BLOWING SMOKE

Only fools and knaves get surprised when the road of life gets a little bumpy.
                                                  RL Ellison

Blowing smoke has been around for a while.

Here's proof positive. And as we keep repeating, there's nothing new under the sun. It's just packaged a little different as the excerpt below from Burt Prelutsy's recent article, Guns & Goons, at BurtPrelutsky.com recounts about the powers that be in D.C.

Who said all the good rappers are in Hollywood?

Finally, someone else sent me a photo of a strange-looking instrument and asked me if I could identify it. I couldn’t. It turned out to be a combination of a bellows and a tube that was widely used in the 18th century. The purpose of the contraption was to help in the resuscitation of drowning victims by forcing tobacco fumes into their rectums. 

The warmth of the smoke was thought to promote respiration, but doubts about the smoke enemas ultimately led to the popular phrase “blow smoke up someone’s ass.”

Although it fell out of favor two centuries ago, it has not only been rediscovered by the Democrats in Washington, D.C., but Pelosi and Reid are insisting that it be mass-produced as an essential part of ObamaCare.

Editor's Note: Though we weren't yet able to verify it, rumors abound that instrument actually originated on Wall Street at an investment bankers convention.

LET THE CUTTING BEGIN

There is an old saying in medicine whenever one is dealing with an open wound or a contaminated laceration: "The solution to pollution is dilution."

In some cases the more dilution the better. And when it comes to pollution, you can forget about carbon dioxide and ozone layers. What we're talking about here is government pollution.

From the silly legislation that prevents start-up businesses from starting up to burdensome, complicated tax codes more mysterious than the Da Vinci Code to wasteful government spending that would make every drunken sailor who ever lived blush, it's as obvious as Barney Frank's sexual preference: Too many chits out, too many IOUs, the sum and substance of politics everywhere.

Now before all you epithet-hurlers get worked too tight, Mr. Frank has publicly avowed his preference; that makes it a statement of fact, one of public record. If beauty is in the eye of the beholder, so too must be malice. No malice intended here, just fact.

Irrigating a wound helps remove the unwanted bacteria and debris. The wrong bacteria in the wrong place is just another name for debris. And that's what government waste has become, just so much debilitated, dead debris that will soon include, if something sensible isn't done, the U.S. dollar, DOA. And the answer sure isn't passing out more heroine to the addicted like New York Times columnist and left-wing economist Paul Krugman keeps pimping.

Infections frequently have to be opened and drained to let all the waste and harmful debris out. Krugman's prescription calls for kicking the can further down the road, arguing the US debt problem is relatively small compared to other developed countries.
Krugman and his ilk apparently believe the possibility of septicemia isn't wound specific.

As is sometimes the case with wounds, irrigation often isn't enough. Unwanted waste must be excised. That usually means taking a scalpel and some scissors to cut away the unwanted so the remaining healthy tissue can flourish. That's just about where we are today as a nation.

So forget all that political nonsense about bipartisanship; it never was and never will be. Just send your elected official a scalpel and a pair of scissors.

BE CAREFUL

Be careful what you get use to. Probably no place is that more important than it is with today's stock market.

The trend may be your friend and all that, but complacency often comes with a high price tag. The S&P 500 is up 5.4% so far this year closing at 1502.96 last week, not far from its all-time high of 1565.19 in 2007. Annualized that would produce a market gain over 60%. Ain't going to happen.

Sell in May and go away is a shopworn Wall Street slogan. Could we see a summer sell-off to rival the Summer 2011 one when all the political nonsense about budget deficits and ceiling cliffs is over come June?

Another well-worn Wall Street ditty says markets always climb worry-walls. Maybe so but this market is acting like it doesn't have a single global care, climate change and genetically modified grains notwithstanding. Yet there remains enough possibly serious problems in the wind that could sideswipe the entire dog and pony act.

Start with sequestration. Set to take place in March if Congress can't agree to disagree to agree that many believe will whack about 1% off the hide of GDP and push unemployment higher. One government agency expected to get whacked pretty hard is DoD, the Department of Defense, where an estimated 118,000 jobs will disappear faster than my old girlfriend's affections.

Sequestration is, in case you haven't heard, a politically-contrived term to describe mandated budget cuts to reduce the deficit set to kick in if Congress can't agree to disagree to agree before summer rolls around.

Stimulus packages, like many things in life, arrive in various forms: tax cuts, easier credit, ramped up spending, lower interest rates, to say the least. According to one report, in the last year and a half globally there have been over 300 stimulus packages from various governments. Forget the Yellow Brick Road, follow the stimulus package because there is most likely a stock market profit in there somewhere.

One such package is the Federal Reserve's love affair with the bond market (Yea, we know folks have been talking about this for some time.) that many seem to believe can continue forever. But if the minutes of the last FOMC meeting earlier this month are any indication, forever might not linger more than, give or take, a few bond auctions away. In short, there appears to be some conflict in Federal Reserve Land. Not everyone wants to continue riding the same attraction.

Say it anyway you want, frontwards or backwards or whatever, it means higher interest rates. And don't be too surprised if those higher rates are already in the economic porridge.

TAKE A TIP

The speculator's deadly enemies are ignorance, greed, fear and hope. All the statue books in the world and all the rule books on all the Exchanges of the earth cannot eliminate them from the human animal.
                                               Jesse Livermore

Somebody forgot to tell all the politicians and the social do-good crowd.

Jesse Livermore was one of the all-time great stock market traders amassing several fortunes over his career. He shorted the market before the big 1929 Crash, pocketing nearly $100 million dollars, a sum that equates to roughly $12 billion today.

In 2009 almost a century later another famous Wall Street icon, probably 100 times more famous than Livermore in his day, was asked reflecting on the market's recent doldrums: "Why can't we learn the lesson of the last recession. Look where greed has gotten us."

The Omaha Oracle, Warren Buffett, replied, "Greed is fun for a while. People can't resist it."

Buffett went on to point out what in our opinion was the most important point implied in Livermore's statement, one most people either fail to or refuse to learn about the human species, "...however far human beings have come, we haven't grown up emotionally at all. We remain the same."


Livermore's comment about statue and rule books in our judgment is even more telling. Humans will keep on doing what humans do, regulations and rules notwithstanding; and all the Kings horses and all the King's men aren't going it change it. What they can do, however, unintended or otherwise, is makes things much worse.

We had a spate of high profile athletes recently commit suicide. It's highly unlikely the way they died will tarnish their athletic feats. Nor should it. Jesse Livermore likewise died by his own hand, a fact some might use to try to tarnish his feats. But as Buffett noted much of human kind has yet to emotionally grow up. If you entertain any hope of making serious money in the market take a big tip from two of history's best players.

A LOOK 2013

                                                           
This is, to paraphrase Dickens, the worst of the clueless versus the best of the clued-in time, a time when much money will change hands now that we have four more of the Bamster crowd.

Worse nightmare: taxes rise? Nope! Worst nightmare: taxes go up and deficit stays same or expands. Printing presses world-wide running hard. Japan's debt to GDP 250%, US 170%; highest in history for country: UK 290% in 1815 and again in 1945, British lost its currency status as international trade currency after WW II. US housing market showing some vague life-like signs, much of it coming from higher rents when demand there increased owing to the trashed home-buying market. Demand or lack thereof creates markets, up or down. Housing inventory still high, banks afraid to lend, oil at $85/barrel--cheap. US has one ace in hole--domestic gas and shale oil, but politicians could screw that up. Materials, metals, agriculture all places for money. Water too.

Romney biggest winner in election; he won't have to explain messy next 4 years. Biggest losers the great unwashed masses of the clueless. Rising prices not only way to create inflation, debasing the fiat currency works just as good. It's going on big-time. Bamster loves the word equal, but a Russian immigrant recently told me, equal there means everyone is poor, working hard and have jobs, but top 10% have all the money. Familiar ring. Here it's top 1%. No middle class there, vanishing one here. Divided nations create opportunities. In fact, one could argue when was it ever undivided.

Take look at how dollar debased over last 100 years, the anniversary of Federal Reserve Bank and the IRS, both created in 1913.

We have not had 20% market decline since the bottom in 2008. 20% declines usually occur about every 3.5 years. We've had couple 10 percenters and one 17% in 2011, so after lame duck season ends, political dealing begins. But the market may well tip it's mood before that. Lot of talk/concern right now about fiscal cliff. Market may soon, if not already, factor in that possibility. Most likely scenario non-event short-term.

Here two oil picks to add to, BP and COP. BP just settled spill issue and has 5.3% yield at current price, 40.16, mid-way between 36 and 48 on 52w high-low. Earning 4.95 this year and possibly 5.20 next, trading at 8x earnings. Added kicker also just settled dispute with Russia. Similar story for COP, trading just over 54 with 52w high-low 50-78 range at 9x times earnings yielding 5% earning close to 6 a share.  Average yield on S&P 500 stocks 2% and trading at p/e 14. These are good rainy-day buys in here with recent pullback in energy prices.

With taxes set to go up muni bonds should become more in demand, but higher interest rates when they arrive, and they will, could prove troublesome. Like the line in a long-ago popular song: It's just a matter of time. Could be facing a cap on part of tax-exemption of muni bonds based on one's tax bracket. A Bamster proposal.

Some of the bartering is in and dividends for those earning less than 400k for single folks and 450k for married couples survived at 15% tax rate. Above that the pic gets a bit like the portrait of old Dorian Gray, pretty ugly. Interest income took a hard hit, so investors will react accordingly. The same for capital gains in the higher brackets.

To put it succinctly, the recent deal to avoid a cliff that was better advertised than the upcoming Super Bowl where Beyonce will do the halftime gig will be is just a period between crises. This lull presents major opportunity in the energy sector. Meanwhile, back at the ranch the Obamacare surcharge tax at 3.9% gets added to interest income and that coupled with this administration's latest definition of "rich" spells trouble in so-called paradise. Rich is as rich does.

New US credit downgrading in the wind. And if you like the quirky, unfathomable, see
Oregon where legislators want to tax all those greenies who rushed out and bought a Prius. It's a mileage tax. And don't laugh Washington has one on the books and Nevada is considering. Reason: falling tax revenues at the gas pump. The Washington tax requires electric vehicle owners to pony up an annual flat tax and a mileage added tax is under consideration. So where is Ed Begley, Jr. When you need him?

Investments: buys

Oil ............. yes
Gold/silver...........yes
Energy...........yes
Good quality dividend payers......both here and Europe...yes. General Mills, Diebold, J&J

US Treasuries.......no
Bonds.....no. Munis....yes with care and benefit of clergy.

We want some exposure to large cap European stocks, most likely via either vanguard /fidelity fund. Also commodities via fund. Copper has already started back up. Agriculture, too. One financial we like is HBAN, Huntington Bank, traded in low 20s in 2007 and has chance to return there. Slowly buying more. Trading around book value with small dividend. Made its mistakes, but is now well-run regional with some upside.

Other outside the box good dividend plays are SCCO, Southern Copper, an Arizona based metals that mines more than just copper--lead, molybdenum and zinc with 6.5% yield trading at around 11p/e. Another is CLF with big yield, low payout ratio, trading way off 52 week highs. This is a good return-of-inflation play.

What's In Another QE?

The QEs have had it.

Trusting souls want to believe Bernanke stands at the ready, rescue button in hand. That's an old, old movie.  The monetary wiggle string is mostly all out. Another round of QEs could further spike raw material prices, picking more money from consumer pockets, something rebounding energy costs is already doing.


Economic growth prospects in most developed areas are anemic; shortfalls in corporate earnings and declining retail sales are but a few of the current economic downers facing investors. A case in point, high-end retailer Coach shareholders witnessed a 17%  decline in its stock price recently. Or Tiffany's shares, down nearly 5% since late last month.


On the other side of the retail trade is Walmart. Its shares are up dramatically in just the last two months, trading at 73 and change, just off its 52-week high. Some refer to this as slum retailing as folks pinched for capital downsize their spending seeking more bang for their buck.


And forget about jobs. Most folks have. The prospect of higher taxes beginning next year and fewer incentives to invest sound more and more like a super-sized horse-meat sandwich--unappealing, to put it kindly. Where is Mayor Bloomberg when you need him?  Super-sized soft drinks maybe persona non in high places, but BS as always rides free.


That the trusty Fed stands ready is more whistling past the bone yard.  Bond dealers and some big-time investors are suggesting the US Treasury float short-term paper with negatives yields. That should palliate the worries of fixed-income investors. QEs are DOA, just ask the smart money. 


Markets may climb the proverbial worry-wall from time to time.  But short of defaults and higher inflation, few have discovered the magic formula for cheating the piper.  

Risk-free return versus free-return risk

Well now,Spainish 10-year government bonds are yielding around 6.7%, given a negative or positive news day or two, versus US 10-year government bonds coughing up the prodigious sum of 1.65%. Confusion reigns top draw as to just how the Spainish government will rescue one of its largest banks,Bankia,that has been grabbing much of the negative headlines for a while now. Over in the UK 10-year government bonds are yielding 1.64%,the lowest on record since records have been kept,dating back to 1703. The current yield on 10-year German government Bunds is a paltry 1.37%. This so-called flight to safety,many believe, reflects investor worries about more deflation,but a surprise when all is said and done and government printing presses finally go tilt could be just the opposite of what the safe haven crowd expects.

The Unexpected

Just a short time ago the S&P 500 index closed above 1400, a move it's made several times over the last decade or so. The first time it closed above 1400 was July 9,1999. Looking at a chart, the S&P 500 formed a classic M-shaped top in late April-May before dropping down to its 200-day moving average support area of 1282. Less than a year ago the S&P traded well below its 200-day moving average, making a classic W or inverted-M double bottom at the 1100 level. The end of May just might be signaling a big move below the 200-day moving average. It's for sure no one knows what the upcoming summer will bring investors. Pessimism is high,especially over Euroland. However well-deserved given Europe's ugliness, a rally could be in the offing even if the index breaks below the 1200 level.

OVERDONE

The US Treasury recently unloaded a bunch of 10-year debt with a yield of 1.9%, selling into demand for these anemic 10-year puppies that was the third highest on record. The official inflation rate--assuming anyone out there still believes that--is now actually higher that the 1.9% yield investors are scrambling to get.

This is the old boiling-the-frog method of a slow capital death. It's the just-give-me-back-my-money-and-forget-about-any-returns mantra of the times. Maybe it's time to consider taking the other side of that trade and ramping up for unexpected higher interest rates down the road? Sooner or later overdone gets undone.

What Do I Know?

What I do know is equity risk premiums are near 40 year highs, meaning the premium equity holders require to hold stocks over bonds; many of these stocks are paying decent dividends well above what so-called safer Treasury bonds pay; predictions, as they usually are, for 2012 run the gamut; developed markets including the US are supposed to underwhelm; last year the so-called no-brainer was shorting or avoiding US Treasury bonds. They were expected to go down not up in value, sending yields much higher. Gold enjoying a 10-year run had become every man’s safe haven of choice with a gaggle of radio talk show hosts hawking the yellow stuff.

Though we only have intuitive evidence, second term presidents are usually not as effective. An Obama re-election, if it occurs, will be a concession not a mandate. Plenty of people are fed up with the Obama administration and they are hardly religious, right wing or racist nuts despite what the media portrays. With that said we like big pharmaceuticals and healthcare; we like energy and defense given the turmoil worldwide

The famous, fictional Gordon Gecko pointed out that greed is good and it is. And so, too, is gridlock. The problem is always the same as in whose ox is getting gored. Oprah Winfrey at her height was earning 30 times the annual salary of the highest paid American corporate executive. The top 10 Hollywood celebrities earn a big multiple of what those corporate executives earn and we won’t even mention the highest paid sports figures. See anyone picketing them?  Money can be made off of gridlock and it should be. It’s called a semi-free market. Bernanke with his QE babble has essentially tried to put a put option below the market.

Manufacturing is on a rebound in the US owing in part to China’s high cost of labor and energy. Customer demand is another reason centering on rapid delivery times and quick design changes. Energy prices could be the 2012 market’s Treasury Bonds, going down instead of up. But we give that about a 10% chance and remain long oil and natural gas. Austerity suddenly became the catch word of 2011, especially in the EU. Austerity usually implies another strong word, discipline, but the two could become the proverbial irresistible force versus the immovable object, the worst nightmare for politicians and bureaucrats. It’s mostly just a fiscal form of whistling past the graveyard. Behavior changes never come easy. They almost always require a catastrophic event.

A friend retired after being in medicine for 25 years. He decided he wanted to do something different, like selling since he viewed himself a people person. One day after numerous applications, a few interviews and much waiting he found himself sitting in a huge high riser across the desk from a corporate executive dressed in the obligatory blue suit, white shirt and red tie. Several plaques and an Ivy League MBA degree framed the wall behind the executive.

They sat in silence for a long time while the suit perused my friend’s resume.

“I don’t see anything here, “the suit said, finally breaking the silence, “that says you can sell. What makes you think you can sell our product?”

My friend said he paused for a long second because turnaround is fair play before he responded: “Because for the last 25 years I’ve been selling the hardest product on the planet.”

There was another longer, more awkward silence as the executive pondered my friend’s reply. It was almost as if, my friend recalled, you could see the wheels of his MBA grey matter spinning.

“And what might that be?”

“Trying to get people to change their behavior,” my friend shot back.

The safe bet here is, short of a real collapse; go against behavior changes of any serious magnitude. And that’s what I know.