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The Caveat Emptor Market: Barron's Picks Up 2 comments

Saturday, September 30, 2006 | 11:17 AM
in Media



Wow, kinda crazy: Our commentary Wednesday and Thursday both got picked up by Barrons. The MARKET WATCH page, and for the 2nd week in a row, Alan Abelson's column. Both are below:

MARKET WATCH: Dow Ready to Top Last High
RR&A Market Letter by Ritholtz Research & Analytics
230 Park Ave., New York, N.Y. 10169

Sept. 26: As markets march higher, we note the short-term factors at work: window dressing-funds buying more of their favorite stocks to improve their short-term performance...; there is a surfeit of cash in the hands of fast traders; expect them to chase momentum ...; technical analysis and intermediate-term trend remain constructive.

Those are up against longer-term issues of economic softening and market internals: real estate, continues decelerating; market advances have taken place on lower-than-average volume; energy is oversold, and likely to bounce upward; [a] double top may present a formidable barrier ( an upside penetration could create a bull trap); despite the Dow rally, new highs are lagging while the number of new lows are expanding; fewer stocks are participating in the advance:

Indeed, this rally is very Dow-centric, meaning it's focused more and more on fewer and fewer stocks...as the Dow [hit] its all-time high, the other indexes are further away. This is no coincidence.

And the ever popular Alan Abelson:

The Caveat Emptor Market:

WALL STREET, WE MUST SAY, IS HAPPILY free of any appreciable outbreak of bugging. That has to be, we've not the slightest doubt, because brokers, analysts, investment bankers and traders are models of virtue.

Although it also may be because Wall Street is so taken with e-mail and so proud of its electronic scribbling that it can't bear to consign to the ether even a single, solitary sentence. So when hungry regulators pay a visit, subpeonas at the ready, they can be assured of an abundance of incriminating evidence waiting to be harvested. With such thoughtful suspects, who needs to bug a phone?

Besides, these days, with the stock market on a bit of a roll, the Street's stalwarts are raking it in hand over fist and too busy counting their money to spare any time to play with bugs, even if the spirit so moved them.

After more than a month of vacillating between dawdle and decline, the market decided for reasons known only to itself, except that most of the investment crowd was nervously peering down, to go up. And by quarter's end, the Standard & Poor's 500 was ahead 5.2% (the S&P's strongest third-quarter showing in nine years), the Nasdaq, 4%, and the good old Dow, 4.7%. (Toss in dividends, and you can add another tick or two to the returns.)

On Thursday and Friday, the Dow actually, if briefly, topped its all-time closing high of 11,722.98, set in the giddiest of those gloriously giddy days back in 2000 -- but slipped a tad each day before the final bell.

For its sterling performance, that hoary average is especially indebted, as the keen-eyed Barry Ritholtz points out, to this year's outsized gains in Boeing, United Technologies, Caterpillar and Altria Group (the newest incarnation of Philip Morris). By contrast, some big names and erstwhile hot numbers in the Dow are off sharply from their historic highs, including Intel, down 73%; Microsoft, 54%; Home Depot, 47%; Merck, 53%, and GM, 65%.

Even among the blue chips, this recent bull move has been anything but encompassing. The Nasdaq, moreover, heavily laden with techs, still hovers a scant 2,790 points below its all-time top of 5,048, also, as you might guess, reached at the most maniacal moment of that runaway bull market that turned tail in 2000. Breadth, which, for the uninitiated, is the difference between advancing and declining stocks, hasn't been terribly impressive, confirming the pronounced choosiness of investors in their stock buying.

The absence of widespread participation obviously reflects a lack of investor conviction. But it also reflects, we suspect, ambivalence on the prospect for the economy and corporate profits. The lack of conviction can change quickly as bullish sentiment continues to build, a likely result of headlines blaring "new highs." The concerns about the economy, however, seem apt to deepen rather than dissipate as they're reinforced by fresh signs of weakness in the economy and disappointing profits.

There may well be some speculative steam left in the boiler. But we don't think investors have paid much heed to the possibility of economic and earnings shortfalls; nor to next year's looming budget deficit (possibly as much as $400 billion, compared with this waning fiscal year's relatively benign (?) $260 billion; nor to indications that the Democratic devils may score substantial gains in the congressional elections; nor, lest we forget, to the likelihood that Iraq will remain a place you do not want to vacation in.

In short, this is unmistakably a caveat emptor market, one of those markets, as someone once put it, that has discounted everything but the bad news.

As we related back on Wednesday, credit for putting together the full list of Dow Components goes to Mike Panzner.


Infestation of Bugs
Barron's, October 2, 2006   

Barron's OCTOBER 2, 2006      

Saturday, September 30, 2006 | 11:17 AM | Permalink | Comments (5) | TrackBack (0)
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The Spock Market

Friday, September 29, 2006 | 06:30 PM

I'm outta here early for the holidays, but let's leave you with this amusing piece of nonsense for a Friday afternoon :


I'll see you at Leonard Nimoy's house for apples and honey . . . 

Friday, September 29, 2006 | 06:30 PM | Permalink | Comments (2) | TrackBack (0)
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Calling All Conspiracy Theorists!

Friday, September 29, 2006 | 06:30 PM

At Wednesday's Kudlow & Company, Larry laid down an interesting challenge to me.  "The Dems in D.C. are saying the White House cut oil prices just before the election. What do you think of that?"

My answer was straight forward: "I don't really believe in conspiracy theories. The White House couldn't even keep a 2nd rate burglary under wraps. Sure, it was fortuitous timing for the GOP to have Gas prices plummet by a third 6 weeks before elections. But I need to see a market mechanism. We know the Saudis have been pumping all out for 3 years. What made prices go down?"

This was before we went on air, and in the subsequent "Goldilocks" infused adrenal rush, I kinda forgot about it. 

On the train in this morning, I overheard a couple discussing how they tanked up at $2.45, and how much lower gasoline now is.

And it got me thinking:

Yes, the timing is convenient. But so far, there's nothing more than few funny coincidences. Show me the market mechanism for this, and give me a credible person saying this happened, and I will push it further.

Larry raised this issue, and all I have now are some interesting "coincidences.  So I ask the assmebled multitudes -- what proof is there of energy price manipulation?  I don't want theories or any tin foil hat crowd conspiricies -- show me facts data or some evidence, and we will dig deeper into this.

Friday, September 29, 2006 | 06:30 PM | Permalink | Comments (79) | TrackBack (0)
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Dow 36,000!

Friday, September 29, 2006 | 02:49 PM

James K. Glassman, the author of the book Dow 36,000 was on CNBC just now, credibly discussing his 36,000 forecast.

This one is so obvious, I will not even comment, and instead ask you: What do you suspect this  might possibly mean?



Friday, September 29, 2006 | 02:49 PM | Permalink | Comments (34) | TrackBack (1)
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Dow vs Money Market (Since Peak)

Friday, September 29, 2006 | 05:30 AM

On Wednesday, we looked at the breakdown of Dow components, surprised to discover that only 10 of the 30 Dow components were above their 2006 2000 highs. Four stocks -- Boeing, United Tech, Caterpillar and Altria -- were the primary drivers, pulling the Dow higher despite the drag of so many other relatively weak components. 15 of the 20 Dow stocks still below their prior highs are down substantially, with GM and Intel off ~60%, and Microsoft still down by 51%, and Home Depot and Merck off ~ 40%.

But before we get too excited about the new highs on a closing basis -- perhaps even today? -- perhaps we should look at the actual real performance of the Dow.

Consider what happened if you actually held these 30 stocks (individual issues or through the Diamonds) since January 2000: After 6 1/2 years, you are now almost breakeven on a nominal basis. If you reinvested the dividends from the Dow, you would be up 12.7%.

On a real basis, adjusted for inflation, you are actually down 19%; With reinvested dividends, you are down around 9%.

If you were lucky enough to sell back in January 2000, and you instead simply placed the money in a cash fund (money market), you would be up ~20.87%  on a nominal basis; On a real basis, you are up just under 2%.

So while everyone on TV is celebrating the new highs, I can't help but think:  "Yeah! We only underperformed cash by 818 basis points! Yeah!

Dow Industrials and Fidelity Money Market Fund



That's on a real or a nominal basis.


Friday, September 29, 2006 | 05:30 AM | Permalink | Comments (31) | TrackBack (1)
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Soft Landing Continues to Fade

Thursday, September 28, 2006 | 10:47 AM

The market can stay irrational longer than you can stay solvent.
-John Maynard Keynes (1883 - 1946)


Yesterday, I received the following question: "Why aren't you short yet?"

The short answer is, "No manager can afford to be too early on the short side. You can be long and wrong; you can even afford to be in cash and wrong; but short and wrong is fatal."

The more complete answer is simply this: The markets have been banking on a soft landing; As the recent economic data points have shown, this is an increasingly unlikely outcome. Consioder the following:

Durable Goods Orders: A key barometer of business CapEx equipment spending - decreased by 0.5% in August. Durables were downwardly revised to 2.7% in July. This confirms prior reports indicating slowing growth in the manufacturing sector. ISM index slipped 54.5,  in August from 54.7 in July. The Philly Fed reported a -0.4 reading of its business conditions index. Economists had expected 15.0;

Mortgage Apps  Despite rates sliding to multi month lows, mortgage apps were soft.

New Homes Sales: We looked at the New Home Sales data last year, and found them unreliable -- they are based on statements from Builders; A more accurate basis is to use a moving average, and to ignore wild swings beyond the margin of error.

Existing Homes Sales: Existing home sales, at 6 X the size of the new home sales, continue to slide as sales units slow, inventories rise and prices fall.

Consumer Revolving Debt: As HELOCs and Mortgage refis fade, we see revolving credit increase.  That's right, the US consumer has maintained their consumption by taking on more debt;   

Business CapEx Spending:  See Durable Goods

The market's short term technicals do support the run for the highs; We have an excessive short interest, as well as generally gloomy sentiment readings.

But that peak is unlikely to be very sustainable.

Durable-Goods Orders Declined Unexpectedly in August by 0.5%
WSJ, September 27, 2006 9:16 a.m.

Thursday, September 28, 2006 | 10:47 AM | Permalink | Comments (59) | TrackBack (1)
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Paul Volcker at Bloomberg HQ

Thursday, September 28, 2006 | 07:05 AM

The King Report, an institutional commentary, recounted a fascinating discussion that took place at Bloomberg's HQ in NY on Monday night. A panel of ex-NY Fed Presidents (Paul Volcker, Gerald Corrigan, William McDonough and Anthony Solomon) held a panel discussion on the risks to the US economy. The panel chair was current NY Fed President Tim Geithner.

Here are a few comments that Bill King was kind enough to pass along:

"Volcker and Corrigan warned about inflation.

Gerald Corrigan on our current structutral issues: “Once the genie [inflation] is out of the bottle, it is very, very difficult and expensive to put it back in the bottle...The U.S. savings rate is virtually zero. It brings with it some potential of very serious problems down the road, as far as the well-being of our citizens.”

While Greenspan gets most of the credit, the reality is we have been living in the house that Volcker built. Easy Al has frittered away much of the solidity of that Anti-Inflation structure. 

Here are Volcker's comments:

Paul Volcker: “I am a little bit more worried about inflation…it is kind of creeping up, and I am impressed by the degree of pressure, if that is the right word, psychological pressure, political pressure, there is not to do anything about it.”

Volcker added, “A lot of people out there on Wall Street, and on Main Street, are operating on the assumption that nothing very startling will happen in terms of restraint…But once people are convinced that that’s the case, it can creep up and the more it creeps on you the more difficult it becomes to do something about it.”

Volcker also criticized the LTCM bailout. “I expressed certain reservations about that particular operation at the time and I hold steadfast to my reservations.”

Paul also takes a swipe at the contemporary Fed for its penchant to warble. “I do think actions speak louder than words and the words should as little as possible confuse things. The market ought to make up its own mind once in a while and eventually it will. I don’t know how much they need to be spoon-fed, so to speak.”

Mr. Volcker, God bless him, ridicules contemporary central bank & Street sophistry:
“We live in this peculiar world where 3 percent inflation is stability but a half percent decline in the price index is deflation. I am not quite up with modern nomenclature.”

Great stuff. Thanks, Bill.


The King Report
Bill King
M. Ramsey King Securities, Inc.
Tuesday September 26, 2006 – Issue 3482 “Independent View of the News”

Thursday, September 28, 2006 | 07:05 AM | Permalink | Comments (10) | TrackBack (0)
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Thursday, September 28, 2006 | 05:38 AM

I was speaking with Kudlow yesterday before the show, and he loved a cartoon I had sent him (via Weedon):


It would certainly benefit Moderate practioners of Islam if they were to recognize the disrepute the radical Islamofascists (is that really a word?) brings to their religon. Even the Pope apologized for the holocaust and the Spanish Inquistion.  I hope we don't have to wait 400 years to hear moderates condemn the violence somewhat louder . . .

Thursday, September 28, 2006 | 05:38 AM | Permalink | Comments (51) | TrackBack (0)
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Media Appearance: Kudlow & Company (9/27/06)

Wednesday, September 27, 2006 | 04:00 PM
in Media



Back in the studio for the regular appearance with Kudlow tonite.

The topics will be Dow Rally, The Economy, Sentiment, and Earnings. Guests include Diane Swonk (Mesiro Financial), Brian Wesbury (1st Trust Advisors) and Stephan Abrahms (Trust Company of the West).

Should be rather interesting.


Wednesday, September 27, 2006 | 04:00 PM | Permalink | Comments (14) | TrackBack (0)
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Change in Dow Components

Wednesday, September 27, 2006 | 12:21 PM

Mike Panzner on the Net change in the constituent members of the Dow from the January 14, 2000 record close through earlier today...

Dow Components

Eastman Kodak      -62.22% [No longer in Dow]
General Motors      -60.74%
Intel   Corp      -60.18%
Microsoft   Corp      -51.27%
Home   Depot Inc      -41.21%
Merck   & Co      -39.47%
Intl   Paper Co      -38.47% [No longer in Dow]
Du   Pont      -36.06%
Honeywell   Intl      -31.31%
IBM      -31.19%
Alcoa   Inc      -30.83%
General   Electric      -29.46%
Coca-Cola   Co      -26.62%
Wal-Mart   Stores      -23.24%
AT&T   Inc      -21.05%
Hewlett-Packard      -18.83%
Disney   (Walt) Co      -7.43%
McDonalds   Corp      -6.35%
JPMorgan   Chase      -4.43%
Dow   Jones Indus. Avg -0.12%
Procter   & Gamble      7.72%
American   Express      19.73%
Citigroup   Inc      24.22%
Johnson&Johnson      38.18%
3M   Co      50.67%
Exxon   Mobil Corp      59.09%
Boeing   Co      80.93%
United   Tech Corp      98.52%
Caterpillar   Inc      153.77%
Altria   Group Inc      220.83%
SBC Communication [Now part of AT&T]


What's amazing is that 20 of the 30 Dow Components are off their highs, and that so many of the them are WAY OFF their 2006 highs. Of the 20 Dow components that are below their 2000 peaks, 14 of those 20 off by more than 25%.

That is the nature of a price weighted index . . .


UPDATE:  October 27, 2006 11:10am

Attention Slate readers:  Be sure to also see our comparisons between the Dow vs Money Market since the market peak. You may be surprised to learn that since January 2000, cash (yes, cash) has outperformed the Dow.

Wednesday, September 27, 2006 | 12:21 PM | Permalink | Comments (16) | TrackBack (3)
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