Week of 9/18/11

Bulls Begin To Snort

Don’t look now, but the market’s recent crash tendency is firing up the bulls. Doug Kass of Seabreeze Partners told CNBC he thinks “the lows are in” and that investors are missing the key point that growth is slowing but not stopping. He sees no double-dip recession and believes banks are about to shape up. “Stocks are now more undervalued than at the generational bottom back in 2009,” he claims.

Barry Knapp of Barclays said at a press conference yesterday that stock investors always think the Federal Reserve knows something it’s not telling the public, and sell after a Fed action — as they did the past two days. This time, however, traders will switch focus in a week or two and conclude that the Fed’s “Operation Twist” will be good for stocks because it represents “a loosening of financial channels.” He suggests buying shares in these sectors: consumer discretionary, materials, and technology.

Finally, the G20 pledged to help stabilize the global economy. – 9/23/11

El-Erian Sees Next Crisis

PIMCO’s Mohamed El-Erian thinks the world is on the eve of its next financial crisis, due to sovereign debt collapse.

“There has been a significant increase in the financial requirements of international intervention,” he said. “You need a lot more firepower in order to be a circuit breaker. Look at how much the ECB has put in and ask yourself the question: has it created a circuit breaker? The answer is no, even though the amounts involved have been massive.”

He sees “signs of an institutional run on French banks. If it persists, the banks would have no choice but to delever their balance sheets in a very drastic and disorderly fashion.” – 9/23/11

Kudlow Sees New Recession

Larry Kudlow wrote at his blog that the US is “on the front end of a recession” and cited a lousy profit picture, more “Obamanomics tax hikes,” Europe, and US banking.

On Europe: “The banking and sovereign-debt crisis is still a shoe waiting to fall. Greece may get bailed out again in a couple of weeks. But so far, the European Union’s authorities have not agreed on a bailout or bankruptcy plan to backstop debt-restructurings, or to recapitalize banks in the wake of those default restructurings.”

At least he thinks the recession won’t be so bad, as hinted by the non-inverted yield curve. Cash in the US banking system and corporate America will help soften the blow, low interest rates will help, profit growth will slow but not stop, and cheapening oil will help. “So it’s not 2008. Not by a long shot. But it’s not a pretty picture either.” – 9/23/11

Soros Says US In Recession

George Soros told CNBC the US is already in a double-dip recession, and blamed Republicans for opposing President Obama’s fiscal stimulus ideas.

“We have a slowdown and basically a conflict about whether the rich ought to pay taxes to create jobs or not, and there was a deal in the making which would have balanced the budget over the long term, but would have allowed short-term fiscal stimulus, which would have been the right policy,” he said.

He’s gravely concerned about the situation in Europe but thinks what needs to be done will be done. “It is a more dangerous situation [than Lehman Bros] and I think that the authorities, when push comes to shove, will do whatever it takes to hold the system together, because the alternative is just too terrible to contemplate. … I think that you could have two or three of the small countries default or leave the euro provided it is prepared and done in an orderly way.” – 9/23/11

Banks Still Need US Backstop

Sandler O’Neill & Partners think the Moody’s credit rating downgrade of Bank of America and Citigroup on Wednesday was “a matter of dwindling government support and not a deterioration of company fundamentals. The debt ratings were lowered due to Moody’s assessment that the US government is more likely to allow a large financial institution to fail.”

However, they “remain skeptical that the government would actually allow a systemically important financial institution to fail” and, therefore, expect only “a modest negative impact from funding costs and collateral calls.” – 9/23/11

Rising Short-Squeeze Risk In Europe

In yesterday’s Eye on the Market research note from JPMorgan, CIO Michael Cembalest wrote that “financial markets have finally priced in our dire view of the European Monetary Union.” He thinks Citigroup offers a better paradigm for EU banks than does Lehman Brothers, due to the systemic risks Citi faces. He notes that with each new capital injection, EU banks are getting close to the dirt-cheap price/book ratios that Citi reached after its injections. The problem for Europe is that its “banks are a lot bigger than US banks, making the problems harder to solve.”

“Until a few weeks ago, the reliable strategy was to assume European assets would underperform, since policymakers would only react after a market riot. Now there has been one, and the range of outcomes is hard to predict. We still maintain large underweights to Europe given the uncertainties, and our inability to figure out how they can fix it. But policy options remain, and given how consensus our views now are, the risk of short squeezes and relief rallies is rising.” – 9/22/11

Fed Worried About Europe

Yesterday’s “Operation Twist” announcement by the Federal Reserve was expected, thus disappointing to investors wanting a bigger splash for stocks — especially after Gluskin Sheff’s David Rosenberg said they’d get one.

The only surprise was a downer for investors, too. For the first time since 2009, the Fed cited “strains in global financial markets” as “downside risk” for the US economy. That’s probably why the Fed made itself the planet’s lender of last resort. With its balance sheet already at $2.8T, however, it’s unclear how reliable a defender of anything financial the Fed will be in a collapsing-Domino scenario in Europe. – 9/22/11

Oppenheimer Sees Q4 Rebound

Brian Belski expects a strong Q4. He told CNBC that seasonal patterns provide a clue: Q4 averaged twice other quarterly returns since 1950, even better when the preceding period was negative with always positive returns since 1970 following a double-digit negative Q3.

He also thinks the “increasingly bunker mentality” of bad sentiment sets the stage nicely for Q4 to perform well again this year, and is bullish on upcoming earnings. He says earnings revisions have already come down enough and that Q3 earnings are set to surprise on the upside. – 9/22/11

GOP Urges Fed To Back Off

From a letter to Fed Chairman Ben Bernanke signed by House Speaker John Boehner (R-OH), Senate Majority Leader Mitch McConnell (R-KY), and other GOP leaders:

“It is not clear that the recent round of quantitative easing undertaken by the Federal Reserve has facilitated economic growth or reduced the unemployment rate. … Although the goal of quantitative easing was, in part, to stabilize the price level against deflationary fears, the Federal Reserve’s actions have likely led to more fluctuations and uncertainty in our already weak economy.

“We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the US economy. Such steps may erode the already weakened US dollar or promote more borrowing by overleveraged consumers. To date, we have seen no evidence that further monetary stimulus will create jobs or provide a sustainable path towards economic recovery.” – 9/21/11

Nightmare Just Beginning

Swell times ahead, as predicted by John B. Judis in The New Republic:

“Unless there is a fundamental—and difficult-to-imagine—change in the way our politics interacts with our economy, the United States and much of the world are headed for a very grim future.

“The United States will once again have to raise rather than lower the level of federal spending as a percentage of GDP. … because of an aging population that will need public services… The United States and other nations will also have to reform the world’s monetary system — again…

“In the ’40s, it finally took a world war to bring about the conditions for reforming the world’s leading economies. The war established the United States as the unchallenged leader of world capitalism… Will it take another global catastrophe to convince the leaders of the United States, Europe, and Asia to halt the repetition of past errors—to recognize that they need to establish a new economic order?” – 9/21/11

The Amazing 9/11 Boatlift

Narrated by Tom Hanks, the video below tells the story of how an emergency call by the Coast Guard on 9/11 brought ferries, private craft, tugs, and just about anything that could float to the crowded seawalls of lower Manhattan to manage in just nine hours the largest boat evacuation ever.

When disaster strikes, a core group of fast-acting volunteers makes a difference.
– 9/21/11

Beware Whateverness

Jay Merrick wrote in The Independent that the “and/but” vibe has kidnapped communication:

“When postmodern idea-surfing allows one to keep talking, texting, or tweeting, how very dare you say anything final and irreversible when there’s obviously no need to? More than ever before, ideas, opinions, objects, buildings and behaviour have become existential decor. We’ve become relativists, but not in the scientific or creative ways that Albert Einstein or James Joyce were. We make connections between disparate, and mostly trivial, facts or ideas to demonstrate how very coolly alert we are, and how interesting and ironic every fact and figment must surely be -– for the moment, anyway.” – 9/20/11

The White House Should Panic

Democratic strategist James Carville wrote at CNN Sunday:

What should the White House do now? One word came to mind: Panic. This is what I would say to President Barack Obama: The time has come to demand a plan of action that requires a complete change from the direction you are headed.

I don’t know how else to break this down. Fire somebody. No — fire a lot of people. This may be news to you but this is not going well. For God’s sake, why are we still looking at the same political and economic advisers that got us into this mess? It’s not working.

Furthermore, it’s not going to work with the same team, the same strategy and the same excuses. I know economic analysts are smart — some work 17-hour days. It’s time to show them the exit. Wake up — show us you are doing something. – 9/20/11

Take Shelter Now

Kevin Tuttle wrote at Minyanville a week ago that a “prominent European money manager” told him the consensus is not “if,” it’s “when” the financial pressure in Europe will blow. He said “it could truly begin unraveling within the next few weeks considering the catalysts currently in play.”

“Now is the time. Take shelter! Do not concern yourself if the market goes up today, tomorrow or a month from now. Clarity is key! Would you sail your boat into rocky waters with a potential hurricane looming because of your love of sailing? Is the risk worth the reward? For some, maybe; but for most, probably not.” – 9/19/11

Tuttle Secular Channel Chart

Watch For Default On Tuesday

Peter Tchir of TF Market Advisors wrote on Saturday: “If Greece is going to default, September 20th seems to be as good a day as any. Actually, it is far better than most to be GD-Day. Two big bonds, the 4.5% of 2037 and the 4.6% of 2040 both have coupon payments due that day, totalling 769M euro. So if the IMF wanted to avoid letting another billion euro go down the drain, September 20th would be a good day to do it.”

He thinks “every step and virtually every comment made, for the past 8 days, is consistent with preparing for a default.” – 9/19/11

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