Sunday, February 19, 2012

Regarding Monday's Greek 'decision.' The yield on one-year paper in Greece now yields nearly 630%. The rise in yield today was the largest on record. Greece is obviously already bankrupt.

On Bloomberg: "Workplace auditor finds 'tons of issues' at Apple manufacturer."

I would not be surprised if the shares of ASPS more than doubled in the next 12 to 18 months. Free cash flow will be almost $6.30 a share. Why can't the shares trade at 15x free cash flow? ASPS may be the stock of the decade. BTW, it's doubled in 2 years.

Core CPI is currently rising at the quickest pace in almost three and a half years.

The core and headline January CPI rose by 0.2%, which was in line with expectations.
Many market players didn't want to do much ahead of the long weekend, with the possibility of more news coming out of Greece while the market is closed Monday.

But the old adage about not shorting a dull market came to life and the market held up. The bulls may not have wanted to do a lot of buying, but they did more than enough to keep the bears from gaining traction.

Once again, underlying support is remarkably strong, and one mild dip was well bought. There wasn't a lot of major strength, and Nasdaq breadth was even, but the price action could not be faulted.

Dow 13,000 talk is heating up again. I expect to hear that kind of chatter as the market tops; it's a sign of overconfidence and complacency.

On the other hand, it has been very easy to make bearish arguments for quite a while, even though they haven't mattered. Until there is an actual change in the price action, the arguments are irrelevant, even dangerous.

On Tuesday morning, we'll likely be reacting to Greece one way or another. Some sort of deal will give the market short-term support, but in the long run, we know that it is a matter of time before Greece is in trouble again.

I suspect that Europe will eventually be the catalyst for a market turn, but they are doing a good job of kicking the can down the road and preventing the overanxious bears from gaining a foothold.

Thursday, February 16, 2012

Today's tweet of the day is again from Hedgeye's Keith McCullough: "Evolve or whine."

Housing continues to show signs of recovery as the NAHB confidence index rose to 29 (consensus was 26), the best reading in four and a half years and substantially above the recent six-month average of only 20. This index has risen for six consecutive months, a feat not accomplished in 16 years.
After the sudden drop in AAPL and an intraday reversal of the indices yesterday, many market players quickly became bearish. After all, the market has been extended and hasn't corrected for quite some time, so didn't it make sense to anticipate more profit-taking in the near term?

What the bears failed to appreciate was that the dip-buyers weren't ready to go away. They have had great success for a very long time, so when we had slightly decent economic numbers and then news that Greece was going to be saved (yet again), they piled in and just kept pushing. The bears, who felt so confident last night, were forced to reverse course suddenly and yet another straight-up move was under way.

It is almost comical that the market keeps responding to news about Greece when everyone knows it's just a matter of time before it defaults. Greece is just a convenient excuse for dip-buyers to do what they are already inclined to do. When the market really does have a change in character, the news will be viewed in a much different way.

So here we are, right back where we were a couple of days ago. We had a brief hiccup that helped to create a little negativity and, in the ironic way the market works, that helped to propel the move to the upside today.

It was a solid day for the bulls, with decent volume and close to-3-to-1 positive breadth. It is amazing how fast we can regain upside momentum.

Wednesday, February 15, 2012

The FOMC minutes were a nonevent -- nothing of note regarding QE, inflation, interest rates or the economy.

Dallas Fed head Fisher calls QE3 a 'fantasy of Wall Street.'

High-end and luxury retailers could be excellent shorts in slowing domestic and European economies.

More Greece headlines on tape:

* "Some of Greece's Euro Zone Creditors Mulling Possible Bailout Curtailment"
* "Bridging Loan Possible to Help Greece Pay March Bond Redemption"
* "New Arrangement Would Delay Full Bailout Until After April Greek Elections"
* "Possible New Greek Plan Hasn't Been Proposed or Detailed, Support Uncertain."

The European leaders can't change the fact the Greece is bankrupt.

I continue to believe that the optimism surrounding Greece is misplaced.

Greece is bankrupt, and almost nothing the European leaders can do will change it.

Today the yield on the two-year Greek note rose to above 200% for the first time in history.

From the Financial Times:

Sounds like European governments are moving to delay any decision until March 2, another two weeks beyond Monday's Eurogroup meeting. A working document distributed last week says the governments will try and force through the PSI debt swap (expected to be announced tomorrow) before committing any more money. Both Lazard and Cleary Gottlieb advised the officials that PSI without Troika pushing through the second bail out would mean take up could suffer (forcing CACs?) and that bond holders would have weeks of uncertainty. As the article ends, "In its legal advice, Cleary Gottleib said it would be legal to scupper the debt swap even after the invitation went out, but it warned against it...Each sovereign restructuring is unique and sets a precedent," says the legal note. "The adverse reputational consequences (for [Greece] as well as the rest of the EU) of launching a transaction that fails as a result of their collective failure to meet the conditions should be assessed very carefully."
The character of the action changed a bit today as the bears put up their best fight in a long time. The dip-buyers spiked us up to recent highs twice during the day but were turned back rather vigorously both times. We even went out at the lows as the market ignored more yammering from the European finance ministers, who are obviously hoping to keep their comedy show running for a few more months.

What was most notable about the action today was that AAPL, the holiest of the holy in the land of dip-buyers, reversed hard and went out at its lows. Apple had been up for 10 straight days and acted like it would never go down again. It has been anointed the greatest stock in the history of mankind, and it is guaranteed to upset the market beast that punishes anyone who gets too cocky.

The big question for us to contemplate now is whether the recent back-and-forth action is a signal that we are building a significant top or just healthy consolidation which will eventually set us up for further upside.

I don't know the answer to that question, but I'm leaning toward the defensive side. Maybe with Apple finally being knocked down, the indices will be more reflective of the action in individual stocks.
Some I would buy, given they are at certain levels:

* Charming Shoppes (CHRS), under $4.50
* Colgate-Palmolive (CL), under $85
* Clorox (CLX), under $65
* Cohen & Steers (CNS), under $31
* Dell (DELL), under $16
* eBay (EBAY), under $30
* E*Trade (ETFC), under $9.10*
* Ford (F), under $12
* iShares FTSE/Xinhua China 25 Index Fund (FXI), under $37.50
* General Motors (GM), under $24
* Goldman Sachs (GS), under $105
* Hewlett-Packard (HPQ), under $26.50
* International Flavors & Fragrances (IFF), under $57*
* KKR Financial (KFN), under $9.10
* Legg Mason (LM), under $26
* Lincoln National (LNC), under $22.50
* MetLife (MET), under $35
* MGIC Investment (MTG), under $4.10
* Och-Ziff (OZM), under $8.75
* Pitney Bowes (PBI), under $18.50*
* PepsiCo (PEP), under $64*
* Procter & Gamble (PG), under $63
* PNC Financial (PNC), under $55
* Prudential (PRU), under $56
* Schwab (SCHW), under $12
* ProShares UltraShort 20+ Year Treasury (TBT), under $19*
* T. Rowe Price (TROW), under $58
* Waddell & Reed (WDR), under $28
* XL Group (XL), under $18.50
* Exxon Mobil (XOM), under $78

*Eligible to buy at current levels

All Things Digital has tweeted that talks on Yahoo!'s (YHOO) sale of its Alibaba stake have broken down. Stock's getting hit; YHOO's a graveyard.

The sooner Greece declares bankrupcy, the sooner the market can move on fundamentals, not macro risk.

Headlines crossed today, reporting that Greece's Prime Minister says that a Euro Group meeting will take place in Brussels tomorrow.

More mumbo jumbo as Greece is hopelessly bankrupt.

The sooner they declare, the sooner the market can move on fundamentals not macro risk.

In a Q&A session at the 2006 Berkshire Hathaway (BRK.A/BRK.B) annual meeting, Charlie Munger, Berkshire's vice chairman, was asked about Dr. Siegel's theories.

Munger said, "I think Jeremy Siegel is demented."

Buffett, clearly embarrassed, added "Well he's a very nice guy."

Munger continued, "He may well be a very nice guy, but he's comparing apples to elephants in trying to make accurate projections about the future."

"What the wise man does in the beginning, the fool does in the end."

-- Warren Buffett

The combined market capitalization of Google (GOOG) at $200 billion and Microsoft at $257 billion is less than Apple's capitalization at $475 billion.

The combined market capitalization of each of Apple's key vendor rivals -- Samsung, Nokia (NOK) HTC, Motorola Mobility (MMI), Research In Motion (RIMM), Sony (SNE) and LG -- stands at $235 billion (less than half Apple's capitalization).

The 17 brands that make up Apple's smartphone competition have a total market capitalization that falls about $100 billion short of Apple's current equity value.

No one deserves this level of adulation -- no one.

I believe that the stock market will do better in 2008 than it did in 2007, when it chalked up a 5.5% return, the fifth year in a row that the market went up. Year-ahead forecasts for the market are notoriously difficult, but I believe that a 10% to 12% gain is possible, on the heels of a recovering financial sector. Financial stocks plummeted about 20% last year, and this was the reason why the market had a mediocre year. Outside of financials, the S&P 500 Index had double digit returns. A revival of financial stocks would spur good market gains this year.
-- Dr. Jeremy Siegel, "Outlook for 2008"

Over the past few weeks -- in a cover story by Gene Epstein in Barron's ("Enter The Bull"), in flattering words of endorsement from Jim Cramer on "Mad Money" and on Real Money, on CNBC's "Street Signs" and in an appearance on "Fast Money" -- Wharton Professor Dr. Jeremy Siegel has been heralded for his wisdom and forecasts.

History shows that the media has a penchant for untimely anointments -- the names are well known by all of us. Think Dr. Nouriel Roubini and his very incorrect view on stocks and of the economy since the generational low in 2009, or Meredith Whitney's wrong-footed view on municipals over the past 18 months.

I recognize that Roubini correctly forecasted the demise of the world's economy and the consequences of the mushrooming of the derivative market in 2007-08, and Meredith Whitney correctly predicted the demise of the domestic banking industry during the same time frame. And I also recognize that Siegel, along with many other pundits, expressed caution toward the sky-high technology multiples in late 1999 and early 2000.

But quite frankly, the streets of Wall Street are paved with geniuses who have made one great call in a row.

I don't mean this to be an ad hominem attack on Siegel (or on the others), but frankly I don't get the media's adulation, continued preoccupation and almost deification of these wags and their views.

Dr. Siegel comes off as a very nice person, but he is an academic who has been bullish at some very wrong times. Importantly, his theories regarding equities for the long term have been wildly off, as bonds have outperformed stocks for one, five, 10, 30 and 40 years, which, according to his investment thesis, is impossible.

His view on the fixed-income market also has been manifestly incorrect over the last two years. Dr. Siegel's Wall Street Journal op-ed, "The Great American Bond Bubble" was wrong in its conclusion back in August 2010.

In a Wall Street Journal column back in July 2009 -- "Does Stock-Market Data Really Go Back 200 Years?" -- Jason Zweig even questioned whether Dr. Siegel's data were compromised:

There is just one problem with tracing stock performance all the way back to 1802: It isn't really valid. Prof. Siegel based his early numbers on data first gathered decades ago by two economists, Walter Buckingham Smith and Arthur Harrison Cole.

For the years 1802 through 1820, Profs. Smith and Cole collected prices on three dozen banking, insurance, transportation and other stocks — but ended up including only seven, all banks, in their stock-market index. Through 1845, they tracked 19 insurance stocks, but rejected 95% of them, adding only one to their index. For 1834 onward, they added a maximum of 27 railroad stocks.

To be a good measure of stock returns, an index should be comprehensive (by including many stocks) and representative (by including the stocks commonly held by investors). The Smith and Cole indexes are neither, as the professors signaled in their 1935 book, "Fluctuations in American Business." They cherry-picked their indexes by throwing out any stock that didn't survive for the whole period, whose share prices were too hard to find or whose returns seemed "inflexible," "erratic," or "non-typical."

-- Jason Zweig, Wall Street Journal "Does Stock-Market Data Really Go Back 200 Years?"

As The Big Picture's Barry Ritholtz put it (in reaction to the above Wall Street Journal column):

Thus, Siegel's basis for Stocks for the Long Run [2] exclude 97% of all the stocks in the early history of the US market by cherry picking winners, ignoring survivorship bias, and engaging in data smoothing.


What did this do to the results? As you would imagine, it juiced them significantly. The era of 1802-1870 ended up with a much bigger dividend yield then it should have had. Siegel originally started at 5.0%, but over ensuing versions, that crept up to 6.4%. The net impact was to raise the average annual real returns during the first half of the 19th century from 5.7% to 7.0%.

If you artificially raise the initial returns in the early part of the data series, then the final annual returns become much higher. As Zweig sardonically notes, "Another emperor of the late bull market, it seems, has turned out to have no clothes.

To summarize, as Bill King has put it, "Permabull Jeremy Siegel, who has been not just wrong but magnificently wrong, is forecasting DJIA 15k."

As it is said, "Beware of false prophets of the past."
Typically, light-volume pullbacks within an uptrend are healthy. They allow stocks to migrate into stronger hands as short-term holders take profits, and they allow big funds to accumulate at lower prices. As long as the pullbacks are contained, they make it more likely for further upside.

That is what saw today. But a late spike caught the bears leaning the wrong way after several failed intraday bounces. We had a decent recovery and ended up with just mild losses. The perma-bulls love that the bears are so inept, but it makes for dangerous conditions when there is so little fear.

Disinterest is what really kills a market, and you have to wonder what is going on as volume on the NYSE continues to descend to levels not seen in a very long time.

You would think that a market that has been trending up for weeks and is close to its highs would be generating increased interest, but we seem to be going in the opposite direction, which makes the persistent bids seem more manipulative than indicative of real accumulation.

Ultimately, price action is what matters and it is hard to argue with a market that closed the way this one did today. We had a number of failed bounces and looked ripe for the weak finish, but the dip-buyers wouldn't stand for it. I suspect that the computers had something to do with the energetic close, but it just goes to show that you really have to be careful fighting this market.

Tuesday, February 14, 2012

One To Watch

TROX manufactures titanium dioxide and is one of five companies with the technology to produce it via the chloride method, which is cost-efficient and environmentally friendly. Tronox recently announced a merger with a division of Exxaro Resources [EXX.South Africa], a South African company that mines titanium dioxide feedstock. This will make Tronox vertically integrated. The acquired business has a 1.5-million-ton stockpile of ilmenite, the feedstock, which is in tight supply.

Tronox hit a high of $165 last year. Shares have backed off due to market turmoil, mixed feelings about the acquisition and uncertainty regarding the economy. Most important, sales of titanium dioxide were slow in the fourth quarter. Investors didn't understand this was a seasonally weak period. Insiders have been buying shares at Kronos Worldwide [KRO], a Tronox competitor, which adds credence to the buy idea on TROX.

Tronox came out of bankruptcy court last year. Why did the company go broke?

It was spun out of Kerr-McGee with a lot of environmental liabilities and debt. Then the financial crisis hit. But there have been positive surprises since 2011. Tronox has tax-loss carryforwards that are worth about $30 a share. And the company has incredible earnings power, in the range of $20 to $30 a share. Analyst had guessed it was around $12 a share. Some think it is overearning because of the tight supply situation, but even using an 11 multiple of the prior estimate and adding the tax assets and the next 12 months' free cash flow gets you a target price of more than $190 a share. If earnings continue to grow at the current rate, they might be sustainably closer to $20, which gives you a $250 stock.
Moodys, that forward-looking thoughtful ratings agency, has reduced the debt ratings of six European countries including Italy, Spain and Portugal and has revised its outlook on the U.K.'s and France's top Aaa rating to "negative."

A rumor has it that Saudi tanks have approached the Jordanian border, giving a 72-hour ultimatum to Syria.

Today's tweet of the Day is from Hedge Eyes' "Keithy" Keith McCullough: "It appears to me that the old broken glass/economic growth model of Keynes has met its burning buildings #Greece."

The Greece deal is really no deal but rather a slow-motion train wreck to bankruptcy.

Why have all the Cassandras been wrong? Because they ignored the power of central banks to cause credit spreads to narrow. The outcome is reflected in market movements and in certain sectors....

The European Central Bank's ingenious concept of a three-year, 1% loan via LTRO (long-term refinancing operation) worked. It was successful because it allowed the banks to buy their own debt at a higher yield than 1%, book the difference in yield as income, and mark up the value of their own bonds to par. That process functioned as a mechanical way for there to be an addition to the bank's capital. The ECB used a creative way to solve a portion of its eurozone and the Europe-wide banking crisis....

We have replaced meltdown of the type we saw after Lehman/AIG with "melt-up" of the type we have been seeing since March 2009. We have shifted from collapsing leverage and failure at the institutional level to central bank intervention of unprecedented size....

We are going through huge transitional times. Never before have we seen coordinated, global central bank activity of this order or magnitude. By the end of this year, the G4 central banks will have expanded their balance sheets approximately threefold during the financial crisis. The negative and inflationary results of this activity may appear in the future. That remains to be seen. For the present, this is a very bullish construction for asset prices and equities in particular.

-- David Kotok, Cumberland Advisors (Feb. 11, 2012)
The bears had a good opportunity to build on Friday's weak action by selling the gap-up open, but they failed miserably once again. There was a brief dip in the first hour or so of trading, but the buyers didn't wait long, and they walked us back up the rest of the day.

Not only was the underlying support very impressive, breadth was quite strong, with 4,200 gainers to just 1,400 decliners. Volume was light, but the big-cap momentum favorites were lively, with PCLN, ISRG, AAPL, GOOG, AMZN and BIDU attracting attention. Small-cap oils were the favorite speculative play today, but there was no shortage of green on the screens.

It is extremely tempting to keep trying to call a top in this market, but by now it should be painfully clear that sticking with the trend as long as you can is the way to go.

Saturday, February 11, 2012

It' been a long time coming but today we saw the worst action of 2012. We've had only one other bad day this year, Jan. 26, where we sold off all day and closed near the lows. Despite a last-minute spike, we not only sold off and closed near the lows, but it was the biggest point loss of the year.

The big question is whether this is an indication of a major change in market character and an intermediate top, or long overdue profit-taking that will give us a healthier market as we shake out recent excesses. It's been amazingly one-sided for so long that it was inevitable the streak would end.

While it's probably a good idea to lock in gains after the big run, it's premature to conclude that the uptrend is over and a major breakdown will ensue. In fact, it can be argued that this is merely a return to normality and a little downside is healthy. The market needs to shake out overly exuberant bulls now and then to rebuild skepticism and attract new buyers.

Earnings season is basically over and we are heading into a weaker time of the year seasonally. The issues in Europe are not improving, so the bulls will have some headwinds to contend with going forward.

Thursday, February 9, 2012

The dip-buyers did their thing for a third straight day but they weren't as enthusiastic. Fortunately for the bulls, AAPL kept us in positive territory. Although the bulls managed minor gains, breadth was slightly negative and we closed a little soft.

The market continues to hold up remarkably well, which may be due in part to so many folks looking for a pullback. Every time it looks like we may finally see a little downside momentum, the dip-buyers jump in and put the squeeze back on. Any bear that feels confident isn't paying attention to the action.

Even if you are bullish and don't expect a top to occur soon, it is a challenge to keep chasing higher and higher. Many bulls are rooting for some downside to get a better opportunity to put cash to work.

Wednesday, February 8, 2012

The flight to safety continues to buoy fixed income.

The 10-year U.S. note auction came in at 2.02%, 1 basis point below the when-issued yield.

The bid-to-cover at 3.05 was a bit lighter than past auctions, and direct and indirect bidders were in line.

Greece will be resolved (in the fullness of time), but austerity and a lot of heavy lifting lies ahead for the eurozone. This malaise spells weaker-than-expected economic growth ... for years ahead.
Once again, this market showed why intraday weakness shouldn't be trusted. As soon as we breached Tuesday's low, the dip-buyers jumped in and had us back into positive territory by the close.

Strong action in AAPL, GOOG and other big-cap momentum names helped to fuel the bounce, but it was a broad-based recovery and with solid breadth by the finish.

Like yesterday, the bounce had the feel of being driven in large part by algorithmic trading that took advantage of the many market players who are overanxious for a pullback. The inclination is to press the short side when we finally breach an important intraday level, but those bears are immediately squeezed and that helps propel the very fast bounces.

It is the close that counts, and this was another good one. If you really want to play the dark side, wait for a weak finish and some sort of news catalyst to trigger exits.

What we have is a market that the technicians claim is obviously extended but keeps running because dip-buying is working so well. The market loves to stick with a pattern that works until it is obviously broken, and this pattern still works just fine.

Tuesday, February 7, 2012

DIS beat on the bottom line and missed on the top line. I suspect the top-line sales miss will weigh on the shares tomorrow.

So-so three-year auction.

Yield and bid to cover was fine, but direct and indirect buyers were at the lowest level in three years. Tomorrow's 10-year and Thursday's 30-year will be important tells.

KFN, a KKR-sponsored entity, maintains a portfolio of below-investment-grade corporate loans and debt securities, commercial real estate loans and debt securities and special situations.

The company funds its growth through the issuance of match-funded non-recourse debt in the form of collateralized loan obligations and collateralized debt obligations.

KKR Financial enjoys a strong ROI (rising), a 9% dividend yield (rising, expected 50% growth in dividend distributions) over the last 12 months and trades at a slight discount to book value (rising).

KKR Financial reported core investment income of $0.35 per share compared to consensus of $0.32 a share.

Book value increased 3% sequentially, to $9.41 (buoyed by retained earnings and gains on investments), cash earnings rose from $0.35 per share to $0.39 per share, and net interest income advanced by 4% from third quarter 2011.

There was no loan-loss provision, and the company deployed about $200 million in the period. Return on equity exceeded 18%, well above Street forecasts.

The company distributed $0.26, which included a special dividend of $0.08, again above expectations.

The pro-forma 2012 dividend yield is 9%.

According to a Greek official, the government is drafting an agreement on a bailout deal for approval today. Right. And all the Greek tax cheats are announced they are lining up, with cash in hand, at the Greek equivalent of the IRS.....

Investing in the market or in individual securities is always about asking myself the question, What is the risk and reward?

Chasing stocks (in either direction) is not for me, as price is what you pay, and value is what you get.
After the straight-up run we've had recently, many market players have been anticipating at least a minor pullback. It looked like they might have been right when we started the day, but the dip-buyers jumped in and we ended up closing in positive territory near the highs.

The action felt like it was driven by computerized trading, which took advantage of many market players looking for a pause in the action. When we bounced back from this morning's dip, the machines kept pushing and that helped create a short squeeze. Extremely light volume indicates the absence of buying by major institutions.

Typically, an uptrending market doesn't need a major pullback to set up new opportunities. A couple of days of profit-taking will be sufficient to reset a few things, but we just haven't seen that with this market. We become more extended as the dips are snapped up by hungry, underinvested bulls.

There is an old saying that extended markets can become even more extended. That has certainly been the case. It will end one of these days, but even the fortune-tellers don't have a clue when that might be.
Once again, the dip-buyers show how tough they can be. We opened slightly soft, but that proved to be the lows of the day as the market inched slowly back up and closed with minor losses.

Breadth was a bit weaker than indicated, but there was enough speculative action in shippers, small biotechs and large oil services to offset pressure on chips, retail and precious metals.

Just about everyone recognizes that this market could use a rest, but as long as it refuses to let up they are going to keep looking to buy. There was strong action for a market that is tired and technically extended.
I think it is time, again, to expose the BLS' shennanigans to both keep the headline unemployment rate suppressed, and to generate an upward bias in the market courtesy of a "bigger than expected beat" of "expectations." Granted, various semantics experts continue to scratch their heads in attempting to explain a collapsing labor force when even Goldman's Sven Jari Stehn just predicted that it will drop to 63.1% by the end of 2012 (and 62.5% by the end of 2015). Funny, then, that the US will have no unemployment left when the participation rate drops to 58.5%.....And no, the "population soared" argument based on "revised data" doesn't quite cut it when the bulk of said surge not only did not get a job, but was not even counted toward the labor force. The biggest flaw with all these arguments that vainly attempt to defend the US economy - as if it is growing - is that they focus exclusively on the quantity of jobs, doctored or not, and completely ignore the quality.

Saturday, February 4, 2012

KFN at $9???

Regarding today's jobs report, here is the downside to the "strong" labor report (that could constrain, though probably not deny, the upward movement in stock prices):

1. Today's outsized REPORTED jobs "gains" eliminates any chance of QE3, which the bullish cabal has expected.
2. A strong labor market, if it in fact exists/continues, will force the Fed to raise the federal funds rate well before the recently announced date of late 2014.
3. A so-called much improving economy raises re-election odds of President Obama. Most consider a Democratic/Obama win in November's presidential contest as not as market-friendly as a Republican (presumably Romney) win.

According to a Washington Post article, Secretary of Defense Leon Panetta believes there is a growing possibility that Israel might attack Iran as early as April.

The Secretary's remarks are in line with a recent lead article in The New York Times Sunday magazine section two weeks ago.

The real issue for risk markets is how will stocks respond to a successful attack? My guess is down on the news but up, in the fullness of time (once it is digested by the markets), as planet Earth is rid of a nuclear Iran.

From there, the issue likely becomes whether Iran retaliates.

Regardless, I believe the greatest risk to the markets is geopolitical, not economic.

Higher stock prices plus lower bond prices equals an ideal setting for life insurance stocks.

F and GM are uniquely positioned to benefit from unleashed pent-up demand for cars, reflecting in part the record 10.8 years average age of the existing car fleet on the road.

The automobile industry, unlike the housing industry, is not burdened by the supply of unsold home inventory.

On Thursday January light vehicle sales rose to 14.2 million units (SAAR). Expectations were for 13.5 million, in line with December.

January's sales represent the best SAAR in three and a half years and were substantially above the fourth quarter 2011's 13.4 million units and suggest that consumer spending on durables will remain firm in first quarter 2012.

The current sales rate of 14.2 million units is still well below the trend line demand of over 16 million units, so there is a lot of runway left for the industry to recover.

This auto sales release and other recently released high-frequency economic statistics call into question the recessionistas' downbeat views and suggest that a self-sustaining economic recovery is in progress.
Early in the week, the market looked like it might be in danger of rolling over after a good run in the month of January. But it jumped higher on the first day of the new month and it hasn't looked back.

I suspect that the bears were over anticipating some sort of correction and when the market suddenly turned back up they had to scramble to reposition.

The main catalyst today was the better-than-expected jobs news. Again, I suspect that there were too many folks looking for some "sell the news" action. When that didn't work, they gave up and turned into buyers.

Probably the most impressive thing about this market continues to be how one-sided the action is. There are barely any dips at all and the dip-buyers have been forced to pay up if they want to play.

I find it a bit troubling that complacency seems to be increasing; this one-sided move has made anyone who is fearful feel just plain ridiculous. What is there to worry about when the market never goes down -- despite lots of good reasons why it should?
Looking at the euphoric jobs "data" from Friday from every angle. Is it credible? The CEO of TrimTabs, who likely knows this data a little better than the average Jim on the street, having collected tax witholdings data for the past 14 years, is modestly apoplectic at the adjustments. In one of his more colorful episodes, and rightfully so, Charles Biderman notes that "Either there is something massively changed in the income tax collection world, or there is something very, very suspicious about today’s BLS hugely positive number," adding, "Actual jobs, not seasonally adjusted, are down 2.9 million over the past two months. It is only after seasonal adjustments – made at the sole discretion of the Bureau of Labor Statistics economists – that 2.9 million fewer jobs gets translated into 446,000 new seasonally adjusted jobs." A 3.3 million "adjustment" solely at the discretion of the BLS? And this from the agency that just admitted it was underestimating the so very critical labor participation rate over the past year? Finally, Biderman wonders whether the BLS is being pressured during an election year to paint an overly optimistic picture by President Obama’s administration in light of these 'real unadjusted job change' facts. Frankly, in light of recent discoveries about the other "impartial" organization, the CBO, I do not think there is any need to wonder at all.

Thursday, February 2, 2012

Once again, takeover chatter has emerged in regards to RIMM.

Kellogg is an example of a low-beta stock that can be rich in rewards.

Today's dominant investor classes -- individual investors, hedge funds and pension funds -- have de-risked and are relatively uncommitted to equities.

A re-allocation into stocks (and out of bonds) represents an underappreciated and potentially massive (and latent) demand that could easily be the catalyst for a move to all-time highs in the S&P 500 in 2012.

Individual Investors

According to the Investment Company Institute, in 2011 retail investors liquidated $130 billion of domestic equity mutual funds, accumulated $1.7 billion of international stock mutual funds, purchased $120 billion of bond funds and bought $8.4 billion of high-yield funds. Since the beginning of 2007 (through 2011), retail investors liquidated over $450 billion of domestic equity funds, accumulated $130 billion of international stock mutual funds and purchased $930 billion of bond funds. The near-$1.4-trillion swing out of domestic equity mutual funds and into bond mutual funds is unprecedented.

Since 2001, as measured by stock holdings as a percentage of total financial assets, individual investors' share of stocks has declined from 25% to only 18%. In the same time frame, stock mutual funds have dipped from 79% of total mutual fund assets (excluding money market funds) to only 65% at year-end 2011.

Hedge Fund Investors

After Wednesday's close the ISI Hedge Fund Survey, which is based on the actual exposure at 36 long/short funds, which have approximately $90 billion in assets, indicated that net hedge fund exposure moved down to 44.3% (while gross exposure dipped to 49.7%). This is close to the lowest level of long exposure in four years and equivalent to the low exposure at the generational low in March 2009.

Large Pension Fund Investors

There is less official data on pension funds than on retail investors and hedge funds, but it is commonly recognized that pension funds are disproportionately exposed to fixed income over equities. This important asset class remains fearful of stocks, preferring the haven of safety available in low- or virtually non-yielding bonds (which provide returns well below actuarial assumptions).

Watch What They Do, Not What They Say

I prefer to watch what investors do, not what they say. That is why I am dismissive of many of the sentiment surveys (AAII, Investors Intelligence, etc.) as well as put/call ratios (which are further rendered relatively meaningless, owing to the proliferation of leveraged ETFs).

The aforementioned de-risking and flight to safety in bonds by all three dominant investor classes help to explain the last five years of action in domestic equities and the contraction in P/E ratios in 2011.

I expect the recent trend of large outflows over the last year (and last five years) to be reversed in 2012. Not only are interest rates at generational lows but many high-quality companies are yielding (at 2.5% or even better) well above the yield on the 10-year U.S. note.

At first, similar to the past two weeks, in which under $1.5 billion has come into stock mutual funds, the pace of inflows will be slow. As it becomes clearer that the domestic economy is self-sustaining, that the European debt crisis is showing continued evidence of stability, that a Republican presidential win in November grows more likely and that corporate profit (and margin) expectations will be achieved, I expect the rotation out of bonds and into stocks to accelerate.

Tactically, I favor the asset management stocks such as OZM, TROW, WDR and LM and the discount brokerage stocks such as ETFC and SCHW as direct beneficiaries of the expected rotation out of bonds and into stocks in 2012.
While the indices had a very mixed day, very dogged underlying support prevailed again and prevented any real weakness. There was a fair amount of speculative action in individual stocks, which I suspect is a function of underperforming bulls trying to catch up with a market that won't go down.

While the market has been struggling over the past week to make progress, it is still holding and we need to respect the fact that the uptrend is intact. There are plenty of reasons to be wary but, so far, there is no price action to support the bearish bet.

Don't forget we have the monthly jobs news in the morning, and that will be a major market catalyst. I'll be looking for the bears to try to sell any strength the news brings and, of course, I'm sure we can count on the dip-buyers to step up fast if there is a negative reaction.
The asset management sector has been weak over the past few days based on misses at LM and WDR. Those misses aren't surprising, though, because outflows have been unmerciful during late 2011 and 2012 (32 of the past 34 weeks yielded outflows!). But that is exactly when one should buy a cyclical like an asset managers.

Remember what Roy Neuberger once said: "Buy cyclicals when the factory door is padlocked. Sell cyclicals at the sound of trumpets."

Like discount brokers, traditional asset managers have likely seen the nadir of their fundamentals. Mutual fund inflows are trickling back, but there is a huge potential of a massive rotation out of bonds and into stocks that could materially change the earnings picture for the group.

I would be a buyer of the group now.

Now look at housing-related stocks (particularly the homebuilders) and consider their quick and substantial share price advance, well before the housing markets have improved (in price and turnover activity).

The same should occur in the asset managers, as stocks typically discount news well before there is an inflection point in fundamentals.

This is interesting: ETFC, which has often been rumored to be a potential takeover target of rival AMTD, named Frank Petrilli its new chairman. He replaces Chief Executive Steven Freiberg, who held the role on an interim basis since last spring.

Petrilli, 61, was most recently CEO of Surge Trading. But he also has past ties to TD, a 45% owner of TD Ameritrade. As noted by Dow Jones Newswires, Petrilli held several positions at TD Waterhouse, formerly a U.S. unit of TD Bank Group, from 1995 to 2004. He reported to the Canadian bank's current head, Ed Clark.

"We suspect Mr. Petrilli's relationship with Mr. Clark is strong and can only benefit E-Trade over the longer-term as it looks to potentially unlock the embedded value of the franchise with, in our view, its #1 acquisition/merger candidate, TD Ameritrade," Sandler O'Neill analyst Richard Repetto told clients in a note.
-- Barrons

This Barron's piece yesterday, "E-Trade Names New Chairman With Ties To AMTD: Coincidence?" piqued my interest and raised the specter of a possible takeover.

I have concluded that despite no apparent short-term catalyst, there is little risk in the shares.

Moreover, the recent weak DARTs monthly data likely represents the nadir of the discount brokerage cycle for both ETFC and SCHW.

ISM comes in at 54.1, slightly below expectations.

Fitch says Greece will default. Big surprise!

The ADP report was basically slightly less than consensus -- it should have no impact on risk assets, as it probably reflects some reversal of seasonal adjustments which distorted December's release.

Run, don't walk, to read the monthly commentary from Pimco's Bill Gross, "Life - and Death Proposition."

Stated simply, our monetary policy (coupled with global easing) is inflationary. In the fullness of time, bonds will suffer.

Now the only question is how we define "the fullness of time"!

Fears of hard landing in China eased as China's January manufacturing index rose to 50.5 (expectations were 49.5) vs. 50.3 in December. This is the best print since September 2011. New orders advanced for the first time in three months while shipments rose to best level in more than six months. As a perspective, China's real GDP increased 10.4% in 2010, +9.2% in 2011 and consensus lies at +8% to +8.5% for 2012 (bottoming at +7.5% in the first half). Like the rest of the planet, I expect China to ease in the months ahead (with a bank reserve requirement reduction imminent).

The January Chicago Manufacturing Index came in at 60.2 (expectations were 63) compared to December's 62.2. This was the third consecutive month with a reading over 60. It is important to recognize that 60.2 is indicative of relatively robust growth and compares positively to the long-term average of only 54. Importantly, the production and order components were strong. The equity market flinched, but recovered nicely from this news.

The January conference board's index of consumer confidence came in at 61.1 vs. 64.8 in December and against expectations of 68.The print contradicted the previously released Rasmussen and University of Michigan consumer numbers. Again, the market rebounded from this release.

Case-Shiller's home price index continued to fall. There was a slight reacceleration in home prices' rate of decline. November prices (year over year) were down by 3.7% (previous months' drop was 3.4%). I have written that the aggregate home price indices fail to address the developing bifurcation in the residential real estate market, with areas of the country that are unencumbered by a large shadow inventory of unsold homes doing far better (e.g., the D.C.-to-Boston corridor). Moreover, bank lending standards are easing (based on the most recent survey), the ownership/rental equation is improving, mortgage lending rates are at historic lows and the jobs market is experiencing a slow - very slow - improvement -- all positive factors contributing to a stabilization of the U.S. housing markets. I expect no price degradation within receipt of the 1Q2012 Case-Shiller Index release.

The employment cost index continues to suggest that unit labor costs (and wage inflation) will be tame, likely extending a market-friendly profit/dividend/share buyback cycle. The wage index was +0.4%, in line with consensus. For the year, private wages increased by 1.6%. I want to emphasize that corporate profit margins typically don't contract until unit labor costs increase by greater than 3.5%. We are under 2% now!
Apparently, this is the market of the never-ending bid.

After the market basically went straight up for the entire month of January, a number of market players were anticipating that the indices might take a rest. We had four straight days of mixed action to end January, and it looked like we might be weakening, but it turned out to be a bear trap, and it was sprung today.

What made today particularly impressive was that the upside move picked up steam even though there really wasn't any real catalyst for the strength. Economic reports were mixed, Greece continued to promise it would have a debt deal any minute, AMZN's earnings were unexpectedly weak, and there wasn't any real positive headline news. In the perverse manner of the market, that probably helped to keep things running, as it increased the fear of being left behind.

Although we have had a number of runs like this in recent years, these markets with the never-ending bids are not as easy as they look unless you just buy and hold and never have an interest in selling an extended stock.