Talking Head Alert

It's talking head time with yours truly in the media this past week: Bloomberg radio, BNN TV, and New Delhi TV.

To view and listen to the segments, click here.

Krugman Agrees with Vinny - again

Over the past several days, an awakening of sorts has occurred in Princeton, New Jersey, home of Nobel Laureate Paul Krugman. It is the reality that Barack Obama is no leader. This is a point that Mr. Krugman has begun to make several times of late, most recently in his blog today. This is point that I first made nearly one year ago.

So, as we await yet another speech from the man in the White House, here is what the Nobel Laureate had to say today (link to full commentary provided) and what little old me said one year ago. The rest is history in the making.

from Paul Krugman's blog today today:

"Various reports suggest that in today’s speech Obama will try to position himself as a pragmatist, as opposed to the ideologues of right and (probably) left. We’ll see how that works; as I recall, the last president we had who viewed himself primarily as a manager was … Jimmy Carter."

from this blog, June 9, 2010 (note the year):

The Real Problem with Obama

"Let me cut to the chase: It’s not about Mr. Obama’s capacity to show emotion beyond a clenched jaw that is missing. It’s about his capacity to lead. Just because someone has the title of leader doesn’t mean he/she is a leader.

In his media book tour for “The Promise”, author Jonathan Alter notes how impressed he was with Obama’s ability to manage the job – to synthesize the information and make an informed decision. This is no doubt due to his God given abilities. But it is also no doubt due to his educational training.

Mr. Obama is an excellently trained Harvard business manager. One of the attributes of a good manager is the ability to work for incremental improvements. Another is to be quite pragmatic. Mr. Obama has both qualities, so eloquently combined in Frank Rich’s commentary this past Sunday – incremental pragmatism. And therein lies the rub.

Being an excellent manager means espousing phrases like “don’t let the perfect be the enemy of the good”. Stop and think about that phrase for a moment, then ask yourself if that is something that a leader would ever articulate as the centerpiece of his philosophy?

Perhaps a Chicago trained politician might hold such a core view. Certainly a well trained manager would. But a leader?"

Will Mr. Obama surprise us today with a demonstration of spine and vision? Does a leopard change his spots?

A Head and Shoulders Bottom?

If you have read any of my technical analysis work over the past years, you know that I am not a pattern recognition guy. However, there are times when one can't help but notice the emerging pattern involving long term interest rates. Specifically, the head and shoulders bottom that appears to be forming in the 10 year US Treasury (see accompanying charts).

When you add into the equation the following recent comment in an Economist article - "Since mid-November America’s Treasury has issued some $589 billion in extra long-term debt, of which the Fed has bought $514 billion." - it is hard not to conclude that once QE2 ends and the Fed stops buying long term Treasuries that a major demand factor will be removed from the mix.

The obvious equity market impact of rising rates is in valuation models, which will note that the cost of capital has just gone up thereby making equities less attractive. Could this explain why stocks have recently traded sideways?

Is Technical Analysis Dead?

Something very peculiar is happening with equities.

For more than a year, stocks have not performed according to technical analysis Hoyle. Stock markets have risen on far below average volume. Correlations for virtually all economic sectors and many asset classes hover just below 1.00. And many technical analysis tools have been rendered impotent. Why is this so? Perhaps the answer lies in the nature of the beast: the structure of the market.

Over the past several decades, the structure of the market has changed. In the 1960s and 70s, traditional institutional investors (mutual funds, pensions, insurance companies, and large asset managers) replaced individual investors as the dominant traders of the day. Recently, hedge funds and now high frequency traders (with algorithmic traders in tow) have supplanted traditional institutional investors as the dominant volume drivers in equities. At the same time, products and services such as dark pools, derivatives, and structured products operate outside the traditional norms of equity investing.

Yet, most investors and many in the financial media operate as though there are virtually no effects, no consequences – intended and otherwise – that have occurred in this new environment. All is as it was. Or is it?

As for technical analysis, of all the tools that have worked with a reasonable degree of accuracy, perhaps none have been impacted more by the brave new financial innovation world than sentiment indicators.

Once the bastion of sound investment strategy, the human emotions of greed and fear afforded astute investors and traders with the opportunity to exploit the polar ends of investment human behavior. Ride the greed and fear train for as long as possible then, when things go too far, shift to other side (the contrarian side) of the equation. Not easy to do but highly rewarding if done correctly. However, given the changed world equities operate in today, the question has to be asked, Do such tools work in a world dominated by black box methodologies? A financial world without humans?

When it comes human emotions such as greed and fear, does a hedge fund manager, an algorithmic trader, or a high frequency trader base their decisions on judgment? Do they feel anything? Do they get swept up in the emotional tide of the times? Or is virtually every action taken done based on a set of rules and parameters that do not rely on such human qualities?

And that brings us back to the issue of technical analysis and, specifically, sentiment indicators. Do they still work? Has technical analysis lost a key tool in its toolbox?

Based on the evidence at hand, in the case of sentiment indicators, the answer has to be yes. In the case of volume indicators, the answer is also yes. In the case of momentum indicators, the answer is no.

The one market variable that is least impacted by our financial innovation brave new world is price. And price changes over time, which is what momentum indicators are all about, are tied to the real world of valuation, which is, in turn, tied to the real economy.

Is technical analysis dead? No. But I find it hard to argue for the status quo when so much has changed. Or Keynes once said, “When the facts change, I change my mind. What do you do, sir?”

Life After QE2

“…it’s far from clear that the recovery will prove self-sustaining.”
Paul Krugman
NY Times, April 4, 2011

In his “The Transmission Mechanism for Quantitative Easing” commentary, Dr. Krugman delves into the how, why, and to what extent QE2 has worked thus far. He points to the sources of growth in US GDP (see accompanying chart) and highlights the fact that consumption and exports account for nearly 90% of the increase. Going a step further, Mr. Krugman then explores how a weaker US dollar and a higher stock market are likely significant factors to the results noting, “…casual observation suggests that a lot of the growth in consumer spending has been at the high end, which suggests in turn that a higher stock market might be driving it. And the lower dollar has clearly helped US exporters and import-competing firms.”

One conclusion from his analysis has to be the Fed’s intention of lifting the value of risky assets (stocks, specifically) and, thereby, triggering the “wealth effect” which then produces greater consumption which in turn helps the overall economy. However, as Mr. Krugman also notes, “…a lot of the growth in consumer spending has been at the high end…”, which helps bring him to a conclusion that is the crux of yesterday’s blog commentary: will the end of QE2 usher in an era of private sector led sustainable economic expansion?

If yes, then the US economy will (at best) continue to improve and maybe create the virtuous circle that enables the Fed and the government avoid, but more likely forestall, the day of economic reckoning.

If not, then what? Just a few points investors should contemplate as the stock market continues its Alfred E. Neuman (oh, excuse me, its climbing a wall of worry) rally.

Ho Hum

I don’t know about you but I’m bored.

Stocks are locked into their upward drift waiting for what will almost certainly be an earnings season right around expectations (MERI data). And since we have 2 more months of monetary alcohol (that’s supposed to find its way into the real economy but is actually is stuck swirling around risk assets) to finally see if it has worked its magic and produce a private sector led sustainable economic expansion, the predictive dynamics of equity investing has been reduced to the investment equivalent of waiting for Godot. And therein lies the real rub for stocks.

The central issue for stocks is not whether earnings and guidance will exceed or (more likely) meet expectations. Nor is it a 15 multiple on a $90 S&P 500 operating number (which results in a 1400 target) that is at the top of the investment decision-making to do list. Rather, it is what happens after the monetary steroids have stopped being pumped into the sub par US economy? Which brings us to when things will start to get more lively – the third quarter of this year. For it is in 3Q11, when Chairman and head drink mixer Bernanke is set to stop (but not withdraw) the flow of monetary alcohol that we will see just what $4 to 6 trillion dollars has gotten us: a private sector led sustainable economic expansion or the early stages of the next economic crisis?

Until then, a plentiful supply of No-Doz is in order.

U.A.E. To The Rescue

How is the US going to square the circle of involvement in Libya but not in the far more strategically important Bahrain? While the thrust of the following WSJ article is in one direction (why the United Arab Emirates (U.A.E.) is not engaged militarily in Libya), the real value lies in the fact that the U.A.E. has provided a way for the US to avoid the hypocrisy of involvement in Libya but not Bahrain: blame it on Iran.

From today's WSJ:

Former U.A.E. Official Blames U.S., EU for Libyan Pullout
By NOUR MALAS

"ABU DHABI—The United Arab Emirates was prepared to deploy 24 aircraft to help enforce a no-fly zone over Libya but decided not to participate in the allied effort because of U.S. and European policies towards Bahrain, the former commander-in-chief of the U.A.E. Air Force said Tuesday.

"The U.A.E. was willing, and there were preparations, to deploy a significant number of aircraft for the no-fly zone, but a re-prioritization—specifically the European and U.S. positions on Bahrain—did not satisfy the Gulf states to this end," said Maj. General Khalid Al Buainnain.

The U.A.E. had been prepared to deploy two squadrons of 12 aircraft each to Libya, Mr. Buainnain, said on the sidelines of a conference in Abu Dhabi.

Mr. Buainnain said the U.S. and Europe had failed to appreciate the extent of Iran's interference in the Gulf countries, and had misread the protests in Bahrain as a spill over of calls for democratic change sweeping through the region.

"What's going on in Bahrain is much beyond our Western allies [ability] to understand," he said. "It is a complete conspiracy of the Iranians in the region...The European and U.S. positions are unable to imagine the extent of Iranian intervention in Bahrain."

"It's a matter of political disagreement—not a matter of resources—between the Gulf states and the Europe and U.S.," Mr. Buainnain said. "The position of the Europeans, especially the United States, towards Bahrain—really, this is something that is very scary, and it's not encouraging," he said.

Mr. Buannain didn't specify which policies the U.A.E. objected to. But the U.S. warned against the use of violence during the recent crackdown on protesters in Bahrain, and urged both sides to reach a negotiated solution.

On Sunday, Qatar became the first Arab nation to join international action against Libya's Col. Moammar Gadhafi, saying it was sending fighter jets to Libya to help enforce the U.N. resolution calling for an international military intervention to impose a no-fly zone over the country.

There has been speculation that the U.A.E. would send military assistance as well, though late Monday the country said it is playing a purely humanitarian role in Libya by delivering aid supplies. The U.A.E.'s role is "strictly confined to the delivery of humanitarian assistance," according to a statement carried on the state news agency.

The U.A.E had taken a leading role in the calls for action in Libya, hosting a meeting of the Gulf Cooperation Council in Abu Dhabi on March 7 at which the six-member bloc of Gulf Arab nations urged the international community to enforce a no-fly zone.

The U.A.E. Ministry of Foreign Affairs didn't immediately return requests for comment Tuesday.

Bahrain's Sunni ruling family has for more than a month battled protests led by its largely-Shiite opposition, leading King Hamad bin Isa Al Khalifa to declare a three-months state of emergency amid rising sectarian tensions on the Gulf island kingdom.

Last week, Saudi Arabia and other GCC states including the U.A.E., sent security forces to Bahrain to help quell the ongoing protests. Soon after the Gulf troops arrived, Bahrain launched a violent crackdown on the antigovernment protesters, clearing them from the capital's financial district and the Pearl roundabout, imposing a curfew and banning all public gatherings.

On Monday, Bahrain's King Hamad said a foreign plot against his state had been foiled—presumed to be a reference to Iran—and thanked troops brought in from neighboring Saudi Arabia and the U.A.E. to help keep security. Iran has condemned the arrival of foreign troops in Bahrain.

Mr. Buainnain said the U.A.E considered Bahrain's security "an extension" of its own security, and sees it as a top priority. He also said Bahrain risked turning into a third center of Shiite extremism in the Arab world, in addition to the presence of Hezbollah in Lebanon and the Houthi group in Yemen.

His comments follow warnings by GCC Secretary General Abdel Rahman bin Hamad Al Attiyah Monday, at the same conference, that the Gulf states reject any foreign intervention in their affairs, including by Iran.

Mr. Buainnain, a former U.A.E. fighter pilot who rose to head the air force, retired in 2006. He is now president of the Dubai-based security think-tank, the Institute for Near East and Gulf Military Analysis."

*Note: bold and italics emphasis added above

Nero Would Be Proud

From Today's FT:

Inside Obama’s not-at-war room
By Robert Shrimsley
Published: March 16 2011 21:49 | Last updated: March 16 2011 21:49
The leader of the free world is debating Libyan intervention with his closest advisers.

Obama: So what are we going to do to support the Arab democrats?

Which ones.

The ones in Libya. They are taking a shellacking.

Actually, Mr President, our intelligence has classified it as a hammering; Secretary Gates is not ready to upgrade it to a shellacking.

When will he be ready to do that?

After they’ve been crushed, sir.

Shouldn’t we be helping democrats against a brutal dictatorship?

Are we sure they are democrats, Mr President?

Second aide: Didn’t we do this meeting last month?

That was Egypt. . . or Tunisia.

Obama: Well, that seemed to work out; what did we do then?

We positioned ourself carefully behind the curve and immediately backed whatever had happened the day before. It was cost-effective and it worked, sir. Your strategy of protracted hesitation has paid dividends in a number of theatres.

David Plouffe prefers to call it the evaluate-and-decide strategy.

I apologise Mr President, I thought that was our Afghan strategy. I understood we’d moved on to an “evaluate and then evaluate some more” strategy here.

The forces in Benghazi may only have a few days left.

Yes Sir, the Secretary hopes this problem will be off your desk by Friday.

So don’t we need to act now? What about a no-fly zone.

Secretary Gates is strongly in favour of a no-fly zone, Mr President. He says all talk of intervention must be shot down immediately. He advises we do all we can to assist the rebels short of actually helping them.

I have spoken out many times on the need for Gaddafi to go.

Yes Mr President, Secretary Gates has long felt that your words can speak louder than our actions. He added that should you wish to make an inspiring speech on the matter, he’d very much like to be there.

Obama: What are the risks of intervening in Libya?

The risk is that we face another Iraq where we are dragged into a foreign war from which we cannot extricate ourselves. What’s more, there’s also strong evidence that democrats would not support it.

Really, which democrats?

The ones in New Hampshire, Sir. There is also the issue of double standards Mr President. Can we be seen to support rebels in one place while acquiescing in their suppression somewhere else.

We must back hope against fear; fright against might; the oppressed against the oppressors.

Is that everywhere, Sir, or on a case by case basis?

Which case did you have in mind?

Libya.

Yes.

Bahrain?

I see your point.

As you know Mr President, the Saudis have already gone in to quell the protests in Bahrain. They will not let the Crown Prince fall.

That doesn’t sound good. What influence can we bring to bear?

We’ve told the Saudis to use restraint, Sir.

What does that mean?

They’ll try not to kill anyone on camera and restrict brutal crackdowns to the hours of darkness.

That seems a measured approach. We must be careful about the signal we send to our ruling friends and allies in the region. They need to know we will not desert them in their hours of need; that America is a true and loyal friend. They need to know that we will not cut and run at the first whiff of trouble.

No Sir.

We want them to know that we only cut and run when trouble hits at least its second or third whiff.

Yes Mr President.

OK, now what am I going to do about the Europeans. David Cameron is leaving lots of messages with my secretary. I’ll have to get back to him sooner or later.

The Brits are pressing for a no-fly zone over Libya.

That’s pretty easy to do when you’ve abolished the Royal Air Force What’s he planning to police it with, a British Airways 737? Thank you for joining us on this routine patrol; we will be circling Benghazi for a few hours. Insurgents are invited to help themselves to snacks and drinks from our trolleys.

The French are also demanding actual intervention, Mr President.

We’re being out-hawked by the French?

We think it’s empty rhetoric, Sir.

I’m being outgunned on rhetoric?

The (Fed) King's Speech

Lionel Logue: [as George "Berty" is lighting up a cigarette] Please don't do that.
King George VI: I'm sorry?
Lionel Logue: I believe sucking smoke into your lungs will kill you.
King George VI: My physicians say it relaxes the throat.
Lionel Logue: They're idiots.
King George VI: They've all been knighted.
Lionel Logue: Makes it official then.

“We have seen increasing evidence that a self sustaining recovery in consumer and business spending may be taking hold.”
Fed Chairman Ben Bernanke
Congressional testimony, March 2011

There are two major issues equity investors are currently struggling with. The first is the obvious one: the price of oil. The second is one that I raised months ago at each and every Market Forecast event (10 of them) that I conducted throughout the US: will the US economy reach what economists call “escape velocity” and achieve a sustainable, private sector-led economic expansion WITHOUT the aid of government stimuli? Apparently, our esteemed Fed chairman has answered that question. Let’s hope he’s right.

Let’s hope that:

• The US consumer is capable of spending beyond his/her means, a fact that becomes that has been made all the more difficult as middle income wages have stagnated for decades, that the ability to borrow is now limited to non revolving (as in autos) credit versus other sources, such as revolving (credit card) and home equity withdrawals (see Monday’s Consumer Credit report for the latest installment of this reality), and that the need to continue to repair their balance sheet (deleverage, a/k/a save more, spend less) is combined with the need to prepare for a world of reduced government support (cuts to Social Security and Medicare, for example) looms on the horizon.
• US based corporations decide it’s time to unleash their nearly $2 trillion cash horde on capex projects in the low growth/high cost US and not in the high growth/low cost emerging markets.
• High growth/low cost emerging market governments allow US based companies in to the detriment of their domestic companies, not to mention their emergent, large, multinational competitors.
• Cut backs at the state and local level don't more than offset a prospective hiring and wage increase binge by US companies.
• The US dollar doesn’t crater to new all-time lows thereby driving up longer-term interest rates.
• The unrest and turmoil in North Africa doesn’t leap frog over the Suez Canal into the oil rich, Western friendly despotic kingdoms of the Middle East thereby driving oil prices to record levels.
• The structure of the markets doesn’t produce a financial crisis courtesy some financially engineered Frankenstein ("It's alive!") product, service, or process that few truly understand.

This partial list of concerns is the tip of the iceberg. The full list is a long one. But that’s what bull markets driven by tons of liquidity and constructive earnings results* are supposed to look past. Or, so it's said.

Investment Strategy Implications

Stock market dogma states that a bull market climbs a wall of worry. However, when that wall has lots of grease on it and given the interconnected, interdependent, rapid transmission nature of our globalized world, any slip can turn into a self-reinforcing downward tumble in a very short period of time.

Hope is not a strategy but in the end it may be what this bull market largely rests on.

* The one truly bright spot, that may have run its course with its cutting, management and technology efficiency benefits. Is there more blood that can be wrung from the cost cutting efficiency stone?

Note: Many of the above points were expressed yesterday when I appeared on foxbusiness.com. To view the interview on my media blog click here.

Talking Head Time

This morning I had the opportunity to participate in a week ahead market discussion for BNN TV.

To view the segments, click here.