The Daily Stox Report

2009-11-09T08:30:00.000-06:00

We opened up about 35 on the Dow.

Futures

2009-11-09T06:04:00.000-06:00

Dow futures are +85. Gold is +12 to $1,108.

2009-11-06T09:34:00.001-06:00

Watch for Mid-Day Weakness
By Rev Shark
RealMoney.com Contributor
11/6/2009 10:33 AM EST

The thesis I stated this morning was that the dip-buyers would buy the pullback on the employment news and take us into the green but that they would struggle to gain further momentum. We have the green on the screens, and now we'll see if the buyers have the juice to keep on chasing them higher.
I've made a couple of smaller buys, but I'm having a very difficult time finding new long setups that I like. We have a lot of broken charts with big bounces back to resistance that look more like potential shorts than buys, but obviously this is a market in which shorts get little respect.
I think we have the potential for the market strength to fizzle, especially as the bulls become overly euphoric about how wonderful everything is, although the jobs report really wasn't so hot. The market has had a tendency for mid-day weakness lately, and I'll be watching for that pattern again.

2009-11-06T09:27:00.000-06:00

Goldilocks, We Hardly Knew Ye!
By Ron Insana
Portfolio Manager
11/6/2009 10:11 AM EST

Just yesterday, the market surged on a jump in productivity and declining jobless claims. This morning, a slight miss on the October employment report and we're set to tumble once again.
As I have said in recent radio reports, this market has all the emotional stability of John & Kate Plus Eight!
When combing through October report, it is not as bad as the market response would suggest. True, the unemployment report has jumped to 10.2%, the highest since April 1983. And the economy lost 190,000 jobs.
Still, prior months were revised upward, making the three-month average show improvement.
What today's data reinforce is the notion that the Fed is on hold for the foreseeable future, an argument I have been making for months, despite numerous protestations among the inflation hawks to the contrary.
Stock-index futures are pulling back, though I wouldn't be surprised to see a rally by the end of the day, given the market's recent history.
What is most interesting is the new and pronounced divergence between gold and oil. Gold is closing in on $1,100 an ounce, while oil is dropping more than 2%.
The break in the oil-gold linkage underscores another point I have recently made. Gold is rising as a safety play, or a hedge against financial or paper assets, not as a harbinger of future inflationary pressures.
This is a key distinction that gold bugs simply refuse to make, suggesting that gold is discounting hyper-inflation that will eventually, some day, some way, result from the Fed's accommodative monetary policies.
This is simply not the case, otherwise all commodities would be following gold's lead. Soft commodities, like grains continue to collapse amid bumper harvests, while other raw materials prices are advancing on faux Chinese demand. (Stockpiling commodities is not the same as using them. The Chinese may be spending money on importing raw materials, but it does not mean there is end-user demand for the goods. Simply consider Beijing a "buffer stock manager" for the world's industrial metals.
(By the way, when I first started in financial journalism, there was a "buffer stock manager" who was charged by international governments to control, or manage the world supply of tin -- as his job. He would add or remove tin from world supplies to maintain a steady price for the metal. His ability to maintain prices diminished and the effort collapsed in October of 1985, leading to a collapse in the price of tin. Don't think it can't happen again without a fully fledged worldwide economic recovery to support prices of key commodities! But that is really another story for another day!)
As I write, the stock market is clawing its way back toward unchanged, pre-open, as investors realize that trendline improvement in employment should, according to economist Robert Barbera, quoted on CNBC this morning, produce positive jobs numbers by the spring.
Goldilocks took a two-year walk in the woods. She was sighted walking down Wall Street yesterday, scaring the bears away.
The bears may be back for the moment, but Goldilocks seems to have gotten her mojo back, today's data notwithstanding. I'd expect the bears must be wondering who was sitting in their chairs, yesterday. They may find a waking and more confident Goldilocks in the days and weeks ahead. Main Street will spot her about 6-9 months after the bears departed Wall Street ... also just as the flowers start to bloom.

2009-11-06T08:39:00.000-06:00

Ignore the Jobs Report? Not I!
By: Doug Kass
thestreet.com
11/6/2009 9:24 AM EST

The jobs report is a bad report -- let the talking heads and investors/traders who worship at the altar of price momentum disregard it or rationalize it away.
But I won't, because in the fullness of time, fundamentals always trump the market's price momentum.
The prices on Wall Street remain ahead of the conditions on Main Street. The increased certainty and consensus of a smooth and self-sustaining economic recovery as well as a $72-$73 a share in 2010 S&P earnings should be tested in the period ahead -- in all likelihood, the unemployment rate will remain elevated at levels far higher than assumed by most. And with this will likely come disappointing personal consumption expenditures and higher savings, and, most important, lower-than-expected business confidence, expenditures and profits.
I remain of the view that the U.S. is experiencing a structural change in employment in the current cycle. (Just speak to company managements (as I do every week) and ask them what their hiring intentions are -- even if the revenue delta improves.)
Today's report showed a 55.1% structural loss of jobs not coming back, duration of unemployment was at a high of nearly 27 weeks and temporary workers experienced its largest jump in two years.
I wanted to repeat something I spoke about on "Fast Money" Monday night and that I wrote as a follow-up, in my opening missive on Tuesday morning:
It is truly is different this time.
America is about to experience a transformation from a nation with debt growing faster than incomes to a nation in which incomes will grow faster than debt. And it's not because incomes are growing especially quickly. They are not; they are trending lower. It is because of the expected large contraction of consumer debt, and the great debt unwind is the obvious byproduct of the credit crunch just passed. Past cycles, businesses have consistently been the driver of consumer incomes and spending.
I learned in my economics classes at Wharton that this phenomenon is known as Say's Law of Production. Say argued:
against claims that business was suffering because people did not have enough money and more money should be printed; and
that the power to purchase could be increased only by more production.
But -- and this is the big BUT -- over the last century, the consumer was in far better health than today.
Consider the following facts:
In the past, corporations didn't engage in the draconian cost-cutting that they have embarked on in the past several years.
Globalization wasn't the mainstay condition that it is currently, so previously we didn't see the wage deflation and the magnitude of the decline in disposable incomes present today.
Finally, consumers were not as tightly wound and leveraged in any of the previous cycles. Just look at the record level of household debt relative to incomes that exists today.
As a result of the above factors (and others), the U.S. currently has 10% unemployment, and if you count in part-time workers that can't get full-time jobs and those that have given up looking, the number almost doubles to one-fifth of all Americans. The consumer is in dire straits, and, for the first time in history, it is the consumer that is going to drive business' growth, expansion plans and confidence, not vice versa.
Sorry, monetarists and optimists, Say's Law might be dead -- and we face a structural rise in unemployment that the markets have not yet accepted.

Strong Close

2009-11-05T14:58:00.000-06:00

We closed at session highs; the Dow is now back above 10K. This makes
for an interesting set- up in front of the jobs number tomorrow.

2009-11-05T12:10:00.000-06:00

Is Another V-Shaped Bounce Afoot?
By Rev Shark
RealMoney.com Contributor
11/5/2009 12:16 PM EST

Once again, the market is seeing some midday selling. That has been another recent change in patterns that is a bit troubling. The selling of "good" news, the disappearance of pockets of strong momentum and the less-aggressive dip-buying are other developments that have given this market a more bearish tinge lately.
On the other hand, we have very positive breadth today, and it sure looks as if a lot of folks were caught unprepared for this strength. The problem is that trusting that this is another V-shaped bounce just like those at the beginning of September and October is a very tough call, especially with the jobs report pending tomorrow.
Right now it looks like the exact same pattern that we have seen the last two months. We sell off sharply and look ready to gain downside momentum as the month starts, but the buyers make a stand and send us straight back up. As I've commented, that is not what you normally expect to see technically, but it has happened consistently in this market.
So the million-dollar question is whether the pattern of V-shaped bounces to start the month continues or whether we stall out as we run into overhead resistance. I have to stick with the charts and question how easily we can go straight back up, but this market has made those who stick with a disciplined approach look foolish. It could easily happen again.

2009-11-05T08:49:00.001-06:00

In the week ending Oct. 31, the advance figure for seasonally adjusted initial claims was 512,000, a decrease of 20,000 from the previous week's revised figure of 532,000. The 4-week moving average was 523,750, a decrease of 3,000 from the previous week's revised average of 526,750.
source: US Dept. Of Labor
http://www.dol.gov/opa/media/press/eta/ui/current.htm

2009-11-05T08:42:00.000-06:00

More Insider Arrests on the Way?
by: Doug Kass
thestreet.com
11/5/2009 9:34 AM EST

The new insider trading arrests announced this morning broaden the scope of the FBI's investigation. My sources say this is the "tip of the iceberg" -- that many other hedge funds and corporate insiders will be claimed by the illegal trading probe that commenced with Galleon.
This has the potential of being an important market and corporate event (and not just for the perpetrators!).

2009-11-05T08:27:00.000-06:00

Those Damn Yankees
By: Doug Kass
thestreet.com
11/5/2009 8:18 AM EST

We have all come to expect three things to be true:
Equities have a tendency to rise: U.S. stocks have typically risen (at an average annual rate of between 8% and 9% over the course of the last century).
The New York Yankees have a tendency to win championships: The New York Yankees baseball team often win the World Series (as they did for the 27th time in history last evening).
Whatever Lola wants, Lola gets! That said, stocks don't always rise (as we witnessed in 2008 and early 2009), and the New York Yankees don't always win the World Series. Often, though not the majority of the time, stocks stumble. Stocks can drop for many reasons -- business conditions may weaken, credit sometimes tightens up, cost pressures can rise and profits can dip. Stocks can even drop during prosperity and expansion because the market occasionally runs ahead of the fundamentals.
And the New York Yankees don't always win the World Series. Often (though fortunately not too often!) injuries plague the team, the coaches make poor decisions on the field and the general manager makes ineffective personnel decisions.
So what the heck's the use of cryin'? Why should we curse? We've gotta get better, 'cause we can't get worse! -- Damn Yankees, "Heart"
Which gets me to last night's "Mad Money" show, which began with a rant by Jim "El Capitan" Cramer against the bears and their negative market script. Jim contends that bears "always think the world is coming to an end, but all they really do is cause you to miss out. ... Listening to these bears is a great way not to make money."
While I recognize that Jim was being hyperbolic in making his point, there are times to be overweighted, underweighted or neutrally weighted in stocks. My experience is that both permabulls and permabears tend to be headline makers, not money makers. Well constructed and rigorous views (whether bullish or bearish) should always stand on their strength of argument, not on the attention they can grab. So I agree, in part, with Jim -- the Cassandras are useless ... but so are the many Sunshine Boys and Talking Heads who have a highly visible profile and platform in the business media who never saw a stock, a market or an economy they disliked. From my perch, the investment scene is far more populated by the optimism projected by the permabull cabal than by the bears.
Unlike Jim, when the markets drop, I see no conspiracy perpetrated by the short-selling of permabears -- rather, the market's price is a collective view of an auction market at any one point in time. And when the markets rise (in opposition to the contentions of the bears), there is no conspiracy perpetrated by the long buyers, or permabulls -- again, it is a collective view of price by market participants.
Ugh! Who's got the pain when they do the mambo? Who's got the pain when they go "Ugh"? Who's got the pain when they do the mambo? I dunno who -- do you? -- Damn Yankees, "Who's Got the Pain?"In the defense of the short-term bear case, I and others on the site (like Dr. Bobby Marcin) have recently argued that the world's equity markets face numerous intermediate-term and structural challenges and that expectations for corporate profit growth, personal consumption expenditures and economic activity still remain elevated. (Until those expectations are brought lower, we argue, further upward market progress may be difficult). And I and others (like Rev Shark and Helene Meisler on RealMoolah have also identified signs of deteriorating technicals that probably shouldn't be ignored either.
Critical analysis and skepticism are the lifeblood to successful investing. My experience, as I made the case in a 2008 Financial Times editorial, has been that, bears sometimes have some important things to say -- especially into economic inflection points!
Regardless, the key to delivering superior investment returns is being permanently flexible -- in weighing the assets and liabilities of Mr. Market's health and well being.
I am sensitive to this issue of being a permabear. Ever since I wrote a critical cover story in Barron's in 1992 on Marvel Entertainment (the company went bankrupt within two years (and again and again over the next three years!)) and after The Wall Street Journal's "Heard on the Street" column gave me the moniker of "The Bear of Boca" back in 1994, I have followed up with a number of Barron's interviews (with my favorite financial writer of all time, Mr. Alan Abelson) and wrote some additional stories and editorials in Barron's (mostly all bearish on companies, industries and economies!). Since then, many (such as Sir Larry Kudlow) consider me a permabear. While over the years I have enthusiastically taken the role as one of the Dark Side's standardbearers, in reality I am an opportunistic investor who recognizes that money can be made on both sides of the pew.
You gotta know just what to say and how to say it You gotta know what game to play and how to play it You gotta stack those decks with a couple-a extra aces And this queen has her aces In all the right places! -- Damn Yankees, "A Little Brains, A Little Talent"
I am a hedge fund manager -- in the game to make money for my investors. I am not in the game to be steadfast, dogmatic and inflexible.
This morning's advice is, above all, to stay committed to your decisions, be rigorous in your analysis, stay flexible and be skeptical in your approach.

2009-11-04T10:47:00.001-06:00

Meredith VS. Dick
By: Bob Marcin
thestreet.com
11/4/2009 11:45 AM EST-->-->

I am sticking with Meredith on the negative call for banks. Wait, now Dick [Bove] is on the same page as Meredith too. Bank stocks too dicey for me when both big guns see significant problems. Run, don't walk to read her piece on the mess the Fed's $1,200,000,000,000 purchase of agency/mortgages is for the banks at unwind time. It's when, not if, rates rise from the Infinite Monetization.
In order to mitigate the Great Unwind today, the Fed/Congress is positioning our economy for lower growth, higher inflation, higher interest rates, and a lower dollar over the intermediate term. Now, many are cheering the Infinite Intervention, in the next year they might get and regret it.

2009-11-04T10:43:00.000-06:00

Thirty Years Ago Today
By: Howard Simons
thestreet.com
11/4/2009 11:22 AM EST-->-->

The U.S. embassy in Teheran was seized by a group of militants; some allege current Iranian president Ahmadinejad was part of that group.
Revolutions take a long time to evolve; recall Chou En-Lai's apocryphal response to Henry Kissinger about the impact of the French Revolution on Western civilization, "Too soon to tell."
Given Iran's demographics, common throughout the Middle East, of a very young population skew, it is likely more than 70% of Iranians have no direct recollection of the Shah. Iran's revolution has become institutionalized, much like Mexico's PRI or Institutional Party of the Revolution.
The U.S. has fought two land wars in neighboring Iraq and is in an intractable situation in neighboring Afghanistan. The 19th century Great Game in central Asia continues, and no doubt will draw both China and Indian in to protect their economic interests, principally natural gas supplies and Russia back in to influence the security of those supplies.
In retrospect, the Nixon/Kissinger strategy of making the Shah's Iran our local bulwark failed spectacularly. Given the constraints of cost and political will, it is unlikely the U.S. will be the primary influence in this region, which remains both the central of oil geopolitics and emerging natural gas geopolitics.
But it is too soon to tell.

2009-11-04T09:32:00.000-06:00

Crude oil spikes to its best levels of the day, at $80.97, following inventory data; now up $1.34 to $80.94
Briefing.com

2009-11-04T09:01:00.001-06:00

ADP reports a loss of 203,000 private-sector jobs in October, an improvement from a revised loss of 227,000 jobs in September. The consensus estimate was for a loss of 198,000 jobs, according to Yahoo! Finance.
Source: thestreet.com

2009-11-04T08:51:00.002-06:00

Buffett's Train Bet Could Knock Berkshire's Shares Off-Track
By: Doug Kass
thestreet.com
11/4/2009 8:54 AM EST

To date, Dexter is the worst deal that I've made. But I'll make more mistakes in the future -- you can bet on that. A line from Bobby Bare's country song explains what too often happens with acquisitions: "I've never gone to bed with an ugly woman, but I've sure woke up with a few."
-- Warren Buffett, Berkshire Hathaway Letter to Shareholders (2008)

I always qualify my Berkshire Hathaway (BRK.A) observations, especially when there is some criticism or questioning of strategy involved, by saying that I literally worship the Oracle's body of work, his unprecedented investment success ... and his wealth!
In the past, I have shorted Berkshire when I thought Warren lost his groove, and I have gone long Berkshire when the market was in a state of panic -- both times profitably. I have criticized what I have seen as style drift when he increased his involvement in derivatives (or financial weapons of mass destruction) and I have parodied his high-profile editorial in The New York Times in October 2008, "Buy American. I Am."
Unquestionably there will never be another Warren Buffett, and yesterday's deal will not be a "train wreck," but elements of yesterday's Burlington Northern Santa Fe (BNI) acquisition go against some of his previous tenets and a deeper dive into the Burlington Northern deal and its ramifications are suggested below:

Not Ben Graham-Like. Unlike the Goldman Sachs (GS) transaction and a number of other timely deals over the past year, in which Buffett extracted blood through hefty warrants issuance, Buffett paid up for Burlington Northern (a 30%-plus premium), and he paid a full price of about 20 times earnings.

Offering Berkshire Stock. A hefty portion of the acquisition of Burlington Northern was funded by exchanging Berkshire Hathaway stock. While Buffett has in the past held his equity dear and has criticized himself (see quote at beginning of today's opening missive) for how expensive early stock acquisitions were, Burlington Northern is no Dexter Shoe.

Stock Split. To accommodate the large portion of the exchange of stock, he split Berkshire Hathaway's shares 50-1. Splitting his shares is something he previously cautioned against ever doing. Though the company introduced a lower priced Class B share in 1996, in a letter to Berkshire shareholders in 1983, Buffett stated that investors should be "focused on business results, not market prices." He wanted owners, not renters, in his stock, but the split is likely to result in an intrusion of renters and in great fluctuations in Berkshire's shares.

Berkshire's Cash Hoard Is Now Materially Depleted. This closes the bullish chapter during which Buffett, through a series of well-timed and well-priced deals, had converted a low-yielding $45 billion-plus cash position into accretive and higher earnings yields through portfolio acquisitions. For the time being, there is little more that can be done to buoy Berkshire's returns; it's now up to the world's economies.

One of the clear positives to yesterday's announcement is that Berkshire's shares will become more liquid, and an entry into the S&P 500 now seems inevitable. That said, it should be emphasized that a steady supply of stock will counter the better liquidity offered up through a split and lower share price. The Bill and Melinda Gates Foundation will likely accommodate the renewed interest by stepping up their sales of Berkshire Hathaway stock. As it has previously announced, the Gates Foundation has been selling at a steady pace; the Foundation sold approximately 17,000 "B" shares that in each of the last several months.
On to the negative side of the ledger, given his age (and the growing possibility that Buffett might hand over running Berkshire to his successor sooner than later), the size of the Burlington Northern deal relative to Berkshire's cash position and the scope of the deal (and the need to consolidate Burlington Northern's operations into Berkshire), this is likely the last meaningful deal that Warren Buffett will make.
My conclusion?
As there arguably still remains a Buffett share price "premium," I would now make the case that the interaction of the above factors will lead investors to valuing Berkshire Hathaway more like a closed-end fund (selling at a discount to its underlying or "intrinsic value") and less as the premium and prized possession that it has been over the past 40-plus years.

2009-11-04T08:24:00.002-06:00

Wisco Research initiates Sanderson Farms (SAFM $37.65) with a Buy. The firm notes that the bankruptcy of the nation's largest chicken processor along with the recession has resulted in the most significant decline in chicken supply in over 20 years. However, the firm believes that low supply will ultimately support price and they look for pricing to rebound nicely once demand starts to grow again. Furthermore, the firm notes that unlike their larger competitors, SAFM has not over-extended their balance sheet to grow processing capacity. The firm believes that this has put the co in a position to expand when others cannot
Briefing.com

Futures

2009-11-04T08:03:00.000-06:00

Futures are pointing to a higher open.
Gold looks like it is going to $1,100 and crude is back to $80.

2009-11-03T13:11:00.001-06:00

Extreme Bullishness Simply Isn't Justified Right Now
By Rev Shark
RealMoney.com Contributor
11/3/2009 2:01 PM EST

I'm a bit puzzled by complaints that market players aren't properly bullish in view of the positive news flow we have been seeing. My attitude has always been that it isn't the news itself that is important, but rather the way the market reacts to it. When the market struggles on good news, it is a pretty important indication that maybe we have already anticipated the news and have priced it in. Perhaps the market isn't very bright, but you aren't going to win an argument with it.
Many folks, including me, had a very difficult time embracing the summer's rally, so I don't think it is at all surprising that sentiment is still quite negative now that we finally are acting weaker. Folks never loved this market on the way up, so they certainly aren't going to love it on the way back down.
The easiest way to get in trouble in the market is to be too quick to characterize news as "good" or "bad." When Intel (INTC) reported its earnings a few weeks ago, I don't think anyone would have called that "bad" news, but the market has barely had a positive day since then. Is the market "wrong" in the way it has treating this stock? Perhaps, but I figure I have no special insight, so who am I to argue with the price action?
I'd love to be a wild, raving bull, and if there were a lot of great charts and price action to support that view, then I would be. That isn't the case, so I certainly can understand the rather dour attitude that seems to dominate this site right now. Trying to force bullishness in a market that isn't acting that great isn't a good way to make money.

2009-11-03T08:54:00.001-06:00

The stock market started the session moderately lower and started to trim its losses before another flurry of selling pressure recently knocked it deeper into negative territory. The decline has been broad, but financial stocks are showing the most weakness; the sector is currently down 1.2%, worse than any other major sector... Declines by the financial sector stem partly from a sharp sell off in shares of MasterCard (MA 211.81, -10.84), which posted better-than-expected earnings for its latest quarter and said during its conference call that the worst of economic conditions is behind it and recent data are encouraging. However, the company still doesn't expect any global economic improvement until 2010. With that, the company reaffirmed that it doesn't expect revenue from 2009 to 2011 to grow at its 12% to 15% annual target.
Briefing.com

2009-11-03T08:41:00.000-06:00

Talking Fast With the "Fast Money" Team (Part Deux)
By: Doug Kass
thestreet.com
11/3/2009 9:35 AM EST

Last night, I was on a segment with Melissa Lee and CNBC's "Fast Moolah" team. As always, I had a lot of fun doing it.
Each segment of "Fast Moolah" lasts only about five or six minutes. The pace is quick, almost staccato-like, and there is a time limit to how much one's arguments can be fully explained in order to support one's market conclusions.
I thought instead of summarizing my appearance, as I customarily do, I would expand upon the points I made on the show.
For those interested in watching the abridged, "Cliff Notes" version, here is the tape of last night's show.
I started the show by saying that the investment mosaic always contains positives and negatives. The job we have is to figure out which factors will dominate and for how long a period of time they will serve as an influence.
So I had some good news and some bad news last night.
Not surprisingly, I started out first with the bad news because I believe that, over the short term, the negatives will dominate the market landscape.
Like my buddy/friend/pal, the handsome Guy Adami, I am currently dating "Debbie Downer."
Troubling Fundamentals
America is about to experience a transformation from a nation with debt growing faster than incomes to a nation in which incomes will grow faster than debt. And it's not because incomes are growing especially quickly. They are not; they are trending lower. It is because of the expected large contraction of consumer debt, and the great debt unwind is the obvious byproduct of the credit crunch just passed.
That's why on last Monday's "Fast Moolah," I warned that a hard correction of 5% to 12% from the highs could be ahead of us because the state of the consumer is different this time. Remember, on the week-ago show, I doubted the sustainability of the economic recovery. I felt that investors would look right through the better-than-expected third-quarter GDP print that was so government-dependent and also, upon further thought, would look through the silly earnings beats, which were off of manipulated guidance by corporations' investor relations departments.
If we look at past cycles, businesses have consistently been the driver of consumer incomes and spending. I learned in my economics classes at Wharton (like Karen Finerman) that this phenomenon is known as Say's Law of Production. Say argued:
against claims that business was suffering because people did not have enough money and more money should be printed; and
that the power to purchase could be increased only by more production.
But -- and this is the big BUT -- over the last century, the consumer was in far better health than today.
Consider the following facts:
In the past, corporations didn't engage in the draconian cost-cutting that they have embarked on in the past several years.
Globalization wasn't the mainstay condition that it is currently, so previously we didn't see the wage deflation and the magnitude of the decline in disposable incomes present today.
Finally, consumers were not as tightly wound and leveraged in any of the previous cycles. Just look at the record level of household debt relative to incomes that exists today.
As a result of the above factors (and others), the U.S. currently has 10% unemployment, and if you count in part-time workers that can't get full-time jobs and those that have given up looking, the number almost doubles to one-fifth of all Americans. The consumer is in dire straits, and, for the first time in history, it is the consumer that is going to drive business' growth, expansion plans and confidence, not visa versa.
Sorry, monetarists, Say's Law might be dead.
To me, the question to be answered is this: How fast will the economic backslide be while the Fed and the government are still providing the seeds for growth in the form of generational low interest rates and massive fiscal stimulus, and what will the impact be when we see a withdrawal of that stimulus?
I don't have the answers, but I am certain that the consumer will serve as a brake to growth. Americans are anxious. As I said last week on "Fast Moolah," the aspirational consumer who supported the consumption binge that we have taken for granted is going the way of the dodo bird. Instead, many could revert to a post-Depression legacy, which we recall was embraced by many of our parents, of simply trying to maintain the status quo.
And a small downtick in jobs claims won't change the consumer's fate or alter it as a headwind to growth. In all likelihood, the "Paradox of Thrift" will become evident in the quarters ahead as businesses and corporate profit expectations will disappoint and be tested under the weight of lower personal consumption expenditures and higher savings rates.
So, what is the outcome of all this?
The more productive American industry is and the greater the perception that corporations are taking a larger piece of the profit pie from the average American, the more that will be asked from corporations and the wealthy in a growing tidal wave of populism.
It is why, besides an exposed consumer, the weight of substantially higher local, state and federal tax rates remains prominent in the bearish case. Both of these factors will be P/E deflators.
Troubling Technicals
On last week's show, I highlighted some troubling technicals, such as the rollover in transports and the reduced number of stocks above their 26-week moving average, as well as the lower new highs on the NYSE.
As we all know, it's how markets react to news that is important; sometimes the reaction is even more important than the news itself.
Recent market advances have been featured by far less overbought readings, and the market declines of late have been showing deeper oversolds. In fact, the latest rally of two weeks ago has exhibited the weakest short-term momentum in months and the broadest oversold since the recovery's start.
Financial stocks, which were the lifeblood to the market's rally, have lagged since September and have reached new relative strength lows in last week's reaction. Small caps and technology stocks have also lost their momentum as large-cap quality stocks have improved. The Divine Ms. M. makes the same point in her column today.
This sort of action is a typical feature in a maturing bull move. This is a clear signal that the market's health is changing -- and not for the better.
The Market Positives
Now for the good news:
Unlike most other asset classes (commodities, real estate, etc.), stocks were never overly exploited in this cycle, so valuations are not stretched, even despite the sharp rise from March. The S&P 500 sells at only about 14.5 times normalized earnings or about 2.5 multiple points less than its historical averages and compares to an average P/E multiple of around 19.5 times, which is historically with markets when inflation is subdued (under 2%).
Most investors already recognize that the economic recovery in 2010-2011 will pale in comparison against other recoveries. It is now accepted that unemployment will be elevated, consumer debt loads will be a drag on growth and that confidence will stay deflated.
We are now in the sweet spot in the profit cycle. Corporate profit margins have been maintained at levels far higher than the bearish cabal thought possible and are well above previous recessions.
Inflation and inflationary expectations are subdued.
The Fed is far more aggressive in its monetary policy than in previous cycles. It has put a curse on cash.
Corporate balance sheets are in an excellent position. Companies are generating record free cash flow and have more cash as a percentage of assets than in any other time over the past 40 years.
My Market View
In summary, I said that I was sticking to the forecast I made on my previous appearance a week ago. I still expect a 5% to 12% drop from the highs. For the reasons above, I see the decline being contained, and once we get into a real short-term oversold later this month or in early December, we could get a classical year-end rally, but that rally will not likely get through the previous highs.
Questions and Answers
In response to Guy Adami's question about whether I was more scared going ahead than a I have been in the past, I said that after the anticipated year-end rally, 2010 is likely to be challenging, which is unlike the opinion of many of the guests that I respect that have recently been on the show with more optimistic forecasts (Rich Bernstein, Byron Wien and Barton Biggs, etc.). I don't see the start of a self-sustaining or long-lasting business or stock market cycle. More importantly, I said to Guy that we seem likely to be passing on the first generation of lower living standards because all forecasts come prepackaged with lower growth rates and higher tax rates.
During the show, Karen Finerman (The Divine Ms. F.) waxed enthusiastically about the ISM report. I didn't have a chance to respond, but here is what I would have said in response to her optimism. In the ISM report, orders were down for the second straight month, backlog was flat, and inventory was up 10% sequentially (month over month). Moreover, there was a meaningful downward revision in construction spending in the prior month. As Bill King wrote this morning in The King Report, "Industry is building inventory, but transportation data show that the goods are not yet moving in concert."
And here are some of the more ominous quotes contained in the ISM release:
"Still a very difficult environment -- commodity increases threaten recovery and don't seem to correlate with any supply/demand fundamentals." (Food, Beverage and Tobacco Products)
"The improvement seen earlier is not holding." (Primary Metals)
"After several rather busy months, we are seeing the order intake for early next year soften." (Transportation Equipment)
It remains my view that the markets will look right through the strong ISM, just the way investors looked through the strong GDP print late last week. In fact, the ISM reading of 55.7 might be the most expensive in history. (Heck, we could theoretically get ISM to 100 if we throw another $25 trillion to $50 trillion at it, which may in fact be the plan!)
Frankly, if the current strategy of massive fiscal stimulation was so easy, Zimbabwe would be a worldwide economic powerhouse.
We should not lose sight that the better-than-expected third-quarter 2009 GDP was created by the government's massive monetary excursion in which consumers were induced, through various government programs with far less than one time multipliers, into spending what precious little savings they had accumulated since the crisis began. Ten years of egregious use of debt does not resolve itself in 12 months, and in the interim, policymakers are encouraging more irresponsible behavior on top of it.
The next 12 months are going to be marked by more uncertainty than certainty -- and, to me, the last two important economic releases (GDP and ISM) strengthens the case that the foundation of economic growth is shaky relative to the consensus view of self-sustaining growth.
More on the Top 20 Signs of How Bad the Economy Is
Melissa ended the segment by highlighting what the "Fast Moolah" group thought were my best of the top 20 list in yesterday's opening missive.
Here they are:
"The economy is so bad that a picture is now only worth 200 words."
"The economy is so bad I saw the CEO of Wal-Mart (WMT) shopping at Wal-Mart."
"The economy is so bad that I bought a toaster oven and my free gift with the purchase was a bank.
It was a great show, and I can't wait to get back on!

2009-11-03T08:24:00.000-06:00

Selling Is the Easy Answer
By Jim Cramer
RealMoney Columnist
11/3/2009 9:18 AM EST

Suddenly, people think I am a genius. You know what I did? All day, every day, I am hit by people with ideas: "Take a look at the semis down here; Morgan Stanley's late in its sell call." Or, "Buy some banks, they've been hammered mercilessly." How about this one: "Medco Health (MHS) , great quarter, scoop some up."
You know how I have answered the question this morning? You know how I have made myself look so smart? I have been saying, "Sell it" to whatever the proposition might be, including Burlington Northern (BNI) (which I explained away as Warren Buffett's attempt to make U.S. Bancorp (USB) and Wells (WFC) (two rogue outfits) a smaller part of his portfolio and to minimize his exposure to Goldman Sachs (GS) and GE (GE) ). Or if it is a group of stocks someone touted, I shot back, "Sell 'em all." I am thinking of getting even smarter and writing, "Short them all." But I need a little uptick in the market to have that happen, something made difficult by Buffett's foolish buy of a railroad. Every time I have done it -- and I have done it half a dozen times -- every single person agreed with me. They rethought their positive ideas on the spot and decided to go negative right along with my new stance.
It felt so good to be so negative. So rigorous and cozy. I'm so glad I didn't get asked about BNI or Black & Decker (BDK) during yesterday's session -- those would have been costly sell calls! But even with those, you can dismiss them as aberrations across a broad panoply of needing to sell. Sometimes you get hit with a takeover when you are bearish. I even wrote about it in Confessions of a Street Addict. It the hazard of being negative.
Again, I see the ease of going flat-out negative. How can you go wrong with the sell call? Why own anything? The gloom is so palpable that it has worn me down. Why not go with the flow?
Goldman Sachs? Why not sell it? A lot of points there. Intel (INTC) ? Good sell call, as this was the last good quarter. Caterpillar (CAT) ? Why not sell off that soggy EU number.
I could go on and on. CSX (CSX) , Norfolk Southern (NSC) , Union Pacific (UNP) ? Short 'em all. There's only one Buffett. Short 'em right into the strength.
The course of least resistance is to sell. Especially when the economic backdrop is uncertain and we have moved too much and I think to myself, "Why bother? The sea of negativity is too great to overcome. Obama and Pelosi give the whole exercise gravitas based on the anti-business rhetoric coming from Washington."
But then again, I look at Medco, and even though I know it will disappoint some, it is a spectacular quarter. Emerson (EMR) did beat the numbers. Even if Antitrust stops the Black & Decker deal with Stanley Works (SWK) -- hard to see how they wouldn't, because I expect tool prices to rise immediately -- you still got a huge win. As you did with Encore (EAC) . As you did last week with the Canadian oil trusts. And with BNI.
So the question becomes, are these needles in haystacks? Is everything that is good simply small pebbles?
I don't know the answer. I do feel that fighting the endlessly negative headlines and the caveats and "to be sures" that accompany any good news, just opposing the vast majority of naysayers here has gotten too difficult. The genius of "Sell everything!" and "Get out now!" trumps even the opportunity to make money.
So, bears, take it to heart. I see how easy it is to say, "Sell sell sell." It's enjoyable. It's rigorous.
Even if it might be wrong, I am on board! Trying it for a day. Seems delicious!

Futures

2009-11-03T06:23:00.000-06:00

Dow futures are down about 100.

2009-11-02T12:20:00.001-06:00

On Friday we get the non-farm payroll data for October. Keep in mind we have had 21 straight months of job losses.

2009-11-02T12:17:00.000-06:00

We're Doing Better Than the Consensus Says
By Jim Cramer
RealMoney Columnist
11/2/2009 1:16 PM EST

Is the "action" disappointing? I don't know, when I left University of Oklahoma last week, I thought everything was OK except the stock market. I figured we could be in for another pummeling. But we got good data, and the sellers have taken a breather. Of course, they look like they could roll over big, and I know the vast majority of people I talk to think that this market has had it, kiss of death, don't ever buy it.
That's the consensus.
What's tough is why it goes up 100 on the good data instead of just stabilizing, given that every single time you have paid up in this environment is wrong.
Also, I love the catcalls I am getting about liking it here. It has the delicious tone of what an idiot I am and how little I know and how I should retire or get out of the business because I said the sellers look to be done. Business as usual.
Again, I point out that the easiest thing to do is to be bearish. The easiest call is to pooh-pooh everything good. The easiest call is to say the drop-off is the start of something big.
But I thought we would be down 200 from the get go.
Didn't get it.
Not all that disappointed. I will be, though, if we do decline 200, which is now the betting line I am hearing.

2009-11-02T12:15:00.001-06:00

Intraday Reversal Is a Sign of the Times
By Rev Shark
RealMoney.com Contributor
11/2/2009 1:12 PM EST

The worst thing for this market would be a failure of a bounce following some good economic reports. That's exactly what's happening now, and as a little panic sets in we are even taking out the lows of last Friday.
This is nothing really complicated about this. In an uptrending market, the buyers constantly jump in and buy the dips and ride the bounces higher. In a downtrending market, the focus shifts to using bounces as opportunities for selling and shorting. The anxiety about being left behind as the market goes higher is suddenly replaced with the fear of being trapped in stocks that are going lower.
The character of this market has changed over the past week, and the action so far today simply confirms that fact. A month ago we wouldn't have sold off like we did on Friday, and we wouldn't have the intraday reversal like we are having today -- especially given that the news flow is positive.