Monday, January 31, 2011


Gold had a broad range today. At one point, it lost $18 an ounce, or nearly all of its Friday gain. It closed down $11 an ounce, and, technically, the commodity continues to look so yesterday.

I still look for further price breaks and more volatility in the precious metal.

I don't trade commodities, but it is interesting to note that oil has been a far better play on the Egyptian crisis than gold recently. Indeed, the price of crude has risen by $6 to $7 per barrel, or by 8%, since Thursday.

At the same time, the price of gold has been virtually flat.

Meanwhile, back in the stock market, YHOO owners got a nice kiss from a PacCrest upgrade, and Mr. Market was, according to many (though a tad ragged in the late afternoon), surprisingly resilient after some more positive economic news and in the absence of escalating riots over there.

The economic indicators today were consistent with the other recent surveys and releases and indicative of a gradually improving domestic economy. (I still question its durability and ability to sustain itself as the secular headwinds' strengthen as the year advances.)

Loan Demand Ticks Higher

The Fed Senior Loan Officer Survey revealed a steady strengthening in loan demand and some easing of lending standards.

All in all, not market-moving, though.

Pacific Crest raises YHOO to outperform with a $21 target. The upgrade is based on a sum-of-parts valuation story that "is gaining urgency."

Pac Crest sees a Yahoo! Japan monetization shortly with Taobao following with an IPO within the next year.

The company has more than $2.20 a share in cash and is adding $0.50 a year ... etc., etc.

Run, don't walk, to read "The Fed in La-La Land, Again" on Jeff Matthews Is Not Making This Up.

Brent crude futures trade over $100 a barrel.

Economic Releases Accentuate the Positive

Let's summarize this morning's upbeat economic releases:

* Personal income was up 0.4%. Real disposable incomes continue to rise, as the savings rate drops modestly. Most importantly, balance sheets continue to improve, with debt service as a percentage of income at a 10-year low while liabilities drop relative to assets.

* Consumer spending was vibrant, rising by 0.7% (well above the 0.5% consensus). Real consumption was indicative of a near-4% rise in real first-quarter 2011 spending.

* Monthly core PCE was flat, with a cumulative rise of 0.7% for the full year (at a five-year low). This is a key number and remains well below the Fed's intended target of around 2.0% PCE, indicative that the federal funds rate will likely stay close to zero for some time to come.

Intel Chips Away at Guidance

INTC reports that there is a design error in its new generation of chips. As a result, it's lowering its profit margin guidance and profits. This is company-specific and shouldn't hurt the indices.

Continued Strength in Chicago PMI

Continued strength in economy and in prices was printed in today's Chicago Purchasing Managers Survey. This is consistent with previous reports.

The concept of screwflation of the middle class (which clearly undermines the foundation of domestic economic growth) is clearly becoming an international phenomenon. Indirectly, food inflation is the source of many riots around the world and is a byproduct and unintended consequence of the U.S. policy of easy money.

Finally, in theory, the situation in Egypt and other powder kegs could result in a continued disintermediation of investment funds out of emerging markets and into the U.S. stock market, serving to make domestic equities the "best house in a bad neighborhood" -- a positive for stocks.

long YHOO

Dead Cat Bounce?

After a beating like we had on Friday, you have to expect some sort of reflexive rebound. It is the vigor of the oversold bounces that tell you a lot about the market's health, and today's bounce today wasn't particularly lively. Breadth was pretty good on the NYSE due to strength in oil, coal and basic materials, but the Nasdaq lagged as technology stocks didn't do much.

Volume was quite light compared to Friday, which makes the bounce less trustworthy. However, the bulls have the start of a new month tomorrow, which has had a very positive bias.

We'll see if the trend of having strength on the first day of a new month holds. After that, the bulls will have a real test of their resilience. The bounce today was not enough to negate the ugly breakdown on Friday, but a big day tomorrow will definitely cause some consternation for the bears if the seasonal pattern holds.

Friday, January 28, 2011


Five Things I Have Learned From Mr. Market This Week

1. Do your own research and homework. And take the precision and the quality of Wall Street research with a grain of salt. Specifically, I am referring to Merrill's really dumb price target increase for NFLX on Thursday from $131 to $275. I mean, how can you be off by that much in a calculation of value? So, when you hear from your broker and he repeats his research department's next best idea, be skeptical; that broker is not necessarily your friend. If you want a friend, get a dog, and don't listen to Wall Street research without doing your own work.

2. Never short valuation, and avoid shorting stocks with high short-interest ratios. This is a recipe for a portfolio disaster. Never short a stock such as Netflix that is crowded. Whenever short interest exceeds about 10% of a company's float, it's a non-starter for me. Stay away, and don't short. In the case of Netflix, the theatre is very crowded with 32% of the float short. If you have a death wish and want to short a Netflix, AMZN or AAPL, buy out-of-the-money calls for as a hedge to define your risk and force the discipline of taking a small loss.

3. Even smart investors, including some great hedge fund managers, make mistakes. Don't automatically follow them into positions. Case in point: gold. John Paulson might have personally made $10 billion in the last two years, but one of his largest positions, gold, has cratered in recent weeks, falling by $100 an ounce since January.

4. There are adverse and unintended consequences to the Bernank's quantitative easing policy. Today is a vivid example of how QE2, which indirectly moved food prices higher, has provoked the unrest in Egypt and in other corners of the world.

5. The path to a $95 a share in S&P 500 earnings for 2011 might be bumpy. Numerous earnings reports this week, including F, CL, PG, SBUX and even AMZN, indicate that higher input costs could challenge profit margins and that second-half earnings are not automatically cast in stone.


It is always interesting how extended markets always find a good reason to finally correct. According to the media, stocks never correct because they have become expensive or extended. There is always a catalyst or news event that receives the blame.

Today we had a number of good excuses for some selling. Earnings reports from AMZN, MSFT and F were lackluster, the fourth quarter GDP numbers came in soft, and then there was the big one, the unrest in Egypt. The market focused on Egypt because it creates the most uncertainty and raises speculation that unrest could spread throughout the Middle East.

Whatever the reason for the selling might be, the aggressiveness of the selling today warrants our attention. Breadth was nearly 5 to 1 negative, volume was heavy, and we have a clear technical distribution day.

The technical picture of the Russell 2000 small-cap index is particularly worrisome. After the breakdown a week or so ago, we now have a failed bounce and a lower high. We are still holding the 50-day simple moving average, but that support doesn't inspire much confidence.

The Nasdaq has a similar setup, but it bounced bigger after the initial pullback and has already breached the recent lows. With any sort of downside follow-through, we will have a broken uptrend line and the start of a downtrend.

We definitely can't be overly confident about downside, given how often and how fast this market comes back every time it looks like it is on the verge of a major breakdown, but on the other hand, we can't be confident that this time it won't be different. It is better to be defensive and to err on the side of caution than to risk good gains in a market that is exhibiting some cracks.

More On YHOO

I find it very interesting that China's largest e-commerce firm, Alibaba Group, has postponed indefinitely its listing plans for its subsidiaries, according to a company source.

Alibaba Group, which is 40 percent owned by YHOO, owns China's largest consumer e-commerce platform Taobao. Alibaba Group's Chairman Jack Ma wrote in an internal email to employees that the subsidiaries are not yet mature enough for initial public offerings, and Alibaba will instead speed up investment on e-commerce infrastructure over the next few years, the China Business News reported.

A company source confirmed Ma's email to employees and its content about the postponment of the subsidiaries' listing plans.

A top executive at Taobao had said last week that there were no plans for an initial public offering.

Taobao handled 400 billion yuan ($60.78 billion) in transaction value last year, an Alibaba Group executive said last week.

Taobao is one of Alibaba Group's crown jewels and its valuation is a point of contention between the group and Yahoo. Alibaba Group said last September the company had offered to buyback Yahoo's stake in Alibaba, but the offer was rejected.

The group, which dominates the country's e-commerce industry, announced plans last week to invest up to $4.5 billion over the medium term to build a nationwide warehouse network to boost China's logistics industry.

So Alibaba has decided to shelve the offerings of its subsidiaries; is there anything to read into that, as it relates to YHOO potentially being "in play"?

long YHOO

Thursday, January 27, 2011


Decent Treasury Auction

The seven-year Treasury auction results were OK, with bid-to-cover, yield and indirect participation in line with prior auctions.

Gold Gets Sold

Gold is now down $13 an ounce, and I continue to hear that several large macro hedge funds are liquidating.

Yahoo for Yahoo!

YHOO, especially after the recent weak profit report, remains unloved.

In Wall Street's analytical community, there are currently only six Strong Buys and seven Buys on Yahoo!; there are also 20 Holds and one Sell.

The average price target is only $18.23 a share.

I would like to briefly explain why the Yahoo! bears are wrong-footed and why the market is underestimating the value of the company's private assets.

I have been far too low as to the value of AliPay, as the business has grown dramatically since that report. Indeed, given AliPay's market share of online payments, transaction volume and registered users, it is likely now more valuable than PayPal. In the fullness of time, it will be worth much more.

As of December 2010, AliPay had more than 550 million registered users with daily transaction volume of RMB 2.5 billion (U.S. $378 million). The company is processing 8.5 million transactions a day, and in fourth quarter 2010, AliPay processed more than 50% of Chinese online payments. (AliPay's transactions rose by 88% in the first half of the year!)

These are almost Facebook numbers, and Facebook is now capitalized at $50 billion.

Again, I strongly suspect that AliPay (40% owned by Yahoo!) is now worth more than the estimated $20 billion that PayPal is worth -- or as much as $8 a share to Yahoo! (and moving higher based on the continued rapid growth in the Chinese online payments market).

Head in the Sand

The market continues to ignore a structurally weak jobs market, further reflected in today's disappointing initial jobless claims report.

Run, don't walk, to read "On the Move: Adapting to a New Global Economy" on Knowledge@Wharton.

long YHOO

AMZN May Be Key

The indices didn't make much progress today, but the overall the action was upbeat. Retailers, chipmakers and regional banks led while steel reversed after a big day yesterday and gold got slammed once again. The soft spot in this market today was oil and commodity-related names, but strength in tech made up for it.

Speaking of technology, the maker of that bug-proof software known as Windows accidentally released its earnings before the closing bell. MSFT spiked initially on strong numbers but came back in very fast on talk of slowing computer sales. It is now trading below the levels it was at prior to the news.

AMZN's numbers are out, and the stock it is getting smoked due to weak margins and poor guidance. The report is a few cents ahead of expectations, but expectations where very high these numbers don't look nearly good enough to bring in new money.

This market has done a great job of shaking off any and all negativity, but we have some more now and it might become more difficult for the market to continue down the same road.

Wednesday, January 26, 2011


Starbucks Is Not a Surprise

Companies with food and agricultural products as an inputs -- think Starbucks -- will face margin pressure this year.

Tom DeMark was on CNBC with a dire market prognosis.


Fed comments = nonevent.

Run, don't walk, to read Pimco's report on monetary policy.

New-Homes Sales Built on a Weak Foundation

We are in a market that appears to interpret every statistic positively.

Case in point -- today's housing report, which appears to have been the proximate cause for the upside move in the indices this morning.

Sometimes, such as in this morning's December new-home sales report, the positive interpretation is nothing more than a sound bite from a bullish cabal that incorporates little analysis and overstates the case that a broader based housing recovery is in place.

December new-home sales rose to 329,000, easily beating expectations of 300,000 and compared to 280,000 in November. But the bulk of the rise was in the Western region, increasing by an outsized 71%. By contrast, sales only increased modestly in the South and Midwest. The Northeast's sales actually declined!

I suspect that during the last few months, the West Coast (California) numbers artificially inflated the national and state housing statistics, owing to the California first-time homebuyer tax credit (Assembly Bill 183), which expired on Dec. 31, 2010 (well after the national credit expired). This California home credit could be used regardless of income and was worth up to 5% of the home's price or $10,000, whichever was less.

I haven't heard a single person in the media or elsewhere focus on the notion that December's new-home sales were inflated by the expiration of the California tax credit.

No one!

This credit likely positively affected September to December new-home sales activity and prices. Since December was the last month of the state tax credit, it probably had a particularly outsized impact on today's sales report.

For example, if you go back to Case-Shiller's October report, home prices in San Francisco, San Diego and L.A. rose by about 3%, though the total country (20-city composite) reported a 0.8% drop in home prices.

But the skew in new- and existing-home sales is even more pronounced (than prices) by the California tax credit.

For example, California single-family new-home sales rose by nearly 40% in November, as nationwide new-home sales increased by only 5%. (The Northeast dropped by 27% that month!) During the same period, existing-home sales in the West rose by 13%, even though the national activity was flat.

What, Me Worry?

The federal government's budget deficit is now expected to grow by about 14%, to $1.48 trillion this year, well above prior forecasts.

Weak Mortgage Data

Housing bulls should read the very weak mortgage application data this morning.

Applications for new mortgages declined by almost 9%, the fourth straight weekly drop. This reading represents a marked reversal of the entire increase since summer 2010.

The refinancing index declined by 15%, standing at its lowest reading in 12 months.

This is a meaningful negative for consumer cash flows in early 2011.

Aggregate federal debt is now above 90% of GDP now. (In This Time Is Different: Eight Centuries of Financial Folly, authors Carmen Reinhart and Kenneth Rogoff point out that once you get to the 85%-90% threshold of excessive debt/GDP levels, there is a secular erosion in country growth rates.)

Stated simply (and from my perch), our domestic economy is now mature, and U.S. economic hegemony is a thing of the past.

This is a P/E-deflating, not P/E-inflating, phenomenon.

Look East for above-average and sustainable economic growth.

Citigroup maintained a hold rating and slightly increased its price target on YHOO, which seems right to me:

* 2011 EBITDA reduced 3% to $1.89 billion, but price target bumped from $18 to $19 on larger cash balance, Asia assets appreciation, and reduced share count assumptions. $19 = 5x 2012 EBITDA of $2.20 billion. Staying conservative with their estimates -- modeling slightly below the guidance of 13% display revenue CAGR and below the guidance for 30% 2013 operations margin.

* Valuation is undemanding at 4x 2011 EBITDA. Yahoo! has a very attractive Asian Internet investment portfolio and a strong balance sheet. And YHOO's display ad segment is pacing the market and not underperforming. But Citi remains concerned about:
1. Long-term Display growth -- given increasing competition from Google (GOOG) and Facebook
2. Continued Internet usage share loss -- now less than 10% of U.S. Internet usage minutes
3. Lack of mobile, social, local and video advertising assets.

My view is that the quarterly results and 2011 guidance likely hasten a corporate transaction.

long YHOO

Lack Of Worry

The action today felt as though market players were caught by surprise. No one really expected the market to do much on the State of the Union address, so when we gapped up to start the day, it was quickly sold, but the bulls found their footing and caught the overanxious bears and underinvested bulls by surprise. What was particularly surprising was that the charge was led by small-caps initially, but then oil and commodities took over and really caught fire.

The FOMC interest rate decision was greeted with a yawn. There were a few language changes in the policy statement but nothing to spook the market or change the view that the Fed will keep on running its dollar printing press.

We ended up closing slightly soft, but breadth was very strong at better than 2 to 1 positive, and volume picked up a little, giving us a technical accumulation day. Unfortunately, the DJIA failed to close over 12,000, so we will continue to hear about that irrelevancy from the geniuses on TV who seem obsessed with it.

The big question now is whether we are right back to where we were eight trading days ago, when we were going straight up without a pause. Is the never-ending uptrend back on? The indices certainly aren't acting like there is anything to worry about, but quite a few stocks suffered some damage in the last week, and you have to wonder if they can just shake it off and act like nothing happened.

Once again, the market has done a superb job of beating up any bears who thought that we could actually see some sort of downtrend. Conditions were quite good for more aggressive selling, but just when we looked ready to crack, we turned back up and used the shorts and underinvested bulls for jet fuel.

Earnings reports after the close are coming in quite good so far, and that is giving us an additional boost. Don't forget that we have AMZN and MSFT tomorrow night, which will be market movers.

Tuesday, January 25, 2011


I Still Like Yahoo!

YHOO's results were slightly disappointing and the market's weakness seems overdone.

As the dominant firm in display advertising, Yahoo! generates stable and significant cash flow and it is rich in private Asian assets. Yahoo! is likely to be acquired in the fullness of time. If anything, the quarter could hasten a corporate transaction.

Similar to other commodities, the price of cotton has climbed to an all-time high today, doubling in the last five months.

We are in the nascent stages of cost-push inflation.

It's possible that corporate profit margins have peaked and are vulnerable to mean-regression.

Are consensus S&P profit forecasts safe?

Meredith Makes Nice

After her clash with the municipal bond community, Meredith Whitney is now making nice with Wall Street.

It remains my view that Yahoo! is a 2012 turnaround story that is supported by the underlying values of the company's Asian assets. Currently, those private assets are knocking the ball out of the park.

Tough Call on Financials

Is the recent weakness in financials simply profit-taking or a more dire foreshadowing of lower stock prices?

Run, don't walk, to read Bloomberg's fascinating account of the Goldman Sachs/Facebook deal.

Why the Gold Plunge?

I'm hearing that the schmeissing in the price of gold stems, in part, from a hedge fund leveraged to the hilt in the commodity that is now liquidating.

long YHOO


That sure was a crazy day. We had about six intraday changes in direction and went from a near breakdown two hours before the close to a finish at the high of the day. Overall, we ended the day with some very minor losses. There just isn't much conviction one way or the other, so we end up with very random action. Days like this make you think there actually may be something to the "random walk" theory of the market.

Breadth ended up just about even, and volume was nothing special. Retail led all day, and it was mainly a bounce in oil and commodity stocks that gave us the end-of-the-day flourish.

Perhaps market players are hopeful that the State of the Union speech tonight will be a positive for the market. It generally doesn't have much impact except for a few niche areas like alternative energy, but the new, business-friendly President Obama could actually be a positive for the market for a little while.

Whatever happens, it won't last long, because the focus will turn very quickly to the Federal Open-Market Committee interest rate announcement. We also have plenty of earnings reports to come, but the next really major ones aren't until Thursday night, when AMZN and MSFT report.

Earnings from YHOO and JNPR are out after the bell, and neither stock is reacting particularly well to the news.

Monday, January 24, 2011


Curious action today.

From my perch, it looks manufactured (i.e., program driven).

Maybe Mr. Market has a mission (i.e., DJIA 12,000), but there is conspicuous weakness in the financials and selected commodity plays.

The Specter of Profit Margin Pressures in 2011

Corporate profit margins are among the most mean-reverting economic series extant.

Both MCD and HAL are trading lower on concerns about fourth-quarter profit-margin pressure (reported this morning).

Despite the expected growth in U.S. capacity utilization this year, disappointing margins (inability to pass on higher input costs) remain a possible 2011 feature.

Run, don't walk, to read '12 Reasons Meredith Whitney Is Wrong About the Muni Crisis' on Business Insider.

It is my view that a classic buying opportunity might be emerging in the municipal bond market.

Eurozone PMI Beats Expectations

The eurozone's January flash purchasing managers index comfortably beat expectations, rising to 56.3 against expectations and December's reading of 55.5.

Not surprisingly, Germany provided a boost as stronger service sector activity supported the gains.

I suspect that the austerity measures imposed by the weak links of the eurozone will be felt in the purchasing managers index in the months ahead.

Gold bulls are clinging to the tired thesis that the world's central bankers are in an inflation/money-printing action that should support higher gold prices. Unfortunately, for those bulls, many non-U.S. central banks are hiking interest rates and restricting credit. Moreover, our Fed seems likely to be on the last leg of quantitative easing, which is not likely to be advanced further than QE2 beyond midyear.

I continue to view the price of gold as exhibiting wild volatility (particularly against its steady price appreciation over the past decade) and ending the year about $150 per ounce lower than it is today.


A big bounce in AAPL and continued strength in a few Dow stocks led the market higher. There was a brief dip in the final hour, but the buyers regrouped and managed to close pretty well.

In addition to Apple, there were also quite a few bounces in smaller stocks that were crushed last week. In many cases it was on lighter volume, but the dip-buyers, who had disappeared last week, did step up. It is pretty much what you'd expect in a market where a number of stocks had become oversold, but the much more important question is whether or not we keep on going.

Although breadth was almost 2 to 1 positive, volume was quite light, which tends to make a bounce less trustworthy, but since March 2009, shorting low-volume bounces has been a disaster for any bear brave enough to do it much. Technically, bounces like we saw today shouldn't be trusted too much, but as a practical matter that has been a bad call far too frequently for far too long to do so with a high level of confidence.

We'll see if the bulls can pull it off, but they are going to need some strong reactions to earnings reports to really heat up the momentum again. GE, WMT, and IBM can lead for only so long on their own. They need to drag along some other stocks with them to if we are going to have a healthy market. It is a very rare thing for these big-caps to lead like this, so either the rest of the market perks up or big-caps falter, or it is going to be a very odd mix.

Nothing is moving very much on earnings after the close, but we have a slew of reports tomorrow, including a number of Dow names, which should keep things interesting. The bulls are trying to pull off yet another quick recovery. They have their work cut out for them, but they had a decent start today.

Friday, January 21, 2011


AAPL has dropped notably, especially on a relative basis.

For example, looking at AAPL, this stock just got a lot cheaper as the earnings were explosive and cash per share just increased nearly 18% in just one quarter. Think about that! The cash production alone is both stunning and historic. So, less cash and counting for increased earnings, AAPL's valuation just dropped over 20%.....


Will Yahoo! Catch Up?

With eBay and Google's great numbers, I continue to expect a catch-up in Yahoo!'s shares over the near term.

Dysfunctional YHOO's shares have been well behind its peer group over the course of the last few months.

With EBAY and GOOG's great numbers, I continue to expect a catch-up in Yahoo!'s shares over the near term.

Gold Gets Schmeissed

Gold, the object of my disaffection, continues to get schmeissed, now down by over $7 per ounce.

Good Reports Getting Punished

It was a fitting end to a week that saw the worst selling since August. Not only did we have a poor close but we have to be at least a little concerned that the market might be undergoing a change in character which will lead to a more vigorous downtrend. We aren't broken yet, but there are some worrisome developments.

Good reports from AAPL and GOOG were sold, and small-caps were pounded as bids disappeared. The DJIA managed to escape the carnage with some good action in a small handful of stocks, but it really was a very misleading indicator of the overall action.

The biggest shift this week was that the dip-buyers just weren't there to bail us out. After the selloff on Wednesday, there was little notable bounce on Thursday, and then the opening gap this morning was faded. We just didn't have that tenacious dip-buying that has served this market for so long.

What was particularly troubling was the very poor action in small-caps and many big-cap momentum stocks, especially the cloud computer group. Those are the stocks that the aggressive speculative money tends to favor, and when they act poorly, the downside can come very quickly.

If you were holding long positions, it was very tough not to take some hits this week, but if you have taken your hits and made some defensive moves, then you'll be in good shape. This market has come back from the brink of disaster so often that it is dangerous to be too negative, but we certainly have to be wary when so many stocks act so poorly.

The good news is that we needed a shakeup to create a new crop of opportunities. We were almost ridiculously extended, and it was becoming very difficult to navigate at those nosebleed heights.

Thursday, January 20, 2011


On Gold and Europe

Gold: Based on the majority of bullish comments I am seeing this week to exploit the current weakness and buy the dip in gold, gold bugs/bulls seem to remain of the view that "Gold is just 'God' with the letter 'L' -- that is, they worship at its shiny altar. I remain of the view that the gold bugs and gold bulls are clinging to the "inflation/money printing" actions of the world's central bankers. Unfortunately (for them), non-U.S. central banks are now hiking interest rates and restricting credit, and our Federal Reserve is likely to be employing its last quantitative easing effort over the next few months.

Europe: Central to my worldwide economic growth case is the idea that Europe's GDP will disappoint. The eurozone remains critical to many multinational S&P companies.

Buffett to Wrap It Up at Washington Post

Warren Buffett will retire from the Board of Directors of Washington Post.

Defensives Catch Fire

As should be expected in a market downturn, the defensives are on fire.

Recommended Reading

Run, don't walk, to read Knowledge@Wharton's "The Goldman Sachs Facebook Deal: Is This Business as Usual?"


After the ugly action yesterday, market players struggled to put together a bounce today. A very poor reaction to earnings from FFIV helped to keep sentiment negative, and small-caps, in particular were pretty lifeless. Breadth improved during the day, but the Nasdaq was still solidly negative, with 740 gainers to 1,920 decliners.

The big question now is whether some good earnings reports can restore the bulls' vigor. Unfortunately, once a major stock like AAPL has a sell-the-news reaction to a good report, there is a greater inclination to do the same to other good reports.

We have another good test hitting right now. GOOG just put up some very good numbers, and the stock initially was up about 25 points, but it is now up about 3. The report looks very good with a big beat and good growth in paid clicks, but this market is still very extended on a technical basis, and that is going to be tough to overcome no matter how good the numbers might be.

We definitely have had some change in the character of the market action, but this market has a history of shrugging off these selling flurries pretty easily. We'll see what they do with Google tomorrow. If it can hold up better than Apple, that will help us build some support, but if the sellers don't relent, this correction is likely to gain some traction.

Wednesday, January 19, 2011


Road Remains Rough for Residential Real Estate

The housing data this morning confirms my view that residential real estate is struggling to stabilize.

Though refinancing applications rose by over 7% (its third weekly rise), applications for new mortgages were 2% lower, for the fifth weekly decline in the past six weeks.

Run, don't walk, to read Goldman Sachs' worthwhile "The Bitter After Taste of Higher Food Commodity Prices," which was released last night.

Here is Goldman's report summary:

* "Prices for food commodities have surged in recent months, with our Goldman Sachs Commodity Agriculture & Livestock index up 60% since its recent trough in mid-June 2010."

* "Higher food costs have yet to reach the retail level. Our analysis suggests an average lag of seven months from commodity price changes to retail food price changes. Typically, retail food prices move about one-tenth as much as commodity prices. Of course, there is significant variation in both the time lag and the degree of pass-through in individual episodes."

* "If commodity prices held steady at current levels, we would expect to see consumer food inflation accelerate from roughly 1% over the past year to about 5% in mid-2011, contributing about ½ point to the headline Consumer Price Index. Pass-through into core could also be a few tenths of a percentage point, although there is considerable variation around this outcome. These results suggest that the burst of food inflation seen thus far poses modest upside risk to our current inflation forecasts, but not a major threat to the broader economic outlook."

Sequential and combo indicators designed to identify market tops and bottoms are giving a sell signal on the main U.S. stock benchmark for the first time since mid-2007. On a weekly basis, the two indicators signaled on Jan. 14 that a reversal is imminent.... DeMark expects a decline of at least 11% because his work shows that markets move in increments of 5.56%, he said. Assuming a drop of twice that size "is a conservative estimate," he said.

-- Bill King, The King Report


Last Thursday, a number of market players were contemplating whether INTC's earnings report would trigger a "sell the news reaction." That didn't happen at all, and many of the bears were served up as short squeeze fodder once again.

Today the bears finally got their long anticipated "sell the news" reaction, but the catalyst was the Big Kahuna: AAPL. There was nothing wrong with the Apple earnings report at all. It even surpassed some of the most optimistic predictions, but the sellers hit the gap-up on the news and have been selling all day.

When one of the primarily leaders in the market sells off on a very good earnings report, it isn't too hard to imagine how other stocks might react. If they don't want to buy Apple on that great news, why would anyone want to buy hundreds of other technology stocks that aren't even in the same class as Apple?

The selling today shouldn't be a huge surprise to anyone. It was going to happen sooner or later -- the market just needed a good excuse. The poor reaction to Apple's good earnings was the excuse.

Despite the very misleading Dow Jones Industrial Average, this was the worst day of selling for the market since August. What really surprised me was that there was absolutely no bounce at all. It was a straight trend down all day long with no respite in the selling. Breadth was better than 4-to-1 negative by the close. The good news is that volume wasn't too heavy. It wasn't a massive day of distribution with big institutions dumping shares, but it sure was some pretty aggressive profit-taking.

The thing we have to watch very closely for now is a failed bounce and some downside follow-through. What really makes corrections painful isn't the initial pullback (although that can hurt), it is being sucked back in and loading up for a failed bounce. One should not dismiss today's action as an aberration.

F5 Networks just reported earnings, and it is getting smoked on a slight beat and in-line guidance. That isn't going to help the technology group tomorrow.

Tuesday, January 18, 2011


The National Association of Homebuilders Confidence Index came in at 16, in line with forecasts. Present and future indices, which have been relatively range-bound over the past 12 months, were not changed from the prior month. (More on housing tomorrow morning.)

Foreign net long-term buys of U.S. financial assets in November were well above the prior two months at $85 billion. An increase in Treasury bonds and notes were a notable reason for the rise in what appears to have been a flight to safety.

I'm hearing that several major prime brokerage firms are planning to implement an increase in margin requirements to their hedge fund clients.

Recommended Reading

Run, don't walk, to read President Obama's op-ed in The Wall Street Journal today on striking "the right balance."

The Book of Jobs

Over this weekend, I thought about how the Bible has supplied symbols and images to some of the greatest songwriters -- ironically, even to those that seem to have little faith (Woody Guthrie, Bob Dylan, Pete Seeger, Johnny Cash, etc.).

For example, consider Bob Dylan's "All Along the Watchtower" (popularized by Jimi Hendrix) in which the image of the watchtower is an allusion to the Book of Isaiah: "There's too much confusion / I can't get no relief" refers to a "city of confusion" and a "watchtower" and his reference to the time growing late and to the duty to keep watch alludes to the The Gospel According to Matthew.

The wisdom of Ecclesiastes is especially prominent -- for example, in Bob Dylan's "Blowin' In the Wind," in Pete Seeger's "Turn, Turn, Turn..." and in Kansas's "Dust in The Wind." Sometimes called the white elephant of the Canon of Scripture or the sphinx of Christian literature, Ecclesiastes has been an enigma and mystery to students of the Bible as it fails to give easy answers to life's complexities.

All we are is dust in the wind.

The lack of predictability of life (and in investing) were underscored over the weekend with the news that Steve Jobs has taken an indefinite medical leave at Apple.

The Obvious

* There is no company in the S&P 500 that relies so importantly on its CEO as does Apple.

* The public currently lacks any meaningful information on Jobs' health. Uncertainty will reign as little new information will likely be forthcoming over the next few months.

* The company's creative team and new product launches will be under intense scrutiny, but the clear-cut impact of Jobs' indefinite leave is only conjecture at this time. It cannot be viewed as a positive and the continued uncertainty is likely value- and P/E-ratio-destructive.

* Heavily weighted in numerous hedge funds, Apple's shares are vulnerable to continued heavy selling, particularly after its massive run.

* The weight of the Nasdaq's advance has been firmly in Apple's lap. The shares account for over 20% of QQQQ.

* Arguably, in an already overbought market, the news could promote and expose the markets to a harder selloff.

The Not-So Obvious

* Product innovation will continue at Apple, with or without Steve Jobs, as the company's product cycle is likely formulated years in advance.

* Steve Jobs (and his family) could conceivably decide to sell some Apple's shares. This would likely place more pressure on the company's share price.

* Apple's Board of Directors could begin to unleash its hoard of cash in the form of dividends.

* Will the proceeds from the sale of Apple's shares today remain in cash, or will it be distributed in other tech shares or in other sectors of the market?

Similar to Ecclesiastes (or even a more recent Burt Bacharach's "What's It All About, Alfie"), unfortunately, I don't have the answers to Apple ... or to life.

More Rallying

News that AAPL's Steve Jobs is taking a leave of absence looked like it would be a good excuse for some consolidation while we awaited the company's earnings, but this market refused to rest. Apple bounced back, and we went out near the highs of the day. Early in the day, breadth had been poor and small-caps were lagging, but by the finish that was no longer the case.

If this market is going to pull back, then earnings are most likely going to be the catalyst. IBM numbers are out, and that stock is trading up after a 10-cent beat. Cree is down sharply, but that chart signaled that there were problems.

Apple, of course, is well ahead of estimates with EPS of $6.43 versus estimates of $5.43. That looks like it will beat the whisper number as well, and the company even raised guidance a bit for next quarter, which it does not normally do. This looks like a very good report, and I expect to see Apple trading up at least $10 when it reopens. The Nasdaq-100, which is about 20% Apple, is already trading up about 0.5%.

With the good earnings tonight, we should have another gap up tomorrow morning. The bears are going to be hoping and praying for some sort of intraday reversal to finally kick in, but there just aren't any selling catalysts to be found. We have the conditions in place for a sell-the-news reaction, but that game just isn't playing.

Saturday, January 15, 2011


While YHOO traded like a dead sardine on Friday, I would note that the out-of-the-money call options were very active over the last two days.

Is subprime making a comeback in the Big Apple?

Run, don't walk, to read Knowledge@Whartons' "China at a Crossroads: Trade Tensions Vie With Consumer Needs."

I thought many of the economic releases Friday morning (among them inventories, confidence, retail spending and consumer prices) were unambiguously negative vs. consensus.

Regardless, Mr. Market remains the Energizer Bunny.

China has raised its reserve requirements in an attempt to take preemptive measures to control inflation.

Big Earnings On Tuesday

Given the way this market has been acting for the last six weeks, it shouldn't come as too big of a surprise that INTC's earnings report failed to be a turning point, like it has been in the past. Intel itself finished down, but it seems like it was the only name in the chip sector that actually declined. There was some wild chasing of semiconductor-related stocks and, to add to the euphoric feeling, banks were very strong as well.

Volume and breadth were OK (nothing fantastic), and there was notable weakness in commodity-related stocks and sectors, including steel and coal. I was a bit surprised to see the list of new highs shrink today, but that was due mainly to the pullback in oil.

There is not much new that can be said about this market. The indices have tremendous momentum. In fact the lack of pullbacks is at historic levels. There has been no profit-taking at all in this market and anyone brave enough to try to call a top is being crushed.

Maybe the market is acting irrational and illogical, but that is the nature of the beast. The market doesn't care what we think or feel, and we certainly aren't going to win any arguments with it.

Don't forget that earnings season is just beginning. The very important report from AAPL will come after the close on Tuesday, and that will set up a very interesting situation with the market at such lofty levels.

Thursday, January 13, 2011


Constructive on the Macro Picture

From where I sit, it looks like the economy will continue to gradually improve.

Unemployment remains stubbornly high, but this is not a good data point to wait for when investing -- it lags.

The ECRI weekly growth rate continues to improve. Last week, it moved further into positive territory at 3.3% (a 33-week high), and we get another update tomorrow.

Interest rates are poised to move higher, but I don't think they will do so dramatically. Moreover, the reason they are moving higher is as a reflection of an improving economy. Over the summer when the double-dip crowd grew vocal, interest rates fell to levels that appeared unsustainable. So upon an improving economy, one should expect rates to drift higher to a more normalized level. Also, inflation remains low. I know there is some food and energy inflation, but the biggest component of inflation in the economy is labor costs, and those appear well anchored. Additionally, there remains considerable slack in the economy, so inflation is unlikely to be broad-based in the near future.

MERU is a provider of virtualized wireless LAN solutions, a space that is heating up and garnering a lot of attention. It has a $300 million market cap and very high growth rates. The stock has been publicly traded for less than a year, so is under most people's radar. It broke out on high volume the other day and is now on my radar.

MIPS Tech is a chip maker for home entertainment, telecom, networking and multimedia. It has a market cap of $800 million and very high earnings growth. This is another stock that has been moving higher on big volume increases, and that could bode well for further gains this year. The stock also ranks well on measures of profitability, relative strength, fund sponsorship, etc.

Radware is a $700 million market cap, Israeli provider of network security solutions. This is another hot space, and there have been many rumors of a suitor looking to buy RDWR. On its own merit, the stock ranks well on all of the measures of growth and profitability that we look for. But the kicker is that I believe that eventually it will get an offer high enough to accept, and that could be the cherry for investors.

Positive Signs From the Eurozone

Is it possible that the euro crisis won't be the calamitous market event everyone is expecting?

The euro is bouncing for a third day after another bout of solid demand for bond auctions. Earlier this week, it was Portugal, and today Italy's auctions were met with solid demand. More notable is the action in the credit default swaps (CDS) market, where CDS prices for Greece are down 5%, Italy has fallen 8%, and Spain is down 9%. This is a good sign, and hopefully it will continue.

ECB President Trichet has urged eurozone governments to "get ahead of the curve" in dealing with their debt issues. He also wants to improve the "quality and quantity" of the European Stability Fund. So is it possible that the euro crisis won't be the calamitous market event everyone is expecting?

Look, the sovereign debt issues in Western Europe are serious matters, and as such they are not being taken lightly by the markets. But it is possible that they will be dealt with without a huge amount of fallout in the other parts of the global financial markets. Not every crisis leads to a market crash. It might just be that the market will price in these events, yields will move higher for those affected nations, and in the end, we will look back on it as just another stone in the wall of worry that bull markets like to climb.

Everyone's Looking At INTC

There was some minor selling pressure for a change, but a late run took us off the worst levels of the day. Breadth inched lower today with about 2,500 gainers and 3,100 decliners. The most notable action was weakness in precious metals, oils and commodities despite a very weak dollar. The inverse correlation did not work today, and that is not a good sign -- especially for gold.

Most of the rest the market was very mixed. There was some minor strength in retail but semiconductors stayed flat for the most part ahead of INTC's earnings.

All eyes are on Intel now. The company, over the past year or so, has had a history of issuing very strong reports and then running into selling pressure after initial positive action. With the exception of last quarter, this has been a classic "sell the news" stock.

Intel has not been much of a leader for quite a while, but it still is important as far as setting the tone for earnings season. If a bad report is bought, that will bode well. But if a good report is sold, things could get very tricky given how technically extended this market is.

I still see some strong pockets of momentum and some extremely extended stocks, but what I don't see is any real fear out there. Market players still appear to be very unconcerned about chasing strength. We'll see if earnings season does anything to change things.

long INTC

Wednesday, January 12, 2011


The Beige Book reported moderate economic expansion. The market's reaction was nil.

A Return to the Past

Do you know Lou Manheim? He is one of the greatest investment philosophers of all time. Here are some of his pearls of wisdom:

* "Stick to the fundamentals. That's how IBM and Hilton were built. Good things, sometimes, take time."
* "The worst mistake we ever made was letting Nixon get off the gold standard."
* "Kid, you're on a roll. Enjoy it while it lasts, 'cause it never does."
* "Man looks into the abyss, and there's nothin' staring back at him. At that moment, man finds his character, and that's what keeps him out of the abyss."

Of course, Lou Manheim was the character played by Hal Holbrook in the original Wall Street movie. Manheim was the old veteran who had been through the one of the worst periods in the equity markets' history, 1966 to 1982. The equity indices went nowhere for over a decade. The Dow Jones Industrials went over 1000 for the first and a brief period of time in January and February 1966; it was not until November 1982 that the Dow Jones went back over the 1000 level for good. For 16 years, the market went nowhere.

We lost an entire generation of investors to the Great Depression. We regained them in the post-WWII global economic boom that lasted through the early 1960s. In 1982, a new investor class was cultivated ... until they were sent into their own financial diaspora after the tech bust of 2000. From 2000 until 2010 we destroyed another generation of stock investors and sent them to the fixed-income markets. The void left us with Internet-based traders, technicians and hedge fund gunslingers who fed on bearish sentiment, volatility, lack of liquidity and investor apathy.

I hope they enjoyed it while it lasted.

In 2008 we looked into the abyss. In 2010 we ended the decade-long equity doldrums while concurrently ending the nearly three-decade-long bull market in bonds. Here it is 2011, and fundamentals matter once again.

Too many market participants relied on 2000-2010 as the new normal or a paradigm change in the equity markets. The art of fundamental investing and financial statement analysis was lost. History will prove that like 1966-1982, the period 2000-2010 will just be another protracted bear market that is going to be followed by a period of global economic growth and equity investor interest.

Understand that in every economic expansion, there will be winners and losers. There will be challenges of economic, political and military proportion. It won't be easy, and it won't be in a straight line. A crisis is bound to come, just like the crash of 1987. We are seeing the next IBMs and Hiltons being built -- AAPL is a great example. We will also see the destruction of household names that will succumb to technological innovation, changing consumer behavior or bad management. In the last bull market, Woolworth was replaced by WMT as the largest general merchandise retailer. I can foresee a major newspaper meeting its demise this decade.

Get ready -- the 2010s will mark a return to our economic and financial past. I would not even rule out a return to the gold standard.

Momentum Continues

Today was one of those days when all the gains came in the gap-up open. The indices did nothing the rest of the day, so if you weren't in yesterday, it was difficult to make much additional progress. Breadth was solid but volume weak. The good news was that we had some leadership from banks, and the dollar weakened, which helped to boost oil and commodities. All major sectors were positive.

Overall, the song remains the same. We continue to ride an amazing tide of momentum, and there just isn't any notable selling pressure at all. We dipped a bit in the final hour today but bounced right back. There isn't any fear or worry right now, and bullish sentiment keeps on building.

Tomorrow afternoon, earnings season kicks off with the report form INTC, and then JPM on Friday morning. It is going to be very interesting to see if earnings season does anything to change the character of the market action. Expectations are quite high after the run we've had, but companies have delivered nicely in the last few quarters and haven't reflected the ugly recession that has weighed on Main Street for so long.

long INTC

Tuesday, January 11, 2011


Inflate or Not?

This question gets to the heart of monetary policies being pursued to restore economic growth. A recent study presented at the American Economic Association's (AEA) annual meeting asserts that the Fed should push inflation to 2.5% or so while holding rates at zero, creating a negative real interest rate. While not contemplating who actually pays in a negative real rate environment, the AEA believes that negative rates will spur growth and employment.

In contrast, the brilliant John Hussman points out this week that economic growth typically follows periods of high real interest rates, because this incentive to save creates the capital investment that generates growth. Hussman offers some real-world data, not theory, to bolster his point. His chart shows that economic growth or contraction correlates positively with real interest rates.

Bernanke is pursuing option A at the moment, trying to create inflation while keeping rates low. This could create a spurt of growth, but is likely to incent the sort of mal-investment that caused the housing bubble of the last decade. I put more faith in the reasoning of a real-world practitioner like Hussman, who has data to support his thesis.

Will the Sun Shine on Solar in 2011?

My nomination for the most unjustly unloved group right now is the solar stocks. The group performed terribly last year despite great sales and earnings growth, as investors refused to believe that various government subsidies would continue to drive business. Every year, German feed in tariffs are about to get cut, U.S. tax credits are about to expire, Italian subsidies are about to go away -- and on it goes. Yet, every year the price per kilowatt continues to decline, making projects more economical, and low interest rates create low hurdle rates to get projects funded.

Because of these fears, the group is beaten down to absurd valuations, especially given the prospects for growth in 2011. There are no signs of demand receding, and in fact, the news from LDK yesterday indicates that market conditions are still very strong. Tell me in what other group can you buy spectacular growth at single-digit P/Es?

Solar Stocks

I will grant that many of these names are Chinese, and no one trusts the Chinese bookkeeping. I argue, however, that these global players are in a different league than the reverse-merger microcaps that dot the fraudulent landscape. The solar names are large and globally prominent companies, and must keep the accounting squeaky clean in order to win business around the world. I don't think the low single-digit P/Es are sustainable, and these stocks are likely to get the "double dip" of rapid EPS growth and multiple expansion this year.

Revisionist History

Changes in expectations matter greatly in finding the best stocks.

After not working from mid-2008 through mid-2009, earnings estimate revisions made a comeback as a powerful indicator of stock price performance in 2010. Generally speaking (since there are always exceptions), the greater the change in the EPS estimate over the course of 2010, the better the stock price performance.

High returns were associated with larger positive revisions, while poor returns were associated with negative revisions.

Of course, there is one important detail to mention: You don't know in advance which stocks will have the largest upward revisions!

In 2009, the market precisely tracked the last post-bubble bursting in 2003, with a bottom in the spring followed by a robust rally in which many felt the market got ahead of the fundamentals. And 2004 was sideways to down until the fourth quarter, when a rip-roaring rally appeared as the economic recovery took hold. Not surprisingly, 2010 followed the same pattern.

Naturally, the question now is whether 2011 will follow the 2005 pattern, when the S&P 500 gained only 4% after a painful year of trading up and down. Doug "Orson Welles" Kass did make this call recently in his outlook for 2011. The 2005-2007 market was driven by a lot of unnatural acts occurring in the fixed-income and housing markets, which are unlikely to be repeated, however. If similar bubbles form in some other asset class, which is possible given the easy conditions at the moment, the markets could follow this pattern.

Uncertainty Ahead

It was another day of gains as the bulls just keep on plodding along. We stumbled a bit in the early afternoon but, of course, the dip-buyers jumped in to prevent the market from staying in negative territory too long. Breadth was positive as oil, steel and commodity plays bounced back with the euro (which was up a little). No major sector was negative, but financials lagged a little.

A number of traders have indicated that they find this action to be rather tedious. It isn't bad, but it is so unvarying from day to day that it is becoming tiresome. Opportunistic traders who are agnostic about market action would like to see a good shake or two and little more variety to create a new supply of opportunities.

Earnings reports will start to roll out on Thursday night when INTC reports, and that should cause a little more volatility. In the interim, however, the action will probably remain very slow.

long INTC

Monday, January 10, 2011

Eurozone credit default swap spreads hit a new high this morning.

Last week's expiration of the California first-time homebuyer tax credit (Assembly Bill 183), which was regardless of income and worth up to 5% of the home's price or $10,000 (whichever was less), will likely weigh on home turnover and prices in the months ahead.

This is important, and few housing observers have mentioned the potentially adverse effect on the national housing price figures, which have been positively skewed by the California home tax credit.

For example, Case Shiller reported that home prices in San Francisco, San Diego and Los Angeles rose by about 3% in October, though the total country (20-city composite) reported a 0.8% drop in prices.

National home activity/turnover volume was also skewed because of the California tax credit. For example, California single-family new-home sales rose by nearly 40% in November, as nationwide new-home sales increased by only 5%. (The Northeast dropped by 27%!) During the same period, existing sales in the West rose by 13%, even though the national activity was flat.

Ergo, a combination of the judicial uncertainty, the expiration of the California tax credit, lower available credit and higher mortgage rates suggest that national home activity and home prices are headed for a fall in the months ahead.

We should all be mindful, however, that, with few exceptions, many (if not most) observers -- and that includes Ben Bernanke -- missed the 2008-2009 downturn, despite the clear and accumulating evidence of economic uncertainty and growing credit risks (and abuses). The analysis of multi-decade charts and economic series convinced most (along with other conclusions) that home prices were incapable of ever dropping, that derivatives and no-/low-document mortgage loans were safe, that there was no level of leverage (institutional and individual) too high and that rating agencies were responsible in their analysis. Importantly, they also failed to see the signposts of an imminent deterioration in business and consumer confidence that was to result in the Great Decession and credit crisis of the last decade. Many of those who are now expressing more extreme levels of optimism were in the above camp and experienced significant pain in the last investment cycle, while The Edge profited in those years.

Indeed, as I recently wrote, many investors seem to be similar to victims of Plato's allegory of the cave, a parable about the difficulty of people who exist in a world shaped by false perceptions to contemplate truths that contradict their beliefs. This is why so many investors were blindsided by the last downturn and, from my perch, continue to wear rose-colored glasses.

-- Doug Kass, "Where I Stand" (The Edge | Dec. 17, 2010)

I truly continue to marvel at the confidence in the forecasts of strategists and economists given, their recent inability to come anywhere close to what actually transpired in the economy, stock and credit markets during 2007-2009.

Coincident with higher stock prices, the cheerleaders (within Wall Street and the Obama administration) are in force (e.g., Fed member Yellen's assertion that quantitative easing will produce 3 million jobs).

In the realm of realists, Pimco's El-Erian calls the current cycle "The New Normal," and Carmen Reinhart and Kenneth Rogoff write that This Time It Is Different.

Regardless of the term used (and though P/E multiples are approaching their historic mean), this is not your father's economic cycle.

From my perch, tail risk and an abnormal amount of hard-to-measure moving parts characterize the current backdrop, leading to the possibility of a wider variety of economic outcomes as compared to prior cycles. You wouldn't detect this, however, from the conviction and lack of caveats within the bullish cabal (even despite Friday's weak jobs report).

Case in point: housing.

Under normal conditions, housing would be poised for a dramatic turn to the upside.

* Until recently, mortgage rates were at generational lows.

* New-home production has been on the descent for three years, and current levels of production are at historically low levels.

* With mortgage rates low and home prices 30% below 2006-2007 highs, affordability is at a multi-decade high, and the benefit of home ownership vs. renting is at 15-year highs.

* Continued migration into the U.S., steady population growth and normal household formations should provide meaningful pent-up demand against the aforementioned underproduction of new homes.

Unfortunately, there is nothing normal about the current (and past) housing cycle.

* Abusive mortgage lending (low-document and no-document loans) and death-at-birth mortgages (pay option ARMS, interest-only and ridiculously ballooning mortgages) coupled with the Great Decession provided a toxic cocktail and produced an unprecedented drop in home prices.

* Owners and prospective buyers were in shock, and a large shadow inventory of foreclosed and (very) delinquent began to emerge.

* As home prices began to decline, the speculation in housing subsided, and, as home prices slipped more precipitously, the speculators (and "daytraders of homes") were eliminated from the marketplace.

* Houses were dumped into the market, and the shadow inventory grew geometrically.

* In the end, the shock effect of a Black Swan-like 30% drop in home prices has soured traditional buyers away from home ownership in favor of renting (a market that is now thriving/booming).

* The tail risk of housing's last cycle emerged as abusive lending practices (and "shortcuts") surfaced, robo-signing mortgage-gate disrupted the housing market, and available credit was steadily withdrawn, among the increased confusion, in the mortgage market.

Contrary to CNBC's revolving door of 'experts' who relentlessly downplayed the impact from yesterday's verdict through shoot-from-the-hip, on-air, instant analysis, it is a huge deal. To this day, I don't understand what that channel has to gain by hurting investors in this manner. This was exactly what they did during the subprime crisis in 2007 and ended up missing the whole thing -- getting serious about big events only after they occurred -- because they spent all their broadcasting time every day trying to downplay and bullishly rationalize what was really happening. Sometimes the glass just ain't half full.

-- Mark Hanson

The latest sword placed in the heart of the housing market occurred on Friday with the first high court ruling against banks and in favor of homeowners in Massachusetts, which ruled that there was no legal right to foreclose because assignment was not done properly -- again, questioning the integrity of the home title chain, the legal right to have foreclosed on 3 million homes since 2007 and the right to foreclose on another 8 million homes that are currently in the distressed/foreclosed pipeline.

In addition to this verdict's immediate impact, it brings about death by a thousand cuts ... the litigation phase of the foreclosure crisis is going to get out of control. Homeowners, originators, underwriters, trustees, servicers, title companies, MI firms and everybody else involved in the origination, funding, securitization, servicing and insuring spaces will be suing everybody else. Multiple, big cases will come from state AG's, and class action suits will be announced daily.

-- Mark Hanson

Massive legal confusion and uncertainty now surrounds the housing market, and with the recent rise in interest (and mortgage) rates, how anyone can make an optimistic housing forecast (or any forecast at all!) is beyond me.

For housing, it's (very) different this time.

Wondering If Things Will Change Quickly

The indices ended up mixed and breadth was slightly negative, but what was most interesting about today's market is how unworried everybody seemed. There just isn't any urgency to lock in profits, and the slight gap-down open to start the day was just another dip-buying opportunity.

The dollar weakened today after a big move last week, and that helped to make precious metals the leading group. That said, AAPL, FFIV, NFLX, DECK and the big-cap momentum plays were the main focus of the bulls. There was little notable action in the various sectors today.

AA kicks off earnings season tonight. The company reported a slight beat on earnings and a slight miss on revenue. Alcoa isn't an important stock, but it receives attention because it is always the first to report. Thursday night's report from INTC will be the first real market mover. In the meantime, I don't expect this market to do too much.

It is very impressive how well the market continues to hold up, but it is slowly becoming more mixed. There are still some good upside movers, but the list is getting shorter. The market still isn't doing anything wrong, but traders definitely have to be very vigilant and make sure they don't give back gains. We need to be mentally prepared for the fact that things can change very quickly once earnings reports start to roll out.

long INTC

Friday, January 7, 2011


Massachusetts Ruling Good for Private Mortgage Insurers

The Massachusetts ruling against the banks should be positive for the private mortgage insurers.

The Massachusetts court decision ruling against WFC and USB should be interpreted positively for the private mortgage insurers.

Big Win for the Bulls

The continued strength in General Motors, Apple, Baidu, Google and Amazon is very impressive.

First Boston Defends Big Banks

First Boston is out defending the large-cap banks and saying that the Massachusetts ruling will be reversed on appeal.

Swiss National Bank Bans Portuguese Bonds

The eurozone crisis continues.

The Swiss National Bank refuses to accept Portuguese bonds as security.

Concern No. 1: Fiscal Policy and Imbalances

There are consequences to our profligate spending and to our monetary and fiscal policies. That has been the message of the rising price of gold over the past several years. As we move closer to the 2012 election, the risk is that neither the Democrats nor Republicans have the political will to move on reducing the deficit. I fully expect partisanship to replace what now appears to be a move to the center by the Obama administration and its opponents. Our fiscal imbalances at the local, state and federal levels are out of control. Aggregate federal debt is now above 90% of GDP now. In This Time Is Different, authors Carmen Reinhart and Kenneth Rogoff point out that once you get to the 85%-90% threshold of excessive debt/GDP levels, there is a secular erosion in country growth rates.

Concern No. 2: Structural Unemployment

While the job picture has brightened, the large roster of unemployed is structural and will remain with us in the new year, owing to a bunch of "mega trends" such as rising globalization, gains in technology and temporary employment becoming a permanent feature to the jobs market.

Concern No. 3: The Rapid Rise in Interest Rates

Not only do higher rates compete with equities but they represent a serious challenge to the already weak residential real estate market. Home prices may not have bottomed. Refinancings are already evaporating, and the S&P/Case-Shiller Home Prices Index has turned down in the last three months (and will likely worsen as foreclosures delayed by the robo-signing scandals come back into the marketplace for sale).

Concern No. 4: Screwflation

The struggling middle class faces wage deflation and rising costs of living -- it is being screwed. Moreover, 10 years of flat stock prices and three years of declining home prices provide a weak foundation for the U.S. consumer, an important contributor to economic growth. We don't have to look much past TGT's weak December same-store sales to see that corporations will fall victim to screwflation. From my perch, Target's poor sales are not a one-off event. If I am correct that a relatively large component of the October-November improvement in retail sales was simply recession fatigue, personal consumption expenditures could flatten out in the months ahead.

Valuations could contract somewhat (a variant view) this year based on:

1. a deceleration in the rate of earnings growth;

2. rising inflation and interest rates;

3. an uneven and lumpy economic setting would produce lower and more volatile than consensus corporate profits; and

4. the continued tail risk in credit from the last cycle (e.g., the difference between the yields on Spanish and German 10-year bond yields indicates that the eurozone crisis remains intense).

Bears Can't Close The Deal

Once again, the bears squandered a good opportunity to push this market lower. They had a very good sell-the-news setup, an extended market, high expectations, complacent sentiment and a disappointing jobs report, but all they could manage was a half day of selling. Once we started to bounce at midday, we chugged steadily higher and ended with just minor losses for the day.

Oil was the biggest positive today, even though the dollar continued to rally. Banks were the weak spot after a negative court ruling on mortgage securitization. Leadership names PCLN, GOOG and AAPL helped the bullish cause, but it was a mixed bag with some good momentum in spots but some breakdowns as well.

It was a nice comeback by the bulls and another poor performance by the bears. It shouldn't be too shocking, since the bears must be lacking confidence after the shellacking they have suffered for over five weeks now, but you would think they would do a little better when giving such a good setup.

Once again, the trend is to the upside, and having any doubts about this market proves to be a mistake.

Thursday, January 6, 2011


Five Big Risks to the Recovery

These five factors could make the smooth recovery a lot more rocky.

They are:

* Fiscal policy and imbalances.
* The rapid rate of ascent in interest rates.
* Structural unemployment.
* "Screwflation."
* Sentiment and speculation.

Exploding Packages in Maryland

CNN reports that two packages exploded in a Maryland government building.

Heavy Call Action in Yahoo!

The January 17.50 YHOO calls have traded nearly 36,000 contracts today.

Run, don't walk, to read Zach Karabell's piece on strucutral unemployment in Time Magazine.

Hello, Screwflation, My Old Friend

Screwflation is a theme that I have emphasized lately; it has broad economic, social, political and market implications.

Similar to its first cousin stagflation, screwflation is a period of slow and uneven economic growth, but, in addition, it holds the existence of inflationary consequences that have an outsized impact on a specific group. The emergence of screwflation hurts just the group that authorities want to protect -- namely, the middle class, a segment of the population that has already spent a decade experiencing an erosion in disposable income and a painful period (at least over the past several years) of lower stock and home prices

Public companies, even some of the largest are not immune.

Just look at TGT -- today's victim of screwflation.

Given the domestic economy's reliance on the consumer, there will be many more victims.

I continue to question the foundation of growth and the assumption of a smooth and self-sustaining recovery that is so dependent upon the pressured average American consumer.

So, what went wrong with our economic and financial system in the past several years?

Wall Street was at the epicenter of all that went wrong in our economy over the past three years. A small cabal of bankers who created unwieldy, unregulated and unnecessary derivative products, or financial weapons of mass destruction, ended up producing an economic, financial and credit disequilibrium that affected nearly everyone in the audience today. This was done under the not-so-watchful eyes of regulatory agencies and of our government.

Recklessness abounded. How else to explain investment banks that were leveraged to the tune of 35-1, which seems to be the equivalent of playing Russian roulette with five of the six chambers of the gun loaded. If one added up the off-balance sheet liabilities to this leverage, you might as well have filled the sixth chamber with a bullet and pulled the trigger.

America rushed headlong into the twenty-first century without a proper understanding of what economic policies and financial tools were going to be required to prosper in a changing world. For more than two decades, the U.S. economy favored financial speculation over production.

The financial crisis impacted nearly everyone in our country, and, with those derivative products imported by the investment banks, AIG and several large money center banks to other financial institutions around the world, a massive credit crisis ensued, which nearly resulted in an unfathomable collapse in the world's banking system and securities markets.

Household net worths were decimated by the unprecedented stock and home price drops, and, to varying degrees, your parents' ability to help you pay for a college education was hurt.

Big Whisper Numbers

The action was a bit more sedate today. Breadth came in at 2,300 gainers to 3,300 declines, but the bears still couldn't gain any downside traction. Once again, the stronger dollar played havoc with oil, gold and commodities. Weak same-store sales data hurt retailers, but the semiconductor and pharmaceutical sectors stepped up. The action in leadership names was mixed, but no real damage was done.

The action tomorrow will be driven by the monthly jobs report. Expectations are quite high after the ADP report on Wednesday morning. I've heard some very big whisper numbers, so the risk of disappointment is quite high. Even if the numbers are solid, one has to wonder how much has been priced in as we've gone straight up for almost five weeks now.

The good news is that the dip-buyers are probably still hungry since they have had so few chances to buy weakness lately. They would probably step up fairly quickly in the event of early weakness on the report. I'm much more concerned about the possibility of a reversal if we have a strong initial response to the news.


You want to know which banks to buy? How about C, BAC, WFC, PNC, JPM and HBAN? How about USB?

You know what these stocks have in common? They are ridiculously low, kept down by rumor, innuendo, disbelieving analysts and lies.

Take Bank of America. On Monday I am reading some clown, and I use that term with great respect, talking about $150 billion in mortgage liabilities. Hey, why not say they have to make good on every mortgage ever? How short BAC is that guy? Hey, speaking of innuendo, when are we going to see the big WikiLeaks attack on Bank of America? What is that going to say? That Ken Lewis was pressured into completing the deal with Merrill? That Tim Geithner yelled at someone there? That Countrywide is a disaster? I mean, come one, what hasn't been said about this one?

In the meantime, what's really happening post-fin-reg? All of the unintended consequences we love to see so much if we are shareholders: higher debit fees, ATM fees, checking fees. What did we think would happen? That they would choose to make much less money? That they would become charities?

I figure any day now we catch some downgrades in these stocks, especially Bank of America, where people will say that it has moved up too much and that the housing and mortgage morasses are not solved and not priced in. Forgive me, but this stock used to be at $50. From $12 to $14? Yeah, what a move.

I think Citigroup could double by the end of this year. I can't even fathom how high JPMorgan goes when it reinstates that bountiful dividend.

The group has legs. It is way behind the market.

long BAC, C


It's not a question of when the housing recovery will occur, but how big it will be. I use a couple of classic tells to forecast housing sales and values, and they are flashing bright green, really defying gravity in their obvious way of saying, "Housing's back in 2011." This despite the universal, "Housing's the same mess it has always been" rap, as well as the downbeat projections, mostly from the noisy folks at Zillow, many of which do not reflect the hard macro data kept by other entities.

Look at these breakouts we have seen just this year: WHR, LOW, SHW, PIR, ETH, MAS, SWK and even WSM after that disappointing outlook. That's incredible. These stocks are screaming that sales for homes are going higher and that the value of homes is going higher, or you wouldn't be throwing good money after bad.

Especially ETH, as one does not go shopping at ETH unless you think your home's worth spending on. The stuff's too expensive, much of it now custom, and the sales are amazingly strong. That's good for the $300,000 home cohort. For the $200,000 home cohort, I look at Pier 1, and its sales are the best they have been since the housing boom -- before the bust -- began. Maybe better. Williams-Sonoma's run is harder to pin down, as it is a TIF kind of place. However, its catalogs are a little more downscale. I say the strength reflects good news for all except the lowest-price homeowners and buyers.

Whirlpool's been trying to break out forever, but the housing start numbers have killed it. The WHR move says that housing starts are going to get stronger. I have mixed emotions about that, because I don't want a lot of new inventory, but you have to think that at some point, these homebuilders will want to put up new homes to make money and not just to fulfill credit agreements or, wrongly, try to capitalize on the tax credit stimulus.

Wednesday, January 5, 2011


After early weakness, the market's reaction to the better-than-expected economic releases was far better than I had expected.

A nice win for the bulls today as risk remains on.

Gold's Near-Term Risks

Gold's inability to have a dead-cat bounce today probably augurs poorly for the price over the short term. As I see it, here are some of the near-term fundamental/sentiment risks to the price of gold:

* Investors might grow increasingly comfortable in a self-sustaining, inflation-free worldwide economic recovery.

* Real interest rates could ratchet higher, providing competition for non-income-producing assets (like gold).

* The world stock markets could surprise to the upside, reducing investors' interest in real assets (like gold).

* The U.S. government might (astonishingly) address the deficit.

* QE2 could mark the end of U.S. quantitative easing.

Run, don't walk, to read the Dallas Fed piece on housing, which was published during the holidays.

S&P vs. Junk

It is interesting to note the developing divergence between the S&P 500 and junk bonds.

Commodities Continue to Get Crushed

The commodities schmeissing continues today, with crude oil, gas, cocoa, coffee, corn, cotton, wheat, sugar, soybeans, oats, copper, gold and silver all down.

ADP Above and Beyond

The ADP report was well above expectations, at 297,000 against expectations of 100,000 growth.

Noteworthy was the large rise (270,000) in service employment, which, according to Miller Tabak's Dan Greenhaus will be the eleventh consecutive increase and the largest monthly increase ever in the ADP survey.

But as Dan cautions ADP has been off by an average of 71,000 jobs per month, and December is filled with statistical aberrations.

After a gap lower in futures overnight, the report has served to stabilize and then rally the futures.

It will be interesting to watch how the market reacts to the news.

I will remind everyone that it is not necessarily the news that counts; it's the way that the markets respond to the news that holds the key to future stock market performance.

The jobs picture has brightened somewhat, but the large roster of unemployed will remain with us in the new year owing to a structural disequilibrium in the labor market and the secular rise in hiring temporary workers (at the expense of permanent positions). As mentioned previously, wage deflation and rising costs of living are a toxic combination for the middle class that dominates our economy and spending (see screwflation).

I am especially concerned that some portion of the better economic figures (especially of a retail kind) is likely a byproduct of "recession fatigue."

The Market Bounces Back

One thing that's driven the bears crazy about this market for quite a while is how vigorously it bounces back just when it starts to show a little weakness. Yesterday, we had the breakdown in precious metals and some troubling action in small-caps.

Today, any worries or concerns about this market looked foolish. That good old-fashioned momentum was back again, with plenty of stocks acting well. What was particularly positive was the strength in key names such as PCLN, GOOG, CRM, AAPL, and even RIMM. The leadership stocks were leading once again, and that bolstered sentiment for just about everything. Even the GLD managed to close well off its lows despite the dollar's strong finish.

There is a strong tendency toward some aggressive profit-taking in early January as those folks who deferred taking gains for tax reasons are finally in a position to act.

Tuesday, January 4, 2011


Broadcom Could See Some Collateral Damage

If the ATHR/QCOM deal is accurate, BRCM should get hit, as the company has a licensing agreement with Qualcomm.

Minutes Minutiae

The Fed seems fully committed to completing QE2.

My principal takeaway from the Fed minutes is that the members have a high economic threshold upon which any alteration of policy would be implemented. In other words, the Fed seems fully committed to completing QE2.

Recommended Viewing

To some degree, I agree with Jim Cramer's contention that gold should be viewed as another currency. I fully recognize the difference between AU and industrial commodities such as copper and steel.

But more importantly, I can envision an economic/capital market setting where the conditions for gold, even when viewed as another currency, could be pressured and volatile.

Today's $45-per-ounce drop in the price of gold could be the precursor of increased volatility this year for the commodity.

Large Gold Put Buyer

I'm hearing rumors that there has been a large buyer of gold puts over the past few days.

Over the last few months, I have highlighted screwflation -- the notion that while corporations are flush, the average American is not.

The risks associated with this imbalance were highlighted in two editorials in The New York Times recently.

Momentum Slows

It was a mixed day of action, but the bulls were still able to hold up the major indices quite well. We had some aggressive selling of gold, silver and oil, which have been leading lately, and there was weakness in small-caps, but strength in some big-cap technology names like AAPL and AMZN helped to offset the negatives to a great extent.

I don't like the fact that the pockets of speculative momentum that we enjoyed during the thin holiday trading have dried up. Also, it is troublesome that we don't have any obvious upside leadership, however we still aren't seeing enough negative price action to make shorts attractive.

It was a good sign that the bulls managed to close us fairly well, but with positive seasonality slowing and still a couple weeks before fourth-quarter earnings to start to hit, we are susceptible for a bit more profit-taking.

If the market stays true to its recent character, that means we will just keep on climbing and make any sort of caution look foolish. Luckily, I've been trading long enough that I'm used to feeling and looking foolish.

Except For The FT, Most Of The Papers Have It Dead Wrong On BAC's Mortgage Exposure....

Why is the "truth," meaning the objective truth, so hard to come by? I am astounded by all of the misinformation and, perhaps, disinformation -- the latter meaningfully pejorative -- about BAC's settlement with Fannie Mae and Freddie Mac.

First of all, lets lay it out: Bof A is paying $2.6 billion to government-sponsored entities in order to solve $18 billion in claims against mortgages gone bad that were issued by Countrywide Financial, leaving about $4 billion in claims still extant. The agreement covers current and future claims on 787,000 loans by loans sold by Countrywide through 2008 and 12,045 loans sold to Fannie Mae.

Again, the latter can still bring claims for future losses, but BofA claims it is reserved, presumably at some reasonable level based on the default rate of the loans, which, of course, is ridiculously high.

That's the story. Fifteen cents on the dollar. That's what they paid. Again, there are more claims to come, but that's the ratio that they are paying out on.

The articles this morning, all except the Financial Times, which really got this right, go on to say that BofA still faces a slew of mortgage putbacks and that they are going to be very expensive. We don't know exactly how much is at stake, but we know that the private-label claims are supposed to be roughly equal to the entire claims of the GSEs, which, again, are about $22 billion.

Because of that last figure and the prospective claims that can still be contested by Fannie Mae, we hear again that there is $30 billion in exposure -- BofA didn't even go down on this news! We are told, told by very reputable journalists, although not the FT, which, again, nailed this issue, that it is way too early to "celebrate," as if a move from $11.50 in October to $14 now, with a huge resolution, equals celebrating. A stock move like that is simply a catch-up to a player like C and is nowhere near the longer-term gains of WFC, which is still devouring Wachovia's issue.

Here's the problem with the $22 billion in private-label claims that we are supposed to be fearful of, claims by outfits like BLK and AZ and Pimco, as well as, bizarrely, the New York Fed. I say "bizarrely" because the Fed isn't a huge claimant here, and, frankly, it may not even have standing.

But let's think about these claims of these private entities vs. the government entities. These private entities are all sophisticated. They all bought these mortgages not because they were trying to help the system by boosting home ownership but because they were trying to reach for yield. They all had models which showed defaults. Sure, there were a lot of no-doc loans, but they knew that. Sure there were lots of possibilities that the loans were phony, but they built that into their models. Or they should have, because boy oh boy were there ever stories written about it.

Each of these firms had a model that predicted a certain percentage of defaults based on employment figures. In every single instance of home-price declines since the Depression, it was employment losses that triggered the declines. They all knew this!!

Almost every entity therefore reasoned that it was worth it to reach for yield while employment was strong, betting that the defaults would be historically low.

The fact that these institutions are sophisticated and motivated by profit -- not by the charter to promote home ownership -- is a huge hurdle for them to overcome. Huge. Why is this not a part of the story? These firms borrowed at low rates and then bought these pieces of paper as an arbitrage to capture the interest differential. That's not the same as buying paper to get more people to buy homes, a government imperative.

Therefore, the case isn't that good as the government case, simply because you can bet that no court is going to be as sympathetic to profit-seeking sophisticated investors vs. government-sponsored entities that packaged loans to fulfill their government charters, even if the government entities were hopeful to make a profit.

Now, unlike the GSEs, these profit-seeking entities relied on purportedly diligent ratings agencies to make their decisions. The fact is that the agencies are a huge mitigating factor for Bank of America. Nobody told these companies to buy this stuff. No one put guns to their heads. They had ample resources to do due diligence, yet they mostly relied on the agencies for the work they did. I have to believe that, because if they had done their own work, they would have found what we were writing here, that the paper was universally suspect.

Therefore, it is very hard for me to believe that these profit-seeking entities would get -- not be owed, but get -- the same settlement from BofA as the GSEs, which BofA needs badly in order to continue its ongoing mortgage business, which represents 20% of the entire mortgage market. Put simply, BofA can't afford to alienate Fannie and Freddie.

It can easily afford to alienate the profit-seekers.

But it may not even have to. I am sure that the profit-seekers would love to get 15 cents on the dollar from BofA, given that that's all that it had to give to an entity that trusted Countrywide's assurances.

I can tell you, though, they ain't getting that. Bank of America, now run by a lawyer, Brian Moynihan, knows that he has many more cards with these profit-seekers than he had with the GSEs. The leverage of the GSEs was immense. They also had unlimited legal firepower.

That's not the case of the profit-seekers, and Moynihan knows that very well. They can't afford to litigate endlessly, but BofA can, because BofA knows that in the end, it has judges looking at what it paid Fannie and Freddie, which did not have the sophistication or the motive that these other buyers had.

Plus -- and this is really important and not mentioned in any of the stories -- these private entities could have taken either side. They didn't need to buy this paper as part of their charters. They could have easily kicked the tires, not relied on the agencies and reached the conclusion that they should be sellers, not buyers, of the paper, as so many firms were.

My conclusion: You can take that $22 billion and give it a haircut that will probably amount to no more than 10 cents per share. Or it could be nothing at all, owing to the sophistication of the plaintiffs.

Lets say 10 cents.

$2.2 billion.

Much of it reserved.

That's what I think is the true exposure.

The "celebrating" is over, because the market looks like it is going to roll over. To me, the story is clear: Do not fear the liability. It's vastly overblown.

I was far more concerned about the Fannie and Freddie exposure.

The bears will say, "But the agencies lay down for Bank of America." To which I say, give me a break. The public anger against BofA made it so that Fannie and Freddie hardly rolled over. It got what it could.

The profit-seekers should be so lucky.

long BAC

Monday, January 3, 2011


Rare-Earth Metals Could See a Pause

Japanese researchers' development of a nano-processing technology could lead to the capability of producing artificial rare metals; the story is now circulating trading desks and could cause a hiatus in the strength in the rare-metal arena over the very short term.

ISM prices paid were hotter.

ISM manufacturing was in line.

Run, don't walk, to read the New York Times' You're The Boss: The Art of Running a Small Business blog.

I continue to see risk in the unresolved tension between the short-term tailwinds of monetary stimulation and the longer-term headwinds of fiscal imbalances (local, state, federal and non-U.S.), a reluctance to move on the domestic deficit, the inevitability of higher marginal taxes, the screwflation of the middle class and other nontraditional factors. More immediate, a still-moribund housing market, vulnerable corporate profit margins, and rising food, energy and interest rate costs are causes for concern.

An unusual impediment to smooth and self-sustaining recovery is a relatively anemic trajectory of expansion -- "it's different this time" - which exposes the slope of the recovery to policy mistakes, the long tail of the last credit cycle and other unexpected and exogenous events. This should limit valuations and most likely result in a contraction in P/E multiples during this year.

GS starts GM with a buy.

Enjoy It

The upbeat trading action continues, and what we saw today was -- in many ways -- even better than last week. Volume was up, breadth was better and there was some leadership from key big-caps such as AAPL, AMZN, FFIV and CMG. There wasn't as much action in the speculative garbage names, but the rare earth sector remained hot.

There is no question this market is extended and that sentiment is a bit frothy, but, historically, the second trading day of a new year has an even better track record than the first day. However, after that, we start to lose the positive seasonality as we begin looking forward to fourth-quarter earnings season.

The close today wasn't particularly strong, and that could be an indication that pressure to protect recent gains is picking up, but the market still has not done anything wrong. The thing that seems to be bothering people the most about this market is that it simply refuses to correct. Even the perma-bulls are starting to worry that we are in for a pullback soon.