Thursday, March 31, 2011


According to the Wall Street Journal, the SEC is considering an investigation into Berkshire Hathaway.

Two-and-a-half-year high in crude oil now.

Run, don't walk, to read "U.S. Energy Policy After Japan: If Not Nuclear, Then What?" from Knowledge@Wharton.

Run, don't walk, to read Whitney Tilson and Glenn Tongue's recent analysis of Berkshire Hathaway.

A Tougher Quarter Probably Awaits

The first quarter of 2011 is in the books, and it was another good one for the bulls. After topping out in mid-February, it looked like we might finally see a correction, as we were hit with a number of negative news events such as the earthquake in Japan, nuclear plant fallout, a war in Libya and record high oil prices.

But once again, the market did what it has done so often over the past couple years and, after teetering on the brink of the abyss, jumped straight back up. The news flow wasn't all that great, including economic data and housing in particular, but it just hasn't mattered - POMO is too strong. We bit through the obvious resistance at 1300 on the S&P 500 and just kept running as the serial top-callers were badly abused by the market beast yet again.

The million-dollar question as the second quarter starts is whether we can keep this bounce going. We won't have window-dressing, which really helped this week, and after tomorrow, seasonality becomes more challenging. In addition, we are still technically extended, and we have a couple weeks before first-quarter earnings reports start to hit. There aren't a lot of obvious catalysts on the horizon, but good news, bad news and no news seem to be equally good excuses for some buying lately. Nonetheless, we can't be too sanguine about the possibility of some consolidation after the run we have had over the past couple weeks.

Wednesday, March 30, 2011


We are back in a bull market of complacency, a condition that existed before the Japanese nuclear crisis.

For the third time this week, the Treasury's auction (of seven-year notes this time) was weak. Thomas Hoenig of the Kansas City Fed delivered a predictably hawkish speech today.

The yield came in at 2.895% against an expectation of 2.873%, with a bid-to-cover at 2.79 (compared to prior auctions averaging 2.88) and with indirect bidders in line with the past five or six auctions.

Hoenig, who is retiring as president of the Kansas City Fed, delivered a predictably hawkish speech, in which he believes the Fed is too easy and that the federal funds rate deserves to be at 1%. He sees the Fed as partially responsible for higher commodity prices around the world and views Fed policy as at risk of causing another bubble.

Is crude's weakness market-friendly? I honestly don't know anymore.

Mortgage Applications Drop

Mortgage applications dropped by 7.5% last week, reversing modest strength in the previous seven-day period.

Refinancing activity dropped by nearly two-thirds of total applications, bringing it to the second-lowest refinance share since May 2010.

More Fiscal Woes for Local and State Governments

The fiscal problems at our local and state governments are playing out around the country.

Defaults? No.

Austerity? Yes.

Something By Keynes And Then: Japan Prepares To Bury The Problem Following News Of Uncontrolled Reactor 1 Chain Reactions.....

John Maynard Keynes once said of inflation: "There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."

The inevitable entombment of the entire facility in thousands of tons of concrete is coming to fruition. Bloomberg reports that Japan will consider pouring concrete into its crippled Fukushima atomic plant to reduce radiation and contain the worst nuclear disaster in 25 years. The reason for the admission of total defeat is the gradual comprehension that the worst case scenario has come to pass: "The risk to workers might be greater than previously thought because melted fuel in the No. 1 reactor building may be causing isolated, uncontrolled nuclear chain reactions, Denis Flory, nuclear safety director for the International Atomic Energy Agency, said at a press conference in Vienna." Not one to cover up the worst case outcome for a week, TEPCO only did so... for five days: "Radioactive chlorine found March 25 in the Unit 1 turbine building suggests chain reactions continued after the reactor shut down, physicist Ferenc Dalnoki-Veress of the James Martin Center for Nonproliferation Studies in Monterey, California, wrote in a March 28 paper." It's good thought" Radioactive chlorine has a half-life of 37 minutes, according to the report." It appears Japan is willing to give up, and write off a several hundred square kilometer area, as nobody in their right mind will ever agree to move in next to a territory that, contrary to lies, er, promises, will not seep radioactivity in the soil and in the water. This is an unprecedented admission of defeat by the Japanese which unfortunately may be the only solution, which will certainly have major implications for the Japanese economy.

The now much expected spin on this last ditch effort:

Tokyo Electric mixed boron, an element that absorbs neutrons and hinders nuclear fission, with emergency cooling water to prevent accidental chain reactions, Kathryn Higley, head of nuclear engineering and radiation health physics at Oregon State University in Corvallis, said in an e-mail.

Dismantling the plant and decontaminating the site may take 30 years and cost Tokyo Electric more than 1 trillion yen ($12 billion), engineers and analysts said. The government hasn’t ruled out pouring concrete over the whole facility as one way to shut it down, Edano said at a press conference.

Dumping concrete on the plant would serve a second purpose: it would trap contaminated water, said Tony Roulstone, an atomic engineer who directs the University of Cambridge’s masters program in nuclear energy.

As for what happens after a concrete tomb, which increases the surrounding pressure by orders of magnitude, is put over what now appears is still a live fision reaction, well, I won't make any predictions. Suffice to say if historical precedent of how TEPCO has handled this situation to date is any indication, expect the sarcophagus to crack, and a 100 km "No Live Zone" radius to be extended around Fukushima in perpetuity.....


A low-volume, V-shaped bounce is exactly what we have seen once again. We cut through resistance and just kept running despite poor news flow and lots of confused bears. I suspect that end-of-the-quarter window dressing aided the action today, but it has been another remarkable show of resilience by the bulls just when it looked like we could run into some real problems.

Typically, the window-dressing pressure dries up the day before the end of the quarter and that may have been what caused a little late-day weakness. But what we have normally seen after this sort of run is a new supply of dip buyers who are sick and tired of being underinvested as the market runs away from them. They may not believe the bullish arguments, but being left behind is enough to cause them to add some long exposure anyway.

Tuesday, March 29, 2011


The 5-year Treasury auction was on the weak side, as the yield came in above expectations.

While clearly not enough to deter the stock market's gains, most of the economic releases today were on the light side.

The Case-Shiller home price index fell, but the rate of decline was better than expectations. Home prices have now dropped for seven months in a row as the shadow inventory of unsold homes continue to weigh on the supply/demand equation.

It is important to recognize that the economic impact of the weak residential real estate market in 2011 is substantially less than was the case back in 2008-2009 for several reasons. First, housing investment now represents an extremely low percentage of GDP. Second, most of the price declines and low level of sales are now behind us. Third, expectations are subdued.

That is not to say there isn't a negative knock-off effect, as consumer confidence is impacted -- as is spending.

Speaking of consumer confidence, that index declined to 63.4 from 72 in the prior month and from expectations of 65. Present conditions improved, while future conditions dropped. (Bulls await an improving jobs market to offset recent weakness in confidence.)

Run, don't walk, to read Seth Klarman's book, Margin of Safety. It goes for about $750 on ebay.......

In his seminal book Margin of Safety, hedge fund manager Seth Klarman tells an old story about the market craze in sardine trading. One day, the sardines disappear from their traditional habitat off the Monterey, Calif., shores, the commodity traders bid the price of sardines up, and prices soar. Then, along comes a buyer who decides that he wants to treat himself to an expensive meal and actually opens up a can and starts eating. He immediately gets ill and tells the seller that the sardines were no good. The seller quickly responds, "You don't understand. These are not eating sardines; they are trading sardines!"

Similar to Klarman's tale, today's market is a trading-sardine market, not an eating-sardine market.

The core challenge to the markets? Upside surprises, both profit and economic, have likely peaked, and downward revisions will probably occur with more frequency.

There is more economic and profit ambiguity emerging, and the consensus profit forecasts for the S&P have become the best case and are no longer considered the likely case.

The good thing is that bullishness has ebbed, and there is some fear. Animal spirits have subsided, and valuations are not unreasonable.

I continue to believe that comparisons to the market correction in November 2010, which morphed into another bull-market leg, are not yet in place. What would make me more positive technically would be a shift out of the defensive area (a deterioration in consumer staples) and/or a breadth thrust accompanied by a 90% up day. These are the conditions that reversed the November 2010 correction.


1. Higher energy and other input prices. Higher energy costs remain the biggest risk to profit and economic growth. Japan's nuclear crisis has likely further increased our dependency on fossil fuels. U.S. policy is on a slippery slope on which oil might be increasingly impacted by the outside influences of Mother Nature and political developments -- all beyond our control. Besides energy prices, a broadening increase in input prices also threatens corporate profit margins. Meanwhile, these factors are pressuring the consumer, as gains in real incomes, adjusted for several extraordinary factors, remain relatively weak. And, as The Wall Street Journal duly noted, screwflation of the middle class remains a further challenge to forward personal consumption expenditures and to aggregate economic growth. Already, the consumer is dipping back into savings, a worrisome sign.

2. Confidence. Consumer confidence is dropping, reflecting current events and continued screwflation of the middle class. The Gallup confidence and the University of Michigan sentiment surveys have been disappointing.

3. Middle East/North Africa. Geopolitical risks abound (and will likely linger) in the Middle East, despite the recent unified efforts to upend the regime in Libya.

4. Housing. The residential real estate market remains moribund; any further weakness in home prices will serve as a drag and will jeopardize confidence, consumer balance sheets and economic growth.

5. Monetary policy. Exiting QE2 will have an uncertain impact, so will recent monetary tightening in India and China.

6. Tech questions. We have renewed tech inventory and demand concerns in the defense (e.g., SANM, optical (e.g., FNSR and tablet spaces).

7. Supply disruptions. In our increasingly interconnected world, the Japanese nuclear crisis has caused numerous supply disruptions in tech, autos and other industries.

8. Slowing business momentum. Given the confluence of events, first-quarter 2011 business activity likely ended weaker than expected. If businesses begin to treat the geopolitical and elevated oil prices as a more permanent condition, order cancellations and corporate-spending deferrals loom in the months ahead.

Like Father Like Son (In Law): Ivanka Trump's Husband About To Experience His First Real Estate Default

Over two years ago, when discussing the absolutely top ticked purchase of one 666 Fifth Avenue by under-30 real estate mogul extraordinaire, NY Observer owner and now Donald Trump son in law, Jared Kushner, we said: "Looks like the commercial mortgage apocalypse is about to claim its next victim, this time in the form of the appropriately numbered 666 Fifth Avenue building, home to such previously flourishing tenants as Citi Private Wealth Management...the building's DSCR has fallen to an abysmal 0.69. Even when taking into account the $98 million (or much less) reserve fund the building has set aside to cover rent shortfalls, one can assume it won't be long before the 666 insignia again prominently graces the roof, especially since it would have to replace a laughable Citi sign." Ah, the good old days of 2009, when news mattered, data actually flowed through models, hedge funds traded on constant inside information, markets actually dipped, POMO was a clown, and central planning was merely a drop of unrecycled ink in Ben Shalom Mugabe's toner cartridge. But we digress. With little surprise we read in the WSJ, that after an artificial delay of over 2 years, the inevitable is about to catch up with reality, confirming that no amount of Vissarionovichian market manipulation can make up for the complete absence of cash flows. "As of March, the aluminum-panel-clad skyscraper was about $3.5 million-a-month short on debt service, say people familiar with the matter. Only $10 million remained in a reserve fund used to service the property's $1.22 billion mortgage, which is tied to the office portion of the building. Its revenues are only one-fourth the amount forecast in 2007." Next steps: technical and/or full blown default.

More from the WSJ, which describes what in a normal world would have happened literally years ago:

Mr. Kushner is now facing off against a set of lenders that include private-equity heavyweights Starwood Capital Group and Colony Capital LLC. Talks have accelerated recently, with Mr. Kushner offering to put in tens of millions of dollars to recapitalize the property in exchange for some form of relief, people familiar with discussions said.

The Kushner family appears to have significant financial resources, and lenders don't expect other backers, including Mr. Trump, to come to Mr. Kushner's aid.

"The Kushners are ready and willing to invest more money into the property as soon as they can come to mutually satisfactory terms with the servicing agent," a spokesman for Mr. Kushner said.

Talks are fluid, but several people familiar with the talks say that outlines of a deal could be agreed upon within weeks.

New to the New York office market, Mr. Kushner, then 26, took the lead in buying 666 Fifth Ave., at 52nd Street, from landlord Tishman Speyer. The price—paid for with $1.75 billion in debt and $50 million in equity and $100 million in reserves from the Kushner family and family business partner George Gellert—assumed that a string of below-market expiring office leases would be replaced with companies paying far higher prices, according to loan documents. They also planned to sell a stake in the retail portion of the building and paid off junior debt.

The retail sale turned out well. In 2008, Mr. Kushner sold a controlling 49% stake in the space in a deal that valued it at $525 million. Earlier this month, Spain-based Inditex Group agreed to buy a portion of that retail at a significantly higher price, valuing it at about $8,300 a foot. It used to house an NBA store and will soon house the clothing brand Uniqlo's flagship store.

Once projected to take in nearly $120 million in annual office rent, the 39-story building will post income of close to $30 million this year, down from $60.1 million in 2007, people familiar with the rents said.

But the higher office rents haven't materialized and vacancies have increased. If Mr. Kushner were to miss a payment after the fund is depleted, he would be in default and representatives of the lenders could eventually attempt to seize the building if a deal isn't worked out, people involved with the talks said.

The commentary from the future presidential candidate now is oddly comparable to that uttered by young Master Kushner back then. Compare: "He is a very smart young man," Mr. Trump said of Mr. Kushner in an interview Tuesday. "I think it will come out well for him and everybody" (as of March 29, 2011) with: "We are well capitalized and conservative and feel confident that we will do well with this over time.” Kushner said (as of January 15, 2009). At least one has been proven wrong. Of course, sooner or later, everyone else who bets on the fortuitous alignment of the stars (ahem Gideon Bernanke) will end up bankrupt. The only question is how much of other people's money will be used up in the process- the Kushner cash legacy is about to find out first hand. "The bulk of the mortgage, $929.5 million, was securitized and sold off to investors as bonds. Private-equity firms Starwood Capital, Colony Capital, Area Property Partners and Paramount Group each bought stakes of the remaining $285.5 million in debt at a roughly 30% discount over the past two years, according to people familiar with the deals. Loan special servicer LNR Property Corp. has been taking the lead for all debt holders in the talks." And all will demand a piece of the pie.

Then again, with Kushner investing virtually zero equity in the project (thank you idiot CMBS investors), we are fairly confident he will promptly walk away leaving Starwood, et. al. fight over who gets to defect next.

This is especially true if the updated remittance report indicating that 666 Fifth is now a ghost town, is true, and where Izzy Englander's Millennium Partners may be the largest tenant left.

Not A Dull Market

The old adage about not shorting a dull market applied today. We followed through on yesterday's poor close to start the day, but after a little hesitation the dip buyers stepped up and drove us higher. We even managed a strong finish that took us out at the highs. Breadth was good but volume was poor.

A lot of stocks are being walked up on mediocre volume, which suggests that big funds want to make sure that their key holdings finish the quarter strongly. The window dressing activity tends to slow a day or so before the end of the quarter, so watch for some of the institutional favorites becoming more volatile over the next two days.

This market is causing some real confusion for the bears. Oil is up and the news flow continues to be challenging, yet we cut through technical overhead and drifted higher on light volume. It isn't very logical, but if you want logic you should study algebra rather than trading. The market just isn't a very rational beast at times and you have to recognize that fact if you want to stay ahead of the game.

Once the end-of-the quarter pressure subsides, further upside may be more difficult. But plenty of folks were thinking that last week, just before we broke through 1300 on the S&P 500. It just hasn't paid to try to call a top in this market and that continues to be the case.

Monday, March 28, 2011


No Competition for Netflix

The investment graveyard is full of Netflix shorts.

From my perch, Netflix is still in its relative infancy -- yup, you heard me correct! -- very similar to AOL sans TWX back in the 1992-1995 period, when it aggressively added subscribers at a frenetic pace by distributing promotional discs. (Some of you graybeards will remember this!)

And, I will underscore the fact that, back then, there was far more skepticism regarding AOL's marketing initiatives and business model than there is about Netflix's current strategy.

Far more!

Fast-forward to today.

Ironically, I view Netflix is to its competition (e.g., Time Warner's attempts to compete by putting movies on Facebook) as AOL (which was until recently part of the Time Warner empire) was to second-place competitor Compuserve 25-27 years ago.

Ultimately, Compuserve, which was jettisoned by HRB, ran so far behind AOL competitively that it disappeared off the face of the earth.

Subsequently, AOL continued to add subscribers at breakneck speed in the latter part of the 1990s, just as adoption of the Internet expanded broadly.

That was, of course, until, AOL's competition caught up in the new millennium. But, by the time AOL stumbled, fortunes were made in the stock as its equity capitalization grew to be in excess of $150 billion.

In all likelihood, Netflix's lead has now grown so wide that its success will probably resemble the success that AOL achieved in the late 1990s. Yup, Netflix's competition is Compuserve redux -- for now.

Don't Drink the Water

Reuters reports that radioactive water is leaking from one of the crippled nuclear reactors in Japan.

Dallas Fed Disappoints

The Dallas Fed Manufacturing release was disappointing. At 11.5, it compared to the prior month of 17.5 and to consensus of 18.4.

Reuters reports that Unilever and Procter & Gamble may raise detergent and soap prices by as much as 15% in China.

Runaway inflation in China?

It looks like St. Louis Fed President is calling an audible on QE2 this weekend.

Run, don't walk, to read Dr. Gregory Mankiw's chilling op-ed on the U.S. budget deficit in Sunday's New York Times.

Late Collapse

The market saw a peculiar mix of action today. There was some strong action in bigger-cap momentum names such as NFLX, LULU, TZOO, OPEN, PAY and APKT that was probably window dressing action, but breadth was negative and we had an unusually weak close. We haven't had many closes at the lows even as the market corrected so that is not a good sign. On the other hand, volume was the lightest of the year, which means the big institutions weren't rushing to exit.

After the bounce we have had over the last seven trading days, stocks look very vulnerable. They have simply gone up too far, too fast on light volume and may need some simple consolidation.

But maybe the good news is that the reversal today is what we needed to work off the overbought technical conditions that have developed. The S&P 500 is still holding above its 50-day simple moving average on very light volume. The bulls are in good shape to regroup and make another push higher after a bit of a correction, so it isn't at all negative. The market may need to consolidate, and that's what is happening for the most part. There are some cases of end-of-the-quarter window dressing causing some (likely) extended stocks to stay elevated.

Friday, March 25, 2011


Conspicuous Weakness in Retail

Retail stocks have been conspicuously weak over the last two days of rally.

Disappointing Confidence Reading

The article in The New York Times on GE's low tax payments will doubtless get a lot of discussion today.

The Market Ticked Higher All Week

Logic isn't always a helpful attribute when it comes to trading the market. A rational, logical person might think that the market would struggle a little as it deals with disaster in Japan, war in Libya, debt problems in Europe, the worst new housing numbers in decades, record high oil and creeping inflation. They would not only be wrong, they would lose big money if they tried to fight this market strength.

The market ticked steadily higher all week and even gained traction the more technically overbought it became. Volume was light but breadth quite strong. The market acted like it didn't have a worry in the world.

Perhaps the fact that there was so much skepticism and doubt kept things running. Also, the end of the quarter is approaching and that tends to help hold stocks up, but it is still surprising that the recent buyers of weakness weren't more aggressive locking in gains.

It is often said that extended markets can become even more extended, and that has certainty been the inclination of this market for a very long time. We continually overshoot to the upside, which makes normal trading discipline feel rather foolish at times.

After the run we've had this week, a tremendous number of stocks are now technically extended but we have window dressing next week, which should help to hold some of those stocks up. This market has had a similar configuration quite often over the last couple of years, and the bulls have almost always emerged with the victory.

Thursday, March 24, 2011


I'm hearing that a high-profile hedge fund that has endorsed gold in the past has begun to trim its outsized (and highly profitable) position today.

Weak TIPS Auction

We had an $11 billion auction of 10-year TIPS notes today. The results were weak, based on indirects.

Awful Durable Goods Report

Are corporate profit margins peaking?

Color today's U.S. durable goods orders report awful.

For the second consecutive month, inventories rose by 0.9%.

Stated simply, orders are slowing, and inventories are accumulating. (The inventory/shipments ratio has increased from 1.58 in August to 1.62 currently.

Summary Of Key Health Issues From Fukushima Radioactive Substances

Now that both food and drinking water in Japan have been confirmed to be tainted with various stages of radioactive toxicity, Reuters provides a quick summary of the impact the three key fallout isotopes (Iodine 131, Caesium 134 and Caesium 137) have on human health, and what to look for to determine if one may have injested just a tad too much of those glow in the dark shoots...

Below are the three radioactive substances health experts are most concerned about, their detected levels in Japan and what they mean for human health:


Leafy green vegetables in Japan were found this week to contain up to 22,000 becquerels of iodine-131 for every kilogram.

Such a level exceeds the limit set by the European Union by 11 times. Becquerel is a measure of radioactivity.

Eating a kilogram of such vegetables would give half the amount of radiation typically received by the average person from the natural environment in a year.

Eating this amount every day for 45 days will accumulate 50 millisieverts, the annual radiation limit set for a nuclear plant worker. Millisievert quantifies the amount of radiation absorbed by human tissues.

Exposure to 100 millisieverts a year increases the risk of cancer. That is equivalent to about three whole body CT scans.

If inhaled or swallowed, iodine-131 concentrates in the thyroid gland and increases the risk of thyroid cancer. Children, fetuses and young adults are especially vulnerable.

The risk of thyroid cancer can be lowered by taking potassium iodide pills, which helps prevent the uptake of the radioactive iodine.

However, iodine-131 disintegrates relatively quickly and its radioactivity is halved every 8 days. This means it loses all its harmfulness in 80 days.

Caesium-134 and Caesium-137

Vegetables in Japan have also been found tainted with up to 14,000 becquerels of cesium for every kilogram.

That exceeds the EU limit by over 11 times.

Eating a kilogram of such tainted vegetables every day for a month would accumulate radiation equivalent to a full body CT scan - or 20 millisieverts.

External exposure to large amounts of radioactive cesium can cause burns, acute radiation sickness and death. It can also increase the risk of cancer. Ingesting or inhaling cesium allows it to be distributed in soft tissues, especially muscle tissue, increasing cancer risk. It can also cause spasms, involuntary muscular contractions and infertility.

Unlike iodine, uptake of radioactive cesium cannot be prevented once the person is exposed.

This substance is of more concern than iodine-131 because it is very hardy and takes far longer to disintegrate.

Caesium-137 has a half life of 30 years, meaning it takes that long to reduce its radioactivity by half. It will take at least 240 years for this contaminant to exhaust all its radioactivity.

Caesium-134 has a half life of 2 years, which means it will take about 20 years for it to become harmless.

Below are the effects of short-term, high-level exposure to radiation, as published by the U.S. Environmental Protection Agency. Unlike cancer, these effects from acute radiation exposure usually appear quickly, causing what is known as radiation sickness, which includes symptoms like nausea, hair loss and skin burns. If the dose is fatal, death usually occurs within two months.

* Exposure to 50-100 millisieverts: changes in blood chemistry.

* 500: nausea, within hours.

* 700: vomiting

* 750: hair loss, within 2-3 weeks

* 900: diarrhea

* 1,000: hemorrhage

* 4,000: possible death within 2 months, if no treatment

* 10,000: destruction of intestinal lining, internal bleeding and death within 1-2 weeks

*20,000: damage to the central nervous system and loss of consciousness within minutes, and death within hours or days.

No Bad News, So The Market Rises

Although there wasn't any definitive good news to serve as a catalyst, the bulls chugged away all day and managed to close the S&P 500 solidly above key resistance at 1104, which is the 50-day simple moving average. While there weren't any obvious positive headlines to spark the buying, there weren't any new negatives, either -- and that was all that was needed to keep the buyers coming and the bounce going.

With the straight up 50-point bounce in the S&P 500 following the breakdown on the Japan crisis, you have to wonder if our old pal, the V-shaped bounce, is back. Shorts and underinvested bulls have to be nervous about that, especially with the potential for end of the quarter window-dressing in the next few days.

The bulls are going to have their work cut out for them to keep this bounce going, but action on days like today create plenty of dip buyers who won't want to miss buying on the next bout of weakness. There are some very good reasons to look for the market to roll back over, but the market doesn't much care what is logical most of the time.

Wednesday, March 23, 2011

Just A Bit More About Why Nuclear Power Is The Correct Answer

As a result of the disaster at Fukushima, I am more in support of the technology than ever.

A crappy old plant with inadequate safety features was hit by a monster earthquake and a vast tsunami. The electricity supply failed, knocking out the cooling system. The reactors began to explode and melt down. The disaster exposed a familiar legacy of poor design and corner-cutting. Yet, as far as we know, no one has yet received a lethal dose of radiation.


The AP reports that the Eiffel Tower was evacuated after a bomb threat.

Crude's Rise Continues to Worry Me

The price of crude oil remains at the top of my list of market worries.

U.K. Chancellor of the Exchequer George Osborne reduces the GDP growth rate for 2011 from 2.1% to 1.7%.

The Future Of Nuclear, And Of Japan

You can't beat for drama the struggle of Japanese operators to manage the emergency cool-down of nuclear reactors in the tsunami zone. For the things that matter most, though—life and safety—the nuclear battle has been a sideshow. Hundreds were feared dead when entire trains went missing. Whole villages were wiped out with the loss of thousands of inhabitants. So far one worker at one nuclear plant is known to have died in a hydrogen explosion and several others have exhibited symptoms of radiation poisoning.

As for environmental degradation, video testifies to the brown murk that the tsunami waters became when they crossed into land. An infinity of contaminants—sewage, fuels, lubricants, cleaning solvents—have been scattered across the Earth and into aquifers. Radiation releases, meanwhile, haven't been a serious threat to anyone but the plant's brave workers.

Just under a decade ago, when Americans were worried about the vulnerability of nuclear plants to deliberate terrorist destruction, Nuclear Regulatory Commission Chairman Nils Diaz gave a notable speech: "In general, I do not believe nuclear power is being portrayed in a balanced manner. . . . This is probably the fault of all of us who know better since there have been strong currents for not mentioning consequences [of nuclear accidents] out loud."

He proceeded to lay out the consequences of Chernobyl, a uniquely bad nuclear accident, in which a graphite core reactor burned in the open air for more than a week. Along with 59 firemen and workers who lost their lives, the failure to evacuate or take other precautionary steps led to 1,800 thyroid cancer cases among children, though fewer than a dozen deaths. "Leukemia has been expected to be among the early primary latent health effects seen among those exposed to significant amounts of radiation," Mr. Diaz continued, "yet excess cases of leukemia that can be attributed to Chernobyl have not been detected."

Do not pretty up what Mr. Diaz was saying. He was not offering risk-free energy. Now think about Japan. It suffered its worst earthquake in perhaps 1,100 years, followed by a direct-hit tsunami on two nuclear plants. Plenty of other industrial systems on which the Japanese rely—transportation, energy, water, food, medical, public safety—were overwhelmed and failed. A mostly contained meltdown of one or more reactors would not be the worst event of the month.

In a full or partial meltdown, you don't really know what you will get unless you know the condition of the containment structure and, even more, what's going on inside it, especially in terms of fluids and gases that might have to be vented. Complicating matters in Japan's case is also the failed cooling of spent fuel, contributing to a burst of emissions that alarmed but didn't threaten the wider public. Tokyo Electric has an almighty mess to clean up, but even in circumstances compounded by a region-wide natural disaster a Chernobyl-scale release seems likely to be avoided—in which case this year's deaths from nuclear power will be less than those from coal-mining accidents.

So here's a question: The world has gas and coal with which to produce electricity. Nuclear is a hot-house plant, requiring lots of government support. Environmental groups, with their perhaps unmerited moral authority, have insisted for years that curbing carbon is the greatest human challenge, and those groups that haven't opted for escapism, insisting wind and solar somehow can make up the difference, have quietly recognized that the only alternative to fossil energy is nuclear.

Where will these groups be in the morning? China and India, two fast-growing producers of greenhouse gases, have dozens of nuclear plants planned or under construction. India being a democracy, that country is particularly ripe to be turned off course by political reaction to Japan. If they believe their climate rhetoric, will environmentalists speak up in favor of nuclear realism or will they succumb to the fund-raising and media lure of antinuclear panic?

We suspect we already know the answer. In the unlikely event the world was ever going to make a concerted dent in CO2 output, nuclear was the key. Let's just guess this possibility is now gone, for better or worse.

On a slightly different subject, the Sendai catastrophe throws into relief the continuing enigma of the Japanese economy. By official data, Japan has stagnated for two decades, growing at barely 1% a year. The population is shrinking. Pork-barrel construction spending seems to be bankrupting the public purse. Government debt appears to be huge and out of control.

At the same time, Japan is more of an export powerhouse than ever, its current account surplus having quintupled since the heyday of Japan Inc. in the late 1980s. Public services are first-rate. The yen is strong. Interest rates are low. The Japanese are healthy and well-supplied with the latest and best of everything. For purveyors of luxury brands Japan remains their superlative market. The reported unemployment rate is less than 5%.

One theory is that Japan has been lying about its growth rate to allay protectionist blowback. The malaise of Japan exists mainly in the eyes of Western beholders, who fail to grasp the enduring dynamism of its state-directed, bank-centric, export-oriented capitalism. This theory, while dubious to many of us, is about to get a fascinating and poignant test as Tokyo goes on a fresh borrowing and spending binge to rebuild.

Small Rebound

The indices managed some pretty gains, but it was a deceptive day. We started off quite nervously and it looked like another failed bounce might kick in, but after an hour of some selling we found support and gained strength the rest of the day. The market even managed to close near the highs for the first time in a while, although it did pull back slightly in the last few minutes. Despite the strength, breadth was mediocre -- particularly on the Nasdaq where there were 1394 gainers to 1219 decliners. Volume was quite light but did pick up over Tuesday. It wasn't a wild dip-buying frenzy but the overall tone was good.

Once again the S&P 500 fizzled out as it hit resistance in the 1300 to 1304 area - which everyone is watching and is obviously triggering some selling as it gets tested. It is probably healthier not to move through that level too quickly as the chances of a failed breakout would be higher without better support. We'd be better off with some more back-and-forth action, which would move shares into stronger hands and provide a foundation for a stronger move.

If AAPL hadn't lagged today, the indices would have had much bigger gains -- but a lot of technology laggards finally acted better. The mediocre breadth is still a concern, but there were definite positives as well.

We are in the same position for a couple days now, with the indices trying to build on the recent bounce but running into resistance right where it's expected. It is a positive that we don't roll back down right away, but this is not the sort of V-ish action that the bulls enjoyed for so long prior to mid-February.

The news continues to be tilted to the negative, but we managed to shrug off higher oil and issues in Portugal. There were some dip buyers once again, and that is what the market needs to kill this downtrend.

Tuesday, March 22, 2011


The market could have seriously rolled over, but it didn't.

Overall, I thought the market did well, especially in light of the climb over the previous three days.

Erin Go Broke?

A heads up: The Irish debt market is stinking up the joint and is a tail risk. Since year-end 2010, Irish two-year bonds have risen by 500 basis points. Over the last twelve days, however, those bonds have climbed by 200 basis points.

Gasoline Prices Will Get Worse

From Rich Farr, Boenning & Scattergood's economist:

In February's Retail Sales Report, gasoline took a little more market share of consumer spending. Gasoline as a Percentage of Retail Sales increased from 10.28% of sales in January to 10.33% in February. Unfortunately, it looks like that trend is going to only worsen from here. Average gasoline prices for March are now trending well above February's average. Furthermore, with the political unrest in the Middle East and Libya, the average price for gasoline is quickly approaching its 2008 peak, and unemployment is far worse now than it was in early 2008.

Fed Official Sounding Deficit-Minded

Fisher of the Dallas Fed makes some hawkish comments.

Screwflation Hits the U.K. Middle Class

U.K. CPI is now up 4.4% year over year.

February headline U.K. CPI increased by 0.7% (above forecasts) -- it is now up 4.4% year over year. Not only did energy prices contribute to the large increase but so did higher clothing and utility prices.

Another contagion, that of screwflation, continues to hit the middle classes around the world.

Run, don't walk, to read 'The Seven Immutable Laws of Investing' by Grantham Mayo's James Montier.

2 US Crewmen Rescued By Libyan Rebels After F-15 Crash; How Much Gold Does Gaddafi Have?

The first confirmed US military asset lost over Libya is an F-15E jet, following confirmation from The Telegraph that the plane crashed, supposedly as a result of a mechanical error, not due to being shot down. From Reuter: "A U.S. Air Force F-15E fighter jet crashed in Libya overnight after apparent mechanical failure but its crew were safe, a spokesman for the U.S. military Africa Command said on Tuesday. Libyan rebels rescued the pilot after he ejected from the warplane which came down near the eastern city of Benghazi, Britain's Daily Telegraph newspaper reported on its website. "Just found a crashed US warplane in a field. believe a mechanical failure brought it down," Telegraph correspondent Rob Crilly said on the Twitter micro-blogging site."

U.S. spokesman Vince Crawley declined to give the location of the crash and also would not say how the rescued crewman was picked up or where he was taken.

Another spokesman for the Stuttgart-based Africa Command said later that the second crewman had also been safely rescued, and that both crewmembers had suffered only minor injuries after ejecting from the aircraft.

The crash was likely caused by mechanical failure and not hostile fire, Crawley added.

The Telegraph web site showed local Libyans inspecting the charred wreckage of the plane.

"Came down late last night. Crew believed safe," Crilly added in subsequent tweets.

Western forces carried out a third night of air raids overnight aimed at protecting civilians from forces loyal to Libyan leader Muammar Gaddafi.

At the same time, the FT is hypothesizing that the one saving grace for Gaddafi may at this point be the country's 140+ ton gold stash, which is worth $6.5 billion at today's fixing. Just as the gold may be the reason for why Gaddafi has so far not been backed into a corner following all the recent asset freezes, it may, in conjunction with the country's oil be the explanation for the UN's eagerness to liberate the country. Because last time we checked Ivory Coast had a deposed dictator who was killing his people in the midst of a civil war and nobody really seemed to rush to establish a no fly zone. Looks like that edible cocoa just is not as valuable as yellow and black gold after all...

The Libyan central bank – which is under Colonel Gaddafi’s control – holds 143.8 tonnes of gold, according to the latest data from the International Monetary Fund, although some suspect the true amount could be several tonnes higher.

Those reserves, among the top 25 in the world, are worth more than $6.5bn at current prices, enough to pay a small army of mercenaries for months or even years.

While many central banks hold their gold reserves in international vaults in London, New York or Switzerland, Libya’s bullion is in the country, said people familiar with the country’s activities in the gold market.

US and European governments have frozen billions of dollars in Libyan assets, as sanctions have hit the central bank, sovereign wealth fund and state oil company.

But Libya’s gold reserves may provide Col Gaddafi with a lifeline – if he can sell them. To raise large amounts of money, bankers said, Col Gaddafi would have to transport the bullion out of Libya.

Wondering what other middle eastern country is sitting on lots and lots of oil, and according to recent disclosures, has double the gold of Libya... And whether this combination will be the pretext for another "humaniatrian intervention."

No Leadership

The bulls just aren't pressing very hard and the obvious overhead resistance on the S&P500 at 1300-1304 proved to be a roadblock.

What has been particularly worrisome is that there isn't any leadership or major pockets of momentum. We had some action today in rare earth stocks, like AVL and MCP, and some of the small-cap oils, like BDCO, LEI and ROYL, but we are only talking about a handful of stocks. The vast majority of stocks and sectors are showing very little life.

The good news is that we are still holding above the Monday morning gap area and if we can continue to do that, then the odds of a successful attack on upside resistance are better.

Monday, March 21, 2011


Financials Fail to Follow Through

The first negative I see today is the failure of the banks to follow through on Friday's broad gains.

Existing-home prices weakened, and I expect prices to drop another couple of percent this year.

Housing is scraping along the bottom with no meaningful recovery in sight this year, despite good affordability and some improvement in the overall jobs picture, in some regions.

"Without a measureless and perpetual uncertainty, the drama of human life would be destroyed."

-- Winston Churchill

A Good Market Day

It was definitely a positive day for the bulls, but it was not the sort of vigorous recovery that suggests buyers were scrambling to add long exposure. It was mostly just a pretty routine oversold bounce into resistance.

Small caps outperformed and closed strong, but the major indices drifted around most of the day and closed below their morning highs. In strong markets we will generally see a strong finish as market players anticipate follow through. That was not the case today.

In view of the technical picture, it makes sense that the S&P 500 would struggle to make it through 1300 and the 50-day simple moving average at 1303. We need a better base of support before we can mount a better attack on significant resistance like that. There are still stuck bulls and opportunistic bears looking to sell into strength.

Friday, March 18, 2011


My view is that interest rates will inevitably move higher in the fullness of time.

KeyCorp, like SunTrust, announces a stock offering designed to repay TARP.

Banks Could Be Topping on Fed News

The Fed's news on dividends could account for the sector's run.

The Fed's dividend news regarding banks could mark a short-term and temporary top in the group's performance. I don't see anything really new to account for the run since midday on Thursday.

Run, don't walk, to read these three informative, inquisitive and timely Knowledge@Wharton articles:

1. "Valuing Water: How Can Businesses Manage the Coming Scarcity?"

2. "Crisis in Japan: What Will the Costs Be?"

3. "Crude Reality: Why High Oil Prices Are Here to Stay"

Lots Of Stocks Have Pulled Back

All the major indices except the S&P500 were up Friday on better than two advancers for each decliner, but it was a very lifeless day. After the gap-up to open, we drifted slowly lower into the close.

Banks popped on news of dividends but faded fairly fast, oil stocks were very volatile, and big-cap technology names acted very poorly with AAPL in particular being a laggard. There isn't any leadership right now, which is what happens when the market is correcting.

Probably the biggest disappointment this week was not being able to manage a very good bounce after the nuclear situation in Japan finally calmed down. We were technically oversold and had some positive news, but the dip buyers failed to deliver the sort of vigorous bounce that flummoxed the bears when the market was trending up.

What we have now are classic downtrending characteristics. Market players are looking to sell into strength and are not as inclined to buy weakness.

The good news is that plenty of "good" stocks have pulled back -- and some of them will emerge as winners as the market settles down and finds some support.

Thursday, March 17, 2011


Run, don't walk, to read Mort Zuckerman's thoughtful Wall Street Journal op-ed on the "anemic recovery."

Libya Sets Cease-Fire

According to Dow Jones, Libya has set a temporary cease-fire for Sunday.

Industrial Production Is Down

Industrial production failed to live up to the consensus forecast, dropping by 0.1% (vs. espectations of +0.6%).

The AAII Survey indicates that bulls have come down to 28%, a level seen only five times since the March 2009 low.

IMO, Kind Of A Lame Bounce

The market was set up for some sort of oversold bounce, but the one we saw wasn't all that convincing. After the gap up this morning, the market was unable to gain further traction and traded in a fairly tight range the rest of the day. The bears made one push in the early afternoon that failed, and then he bulls once again managed some late buying to close the market on a positive note. Buying in the closing hour isn't something you normally expected to see when the market is in a downtrend, but it has been a consistent theme of late. It is a good thing, too, because those end-of-the-day moves have helped prevent much uglier action.

Oil was the leader today as the focus shifted back to the Middle East. Japan is obviously going to be an ongoing issue, but emotions calmed down today. Talk that the Fed would soon allow dividend payments boosted the banks, and that helped us a bit later in the day also. Breadth was quite good today (2-to-1 positive) and all major sectors were in the green. But this was not the most energetic bounce, especially when you consider how oversold the market was to start with.

We are in a downtrending market now, and that means all bounces are suspect. But keep in mind that the biggest and strongest bounces generally occur in downtrends. Market players just aren't as well prepared for them and, as a result, bears are squeezed and underinvested bulls scramble. Once the buyers are sucked back in, that is when the most painful reversals tend to occur. Bad markets will wear out investors rather than scare them out, and the way it does that is by producing a failed bounce just when you start to think things are looking better.

Wednesday, March 16, 2011


Nikkei Hearing Calls to Shut Down

Nikkei officials are being urged to close the exchange for a few days.

Apple Also Gets an Outperform

Credit Suisse also initiates coverage of Apple with an outperform rating.

Hillary Clinton has announced that she will not be Secretary of State for a second term.

A possible explanation of today's downdraft could be related to the expiration on Friday and the substantial open interest, which implies there could be a lot of negative gamma (forcing futures selling vs. short puts) as the market plummets lower.

Recommended Reading

This was written by a distinguished nuclear physicist regarding the crisis in Japan.

In the absence of facts and information, here is an excerpt from an email written by a distinguished nuclear physicist from the University of Michigan regarding the crisis in Japan.

"I'm not expert on this particular engineered system (not a nuclear engineer); but rather a nuclear physicist. That said, I see no reason to expect that, even if attempts to cool these cores completely failed and there was a worst case so-called meltdown of the entire core, the ultimate container vessel would not completely contain the entire mass and it's radiation indefinitely.

The radiation releases to date are quite well understood as simply radiation entrained in steam that undergoes controlled releases as it is generated in cooling the rods with water. The rods are indeed cooling and the steam releases are apparently decreasing. Meanwhile spent rods in the pools are not in danger of some full meltdown, but need to be covered in water to dissipate heat and suppress radiation.

These are of course serious matters; but no one should be telling the public that a 'meltdown' would release large amounts of radiation or contaminate large areas as long as there is no evidence that the ultimate container has ever been damaged. I have seen no such claims."

On the other hand -

Dow Jones reports that the E.U. energy chief says the situation at the Japanese nuclear plant is out of control and that a possible catastropohic event could occur shortly.

Sanford Bernstein downgrades IBM to Market Perform this morning.

Apple catches a downgrade on production risks in the wake of the Japan crisis.

JMP -- not to be confused with JPM! -- downgrades AAPL based on production risks and increased deceleration from its primary manufacturing partner Hon Hai following the nuclear crisis in Japan.

Japan/AAPL/IBM = A Bad Day

After a good intraday recovery yesterday and a big bounce in Japan last night, many market players were looking for further upside today. But continued worries about nuclear power plants kept the market in disarray. It didn't help that AAPL and IBM were downgraded and that there was talk about supply-chain issues for technology stocks due to the disruption in Japan.

The end result of all this uncertainty was some very choppy and random action that was difficult to trade. The market closed with just coal and gold showing some very minor gains while oil services, banks, retail and steel struggled.

Volume was quite heavy today, making for another day of technical distribution. The best hope for the bulls is that the market is oversold enough for some sort of bounce. But, this market has broken down and we have to keep in mind that the bigger picture is now quite negative. Any oversold bounce should be regarded as just that.

Tuesday, March 15, 2011


FOMC Stays Fixed

The statement from the FOMC contained no surprises. QE2 will continue to be implemented and will supposedly end in June.

Firmer economic footing, a still-elevated unemployment rate, rising commodity prices (but transitory in nature) and supposedly subdued core inflation.

A Firm Downtrend?

Worries about a nuclear meltdown in Japan caused some panic selling at the start of the day but the dip-buyers went to work and moved the market steadily higher. There was some slight weakness at the close but, overall, we finished the day well off the lows. There was still plenty of red and breadth was approaching 3-to-1 negative, but the bulls started feeling better as the dip-buyers persisted.

While cutting intraday losses to such a great degree is a good thing, it doesn't do much to change the overall picture. According to the technicians, a number of key support levels have been broken and there's no notable leadership. They say this morning's lows will not set up as the key technical support level, but we have a big hurdle at yesterday's highs at around 1301 on the S&P 500.

Monday, March 14, 2011


Globalization creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words, it creates devastating Black Swans. We have never lived before under the threat of a global collapse. Financial institutions have been merging into a smaller number of very large banks. Almost all banks are interrelated. So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks -- when one fails, they all fall. The increased concentration among banks seems to have the effect of making financial crises less likely, but when they happen, they are more global in scale and hit us very hard. We have moved from a diversified ecology of small banks, with varied lending policies, to a more homogeneous framework of firms that all resemble one another. True, we now have fewer failures, but when they occur ... I shiver at the thought.

Banks hire dull people and train them to be even more dull. If they look conservative, it's only because their loans go bust on rare, very rare occasions. But ... bankers are not conservative at all. They are just phenomenally skilled at self-deception by burying the possibility of a large, devastating loss under the rug ... But not to worry: their large staff of scientists deemed these events "unlikely."

Once again, recall the story of banks hiding explosive risks in their portfolios. It is not a good idea to trust corporations with matters such as rare events because the performance of these executives is not observable on a short-term basis, and they will game the system by showing good performance so they can get their yearly bonus. The Achilles' heel of capitalism is that if you make corporations compete, it is sometimes the one that is most exposed to the negative Black Swan that will appear to be the most fit for survival.

Please, don't drive a school bus blindfolded.

Owing to ... a misunderstanding of the causal chains between policy and actions, we can easily trigger Black Swans, thanks to aggressive ignorance -- like a child playing with a chemistry kit.

-- Nassim Taleb, The Black Swan: The Impact of the Highly Improbable

Black Swans are occurring with greater frequency.

Last week's historic earthquake in Japan contradicts the notion and appearance of stability and is yet another Black Swan in a series that has (time and time again) threatened the order over the last decade.

The new normal is abnormal and is bound to haunt investors for some time to come.

"I'm astounded by people who want to 'know' the universe when it's hard enough to find your way around Chinatown."

-- Woody Allen

"It is often said that 'is wise he who can see things coming.' Perhaps the wise one is the one who knows that he cannot see things far away."

--Nassim Taleb

To put it into an ugly, crass context, it seems obvious that the U.S. automakers are one of the principal beneficiaries of the tragedy in Japan.

Most Likely A Meltdown

Japanese Officials Say Nuclear Fuel Rods Likely Melting In All Three "Troubled" Japanese Reactors

Heading Into A Big Downturn?

The routine late-day bounce took some of the sting out of today's action, but it was still another poor day for the bulls. Many were optimistic that the market might bounce back quickly and were caught by surprise when the Nikkei got slammed overnight.

In addition, oil remains quite volatile as reports of problems in the Middle East continue to roll in. Overall, it is just a very uncertain environment, and there aren't many good reasons for the buyers to step in -- especially since we've seen a series of failed bounce attempts lately.

The market had been crushing skeptics with vigorous bounces for quite a while. But there has been a significant change in market character lately, as evidenced by the failure of this oversold bounce just as the bulls were starting to regain their excitement.

The market is still oversold enough to see a further bounce, but the big picture is not very pretty. We clearly are seeing the development of a downtrend with a series of lower lows and lower highs. The lack of good leadership and the nearly nonexistent pockets of momentum support the thesis that the market has undergone a shift in character.

Friday, March 11, 2011


To put it mildly, there are numerous moving parts to the investment mosaic these days!

More Bad News Out of Greece

The Greek two-year note is yielding 17.5% this morning. Not good.

Will the Japanese Earthquake Be Viewed as QE3 in Disguise?

The Japanese earthquake might be viewed as another meaningful economic stimulus -- the equivalent of QE3.

My initial thought is that, considering the magnitude of the Japanese earthquake, it might now be viewed as another meaningful economic stimulus -- the economic equivalent of QE3.

Does A $440 Billion Drop In Shadow And Conventional Banking System Liabilities In Q4 Give Bernanke Carte Blanche For QE3?

The shadow banking system, the financial "system" that is far more important to the economic prosperity of the US economy than the traditional liabilities held by conventional banks, and after declining for 9 consecutive quarters, and having hit a peak of $21 trillion in 2008; had reached an inflection point and had posted a very modest increase at around $16 trillion in total liabilities in the third quarter of 2010.

Well, following yesterday's Z.1 release, it seems the bulk of the data was revised, and it appears that not only was last quarter's upward pre-revision data a fluke, when in reality it was another decline of $191.7 billion, but the Q4 data further reinforced the negative trend, with shadow liabilities declining by an even greater $206.4 billion. The components responsible for the decline were ABS Issuers whose liabilities declined by $94 billion, securities loaned by funding corporations declining by $40 billion and lastly repos, which dropped by $79 billion.

In other words, speculation that the Fed had achieved its goal of stimulating an organic reflation in the shadow banking system at which point it would be able to end QE and hand off releveraging over to the private sector were premature, and recent data confirms that the Fed has no choice now but to continue with its quantitative easing process, as it does more of the same: take capital from the public sector and proffer it to Primary Dealers in an attempt at ongoing asset reflation, which will, the theory goes, be matched by a comparable hike in liabilities.

Botton line - Bernanke has once again failed to spark a "virtuous leveraging cycle" even with QE2, which after all is the fundamental goal of the Fed, far beyond even getting the Russell 2000 to 2000. Which means that the Fed will have no choice but to continue "printing" money, and monetizing bonds, as it (in conjunction with the Treasury of course) continues to be the only incremental source of leverage, and thus money, for the world's biggest economy.

Devastation In Japan

The good news is that we were able to shake off the Japan earthquake, lower-than-expected consumer sentiment and worries about further unrest in the Middle East. The bad news is that today's market looked like nothing more than a very low-volume, oversold bounce.

The bulls were able to apply a bit of a squeeze in mid-afternoon trading, but fizzled slightly at the close. There was little urgency to the buying, although breadth did improve nicely during the day.

If we look at the big picture, the action today did little to change the notion that we are seeing technical deterioration. We recouped less than half of Thursday's losses, and did it on unconvincing volume. What we have to watch for next week is another rollover and a test of Thursday's lows. If the bulls are going to run this market up any further, they will need to put forth a better effort than what we saw today.

This correction is doing a nice job of washing out the overbought conditions that have plagued us for so long, but it takes some time for new long setups to form. At this point, bounce attempts should likely be viewed as selling or shorting opportunities, rather than an indication that we are making a lasting low.

Thursday, March 10, 2011


The 30-year Treasury bond auction caps the three auctions this week. Like the previous ones, this was a benign and market-friendly auction.

The yield came in at 4.57% vs. expectations of 4.61%. Bid-to-cover was the best in a decade at over 3.0. And the strong buyers (indirects) was at 41%, well above the previous six auctions.

Bond yields remain rangebound -- as they have for the last three months -- and, for now, don't pose a risk to equities.

After the auction, the reported violence in the Middle East put a bid under fixed income, and interest rates have fallen further.

Is The Trend Now Down?

Quite a few players were worried that this market was going to correct some more, but most thought the catalyst would be higher crude oil prices. We did correct, but oil was down nearly 2% today. So market players found a few other reasons to intensify their selling. China announced some surprise weakness, Spanish debt was downgraded and there were reports of some unrest in Saudi Arabia.

The economic news from China was probably responsible for some of the weakness, but this was a market that has been signaling caution for a couple weeks now. We have had a series of technical distribution days, especially in the Nasdaq, as well as a number of failed bounces. We had been holding within a trading range but were unable to hold recent lows today.

All the major indices, except for the Dow, are now under their 50-day simple moving average. For many technicians, that is an automatic sign of caution. This is the first time the market has been below that level since the beginning of September. The last time the S&P 500 broke its 50-day support was April 2010. It corrected almost 14% after that before finally bottoming in July.

Wednesday, March 9, 2011


Solid 10-Year Auction

Based on yield, bid-to-cover and percentage of indirect bidders (strong holders), a solid 10-year U.S. note auction.

New OS for iPhone and iPad

AAPL released its new operating system for for new iPad and iPhone.

Run, don't walk, to read George Will's Washington Post op-ed, "On Libya, Too Many Questions."

Will raises a lot of questions and suggests, as I beleive, that the Libya situation will be with us for a while.

long AAPL

What Public Employee Leaders Could Be Saying - But Aren't

Public employees and their leaders could publicly recognize the structural and demographic changes in the U.S. economy, and vow to tax the top 1% instead of supporting terribly regressive junk fees and sales tax increases on the working poor and the middle class tax donkeys who pay most of the taxes. The fact that they refuse to acknowledge these realities and refuse to take on the Financial Elites speaks volumes.....

Dips Aren't Being Bought (Yet?)

IBM's strength helped cover up a fair amount of the weakness but, beneath the surface, there was plenty of poor, low-volume action, particularly in oil, chips and technology. Though retailers and banks managed a little upside, there weren't any notable pockets of momentum to attract aggressive traders.

Without better leadership, stocks will just flop around. There's also a risk that stocks could quickly pull back due to disinterest rather than aggressive selling. The problem for the bears is that any quick dip in oil prices has the potential to bring in buyers. This would send the shorts scurrying for cover. (And who can forget the endless short squeezes we had for so long?)

The fact that the pullback today in the USO did little to bring in buyers is troubling for the bulls. The losses in the indices were mild overall, but the buyers are not showing the sort of interest you'd expect to see if they really thought oil was ready to top out. In addition, we definitely are not seeing the sort of dip-buying that propelled the market for so long. The shorts are still a bit skittish, but there is growing concern that the character of the market is undergoing a substantial change.

Tuesday, March 8, 2011


Careful About Fading Roubini

Roubini's views are not as extreme as they have been in the past.

Dr. Roubini believes there could be a double dip "in the advanced economies." But he is of the view that, in light of the growth acceleration path in the U.S., that we won't double-dip but will be reaching a "stalled speed again."

But, respectfully, I don't view his statement as a contrarian spark, because most strategists are in general agreement with his conclusion!

In other words, Roubini appears to be going mainstream.

You know how I feel about Roubini, but in this case I don't think you fade him, as his view is not at all in the extremus as it has been so often (and so incorrectly) in the past.

Some comments from BAC's investor day:

* back to normalized earnings in 2013;
* bank has significant earnings power;
* still eating large costs and expenses still elevated;
* grew tangible book by 10% in 2010;
* time to grow organically.

Some more doubletalk from former Federal Reserve Chairman Alan Greenspan in a CNBC interview on "Squawk Box" last week:

"There is no question that the momentum of this economy, leaving out the oil price issue, leaving out euro problems that have emerged, and very specifically leaving out the budget problems, this economy is really beginning to pick up momentum. ... The fascinating issue for forecasters is, how do you factor in all the negatives."

-- Alan Greenspan, CNBC interview

Whatever happened to straight talk about the state of the world?

Whatever happened to company and sector analysis?


Trading Range

The trading range action continues. Today was the bulls' chance to bounce us after a couple days of fairly aggressive selling. A pullback in oil provided a convenient excuse, and when we didn't fizzle right away, that caused some more buyers to inch back in.

If you have watched this market at all over the past two years, you know how we can bounce on low volume and keep on running. However, this time it isn't likely to be quite as easy. The oil issue is far from resolved, as there is plenty of uncertainty in the Middle East.

Monday, March 7, 2011


Crude's Ramp Benefits Gold

From my perch, the rise in the price of crude is the best friend to gold investors.

Oil at $105 a barrel is deflationary, and if energy prices continue to stay elevated, it argues in favor of more monetary easing, more currency debasement and higher gold prices.

Morgan Stanley Cancels Oil Trades With Libya

Reuters is saying that Morgan Stanley is cancelling oil trades with Libya.

Gadhafi Seeks Safe Passage?

I am hearing rumors that crude moved lower today (from its highs) based on rumors that Gadhafi has turned to the rebel National Transitional Council to gain a safe passage out of Libya.

I have no clue if there is any accuracy to this story.

A Two-Headed Economy

"Now, by two-headed Janus, nature hath framed strange fellows in her time."

-- William Shakespeare, The Merchant of Venice (Act I, Scene I)

In Roman mythology, Janus is the god of beginnings and endings. He is depicted as having two heads, facing opposite directions. So it is with the two-headed U.S. economy.

While corporations are flush with cash, are running a near-six-decade peak in operating margins and are within two quarters of eclipsing the previous peak in corporate profits, the economic crisis of 2007-2009 still haunts the average American.

Nevertheless, the schism between the haves (large corporations) and the have-nots (the middle class) -- what I have described as the screwflation of the middle class -- continues to widen and, in the fullness of time, could jeopardize the economic expansion.

According to the Bureau of Labor Statistics, 16% of the labor force, or over 25 million Americans, are out of work (14 million unemployed and 11 million underemployed). Mega trends of globalization, technological advances and the growing presence of temporary hirings as a permanent feature of the workplace form the basis of a secular rise in structural unemployment. Further depressing job creation is the fact that there are few growth engines to replace residential real estate, a sector that was such a prominent contributor to GDP and labor in the last cycle.

The plight of the middle class, both in a relative and absolute sense, seems to have deteriorated further as Friday's jobs report disclosed that the average workweek declined by 0.1 hours and there was no change in average hourly earnings. The employment participation, back down to 27 year lows, casts a long shadow on the domestic economy, which, despite normal population growth, currently employs only the same number of people as in 2003. Meanwhile, the cost of necessities (most notably of an energy kind) continues an uninterrupted rise, serving to obviously pressure not only the unemployed but the average Joe that has a job.

Most bulls object to this negative analysis, citing a likely pickup in hiring that will be the natural consequence of an expanding domestic economy, rising profits and buoyed confidence in the future. They fully recognize the ultimate cost of policy and absence of budget constraint but view the due bills (of higher inflation and interest rates) as too far in the future to be concerned with, particularly given the confidence held regarding 2011 profit growth.

Since the generational low, those bullish investors have correctly dismissed numerous other concerns:

* rising instability in the Middle East and the resulting sharp increase in energy prices;

* a rapid rise in food and other input prices;

* the historical ramifications of higher silver and gold prices (read: currency debasement, higher inflation);

* fiscal imbalances (and the austerity that ensues) at the local and state levels;

* an apparent unwillingness of either political party to address the federal budget deficit;

* a eurozone that has only temporarily deferred its sovereign debt problems;

* a still-moribund housing market plagued by a large shadow inventory of unsold homes.

Probaby Range-Bound Now

A routine, late-day bounce took some of the sting out of the day, but there was still plenty of ugly action. All the major indices managed to close above their 50-day simple moving averages once again, but there was plenty of damage done -- particularly in semiconductors and other tech stocks. Retailers, steel and regional banks were also weak. Even precious metals pulled back from their highs. There was no place to hide today as sellers hit the exits (albeit on average volume).

The market has had two strong bounces over the last couple weeks. Though each bounce has failed, the market still has some underlying support that's holding it above recent lows. There is obviously some troubling price action in individual stocks, and traders need to be very disciplined when it comes to money management, but a downtrend has yet to develop.

Friday, March 4, 2011

Employment Numbers Stuff

Today the Department of Truth's NFP numbers came in a bit shy of the estimates on the various seasonal and birth death adjustments of 250,000. Wonder why the unemployment rate is at an artificially low 8.9%? Three simple words: Labor Force Participation. At 64.2%, it was unchanged from last month, and continues to be at a 25 year low. Should the LFP return to its 25 trendline average of 66.1%, the unemployment rate would be 11.6%. And indicatively, the Birth/Death adjustment was +112,000.

On the other hand, we have Gallup which actually does real time polling without a procyclical propaganda bias. And Gallup doesn't have any good news: "Unemployment, as measured by Gallup without seasonal adjustment, hit 10.3% in February -- up from 9.8% at the end of January. The U.S. unemployment rate is now essentially the same as the 10.4% at the end of February 2010." And the one indicator that nobody in the mainstream media will touch with a ten foot pole: "Underemployment, a measure that combines part-time workers wanting full-time work with those who are unemployed, surged in February to 19.9%. This resulted from the combination of a sharp 0.5-point increase since the end of January in the percentage unemployed and a 0.5-point increase in the percentage working part time but wanting full-time work. Underemployment is now higher than it was at this point a year ago (19.7%)."

There is essentially no difference between the unemployment rate now and the one at this time a year ago; January's rate, in contrast, showed a 1.1-percentage-point year-over-year improvement. This suggests that the real U.S. jobs situation worsened in February. That is, jobs are relatively less available now than in January. January's year-over-year improvement of 1.0 points became -0.2 points in February. In turn, this suggests job market conditions in terms of underemployment also worsened during February.

This deterioration in the jobs situation combined with surging gas prices, budget battles at the federal and state level, and declines on Wall Street tend to explain the recent plunge Gallup recorded in consumer confidence. They also align with the continued "new normal" spending patterns of early 2011. Although Gallup's Job Creation Index has improved over the past year and showed modest improvement in February, the improvement has not been significant enough to positively affect underemployment and unemployment.

Warren Buffet said Wednesday on CNBC that the U.S. unemployment rate should be in the low 7% range by late 2012. If that is going to be the case, the job creation environment must change dramatically from what it is today.....


Have I mentioned that the market has no memory from day to day?

We got an in-line jobs number, but the screwflation of the middle class continues apace. The average workweek declined by 0.1 hours and the average hourly earnings experienced no change.

YHOO's investment appeal:

* Increased signs that Yahoo! Japan will be monetized. (CFO Tim Morse commented this week that the company is discussing with Softbank the possibility of finding a solution that meets the needs of all Yahoo! Japan's shareholders).

* Improving core business trends (display and search).
* The growing value of AliPay -- Yahoo!'s crown jewel.
* Trading at under 2.5x EBITDA adjusted for net cash and value of Asian assets.

Turns Out The Bears Weren't Dead After All

There is an old saying: be careful what you wish for, because you might get it. Many traders have been wishing for greater volatility -- and now that they are experiencing it, they aren't so sure it's such a great thing.

We saw a crazy close with a big buy program causing a late squeeze to cut our losses, but it was still a pretty ugly day. Silver and gold were the winners; some select technology names such as JDSU, IPGP, APKT and RVBD were doing well also, but all other major sectors were down. Volume was light and breadth not quite 2-to-1 negative, so it wasn't exactly a major rush for the exits.

The whole week was a roller coaster ride with a strong move on Monday, a very ugly reversal on Tuesday, a strong recovery Wednesday and Thursday and then another ugly reversal Friday. It is good action for active traders, but you had to be really active to stay ahead of the game.

Thursday, March 3, 2011


Late News From Wal-Mart

Wal-Mart has just raised its dividend.

Among the talking heads on CNBC today, there have been 14 bulls and one bear.

The next big thing in retail will be talk about LIFO charges.

Based on ECB President Jean-Claude Trichet's comments today (on how they must exercise strong vigilance as inflation risks have moved to the upside), it looks like he is considering tightening moves sooner than generally expected.

Run, don't walk, to read Knowledge@Wharton's latest missive on a popular issue in "Union Leaders vs. Republican Legislators: What's at Stake in the Standoff.

Bears On The Run Before Tomorrow's Jobs Report

I suspect that quite a few market players were surprised today by the very steady buying. The market gapped up and just kept on going all day without a single pullback. In view of the recent issues in the Middle East and higher oil prices, you would think there might be a little more caution -- but there was no evidence of that. The buyers were fearless once again and the fact that we will get an important jobs report in the morning was of little concern. Of course, the poor bears were painfully squeezed once again, but did they really think they market was going to make it easy for them?

Breadth was very good with everything except precious metals in positive territories. Volume was a bit light but that has not been a good reason to be distrustful of recent bounces.

We'll see what the jobs report brings in the morning but the buyers regained their momentum today and have the bears on the run again. Just don't forget how stubborn the bulls were from November to mid-February. Apparently they haven't suffered enough damage lately to keep them from returning to that pattern.

Wednesday, March 2, 2011


Beige Yawner

The Beige Book revealed no surprises.

Loan demand was not materially changed, and while commodity prices were rising, they have had no impact on inflation of finished goods.

The new iPad 2 is 8.8mm. The original iPad was 13.4mm.

Bill Gross of Pimco has some warnings in his March commentary.

Among today's announcements, Apple has revamped its Apple Store website.

Don't be surprised if PNC cashes in its PNC holdings.

Yahoo! Close to Pulling Out of Japan

Last night, Reuters reported that YHOO is close to exiting its joint venture, Yahoo! Japan.

I value Yahoo! Japan at more than $9 billion, or $7 a share to Yahoo! (pretax).

Hopefully this is the beginning of the company's disaggregation.

long AAPL

Probably More Bumps Ahead

We managed to hold fairly steady during a choppy session of trading, but the bulls definitely aren't feeling the love like they did a couple weeks ago. We bounced a couple times and a fizzled a couple times and didn't gain any traction. It is quite different than the rush to jump in on any pullback that we saw from November to mid-February.

Volume was light but breadth was pretty good, especially on the NYSE. AAPL and a couple of other big-cap technology names helped the Nasdaq, but breadth there wasn't as strong although the semiconductors had a good day.

Right now the market's biggest problem is that we are still dealing with the uncertainty of the Middle East and its impact on oil prices. There is no way to know how long that will continue, and it is going to be tough for the market to regain upside momentum until we have greater clarity. In other words, look for a trading range and lots of choppy action as we react to the news flow.

Tuesday, March 1, 2011


High-octane, high-beta, momentum-driven stocks are getting schmeissed.


Stocks are sliding, likely spurred by Fed chief Ben Bernanke's testimony on inflation.

Stocks appear to be moving lower based on The Bernank's statement that while inflation remains low, the recent rise in commodity prices will likely contribute to an increase in headline inflation in the months ahead.


Saudi Slump

The Saudi stock market is down by more than 6%.

Oil and gold have picked up a bid.

Following 10 years of material outperformance of fixed income over equities, record inflows into bonds accumulated during 2009-10 as investors sought safety and yield following the Great Recession. Once again, the asset of choice -- bonds -- fared poorly even as inflows accumulated. Bond yields rose and bond prices fell, despite the Federal Reserve announcement and implementation of QE2.

During 2009-10, when the investment outlook began to clear, all of the incremental retail inflows were committed into nondeveloping foreign markets. But beginning in early 2010, emerging markets began to underperform the U.S. stock market. And by November 2010, that underperformance grew more conspicuous as the most popular strategy again let investors down.

Unlike almost any other time in history, the non-upper-income investor class may not be positioned economically to invest in equities to the degree the bulls expect. That investor class faces unique economic challenges and conditions and lower confidence in the form of an unprecedented drop in home prices (which has damaged the consumer's balance sheet), still high (though improving) debt ratios, the insecurity brought on by structural unemployment (and an elevated jobless rate) and the screwflation of the middle class (as the cost of the necessities of life have risen during a period in which wages have stagnated, serving to depress disposable incomes).

This Usually Happens In Late February, But This Year It Decided To Wait Until March...

We usually get some very bad weakness in late February; this year took a few days longer. It has been a while since we have seen a failed bounce and a rush for the exits, but we sure had one kick in today. After bouncing three days in a row, we topped out just as the bulls were ready to celebrate another big gain on the first day of the new month. Apparently too many folks had been sucked in, hopeful that our correction was over, and they put pressure on the market all day as they scrambled to escape positions.

The good news is that we are still above last week's lows; the bad news is that according to the technicians it looks like a test of support is almost inevitable. We haven't yet really cracked the uptrend line that has been in place since September, but we are moving in that direction.

There isn't any big mystery about what is causing the pressure. Oil is close to $100 a barrel, and there is fear that it is going to stay up there for a while as the issues in the Middle East continue to develop. That's the official oil story; the real reason is some powerful folks are quite worried about big sources of oil, like Saudi Arabia, are tapped out, lying about their reserves for years.

The only sectors that finished in the green were gold and silver. There was a whole lot of ugly out there, particularly in some big-cap momentum favorites like GOOG, DECK and PCLN, which are not attracting any dip-buying interest.

At this point we are obviously going through a correction, and the issue is whether it is going to develop into a change of trend. Either way, the best approach is to just stay out of the way and let it play out.