Grand View

GSA 2012 Outlook

2012-01-12T10:55:00.001-06:00

As we exit 2011 I’m reminded of the season finale from the television series Dallas. After a whole season of treachery, cheating, back stabbing, love and hate we learn it has all been one long bad dream for Larry Hagman. This year’s markets have experienced it all. We look for 2012 to be the awakening. But, first let’s review.

GSA’s outlook for 2011 went unfulfilled. Earnings came in better than projected, however the earnings multiple afforded the superior growth rates and earnings actually contracted instead of expanding to the historical norm. We don’t take it lightly, but a miss is a miss and we own it. We listed four major risks:

1. Political. The inability of the mainstream Republican Party to find common ground with the tea party faction cost the US its AAA rating. This nearly triggered a credit default event and double dip recession due to consumer angst.

2. Sovereign debt default. We warned about the necessity to be aggressive and progressive abandoning the reactive posture the EU memberships had taken thus far. We warned of a potential 20% haircut on Greek debt of which we were too conservative. It turns out it will be a 50% or greater scalping. Meaning holders of Greek treasury bonds will receive .50 for every $1 they own. The EU membership and ECB never took the necessary pre-emptive steps to fend off the bond vigilantes. Thus the battle lines are now drawn squarely around Italy. This will prove to be the European Union’s Lehman moment. Less talked about, in GSA’s assessment the ECB just went all-in with their latest 3 year term loans program. Step 1. Lending out unlimited Euro’s to the Euro banks. Step 2.The banks can in turn buy Sovereign debt. Step 3.They can use this debt as collateral at the ECB for additional funding. Sound familiar?

3. Inflation. The current benign inflationary period we are enjoying (for those of us that don’t eat, heat our homes or drive) was threatened over the summer when gasoline spiked above $4. The effect on consumer psyche and in turn spending choked off retail sales momentum to near recessionary levels. The stopped clocks (analysts preaching same story ad infinitum waiting to be proven correct) resurfaced en-masse. In short time and with renewed confidence the calls for a super spike in oil and gas came along with the rehash of the useless Peak oil theory. Then Ghadaffi was ousted and Libyan oil began to flow again. Natural gas fracking unleashed enormous amounts of both domestic gas and oil. This deflated the price of Natural gas below $3 and held oil in check below $100. For now.

4. A failed US treasury auction. Not even close here. The US lost its AAA rating and auctioned off a staggering amount of new debt at record low rates. There was in some instances unprecedented demand. The flight to safety trade was incredibly impressive.

We batted .750% and didn’t win the World Series. Our projections were undermined by severe skepticism of global politicians’ backbones and willingness to do what was right and necessary for their respective countries. The US was front and center. Politicians need to do what is necessary vs. worrying about keeping their jobs which in times such as the ones we live in, may prove to be at odds with one another. We were further hamstrung by the collapse of MF Global just as the market was regaining its footing and recovering from the summer Washington political stalemate. Instead of gaining confidence from dramatically improved balance sheets, increased optimism from an improving jobs market and year over year gains in revenues and earnings resulting in a historical P/E or P/E v G we actually witnessed the opposite and the market multiple contracted. The prevalent negative sentiment resulted in investors pulling monies from equity markets globally. In closing, we would like to wish a happy retirement to ex-ECB President Jean Claude (Sleepe’) Trichet, have fun second guessing your successor. Ex-Greek Prime Minister Papandreau, enjoy the two-for-one dolmathes coupons I sent. Ex-IMF chief Strauss-Kahn, lay off the hotel staff. Ex-MF Global CEO Corzine, go back to politics. Finally Ex-Italy PM Berlusconi, now you’ll have plenty of time for your other girl friends. I think I was a teenager living in Rockaway Beach, NY one summer on a bad streak the last time I had this many ex’s in one year. But, in this case anyway I can almost guarantee I’ll be a better person without them.

We’ll look at a few potential major risks to 2012:

Iran. The global community is seemingly finally united in confronting Iran’s nuclear ambitions. Their solution, hit ‘em where it hurts, in their purse. New sanctions on the Iranian Central Bank have prodded Iran to respond with threats of closing the Straits of Hormuz which sees roughly 17 million barrels of energy pass through daily. Should there be an all out blockade we’d most likely see a super spike in oil crippling consumer discretionary spending, at a minimum. The next escalation would mostly be a full blown strike on Iran by the US or Israel. We look forward to the day the Middle East can patrol and protect themselves.

China. The soft landing currently anticipated turns out to be more of a crash which sets off riots among the populace.

The European Union. The EU membership is unable to come to consensus on fiscal policy and backtracks from any rescue package. Greece abruptly exits the EU, followed by Portugal triggering credit events that force EU financials to pay on outstanding CDS contracts punching huge holes in their balance sheets as the credit markets slam shut for new funding to fill those gaps causing cascading defaults, a run on the banks, Italy being frozen out of the credit markets and finally the ultimate destruction of the Euro as a whole.

The Good ole’ US of A. (A) The US economy, fueled by a rejuvenated job market producing 250,000+ new jobs per month allowing for an even greater increase in consumer spending. This light the inflation fuse, the Federal Reserve must adjust policy before previously planned, pushing up sharply borrowing costs across the spectrum. The nascent housing recovery is stifled. The US dollar spikes, reducing our export advantage our current dollar exchange rates affords US multinationals.

The Good ole’ US of A (B). The US “leadership” remains severely partisan and divided in the face of ballooning entitlement programs and we experience another summer of 2011 resulting in an almost inconceivable and insurmountable second ratings downgrade. This second downgrade should cause global investors to seek in earnest another more fiscally responsible safe haven for the monies. This should cause a spike in US borrowing costs and potential QE III which would begin the swirling of the toilet bowl.

Projection:

Global Monetary policy remains highly accommodative. The US Federal Reserve has pledged to maintain the zero interest rate target until mid 2013 and may extend the date if necessary. The European Central Bank under New leadership from Mario Draghi has gone all-in with its offering of unlimited liquidity in the form of 3 year loans at 1%. My concerns surrounding the end of such policies and Quantitative Easing in general as such, are not of a concern for 2012 obviously.

The EU membership has finally begun to work toward fixing their balance sheets. In some cases draconian cuts in social services, downsizing the government work force and reshaping the local labor laws are being fought tooth and nail by the union membership as well as those on the receiving end of these all too generous unsustainable programs. For any of these austerity measures to be successful they must have a growth counterpart. All they need do is look to Ireland as a model of success, which just returned to positive GDP expansion, albeit modest. After a decade of over borrowing and spending beyond their means the EU membership are finally dealing with this debt and spending largess. In the end it may be years before these issues are resolved and they are on firmer footing, but the mere presence of a sound plan should be enough. The Euro-zone economy is expected to dip into a recession in the first quarter of 2012 and end the year modestly positive 1% with Germany and France doing the heavy lifting.

China has hit a slow patch. The dissipation of the inflationary clouds should allow for the stimulus spigots to get turned back on and help this behemoth regain its footing. This managed economy’s plan of build it and they will come has resulted in ghost cities and put strains on their domestic banking system. Doubters need only look to Shanghai as turning out to be just such a success the Chinese leadership hang their hats on. We’ll also continue monitoring how the shift towards a more balanced economy, one of manufacturing and services unfolds. Further, the push to foster domestic consumption is an ongoing story that has made for a good read with reasonable success. The economy is expected to expand at a modestly slower than norm, but enviable rate of 8 ½%.

India heal thy self. Elevated levels of domestic Inflation forced the central bank to hike rates even as the economic growth eased. India needs to reform its tax code and reintroduce a strengthened anti-corruption legislation. Passing this stronger more broad based anti-corruption legislation along with opening the doors for further foreign capital investment should allow the Indian markets to help regain the confidence of investors and capital flows. Like China this country has over 1 billion folks that continue to migrate towards urban living and ultimately become consumers of US goods. The domestic economy, likewise expands a bit slower than last but at an enviable 6 ½-7% rate.

The US economy continues to be exceptionally resilient DESPITE Washington. The ISM Manufacturing Index just released came in +53.7, better than expected, with a strong jobs component and new orders index embedded within. The Leading Economic Indicator increased .05 in November on top of +.09 the prior month. Housing start rose 9.3% in November while permits were a strong +5.7% both highs not seen since March and April of 2010. Perhaps a sign of a bottoming process in housing taking place. The jobs front continues to make gains with this upcoming Friday’s Non-farm payroll number expected to come in a healthy 175,000-200,000. I will look more closely at the household jobs figure to come in +350,000-400,000. as this figure captures small business and self employed not counted in the more popularly reported Non-Farm Payroll number. Capital spending has been robust, exports are exploding, with the US about to be a MAJOR exporter of OIL and GAS. We couple these with virtually pristine balance sheets of non-financial corporations and fortress like balance sheets of the major financials allowing us to be cautious but certainly optimistic for 2012. We see S&P 500 earnings coming in conservatively $106 and due to the pessimistic overhang coming into the year a below historical average market multiple of 13 ½-14 to come up with our year end target range of 1431-1484. Volatility should remain the stubborn family member that refuses to go home after the holidays are over. We may see a strong move above our year end target and brute selling that will test the metal of investors yet again. Should confidence grow the EU has a formidable plan to handle the debt crisis that gripped headlines the last few years along with US politicians making progress with a credible deficit reduction plan our targets may prove to be too conservative.

We maintain our aggressive, balanced investment posture entering 2012 but remain on heightened alert for any setbacks to the EU debt issues and domestic jobs creation front and center. Should the economic environment retrace from the progress already made or the EU hit crisis mode, yet again, we’ll be quick to reassess our cash position and be in contact immediately and act accordingly.

We thank you for your patience and confidence in these extremely challenging times.

Yours in search of the Kwan!

Let 'Em Eat Dolmathes

2011-11-03T15:51:00.001-05:00

Let Them Eat Dolmathes! The US markets are being held hostage by a country the size of a postage stamp. Greece accounts for a bit less than 3% of the Eurozone GDP output. The Greek economy is the 32nd largest in the world. Why are we hanging on every rumor? Why do the lights go hot and the cameras fire up every time a Greek student flings a stone at the Greek Parliament building? It started out as contagion fear. It seems so long ago, but remember the PIGS. Portugal, Ireland, Greece and Spain. Portugal received its bailout and is in the process of righting the balance of debt to GDP. Ireland took their EURO-TARP like bailout and backstopped the banks and staunched the bleeding immediately followed up with severe austerity measures. The Celtic tiger is beginning to roar again. Greece, well there is simply an unwillingness of the citizenry to work and pay taxes. Pure and simple. Politicians over the years continued to stuff the public payrolls with unnecessary hires in order secure their cushy seats. The details I read look so very similar to the auto union contracts. Teachers were hired without any classrooms to tend to. Once hired, they were near impossible to fire. People didn't get fired anyway, they were put into a jobs bank. Meaning they sat in a room, collected a check with full benefits and played Sudoku. We saw how well that worked out for our Auto industry. In Greece paying taxes is merely a suggestion. One example, Greece has a pool tax. Meaning if your home has a pool, you must pay a pool tax. Pretty simple. The clever home owners instead called in the interior decorators and had them attach an AstroTurf like cover over the pool so the helicopters flying overhead to count pools would miss them. BRILLIANT! The situation is so poor Greece finally had to attach individual tax bills to monthly electricity bills. They felt this was the only way to begin collecting taxes. The situation is simply unsustainable from both sides. I believe it has come to the point of let them eat their own cooking. The politicians don't want to anger their constituents any further lest they lose their treasured seat. The citizenry believe outsiders are ruining their way of life and don't wish to pay their bills. I believe it is time to let them go. After allowing the global economy to be walked to the edge of the abyss far too many times over the last three years, the EU has finally gotten serious about this financial mess. The formation of the ESFS with over $1 trillion euros ($1.35 trillion US) in firepower was huge. Now that the EU has gotten serious the IMF can be more aggressive in their interventions. Here is a game plan as I see it:

1. Totally wipe out the Greek debt. Forget taking 50% haircuts. Taxes aren't being collected, spending cuts aren't being enacted, entitlement programs aren't being scaled down. Write off the debt completely
.
2. Kick their non-Laissez Faire cans out of the Eurozone. This Greek tragedy has tortured us long enough. Until the Greek citizenry realize it isn't outside forces destroying the country, it is unsustainable social programs and cronyism that is the cancer, no one can help them. Much like an addict that needs to hit rock bottom before he can scrape himself off, pick himself up and begin rebuilding.

3. Initiate operation Euro-Tarp. Direct injections of capital into banks. Back stop financial institutions, guarantee money market funds and flood the system with cash.

Time to rip off the band-aid with one quick yank instead of the slow painful process we're experiencing currently. Either way it takes the same amount of hair off your shin, but the shriek is a heck of a lot shorter.

There is something really positive going on right under our noses and apparently hiding in broad daylight. The US economy is regaining its footing. Third quarter GDP popped up to 2.5%, good not great. Unemployment claims, released this morning dipped below 400,000. The monthly private employment survey released by ADP showed a surprising 110,000 gain for October. Retail sales remain elevated. Finally corporate earnings have not cratered, as some perma-bears have been prognosticating. Companies that have released earnings thus far have beaten 75% of the time. We are on target for $95-$100 earnings per share for S&P 500 companies for 2011. Next years 2012 earnings estimates come in close to $110 per share. If these numbers hold, it becomes the multiple on those earnings we will afford. It would be reasonable to use a 13-15 multiple historically which brings us our target range of 1430-1650. This with a dysfunctional Euro zone. This with the collapse of another Investment bank with $41 billion in assets. Think of the firepower US corporations would have if one of our major trading partners stabilized along with the soon to be announced US austerity measure by the Gang of 12 on or before November 23.

In closing today we continue to be held hostage by Greece and until that gets resolved, we remain cautious and skeptical we can have a meaningful breakout without some resolution. Either way this meal leaves a sour taste in your mouth and one begging for a change in menu.

I'll continue monitoring the data and be in touch should we need to shift out strategy going forward.

Yours in pursuit of the Kwan!

Fourth Quarter Outlook

2011-11-03T15:49:00.000-05:00

In the past a major critique of market watchdogs has been that Federal Reserve officials stand idly by watching, even fostering the formation of bubbles instead of acting decisively and preemptively thus saving us all from the ensuing shocks to the system. More importantly the dents to our wallets and investments. Key example was the tech bubble. At the time, Federal Reserve Chairman Greenspan even identified the bubble in the making. His preemptive strike? He searched deep into his arsenal of tools available. Should he raise the Fed Funds Rate? Raise the Discount Rate? Perhaps hike the reserve levels banks are required to hold in order to stem the free flow of credit? No no to arcane and blunt. No this called for all the force he could muster his most powerful tool at his disposal, his exquisite grasp of the English language. Thus he launched his assault and we were buried with "Irrational Exuberance". Oh the pain! No, Chairman Greenspan did nothing but observe and we see ten years later the NASDAQ Index still trades well below fifty percent off the highs.

There is and had been evidence of bubble formation in a few areas. Look no further than commodities. The Federal Reserves easy money policies have consequences. Inflation and possible bubbles. The difference this time is our watchdogs are engaged. In response to the rapid rise and possible speculative bubbles in gold, silver, wheat, corn and oil etc., the regulators have hiked margin requirements on all of these futures contracts numerous times this year alone. Regulators finally acknowledged the last time oil traded up to $140 under the Bush administration it had more to do with hot money and rapid speculation than the fundamental supply and demand equation. Listen when you go to the casino you know you're gambling and more likely than not to come away with a few more vacancies in your wallet or purse. The commodities trading floors are not supposed to be casinos though, and futures contracts are a legitimate tool utilized to help mitigate risk. When speculators drive commodity prices into the stratosphere and completely decoupled from the underlying commodity the effect on the consumer and his spending habits can and have been stifling to the economy. We seem to be shaking out some more of the hot money as witness the price of oil back from $120 to $75, see gold hitting a high of nearly $1900 intra-day and recently tanking to $1560 the same price action can be seen with all the food stocks. I haven't been able to say this about our regulators to often this decade, but WELL DONE!. The battle isn't over but those speculators that were using cheap funding and excess leverage to make huge directional bets on our food sources and energy (basically everyday staples) have been put on alert. There is one more bubble that is being allowed and fostered. That is the one in the US Treasury market. Savers balk when they look at bank CD's yielding 1/2%. Why are investor scrambling to lock up their money for ten years at 1.75% and thirty years at 2.8%? The Federal Reserve has launched operation Twist (Chubby Checker). This entails the Federal Reserve selling off the shorter maturity bonds in the 1-3 year vicinity in their portfolio and purchasing bonds that mature in 6-30 years to push down long term lending/borrowing rates to help stimulate the economy. The Fed is breaking out all the tools in an attempt to support the US economy. The Chairman seems to be the only passenger on this boat with a set of oars, or is it a bucket he's trying to bail us all out of a mess our elected officials seem unable or unwilling to tackle? History will answer whether the Chairman was right. I'm willing to side with him and give him credit for his creativity and willingness to try and do something and near about anything to spark the economy.

The current environment is fraught with danger, amplified by the upcoming election year. At a time where the primary theme for all involved should be "it's the jobs stupid", we're left to scratch our heads at the goings on in Washington. The EPA (Employment Prevention Agency) is on a full frontal assault focusing on Nat Gas and Oil Fracking. Pennsylvania and North Dakota are terrific success stories of states that encouraged companies and the new technology utilized to access these once unreachable resources. Pennsylvania alone boasts 70,000 in job creation along with $2 billion in revenues. North Dakota is a similar story. The EPA response to take on ND with fines for killing 24 ducks while windmills are slaughtering 440,000 birds a year without a blink is again, a head scratcher. Similarly the NLRB is attempting to block Boeing from utilizing good paying high skilled workers in South Carolina instead of Washington state. Whew! What would they say/do if Boeing decided Mexico was a more friendly environment and site for its plant? The message in these instances is the White House and Capitol Hill need to get out of the way of businesses that work and would put some of our 16 million unemployed back to work.

Front and Center. What's infected our economy and markets is rancid debt festering in the Petri dish in Europe. The Greek debt crisis 2 1/2 years and counting is desperate for a soothing financial tonic. The prescription, cultivated here in the US laboratory called Wall Street is what I refer to as Euro-Tarp. Direct injections of capital into the strategically important Euro zone banks. The fiscal and monetary impotence demonstrated by the European Central Bank and the European Union membership in general has left our domestic markets solely reliant on Federal Reserve stimuli. In our current global financial structure the response must be global. Which helps explains the limp response of the markets thus far.

Where we're at. The US economic recovery is progressing as anticipated, below trend expansion. Housing remains a constant drag that must be addressed. Homeowners, with borrowing rates and generational lows, need to have access to refinancing. The Fed has done their part in pounding rates into the dirt. Banks and regulators need to come together to allow underwater borrowers that are current on their payments to refinance. In many cases home owners cannot refinance because the outstanding balance on their mortgage is more than the value of their homes due to the housing market collapse. What needs to be done is 1.banks need to waive a new appraisal .2. banks need to receive a waiver from Fannie Mae and Freddie Mac from putting back any of these mortgage that may default citing lax underwriting. That simple. This would stem the tide of foreclosure along with the flood of supply currently flooding the resale markets depressing values and deterring new home buyers. Allowing homeowners to refinance at today's low rates would put billions of dollars into consumers wallets/purses. Next Euro Tarp and a Greek restructuring needs to happen sooner than later. Lastly the White House and Capitol Hill need to cease this political gamesmanship on Free Trade, Energy Policy, Tax Reform all of which should result in job creation. Do any combination and potentially unleash a tsunami of investment and job creation to steady this, at best, shaky economic recovery.

For now, no surprise, we remain on Euro watch. As Federal Reserve Chairman Bernanke stated in his recent testimony, "in this current situation we, the US, are the tail and the EU is the dog". With the final departure of ECB President Trichet hope springs eternal. We have most recently heard rumors floating in the market a bailout of the banks and Greece is coming and at long last there is a sense of urgency to move with scope and force. Domestically the US economy is anticipated to expand at a 2-2 1/2% GDP pace for the just completed third quarter and 2 1/2-3% for the upcoming fourth quarter. Obviously we have not been able to obtain break away velocity from the pull of the severe recession we are attempting to extricate ourselves from. While worries of a double dip recession have been elevated by the Euro woes, recent data do not support this conclusion. But, again the longer EU zone countries take to address and contain any potential contagion, the greater the risks to the global economy. GSA remains cautious and continues to build out our watch list. We'll wait for the market to signal the time to get fully re-engaged again and continue to monitor this very fluid situation as it develops.

Third Quarter Outlook Points to More Turbulance But A Positive Outcome

2011-07-19T10:05:00.002-05:00

Grand Street Advisors

Market Outlook

Third Quarter 2011

Where we are. Right to it. The US equity market is celebrating its third anniversary of the bull market kick started in early 2009. Top down and bottom up analysis of the economic recovery have been wildly bullish and wildly pessimistic, basically all over the map. This is no more evident in the scorecards for hedge funds over the last twenty four months, negative thirty percent to positive one hundred percent. These are supposed to be some of the best and brightest who put their money where their “black box trading models” are. Just evidence how difficult and challenging it has been in reading the economic tea leaves and investing appropriately.

From my perch analysts are looking at this earnings cycle from the wrong perspective. Many view the earnings momentum as about to peak. In my view, for this to occur, the US economy would need to revert back to the brink on recessionary levels. I just don’t see it. The US economy is growing below trend. Domestically, steps are being taken to stimulate growth with potential tax cuts being discussed in the hallowed halls of Congress as we speak. Thus far emerging market growth has been pulling the US along for the ride reflected in the explosive growth in exports and export related job growth. When the US economy regains its traction and we will, earnings and revenue growth should accelerate up markedly, unemployment should drop precipitously. The austerity measures being negotiated currently up on the hill will push the US back towards a balanced budget and trend rate growth.

I will have to be the first to state I’m wrong (as far as I know anyway) my projections for the market were incorrect. I’ve been far too conservative. Even with unemployment at 9% corporate earnings and productivity have defied gravity. Viewing an accommodative Fed policy for the next two years (due in no small part to the bulbous housing stock), strong export driven growth, lower corporate tax rates and even a modestly expanding job market coupled with pristine corporate balance sheets earnings and revenues should continue their upward trajectory dragging the S&P 500 along for the ride well through 1500 over the next six to twelve months.

Risks.

1. Forget about the 800 lb. gorilla in the room, let’s look at the 1200 lb. polar bear. He’s the one less dangerous looking, highly pet-able and cuddly that will rip my face off if I don’t have a 3” glass partition between us. He’s lurking out there. He’s playing coy in the form of the potential US debt default. Should our fearless leaders dig in their heels and fail to come to a deficit cutting, revenue increasing compromise a US debt default would most assuredly shred any and all portfolio making the Lehman Titanic look like a dingy.

2. The end of the Feds QE II asset purchase program allows natural market forces to identify and dictate where investors are willing to commit capital. If it turns out rates rise precipitously it may choke off any housing recovery.

3. Greece Part Deux. The ECB and Jean Trichet seem to not have learned anything these last few years. The ECB refuses to or is unable to get out in front of this potential financial collapse and/or exit of Greece from the EU.

It is not only Greece the markets fear, it is the potential contagion and bond vigilantes. If Greece fails, the thinking is then Portugal, if Portugal then Ireland/Italy and Spain etc... This would be the equivalent of Lehman squared. There would be nowhere to hide…again.

In the end we have to factor in probabilities. Ex-Lehman our esteemed academics may have run an experiment and re-hash “moral hazard” (hey it was catchy) and let either Greece or the US go thinking they have any collateral damage contained. However, they have experienced the Lehman catastrophe and found out first hand how interconnected the global financial system is no matter how many creative financial derivatives we concoct to “hedge” our risk. We can still see the carcasses in the rear view mirror, we know the claw marks would cut too deep and critically injure any recovery.

So, while we need to be aware of risks and always look for the unexpected, I believe the likelihood of any default to be extremely slim. Going forward I see uneven market gyrations, but ultimately ending with a strong rally to finish up the year and recommend an aggressive posturing to equities. We’ll continue to monitor the data and market. Should our opinion change and we need to alter our strategy I will be in contact immediately.

Thank you again for your patience and confident in these very challenging times.

Yours in pursuit of the Kwan!

The Economy to Regain Its Mojo and Investors Can Look to Coal Play Alliance Resource 5% Yield for Growth and Income

2011-06-22T07:50:00.003-05:00

The economy’s recent stutter step may prove to be just that. We have recently got speed bagged by an Ali hammer jab of Japan’s economy screeching to a halt followed by a Frazier left hook by Greece’s near debt default. Taken together it’s no wonder the US economy was left reeling on the ropes. I believe however, while we may have been staggered and given the mandatory eight count, which is what this hiccup in growth may turn out to be, we were not counted out. Evidence of just such a blip being the down tick in Weekly Unemployment Claims, the surprising rise of Leading Economic Indicators and Industrial Production. The Japanese economy shutting down closed off electronics component shipments along with parts for auto suppliers and manufacturing which cost an estimated one full percentage point off of growth. The question remains with Japan factories back humming will we, the US economy, resume its expansionary trajectory. We’ll need more time and data to support either conclusion, but I believe the momentum of the expansion will not be stopped on a dime. The weakness or slow down we’re experiencing being more a temporary downshift due to an external shock and the fundamentals for higher equity valuations remaining in tact.

Greece. As distasteful as it seems, no one entity that may have the characteristics of being “Lehman-esque” (Too Big To Fail-TBTF) will be allowed to fail. No matter the costs or effect on currencies or assets, or to what extreme measures need to be taken to avert the disaster. I’m not saying Greece won’t default, from what I’ve read it most likely will experience a “technical” default. The Greek debt load is far to great for the size and structure of their economy. If this is the case, a plan will have been well thought out, the problem ring fenced thus preventing any contagion from spreading to EU members Ireland, Portugal, Spain and Italy. Now, after Lehman, we were able to witness, real time, what can happen when an entity of such scale is allowed to go under, and the catastrophic repercussions, all Central Bankers are squarely on the same page. They, we witnessed history as it unfolded. Remember back in the early days as the financial crisis was only beginning to take flight. ECB President Trichet warned the markets he may need to hike interest rates on inflation fears at the same exact time Chairman Bernanke was aggressively cutting rates interest rates and converting Investment Banks to Savings Banks to gain access to cheap money. In Trichet’s opinion the financial crisis was a US problem and he had no fears of any contagion. Many of us argued against such a move then and were proven out correct and ultimately Trichet reversed course. The ECB perception was the wide spread proliferation of derivatives had allowed EU Financial institutions to lay off or hedge their risks. Who did he believe the counter party was that the risk was off loaded to? Yes that’s correct AIG, Lehman, Bear Stearns etc. The point being now that we have real time data on how catastrophic such a failure can be, the appetite to run another such experiment is nil. So, as long as Central Banks are reading from the same playbooks and recognized how inter-connected the global financial systems is, expect monetary responses to be of a proportion to meet any catastrophe that threatens the system. The implications being Central Banks and the Federal Reserve will remain committed to debasing our currencies to support the economy and foreigners will continue “buy our tulips”, as we, the US is still the best game in town. I believe we’ll be fine. It’s only when someone refrains from accepting those “tulips” that we follow the path of the Dutch.

The market correction we’ve experienced is normal and may prove a healthy set up for the next leg higher. The market has rallied significantly over the last twenty four months and barring any further aggressive deterioration of the market, remains a healthy correction within the context of a bull market. As we entered 2011 we set out a few wild cards, 1. Greek Default 2. Super Spike in oil 3.Failed US debt auction. None thus far has come to be, nor were they predictions of what would happen to derail the bull market, merely what could. We’ve received enough of a scare on a few so far, but not enough of one to send the bull into hiding. So, GSA stands by our year end target for the S&P 500 of 1410-1450 and look to add to or establish new positions on weakness.

Investors looking for Income and Growth can look no further than Alliance Resource-ARLP to sate their appetite. Alliance Resource continues to bring new production to market while securing long term commitments for up to 75% of production out to 2014 giving clear visibility for the near term. Their last quarterly earnings was yet another stellar performance with revenues up 11% driven by coal prices and production. Alliances is in the the sweet spot with attractive assets and production ramping up at a time where the global distaste for nuclear power after the Japan disaster still taints the palate of many. A potential for a take out is on the table but even without that catalyst earnings and revenue growth coupled with a very attractive 5% yield should allow investors to breathe easy for some time.

Yours in pursuit of the Kwan!

Market Outlook 2011

2011-01-08T10:40:00.000-06:00

The New Year is kicking off with a bang! Economic data continues to suggest the US and global economy remain on a positive trajectory. Be it the downward trend in weekly unemployment claims, the ongoing strength reflected in the Purchasing Managers Index, or weekly Leading Economic Indicators, all point to a sustainable economic revival while chances of a double dip seem remote.

The oft written off consumer refused to succumb to pressures to conserve and nest. Hikes in personal incomes and spending lead to robust fourth quarter retail sales from dollar discounters to high end bag producer Coach. New and existing homes sales received a bump in the recently released November numbers. Granted, there is still much work to be done on this front, but analysts are pointing to this just past year as being the trough. As has been noted in this space many times, the deleveraging US consumer simply cannot do all the heavy lifting this go around. The good news has arrived. Importantly emerging markets consumption is gaining traction. History shows between 1998 and 2008 Emerging Market consumer spending rose 66%. That figure represents twice the rate of developed nations. Average per capita spending was 48% higher in 2008 vs. 1998. In 2008 Emerging Market consumer spending represented 27% of worldwide totals. Industry forecasts middle class consumers will grow from 2.5 billion to 4.5 billion by 2025 the majority of which should come from Emerging Markets. The hard work and huge capital investments of the US these last fifty years are finally producing a positive return.

A last fun fact. Since 1947 the ratio of S&P 500 Index to US national Income and product accounts has averaged .86%. It now stands closer to .74%. If profits were to remain constant and the ratios were to revert to the mean the S&P500 would rise above 1400. GSA’s projection for 2011 is slightly higher for the year. Now to the risks, there just may be a few which we’ll now flag.

1. Political. Domestically our newly elected Democrats and Republicans Tea-Party-ers need to take a que from Rocker Prince and “party like it’s 1999”. Federal pay freezes and social security benefits age extensions won’t do it alone. We need to roll back budgets and spending to levels not seen this decade to make meaningful progress on our ballooning deficits and maintain our AAA debt ratings.

2. Sovereign Debt default. When looking for potential landmines abroad, Greece still lurks as potentially the first domino (think Lehman Brothers) to fall and potentially ignite a contagion. The trial balloon has already been set afloat into the market. On a quiet Friday afternoon some weeks back in December, Greece officials whispered the idea of restructuring their debt. Under this scenario bond holders would take a 15-20% haircut to principal along with restructured bonds with lower more favorable interest rates. It was like no one heard or was paying attention and focused too much on the holiday season. Should this restructuring come to fruition, lookout. First it sets precedence and opens to the door for Ireland, Portugal and who knows else to follow suit. Banks are major holders of these sovereign bonds and if forced to write down these investments by 20% once again would result in recapitalization in the hundreds of billions of dollars or Euros. The effect being another choking off of lending. Austerity needs to reign here.

3. Inflation. Since core inflation is benign so we have no worries here. That is if you don’t eat, heat your house drive a car etc. The proliferation of ETF’s coupled with the debasing of the US greenback has sent some commodities parabolic. These spikes push higher prices into the pipeline that eventually may/should work its way to the general economy and pricing of goods. A super spike in oil needs to be monitored as this would surely have a profound impact on consumer spending and sand up the gears of our domestic economic engine.

4. Real Wildcard. The US Treasury has a near failed bond auction. Meaning the Treasury attempts to raise cash, via a usual bond auction. A near failure would be if the bid to cover ratio is less than 2-1. Our typical auctions reflect 2.5 -2.6 dollars in bids for every 1 dollar in bonds being offered. An auction with 1.9 to 1 would be terrific for most any other country, but not the US. This would send shock waves throughout all markets globally.

Projection:

Monetary policy remains highly accommodative and due to continued housing market weakness should remain so throughout 2011. The Federal Reserves current QEII purchase plan may not be fully executed due to the quickening pace of recovery which would/will cause market disruptions and a resumption of volatile market swings. S&P 500 earnings are anticipated to come in close to $94 a share. Being we reside in a low interest rate, low inflation rate deficit cutting environment should allow for P/E expansion closer to 15-15 1/2 This brings us to our target range of 1410-1450 or roughly 12% higher. This also assumes US GDP expansion of 3-3.5%. Should earnings momentum accelerate to the upside we would look to upgrade our targets. GSA believes the challenge, aside from any near term round of profit taking is in handicapping Chairman Bernanke’s ability to identify when and how aggressively to remove any excess liquidity sloshing around the markets in late 2011.

We maintain our aggressive investment posture entering 2011 but remain focused on the progress already made by the markets exiting 2010. Should the market enter into a round of profit taking that appears to be morphing into something more, we will be in contact immediately and act accordingly.

Yours in pursuit of the Kwan!

James Byrne

Chief Investment Officer

The Treasury Bubble is Bursting. Income Investors Potentially Gain Exposure to Growth and Income Through Blackrocks Global Fund

2010-12-19T12:21:00.001-06:00

The new norm we continue to hear about should refer to the rise of emerging markets as a percentage of global GDP and not the potential sub optimal growth of domestic US GDP. Between 1960 and 2000 GDP of emerging markets fluctuated between 18 and 22% of global growth. It was only most recently they broke out to represent close to 30%, reflecting the importance of having a direct or indirect exposure to this important asset class. The key must be in balancing the associated risk and increased volatility that is inherent.

Has the Bond bubble been pierced? The Fed has embarked upon QEII. The bond purchase program not the luxury sea going cruise liner. So, with a constant buyer lurking in the market and one with an exceptionally deep set of pockets, why are rates rising? One could argue the recent economic data would command higher rates. You could perhaps point to growing expectations of a re-ignition of those inflationary embers have investors nervous. Or we could look at the most obvious, rates have been held at artificially depressed levels that were unsustainable. Consider investing in a county’s debt, one with ballooning budget deficits, stubbornly high unemployment and a central bank printing dineros as quickly as we can process trees. No, I’m not talking about Spain, Greece, or the mother ship (Ireland), I’m talking about the good ole US of A. POP!

Closed end bond funds were among the exchanges leaders in hitting fifty two week lows recently. Now that sell side analysts and brokers have lured individual investors into the “safety” trap of bond funds, institutional investors are running for cover. This forces prices down and yields up. POP!

In a sign of clearly “talking up ones position” Pimco’s renowned bond guru, Bill Gross recently stated he was investing his own money into bonds. $17 million to be exact into bond funds. This had the band of folks looking to ride his coattails into prosperity jumping in, resulting in a bit of bounce. While the number seems rather large, Bill Gross’ net worth was recently calculated at close to $2 billion. $17 million of $2 billion really isn’t much of a statement and to these eyes appear to be one bond fund king, talking up his own position. POP!

My early take is for 10 year Treasury yields to finish 2011 at closer to 5% than 3%. My current sense is QEII should not morph into QEIII or IV. Doing so would help nose dive the value of the dollar and potentially sink the economy. Chairman Bernanke does not in action anyway resemble Captain Edward Smith,(although both were fully facially folicled) anymore that the Good ole US of A resembles the Titanic.

The potential for Growth and above average Income can be had in the Blackrock Global Fund-BOE. BOE is a diversified fund that when launched priced at $25 a share with the objective of paying out 9%. Since that date, even during the near collapse of our markets, BOE continued to prudently pay its hefty dividend. As the gloable market and economies continue to heal, investors are well compensated by the hefty yield of 12.6% at current levels as well as the opportunity for capital appreciation.

In a note of full disclosure I may currently own or look to own in the future for myself and my client shares of Blackrock Global Fund-BOE. Before making any investment decisions please perform your own due diligence and contact your investment professional.

The Three Horseman Have Arrived

2010-11-17T10:46:00.002-06:00

This summer market participants were all on pins and needles worrying about a possible double dipping economy and thus sat on their wallets. Then September came around and investors began sensing change was in the air. First a shift in power up on Capitol Hill seemed a fore gone conclusion. Second the Federal Reserve seemed to be telegraphing a second helping of Quantitative Easing or QE II. Third the consumer refused to succumb to analyst surveys of their demise and the impacted spending habits due to a de-leveraging of their balance sheets. The arrival of these three horseman cheered the market and it has vaulted higher ever since.

Then a funny thing happened on the way to QE II, some jobs showed up. The balance of power was restored up on the hill and the end to reckless spending seemed in sight, along with the most likely extension of the "Bush" tax cuts. How about that. Many Wall Street prognosticators are relying upon QE II for the market to continue its ascent. As this current move was driven by liquidity, liquidity and more liquidity needing to find a place. Bonds were the early beneficiaries, and as a result, yields plummeted. Equities are finally being invited to the party as investors finally begin to take on the more visible "risk" inherent in stocks. Most investors don't fully understand the risks associated with bond fund investing. Unfortunately, they will soon enough. But, what happens in the following scenario:

1.Job creation is real and begins to trend higher.
2.Global consumption is back in earnest and trends higher.
3.The US dollar bottoms and the race to debase ends.
4.The wild card. QE II is the final chapter in the Feds playbook to kick-start the economy and re-flate assets necessitated by a stronger US economy. Whoa!

At this point in time, as much as corporate earnings have been stellar, this rally we've experienced off the March '09 lows has been primarily liquidity driven. I believe our next leg up will be more a function of fundamentals. Improvements on the job front may prove to be sustainable and downward pressures on weekly claims appear to be forming. In 2010 alone in excess of 1 million jobs have been filled. More work needs to be done, but just over one year ago we were bleeding over 500,000 job losses a month. This last earnings season we witnessed a second quarter of top line revenue growth and breadth was excellent. We continue to see companies bringing on temp workers. This action is typical and healthy. Companies bring on temp workers due to uncertainty after a sharp recession. As they become more comfortable with the recovery, those temps become permanent hires.

Risks are many. Front and center is the Fed once again. Monetary policy is more a sword than a scalpel. The Fed has attempted to push money to where it was needed most. They have not been entirely successful as many of those dollars have found a home invested in foreign and emerging markets and commodities. Let's hope no major arteries get nicked when the Fed begins to withdraw some of those hundreds of billions. Move to quickly, potentially choke off any recovery. Act too slowly and potentially ignite a sickening bout of hyper inflation.

It is early. The Fed has begun it first round of QE II initiated last week. We're currently experiencing a, most likely healthy round of profit taking. The dollar has firmed, for now. Negotiations up on the Hill have begun on the "Bush" tax cuts and austerity measures. And Black Friday is ten days away. I remain, as I have throughout this rally, cautiously optimistic and even more so now that the balance of power has been restored in Washington. Should there be a shift, I will not hesitate to move to a more defensive investment posture. For now, we maintain an aggressive allocation to equities and no exposure to the potential bubble in US treasuries.

Full Steam Ahead Into Earnings Season-Income Investors Can Look To The Hartford Stag

2010-10-19T10:12:00.002-05:00

The economy has been in the ICU now for over two years. It’s been coddled, medicated and stimulated. Much like a patient in extreme pain. Morphine is administered at drips initially and slowly increased as the body builds up a tolerance to it. Eventually the dosage necessary to ease the pain overcomes the patient entirely. So what soothes the patient’s pain ultimately leads to his demise. The same may be true with stimulus. The initial injection works wonders and we get a super high. The next drip, less so and so on. My point, the next, if needed, dose of quantitative easing or stimulus must be targeted and provide such a jolt to cure the patient or else.

The economy has entered into a “new” phase or as Pimco’s CEO Muhammad EL-Erian references a “new normal” of subpar growth. I would argue that assessment, but I still argue that peanut butter and chocolate don’t go together no matter that Reece’s Cups sale suggest otherwise. I believe the US economy is in a self orchestrated restructuring, accelerated by the financial contagion. Over the last 25 years corporate America has invested hundreds of billions in technology and further educating our workforce. They are reaping the rewards of their investments now. The US has the best most productive workforce anywhere. We also operate in a virtual, ‘just in time’, inventory environment.

Our success though has morphed into an albatross or an anchor around our necks. American productivity is at all time highs. This means existing workers are being asked or demanded to work harder and more efficiently than ever before and are responding and up to the tasks. Investments in inventory management are paying off handsomely also. Inventories are lean and should remain so. Why should companies stock or overstock shelves and cross their fingers the consumer will show up? From a corporate view, that’s wasted money sitting on those shelves. Now, due to their aforementioned investments, this is no longer necessary. Everything is virtually a phone call or mouse click away from factory floor to showroom shelves. So, as we transition to this next phase of our economy, lean inventories and stubbornly high levels of unemployment should linger.

What’s ahead? Change is in the air. The Republican Party should route the Democrats in the upcoming midterms. I say this from a politically neutral perch. My job is to remain politically neutral, unbiased, unemotional and seek to navigate the markets regardless of whom or what party charts our direction. That being said, there is not a chicken in every pot. People are being evicted from their homes (rightly or wrongly) in record numbers, with diminishing hopes of reentering the work force. In short, they are unhappy. The Democrats are in control, and so they should receive the brunt of that discontent, and get unseated. Based upon this not so scientific approach and not some party biased poll suggesting otherwise, I believe the Republicans will retake control of the House and Senate restoring the check and balance between the Hill and the White House. No more rubber stamping either party’s billion dollar pet projects. Let’s hear it for gridlock!

Stimulus II? Our elected officials, sensing the unrest amongst their constituency have been floating the idea of another round of stimulus. Stimulus II. Actually their count is off. Remember President George W sent out those gift checks just for being Americans. No, the stimulus we receive, should most likely come in the form increased exports and an expanding domestic clean energy sector. Both should spur job growth and domestic consumption. Next we should initiate another tax holiday to encourage Global US companies to repatriate their foreign dollars, some estimate to be in excess of $700 billion, sitting overseas. Once back on our shores, companies could reinvest those dollars in new factories and hires. Increase dividend payout and stock buybacks etc. Next, we must end the madness as a government with regard to reckless spending. Just because we/they have a credit card doesn’t mean it needs to be maxed out every month. Sooner or later your credit score gets impacted and your card revoked. That day of reckoning is a good distance down the road for the US of A, and most likely not in our lifetime, but it simply cannot be ignored, and it must be dealt with now to keep it out there.

The next few weeks should be very interesting. We are in the process of ramping up earnings announcements which should create a strong backdrop for the current rally and strengthen the argument for higher valuations. The Federal Reserve is threatening/telegraphing, their intent to remain vigilant in their knock down drag out fight, (one which cannot afford to be lost) against a deflationary death spiral. The rebalancing of power in D.C even if control is lost in only the House or Senate should be enough. All three ingredients combined could lead to a powerful move to the upside. I’ll continue to monitor the economic landscape and earnings results for warning signs. For now, investors, both individual and institutional remain underinvested as a whole. There remains $7 trillion sitting on the sidelines. Time is running out to reach their year end targets, which works to the benefit of our aggressively invested posture.

Many insurance companies got caught up in the near collapse of our financial system. Banks and Insurance companies alike are clawing their way back from the edge of the abyss. One such company, Hartford Insurance still has work ahead of itself but appears to have turned the corner. The company's annuity business is a cash cow and as insurance premiums begin to firm up after a long painful soft market investors can sit back and collect a very attractive 7 1/4% on the convertible preferred. In the current zero interest rate environment that's a home run in my book.

In a note of full disclosure, I may already own or look to own in the future shares of HIG-A for myself or my clients. Before making any investment decisions please do your own due diligence and contact your investment advisor or myself.

Have a terrific day and a wonderful week!

FOMC Preview-Is Chairman Bernanke Backed Into A Corner? Think Again

2010-08-09T10:28:00.000-05:00

Could we receive a surprise announcement tomorrow by Federal Reserve Chairman Bernanke,”The Fed has cut rates again”? The pervasive feeling around the hallowed walls of Wall Street investment houses is the Fed will initiate another round of quantitative easing. It is almost being demanded by Wall Street economists as they read through the tea leaves of economic data and don’t like what they see. Chairman Ben is being called out. Some opine he’s coming to a gun fight with a pea shooter. The rationale being, with rates already at zero, he does not have many tools left to fend off any further economic weakness or equally worrisome the re-ignition of deflationary pressures. I mean, he cannot cut rates to zero minus a quarter percent. The rallying cry to ramp up the printing presses and sling another oh, trillion or so at the economy and see what happens is growing louder.

I would suggest they are missing one very obvious measure he has in his gun belt. Another round of quantitative easing should be shelved as a last resort. We’ve debased the good old US greenback enough this year. Keep that bullet in the chamber for the definitive signs of a double dip recession which are not apparent yet. Here is a simple two step plan that accomplishes what the pundits are suggesting is needed while leaving the Feds printing presses idled.

1. Currently banks have been parking their excess reserves at the Fed and receiving a return on those reserves for the first time ever. The Fed needs to end this practice of paying interest on reserves. Those monies earning zero now, would be taken back by the financial institutions and either redeployed into small business loan and consumer credit or another potential use would be to purchase investments securities, US Treasuries, FNMA and Freddie Mac Mortgages for instance, which would assist in keeping rates ultra low and accommodative. Exactly what they are suggesting the Fed needs to do. How much you ask? $1 trillion+ is sitting at the Federal Reserve currently.

2. The Obama administration needs to take a page from the Bush playbook. I know most copies were burned and are hard to come by. However, there were a few notables. This one, a tax cut for companies with foreign earnings. A cut to 5% from 35% to encourage companies to repatriate those profits sitting overseas, being invested overseas, creating jobs on foreign soil. Incentivize corporate America to bring those profits home to the good ole US of A to invest in their domestic plants and hire the best workers in the world. The last time we offered up this tax holiday the response netted $500 billion+ coming back to our shores.

That’s $1.5 trillion potentially available for investment in new plants, employees and /or asset purchases. Just happens to be the same ballpark figure economists are calling for the Fed to ramp up the printing presses and magically create for another round of quantitative easing. Aside from that $1.5 trillion, if we’re able to gain the confidence of corporate America that the economy is on firmer footing, that those new hires will firm up consumer demand and lead to a sustainable recovery, it just may encourage them to release some of the $2 trillion sitting on the balance sheets of non-financials. I’m not necessarily ruling out that another round of quantitative easing won’t be necessary should the economy come to a complete stall and asset prices begin a spiral downward, I am suggesting there is currently another prudent potential response. This one is so obvious it’s virtually hiding in broad daylight.

Investing In Today's Market With A Bottoms Up Approach

2010-08-05T07:06:00.002-05:00

Bottom's Up or Top Down.
You can view her from the top down or from the bottom up. Either way she's looking pretty snazzy these days. Corporate America that is. What is this top down or bottom up. They are simply two separate disciplined approaches used to analyze potential investments.
Utilizing a top down approach we could start with a macro approach or a view from ten thousand feet above. Beginning with the overall economy, monetary policy, consumer sentiment and consumption, which sectors look attractive and finally all the way down to an individual company and earnings, revenues and opportunity.

Now to the bottom up, we'd start from the "micro" or individual company then sector, growth opportunity etc. all the way back up to that perch ten thousand feet above. I don't mind a bit of both when I'm doing my personal research. It takes a bit more time but, it's worth the outcome.

I've looked at today's investment using both and no matter how I look at PPL I believe I have to own it. I wouldn't mind owning the common stock sporting an attractive 5% dividend yield. However, if I like 5% I have to love 9 1/2% which is what the convertible preferred pays. PPL is a diversifed electric utility with assets in the UK but primarily domiciled here in the US and founded in Pennsylvania. They are anything but a boring old utility. Their growth strategy lead to the most recent acquisition from EON of their Kentucky assets. This recent acquisition should have a negative impact on earnings for the next two years. Then the story changes and the growth trajectory should reemerge. The ROE remains attractive. As the economy even modestly improves electricity demand should increase and profits follow. In the interim, since we own the convertible preferred we'll be collecting our 9 1/2%. Even in a tepid recovery and incremental improvement in demand could see a 2-3% appreciation in the stock price for a double digit total return. That's before we see the full benefits of the recently acquired Kentucky assets.

In the current interest rate environment of 3% Ten Year US Treasury Notes and 1 5/8% 5 year Notes 9 1/2% is pretty snazzy no matter how you look at her.

In a note of full disclosure I may own for myself and my clients shares of PPL and PPl+U convertible preferred. Before making any investment decisions please do your own due diligence and contact your financial professional. Or you may contact me at Grand Street Advisors 816-510-9897.

Earnings And Guidance At Odds With Economic Data For Yield Hungry Investors Bristol Myers May Have The Cure

2010-07-18T02:04:00.003-05:00

Grand Street Advisors

Market Snapshot

July 2010

The market and economy seem to have collectively limped into quarter end and the half way mark on the calendar. The recovery remains in tact, albeit the strength and durability have come into question. The main culprits causing this bout of agita remain the same, housing and employment. With the home buyers tax credit having expired we witnessed a thirty percent drop off in sales. Obviously, the credit had pulled forward some future sales. Unemployment, as captured by the non-farm payroll numbers dropped by 125,000 and the unemployment rate dropped to 9 ½%. These figures were nothing to smile about. However, viewed in context and with a wider lens, on a three month basis, we see job growth trending higher. As well, using that same lens we can see a bottoming of the home sales numbers and stabilization in the rate of home price declines. Looking at these numbers on this basis makes sense since in a recovery, history suggests and it is playing out right now, any recovery will be uneven. Now, should the weakness in both indices carry forward, this obviously would be worrisome and bears watching closely. For, now market participants are taking this current market weakness to begin snapping up oversold equities. The flight to safety, or the fear trade which drove ten year treasury yields to 2.95% and 30 years bond yields down to 3.87%, is beginning to unwind with both popping up above 3% and 4% respectively.

The Artificial Intelligence(AI, not Allen Iverson you basketball fans) amongst the financial community continues to proclaim short term rates as controlled by or influenced by the Federal Reserve as artificially low or depressed. It is coming close to the point in time to concede this hypothesis as flawed. Fed funds at zero appear to be exactly where they need to be, for an “exaggeratedly extended period of time” (new phrase to look for at next FOMC meeting). Propping up the economy with free money may be necessary throughout 2010 and into 2011 and beyond. Thus far the Federal Reserve has helped reliquify and recapitalize the banking system by allowing them to borrow at virtually zero (think about your CD’s, checking and savings accounts) and lend out at 4 ½% at a minimum ( mortgage rates). While the costs to borrow for consumers are at generational lows, borrowing has not been as brisk as one would anticipate. One solution, collapse spreads further (Rates charged - Cost of acquisition) now that bank balance sheets are healthier and well capitalized. While 4 1/2 % on a 30 year mortgage appears and is, inexpensive by historical standards what effect would 4% or 3 ½ % rates for the housing industry let alone small business have? Why can’t rates drop there? Can this happen? Of course. I offer it should happen and now. A bit of prodding by the Federal Reserve Chairman could get us there tomorrow. Washington has its hands tied now with an election year amid mounting pressure for debt reduction and not another round of spending, excuse me stimulus. The economy is in a process of coming about. Finally. It will take a while, but it certainly has begun. It requires a bit of priming the pump. Targeted tax cuts would go a long way, but there is no consensus on this front. Once again, during this crisis it may fall on the shoulders of Chairman Bernanke to do the heavy lifting. Spreads need to collapse from the bare minimum four percent closer to two, two and a half. With the cost of funds so cheap we may once again spur small business lending and accelerate consumption along the way. Banks will need to revert back to prudent lending standards, which has already begun. These lower costs of funding should encourage home buyers to get off the sidelines and soak up some of the current bloated inventories of unsold homes. This would further help to stem the deflationary tide dragging down asset valuations and the ensuing negative wealth effect on consumers.

Looking forward we must keep a global perspective. The US market was held hostage by the near collapse of the Eurodollar and questions surrounding the capital reserves of large European financial institutions. The recently announced bank stress tests should help alleviate some of these concerns and promote a round of capital raising for financial institutions in need. The results of those tests will be made public later on this month. We may experience some market jitters as those results are anticipated and/or leaked. The US expansion is not alone as China and India economies continue to expand at rates in excess of 7%. Recently released data show job growth gaining traction in Korea, Australia and our neighbor to the north Canada. Being that a good part of our economic recovery game plan is based upon an effort to double our exports this is very positive news.

In closing investors still scarred from the 2008 near collapse of all markets had their band-aids ripped off along with a bit of the scab by the flash crash. A sell first ask questions later mentality re-emerged. Valuations currently look very attractive, but there was some technical damage inflicted upon the charts so caution prevails. This earnings season, about to kick off next week, most likely will determine the direction of the markets for the remainder of the summer. Revenues and earnings should once again beat estimates handily. This time it will be all about the guidance. CEO’s may need to walk the tightrope here. Overly cautious or pessimistic guidance and stocks will get pole axed. However, investors will want and expect a true assessment of the current business environment and end user demand. My sense, based upon conference calls and independent research reports, is we’ll get a modestly positive outlook, which, due to the selloff in June, should be enough to introduce a positive bias to value and income seeking investors. However, I must note there is some concern brewing in the divergent paths CEO guidance has taken relative to recent economic releases. Guidance has, thus far been quite favorable for the most part, while economic data point to the economy heading towards a stall.

We’ll continue to monitor copper, charts, markets and economic releases for a clear signal to either become more defensive or to more fully engage the markets.

For investors seeking an alternative to treasuries, we look to Bristol Myers and the attractive 5% yield it currently sports. The company has a robust pipeline that should help eleviate some of the pain of existing drugs coming off patent protection. The dividend is well covered with cash flows and patient investors can collect the income while awaiting the pipeline to mature.

Euro-Crash or Euro-Trash? Along With A Compelling Case for Transocean Bonds

2010-06-10T12:25:00.002-05:00

I must admit I may have spoken a bit too early in my mea culpa to European Central Bank head Jean Claude Trichet. Now I may be wrong but it appears that orchestrating the E.U, I.M F bailout fund absolutely wore him out and he needed another extended nap. Make no mistake about two things. 1. The Eurodollar and the European Union is under siege. 2. US markets are being held hostage by the Euro dollar. Where is the leadership? At a time when liquidity is becoming tight, the European Central Bank is accumulating Euro’s. Have they learned nothing? Say it with me, Quantitative Easing! President Obama, our Irish President was searching for a bit of arse to kick a few short days ago, here’s one with a bulls-eye, and in need of it. Wake Up! The ECB must take a page from the Bernanke Fed playbook and expand the balance sheet. Purchase assets and pump Euro’s into the system. Take a look at Spain’s financial behemoth, Banco Santander-STD. Their business is churning along. Their expansion plans being executed, most recently with the $2.5 billion purchase of Bank of America’s, Santander Mexico stake. Yet, the stock is getting taken to the woodshed daily. Why? Fears of liquidity or rather illiquidity. Santander generates tons of free cash flow and is very well capitalized. However, if Trichet continues to stay the course in building his Euro stash, perception may become reality and tip the first domino. Highly unlikely. Even he must be aware of the pressure from vocal EU member Germany to follow the Bernanke playbook.

I’ve noted in the past a Eurodollar target range of $1.12-$1.15. Yesterday’s action was impacted negatively by two things. Goldman Sach’s revised their EU target to $1.15. Separately, traders, talking up their positions are whispering about a potential (not likely) prepackaged bankruptcy for British Petroleum-BP. BP generates $300 billion in annual revenues along with roughly $20 billion in earnings and has a global footprint vs. as yet an unknown liability in cleanup and compensation. Any settlements would likely take years to agree upon in our court system. Which in the mean time, BP can begin to reserve against potential claims. However, it is an election year so, what the heck give a politician a soap box. Midday a story floated out that 30 lawmakers sent a letter to BP head Haywood suggesting he suspend the dividend. When did the legislative body begin to have a say in whether a publicly traded company “may” be permitted to pay their investors and shareholders (which may include state pension funds) a dividend. Oops! One caveat may be legislators may be allowed if the US government owns shares of said bailed out company. Otherwise, butt out! This impromptu proclamation,” you’ll pay not a dime before it’s time” flung open the gates for selling anything oil related and helped wipe out the days gains.

We are most likely trading within a well defined trading range. Probing both support and resistance for investor resolve. The Euro must find its equilibrium. We’ve tossed the child into the deep end of the pool to teach him how to swim. Coaches Merkel (German Chancellor) and Berlusconi (Italian Prime Minister) are bellowing instructions. Good thing. The life guard (Trichet) is at the other end of the pool checking bikinis. Lastly, Chairman Bernanke reiterated what I’ve been seeing in the overall recovery. Namely, things continue to improve. The velocity of money movement is increasing, inflation is benign, interest rates will rise,,,, at some point and job creation is uneven but improving. The message? Domestically we are in much better shape due to many of the aggressive earlier steps taken. The probability of a double dip recession is limited. So, let’s just keep our eye on the bouncing Euro. Euro-Cash to Euro-trash in this environment is a rather short hop.

While BP has been the headline grabber Transocean's-RIG, stock and bonds have also come under intense selling pressure. This may be presenting a buying opportunity RIG's bonds due out in 2018 were yielding 8 7/8% as of this morning. Litigation risks and cleanup costs remain surely. However, Trans is a well diversified company, generates $11 billion in annual revenue, $2.8 billion in annual earnings, $1.5 billion in cash on hand and a manageable outstanding debt level.

In a note of full disclosure I may own or look to purchase in the future Transocean bonds or equity. Before making any investment decision, please do your own due diligence and contact your investment professional.

Time For A SIP of Volatility Along With A Second Look At Pepsi

2010-06-01T11:07:00.001-05:00

The current market volatility has shaken the staunchest bull to his horns. Conventional wisdom would conclude based upon these known variables, an accommodative Fed + improved corporate earnings and revenues + an economy in expansionary mode + benign inflation + job creation gaining momentum, should = multiple expansion along with higher prices on the major indexes. So, why has conventional wisdom been tossed out the window? Here’s a sour tonic to SIP on, add one half cup Spain to a quarter cup of Italy and Portugal, shaken not stirred. Extremely bitter if not taken with a bailout sidecar. With Greece’s can kicked down the road, investors shifted their focus to their EU brethren with similar characteristics. Over leverage, overly generous social programs and stagnant domestic economies coupled with a need to tap the credit markets to refinance outstanding debt and fund bulging budget deficits. If that doesn’t give you a buzz, try this for the next round.

China’s real estate market has all the markings of our tech bubble of the ‘90’s. Excess liquidity, a seemingly insatiable investor appetite for anything tech/Real estate and valuations stretched to the limits of common sense, but surely not priced outrageously by some computer model. China is attempting to deflate the real estate bubble by a number of aggressive measures, short of raising interest rates. They’ve raised bank reserves and they’ve required higher down payment on purchases to name a few. Why not simply hike interest rates? Raising rates would theoretically attract foreign investor dollars seeking the most attractive returns. This may in turn cause an appreciation of the Yuan vs. the greenback. China wages a daily battle to suppress the true value of the Renminbi, lest their goods may not appear as cheaply to their primary trading partners. If current steps taken prove unsuccessful and the real estate market does take the historical path of bubble then burst, the growth engine of the global economic recovery may sputter. The ripple effect would be felt across the south Pacific and may tamp domestic growth which is becoming more and more reliant on exports.

To recap, we have opposing forces at work currently. The Euro dollar may experience further depreciation in the near future, which would suggest more pressure on equities and commodities is in store for us. While China’s real estate market is looking bubblicious, the domestic economy grew in excess of 11%. Not to be overlooked, India’s domestic economy grew in excess of 8.5%. Back in the US, the domestic economy has returned to expansionary mode which, after originally having gotten off to a lack luster start is beginning to gain momentum creating jobs. Consumers, when employed tend to consume more. Meaning more computers and I-Pads bought. More new cars and appliances purchased. Equally significant these same consumers tend to make timely payments on their mortgages and credit cards balances. This should translate to lower defaults and foreclosure levels along with a more stable financial system more willing and able to make prudent loans to small businesses and qualified borrowers.

Our posturing remains virtually the same, balanced but cautious. The GSA year end target of 1250-1300 for the S&P 500 index remains in tact with a neutral bias. We’ll continue to monitor economic, geopolitical and corporate news for any revisions to our forecast.

While gittery investors run for cover, value investors willing to dig through the carnage may take this current volatility to pick up shares of Pepsi of all companies. Pepsi's global beverage and snack franchise story is no less compelling now at $63 than it was at $67. If anything sporting a 3% yield you can fall back on the old adage, "if you liked it at $67 you're going to love it at $63". Pepsi's global franchise should continue to spur top and bottom line growth as they expand their foot print with existing and new beverages and snacks in new and mature markets.

In a note of full disclosure, I may currently own or look to purchase in the future shares of Pepsi for myself and my clients. Before making any investment decision, please do your own due diligence,contact your financial professional or contact myself.

The Economic Recovery In Full Swing As Earnings Season Kicks Off

2010-04-19T12:01:00.001-05:00

The economy continues to show signs of healing reflected most recently in the Leading Economic Indicators coming in at +1.4 the highest reading in ten months, the household job survey showing 260,000 jobs created in the prior month (over 800,000 the previous 3 months) the ISM Manufacturing and Non-Manufacturing Indexes hitting multi year highs and retail sales for March registered a 9% gain. The best showing in more than a decade and the fourth consecutive monthly gain. The argument for a double dip recession is bleeding disciples at critical rates. As stubborn as the bear membership has been, the mounting evidence can overcome the most ardent of camp residents. As the market has continued to grind higher, it has once again put us at yet another potential capitulation point. Either earnings season will provide such a compelling story as to force defensive investors into finally re-engaging the markets or earnings and forecasts will simply meet and disappoint overly optimistic bulls and the much anticipated and forecasted breather will finally materialize in a 5-10% correction. To date, fifty one of the S&P 500 companies have reported and here are the stats:

88% Have reported a beat on earnings per share.
64% Have reported a beat on top line revenues.

The trap investors may fall into is watching the mounting evidence of economic expansionary data and looking past the any number of 200lb gorillas in the room for concern:

1. The European Union and International Monetary Fund has finally dealt with the first of the aforementioned PIGS, with Greece’s ongoing debt refinancing. Or have they? The saga continues, all the while Portugal is getting warmed up to step into the batters box to test the markets appetite for debt refinancing from a country reckless with its spending and unwilling to undertake prudent fiscal measures clearly necessary. I’m talking about Portugal not the US.

2. A potential trade war with China. The saber rattling is ramping up. The time for a more aggressive revaluation of the Yuan is nearing…..or else.

3. Oil currently trading around $85 barrel, while gasoline is hovering just below $3.00 in most markets. Could we experience another super spike? Can our fledgling recovery handle it?

4. Maybe the 400lb gorilla in the room is the end of Quantitative Easing. Without the Federal Reserve supporting the Mortgage Backed Securities markets with the closing out of March, is there sufficient private demand to support mortgage rates of 5%? 5 ½%? 6% or will investors demand higher returns? If so, can the housing market continue its bottoming process if mortgage rates pop to 6%?

5. Will the economic strength prove sustainable? Will this force the Federal Reserves’ hand in a pre-emptive inflationary strike to hike interest rates?

There are many more of these gorillas in the mist, but these seem to be the alpha males most dominant in the pack. For now, the mountainous positive economic data suggests a continued aggressive posturing. We’re cognizant we’ve come such a long way off the March 2009 lows and the market is perhaps currently fairly valued. Keeping things in perspective, we’ve only recently recaptured the high ground lost from the Lehman collapse. Now, earnings season is upon us. As Warren Buffet so eloquently put it, this is a time where when the tide goes out we can all see who’s wearing swim trunks and who isn’t. So, prepare for either seared retinas or pass out the hiking boots, wake up George and Wheezy because we’re moving on up. Personally I’d look for some nice thick socks and forget about any protective eye wear. The pre-announcement period to earnings has come and gone. Typically companies that may have missed on earnings or revenues attempt to telegraph this to institutional investors in the weeks leading up to earnings season kickoff. This season, not a peep. However, as always, I’ll let the market tell me where we’re going. Should we receive a pause signal we’ll be in touch immediately as we’ll look to get a bit defensive and raise our cash position.

Income anyone? Aon Corporation is the largest insurance broker in the world have dethroned Marsh McClennon after the Greenberg-Spitzer clash of the titans or is that the Titanics. Having witnessed the spectacular fall from grace of both it's easily confused. Aon has basically jettisoned the risk taking arm of the company while expanding its core brokerage footprint globally over the last five years. Investors are left with a streamlined company less exposed to the catastrophic nature of the insurance business. Now with insurance premiums stabilizing along with an improving economy and cash flows, investors should be well protected locking in an 8% yield on Structure Products Corts Aon Capital 8.205%-KTN at todays levels.

March Madness or Much of The Same

2010-02-28T09:42:00.001-06:00

The economic and business recovery is clearly underway. That is ex-jobs, but let’s not split hairs. On another front we’ve navigated our way through earnings season virtually unscathed by major disappointments. Quite the opposite. Thus far S&P 500 reporting companies have beaten earnings and revenue estimates 70% of the time. Accompanying this stellar performance is a raising of the bar for future earnings and revenues guidance and an upbeat outlook on end user demand from CEO’s.

In the current low interest rate, benign inflation environment coupled with rising corporate revenues and profits we should be popping champagne corks right? So, why are we not bathing in the Dom Perignon? There’s an old saying on Wall Street, “The bulls and the bears make money, but the PIGS get slaughtered”. Well this PIG must have swine flu because it has single handedly derailed a perfectly good bull market rally. The infected PIGS is not of the Wall Street brethrens. These PIGS are Portugal, Italy, Greece and Spain. The all too familiar symptoms have been identified, over leverage and too much debt. Sound familiar? Think Bear Stearns and Lehman Brothers for starters. The first of the PIGS to hit the skids has been Greece. Greece like many, borrowed heavily and the global recession has taken its toll. The time for belt tightening and fiscal discipline is upon them. The response has been less than inspiring to say the least. Once again, Jean Claude Trichet, awakened from his slumber by German Chancellor Merkel has finally stepped forward with some reassuring words to soothe the markets panic. Any type of bailout, should one be necessary, must be flexible enough should the remaining piggy’s hostels begin to tremble. Greece in of itself is not that significant, the California economy dwarfs the country’s GDP, even the event of a default would not cause the global economy to seize up. But, the pervasive fear had/has been similar to the Investment Banking crisis here in the U.S. If Bear Stearns than Lehman Brothers. If Lehman Brothers than Merrill Lynch. If Merrill Lynch than Morgan Stanley and so on right up to the Goldman Sach’s frat house. In Europe the fear is if Greece fails then Portugal. If Portugal than Italy. If Italy than (and this is the more significant one) Spain and the death spiral gathers enough momentum to toss the global economy into free fall again. So, the need to draw the line in the sand and prevent the short sellers and a bear raid on these countries sovereign debt and currencies was imperative. Bully for Chancellor Merkel. Strike 2 for Trichet.

The good new is the announcement of the possible rescue should allow investors to reflect back on the fundamentals which appear to be firming up quite a bit from depressed levels. Investors now need some clarity around the regulatory risks injected into the market by our elected officials. Healthcare reform. Financial regulatory overhaul. Higher taxes. Investment professional and corporations need to clearly understand the rules before they can make long term capital commitments. How can the Jayhawks, Tigers or Wildcats run an offensive scheme if the refs keep moving the 3 point line? All players have identified what the issues are. Now elected officials and lobbyists are currently walking these through to resolution or stalemate either works as even a stalemate reverts back to the status quo and removes an unknown from investment variables to consider before deploying capital.

In our opinion the current gyrations of the market are reflective of the market being fairly valued. Market participants are waiting for the holy grail of the recovery Job Creation! While unemployment claims remain stubbornly elevated, we may see positive job growth reflected in the non farm payroll numbers this coming Friday due a slight recovery in government payrolls. We continue to see a strong pick up in manufacturing activity while a lag persists in the service sector. Housing continues to be the Achilles heal, but should, in my opinion be viewed positively. Housing starts continue to drag along at deeply depressed levels, suggesting a weak housing sector. I would argue for the necessity of these low levels of new construction in order for the market to absorb the excess supply currently available due to a decade of overbuilding. Fourth quarter GDP surged +5.7%. While this pace will not carry over to the first quarter 2010 the positive growth should continue and post a more modest 2.5-2.6% rate of expansion. This drop off may be explained by the building and or depletion rate of inventories. Even so, the consumer has held up better than almost anyone would have expected or could have explained. We are seeing a leveling off of credit card delinquencies and charge-offs. While still at elevated levels, much progress has been made.

While we remain cautiously upbeat and view the current market churning nothing more than a healthy bout of profit taking. Should any further deterioration materialize, we would take a more defensive posture and raise our cash positions. For now, we continue our research and look for the signs that the time to deploy our cash is upon us. When those signals come we’ll be in touch immediately.

Kansas City based Inergy LP continues to offer a compelling story for investors seeking growth with an attractive dividend. At current levels Inergy yields 7.6%. Inergy operates in the fragmented Propane gas market. It is one of the most active consolidators in the industry. However, this is no one trick pony. Seeing the shift towards clean energy and the necessity for the infrastructure build out, Inergy has entered into the Nat gas pipeline and storage facility arenas. The US is moving aggressively, finally, to tap into the enormous domestic natural gas deposits. New technology has made accessible and economically viable gas deposits in the Marcellus Shale deposit. Located in New York, Pennsylvania, and Virginia exploiting these wells should lead the US down the correct path towards energy independence. In order to transport the gas significant private investment has had to be made to build out the pipeline and storage facilities. Here’s where Inergy staked it bets. The company has continued to expand on both fronts. New pipeline and storage facilities should come online in the near future adding to earnings, cash flows and lead to yet another hike in the dividend payout. Since inception, 2001 this local star has rewarded investors each and every year by doing just that. Another bonus, since this is an energy Limited Partnership structure, the dividends are considered tax advantaged in most cases. ,

In a note of full disclosure, I may own for myself or my clients shares of Inergy LP-NRGY. Before making any investment decision, please do your own due diligence and consult your investment professional to identify whether Inergy would be an appropriate investment candidate.

Fourth Quarter GDP Fails To Impress

2010-01-30T11:51:00.001-06:00

The US economy rebounded smartly in the fourth quarter, with Friday’s release of fourth quarter growth as reflected by GDP coming in at a much stronger 5.7%. These figures were aided by the now expired cash for clunkers auto purchase program to a degree. However delving deeper into the details reveals non-auto spending came in at a robust 2.9%. What cannot be ignored also, since the US consumer accounts for roughly 70% of our nations growth, wages, salaries and benefit rose by .5% Most importantly we see business investment reversed the prior three month decline of 5.9% to post a positive 2.9% expansion. When we finally see evidence corporate America is no longer hoarding every dollar and is in the nascent stages of deploying capital due to increasing confidence in their respective businesses, can adding headcount be far down the road. Just in January alone we see another sign of healing in one of the most troubled areas, autos. All the domestic major automakers, Ford , GM and Chrysler are adding headcount amid stronger than anticipated demand. Another positive for the area, US Bancorp recently announced they plan on bringing 1100 new jobs to the local area. Additionally local Medical IT provider Cerner Corporation inked a deal with Wyandotte County to build a new campus beginning in 2011 which could potentially introduce 4000 new jobs by 2016 to the area. These are all positive signs, and if we can think for a moment of the US economy in terms of an oil super tanker making a turn. The US economy is the most mature and largest in the world, so we cannot make turns as quickly as a speedboat. But these clearly are early signs we are coming about!

Now the market is taking a breather in the wake of this early good news. The bulls have had a historic run, off the March 2009 lows. The current scorecard for earnings season for S&P 500 companies reflects 70% have beat estimates thus far. Even with earnings season producing outstanding numbers and guidance relatively good we seemed to have stumbled. We need look no further that Capitol Hill. Market participants have shifted their monocle’s temporarily away from earnings season as they consider the regulatory risks now being considered in Washington . The Democrats, having lost an important seat in Massachusetts , are fine tuning their message and focus. Currently a shift away from Healthcare reform and now more aggressively towards taxing large banks and (finally) job creation. These are all worthy and necessary causes, however the current debate on Wall Street and Main Street are priority and timing. At a time when credit remains elusive for many individuals and small businesses, should we be taxing banks and therefore removing even more money from the lending pool? This question along with the threat of higher capital ratios and separation of banks and risky investments may have the effect of banks hoarding cash until they receive clarity around these issues. One possible outcome, companies put expansion plans on hold, small businesses can’t execute their business plans and new hires never materialize causing a double dip recession.

These are valid concerns, however I remain very confident in the resilience of the US worker and the entrepreneurial spirit of Americans as a whole. The current market pause, may prove, as I believe to be a natural healthy bout of profit taking after having rallied 70%+ and provide opportunistic investors attractive entry points for new money.

2010-01-08T09:06:00.000-06:00

Exiting 2009 we collectively breathe a sigh of relief and look to the future and the new normal. Our initial outlook for the market and economy remains favorable. The easy money policies of the Federal Reserve should continue to provide the stimulant this recovery has become so reliant upon. Through the first half of 2010 corporate earnings should continue to surprise to the upside. We should see a resumption to job creation in the first quarter perhaps as soon as February. I anticipate the Obama administration rhetoric to make a Clinton-esque type shift emphasis towards cost cutting and balancing the ballooning budget deficits and away from entitlement programs and tax hikes. This shift should restore confidence in the severely weakened dollar.

While risks remain, and I’ll share a few later on, with the economy continuing to heal, real estate on the mend and the fob front improving by the week, the surprise in my opinion may be the strength of the recovery and market advance. With that said GSA looks for the overall market to advance unevenly throughout the year and sets a year end target of 1250-1300 on the S&P 500. We gather our target by looking at S&P 500 earnings of $78.00. Based upon benign inflation and expectations for Fed Funds rates to remain in a range of 0-2% we utilize a 16-17 market multiple. This target may be breached before year end and a revisit may be necessary to either adjust strategy or raise targets based on the conditions that portended the breach. We look for domestic growth to be within the consensus range of 2 ½ - 3%. The surprise here may be to the upside as corporate spending picks up materially and follows the return of consumer consumption. This moderate growth projection would work to the benefit of the Federal Reserve as they begin the arduous process of extracting excessive stimuli.

Canaries in the coal mines: We’ll keep an eye on the Automobile industry and Homebuilders. Government incentive programs, Cash for Clunkers and New Home Buyers tax credits have expired or about to. The argument has been made that all Cash for Clunkers did was pull forward future car purchases from 2010 into 2009 to take advantage of the tax credit. I didn’t believe it then and don’t believe it now. However, should they prove me wrong and another big drop off in auto sales does occur it would solidify the bear case and allow the argument for a weak consumer reemerge. The same must be monitored when the home buyers’ tax credit expires this year. While the tax credit may have pushed some folks off the fence, homebuyers were/are taking advantage of exceptionally low mortgage rates and the affordability index in very favorable territory. Mortgage rates will rise perhaps a full percentage point once the Federal Reserve allows its Mortgage Purchase plan to run off later this year. So, again we would anticipate home sales to remain robust as the rush to take advantage of the current environment allows for the excessive supply of homes to be taken down to a more manageable level.

A brief review of economic releases shows the Conference Board LEI up .9% in November for the eight straight increase. Following a .03 and 1.2% increase in October and September. Industrial Production rose .08% in November for the fourth time in five months. Importantly Capacity Utilization rose .07% to 71.3%. Keeping in mind with the US economy operating at 3-4% annualized GDP Cap U would normally be closer to 81%, this leaves plenty of room for expansion without triggering a bout of hyper-inflation. Along with unemployment running just north of 10%, wage pressures should remain well constrained. These two combined gives us comfort and confidence that the Federal Reserve should have some time to execute their plan.

As we enter earnings season we anticipate analysts were too pessimistic with their corporate revenue, earnings along with the consumer to revert back to his spending habits.

Risks: Obviously many. As we exit recessions there arise as many questions as answers. While the trend is early, it clearly favors one of healing and modest growth at a minimum. But, the recovery and flow of information is fluid and uneven at best. Here are a few hot spots, not in any order of significance.

China: The China economy stumbles and growth under impresses. Unlikely as the Central bank just raised interest rates to tamp down growth.

Federal Reserve/Treasury; The Federal Reserve and Treasury misread the strength of the economy and remove stimuli to early. In the need to fend off a double dip they reinstate extraordinary programs and a second stimulus program is instituted further ballooning the level of US debt.

Commercial Real Estate: the CRE market follows the path of sub prime and residential real estate and experiences a collapse of demand and rates.

Commodities: Should a super spike on improving demand and global economic recovery occur, it would have the ability to choke off a fragile economic expansion.

Geopolitical: Not enough room to list them all, so I’ll start with the 800 pound gorilla. Iran. We’ll all be watching, the silence has been deafening, as the potential for Israel to strike Iran’s nuclear facilities may reignite the fuse in the Middle East conflict.

Financials: A major bank crumbles under the weight of risky investments and is allowed to fail testing the new regulators powers to dismember a financial institution.

While there clearly remain high profile risks, the evidence of a Domestic and global recovery continues to mount. We’ll continue to monitor economic releases, geopolitical tensions and regulatory risks for any alterations to our outlook, projections and strategy. As we enter earnings season we anticipate analysts were too pessimistic with their estimates for corporate revenues, earnings and the willingness of the US consumer to part with his greenbacks if THE PRICE IS RIGHT!

Yours in pursuit of the Kwan!

Welcoming Year End

2009-12-15T13:52:00.001-06:00

Where do we go from here? With Christmas, Hanukkah and Kwanzaa now clearly
in sight and consumers and investors in a relatively good mood we should
have a nice quiet conclusion to the trading year. December has virtually
mirrored the rest of 2009. We witnessed promising signs on Home Sales,
Employment and Leading Economic Indicators. Each time a data point was
released the market appeared ready to roar ahead only to quickly lose
momentum and close with a ho hum. We recently saw Dubai taken to the brink
of collapse only to be reeled back from the edge by big brother Abu Dhabi.
The market trembled for a day only to recover fully the following week.
So, again where do we go from here? Barring another external shock to the
market the path of least resistance marginally favors the bulls.

The employment picture continues to improve somewhat modestly month over
month. Productivity remains strong. With an even incremental uptick in
revenues corporate earnings should be set to impress. While credit remains
elusive to some, conditions are much improved from the dark days of early
2009. The Federal Reserve is forcing money out of safe havens into the
lending pipeline. But, there remain bottlenecks and clogs on the way down
to the consumer. Unclog the pipes and look out above.

One last positive note to share, the Federal Reserve just executed another
reverse repo in the amount of $180,000,000.00. Sure that is a drop in the
bucket when considering the Feds balance sheet has ballooned to in excess of
$2 trillion. What does this mean? The Fed offered out $180 million of
Agency notes (Freddie and Fannie) to the market. After reviewing all the
bids for the notes, they allocated the Agency debt and extracted $180
million green backs from the system. The importance is the Federal Reserve
is sending two signals to the market, 1.That they have a plan and the tools
to remove the excess liquidity from the market when the time comes. 2. They
believe we are, economically on firmer ground and the time for the
extraction of liquidity is coming soon (in context soon may be 6 to 12
month).

This doesn't mean a rate hike is right around the corner merely the Fed may
begin to tailor its focus to one of balance between stabilizing and
promoting growth in the economy while being a vigilant inflation hawk rather
than the deflationary spiral they've engaged for the past two years. For
now we remain aggressively invested and anticipate remaining so through year
end. We are working on our 2010 outlook and projections and look forward
to sharing with you soon.

Thank you again for your patience and confidence in these very challenging
times. Have a terrific holiday.

Yours in pursuit of the Kwan.

Fears of Prematurely Removing Stimulus Trumped by Dubai Debacle

2009-11-28T13:28:00.001-06:00

Look for things to get worse before they get better. Earlier forecasts for the Federal Reserve to begin reversing course and raising rates by first quarter surely must now be dismissed and recalculated. Even GSA’s earlier forecast for the first rate hike to occur by mid 2010 may prove overly optimistic as well. Recent remarks by Fed officials point to 2012 as the most likely period for the first reversal of policy. Similar comments came from the ECB officials pointing to 2011 as the most likely earliest point in time to begin the removal of excess liquidity in the system.

The upside, we can expect to enjoy generationally low interest rates for the next year or more. One downside, Central Banks don’t keep rates this depressed because domestic economic conditions are experiencing boom times. So, expectations of any imminent pronounced improvement may prove elusive and wishful thinking. However, with borrowing costs at extremely attractive levels and the velocity of credit improving, GSA anticipates an uneven staggered recovery slowly gaining momentum throughout 2010. Further, we hold to our original position of this being an initially jobless recovery which should restrain economic momentum at a minimum until the first quarter of 2010.

The announcement last week of a possible financial collapse in Dubai takes front and center. Memories of the Bear Stearns collapse and of being the first domino to tip come front and center. Is Dubai the first domino, will Greece be next? Is Hungary close by? Or is this an isolated event with Dubai to be rescued by Abu Dhabi? We’ll watch closely over the next few days for the signal and act accordingly and swiftly. What can’t be overlooked as a potential major threat for derailing this nascent recovery would the withdrawal of stimulus too soon. Misjudging the strength and breadth of the recovery could trigger a double dip that could costs millions more jobs and trillions more in debt. Chairman Bernanke, being a historian and expert on the last major depression is keenly aware and has warned both Congress and the Senate of these perils.

For now two things are certain. The direction of the market come next week will primarily be driven by progress made in Dubai. The quicker Abu Dhabi (the rich uncle) comes to the rescue of Dubai (the spoiled trust fund nephew) the quicker we can refocus on the forces driving this market (liquidity) and the path of least resistance. Expectations are for a quick resolution of the Dubai debt issue, which would present investors, still sitting with cash on the sidelines with an attractive entry point after Friday’s selloff. Should Abu Dhabi decide to extract a pound of flesh and the negotiations be protracted, sellers may gain the upper hand while the deal making drags on. We’ll watch closely for any signals for our next move.

Friday's rush to safety put pressure on everything tradeable, ex the US greenback. The market, after opening underwater and being pressured early, rallied nicely and took back some of the high ground before closing down 150+ on the Dow. Investors looking to gain exposure to the precious metals, can use Friday's weakness to purchase Silver Wheaton Corp-SLW. Silver Wheaton purchases stakes in mines from other miners. When new production comes fully online next year, Silver Wheaton production should make it one of the top silver producers. Expectations are for both revenues and earnings to nearly double over next two years. For Silver Wheaton, the need for further price appreciation in Silver itself is not even necessary, though anticipated. So, with Silver Wheaton sitting under $16 and earnings and revenues about to ramp up, this may still prove an attractive stocking stuffer.

As always, do your own due diligence and consult your investment advisor before making any investment decisions.

In a note of full disclosure, I may own or may purchase for myself and clients Silver Wheaton.

Are Treasuries The First Bubble To Pop

2009-11-11T10:30:00.003-06:00

The decision by the Federal Reserve to maintain its basic zero interest rate policy has many in search of bubble formations. There is a term, hiding in broad daylight that applies here. While investors monitor equity markets, precious metals and believe it or not even real estate they've glossed over the 800 pound gorilla in the room. US Treasuries.

While progress is being made in stemming the deflationary tide and freeing up credit, the recovery remains fragile. The Federal Reserve recognizes this and Fed Fund futures suggest a tightening should not be a concern until the later half of 2010. U.S. treasuries are at generational lows in the face of bulging budget deficits and seemingly endless stream of new supply. Foreign demand for new supply has waned. Frightened retail investors flocked to the safety of treasuries during the meltdown which continues to replace some of that demand. Domestic banks, flush with taxpayer dollars, instead of recirculating those billions are stepping in purchasing treasuries filling the remaining gap. This cannot continue.

At some point, rates will rise, and precipitously whether in response to the debasing of the dollar, a whiff of inflation or signs of a sustainable economic recovery. Chairman Bernanke's legacy most likely will be defined in this next period. Leave policy too accommodative too long and risk igniting a bout of hyper-inflation and potentially double digit interest rates, aka Fmr. Chairman Volker ( I don't fall into this camp). Take away the punch bowl too early and risk choking off the economic recovery. Either way, if not articulate and definitive with policy response the Chairman risks losing both domestic and foreign investor confidence and damaging the greenback further.

Investors looking to gain access to a recovering housing market may look no further than Home Depot- HD. Home depot after cleaning out the CEO office and bringing in fresh blood has been aggressive in cutting costs and regaining its footing against a hungry Lowe's. The company shuttered unprofitable store fronts and has been opportunistic in opening new centers. HD should benefit as the economy and housing continue to stabilize. In the interim investors get to collect a healthy 3.4% dividend yield. Earnings are out on November 17 so interested investors should sit in on the conference call.

As always, investors should conduct their own due diligence and contact their investment advisors before making any investment decisions.

As a note of full disclosure, I may currently own or look to own in the future securities mentioned here for myself and my clients.

Investors Turn Cautious As Rally Gets a Bit Long In The Tooth

2009-11-02T13:42:00.001-06:00

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Investors turned cautious as we closed out October seeing swings of 200 points the last three sessions. Troubling was the rejection of higher prices in the face of what appeared to be investor friendly news from Corporate earnings and Economic data. What needs to kept in mind, is October is year end for many hedge funds, and could have added to the volatility.

This week kicked started November with strong numbers on pending home sales and the Purchasing Managers Index (PMI) both. Buried within the PMI is an employment index which finally went from contraction mode last month, 46.2 (above/below 50 reflect contraction/expansion) came in at 53.1 suggesting jobs are being created. Will that expansion be reflected in Friday's Non-Farm Payrolls release. If not, it would be just the fourth time over the last thirty years that a positive ISM employment index is not reflected by a positive non farm payroll number. Now Friday's number, estimated to reflect a contraction in the job market by 175,000, may come in negative, but the PMI cannot be ignored.

On the corporate front, Ford (F) came front and center with terrific news of an almost $1billion dollar profit. That profit came on cost cuts and market share gains, but a dramatic improvement from the staggering losses we've grown accustomed to hearing.

The good news as of this writing, is the market is responding as expected with a triple digit move higher. It makes it a bunch easier, when the data releases and corresponding market response makes sense. We'll continue to monitor the dollar and the inverse relationship it currently enjoys with the equity markets. For now, we'll enjoy the level of chi achieved within the market this morning.

3rd Quarter GDP Surprises With a Shift in Consumption

2009-10-30T10:18:00.003-05:00

Since we seem to have escaped the “September to Remember” followed by the “October Surprise” have we merely pushed out the inevitable to the “November Surrender”? Well that’s exactly what some are hoping. The same group I refer to as the stopped clock crew. Referencing even a stopped clock being right twice a day. Interpreted to, these folks have been predicting the market cratering and retesting the March lows, well, from April on. Now, a normal five to ten percent correction after having moved fifty percent off the lows would not be abnormal or worrisome. However, since many market participants missed this move, corrections thus far have been contained to the four to five percent area.

Earlier this week the bear camp as if protecting a cub, jumped on hinds and gnashed their teeth and had their way succeeding in pressuring the markets lower. This got the hair up on the neck of most bulls. Tuck tail and run or man up and stand ground. Thursday’s upside surprise to third quarter GDP gave the bull camp just enough to dig in their heels and flash their horns responding with a close to 200 point up day. The initial third quarter GDP release came in at +3.5% from a prior quarter reading of -.7. Quick to counter the good news, shorts pointed to government handouts, cash for clunkers being the big drive. Closer examination of the numbers reveals that even stripping out autos the US economy still expanded at a 1.9% annualized rate. Real personal consumption rose 3.4%. Direct evidence the consumer lives. To the contrarian camp, with unemployment still on the rise the US consumer, to shamelessly steal a Ricky Martin song title, is Living La Vida Loca.

On a final note with regard to 3rd quarter GDP, inventory draw down continued. Inventories contracted an estimated $130 billion. Shocking as that number seems, that’s an improvement from the previous draw of $160 billion last quarter. This data tells us the restocking phase of the recovery hasn’t even begun. We’re simply liquidating existing inventories at a lesser rate. My initial analysis points to a repeat performance of positive GDP growth in the fourth quarter and when the restocking phase does kick in, a resumption of job growth should accompany.

Many investors seeking alternatives to the paltry money market yields being offered today are turning to bond funds. With rates expected to rise sometime in 2010 Fixed Income investors should keep in mind the potential for losses here. As yields rise, prices which have an inverse correlation will be depressed. I utilize individual securities to manage duration, yield and valuations. When holding individual securities as opposed to a mutual fund, one can simply hold their investment until maturity to recoup the face amount plus interest accrued.

As always, before making any investments perform your own due diligence and consult your investment professional.

Quick Take

2009-10-27T09:51:00.001-05:00

In the past I’ve received compliments for me terse market commentary. I’m not entirely certain, but there may have been a hint of sarcasm buried in there. Keeping that in mind here’s today’s update.

The hits keep rolling in, just not enough of them for the Los Angeles Angels last night. With a touch over 100 of the 500 companies in the S&P index having reported the results look pretty darn good. Over 80% are beating on earnings estimates. Importantly over 60% are beating in top line revenue. Coming into earnings season market participants were looking for two things.

1. Increased revenues. Prior earnings beats had been achieved through cost cutting and delaying deployment of capital. We all understand you can only cut costs and headcount so far.

2 Guidance. We need to hear companies give some clarity on future estimates and customer end demand.

It is early, but so far, we’re hitting the tri-fecta. Earnings are beating handily. While Top line growth has been tepid, it is still a vast improvement. We’re hearing company CEO’s feeling confident enough about their respective business to raise future earnings estimates while noting a sense of stability returning to end user demand.

Again, we’ve got a ways to go in this current earnings season before we’ll have enough company data to signal the worst is behind. But, if the current trend continues, analysts will be breaking out their erasers yet again and raising earnings estimates and targets.

Until next time

The Market Coming Down the Home Stretch

2009-10-13T08:39:00.002-05:00

Grand Street Advisors
Fourth Quarter
Outlook 2009
Short and Sweet! I first need to announce I am putting together a petition drive that I believe will be the first ever to receive 100% support and zero detractors. I propose replacing the annual clubbing of the baby white seals (as fun as that has been) with “The First Annual Skinning of The Bears”. I know what you’re thinking, Brilliance! However I cannot take full credit. This year they have been highly visible, overly aggressive and annoyingly persistent which makes for easy targets. I’m looking forward to easy passage and celebrating every October.

The economy is inarguably in recovery mode. Consumer confidence is on the mend, though fragile. Home sales, both new and existing, is undergoing much of the same. Auto sales are stabilizing at close to a ten and a half million annual run rate. Wall Street? They are making money like they printing it. Oh, yeah, they are printing it. If everything is going so well, what’s the hold up? Well the “S” on this boy wonders chest stands for Sustainability. Corporate America right sized, and actually got it right this time. Much like the Federal Reserve, while late in recognizing the collapsing of the economy and end demand, once engaged they went full throttle on the guillotine, slashing head count and slicing inventories.

Now that the incentive programs for home purchase and autos has expired, will consumers retreat back to savings mode? Or do what he does best, buy buy buy. It all hinges right here. The good news is the global economy is not sitting back and holding its breath on the US consumer. This time around it’s not necessary. Domestic consumption in emerging economies is picking up some of the slack and doing some of the heavy lifting.

The, thus far, orderly retreat of the value of the US dollar is having the desired effect of making our goods more attractively priced overseas. The result, exports are up again and with imports down our trade deficit contracted again. I have to admit George W actually got this one right and acted on it when questioned about support for the value of the dollar. He responded with, “There is such a thing as a strong dollar policy and the wrong dollar policy”. By propping up the US dollar for the last three decades, US goods were at a decided disadvantage. Now the currency markets are searching for its equilibrium and not the pegged levels that hamstrung the US in the past. As long as the retreat is orderly, we should be fine. This needs very close monitoring. Based upon Fed comments and foreign central bank commentary we are approaching levels where we should begin to level out.

Lastly, on the glass half full view side. As I’ve stated in the past, earnings are spring loaded to impress to the upside. We are currently in the sweet spot, timing wise. The market is searching for the catalyst to determine the path of least resistance. Earnings should identify that rather clearly. Analysts are finally catching on. Estimates are being revised up almost daily. Current numbers for the S&P 500 for 2009 are targeted for $62.00 share up from $40.00 share a short time back. For calendar year 2010 estimates are coming in at $75.00 share and as of now, $92.00 for 2011. To give some clarity around how analysts come about their projections, use a 16-17 multiple. This brings targets to 1250 for 2010 and 1380 area for 2011. Now, for me it is way too early to give projections for 2010, let alone 2011. Too much can change between now and year end. It is a fluid process with new data coming in weekly. Really, an exciting time.

Now the caution. We need to be on high alert for any feint signs the China recovery is petering out. Any dents in the armor here, and all bets are off. Clearly we are taking our lead and some comfort from China recovering along with the emerging markets. Just last week Australia’s Central Bank hiked rates. Let me emphasize what a bold statement that was. The Australian Bank Officials must have felt confident in the sustainability of their economic recovery as the last thing they want to do is flip flop. Hike rates too early, have the economy stumble and have to revert back to an easy money posture. They understand they would lose street cred (Wall Street that is) and most likely their jobs as being viewed as out of touch and incompetents. Now the question becomes, who will be next to hike?

Worth keeping a close eye on is any breach in the developing trend of lower monthly payrolls. Progress continues, coming from losses of 700,000 to most recently 255,000. Still, while making progress, we’re not creating jobs just yet.

We’ll be on the watch for continued progress in home sales. This too is an Achilles heel. The stated inventory figures are coming in around 4 million + homes and a roughly 8 month supply. Taken alone, not bad. However, adding in the shadow inventory, (homes taken off market, on bank balance sheets, in process of foreclosure) let’s add back in another 5 million homes. We see that inventories really are closer to a 2 year supply. This problem and overhang will be with us for 4-5 years. And that is assuming home builders don’t begin ramping up production again further exacerbating the overhang.

Finally, I must admit I am constantly frustrated with reports of the market having rallied 50% off the market lows and the need to take a pause. When did we begin calculating returns from peaks and troughs and not year to date calendar? But, this feeds right back to my original purpose, which was to garner support for my First Annual Skinning of The Bears. With those out there using the March lows and not January one when calculating total market returns, they’ll be watching the markets continuing ascent, confused, while sitting on the sidelines. This makes for plenty of the furry beasts when my petition passes and pelts for everyone when the season kicks off.

I continue to be optimistic this market move still has some positive upside left in it. I will continue to monitor economic releases, the dollar, precious metals, cash flows, geopolitical tensions and signs for a market topping out and be in contact immediately should we need to adjust our strategy.

I thank you again for you patience and confidence in allowing me work with you in these incredibly challenging times. I am equally honored and humbled by both.

High Frequency Trading or Front Running

2009-09-28T16:04:00.003-05:00

Toma'to / tomato. Let's look at High Frequency Trading (HFT). HFT is allowing a select group to get an advanced look at trades before they are executed. Granted the timing is in milliseconds. In other words, a select few firms get a look at orders about to be fed into the system for purchases and sales. These firms, utilizing highly complex trading programs and systems can react within these half seconds to execute trades in the firms' behalf, based upon the flows, volumes direction of the market etc. So, let's say they pick up large volumes of sell orders on XYZ stock. do you think in the blink of an eye, their systems are stepping in front of all those oncoming sales with purchase orders or executing sales?

From where I come from that is referred to as front running and not legal. This is how it works from where I sit. Say I am a broker and I receive a large order from one of my clients to purchase 1,000,000 shares of a thinly traded ABC stock. Before entering that client order, I, for my personal account, buy 10,000 shares of ABC. Once I've purchased my shares I then place the order for my client. Knowing the large order will push up the price as I sit back and reap the windfall. The difference. I'm placing a few small orders looking for a big move in price to enrich myself. HFT require fractional moves in price and relies on high volumes of trades. Either way Illegal from where I sit! In the near future, James has a new address with a non too friendly and rather burly roommate. Perhaps James should have used terms like Flash Orders, and Algorithms. He probably should have upgraded from hand written trade tickets and invested heavily in his IT department and computer trading programs.

Good news for us. The new sheriffs at the SEC and NYSE are looking to pulling back the curtain and shining some light on HFT and "dark pools". If as proponents of HFT state that these rapid fire trading and dark pools actually add to the liquidity of the overall markets, how can shining a bit of light and transparency not be a good thing?

I'm sure the lobbyists up on the hill are already armed with checkbook in hand ready to do battle for the Wall Street Frat boys, so I'm not sure how much can really be changed. But, there is indeed a battle brewing and with billions in revenues at stake, the spin from both sides should be dizzying to the little investor.

Markets In The Midst Of Turning

2009-09-22T12:06:00.001-05:00

The market seems to be at a pause phase these last few days. We are in the process of closing out the third quarter and heading down the home stretch of a very challenging year. Valuations may begin to appear stretched and rich if we utilize a trailing twelve month basis. But reflecting upon the current low interest rate environment along with the lack of any “reportable” inflation, a higher price earnings (P/E) is easily attached to equities. What is or should follow would be the growth phase ramping up, spurring higher earnings and bringing those P/E multiples closer to the midrange levels. Another way to view this would be, since the markets, both equity and fixed income, are forward looking or anticipatory vehicles, we can look at market valuations on a forward basis. Meaning, we use earnings estimates for the calendar year 2010. Earnings estimates were entirely too pessimistic coming into this current quarter. Analysts are still being calculated and updated, but I see the range of estimates coming in between $65.00-$80.00 share. Let’s take the middle ground of $72.50 and attach a 15 and 17 P/E. Viola, we have a range of 1087-1232 for the S&P 500 index. I believe earnings will surprise many for this current quarter and future estimates will need to be revisited again.

The Leading Economic Indicator (LEI) once again turned out positive for the fifth month in a row. This is very positive for the economy and a market searching for a directional signal. The LEI is not definitively stating the US economy will be raging through 2010 but it is strongly suggestive of a continued recovery for the first half of 2010. US economic expansion as measured by GDP has received notable revisions over the previous two months. Entering this current third quarter, economists estimates on average called for a contraction of between 1%-2%. Now, with the information available estimates have swung to an expansion of between 2%-6%. This is a huge swing. Let’s take out the high (someone is looking to be the high water mark here) estimate of 6%, although with all the easy money sloshing around it could happen, and look at even the mid-low estimates of 3%. That is a 4%-5% swing for an economy as mature and in excess of $12 trillion. The stimulus, it can be argued whether it could have more targeted and the sheer enormity, but the effects, if this plays out, can no longer be disputed.

Autos, employment and housing oh my. (I couldn’t resist since MGM is re-releasing the Oz classic in HD for the 70th anniversary) These three amigos will continue to be front and center. The employment picture is improving as weekly claims continue to show modest improvement, although remain stubbornly high. Auto sales and home purchases have been aided by government enticements. We’ll get a more honest read on whether the bump up in both was a reflection of this government tax break or real pent up demand. I tend to believe in the latter. We’ll be watching over the next few weeks for non-farm payrolls if they can build upon recent improvements. August non farm showed a drop of 216,000, troubling yes, but a drastic improvement from June’s 463,000. For sure there is still much work to be done, but we must be aware and respectful of the current turn the economy is experiencing.

One note that I haven’t touch upon in recent past is the psyche of analyst, economists, market participants and even the bench warmers that missed this whole move. Investors and analysts, after having been scorched for the better of 15 months dating March 2009 on back, were reluctant to accept any good news. Think back after you and I bailed out the banks, backstopping the systemically important. Even after the US guarantee, their securities, both bonds and equities, traded as if they would be liquidated, for months. The conversation for the better half of 2009 was of which banks would go to the way side and how the US economy had lost its ability to innovate and grow. Over the last few months, the discussions have shifted from one of how to jump start the economy, to how is the Federal Reserve going to orchestrate the removal of excess liquidity. It was subtle at first, just a murmur, now the idea and conversation has gone main stream. As more and more analysts and investors buy into this assessment, capital will be deployed. I’ve mentioned one such area to keep an eye on, Mergers and Acquisitions for some signs. They are beginning to pick up, most recently a nice $3+ billion deal with Dell the acquirer of Perot Systems. Expect more and the velocity to pick up momentum. Corporations are generating huge cash flows. They’ve been hoarding cash for the better part of 2 years. As more companies get comfortable with the recovering economy and earnings/demand visibility, they will deploy that cash. As investors continue to receive data supporting a recovery and a sustainable one, they will deploy some of that $3.5 trillion sitting in cash.

At this point in the economic recovery phase there is typically a significant divergence in prognostications, especially after the severity of the recession we may just be exiting. This leads some traders to have a spasmatic trading trigger finger and can create for whipsaw trading. For now, the technicals remain strong. Higher highs. An expansion in the number of stocks making new highs. Low number of stocks making 52 week lows. Stocks trading above their 50 and 200 day moving averages. Couple that with Institutional managers that missed this move and are running out of time to make up for underperformance. Oh yeah, that $3.5 trillion sitting in cash. I’m not saying we may not still have a bout of profit taking. But, that $3.5 trillion hoard, now that’s stimulus.

A September to Remember?

2009-09-07T13:59:00.001-05:00

As we work our way through the early days of September we’ll no doubt be hit with a tidal wave of reports, exclusives and exposes wishing to reflect on the one year anniversary of the Lehman Brothers collapse. We lived through that epic period together. I’ll leave the story telling and history lessons to the talking heads in search of ratings. Me, I’ll focus on the current conditions and future.

Those investors that fell victim to the catchy sounding “sell in May and go away” mantra missed out on the opportunity to participate in the roughly 8% market ascent. While not clear how September will play out, investors should remain cautions, but in my opinion engaged. First things first. The economic data continues to suggest we have resumed a positive growth trajectory as reflected by GDP.

The Leading Economic Indicators (LEI) posted a fourth straight gain of +.6. This is a terrific gauge of future economic activity. Digging into the LEI we see more reasons for optimism. Six of the ten indicators were showing increases. Among them, manufacturing average hourly workweek and new orders for non-defense capital goods.

Industrial Production (IP) increased .5%. The first increase since October 2008. To be sure the 43% improvement for light vehicle assemblies needs to be monitored. We’ll have no more coins for clunkers to lure wary consumers back to the showrooms. Will this result in a crash in car sales? Was the pick up in the IP a mere a blip as dealerships restock inventories? Or was there real pent up demand finally being released? I’ll be watching closely.

The real estate market continues to show signs of stabilization. Existing home sales rose 7.2% in July, the fourth straight month of improvement. New home sales popped 9.6% matching the fourth straight month of improvement. The potential fly in the ointment here is the $8,000.00 tax credit which expires at the end of November. New home buyers may have rushed in to meet that November deadline. That is the current argument. It may have some teeth, however, remember that home buyers also agreed to take on the $180,000.00-$220,000.00 mortgage that came with the tax credit. Also these new home buyers had to qualify for loans under much more stringent underwriting criteria. Again, I tend to believe there is pent up demand being released here. I’ll be watching very closely.

Inflation and interest rates are expected to remain at depressed levels for an extended period of time. Capacity Utilization at 68.5% leaves significant slack in the system. Couple that with worker productivity advancing at a 6.4% clip in the second quarter, the fastest since 2003. You would realistically like to see this type of number when the economy is humming along running at trend growth or above, not at the trough. When productivity spikes down here, employers don’t need to add headcount. Don’t forget (like anyone could) the current unemployment rate of 9.7% and rising. Employers remain in the driver seat. Wage based inflation is not a big concern, at this point in time. Which brings us to interest rates. As posted in the Federal Open Market Committee (FOMC) statement, rates shall remain low for an extended period of time.

A quick thought on the Obama Economic Recovery Plan and jobs. We currently have an unemployment rate of 9.7% and 14.9 million unemployed out of a workforce of 153,600,000. The administrations original projections had been to create or save between 2-3 million jobs. Let’s take the mid-point and agree 2.5million jobs created and no further deterioration in job losses. I’m being very generous on the latter. While the trend in job losses has dramatically improved the job market still contracted by 216,000 slots, a far cry from adding headcount. Back to the numbers. We’ll assume the workforce remains static and add back in 2.5 million to the rank of the employed. This brings down the number of unemployed to 12.4 million and a rate of 8%. For my example not one of the 2.5 million jobs was a save, it was counted as a new hire. Due to space I won’t go into why. To hit this 2.5 million goal we’d need a huge reversal of draining 200,000+ jobs a month and adding a like amount which comes to a 400,000 swing. Why bring this up? To prep you. Expect elevated levels of unemployment for the next 18-24 months. Unemployment has not peaked yet, and most likely won’t until the first or second quarter of 2010.

The market appears to be fairly valued at current levels. Seasonally we’re entering dicey waters as the earnings pre-announcement period begins. Technically, the charts suggest we’re currently a bit overbought, but are working off that condition. Foreign markets, China, India and Brazil, which had lead this rally and dragged the US along for the ride have taken a breather. China has technically entered a bear market, or some would have you believe. The part they omit or conveniently leave out is the China market rallied 100% before a bout of profit taking took back 20%. Those spouting the China bear market story are most likely talking up their positions, or more accurately put, their lack of positions. Many managers missed this move and or had the unfortunate and painful experiences of shorting the market into what they believed were unsustainable rallies. Time is running out to make up lost ground. We’ve only got four months for these investors to catch up to their respective indexes in performance. There is roughly $3.6 trillion sitting in money market funds earning less than 1%, some of which will be the fuel for the next leg of the current bull market. However, caution and prudence for the next few weeks will be mandatory, from current levels. I hesitate to ever dig in my heels, and I wouldn’t say definitively we’ll have positive returns for September, which reminds me of a saying I took with me from working on Wall Street. If your opinion is wrong, lose your opinion (implied, before you lose your position). The turn in the economy and market began showing signs awhile back, granted you may have needed a powerful set of binoculars to see the bear market exit up ahead. However, once you missed the turnoff, your best tactic is not to gun the accelerator. No, take the next exit, breakout the roadmap and get back on track. Some did, many did not, and still have not, and are now only acknowledging the error. This is why, thus far, even the strongest retracements are met with very willing buyers of weakness.

It remains my position any pullbacks will be contained within the 5%-8% range, and chatter of the need to have a 10%-15% pullback are those still waiting for the full retracement to the March lows. Of course they could be right or they could be just talking up their position.

A Second Term for Bernanke

2009-08-26T13:54:00.003-05:00

Economics 101: It’s all about the Benjamin’s. As in Benjamin Bernanke and Benjamin Franklin.

The recession seems to have run its’ course and wreaked still not fully accounted for havoc on investor wealth, home values, (for those still willing to make their mortgage payments) and countless millions of jobs. Tuesday the market breathed a collective sigh of relief. Chairman Bernanke was offered up another 4 year term by President Obama. Why? The markets dislike uncertainty. With Chairman Ben you know what you are getting. A monetarily creative, great depression era history buff. Or, does he more closely resemble a fire fighter with arson-istic tendencies? For wasn’t it the policies of easy credit and lax regulatory oversight that created the fireball the Federal Reserve itself had to ride to the rescue and extinguish?

How exactly are we or did we exit the recession and avoid a deep depression? As I stated it’s all about the Benjamin’s. As in Ben Franklin's face on the US currency, $5 and $100 bills. Most of us don’t fully understand the concept of the liquidity crisis, or as it were, the lack of liquidity that nearly crippled the US and global economy. We believe you either have money or you don’t. Not necessarily. As many of us know you personally can be wealthy, owning a home, lake house, stocks and bonds, etc. But, let’s say a tornado rips through your neighborhood and tears your roof off and levels your garage. Now you need to repair the roof and rebuild the garage. For our example, your homeowners insurance has somehow lapsed. You now need to raise cash and in a hurry. But, you find the stocks you own are actually private placements, 144a’s that don’t trade actively. Your bonds are severely discounted and your bank won’t lend against your lake house. We can agree to a reasonable degree, you still maintain a significant amount of wealth, you are simply constrained by your illiquidity.

Now you are a bank, with over a trillion dollars in assets. However, no bank will lend you money against your collateral. I bet you didn’t realize you had so much in common with Goldman Sachs. When no one else will lend, what’s a Fed to do? Crank up the printing presses and open the windows. Those presses were running full tilt, 24/7. That room, I’m sure was getting smoky. Banks couldn’t or wouldn’t lend, even to one another. The Federal Reserve, instead of the backstop lender of last resort, became the only lender out there. They offered funding at reasonable rates and accepted collateral others balked at.

As private investors regain their appetite for risk, the Federal Reserve will begin sopping up all that excess liquidity. A trick I’m sure that if executed properly would impress Houdini himself. If they miscalculate and move too early, they risk choking off a potentially fragile economic recovery. If they keep the peddle on the accelerator too long, they risk igniting a bout of hyper inflation and a Volker like response to borrowing rates down the road.

So, while we can debate who was responsible and how we got so dangerously close to the abyss, when the discussion switches to how we escaped? As I stated, it’s all about the Benjamin’s!

Can This Production Lead Recovery Continue or Are We Putting The Cart Before The Horse

2009-08-19T14:09:00.003-05:00

While attempting to handicap the recovery, aside from government spending, the real wildcard is the consumer. To take on the consumer we must examine the employment front. The resiliency of the recovery will be firmly on the shoulders of consumers. But, as corporate America deleveraged across the board, laid off consumers found themselves walking up to the buffet only to find no plates, knives or forks. Consumers, due to massive head count reduction, were forced into a deleveraging of their own. Incomes lost, credit lines eliminated and government benefits exhausted, they simply had no other choice. This leads us to the coming conundrum we will be facing over the next few quarters. We have most likely experienced the worst of on the jobs front and should not expect to see readings of -500,000 to -700,000 in non-farm payrolls. Why? Taking a look at where were the excesses and mistakes made brings into focus the following:

1. An auto industry at peak output, pumping out 17 million vehicles annually financed with zero interest rate to people with questionable credit.

2. Housing. Remember “Home ownership is the American dream and should be made available for every American”. I know we started out some many years ago with a much more modest, “a chicken in every pot”. Clearly we went overboard here. Another perpetrator, which at peak was building 1+ million new homes, far outstripping natural demand. All the while extending credit to borrowers unworthy of such generous proportion.

3. Wall Street. Greedy Villains! Shysters! Thieves! I’m quite sure there are enough of each skulking about Wall and Broad. But, there are plenty of honest, hard working decent people that make up the thundering herd as well. These people that comprise the rank and file, that don’t have golden parachutes and million dollar bonuses. Receptionists, secretaries, mailroom workers, messengers earning a decent living generating $25,000.00- $60,000.00 annually. Bonuses, if they trickle down to this level, on a given year are closer to the $1,000.00-$5,000.00 range, rather than the $500,000.00-$100 million, which grab headlines. We can see how the average skews reality when it comes to Wall Street compensation. We hear the average bonus for Wall Street was $112,000.00 in 2008, but the bulk of those payouts were gifted to the few. Case in point is the Citibank energy trader now getting his 15 minutes of fame for securing a $100 million bonus. Outrageous, considering the losses at the parent firm. This trading unit was part the fabled Solomon Brothers Investment bank that Citibank absorbed back in 1998 as part of the Travelers acquisition. The same Solomon Brothers that got caught submitting false customer bids in an attempt to rig the Treasury auctions in their favor, resulting in a $290 million fine and ultimate failure of Solomon and forced exit of its’ disgraced CEO John Guthfreund. Now with the SEC under marching orders from the white house, fully engaged and the CFTC having awakened from their eight year slumber, the music, for hedge funds and speculators, has finally silenced and a lot of chairs are missing. Change is coming, and coming rapidly. Some hedge funds are responding and adapting by returning client money and closing shop. Aggressive traders, sensing the change coming, are closing out positions evidenced by the drop in open interest figures.

These three, were the primary culprits that lead to the many excesses of the previous expansion and bubbles. They gorged themselves on cheap credit and overproduction. Which brings to mind the Kevin Costner movie, A Field of Dreams. The catch phrase, “if you build it, they will come”. Boy did they build it. Homes, cars trucks, more and more complex financial products. Then a not so funny thing happened, one day they stopped coming. What followed was the elimination of millions of jobs as these sectors of the economy right sized. Massively cutting production, head count and capital outlays, while attempting to conserve cash.

This brings us to where we are today. We are seeing incremental evidence of stabilization in these three areas. Ford and GM are ramping up production and calling back workers. The major home builders are seeing a pick up in new orders and extending work weeks. Wall Street firms are selectively hiring again. Good news sure, but in each group millions of jobs have disappeared and will never return. Never! That’s important to consider. This is, in my opinion why it is vitally important the stimulus money targeting Green and Renewable energy must succeed. This is nascent industry in its infancy that requires our support. We’re looking at a bit of a priming the pump to create new jobs where none previously existed, for some of those previously displaced workers. I think former Chairman Greenspan’s recent comments regarding this current stage of recovery hits it squarely. To summarize, we are experiencing and will continue to experience a production lead economic revival over the next few quarters. Past that, anticipating a resumption of increasing consumption becomes a much more difficult task. This leads us to the Horse and Cart dilemma.

Putting the horse before the cart. Corporate America took nearly fatal blows during this last 18 months, leaving large visible scars. They will not add to new hires until they are confident demand has sufficiently been restored and is largely sustainable.

Putting the cart before the horse. Consumers, lacking job security and in some cases jobs period, cannot and will not consume.

Who’s right and who will blink first? Maybe they both got a little something in their eyes. Early signs are suggestive the bounce back in growth will be sharper and more powerful than most had been anticipating. Consumption inched up two months in a row while the rate of job losses slowed significantly. No coincidence, the average work week extended along with gains made in average hourly earnings as severely depleted inventories begin the replacement cycle. Economists and analysts are ratcheting up estimates for 3rd and 4th quarter GDP along with earnings estimates and targets for the major indexes. GDP estimates are being raised from -1% - -2% up to +2% - +4.6%. S&P 500 projections have jumped from 600-900 range up to 1050-1400. Very aggressive on the latter, with analysts looking for anywhere from 15%-40% returns from current levels. These projections assume a lot of things continuing to go right. These assumptions seem to paint quite a rosy picture, and at present the pieces of this puzzle appear to be coming together quite nicely. However, should this picture begin to breakup, we’ll be quick to respond.

Yea or Nay on Chairman Ben

2009-08-14T10:32:00.004-05:00

The topic surrounding whether the Chairman should gain another term at the helm of the Federal Reserve is front and center these days. The opinion are as diverse as whether we should have a designated hitter in baseball. Here what is being bandied about. First on the "Con".

1. Bernanke was not up to the task. As sitting Chairman he allowed the unregulated Credit Default Swaps market to experience explosive, and unknown to the rest of us at the time, unregulated proliferation.

2. As the financial collapse began he was slow in recognition and guilty of a sloth like response.

3. His Quantitative Easing policy is monetizing the U.S debt further allowing for enormous deficits instead of forcing Congress to address the fat and waste embedded within all aspects of government and budgets.

4. All this money sloshing around in the market and economy is going to create a bout of hyper inflation in the not to distant future, resulting in skyrocketing interest rates not seen since the President Carter - Volker days and cause the US economy to enter into a prolonged depression.

Now the "Pro's"

1. While late in recognizing the magnitude to which all financial institutions had levered themselves up on cheap money and complicated derivatives, once engaged, he acted decisively. His policy response, to drive rates to virtually zero using both conventional and non-conventional methods. Think back to the days of his predecessor, Chairman Greenspan. A bold move back then would see the Funds rate moved 1/4-1/2%. While the financial walls were crumbling, back in January 2008, the current Chairman cut rates 3/4% at the regularly scheduled meeting only to follow up a bit more than a week later, sensing the rampant market fear and the need for bold action, cut rates a further 1/2%.

2. Did he save the system? One only need look back to the Bear Stearn's collapse. With the SEC asleep at the switch and the FASB accounting board sipping margarita's on some beach, short sellers set their cites on the Investment banks. Bear, along with the other investment banks were over-leveraged and the very ones they were providing the funding to (hedge funds) began eating the host. Fear began to spread, Bear would fall first, then onto the next, Lehman, then Merrill, Citi, Bank America and eventually to the golden child Goldman. Those were dark days and the Fed worked every weekend "negotiating forced" marriages identifying who would and could emerge from the ashes. What could have been done? The SEC could have done their job and enforced the naked short sale rule already in place. FASB could have amended the Mark to Market accounting rules #157. The investment banks could have and should have cut the lines of credit for the very hedge funds that were creating the run on the banks. But, that is very lucrative business and the banks themselves never looked far enough down the road to see that they themselves would one day become the prey. By the time of that epiphany, it was way too late. This left the Fed and Treasury to Hold the Line, as it were.

3. George Santayana once said, "Those that cannot remember history are condemned to repeat it". Chairman Bernanke is widely acknowledged as an expert surrounding the crash and subsequent Great Depression. Couple that with his experience gained working during Greenspan's reign, and it would seem he has a unique knowledge of both an economy being over stimulated with easy monetary policy and the crippling effects of not enough credit.

4. Transparency. In a break from his predecessor, Chairman Ben has been a breath of fresh air. Having worked on Wall Street at some of the largest firms I can attest to this first hand. No matter which firm I was at or how prominent our economist, after listening to Greenspan their analysis went something along this line, "After having listened to and reading his policy statement, I "think" he looking at XXX for signs of inflation and stabilization. For future moves he "could" be looking at XXX". Our top economist had to always give a best guess, because they simply did not know. Which, from my seat in the room was frustrating. After listening to both Greenspan and then our economist, I had to go back and re-read everything. Probably explains why I'm a bit thin on top now, all that scratching my head all those years. Thanks Alan! Chairman Ben has been clear and articulate with policy outlook and execution. Clearly under Ben if you don't know his intentions, for economists, you're simply not listening.

Closing. So, as I stated in past updates and personal conversations, I believe there is no other person we want at his post. Time to re-up this man before he realizes he could get a much better paying job in the private sector without being left for cannon fodder should things get a bit more dicey on the economic front.

Raging Bull or Just full of it

2009-08-12T13:02:00.002-05:00

The resiliency of the markets has many investors, both retail and
institutional, playing catch up. Opportunistically stepping in to buy any
weakness, making all corrections thus far, shallow in depth. There are many
reasons for optimism as there are a number of reasons for the wise to show
caution. Which is natural when exiting a recession. The Bear case: We've
rallied significantly off the March lows, top line revenue growth is hard to
come by, the continued excess liquidity being forced into the market, and
the lack of a cohesive exit strategy all are valid arguments for a pause.
The other side of the coin, global stimuli is gaining traction both
domestically and internationally, we're witnessing a stabilization in the
housing industry, the strong evidence of progress made in credit and
lending, the rate of job losses has ebbed, inflation is under arrest, and it
appears the recession has ended and a resumption to growth for the US
economy should be reflected in the current quarter. I remain cautiously
optimistic, but respectful of the fragile recovery we are currently
experiencing. I have one nagging concern that refuses to go away and keeps
me from being a blind raging bull. That concern remains the bank balance
sheets, and how we "healed" them so quickly and effectively. One of the
many cures we treated this patient with was merely an accounting gimmick.
An amendment to the so called "Mark to Market" account rule, FASB 157. But,
it turned out to be a miracle cure. (As you all know, I was very vocal and a
proponent of repeal during the financial meltdown) I don't want to be a
hypocrite now that the hurricane has move out to sea, but many of those same
assets still reside on bank balance sheets. Many of those same assets are
still tied to Real Estate, both commercial and residential that continues to
lose value. The program designed to remove those "legacy" (toxic has such a
bad ring to it) assets, PPIP has stalled, for now. This poses the following
dilemma for the PPIP. If banks no longer need to mark down the valuations
of those assets and can continue to hold them at fictitious valuations why
would they sell them at a severe discount to carrying values? How can banks
do that? Simply by moving these assets from one column, being "Held For
Trading" to the other side of the ledger, "Held For Investment". Now under
the new accounting rules, you no longer need to mark them at say .60/100,
since you plan on holding these securities until they mature, you carry them
at $1.00. That would be similar to you or I with our 5 year old autos,
since we don't wish to sell them today, can continue to count them as assets
at the original purchase price and not the blue book. As you can see,
looks great on paper, until we need to sell or trade in our car for a new
one. Now, banks, due to the steepness of the yield curve are generating
huge cash flows. They have also raised fees and are using those enormous
cash flows to aggressively build loan loss reserves. Are they
over-reserved? Perhaps and there is mounting evidence this is correct. And
I come down on this side of the equation. However, just this last week we
heard from State Street they may have potentially under-reserved against
future losses. There are many smaller regional banks that are still
battling a deteriorating loan portfolio and delinquencies that don't have
the massive deposit base to bail them out. We most likely will need to
recycle those early TARP repayments back to these smaller neighborhood banks
that require assistance. Plans are being worked on to do just that.
We'll need the following, more time, more TARP money, stabilization in
housing and jobs to help heal these smaller non-systemically critical
financial institutions heal. We've certainly bought ourselves the time by
printing up the money.

Now I'm on Bernanke watch for the next 45 minutes. Actually I know what he
looks like, I want to see his statement, which is most critical.

Yours, still a bull, just not a blind one.

August Opens With a Bang Still Not to Late to Add Income

2009-08-03T13:43:00.002-05:00

Once again, the bears have been declawed! Yet again! As we go to print, the market has retraced its highest levels since October 2008. As both buyers and sellers argue whether we deserve to be here, even those in the contrarian camp are capitulating and committing money to this market rally. They’ve missed this move off the lows, the “sell all rallies” strategies left them as cannon fodder for the stampeding herd. Many hedge fund managers after their “black box” quantitative models broke down in 2008 and underperformed thus far 2009, are coming to grips with the old adage, “you don’t fight the Fed”. Meaning, when the Federal Reserve is priming the pump, easing rates those monies will eventually find its way into the economy and markets. Only this time, the impact has been magnified by the extraordinary steps and programs the Federal Reserve has implemented along with quantitative easing. Bring in the Treasury teaming up with the Federal Reserve, and well, you have a 50% rally of the lows I guess? Is this move substantiated? Let’s look at a few metrics.

Remember the ACDC song TNT (for those that are old enough to remember ACDC) well today it’s P-M-I is DYNOMITE! That’s what I’m talkin’ bout! Growth in China, announced overnight and reflected in the Purchasing Managers Index (PMI) came in at 52.8 driven largely by domestic demand. That’s 3 months in a row reflecting an expansion in the domestic economy. The China stimulus program is gaining traction. Even as their exports sputtered, domestic orders picked up the slack. Back on our shores we had had a much bigger than forecast jump in the Institute for Supply Management(ISM) PMI, which was forecast to come in at 46.5 leaped to 48.9. A few whiskers below that all important 50 level. A reading above 50 is reflective of an expanding economy. Buried within this report were some more nuggets for optimists. Indicators which are more predictive of future expansion or contraction, such as new orders, which leapfrogged over 50 to 55.3. The employment index bounded 4.9 pts month over month. Which by the way would point to good news coming in Friday’s non-farm numbers, (which is a lagging economic index)? Lastly on the PMI, of the 18 manufacturing sectors reporting, 6 have returned to growth or expansion mode. I’ve mentioned in the past the trend developing in the Leading Economic Indicator (LEI), 3 months in a row of growth. This is one index to keep a close eye on. This Friday, while the overall rate of unemployment may inch higher, I’ll be closely following two components buried within the report. Hourly Earnings and The workweek. Those two are leading indicators worth watching. We know job losses continued simply by watching the weekly announced Unemployment Claims numbers. However, by watching the workweek, and perhaps seeing an extension of the workweek, think overtime, would give hope that once the existing workforce is stretched enough, head count additions can’t be far behind.

Good news from the auto industry. Yeah! I typed it and even I had to go back and re-read that one! Cash for Clunkers program has inspired new car buyers to get off the couch and into the dealership showrooms. As we speak Congress is in the hunt for funding to expand the program from $1 billion, which is already tapped out, to $3 billion. Ford reported today auto sales increased 2.3% the first year over year gain in two years. While Chrysler, yes they’re still around, can’t make the same claim, they did report workers are back on the assembly line and working overtime. Wow! Who’d a thunk it? Now contrarians will pose the following argument, although I’ve seen nothing documented to support it. “The Cash For Clunkers has only borrowed car purchases from the future and once the funding is exhausted, car sales will slump back to prior levels.” Meaning, automobile buyers that may have normally purchased a vehicle in September to January, in order to take advantage of the potentially $4,500.00 break, simply moved up their purchase date. I believe you could argue the following, buyers, knowing this incentive was on the horizon, put off purchases until recently to take advantage of the voucher program. It is widely accepted we may not get back to the 17 million annual automobile run rates anytime soon, however the current 8.5-9 million run rate is insufficient as well. Now, we have a case of the pendulum having swung to both extremes. Over the next year or so we’ll find out where the supply/demand equation actually levels out.

There is mounting evidence the worst of the recession is behind us and perhaps has indeed ended. But it is early. The sages of Wall Street are realizing they got it wrong, in a big way. As the data reflect an improving economy, and the current earnings season is coming in much better than anticipated, many analysts are scrambling to update their models and projections. Two of note. Goldman Sach’s, supposedly the best and brightest by some raised the target for the S&P 500 from 940 to 1060. Their prior analysis saw earnings estimates for 2009 at $40.00 share for 2009, and $63.00 share for 2010. Those have been bumped up to $52.00 and $75.00. Huge bumps, but certainly not the highest estimates. Over the weekend a well respected analyst picked up on what I’ve been telling clients, that due to massive head count reductions, streamlined inventories and trimmed back capital spending, in anticipation of the next great depression and coupled with productivity gains, have, “spring boarded earnings to catapult higher, even without a strong resumption of growth.”.

While the market has rallied 50% off the March lows, keep in mind at that time the market seemed to be pricing the US economy and corporations for liquidation. That is off the table, along with the fear factor that that presided over that period. In other words, it was the effects, of a number of factors I won’t go into again, of a perfect storm that pushed us to levels we never should have seen. I would also remind contrarians and short sellers that make the argument we’ve rallied too far, to take a step back and see how far from 2007 prices we’ve fallen, even at today’s lofty levels For the time being I’m staying with my target range of 1050-1100 but I’ll be monitoring conference calls and economic releases closely for any changes .

Now for Income Investors. A not so little company called Inergy, symbol NRGY. Inergy is a Limited Partnership operating in the energy sector. Inergy focuses in the fragmented Propane distribution, sale and storage along with natural gas and liquified natural gas in the US and Canada. They have a "growth through acquisition" strategy" thus far very successfully executed. The company continues to purchase small local propane distributors in this highly fragmented industry, keeping the local brand names in most cases. One important criteria for any acquisition is it must be immediately accretive to earnings. Lastly, once all of their current projects are completed Inergy will have an estimated 53 billion cubic feet of natural gas storage capacity. At current levels, this Limited Partnership yields a still healthy 8.8%, with a history of increasing dividend payouts.

In a note of full disclosure I may currently own or in the future will purchase NRGY for myself or clients. Please do your own due diligence before making any investment decision.

2009-07-23T12:50:00.004-05:00

Ford Motor has made significant strides and progress under the stewardship of Alan Mulally. While his domestic competitors ducked into "prepackaged" bankruptcies wiping out shareholder values, Mulally skillfully steered Ford back from the brink. The easy route was this route, however Mulally had another plan. He, like the rest of America, saw the bloated costs and declining market share the domestics were experiencing. Unlike his competitors, Mulally decided something needed to be done. Changes needed to be made, costs needed to be reigned in, and the Unions had to become a partner in saving this company and returning it to prosperity for the good of all parties involved.
Thus far, he gets an A+ for clearly articulating his plan, then having the backbone and negotiating skills to implement the necessary changes. The $million dollar question, "How do I play this?" Ford unlike its' competitors, still has a mountain of debt it needs to service (GM and Chrysler were able to unload much of their debt within the confines of bankruptcy protection). Ford has continued opportunistically buying back its own debt at deep discounts. To further bring down their expenses they will need to continue along this line. The concern is they may once again tap the markets with another share offering raising a few $billion dollars to again, pay down debt. Good news. Not so good news for existing shareholders as it would be highly dilutive.
I like the Ford Corporate Backed Trust Securities 8%, symbol XVF. These shares IPO'd back in 2003 at $25.00. They trade at a significant discount to par. At current levels they yield close to 14 1/2%. So, while the overall picture improves for the company, these shares should allow for investors to potentially capture significant capital appreciation as it gravitates back towards par, all the while paying out a hefty $2.00 share annually.
In a note of full disclosure, I currently own XVF. Due your own due diligence before making any investment decisions.

The earnings thus far are fine, but these yields, devine

2009-07-22T10:45:00.006-05:00

Earnings season, in my opinion, really kicked off with Goldman Sachs absolutely hitting the ball out of the ballpark. Granted, they did it with all the money we lent them at extremely favorable terms. And yes, they use more leverage than would a traditional money center institution, but, Goldman is more a hedge fund, than bank. Bank of America, Citigroup and Wells Fargo, there we have more traditional banking institutions. Within, JP Morgan Chase we have the JP Morgan trading desk, that was more closely reflecting Goldman, but since its merger, now is wrapped inside Chase, which groups them more closely with the latter three I mentioned. Back on point, earnings as of this commentary we have witnessed better than 70% of companies reported thus far have outperformed. Consider, that the Dow is comprised of what are considered Large Cap companies and widely covered by analysts on Wall Street. The percentage of the "beat" on earnings has been significant, 20,30 even 40%. How could so many analysts get it soo wrong. On one issue, they missed the impact of streamlined head count along with stripped down inventories. On another, exports are improving. Those 25 some years of global trade has worked in creating consumer nations overseas. Domestic consumption in China and India have picked up, and should continue. Larry Summers made point of this in a speech just the other day in pointing to the direction for the new economy.

The contrarians and bears will point to the weakness of earnings being, top line weakness. Meaning, you can only cut so much in expenses. They use this logic when setting short positons and every day the market rallies and they are forced back in to cover . As I stated in the past, this recovery should initially be a jobless one. We have excess capacity in the system of at least 12-14%, (the US economy historically runs at 80% in normal times give or take), so that slack in the system must be soaked up before new additions to headcount begin meaningfully. In the interim, a mere stabilizing of the economy should boost productivity and can drop right to the bottom line. Boosting earnings significantly while allowing for multiple expansions can command much higher market valuations. That's my story and I'm sticking to it, until data prove me wrong that is.

Now for the yield. Yields remain attractive in many sectors of the market. One must find investments with good coverage, reasonable debt levels, access to the capital market and a defensible position. Obviously the banks did not fall into that category once they levered up and chucked any and all underwriting criteria. But, back to the idea, Senior Housing Properties-SNH. This company fits the pre-stated criteria, has a history of increasing dividends. Demographics are in it's favor and it has a very attractive 8.6% yield. So, if you want to invest for your future income or your future retirement community Senior Housing just might be good for you.

On a note of full disclosure, I may own or may look to own in the future shares of Senior Housing Properties. Please do you own due diligence before investing.

Did the Green Shoot Get Weed Whacked?

2009-07-14T13:31:00.002-05:00

The market has experienced a smart rally off the March lows. We’ve most recently set into a digestive phase. Interpreted to mean, the market is taken a breather of sorts to consider the how and why we’ve rallied to the current levels, and equally important, are these levels deserved based upon where we are in the recovery. As we’ve witnessed over the last few weeks, the market has what appears to be a nasty case of indigestion. When the bears resurfaced and began imposing their will on the general markets, they point to the mounting staggering job losses and ballooning budget deficits. Add in the continuing deterioration in housing prices and it leaves investors with one real option, bid up TUMS futures.

Then a funny thing happened on the way to the retracement, earnings season got in the way. Nervous longs and traders have been taking profits and hedging positions leading up to the real kickoff of earnings season with Goldman Sachs (GS) this week. The bar has been set sufficiently low in my opinion to allow for significant outperformance to the upside, primarily by the financials. Consider in the financial arena, three major competitors no longer exist or are a lot less formidable, Bear Stearns, Lehman Brothers and Merrill Lynch. Also, while M&A(Mergers and Acquisitions) and Investment Banking (IB) business is off dramatically, the need to raise capital by Publicly traded companies along with the astronomical borrowing needs from the Treasury should have the financials coffers overflowing. In the not too distant future, look for M&A to experience a spike in activity. Corporate America has been hoarding cash. Companies are on the prowl. Dell with in excess of $6 billion is an acquirer. Microsoft is still a passive pursuer of Yahoo. EMC outbid NetApp (NTAP) in a bidding war for Data Domain. So, does the prowler NTAP now become the prey? NRG refuses to blink in a standoff with Exelon’s attempted buyout. There are many deals being looked at currently. However, much like in real estate negotiations, buyers look at current conditions and put out a wish bid. While sellers stubbornly remember the high water mark when times were better. How do we close these gaps in proposed valuations? It comes down to a restoration in confidence and fortitude. Confidence in the economic recovery and the fortitude to execute ones strategy. The companies willing and able to correctly look out six, twelve, eighteen months, know their markets, identify opportunities and then have the backbone to commit the necessary resources to execute their plans will ultimately be the survivors and winners. Think about Berkshire’s Buffet, back in September, when fears of financial Armageddon were at their heights, made an opportunistic investment into Goldman Sachs. The investment called for receiving 10% interest rate, with the option of buying Goldman stock at $115.00. Shortly thereafter the stock plunged to $47.00. Many claimed the old man had lost his touch. Today those shares change hands at $149.00. He also made an investment into GE. The jury is still out on that investment. But, while he waits for that to play out, Berkshire will also be receiving 10% interest. The current environment continues to be extremely favorable for the financials. The yield curve remains steep. Meaning, short term rates remain quite low, .25%-.375 vs. 30year treasuries at 4.3%. So, banks can pay virtually nothing on savings accounts, checking accounts, CD’s etc., and lend, when they actually approve a loan at 5-6%. Netting out 4 ¾% - 5 ½%. Multiply that by a few $billion and you can see the cash flows being generated. They’ll need them to offset the mark downs still coming.

Where are we?

There is plenty of reassuring news. The fears of financially important companies failing creating systemic risk, has been effectively neutralized. Another positive notes, The Conference Board’s Leading Economic Index (LEI) came in at +1.2% for the month of May, following April’s +1.1% increase. As the name clearly implies, this is a leading indicator of future economic activity, contraction or expansion, in this case expanding. Focusing further on the domestic economy, we look to the Manufacturers Purchasing Managers Index (PMI), which registered 44.8 for June. Yet another Month over Month improvement over May’s 42.8 reading. This still represents a contracting domestic economy, but with continued improvement. The ISM’s Non-Manufacturing report on Business came in at 47% up 3% from May. Importantly, new orders came in at 48.6%. Nestled in the data was further good news, 7 of the 18 reporting groups reported a resumption to growth in June. Participants also noted bloated inventory overhangs was seen significantly reduced. With the real orders emerging, they believe real domestic demand is reappearing and not merely a restocking of depleted inventories. I’ll continue to monitor this closely. Inflation? In the current environment the Federal Reserve is more concerned with breaking the deflationary spiral we were caught in. I believe they are having success, but work remains. That being said, with the massive treasury borrowing coupled with all the creative programs the Federal Reserve has implemented, inflation will come into focus, Also, an exit strategy for all that liquidity sloshing around must be formulated and articulated to investors. But, we’ve kicked that can down the road.

Let’s expand our view a bit and look overseas. First, let’s look to the leader, that turns out to be India. That’s right, India leads the global recovery as measured by the Purchasing Managers Index (PMI), which registered 55.3. Included in that reading was the new orders index which came in at a very strong 58.1. Next up is China, whose PMI registered 53.2. That is four months in a row for these emerging Tigers. While the Euro-zone, Japan and Russia remain in contraction the trend is clearly one of healing. All have made continued significant improvement in stabilizing their respective financials and economies.

Now, the balance, the not so good. Only 3 economies are expanding. Granted 2 are large globally significant, the remaining economies, including the US, are simply contracting at a less rapid rate. We can’t ignore the 800 pound gorilla in the room. Real Estate. Prices continued to decline. Albeit, at a less rapid pace. What I’m finding worrisome is the Pay-Option-Arms have overtaken Subprime mortgages in terms of default and delinquencies. These products were primarily designed for Real Estate “speculators”. A moment please, I need some mouthwash to get out that bad taste in my mouth from that one. These “investors” are worse than Subprime borrowers in my opinion. Subprime borrowers were in many cases less sophisticated and or educated. These “speculators/investors” gambled on Real Estate, and made few if any payments, simply opting not to pay. As they began to realize their “investment” wasn’t working out, since they had no skin in the game, simply are waking away. Reworking these loans will not work. When a borrower decides not to make a full payment, the payment not made is added onto the principle amount of the loan. It is only when these loans get to 125% LTV are the borrowers forced to begin making full payments. Then the delinquencies kick in. So, the loan is now 125% of the original inflated property value. Attempting to refinance when the value of the underlying property has fallen 25-40% makes it undoable. These “investors” in essence rolled the dice, it came up craps, then they took their chips off the craps table. I wonder what would happen if they attempted that at one of the Riverboat Casino’s?

The employment prospects don look promising yet. The US economy has significant spare capacity as reflected in the Capacity Utilization numbers which at 68.3%. Think GM. You’ve got 100 workers and 31 of them are sitting in the job bank, parked on Facebook all day. Didn’t work out to well for them. This is the reason you may hear the unemployment figures being referred to as a lagging indicator. Before companies will add new hires, they need to fully utilize existing assets/workers. Things must clearly be on a path of sustainable recovery and spare capacity sopped up, before companies will take on the time and expense of new hires.

Lending. The free flow of credit has not been restored to pre-crisis levels. For a number of reasons. Banks are still hoarding cash. The securitization markets are thawing but the pipes are still clogged. Prudent financial institutions have strengthened underwriting guidelines. The result, rates for small and mid sized business loans remain stubbornly elevated, if they can access them at all. While noting progress has been made, the Treasury and Federal Reserve recognize the need to address the velocity with which capital is flowing. What needs to be addressed also is that banks are appropriately pricing risk premium reflected in these elevated rates. How and why will this risk premium compress? Just see above. When banks have confidence in Asset prices, Housing Prices, Business climate and that borrowers will continue to be employed, spreads will compress and rates will come down.

Regulatory Risk.
Wall Street dislikes uncertainty. Implementing business plans when the playing field is virtually moving beneath your feet leads to a lot of trips and falls. The SEC is about to announce new rules and regulations surrounding the Uptick Rule and Naked Short Sales among other things. The CFTC is looking into position limits on a basket of commodities. Why is this important? Two timely examples. Oil nearly doubled in 6months time, boosted by hot money. Now, the CFTC steps in to investigate any manipulation,(although there was none when oil hit $147 in 2008). Long positions have been liquidated aggressively pushing down prices over 20% in 2 weeks. Just look at the drama playing out with CIT. The FDIC and Treasury have the ability to further assist CIT (already a recipient of $2.3 billion in TARP and the number one lender for small businesses) with their short term liquidity. However, as of this moment they have not. Why? No one is really sure. Do they wish to test there new plans and capabilities for an orderly dissolution of a non-systemically important financial? We don’t know. With all this uncertainty, institutional investors are using patience and restraint in not chasing this market too far. Which caps potential rallies, but puts a soft floor under the market as market participants are willing buyers on weakness.

What to do?
As the market rebounded smartly, investors as a group, whether Hedge Funds, Mutual Funds, Traders or Retail Investors, wished they had bought in March and April. A retest of those lows is highly unlikely as the catalyst for those lows was the potential failure of systemically critical companies, now has been removed. Now that we are experiencing a digestion phase, and the market, chart wise, completes a back and fill, we may get an opportunity to buy some companies on sale. Earnings season will be vitally important in dictating the depth of this correction and dictating direction. We’ll just need to have a keen eye in recognizing the need to use our trimming shears on the rose bush or spot the dandelions and break out the weed whacker.

The Alphabet Recovery? or Smiley Face

2009-06-24T08:56:00.004-05:00

We continue to receive anecdotal evidence the economy is healing. While the financial contagion began domestically, it spread globally. The responses to the ensuing crisis and recession have been massive and appear to have been effective, thus far. Will it be enough? We are, I believe in the early phases of recovery. The earliest being, stabilizing the economy. Evidence suggests the rapid pace of deterioration of the US and global economic contraction has eased significantly. That does not mean we will immediately return to an expansion mode. Not for awhile. Job losses are still mounting at troubling levels. Keep in mind how bad things were though. The job loss numbers as measured by the monthly non-farm payrolls were applauded when the June announcement reflected only 300,000+ workers no longer existed in the workplace. Wall Street practically did back flips. Currently, there are in excess of 7 million workers unemployed. We must stabilize the economy first, then find a way to stimulate growth. There continues to be significant spare capacity in the US. Steel manufacturers are running at 60% up from 50%. The rate of Capacity Utilization for total industry stands at roughly 68.3%. Companies need to use that spare capacity before real growth can occur. So, while I believe we’re in for a long bumpy ride, I believe the worst is behind us. I hear the “experts” analysts and economists on Wall Street scouring the alphabet to describe how they see the recovery coming. Strong snap back, V-shaped recovery, no snap back just grind out a bottom, L-shaped recovery, double dip, W-shaped recovery, just heard about strong snap back, flat line then dip back, so, H-shaped . I tend to think of the shape of the recovery appearing as a smiley face. The economy is grinding out a bottom and attempting to stabilize, which will take some time. We could show flat to positive domestic GDP growth as early as the 2nd quarter, more likely this will be reflected in the third and fourth quarters. We should return to subdued below trend growth in 2010. So, why invest here if growth will be so constrained? Corporate America is running extremely lean on inventories and head count. As the stabilization of the economy occurs, this productivity and profitability should boost earnings dramatically. So, initially we most likely will see a jobless recovery until we use up all that spare capacity, which should be reflected in a surge in productivity.

International markets offer attractive opportunities. From Brazil, Russia for commodities and inflation/reflation exposure. While Russia presents significant opportunity, their remains political risks that need to be seriously considered before investing. Then, South Korea, China and India for their educated workforce and cheap labor. Keeping in mind the India and China PMI have crossed over 50 already reflecting a resumption of economic expansion. Looking for additional Brazilian exposure? Look no further than America Movil and Telefonica two large and growing wireless operators.

The market is finally taking a breather. Many market participants have incorrectly predicted this wave of profit taking numerous times during this 40% rise off the lows. Many hedge funds and money managers have missed a good part of this move and underperformed their respective bench marks. They are in the process of raising cash in anticipation of redemption calls from their investors. They missed the move last year when their black box models and quantitative investment models failed to adjust to the quickly deteriorating conditions and they quite frankly, many got their doors blown off. Fast forward to 2009, and they were overly cautious, bought into the Armageddon fear, were gun shy about re-engaging the markets and either stayed in cash too long or continued to sell into all rallies. Either way, it points to under performance, and quarter end will be accompanied by angry investors demanding their money back.

We are in the process of working through this along with quarter end. With the close of the quarter, we have the opening of earnings season, which early evidence leads me to believe, will be another pleasant surprise from overly pessimistic estimates.

So, in closing when thinking about the recovery, forget the alphabet soup approach, just take a look in the mirror and smile.

On The Recovery- Three Steps Forward, One Step Back

2009-06-09T07:41:00.004-05:00

When we speak of the recovery, we need to be clear about where we are pointing to. The healing of the credit markets is ongoing. Major financial institutions have successfully tapped the markets to the sum of $78 billion in shares and bonds to satisfy the Federal Reserve and Treasury and replenish their respective balance sheets. Aside from some of the banks themselves, most agree the capital raise was necessary as the losses on mortgages and declining assets values will continue to haunt them for some time to come.

The equity markets continue to stubbornly hold the high ground. Investors, both individual and institutional, continue to bid up stocks and only become more aggressive buyers on any weakness. The extreme pessimism and fears of financial Armageddon have largely left the markets, leaving investors to focus on company earning power and valuations. With lean inventories and streamlined head counts earnings power could be turbo charged should the stimulus plan prove to be just that, stimulus not stimu-less.

The economy is no longer in a free fall. Stabilization appears closer, expansion a bit further out. The US Purchasing Managers Index continued its’ winning streak inching ever closer to the 50 number. In fact the US Institute of Supply Management (ISM) Manufacturing Survey showed the New Orders Index crept above 50 for the first time since November 2007. Couple that with the Purchasing Managers Index (PMI) of India and China breaking above 50 as well. More supportive evidence that the US consumer alone will not be required to do all the heavy lifting to jump start the global economy.

So, three steps forward, now one step back. Interest rates are inching higher. Rather, leap frogging higher. We can have a spirited argument whether it is dollar related, the avalanche of supply or optimism of the rebound of the US economy and reflation or all the above. That is for another column. The attempt by the Federal Reserve Chairman, Ben Bernanke to hold rates down should prove unsuccessful. They have been aggressively expanding their balance sheet, purchasing Mortgage Backed Securities, Treasuries and doing just about whatever is necessary to stimulate lending. Now that investors have rejected abnormally low returns on treasuries and demanding higher yields, the Fed is left attempting to hold down rates or at the least allow for an orderly retreat. Its' akin to holding down the brakes in your car while simultaneously flooring the accelerator. Slowly but surely you move forward. Interest rates need to be monitored closely. Individuals and corporations still need to refinance loans that otherwise may fall into default. Any dramatic interest rate hikes may prohibit these moves impairing bank balance sheets once again.

I remain cautiously optimistic on the equity markets and have not changed my 2009 target for the S&P 500 of 1050-1100. The news on the economy got yet another kernel of good news this morning with the release of the National Federation of Independent Business (NFIB) showed improvement coming in at 88.9, just below 90 which would signify the business climate for small companies is expanding. Further, this survey has a history of prognosticating economic activity within 1-2 quarters, which would fit in with the views for the economy to resume expansion mode by the 3rd quarter. All in all very good news.

More Positives on the Economy and Treasury/FRB Programs

2009-05-27T13:17:00.006-05:00

Green Shoots On The General Economy? Yes! On Housing? More like Don't Shoot!

Much has been made about the green shoots. There certainly are many more reasons today to believe the bottoming process, and stabilization of the general economy continue to make strides. We continue to see mounting signs: The Index of Leading Economic Indicators rose for the first time in seven months; The continuing improvement in the domestic Purchasing Managers Index; The thawing of our Credit Markets and the early signs of stabilization in our Financial Institutions. All have been helped to a significant degree by the programs initiated by the Treasury and Federal Reserve. The list of acronyms is many, but the last initiative may prove to be the most important. The TALF and PPIP.

The TALF is allowing the velocity with which credit flows, do so more freely again in the Auto Receivables and Credit Card Receivables arenas. More work needs to be done with the aforementioned along with SBA Loans and equally important Commercial Mortgage Backed Securities (CMBS). The latter will be tested on June 2nd when the Federal Reserve holds its' CMBS operations utilizing 5 year terms. This may be the equivalent of building the flood wall before the hurricane hits. The CMBS market is virtually still frozen. To re-liquify this market they will need to free up capital at the banks as well. Thus the importance can't be underscored for the success of the PPIP. If successful, a functioning active market is created where buyers pay reasonable prices and sellers take a haircut, but aren't scalped, billions of dollars can and should be released from balance sheets for redeployment and reinvestment.

Housing prices continued the troubling trend lower, falling 18.7% in the 20 city index. The supply of homes on the market remains stubbornly high, above 10 months. That takes into account only homes that are listed for sale. There remains the 'shadow' market supply which takes a bit of creativity to total. The Shadow supply takes into account sellers who may have been unsuccessful selling their homes and have since taken it off the market. It also includes bank foreclosures that are sitting on balance sheets of institutions unwilling to sell at such depressed prices. The one commonality of the two, should real estate pricing firm up, they both would become willing sellers thus immediately adding to available supply. Some estimates have the combined inventory coming in closer to 3 years not 10+ months.

Around the times of a turn I adhere to "keeping some powder dry" and "not wasting all of your bullets". So, while I clearly see the landscape of an economic bottoming taking shape and abundant investment opportunities, when I hear pundits cry out the early cyclical play is to be investing in the home builders, I have to shout, "Don't Shoot"!

Yours well armed with powder dry.

How we get our MOJO back?

2009-05-20T08:54:00.005-05:00

Has the US consumer lost its' MOJO

The market continues to prove encouragingly resilient in the face of significant supply. We continue to believe the significant market low made back in mid March was the low point of this horrific bear market we've all experienced, and more importantly need not be retested.

First ,the total collapse of the credit markets which exacerbated the move down, have to a large part been restored. Credit, in the form of Inter-bank lending, Commercial Paper, Mortgages, Student Loans, SBA Lending etc., has begun flowing. The velocity with which money is flowing needs further improvement and plans to assist this point are to be implemented over the next 4 to 6 weeks (TALF to include Commercial Mortgages and PPIP to purchase "legacy" assets from banks). Much work still needs to be done and the real test will be when the Federal Reserve is able to extricate itself and allow the market to function independently.

Second, the overwhelming global response, has well, been, overwhelming. After finally recognizing this credit contagion was not solely a US problem, the monetary and policy response has been significant and we believe for the most part, will prove sufficient.

Third, and equally important, is resolve. Global leaders have recognized how intertwined our economies have become. The need to work collaboratively is imperative and understood. The decoupling theory that had gained acceptance in some corners, have largely been discounted and dismissed. Toto has pulled back the curtain and instead of exposing the little old man, (not Alan Greenspan or Chairman Bernanke) we're greeted with more of a mythical Hydra. The US must come to the realization while we still get to sit at the head of the table, there are many more chairs stationed at that table. We should welcome the additional players.

The "other" stress test. The stress laid upon the shoulders of the US consumer to drive the global economy is no longer realistic, possible or necessary. The US consumer along with large financial institutions, is de-leveraging himself. After years of gorging himself on vacation homes,new cars, plasma TVs and i-things, with cheap and available funds, the piper has come a callin'. One goal of expanding US global trade, aside from lowering our cost of goods and services, was to help create and foster other markets for our goods. Success! China and India, recognizing the currently fragile domestic economic status of their trade partners, have focused on bolstering domestic consumption. China continues to channel money through state controlled banks for infrastructure projects and prop up real estate markets. India has followed suit with interest rate cuts and IT tax cuts to support their services based economy. In these two countries alone, we are looking at a combined population of 2 billion+ with a working class of 700 million+. China's working class alone is expected to top 700 million by 2020. Working class wage earners are consumers. Success!

This is not to signal the death of the US consumer or to cede our crown or silence our snorting, far from it. The US consumer will be critical to a resumption to growth of the US and global economy. We still have the best workers in the world. A few notes that point to a healthier consumer lie in the tax cuts and tax refunds to start. Not to be forgotten is the benefit of lower prices at the gas pump also act as a tax cut of sorts. Lastly, mortgage refinancings are not only keeping folks in their homes, it allows consumers to keep more of their paychecks. While we are experiencing a spike in the US savings rate, as evidenced by recent retail sales numbers, US consumers just can't resist a sale. Snort!

What I am looking for over the next few days and weeks domestically, is a continuation of the improvement in home sales, mortgage banking applications and weekly unemployment claims. On the global stage, since I believe China and India will be keys to signs of growth or contraction is a focus on their respective PMI's (which incidentally both crossed over the 50 figure signaling an expanding economy) and commodity imports.

I may currently own or plan on owning FXI-I-shares China 25 Fund and IFN-The India Fund.

Is This A Round of Profit Taking Or Something More?

2009-05-14T09:49:00.002-05:00

To take a Bill Clinton campaign statement and unashamedly use it to my benefit, "IT'S THE SUPPLY STUPID!"

A wave of profit taking has begun. The markets having rallied in excess of 35% since the March lows, we’ve finally gotten a, thus far, slight correction. This has been looked for and well anticipated by many and may I add many times, as the market continued to rally. In the early stages of this rally, day traders and hedge fund managers continued to believe the rally had no basis and sold aggressively into any strength. The trade obviously did not work out and they were forced into the market to cover their short positions. Proclaiming to anyone who would listen, we were experiencing a suckers rally. Soo, on the next leg higher, they re-entered the market, reset their short positions once again, feeling even more emboldened and having a much higher price point to sell into. Only the market didn’t cooperate, and rallied “blindly” and “without cause”. “Irrational” they screamed! “Suckers rally” they railed! But, cover their shorts once again they did. Why talk about this now?Because, investors are still, understandably jittery about any signs of weakness in the markets. Keep in mind nothing goes straight up.

Let’s look at two points in time. First that day in March when fears of financial Armageddon were raging. Rumors of nationalizing the banks ran rampant. Retail investors along with institutional investors were hoarding cash. That fear has clearly dissipated and nationalization is off the table. The financial system was pushed to the brink and took a ‘bend,don’t break’ posture and have moved back to firmer footing. Since that fateful week, we’ve received enough data to show early signs of a return of the consumer. We’ve witnessed a pickup in home sales, both new and existing. We’ve made it through earnings season and had a much better showing from corporate america. We are also seeing feint signs that the trough in the economic cycle may be behind us. Now fast forward, to the current week. With all the relatively good news (things need to be taken in context of expectations of disaster to what we are experiencing) why has the market done such a quick about face? Two reasons I believe. First, as I started off, profit taking. We just got through a pretty good earnings season. Also, we’ve come quite a ways off the bottom and people are taking profits awaiting the next catalyst to drive the market. Second, and most significant, in a terrific sign of the credit market thaw and a return of risk appetite, new issuance is hitting the market like a tsunami. The Bank Stress tests suggested to many firms they needed to raise capital. Further, the treasury announced the willingness to allow firms to return TARP funds if they show the ability to raise capital in the private markets without government assistance or guarantees. What a shock, banks sprinted to the markets to issue new securities. What we are experiencing, in my opinion is merely a function of the severe imbalance of the supply demand equation. Too much supply hitting the market in such a short period of time is outstripping demand. Also, traders and hedge funds, alerted to all this supply, have set shorts quickly, knowing they can buy these new shares at discounted prices. This rush to tap the capital markets has spread like a swarm of locusts from banks to Real Estate Investment Trusts to Casino's and not to be forgotten, Ford(I can't say auto's anymore, there is only one survivor).

Now, will it turn into something more? It's early and I do not believe so. However, I’ll continue to monitor the markets and economic releases for any signs. As for supply, from where I sit we'll all need to break out the foul weather gear, because I can hear another wave in the distance.

Unstressed

2009-05-08T10:34:00.002-05:00

What now? The much anticipated results of the financial stress tests have been released and greeted with a loud yawn. While the results point to a number of institutions having to raise significant sums of capital, the manner in which they were released, drips and drabs over these last few days, had the intended effect of eliminating the potential shock and awe. Had the suggested capital raise figures been released just 2 months ago, the tremors rumbling through the markets could have caused a retest of the march lows or worse. Now, not just a yawn, but a justifiable continuation in this quarter long rally in financials and the markets as a whole.

One thought on the financials to keep in mind is the steepness of the yield curve. This is an extremely favorable environment for banks. Consider again, banks can gain deposits for virtually nothing, 1/2%-1% on checking and savings accounts while lending at a minimum 5% on mortgages, 7%-8% on home equity lines of credit, and an even juicier 14%-24% on credit card balances. As you can see, as I've said many times, in this environment even a chimp could make money. The Federal Reserve Chairman, Ben Bernanke recognizes this as well. We simply need to keep the banks open and they, through their normal course of business, can recapitalize themselves. And, they will need every bit they can generate. Here's why. The market is reacting as if this mornings non-farm payroll reflecting a loss of 539,000 was actually a build in payrolls. Think about that 539,000 job losses. While understandable, it broke the trend of higher job losses we've experienced, and came in sub 600,000, but it is still quite a large number. Expect the delinquency rates on mortgages, auto loans and credit cards to gravitate higher the longer this job contraction continues.

While I'm am extremely optimistic about the potential for of the US economy to rebound along with the resilience and ability of our workers to adapt and our entrepreneurial spirit, this euphoria surrounding the financials seems to be getting a bit ahead of itself. I'm of the belief the lows we saw in March was a non-traditional capitulation trade, that drove the stock prices and valuations to levels they never should have seen. The fear was rampant everywhere. That fear has clearly dissipated. The snap back rally we've since experienced has been welcome and to some extent, long overdue. Short term we run the danger, however, of valuations getting too far ahead of the current fundamental backdrop. Longer term, I believe corporate America is positioned for an above average acceleration of earnings. Most companies, or should I say the survivors, have cut expenses close to the bone and are running extremely light on inventory and manpower. As the economy improves, adding to the workforce is one of the last things businesses are want to do. So, productivity explodes and drops right to the bottom line in the form of earnings.

On a closing note before we head off to the weekend, since it is one of major importance, is the China story. China's stimulus appears to be gaining traction across the economy. The China PMI broke a hair above 50 (a sign of neither expansion nor contraction) to 50.1. This continues the improving trend experienced over the last 5 months. These numbers are always met with some skepticism. Supportive comments came from Caterpillar, among others about the level of activity hitting record levels again within China. If indeed the global economy can return to growth mode without the US consumer doing the heavy lifting alone, we are in for a stronger and more sustainable economic recovery, as I believe, but perhaps a lot more quickly than most are forecasting.

Yours Unstressed.

Look Out Above! GDP falls a worse than expected 6.1%

2009-04-29T09:26:00.006-05:00

Wait a moment, that is not a typo in the headline. I did not mean, look out below. Let me explain. While the headline figure for first quarter GDP came in worse than economists estimates, the devil is in the details. Lets review the major drains and impact on the headline number released. The big drains on the first quarter reported were business investment down -37.9% annual run rate (-4.7%), inventories declined $103 billion (-2.8%), investment in housing fell 38% annual run(-1.4%) and government spending fell 3.9%(-.08%)

To the positive contributors, Consumer spending +2.2% (+1.5%). Imports declined 34% vs exports declining 30%. Net exports resulted in positive effect of 2% to growth as the trade gap narrowed. Noteworthy, the savings rate rose to 4.2%.

Now why, with a worse than expected headline figure, and some disastrous internals, is the market rallying, and we are hearing a sigh of relief? In my opinion it lies in a few areas, and granted you have to dig for them, but they are there. First the consumption numbers. Consumer spending came in at a much better than anticipated 2.2%. Almost double what analysts had anticipated. This leads to the question of pent up demand. I've talked about this in the past, consumers can and have put off purchases due to fear. Fear of falling home prices, fear of loss of income, etc. As I've stated in the past, this can have a coiled spring effect. Sooner or later, that car may need to be replaced rather than repaired. That roof replaced instead of patched. That copier replaced with one that doesn't drink all your ink and spit out crumbled faded images.

Next the significant draw down in inventories, $103 billion. Continuing a conscious effort by businesses to right size there companies and trim overhead. Inventories are lean and continue to be trimmed by companies to adapt to the current environment. Why is that positive? See the pick up in consumer and business spending. Also, the tax cuts already announced should be getting into consumers pockets and add to this momentum. Worth watching and vitally important for any expectation of an economic correction.

Finally, government spending contracted. WHAT? Government spending falling at a 3.9% annual run rate. I had to say that again. Because that is most likely the last time I'll get a chance to say that for the foreseeable future. Look for the government to ramp up spending in the coming quarters significantly. So, instead of a negative draw of .08% to GDP we should anticipate a very positive contributor to our growth figures. Whether we like it or not.

So, while the headline numbers seem troubling, keep in mind the following. The first quarter is in the rear view mirror. It's history. Also, credit was quite a bit tighter in February vs March and January vs. February. Meaning, the credit market thaw is ongoing. More companies and individuals are gaining access to credit, allowing for big ticket purchases and execution of business plans. Also, should this rebound in consumer spending continue, those depleted inventories will need to be replenished. I would anticipate analysts and economists revising their estimates for second and third quarter GDP over the course of the next few months as we get more supporting data suggesting the worst is behind us.

On a final note, we are in the midst of earnings season which are coming in better than anticipated. Of the companies that have reported thus far, 69% have beaten estimates. It's early, but important. What continues to be of interest is a common theme I've noticed, one of beating on earnings but missing on revenues. How can this be good news? It tells me companies are running lean. It would suggest, should the rebound gain traction, companies that have been most prudent with expenses and head count should see significant expansion in productivity and earnings.

For today, the shorts are nervous and to offer a Martha Stewart, "that's a good thing".

Stress Test for Banks or Investors

2009-04-23T10:13:00.002-05:00

The buzz these last few days and circulating around the trading floor this morning surrounds the details and outcome of the Bank Stress Tests. What will they show? Who will get exposed? Which, if any are solvent? The tests originally designed to assuage investor concerns. Instead the tests have raised fears and increased rumors on who will pass, more to the point who will fail. The treasury has attempted to get out in front of the release of these results and inform jittery investors this is not a pass fail test, more a way to identify which institution requires additional capital. Apparently, after the results are announced and the under capitalized institutions identified, they will be given a window of six months to raise capital from the private sector. Sounds reasonable. It has raised some fears and rumors a large bank will be thrown under the bus to prove the soundness of the test and add validity.

Financials should receive some detail beginning Friday and into the weekend. The Federal Reserve and Treasury have done some of their "best" work over the weekend these past twelve months. Do we really want to be too long with the markets closed. Which leads to a potential strategy. For investors with a taxable account, as a way to minimize taxes (eliminating the need to sell profitable positions) may wish to utilize the Short Proshares. For NASDAQ utilizing PSQ- short the QQQQ. For the Dow utilizing DOG-short the DJIA, and for S&P SH-short the S&P 500. For more aggressive investors there are additional Proshares that return twice the inverse return of the relative indexes.

Barring any surprises these positions may be unwound or sold come Monday after assessing the news,reactions and current environment. The market has run into some resistance recently and has had difficulty overcoming. But, the retracements have been minor and met with good buying. I believe we are in a base building phase fairly well contained by 860 on the upside and 806 below current levels on the S&P 500. Earnings are likely to help drive our next big market move and they are coming in fast, furious and widely mixed.

So, as the weekend approaches, if you seem to be tossing and turning more than normal, this strategy may help keep the Ambian in the medicine cabinet.

Have a prosperous day!

Merger Mania or Smart Shoppers

2009-04-22T12:29:00.002-05:00

The market continues an impressive recent pattern of selling off early only to be met with strong buying both from individual investors and institutional as well. Very impressive also has been the deal making thus far in 2009. Most recently the Oracle of Redwood, Larry Ellison pounced on a bride left at the alter, Sun Micro. Will IBM reenter the fray? IBM, for now says not. But, the real story is the magnitude and swiftness of the deals being done in 2009 and the manner. Most announced deals are coming with all or a significant cash portion in the offerings.
Perhaps lost in the carnage of 2008 and early 2009 is companies became extremely frugal. Hoarding cash and aggressively managing expenses. As we start to see signs of an economic bottoming, even hints, I believe we'll continue to see oportunistic M&A activity accelerate.
Where to look? Follow the cash. Telecom? How about local company Sprint (local for me)? Who could have an interest? Look no further than Deutche Telecom. DT is having difficulty expanding it's footprint in the US and a combination with Sprint would present a formidable competitor to AT&T and Verizon the number 1 and 2 carriers in the US.
We can look at out of favor areas such as the farm and construction machinery playground for opportunity. While the sector as a whole is in a hunckering down period, valuations look extremely enticing. Looking to the big players with strong cash flows, Deere as an acquirer. The potential prey? Oshkosh perhaps? Oshkosh has gotten hammered with the collapse of the construction markets. However, they have strong defense, fire and refuse business. Oshkosh is reducing debt and cutting expenses resulting in cost saving of $150 million in FY 09. While work needs to be completed on their credit facility, as the construction cycle recovers, so should the weaker areas of the company's business. Deere would have the opportunity to enter new markets, acquire a company with a solid product mix, but one that was overextended at the wrong time. A positive for Deere and Oshkosh as well, Deere just recalled 68 employees on improved orders in construction and forestry.
If this is the beginning of the turn, now should be the time to be forward looking and oportunistic. We are all to cautious for a mania to grab hold, but when opportunity knocks....
As a note, I own no share of any stocks mentioned here.

2009-04-21T08:55:00.003-05:00

A GROWL or purrr

The market activity over the last six weeks has inflicted a considerable amount of discomfort to the bears. With claws trimmed they reemerged yesterday and with an overextended rally and over bought conditions on most technical indicators, they roared and successfully pushed the markets down roughly 3%. But is the bear back in charge?

Obviously too early to tell. We know the market was overextended. We know the recession continues(although evidence of a deceleration in the rate of contraction is accumulating). Entering into yesterdays trade the sellers and profit takers were looking for the catalyst to embolden their case. They received it in the form of mixed financial earnings, also a blog stating the Treasury would convert their preferred shares to common, significantly diluting existing shareholders. Further we heard should Citi require more capital, sayonara Vikram Pandit and board. Did we think the market would react positively to news the Government, in essence would demand a seat on the corporate board? Thus far, the track record of our fearless leaders on the hill has not instilled a tremendous amount of confidence.

The bears had their day. We'll continue to monitor the markets to see if this is anything more than a natural round of profit taking or something more significant. I tend to believe it a natural round of profit taking, with perhaps a bit further to go. However, I will be respectful of the market gauges and technicals levels for any longer term damage to this up move.

I enter today with minor scratches and a defensive posture, respectful of my well trimmed stalker.

Grand View- Is the recovery here?

2009-03-31T11:33:00.000-05:00

The US economy has continued contracting in the soon to be completed first quarter. Current estimates suggest the US economy as measured by Gross Domestic Product (GDP) contracted by close to 6%. The initial release will be issued April 29th. This following final fourth quarter GDP numbers of -6.3%. Recently the Federal Reserve released its new forecast for economic activity. They look for 2009 GDP to range from -.5% to -1.5%. So, after a severe contraction in the first quarter, they expect the healing process underway to begin in the second quarter and continue throughout the remainder of the 2009. Further the Federal Reserves 2010 estimates for GDP suggest a return to growth of 2.5%-3.3%. The numbers coming out of the Federal Reserve on Inflation remain promising also with estimates of 1%-1.5%, well within their targeted range. They estimate unemployment ranging between 8-8.8% for both 2009 and 2010. Chairman Bernanke testified before congress in late February that he anticipated the current recession to end this year and the following year to be one of resumption to growth, dependent in no small part, upon stabilizing the financials.

There is the potential for significant improvement in GDP growth in the second half of the year. The recovery should be a continuation of the gradual improvement currently underway. To see this improvement we need to take a step back and search for this evidence over the course of a period of time. First let us look at the National Manufacturing Purchasing Managers Index. While the February release came in at 35.8 well below the 50 number that would reflect an expanding economy. If we take a step back we see that February’s number was .2 better than January and 2.9 ahead of December’s reading of 32.9. Next we look at Industrial Production (IP), again the recent February release came in at -1.4%. Again, taking a step back we see that as being an improvement from January’s -1.9% and December’s -2.4%. What we are searching for at this point is stabilization. We must stabilize the economy before we can resume a growth trajectory. So, as you can see, while not a resumption to growth, definite signs of improvement worth monitoring. Now a look at one of the most troubled areas of our economy, housing. February existing home sales came in at a surprising +5.2%. New homes sales followed lock step coming at +4.7%. The Commerce department reported a surprising jump in construction of new homes of 22%. The first time housing starts increased since June. Meantime the Mortgage Bankers Association showed an increase of 30% from the prior week in Americans applying for home loans. While one month does not indicate a trend, it is worth monitoring.

There are promising signs outside the US boarders as well. The China growth and decoupling story has taken a beating over the course of 2008 and into 2009. Could the global economy recover without the US growth engine in tact? Or the US consumer in retrenchment? The answer is still not conclusively there yet. One area to look is the Chinese Purchasing Managers Index (CPMI). The latest release rose to 49 up significantly from January’s 45.3 gaining for the third straight month. While the 5th straight month the index is below 50, the estimates for March show the Chinese economy back in expansion mode at 54. Outside of China’s expectations of growth exceeding 8%, India anticipates the measures already taken should lead to 2009 annualized growth to range between 6.5%-6.7%. Should both of these two developing economies be successful in stimulating domestic consumption and be less reliant on the US, would be viewed as significant and applauded. We’ve also witnessed significant rallies in emerging market stock indices, which would suggest a return of risk appetite from investors.

Back to the domestic side of the equation. The US market has rebounded smartly off the March lows. There continues to be a battle being waged between the “top down” and “bottom up” analysis for earnings. Top down looks at the market from 10,000 feet above. Looking at the macro economic environment on down, while the bottom up starts from company specifics on up. Due to the extreme contraction in the availability in credit and the ensuing ripple effect, the estimates are so wide as to drive a truck through it. Estimates for earnings on the S&P 500 index range from $45.00 to $75.00 a share. Taking that a step further, being in a low interest and low inflation environment utilizing a 14 to 20 price earnings multiple can be and is being arguably made. The divergence in estimates lie primarily, in my opinion with the financials. Will the financials be neutral to earnings or continue being a detractor to earnings? If we can finally believe the CEO’s of the major money center banks, “The first 2 months of the quarter have been very profitable”, financials could actually add to earnings. There is reason to finally believe these CEO’s. The many programs the Federal Reserve has implemented, most recently TALF-Term Asset Backed Securities Lending Facility should help thaw the securitization markets. The Federal Reserve may expand this programs ability to purchase a broader array of securities. Further the announcement to purchase longer dated Treasury bonds and Mortgage backed securities. This current lending environment where institutions can borrow at virtually 0% and lend at 4 ¾% on new mortgage originations and 8%, 14% and in some cases 25% on credit cards should allow banks to recapitalize their balance sheets through actual earnings. Now onto the Geithner plan. Finally. While we’re not sure exactly what prices investors will pay, or which sellers will participate, we’ve got the plan. In short, investors, (hedge funds and private equity) will be given access to cheap funds with significant protection to set up SPV’s (special purpose vehicles) to buy those ‘legacy’ assets from banks. While not perfect, at the minimum the taxpayer has an opportunity to participate in any profits, at the margin banks get to relieve themselves of bad investment decisions. This allows for banks to free up reserves against held against potential losses which can be redeployed for investment and loans directly into the economy. Also, for those banks that have aggressively marked down these assets on their books may be able to book profits on these sales or simple “mark-ups’ instead of the unending mark-downs we’ve become accustomed to during this crisis.

Where are we? While there is still enough negative news abounding in the markets, there are feint signs of stability as evidenced by the PMI, CPMI and IP. There are also conflicting signs in the commodities arena. In the midst of a global economic contraction you wouldn’t expect to see a spike in commodities, specifically copper and the stabilization of the CRB index (Commodities Research Bureau). While short term encouraged by the recently announced aggressive plans put in place by the Federal Reserve and Treasury ( exiting these plans will take the skill of a surgeon) the full effects and ensuing restoration of confidence is down the road. The plan of the Fed and Treasury in unleashing the potential pent up demand for housing, automobiles and economic expansion by artificially depressing lending rates should be effective, but will take some time. Akin to a turning of an oil tanker. The new captain and crew, President Obama, Geithner and Summer, have seen the iceberg and the turn has begun. I would conclude the rally has been significant and expeditious and mainly technical in nature. We were extremely oversold, by any measure. Now taking a pause, allowing for the underlying fundamentals (economic and corporate earnings and outlooks) to catch up, confirm and justify the next move higher is warranted. While still looking for a 12 month target range of 1050-1100 on S&P 500 it will be a challenging journey fraught with major rallies followed by rounds of profit taking. Prudent investors need to be alert and recognize the signs of a bear market rally or the emergence of the the next raging bull.

Cheers
James