Monday, February 28, 2011


Stocks Don't Worry About Crude

Clorox may be a takeover target for an acquirer other than Carl Icahn.

The January change in disposable personal income (DPI) was affected by two large special factors. Reduced employee contributions for government social insurance, which reflected provisions of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, boosted personal income in January by reducing the employee social security contribution rates (employee contributions for government social insurance are a subtraction in the calculation of personal income). The January change in DPI was affected by the expiration of the Making Work Pay provisions of the American Recovery and Reinvestment Act of 2009, which boosted personal current taxes and reduced DPI (personal current taxes are a subtraction in the calculation of DPI). Excluding these two special factors, which are discussed more fully below, DPI increased $11.4 billion, or 0.1 percent, in January, following an increase of $48.5 billion, or 0.4 percent, in December.
-- U.S bureau of Economic Analysis

This morning's strong spending number (which showed the largest increase in more than a year and a half) reflected less an improving retail picture and more a result of tax changes that were put into place Jan. 1, 2011.

By contrast, personal spending did not meet consensus forecasts (rising by 0.2% vs. forecast of +0.4%). Importantly, adjusted for inflation, real personal spending dropped by 0.1% in the past month.

A cautious call by UBS this morning, with a de-emphasis on companies leveraged to the economy and an emphasis on defensive issues:

More balanced performance ahead: Performance of cyclical sectors relative to defensives is apt to be more balanced going forward. Indeed, the duration and magnitude of cyclical outperformance has already lasted longer than history would suggest. This is largely explainable given the severity of the downturn, the strong rebound in earnings growth from cyclical sectors and the manner in which global growth surprises reaccelerated over the back half of 2010. However, we anticipate sector returns will be less delineated along cyclical-defensive classifications as we move forward.

The First Of The Month Again

Unsurprisingly, we managed a bit of a pop in the closing minutes after a rather lackluster day. Given the propensity for strength on the first day of a new month, plenty of market players likely wanted to position themselves for the inevitable gap up as we kick off the month of March.

Overall it was a mixed day, with quite a bit of weakness in big-cap momentum names like CRM, AMZN, NFLX and CMG, but that was offset to a great extent by strength in AAPL, QCOM and GOOG, which have very big weightings in the indices. Semiconductors were also weak, and technology stocks in general struggled a bit after a negative call on the sector by a major broker.

Oil stocks reversed to the upside and finished well as talk about unrest in the Middle East continues and skepticism grows over whether Saudi Arabia is blowing smoke again with its promise to increase production. There is still tremendous uncertainty in that region, and it doesn't look like it is going to end soon.

The big issue for us to deal with now is the tendency for positive action on the first of the month. It is very well known, so that tends to negate it to some extent, but this market has a way of producing self-fulfilling prophecies even when they seem to be painfully obvious.

Friday, February 25, 2011


More Evidence of Screwflation

I thought the University of Michigan consumer sentiment survey this morning was revealing.

Though the aggregate number reached the highest level in three years, it was entirely due to improved readings from higher-income households.

Among households with incomes greater than $75,000, the sentiment index rose 9.7%. However, the index fell 1.4% among lower-income households.

More evidence of screwflation of the middle class.

Insiders Buying Platinum Underwriters

This week, I am seeing several insider buy transactions in PTP.

Run, don't walk, to read this Wall Street Journal article that summarizes individual state budget shortfalls.

Ignoring Bad Geopolitical News

The major indices all suffered a losing week, but it sure felt like we had another V-ish shaped bounce kicking in today. I thought there might be a little nervousness about holding over the weekend, given the chaos in Libya, but I was obviously wrong. Market players seem to be back to the state of bliss that delivered such steady upside for so long.

Market players are just too well conditioned to buy weakness, even when there are some legitimate concerns out there. If you have hesitated to jump in on pullbacks, you have ended up having to chase, and I'm sure that is on the minds of many as they watch the action today.

Another good reason for the market not to sell off late is that we have had so many strong opens on Monday mornings, and then Tuesday is the first day of a new month, and that has a stellar record as well. With price patterns like that, why worry about minor things like a revolution in a major oil-producing nation?

The good news is that, since so many seemed to want a good shakeup, we got one this week.

Thursday, February 24, 2011


Colgate-Palmolive Raises Divvy

CL increases its dividend by 9%, to $0.58 per quarter, raising the current yield to 3%.

GM Breaks IPO Price

Run, don't walk, to read George Melloan's Op-Ed on screwflation.

Buyers Becoming Interested?

It was another volatile day of action with a good recovery late in the day as oil reversed sharply. There was lots of talk about what is going on in Libya, but the simple fact is that plenty of stocks with solid fundamentals have come down far enough to attract a little buying interest. Market players are still reflexively inclined to buy dips, and they did that this afternoon.

The big picture remains murky. We still have not put together a very good oversold bounce, which is what we need to gain a better feel for what sort of correction we are going to undergo. Already the bulls are less aggressive than they normally have been because of the uncertainty in the Middle East, but there are some signs that they are champing at the bit to light things up.

We have a couple strong reports after the close from momentum favorites DECK and CRM, which should help sentiment but the news risk out of the Middle East remains very high. The market hates uncertainty, and we are likely to have some for as long as oil supplies remain problematic.

Wednesday, February 23, 2011


Positive Early Signs From Toll Brothers

There are some good early signs in Toll Brothers' (TOL) conference call that residential real estate is in a modest recovery and that inventory is being slowly cleared.

This input is consistent with this morning's national housing sales report.

Specifically, orders (though only at 60% of the average over the last decade) are back to 2007 levels. Importantly cancellation rates, which peaked at around 36% at the cycle bottom, are now back to 6%-7%, which is the company's historic norm.

The spring selling season has started off well, with sales deposits up 15% year over year (up 9% on same-store basis).

The company reports that the Washington, D.C., to Boston corridor is very strong, especially Hoboken, N.J., Brooklyn and Manhattan.

It appears that the national housing picture is a bifurcated one, with the aforementioned regions doing well and the very weak areas (e.g., Arizona, Nevada and California) still sluggish.

Overall, pricing power is still broadly lackluster.

Large Yahoo! Share Accumulation?

I'm hearing that there is a rumor in Europe of a large accumulation of YHOO shares in the last month.

I should be so lucky.

For Whom the Barrel Tolls

Crude's outsized price advance is the death knell to the market's advance.

The further rise in the price of oil, up $3.50 a barrel after yesterday's outsized advance of nearly $8 a barrel is the death knell to the market's advance.

According to Boy Genius' website, AAPL has sent out invites for a March 2 media event to unveil iPad2.

"History does not repeat itself; it rhymes."

-- Mark Twain

It is argued by bullish investors and strategists that the increased level of M&A activity highlights a greater appetite for risk assets, improving business confidence, a better lending climate and underscores the large cash hoards at the some of the world's largest companies.

These arguments have merit. But so does the observation that takeovers are often done at or near the top of market and of the general economy.

History also shows that the popularity of companies and industries often peaks (and goes to the extreme) coincident with takeover activity in those areas.

Last week, in an case of impeccable timing after a doubling in the S&P 500 since March 2009, NYX announced an agreement to be acquired by the Deutsche Boerse.

Equally amusing was the previous week's AOL acquisition of The Huffington Post for a large multiple of sales, cash flow and earnings, and this happened after we had already seen an explosion in Internet (again!) and social network valuations -- namely, Facebook's recent GS funding at a $50 billion capitalization.

If history is a guide, both deals could mark that the end is near, in general, for the rise in the U.S. stock market and, in particular, for the outsized increases in Internet and technology sector valuations

I got to thinking about the large takeovers littered over the last decade, and I suspect the NYSE transaction and the AOL deal will end up as miserably as many other high-profile deals, most of which occurred at the end of a cycle and resulted in large writedowns or unprofitable transactions.

Time Warner/AOL Merger

"This is a historic moment in which new media has truly come of age."

-- Steve Case, Chairman of AOL

"The Internet has begun to create unprecedented and instantaneous access to every form of media and to unleash immense possibilities for economic growth, human understanding and creative expression."

-- Gerald Levin, Chairman of Time Warner

In early 2000 AOL acquired TWX for $180 billion in stock and debt in one of the largest media takeovers in history. That transaction, which ultimately resulted in the largest corporate writedown in history, marked the end of the Internet bubble. The Nasdaq subsequently fell by over 70%.

There have been many other huge takeover goofs since 2000 at cycle highs -- for example, Sprint/Nextel, HBC/Household Finance, RBS/Fortis, STD/ABN Amro and the list goes on and on.

The message for Deutsch Boerse, AOL and all the others?

Approach the euphoria surrounding increased takeover activity with some skepticism, as it often, in the fullness of time, ends up badly.


More "Normal" Action

After weeks of dealing with a market that acted in a very artificial way as it went straight up with hardly a pause, we are finally experiencing more "normal" action, albeit mostly to the downside. After a very brief attempt at a bounce this morning, we had some pretty strong downside follow-through once we took out yesterday's lows. Given the news flow and the damage that was done on Tuesday, that wasn't too surprising. We continued to struggle until the early afternoon and finally were oversold enough to put together a bit of a bounce, but it started a little early, and we gave some back at the close.

That is exactly the sort of action you'd expect to see after the market takes a big hit. We don't fly straight back up like we so often have done but, instead, we shook out more weak holders and managed a mild bounce. The dip-buyers were nervous enough not to pile in this time, but there were still some bargain-hunters who decided to put some money to work.

Tuesday, February 22, 2011


Though overwhelmed by negative geopolitical issues, today's economic data was positive.

February consumer confidence at 70.4 came in well ahead of consensus (65.5) and also far better than January's 64.8 reading. The print was the best in two years and compares against a year-ago reading of 46.4. Importantly, most of the improvement was in forward-looking components (with a month-to-month rise of 8 points). Indeed, the current reading of future conditions rose to the best level since year-end 2006.

The Richmond Fed manufacturing index for February came in at 25, 7 points better than expectations and in the prior month. Shipments, backlogs and new orders all improved.

Of late, foreclosures have begun to reaccelerate, and the shadow inventory will continue to weigh on housing activity throughout the year.

Housing, from my perch, is scrapping along the bottom even though production has been well under household formation for some time.

If one is looking for a sector that will be the beneficiary of pent-up demand, look at cars not homes.

The problems associated with the muni debacle are several-fold:

* the underfunded and misstated pension liabilities;

* the imbalance between state and local tax receipts and expenses;

* the high amount of debt to service at all levels of our government; and

* attacks on collective-bargaining rights could worsen the schism between the Democrats and Republicans, serving to reduce the chance of movement on the federal deficit.

Consider, for the sake of comparison, how private corporations, in measuring the value of the assets in their pension systems, are required to use real portfolio market prices. Government accounting standards, in contrast, allow public pension systems to measure their assets based on average values looking back over a period of years. In most instances those average values add up to a figure that is much higher than the amount of money the pension plan actually has.

Public pension funds are also allowed to make assumptions about future investment returns that many of us would regard as overly optimistic. And since those assumed returns are incorporated into measurements of the fund's status, as if they had already been realized, states that come up with the most rosy market forecasts look, on paper, to be better financed....

To make matters worse for state budgets, hidden underfunding of public employees' health retirement costs is even greater than that of their pensions....

Accounting is inevitably an artificial language that can distort some economic truths. But at the least, government accounting should aim for greater transparency and consistency, allowing outsiders to compare one jurisdiction against another. At the same time, the social contracts that exist today in many places among taxpayers, beneficiaries of public services and public employees need to be renegotiated before a crisis arrives.

-- Orin Kramer, "How to Cheat a Retirement Fund," The New York Times (Sept. 10, 2010, op-ed)

An article in Friday morning's Financial Times reports that Fitch Ratings is considering downgrading ratings on city and state municipalities because the firm is planning to change the way in which it account for budget deficits.

Wisconsin has become ground zero for the union debate as public workers in Wisconsin and around the country protest lower benefits, which are the outgrowth of an imbalance between revenue and expenses. The risk is increasing that the "Wisconsin Power Play" becomes a focus of renewed political partisanship and a resurgence in the sort of populism that led to the 2008 Democratic Tsunami. Polarization could even end up being disruptive to a budget compromise (and "shared sacrifice"), as the debate in that states widens the fundamental schism between the two parties in the months ahead (as I have suggested would occur leading up to the 2012 election).

Today, Ohio apparently has protest plans to do the same as Wisconsin. Other states, including Florida, Indiana, Iowa, Michigan, New Hampshire and New Jersey, are planning the same legislation.

Many states, such as Illinois, will be cutting spending. Illinois can't avoid big spending cuts.

Higher taxes are inevitable.

As an example, over the past 10 days, the Governor of Minnesota has proposed to raise the state's top individual tax rate temporarily to 13.95%. In addition, he is proposing a higher property tax on homes valued greater than $1 million. Minnesota Governor Mark Dayton, heir to the Dayton Hudson fortune, might have the luxury to be able to afford much higher taxes, but the screwflation of the middle class is more than just a distraction. Multiply this by every state in the U.S., and we get a huge contraction force from this nontraditional headwind to growth.

In this context, the screwflated consumer (already pressured by stagnating wages and the rising costs of necessities of life) now faces the trials and tribulations of our city, state and federal government, forming a serious challenge to the foundation of smooth and self-sustaining growth. With the consumer already on an anemic slope, any further exogenous or systemic shock -- such as the turmoil of the Middle East, which has raised the price of oil over the last 24 hours by $7 a barrel -- could serve as an economic tipping point.

More Tomorrow?

For the second time in a month, we have a sharp selloff due to unrest in the Middle East. Both times we went straight down all day and closed poorly, but last time we immediately bounced back over the next couple days and then kept on going. The million-dollar question is whether we can do it again.

There are some major differences this time, such as the potential for significant bloodshed and the fact that an important source of oil is being cut off. In addition, there is significant risk that the unrest will spread to other countries that provide significant oil supplies.

What adds to the difficulty is that this market has had such lopsided action for so long. We have not had any notable consolidation for some time. Even if you aren't worried about the Middle East, you can't look at the technical pattern and not see the potential for further downside. According to the technicians, there just isn't much support, since we went up without any consolidation along the way.

Friday, February 18, 2011


Relative Weakness in High-Octane Stocks

Big Buyer for Genworth?

I'm hearing that GNW is trading higher on rumors that either Berkshire Hathaway (BRK.A/BRK.B) or Ackman's Pershing Square has accumulated a position in the shares.

Thursday, February 17, 2011


Talking Feds

Charles Evans said that unemployment is too high, inflation is too low and the recovery is too slow.

Dick Fisher sees inflationary pressures developing, and he is not supportive of further quantitative easing.

Two talking Feds spoke today.

1. Charles Evans, President of the Chicago Fed is a dove and predictably said that unemployment is too high, inflation is too low and the recovery is too slow. He, similar to Chairman Bernanke, supports ZIRP and a completion of QE2.

2. Dick Fisher, President of the Dallas Fed, is a hawk, and predictably, he sees inflationary pressures developing, and he is not supportive of further quantitative easing.

Run, don't walk, to read Matt Taibbi's "Why Isn't Wall Street in Jail?" in Rolling Stone.

Iran Warships in the Suez

Iran warships are about to cross the Suez Canal.

Minnesota Governor Mark Dayton proposed to raise the state's top individual tax rate temporarily to 13.95%.

Minnesota Governor Mark Dayton, heir to the Dayton Hudson fortune, might have the luxury to be able to afford much higher taxes, but the screwflation of the middle class is more than just a distraction. It will likely result in a less smooth and more uneven economic recovery than most expect, it and represents the single greatest challenge to self-sustaining domestic economic growth.

Watch retail sales in the months ahead -- carefully.

Run, don't walk, to read "Decoding the Economy's Mixed Messages" from Knowledge@Wharton.

The Jobs Report

The Apple guru is making headlines again today.

Unfortunately the big news overnight was about Steve Jobs' health.

Jobs and other tech industry leaders are scheduled to meet with President Obama today.

The Same

The market has displayed amazingly consistent action with slight weakness in the morning, which is pounced on by the dip-buyers, and then strong finishes. Any downside has lasted just a few minutes, and should analysts downgrade a stock, you can be certain the buyers will jump in and squeeze the poor shorts.

Obviously, no one has accurately called a top for many months, so why should we believe that tomorrow will be any different? Markets can't go up forever, but they sure can act that way for quite a long time.

There is a lot of frustration out there as this market refuses to cooperate and give underinvested bulls a chance to buy weakness. That is probably a big part of the reason we are going up so consistently. The buyers are capitulating and are jumping in because they feel they have no other choice.

Wednesday, February 16, 2011


NetApp Disappoints

NetApp reports only in-line revenue, and the stock gets creamed.

More on the Wells Fargo Story

A company spokesman defends the bank's financial integrity.

A WFC spokesman told Dow Jones Newswires this afternoon:

Any assertion that our recent CFO succession has had to do with conflicts over the integrity of the company's financial conditions, financial reporting disclosures or financial controls is completely untrue. And to underscore this, investors can expect Wells Fargo & Co. to file its form 10-K for 2010 on schedule and with all required Sarbanes-Oxley Act certification later this month.

Fed Raises Inflation Expectations

The FOMC raised expectations for growth and inflation. It appears, as well, that several FOMC members leaned toward ending quantitative easing with QE2.

YHOO's CFO will be presenting at a Goldman Sachs Internet Conference after the close at 4:30 p.m. EST. YHOO's shares are approaching the April 2010 high.

Large-cap "quality" stocks have lagged the market over the last 12 months. From my perch, this is where value resides today.

Within the context of a zero-interest-rate policy and a yield of 3.70% on the 10-year U.S. note, I suspect a package approach will be rewarding.


1. The average P/E on 2010 EPS is 14.5x.
2. These stocks trade at 84% of their five-year average P/E.
3. The average P/E on 2011 EPS is 13.2x.
4. The free cash flow yield is 6.0%.
5. The average dividend yield is 2.2%.
6. Cash as a percentage of assets is 17%.
7. The growth rate of dividends over the last five years is 14%.
8. The estimated growth rate of dividends over the next five years is 10%.
9. 16% of the outstanding shares have been repurchased in the last five years.
10. The average return on equity is 30%.
11. Long-term debt as a percentage of total capital is 30%.

January housing permits stood at only 562,000, in line with consensus but down by 100,000 from December 2010 (which was buoyed by anticipatory permiting ahead of the implementation of new building codes in 2011).

Of late, foreclosures have begun to reaccelerate, and the shadow inventory will continue to weigh on housing activity throughout the year.

Housing, from my perch, is scrapping along the bottom even though production has been well under household formation for some time.

If one is looking for a sector that will be the beneficiary of pent-up demand, look at cars not homes.

From my perch, cars are more safe -- at any speed.

Words of wisdom from Tony Crescenzi this morning:

Pipeline inflation pressures remain high in producer prices. The prices of both crude and intermediate goods continue to increase at a fast pace. Crude prices of course reflect raw materials prices. Intermediate prices reflect the prices of materials that have had some processing. To better understand these stages, picture a shirt: the crude material is cotton from the field; the intermediate material is cotton yarn; the finished good is the shirt. Importantly, perceptions about inflation are high, too, and this will continue to affect the yield curve, because the Fed is hinged to core prices. In other words, the Fed, which should because of its mandate be the bondholder's protector, is in the face of rising headline inflation pressures, letting the enemy outflank the bondholder by paying more attention to headline inflation that core inflation.

It now seems as if the U.S. stock market is interpreting the outcome of almost every world political development and domestic economic release as market-friendly; at the same time, emerging stock markets are beginning to break down, the pace of increase in the rate of change in bond yields has accelerated (as we fail to address our ever-growing deficit), and signs of a possible contraction in corporate profit margins grow more visible (as raw material input costs are increasingly more difficult to be passed on to customers). Meanwhile, rising food costs and the prices of life's necessities continue to pressure the average consumer and raise the specter that recent gains in retail sales are not durable but rather represent nothing more than recession fatigue.

The Trend Is Up

If you've been looking for some variety in market action, today wasn't your day. The action today was almost exactly the same as we've seen every day so far this year. The dips were quickly bought and the market finished strong.

There is only one thing you need to know about playing in this market: don't fight the trend. In fact, not only shouldn't you fight the trend, you might want to embrace it with both arms and have faith it will never end.

This market favors the buy-and-hold investment. That is usually case during uptrends, but it is even more so in this market because it has been so lopsided. There's just no ebb and flow to the action, and that makes it very challenging to add long exposure. A more normal uptrend will dish out at least a few moments of weakness here and there, but this one isn't really doing that. Many market players believe this is due to the dominance of computerized trading. That sounds logical, but all I know is that it isn't easy to deal with when human psychology seems to no longer exist.

Tuesday, February 15, 2011


Peltz Might Buy Family Dollar

Nelson Peltz indicated a willingness to take Family Dollar Stores private.

Today's economic data was not market-friendly.

Commodity price inflation is developing, retail sales were weaker than expectations (+0.3% vs. forecast of +0.5%), the components of the Empire State Manufacturing Index were disappointing (slowing shimpments, a lower employment component and a sharp increase in prices paid), and import prices (less fuel) spiked.

Yahoo! Getting Jiggy

My favorite, stock, YHOO, is getting jiggy -- again.

Fooling all the people all of the time? The deficit is not being addressed, and there is a lot of fuzzy math incorporated in projections. On the same day that the administration unveiled its 2012 budget and proposed a $110 billion per year reduction over a 10-year period, it raises this year's budget by $150 billion.

But Fed Chairman Bernanke and others insist that core inflation is under control! Increases in clothing prices are reversing a decade long reduction in prices this spring. During my appearance on "The Kudlow Report," a University of Michigan professor debated me about inflation; he, too, said it was contained. He highlighted produce prices under control in his argument. Really, Chairman? Really, professor?

long YHOO

A Rest?

We've needed some dull, flat-to-down action to help this market consolidate gains and we sure got it today. It was a very slow day with a lot of mild selling on lighter volume. There wasn't any panic, but some of the extended names such as CMG, JDSU and NFLX saw some decent-sized pullbacks. I was actually starting to wonder if there really were stocks that never go down. I guess I don't have to worry about that too much anymore.

Looking at the bigger picture, the selling today was hardly noticeable. It was just a very minor blip within a massive up trend. The big question is whether this is the start of something more severe or just a pause that will refresh and rejuvenate the buyers. The buyers have consistently come roaring back ever since the bottom in March 2009, so it's a bit too early to think they are now suddenly going to change their tune.

At this juncture, there is no reason to believe that the end of the uptrend is upon us. That said, keep in mind the fact that tops are processes that play out over time. A day like today could be the very first step in a change in market character, but we will need a number of failed bounces and some lower lows before it makes sense to shift to a more bearish stance.

The bears did put a few points on the board today, but the bulls have such a huge cushion that it is going to take a lot more before the bears can be taken even a little seriously. So far, this is nothing more than a well-deserved rest.

Monday, February 14, 2011


Run, don't walk, to read an informative column by Real Money's Dan Dicker on West Texas grade crude oil.

Cisco's At a Nice Level

You can't get killed falling off of a curb. In light of that wisdom, I believe that CSCO has moved to a level where the risk/reward is favorable.

The Meredith Whitney Debate Is a Sideshow

It is a distraction from the growth-deflating impact of our local, state and federal fiscal imbalances.

Of late, much has been made of Meredith Whitney's municipal bond call.

Some of the criticism leveled at Meredith is likely based on a solid and thoughtful rejection of her dire analysis. But some of the criticism might also be schadenfreude, jealousy regarding some of her prior prescient bank calls and an attack against her popularity.

From my perch the Whitney debate is a sideshow that has deflected investors from the true fundamental debate as to the growth-deflating impact of our local, state and federal fiscal imbalances.

While we will not know for some time to come whether her analysis will prove accurate, I do believe strongly that too little has been made of the local and state imbalances, the ensuing austerity and its impact on domestic economic growth and the unemployment and higher taxes that follow.

Run, don't walk, to read an excellent post on Zero Hedge on plunging labor force participation.

Run, don't walk, to read an excellent post on Zero Hedge on plunging labor force participation -- "the biggest scandal of the last decade."

As usual, very good stuff from Zero Hedge's Tyler Durden.

It seems as if the U.S. stock market is interpreting the outcome of almost every world political development and domestic economic release as market-friendly, no matter how uncertain the immediate outlook for the regime changes are or how fundamentally weak certain important domestic economic sectors remain (e.g., structural unemployment, a weakening residential real estate market, and an apparent reluctance to address fiscal imbalances and elevated deficits).

The market is a freight train, but with its intensity and unrelenting drive higher, coupled with the increased predictability of a now too-regular pattern of lower futures in the morning followed by a persistent strength throughout the afternoon, we have to be on the watch to see if the freight train is going to run off the tracks.

After eight consecutive up weeks, it is official: The markets are virtually impervious to any concerns. Arguably, the ranks of the bulls has expanded dramatically, and even many that were so wrong three years ago have become glib and self-assured and even defiant towards the bears.

From my perch, looking at the market's doubling since the 2009 generational low with such confidence, certainty and even ebullience is walking a slippery slope.


1. Interest rates: The rate of increase in bond yields might be approaching a tipping point. This month, for only the third time in 50 years, we have experienced the juxtaposition of the following three events:

1. a greater than 5% rise in the yield of the 10-year U.S. note;
2. a six-month high in the yield of that 10-year note; and
3. a six-month high in the S&P 500.

In the two previous periods, February 1980 and June 2009, the S&P corrected by 17% and 7%, respectively.

2. Submerging markets: We are seeing a clear breakdown in certain important emerging stock markets -- for example, Brazil's market is down 5% year-to-date while the Indian Sensex is 13% lower. Historically, a breakdown in the iShares MSCI Emerging Markets Index Fund (EEM) typically presages weakness in our market.

3. Geopolitical: The markets are obviously ignoring a very messy geopolitical picture (especially in Egypt). I don't see any easy resolution to the spread of riots by the international middle class that has been victimized by screwflation, which I define as limited wage growth accompanied by higher food costs and higher prices for most necessities of life. Thus far, there have been limited adverse economic consequences to the rioting and protests, but a contagion to other parts of the world (such as Algiers experienced over the weekend) could be disruptive and destabilizing to world trade and to world markets. (Tom Friedman issued the following warning that rough days lie ahead in Egypt in his Sunday New York Times editorial:

That's why today Egypt has before it only two paths, and both are unstable. One is where this democracy movement falters and Egypt turns into an angry Pakistan, as it was under the generals. And the other is the necessarily unstable, up-and-down transition to democracy, which ends stably with Egypt looking like Indonesia or South Africa.

And Cumberland Chief Global Economist Bill Witherell writes, "The path ahead for Egypt will be a difficult one, with various interest groups sparring for power or to protect benefits they had under the previous regime."

4. Corporate profit margins are extended and exposed: Investors are ignoring the potential impact of raw materials price increases on industrial profit margins. During this past week, numerous companies, including PEP and KFT, issued profit-margin warnings. Those who think that rising input costs can be materially passed on might be too optimistic. Rising raw materials (especially of an energy and agricultural kind) are certainly part of the recovery cycle story, but it also means that corporate profit margins, which are now elevated to 57-year highs, might be in jeopardy.

Hanging In There

There isn't much new that can be said about this market. We just keep plodding along as any and all weakness triggers automatic buying. It is nice to keep racking up gains on long positions, but you have to worry about how healthy this is. At some point we will pay a price for our lack of any consolidation, but who knows when that might be.

Friday, February 11, 2011


Money Keeps Flowing Into Equities

A pullback will occur but from what level is obviously uncertain.

The lessening of geopolitical concerns coupled with strong corporate earnings helped to keep money flowing into equities.

The disbelievers need a pullback. No, change that. They need a break down. A pullback will occur but from what level is uncertain.

Nasdaq Rebalance and Apple

A rebalancing of the Nasdaq 100 would have little or no effect upon Apple's stock.

What impact, if any, rebalancing the Nasdaq 100 would have upon AAPL. The Nasdaq 100 is a modified market-capital-weighted index. As such, it is a hybrid. Stocks are first allocated according to their market capitalization, however, then a modification is made so that no individual stock's weighting exceeds a predetermined cap. Once that cap is met, the excess weighting is then redistributed to stocks below the cap.

Hence, with Apple being such a large component of the Nasdaq 100, it is likely that it has already met its cap weighting and a rebalancing would have little or no effect upon the stock.

Markets Cheer Mubarak Ouster

Mubarak has stepped down as the president of Egypt. The Egyptian army is assuming power. Markets are rallying.

Thoughts on Agco

* The company had very strong results.

* Guidance was an example of underpromise as the company likes to overdeliver.

* The stock is selling at a PEG ratio of less than 1.00.

In the late 1970s and early 1980s, the Hunt Brothers attempted to corner the world's silver market. Silver prices skyrocketed and later fell when the brothers were forced to liquidate and meet margin calls. Fortunes were lost by the Hunts. Turn those machines back on.

During the Year of the Hurricane, 2005, Brian Hunter of hedge fund Amaranth made billions of dollars by betting on the rise in the price of natural gas. In 2006, Hunter tried to repeat his prior year's success. When his spread trades did not prove to be correct bets, he lost several billion dollars, and Amaranth was shut down.


Aside from the bit of flat action we had on Wednesday, the market traded straight up once again. The S&P500 had had two minor red days in the last two weeks, but we continue to see no selling and little consolidation.

Egypt was in the headlines all week, but it apparently doesn't matter what the news is because market players bought it all. Today, the resignation of Mubarak was another reason to buy, even though we didn't have any losses to recover from.

Breadth improved quite nicely from a poor start this morning, and we ended with about 4050 gainers to 1580 decliners. Banks jumped after some favorable comments from Goldman Sachs while gold and oil lagged. Plenty of extended stocks became even more extended, and the big-cap momentum favorites stayed particularly hot.

This market continues to illustrate the old adage that the "trend is your friend." Apparently the market has never heard that it's possible to have "too much of a good thing." This is a great market for buy and hold investors who are unworried and unconcerned, but the lack of any downside is driving my traders crazy. Too quote another old adage, "Variety is the spice of life." And that is what we are lacking in this market.

It is hard to believe that this sort of action can continue much longer, but that is what many folks were saying a month ago. This market has been an absolute nightmare for anyone who has tried to call a top. Unfortunately, the longer this continues, the more people will be tempted to do so. Someone will finally be right one of these days, but most will be so far underwater by then that it won't matter.


YHOO is a dysfunctional company led by dysfunctional management, thus leaving it quite vulnerable to takeover or some sort of significant corporate transaction.

Valuable assets

It's certainly been a tumultuous couple of years for Carol Bartz as the leader of Yahoo!. It is a company that Bartz herself has had difficulty understanding, let alone explaining to investors. Recently, she was asked to do just that, to which she replied, "Maybe it's taken me two years, but I've got it: content, communications, media, and innovation. I think Yahoo! has always stood for those words. It went off track a bit when people thought it was a search company."

While Bartz may not grasp exactly what the company's focus should be, she does acknowledge that it should be geared more toward Facebook than GOOG. With Yahoo!'s search business now in the hands of MSFT, it can now focus on some of its high value and social assets.

Yahoo! is actually the leader by a wide margin in a social network that has been around long before Facebook. Yahoo!'s fantasy sports games bring more than 30 million unique users to the site monthly, and not just any users: The majority are from the highly coveted age 25-49 male demographic. This had made Yahoo! Sports the most visited sports site on the Internet, commanding 20% of all time spent surfing online sports properties.

The company's continuous improvement of Yahoo! Sports is a stark contrast to what many believe are the company's two crown jewels: Yahoo! Finance and Flickr. While both sites are widely used, Yahoo! hasn't really added any value to either for years. Yahoo! Finance had 17 times as much traffic as Google's comparable finance site in 2009, but as Google continues to upgrade its content, Yahoo's has been close to stagnant for years.

Since being acquired in 2005, Flickr, which was once the largest photo sharing site on the Internet, was quickly overtaken by Facebook. While many are satisfied that Yahoo! didn't destroy the site, the company has certainly not added much value. These assets do remain valuable, but similar to the company as a whole just need some direction.

The real value

While I do think that the value in these assets will be unlocked at some point, it is not what excites me about the stock in the coming year. What does excite me are the initial public offerings of Chinese companies DANG and YOKU that show how undervalued Yahoo! is.

Both companies recently completed IPOs in the U.S. and have already achieved values in the billions in market capitalization. Yoku is China's equivalent to YouTube, while Dangdang is an Internet retailer similar to AMZN. DANG is a much smaller competitor of China's largest e-commerce company and the EBAY of China called Tabao. More importantly, Yahoo! owns 40% of Taobao's parent company, Alibaba. Many analysts had valued Yahoo's stake in Alibaba around $11 billion, but if these recent IPOs are any indication, those estimates woefully underestimate the price the market is willing to pay for a similar IPO or spin-off of Alibaba's top online shopping site, Taobao, which has more traffic and sells more merchandise than Amazon.

Yoku's stock price increased by 161% on the first day it traded on the NYSE, and it is still not even a profitable company -- but let's look at Taobao to DANG because they are more easily comparable.

Dangdang's first year of profitability was 2009, in which it produced revenue of $218 million and profit of $2.5 million. Analysts estimate that Taobao earned a similar amount through advertising fees and enhanced product listing fees that it charges consumers. However, the profitability from these transactions is many times higher than what Dangdang earns from its total revenue.

In addition, through September of 2010, Dangdang has reported that its site has had 1.61 million daily unique visitors compared with Taobao, which has reported more than 50 million daily unique visitors through October. This helps explain why analysts believe Taobao accounts for 75% of China's rapidly growing online commerce market, while Dangdang's site accounted for less than 1%.

Even Yahoo! can't screw this up

So a barely profitable Dangdang, which some call an also-ran, trades at more than 300 times EBITDA. If we apply a similar evaluation to Taobao -- the rapidly growing leader in the fastest-growing Internet market in the world, in which only about a third of the population is online today -- you begin to see just how much this company might be worth.

This doesn't even take into account Alibaba's other properties such as Alipay, which is China's equivalent to eBay's crown jewel, Paypal. Alipay recently overtook its U.S. counterpart as the largest online third-party payment platform in the world. Alibaba's other properties include the Craigslist of China, Koubei, and publicly traded, which is the leader in e-commerce for Chinese exporters. The best part of all is that Yahoo! can't screw up a company it doesn't run, at least on its own.

With that being said, it is hard for me to come up with a valuation that doesn't have the total value of Yahoo!'s Alibaba stake worth more than the company's entire $22 billion market capitalization.

I won't attempt to argue that Bartz can lead a Yahoo! turnaround, or that the company is on the verge of tremendous growth. However, I do believe that the company is woefully undervalued and under pressure to unlock some of this value soon. In addition to some of its core assets I discussed and the ownership in Alibaba, Yahoo! also has a 34.5% stake in Yahoo! Japan believed to be worth at least $7 billion, as well as an additional $2.8 billion, or $2.16 per share, of cash on its balance sheet.

Even without a Taobao IPO, if Yahoo! were to sell some of its foreign assets and raise a significant amount of cash, the idea of Bartz taking the company private isn't out of the realm of possibility. Many commentators also believe that Microsoft might be looking to make another offer for YHOO. Maybe even EBAY as well, as the company looks to boost its e-commerce marketplace.

long YHOO

Thursday, February 10, 2011


Israel is a true economic success story that teaches the lesson of brains over brawn.

Jobs <> Profits

Manufacturing jobs are hard to come by these days, but the industry itself is booming. The fruits of this trend show up in the stocks.

For some reason, the decline in manufacturing jobs is incorrectly projected into a decline in the U.S. manufacturing economy in general, which is simply not true. A recent University of Michigan-Flint study points out that over the past four decades, our manufacturing output has doubled, even while employment in the sector dropped 26%! While a disaster for unskilled workers, this is an unadulterated success story for our overall economy. We only need 8% of our population to produce our abundance of wealth, whereas we needed 28% to produce far less 50 years ago. If you don't applaud this trend, perhaps you'd like to be back on the farm, guiding an ox team while they pull your plow through your small plot of land.

All That Matters Is Earnings

And earnings are spectacular right now.

How can this market continue to rally day after day? What about falling housing prices? What about high unemployment and the lack of job creation? What about surging inflation? With so much that can go wrong in the world, how can we keep going up?

The only thing that matters is earnings, and earnings are spectacular right now. Companies have restored their margins and are piling up cash, even if revenue growth is less than spectacular. Expected earnings continue to rise, and valuations are reasonable. At 14x the 2011 earnings estimate, the S&P 500 would not be overvalued in more robust times and is certainly not overvalued in an era of 0% interest rates!

American corporations are doing exactly what recessions force them to do -- namely, doing more with less, shedding workers, increasing productivity and restoring profitability. Higher stock prices are completely justified by U.S. businesses' newfound efficiency, which is revealed in productivity and profit statistics.

Market's Unconcerned About Egypt

We started off the day a bit shaky because of a couple poor earnings reports and some inflation fears in the U.K., but of course the dip-buyers found a good excuse to jump in once again and soon had us back near the highs.

What was interesting was that the main excuse for the buying was a story that Egypt President Hosni Mubarak was ready to resign. The market has already recouped all losses and more since the troubles began, but it was still a reason to buy. When it turned out that Mubarak wasn't ready to resign, we rallied some more and went out close to the highs.

The Egyptian situation makes for some good headlines, but the market's reaction to it is nonsensical. It is just providing an excuse for the buyers to keep pushing and squeezes the poor bears who can't buy a break.

I would think the situation in Egypt has a good chance of deteriorating overnight, since Mubarak is staying, but the market seems very unconcerned. We'll probably have a gap up in the morning when it turns out that the protestors did only a minor amount of damage.

It feels like we are walking an increasingly unstable high wire, but we are just wobbling a little bit, and optimism remains high that we won't fall. It sure seems prudent to be a little more cautious, but this is not a market that has rewarded prudence of any degree.

Wednesday, February 9, 2011


On the Economy

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

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

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

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

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

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

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

On the Housing Market

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

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

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

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

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

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

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

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

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

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

On the Financial Crisis

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

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

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

On Derivatives

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

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

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

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

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

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

No New Ground From the Fed Chairman

His main points:

* Unemployment will remain high.

* Domestic economy is recovering.

* Inflation is contained and will not pose a threat.

* Our fiscal problems are worsening and must be addressed.

In terms of the direction of monetary policy, the conclusion remains that QE2 will be completed and that zero-interest-rate policy will persist throughout this year.

Collin Stewart's Tony Dwyer:

The rate on 10-year Treasury Notes (UST) has now jumped more than 8% in the past week, to a new six-month high. This is very rare and only the third time since 1962 that the 10-year UST yield rose at least 5% over the past week to a new six-month high at the same time the S&P 500 (SPX) rose to a six-month high. While only two prior data points, the market grinded higher over the next week (has done this time as well), then saw a sharp drop followed by a new significant leg higher (Table Below).

The history of SPX returns following this rare event dovetail very nicely with our macro view. We continue to expect a 4-7% correction (imminent) followed by a new leg higher toward our 2011 SPX target of 1500. The key will be to remain convicted about the next leg higher as prices pull back and bearishness increases. As outlined in our CS February 2011 Picture Book, we are highly convicted on the equity market potential, especially if it goes on sale. Remember that corrections only seem "natural, normal and healthy" until they actually happen, but truly are very healthy as it renews interest in the market as measured by volume.

Source: Stewart Strategy

Mortgage Applications Drop

Not surprisingly (at least not to me!), given the increase in interest rates, applications for new mortgages dropped after increasing by nearly 10% in the prior week.

The refinancing activity was far weaker than expected, contracting by 8%. The continued weakness in refi will partially offset a moderately improving jobs picture this year.

This morning General Motors reported that its January monthly sales to the Chinese market hit an all-time high, rising by 22% year over year.

GM estimated that its market share in China is now 14.7%. And the manufacturer sold more cars and trucks into that market than it sold domestically (for the first time in the company's 102-year history).

After CSCO, More Weakness Ahead?

The indices didn't move much today, but we did have a more interesting mix of action. The dip-buyers jumped in three times today and were turned back twice before a good late run into the bell.

Under the surface, breadth was poor, but that was covered up by some big-cap strength. The Dow Jones Industrial Average continues to outperform in large part because some of the higher-priced stocks like MMM are doing well.

The DJIA is a priced-weighted index which results in IBM making up more than 10% of its total weight, simply because it is the highest price stock in the index. For that reason, I find the DJIA to be pretty useless as true indicator of market strength, but the media use it because it is what many people are used to. It continues to show the best relative strength, which is adding to the Teflon feel of this market.

The most important thing to keep in mind right now is that markets at their high seldom go straight down. Even if you are bearish, you have to expect some stickiness to the upside. Straight-up markets create a lot of underlying bids from folks who want to buy the pullbacks. Usually these traders have to be burned a few times before they lose their zeal to jump in on any weakness. This market has constantly rewarded dip-buying, and traders always stick with what works until it doesn't.

Given how lopsided the action in this market has been lately, even some minor weakness like we had today feels like a bear victory, but in the bigger scheme of things it is immaterial. This market could see much more selling before it would become unhealthy. We are still extended, and the risk of more aggressive profit-taking exists, but the tenacity of the dip-buyers must be respected.

Tuesday, February 8, 2011


In watching the market and listening to the financial media, I'm hearing two certainties these days on the part of investors:

Certainty No. 1: The bullish crowd continues to outsmart the bearish remnants -- look, stocks have hit another high this afternoon. (It's Groundhog Day all over again.)

Certainty No. 2: The investment rationale of the bullish talking heads is also constant and consistent -- a high level of uncommitted reserves by the retail investor, abundant corporate liquidity, conviction of $95/share S&P profits, contained present inflation and inflationary expectations, imminent jobs growth, monetary policy anchored at zero, interest rate advances will be muted and manageable, the budget deficit is not an immediate problem for equities ("due bills" come later), housing is on the verge of recovery, valuations are reasonable and the administration's more centrist policy is market- and business-friendly.

The question is, how much will investors pay for this optimism -- whether misplaced or properly placed?

Enormous numbers of workers are in grave danger of being left behind permanently. Businesses have figured out how to prosper without putting the unemployed back to work in jobs that pay well and offer decent benefits.

Corporate profits and the stock markets are way up. Businesses are sitting atop mountains of cash. Put people back to work? Forget about it. Has anyone bothered to notice that much of those profits are the result of aggressive payroll-cutting -- companies making do with fewer, less well-paid and harder-working employees?

For American corporations, the action is increasingly elsewhere. Their interests are not the same as those of workers, or the country as a whole. As Harold Meyerson put it in The American Prospect: "Our corporations don't need us anymore. Half their revenues come from abroad. Their products, increasingly, come from abroad as well."

The schism between the middle class (or screwees) and flush corporations is growing ever more conspicuous. This is not meant to be a statement of class warfare or a political view, rather it is meant as an accurate economic statement.

The market has clearly looked through and dismissed this issue and is ignoring its potential consequences, as it focuses on more constructive developments (corporate profit growth, an expansion in merger and acquisition activity, positive stock price momentum, etc.).

Under normal conditions, housing would be poised for a dramatic turn to the upside for the following reasons:

* 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.

Again, it's different this time, especially in the jobs market and in the U.S. housing market.


Another day, another gain. The Dow Jones Industrial Average closed higher for its seventh straight day today, and the other indices aren't far behind. The rise is coming on declining volume but, in this perverse market, that seems to be a positive. Breadth improved nicely during the day while retailers, regional banks and gold attracted buyers. Oil was the laggard, but selling remains quite sedate.

One day we may look back and wonder how this market could go up like it did. Right now, however, it is impossible (and extremely dangerous) to call a top in this market.

Monday, February 7, 2011


I have a high conviction on a YHOO long based on the extremely appealing sum of the parts, the emerging and rapidly growing Chinese opportunity (AliPay) and the relatively dysfunctional company management that makes Yahoo! vulnerable to a takeover or dismemberment.

The number of Americans who are not in the labor force but who want a job now rose by another 431,000 in January -- the total now stands at 6.65 million people. If these Americans were in the labor force (and were looking for a job), the unemployment rate would go from 9% to 12.8%. This is an element of screwflation, and it holds broad economic and political ramifications and represents one of the principal challenges to the self-sustaining economic thesis that has served as the foundation of the bull market.

The food fights and civil unrest occurring around the world are a natural reaction to screwflation. If the Fed Chairman isn't careful and the trends in commodity price inflation continue, food fights could occur on our shore.

long YHOO


The market saw a little softness this afternoon, but, by and large, it was another day of gains. Investors and traders were downright ecstatic in early trading, but the market topped out after a few hours and then drifted the rest of the day.

Volume was lightest of the year and breadth was solid at better than 2 to 1 positive. Sector wise, the chips reversed after early strength and oil weakened as well. Regional banks were the leaders while natural gas was the laggard.

The biggest positive this market has going for it is the very strong momentum, which has created a large supply of underinvested bulls who are anxious to buy pullbacks. The biggest negative is that the market is extended, having seen approximately two days of correction in the last two months. The market has not offered good entry points for a while, and that makes it very vulnerable to a sharp pullback if those dip buyers lose their conviction.

Keep in mind that markets at their highs very seldom just fall apart. Market tops are processes that take some time to form (and we haven't even take the first step), so don't be overly anticipatory.

Going forward, the bears have two things going for them. Seasonality turns negative and we don't have much in the way of catalysts for potential positive news. There are still small-cap earnings reports coming in, but no major economic reports are due this week other than the weekly unemployment claims on Thursday.

Friday, February 4, 2011


Discouraged Workers Reach an All-Time High

The total number of Americans who are not in the labor force but who want a job now stands at 6.65 million.

The bullish spin doctors have been rationalizing the January jobs number all day.

The number of Americans that are not in the labor force but who want a job now rose by another 431,000 in January -- the total now stands at 6.65 million people.

If these Americans were in the labor force (and were looking for a job), the unemployment rate would go from 9% to 12.8%.

Bulls Blow It Again on Job Growth

The economic bulls have been wrong about their job growth forecasts for almost 15 months.

They continue to ignore three mega trends:

1. advances in technology;
2. globalization; and
3. the fact that temporary workers are becoming a permanent feature of the workplace.

They will also spin today's numbers.

Eventually, they will be correct, with "eventually" being the operative word.

Bernanke's head-in-the-sand mentality is paving the way for a classic policy mistake of easing too hard and for too long.

Recommended Reading

Knowledge@Wharton has a special report out this week on how to operate in a two-speed world.


After an ugly day last Friday, many market players were hopeful that we might finally see some pullbacks and/or consolidation, but this market was having none of that. We bounced back a little on Monday and then really flew back up on Tuesday as the "first day of the new month" phenomenon kicked in with a vengeance. We hesitated a little on Wednesday and then dipped for a short while on Thursday, but the buyers just keep on coming and now have us at yet a new high in the final few minutes of the week.

Trying to guess a top is obviously futile, but even the most bullish bull has to wonder when we will finally see some selling. Even great markets rest once in a while, but this one isn't resting.

Variety may be the spice of life, but that doesn't apply to this market recently.

Thursday, February 3, 2011


The foundation of corporate profit growth is not as solid as most market participants think.

Why should investors/traders be surprised with the afternoon ramp?

They shouldn't be surprised - after all it was Groundhog Day (literally) yesterday.

Today, we had another trading day and another 10- to 12-handle S&P rally from the lows.

Though fighting Mr. Market on the short side has been dangerous to one's financial health, these positive reversals are getting too pat, from my perch -- and so, too, is the causality/explanation between Bernanke's quantitative easing and the certainty of higher stock prices.

Again, not surprisingly, the predictability of these never ending intraday up moves has broken the spirit of the shorts.

In a Bloomberg interview, Dallas Fed President Richard Fisher is now saying that he cannot see giving his support to further quantitative easing after June 2011.

Active Call Trading in Yahoo!

I am seeing huge activity in the YHOO March 19s and in the April 18s and 20s.

Screwflation for Breakfast

We need food to survive, and food inflation remains a serious threat to the U.S. and to the emerging markets, far more so than energy prices.

Over here, in our country, food represents about 8% of disposable income; over there, it's much more.

The worldwide foundation of a consumer-centric economy remains less sound than most believe.

If food prices continue to soar, the self-sustaining recovery thesis (which is the cornerstone of the bull market thesis) will be in jeopardy.

Run, don't walk, to read Pimco's Bill Gross's 'Devil's Bargain.'

His main points:

* Money has become the economic and political wedge for profound changes in American society.

* Perhaps the most deceptive policy tool to lessen debt loads is the "negative" or exceedingly low real interest rate that central banks impose on savers and debt holders.

* Old-fashioned gilts and Treasury bonds may need to be "exorcised" from model portfolios and replaced with more attractive alternatives both from a risk and a reward standpoint.

Run, don't walk, to read Knowledge@Wharton's take on the chaos in Egypt: "Uprising in Egypt: Rebirth in an Ancient Land?"

long YHOO

Bulls Charged In

We had a little selling this morning but in this market, it is like waving a red flag in front of bull. The buyers charged in, and then after some comments from Fed Chairman Ben Bernanke, they concluded that the Fed was determined to keep on pumping the liquidity indefinitely. We ended the day at a new high, and once again have crushed all doubters, skeptics and bears.

This makes for an interesting setup for the jobs news tomorrow. Obviously, market players aren't particularly worried about a bad number, and given how this market has reacted to economic news lately, they probably shouldn't be worried. The bull case is that the trend in employment is improving, and it is likely that any big surprise to the downside will likely be dismissed as an aberration.

So the uptrend continues, and we'll see what impact the jobs news has on it tomorrow.

Wednesday, February 2, 2011


The Muslim Brotherhood's Official English website is a good breaking-news resource.

Market Running Out of Energy?

At some point, the rise in energy prices is almost always a negative for equities.

We might be approaching that point now.

Whenever the XOI has experienced a big run against the S&P 500, it is usually bad for the U.S. stock market.

Genworth Takes Out Bank Stocks

Bank stocks are getting hit on the GNW news. (Genworth's shares are down by 10%.)

Housing watchers should pay special attention to Genworth's release.

PayPal to Partner With Android?

I'm hearing that PayPal will become the exclusive payment partner on Android. If accurate -- and I have no clue if it is! -- it should help EBAY.

Should the rate of increase in commodity prices continue their upward assault, I would expect more geopolitical risk and chaos around the world.

This is one of the unintended consequences of massive quantitative easing.


It was a very quiet day of trading. The indices saw little movement, breadth was slightly negative and volume slowed. Whether that action is positive or negative depends on your individual perspective. The bulls will say that it is a healthy consolidation after a big move. The bears will argue that there was no follow-through and that momentum must be fizzling.

Since the trend is still up and we are hovering near annual highs, we still have to give the bulls the benefit of the doubt. The "first day of a new month" manipulation does somewhat diminish yesterday's breakout, but, so far, we haven't given much of it back. I'm not convinced that yesterday's action was a signal that the market is back on track.

The biggest problem I see with the market right now is that there are simply too many extended stocks that are in need of a rest. There aren't any glaring negatives out there but, with seasonality turning negative and earnings season winding down, I would be very surprised to see this market move straight up with hardly any pullbacks (like we saw in December).

I am worried that trading the upside is going to become increasingly more difficult. The market recovered too quickly from last Friday's weakness for stocks to have a chance to rest. Some flat action might take care of that.

Tuesday, February 1, 2011



I am astonished that the S&P futures are now 50 points above their Sunday night low.

Regardless of one's view on the markets, a move of this magnitude was nearly impossible to predict.

Away from the economy, interest rates, etc., Mubarak's speech raises more questions than answers.

His decision to stay in power until the election later in the year fails to address the demands of the Egyptian people and is full of doubletalk.

I would rate his speech as more than slightly (but not extremely) market negative over the short term especially in light of (1) his defiant tone, (2) the magnitude of the market's move, and (3) the potential for more uncertainty in the months ahead leading to the country's elections.


All indications suggest that Egyptian President Hosni Mubarak's days are numbered.

I suspect a relatively painless political "transition" is right around the corner.

Gap in Prices Paid

A good beat in ISM Manufacturing, but the real headline is the huge gap in prices paid in ISM.

Bill Ackman Gunning for Best Buy?

I'm hearing that Pershing Square's Bill Ackman has taken a filing position in BBY.

Over there, the U.K. Manufacturing PMI rose to a higher-than-consensus 62%, an all-time record. Orders were strong and at a new high.

Eurozone unemployment remained high, but at 10%, it was a slightly less-than-expected reading.

Germany's unemployment fell more than expected, bringing the country's unemployment rate below 7.5%.

Meanwhile, rising prices were seen in South Korea and in Thailand, with food and energy prices the source of the pressure.

Finally China's Manufacturing PMI came in less than expected and dropped from December.

Yahoo! for Baidu?

After BIDU's off-the-chart results, it's difficult to see how YHOO's shares don't work.

Gabelli & Co. initiates YHOO with a buy this morning sees 41% upside.

Egypt Was an Upside Spark

long YHOO


Given the recent history of strength on the first day of a new month, it isn't too surprising that we had a positive day, but the intensity of the buying still caught many folks by surprise. Volume was good and breadth quite impressive at almost 4 to 1 positive.

We went from an ugly breakdown on Friday to a euphoric breakout today. When things shift that quickly, a lot of market players are going to be caught out of position, and that tends to add to the momentum as they anxiously try to reposition.

So now that we have been whipped around, the issue is, do we return to the straight-up action that we saw for the two months prior to last Friday, or do we have increased volatility ahead? The bears have had their chances, but they squandered them yet again. That is certainly nothing new, and typically we just continue to trend upward after we shrug off a downside push.

The two biggest obstacles that the bulls face going forward is that most of the important earnings reports are now out of the way, so there is less likelihood of positive news, and seasonality starts to turn negative. We had a great example of positive seasonality today with the huge gain on the first day of a new month. Following through after that is not a sure thing at all. In the bigger scheme of things, the positive seasonality we enjoyed in December and January also comes to an end as we move into February.

The bulls are obviously in control of this market and deserve the benefit of the doubt. Today they had the big advantage of the money flow on the first day of a new month, and now they are in good shape for continued momentum. Whether we can continue to run without better consolidation first is the big question and should give us an interesting battle over the next few days.