Market Commentary

As Markets continue higher, more people wonder how that reflects the real economy?

Meredith Whitney’s Perpetual Cycle of Weakness.

Why is Meredith Whitney so bearish on things?  Business Insider has some insights on the subject. Perhaps it is because she sees the economy as a perpetual cycle of weakness.

Basically, as she sees it, job destruction leads to increased foreclosures, which in turn leads to lower real estate values, which then leads to lower tax revenues, which causes state budget gaps, etc.

For more, see “The Meredith Whitney Muni Bond Report That Insiders Have Been Passing Around“.

So, What’s Keeping the Market Moving Higher?

In short, the answer is that the Fed is printing money.

Officially the Federal Reserve System has a dual mandate, promote price stability and maximum employment. Now it has admitted to a third one, pushing stock prices higher via its quantitative easing policy.

During a recent CNBC interview, Steve Liesman asked Bernanke how he could claim QE2 was a success even though both interest rates and commodity prices have risen considerably since he first announced it.  Bernanke’s response:

“Policies have contributed to a stronger stock market just as they did in March 2009, when we did the last iteration of this. The S&P 500 is up 20% plus and the Russell 2000, which is about small cap stocks, is up 30% plus.”

Permanent Open Market Operations.

According to the NY FED, Permanent Open Market Operations, or “POMO”, are purchases or sales of securities on an outright basis that add or drain reserves and change the size of the System Open Market Account (“SOMA”).  As you know, on November 3, 2010, the FOMC decided to expand the Federal Reserve’s holdings of securities in the SOMA to promote a stronger pace of economic recovery.

The chart below, from the McClellan Report, shows how well that technique has worked.

The Fed’s POMO actions are keeping the financial markets flush with cash, and the Markets are responding. However, Bernanke says he’ll quit QE2 in June.  What happens then?

In the meantime, be vigilant and enjoy the ride.

The Economist has a funny map on its cover this week.  It shows the troubled state of our Union.

President Obama used different words to describe the State of the Union from his perspective.  Here is a Word Cloud.

According to CBS News, President Obama's State of the Union speech included more than 6,500 words, led by variations on "America," "people," "new" and "jobs," with "future," "work" and "years" also high in the word count. While word repetition doesn't offer any deep analysis of the speech, the broad message is clear: "American people need new jobs and work in future years."

Market Commentary

The Markets were ripe for a pull-back.  I say that only because the climb higher has seemed un-relenting, in the face of good or bad news.  Recently, technical indicators showed some underlying weakness, but price marched forward. Finally, this past week, we saw some selling pressure.

The real question isn't whether buyers will step back in, rather, it is whether sellers will apply some pressure.

Last week we got a GDP number that wasn't great, but it wasn't terrible either.  Combine that with the political unrest in Egypt, and some less than stellar earnings reports … and the pull-back seems mild.

Price is still the primary indicator.  This chart is just an early warning to pay attention.

So, What is Jim Rogers' Advice? … One Word: "Commodities".

“If the world economy gets better, commodities are going to make a fortune. If the world economy does not get better, commodities are the place to be because they are going to print more money, and that’s how you protect yourself,” investor Jim Rogers told Larry Kudlow on CNBC.

“This is the time when you should own real assets, not stocks and bonds. Throughout history, go back and look, you know we had huge inflation in the 70s, stocks were not in a good place to be,” he said.

"Given the uncertainties surrounding the global economy, investing in commodities is your safest bet," says Rogers.

From my perspective, I'm watching where smart money asset flows point.  There is always something working in the markets.  Our job is to find what's working and avoid the rest.  Easy, right?

The Economist has a funny map on its cover this week.  It shows the troubled state of our Union.

President Obama used different words to describe the State of the Union from his perspective.  Here is a Word Cloud.

According to CBS News, President Obama's State of the Union speech included more than 6,500 words, led by variations on "America," "people," "new" and "jobs," with "future," "work" and "years" also high in the word count. While word repetition doesn't offer any deep analysis of the speech, the broad message is clear: "American people need new jobs and work in future years."

Market Commentary

The Markets were ripe for a pull-back.  I say that only because the climb higher has seemed un-relenting, in the face of good or bad news.  Recently, technical indicators showed some underlying weakness, but price marched forward. Finally, this past week, we saw some selling pressure.

The real question isn't whether buyers will step back in, rather, it is whether sellers will apply some pressure.

Last week we got a GDP number that wasn't great, but it wasn't terrible either.  Combine that with the political unrest in Egypt, and some less than stellar earnings reports … and the pull-back seems mild.

Price is still the primary indicator.  This chart is just an early warning to pay attention.

So, What is Jim Rogers' Advice? … One Word: "Commodities".

“If the world economy gets better, commodities are going to make a fortune. If the world economy does not get better, commodities are the place to be because they are going to print more money, and that’s how you protect yourself,” investor Jim Rogers told Larry Kudlow on CNBC.

“This is the time when you should own real assets, not stocks and bonds. Throughout history, go back and look, you know we had huge inflation in the 70s, stocks were not in a good place to be,” he said.

"Given the uncertainties surrounding the global economy, investing in commodities is your safest bet," says Rogers.

From my perspective, I'm watching where smart money asset flows point.  There is always something working in the markets.  Our job is to find what's working and avoid the rest.  Easy, right?

As the markets hover in the rare air of their recent advances, there is a quote I've thought about several times recently.  It is a little colorful … yet, it gets the point across.

Market Wizard, Ed Seykota, reminds that:

BusinessInsider had an interesting piece on David Einhorn's criticism of Ben Bernanke in his fourth quarter letter to investors.  Here's what he wrote:

On August 27, 2010, Fed Reserve Bank Chairman Ben Bernanke gave a speech in Jackson Hole, Wyoming where he hinted that the Fed would provide additional monetary easing. At the time, the S&P 500 was down more than 3% for the year. From that point through the end of the year, the s&P rallied 19%. At the same time, oil prices rose 16%, copper prices rose 32%, coffee prices rose 34%, corn prices rose 43%, and cotton prices rose 57%.

In front of Congress, Mr. Bernanke credited his policies for "significant improvements in stock prices" which are "contributing to a better outlook for the economy." Mr. Bernanke also said his policies are not to blame for the sharp increase in the price of oil, which he claimed is the result of strong demand from emerging markets. Does Mr. Bernanke really believe anyone buys that? Ostensibly, it's a coincidence that many of the necessities of life came into simultaneous shortage and shot up in price just as Mr. Bernanke promised additional monetary stimulus.

Later in the letter, Einhorn continues the tirade against Bernanke for, among other reasons, that Bernanke told "60 Minutes" that he was 100% certain that the Fed could control inflation. Einhorn's take: "As for the future, we are 100% certain of nothing."

As the markets hover in the rare air of their recent advances, there is a quote I've thought about several times recently.  It is a little colorful … yet, it gets the point across.

Market Wizard, Ed Seykota, reminds that:

BusinessInsider had an interesting piece on David Einhorn's criticism of Ben Bernanke in his fourth quarter letter to investors.  Here's what he wrote:

On August 27, 2010, Fed Reserve Bank Chairman Ben Bernanke gave a speech in Jackson Hole, Wyoming where he hinted that the Fed would provide additional monetary easing. At the time, the S&P 500 was down more than 3% for the year. From that point through the end of the year, the s&P rallied 19%. At the same time, oil prices rose 16%, copper prices rose 32%, coffee prices rose 34%, corn prices rose 43%, and cotton prices rose 57%.

In front of Congress, Mr. Bernanke credited his policies for "significant improvements in stock prices" which are "contributing to a better outlook for the economy." Mr. Bernanke also said his policies are not to blame for the sharp increase in the price of oil, which he claimed is the result of strong demand from emerging markets. Does Mr. Bernanke really believe anyone buys that? Ostensibly, it's a coincidence that many of the necessities of life came into simultaneous shortage and shot up in price just as Mr. Bernanke promised additional monetary stimulus.

Later in the letter, Einhorn continues the tirade against Bernanke for, among other reasons, that Bernanke told "60 Minutes" that he was 100% certain that the Fed could control inflation. Einhorn's take: "As for the future, we are 100% certain of nothing."

Beware What You Wish For …

Bears just can't catch a break. 

The Market is holding up well.  By that, I mean it isn't going down well.

The Smallest "Biggest" Decline in 50 Years.

Why are the markets going up?  Does it matter?  Clearly, there has been virtually no selling pressure; and it's been that way for months.

Jim Cramer said: "Really bad markets go down on the same news over and over again. Really good markets just keep going up on news that is well-known and is, well, hardly, news."  By that definition, we are in a good market.

Respect the Trend.

The primary trend is higher.  Higher highs and higher lows is the definition of an up-trend. Until price tells you otherwise, the key message is that Bulls control the market.

Imagine how frustrating it has been to be a Bear (because they simply haven't caught a break, and classic bear setups just aren't working). Will there come a time when Bears control the market again?  Of course there will.  Before that there will probably be a few nasty selling episodes. For now, though, all they know is that the market simply won't fall, no matter what the readings say, and no matter how overbought the daily index charts happen to get.

The Markets are a harsh teacher … and the hard lesson to learn is to avoid front-running a move. Over the long-term, it is safer to respect the primary trend.

A Condensed Restatement of the Bullish Case.

One of the StockTwits columnists posted this excerpt from a post in Barron's written by Michael Santoli.

The reasons the bulls are bullish are also pretty universally agreed upon. The industrial economy has gathered some momentum, the emerging markets are surging, companies are flush, profits look set to rise decently again, the Federal Reserve is seeking new ways to penalize risk aversion, taxes won't go up and the market tends to do well in the year after a midterm election.

And we can add to the list the likelihood that another financial-engineering cycle is just getting into gear, so expect lots of equity-friendly refinancings by stretched companies, re-leveraging by cash-rich ones and buyouts hither and yon.

The thing is, it's all pretty much true. And because of that, and given that stock valuations are not excessive, it's tough to think a likely pullback or worse would signal some major top.

That pretty much says it … Hope you have a great week.