Saturday, July 30, 2011


Bargains have begun to emerge.

Thinking optimistically, it is quite possible, with the pressures by conservative Republicans being placed on their own party and on the opposing party, that more meaningful budget cuts might be enacted than if the Democrats more directly controlled the decision-making process.

Even though forced by a vocal Republican minority, addressing the long-term fiscal imbalances should be considered a longer-term market positive.

What Idiocy Will The Weekend Bring?

This was a week when all the normal stock market stuff that we usually consider didn't make a difference.

What we needed was a degree in abnormal psychology to figure out what's going on politically. We were held hostage to the endless, and tedious, debt debate all week.

Early in the week, market players were relatively complacent about a debt-ceiling deal. They figured politicians would do their usual wrangling and then finally get it done. But as the week progressed, market players began to think, "These idiots may actually be capable of creating a debt downgrade or even a default!" And to quote the fellows from Public Enemy: "It all adds up to a fucking situation." Sorry for the language. I'm sick of all this shit.

With huge uncertainty hanging over us, many market players stood aside and let the market fall. We had a few brief periods of optimism, but closed weak every day this week as folks didn't want the risk of waking up to more bad news.

We are very likely to see a gap at the open on Monday. The big question is in what direction. If we have the rough outline of a deal this weekend, we'll see buyers step up. But if we don't have some clarity, it is going to be panic again.

Unfortunately, it isn't just the political debate that is cause for concern. The economic reports, particularly the GDP numbers this morning, have not been strong lately, and earnings season has been a mixed bag, with a few big names doing well but quite a few disappointments, particularly in the technology group. And then throw in slow summer trading and negative seasonality.

Friday, July 29, 2011


I read about a segment on CNBC, where a Republican and a Democratic congressman discussed their views on the debt ceiling and budget negotiations and on the vote (that was later cancelled).

It was embarrassing as they glibly giggled their way through the commentator's questions.

I guess they think this is a joke.

I fully expect a watered-down debt ceiling and budget compromise by Sunday.

Maybe earlier.

Tomorrow Might Be Ugly - A Buyer's Strike Due To Headline Risk?

We started off slowly, but some midday optimism over a potential debt-ceiling deal kicked in, and that attracted some buying interest. Unfortunately, the trust in our politicians apparently isn't all that high, and worries over the ability to make a deal cropped up again. We sold off all afternoon and closed near the lows of the day. After the pounding we suffered on Wednesday, that isn't exactly the sort of bounce action that we like to see.

The bottom line is that the market continues to be held hostage by the headline news. It is just too risky to load up in hopes that the politicians are going to suddenly find a way to compromise and reach an agreement. In fact, the risk is growing that we'll have some sort of debt downgrade, and even it such an event is anticipated to some degree, it would generate a very nasty reaction from the market, since it would create a huge amount of problems and uncertainty.

I don't expect to see a debt-ceiling deal until the very last minute. We will probably have some progress made this weekend, and then we'll finally see something passed next week, but we have to keep in mind that we are counting on our "leaders" in Washington, and that shouldn't make anyone feel very confident.


Over the past 10 years:

• The U.S. economy’s output of goods and services has expanded 19%.

• Nonfinancial corporate profits have risen 85%.

• The labor force has grown by 10.1 million.

• But the number of private-sector jobs has fallen by nearly two million.

• And the percentage of American adults at work has dropped to 58.2%, a low not seen since 1983.

As United Technologies Corp. Chief Financial Officer Greg Hayes put it recently: “Sales have come back, but people have not.”

You might hear the argument that if demand were higher, employment would be higher too. That’s true, but consider a comparable claim. Let’s say you were a 6’2″ basketball player with a so-so outside shot. If you were seven feet tall, that problem wouldn’t matter so much because you could just dunk the ball. In the meantime you could say “It’s not my shot that’s the problem, it’s my height. If I were taller, they would all go in.”

At the end of the day, this player still has a problem with his shot, no matter how true his counterfactual. In the macroeconomics of 2011, it is important that we understand our problems as existing along multiple margins.

Can The Fed Fund The Treasury With Emergency Capital?

The Fed is not powerless to assist the Treasury in a modestly long-term term fix of the debt ceiling fiasco. In fact, as Stone McCarthy's Raymond Stone observes: "The Fed does not want to be a player in this debt ceiling/potential default debate. It didn't want to be a player in the Bear Stearns debacle, or the Lehman situation. But when push comes to shove the Fed will do what it can to avoid a default." In summary there are three avenues that the Fed can pursue in order to help Tim Geithner prolong the cash illusion modestly longer. The three options for Bernanke are to i) book profits; ii) prepay expenses and, yes, iii) sell gold. Combined, these three approaches could squeeze out well over half a trillion dollars, giving the Treasury breathing room not only past August 2, but potentially into 2012. That said, "The Fed would not want to advertise to Congress the possibility of delaying default. It does not want to take Congress off the hook on increasing the debt ceiling." But it will, if it has to, and the end result will be a delay potentially of up to a month. And if it means selling off the Fed's gold, so be it.....

Thursday, July 28, 2011


Though one should never buy stocks solely on the chance of a takeover, here are some stocks that could be takeover candidates -- and whose share prices have been schmeissed in recent days: VHC, CLX, CL, LNC, XL and STI.

Miller Tabak's Peter Boockvar has some takeaways on the Fed's Beige Book:

"Economic activity continued to grow; however, the pace has moderated in many Districts. Consumer spending increased overall, with modest growth of non-auto retail sales in a majority of Districts. Activity among nonfinancial service sectors improved overall in most Districts. Manufacturing activity expanded overall, but capital spending plans were somewhat cautious. Most residential real estate activity was little changed and remained weak, although construction and activity in the residential rental market continued to improve. Price pressures moderated somewhat in many Districts, although some firms indicated that they were able to pass on some cost increases to their customers. Reports of loan demand were more mixed. Labor market conditions remained soft in most Districts. Wage pressures remained subdued."

The five-year U.S. note auction was weak, with yield higher and bid-to-cover lower.

Watch For Rumors Tomorrow To Trip Up Overconfident Bears

On Tuesday, market players were feeling fairly confident when the market didn't sell off following President Obama's speech predicting disaster if a debt ceiling deal wasn't reached. Although the market closed a bit weak, many were optimistic since the market seemed to be so unworried.

Of course, the fact that quite a few folks were feeling complacent set the action up for some panic today when folks suddenly realized that maybe a debt deal really isn't a sure thing. What made it even worse is that there has apparently been no progress at all in finding a solution and there is unlikely to be until the very last minute.

I believe it is very unlikely that we will see a deal before the weekend. But I'm looking for some rumors -- probably tomorrow -- to trip up the bears who might be a bit overconfident now.

The action today was truly ugly and that may cause some overhang as folks sell out of disgust and dismay. The point loss was big, breadth terrible and volume heavier. The market took out support at the 50-day moving average and moved solidly into red for the quarter.

What makes this so tricky is that the market has the potential for a spike back up at any moment on positive news. It isn't going to take much to bring in the buyers, and they will be anxious to reload if we ever get this thing behind us.

Many folks really are fearful now that a deal won't be done and that we'll suffer a real calamity next week when there is a debt default and downgrade. I still believe that is highly unlikely, but the risk exists and the uncertainty is going to keep some folks on the sidelines.


Jeff Clark of Casey Research has created a wonderful historical "art" album which addresses the number one question which most people living in the US right now are unable to fathom: how can one's currency go from X to 0? It is impossible, right? Can't happen to the dollar, right? Well, as Jeff says: "History has a message for us: No fiat currency has lasted forever. Eventually, they all fail. You might suspect this happened only to third world countries. You’d be wrong. There was no discrimination as to the size or perceived stability of a nation’s economy; if the leaders abused their currency, the country paid the price." One other thing: no country in the history of the world has imploded from hyperdeflation. Not one. At the point where the debt load was insurmountable and not enough cash flow was being generated to sustain it, the authorities would always find a way to step in and be the terminal source of dilutive fiat demand: from ancient Rome, to Weimar, to the collapse of the Soviet Bloc, to, inevitably, the unwind of the failed (neo) Keynesian model, where we are right about now. Sure, we can all come up with goalseeked theories that validate our perspective but they are all meaningless at the end. Past a given threshold debt money ceases to function as backed by the full "faith and credit" of the backstopper and is nothing but paper. Even the abstract concept of so-called "reserve" currencies. I won't show the pics, but I'll describe them - Clark: "As you scroll through the currencies below, you’ll see some long-ago casualties. What’s shocking, though, is how many have occurred in our lifetime. You might count how many currencies have failed since you’ve been born." There are many more where these came from. Thousands in fact. Hey, some are worth something - to collectors.

1993 Yugoslavia – 10 billion dinar

Zaire – 5 million zaires, 1992

Venezuela – 10,000 bolívares, 2002

Ukraine – 10,000 karbovantsiv, 1995

Turkey – 5 million lira, 1997

Russia – 10,000 rubles, 1992

Romania – 50,000 lei, 2001

Central Bank of China – 10,000 CGU, 1947

Peru – 100,000 intis, 1989

Nicaragua – 10 million córdobas, 1990

Hungary – 10 million pengo, 1945

Greece – 25,000 drachmas, 1943

Germany – 1 billion mark, 1923

Georgia – 1 million laris, 1994

France – 5 livres, 1793

Chile – 10,000 pesos, 1975

Brazil – 500 cruzeiros reais, 1993

Bosnia – 100 million dinar, 1993

Bolivia – 5 million pesos bolivianos, 1985

Belarus – 100,000 rubles, 1996

Angola – 500,000 kwanzas reajustados, 1995

Zimbabwe – 100 trillion dollars, 2006

Clark concludes:

So, will a similar fate befall the U.S. dollar? The common denominator that led to the downfall of each currency above was the two big Ds: Debts and Deficits.

With that in mind, consider the following:

Morgan Stanley reported in 2009 that there’s “no historical precedent” for an economy that exceeds a 250% debt-to-GDP ratio without experiencing some sort of financial crisis or high inflation. Our total debt now exceeds GDP by roughly 400%.

Investment legend Marc Faber reports that once a country’s payments on debt exceed 30% of tax revenue, the currency is “done for.” On our current path, analyst Michael Murphy projects we’ll hit that figure by October.

Peter Bernholz, the leading expert on hyperinflation, states unequivocally that “hyperinflation is caused by government budget deficits.” This year’s U.S. budget deficit will end up being $1.5 trillion, an amount never before seen in history.

Since the Federal Reserve’s creation in 1913, the dollar has lost 95% of its purchasing power. Our government leaders clearly don’t know how to – or don’t wish to – keep the currency strong.

Whether the dollar goes to zero or merely becomes a second-class currency in the global arena, the possibility of the greenback being added to the above list grows every day. And this will lead to serious and painful consequences in our standard of living. While money is only one of many problems we’ll have to deal with, you can protect your assets with the one currency that can’t be debased, devalued, or destroyed by irresponsible leaders.

Because when it comes to money, worthless is not a fun word.

Tuesday, July 26, 2011


"We are up to our knees in midgets when it comes to policymakers in Washington, D.C." - Michael Steinhardt

My explanation for the recent market's strength in the face of a possible U.S. debt default is twofold. First, there is still some time for a compromise to be made, and a compromise will be based on who blinks in the last hour of negotiations. Moreover, most market participants expect -- and I agree -- that the regulatory agencies will give our officials some slack and won't act prematurely. Second, there has been a lot of derisking into the Greek/eurozone sovereign debt fiasco and especially after the hedge fund community's woeful results in May and June (as an example, it has been reported that the Soros funds are 75% in cash). There has also been some summer exhaustion (probably caused by uncertainty and market volatility), and most of the larger funds have grown reluctant to trade on Washington headlines. Those funds have been caught "offside" in the recent market advance and are underinvested. This setup has softened any market blows based on the repeated failures in agreeing to a budget and debt ceiling increase.

In the fullness of time, it appears we will get tax and entitlement reform -- finally everyone realizes the soup we are in with fiscal imbalances (local, state and federal) out of control. (Unfortunately these headwinds will serve as significant growth deflators in the years ahead).

It always seems to take abject fear to get anything done in Washington. It happened three years ago with Secretary Paulson's $700 billion rescue package; there was little debate or analysis. The same thing is happening now. These proposals are being rammed through based on the same fear-mongering that occurred when Bear and Lehman failed. Daly and Boehner are even using the same terminology today -- our regulators again argued that a package must be prepared "before the Asian markets open." (I think these guys have read Sorkin's "Too Big to Fail" too many times.)

We continue to run policy based on how that policy impacts asset prices. QE2 was such an example, and so are this week's negotiations on the budget and debt ceiling. Something has happened to encourage scripted talking points and to discourage compromise between our two political parties; debate has become vitriolic and acidic.

A divided and dysfunctional government more concerned with those talking points than thoughtful policy has likely already brought much damage in the "aura" of the U.S. -- in our creditworthiness and in the perception of a lack of seriousness regarding a decisive attack on our fiscal imbalances. As well, investors have become like Dorothy in The Wizard of Oz when she discovered that the Wizard was only another human being. We investors have learned -- perhaps painfully over the last decade -- that our politicians are only human beings, mortals whose primary concern appears to be being re-elected.

Core concerns:

1. the continued secular headwinds to growth,

2. a general loss of confidence and

3. the increased recognition of the ineptitude and partisanship of our politicians, which has been vividly demonstrated and reinforced in the D.C. debt ceiling circus over the past several days.

Stated simply, the problems run deeper than the current debate, as evidenced by the absence of major deals and solutions on trade, jobs and other key issues.

Debt Ceiling Chatter; All Day And All Night

Despite the bleak picture of debt-ceiling negotiations painted by President Obama last night, the market held up fairly well today. Though the close was weak and breadth was much poorer than the indices indicated for the second day in a row, there were no signs of panic and no rush for the exits.

Market players appear to be sanguine about some sort of deal before the deadline, though there hasn't been any news of substantial progress. In fact, there doesn't seem to be any bill that has a chance of passing right now, but market players are unperturbed.

Despite continued focus on debt-ceiling news, it was a very uneventful day for the market. MMM pressured the DJIA and steel stocks were particularly ugly. Big-cap technology names like AAPL, BIDU and GOOG did well, and financials continued to bounce.

AMZN's earnings report is solid and attracting buyers, but the market has not been sensitive to earnings reports this quarter. It has been company-specific action and hasn't led to any clear market themes. Most market players would be happy not to hear about the debt ceiling any further; unfortunately, it is likely to drag out for a least a few more days.

Your Home For Eternity, Kim?


Recently written by Northeastern University's economists, the following passage further explains the disproportionate benefit of the post-recession recovery on our largest corporations:

Between the second quarter of 2009 and the fourth quarter of 2010, real national income in the U.S. increased by $528 billion. Pre-tax corporate profits by themselves had increased by $464 billion while aggregate real wages and salaries rose by only $7 billion or only 0.1%. Over this six quarter period, corporate profits captured 88% of the growth in real national income while aggregate wages and salaries accounted for only slightly more than 1% of the growth in real national income. ...The absence of any positive share of national income growth due to wages and salaries received by American workers during the current economic recovery is historically unprecedented.

"Under democracy one party always devotes its chief energies to trying to prove that the other party is unfit to rule -- and both commonly succeed, and are right."

-- H.L. Mencken

While recent economic releases suggest an anemic trajectory of economic growth, an economic double-dip still seems unlikely. Nevertheless, the recovery's sluggish pace exposes it to mistaken public policy (something we are getting in spades these days).

My view continues to be that a contagion in confidence is one of the most powerful headwinds to business expansion and economic and employment growth.

At the core of this loss of confidence is the increased recognition of the ineptitude and partisanship of our politicians, which has been vividly demonstrated in the Washington, D.C., debt ceiling circus over the last several days.

But the problems run deeper than the current debate as evidenced by the absence of major deals and solutions on trade, jobs and other key issues.

Something has happened to encourage scripted talking points and to discourage compromise between our two political parties as debate has become vitriolic and acidic.

A divided and dysfunctional government more concerned with those talking points than thoughtful policy has likely already brought much damage to the aura of the U.S. -- for instance, in our credit worthiness and in the perception of a lack of seriousness regarding a decisive attack on our fiscal imbalances.

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.

-- Nicholas Kristoff, The New York Times

"A fool and his money are soon elected."

-- Will Rogers

Make no mistake, investors' rage and contempt against our politicians' lack of judgment (that borders on foolishness) runs deep -- and is bipartisan. It originally surfaced in the Democratic tsunami in the November 2008 elections, then in the formation of the Tea Party and ultimately morphed into a repudiation of many incumbents (Republicans and Democrats) in subsequent elections.

Headlines Fun

It would have been a rather tedious trading session just because of the light volume and random action, but what made it worse was that we continued to be at the mercy of the genius politicians, who still couldn't come up with a solution to the debt ceiling issue.

The weak open did give us a decent trade opportunity, as the dip-buyers did a nice job of slowly working the market back up. But then we had to listen to the newest brilliant solution out of Washington and the market ended up closing weakly. Breadth was poor all day and finished close to 4-to-1 negative with precious metals being the only group that did much. Big-cap Nasdaq names also outperformed, but the action was not very energetic.

Unfortunately, we probably will have to contend with another week of this political nonsense. Our politicians are simply incapable of doing anything in a reasonable manner until they are forced to -- and what they really want to do is defer decisions as long as possible.

At this point, we are pretty much handcuffed by the headlines.

Let's Talk Accounting/Numbers The Washington Way

The Reid plan advertises $2.7 trillion in spending cuts; of which $1 trillion is from pulling troops out of the Mid East - which we were going to do anyway. Apparently, not spending $$$$ you weren't going to spend anyway is "savings."

What is even more enraging is that $400 billion of the spending "cut" is the interest that would have been paid on the $$$$ that would have been borrowed to fund the spending. So, not only do they call money that we weren't going to spend in the first place "savings," but the interest we never would've paid on the money we aren't spending is "savings" too.

Saturday, July 23, 2011


With Boehner/Obama collapsing, and little expected over the weekend, I suspect the debt ceiling will not be raised in time. I expect ratings downgrades for US debt as well.

Have we returned to a bull market in complacency?

General Electric's industrial organic sales growth in second quarter 2011 was 3% vs. a 5% consensus estimate. Margins were soft during the quarter.

Recent quarterly taxes rates for Microsoft and GE are below what the average American and many small businesses pay.

GE's 'beat' was juiced by a couple of one-time items. But it was less of a beat than it appears, as earnings were buoyed by:

1. a lower tax rate (19.7% vs. 20.7%) that added a half a penny (echoing yesterday's MSFT report in which a substantially lower tax rate caused an apparent "beat"); and

2. contribution from discontinued operations (went from loss of $100 million to a gain of $217 million), a year-over-year positive swing of $317 million -- or about $0.03 a share

Both of these factors combined added $0.035 a share to the bottom line -- accounting for the entire beat to consensus...

Very Good Week For The Bulls, But Watch Out For Those Headlines Next Week......

It was a very good week for the bulls, but there was no lack of confusion. The week started poorly Monday, but jumped sharply Tuesday as market players correctly anticipated a very good earnings report from AAPL. Wednesday it looked like it would stall, but news of progress with the debt issues in both the U.S. and Europe hit Thursday. That caught many folks leaning the wrong way and produced another spike higher.

Ironically, it was macro news that really drove buying, while earnings news was generally poor, with a few exceptions like Apple, MCD, IBM and GOOG. The problem with macro news as a driving force is that there is a risk that it can reverse immediately as things develop. News of a debt-ceiling deal one minute may lead to news that the deal has fallen apart the next. That doesn't happen with earnings, so that is usually a preferable driving force.

Given the risk of negative headline news over the weekend, I'm surprised the market held up as well as it did today. On the other hand, market players have learned that this market has a strong tendency to continue to run up as the big-picture bears grow louder. Overbought conditions tend to become even more overbought, and the folks trying to catch a top end up fueling further upside.

If that tendency wasn't tricky enough, the lack of a positive response to earnings reports isn't helping. Some stocks did bounce back as dip buyers showed interest in stocks that were punished on reports, but the overall response has not been nearly as euphoric as we have seen in recent quarters.

Those Look Too Big For You, Kim.....

Friday, July 22, 2011


Before we jump up and down about MSFT's headline earnings beat, I would mention that while deferred revenue was good, the company's 4Q tax rate was much lower, only 7% vs. 25% a year earlier. As a result, nearly all the bottom-line beat was due to the change in the effective tax rate!!

Run, don't walk, to read about the most recent reviews of the new Apple MacBook Air 13-inch notebook.

A must buy -- from my perch.

Crude is once again approaching $100 a barrel.

I suppose you can say what we have learned from history is that we have not learned from history.

Adding to Peter Boockvar's comments, below is what the IMF wrote about the lessons learned in Argentina's debt crisis in the early 2000s:

As stated in the text, an important lesson of the Argentine crisis is that market-based and voluntary financial engineering operations, such as debt swaps transacted at current market yields, do not work during a crisis. This follows from the voluntary or market-based nature of such operations, which implies that they are by definition NPV-neutral. But interest rates are typically higher during crisis, and any NPV-preserving transformation of cash flows made at higher rates would mean a much higher debt-service burden calculated at more normal rates and serves to worsen debt sustainability.

Voluntary debt swaps (and debt buybacks) done during a crisis can be likened to the case of an individual who, unable to service mortgage undertaken when interest rates were low, decides to refinance it at a much higher interest rate in exchange for temporary relief. -- "The IMF and Argentina, 1991-2001"

Miller Tabak's Peter Boockvar reports that there is a big condition in the Greek bailout agreement:

DJ is reporting that the ECB is not willing to accept possibly newly defaulted (selectively) Greek debt as collateral for loans to Greek banks out of the goodness of their heart but because the EFSF may be willing to guarantee the ECB's Greek bond holdings from any loss. This is an ECB demand and it remains to be seen if the EU will agree to have the EFSF used for this too in addition to its other newly announced functions.

For the fifteenth week in a row, initial jobless claims exceeded 400,000. Claims rose back to 418,000 this past week, which is about 9,000 higher than consensus. More of the same -- and further evidence of structural employment issues and the screwflation of the middle class.

I don't think it is going to be fun in the market overall, for the averages, nor will it be easy in the weeks ahead, and a healthy dose of skepticism should not be abandoned as we move toward S&P 500 1400, which many expect to reach. Worries:

1. Eurozone slowdown. The composite output for Germany decreased to a 24-month low of 52.2 in July from 56.3 in June. The flash services activity index dropped to 52.9 in July from 56.7 in the previous month and was well below forecasts for a reading of 56.1. The latest reading was the lowest in 17 months. The flash purchasing managers' index for the manufacturing sector fell to a 21-month low of 52.1 in July from 54.6 in June. (Consensus was for 54.1.) The flash eurozone composite PMI fell to a 23-month low of 50.8 in July from June's 53.3. (Consensus was for 52.6.) The latest reading was the lowest since August 2009 and signaled a near-stagnation of private-sector output, the rate of growth having slowed sharply in each of the past three months. The eurozone manufacturing PMI slid to 50.4 from 52, well below economists' forecast of 51.5. The services PMI declined to 51.4 from 53.7. (Consensus was for 53.2.) Both manufacturing and services index readings were the weakest in 22 months.

2. China slowdown. HSBC's China "flash" purchasing managers' index fell to a 28-month low of 48.9 in July, down from 50.1 in June, marking the first time the gauge has indicated a contraction since July 2010. The preliminary version of the PMI output index also showed further deterioration, dropping to 47.2 in July from 49.8 in June. Both these prints were below expectations.

3. Can-kicking continues both in the eurozone and on our shores. A selective default in Greece appears likely, and a temporary fix appears likely in the U.S. Investors should see themselves through both. Again, growth-deflating forces, in the aftermath of the credit crisis, seem to be the order of the day around the world.

Which Headlines Will Influence Tomorrow??

As they have for the better part of 10 years, market participants ignored a good report from INTC, and a generally negative reaction to earnings had market players leaning bearish when news out of Europe about progress on the sovereign debt issues caught them by surprise. Just when it looked like that excitement was about to fizzle out, the New York Times reported that a debt ceiling deal was close. Although that news was semi-denied, it helped to keep bid under the market for the remainder of the day.

Overall, we saw good breadth and some strong point gains, but it had the feel of market players being underinvested and short rather than real buying. We saw similar action back in late June when there was a furious move higher as poorly positioned players struggled to keep up with a market that wouldn't pull back --even though everyone agreed it was overbought and that the news flow didn't support the move.

Once again, we have plenty of folks thinking that this market is ready to be hit with a strong 'sell the news' reaction soon on some news like a debt ceiling deal. Technically, that setup makes sense but this market has been extremely perverse and we have a strong tendency to overshoot to the upside. Of course, a news headline can change things quickly. Let's see which headlines hit tonight.

North Korean Detergent Is The Best! Watch Out P & G!

Thursday, July 21, 2011


YHOO's a piece of junk; at what point is the price enticing? 10?

No memory from day to day -- or group to group!

Run, don't walk, to read Treasury Secretary Geithner's Wall Street Journal op-ed today on Dodd-Frank/banks.

Are AAPL's results a one-off situation? They certainly have positioned themselves uniquely in an aspirational category, which, for now, Apple has to itself.

Do politicians regulate when they can't spend?

The Fed Is Preparing For A US Default Says Plosser

Fire up the printers! According to the Fed's Charles Plosser, the Federal Reserve is actively preparing for the possibility that the United States could default. Which can only mean one thing: an immediate paradrop of millions of $100 bricks to every man woman and child in the US since as we all know by know Tim Geithner has repeatedly confirmed the Treasury has absolutely no default plans. None.

Per Reuters:

Philadelphia Federal Reserve Bank President Charles Plosser said the Fed has for the past few months been working closely with Treasury, ironing out what to do if the world's biggest economy runs out of cash on August 2.

"We are in contingency planning mode," Plosser told Reuters in an interview at the regional central bank's headquarters in Philadelphia. "We are all engaged ... It's a very active process."

Plosser said his "gut feeling" was that President Barack Obama and Congress will come to an agreement to increase the Treasury's borrowing authority in time to avert a default on government obligations.

And in addition to the warming up, the Fed is also engaging in the following:

The Fed effectively acts as the Treasury's bank -- it clears the government's checks to everyone from social security recipients to government workers.

"We are developing processes and procedures by which the Treasury communicates to us what we are going to do," Plosser said, adding that the task was manageable. "How the Fed is going to go about clearing government checks. Which ones are going to be good? Which ones are not going to be good?"

"There are a lot of people working on what we would do and how we would do it," he said.

Plosser added that there are difficult questions that the Fed itself had to grapple with.

The Fed lends to banks at the discount window against good collateral. But what happens if U.S. Treasuries no longer fit that bill?

"Do we treat them as if they didn't default, in which case we would be saying we are pretending it never happened? Or do we treat them as if they defaulted and don't lend against them?" Plosser said. "Those are more policy questions."s at the basement of Marriner Eccles getting refills and start the warm up process.

After Tuesday's Monster Rally, Not Surprising There Was No Momemtum Left For Today...

Despite exceptionally strong earnings from AAPL Tuesday night, the market was unable to build on that momentum today. In fact, Apple did nothing after its initial gap up, and a number of other stocks performed poorly following their reports.

Overall, breadth was slightly negative, but a bounce in financials, notably from GS, helped contain the damage.

The most notable characteristic of today's action was that it was very slow and there wasn't any excitement over earnings. Many stocks drifted around and there was some ugly action in technology names like FTNT, RVBD, APKT and FFIV.

F5 has reported and it's under pressure as it confirmed what Riverbed said yesterday about Europe being slow. QCOM is also down on an OK report.

The big test is INTC results, I suppose. They reported a good quarter and guidance, but the stock traded down after hours. It seems like it is always trading with a "PC discount" attached to it. As expected, INTC lowered PC growth forecasts. Other business segments are showing excellent growth, but traders at the moment are not caring about that.

We are very likely to see some news out of Europe overnight, so there may be plenty of potential landmines to navigate.

Wednesday, July 20, 2011


Moody's cites U.S. sovereign risk vulnerability. Five of 15 AAA U.S. states on review for possible cut by Moody's.

If the McConnell/Reid plan is accurate, it will have solved nothing. It's a band-aid.

"I am ugly, but I have a beautiful mind."

-- Nouriel Roubini

Some who have met Roubini say he seems like a good guy and is certainly a respected professor. Nevertheless, he appears, "often wrong but never in doubt." And he is rarely challenged by an adoring media.

The media has a preoccupation with Dr. Roubini. In many ways, the spotlight on him, even when he is a made the following observation on Aug. 25, 2010:

"Third-quarter GDP growth is very likely to be below 1% -- and likely closer to 0% than to a pathetically lousy 1%. So double-dip risk is greater than 40%."

-- Nouriel Roubini

The media, as in many cases of numerous dire and wrong-footed prognostications by Dr. Doom, never confronted him on this -- they rarely, if ever, do.

Big AAPL Earnings

Today was one of those days in which a big move in the indices wasn't reflected in the level of excitement among market players. Part of that is due to much of the gain being produced by some big-caps, including IBM, KO and MSFT, but another part of it was that much of the afternoon strength was due to scrambling to reposition when President Obama made comments that there has been some progress on a deal regarding the debt ceiling. There is much skepticism about how easily a deal will be put together but the potential for a substantial relief rally is just too great to fight it.

I suspect market players are not particularly well positioned for upside at this point, which helped to contribute to the strong spike up this afternoon. We saw similar straight-up action a couple weeks ago, when market players were caught by surprise and that ended up going much further than many anticipated.

Earnings reports rolled in and VMW and ISRG are doing very well but CMG, FTNT, YHOO and RVBD are under pressure, at least so far. AAPL's report was stellar.

Never a dull moment.

More Rice For Kim.....None For You....

Tuesday, July 19, 2011


Looks like IBM's earnings were a clean beat - top line, bottom line, and orders.

It's incredible that the market has no memory from day to day.

If home prices continue their decline, it will be time to consider the adverse consequences of the bankruptcy of the private mortgage insurance industry on the already fragile residential real estate market.

Another (non-traditional) headwind.

I'm hearing that the iPhone 3GS will be sold with the iPhone 5 as a prepaid phone.

Macroeconomic worries

* Goldman Sachs reduced its second-half 2011 GDP growth expectations

* The validity of the European stress test has been questioned.

* Some German officials are balking at the Greek bailout plan.

* More political partisanship has been on display and little progress has been made on the U.S. budget ceiling discussions.

* A weekend Wall Street Journal report states that the European stress test did not include loans to businesses and consumers in southern Europe.

Bill Fleckenstein succinctly describes "the overriding game theory at present relating to the Washington, D.C., circus":

* Debt ceiling debate matters and is resolved one way or another: It gets raised, stocks knee-jerk rally, bonds tank as the slosh ebbs and flows. Or maybe the reverse happens.

* Debt ceiling does not get raised on time, stocks tank, bonds rally, dollar goes nuts in some fashion, or maybe everything tanks.

* While all the debt ceiling hype churns around, jerking players back and forth, Europe implodes and various parts of the "circus" go nuts in assorted directions.


After a very ugly morning, the buyers managed to bounce the market a little this afternoon -- but they did so in very lethargic fashion. Breadth was better than 4-to-1 negative and the small-caps were particularly weak. A big move in heavyweight AAPL helped to cover up quite a bit of weakness, but for the most part big-cap momentum names acted poorly as well.

There is no big secret as to what is happening here. Market players are worried about the debt issues in Europe and the debt ceiling negotiations in the US. In addition, GS stirred up worries about a double-dip recession again.

The million-dollar question right now is whether earnings can help to turn sentiment positive again. GOOG helped a little on Friday, but IBM just reported and the stock is doing nothing. So you have to wonder what Apple is going to do tomorrow night being as the stock has already made such a huge move into its report. We will need to hear some better-than-expected news as well as some positive comments from management about its business prospects. At the moment, market players just don't seem to think that is going to happen.

The good news is that it is awfully gloomy out there, which means that folks are going to be well positioned if we do see some upside movement. That can help to produce a sharp move, but the bigger picture is definitely mixed. The market is back below the 50-day simple moving average, but there is some support. It is not an illogical spot for the market to hold but it will need some help from the news flow.

The environment is very muddled.

Steve Wynn Lays It On The Line

During the just-completed Wynn earnings call, Steve Wynn unleashed quite a tirade against the Obama administration. It was without doubt one of the most blistering and scathing critiques of Obama's administration to date by anybody in the public domain.....

From the call transcript:

I believe in Las Vegas, I think its best days are ahead of it, but I'm afraid to do anything in the current political environment in the United States. You watch television and see what's going on on this this debt ceiling issue. And what I consider to be a total lack of leadership from the President, and nothing will get fixed until the President himself steps up and wrangles both parties in Congress. But everybody is so political, so focused on holding their job for the next year, that the discussion in Washington is nauseating.

And I'm saying it bluntly that this administration is the greatest wet blanket to business and progress and job creation in my lifetime. And I can prove it and I could spend the next three hours giving you examples of all of us in this marketplace that are frightened to death about all the new regulations, our health care costs escalate. Regulations coming from left and right. A President that seems, you know -- that keeps using that word redistribution.

Well, my customers and the companies that provide the vitality for the hospitality and restaurant industry, in the United States of America, they're frightened of this administration. And it makes you slow down and not invest your money. Everybody complains about how much money is on the side in America. You bet. And until we change the tempo and the conversation from Washington, it's not going to change.

And those of us who have business opportunities and the capital to do it, are going to sit in fear of the President. And you know, a lot of people don't want to say that. They say oh, God, don't be attacking Obama. Well, this is Obama's deal. And it's Obama that's responsible for this fear in America.

The guy keeps making speeches about redistribution, and maybe's ought to do something to businesses that don't invest, they're holding too much money. You know, we haven't heard that kind of money except from pure socialists.

Everybody is afraid of the government. And there's no need -- there's no need, you know, soft pedaling it. It's the truth. It is the truth. And that's true of Democratic businessmen, and Republican businessmen, and I am a Democratic businessman and I support Harry Reid, I support Democrats and Republicans, and I'm telling you that the business community in this country is frightened to death of the weird political philosophy of the President of the United States. And until he's gone, everybody is going to be sitting on their thumbs.

And if anyone should know about a comparison between capitalism and "alternative systems" it is Steve Wynn: After all, the biggest growth prospect for his company, and the only reason why his company trades at the multiple it does, is currently located roughly 12 time zones away in Macau......

Sunday, July 17, 2011

"Baseball Law" Is Unique

All parties in the Dodgers dispute tearfully accuse the others of not putting the "best interests" of the "storied" franchise and baseball first. Sob. But it would take a long-lasting showdown before it could be blamed for the team's performance. History shows that baseball teams need not be happy or have bright owners to perform well over the length of a season or so. The Texas Rangers fought their way to the World Series last year while in bankruptcy.

That said, Dodgers "owner" Frank McCourt, by inviting the intervention of the courts through a bankruptcy filing, has thrown a beanball not just at the head of Commissioner Bud Selig, but at the private legal empire known as Major League Baseball's rulebook.

"I simply cannot allow the Commissioner to knowingly and intentionally be in a position to expose the Dodgers to financial risk any longer," Mr. McCourt said in the filing for Chapter 11. Guffaw. By some vast, incalculable margin, Mr. McCourt's personal welfare is his most urgent priority. That's his natural right. More interestingly, he seeks to put the team beyond the reach of the baseball laws, which Mr. McCourt volunteered to live under—laws that let the commissioner basically strip an owner of many of the privileges of ownership without much recourse.

As the Los Angeles Times put it: "Even in a city known for conspicuous consumption, the McCourts stood out for their ostentation—much of it on the team's tab."

As David Boies, celebrity divorce lawyer for soon-to-be ex-wife Jamie McCourt, put it: "The rule-or-ruin philosophy that appears to have motivated today's [bankruptcy] filing is bad for everyone who cares about, or has an interest in, the Dodgers."

Nobody seems to like Frank. Yet under any other circumstance, they might be rushing to his defense in the name of the "rule of law." Friends of leviathan, of which there are many, usually don't like it when any area of life escapes the rule-making of public officials, judges and politicians. As one lawyer put it: "Why should Major League Baseball be able to just walk into the corporate offices and take over?"

Those who won't stick up for the unloved Mr. McCourt are usually the first to grumble about baseball's antitrust exemption. The obvious rejoinder might be: Why does baseball even need an antitrust exemption, in a free country, to do what it does? Likewise, an answer to Mr. McCourt's defenders, if he had any, might be: He agreed to be bound by baseball's rules, so what role does the court have except to make sure those rules are administered properly?

Mr. McCourt's whole ballgame is to claim in court that baseball has no right to enforce the rules he agreed to. He piled on more debt than the league allowed. He wants to bail himself out with a TV deal the league's rules allow the league to veto—which it did. He put the team into Chapter 11—which league rules forbid without baseball's OK.

Civil society, which is lauded in the abstract but then attacked whenever somebody doesn't like how civil groups use their freedom, gave rise to baseball's peculiar organization in the first place. Baseball is big business now, but that shouldn't matter—except, in political reality, it does. Baseball, like all of us, must look over its shoulder occasionally.

And Mr. McCourt is not lacking in shrewdness. He uses the court the way many business people do, as negotiating leverage. That leverage is created by one of the unalterable facts of legal life—lawsuits take time, and can be made to take a lot of time by diligent stonewalling.

He also has a sliver of a case: If baseball's rules are so important, why did the league let him buy a team with so much borrowed money in the first place? Why did it stand by while he subdivided its properties so he could milk and mortgage every rosin bag to finance his lifestyle? Not just the Dodgers but nearly a third of the league is in violation of MLB's debt rules.

MLB dearly hopes the bankruptcy court will defer to league rules because league membership is what gives the Dodgers property its value—which a bankruptcy court is duty-bound to protect for the benefit of Dodgers creditors, who include nonplayers like Manny Ramirez ($21 million) and Andruw Jones ($11 million). Mr. McCourt says he wants to remain the owner of the Dodgers—a result likely not in the cards. But Mr. McCourt may yet profit handsomely from a league-orchestrated sale of the team—a vanity item that could fetch $1 billion.

MLB does not want a drawn-out fight. It certainly doesn't want to give the courts an opening to rewrite its governance rules. Therefore look for a settlement that involves a payoff to Mr. McCourt.

James Grant Foresees A New American Gold Standard Despite Wall Street's Stake In Monetary Chaos....

Mr. Grant is founder and writer of Grant's Interest Rate Observer, perhaps the most iconic of the Wall Street newsletters. He is also one of Wall Street's strongest advocates of the gold standard, knowing full well it would take away much of Wall Street's fun.

You might say that, as a journalist and historian of finance, he has been in training his whole life for times like ours—in which the monetary disorders he has so astutely chronicled are reaching a crescendo. The abiding interest of Grant's, both man and newsletter, has been the question of value, and how to know it. "Kids today talk about beer goggles—an especially sympathetic state of perception with regard to a member of the opposite sex," he says of our current market environment. "We collectively wear interest-rate goggles because we see market values through the prism of zero-percent funding costs. Everything is distorted."

He adds: "I can't explain the world's infatuation with government securities and negligible yields. These bonds and notes and bills are denominated in currencies that central bankers are doing their best to depreciate."

By "can't explain," he perhaps means he recognizes too well a phenomenon he can't justify. Grant is a dyed-in-the-wool skeptic of the efficient markets hypothesis. Markets are "unpredictably inefficient," he says. Right now, he sees Ben Bernanke's Federal Reserve as a prime malefactor behind the characteristic economic folly of our age (though China is a big offender too): suppressing the proper functioning of the price system. "By flooding the system with dollar bills, I submit to you that he has accomplished little of what he meant to accomplish and he has unintentionally done a great many things he didn't want to do."

Grant is also a critic—albeit with caveats—of today's great bankers, whom he says in one respect don't hold a candle to their gilded forebears. "When you take away the downside, you take away the virtue. You take away the moral foundation of markets. You always have envy but now the envy is a little better grounded in objective facts. Taxpayers get the downside. Modern-day Wall Street gets the upside."

Grant is interviewed frequently on television. ("Business development," he calls it.) Along the way he's also written several books of financial and political history, including 1992's acclaimed history of debt, "Money of the Mind."

Of his own Wall Street clients, Mr. Grant says, they seem to renew at "gratifying rates," his best indication that he's doing something right—i.e., making them money. He freely admits to a lack of market clairvoyance. What Grant's can do for its readers, he says, is observe how the market is handicapping future outcomes and call attention to cases where it thinks the odds look out of whack. When Treasury bonds were yielding 13% in the early 1980s, Grant's called them a screaming buy. If inflation, then coming down, suddenly ran amok again, an investor could give up 13% a year in principle and still break even on the coupon.

Likewise, before the housing crash, he took a hard look at subprime mortgage securities and urged investors to short them. "They were then selling at 100 cents on the dollar," he now says. "If we were wrong, they might go to 101 or 102. If we were right, they'd go down a lot."

And today? "We are looking at a bunch of these big cap, astoundingly cheap American enterprises that are hiding in plain sight. Wal-Mart is one, J&J is another," he says. Wal-Mart he describes as a mature business whose per-share earnings are those of a growth company, thanks to its massive share buy-backs.

"We can observe that the dividend yield [on many blue-chip U.S. companies] is a match for most points on the Treasury yield curve. But their managements are adaptive, unlike the inert Treasury bond that you buy for so-called safety."

In the present macro environment, Mr. Grant adds, "you can't exactly predict whether the debt predicament or the printing press is going to get the upper hand in our affairs. Rather than hiding out in the unguided missiles including my beloved gold bullion, look at these impressively adaptive businesses that have managed to make a go of it in every political environment and even today."

The key is "adaptive"—willing and able to do what it takes to produce returns for shareholders. The lesson was painfully reinforced by his one foray into professional money-managing. In the late 1990s, with a partner, he raised money to invest in severely undervalued Japanese companies. "These bargains can and did remain bargains for 12 years," he says with a grimace, because Japanese managers don't need to care about shareholder wealth.

Mr. Grant is skeptical, scathing even, of the Japanese-style deflation fears that today motivate Mr. Bernanke's monetary spigots. Good deflation, he says, is "when prices fall as a result of productive processes and technical apparatus, that is called progress." Bad deflation is when merchants, drowning in debt and unable to get credit, dump goods at firesale prices. "The Fed refuses to make that distinction."

Hence a horrifying irony: After the dot-com crash, Alan Greenspan and Mr. Bernanke drove down interest rates to fight a feared deflation and ended up inflating the mortgage bubble. "The Fed, in assaulting a phantom deflation, precipitated an actual one."

Mr. Grant would prefer a monetary system tied to the amount of gold dug out of the ground to one based on the untrammeled discretion of Ph.Ds. The latter is what America got with President Nixon's 1971 decision to close the Treasury's gold window, breaking the last link to the classical gold standard, in which anyone was free to exchange dollars for gold at a fixed and guaranteed price. Result: the dollar, not gold, became the world's "reserve currency."

The U.S. government was empowered to borrow seemingly unlimited funds from foreigners and repay with a currency that the U.S. government itself could print. "Dollars pile up in Asia. Merchandise piles up here," says Mr. Grant, as America, in possession of the printing press, has tried to achieve the "ancient hope of mankind, to live without working."

The "fiat" dollar, he adds ruefully, "is one of the world's astounding monetary creations. That a currency of no intrinsic value is accepted as money the world over is an achievement that no monetary economist up until not so many decades ago could have imagined. It'll be 40 years next month that the dollar has been purely faith-based. I don't believe for a moment it's destined to go on much longer. I think the existing monetary arrangements are so precarious, so ill-founded and so destructive of the economic activity they are supposed to support and nurture, that they will be replaced by something better."

How exactly the transition to a new gold standard might take place is a puzzle, but Mr. Grant says he's seen many "impossible" things come to pass in his career. A certain "social spontaneity" might take a hand. He points to GLD—the ticker symbol for an exchange-traded fund whose gold holdings now make it equivalent to the world's 10th largest central bank. "At the margin," he says, "people are registering dissent from the judgment of our central bankers by bidding up the price of gold."

Earlier this year Mr. Grant put his mouth where his mouth is, testifying before Rep. Ron Paul's House monetary affairs subcommittee on the virtues of the gold standard. No Democrats and few Republicans showed up. Asked to predict exactly when the dollar will blow up, Mr. Grant jokes, "I'd say 1978."

But his point is an earnest one and brings us back to the modern character of Wall Street. The gold standard, he says, citing the "late, great" libertarian economist Murray Rothbard, was the "people's system. If you didn't like the currency, you could exchange your paper for gold and that sent a message."

In our age of "wiki everything," Mr. Grant finds it anomalous that we sacrifice freedom of monetary choice for the diktats of central planners acting out of the Fed's faux-colonnaded headquarters in D.C. The fiat dollar is an "elite" system, he says, and Wall Street is its supporting "interest group"—those nimble, market-savvy, plugged-in folks know how to shuffle assets and exploit cheap funding from the Fed to leverage up their profits and soften the downside.

'The winners in Wall Street have always been hugely rich and therefore have been objects of great envy and great populist animosity. This is one of the great evergreens of American politics," Mr. Grants says. But those earlier financiers "got to participate fully in the downside as well as the upside. Years ago, Goldman Sachs was a partnership and partners were at risk for everything they owned. I think it's fair to assume that attention to risk management is different now.

"Wall Street today is a statist creation," adds the man who has known, loved and chided the Street for nearly four decades as one of its most able observers. "Greenwich, Connecticut"—where billionaire hedge-fund operators keep their homes—"is not what Fifth Avenue was in the Edwardian age. Greenwich, Connecticut will be the last to sign up for the new gold standard."

More Capital, No Bailouts?

Too bad banks didn't have more capital back in 2007, the thinking goes, or they wouldn't have needed bailouts. Right? True, if one makes an unwarranted assumption that the riskiness of bank assets would have been unaffected, or even improved, under higher capital requirements.

Leverage is what allows banks to make money by holding safe assets. At one extreme, think of the hedge fund Long Term Capital Management. It used massive leverage to hold extremely safe assets (and blew itself up).

At the other, think of your neighborhood loan shark. He uses no leverage. He makes loans entirely out of his own capital and, if he's to have any hope of profit, must seek out the riskiest customers (i.e. those who can't get a credit card or payday loan), charge them usurious interest rates and send two really large thugs to break their legs when they don't pay.

Moral hazard does not play a role in the loan shark's business model since he's betting his own money.

So the equation more capital = safer is not as straightforward as it seems. Happily, the complexities are not lost on the gnomes of Basel, the Swiss gang of global regulators who've been trying to solve the problem of too big to fail since the 1970s, after the failure of the now-forgotten Bank Herstatt.

Their latest solution, Basel III, would seriously hike the amount of capital banks must hold, but otherwise persists with the basic strategy of setting different levels of capital against different assets precisely to preserve the incentive of banks to invest in assets perceived as safe.

The fatal conceit, of course, is "perceived." Triple-A mortgage securities once were seen as safe. Greek bonds were safe. Under TBTF, when banks receive no discipline from their own creditors who expect to be bailed out, it falls on regulators not only to guess which assets are safe but to lean against the incentive of banks to categorize risky assets as safe in order to hold less capital against them.

How well regulators have performed this function can be guessed from a succession of global financial crises—as well as the rough-and-ready regulatory wisdom that has actually prevailed in those crises: "Big banks don't need capital. They just need liquidity."

And so it proved in the recent crisis, when the Federal Reserve and FDIC did the heavy lifting to keep the banks afloat. So it has proved in every banking crisis for the past 40 years. Nor is it pound-foolish to avoid banking panics at the cost of increasing moral hazard. But the fact remains: Everything we do ends up increasing moral hazard.

Here's the problem: Banks may be able to blow up the world economy, but they are just another company in the portfolio of stock investors, who use the same incentives to motivate bank CEOs as they do all other CEOs. Under TBTF, gaming whatever capital standards are imposed becomes virtually a competitive necessity if banks want to keep up with rivals and CEOs want to keep their jobs.

With each hike in capital for the biggest banks—we've gone from 3% to 9.5%, with some now calling for 15%—the effects are magnified. Bankers may be proscribed by self-interest from acknowledging any impact of TBTF on their own behavior, but even they will acknowledge one perverse outcome: a heightened incentive to play global regulators off each other. In this regard, see the recent speech of Fed Governor Dan Tarullo for a catalog of unintended hubris, given all the factors bank examiners would use (size, complexity, global "interconnectedness") to set capital levels for each specific bank.

Lacking, meanwhile, has been any willingness to grasp the nettle of moral hazard directly. We want a messiah, but apparently not one who asks anything radical of us or challenges us to relinquish any sacred cows.

All but dismissed, for instance, has been the idea of contingent capital—requiring banks to sell a bond that would convert to equity if the bank gets in trouble.

Forget the trifling argument over whether such convertibles should count as "capital." What matters is the creation of a class of tradable debt exempt from bailout, giving speculators an incentive to scour for early signs of trouble.

Or how about requiring government-insured deposits to be 100% backed by Treasury bills?

Don't underestimate the importance of FDIC deposit insurance to the edifice of TBTF. If government were seen acting in advance to protect its own claims in a bank failure, and devil take the hindmost, it would have a powerful effect on the thinking of the hindmost.

Bank creditors might begin to doubt their own rescue and demand more transparency and less complexity from bank CEOs. Government will always have a role in a liquidity panic, but we might have fewer such panics in the first place if different incentives operated on the banks and their creditors.

Saturday, July 16, 2011


Observations from Bill Gross:

* Lawmakers "don't get" the ramifications of the debt debate (and the $60 billion net present value liability burden).

* QE3 will likely take the form of strong language.

* The debt ceiling will be raised.

* Look for Medicare age eligibility rising from 65 to 67 (but not for a couple of years, and the market won't be fooled by it).

* The Fed stays at 25 basis points for several years. (In this "inflationary moment," the long end of the curve is vulnerable.)

* Europe lacks political leadership to cure the sovereign debt crisis.

* And he still likes PG.

My first read on the European stress test is relatively positive.

The core CPI (+0.3%) was hotter than expected (at the highest level since October 2008), and I suspect this will continue -- as will the screwflation of the middle class.

Owners' equivalent rent (which makes up 40% of the core rate) is rising, owing to the acceleration in rental prices.

With the propensity to rent overcoming the propensity to buy (after a 34% drop in home prices), the core rate of inflation will be rising in the months ahead.

"I hate banks. They do nothing positive for anybody except take care of themselves. They're first in with their fees and first out when there's trouble."

-- Earl Warren

The problem for investors in bank stocks, in my opinion, is far more deeply rooted than the near-term profit picture (at JPM or any other bank for that matter). The problem is structural:

1. Poor bank managements who have exposed the industry to restrictive regulation and scorn: After the lending and investing policies and travesty of the last cycle, no one in their right mind can have any confidence in the ability of bank managements to manage over nearly any time frame. The industry is a piñata, scorned by investors and politicians who want retribution and revenge by mandating control over compensation and in the very manner that the banks do business.

2. Changing business model: Because of issue No. 1 above (i.e., the failure of laissez faire regulation and other factors), the entire banking industry is undergoing a forced change in its business model. Not only do we not know but the managements don't know what the exact business configuration will be. The change, however, will not likely be for the better. I can say with confidence that the banking industry earnings power has been markedly reduced, reflecting the changing business model and the dilutive impact of equity raises.

3. Worsening business mix: The banking industry's high return on equity businesses (e.g., prop trading and derivatives) are being reduced in size or jettisoned completely by government fiat. Banks are now left with servicing the consumer, the residential/nonresidential real estate buyer (and seller), small businesses and large corporations. The consumer is in rough shape, however, and although the office sector is fine, the residential real estate market is inactive and double-dipping in price (as the industry is burdened with an extraordinarily high level of unsold shadow inventory). Also, small businesses are pressured by rising costs (and bankers are slow to lend in this sector), and large corporations are so liquid that they don't need the banks to nearly the degree they have in the past.

4. Benefits of improving credit quality fading: Bank earnings have been buoyed by improving credit quality and a steep yield curve over the last two years, but credit quality improvement is fairly advanced -- and comparisons will grow more difficult -- while the yield curve can't be expected to be as steep forever. These two positive factors seem to have shortening half-lives ahead of them.

5. Low interest rates a problem: Quantitative easing and a zero-interest-rate policy is a big negative for banks, as the industry has an imbalance of interest-sensitive earning assets over interest-sensitive liabilities. Low interest rates further delay the return to normalized profits and trump the benefit of a steeply sloped yield curve as a negative.

6. Loan demand remains weak, and legacy losses linger: In particular, the mortgage putback problems (economic and legal) will continue to weigh on the industry's profits. (JPM had a more-than-$1-billion legal charge in the quarter just released.)

7. High cost structure: The banking industry is burdened by a high-fixed-cost branch structure that is antiquated, inefficient and, in the fullness of time, exposed to technological change and competition from lower-cost entrants in the delivery of most consumer banking functions.

Earnings Onslaught Coming

After four straight weak closes it makes sense for the market to switch things up and give us a strong finish on Friday afternoon. The market beast always does its best to confound market players and a strong close after a series of intraday reversals and poor action is a good way to do that.

We had a very high level of nervousness all week as we reacted to the struggles in Europe and the political battle over the debt ceiling. We have been highly sensitized to macro matters lately and that has made for some very choppy action.

The good news is that GOOG kicked off earnings season with a very good report which should help to turn the focus back to individual stock picking as the news rolls in over the next couple weeks. We still have the potential for some landmines to hit as the European sovereign debt issues continue to go unresolved.

Sooner or later we are going to see some sort of deal on the US debt ceiling, but it is likely to go down to the wire and there will be many scare tactics and predictions of doom that may spook the market. The market has had a rather sanguine response to the moves by the rating agencies this week and that is because most market players think a deal will eventually be done.

For the next couple weeks, earnings will dominate the action.

Friday, July 15, 2011


We need interest rates to rise for an 'all clear' for equities.

The 30-year bond auction completes the trifecta (three-year and 10-year) of good auctions this week.

The yield was 2 basis points below the when-issued, the bid-to-cover of 2.8 was above the previous averages, and direct and indirect bidders took a lot of it.

If QE3 is in fact needed, we would have to take a much deeper drop in economic activity and in stock market prices. It would have to get very ugly, accompanied by a lot of pain.

Neither the political will nor the electorate's acceptance should guide us toward the expectation of more quantitative easing.

Indeed, most agree that the consumer got screwed and the middle class got crushed by QE2 as the necessities of life rose in price while their wages stagnated.

After all, what was The Bernank going to say yesterday -- that the Fed will never do anything? Of course not!

But the reality today is that neither the Federal Reserve nor the Treasury Department have the carte blanche that they once did with regard to aggressive stimulus policy.

These are the facts. Disregard the bullish spin.

Miller Tabak's Peter Boockvar's comments on inventories this morning conform with what I believe are second-half economic risks:

May Business Inventories rose 1%, a touch above estimates of a gain of 0.9%, and April was revised higher to also a 1% gain. Because sales fell by 0.1%, the inventory-to-sales ratio rose to 1.28 from 1.27, the highest since December. The gain in inventory was particularly felt at the wholesale level where it rose 1.8% month-over-month, led by a 4.7% rise in autos, a bounce back from the 2.3% fall in April and 0.7% drop in March, mostly related to Japan. The inventory gain at the retail level was also led by the autos/parts sector. Bottom line, the gains in inventories of 1%-ish in March, April and May were definitely influenced by the Japanese disaster as businesses tried to get their hands on as much product as possible in order to prevent disruptions. As seen with the sluggish pace of sales, though, the inventory build could lead to smaller ordering in the next few months as this inventory gets worked down as Japan gets back to some normality and end-customer demand remains sluggish. With this said, the higher inventory build will be a support to second-quarter GDP.

Dumb $$/Smart $$

For the fourth straight day, the market closed weak after showing intraday strength. Market players are aggressively selling the upside spikes and that is producing some very unhealthy action.

It is often said that the "dumb money" acts at the open and the "smart money" acts at the close, which makes these strong opens and weak finishes rather worrisome. Adding to the negative picture, the S&P 500 is back below its 50-day simple moving average and the Nasdaq and IWM aren't far behind.

While technical support levels look precarious, it is all about the headline news lately. It is hard for either bulls or bears to be too comfortable with the potential of some new development catching folks by surprise.

Speaking of surprises, GOOG put up some solid numbers and is trading up sharply after hours. Hopefully this will shift the focus more toward individual stocks and allow us to focus more on stock picking rather than politics and global economics.

Thursday, July 14, 2011

Barney Frank Goes All Batty After S&P In A Report Insinuates That Dodd-Frank Is A Miserable Failure, Hypocritical Hilarity Ensues....

There is something oddly pot-meet-kettle-esque when Barney Frank, one of the men most responsible for the nationalization of the GSEs, sends out a letter bashing S&P head David Sharma, one of the men responsible for the credit crisis. Especially when the bashing is over something that is actually 100% true: that Dodd-Frank is the most pathetic and corrupt pieces of legislation to come out of Washington since Gramm-Leach-Bliley.....

Tractor Pull Time!

Moody's has warned that it may downgrade U.S. debt if the debt ceiling is not raised. I'm hearing many are covering shorts; Buy the news?

As the market grew more narrow and lopsided, an illogical rally based on the hope of more quantitative easing had a rather predictable reversal. Again, for emphasis, this is an ideal trading market for opportunistic traders but a real lousy one for investors.

The 10-year U.S. note auction, similar to yeseterday's three-year, went well. A couple of points below the when-issued yield, strong bid to cover at 3.17 and direct bidders in line. I suppose Bernanke's testimony helped the auction.

The cost of the necessities of life has gone up dramatically.

In response to Ron Paul's question, Bernanke has said in his testimony that quantitative easing did not cost the government anything.

But it did cost the world's consumers -- they were screwed -- as the cost of the necessities of life rose dramatically.

Why will the same Fed policies work when they haven't before?

The cost of 2008-2011 policy is a mushrooming and outsized deficit.

"I don't make jokes. I just watch the government and report the facts."

-- Will Rogers

You can day trade, trying to predict every tiny little shift of weight and attempting to profit from it, but I think that's too hard, and I used to be a hedge fund manager, specializing in these short-term moves. Or, better, you can step away from the day to day seesaw, which is what this device really amounts to, and focus on the fundamentals of great individual companies, while tempering that conviction with the discipline of recognizing that the one piece of bad macro news can pull down the entire market, giving you a chance to put your convictions to work buying high-quality stocks.

-- Jim Cramer, "Mad Money" (episode aired July 12, 2011)

I couldn't agree more.

While recent economic releases suggest an anemic trajectory of economic growth, an economic double-dip still seems unlikely. Nevertheless, the recovery's sluggish pace exposes it to mistaken policy.

As Jim expressed last evening, there are clearly other contributing factors at work that have dulled investors' appetites for stocks and have resulted in sub-historic valuation levels.

My view continues to be that a contagion in confidence is the proximate cause for the recent market weakness and falling valuations. More specifically, my vote for the reason behind that loss in confidence is the increased recognition of the ineptitude and partisanship of our politicians.

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.

-- Nicholas Kristoff, The New York Times

Our impatient and undisciplined politicians have opted for the expediency of reflation to counter a decade-plus-long accumulation and egregious use of debt. In turn, a more painful adjustment period seems possible in the not-too-distant future unless fiscal discipline is imposed in the near term.

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 about 15% against the euro, as market participants have dismissed the notion that the hard decisions to reduce the deficit will be implemented. At the opposite side of our plunging currency is the message of ever-higher gold prices. (Warning: Dismissing the meaning of $1,570-per-ounce gold might be hazardous to your financial and investment well-being.)

It is no wonder that investors, small businesses and consumers have all lost their collective confidence. These performances by our representatives underscore my view that the general perception that our politicians are inept and partisan has possibly eclipsed fundamental economic concerns, on one hand and, on the other hand, what Jim describes as positive microeconomic conditions.....

"A fool and his money are soon elected."

-- Will Rogers

Make no mistake, investors' rage and contempt against our politicians' lack of judgment (that borders on foolishness) runs deep -- and is bipartisan. It originally surfaced in the Democratic tsunami in the November 2008 elections, then in the formation of the Tea Party and ultimately morphed into a repudiation of many incumbents (Republicans and Democrats) in subsequent elections.

Chinese inflation prints over 6% almost always lead to lower stock prices in our country, and it is interesting to note that the 2007 high in the S&P 500 correlated precisely with such an elevated inflationary reading.

Don't believe the Chinese doves, more tightening lies ahead -- and this could serve as a headwind to our equity market.

Wednesday, July 13, 2011

Macro Appears To Be It

For the second straight day, the market closed poorly despite intraday optimism over the possibility of another round of quantitative easing. It was a feeble excuse for buying in the first place, but it might have worked if we didn't have the issues in Europe hanging over our heads. A comment by House Speaker John Boehner calling a deal on the U.S. debt ceiling "a crapshoot" didn't help matters either.

Technically, the market has been in good shape to find support, but the news flow is sapping the bulls of confidence and the bears are doing well shorting the strength as a result.

I'm hopeful that earnings season will help to produce better action in individual stocks, but the macro matters don't appear to be going away anytime soon. I cringe to think that we still have at least a couple of more weeks of political wrangling over the debt ceiling before the Aug. 2 deadline, which will probably get pushed out anyway....

Defense Spending

Defense is a public good. My consumption of it does not reduce the quantity available for your consumption. Thus, there is no reason for defense spending to rise continually with population/GDP.

More Thoughts

Here is an excellent summary of the Fed minutes by Miller Tabak's Peter Boockvar:

As should have been expected, the June 21-22nd FOMC meeting had members discussing their exit strategy with days before QE2 was winding down. In the minutes they emphasized that a discussion of reversing policy in no way implies that it would be happen anytime soon. The talk was on a "set of specific principles that would guide its strategy." With the state of the U.S. economy, we know nothing will be implemented for a while as they revised down their GDP estimates. They do though think that some 'transitory' factors influenced growth, such as Japan.

On inflation, sanguine continues to be their attitude toward it as they continue to expect headline inflation will recede over the medium term and the recent rise in core inflation doesn't bother them. The stock market has bounced subsequent to the minutes on this one sentence, "Some participants noted that if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate and if inflation returned to relatively low levels after the effects of recent transitory shocks dissipated, it would be appropriate to provide additional monetary policy accommodation."

While QE3 calls are now out there, there are "if"s there and also, "Others, however, saw the recent configuration of slower growth and higher inflation [what we call "stagflation"] as suggesting that there might be less slack in labor and product markets than had been thought.

Bottom line, the bar is extremely high for QE3 and I believe it only comes after a 15-20% decline in stocks and a dramatic downturn in the U.S. economy, thus those buying stocks right now on the possibility of QE3, be careful what you wish for. Buy after it becomes a much greater possibility, at lower levels. As long as Ben, Janet and William are running the Fed, more money printing is always a possibility, but the next time will be much more contentious within the Fed.

Which will be resolved first -- the NFL labor dispute, or the debt ceiling?

The Labor Department's Job Openings and Labor Turnover Survey, or JOLTS, was relatively weak, with only a small (20,000) increase in job openings in May. Total job openings are now at 2.97 million vs. 4.4 million openings at the end of 2007. The hire rates were unchanged, but separations increased modestly.

The trade deficit widened in May ($50.2 billion) to the largest print in almost three years. This should take down the final second-quarter2011 GDP number.

Finally NFIB small business optimism fell slightly. "Weaker sales" not "credit supply" continues to be the sore point.

The tug of war between the cyclical recovery in corporate profits and the nontraditional headwinds facing the world's economies will continue to be a relative standoff and frustrate those with strong directional opinions.

Headlines, such as this morning's news on Italy's debt, will influence the day's and week's prices, but soon following, amnesia will set in, and all will be forgotten with the release of another headline.

From my perch, I feel comfortable in a base case for the S&P 500 to be confined to the 1,250-1,350 range over the balance of the year.

"If one does not understand the severity of the profound problems that plague Europe and the U.S., as well as smaller but significant China ills, then there is little that can be preached at this point that will convert the misguided."

-- Bill King, The King Report

With the structural disequilibrium in our labor force, the eurozone debt contagion spreading, consumer confidence in the U.S. weakening, a housing market laboring under a large shadow inventory of unsold home and with the fiscal imbalances being kicked down the road (over here and over there), we can say sayonara to a jobs recovery and to a smooth and self-sustaining domestic economic recovery in 2011-2012....


The market would have been better off without the quick spike on the mention of QE3 in the Fed minutes this afternoon. When the kneejerk buying on the news fizzled, the buyers who had been providing underlying support bailed out and the market finished weak.

It's obvious that market players are nervous about further negative news out of Europe. Moody's downgraded Ireland's debt this afternoon, but the situations in Italy and Greece is still in flux, and that is going to keep folks on the sidelines.

The big negative today was weak action in technology stocks such as MCHP, QSFT, NVLS and MXIM. That is worrisome action as we kick off earnings season, and hopefully it's not the start of a theme.


Italy bum-rushed the mainstream mindset this week and officially entered the sovereign debt discussion, as well they should. The Italian economy is bigger than Greece, Portugal and Ireland—combined.

An earnings avalanche is about to hit Wall Street; please remember that these reports represent rear-view assessments, while the stock market is a forward-looking discounting mechanism.

Field position matters; stocks that are overbought tend to get sold on good (not great) news while stocks that are oversold are typically bought on bad (not horrid) news.

Tech 2.0 is forming on the horizon, with the likes of Facebook, LNKD, Twitter and Groupon seemingly destined to become the four horsemen of tech, replacing INTC, CSCO, DELL and MSFT.

Speaking of which, did you know that those four former horsemen are all lower than they were ten years ago—after the first tech bubble burst?

The reaction to news is always more important than the news itself; that applies to financial markets, and it also applies to life itself.

The government continues to jack liquidity into the marketplace, which is why we must draw the distinction between a stock market rally and an economic recovery.

Cases in point: Housing and Joblessness, two dynamics that cannot be synthetically altered.

If you ask me, we should swing the debt guillotine, share the haircut, swallow the bitter pill and move forward as one, even if the sum of the parts won’t be as big as the whole once was— at least initially.

The real unemployment rate (including those under-employed) is roughly 16 to 20%, not the 9.2% as reported by the government.

We outsourced our middle class long ago; the friction between the have’s and have not’s is simply getting louder and more pronounced.

I think GS takes themselves private when the stock trades double-digits, for what it's worth (and no, I have no edge, just the hairs on the back of my neck).

Bill King of the King Report reported that for the week ending June 27, the Fed pumped $76 billion into the markets. A little context for ye faithful: that's the biggest increase since the days following the Lehman Brothers collapse.

One more bit of perspective; the Fed injected roughly $1 trillion of liquidity into the system in 2008. Thus far in 2011, they've synthetically sweetened to the tune of $700 billion.

So, draw the distinction between an equity rally and an economic recovery. Anyone who claims that we're out of the woods must put an asterisk on their statements until we take the true temperature of the natural, unfettered, left-alone market.

The path we take is more important than the destination we arrive at (as we edge our way towards global debt restructuring) and profitability is found in the friction between perception and reality.


* There's way too much debt in the world, and while corporate balance sheets are buff (after the government reflated equity markets to allow companies to roll debt and issue stock), either side of the debt sandwich--sovereigns above, consumers below--is unsustainable.

* There is a difference between drugs that mask the symptoms and medicine that cures the disease.

* The imbalances are cumulative still and the longer we let this snowball build, the heavier the avalanche will feel when it finally melts.

Here's why the bears are scared:

Defending the financial markets long ago morphed into a matter of national security. We're not just talking about profit and losses anymore, we're talking the security and functionality of modern day society, which is finance-based, derivative laced and extremely fast-paced.

There is a rising probability of a seismic shift in the DNA of the financial landscape, including but not limited to banning naked credit default swaps. That would trigger a massive spike in equities (akin to the short-sale ban) but would lead to a bevy of unintended consequences (such as counter-party contagion).

Much like we saw in 2008, the bears should be careful for what they wish. We're not just talking about capital preservation here, we're talking about preservation...period.

The Lingering Stealth Depression

Despite the seeming enormity of it in retrospect, the stock market crash of 1929 barely even registered for most Americans. The day before the crash, Time Magazine's Oct. 28, 1929 issue was business as usual; national stories, Washington stories, a review of the newest plays opening in Manhattan, a piece on a cat washing contest in Kingston, NC.

A week later, in the wake of the stock plunge, the cover story was as far from a piece on crashing share prices as you could get - a profile of a man named Samuel Insull, the "financial father of the Chicago opera." The crash did make the magazine, of course, second billing in the Business section in a piece titled, "Bankers v. Panic." The next piece, however, was about a $2.5 million investment by a Wall Street investment bank in orchids: "Last week, however, to the orchid industry went 2,500,000 Wall Street dollars, not squandered, but carefully invested."

Yeah! Vodka!!

Monday, July 11, 2011


People are avoiding bank stocks because:

1. After the lending and investing policies of the last cycle, no one in their right mind can have any confidence in the ability of bank managements to manage over nearly any time frame.

2. Because of No. 1, the failure of laissez faire regulation and other factors, the entire banking industry is undergoing a change in its business model. Not only don't we know what the exact configuration will be but the change is not likely for the better.

3. The baking industry's high return on equity businesses (e.g., prop trading and derivatives) are being reduced in size or jettisoned completely. (By contrast, the traditional insurers are building up their high-return businesses)

4. Banks are now left with servicing the consumer, the residential/nonresidential real estate buyer (and seller), small businesses and large corporations. The consumer is screwed, however, and although the office sector is fine, the residential real estate market is inactive and double dipping in price. Also, small businesses are pressured by rising costs (and bankers are slow to lend in this sector), and large corporations are so liquid that they don't need the banks to the degree they have in the past.

5. Bank earnings have been buoyed by improving credit quality and a steep yield curve over the last two years. But credit quality improvement is fairly advanced (and comparisons will grow more difficult) while the yield curve can't be expected to be as steep forever. They have shortening half lives.

6. For some of the reasons listed above, loan demand remains weak.

7. Banking industry earnings power has been markedly reduced, reflecting the changing business model and the dilutive impact of equity raises.

The Spanish 30-year bond yield exceeds 6% for the first time since 1997.

"We need to stop being surprised by the continued weakness of job creation and start being prepared for it. We need to confront a changed global system and the place of the United States in it, as well as the challenges of future growth for what is on balance an extremely affluent society compared with the rest of the world. The cycles of the 20th century are not and will not be the cycles of the 21st. This time, it's different."

-- Zachary Karabell, Daily Beast ("Jobs Aren't Coming Back")

The mistake many have made and are continuing to make is that they view the jobs weakness of 2009-2011 as cyclical. It is not -- rather, it is a structural phenomenon. Employment will not resume (relative to bullish expectations and relative to past cycles) as the overall economy recovers.

The economy in the 21st century will not resemble the economy of the 20th century.

Public policy of throwing money at the jobs problem (quantitative wheezing) is misplaced. Nor will lowering tax rates for corporations and the wealthy help -- both groups have more than enough liquidity. Corporations, in particular, have never had more liquidity and more solid balance sheets, yet they are still not hiring.

So, from my perch, trickle-down economic theory is dumb theory -- it's yesterday's theory.

Indeed (with the benefit of hindsight), the policy of quantitative wheezing had adverse consequences in raising the costs of the necessities of life and by penalizing the savings class, placing more pressure on the middle class. (Screwflation of the middle class remains an important theme to the last decade and to the next 10 years.)

The wrong tools are being used to deal with elevated unemployment that is being influenced by new factors that include globalization, austerity, the shedding of municipal jobs (associated with local, state and federal fiscal imbalances), technological innovation and the use of part-time employees as a permanent part of the workplace, reflecting mounting health care costs and the costs of regulatory burdens.

Structural unemployment will be a consistent drag on domestic economic growth -- and, in the fullness of time, corporations will be victimized by lower demand for their products -- until authorities recognize the source of the secular problem and deal with it in a more focused and aggressive manner.

Investors will soon recognize that correcting our structural issues requires time and patience. When they finally do, share prices and valuations will be lower than they are today.

The notion of a self-sustaining and smooth recovery in the U.S. is in jeopardy and is now further complicated by the sovereign debt contagion in the eurozone, which, too, is being addressed by kicking the can in a temporary but not meaningful way.

In the final analysis, the budget impasse in the U.S. will be "resolved" but only with some more can kicking.

As to the U.S. stock market viewed as a leading indicator of growth, that is bogus, too. In 2002, 2007 and in the first half of 2010, the direction of the U.S. stock market gave the wrong signals on the direction of economic growth. Stated simply, the recent two-week rally in stocks is, too, giving the wrong signal of smooth and self-sustaining growth.

It should be noted, however, that sentiment has shifted to a more optimistic mood with advancing share prices:

* The AAII individual investor survey is at five-month high (42% bullish/26% bearish).

* The CBOE 10-day put/call ratio has fallen from 1.15 to 0.92.

* ISI's hedge fund study indicates a swift and sudden rise in net long positions in the past seven days (from 49.4% to 52.6%).