Tuesday, July 27, 2010


The bulls are frustrated, the bears are frustrated. The S&P is up 100 pts to 1120 since July 1, after falling 100 pts from Jun 21 - Jul 1. These are big moves 8-9% in weeks. Why. Well we had terrible economic data towards the end of June that gave us 9 out of 10 down days, everything from bad payroll, weaker ISM, lousy retail sales, etc. Then from the middle of July on we had terrific earnings news. They beat their numbers bottom and top and raised full year estimates while giving optimistic guidance.

This points out a great divergence. The S&P 500 which is the stock market to most of us, no longer correlates to the US economy, at least not like it used to. We've got almost 10% unemployment, two months of declining retail sales, new home sales at the second worst level since 1963, and companies are reporting earnings like its early 2008, and expected to do $92 in 2011 for a new record.

Those bears who correctly predicted this wave of dismal economic statistics, were completely blown out by this 10% rally. S&P 500 companies get almost 50% of their revenues internationally. They can cut to the bone in the US and ride the wave of demand in Asia, Europe and Latin America, which is exactly what they have been doing. Sure, if we fall off the table like we did in 2008, everything will go down, but look how well they are doing when we are just bouncing along the bottom. Forecasting the US economy is no longer forecasting the S&P500, except in the very long run. Yes our weakness should manifest itself in China and Europe and loop back to weakness for our multinationals, but that is taking some time.

Wednesday, December 16, 2009


From a high of 100 on Oct 8 2007 to a low of 1.81 on Mar 02 2009, back to 10.35 today what a ride. With the opening of City Center, MGM expects to get it's mojo back. How?
Why is a residential development expected to draw visitors. Yes I know it has a few nice hotels. Who goes to look at apartment buildings. There is no volcano, no pirate ship, no fountains or circus. This is a mystery to me.
To put that much new living space on the market in the epicenter of the real estate debacle is insane, but then they have no choice. They have already cut asking prices by 30%.
Also, does the strip need 3 more casinos and hotels. Not to mention all the supply in Macau and the new casino in Singapore coming on line. More states are also turning to gambling to close budget deficits. Alas, vegas is no longer unique or forbidden as it was in the days of my youth.
Kirk Kekorian doubled down. At his age and wealth I wonder why he bothered. Well prince or pauper we'll soon find out.

Wednesday, December 09, 2009


It seems we have reached a stalemate in the markets as of late. Today we closed at 1095.95 in the S&P. A month ago 11/10/09 we closed at 1096.42. In between we have been as high as 1118 and as low as 1085, a 33 point range or about 3%. Just eyeballing the charts, we haven't gone sideways for this long in years. The forces of good and evil seem well balanced at the moment.

The bulls see continuing economic improvement. Unemployment claims are falling, job losses diminishing, stronger car sales, improving home sales and stronger growth overseas. China's PMI up to a record 55.7 and India's GDP up 14.6%. In addition, the bulk of the stimulus package is still to be spent, oil prices are falling, zero interest rates, low inflation and mortgage refi's liquefying consumer balance sheets are supportive.

The bears are an august group not to be taken lightly, Mauldin, Roubini,Hussman,Grantham, Smithers, Comstock, Rosenberg, Pimco and Prechter.Who wants to bet against them. Some of their arguments are: The economic rebound is tepid and won't last. The markets are overvalued. That the market is pricing in a recovery to peak earnings and peak profit margins. Volume is weak. Credit availability not improving. How can consumers spend when their credit lines are being reduced. Commercial real estate problems still ahead of us. De leveraging, debt reduction takes a long time.

The ying and the yang. The rally started with 2nd derivative improvements, the less bad and moved to absolute improvements, like the PMI's moving above 50. Companies made their numbers through tremendous cost cutting. They seem to indicate that they can hit their numbers going forward with the current level of demand. In that sense they are better off than main street who can't fire themselves to cut costs. But then we have Dubai and Greece. So which way do we break?

The news has been mixed lately. The non-manufacturing PMI was a disappointment, so were chain store sales, but payrolls were a great surprise.
That's why we are at a stalemate. The first leg of the bounce is over and the ride gets more bumpy from here. The numbers haven't and won't show clear uninterrupted trends.We won't have a V shaped recovery nor fall back into recession. Companies have adjusted to the current level of economic activity as well as the 80% of the working population that has jobs. Perhaps what the market is in for is a period like 2004 where the S&P traded between 1060 and 1160 from January to mid November. Most of the time it was between 1080 and 1140. That makes this months 30pts look huge. In other words, without a crises, we just muddle along.

Sunday, November 30, 2008


This weeks post will be short and sweet lest I become too redundant. Biggest 5 day rally since the 30's, even though the news continued atrocious. New homes sales lower as well as prices, durable goods down 6.2%, personal spending -1% and it's not going to get much better. But the market was deeply oversold and more importantly the mother of all fiscal stimulus packages is coming. The bad news is in the rear view mirror and being ignored as consensus over the stimulus package grows. If you recall, the last stimulus package gave us a quarterly growth rate of almost 3%. This one is going to be much bigger. It will buy us a temporary respite. Is it the right thing to do? That is a different question. The market will probably meander in a range of 800-1000 in the S&P. Bad news will be absorbed as good news is coming. Volatility will decrease. The next big leg will not come until we see if the next administration's policies turn things around or otherwise.
Good trading -till next week.

Sunday, November 23, 2008

We keep making new lows. Maybe Thursday was the washout. We finally broke the 10/10 lows and the 2002 lows. I don't think it is the final bottom. It might be a short term bottom perhaps even a intermediate bottom but not the final bottom. My reasoning is simple. This is much much worse than 2002 in every metric you want to measure, so I think the stock market low will be lower. How much lower? If we go into a depression which I don't believe we will, I don't think we will fall the 86% we fell in the thirties. We have an active Fed and government that we didn't have then. We are a much less manufacturing economy now. We have FDIC insurance and a wide range of social safety net programs we didn't have then. So I think the low will be somewhere between the 50% we are down now and the 86% we were down then. For lack of a better crystal ball, lets take the middle, which is roughly 68% and translate to an S&P of 500. Yikes! Seems improbable but consider we hit a high of 1007 on election day and Thursdays low was 746. That occurred in less than 3 weeks!

The problem in trading is how to turn prognostications into profit. That depends a lot on not on how right you are but on figuring out how the market will get there, what will all the twists and turns be. You can't be too early, you can't be too late, you can't get whipsawed. You have to be right within all the proper risk controls with a meaningful position. The speed of the move lower from 1255 on Sep22 to a low of 750 last Thursday Nov20, less than 2 months 43 trading sessions 500 S&P points certainly caught me off guard. Took profits too early. That's the problem going forward. Will we just continue to fall or bounce or trade sideways until the final low has been made. It is certainly difficult to commit new funds to the short side at these levels. The only confidence I have is to sell any rallies that get back to the 1000 level and to sell out of the money calls in the stocks of your choice as deflationary recessions do not end quickly. When and at what price we do hit bottom at, I think we will languish there for quite some time as the market goes through a period of apathy.

Saturday, November 08, 2008


Well. we have a new president and hope springs eternal. We have a bunch of problems and the hope is Barack has the solutions. Now the auto companies and insurance companies have their hand out. Pelosi wants to pass another stimulus bill even though its pretty much agreed that the first one did not work. Jobs and consumer spending are falling off a cliff and everywhere, everyone feels the need to take some kind of action. Infrastructure spending is the new cry. Eventually, most will come to the realization that there is no quick fix that will return us to the prosperity we just so recently enjoyed. Has everyone forgotten? Governments cannot legislate prosperity. They can only foster conditions for it at best. That does not stop them from trying. They have to get re-elected after all.

We need to step back a moment and consider how we got here to evaluate possible solutions. I believe three major secular trends contributed to where we are today and are not being discussed in terms of finding solutions to our current crises.

The first major trend of the last 15yrs, discussed often and in depth by Stephen Roach of Morgan Stanley has been the migration of jobs to the emerging economies as a result of labor arbitrage, as Roach calls it. This has led to the hollowing out of our industrial base, our huge trade deficit, and our stagnant wages. So first and foremost we have to protect any jobs we still have left while we try and create new ones. If that means bailing out the automakers so be it. Look, just like energy, where we are engaging in an enormous transfer of wealth that is unsustainable, if we lose our domestic auto industry , we will have another major transfer of wealth, mainly to Asian countries getting or auto money while the middle east gets our oil money. The point is. we can not buy everything we need from someone else. We have to pay for it. We earn it or we borrow it, and we're already in hock up to our eyeballs.
I think Obama has got this figured out. He seems to want to accommodate the automakers and he describes himself as a fair trader not only a free trader. So I think he will try to hang on to some jobs that would otherwise go overseas.

The second major trend has been the inexorable decline in the savings rate, year after year after year. Savings became passe over the past quarter of a century as first stocks and then our homes values marched inexorably higher. Why do you need savings when your getting 500 credit card offers a year. There are many reasons that have caused the age of thrift to vanish, down payments to become a thing of the past. Saving up for something-how quaint. But here, let it suffice to say we are at zero.

Third and most important, has been the rise of debt. In 1981, total credit market debt was about 5 trillion with GDP of about 3 trillion, by 2002 debt had grown to 31 trillion while GDP had only grown to 10 1/2 trillion. Debt was 3 times greater than GDP. As a comparison, in 1930 debt was about 2 1/2 times GDP the all time high until 2002. Since 2002, it has only increased with all the war spending adding billions to the debt and the recent bailout spending will cause this to accelerate and explode. It was of course the final folly of extending credit without any due diligence to those who couldn't repay that was the spark that lit the fuse of the sub-prime crises that has spiraled into what we have today.

To recap, the housing market starts to crumble as teaser rates are reset and the first defaults occur. Housing prices stop rising, inventory increases, adjustable rates are reset, the spiral continues. When prices continue to fall that undermines all the securities and derivatives associated with mortgage securities, causing catastrophic losses for holders of those instruments. The consumer whose real wages have been stagnant for a decade and whose net worth is mainly held in his home which has declined by 20% is also hit with stock market losses of 40%. As a result the economy weakens, job losses rise and without any savings to fall back on it becomes harder for Joe consumer to pay his bills. Mortgage, auto loan, and credit card delinquencies increase creating a negative feedback loop. Pretty scary stuff.
Many people compare us to Japan. At least the public had savings to ride it out. When unemployment benefits run out, what will happen then. As far as infrastructure spending goes, I remember Japan approving one supplementary budget after another building roads to nowhere. All it got them was the highest government debt to GDP ratio in the developed world.
At which point they had to stop.

As I said before, the government cannot legislate prosperity. It also cannot make the ramifications of living beyond our means for decades go away. Look at all the programs FDR put into place during the depression and unemployment was still 20% in the mid thirties. The public needs to fix its balance sheet. Debt can only be repaid or not. To help repay debt we have to keep and create as many jobs as possible. We have to buy time for people to pay their bills by extending unemployment insurance and enacting some type of mortgage help. Some one will have to break the bad news that sacrifice and belt tightening will be necessary, a message not heard since the war. Debt reduction and saving will become the watchwords. As far as not paying debt, some kind of liberalization of the bankruptcy laws might be in order to help people get a fresh start. Debt deflation's and deleveraging take so long because it is so hard to reduce debt service with diminished revenues and low asset prices. Finally, government Manhattan projects, that lead to innovations that create new industries and new jobs in which we can lead.

Sunday, March 16, 2008


I have been a free trader for most of my career, and I still believe free trade works in the long run. By the long run I mean a generation. In the short run there are clearly big winners and losers. This administration and this country has been oblivious to the para dime shift that has been occurring.

Trade is a heated issue. With all kinds of pro and con arguments. Trade costs jobs. Trade creates jobs. Trade allows us to buy cheap manufactured goods, trade opens up markets for us. We've all heard them to the point where people can't distinguish between the forest and the trees.

To me the test of whether trade is good or bad is simple. Follow the money. When you play monopoly, at the end of the game the winner is the one with all the money, hotels and houses. In terms of trade China has all our money, almost a trillion in reserves, and they are be able to buy our hotels , houses , companies and resources. This is not rocket science. We borrow and spend, and they save and invest and sell. This is a transfer of wealth at a speed and magnitude never before witnessed. We have tun trade and current deficits on a scale never before seen by any country in the history of the planet. When you have two billion people increasing their living standards as rapidly as has been occurring over the last two decades only a fool can think its not coming at some one's expense. Together with the transfer of wealth that is occurring to the oil producers and the cost of the war it's no wonder we are going broke.

What should have been done and still needs to be done, in my opinion is to have trade policies that slow this thing down. So that this monumental shift can take place over a greater length of time. We need to buy time to adjust to compete with these low wage behemoths without health care or environmental constraints. We need to keep jobs and dollars circulating in this country rather than sending them abroad. We should provide ourselves some time to fix our health care system retrain our workforce change our economic policies away from consumption to savings and investment, instead of allowing ourselves to be pillaged.