Wednesday, August 31, 2011

this made me smile


This late into a rally and deeper into an economic cycle, second-derivative news ("better than expected") can be tricky, as it usually doesn't move the market's needle.

Be forewarned amid the cheerleading over the past three trading days. (Again, interest rates (lower) and gold prices (higher) are usually warning signs.)

Here are some intelligent comments on the likelihood of QE3 from economist Rich Farr at Boenning & Scattergood:

Yesterday, on CNBC, Chicago Fed President, Charles Evans, said that the Federal Reserve may need to be even more accommodative unless the economy shows significant improvement. Also yesterday, Minneapolis Fed President Narayana Kocherlakota signaled he may be open to dropping his opposition to further easing policies.

OUR CONCLUSION: The Fed can’t possibly believe that QE2 helped the economy. The evidence is overwhelming that QE2 did more harm than good. We’ve argued all along that if $600 Billion in QE2 can be proven mathematically to have worked, then why not do $600 Trillion? If it works, then we should be doing it in incredibly large scale so that we all become wealthy beyond our wildest dreams.

Despite the fireworks over the last few days, the continued drop in interest rates and the ramp in gold are significant warning signs that I am now paying attention to.

Some sensible talk and excellent perspective from Miller Tabak's Peter Boockvar this morning:

After weak mfr'g data in the regions of Philly, NY, Richmond, Dallas and Kansas City, the Chicago PMI fell to the lowest since Nov '09 at 56.5, down from 58.8 in July, but was above expectations of 53.3. New Orders fell 2.5 pts to 56.9 and Backlogs were down by almost 6 pts to below 50 at 49.6. Inventories fell a touch. Employment rose .6 to 52.1, off the lowest since Dec '09 in July. Prices Paid moderated by 3 pts to the lowest since Oct. Chicago PMI has historically been influenced by the auto sector and production has come back well after the disruptions caused by the Japanese disaster. This may be a factor in the better than expected print. All that matters now though is the ISM national figure that will merge all the regional figures but today's Chicago number not as bad as feared may help the ISM to stay above 50. Expectations are currently 48.5.

Over the course of financial history, the U.S. stock market has served as a conduit and repository for investors and savers. It is the platform upon which new capital is raised for start-ups, for emerging companies and for existing businesses. As such, equity markets assist and are invaluable in the creation of jobs in our country and, in turn, in promoting aggregate economic growth.

But the toxic combination of price momentum-based high-frequency trading strategies and the proliferation of leveraged ETFs has served to launch the newest forms of financial weapons of mass destruction, and they're alienating legions of investors.

Computers don't sleep, don't get tired, don't care about politics or fundamentals and don't vacation in late August in the Hamptons or on the Jersey Shore -- they just wreak havoc on our marketplace by amplifying moves on the upside and on the downside.

The de-risking in the hedge fund industry and a record level of domestic equity mutual fund liquidations have reduced the role of the more stable classes of intermediate- to longer-term retail and institutional investors. The ensuing vacuum created has produced heightened volatility and an unforecastable risk-on/risk-off atmosphere owing to the increased presence and disproportionate role of high-frequency, momentum-based trading strategies and intraday adjustments to the holdings of leveraged ETFs. (Some have estimated that high-frequency trading now accounts for almost 75% of all trading!)

This unfortunate set of affairs has, in essence, transformed a relatively stable marketplace into a casino-like environment, as investors have been replaced by machines that trade securities not based on intrinsic value decisions but on small trading edges and price-momentum-based algorithms.

These financial weapons of mass destruction have taken over the wheel in a period in which there is already too much uncertainty about the economic and stock market future. These strategies and vehicles have no redeeming social and/or economic value. Indeed, one can argue that their influence (on the market's volatility) is contributing to the negative feedback loop that is threatening our domestic economy's growth trajectory.

One only has to look at the intraday price movement between 3 and 4 p.m. EDT during yesterday afternoon's trading session to understand the damage in investor confidence that is being done to our marketplace -- up more than 10 points on the S&P 500 from 3 to 3:30 and then back down a like amount in the last half hour of trading -- by the randomness and unpredictability of stock movement caused by the two factors.

I want to quantify the dimension of the loss of confidence on the part of the individual investor.

In June nearly $21 billion was redeemed from domestic equity funds. Last month, almost $29 billion was redeemed and, in August, it has been estimated that more than $35 billion poured out.

The $85 billion of outflows from June to August will likely approach the previous three-month record of $88 billion, which came out of domestic equity funds between September and November of 2008!

Thus far in 2011, individual investors have sold about $75 billion of domestic equity funds, only $10 billion less than last year's total outflows.

Astonishingly, since the beginning of 2007, domestic equity mutual funds have had net outflows of more than $400 billion (in the same period, $835 billion of fixed-income funds have been purchased! That spread between stock outflows and bond inflows -- $1.235 trillion -- is unprecedented in the annals of financial history.

I fully recognize that the instability and damage to confidence caused by the impact of high-frequency trading strategies and uber-leveraged ETFs are not the sole reason for retail disenchantment with stocks. A weak jobs picture (with about 9% unemployed and another 9% working part time or just giving up on a job search), stagnating real incomes (and screwflation), broader economic uncertainty and the ever-present memory of the 2008-09 investment and economic shock are additional reasons individual investors have developed a distaste for stocks.

Nevertheless, time is running out to stop the damage in investor confidence.

If these financial weapons of mass destruction are allowed to continue to impact our marketplace -- as they did again on Tuesday -- investor confidence will not be restored for years.

Can It Last?

The bulls managed further upside this morning on mediocre but better-than-expected economic reports, but a few cracks appeared mid-morning and we trended down the rest of the day.

We had decent breadth and the indices closed green, but the action under the surface didn’t feel very positive. There were a few big reversals in names that have led recently -- AAPL, HANS, BIDU, JVA -- and plenty of stocks closed well off their intraday highs. Of course, the computers kicked in again in the final hour and spiked us up, but the sellers gained a foothold in the afternoon.

The "Shining" Example Of Obama's $787 Billion Fiscal Stimulus Act, Solar Energy Company Solyndra, Files For Bankruptcy

Solyndra filed for bankruptcy less than 24 hours after an insightful investigative report proposed that the company is nothing but a stimulus black hole. What timing. And while there are no winners, there are plenty of losers. Who? Why US taxpayers of course. Why? Because as some may recall, Solyndra is one of the "shining examples" of Obama's $787 billion American Recovery and Reinvestment Act. After all none other than president Obama said that Solyndra is "leading the way toward a brighter and more prosperous future.” He also cited it as a success story from the government’s $787 billion economic stimulus package. Alas Solyndra has now become a less than shining example of the complete catastrophe this latest exercise in pointless Keynesianism has been, all on the backs of US taxpayers. But don't worry, Obama is about to bring us a fresh new such fiscal stimulus catastrohpe any minute. This time it will be different......

This from ABC:

President Obama visited Solyndra in May 2010, heralding the company as “leading the way toward a brighter and more prosperous future.” He also cited it as a success story from the government’s $787 billion economic stimulus package.

“Less than a year ago, we were standing on what was an empty lot. But through the Recovery Act, this company received a loan to expand its operations,” Obama said at the time. “This new factory is the result of those loans.”

In 2009, the Obama administration fast-tracked Solyndra’s loan application, later awarding it $535 million in guarantees from the stimulus funds.

The deal later came under scrutiny from independent government watch dogs and members of Congress, which said the administration had bypassed key taxpayer protections in a rush to approve the funds — claims the administration has denied.


High-frequency trading took us up in the mid-afternoon, then took us down at the close.

Here is Miller Tabak's Peter Boockvar's take on the Fed minutes:

"In response to the FOMC's concern with the lackluster economic recovery and the mostly benign outlook on inflation (some were more concerned about inflation), members on Aug 9th discussed doing more. They discussed selling short term maturity debt they own and buying longer term debt with the proceeds. They talked about lowering the interest rate paid on bank reserves to encourage bank lending (.25% rate is certainly no impediment) and they debated the only thing they followed thru on, that of explicitly defining the time frame of an 'exceptionally low' fed funds rate. The 1st and 3rd options were meant to lower further the level of long term interest rates as many on the committee still believe that even lower rates will somehow help. Some didn't want more because they didn't think it "would likely do much to promote a faster economic recovery" and "that providing additional stimulus at this time would risk boosting inflation without providing a significant gain in output or employment." The majority of members "agreed that the economic outlook had deteriorated by enough to warrant a Committee response at this meeting." Remember that this is only 5 weeks after the end of QE2 that they felt the need to act again. Some members even wanted more and will likely use the Sept meeting to push for it. Bottom line, after hearing from Bernanke on Friday, Evans and Kocherlakota today and Fisher and Plosser (dissenters) after Aug 9th, we got a good read of what the Fed is thinking and it seems that the majority still want more."

My take on the Fed minutes is that the Federal Reserve is as divided as our Congress is on the major factors influencing and the causality of weaker-than-expected domestic economic growth.

There is no historic game plan to deal, either monetarily or fiscally, with structural problems plaguing economic growth.

Extraordinary monetary accommodation didn't work and, as we move closer and closer to the November 2012 elections, the odds of meaningful bipartisan fiscal policy diminishes.

Enough is enough.

"In a famous Saturday Night Live skit, Christopher Walken plays a legendary rock music impresario whose advice, his only advice, to a young band is "more cowbell." The actor Will Ferrell furiously pounds away on a cowbell but it's never enough for Mr. Walken, who ultimately shouts, "I got a fever, and the only prescription is more cowbell!" Federal Reserve Chairman Ben Bernanke must be a fan of that skit because he is applying the same logic to monetary policy: The economy isn't growing fast enough, and the only prescription is more money." -- Wall Street Journal Op-Ed

My vote is for no more cowbell.

No more fast and easy money.

Enough is enough.

The authorities should either engage in pro-growth fiscal policies or recognize that we must be patient and let the markets clear (as private and public sectors delverage) by themselves.

Pay heed to the message of higher gold prices over the last week.

From my perch the message is clear cut.

Continued easing and mo' money will not deliver economic growth, clear excessive home inventory or result in improving (and higher wage) jobs (what the Fed wants), but rather will result in higher costs of the necessities of life that squeeze the Average Joe and will likely translate into a further drop in our currency (and the further loss of US hegemony) -- that will, in the fullness of time, serve as a headwind to domestic economic growth.

Mark-ups aside, lower interest rates and higher gold are troubling.

I suspect that in combination with momentum-based high-frequency trading strategies, some portion of the rally over the past few days is due to mark-ups.

That said, what concerns me today is the drop in interest rates and the rise in gold prices.

MKM Partners' Mike Darda has been very right about the markets and the economy over the last three years. He forecast the rally and is now quite negative.

As I have written repeatedly, Europe is a wild card.

Darda expounds:

European credit markets are a mess. As we noted yesterday, euro two-year swap spreads, one measure of systemic/banking stress, are pushing the 90 bps threshold, a very high level historically.

Corporate bond spreads in the eurozone have exploded to 221 bps, the highest level since the spring of 2009. Indeed, the action in European corporate debt markets looks a lot like the late 2007- early 2008 period. Moreover, credit default swap spreads on European banks are wider than they were at the height of 2008 crisis. While many continue to argue that whatever we’re heading for cannot possibly be worse than 2008, it may indeed be worse than 2008 for the eurozone. This may sound semi-hysterical, but there is a powerful case to be made that a collapse of the eurozone as we know it is more probable than the more benign alternative. We wish we could disagree.

The June Case-Shiller 20-City Home Price Index was in line with consensus forecasts, falling 0.1% over May 2011 and down 4.6% year over year.

The vote was unanimous -- all 20 cities dropped in price.

The weakness in residential real estate will be with us for years. It's one of the more important nontraditional factors that will weigh down domestic economic growth.

Fed member Charles Evans is out with some very dovish remarks, joining fellow doves Ben Bernanke, William Dudley and Janet Yellen.

Not surprisingly, gold is exploding to the upside.

Italian bond yields have risen to monthly highs after the sale of 3- and 10-year notes (less than expected). Nevertheless, the yields were below last month's record levels. The italian auction shoud be viewed somehat negatively and coud adversely affect risk assets.

Italian business confidence rose modestly (month over month) but was still at the second-worst level in a year. The eurozone confidence index dropped to a level last seen almost 16 months ago.

In Japan, the unemployment rate rose a tad.

Meanwhile, Chinese stocks are dipping again.

Yesterday the administration announced that Alan Krueger will be nominated to become the new chairman of the Council of Economic Advisers.

Like many of the president's economic positions, the choice was predictable. Krueger worked in the Clinton administration and is very close with (and plays tennis with) Larry Summers and Tim Geithner. And he, like Ben Bernanke, is a member of the Princeton University Economics Department.

Window Dressing

The lesson is....don’t fight the Fed -- even when it isn't very clear and hasn’t done anything.

The release of the minutes of the August meeting of the Federal Open Market Committee (FOMC) indicated a fair amount of disagreement among the members. But the market decided that QE3 is coming sooner or later and that was all that was needed to squeeze the market higher. Any talk at all about quantitative easing lights a fire under the market as the bulls have very fond memories of what happened last year after Ben Bernanke announced QE2 at the end of August.

We also saw what looked like some pretty obvious end-of-the-month window dressing in big-cap names, including PCLN, BIDU, LVS and UA. Window dressing tends to peak on the day before the last trading day of the month and that sure looks like the case today.

Interestingly, the market completely overcame a very poor consumer sentiment number this morning. I think that is not as irrelevant as the market treated it today and will be felt again as further economic news rolls out.

Technically, this action looks quite familiar. It is our old friend the low volume, V-shaped bounce. These moves confound the underinvested bulls and destroy the aggressive bears who think the market is going to start acting in a manner that makes more sense to them.

Tuesday, August 30, 2011


The question I ask myself: Self, Friday created today; what does today create?

The most asked question on Friday and today: "Why the sudden strength over the past few days?"

I believe it has little to do with a stabilizing Europe or improving U.S. economic data (especially as neither are actually happening). Rather, it is more likely a function of the asset reallocation out of fixed income into equities.

These programs have little interest in last week's prices or last month's prices -- they are machine-based.

Nothing more, nothing less.

Weakness in the Dallas Fed manufacturing confirms those readings in other regions (including Richmond, Philadelphia and New York).

At -11.4, it was nearly 3 points below expectations and marked the fourth or fifth consecutive monthly crop.

New orders, production backlog and unemployment indicators all dropped.

I would guess that the proximate cause of today’s rally could importantly be the ECB release that the central bank purchased less than 7 billion euros of bonds last week (vs. 14 billion euros a week earlier).

The interpretation being that ECB could keep Spanish and Italian 10-year yields below 5% with less purchases.

The July income was in line, but spending was much better than consensus expectation (+0.5% vs. +0.8%E).

With the deflator up 0.4%, real income dropped slightly, and real spending rose by 0.4%. Savings rate fell slightly.

Ergo, more screwflation of the average Joe.

Again, this is July data and the world stood still in August.

“It’s tough to make predictions especially about the future.”

-- Yogi Berra

Bulls In Charge

Power outages caused by the hurricane this weekend kept volume very light, but the storm must have disproportionately affected the bears. The bulls were in charge all day, and the buying was tremendously lopsided, with breadth better than 7 to 1 positive and a huge move in the small-cap indices.

What was particularly interesting about the action today was that there were hardly any pullbacks at all. We gapped up to start the day and never looked back. We even finished at the highs on a little burst of volume.

This sort of action is indicative of high-frequency trading. The computers just keep on pushing as they extract their fraction-of-a-penny profit on the move. It is a lot easier to push the market in a straight line once it begins to move, and we saw a good example today.

It was downright humorous to hear all the attempts to explain the action today. Take your choice from window-dressing, Greek banks, hurricane relief, too much negativity, Ben Bernanke, high-frequency trading and so on.

Technically, the bulls even managed to break through last week’s high, which looks good but is undermined to some extent by the low volume. You can almost hear the bears muttering about how this is setting up as a bull trap, but these moves have proven to be bear-killers more often than not.

It is tough to believe that the bulls can keep this going without some sort of rest, but they have done it before. In fact, this action feels a lot like the move we had back at the end of June, which everyone thought was window-dressing but went a few more days before it topped.

Monday, August 29, 2011



1. Bernanke showed his version of self restraint
2. July Durable Goods orders both headline and ex transports exceed forecasts but we know the world changed in August
3. July New Homes remain depressed, falling to lowest since Feb, better chance to eat into excessive existing home inventory
4. China preliminary HSBC mfr'g index rises to 49.8 from 49.3, below 50 still but better than feared
5. July Euro region mfr'g and services composite index unchanged vs expected decline
6. Better than expected earnings from Credit Agricole help to lift most European bank stocks on the week


1. July non defense capital goods ex aircraft, a core cap ex reading, falls 1.5% even before Aug turbulence
2. While Initial Claims boosted by VZ strike (yes, they get paid to strike) they remain stubbornly above 400k
3. Richmond Fed mfr'g survey falls 9 pts and follows weakness seen in Philly and NY regions
4. UoM confidence final reading has it at lowest since Nov '08 but bounces from initial report of a 31 yr low
5. Greek bailout in disarray but should get resolved, Greek banks hanging on by a thread
6. Germany IFO business confidence falls to lowest since June '10, ZEW investor confidence plunges
7. July New Homes sales remain depressed, no end in sight
8. MBA said purchase apps fall to lowest since 1996

The Fed might ease further if its baseline forecasts are too optimistic.

I believe one of the reasons the market has rallied after Bernanke's comments was his reference to a two-day Fed meeting in September, which will allow for a fuller discussion of the benefits and costs of the available policy options.

To me and many observers, this is a clear indication that the Fed might ease further if its baseline forecasts are too optimistic.

Also, Bernanke reiterated the importance of disciplined fiscal policy and the need to adopt a housing policy that could turn the residential real estate markets around.

Corporate pension plans are rumored to be setting up for a large reallocation out of fixed income into stocks.

I think this one is important.

Bernanke's remarks:

In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. We discussed the relative merits and costs of such tools at our August meeting. We will continue to consider those and other pertinent issues, including of course economic and financial developments, at our meeting in September, which has been scheduled for two days (the 20th and the 21st) instead of one to allow a fuller discussion. The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability.

“Life is about not knowing, having to change, taking the moment and making the best of it, without knowing what's going to happen next.”

-- Gilda Radner

Volatile Mix

We had an interesting mix of expectations going into Fed Chairman Ben Bernanke’s comments Friday morning, and, unsurprisingly, it produced volatile action.

Initially, market players were concerned when Bernanke didn’t mention any specific new monetary approach for the ailing U.S. economy, but after a little reflection a consensus developed that something is likely to be announced after a two-day meeting in September. We will have to go through the same thing we experienced today once again, but the bulls are optimistic that something is coming from the Fed that will be market friendly.

I suspect that some overly aggressive positioning by the bears also helped contribute to the strong reversal to the upside. They were thinking that since nothing specific was announced, we’d see a run for the exits. When that didn’t happen, the bears ended up as short-squeeze fodder.

While it was a clear victory for the bulls Friday, the big picture remains murky. We are now in a clear trading range between 1120 and 1205 of the S&P 500, but the intermediate trend is still downward. Predictions that we will hold the recent lows look a little better now but the macro news flow can turn things quickly.

The biggest negative is that European sovereign debt problems remain largely unresolved. Germany has been under tremendous pressure to save Greece, which is hanging by a thread again. Greece obviously wants to default and start over. Germany won't let them, because that starts the dominoes falling. Many European banks then fail. Obviously, the U.S. economy and poor consumer sentiment is a headwind as well, but it’s the uncertainty in Europe that the market is struggling to discount.

I suspect it is going to be a bumpy ride again next week, as end-of-the-month games and then the start of what is the weakest month of the year. Tech tends to get slammed in September. Will AAPL see $400? Or $330? The bulls really need better macro news flow to turn this market but, at the moment, there isn't much on the horizon.

The good news is that this poor market action has created bargains.

Will Irene Effect The Stock Market Opening On Monday?

No - the NYSE announces that robotic frontrunning to resume Monday At 9:30 Eastern time, as per usual........

We're Not Japan, But There Are Similarities

There are similarities and differences between the US and Japan (20 years ago).


* High private debt levels leading to high government debt levels, as the government “rescues” selected areas of the private sector
* Asset bubble deflating
* Desire for security drives government interest rates lower
* Intractable government deficits
* Both have warped monetary policy to try to deal with the problem.
* Slow to fix banking problems; reluctance to take big banks under.
* An unwillingness to note that the problems are structural, not cyclical.
* Failure to recognize that growth is not a birthright. Proper policies must be maintained.
* Slow response from legislators.
* Low growth is anticipated, because of high private debt levels.


* Japan’s deficit is self-funded for now.
* Demographics in the US are far more favorable.
* US Economy more open to global competition.
* No Tohoku tsunami in the US.
* Japanese politics don’t care as much about their problems.
* Japan’s debts were debts of over-production, rather than over-consumption.

I think the right answer to the question of whether the US is going the route of Japan is no, but there are similarities, and significant differences. In Japan, they entered their troubles with corporations and banks overly indebted, whereas in the US it was consumers and banks. A lot depends on how much US consumers reduce debt, making them more capable of buying goods and services in the future.

With over-production, there is no guarantee that the world will ever get up to the level where they demand all the capacity that was developed. With over-consumption, many debts will get compromised, lenders may be in a funk for a time, but there should be cleaner ways of clearing away and paying off the overindebtedness.

In the Great Depression, the US was in the position of being the over-producer. Other nations indebted to the US came through the experience better. Japan was the over-producer of the 1980s. This time, the US will probably come through the crisis better than China and other creditors of the US. No guarantees, but foolish lenders eventually get their comeuppance.

Thursday, August 25, 2011


BAC - Either Moynihan lied that the company didn’t need capital or he and the board of directors are just plain stupid.

Bank of America is good at two things:

1. buying high (Merrill Lynch); and
2. selling low (its stock).

It looks to me like Moynihan got fleeced on this Buffett deal.

"If I knew for a certainty that a man was coming to my house with the conscious design of doing me good, I should run for my life, as from that dry and parching wind of African deserts called the simoom, which fills the mouth and nose and ears and eyes with dust till you are suffocated, for fear that I should get some of his good done to me -- some of its virus mingled with my blood. No -- in this case I would rather suffer evil the natural way. A man is not a good man to me because he will feed me if I should be starving, or warm me if I should be freezing, or pull me out of a ditch if I should ever fall into one. I can find you a Newfoundland dog that will do as much."
-- Henry David Thoreau

If BAC can borrow at close to zero percent, many are justifiably now questioning why the company agreed to pay a 6% dividend on the $5 billion preferred issued to Berkshire Hathaway (BRK.B).

In reality the cost of capital on the $5 billion Berkshire investment is well in excess of the 6% annual dividend. As was the case in similar deals with Goldman Sachs (GS) and General Electric (GE) several years ago, Berkshire receives a large warrant. (In today's transaction, Berkshire gets the right to buy 700 million shares of BAC at an exercise price of $7.14 a share over a 10-year period).

By my calculation, Berkshire Hathaway is receiving an annual rate of interest on its $5 billion investment of about 10.5%, when incorporating the value of the attached call options on top of the 6% annual dividend on the preferred and the redemption premium of 5%.

Assuming BAC's share price is at $7.72/share and a 45 vol, a 10-year option on 700 million shares of BAC that mature on Sept. 1, 2021, that are exercisable at $7.14/share is valued at about $3.40/share (times 700 million shares), or about $2.4 billion! Add another $250 million of redemption premium -- that makes $2.650 billion in value (or immediate profits today!) incurring to Berkshire.

In other words, the current value of the warrants -- taken over the 10-year period -- provides an additional 4.5%-per-year return on top of the 6% dividend on the preferred, for a total cost of capital per year to Bank of America of nearly 10.5%. (Taken another way, deducting from the exercise price of $7.14/share the value of the call option ($3.40/share) means that Berkshire Hathaway may be paying, if exercised, less than $4/share for BAC!)

If Bank of America didn't need the extra capital (as CEO Brian Moynihan reportedly told Warren Buffett), was the imprimatur of Berkshire Hathaway really that valuable?

From my perch, Moynihan got fleeced by Buffett, the savviest of wolves who slipped out of his bathtub wearing sheep's clothing.

Investors are applauding Warren Buffett's Bank of America investment today. As well, the media is putting a positive spin of the deal.

I, too, believe that the financials are attractive. I have expressed admiration for Bank of America and for the banking sector.

Nevertheless, a more objective assessment of his move is in order now.

Buffett's widely heralded previous buys of General Electric (GE) and Goldman Sachs (GS) were done when the common share prices were at levels that were much higher than current prices. I suspect if one did the analysis of those purchases, we would find that both GE and Goldman common have been massive underperformers as their share price changes are likely in the bottom decile of stock performers since his "preferred" purchases.

The Oracle's investments in GE and Goldman did well not because the underlying share prices appreciated -- they did not; they declined -- they did well because of a preferred structure that included a high-yielding paper with enormous warrants attached.

In the media, I am seeing a lot of flag-waving about Buffett's move today but little in the way of substance. Based on reports, it appears that Buffett did not have a deep knowledge or perform an extensive analysis of Bank of America. Indeed, “Squawk Box's” Becky Quick reported that Buffett told her he got the idea while in the bathtub. When he emerged from the tub, Buffett initiated a call to Bank of America's Moynihan and spelled out his interest in making an investment in the bank.

In other words, it appears that there was little due diligence done and that Buffett, similar to his previous deals, is relying on the preferred structure of the Bank of America deal.

If Warren Buffet was a real believer, wouldn't he simply buy the common stock like other investors? Now that would have been a reason for investors to rejoice.

It would be disingenuous for Buffett to say and for the media to conclude that in making a "preferred" investment in Bank of America that he is making a statement on the U.S. and that he is, once again, buying America.

Warren Buffett is a brilliant investor -- the best there ever was -- but the Bank of America deal is another example of how Buffett benefits from his unique stature in the world's financial community.

Here is how Oaktree Management's Howard Marks draws a colorful parallel between gold and religion, over the past weekend in his always-thoughtful commentary on the markets:

My view is simple and starts with the observation that gold is a lot like religion. No one can prove that God exists ... or that God doesn't exist. The believer can't convince the atheist, and the atheist can't convince the believer. It's incredibly simple: either you believe in God or you don't. Well, that's exactly the way I think it is with gold. Either you're a believer or you're not.

What we do know is that gold is valued in an auction market based on the price where buyers ("the believers") and sellers ("the atheists") meet.

Media-Based Trading

The smart trade today was to fade the media.

If you bought the gloomy reaction to Steve Jobs' resignation and sold the excitement over Warren Buffett's investment in BAC, you would have done well. The market was a bit nervous anyway since there were recent gains to protect ahead of Fed Chairman Ben Bernanke's speech Friday morning in Jackson Hole, Wyo., but the news flow didn’t help much and uncertainty in Europe continues to weigh on things.

It was a day of big reversals. In addition to the turns in AAPL and financials, gold climbed steadily after a weak open and finished positive. Unfortunately, that was about the only sector that did anything positive. Oil, retail, tech, drugs and just about everything else was red.

It is a bit depressing to look at the action in small-cap stocks. There is no interest in these names, despite what looks like very compelling valuations in places. These thin stocks can go lower and stay weaker far longer than you think possible, which is why it can be tough to be a value investor.

We’ll see what comes out of Jackson Hole tomorrow. The bears think expectations for some sort of Fed magic are too high, while the bulls are optimistic that just about any move by the Fed will get this market running. It is going to be a good battle.

HFT In Action

Now that we can directly monitor the amount of quote stuffing in the NYSE courtesy of Nanex (an ability that the SEC apparently never will have), we know that every time there is a massive spike in hollow trade (as in without intentions to cross bids or asks, something everyone but the SEC and the HFT lobby believes should be a felony offense), the market is programmed to either rip or plunge. And, sure enough, I read that just after 3:19 pm we saw an epic spike in empty packets on the NYSE, which set off red flags and immediately prompted some to observe the move in ES, which naturally confirmed that an HFT driven coordinated buy order (no block) was going through and pushing the ES well on its way to VWAP. Market manipulation no longer needs anything more than a coordinated packet stuffing dump, as what happened on May 19. Keep in mind: these work on both the upside and the downside- the reason why suddenly everyone hates HFT after loving it for over 2 years, is that while it provides volumeless levitation, it just as easily can serve as quicksand in a downmarket. That, however, does not make it right. HFT should be abolished immediately by the imposition of a minimum active quote latency. That would eliminate all quote stuffing in a millisecond.


I want to comment on the decimation of the leveraged bank loan market, as it is symptomatic of the deterioration in the world's economies, as well as take a brief look at other credit metrics.

The S&P/LSTA U.S. Leveraged Loan 100 Index, which tracks the 100 largest U.S. dollar-based first-lien loans, is now down to 88.06% of par. During the month of August, the index has dropped by 6.3% -- that's the poorest performance since November 2008's loss of nearly 10%.

In a non-crisis environment, the magnitude of such a discount as exists today is very unusual, as defaults on these types of loans usually don’t occur. Most of the index components have already benefited from the Fed's largesse and have refinanced their loans (at lower rates and longer maturities), and their operating status is nonthreatening. As well, a good proportion of the index's loans were issued post the 2008 crisis.

In other credit metrics today, high-yield bonds are trading at over 700 basis points. BAC credit default swaps are trading at +445. GS credit default swaps are trading at +258 (down from +283). Other swap spreads are showing small signs of stress but nothing alarming yet. For example, the difference between the two-year swap rate and two-year Treasuries has widened to 33.3 basis points, which is the highest level since July 2010. This is not a problem yet but is worth watching.

The two-year Greek note yield has risen by nearly 500 basis points today and now is approaching 45%!

The European Parliament has just confirmed a meeting next week to discuss the advancing sovereign debt contagion, which will include Rehn, Trichet Rostowski and Junker.

These high-frequency, momentum-based trading strategies and leveraged ETFs are raising volatility dramatically, and, in turn, the confidence in the marketplace is eroding quickly.

More important, this instability is (to paraphrase George Soros) causing a reflexive and negative impact on the real economy.

As such, high-frequency-trading strategies and uber-leveraged ETFs are the new weapons of mass destruction -- perhaps, instead of calling on the SEC, we should be reporting this to the Pentagon, CIA and FBI.

Here we go again.

Those quantitative, high-frequency traders that utilize computer programs to focus on price-momentum-based trading "strategies" and the uber leveraged ETFs have retaken control of the wheel.

Neither strategies nor vehicles have any redeeming social and/or economic value. Indeed, one can argue that their influence (on the market's volatility) is contributing to the negative feedback loop that is threatening our domestic economy's growth trajectory.

They were back in force on Tuesday afternoon, when the DJIA advanced sharply from being up by about 150 points at midafternoon to closing with a gain of over 300 points by day's-end.

Computers don't sleep, don't get tired, don't care about politics or fundamentals and don’t vacation in late August in the Hamptons or on the Jersey Shore -- they just wreak havoc on our marketplace by amplifying moves on the downside and on the upside (as they did in the last hour of trading yesterday).

I recognized the important fundamental catalysts of the recent market swoon, the growing ambiguity of worldwide economic growth, the negative feedback loop engendered by the gridlock and rancor associated with the political circus in Washington, D.C., and the fragility of the European banking industry, I also underscored that several non-economic, temporary and artificial influences have conspired to exaggerate high-frequency trading's dominance and impact in accelerating market moves and volatility.

Ever since the investment shock of 2008-2009, some of those non-economic factors, including a general de-risking in the hedge fund industry, growing hedge fund redemptions and a record level of domestic equity mutual fund liquidations, have served to reduce the role of the more stable classes of intermediate- to longer- term investors. This has created a vacuum of the more stable and two-sided retail and institutional trading flows and activity and has produced heightened volatility and a risk-on/risk-off atmosphere (which changes daily) owing to the increased presence and disproportionate role of high-frequency, momentum-based trading strategies. Some have estimated that high-frequency trading now accounts for about three-quarters of all trading!

This unfortunate set of affairs has, in essence, transformed a relatively stable marketplace into a casino-like environment (up 400 points one day, down 400 points the next day), as investors have been replaced by machines that trade securities not based on intrinsic value decisions but on small trading edges and price-momentum-based algorithms.

Meanwhile the SEC fiddles while the New York Stock Exchange and investors burn.

I suppose one important reason why the SEC is hopelessly unresponsive is that they are literally "paid off" by the high-frequency-trading industry and its lobbying efforts have likely retarded regulatory responses. We shouldn’t be surprised in the SEC's incompetence and "blind eye" -- after all, this is the agency that still can’t explain the Flash Crash and, despite ample evidence and warnings, failed to uncover Madoff's and Stanford's Ponzi schemes.

The volatile, arbitrary and unpredictable risk-on/risk-off moves brought on by these disruptive strategies have grave longer-term consequences -- they are disaffecting investors across the world, as many are permanently leaving the investment house.

For example:

* Retail investors have pulled out money from mutual funds for five consecutive years, an all-time record.
* August's outflows (estimated to be close to $40 billion) are approaching record monthly withdrawals.
* Hedge funds, too, have been affected. Facing a much higher daily volatility, hedge-hoggers have adjusted their exposures and have reduced their values-at-risk by de-risking down to net levels that are back to 2009 net long positions.

Here is Neuberger Berman's Marvin Schwartz's well-articulated rant against high-frequency trading from Thursday's CNBC “Strategy Session” with Gary Kaminsky and David Faber:

I think the high-frequency trading is a major negative for the stock market. It is a major negative for the economy, and it does not do anything for the economy. It does not add any value to the economy. It doesn't add any social value. Charles Munger, Warren Buffett's partner, in an interview on CNN in May, essentially said the same thing.

These high-frequency traders begin the day owning nothing and end the day owning nothing in terms of common stocks. During the day, they are accounting between 50% and 60% of the volume.

There was a terrific article in The Wall Street Journal on Tuesday. The headline was “A Wild Ride to Profits.” The article talked about what happened on Aug. 8, when the S&P 500 index was down 6.8%. That day happened to be the single most profitable day in the history of high-frequency trading. These high frequency traders made an estimated $65 million. While on that day, the stock market lost $850 billion of value....

The liquidity that they add to is useless liquidity. It has no lasting value. It consists of orders that are placed and that are quickly retracted. It heavily, heavily consists of front-running.

It is amazing to me the New York Stock Exchange puts up a facility right next door to their computers in New Jersey and then they lease out space to 10 or 15 or 20 of the highest so-called co-locations so that those individuals putting their computers there can get a microsecond of an advantage over their competition. If the New York Stock Exchange thinks this is a smart idea, in order to generate volume, I don't think so.

But can I go back to something else? There was no high-frequency trading four years ago. What permitted high-frequency trading, in my opinion, to occur was when the SEC removed the uptick rule -- on July 7, I think, 2007.

Right now, I ask a question, where are the regulatory bodies? We have had a major destruction in confidence. You can help restore confidence to the markets tremendously, in my opinion. If the SEC would consider reinstating the uptick rule, reinstating the uptick rule -- if you reinstate the uptick rule, you don't have to do anything else. That will bring high-frequency trading to a screeching halt, but understand that the New York Stock Exchange may not be in favor of it. The major investment banking firms won't be in favor of it. The hedge funds, most of them, won't be in favor of it.

-- Marvin Schwartz (Neuberger Berman) on CNBC’s “Strategy Session” (Aug. 18, 2011)

Kill the quants before they kill us.

One final word.

In the last cycle, the banking industry bought off derivative reform from the politicians; in this cycle, the high-frequency-trading entities have bought off reform from the publicly held exchanges.

It’s that simple.

The banks ultimately were nearly destroyed by their avarice, and the greed of the high-frequency-trading will likely hold the same fate.

Wednesday Market

The good news is that the bulls managed a second day of decent gains. The bad news is that it looks like we are developing a great set up for shorts. The fact that many are ready to proclaim the worst is over and the economy really isn't bad doesn't help either.

The bulls are obviously anticipating something positive from Fed Chairman Ben Bernanke when he speaks on Friday and that is also contributing to nervousness in the precious metals group. Dr. Bernanke is going to move metals and the markets one way or the other, and many folks with big recent gains in gold and silver are going to step aside until that event is over.

It will be interesting to see if the bulls continue to push into the Bernanke speech. You have to be thinking at least a little bit about a possible sell-the-news reaction, especially if there is no QE3 or some variation announced. This market wants endless support from the Fed, regardless of the outcome, and if Bernanke doesn’t give the bulls a bone they will not be happy.

Wednesday, August 24, 2011

Millions Are Starving - Hey! Let's Have A Salad!!


China's preliminary August manufacturing PMI came in at 49.8 compared to consensus of 49.3 in the prior month -- this is the first increase in two months and comforting in the face of the eurozone banking crisis and the volatility of the world's stock markets. The print implies full-year Chinese growth of about 8%, which would qualify as a soft landing to most. (The recent drop in oil prices and a moderation in food prices tightening in China would be a plus for risk assets.)

In Europe, the August composite of service and manufacturing indices held constant at 51.1 (well above consensus of 50.0). Though at a low level, the print is still consistent with positive economic growth and markedly different to the chaos in the eurozone stock markets. Orders were slightly lower, but the employment component was solid. Manufacturing was 49.7 vs. 50.4 in July while services were flat at 51.5.

Here are 10 changes that I endorse:

1. Establish term limits for all our representatives.

2. Limit government spending. Set a specific limitation on the annual gains in spending to be less than the increase in consumer price index.

3. Develop a comprehensive jobs plan.

4. Fix housing. Over 15 million homeowners are underwater with their mortgages, the shadow inventory of unsold homes is a drag on a housing recovery, and we must find a way to find a way to reemploy over 2 million former housing-related workers. We need a Marshall Plan for housing. I would suggest that the Obama administration reach out to the two most knowledgeable and smartest guys in the residential real estate markets, Eli Broad and Bob Toll. I would have them all meet in a locked room with Fed Chairman Ben Bernanke, Treasury Secretary Geithner and President Obama (and his economic team).

5. Raise taxes on the rich. Put a three-year income tax surcharge (of 10% to 15%) on incomes above $500,000.

6. Create a health care czar and tackle our health care industry's delivery and costs.

7. Mean test entitlements, freeze entitlement payouts and gradually increase the social security retirement age to 70 years old.

8. Exit Afghanistan and Iraq immediately. More effectively rationalize the defense budget and provide returning soldiers full tuition to vocational schools and colleges as they have sacrificed much.

9. Build infrastructure. Set up an infrastructure bank, and place the money saved on defense into a massive build-out and improvement of the U.S. infrastructure base.

10. Create energy self-sufficiency. Develop a comprehensive plan designed to rapidly develop all of our energy resources.

The Sharpest Rallies Occur In Bear Markets

The sharpest rallies tend to occur in bear markets. Market players just aren’t positioned for the upside, so once a bounce kicks in it gains steam quickly.

We had a particularly good example of a bear market bounce today. The point moves were big and breadth was strong, but volume was nothing special and there was a distinct lack of excitement. Of course, since the action was positive, we heard very little about the evils of computerized and high-frequency trading, which probably helped push things along quite a bit.

What always happens when we have a bear market bounce like this is the bulls start high fiving because they know for sure that we have seen the bottom. You will hear a lot of comments about how the worst is over and it's clear sailing.

While it certainly is possible that today’s action will mark a major turning point, there isn’t any hard evidence to support that conclusion. It really is nothing more than a low-volume, oversold bounce. Chances are good we’ll see some follow through to the upside in the next few days, especially with Fed Chairman Ben Bernanke on deck, but the odds that we will roll over again in the next couple of weeks and take out the recent lows remain quite high. Once Bernanke is out of the way, I wouldn’t be surprised to see the bears press once again.

Monday, August 22, 2011


Buybacks are not silver bullets unless a corporation is buying back stock well under its private market value. Even with this metric, there should be some margin of error, especially during these uncertain times.

HPQ repurchased about $7.5 billion of stock at an average price of over $38 a share in 2010. Over the last seven years, the company has bought back over $60 billion of stock at an average price of $37 a share.

Today's equity capitalization of Hewlett-Packard? Only $50 billion.

Enough said.

The growing ambiguity of worldwide economic growth, a negative feedback loop engendered by the political circus in Washington, D.C., and signs of an increasingly fragile European banking industry have (in large part) contributed to the recent selloff in the world’s markets. I am convinced, however, that several noneconomic, temporary and artificial influences have conspired to accelerate the recent drop of stock prices.

A General De-risking by Hedge Funds

The recent selling bout has occurred at a time when, according to the ISI Hedge Survey, hedge funds were already reducing their net equity exposure. ISI’s latest numbers (based on “the actual exposures at 35 funds capturing $86 billion in long/short assets”) indicate that net hedge fund exposure has moved to about 45.8% -- that’s the lowest exposure in two years. Hedge funds have cut back based on growing losses (and the trading associated with the discipline of limiting losses) as well as in response to the marked rise in the VIX, which creates a higher VAR (dollar value at risk per day). The swiftness and magnitude of the drop has begotten more and more selling by the hedge fund community.

Recent Hedge Fund Redemptions

Large redemption requests in the hedge fund community have led to further selling pressure. Many of those hedge funds had a large exposure in the financial sector, and this could explain the outsized drop in bank stocks and other non-bank financials.

A Nearly Unprecedented Liquidation of Domestic Equity Funds

Last month, individual investors fled equity funds in a massive move toward the flight-to-safety trade. In July, over $25 billion was redeemed. A week ago, over $20 billion was pulled. Surprisingly, assets were taken out of every mutual fund asset class (equities, taxable and nontaxable bond funds) and went into money market funds. I estimate that individual investors will pull out at least $35 billion in August, representing the second-highest liquidation on record since the series of data began to be accumulated in 1979. It is almost a certainty that 2011 will represent the fifth consecutive year of liquidations -- something that has never happened in mutual fund history.

Combined with the taking away of the original uptick rule, I think the high-frequency trading is a major negative for the stock market. It is a major negative for the economy, and it does not do anything for the economy. It does not add any value to the economy. It doesn't add any social value. Charles Munger, Warren Buffett's partner, in an interview on CNN in May, essentially said the same thing.

These high-frequency traders begin the day owning nothing and end the day owning nothing in terms of common stocks. During the day, they are accounting between 50% and 60% of the volume.

There was a terrific article in The Wall Street Journal on Tuesday. The headline was “A Wild Ride to Profits.” The article talked about what happened on Aug. 8, when the S&P 500 index was down 6.8%. That day happened to be the single most profitable day in the history of high-frequency trading. These high frequency traders made an estimated $65 million. While on that day, the stock market lost $850 billion of value....

The liquidity that they add to is useless liquidity. It has no lasting value. It consists of orders that are placed and that are quickly retracted. It heavily, heavily consists of front-running.

It is amazing to me the New York Stock Exchange puts up a facility right next door to their computers in New Jersey and then they lease out space to 10 or 15 or 20 of the highest so-called co-locations so that those individuals putting their computers there can get a microsecond of an advantage over their competition. If the New York Stock Exchange thinks this is a smart idea, in order to generate volume, I don't think so.

But can I go back to something else? There was no high-frequency trading four years ago. What permitted high-frequency trading, in my opinion, to occur was when the SEC removed the uptick rule -- on July 7, I think, 2007.

Right now, I ask a question, where are the regulatory bodies? We have had a major destruction in confidence. You can help restore confidence to the markets tremendously, in my opinion. If the SEC would consider reinstating the uptick rule, reinstating the uptick rule -- if you reinstate the uptick rule, you don't have to do anything else. That will bring high-frequency trading to a screeching halt, but understand that the New York Stock Exchange may not be in favor of it. The major investment banking firms won't be in favor of it. The hedge funds, most of them, won't be in favor of it.

-- Marvin Schwartz (Neuberger Berman) on CNBC’s “Strategy Session” (Aug. 18, 2011)

The influence of these factors has been to produce a dearth and vacuum of normal retail and institutional trading flows and activity. The absence in the marketplace of these more stable classes of intermediate- to long-term investors has brought on heightened volatility, producing a perfect storm of selling as the increased presence and disproportionate role of high-frequency, momentum-based trading strategies has exacerbated both the up and (mostly the more common) down moves during the month of August.

This unfortunate set of affairs has, in essence, transformed a relatively stable marketplace into a casino-like environment, as investors have been replaced by machines that trade securities not based on intrinsic value decisions but on small trading edges and price-momentum-based algorithms.

The bad news is that the SEC is remarkably unresponsive and apparently unaware of the damage being wrought by the quants and by the kings of high-frequency trading during these difficult times for most investors. The good news is that it is likely that the hedge fund de-risking and mutual fund redemptions are growing mature, might be materially behind us and will probably slow in influence in the period ahead.

Setting Up For A Monster Rally?

The indices closed the day around flat but it was no victory for the bulls as they squandered a strong open and trended lower all day. They couldn’t even manage to keep breadth positive and finished with about 2,500 gainers to 3,100 decliners. Gold and silver were the big winners once again and mining stocks even managed to outperform the metals a bit.

We certainly have lots of gloom and negativity, so it won’t take much for an oversold bounce/short squeeze to kick in. In fact, bearish action like we are seeing right now is a great setup for a bear market rally.

Sorry Kim - Nothing In Your Size!!

HFT/Algo Trading Is Fine - As Long As The ORIGINAL Uptick Rule Is Brought Back

If the HFT/Algo's had to comply with the original uptick rule, then those firms would actually provide the liquidity they claim to create. My long held view is that without the uptick rule, these firms are really liquidity takers and not liquidity makers -- especially under the mega cap range.

Reason being is that they can force price discovery in volume ranges that just do not naturally exist. This then creates a self fulfilling prophecy of successively lower bids that they themselves are creating. If this isn't a form of front running or stock manipulation, then I don't know what is. Lastly, when they start trading shorts without having to "go get the borrow", then this is electronic paper hanging (naked shorting), which many MM's (market makers) are exempt from. If one spends any time at all thinking logically about the ramifications of all this.....and combines the fact that all of the above can literally be programmed in succession, then it is not hard to see the ultimate form of a rigged game that this creates. Not to mention the huge impact to valuations of publicly traded enterprises.

Much as I knew that the FAS157, no uptick rule and naked CDS spiral was a huge piece of the 2008 financial collapse puzzle, I also know that the reason we have seen so much absolute and relative valuation destruction (in the public markets) since 2007 is substantially due to the elimination of the uptick rule, combined with HFT/Algo trading.

To reiterate, I am completely supportive of HFT/Algo based trading as long as it's combined with the "original" uptick rule. If not, then the practice is only serving to destroy liquidity, force false price discovery and greatly harm public market capital formation. This is yet another assault on US competitiveness.

On the other side, all this is also part of the mosaic that keeps me steadfast and increasingly more bullish the lower we go. The sort of valuation creation we saw with the elimination of just the FAS157 rule may pale in comparison to the ultimate upside we have from the confluence of events that should be forthcoming.....

Regarding Taxes, Buffett Is A Hypocrite

Warren Buffett, with his seemingly folksy ways and his folksy sayings, is obviously trying to pass himself off as a "man of the people." Possibly, but not regarding federal income taxes. Buffett is in favor of increasing taxes that he doesn’t pay. Estate tax? Buffett isn’t paying it, he’s giving his fortune away to the Gates foundation, largely. Income tax? Relative to the increase in his net worth, Buffett pays almost nothing in taxes because we don’t tax stocks until a dividend is paid, or until some stock is sold. What’s more, BRK has a $38 billion deferred tax liability, which measures taxes that would have been paid on GAAP income, but weren’t paid because taxable income was lower for reasons that may revert, someday.

Thus, I say Buffett is a hypocrite on taxes. Let him argue for the following:

1) Unrealized gains on assets should be taxed each year, for corporations, partnerships, and individuals. Losses should receive deductions.

2) Eliminate deductions/credits from the personal and corporate tax codes. We could eliminate the deficit instantly with that one simple change. Don’t use the tax code for social engineering. Much as I favor a Balanced Budget Amendment, perhaps a “No Social Engineering” Amendment would be better.

3) Tax corporations on their GAAP income, or better, whatever they represent to investors as the true increase in period-to-period net worth.

4) Add in an EBITDA tax on private equity, and everything like it, such that we assume a 15% ROE for tax purposes that trues up when the partnership closes. Everywhere, make the tax basis equal to GAAP, or modifed GAAP, where it exists. Where it doesn’t exist, make the taxes punitive enough that adopting GAAP is preferable.

With the present tax rates, implementing all of these would put the budget in a decided surplus, WITHOUT RAISING RATES. You would even eliminate the estate tax, because estates would finally be taxed year-by-year. The tax code would then be close to fair, like some say it was with the Tax Reform Act of 1986.

But there is one place where I agree with Buffett entirely:

People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.

Taxes affect business decisions when the definition of taxable income gets changed or credits get offered. Examples include section 42 housing credits, private equity, and in insurance company accounting. I’ve seen it with clever investors that max out debt while growing net worth....

In that sense, the definition of income, and the offering of credits make a huge difference in the behavior of those taxed. But within reason, tax rates don’t make that much difference. Yes, up 10%, there will be some effect on economic activity. The bigger changes come from deductions and credits.

You want a pro-growth tax code? Eliminate the deductions, credits, and deferrals. Tax us year-by year on an estimate of our increase in income including unrealized capital gains and losses.

Yes, there will be unemployed accountants, actuaries, attorneys and administrators. But the system as a whole will be better off, and for once, who will argue in favor of preserving the nation, and ignoring special interests?

What Buffett suggests will get little in the way of results. A focus on defining income properly will bring in more than sufficient taxes, and especially from Mr. Buffett, one of the least taxed relative to the increase in his net worth.....

Friday Thoughts

Here is a good summary of this week's events from Miller Tabak's Peter Boockvar:


1. Gasoline prices fall another few pennies to a six-week low, relief for consumer.

2. IP rises greater than expected, 0.9%, but not sustainable, as auto snapped back after Japan and hot weather boosted utility output.

3. Multi-family housing starts bounce, helping to partially offset drop off in single family construction.

4. Refis rise 8% to the most since November.

5. Fitch says U.S. AAA is OK for now.

6. Thanks again to the ECB, Spanish and Italian debt trade well. What happens though when they stop? They do fully sterilize the purchases, and the euro continues to trade great vs. the Fed money printed backed U.S. dollar.

7. Japan's second-quarter GDP contracts only 1.3% instead of expectations of 2.5%


1. European markets get hammered again, bank funding sources are in question.

2. Merkel and Sarkozy break bread with no further bailout, as there's no change in the size of the EFSF, no Eurobond, and they throw down the hammer of a transaction tax just as the region is capital-starved, brilliant!

3. Initial jobless claims at 408,000, 8,000 higher than expected, but the four-week average falls to the lowest since April.

4. Existing-home sales are 230,000 below forecasts, Purchase applications fall 9% to a one-year low.

5. Philly manufacturing plunges to -30.7 from +3.2, and New York falls 4 points to -7.7.

6. Inflation figures all run hot, import prices, PPI and CPI. While all may back off with economic slowdown, stickiness will be theme, and the rest of us will continue to be force-fed real negative interest rates

7. Greek yields spike, everyone wants Finland's deal of collateral in return for funds.

8. Gold continues its amazing move up, paper currencies turning into paper towels.

I see the following buffers of support that could insulate the markets from further declines:

* There will be no double-dip (the negative feedback loop is hurting business and consumer sentiment) but other hard economic indicators don't signal a recession.
* Interest rates are anchored at zero;
* Inflation and inflationary expectations are contained.
* Strength of corporate balance sheets and trailing profits are strong.
* Valuations are reasonable.
* 55% of the all S&P stocks now yield more than the 10-year U.S. note.
* Risk premiums (the difference between earnings yield and corporate bonds are near record levels).
* Investor expectations are limited.
* Derisked hedge funds (ISI Hedge Fund Survey reports net exposure down to 45.8%, the lowest level in two years).
* The wholesale abandonment by the individual investor ($30 billion withdrawn last week alone).
* The possibility of a large reallocation out of low yielding bonds and into stocks.

" If you can keep your head when all about you
Are losing theirs …
[Y]ou'll be a Man, my son!"
-- Rudyard Kipling, If

Bank stocks - Weak business and consumer sentiment is indeed a byproduct of the negativity feedback loop. But I would emphasize that certain hard gauges of real-time activity (in production, retail sales and employment) are holding up far better than the sentiment numbers. For example, the leading indicators usually flash recession only when the numbers are negative -- but the LEI is up 6.2% year over year. Retail sales that were also holding up well through the middle of August. (As an example, Johnson Redbook sales were +4.7%.) Important gauges of employment also point to stability, not weakness. The four-week moving average of initial job claims is at the lowest level in four months and the rate of growth in withholding tax receipts have actually accelerated from under two percent to +2.7%.

1. Forced liquidations: Recent weakness is, in some part, due to forced hedge fund liquidations and high-frequency trading strategies that are exacerbating the sector's weakness. We are in a panic mode for the industry's share prices, in part reflecting concerns over Europe's fragile banking system.

2. Franchise Values or private market values are enormous relative to current stock prices. In housing, BAC and WFC will have the residential real estate markets to themselves in the period ahead. JPM and C will become the go-to lending institutions, not only in the U.S. but around the world.

3. Market Share Gainers: With the shadow banking industry obliterated, the European banks (many of which have U.S. branches) suffering and consumers less likely to expose themselves to banking in smaller, local banks, the largest banks in this country will dominate banking in the years ahead.

4. Improved Balance Sheets: The banking industry has delevered and is far better shape in terms of capital and liquidity than most investors realize. They are prepared for short-term funding disruptions.

5. Income Statement Strength: Pretax income before provisions is strong for the industry and very sustainable -- and I see the coming earnings reports as supportive of this and as a possible catalyst to higher prices. The stocks trade at absurd levels relative to 2013-14 earnings power. Today Citigroup is less than 57% of book value. And at $7 a share, BAC shares are implying another $70 billion of writeoffs and that the bank will only be able to achieve a mid-single-digit return on the depleted equity base.

6. Economic and Housing Concerns Are Now Consensus: My long-held concerns about the housing market, the impact of low interest rates on net interest margins and my view that economic growth would disappoint have now become consensus. And, with share prices down so far, those concerns have been largely discounted.

7. Low Interest Rates Have a Silver Lining: When the inventory of unsold shadow inventory is worked off -- and we are beginning to see it (that wonderful agency Standard & Poor's just came out with a 130-page report yesterday that shows that it is beginning to be worked off) -- low interest rates will probably accelerate the process. Low rates also improve the consumers' balance sheet and income statement (mortgage service is a large component of incomes), and this will allow for a continuation of the trend over the past 12 months of improving credit quality trends.

In summary, the largest banks that have scale are the best positioned.

Thursday Thoughts

According to a report, the New York Fed is concerned about European banks and the funding of their U.S. operations.

Here is an excerpt of the Wall Street Journal article describing the situation:

In one sign of how European banks may be having trouble getting dollar funding, an unidentified European bank on Wednesday borrowed $500 million in one-week debt from the European Central Bank, according to ECB data. The bank paid a higher cost than what other banks would pay to borrow dollars from fellow lenders. It was the first time for that type of borrowing since Feb 23.

Last week's initial jobless claims were revised up by 4,000 jobs, and this week's initial claims came in at 408,000 (consensus was 400,000).

Continuing claims were in line with estimates.

The conclusion is that the jobs market has stabilized but is not improving.

Memories of financial disaster are now fresh, as after the Great Depression, causing an over-estimation of the probability of a repeat disaster. In these situations, psychological scarring is likely to result in risk appetite and risk-taking being lower than reality might suggest. Risk will be over-priced. Today, the very disaster myopia that caused the crisis may be retarding the recovery.

-- Andrew Haldane, Bank of England

The Philly Fed for August was a shocker, falling to -30.7 vs. a consensus forecast of up 2%.

That is the lowest read since April 2009.

New orders plummeted, backlogs were down, shipments dropped, and employment deteriorated.

The Philly Fed cited the weakness as a function of "unusually high volatility in both domestic and international financial markets."

Market on Friday

Ugly downtrend. Since the bottom in March 2009, we have been spoiled by very quick recoveries just when it looked like we were going to break down.

This time, unfortunately, the downtrend has developed in textbook fashion. We had a classic low-volume bounce following the massive breakdown in early August and rather than go straight back up, the bounce failed miserably. It's what you typically expect when there's a sell-off. But folks have gotten used to those V-shaped bounces, so the rollover has been especially painful for those who have come to expect these corrections to end quickly.

The big question is whether the lows hit on Aug. 8 and Aug. 9 will hold. Those levels are so close that they have to break first before seeing a lasting low. There are still too many folks hoping we've already seen the lows and need to wash that optimism out completely by cracking further. That should help produce the sort of capitulation needed to get closer to a turning point.

Markets will almost always trend further than you think reasonable. For the past two-and-a-half years that trend has been mainly to the upside, but now we are seeing that phenomena to the downside and it is feeding on itself.

Market On Thursday

Putting aside the fact that it was massively ugly, there are two notable things about Thursday's action.

First, it was a classic failed bounce. Exactly the sort of technical action you would expect after the early August collapse and the recent low-volume bounce. This is how a market acts when overhead resistance matters.

I don’t know how many times in the last two years we have had these V-shaped recoveries after a pullback. A lot of folks were counting on that to happen again, and it helped to make the action today even worse. Suddenly, the folks who had proclaimed that the worst was over found themselves leaning the wrong way.

The other notable thing was how lopsided the breadth was. Obviously, you don’t expect to see much green with a giant point loss like this, but nothing was left unscathed by this action. A little more than 400 stocks were up on the day, and most of those were defensive names.

"Ear's" To Some Corn!

Wednesday, August 17, 2011


NTAP cites weakness and gets hammered after hours.

Venezuelan President Hugo Chavez has announced that he plans to nationalize the gold industry in his country.

My more optimistic view (relative to the bearish cabal) is based on the following factors (among others):

* there will be no double dip;
* interest rates are anchored at zero;
* inflation and inflationary expectations are contained;
* strength of corporate balance sheets and trailing profits;
* reasonable valuations;
* limited investor expectations; and
* the wholesale abandonment by the individual investor.

Apple Insider was out with some worrisome comments on Apple today.

Maybe the Mac weakness is because the consumer is continuing to buy a large amount of iPads!

From BTIG, commenting on the company's conference call this morning:

Management notes that the sales pace month-to-date is within the range of company expectations for the month, though slightly below June/July. Recall the company guided August comps up low to mid single digits on Aug. 4; recall July comps were up 4.1% and June increased 4.5%.

Run, don't walk, to read 'White Picket Fence? Not So Fast,' a New York Times op-ed.

This new housing policy will lead to a different economy. As subsidies to the housing sector are removed, American households will take on less debt and there will be less overconsumption of housing. The private sector will shift its investments from the housing sector to areas of the economy that offer higher rates of return, like human capital, infrastructure projects and capital business projects in other industries. The long-term impact will be tectonic in nature, leading to higher economic growth and a more stable financial system. Why is this relevant now? The budgetary problems of the United States are dire. Economic growth is anemic. Reforming the American housing finance system will improve the budget and stimulate growth and will make a real contribution to our future prosperity.

-- Viral V. Acharya, Matthew P. Richardson, Stijn Van Nieuwerburgh and Lawrence J. White, "White Picket Fence? Not So Fast," The New York Times

We seem to move to extremes in terms of policy.

After decades of overconsumption in housing and a large buildup in mortgage debt, which led to outsized real gains in home prices, academicians and policymakers are now moving in the opposite direction of encouraging homeownership.

Case in point: an op-ed in The New York Times, "White Picket Fence? Not So Fast," which makes the case that our budget load and anemic growth should serve to bring radical tax reform in housing by gradually reducing the tax benefits of ownership and encouraging rentals.

This has important implications for future home prices (negative), household net worth (negative) and the role of housing on the domestic economy (also negative).

Today's outsized PPI is another blow to the corporate profit bulls, of which there are too many.

Slowing economic growth and rising costs of goods are ingredients for profit margin erosion.

As a series, corporate profit margins are mean-reverting, and be prepared for such a regression in the year ahead.

Consensus corporate profit forecasts remain Stephen King-like -- they are books of fiction.

Twelve members of Congress will soon take on the crucial job of rearranging our country's finances. They've been instructed to devise a plan that reduces the 10-year deficit by at least $1.5 trillion. It's vital, however, that they achieve far more than that. Americans are rapidly losing faith in the ability of Congress to deal with our country's fiscal problems. Only action that is immediate, real and very substantial will prevent that doubt from morphing into hopelessness. That feeling can create its own reality.

-----Warren Buffett, New York Times

Focusing On Tech Guidance Tonight

The earnings reports are coming in, and right now the reactions are ugly. The tone is clearly becoming cautious looking into next quarter. For the most part, the reports for the past quarter have been good, but the outlooks are just not there.

The weight thus far is being felt by the Nasdaq, but how long can equities withstand more and more cautious outlooks before shattering? The technical picture is still cautious, but these earnings outlooks are beyond cautious. The debt situations around the world look like they may be getting into the psychology of businesses. On top of the sovereign debt issues and the lack of job growth, the world economies cannot lose the positive psychology of big business. Perhaps we aren't positive, but if mentality swings to negative, then equities could have a long way down.

JDSU continues the reign of the optical bears. They reported results in line with EPS estimates and slightly better revenue, but guidance is weak.

NTAP echoed that sentiment, and both stocks are paying up dearly right now. JDSU dipped all the way below $10, but it has bounced back to support around $10.70, but this may also act as resistance. Over $10.70, there is a chance for a bounce up to $11.50. This group just can't adjust its inventory fast enough, and now it is JDSU's turn to experience an inventory correction. For many in the sector, it is now the third or fourth quarter of the "correction," which makes you wonder just how short-lived it will be for JDSU, even though that is the claim of management. The only hope here may be the decision of traders that all the bad news -- and then some -- is priced into shares and this sector.

NetApp is getting hit even harder than JDSU after hours. NTAP bulls need to defend $37 and make a push back to $39, or else $35 seems very likely in short fashion. CREE announced a $525 million purchase of Ruud Lighting. Cree is issuing 6 million shares with this purchase as well as laying down $372 million in cash. Unfortunately, this is about one-third of Cree's cash position, and Cree is now guiding the quarter toward the low end of its range of $0.25 to $0.28 a share in earnings. The stock needs to hold $32, or else I would look for a target of $30.

Many folks are waiting for the rollover in gold. I am too, but I just don't feel it yet.

"took us a year, dear leader, but here is our complete metal pipe production!!"


I remain of the view that Mr. Market hit a low for the year last Monday evening.

But I am less certain that there is much upside now given the plethora of social, economic and market uncertainties.

Below are some issues that limit upside to our markets from the current levels:

* Politics as usual. The divisive and partisan circus in Washington, D.C. is likely to continue, especially since we are moving closer to the 2012 Presidential election. As a result it is unlikely that thoughtful and bold pro-growth fiscal strategies will be delivered any time soon.

* Moderate domestic economic growth. Over here, an already-fragile recovery has been weakened under the weight of nontraditional structural problems (middle-class screwflation, fiscal imbalances, a weak housing market burdened by a huge shadow inventory of unsold homes, structural unemployment etc.) The trajectory of domestic growth over the next two quarters remains uncertain.

* Weakening eurozone economic growth. Over there, a sovereign debt contagion and a weakening European banking system are likely to be exacerbated by the eurozone's economic stall reported last night (+0.2% second-quarter 2011 GDP growth). The most alarming part of the eurozone release was the sharp deceleration in Germany's growth rate (second-quarter 2011 slowed to +0.1% as compared to +1.3%). Importantly, the growth slowdown in Germany will likely materially reduce that country's support of a euro bond that would stem the debt contagion in Europe.

* Dependency on market valuation and government action. With these real growth issues (U.S. economic growth now uncertain and European economic growth near zero now), the health of the stock market is dependent upon valuation and government support. These are slippery slopes of optimism!

* Eroding confidence. Business and consumer confidence has cratered and is not likely to recover quickly.

* Technical damage. Volume accelerated to the downside but was milder on the upside -- never a good signal. The stock market, technically speaking, has been broken for now. It will take time to resuscitate the patient.

I think a strict, by definition, double dip still remains unlikely. Moreover, the health of the corporate sector (as measured by profitability and liquidity) has never been more solid. Inflation and inflationary expectations are contained, and interest rates will also be contained as far as the eyes can see.

Investor expectations are materially subdued, and investor sentiment is low. In the end, we all remain hopeful that, in the fullness of time, our leaders rise to the occasion in the current crisis.

"What man has joined, nature is powerless to put asunder." -- Aldous Huxley, Brave New World

Remember the days when we analyzed and picked stocks -- and we were not subjected to the endless worldwide macroeconomic, currency, political and financial news releases?

Huxley also said, "These are unpleasant facts; I know it. But then most historical facts are unpleasant."

Screw this brave new investment world!

Germany will have to think long and hard as to what degree it wants to support almost all of Europe.

I'm hearing that AAPL plans to initiate pre-orders for the next-generation iPhone (No. 5) by the end of September for a product launch between Oct. 7 and Oct. 14.

To summarize my market view and distill it into one sentence: The market presents uncommon values, but the investment mosaic is complicated by uncommon times.

Trapped Bulls

After a low-volume, three-day bounce, the market trapped a few bulls with a poor open this morning. It was able to stabilize for a while, but the Europeans failed to offer any real solutions to its sovereign debt issues and it pulled back again. For some reason, or maybe it was just the machines, there was some dip-buying interest, which moved the market back up again but it didn't close with any great energy.

We saw some strength today in WMT and HD, which helped the retail sector, but big-cap technology acted quite poorly. There really hasn't been any sector that is doing anything notable other than precious metals. Everything is pretty much moving in lockstep which isn't very interesting if you like to pick stocks rather than trade headlines.

This is the peak time for summer vacations and that is clearly having an impact on the action. There doesn't seem to be much desire to make big moves and that is allowing the computers to push the action around even more than usual.

Monday Thoughts

What we're seeing on the streets in Britain right now is something we may be starting to see here. It hasn't come together in a conflagration, but it is out there, and I think it's growing. And as in Britain, it doesn't have anything to do with political grievances per se.

Philadelphia right now is under curfew because of "flash mobs." Young people send out the word on social media, and suddenly dozens or hundreds of them hit a targeted store, steal everything on the shelves, and run, knowing no one will stop them or catch them. It's happened in other cities, too. Sometimes the mobs beat people up on the street and take their money. There are the beat-downs in McDonald's, where the young lose all control and the old fear to intervene. There were the fights and attacks last weekend at the Wisconsin State Fair. You've seen the YouTubes of fights on the subways. You often see links to these stories on Drudge: He headlines them "Les Miserables."

Some of these young people come from brokenness, shallowness and terror, and are bringing those things into the world with them. Here are some statistics of what someone last week called a new lost generation. In 2009, the last year for which census data are available, there were 74 million children under 18. Of that number, 20 million live in single-parent families, often with only an overwhelmed mother or a beleaguered grandmother. Over 700,000 children under 18 have been the subject of reports of abuse. More than a quarter million are foster children.

These numbers suggest the making -- or the presence -- of a crisis....

After that, what? Britain is about to face that question. We'll likely have to face it, too.

-- Peggy Noonan, "Après le Déluge, What?" (The Wall Street Journal)

The U.S. stock market has rarely experienced such manic and frenzied action as it has over the past two weeks.

We are in a bull market in behavioral economics, and we are in a bear market for regression-based economic forecasting (that relies on historical patterns repeating themselves).

More than any time that I can remember, today's investment decision making must be entwined with social observations and analysis of investor psychology and the behavior (or, at times, madness) of crowds. As such, market forecasts must be conjoined with the recognition that possible economic and market outcomes are more numerous and clearly not well-defined.

While acknowledging that standard measures of valuation based on interest rates, inflation expectations and consensus corporate profit forecasts (among other variables) suggest equities are inexpensive, for the time being, such traditional analysis could prove disappointing (and even myopic), as extraordinary and unpredictable outside factors (and their effect) can influence, override and possibly upset the current fundamental assumptions that underlie a cheap stock market.

No more important influence today is the negative feedback loop.

No matter how you look at it, a negative feedback loop is intensifying (most recently catalyzed by the wild card presented by the European banking crisis) and, if not stopped, will have even more adverse implications for markets and economies.

The markets have been bombarded by a plethora of negative data:

* the divisive and partisan circus in Washington, D.C.;

* the absence of thoughtful and bold pro-growth fiscal strategies;

* a U.S. debt downgrade;

* an already fragile recovery has been weakened under the weight of nontraditional structural problems (middle-class screwflation, fiscal imbalances, a weak housing market burdened by a huge shadow inventory of unsold homes, structural unemployment etc.);

* a sovereign debt contagion and a weakening European banking system; and

* lower world stock prices and unprecedented market volatility.

Confidence has cratered both here and abroad.

In the U.S., with over 25 million Americans who can't find a job and with an existing workforce whose real incomes have stagnated for years (contrasted against corporate America whose income statement and balance sheet have never been stronger), it is abundantly clear that we live in uncertain times. What makes matters worse is that we don't know how bad it might be (if the negative feedback loop deteriorates further) for both our economy and for our stock market.

Speaking to Reuters late on Tuesday, looters and other local people in east London pointed to the wealth gap as the underlying cause, also blaming what they saw as police prejudice and a host of recent scandals. Spending cuts were now hitting the poorest hardest, they said, and after tales of politicians claiming excessive expenses, alleged police corruption and bankers getting rich it was their turn to take what they wanted. "They set the example," said one youth after riots in the London district of Hackney. "It's time to loot."

-- Reuters

In her editorial on Saturday, The Wall Street Journal's Peggy Noonan writes about the riots in Europe and questions whether the U.S. is next? These riots are an outgrowth of the worldwide inequality and schism between the haves and the have-nots. (As I wrote in Barron's months ago, average Americans arguably face no better conditions than their European counterparts who are expressing their disgust violently.)

For the ambitious, I recommend Niall Ferguson's 2006 book The War of the World: Twentieth-Century Conflict and the Descent of the West, which chronicles that periods of quickly deteriorating economic change often produces mob violence or worse. Some, like Mike Lewitt, have understandably even argued that "in light of our country's racially and socially fragmented makeup, we may not be able to ride out an extended period of financial malaise without violence."

"I don't think the implications of this have been fully thought through or accepted yet," said Pepe Egger, western Europe analyst for London-based consultancy Exclusive Analysis. "What we have here is the result of decades of growing divisions and marginalization, but austerity will almost certainly make it worse. Yes, the police can restore control with massive force but that is not sustainable either in the long term. You have to accept that this may happen again."

-- Reuters

The smoldering structural issues of the past cycle, led by the deleveraging of excessive debt loads in both the private and public sectors, weigh like an albatross around the neck of worldwide growth and are now complicated by the impact of future austerity and government spending cuts -- both in the U.S. and in Europe. As well, the current balance sheet recession (unlike the normal income statement recession), which calls upon the world's central bankers and governments to adopt bold (not piecemeal) and unconventional (not traditional) policy, has fallen on deaf, untimely and one-sided partisan ears.

Does fiscal consolidation lead to social unrest? From the end of the Weimar Republic in Germany in the 1930s to anti-government demonstrations in Greece in 2010-11, austerity has tended to go hand in hand with politically motivated violence and social instability. In this paper, we assemble cross-country evidence for the period 1919 to the present, and examine the extent to which societies become unstable after budget cuts. The results show a clear positive correlation between fiscal retrenchment and instability. We test if the relationship simply reflects economic downturns, and conclude that this is not the key factor. We also analyze interactions with various economic and political variables. While autocracies and democracies show a broadly similar responses to budget cuts, countries with more constraints on the executive are less likely to see unrest as a result of austerity measures.

-- Jacopo Ponticelli and Hans-Joachim Voth, "Austerity and Anarchy: Budget Cuts and Social Unrest in Europe, 1919-2009"

Studying instances of austerity and unrest in Europe between 1919 and 2009, Ponticelli and Voth conclude that there is a "clear link between the magnitude of expenditure cutbacks and increases in social unrest. With every additional percentage point of GDP in spending cuts, the risk of unrest increases":

Expenditure cuts carry a significant risk of increasing the frequency of riots, anti-government demonstrations, general strikes, political assassinations, and attempts at revolutionary overthrow of the established order. While these are low probability events in normal years, they become much more common as austerity measures are implemented.

-- CNN

We already know that the uncertainty and structural problems will likely adversely impact business and consumer confidence, exposing an already tepid domestic growth trajectory. Business capital spending and hiring plans and retail sales and personal consumption expenditures are increasingly vulnerable to the intensification of the negative feedback loop.

The imposition of austerity around the world now has become another serious growth deflator and has led to growing social instability.

Will the negative feedback worsen and cause a further blow to economic growth?

Will the negative feedback produce continued volatility in the markets and cause a further blow to stock prices?

We can't know for sure as we are in unfamiliar territory. Anyone who pretends to offer certainty of opinion is lying and, quite frankly, shouldn't be listened to.

The chorus of perma bulls have proven to be wrong and are unworthy of being listened to.

And the chorus of perma bears, who have until recently been proven wrong (and are now chest-thumping), know not of how this all will work out either and will likely continue as Cassandras, regardless of changing conditions.

In summary, while I am of the view that the U.S. stock market has likely bottomed for the year, the wide variety of economic and market outcomes suggest that erring on the side of conservatism remains the most reasonable trading and investment strategy in an uncertain and volatile backdrop.

President of the Atlanta Federal Reserve Dennis Lockhart gave a speech Monday.

1. He sees the economy re-accelerating in the second half of this year, so there is no need for more easing.

2. If the economy fails to recover, the Fed would consider a further expansion in its balance sheet and/or a lengthening in the maturities of its government bond and note holdings.

The Fed's survey of bank loan officers for the three-month period ended June 30, 2011, signaled that the banking industry (excluding real estate) is loosening up its standards.

The financials -- especially of an insurance kind -- are perking up now. My view is that we can still see a 10%-15% rally in the sector over the short term.