Tuesday, January 31, 2012

Over the last eight trading days, the S&P 500 has declined a grand total 0.13%, which is less than 2 points. Strength is being sold and weakness is being bought, and that keeps us pinned down. For four days now we have had negative action but don't quite seem to crack. Last Thursday we had steady selling all day, but in the last three days the dip-buyers have bailed us out just in the nick of time. With window-dressing pressures now over, will those dip-buyers be less zealous?

I'm seeing this is the first January ever in which the S&P500 did not have a day with a loss of more than 0.6%. It just goes to show how the market has not traded in "normal" fashion. When human beings are in control, there usually is some ebb and flow, and emotions shift, but in this market, which is largely machine driven, we never have the excess of emotions overcompensating in one direction then the other.

AMZN earnings are out, and revenue disappointed. That is giving us a little pressure after hours, but this is a market that keeps bending but not breaking. As long as those dip-buyers are out there, we'll be OK, but you have to wonder if they are losing some steam.

Monday, January 30, 2012

Dallas Fed January manufacturing comes at 15.3, far better than consensus.

The good news is that Europe is running out of bankrupt countries.

The bad news is that concerns now are gravitating toward Portugal.

Yields on Portugal's two-year note are now nearly 21%, up 370 basis points on the day. The 10-year note has risen in yield by almost 200 basis points, to over 17%.

Let's not lose sight of the fact that Portugal is smaller than Greece (as Peter Boockvar noted an economy of $225 billion vs. Greece's $285 billion). More importantly, public debt in Portugal is less than half of Greece's $455 billion.

A strong U.S. dollar is not a prerequisite for a healthy U.S. stock market.

Recently, a number of market observers (most notably Hedgeyes's Keith McCullough and "The Kudlow Report's" Larry Kudlow) have opined that the health of U.S. equities is dependent on a strong U.S. dollar.

Based upon history, however, the notion that a strong U.S. dollar is a prerequisite for a strong U.S. stock market is a myth.

Intrade has Romney's chances of winning the Florida primary at 97% vs.Gingrich's chances at 4%. Intrade has Romney's chances of winning the Nevada caucus at 94.3% vs. Gingrich's chances at 4%. Intrade has Romney's chances of winning the Republican nomination for presidential candidacy at 87.8%. Intrade has Obama's chances of being reelected at 54.4%.
It looked as if the European sovereign debt issues were going to trigger selling at the open, but the market held up reasonably well given the few positives in the air. The dip-buyers managed two good bounces and breadth managed to improve quite a bit from nearly 4-to-1 negative in the early going.

Although we did manage to close near the highs of the day, there wasn't much aggressive accumulation to be found. AAPL helped the bull cause, but every major sector was in the red and Facebook mania calmed down.

The big question is whether a couple days of soft action is a sufficient correction to help set the stage for more upside. I'd really like to answer with a yes, but there have been very few signs of any real pessimism. We pretty much shrugged off Europe, and the attitude is complacency, even though there are good reasons to believe the selling has not run its course.

My fear is that the dip-buyers have used up a lot of juice recently and don't have much to show for it, which may cause them to be less aggressive on subsequent pullbacks. Dip-buying always sounds great in theory when we are trending up, but it loses its appeal quickly when the bounces don't hold.

Saturday, January 28, 2012

The private mortgage insurers should be beneficiaries of the Fed's largesse and easy policy into 2014.

MTG was weak in the morning, but it has rallied by over 10% from there for no observable reason.....

Asset managers are also beneficiaries of the Fed's largesse and easing; considering TROW, OZM, LM and WDR.

Fitch takes down sovereign debt ratings on Italy, Spain, Belgium, Cyprus and Slovenia.

Fitch's ratings for Italy and Spain are still above Standard & Poor's.

Moody's is the next agency expected to reduce the ratings of these countries.

Since sovereign debt yields already discount the downgrades, risk assets shouldn't flinch much.

"When the facts change, I change my mind. What do you do, sir?"

-- John Maynard Keynes

A pair of important developments will have a positive intermediate-term impact on the markets and on risk assets.

While I continue to expect some short-term market weakness, two important developments occurred over the past few days that will have a positive intermediate-term impact on the markets and on risk assets:

1. Mitt Romney has materially regained his lead in the Florida primary and the likelihood of him winning the Republican nod for presidential candidacy has measurably increased as well (based on this week's Intrade probabilities). A political regime change and Republican presidential win in November must be viewed, in the fullness of time, as market-friendly.

2. The Fed announced its intention to keep interest rates low into 2014. This will have a generally positive impact on equities but will have a mixed impact on financial stocks.

Regime Change

Let's first start with the Romney/Gingrich contest, remembering that a regime change in the November 2012 elections would be considered market-friendly and is an important precondition that I hold for the possibility that the S&P 500 regains new heights in 2012.

This morning's Wall Street Journal features a headline-grabbing poll conducted in tandem with NBC (below) that gives the impression that Gingrich is a clear leader over Romney. But when we read the fine print, we see that the poll was conducted days ago (Jan. 22-24) and only 441 Republican primary voters (a small sampling) responded. I totally dismiss the poll and question why The Wall Street Journal even published this old poll.

By contrast, below are the current Intrade probabilities (Jan. 27), which are more important to me and clearly show that Romney has resurfaced as a frontrunner for the Republican Party's nomination.

Intrade has Romney's chances of winning the Florida primary at 91%. Intrade has Gingrich's chances of winning the Florida primary at 8%. Intrade has Romney's chances of winning the Nevada caucus at 94.5%. Intrade has Gingrich's chances of winning the Nevada caucus at 5%. Intrade has Romney's chances of winning the Republican nomination for presidential candidacy at 87.5%. Intrade has Obama's chances of being reelected at 54%.

I view the reestablishment of a large Romney lead as an important intermediate-term market positive.

Fed Policy Buoys Risk Assets, Hurts Some Financials

The second development -- that is, the Fed's announcement on Tuesday that interest rates will remain low into 2014 (and perhaps longer) -- while also a general market positive, will adversely impact certain sectors of the financial industry. If interest rates remain subdued, equities are now more valuable (in any discounted cash flow/earnings model).

That said, some areas of the financial sector (in particular) will be negatively impacted by Fed monetary policy, as net interest margins and low reinvestment rates will reduce many bank and insurance companies' earnings power and likely yield lower valuations and risk/reward ratios by threatening upside price targets.

It is important to note that I don't think there is much downside risk to financial stocks but I do think upside targets have been reduced and (obviously) industry risk/reward has turned less favorable.

That said, some areas of the financial sector will benefit from lower interest rates in the form of improved capital market activity, continued low mortgage rates and a rotation out of bonds into stocks. These include private mortgage insurers such as MTG; investment brokers such as MS and GS; and asset managers such as TROW, LM, OZM and WDR.

Banks, in particular, including C, JPM and WFC, are negatively exposed to the Fed's Tuesday announcement of policy -- they have balance sheets that are net-asset-sensitive -- as non-trading income and net interest spreads will be compressed.

Life insurance companies such as PRU, MET and LNC face reinvestment issues that will mute profitability and upside price targets.

Discount brokers such as SCHW and ETFC, and investment brokers such as Goldman Sachs and Morgan Stanley face a more mixed picture. While discount brokers' profitability and "earnings power" will be negatively impacted by low interest rates, in theory, a more healthy stock market will draw retail investors back into the market -- and I expect daily average revenue trades to improve at Schwab and E*Trade after a weak fourth quarter 2011. The major investment brokerage industry's future profitability has been enhanced by the likelihood of improving capital market activity and the probability that merger and acquisition volume will accelerate in the months ahead.

Bottom line: I believe that this week's two new developments -- namely, the improved prospects for a Romney presidential election win in November and lower interest rates -- will serve to limit the degree of market consolidation that I previously had expected, and raises the probability that new highs in the S&P 500 will be achieved later in the year. At the same time, the prospects for lower interest rates will negatively impact certain financial companies. Net-net, I still expect a correction (though more shallow than previously thought) and a period of backing and filling ahead -- before a new bull market leg commences.
The market looked anemic today if you just glanced at the indices.

Volume was light and we drifted lower, but there was some good action under the surface. Breadth was nearly 2-to-1 positive and all major sectors except pharmaceuticals were in the green.

What was most interesting, though, was the relative strength in small-caps and Internet-related names. News that Facebook expects to announce its initial public offering next week ignited a wide range of names -- many of them having nothing at all to do with Facebook -- but this sort of action is more about a positive mood than balance sheets and income statements.

It's always refreshing to see these flurries of speculative action develop, but the big picture is little changed. We continue to hold up extremely well and there is underlying support, but the upside momentum is muted in many cases. We aren't breaking down, but we aren't making much progress, either.

The optimistic scenario is that we continue to churn and consolidate, and that builds a foundation for another leg up. The pessimistic view is that if we don't see more upside soon, folks will grow impatient and start locking in recent profits, which will send us downward.

Thursday, January 26, 2012

It has taken 17 days of trading, but we finally had our first day of real selling in 2012. Apparent euphoria over the Federal Reserve's zero-percent interest-rate announcement continued early on, but we topped out in the first 30 minutes and then traded down the balance of the day. We closed near the lows for only the second time this year.

Even though it was the poorest day of the year, it still wasn't that bad. Breadth was only slightly negative and the point losses were mild. The biggest negative was that we had an intraday reversal to the downside after a strong start, which is a change in character.

Whether or not this turns out to be a short-term top will depend on the dip buyers. They have supported this market diligently and that typically doesn't end swiftly. There usually comes a point, however, when the weakness is bad enough to cause the dip-buyers to lose confidence, and that is when a more severe correction often develops.

Wednesday, January 25, 2012

Here's what we're not hearing about the consequences of a zero-interest-rate policy.

The media's peanut gallery is asking the obvious questions of the Fed Chairman in this afternoon's press conference.

The two questions I would like to ask The Bernanke right now are, what is the justification of penalizing the savings class in a multi-year period of zero-interest-rate policy that extends into 2014, and what is the economic and social cost and consequence?


Even though we saw a decline in pending home sales, the metric continues to show slow improvement.

The pending home sales decline from the highest level achieved since early 2010 was no cause for concern.

Falling by 3.5%, with weakness in Northeast and Southern regions and strength in the Midwest, this continues to show stabilization and slow improvement in the U.S. residential real estate market. I have purchased MTG.
It's been a while since we've rallied on talk of the Federal Reserve's quantitative easing program, but that is what occurred today. There wasn't any specific plan mentioned for further easing in today's policy statement, but Chairman Ben Bernanke made it clear that the Fed is ready, willing and able to act should the economy falter.

Some might think that it was a negative that the Fed feels the economy is weak enough to justify keeping interest rates low until the end of 2014, but the prospect of endless cheap money had the bulls salivating.

This morning, it looked like the exceptionally strong report from AAPL wasn't going to do much to spark the broader market. In fact, the S&P 500 and the DJIA were trading in negative territory despite the stellar news. But a whiff of quantitative easing from the Fed was all it took to light a fire. Precious metals exploded higher, the U.S. dollar was hit hard, and oil and commodities ran as market players rolled out their QE playbooks.

Tuesday, January 24, 2012

Wells Fargo had a bullish note on the automobile industry this morning.

The firm's channel checks indicate that January light vehicle SAAR could be as much as 13.8 million.


The company's reported quarterly loss was less than what was expected.

MGIC Investment's (MTG) loss, at $0.67 per share, was a bit better than the consensus expectations for a loss of $0.81 per share.

Let's put some perspective on Joseph Granville's call for a 4,000-point drop in Dow.

Speaking of market opinions -- similar to noses everybody has one! -- legendary Joe Granville appeared on Bloomberg Television yesterday afternoon and predicted a 4,000-point drop in the DJIA in 2012.

This morning Arthur Cashin wrote about and put Mr. Granville's record into perspective:

Joseph Granville, whose "sell everything" call in 1981 sparked a decline in U.S. stocks, said the Dow Jones Industrial Average (INDU) will drop toward 8,000 this year because of waning momentum and volume. "Volume precedes prices," Granville, 88, a technical analyst who has been publishing the Granville Market Letter from Kansas City, Missouri for about 50 years, said in an interview on "Street Smart" on Bloomberg Television. "You are seeing much lower volume. That tells you that prices are going to go much lower, much lower than most people think possible and very few people have projected.

The article did a brief review of some of his prior calls:

Trading in U.S. stocks fell to the lowest level since at least 2008 amid mutual fund withdrawals and Wall Street job cuts. An average of 6.69 billion shares changed hands on U.S. exchanges in the 50 days ended Jan. 18, the fewest on record in Bloomberg data starting three years ago that excludes over-the- counter venues. On the New York Stock Exchange, volume has tumbled to the lowest level since 1999, the data show.

Granville told newsletter readers to "Sell Everything" on Jan. 6, 1981. The Dow fell 2.4 percent the next day. He correctly forecast the bear market of 1977-78 and the burst of the Internet bubble that began in 2000. In March 2008, Granville said the Dow would end the year near 9,000, more than 27 percent below its level of 12,392.66 at the time. The gauge finished the year at 8,776.39.

His predictions proved less prescient during some of the previous bull markets. He failed to foresee the rally that started in 1982 and lasted for five years. He also called for losses in 1995 while the S&P 500 rose every year till 2000.

Occasionally spotty, or not, when Granville makes a call, you can be sure it makes a headline or two."

-- Art Cashin

Joe Granville graduated from the Todd School for Boys in Woodstock, Ill., a school made famous by the graduation of another entertainer, Orson Welles, and briefly attended Duke University. Granville's first book, A School Boy's Faith, was a travelogue in poetry.

After enlisting in the Navy, Granville joined E.F. Hutton. He quit six years later to start the Granville Market Letter.

Thirty years ago, Kansas City-based market technician Joe Granville was seen as a Wall Street prophet. He was one of the first market technicians to use on-balance volume as a means of predicting stock prices. Under the sponsorship of an unknown brokerage firm, Arnold Securities, Granville began to tour the world, giving a series of traveling seminars in the late 1970s and early 1980s.

He had a remarkable run of prescient market calls that resulted in international recognition.

His "sell everything" message to subscribers in January 1981 (see Cashin's comments above) made headlines around the world; the Dow fell 2.5% on the next day and 1.5% on the day after that.

Granville's fame and seminars grew in size and sensationalism. Toward the end of his skein, his presentations were staged in huge hotel auditoriums, and attendance was always standing-room only. The crowds were boisterous in response to the circus-like festivities, which typically included belly dancers, a band and often clowns.

Granville made a dramatic entrance in each of these "seminars," dressed in a tuxedo as he walked down a long aisle while the crowds cheered the messiah's next coming. His antics were wild, in marked contrast to the more subtle presentations then seen on Wall Street. Once, on the stage of one of his seminars, Granville dropped his tuxedo pants and pointed to stock symbols printed on his boxer shorts, ending with a delighted cry of, "And here's Hughes Tool!"

Granville is now 88 years old and, similar to the Energizer Bunny, is still ticking with an opinion to go with it.

Last night Romney seemed to have won a split decision in the Florida debate. The two candidates are now in a statistical tie for the run to the Republican presidential candidacy, according to Gallup. On InTrade, Gingrich is a 60% probability to win Florida and Romney is at nearly 40%. Romney is at 63% to be the Republican presidential candidate on Intrade.

Romney revealed his taxes this morning and we learned what we knew -- he is rich.

The Bank of Japan cut its country's projected growth rate.
The bears keep waiting for the underlying strength in this market to falter, but the dip-buyers aren't backing down. We gapped down to start the day but worked steadily higher and closed at the highs. The indices didn't have much to show for it, but it is impressive that the bears are incapable of building on any weakness.

The reversal in oils was probably the biggest driver of the intraday bounce, but it was mild action without any major leaders or laggards.

AAPL numbers are out and it looks like blowout -- very strong numbers across the board and guiding upward for the second quarter. The stock is going to open up huge and the chase will be on.

AAPL is a major factor in the indices, so look for a gap up open on this news in the morning. We are going to be even more technically extended, but as we all know, trying to fight an uptrending market because it is overbought is extremely dangerous.

Monday, January 23, 2012

The Republican debate tonight in Tampa should be fascinating, especially after the South Carolina results on Saturday.

He's baaaaaaaaaaaaaaack! Joe Granville was on Bloomberg Television, calling for a 4,000-point drop imminent in the DJIA. Enough said.

The history of tech is littered with companies that failed to reinvent themselves and ultimately succumbed to the weight of legacy and rapidly obsolete businesses.

It is why both the shares of Research In Motion and Yahoo! should be avoided, from both Jim Cramer's and my perches.

Money managers are unhappy because 70% of them are lagging the S&P 500. Economists are unhappy because they do not know what to believe: this month's forecast of a strong economy or last month's forecast of a weak economy. Technicians are unhappy because the market refuses to correct and gets more and more extended. Foreigners are unhappy because due to their underinvested status in the U.S. they have missed a big double play: a big currency move plus a big stock market move. The public is unhappy because they just plain missed out on the party after being scared into cash. It almost seems ungrateful for so many to be unhappy about a market that has done so well. Unhappy people would prefer the market to correct to allow them to buy and feel happy, which is just the reason for a further rise? Frustrating the majority is the market's primary goal.

-- Bob Farrell, September 1989

"He who lives by the crystal ball soon learns to eat ground glass."

-- Edgar R. Fiedler, "The Three R's of Economic Forecasting -- Irrational, Irrelevant and Irreverent"

Deteriorating Presidential Prospects for Republicans

We have entered a new phase, the Republican primary as John Grisham novel. Secret offshore bank accounts, broken love, the testimony of anguished ex-wives: "He wanted an open marriage." A battered old veteran emerges from the background and, in his electoral death throes, provides secret information—"I'm for Newt"—that he hopes will upend a dirty, rotten establishment. A vest-wearing choir boy turns out to have been the unknown winner of that case back in Iowa. And all this against the backdrop of a mysterious firm that moves in and destroys communities—"When Mitt Romney came to town . . ."—while its CEO pays nothing in taxes.

If you are a Republican who hates a mess, or if you are a member of that real but elusive and hydra-headed thing, the GOP establishment, you are beside yourself with anxiety and unhappiness. You think: "They're losing this thing! They're going to limp out of South Carolina, they'll limp through Florida, they're killing each other and killing the party's chances. How will they look by the fall? What are independents going to think of the guy we finally put up? We all know politics ain't beanbag, but it's not supposed to be a clown-car Indy 500 with cars hitting the wall and guys in wigs littering the track!"

There's been a lot of damage. We lose sense of it in the day to day, but in the aggregate it's going to prove considerable....

The bleak thought: Mr. Obama this week blocked Keystone pipeline, a decision that means tens of thousands of jobs lost, new energy possibilities rejected. It is a decision so bad, so political, that it amounts to a scandal. But it just sort of eased through the news, blurrily. All the cameras were focused on the Republicans, who were distracted by their own dramas. They did not, together, in one voice, protest, as they should have. Keystone happened while they were busy looking like the Keystone Kops.

What's happening out there on the trail is a great story. But it's not a good story. And the past few days it didn't feel like a story that was going to end well.

-- Peggy Noonan, "The No-Obama Drama," The Wall Street Journal

Then there are the unpredictable twist and turns (and the investment implications) of political change -- think The Ides of March.

A week ago, Mitt Romney was wrapping up his likely nomination as the Republican presidential candidate.

No more.

The clear winner in South Carolina on Saturday night may not have been Newt Gingrich; it might have been President Obama.

Endorsements from established Republican leaders (Portman, DeMint, Graham, Pawlenty, Haley etc.) are no longer enough after Romney has only succeeded in winning one of the Party's first three state caucuses/primaries. Romney must now retool given the ascendancy of Gingrich's candidacy.

The prospects for regime change (and a new and market-friendly administration in 2013), which was one of my key market catalysts, has taken a turn for the worse, for now, with the newfound popularity of Republican presidential aspirant Newt Gingrich and the growing, heated and divisive conflicts between him and Mitt Romney. This emerging development has likely reduced the assurance of a Romney candidacy and what I had assumed to be a Republican November win. (The Republican Party is generally viewed as the more business- and market-friendly party.)

And Then There Is Europe

Europe's leaders are committed to keeping both the euro and the eurozone as it is. But for it to do so, everything must change, as the wonderful quote from the 1958 Italian novel suggests. This is no easy task, as no one wants a change that will impact them negatively; and there is no change that will allow things to stay the same that does not impact all severely, as we will see. In the third part of a continuing series, we look at the actual options that are available on the menu of choices, or as one group called it, the menu of pain.

-- John Mauldin, "Staring Into the Abyss," Investors' Insight (Jan. 21, 2012)

Over 2,150 years ago, the Roman poet Virgil once said, "I fear the Greeks, even when they bring gifts."

Virgil was ahead of his time!

The sovereign debt crisis saga continues.

While a potentially fatal affliction (and systemic risk) in Europe's ongoing saga has seemingly been taken off the table, morphing instead to a difficult condition that must be monitored closely, the heavy lifting of promised austerity and fiscal responsibility lies ahead, and with it, uneven progress, additional crises and uncertainty.

Some Positives but Future Economic Uncertainty

On the other hand, the market's price momentum is excellent, volatility is on the descent, as the major indices have not had a more-than-1% move on any day during the last 13 trading sessions (an important ingredient to improving investor confidence), and the high-frequency domestic economic statistics are showing continued improvement (albeit there was some deceleration in the rate of growth towards year-end). Regarding the latter point, we have to watch and be mindful that some of the recent improvement in economic growth reflects the consumer eating into his/her savings and 100% capital spending tax credits/benefits were in place -- they halved on Jan. 1, 2012 -- so it would not be surprising if some of the recent strength in fourth-quarter 2011 had been borrowed and pushed forward from early 2012. More squishy economic data in the first half will not likely be greeted well by investors, especially in the context of the recent market rise.
There's no shortage of reasons why this market should pull back a little, but the bulls remain extremely stubborn. We had a sharp intraday reversal after early strength, but the dip-buyers provided support once again and kept the indices almost exactly flat.

Breadth was positive and strength in financials, precious metals, steel and coal kept the buyers busy, but oil stumbled and technology names were mixed. AAPL helped to cover up some weakness as anticipation for its earnings tomorrow night grew.

The market has substantial technical challenges and the arguments in favor of some sort of pullback continues to grow, but if there is one thing we've learned, the market can be extremely sticky to the upside even when it is obviously extended.

We have a slew of earnings reports hitting the rest of the week and I'm still concerned that the setup for some "sell the news" action is quite high. So far, we have avoided any major profit-taking or a rush to the exits, but there were quite a few reversals today in some stocks that have been squeezing higher, such as SHLD, SBUX and AMZN.

Saturday, January 21, 2012

The Ministry of Economic Affairs reported that Taiwan industrial production dropped over 8% in December.

The question is whether this weakness will find its way to mainland China, as over 40% of Taiwan's exports go to Taiwan and Hong Kong. (The U.S. is the next largest trading partner with almost 12%.)

I believe that the reallocation out of bonds and into equities has now begun.

The 10-year U.S. note is now yielding over 2%.

GE - When one takes into account Shinsei charges, corporate items and a lower tax rate, the company missed by $0.01.

Industrial equipment orders were a touch light. Most segments -- including transportation and GE Capital home/business were strong, but energy, aviation and health care saw sizeable misses.

The news flow was on fire over the last day or so:

1. Last night's earnings at MSFT (good), INTC (good), IBM (good), AXP (weak), COF (bad) and GOOG (awful)
2. ANOTHER Republican debate: Romney (weak), Gingrich (strong)
3. This morning's earnings at GE (weak)
4. Last night was the announcement of the preliminary HSBC PMI manufacturing for China (so so)

Didn't Get The Expected Selling; I'm Thinking It May Come Soon, However

It was a deceptive day of trading, especially if you just looked at the DJIA, which rose nearly 100 points. The gain was entirely due to strong action in MSFT, IBM and INTC. Both the S&P 500 and Nasdaq were flat, but that was mainly due to big buy programs that hit in the final 15 minutes of trading.

GOOG was mostly ignored, but there was some weakness in key names such as AAPL, ISRG and AXP. Small-caps lagged with oil and gas plays being the worst of the bunch.

Perhaps the "sell the news" play was too obvious, especially with GOOG such a clear disappointment, but it sure looked like there was a concerted rotation into the slow-growth technology names. Perhaps that was driven by option expiration to some degree, but when market players are dumping the more speculative names and loading up on MSFT instead, you have to be at least a little concerned - or perplexed.

There are a number of things I didn't like about today's action, such as the leadership by slow-growth technology, the underperformance of speculative stocks and the highly manipulated close, but fighting the price action isn't the way to make money.

Thursday, January 19, 2012

LNC - I'd be interested again below 20. I have learned today (in a form 8-K SEC filing) that Frederick Crawford, the Executive Vice President of Corporate Development at LNC, has resigned (effective Jan. 20, 2012) and will be joining CNO shortly.

Unfortunately, I have to conclude that Lincoln National will not be sold anytime soon, as Crawford would not likely forego options and/or a golden parachute (on a control change) and leave the company if a deal was imminent or in the works.

"Volatility is fairly common this time of year."

-- Labor Department

Initial jobless claims came in 50,000 lower than the prior week's report at 352,000 (and compared to 384,000 consensus).

Apparently, the Monday holiday forced municipalities to estimate the claims figure.

Smoothing out the four-week average produces 379,000 (probably a better number).

Continuing claims also fell by a greater-than-expected 215,000. By contrast, extended benefits increased by over 105,000.

BAC - One-time items suggest a loss.

A combination of non-recurring items suggest that BAC's core results were in the red, far from the $0.15 a share reported.

Indeed, including a reserve release of 7 cents on top of other non-recurring factors (securities gains, etc.) it suggests that the company, on a recurring basis, had a loss of about 10 cents a share.

Revenues were light. Investment banking and equity activity were especially weak.

Tangible book value per share dropped from $13.22 to $12.92. The stock trades below $7.....

There may be a bustle in the fund-management hedgerow.

"Does anybody remember laughter?" -- Led Zeppelin, "Stairway to Heaven"

There has been no laugher in mutual fund land over the last few years as individual investors have fled equity funds for over five years.

Individual investors have taken out $450 billion from domestic equity funds since 2007 and have added $850 billion into bonds. That swing of $1.3 trillion is unprecedented in history.

Meanwhile hedge funds, according to The ISI Group, are now at their lowest net long exposure since the Generational Low of March 2009. And large pension funds are disproportionately skewed in a flight to safety into fixed income over equities.

It is for the reasons above that I have reasoned poor investor sentiment as a foundation block for the bullish market case this year and why the weekly investor surveys are not a particularly a good gauge for evaluating investor confidence. I prefer to watch what investors do, not what they say.

That said, according to ICI after 20 weeks of consecutive outflows of equity-focused U.S. mutual funds, the latest week showed a modest $1.5 billion of inflows.

This could be the start of something far bigger, like an inflection point after five years of negative fund inflow datapoints.

So, if you are looking for a catalyst for higher stock prices in a slow-growth enivronment, I continue to see a rotation into U.S. stocks and out of bonds (of all types) as a major investment theme in 2012.

I'm looking at TROW, WDR, OZM, LM, SCHW and ETFC, who will be material beneficiaries of a gradual move back into stocks (and out of bonds).

Already, the shares of the aforementioned are starting to outperform as investors seem to be anticipating a bigger reallocation trend that might have already started.

As Zeppelin's Page and Plant went on to write:

"And it's whispered that soon if we all call the tune
Then the piper will lead us to reason.
And a new day will dawn for those who stand long
And the forests will echo with laughter."

Selling Probably Takes Hold Tomorrow

The earnings reports are coming in and, so far, the big news is that GOOG missed both the top and bottom line and the stock is down sharply in after-hours trading, about 9%.

IBM, INTC, MSFT and ISRG are all trading slightly higher on their reports. There aren't any big upside surprises, but the numbers are good enough to keep the sellers at bay.

Today is particularly important to see if a "sell the news" reaction takes hold. Expectations are fairly high, and we are technically extended and in need of consolidation, so conditions are ripe for selling. But the dip buyers have been in control recently and have not been in a hurry to step aside.

Although the indices went out near their highs today, there were quite a few pullbacks in individual stocks intraday. We are just too extended in places for profit-taking not to occur. The big issue is whether it develops into something more extreme once we pause. The latter part of January has a tendency toward weakness.

Wednesday, January 18, 2012

It's often said that said history doesn't repeat but it often rhymes.

My favorite sector to buy is the life insurers, and my favorite sector to short is dental.

Egan-Jones ratings agency has lowered Germany's sovereign debt rating from AA to AA-.

Equity markets didn't flinch as risk is back on today.

MTG under $4 looks very tempting.

Industrial production rose by 0.4%, a slight miss to expectations as the warm weather likely negatively influenced the print.

The results are supportive of at least 3% real GDP in fourth-quarter 2011.

Samsung stated it has no intention of acquiring Research In Motion, according to reports.

The rumor du jour yesterday was that Samsung had approached Research In Motion (RIMM) in a takeover in the mid-$20s.

Goldman Beats - Low compensation levels had a levered bottom-line benefit.
One of the complaints about this market recently is that we have not seen good sustained momentum intraday. That changed as today was a solid trend day. The dip-buyers jumped in on some very minor weakness and then pushed us higher all day long. Breadth was solid at almost 3-to-1 positive.

Oil, banks, retail and biotechnology all performed well but the star of the show was semiconductors. Good reports from LLTC and ASML caught a lot of folks by surprise and set the sector on fire.

While it good to see some leadership in technology names, the pessimists were mumbling about how strength in chips so often marks a market top. We have seen it happen quite often where a big move in the SMH comes shortly before a market turn. I'm not buying the argument, but it is worth noting as earnings roll out.

We have some earnings hitting tonight, most notably FFIV, but tomorrow afternoon is when the major fireworks start. After the close tomorrow, we have AXP, GOOG, IBM, INTC, ISRG and MSFT. That will be the most important night of earnings this quarter, so look for a lot of jostling around tomorrow as market players move into position.

Tuesday, January 17, 2012

Barron's published a negative column on the private mortgage insurers over the weekend that seemed hyperbolic, inconsistent and wrong-footed in areas of (fundamental) substance.

Specifically, the Barron's column suggested that reserves are understated based on the analysis that defaults will rise and cures will come down in the period ahead.This simply is inconsistent with the recent and current data trends that are incorporated in industry reserve policy.

The article failed to identify some positives (e.g., the runoff value of the industry's portfolio) and failed to recognize that the housing markets (pricing, turnover and new orders) are, in general, stabilizing and, in areas not exposed to large shadow inventory for sale, certain regions are actually improving.

Finally, the article didn't incorporate some positive news that came from RDN late last week.

Run, don't walk, to read Jeff Matthews' blog on Sears Holdings today.

SHLD shares are trading much higher this morning after Lampert added to his personal holdings in the shares.

The January New York Manufacturing Survey surprised to the upside, rising to 13.5 (consensus was 11.0) and comparing to 8.2 in December.

This is the best number in seven months.

New orders rose to 13.7 from 6.0, and backlogs were less negative. Employment improved markedly from 2.3 to 12.1.

Domestic and non-U.S. concerns are known, will not likely be discounted again and, importantly, will likely diminish in consequence. Markets typically fall or rise (sharply) on the unexpected. Our fiscal imbalances and those of our counterparts are more appreciated than they were a year ago, when there was almost universal agreement (by the Fed, Wall Street strategists, etc.) of a normal duration (to history) and self-sustaining economic cycle. That optimism was incorporated in a consensus 15%-20% gain for the U.S. stock market and proved incorrect. Good times (late 2010) morphed into worsening times last year, as economic growth expectations failed to be realized and were marked down. With the benefit of hindsight this provided a strong headwind to stock prices in 2011.

Monday's European equity markets closed near their highs; our futures are substantively higher; French, Spanish and Italian bond yields dropped; and the euro has advanced smartly against many currencies (up by nearly 1% against the U.S. dollar at the time of this writing) -- it is not out of the question that the reaction will not be dissimilar to the reaction to the U.S. downgrade during the summer. On the positive side, S&P's (those wonderful folks who brought us AAA subslime ratings back five years ago) European ratings change could serve as a catalyst to hard but coordinated fiscal and political decisions -- the heavy lifting is still ahead -- that will ultimately produce more positive outcomes and stability.

As I have previously written, European "tame and timid" will, in the fullness of time, become "shock and awe," as Europe's leaders and central bankers eventually do what has to be done. February's liquidity add through the long-term refinancing operation facility will likely stabilize the debt crisis in Europe. And the ECB is already thinking more "shock and awe" based on a report in The Wall Street Journal this morning. In the fullness of time, Greece (which all now know is already bankrupt) and its lenders will agree to deeper writedowns of debt, as that country remains in the EU. More is to come.

Negatives have been sufficiently discounted. The S&P 500 now trades at only 12.2x estimated 2012 earnings consensus, 3 multiple points below the last 50 years' average (when the yield on the 10-year U.S. note approached 6.70%) and nearly 7 multiple points below times in history when interest rates and inflationary expectations were similar. The consensus, upbeat 12 months ago, is now downbeat, as vividly illustrated by the interview with Pimco's Bill Gross who, along with many others, ask now whether there will be another economic/debt apocalypse. But how will the apocalypse occur?

With "the new normal" of de-leveraging, re-regulation, de-globalization and slowing economic growth now embraced by consensus, investors' expectations are lowly ebbing, as individuals and institutions have materially de-risked in response to growth assumptions. Economic growth expectations, which surprised to the downside in 2011, have been recast to lower expectations as a baseline view and, as such, have been materially discounted. Surprises could come from the upside in 2012 to that baseline and lowered view. (Last night already saw two surprises, as the German confidence index exhibited the largest one-month rise in history and China's GDP rose better than expectations. The later report resulted in the largest upside move in the Chinese stock market since late 2009.)

A market crescendo will build throughout 2012. I expect that U.S. share prices will slowly climb the wall of worry in the first half of the year as the European crisis stabilizes, owing to a growing commitment by European leaders and central bankers to do whatever is necessary to avoid the unimaginable. At the same time, high-frequency domestic economic statistics will likely continue to gradually improve, led by surprising strength in housing and automobile industry sales.

Prospects for a U.S. political regime change will embolden investors as the year unfolds. A business- and market-friendly Republican leadership will look increasingly likely to replace the current administration as the year progresses. A crescendo-like buildup in consumer and business confidence will likely unfold.

Interest rates remain low, and inflation stays quiescent. A market-friendly Fed (and a worldwide global loosening of the monetary reins), a still-large manufacturing output gap and a "not too hot, not too cold" jobs picture (which will contain wage inflation and protect corporate profit margins) could contribute to a crescendo-like buildup in stock valuations. It is not inconceivable that the contraction (around 15% in valuations in 2011) will be entirely reversed in 2012. This expansion in multiples, coupled with near-10% earnings growth, could produce an outsized and totally unexpected 20%-25% gain the S&P 500 this year.
Today was one of those days that looks good if you just consider the closing numbers, but much less positive if you consider the intraday action.

The market gapped up and then did absolutely nothing. Breadth deteriorated steadily and the vast majority of stocks closed lower than they opened. We did stay positive, and the Nasdaq led, so give the bulls respect, but they have had a tendency to be very lazy following these big gap-up opens.

The challenge of this market is that we have good underlying support but very little strength other than the gaps that we had three Tuesday mornings in a row. It is much harder to catch the recent strength than many people think. Obviously, the buy-and-holders are happy no matter how the market gains. But for active traders, this environment makes it very hard to have good long exposure at the right time.

One positive for the bulls today was that the poor earnings report from C didn't do more damage. Financials were the primary laggard today, but the pullback was mild and there didn't seem to be any great worry, even with heavyweight GS on deck in the morning. On the other hand, C continues the pattern of weak earnings that we have seen so far this quarter, and you have to wonder if the market can shrug it off for long if the onslaught continues.

Overall, the market action isn't bad but it lacks energy, momentum and leadership.

Sunday, January 15, 2012

Standard & Poor's website confirms that the ratings agency has cut France's debt rating by one notch.

AA is the new AAA

The University of Michigan confidence survey came in at 74, almost 3 points above expectations and up from 69.9 last month.

Outlook and current conditions improved.

This was the fifth straight month of improving prints in confidence.

Here is a good synopsis of the S&P downgrade issue by Miller Tabak's Peter Boockvar:

With the likelihood of an S&P credit downgrade of France, Spain, Italy, Belgium and Portugal, it's important to understand that #1, they are just following what the markets have priced in and #2, Fitch and Moody's in some circumstances have already moved ahead of S&P. With respect to France, they will likely lose their AAA rating at S&P but Fitch specifically said earlier in the week that they will maintain their AAA rating for them thru 2012. On Italy, S&P is currently at A, in line with Moody's and one notch below Fitch. A downgrade will likely take them to A-. With Belgium, S&P is at AA, one notch above Moody's and one below Fitch. Portugal has a BBB- S&P rating, two notches above Moody's and one above Fitch, so catch up is what S&P would be doing with them. With Spain, S&P is already one notch above Moody's at AA-. We'll also see whether Austria loses its AAA rating. Following a French downgrade, the EFSF will also lose its AAA rating but buyers of EFSF bonds have certainly been put on notice that it was a high likelihood. I say this all from a credit perspective because equity markets have behaved with a much more sanguine view of things that doesn't fully square with the reality of a very tenuous global economy.

JPM - investment banking and capital markets activities were worse than expected while credit and compensation ratios were better. A lower tax rate (22% vs. 34% consensus) contributed to the bottom line, which appeared to be about $0.95 a share at its core.

The bank completed its buyback program (nearly $1 billion in fourth quarter 2011).

The commentary indicated an improving commercial and industrial loan picture and continued progress in credit.

As GS mentions in its assessment of this report, it was a relatively low-quality report (after 11 consecutive quarters of beats), which could weigh modestly on the bank sector (after its market-leading performance thus far in 2012).

Every American citizen should be concerned about the Fed's lack of transparency and poor forecasting abilities.

Richmond Fed President Jeffrey Lacker was forecasting 2011 real GDP growth in the U.S. at 3.5%; it came in half that amount.

Lacker admits that he and the other Fed members only recently realized that the structural headwinds (fiscal imbalances, structural unemployment, etc.) in the U.S. will limit and be a governor on domestic growth.

I find this mind-boggling and scary, as, with 150-plus economists on staff, this is not exactly confidence-building and exposes a serious and fundamental flaw in the Fed's forecasting and in the policy based on that errant forecasting.

As a result, it shouldn't be too surprising that many, in support of Ron Paul, are in favor of abolishing the Federal Reserve.

It's embarrassing for the Fed. You see an awareness that the housing market is starting to crumble, and you see a lack of awareness of the connection between the housing market and financial markets. It's also embarrassing for economics. My strong guess is that if we had a transcript of any other economist, there would be at least as much fodder.

-- Justin Wolfers, Economics Professor at the University of Pennsylvania

This morning, the Fed released transcripts from the mid-2000s (covered by both The Wall Street Journal and The New York Times) that revealed an unflagging optimism and provided a profoundly unflattering view of Greenspan, Geithner, Bies, Warsh, Yellin, Bernanke et al. in their ability to foresee the economic collapse and debt crisis in 2007-2009.

Here are some examples of several wrong-footed quotes from some of the Fed's players during the 2006-2007 period, which was the end of the housing boom:

"I think we are unlikely to see growth being derailed by the housing market."

-- Ben Bernanke, Federal Reserve Chairman

"It's fitting for Chairman Greenspan to leave office with the economy in such solid shape. The situation you're handing off to your successor is a lot like a tennis racquet with a gigantic sweet spot."

-- Janet Yellen, Vice Chairman of the Federal Reserve

"I'd like the record to show that I think you're pretty terrific, too (referring to Greenspan). And thinking in terms of probabilities, I think the risk that we decide in the future that you're even better than we think is higher than the alternative."

-- Timothy Geithner, Treasury Secretary (praising Greenspan in Greenspan's final Fed meeting)

"I would say that the capital markets are probably more profitable and more robust at this moment, or at least going into the six-week opportunity, than they have perhaps ever been."

-- Kevin Warsh, Former Federal Reserve Governor

The Fed's lack of transparency and poor forecasting abilities (at nearly every inflection point) should be a concern to every American citizen, as the Fed wields huge power in establishing monetary policy.

Perhaps too much power.
Weaker-than-expected earnings from JPM and downgrades of European sovereign debt gave the market good excuses for profit-taking, but the dip-buyers refused to give up and closed the indices at the highs of the day once again.

We still had plenty of red on the screens and breadth was around 2-to-1 negative, but the underlying support was impressive, as it has been every day this year.

Apparently, the bulls are more worried about being left behind than about being caught by bad news. In other words, greed over fear. We had some negative economic news this past week and it simply didn't matter. The only news that was positive was that stocks refused to go down.

The big question now is whether earnings season is going to change the character of this market. Expectations, as measured by the action in the indices, are quite high, which creates a danger of a 'sell the news' reaction. But if the dip-buyers stay with us, those pullbacks may just be good buying opportunities.

We shall see how things react as the reports roll out, but I wouldn't be surprised if we see more stocks act like JPM did today, which gapped down and lost 2.5% on the day but bounced well off its early lows.

The dilemma is that while we have very tenacious support and active dip-buying but rather lackluster momentum. We hold up well but don't really gain substantial traction. It is strong enough to frustrate the bears but not energetic enough to attract the hot money.

Thursday, January 12, 2012

Run, don't walk, to read Mark Gongloff's blog in The Wall Street Journal, "Investors Talking Like Bulls, But Investing Like Bears" in the boo-hoo rally.

Stated simply, the 30- year auction didn't receive the good reception that the three- and 10-year notes did earlier in the week.

The market's advance has the potential to get disorderly to the upside.

Never forget that the market inflicts the most pain on the most investors.

So, with hedge funds as underinvested as at March 2009, retail investors uncommitted (2011 was another year of large outflows) and strategists downbeat, I have learned over the years that we should never underestimate the power of the schwartz!

January Philly Fed business conditions come in at 6.8 vs. consensus of 5.0 and December's 3.6.

Spanish 10-year bonds are down 13 basis points in yield, to 5.13%, and Italy's has dropped by 30 basis points, to 6.64%.

As well, the euro is stronger, European stocks are elevated, and the three-month Euribor rates have declined to the lowest level in 10 months.

According to a report, CIT Group will no longer provide financing to suppliers of Sears that are awaiting payment.

SHLD may declare b/k soon. Cash flow has evaporated; (already down $800 million 2011 over 2010). With funding and vendor support evaporating, as paper-thin earnings before interest and taxes margins turn negative and cash flow is insufficient to fund inventory growth, the company may file. If that happens, expect ten to fifteen percent of Sears' 4,000 Kmart and specialty stores to close and more than 35,000 of the company's 317,000 full-time workers laid off. As a major anchor tenant in many of the nation's shopping centers and with no logical store replacement, the REIT industry's shares may suffer through the balance of the year.

Sears dismissed the issues citing that "the payables the firm had financed amounted to only 5% of their inventory." The company went on to say that "Sears Holdings has more than adequate liquidity."
The two strategies that have worked so far this year are to sell opening strength and to buy the early dip. We were able to do both today. Higher-than-expected unemployment and weak retail sales numbers gave the bears a little ammunition, but it didn't last long against tenacious dip-buyers that jumped in as soon as we tested the prior-day lows. We were able to work steadily higher the rest of the day and even managed to close around where we started.

Once again, there was impressive dip-buying, but it didn't result in any big point gains. The action tends to feel better than it really is when we have moves like this because the intraday recovery to breakeven is substantial.

Even with relatively minor point gains, breadth was solid with about 3350 gainers to 2100 decliners. Unlike yesterday, we didn't have clear pockets of momentum. The movement was much more random, but there was plenty of good trading. Individual stock-picking mattered, and that is always refreshing.

Next week the focus turns to earnings. High expectations are dangerous here, but if you consider that the indices are at multi-month highs, that seems to be exactly what we have.

Wednesday, January 11, 2012

Shorting fixed income in the U.S. continues to be a good hedge.

Though Yale's Robert Shiller agrees with me on a possible bond bubble, shorting fixed income in the U.S. continues to be a good hedge against profits as the flight to safety persists.

Today's 10-year U.S. note auction was good, with a strong bid-to-cover ratio of 3.29 -- much better than the average over the last year at around 3.13, and the second-best ratio in 2011. Direct and indirect bidders took 56% of auction, in line with averages last year.

More scary stuff between Iran and Israel.

Lacker admits that he and the other Fed members only recently realized that the structural headwinds (fiscal imbalances, structural unemployment, etc.) in the U.S. will limit and be a governor on domestic growth.

I find this mind-boggling and scary, as, with 150-plus economists on staff, this is not exactly confidence-building and exposes a serious and fundamental flaw in the Fed's forecasting and in the policy based on that errant forecasting.

As a result, it shouldn't be too surprising that many, in support of Ron Paul, are in favor of abolishing the Federal Reserve.

I'm hearing rumors in Europe of a French ratings downgrade this afternoon.

Of note, last night the Goldman Sachs strategy group came out optimistically on the 2012 outlook for Chinese shares, looking for a 17% rise in value.

I suspect they are too low in their price target for the Chinese stock market.
The market continues its pattern from 2011 of bouncing back from weak opens. We have had early weakness on five of the first seven trading days this year, and closed strong on each of those days. The indices didn't do a lot, but improved nicely through the day.

Most notable was speculative action in low-priced, garbage stocks. Solar energy, homebuilders and China were the most active, with a smattering of biotechs and technology names.

I'm not sure what the catalyst was for this sudden burst of activity in low-priced stocks, but it makes me feel better about the market. Maybe it's a new variation on the January Effect. One thing we have lacked for some time is real excitement about price action. The fact that we had aggressive trading in junk stocks again makes me believe the good old days might not be completely gone.

We have a few more days before earnings next week, and there isn't much news that favors more of this type of trading. I'm concerned that we are going into earnings season with high expectations, which could cause trouble.

Tuesday, January 10, 2012

Microsoft says PC sales probably fell short in the fourth quarter.

From HedgeEye's Keith McCullough.

"Volume like this is putting every guy that came into the year net short/neutral in a very uncomfortable position."

I see low volume and retail and hedgehoggers' derisking as a positive and a potential sign of latent market demand down the road.

Moreover, today the aggregate volume is rising -- and, historically, rising volume and better share prices are a benign cocktail and a signal that I might be on the right track.

Volumes today are +44%, +31% and +16% vs. 10-day, 20-day and 30-day averages, respectively.

We have entered the Tim Tebow Stock Market -- low on expectations and high on results.

When Tebow was drafted after graduating from the University of Florida, few expected him to be NFL material. It was generally assumed his passing arm was not good enough -- but he has quieted his critics, some of them, for now. In the longer run, however, Tebow won't make it. But for now he's winning.

As for the market, until individual investors and hedge funds re-risk -- and that process has not even started -- today's breakout can continue for some time to the upside ... well above levels that the consensus sees as "fair value."

The market, I believe, will surprise to the upside in the near term for the following fundamental, technical and sentiment reasons:

1. Poorly positioned market participants: Forget put/call ratios, Investors Intelligence and AAII readings -- investors (of all shapes and sizes) are now negative and could be caught offside. Watch not what they say; watch what they do. And the dominant investors (retail and institutional/hedge funds) are underinvested and/or skewed disproportionately in a "flight to safety" into fixed income over equities. Individual investors have taken out $450 billion from domestic equity funds since 2007 and have added $850 billion into bonds; that swing of $1.3 trillion is unprecedented in history. Hedge funds, according to ISI, are now at their lowest net long exposure since the Generational Low of March 2009.

2. Technical breakout: We closed trading on Monday right at resistance in the major indices. Given the sharp rise in futures overnight (+12 handles), we will easily pierce through resistance at the open and break out of the recent trading range. This action will encourage technically based chasers of market momentum.

3. Big rotation: The rotation from high-octane, high-beta leadership (Priceline (PCLN), Google (GOOG), Baidu (BIDU), etc.) has investors poorly positioned. Google's sudden weakness, in particular, has scared a number of hedgehoggers into materially raising cash in recent days. Meanwhile, financial stocks have been meaningfully outperforming in 2012. Don't market historians tell us that a better tone for the financial sector is a necessary condition and reagent for a better stock market? Yet that turnaround of the financial continues to be treated with skepticism by most. (How many times have you heard that the sources of banking revenues are greatly reduced in "the new era" for banks, and that return on capital is destined to be in the single digits given that the industry is a regulatory piƱata in an era of populism?

4. Mispaced preoccupation with Europe: The European situation has improved. Timid policy response is moving toward "shock and awe" -- yet investors are still scared to wake up every morning to rising sovereign bond yields, and that fear is keeping them sidelined. Unicredit's deep discount rights financing (and the specter of more dilutive bank refinancing) have especially scared investors in the last week. But who cares at what price Unicredit and others finance ... as long as they finance! Deep discount capital raises dominated the U.S. banking landscape three years ago, and now our banks are positioned well in terms of liquidity and capital (and most experienced outsized market advances in their shares following their 2008-09 refinancings. As to the weakening euro, a weak euro and a strong U.S. dollar only helps our capital markets as more investors buy American at the expenses of other non-U.S. markets. I see the rotation into U.S. stocks and out of non-U.S. stocks as a dominant theme in 2012.

5. Recent earnings cuts discounted: Memo to negative strategists: The market has likely already discounted (with a 15% decline in price-to-earnings ratios in 2011) a diminished profits outlook.

6. Likely regime change in the U.S.: Though the odds of a Republican presidency have improved, most investors are ignoring this "market friendly" development that could occur within the next 12 months.

7. Better economic data: Consistently ignored have been improving domestic economic releases (PMI, consumer confidence, housing, automobile industry sales). Fourth-quarter real GDP growth should be 3% to 3.5%. But more important is that the prospects of a self-sustaining U.S. economic recovery have been more solidified in the past six weeks.

8. Contained geopolitical risks: Investors remain justifiably fearful of North Korea and Iran. But, geopolitical risk will be a constant risk in our life and in our investments. We should monitor but not let geopolitical issues predominate our investing thinking.

9. Market-friendly rates: Low interest rates around the world in 2012-13 mean that any model based on interest rates results in a very inexpensive market valuation. Risk premiums, for example, hit a 37-year high recently. We have to go all the way back to 1974 to see similar levels -- and in 1975 and 1976 the S&P 500 index returned 35% and 19%, respectively, after a similar spike in risk premiums. (I continue to expect a massive reallocation trade out of bonds and into stocks.)

10. Lower volatility: Crazy market swings scared off and alienated investors over the past year. Shouldn't the recent collapse in volatility help bring back investor confidence?

For these reasons, I continue to take the variant view that the U.S. stock market could surprise people to the upside in the near term.
The market pattern so far in 2012 is clear: fade the open. If it's weak early, buy. If it opens strong, sell

The market enjoyed a nice move today, but it all came at the open. We had no traction intraday, which is exactly what happened on Jan. 3, when we kicked off the new year with a big early gap.

We are up nearly 3% in a week but it all came overnight. Even though all the gains came at the open, it was an extremely strong day. Breadth was better than 3-to-1 positive, and all major sectors, particularly oil and commodity-related names, did well.

The main thing to keep in mind about action like this is that it creates a lot of underlying bids. Those who get caught underinvested tend to become aggressive dip-buyers, especially since many of them are suffering from underperformance.

Once again, we're in a very familiar place. The indices are acting well, but don't have convincing volume or momentum.

Monday, January 9, 2012

From my perch, the consensus view is that the markets will move higher in the second half of 2012 but will face headwinds over the first half of the year. By contrast, a contrarian view would be for a near-term move to the upside -- putting offside most who are waiting for summer/early fall to expand market exposure.

To reiterate, I wouldn't be surprised to see AAPL trade over $500 this year, based on continued above-consensus volume growth in the iPhone and iPad. Profit forecasts for 2012 could rise to nearly $50 a share (up about 60%). In the second quarter, I wouldn't be surprised to see Apple pay a $20-a-share special cash dividend, introduce a regular $1.25-a-share quarterly dividend and split its shares 10-1. Jobs is gone. Cook will handle the stock much differently, in my opinion.

The SEC is playing hardball, as several high-level insider trading cases have advanced recently; these cases could reach some of the most prestigious hedge funds around.

As we enter 2012, the optimistic economic and market consensus of a year ago has turned far more subdued. Reflecting more downbeat economic growth and investor expectations, individual investors (taking another $100 billion out of domestic equity funds) and hedge funds (now at their lowest net long exposure since the Generational Bottom in March 2009) have materially de-risked.

Consensus rarely triumphs in the stock market, and I see 2012 as another year in which the consensus will be wrong.

While I fully recognize the world is imperfect, the blemishes are now well known and, arguably, incorporated in current share prices. More importantly, three pressing concerns (high volatility, a mounting European debt crisis, a weakening domestic economy and the division between the Republican and Democratic parties) are moving in the right direction. And, the fourth, our divided leadership incapable of compromise, might now be coming closer to resolution with a country that appears to be leaning toward the Republican party. A close Romney win has been my baseline expectation for over a year, and such a political outcome would be more market-friendly than would occur with another four years under President Obama.

In Europe, political leaders and central bankers are slowly addressing their sovereign debt problems. Very slowly. Though tame and timid in approach at the outset, more "shock and awe" has been employed -- and more is likely on the way. It is my view that the eurozone affliction is moving toward a condition that can be tolerated by the markets (but must always be monitored).

Another market-friendly condition is that central bankers around the world have signaled increasingly accommodative monetary policies. With inflation quiescent, low short-term interest rates are likely to remain for some time.

With better economic growth ahead in the U.S. and the hope for some stability in Europe, a meaningful rotation out of bonds and into stocks is a growing possibility. U.S. stocks have had an average P/E multiple of 15.3x over the past 50 years, while the yield on the 10- year U.S. note has averaged 6.67%. Today, U.S. stocks trade at only 12.5x with the yield on the 10- year U.S. note at around 2%. Moreover, historically U.S. stocks have been valued at 17x-18x when interest rates and inflation (and inflationary expectations) are around current levels.

Risk premiums (the earnings yield less the risk-free cost of capital) are now elevated and back to levels last seen in 1974 as European sovereign debt issues have accentuated the flight to safety. It is important to note that following the last spike in risk premiums 37 years ago, the S&P 500 index returned +35% and +19% in 1975 and 1976, respectively.

These low stock market valuations (mentioned above) will likely serve as a margin of safety for stocks. I also believe strongly that conditions have evolved over the near and intermediate term that have conspired to favor risk assets in the U.S. over many other areas of the world.

To summarize, I believe 2012 will be a surprisingly good year for the U.S. stock market. I anticipate that domestic economic and profit growth will surprise to the upside, and I am of the view that market valuations will expand (after contracting in 2011). If Europe settles down, the flight to safety of 2010-11 should become a thing of the past this year, and fixed-income instruments could take the brunt of the damage in a potentially large reallocation out of bonds and into equities.

I fully recognize that the slow worldwide economic growth exposes economies and markets to exogenous shocks, but I also think much is discounted in current prices.
Once again, the market saw solid dip-buying after a weak start. Four of the first five trading days of 2012 started slowly and closed well. Strong finishes tend to indicate that market players are trying to add long exposure intraday because they are afraid the market will continue to run without them. It's better than a series of strong opens and weak closes.

On the other hand, volume is mediocre, breadth mixed and we aren't seeing much in the way of point gains on the indices. There are some pockets of momentum, with biotechnology the most notable today, but there also is some troubling action in GOOG, TGT and AMZN.

Sunday, January 8, 2012

Run, don't walk, to read Jim Cramer's more cautious view of Europe's influence on U.S markets.

Sanford Bernstein lowers Goldman Sachs' fourth-quarter 2011 EPS to $0.77 from $3.15.

Don't be surprised if, in the 2nd quarter, AAPL pays a $20-a-share special cash dividend, introduces a regular $1.25-a-share quarterly dividend and splits its shares 10-1. I could easily see it trading well over $500 this year. I think it very well may become the T of a new investing generation, a stock to be owned by this generation's widows and orphans.
The first week of 2012 is in the books and it wasn't bad. We managed a gain of 1.58% in the S&P 500 but if you bought the SPDR S&P 500 (SPY) at the open Tuesday and sold at the close today, you just about broke even as the majority of the gains came over New Year's weekend.

On the other hand, we did have good intraday trading opportunities as dip buyers jumped in on soft opens three straight days. The bounce was a little less energetic today, but again, we managed a decent recovery and had good support. When the dip buyers are busy, that usually bodes well.

Probably the most notable development this week was that we ignored poor action in Europe. Better-than-expected jobs news was the main reason for that, but I expect it also had something to do with positioning and the various games that occur at the start of a new year. I don't think we've seen the last of Europe, but perhaps we will see a little less sensitivity to it -- unless some new drama develops.

Earnings are coming, so next week will be all about expectations.

Thursday, January 5, 2012

The White House denies the report of a massive home refinancing program.

If the equity market continues its advance and bonds start slipping, THE BIG REALLOCATION TRADE (out of bonds and into stocks) is ever closer at hand.

And that could make for fireworks in the months ahead.

Our equity markets, to use a phrase that is being used more frequently (perhaps too much so!) these days, may have become the best house in a bad neighborhood.

Here are 10 reasons for my optimism:

1. U.S. relative and absolute economic growth is superior to global growth. The U.S. economy, though sluggish in recovery relative to past expansions, is superior to most of the world's economies (with the exception of some emerging markets) in terms of diversity of end markets, quality of global franchises, management expertise, operating execution and financial foundations.
2. U.S. banks are well-capitalized, liquid and deposit-funded. 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 capital raises. Importantly, our banking system is deposit-funded, while Europe's banking system is wholesale-funded (and far more dependent on confidence).
3. U.S. corporations boast strong balance sheets and healthy margins/profits. Our 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 solidified their global franchises that serve increasingly diverse end markets and geographies.
4. The U.S. consumer is more liquid and stable. An aggressive Fed (through its extended time frame of zero interest rate policy) has resulted in an American consumer that has re-liquefied more than individuals that live in most of the other areas in the world. (Debt service and household debt is down dramatically relative to income.)
5. The U.S. is politically stable. 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 civil discourse, relatively balanced legislation, smooth regime changes and law that has contributed to social stability and a sense of overall order.
6. The U.S. has a solid and transparent corporate reporting system. 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. (It is beyond compare.)
7. The U.S. is rich in resources.
8. The U.S. has a functioning and forward-looking central bank that is aggressive in policy (when necessary!) and capable of acting during crisis.
9. The U.S. dollar is still the world's reserve currency and is far more solid than the euro.
10. The U.S. is a magnet for immigrants seeking a better life. This and other factors have contributed to a better demographic profile in our country that has led to consistent population growth and formation of households. (Demographic trends in the U.S. are particularly more favorable for growth than those population trends in the Far East.)

ISM services index came in at 52.6 vs. consensus at 53 and November at 52.

There were no surprises in the components, though the labor component was weaker than the ADP report.

Risk premiums are back to 1974 ratios -- and that level led to 35% and 19% S&P 500 rebounds in 1975 and 1976, respectively.
The market did a surprisingly good job of shrugging off weak action in Europe. We gapped down to start the day on the usual negative headlines, but chugged steadily upward the rest of the day and even gained traction after Europe closed in the red across the board.

Have we finally stopped moving in lockstep with each new development in Europe? That would be nice, but those problems are not going to go away quickly or easily, and they are severe enough to be a continuing issue. It's progress when we can have a day without the European pall, but it's premature to believe that we will become completely uncoupled.

The supposedly-strong-but-not-really ADP employment report certainly helped the mood, but it is going to be quickly tested by the government report tomorrow morning. I suspect the bears stood aside this afternoon rather than risk being squeezed on that news in the morning.

After the close, we had another warning in the technology sector and one in the retail group. This is by far the most warnings in quite some, time but we have yet to see much of it reflected in the overall market. Good earnings have been the best thing that market has had going for it since the lows in 2009, and it is going to be interesting to see how we deal with it if we don't see the same level of beats as the past quarter.

Wednesday, January 4, 2012

Rumors of dubious QCOM accounting practices; what took them so long?

The last time risk premiums were this high (in 1974) the S&P index rose by 31.5% in 1975 and 19.1% in 1976.

Rising interest rates will accelerate and hasten the almost inevitable rotation out of bonds and into stocks (as losses mount).

Rising interest rates will benefit the savings class, who will have more money to spend.

Market sectors with balance sheets that have an imbalance of rate sensitivity on the asset side -- like banks and insurance stocks -- will thrive as interest rates rise.

Rising interest rates will encourage fence-sitters who plan to make durable purchases (e.g., housing and autos) to take the plunge and buy.

Rising interest rates will signal to many that the economy is advancing.

Run, don't walk, to read monthly commentary from Pimco's Bill Gross, "Towards the Paranormal."

A year ago, I predicted Romney would be the next POTUS. Despite the closeness of the Iowa race, I continue to strongly expect Mitt Romney to be the Republican presidential nominee and to become the next president.
The market battled back from a poor open and the senior indices even managed to end with minor gains, but it was tired action with a few big-caps, MSFT, AAPL and GOOG, doing most of the heavy lifting.

The big question is whether the market is vulnerable to a pullback as positive seasonality winds down and we enter earnings-warning season. We are still a bit overbought and the action has been a little tired, but we were able to shake off European worries and the struggling euro.

One thing that has plagued this market for a while is the lack of any real leadership. That needs to change for us to have a powerful market move. Strong markets need leadership, and this one doesn't have much. Overall, the market is in OK shape but a bit tired and in need of more energy and leadership.

Tuesday, January 3, 2012

The December ISM came in at 53.9 (above expectations of 53.5) and better than 52.7 in the prior reporting month. That's the best print in six months and well above the six-month average and long-term average of about 51.7. In terms of components production and new orders, we're at an eight-month high.

If there is one factor that is beginning to concern me regarding the markets and the economy, it is the rising price of crude oil -- now up by nearly $4 a barrel, to $102.50.

From my perch, the four conditions for a sharp upward turn in equity prices are moving into place:

1. reduced volatility;
2. improving domestic economic statistics;
3. aggressive moves to address/contain the European debt contagion;
4. and a more pro-active movement on the U.S. fiscal imbalances and pro-growth policy (in large measure brought on by a growing likelihood of a Republican presidential win in November).

A soft landing in China and India? China's December PMI was better than expected at 50.3 -- the consensus was at 49.1 -- and the prior month came in at 49.0. China's December non-manufacturing PMI at 56.0 was well above the November print at 49.7. Manufacturing expanded above consensus in India.

German unemployment fell by a better-than-expected 22,000 jobs. U.K. December manufacturing also rose above expectations.
Of course, the news media is celebrating the fact that the indices kicked off 2012 with a good-sized gain. But for traders, it was awful. Following the gap up to start the day, we traded poorly and closed at the low. All the gains came overnight, and there was no intraday momentum to be found.

Breath was quite good and all major sectors were in the green, but volume was light and few, if any stocks, closed at their highs. It's the same action that has frustrated traders for months because all the movement occurs overnight. Pure day traders, who aren't carrying any inventory, had few chances to match the gains of the indices.

The second day of the new year is generally considered the close of the holiday trading period, and much of the artificiality caused by mark-ups, positioning and tax moves end. That doesn't mean stocks will suddenly start trading on their individual merits, but there should be a bit more focus on stock picking as we head into earnings season.