Outta my way ! Money managers are scrambling to buy, the individual investor is not far behind. Days like Tuesday ( DJIA +60) and Wednesday (+128), can be a sinking feeling for Investors with loads of cash or heavily invested in bond funds.
Did you miss your last chance to buy ?
No, this bull has room to run. New leaders will surface, old leaders will correct as investors take profits and look for other scores.
While no correction appears to be in sight, that in itself should be a warning sign, not to reach for too much. A correction will develop when least expected.
What’s the message here ?
DON”T PANIC !
When a market presses up without a correction, investors tend to feel pressures to go all-in. One of the biggest contributors to an ill-timed investment is buying because one thinks they will miss a move. It is a decision that is not made on the investor’s terms, but one driven by emotions.
One tactic that allows an investor to get on board, reduces panic, but also reduces the risk of getting bagged by a correction, OR A PLUNGE IN A STOCK BECAUSE ITS Q 1 EARNINGS DISAPPOINTED THE STREET, is to buy a portion of what an investor plans to own, then pause before buying more. If it drops, buy more, it it runs, move on to another stock, but paying-up is risky.
Q1 earnings reports can hurt. If a company fails to “beat” projections by “enough,” a stock can be hammered. While guidance and projections are generally low-balled, the Street has no mercy.
Investor’s first read – an edge before the open
DJIA: 14,803.24
S&P 500: 1,587.73
Nasdaq Comp.: 3,297.25
Russell 2000: 946.09
Thursday, April 11, 2013 (7:29 a. m.)
NOTE: My post will be released early today and not include the impact of news after 8:10 a.m., nor will it be based on stock-index future activity before the open.
SEQUESTER: I’m keeping this posted so you don’t forget the market may begin to worry about its impact.
At some point, the question will be raised about the sequester’s impact on the economy, notwithstanding the uncertainty it brings to persons at risk, directly and indirectly.
It is too early to expect anything to show up in the indicators, and it may never be a major issue if our economic recovery gains traction.
It is one of those potential negatives one has to consider along with other ingredients that lead to a decision to buy or sell.
Employers (government or private) may opt to furlough employees without pay, cut back on hours rather than release them to unemployment at the expense of the government. Even so, several weeks without pay has an impact on the economy.
This is one of those uncertainties that, along with a few others, can trigger a consolidation or pullback in the stock market.
Apple (AAPL: $435.69)
AAPL broke out above resistance at $428 yesterday, turning its pattern from a weak positive into a positive. It held above $419 on Mar 4 and again on April 5, and now has a shot at being a double bottom and final turning pattern for this battered leader. Support is $432, resistance is $437. Breaking that on the upside, AAPL can get to $445, near-term.
I am not long or short AAPL.
FACEBOOK (FB - $27.57)
With the help of a strong market, FB broke out of its consolidation yesterday on a nice increase in volume. Support now moves up to $27.30. Resistance is $27.80. That’s where it ran into a wall four days ago. It should be able to get across $28 today.
Between Aug. and Dec. last year, a trading range between$18 and $24 developed. That should provide support for FB and a buying opportunity. That’s where a three month tug of war took place between the believers and non-believers.
I am not long or short Facebook.
ECONOMY:
This will be a light week for economic reports.
But the Street is heartened by favorable economic data on employment, personal income, consumer sentiment, auto sales construction spending, durable goods manufacturing, and housing.
I am going to list the economic reports below but will not include the numbers from the last report, since those numbers are often revised significantly and therefore are potentially misleading.
I strongly urge you to access the website: www.mam.econoday.com for detailed reports on this week’s calendar and an excellent recap (plus graphs) of last
week’s reports. The site does a great job graphically illustrating key indicators.
THURSDAY:
Jobless Claims (8:30)
Import/Export Prices (8:30)
FRIDAY:
Producer Price Ix. (8:30)
Retail Sales (8:30)
Consumer Sentiment (9:55)
Business Inventories (10:00)
George Brooks
“Investor’s first read – an edge before the open”
This email address is being protected from spambots. You need JavaScript enabled to view it.
……………………………………………..
The writer of Investor’s first read, George Brooks, is not registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.

The sugar market is currently displaying a number of characteristics that truly define what trading in the futures markets is all about both long and short-term as well as trend and countertrend strategies. Looking at the sugar futures market from a long-term trading perspective it is easy to see that short traders have been in control of the market since the last upward spike in prices last July. The sugar futures have steadily declined under the growing certainty of a large Brazilian harvest as well as declining demand in a slow global growth economy. These factors have combined to push sugar to its lowest traded prices since December of 2010.

All the telltale signs of a solid trend have accompanied the sell off in sugar. For example, open interest has skyrocketed from approximately 70k to more than 350k since the July 2012 high. There are two reasons that open interest swells as the market moves directionally. First of all, the market allows the people who are early to put on the correct position to stay in that position. I know this sounds simplistic but traders with profitable positions can rest easy and let the market do its own work. Secondly, the increase in open interest is attributable to more people climbing on the trend. Other than a minor spike last October, most anyone who has initiated a short position in the sugar futures market has been rewarded with profits quite readily. These two factors work hand in hand inviting more people to board the gravy train of easy trend riding profits.

The downward trend in sugar futures is well founded due to the expectations of a huge 2013 harvest that should be led by a record Brazilian harvest. This is news that everyone is aware of and this fundamental information has attracted good traders to the sell side of the market. Technical traders have also had an easy go of it since what rallies there have been have been capped nicely by the 90 day moving average. In fact, the last time the 30-day moving average crossed under the 90-day moving average was in August of last year. Finally, technical traders on the short side have collected profits due to the orderly decline of the market thus far rather than getting stopped out on any spikes in volatility.

This brings us to the current situation and our reasoning for looking for a buy signal in a downward trending market. First of all, the ballooning open interest happens to occur as the market has begun to stall. The market has traded between 16.69 and 19.25 since February 1st. This is a pretty tight range considering open interest has more than doubled since then. This means that there are more than 150k new short positions in the market over the last six weeks. Furthermore, none of these new short positions have had the chance to accrue much in the way of profits.

Technically speaking, these new short positions should be sweating. The sugar futures made a new low for the move last week, trading down to 17.56 and followed it up with a new low this week down to 17.55. Last week’s trading range was merely 22 points. The last time the market traded that tightly for an entire week was in September of 2010. Furthermore, this week’s new low, by one tick, has now been followed by a breach of last week’s high at 17.78. This creates an outside bar on a weekly basis. This is typically a good reversal signal for the next couple of weeks.

The new short positions will have protective stops placed relatively close to the market since risk should always be the number one consideration when determining a trade’s appropriateness. This week’s action clearly showed that the market has run out of people willing to create new short positions under 17.55. Markets always run to where the action is. The declining ranges combined with this week’s reversal bar lead me to believe that the next move is higher.

I expect the market to make some type of bottom here. However, it is always important not to sell a rocket or, buy a falling knife. We will enter the market through the use of a buy stop order. This means we will only buy the market if it can climb high enough to trigger our entry stop, which will be placed at 17.85. We expect this to begin triggering buy orders all the way up as traders take their profits or losses, accordingly. I expect the market could trade as high as the 90-day moving average at 18.74. More likely, it will stall out between the trend line dating back to July that now comes in at 18.47 and the 90-day moving average, now at 18.74. If our buy stops are filled, we will place a protective sell stop at 17.59, which should limit risk to just under $300 per contract.

Rarely do we find a contrarian play so clearly set up and with such a high risk to reward ratio. If we are right, the market will get us in on the long side just as 150k contracts are washed out on the short side thus creating a technical bottom in line with the seasonal tendency of the New York July sugar futures #11 contract.

Newly appointed Treasury Secretary Jack Lew made his first visit to Europe in his official capacity this week, and surprised many by calling unequivocally on European leaders to ease off austerity measures that have been applied to the continent’s rash of sovereign debt crises, urging his counterparts on the mainland to focus instead on measures that would stimulate employment and economic growth.

Lew, a veteran of the Obama administration prior to his new post, framed the situation in terms of the shared fate of the United States and Europe, saying “Our economic strength remains sensitive to events beyond our shores, and we have an immense stake in Europe’s health and stability,” before urging European leaders to “strengthen sources of demand.”

Citizens in European countries like Spain, Italy, Greece, Portugal, Ireland, and now Cyprus have all had to deal with the effects of austerity measures resulting from the collapse of various housing and financial bubbles across the continent’s Southern countries, with social unrest and political gridlock becoming a feature of everyday life.

While some have interpreted Lew’s comments to his European interlocutors as having been delivered rather bluntly, they seem dovish when compared to a speech given by George Soros on Tuesday in Frankfurt.

At approximately the same time that Secretary Lew was in Berlin for talks with Germany’s Finance Minister Wolfgang Schaeuble, urging countries with the ability to do so to adopt policies that would “encourage consumer demand”, Soros spoke to an audience in Germany’s financial center, where he in no uncertain terms criticized his host country for its handling of the Cyprus banking crisis, as well as Europe’s sovereign debt crisis as a whole.

The substance of both Lew and Soros’s statements suggest a growing North American impatience with the way European countries have been handling their protracted financial crisis. But while Lew chose to focus on symptoms such as austerity and stimulus, Soros’s critique was broader in scope, and addressed the structural complexities of the European Union’s current impasse.

His conclusion, that Germany should either assent to a Eurobond as a means of alleviating government debts, or consider exiting the Euro altogether, turns all of the customary discussion of the Eurozone crisis on its head. In other words, the common fear or assumption is that the indebted nation will be forced to leave the European monetary union as a result of financial insolvency.

The legendary billionaire speculator cut quickly to the chase and the second paragraph of his speech lays out the argument succinctly:

“The causes of the crisis cannot be properly understood without recognizing the euro’s fatal flaw: By creating an independent central bank, member countries have become indebted in a currency that they do not control. At first, both the authorities and market participants treated all government bonds as if they were riskless, creating a perverse incentive for banks to load up on the weaker bonds. When the Greek crisis raised the specter of default, financial markets reacted with a vengeance, relegating all heavily indebted eurozone members to the status of a Third World country over-extended in a foreign currency. Subsequently, the heavily indebted member countries were treated as if they were solely responsible for their misfortunes, and the structural defect of the euro remained uncorrected.”

Soros suggested that if EU countries were allowed to convert their government debts into European bonds, deeply troubled budgets and bank balance sheets alike would see immediate benefit, while the stress of permanently delayed but inevitably default would be removed from the horizon of possibilities.

While he also said that “Eurobonds are not a panacea,” not sufficient in themselves to solve Europe’s financial calamity, they would be a step in the right direction. Using Italy as an example, he noted that the country would save as much as 4 percent of its GDP, the budget would approach surplus, and “stimulus would replace austerity”.

Noting Germany’s fierce opposition to Eurobonds, Soros concluded that it is they who would do better to leave the Euro rather than a troubled and indebted country like Italy. The reason for this has to do with the fact that a Eurozone minus Germany would still have bonds comparable in value to those issued by the U.S., the UK, or Japan.

Germany’s departure from the European Union would cause depreciation in the currency, allowing indebted countries to regain competitiveness against essentially reduced debts.

If this seems counter-intuitive, it is instructive to think of the situation in reverse. The worst-case scenario that is always envisioned involves the potentially disastrous consequences of an otherwise vitally important economy, such as Italy, leaving the monetary union. Indeed, such an event would be crushing for Italy itself, and the resulting chaos would shake the global financial system.

Meanwhile, a German departure from the EU would result in some readjustment burdens for primarily Germany, with no major global consequences.

But Soros did not advocate for Germany to actually leave the EU. Instead, he suggested that if Germany insists on maintaining its opposition to a sensible and practical solution to Europe’s long-running debt saga that cattle-prods global markets every few months with the promise of contagious financial calamity, they would do better to extract themselves from the situation entirely, and let the rest of Europe sort out its own mess.

With Slovenia set to issue another bond by this summer, amid troubles meeting its obligations, there may just be a good chance to test some aspects of Soros’s claim about the benefits of a Eurobond.

On Wednesday, the S&P 500, the Dow, and the Nasdaq all gained near 1 percent or more and Wall Street extends its record-breaking tendencies into the second quarter.

Against the unlikely backdrop of the Fed’s early and accidental leak of the Open Market Committee meeting’s minutes, as well as the beginning of an earnings season that has so far provided mixed results, the S&P 500 broke through to a new all-time high in intraday trading, as high as 1,589.07 before closing at 1,587.73, up 1.22 percent.

The minutes of the FOMC showed that a majority of the Fed’s board members favored continuing the reserve bank’s monetary policy pending solid improvement in the economy, though there was a good portion of the summary that dealt in some detail with reservations on the part of some members regarding the potential consequences from quantitative easing and sustained record-low interest rates.

Half of the S&P’s top 20 performers were tech stocks. JDS Uniphase Corp. (JDSU) gained 4.84 percent to close at $13.99, followed by Micron Technology Inc. (MU) up 5.38 percent to $10.09, and Juniper Networks Inc. (JNPR), up 4.67 percent to close at $18.84. Teradata Corp (TDC), SanDisk Corp. (SNDK), Akamai Technologies, Inc. (AKAM), MetroPCS Communications (PCS), Applied Materials Inc. (AMAT), Western Digital Corp. (WDC), and TripAdvisor Inc. (TRIP) making up the rest of the list, all making gains of over 3 percent on the day.

First Solar’s (FSLR) shares cooled off after Tuesday’s close that saw the stock gain nearly 50 percent, dropping 7.70 percent on the day to close at $36.32, while Best Buy (BBY), whose shares have more than doubled in price in 2013 as a result of the company’s successful turnaround plan and, more recently, its deal with Samsung, dropped 3.57 percent to close at $24.82.

The Dow also reached and held yet another record high during, reaching 14,826.66 before closing up 0.88 percent to 14,802.24, pushed upward by 6 tech stocks among its top 20 components, with Intel Corp. (INTC) leading the way, up 2.34 percent to $22.26, propelled by the announcement of the second version of its super-fast Thunderbolt computer connectivity technology, as well as the introduction of its much anticipated Moonshot server systems.

Intel was followed closely by Cisco Systems Inc. (CSCO), who gained 2.46 percent to close at $21.49, and Microsoft Corp. (MSFT), up 2.09 percent to $30.23, with International Business Machines (IBM), AT&T (T), and Verizon Communications (VZ) in tow.

Only three of the Dow’s components were in the red, including aluminum manufacturer Alcoa (AA), down 0.83 percent to $8.32, Wal-Mart Stores (WMT), down 0.74 percent to $77.54, and The Travelers Companies Inc. (TRV), down 0.54 percent to $84.81.

The Nasdaq gained a whopping 1.83 percent to close the day at 3,297.25.

Royale Energy (ROYL), the independent oil and gas company from San Diego, had a monster day gaining 67.05 percent to close at $3.34, the second time its shares have done so in as many weeks, as a result of the news of an upcoming and extremely lucrative deal with an as-yet unnamed partner who will help the company explore and drill its North Slope, Alaska holdings.

JetBlue (JBLU) clocked in a gain of 4.33 percent, to close at $6.99, after the popular discount airline reported a year-on-year traffic increase of 8.6 percent, while Coinstar, Inc. (CSTR) was up 3.87 percent to close at $58.78.

A Federal Reserve staff member on Tuesday accidentally released the minutes of the Federal Open Market Committee meeting from March 19 and 20, prompting the Bank to release the document early itself.

Minutes of the FOMC meetings are closely scrutinized these days, given the centrality of the Federal Reserve’s monetary policy in recent market gains.

Every statement emanating from any representative of the Fed is carefully sifted through for any indications about the future of the quantitative easing program that currently sees the Fed spending $85 billion monthly on assets. Chairman Ben Bernanke and a number of Presidents of regional Federal Reserve banks from around the country have repeatedly stressed that QE will continue until the labor market and the economy as a whole make significant improvements.

The accidental release of the minutes that had originally been slated for a 2pm Wednesday afternoon release occurred on Tuesday, and showed that participants to the meeting “generally judged the macroeconomic benefits of the current purchase program to outweigh the likely costs and risks, but they agreed that an ongoing assessment of the benefits and costs was necessary.”

While the leaked document testified to a sense of moderate optimism over recent economic and market developments in the U.S., and the role of Fed spending and low interest rates, there were some who were “not convinced of the benefits of asset purchases, stating that the effects on financial markets appeared to be short lived or that they saw little evidence of a significant macroeconomic effect.”

The objections to continued QE were based on the potential risks of the sort of open-ended monetary accommodation that seems to have become a fixture of the financial system.

Some objected that asset purchases were exacerbating imbalances and asset prices in the market in general, while apprehension was also expressed regarding the possibility of increased risk-taking that can result from longer-term and artificially low interest rates.

Another worry that was expressed was that the eventual and inevitable withdrawal of QE could backfire on the Fed, as increased net income and remittances to the Treasury resulting from asset purchases dry up for a time.

Despite some apparent objections however, “purchases might well continue at the current pace at least through the end of the year. It was also noted that were the outlook to deteriorate, the pace of purchases could be increased.”

The committee voted 11-1 in favor of continuing its current monetary policy, with the lone dissenter being Esther George, President of the Federal Reserve Bank of Kansas City.

This week, President Bill Clinton stepped into the Twittersphere on political satirist Stephen Colbert’s show on Comedy Central, The Colbert Report.  Comedy Central is a property of entertainment content company Viacom, Inc. (VIA).  Other Viacom networks include BET, MTV, Nickelodeon, Nick at Nite and about 160 more networks across the globe.

At the Clinton Global Initiative Meeting, the former U.S. president discussed poverty, foreign aid, CGI and more with host Colbert.

The two also discussed Twitter.

Clinton detailed that when he became president in 1993, email wasn’t even mainstream; it was primarily inner-office communication.

“After I became president and everybody started sending blizzards of emails within the administration, the Congress subpoenaed them all,” Clinton explained. “And all these young people, drunk with the power of the new technology, said the first thing that came into their head, so some of these emails were mildly embarrassing.”

President Clinton said that he texts and uses Facebook (FB), where he has nearly one million “likes,” but he doesn’t use other social media websites, including Twitter.  He jokingly explained that he is so insecure that he’s afraid if he tweets, that maybe no one would tweet back.  “There’s nothing worse than a friendless tweeter, right?  You’re just wandering around in cyberspace,” said Clinton.

Colbert took the liberty of opening the former commander in chief his own Twitter account, but “PresidentClinton” and “WilliamJeffersonClinton” were already taken, so Colbert had to go with the next, best thing, “PrezBillyJeff”.

Laughingly, Clinton sent his first tweet on the account, “Just spent amazing time with Colbert!  Is he sane?  He is cool! #cgiu”  Colbert typed and sent the tweet from his Apple (AAPL) iPhone for Clinton.

PrezBillyJeff, hasn’t yet tweeted anything else from the Twitter account, but at least he’s not walking through cyberspace alone.  More than 124,000 people are already following him.

There are times when getting a read on the direction is simple, rather than difficult. As I noted Monday, “There are simply more buyers than sellers.”
So who needs a host of indicators, charts, input the Street’s best and brightest when buyers are driven to accumulate stocks pushing prices relentlessly higher?

And there are times when the less a person knows, the better off they are.

Mid-to late stage bull markets are characterized by these conditions. By that time, much of the “wall of worry” has been climbed, confidence begins to replace fear, investors become more aggressive, and it becomes easier to make money..

An absence of a nasty correction in many months re-assures investors making money in the market is riskless; they chase rallies and are quick to buy on dips.

What I am saying is, there are times when this isn’t rocket science.

There are too many buyers to enable a correction, barring unexpected bad news.

Money managers must buy stocks. For one, that’s what clients pay them to do. For another, they cannot afford to see targeted stocks run away from them.
Most stock brokers have clients who are coming back into the market, newsletter writers are competing with other newsletter writers, and hedge funds are leveraging up.

Once they sell, profit-takers then have cash to reinvest. The perpetual machine. But investors get careless as the fever rises until the unexpected – a seemingly harmless correction, turns into a nasty correction when new negatives whack stock prices just when they seem ready for the next leg up.

That is what we are seeing – the good news is, the fever to buy escalates into a frenzy, the bad news is, many will get hurt in the end. Once a market tops out and turns down, investors view it as an opportunity and buy only to see stock prices tank big-time.

I believe this market has plenty of upside, but not in a straight run. The Street is getting a little too complacent.

TODAY: Corporate earnings will begin to hit the Street in coming weeks The stock of companies that fail to “beat” by a comfortable margin will get punished. That makes buying riskier than usual. Support: DJIA : 14,570 (S&P 500: 1,557). The Nasdaq Composite and Russell 2000 are lagging in this 3-day rebound.
Investor’s first read – an edge before the open
DJIA: 14,673.46
S&P 500: 1,568.61
Nasdaq Comp.: 3,237.85
Russell 2000:929.34
Wednesday, April 10, 2013 (9:14 a. m.)
SEQUESTER: I’m keeping this posted so you don’t forget the market may begin to worry about its impact.
This week will feature some key economic reports (see below). At some point, the question will be raised about the sequester’s impact on the economy, notwithstanding the uncertainty it brings to persons at risk, directly and indirectly.
It is too early to expect anything to show up in the indicators, and it may never be a major issue if our economic recovery gains traction.
It is one of those potential negatives one has to consider along with other ingredients that lead to a decision to buy or sell.
Employers (government or private) may opt to furlough employees without pay, cut back on hours rather than release them to unemployment at the expense of the government. Even so, several weeks without pay has an impact on the economy.
This is one of those uncertainties that, along with a few others, can trigger a consolidation or pullback in the stock market.
Apple (AAPL: $428.98)
AAPL tested its support at $422 again yesterday and tested resistance at $428 before closing up a fraction for the day. It is trying to hold above $422, its pattern is a weak positive. A break above $428 turns the near-term pattern positive, a break below $422 indicates a test of $419, which is critical support, the last stop before a drop below $400.
I am not long or short AAPL.
FACEBOOK (FB - $26.59)
FB continued to digest the gains it posted over the 7-days ending Friday, finding buyers yesterday at $26.42. A drop below $26.40 would raise the chances of a drop to $26.10 where it should find buyers.
Between Aug. and Dec. last year, a trading range between$18 and $24 developed. That should provide support for FB and a buying opportunity. That’s where a three month tug of war took place between the believers and non-believers.
I am not long or short Facebook.
ECONOMY:
This will be a light week for economic reports.
But the Street is heartened by favorable economic data on employment, personal income, consumer sentiment, auto sales construction spending, durable goods manufacturing, and housing.
I am going to list the economic reports below but will not include the numbers from the last report, since those numbers are often revised significantly and therefore are potentially misleading.
I strongly urge you to access the website: www.mam.econoday.com for detailed reports on this week’s calendar and an excellent recap (plus graphs) of last
week’s reports. The site does a great job graphically illustrating key indicators.
WEDNESDAY:
Treasury Budget (2:00)
FOMC Minutes (2:00)
THURSDAY:
Jobless Claims (8:30)
Import/Export Prices (8:30)
FRIDAY:
Producer Price Ix. (8:30)
Retail Sales (8:30)
Consumer Sentiment (9:55)
Business Inventories (10:00)
George Brooks
“Investor’s first read – an edge before the open”
This email address is being protected from spambots. You need JavaScript enabled to view it.
……………………………………………..
The writer of Investor’s first read, George Brooks, is not registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.

Homes in Kansas City have, since November, been receiving the Google (GOOG) Fiber internet service that the tech company claims is “100 times faster” than the typical broadband offering of any of the major telecoms who traditionally provide internet connection.

If the plan works out, it will look much the same as the Kansas City deal that allows residents to choose from standalone Gigabit Internet service, or a bundle service that includes almost 200 TV channels. As in Kansas City, Google will also offer residents of Austin a slower 5 megabit-per second service for a period of seven years, in exchange for a one-time construction fee.

AT&T, Inc. (T) was quick to criticize the deal and make a similar offer to the city of Austin.

In a statement, the telecom giant said that it anticipates its plans to expand fiber connection in Austin “will be granted the same terms and conditions as Google on issues of geographic scope of offerings, rights of way, permitting, state licenses and any investment incentives”.

The move on Google’s part comes at a time when more priority is being placed on faster internet connection speeds. The traditional telecoms have been seen to be lagging in this regard, as the U.S. as of last year was ranked only 12th in the world for average internet connection speed, according to data compiled by Akamai (AKAM). The same study reported that the average internet speed in the U.S. was 6.7 Mbps, not to far off from Google's free offering.

While countries in the European Union have long-term connection speed targets in the tens or hundreds of megabits per second, as recently as one year ago, only 15 percent of connections in the United States were in excess of the 10mbps threshold (though this figure represents almost a doubling of the previous year).

Regardless of what happens with AT&T’s offer to the city of Austin, in a larger sense Google Fiber can be seen as one of the first serious swipes at the entrenched dominance of telecoms over how people connect to the internet.

It can also be seen as yet another attempt for the company with one of the most expensive stocks on the market to capture an even larger share of advertising dollars than it currently has (Google is in first place for mobile ad revenue, well ahead of Facebook (FB) who holds second place).

Consider the expense and contractual obligations that accompany any of today’s typical broadband offerings from the big telecoms, it is hard to see how Google’s plan could go wrong. If Kansas City and Austin become successful prototypes, and the company is invited into other cities for the same purpose, the company’s exponentially simpler pricing scheme ($300 for a whole seven years of the 5 megabit service in Kansas City) could corner AT&T and others to drastically reduce fees and make contracts less cumbersome.

On Tuesday, the Board of the Federal Reserve and the Office of the Comptroller of the Currency released a joint statement announcing that as of April 12, 4.2 million borrowers whose homes were being foreclosed on in 2009 and 2010 by 13 of the nation’s largest banks would begin receiving compensation payments.

The payments total about $3.6 billion, and are being paid out by the following institutions: Aurora, Bank of America (BAC), Citibank (C), Goldman Sachs (GS), HSBC (HSBC), JP Morgan Chase (JPM), MetLife Bank (MET), Morgan Stanley (MS), PNC (PNC), Sovereign Bank, SunTrust (STI), U.S. Bank (USB), and Wells Fargo (WFC).  The payments will begin on April 12 with an initial distribution of 1.4 million checks, and should conclude with a final wave of payments by mid-July of the year.

Those whose mortgages were serviced by either Goldman Sachs or Morgan Stanley will have to wait for a separate announcement regarding payouts from those institutions.  Additionally, the statement indicated that the Independent Foreclosure Review process is still ongoing for OneWest, Everbank (EVER), and GMAC Mortgage.

The payments will range anywhere from $300 to $125,000, and do not preclude borrowers from taking their own legal action against any of the banks should they so desire.

The amount of money allocated to each of the 4.2 million borrowers is determined by the June 2012 financial remediation matrix, based on both the stage at which the borrower was in the foreclosure process, as well as the type of “error” committed in the servicing of the mortgage.

Many of these same banks got credit on Monday from Fed Chairman Ben Bernanke for much greater preparedness in the event of another period of economic turmoil. Fourteen of the nation’s 18 biggest banks met the Fed’s capitalization thresholds for their share purchasing and dividend payout plans that were the subject of the most recent set of stress tests. Tuesday’s official announcement was understated by comparison.

The announcement did not directly mention any of the reasons for the settlement aside from “possible servicer error.”  These reasons include “robo-signing”, one of the more unpleasant revelations about the foreclosure crisis that occurred subsequent to the collapse of the housing bubble.  “Robo-signing” involved large quantities of foreclosure affidavits being processed by bank employees who in many cases signed off on documents about whose contents they knew little or nothing.

Last Friday I was in Sonoma, California, for Mike Shedlock’s investment conference. The weather was grey and gloomy, but the conversation was animated and bright. I was fully engaged the whole day and never more than when John Hussman was speaking, commenting, or asking tough questions. John and I have talked on the phone and corresponded for years but had never met. What a consummate gentleman and scholar. We felt like we had been old friends for years and committed to finding opportunities in the future to get together and compare notes in person.John is no stranger to long-time readers of Outside the Box, as he has probably been the source of more OTBs than any other writer. John and I share a common foe that focuses our attention: a weekly deadline that we sometimes battle long into the night. This week John shares with us some of the insights he presented in Sonoma. One quick quote that I bet will spark your interest:

On the earnings front, my concern continues to be that investors don’t seem to recognize that profit margins are more than 70% above their historical norms, nor the extent to which this surplus is the direct result of a historic (and unsustainable) deficit in the sum of government and household savings. As a result, investors seem oblivious to the likelihood of earnings disappointments, not only in coming quarters but in the next several years. We continue to expect this disappointment to amount to a contraction in earnings over the next 4 years at a rate of roughly 12% annually.

Corporate profits are nothing if not mean-reverting. There are several explanations for this phenomenon; but whatever the cause, the current off-the-charts percentage of profits to GDP is highly unlikely to become an enduring feature of the New Normal. Especially not given the recent weakness across the rest of the data spectrum.

John manages the eponymous Hussman Funds, and you can learn more and read his additional work at www.hussmanfunds.com.

I am in the air, on my way to New York City at the moment, where I will enjoy a few dinners and two days of meetings and media before returning to Dallas. Tonight, Barry Ritholtz has called a dinner summit, and I notice that Maine fishing buddies Scott Frew and Jim Bianco are on the guest list. One of the topics, I am sure, will be the unintended consequences of central bank policy. I get what Japan, Europe, and the US want to try to achieve. But what uninvited and unwelcome guests will disrupt their efforts? We are in totally uncharted waters, with no historical precedent of QE on such a massive and global scale. And our political leaders, in Europe and elsewhere, pick this moment to screw around with the trust that depositors place in their banks? Is this really any way to run a railroad, barreling full speed down the track when there has been no slow-motion testing done? No stress tests on the bridges?

Do the politicians and central bankers actually think they can fully model the ramifications of their present actions? And if so, what model are they using? I get worried that they may be using a two- or three-level, variable-input model, when there may actually be a dozen or more major interconnecting nodes. Which is all the more reason to respect Hussman’s nervousness.

But tonight I will enjoy my dinner and friends. We have to take life’s pleasures as they come to us, and I am grateful that I get more than my share of such opportunities. I have to add, though, that looking over the latest analysis of the health insurance costs for my small company and family has certainly soured my stomach. Ouch. Good thing inflation is only 2%, right? If I couldn’t trust that government-derived number, I think healthcare cost increases might worry me.

But let’s all have a great week!

Your can’t afford to get sick analyst,

John Mauldin, Editor
Outside the Box
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Taking Distortion at Face Value

By John P. Hussman, Ph.D.

March U.S. Non-Farm Payrolls +88,000 (payroll survey, median expectation was 175,000)

March U.S. Civilian Employment -206,000 (household survey)

March Canadian Employment -54,500 (worst print in 4 years)

March German Unemployment +13,000 (surprise increase)

Companies issuing negative earnings preannouncements for Q1 2013: 78% (h/t Josh Brown)

One of the striking features of the recent market advance has been the nearly triumphant confidence that there is zero risk of a U.S. economic recession. Back in January, I observed:

The economic data are wrestling between two likely possibilities and a third less likely one. The first of the likely ones remains that the U.S. already entered a recession in the third quarter of 2012. While I expect the full third-quarter GDP figure of 3.1% to remain positive post-revision, it’s not at all clear that fourth-quarter GDP (estimated to come in about 1.5%) will survive those eventual revisions – ditto for the marginal bounce in industrial production. The second likely possibility is that the enthusiasm about QEternity (combined with a positive jolt to personal income from special dividends to front-run the fiscal cliff) represented another successful round of “kick-the-can” to push a weak economy from the verge of recession for another few months. When we look at the broad evidence from a variety of good leading and coincident indicators, that’s actually the possibility that I am starting to lean toward. The unlikely possibility, in my view, is that the economy has started to walk on its own. (see Puppet Show)

With a few months of additional data in hand, the evidence further supports the "kick-the-can" interpretation. Specifically, enthusiasm about QEternity, coupled with a positive jolt to personal income from special dividends, can probably be credited for another successful round of “kick-the-can,” pushing a weak economy from the verge of recession for another few months, but not durably so.

My impression is that we have once again arrived back at that can. While there is no shortage of smug observers who believe that recession risk does not exist and never did, the fact is that the strongest leading indicators, as well as the most timely coincident data, have deteriorated and danced along the border between economic expansion and economic recession for more than two years. Meanwhile, repeated rounds of QE have produced little but short-lived bounces to defer a recession that historically would have followed such deterioration more quickly. The chart below offers a good picture of this process.

Notice the successively lower levels, as each round of quantitative easing has smaller and smaller effects on real economic activity (speculative activity in the financial markets aside). The question at present is whether the recent bounce will prove to be temporary as well. This expectation is certainly consistent with the series of rapid-fire misses from the Chicago Purchasing Managers Index (particularly the new orders component), the national PMI reports for both manufacturing and services, and the unexpected weakness on both payroll and household employment surveys.

For my part, I continue to expect the U.S. economy to join a global recession that is already in progress in much of the developed world (assuming a U.S. recession has not already started, which we can’t rule out, but would require knowledge of eventual data revisions to confirm). Suffice it to say that the realistic case for a sustained economic expansion here remains terribly thin.

While some observers will reflexively point to the housing market as a sign of economic recovery, it is important to recognize that the millions of homeowners with underwater mortgages (home values below the amount of mortgage debt still owed) have no ability to sell their homes even if they wish to do so, unless they can come up with the difference out of pocket. As a result, the natural flow of demand from new household formation must be satisfied from an inventory of homes for sale that is much smaller than the actual “shadow inventory” that would be available if losses did not have to be taken in order to sell those homes. So the demand for homes resulting from household formation is satisfied from limited inventory plus new home building, even though there is an ocean of distressed and unsold homes already in existence. From this perspective, it should be clear that the bounce we’ve seen in housing is not a sign of economic recovery, but is instead a sign of misallocation of capital due to what economists would generally call a “market failure.”

Taking Distortion at Face Value

On the earnings front, my concern continues to be that investors don’t seem to recognize that profit margins are more than 70% above their historical norms, nor the extent to which this surplus is the direct result of a historic (and unsustainable) deficit in the sum of government and household savings (see Two Myths and A Legend for an analysis, including more than a half-century of data on this). As a result, investors seem oblivious to the likelihood of earnings disappointments not only in coming quarters, but in the next several years. We continue to expect this disappointment to amount to a contraction in earnings over the next 4 years at a rate of roughly 12% annually.

Despite the enormous weight of both accounting identity, historical data, and simple arithmetic, we continue to encounter persistent hostility to the idea that profit margins are the mirror image of extraordinary and unsustainable deficits in the government and household sector. The actual relationship was first detailed by the economist Michal Kalecki in the mid-1900’s. James Montier of GMO gives a nice derivation. The full relationship is:

Profits = Investment – Household Savings – Government Savings – Foreign Savings + Dividends

As I noted over a year ago, dividends exhibit very little volatility over time, and do not exert a material amount of volatility in the above relationship over the course of the economic cycle. It also happens that particularly in U.S. data, the difference between Investment and Foreign Savings (i.e. the inverse of the current account deficit) also fluctuates relatively little, because current account “improvement” is typically associated with deterioration in gross domestic investment, as shown below in data since the 1940's.

As a result, the Kalecki equation reduces, for all practical purposes, to a statement that corporate profits move opposite to the sum of household and government saving. Again, see Two Myths and A Legend. More than a half-century of data that demonstrates the tightness of this relationship.

The upshot is very simple, the U.S. stock market presently reflects two unstable features. One is that extraordinary monetary policy – specifically quantitative easing – has created an ocean of zero-interest money that someone has to hold at each point in time, and that provokes a speculative reach for yield. The other is that extraordinary fiscal policy, coupled with household savings near record lows, have joined to elevate profit margins more than 70% above their historical norm, as the deficit of one sector has to emerge as the surplus of another. The result is that investors quite erroneously accept the distorted “earnings yield” of stocks (and the associated “forward price/earnings multiple” of the S&P 500) at face value, without any adjustment for elevated profit margins or the historical tendency for such elevations to be eliminated over the course of the business cycle.

Put simply, stocks are not cheap, but are instead strenuously overvalued. The speculative reach for yield, encouraged by the Federal Reserve, has created another bubble – which is not recognized as a bubble only because distorted profit margins create the illusion that stocks are reasonably valued. We presently estimate a prospective 10-year nominal total return for the S&P 500 of less than 3.5% annually. The likelihood of even this return being achieved smoothly, without severe intervening volatility and steep market losses, is roughly zero. This does not imply or ensure immediate market losses, but it doesn’t need to. On any horizon of less than about 6-7 years, we expect that any intervening returns achieved by the S&P 500 will be wiped out, and then some. Speculate if you believe that your exit strategy will dominate that of millions of other speculators, despite market conditions that are already overvalued, overbought, overbullish. In my view, all of this will end badly.

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