Wednesday, November 30, 2011

We are in uncertain times -- nothing is certain. And, I might add, in many instances things are not as they seem......

Always remember, price is what you pay but value is what you get!

Today's government interventions -

* The actions were introduced not to stimulate growth but in order to prevent a crisis in liquidity.
* The problems of solvency remain very much in place and will be unaffected by the dollar swap action.
* The last time funding costs of dollar swaps were reduced was back on June 29, 2011. Over the next week the S&P 500 rose by about 57 handles, from 1295 to 1353. Less than seven days later, all of the gains were erased and the S&P fell all the way back to 1100 by the first week of August.

In no way do I expect such an extreme downturn, but I want to point out the historical precedent.

If George Lindsay's technical observation proves correct, the S&P 500 should embark on a sharp move higher.

By means of background, technical analyst George Lindsay coined his 23-step "Three Peaks and a Domed House" technical pattern and gained celebrity because it pointed to a market peak in late 1968 -- and the largest stock market correction since World War II followed in the years after.

The sharp downturn in stock prices in July (matching Stages 9 to 10) that followed provided an almost perfect fit to Lindsay's observed technical configuration.

But now (after possibly moving from Stage 1 to Stage 19), a positive setup and phase (from Stages 20 to 23) might be in order.

If the pattern of Lindsay's "Three Peaks and a Domed House" continues, a sharp upside move in the stock indices appears possible.

Central banks around the world lowered dollar swap rates, and futures exploded to the upside.

The Fed, ECB, Bank of Japan, Bank of England, SNB Bank of Canada all lowered swap rates in an attempt to address worldwide liquidity concerns. In other words, throwing more dollars at the debt problem. In still other words, papering over (print, print, print) the debt.

No one ever said that investing in the market would be fun.

No one ever said that investing in the market would be easy.

There is an inevitability that we will be moving toward some sort of solution to the eurozone's debt crisis and that the U.S. stock market has discounted a downturn in the domestic economy.

For the time being, those looking at technical signs and/or price behavior might be whipsawed by the market's lack of predictability, absence of memory (from day to day) and enormous volatility.

Understandably, many are freaked out by the above three market conditions -- it has been manifested in continued massive outflows of domestic equity funds and further de-risking of the hedge fund community. But these sentiment conditions are not new. Retail investors have taken out over $400 billion from equity funds over the past four years -- the pace of outflows has recently accelerated -- and hedge funds have been de-risking for two years. Sentiment extremes such as this are more often seen at market bottoms than at market tops.

Volatility represents the reality of the marketplace and, to some degree, has become (understandable) a distraction to those investors that trade/invest based on price momentum.

But opportunistic trading requires the fortitude of buying in panics (and sometimes selling into euphoria), and intermediate- to longer-term investing produces returns when investors are greedy while others are fearful.
Good news, for the short term at least, out of Europe and China caught market players by surprise and it was off to the races as skeptical bulls scrambled to find new buys. The fact that we ramped up even more in the final 30 minutes of trading was a sign that market players are underinvested and felt they had no choice but to chase things that had already made huge moves.

Obviously, it was a sea of green today with huge point moves and very strong breadth. Volume was relatively light given the magnitude of the point move, but picked up at the close on what looked like buy programs. As soon as we hit the day's highs in the final hour of trading, the momentum-chasing algorithms were triggered.

The S&P 500 is up 7.52% so far this week but 87% of that gain occurred overnight. In other words, if you weren't loaded up long at the close, you missed the great bulk of the move. That caused much consternation for day traders and position traders who have been waiting for better charts to develop. They never had much of a chance to buy either.

The big issue now is whether this momentum continues. This market has had a strong tendency to run even higher after moves like this. It becomes overbought and just keeps going. We saw it happen in October, after we hit the lows of the year, and when we went straight up from the beginning of December 2010 through February 2011. We stayed overbought for weeks and had very few pullbacks along the way.

Tuesday, November 29, 2011

Our markets, if one can call them that, may have a pleasant ride up into the end of the year. If the stock market does make a final-month push up, that doesn't mean all is well structurally. The stock markets are broken in the United States. There is still no uptick rule; this must be changed immediately. There is absolutely no enforcement of naked shorting laws; some naked shorting is brazenly out in the open. Naked CDS' should not exist. There absolutely must be an insurable interest component to these insurance-like contracts. Right now, there is none. The unregulated existence of ultra-levered ETFs has made the stock markets a joke; they are really casinos.

The world financial system is being destroyed by the incredibly poor policies of the EU, financial terrorism - which utilizes the terrible market rules against the markets, and the use of fractional reserve banking.
Standard & Poor's wide-ranging downgrade of major banks was expected, and it should not move these stocks very much tomorrow. BAC at 5 or below looks very, very interesting to me. This move had been telegraphed by the ratings agency, which had previously said it planned to update its credit ratings on the largest 30 banks in the world by November's end.

The market was expecting a broad downgrade of the banking industry.

The fact that there was "only" a one notch downgrade may be viewed as a mild positive surprise in my view.

The S&P 500 is at approximately the same price that existed in December 1998, so a lot has already been discounted.

I read that Bill Gross was on CNBC late in the afternoon discussing his downbeat monthly commentary. Gross sees years of slow growth and little upside to risk assets. I agree completely on his assessment of slow growth, etc., but I would remind investors and Mr. Gross that the S&P 500 today is at approximately the same price that existed in December 1998.

In other words, in the market, a lot has already been discounted.

Run, don't walk, to read a letter sent yesterday from Leon Cooperman, head of hedge fund Omega Advisors, to President Obama.

The letter is an informed and intelligent plea to the president -- it might be the best 15 minutes of reading you have engaged in for some time.

There is a lot of doom and gloom on housing today. The September Case/Shiller Home Price Index dropped by 0.6% (month over month) compared to expectations of flat pricing. This result was the greatest drop in almost eight months, with 15 of 20 cities surveyed showing price declines. The year-over-year Case/Shiller Index is down by about 3.5% this year.

But I believe some of the negativity on housing is misplaced, as overall pricing and turnover is being affected by broad differences in regional locales. The national housing market is bifurcated. There is strength in regions that are not exposed to the shadow inventory of foreclosed and near-foreclosed properties -- like the corridor between Washington, D.C. and Boston.

In areas like Florida; Nevada; Orange County, Calif.; Phoenix; -- all of which are inundated with shadow inventory for sale -- pricing is still very weak.

Areas not plagued with shadow inventory are likely a harbinger of better times even as Florida et al. are still weighing on average industry pricing.

The good news is that, very slowly, foreclosure inventory is dropping. Better is that in some areas of the country it is now cheaper to buy than rent, mortgage rates remain attractive and new-home production is well below demographic and household formation trends.

The U.S. residential real estate market is in the process of bottoming and is making a cyclical low. While the housing recovery will be muted in the year ahead, and for possibly several years, a multiyear recovery (from very, very low levels!) can now be expected.

Peter Boockvar from Miller Tabak is saying that Yellen's words almost guarantee QE3:

Likely confirming QE3 on Dec 13th when the FOMC next meets, Fed Gov Yellen, part of the Bernanke, Dudley trio said while the "Fed continues to provide highly accommodative monetary conditions to foster a stronger economic recovery in a context of price stability," she said "the scope remains to provide additional accommodation through enhanced guidance on the path of the federal funds rate or through additional purchases of longer term financial assets." Fed members pick their words very carefully and she wouldn't be saying this unless they were prepared to act. Other voting members saying the same recently have been Dudley, Evans and Tarullo and Bernanke's beliefs are along the same lines. Thus, those that want even more Fed action already have 5 of the 11 voting members. This meeting will come days after the EU fiscal union will be enhanced at the Dec 9th EU summit with hopes of some that the ECB will follow with something more.

Sir Peter concludes that "notwithstanding all the worrisome European headlines, if there is one thing markets like, it's central bank juice."

I agree.

From Yellen:

* "Scope remains" for additional Fed easing.
* Fed can ease with rate guidance or asset purchases.

Run, don't walk, to read Pimco's Bill Gross's latest monthly commentary, "Family Feud."

Below are some of his conclusions:

* "Investors should recognize that Euroland's problems are global and secular in nature; it will be years before Euroland and developed nations in total can constructively escape from their straitjacket of debt."
* "Global growth will likely remain stunted, interest rates artificially low and investors continually disenchanted with returns that fail to match expectations."
* "Investors should consider risk assets in emerging economies, such as Brazil and Asia, and bonds in the strongest developed economies, where the steep yield curve may offer opportunities for capital gains and potentially higher total returns."
It was a mixed and choppy day of trading with the DJIA acting well while the Nasdaq struggled. Oil, commodities and retail led while financials and technology lagged. Market players kept one eye on Europe but nothing new developed there, so we had no clear drivers. The better-than-expected consumer confidence numbers this morning helped a little, but were soon forgotten.

After a big move like Monday's, the important thing is that we not give back too much too quickly. We want the short-termers and flippers to exit but dip-buying interest should prevent too much of a pullback. It is helpful if volume recedes a bit after a spike but it has been equally slow on both days, which is a little troubling to those who remember when volume mattered.

Monday, November 28, 2011

According to a report, the European commission is planning to propose bank debt guarantees.

Goldman Sachs calls for $25 billion in equities to be bought in pension rebalancings by month-end.

The eurozone's economic union and banking system, a house built on pillars of sand -- that is, too much sovereign debt, reckless leverage and incredibly unrealistic unmarked-to-market accounting by the banking industry -- are now in jeopardy.

Given the disparate economic, political and legal interests in the E.U., the regimes of some monarchs and prime ministers have been toppled, but the heavy policy lifting lies ahead.

The lesson learned in the American economic crisis and Great Decession of 2008-2009 and now in the eurozone crisis of 2011-???? is that debt cannot grow beyond the ability to service it. Obviously.

A period of subpar economic growth is the best outcome for the eurozone. At worst, the European economies' downturn will be far deeper, bank credit will be restrained, the euro could vanish, currency and trade wars might erupt, and the European banking system could collapse -- or a combination of these factors could occur.

The only practical solution in Europe appears to be going the route of the U.S. and our Fed three years ago and embarking on its own brand of massive European-style quantitative easing.

Risk markets are losing their patience. The eurozone situation is approaching a major climax. This is by far the most important story to follow in the coming days and weeks. U.S. economic data muddles along. If Europe took care of business quickly, global stock markets would rally sharply. The S&P 500 could possibly make a run at the bull market highs. Unfortunately, there is a major ongoing political crisis in the region.

It is the rapidity of the loss of confidence and the quickness with which European sovereign bond yields have risen that have served as 2011's sword of Damocles hanging over stocks. The world's markets have broken down under the weight of the eurozone crisis in a punishing and incessant display of selling over the past two weeks. As a result, our stock market is now discounting recession.

It is now up to Europe to forcefully address, arrest and reverse the negative credit trends that have taken hold of our markets with forceful policy (easing and the implementation of euro bonds).

As Zero Hedge's Tyler Durden writes, the outcome looks binary -- either policy is implemented and the world's risk markets experience a sharp rally or the absence of policy to stem the European debt contagion leads to a bear market.

History shows that our world's leaders rise to the occasion in the face of crisis. It happened (and worked to correct the impending doom in our credit markets) in the U.S. in early 2009, when all seemed in chaos.

I don't know whether La Stampa's report on Sunday that the IMF is preparing a 600 billion euro loan for Italy is credible, but I do expect that the market's recent deterioration itself will likely pressure Europe's leaders into more forceful policy. As a possible precursor to more proactive, powerful and more timely policy, the eurozone countries appeared to be moving toward an accelerated path of fiscal integration over the weekend (that would bypass the cumbersome process of treaty changes). Reuters reported that this path demonstrates the seriousness that politicians are taking the growing debt contagion. Hopefully, as The Wall Street Journal reports, "Some within Berlin say a new binding fiscal regime might just be enough to justify ECB action." Other measures, such as an EFSF partial guarantee of a portion of eurozone sovereign bonds, appear to be on the table as well.

Tomorrow's meeting of financial ministers might hold some additional clues as to the timing of policy responses as documents that formalize the EFSF leveraging will be completed and ready for signatures. And the Dec. 9 Leaders summit might have more information.
We were due for an oversold bounce, and we had a pretty good one following upbeat news about Europe and Black Friday. Breadth was better than 4-to-1 positive, but volume was extremely light, and we had few signs of real momentum. This market has been lacking leadership and pockets of speculative interest for quite some time and nothing new emerged today.

I don't know how many times a low-volume, oversold bounce has turned into a V-shaped move that just keeps on going. There's still lots of negativity, the bulls are poorly positioned and end-of-year seasonality should be kicking in, so conditions are good for an upside surprise.

Friday, November 25, 2011

With rising liquidity fears around the world, at what point is even the U.S. bond market unsafe? U.S. yields are not sliding into a market selloff.

Perhaps today is an outlier.

Or perhaps the rapid increase in German bund yields this week is a specter of things to come on our shores in the days ahead.

Without question the flight to safety has spurred the recent decline in U.S. bond yields and the increase in bond prices, but, with rising liquidity fears around the world, at what point is even the U.S. bond market unsafe?

Tom Lee's market catalysts:

1. European auctions acting better help alleviate fear of spread.
2. U.S. election dynamics bode well for next year.
3. U.S. companies ramp up buybacks given excess cash -- as our report shows need to boost by 28% or $250 billion.
4. In Europe, the ECB or Germany relents.
5. China eases.
6. Mergers and acquisitions ramp up into year-end.
7. Fund managers see market oversold and despite feeling of no year-end catalyst, starts buying due to underperformance.

Germany's steadfast hawkish monetary policy is like a game of chicken in which eurozone sovereign auction results -- on Wednesday, the German bund auction failed, and Italy's six-month sale this morning disappointed again -- make the solution and the wait for investors harder and more expensive.

The European bourses have dropped for 10 consecutive sessions and our markets for seven days.

I am watching with amazement and, naturally, disappointment (that for now there is still no safety net installed in Europe that might stem the debt and liquidity contagion).
After six straight days of losses, you might think we could manage a little bounce on a thin half-day of trading, but market players showed no interest at trying to catch a turn.

We did start off with a small bounce after the weak open, but the news out of Europe continues to be devoid of any positives, and then we had a downgrade of Belgium debt by S&P and Fitch in the last hour of trading. That seems like a rather fitting end to the worst Thanksgiving week ever for the market.

About the only positive thing that can be said about this market right now is that it is so negative and so oversold that we are likely to see some sort of bounce soon. Of course you'd have to be a major optimist to believe that this market is going to suddenly turn and go straight back up.

I'd love to some good old fashioned, end-of-the-year positive seasonality, but the market is giving absolutely no indication that the buyers are looking to step up for some year-end mark-ups. If we do manage to turn back up and gain a little traction, there is going to be a very big group of traders who are not positioned for strength. That could give us some aggressive upside action, especially since so many folks are underperforming, but right now no one is very worried about missing out on the upside.

Wednesday, November 23, 2011

Europe seems to be losing whatever grip they had on their debt problems. But one never knows; a shockandawe 'solution' may be pushed forward by the Germans in the days to come. Meanwhile, good to great stocks get cheaper; dividend yields get fatter....


A week ago, the market didn't look bad at all but we have since suffered five straight days of poor action and the mood has turned dark. This is supposed to be the time of the year when upbeat sentiment produces positive action, but there are no signs of positive seasonality so far.

To add insult to injury, the Federal Reserve issued a press release right at the close that it will stress test banks for exposure to European debt, and we sold off a bit more after the close.

What's most worrisome about the action today is that we were oversold enough for a potential bounce but market players couldn't get much going. Traders are happy to ignore the negative news flow for a few days if they can hammer out some good long trades, but we had few signs of that.

We did bounce momentarily on news of another European rescue plan, but that fizzled fast. Even some comments in the Fed minutes that were supportive of further quantitative easing didn't produce a reaction.

Market players didn't want to play and we ended up with dismal action.

Ironically, the biggest positive right now is that things look so bad and there is so little optimism. Market players are not well prepared for a bounce, which means we can move fast if we gain a little traction. Unfortunately, the bulls don't seem to have any juice lately. Will they find some during the slow trading in front of the holiday? That happens quite often, but it's going to be action dominated by short-term traders who have no plans to stick around for long.

Monday, November 21, 2011

An optimist (and cynic) would say that a member of the super committee could conceivably trade on inside information regarding its progress.

Wouldn’t it be funny if they bought SPY today?

Well, it wouldn’t be that funny!

Congress and insider trading -- you simply can’t make these things up.

We could be closer to the end than the beginning of the eurozone sovereign debt concerns and poor sentiment that it brings to our markets.

The Wall Street Journal just introduced a column on the cover of the online edition that shows the 10-year yields, the spread against German bunds and the basis-point change during the day on Italian, French, Portuguese and Spanish debt.

The contrarian in me says this could mean we are closer to the end than the beginning of the eurozone sovereign debt concerns and poor sentiment that it brings to our markets.

Interesting comments by Miller Tabak's Peter Boockvar on ECB sovereign bond purchases last week:

Capturing a more aggressive ECB on Nov 10 and Nov 11, the ECB said it settled sovereign bond purchases of 7.99 billion euros for last week, up from 4.48 billion euros in the week before and vs. 9.52 billion euros in the week prior to that. They now have a total of 194.5 billion euros to sterilize with the latest purchases continuing to be Spanish and Italian debt. To measure the effectiveness or lack thereof of the buying of Italian bonds, today's 10-year yield is at 6.68% vs. 6.09% the close before the buying started Aug. 8 and the Spanish 10-year is at 6.57% vs. 6.04% right before. The Italian two-year yield is at 6.38% vs. 4.52% on Aug. 5, and the Spanish two-year yield is at 5.57% vs. 4.35% on Aug 5.

1. Establish term limits for all our representatives.
2. Limit government spending. Set a specific limitation on the annual gains in spending to be less than the increase in consumer price index.
3. Develop a comprehensive jobs plan.
4. Fix housing. Over 15 million homeowners are underwater with their mortgages, the shadow inventory of unsold homes is a drag on a housing recovery, and we must find a way to find a way to reemploy over 2 million former housing-related workers. We need a Marshall Plan for housing. I would suggest that the Obama administration reach out to the two most knowledgeable and smartest guys in the residential real estate markets, Eli Broad and Bob Toll. I would have them all meet in a locked room with Fed Chairman Ben Bernanke, Treasury Secretary Geithner and President Obama (and his economic team).
5. Raise taxes on the rich. Put a three-year income tax surcharge (of 10% to 15%) on incomes above $500,000.
6. Create a health care czar and tackle our health care industry's delivery and costs.
7. Mean test entitlements, freeze entitlement payouts and gradually increase the social security retirement age to 70 years old.
8. Build infrastructure. Set up an infrastructure bank, and place the money saved on defense into a massive build-out and improvement of the U.S. infrastructure base.
9. Create energy self-sufficiency. Develop a comprehensive plan designed to rapidly develop all of our energy resources.
After weak action on Thursday and Friday, the market was in precarious position, and the bulls needed to hold technical support of around 1207 on the S&P 500. They failed miserably, and we broke down badly today.

What was particularly worrisome about the action was that when we gapped down to start the day, the dip-buyers hardly even gave it try. Typically, the flippers will try to bounce us when we open weak on a Monday morning, but they didn't have the nerve today. We did bounce later in the day, but there was no big rush to load up into the close.

The market has been struggling with a constant flow of negative news for a while. A week ago, we were going a good job of shrugging it off and were actually climbing a wall of worry, but the failure of the U.S. congressional "super" committee and the constant headlines about issues in Europe just were too much for this market. We simply could not hold up under the barrage of negative news.

So now what? Given the high level of negativity and the fact that folks are underinvested and in need of relative performance and positive seasonality, there is potential for a strong bounce if the bulls can make a stand.

Friday, November 18, 2011


Here is a summary of the macroeconomic events of the week compiled by Peter Boockvar at MIller Tabak:


1) October retail sales surprise to upside even after taking out gasoline sales.

2) Six-month outlook in both New York and Philadelphia manufacturing indices point to optimism.

3) New York manufacturing current outlook a touch better then estimate.

4) Multifamily construction permits rises to most since October 2008 in response to growing landlord pricing power.

5) NAHB home builder index rises 3 points to 20, two points better than forecast and the best since May 2010.

6) CPI recedes to 3.5% (year over year) from 3.9%, but oil now $10 above October average and rents moving higher.

7) Japan's Q3 GDP rebounds 6% after three quarters of contraction


1) Yields jump in Spain, Italy, France, Belgium, Finland and the Netherlands.

2) Euro zone Q3 GDP up just 0.6% annualized (but in line).

3) German ZEW six-month outlook falls to lowest since October 2008.

4) Euro basis swap jumps 20 basis points to highest since December 2008, USD 3-month LIBOR approaching most expensive since July 2009 and swap spreads rise to levels last seen in May 2010.

5) Even with mortgage rates just a few basis points from multi-decade lows, refinancings fall 12.2% to a four-week low and purchases fall 2.3% … but have no fear: Evans and Dudley of the Fed said lower rates from here will help.

6) Not-so-super-committee charade toying around with more than $1.2 trillion of deficit reduction over 10 years -- in the context of a $15 trillion economy and $60 trillion of unfunded liabilities today.

7) U.K. unemployment rate rises to 8.3%, the most since 1996.


Fear has entered the marketplace.

Investors are fearful of (in order of importance):

* the eurozone's continued debt crisis;
* a liquidity squeeze in which banking credit is cut off;
* the perception that Republicans and Democrats in the Super Committee will fail to make the needed compromises; and
* a technical breakdown in the averages.

But fear is a necessary reagent to a sustainable market advance.

"I am deeply unhappy with the current forecast of prolonged high unemployment, and will continue to review whether there is more that we could do that would bring more benefit than cost...If additional asset purchases were deemed appropriate, it might make sense to do much of this in the MBS market. This would have a greater direct impact on the housing market and would be less likely to disrupt market functioning compared with further purchases in the Treasury market."

-- Federal Reserve Vice Chairman William Dudley

Dudley appears to be previewing the possibility of more quantitative easing -- perhaps as early as at the next meeting (Dec. 13, 2011).

Rumor has it that the continued torturous MF Global situation is scaring potential providers of credit and swap lines to Jefferies.

While I recognize that this is a ridiculous long shot, our political leaders might wake up and learn from the eurozone's policy mistakes and effect meaningful and outside-of-the-envelope policy that more swiftly cleans up the mortgage mess (by addressing the shadow inventory of unsold homes), directs more serious attention to our structural unemployment problem and enacts pro-growth fiscal legislation.

The process of limiting the debt contagion in Europe has continued for too long and has become the tail wagging the dog (and the world's equity markets), as demonstrated by the sickening late-afternoon market swoon on Wednesday.

One of the differences I have with the bears now is that I expect, before the problems in Europe get too worrisome and out of hand, that the ECB will ultimately step up by lifting its purchases of Italian and Spanish bonds, will further cut targeted interest rates and will introduce a large quantitative-easing program, so I am willing to look over the valley of eurozone uncertainty.

To date, the ECB has been tame and timid, so the speculators and bond vigilantes in Europe have continued to put pressure on sovereign debt prices until the ECB enters the shock-and-awe phase.

Shock-and-awe will come sooner than later; the adverse economic ramifications and poisoning/collapse of the European banking industry are alternatives that will ultimately be unacceptable to Europe's leaders and populace.

The French bond auction went better than expected, as the bid-to-cover ratio expanded. That's the good news.

The bad news was that the Spanish auction was worse than expected, as bid-to-cover ratio contracted. (Yields have risen by 26 basis points.)

Wednesday Thoughts

Why the selloff? It could be the impasse on healthcare reform and a statement form Fitch that the eurozone contagion is a threat to U.S. banks.

Stocks sold off in the last hour possibly based on the following:

* Super committee Co-Chair Jeb Hensarling's statement that talks have "stalled" over differences in how to reform Medicare and Medicade. Hensarling stated that the Republicans have offered to use the Medicare reform proposals that former Senator Domenici and former Clinton CBO Director Alice Rivlin had put together but that Democrats rejected the offer.
* Fitch's statement that the Eurozone contagion poses a threat to U.S. bank ratings.

Howard Marks:

In his commentary, Howard attempts to define the notion of what is a "fair share" of the tax burden, defines the magnitude of the problem (i.e., the U.S. government spends more than it takes in), talks about the potential solutions and discusses the philosophical differences between parties on the subject.

All these subjects will likely be part of the public debate in the years to come.

* November NAHB homebuilder sentiment rose to 20 from 17 in October and vs. expectations of 18. This is the highest reading in 15 months.
* The headline October CPI declined by 0.1%. That compares to expectations of no change and +0.3% in September. Core CPI was +0.1% vs. +0.5% last month and was in line with consensus. The three-month annual change in core inflation (+1.8%) has slowed slightly.
* Industrial Production rose by 0.7% vs. consensus at +0.4 % and a September drop of 0.1%. The October print was the best since the summer. Motor vehicle production was particularly strong at +3% (I bought more Ford (F) today.) Generally, the rise was broad-based, which is a good thing, especially since inventory levels are low. With this strong final demand report, the upcoming ISMs should continue to show strength as should durable goods orders.

This means that fourth-quarter 2011 corporate profits should be at least in line with the more optimistic numbers and quite probably exceed projections.

In summary, tame inflation and improving trends in industrial production augur well for S&P profits and the prices for risk assets.

Now all we need is for the European central bankers and leaders to get their act together.


We started the week quite hopeful. Political progress had been made in Italy, the technical picture looked good, and positive seasonality was about to kick in. But market players were skeptical and underinvested, which made for a good setup, but we just couldn't shake off the giant nuisance that is Europe.

The market fell out of its base Wednesday and Thursday and failed to bounce back today, simply because so many market players are worried that nothing positive will come out of Europe.

In addition, the deadline for the Super Committee to strike a U.S. budget deal is approaching and there is concern that we might see a repeat of the contentious budget debate that led to the formation of the committee in the first place.

Technically, it would have been better if we had held the 1220-1225 area of the S&P 500, but we didn't suffer too much damage. We are still above the 50-day simple moving average around 1207 and haven't fallen into a downtrend yet.

Market players are not well positioned for upside. When there's any sort of positive news, they pile in and try to play catch up. It is worse because so many are lagging the indices and trying to catch up with benchmarks. It is a big game of chicken where we battle back and forth, wondering if all these obvious negatives are going to matter.

It makes sense that we should be cautious, but that is exactly why there is such good potential for a strong move to the upside. If the market decides to ignore the negatives, there are an awful lot of folks who will be very worried about being left behind.


The dip buyers have had good results recently when they jumped in early following European worries overnight. Unfortunately, for the second straight day, the dip buyers were stung badly when the bounce fizzled and we breached the opening low.

What was particularly worrisome about the action was that once we broke the opening low, the dip buyers completely disappeared. We couldn't even manage a little bounce at the close. All major sectors were red, breadth was poor at 1300 gainers to 4200 losers, and volume was heavy.

Technically, we fell back into the trading range that was in place from early August to mid-October. The breach of 1220 support on the S&P 500 was not a good sign, but we did manage to hold 1205, which is the 50-day simple moving average.

The big question now is whether two days of selling have killed this market. It has suffered some damage, but the wounds can be healed if those dip buyers regain their nerve and make a stand before flirting with 1200.


One of the reasons there has been a wall of worry for this market to climb lately is that there are some very legitimate and obvious issues to worry about. This afternoon, those worries came to the forefront again as Moody's cut 10 German banks on expectations of a decline in government support, and Fitch expressed concerns about U.S. banks' exposure to euro-zone debt.

Those two headlines slammed the market back down after an impressive recovery following a weak open.

The fact that we have this very dangerous and well-known situation in Europe is a big part of the reason the market has been acting the way it has. Market players are worried they are going to be caught by news like we had this afternoon, but when we go for a period when the issues are ignored, then the worries about being left behind start to crop up.

We had a very good example of that dynamic the last two days. We gap down to start the day, because of worries out of Europe, but then the underinvested bulls who are trying to rack up some relative performance start to buy, and before you know it, we are trending back up.

That works out quite nicely until we are suddenly hit by some negative headlines and send everyone scurrying back to the sidelines, where they are ready to repeat the process.

It was quite a roller coaster ride today, but it was interesting to see that we actually had a pretty good theme going for a change on the strength in oil and gas. That was where all the positive action was today, and it goes to show that there is some potential for speculative trading if we can set aside the macro concerns for a little while.

Wednesday, November 16, 2011

Crude is back on a run and approaching $100/barrel.

A rumor in Europe has it that Italy will be downgraded.

Stated simply, there is not yet a safety net available for the eurozone.

That net will be established but probably not until there is some more pressure placed on sovereign debt prices.

Tuesday, November 15, 2011

The market looked sluggish Tuesday morning, but it suddenly came to life around midday and there was a scramble to add long exposure. There wasn't any obvious catalyst for the positive turn, but the anxiety was sensed about being left behind when things went green.

Volume picked up from very light levels Monday, but it was still lackluster. One of the challenges since the lows of March 2009 has been how often we have had rallies on diminishing volume. Logically, it makes sense that a market rising on increasing volume would have stronger momentum, but it hasn't mattered much lately.

The fact that buyers suddenly jumped in for reasons that weren't obvious tells us that they are worried about being underinvested and missing a year-end rally. We continue to have plenty of nervous news flow to keep skepticism high, which is a big reason this market keeps chugging along.

Monday, November 14, 2011


Berkshire Hathaway gets preferred treatment on disclosure requirements. Run, don’t walk, to read Zero Hedge's post, “Congress Must IMMEDIATELY Pass HR 1148: The ‘Stop Trading On Congressional Knowledge’ Act,” which follows up 60 Minutes' piece on Congressional insider trading. Also, ran this story some time ago - it finally "stuck."

Run, don’t walk, to read more on the Oracle of Omaha from The Wall Street Journal's Deal Journal, "Is This Why Warren Buffett Has Been Keeping Secrets?".

Personally, I don't understand why Buffett gets preferential treatment by getting special dispensation that permits him not to disclose certain investments that Berkshire Hathaway (BRK.A/BRK.B) makes in its quarterly holdings reports.

Maybe it’s just me!

Papademos says "Euro membership the only choice" on Bloomberg News.

Run, don’t walk, to read Princeton economics professor and former vice chairman of the Fed Alan Blinder's Wall Street Journal op-ed column, "The Folly of the Flat Tax."

The eurozone's economic union and banking system, a house built on pillars of sand -- that is, too much sovereign debt - reckless leverage - are now in jeopardy.

Given the disparate economic, political and legal interests in the E.U., the regimes of some monarchs and prime ministers have been toppled, but the heavy policy lifting lies ahead.

The lesson learned in the American economic crisis and Great Decession of 2008-2009 and now in the eurozone crisis of 2011-???? is that debt cannot grow beyond the ability to service it.

A period of subpar economic growth is the best outcome for the eurozone. At worst, the European economies' downturn will be far deeper, bank credit will be restrained, the euro could vanish, currency and trade wars might erupt, and the European banking system could collapse -- or a combination of these factors could occur.

The only practical solution in Europe appears to be going the route of the U.S. and our Fed three years ago and embarking on its own brand of massive European-style quantitative easing.

This weekend's edition of John Mauldin's “Thoughts From the Front Line: Where Is the ECB Printing Press?” covers the problems and potential eurozone scenarios far better than I could summarize. (Read it!)

John writes:

[B]ut the choice is print or let the euro perish. I see no other realistic solution, aside from massive austerity, willingly accepted by Europeans everywhere, along with the nationalization of their banks, etc., as described above. I think there is even less willingness to endure all that.

It is a hard choice, I know. If you held a gun to my head and asked, “What do you think they will do?” I would have to say, “I think the ECB prints.” But not without a lot of rancor and solemn pledges and maybe a rewriting of the treaty in order to get Germany to go along.

The choice is between a much lower euro or one that is far different from today’s, with a number of countries having left it. There are no good or easy choices.

As a closing aside, a lower euro means lower US and emerging-market exports (Europe is China’s biggest customer!) to Europe and more competition from Europeans in what the rest of the world sells to each other. It will be the beginning of serious trade issues and when coupled with the collapse of the Japanese yen, circa 2013, will usher in currency wars and protectionism. This will be a decade we will be glad to leave in 2020.

However, a Financial Times report on Sunday underscored how volatile and uncertain the situation in Europe will be in the months ahead, as European Central Bank Governing Council member Jens Weidmann said the bank’s policy stance is “appropriate” after officials reduced interest rates. Weidmann said he’s “confident that Italy will be able to deliver” on fiscal reforms and that the ECB won’t aggressively buy peripheral debt (Italy and Spain) and increase the size of its balance sheet, as “fixing an interest rate for a country is certainly not compatible with our mandate … you would guarantee a certain refinancing cost for a government and you could not argue that this was not monetary financing.”

Even though headline inflation is subsiding, bank deleveraging and upcoming capital raises, when combined with a recession of unknown consequence in Europe, make it essential that the ECB both eases monetary policy and lifts its purchases of Italian and Spanish bonds, but an unrelenting, narrow and almost religious interpretation of their mandate risks more instability in that region.

Last week, I expressed the view that the U.S. stock market has become the best house in a bad (worldwide) neighborhood and that conditions have evolved over the past decade that have conspired to favor risk assets in the U.S. over many other areas of the world.

The recent travails of the eurozone (with Ireland, Italy, Spain and Greece on the economic precipice) confirm that my investment focus back to the U.S. is justified.

Low Volume

What was most notable about the action today was that volume was the lightest of the year. Technically, it is a good sign when volume contracts on a day of profit-taking, but it is worrisome that there is such a high level of disinterest. The lowest volume of the year should occur in August when folks are on vacation, not in the middle of November when it is time to consider positive seasonality and end-of-the-year positioning.

Low volume has plagued this market since June 2009, and hasn't been a very good indicator of market direction. Nonetheless it is symptomatic of the fact that individual investors are becoming even more disenchanted with action that seldom feels very natural.

Ironically, it does seem lately that we are not being pushed around as aggressively by the high-frequency and computerized trading. The light-volume pullback today is textbook action. It is exactly what you'd look for after the bounce last week. We had a good sell-the-news setup on the news out of Italy, and we also have some technical overhead not far away. A pullback here is unsurprising and probably healthy.

If things continue to play out in the usual fashion, we should have another day or two of consolidation and then a run at the highs over 1275 or so. The longer we consolidate now, the better the setup will be for the bulls.

The bears continue to worry about the headline news out of Europe and the health of the domestic economy, but this wall of worry has served the bulls well lately. As long as we have obvious negatives, there is idle cash out there to support the market.

Friday, November 11, 2011

Here is Peter Boockvar's (of Miller Tabak fame) summary of this week's macroeconomic events.


1) Berlusconi goes and Italian Senate passes budget (awaits lower House)

2) The EFSF sells bonds to fund Irish bailout after last week's failure

3) ECB members stick to guns and say money printing not going to happen. They implicitly say to Italy "you figure it out"

4) September exports rise to record high ... but can it last?

5) MBA said refis rose 12.1% and purchases were up 4.8% as mortgage rates fell

6) U.S. import prices unexpectedly fall by 0.6% month-over-month led by food and energy prices

7) China's CPI moderates to five month low but remains still high at 5.5%


1) Italian bond yields move higher again but close well off week's intraday highs. The third-largest bond market in the world is staring over the edge. French rising bond yields becoming big focus too

2) Will the ECB be left with no choice but to be like Ben?

3) US 10 yr and 30 yr Treasury auctions were weak, finally push back on historically low yields with inflation elevated and concerns with Super Duper Undercover Secret Committee?

4) Import prices from China rise .4% month over month, the most since April

5) India's Industrial Production in September rises at the slowest pace in 2 years

6) German Industrial Production in September falls a greater than expected 2.7%

If all goes well in Italy over the weekend, I expect the ECB to cut rates again shortly.

Wall Of Worry, Defined

After Italy scared the bull out of quite a few market players Wednesday, we rebounded sharply Thursday and Friday and recouped nearly all the losses.

Many were convinced Wednesday that we were on the verge of a major change in market character. When we quickly reversed as the European fears subsided, too many folks were caught by surprise and forced to cover shorts and try to find some long exposure. That caused a straight-up move and a big gap this morning with no notable profit taking all day.

Market players have been understandably bearish given the macro concerns, and have been struggling to keep up with the market ever since we exploded higher in October. It is difficult to consider all the issues and not expect that the market is going to have a day of reckoning eventually.

The problem for many market players is that it this day of reckoning is obviously happening later rather than sooner, and they are going nuts as the market continues to run up without them as it ignores all the dire predictions.

Perhaps it is the very fact that the negatives are so obvious that keeps us running. It is an ideal wall of worry, with glaring negatives and many market players underinvested and underperforming. When the market keeps going, they capitulate and do some buying, which drives us up further and causes more folks to add longs so they won't miss the party.

An additional frustration for many is that it is a market that is primarily driven by the indices. Individual stock picking isn't very rewarding right now. It is all about overall direction, and you might as well buy a leveraged exchange-traded fund rather than bother trying to find a stock that may outperform.

It is a much tougher market than it looks to be, and the likelihood of more news out of Europe next week is going to keep it that way.

Thursday, November 10, 2011

Thursday Thoughts

Run, don't walk, to read and listen to Knowledge@Wharton's takes on the crisis in Italy and in the eurozone.

Credit Swiss conclusions:

* Italian Parliament will pass the agreed upon austerity measures this weekend.
* The ECB will then step in and act as the "lender of last resort" and buy up Italian bonds (taking yields back down). The new ECB President, Mario Draghi is Bernanke-like and will continue to cut interest rates sooner than later.
* The euro will drop in value relative to the U.S. dollar, forcing the Fed to engage in QE3.

Their investment conclusion: "prepare to hold their breath, plug your nose and buy risk assets (just like summer/fall of 2010)."

The 30-year auction today was weak (at high yield and at a bad bid-to-cover), and long bonds are down 3 on the day.

We might be in the early phase of the reallocation out of bonds and into stocks.

The way to play this?

Buy asset managers such as WDR, TROW and BEN.

Another beneficiary of higher rates is the life insurance group, the valuations of which have been challenged by low interest rates (as it hurts the group’s marginal investment portfolio returns).

Here is the official statement from Standard & Poor’s on France's rating:

As a result of a technical error, a message was automatically disseminated today to some subscribers of S&P’s Global Credit Portal suggesting that France’s credit rating had been changed. This is not the case: the ratings of France remain AAA with a stable outlook, and this incident is not related to any ratings surveillance activity. We are investigating the cause of the error.

Some possible negatives to consider:

1. The crisis in Europe is very close to reaching the point of no return.
2. The steep contraction that Europe is about to encounter will drag the U.S.’s teetering economy back into recession.
3. For the first time in U.S. history, the Fed has no ability to effectively stimulate the economy.
4. Deficits will worsen, U.S. debts will grow, and downgrades will follow.
5. Global deleveraging will accelerate, U.S. banks will recoil, loan growth will stagnate, and spreads will continue to compress as Treasury yields move lower.
6. U.S. equity valuations do not discount points 1-5. Being the tallest dwarf is not a good argument.

Wednesday Thoughts

The 10-year auction was weak, trading at about 3 basis points above when issued, with a weak bid-to-cover of 2.64, below the recent average of 3.10.

The U.S. stock market has become the best house in a bad neighborhood.

I believe that the events over the past year (especially in the eurozone) highlight the likelihood that the U.S. stock market will be favored among most other investment markets in the world.

The U.S. stock market has become the best house in a bad neighborhood for the following reasons:

1. The U.S. economy, though sluggish in recovery relative to past expansions, is superior (with the exception of some emerging markets) to most of the world's economies in terms of diversity of end markets, quality of global franchises, management expertise, operating execution and financial foundations.
2. Our banking industry's health, which is the foundation of credit and growth, is far better off than the rest of the world in terms of liquidity and capital. Our largest financial institutions raised capital in 2008-2009, a full three years ahead of the rest of the world. As an example, eurozone banks continue to delay the inevitability of their necessary raises.
3. Our large corporations are better positioned than the rest of the world. Through aggressive cost cutting, productivity gains, external acquisitions, (internal) capital expenditures and the absence of a reliance on debt markets (most have opportunistically rolled over their higher cost debt), U.S. corporations are rock solid operationally and financially. Even throughout the 2008-2009 recession, most have solidified their global franchises that serve increasingly diverse end markets and geographies.
4. An aggressive Fed (through its extended time frame of zero interest rate policy) has resulted in an American consumer that has reliquefied more than most areas in the world. Debt service and household debt is down dramatically relative to income.
5. After watching regime after regime fall in Europe in recent weeks (and given the instability of other rulers throughout the Middle East), it should be clear that the U.S. is more secure politically and from a defense standpoint than most other regions of the world. Our democracy, despite all its inadequacies, has resulted in relatively balanced legislation and law that has contributed to social stability and a sense of order.
6. Our regulatory and reporting standards are among the strongest in the world. Compare, for example, the opaque reporting and absence of regulatory oversight in China vs. the U.S.

In summary, conditions that have evolved over the past decade have conspired to favor risk assets in the U.S. over many other areas of the world.

In the period ahead, I expect a reallocation trade out of non-U.S. equities into U.S. equities.

Bloomberg is reporting that ECB is buying Italian bonds.

This should stabilize risk assets.

The falloff in Italian bond prices overnight is unprecedented. The pricing reflects not only the uncertainty regarding the timing of the turnover and nature of the Italian government's leadership transition, but also the London Clearing House's decision (based on the increasing perception that Italian sovereign debt has diminished in quality) to raise the initial margin (by 5%) on Italian bond purchases.

The outsized increase in Italian yields puts more pressure on the ECB to expand its balance sheet and buy discounted Italian debt, as the austerity measures in Italy are being threatened now by the disequilibrium in its bond market. What's more, the weakening in the value of the European banking industry's sovereign debt holdings further threatens European economic stability.

On a more encouraging note, inflation in China is moderating. The October CPI increased by only 5.5% -- the slowest pace in seven months -- well below September's 6.1% and in line with consensus. The October producer price index in China rose by only 5.0%, compared to expectations of 5.8% and September's +6.5%. For now China's landing appears soft, and the tighter monetary policy in place should soon shift to easing monetary policy.


After the pounding on Wednesday, the bulls managed a decent bounce today. There was some nervousness after the big loss so market players took the opportunity to do some selling into the gap-up open, but we managed to hold and drifted higher in the afternoon. Volume was lighter and there wasn't much energy to the trading, but the signs of panic that existed Wednesday dried up.

The biggest negative today was the poor action in AAPL, as there apparently are concerns that iPad sales are slowing, and even though it is probably still the most loved stock in the market, there was little interest in buying the dip. Technically the stock looks poor as it takes out recent lows and its 50-day simple moving average.

Unfortunately, AAPL isn't the only big-cap momentum name languishing lately. There just isn't any clear leadership in this market. ISRG and PCLN are probably the best of the big-cap momentum names right now, but they aren't that lively. Oil stocks have some momentum as crude heads for $100 a barrel again, but if you have been trying to play sectors or themes, there have been very few of interest.

The reason for this lack of leadership is that it is still a market that is mostly reacting to news headlines out of Europe. Everything goes up or down in tandem, and market players seem to be using mostly exchange-traded funds to trade the news rather than picking individual stocks.

I'm afraid that the focus on Europe is unlikely to change soon. There is talk that there will be some sort of deal in Italy over the weekend, and the market will be anticipating that tomorrow. Given how often we have spiked on some meaningless deal, the bears have to be a little nervous about being too aggressive in front of the weekend.

Hope that we will see Europe saved yet again is likely to keep a bid under this market into the weekend, but the possibility of a negative surprise can't be discounted.


Italy was obviously the catalyst for today's vicious selling, but you have to wonder why it suddenly became such a problem overnight. Italian bond yields inched higher, but there really wasn't any new or dramatic news. The market just decided that it was going to focus on the negatives today, and when we didn't bounce back after the weak open, the selling accelerated as folks decided they better step aside just in case.

The poor action today raises the big question of whether the sharp rally off the October low is finally coming to an end or if this is just a healthy bout of profit-taking that will set us up for a well-anticipated year-end rally.

The bearish argument here is obvious. Europe is a mess, and the problems in Italy are just the tip of the iceberg. As the extent of the problems becomes known and the market comes to understand that there are few solutions, the selling pressure will increase, and a downtrend will gain momentum.

That indeed may come to pass, but so far we are still holding above key technical levels at 1220 and, more importantly, the 1200 level of the S&P 500. If the downturn gains sufficient momentum to take out those levels, it will change the complexion of the action drastically, but I'm not inclined to anticipate that development.

We have often and consistently seen "Europe is saved" rallies. I expect that this dynamic will continue, even though so few folks believe that any real solution is close to being reached.

Wednesday, November 9, 2011

Another day, more YHOO takeover talk.

Alibaba and Softbank are looking for partners for an acquisition of Yahoo!

Prudential has raised its annual dividend by 26%.

One thing that has been ignored during the eurozone debt crisis is the rising geopolitical risk around the world.

Gold reversed massively.

Philadelphia Federal Reserve President Charles Plosser gave a speech today in which he said the central bank should adopt a 2% long-term inflation target in order to improve economic stability and accountability.

The speech should have no impact on risk markets.

Mr. Market continues to act well. There is every reason for the market to correct (Italian political situation, Italian bond yields higher, gold soaring, Greece a mess, European economic numbers softening, etc). But it only bends, it doesn't break.

One can almost feel that many investors (especially of a hedge-fund kind) are
offsides and underinvested, wanting to get in but unwilling to pay up.

Tuesday, November 8, 2011

Once again, the bulls were impressive and kept pushing right into the close. We had the anticipated news that Italian Prime Minister Silvio Berlusconi would resign -- but with conditions and not immediately. The market was unconcerned and launched another Europe-is-saved rally.

The action has become a bit V-ish again as we recouped almost all of last week's losses and are now challenging the highs hit the last time Greece was bailed out and Europe was saved. Just imagine how far we can run when Italy is bailed out and Europe is saved three or four more times.

There are folks who are very anxious to buy this market and are willing to do so even when there is a questionable basis for bullishness. I don't think anyone really believes that the problems in Europe are being systematically solved, but market players are more fearful of being left behind than they are about being wrong about how positive the news really is.

This appetite for stocks is largely a function of too many folks having been caught underinvested during the big run in October and now they are trying to play catch up as the year winds down. Given this market's recent propensity for V-shaped rallies, it isn't too surprising that there are folks anxious to buy this rising market.

We are always at the mercy of news out of Europe overnight, but even if we are hit with something negative, I expect to see the dip buyers show up fast. We have an uptrend in place as we climb a wall of worry. The big concern for many traders is that they don't have enough money at work.
The market was pressured in the early going and then again at midday.

It broke but did not break. A very good win for the bulls today.

Many are focusing on the ever-rising yield on the 10-year Italian bond, which is at 6.68%. Other maturities are higher as well.


1. An imbalance between demand and supply in the U.S. housing market as a large shadow inventory of unsold homes would weigh on home prices (and on consumer balance sheets).
2. Divided and divisive political leadership unable to agree to and enact hard-hitting, pro-growth fiscal policy.
3. Structural disequilibrium in the labor market, which would lead to an elevated unemployment rate.

"Most people get interested in stocks when everyone else is. The time to get interested is when no one else is."

-- Warren Buffett

The S&P 500 sells at roughly the same price as it did in December 1998 (13 years ago).

As a result, I do not feel as though I am paying up for stocks today.

Current valuations are attractive. Risk premiums (the earnings yield less the risk-free rate of return) stand at a multi-decade high, placing stocks, in theory, even cheaper than at the March 2009 bottom. Looking out longer term in history, over the past 50 years the S&P 500 has averaged a 15.2x P/E multiple while the yield on the 10-year U.S. note averaged 6.67%. Today, the S&P 500 trades at only 12.5x (2012 earnings) while the yield on the 10-year U.S. note stands at only 2.05%.

Right now, the hardest trade is not to buy and trade opportunistically; the hardest trade is now to buy and hold.
Constant chatter about growing problems in Italy provided a good excuse for some selling, but the bears were unable to do much. Breadth was negative due to underperformance by small-caps, but strength in big-caps as well as precious metals, oil, banks and retailers made up for it.

There were some comments from European leadership that the debt crisis would be under control within two years, which the media claimed was the reason for the afternoon recovery, but I believe it was simply a continuation of buying pressure created because there are too many underinvested bulls struggling to produce some relative performance.

We would probably have been in better shape if we corrected a bit more aggressively and washed out some of the overly optimistic bulls, but it is hard to be too negative when we have the sort of underlying support we saw today. There was some poor action in select small-caps, but there were few signs that market players are worried about recent gains slipping away.

We continue to set up quite well for positive action into the end of the year. Dip buyers are providing support and we are doing a better job of ignoring Europe.

Sunday, November 6, 2011

Friday Thoughts

Here is a good summation of this week's macroeconomic events compiled by Miller Tabak's Peter Boockvar:


1. While October job gains were only 80,000, the weakest in four months, the prior two months were revised up by a net 102,000.

2. Initial claims were below 400,000 at 397,000.

3. October vehicle sales were in line with estimates but at the best level since February 2011.

4. China service indices were mixed relative to expectations but both firmly above 50.

5. India manufacturing PMI rises to 52 from 50.4, and South Korea rises a touch, although it remains below 50.

6. The Reserve Bank of Australia cuts interest rates 25 basis points to 4.5% to help economic growth, as one of the only responsible central banks in the world gave themselves bullets over the past few years.

7. The European Central Bank cuts rates to help the economy, but inflation is its mandate -- Phillips Curve faith.


1. Within payrolls, the average hourly earnings were up only 1.9% year over year vs. CPI near 4%.

2. ISM manufacturing and services were both slightly below forecasts.

3. U.S. October retail comps were light -- five companies did better than expected, and 13 came in worse than expected.

4. Canada reports an unexpected sharp drop in jobs.

5. Papandreou creates a chaotic situation in Greece with referendum call.

6. The Italian government is losing the faith of the markets to liberalize their economy as yields spike across their yield curves.

7. EFSF can't sell bonds, an embarrassment for this supposed AAA paper.

8. Germany's September factory orders unexpectedly fall for a third straight month.

9. The euro zone manufacturing and services composite index was revised down to 46.5. Italian manufacturing was specifically down to 43.3, and services at 43.9.

10. Euro zone CPI at 3% -- holding at the highest level since October 2008. The ECB bets it's not sustainable with slowing economic growth -- we'll see.

11. The China manufacturing PMI falls to 50.4 from 51.2, and Taiwan drops to 43.7.

12. Bernanke officially lays groundwork for QE3.


It was an interesting week of action, and even though we lost ground, it had a more normal feel to it. We started with two big losing days after Greece bailout euphoria the previous week. We pulled back right to key support at the highs of the recent trading range, then bounced nicely before some mild selling hit today.

Although stocks remained highly correlated, what was interesting about the action was that the pullbacks and bounces in the indices had a more natural rhythm. It didn't feel like we were being pushed around by the computers and exchange-traded funds to the same degree as when the market went straight up in early October.

We were still highly sensitive to the news headlines, but there were a few subtle signs that stock picking might actually matter again. I've been anticipating that as things settle down in Europe, market players would focus more on individual stocks to try to rack up performance before year-end.

The intense focus on Europe has created quite a bit of bearishness lately. They obviously have a mess to deal with and their problems won't be solved quickly or easily.

The negatives are so obvious that they create good conditions for climbing a wall of worry. There are a lot of very underinvested bulls looking for entry points, and they will keep pushing the market up as they try to put capital to work.

I don't expect smooth sailing, but I do believe conditions will be favorable for upside as the year winds down. We only have 38 more days of trading in 2011, and I expect some good action as market players try to enhance returns.


So Europe is saved once again, and the market celebrates. This is about the 25th time Europe has been saved in the last few months, and all it took this time was for Greece to cancel its referendum on accepting a bailout. Of course, there are still plenty of uncertainties, and no one seems to really believe we are near the end of the European ills, but we have some short-term clarity, and that is all that the buyers need.

The bulls had the extra benefit of a bullish setup to help matters, and that helped to deliver solid gains on good breadth. All major sectors finished positive, with oil, gold and commodities leading. Retailers, which were under pressure early, reversed strongly during the day, and banks improved as well.

The big question now is whether we can gain further upside traction. We have the monthly jobs report in the morning, which will help to set the tone, but expectations are low, and a poor report probably won't have much impact.

Technically, we are heading into some resistance at the 200-day simple moving average of the S&P 500 at 1275 and then the recent highs at 1290 or so. We have been making very big moves as we swing around lately, and it is very easy to underestimate how far we can run once we start moving. We overshot to the upside last week, and we probably overshot to the downside this week. There is no reason to believe that this sort of overshooting won't continue.


After two days of aggressive selling that took the market back to technical support levels, we were in good shape for a bounce today. A lack of further negatives out of Europe and an unsurprising Fed FOMC interest rate announcement was all it took to provide decent upside.

Volume was lighter, but only the machines trade anyway nowadays. Breadth stayed highly correlated and was positive to the upside. Once again, there weren't any obvious themes or sector leaders. Oil, commodities, retail and banks all did well, but stocks moved mostly in tandem and rose across the board.

To trade this market you have to stay focused on headline news and overall direction. It is extremely difficult to make money by finding stocks with a high alpha, which is a stock's tendency to move independently of the market (and what makes individual stock picking profitable, at least in the short run).

In this market, traders are more focused on finding beta, which is a stock's tendency to move in the same direction as the market, albeit at a higher rate.

Even if you focus on trading high-beta stocks, it has not been that easy since the market swings have been so severe and so abrupt. High-beta stocks pay off nicely if you are in tune with the overall market direction -- but if you don't catch the turns, you can lose money very fast.

Tuesday, November 1, 2011


While the October national ISM index looked weaker than expected at 50.8 (the consensus was 52) the composition was good as new orders rose from 49.6 to 52.4 (that's the best level in seven months).

Lower inventories moved the index to below consensus and the new orders/inventories gap rose dramatically.

International markets are now in full panic mode.

A muddle-through economic scenario has increased in likelihood (despite the Greek hitch yesterday, today, tomorrow, etc., etc.), and, given the level of interest rates (low for as long as the eyes can see), the likelihood of healthy corporate profits in 2012 and conservative investor expectations, I would be a dip-buyer at this point.

A call for a new referendum in Greece will likely hang over the market for weeks.

Yesterday afternoon's government call for a Greek referendum on the country's aid package has had a delayed impact on the markets, but it is hurting overseas markets and U.S. futures this morning.

Stated simply, the full positive effect of last week's initiatives in Europe has been wiped out by the call for a new Greek referendum yesterday afternoon. Since the referendum won't be held until the first week of December at the earliest, this uncertainty will weigh on the markets for the next several weeks.

One would assume that the referendum will pass; if it doesn't, new elections will be called (as well as a new referendum) in early 2012. Not passing the referendum will materially increase the economic risks in Europe, likely leading to Greece being kicked out of the eurozone, causing a run on Greek banks as well as other countries' weak financial institutions and placing further strain on the bond markets of Italy and Spain.

Greece, Again

Once again, all that matters to the market is what is going on in Europe and, unfortunately, what is going on in Europe isn't very good.

It is absurd that the Greeks are hesitating to accept the bailout that the European Union felt it had to pass in order to save them. Europe just went through this painful process of crafting a deal and now Greece is saying, "We'd like to think about it for a while and probably vote on it in January."

Drawing on what I know about a significant portion of the Greek people, they yearn to experience danger; many don't feel "alive" unless they're walking on the edge...

The market obviously didn't see this coming, and now all the folks who were scrambling to add long exposure last week on the Greece-is-saved news are scrambling to get rid of positions as the house of cards comes crashing down.

Dancing around to the European headlines is really wearing on many market players as it makes it nearly impossible to focus on charts, fundamentals or individual stock picking. We just react to the latest news. What makes it worse is that we seem to be blindsided by news no one saw coming.

If we could move past this obsession with Europe, the overall technical picture isn't bad, say the technicians. We have "corrected the overbought" technical conditions and are sitting on decent support at the high end of the recent trading range.

Many folks who missed the October move would love to jump on these pullbacks, but the European mess is keeping them on the sidelines. As soon as we have a little clarity I expect to see buyers become aggressive quickly. The problem is that we end up with these big gaps, one way or the other, every morning depending on what happened in Europe overnight.

Monday Thoughts

Papandreou to EU: Drop Dead

The eurozone debt drama is far from being resolved.

At 2:01 p.m. EDT these headline came out on Bloomberg, suggesting the eurozone debt drama is far from being resolved:

* Papandreou says challenge to exploit window of opportunity
* Papandreou says new Greek plan must be put to referendum
* Venizelos supports Papandreou in referendum on new Greek loan
* Papanedreou says Greek elections to be held in 2013 as scheduled

Life insurance stocks are selling off under the pressure of profit-taking and another ratchet down in bond yields. I would add to the group only if they drop another 5% to 10%.

To be honest I continue to be surprised by the group's volatility, both up and down. It seems the sector moves by 3%-5% every day -- that sort of volatility is not what I expected when I began to do work on the group.

The MF Global bankruptcy filing shows that news commenters can also be advertisers.

There is a need for more disclosure regarding the financial role that contributors/"talking heads" employers' have in their relationship with the media (e.g., CNBC, Bloomberg, Fox etc.).

Case in point: MF Global Holdings, whose chairman, Jon Corzine, was a frequent guest host on CNBC's "Squawk Box." It turns out that MF is a large advertiser on CNBC. And in this morning's bankruptcy filing (hat tip Zero Hedge!), CNBC is owed $845,000 in advertising from MF!

The October Chicago PMI came in at 58.4, slightly below consensus expectations of 59. New orders and inventories dropped, backlogs rose (as did employment improve).

To summarize the previous regional reports, Chicago's weak report was in line with disappointing results in the New York and Richmond regions, Philadelphia was better and Kansas City in line. Dallas PMI comes out soon; tomorrow we get national ISM (consensus is at 52.0 vs. 51.6 in the prior month).

As I look at all these reports, I would conclude that a lot of the forward-looking business expenditure data are likely to slow in the quarters ahead:

* CEO Roundtable survey on capital spending is close to two-year lows.
* The Fed's Beige Book suggests continued weakness in hiring and spending.
* New orders in the ISMs suggest slowing capex.

Europe remains a destabilizing force on world economic growth despite the euphoria of last week.

Meanwhile, on a fundamental note, the September euro-zone unemployment rate rose to 10.2% -- that's the highest reading in over three years.

Placing further pressure on the European consumer and economy was the October CPI, which was over 3% for the second month in a row.

Europe remains a destabilizing force on world economic growth despite the euphoria of last week.

What we have learned from history is that we haven't learned from history.

"In sum, with both earnings and bond yields near historic lows as a result of a lack of real growth in developed economies, investors will need to find lots of pennies to produce asset returns much above 5% in bonds or equities. Pension funds, Washington politicians, and indeed Main Street investors are likely expecting much more. One of the big problems of an asset-based economy is that once interest rates inch close to zero and discounted future cash flows are elevated in price, it’s difficult to generate much more if economic growth doesn’t follow. Such appears to be the case today. Unlucky…very, very unlucky." -- Bill Gross, Pimco's November Investment Outlook

What we have learned from history is that we haven't learned from history. Case in point: MF Global Holdings, which is on its death bed this morning after having leveraged up its capital into the purchases of European sovereign debt.

CEO Jon Corzine tried to accelerate MF Global's growth strategy by utlizing more debt.

It hasn't worked out.

I think Europe, which is also attempting to solve its debt crisis with more debt, will face a similar problem/fate.

The Wednesday eurozone "solution," designed to put economies on a sounder footing is ambiguous in many ways. The region has likely already entered recession and it is far from certain that the contagion that has moved from one country to another over the last 24 months will continue to be troubling.

In "Pennies from Heaven," Pimco's Bill Gross covers the challenges of asset-based and driven economies in his November outlook.

Emotion is taking over the market. On any given day (or maybe any given hour!) the U.S. stock market can swing by several percent based on a rumor, a flimsy blog or by a statement by a central banker or world leader.

In one brief four-week period, the fear of return of capital has been replaced with the fear of an inadequate return on capital as fear of the downside has been replaced with fear of missing the upside.

"Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."
-- Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds

The Oracle of Omaha, Warren Buffett, has often written about the madness of investing crowds and why it often pays in the long run to be a contrarian:

* "You can't buy what is popular and do well."
* "Most people get interested in stocks when everyone else is. The time to get interested is when no one else is."
* "You're neither right nor wrong because other people agree with you. You're right because your facts are right and your reasoning is right -- and that's the only thing that makes you right. And if your facts and reasoning are right, you don't have to worry about anybody else."
* "A public-opinion poll is no substitute for thought."
* "The most common cause of low prices is pessimism -- sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer."
* "If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices."

And above all, let's be attentive to Buffett's observation below that applies as much to today's market as it did when he wrote this quote several decades ago:

* "Remember that the stock market is manic-depressive."

Crowds usually outsmart the remnants, but in today's emotionally charged and volatile market (which demonstrates no memory from day to day) confusion reigns and the crowds seem to bend with the emotion (and news) of the day.

What's causing these rapid changes in sentiment, and how should the average investor respond?

Arguably this manic crowd behavior (manifested in the ups, downs and insane volatility that follow) is reflected in the mood swings from depression to euphoria that have been goosed and exacerbated by the media, by performance-chasing investment managers and by high-frequency trading, momentum-based strategies and levered ETFs. We must try to stay (and invest) above the hype, avoid the pressure to "get in" during vertical moves (and to sell during deep swoons) and continue to try to take advantage of the volatility served up by the robots (rather than having it sap our confidence).

A little-discussed secret is that representatives of significant media advertisers (print, radio and television) often appear with greater regularity than other "guests." This helps to explain, in part, the media's sometimes limited criticism of glib, formerly wrong-footed bulls (names are excluded to protect the guilty!) -- many of whom failed to see the drop into the debt and equity abyss in 2008-09 -- compared to the relative quickness in criticizing recently wrong-footed bears like David Rosenberg, Nouriel Roubini and Meredith Whitney.

Back in 1973 the first health warning appeared on cigarette packaging -- "Warning - Smoking is a Health Hazard." Perhaps in 2011 it should be legally mandated that guests/talking heads in the business media disclose that their employers are important advertisers on the platform on which they are appearing. For example, BlackRock Vice Chairman Bob Doll's appearances on Bloomberg might disclose BlackRock's significant business/advertising relationship with Bloomberg. And, as another example, Jim Paulsen's frequent appearances on CNBC might disclose that Wells Capital Management is a significant advertiser on the network.

The hedge fund community has become the dominant investor over the past two decades. The rewards of differentiated performance, especially in a successful hedge fund, is huge. As a result, the performance pressures are intense. The fear of missing meaningful moves -- especially to the upside -- make for hedge fund catch-up buying (sometimes oblivious to overall macroeconomic strategy or individual company analysis) like we might have seen last week. History shows that hedge fund managers can get even more emotional than retail investors (though there is less emotion, it seems, when markets drop).

"It's not a market, It's an HFT 'crop circle' crime scene."
-- Tyler Durden, Zero Hedge

We live in an investment backdrop that is tortured by insane volatility.

The disproportionate influence of electronic trading, high-frequency strategies (based on price momentum) and leveraged ETFs (operating in a vacuum of de-risked and inactive individual and institutional investors) corrupt the markets by exacerbating price trends (both up and down). These exaggerated moves tend to obscure any sense of fair market value at any given point in time and too often influence unduly our own investment behavior.

"Obviously the thing to do was to be bullish in a bull market and bearish in a bear market."
-- Edwin Lefèvre (Jesse Livermore), Reminiscences of A Stock Market Operator

The game does not change and neither does human nature. So, how should the average investor respond to the manic markets?

Books to read -

* Howard Marks' The Most Important Thing
* Jim Cramer's Getting Back to Even, Stay Mad for Life: Get Rich, Stay Rich (Make Your Kids Even Richer), Mad Money: Watch TV, Get Rich, Real Money: Sane Investing in an Insane World, Confessions of a Street Addict, You Got Screwed! Why Wall Street Tanked and How You Can Prosper
* Barry Ritholtz's Bailout Nation
* Michael Lewis' The Big Short
* Andrew Ross Sorkin's Too Big To Fail
* Richard Bernstein's Navigate the Noise
* Michael Lewitt's The Death of Capital
* Gregory Zukerman's The Greatest Trade Ever
* Charles Mackay's Extraordinary Popular Delusions and the Madness of Crowds
* Edwin Lefevre's Reminiscences of a Stock Operator
* Jeff Matthews' Pilgrimage to Omaha
* Jeff Hirsch's Super Boom
* Walt Deemer's Deemer on Technical Analysis (2012)
* Jack Schwager's Market Wizards (all versions)
* Adam Smith's The Money Game
* George Soros' The Alchemy of Finance
* Leon Levy's The Mind of Wall Street
* Martin Shubik's The Uses and Methods of Gaming
* Graham and Dodd's Security Analysis
* Charles Raw's Do You Sincerely Want to Be Rich?
* James Grant's Minding Mr. Market
* Hewitt Heiserman Jr.'s It's Earnings That Count
* Martin Mayer's The Fed
* James Altucher's Trade Like a Hedge Fund
* Marty Schwartz's Pit Bull
* Robert Shiller's Irrational Exuberance

A Weak Close

There was plenty of red on the screens today, and we closed very weak, but volume was light and we are still above key support levels at 1230 of the S&P 500. It is never a good sign when the selling momentum increases in the last few minutes of trading, but it was probably program driven to some degree.

Given how extended the market was after last week, this action only qualifies as a pullback rather than a reversal. But it is a bit worrisome that Europe is such an easy excuse for profit taking. There are already worries about the health of the Greece deal and the potential that Italy, Spain, Portugal and Ireland are not going to be easily dealt with.