PLAY ME VIOLINS AND FLOWERS

t.man hatter

Greed knows few bounds.

To the surprise of most the first half of 2014 had unexpected leaders like utilities, consumer staples and healthcare. Energy jumped in there especially after the Ukraine and Iraqi situations erupted. But it was hardly what many anticipated when the new year rolled around in January

Lately, there's been the hint of a slight change as more aggressive areas of the market muscle their way to the front. Over the long Fourth weekend CBS News banged out this story ,http://www.cbsnews.com/news/stocks-soar-and-most-americans-just-dont-care, as we head into earnings season and the second half.

Second quarter earnings, according to some, are expected to clock in around 5%, down for sure from an earlier call of nearly 7% when the second quarter started. But expectations are expectations. And for that matter so is disappointment.

Take it for certain that many want this rotation away from the softer more defensive issues to those aggressive bigger boys. It's what's needed to bring the retail mom and poppers back in for another kill. Line the prey up carefully, dangle the reward up front and wait.

The message is clear. The gap between the haves and the have-not crowd has numerous causes, but one of them is because you folks gave up on the system too early. More than 50 percent of Americans, according to one survey, avoid the stock market like most of us try to avoid a 5 o'clock rush hour on a Friday afternoon.

The ones who stayed the course have seen their holdings for the most part more than make up for (and then some) the losses suffered when things went nasty in 2007. If you've ever managed money--and we have and still do--you know how difficult it is to keep people from panicking.

What is almost as difficult is trying to get investors to buy out-of-favor, banged-up stocks or sectors. Several years ago when the Cox-2 inhibitor furor hit the market and Merck, the huge drug firm,was getting sued by nearly every lawyer worthy of the label and many who weren't and still aren't, we ran a survey of our longest standing clients suggesting they sell rolling puts against the stock as it fell, the given part in all the uproar.

The plan was simple. We wanted to accumulate as many shares as we could on the cheap. Risk has its rewards. Our research, though hardly impeccable, told us this too would somehow pass.

This was an old Buffett move he used with Coca Cola several years ago, though Coke wasn't being sued by anyone. We didn't have any inside info that things would go well, but what we did have was years of experience banging around the medical research industry. 

The FDA has two fundamental flaws--efficacy and safety. Both are like timing and direction in the market: You might get one correct, but seldom do you get both. What is suppose to be always safe isn't. And what is supposed to be efficacious often falls short.

And we also had an earlier experience with all those greedy state attorneys generals who sued big tobacco. The odds were better than good that those with some patience would make money. And we and our clients did. Now these things are never guaranteed. And that's what those who beat the have-versus-have-not drum want. It's disguised as equal outcomes, ten shades beyond anything that has to do with equal opportunities.

Anyone today can buy equities; it's not that hard or costly. Any stock market historian, right, left or revisionist, worthy of the monicker will attest to the shakeout in the broker business even before the Internet arrived. Before that it was a transaction-based business where even one side of a trade could cost several hundred dollars.

Things don't change over night, but before long discount brokers were riding herd and financial news exploded on the major airways overtaking what for many years was the bailiwick of public television. Few cared about it and even fewer watched. Financial media from newsletters to mutual funds to television--much of it directed at the proletariat--proliferated. 

Back in late 1982 when this big, bad bull market finally shook off the cobwebs of the deep, painful 1973-74 bear market, there were fewer than 400 mutual funds. Check out the number now if you can count that high without a calculator

Some of our clients still own Merck and have collected some nice dividends over the time, notwithstanding the upside. Now let's make this clear. This is not one of those pat-yourself on the back or hey-look-at-us things. Not every move in the market goes your way. Plenty don't work out.

And some day when there's more time--but we doubt if there will ever be enough time--we'll discuss a few that went the way of the noted "The best-laid schemes o' mice an' men." It happens.

Whether you put any stock in studies, over the years numerous ones have shown that fear is a much greater motivator than greed. In the case of the mom and poppers it's the fear of  missing out. The higher this market gets, the more Wall Street, MSM, Yellen and friends will roll out the violins and flowers.

AROUND THE WEB

 Don't See Any Bond Buying By ECB
http://www.reuters.com/article/2014/07/05/us-ecb-lautenschlaeger-idUSKBN0FA0AS20140705

Commodities Uncoupled
http://www.bloomberg.com/news/2014-07-03/commodities-obsolete-in-models-yielding-to-fed-ecb.html

 CO2 Emissions
 http://wattsupwiththat.com/2014/07/04/message-to-the-president-data-shows-co2-reduction-is-futile/#more-112527

Iraqi Army Retakes Saddam H's Home Town
http://www.businessinsider.com/the-iraqi-army-just-retook-saddam-husseins-birthplace--a-huge-symbolic-and-tactical-victory-2014-7

 Mind And Mushrooms
http://www.reuters.com/article/2014/07/03/us-health-magicmushrooms-idUSKBN0F80YB20140703

Higher Wage New Jobs
http://blogs.marketwatch.com/capitolreport/2014/07/03/more-than-half-of-2014s-new-jobs-pay-higher-than-average-wage/

JP Morgan Moves Up IR Forecast
http://www.reuters.com/article/2014/07/03/us-jpmorgan-chase-employment-idUSKBN0F81LA20140703

A Good Chart To See Going Into 2nd Half
http://static2.businessinsider.com/image/53b4782becad04db0ed8477b-960/c-53.jpg

German Minimum Wage Hike
http://money.cnn.com/2014/07/03/news/economy/minimum-wage-germany/index.html?iid=HP_River

THE BOMB WILL NEVER GO OFF

 
j. eugene jones

A lot of talk is making the rounds today about the Federal Reserve's massive case of lethargy when it comes to inflation and interest rates.

Translation: inflation isn't a problem and interest rates won't be heading higher until the experts say so. The so-called new focus is stable, sustainable growth.

Can someone toss a hell or high water in there? Thank you!

We've heard this from a multitude of gurus. Some have even been shouting it from the electronic mountain tops. That's one of the unspoken prerequisites. And they could turn out to be correct.

But just for the thrill of it, let's take a look at some examples where something went terribly wrong. And then you, too, might agree: There is real danger in following the experts.  

 "Whatever happens the U.S Navy is not going to be caught napping," Frank Knox, December 4,1941, three days before Pearl Harbor.

There is no reason for any individual to have a computer in their home. Kenneth Olsen, president and founder of Digital Equipment Corp., 1977.


“640k memory ought to be enough for anyone.” Bill Gates 1981.

“X-rays will prove to be a hoax.” Lord Kelvin, President of the Royal Society 1895.

That the automobile has practically reached the limit of its development is suggested by the fact that during the past year no improvements of a radical nature have been introduced.
                                                         Scientific American, Jan. 2, 1909.


“Who the hell wants to hear actors talk?” Harry Warner (Warner Bros.) 1927.

“While theoretically and technically television may be feasible, commercially and financially I consider it an impossibility.” Lee Deforest, the inventor of the vacuum tube/electric value.

“I think there is a world market for about five computers.” Thomas Watson, chairman IBM, 1943.

JFK, after his Bay of pig disaster in Cuba, moaned that all his life he knew not to believe the experts, so what the hell was he thinking.  There are plenty of more recent examples where the so-called experts proved wrong.

There's no chance that the iPhone is going to get any significant market share. Steve Ballmer, USA Today, April 30, 2007.

And lastly, here is one of our favorites.

 “This is the biggest fool thing we have ever done. The bomb will never go off, and I speak as an expert in explosive.” Admiral William D. Leahy on the atomic bomb, 1945.

Now to be fair people associated with Gates and Watson claim neither made those assertions. But there's more than enough evidence that even without those two going far back in history right up to today the predicting record of so-called experts is fragile at best and pathetic at worst. 

HAPPY FOURTH

If you ever pretended to be a journalist--and mostly that's all we have today, pretenders--you may have gotten lucky and crossed paths with the works of HL Mencken.

                                                           

Warren Buffett might be known as the "Scold of Omaha," but that's really a badly repeated joke. Known as the "Sage of Baltimore," Mencken was, like all humans, flecked and flawed. An essayist, journalist, editor and, perhaps most of all, critic of American life and culture, Henry Louis Mencken for all his shortcomings got many things correct. And one of them on this Fourth of July most memorable is the statement quoted below.

From Plato to Mencken and way beyond, the tentacles of centralized government get ever longer in their assault on human dignity and liberty.

HL Mencken warned us about the spread of government and that slow slipping away of liberty when he said "The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary." For that matter Plato was probably the first to warned us about governments inevitable infringement of the rights of the people telling us so very long ago "When the tyrant has disposed of foreign enemies by conquest or treaty and there is nothing to fear from them then he is always stirring up some wary or other in order that the people may require a leader." I worry that the political parties have done such a fantastic job of spreading government s reach into our daily lives by sowing dogmatic discord throughout the populace. The straights hate the gays, the blacks don't trust the whites, the Northerner dislikes those in the south, the farmer hates the city dweller. We turn gay rights and family values into war cries and march off under our banner to demand our rights and more importantly privileges. The two parties rally the folks around their causes and drive a deep divide into the populace all the while strengthening their death grip on the seat of power and the public purse.

--dailyspeculations.com

WEAK OIL

Oil and safe-haven favorite gold were also under pressure as the unrest in Iraq and between Ukraine in Russia - supportive factors for both in recent weeks - remained in a lull.

The Iraqi army retook Saddam Hussein's home village overnight, while former Iraqi parliament speaker Osama al-Nujaifi said he would not run for another term, a move that should make it easier for the Shi'ite parties to replace Prime Minister Nuri al-Maliki with someone more widely accepted.

Russian President Vladimir Putin also called for better relations with the United States on Friday in a congratulatory message to President Barack Obama marking U.S. Independence Day.

Brent crude dipped back below $111 a barrel and was set to post its biggest weekly loss since early January. U.S. oil futures were down for a seventh straight and heading for their longest such run since 2009. [O/R]

"Supply fears are easing somewhat, but Iraq is setting a high floor on prices," said Victor Shum, vice-president of energy consultancy IHS Energy Insight.

--Reuters 7/4/14

Yielding 3.4%, the 15 Dow utilities disbursed a total of $4.96, up about 2% from $4.87 a year earlier. NiSource (NI), Southern Co. (SO), and Williams Cos. (WMB) raised their quarterlies. NiSource has an August pay date, while Williams announced a second boost for sometime in the third quarter.

Duke Energy (DUK) on Tuesday started the third-quarter dividend ball rolling for the Dow utilities with a boost in its quarterly to 79.5 cents a common share from 78 cents, for a 4.4% yield. Duke has paid dividends without interruption since 1926, and this is its seventh yearly increase in a row and heading for their longest such run since 2009. [O/R]
 --Barron's 7/3/14

Energy sectors currently under pressure from O's anticarbon policies could be in for relief, the report speculates. The Keystone Pipeline would be built, benefiting some refineries along the Gulf Coast, including those of Valero (VLO) and Phillips 66 (PSX) that can process lower-grade Canadian crude. Republicans also would remove restrictions on liquefied-natural-gas exports, which would lift prices. That, in turn, would boost coal demand, benefiting the Market Vectors Coal exchange-traded fund (KOL) and companies such as Arch Coal (ACI) and Peabody Energy (BTU).

Of course, it's still a long way until November. Never underestimate Republicans' ability to blow an election, as they did in both 2006 and 2010.
--Barron's  7/3/14

One last peek at the first half.

Asset Percent gain                                                               

Gold 9 percent

S&P 500 6 percent

MSCI World 4 percent

Commodity ETF 4 percent

Total bond ETF 2 percent
--MarketWatch 7/3-14

INTERESTING CHARTS

The charts below came from various sites: Business Insider, The Automatic Earth and Zero Hedge. You can as they say, read between the lines and draw your own conclusions. The first is a proxy for what unbridled money printing will do. The other two have to do with jobs, full and part-time, participation rates and the bogus numbers fed to the MSM by you know who. 

LIQUIDITY SPEAKS



Anyone who even remotely fiddles around with the labor market knows that part-time job creation far outstrips full time ones. They also know that employers are extremely selective, often requiring far more stringent qualifications for even entry jobs than in the past, putting an unannotated damper on job creations that never finds its way in the official numbers.




Participation Rate Hits 35 Year Low.

OUR VIEW

 

The news is out.

The winner of the bitcoin auction is a single person, a billionaire, the same Silicon Valley billionaire who mercifully wants to break California up into six states. A consummation for those who live there devoutly to be seen.

What ever tiny part up north is left the current governor and the legislature can reside, walled off to do their damage on a microscopic scale. A Western block replica of the Berlin Wall, this time keeping the ugly, bad and horrible not the good inside.

The billionaire is Tim Draper, founder of a Silicon Valley venture capital fund who apparently scooped up the $18 million in coins the government had confiscated. Supporters of the virtual currency feel it could become a viable option to fiat currencies, the kind governments world-wide continue devaluing to keep their leaky, bureaucratic-overloaded, debt-laden vessels afloat.

Draper was quoted as saying: "Bitcoin frees people from trying to operate in a modern market economy with weak currencies. Of course, no one is totally secure in holding their own country's currency. We want to enable people to hold and trade bitcoin to secure themselves against weakening currencies."

Draper is a much welcome advocate of free markets in an age of ever encroaching government regulations, spying and interference, a beacon of bright light against the darkness of the Washington-centered octopus. 

He is also the third generation in his family to make his mark in start-up investing, the real American dream, that the Big O is constantly trying to shackle.  

That's our view. We hope you know yours.

GET YOUR FACTS FIRST

GET YOUR FACTS HERE

Back in the day when we used to fool around with some serious medicine, a prominent colleague with an Ivy League pedigree would begin nearly every one of his responses with: "My bias is....."

Based on today's jobs report the market looks more and more bipolar with part of it egged on by growing confidence in the recovery and the other laden with fear about the likelihood of rising interest rates.

New highs in the indexes are becoming almost daily happenings but overall on the year these markers aren't up much.

Call it yin and yang, economic push-pull, financial schizophrenia or whatever you like. But don't it call boring. It's a decent bet something's on the brink. Honeymoons and Goldilocks markets don't last. If they did it would be a fundamental violation of human nature.

Like central banks, we humans usually find a way to screw things up. It kind of comes with the territory. Some might define this skill as bias. Most of the action before long three-day holidays is protective and tame.

The big July holiday is a doorstop between the first half and the last. A brief respite period to either cheer for more of the same or pray for change, depending on one's bias. Will this turn into a picker's market or one just over-inflated looking for a way station to deflate?

As always your guess is about as good as the next guru's. Just try to keep your bias reasonable, if such a thing exists. As Mark Twain once put it: "Get your facts first, and then you can distort them as much as you please."

COLLAPSED

Just for the mental exercise let's play the dot connecting game.

There are three of them in this round. The first is easy to understand because it has the term easy in it as in easy money. 

The other two can be described in a single word--collapse. Both risk premium and volatility, like a good magician, pulled their own Houdini, disappearing a while back without a trace.

And it's the without a trace that troubles all those who get mislabeled by the bulls and MSM as being bears.

Caution is obviously a word these folks have difficulty with since they try to use the old black and white parameter, if you're not with them you must be a bear. These are easy, loose terms to toss around, one of the hallmarks of modern day gurus and the shallow MSM.

Stock-trading volume in June hit its lowest level for the month in eight years, according to the Wall Street Journal, not a good sign that individual investors are rushing to call their brokers. That's a drop of 18% over last June when the tapering news bulled it's way into the headlines.

Though June's volume did exceed that in May, discount brokers, a favorite of mom and poppers, according to reports, are expecting a decline in trading of 20% or more leading to a decline "in daily average revenue trades for the second three months of the year."

We're not suggesting it, but some might view this as another dot that's collapsed.

THE BOOKIE BET

With the upcoming July 4th holiday approaching and the stock market being closed, next Monday will really be the start of the second half of 2014.

We all pretty much know what happened during this year's first half, so an appropriate question now might be: What's up for the second half?

The realistic short answer is nobody knows for sure. But many are expecting more bumpiness, a pretty safe call it seems to us, given what's gone before it. Among this group you'll hear such hedged terms as "stretched," "not cheap" or "fair valued" to describe valuations.

Much of the concern centers on the end of QE and when investor attention shifts to the possibility of rising interest rates. Some would suggest the reality of rising rates. But these two suspects just might be the most anticipated events since the turn of the century and the predicted Y2K melt down that never melted down.

Granted there are many more factors involved now, more dreariness seemingly afloat around the globe, not to forget fears about rising inflation that many seem inclined to taking a head-buried-somewhere-the-sun-don't shine approach to.

We'll leave out the deflation worry mongers for now because they've been the darlings of MSM for some time. Perhaps a more accurate term would be uncertainty. But if past is any kind of prologue to the future, stretched valuations can remain stretched for a while as in longer than most think.

In our view, however, many of the assumptions about those valuations have a built-in fallacy. That valuations must always reach previous bubble or, to quote a term making the rounds today, outrageous proportions for something ugly to occur.

That's brings up another interesting question: Just what is ugliness? The kinder, gentler response is the absence of beauty. Most asset classes from bonds to gold to stocks have been up during the first half, not a normal thing in markets. It happens about every once in the twelfth of never.

As any bookie worth his bets will suggest the odds against that continuing are ones he just might want to discuss with you.

NOT SO CHEAP TRANSFER

 

 If you've ever rode on any public transit system you're most likely familiar with transfers.

Transfers usually have a slight extra charge for allowing you to connect with another part of the transit system to get to your destination. It's simple concept.

A good part of risk management is about transfers. For a fee you can buy an instrument that allows you to transfer that risk to someone else. Most people know them as insurance policies but there are many other forms.

If you buy a home and have a mortgage, the lender usually mandates what's called a homeowner's policy to protect you and the lender from something both presumably don't what to happen, unexpected damage to the property.

It's really just a put option. It has a beginning date and an ending date, cost a certain amount and the closer it gets to expiration the less it's worth if you want to redeem it. In the world of option trading it's known as a decaying asset, much like you and me.

The point is the only way that option can go up in value is if something neither you nor the lender wants to happen. Then it becomes worth a lot more than the funds you most likely begrudgingly coughed up to own it.

In the world of high finance there are all kinds of options, many with fancy names like swaps, Cocos, CLOs, etc., not just the ones that get traded daily on the option exchanges. And the denizens of Wall Street and investment banking are never short on ideas about how to create new ones.

What all these fancy items share is the principle of transfer. Hypothetically, they symbolize something physical behind each transaction like a piece of paper or so many shares of a stock. In the commodities world you could be forced to take physical possession.

Imagine the third Friday of some distant month they deliver two tons of fresh elephant manure to your door. It's a huge, smelly risk 

And that's just about where we are now with the Federal Reserve. Having taken most of the risk off their long-time friends, the big banks, the Fed with their crazy QE game and low interest rates have transferred that risk to the global markets.

In plain English, you and me and all those yield starved folks including institutions like asset managers and pension funds who have been forced out onto the same limb seeking some income oxygen. If you think about junk bonds here, you'll recall that the Fed prohibited the big boys from supplying their usual liquidity for corporate bonds.

It was a regulatory form of a slap on the big boys' wrists, a conciliatory signal to the masses that "We got this covered!" According to reports, the bond inventory that these big boys now hold is at a record low, hovering somewhere around $50 billion or a miniscule 0.5% of the entire market.

Transfers have their place and their function. Unlike those transfers one gets on the transit system, however, this is one that in the end won't be cheap.