Friday, April 29, 2011



Today yet another competitive threat to NFLX was announced, called "HBO Go."

I suspect this is but the tip of the iceberg.

Here is a quote from Warren Buffett:

"I still worry about inflation. I think [the FOMC] see the same things that I'm seeing, but they may interpret them differently. ... There [are] a lot of people that take the approach that because there is excess capacity in the United States industry, that you can't have inflation because it won't get tight. But I can tell you that in the businesses we're in, plenty of them have a lot of excess capacity still, but if we get enough commodity price increases, we raise our prices even though business is not good."

Dour Data

This morning's personal income data is being heralded as positive by the bulls, but it was terrible.

We are beginning to get economic data that incorporates the full increase in higher energy prices and the picture, especially for the U.S. consumer, is deteriorating.

Here's why.

Though personal income rose by 0.5% in March, the real rate of growth in disposable income (adjusted for inflation) was 0.1% in March and just +2.5% year over year. Moreover, the nominal increase of a half of 1% was all a function of personal income that came from government transfers. A record high 18.3% of personal income is now coming from transfer payment. And since we are now entering a period in which the outlook for 2011 government expenditures (local, state and federal) has eroded, optimistic personal consumption expenditure forecasts are in jeopardy.

Meanwhile, personal expenditures, which rose by 0.6%, vastly exceeded adjsusted income growth. This means that the consumer is either dipping into credit or savings in order to maintain his spending.

This can't and won't last, especially if the price of food and gasoline remain elevated.

Here is what Boenning and Scattergood's Rick Farr wrote on the subject this morning:

Today we learned that personal wages are still falling behind personal spending, as consumers still spend every dime they make (and then some). Personal Spending grew +0.6% M/M (4.6% Y/Y), whereas Wages grew just +0.3% (+4.4% Y/Y). Basically, there is no money left over for savings. Contrast this reality with the stated view from one of the money printers at the Fed, Charles Evans. In an interview with the Wall Street Journal on 10/5/10, Evans stated rather explicitly: "I think we're in a liquidity trap where there is excess savings." We'd like to know where this excess cash exists.

The Federal Reserve's inflationary policy makes absolutely no sense in our eyes. The best thing for the Fed to do is to allow prices to decline. That would provide consumers with a bit more disposable income and that disposable income would help to repair consumer balance sheets. The Fed, under no circumstances, should ever try to prevent consumers from increasing their savings.

Two Potential Takeover Targets

Reinsurer XL would be a tasty morsel for Swiss Re or Munich Re or even Berkshire Hathaway. SunTrust would be a natural target for any large European or Canadian bank.

Mister Softee Is a Value Trap


1. The Fed may not be so friendly as many expect.

2. The assessment of the economy is too optimistic.

3. Secular headwinds are emerging; they are numerous but are being dismissed.

4. We are approaching several economic tipping points -- for example, in food prices, gasoline costs and in a sharp decline in our currency -- that in the past have led to economic and market contraction.

5. Even the most ardent bears are capitulating.

Let's go over these point by point now.

Relying on the Fed

There is now an almost universal view that the fed has given the green light to risk, but I am less certain.

It should be clear to the Fed that consumption and housing are continuing problems. In part, as an outgrowth of monetary policy, we have seen a rising stock market, which has made the rich richer, while raising the costs of necessities such as food and gasoline, which has made the poor poorer.

Whereas food and energy are investment vehicles for the investor class, they are expenses for the American consumer. Zero-interest-rate policy and a lower dollar have not assisted innovation, have not resulted in the creation of new businesses and certainly have not materially reduced employment. These elements might even have served to hurt the jobs market, as there is industry consolidation as well as higher input costs, which require labor cost reductions in order to preserve margins.

In listening to some of the Fed governors and The Bernank's reference to the words "several meetings" before a tightening is considered, they all appear to have begun to recognize this, and a more hawkish turn by the Fed is increasingly possible in order to combat the unintended consequences of easy money. There is no chance for QE3 to follow QE2.

Overly Optimistic

The majority of strategists are gushing over the economic statistics of the last two quarters and incorporating them into the bullish view of a smooth and self-sustaining domestic recovery. But all the data being dissected have been achieved under the umbrella of QE2, under zero-interest-rate policy, with a FICA cut, with the Recovery Act and with 100% depreciation benefit on capital expenditures.

When these influences fall by the wayside -- and they will -- the U.S. is left with an indebted consumer and a deteriorating currency. Look at housing as an example of underlying weakness: It's now double-dipping despite favorable affordability ratios and an unprecedented 30%-plus drop in home prices.

At best, we don't know if the recovery is self-sustaining, and quite frankly, I don't know anybody who can judge otherwise.

As to stocks, they may be somewhere between fairly priced and overpriced.

Numerous Secular Headwinds Being Dismissed

The political winds are forcing major cuts in government spending. Our local, state and federal fiscal imbalances translate into higher marginal tax rates and austerity measures. We continue to be plagued by structural unemployment, and we again saw a jump in jobless claims Thursday morning. Today, the City of Philadelphia, in response to a $1.1 billion reduction in the state's education budget, eliminated 4,000 teachers and school workers. This is happening all across the country and will continue in the year ahead.

I know that most investors recognize these issues, but everyone seems to think they are smart enough to get out before the proverbial door closes.

Strategists and investors are like Scarlett O'Hara in Gone with The Wind who said, "Oh, I can't think about that right now. If I do, I'll go crazy. I'll think about that tomorrow.... After all, tomorrow is another day."

But I think tomorrow is coming sooner than most expect.

Tipping Points Aplenty

When gasoline as a percentage of GDP gets to the levels it is at today, with one exception, the U.S. economy has always fallen into contraction. Maybe it's different this time, but I don't think so. On top of a 30%-plus decline in home prices, the market is also ignoring other tipping points such as rising food costs and a sharp currency depreciation, which I might add was one of the forces behind the October 1987 crash. A weakening U.S. dollar also buoyed exports and contributed to great profit growth in 2007, which eventually trapped investors.

The Capitulation of the Bears

Even uber bear David Rosenberg threw in the towel this week. Enough said?

Recommended Reading

Dr. Ed Yardeni eloquently waxed on the screwflation of the middle class.

The Fed is still your friend if you are invested in cyclical stocks , commodities, and foreign currencies. If you eat food and run your car on gasoline, the Fed will continue to hurt you. If you are looking for a job, you may be wondering why it is still so hard to find ond despite all the money the Fed has spent so far on QE2.0. If you are retired and living on interest from your CDs, then you are getting really squeezed between rising food and fuel prices and the Fed's zero interest rate policy. In other words, the Fed seems to be doing everything to widen the gap between the Haves and Have Nots than to lower unemployment and boost economic growth, which remains "moderate" according to yesterday's FOMC statement.

The Market May Take Awhile To Pause

The Nasdaq-100 is rebalancing at the open on Monday and that is causing a little craziness in key components like AAPL, GOOG and MSFT, but overall it was another winning day for the bulls. The indices went straight up all week, with Fed Chairman Ben Bernanke's market friendly comments giving the biggest push. Higher crude oil, the weak U.S. dollar and mediocre economic reports were ignored -- but there were plenty of good earnings reports, so the buying wasn't totally irrational.

Despite the straight-up indices, under the surface the trading has not been all that easy. The number of stocks hitting new highs has been slipping and many of the big-cap momentum names have been trading in a soft manner. There have been some big movers on earnings, but also some quick reversals.

The best way to deal with this market may be by not anticipating weakness. It will happen at some point, but it will cost you dearly if you act prematurely, so don't even try to time a top.

Thursday, April 28, 2011



If one normalizes earnings for the lower tax rate and "other income," the company would have missed the consensus by 2.5 cents.

By contrast, over the last year and a half, Microsoft has beaten consensus for six straight quarters by, on average, 15%.

Importantly, Windows revenue missed by about $200 million on the top line. On the other hand, deferred revenue was about $200 million above expectations.

Research In Motion Cuts

RIMM cut their forecast on shift in mix.

Soros Selling Commodities?

I have heard that Soros Management has been a large seller of commodities over the last few days.


1. the restoration of Berkshire Hathaway's reputation has commenced; and
2. the discount of Berkshire's share price to intrinsic value has reached its widest level in six months owing to the Sokol event.

Recommended Reading

Rush off to read Knowledge@Wharton's 'Lowering the Deficit: The Choices Range From Drastic to Draconian.'

The Debt Ceiling Facts And Falsehoods

According to my research, since 1962, the U.S. has reached its debt ceiling 74 times, about once every eight months. Every time, the ceiling has been raised with little notice outside Washington and little, if any, change in the trajectory of government spending. But when opposing parties have held the White House and Congress, the process has always resembled a Kabuki dance. What should be a debate becomes an exercise in scoring political points.

In one such exercise in 2006, congressional Democrats criticized the Bush deficits and publicly refused to raise the ceiling, yet they had every intention of doing so. Almost daily their leadership called Bush administration officials to ensure they knew when the ceiling would be breached, so they could strike a deal before reaching the limit.

The difference today is that—in the wake of news like Standard & Poor's revising its outlook for the U.S. to "negative" and Pimco shedding U.S. Treasurys—the world is watching. Observers around the globe can expect to hear many old myths:

• The Treasury is certain that there will be wrenching dislocations in the capital markets if the ceiling is not raised. In fact, there is no secret Treasury analysis suggesting the world will collapse. Because we've always raised the ceiling, we simply don't know the consequences of not doing so. Four times the ceiling has been reached, remaining in place for months while Congress found consensus, and there was no disruption to the capital markets.

The real disruption would result from the sudden drop in federal spending and its significant impact on economic activity. But that would be partly offset by a stronger dollar, a healthier balance sheet, and the removal of the uncertainty which clouds our markets today. Near-term economic dislocation might be the painful medicine necessary for long-term health.

• The Treasury will raid pension funds to avoid exceeding the debt ceiling.When the ceiling is reached but not exceeded, the Treasury has lawful tools to free up borrowing capacity and prolong the time until the ceiling's technical breaching. The Treasury correctly calls the tools "extraordinary" since they are out of the ordinary course of business, but in reality they are neither extreme nor dangerous.

Still, if Treasury deploys these tools, expect Democrats to claim that Republican intransigence is forcing the administration to take drastic measures. Such demagoguery can yield political fruit because Treasury's tools include postponing transfers of U.S. Treasurys that would otherwise go to pension funds such as the Civil Service Retirement and Disability Fund.

But Treasury would be required to restore these funds upon any budget agreement: No retiree will lose a penny by virtue of the Treasury's technical use of its time-tested tools.

• The government will default on Treasury obligations if the ceiling is not raised. It is critical that we not default, but we don't have to. Hitting the ceiling means that we can spend only what we collect in taxes. According to the Congressional Budget Office, tax revenues for 2011 will be around $2.2 trillion, with net interest on the debt costing $225 billion. We can afford that interest and therefore not default. Also, Congress could pass legislation requiring the government to honor interest payments before any other expense, thereby avoiding a technical default.

Not raising the current ceiling would please our creditors who, like all lenders, care simply that they be paid timely interest and principal. Leaving the ceiling in place and restricting further debt would, in the long run, make that more likely.

But the reality is that the debt ceiling will be raised once again. By law, Congress must pick a specific number, which will be the subject of intense negotiation behind the scenes. Those negotiations will also determine the timing of the next debt ceiling debate. If past is prologue, that could be during the election year of 2012.

Time For A Rest? Or Not?

The Nasdaq managed its seventh straight positive close, but the strength of the indices is not reflected in the action of individual stocks. We have a few that are acting well on earnings reports, but most key leadership stocks like AAPL, GS, NFLX and BIDU are struggling.

Breadth improved during the day and we closed near the highs, but it seemed like just going through the motions without any real buying conviction. When the indices are acting like this, there usually are some very aggressive pockets of momentum - but no one seems to be seeing much of that. It is classic non-confirmation action, but the market has had a tendency to shrug that sort of thing off and stick it to the skeptics who start to contemplate the possibility of a pullback.

News is hitting that RIMM lowered guidance, and MSFT shares are down after initially trading up a few cents on its earnings report, so there are some negative catalysts in place. Microsoft has been a laggard for such a long time that it's very unlikely to attract much interest outside of value buyers who don't worry about the opportunity cost of dead money.

Wednesday, April 27, 2011


Bernanke Passes the Buck

I didn't hear them live - I read them later - but I was shocked by Ben Bernanke's disingenuous comments regarding the U.S. dollar. Our currency might be approaching levels that could be destabilizing for the risk markets. Remember the October 1987 crash?

Pain by Numbers

Thus far, Ben Bernanke has lowered his GDP forecast and increased his inflation projections.

Crude's remarkable climb continues. Regarding gasoline and other commodities, we continue to be in a Scarlett O'Hara Gone With The Wind mode, "Oh, I can't think about this now! I'll go crazy if I do! I'll think about it tomorrow. After all, tomorrow is another day."

Bulls Win Today

It wouldn't have taken much to put a negative spin on the FOMC news today. After all, the policymaking board cut its GDP projection, admitted there were some slight increases in inflationary pressures and stated that QE2 is coming to an end in June. None of that is particularly market-friendly, but the bears were unable to do anything with it, so the bulls took control and did their thing once again. We went out strong and had a good ramp in breadth as well.

Many seem to be grumbling again about the illogic of this market action, with crude oil and precious metals ramping, the dollar going to zero and some struggles in big-cap names like AAPL, but the negatives are being ignored for now, and that's all that matters. It is easy to make a negative big-picture argument, but until the price action reflects some pessimism, it is a waste of time.

Technically we are right back where we were in mid-February. We have a straight-up move on light volume and are overbought, but this market has consistently crushed anyone foolish enough to try to call a top when we have this sort of setup. Perhaps it is the fact that it isn't very loved action that leads to such consistent and persistent upside.

A Housing CEO Is Rotting In Jail - No Thanks To Freddie Mac...

Just as I was getting all set to get ready to join countless commentators lamenting that no "big fish" has been caught in the housing blowup, a big fish was convicted and now sits in jail awaiting sentencing.

Alas, on closer inspection, the case of Lee Farkas, former chairman of Taylor, Bean & Whitaker Mortgage Corp., doesn't provide the closure we crave—it fails to confirm the media intuition that the housing boom and bust were brought on by the criminality of mortgage CEOs.

Mr. Farkas's sinning appears to have been less instrumental in causing the housing boom than the housing boom was instrumental in concealing his sin. He certainly was no Angelo Mozilo, the mortgage impresario whom many would like to see strung up for the bubble. For one thing, Taylor Bean wasn't heavily involved in subprime—in 2007, more than 90% of its loans were conventional fixed-rate mortgages and 76% were insured by federal agencies. And the two states where the firm was most active, Georgia and Massachusetts, were not ground-zeroes of the housing meltdown.

Further confounding expectations, his company appears somehow to have lost money all through the boom. His case would seem to have more in common with those of Bernie Madoff or WorldCom's Scott Sullivan—or Harry Stoner, the Jack Lemmon character who fiddles the books to keep his garment factory afloat in "Save the Tiger."

That is to say, his case is a story of accounting fraud as old as the hills, which just happened to take place in the mortgage business.

Not that the episode isn't instructive anyway.

One lesson is that it's hard for a chief executive to commit a crime without everyone around him committing it too. Much of Taylor Bean's management has pleaded guilty to participating in Mr. Farkas's skanky seven-year juggling act, which involved kiting checks at Taylor Bean's bank, selling loans that didn't exist, and pledging the same collateral to different lenders.

The scheme wouldn't have been possible, even then, without the active connivance of a top officer at Alabama-based Colonial Bank, who began by covering up $15 million in overdrafts for Mr. Farkas. Within barely a year, she was helping to fill a hole that amounted to $150 million a day.

As her former boss, Colonial's CFO, later testified: "A customer is typically a check on a bank and a bank employee is a check on the customer. If these two are working together, it makes it very difficult to find any issues."

Another facet to ponder is the role of the government housing lenders, especially Freddie Mac.

As prosecutors tell the story, Mr. Farkas resorted to fraud to conceal a cash crunch when Fannie Mae, in 2002, abruptly stopped doing business with the firm. The previous year Fannie had bought $4 billion in mortgages from Taylor Bean. Fannie accounted for 80% of the firm's volume. Mr. Farkas told an industry publication at the time: "Fannie requested that we disconnect our relationship. They never told me why."

That wasn't quite true. Fannie's decision had followed the discovery that Taylor Bean had sold it six loans that Fannie had previously rejected—loans that defaulted without a single payment being made. Several of the loans had been issued in the name of Mr. Farkas himself. Significance? Because Fannie can send such obviously defective loans back to the originator, one possible implication may be that Mr. Farkas was already gaming the mortgage-insurance system for short-term cash even before prosecutors say his main fraud began in 2002.

Fannie's decision to stop doing business with his firm should have been taps for Taylor Bean. Lo, that's when Freddie Mac arrived and, fully apprising itself of the situation, nonetheless decided to step in and take Fannie's place.

Inexplicable in itself, Freddie's rescue does explain why a former Freddie executive, Paul Allen, came to be hired as Taylor Bean's "CEO," even though he worked out of his home in Virginia, near Freddie's headquarters, and not at Taylor Bean's gleaming office in Florida, where Mr. Farkas still reigned supreme and even prohibited his new CEO from seeing all the company's financial data.

Thanks to Freddie, a $15 million fraud was allowed to blossom into a $1.9 billion one. Mr. Farkas even almost succeeded in scamming $553 million out of TARP to conceal the hole he and his fellow conspirators dug for Colonial Bank (it was TARP investigators who finally blew the whistle on his fraud).

So maybe the saga does have a direct bearing on the housing bubble after all. In 2002, Freddie rescued Taylor Bean. In 2003, Freddie succumbed to its own accounting scandal. In 2004, to make amends to Congress, Freddie's new chief vowed to redouble its "affordable housing" mission. In 2008, Freddie collapsed into the hands of the government under the weight of these subprime loans—beating Taylor Bean and Colonial Bank to bankruptcy by nearly 11 months.

The Housing Bubble Broke The (Mortgaged) Middle Class....

The bursting of the housing bubble wiped out half of the net worth of the Mortgaged Middle Class.

On the face of it, American households were not that affected by the bursting of the housing bubble. If we look at the Fed Flow of Funds report, the Balance Sheet of Households and Nonprofit Organizations, we find that net worth only declined by about 11% ($7.3 trillion) from 2007 to 2010: a $2.9 trillion decline in financial assets and a $4.9 trillion decline in tangible assets, i.e. real estate and consumer durable goods.

Here are the basic numbers, rounded, in trillions:

Total Assets:
2007 $78.5 trillion
2010 $70.7

2007: $14.4
2010: $13.9

Net worth:
2007: $64.2
2010: $56.8

Financial assets:
2007: $50.5
2010: $47.6

Tangible assets:
2007: $28.0
2010: $23.1

Most of the decline in assets results from the popping of the real estate bubble: $6.3 trillion of the $7.3 trillion decline is housing:

Real estate:
2006: $22.7
2010: $16.4

Despite massive write-offs from millions of foreclosures, mortgage debt barely budged:

2007: $10.5
2010: $10.0

Ditto consumer credit, essentially flat: no deleveraging here:

Consumer credit:
2007: $2.55
2010: $2.43

This is a better reflection of the true devastation left by the bubble: I will explain why below:

Owners equity as percentage of real estate:
2006: 56.5%
2010: 38.5%

Despite the 100% rally off the March 2009 low, stocks and mutual fund assets are still down by a trillion dollars:

Corporate equities and mutual fund shares:
2007: $14.2
2010: $13.2

Households pulled money out of stocks and put it into Treasury bonds. Yeah, the public really bought the stock rally....

Treasury securities:
2007: $255 billion
2010: $1.0 trillion

Cash clicked up a bit:

Savings and money market funds:
2007: $7.2
2010: $7.5

On the surface, this rise in income looks good, too bad the increase is mostly Federal transfers of borrowed money:

Disposable personal income (SAAR):
2007: $10.4
2010: $11.5

If we look beneath the surface at the distribution of wealth, the picture isn't so benign. Will delinquencies trigger a new american revolution some time in the future?

The numbers have changed from 2008, of course, but the basic outlines and percentages have not.

Beneath the surface, most of the income and wealth is held by the top 10% of households. Over a quarter of households are at or below the poverty line; they have no appreciable assets and depend heavily on government transfers.

Almost half of the total income (47%) goes to the top 10%, and 21% flows to the top 1%.

Over 18% of personal income is transfers from the Federal government, most of which is borrowed, of course: Reliance on Uncle Sam hits a record:

A record 18.3% of the nation's total personal income was a payment from the government for Social Security, Medicare, food stamps, unemployment benefits and other programs in 2010. Wages accounted for the lowest share of income — 51.0% — since the government began keeping track in 1929.

From 1980 to 2000, government aid was roughly constant at 12.5%

If we extrapolate the additional 6% increase in transfers, that comes to $700 billion. So roughly 70% of the increase in personal income was simply money borrowed by the Federal government (recall the $1.6 trillion annual Federal deficit) and distributed to the citizenry. In other words, people aren't making more money--the Central State is simply borrowing more and it's being counted as "income" when it's distributed.

There are about 105 million households in the U.S. and about 72 million owner-occupied dwellings. Roughly 25 million are owned free and clear, and 48 million have a mortgage.

Let's look at homeowner's equity, which stands at 38.5%. Equity is what's left if you sell your house and pay off the mortgage.

About 27% of all homeowners (13 million) are underwater, i.e. their house is worth less than their mortgage. This is called negative equity, but in practicality it means zero equity.

Since a third of all homes are owned free and clear, then their equity is 100%. Assuming a broadly even distribution of these homes owned without mortgages (most likely, the majority are owned by elderly people who paid off their mortgages), then we can conclude that 33% of total owner's equity resides in these homes owned free and clear.

That leaves 5.5% of total equity spread among the 35 million mortgaged homes which are not underwater.

Calculated another way: household real estate is worth $16.4 trillion, and there is $10 trillion in outstanding mortgage debt, so total equity is $6.4 trillion. One-third of homes are owned free and clear, so one-third of $16.4 trillion is $5.4 trillion. $6.4 trillion - $5.4 trillion = $1 trillion in equity spread over 35 million homes.

That's not much--roughly 1.8% of all household net worth.

The family house was the traditional foundation of household wealth. As for all those trillions in financial wealth--as we all know, 83% is owned by the top 10%.

So here's the reality: over one-fourth of all households are at or below the poverty line: 28 million.

The top 10%--10.5 million households--own the vast majority of the financial assets ($45 trillion)(the total owned by non-profits is not broken out).

The next 10% own 10% of this wealth, or about $4 trillion. So the top 21 million households own 93% of all financial wealth.

The Great Middle Class between those in poverty and the top 20%--56 million households-- owns about $2.7 trillion in financial wealth, and the millions with mortgages own an additional $1 trillion in home equity. That comes to $3.7 trillion, or about 6.5% of the total household net worth.

Consumer durables--all the autos, washing machines, jet-skis, etc.--are worth about $2.2 trillion ($4.6 T = $2.4 T in consumer debt). Add the durables and the other wealth, and the Great Mortgaged Middle Class holds about 10% of the total household wealth ($5.9 trillion).

Before the housing bubble, households owed about $5 trillion in mortgages. The housing bubble came along, introducing the fantasy of home-as-ATM-cash-withdrawal-machine, and mortgages ballooned to over $10 trillion.

Back at the top of the bubble, the middle class had $6 trillion more assets on the books. Considering the Mortgaged Middle Class now owns about $6 trillion in net assets, then the bursting of the housing bubble caused their net worth to drop by 50%.

I'm not making any political statement here--these are the numbers.

Tuesday, April 26, 2011


After hearing from a slew of restaurants lately, it appears that gas prices are not spooking diners.

IBM seems like a company that everyone thinks was passed by two decades ago. However, it has transformed itself and is a tech leader that never seems to get any respect.

Maybe today's $8 billion buyback and dividend boost will get CEO Sam Palmisano and the company the respect it deserves.

Ford Posts a Great Quarter

The automaker beat on the top and bottom line. Retail-related charge-offs were down $84 million vs. the December 2010 quarter.

To put it mildly, F put in a terrific quarter, beating on the top and bottom line. This company has had plenty of rumors and stories thrown at it by the bears over the past few weeks, but there is no denying the strength of Ford's results today.

I have been sifting through the Ford Motor Credit results. The credit arm of Ford was one of the reasons why Ford did not buckle under during the credit crisis. One metric really stood out this quarter: charge-offs. On finance receivables of $73 billion, there were only $59 million in retail-related charge-offs, which was down from $143 million in the December 2010 quarter.

Small Cap Winners

If you just looked at some of the big-cap momentum favorites today, like AAPL, NFLX, AMZN, VMW, LULU and SINA, you would think the market was slaughtered today, but that wasn't the case at all.

Despite some very glaring weakness in key names, the indices racked up some good-sized gains, breadth was around 2 to 1 positive, and many small-caps performed very well. It was feast or famine, depending on whether you focused on big-cap momentum or small-cap technical setups.

The mixed action was probably due in part to mixed feelings about what Federal Reserve Chairman Ben Bernanke may have to say tomorrow. Bernanke has tended to be very market-friendly, and he is unlikely to say anything that will really hit the market, but if he isn't going to announce QE3, that is a negative, no matter how it is spun. This market has been living on Fed-induced liquidity for a very long time, and if the spigot is turned off, there is no way to regard it as a positive, especially with economic and job growth still so tepid.

Earnings reports are hitting, and so far the big ones are mostly negative. AMZN, ALTR and APKT are trading down, although the numbers were slightly ahead. We have a little selling pressure on the indices after hours, but at this point it is all about the Fed tomorrow.

20 Questions For Ben

1. The rescue packages in 2008-2009 were all aimed at restoring CONFIDENCE to the financial system. Yet from 2001 to 2011 the DXY is down 41.5 and gold is up 473%. Does this not equate to a loss of confidence in the US monetary system? If not how would you explain this phenomena?

2. In March of 2009 you said the ONLY reason you care about Wall Street is because of the affect it has on Main Street. You wanted to become Fed Chairmen to make things better "for the average person". You have been Chairmen since 2006, do you believe you have accomplished your goal? And if so how?

3. In March of 2009 you stated that "many mistakes were made leading up to the crisis of 2008", chief amongst them was "enormous amounts of savings has flowed into the United States, and some other industrial countries. That savings has come from China and East Asia. It's come from oil producers. And it has-- and hundreds of billions of dollars, it has come into our financial system. And, you know, that would be great if we took that money and invested it wisely, and got a high return. But instead, our financial system-- didn't-- didn't do a good job" What has changed since you made that statement? Is money being invested wisely.....getting a high return?

4. You believe that confidence in the financial system, is one of the most if not the most important aspect in creating a lasting recovery. Yet 2 years after the recession ended and the banks have been stabilized, the recovery remains tenuous at best. Could this be because "average people" do not trust a regulatory system that did NOT hold banks and the people therein accountable for their bad/fraudulent behavior leading up to the financial crisis of 2008?

5. What do you consider to be the mandates of the Federal Reserve? Is the "wealth effect" not the 3rd mandate of the federal reserve?

6. You have stated that you believe high food and fuel prices to be transitory. Can you define transitory? And define what you believe to be a return to normalcy for food and fuel prices.

7. In March of 2009 you stated that for QE1 the Fed was printing money. However, you have stated that QE2 is not printing money. Can you define the difference?

8. The recession has been over for 2 years. Yet job gains have been anemic. Why do you think this is? And how long until Americans will see a more normalized unemployment rate?

9. The disclosed portfolio of Maiden Lane I assets includes various eurodollar and interest rate swaps indicative of hedging. Does the Federal Reserve hedge its broader $2.7 trillion SOMA Balance Sheet? And if so how? If not, why not?

10. Has the Federal Reserve ever invested in domestic or international equity markets? If so, which Wall Street broker does the Fed use to conduct equity market interventions?

11. In the June 2003 FOMC Transcript Vince Reinhart disclosed that the Fed had sold derivatives on instruments held by the Fed's balance sheet: "the Desk sold options on RPs for the weeks around the century date change that totaled nearly $0.5 trillion of notional value." Has the Fed since then engaged in selling of derivatives on RPs or any other Fed assets? If so, which Wall Street institution does the Fed use as a broker to transact through?

12. The president recently announced that he will pursue oil "speculators" blaming them for the nearly 50% jump in Crude. Yet a simple correlation shows that broad commodity indices correlate nearly 100% with the size of the Fed's assets. In light of this do you side with the president and blame speculators for the surge in energy prices, or believe this is some collusive cabal acting independent of the surge in free liquidity?

13. A quick look at your most recent balance sheet indicates that "Other Federal Reserve Assets" hit an all time high of $125.6 billion in the week ended April 20. Can you provide a break down of what these "assets" consist of?

14. A prevailing theme of over 80% of recent Permanent Open Market Operations has been the prompt refunding of Primary Dealer "On The Run" (just auctioned off) Treasurys back to the New York Fed, with the Fed purchasing up to over the old SOMA limit of any given CUSIP within a month of auction. Can you explain how this is substantially different from outright monetization of up to a third of any given issue? Can you also explain and quantify what the economic benefits to the Primary Dealers are from participating in such a process? Does the Fed keep track of how much in Mark To Market gains and losses are incurred by taxpayers as a result of the POMO reverse dutch auction? How much money have Primary Dealers made by "flipping" bonds from the Treasury back to the Fed?

15. At the time QE2 is over, the Fed's balance sheet will be just over $2.8 trillion. The DV01 on that amount of holdings will be about $1.5 billion, or in other words a 1% rise in interest rates will be three times greater than the Fed's total capital of $52.6 billion as of April 20. Does the Fed only have a capital buffer for a 33 bps rise in rates? What happens if rates increase by more? What is the basis by which the Fed's total capital account is calculated?

16. As a result of rising interest rates, the principal repayments of agency MBS and agency debt (the mandate of QE "Lite") have ground to a halt. In fact, in the most recent POMO schedule, the QE Lite component was a QE2 low $17 billion. If rates continue to rise (an indication of QE2's failure according to some) the QE Lite mandate will be rendered irrelevant. Does the Fed model for what interest level will end the process of principal repayments on its agency portfolio?

17. The Fed is expected to continue the QE2 Lite mandate of keeping the size of its balance sheet constant, which means rolling maturing Treasurys. As of April 20, the Fed held $119 billion in Treasurys maturing in under a year. Assuming the full amount is "rolled" this is roughly one fifth of the full amount of of Treasurys to be purchased under QE2. If so, will replacement Treasurys be purchased in the open market and what maturities will the Fed be focusing on?

18. Recently the San Francisco Fed compared QE 2 to 1961's Operation Twist whose purpose was to halt the exodus of gold as an interest rate arbitrage vehicle from the US to Europe. Is the Fed conserned that gold is once again being transferred offshore? Does the Fed have a "fair value" estimate for what the price of gold should be under the Fed's current view of the economy?

19. The Fed focuses on CPI to inform its decision about the prevailing rate of inflation in the US. In the US, food and energy components of CPI are deminimis, accounting for under 20% of the overall inflation gauge. Other countries, particularly China whose currency is pegged to the dollar, and whose monetary policy has a major impact on the US as well, have a CPI where food and energy account for nearly half the overall inflation metric. Is it this discrepancy that the Fed will attribute the paradox of China tightening rates (and having done so for nearly half a year now) while the US continues to rely on a ZIRP policy and is still loosening via daily POMO operations? At what point will the Fed consider this parallel tightening and loosening for the world's two largest economies, whose currencies are pegged, problematic?

20. In prior FOMC transcripts, Alan Greenspan indicated that gold had historically been used by the FOMC to gauge inflation expectations. Is it still used in that capacity, and if so what does it tell the Fed about where the market believes inflation is headed?

21. Bonus question: Per Frank-Dodd, the Fed is now regulator of all banks. Yet banks are still allowed to circumvent Mark To Market accounting. How comfortable is the Fed that the financial information provided it by the MTM-exempt institutions is credible, the institutions are actually risk-free, and that the Fed is conducting prudent monetary policy in the absence of real time financial data?

22. Bonus Bonus question: the Fed's primary market-valued liability: the USD has plunged to multi year lows. Yet the Fed's primary market-valued asset: Treasury bills continue to trade in a range and as recently as some months back traded at all multi year highs. To what do you attribute this fundamental mispricing?

Monday, April 25, 2011


Good Action in the Banks

Weak Dallas Fed Data

The Dallas Fed manufacturing index slowed in April.

History doesn't repeat itself ... at best it sometimes rhymes."

-- Mark Twain

In many ways, today's problems -- namely, structural unemployment, the screwflation of the middle class and fiscal imbalances (around the world) -- are even more serious and more difficult to resolve than its recent predecessors.

At best, subpar growth looms on the domestic economy's horizon; at worst, a double-dip is still possible.

In this past Sunday's New York Times op-ed David Stockman spelled out the most serious (deficit) challenge clearly:

It is obvious that the nation's desperate fiscal condition requires higher taxes on the middle class, not just the richest 2%. Likewise, entitlement reform requires means-testing the giant Social Security and Medicare programs, not merely squeezing the far smaller safety net in areas like Medicaid and food stamps.

Unfortunately, in proposing tax increases only for the very rich, President Obama has denied the first of these fiscal truths, while Representative Paul D. Ryan, the chairman of the House Budget Committee, has contradicted the second by putting the entire burden of entitlement reform on the poor. The resulting squabble is not only deepening the fiscal stalemate, but also bringing us dangerously close to class war.

This lamentable prospect is deeply grounded in the policy-driven transformation of the economy during recent decades that has shifted income and wealth to the top of the economic ladder. While not the stated objective of policy, this reverse Robin Hood outcome cannot be gainsaid: the share of wealth held by the top 1% of households has risen to 35% from 21% since 1979, while their share of income has more than doubled to around 20%.

The culprit here was the combination of ultralow rates of interest at the Federal Reserve and ultralow rates of taxation on capital gains. The former destroyed the nation's capital markets, fueling huge growth in household and business debt, serial asset bubbles and endless leveraged speculation in equities, commodities, currencies and other assets.

-- David Stockman, "The Bipartisan March to Fiscal Madness" (The New York Times)

Another Run To The Upside Probably Coming

Both the NYSE and the Nasdaq saw the lightest volume of the year by a fair margin, but that didn't trigger much selling. We dipped slightly after the gap-up open, but we plodded back up and went out on a high note with the indices mixed. Breadth was poor, with oil and commodity-related plays pulling back, but INTC and other technology helped to make up for it. Overall, it wasn't a very interesting day, but it wasn't bad either.

Technically, after the big jump last week, we needed to consolidate, and we did it in ideal fashion today on very light volume. Market players were in no rush at all to exit, and that suggests that they will be ready to make another upside try pretty quickly.

We have plenty of earnings to digest that will move many individual stocks, but the Ben Bernanke news conference on Wednesday is likely to be the next big market catalyst. I don't expect that he there are going to be any big surprises, but the event itself is the sort of thing that will trigger some moves regardless.

Overall, the market is in good shape technically, and it's probably a positive that there are so many bears ready to paint a negative fundamental and economic picture. The pessimists have some great arguments, but that has been the case for a very long time, and as we've learned often, negatives don't matter until the market decides that they do.

Sunday, April 24, 2011

I Still Think Nuclear Energy Is THE Long-Term Solution, Even After Fukushima....

It's not easy being a supporter of nuclear energy these days. The events in Japan have confirmed many of the critics' worst predictions. We are way past Three Mile Island. It is not quite Chernobyl, but the possibilities of widespread radioactive contamination remain real.

Still, other energy technologies are not without substantial risk. In 1944 a natural gas explosion in Cleveland leveled an entire neighborhood and killed 130 people. Yet we still pipe gas right into our homes. Coal mining killed 100,000 workers in the 20th century, and still kills an average of six a day in China, but we haven't given up coal. A hydroelectric dam collapsed in Japan during the earthquake, wiping away 1,800 homes and killing an undetermined number of people, yet nobody has paid much attention.

But talk about the risks of other energy sources really doesn't cut to the issue. The obvious question people are asking is, "Why do we have to mess with this nuclear stuff in the first place? Why do we have to risk these horrible accidents when other better technologies are available?" The answer is that there are no better alternatives available. If we are going to maintain our standard of living—or anything approximating it—without overwhelming the earth with pollution, we are going to have to master nuclear technology.

Consider: Uranium fuel rods sit in a reactor core for five years. During that time six ounces of their weight—six ounces!—will be completely transformed into energy. But the energy produced by that transformation will be enough to power a city the size of San Francisco for five years.

A coal plant must be fed by a 100-car freight train arriving every 30 hours. A nuclear reactor is refueled by a fleet of six trucks arriving once every two years. There are 283 coal mines in West Virginia and 449 in Kentucky. There are only 45 uranium mines in the entire world. Russia is offering to supply uranium to most of the developing world with the output from one mine. That is why the environmental impact of nuclear is infinitely smaller.

What about natural gas? Huge reservoirs of shale gas have been unlocked by hydrofracking. But "fracking" has been able to proceed so rapidly only because it has been exempted from federal regulations governing air and water pollution. Now that concern has arisen about damaged aquifers, natural gas production may slow as well.

So what about hydro, wind and solar? These energy sources will not bring about utopia. The only reason we don't object to the environmental effects of these renewables is because we haven't yet encountered them.

The amount of energy that can be derived from harnessing wind or water is about 15 orders of magnitude LESS than what can be derived from uranium. Thus a hydroelectric dam such as Hoover must back up a 250-square-mile reservoir (Lake Mead) in order to generate the same electricity produced by a reactor on one square mile.

Windmills require even more space, since air is less dense than water. Replacing just one of the two 1,000-megawatt reactors at Indian Point in Westchester County, N.Y., would require lining the Hudson River from New York to Albany with 45-story windmills one-quarter mile apart—and then they would generate electricity only about one-third of the time, when the wind is blowing.

Solar collectors must be built to the same scale. It would take 20 square miles of highly polished mirrors or photovoltaic cells to equal the output of one nuclear reactor—and then only when the sun shines. Such facilities may one day provide supplementary power or peaking output during hot summer afternoons, but they will never be able to supply the uninterrupted flow of electricity required/desired by an industrial society.

It will be impossible to meet the consumer demands of a contemporary society without a reliable source of energy like nuclear. Other countries have already acknowledged this. There are 65 reactors under construction around the world (far safer and more advanced than the 30-year-old technology at Fukushima Daiichi), but none in the U.S.

The Russians' sale of uranium to the world comes with an offer to take back the "nuclear waste" and reprocess it into more fuel, at a profit. The Chinese have commercialized their first Integral Fast Breeder, a reactor that can burn any kind of "waste" and promises unlimited quantities of cheap energy.

We have become the world's predominant industrial power because our forebears were willing to take the risks and make the sacrifices necessary to develop new technologies—the steam engine, coal mining, electricity, automobiles, airplanes, electronics, space travel. If we are not willing to take this next set of risks, others will. Then the torch will be passed to another generation that is not our own and they will live with the consequences......

Friday, April 22, 2011

Jim Grant Has A Piece Out Explaining Why QE3 Is Coming....

Once again I am reminded why I like Jim Grant's work so much. From his latest Grant's Interest Rate Observer (which, trust me, is worth the subscription): "Almost 30% of the respondents to a poll conducted by UBS a few weeks back said they anticipate a third round of so-called quantitative easing... We count ourselves among the expectant 30%. To its congressional directed dual mandate the Bernanke Fed has unilaterally added a third. It has undertaken to make the markets rise. The chairman himself has more than once taken credit for the post-2008 bull market (on one such occasion in January, he reminded the CNBC audience how far the Russell 2000 had come under Fed ministrations). Could he therefore stand idly by in the face of a new bear market. Byron Wien, vice chairman of Blackstone Advisory Services, went on record the other day predicting a summer swoon in stocks following the scheduled winding down of QE2 in June. Let us say that Wien is right, and that, furthermore, drooping stocks are accompanied by sagging house prices and a weakening labor market. Bernanke was hard put to explain why he chose to let Lehman go while acting to save Bear Stearns. He would be harder put to explain why he chose to implement QE1 and QE2 but, in another hour of need, refused to launch QE3." And "Sooner or later, gravity turns speculative markets into investment markets. When this transformation occurs, the Fed will confront the need to bail out the innocents it had previously bailed in. Hence, QE3." And therein lies the rub......Simple, sweet, and, for the US dollar, most likely suicidal.

Thursday, April 21, 2011


Dreadful Philly Fed

The index fell to its lowest reading since November 2010.

New orders caved, and the number of employees, inventories, unfilled orders and shipments slipped.

By contrast, the leading indicators rose by 0.4%, a tick better than expected. This is the ninth consenctuve rise for the index.

Dissecting the GE Beat

The beat came from GE Capital, while the industrial margins were weaker than expected.

Jobless Claims Disappoint Again

With the markets advancing, however, there is little skepticism at all on the jobs number.

Jobless claims disappointed again today at 403,000 vs. expectations under 390,000.

Two weeks ago, the excuse was end-of-quarter "adjustments," but with the markets advancing, there is little skepticism at all on the jobless claims number -- or any number for that matter!

Quick Read on SunTrust

Similar to PNC Financial, SunTrust beat on the top and bottom lines.

The tension between cyclical tailwinds and nontraditional headwinds is having a salutary resolution for the bulls.

Sharp Reversal

Just when you thought the market couldn't possibly do it again, there was a huge V-shaped bounce today, and we finished the week at the market's highs. Even the perma-bulls have to be a little surprised at how quickly this market reversed and moved back up.

The primary catalyst for this impressive action was stodgy old INTC. Expectations were quite low due to concerns about slowing personal computer sales, but low inventories and strong corporate sales more than made up for that in when it reported quarterly earnings earlier in the week. Market players were caught flat-footed and many were leaning the wrong way in the technology sector, which has been struggling lately. The scramble to reposition, and the inability of the bears to fade the move, resulted in steady buying.

AAPL pulled off a similar surprise on Wednesday night, but it had already bounced back quite a bit form the lows it hit on Monday, so the impact wasn't quite as dramatic. The bears who tried to fade the second big gap up were equally unsuccessful and they capitulated into the close and went out strong.

It is almost the exact action that served the market so well from September 2010 to February 2011, and then again in mid-March 2011. Once the market starts to run, it goes straight up, causing great frustration for underinvested bulls and anticipatory bears.

Next week promises to be equally challenging. We have a slew of earnings reports coming, but none that are likely to be as market-moving as INTC and AAPL were. That is good for individual stock picking and will likely lead to more choppy action.

Technically, we repaired quite a bit of damage with the strong action the last couple days. Things are a bit extended and need some consolidation, but the market is back above key resistance and the February highs are just a stone's throw away. The bulls will be looking for the breakout, and I suspect the bears may let them have it before they make an effort.

long INTC

Wednesday, April 20, 2011

Acropolis Now

Greece's two-year note is now at a record yield at over 22%.

Loan Demand Is Comatose

U.S Bancorp CEO Richard Davis referred to loan demand as 'fragile.'

In yesterday's U.S. Bancorp (USB) earnings conference call, Richard Davis, the company's chairman, stated the following in response to questions on loan demand:

[Loan demand] is still measured, slow and slightly positive, but there is nothing remarkable about it. I think we have seen the economy slow a bit in the second half of the first quarter [since] we last had a question in a public forum to talk to all of you. Things are actually not quite as positive as we thought they would be at the middle of the quarter.... And I do think it is fragile."

Whether you agree or disagree, run, don't walk, to read Dr. John Hussman's most recent missive, "Anatomy of a Bubble."

Wells Fargo: A Closer Look

On the negative side, the tax rate dropped, mortgage-servicing rights were written up, net interest margins were slightly worse and the quarter benefited from small security gains.

On the positive side, credit was stronger and loan growth expanded from the prior period and was above consensus.

Big Day For INTC

It was one of those days where if you weren't in at the open, there wasn't a chance to do much. The market traded in an extremely tight range all day after the gap-up open. The anticipated AAPL results probably helped keep both sides pinned down.

The action today was all about a surprisingly strong earnings report from INTC. There were a few other strong reports, like LVS and VMW, but it was Intel's report that turned the technology sector around and that caught a lot of folks by surprise. There had been growing chatter about a slowdown in PC sales recently, but Intel's results made it clear that inventory levels were low and corporate business is quite robust.

Breadth was exceptionally strong and volume was decent. Banks were the only blight on the screen as WFC performed poorly amid its report and GS continues to downtrend.

The bears are going to be pointing out that crude oil is running up again and that financials are acting very poorly, but you have to be impressed how Intel didn't sell-off at all today, like it usually does after a good report.

long INTC

Tuesday, April 19, 2011


A more cautious overall market view?

1. higher oil and input prices;

2. a debased U.S. currency, lingering budget concerns and political partisanship, which could jeopardize a budgetary compromise (and resolution);

3. screwflation of the middle class and its inevitable impact on economic growth and corporate profits;

4. the specter of structural unemployment;

5. the absence of a recovery in home prices;

6. the fiscal and monetary "stabilizers" are soon to be taken off;

7. vulnerability to consensus 2011 growth projections, corporate margins and profitability

Strong Finish

The market flopped around early as it tried to bounce back from yesterday's selling and managed to gain strength as the day progressed. Volume was light and the buyers weren't overly aggressive.

We had some strong pockets of momentum in select groups like Chinese Internets, and some of the big-cap momentum favorites like NFLX, PCLN, LULU and AAPL acted well also. That really helped overall sentiment and helped to produce a strong finish, which has been relatively rare lately.

The issue now is going to be earnings and, so far, we have some pretty ones this evening from IBM, WYNN and VMW.

INTC is the one that tends to be the biggest market mover, and it just came in with some solid numbers. It is trading up strongly, but it has a tendency to fade the next day even when the numbers look quite good.

Monday, April 18, 2011


Here's a wish list with price entry points:

PNC - $60
MSFT - $24
C - $4.25
GM - $28
JPM - $40
MET - $40

Here are my reactions to today's S&P news:

* U.S. debt will not be downgraded. It is not likely that U.S. debt will be downgraded in the next few years. The last two country downgrades (Canada and Japan) were nations that:
1. weren't reserve currency countries; and
2. had debt to GDP ratios of over 100%.
By contrast, the U.S. is a reserve currency, and our debt is only 62% to 64% of GDP.

* Progress will likely be made on the deficit front. There is now renewed pressure on the Democrats and Republicans to make progress on the deficit front.

* Taxes will rise, and austerity measures will be enforced. Along with the budget deficit progress that will come in the fullness of time (or maybe sooner!), expect higher marginal tax rates and more meaningful austerity measures.

* Corporate profit forecasts will be downgraded for 2011-2012.

* Economic growth expectations will be scaled back. Consensus projections for 2011 U.S. GDP growth will be lowered from +3.5% to around +2.5%.

Here are the comments of Miller Tabak's Dan Greenhaus on the concern du jour:

U.S. government officials are out in full force doing damage control with the main points being:

* S&P is making a "political judgment," a phrase that appears intended to dismiss the agencies concerns as partisan rather than economic or fundamental in nature
* Officials are reminding people that this has no bearing on the U.S.'s ability to issue or finance its debt nor does it mean a default is imminent. A default is most certainly not imminent. Indeed, S&P itself noted this morning that a default in the short to medium term is quite low while the "worst case scenario" is for a "mild" deterioration in the credit rating of the U.S. Longer term is a different story.

The 2011 budget compromise resulted in very, very little actual spending being cut. The only way to credibly and sustainably address the medium and long term deficit picture is by attacking Medicare, Medicaid, Social Security and Defense spending.

Worries -

1. Consumer nondurable issues have outperformed, a classical sign of a more defensive market.

2. Former market-leading stocks -- namely, GOOG and AAPL -- have begun to underperform.

3. First-quarter earnings reports have been disappointing and, when combined with No. 4 below, render the $95-a-share consensus S&P forecasts for the year more problematic.

4. The price of energy products and other input prices show little signs of moderating.


Ratings agency Standard & Poor's cut its outlook on the U.S.'s AAA-rated debt to Negative from Stable today, and that unleashed some aggressive selling. The market recovered a bit late in the day, with help from a strong bounce in AAPL, but it still was a very poor day for the bulls. Volume was not heavy but breadth was 4-to-1 negative and with plenty of technical damage.

There was a little panic that became oversold fast enough to support some sort of snapback.

The good news is that we do have earnings reports coming from TXN after the close, GS and JNJ in the morning and then IBM and INTC after tomorrow's close. That is going to change the focus for at least a little while, and we might be able to generate a little more upside action if the reports are upbeat. But earnings season so far has reflected a desire to exit on the news. If that continues, it is going to be very rocky going.

The Real Tax Money Bonanza

A dominant theme, and a stupid one at that, of President Obama's budget speech last Wednesday was that our fiscal problems would vanish if only the wealthiest Americans were asked "to pay a little more." Since he's asking, imagine that instead of proposing to raise the top income tax rate well north of 40%, the President decided to go all the way to 100%.

Let's stipulate that this is a thought experiment, because Democrats don't need any more ideas. But it's still a useful experiment because it exposes the fiscal futility of raising rates on the top 2%, or even the top 5% or 10%, of taxpayers to close the deficit. The mathematical reality is that in the absence of entitlement reform on the Paul Ryan model, Washington will need to soak the middle class—because that's where the big money is.

Consider the Internal Revenue Service's income tax statistics for 2008, the latest year for which data are available. The top 1% of taxpayers—those with salaries, dividends and capital gains roughly above about $380,000—paid 38% of taxes. But assume that tax policy confiscated all the taxable income of all the "millionaires and billionaires" Mr. Obama singled out. That yields merely about $938 billion, which is sand on the beach amid the $4 trillion White House budget, a $1.65 trillion deficit, and spending at 25% as a share of the economy, a post-World War II record.

Say we take it up to the top 10%, or everyone with income over $114,000, including joint filers. That's five times Mr. Obama's 2% promise. The IRS data are broken down at $100,000, yet taxing all income above that level throws up only $3.4 trillion. And remember, the top 10% already pay 69% of all total income taxes, while the top 5% pay more than all of the other 95%.

I recognize that 2008 was a bad year for the economy and thus for tax receipts, as payments by the rich fell along with their income. So let's perform the same exercise in 2005, a boom year and among the best ever for federal revenue. (Ahem, 2005 comes after the Bush tax cuts that Mr. Obama holds responsible for all the world's problems.)

In 2005 the top 5% earned over $145,000. If you took all the income of people over $200,000, it would yield about $1.89 trillion, enough revenue to cover the 2012 bill for Medicare, Medicaid and Social Security—but not the same bill in 2016, as the costs of those entitlements are expected to grow rapidly. The rich, in short, aren't nearly rich enough to finance Mr. Obama's entitlement state ambitions—even before his health-care plan kicks in.

So who else is there to tax? Well, in 2008, there was about $5.65 trillion in total taxable income from all individual taxpayers, and most of that came from middle income earners. The nearby chart shows the distribution, and the big hump in the center is where Democrats are inevitably headed for the same reason that Willie Sutton robbed banks.

This is politically risky, however, so Mr. Obama's game has always been to pretend not to increase taxes for middle class voters while looking for sneaky ways to do it. His first budget in 2009 included a "climate revenues" section from the indirect carbon tax of cap and trade, which of course would be passed down to all consumers. Such Democratic luminaries as Nancy Pelosi have often chattered about a European-style value-added tax, or VAT, which from a liberal perspective has the virtue of applying to every level of production or service and therefore is largely hidden from the people who pay it.

Now that those two ideas have failed politically, Mr. Obama is turning as he did last week to limiting tax deductions and other "loopholes," such as for mortgage interest payments. I support doing away with these distortions too, and so does Mr. Ryan, but in return for lower tax rates. Mr. Obama just wants the extra money, which he says will reduce the deficit but in practice will merely enable more spending.

Keep in mind that the most expensive tax deductions, in terms of lost tax revenue, go mainly to the middle class. These include the deductions for state and local tax payments (especially property taxes), mortgage interest, employer-sponsored health insurance, 401(k) contributions and charitable donations. The irony is that even as Mr. Obama says he merely wants the rich to pay a little bit more, his proposals would make the tax code less progressive than it is today.

Mr. Ryan isn't proposing controversial entitlement reforms because he likes pointless political risk, or because he likes being berated to his face from a front row seat, as he was on Wednesday. Medicare and Medicaid spending are consistently growing two to three times faster than the rest of the economy, while Medicare's cash-in-cash-out financing model means that seniors collect far more in benefits than they paid in taxes over their working lifetime. The entitlement state was designed for another era.

Mr. Obama's speech was disgraceful for its demagoguery but also because it contained nothing remotely commensurate to the scale of the problem. If the President had come out for a large tax on the middle class, like a VAT, then at least the country could have debated the choice of paying for the government we have or modernizing it a la Mr. Ryan so it is affordable.

Instead the President will continue targeting the middle class for tax increases to pay for an entitlement state on autopilot, while claiming he only wants to tax the rich.

Tax Day

Ah, April 15th! I want you to consider that the date means absolutely nothing to 47% of US households as they will pay zero in federal income tax. Yes, state, property and sin taxes still get them, but we are seeing a disturbing trend towards a tipping point where fewer than half of us pay any sort of income tax. Five years ago it was 40% who paid no income tax. By 2012 this could be the first election in which the majority of voters will be able to vote themselves more government largess paid for by a minority of taxpayers. We may soon have to re-jigger the American Revolution’s familiar rallying cry into: “Representation Without Taxation!”

Statistics vary slightly but it can be argued that the top five percent of US households pay 60% of federal income tax. Ten percent account for over 75%. Another two-fifths make up the rest. And half are exempt. And yet…twenty percent of US households get 75% of their income from the federal government. Another one-fifth receives 40% of their financial support from Uncle Sam. Think about what this means in terms of fiscal responsibility down the road. How receptive to cutting taxes which they do not pay, or cutting government spending, from which they benefit, is a majority voting block going to be in the future? Indeed, what does this say about our prospects for economic growth or curbing the size and scope of an ever growing government colossus in the face of a crushing $20 trillion deficit looming on the horizon?

Very soon we may not be merely de-incentivizing economic activity but actively waging war on it.....

Obamacare is but the most recent and fiscally insane manifestation of this myopia that now holds sway in the capitol and white
house—and has for over a decade regardless of the party in power (in case one thinks this overtly partisan). I am coming to fear that this administration is not about mere “spreading the wealth” as 2008 candidate Obama let slip in a revealing off-teleprompter moment. Rather its aim is to increase dependency upon the state based upon an illogical faith in the judgment of detached federal bureaucrats over the parochial citizenry. It is also about cynically creating a permanent voting block addicted to government hand-outs which will in turn reward politicians with life-time tenure so long as they keep the gravy train of our confiscated wealth flowing. Democracy’s most insidious enemy is the gradual devolution into the tyranny of the majority where 51% of the populace can vote again and again to empty the pockets of the other 49%. Not only is this dynamic morally wrong, this is the death knell for a free and vibrant republic as wealth will inevitably flee to safer havens (or to the black market) taking future prosperity and stability with it. How many of us ever got a job from a poor man?

A lot of harm in the world has been done by intellectuals who started off with noble intentions but little understanding of how the real world operates. Consider the on-going Eurozone’s massive bail-outs of financially distressed states like Greece because, at the risk of oversimplifying, the ballooning costs of its overly-generous state entitlement apparatus eventually overwhelmed its tax base—25% of which has been driven underground. It should be a stark lesson in the mathematical limits of trying to financially engineer social justice…one Washington should watch very closely. Unless, of course, the aim is just the accumulation of raw power through expanding government and manifesting life-time tenures in Congress by robbing productive Peters to pay suckling Pauls in exchange for votes. Then the lessons screaming at us from across the pond are irrelevant. In the meantime, Happy Tax Day! I’m sure our money is being well spent.

Sunday, April 17, 2011

Epc Leadership Failure: Obama Threatens Global Recession If Debt Ceiling Is Not Raised.....

And people made fun of Hank Paulson for threatening with eternal damnation if congress didn't stamp his multi-trillion blank check to bail out his former co-workers from Goldman. In a step that makes the Kashkari-Paulson threat seem like amateur hour, the teleprompter just received its latest high frequency directive from the Wall Street superiors, promptly delivering the latest MAD message to what continues to be perceived as an idiot audience: "Failure by Congress to raise the U.S. debt limit "could plunge the world economy back into recession," President Barack Obama declared Friday, and he acknowledged that he must compromise on spending with Republicans who control the House to avoid such a crisis. Obama urged swift action, saying he doesn't want the United States to get close to a deadline that would destabilize financial markets. He said he was confident Congress ultimately would raise the limit. "We always have. We will do it again," said Obama, who voted against raising the debt limit as a freshman senator from Illinois.

For those keeping score of the President's numerous accolades, this merely underscores that the president is now in contention for the Nobel Prize in hypocrisy: after all compare this statement to Obama's now supremely ironic remark from March 20, 2006: "The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. … Increasing America’s debt weakens us domestically and internationally. Leadership means that ‘the buck stops here. Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better." They sure do. And in order to replace the current failed leadership, they will gladly start with a new president.

From AP:

"I'm the person who is best prepared for us to finish the job so that we're on track to succeed in the 21st century," Obama said. That's the heart of his argument for voters to give him a second term over more than a half dozen Republicans seeking the White House.

As the 2012 campaign gets under way, it's being shaped by a deep disagreement over federal spending in Washington between Republicans who control the House and Democrats in power in the Senate and White House. Obama and Republicans compromised a week ago on a spending bill to avert a government shutdown, a preview of the debate that's certain to dominate the coming months on deficits and the ceiling on money the nation can borrow.

The president said that he doesn't expect either side to get everything it wants in negotiations and that he's pushing for "a smart compromise that's serious."

He warned of dire consequences if the debt ceiling is not raised before it hits its limit of $14.3 trillion; the administration says the latest Congress could possibly act is by early July. But Obama said some longer-term questions about where the government trims its operations will have to be left until after the 2012 presidential election.

"I'm confident that the withdrawal will be significant," he said. "People will say this is a real process of transition, this is not just a token gesture."

Friday, April 15, 2011


Many economists/strategists who have waxed enthusiastically about forward growth rates have explained that the housing market is now such a low percentage of GDP that it will no longer be an economic drag in 2011-12.

That said, I see plenty of drag, as yesterday BAC announced that is laying off 1,500 underwriters and loan processors in its mortgage business.

And it's happening at other mortgage and lending bank departments around the country, as the housing market's outlook has not improved.

This softness will serve as another headwind to the more optimistic jobs growth expectations from the bullish cabal, and it seems to me to be something of a statement regarding the future outlook for housing markets as well.

Despite all the hubbub surrounding the municipal bond market several months ago after Meredith Whitney's 60 Minutes appearance, muni prices have behaved well.

Cleveland Fed Sees More Inflation

The Federal Reserve Bank of Cleveland's Median Consumer Price Index signals increasing inflation.

Some conspicuous insider selling in Google should give dip-buyers some pause.

Before one buys the Google weakness, I would suggest looking at the company's insider sales recently.

Even though this is likely 10b5-1 selling, it is, well, conspicuous and should give dip-buyers some pause.

Value Traps

BAC is to the banking sector as CSCO is to the technology sector. They may be poor investments over the balance of 2011 with lingering fundamental legacy headwinds. As such, they both may be value traps.

"When the facts change, I change my mind. What do you do, sir?"

-- John Maynard Keynes


* March ISM manufacturing showed notable declines in the growth rates for orders, exports and order backlogs. And core capital goods orders were surprisingly weak in both January and February.

* The trade deficit unexpectedly expanded and will be a drag on first-quarter 2011 growth.

* First-quarter IDC personal computer sales were disappointing.

* Consumer confidence continues to be weak.

* Housing remains in the crapper.

* Jobless claims have deteriorated.

* Cost pressures abound (especially of an energy kind).

* Sovereign debt pressures in the eurozone are intensifying.

Shoulda Rolled Over, But Didn't

A ramp in crude oil and poor reactions to earnings from GOOG and BAC gave the market a good excuse to sell off, but buyers were unperturbed. Positive breadth was 2-to1 and most every major sector except banks were in the green.

Even after an intraday reversal on Thursday, we were still technically oversold today. That and option expirations were probably sufficient reasons for the market to hold up the way it did, despite the negative news flow. Watch out for early next week though; April can get rough after tax day - April 18th this year.

If we take a step back and look at the bigger picture, there is good reason to remain cautious, especially since the early responses to earnings reports have been so poor. We have a classic oversold bounce occurring and it is going to take some pretty good earnings news to turn it into another V-shaped bounce.

Next week brings hundreds of earnings reports, but probably the most important will be IBM, INTC and AAPL. IBM's report has often been a turning point in the market, and in view of the struggles of the semiconductor sector lately, it is hard to be overly optimistic.

Apple has been acting quite poorly for a while now but still isn't finding any major buying support. There are worries that its supply chain has issues due to Japan disruptions, but at some point the bottom-fishers are going to be looking for entries. I suspect a lot of buyers would like to jump in if the stock gaps down on its earnings report. I'd love to buy it in the 290s.....

Thursday, April 14, 2011


The bad feature in the GOOG report was the eleveated operating expenses.

Run, don't walk, to read Goldman Sach's Dave Kostin's "Portfolio Strategy Research" comprehensive report this morning.

In terms of sectors, Dave would be long cyclicals, short defensives and companies that have large sales exposure into BRICs.

The greatest risks to economic growth and to his market projections are interest rates and the cause, duration and macroeconmic backdrop of a potential oil price shock.

Things to worry about:

1. higher oil and input prices;

2. a debased U.S. currency, lingering budget concerns and political partisanship, which could jeopardize a budgetary compromise (and resolution);

3. screwflation of the middle class and its inevitable impact on economic growth and corporate profits;

4. the specter of structural unemployment;

5. the absence of a recovery in home prices;

6. the fiscal and monetary "stabilizers" are soon to be taken off;

7. vulnerability to consensus 2011 growth projections, corporate margins and profitability;

8. the euro sovereign debt crisis, thought to be contained, has continued to spread;

9. a relatively anemic recovery exposes the economic cycle to the vulnerability of more black swans (and tail risk), which are occurring with greater regularity; and

10. investor sentiment has moved to a lopsidedly bullish extreme.

Initially At Least, A Negative Reaction To GOOG

For the first time in about two weeks, we managed to close near the highs of the day. Of course, we were oversold and due for some sort of bounce, but at least it was a decent effort for a change. Volume was light and breadth wasn't great, but it was positive. The issue now is whether the bulls can keep on pushing a little longer, or will they quickly run into resistance.

Unfortunately, GOOG isn't helping. The Internet giant missed earnings estimates by a couple of cents, but that was enough to send the shares down $20 or so. That puts the stock below its 200-day simple moving average for the first time since last September. Of course, the fanboys on CNBC loved the report, but it doesn't look overwhelmingly healthy to me at the moment.

My big concern is that we have a negative theme developing so far this earnings season. This is the third major report to receive a negative reaction, and that is going to cause folks to look harder for exits as other reports roll out.

The bounce we had today was an improvement over some of the recent action, but it was neither very big nor very vigorous. Could be just an oversold bounce.

Wednesday, April 13, 2011


The Federal Reserve has launched enforcement actions against Lender Processing Services relating to its foreclosure services.

This should be viewed as a positive for ASPS.

Mortgage Malaise

More weak mortgage data this morning.

Both new mortgage and refinancing applications dropped again -- 5% and 8%, respectively.

The bulls continue to argue that a supposedly improving jobs market, a decade high in affordability, favorable case for ownership vs. renting, relatively low mortgage rates and low levels of new home construction all augur for a gradual improvement in the residential real estate markets.

Given the immense phantom inventory of unsold homes and other factors, I am less optimistic.

From my perch, housing will scrape along the bottom for the next couple of years.

Donald Trump will announce that he has no intention to run for president.


As with Howard Stern in years past, he (Trump) is unwilling to disclose his personal finances.

I'd Rather Have Nuclear Than Coal

For the first time, Germany's Green Party will control one of the country's state governments, just in time to decide the fate of several nuclear plants temporarily idled in response to the Japanese nuclear mess—the same mess that catapulted the Greens to unfamiliar success in state elections two weeks ago.

Were they to surrender to their inner Al Gore, their answer to the resulting electricity shortage would be for consumers to make do with much higher prices. But Green Party leader Winfried Kretschmann is unlikely to seek immediate return to the political wilderness. Forget the fantasy talk of wind and solar. The choice then is nuclear or coal.

Countries all over the world are making similar choices in light of Japan's disaster, whose severity the government now puts on a par with Chernobyl (even if the radiation releases haven't been remotely comparable). Thanks to Fukushima, officials everywhere will have to reacquaint themselves with one of the great noise-to-signal puzzles of modern science: How much harm does low-level radiation exposure do?

For 60 years, the hunt has been on for handfuls of "excess" cancers in populations subjected to unnatural doses of radiation. The findings have been more politically vexing than scientifically satisfying.

The once-golden Hiroshima and Nagasaki studies, jointly funded by the U.S. and Japanese governments, showed little or no low-dose cancer risk, and even a boost to longevity from low-dose exposure in the form of reduced deaths from "non-cancer" diseases. But the A-bomb studies have had their scientific crown knocked askew in recent decades. One reason is "survivor bias"—having survived not only the bombings but homelessness, hunger and a typhoon in the immediate aftermath, the subjects may be a hardier lot than the Japanese population at large.

Investigations of U.K. infants exposed to X-rays in the womb and workers in U.S. weapons plants gradually began nudging the bomb studies aside in the 1980s, for reasons due partly to legal and regulatory convenience: Their findings seemed to confirm the simple and intuitive "linear, no-threshold" hypothesis, which holds that radiation is always dangerous in direct proportion to dose.

These studies have problems too. British mothers had to guess years after the fact how many X-rays had been taken during pregnancy. A study of workers at the Hanford weapons plant claimed to distinguish between 6% and 7% "excess" cancers out of 2,500 cancers suffered by 35,000 workers.

There are other caveats. In lab experiments, low levels of radiation appear to stimulate the cell's own highly capable repair mechanisms. Studies of radiologists show a heightened cancer rate among those who practiced before the dangers of X-rays were known; later cohorts show no effect from a lifetime of small exposures.

And then there's the "hot particle" problem: The real danger may be long-lasting particles ingested or inhaled, even low-energy particles whose radiation doesn't normally penetrate the skin.

Meeting in Vienna in 1986, experts expressed a hope that Chernobyl would finally resolve the debate. "In 20 to 30 years' time we're going to know whether the linear dose hypothesis [is correct]," predicted one, "at least for leukemia and maybe for lung cancer."

It was not to be. For the record, aside from a serious uptick in curable thyroid cancer among those exposed as children (which faster action at the time would have avoided), a U.N. monitoring project finds "no scientific evidence of increases in overall cancer incidence or mortality rates" among residents of the Chernobyl region. But that hasn't stopped other studies from predicting tens of thousands of "excess" cancer deaths across Europe over many decades based on the same linear, no-threshold modeling that governments everywhere have adopted as a regulatory standard.

All this has direct bearing on Japan, where hot particles especially will be a worry for some time to come. In a linear, no-threshold world, the Japanese government can never call a given level of exposure "safe" even if the additional risk is statistically negligible for the average person. In fact, Japanese politics may be roiled for decades to come by insoluble arguments over small anomalies in the cancer rate and whether a given sufferer is a "victim of Fukushima."

Of course, the galloping irony for the Baden-W├╝rttemberg Greens is that the exact risk model doesn't matter. However you slice it, coal is more dangerous than nuclear.

Start with deaths that aren't the product of statistical imagination: Thousands more die in coal mining accidents each year (especially in China) than have been killed in all nuclear-related accidents since the beginning of time. What's more, coal plants spew toxins like mercury and other metals—along with more radioactive thorium and uranium than a nuclear plant—which are no less amenable to linear, no-threshold thinking. In 2004, the EPA estimated that a new emissions standard then being promoted would, by itself, save 17,000 lives a year.

So the question is a no-brainer for the Baden-W├╝rttemberg Greens. Yep, you guessed it: They can be counted on to shut down the nukes anyway. Their anti-nuke stance is an article of faith not subject to review.

Oversold Bounce

The market was set up for an oversold bounce, and we even had the potential for President Obama's speech to serve as a positive catalyst, but the buying was very lackluster.

We managed some green today and the Nasdaq outperformed, but breadth was only 2,875 gainers to 2,650 decliners. Banks were the biggest problem, but there wasn't any big rush by dip buyers to load up on them.

We are still oversold and have the potential for a better bounce attempt tomorrow, but it's troubling that the bulls couldn't manage better energy today. So far the two major earnings reports have been disappointing, with both AA and JPM being sold off on their reports. GOOG reports tomorrow after the bell and we'll have a better test to see what sort of sentiment is likely to prevail during earnings season. There usually is some sort of theme that develops, such as "buy the bad news" or "gap and reverse." We haven't had enough reports to establish a clear theme yet, but Google will be important in that regard.

For the eleventh straight day, the market was unable to close near the highs of the day. That is the sort of action you expect to see in a downtrend. We are very lucky that this consistent intraday selling pressure has not resulted in more aggressive downside so far.

Tuesday, April 12, 2011


I view the price of energy to be crucial in here.

Should the price of oil continues its descent, the autos, airlines and retailers could provide something of a near-term floor for the broader market.

Signs of Slower Domestic Economic Growth

My guess is that first-quarter GDP will barely grow by 2% -- down appreciably from 3.1% in last year's fourth quarter.

The higher-than-expected trade deficit of $45.8 billion (consensus was $44 billion) confirms my view that first-quarter 2011 GDP will be weaker than most economists expect.

Most notably, especially within the context of a weak U.S. dollar, exports are down 1.4% month over month and will serve to reduce first-quarter GDP by as much as 0.6%.

My guess is that first-quarter GDP will barely grow by 2% -- down appreciably from 3.1% in last year's fourth quarter.

The trade deficit, when combined with March's higher headline import prices (up 2.7% month over month), raises the specter of stagflation.

That said, wages are going nowhere, and with the drop in oil prices over the last three days, the second quarter could see an acceleration in growth -- but it's too early to tell right now.

The yen is advancing -- causing an unwind of the carry trade and selling of leveraged equity and commodity positions.

It'll be interesting to see if (or when) the G7 cabal intervenes to stabilize the capital and currency markets.

The National Federation of Independent Business Optimism Index declined to 91.9 -- well below the prior month (94.5) and well below consensus of 95.

It's the first drop in this index in three months, with most of the decline in economic expectations and in expected sales growth.

Two positive features of the release were in capital spending plans and in hiring expectations, so if energy prices continue to drop and the jobs market continues to improve, we might see a better overall reading next month.

Bears Are Bolder

There was a lot of selling pressure and plenty of red on the screens today, but most notable was the weak intraday action. We were in good shape for a late rebound after the sharp selloff in the morning. We did start to bounce around 1:30 p.m. EDT, but the buyers couldn't keep it going, and we closed in the middle of the intraday range. When the market was trending higher, the buyers would be tripping over each other to add long exposure late in the day.

There were two others negatives today. First was that breadth was quite poor. We were around 3-to-1 negative, and the banks and retailers that had been leading fizzled late. The second negative is the degree to which many stocks have been hit. The thinner small-caps were not attracting any bids. The buyers just stood aside and let things free-fall. Without dip-buying interest, many stocks become ugly very fast. With earnings season coming up, conditions could change quickly, but for now the poor intraday action makes it clear that the bears have the edge.

Monday, April 11, 2011


Run, don't walk, to read Mary Meeker's analysis of America's financial statements.

There seems to be a lack of conviction around the direction of bank earnings.

This is best expressed by the implied volatility of between 4% and 6% percent in numerous bank and non-bank financial shares, including BAC, 4.1%, WFC, 4.1%, STT, 5.1%, HIG, 6.4% and PRU, 4.7%.

Structural Unemployment Is Ever-Present:

Globalization, technological advances and the use of temporary workers becoming a permanent condition of the workplace are all conspiring to keep unemployment elevated and wage growth restrained. The lower the skill grade and income, the worse the outlook for job opportunities and real income growth. (This is not a statement of class warfare; it's a statement of fact.)

Home Prices Remain Pressured:

The consumer's most important asset, his home, continues to deflate in value, despite the massively stimulus policies, a multi-decade high in affordability, improving economics of home ownership vs. renting and burgeoning pent-up demand (reflecting normal population and household formation growth). Consumer confidence has continued to suffer from the unprecedented home price drop, which has been exacerbated by the aforementioned (and decade-plus) stagnation in real incomes. The toxic cocktail of weak home prices, limited wage growth and nagging upside commodity price pressures (particularly from the price of gasoline), will likely pressure retail spending for the remainder of 2011.


Lower oil got the market off to a positive start this morning, but intraday weakness set in again and we closed near the lows of the day. There was a slight bounce in the last few minutes of trading, but buyers were in no rush to jump in.

Retail and defensive stocks led today while oil and metals were laggards. Particularly troubling was the poor performance of technology and many big-cap momentum stocks. There were really no good pockets of momentum to be found.

The downside has remained contained, which is a positive, and we aren't seeing any panic selling or a rush for the exits. The S&P 500 is just slightly off its recent highs and hasn't been gaining any major downside momentum. There is still plenty of technical support, but the longer we continue to experience this poor intraday action, the greater the risk that selling will pick up as buyers move to the sidelines.

Friday, April 8, 2011


Being someone who appreciates a great valuation, I must post in defense of RIMM. Although there is some good analysis of legitimate risks to the RIM story, mostly focused on competition, I also find that it is now fashionable to be a RIM-hater.

Since the generational low in spring 2009, RIM stock essentially topped out around $85 in early summer 2009, and has gone nowhere since.

This sort of stock performance is usually reserved for boring no-growers, or companies with real issues they are working through. In contrast, RIM has been wildly successful over this period, posting the sort of growth that few companies can ever hope to achieve. Sales are up 62% over that period; units have grown 91%; and the subscriber base is up 114%. Furthermore, RIM is one of the leaders in a huge market with open-ended growth opportunities. The mobile phone market is over 1 billion units annually. The leading smartphone vendors, AAPL, RIMM and the Androids, are still only selling a fraction of the total.

One argument the bears immediately make is that sales are not up as much as units, so ASPs are declining. Fair enough, except this is the story of every high-growth technology product market that ever existed. Your expectation should be that the company can bring down the unit price as the technology matures and volumes boom. Apple is doing exactly the same thing. Be far more fearful of tech companies that do not lower prices! Another ursine argument is that sales growth is in lower-end devices to emerging markets. Again, fair enough, the growth is overseas and RIM is addressing the most robust markets.

The proof that they are doing the right thing is in gross margins, which were supposed to collapse but instead have remained right in the 40%-45% range this whole time.

There is no doubt the smartphone market is getting more competitive, but I can think of few markets in which one company garnered 100% market share. I like AAPL stock and the company very much, but they will not sell every smartphone shipped in the world. Look at those unit growth numbers for RIM again: Since the iPhone was introduced two years ago, RIM has doubled its unit sales. Some people just like the attributes that the BlackBerry offers.

I might erase this whole argument if this stock traded at a multiple that reflected its growth prospects. Instead of being a highflier with a momentum multiple, this fashion to hate RIM has driven the P/E down to 7x this year's EPS estimate. I mean ... really? Even if you discount the bear case, it isn't worth a market multiple?

RIM has gone through these periods before. Mid-decade, the patent suit kept the stock in a flat range for two years, while the business continued to grow. When the cloud lifted, the stock ran from $20 to $140 in one year. We are at a similar junction now. Unless their business completely collapses, sentiment will turn and this stock will have a massive run. My price target is $150 or so. This uses 20% growth on top of this year's $7.50 guidance, meaning $9.00 of calendar 2012 EPS, and a multiple of 18x, a modest premium to the market to account for the growth prospects. That is a 200% gain from current levels, and could happen literally in months IF (that is a big "if") the revaluation happens in the near term. Obviously, if the stock is re-rated next year, the multiple would apply to an even higher EPS number, since by mid-2012 you will start trading off the calendar 2013 EPS estimate.

Inflation is accelerating more quickly than CPI and other measures can pick it up, in my opinion.

When researching potential retail names, do two things:

1. focus on those with comps well above inflation rates; and

2. dig in to see which names have increasing unit volumes and traffic.