Individual Results May Vary

Hopes for a big ending to 2011 faded last week as the euro was hit and prices of distressed European bonds fell. Traders did manage to put in one positive day on the week which kept the major indexes from straying too far from unchanged. For the year the narrow Dow 30 stocks rose by 5.6%, but the broader S&P index was astonishingly unchanged for all of 2011. That seems incomprehensible given the tumultuous year. Of all the surprises in 2011, perhaps closing the year absolutely unchanged was the most surprising.

You are no doubt familiar with the ad disclaimer “Individual results may vary.” Those are most common at the end of ads for the latest weight loss miracle cure. How did that guy lose 70 pounds when you only lost 10? Individual results may vary. That same disclaimer can be used in investing. While the broad S&P index ended unchanged, your investments might have performed much better or much worse. If you followed a conservative path of cash, high quality bonds (no high yield bond funds), and quality dividend stocks, congratulations! You beat Wall Street. If, on the other hand, you heeded the Wall Street advice at the beginning of 2011 you might want to toss your 401ks when they hit the mailbox this month. At the beginning of 2011 Wall Street had a very strong consensus that stocks would move higher by 15-20%, investors should move money into foreign markets (especially emerging market stocks), buy commodities, and avoid U.S. treasuries like the plague. Stocks were flat, foreign stock markets fell by 15-20% generally, the broad commodity funds all fell on the year after the bubble burst in April, and U.S. treasuries was the best performing investment in 2011.

The Wall Street consensus for 2012 is less concrete than at the beginning of 2011, but Wall Street expects stocks to rise 15-20%. Wall Street always expects stocks to rise. Selling you stocks is their business. They wouldn’t have anything to gain by telling you that their product was going to stink for the coming year. But the consensus is a bit more divided and for good reasons.

The list of potential road bumps in 2012 is long but of course starts with Europe. Wall Street mavens say the euro will survive, and the worst of the possible market unrest will be over by mid-year. Wall Street experts also believe that the economy will then begin to advance more strongly for the balance of 2012. Generally, the consensus is that the few months of 2012 will be unstable and volatile but followed by several months of growth and stability. In other words, stocks down early in the year but roaring ahead later.

I’m not taking a contrarian stand just to be contrary to Wall Street’s view, although that’s usually the best bet, but I expect a different outcome. If you haven’t totally blocked from your mind what happened in 2011, you’ll remember that the biggest stock market rallies came after the multiple euro rescue efforts following each crisis. The first three months of 2012 will present similar opportunities. There will be endless summits, “secret” meetings, and numerous proposals to save the euro from extinction. I expect those events will actually help stocks early in 2012.  But reality will settle in that nothing positive will be forthcoming from the tumult in Europe. Most importantly to us, regardless of what “solutions” are achieved in Europe, the European economy will suffer. Remember that the combined European Union economy is actually larger than that of the U.S. The U.S. will suffer mostly the backside of the storm. Europe will be more of a drag on South America and Asia, but the resulting weakness in those economies will hamper our prospects as well. I think our best economic numbers of 2012 will be early in the year, not later. This week in fact we should have two positive reports, one manufacturing index and the monthly Nonfarm Payroll report. I believe the U.S. can avoid a recession, but the risk for the economy is to the downside not the upside.

There are wild cards aplenty. A China economic meltdown on a crumbling real estate market? Another surge in oil prices brought on by strife in the Middle East? A surprising plunge in Russia’s economy that leads to a civil unrest? What we don’t know we don’t know? (That last one was courtesy of Donald Rumsfeld.) The point is we just don’t know what will become the issue of 2012. You’ll notice I did not mention the 2012 election. That’s because it is simply irrelevant for the 2012 economy and market performance. The government will not be a factor this year; that will come in 2013. It is certainly logical that Europe will top the list for the second straight year, but you can never be certain.

One thing that does look certain is that interest rates on the long-end of the market will not fall as much as in 2011. If they were to do so, the U.S. 10-year Treasury note yield would end 2012 at 0.50%. Not impossible mind you, just not very likely. I expect rates will stay very low again in 2012. With the uncertain global economic picture, I cannot make the case of a significant rise in rates. For those of still on fence about buying a house or re-financing your mortgage, that’s good news. Time is on your side. For those savers among us, well, we’re getting used to paltry returns.

If you enjoyed the volatility in the markets in 2011, chances are good you are going to love the volatility in 2012. I can see reasonable prospects for a trading range on the S&P of as low as 900 to as high as 1400 or so. It’s also possible that the market will end 2012 unchanged again, but guessing on the stock market isn’t the point. If the twists and turns in the markets were unsettling to you last year and made you question your retirement plans, etc, you need to take action now. No more excuses. Get help from trusted and qualified sources, and get educated. Do not blindly follow Wall Street’s annual marketing pitch for certain wealth. Individual results may vary is a warning, not just a disclaimer.

The first week of November the markets had a feast of Greek dolmas (stuffed grape leaves). Greece appeared to be in a meltdown only to be revived at the end of the week. Last week the markets dined on cannoli as the collapse of the Italian bond market moved the crisis from Greece to Italy. In both cases, a change in leadership temporarily caused the markets to surge and recover the big losses that started each week. We now have two new leaders in Greece and Italy who will ultimately prove just as ineffective as the two ouster premiers. When debt problems are so overwhelming and the structural flaws of the political and financial systems are so deeply embedded it’s just a matter of time before the endgame must be played regardless of the quarterback. Once again it appears the endgame has been delayed until 2012. But with the rapidly moving scenarios playing out across Europe, the opening whistle to the endgame could blow at any time.

What’s ahead? It’s clear that no one knows. While the markets celebrated the end of the Berlusconi reign, there is no guarantee that the bond market in Italy will cooperate. The plunge in prices in Italian bonds was arrested by the change, but the debt of Italy remains in a very fragile state. The conditions that caused the bond debacle are still present; only the name on the Premier’s office changed. Unfortunately, even if Italy and Greece manage to avoid further disruptions for a few weeks, Spain could be next in line in the unlimited buffet of debt problems in Europe. The debt of Spain has been trading better than that of Italy, but the Spanish bond market is following the same pattern as Italy’s. In fact, some of the concerns about the true nature of Spain’s banking system (with potential losses unaccounted for) are more troubling than those in Italy. Tapas might be next on the menu.

The perplexing aspect of all of this is that the stock market in the U.S. is virtually unchanged on the year. While it’s always possible that the European debt crisis will be solved in an orderly fashion, it’s also not realistic. At best, the various components of the European Union bailout plan will result in a recession in Europe that will have be a drag on the global economy. At worst, the debt fiasco will end badly and result in a few weeks of market chaos and then a global slowdown.

As I’ve mentioned in the prior weeks, Wall Street traders, et al, just want to end the year in rally mode in order to bank some more bonus checks. To most of us, logic would dictate a cautious approach with some many unresolved issues ahead, but that’s just crazy talk on Wall Street. The 3^rd quarter was a terrible quarter for Wall Street and especially hedge funds (big accounts that take big risks with borrowed money). Most of us would be reluctant to take on more risk after that experience. But these guys play a different game – big risk for big reward. There is no middle ground. What some recent numbers and anecdotal information have revealed is that hedge funds actually ramped up risk after that the 3^rd quarter debacle. Wall Street mavens are saying that the market has taken on all the bad news and remains unshaken, and this means the market is a “buy.” Perhaps. But, it could also mean that the market is an illusion if not delusional and not at all reflecting any future outcome other than the optimal.

While Europe has been and will continue to be the dominant force, our own economy continues to chug along at a sluggish pace. We should get more evidence of that this coming week. You will be reading about Housing Starts, Retail Sales, Industrial Production, and the Consumer Price Index. All of these should reflect an economy that is cautiously moving ahead. As mentioned in last week’s column, businesses are being cautious in these uncertain times. The pace of economy and level of business and consumer confidence reflect more an appropriate response to the events this year and the risk ahead. Wall Street’s throw-caution-to-the-wind attitude is fine for the big, short-term risk takers, but that attitude doesn’t work for those in it for the long haul.

For some of you the last few weeks (months) of volatile trading has led to several bouts of indigestion. As I’ve said before, the real test of whether or not you have the right investment mix is whether you can sleep at night. It’s really hard to get a good night’s sleep if you have indigestion. Delusional or not, the market continues to give you opportunities to think long-term about your needs and whether or not your current investment profile is really right for you. Eating at an all-you-can-eat buffet when your system can’t handle it is bad for your health.

After an absurd day with a 400 point swing in the Dow, the Dow closed with a gain of   points 61 points. The S&P closed almost unchanged and just decimal points below 1200. The NASDAQ closed down 1%. Volume was huge! (Read updates for reasons) For the week the Dow closed lower by 700 points. At the beginning of the week, with the debt ceiling bill passage, I reminded everyone that after the 2008 TARP passage the Dow was 1,000 points lower thirty days later. At the low this morning, the Dow was in fact down 1,000 points in just one week. The S&P lost 7% this week, and the NASDAQ gave up 8%. The all-important Nonfarm Payroll number was forgotten after the first 15 minutes of trading.

A day like today makes you want to sell every stock you own and never buy stocks again. We have some serious problems, but I’ll just give you two. First, the credit crisis in Europe will eventually overtake everything. If the EU follows through with bond purchases next week the crisis will be postponed but remain inevitable. They have no long-term answers, and their short-term answers have shrinking credibility. It’s like tossing doggie bones at traders. Stock trading today alone tells you this will be a problem for the market. The Dow went from +170 to -230 at least partially on Europe. The news of purchases caused the Dow to go from -230 to +150 points. That ain’t right folks. Plus, at least half of the entire recent downturn in stocks was Euro based. Money was fleeing European banks, and my bet is that we haven’t seen the last of that.

Second, high frequency traders have not gone away. We haven’t heard much about them as they pulled back after some scrutiny. They were obviously still lurking on the street corner. While most of the activity today was from leveraged traders who were forced to sell and from big bargain hunters, we saw instantaneous 100 point swings. That can only come from those high frequency computers. One of these days, those computers might get stuck on the sell signal. The economy is the least of our worries.

No one knows what we’ll walk into Monday. European markets were closed when the news of the bond purchases broke. Those markets should open up huge. But, if European traders get any whiff over the weekend that the bond purchase plan is not completely credible, the markets could be in a freefall. What a choice.

If I ruled the world (I’ll be happy to just start with the U.S.), I would tell everyone “Get a grip!” Every television and radio newscast, website, newspaper etc. led Thursday night with dire stories of the stock selloff. The most common headlines were “America in Crisis” and “Global Meltdown.” Hey, so stocks have sold off for a few days. Big deal. In the U.S., the markets are down just slightly on the year. Many of the articles written said that governments needed to do something to avert another recession. Really. Is that what you want? Government and central bank tinkering has done nothing but put band-aids on wounds that need open air to heal.

This hardly qualifies as a crisis. More importantly the economy isn’t in crisis either. Yes, the economy has slowed, but we’re not burning up jobs at 500,000 jobs per month, and our financial institutions aren’t under attack. The stock market was simply breathing thin air and living on QEII money, and traders weren’t thinking clearly. Leverage amplified everything. Now, some of that has come out. Could it get worse? Yes. And I believe there will be a “real” crisis sometime in the next twelve months in Europe, but I don’t believe this will lead to another economic meltdown in the U.S. The economy will slow again and stock prices will fall. This is just the cycle we’re stuck in. Relax.

Finally, a couple of thoughts on the S&P downgrade. First and foremost, this will mean nothing to interest rates for a variety of reasons. Frankly the world cannot do without our huge market to use as a giant liquidity pool. Plus, where the heck would they put all those dollars they have? Rates will move on fears or lack thereof, economic conditions, and inflation. The world knows we can pay our debt. We have a printing press.

Second, S&P is looking pretty dumb on this one – even dumber than usual. These are the same guys who never saw the mortgage crisis coming. While that is their most spectacular failure, the history books are littered with corporations and municipalities that S&P had highly rated just before the entities dove for the cheap seats. The S&P also admitted they had missed estimates by $2 trillion, but that made no difference to them. They ended up claiming the big reason was they didn’t like our political atmosphere after witnessing the debt ceiling fiasco. Well who does! No one. But it’s hardly S&P’s place to base financial analysis on their limited view of politics.

S&P also rates France AAA, but it’s clear to everyone that France’s own social program costs will be much worse than ours in the years ahead. They have the Germany and France AAA although those two will be taking huge hits on Greek debt et al, as Germany and France are the primary funding source of the ECB purchases of bad debt. And, by the way, S&P still rates Italy and Spain AA although their numbers are looking more like junk bonds. S&P seemed determined to make a political statement regardless of facts. I don’t like our fiscal outlook either, but I know the U.S. will pay although the process of getting there is ugly.

S&P needs to take a hard look at itself and clean up its own house before it gossips about the U.S. having the messiest house on the block.

Coming into last week traders were dreaming of new highs for the year. The indexes were just a few points shy of those goals at the close Thursday. In fact, a new 2011 high for the NASDAQ would also be an almost eleven-year high for that index. That still leaves it short 2,000 points of the year 2000’s high , but that’s not even in the discussion. When the jobs numbers came out, the markets did drop sharply with the Dow down about 150 points. But by the end of the day the index was down only 63 points. This token decline after the worst economic data we’ve had in a full year, tells us that rampant optimism on Wall Street still rules.

You’ve probably already read quite a bit about the number, but I want to highlight the worst of the worst. The paltry 18k gain would have been even worse had the Bureau of Labor Statistics (BLS) not added almost 150k phantom jobs through the birth/death adjustment of businesses. This is an economic modeling assumption, not based on actual data. There are approximately 14 million workers unemployed, with half of those unemployed for more than twenty-six weeks. There are another 7-8 million workers that simply aren’t counted any longer due to classifications by the BLS. The true Unemployment Rate is 16.2% or possibly even higher. Temporary workers declined for the third straight month. This category typically signals trend changes. If so, the trend is not your friend.

Wages and hours worked fell. Wage growth is now roughly 1% below the inflation rate on a year-over-year basis. The hours worked decline is not a good omen for businesses adding workers. I think you get the drift.—a poor job market accompanied by low wages.

While Wall Street mavens and pundits expressed surprise and disbelief at the number, the fact is that this weak report is in line with what we’ve been seeing in other numbers over the past two months. Almost every indicator, other than one recent manufacturing report, has been signaling slowdown. The day before the Unemployment Report the ADP payroll service predicted jobs would increase by more than 150k. Traders rejoiced at this projection. Yet, at the same time, a highly respected survey of small businesses said that small businesses added fewer jobs in June than in any month in more than a year and businesses were planning for weak hiring the rest of this year. But Wall Street’s traders completely ignored that report. It clashed with the pretty picture they were painting.

The U.S. is supposedly two years into the recovery, but we’re still short 7 million of the jobs lost during the recession. Wages are going nowhere, consumer confidence is shaky at best, and the housing market has at least one more year in purgatory. I don’t believe the economy is ready to fall off a cliff without a shove from Europe or some strange action in Washington. But the very long process of unwinding the credit bubble has years to go and leaves us vulnerable to shocks.

Does this mean that stocks are ready to tumble? Not necessarily. With this much optimism in the market, warranted or not, traders are not going to give up easily. Additionally, there are some developments that might help a bit in the next few months. As mentioned last week, I’m hopeful that commodity prices continue to decline and allow consumers to spend more in discretionary categories. There is also some validity that the Japanese tsunami did more economic damage than thought to the supply line, and a rebound is likely as the supply line is restored. Business inventories are low, and any renewed confidence should cause an increase in production to build inventories. Finally, corporate earnings are still good. Most are good because of cuts to operating costs, but some businesses have found ways to expand business.

The paragraph just above lays out reasons for hope, but the paragraph just above that one lays out how things are. The markets are trading on hope, not reality. Perhaps we should be thankful for blind optimism.

This coming week you’ll hear virtually nothing about the awful jobs report. This is the beginning of earnings season. In case you’re not familiar with the “season,” this is when most companies release quarterly earnings. It’s also one of four times a year when companies, stock analysts, and traders all come together to play a game. The game is that companies and stock analysts tell us that earnings for a company will be X, knowing full well that earnings will be X-plus. Traders know this too, but they pretend shock and delight at the prospects of companies beating expectations. The only real surprise comes in those rare releases that only match or fall short of expectations. It’s a dumb game, and most everyone knows the game is rigged. But everyone seems willing to play along, especially when optimism is so extraordinarily high.

Just remember my basic premise. The stock market is a reflection of collective optimism or pessimism. We’re currently in the stage of optimism to the extreme. The market has been telling us that even through the very modest selloff in May and early June. There is no way to predict when optimism will give way to pessimism. Fortunately, periods of optimism last far longer than pessimism. But I’m throwing up the caution flag. Not the red flag, just the yellow one. The basic drivers of the economy are still broken; at best they are merely functioning with short term patches. Given the overwhelming consciousness of optimism, I worry what things will look like when that morphs into pessimism.

Wall Street loves to claim that the stock market is the Great Anticipator of future events. That’s a lie. If it were true, the Dow would not have been at 14,000 just prior to the credit meltdown. It also wasn’t true at the Dow’s 6,500 just before the recovery began. The stock market isn’t the Great Anticipator. The stock market is the Great Mood Ring.

Crowded House

Last week’s big event was Ben Bernanke’s press conference, the first post-FOMC  meeting press event by a Fed Chairman. For those currency traders betting against the dollar and commodity traders betting on rising prices, it was a tour de force. Bernanke started with the Fed’s latest forecast, which calls for moderate economic growth and slightly higher inflation. Then the Chairman responded to questions regarding the dollar and rising commodity prices. His responses were music to the speculators’ ears.

Bernanke said rising commodity prices were related to demand and fears of supply shortages and nothing to do with the Fed’s policy or the dollar. He termed the price moves as “transitory.” I would have liked to have had a follow-up question that would have gone something like “By transitory, do you mean prices will go from very high to excruciatingly high?” But the reporters acted like they were on a first date and didn’t ask any meaningful follow-up questions. Regarding the dollar, Mr. Bernanke said the dollar was under the purview of the Treasury Department. Technically, he is correct. But in the real world, monetary policy has by far and away the biggest impact on the value of a currency.

Bernanke has never been involved in markets, but he isn’t dumb. Additionally he has a massive staff at the Fed of economists, other staff professionals who have dealt in the markets, and instant access to any big investment bank in the world. He also has access to data bases that would put Goldman Sachs to shame. Bernanke knows very well that his adherence to a crisis monetary policy, when there isn’t one, has caused the value of the dollar to plunge and commodity prices to rise. His Quantitative Easing programs have flooded the markets with dollars. In the academic world the textbooks say that, when the Fed adds massive reserves to the system, those reserves go to providing money for loans and help grow the economy. Maybe that’s the way it once was, but no longer. Today, that money has gone into the hands of speculators to leverage (borrow) money near 0% and buy risk assets. The latest Barron’s Magazine cited a study that estimated that 85% of the reserves Bernanke has provided has gone toward speculation, not domestic loans to businesses.

Bernanke knows this, and this must mean he is really okay with this. He was so intent on avoiding deflation, he wanted to see commodity prices rise. He also likely felt that if speculators drove up global equity prices, businesses would have more confidence to expand. In that case he was somewhat correct. But the level to which he has allowed this to reach unchecked has put the U.S. on a dangerous path. Not only did he promise 0% money for as far as the eye can see, he did not take off the table more QE money if he sees fit. He stood there and coolly told the press that when it comes to the dollar “it’s not my job” or words to that effect. The markets immediately told the real story. The dollar fell to close at a new three-year low, gold soared to a new record high, silver just barely missed $50 an ounce, and oil closed at almost $114 a barrel.

So, are we doomed to an inflationary future and sharply interest higher rates? Not necessarily. There is hope, although none of that hope centers around Bernanke. He’s a lost cause. The hope is that the markets themselves will correct the excesses. The commodity market has reached extreme sentiment and trading levels that match the dot com bubble. Investors of all shapes and sizes have poured into this market. The last group in has been individuals. Volume in the silver ETF (exchange traded fund), which mirrors the movement in silver, exceeded the volume of the ETF that mirrors the S&P stock index. Silver is a tiny market compared to the value and diversity of the stock market, yet interest was greater for silver than in anything else. In the meantime, speculators are ramping up their bets.

Margin debt (borrowing) for commodities has blown past any previous records. Also remember that as the value of an asset rises and provides a bigger “equity” cushion, owners can borrow more against that same asset to buy even more of that or other assets. Does this sound familiar? It should. Think in terms of the housing bubble. Once home values started to rise above the original mortgage, home owners were able to take out more loans against that very same asset to spend elsewhere. If that doesn’t send chills down your spine, it should.

Remember how taking money out of your home was “riskless” because a sustained decline in home  prices had never happened? The same mentality has gripped the commodities markets. Traders and investors believe that commodity prices could never fall far, nor would stay low. Part of this belief stems from the thought that Bernanke would just pour money on the fire. But markets can do funny things. I speak from over thirty years of just watching how these events can play out.

The dollar-bear and commodity markets are very “crowded.” This means that all the players are in the same room, drinking from the same bar. Imagine what would happen if someone shouted “fire!” The “fire” could come from some unexpected event, or it could simply come from some of the very big speculators deciding to cash in some and head out the door early. Sophisticated speculators know they are in a risky trade. They have huge profit cushions of protection, but they are also savvy enough to know how quickly those cushions can evaporate in a stampede. In the hedge fund world, word spread very quickly about the big trades from the big traders. All it would take to trigger a mass exodus would be word that some of the big boys are leaving the building.

The next three months are probably the most critical. Since we know we can’t count on Bernanke to do anything, we will wait to see if some other event triggers an end to this potentially devastating run. Yes, the stock market will fall along with commodity prices. But the stock market’s room is not as crowded as the others. Leverage is also a bit less of a problem, and the stock market is a very deep with diverse asset classes. A plunge in commodities would hit the stock market very hard in the short-term, but this would be the very best thing that could happen for the long-term. If something along these lines doesn’t happen, I’m afraid the inflation doomsayers might have it right.

But there is something else at work here. It’s clear that pension reform in the public sector absolutely must be reformed. Not all public pensions have gone overboard, but the ones that have are getting all of the attention. Cutbacks are necessary, not optional. Here is the strange development. The Wisconsin fiasco has resulted in what seems to be an anti-teacher sentiment. Taxpayers, at least the vocal ones, have expressed outrage at the pensioners. Various groups, led by Tea Party types, have developed and us vs. them attitude toward teachers. The facts are that the majority of pensioners are not living in the lap of luxury provided by fat pensions. Most pensions in the public sector are modest. There are certainly well-publicized abuses, but that’s the minority.

But news outlets and ultra-conservative groups have seized on this to rile up constituents. I’ve heard more than one commentator on a certain network speak derisively of teachers and their “part time” jobs. Personally, I have never known a single teacher who walks away at 2:30 with no further obligations. But certain parties have successfully managed to direct anger toward teachers in particular. The primary argument is that this is “our” tax money, and that is why we have a right to be so outraged.

Fine. It is coming from tax money, but that’s the deal with public jobs. But consider the real villains here. Big banks, big lenders, and big securities firms are the ones that were primarily responsible for the economies woes over the past few years. Yet, you hear absolutely no expressions of outrage over what they did. The companies are printing money again, courtesy of the Federal Reserve’s largesse, and bonuses are flowing in the land of milk and honey called Wall Street. A lot of taxpayers, outraged at those fat cat teachers living off our tax dollars, seem to believe that letting banks off of the hook for the financial disaster is just fine. Regulations or retribution for their actions? Forget it. They are making money again and costing the tax payer nothing, so it seems. Just stop and think. The costs to taxpayers by the actions of bankers dwarf the costs of pensions for teachers. How about the hundreds of billions of tax dollars for Fannie and Freddie? How about the hundreds of billions of tax dollars for the increases in necessary unemployment and welfare payments? How about the huge amount of wages they cost the 8 million unemployed people as the result of their actions? How about the still unknown costs of bailing out the likes of AIG, GM, etc?

Tax payers are absolutely right to be angry over where our tax dollars are going. But we should stop and think about where the big tax dollars have gone and are still going and why. It’s not teachers in Wisconsin.

I am not a conspiracy theorist. I won’t say this is all part of a plan by rich conservatives and conservative groups to divide the country even further. I think it’s more of a case that most people in the U.S. are still searching for an outlet at which to vent anger about a world that has simply changed. The housing debacle and the losses in the stock market have completely altered the views of what Americans thought their futures would look like. Most Americans cannot grasp the concepts in the investment banking industry that wrought what we have, and therefore cannot focus their anger on something they can’t understand. But everyone can understand pensions, and, abetted by certain groups and news outlets, they have found an outlet for their anger. I don’t have a solution for this. I just hope that someday we can all figure out where our anger should really be directed. Unfortunately, that might take another financial debacle.

Pushing for pension reform is the right thing to do. We’re actually facing several years of needed but painful reforms. The tax system will someday be reformed, which will likely include goring some sacred cows like mortgage interest deductibility. Medicare and social security changes are simply inevitable. But let’s not direct anger at those on the receiving in of various benefits. The world changed because Wall Street changed.

All regular Daily and Longer-term

I will use this blog for an occasional one-off comment… how could I possibly give up the name “DJ and the  Bear”? If you haven’t yet, I hope you’ll visit my new site and review the services offered. Thanks, everyone.

Close:

Stocks managed to creep on the day, and the Dow closed with a gain of 44 points. Volume was very low. I suppose that any gain is a good gain, but we’ve had gains in all but one day over the past two weeks and all with very low volume.

In the previous update it looked like the bond market was in the process of losing most of the day’s gains, but there was a nice turnaround to close out the week. The 2-year ended at .83%, the 5-year 2.36%, and the 10-year closed with a ½ point gain to yield 3.63%. The 30-year bond gained a point to yield 4.69%. Bonds traveled a tortuous path this week but believe it or not, yields actually fell very slightly on the 10-year and 30-year. Short rates did move higher as yield curve flattening is still the trend.

Unless some other country decides over the weekend to blow up its government, the focus next week should be on economic statistics. Oh be still my nerdy-data loving heart. There isn’t anything Monday, but we’ll roar out of the gate on Tuesday with Retail Sales. Economists are forecasting a gain of .5%, but there have been conflicting reports from retailers. Some say January was hot, others cold. This number might get the most attention of the week if there is a big miss one way or the other. We’ll also get the latest homebuilders sentiment survey. That’s on the very lowest rung of data.

Wednesday brings Housing Starts, and a gain of 2-4% gain is expected. Nasty weather could play havoc with this one. I wouldn’t take too seriously any of the housing reports for a couple more months. Also out at the same time will be the Producer Price Index. The PPI soared by 1.1% in December, and economists say to look out for at least a .8% gain in January. Core PPI (ex-food and gasoline) should rise by only .2%. PPI is always good for a few headlines, but the Consumer Price Index on Thursday will limit any reaction to PPI.

Economists are calling for CPI to rise by .3% and .1% on the core rate. This might be the last really .1% or 0% number for the core for a couple of months. We typically see the core rate rise in first half of the year then cool the second half. We might also see a nudge higher than expected depending on how the BLS estimates the rent factor. We’re hearing anecdotally that rents are rising as more people opt to become or remain renters. That makes up about 30% of the core CPI. That same day we’ll also get Weekly Jobless Claims and the Philadelphia Fed  index. Friday is a day of rest.

Of course the bond market will remain under the microscope next week. The rally today took some of the heat off the market. All the buyers of the Treasury’s new 10-year notes and 30-bonds have small profits. Not so much for the 3-year buyers. There are no big Treasury auctions next week, but supply has not been a very good indicator of what happens to the bond market.

Have a great weekend. Don’t burn up too many credit cards buying lavish Valentine’s Day gifts for your S.O.

Update 11:15 a.m.:

After the distraction of the Egyptian news, stocks seem set to coast to a higher close. The Dow is higher by 25 points. Volume has been very low, but that’s been the story the entire week.

To the surprise of absolutely no one, bond prices are giving back some but not all of the early gains. The 2-year yield is back up to .83%, the 5-year 2.36%, and the 10-year yield is 3.65%. The 30-year bond is higher by 1/2 point to yield 4.72%.

I’ll be back with the close and a look ahead at next week.

Update 8:30 a.m.:

In the Morning Comment I mentioned the stand-off in Egypt could not last long, but it didn’t look like the resolution would come this quickly. Unless this is yet another false start, Mubarak is resigning and turning the control over to the military. In most countries, a military takeover would not be welcome, but Egypt is different. The military is held in high regard and considered less corrupt than the politicians. Further, the military actually owns much of the industry in Egypt, and this makes people believe the focus will be on getting the country back to work.

U.S. stocks are rallying on this. It has absolutely nothing to do with U.S. equities. Stocks weren’t down sharply based on Egypt, but this bull market will use anything as an excuse to rally. The Dow is higher by 35 points at this time.

Surprisingly, bonds are hanging on to gains on the day. The 2-year is .81%, the 5-year 2.34%, and the 10-year remains higher by 1/3 point to yield 3.64%. The 30-year bond is up 20/32s in price to yield 4.71%.

Update 7:00 a.m.:

The Dow traded as low as -49 early but was down only 25 points ahead of the University of Michigan consumer survey. That index came in as expected at 75.1, higher by about a point. That number had no impact, and the Dow remained down 25 points.

Bond prices are still higher on the day, but that’s no guarantee they will close higher in this depressed market. The 2-year is .80%, the 5-year 2.32%, and the 10-year is higher by 18/32s to yield is 3.63%. The 30-year bond is up a full point to yield 4.69%.

Morning Comment:

After the very weird scene in Cairo yesterday afternoon, there were some fears Egypt would blow up overnight. The outrage among protestors remains, but there have been no reports of violence. It’s a standoff. Of course this cannot last much longer. The country is at a standstill, and a poor country gets poorer every day. The longer this condition goes, the riskier the situation becomes. Right now there is little risk an unfriendly (to the U.S.) government emerges, but if the people are driven to the brink due to lack of food (or prices too high for food) there comes with that the chance that an extreme sect emerges.

Markets around the globe were only slightly lower last night. Dow futures are down 30 points in pre-opening trading.

Bond prices are actually up to start the day. There was a sudden selloff yesterday afternoon that seemed to have no explanation. It just demonstrates how vulnerable the bond market remains to any hint of selling. The 2-year is .81%, the 5-year 2.35%, and the 10-year yield is 3.65%. The 30-year bond is higher by ½ point to yield 4.72%.

Speaking of interest rates, the 30-year mortgage rate popped over 5% for the first time since April of 2010. In the past four months the rate has jumped from the record low of 4.17% to 5.05%. This is not a huge headwind yet for the housing market, but it does create problems for those trying to qualify on the margin. From a lenders perspective, this is bad news. One business that has very good last year was the refinancing business. This rate increase will certainly hurt that business, and a further increase would virtually kill the refinancing business.

The Trade Balance came in as expected, and at 7:00 a.m. PST we’ll get the latest read on consumer sentiment – the University of Michigan version. That one usually gets more attention than it’s worth.

The Treasury Department is also posting the “white paper” on the resolution for Fannie and Freddie. This is not a definitive plan. The report suggests different options and is turning this over to Congress to wrestle with. I can hear those big lobbyist money dump trucks backing up at the Capitol now. Banks, mortgage bankers, builders, realtors, etc. all have a stake in this and will spend whatever it takes to get the most benign outcome. Those groups will be lobbying for a system that allows them to do whatever they please as private lenders but have the government ultimately insure everything they do – no questions asked.

This process will take a very long time. There is nothing in any of the proposals that is draconian or threatens the payment on securities issued by Fannie and Freddie. The plan also stops short of getting the government completely out of the mortgage business over a number of years. The report sets a goal of winding down Fannie and Freddie in five to seven years. That means a private market (with some form of government insurance) must be completely up and functioning in that time. That sounds like a lot of time but it’s probably not long enough in this economy and with the housing market years from being healed. But the road through Congress to any final bill will be long and paved with lobby money.

I’ll be back with updates later and with a look ahead at next week. After a dearth of economic statistics this week, the economic calendar will build again. I’m really looking forward to that, but I’m probably the only one.

Close:

Stock traders made a couple of late attempts to run the Dow up to a positive close for the 9th day in a row, but traders fell a bit short with the Dow closing down 11 points. What saved the market this morning was the odd reaction to the news Mubarak would step down. He is speaking now, but he doesn’t sound like a man read to step down until September. He did indicate he would be transferring power in stages to the V.P., but this is not what the people wanted to hear. But, this is unlikely to have a negative reaction in the markets unless something really explodes after his speech.

Bond prices closed at the lows of the day. All of those auction buyers this week are left with losing positions. There was never a real explanation for the sudden selloff. As mentioned below, it was likely just a few sellers muscling a weakling market. The 2-year ended at .83%, the 5-year 2.40%, and the 10-year slumped to a close of 3.70%. The 30-year bond ended down one point to yield 4.78%.

We’ll get the Trade Balance and the University of Michigan Consumer Sentiment Survey tomorrow. Those are unlikely to get a lot of attention. The bond market could get interesting tomorrow. With the weak close today, dealers are being left with a lot of underwater inventory after the auctions this week. We’ll see tomorrow if they cut and run or hold on for buyers.

Update 11:30 a.m.:

Just after commenting on how well the bond market was behaving, the bottom dropped out. I guess I cursed the bond market. I haven’t unearthed any news to match to the move. It’s likely just a couple of big players dumping positions. Perhaps they bought the auctions and had buyer’s remorse. The 2-year yield is .83%, the 5-year 2.36%, and the 10-year yield has popped to 3.70%. The 30-year bond, after getting near unchanged, is now down almost a point to yield 4.77%. This really isn’t the sort of behavior that will encourage buying.

Update 11:00 a.m.:

The bond market has been trading relatively well since the 30-year auction. While the results did not spark any activity at the time, there has been slow but steady buying since. The early losses have all been recovered through the 10-year note. The 2-year is .81%, the 5-year 2.33%, and the 10-year yield is back to 3.65%. The 30-year bond loss has been whittled down to 8/32s to yield 4.73%.

The Dow is quietly trading at -40 points.

Update 10:10 a.m.

There was no question that today’s 30-year auction couldn’t match yesterday’s 10-year result. There are simply fewer investors who can stretch that long. The auction results are out now, and the results were good – not great. The foreign demand was relatively high, and the yield of 4.75% was about as expected. Bond prices have moved very little since the results and remain lower on the day. The 2-year is .82%, the 5-year 2.35%, and the 10-year yield is 3.67%. The 30-year bond remains down 1/2 point to yield 4.74%. This week’s auctions are now done, and the overall results were positive if not stellar. But, a couple of weeks ago we had three very strong auctions, but bond prices tumbled in the days following.

Stocks have quieted down considerably. The Dow tried to close in on unchanged but backed off and is now down 40 points.

Update 8:35 a.m.:

The Dow was down over 80 points in the early going but shot higher to -25 in a very few minutes. This was due to the word that Mubarak would announce later today that he is stepping down. The stock market’s reaction to this is ironic. The Egypt story hasn’t been a factor after the first couple of days. The market was down one day on the initial news, then up  the next when traders realized this wouldn’t have an impact on the global scene. The positive reaction today is merely an excuse to buy stocks after a very brief selloff. The Dow is now down only 17 points.

Bond prices remain lower, and dealers are getting nervous about today’s 30-year. The 2-year is .81%, the 5-year 2.36%, and the 10-year note yield is up to 3.68%. The 30-year bond is down 1/2 point to yield 4.74%.

Federal Reserve Board Governor Warsh has announced he will resign effective March 30. He has been a low-profile guy, but he is known as a “hawk” and not supportive of Bernanke’s QE obsession. Warsh is 40, and he is probably ready to head back to the Street and make the big bucks. But, this means one more negative voice that Bernanke doesn’t have to worry about. Not good.

Update 6:50 a.m.:

As indicated by futures trading, stocks are off to a shaky start. (Reasons below) The Dow is down 81 points.

Bond prices remain slightly lower. The 2-year is .81%, the 5-year 2.34%, and the 10-year yield is 3.67%. The 30-year bond is down 12/32s to yield 4.74%. Based on the back-up in the 30-year, it’s apparent that dealers aren’t as certain about demand for the 30-year auction today as they were for the 10-year yesterday. Those results will be out shortly after 10:00 a.m.

Morning Comment:

Based on pre-opening trading in futures, stocks are likely to get off to weak start this morning. First, Cisco reported disappointing earnings last night. Second, debt problems in Europe, always simmering below the surface, emerged a bit last night. The debt of Portugal specifically has fallen sharply. The ECB had to step in to buy Portuguese debt to stop the freefall. Third, short-term rates in virtually all of the emerging markets are rising sharply. This is being blamed on global inflation pressures. Traders fear rising global rates could throw a wrench in the growth estimates for global economies. Finally, stock indexes in Europe are down 1-1.5% on the day. This is all leading to a dollar rally, which of course our stock traders don’t like.

Weekly Jobless Claims fell from 417k to 383k. That headline sounds like good news. The markets have been hoping to see claims fall but, as mentioned in the closing comment last night, the headline number is likely false. If the recent pattern holds, the drop in claims came because some snow-buried states simply could not process claims. The number should bounce higher next week as the states play catch-up.

The guys on CNBC tried to cheerlead the market on the Weekly Jobless Claims number, but traders seemed to have this figured out for a change. Dow futures were down about 50 points before the claims and remain down close to 50 points.

Bond prices, after finally having a good day yesterday, are slightly weaker today. The concern today is the 30-year auction. The 10-year auction was a huge success, but that doesn’t necessarily mean the same fate is in store for the 30-year year. Still, I think a 4.75% yield on the 30-year will bring in the buyers.

Wall Street traders and analysts are idiots. I mentioned the negative reaction to Cisco’s earnings. The problem wasn’t revenues or profits, which were merely in line with expectations. The item that caused Cisco to not “exceed” earnings was a big jump in research and development expenses to help the business grow in the future. Apparently Wall Street only wants to see companies exceed earnings in the short-term. To heck with the long-term. I remember that Amazon in 2006 was routinely battered by “disappointing earnings” driven by expenses on facilities and development costs to grow their business. Despite the general stock market rally in 2006, Amazon could not get out of the rut of trading between 25 and 40. Amazon was on very few buy lists. So, geniuses on Wall Street, how did that work out? Amazon closed last night at 185. (Analyst discloser statement: No, I don’t own Amazon, darn it.) The point is investors look at Wall Street “experts” as having some sort of insight into companies. That insight goes as far as the end of their noses. That’s the problem for the entire market. We’re in a “now” environment. What can you do for me now is the only thing that matters. Guess that goes for the government and the Federal Reserve Bank as well. Wall Street only wants what benefits stock prices now from the Fed and Washington.

I’ll be back with updates

Close:

Traders managed to goose the Dow into yet another positive close by buying in the last ten minutes. The Dow closed up 6 points. The NASDAQ and S&P each fell by a handful of points. Another low volume day is in the books.

Bonds finally had some relief from all of the negativity. Bond gains, after those sterling 10-year auction results, held through the close. The 2-year ended at .80%, the 5-year 2.33%, and the 10-year closed today with a 22/32 gain to yield 3.65%. The 30-year bond gained 25/32s to yield 4.71%. While today’s 10-year note auction was certainly encouraging, we’ll get another test tomorrow with a new 30-year auction.

The only economic news tomorrow will be the Weekly Jobless Claims report, and this could be another funky one. Weather was probably a big factor last week. When that happened earlier in January, claims fell sharply because of the inability of states to process claims. Economists are looking for something down very slightly, but don’t be surprised at anything tomorrow.

Update 10:05 a.m.:

Bond dealers apparently knew demand for the 10-year auction would be good, and the price on the 10-year note was up 13/32s to yield 3.67% heading into the auction.  Those dealers were certainly right. The auction came much better than anyone could have expected a day or two ago. The yield came in less than expected at 3.66%, the number of bids received was high, and a huge percentage went to foreign bidders. Guess I wasn’t the only one who saw value in the long-end. Bond prices are higher since the results. The 2-year is .79%, the 5-year 2.31%, and the current 10-year note is now higher by 25/32s to yield 3.63%. The 30-year bond is higher by 28/32s to yield to 4.71%. The Treasury will auction a new 30-year tomorrow.

Stocks are continuing trade quietly. The Dow is down only 12 points.

Update 9:15 a.m.:

Bernanke’s Q&A has failed to produce any fireworks as yet. I thought he might get a tougher grilling from this new House panel, but that wasn’t happened. Stocks are having another lazy day although prices are down slightly for a change. The Dow is down 17 points.

Bond prices are still marginally higher ahead of the 10-year note auction. Dealers are apparently encouraged the bidding will be better than in yesterday’s 3-year note. The 2-year is .81%, the 5-year 2.36%, and the 10-year is higher by 8/32s to yield 3.71%. Those auction results will be out shortly after 10:00 a.m. There is always a risk of a big surprise, but the street seems rather unconcerned at this point.

Update 7:05 a.m.:

Ben Bernanke’s written testimony before the House Budget Committee have been released. There is nothing new in the release. He says the economy has improved but not sufficiently to significantly improve the job outlook. He defended the QEII program as necessary. He also paid lip service to inflation. The Q&A comes later and could be more interesting. The leaders on the Budget Committee are not as friendly toward Bernanke as the past leadership.

The market had no reaction to Bernanke’s words. The Dow opened down about 10 points and is now unchanged.

Bonds continue to cling to small gains. The 2-year is .81%, the 5-year 2.36%, and the 10-year is higher by 8/32s to yield 3.71%. The Treasury auction results will be out at 10:00 a.m.

Morning Comment:

The first two days of this week the stock market started slowly but still managed to gain about 70 points each day. Looks like stocks will start slow again today. Dow futures are down 10 points in pre-opening trading. There was no significant news overnight, and there are no economic releases today. The only event of the day will be my friend Ben Bernanke’s testimony before the House Budget Committee. His prepared remarks will be released at 7:00 a.m. PST, and Q&A will follow during the morning. I doubt we’ll hear anything new from the Chairman. He’ll note progress in the economy while still emphasizing the slow growth in jobs. His favorite topic recently has been stocks, but I doubt he’ll talk much about that before the House.

In the Longer-term Commentary I posted Monday, I took Bernanke to task for being so focused on his “success” at raising stock prices without regard to anything else. Ben should be getting a little nervous these days. While the pied piper is leading everyone down the rally road in stocks, the bond market, which he has completely ignored, might threaten to disrupt his celebration of stocks and himself.

Although rates are still relatively low, the rise in rates cannot be doing the housing market any favors. Plus, this can also make businessmen nervous about borrowing. Banks also have to be concerned that short rates might jerk higher and threaten the gift of the steep yield curve. While I still believe that the longer-term outlook is for low rates, spikes like this one in rates can upset the general good in economy. As I mentioned in the latest Longer-term Commentary and yesterday’s Daily, I think I might not be along in being nervous about Bernanke’s recent appearances. He sounds more like a preening hedge fund manager than the Fed Chairman. Yesterday’s three speeches by regional Fed presidents were more of what the bond market wants to hear than what Ben has been saying. Unfortunately, Bernanke seems firmly in control.

In yesterday’s USA Today there was a table on U.S. counties where homeowners were upside down vs. the mortgage owed. There are 17 major counties in the U.S. in which those underwater were 50% or higher. The list was of course dominated by California and Florida. But the number one county was Clark Co., Nevada. Seventy-one per cent of homeowners with mortgages are underwater in the Las Vegas county. Close behind was Osceola Fl. with 63.5%, and Merced, Ca. with 61.1%. There were dozens of other counties in the U.S. with numbers in the 30’s, 40’s, and 50’s. Just think on that a moment. This is stifling. Just think of all those homeowners who might be better off moving for one reason or another but feel captive. Home ownership is supposed to give one a sense of pride and ownership, but for thousands and thousands of Americans their homes have become prisons.

Okay that was a downer comment. Let’s move on. The bond market is actually very slightly better to start the day. The 2-year is .83%, the 5-year 2.37%, and the 10-year is higher by 8/32s to yield 3.70%. The Treasury will auction a new 10-year note today. While traders are wary of the auction, this yield level will likely attract interest. As I’ve mentioned the last few days, I think the long-end of the market is looking pretty attractive again. But, it might be worth waiting this out until tomorrow’s 30-year auction before acting.

I’ll be back with updates.