Tuesday, November 30, 2010


BAC says it has no evidence Wikileaks has a hard drive with incriminating emails about the bank.

The desks have been abuzz with the notion that Wikileaks will be "exposing" BAC early in 2011.

It seems Wikileaks withstood some powerful cyberattacks.

In his commentary, Marc Chandler believes that the ECB should expand its balance sheet and increase its bond purchase program -- much like our Federal Reserve. His thinking is that this could give risk assets over there a lift by reducing its debt concerns.

Good News From Chicago

With the Chicago, Richmond, Philly and Kansas City PMIs all uniformly better, color me ready for a rally into year-end.

ETFs for Water Concerns

If you believe that water scarcity will be an issue in 2011, consider these three ETFs.

There are several ways to "play" water scarcity. some exchange traded funds to consider include PHO, PIO and CGW.

China has about 23% of the world's population but only approximately 7% of the world's fresh water supply. Moreover, China's water resources are not distributed proportionately; the 550 million residents in the more industrialized northern area of the country are supported by only one-fifth of the fresh water and the 700 million in the southern region of China have the other 80% of the country's fresh water supply. The shared resources of water supply have been a focal point of conflict between China and India since the 1962 Indo-China War.

A Rollercoaster Market Day

It was another rollercoaster ride today with the dip buyers jumping on the open, followed by a boost from President Obama on hints of a tax deal and then weakness at the finish on a downgrade of Portuguese debt by Standard & Poor's. The indices managed to push into positive territory for a little while, but breadth was poor all day.

We had some very narrow leadership from the likes of NFLX, DECK, RIMM and CMG. Gold and silver were the leaders. That isn't a particularly great combination, but it did serve to cover up some of the damage that is being done to the average stock.

Weakness in technology stocks is the biggest negative I see right now.

What is holding us up is the generally good economic data and some good fundamentals in individual stocks, but the bulls are doing battle with the bad news out of Europe and it is taking a toll. The problem is, if Europe really is going down the tubes, our upbeat economic reports aren't going to matter for long.

The good news is that the S&P 500 is still in the trading range of 1175 to 1200. However, each time we test 1175, the more likely it is to fail. It held again today, but if we test again in the next day or two, I'm concerned it will trigger some stops and cause a fast spike to the downside.

long NFLX

Monday, November 29, 2010


Bulls Have the Day

One for the bulls today.

Dallas Has a Winner

The Dallas Fed PMI, that is, not the Cowboys.

This morning the Dallas Fed PMI came in at 16.2 compared to only 2.6 in October and expectations of less than 5.

Thus, the Dallas PMI joins the Richmond and Philly Fed PMI in reporting an improving trajectory of growth.

Indeed the Dallas Fed PMI was the second strongest reading in almost four years, with all components strengthening (especially the new orders and employment components, which were the strongest in six months).

Banks Rounding the Corner?

If the strength persists, I view this as potentially meaningful (and constructive) in the days ahead.

Mondays After Thanksgiving

Here are some tidbits from the Stock Trader's Almanac.

* The Monday after Thanksgiving total DJIA point loss is 871 points since 1988.

* The Monday after Thanksgiving was down five straight years from 2004 to 2008.

* In the 58 years since 1952, the DJIA was down 33, up 24, unchanged only one time.

Here are the basic bullet points on why I like Yahoo!.

* The public company has $1.2 billion of earnings before interest, taxes, depreciation and amortization. Applying a normal multiple 6x to 9x creates $8.5 billion of value.

* Yahoo! boasts net cash of $3.4 billion.

* The company's public holdings total $9.5 billion. (AliBaba.com and Yahoo! Japan)

* Its private holdings total $6.0 billion.

Yahoo! owns 40% of private AliBaba through two assets:
1. Call option on Chinese search via Microsoft (MSFT) joint venture. Based on the value of Baidu (BIDU), Yahoo! has a 10% share of $5 billion, so the value to Yahoo! totals $1 billion. 40% of 50%

2. 40% of AliPay. This is the elephant in the room. Current AliPay payments are 60% of PayPal, but the company is growing much faster than PayPal. PayPal is worth $18 billion, while AliPay is worth $12 billion. Yahoo!'s 40% is worth $5 billion now but will easily be $10 billion in three years.

In summary, the current low-valuation case is $27.5 billion, or approximately $21 a share. The current high-valuation case is closer to $23 a share. By year-end 2011, the low-valuation case rises to about $23 a share, and the high valuation case will be $25 a share.

Last week's economic news over here and over there presented a study in contrasts.

On one hand, the trajectory of domestic economic growth has improved somewhat and is clearly on the ascent -- albeit from relatively low levels. While capital spending remains subdued and housing (plagued by mortgage-gate and a large phantom inventory of unsold homes) still resides in the basement, most indicators are improving -- including the regional district growth indices (Chicago's National Activity Index, Richmond Fed Manufacturing Survey and the Kansas City Fed Survey) -- the capacity utilization rate is well off its bottom, the ISM and ECRI's Weekly Indices are moving higher, personal income/spending growth is expanding, jobless claims/labor market trends are improving, inflation is quiescent, and other key barometers of expansion such as an upwardly revised third-quarter 2010 GDP of up 2.5% are better than consensus forecasts.

On the other hand, the European economic theatre has deteriorated, and the lower demand and economic growth from the imposed austerity measures will present profit challenges to the many U.S. multinationals that serve and have an important presence in that geography.

Other wild cards? They seem recognizable, contained and controllable:

* The Korean situation is a clear wild card and presents headline risk, but, in all likelihood, the crisis will be resolved before long and will not impact the markets.

* China's growth rate is a short-term wild card for the markets, but, in the near term, I don't expect a surprise much beyond a slight deceleration in the country's growth rate.

* Politics, too, looks relatively predictable. Gridlock is the likely outcome, as neither party has expressed a willingness to move to the center and compromise.

* Nor does a major surprise appear likely from the Fed. Short-term interest rates are anchored at zero, and the Fed will move uninterruptedly on its stated QE2 journey.

Range - Bound

The market flopped around all morning and the S&P 500 managed to trade below its 50-day simple moving average for the first time since the beginning of September, but we held where we needed to and managed a decent spike back up in the last two hours of trading. It looked like the bears decided to cover some shorts when they were unable to keep the market below the breakdown level and some dip buyers added to the upside as well.

The recovery from the lows was a good sign, but there was still plenty of red, breadth was poor and we are still smack dab in the middle of a trading range. Volume was quite light, but the strength in oil, banks and some of the commodity names (when the dollar was strong) was a positive.

When we are in a trading-range market like this one, the best move is to focus on trading it (and not worry too much about being bullish or bearish). The range will eventually resolve itself, and that's when we'll be able to focus more on catching a trend, but at the moment, we are chopping around and changing direction quite quickly.

It is very easy to come up with scenarios and theories for which way we will eventually break, but there is no real edge to be found. Europe is keeping downside pressure on things while some better economic numbers are helping the bulls to hold us up. What matters most one day is forgotten the next, and that has resulted in some very choppy action.

We have some economic news tomorrow to deal with, but be ready for the market to continue its trading range action.

Friday, November 26, 2010


Amnesia Abounds

Down big on Tuesday, up big on Wednesday, down big on Friday. Did I mention that Mr. Market has no memory from day to day?

The Two Main Issues

Can the improving U.S. economy trump Europe's problems?

To what degree has the improved U.S. economy been discounted in share prices?

From my perch, the critical issues for the markets over the balance of the year are whether the improving domestic economy can trump the problems in Europe and to what degree a better-than-expected U.S. economy has been discounted in share prices.

Is Switzerland Safe?

As of year-end 2008, the banking industry in Switzerland had an average leverage ratio of almost 30-to-1.

The industry's short-term liabilities were equal to 260% of the Swiss GDP. My concern is with the second- and third-tier banks.

I have thought recently that investors have been too dismissive of the European debt crisis, as fiscal imbalances are only resolved by austerity measures that slow aggregate growth. Today the issue is back on the front burner as Portugal's spreads have widened ever further.

Which gets me to Switzerland -- a country widely believed to be a safe haven financially and economically.

I have done little analysis of Switzerland's banking industry or on the country's economy. But we have learned from history that there is an inherent risk to any country when the financial services business is large relative to its GDP.

As of year-end 2008, the banking industry in Switzerland had an average leverage ratio (assets/net worth) of almost 30-to-1, while the industry's short-term liabilities were equal to 260% of the Swiss GDP, or 1,275% of the Swiss national debt.

There are about 330 authorized banks and securities dealers in Switzerland ranging from the "Two Big Banks" down to small banks serving the needs of a single community or a few special clients.

UBS and CS are the largest and second largest Swiss banks, respectively¸ accounting for more than 50% of all deposits in Switzerland. Each has extensive branch networks throughout the country and most international centers. They are sound.

But my concern would be with the second- and third-tier banks.

Wait For More Volume Next Week

The gap-down start to the day put a damper on the holiday mood, but the dip buyers did do a nice job of bouncing us for a few hours. That said, they were unable to hold on to gains and ended up taking a roundtrip intraday. Breadth wasn't terrible, but no major sector managed a positive day. It appears that market players simply weren't willing to hold onto positions over the weekend when there is a chance of more poor news out of Europe.

Overall, trying to draw conclusions from the action today is like trying to find meaning in the Black Friday shopping activity. The conditions that exist are unique to the Friday after Thanksgiving and not very predictive of what will happen next week.

Technically, the S&P 500 has carved out a very obvious trading range between 1173 and 1200. Some better-than-expected economic data has helped to support the market, while the ongoing sovereign debt issue in Europe is a source of pressure. As a result, we have been ping ponging up and down more than usual.

Volume will pick up next week and we'll have a much better sense of sentiment and which way this market may break. The bulls need to push us back up over 1200 to trigger a resumption of momentum, but the news flow lately is providing some big obstacles. I suspect that Europe will continue to struggle with uncertainty, and that will keep the dollar strong and prove to be a major headwind.

The biggest positive we have is that there are some stocks out there with very good earnings numbers that seem unperturbed by the macroeconomic conditions. The dip buyers are staying focused on them, and that is keeping the downside contained, so far.

Wednesday, November 24, 2010

Market Thoughts From A Really Bad Day

Loneliness, especially during the holidays, is a devastating thing.

Domestic Data Triumphs

Data over here are trumping data over there today.

Stated simply.

Better on the University of Michigan confidence number at 71.6.

Personal income and spending coupled with a good jobless claims print augured well for today's trading (even in the face of weak durable goods orders).

Naturally, as the day advances, volume will dry up as we move toward the holiday.

Over There

Business expectations in Germany are now at the highest reading in two decades.

Look for fourth-quarter German GDP forecasts to be lifted in the days ahead.

Today's release of Germany's Ifo survey indicates a reacceleration in fourth-quarter growth and is confirmation of Tuesday's better "flash" manufacturing and services PMI survey.

The Ifo composite rose to 109.3 (consensus was only 107.5), up from 107.7 last month -- that's the highest reading since German unification.

The current assessment and business outlook also showed better-than-consensus growth at 112.3 (110.4 in October) and 106.3 (105.2 in October), respectively.

The Fed has weighed having occasional press briefings subsequent to Fed meetings.

In early November, I heard rumors that Fed Chairman Ben Bernanke might introduce Trichet-style press meetings after the Fed's meetings in order to "nuance" the policymaking board's decisions.

Indeed, according to yesterday's FOMC minutes, the Fed has weighed having occasional press briefings subsequent to Fed meetings.

A Very, Very Bad Day

But not for the stock market. The action today was a great example of holiday trading. All the worries and concerns that hit us yesterday were forgotten as market players stayed in a positive mood all day. We even managed to go out near the highs on a late burst of buying. Breadth was superb at better than 4 to 1 positive but, as you'd expect, volume dipped sharply.

We have had quite a bit of volatility lately, and I'm a bit concerned we could see more negatives out of Europe while we are eating turkey and that good stuffing with the walnuts.

The action today did help to negate the ugly action we saw yesterday, but the S&P 500 still hasn't moved back above key resistance at 1200. Things look much better than they did yesterday, but thin trading around the holidays can produce some surprises.

Tuesday, November 23, 2010


Beatles for Sale

EMI says that Apple has sold 450,000 Beatles albums since the company made the albums available online.

It's SAC's Turn

Not surprisingly, SAC has been requested to provide information to authorities.

Next Up, Janus

Next up on the insider trading probe: Janus was asked to provide information to the authorities.

Janus and Wellington join some hedge funds in the inquiry, but unlike some of the hedge funds, I don't expect Janus and Wellington to "lock down" trading.

So this won't impact the markets.

The five-year auction was on the weak side, but considering the sharp drop in yield over the last 10 days, it was not surprising.

The yield was printed at 1.411%, with a bid to cover at only 2.65 (had averaged about 2.85 in previous auctions). Indirect bidders were also weaker at 32% vs. 44% in the last five or six auctions.

The FBI has requested information from Wellington Management.

For some reason, the bullish cabal believes that the Korean geopolitical situation and the problems facing the multiple fiscally weak European countries are sideshows.

They are not sideshows; they are our reality. And they are valuation-deflating for risk assets.

Fiscal imbalances are resolved by austerity measures that slow growth, and military skirmishes underscore a degree of world instability.

As well, I remain concerned about the failing financials and the narrowness of the recent advance. Specifically, the strength in a narrow list of names -- many of which are Jim Cramer's favorites, such as CRM, FFIV, NFLX and AAPL -- is becoming reminiscent, though not as extreme, as in 1990-1991.

Finally, I can't fall in love with the macro news (especially with a still-tepid but upwardly revised 2.5% third-quarter 2010 GDP), which was artificially goosed by unprecedented fiscal and monetary catalysts -- the benefits of which will abate in 2011.

I remain less certain than most that the domestic economic recovery is headed on a smooth path toward profitable and self-sustaining growth -- conditions that seem to be needed in order to ratify the market's rally since late August.

The necessary ingredient to a continued market climb and to the restoration of self-sustaining growth lies in the hands of our fiscal authorities, not our monetary authorities.

Neither Republicans nor Democrats appear to be moving to the center, and gridlock is the likely outcome. Accordingly, we are not going to see the sort of intelligent, transformative and focused fiscal moves directed at job growth that are needed.

I'm expecting a series of populist initiatives by the current administration beginning by a frontal assault on mutual fund 12b-1 fees. The asset managers -- BEN, TROW and WDR -- are exposed.

I'm thinking the internet becomes the tactical nuke of the digital age. Cybercrime likely explodes exponentially as the Web is invaded by hackers. A specific target next year likely will be the NYSE.

Korea and Europe shouldn't be dismissed as inconsequential.

long NFLX

Is The PBOC Easing?

On Friday the People's Bank of China raised its reserve requirement ratio for the fifth time this year and last month the PBOC raised interest rates for the first time in three years. China is trying to tap lightly on the brakes to keep rising inflation--mostly through food prices-- in check. Yesterday morning in his must read letter, Dr. Ed Yardeni argues that China is offsetting its monetary tighten with its own QE program. Those tricky Chinese...

"My analysis of the PBOC’s balance sheet shows that China’s central bank continues to more than offset these recent tightening moves with quantitative easing (QE). The Fed has gotten all the recent attention and criticism for its second round of QE. The PBOC has been the world’s champ of QE for years! If we define QE as Large Scale Asset Purchases (LSAP) by a central bank, the PBOC has been aggressively pursuing this policy by increasing its holdings of foreign exchange assets without offsetting them by selling domestic assets. Let’s review:

(1) From January 2001 through September of this year, the PBOC’s assets increased $3.2tn to a record $3.7tn, led by a $2.7tn increase in foreign exchange holdings to a record $2.9tn.

(2) During September, foreign exchange accounted for 78.5% of the total assets of the PBOC, up from 37.5% at the start of 2001.

(3) On the liability side of the PBOC’s balance sheet, “deposits of financial institutions,” a.k.a. bank reserves, rose from just $159.4bn during January 2001 to a record $1.7tn during September (Figure 33). These are almost all required reserves, and have been amply provided by the PBOC to fund the huge expansion in China’s M2 and bank loans."

Korea And Ireland (And Spain.....)

We had our third weak open in a row, but this time the dip buyers were not able to turn us back up like they did so well on Friday and Monday. We had three failed bounce attempts intraday and ended up closing in the lower end of the trading range. The bulls just couldn't regain their traction, and that's not too surprising given how much buying power they have expended on the recent bounces.

Breadth was 4 to 1 negative. Today's volume wasn't heavy, though it did tick up over yesterday's, and that means that it was a technical "distribution" day. Gold was a safe haven, but it was about the only sector that managed to stay positive. Retailers started off strong and some stocks on the group were acting well, but it wasn't nearly enough to turn the tide of selling. Banks were the biggest problem spot.

What really added to the pain today were those red-hot pockets of momentum lately we've been seeing lately. These momentum chasers found themselves trapped today, and the dip buyers never bailed them out. A few of the key names such as CRM, CSTR, NFLX and RVBD did come back fairly well, but others such as AAPL and GOOG couldn't put together much of a recovery.

Technically, the market saw a failed attempt at a bounce, and the S&P 500 is back to support around the 50-day simple moving average in the 1175 to 1180 range. We are a little oversold and we have the holiday spirit around Thanksgiving to help the bulls if they can perk up again.

The big picture isn't particularly attractive now with the failure at 1200 and the news flow has certainly become rather grim, but I expect to see a better effort to bounce back tomorrow and/or during the half day session on Friday.

long NFLX

Monday, November 22, 2010


We're in an uncommon market that's dominated by a handful of stocks.

Time to short?

Breadth and financials stunk up the joint.

The FBI Lowers the Boom

The FBI's investigation of insider trading is far-reaching.


The FBI raids are starting to feel like the movie The Godfather when Michael Corleone kills all his enemies in one fell swoop!

Hedge fund Loch Capital has now been raided.

The insider allegations are likely to be far-reaching and market-impactful.


According to Bloomberg, the FBI has raided two hedge funds whose general partners were formerly affiliated with SAC.

Continued weak action of the financials.

The market advance is again narrowing, with the high-octane, high-beta and high-growth names leading the way.

It's almost too predictable and probably not too healthy.

A market with no memory from night to morning!

Last night S&P futures advanced by over 10 points; at the opening they are down by 6 points.

A 16-point drop on no news.

Get used to it!

Update Your iPhone

Apple will announce a free iPhone software update this morning.

The view that stocks will go up because of seasonal strength late in the year is not rigorous.

If it was that easy, kids would be doing it.

Stated simply.

Inside Heist

The weekend was filled with chatter regarding a vast insider-trading probe.

This is may very well be a big deal.

Insider-trading charges expand. The SEC alleges, in a broad-ranging sting, the existence of extensive exchange of information that goes well beyond Galleon's Silicon Valley executive connections. Several well-known long-only mutual funds are implicated in the sting, which reveals that they have consistently received privileged information from some of the largest public companies over the past decade.

-- Doug Kass, "20 Surprises for 2010" (surprise No. 13)

Federal authorities, capping a three-year investigation, are preparing insider-trading charges that could ensnare consultants, investment bankers, hedge-fund and mutual-fund traders, and analysts across the nation, according to people familiar with the matter. The criminal and civil probes, which authorities say could eclipse the impact on the financial industry of any previous such investigation, are examining whether multiple insider-trading rings reaped illegal profits totaling tens of millions of dollars, the people say. Some charges could be brought before year-end, they say.

-- Saturday's Wall Street Journal report

I believe that the soon-to-be-announced insider-trading indictments will be far-reaching and could even have the potential to be market-impactful, as the allegations will not only include some of the most prestigious hedge funds but will also allegations against some of the largest and most conservative mutual-fund companies, investment bankers and law firms.

In other words, this is may very well be a big deal.

Up till now, the SEC has been asleep on many counts. Here are a few obvious examples:

* The SEC dismissed multiple complaints and internal regularities in the Madoff case.

* Takeovers are routinely preceded by strength in the shares of target companies.

* High-frequency-trading strategies buy (and see) order flow before they get executed.

* Monthly, quarterly and yearly share price markups are common place and are generally ignored.

* There have been limited prosecutable actions by many of those companies/executives that sold stock with knowledge of deteriorating finances. (The most conspicuous example of this sort of abuse, at Countrywide Financial, was punished with a fine that was dwarfed by what the chairman took out of the company).

* Arguably, Sarbanes-Oxley was ignored by many financial institutions that obscured their true health through structured investment vehicles and other accounting devices -- yet there have been few indictments.

Stated simply, I say lock all the assholes up, as the playing field has been uneven for some time, from my perch.

Tech Saves The Day

Today's market action should be filed under the labels "peculiar" or "odd." We certainly had a mix of action, with pockets of red-hot momentum in big-cap technology stocks contrasted by early concerns about the Ireland bailout news of FBI raids on a couple of hedge funds (which weighed on financials). Breadth went from about 2 to 1 negative this morning to flat at the close. The Nasdaq ended with a solid gain while the senior indices took minor losses.

What was most fascinating about the action today was the very strong trading was in key names such as NFLX, FFIV, AAPL, CRM, CSTR, and so on. The buyers chased these stocks up aggressively and were unperturbed about Ireland, insider trading and any other negatives you could throw at them.

Strong pockets of momentum are exactly what you expect to see during holiday trading. Some of these names were a bit too hot and look extended, so the action may broaden out if the upbeat mood continues.

The dip buyers did a nice job today as they battled back from an opening dip and a break below recent lows at mid-day. The action this afternoon felt similar to what we had late on Friday and clearly indicates that there is strong speculative interest and an appetite for stocks, especially the liquid, high-beta tech names.

We had a couple good earnings reports in the technology sector after the close that are helping keep sentiment perky. The bulls are certainly acting like they want to celebrate the short week of trading. Though there are plenty of negatives that we could worry about, it usually is not a good idea to try to short the holiday spirit when it begins to kick in.

Friday, November 19, 2010


Why the Drop in Apple?

Perhaps it's due to news that T.J. Maxx and Marshalls are offering the 16GB iPad for only $399.99 as a loss leader.

From my perch, yesterday's market advance was more of a reaction to the strength in the Philadelphia Fed Manufacturing Index's sharp rise than any other factors, including the possible resolution of the Irish debt situation and/or the excitement surrounding GM's large IPO.

"Now you won't need reminding that it is the change in growth in inventories that counts towards GDP growth. So even if inventories rise another $110 billion in the fourth quarter, as they did in the third quarter, the contribution to GDP growth is zero. If inventories rise a still-strong $60 billion in the fourth quarter, for example, inventories will deduct 1.5% from annualized GDP growth. With final sales rising a sickly 0.75% annualized (!!) over the last two quarters, you don't have to be a genius at math to realize a recession is entirely possible, even without sharp declines in housing or consumer durables."

-- SocGen Economist Albert Edwards

I cannot overstate the magnitude of the role of inventory accumulation in 2010 as it relates to domestic GDP growth. In the last three months, production has exceeded orders by the widest gap in nearly 20 years. Indeed, SocGen's Edwards believes that the inventory build will soon be complete and that U.S. GDP will suffer measurably.

The ratio of ratio of coincident index to lagging index has had an excellent track record of forecasting future economic activity.

Over there, austerity measures, massive debt restructurings and possible further contagion in Europe coupled with the just-announced more restrictive bank reserve policy in China and potential currency/trade issues with that country are near-term economic- and valuation-deflating factors.

While the markets appear to be discounting smoother and self-sustaining growth ahead, I continue to see an uneven domestic economic recovery

Again, while the market roared yesterday on the Philly Fed Index's great reading (arguably cherry-picking the positive data by ignoring the Empire State's equally poor reading earlier in the week) and reversed the course of Tuesday's schmeissing, the continued weakness in the important housing sector, relatively weak final sales, structural employment issues and several of the storm clouds I mentioned above create an uncertainty toward the trajectory of economic and corporate profit growth in 2011-2012.

Jim Cramer justifiably writes that we should ignore many of these macro variables and we, as investors, should emphasize micro achievements by numerous well-positioned companies in high-growth sectors. His view has much merit, as a portfolio of AAPL, FFIV, AMZN and CRM would attest to, but my position and his are not mutually exclusive, as I suspect something between the extremes of macro and micro might capture the market's essence and its future direction. On that score, the tension between the cyclical tailwinds of stimulation (and the appearance of some modestly better economic signs) continue to contrast with some emerging near-term concerns and, intermediate term, the secular headwinds (of numerous non traditional influences) that will likely keep the U.S. stock market range-bound in the months ahead.

Cisco Authorizes Buyback

CSCO authorizes an additional $10 billion in stock repurchases.

Don't Bet on a Harrah's IPO

Harrah's terminates its IPO, which was planned for today.

1200 Is Key

The S&P 500 finished the day with a little spike and closed just under key resistance at 1200. It was a peculiar mix of action with some very strong performers like CRM in the cloud computing group and a number of coals, miners and commodity plays heating up as well. On the other hand, key stocks like GOOG, AAPL and PCLN were in the red and banks lagged once again.

It is certainly a positive that we were able to take on some minor gains to yesterday's big oversold bounce. The setup for a move through 1200 looks quite good. I would not be at all surprised to see this bounce gain further momentum and give us yet another V-shaped recovery. One additional positive the bulls have going for them is that Thanksgiving week often is quite upbeat as the holiday spirit takes hold.

I don't want to be too sanguine after the breakdown we have suffered recently, but the bulls are doing a pretty good job of recovering. Europe could still present some problems as it wrestles with the sovereign debt issues, and China stocks have not been acting well recently as efforts to cool inflation play out. On the other hand, we have technology and mining stocks acting well, and that isn't bad leadership. There are some interesting setups, and if we have upbeat holiday trading, it could turn out well.

Thursday, November 18, 2010


Another Sharp Comeback

Over the past few months, we have been seeing big rebounds from market declines.

While I began to expect a rally yesterday, equities fared far better than I thought they would. Though I think it was too much, too fast, the pattern of sharp comebacks from market declines has been the character over the last few months.

From my perch, it's all too familiar and all too predictable.

Insider Buying in Altisource

I am seeing a small insider buying in ASPS this afternoon.

Tidbits From Lincoln National

Core business is growing moderately, and excess capital is now approaching $750 million.

Returns on invested capital should be about 9% in 2011, and the company remains sensitive to low interest rates.

LNC's annual analyst day was uneventful.

Did Google Go For Twitter?

Sources say that Google offered between $2.5 billion and $4 billion to buy Twitter earlier this year.

Bank of America Secondary?

BAC's shares continue to trade poorly. The rumor du jour is that there will be a secondary in the name announced shortly. I doubt it.

The proximate cause for the overnight strength was based on news over there.

Specifically, signals that the Irish debt crisis is close to being "resolved" and indications that the Chinese will take a more gradualist approach and would not likely be issuing price controls to stem inflation.

Securitized Lending

I remember like yesterday, it was the autumn of 2006. I remember seeing a chart of "shadow banks" going out of business, I remember doing a double take and then looking at the data long and hard.

To explain here's an excerpt from the book “A Colossal Failure of Common Sense - The Inside Story of the Collapse of Lehman Brothers.”

"The process began in the offices of large US mortgage brokers, particularly in California, Florida, and Nevada, where the prospect of a fast buck has never antagonized the natives. This was the start of a lending twilight zone, the advance of the Shadow Banks, places with no depositors, no customers filing in and handing over their paychecks to carefully run commercial banking organizations. The Shadow Banks would lend, finance and provide capital for house purchases, but they had to borrow the money in the first place, from proper banks, mainly because they didn’t have the money themselves. Presto ! We have a lender who’s not really the lender, a lender who had to borrow the money in order to make the loan. Huh?"

All over the United States of America companies like Own It Mortgage, New Century, NovaStar were dropping like flies.

What does this mean to you, financial reform in the Dodd Frank Bill, our economy and the Federal Reserve today?

The math is simple, since the fall of 2006 over 380 of these shadow banks have gone out of business. The big ones like New Century and BNC / Aurora Mortgage (owned by Lehman Brothers) were lending close to $5 billion a month of Subprime and Alt-A mortgages. Now $5 billion x 380 now defunct shadow banks would be $1.9 trillion a month of lending power which does not exist today. But not all Shadow Banks were lending at this insane pace. The average was more like $600 million x 380 now defunct Shadow Banks equals $228 billion a month or $2.7 trillion of annual US lending power which does not exist today. There were over 500,000 mortgage brokers in California alone, now that's a distribution system!

You must thoroughly understand this 21 century lending power. This isn't some government sponsored Highway Works Project or some Stimulus money the Obama Administration and Congress are throwing at the economy to try and get things cooking again. This money doesn't go through the hands of a million bureaucrats and eventually end up in the US economy. This lending power was like taking a syringe filled with liquid cocaine and placing it right into the jugular vain of the US economy. I stress the word was.

Most economists didn't understand the multiplier effect of the securitization process described above in 2006, they called it "Goldilocks" out of ignorance and they still don't understand it today. The multiplier effect of this amount of capital oozing through our economy is and was nothing short of jaw dropping. Every time someone buys a home in America hundreds of jobs are created. Carpets, appliances, electronics, cement, and wood. It goes on and on, money is spent and the money gets spent over and over again in the economy.

Which brings me to Quantatative Easing, the now infamous QE1 and QE2. Our Federal Reserve is taking almost $2 trillion and buying US Treasury securities to suppress interest rates, create cheap money in the hope US consumers get out and spend. The problem is this is like giving an ill patient a colossal blood transfusion with veins running through the body which are completely clogged. They're flooding the engine with gas with no spark plugs.

I'm disgusted with the fact that very little has been done to fix our critical securitization process. I say critical because it needs to be fixed as soon as possible. In commercial real estate there was over $260 billion of securitized lending in 2007 vs. less than $10 billion this year. Imagine the jobs and lives this is impacting.

The most appalling focus point I see is the Dodd Frank Financial Reform implementation process has securitization on the back burner, I mean the left field or Siberian type of back burner. It's the last priority. To understand Dodd Frank picture in your mind an 8 lane highway with some cars moving at 90 mph, some 50 mph. Securitization reform is more like 15 mph. Take residential mortgage backed securities, for example RMBS. Where's the system of registering mortgage brokers? Stock brokers and financial advisors have a rigorous registration and regulation infrastructure known as the Financial Industry Regulatory Authority FINRA but we still have nothing in mortgage origination. There's a buyers strike right now in securitization of mortgage backed securities. Investors around the world who once flocked to mortgage backed securities like drug addicts chasing their dealer are not buying because they don't trust the origination process at the street level. This must be fixed before another round of QE3 or we get another stimulus package out of Washington.

We're in a row boat and Congress has the oars going one way and the Fed the other, let's right this ship!

Can We Build On It?

Although the GM IPO was disappointing, with the close near its low, the indices managed to hold up fairly well. We closed off the highs but held on to the vast majority of the day's gains. Breadth was better than 4-to-1 positive, and all major sectors were in the green.

We had a lot of bounces, but many of them lacked convincing volume. I'm told that GM, C and F made up 18% of total U.S. equity volume today, so there is no question where the funds were flowing.

The issue, of course, is whether we can build on today's bounce. We breached 1200 on the S&P 500 by a few pennies for a few minutes, but that turned out to be the key overhead resistance level. In a market that isn't as liquidity driven as this one, I'd look for a more convincing breakout of the 1200 level, which triggers buy stops and then a quick reversal. However, in this market, I'm much less confident that bounces will fail like they normally would because of the endless supply of cheap money provided by the Fed. The only way to deal with that sort issue is to make sure you stay very disciplined with new buys.

General Motors is going to be very interesting in the next few days. Institutional Wall Street needs this one to perform well, and that is even more so now that buyers today of 400 million or more shares are now sitting on losses. If they aren't successful in keeping the stock up, it is going to be an issue, especially since it sucked up such a huge amount of liquidity.

Wednesday, November 17, 2010


GM Priced at $33

Buffett to Receive Medal of Freedom?

I'm hearing that the Oracle of Omaha will receive the Presidential Medal of Freedom.

NTAP Stinks Up the Joint

NTAP's poor numbers put a cloud over technology in the last 30 minutes.

Run, don't walk, to watch the construction of Ark Hotel in China -- in only two days.

Truly astonishing -- and probably truly dangerous!

Implied Price for GM IPO

The GM preferred, when issued, is trading at $53.50/$54.00, which implies a price for the GM common of $35.50/$36.00.

This implies a price for the GM common of $35.50-$36

Poor Economic Releases

Year-over-year core inflation rose by only 0.6% -- that's an all-time low.

And housing activity continues to scrape along the bottom, with a larger-than-expected decline in housing starts.

The economic releases this morning underscore why the Fed Reserve moved into another tranche of quantitative easing.

Year-over-year core inflation rose by only 0.6% -- that's an all-time low. The core CPI dropped modestly in October. In terms of components, only owners'-equivalent rent and transportation recorded gains, while most other components exhibited a broad-based dis-inflationary trend.

As well, housing activity continues to scrape along the bottom, with a larger-than-expected decline in housing starts (led by a sharp drop in multi-family units).

Banks Crawling Out From Under

Comerica's announcement yesterday afternoon will serve as a catalyst to better short-term performance for the banks.

CMA's announcement that it planned to double its dividend and buyback stock has gotten short shrift in the markets.

By contrast, I think it will signal and generate renewed buying interest in the stock market's most-hated sector -- banks.

Sentiment for the group, understandably, is poor, and while Comerica has an elevated capital base vis-a-vis most other banks, I believe the announcement late yesterday afternoon will serve as a catalyst to better short-term performance for the bank sector.

Tell Me Something I Don't Know

Over the next few weeks, a very large settlement will be made with the SEC by principals of a large Madoff feeder fund.

Target Is Very Upbeat

"Based on our merchandising and marketing plans, combined with the expected impact of REDcard rewards and our newly completed remodel program, we expect Target's fourth-quarter comparable-store performance will be the best of any quarter in the last three years."

-- Gregg Steinhafel, Chairman Target

TGT's management is usually quite conservative, however, this morning they are atypically upbeat about the current quarter.

The word "contagion" is back in the headlines this week.

And run, don't walk, to read Warren Buffett's letter to Uncle Sam in today's New York Times Op-Ed page. Its a gem!

It Was All About NTAP And General Motors Today

We started the day with an oversold market that looked like it might be ready to bounce a little, especially with the endless hype over the General Motors IPO. However, the bulls never were able to gain any real traction, and a boring day turned ugly in the final hour. An early earnings release by NTAP with some poor numbers was all that was needed to tip us into the red. We did manage to recover a little in the last 30 minutes of trading, but it definitely was no big victory for the bulls.

We are still technically oversold, although less so after the flat action today, but the General Motors deal is going to set the tone tomorrow. I'm a bit concerned that there is just too much optimism about the offering, and I wouldn't be at all surprised to see it hit its high of the day shortly after opening. The underwriters will give it plenty of support at the offering price, but an IPO of this size is going to have a lot of players who are happy to flip some shares for a quick gain. Of course, all the folks who are getting an allocation love it right now, but we'll see how willing they are to sell on a strong open.

It is troubling that a market as oversold as this one couldn't manage a better bounce. The dip-buyers sure left town in a hurry, and they aren't in a big rush to jump back in. Tomorrow we will see if endless news coverage of General Motors can shift the tide and maybe entice some buyers back in, but I wouldn't be overly bullish, even if we do have a positive day.

Keep in mind the big picture. The market is in a downtrend and struggling to produce an oversold bounce.

Tuesday, November 16, 2010


The GM Deal Just Got Bigger

The firm increases the size of its stock offering to $15.5 billion.

Comerica Boosts Dividend, May Announce Buybacks

This is very important regarding the banks.

I couldn't agree more with Jim Cramer's latest post that this is a correction, not a meltdown.

Another Long Look at the Banks

The steepening yield curve and continued improvement in asset quality has me re-examining the banks for long plays.

Carry That Weight?

Why is having the ability to buy all The Beatles songs for $149 on iTunes such a big deal for Apple?

Ireland Seeks Bailout

Stay tuned.

It appears that Ireland is in bailout talks with E.U. officials.

Anti-Fed Rhetoric Heats Up

Congressman Mike Pence proposes a bill for the Fed to focus solely on controlling inflation in setting monetary policy.

The Republican party's attack on the Fed is intensifying, with conservative Congressman Mike Pence proposing a bill that would force the Fed to focus solely on controlling inflation in setting monetary policy.

This movement is P/E multiple-deflating, and bullish investors should be mindful and forewarned.

No Market Is an Island

The word 'contagion' is back in the headlines.

"No man is an island, entire of itself; every man is a piece of the continent, a part of the main. If a clod be washed away by the sea, Europe is the less, as well as if promontory were, as well as if a manor of thy friend's or of thine own were. Any man's death diminishes me, because I am involved in mankind; and therefore never send to know for whom the bell tolls; it tolls for thee."

-- John Donne, "Meditation XVII" from Devotions Upon Emergent Occasions

The role of the QE2 program in changing expectations is greatly underappreciated and something I planned to write about this morning, but news elsewhere trumped that opener (which will wait for later this week).

While the anticipation associated with QE2 has already impacted (rising) input prices and (rising) U.S. stock prices, it has yet to produce a knock-off effect on domestic economic growth and has had only a limited impact on the economics over there.

And while the opposition to QE2 is apparently growing, most of the market making news was over there last night.

And the international news, despite the protestations from the bullish cabal (which has been enveloped by the attraction and the force and the rising animal spirits produced, in part, by quantitative easing), has turned cautious as the word "contagion" is back in the headlines.

Greece, Portugal and Ireland's debt spreads have widened as rumors of a swap in sovereign debt for assets rise.

The European finance minister meeting today will give us some clues as to what will happen next.

No market is an island.

long AAPL

Looks Like The Downtrend Is Here

The market did manage a tiny bounce in the final minutes of trading to take it off the lows the day, but the bears had their most dominate day of selling since the uptrend began on Sept. 1. Breadth was very poor at nearly five losers for each gainer and volume picked up quite a bit on both exchanges. Retailers appeared as though they might buck the trend, but they, too, faltered as the day progresses. All major sectors finished in the red.

The biggest negative we have is that the downside momentum gained traction today and we just don't have much underlying support. Obviously, the dip buyers have completely disappeared and it is still a bit too early for the value buyers to appear. The good news is that we are a bit technically oversold and many individual stocks are hitting some support levels.

I suspect the General Motors IPO, which is supposed to price Wednesday night and start trading Thursday, may help to improve sentiment, at least for a little while, and give us some relief bounces. Given how weak the bounce attempts were today, we'll have to be on the lookout for more failed bounce attempts down the road. But if your time frames are short enough there may be some tradable, oversold bounces.

Monday, November 15, 2010


GM Offering to Be Priced Higher

The GM IPO price is raised to a range of $32 to $33 a share.

I still like the deal.

Why the Bond Market Blast?

I'm hearing that the U.S.'s AAA rating could be challenged if the Bush tax rate reductions are made permanent.

The bond market is being hit by rumors that Moody's might be contemplating a statement that the U.S.'s AAA rating will be challenged if the Bush tax rate reductions are made permanent.

Recommended Reading

Run, don't walk, to read is the other side of the Bernanke/QE2 debate from Alan Blinder in The Wall Street Journal.

Bobbing for Apple's Announcement

Could it be that Apple is creating a giant data center that will house all its data in the cloud?

Here is a list of possibilities compiled by BayCrest Partners of what tomorrow's announcement might be:

* subscription-based music/TV service (been rumored since 2004);
* Ping social network integrated with Facebook (Ping and Twitter unveiled a cross-platform integration on Nov. 11);
* the long-awaited Beatles catalogue (the highest likelihood);
* expanded TV rental content (Currently only FOX and ABC allow $0.99 TV rentals);
* streaming iTunes from any computer or iOS4 via the cloud, which would be a major announcement, and thus very unlikely to be unveiled in this manner -- something of this nature would likely be introduced and showcased at a Mac-centric media event.

I personally think the announcement could be that Apple is creating a giant data center that will house all its data in the cloud.

Ben Bernanke Blooper Reel

Check out this interesting recap from Sourcewatch of Chairman Bernanke's misguided comments over the past five years.

As an example, here is an open letter by several leading investors and economists to Chairman Bernanke in opposition to QE2.

On this subject, here is an interesting recap from Sourcewatch of Chairman Bernanke's misguided comments over the past five years on derivatives, the financial crisis, housing and the economy:

On the Economy

* In February 2006, Ben Bernanke, as President Bush's Chairman of the Council of Economic Advisers, was responsible for drafting the Economic Report of the President, which claimed the following: "The economy has shifted from recovery to sustained expansion.... The U.S. economy continues to be well positioned for long-term growth." In this report, Bernanke projected the unemployment rate to be 5% from 2008 through 2011.

* On July 20, 2006, Fed Chairman Bernanke referred to the economy as "robust" and "strong."

* On February 15, 2007, Fed Chairman Bernanke said, "Overall economic prospects for households remain good. The labor market is expected to stay healthy. And real incomes should continue to rise. The business sector remains in excellent financial condition."

* On July 18, 2007, Fed Chairman Bernanke said, "Employment should continue to expand.... The global economy continues to be strong ... financial markets have remained supportive of economic growth."

* On February 27, 2008, Fed Chairman Bernanke said, "The nonfinancial business sector remains in good financial condition with strong profits, liquid balance sheets and corporate leverage near historic lows.... Projections for the unemployment rate in the fourth quarter of 2008 have a central tendency of 5.2% to 5.3%, up from the level of about 4.75% projected last July for the same period. By 2010, our most recent projections show output growth picking up to rates close to or a little above its longer-term trend, and the unemployment rate edging lower. The improvement reflects ... an anticipated moderation of the contraction in housing and the strains in financial and credit markets."

* On June 9, 2008, Fed Chairman Bernanke said, "The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so."

* On May 5, 2009, in front of the Joint Economic Committee, Fed Chairman Bernanke said, "Currently, we don't think [the unemployment rate] will get to 10%." In November the unemployment rate hit 10.2%.

On the Housing Market

* July 1, 2005: Bernanke, then President Bush's Chairman of the Council of Economic Advisers had the following exchange with CNBC:

CNBC interviewer: Ben, there's been a lot of talk about a housing bubble, particularly, you know, from all sorts of places. Can you give us your view as to whether or not there is a housing bubble out there?

Bernanke: Well, unquestionably, housing prices are up quite a bit; I think it's important to note that fundamentals are also very strong. We've got a growing economy, jobs, incomes. We've got very low mortgage rates. We've got demographics supporting housing growth. We've got restricted supply in some places. So, it's certainly understandable that prices would go up some. I don't know whether prices are exactly where they should be, but I think it's fair to say that much of what's happened is supported by the strength of the economy.

Interviewer: Tell me, what is the worst-case scenario? We have so many economists coming on our air saying, "Oh, this is a bubble, and it's going to burst. And this is going to be a real issue for the economy." Some say it could even cause a recession at some point. What is the worst-case scenario if in fact we were to see prices come down substantially across the country?

Bernanke: Well, I guess I don't buy your premise. It's a pretty unlikely possibility. We've never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don't think it's gonna drive the economy too far from its full employment path, though.

* On February 15, 2006, Fed Chairman Bernanke said, "The housing market has been very strong for the past few years.... It seems to be the case, there are some straws in the wind, that housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise but not at the pace that they had been rising. So we expect the housing market to cool but not to change very sharply."

* On February 15, 2007, Fed Chairman Bernanke said, "The weakness in housing market activity and the slower appreciation of house prices do not seem to have spilled over to any significant extent to other sectors of the economy."

* On March 28, 2007, Fed Chairman Bernanke said, "The impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained."

* On May 17, 2007, Fed Chairman Bernanke said, "We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system."

* On February 27, 2008, Fed Chairman Bernanke said, "By later this year, housing will stop being such a big drag directly on GDP.... I am satisfied with the general approach that we're currently taking."

On the Financial Crisis

* On February 15, 2007, Fed Chairman Bernanke said, "The Federal Reserve takes financial crisis management extremely seriously, and we have made a number of efforts to improve our monitoring of the financial markets to study and assess vulnerabilities, and to strengthen our own crisis management procedures and our business continuity plans."

* On February 28, 2008, Fed Chairman Bernanke said, "Among the largest banks, the capital ratios remain good, and I don't expect any serious problems ... among the large, internationally active banks that make up a very substantial part of our banking system."

* On July 16, 2008, Fed Chairman Bernanke said that Fannie Mae (FNM) and Freddie Mac (FRE) are "adequately capitalized" and "in no danger of failing." Since then, Fannie Mae and Freddie Mac have received a $200 billion bailout and have been taken over by the federal government.

On Derivatives

While Warren Buffett warned that derivatives were "financial weapons of mass destruction" that pose a "mega-catastrophic risk" to the economy in 2003, Bernanke supported the deregulation of these risky schemes.

* In November of 2005, Mr. Bernanke was questioned by then-Senate Banking Committee Chairman Paul Sarbanes:

Sarbanes: Warren Buffett has warned us that derivatives are time bombs, both for the parties that deal in them and the economic system. The Financial Times has said so far, there has been no explosion, but the risks of this fast-growing market remain real. How do you respond to these concerns?

Bernanke: I am more sanguine about derivatives than the position you have just suggested. I think, generally speaking, they are very valuable. They provide methods by which risks can be shared, sliced and diced, and given to those most willing to bear them. They add, I believe, to the flexibility of the financial system in many different ways. With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly. The Federal Reserve's responsibility is to make sure that the institutions it regulates have good systems and good procedures for ensuring that their derivatives portfolios are well managed and do not create excessive risk in their institutions.

* On February 27, 2008, Fed Chairman Bernanke said, "If you have two investment banks doing an over-the-counter derivatives transaction, presumably they both are well-informed and they can inform that transaction without necessarily any government intervention."

* On July 10, 2008, Fed Chairman Bernanke said, "Since September 2005, the Federal Reserve Bank of New York has been leading a major joint initiative by both the public and private sectors to improve arrangements for clearing and settling credit default swaps and other OTC derivatives.... I don't think the system is broken, but it does need some improvement in execution.

Buy General Motors

At a proposed IPO price of between $26 and $29, General Motors shares are very attractive.

The company has dramatically transformed its balance sheet.

General Motors is positioned well and an inexpensive way to participate in emerging markets.

The company has embarked on a meaningful cost-savings program and is poised for above-average cash flow and profit growth. The stock is an inexpensive way to participate in rapid emerging-market growth.

Based on 2011 estimated EPS of $5.40 per share, up from $3.00 in 2010, and 2011 estimated cash flow of $16.0 billion, up from $12.7 billion in 2010, my year-end 2011 target is $55 a share, or only 4.1x my preliminary 2012 estimate of $7.20 a share (well below OEM comps).


General Motors is the outgrowth of a 363 Sale under the U.S. Bankruptcy Code, under which the company acquired all the assets and assumption of certain of the liabilities of The General Motors Corporation.

GM is a global company with 70-plus assembly facilities and 85-plus manufacturing facilities, with over 21,000 independent dealers in over 120 countries around the world. Its product offerings are broad and include passenger cars, light trucks, SUVs, vans and crossover vehicles, representing slightly under 12% of worldwide vehicles sales.

The company has a 19% market share of the U.S. auto industry, with 72% of the company's sales generated outside the U.S.

The Case for General Motors

* Markedly improved financial position. The new GM's financial position no longer resembles the old GM, as total debt and other liabilities have been extinguished by $93 billion.

* An aggressive cost-savings strategy will maintain operating margins above historical averages. An aggressive cost-savings program portends a sustained high-level of operating margins. Earnings before interest, taxes, depreciation and amortization (EBITDA) margins should exceed 12.0% by 2012 vs. 9.8% in 2010. Gross margins are forecast at 14.5% vs. 12.5% for full year 2010.

* Emerging market exposure is meaningful. With 40% of the company's sales in high-growth, emerging, non-U.S. markets, General Motors is positioned well and an inexpensive way to participate in emerging markets.

* Excellent short-term profit picture. GM reported $3.5 billion of cash flow in third quarter 2010, cash flow year-to-date of $10.5 billion and 12-month trailing of $11.5 billion. Given management's guidance on the conference call, full-year 2010 revenue, EBITDA and free cash flow should total $131 billion, $12.7 billion and $5.3 billion, respectively.

* Industry auto sales are depressed, and intermediate-term expectations are low. Worldwide automobile industry sales are depressed and future expectations are modest. A steady albeit slow improvement in industry sales provides a broad runway of growth for General Motors.

* Inexpensive valuation. At an estimated IPO price of $26 to $29 per share, General Motors' enterprise value to EBITDA is only 4.5x, 3.6x and 2.9x 2010, 2011 and 2012 respective estimates. The company's P/E is less than 6x 2011 estimates and approximately 4x 2012 estimates. On a post-exchange basis, free cash flow yield estimates for 2011 and 2012 are at 11.5% and 15.9%, respectively.

long AAPL


After the selling last week, the bulls were ready to bounce us a bit today, but they weren't able to gain much traction. We hit the highs at midday but we never were able to generate much energy, and we ended up with a poor close. The dip-buyers just didn't have sufficient conviction, and they bailed out again at the end of the day.

A couple of takeovers and some relative strength in banks were the bright spots, but weakness in key stocks like AAPL, AMZN and NFLX and strength in the dollar kept sentiment negative. Volume was lower, and that was a minor positive, but overall the day had a dead-cat-bounce feel to it.

Failed bounce attempts are what downtrends are made of, and that is what we had today. We are still holding just under 1200 of the S&P 500, but the bulls really need a better showing than this if they are going to drive the bears away.

Tomorrow we have the General Motors offering, which is going to receive a lot of attention. Good action there will help the market mood. We also have the Producer Price Index number in the morning and some earnings reports in the retail sector.

Tops are processes that play out over time, and this one is starting to play out a bit too well. The biggest problem for the bulls will be if they lose QE2 as a driving force. There just aren't a lot of catalysts out there right now, with earnings season over and no major news events on the horizon.

long AAPL

Friday, November 12, 2010


It already seems like everyone is jumping into the correction camp. That very well could be the case. I think a lot could depend on whether China tightens and if the wheels come off the commodity rally for a while. How sentiment shapes up will also be key. But I suspect that the major indices will not break their 50-day averages in any meaningful way, if we even get there this time around.


I would not sell Apple just because Ken Heebner reduced his position as of September 30, 2010.

His fund's performance over the past two years has been atrocious.

I think Apple continues to fire on all cylinders, and I also think the company is going to have a huge holiday selling season.

from previous post = long INTC; this post = long AAPL

Many Are Getting Defensive

After bouncing back fairly well from some selling three times this week, the bulls just couldn't pull it off a fourth time. The dip-buyers made a very brief attempt in the first 30 minutes of trading, but once we rolled over and took out the opening lows, the dip-buyers gave it up.

The action under the surface looked much uglier than the 1% or so decline in the major indices. Breadth finished better than 4 to 1 negative, and all major sectors were in the red. Semiconductors showed some relative strength due to an upgrade of INTC, but precious metals, oils and commodities were trashed. There was no place to hide, as even the big-cap momentum favorites were sold across the board.

The blame for the weakness goes to China, which was down 5% overnight on fears that it would tighten rates to cool off its very hot economy. In addition, there is barrage of criticism of the Fed's QE2 program. No one outside of Ben Bernanke and his minions seems to believe it is going to work, and economic leaders around the world are concerned about a competition to see who can debase their currency the fastest.

There was definitely a change in the character of the action today, and the dip-buyers are now likely to be far less confident after being burned. We did hold near key support just under 1200 on the S&P 500, but this market has run almost straight up for two and a half months, so the support is precarious.

Market players have probably grown too confident that the Fed was going to keep this market from going down at all, so it is probably a positive that we have a day like this to shake out the complacency. The Fed is still out there making conditions right for the Treasury to run its printing press, and that is going to give us some support, but it is better if the bulls just don't take that for granted.

Thursday, November 11, 2010


DIS prematurely released its results, and they appear to have disappointed.

The Great Unwind

Look for money to pour out of bonds and bank time deposits and into stocks and commodities in the years ahead.

I think the markets now and in the months (and maybe years) to come can be analyzed as a multiple-choice SAT question. You need to eliminate the bad choices to arrive at the answer, rather than guess at the right choice.

If you have cash today, you should invest in

1. Bonds
2. Bank time deposits
3. Commodities
4. Stocks

You have to eliminate "A.) Bonds," because rates are so low and are likely to rise. Also eliminate "B.) Bank time deposits," because with inflation likely to move higher, your real returns will be negative.

That leaves you with "C.) Commodities" and "D.) Stocks." In this case, one or both would be the correct answer.

We are witnessing the unwinding of a generational or multigenerational hoarding of bonds and time deposits. The unwinding started when paper issued by many tried-and-true companies went worthless or near worthless in the 2008 credit crisis. That upheaval was followed by the last gasp of the nearly-30-year bond bull market as the FOMC pushed interest rates to historic lows. This action is being viewed as a credit bull market; in the fullness of time it will be viewed as another artificial propping up of an asset class.

Liquidity drives all markets. Liquidity will be coming out of bonds and time deposits at record levels over the next several years. It will go into commodities and stocks. Stock bears consider this to be buying on dips. Unfortunately, the "buying on dips, selling on rallies" mentality was a complacent condition created by the near-decade-long stock bear market, which in my opinion is likely coning to an end.

Given the relative amount of money invested in bonds and time deposits vs. that of stocks and commodities, it will not take much of a movement from the former into the latter to make a significant difference. In other words, the multiplier effect of the unwinding and asset reallocation will be great.

Cisco the Kid Is All Grown Up

Cisco was an important growth stock in the 1990s, and its best days as such are behind it.

The first hour of trading today was pretty much as I expected it would be. Bad sellers dominated the open.

Market participants have to let go of the romanticized notion that CSCO matters. We had to realize the same thing when it came to IBM in the '80s and MSFT in the 2000s. Cisco needs to right-size itself, cut costs and issue an above-market dividend to make it relevant to investors again.

If you want to know relevance, look at AAPL, which gapped lower on the open as the bad sellers tried to extrapolate Cisco to the rest of tech. Apple fought back and briefly went green.

One day, Apple will be like IBM, Microsoft and Cisco, but that day is long in the future -- maybe come the 2020s.

Misery in Munis

The muni space is getting slammed.

Take a look at some of the closed-end funds like NQU or just the MUB.

I have often seen the muni market as the most one-sided market out there. Unless you intend to hold bonds to maturity, you will get your face ripped off when you go to sell.

On a fundamental basis, the problems facing states, cities and municipalities are so great that munis -- once seen as the least risky of asset classes next to U.S. Governments -- now has to be considered a higher-risk class.

If there were one market that the FOMC should be putting its quantitative easing into, it should be the muni market.

Frankly, Veteran's Day should be the second Monday in November and all markets, exchanges and schools in the U.S. should be closed.

Is QE2 All Bark and No Bite?

Bernanke has been communicating his QE2 intentions for months without taking much action.

And his WORDS have had a beneficial effect upon the economy.

So will the market be scared into economic growth and inflationary pressures without the Fed having to take much action?

What has more impact for the financial market -- quantitative easing or the mere threat of quantitative easing?

So far, it appears to me that quantitative easing is just a recirculation of money in the system. I do not expect the next round to be any different.

QE2, however, could really have its full impact not by the action of monetary easing (whether or not that takes) but by the mere anticipation and communication of the easing itself. We'll see.

Ben Bernanke has been on a mission to clearly communicate his intentions of quantitative easing for the past several months without really taking much, if any, action. His plans, intentions or threats (however you might deem them) have had a beneficial effect upon the economy. Most economic data points have improved dramatically since August, when the notion of QE2 was first being floated in earnest.

In essence, Bernanke has allowed the economy and financial markets to front run his anticipated actions. Please note that this is all being accomplished during the period leading up to the holiday shopping season, which so far has gotten little or no attention. I don't think QE2, if it's actually done, will work. But maybe it was never intentioned to even be started. This is why Ben Bernanke has done a masterful job, so far.

Echo Chambers

Last quarter, CEO John Chambers guided lower after Cisco reported better-than-expected results. Lather, rinse, repeat.

The company reported a slightly better-than-expected quarter. Recall last quarter that CEO John Chambers guided lower after Cisco reported better-than-expected results.

Lather, rinse, repeat. Now Cisco has done it once again -- bettered estimates (which were guided down in the prior quarter) and then slashed forward guidance.

Maybe John Chambers is an excellent technologist and business manager. His credibility on earnings calls, however, has to be questioned at best. At worst, it has already been destroyed.

The Bears Failed Today

I know the bears were hopeful, but did they really think it was possible for this market to go straight down on poor news from CSCO? This market just has too much underlying support and too many willing dip buyers for it to go straight down. Bad news for the bears. Cisco is just another dip-buying opportunity.

We trended up pretty steadily all day after the poor open this morning, but an early release of poor earnings from DIS prevented a close at the highs. None of the indices were able to make it all the way back into the green, but the intraday recovery was certainly quite strong.

Volume picked up quite a bit in the Nasdaq due primarily to the surge of trading in Cisco, but that gives us our second day of technical distribution this week. Coal, oil, gold and commodity stocks led even though the dollar was stronger. Banks and chips were the laggards, and that isn't what we want to see.

Once again, tops are processes that play out over time as we bounce around and the bulls slowly lose their confidence as they fail to see further upside. We have a few negatives developing (two distribution days in a week), but so far we are holding quite well, and the bulls don't look like they have had their confidence shaken too badly. We have to stay very vigilant and heed any further fractures in the action, but the dip buyers are doing a heck of a job and you can't count them out until they actually have a failure or two.

It is very tempting to want to call a top here, but we just aren't seeing enough selling pressure to turn the tide. The uptrend is still intact. Although we had three down days this week, it hasn't amounted to anything more than healthy consolidation so far. Things could change and the level of complacency is worrisome, but the bears still have the burden of proof.

Wednesday, November 10, 2010


Jim Cramer wrote today that 'good news gets drowned out again.'

Or is it that the good news has been more than fully discounted?

Kass is getting longer in YHOO...........

Early Read On GM

I will have more on the General Motors IPO next week, but my early read on the company's prospectus is quite positive.

Trading Desk Tapas

A lot of trading desks are sharing a portion of a Bloomberg story on LCH Clearnet's positions on European debt.

This portion of a Bloomberg story is getting a lot of discussion on trading desks:

"LCH Clearnet Ltd. demanded its clients place a larger deposit when trading Irish government bonds after the yield on the nation's debt soared, and may impose similar measures on other European securities."

The recipe for restoring economic growth is in the hands of our fiscal authorities, not in the hands of our monetary authorities.

I believe, as Dallas Fed President Richard Fisher does, that the Federal Reserve is prescribing the wrong medicine for the ailment from which the U.S. economy is suffering, as the uncertainty regarding income and future demand, not abundant liquidity, are the binding constraints to growth. Our domestic economy needs an intelligent, creative and transformative fiscal response to tame our deficit and grow jobs, not more monetary "cowbell" that disproportionately benefits the richest Americans and that is not likely to trickle down to the majority of the population.

In summary, I continue to argue that QE2 will not deliver the anticipated virtuous and smooth circle of economic growth that the Fed desires and that our domestic economy will stay on a path of uneven, below-historic and (potentially) vulnerable growth. In the fullness of time (perhaps sooner than later), developing commodity price inflation, further pressure on consumer real incomes and accelerated declines in our currency will likely weigh on the trajectory of domestic growth and on corporate profit margins.

Questions I Asked Myself This Morning

Here are some topics that I am mulling over.

1. What would the legendary Technical Analyst Bob Farrell Sr. think about yesterday's market action? Was it the reversal day? Would he argue that, with the lowest five-day put/call ratio since April, we finally have seen a top in complacency/bullishness? Or was Tuesday's market reversal another "pause that refreshes," as Jim Cramer suggests, or even just a "one-day wonder?" Will Tuesday prove to be something more significant that "feeds on itself?"

2. Will the backup in Treasury bond yields (a five-month high in yields/low in price) continue? Did the Fed buy a large portion of the auction? Will yesterday's weak auction foreshadow more poor auctions in the months ahead?

3. Will the CME's hike in required silver margin be matched in other metals and commodities in the days ahead?

4. Should China's Dagong Global Credit Rating Company downgrade of the U.S. be readily dismissed as many suggest?

5. Will a behind-closed-doors deal at next week's G20 meeting involve a reduced QE2 in exchange for an agreement for an appreciation in the yuan or even an agreement on trade/current accounts?

All QE2 All Day Long

For a while this morning, it looked like we were going to build on Tuesday's intraday reversal, but we found support, and the focus then shifted to the Fed's first buys under its new QE2 program. We all knew it was coming, but the initial buys are a bit bigger than expected, and that was all it took to turn the tide.

I don't know if it is the actual open-market buying by the Fed that is driving the market or just the perception that the Fed is going to provide strong underlying support, but it doesn't much matter. The market is extremely confident that the Fed has its back, and it is preventing any sort of sustained buying pressure.

Normally, such positive factors lose their ability to drive the market after a while. They are well anticipated and are eventually priced in, but that has not been the case for QE2. Time and again, it boosts the market at exactly the right time and just keeps the trend going and going.

Many market players would prefer a less manipulative catalyst, but there isn't much we can do about it. We just have to make sure we understand the dynamic that is at work and not fight it, even if we don't think it is such a great thing.

CSCO earnings are out, and the stock is seeing a fairly severe negative reaction so far. The numbers aren't bad, but expectations may have been too high. Cisco has been a laggard with a relative strength rank in the bottom quartile, but it still may assert a little pressure on technology stocks tomorrow.

The uptrend is still intact, and the bears didn't do a very good job at all of building on yesterday's weakness. However there was a lot of choppy action, and I see some reasons for caution here. There is no reason not to take the good trades that are still out there, but we also need increased vigilance.

Tuesday, November 9, 2010


Banks rolled over today

Some Slippage in Retail

Besides the REITs, I am beginning to see some slippage in retail.

Long Bonds Are Getting Schmeissed

And REITs could follow.

Jim Cramer had a crystal ball on today's Atlas news.

Sometimes someone gets it just right and here is a case in point that merits viewing -- again!

Recommended Reading

Run, don't walk, to read Dallas Federal Reserve President Richard Fisher's Nov. 8 speech.

Fisher has been a consistent hawk, so the bullish cabal will reject nearly anything he writes/says.

Nevertheless, I thought his speech yesterday was sober, direct and reasonable, and it incorporated many the concerns that I have written about over the past month.

Asset Managers Are My Tell

My market tell these days are the asset managers -- BEN and TROW. They go up, the market does, too -- and vice versa.

I'm hearing that MT is in talks to buy X at nearly $60 a share.


It had to happen eventually. The bears thought it was going to happen last week but the market refused to sell off on all the big news events. We just finally ran out of positive catalysts and, with the dollar reversing strongly to the upside and precious metals in an outright frenzy, we finally had a big intraday reversal.

The action was worse than indicated by the indices because there were so many big intraday reversals. Silver, in particular, stung a lot of the momentum players who have been chasing the move in that metal. Silver is back to where it was two days ago, but the folks who were buying yesterday (and especially this morning) were really whipsawed.

Volume picked up so we have the first day of technical distribution in quite a while. Typically, it takes a number of down days on heavier volume to kill an uptrend. Today was just a warning that we need to be more careful and watch for further developments.

Tops are typically are processes that play out over several weeks. Markets with strong momentum don't typically just roll over and go straight down. Dip buyers will be confident on the first couple pullbacks, and the bulls will tend to dismiss softness as healthy consolidation. It is when the bounces fizzle out and the dip buyers are caught leaning the wrong way that downtrends tend to develop.

It was a poor day, but the overall character of the market has not yet shifted.


Pure and brutal honesty is hard to find in life. It is even harder to find in trading. Some questions are just so loaded, there really isn't a correct way to answer them truthfully without risk. Does this dress make me look fat? Do you find him/her attractive? Do I look like an idiot? There are the answers you want to give, and then there are the answers you should give.

But what about hopes and dreams? We are told from an early age that with hard work we can accomplish anything we want to. You ask many young children what they want to be when they grow up, and many will say they want to be some type of professional athlete or a superhero or maybe an actor or actress or even a singer. The brutal truth is that many of them just don't have the talent. For many, all the hard work in the world won't replace a lack of natural aptitude. The same can be said for trading. It is a hard and brutal truth.

In the long run, being profitable does determine your longevity as a trader and an investor, but profitability doesn't always make you a good trader, nor does losing money mean you are a terrible trader. The real question some need to ask themselves is, should I be making my own decisions? A separate but similar question is, should I be trading? The first one is a bit easier to tackle, especially if you listen to commercials. I mean, if a talking baby can do it, then anyone can. Heck, this kid still needs a parent to change his diapers, so clearly I have a big advantage over him.

We probably all know people who seem to buy the market at the top, then panic and sell everything at the bottom. A few years pass, and they repeat the process. This doesn't make them bad investors or disqualify them from making their own investment allocations. This makes them investors who need a bit of emotional hand-holding. Their actual investments are often appropriate and even diversified by typical standards, but their emotions cause ill-fated buys and sells. They simply need someone to talk them off the ledge.

Some other long-term investors are plagued by the fear and greed generated by the media. They often consider themselves unlucky or cursed and swear off the market several times in their lives. In the end, they will probably never be able to run their own portfolios. However, they can often construct their holdings as long as they have a crutch to lean upon when times get tough and markets get volatile.

Trading is a different story. How do you tell someone that he or she a terrible trader? Better yet, how do you tell them to stop, or that they shouldn't be trading?

I break "losing" traders into the types: 1.) the "ins/uns," 2.) the inevitable, and 3.) the hopeless.

The first type of losing trader is either inexperienced or uneducated. This is a losing trader with promise. Just because you lose money as a trader, that does not mean you are a bad trader or should quit trading. Often you will hear the term "trader's tuition." This is the cost of experience. Many people, when they are early in their trading careers, will miss entries or be late. They will exit early or miss exits, and have losses instead of gains. Over time, this lack of experience will correct itself. Over that same time, traders can become more educated and strengthened by the experience. If their emotional mind-set is strong and they remain somewhat humble, losing traders can take the experiences and become consistent winners.

Unfortunately, the opposite is also true. Some winning traders are destined to become losers -- traders who are undisciplined but who have gotten lucky early in their careers. Perhaps they have hit the market during a strong bull or bear cycle. Or they are momentum traders riding the train much farther than anyone else in a particular area. Unfortunately, for many of these destined losers, trading is "easy." They enter the market at a time when almost anyone can make money. Not only do they lack the education, they lack the experience of trading in a tough environment. Everything is so easy at the beginning, these traders never develop any discipline or respect for the market. These are the traders whose accounts double or triple in value over the first few years, but they are also the same ones who will inevitably zero out their accounts in months or even days, chasing a bad trade. It is difficult to convince this type of trader to slow down or even quit while he or she is ahead.

The last group is the hardest. These are the hopeless losers. I don't mean it in a derogatory way, but these are traders who have experience, and many have education. However, they don't learn from the experience or the education. They are looking to enforce their will upon the market. This doesn't just apply to the small retail trader. Look at how many professional hedge-fund managers have blown up two, three or even four hedge funds, yet they keep coming back for more and find investors to give them money. These are traders who will never walk away, even though they should. Unfortunately, you will find them everywhere. They make the same mistakes repeatedly. I suppose I should call them insane, since they expect different results from the same strategy.

This last group of traders will often be very oversized in a single position or sector. They will trade beyond their comfort level. Rather than viewing trades in a manner of discipline, they view it in wins and losses. These traders hate losses, like everyone else, but refuse to take them. They are quick to get out of winners, but they do everything they can to get a losing trade back to even. Rather than look for other opportunities to grow their portfolio, "getting back to even" on a specific trade dominates their way of thinking. Their mind-set becomes their reality even if the market disagrees, and rather than adjust to the market, they become angry and frustrated, and that causes them to push positions farther rather than step back to re-examine their mind-set. Kudos to Doug Kass for doing this exact step back to re-examine his thinking. If anyone views this as weakness, shame on you, because this is the sign of a truly good investor and trader. The desire to always be right is what will almost always make this type of trader lose. Many traders looking for the big score and to get rich quick will fall here as well.

If you find yourself constantly trying to justify and rationalize a position you are in and really stretching for answers, yet you continue to expand your position, if you find yourself hoping and praying for a turn in the position just so you can get out even, if you find yourself losing sleep and cursing at the television, media or markets themselves, if you find yourself not understanding what you are doing or why, then it might be time to raise the question, should I be trading?

This isn't an easy article to write, nor can I say I've never been in at least two out of the three categories above, but it needs to be said.

Monday, November 8, 2010


I'm hearing Amazon might be pricing a $1.25 billion convertible offering this week.

Fed Speakers Rule the Headlines


Jim Bullard, St. Louis Fed Reserve Bank president (and anti-Warsh), repeated his support of QE 2 this afternoon in a speech that suggested that the real effect of the policy will be felt in three to six months.

QE2 may not deliver the anticipated virtuous and smooth circle of economic growth that the Fed desires.

"Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion."

-- Fed Chairman Ben Bernanke, Washington Post op-ed

He cited that easy money will be a palliative to domestic economic growth by spurring confidence and higher stock prices. Bernanke further expressed his belief that a virtuous circle would be encouraged by:

1. lowering mortgage rates, making housing more affordable and allowing homeowners to refinance; and

2. reducing corporate bond rates, which will likely encourage investment.

"It's hard to have a big impact on the short-term interest rate that is already zero, and on the bond market ... two things are working in opposite ways on the interest rate."

-- Former Federal Reserve Chairman Paul Volcker

"Lower risk-free rates and higher equity prices -- if sustained -- could strengthen household and business balance sheets, and raise confidence in the strength of the economy. But if the recent weakness in the dollar, run-up in commodity prices, and other forward-looking indicators are sustained and passed along into final prices, the Fed's price stability objective might no longer be a compelling policy rationale. In such a case -- even with the unemployment rate still high -- we would have cause to consider the path of policy. This is truer still if inflation expectations increase materially."

-- Kevin Warsh, Member of the Board of Governors of the Federal Reserve

I wrote that, while QE2 will anchor short rates to near zero, it remains unclear to me whether QE2 will generate much lower mortgage and corporate bond rates from here.

If anything, government bond yields over 10 years in duration are going in the opposite direction.

At last week's close, the 30-year U.S. treasury bond (which is not the beneficiary of Fed buying but is an indicator of future inflationary expectations) finished at its lowest level in price and highest in yield than at any time over the past several months. Since QE2 was telegraphed by the Fed in the late summer, the 30-year bond yield has risen by nearly 65 basis points vs. the shorter-dated 10-year U.S. note's yield, which up by less than 10 basis points.

In this morning's Wall Street Journal op-ed Federal Reserve Governor Kevin Warsh warns that the Fed, by expanding its balance sheet, has become more of a price maker than a price taker in the government bond market. But, if market participants come to doubt these prices -- or their reliance on these prices proves fleeting -- "risk premiums across asset classes and geographies could move unexpectedly."

In his Washington Post op-ed, Chairman Bernanke suggested that mortgage rates will move ever lower. I just refinanced my mortgage down to a 3.50% seven-year ARM. In the fullness of time, how much lower can mortgage rates drop from my rate of 3.50%? And, what if the U.S. 10-year note continues to rise in yield? It is the rate on which mortgages are principally based!

The problem with the housing market's recovery is a large shadow inventory of unsold homes coupled with high unemployment. For months, a generational low in interest rates has failed to dent the weakness in the residential real estate markets. Moreover, it is my continued concern that the consequences of QE2 will be harmful (likely producing screwflation), which is bad for the average American consumer buying the average American home.

However, the math of the virtuous stock market cycle seems less cooperative than Chairman Bernanke insists.

In support of my view, I highlighted the research of the Federal Reserve Bank of Atlanta and other reports to illustrate that consumers have historically spent $0.03 to $0.04 out of every additional dollar of stock market wealth.

Households own nearly $11 trillion in equities, ETFs and mutual funds. I then assumed that the Fed's move has been responsible for a 10% rise in stock prices, serving to increase the aggregate value of equities by $1.1 trillion. Applying the historic stock market wealth multiplier mentioned in numerous research pieces on the subject would only translate to a modest $40 billion rise (or thereabouts) in personal consumption expenditures in a U.S. economy with a GDP that exceeds $14.0 trillion.

Not much beef there.

The Rich Get Richer, and the Poor Get Poorer

* The top 1% of U.S. households own 38% of all mutual funds and stocks.

* The next 9% of U.S. households owns 43% of all mutual funds and stocks.

* The bottom 90% of U.S. households owns only 19% of all mutual funds and stocks.

"There is one rule that works in every calamity. Be it pestilence, war or famine, the rich get richer and poor get poorer. The poor even help arrange it."

-- Will Rogers

Let's now move one step further and determine how broadly the domestic economy will be influenced by the approximate $1.1 trillion of stock market wealth that may lead to consumption gains and how likely the historical multiplier ($0.03 to $0.04 of consumption per every dollar of stock market appreciation) will hold up in the current cycle?

According to University of California at Santa Cruz Professor G. William Domhoff's "Weath, Income, and Power," the U.S. wealth (and the holdings of stocks and mutual funds) are highly concentrated in a relatively few hands. As of 2007, the top 1% of households owned 34.6% of all privately held wealth, and the next 19% had 50.5%, which means that just 20% of the people owned a remarkable 85%, leaving only 15% of the wealth for the bottom 80% (wage and salary workers). In terms of financial wealth (total net worth minus the value of one's home), the top 1% of households had an even greater share: 42.7%.

In terms of types of financial wealth, the top 1% of households has 38.3% of all privately held stock, 60.6% of financial securities and 62.4% of business equity. The top 10% has 80% to 90% of stocks, bonds, trust funds and business equity, and over 75% of non-home real estate.

The research above indicates that the wealthiest households will receive almost all of the benefit from the appreciation in stock prices (that has seemingly been generated by the optimism regarding the success of further monetary easing), as the top 1% of the households own nearly 39% of the stocks and mutual funds in the U.S. and the next 9% own another 43% of the stocks and mutual funds. The bottom 90% of the households own only 19% of the stocks and mutual funds.

I recognize that the wealthy have historically accounted for much of the spending growth in the U.S. The bullish argument is that there will be a multiplier effect of the $40 billion increase in consumption -- a trickling down, producing payroll and inventory growth that will add further to real GDP (above and beyond the $40 billion estimate).

"Policy makers should be skeptical of the long-term benefits of temporary fixes to do the hard work of resurrecting the world's great economic power. Since early 2008, the fiscal authorities have sought to fill the hole left by the falloff in demand through large, temporary stimulus -- checks in the mail to spur consumption, temporary housing rebates to raise demand, one-time cash-for-clunkers to move inventory, and temporary business tax credits to spur investment."

-- Kevin Warsh, Member of the Board of Governors of the Federal Reserve

Given the challenges of reviving our domestic economy from the economic and stock market carnage of 2007-2009, the nontraditional headwinds that make the current cycle so unique and the unevenness of the wealth benefit, I remain less certain that QE2 will even translate to the lower end of the historical relationship ($0.03 to $0.04 per $1 of market gains) of spending to stock market wealth creation. Here's a list of reasons:

* Artificiality of policy and persistent structural imbalances/headwinds. QE2 is a temporary program that has seemingly marked up stocks for the benefit of the highest earners and most wealthy Americans. In a sense, QE2 is a cash for stock market gains program (similar to cash for clunkers or the tax credit for new home buyers) that appears to be a gift to the wealthy (and large corporations that have access a cheap and hospitable debt market anchored with zero interest rates). At the same time, it potentially hurts the savings class with little benefit to small businesses and to the average American, who gets hit with screwflation in higher food, energy and other costs that eat further into real incomes.

* Less trickle down/multiplier. There might be less trickle down in stock market wealth to consumption than many suppose, given the hit to confidence from the depth of the recession, the high level of under- and unemployed (and the impact of the structural jobs issues), the fiscal imbalances in our local and state governments, the unintended consequences of higher costs of stuff, the still-persistent hangover from the 2008-2009 stock market dive and the current low levels of business and consumer confidence. Economic traction better happen soon in order to justify the stock market traction of the past three months.

* Screwflation creates more imbalances of wealth. The forces of screwflation (i.e., rising costs, limited wage growth and still-elevated underemployment and unemployment) run deep and are impactful to the majority of Americans. Again, the virtuous cycle of confidence (and job growth) better happen shortly.

* The savers class gets screwed, too. Low interest rates will continue to penalize the incomes of the growing savings class -- a maturing baby boomer generation and current retirees/elderly. I strongly suspect that the lost interest income (in fixed income maturities under 10 years) and reduced purchasing power eliminates the full benefit of an estimated $40 billion in consumption tied to higher stock prices.

I fully recognize that lower short-term interest rates, the implementation of QE2 and the likely extension of the Bush tax cuts reduce the downside risks to the economic outlook and appreciably lower the risk of deflation.

And I fully recognize that, by having fought the stock market's advance, I am fighting an uphill battle.

"With all due respect, U.S. policy is clueless. (The problem) is not a shortage of liquidity. It's not that the Americans haven't pumped enough liquidity into the market.... The U.S. has lived on borrowed money for too long."

-- German Finance Minister Wolfgang Schäuble

But in order to move toward self-sustaining growth (which would ratify the stock market's rally), our domestic economy needs an intelligent, creative and transformative fiscal response to tame our deficit and grow jobs, not more cowbell that benefits the richest Americans.

I continue to argue that the largesse of QE2 will not deliver the anticipated virtuous and smooth circle of economic growth that the Fed desires but that our domestic economy will remain on a path of uneven, below-historic and (potentially) vulnerable growth, owing to policy mistakes and other exogenous events. In the fullness of time (maybe sooner than later), developing commodity price inflation, declines in real incomes and further drops in our currency may serve as further headwinds to a self-sustaining domestic economic growth cycle.

A Bottom for BAC?

Late last week, litigation surrounding $352 billion of claims against BAC were dismissed.

This information was disclosed in the company's third-quarter 2010 10-Q.

While the issue of reps and warranties will plague the company for a while, the continued credit-quality improvement coupled with the dismissal suggest that Bank of America's problem-ridden shares have bottomed and provide value.

Over There

German industrial production unexpectedly dropped by 0.8% in September.

"German industry is slowing down ... European governments are stepping up the pace of fiscal tightening, while world trade growth has weakened as well."
-- Aline Schuiling, economist at ABN Amro Bank

I continue to question the efficacy of "QE 2," which has served to stoke the animal spirits -- and I conclude that the worldwide economic recovery remains anemic and vulnerable to policy mistakes or exogenous factors.

In support of that view, last night we learned that German industrial production unexpectedly dropped by 0.8% in September compared to expectations of 0.4% growth and August's rise of 1.5%.

Run, don't walk, to read Peggy Noonan's latest editorial in The Wall Street Journal.