Thursday, April 30, 2009

Obama Obliterates Rally; Market Was Probably Looking For A Reason To Sell Though

After the buoyant action on Wednesday, market players were anxious for more. We started off with some very strong breadth and more momentum, but it was becoming increasingly frothy. President Obama, with some not-so-subtle jabs at "Wall Street," provided an excuse for the buyers to rest and some profit-taking to kick in. We rolled over at midday and after some choppiness finished at the lows. Of course, we once again saw some last-hour jerkiness before we had one final spike, this time to the downside.

So the question now is whether momentum is just going to cool off a bit and allow the bulls to regroup for another push higher or whether we finally see more downside develop as this big move off the March lows grows old and extended. Traders are obviously anxious for action and have been quickly jumping in every time we dip even briefly.

Momentum tends to be a sticky thing and doesn't go away easily. The essence of momentum is that it is persistent. If it just went away quickly and easily, then it wasn't momentum in the first place. So don't be quick to think the market will just die a sudden death, but once momentum does falter, things can slide very fast. The folks who chase momentum will sell first and ask questions later once support cracks and stops are hit. It is all about respecting the strength but staying disciplined when it disappears.

The good thing about this market is that there are some excellent opportunities in individual stocks. For example, RST caught some aggressive buying this afternoon and went out at its highs. You can be sure that plenty of traders will have it on their radar tomorrow.

Going into more detail, it was a lackluster finish for stocks today. Continued strength in cyclical stocks helped the stock market get off to an impressive start, but Thursday's trading session concluded in lackluster fashion after sellers moved against energy and financial stocks... The stock market began the session with broad-based strength and climbed as high as 1.7%. The positive tone followed a deluge of earnings reports, which were generally better than expected and helped investors look past another dreary dose of weekly jobless data... Buyers favored materials stocks and industrial stocks in the early going. At their highs, the two sectors were up as much as 3.9% and 3.0%, respectively. Materials finished with a gain of 3.0%, while industrials closed 0.7% higher... The interest in materials and industrials compounded their recent gains, which have been underpinned by the belief that such early cycle stocks will be the first to recover when economic conditions improve. That argument has pushed materials stocks up 16% in the past month and industrial stocks up 19% in the past month... Trading volume picked up in the final few minutes of the session to come in-line with recent trends. Until then, the apparent lack of conviction in the broader market's climb seemed to enable sellers to rally around energy and financial stocks and cause the broader market to buckle. Many expected money managers and investors to increase their involvement this session by partaking in some end-of-month window dressing. ... Energy finished as the worst performing sector by closing with a 2.1% loss. Oil and gas drillers were some of the weakest performers, but weakness in integrated energy plays like XOM caused the most damage in the sector, due to their market weight. Exxon Mobil faltered after reporting earnings results that missed analysts' expectations... Financials fell under pressure as investors pushed back against bank stocks, which led gains in the prior session. Financials closed 0.8% lower.

End Of The Recession Is In Sight

The end of this recession - the most severe downturn since World War II - is finally in sight. This is the clear message from Economic Cycle Research Institute's array of leading indices of the U.S. economy.

What are these indicators? One is the ECRI's U.S. Long Leading Index, which has the longest average lead times of any U.S. leading index. Another is the Weekly Leading Index, which has a shorter lead over the business cycle but is very promptly available.

The growth rate of the USLLI turned up in November 2008 and has now advanced for four straight months. The growth rate of the WLI turned up soon after that, in early December 2008, and as of mid-April 2009 it had been rising for more than four months. A rigorous examination of the data affirms that both USLLI growth and WLI growth have been in cyclical upturns for at least four months.

Therefore, the economy is on the cusp of a growth rate cycle upturn, a cyclical acceleration in economic growth. In other words, U.S. economic growth, which, according to ECRI's U.S. Coincident Index growth rate, is still plunging deeper into negative territory, will start becoming less negative in short order.

But so what? Isn't this tantamount to the growing conventional wisdom about the slowing descent in economic activity? Indeed it is, but those who dismiss this development don't understand its implications for a business cycle recovery.

In fact, over the last 75 years, growth rate cycle upturns during every recession were followed zero to four months later by the end of the recession itself. No exceptions.

Actually, there's been only one solitary exception in the data, which go back well over a century. This was the growth rate cycle upturn of 1930-31, which gave way to a renewed downturn. But when this growth rate cycle upturn was beginning at the end of 1930, USLLI growth was turning back down, warning that the firming in growth would soon be reversed, effectively opening the door to depression. That's not the case today.

We know this because the USLLI data go back to 1919, covering not only the Great Depression but also the 1920-21 depression. Another ECRI leading index has a 105-year history, covering not only those depressions but also the panic of 1907 and the associated 1907-08 depression. All of those leading indices, which correctly anticipated recessions and recoveries over long periods of history, are now pointing the same way.

While ECRI has known about the growth rate cycle upturn for a while, what's new this month, beyond the implications of a growth rate cycle upturn, is that the level of the USLLI has been rising for three straight months in a way that signals the end of the recession. The level of the WLI has been rising for six weeks - this wouldn't yet be significant, except that this comes in the wake of the upturn in the USLLI. Along with the rest of ECRI's leading indices, these developments are pointing to a business cycle recovery this year, probably by the end of the summer.

In order to take this forecast seriously, it's important to look at the track record of ECRI's leading indices. Some may recall that these indices helped us predict the 2001 recession. These same leading indices correctly anticipated the current recession, turning down before the recession began. Specifically, the Weekly Leading Index turned down in early June 2007. By December 2007, its growth rate had plunged to its worst reading since the 2001 recession.

In January 2008, I recognized that a self-reinforcing downturn had already begun. It morphed into the vicious cycle known as a business cycle recession. At the time, I wanted prompt stimulus to boost consumer spending, to avert a recession. The stimulus was needed immediately.

No stimulus was forthcoming, of course. By March 2008 we entered a recession that "didn't have to happen." Even as stock prices rallied by 12% that spring and upbeat analysts decided that the economy had dodged the recession, I suspected otherwise, knowing that the recession would be recognized belatedly, as usual.

In the following months, the S&P 500 lost half its value - even today, after a sharp run-up, it's still a third below its value at the time. But the leading indicators that warned us of recession are now pointing clearly to a business cycle recovery.

But isn't this recession without precedent? Sure, if you consider only the run-of-the-mill postwar recessions to which most economists have fitted their models. But the ECRI's indicator systems cover not just garden-variety recessions but also jungle-variety depressions, panics and crises spanning well over a century. This recession shares family resemblances to earlier, prewar downturns.

Still, most will be skeptical about a forecast calling for a business cycle upturn. This is expected. Why is that?

Wesley C. Mitchell described how the error of optimism at the heart of every boom "grows in scope and magnitude. ... But since the prosperity has been built largely upon error, a day of reckoning must come. ... Then the past miscalculation becomes patent - patent to creditors as well as to debtors, and the creditors apply pressure for repayment. Thus prosperity ends in a crisis."

Then, as Mitchell quotes A.C. Pigou writing in 1920, "The error of optimism dies in the crisis but in dying it 'gives birth to an error of pessimism. This new error is born, not an infant, but a giant; for [the] boom has necessarily been a period of strong emotional excitement, and an excited man passes from one form of excitement to another more rapidly than he passes to quiescence.'"

The "giant error of pessimism" is now rampant. This is why many will be blind to the light at the end of the tunnel that marks the exit from this recession. But to ECRI's array of objective leading indices, designed specifically to spot recessions and recoveries, the end of the recession is now in clear sight.

Wednesday, April 29, 2009

Why It's Right To Be Excited About Housing Again

Reports are piling up stating that housing in the worst places is getting better; one of the largest private builders in Florida - ICI Homes - has just had the best April since 2006.

And why not? Prices have come down gigantically. Mortgages are the cheapest in our lifetimes. There's a new tax credit for first-time homebuyers. You combine all of these and you get two things: 1) It is dramatically cheaper to buy than to rent -- by as much as $4,000 a month, and 2) You have to be an idiot not to think about buying a property right now.

Despite The Late-Day Selloff, A Good Day - Will Tomorrow Bring A Reversal?

Even with a sell off in the final hour, it was a surprisingly strong day. We had very good breadth and decent volume with all major sectors up. I say it was surprising because there really wasn't any catalyst and technically the S&P 500 has been in a trading range.

We have had a history recently of strength on the day of the Fed interest rate announcement, which probably helped get things running. It didn't make sense for bears to try to get in front of the Fed and they stayed out of the way of the bulls even though there weren't any great expectations about what the Fed might do.

The Fed offered up some optimism but nothing else, and after one attempted squeeze higher, the sellers came in during the final hour. We still managed some good gains and technically the overall uptrend is still intact.

The action felt a bit frothy at times today and you have to wonder if we have some end-of-month manipulations contributing to the action. Nonetheless, there were some very big moves and some good opportunities for aggressive traders.

We have a deluge of earnings reports tonight and technically momentum remains very strong. The bulls have the upper hand and traders may becoming a bit overconfident. Keep on plugging away but don't be shy about locking in some gains.

Earnings reports are hitting as I write. V is ahead and getting some steady buying but it's another solid report from FSLR that is causing real excitement. That should light up the solar sector tomorrow.

Tuesday, April 28, 2009

Market Shakes Off Bad News; Lower Open

For the second day in a row, buyers stepped up to plate following a gap lower at the open. This morning’s trigger was news that regulators have said that preliminary results from their bank stress tests show that both BAC and C may need additional capital. Still, while we were able to recover quickly early in the morning, the troops weren’t ever able to get things moving to the upside.

A brief surge to the best levels of the session during the contra-hour gave market players a chance to hit the exits as another bout of wacky action in the final hour pushed us right back towards the unchanged mark. Still, despite the fact that the broader market remains range-bound, there’s plenty of speculative action under the surface. Not only are traders busy chasing names that have already seen strong runs even higher, but they are rooting around, trying to see if they can get other stocks that have yet to break out of their bases.

So, there are plenty of opportunities out there for some short-term trading. I'm still not in a spot where I can put significant amounts of capital to work, but it sure beats the constant negativity we had to deal with earlier this year.

Going into more detail, stocks log minor losses, but finish well off of the session lows:

Bank stocks led losses in the early going and into the close, but in between stocks were able to trade with modest gains amid signs of improved consumer confidence and strength in Dow component IBM... Financial stocks were down as much as 2.6% in the first few minutes of trading as investors grew worried about bank capital levels. According to a report from The Wall Street Journal, Bank of America and Citigroup may need to raise billions to satisfy the government's bank stress tests. Citigroup simply responded by stating that its regulatory capital base is strong and it continues working to improve tangible common ratios, according to Reuters... JPMorgan Chase bucked the negative trend among major banks to lead financials into positive ground, but the advance proved unsustainable as sellers redoubled their efforts against financials and handed the sector a 1.8% loss for the session, worse than any other sector... Though the financial sector's late downturn resulted in a loss for the broader market, stocks were able to trade with modest gains for much of the session. The gains came after the Conference Board reported its Consumer Confidence Index for April improved to 39.2 from 26.9. The reading was expected to come in at 29.7... Meanwhile, IBM provided additional support to the broader market by increasing its quarterly cash dividend by $0.05 to $0.55 per share and authorized $3 billion in funds for stock repurchases. Despite IBM's announcement, tech stocks finished the session with a 0.6% loss... Telecom stocks actually logged the best performance of the session by advancing 1.2%. Verizon showed leadership amid reports that the company is pursuing partnerships that will help develop advanced generation mobile phones... Biotech stocks and managed health care stocks provided support to the health care sector after Hospira and Coventry Health each reported better-than-expected earnings for the latest quarter. Pharmaceuticals stocks garnered little support even though Pfizer and Bristol-Myers Squibb both posted solid quarterly earnings results....

GM At Almost $2 Makes No Sense

Does anyone know what to do with GM, other than to trade it? It is so not representative of the soon-to-be-owners that it makes little sense to buy at all. But that's never stopped anybody.

From the looks of things, the government is going to give the union enough of the common stock of GM that you will be buying something that is so diluted that it could be worth pennies on the dollar, especially because there are no plans currently to be profitable at the run rate that exists right now in this country. You have the company offering some sop to bondholders, but one can only imagine how much stock they will need and how little there will be left for existing common-stock holders when you consider that the government and the unions have the big stakes.

The ridiculous rally yesterday was simply a total misunderstanding of the coming capital structure and what it will take to win over the bondholders. It was an amazing disappointment, and the company is basically going to be owned by the unions, not existing shareholders. Why anyone would want to own a company run by the interests that have done more to destroy the company is beyond me. But there's momentum to the name, so people play it no matter how stupid it is.

I know that no one wants to hear that GM shouldn't be bought as a lottery ticket. I know there is no opportunity cost. I know it will be kept alive by the government.

I just don't see why you would bother!

Monday, April 27, 2009

Crazy Late Day Action Once Again

The morning futures indicated an ugly day, but turned out to be a headfake (again). The market didn't like the flu news (hey everybody - WASH YOUR DAMN HANDS REGULARLY!!!!) or the incredibly insensitive "photo op" featuring what looked like Air Force One and a military plane - Someone should be fired immediately for that unannounced disaster.

Plus the late day action was crazy once again as five big swings took traders on a wild ride in the final 60 minutes, but in the end, each of the major indices closed just barely off the lows of the day with average losses of 0.84% on breadth that was right around 2:1 to the negative. With BIDU set to report their earnings this evening, big-cap tech was able to show a skosh of relative strength, but none of the cyclical sectors was able to close the day in the green.

It’s often uncanny how, when the market is ripe for some consolidation after a good run, some bit of news comes along to act as a catalyst, and today it was the influenza pandemic fears (very irrational, but that will be realized later). So, while the news channels were busy digging up footage of folks in big cities wearing surgical masks, investors were focused on bidding health related stocks higher.

Now that most of the big earnings reports are out, market players will be able to begin focusing on individual stocks. With the indices basing out here near recent highs - action that will ultimately be necessary if we are to see further improvement as we move forward - hopefully that will turn out to be the case.

Why Nuclear Power Is THE Answer; By Peter Schwartz And Spencer Reiss

On a cool spring morning a quarter century ago, a place in Pennsylvania called Three Mile Island exploded into the headlines and stopped the US nuclear power industry in its tracks. What had been billed as the clean, cheap, limitless energy source for a shining future was suddenly too hot to handle.

In the years since, we've searched for alternatives, pouring billions of dollars into windmills, solar panels, and biofuels. We've designed fantastically efficient lightbulbs, air conditioners, and refrigerators. We've built enough gas-fired generators to bankrupt California. But mainly, each year we hack 400 million more tons of coal out of Earth's crust than we did a quarter century before, light it on fire, and shoot the proceeds into the atmosphere.

The consequences aren't pretty. Burning coal and other fossil fuels is driving climate change, which is blamed for everything from western forest fires and Florida hurricanes to melting polar ice sheets and flooded Himalayan hamlets. On top of that, coal-burning electric power plants have fouled the air with enough heavy metals and other noxious pollutants to cause 15,000 premature deaths annually in the US alone, according to a Harvard School of Public Health study. Believe it or not, a coal-fired plant releases 100 times more radioactive material than an equivalent nuclear reactor - right into the air, too, not into some carefully guarded storage site. (And, by the way, more than 5,200 Chinese coal miners perished in accidents last year.)

Burning hydrocarbons is a luxury that a planet with 6 billion energy-hungry souls can't afford. There's only one sane, practical alternative: nuclear power.

We now know that the risks of splitting atoms pale beside the dreadful toll exacted by fossil fuels. Radiation containment, waste disposal, and nuclear weapons proliferation are manageable problems in a way that global warming is not. Unlike the usual green alternatives - water, wind, solar, and biomass - nuclear energy is here, now, in industrial quantities. Sure, nuke plants are expensive to build - upward of $2 billion apiece - but they start to look cheap when you factor in the true cost to people and the planet of burning fossil fuels. And nuclear is our best hope for cleanly and efficiently generating hydrogen, which would end our other ugly hydrocarbon addiction - dependence on gasoline and diesel for transport.

Some of the world's most thoughtful greens have discovered the logic of nuclear power, including Gaia theorist James Lovelock, Greenpeace cofounder Patrick Moore, and Britain's Bishop Hugh Montefiore, a longtime board member of Friends of the Earth (see "Green vs. Green," page 82). Western Europe is quietly backing away from planned nuclear phaseouts. Finland has ordered a big reactor specifically to meet the terms of the Kyoto Protocol on climate change. China's new nuke plants - 26 by 2025 - are part of a desperate effort at smog control.

Even the shell-shocked US nuclear industry is coming out of its stupor. The 2001 report of Vice President Cheney's energy task force was only the most high profile in a series of pro-nuke developments. Nuke boosters are especially buoyed by more efficient plant designs, streamlined licensing procedures, and the prospect of federal subsidies.

In fact, new plants are on the way, however tentatively. Three groups of generating companies have entered a bureaucratic maze expected to lead to formal applications for plants by 2008. If everything breaks right, the first new reactors in decades will be online by 2014. If this seems ambitious, it's not; the industry hopes merely to hold on to nuclear's current 20 percent of the rapidly growing US electric power market.

That's not nearly enough. We should be shooting to match France, which gets 77 percent of its electricity from nukes. It's past time for a decisive leap out of the hydrocarbon era, time to send King Coal and, soon after, Big Oil shambling off to their well-deserved final resting places - maybe on a nostalgic old steam locomotive.

Besides, wouldn't it be a blast to barrel down the freeway in a hydrogen Hummer with a clean conscience as your copilot? Or not to feel like a planet killer every time you flick on the A/C? That's how the future could be, if only we would get over our fear of the nuclear bogeyman and forge ahead - for real this time - into the atomic age.

The granola crowd likes to talk about conservation and efficiency, and surely substantial gains can be made in those areas. But energy is not a luxury people can do without, like a gym membership or hair gel. The developed world built its wealth on cheap power - burning firewood, coal, petroleum, and natural gas, with carbon emissions the inevitable byproduct.

Indeed, material progress can be tracked in what gets pumped out of smokestacks. An hour of coal-generated 100-watt electric light creates 0.05 pounds of atmospheric carbon, a bucket of ice makes 0.3 pounds, an hour's car ride 5. The average American sends nearly half a ton of carbon spewing into the atmosphere every month. Europe and Japan are a little more economical, but even the most remote forest-burning peasants happily do their part.

And the worst - by far - is yet to come. An MIT study forecasts that worldwide energy demand could triple by 2050. China could build a Three Gorges Dam every year forever and still not meet its growing demand for electricity. Even the carbon reductions required by the Kyoto Protocol - which pointedly exempts developing countries like China - will be a drop in the atmospheric sewer.

What is a rapidly carbonizing world to do? The high-minded answer, of course, is renewables. But the notion that wind, water, solar, or biomass will save the day is at least as fanciful as the once-popular idea that nuclear energy would be too cheap to meter. Jesse Ausubel, director of the human environment program at New York's Rockefeller University, calls renewable energy sources "false gods" - attractive but powerless. They're capital- and land-intensive, and solar is not yet remotely cost-competitive. Despite all the hype, tax breaks, and incentives, the proportion of US electricity production from renewables has actually fallen in the past 15 years, from 11.0 percent to 9.1 percent.

The decline would be even worse without hydropower, which accounts for 92 percent of the world's renewable electricity. While dams in the US are under attack from environmentalists trying to protect wild fish populations, the Chinese are building them on an ever grander scale. But even China's autocrats can't get past Nimby. Stung by criticism of the monumental Three Gorges project - which required the forcible relocation of 1 million people - officials have suspended an even bigger project on the Nu Jiang River in the country's remote southwest. Or maybe someone in Beijing questioned the wisdom of reacting to climate change with a multibillion-dollar bet on rainfall.

Solar power doesn't look much better. Its number-one problem is cost: While the price of photovoltaic cells has been slowly dropping, solar-generated electricity is still four times more expensive than nuclear (and more than five times the cost of coal). Maybe someday we'll all live in houses with photovoltaic roof tiles, but in the real world, a run-of-the-mill 1,000-megawatt photovoltaic plant will require about 60 square miles of panes alone. In other words, the largest industrial structure ever built.

Wind is more promising, which is one reason it's the lone renewable attracting serious interest from big-time equipment manufacturers like General Electric. But even though price and performance are expected to improve, wind, like solar, is inherently fickle, hard to capture, and widely dispersed. And wind turbines take up a lot of space; Ausubel points out that the wind equivalent of a typical utility plant would require 300 square miles of turbines plus costly transmission lines from the wind-scoured fields of, say, North Dakota. Alternatively, there's California's Altamont Pass, where 5,400 windmills slice and dice some 1,300 birds of prey annually.

What about biomass? Ethanol is clean, but growing the amount of cellulose required to shift US electricity production to biomass would require farming - no wilting organics, please - an area the size of 10 Iowas.

Among fossil fuels, natural gas holds some allure; it emits a third as much carbon as coal. That's an improvement but not enough if you're serious about rolling back carbon levels. Washington's favorite solution is so-called clean coal, ballyhooed in stump speeches by both President Bush (who offered a $2 billion research program) and challenger John Kerry (who upped the ante to $10 billion). But most of the work so far has been aimed at reducing acid rain by cutting sulphur dioxide and nitrogen oxide emissions, and more recently gasifying coal to make it burn cleaner. Actual zero-emissions coal is still a lab experiment that even fans say could double or triple generating costs. It would also leave the question of what to do with 1 million tons of extracted carbon each year.

By contrast, nuclear power is thriving around the world despite decades of obituaries. Belgium derives 58 percent of its electricity from nukes, Sweden 45 percent, South Korea 40, Switzerland 37 percent, Japan 31 percent, Spain 27 percent, and the UK 23 percent. Turkey plans to build three plants over the next several years. South Korea has eight more reactors coming, Japan 13, China at least 20. France, where nukes generate more than three-quarters of the country's electricity, is privatizing a third of its state-owned nuclear energy group, Areva, to deal with the rush of new business.

The last US nuke plant to be built was ordered in 1973, yet nuclear power is growing here as well. With clever engineering and smart management, nukes have steadily increased their share of generating capacity in the US. The 103 reactors operating in the US pump out electricity at more than 90 percent of capacity, up from 60 percent when Three Mile Island made headlines. That increase is the equivalent of adding 40 new reactors, without bothering anyone's backyard or spewing any more carbon into the air.

So atomic power is less expensive than it used to be - but could it possibly be cost-effective? Even before Three Mile Island sank, the US nuclear industry was foundering on the shoals of economics. Regulatory delays and billion-dollar construction-cost overruns turned the business into a financial nightmare. But increasing experience and efficiency gains have changed all that. Current operating costs are the lowest ever - 1.82 cents per kilowatt-hour versus 2.13 cents for coal-fired plants and 3.69 cents for natural gas. The ultimate vindication of nuclear economics is playing out in the stock market: Over the past five years, the stocks of leading nuclear generating companies such as Exelon and Entergy have more than doubled. Indeed, Exelon is feeling so flush that it bought New Jersey's Public Service Enterprise Group in December, adding four reactors to its former roster of 17.

This remarkable success suggests that nuclear energy realistically could replace coal in the US without a cost increase and ultimately lead the way to a clean, green future. The trick is to start building nuke plants and keep building them at a furious pace. Anything less leaves carbon in the climatic driver's seat.

A decade ago, anyone thinking about constructing nuclear plants in the US would have been dismissed as out of touch with reality. But today, for the first time since the building of Three Mile Island, new nukes in the US seem possible. Thanks to improvements in reactor design and increasing encouragement from Washington, DC, the nuclear industry is posed for unlikely revival. "All the planets seem to be coming into alignment," says David Brown, VP for congressional affairs at Exelon.

The original US nuclear plants, built during the 1950s and '60s, were descended from propulsion units in 1950s-vintage nuclear submarines, now known as generation I. During the '80s and '90s, when new construction halted in the US, the major reactor makers - GE Power Systems, British-owned Westinghouse, France's Framatome (part of Areva), and Canada's AECL - went after customers in Europe. This new round of business led to system improvements that could eventually, after some prototyping, be deployed back in the US.

By all accounts, the latest reactors, generation III+, are a big improvement. They're fuel-efficient. They employ passive safety technologies, such as gravity-fed emergency cooling rather than pumps. Thanks to standardized construction, they may even be cost-competitive to build - $1,200 per kilowatt-hour of generating capacity versus more than $1,300 for the latest low-emission (which is not to say low-carbon) coal plants. But there's no way to know for sure until someone actually builds one. And even then, the first few will almost certainly cost more.

Prodded by the Cheney report, the US Department of Energy agreed in 2002 to pick up the tab of the first hurdle - getting from engineering design to working blueprints. Three groups of utility companies and reactor makers have stepped up for the program, optimistically dubbed Nuclear Power 2010. The government's bill to taxpayers for this stage of development could top $500 million, but at least we'll get working reactors rather than "promising technologies."

But newer, better designs don't free the industry from the intense public oversight that has been nuclear power's special burden from the start. Believe it or not, Three Mile Island wasn't the ultimate nightmare; that would be Shoreham, the Long Island power plant shuttered in 1994 after a nine-year legal battle, without ever having sold a single electron. Construction was already complete when opponents challenged the plant's application for an operating license. Wall Street won't invest billions in new plants ($5.5 billion in Shoreham's case) without a clear path through the maze of judges and regulators.

Shoreham didn't die completely in vain. The 1992 Energy Policy Act aims to forestall such debacles by authorizing the Nuclear Regulatory Commission to issue combined construction and operating licenses. It also allows the NRC to pre-certify specific reactor models and the energy companies to bank preapproved sites. Utility executives fret that no one has ever road-tested the new process, which still requires public hearings and shelves of supporting documents. An idle reactor site at Browns Ferry, Alabama, could be an early test case; the Tennessee Valley Authority is exploring options to refurbish it rather than start from scratch.

Meanwhile, Congress looks ready to provide a boost to the nuclear energy industry. Pete Domenici (R-New Mexico), chair of the Senate's energy committee and the patron saint of nuclear power in Washington, has vowed to revive last year's energy bill, which died in the Senate. Earlier versions included a 1.85 cent per-kilowatt-hour production tax credit for the first half-dozen nuke plants to come online. That could add up to as much as $8 billion in federal outlays and should go a long way toward luring Wall Street back into the fray. As pork goes, the provision is easy to defend. Nuclear power's extraordinary startup costs and safety risks make it a special case for government intervention. And the amount is precisely the same bounty Washington spends annually in tax credits for wind, biomass, and other zero-emission kilowattage.

Safer plants, more sensible regulation, and even a helping hand from Congress - all are on the way. What's still missing is a place to put radioactive waste. By law, US companies that generate nuclear power pay the Feds a tenth of a cent per kilowatt-hour to dispose of their spent fuel. The fund - currently $24 billion and counting - is supposed to finance a permanent waste repository, the ill-fated Yucca Mountain in Nevada. Two decades ago when the payments started, opening day was scheduled for January 31, 1998. But the Nevada facility remains embroiled in hearings, debates, and studies, and waste is piling up at 30-odd sites around the country. Nobody will build a nuke plant until Washington offers a better answer than "keep piling."

At Yucca Mountain, perfection has been the enemy of adequacy. It's fun to discuss what the design life of an underground nuclear waste facility ought to be. One hundred years? Two hundred years? How about 100,000? A quarter of a million? Science fiction meets the US government budgeting process. In court!

But throwing waste into a black hole at Yucca Mountain isn't such a great idea anyway. For one thing, in coming decades we might devise better disposal methods, such as corrosion-proof containers that can withstand millennia of heat and moisture. For another, used nuclear fuel can be recycled as a source for the production of more energy. Either way, it's clear that the whole waste disposal problem has been misconstrued. We don't need a million-year solution. A hundred years will do just fine - long enough to let the stuff cool down and allow us to decide what to do with it.

The name for this approach is interim storage: Find a few patches of isolated real estate - we're not talking about taking it over for eternity - and pour nice big concrete pads; add floodlights, motion detectors, and razor wire; truck in nuclear waste in bombproof 20-foot-high concrete casks. Voil�: safe storage while you wait for either Yucca Mountain or plan B.

Two dozen reactor sites around the country already have their own interim facilities; a private company has applied with the NRC to open one on the Goshute Indian reservation in Skull Valley, Utah. Establishing a half- dozen federally managed sites is closer to the right idea. Domenici says he'll introduce legislation this year for a national interim storage system.

A handful of new US plants will be a fine start, but the real goal has to be dethroning King Coal and - until something better comes along - pushing nuclear power out front as the world's default energy source. Kicking carbon cold turkey won't be easy, but it can be done. Four crucial steps can help increase the momentum: Regulate carbon emissions, revamp the fuel cycle, rekindle innovation in nuclear technology, and, finally, replace gasoline with hydrogen.

• Regulate carbon emissions. Nuclear plants have to account for every radioactive atom of waste. Meanwhile, coal-fired plants dump tons of deadly refuse into the atmosphere at zero cost. It's time for that free ride to end, but only the government can make it happen.

The industry seems ready to pay up. Andy White, CEO of GE Energy's nuclear division, recently asked a roomful of US utility executives what they thought about the possibility of regulating carbon emissions. The idea didn't faze them. "The only question any of them had," he says, "was when and how much."

A flat-out carbon tax is almost certainly a nonstarter in Washington. But an arrangement in which all energy producers are allowed a limited number of carbon pollution credits to use or sell could pass muster; after all, this kind of cap-and-trade scheme is already a fact of life for US utilities with a variety of other pollutants. Senators John McCain and Joe Lieberman have been pushing legislation such a system. This would send a clear message to utility executives that fossil energy's free pass is over.

• Recycle nuclear fuel. Here's a fun fact: Spent nuclear fuel - the stuff intended for permanent disposal at Yucca Mountain - retains 95 percent of its energy content. Imagine what Toyota could do for fuel efficiency if 95 percent of the average car's gasoline passed through the engine and out the tailpipe. In France, Japan, and Britain, nuclear engineers do the sensible thing: recycle. Alone among the nuclear powers, the US doesn't, for reasons that have nothing to do with nuclear power.

Recycling spent fuel - the technical word is reprocessing - is one way to make the key ingredient of a nuclear bomb, enriched uranium. In 1977, Jimmy Carter, the only nuclear engineer ever to occupy the White House, banned reprocessing in the US in favor of a so-called once-through fuel cycle. Four decades later, more than a dozen countries reprocess or enrich uranium, including North Korea and Iran. At this point, hanging onto spent fuel from US reactors does little good abroad and real mischief at home.

The Bush administration has reopened the door with modest funding to resume research into the nuclear fuel cycle. The president himself has floated a proposal to provide all comers with a guaranteed supply of reactor fuel in exchange for a promise not to reprocess spent fuel themselves. Other proposals would create a global nuclear fuel company, possibly under the auspices of the International Atomic Energy Agency. This company would collect, reprocess, and distribute fuel to every nation in the world, thus keeping potential bomb fixings out of circulation.

In the short term, reprocessing would maximize resources and minimize the problem of how to dispose of radioactive waste. In fact, it would eliminate most of the waste from nuclear power production. Over decades, it could also ease pressure on uranium supplies. The world's existing reserves are generally reckoned sufficient to withstand 50 years of rapid nuclear expansion without a significant price increase. In a pinch, there's always the ocean, whose 4.5 billion tons of dissolved uranium can be extracted today at 5 to 10 times the cost of conventional mining.

Uranium is so cheap today that reprocessing is more about reducing waste than stretching the fuel supply. But advanced breeder reactors, which create more fuel as they generate power, could well be the economically competitive choice - and renewable as well.

• Rekindle innovation. Although nuclear technology has come a long way since Three Mile Island, the field is hardly a hotbed of innovation. Government-funded research - such as the DOE's Next Generation Nuclear Plant program - is aimed at designing advanced reactors, including high temperature, gas-cooled plants of the kind being built in China and South Africa and fast-breeder reactors that will use uranium 60 times more efficiently than today's reactors. Still, the nuclear industry suffers from its legacy of having been born under a mushroom cloud and raised by your local electric company. A tight leash on nuclear R&D may be good, even necessary. But there's nothing like a little competition to spur creativity. That's reason enough to want to see US companies squarely back on the nuclear power field - research is great, but more and smarter buyers ultimately drive quality up and prices down.

In fact, the possibility of a nuclear gold rush - not just a modest rebirth - depends on economics as much as technology. The generation IV pebble-bed reactors being developed in China and South Africa get attention for their meltdown-proof designs. (See "Let a Thousand Reactors Bloom," issue 12.09.) But it's their low capital cost and potential for fast, modular construction that could blow the game open, as surely as the PC did for computing. As long as investments come in $2 billion increments, purchase orders will be few and far between. At $300 million a pop for safe, clean energy, watch the floodgates open around the world.

• Replace gasoline with hydrogen. If a single change could truly ignite nuclear power, it's the grab bag of technologies and wishful schemes traveling under the rubric of the hydrogen economy. Leaving behind petroleum is as important to the planet's future as eliminating coal. The hitch is that it takes energy to extract hydrogen from substances like methane and water. Where will it come from?

Today, the most common energy source for producing hydrogen is natural gas, followed by oil. It's conceivable that renewables could do it in limited quantities. By the luck of physics, though, two things nuclear reactors do best - generate both electricity and very high temperatures - are exactly what it takes to produce hydrogen most efficiently. Last November, the DOE's Idaho National Engineering and Environmental Laboratory showed how a single next-gen nuke could produce the hydrogen equivalent of 400,000 gallons of gasoline every day. Nuclear energy's potential for freeing us not only from coal but also oil holds the promise of a bright green future for the US and the world at large.

The more seriously you take the idea of global warming, the more seriously you have to take nuclear power. Clean coal, solar-powered roof tiles, wind farms in North Dakota - they're all pie in the emissions-free sky. Sure, give them a shot. But zero-carbon reactors are here and now. We know we can build them. Their price tag is no mystery. They fit into the existing electric grid without a hitch. Flannel-shirted environmentalists who fight these realities run the risk of ending up with as much soot on their hands as the slickest coal-mining CEO.

America's voracious energy appetite doesn't have to be a bug - it can be a feature. Shanghai, Seoul, and S�o Paolo are more likely to look to Los Angeles or Houston as a model than to some solar-powered idyll. Energy technology is no different than any other; innovation can change all the rules. But if the best we can offer the developing world is bromides about energy independence, we'll deserve the carbon-choked nightmare of a planet we get.

Nuclear energy is the big bang still reverberating. It's the power to light a city in a lump the size of a soda can. Peter Huber and Mark Mills have written an iconoclastic new book on energy, The Bottomless Well. They see nuclear power as merely the latest in a series of technologies that will gradually eliminate our need to carve up huge swaths of the planet. "Energy isn't the problem. Energy is the solution," they write. "Energy begets more energy. The more of it we capture and put to use, the more readily we will capture still more."

The best way to avoid running out of fossil fuels is to switch to something better. The Stone Age famously did not end for lack of stones, and neither should we wait for the last chunk of anthracite to flicker out before we kiss hydrocarbons good-bye. Especially not when something cleaner, safer, more efficient, and more abundant is ready to roll. It's time to get real.

LIBOR Hits A New Low

3 month LIBOR fell for a 20th straight day today, to 1.05375%, down 1.875 basis points from Friday and to its lowest level since June 2003.

The decrease largely reflects the generous liquidity injections by the world's central banks as well as a reduction in anxieties regarding counter-party risks. Further decreases in LIBOR are likely.

Importantly, at 80.5375 basis points, the spread between three-month LIBOR and the federal funds rate is for the first time at its pre-Lehman level. Historically, a spread of closer to 12.5 to 25 basis points was normal. Although for obvious reasons the spread is not likely to return to those levels, upcoming declines will occur largely in response to a further expansion of the Federal Reserve's balance sheet, which has the effect of boosting the amount of money available in the inter-bank system.

Other money market rates are following LIBOR lower. For example, the rate for 90-day asset-backed commercial paper is today at 0.98%, its lowest since January and well below the peak of 6.18% last September.

LIBOR's decline is of course important to those with debts tied to it. The decline is important also because it signals stabilization in the money market and in risk attitudes. Good for equities? (After this swine flu nonsense is put away?)

Friday, April 24, 2009

Another Day Of Manic, Ridiculous Action

Despite a couple of days of frenzied buying this week, the S&P 500 failed to fully recover from the big red bar on Monday. It looked like things were ready to crack when we sold off and threatened the uptrend line, but some good responses to earnings reports from the likes of MSFT, AAPL and AXP helped matters quite a bit. Also, banks recovered from the Monday beating as the focus moved to the government stress test. I'm not sure that clarified anything, but it kept the bears from leaning harder on the financials.

Once again we had some big swings late in the day. We sold off initially on the stress test news but the dip-buyers jumped in and we squeezed to a new intraday high before another bout of selling in the final minutes.

There has been a lot of very frenzied action in individual stocks to go along with these late-day swings. It is tricky trading, but there is no doubt that hot money is looking for a place to go. Performance anxiety and underinvested bulls are keeping a bid under this market, but some stocks are certainly extended and entry points are difficult to find.

There is plenty of technical resistance here for the major indices, especially at 875 on the S and P, but individual stocks are trading better and we have to focus on that.

No Way The US Dollar Is Replaced As The World's Reserve Currency

In recent days, Canada and Sweden have joined most of the other G10 central banks by indicating that they too might have to engage in quantitative easing, now that their interest rates have been reduced to 25 and 50 basis points respectively. The European Central Bank is wrestling with ways to extend its own form of quantitative easing, and an announcement is likely at its next meeting on May 7.

While some observers have focused on the potential debasement of the U.S. dollar by the aggressive monetary and fiscal policies of both the Bush and Obama administrations, many investors are worried about the viability of the whole universe of paper money.

As Gillian Tett, the journalist at the Financial Times, put it in a column earlier this month, there has been a four-decade-long experiment with fiat currencies not backed by gold or silver. The present crisis is so profound that increasingly it appears to have shaken confidence in the experiment. At the same time, the crisis appears to have widened the range of possibilities.

The Special Drawing Rights that the Chinese and others have suggested to eventually replace the dollar do not get beyond paper money. The SDR is a basket of fiat currencies. It is not and cannot be a serious alternative to the U.S. dollar.

Consider that 44% of an SDR is the dollar. The IMF's figures show that roughly two-thirds of the world's reserves are in dollars. If countries' reserves were allocated according to the SDR, the dollar's share of reserves would fall by about a third. While the euro would pick up some slack, the big winners would be the yen and sterling, whose shares of the SDR are 11% apiece, which is two to three times larger than their reserve allocation.

If there has been a shift in reserve allocation in recent years, it is not away from the dollar, as so many wrongly claim. It has been away from the yen and toward sterling. And even this shift has been marginal at best. Reserve managers generally want, in order of importance, security, liquidity and yield. Japanese bonds are often seen as deficient in both liquidity and yield.

Can gold return to its role as the anchor for currencies? The advocates of gold are a passionate and vocal minority that appears to be second in terms of intensity only to Ayn Rand devotees. Of course there is a large overlap among these groups, as Alan Greenspan's 1966 essay "Gold and Economic Freedom" illustrates.

Top Gold Holders (in metric tonnes)

US 8,133.5
Germany 3,412.6
IMF 3,217.3
France 2,508.8
Italy 2,451.8
China 1,054.0
Switzerland 1,040.0
Japan 765.2
Netherlands 621.4
ECB 533.0

Source: World Gold Council

To appreciate why gold is ill-suited today to once again back paper money, we need to consider why the gold standard was ended in the first place. Simply put, the gold standard provided an economic barrier to the political agenda. That political agenda called for rapid growth to resist the spread of communism. It called for "guns and butter" in the U.S., with the Great Society and the war in Vietnam. The European political agenda including the expansion of the welfare state -- from cradle to grave.

Jettisoning gold not only allowed for the pursuit of the political agenda, it helped create the conditions for the rapid and dramatic expansion of trade, capital flows and globalization. What is all too often lost amid the despair and cynicism that the crisis has wrought is the amazing success of that regime. Since 1980, for example, the world economy has grown by 145%. Taking into account the (roughly 1.6% per annum) increase in the world's population, per capita income has risen by almost 40%.

How that wealth is distributed is an important issue that is beyond the scope of this discussion. Yet it is interesting to note that longevity, a measure that subsumes numerous other metrics, has risen sharply in both developing and developed countries, and the gap in longevity between the two has narrowed.

The same problem would exist with a new gold standard that existed with the old. There is simply an insufficient amount of gold. Or to say the same thing, the price of gold that would be necessary to put the international monetary regime back on a gold standard is so astronomical as to make such a plan unworkable.

There are different ways to go conceptualizing the magnitude of the challenge. As the table above indicates, the U.S. has more gold that Germany, France and Switzerland together. Given that foreign investors own about $2.5 trillion more of U.S. assets than Americans own of foreign assets, what price of gold is necessary for the U.S. to no longer be a debtor? Answer: more than $8,500 an ounce.

Another approach, suggested by a Swiss investment bank, is to relate the price of gold needed to cover some measure of money supply. By its reckoning, the U.S. would need gold to be worth about $6,000 an ounce to reintroduce a gold standard. However, it may not be sufficient to simply have the U.S. adopt a gold standard. For the three largest economies (measured at purchasing power parity) -- the U.S., China and Japan -- to back their money with gold, they would require a price closer to $9,000 an ounce.

The price of gold is just above $900 an ounce. It peaked in March 2008 near $1,032. It has averaged $638 over the past five years and $473 over the past 10 years. For the yellow metal to reach the kind of levels that would be necessary to make a gold standard mathematically feasible now would require a protracted period of deflation, and that would not be politically acceptable.

There is no realistic alternative to the dollar. Not SDRs. Not gold. Not the euro. Not the yuan. That might not be deducible from macroeconomic first principles. But it is proven by what central banks are actually doing.

This does not mean that there is no role for gold in individual portfolios, though often people seem to confuse a paper claim on gold for the actual bullion. Also, the touts for bullion often do not include the costs of storage and insurance for gold, which has gone decades without appreciating and, of course, generates no income stream.

Central banks that have accumulated large holdings of foreign currencies, such as those in Asia and the Middle East, tend to have relatively little gold. European central banks, which could not get enough gold during the late 1960s and early 1970s, have turned into sellers in recent years. Paradoxically, as they sold off their gold in an orderly way, the price of gold trended higher. Yet many seem to believe that it is a given that the dollar will fall if these same or other central banks sell dollars. Huh?

China revealed on April 24 that it has dramatically increased its gold holdings since 2003. In 2001, China said it had about 500 tonnes of gold. By 2003, it had risen to a little over 600 tonnes. Now it says it has 1,054 tonnes of gold, more than a 75% increase. Still, this means that gold accounts for only about 1.6% of China's reserves.

China is the world's largest producer of gold, but it also refines scrap gold. As part of the standard arguments, gold advocates assert that all the gold that has ever been mined is still here. That is true up to a point, and it is at that point that the issue gets interesting. China is exploiting the fact that a ton of computers and cell phones has several times more gold than a ton of gold ore.

Central banks in Asia and the Middle East may buy more gold going forward, and European sales seem set to slow (though the IMF sales will reportedly go ahead), but it will be barely noticeably in terms of the international monetary regime and the role of the dollar.

BAC Preferred

There is a significant bet being made short Bank of America common, long the preferred. The theory is that that the preferred will get converted into common similar to what Citigroup did.

I don't think BAC will convert the preferred because of the stress test. I think C was a special case where they knew they needed to preempt the stress test and convert existing preferred share holders to prevent de facto nationalization. At this point, banks that need more money can still take on more government preferred rather than convert existing preferred.

Home Inventories Continue To Plunge

New home sales fell a tad in March to a 356,000 annual pace from February's pace of 358,000, which was revised upward from 337,000. Forecasts were for a 337,000 pace. Sales are stabilizing but at record low levels; the record high was 1.389 million in July 2005.

Importantly, inventories continued to decline on an outright basis and are now near normal levels after having moved materially above in 2006. The total number of unsold homes was 311,000 in March, down from 328,000 in February and its lowest tally since January 2002. The peak was 570,000 in June 2006.

The current level is below both the 25-year average of 355,000 and the 15-year average of 369,000. Inventories are falling because builders are severely under-building relative to population growth and household formation.

I ask again, where will the country's 3 million additional inhabitants live when they enter the country this year? It is a simple fact of human existence that people need shelter. Inventories will fall.

I therefore am sticking firmly with the idea that inventories have peaked and will continue to move downward in the time ahead based on this very bankable top-down theme. At least 500,000 and probably closer to 700,000 homes will be removed from the inventory problem by year's end.

Skeptics will say that foreclosure sales, phantom inventory (homes that people would like to sell but can't) and difficulties obtaining credit will stymie this trend. That misses the main point regarding the need for shelter: People will fill up empty space one way or another, whether through renting or buying. Sales needn't increase to fix the inventory problem, although sales are obviously needed to let the inventory dynamic take power over forced sales from a price perspective.

Still, supply ultimately will win out and it is shrinking for both new and existing homes, despite the very factors that skeptics say will stymie the decline. This shows their premise is false.

Yield Curve Steepest Since 11/08

Treasuries could face a test of the Fed's 3% de facto line in the sand for the U.S. 10-year. Whatever the cause, Treasuries have steadily ebbed, with the weakness concentrated on the long end of the yield curve -- the short end is going nowhere because the Fed controls the rates.

The Treasury yield curve is steepening and is at its steepest since the end of November, which has both good and bad connotations. The most important positive is that a steep yield curve typically precedes economic recoveries. Today the spread between three-month T-bills and 10-year T-notes -- the key empirical gauge used in forecasting models -- is 287 basis points, a level that historically has indicated the chances of recession 12 months hence are very small.

For example, in a study by Estrella and Mishkin, a yield spread of more than 121 basis points was associated with just a 5% chance of recession, which makes the current level comforting. For reference, note that the same study showed that a yield spread of -82 basis points (an inverted yield curve) produced 50% odds of a recession. The yield spread was as wide as -60 basis points in February 2007.

Some of the recent steepening of the yield curve reflects the increase in Treasury supply, with the long end of the yield curve bearing the burden. This is the negative side of the steepening.

If the U.S. dollar were to fall, any steepening would take on an even larger negative connotation, but the dollar's decline would have to be significant to have meaningful effect on the yield curve. The negative implication of a significant dollar drop and sharply steeper curve is the message it sends regarding the global appetite for U.S. assets.

Any increase in the cost of capital in the U.S. would complicate efforts to battle the financial and economic crisis.

Durable Goods

Durable goods orders fell 0.8% in March compared to forecasts for a 1.5% decline. Excluding transportation orders, durable goods orders fell 0.6% compared to forecasts for a decrease of 1.2%. Revisions to past months reduce the shine of the data; revisions to the overall tally totaled 1.8 percentage points and revisions to core orders were 2.5 percentage points. Despite the revisions, the two-month change for durable goods orders is now +1.3% and 1.4% ex-transportation. This is far better than the previous four months, when orders fell a cumulative 24.9% overall and 21.2% excluding transportation orders. The sharp contrast hence qualifies the durables data as having stabilized, relatively speaking.

Orders for non-defense capital goods orders ex-aircraft, a key gauge of capital spending, increased 1.5% following a 4.3% gain in February. These are the first back-to-back increases since last June and July. Keep in mind, however, that orders for this category have fallen to a dollar value of $51.56 billion from a peak of $67.8 billion, a 24% decline, so there is a long way to go before reaching a full recovery.

Nevertheless, the concept of recovery alone is what financial markets are feeding on at present. Later, sustainability and the depth of recovery will guide market prices, limiting gains in riskier assets.

Shipments of non-defense capital goods orders ex-aircraft were weaker than orders (because of lagged effects), falling 1.7% following a 0.1% gain in February. Shipments, not orders, are used as source data in computations for GDP, suggesting a fifth consecutive quarter of decline in spending on equipment and software. The decline will nonetheless be far smaller than the fourth quarter's 28.1% rate of decline.

Thursday, April 23, 2009

Prime Time For Earnings

Although things were looking shaky earlier this morning, buyers did a good job of pulling the market off their lows through the New York lunch hour, while some sideways action in the afternoon set us up for another wild ride into the close. The final hour was choppy, but the troops really got on their horse in the final 20 minutes, pushing the indices to their best levels of the day by the time the final bell rang.

A lot of that was likely influenced by some anticipation ahead of some earnings reports which are crossing the wires now (MSFT missed both top- and bottom-line estimates, but is $0.65 higher in after-hours trading, while AMZN is little lower after beating expectations but delivering cautious guidance), but with the big ramp-up in the financials at the end of the day, market players were also looking to position themselves in front of tomorrow’s bank stress test results.

Although the major indices didn't gain any traction on a good earnings report from AAPL, it was healthy action. We needed some consolidation and there wasn't any technical damage done.

We have a full slate of earnings tonight and there should be plenty of volatility. This is probably the most important night of earnings we have left this quarter; it is mostly smaller stocks in the next few weeks.

The good news is that expectations are generally pretty low. We have AMGN, AXP, KLAC, CAKE and many others. Amazon probably has the highest expectations of the group and holds the most danger, but it has been posting some strong reports in recent quarters.

Amazon earnings are hitting as I write and although they look nice, revenue guidance for next quarter is a bit weak. Some further profit-taking for the overall market would be healthy at this point so I'm not too worried about Amazon being bad news.

How The World As We Know It Almost Came To An End On The Afternoon Of September 18, 2008

LiveLeak has caught a scary moment of previously undisclosed insight by Paul Kanjorski, where he reveals some facts that have not been captured by the media previously. Watch the video on YouTube. At 2 minutes and 20 seconds in the video, Democratic Representative Kanjorski explains how the Federal Reserve told Congress members about a "tremendous draw-down of money market accounts in the United States, to the tune of $550 billion dollars." According to Kanjorski, this electronic transfer occurred over the period of an hour or two. And it gets worse. Kanjorski paraphrases the following disclosure by Bernanke and Paulson:

On Thursday (Sept 18), at 11am the Federal Reserve noticed a tremendous draw-down of money market accounts in the U.S., to the tune of $550 billion was being drawn out in the matter of an hour or two. The Treasury opened up its window to help and pumped a $105 billion in the system and quickly realized that they could not stem the tide. We were having an electronic run on the banks. They decided to close the operation, close down the money accounts and announce a guarantee of $250,000 per account so there wouldn't be further panic out there.

If they had not done that, their estimation is that by 2pm that afternoon, $5.5 trillion would have been drawn out of the money market system of the U.S., would have collapsed the entire economy of the U.S., and within 24 hours the world economy would have collapsed. It would have been the end of our economic system and our political system as we know it.

We are no better off today (12/08) than we were 3 months ago because we have a decrease in the equity positions of banks because other assets are going sour by the moment.

Interestingly, maybe that is why Kanjorski, and likely more Democrats, shifted to the camp a few months ago that more time was needed to make a correct decision (which may explain Geithner's decision to postpone the "bank-rescue" announcement several times), instead of rushing into another half-baked plan. Very scary stuff.

And for all who claim that Kanjorski is yapping with a few screws loose upstairs, taking a look at archived footage from the September 24, 2008 House Financial Services hearing at which both Paulson and Bernanke are present, Kanjorski asks Paulson this very question, and states to Paulson, that the information came originally from him. Now, Kanjorski may be anything but not senile as he is merely repeating facts that Paulson tells him. And Paulson does not refute the facts...

Home Inventories Falling

Existing-home sales fell 3.0% in March, after posting a 4.9% increase in February, which was the largest percentage increase since July 2003.

Sales ran at a 4.57 million annualized pace in March, down from 4.71 million in February and the nearly 12-year low of 4.49 million set in January. March was the fifth month when sales hovered near the current level, suggesting stabilization.

Condo sales, which are included in the overall tally, decreased 4.1% in March after an 11.4% gain in February. Condo sales have been boosted by price discounts and by prospective homeowners shifting to smaller dwellings.

Continuing a theme, inventories decreased in March, to 3.737 million from 3.798 million in February. The decrease is important, because it occurred at a time when "phantom" inventory tends to surface, with hopeful sellers seeking to take advantage of what is the busiest time of the year for home sales. Inventories are now 838,000 below the peak, which was set in July (4.575 million). Inventories of unsold new homes have fallen at an even faster pace and are now near normal levels from an historical perspective.

Progress on the inventory front is likely to continue this year for a number of reasons, but the most understated and least talked-about reason is the one that is most important: Builders have stopped building and the population is still growing; people need shelter and will occupy empty space either by buying or renting.

The main thing is that the inventory of vacant homes will decrease, and cash flow will be generated, and the cash flow will reduce foreclosures. There is also the possibility that sales will increase because of government incentives to purchase a home ($8,000 first-time homebuyer tax credit) and because of efforts to boost affordability (the Fed's MBS purchase program) and those geared toward unclogging the financial system (for example, the PPIP). In and of itself the signs of stabilization are likely to draw in fence-sitters, particularly given the record level of affordability.

Wednesday, April 22, 2009

Sellers Dominate The Final Hour

For the second session in a row, stocks opened lower but buyers moved in to bid the major indices higher. However, upward momentum stalled as the S&P 500 approached the 850 level in the final hour of trading, which prompted sellers to re-enter the fold and hand stocks a significant loss... The late selling effort focused on financial stocks, which closed with a loss of 3.8%, worse than any other sector in the S&P 500. Shares of MS weighed heavily on the financial sector after the company reported a larger-than-expected first quarter loss and a dividend cut...WFC worked to offset weakness in the financial sector. Its shares spent most of the session in higher ground after the company reported slightly better earnings than it previewed on April 9. Heading into the close, the stock surrendered its gains to join the sector's many decliners; declining issues in the financial sector outnumbered advancers by more than 6-to-1... Industrial stocks saw the strongest gains of any sector by closing 1.1% higher. Their advance was led by General Electric, which jumped after The Wall Street Journal reported GE's chief executive stated there is opportunity to grow the company over the long term... Despite the industrial giant's strength, the Dow lagged the other headline indices and finished 1.0% lower... Meanwhile, the Nasdaq outperformed its counterparts for nearly the entire session. Its advance was largely led by GILD, which garnered support after reporting better-than-expected quarterly earnings... There were several other earnings reports for market participants to digest this session. T, MCD and YHOO all topped estimates, but BA and COF missed estimates... Earnings results will remain in focus heading into tomorrow's session. However, there will also be several economic reports to provide direction to participants. Weekly jobless claims data is due prior to the open (8:30 AM ET), and existing home sales data for March will be released shortly after the opening bell (10:00 AM ET).

FCX Analysis

FCX reported earnings of 11 cents per share, slightly below expectations of 13 cents a share and dramatically lower than last year's $2.64 per share. Revenue was $2.6 billion vs. the consensus of $2.69 billion. Analyst estimates covered a wide range, from a loss of 14 cents per share to a gain of 34 cents per share.

The results were announced before the market opened and the two-hour call ended at noon. The stock traded through a 9% range without any apparent link to the actual information revealed on the call. Many questions related to exploration and other long-range factors.

Key developments:

* The company succeeded in various cost-containment efforts promised last quarter. The cost-reduction strategy helped in achieving a positive quarter. When the time comes, this will take many months to reverse.

* The company sold 26.8 million shares of common stock at an average price of $28, raising net proceeds of $740 million. There are now 412 million shares outstanding, 469 million including convertibles.

* Proceeds from the stock sale helped to offset an unusually large expense ($919 million) for customer settlements related to provisionally priced sales (a normal business practice).

* The company has a policy against hedging by selling future production, preferring to give shareholders unhedged exposure to the underlying commodities. For the first quarter, Freeport did lock in some prices to protect liquidity in the face of working capital needs.

* Realized copper prices during the quarter were $1.72/pound, better than the LME average of $1.56.

Briefly put, Freeport-McMoRan has successfully implemented a de-leveraging strategy in the aftermath of the Phelps Dodge acquisition. This approach reflects current economic and demand conditions and helped to protect the cash balance of $644 million. Debt is at $7.2 billion, and a $1.5 billion revolving credit line was not used.

Management continues to see firm demand from China as a factor supporting copper prices. The company sees a resumption of growth in developing countries and positive effects from the stimulus programs in the U.S. but offers no guesses about timing.

Freeport makes forecasts of production but not revenue or earnings. The company expects consolidated sales from mines "to approximate 3.9 billion pounds of copper, 2.3 million ounces of gold and 50 million pounds of molybdenum for the year 2009, including 955 million pounds of copper, 650 thousand ounces of gold and 11 million pounds of molybdenum for second quarter 2009."

The company provides simulated results using copper prices of $2.00 a pound to reach estimated cash flow of $2.5 billion, net of working capital requirements. Investors can substitute their own price assumptions by making suggested adjustments as follows:

* $240 million for each 10-cent-per-pound change for copper;

* $75 million for each $50-per-ounce change for gold; and

* $30 million for each $1-per-pound change for molybdenum.

The company strategy, approach to hedging, and helpful metrics all encourage shareholders to consider investing as a pure commodity play, especially on copper prices.

Consumer Sentiment Gains Ground

I never used to put much "stock" in polls or consumer sentiment numbers; it seemed to me that too often too many people said one thing and did another. However, as I've gotten older, I've changed my mind a bit on the reliability of consumer sentiment numbers as they relate to overall mood.

The ABC News weekly consumer sentiment index matched a six-month high in the week ended Sunday, rising 4 points to -47. All three subcomponents increased: The index on personal finances increased 4 points to -4, the index on the purchasing climate increased 6 points to -50, and the index on perceptions about the state of the economy increased 4 points to -96.

The index on the state of the economy obviously has the most to gain and will likely increase in the current quarter in line with improvements in the news flow regarding the economy, which will be driven by a slowing in the rate of decline in industrial output. Expectations about future economic growth are apt to change more quickly than assessments about the present, chiefly because they are based more on perception than on reality.

Gains on the whole for ABC's consumer sentiment index are probably being driven by recent improvements in the trajectory of some economic data, as well as the rebound in stock market. Keep in mind that the three-month change in equities tends to correlate well with consumer spending, which suggests the first quarter's stabilization in retail sales will be sustained in the current quarter.

Tuesday, April 21, 2009

Capitalism Requires Capital

Let's say, just for the sake of argument, you are a certain export-dependent East Asian country with $1.95 trillion in foreign exchange. Your largest customer and the largest debtor to you is a certain North American country whom you suspect is counterfeiting the world's reserve currency and whose combined current account and federal budget deficits could swallow your reserves in one gulp.

You have to run a capital account deficit in order to maintain your current account surplus. Otherwise, all of those unattached young men -- you have a 1.23-to-1 male-to-female ratio among your young people -- who migrated into your cities from the countryside will either start rioting or be faced with the prospect of migrating back to the farms, where a lifetime of chasing water buffalo awaits.

Given this choice, a rational investor would rather buy plants and equipment than portfolio investments. Of course, if you are China and saw your efforts to acquire Unocal stymied by the Bush administration or watched how Congress stuffed Dubai Ports' efforts to buy into U.S. port infrastructure, and if you have seen how both Congress and the last two presidential administrations have run roughshod over property rights when it suits their short-term political needs, you might think twice about direct investments. The U.S. is the big loser here; while portfolio investments can come and go with the click of a mouse, direct investments can create real jobs without resorting to multi-trillion-dollar federal pork projects.

But we digress. The U.S. foreign direct investment picture is negative. As a percentage of total nonresidential fixed investment, the 5.4% total is actually 1.1 standard deviations greater than the post-1986 average; 1986 was chosen as the starting point here because that's when the U.S. engaged in direct intervention against its own currency. However, as a percentage of foreign-owned assets at the end of the previous quarter, it will be negative -- foreign assets owned fell to -$7.61 billion at the end of 2008.

A critical point of understanding about the recent unpleasantness is that the money was lost not during the credit crunch and concomitant collapse, but rather during the misallocation of investment capital to residential investment as opposed to nonresidential investment during the housing bubble. You cannot hop in a time machine and redress that loss. You can only avoid compounding the errors by not throwing good money after bad, but it is probably too late for that, too.

The decline in housing starts adjusted for changes in population certainly contributed to the recession. Nonresidential fixed investment would have had to have increased to offset the decline in residential fixed investment, and then some; all major changes in investment patterns involve frictional costs as the economy heads off in a new direction.

While such an adjustment is required for the long-term health of the American economy -- we should know by now the global imbalance of China producing everything we buy and financing everything we consume is not a sustainable economic model -- our monetary policies seem determined to re-inflate the 2003-to-2006 bubble. Here they are failing.

If we look at previous credit-tightening episodes as measured by the forward rate ratio between one and 10 years -- the rate at which you could lock in borrowing for nine years starting one year from now, divided by the ten-year rate itself -- you would see prior to the elimination of Regulation Q interest rate ceilings in 1980 a pattern of population-adjusted housing starts falling in response. After 1980, loosening of credit led to an increase in population-adjusted housing starts. The current episode shows how a massive steepening of the yield curve has been met with a major decline in population-adjusted housing starts.

The 23.0% share of fixed investment claimed by residential construction is the lowest since the third quarter of 1982 and is well below the 1959-2000 average of 28.1%. This share bottomed in the fourth quarter of 1981 at 18.8%; real GDP did not turn higher until the first quarter of 1983, and that was during the very pro-growth Reagan administration. Even if we could repeat that turnaround -- unlikely given the circumstances -- the first quarter of 2010 would be the earliest we should expect positive changes in real GDP.

Can we expect nonresidential fixed investment to pick up the slack? This measure has been rising as a percentage of real GDP since the first quarter of 2005, but it has been unable to offset the decline in residential fixed investment. Federal Reserve inflationistas should note this measure is unrelated to monetary stimulus.

Quite simply, why should the next dollar of fixed investment be made in the U.S. as opposed to China? The Chinese communist party understands the importance of pro-business policies whereas we seem determined to punish those who create value and want to redistribute it before it is created. Shortstops who worry about the double-play before they catch the ball generally see "E-6" on the scoreboard.

The win-win in this situation is simple, and that involves creating an economic, political and legal environment conducive to attracting direct investment from China. That would promote real job growth in the U.S. and a better global balance. Not a perfect solution, especially for some people, but one that would work.

Dip Buyers Show Up Again

Although it was looking like yesterday’s downward pressure might continue as the day got under way, the dip buyers did a good job of buying the early weakness, and after some sideways action early in the afternoon, the troops once again turned on the heat into the close. Those late day ramp-ups have been the norm lately, and even though we took a break from that yesterday, we saw once again the danger of betting against those sorts of self-fulfilling prophesies.

Tomorrow should be another interesting day with earnings from JPM, WFC and FCX.

As for today, buyers focused on financials for some support. Uninspired by the latest batch of earnings announcements, bulls initially yielded control of stocks to sellers for the second straight session. However, the early decline in stocks compelled buyers looking for more attractive entry prices to move in and offer their support. That helped stocks rebound midmorning and climb higher for the rest of the session... Financials attracted the most support. The sector was down more than 1% in the early going, but finished with an 8.2% gain at its best levels of the session. Buying in the sector was broad-based, but USB provided some of the most positive influence to diversified banks and the overall financial sector after it reported better-than-expected first quarter earnings... Meanwhile, RF attracted buyers into regional banks after holding an upbeat conference call. The stock was initially sent lower after the company announced a small profit for the latest quarter. Shares of RF swung nearly 28% from their session low to their closing price.

How A Phony Story Moved The Market Yesterday - A Sign Of Nervousness....Or Stupidity?

Yesterday, the market "decided" to panic in financials. Or, maybe, someone NEEDED some panic in financials.....

Let us consider the factors: market conditions, vested interests, a questionable leak and an influential mainstream media source.

Market Conditions

Financial stocks and the overall market have enjoyed a big run. Nearly everyone, even those who are bullish on the group, expected that there would be a pullback. In these circumstances, this acts as tinder. All we needed was a match.

The Vested Interests

Jim Cramer noted on CNBC that he was bombarded with emails while he was on vacation. People wrote him within seconds of earnings announcements, seeking his endorsement that earnings were all wrong. Many traders needed this pullback, either because they were short, or to find an entry point.

The 'Leak'

The day started with a "leak" late Sunday evening from a blog called the Turner Radio Network. This got a lot of play in Monday's premarket trading. Mainstream media and bloggers picked up the story that most banks were failing the "stress test" and that the banking system was on the verge of collapse. Many people apparently believed, at least initially, that Turner meant Ted, not Hal.

Although reasonably intelligent people quickly realized the dubious nature of this source, the story continued to get plenty of play on blogs.

Denials from Treasury about this story had zero impact. It would be nice to think that bogus information has no effect, but it got the ball rolling. It helped to create a receptive climate for other stories, including the very critical analysis of the earnings report from BAC.

The Times Chimes In

This story was immediately embraced by commentators as official Obama policy. Why?

The New York Times ran an article about the TARP program and a purported conversion of the government's preferred bank shares into common stock. The story was poorly sourced. It should have been noted that the proposed change would affect the tangible common equity ratio, or TCE, but not overall bank capabilities. The TCE is a favored measure of bearish bank analysts but not a measure of regulatory capital.

A look at the story supports this analysis. Here is the key quote from the Times article:

The White House chief of staff, Rahm Emanuel, alluded to the strategy on Sunday in an interview on the ABC program This Week. Mr. Emanuel asserted that the government had enough money to shore up the 19 banks without asking for more.

"We believe we have those resources available in the government as the final backstop to make sure that the 19 are financially viable and effective," Mr. Emanuel said. "If they need capital, we have that capacity."

Let us now compare this with the actual text from the program. Emanuel carefully avoided any implication of a specific policy or use of the nationalization language. He noted, several times, that this was a sensitive issue and that he did not have specific results. He merely stated that the administration believed current resources were adequate. Here is a key quote, as recounted on the ABC News Web site, but anyone who is interested in the truth should go back to the full interview:

"And you will avoid any kind of temporary nationalization?" I asked.

"I think we will be able to avoid that," he said. "And again, obviously -- I want to be careful, George, because this is very important, and rightfully so. I believe we have the resources. I believe -- not only -- I believe we will not have to deal with nationalization, and that's not the goal, nor do we think that's the right policy objectives here."

This article says nothing about conversion to common stock. It is also not the way policy makers float a trial balloon. When policy makers want to do that, they pick a good outlet and do an unsourced story, citing unnamed "high officials" or the like. It is very specific about the policy in mind, or else it would do no good.

My own reading is that Emanuel and the administration, rightly or wrongly, believe that the public-private investment program, or PPIP, will address what it refers to as "legacy assets." The administration expects the remaining funds to have enough leverage to guarantee loans to private investors. We will not know the answer to this until May 15 when this is announced. For those of you keeping score at home, this is eight full months after former Treasury Secretary Henry Paulson went to Congress with the plan for dealing with these assets.

The failure to understand the importance of this issue and deal with it quickly is the biggest single policy failure of both the Bush and the Obama administrations, exacerbated by the intervening transition of power.

The assembled punditry are all too willing to ascribe a policy decision to Obama, based simply upon this vague article.

The Limits to Being Right

Let us suppose that you had the skill to read the Turner story and to immediately recognize the flaw. Let us further suppose that you checked out the ABC News and New York Times sources.

It would not have helped your trading. The trade is more about understanding what other market participants will do. As John Maynard Keynes noted, you need to watch the faces of the judges, not the contestants. Many market participants are so skeptical about Obama and about government in general that they are always willing to believe the worst.

In the longer run, it is a mistake to confuse your political opinions with your investment decisions. Financial stocks will find their level. Those who are looking for an entry have their chance.

Monday, April 20, 2009

A Very Bad Day - The Selling's Overdone

It has been a while since we have had a trend-down day without at least some last-hour bounce attempt, but that is that is what we had today. Breadth was terrible, with close to 10 losers for every gainer at times on the NYSE. No sector was left untouched expect for precious metals, which regained their safe-harbor designation after being hit last week.

The big question now is whether this is just the inevitable profit-taking that hits after a sharp rally or the beginning of the end of a bear market bounce. Technically, the S&P 500 did take out the uptrend line that connects the lows in early and late March, but we still have support down to 800 or so. If we start breaking below that level and challenge the 50-day simple moving average, which is at 791, then it changes things dramatically. For now, we just have an ugly day of selling, and we planted a few seeds of doubt about the idea that a new bull market is emerging.

What I'm hopeful will develop from this point is that earnings will help us find support and put us in a trading range where individual stock-picking will matter more. The recent run has been dominated primarily by banks and financials with confusing fundamentals and expectations, but earnings reports will hopefully give us a few real winners with some decent charts.

We have IBM and TXN tonight, which will give us some insight into the mood, but aside from financials, we have not had that many strong reactions to earnings. We'll have a much better test when we start seeing how a variety of sectors act.

This rally isn't dead yet, and better opportunities may still lie ahead. A weak day like today had to occur sooner or later and can be very healthy in the bigger scheme of things.

Friday, April 17, 2009

Late Day Fade Into Expiration, But Some Hidden Momentum Regardless

Just looking at the major indices, it looked like a very mild day for the market. There was some late-day selling that left us close to flat, but under the surface there was some very strong momentum.

Regional banks were the leaders, as there just doesn't seem to be anything perceived as bad news at all in that sector. Maybe expectations just got too low, but the optimism about a bottom for banks is dramatic. Maybe in part it's just shorts being run over, but there is no shortage of positive emotion for the banking group right now.

Other groups showed some strong positive emotions as well. Bulk shippers were extremely strong on news of a financing deal for DRYS. Oils came on late in the day, and homebuilders built on their recent breakout.

Even further under the surface, the hot-money boys are busy chasing select small-caps. There is a lot of junk seeing some chasing for the first time in a while. Some worry that such speculation is a sign of overconfidence, but this sort of trading action will often fool you with how long it will persist.

I know a lot of folks are looking for the market to take a breather. Even some of the bulls would like to see things pull back a bit and reset so that we can have some better entry points. Some people never want the market to go down, but it is inevitable, and when we are too overheated, the reversals can be quite vicious once they kick in.

Next week we have a lot more earnings reports. So far it has been mostly the banks that have been driving the reaction to earnings, but now we are going to see some other sectors as well, which may have a whole different set of expectations.

In more detail, the afternoon rally faded, as continued strength in the financial sector helped take the broader stock market markedly higher in afternoon trading, but momentum eventually slowed and stocks were left to finish with modest gains... Buying in the financial sector followed optimistic comments from regional bank BB&T, which essentially reassured investors that banks can still make money while building loss provisions. The comments helped regional bank stocks swing from an early loss to close the session with a 8.1% gain. BB&T also won favor for regional banks by reporting first quarter earnings of $0.48 per share, which bested the consensus estimate of $0.31 per share... With the help of regional banks, financials were able to reverse an early loss of nearly 2% to close with a gain of 1.3% after being up more than 3% at their session high. Still, financials were able to log a weekly gain of 4.1%, which was helped along by improved commentary from several widely held companies during the past week... Though it was a leader during the last several sessions, financial giant C was a laggard this session. The company reported a loss of $0.18 per share for the first quarter. Analysts had expected a loss of $0.34 per share. That initially provided support for Citi's stock, but buyers pushed back when the company indicated it expects second quarter charge offs to increase, and it doesn't see any reduction in credit costs from prior forecasts. Citi finished 9% lower, but still managed to gain almost 21% for the week... Industrial giant and economic bellwether GE saw its shares climb to their highest level in more than two months this session. The stock has been battling to restore investor confidence after speculation about the health of GE Capital, along with a dividend and ratings cut. GE took a step in the right direction this morning by reporting better-than-expected quarterly earnings of $0.26 per share. The consensus stood at $0.21 per share... Internet giant GOOG brought large-cap tech stocks back into focus by unveiling record high adjusted earnings. The company brought in $5.17 per share, which topped the consensus estimate of $4.93 per share. However, Google's results failed to inspire buying in other large-cap tech stocks, which caused the tech sector to lag the broader market and close with a 0.2% loss... Trading volume climbed to its highest level in nearly one month as almost 2 billion shares traded hands on the New York Stock Exchange. While volume is typically regarded as a sign of conviction, this session's volume was distorted by the expiration of stock options.

Lots Of People Out There Denying A Bottom Is In

As Cramer writes over at Real Money, the pressure is on to find some quick fault with C and GE, two common stocks that have been the linchpin of so many bear raids. The bears thought they had it with a deliciously negative piece in the New York Post about how Citigroup will finish dead last among the 19 banks being stress-tested by the government. GE? Basket case, right?

Both stocks have doubled from their lows, so take profits, right?

I have no idea, short term, what the bears can do. They waited a week before going to work on WFC with lots of warmed-over arguments about bad housing loans when we are about to find out that bad housing loans -- of the first-mortgage type -- could have a lot of upside. When I read that JPM doesn't want to sell in the public-private partnership and that its loans from WaMu are worse than Wachovia's and its writedowns not as steep, it says to me that we could be in for a moment when you want these loans.

Now, we are already asterisking Citigroup's numbers, and I have no doubt that Citigroup's stock is more short squeeze than performance, but given that JPM set us all up by saying March wasn't so good, and then March turned out strong, Citigroup's buoyant stock will be a difficult mission to keep down, especially because we don't have the full preferred cram-down going on.

General Electric, on the other hand, is quickly becoming the proxy for a worldwide earnings turnaround, not because it seems to be happening -- it sure doesn't look like it yet -- but because when it does, this stock could be a coiled spring because it has all the funding it needs.

Meanwhile, desperate mutual fund managers who fall behind the S&P every day and are way behind the Nasdaq are feeling their hearts jump every time they see "better than expected" or they see situations like FDX, now up 10 from where it had a bad quarter but called the bottom, or an ITW, which rallied hard on numbers that would have sunk it just three weeks ago.

What's going on? Three things:

1. the firings have been huge, so the sales are falling fast to the bottom line;
2. the stimulus, particularly the lower tax take, is playing a role; and
3. the housing bottom is changing the complexion of bank earnings.

Oh, and by the way, the endless stories about how Geithner's plan is being ripped by the banks and by important funds? There are really about two or three hedge funds that have sworn it off, and what the heck do you expect JPM to say? "We have a lot of bad loans we will sell for next to nothing"?

People still don't get the point of the program. When banks fail the stress tests, they get merged into the good banks that are developing and then the government sells the bad assets at cheap prices to the public-private partnership.

I can imagine, behind the scenes, all the sharpies setting up partnerships to buy this stuff from the government. Do you think they tell reporters their true intentions? Don't be naïve. The program's working and the new mark-to-market rules simply make it so everyone has time to dispose of what they eventually want to dispose of after they build a lot of capital.

The tape continues to be fought viciously by everyone. Everyone is hoping for the selloff. I remind people that things are getting better in housing and stabilizing in employment when China is on fire and earnings estimates are finally low enough to be beaten. This combination has been the prescription for the bottom every single time for the last 30 years.

Maybe this time is different. I think that could be a costly presumption.

Thursday, April 16, 2009

Some Fairly Big Expectations, I'm Afraid

Things were heating up this afternoon on optimism about earnings reports and anxiety over being left behind. After the solid report from JPM, market players looked for more of the same from GOOG, which reports tonight, and GE and C, which report in the morning.

So far reports have been very solid and the stocks have held despite an increase in recent expectations. Google is going to be an important test tonight. Obviously a lot of people are expecting something very good.

The most notable thing about the market right now is that it simply refuses to pull back very much. If you want in, you have to be willing to pay up and that is an awfully tough thing for many folks to do after the bear market we have been through.

The longer the market holds up the more frustration there is over being left behind and the more likely that cash is slowly deployed. It is a classic example of climbing the wall of worry.

The Google report is hitting as I write and the numbers are slightly ahead but I'm not sure its enough to keep the momentum going. After an initial move over $400, Google dipped slightly but is now up over that level again. The conference call is the key, but right now buyers are feeling OK.

This market is getting awfully excited lately and the anxiety over being underinvested has to be tremendous. That bodes well for more upside, but this is becoming rather frothy and making new buys is a real chase.

Google continues to move higher as I write, but I think we'll see it dip a bit after conference call starts.

Going into more detail, despite a slow, choppy start, stocks climbed in afternoon trading and finished with healthy gains. The Nasdaq outperformed the other headline indices as shares of large-cap tech stocks rebounded from their losses in the prior session... Tech sector was the only sector to finish in the red Wednesday, but it bounded back this session to close with a 3.2% gain. The sector's rebound was led by large-cap tech holdings... Though tech's move was impressive, consumer discretionary stocks staged the best advance. The sector closed 3.4% higher as 78 of its 81 components logged gains... Financial stocks also closed higher, but they lagged the broader market. The sector made a late rally effort, which took it to a 2.4% gain, but the move lost momentum into the close. Financials finished with a gain of 0.6%... JPM provided leadership to the financial sector for the entire session after the company announced first quarter earnings results of $0.40 per share, which bested the $0.32 per share that was widely expected. The company reminded investors that all isn't well just yet by reporting higher loss provisions... Financial giant Citigroup also made strong gains. The company is scheduled to announce its latest results tomorrow morning... Economic bellwether General Electric also reports tomorrow morning. Interest in its shares helped send the industrial sector 2.9% higher... In economic news, the latest jobless claims data suggest that the pace of layoffs is slowing, but that it isn't getting any easier to find work. Initial claims for the week ending April 11 totaled 610,000, which is down more than expected from the prior week, but continuing claims climbed more than expected to a new record of 6.02 million... Separately, housing starts disappointed investors hoping to find signs of a recovery in home building. Housing starts for March totaled 510,000, which was below the 540,000 starts that were expected and down from the prior month. Meanwhile, building permits in March totaled 513,000, which is below the 549,000 permits that were expected, and down from February.