Thursday, June 30, 2011

Change The Oil?

We open the emergency spigot a bit to sell our light sweet crude to bring Brent down. Hey, I get that. Brent's way too high versus the West Texas Intermediate that trades here.

But what we should be doing, what people like James Cramer have urged the government to do, is sell the Brent futures. That's the imperfect market. That's the market that's being manipulated despite claims from the exchanges that there aren't that many speculators playing in that market. Oil is flying because inventories are lower than we thought. I believe it's because Japan's in there buying. The issue that's killing us, though, is Brent because we price off of Brent here, even though that's not fair or right.

But here's the issue. Here's why Brent seems intractable. There's no incentive for the producers of oil anywhere to bring the price down there. And there is no incentive by the refiners here to take advantage of the high prices there by using tankers to ship it to the Brent buyers. That's because they can charge Brent prices at the pump. What's the point of shipping it when you can abuse the American consumer by pricing off of Brent and the U.S. government doesn't care?

A one-two-three punch of selling Brent futures against the Strategic Petroleum Reserve, raising margin rates to shake out the non-consumer hoarders and laying down the law regarding pricing of refined product at the pump would have the desired effect of bringing down oil to levels that are economically commonsensical.

When you consider we are awash in oil even without OPEC doing the right thing by the consumer -- as if we could ever trust this cartel to do that ----the absurdity of these high prices it astounding. The marketplace is rigged and the rigging is so beneficial to the treasuries of companies and governments alike that only government intervention in the rules of the game, not just the supply side, and a dramatic change of the rules that keeps financial buyers from being in control of something that affects the natural interest can make the changes we need.

We are basically financially suicidal and naïve as a country for this not to happen.

Of course, in the interim we need a policy that transfers a lot of our natural gas into vehicular fuel if we want to bust both the hedge-fund cartel and the OPEC cartel. But the New York Times has spoken and the lawmakers are listening. Somehow the agenda's been hijacked and the environmentalists have, de facto, thrown their weight in favor of coal, the default fuel for natural gas and imported oil.

I just don't know if this current regime, which is totally enthralled by the press and the press reports, can go against the Times and push for domestic natural gas as an alternative to foreign diesel (the real trade-off as 18-wheeler LNG engines are readily available for truck fleets to switch to).

The desire to have electric cars that plug into a coal based system -- there goes coal again -- is too great and it appeases too many constituencies to which President Obama is beholden.

So, we have no short-term way or will to bust the two cartels other than through the Rube Goldberg way of physical delivery when it is the financial "delivery" that is in control. And we won't use the cleaner domestic fuel of natural gas.

That's pathetic.

Wow, Lots Of Riboflavin In This One....

Tuesday, June 28, 2011


MSFT traded up on a rumor that a cloud-based product is shortly going to be announced.

Today, the Los Angeles Dodgers baseball team filed for bankruptcy. Even a goldmine like the Dodgers cannot overcome the severe financial mismanagement of Mr. and Mrs. McCourt.

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

-- Woody Allen

"I don't want to make the wrong mistake."

-- Yogi Berra

"The first thing we do, let's kill all the lawyers."

-- William Shakespeare, Henry VI, Part 2

Started Slow, Then Picked Up...

We started off slowly this morning but gained steam before a weak finish. Strength in financials was the main driving force, but weakness in dollar helped quite a bit as well, and oil and commodity plays bounced back after some rough action last week.

The bounce in big-cap momentum names such as AMZN, CMG, GOOG, AAPL, LULU and NFLX is what really helped to make some folks feel better, but it really had the feel of a combination of a short squeeze and end-of-the-quarter window-dressing. Most of these names are still facing substantial technical hurdles, but these are the names that money managers need to see recover if they are going to post decent returns.

Quite a few traders were moaning and groaning about poor charts and the low-volume nature of many of the bounces. That is just the nature of the action that occurs within the context of a downtrend. Market players are not acting as though they believe that we are on the cusp of a major market turn.

The bulls have a number of positives going for them in the near term. We have the end of the quarter, positive seasonality, oversold technical conditions, some nearby support, the potential for positive news out of Europe and a fairly high level of negativity. That may be all we need to give us some additional upside follow-through.

The Amount The U.S. Military Spends Annually On Air Conditioning In Iraq And Afghanistan....

$20.2 billion.

That’s more than NASA’s budget. It’s more than BP has paid so far for damage during the Gulf oil spill. It’s what the G-8 has pledged to help foster new democracies in Egypt and Tunisia.......

Kim Selects His New Socks....

Saturday, June 25, 2011


Today we have learned that Peter Falk has passed away.

Rest in peace, Lieutenant -- That was a great show.

As stocks continue to descend, here are some questions that come to mind.

* How badly has the macro hedge-fund community been hit in the month of June?

* Will there be redemptions from hedge funds, serving to adversely affect late June and early July trading as lquidations occur?

* Will strategists lower their 2011 S&P earnings and price target forecasts? And when?

Taking off a "monetary stabilizer" of QE3 from the table (though keeping on a ZIRP policy) at a time when the emerging fiscal headwinds (with austerity measures associated with addressing fiscal imbalances at the local, state and federal levels, as well as in Europe) represents challenges to economic growth and stock market valuations.

Can't Wait For The Scary Weekend Headlines Out Of Europe....

There was a little optimism in the air last night after the market bounced back from the pounding it took on news of increased oil supply and some progress in the Greek bailout deal. We had finished strong on Thursday and futures were perky overnight, but then news hit that Italian banks were now under review, and another cycle of worries about European sovereign debt set in.

A number of bulls seem convinced that additional crude supply is going to crush gasoline and oil prices and prove to be a major boon to consumers and the economy. Oil ended up doing little today, and I don't think we can be all that certain that it is definitely going lower and staying there. Oil has never just been a case of supply and demand.

Plenty of headlines right now are pushing the market around, and that is likely to continue. I suspect we will see at least two or three more rallies and reversals on headlines about Greece, and then if that is ever resolved, we'll hear about Italy, Spain, Portugal, Ireland, etc.

Earnings season is coming up soon, hopefully allowing focus to return to individual stocks and less on macro matters, and that will be refreshing.

This Is The Most Glorious Piece Of Plywood Ever Made!!

Friday, June 24, 2011


The price of oil has now fallen below $90 a barrel for the first time in over four months.

Remember when the headlines in NYC blared "Ford To City: Drop Dead?" The way he dealt with NYC's severe financial problems in the mid-70s most likely cost him the election in '76, as Carter narrowly took the state of New York.

Anyway, on Wednesday, the chairman of the Federal Reserve effectively told the U.S. economy to drop dead. It might cost him his position, too, as investors down the road might seek an economic scapegoat....

"Other Fed Assets" Hits Record $133 Billion, More Than The GDP Of Kuwait

That the Fed's balance has hit another record high (and will do so for at least two more weeks) should come as a surprise to nobody. After all, when something is at a record and grows relentlessly, it is pretty safe to say next week will be another record. That said, there were several curious observations in this week's H.4.1 update. First and foremost is that the "other Fed assets" category just hit an all time high of $132.7 billion. This category, which is now larger than the GDP of Kuwait, is apparently so comprehensible and transparent to the hoards of FOMC precleared journalists, that for the second meeting in a row, nobody feels like asking a question about just what is contained in this asset class. We also hope that nobody attempts a correlation between the Other Fed Assets class and the S&P. Another notable thing is the amount of MBS prepays continues to drop and has slowed down to a trickle. Elsewhere, the Fed's excess reserves are once again back to chasing Bernanke's expanding asset class, with over $40 billion more in cumulative asset expansion since the start of QE Lite, than excess reserves. Lastly, looking at the Fed's custodial treasury holdings, there was another small decline in USTs held in proxy by the Fed: the first decline in 4 weeks, since the May 25 second biggest historic drop. Aside from these, it was smooth sailing for the Fed, where the average maturity of SOMA holdings declined just modestly from 61.6 to 61.5 months.


Mr. Papandreou’s first task is to persuade his governing Socialist Party to pass a bill that would save or raise about $40 billion by 2015, equivalent to 12 percent of Greece’s gross domestic product, through wage cuts and tax increases, at a time when the economy is shrinking.

To put that in perspective, spending cuts and tax increases of a similar scale in the United States would amount to $1.75 trillion, considerably more sweeping than even the most far-reaching proposals for reducing the American federal budget deficit. And Greece has promised to generate another $72 billion by selling off prime state assets, which many Greeks consider a fire sale of national patrimony.

See How Rigged The Oil Futures Are?

I read all about it today, about this SPR gambit and how silly it was, how it won't work and how it is just a sign of desperation.

To which I say, we have thrown trillions of dollars and euros all over the place to get this world's economy moving again, and it is failing in some part because of oil being too high. Is it really such a nutty idea to hit the market with enough oil that the non-consumers who are hoarding it get blown out and the price falls? Is it really so crazy that we should criticize it when, already, it is working?

Sometimes people have to recognize the beauty of this. If all it takes to destroy the price is the release of a couple of days' supply of oil from our reserve to the marketplace, can't you see how phony the whole thing is? The critics would let us be hostage to that situation instead of having this artificial and easily manipulated market be brought to heel.

Yes, it is true, I think a raising of the margin rates to levels where silver is might have done the trick. I am not thrilled that they went this way. However, when I read, "Oh, but it is so little oil, it won't even matter," that is spoken/written by someone who is either long or doesn't have a screen, because oil went right through where "they" said it wouldn't go. In a chart-driven market, where people know that if they keep oil off the market it goes higher, the governments tipped the balance against the speculators and for the people.

Crazy Market Today

Much earlier today, when I was contemplating what I'd be writing later, the market was ugly and I was formulating in my mind the thoughts of "everything's on sale," etc. But then.....

More than a few traders described today's action as "crazy." It started off weak as the market fretted over the lack of any hint about further quantitative easing by the Fed, then got hit by a surprise announcement that the International Energy Agency was set to release 60 million barrels of oil from its strategic stockpile. That sent crude oil tumbling, drove up the U.S. dollar, slammed commodities and caused some panic selling.

After emotions calmed down, the dip buyers started buying retailers and some big-cap technology names that may benefit from lower gasoline prices. That helped the Nasdaq to outperform nicely when commodities, financials and other sectors struggled.

The bounce then started to fade and it looked like another ugly close when news hit that Greece had reached a deal on austerity measures. That doesn't seem very surprising, but the market suddenly leapt higher on the news. The sellers tried hard to fade the move but were unsuccessful and the market closed at the highs of the day.

I suspect the Greek news simply caught too many folks out of position, especially the bears, who were betting that the intraday bounce would fizzle. The spike up was very similar to what we saw Tuesday morning, when the market went straight up in vicious fashion.

At this point, many market players would probably welcome a market that is less macro-driven and more focused on individual stock picking. Tomorrow is likely to be another chaotic and hectic day, though, as the Russell indices are rebalanced. This always produces a big jump in volume and some crazy action in the stocks that are being added and dropped. Last year Nasdaq volume jumped to 3.5 billion shares on rebalancing day from around 2 billion the previous day.

Wednesday, June 22, 2011


Reality (and Ben Bernanke) hit the markets after the Fed's press conference.

From my perch, Bernanke's baseline Federal Reserve economic forecast -- like that of the more optimistic strategists on the "Street of Dreams" -- has become something of a leap of faith (requiring a quick pace of growth in the second half of this year).

My view remains that there is downside risk to his baseline forecast, owing to secular headwinds and the more important influence of consumer behavior (in an economic sense) following the investment and economic shocks of 2008-09.

Meanwhile, the Fed appears to be in a "zone of inaction" for the next few months so it will not likely be impact the market.

Market participants will now focus on the economic fundamentals and the corporate profits outlook -- without the benefit (over this period) of "The Bernanke Put."

Nearly 40% of the assets of the five largest US money market funds are invested in European bank debt!

Bonds trade like the Fed's next move is to put an artificial ceiling on interest rates.

The outcome of the pro-Papandreou vote was fully expected and the "heavy lifting" of passing austerity measures now faces Greece.

Will a temporary plan delay the inevitability of default? Possibly, but not for long.

By means of background, when Lehman's CDS blew through 600 several years ago it implied trouble -- Greek CDS now trade at 1800!

In the fullness of time Greece will follow the 12 other sovereign defaults that occurred over the last 12 years.

Greece and Taxes

"Yesterday, new Greek Finance Minister Evangelos Venizelos said that a top priority of the Greek government would be to implement a new tax system. The new system should focus on ending tax evasion." -- Citigroup Sovereign Debt Crisis Research Today.

The above quote sort of summarizes the XXXX show in Greece, doesn't it?

Fed Spurs Selling

The only thing surprising about the selloff today is that it didn't happen sooner and more aggressively. The Fed cut all of its key economic projections -- growth, employment and inflation -- and didn't offer even a minor hint that some form of quantitative easing would be forthcoming. The market could have handled the weak economic forecasts if it felt that the Fed was going to be printing more money and keeping the dollar weak, but Ben Bernanke said that it will be a couple months before such a move is even considered.

Despite the poor news, we held up surprisingly well until the final 90 minutes of trading. We broke down and finished at the lows of the day. It didn't help that we were technically overbought after a vicious short-squeeze yesterday. The bulls already had their work cut out for them if they were going to build on the bounce, and the news flow just didn't support it.

The action recently has been exactly the sort of action you expect within downtrends. We had a very vicious spike to the upside that squeezed shorts and caught underinvested longs by surprise, and then a fairly quick failure on poor news flow.

The primary thing to keep in mind is that despite the strength on Tuesday, the market remains in a downtrend. Strength should be treated with suspicion.

Tuesday, June 21, 2011


As the world awaits the perfunctory Greek vote, stocks rejoiced in anticipation throughout the day.

We should not lose sight of the fact that the Greek austerity measures will not be in isolation. Similar growth-deflating measures are being planned for Harrisburg, Pa., the state of Illinois and Washington, D.C.

Thursday's trading day will contain a lot of important economic releases: Chicago Fed National Activity Index, initial jobless claims, Bloomberg Consumer Comfort Index and new-home sales.

The yield on the 10-year U.S. note is now at 3%.

The Misery Index has hit a 28-year high.

Dr. Arthur Okun, an economics adviser to President Lyndon Johnson, created the Misery Index in the 1960s.

The Misery Index is the unemployment rate added to the inflation rate. The assumption is that both a higher rate of unemployment and a higher reading in the inflation rate create economic and social costs for a country and a rise in the Misery Index.

The screwflation of the middle class (stagnating wages and higher inflation) caused by public and private (corporate) policy, globalization and technological innovation continues to be among the most important and challenging nontraditional headwinds to domestic economic growth.

It's Really All About The Fed....

After a weak bounce Monday, a gap up open this morning caught a large number of market players out of position for further strength. When the short squeeze didn't reverse quickly, the scramble for long inventory was on. The action this morning was a classic example of how vicious the upside spikes can be during a downtrend. We went straight up all morning without a single dip.

The market finally did pause at midday, but by then the media was practically euphoric over the possibility that Greece would pass some austerity measures. I doubt anyone still believes that Greece wasn't going to be bailed out, but it is easy and convenient justification for a strong day.

The Greek deal is a sideshow and does little to resolve the foundational problems in Europe. I believe the real driving force today, and what helped to rally the euro against the U.S. dollar, is hope that Fed Chairman Ben Bernanke might make some hints about some form of Quantitative Easing 2.8938378735 tomorrow. There has been more and more talk that the Fed is in a position to continue to run its printing press, and any such hint is going to ignite the bulls.

If Bernanke doesn't throw the bulls a bone tomorrow afternoon, I'll be looking for the bears to get busy again very quickly, especially if they can also generate a little "sell the news" action on some positive Greece news.

We have a pretty good countertrend bounce going, but the bulls will face some hurdles after the Fed news hits tomorrow. If they can maintain these gains for a few more days, it is going to create some real performance anxiety, especially with the end of the month coming. But the technical setup is supportive of the short side, and the way the news is hitting probably is also.

The (Probably) Lost Cause That Is Tax Repatriation

Just like back in January when rumors of tax repatriation holiday started creeping up, the past week has seen a surge in speculation that the Homeland Investment Act part 2 may be coming back. Unfortunately, neither now, nor in January, nor during the original HIA back in 2005, did this tax repatriation of billions in cash do absolutely anything to stimulate the economy, and in fact the waves of layoffs that followed likely added to the weakness that would become apparent with the December 2007 transition into the Second Great Depression. Yet that will not stop big multinational companies from lobbying for this one time gift which will allows management teams to buy back shares, and lock in individual profits on their insider holdings (certainly expect an unseen wave of insider selling in the aftermath of a HIA 2 should one be implemented). As for the economic rationale, it is suspect. Here's a good recap courtesy of David Rosenberg's latest letter to clients.

Tax Breaks for Companies

At a time when nearly half of the ranks of the unemployed have been looking for work fruitlessly for at least six months, and a time when they are about to lose their long-term jobless benefits, it is amazing to see so many folks out there calling for the White House to stimulate the economy by allowing businesses a form of tax holiday to bring home their locked-up profits from abroad. This is being touted as a low-cost scheme to get the economy moving (the NYT had a good article on this proposed strategy yesterday).

First off, the major contributors to employment are small businesses, and they don't have locked up earnings abroad — they are paying their 35% top marginal rate rather than avoiding it. Second, the Bush team tried this gimmick in 2005 with absolutely no impact on capital spending or employment growth, though it sure did help out on the stock buyback programs and divided payouts. So would it be good for the stock market? Very likely. But a lot of this locked-up cash sitting abroad is centered in the pharma industry and as such it was nifty to see how the NYT tracked what Merck did with the $15.9 billion it brought home back in 2005 — "according to regulatory filings, though, the company cut its work force and capital spending in this country in the three years that followed."

Here is what Kristin J. Forbes, an MIT economics professor who was on the Bush team back then (and led a study by the NBER showing there to be little impact outside of helping reduce the deficit temporarily) said on the matter:

"For every dollar that was brought back, there were zero cents used for additional capital expenditures, research and development, or hiring and employees wages."

Quite an admission of failure. It does stand to reason as to why such a policy today would have any impact since this is not exactly a business sector that is starving for liquithty as it is.

And below we repost some of the salient points from Citi's Steven Englander who essentially said the same thing 6 months ago:

HIA-2 under discussion

* HIA is attractive as a way of reducing effective corporate taxes temporarily and improving the tone of the US corporate sector, but the direct impact on investment and employment appears limited
* The total flows are likely to be much higher than in 2005
* The non-USD share is less certain but may be somewhat lower
* Central banks may see this as a golden opportunity to diversify

A renewed program to allow repatriation of foreign profits at favourable tax rates is again under discussion in the context of broader corporate tax reform. Proponents argue that it provides inexpensive stimulus to the US economy at a limited budget cost. Opponents argue that it provides few practical benefits; rather it creates incentives to keep earnings abroad in anticipation of subsequent rounds of HIA (Homeland Investment Act – the actual name of the bill was the American Jobs Creation Act of 2004, but we will use HIA-1 to refer to the 2004 bill and HIA-2 to refer to any prospective 2011 measure).

And the pros and cons:

The disadvantages:

1. In 2005, HIA-1 delivered much less in direct employment and investment than promised. For example, see “Tax Incentives and Domestic Investment: An Empirical Analysis of the Repatriation Decisions of U.S. Multinational Corporations Following the Implementation of the Homeland Investment Act of 2004” Michaele L. Morrow, Ph.D,. Dissertation, Texas tech University, May 2008, or “Watch What I Do, Not What I Say: The Unintended Consequences of the Homeland Investment Act “ J Dhammika Dharmapala, C. Fritz Foley and Kristin J. Forbes, Journal of Finance, forthcoming (2011).

2. Under HIA-1, the incentives to increase employment and investment were limited. The major impact of HIA-1 was to allow foreign earnings to be repatriated at low tax rates, with few binding additional requirements. From firm’s point of view, HIA-1 was equivalent to a lump-sum tax benefit which would generate additional investment and employment primarily in cases in which firms had restricted access to credit markets. Firms with large amounts of profits abroad probably could borrow domestically for hiring or capital expansion so would not have been constrained in their prior investment decisions.

3. Crafting a bill that increases direct marginal incentives for employment and investment is difficult. If the requirements are too stringent, firms will simply pass on repatriation. If firms are already unconstrained with respect to hiring and investment, a marginal increase may bring forward investment plans into 2011, with some payback in subsequent years. If the terms are relatively lax, as in HIA-1, the impact on direct employment and investment will be small.

4. The firms that have the money abroad (tech, pharma) are not the sectors that need the most balance sheet help (households, real estate, state and local government) nor does it help firms whose operations are primarily domestic.

5. Repeating HIA produces incentives for firms to keep funds abroad. There is the risk that firms will see HIA as a once or twice a decade low-tax repatriation opportunity. The extent of these incentives depends on the gap between US domestic and foreign tax rates. The combined effect of HIA plus a reduction in US corporate rates would largely mitigate these incentives. Surprisingly, BEA data suggests that until the possibility for HIA-2 emerged again in early 2009, the aggregate dividend repatriation rate was not much lower than it had been prior to HIA-1(Figure 1), and the low repatriation since 2009 could also reflect limited US investment possibilities.

The advantages:

1. HIA-2 presents an opportunity for the Obama Administration to demonstrate its commitment toward a more business friendly approach to an important constituency.

2. HIA-2 eases access to funds that are viewed as locked abroad to some degree. A corporate tax system that encourages firms to keep cash abroad while borrowing domestically is arguably less than optimal.

3. The sums involved are substantial. There are estimates of up to USD 1 trn kept abroad - roughly half the cash currently held by US corporates. Data from the BEA shows USD1.2 trn of un-repatriated earnings since 2006, significantly more than had been accumulated over the 1990-2004 period (Figure 2).

4. The tax costing can be relatively benign because the low tax rate is largely offset by the increase in flows. The repatriation flows in response to the lower corporate tax rate are so high that they largely pay for themselves (in subsequent years, costing depends on how much flows are expected to be reduced by anticipation of future HIA).

5. In contrast to 2005, improving balance sheets and financial statements is higher on the list of policy priorities. One of the Fed’s stated objectives in QE2 was improving the attractiveness of other asset markets relative to the bond market, so in 2011, balance sheet improvement can be viewed as a macroeconomic policy goal.

6. 2005 was one of the best years of the decade in terms of asset markets and growth so indirect effects may have been large. It is hard to pin down these indirect effects (and obviously there were broader macroeconomic forces at play) but 2005 was a year of strong employment and investment growth (Figure 3), a strong USD, and sharply revised expectations of how quickly the Fed could normalize rates. From the time the bill was passed in late 2004 till the end of 2005, expectations of Dec 2005 short rates rose from just over 3% to 4.5% (Figure 4).

7. No one’s ox is gored, at least not directly. It is difficult to craft a stimulus package that is relatively cheap in budget terms and which provides broad stimulus and that does not carry a well-defined set of losers. Especially if combined with broader corporate tax reform that narrows the gap between US and foreign corporate tax rates, HIA-2 may be viewed as more attractive and practical than other more theoretically attractive stimulus measures.

Lastly, for all those who believe that HIA 2 will be an unequivocal benefit for the S&P, a piece by GS from January reminds that the biggest impact from all that fund flow will likely serve as a major catalyst for USD strength. Recall that nothing in the current centrally planned market is more important than the weakness of the USD. If indeed, the HIA 2 is contemplated as a short-term boost to the S&P, will it backfire even with that modest purpose of making the mega rich even richer? Goldman seems to think so.....


It feels like we need a washout/swoosh lower at some point to clean out what little optimism is left.

Recommended reading: John Hussman on Greece.

It remains my view that the insurance stocks could be upside market leaders as investors rotate out of banks stocks.

Vodafone announces a buyback.

Is The Trend Still Down?

A weak Monday morning open was a good setup for a mild oversold bounce. The dip-buyers had an opportunity to jump in early and they were able to hold on during the day. This, in turn, attracted a few more buyers who were worried the market might run up without them. Not too many folks were concerned as volume was very light, although breadth was solid.

The main driving force behind the market right now is the situation in Greece. The markets opened weakly because a deal to bail the beleaguered country out did not happen over the weekend. But the market gained its footing as the players seemed to adopt the stance that they just aren't going to allow Greece to go down. It will be bailed out at some point, but lots of posturing will take place first.

We could easily see some more upside in the near term -- especially if we hear any positive news out of Europe -- but there is no compelling reason at this point to believe that the market has made a near-term bottom.

Saturday, June 18, 2011


Watch the 10-year -- if yields are rising, so should equities (and vice versa).

Run, don't walk, to read Nancy Miller's column in this week's Barron's, "All Atwitter With Investment Tips."

Higher energy costs remain the biggest risk to profit and worldwide economic growth -- it is the greatest and most pernicious tax of all. The rapid rate of change in the price of crude oil has historically presaged weakness in U.S. stock prices. A world rolling quickly toward industrialization, with an emerging middle class and goosed by an unprecedented amount of quantitative-easing has conspired to pressure commodity prices (especially of an energy kind). Moreover, Japan's nuclear crisis has likely further increased our dependency on fossil fuels. U.S. policy is on a slippery slope on which oil might be increasingly impacted by the outside influences of Mother Nature and political developments -- all beyond our control.

Besides energy prices, a broadening rise in input prices also threaten corporate profit margins. While Bernanke is unconcerned with rising inflationary pressures and the CRB Index, as the Economic Cycle Research Institute notes, the Fed runs the risk, once again, of being behind the inflation curve and, in the fullness of time, being faced with the need to introduce policies that could snuff out growth with errant policy. HSY, PG, CL, MCD, WMT and KMB have all announced sharp price increases (of 5% to 10%) in the cost of their staple products, running from chocolate kisses to diapers!

The cost of 2008-2011 policy is a mushrooming and outsized deficit. Since the generational low in March 2009, the U.S. dollar has dropped by over 23% against the euro, as market participants have dismissed the notion that the hard decisions to reduce the deficit will be implemented. As Nicholas Kristof wrote in The New York Times yesterday, "This isn't the government we are watching, it's junior high school.... We're governed by self-absorbed, reckless children.... The budget war reflects inanity, incompetence and cowardice that are sadly inexplicable." At the opposite side of our plunging currency is the message of ever-higher gold prices. (Warning: Dismissing the meaning of $1,500-per-ounce gold might be hazardous to your financial and investment well-being.)

Most importantly, policies have placed continued pressures on the middle class, with the cost of necessities ever-rising and wage growth nearly nonexistent. The savers' class has suffered painfully from zero-interest-rate policy and quantitative-easing, policies that have contributed to the inflation in financial assets (and to an across the board hike, or consumer tax, in commodity prices) but have failed to trickle down (until recently) to better jobs growth, to an improving housing picture or to an opportunity for reduced consumer borrowing costs and credit availability. Meanwhile, the schism between the haves (large corporations) and the have-nots (the average Joe) has widened, as best reflected in near-record S&P 500 profits and a 57-year high in margins. Corporations have feasted (and rolled over their debt) in the currently artificial interest rate setting, but the consumer and small businessman has not fared as well. Particularly disappointing has been overall jobs growth (as reflected in the labor participation rate) and the absence of wage growth (as the average workweek and average hourly earnings continue to disappoint). It is my view that ultimately corporations' margins will be victimized by the screwflation of the middle class, as rising costs may produce demand-destruction and an inability for companies to pass on their higher business costs.

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.)

Meanwhile, 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.

Key factors guiding me toward expecting a near-term slowdown in the rate of domestic economic growth:

* A low in bond yields: The continued drop in the yield on the 10-year U.S. Note to 3.15%.

* A double dip in housing: A still-large shadow inventory of badly delinquent and foreclosed homes continue to weigh on home prices, which resumed their fall in first quarter 2011.

* Worrisome group rotation: The continued improvement (absolutely and relatively) of the consumer nondurable sector.

* Weakening commodities: We have witnessed a decline in the price of copper (to below its 200-day moving average), oil and other major industrial commodities.

* Economic indicators flash caution: A multiyear low in the Baltic Dry Index, a weak household jobs survey, the ISM nonmanufacturing Index falls to the lowest level in nine months and, for the fourth straight week, we get an initial jobless claim print above 400,000.

* Emerging weakness in non-U.S. markets: A break is developing in the natural-resource-based regional markets of Australia, Mexico, Canada and Brazil.

I continue to see, as I have for months, an inconsistent and uneven economic recovery -- difficult for corporate managers and investment managers to navigate. Tail risk, greater earnings volatility and corporate margin and profit challenges are the headwinds I see above and beyond the nontraditional issues of fiscal imbalances, higher marginal tax rates and elevated structural unemployment caused by globalization, technological advances and temporary employment as a permanent fixture to the jobs market.

However, the preconditions for a market bottom could be falling into place:

1. The strength in corporate balance sheets and income statements. While I see some vulnerability to corporate profits, my estimates are only a few dollars per share below consensus.

2. Valuations are not stretched, especially relative to inflation and interest rates. At 1250, the S&P 500 will be priced at a reasonable 13.5x my 2011 S&P forecast of $93 a share. (Price is what you pay; value is what you get.)

3. Uneven and more volatile economic and profit growth are my baseline expectations. But an extended (yet lumpy) economic up-cycle still appears the most likely outcome. More effective and productive public policy could extend the recovery further.

4. At 1250, the market will be sufficiently oversold technically, and sentiment will have moved to a more negative extreme. Always remember that a public opinion poll is no substitute for thought.

5. Individual investors are relatively uninvolved and hedge funds are conservatively positioned.

When the price of energy products was rising, it was the most pernicious tax of all to the weakened U.S. consumer victimized by screwflation.

Now that the price spiral is being reversed, the positive benefit cannot be overstated.

Too Bad We Did Not Learn Our Lesson Back In 2008/2009....

We didn't figure out what causes contagion. Our stupid politicians didn't care what causes contagion; all they wanted to do was punish, was get even. We didn't understand or want to understand what happened between GS and AIG. We spent more time trying to punish the remaining institutions than figuring out what really went wrong with the ne'er-do-wells that collapsed. We had no idea what we were doing.

That's what I think about when I watch this Greek tragedy. Think about it. I am not saying we should not be hurt by a collapse in Greece. There should be pain concomitant to the amount of GDP of our country and theirs that might be lost. Same with Spain and Portugal. Our trade should suffer. There should be some repercussions from efforts in Europe to make it so the problems don't happen again, not that I can truly expect anything that clairvoyant from countries that seem to want a common currency without the fiscal responsibility of some of the partners in the currency.

But what should have happened is pretty simple: We should have figured out how to eliminate certain securities. We should have said that certain securities, notably credit default swaps, aren't in our national interest, as demonstrated by how much taxpayer money we had to shell out to those who wrote them. We should have said that some instruments that require very little margin but can truly cause pain to all of us, such as buying crummy mortgage bonds with almost no money, aren't in the national interest either.

We should have thought about national interest, not domestic equity. We looked at this problem from the point of view of which banks ran hedge funds -- I really blame Paul Volcker for that, because he truly didn't understand the way the world had changed in the last decade. We thought about which banks should be punished for stringing together suspect securities.

But we never looked at it from the point of view of margin and collateral. I always found this amazing, because The New York Times explained over and over again how these default swaps truly worked and the wrangling of collateral and how Goldman Sachs' legal right to a payoff from AIG was the proximate cause for the collapse of AIG.

Should EVERYTHING be traded? Should we even be able to insure financial products? We know that the banks and insurers who wrote this stuff didn't understand the ramifications at all or were so incentivized to write business that there were no standards.

But we didn't tackle it that way.

So our institutions wrote insurance on banks and government bonds and then didn't raise the collateral needed or sequester the capital needed if the contracts needed to pay off. Just like AIG.

I am sure some of that had to do with not willing to lose critical business to global entities that competed with them. The need to have "the full suite of services" has often been the excuse for why huge amount of risk with little reward -- or thought -- have occurred, and that's what happened with Greece and the other countries.

It isn't a matter of "we never learn." It is more a matter that the regulators didn't understand and that the hapless/stupid people in Congress really didn't get it at all. The incentive system to write this risky stuff is so great, the vig is so huge, that unless you ban it from being written entirely, it is going to keep happening. We didn't learn because we didn't attempt to understand. How much I wish that someone in Congress actually had been in sales at some point at any major bank. There would be no mystery to this at all. You sell the most irresponsible paper, because the gross credit or commission is the largest. Or you sell it because you need to keep the client from going to UBS or DB.

The endless belief, though, that once a product is created and sold it is therefore OK and can't be reviewed or pulled off the market is just catastrophic to our national interest, especially when we see the same thing at work now with Greece. Our banking system could have been immunized. The collateral system on physical assets, not financial assets, always worked. But financial assets? When it works, it's fine. When it doesn't, the system is in jeopardy and the national interest compromised.

I had thought that this problem MIGHT go away when the laissez-faire Republicans left the White House. But the Democrats didn't seem to think it was right to tamper with these toxic products either.

The lesson they may have taken from the New York Times series on Goldman and AIG is that Goldman is "bad" and deserves "sanctions." It is as if they thought Goldman acted criminally. Goldman was just following what it was allowed to do without being criminal.

Doesn't matter. Governmental punishment and retribution don't change the incentive structure and don't outlaw the product.

So we are stuck with our banks being hostage, and therefore our system being hostage. We are stuck with a true linkage that could be awful, and the usual suspects being involved. If they weren't, why don't they come out and say it?

Twenty-four years ago, we had shysters offering portfolio insurance against a decline in the market using stock futures. It didn't work. It also helped precipitate the devastating crash of 1987. After that, the clients forsook the product, and it went away.

But there is no incentive for the clients to forsake swaps, because the lesson of AIG is that if the insurer doesn't pay off, the government will. So why not take out the product? It's as cheap as term life, and all you have to do is take more of it than you have bonds or take it without the bonds. Either way, it is a good bet, because all that happens is that the Treasury pays off.

The alternative?


And as we have heard again and again, we must pull out all of the stops to make sure we don't have another Lehman. Alot of hedge funds are betting this way....

Which is exactly what this crisis is all about.

Underlying Fear

The senior indices finished in the green while the Nasdaq struggled.

For the second day in a row we started off on a positive note but couldn't sustain it, reaching a new low in the afternoon before getting a slight uptick at the finish line. For a market that has been as beaten up as this one, and is technically oversold, it is not a good sign that it can't manage some better countertrend movement. There is plenty of bearishness out there, and market players are not well positioned for upside yet. We can't seem to produce even a short-lived squeeze.

The dilemma is that the market is oversold and everyone knows it, but there is still substantial downside momentum. The market is not doing anything to make the folks on the sidelines worry that they are missing out on the big turn.

The bigger fear is the possibility of being caught by bad news out of Europe. I'll bet we will see a gap on Monday, in one direction or the other, due to some development in the Greek sovereign debt crisis this weekend. The market is obviously more worried about bad news than good, and I'm inclined to respect the wisdom of the market beast when it is this contrary.

Friday, June 17, 2011


League leader Apple's shares broke their 200-day moving average today.

Business Insider reports a rumor that Steve Ballmer might resign at Microsoft.

The stars are now officially aligned, with Nassim Nicholas Taleb calling for a 40% drop in the S&P 500.

"Every single human being should bet Treasury bonds will decline. It's a 'no-brainer' to sell short the debt."

-- Nassim Nicholas Taleb (February 2010)

Um, Taleb made a more dire call on equities at almost the exact bottom of the bull move in equities on August 11, 2010.

Buy, Mortimer.

ETFC is a buy; it's a great value, a potential takeover target.

Run, don't walk, to read David Kansas's Wall Street Journal column on Berkshire Hathaway.

David makes the point that Berkshire's shares rarely have been so inexpensive at only 1.1x book value. (Its historical average in the last decade is about 1.6x.)

Our government consists of partisan morons whose No. 1 objective is to get reelected, not to formulate legislation that will help us out of our current bind.

Lower retail sales and rising inflation in the U.K. indicates that screwflation is hitting the middle class over there.

More Downside To Come??

It was a very messy day but the market managed to close fairly well, which helped boost sentiment a bit. The afternoon selloff started early and that left enough time for a pretty decent bounce going into the close. Quite a few stocks, like AAPL, were hitting new lows before bouncing back sharply late in the day.

The bulls were a little overexcited this morning when the market bounced back quickly and then went green after weak Philly Fed news, but uncertainty in Greece stalled the momentum. In addition, the big-cap technology names showed pronounced relative weakness. Names like NFLX, AMZN and PCLN were under much greater pressure than the overall market. There was some talk that maybe a big technology fund was liquidating, but I have seen no confirmation of that rumor.

The market did come back late in the day, which was positive, but given how hard the market has been hit lately, it wasn't much of a bounce. Technically, the risk for further downside remains quite high. With the situation in Europe still a mess, it isn't hard to imagine a negative catalyst.

Back To 2008?

So, after all of that wrangling, after all of that "too big too fail" jibber-jabber we are already 2+ years later talking about another Lehman moment? Does anyone see the irony?

From the beginning of the so-called reforms put through Washington in order to stem the collapse of major institutions, you knew they never once addressed the most important way to bring down the institutions: credit default swaps, the taking out of insurance on a company or a country where you win money if it fails. Some of that win might be because you have an insurable interest -- i.e., you own the bonds -- and some of it might be because you just wanted to make a directional bet against an instrument.

Throughout the hearings on Dodd-Frank and throughout the discussions about what made institutions fail, we never addressed head-on the idea that some could be rooting for institutions to fail or bonds to fail so they could cash in. Think about all of those hearings castigating GS in the Senate. What were they really about? Most people probably don't even know but a lot if it was about setting up a security that could fail so that it could be bet against by a very important client.

The big money then, and it looks like the big money now, is being made betting against something. In 2007-2008 it was first betting against mortgage securities that were wildly overvalued if not worthless. Then it was about betting against the institutions that brought the stuff public or insured it through credit default swaps, instruments that let you cash in on the downfall of something.

Now the downfall isn't mortgage bonds or the bonds of Lehman Brothers but the bonds of countries. Same difference though. Greece might as well be a big mortgage bond. Those who offered you a way to bet against Greece, through credit default swaps, are now about to be forced to pay out on that wager. I am using the word "wager" because while some of the insurers might own Greek paper, a lot of insurance is owned by hedge funds who need Greece to fail to have good quarters. It was never outlawed. It was never made transparent. Yet, in retrospect, the hidden insurance was the proximate cause of the disaster that crushed Lehman and brought down so much more in its wake.

The only real difference this time isn't that we have legislation or that we have transparency. We don't. We just have guesses who wrote insurance. And guesses about who took it out. And guesses about if anyone has the collateral against the policies. No, the difference is, alas, at least AIG isn't involved! They wrote insurance on everything and everyone which is why that bailout was so painful!!

Everything else is pretty much the same. We didn't do anything to stop the process of insuring financial instruments for both defense and offense. And we didn't make banks put up enough capital for, heaven forbid, a real default that they were insuring against.

That's why, as absurd as it seems, if we get an actual "trigger" event, meaning an event that makes the insurers -- whoever the heck they are -- pay out on Greek bonds, a Lehman financial tragedy might and can occur. It will hurt a lot of the world's economies, just like last time, but the real danger is to the European banks and insurers that might have written the policies or might have taken them out and are afraid of not being paid -- think Goldman Sachs versus AIG, which The New York Times has chronicled a gazillion times.

So, where does it put things? We know two things: You simply can't own any European financial institutions because they are even worse than ours, and you shouldn't own any of our big banks because we have no idea whether they need insurance or wrote insurance.

European banks are shorts; pretty much all of the majors. I just wish I owned credit default swaps on them all. That's the trade. And believe me, plenty of people are making it.....

Wednesday, June 15, 2011


P is nothing more than another trading sardine. The company sold 14.7 million shares in its IPO, and 41 million shares have already traded today.

Even if one cannot stand YHOO, it's a hard-to-resist value right now. Under 15 it's a good buy...

Today's June Empire State Manufacturing Index came in at -7.8 vs. expectations of 12 (which was the same print as May).

This indicates a contraction in manufacturing.

This is the first negative reading in seven months and compares disappointingly with the long-term average of 10.0. And it compares adversely to the average read of 12.0 in 2011.

Retail observations of Bill King of The King Report, who made the following observations this morning:

* The prior month (April) retail sales revised down from +0.5% to +0.3%.
* Retail sales, ex-auto, exhibited the smallest gain since July.
* And gasoline station sales increased 0.3%; ex-gasoline May retail sales declined 0.3%.

Stated simply, this, when combined with dropping home and equity prices and the limited growth in compensation, is screwflation of the middle class.

Sam Zell is buying an office building in Chicago, which is a good sign for the non-residential real estate market.

"We've chosen this point to re-enter the market because we think the fundamentals are getting better."

-- Sam Zell, Wall Street Journal interview this morning

The Market Has No Memory From Day To Day....

It was a particularly ugly day for the market, but what made it much worse was that Tuesday's oversold bounce had given the bulls a little hope. Even though the bounce was nothing special, there were plenty of folks who were ready to believe that the worst was over.

Unfortunately, the gap-down open this morning and the poor Empire State Manufacturing Survey caught them by surprise. The steady flow of negative news about Greece kept the pressure on all day. Once it became clear that the bulls weren't able to come back from the weak open, they hit the exits hard and it was just plain ugly all day.

Ultimately, this sort of purge will be healthy, but it could easy continue depending on the news flow out of Europe. Some good news might give us a gap up in the morning, but it is just a coin flip at this point.

After action like this we always end up with a fair number of traders calling a market low. They usually don't have any solid reason for believing we have hit a low -- they just don't feel it's reasonable that the market can continue to act this way much longer. It offends their sense of how far a correction should go and, therefore, they start predicting that the market won't go much lower.

The problem with the approach is that the market doesn't care what anyone thinks is reasonable or appropriate.

I Will Take This Glorious Headlight To Go!


The U.S. economy needs a definitive and focused jobs program and a Marshall Plan for housing.

On housing, I suggest that the Obama administration should reach out and make telephone calls to the most knowledgeable and smartest guys in the residential real estate markets such as Eli Broad and Bob Toll. I would have them meet in a locked room with Ben Bernanke and Treasury Secretary Geithner and iron out that Marshall Plan for housing.

Jobs? I think that some quick policy moves that would help would be the extension of the Obama administration's payroll tax cut coupled with an offer to allow tax-free repatriation of foreign corporate profits if those monies were earmarked for hiring.

Today Was The Expected Bounce

A decent oversold bounce finally kicked in today, but volume was very light and there was another selloff in the final hour of trading. That shows a lack of conviction on the part of the bulls and has to have you thinking about how quickly this bounce could fizzle.

The point gains were quite good and breadth was solid with about four gainers for each loser. Overall, it was a run-of-the-mill bounce but I don't want to be too quick to look for it to fail. I'm going to give the bulls a little more room to prove themselves, but I see no reason to believe that our downtrend has come to an end.

This is exactly the sort of weak bounce you'd expect to see in the middle of a downtrend. It's strong enough to suck in some of the folks who tend to always be bullish, and it attracts some traders, who are looking to knock out some quick gains. But, overall, there are no signs of a major change in market character.

We'll see if the bulls can build on this. I wouldn't be surprised to see some more upside in the near term but I'm not expecting much.

Tuesday, June 14, 2011


MSFT seems to be firming up.....

Today's merger between Allied World and Transatlantic Holdings should put a bid under XL Group.

I have recently expressed optimism with regard toward the insurance business (in general) and toward reinsurance (in particular).

Today's merger between AWH and TRH should put a bid under XL.


The market was totally dead today. The indices did little, breadth was negative and there just wasn't anything of interest happening. We opened slightly positive, drifted lower all morning, popped higher on some chatter about new jobs initiatives and then closed weak.

There was no energy in either direction, which is particularly troubling for the bulls since we are oversold enough and down a sufficient number of days in a row that we should have a little better bounce. But even the very short-term traders can't seem to pull it together long enough to create a little action.

Hopefully, something will shake us out of this lethargy soon. There is no edge out there, and we can't change that fact.

Friday, June 10, 2011


Buy the insurers - XL, BRK.B, MET, PRU, LNC....

There were vague reports circulating around the end of the day that the capital charge on big banks will only be 2.0% - 2.5%.

There are huge reservoirs of reserves that will find their way back into equities when confidence begins to return.

They are always attracted to higher prices!

Fear is clearly rising, as reflected in the pounding of spread products (especially mortgage) -- and, of course, in the shellacking of world equity markets.

Libor is now trading below the fed funds target. The last time three-month Libor traded below fed funds was in first quarter 2008, a difficult period for risk assets. This could signal that banks are now hoarding cash.

The mounting pressure on the middle class is manifesting itself in many quarters.

Yesterday CBS News highlighted the record amount of borrowings from individuals' 401(k) plans as evidence of the financial and economic pressure on the Average Joe.

A Brutal Week

We were drifting and hitting new lows in the early afternoon when some surprise bank news temporarily spiked the market, but the bulls needed a closer and they had no one in the bullpen. The market rolled back over in the final hour of trading and concluded a poor day with a whimper.

Overall, it was a brutal week. The market sold off hard on Monday, struggled and failed to bounce on Tuesday and Wednesday, managed a poor bounce on Thursday and then resumed the downtrend and made a new low for the week today.

What was most notable about the action was how little underlying support there was. The dip-buyers, who couldn't get enough of this market for so long, completely disappeared. The usual chorus of bulls who proclaim all weakness is "a buying opportunity" was surprisingly quiet as well.

The catalyst for this weakness is painfully obvious. There are now major concerns that our already slow economic growth is slowing further and the jobs and real estate markets remain under substantial pressure. With QE2 coming to an end in the next couple weeks there is fear that we will no longer have the Fed to prop the market up endless with cheap funds.

So we have ugly fundamental news and poor pricing action. The end result is a down-trending market with no bounce to it. The market will be oversold enough for some sort of bounce but we better not lose sight of the bigger picture, which demands caution at this time.

I Love The Selection In This Glorious Peoples' Store!

Thursday, June 9, 2011


It is time for the Oracle of Omaha, Warren Buffett, to put his money where his words are and to announce a buyback of Berkshire Hathaway (BRK.A/BRK.B) shares.

It would be an exclamation point to his bullishness.

Insurance stocks represent one of the most attractive areas in which to invest.

Across almost every sector of the market, the insurance stocks represent one of the most attractive areas in which to invest.

The group has rarely been as inexpensive statistically.

Note: ROI = Book value obtained from Yahoo! Finance/2012 EPS estimate

* Strong profit: On average, insurers should demonstrate EPS growth over 20% in 2011 and 10% in 2012.

* Valuations are cheap: Selling at 6.8x 2012 consensus earnings forecasts and at only 0.74x book value, both of these metrics are well below the historical averages - P/E ratios and discounts to book value are both over one standard deviation below long-term averages. (The industry has traditionally traded at 1.2x book value.)

* Share buybacks: Given the improved capital bases, most companies are buying back stock. And at current valuations, those buybacks are very accretive to EPS. For example, this week Prudential (PRU) announced a large $1.5 billion buyback.)

* Sector underweight: According to Goldman Sachs' analysis of mutual fund weightings, the life insurers are underweighted (by nearly 40%) relative to the S&P 500.

* Insurance industry credit spreads are narrowing.

* Short interest has expanded.

* Rising interest rates: Life insurance stocks typically do poorly when interest rates are declining. I expect a rise in the yield on the 10-year U.S. note.

The largest component of the financial sector in terms of S&P weighting is the banks. While I currently expect a bounce from very depressed levels, it is hard to see a sustainable rise in bank stocks given the absence of loan growth, ongoing regulatory pressures and more stringent capital requirements. By contrast, the insurance sector may take up the slack for investors seeking financial exposure.

Multiple black swans (earthquakes, flooding, tsunamis, etc.) have begun to have a salutary impact on the reinsurance industry's pricing.

Run, don't walk, to read 'The Economy: When Will Happy Days Be Here Again?' on Knowledge@Wharton.

A Relief Bounce; But Not A Good One

At long last, the market finally managed an oversold bounce. The major indices broke their losing streaks, breadth was positive, and there was some green on the screens. Unfortunately, we closed weak and there wasn't enough vigor to the action to cause the bears much concern. It just looked like a minor relief bounce after a real pounding.

The action today was pretty lackluster overall, and you have to be quite optimistic to expect this to develop into another one of those V-shaped moves that we saw so often before the first of May.

The only surprise is that we didn't see this sort of bounce earlier. It is exactly the sort of countertrend move you'd expect to see within a downtrend. In fact, oversold bounces are often more lively, because no one is well positioned for them.

We'll see if the bulls can manage some follow-through tomorrow. It is going to be a hot summer Friday, so the action is likely to be slow, but that may allow the bulls to push us a bit more.

Kim Sharing A Lighthearted Moment At The Glorious Peoples' Factory Of Ugly Shoes....

Wednesday, June 8, 2011


The 10-year U.S. note auction went well (2.967%) -- which is not surprising considering rising economic concerns and sovereign debt issues.

The bid to cover was better than the last several auctions and the percentage of indirect bidders (strong holders) was basically in line with the averages over the previous auctions.

Gartner has reduced its PC growth numbers for this year, now looking for an increase of 9.3%, to 385 million units. The firm's prior forecast was for 10.5% growth.

The housing market is drowning in debt and that while residential real estate markets are now a small percentage of GDP, the weight of the markets will continue to be a headwind to domestic economic growth.

I still believe this to be the case, as the shock of a 30% drop in home prices will weigh on consumers' balance sheets, confidence and spending patterns.

Regarding Whitney Meredith's expectation that 2011 will bring a 10%-plus drop in home prices, however, the housing market has become bifurcated, so aggregate numbers lose some of their meaning.

This was brought home by the TOL conference call. Home price weakness continues to be in regions exposed to the shadow inventory overhang. But there are emerging areas of strength where that challenge doesn't exist -- for example, the Northeast corridor is experiencing price increases, reduced incentives and near-record-low cancelations.

This distinction must be made, as this signals the beginning of stabilization, not a material leg down in the U.S. housing market.

The near-universal investment optimism of April has now been replaced by growing investment concerns, as weakening economic data call into question growth assumptions.

As share prices move ever lower, we have finally begun to discount the increased possibility of a self-sustaining soft patch as opposed to the consensus forecast of smooth and self-sustaining growth, which vaulted stock prices to two-year highs only seven short weeks ago.

There are offsets to my economic concerns; ignoring the positives would be foolhardy and inflexible (as arguably was the case when the bulls dismissed economic and market risks when the S&P 500 was at 1360).

Too many investors bathe in the water and find comfort in the momentum of rising stock prices, and too many investors are frightened by the value that is created as an outgrowth to market drops.

"In the twentieth century, the United States endured two World Wars and other traumatic and expensive military conflicts, the Depression, a dozen or so recessions and financial panics, oil shocks, a flu epidemic, and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497."

-- Warren Buffett

Here are some of the reasons why I believe that the downside to stocks is limited:

1. The strength in corporate balance sheets and income statements. While I see some vulnerability to corporate profits, my estimates are only a few dollars per share below consensus.

2. Valuations are not stretched, especially relative to inflation and interest rates. At 1250, the S&P 500 will be priced at a reasonable 13.5x my 2011 S&P forecast of $93 a share. (Price is what you pay; value is what you get.)

3. Uneven and more volatile economic and profit growth are my baseline expectations. But an extended (yet lumpy) economic up-cycle still appears the most likely outcome. More effective and productive public policy could extend the recovery further.

4. At 1250, the market will be sufficiently oversold technically, and sentiment will have moved to a more negative extreme. Always remember that a public opinion poll is no substitute for thought.

5. Individual investors are relatively uninvolved and hedge funds are conservatively positioned.

A Bear Market

The market is down six days in a row and can't put together any sort of bounce -- despite being oversold. The dip buyers have totally disappeared and there doesn't seem to be any buying support.

I thought there was a good chance of a washout and reversal this morning, following the negative response to Fed Chairman Ben Bernanke's speech late Tuesday afternoon. The market had already sold off substantially, so conditions looked ripe for a final shakeout before some brave dip buyers finally made a stand. It just didn't play out that way and that is troubling.

There is a real aversion to the market and nothing seems to be enticing buyers, even for a short-term trade. There isn't any way to know with certainty when the low will be reached. And given the steadiness of the selling lately, I'm concerned that we are going to test the March lows.

There's nothing very positive other than the fact that the market continues to be oversold, but that hasn't mattered at all. The bears are obviously in control and even when we do eventually bounce, it is going to be very tough to trust it to last.


The Fed chairman cools expectations, and JPMorgan's Dimon raises some questions.

The bearded one made four major points:

1. The soft patch currently being experienced is mostly a byproduct of an increase in the price of oil, weather and the Japanese nuclear accident and tsunami.

2. Second-half 2011 economic growth will likely rebound to a moderate rate of increase.

3. Commodity price inflation will likely abate.

4. The Fed will maintain its policy of accommodation.

While the above provideed no surprise, the Fed chairman was clearly more negative in his assessment of the economy (citing the fiscal drag and a loss of momentum in job growth). With more market participants now seeing a self-sustaining soft patch rather than a self-sustaining recovery, it should not be surprising that a slightly negative immediate market response occurred.

JPMorgan's Jamie Dimon, in a long soliloquy, essentially voiced concerns that the intervention by the government during and after the crisis had a good outcome but might be now derailing confidence by interfering with the recovery.

Dimon's question will get a lot of press overnight.

April consumer credit growth came in better than expected, rising by $6.25 billion.

For the traders, the market has been so bad and acts so poorly that it can probably be traded on the long side.

Run, don't walk, to read Andrew Ross Sorkin's analysis in the New York Times of the fine print of GS' testimony.

Meredith Whitney doubled down on her negative municipal call/warning that the worst is yet to come in that market.

No Turnaround Tuesday; Bernanke Buzzkill

For the fourth straight day, the market was unable to put together a decent bounce. The market was in positive territory most of the day but closed poorly after Fed Chairman Ben Bernanke's speech this afternoon didn't offer anything new or helpful. The fact that the market acts this poorly after we have already had four days of selling pressure is kind of interesting. This is mini-bear-market-type action, and market players aren't going to bother trying for a bounce if conditions don't improve soon.

What makes this action so challenging is that there is little intensity in either direction. We did have a little pickup in the selling in the last hour today, but we haven't had the sort of panic that really flushes out marginal holders.

There is an old saying that oversold markets can become even more oversold. So far, that is the sort of action we are seeing. At this point, even when we do finally see an oversold bounce, there are going to be a great number of market players looking to exit. We are creating a lot of overhead resistance with action like this, which is going keep bounces contained and short lived.

I Want This One! No! Wait! I Want That One!

Tuesday, June 7, 2011


Rumor has it that the Oracle of Omaha is considering a buyback of Berkshire Hathaway (BRK.A/BRK.B).

I continue to focus on the banks stocks in order to get a sense of market stability.

Will the domestic economy proceed in a smooth trajectory, be self-sustaining and capable of maintaining itself in line with the historic length of previous economic expansions (lasting nearly four years)?

Will S&P 500 profits meet the consensus earnings forecasts of $95 a share for 2011 and $100-plus per share for 2012?

Is the consensus forecast for a year-end S&P target of 1450 still a reasonable expectation?

If the answer to the first three questions is no, does that mean we are entering a bear market?

Inconsistent Domestic Economic Recovery Will Be the Mainstay of 2011-2012

Above all, it remains my view that the optimists may be incorrectly viewing the strong resurgence of corporate profits and benign credit metrics in isolation -- somewhat similar to the mistake that was made in early 2008, when the bullish cabal (despite reams of data, tables and valuation models that seemed to be supportive of higher stock prices) grossly misinterpreted the consequences of the unprecedented housing speculation (and abuse in mortgage lending) as well as the financial damage from the proliferation of derivatives.

The world economies in early 2008 and (to a much lesser degree) in 2011 resemble the frail psyches of Cleopatra and Marc Antony, Kurt Cobain, Marilyn Monroe, Ernest and Margaux Hemingway, Hunter S. Thompson, Vincent van Gogh, Billie Holiday, Diane Arbus and Virginia Woolf. All were talented, most were respected, and many were beautiful. They appeared fine externally, but a depression haunted the very core of their existence. All succumbed to suicide.

History doesn't repeat itself, but it often rhymes.

Papering over problems (quantitative easing) over the last year has certainly raised animal spirits and share prices, but it has done little to resolve several consequential and fundamental issues that have resurfaced.

Excessive debt and the expected fiscal austerity (needed to rebalance the global fiscal imbalances) are not the ingredients to a smooth and vibrant recovery, so the recent soft patch could prove more problematic than many recognize.

In the current cycle, the optimists might be understating the influence of some challenging nontraditional headwinds that are beginning to assert themselves. Structural unemployment; an unprecedented 30%-plus drop in home prices (and a housing market still challenged by an expanding shadow inventory of unsold homes); fiscal imbalances at the local, state and federal levels (which will, as night follows day, bring with it austerity and rising tax rates); and the tail risk of the last cycle (manifested in the latest contagion of the sovereign debt crisis) are but some of the reasons this economic recovery is different this time.

The consequences and eventual impact of screwflation of the middle class and the associated behavioral changes of the average Joe could become an albatross weighing on economic growth and profits. These changes are already seen in the middle class's increased propensity to rent rather than buy a home and its vote of no-confidence in the system (whether it is in spending or investing), which, in the fullness of time, will victimize the very corporations that have achieved unsustainable and record high profit margins by cutting fixed costs to the bone and by making temporary workers a permanent part of the workplace.

The downside is limited, in part due to the amount of liquidity in the system (and expected to be going forward), the strong financial and operating position of our country's largest companies, a still-cautious and underinvested individual investor and the fact that many of my longstanding structural concerns are in the process of quickly being accepted and recognized.

The upside is also limited owing to the likely markdown and volatility of profit and economic expectations, the vulnerability to P/E multiples, continued tail risk and the possibility of policy mistakes (both here and abroad).
Sometimes it is easy to forget what really poor market action feels like, but we were reminded in rather rude fashion today.

After a breakdown and a couple of poor bounce attempts last week, it looked like we might finally be stretched enough to the downside to attract some dip buyers. We even opened weak, so there wasn't any temptation for the bears to fade a gap-up open.

The buyers did manage a brief bounce attempt before lunch, but were never able to work us back up to the opening highs. After that it was downhill the rest of the day. Bids just disappeared and we dripped steadily lower and closed near the lows of the day. There simply wasn't any interest in trying to catch a low.

What makes this action particularly challenging is that the selling isn't intense enough to scare out weak holders and set up a sharp rebound. Instead we have sellers giving up out of disinterest and disgust. It is slow and steady selling and doesn't produce good washouts.

Prepare a buy list; although there is lots of hyperbole about how terrible this market is acting there is nothing all that unusual about it. It is just part of the cycle. The only surprise is that it didn't happen earlier.

Japanese Authorities Find Plutonium One Mile Away From Fukushima, Doubles Radiation Leak Estimate

In a double whammy of bad news from the mainstream media blackouted Fukushima (or perhaps the general population just doesn't care any more) today we learn that not only did The Nuclear and Industrial Safety Agency (NISA) double its estimate of the radiation leak in the early days of the Fukushima catastrophe, something I had suspected would happen eventually courtesy of the secretive Japanese government, but that Plutonium from Fukushima has now been found in the town of Okuma, over 1 mile away from the stricken Nuclear Power Plant.

On the fallout estimate doubling:

The Nuclear and Industrial Safety Agency says it believes the earthquake-stricken Fukushima plant emitted nearly 800,000 terabecquerels of radioactive material into the air in the days after it was hit by a massive tsunami.

That is more than double the original estimate and is based on new information suggesting the No.1 and No.2 reactors suffered meltdowns much earlier than thought.

The revision reveals the failure to contain the disaster resulted in much more radioactive contamination of the soil, sea and air than the plant's operators had acknowledged.

And far more importantly, on the plutonium and its 87 year half life:

Plutonium that is believed to have come from the crippled Fukushima No. 1 power plant has been detected in the town of Okuma about 1.7 km away from the plant's front gate, a Kanazawa University researcher said Sunday.

It is the first time plutonium ejected by the stricken facility has been found in soil beyond its premises since the March 11 megaquake and tsunami led to a core meltdown there.

Of course there had to be a silver lining of lies with the latest mushroom cloud:

Professor Masayoshi Yamamoto of Kanazawa University said the level of plutonium detected in soil in Okuma, Fukushima Prefecture, is lower than the average level observed in Japan after nuclear tests were conducted abroad.

This was the last resort after earlier attempts to lie about the source of the material failed:

The Education, Culture, Sports, Science and Technology Ministry has found plutonium in soil on the nuke plant's grounds, but it was believed to have been fallout from bomb tests abroad.

By analyzing the ratio of three types of isotopes in the plutonium, Yamamoto was able to determine that it was emitted by Fukushima No. 1 and not past bomb tests.

The soil samples were collected by a team of researchers from Hokkaido University before April 22.

Somehow I think by the time this is all over, mutated rabbits will be the least of the worries of the demoralized Japanese population, which already is experiencing a demographic crunch....

Saturday, June 4, 2011


I think the key to a sustained stock market advance will have to come from AAPL.

One of my favorite rap songs is "911 Is A Joke;" the SEC is also a joke. A bad joke.

The SEC may rebuke Lehman executives for their role in the firm's demise but will not sue them. Unbelievable. They get a slap on the tush for nearly putting the world into global depression. You mean to tell me that everything that took place at Lehman was on the up and up?

The SEC is a joke. It missed the boat with Bernie Madoff. It cannot coordinate with the CFTC, which is also a joke. It will try to beat up on GS because that is Washington's favorite punching bag.

This is really an outrage. Will Stan O'Neal get a free trip to the Caribbean for his role in destroying Merrill Lynch? How about Franklin Raines? Will he get the Congressional Medal of Honor for his role as Chairman of Fannie Mae? At least Angelo Mozilo was charged by the SEC and wound up settling for cash.

Just as I question the economists' ability to forecast, I also question the government's ability to accurately aggregate and analyze labor information for a one-month period of time.

At the end of the day, the best economic metric is corporate earnings. I am expecting those to remain strong.

In the coming days, maybe even over the weekend, I expect the White House to flinch and agree to substantive expenditure cutbacks in order to expand the debt ceiling. The White House is the biggest loser today.

Double-dip recession? QE3? Weak dollar? Stagflation?

The Labor report was weaker than expected. While the report was weak, another problem is also in expectations.

Definitely A Downtrend; Garden-Variety Yes, But Still Somewhat Painful...

For the second day in a row the market could not manage to put together a decent bounce, despite a high level of negativity and some oversold technical conditions. Yes the employment report was quite poor, but the ADP report earlier in the week indicated this was coming and expectations were already quite low.

It was particularly interesting today that a weaker dollar, talk about a Greek bailout and even hints that QE2 may not be wrapped up right away all failed to entice buyers. We had a little dip-buying action on the gap down open, but we lost that weak momentum pretty quickly.

When the bounce action is as weak as it has been these last couple days, the only thing we can conclude is that the character of the market has shifted and that market players are more concerned about finding exits than they are about finding bargains. That is what a downtrend is all about and we definitely are in one right now.

Protect your capital....

The US Has To Create 250K Jobs A Month For 66 Months To Return To December 2007 Unemployment By End Of Obama's Second Term....

Following the most recent NFP disappointment, the simple math indicates that for the US to return to its December 2007 level of unemployment, when factoring in the natural growth of the labor force of 90k people a month, the economy will need to add 250k jobs a month for the next 66 months; or until the end of Obama's now very implausible second term. (Or is it implausible? I can't decide if it is or not - I mean, who's going to run against him? Will the GOP produce anybody who can actually win an election?)

Friday, June 3, 2011

Looks Like John Paulson Lost About Half A Billion Dollars In About 24 Hours...

Hedge fund titan John Paulson's worst nightmare is on the verge of coming true. As reported yesterday, JP is a holder of 34.7 million shares of Sino-Forest, which was halted yesterday after Muddy Waters came out with a report exposing the company as a fraud. A good example of Wall Street groupthink, as names as varied as JP, CapRe, Bessemer, Blackrock, John Hancock, Hartford, and many more learned they all may have been fooled by the biggest ponzi fraud since Madoff. And while the funds may pretend things are good courtesy of the continued freeze of TRE.TO on the Toronto Stock exchange, where it still has to issue an announcement despite promises it would do so before market open, its sister stock, SNOFF.PK continues to trade domestically. And it's a bloodbath. After opening at $18 yesterday, the stock just touched $2.45, generating a loss of over $500 million for John Paulson, who in addition is rumored to be very heavily long the company's bonds. It will be ironic if one Chinese fraud ends up being the black swan that confirms that there is no such thing as a consistently good hedge fund, and it is all merely a function of one right trade, at the right time, executed with infinite amounts of leverage (thank you CDS).

Update: Here is the company's response which was just filed. The gist of it is - the company does not admit it is a fraud, and says not to believe MW because they are short.

TORONTO, June 3, 2011 /PRNewswire/ - Sino-Forest Corporation (TSX: TRE) ("Sino-Forest" or the "Company"), a leading commercial forest plantation operator in China, today commented on the share price decline on June 2, 2011 as a result of the allegations made in a 'report' issued on a website by a short seller operating under the name Muddy Waters, LLC. The Company was not contacted by Muddy Waters for comment ahead of publication of its report.

The Board of Directors and management of Sino-Forest wish to state clearly that there is no material change in its business or inaccuracy contained in its corporate reports and filings that needs to be brought to the attention of the market. Further we recommend shareholders take extreme caution in responding to the Muddy Waters report.

As indicated in the report, Muddy Waters has a short position in the Company's shares and therefore stands to realize significant gains from a share price decline that it precipitated. Muddy Waters expressly admits that it makes no representation as to the accuracy, timeliness, or completeness of any information contained in its report. Further, its website discloses no address or ownership information, nor the credentials of any of the authors of the 'report'. Neither the Ontario Securities Commission nor the Securities Exchange Commission website lists Muddy Waters or its author as being registered as an advisor. Nevertheless, due to the substantial impact that the report has had on the prices of the Company's securities and the reputation of the Company, the Board has appointed an independent committee consisting of three of the Company's independent directors, William Ardell (Chair), James Bowland and James Hyde. All three of these directors are financially qualified professionals and two of the three are recent appointees to the Board. The independent committee's mandate is to thoroughly examine and review the allegations contained in Muddy Waters' report, and report back to the Board. The independent committee has appointed Osler Hoskin & Harcourt LLP as independent legal counsel and will retain the services of an independent accounting firm and such other independent advisors as it deems necessary to assist with its examination. During the course of the independent committee's examination, the Company will provide any updates as appropriate. Following conclusion of the report, the key findings of the independent committee will be released to shareholders.

Allen Chan, Chairman and CEO of Sino-Forest commented: "We are committed to a high level of corporate governance and stand by the integrity of our company, our 16-year operational track record and our financial statements. Our company has continuously retained the services of internationally recognized law firms, auditors and expert consultants from Canada, the US, Hong Kong and mainland China."

"It is important that our independent committee thoroughly address Muddy Waters' allegations, and they will have my full support and those of the management team in doing so. However, let me say clearly that the allegations contained in this report are inaccurate and unfounded. Muddy Waters'
shock-jock approach is transparently self-interested and we look forward to providing our investors and other stakeholders with additional information to rebut these allegations."

David Horsley, Senior Vice President and CFO of Sino-Forest commented: "I am confident that the independent committee's examination will find these allegations to be demonstrably wrong, as for example:

(a) Muddy Waters fundamentally misunderstands and misrepresents the most basic items in our published Management's Discussion & Analysis with respect to revenue generated from Yunnan Province, which we report as being approximately 45.5% of the Company's standing timber revenue of approximately US$508 million. Muddy Waters alleges that it is impossible that such revenue existed because achieving such levels would greatly exceed allowable cutting quotas and it would be impossible to truck close to that volume in the period.

However, that revenue was very clearly disclosed in our MD&A filed for Q1 and Q2 of 2010 as revenue resulting from the sale of the standing timber - there is no cutting or transport involved, as the trees were sold but not harvested and therefore are not considered part of the quota for the region until the harvesting is conducted by the buyers.

(b) Muddy Waters alleges that the Company overstated the assets in Yunnan Province, based on its erroneous and narrow assumption that our only purchases in Yunnan Province consisted of purchases of 20,574 ha of plantations in Gengma county in Yunnan. However, this allegation ignores the fact that in addition to the purchased plantations in Gengma county, (as disclosed in our 2010 annual MD&A of a total of approximately 193,000 ha purchased in Yunnan Province) we have purchased approximately 173,000 ha of plantations in approximately 25 other counties in Yunnan Province as of December 31, 2010."

As at December 31, 2010, the Company had approximately US$1.26 billion in cash, cash equivalents and short term deposits as reported in the audited consolidated balance sheet. As at March 31, 2011, the comparable amount was approximately US$1.09 billion. The Company continues to hold such cash, with the majority of it in banks in Hong Kong and offshore.

As previously announced, the Company intends to file its Q1 2011 results on June 14, 2011.

They All Seem Quite Pleased With North Korean Manufacturing Technology....

Thursday, June 2, 2011


Moody's may cut its rating on U.S. government debt if no progress is made on addressing the debt ceiling.

Price is what you pay; value is what you get.

Earnings momentum will improve as pricing firms up for the insurance sector. The liquidation of banks will cause a natural rotation into insurance as insitutional investors need financial exposure.

GS has been subpoenaed. Big deal - it will amount to absolutely nothing.

The most conspicuous items regarding Wednesday's market action:

* The profound weakness in financials coupled with the developing double dip in housing. The bulls cite that residential real estate has declined to a very small part of GDP, but I argue that a double dip in housing activity and home prices will have a multiplier effect by weighing on consumer confidence, retail spending and investing. Importantly, a weakening housing market would impair profits in the banking industry and in others.

* The obliteration of a week of gains in only three hours of trading is stunning.

Whither QE3?

Until Wednesday, weak economic numbers have been greeted by the notion that more liquidity will be poured into the system -- that a third round off quantitative easing would further inflate animal spirits.

Look Past The Jobs Report

The good news is that the market finished the day off of this morning's lows. The bad news is that it didn't close with any vigor and took a very anemic bounce in view of Wednesday's selloff. The indices were oversold enough for some sort of reflex bounce today, but the bulls just couldn't manage it. There isn't much confidence, and there's no rush to dive in.

I suspect there was some nervousness about loading up ahead of the jobs report Friday morning. If we get a bad number and gap down, I'll be looking for the dip buyers to give it a go, but I wouldn't be very trusting of a gap up on a mediocre number.

We have quite a few stocks that are being washed out, and that can be favorable for some selective stock picking, but we are hypersensitive to news headlines about Greece and domestic economic reports, and that prevents aggressiveness.

Reuters Reporting A New Greek 3 Year "Adjustment Plan" Has Been Agreed On, Can Kicked Down The Road Another 3 Years.....

According to a source, the program will involve new international funding to mid-2014, apportionment yet to be agreed. According to a source senior Eurozone officials agree in principle on new 3-year adjustment plan for Greece. The private sector will participate in new Greek rescue plan, details still being worked out...

Private sector involvement will be limited to avoid a credit event....

Congratulations Europe: you just screwed your taxpayers, but at least bought your insolvent banks 3 more years of bizarro world existence.

From Reuters:

Senior euro zone officials have agreed in principle on a new three-year adjustment program for Greece to run until mid-2014 and involve increased external funding, a source close to the negotiations said on Thursday.

The Economic and Financial Committee (EFC) of deputy ministers and senior officials of the 17-nation currency zone approved the Greek program in principle in talks in Vienna that ended after midnight, the source said.

The second program for Greece, which will effectively supersede the 110 billion euro ($160 billion) bailout agreed in May 2010, will involve some participation of private sector investors but limited to avoid triggering a credit event, the source said.

Details of that involvement, and the apportionment of the additional official international funding, remain to be worked out in time for a June 20 meeting of euro zone finance ministers, the source said.

He declined to comment on figures but said the program would cover Greece's funding needs on the assumption that it could not return to private capital markets in 2011 or 2012. The original bailout envisaged Athens raising 27 billion euros on the markets next year and 38 billion in 2012.