Wednesday, September 28, 2011


After being downgraded by Moody's last week, Slovenia's debt has just been downgraded by Fitch.

With only 2 million people, Slovenia is not much a European powerhouse but it is a voting member of the ECB -- each of the 17 countries in the Eurozone has a vote on the Greek default issue and other issues of the day!

Job growth and economic growth could disappoint in the months ahead.

The markets and our economies are captive and beholden to incompetent and probably corrupt policymakers (both here and abroad); it’s a slippery slope where investors and corporations don't seem to be in control of their own destinies.

Back To The Bear

It sure felt like a bear market today. Bulls hoped to see some window-dressing by fund managers, but it looked like they might be dealing with liquidations instead.

A minor opening bounce was aggressively sold, and a couple minor attempts to turn the action up during the day failed miserably, so the market closed near the lows of the day. It is dispiriting how quickly our three-day bounce was crushed.

Volume was a bit lighter, which may indicate that the action didn't reflect a full-fledged panic -- but that may not be a good thing. This market looks as though it is anticipating a big, bad news event of some sort and it isn't going to bottom until what exactly that might be becomes clear. A slew of possible negatives could hit the fan but they are still quite vague and not quantified, which is what prevents us from making a good low. Maybe. Maybe not.

Tuesday, September 27, 2011


You have to laugh when the business media trots out the same glib talking heads that:

1. were bearish last week but now they are bullish; or
2. are always bullish (i.e., perma-bulls).

I continue to be mildly surprised by how many traders and investors are simply momentum players with little sense of underlying company values and how many are simply bulls forever (regardless of the whether the facts have changed).

There remains numerous structural concerns about a European super bailout. Among other issues:

* Is it legal?
* It requires unanimous approval of 17 member nations.
* The issue of leverage (which got us into the problem in the first place!) has been renewed.
* Monetary financing of state budgets are forbidden by treaty.

The national ISM will be reported on Monday. Expectations are for a 50.4 print, but in light of the release of all of the regional ISMs, a disappointing number in the high 40s is likely.

Notwithstanding the omnipresent eurozone news issuances, the question is whether the sharp rally in the last two days has been discounted in the weak national ISM expected for Monday.

It will be interesting to note the future direction of home prices after the sentiment downturn in August.

The July Case-Shiller 20-city home price index rose negligibly month over month (in line with forecasts) but is now down by over 4% in 2011 over 2010.

With the benefit of hindsight, this past weekend was associated with some market panic and a nearly universal (fundamentally and technically) belief that the near-term investment outlook was dicey. In retrospect, we learned again on Monday (and this morning) to stay independent in thought and judge value not be the crowd's opinion but by weighing the rewards relative to risk on current prices and within the context of reasonable (not hyperbolic) economic expectations.


Days like today can be rather frustrating since the only thing that mattered at all was the news out of Europe. What makes it even worse is that the market doesn't even seem to be interpreting the news correctly in many cases.

This morning, the market blasted higher on continued chatter about some sort of quasi-TARP program. There are all sorts of obstacles to actually implementing this strategy, but the market celebrated and was fueled in large part by a high level of skepticism.

Of course, just as the market was hitting the high point of the day, news rolled out that the most recent Greek deal might be in trouble because private investors are balking about the size of the hit they are willing to take. That reversed very swiftly and the market went out near the lows of the day -- and well off the earlier highs.

Despite the sharp reversal, there was still plenty of green on the screens. Breadth was almost 4-to-1 positive and the only major sectors in the red were retail and silver. One odd aspect of the action today was the weakness in some of the big-cap momentum favorites including AAPL, AMZN and CMG. These are stocks that you would normally expect to see lead a window-dressing rally at the end of the quarter, but they were laggards today for some reason that wasn't clear to me.

This is not a market that rewards astute stock picking. The action today demonstrated that very well. It was all about timing the headlines out of Europe and trying to figure out how the market might react. It was a waste of time to even consider fundamentals or charts.

A lot of traders are rooting for Greece to just get it over with and default so that maybe we can have more normal trading once again. Unfortunately, the leadership in Europe seems determined to drag this out as long as they can rather than biting the inevitable bullet.

Monday Thoughts

"Imagine there's no Heaven
It's easy if you try
No hell below us
Above us only sky
Imagine all the people
Living for today

Imagine there's no countries
It isn't hard to do
Nothing to kill or die for
And no religion too
Imagine all the people
Living life in peace."

- John Lennon

Today was a very good example of what happens when many classes of investors (retail, institutional and hedge fund) are all "off sides."

Imagine if I am correct that worldwide economic growth will moderate, but not move into recession territory and that corporate profits will maintain their integrity and not fall out of bed either.

Consider that retail investors have pulled $400 billion plus from domestic equity funds since 2007 and have added $800 billion plus in fixed income funds, for a swing of more than $1.2 trillion away from stocks. And that more money has been redeemed from equity funds in the last three months that at any three-month period since late 2008.

Imagine how powerful is the potential tide of a massive asset reallocation out of fixed income (which is earning very little current income) and equities (which have the widest spread between their earnings yield and risk-free rates of return).


New-home sales of 295,000 were in line with expectations, coming in basically in line with the 270,000 to 325,000 range over the last year. This series has been flat for a year, but it is important to recognize that existing-home sales have been improving (up 15%), as have prices increased over the last four months. The latter, existing-home sales, are benefiting from active sales of lower-priced foreclosed properties. Months of sales of unsold new homes stands at 6.6, still above the longer-term average of around 7.5 months. In summary, residential real estate activity has stabilized at low levels, and the impact on 2012 GDP will be slight as it is now such a low percentage contribution.

The broad-based gauge of current economic activity, the Chicago Fed National Activity Index, uses 85 different metrics to measure economic growth, so it is a good indicator. August came in at -0.43 (consensus was -0.37), and July was 0.02. A recession reading for this measure is between -2.0 and -5.5, so the August release is more indicative of a moderating domestic recovery that one that is entering recession.

Mr. Market usually inflicts the greatest hurt on the most investors. Who would have thought in March 2000 that the S&P 500 (at around 1535) would make no progress over the next seven and a half years and that the November 2007 high of about 1555 would drop all the way down to 666 in March 2009 (and then nearly double in the next two years!)?

To me, stocks today are increasingly cheap relative to fixed income and relative to private market values. The market has finally begun to discount the uneven and inconsistent economic climate that I (and others) have anticipated over the last year and a half.

We should never be handcuffed by statistics, but it is interesting to note that over the last 50 years, the S&P 500 has averaged 15x while the average yield on the U.S. Treasury bond was at 6.70%. Now the 10-year U.S. note is at 1.80%, and the market’s P/E is 12x.

Or, consider that at the height of the financial crisis in late 2008, the yield on the Bloomberg high-yield index was over 25% -- the S&P 500 sold at almost 14x then. Today the yield on junk bonds is 8.25%, and the S&P 500 sells at 12x.

To be sure, I fully recognize that the U.S. economy has matured over the last 50 years and is now plagued with structural challenges that are as unique in context as they are difficult to counteract and that our financial hegemony has been challenged and, in recent years, has been ceded to China. But these factors, though limiting the market's upside, are now universally recognized and might possibly have begun to be discounted by not only the recent market weakness but by the extended decade-long drop that dates to the S&P 500's high of 1525 all the way back in March 2000!

Monday Market

In the last few months, we've had numerous Greece-is-saved rallies, but now that the crisis has deepened, the stage is set for powerful Europe-is-saved rallies.

There are plenty of skeptics who question whether a solution is really forthcoming, but we've seen this combination of negativity and high-frequency trading before, and it can create amazing momentum. The lopsided nature of the moves, once they start running, makes it clear that the machines kicked into gear and goosed the momentum once it caught hold.

Breadth was about 2:1 positive but the underperformance of the Nasdaq and small-caps versus the senior indices was the most striking aspect of the action. The biggest and sharpest upside moves almost always occur within downtrends. Market players are not ready for them, so when we start to run, many are inclined to rush in out of fear that the low is in and they will be left in the dust if they aren't immediately invested. That usually doesn't turn out to be the case, but a sudden reversal in a downtrending market can cause a lot of anxiety for underinvested money managers, especially as we are near the end of the quarter.

So, does today's bounce mean the worst is over? It's possible, but the big technical picture hasn't changed - according to those who believe.

Saturday, September 24, 2011

Friday Thoughts

Will Europe get its act together?

There are four rumors about what could take place:

1. The ECB will offer a one-year maturity liquidity facility to complement the short-term facilities that are in place already (three- and six-month). The odds are reasonably good that this might be done and its likely a slight positive for risk assets, though a longer-term maturity of two years (plus) would be better (but, naturally, the odds are much lower).
2. A possible rate cut of 25-50 basis points from the current rate of 1.50%. This would likely yield a much more positive impact than #1 but the odds are not high.
3. Expanding its balance sheet by more aggressive repurchases of Spanish and Italian debt (without sterilization). This (like #2) would have a salutary impact on stocks, but the odds are also low.
4. The Dollar Swap rate of 1.1% will be halved. Again, unlikely.

One consistent economic concern I, and others, have had over the last few years (since the 2008-09 financial crisis) was that the worldwide economic recovery was so fragile that it was exposed to exogenous events (like the Japanese nuclear disaster in early 2011) and/or to policy errors that could shift us into recession.

I would say the recent weakness in equities is a direct result of that rising fear of policy errors that could put the world's economies into recession.

Unfortunately, nothing emanating out of the central bankers and political leaders in the eurozone has done anything to engender the necessary confidence that policy is well directed in stopping the sovereign debt contagion.

Over here, the continued divide within Washington (and the policy inertia that has resulted) coupled with this week's Operation Twist, also holds little incremental economic benefit and severely penalizes the savers class.

The next few weeks probably hold the keys to the market direction for the next twelve months.

Thursday Thoughts

History rhymes: The European sovereigns and banks are today where our country and banks were in 2008.

Importantly, the risk premium (the difference between the earnings yield and bond yields) is such that U.S. equities -- relative to investment grade and high yield debt instruments -- are now more undervalued than at the Generational Bottom in 2009.

Low interest rates don’t hold the key to the market. But I am increasingly encouraged that lower commodity prices (especially of an oil-kind) might hold the key to a recovery in the economy and in the U.S. stock market.

"Following a story earlier in the day that 'there is a growing consensus among EU diplomats and officials that Greece will default while remaining inside the eurozone,' the EU Economic Commissioner Rehn is just on the BN tape saying that they are working toward a recap of European banks. Germany said they are doing this internally a few weeks ago and the Spanish Budget Minister said the same last week. While Greece will likely get its next round of bailout 1 money in a few weeks so they can pay upcoming bills, the time is now possibly finally approaching that Greece will have a more pronounced default that will allow them to write down a more significant level of debt and EU officials are in the process of preparing for the fallout." -- Peter Boockvar, Miller Tabak

Read Peter's comments in conjunction with the Bloomberg report that quotes Treasury Secretary Geithner at a National Journal event in Washington today:

“You are going to see them act with more force in the coming weeks and months."

“It’s a difficult challenge to do because it’s not just about financial support ... Financial support is a necessary condition but it is not sufficient ..."

Lower mortgage/interest rates a la Operation Twist are no longer the answer. The ball is in the politicians' court.

"Economic growth so far this year has been considerably slower than the committee expected. Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out... " -- FOMC

Let’s review my thoughts regarding Operation Twist, the U.S. stock market’s reaction yesterday and the German and Chinese economic news released last night.

I still don't know why there will be any real benefit to the economy from this strategy, as the shape of the curve and the level of interest rates are not currently growth constraints.

The Bernank does not control fiscal policy and the economic ball is no longer in his court. It is in the hands of our political "leaders."

Upon reflection, I see the FOMC release as a negative to risk assets because it emphasized (for those who live in another bullish economic galaxy, and there remain some) that the current domestic economic challenges (significant downside risk in FedSpeak) will likely continue to be in place absent a pro-growth strategy.

There were other factors that led to a post-FOMC decision selloff yesterday and overnight:

* Reports that French bank BNP might be seeking capital.
* The European banks continue to be reluctant to recapitalize (which they must).
* A divided Europe continues to be unwilling to address its fiscal issues.
* We still have no sense regarding counter party risk when Greek defaults.
* The tape was already exhibiting deflationary signals going into FOMC announcement -- industrials, transports, etc. breaking down -- so maybe the “downside risk” Fed statement was a tipping point where investors simply gave up.
* By making the “downside risk” statement, investors might have come to the conclusion that the Fed has a better sense of how bad upcoming economic numbers will be and that poor August sentiment will translate into weak hard economic data in early winter. (One can even argue that the “significant downside risk” pronouncement might have frightened the markets more than Operation Twist helped in reducing interest rates.)
* Growing recognition that the Fed will not likely entertain QE3 in the face of much opposition within the Fed and in the Republican Party.
* Growing recognition that the domestic economy (combined with the eurozone uncertainty and structural challenges) is now on its own.

Let’s now briefly return to a discussion of home refinancing and mortgage activity, which helps to explain an important reason why I believe that lower interest rates may no longer hold the economic answer.

Based on Wednesday, the Federal Reserve and its chairman appear to still be in favor of more cowbell. They see lower interest and mortgage rates as fuel for the consumer, as lower–rate refinancings, in theory, aid consumer's cash flows and expenditures. But refinancings have not improved in response to easing rates. In fact, the opposite has occurred.

The logic behind more Fed easing has grown less compelling. That’s a blow to the easy money crowd and explains the broken connection between lower interest rates and an improving housing market. Perhaps it also helps to explain the market’s recent pasting, as well as help to explain the recent dissents among voting Fed members.

The residential real estate industry is suffering from a structural imbalance between supply and demand. An unprecedented 35% drop in home prices, due in large measure to the egregious use of debt, has resulted in 22% of all U.S. homes with mortgages under water and another 5% at "near negative" equity.

As to refinancing trends, the relationship to lower rates and a rise in refinancings has been broken for some time for numerous reasons. The Fed has been remiss in understanding structural issues (vs. cyclical) like this, though they are slowly warming up to the reality.

1. The mortgage-origination business has changed in the last six months. Most mortgage brokers now get paid a salary plus small commission.
2. The transformation from low- or no-documented mortgages (like a pendulum) has moved back to the old days, when credit scores, incomes and net worth are actually documented. Many are no longer qualifying for mortgages (as their loans to values are too high and incomes/credit scores too low).
3. As credit gets tighter, the appraisal process is getting much longer. It’s more conservative and much more stringent since lenders do not want to make any errors, be sued or face additional rep and warranty issues.
4. The pool of available refinancing applicants are diminished importantly by the number of homes that are still underwater and the weight of a heavy supply of shadow inventory of unsold homes (which keeps home prices down).
5. The weak jobs market is still keeping homeowners on the sidelines (especially after a 30%-plus drop in prices over last five years).
6. The tenuous real-estate market is forcing many homeowners that are considering refinancing to raise their equity investments before banks agree to lower mortgage rate terms.

Given that shaky situation, the banking industry is not keen to expand its mortgage lending activity, even if Treasury rates move ever lower and real-estate lending provides a better net interest margin. The housing situation remains weak and it will take years to clear despite affordability at multi-decade highs. Lower mortgage (interest) rates a la Operation Twist are no longer the answer.

The ball is now in Washington’s court. While I remain extremely suspicious of a meaningful break in gridlock, the current crisis could potentially serve to reduce the divisiveness and polarization even before the November 2012 elections.

But should a divided government not change, we are in for an extended period of uneven and lumpy domestic growth and that's hard for investment managers (with limited upside and corporate managers with limited pricing power to navigate.

Nevertheless, all is not lost and getting more bearish with lower share prices could be wrong footed.

With sentiment and expectations low and finally adjusting to reality, inflation, at least in how the government counts it, contained, a friendly Federal Reserve and balance-sheet-healthy corporations (operating at a high level of profits), I still expect that we have seen the lows on the S&P for the year.


The Fed's interest rate decision Wednesday was the catalyst for some of the worst selling we have seen since the crash in 2008. Operation Twist was expected, but the market was disappointed that the quantitative easing program wasn't expanded.

It wasn't just the Fed news that caused selling pressure, it was the growing perception that the Fed is running out of ammunition and that there just isn't much it can do to help this poor economy with interest rates already near zero.

If the only issue was the Fed, we probably would have seen some quick buying interest, but the focus quickly changed to the mess in Europe. Not only are the sovereign debt issues unresolved, but there is growing concern that individual banks may be in trouble as well.

There is a tremendous amount of uncertainty about the European situation and we are jumping around constantly as each new headline or rumor hits. While many market participants aren't very optimistic about a solution they are also afraid of being squeezed by whatever talk emerges from the G20 meeting this weekend.

It's a good time to identify candidates to buy.


The one thing that we have a bull market in is comparisons to the fall of 2008.

Today we saw some of the worst action since the bank crisis. The bulls are trying to dismiss that sort of talk but when the selling is this severe, you have to be at least a little worried.

The point loss was big, volume heavy and breadth very poor, but what is probably the worst statistic is that we had 15 stocks hitting new 52-week highs while 1450 were hitting new lows. The very high level of new lows makes it clear that this is a market that has not been healthy for a while. The vast majority of stocks have been struggling, notwithstanding the big bounce last week.

The one positive the bulls can point to is that negativity is extremely high. On the other hand, just because folks are negative doesn't mean they have already sold. It takes a real leap to conclude that the bulls have all been washed out, especially since they were feeling pretty good just two days ago.

Thursday, September 22, 2011


The economic ball is no longer in Bernanke's court.

I am reading in the postmortem of policy today that there are still some strategists who view Operation Twist as benefiting economic growth and that it could help to stabilize and then rally risk assets.

From my perch, I still don't know why there will be any real benefit to the economy from this strategy, as the shape of the curve and the level of interest rates are not currently growth constraints.

The Bernank does not control fiscal policy and the economic ball is no longer in his court -- it is in the hands of our political "leaders."

Bottom line, I see the release as a slight negative to risk assets because it emphasizes (for those who live in another bullish economic galaxy -- and there remain some!) that the current economic challenges domestically will likely continue to be in place absent pro-growth strategy.

Bottom line, the Fed said nothing different than expected regarding the domestic economy (it stinks!) and its Operation Twist (aimed at cheapening money further) was materially in line with market expectations.

Pro-growth fiscal policy is the answer. Without it, at best, we muddle along. At worst, we double dip.

Should a divided Washington D.C. not change, we are in for an extended period of uneven and lumpy domestic growth and that's hard for investment managers and corporate managers to navigate in.

HPQ's corporate turnaround will be a process ... a long process. Consumers probably don't care much about the company's misguided capital allocation and expensive acquisitions and management turnover. But the enterprise market seeks out stable partners -- and Hewlett is anything but.

I see continued secular erosion in HPQ's corporate competitive position.

Bottom line, I would look towards the company's competitors' shares, not to Hewlett, for an investment.

Several "leading" Republicans send a letter to the Fed.

I recently expressed a view that any decision of the U.S. to participate in a sovereign or bank rescue package would irk some average Americans (who have been pressured by screwflation, or stagnating incomes and rising costs in the necessities of life) and could further cause a negative response by some of our politicians who, understandably, also want to prioritize the health of our domestic economy.

Yesterday, several Republicans took the unusual step of sending a letter to the Federal Reserve, saying the Fed should refrain from any further "intervention" since they believe quantitative easing has failed to improve the jobs picture or to stimulate growth and, has likely served to reduce the value of the U.S. dollar. That’s something I agree with.

This letter raises the question of whether the small chance of QE3 today, or anytime soon, can be thrown out.

It reads:

Dear Chairman Bernanke,

It is our understanding that the Board Members of the Federal Reserve will meet later this week to consider additional monetary stimulus proposals. We write to express our reservations about any such measures. Respectfully, we submit that the board should resist further extraordinary intervention in the U.S. economy, particularly without a clear articulation of the goals of such a policy, direction for success, ample data proving a case for economic action and quantifiable benefits to the American people.

It is not clear that the recent round of quantitative easing undertaken by the Federal Reserve has facilitated economic growth or reduced the unemployment rate. To the contrary, there has been significant concern expressed by Federal Reserve Board Members, academics, business leaders, Members of Congress and the public. Although the goal of quantitative easing was, in part, to stabilize the price level against deflationary fears, the Federal Reserve’s actions have likely led to more fluctuations and uncertainty in our already weak economy.

We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy. Such steps may erode the already weakened U.S. dollar or promote more borrowing by overleveraged consumers. To date, we have seen no evidence that further monetary stimulus will create jobs or provide a sustainable path towards economic recovery.

Ultimately, the American economy is driven by the confidence of consumers and investors and the innovations of its workers. The American people have reason to be skeptical of the Federal Reserve vastly increasing its role in the economy if measurable outcomes cannot be demonstrated.

We respectfully request that a copy of this letter be shared with each Member of the Board.


Sen. Mitch McConnell, Rep. John Boehner, Sen. Jon Kyl, Rep. Eric Cantor

Selloff Twist

The FOMC announced the much-anticipated Operation Twist today and that produced some very persistent selling.

It was quite a different reaction than what we have seen on prior moves by the Fed and may indicate that market participants have lost confidence in the Fed's ability to be a positive force. The endless supply of cheap funds has obviously not done much to solve our economic woes and with the Fed running out of ammunition, the buyers weren't very interested that this time our problems would be solved.

The biggest problem I see is that a lot of poor action has been covered up by some recent strength in big-cap names. Financials, commodities, China names, small-caps and so on have been acting poorly for a while.

The recent move up was driven almost completely by a small handful of big-cap stocks that dominated the indices and may have given a false sense of confidence to some who have not been tracking the underlying action as closely. This market has been sick for a while, and this reaction to the Fed news merely confirms it.

With the rollover action today, the market is right back in the middle of the trading range that has been in place since early August. This is the third bounce that has been turned back.

Wednesday, September 21, 2011


As stupid as this sounds, Slovenia's incumbent politicians just lost a confidence vote.

As a unanimous ECB vote is needed, this could delay the implementation of a eurozone bailout.

I have heard that a Canadian financial institution has had talks to acquire Lincoln National.

The Swiss franc is plunging on unconfirmed talks of the euro peg to be widened to 1.25 tomorrow.

A Sharp Reversal

After the third day of runaway action in some big-cap momentum names, the bulls were a bit too overconfident, leading to a sharp reversal. AAPL, which was up more than $11 per share at one point, closed just over $2 higher to $413.80 after briefly going negative.

The narrow strength in a few big names has helped to drive up the indices recently but has covered up some far less positive action in financials, commodities and small-caps. New 12-month lows have been outrunning new highs for the last few days, which usually doesn't occur if strength is broad. The fact that only 85 stocks hit new highs today confirms that there isn't any real leadership.

Given that a number of stocks have traded almost straight up for more than a week, we shouldn't be too surprised to see profit taking with the very important Fed meeting coming tomorrow. You have to at least consider the chances of a little sell-the-news reaction, especially with substantial overhead resistance nearby.

Tuesday, September 20, 2011

Weird Day

For about the 20th time in the last couple months, the market jumped sharply on news that Greece was close to reaching a deal to save itself. I am not sure what has happened to all the other deals that were reached in the past, but apparently traders have now programmed a "Greece is saved" macro into their computers, which automatically buys on each new announcement that the crisis is solved.

The latest Greek rumors were just the icing on the top of rather peculiar day. We saw very bifurcated action with a small group of big-cap names, including AAPL, CMG, PCLN, ISRG, GMCR, AMZN, WYNN, etc. charging ahead while market breadth was more than 2-to-1 negative. Small-caps underperformed badly while money flowed into a select number of big-cap names.

Volume was down quite a bit and, with breadth so weak, it is not a very attractive picture but that outweighed the intraday reversal to the upside and the frenzy of buying in a few momentum favorites. It would be much healthier if the action was broader, but it simply isn't a very healthy market, so we shouldn't expect it to act like it is.

With the Fed announcement coming up on Wednesday afternoon, I don't expect the bears will have much appetite for pursuing shorts. In addition, action like we have seen today is going to encourage dip-buyers. If the market can turn back up so easily, they will be looking to go it again on another pullback.

Saturday, September 17, 2011


Matt Taibbi's take on the $2 billion UBS loss by a "rogue" trader:

They’re not "rogue" for the simple reason that making insanely irresponsible decisions with other peoples’ money is exactly the job description of a lot of people on Wall Street. Hell, they don’t call these guys "rogue traders" when they make a billion dollars gambling.

The only thing that differentiates a "rogue" trader like Barings villain Nick Leeson from a Lloyd Blankfein, Dick Fuld, John Thain, or someone like AIG’s Joe Cassano, is that those other guys are more senior and their lunatic, catastrophic decisions were authorized (and yes, I know that Cassano wasn’t an investment banker, technically – but he was in financial services).

In the financial press you're called a "rogue trader" if you're some overperspired 28-year-old newbie who bypasses internal audits and quality control to make a disastrous trade that could sink the company. But if you're a well-groomed 60-year-old CEO who uses his authority to ignore quality control and internal audits in order to make disastrous trades that could sink the company, you get a bailout, a bonus, and heroic treatment in an Andrew Ross Sorkin book.

In other words, "rogue traders" are treated like bad accidents and condemned everywhere from the front pages to Ewan McGregor films. But rogue companies are protected at every level of the regulatory structure and continually empowered by dergulatory legislation giving them access to our bank accounts.

-- Matt Taibbi

There is a rumor of an Italian downgrade over the weekend.

This decision by the Fed to lend ill-collateralized loans to European banks will be fodder for the Tea Party and those on the far-right here in the U.S., and quite honestly, we think the right’s antipathy toward this lending is correct. Does the Fed have an obligation to defend the banks of France or Germany or Austria or Italy et al.? Or should the Fed’s aegis only extend to the coasts here in the U.S.? We think the latter, and we suspect that the repo-lending operation had better be very short-term in nature and be unwound at the first opportunity or there shall be fiscal “hell to pay” from the right.

-- Dennis Gartman, The Gartman Letter (Sept. 16, 2011)

There is a precedent for outrage from when the Fed lent to foreign banks during the 2008-2009 crisis, but, in 2011, the idea that the Fed feels as though it has the right to lend U.S. taxpayer money to foreign banks (against what is POSSIBLY mismarked collateral) will likely ignite Rick Perry and Ron Paul and the Tea Party in general. Moreover, the U.S. middle class, already victimized by screwflation, will not likely be happy with the notion that the U.S. is bailing out Irish, Portuguese, Spanish, French and Greek banks. Or, if not "bailing out," then certainly helping out.

Essentially the Fed, Bank of England, Bank of Japan and Swiss National Bank are lending money to the ECB, which is under pressure because it is funded by 17 countries, many of which are under funding pressure themselves -- pressure that is being alleviated by funding from the ECB, which itself is funded by the stressed countries to which it is lending that in turn fund the ECB and so on and so forth.

To me, the banking and sovereign debt problems in the eurozone are far more structurally complicated than was the case in recapitalizing the U.S. banks three years ago, and with 17 countries in the ECB, represent a huge challenge ahead. Remember, the central banks are providing liquidity, not capital, to the European banks. We still appear far from the necessary solution of raising permanent capital, which puts the European banking crisis closer to the U.S.’s crisis in mid-2008 than late 2009.

Importantly, nothing in yesterday’s move reduces the possibility of a worldwide recession in 2012. The clock is ticking in Greece, and it appears inevitable that Greece faces bankruptcy sooner than later, raising a further risk of more contagion in the eurozone.

Now, The Fed

If you only glanced at the indices today, it looked as if it was a great week for traders.

The S&P 500 was up every day and jumped more than 5% for the week. You'd expect to see lots of high fiving and chest thumping among the bulls, but that was not the case. The main emotion was disappointment, as many market players were surprised by the straight up move and never managed to reposition themselves.

What caused the most consternation for traders was unrelenting buying despite great skepticism over the latest efforts to end Europe's sovereign debt issues. It was easy to talk yourself out of a bullish bias given the news flow.

Ironically, a high level of negativity and a great amount of skepticism drove the action. Market players were not positioned for anything positive and when the market started to run, they kept it going as they scrambled to keep pace. It was a classic example of how contrarian thinking is supposed to work.

I'm not sure that this week's action changed many opinions about the health of the European or the U.S. economies, but it probably did change some thinking about putting money to work. Market action like this causes skeptics to hold their noses and buy because they can't stand being left behind. That often turns out to be a poor strategy but the bears, who argued that all week, were the ones underperforming.

Things won't be any easier next week. We have an extremely important meeting of the Fed. Expectations for some form of quantitative easing are extremely high and we are likely to see a major move when if that news hits on Wednesday at 2:15 p.m. EDT.

the son certainly appears to be well-fed; AND I LOVE THE HAIR!!!

Friday, September 16, 2011


There is a story out on the Daily Telegraph which has a lot of bond traders talking. Ambrose Evans-Pritchard reports that China is planning to liquidate some Treasury holdings and buy physical assets, stocks, and basically anything else that isn’t U.S. bonds. Prichard makes the claim that China views the Fed’s quantitative easing program as a "stealth default." I don’t believe that is true at all. I know that China will say things like "stealth default" in public. But to assume that is what their economic officials actually believe is plain insulting to China. It implies that they don’t understand monetary theory, the transmission mechanism between rates and money growth, or the U.S. growth/inflation situation. I think they understand all too well.

Indeed, you can tell so from China’s own monetary strategy. They have been “printing” yuan to buy dollars for years, and proportionately in much larger amounts than any QE program. There is very little difference between rapidly expanding the money base via the foreign currency markets vs. doing so via the interest rate complex. Either way, you’ve expanded the money base. In fact, even an elementary understanding of monetary theory would lead one to know that extremely easy money in a rapidly growing country is much more likely to be inflationary (i.e., China) than the same policy in a contracting and/or stagnant economy (U.S.)

There are several more of Prichard’s claims that don’t pass the basic smell test (if China thinks that our currency is getting trashed, why buy our stocks?). Here is the reality. China knows that their foreign currency peg is creating problems for themselves. One of those problems is a reliance on the U.S. dollar, but there are others. China’s economic minds are no doubt worried that a sudden decoupling with the dollar is risky, and therefore they’d rather slowly loosen the peg. But it will be the loosening of the peg that causes Chinese demand for U.S. Treasuries to decline. Not the bogey man of sudden liquidation.


No one in the media is discussing the potential political fallout from U.S. financial support of European banking institutions.

The announced move by the Fed, Bank of England, Bank of Japan and Swiss National Bank (coordinated with ECB) is an attempt to stabilize U.S. dollar funding for European banks.

I suspect there has been something of a run on several large European banks' funding (particularly U.S.-dollar-based funding).

This move provides temporary liquidity (more cowbell) to the affected institutions and buys them some breathing room over the balance of the year.

Emphasis on temporary, as the structural issues remain very much in place!

Today's economic releases underscore the screwflation of the middle class.

Initial jobless claims were nearly 20,000 more than consensus, while the prior week was revised upward by 3,000. Continuing claims dropped but were still above expectations.

In terms of the rising costs of the necessities of life, the August CPI increased by 3.8%, the biggest increase in three years. The headline CPI was up by 0.4%, and the core was up by 0.2% (year over year). Food prices, rent prices and clothing were the source of the increase in the CPI.

Meanwhile, the NY Manufacturing Survey came in at -8.8, weaker than estimates of -4.0 and the worst number in a year.

NFLX, after raising prices, negatively preannounced a third-quarter subscriber miss (guides down on streaming and DVD subs).

Moving Up, But With Negativity

It is always puzzling when the market runs the way it has the past few days, when no one really seems to believe in it. Even folks who tend to be perma-bulls are advising caution. Who can blame them when using the news as an excuse to buy is so flimsy?

To understand the market beast, you have to appreciate how perverse it can be at times, especially when there is a widely held consensus. The more monolithic the thinking, the more likely the market will do the opposite. When everyone agrees, the more likely it is they have already acted on that belief, and the easier it is for the market to move in the opposite direction.

That sort of contrary action is challenging enough, but when you add high-frequency trading to the mix, it really gets tricky. There are many different styles of computerized trading, but one of the most obvious is the one that juices momentum. It walks stocks straight up and extracts pennies along the way. It is like a Ponzi scheme, and as long as the trend continues, everyone is happy. But the moment the machines pause, the pattern breaks down quickly.

There are plenty of good reasons why the market should falter. There is substantial overhead resistance, somewhat extended short-term conditions and problematic news flow. On the other hand, there are a lot of frustrated bulls who want to buy a dip and will probably give the market some support.

Thursday, September 15, 2011

Thoughts 9/14/11

We have to try to make the market's volatility our friend.

Today might have been significant (from a constructive basis), as we see what can happen to the U.S. stock market with the slightest bit of good news.

Hedge funds, institutional investors and retail investors -- as previously mentioned -- are all underinvested. Indeed, after the close of trading, ISI's hedge fund survey indicated that for the last week, the net exposure of hedge funds dropped further -- from 45.7% to 44.4%. That's the lowest invested position since April 2009. (Gross exposure also declined).

So we shouldn't be surprised that the slightest bit of "good news" triggers such a profound spark and positive impact on equities.

Facebook IPO delayed until 2012.

Miller Tabak's Peter Boockvar's take on the Greek news:

A Greece spokesperson is saying the following after the call with Merkel and Sarkozy, *GREEK BUDGET DECISIONS WILL SHIELD ECONOMY, STATEMENT SAYS, *GREEK BUDGET DECISIONS IN RECENT DAYS WILL HELP MEET TARGETS, *GREECE DETERMINED TO CARRY OUT ALL ACTS TO MEET BUDGET PLANS. GREECE TO MEET 2012 FISCAL TARGETS, PRIMARY SURPLUS WITH NEW MEASURES. Bottom line, Greece is likely going to get its next 8b euro tranche in 2 weeks but apparently Merkel, Sarkozy and Papandreou still don't like paying attention to the bond market where the 1 yr yield in Greece is yielding 141.8%, the 2 yr is yielding 74.5% and the 10 yr is yielding 25.7%. This says of course that the only lifeline the Greek government has is thru the generosity of its neighbors as they have almost zero chance of paying back in full all that is owed. I mentioned Merkel being in fantasyland yesterday and delusion is the word today that comes to mind after seeing these Greek headlines. One would think at this point that Greece would want a more pronounced debt restructuring in order to slash their debt instead of playing this game of pretend because they're afraid to hurt the feelings of bondholders.

Geithner expressed the view that Europe has the capital to handle the growing sovereign debt crisis. He said that "there was no chance" of a Lehman-type failure of any of the major financial institutions in Europe.

Whether Europe has the political will is another issue, as we must recognize that our Treasury Secretary doesn't hold the strings of eurozone policy.

As to U.S. policy, he underscored the need to find near-term solutions to buoy domestic growth in the face of structural and secular headwinds.


* an added buyback given strong cash flows;
* fiscal-year 2012 guidance will be at least in line with consensus, fueled by strong private loan growth (greater than 2011's $2.5 billion, with potential as high as $3 billion); and
* low valuation.

CoreLogic released second-quarter 2011 negative equity data for U.S. homes yesterday -- it makes for bad reading and suggests a lengthy period will be required before the residential real estate markets recovers.

There are currently 10.9 million homes, which represent 22.5% of all residential properties with mortgages that are in negative equity as of June 30, 2011. This is down only modestly from the 22.7% at first quarter's end.

An additional 2.4 million mortgagees are considered to be "near negative equity," with less than 5% equity.

Combined, negative and "near negative” equity accounts for 27.5% of all residential properties in the U.S.

Over 70% of all homeowners with mortgages that are in a negative equity state pay higher-than-market mortgage rates.

We have a few market-constructive data points that could keep us afloat for a while.

1. The S&P futures act like monsters during the evening and early-morning session but seem to act like dancing fairies during the trading day (when the markets are more populated).

2. The semiconductor index (often seen as a leading market indicator) has made a series of higher highs and appears close to breaking out over its 50-day moving average.

3. In the just-released Investors Intelligence survey, there are now 40.9% bears (up from 37.6% last week and 21.5% in July). This week's bear percentage is at the highest level since the generational low in March 2009 when there were 47% bears.

Market On Wednesday

Once again, Greece is saved and the market celebrated.

I don’t know how many times we have rallied on similar news, but it sure didn’t deter buyers, and it really surprised the folks who thought we might see a sell-the-news reaction to what seemed like very unsurprising news to me.

And just when it looked like the buying frenzy was out of control, the market dropped a quick 1% into the close.

The big news today was the leaders of France and Germany agreeing that committing to a bailout is "essential for the Greek economy to return to a path of lasting and balanced growth."

That sure doesn’t sound like anything very momentous, but it was all that was needed to ignite stocks. The Financial Times summed it up well: "Apparently stocks rallied on the news, but we have no idea why, and we’re tired of guessing."

I suspect that the catalyst was a combination of overly aggressive bears, underinvested bulls and the power of the machines. The machines do a remarkable job of pushing trends higher as the folks on the sidelines, who have fond memories of when real people made market decisions, are left in the dust.

Being overly logical is not particularly helpful in this market. Everyone is trying to stay one step ahead, which means they are fading the machines, which are fading the contrarians, who are fading the market, and so on.

Wednesday, September 14, 2011


The Dutch Finance Minister wants an orderly Greek default, which he sees as inevitable.

Here is a summary of some of the highlights from today's Cisco analyst day.

1. Chambers sees nearly all of his customers maintaining or exceeding year-ago spending.
2. Growth expectations by sector (2011-2014):
* routing (5% to 7%);
* switching (2% to 4%);
* services and collaboration (13% to 15%);
* video(7% to 9%);
* global enterprise (6% to 9%);
* global commercial (9%-11%);
* global public sector (2%-6%, probably closer to low end with government cutbacks); and
* global service provider (5%-7%).
3. Growth expectations by geography:
* emerging countries (14% to 16%);
* Americas 8%;
* Europe, Middle East and Africa around 5%;
* Asia Pacific, Japan and Greater China 10%; and
* total 7% to 8%.
4. Aggregate Cisco profit growth better than sales growth.
5. Continued active external acquisition-based growth (preferably mid-sized deals) seen.

P.S. -- Cisco's Chambers has disappointed investors for some time. Accordingly and based on history, most investors should question many of the above expectations.

As reflected over by Miller Tabak's Peter Boockvar (below), the German Prime Minster seems to be in denial and in no rush to resolve the eurozone crisis:

German PM Merkel in an interview is not speaking like someone who is prepping the market for an imminent Greek default. She sounds more like a control politician who is in fantasyland with what is going on around her, with all due respect. Here are quotes from the newservices, "Greece default won't solve debt crisis...No quick one word solution to debt crisis...Must allow time to solve euro debt crisis...All we do in euro area needs to be controlled...Need to know consequences of actions in euro area...Want to find way to meet Finnish wish for collateral...Confident to find solution on Greece collateral...EFSF secondary market interventions to help minimize contagion." Ugh is all I have to say on this.

“Insanity: doing the same thing over and over again and expecting different results.”

-- Albert Einstein

Until we stop kicking the can down the road, stocks are not going to gain much ground.


A lack of negative news was all we needed to tack on decent gains following yesterday's strong finish. Volume was light and a bit choppy but the bulls were hungry for action and managed to push things along nicely after the early morning bounce was sold.

While two days of decent gains are a nice change after last week's rough action, it doesn’t do anything to change the big picture. We have been in a trading range with 1120-1125 of the S&P 500 as the floor since Aug. 8. Despite one low-volume, window-dressing run in late August, we have not been able to turn the trend back up.

My major concern is that if we test that support at 1120-1125 again, I do not think it will hold and we’ll see another ugly leg down. Unfortunately, with the negative news flow out of Europe, we have a potential catalyst in place for that retest.

The European situation is a big unknown, and it can remain uncertain for quite some time.

Tuesday, September 13, 2011



The run-off value of the current portfolio approximates $20 a share now.

Away from the company's ongoing business and franchise, the run-off value of the current portfolio approximates $20 a share now.

If one can’t money on SLM, making money is next to impossible on the long side. Barclays upgraded the shares of SLM last week.

I fully expect a Greek bankruptcy. With its paper yielding extraordinary returns, it is a given, quite frankly. The question is whether the inevitability of a Greek bankruptcy has been incorporated in share prices.

From The Washington Post -

"If you go back over the last eleven recessions — the first nine all had 5 to 15 percent profit drops. Perhaps the recession of 2001 was an outlier, caused by the bursting of the dotcom bubble's sky-high P/E multiples. The 2008 recession was even more unusual — with unprecedented leverage in real estate, banking and in corporations."
-- Doug Kass, in Barry Ritholtz's "The Investor's Dilemma: Earnings, Valuation and What to do Now" in The Washington Post

Worries -

1. the stock market's continued volatility and instability;
2. the growing sovereign debt contagion in Europe (and failure of their leaders/central bankers to respond intelligently);
3. continuing political partisanship (and failure of our leaders to properly confront our fiscal imbalances and to promote pro-growth policy); and
4. an inability to gauge whether the erosion in the August sentiment measures (impacted by U.S. stock market and domestic/overseas economic uncertainties) will translate into weakness in hard domestic economic data.

Uncharted Waters

What makes matters current conditions even more difficult to gauge is that resolution of the aforementioned fiscal imbalances (in the U.S. and overseas) is dependent on the effective imposition of bold and creative fiscal and monetary policy. Recent and past historical experiences suggest that it is rarely a good bet to hold on to, be dependent on and put heavy weight upon the hope that our world’s political leaders and central bankers will rise to the occasion. We are walking on what is looking more and more like a tightrope in which recovery is being weighed down by the aftermath of the last cycle of excessive debt creation and the lack of financial responsibility (and growing imbalances) across the private and public sectors.

Positives? -

* an inverted yield curve (it is positively sloped);
* acceleration in inflation (inflation is contained and so are expectations);
* an increase in real interest rates (anything but!);
* bloated corporate inventories (low inventories to sales in place now);
* retreating retail sales (they are expanding);
* negative year-over-year leading economic indicators (advancing now);
* a drop in factory orders (also rising) and;
* outsized durable spending relative to GDP (housing and autos remain at or near cyclical lows).

Today over 55% of the companies listed in the S&P 500 yield more than the U.S. 10-year note. The earnings yield (the inverse of the P/E multiple) less the yield on corporate bonds is as wide as its been in decades, and the possibility of a meaningful reallocation out of record low-yielding fixed income into more attractively priced stocks could produce a surprising upturn in the U.S. stock market once there is better economic clarity both domestically and overseas.

Late Rumor/Story Helps

It was looking dismal as the day wound down, but a late story that China was interested in buying Italian bonds brought in some buyers, squeezed some shorts and kick-started the machines.

Despite a big spike in the last few minutes, plenty of stocks still weren’t included in the computer algorithms, but the mood did improve on an otherwise dreary day.

The day started a bit oversold, which helped to produce a quick bounce after the gap-down open. That faded fast and we eventually hit a new low for the day in the early afternoon. But the bears were getting a little fat and lazy and it just took one decent, but questionable, news headline to put up a spike.

Monday, September 12, 2011

More To Come?

The market underwent a good, old-fashioned thumping Friday. While many market players were hopeful that President Obama’s jobs speech would entice some buyers, it was chaos in Europe that grabbed the most attention.

Once again, rumors that Greece was on the brink of defaulting on its debt were the major worry. Since Greece has supposedly been saved at least a half dozen times already, market players are starting to think there may be some lingering problems there. There has just been a steady stream of negative news lately and the situation in Europe seems to be becoming less certain and more unstable.

I’m not going to list all the worries and concerns that are out there. All we need to do is look at the market action to understand that there just isn’t any confidence or optimism right now. Market players have little interest in snapping up bargains in individual stocks when the macroeconomic news is so bleak.

Friday, September 9, 2011


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! (Hat tip Steve)).That spread between stock outflows and bond inflows -- $1.235 trillion -- is unprecedented in the annals of financial history.
-- Doug Kass, "The Newest Financial Weapons of Mass Destruction"

Recent data suggest that hedge funds have also become noticeably bearish. According to ISI's Hedge Fund Survey (released last night), hedge fund net long exposure (falling to 45.7% from 47.0%) is now at the lowest level since summer 2009.

There are two ways of looking at the hedge fund community's loss of confidence in the equity markets. Either it's bullish that hedge funds are so bearish, or there are some very good reasons why hedge funds (and retail investors) are bearish.

While the bearishness on the part of both retail and institutional investors has normally been associated more with market bottoms than market tops (and thus seen as bullish), four critical factors suggest that both investor groups might stay on the sidelines until they are somehow resolved:

1. The market's continued volatility and instability is scaring investors, who have not yet gotten over the economic/market experience of 2008-09.
2. The growing sovereign debt contagion in Europe and the failure of leaders/central bankers to respond intelligently remains a wild card.
3. Continuing political partisanship and the failure of our leaders to properly confront our fiscal imbalances and to promote pro-growth policy threatens business and consumer confidence.
4. An inability to gauge whether the erosion in the August sentiment measures -- influenced by the chaos in the U.S. stock market and domestic/overseas economic uncertainties -- will translate into weakness in hard domestic economic data.

Back in June 2010, Ara Hovnanian, chairman of Hovnanian Enterprises (HOV), waxed enthusiastically about housing and the prospects for his company on CNBC's "Fast Money." Here is the tape of his appearance in which Hovnanian dismissed talks of a housing double dip and suggested his company was on firm financial footing.

At the time of his interview, the shares of his company were trading between $6 and $7 a share. They now trade at $1.65 a share.

Kass: "Housing will recover but I am less certain that his company will. Hovnanian has $450 million of cash but $1.75 billion of debt -- so the company's net debt is about $1.3 billion. And here are the income statements for the last three years. Ergo, I would challenge his assertions that Hovnanian is positioned to thrive in this environment."

Hovnanian followed up with additional positive comments on CNBC about housing and his company on several additional occasions since last summer:

* On "Squawk Box" on Sept. 10, 2010, he talked about improving momentum in July and August because of better housing affordability.
* Again on "Squawk Box" on Oct. 13, 2010, Hovnanian said that momentum is even better.
* On Jan. 18. 2011, Hovnanian expressed more optimism about his company and the residential real estate market in response to some tough questions by CNBC's Melissa Lee on "Fast Money" (again!)
* The ubiquitous Hovnanian again appeared on "Squawk Box" on Feb. 8, 2011, telling Carl Quintanilla that traffic and sales "really picked up ... as momentum builds" to the upside.

Last night Hovnanian reported large losses for the three-month period ended July 31 and for the year to date. It was not a pretty picture, with three-month losses of more than $50 million and a year-to-date loss of $1.92 a share, or $194 million.

Here were Hovnanian's comments in last night's press release:

"The housing market remains challenging primarily due to uncertainty caused by general domestic economic and political concerns, stock market volatility and turbulent international economic conditions, all of which are taking their toll on consumer confidence... Despite this difficult backdrop, our deliveries, revenues, gross margin and cash flow for the third quarter were in line with our expectations. However, we see very few indicators that any recovery in the housing market has begun. As such, we are taking appropriate steps to run our business based on current market conditions, with a focus on maintaining adequate liquidity."

As i mentioned previously, HOV's stock is currently trading at $1.65 a share and the company appears on the financial brink, even despite a series of capital raises (naturally at much, much higher prices).

So what are the lessons of this column and of Hovnanian's very-wrong-footed commentaries over the past several years?

1. What manager has been bearish on his company's prospects? But Ara Hovnanian's consistent and misguided optimism may take the cake in the pantheon of executives.
2. Make your own investment decisions and put the often predictable cheerleading by company managements that you might see during conference presentations, conference calls and in the media in perspective.
3. CNBC should never invite Hovnanian back on air. Never.
4. And, never, ever should an investor listen to Ara Hovnanian.

The continued bad news was that initial jobless claims came in at 414,000 -- about 10,000 more than expected. Meanwhile, last week's data were revised up by a few thousand claims.

Continuing claims fell by 30,000 but were still worse than consensus.

The good news came on the trade deficit front. Coming in well below expectations at $44.8 billion (consensus was $51 billion), it could add as much as 0.4% to third-quarter GDP.

The political rancor isn't dying down. We are seeing more friction between the two parties, as highlighted in the report that the Republican Party will not respond to the administration's proposal on jobs tonight. In response, Rep. Nancy Pelosi is quoted as saying, "The Republicans' refusal to respond to the president's proposal on jobs is not only disrespectful to him but the American people." In response, House Speaker John Boehner spokesman Mike Steel said the president's proposals tonight "will rise or fall on their own merits" and that a Republican response wasn't needed. Roy Blunt, Republican of Missouri, said to Fox News there will be no formal response as "the speaker doesn't expect to hear much to respond to."

I remain pessimistic, especially as move closer to the November 2012 elections, that our politicians will provide the necessary leadership (and compromise of principles) -- which would, in turn, produce a boost to business and consumer confidence.

Market Frustration

The fact that the market failed to follow through on Wednesday's low volume shouldn’t be a big surprise -- but that doesn’t make it any more pleasant. The market has often caused great frustration for folks who don’t trust low-volume bounces, but this time it actually turned out to be the right move.

The catalyst for today’s intraday reversal was a speech by Fed chief Ben Bernanke that failed to cover any new ground. It was basically a rehash of his Jackson Hole speech last month and it disappointed market players looking for hints about what the FOMC might do at its meeting later this month. It probably wouldn’t have taken much for Bernanke to bring in some buyers, but he offered nothing of interest.

The next news item on the agenda is President Obama’s jobs speech. Unless he offers something truly new and surprising, I can’t imagine it having much market impact. In fact, it will probably stir up another political struggle and help to cement the belief that Washington is hurting the economy more than helping it.

Thursday, September 8, 2011


The strength in consumer nondurables today is conspicuous.

The Beige Book was no surprise (it rarely is!) and pointed to a domestic economy that is sputtering and close to stalling.

Here are three additional factors that are adversely impacting mortgage refinancings.

1. The mortgage origination business has changed in the last six months. Most mortgage brokers now get paid a salary plus a small commission. I have read that those that remain in the business are making one quarter, at best, of what they used to make in the last cycle. They no longer want to bother with smaller and more complicated loans.

2. The transformation from low- or no-documented mortgages has moved back to the old days, when credit scores, incomes and net worths were actually documented, and many are no longer qualifying for mortgages (as their loan to values are too high and incomes/credit scores too low).

3. The appraisal process is much longer, more conservative and much more stringent since lenders do not want to make any errors, be sued or face additional rep and warranty issues.

Refinancings have not improved in response to easing rates; in fact, the opposite has occurred.

The mortgage data is another blow to the easy-money crowd.

Applications for new mortgages were flat.

More importantly, mortgage refinancings, despite historically low mortgage rates, have now dropped for three consecutive weeks (-1.7%, -12.2%, -6.3%).

Ben Bernanke, a proponent of more cowbell, sees lower interest (and mortgage) rates as fuel for the consumer, as lower-rate refinancings, in theory, assist in individuals' cash flows and expenditures. But refinancings have not improved in response to easing rates -- in fact, the opposite has occurred!

There are several explanations for the broken relationship:

* The pool of available refinancing applicants are diminished importantly by the number of homes that are still underwater and the weight of a heavy supply of shadow inventory of unsold homes (which keeps home prices down).

* The weak jobs market is still keeping homeowners on the sideline (especially after a 30%-plus drop in home prices over the last five years).

* Because of the above, many homeowners that are considering refinancing are being required to raise their equity investment before banks agree to lower mortgage rate terms.

Whatever the reason for the recent weakening in refinancings, the logic behind more Fed easing continues to grow less compelling -- and perhaps this helps to explain the recent dissents among voting Fed members.

It is not the time to be glib; it is the time to be opportunistic and conservative (regardless of view). So, do not be swayed by the confident projections you see in the media.

The proximate cause for the strength this morning was the decision by the German constitutional court to uphold the European bailout. Also, Germany's industrial production rose by a better-than-expected 4%, the highest rate of increase since early 2010.

Big Up Day/Low Volume

If you are a trend trader or a momentum player, days like today are almost certain to produce underperformance. There isn’t any way that folks who use those approaches would be carrying much inventory in a downtrending market. And if you weren’t loaded up with longs at the close yesterday, you missed the great bulk of today’s gains.

After the gap-up open, the bulls did a fine job of plodding steadily higher all day. Breadth was impressive with nearly 5000 advancers to just 700 decliners, but the bears are going to be jumping up and down and pointing at the very low volume as a sign that there is no real buying conviction. While there was some hopeful talk that the worst is over, buyers were not exactly tripping over themselves to put cash to work.

All we really have is another low-volume, oversold bounce. That doesn’t mean we won’t go higher. In fact, given the history of this market over the last couple of years, low-volume-continuation moves are generally a good bet. Plenty of news is coming in the next couple of days and I’m looking for volatility to pick up.

Tuesday, September 6, 2011


Can the U.S. stock market benefit from being a relatively safe haven?

While there might be good fundamental reasons to be very negative today, if we were ever at or near a sentiment extreme, it is likely now.

It has been said that the E.U. is considering a suspension of financial institutions' mark-to-market, as was done in the U.S. over two years ago.

The August Non-Manufacturing ISM was higher than expected at 53.3 vs. a 51.0 estimate, 52.7 in July and the long-term average of 53.8.

In terms of the components to the release, orders and backlogs were higher, business activity was slightly lower, and employment dropped (but still remained above its long-term average and consistent with 100,000-125,000/month private jobs increases).

If we combine the non-manufacturing report (this morning) with the previously reported manufacturing release, we are at 53.0, which is consistent with real GDP growth of close to 2%.

By contrast, according to many strategists the market is pricing in at least a two thirds chance of recession.

The problems over there since Friday (on top of the weak domestic jobs report over here) were multiple:

* Greece is racing toward default. (As a reflection, the yield on one-year paper exceeds 80%.) Italian and Spanish yields widened measurably.
* Eurozone growth has slowed.
* Numerous roadblocks have popped up in the attempts to address the sovereign debt crisis in Europe (legal, lack of coordination, political, a fragile European banking system, etc.)

The hard truth about easy money is that it has, for many reasons, lost its effectiveness over time -- more and more cowbell is needed to produce less and less of an economic impact.

Hawkish Richmond Fed President Jeffrey Lacker similarly related this view recently:

My sense is that more monetary stimulus at this point would likely show up almost entirely in higher inflation with very little constructive influence on growth.

My consistent theme is to err on the side of conservatism. While I still am of the view that the U.S. stock market made its yearly low in August, the negative feedback loop threatens domestic and European growth.

We must now closely monitor whether the emerging negative sentiment hits the hard economic data in September.

Decent Comeback Today

The good news is that after an ugly gap-down open, we managed to trend upward most of the day and closed strong. The bad news is that we still finished in the red on better than 2 to 1 negative breadth. There was an intraday trading opportunity for the early dip-buyers, and the machines produced a strong closing spike, but you really have to reach to be very positive about this market.

At the moment, we are still in a trading range, but the risk appears to be to the downside, especially with the news flow still so poor. I don’t expect the Republican debate or speeches by President Obama or Ben Bernanke to help for long, and Europe seems to become more confused every day. Tonight, a court decision out of Germany will likely have a major impact on trading tomorrow.

I read about alot of traders trying to force trades in this market because they are anxious to be doing something. They focus on a handful of charts and talk themselves into believing the market isn’t all that unhealthy.

The Yield Curve Can’t Invert With Fed Manipulation

I have heard otherwise intelligent people say that the economy can’t go into a recession because the slope of the Treasury yield curve is too positive.

With the Fed trying to manipulate the yield curve for its own policy purposes, starving savers of income, the yield curve is not a useful measure. To invert the Treasury yield curve when the Fed is holding short rates at zero, we would have to see the Fed engage in Quantitative Easing to the degree that Treasury Notes and Bonds can be issued at significant negative interest rates.

To argue that we can’t have a recession at present because of the Treasury yield curve essentially says that if the Fed holds short rates at zero, we can’t have a recession.

I’m sorry, but with an overindebted economy, we can have a structural, not cyclical recession, where the shape of the yield curve doesn’t matter much because of all the debt. When large portions of the economy have no inclination to borrow, monetary policy, even unorthodox and evil monetary policy has little effect on the real economy, where ordinary people borrow money (excluding from the GSEs).

This is another reason why I think the Fed actions to twist the yield curve will fail. They can twist the curve, yeah, but it will do little to stimulate an overindebted economy where many mortgage loans are inverted.

The Fed may control the Treasury yield curve, but it does not control the free market yield curve where (aside from Fannie and Freddie and the FHA), ordinary people and firms borrow.


Equilibrium is a concept that economists believe in so that they can get their easy math to work, so they can publish. The truth is that the economy and financial markets are always outside of equilibrium. Capitalist economies are complex, and do not fit the models of neoclassical economists. Goods and services come and go. Improvements in offerings are common.

For those that work in the asset markets, it should be abundantly clear that equilibrium is a weak concept at best, reacting slowly over many years. Mean reversion is slow — four years or so seems to be the periodicity.

Let the economists demonstrate that most markets display equilibria. It is such an important element of their system, and yet so unproven.

My view is that markets are almost always not in equilibrium. Being outside equilibrium causes economic actors to allocate or deallocate assets in order to maximize gains or minimize losses. But the lengths of time for the information to flow, and production decisions to adjust are too long.

The same applies to theories in finance. There is no equilibrium, so why argue for it? Let the finance theorists step forward and show the times where the market was in equilibrium.

Personally, I think that disequilibrium is far more realistic. This includes actions driven by the Fed or the US Government.


The United States has roughly the same number of jobs today as it had in 2000, but the population is well over 30,000,000 larger. To get to a civilian employment-to-population ratio equal to that in 2000, we would have to gain some 18 MILLION jobs.

Saturday, September 3, 2011


I guess after this morning's jobs report there is more than a bit of irony that Labor Day is coming up......

It is growing conspicuous -- and it's likely consistent with renewed signs of domestic economic weakness in that municipalities' creditworthiness is deteriorating and now coming into question (a la Meredith Whitney's thesis).

We need strong and creative pro-growth policies -- more monetary easing isn't going to cut it.

It is a fool's errand to believe that the Federal Reserve will spur any meaningful economic growth by reducing interest rates further.

Ben Bernanke, by himself, cannot save the world.

Nearly three years of easing have proved ineffective in solving nonmonetary problems. Accordingly, without strong and creative pro-growth fiscal policy changes, we will be right back in the soup.

Already business and consumer confidence has been mightily shaken -- and the propensity to invest has been sapped (perhaps even irreparably).

This is a sad state of economic and investment affairs, but it can be resolved if our leaders adopt our sense of urgency.

"(The unemployment report) is grim and scary ... hopefully it will ring alarm bells in Washington." -- Mohamed El- Erian, Pimco

On President Obama's job speech next Thursday, tax and spending initiatives will be proposed "that will have a significant impact on growth and creating jobs." -- Gene Sperling, Director of the National Economic Council

The one-year Greek note yield is now 71%. (up 1000 bps).
The two-year Greek note yield is now 47%. (up 425 bps).
The 10-year Greet note yield is now 18%(up 50 bps).

The typical conditions that precede a recession are not in place:

* large private payroll drops in excess of 175k a month (adjusting for nonrecurrings, they are still averaging about 100k growth over last four months);
* an inverted yield curve (it is not inverted);
* acceleration in inflation (inflation is contained and so are expectations);
* an increase in real interest rates (anything but!);
* bloated inventories (low inventories to sales in place now);
* retreating retail sales (they are expanding;
* negative year-over-year leading economic indicators (advancing now);
* a drop in factory orders (also advancing) and;
* outsized durable spending relative to GDP (housing and autos remain in the crapper).

As it relates to job growth, initial jobs claims, corporate profit growth and capital spending all point to improving and better payroll growth than we saw today.

But what is happening is a negative feedback loop that is taking a turn for the worse, and we don't yet know its impact on business and consumer spending.

When we figure out the disconnect between data and sentiment, we'll have a lot more clarity on what the markets will do.

Boockvar of Miller Tabak chimes in on the jobs report:

Zero net jobs were created in August vs expectations of +68k but it does include a reduction of 45k due to the Verizon strike where all will come back in the Sept data. The private sector created 17k, well below expectations of 95k. The household survey did add 331k after job losses in the two prior months but because the labor force rose by 366k, the unemployment rate held steady at 9.1%. The U6 rate rose .1% to 16.2%. Also disappointing, avg hourly earnings fell by .1% m/o/m and is up just 1.9% y/o/y, well below the recent CPI readings of 3%+ and the avg workweek ticked down to 34.2, the lowest since Jan. The avg duration of unemployment fell a hair from its record high. Manufacturers shed jobs for the 1st time since Oct '10. Jobs were also lost in construction, retail, and at the local government level (state and federal added workers). Jobs were added in finance, business services including temp, education/health and leisure/hospitality. Bottom line, the number sucked and looking to the next few weeks we'll hear more about QE3 and Obama's jobs plan and the political class will still not understand that short term steroid shots into the economy does not alter long term behavior and a price is always paid when the stimulus wears off, aka debt, taxes and inflation. The US economy needs to FERBERIZED and left alone instead of being attended to every 2 hours.

Now there is terrific pressure on policymakers to implement pro-growth fiscal policies.

They fail and we may see an emergence of a third political party!

What was opaque at Bank of America has now turned much darker.

BAC's management has repeatedly dismissed the need for new capital.

But watch what they do -- not what Brian Moynihan says.

It increasingly appears that BAC's management is as disingenuous as the Wilpon family was in their negotiations to sell a portion of the New York Mets to Greenlight's David Einhorn.

After selling preferred stock (on preferred terms to Warren Buffett's Berkshire Hathaway (BRK.B)!), selling its international credit card business and reducing, by half, its investment in a large Chinese bank, according to The Wall Street Journal, BofA is now under additional capital scrutiny by authorities.

What was opaque at Bank of America has now turned much darker.

In company-specific news, the SEC has announced that it is seeking public comment on the mortgage REITs exemption from the Investment Company Act of 1940 -- which, in theory, could result in a marked reduction in leverage allowed (and profits earned) for the sector. Mortgage REITs currently employ leverage of about 8x, which allows them to generate 17% to 18% returns on equity (and pay out a slightly less amount in the form of dividends). If forced to reduce leverage to 1x or 2x, the industry group will return about 3%. (The group was down yesterday and this news will be an overhang until resolved)

Finally, in a sign of our times, Los Angeles Dodgers owner Frank McCourt has been offered $1.2 billion to sell the team -- an offer partially funded by a Chinese-financed investor group.

Probably Should Stay Defensive For Now

This morning I was contemplating whether or not a bad jobs report was discounted by the market. After the action today, I think we can safely conclude that the answer was no.

Market players knew that the economy wasn’t too rosy but the poor data confirmed those fears a little too aggressively. The only silver lining that the bulls could find is that maybe this will push the Fed to act more aggressively. But the cynics were firm in their conviction that there just isn't much the Fed can do at this point anyway. We already have plenty of cheap money out there and adding more does little to change the structural problems that we are grappling with.

The only positive thing I can say about this action is that it will eventually lead to some good opportunities. Just like the selloff in 2008 and 2009 gave us some great values this selloff will also but, like most everything in the market, it is all about the timing. If you act too soon, you can pay a very high price for your impatience but the desire to try to catch the exact bottom can be extremely hard to resist.

The market is now working on its second failed bounce after the massive breakdown in early August and the news flow is the worst since the crash in 2008-09. The S&P 500 is well above the important technical support at 1120 or so but if it comes close to testing it again, it is going to be quite gut-wrenching. The best-case scenario right now is that we stay in this trading range for a while and build a further foundation from which to move higher.

We are going to have plenty of news to sort out after the Labor Day holiday as President Obama announces his newest jobs plan and the European mess continues to unfold. We are also going to continue to hear much about what the Fed is going to do and that may help the bulls a bit. Unfortunately, this is also the seasonally weakest time of the year and that may have some negative psychological impact.

As It Turns Out, A "Shitty Deal" For All.....

Dan "Shitty Deal" Sparks Of GS Sued For Selling "Junk," "Dogs," "Big Old Lemons," And "Monstrosities"

While the FHFA has targeted lawsuits at a whole bunch of employees of the 17 banks previously disclosed, nothing gives as much amusement and frankly pleasure, as the fact that Goldman's definition of smugness - one Dan Sparks of "shitty deal" fame, is among the accused. Perhaps, even in uber crony communist America, what goes around eventually comes around. Now, if only someone can figure out how Warren Buffett's Wells Fargo, with its several hundred billion worth of Wachovia toxic biohazard, is not on the list of defendants...

And some blurbs on Dan Sparks from the filing:

On March 9, 2007, Goldman's Daniel Sparks wrote: “Our current largest needs are to execute and sell our new issues—CDO’s and RMBS—and to sell our other cash trading positions .... I can’t overstate the importance to the business of selling these positions and new issues.” A leading structured finance expert reportedly called Goldman’s practice “the most cynical use of credit information that I have ever seen,” and compared it to “buying fire insurance on someone else’s house and then committing arson.” Senate PSI Hearing Ex. 4/27- 76. As the Senate PSI found, Goldman “sold RMBS securities to customers at the same time it was shorting the securities and essentially betting that they would lose value.” Senate PSI Report at 513.

That Goldman knew of the originators’ abandonment of applicable underwriting guidelines and of the true nature of the mortgage loans it was securitizing is further evidenced by how Goldman handled its own investments. Goldman internally characterized its offerings as “junk,” “dogs,” “big old lemons,” and “monstrosities.” FCIC Report at 235–36. Nevertheless, it congratulated itself for successfully offloading such “junk” onto others. As the public learned in the FCIC’s Report, by January 2007, “Daniel Sparks, the head of Goldman’s mortgage department, extolled Goldman’s success in reducing its subprime inventory, writing that the team had ‘structured like mad and traveled the world, and worked their tails off to make some lemonade from some big old lemons.” Id. at 236.

Friday, September 2, 2011


Unfortunately, the actions by both the Democrats and Republicans do not suggest a likely coordinated pro-growth fiscal strategy that will address the structural issues facing the domestic economy. And the closer we get to the November 2012 elections, the more difficult it will be to break the current gridlock.

Moreover, balancing near-term fiscal stimulation with intermediate-term austerity is a balancing act that our representatives are unlikely to resolve anytime soon.


We’ve reached a stall speed in the economy, not just in the U.S., but in the euro zone and the UK. We see probably a 60% probability of recession next year and unfortunately we’re running out of policy tools. Every country is doing fiscal austerity and there will be a fiscal drag. The ability to backstop the banks is now impossible because of political constraints and sovereigns cannot bail out their own distressed banks because they are distressed themselves.

Everyone would like a weaker currency, but if the currency's weaker, another has to be stronger. There'll be more monetary easing and quantitative easing done by the Fed and other central banks, but the credit channel is broken. The velocity has collapsed and all the extra money is going into reserves. There was asset deflation, but it occurred because the economic numbers in August started to improve even before QE was done. This time around the macro data is negative, so yes, the market is rallying on the expectation of QE3, but I think it will be a short-lived rally. The macro data, ISM, employment, and housing numbers will come out worse and worse, the market will start to correct again. We're going to a recession, we are at stall speed and we are running out of policy bullets.

On whether there are any monetary policy tools that might be more helpful than others:

The ones that are being discussed by the FOMC will not have much of an effect because if you lengthen the maturities, you are buying long-term Treasuries and selling short-term, you are flattening the yield curve in a way that hurts the banks…This time around we will not have an additional purchase of Treasuries or fiscal stimulus. We will have a fiscal drag and the short-term effect of a rally in the market will fizzle out when the real economy is going in the tank. We are entering a recession based on my numbers.

On what President Obama and Congress could do if Bernanke doesn't have the ammunition:

We certainly need another fiscal stimulus. Much stronger than the one we had before. The one we had before was not enough. Congress is controlled by the Republicans and they're going to vote against Obama in the realm of fiscal austerity. If things get worse, it's only to their political benefit.

[The American Recovery and Reinvestment Act of 2009] was effective in the sense that the recession could have turned into a Great Depression. Things would have been much worse without it, so it was very effective in the sense of preventing a Great Depression, but it was not significant enough. With millions of unemployed construction workers, we need a trillion dollar, five-year program just for infrastructure, but it's not politically feasible and that's why there will be a fiscal drag and we will have a recession.

On the yield curve signaling not signaling a recession and whether there's a distortion with the reporting of the Fed:

Traditionally, you can have inversion of the yield curve. Right now, we have policy rates at 0 and we cannot have this inversion of the curve, but the bond market as opposed to the stock market is expecting a recession. We're having a growth scare in spite of the worries about the credit risk of the sovereign. After the S&P downgrade, bond yields fell from 2.5% to 2% or below. The bond market is telling as a recession is coming and the flattening of the yield curve is telling us that. We cannot have an inversion because you can have negative long-term interest rates. That's the reason we don't see the inversion.

On Europe and what can be done to stop contagion:

Not much is going to be enough. Once the FSF is passed they will run out of money in a matter of months and unless you triple the FSF or have euro bonds, then if Italy and Spain lose market access, there will not be enough money to back stop them…I don't think it is politically feasible to tell the German public they're going to backstop several trillion dollars of debt of that in the periphery. If we will not have a euro bond, what happened in the case of Greece will happen not just in an exceptional way as they said in Greece, but Portugal, Ireland and eventually Italy and Spain.

On whether there's anything to prevent a debt crisis from becoming a true systemic financial crisis:

The banks in Europe are already in trouble. Banking risk has become sovereign risk when the banks were bailed out by the sovereigns, but now the sovereign risk is becoming banking risk because you have a bunch of distressed near insolvent sovereigns who cannot backstop their own banks. There is a good chunk of the government debt held by the banking system. It is a vicious circle between the sovereign risk and the banking risk. You cannot separate them. The current approach of the Europeans is to muddle through and kick the can down the road. Extent and pretend. It is not a stable equilibrium. It's an unstable disequilibrium. Either the Europeans go in the direction of a greater economic monetary fiscal and political union or the only other alternative is a disorderly default or work out and eventually break up of the monetary union.

On China and its growth prospects:

China in the short term can maintain growth because there will be a severe recession and advanced economies will do more monetary and fiscal and credit stimulus. The reality is that their economy is imbalanced. Fixed investment has gone now to 50% of GDP. No country in the world can be so productive and take half of the output to invest into capital stock. You'll have a surge in public debt, it's already 80% of GDP including local government…I see a hard landing in China as the likely event, not this year or next year, but by 2013 when this over investment move will go bust.

Even without the slowdown of the U.S., this over investment boom is going to go into a bust in a hard landing. We're going to have weakness in the U.S., Europe and Japan. That is going to accelerate the climate in which the weakening of China will occur.

On the possible debt exposure for Chinese banks:

If you are looking at the Chinese banks, they have huge exposure to state and local governments and special purpose vehicles that have done the financing of the local investment. There has been at several trillion dollars yuans and we estimate 30% of these loans will go into default and become underperforming. The heat will be on the Chinese banks.

On Brazil:

Brazil has some strong economic fundamentals.... Our forecast that when the recession in advanced economies hits, economic growth in Latin America, including Brazil, is going to slow down as sharply next year compared to this year. Brazil has its own other domestic problems. If they do the structural reform that's needed, it could have high potential growth, but the question is whether the new president will be willing to do those structural reforms to reduce the distortion and increase the potential growth of the country. There may be some political economy constraints to doing that.

The good news is that for the 25th consecutive month, the ISM was in expansionary mode in August. The employment component (51.8), though lower (month over month), was also above 50 and in an expansion phase. Imports (55.5) rose by 2 points, and the prices index improved by almost 4 points (55.5) to the lowest level in 25 months.

The bad news is that the August ISM was the lowest reading in over two years and very near contraction. As well, new orders (49.6), production (48.6) and backlogs (46.0) all were at contraction levels. Exports (50.5) fell by nearly 4 points.

Here is a good rundown of the ISM by Miller Tabak's Peter Boockvar:

The Aug ISM remained surprisingly above 50 at 50.6. It's better than expectations of 48.5 and fears of worse but down a touch from 50.9 in July. The level of 50.6 is still the weakest since July '09. New Orders remained below 50 at 49.6 vs 49.2 in July and Backlogs too at 46 vs 45 in July. Production fell by 3.7 pts to below 50 at 48.6. Employment fell almost 2 pts to 51.8, the lowest since Nov '09. Importantly, Export Orders fell 3.5 pts to 50.5, the lowest since July '09. Inventories at the mfr'g level rose 3 pts to the most since Jan and were up 2.5 pts at the customer level but stayed below 50 at 46.5. Prices Paid fell 3.5 pts to the lowest since Nov '09. Of the 18 industries surveyed, just 10 reported growth. The ISM gave a bottom line, "the overall sentiment is one of concern and caution over the domestic and international economic environment, which is affecting customers' confidence and willingness to place orders, at least in the short term." While the number was better than expected, this quote spells out the economic concerns and the ISM does capture all the new market turmoil experienced in August.

Investors will soon begin to realize that more monetary easing will fail to produce more meaningful economic growth.

Last night, the August Chinese Manufacturing Index was reported at 50.9 compared to 50.7 in July and with expectations of 51.0 In response, S&P futures immediately rose by six handles, though futures began to trend down as the evening matured. Over the course of the past 12 months, this index has slowly dropped from 54.0, and many observers now see a soft landing of about 8% GDP growth for China in 2011 vs. 10% last year.

As a consequence of slowing growth but a soft landing in China, several bullish strategists now envision slowing inflation and the end of tight money in China. Those same bullish strategists have pointed to the eurozone's much weaker economic growth prospects, coupled with austerity and slowing inflation, as an indication that the ECB, similar to China, is likely moving away from tightening policy.

Finally, those same bullish strategists have chimed in that, over here, the Fed may continue to ease.

So, with global monetary policy becoming more accommodative, the argument now being made by bulls is that global easing is a plus for risk assets.

But I would like the bullish cabal to respond to the following concerns:

* Why is the need for global easing (and the need for pro-growth fiscal policies) a good thing only two years into a recovery?
* While the consensus has moved down to looking for a relatively weak worldwide economic recovery, when does a weak worldwide economic recovery dependent on generous policy (with the promise of economic reacceleration) become a bad thing as it underscores (among other things) the long tail of deleveraging and the structural issues that will likely continue to weigh on growth?
* After all, in the past, many optimists have observed that rising interest rates would be healthy for risk assets, as it would be a reflection of improving growth prospects, yet rates have not risen.

Nevertheless most market bulls now cite low interest rates as a valuation positive and contributing to the appeal of risk assets.

There seems to be some hypocrisy in this view.

Some rise in interest rates, owing to better economic growth, is what is now needed to extend the market rally. In its absence, I recognize that the option of easing by the Fed and the ECB can serve to stabilize equity markets from the effect of slow growth, but there comes a point in time when the failure of monetary policy to produce a reacceleration of economic growth will become more worrisome to investors. This is particularly true without any sense that pro-growth fiscal policies will be adopted by the November 2012 elections.

From my perch, that point in time is soon approaching when investors will begin to more seriously struggle with the realization that more monetary easing (and cowbell) will fail to produce more meaningful economic growth prospects around the world.

Perhaps the first shot across the bow and recognition of this risk was already seen in the weakness in equities during the first half of August.