May 31, 2009

Hello Summer!

Hello Summer!

June 1, 2009

“I never can think of Judas Iscariot without losing my temper. To my mind Judas Iscariot was nothing but a low, mean, premature, Congressman.”-Mark Twain

Weekly percentage performance for the major indices
Based on last Friday’s official settlement...

INDU: 2.7%
SPX: 3.6%
COMPQ: 4.9%
RUT: 3.1%

The shortened week after Memorial Day closed with a flurry, helping stocks to finish positive for the month in what has historically been the first month of the weakest six months of the year for the S&P 500, but the 7th of the strongest eight months for the NASDAQ. The past three months has been one of the strongest periods ever, matching the jump seen in late 1998, which makes me pine for Greenspan-NOT!!

Breadth (according to 81% of stocks are above their 50 DMA) is at a level typically associated with market corrections, although this data is far from statistically significant. The last time this many stocks were above their 50DMA was just before the market rolled over in early January. The chart below (courtesy shows that the advance decline line has been rebounding, and is now at levels last seen in September 2008. This chart makes me wonder what people were thinking in January of 2008?

Mortgage rates and treasuries have been rising recently as the yield curve continues to steepen (see chart of 10 year Treasury yield below as well as the Yields section below). While treasury rates are still low on an absolute basis, the direction of the movement is worth watching closely. The most significant positive aspect is the extremely steep yield curve, which benefits the faltering banks. Additionally, a curve this steep could certainly be a precursor to better economic growth in the 9-15 month range. The list of negatives are a bit longer, however, in my mind the three key items to keep in mind are 1) higher rates could be signaling higher inflation down the line; 2) higher borrowing costs for the US government can’t be positive, especially given the trillions that the Treasury must issue to cover the huge budget deficits planned by Team Obama; and 3) ten year Treasuries are often viewed as a proxy for the cost of capital (since so many corporate securities are priced off the 10-year) for the market, and a rising cost of capital results in a lower overall market valuation.

I come from a school that says rising stocks and rising bond yields can’t co-exist for extended periods of time. One of the most famous market crashes ever, 1987, was preceded by months of rising stocks and rising yields. The key difference between 1987 and today was that yields were much higher on an absolute basis in 1987 than they are today.

So where does that leave me? I am still net long about 25%, favoring healthcare, materials (mainly via gold), and consumer stocks. I am still net short industrials and technology (to my detriment). I have also been selling out of the money covered calls on non-core positions as I expect the market to consolidate its recent gains. I plan to move more towards a neutral position, but haven’t been rushing there yet.


As we’ve discussed, first quarter earnings were weak but much better than anticipated, enough to help the market surge off its March 9th low. Scott Chronert from Citi has postulated that second quarter earnings and stock performance will mirror that of the first quarter, with earnings missing elevated expectations and the market rolling over as a result. The S&P 500 as a whole is expected to see earnings decline 35% in the second quarter. Material stocks are expected to see the biggest decline in earnings followed by energy. Technology is expected to see earnings decline by 28%, health care and consumer staples are the only two groups forecast to post a gain.

Consumer confidence came in at 54.9 versus the 42.6 consensus and 40.8 in the prior month. This is a significant jump and somewhat reflected in my VIX comments last week. For more comments, see the Speaking of… and Sentiment sections below.

The Case-Shiller Home Price Index came in at -19%, as reflected in the chart below (S&P). Existing home sales came in slightly ahead of consensus at 4.68 million vs. 4.66 million. New home sales were 352K versus the 360K consensus and 351K last month (revised down from 356K).

Durable goods orders for April rose 1.9% from a March level of 2.1% (that was revised down from a decline of 0.8%) and a consensus estimate of 0.5%. The rise was driven by increases in auto and defense orders. Bookings for non-defense capital goods (ex-aircraft) fell 1.5%. Staying on the downward revision theme, March capital goods orders were revised to a decline of 1.4% after being reported at an increase of 0.4%.

Initial jobless claims came in at 623K.

The US mortgage delinquency rate came in at 9.2% vs. 7.9% last quarter. Subprime delinquencies are horrific at nearly 25%, with prime delinquencies at 6% and rising (see Mortgage Defaults section below).

GDP for the first quarter was revised to a decline of 5.7%, an improvement from the initial reading of -6.1% but weaker than the forecast of -5.5%. A downward revision to personal consumption was offset by a less than expected drop in gross private investment, exports and less of a drag from inventories. Real final sales, which takes out the influence of inventories, was left unchanged at -3.4%.

Chicago PMI, which was expected to be 42 (although many were expecting much higher, actually limped in at 24.9 for May.

Speaking of…
Speaking of consumer confidence, Barry Ritholtz writes: “One of the ironic things about the data is how conclusive it is that sentiment is a contrarian indicator. Mark Hulbert looked at consumer confidence data (via the Conference Board’s index) to its beginning — 1977. He then looked at how markets did over the ensuing periods. His conclusion?

“The biggest monthly jumps in the consumer confidence index were, on average, followed by sub-par returns. Conversely, big drops in the index were typically followed by above-average returns.

The starkest patterns in the data, however, were between monthly changes in the consumer confidence index and how the stock market had performed in prior months. When the stock market is going up, their confidence rises too — and vice versa. So, given the stock market’s impressive rally over the last couple of months, it was entirely to be expected that consumer confidence would rise smartly.

In other words, focusing on consumer confidence tells us more about how the stock market has performed in recent weeks than it does about the future.”

As JFK said “those who look only to the past or present are certain to miss the future.”

Best Investment Ever (revisited)

In September I suggested that the best investment ever had been those “Dow 10,000” hats that all the anchors on CNBC were wearing back in 1999. The Dow has crossed that new Mendoza line so many times that they must be getting dizzy flipping those hats on and off. Now with the Dow approaching 8500, the Dow 10K birds are beginning to chirp and I’m sure the talking heads are dusting off their derbies once again.

Personally, I like my “Gold 1K” hat.

Bank of America

From Bank of America (BAC) has won some support for bank stocks ahead of the opening bell by announcing that it has raised almost $26 billion in capital since the government announced the results of its bank stress tests. Bank of America's efforts thus far have included a $13.5 billion common stock offering last week, and the partial sale of its China Construction Bank holding. Bank of America still needs to raise more capital in order to achieve the $33.9 billion capital buffer that the Fed deemed sufficient.

All I can say is the list of leading stocks this week included enormous moves by all of BAC’s preferred issues.

Mortgage Defaults
From Peter Boockvar “An example that the more the US government gets involved in cleaning up the economic mess, the longer it will last, aka Japan, Fitch is forecasting that between 65-75% of mortgage loans that are modified will re-default after 12 months. An example of the damage that can be done to a family by artificially modifying a loan for one who should be renting and re-defaults in 12 months and thus prolongs the agony and delays the inevitable, is the money that a family spends each month on a mortgage during the initial 12 months after modification that can be used for renting at a lower monthly price, with money leftover. It’s not the same as owning one’s own home but it improves the financial health of the family. The foreclosure process however painful also more quickly clears markets and brings out demand.”

As I mentioned earlier, the 2-10 year treasury spread is at a record high.
This is great for banks since they can borrow cheap and lend expensive. However, this steep curve can be bad for mortgages since it causes rates to increase.

From ISI: “Spreads are tightening not because the cost of capital is falling rather because rates are moving up. A consequence of this price action is tight mortgage spreads (a primary Fed goal), but higher mortgage rates. Refi applications have rolled over, perhaps in response to the back up in rates.”

The last two times the yield curve was anywhere near this steep was September 1992 and 2003, and both periods were followed by rallies in the bank stocks.

End of Recession?
From The Big Picture: 1) Conference Board’s Leading Economic Indicators: Historically, when we see the LEIs jump a full point (to 99 in April), that is a positive sign for the end of a recession. David Rosenberg, now Chief Economist & Strategist at Glusking Sheff, notes that going back to 1960, “the only times we have seen increases of this magnitude in recessions were at the very tail end of the downturns.” However, he warns that “even if the LEI has bottomed, it typically takes another six months for the recession to come to an end and that lag time has been known to be as long as 10 months.” Given the severity of this downturn relative to prior recessions, we are likely to be on the longer end of the range.

2) ECRI LEIs: The Economic Cycle Research Institute (ECRI) leading index has risen to -11.5% — that has been a significant point in past recessions. On average, it takes five months from the time this index hit -11.5% until we reach the end point of a recession. Again, the average can be misleading, and the range is what matters. In the past, the minimum was one month and the maximum was 12 months. Again, given the depth of this recession, and then credit destruction it has had, expect the longer end of the range.”

From David Rosenberg: “The last time that there were more equity market bulls (36%) than bears (31%) was back in October 2007 when the market was hitting its peak. This metric works like a charm because in March, at the market lows, the gap between the bears (53%) and the bulls (20%) in the other direction was the largest spread since July 2008 (and the second largest gap on record).”

Exxon Mobil Corp.'s top executive said he suspects the recent $10 a barrel jump in oil prices was due partly to investors anticipating a recovery, but that it was "too early to call" whether the U.S. economy had turned a corner. Speaking to reporters after the Exxon annual shareholder meeting, Chairman and Chief Executive Officer Rex Tillerson said that oil-market fundamentals hadn't changed much since the beginning of the year. He stated that “there has been no significant change in demand” and “there’s been little to no change in inventories”. He further speculated that much of the move may be driven by currency fluctuations (i.e. a declining dollar, see chart below).

From ISI: “prices "at the pump" in the US are now up $.75 per gallon (or 45%) from the start of the year. Each penny rise at the pump equates to $1.4 billion in consumer expenditures, annualized, meaning the rise this year equates to $105 billion in additional expenditures. Crude oil costs make up the largest component of retail prices which has raised a question about just how much the "financialization" of crude is costing consumers.”

The Wall Street Journal is reporting that Arthur Samberg, among the best-known hedge-fund managers, is closing down his firm amid an ongoing investigation into possible insider trading.

I’ll have to disagree with Gordon Gekko, greed is NOT good.

Housing & Unemployment
Reader Jon Fisher, former CEO of software startup Bharosa (which was sold to Oracle) and now a professor at the University of San Francisco, writes that the three biggest housing start declines (72-75), (78-81), and (05-09) have resulted in a V shaped recovery closely followed by an unemployment cap. Jon’s chart can showing this can be found at His blog can be found at

More Auto Woes
Visteon, which was once the parts making unit of Ford but is now independent (spun in 2000), filed for bankruptcy this week. The company has over $5 billion in debt and hasn’t been profitable since 2000. The list of parts makers filing for bankruptcy is over 40, with Visteon and Delphi (former GM parts unit) being the largest. Ford has committed to provide operating capital during the reorganization.

Banking Problems
About a fifth of U.S. banks are in trouble, and more "problem banks" are likely, the Federal Deposit Insurance Corp (“FDIC”) said. The 8,200 FDIC-insured banks saw their collective income plunge more than 60% year on year. "The first-quarter results are telling us that the banking industry still faces tremendous challenges and that, going forward, asset quality remains a major concern," FDIC Chairwoman Sheila Bair said. "Bank failures continued to mount, and they will continue to do so."

Ms Bair also stated that the $27 billion FDIC fund was in danger of running empty by the end of the year. That means higher fees for those banks remaining solvent.

Bullpen Problems
Can anyone please find a closer for the Angels? The daily demolition of that bullpen is horrific. Can we get Frankie or Percie back?

Business Week is reporting that the US is facing a severe chance of stagflation due to the gaping deficits that are being projected and an anticipated collapse of the dollar. Interest rates are rising, pushing mortgage and other rates up as well.

Glad they are finally on board with our expectations.

Semiconductor Demand
Gartner revised its 2009 revenue growth estimate for the semiconductor industry to -22.4% from -24.1% and 2010 to 10.6% from 7.5%. The two primary reasons for the 2009 revision change were the actual number for 4Q08 came in lower than their estimate, which resulted in a 1Q09 sequential decline of 15.7% versus a previous forecast of a 17% decline and PC sales were not as bad as the previous forecast (4.9% sequential growth versus the previous forecast of a 1% decline). Looking at the aggregate forecast for 2009 shows the change had a positive variance of $3.5 billion or 1.8%.

Global Warming
I hesitated before adding this chart because I know it will tick off a number of you, but then I thought it would be fun to get this argument going again. The chart below is courtesy of Bob Bronson, who has collected data from NOAA and NASA, which are calling for an 11 year cycle of global cooling. The chart shows weather data for the earth over the past 3000 years or so, and shows that recent weather isn’t out of line with historical averages. The study can be found at

OK-let me have it!

Commercial Real Estate
Bloomberg reported that Starbucks, among others, has been taking advantage of the weakness in real estate by pushing their rent factors down by as much as 25%. Vacancy rates have been rising as retailers and restaurants close their doors, pushing commercial property values down over 20% in the past year. Mall and shopping center vacancies have risen to 9.5%, the highest level in over 10 years.

Anecdotally, I know of a retail franchise operator who has been acquiring other franchisees and immediately negotiating new leases down 25-50% from their current levels.

Are you kidding me?
We haven’t posted an ‘are you kidding me” for a few weeks, but here’s a great lesson in hypocrisy from the Associated Press: While Gov. Rick Perry is criticizing Washington bailouts, state lawmakers are planning to use $11 million in federal stimulus money to help rebuild the badly burned Texas Governor’s Mansion. The mansion was burned in an arson fire last summer. Perry has railed against federal bailouts and what he called the free-spending, power-hungry ways of Washington. In January, he said Texas was endangered by Uncle Sam’s “audacity.”

People in glass houses just shouldn’t.

I expect the coming summer months to be anything but quiet as more comes out of Washington and all eyes are on second quarter earnings. As always I appreciate your feedback and comments. The notes have been pouring in lately, thanks for all the great flow.

Have a successful week.


“The content of your character is your choice. Day by day, what you do is who you become.”-Heraclitus (Greek philosopher)

"Well ya see, Norm, it's like this: A herd of buffalo can only move as fast as the slowest buffalo. And when the herd is hunted, it is the slowest and weakest ones at the back that are killed first. This natural selection is good for the herd as a whole, because the general speed and health of the whole group keeps improving by the regular killing of the weakest members. In much the same way, the human brain can only operate as fast as the slowest brain cells. Excessive intake of alcohol, as we all know, kills brain cells, but naturally it attacks the slowest and weakest brain cells first. In this way, regular consumption of beer eliminates the weaker brain cells, making the brain a faster and more efficient machine. That's why you always feel smarter after a few beers." Cliff Clavin-Cheers

Come on, how many of you have read a financial piece which quotes Mark Twain, Heraclitus, JFK, and Cliff Clavin in the same note? Actually, the Cliff quote is an urban legend known as “The Buffalo Theory”, he never actually said that, but it made me laugh so I included it anyway.

Ned W. Brines
O (562) 430-3232

May 26, 2009

Better Earnings for the Financials?

Better Earnings for the Financials?

“We’re about to have a big problem. Foreclosures were bad last year? It’s going to get worse.” -Morris A. Davis, University of Wisconsin.

May 25, 2009

Weekly percentage performance for the major indices

Based on last Friday’s official settlement...

INDU: 0.10%
SPX: 0.47%
COMPQ: 0.71%
RUT: 0.37%

The market kicks off the summer with the S&P 500 just below 890. After last week’s hard decline, the week leading into Memorial Day was fairly muted. The big news on the week came from the treasury market, with yields continuing to move higher. On the corporate side of credit, high yield spreads continue to narrow as investors continue to increase their appetite for risk. According to Barron’s, high yield spreads have fallen from 2100bps to 1300bps over the past few months.

Many have asked about market valuation. The chart below, from, shows the PE Ratio of the S&P 500 going back to 1935. In my opinion this chart is somewhat misleading as it is based on the most recent four quarters of earnings-which is one of the worst periods for corporate earnings ever. If you use the $40 estimate that has been bounced around for 2009 S&P earnings, then the valuation would still be considered high, but a more reasonable 22 times.

Building permits and housing starts both missed consensus, coming in at 494K and 458K respectively versus expectations of 530K and 520K, a decline of over 50% from last year and down 3.3% from last month. The housing starts are the lowest on record (see chart below from Econoday). The positive spin suggest that maybe we are finally on our way to controlling the inventory of housing. There are still a record number of delinquent home loans. Surveys show that the number of people preparing to sell their homes or looking to do so if activity picks up or prices stabilize indicate an enormous potential inventory of unsold homes.

The index of leading economic indicators (LEI) gained 1%, the biggest gain since 2005, and ahead of the estimated 0.8% increase. Rising stock prices and consumer confidence led the increase. The negatives were money supply and bookings for capital goods.

Stock prices contributed 0.44% to the increase while the interest rate spread added 0.28%, consumer expectations 0.27%, jobless claims 0.16%, and the average workweek 0.13%.

The main drags on the April number were M2 -0.24%, building permits -0.09% and orders for nondefense capital goods -0.01%, which are estimated and subject to revision.

Unemployment claims came in at 631K as 6.7 million people are now collecting unemployment insurance. Estimates were for 625K. The prior week was revised upward from 637K to 643K.

The Philadelphia Fed Index came in less than expectations at -22.6 versus an estimate of -18.

The U.S. economy will return to growth in the second half of this year, but joblessness will continue to climb well into the second half of 2010, the Congressional Budget Office said. The agency expects unemployment to peak at 10.5% (remember last week I discussed the administration’s budget deficit estimates assumed 8% unemployment for this year, which is now at 8.5%).

When the U.S. economy shifts back in the direction of growth, it will be slowed down by a weak employment market, consumers who are limiting spending to boost savings and banks that are unloading problem assets, said Eric Rosengren, president of the Federal Reserve Bank of Boston. "My best judgment is that a rather slow recovery is likely," he said.

Economic Velocity
Much has been made about the rebound in manufacturing and transportation due to the ongoing inventory restocking. I discussed this again in last week’s note ( The chart below shows the inventory to sales ratio over the past two and a half years.

As you know, the anecdotal comments from our well-informed reader base make this note work. Over the weekend I spent time with a friend in the banking world, and he told me that lending in the middle markets is “on fire.” Companies are aggressively seeking capital, and banks (both small and large) are competing hard for the business. With the shadow banking system all but gone, the pricing on these loans has been quite attractive. Given the low cost of funds the banks are enjoying and the very steep yield curve, it would suggest that bank earnings (ex the write-offs of prior bad business) should be robust in Q2.

Supporting those comments, the KBW Bank Index rose 5.8 percent during the week after the cost of borrowing in dollars between banks dropped the most in two months, a sign credit markets may be thawing.

Changing the Gate
SAC Capital Advisors LLC, the $14 billion hedge-fund firm run by Steven Cohen, will allow investors to take their money out of its flagship fund every quarter. Clients previously had their money tied up in the SAC International fund for three years.

Personally, I think we will continue to see funds adopting measures to improve terms for investors, including greater transparency and access to capital.

When you are the owner…

The Wall Street Journal reports the Obama Administration plans to direct the Environmental Protection Agency and the Department of Transportation to jointly raise fuel economy standards and reduce greenhouse gas pollution so as to raise the overall fuel economy of automobiles to 35 miles a gallon by 2016, four years faster than federal law requires. As part of the agreement, the state of California has agreed to "stand down" from its effort to implement its own greenhouse gas emissions standards for automobiles, since the new federal rule would be as stringent as the state's standard. The current energy law (from 2007) requires automakers to achieve fuel economy of 35 mpg no later than 2020.

The proposed fuel savings of $2800 per driver will be more than offset by the higher prices of the cars, estimated to be $2K-$4K. While this plan is designed to help the domestic auto makers, I wonder how helpful it will be given most of the fuel efficient cars are made outside the US? According to Vince Farrell, only one of the top 10 fuel efficient cars sold today are made by a US company, Ford, which isn’t even owned by our government.

Additionally, it looks like the plan would include a “Cash to Clunkers” clause which will provide a $3500 subsidy to anyone trading in a car getting less than 18 miles per gallon as long as there is at least a 4 mpg improvement. A 10 mpg improvement would get you another $1000.

The positive is that a national standard that meets California requirements will mean automakers aren’t required to make special cars for California only.

Conspiracy Theory

There has been some speculation that government releases have been massaged to look better on the initial release, then are revised towards more negative numbers. I haven’t seen a reliable study on this, and personally assume it is because there is so much subjectivity in the measures. Any thoughts?

Consumer Credit
Dow Jones reported that the U.S. Senate overwhelmingly passed legislation to impose tough new restrictions on the credit card industry, handing President Barack Obama a decisive victory on a hot-button consumer issue. The legislation, approved on a 90-5 vote, would ban certain controversial practices and make it much harder for credit card issuers to raise rates on consumers. It also would place new restrictions on marketing cards, student loans and other credit plans to teenagers and college students. Credit card practices have become a potent political issue as the financial crisis has strained household finances and stoked anger over bank bailouts.

I’d say the end result here will be the elimination of teaser rates, more restrained consumer spending, and a lower rate of new card issuance. The next legislation will probably occur in two years, forcing credit card companies to provide cards to people with poor credit. This is very similar to the CRA passed during the Clinton years, which pushed lenders towards making home loans to borrowers with weaker credit after the S&L debacle led to a dearth of lending.

Does this sound familiar?

Californian’s Say No to the Governator!

Voters struck down Governor Schwarzenegger’s proposals to raise a slew of taxes to pay for the budget mess in California. The rebuke means certain budget cuts in California, $6 billion immediately according to the former Mr. Olympia.

Showing they continue to be in a non-charitable mood, voters also passed a bill which blocked legislatures from getting a raise in years when the budget wasn’t balanced.

Government Unsure of Role

I watched Timothy Geithner getting grilled by Congress on TARP. One Senator wanted to know why the government, as the owners of AIG, had to pay off 100% of their debts to Goldman Sachs and other investment banks. He commented “we own 80% of AIG, why can’t we tell them what to do?”

All of that for only $180 billion.

The VIX finally broke 30, for the first time since last September, before settling back at 32 on the week’s close. Remember this indicator of volatility peaked at nearly 80, and has been on a downward path since the market began its assent in March. While the index certainly isn’t near historically low levels indicating investor complacency (typically that would be the low teens), the fact that it has been cut in half suggests that investors feel the worst is behind them and it’s safe to go back in the water.

I mentioned this back in November, but it is worth repeating. The Chinese, holders of US debt up the whazoo, have been quietly but aggressively using this paper to acquire hard assets. The beneficiaries have been components in the CRB (see below) and oil.

Global Equity Returns
From Bespoke Group: “With global equity markets still in rally mode, below we highlight the year to date performance of the major indices for 83 countries around the world. After nearly every country was down earlier in the year, 62 out of the 83 are now up in 2009. Peru is up the most at 72.92%, while Costa Rica is down the most at -39.94%. And the BRIC (Brazil, Russia, India, China) countries are significantly outperforming the developed G-7 countries. Russia, India, and China rank 2nd, 3rd, and 4th in terms of year to date performance, and Brazil isn't far behind in 10th place.

Canada has been the best performing G-7 country with a gain of 12.62% in 2009, but it ranks 35th out of 83. The rest of the G-7 countries are bunched up in the 0%-5% range, which is closer to the bottom of the list than the top. And the US is the worst of the seven with gains of less than 1%. While the markets here in the states have rallied nicely off of their March lows, most other countries have bounced back even more 2009.”

Deficit Concerns

From Casey Research: The magnitude of the recession was underscored by the latest numbers from the U.S. Treasury: last month’s individual income tax receipts dropped 44% and corporate tax revenue plunged 65% compared to April 2008. Alarming news, as April is historically the biggest collection month of the year and usually results in a sizable budget surplus for the month.

Global Economy
From Eric Boucher at ISI: Japanese GDP fell a stunning 15% in the first quarter showing the world that with bad policy a 20 year slump is possible. In the Baltic's, the GDP decline is more stunning having fallen 35%. Fearing a currency collapse the central banks there remain tight.

The Fed and Quantitative Easing
The Fed has to be concerned since the US dollar index is lower by almost 6% (chart below courtesy Bespoke) since the day before the April meeting, the CRB (chart below courtesy Bloomberg) is higher by 12%, and the 10 yr bond yield up almost 20 bps.

I guess I’m just a cynic in thinking the Fed won’t be able to pull back on the gas pedal as soon as we see a whiff of inflation.

Weak dollar beneficiaries-from David Rosenberg

• Basic materials 87% inverse correlation
• Consumer staples 79% inverse correlation
• Industrials 62% inverse correlation
• Consumer discretionary 34% inverse correlation
• Utilities 28% inverse correlation
• Financials 22% inverse correlation
• Health care 18% inverse correlation
• Tech 5% positive correlation
• Telecom 13% positive correlation

So, the best performers typically would be basic materials (the stuff is
priced in dollars); staples (high foreign currency translation) and industrials
(relative improvement in export competitiveness).

Financials, health care, tech and telecom have more of a domestic content
and as a result screen the worst in a declining dollar environment.

Jack Welch Weighs In
According to Bloomberg, Jack Welch, former chief executive officer of General Electric Co., criticized the government for backing the bankruptcy of Chrysler to favor unions at the expense of creditors. Additionally he said President Barack Obama’s economic stimulus programs will cause massive budget deficits.

Debt Visual

No longer a cheerleader of easy money and now speaking like a three-handed economist, Alan Greenspan reversed course once again this week by saying “There is still a very large unfunded capital requirement in the commercial banking system in the United States and that’s got to be funded.” He also said that “until the price of homes flattens out we still have a very serious potential mortgage crisis.”

After watching this guy be horribly wrong for so many years, this comment makes me seriously consider that the mortgage crisis could be over next week.

Real Estate
A recent RealtyTrac survey showed that 55% of US adults have indicated they are interested in purchasing foreclosed properties. Most are expecting to pay 50% less than market value for those properties. In the same study they found that 24% of homes currently on the market have experienced at least one price decrease.

According to the Wall Street Journal, the Obama administration has instructed federal agencies to be less aggressive in claiming that federal regulations pre-empt state law. This can be terribly costly to companies operating in multiple states at a time when companies need to be conserving capital for stability, new capital purchases, inventory, rising tax burdens, and hopefully hiring.

UK Financial Problems
The UK, with a debt to GDP ratio of 0.7, had its credit rating outlook lowered from stable to negative by Standard & Poor’s. Their credit rating wasn’t actually lowered, but the odds of that happening have increased. In addition to their existing debt load, Britain must issue at least $344 billion in bonds by March 2010. A decline in their credit rating would push the cost of borrowing up as investors will require higher yields to compensate for a perceived increase in risk.

This should serve as a warning to the US, whose debt to GDP ratio is 0.8 and rising fast.

The Next Shoe to Drop
From David Rosenberg “How about pensions? The PFGC (Pension Fund Guaranty Corp), which backs the pensions for 44 million workers in the USA, stated that the looming additional failures in the auto, retail and health care sectors will end up aggravating what already is a record $33.5 billion deficit (this shortfall has tripled since last October!). In the final analysis, retiree benefits will end up being cut, companies will be required to pony up higher premiums to insure the pensions, or taxpayers will foot the bill as they will do for all the other massive fiscal policy measures undertaken by the Administration.”

Fundamental Disconnect

Technology stocks have really been moving the past few months, with NASDAQ leading the markets higher. The wind behind that run is that inventories of chips, boxes, etc all were cut well below sustenance levels, and now there is an inventory rebuild occurring. The question is whether end market demand will materialize to sustain this build activity or will we see another inventory drawdown? Consumer spending on electronics will be one key driver, but the other will be corporate IT spending, and it’s the later where the disconnect is really apparent. Historically financial services companies have been the leaders in technology adoption and spending, accounting for 1/3 of corporate IT spending. Today many of those companies are in retrenchment, or worse. Does this bode well for corporate IT spending in the second half of 2009?

A lot of readers are close to these two groups, I’d love to hear your feedback.

More AIG
Edward Liddy, the CEO/chairman at AIG who is serving for a $1 salary, evidently isn’t happy with the proposed bonus limits of 25% of salary, and has decided to leave the firm. Actually, Mr. Liddy has endured limitless criticism (some justified) for a role he assumed to help turn a listing ship. His resignation will take effect once a replacement has been found.

I’m not sure it behooves the government to beg successful people to take these roles in an effort to do their part to help the country, and then throw them under the bus repeatedly in an effort to deflect criticism away from Washington.

I had this piece in last week’s note, but eliminated it for space reasons. Now it seems appropriate given the UK credit issues, dollar weakness, treasury weakness, and inflation concerns beginning to arise once again. Personally, I have added to my gold position over the past month on weakness in the metal. I’m watching for an overshoot in the metal to the upside, and if the press keeps hyping it I will take some profits. The chart below is courtesy of Bespoke.

Treasury yields continue to head in the wrong direction. According to ISI, the back up in yields has occurred despite $100 billion dollars worth of purchases over the past six weeks.

Oil-Another Weak Dollar Beneficiary?

Does it strike anyone as unusual that oil continues to climb while inventories soar to the point that OPEC is considering more production cuts?

Why am I Being Punished, I Didn’t Do Anything Wrong?

I spoke with a friend over the weekend, and he wants to know why he is being persecuted for being conservative with his money. He works, but his taxes are going up. He saves, but higher sales taxes are eating into his savings. He and his family sold their house three years ago, rented and then later lived with his in-laws to save money. Recently they purchased another home at a discount to historical sales in the area. He hasn’t defaulted on loans, credit cards, or other debt, yet is watching his tax dollars bail out those who were less responsible. Now he is wondering why he shouldn’t just walk away from his obligations as well?

I guess that’s what is meant by the moral hazard of bailouts?

I hope you take the time to view the video clip this week. Thank you for all the positive comments on the embedded video clips. If I could embed them in the emails, I would do so.

I am contemplating taking this note from just an email to a .pdf document attached to the email. I appreciate your feedback on this as well.

Have a great week.


“I am humbled and awed by the past and ongoing sacrifices made by our men and women in uniform to ensure our continued freedom. Thank you and happy Memorial Day.”-me

May 18, 2009

The Robin Hood Budget

The Robin Hood Budget

“I don’t know, but I think the worst of this may well be over.”
—Alan Greenspan, October 2006

May 18, 2009

Weekly percentage performance for the major indices
Based on last Friday’s official settlement...

INDU: -3.6%
SPX: -5.0%
COMPQ: -3.4%
RUT: -7.0%

The market paused from its upward march last week, with the major indices all falling. Small caps, which have had the largest bounce from the March 9th bottom (rising 36%), pulled back 7% while the large cap S&P 500 fell 5%. The pullback seemed orderly, without a hint of panic. Risk taking appears to be returning to the markets, time will tell whether this is too early in the recovery for this type of activity.

It is interesting to note that the market pulled back significantly on the first significant piece of economic data missing expectations in the last few weeks. Retail sales for April (see Economy section below) missed expectations and the results from March were adjusted downward, leading to an almost 4% one day decline. As I discussed last week, the market has been gorging itself on economic data that is bad, but not as bad as the expectations. This retail sales number serves as a reminder that while we may be past the worst portion of the recession, there is still a long way to go before this economy gets back on its feet.

The chart below, courtesy of Chart of the Day, clearly shows the carnage in S&P 500 earnings. The chart shows a decline in earnings of 90% over the past two years. Remember that these are inflation adjusted earnings. Given the recent Q1 results, 2009 earnings of $35-$40 seem feasible. When I mentioned $40 for 2009 earnings in a note in the fall, I received a number of emails strongly suggesting (OK, many of you said I was crazy) I was off base and that there was no way EPS would fall below $60.

The charts below, courtesy of The Bespoke Group, show the nature of the most recent market action. Within the S&P 500 we have seen a sector rotation towards defensive stocks (healthcare & consumer staples) over the past two weeks at the expense of both consumer discretionary and industrials. Could this indicate an overbought condition in the more economically sensitive groups, a reduction in risk appetite amongst investors, or a pending correction?

The trade deficit widened for the first time in eight months, jumping 5.5% to $27.6 billion on a decline in imports of goods while oil imports increased. A drop in exports of 2.4% resulting from a weak global economy also contributed to the jump in the deficit. Autos and capital good exports were weak. Import prices rose 1.6% versus, three times expectations.

Retail sales fell 0.4% for April, versus expectations of no change. March was revised down to a decline of 1.3% (estimates ranged from -0.8% to a gain of 1.1%). Weakness was noted in electronics, furniture, clothing and grocery stores. Retail sales ex-autos declined 0.5% versus an expected gain of 0.2%. Unemployment, higher fuel prices, and America’s newfound frugality conspired to keep sales in check.

Business inventories came in just under expectations with a decline of 1.0% versus expectations of -1.1%. One of the arguments about a potential economic rally later this year hinges on inventories across a wide variety of industries being replenished. Anecdotally I have picked up a handful of data points across a wide swath of industries saying that sales pipelines are starting to become more active. According to these sources, while orders have yet to pick up, the improved activity is still an improvement when compared to three months ago.

The University of Michigan consumer confidence index rose to 67.9 versus 65.1 last month (typically mid-month measures). The index hit a 30 year low in November at 55.3.

Industrial production fell in April, but at the slowest pace in six months and slightly better than consensus, falling 0.5% versus a consensus decline of -0.6%. The Empire Manufacturing index was down 4.6% versus expectations of a 12% decline.

Capacity utilization came in at 69.1% versus consensus of 68.8%.

Core (ex-food and energy) CPI for April was 0.3% versus expectations of 0.1%. The top line number was in line, flat. The core number year over year was up 1.9%. The larger than expected inflation reading was driven by a .4% gain in vehicle prices, a .4% gain in medical care and a 2.6% gain in other goods and services, made up of personal care and tobacco. Rents rose 2%.

Last week I discussed the rosy projections in the new budget deficit estimates. Monday, President Obama announced that the government is piling up larger deficits than estimated and thus raised his estimate of the deficit for this year to more than 4 times last year’s deficit, to $1.84 trillion (a 5% increase from prior estimates) and next year to $1.26 trillion, a 7.4% increase. He cited lower payroll and tax collections (see May 4 note) as well as higher costs of “economic stabilizers” such as food stamps and unemployment benefits. We have a higher unemployment rate today (8.9%) than assumed in the Obama budget (8.1%) for this year, an assumption they haven’t yet changed. Next year they are assuming 7.9% unemployment, which is a significant improvement, suggesting they expect a very robust economic rebound. Typically employment gains lag the economy, and hiring is rarely robust in the early stages of recoveries as companies cautiously rebuild their capacity. Consensus calls for 9.6% unemployment next year and 8.5% in 2011. I anticipate these budget deficit estimates to continue moving upwards, eventually topping $2 trillion.

It is interesting to note the Administration is also expecting 3.5% GDP growth by year end, well above expectations of 1.9%.

Shrinking Economy, Growing TARP
The economy continues to shrink, but the government largess continues. A couple of month ago we discussed the issues brewing in the insurance market. This week the Treasury announced that six insurers would receive access to TARP money. Hartford, Prudential, Allstate, Principal Financial, Lincoln National, and Ameriprise Financial are all eligible for funds. The initial commitment is $22 billion.

How did they get in trouble? As we discussed a couple of months ago, the insurance companies were selling variable annuities which promised minimum payouts. The underlying investments (stocks, bonds, real estate, etc) fell significantly, putting them in a precarious situation.

Why are we saving insurance companies? That’s a great question. They certainly aren’t critical to the functioning of the capital markets. They have proven to be reckless in their business practices by offering rates which they couldn’t deliver. As a money manager I am forbidden from promising a rate of return to my investors, yet these insurers not only have been able to promise an unachievable rate, the government bails them out when they can’t deliver that rate!

The government continues to shower its favorite industries with financial aid. As I have noted with the other TARP recipients and the United Auto Workers, I’m sure we will find that the insurance industry was a major donor to the most recent campaign. Who said buying influence was reserved for third world countries?

Roadblock for Nationalizing Healthcare

From ISI-“The leaders of several major stakeholder groups are meeting with President Obama today with the goal to lower the projected rate of growth for health care spending by 1.5% each year, which would mean $2 trillion less would be spent on health care over the next decade. In summary, the DC team believes this is more of a public relations tactic than a real effort to reduce costs and they remain very skeptical. Despite these promises, we believe major stakeholders will ultimately oppose the health care legislation introduced by the Democrats in the House and probably the Senate bill too.”

Remember that last fall the credit markets literally seized, with capital flows grinding to a halt and no lender feeling comfortable giving its capital to anyone else. All the various credit indicators reflected this fear. The TED spread (chart below courtesy Bloomberg) is representative of the fear that existed in the credit markets. Recently, over the past month, this measure has finally been able to break lose from the 100bps level, falling to a recent measure in the low 70bps range. While still above historical levels, this improvement foretells continued improvements in capital flows, which will be a key factor for the global economy in its efforts to recover.

Money Supply
From the Daily Dirtnap: “As I mentioned before, if we estimate M3 at $12 trillion (we don’t know what it is, they killed the statistic, remember) and we have done or committed to do about $3 trillion of quantitative (or credit) easing so far, then we have inflated our money supply about 25 percent. Twenty-five percent! I have heard the tired argument that the Fed is standing ready to remove liquidity from the system when the time arrives, but I would bet the left arm of my firstborn son that when that moment arrives, it will be politically unpalatable to do so.”

I have added a chart of year over year M2 growth below (again, courtesy of Bloomberg). Remember than when capital floods the economy the markets tend to benefit if the real economy doesn’t have a need for the excess capital. Given present the lack of economic activity, I wouldn’t be surprised if much of the recent market rally we have been experiencing is from the excess liquidity being provided by the Fed.

Congress and Investment Timing

According to Eric Singer “When Congress works – and by "works" I mean "meddles" – it destroys wealth. When Congress doesn't work, wealth grows by itself. From 1965 through 2008, looking at a total of 11,000 trading days, the annualized daily price gain of the S&P 500 Index is just 0.31 percent when Congress is in session. Out of session, that figure jumps to 16.15 percent, a daily difference of 50 times. As government power and influence grow, the trend has intensified in recent years. From 2000 through 2008, in-session performance of the S&P is –12.4 percent. The out-of-session performance: +8.8 percent. In other words, had you invested $10,000 only when Congress was in session from the beginning of 2000 through 2008, putting aside dividends, you'd have $4,615 today. Had you invested that same $10,000 only on days when Congress was on vacation, you'd have $13,416 today.”

Stress Test
Please go to the website ( to view a short video clip on the bank stress tests.

Oil continued its surge this week, moving above $60. As we showed recently, the number of operating rigs worldwide has declined by roughly ½ as the price of oil fell from $150 to almost $30. Demand has shown a very slight increase over the past two months, however, rising prices at the pump may function as a brake as consumers lose their recent gains in discretionary spending/saving they were enjoying as a result of lower gasoline prices. Locally, prices have risen from just under $2 to $2.70 per gallon in the past two months.

Also remember that oil is priced in dollars, and the global markets could be discounting the reckless treatment of the dollar by the Fed. See the chart below from Bespoke Group, which shows recent weakness in the dollar, which coincides with the rebound in oil.

One way to lower the inventory of excess homes on the market is to level them. That’s exactly what Guaranty Bank in Irvine did last week as they demolished 12 spec homes in Victorville. Squatters and thieves were destroying the homes, and the city was fining the bank for not completing the properties. The bank was left with the option of putting more money into the homes and trying to sell them or destroying them. They chose the later.

The Solution to the Global Financial Crisis

by Prieur du Plessis

In a small town on the South Coast of France, the holiday season is in full swing, but it is raining so there is not too much business taking place. Everyone is heavily in debt. Luckily, a rich Russian tourist arrives in the foyer of the small local hotel. He asks for a room and puts a Euro100 note on the reception counter, takes a key and goes to inspect the room located up the stairs on the third floor.

• The hotel owner takes the banknote in a hurry and rushes to his meat supplier to whom he owes E100.
• The butcher takes the money and races to his supplier to pay his debt.
• The wholesaler rushes to the farmer to pay E100 for pigs he purchased some time ago.
• The farmer triumphantly gives the E100 note to a local prostitute who gave him her services on credit.
• The prostitute quickly goes to the hotel, as she was owing the hotel for her hourly room used to entertain clients.

At that moment, the rich Russian comes down to reception and informs the hotel owner that the room is unsatisfactory and takes his E100 back and departs.

There was no profit or income. But everyone no longer has any debt and the small town’s people look optimistically towards their future.

Could this be the solution to the global financial crisis?

Misc from ISI
Taxes are moving up in Great Britain and in the US as well. Ed turned to a Swedish guest at our morning meeting and asked what their marginal rate was. It's 55% in Sweden with a 25% VAT. Marginal rates in NY will soon exceed 50% before social security or Medicaid taxes are added. State taxes are going up in CA, IL, and NJ. Just as the attack is on "millionaires," in the UK, politicians attack wealth while quietly lowering rates to levels that affect high income middle class earners. The Obama tax said to begin at $250,000 will now begin at $235,000 and the Administration is still seeking to lower deductions effective raising rates higher still.

Higher taxes are not being used to offset the massive and growing budget deficits which Nancy estimates to be $1.3 trillion in the US this year, but to offset the higher spending coming from the proposed health care legislation to be delivered later this year. No wonder why the dollar and bond markets are groaning. Jeff thinks the dollar is headed lower after completing a head and shoulders formation. A natural beneficiary of a weaker dollar is the materials sector of the S&P and everything else "real" out there. Mike Rothman thinks the speculators are creeping back into the oil market in anticipation of a weaker dollar.

Goodbye Capitalism?

In another potential blow to capitalism, Barney Frank and Barrack Obama announced plans to restructure the compensation system in the financial services industry. They aren’t simply proposing to cap pay on financial executives of firms accepting federal aid, but instead are proposing to establish guidelines on how compensation is determined across the entire industry.

We should all start practicing the phrase “Greetings Comrade!”

Real Estate
According to RealtyTrac, foreclosure filings in April were filed on 342K properties, up 1% from March and 32% from one year ago. Nevada, Florida and California lead the country in foreclosure activity. Nevada has a foreclosure rate (1 of every 68 homes) that is five times the national average.

Chrysler & GM

As Chrysler begins its bankruptcy proceedings, the company has proposed rejecting dealership agreements with approximately 800 of its 3200 dealers. Reportedly Fiat made the decision as to which dealers will be retained.

Meanwhile, GM is saying that bankruptcy is probable. GM is also planning to close 1000 dealers, with a reported inventory of $2.5 billion in unsold vehicles.

It is interesting to note that these cuts are coming just as dealers begin to see an improvement in their ability to get new flooring capacity. Many dealers have been unable to stock new cars since late summer due to the funding issues, and recent reports indicate that this funding is starting to flow once again. This should mean more profitability for those dealers left standing.

Money Manager Regulation

SEC commissioners voted 5-0 on a proposal that would subject investment advisers holding customer assets to surprise inspections by independent auditors. Some money managers would also face compliance audits to ensure they are adhering to securities laws.

Given the regulatory failures that allowed scam artists such as Bernie Madoff to operate for years without scrutiny, I expect this to be the tip of the iceberg in new oversight requirements for money managers. I’m not opposed to better oversight, however, I feel that more effective enforcement of the existing rules would probably suffice.

The problems at Fannie Mae just seem to continue. It appears they will require additional government aid as delinquency rates continue to rise. Barron’s is estimating an additional $19 billion will be required soon to keep the firm afloat. Additionally, it appears that delinquency rates in their prime portfolio are beginning to pick up, signaling a need for even more bailout funds.

And the cost of letting this company fail initially would have been what?

Death and Taxes
Finally providing an answer to a long running debate at the local sports bar, it appears that only death and taxes are a certainty, not pole dancing. Crunch Fitness, the health-club chain with cardio-strip tease and pole-dancing classes, may have marked the end of an era when it filed for bankruptcy last week after about a 25 percent membership decline since 2004.

Change of website and email address
Please note that in the next few weeks I will begin sending this note from a new email address, If you wish to continue receiving the note, please add this new address to your approved senders list so it doesn’t end up in your spam filter.

For those of you reading via the website, I also plan to change that address, but that will take a bit more time and I will keep you posted on the timing of that cutover.

Have a great week and happy Memorial Day. Next week’s note won’t be out until Monday evening given the holiday.

As always, please let me know if you’d like to be removed from this list.


“The third-rate mind is only happy when it is thinking with the majority. The second-rate mind is only happy when it is thinking with the minority. The first-rate mind is only happy when it is thinking.” A. A. Milne:

May 10, 2009

May 10, 2009

“When everybody starts looking really smart, and not realizing that a lot of it was luck, I get scared.” Raphael Yavneh

Weekly percentage performance for the major indices
Based on last Friday’s official settlement...

INDU: 4.4%
SPX: 5.9%
COMPQ: 1.1%
RUT: 5.1%

The market soared during the week as investors determined that the bad economic news was bad, but not bad enough to derail this rally. The S&P 500 is now up for the year (+2.9%) as more companies beat analysts’ profit forecasts than at any time since 2006. Banks, retailers and commodity related companies led performance during the week as the S&P bounced from its lowest valuation since 1985. Technology stocks have staged the biggest rally in the S&P 500 this year, adding more than 19 percent for the best start to a year since 1998, according to data compiled by Bloomberg.

The chart below (from Bespoke) shows the S&P for 2009.

While the market has run far in this rally, according to Chart of the Day, this rally doesn’t compare well in either percentage terms or number of days to the bear market rallies of the depression, which may indicate the market has further to go.

In my mind there are three questions that need to be considered before we can determine whether this is another bear market rally or that we have emerged from the grips of the mighty bear.

First, why are treasury bonds falling? Falling treasury bonds and rising stock prices have occurred prior to many market corrections, most famously during 1987. Are they falling because of the massive supply coming on to service the gaping budget deficits facing the US; are they falling due to a shift to more risky assets as the economic outlook improves; or are they falling due to inflation concerns?

Second, where are we in this economic cycle? If we have passed the bottom, as the market and some of the data seem to be suggesting, then any subsequent market appreciation will rely upon true economic improvement, which we haven’t seen yet. The economic data is not as bad as it was through the economic winter of December-February, but is still bad. Simplistically, if the bottom actually occurred in Q1 in the middle (chronologically) of the recession, then we wouldn’t emerge from this recession until Q3 or Q4 2010, significantly later than most forecasters are expecting.

Third, are there other systematic shocks lurking in the wings to match the credit market freeze of last fall? Some have suggested commercial real estate, however, the slowdown there seems to be orderly and similar to prior downturns. Personally, if there is another systematic shock, I don’t think it will be led by the banks given the scrutiny that has already occurred there. My sense is that possible sources of another shock would either be a foreign crisis (monetary); political upheaval in an economic or militarily significant country (think Latin America, India, Pakistan); a terrorist event; or policy changes affecting the standard business operating environment (think the US altering contract law).

Low Quality Reigns in April

That was the title of a piece published by Cirrus Research (proprietor Satya Pradhuman is an old friend and great small cap strategist) discussing returns in April. Satya stated “investors increasingly embraced business risk and collectively shed their defensive posture to fuel a powerful rally across risky assets. Eclipsing Mid Cap’s strong showing (+15.3%), Small Caps (+18.6%) experienced its biggest monthly gain since 1975! Micro Caps, up 19.8%, led overall for a second month. Up roughly 31% since February, Micro Caps are now +3.3% YTD. By comparison, Large, Mid and Small Caps stand at -3.2%, +2.9% and +4.6% YTD. Also of note, the Russell 2000 rose 42% from March 9th through the end of the April.”

Market Overbought?
The chart below (from Bespoke) shows that 92% of stocks in the S&P 500 are above their 50 day moving average. Does this mean the market is oversold or just that the market has been hit so hard over the past few months that the 50 DMA is depressed?


The Pending Home Sales Index for March was released and the market got what it was looking (hoping) for, which was a stronger-than-expected number. Specifically, pending home sales were up 3.2% from February versus a consensus estimate that called for a flat reading. At 84.6, the index level is 1.1% higher than the year-ago reading. According to, “The catch with the seemingly good housing news is that it feeds into the recovery argument, which is weighing on the Treasury market and is forcing rates higher there. That, in turn, will drive up mortgage rates and will lower the affordability factor for housing and slow demand.”

Construction spending came in at 0.3% versus a consensus of -1.6%.

The ISM services index came in at 43.7 vs. 42.2 consensus and 40.8 in the prior period. New orders showed an improvement to 47 from 39, consistent with the ISM manufacturing report. The market feels the uptick from March suggests the pace of contraction is slowing. The April report marked the seventh straight month the index has been below 50%.

From The April decline in payrolls of 539,000 was a smaller decline than the published economist median expectation of 600,000, but still represents bad economic news. Part of the smaller decline is explained by a 72,000 jump in government payrolls, which hardly helps the wealth-producing private sector. There, widespread losses occurred, including a drop of 149,000 in manufacturing and 110,000 in construction. The increase of 0.4% to 8.9% in the unemployment rate was in-line with expectations. The 2009 Obama administration budget (ended Sept. 30, 2009) called for a $1.7 trillion deficit. The economic assumptions assumed an 8.1% average unemployment rate for 2009. That looks like a very long stretch at this time, as the rate is likely to move higher the next few months. That implies that the deficit this fiscal year will be higher than forecast. Hourly earnings growth did not add much to consumer buying power. Hourly earnings were up $0.01 to $18.51 an hour, which is reported as a 0.1% increase. There have been hopes recently of a steadying in consumer spending leading to stabilization in economic trends this fall or later this year, but the data does not provide much support for that argument. These are still massive job losses and wage gains are minimal. Granted, payroll trends do lag overall economic trends, but unless businesses start to show a willingness to hire and not just to lay off fewer people, the market may be ahead of itself in looking at the recent economic data as harbingers of much better trends.

Fed Chairman Ben Bernanke says we are “likely to see further sizable job losses, increased unemployment in coming months” and that “the US economy should resume growth later in 2009.”

Additionally he commented that “consumer spending, which dropped sharply in the second half of last year, grew in the first quarter. In coming months, households' spending power will be boosted by the fiscal stimulus program, and we have seen some improvement in consumer sentiment.”

More Goldman Hooey
I could write a separate note each week chronicling the conflicts of interest and government impropriety related to Goldman Sachs. This week Stephen Friedman, Chairman of the New York Fed, resigned. Mr. Friedman is a member of Goldman’s board, a firm which also fell under his supervision since it is a bank holding company. According to the WSJ this week, this conflict of interest is a violation of Fed policy. Friedman was also overseeing the search for a new president for the New York Fed, a role that ultimately went to a former Goldman executive. Friedman denies any conflicts of interest in these events.

Interestingly, during his time as a regulator, Mr. Freidman bought 35K+ new shares of GS stock, booking a gain of $2 million.

(Not so) Stress(ful) Test Results

Thank goodness that’s over. The stress test results are in, and what a surprise, everything is really A-OK! After multiple well timed leaks of what was coming, as well as some aggressive negotiating by the banks as to how and what would be released, the long awaited stress test results were announced this week. The relief rally in the financials was dramatic, and helped pull the market up significantly (see Market section above).

The Federal Reserve determined that 10 U.S. banks need to raise a total of $74.6 billion in capital, a finding that Chairman Ben Bernanke said should reassure investors about the soundness of the financial system.

Citigroup climbed after the Fed said it needs only $5.5 billion in additional capital (reportedly negotiated down from $30 billion). Bank of America, determined to require $33.9 billion, also gained. Fifth Third Bancorp, Ohio’s largest lender, soared 25% as the central bank said it must raise a mere $1.1 billion.

Stress Tests
From Barry Ritholtz: “Consider this simple fact: Treasury and the Fed want these banks to have Tier 1 common stock equal to 4% of risk-weighted assets. In other words, 25-to-1 leverage as safe for the future.

Hence, it is not a big stretch to conclude that the entire stress test exercise is a near charade, with foregone conclusions of deleveraging banks to still wildly over-extended positions.

Recall that before the 2004 SEC Bear Stearns exemption for the 5 biggest investment banks, net cap rules limited leverage to 12-to-1 for investment banks.

Is 25-to-1 leverage appropriate for depository banks? Well, maybe before the repeal of Glass Steagal — but with today’s toxic asset laden banks, 25-to-1 seems awfully friendly.

Why the generosity? According to Bloomberg, it’s to allow the banks to “grow” their way out of the mess through earnings. Instead of being an honest broker of the banks conditions, the Treasury Department is now a shareholder and cheerleader for bank profitability:

“Treasury Secretary Timothy Geithner is betting that U.S. banks can do something their Japanese counterparts were unable to accomplish in that country’s “lost decade” of the 1990s: earn their way out of trouble.

The stress-test results released yesterday by regulators found that the 19 largest banks face a $74.6 billion capital hole that may be filled mostly by private money. That compares with the hundreds of billions of dollars seen by outside analysts, including the International Monetary Fund, and takes into account banks’ projected earnings over the next two years.”

What a horrific idea.

Put on your rally caps, Uncle Sam is in da house . . .

Dollar & Inflation
From Bill King “Ben is now chagrined because his effort to prop up bonds, possibly to appease China (after Hillary’s trek there) by announcing a $300B monetization, has produced the opposite of the desired effect. Ben’s scheme has inflamed inflation concern, as it should have and will continue to do so.
In recent weeks we have also noted that the dollar is close to breaking down. This is the flipside of the inflation coin. And of course, this forces one to consider what China is thinking and what they might do.”

As part of the implied government guarantee, LIBOR rates continue to drop as US dollar 3 month fell for a 25th straight day and is now below 1% and the TED spread is at the lowest level since June ’08. In a sign that banks are still reluctant to lend to each other for any period of time other than very short term, the spread between 1 month LIBOR and 3 month LIBOR is still elevated at 59 bps vs. around 10 bps in calmer times. Below is a five year chart of the Bloomberg Financial Conditions index, showing that credit factors have improved since last fall, although significantly short of where they stood prior to the housing rollover.

According to the Financial Times the Federal Reserve's survey of senior loan officers found that banks continued to tighten lending standards in February through April, putting additional pressure on consumers and businesses. However, the survey found indications that the tightening might be starting to abate. For example, 80% of U.S. banks tightened standards for commercial real estate loans in January, while 65% did so in the past three months.

Tarp Repayments
According to Bloomberg, “the Treasury will tell U.S. banks that have received taxpayer funds that they must raise debt without a Federal Deposit Insurance Corp guarantee as a condition for repaying the government, people familiar with the matter said. The Treasury will unveil conditions for repaying the Troubled Asset Relief Program money as soon as tomorrow, the people said on condition of anonymity.”

In my view the point is to keep banks that aren't solvent from paying back the loans as they attempt to appear solvent.

Residential Real Estate
From “A growing number of U.S. homeowners owe more than their properties are worth after prices extended their two-year decline in the first quarter.

Almost 21.8 percent of all owners were underwater as of March 31, the Seattle-based real estate data service said in a report today. At the end of the fourth quarter, 17.6 percent of homeowners owed more than their original mortgage, while 14.3 percent had negative equity three months earlier.

Property values dropped 14 percent from a year earlier in the first quarter, reducing the median value of all U.S. single- family homes, condominiums and cooperatives to $182,378, Zillow said. The gain in underwater homeowners will lead to more bank repossessions, the company said.”

Gold pulled back from nearly 1000 just prior to the market bottom on March 9th, all the way down to 850. The commodity has quietly moved its way back to 900 as treasuries began the slide I discussed last week. Could this be an indicator that the rise in Treasury yields is due to inflation concerns (see Market above)? I’d love to hear from you on this.

The Dow vs. Gold
From Chart of the Day: Today's chart presents the Dow divided by the price of one ounce of gold. This results in what is referred to as the Dow/gold ratio or the cost of the Dow in ounces of gold. For example, it currently takes 9.2 ounces of gold to “buy the Dow.” This is considerably less that the 44.8 ounces it took back in 1999. When priced in gold, the Dow is down 79% from its 1999 peak and the scale of the current two-month rally has not distinguished it from the many bear market rallies that have occurred over the past decade.

“U.S. stocks may continue their two- month rally as investor appetite for risk returns,” said Richard Bernstein, the former chief investment strategist at Bank of America Corp. “What’s happening is that we’re seeing a real rally and the world is not coming to an end,” Bernstein, 50, said in a Bloomberg Radio interview. “This rally has removed a lot of the risk aversion.”

CRB & Inflation

from Peter Boockvar
With the CRB index rising to within just 1% of its high of 2009, the implied inflation rate in the 10 yr TIPS has broken out to the highest level since Sept 30th at 1.575%. On Tuesday, Bernanke said that he expects inflation to be quite contained over the next couple of years while at the same time expecting the economy to start growing by year end. This goldilocks forecast sounds great but if he’s correct and the economy does stop contracting by Q4, it’s hard to believe that commodity prices will remain tame at the same time. Commodity producers over the past year have responded aggressively to the massive demand destruction seen and have underinvested in response and its not that easy to just ramp up again at a quick pace. It is also for this reason on the supply side, that if commodity demand just stops going down, prices should rise.

Chief Executive Officer John Chambers said business is beginning to level off for customers around the world, a “remarkable” shift that could set the stage for an economic recovery. Said could get to normal sales growth 3-5 quarters AFTER GDP has stabilized at normal levels.

Budget Proposal

President PT Barnum, oh, wait, President Obama says people are tightening their belts and Washington should too. He then introduced a record $3.5 trillion, 1050 page budget proposal. He called it “fiscally responsible”. As a senator he was one of the leading benefactors of special interest lobbyists, yet criticized many existing programs that are the result of “special interest lobbyists.”

The spin is dizzying, but I guess that’s the point.

Changes in Euroland
EC Central Bank President Jean-Claude Trichet announced the ECB voted for a 60 billion Euro plan to buy bonds. They also cut their main interest rate to 1%. This is a significant change in position after receiving strong resistance from inflation hawks in Germany.

Interest Rates
As we have been discussing, treasury rates are bound to move up as the Fed goes crazy issuing their new “Obama Bonds”. The 10-year spiked to 3.3% this week on an exceptionally weak auction for 30 year notes.

My Position
I went back and looked at some of my predictions for 2009. The one I was searching for, relating to the market, is shown below:

Stock Market-as you know I have been maintaining that this is a good time to be accumulating great companies on the cheap, without getting overly exposed to equities. I continue to espouse that view, but still think we are in a long term trading range in the market. Currently the S&P has bounced over 25% from its November 21st low. Some are contending we are in a new bull market, whereas I maintain this is a bear market rally. As you may recall, I have been looking for strong bear market rallies, and have suggested using these rallies to sell your weaker holdings. The S&P is approaching the 950 level I felt would act as the upper band of its trading range. I am still looking for a flat 2009, however, I don’t invest based upon targets set at the beginning of the year, and urge you not to do so either. The S&P is now 931, and I truly feel that it will finish 2009 +/- 10%, which would suggest a range between 840 and 1020.

I am reprinting this as we hover around the same point we began 2009. Obviously my comment that the range would be “+/- 10%” was off a bit given the market fell in the 28% range. A climb to 1020 would suggest another 10%, and would place the index above its 200 DMA.

I still believe the market will be range bound; however, finding the top of this most recent run has been trying. While my portfolio remains net long, I have been frustrated by the rally amongst the low-quality companies, especially given my style favors higher quality at the expense of low quality.

Have a great week. As always, feel free to let me know if you’d like to be removed from this list. If you enjoy the notes, please feel free to view more content on the website ( and remember to support my sponsors.



May 3, 2009


“More and more of our imports are coming from overseas.”-George W. Bush

May 4, 2009

Weekly percentage performance for the major indices
Based on last Friday’s official settlement...

INDU: 1.7%
SPX: 1.3%
COMPQ: 1.5%
RUT: 1.7%

The market resumed its winning ways this week, with most major averages rising by 1.5%. It is interesting to note that as this rally approaches its second full month, the average stock is up over 50% while the indexes have increased in the 30% range. As I have discussed recently, the smaller companies have been leading this rally. This “junk” rally is reminiscent of the 2003 rally, which featured low priced and smaller capitalization stocks leading the market right after the Iraq invasion.

According to Bespoke, both Consumer Discretionary and Technology broke above their 200-day moving averages this week. The firm feels this is definitely a positive technical formation for the two sectors, as it signals the end to a long-term downtrend and the confirmation of an uptrend. It's also positive for the overall market that two cyclical sectors are the first ones to break above their 200-day moving averages.

So far 338 companies have reported earnings, with 232 meeting or beating expectations while 106 have missed. Even though expectations are being exceeded, the first quarter results will be the 7th straight quarter of declining EPS. The table below shows earnings for the S&P 1500 by sector. Note the negative growth in every sector except health care and utilities, and also the large positive surprises in materials and financials.

There has been much discussion in the press recently of the old adage “Sell in May and go away” as May marks the beginning of the worst six months in the market. For those not familiar with this, there is analytical support showing that during the months May-October the market has historically underperformed the November-April time frame by a significant amount. In the tech world we used to say ‘buy at Montgomery, sell at H&Q’, which is difficult given neither of those investment banks still exist. Given the recent run up in the market, 2009 might be one of those years where selling in May makes sense.

I have often advised using market strength to lighten up on weaker holdings and market weakness to add to stronger holdings. Given the large move in this market and the strength of the lower capitalization stocks, a rotation to quality from the junky leaders of this rally might be advised. I would focus on market leaders with strong balance sheet and little or no need for additional financing over the next 24 months.

Bear market rallies are not only commonplace, they occur frequently even in the worst downturns. The chart below (courtesy TBP and Alpha Trends) shows eight large rallies that occurred during the depression, with the smallest rising 19% and the largest 122%.

First quarter real GDP dropped at a 6.1% annual rate in part because the inventory contraction sliced a whopping 2.8% off the reading. Real final sales, excluding inventories, fell at a 3.4% annual rate. The inventory decline reflects sharply lower production.

Real personal consumption expenditures rose at a stronger than expected 2.2% annual rate. In a typical business cycle, consumer spending picks up first, and this might be a signal of better times to come. Bears will note that the gain comes off horrible fourth quarter spending, and that January and February are light consumer months in which gains can be exaggerated by strong seasonal factors.

Investment in software and equipment fell at a 33.8% annual rate. Nonresidential construction spending (offices) fell at an amazing 44.2% annual rate. Residential construction spending continued to plunge, and was down at a 38.0% annual rate.

Government spending fell at a 3.9% annual rate as state spending and defense spending contracted. This was another factor in the overall weaker GDP number compared to estimates.

Benefiting GDP was a tremendous drop in imports due to weak domestic demand. Imports are subtracted from GDP, so declining imports are additive to GDP. Some have estimated that without this benefit GDP may have declined by 12% in the first quarter.

Consumer confidence for April came in at 39.2 versus the 29.7 consensus and the prior reading of 26.0.

The Case Shiller home price index was down 18.6% year over year versus an expected decline of 18.7% and 19% in prior period.

The chart below, courtesy of Bill King, shows continuing jobless claims since 1967. As you can see we are well above any prior highs, suggesting that consumer spending will be slow to rebound in this recession.

Bloomberg reported that Obama's Economic Recovery Advisory Chairman Paul Volcker feels the economy is leveling off and that more stimulus is not needed. He also says that no large systemically important banks will fail.

Consumer spending fell 0.2% in March, the first drop of 2009, versus an expected decline of 0.1%. Personal income was down 0.3%.

The Chicago Purchasing Manager’s index fell again to 40.1 versus 31.4 last month and consensus of 35.0. Under 50 signals a contraction.

In spite of prodding for increased consumer spending by the administration, the savings rate climbed again, to 4.2% from 4% in the prior month and up from 0% in April 2008.

ISM for April was 40.1, indicating more declines but still better than forecasts of 38.4 and the 36.3 reading in March. It appears that the inventory correction during late Q4 and Q1 is beginning to correct as orders improve. New orders climbed to 47.2 versus 41.2 in March, and export orders improved from 39 to 44.

The Michigan Consumer Sentiment index for April rose to 65.1, its highest level since September, just before the market collapsed.

First Birds, Now Swine
Stocks reacted negatively to an outbreak of swine flu, apparently emanating from Mexico. The peso broke down. For Mexico, this is a quadruple whammy. First, tourism falls due to a murderous rage going on in the country, then the US falls into recession, oil prices collapse, and now a swine flu outbreak.

Domestically an outbreak like this could further depress travel, although it may help select healthcare stocks providing flu vaccines, treatments and prevention devices such as masks. Joe Biden (for those who don’t know, he’s the Vice President whose foot in mouth speaking style is beginning to make W look like Disraeli) made comments on TV this week encouraging people to avoid travel and public places.

Hickey and Walters (Bespoke) wrote “The 1918 Spanish Flu was a global flu pandemic that affected nearly half of the world's population at the time (or up to one billion people). The 1918 outbreak was the worst of the 20th century, and it fell under the H1N1 virus subtype, which is the same subtype as the current swine flu outbreak. It's estimated that the 1918 flu killed anywhere from 20 million to 100 million people, which would have equaled a mortality rate of 2.5%-5% of those infected.

The 2009 swine flu is still new to the public, but it is beginning to stoke fear since 152 people have died from it in Mexico as of now. The current swine flu is nowhere near as bad as the 1918 flu pandemic.”

Mexico City officials estimate they are losing $85 million in economic activity per day, and that activity is down 30% since April 24th. A big problem has been absenteeism, people just not showing up for work.

The Little 2
GM opened the week with a $27 billion debt for equity swap in an effort to avoid bankruptcy proceedings.

Aiming to give Chrysler a "new lease on life," U.S. President Barack Obama put the troubled automaker into what he hopes will be a quick restructuring in federal bankruptcy court. The action all but guarantees that Chrysler's future will be guided by Italian automaker Fiat, which pledged to form an alliance with Chrysler despite the bankruptcy filing. Talks reportedly broke down as a small group of debt holders were the obstacle to securing a deal as they held out for a better deal from the U.S. government. Four banks with 70 percent of Chrysler's $6.9 billion debt had agreed to erase it for $2 billion, or less than 30 cents for each dollar held. That left Chrysler's fate in the hands of about 40 hedge funds with about 30 percent of the debt. To entice the hedge funds into going along with the banks, the government on Wednesday afternoon added $250 million to the $2 billion that the banks had settled for, while the funds asked for an additional $250 million.

All this tussling over a company which just announced sales down 48% for the month.

I don’t want to sound cynical, but is anyone else just a bit concerned that the largest contributors to the 2008 election really seem to be making out in the nationalization of the financial system and the auto industry? Last week I discussed Goldman Sachs and Citigroup being the largest political donors of the past 20 years (along with AT&T). What about the UAW? This “non-political” organization was a major Obama contributor, and now in what appears to be a quid pro quo, the Administration has proposed taking a major equity stake in both GM and Chrysler, giving a huge stake to the UAW, and cutting out secured debt holders!

Barron’s provided some analysis of the two deals as proposed by the government:

Chrysler: Banks in the 1st lien position get $.29 on the dollar; Cerebus and Daimler in the 2nd lien position get zero, the US government in the third lien position gets 8% of the company, and the unsecured UAW gets 55% of the equity and a $4.6 billion note.

GM: Banks in the fist lien position have an uncertain recovery, the government’s first lien position gets 50% of the equity, unsecured bondholders get 10% of the equity (their stake is 50% greater than that of the government), and the unsecured UAW (with a stake 1/3 smaller than the unsecured bondholders) gets 39% of the equity.

This government action reminds me of the early days of FDR when he asked for and received the power to “reapportion private wealth and income throughout the nation, in his own judgment.”

Look out healthcare!

Shipping Costs
Shipping costs, which fell from a peak of $177K per day last July to $7K per day in mid-April, are expected to rise soon. Single hulled tankers will be banned beginning next year, which would remove approximately 20% of the global fleet from the market. The catch is that funding isn’t available to complete production of the replacement ships. Most of the orders in the pipeline (141 out of 143) are being built by shipyards in S. Korea, China, and Japan.

Hickey and Walters (Bespoke) write that the Baltic Dry Index is used to track the globalization trade, as it measures the supply and demand for the shipment of goods around the world based on transport costs. The Baltic Dry Index (see chart below) has had some big ups and downs this year, going on multiple winning and losing streaks. This year alone, the index has had a 17-day winning streak, a 21-day losing streak, and it's currently on another 9-day winning streak. The trend in 2009 has been upward, however, as the index is up 145%. And it's still important to remember that we're working off a very low base after the globalization bubble burst last year. The index is still off 84% from its highs in May of 2008.

We haven’t had a “Duh” section for a while, but this week the government gets one for stating the obvious. The “stress-tests” for banks are suggesting that Bank of America and Citigroup may need additional capital.

The fact that we send our tax dollars to the people in Washington so that they can create irrelevant processes which eventually allow them to tell us what we already know helps clarify why we fought for independence 250 or so years ago.

According to BCA Research, China’s economy may be rebounding. “The export sector remains the weakest link in the economy but the government-sponsored infrastructure construction boom has been quickly gaining momentum, partially offsetting collapsing external demand. Credit expansion, fiscal expenditure and capital spending have all accelerated strongly, and industrial production has also stabilized. Importantly, consumer spending has remained reasonably buoyant, rising at a more than 15% annual rate in real terms during the past quarter.”

The BCA estimate (see graph below) points in the same direction as the PMI, leading them to conclude that “although there is still no ‘all-clear’ sign, the Chinese economy may have reached an important bottom and should gradually recover throughout the remainder of this year.”

Because it is so heavily dependent upon exports, particularly to the U.S., China can't return growth to its economy on its own, says China's minister of commerce, Chen Deming. He said the economies of the entire world, and particularly the U.S., must improve before China's economy can recover.

Investors have been spooked by the deal for the IMF to sell 403 tons of gold, at a time Indians, traditionally the most reliable buyers, are on strike. That 500 tons of scrap gold has come to the markets this year is a bad news/good news story: it’s a huge amount for markets to absorb, but it proves anew that gold is a precious asset in tough times. Gold stocks should really shine when the dollar finally falls, and people begin to get genuinely worried about inflation’s return.

What the?
We’ve discussed the inflationary impact of the Fed’s actions many times in this note. Ben Bernanke is now saying that once they recognize that the economy has turned, they will begin offering interest on bank reserves to encourage the banks to hold excess reserves instead of lending.

Are you kidding me??? Let’s analyze that comment.

The Fed is going to time the change in the economy? Isn’t this the same Fed that didn’t recognize we were in a recession until 10 months after it started?

The Fed has been pouring money into banks to encourage them to lend, and when activity starts picking up they’re going to encourage the banks not to lend? What banker is going to avoid making a loan and earning the associated fees so they can leave their assets in an interest earning account?

Fed Borrowing
The Fed banks are holding total capital of just $45.7 billion against the sum total of $2.19 trillion in assets, meaning the Fed is leveraging its capital 48-to-1. That compares to only 27-to-1 two years ago.

Government Borrowing
In the second quarter, the U.S. needs to borrow $361 billion, a new high for the April-to-June period and the third straight quarter of record borrowing, the Treasury Department said. The government's latest projection of the federal deficit for the budget year ending Sept. 30 is $1.75 trillion, almost four times last year's figure of $454.8 billion, which was itself an all-time high.

Real Estate
Mortgage delinquencies increased to a seasonally adjusted 7.9% of all loans in the fourth quarter, the highest in records going back to 1972, according to figures from the Mortgage Bankers Association in Washington. Loans in foreclosure rose to 3.3%, up from 2.0% from a year earlier.

Stress Tests Not So Stressful
From The Big Picture: Of the many issues that arise via the banking bailouts we have seen, perhaps the most pernicious is how corrosive the process becomes. It corrupts even the most well intended parties. The latest example is the stress tests, which run the risk of being window dressing. As noted last week, the Stress Tests themselves weren’t very stressful. And, now that some of the results are coming in, the cure for inadequate capital is not more capital, but an accounting trick — converting preferred stock to common. As Paul Kasriel of Northern Trust described it, this amounts to nothing more than Accounting Alchemy — the financial equivalent of lead into gold. Thus, we see the major test for the sector was inadequate to cleanly identify potential weakness. And even by that soft standard, the cure is inadequate. US banks are suffering a solvency problem, and what they need is more capital, not an accounting sleight of hand. Yet that is precisely what they are getting — the same clever financial engineering that led to the crisis in the first place. All Treasury needs is more leverage and a few derivatives and the transformation into the financial Borg will be complete.”

More Stress Test
From Bloomberg: “At least six of the 19 largest U.S. banks require additional capital, according to preliminary results of government stress tests, people briefed on the matter said. While some of the lenders may need extra cash injections from the government, most of the capital is likely to come from converting preferred shares to common equity, the people said. The Federal Reserve is now hearing appeals from banks, including Citigroup Inc. and Bank of America Corp., that regulators have determined need more of a cushion against losses, they added.

By pushing conversions, rather than federal assistance, the government would allow banks to shore themselves up without the political taint that has soured both Wall Street and Congress on the bailouts. The risk is that, along with diluting existing shareholders, the government action won’t seem strong enough.”

All this goes to show is that receivership was the correct approach to this in the first place. Instead, we get “Gentleman B” stress tests and nonsense accounting gimmicks. The Treasury and Federal Reserve can no longer be considered honest brokers of the process. They too have been corrupted by the ugly process of rationalizing insolvent banks ongoing existence.

A/D Line
The advance/decline line climbed to its highest level of 2009 this week, a sign to technical analysts that the Standard & Poor’s 500 Index may keep rallying after jumping 30 percent since March 9. The measure added 2,031 points, or 8.1 percent, to 27,210, the highest since Oct. 6. The increase represents the difference between the number of NYSE stocks that rose and fell. The index was set at zero in August 1996.

The Best Way to Rob a Bank is to Own One

The comments below are from former S&L regulator turned author William Black: “I think, first, the policies are substantively bad. Second, I think they completely lack integrity. Third, they violate the rule of law. This is being done just like Secretary Paulson did it. In violation of the law. We adopted a law after the Savings and Loan crisis, called the Prompt Corrective Action Law. And it requires them to close these institutions. And they're refusing to obey the law.

So, now we get in trouble, and what do we do? We adopt the Japanese approach of lying about the assets. And you know what? It's working just as well as it did in Japan.

The Bush administration and now the Obama administration kept secret from us what was being done with AIG. AIG was being used secretly to bail out favored banks like UBS and Goldman Sachs. Secretary Paulson's firm, that he had come from being CEO. It got the largest amount of money. $12.9 billion. And they didn't want us to know that.”

Treasuries continue experiencing one of their longest losing streak ever, falling again in the face of massive refunding needs. The curve continues to steepen (see below) indicating either pending growth and/or inflation. Personally I think the move is reflective of future inflation caused by debasement of the dollar.

High Yield
High yield debt has rallied as treasuries have fallen, certainly in line with the wishes of the Fed as they have attempted to encourage risk taking by forcing treasury yields so low as to make them unattractive. The chart below (Bespoke) shows the high yield ETF (HYG) and how it compares with the 7-10 year treasury ETF (IEF). As you can see, the HYG has rallied, signifying smaller risk premium for high yield debt. These types of moves in corporate credit markets typically lead or coincide with better equity market performance. However, these types of declines in treasuries often coincide with equity market declines.

$100 million in Savings
Please go to to see a 60 second video providing an interesting and entertaining example of how the proposed and much ballyhooed $100 million cut the President discussed compares to the entire budget.

Earnings will continue this week. I am looking to continue rotating into higher quality positions as well as to lighten up on my overall net exposure. The risk, as always, is a continued low-quality move to the upside.

Have a great week.


“I am remaking America”, Barrack Hussein Obama on his 100th day in office.