The Depression Continues

ADP's hiring numbers are out. February was revised down by 4000 jobs to -24,000. March was listed as -23,000. Census hiring was irrelevant as the Gov't does not outsource its bookkeeping/payroll to ADP! And ADP says the storms in Feb. did not affect its numbers.

Gallup.com shows that hiring/not hiring shrank to -1 as of today, a number it first hit Nov. 2008. It also showed that elective spending was down to $61/day, a number first hit in Feb. 2009. Even at much better #s such as +10 (% seeing hiring - % seeing negative hiring), unemployment was increasing in 2008.

In the real world, there has been no economic recovery. There has simply been looting of the public's money to pay off Big Finance's bondholders and enrich its stockholders, along with various other shenanigans such as stealing through ZIRP from savers. Though the Govt might counter that absent FDIC, savers in many banks wouldn't have received 100 cents on the dollar from their savings. Given that in the Great D, almost all the money center banks were money good and only a very small % of all bank savings were lost to bank failures, the current crash has been far worse than that of the early 1930s. Nothing like modern life support methods. It used to be that a massive heart attack could not be survived. Dr. Ben: committed malpractice but the patient is sort of alive, suspended like Hamlet between heaven and earth.

Remember that the non-farm payrolls # in 2 days will be revised. It cannot be profitably traded off of unless one is a true pro.

Stock prices cannot go down: bad data means easy money forever; good data means that Larry Kudlow and other permabulls such as Brian Wesbury are right that America has one damn great economy.

At some point presumably ECRI and Conf Board will be correct. There will be hiring. But at about 200,000 jobs added monthly for 12 months needed to bring the unemployment rate down a mere 1%, even a nice job gain number needs to be greeted with restraint. Plus, normalization of Fed policy may accompanying greater economic activity and therefore may be further associated with another conundrum on interest rates and sluggish stock price reaction.

Copyright (C) Long Lake LLC 2010

Cases Study in Hype: U. S. Steel and Laszlo Birinyi

Before getting to the specific case study, I recall that Bill Fleckenstein warned months ago that a sign of the impending market top he was expecting was when "strategists" started pointing to the "resilience" of the market. Well, it's here, and from a well-known figure. Laszlo Birinyi was quite bullish at the end of 2007. He is quite bullish again and uses the "R" word:

“Given our trading background and approaches, we are impressed with the resilience of the market which, in effect, is what trading desks mean when they say the market ‘acts well,’” according to the report Birinyi sent to clients today. “Large stocks are now likely to be contributors rather than detractors.”

This "R" word is accompanied by the dubious statement that large stocks are not contributors to this move.

Are you impressed that the "market" is acting well? Do you believe that acting is reality? Does a body in motion stay in motion? Why is it that people with vested interests in rising prices talk their book? Well, duh, think for yourself. Do you buy more or less of something when its price rises?

One of the larger contributors is United States Steel ("X"). Its 2-year chart shows it to have been a laggard on that time frame but it has soared over 1 year. David Pauly of Bloomberg is bullish, citing the price rise:

Favorable news continues. Shares of U.S. Steel Corp., a backbone-industry company, have climbed almost 50 percent since Feb. 4. Apple Inc., maker of iPods and iPads, may hit $300 from its current price of about $232, Credit Suisse Group AG said Friday.

I searched Yahoo's finance section re news on U. S. Steel.

Basically there are a bunch of references to rising prices. What is lacking is that 2010 and 2011 earnings estimates are down from 60 days ago, while the stock is up. The first substantive news I found was from a couple of weeks ago, which was that a larger competitor, ArcelorMittal, had downbeat earnings news.

U. S. Steel sells at 3 1/2 times tangible book value in an industry that frequently sells under book. It has a dividend yield of 0.3% in a highly cyclical mature industry that in younger mature times such as the 1950s had high dividend yields.

I wish X well. One thing is certain. Past stock performance is no guide to future performance. All shareholders get from the big moves up and down is, at the end of the day, either the dividend, any spin-offs, or whatever another company wishes to pay you for your stock. The idea that you should be an owner of this company because you expect to outsmart a future buyer is, for most people, a difficult one for me to accept.

Has X been a resilient stock and a resilient company that makes non-resilient products?

Who cares?

Copyright (C) Long Lake LLC 2010

Chicken

Conspiratorially, all this relentless rise in the price of the average stock is designed to suck John Q. Public in at prices which soon enough will crash--thing subprime housing and the like. Sluggish real economic activity representing leads to a longer and longer period of Fed ease, with more and more leverage being used. Thus the real economy's weakness in a period of alleged recovery paradoxically leads to higher stock prices, as future earnings don't change much but the short-to-mid term discounting rate stays low.

In August 2007, I said to an investing friend that I believed that the domestic, non-export-oriented part of the economy was in a recession. After all, housing was already in a depression and autos were in a severe recession. The Fed had undertaken emergency action following several months of bad news out of Bear Stearns, housing securitized stuff, and early credit crunch action.

What is amazing is watching Gallup's polling almost daily. Real people still are near cycle lows in observing companies not hiring and in spending on discretionary goods.

When you read about Best Buy's results signaling strength, remember how much competition no longer exists to siphon large amounts of sales away. Nothing at all against this company or stock-- I have traded it successfully a number of times the past year, all from the long side. And one can praise the chart here as setting up for a saucer-shaped breakout.

But BBY sells for 7 times tangible book value and has a dividend yield of about 1.3%.

So it's at 12X current year estimated earnings, but if it were truly cheap, it would have been LBO'ed or acquired by some giant company.

So this is one of many high quality companies that could take a much higher stock price, and the set-up (conspiratorially again) just might be that the public finally gets interested in stocks at $50. Who knows, this could be an $80 stock in a year or two. Or margins could get crunched, earnings estimates could decline, and the stock could easily head to 2X book, which would be an utter disaster.

When stocks were valued based on tangible assets, there was a large margin of safety that does not exist now. One to look at is Everest Re ("Re") and other insurers/reinsurers. The stock has been weak on the heels of a projected Q1 loss due primarily to the Chilean earthquake. But it trades well below current tangible book and could lose money this year and the stock could rise a great deal. Plus you are paid over 2% to wait. To me this beats a 5-year Treasury. No retail clamor exists for RE.

With the absence of public participation, the institutions and Big Finance are playing the high school game of chicken with each other, this time with other people's money instead of real lives and cars. If the public doesn't get suckered in, then they to eat the overpriced sardines they bought to trade.

Ordinarily one would think that these guys are too smart to get stuck holding the bag.

Not so. Think the recent CDO mess etc.

All the incentives continue to favor gambling. Traders are getting it while they can.

There will be more growth this spring. And it will continue. What someone else's company is worth after the orgy of money-printing is the stock buyer's/stock owner's question. Stocks are so far above their historical replacement ratio and so far above their normal cyclically-adjusted price-earnings ratio that fund managers etc. rationalize these valuations by using circular reasoning that the weak economy has caused low interest rates and therefore high valuations are OK.

Yours truly has taken some quick 15-20% profits in DLTR, TJX and ROST and added RE and Chubb (CB) late last week. Too many stocks have gone up too far, too fast. Very few have strong asset-based underpinnings. The market has to discover these relative gems one day. If not, the worst is that one is trapped in value stocks as occurred from 1998-2000-- one was early, but they led the up-move and in fact many bottomed at the overall NASDAQ peak in March 2000. Money just decided to sell the momentum stuff and buy the value stuff. It just sort of happened.

Playing chicken is for kids.

Copyright (C) Long Lake LLC 2010

'Goldilocks' Was a Fairy Tale

Bloomberg.com is reporting Junk Bonds in 'Goldilocks' Market Reach Record:

Companies worldwide issued $38.3 billion of junk bonds in March, passing the previous high of $36 billion in November 2006, according to data compiled by Bloomberg. Yields fell 0.95 percentage point to within 5.96 percentage points of government debt, the narrowest gap since January 2008, Bank of America Merrill Lynch index data show.

In other signs of giddiness, The Technical Tape reports as of March 27:

The sentiment indicators would suggest that this is not investing nirvana. While prices can certainly go higher, the lack of buying power should be obvious. Who is left to buy if everyone is all in? But judging by the emails I receive, most market participants believe that this is a new paradigm, where the Fed is engineering a new prosperity founded on gains in the market. Investing nirvana? I think not. This market environment is more like a high wire act. A new paradigm? Every era is new, but fear and greed never go away. I have yet to convince myself that "this time will be different".

Shorter term Rydex measures continue to suggest excessive bullishness. . . (See nearby pic and click on it to enlarge.)

Finally, Bloomberg.com goes for circular reasoning that supports The Technical Tape's contrarianism in S&P 500 Cheapest to Junk Bonds Since ‘07 Signals Gain:

The Standard & Poor’s 500 Index is trading at the lowest valuation compared with junk bonds in two years, a sign the stock-market rally will continue, if two decades of history are any guide.

The lowest-rated debt pays 3.22 percentage points more than the earnings yield on the S&P 500, the smallest gap since 2007 and a discount to the average 5.93 points of the past 22 years, data compiled by Bloomberg show. The measure of profits compared with share prices shows stocks may be undervalued next to the fixed-income investments most closely correlated with equities.

I didn't bother reading the rest of the article. Who knows if two decades of history are any guide? Who knows if two millenia are any guide? The future exists to surprise us. Who would have thought 3 years ago that 2008 would occur, and then who would have guessed we would be reading about shortages of ships to bring containers to the U. S. and Europe as inventories are replenished?

All we can say is that more and more sentiment indicators are meshing with fundamental, multi-decade tested measures of fundamental valuations of stocks that suggest that stock prices have gotten ahead of themselves.

In the first article in this post, a later section mentions that the world's largest commodity trader, Glencore, is looking to raise multi-billions of dollar from banks in Asia. What's that about? Sounds like leverage ramping up to me. Meanwhile if we are in another cycle similar to the last one, with the Fed likely to stay too easy too long, we note that gold went through periods in the aughties where it lagged stocks, but ultimately did better.
Given a higher relative gold price now than then, my sense is that at least the two asset classes will track each other. Separate from a long-term core position, it makes sense now to tack toward gold on that basis if only on a trader's time frame.

Copyright (C) Long Lake LLC 2010

Where To Now?

Approximately now, the Fed has definitively embarked upon the next tightening cycle. Looked at from a long term nominal or inflation-adjusted perspective, the U. S. economy has not performed well for some time. Measures of consumption, such as cars sold, do not reflect wealth accumulation. Thus when the economy was so weak that to sustain the appearance of strength coming out of the 2001 recession, houses were routinely sold for almost nothing down and with ridiculously low lending standards, and autos were almost always bought on credit, the signs of economic malaise were clear.

The "escape" from the abyss in fall 2008 was unsurprising. Be not impressed by the "heroism" or "brilliance" of the economic doctors in that time. All they did was socialize the losses onto you and me and reward the insiders. Plus they printed money. In other words, they took the Japan solution to a banking crisis rather than the 1990s Swedish solution.

There is no telling if consumer prices are going to go into a period of stability or even decline a la Japan. What makes more sense is that the U. S. is a decade out of phase from Japan. Increasingly we are already seeing that the funding of new Federal debt is domestic rather than foreign. If that continues, America will be following the Japan scenario in that regard as well.

The headlines are going in the MS tout resumption of job growth in March. Whether all of that is from Census hiring we won't even be sure of till revisions occur. What is certain is that small business is not hiring, though it has largely stopped firing. With housing activity not on a clear upward path if not on a downward path, despite all the support, we are left with the prospect of a post-credit crunch economy.

This in turn is one in which frugality continues, and Gallup continues to show consumers just not spending on elective things and workers just not seeing any net hiring at their firms.

The biggest mistake investors can make is to key their stock and bond valuations off of unnatural zero interest rate policies. This failed them in the last cycle and will fail them again. Last time around, Fed funds only got to 5.25%, at most equal to inflation if not below it-- and things collapsed. This is a sign of severe instability, in that the economy could not even survive imposition of a positive real rate of interest on Fed funds. So far, it looks like a replay of that. The Fed is behind the curve on inflation again and will keep that stance longer than inflation hawks want, until real progress is made on the employment front, and there is a huge hiring boom to go for the rate of unemployment to drop. That rate, of course, lags hiring as people re-enter the labor force after giving up and thus not being counted as unemployed for a period of time.

Given a weaker foundation this time and the certainty-- not the unfounded worry-- of financial instability in various spots across the globe -- investors are well advised not to take the Soma of comfort in low interest rates and keep much invested in assets which they would sell at a lower price were another bear market to start tomorrow from such matters as a bursting bubble in China or a bank failure or sovereign default in Europe, or a major rise in Treasury borrowing rates in America.

The feeling here is that the political zeal in the Obama administration suggests that the gold and bond markets will need to react, and more robust political opposition in Congress needs to materialize, before fiscal prudence becomes government policy.

This argues for gold as a core permanent (for now) holding of all investors. If the economy starts shooting up, as may happen one of these quarters based on ECRI and the Conference Board numbers, then silver and platinum may go to new highs for the cycle (new all-time highs for platinum) and outperform gold. If we have economic slowness (no double dip required) first even though the Fed is still "loose", just less loose than recently, though, then gold is the only precious metal than can continue up in price due to its status as an alternative, globally accepted store of value.

In two hundred years, which is more likely to remain a store of value: the Federal Reserve Note, or gold?

Copyright (C) Long Lake LLC 2010

The New Bubble: Feds May Need a Stock Crash to Keep Deficit Spending Affordable

We are moving into government bailout bubble territory in the U. S. The state of California had to (could) increase the size of its bond offering. What's up with that? The Feds are helping.

A potentially vast new FHA rejiggering of mortgages to help bail out borrowers and lenders alike with taxpayer funds has just been announced. The money is said to be coming from some prior bailout funds.

The surprising thing is that with the flood of issuance, the 10-year is not back above its peak of last year in yield. Certainly sentiment on the Treasury bond is as bad as can be imagined. Meanwhile "liquidity" is running wild. The "smart money" "knows" that the party will continue until the Fed tightens, thus stocks and junk bonds are buys.

When I look at my Value Line charts, I can find almost no stocks below their "value lines". Some such as Oracle and Mickey D are at their lines, but one is left with TJX and DLTR, Chubb and Everest Re (insurers highlighted by Barron's today), and scattered others. Mostly the chart patterns look long-term weak, short term overbought. You never know with bubbles and can't try to pick the top.

Holding this bubble together is a rickety edifice.

If Treasury yields surge, look out. Since Obamanomics requires low borrowing rates, watch out for the opposite happening. Obamanomics requires Treasuries to have low rates more than companies to have high stock prices. The more people and businesses suffer, the more the Feds can step in and save them. The question is whether the government can keep long rates low or even for them to move much lower. The Japan scenario, in other words. 1-2% inflation would be fine to allow 3% 10-yar treasury yields. Remember that long rates were much lower than today's all through the 1940s and well into the 1950s even as some years of war and post-war high inflation came and went. In other words, sometimes rates can be well below inflation. It just depends on psychology and on relative opportunities. And right now cash is trash and stocks are fundamentally overpriced.

There is no good general investing solution right now other than trading profits, which most people living normal sane lives cannot hope to achieve. I still think that one of these months, we are likely to see a recrudescence of a Treasury buying surge/panic. No idea when, though. But unlike with stocks as a whole, the 10-year pays you to wait.

Gold continues to act as suggested here. It is frustrating traders, short sellers and long-term investors. The more the financial markets inflate in price and gold does not, the more it is likely that gold prices are set to surge.

Copyright (C) Long Lake LLC 2010

Quote of the Week on Greece's Financial Future; And Thoughts on the Euro and USD

Bloomberg.com is carrying a quote that I believe provides a cogent prediction of Greece's future in Merkel Sets Greek Aid Terms, Sees IMF-EU Tandem as Last Resort. To wit:

“The German strategy for the next couple of months is very simple: provide just enough positive rhetoric that investors continue to purchase Greek bonds,” said Peter Zeihan, an analyst at Stratfor, a geopolitical risk consultancy in Austin, Texas. “On the flip side, they want to make sure via rhetoric that there’s just enough doubt that the markets demand a much higher spread than the Greeks are hoping for. The Germans want to make very sure that the Greeks are punished.”

Sound a bit like World War II at the end. Yawohl?

David Kotok's Cumberland Advisors has been predicting for a few months that the Euro will hold but would show further weakness but would then become a "buy" vs. the U. S. dollar. So far that prediction has been looking - well- prescient.

The idea that the USD would strengthen because little Portugal is downgraded with a governmental deficit of about 9% of GDP, when U. S. deficits are worse, is odd.

The "DXY" tide may be with the USD, but that is a narrow index. The more relevant, broader index of the value of the dollar in the real world is the Trade Weighted Exchange Index. This chart shows essentially a stable dollar lately. The rally in the DXY that may have persuaded some to reprice gold downward is a fake-out. The current financial crisis began in America. The idea that the extend and pretend solution here in the financial community ends with triumph because some small countries in Europe tried to play our game of massive deficit finance without access to their own national printing press strikes me as naive.

The Bushbama policy of socializing the financial losses cannot be good for the USD. Right now sentiment is being whipped up against the Eurozone countries. Sitting here, we are being tipped off by various media statements that the U. K. is next up to be attacked by speculators. I am not so sure. The next attackee, should there be one, could be right here. Just as the Germans thought that the attack onto the mainland was coming elsewhere, this talk could be misdirection. A good buying opportunity in the Euro may be coming relatively soon. If so, one would suspecct that gold prices would move up in USD terms as well.

Copyright (C) Long Lake LLC 2010

Market Tone Changing?

Amidst widespread blogosphere revulsion against all sorts of sovereign debt, for whatever reasons the markets decided to sell Treasuries, which tied in with a stronger dollar against even weaker currencies, and gold acted like a weak currency but was the strongest of the precious metals complex.

Got that?

In stocks, what does smell a bit "correctional" is how many individual issues I follow that have developed positive movements over the 50,150 and 200 day moving averages. And meanwhile Gallup still shows hiring and spending becalmed in depression-range lows. Bill Gross of PIMCO may be selling stocks, as he touted them over bonds. Who knows?

The roiling currency markets are sure reminiscent of 1997-8. That actually marked the end of the great broad bull market of the 1990s, with the Value Line Index peaking then and the rally narrowing through 2000 to the best-known large caps and the flashiest tech-type stocks. In a secular bear market, is the past year's rally enough to lead to a similar scenario? Here we had AAPL up today in a down tape, ORCL down just a bit but with a strong chart, and the breakout candidate WPI (Watson Pharma) up a bit as well. Except for bottom fishing in RE, which is trading way below tangible book value, I am avoiding relatively weak stocks such as FPL (which can't get out of its own way) and have taken some significant percentage profits on some of the discount retailers.

One of my working hypotheses has been a sudden collapse in Treasury yields if even a mini-version of late 2008 strikes. There is precedent for this. The sharp 1987 October bear market was followed 2 years later by a lesser but significant bear move in part related to something or other with United Airlines.

As said many times and not profoundly, all days are new days, but we are in exceptionally unprecedented times. Just because so many aspects to the economy look like typical bottoming processes followed by significant upturns does not prove that this well happen again. The obvious reason to be different is that the Fed is out of interest rate reduction bullets and has monetized amazing amounts of debt.

Yours truly is unpersuaded that the dollar is sound, and the traditional thing against which its soundness is measured is gold. Who knows if gold got too popular, but it certainly didn't move to a 3 standard deviation outlier position vs. anything else, which is the standard definition of a bubble. The other metals are a different story, however.

If we get a sharp sell-off in stocks, the betting here (but not with much money or with any leverage) is that money will flow into Treasuries. If not, then Bill Fleckenstein and Nassim Taleb's disaster scenario may be here, and look out below. Then it would be bills, gold and meals ready to eat if you can find any.

Copyright (C) Long Lake LLC 2010

Obamacare: Petty and Arbitrary Tax Rules Bad for Capitalist Principles, and Other Complaints

Bloomberg.com has a summary of some of the tax implications of the law the President has just signed into law, in New Health-Care Taxes Help Obama 'Spread the Wealth'.

What is the logic of the refusal to allow insurance companies to not be able to deduct executive salaries above $500,000? A CEO can make millions a year elsewhere. Why insurance companies? Why not financial companies, auto companies, oil companies, medical product companies, steel companies, exporting companies, importing companies, computer companies, etc?

More to the ideological point, why not state that no organization can have non-profit status if it pays anyone more than $500,000 per year?

Moving on, did someone from Nevada or Florida decide to impose a special tax on tanning salons? What's special about them to single them out?

The law plans to impose a 3.8% tax on rental income as well as dividends. But working as a landlord is hardly the same as buying stock in a REIT. Why tax this occupation?

More broadly, the government gets the media to buy into the fiction of a "Medicare tax". There is no Medicare tax. There is only a tax.

Taxing something yields less of it. With the growing number of taxes aimed not at the truly high earners but only at a couple earning $250,000-- which could include two very hard-working people simply living a middle-class life in San Francisco-- it must be assumed that fewer professionals will do the marginal extra work, that more people will opt to aim below that number who might otherwise be more productive, and that more people will do less investing and more spending for the moment.

Moving on from incentives, why is there a tax on medical devices?

And what is the humanitarian intent of imposing a 2.3% tax on wheelchairs? Huh??? Wheelchairs?

Consistency and fairness matter in capitalism. Level playing field and let the better or luckier competitor win. Not in Obamacare. And not in economic policy, where Mr. Obama continued the Bush policy of bailouts of financial companies and their bondholders but destroyed bondholders of certain auto companies.

Keeping promises also matters. The President campaigned vociferously opposing Mrs. Clinton's preference for an individual mandate. Whoops! Once in power, position forgotten.

This blog stated over a year ago that there was a depression but it was not the Great Depression and never was going to be so, that all the conditions were present for a smoother functioning of the economy, and that in fact in some ways the economy was better balanced than when Big Finance was riding high.

Unfortunately, the typical post-bubble, post-credit crunch scenario is playing out. This involves financial asset prices rising faster than hiring.

Remember that what has happened has been a financial shell game. The government has used the Fannie/Freddie unlimited bailouts to work with the Fed to socialize the losses and sort of start the game again.
Thus the big banks may "surprise", but these surprises will be solely due to the public's assumption of their bad lending practices along with the Fed's massive money-printing.

The next thing you will see is stagflation, if the script is followed. There will be reports of growth but off of a horribly depressed base, but those reports will serve to embolden the mass of "investors" who sell stocks near the bottom of a recession/depression and who buy them only when prices are high and "confidence" has returned.

There will be growth in the spring, but all this money-printing has caused a huge inflation in stock prices and prices for short-term Treasuries and the like (causing unnaturally low yields on short term money). As the money gradually creeps back into the real economy and out of the financial system where too much "money" is overwhelming the supply of securities, then assuming the Fed stays easy, there is every reason to expect a rerun of the prior cycle, where eventually the inflation will cease being in financial assets. It is unlikely to move disproportionately to housing, but house prices will do OK if the government continues to support it heavily. We do not know yet what will be the favored asset class as people see the inflation and see their standard of living declining due in part to the arbitrary and unfair government policies in favor of Big Finance and the increasing control of the economy according to political dictates from a redistributionist President, Speaker of the House and Majority Leader of the Senate.

Mostly, the real standard of living is declining or in good times holding steady and the above pols are in power because America has lost its mojo. It has become too dependent on debt and not equity (savings or true wealth creation). There are too many people with no savings who then use the ballot box to improve their lot rather than the old-fashioned way of thrift and hard work. There is too little government support for the nuclear family. America recently was ranked 30th out of 30 countries in reading skills. This ranking follows decades of new thinking in education and large increases in spending on education. Unemployment among people in their 20s is at post-war records, yet Obamacare taxes them with an individual mandate to support medical care for the older folks, even if these youngsters do not smoke, exercise regularly, and otherwise maintain good health habits. There is no surer way to prevent a 20-something year old from becoming an entrepreneur than forcing him/her to pay through the nose for individual health insurance while trying to become a success by providing a new good or service to society. In the future, why not just do government work or relatively secure big-company work, get government-subsidized health coverage, and forget about the adventurous, risky course?

Just as with Fannie and Freddie, we can predict that the Democratic Party will move heaven and earth to make the new entitlement a success and that eventually it also will prove to be a financial house of cards. The first card to topple will probably be the lie that the CBO was forced to accept, namely that the Medicare "doc fix" will not once again be repealed for another year.

Many other nations simply set up a one-payer system paid for out of general revenues and leave it at that with variations on that theme.

This has the virtue of simplicity, especially if unlike Medicare and Medicaid, billing fraud is prevented.

What Obamacare instead has done is begin to build a large, complicated structure build on a deteriorating, irregular foundation. If you want a clean new stable house, you have to get a permit to demolish the old one. The President never applied to the people for that permit and thus got in bed with the Big Pharma guys. Now he can walk down the street with Big Finance on one side of him and Big Pharma on the other side.

And if the Repubs get in, the insurance companies they love now remain alive and with more customers than even coming, and they will get more goodies. The people will remain the losers.

What's coming promises to be a mess run largely by people who have run nothing other than political campaigns and professorial offices in academia. All sold to the American people on untrue statements including that the low-margin insurance companies are the villains in our current mess and that physicians take out tonsils rather than prescribe antibiotics because they are greedy and that surgeons make tens of thousands of dollars to take off a limb rather than prescribe diabetes medicine.

And on the half-lie that taxing for a few years before spending really begins counts as deficit reduction. Just wait for the spending to start in earnest.

"Bush lied" is old hat and literally not true re Iraq ("Cheney lied" is less false if such an epistemological statement can be made).

Candidate Obama misled us, and President Obama did the same.

How can transforming the health system this way end well?

Copyright (C) Long Lake LLC 2010

All-Time Highs in Off-Price Retailers

Consistent with the themes of an impoverished nation and redistribution, today we saw new all-time highs in the price of McDonald's and several discount retailers, most notably Dollar Tree (DLTR), which surged over 5% on the news of an accelerated stock buy-back that will retire about 5% of its market cap with no offsetting stock issuance. TJX and Ross Stores also moved up to all-time highs. DLTR, which now trades around $60, would have to reach about $72 by summer simply to trade at its "value line" per the eponymous publication. From that price, it could easily be a strong long-term performer.

In other words, the "right" stocks may have a long way to run.

The stock market as a whole is, however, an entirely different kettle of fish.

Of some interest today is the decline in Treasury yields concomitant with the rise is stock prices. That has not happened much lately, and Treasuries rallied Friday morning when stocks opened down. In other words, the crisis feared and predicted by Bill Fleckenstein and many others, that of declining stock and Treasury bond prices, is not a happening thing.

The Chicago Fed National Activity Index was out today and showed some weakness in February, some of which might in fact legitimately be weather-related. This index also has an inflation predictor in it, perhaps related to the Phillips curve. In any case, every can see that all sorts of economic indicators look identical to multiple other post-recession charts, and sooner or later they all have given way to growth or outright boom conditions. Will past be prologue?

Probably, but from a market standpoint, methinks much of that is priced into all markets except perhaps gold.

In the meantime, I prefer Dollar Tree at under 15X predicted current year earnings to Tiffany's at 20X. And a vegetarian Big Mac.

Plus the long bond (TLT) for a trade.

Copyright (C) Long Lake LLC 2010

Financial Markets and Health Care "Reform"

Whether an investor considers the just-passed reshaping of the health insurance system in the U. S. as beneficial reform or "deform", your thoughts quickly turn to that which you can control: your money.

I confess that I have not kept up on the amount of tax increases that are now scheduled to take effect over the next few years before the real costs (benefits to recipients) are felt by taxpayers. For now, this legislation withdraws spending power from the public and taxes interest income and capital gains, I believe with a new 3.8% "Medicare tax" (a misnomer, as revenues go to the general fund).

This is occurring while two fundamental measures of stock market valuation each show at least 50% overvaluation: cyclically-adjusted price-earnings ratio (CAPE) and "q" (valuation of non-financial stocks based on replacement cost). Please click HERE for a link to Smithers & Co.'s chart and commentary on this.

Can the anti-stimulus measures of upcoming revenue enhancements and the real and psychological effects of increasing taxes on income derived from savings (which savings derive from income that has already been taxed) provide the impetus for declining stock prices and rising prices of Federal debt?

In other words, the Japan scenario, in which imposition of a national sales tax was associated with the above results in the 1990s?

Yes.

Copyright (C) Long Lake LLC 2010

Bernanke Must Be Joking

Bernanke Says Bailouts of Banks ‘Unconscionable’ .

I say "Ha!"

Per the Bloomberg.com article:

Federal Reserve Chairman Ben S. Bernanke said government bailouts of large financial firms are “unconscionable” and must be ended as part of a regulatory overhaul following the worst financial crisis since the 1930s.

“It is unconscionable that the fate of the world economy should be so closely tied to the fortunes of a relatively small number of giant financial firms,” Bernanke said today in a speech in Orlando, Florida. “If we achieve nothing else in the wake of the crisis, we must ensure that we never again face such a situation.”

It was really Paul Volcker who started the bailout tradition at the Fed, most famously in the Continental Illinois mess back in 1984 (though something came earlier, the details of which I forget). The Fed exists as a public-private enterprise, dedicated to the big banking companies it allegedly regulates. Dr. Bernanke was about the head cheerleader for the Fed and Federal government bailouts rather than the clearly fairer strategy of requiring shareholders and bondholders to take the losses, and for any governmental or Fed bailers-outers to make unconsionable profits on said largesse.

The Fed is ahttp://www.bloomberg.com/apps/news?pid=20601087&sid=aieJo0_AzxoI&pos=1 destructive organism, based on Gentle Ben's testimony to the House on Feb. 10, 2010 (point 9):

The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system.

Huh? No minimum reserves? Is that the same as zero reserves? In other words, depositors put $100,000 into a bank, which loans out that $100,000? When some of the depositors want their money back, does the bank call in a loan? Is the bank equivalent to the Fed, and just creates the cash if that's what the depositor wants? Does it keep a printing press on site? How does bank capital figure in this? How does it distort anything for a depository institution to hold onto some of its deposits and not loan them all out?

The regulators must be desperate when something as liberal as small, mandatory reserve requirements may get junked in order to allow the system to perform yet more frenetically.

Got gold?

Copyright (C) Long Lake LLC 2010

Incomprehensible Health Care "Reform"

From FireDogLake, just one example of how not to pass legislation of any sort, especially this momentous bill:

“Unless they put that back in, I can’t support it,” Defazio (an Oregon Democrat Representative) said, referring to the medicare disparity fix. “This is under active discussion. They just decided yesterday morning they’re stripping this out. The senate budget committee staff deliberated for 20 minutes and it was out and our leadership was going to accept that. But a number of us involved in the quality health care coalition said that’s unacceptable and we’re not going to support the bill unless you fix this.”

I have no idea what this detail is. If it truly is enough to affect the vote of a progressive-type Democrat, then the whole process sounds like a mess.

However this legislation comes out, what should have been a broad-based, well-thought out coherent change that most Americans would be awaiting positively is likely to look like a thrown-together omelette.

Not a good reflection on the way the United States functions these days. But entirely consistent with a government whose auditor- the GAO - cannot give an unqualified report to.

Copyright (C) Long Lake LLC 2010

Stocks for the Long Run? And a Gold Update . . .

FedEx reported earnings today which apparently missed a whisper number and/or the company said insufficiently upbeat things about the global economy. The stock is down a few points pre-open to about $86/share, having run up massively from its low point in the mid $30's one year ago.

Long-term FedEx holders have been well-rewarded. The stock traded in a range in 1980 with the midpoint around $5.50/share. Since its dividend yield has been near zero all this time, I compared the total return from FedEx since election day 1980 to that of a zero-coupon Treasury with today's maturity date, about 29 1/2 years.

At that time, Treasuries of that maturity yielded 12.5%. would have given about double the total return of FedEx stock, with lower volatility and less need to follow corporate events.

And FedEx has been one of the big winners over the past several decades.

Kind of makes one think.

Another big winner that by now yields over 1% dividend rate is Teva. It was announced today that Teva is acquiring a German-based generic drugs firm, Ratiopharm, in a competition with Pfizer among other bidders.

Teva is a roll-up. It keeps acquiring large generic firms at premium valuations. It has $2.5 B in tangible net worth against a market cap of $53 B. It is getting too big to acquire. Its stock has gone up for decades. Its market cap to tangible net worth ratio is more than double Merck's. Its dividend yield is one-quarter of Merck's off an estimated P/E on 2011 earnings that is higher than Merck's. It has much less proprietary technology than the brand companies.

It may well be that one of these days, the generic drugs industry will have a major price war. Or, Teva will let its costs get out of control. Or something. I am not loving the risk-reward longer-term for Teva anymore. In the same space, Watson Pharmaceuticals is the one stock I own. Even though there's no dividend, the chart is quite promising and there are numerous potential buyers for this company that now has a global footprint.

The bigger picture is that the "fear index" -- the VIX on the S&P 500, is well into bull market range at 16.77. General market timers historically are on thin ice at this level, but this is NOT a sell signal. The pattern of this recent stock market suggests that a reaction to a VIX at least at 20 will follow sooner rather than later, and if it is not overly delayed, the averages will likely be at least somewhat below today's even if the trend is up over the intermediate term.

Meanwhile, somehow simple chart measurements and comparisons to prior up-cycles in gold in the "aughties" going back to 2001 led me to blog in early December that I was selling almost all my gold ETFs and was looking for an equilibrium point of GLD at $110 +/- $3. Well, here we are at GLD $110 once again. There was a brief stock market-related dip below $107, but my suspicion is that similar factors that pushed gold up the prior decade remain in force, namely excessive money (credit) creation.

The new ETF "PHYS" has a more modest premium to net asset value than does
"GTU". It also offers large holders the guarantee that they can actually withdraw bullion. People who don't want to hold, or don't want to exclusively hold, physical ETF gold via "GLD" may want to consider PHYS.

Copyright (C) Long Lake LLC 2010