finds 'tons of issues' at Apple manufacturer."

I would not be surprised if the shares of ASPS more than doubled in the next 12 to 18 months. Free cash flow will be almost $6.30 a share. Why can't the shares trade at 15x free cash flow? ASPS may be the stock of the decade. BTW, it's doubled in 2 years.

Core CPI is currently rising at the quickest pace in almost three and a half years.

The core and headline January CPI rose by 0.2%, which was in line with expectations.
Many market players didn't want to do much ahead of the long weekend, with the possibility of more news coming out of Greece while the market is closed Monday.

But the old adage about not shorting a dull market came to life and the market held up. The bulls may not have wanted to do a lot of buying, but they did more than enough to keep the bears from gaining traction.

Once again, underlying support is remarkably strong, and one mild dip was well bought. There wasn't a lot of major strength, and Nasdaq breadth was even, but the price action could not be faulted.

Dow 13,000 talk is heating up again. I expect to hear that kind of chatter as the market tops; it's a sign of overconfidence and complacency.

On the other hand, it has been very easy to make bearish arguments for quite a while, even though they haven't mattered. Until there is an actual change in the price action, the arguments are irrelevant, even dangerous.

On Tuesday morning, we'll likely be reacting to Greece one way or another. Some sort of deal will give the market short-term support, but in the long run, we know that it is a matter of time before Greece is in trouble again.

I suspect that Europe will eventually be the catalyst for a market turn, but they are doing a good job of kicking the can down the road and preventing the overanxious bears from gaining a foothold.

Thursday, February 16, 2012

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.
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.

Wednesday, February 15, 2012

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."
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.
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.


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."