Friday, October 29, 2010


More on Bomb Scares

CNN carried the bomb scare incidents today, which might have been tied to an event in an airport north of London.

As well, shots were fired at the National Museum of the Marine Corps (the second time in a month).

Why the Weakness?

The market's late weakness appeared to be directly linked to the alleged bomb scares in multiple locations.

On Dr. Nouriel Roubini

I don't expect the media to confront him on his next appearance, but he was plain wrong.

I have also written that Nouriel does not have a concession on being wrong; we are all often wrong, especially in a business where Mr. Market humbles us so frequently.

I try to recognize and admit when I am wrong.

I have written plenty about the media's preoccupation with Dr. Roubini, not all of it complimentary. In many ways, the spotlight on him, even when he is a wrong-way Corrigan, is more the media's fault than his. It seems that in every cycle, the media needs a standard bearer of the bear case, and Nouriel has been that over the past five years.

That said, Nouriel made the following observation on Aug. 25, 2010:

"Third-quarter GDP growth is very likely to be below 1% -- and likely closer to 0% than to a pathetically lousy 1%. So double-dip risk is greater than 40%."

-- Nouriel Roubini

I don't expect the media to confront him on his next appearance, but he was plain wrong.

Stated simply.

Of course, this morning's 2% print was the advance reading, and Dr. Doom has a series of revisions to be proven correct, but I doubt that will be the case. A third-quarter reading well under 1% just seems absurd.

Of course, this post probably precludes me from being invited to one of his fabulous parties.

Diamonds and Rust

This came in from the Rapaport TradeWire on the diamond market.

Polished markets stable with buyers resisting higher prices. Caution returns ahead of Diwali and Christmas holiday periods. ALROSA Oct. sales at $228M and Gokhran sells $28M at large stone auction (91% sold by lot). Gem Diamonds 3Q sales +0.8% to $52M, Letseng prices -2% to $1,680p/ct. De Beers Forevermark sells $200M in jewelry Jan.-Oct. Christie's Dubai jewels sale nets $13M (84% sold by lot). Titan 2Q jewelry sales +37% to $253M, division profit +65% to $29M. JB Diamonds reportedly defaults on $180M loans. India's Sept. polished exports +36% to $2.4B, rough imports +37% to $973M. DTC Botswana workers end two-week strike as wage negotiations continue.


Quote of the week (?):

After two quarters of stagnation, the [3Q luxury spending] index now shows a decline. This portends a holiday period where retailers need to be even more nimble, need to control the supply chain, and in the case of experiences, limit supply more than originally planned. Fifteen months ago I mentioned the downward spiral dating from early 2008 had bottomed out. The subsequent period did show an increase, but it has reached a plateau and is now declining again.

-- Tom Bodenberg, chief economist with Unity Marketing (Source:

Terrorist Scare Did Not Really Pull Us Down Much, If At All

For the seventh day in a row, the S&P 500 closed nearly flat. We haven't had a move of more than 0.3% since Oct. 20. Whether that is a positive or a negative depends on your bias.

The bulls will tell you that it is very positive that we are holding up and that this is just healthy consolidation which will serve as a foundation for another leg higher. The bears will tell us that momentum is dying and that the market is churning before it finally rolls over. Moreover, the bears are convinced that we have a picture-perfect "sell the news" setup next week with the election results, monthly jobs data and the FOMC interest rate decision. The bulls' rebuttal is that the "sell the news" setup is just too perfect to work.

The battle lines are drawn, and I suspect that the market beast is going to keep things difficult for both bulls and bears and deliver a dose of volatility. Everyone is looking for a break one way or the other out of this tight trading range, so what could be more frustrating than a couple of quick whipsaws that shake out both bulls and bears?

Even with the flat action, there has been some good trading action under the surface. It has actually been somewhat of a stock-picker's market lately, which is a nice change from everything dancing around to the macroeconomic tune. We've even been a little less sensitive to the dollar this week after moving in lockstep with it for nearly two months.

The stage is set for some fireworks next week.

Thursday, October 28, 2010


KKR just said on Bloomberg that it is considering dropping out of the bidding group for Seagate.

10-Year Yield Rises

The yield on the ten year U.S. note has risen smartly (by nearly 40 basis points) over the last month.

I would expect some backing and filling in TBT over the short term now.

Run, don't walk, to read Bill Gross's complete commentary for November, 'Run Turkey, Run.'

Quote of the Year

Bill Gross delivers a doozy!

As we move ever closer to the midterm elections, here is my vote for quote of the year!

It's from Bill Gross on the forthcoming election as highlighted in a recommended reading post this week.

"This isn't a choice between chocolate and vanilla, folks; it's all rocky road: a few marshmallows to get you excited before the election, but with a lot of nuts to ruin the aftermath."

Apartment REITs Priced to Perfection

The apartment REITs are priced to perfection.

Check out David Pogue's downbeat review of the MSFT phone, "A Phone of Promise, With Flaws," in The New York Times.

Finally, Knowledge@Wharton gives the Wharton School's take on what's next for the housing market.

Another Big Earnings Night

For the third day in a row, some late buying helped to cut the intraday losses, but the bears showed a little more aggressiveness today as the opening strength was sold. Even though the dollar was quite weak and unemployment data this morning were better than expected, the bulls couldn't do much with it. That was a bit surprising considering the aggressive dip-buying on Tuesday and Wednesday.

Over the last eight sessions we have battled back and forth and have gone nowhere. The S&P 500 is down 0.1% while the Nasdaq is up and small-caps are down. We have had some big moves on earnings reports, particularly in the technology sector, but it has been fairly narrow, and the follow-through stalled out in some places today.

We have nearly 200 earnings reports hitting tonight and tomorrow morning, so there will be lots of action in individual stocks, but if the broader market doesn't see another surge in momentum soon, the temptation to take profits is going to build.

We have some good earnings hitting after hours. MSFT looks like a solid beat, and it increased guidance. CSTR was well ahead and is trading up big.

Earnings season slows quite a bit after tonight, but we have the election and the Fed on deck. It is going to be a very tricky navigating over the next few days.

Wednesday, October 27, 2010


The Catalyst for Bank of America's Turnaround

It followed a Reuters release that favored the banks.

The turnaround in BAC's shares came after the following Reuters release:

11:21 AM Eastern Daylight Time Oct 27, 2010
WASHINGTON, Oct 27 (Reuters) - The U.S. Treasury does not see a risk that banks may have to take back mortgage securities because of faulty foreclosure documents as a systemic threat to the financial system, a senior Treasury official said on Wednesday.

"We are very closely monitoring any litigation risk to see if there's any systemic threat but at this point there is no indication that there is," Phyllis Caldwell, chief of the Treasury's Office of Homeowner Preservation, told a bailout oversight panel.

Run, don't walk, to read Bill Gross's view that the 30-year bull market for bonds is ending with QE 2.

Recommended Listening

Run, don't walk, to listen to Mort Zuckerman's Boston Properties earnings call now.

Capital Goods Report Looks Bad

This morning's capital goods report was not market-friendly.

Orders, excluding defense and transportation, dropped by 0.6% vs. an expected gain of 0.8%.

Party Like It's 1994?

We will begin hearing similarities between the markets in 2010-2011 and 1994-1995.

And similar to 2010, 1994 was a sideways year that transitioned into a big year for the markets in 1995 after a fourth-quarter swoon.

Similar to 2011, 1995 was the third year of a presidential cycle, a first-term Democratic President, accompanied by a contentious midterm (1994) election that resulted in a Republican Party turnaround.

Recommended Reading

Run, don't walk, to read Mohamed El-Erian's view on Greece.

Must Be the Season of the Witch

As Halloween, the midterm elections and quantitative wheezing approach over the next week, some strange and spooky developments have occurred:

* Interest rates rise. Interest rates are rising despite the intended opposite effect of QE 2 to be announced next Wednesday. (The yield on the 10-year U.S. note, at 2.68%, has risen by about 30 basis points recently and has retraced the entire yield decline since Bernanke's introduction of the concept of QE 2 at the Jackson Hole meeting in August.)

* As does inflation rise. While the Fed is focused on deflation, inflationary pressures are mounting. (I call this screwflation.) While this is one of the primary stated objectives of QE 2, the unintended consequence of rising input costs and rising prices of food, copper (up 16%), gasoline (up 13%) and so on is to reduce global growth, pressure corporate margins and squeeze consumers' real incomes further. (And, as Sir Larry Kudlow teaches us, the price of gold (up 8%) is the precursor to worrisome inflationary trends.)

* A rapid U.S. dollar drop. Sliding 10% against the euro will surely help exports, but further quick declines could cause tensions with our trading partners.

* Chaos in housing. Mortgage-gate has trumped the impact of unprecedented lower mortgage rates on the slope of the housing recovery. (Rep and warranty issues have served to create market disequilibrium and have put a dagger into the heart of housing and the availability of mortgage credit.)

* The long tail of the last credit cycle remains an ever present risk. Europe's debt woes continue. As an example, spreads on Greek bonds have risen by nearly 50 basis points overnight.

* Quantitative easing lite. A positive outcome from QE 2, viewed as the sine qua non by bullish investors, is starting to look increasingly smaller than the Tepper camp desires or expects. Again, more shucks and aww, not the shock and awe of the first round of quantitative easing.

On the last bullet point, QE 2 has become the panacea for not only our economic ills but nearly everything else. Yet, strangely, no improvements in the jobs picture or in the fiscal imbalances (local, state and federal) have been yet seen.

The coup de grace for me was in watching the breathless commentary from one of the panelists on last night's airing of CNBC's "Fast Money," when Brian Kelly extolled the game-changing virtues of quantitative easing (on housing, on the economy, on corporate financing and, yes, on stock prices) after previously having been emphatically bearish at the July market lows (based, in part, on the structural imbalances of the domestic economy and the long tail of the past credit crisis).

It is important to recognize that Brian, similar to David Tepper and the bullish cabal, has been fully correct in interpreting QE 2 as an engine to higher stock prices.

As Jim Cramer wrote yesterday, there might be many reasons for being bullish on equities, but, as I have expressed over the past month, I don't see quantitative wheezing as one of them. And, in light of the mixed economic releases since the market rallied in response to expectations of QE 2, I can only conclude that the confidence in the benefits of further monetary stimulation has been chiefly responsible for the rise in equities.

From my perch, it seems to me the logic regarding the likely efficacy and benefits of quantitative easing has an increasingly weakened foundation, while the unintended consequences loom ever larger.

The Dollar Is Controlling Everything

A stronger dollar presented an obstacle for the bulls, but for the second day in a row, they battled back and managed a strong finish. At midday, it looked like the buyers might stay on the sidelines, but the dip buyers just can't help themselves these days. They started to inch in, and before you know it, they had the Nasdaq back in the green. Strength in semiconductors and financials helped keep the mood from turning gloomy, but breadth was solidly negative, at almost two to one on the NYSE, due to weakness in retail and commodity names.

Buying each and every pullback has worked for quite some time. Market players who don't jump in quickly keep missing out, so they ensure that weakness doesn't last for long. One of these days, the dip buyers are going to find themselves trapped and will create some ugly downside when they try to escape, but today wasn't the day.

It is a good sign that the strength in the dollar isn't having more of an impact, but if it continues, you'll have to wonder how long we can hold up. It is also a good sign that expectations the Fed will roll out an incremental approach to QE II isn't causing disappointment, but it could spell trouble if the market doesn't have that as an upside driver.

We have a slew of earnings reports to digest once again. LVS is looking good on its report, but V is trading down slightly.

Tuesday, October 26, 2010

Tuesday's Thoughts

Benchmark Blasts Nasdaq

Benchmark's comments that clients have turned cautious has stopped the Nasdaq rally in its tracks.

IBM Buyback Lights a Fire Under the Market

The company announced an additional $10 billion buyback, which fueled the market higher.

This was expected and doesn't seem like a big deal relative to its market capitalization of $180 billion.

For emphasis, I am highlighting Dr. John Hussman's 'Bernanke Leaps Into a Liquidity Trap.'

Quantitative easing promises to have little effect except to provoke commodity hoarding, a decline in bond yields to levels that reflect nothing but risk premiums for maturity risk, and an expansion in stock valuations to levels that have rarely been sustained for long (the current Shiller P/E of 22 for the S&P 500 has typically been followed by 5-10 year total returns below 5% annually). The Fed is not helping the economy -- it is encouraging a bubble in risky assets, and an increasingly unstable one at that. The Fed has now placed itself in the position where small changes in its announced policy could have disastrous effects on a whole range of financial markets. This is not sound economic thinking but misguided tinkering with the stability of the economy.

-- Dr. John Hussman, "Bernanke Leaps Into a Liquidity Trap"

Hussman's thoughts are well thought out, and his analysis is well documented.

His ultimate conclusion underscores my writings of the past month that quantitative wheezing will not move the economic needle much and that it has only served to turn up the volume on screwflation and will continue to pressure the increasingly large savers' class.

It remains my view that, more than ever, we live in a one-way, risk-on/risk-off world in which the last algorithm standing, the last economic release governs short-term (and even not-so-short-term) direction, serving to essentially trump individual company earnings reports.

Moreover, in an uncertain economic environment characterized by experimental policy (e.g., quantitative wheezing) with indefinite outcomes, the risk-on/risk-off trade takes increased precedent in determining stock prices.

As well, the magnitude of the market advance over the past few months against a backdrop of mixed economic signals that has produced a stall speed of growth calls into question how many individual company beats have been discounted in the marketplace.

Tuesday's Recap

The dip-buyers foiled the bears once again as they jumped on a gap-down open. The main culprit for the weakness was a stronger dollar, but somewhat surprisingly, the market was willing to shrug it off and held up fairly well. We had a little dip in the final minutes, but overall it was flat action on slightly negative breadth.

Oil led while other commodity plays like steel and coal were weaker. Banks and chips were fairly flat, but the hot money is still chasing names like NFLX, CMG, PCLN and GOOG.

The biggest positive this market has going for it is that it refuses to go down. The uptrend is still well entrenched, the dip-buyers are providing support, and there is no follow-through when we do weaken.

The biggest negative we have is that momentum has slowed lately. We haven't made any real progress for about two weeks now. We aren't falling, but we are using up a lot of buying power to run in place. What is really helping is that we continue to have some good action in individual names due in part to earnings and due in part to stories like a possible NFLX combination with AAPL or RIMM on its new product to compete against iPad.

The dilemma is that while it is easy to make a negative macro call, there is still good action in individual stocks. Market players are still working to put money to work, and that is giving us some good upside trading if you selective.

We have a big supply of earnings reports hitting, which has also helped the bullish cause since earnings have tended to be quite good overall. The positive sentiment associated with earnings has offset some of the big-picture concerns, but after Thursday night, the earnings schedule slows down quite a bit.

The bulls are still doing a very good job of frustrating the bears, but you have to wonder if they are due to take a rest soon. The upside just isn't coming as quickly or as easily as it did a few weeks ago.

long CMG

Thoughts For Monday

GS raised C to a Conviction Buy with a target price of $5.50.

The countdown begins as the dual impact of the results of the November midterm election and the scope of the Fed's QE 2 announcement make the next week an interesting market setup.

In the political arena, the stakes loom large. The Democrats appear to be headed toward a House loss, but the Senate majority remains in the balance and probably won't be determined until the wee hours of the morning.

After spending like drunken sailors during the Bush administration, Republican legislators have acknowledged that it will block even the most sensible stimulus programs, and the Democratic administration and its legislators have lost the will to fight their adversaries. As a result, the responsibility for turning around the domestic economy now lies squarely on the shoulders of the Fed. So, on the monetary front, the stakes, too, loom large. While some internal Fed discord appears present, I expect the QE 2 arsenal to be something slightly more meaningful than the consensus $500 billion over six months.

And, almost more significant than the results, will be the market's reaction to the news.


Will the market greet gridlock favorably as it has historically? Or will investors conclude that in light of the profound local, state and federal fiscal imbalances and other challenges that we face, solutions, not gridlock, are in order? Will the administration move toward the center in an attempt to reach agreement on fiscal policy? How strong a role will the Tea Party play in the GOP as we move closer to the Presidential election in 2012?


The bulls argue that "these are the good old days." They opine that QE 2 will stimulate domestic economic growth and that the risks and costs associated with further easing are justified in light of the risks of deflation and the current elevated unemployment rate. They further argue that more easing is better than nothing and that the bubble risks are outside a relevant investment time horizon.

The bears argue that we are just "chasing after some finer day." They suggest, as I do, that QE 2's ultimate efficacy should be questioned, that the unintended consequences and costs (i.e., screwflation) might be considerable and that the current stall speed of growth, with limited impact/influence from QE 2, exposes the U.S. economy to policy errors and/or an unexpected jolt to the system. Purposeful and transformative fiscal and tax remedies would trump more easing, the ursine crowd suggests. As a consequence of policy, the savers' class is being penalized, and sectors of our economy are getting hooked on unprecedented low interest rates as we await another Fed bubble.

Other general questions (from both camps) both camps:

* Will interest rates continue their descent, or have interest rates already adjusted to more quantitative easing?

* Will the markets grow increasingly concerned with rising commodity costs and the growing mountain of U.S. debt?

* Beyond the first $500 billion, or so, how much quantitative easing will ultimately be needed to achieve the dual mandate of price stability and maximum sustainable employment?

Spooky Scenarios

Interestingly, to complicate matters further (and to makes things even more spooky), Halloween arrives this Sunday evening, only days before the QE 2 announcement and the election returns.

"I dabbled into witchcraft. I never joined a coven. But I did, I did. I dabbled into witchcraft. I hung around people who were doing these things. I'm not making this stuff up. I know what they told me they do."

-- Christine O'Donnell on "Politically Incorrect With Bill Maher" (October 29, 1999, unaired) and "Real Time With Bill Maher" (September 17, 2010, aired)

Perhaps the one thing I can be certain about, is that Delaware Republican Senatorial candidate Christine O'Donnell will receive a lucrative contract for her own show from Fox News within weeks following her loss to Democrat Chris Coons a week from tomorrow!

That said, while corporate profits have beaten expectations (a lagging indicator), over the last two months, a series of tentative and even downbeat (especially on the housing and jobs fronts) domestic economic releases have accompanied the QE 2 optimism, leading me to conclude that the U.S. stock market might be disappointed and could be in the process of topping out for the year.

Recommended Reading

Run, don't walk, to read Ray Ozzie's blog on the challenges that Microsoft faces.

Commodities Are Soaring

Cotton prices are now at Civil War levels!

The remarkable rally in commodity stocks continues apace today.

There is no fear of screwflation on the part of market participants -- for now.

Dallas Fed Releases Poor Manufacturing Data

The components of the Dallas Fed Manufacturing report were poor, and equities dropped modestly after the release.

Curb Appeal

The stock market's initial positive response to housing sales was unjustified, in my view.

September 2009 sales were 468,000. September 2010 sales were only 379,000.

Moreover, this year's sales were buoyed by the tax extension to Sept. 30, 2010.

In addition, September 2010 activity was 7.3% below September 2007 and and 13.2% below September 2008 (two awful years of housing activity!).

Finally, prices plunged.

Whatever positive spin put on the release by housing bulls will likely evaporate in next month's release -- just as it did in July 2010.

More on Dallas Fed Manufacturing Index

Both October orders and employment components weakened, though the six-month order outlook increased to the best figure in four or five months.

Weakness in Financials Cannot Be Ignored Much Longer

Any more commodities strength raises the specter of lower corporate profit margins, which are already at record levels.

Recommended Reading

Run, don't walk, to read John Hussmann's 'Bernanke Leaps Into a Liquidity Trap.'

Amazing -- a five-year TIPS auction with a negative current return!

Sign of a Bond Price Top?

Goldman Sachs is pricing a 50-year, $250 million debt issue at a bit over a 6% interest rate.

More evidence of a top in bond prices (and a bottom in bond yields) comes out of Goldman Sachs, which is pricing a 50-year, $250 million debt issue at a bit over 6% interest rate.

Recap For Monday

The bulls had a weak dollar again today following the G-20 economic meeting, which caused the indices to gap up, but we were unable to gain further momentum. We churned most of the day and ended up with a weak close. Breadth was solidly positive, with about 3,400 gainers to 2,250 decliners, and oil, gold and commodities led. Financials were the sore spot, but there was some good momentum once again in select technology names. It was a narrower group of hot stocks, but there was enough strength to keep sentiment generally upbeat.

Our inability to gain additional upside lately is a function of market players starting to wonder if we have already priced in the main positives. We are widely anticipating gridlock following the election and the start of a quantitative-easing program next week. Both topics have been well discussed, and no one seriously doubts that they will occur. When events are that well anticipated for so long, it is hard not to expect some sort of sell-the-news reaction. The problem is that when everyone is already expecting a sell-the-news reaction, some market players are going to try to beat the rush by selling before the actual news events. In other words, we have to watch for selling in anticipation of the selling.

The biggest positive for the bulls today was that the dollar was weak again. The dollar closed near the highs of the day, which is why the indices closed at the lows. The dollar has provided great support for this market for months now, but we are sensitized to it and that is going to be a problem when it does bounce.

We are still solidly in the uptrend that started 9/1/10, but the weak close and the low volume make this market look tired. With next week's catalysts already so well anticipated, further upside is unlikely to come easily. On the other hand, this market still hasn't done anything wrong, so we don't want to be overly bearish at this point.

Friday, October 22, 2010


Higher guidance doesn't necessarily translate into higher prices over the short/intermediate term.

Indeed, IR and HON are up by pennies, and DOV is getting schmeissed.

Bullard Hints at Screwflation

The Fed's multiple talking heads continue to have diverging views!

In the 35th Annual Policy Conference of the Federal Reserve Bank of St. Louis, St. Louis Fed President James Bullard asserted that the trend in disflation has flattened out (prices paid in yesterday's PMI vaulted higher as many commodities prices are rising parabolically), that the Fed doesn't exist to ratify the market think (or market expectations) and that he subscribes to moderation (shucks and aww) in QE 2 strategy.

Hawk and dissenter Hoenig (a voting member of the FOMC), in the New Mexico Economic Forum, continued to assert that there is no need for interest rates to decline further.

That said, QE 2 will be launched in two weeks.

POMO Today

The S&P500 traded in an unusually tight range all day, but it did manage a couple of points to the upside by the close. Under the surface, the action was much stronger than it looked, with a number of technology stocks heating up the Nasdaq. Volume was light, but breadth solid, with energy and semiconductors leading to the upside.

A number of stocks, like FFIV and RVBD, haven't done much for a couple weeks, but they sprang to life today. AMZN and BIDU acted well on their earnings reports, despite being in good position for a sell-the-news reaction. Market players were going back to some recent winners that looked like they were in trouble, and that made for some pockets of upbeat action.

The bears just can't seem to make a dent in this market. They are fighting some good earnings and confidence that the Fed is going to keep on running the printing press. The dollar did little today, and that is why the market stayed flat. We are still very focused on the dollar, and many market players didn't want to make any big moves in front of the G-20 meeting this weekend, which may have implications for the currency market next week.

So, the uptrend remains in place, and this market continues to ignore its critics. Who cares about unemployment, a double dip in real estate, the mortgage mess and a slow economy when you have some pretty good earnings reports and the Fed on your side? At some point, the negatives will matter, but the trend is telling us that it is still too early to be bearish.

long BIDU

Thursday, October 21, 2010


Amazon is trading down on its earnings report.

"One last thing."

- Lt Columbo

AMZN, which appears to have been priced to perfection, is trading down on its earnings report.

Baby Steps to QE 2?

St. Louis Fed President Bullard favors small increments of QE 2.

Prices Paid

Prices paid jumped to 63.3 from 53.9.

That's screwflation.

An Answer

The SEC tilts the field against short-sellers, and no one wants to endure the issuer retaliation.

"I'm not dead yet."

-- Monty Python and the Holy Grail

As a result, it is next to impossible to raise dedicated short capital.

The public views short-sellers as vultures rather than helpful providers of balanced views.

So, why endure all that when you can defraud the public on the long side like Countrywide's Mozilo and keep your tan and hundreds of millions of dollars.

That is the incentive system fostered knowingly or unknowingly by Washington.

Recommended Reading

Run, don't walk, to read lynx-eyed Dan Greenhaus's comments on the likelihood of QE 2.

"Over the last several days and weeks, the debate over quantitative easing has played out both in public and private. Members of the Federal Reserve have not been left out of the debate with virtually all Fed members taking a stand one way or the other.

After sifting through the various public statements, it appears that at a minimum, the "score" is 8-5 in favor of additional easing with four members -- Duke, Raskin, Tarullo and Warsh -- unknown. We believe that at least three of those four will support the Chairman and further easing, making another round of asset purchases all but a done deal."

October eurozone manufacturing PMI was 54.1, above expectations for 53.2 and September's 53.7.

On a composite basis (manufacturing and service), the numbers were lower than expectations for 53.7, at 53.4, and the prior month's 54.1.

Hanging In There

It was a choppy day with some negative action and now we are seeing a little selling of the AMZN earnings report. The report was ahead of estimates, but expectations were for something more than just a $0.03 beat.

I did not like the action I saw today. We had an intraday reversal to the downside following some good earnings news, there is very little momentum leadership, small caps acted poorly and the dollar is showing some strength. The action is still very much about the dollar so we have to watch it closely, but if it can continue to bounce, it is going to be an issue.

The problem for the bears is that, just when you think this market is about to rollover, QE 2 talk bolsters it. The rallies on QE 2 speculation have not been as vigorous lately, but it is still a force that market players are hesitant to fight.

The market is at a tricky juncture right now as we still have pretty solid technical support but there is some toppy action. The intraday reversal today is a sign that the bulls are losing momentum but we'll see what the mood is as earnings reports are digested. So far the Amazon report isn't seeing a very positive reaction.

Wednesday, October 20, 2010


Plosser doubts that the benefits of further easing outweigh the costs.

Plosser also fears that doubling excess reserves doubles the challenge of exit.

Plosser feels that policy steps with no effect would damage credibility.

A Lighter Shade of Beige

The Beige Book is slightly upgrading the economic growth picture.

This could put some downward pressure on stocks, as it brings into question the need for a large QE program.

Smooth Media Talkers

We're hearing a lot of glibness in the media about the merits of stock ownership.

Increasingly, especially on "up" days, talking heads on CNBC and in other media platforms are growing glib with regard to the merits of equity ownership (both absolutely and relative to bonds) -- despite the sharp ramp over the last several months.

The words "obvious" and "of course" are the most common words being used in discussing the stock market's future course.

I can accept the comments of David "the Finini" Tepper ... but not from many others who have never seen a market or economy they didn't like (Read: Bill Miller). Mr. Market has a way of slapping investors in the face just when no one expects it.

I am beginning to expect the slap.

But it might be on my wrists!

Recommended Reading

Run, don't walk, to check out the Roubini Sentiment Index.

It was only a matter of time before a Roubini Sentiment Index was established in an attempt to forecast market movement.

Merry Medley

Medley Global Advisors suggests that the Fed intends a $500 billion Treasuries-buying program over the next six months.

This announcement helped the markets.

Wells Fargo Wagon Carries the Market Forward

The market (and financial stocks) seemed to rally on WFC's statement that loan demand is improving.

The Turn of the Screwflation

We all recognize the intended theoretical benefits of QE 2, but I am uncertain whether the theory will become a reality.

"In my darkest moments, I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places."

-- Dallas Fed President Richard Fisher

This morning, Bill King (The King Report) weighs in with the following remarks regarding Richard Fisher's speech yesterday, which modify my concerns of screwflation and other matters expressed yesterday.

Fisher's inconvenient truths about quantitative easing:

1. For mid- and large-size nonfinancial firms, capital is fairly abundant in America, and it is unclear how much they would benefit from lowering Treasury interest rates.

2. The reality of fiscal and regulatory policy inhibiting the transmission mechanism of monetary policy is most definitely present and is vexing to monetary policy makers. It is indisputably a significant factor holding back the economic recovery.

3. Yet, far too many of the large corporations I survey that are committing to fixed investment report that the most effective way to deploy cheap money raised in the current bond markets or in the form of loans from banks, beyond buying in stock or expanding dividends, is to invest it abroad where taxes are lower and governments are more eager to please.

4. A great many baby boomers or older cohorts ... are earning extremely low nominal and real returns on their savings.... Further reductions in rates earned on savings will hardly endear the Fed to this portion of the population. Moreover, driving down bond yields might force increased pension contributions from corporations and state and local governments.

5. Debasing those savings with even a little more inflation than what is above minimal levels acceptable to the FOMC is also unlikely to endear the Fed to these citizens.... [I]f it were to prove out that the reduction of long-term rates engendered by Fed policy had been used to unwittingly underwrite investment and job creation abroad, then the potential political costs relative to the benefit of further accommodation will have increased.

6. Besides, it would be hard to build a case that the main recipient of further credit extensions, namely the U.S. Treasury, and borrowers whose rates are based on historically low spreads over Treasuries have difficulty accessing the capital markets.

7. [I]t raises the specter of competitive quantitative easing. Such a race would be something of a one-off from competitive devaluation of currencies, a beggar-thy-neighbor phenomenon that always ends in tears. It implies that central banks should carry the load for stymied fiscal authorities -- or worse, give in to them -- rather than stick within their traditional monetary mandates and let legislative authorities deal with the fiscal mess they have created. It infers that lurking out in the future is a slippery slope of quantitative easing reaching beyond just buying government bonds (and in our case, mortgage-backed securities).... Going beyond investment grade paper, however, opens the door to pressure on a central bank to back financial instruments benefiting specific economic sectors. This inevitably leads to irritation or lobbying for similar treatment from economic sectors not blessed by similar monetary largess.
-- The King Report

Here is Fisher's complete speech.

We all recognize the intended theoretical benefits of QE 2:
o Lower real intermediate- and long-term interest rates are expected to stimulate credit-sensitive spending. Authorities expect housing and refinancing activity to expand (through lower mortgage rates), and a rate reduction is forecast to reduce the consumers' debt service expense.

o Higher stock prices are expected to buoy personal consumption spending through the wealth effect and reduce the cost of capital to corporations.

o A lower U.S. dollar narrows our trade deficit.
It should be clear in my writings over the past month, however, that I am less certain than most that the theory behind QE 2 will become the reality of QE 2. As it relates to quantitative wheezing, in November I still see shucks and aww, not shock and awe. (Morgan Stanley's Steve Roach raises similar concerns this week.)

Here are some additional questions that should be asked in determining the ultimate efficacy and effect of QE 2.
1. With regard to the transmission mechanism in respect to higher equity prices:

A. Is there any physical method whereby the Fed forces equity prices up?
B. Is it pure jawboning that does it?
C. Or is it painfully low rates force more people into equities?

At this point, it can't be choice C given where yields already are, can it? If it's choice B, how much powder is left? If it's choice A, how do they do it? Or is there a choice I am missing?

2. For the wealth effect of equities to matter, how much does the equity market need to go up from here to get a real kicker? Then, does the slope of the line matter? Is there a difference in the impact of the wealth effect if we get a step-function 20% increase vs. a smooth 20% increase over next two years, for example?

3. Does the wealth effect of equities matter much (understand housing does as widely held)? Are equities so widely held by enough of the population that they matter, or is their impact on spending much less meaningful than housing?

4. While QE 2 makes bank lending more attractive, given the rep and warranties issue that has come to the fore (and the general regulatory climate toward strengthening capital ratios), is it reasonable to expect banks to leverage up their balance sheets now?

5. Then, importantly, to the extent that quantitative easing helps increase asset prices, by definition and in fact, this also means that it increases the price of commodities and other inputs as well. (It's already happened again.) Shouldn't the benefit of the wealth effect be offset by an expense effect (not to mention the fact that now huge portion of the population can't earn any interest on their savings, which is also a huge cost)? And is it possible that, for the average American, the expense effect hurts more than the wealth effect of equities helps? Why is the expense effect not considered in a lot of the analysis? Could it be the wealth effect may help in total (huge benefit for the wealthy) but when the expense effect is considered, 70%-plus of the population comes out on the short end of this trade? I think the expense effect is much greater than it has been in the past. Whatever quantitative easing (or "easy money") does to increase equity prices now also flows directly into commodity prices (potentially more rapidly than into equity prices). Do the new Fed models account for this increased expense effect? Do they account for screwflation?

The Weak Dollar

There may have been some good reasons for the selling we saw on Tuesday, but it ended up being nothing more than another bear trap. The shorts were anxious to call a top in this market and were feeling like they may have finally nailed it, but we gapped up this morning and kept right on going until a bit of selling hit in the final hour.

Breadth was solid, but volume wasn't very impressive. While the action was quite positive, it didn't have a euphoric feel to it like the action on Monday. The main driving force was the weaker dollar, which is why oil, gold, steel, coal and commodities led. This inverse correlation with the dollar is getting a bit old, but as long as the market is focused on QE2, we can't afford to ignore it.

There isn't much at all wrong with this market action, but the bounce today lacked some vigor, and that makes me think we have a good chance of another dip in the near term.

NFLX's earnings after the close don't look that spectacular, but the stock is trading up sharply so far. I suspect some over-eager bears are being squeezed there. EBAY is looking quite positive as well.

We have a flood of earnings reports tonight and tomorrow, including AMAN and BIDU after the close tomorrow, so we should have plenty of action in individual names. We just have to monitor the dollar closely. If it stays weak, this market will continue to offer upside opportunities.

Tuesday, October 19, 2010


Bank of America Is Being Wrongfully Punished

I need to start buying BAC in size...

From my perch, the market is now making a big mistake by penalizing BAC shares.

About $47 billion of over 110 securitizations are being put back to the company.

While there likely have been some pay downs, let's assume there have been none.

In order to have at least $10 billion of losses on this book of business, one has to assume more than a 20% loss ratio. (This is very conservative, as a ratio of this order of magnitude is even higher than subprime loss experiences.)

If half of these losses are based on fraudulent practices (a ridiculous assumption in my view!), Bank of America is left with only a $5 billion exposure. Assuming another 50% loss on this figure (again, ridiculously high!) means that on a pretax basis Bank of America has a $2.5 billion exposure, or $1.7 billion ($0.17 a share) after tax!

Two of three Fed speakers today agree with me on the efficacy of quantitative easing.

Two of the three Federal Reserve presidents who spoke today (Fisher of Dallas and Kocherlakota of Minneapolis) apparently agree with my assessment of "quantitative wheezing" -- they both were unconvinced that "QE 2" would be effective.

Only Atlanta Fed President Lockhart today voiced support of more quantitative easing.

That said, Chairman Bernanke will push "QE 2" through in early November, despite the apparent internal disagreement.

Run, don't walk, to read Kate Stalter's common-sense approach to Riverbed and Radware.

Rigorous and vigorous -- a must-read!

In early July 2010, when the S&P 500 was plummeting and closing in on the 1,000 level, I suggested that the scale had tipped to the bullish side and that equities were in the process of making the lows for the year.

Since then, buoyed by the notion that the prospects for an open-ended QE 2, which would be aimed at lowering real interest rates, raising inflation rates and have a strategy that might even be targeted at the S&P 500 in order to elevate the U.S. stock market, equities have leapt forward for weeks in a routine and consistent fashion.

In light of what I expect to be a disappointing economic impact from QE 2 -- I call it quantitative wheezing -- and the negative consequences of that strategy ("screwflation") on the majority of Americans, I fear that equities are in the process of putting in the highs for the year. Could be wrong, though.

After spending like drunken sailors during the Bush administration, Republican legislators have acknowledged that it will block even the most sensible stimulus programs, and the Democratic administration and its legislators have lost the will to fight their adversaries. As a result, the responsibility for turning around the domestic economy now lies squarely on the shoulders of the Fed.

The implementation of QE 2 during the first week of November is now a virtual certainty. The general belief in its efficacy has vaulted stock markets around the world considerably higher.

The markets believe that unusual, definitive and targeted monetary solutions will solve deep-rooted problems that, in the past, were put on the shoulders of fiscal policy (e.g., a tepid jobs market).

On Wall Street, they too easily extrapolate trends. Whether it's company earnings, industry statistics, economic recoveries, policies and rescue packages, investors want to believe in the more or most favorable outcomes. So, we are told by David Tepper, Wall Street strategists and most long-biased investors that if the liquidity infusion from the first round of quantitative easing worked in the U.S., it has to work in QE 2.

Throughout the market's rally over the past six weeks, I was reminded something Milton Friedman's once expressed, which I have taken the liberty of paraphrasing below to emphasize my concerns with regard to the efficacy of QE 2: If you put the Federal Reserve in charge of the Sahara Desert, in five years, there would be a shortage of sand.

We have embarked on a slippery slope of policy, and, from my perch, there is too much confidence regarding a favorable outcome.

Is it really a good idea to put our investment trust in the successful policy of the Federal Reserve in its ability to fine tune inflation and stimulate growth? After all, in the past the Federal Reserve couldn't find their way home and failed to identify the stock market bubble in the late 1990s, the housing bubble in 2003-07 and the recent credit bubble.

In a recent interview with Fortune Magazine's Carol Loomis, Warren Buffett said that he "can't imagine anybody having bonds in their portfolio." (I continue to believe that short bonds is the trade of the decade.) At the same time, Fed Chairman Ben Bernanke is hellbent on buying U.S. bonds ad infinitum. As Jeff Matthews recently wrote, Who do you have more confidence in making your investment decisions -- Berkshire Hathaway's Warren Buffett or the Federal Reserve's Ben Bernanke?

Most market participants are fixated with the potential for QE 2 to boost asset prices and generate organic economic growth, however, without a subsequent rise in aggregate demand and productivity, the program will ultimately be deemed a failure as prices readjust over time to reflect the real underlying fundamentals. Mr. Bernanke is making the same blunder that we made with the past bubbles busts -- if we can create paper profits and convince consumers that they should spend those paper profits, then we'll be on our way to economic prosperity. The problems arise when asset prices readjust lower to meet their true fundamentals. It's Ponzi finance and nothing more.

-- "Northern Trust: QE 1 Failed, Why Will QE 2 Work?" from Pragmatic Capitalism

As I have written previously, I don't believe QE 2 will meaningfully move the needle of domestic economic growth and will only have a limited impact on:

* the jobs market, which is plagued by structural unemployment;

* housing, which that is haunted by a large shadow inventory of unsold homes and in which mortgage credit will likely be further reduced by the moratorium on foreclosures; and

* confidence, which is still mired in uncertainty regarding regulatory and tax policy (and that is undermined by high unemployment).

Conditions are far different for QE 2 than QE 1. Interest rates have already fallen to very low levels, and the benefits have already been felt on mortgage rates and in refinancing. Also, unlike QE 1, when the world's central banks were all-in, differing policies now dominate the global landscape.

Meanwhile, our fiscal imbalances multiply, our currency craters (as a worldwide rush to currency devaluation is offsetting some of the normal trade deficit benefit), and the bulls rationalize these concerns by suggesting that the consequences "are beyond our investment time frame."

Importantly, there are a number of other possible adverse consequences from the inefficient allocation of resources that is the outgrowth of the next tranche of monetary stimulation.

While the immediate response to the likelihood of QE 2 has been to buoy asset prices, the domestic economy is stalling at around 1.5% to 2.0% GDP growth, and little improvement in the jobs market has been seen. This hesitancy makes the anemic slope of the current recovery vulnerable to the unforeseen (e.g., trade wars, policy errors, etc.) and could place the generally assumed self-sustaining economic cycle at risk. As well, the long tail of the last cycle's abusive use of credit looms large, as demonstrated by mortgage-gate.

My bottom line is that QE 2 will have only a modest effect on the broad economy. Our largest corporations will fare better as interest rates drop and will profitably extend their debt maturities in a cheap and hospitable bond market, but, as commodities rise, some troubling consequences could emerge.

We are not on a road to the stagflation of the 1970s, but we may very well be on the road to screwflation.

Screwflation, like its first cousin stagflation, is an expression of a period of slow and uneven economic growth, but, its potential inflationary consequences have an outsized impact on a specific group. The emergence of screwflation hurts just the group that you want to protect -- namely, the middle class, a segment of the population that has already spent a decade experiencing an erosion in disposable income and a painful period (at least over the past several years) of lower stock and home prices. Importantly, quantitative easing is designed to lower real interest rates and, at the same time, raise inflation. A lower interest rate policy hurts the savings classes -- both the middle class and the elderly. And inflation in the costs of food, energy and everything else consumed (without a concomitant increase in salaries) will screw the average American who doesn't benefit from QE 2.

In summary, somebody holds the key to a self-sustaining domestic economy, but I doubt that it is a monetary maven, as some of the potential side effects of quantitative easing might be worse than the medicine. And the confidence and animal spirits that the markets have expressed since early September might just be blind faith.

The domestic economy remains in a contained recession, and, while containment efforts will continue with QE 2, the efficacy of these efforts will likely disappoint and wane.

It remains likely that secular and nontraditional headwinds will produce an extended period of inconsistent and uneven growth in the years ahead, which will be difficult for both corporate managers and investment managers to navigate. Arguably, given the sharp rise in equities, the downside risks might be growing ever greater, especially if I am correct that QE 2 will be a dud.

The key to remedying today's low P/E multiples would be to apply the same amount of attention, brain power and solutions spent on short-term policy (which invariably makes things worse) on the underlying structural problems that our country faces.

But, patience, more than policy, is something that investors, politicians and others have precious little of these days.

Broken? Or Resting?

After the earnings reports from AAPL and IBM on Monday night, it looked like we were in for a sell-the-news reaction. The reports weren't bad, but expectations had moved a bit too high after the good report from GOOG.

If all we had was a simple sell-the-news reaction to earnings, we probably would have shrugged it off fairly quickly. The problem was that that bad news was hitting every sector of the market. A stronger dollar and an interest-rate hike in China clobbered oil, gold and commodities, and concerns about banks being held liable for bad mortgage paper caused a big reversal in the banks after a good open.

With technology, energy, commodities and financials all under the pressure, there was no place to hide in equities, and we saw money flow into bonds. It was just a dismal day of distribution, with breadth almost five-to-one negative on increased volume.

The big question now is whether this is just an ugly hiccup in the uptrend that has been in place since September 1, or the start of a major trend change? We held support at 1160 after a bounce in the final hour, so no real technical damage has been done yet, but the fact that little was left unscathed is a problem. We've had some very frothy momentum action in various areas of the market lately, and that has left us with limited underlying support in places.

Two groups that are good examples of how fast charts can break down when momentum leaves are cloud computing and solar energy. Stocks in both groups have pulled back very sharply and look quite poor. If that sort of momentum selling spreads, there are going to be some landmines to contend with.

On the bullish side of the ledger, we have to keep in mind that the Fed is going to blast this market with a flood of liquidity at some point when it implements QE II. We have witnessed the power of that for the last six weeks, and while we may have gotten a bit ahead of ourselves in discounting the news, I don't think QE II is finished in terms of being a positive SHORT TERM TO INTERMEDIATE TERM market catalyst. Long term? It's toxic....

Right now, we obviously have to play tighter defense and not let losses get out of hand, but the bulls are still in the game. This market isn't broken yet.

long AAPL

More AAPL Thoughts

Disappointment, thy name is expectation. Still, notwithstanding the vicissitudes of the short-term horse race, the disconnect between Apple's growth (~65% on top and bottom) and its valuation 13.5x is as wide and attractive as ever. This is a buying opportunity.

AAPL is well positioned to capitalize on stronger than expected growth in mobile devices, improving penetration in the enterprise, and broadening distribution in China. While consensus gross margin is likely to be reset soon, strong revenue trends largely offset the margin downside and I continue to expect upward EPS revisions in the near-term.

The main surprises were the strength of iPhone unit sales, the slight weakness of expected iPad volumes and the lower-than-expected gross margin. I expect iPad sales to pick-up strongly next quarter, with the Q4 being adversely impacted by component shortages. However, the margin issue is possibly a longer term concern. Apple appeared keen to emphasise its first mover advantage in the tablet space. Various sources (e.g. iSuppli) have performed breakdown analysis that indicates that margins on the iPad are actually lower than those available on the iPhone. As such, a focus on extending its lead here could result in lower margins for the group overall.

Again, the one disappointment, if it can be called that, was iPad shipments. These came in at 4.2 million, up from 3.3 million in June. While the Street was expecting a higher number, it's instructive to note that iPad shipments have exceeded Mac shipments in just two quarters......

Revenue upside was driven by significantly better iPhone units, offsetting slightly lower than expected iPad sales (still up 28% Q/Q). Some investors will be concerned with the lower than expected gross margin given the expected volume leverage. Apple revenue guidance, which is typically conservative, actually was above Street consensus.......

Apple is aggressively pushing the price performance envelope (more value for the same price as prior gen product) and driving strong unit growth and supply constraints. AAPL is on the right side of the price/performance elasticity equation and is extending its first mover advantage (iPhone and iPad). Looking forward, I expect GM to benefit from mix and scale benefits in iPhone and iPad.

Despite pending competition (particularly Android) I foresee sustained global share gains in 3 large, underpenetrated markets -- iPhone, iPad, Mac -- via sustained product leadership. Pending catalysts include: strong holiday sales, new products, healthy GMs. Apple should benefit from subsequent product generations and accessory cycles.

Apple remains a long-term share gainer with low penetration in large addressable markets, with margin expansion opportunities.

Apple now has 317 stores worldwide, 24 of which were opened during the quarter and 16 of which were opened in international markets. Of particular note was the opening of the Beijing and Shanghai stores that took place on the last day of the September quarter. Both Chinese locations recorded higher sales in the first day than any other store opening in company history.

Apple's industry-leading software ecosystem (over 120M installed base of iOS device sales) and its leading hardware expertise will lead to a strong multi-year product cycle for its key products. In fact, based on Apple's strong results and solid sales guidance for its December quarter combined with my expectations of strong longer-term trends for iPhone and iPad sales, I anticipate strong earnings growth for Apple over the next two years versus the coverage universe.

iPhone shipments exceeded even the most aggressive forecasts on the Street, driving $2B of upside to the revenues estimate.

Driven by a growing portfolio of well-designed, easy-to-use, media-centric devices/software, coupled with strong earnings growth and a cash-rich, debt-free balance sheet, AAPL's a compelling buy.

Gross margins of 36.9% were below Street consensus expectations of 38%. Meanwhile, iPad units came in below elevated investor expectations. Despite these bumps, Apple's meteoric revenue and profit growth and 14.1 million iPhone units should be enough for the bulls to keeping running.

long AAPL

My AAPL Options Getting Slammed Today; Here's Why The Selling Is Overdone....

AAPL blew the doors off yesterday evening. Jobs and company have certainly executed in an "insanely great" fashion since early 2000.

By all accounts the quarter was spectacular and, frankly, I thought guidance was strong. To me, any criticisms of "mixed" or "disappointing" iPad sales is laughable. I heard many people say that the iPad was light; it came in over 4mm for the quarter. I remember when I predicted 7.5mm iPad's for calendar 2010 when pundits were high at 3.5-4mm. AAPL has blown out my initial variant high view by a good margin already and we still have a quarter to go. The supply issues seem to have been worked out and, needless to say, I need to completely recalculate my iPad sales projections for 2011. Though now I think a select few analysts are getting overly enthused about the product's prospects.

Also, I heard the guidance described as mixed. Just a history lesson here. AAPL usually guides down by a mile, though it will on occasion provide a guidance beat (maybe once a year). The current guidance was a huge beat on revenues and only shy of consensus by about 20 cents. Most quarters it is shy on EPS by anywhere from 15-30%. At nearly $5 in EPS per quarter, a guide within 20 cents is essentially inline - and to me that's a pretty clear guide higher to this observer.

Lastly, regarding margins. AAPL beat the margin guidance it offered previously, this is something they are usually pretty accurate with. Given the now widely known supply issues, I think margins are running as planned. Also, as AAPL moves into a much higher market share take on computing and tablets, this will compress margins. I'm not surprised by this, so the nitpicking regarding margins seems unenlightened.

Bottom line, while I do perceive more threats to them than many others currently, this quarter gave me renewed confidence that AAPL will still attain my long held view of the mid-low $400's. I do think other tablets will offer a challenge and I do think AAPL's move to be highly proprietary regarding the "silicon inside" of their products may prove problematic. That said, the long term Mac share take is compelling, the iPhone will still be the best single selling smartphone (but not OS) and the iPad is exceeding my very optimistic view. By the way... all this and we have yet to see the holiday season quarter. There still isn't an iPhone selling at VZ (and multiple other CMDA vendors), and we have been supply constrained on iPad's and iPhones for the last two quarters........

long AAPL

Monday, October 18, 2010


IBM Not So Impressive

Service signings are still on the light side.

Bank Stocks Take Off

And mortgage insurers take a hit.

With the announcement that BAC is resuming foreclosures in 23 states next week, bank stocks have taken off and mortgage insurers (the recent "flight to safety" trade during mortgage-gate) have gotten hit.

Huge call option activity in LNC today.

Looks like another round of quantitative easing is a done deal.

Atlanta Fed President (and centrist) Dennis Lockhart is coming out in favor of more Fed easing in a speech this afternoon.

As I mentioned previously, "QE 2" is a fait accompli -- the only question is size.

Size counts, at least in Fed policy, and an aggressive and open-ended "Quantitative Wheezing" is increasingly in the cards.

Recommended Viewing

Run, don't walk, to watch Gamco's Larry Haverty make a compelling case for Yahoo!

Office Depot a Takeover Candidate?

I am hearing vague takeover rumors regarding ODP

Investors Nonplussed by Drop in Business Activity

Industrial production dropped for the first time since June 2009, and capacity utilization fell modestly to 74.7%.

Thoughts on the Euro/Yen?

Are we getting a warning shot from the Euro/Yen cross rate undercutting last week's low?

Almost a month ago, Appaloosa's David Tepper made some very optimistic comments about the U.S. stock market and on the domestic economy. In part, based on those remarks, equities embarked on a sharp run up that began that Friday morning and has continued to date, more or less.

Sometimes it's just that easy.... What did the Fed just tell me? What did they say? They want economic growth. And they said, We want economic growth, and we don't even care -- not only do we not care if there's inflation but we want a little more inflation. Have they ever said that before?... They want the market up. So, what am I-I'm gonna say, No, Fed, I disagree with you?... Either the economy is going to get better by itself in the next three months. And what assets are gonna do well? You can guess the assets that are gonna do well. Stocks!... Or the economy's not gonna pick up in the next three months, and the Fed is going to come in with QE. And then what's gonna do well? Everything!... Let's see. So what I got-I got two different situations. One, the economy gets better by itself.... The other situation is the Fed comes in with money.... You gotta love a put.... I gotta buy; I can't take the chance of not being a little bit longer now.... That does not mean that I'm going balls to the walls.... That's how easy it is right now.

-- David Tepper, "Squawk Box" comments

I respectfully took exception to the certainty of a salutary investment and economic outcome for QE 2 -- or, as I called it, "quantitative wheezing" -- that Tepper expressed in his remarks on "Squawk Box." Tepper concluded that we were in a "heads you win, tails you win situation."

Since I'm Long AAPL, Looks Like My String Of Good Days Ends Tomorrow......

Most of the action today was about positioning in front of the onslaught of earnings. Strength in the dollar was putting some pressure on oil and commodity names, but that relented in the afternoon and let the indices move to new highs. Of course, optimism about AAPL was the main driving force today.

Banks acted better, but chips and retailers struggled, although breadth ended up close to 2-to-1 positive, so the bulls did a good job of staying in control.

VMW's earnings are out and were solid enough to send the stock up initially, but now it is trading down sharply as the market digests the news. The cloud-computing momentum looks like it has now died, and that means that FFIV, CRM, RVBD, RDWR, etc. are vulnerable.

IBM, which beat by 7 cents, is trading down initially on its numbers. Most of its beat is due to share buybacks.

Those are just warm-ups to the star of the show, which is Apple. The biggest problem the market faces right now is very high expectations. You can't expect a stock like IBM, which has been running up for six weeks, to keep on going unless it does something spectacular. Luckily for Apple, it is the master of low-balling guidance, and there is a big supply of folks who'd love to pick up some shares on a pullback.

Apple's numbers are out, and as expected, they are well ahead of expectations of $4.08. However, shares have sold off sharply after-hours; we'll see what happens tomorrow morning from the analyst community. Sure looks like AAPL will be down fairly significantly tomorrow - at least that's how it looks right now. Dip-buyers may come in tomorrow afternoon; we'll see......

long AAPL

Friday, October 15, 2010


Asian markets open in 36 hours.

China Heating Up

China's National Bureau of Statistics reports that major city real estate prices rose 9% in September!

Van Eck is introducing an ETF that provides exposure to China's A shares via swaps, etc., and will track the CSI 300.

We can all now gorge at the trough!

Currency and inflation are important to China again, as the nation's economy appears to be heating up despite attempts to dampen speculation. China's National Bureau of Statistics reports that major city real estate prices rose 9% in September! Real estate investment is up 36% this year. The Chinese evidently still love their empty apartments, no matter what.

If you want to play China's A shares, a vehicle is on its way. (A Shares are off-limits to foreign investors.) Van Eck is introducing an ETF that provides exposure via swaps, etc., and will track the CSI 300 index.

Dr. Doom Predicts

If we double-dip, he will take credit for calling it. If we don't, he will say he was just pointing out the risks. Time to take a stand, Dr. Doom!

Roubini was out the other day predicting a "35% to 40% chance" of a double-dip recession, according to Bloomberg. What information is in this statement? If we double-dip, he will take credit for calling it. If we don't, he will say he was just pointing out the risks.

Mortgage Intrigue

The plot thickens.

I read an interesting thesis on the mortgage mess that goes beyond the unreviewed affidavit angle; if correct, the issues could drag out far longer than investors expect. Evidently, the problem is that REMICs (mortgage-backed securities) must get their underlying mortgages within 90 days of creation in order for pension funds to get tax-exempt treatment. Where the mortgages have documentation issues, they were in effect not legally conveyed into the REMIC within the 90-day settlement period. So, affected REMICs either have fewer-than-expected assets, legally, or if the mortgages can eventually be documented, they still won't be tax exempt.

This is a real issue. The state of Kentucky is suing several mortgage servicers under RICO for fraud!

Global Implications of Inflation

Global food inflation could induce real social unrest.

Inflation is showing up in basic commodities, especially food. Most Americans don't care too much, because food is a small percentage of the household budget. In many developing countries, however, food is a huge percentage of the budget, and global food inflation could induce real social unrest.

The Real Cost of Living

At its core, inflation is a reduction in the value of the currency. The dollar trend, down 8% in the last month against a basket, means the value of the dollar is lower, so by definition inflation is here. Tom Graff has astutely observed that the Fed's real goal is to create a little bit more inflation to help get the economy moving. I think they have already succeeded.

We don't really need a QE 2.

Most economists are worried about a round of competitive devaluations, but the real risk would be no reactions from other currencies. If everyone "devalues," there is no net change in countries' position relative to each other and thus no implicit trade war. The real winner when all currencies devalue is gold, and gold is rocketing.

Weak Capital Formation, Weak Economy

There were 8,823 public companies in 1997; now there are only 5,107.

A recent Institutional Investor article, using data compiled mainly by Grant Thornton, is throwing water on the excitement over a reviving IPO market and thus indirectly pointing out the capital formation issues that I believe are throttling back economic growth.

The IPO window naturally slammed shut during the great bear market, but it is now reviving. So far this year, 90 companies have offered shares to the public, a nearly 50% increase from the 64 IPOs in 2009. Compared to the 1990s (when economic growth was robust), this number is pathetic. Back then, over 500 companies went public each year, on average. The average for the 2000s is 126. Companies that raise capital in IPOs are able to fund growth, hiring new workers and creating new products or markets.

Of course, perhaps the anemic IPO market is a result of economic sluggishness, not a cause? Actually, there is no shortage of new companies. The National Venture Capital Association (NVCA) points out that 6,100 companies have received venture capitalist funding, so new firms are being created; they just aren't reaching the IPO stage. Ninety percent of exits are now M&A vs. 25% in 1993. The cycle from initial funding to IPO has stretched from 4.3 years to over 10 years! With less access to growth capital, the pace of growth is simply slowing.

For investors, this all means a dearth of new, exciting companies in which to invest. There were 8,823 public companies in 1997; now there are only 5,107. The NVCA estimates that we need 360 new IPOs to replace natural attrition from bankruptcies, acquisitions and the like. That is one IPO a day. At least U.S. investors can look beyond our borders. The article lists a wide range of countries with booming IPO activity. Over the last decade, new listings rose 28% in Tokyo, 92% in Hong Kong and 65% in Sydney, so the IPO non-boom appears to be a uniquely American issue.

Since I'm So Long AAPL, Monday Should Be Very Interesting......

It isn't often that the market has such a crazy mix of cross-currents. Big-cap technology stocks flew on GOOG earnings, while the senior indices floundered on weak financials. In addition, Ben Bernanke promoted QE II once again, which caused us to gap up, but the dollar rose and bonds fell hard. The weak dollar has been the single biggest driving force in this market since Sep. 1, but today, it didn't matter much, although the reaction seemed to indicate that the market has discounted QE II to some extent.

Breadth was negative overall, but almost even on the Nasdaq. Retail, chips and oil led, while gold and commodities struggled on the stronger dollar. There continues to be some very aggressive momentum in places, but some of the recent leadership groups, like solar energy and gold, sold off today.

The big question is whether this market can ignore the weak financials and stay focused on the strength in other sectors, or are financials the warning sign of how flimsy the economic underpinning of this market really is? The money coming out of financials and bonds had to go some place, and today, it went into GOOG, AMAN, AAPL and the like. While those stocks might seem technically extended, there just aren't any fundamental negatives there to stop the momentum.

AAPL reports earnings on Monday night, so that is going to make for a very interesting day. After the strong GOOG report, expectations will be very high, but the momentum traders are feeling extremely confident, and they will continue to push.

It is a very unusual market, and it is important to stay open-minded and flexible. The stage is set for a higher level of volatility, but this market has a tremendous amount of underlying support, and QE II will continue to prevent the bears from being too aggressive.

With a slew of earnings reports, Fed speeches and economic news coming up, it should be a very wild week.

long AAPL

Thursday, October 14, 2010


AMD is a short

After all, Advanced Micro Devices is on my list of worst-run companies.

Offshore Drilling Resurrection

The lift in the offshore drilling moratorium has been a great help to the drillers.

The government's news could not have come at a more opportune time. Crude oil has had a nice run of late. Taken together, these are positive developments for the sector.

Next week, HAL and SLB both report results. I should expect continued cautious guidance with a more positive outlook than might have been offered before the drilling restrictions were lifted.

Yahoo! Chatter

Yahoo! is a likely candidate for my list of worst-run companies in the U.S.

The media is buzzing with talk of an AOL/private equity takeover of YHOO.

Bill Gross Suggests Selling U.S. Debt/Buying Foreign Debt

Could this be the straw that breaks the back of the nearly 30-year bond bull market?


F was upgraded by Deutsche Bank to Buy with a target of $19.50. The analyst cites strong demand and market share gains.

Play the Game That Is in Front of You

We are ensconced in the Major League Baseball playoffs on the road to the World Series. Baseball is a wonderful metaphor for life and can also be applied to investing.

The best baseball player is one that has the following five tools:

1. hit for average;

2. hit for power;

3. speed;

4. field; and

5. throw.

In investing, I believe that there are five tools that every successful investor must have.

1. Accounting acumen: One needs to understand how to read and analyze financial statements, beyond the simplistic concept of top-line revenue and bottom-line earnings per share.

2. Economics: It is a complex science that tends to be simplified by the media and those who lack proper training. Successful investors, especially ones that can formulate macro strategies have strong economic backgrounds.

3. Derivatives: A clear, working understanding of options, futures, swaps and asset-backed security markets and theory is mandatory. Unless you understand the Greeks, don't trade options. If you think that delta is a fraternity house, then you don't know much about derivatives.

4. Risk management: Too many market participants do not practice risk management. Reward, the metamorphosis of greed into profits blinds risk. The five-tool investor will incorporate risk management into both the decision and transactional aspects of investing.

5. Statistical knowledge: This tool is a foundation for pretty much everything I discussed above as well as an important factor in understanding technical analysis. Too many people blindly accept charts and data without understanding how they were formulated.

When a batter gets to the plate, he has one of two choices -- swing or hold. Ideally, you wait for your pitch or try to anticipate the next pitch. In investing, one needs to know his/her limits. Don't get up there and hack away at every pitch. In other words, you don't have to trade constantly or be fully invested at all times.

You have to play the game that is in front of you. You can't play the fifth inning if it is still the second inning. Yet, too many market participants are worrying now about what happens three years from now.

Getting back to risk, sometimes you have to go for the long ball. I am a firm believer in portfolio risk management, but sometimes you need to get aggressive.

I'm Thinking We Have A Large Rally Tomorrow....

After running straight up for the past week, the market was due for a little rest -- and that is exactly what we had. We inched down most of the day on slightly negative breadth, and average volume but popped back in the closing hour as market players anticipated the GOOG earnings report.

Google's stock was rewarded by expectations of a good report as shares of the company popped 30 points. Google's strong action hoisted up the broader market as well. This is the first big positive response we've seen this earnings season, and it is going to be very interesting to see how the company performs tomorrow as the news is digested.

The bears have one very big problem right now: with QE 2 in the air, it is very unlikely that they'll be able to make any significant inroads to the downside. The Fed's printing press is more powerful than earnings and economic news. With Ben Bernanke clearly in the quantitative easing camp, this market has some very solid underlying fundamental support to go along with the technical support.

The little dip today obviously did nothing to damage the uptrend that has been in pace since the Sept. 1. And with Google now putting up a strong report, the fear of being left behind will keep the upside momentum going.

We have GE's earnings report in the morning, and there are obviously some issues with financials due to the mortgage mess. But this market is focusing on positives and is ignoring the convenient excuses for selling.

Wednesday, October 13, 2010


Financials remained weak, and retailers such as Kohl's, Target and Coach were down.

Large-cap tech did well, but the market's reaction to Intel's earnings was disappointing.

The 10-year U.S. note auction saw a bid to cover below 3.00.

TBT is breaking up an important moving average.

The 10-year U.S. note auction was so-so, with a bid to cover below 3.00 (compared to the last several auctions at over 3.20). Indirect or strong holders were at 42% vs. 45%.

Meantime, TBT is breaking up an important moving average.

I can't see the banking group making a sustained advance until there are signs of expanding loan demand.

Banks were mixed after JPM's results.

Confidence in the ultimate economic impact of QE 2 ("The Tepper Effect"), a zero-interest-rate policy for as far as the eye can see, reasonable valuations, the calendar trade (as investment managers are pressured to perform) and a nascent reallocation from fixed income into equities seem to be the reasons for the remarkable market ramp that began in early July.

Panic Buying?

One thing I always find interesting on days like this is that, although there is much celebration about how strong the action is, nobody seems to be talking about the buys they are making.

Someone is obviously buying, otherwise we wouldn't be up 1%. But most of the articles I read indicate that traders are reticent to do much. There are always momentum players willing to chase giant moves on big volume, but it always surprises me how little buying I hear about on a day when the market is looking downright euphoric.

I suspect that it is the algorithmic and computerized traders that are primarily responsible for gunning the action rather than individual traders, and that is why the emotions don't correlate with the action. The computer-based traders have no sense of overbought or oversold -- they'll just continue to do whatever is working, and that tends to make upside momentum a self-perpetuating force.

What happened today was that a number of bears were looking for INTC's earnings report to trigger a top. What they didn't figure was that the market doesn't care about earnings right now. It's all about QE 2 and the weak dollar, and as long as the dollar remains under pressure it is going to hold this market up. Earnings are just a momentary distraction from the Fed, which is all that matters at the moment.

long INTC

Tuesday, October 12, 2010



No biggie.

The breathless commentary regarding Intel is laughable -- particularly as it warned back in August.

In line with revised/lowered guidance.

Bizarro World!

The FOMC minutes underscore a fundamentally weak domestic economy.

And the market's positive reaction to the minutes' release continues to underscore that the David Tepper market ("Bad News Is Good News") is still in place.

Recommended Reading

Financials Looking Fine

Nice turnaround in financials today -- a group that appears to be responsible for the turn in the overall market.

Just when everyone -- and that includes me (!) -- had given up on the sector!

Tab for Mortgage Mess

The foreclosure chaos could cost U.S. lenders $2 billion for every month that home seizures are delayed.

Today, FBR Capital's Paul Miller says that the tab for the foreclosure chaos could cost U.S. lenders $2 billion for every month home seizures are delayed.

Goldman Sachs, based on a continuation of QE and lower real interest rates, has raised its 12-month price target for gold to $1,650 an ounce from the prior forecast of $1,365.

Goldman's three- and six-month gold price forecasts now stand at $1,400 an ounce and $1,525 an ounce, respectively.

China Puts a Dent in World Equity Markets

China surprised the world's markets by raising reserve requirements for six commercial banks.

This put a dent in the world equity markets overnight.

long INTC

INTC "Better Than Expected," But The Next Day Always Tells The Tale With Them......

We had a bit of a roller-coaster ride today. Market players looked ready to take some profits this morning as earnings kicked off, but talk about QE II bailed out the bulls once again. We have heard so much about QE II lately that you can't help but wonder how many more times talk about it can cause us to spike up, but we obviously haven't hit the limit yet.

Big-cap technology stocks led the action today, with AAPL, AMZN and GOOG doing well. The cloud-computer and storage plays also bounced, which helped the Nasdaq 100 to substantially outperform the senior indices.

Breadth ended on a strong note, but volume was down a bit. Interestingly, renewed weakness in the dollar after the Fed served up QE II again didn't help gold, which was a laggard today. Oil and other commodities did reverse, but the key leadership was in financials, with names like GS making strong moves.

INTC is out tonight, and it was 'better than expected.' Everyone is well aware of the propensity of the stock to sell off on good news, so there may be some hesitancy to chase it.

Intel often sets the tone for earnings season, so it's a very important report, but it won't settle down until sometime tomorrow, so don't jump to any quick conclusions.


Dividend Capture

Here are my philosophical underpinnings of dividend-capture trading.

The challenge is the perceived "normal" behavior of stocks: Theoretically, they are supposed to drop by the dividend amount on the ex-dividend date. It turns out this is far from normal, and most stocks will trade back to their pre-dividend price in a short period of time.

This observation is why dividend capture can work, if executed effectively. If dividend payers were efficiently priced, they would drop by the amount of the dividend on the ex-date, then spend three months (or at least some very long time period) working their way back to the pre-dividend price. Reality is far different, fortunately. I researched the behavior of dividend-paying stocks and discovered that the majority went back to their pre-dividend price within two weeks of the ex-date. Even in the 2000-2002 bear market, 60% to 70% of stocks bounced back within a couple weeks.

Keep in mind that the two-week period was chosen arbitrarily. Extending it to one month enables even more stocks to bounce back. The challenge in dividend-capture trading is to avoid the one-third of stocks that do not bounce back. Of course, over time you will always be caught with a few of these. The successful dividend-capture trader will minimize both the bad picks and the magnitude of losses when a pick does go bad. Obviously, this is no different from one's efforts in regular capital gain trading.

I usually give myself a couple of weeks to a month to get back to even. I typically don't buy very close to the ex-date. Dividend stocks often spike right into the dividend, as Bristol-Myers did on September 28, for example.

Hazards on the Course

Part of understanding the strategy is to study dividends to avoid. One to possibly avoid last week was NLY. Despite (or because of?) a gigantic dividend of nearly 4%, I passed on this one. There is still substantial risk in the mortgage space, and the high yield indicates that the market does not believe in the sustainability of the dividend. The trade very well might work, but I simply don't want to take the risk. Generally, I target stocks in which the dividend payment is between 0.75% and 1.5%. More on the rationale for this range in the future.

Monday, October 11, 2010


It Ain't Broke...

Mr. Market bended a bit today -- but didn't break.

Mortgage-Gate Could Swing Wide

If extended beyond the next month or two, mortgage-gate could be disruptive to the broader economy and stock market.

My conclusion?

Mortgage-gate reminds me of when the GS controversy began. Whether justified or not, it blew up out of proportion and permanently impaired Goldman's reputation and profitability.

Mortgage-gate, if extended beyond the next month or two (which, given the 40-state attorneys general agenda, seems possible) has implications well beyond the housing cycle; it holds the potential of being disruptive to the broader economy and even to the U.S. stock market.

What a toxic combination of fundamentals, sentiment and policy the banking industry faces.

* populist rhetoric and regulation;

* limited loan demand;

* mortgage-gate, which squelches housing activity through the end of the year and generally reduces the availability of mortgage credit;

* an hospitable and cheap public debt market that allows the well-financed companies to bypass commercial loans;

* a flat yield curve;

* quantitative easing;

* industry capital constraints; and

* a low level of absolute interest rates.

The timing of the banking industry's profit recovery has been delayed, and its earning power (and dividend paying ability) has been reduced.

Risk to the Downside Grows

Given the sharp rise in equities, the downside risk may soon lie at the highest level in a year.

Investors and traders are cheering for more bad economic news so, as the logic goes, the Fed must monetize more assets, even though the strategy has been innocuous. This is like Detroit Lions fans cheering for losses so they can get another high draft pick, even though they have been getting high draft picks for years, and it has had no beneficial effect for the team.

-- Bill King, The King Report

As we begin the final quarter of 2010, let's start by reviewing how both the bulls and the bears have erred in their strategic visions for this year:

* The bulls have underestimated the ability of the U.S. economy to sustain growth without an extreme Fed makeover and did not foresee the continued contraction in P/E multiples. Current low levels of manufacturing capacity utilization rates and an elevated unemployment rate were not in the Bulls' playbook a year, six months or even three months ago.

* The bears have underestimated the extent to which investors would go along with the Fed's ride and were willing to believe that the government can stimulate growth allowing the cycle to become self sustaining.

I have questioned the ultimate efficacy of further quantitative-easing measures. While the first round of quantitative easing produced "shock and awe" two years ago, QE 2 will likely produce "shucks and aww."

Most market participants are fixated with the potential for QE 2 to boost asset prices and generate organic economic growth, however, without a subsequent rise in aggregate demand and productivity, the program will ultimately be deemed a failure as prices readjust over time to reflect the real underlying fundamentals. Mr. Bernanke is making the same blunder that we made with the past bubbles busts -- if we can create paper profits and convince consumers that they should spend those paper profits, then we'll be on our way to economic prosperity. The problems arise when asset prices readjust lower to meet their true fundamentals. It's Ponzi finance and nothing more.

As I have previously explained, the goal of QE is to increase aggregate demand by creating a fictitious wealth effect and by increasing bank loans. The market appears to think that QE 1 was some sort of success, but as I have argued, QE 1 was only successful because it altered bank balance sheets and alleviated the credit strains. After all, this was Ben Bernanke's goal at the time -- to alleviate the credit pressures. What QE 1 did not do (and what we need now) is increase lending supported by a boost in real aggregate demand. QE does not add net new financial assets to the private sector and is not inherently inflationary, though Mr. Bernanke appears to be convinced otherwise. Unfortunately, QE 1 failed to succeed in contributing substantially to the economic recovery as Northern Trust recently showed.

-- "Northern Trust: QE 1 Failed, Why Will QE 2 Work?" from Pragmatic Capitalism

QE 2 (quantitative wheezing?) will not meaningfully move the needle of domestic economic growth and will only have a limited impact on:

* the jobs market, which is plagued by structural unemployment;

* housing, which that is haunted by a large shadow inventory of unsold homes and in which mortgage credit will likely be further reduced by the moratorium on foreclosures; and

* confidence, which is still mired in uncertainty regarding regulatory and tax policy (and that is undermined by high unemployment).

Meanwhile, our fiscal imbalances multiply, and our currency craters (and a worldwide rush to currency devaluation offsets some of the normal trade deficit benefit). There are a number of other possible adverse consequences from the inefficient allocation of resources that is the outgrowth of the next tranche of monetary stimulation.

The Federal Reserve seems determined to make mistakes. First, it started rumors that it would resume Treasury bond purchases, with the amount as high as $1 trillion. It seems all but certain this will happen once the midterm election passes. Then, the press reported rumors about plans to raise the inflation target to 4% or higher from 2%. This is a major change from the Fed's quick rejection of a higher target when the International Monetary Fund suggested it a few months ago.

Anyone can make a mistake, but wise people don't repeat the same one. Increasing inflation to reduce unemployment initiated the Great Inflation of the 1960s and 1970s. Milton Friedman pointed out in 1968 why any gain in employment would be temporary: It would last only so long as people underestimated the rate of inflation. Friedman's analysis is now a standard teaching of economics. Surely, Fed economists understand this.

Adding another trillion dollars to the bank reserves by buying bonds will not relax a constraint that is holding back spending. There is no shortage of liquidity in the economy -- banks already hold more than $1 trillion of reserves in excess of their legal requirements, and business balance sheets show an unprecedented amount of cash and near-cash assets. True, increasing bank reserves means mortgage rates will decline, at least temporarily; they already have in anticipation of the bond purchases. But neither the Fed nor the public should expect much stimulus as a result.

The most important restriction on investment today is not tight monetary policy but uncertainty about administration policy. Businesses cannot know what their taxes, health care, energy and regulatory costs will be, so they cannot know what return to expect on any new investment. They wait, hoping for a better day and an end to anti-business pronouncements from the White House. President Obama could do more for the economy by declaring a three-year moratorium on new taxes and new regulation.

-- Allan Meltzer, The Fed Compounds Its Mistakes, Wall Street Journal (op-ed)

The U.S. economic recovery remains fragile and is still characterized by excess industrial capacity and a surplus of labor. If we were in a sound and non-jeopardized economy, the Fed would not be having a QE 2 discussion nor would the administration be seeking extreme fiscal solutions. In my view we are in a contained recession, and while containment efforts continue, the efficacy of these efforts now appears to be waning.

While the immediate response to the likelihood of QE 2 has been to buoy asset prices, the domestic economy is stalling at around 1.5% to 2.0% GDP growth, and little improvement in the jobs market has been made. This hesitancy makes the slope of the recovery vulnerable to the unforeseen -- trade wars, policy errors and/or numerous tail risks from the last credit cycle (e.g., mortgage-gate).

To be balanced, I recognize that there are a number of factors that will insulate stocks from a meaningful drop. Among the positive considerations is that most discounted dividend models indicate value in equities (as interest rates are anchored at zero). Large corporations are flush with cash, are operating at record profit margins and face an inexpensive and hospitable bond market, which is supporting good dividend growth and robust buyback activity. Allocations into equities by institutional and retail investors remain muted. And, with mortgage rates plummeting, the consumer's debt service and balance sheet has improved more rapidly than anticipated.

Nevertheless, as I have written previously, I continue to see the risks to 2011 corporate profit and U.S. and worldwide economic growth rates to the downside. It remains likely that secular and nontraditional headwinds will produce an extended period of inconsistent and uneven growth in the years ahead -- difficult for both corporate managers and investment managers to navigate. Arguably, given the sharp rise in equities, the downside risk might be growing ever greater and may soon lie at the highest level than at any time over the last 12 months, especially if I am correct that QE 2 will be a dud.

More bad news for Microsoft.

More bad news for MSFT - C reduced the company's 2011 estimate by $0.05 a share as signs of a slowing consumer personal computer market continue to plague the company.