LOGICAL ILLOGIC

The argument will never be settled.

But just for the drill we'll leap in to see how comfortable the water is.



Pundits of all strips, firms, levels of money under management and data banks have different definitions of over-valued, richly valued or whatever is the latest term making the economic or talk-show rounds. Shakespeare might of said: "To error is human, to forgive divine," but neither of those apply to anyone in the securities business

This is hardly a logical business even though many believe in logic. One could easily make a cogent case that any business that involves humans isn't logical. Can't be. Think politicians and bureaucrats here.

In 1930 a guy named Fred C. Kelley wrote a pretty good book, Why You Win or Lose, about the stock market. In Chapter Five Kelley talked about where being illogical is wisdom. Now as a quick aside, if Kelley were around today we might want to debate his statement when it comes to politician and bureaucrats, but when it comes to investors and the market, we think he's correct.

The bond market this year with all it's yield-chasing investors as was the first half run-up in energy pretty illogical. Toss in utilities and consumer staples stocks leading for the first half and you're getting warmer. And don't forget all that easy money central banks, like in Japan, hoped commercial banks would use to make consumer and business loans.

What happened with that?

Kelley states that speculation gets a bad rap because it is assumed that speculators make their money absent sweat and tears. But everyone is a speculator, Kelley argues, even "every conservative, successful manufacturer is a speculator. He has to be. If he doesn't buy raw materials when they are cheap--at least part of the time, he'll go bankrupt."

Kelley goes on "even buying a home is speculative." How many folks discovered that one during the last Fed-incited real estate bubble?

The bottom line here is you have to decide for yourself--something global leaders hope you'll never, ever get around to--what is rational and what is irrational.

It's a big task but don't let anyone get in your way.
c.c. chance

http://www.marketwatch.com/story/us-stocks-will-be-very-disappointing-for-10-years-2014-07-11

BONDS FOR SALE

t. man hatter

A headline on a story in the Financial Times today, "Corporate bond sales at five-year high," discusses how corporations worldwide, exploiting low rates and investor demand, flocked to the market in the first half of this year, making it the highest sales in the first half of a year since 2009.

The list of sellers reads like a who's-who of corporate royalty: Verizon, Walmart, Cisco and big banks like Wells Fargo, Bank of America and BNP Paribas. One can understand BNP's coming to market. They obviously want to recoup some of that big fine money French politicians are so upset about.

So far $1.8 trillion has been sold with financial firms doing the bulk of the selling, $1 trillion, while non-financial firms sold roughly $836 billion, according to Standard and Poor, the big bond rating agency. 

Most of the bonds had investment-grade ratings, but junk borrowers managed to squeeze in $290 billion. Europe got in its share, issuing around $800 billion, according to the report. 

Corporate default rates remain low, 1.8 percent, for the first half of 2014, giving the yield-starved a further boost of confidence or, as some might say, complacency. So far total returns for dollar denominated bonds, 5.6% to date, for long-dated bonds, those maturing in 10 or more years, add to their attractiveness

By comparison junk bonds have returned 5.5% and U.S. Treasuries 2.5%, again pushing yield-conscious but premium-risk-deaf investors further into what could turned out to be really ugly terrain when interest rates rise.

The huge much-disdained and much-shopped giant, Walmart, floated a $1 billion, 30-year puppy. This was Walmart's first such deal in several years. Though we don't have the coupon rate, one can only assume, given current rates, that in 20 years its holders will most unlikely be unable purchase even the firm's cheapest trinket with the annual interest payment.    

IRRESPONSIBLE?

                                            t. man hatter 
We have to confess we might need a little help here.

But let's see if we can just get this right. Fed chair Janet Yellen from what we've been able to read admitted that her bank's policies have created two things--low volatility and paper asset price appreciation.

We'd say stocks here, but for this exercise we want to try to think in the foggy, stilted language economists are noted for. Those two things in themselves are not too puzzling. What's puzzling is, to use an economic term, the lack of correlation.

Simply put, Fed policies caused the run-up in stock prices, but to hear Ms Yellen those higher stock prices --some would suggest bloated prices--are not the Fed's concern. Seems like a disconnect somewhere here to us.

Now we don't know about you, but if you've ever practiced any kind of serious medicine, what they used to teach in the old days is never treat a lab number. That's a metaphor for: Never make your diagnosis in the lab. In short, treat the patient not the data.

But when one is schooled his or her whole life to worship at the Alter of Data, it's probably unrealistic to expect anything else.

From what we can gather, it's Ms Yellen's position that the lab number here, employment, a proxy for steady, continuous growth, is the more important notwithstanding the role she and her merry central banking friends played in creating what many believe is a paper asset bubble.

Sounds like a good gig if one can get it. We're not responsible. Maybe that should be stated a bit differently. You're not responsible.You're irresponsible.

AROUND THE WEB

 Fiddling Versus Statue Building
http://www.washingtonpost.com/blogs/worldviews/wp/2014/07/10/indias-new-budget-includes-33-million-to-build-the-worlds-tallest-statue-not-everyone-is-happy/

 Crude Oil
http://www.seeitmarket.com/crude-oil-back-on-investors-radars-13671/

Looking For A Reason?
http://www.bloomberg.com/news/2014-07-10/leuthold-selling-stocks-on-concern-s-p-500-may-tumble-8-.html

Where Did The US Dollar Go?
http://www.peakprosperity.com/podcast/86044/mike-maloney-dollar-we-know-will-gone-within-6-years

One More Sign?
http://www.marketwatch.com/story/another-sign-the-bull-market-is-nearing-its-end-2014-07-09?dist=lbeforebell

Market Closes Down For Day
http://worldpress.org/link.cfm?http://feeds.reuters.com/~r/reuters/businessNews/~3/6Ezes-xH2-s/story01.htm

Food Fight Or Political Jockeying?
http://www.csmonitor.com/USA/Education/2014/0710/Are-nutrition-standards-for-school-meals-too-tough-Congress-considers-tweaks

Just How Crazy Are The French?
http://globaleconomicanalysis.blogspot.com/

Portugal May Be Joining Argentina?
http://www.cnbc.com/id/101826369

ONCE UPON SOME BOND OFFERINGS

 
 t. man hatter
Once upon a time there were several peripheral countries in the European Union that witnessed some awful days when their economic Humpty Dumpty lost its balance and crashed.

But things got better, so investors were told, as interest rates dropped and from Greece to Ireland to Portugal to Spain any more economic help from their big brothers in Frankfurt and Brussels wasn't needed. To prove their case a couple of them came to the international market after a long absence and sold sovereign bonds.

The ratings on these bonds were like their yield, lower than a duck's belly after lunch. But no matter. Hungry is as hungry does. And investors lined up like the yield-starved lemmings they are, thanks in part to a global group of trusty central bank Svengali.

The end of the tale remains to be unraveled. But some might suggest this was a clear violation of one of the free market's lessor known rubrics, the Cockroach Theory: If you see one, there's bound to be more. 

And that looks like the story today with the big Portugal bank, Banco Espirito Santo, and some apparently irregularities or what is better played down in the crime world as suspect of interest.

All this sparked concerns over another part of the conglomerate – and Portugal's leading bank -- Banco Espirito Santo, with investors speculating that it could be ready to default on its debt. Shares in Banco Espirito Santo were down 19 percent before being suspended by market regulators and Espirito Santo Financial Group dropped 8 percent before also being suspended. 

These concerns rolled over into the wider European equity markets, triggering a sell-off across the rest of Europe. In the debt markets, Banco Espirito Santo bonds continue to underperform, with the knock-on effect on Portuguese government bonds, with the yield on its 10-year sovereign debt moving higher throughout Thursday. Still shuddering at the memory of the euro zone financial crisis, investors sent the yields for other euro zone "peripheral" countries – Greece, Italy and Spain -- higher during the morning session.

To borrow the words of a popular song some time back: "Things got bad, things got worse and I  guess you know the tune, stuck in Lodi again."

Who might get stuck here is one of those who knows. 

Worse case: Though some pundits may claim otherwise, Portugal may be joining Argentina.

http://www.cnbc.com/id/

OIL UPDATE

 

                                           t. man hatter
                                         
A while back we wrote an update on energy, specifically oil, and we suggested there would be a pullback creating opportunity.

At the time oil was trading near its recent highs. Given all the global turmoil--Iraq, Gaza, Ukraine, Nigeria, the South China Sea, to name a few, one would expect the opposite. True, the Iraqi situation seems to have cooled a bit as oil from there continues to flow while the Ukraine appears set for a showdown and Libya cranked up it pumps again.

None of this means the globe's bad actors have exited the scene. Europe will have a tough time weening itself off of Russian energy. And Mr. Putin's still trying to work his black magic in several other former Soviet possessions. 

In today's Around The Web we posted a story about gas prices in 11 U.S. states falling as demand seems to be down so far this driving season. Brent crude (Aug. 14) hit its 52-week high of $115.18 on 6/19/14. In today's early trading it hit a low of $107.76.

Here's a quote today from Reuters. 
Brent inches down toward $108 on weak U.S. gasoline demand

Brent crude had fallen 20 cents to near $108 a barrel, down for a ninth straight session and matching a similar losing run in May 2010. U.S. crude is down for a tenth consecutive session under $102 a barrel, 60 cents below Wednesday's close. The front-month price is on track to post its longest stretch of losses since July 1984.

A steeper fall in West Texas Intermediate has widened its spread with Brent to more than $6 a barrel after touching the narrowest in nearly a month on Wednesday.

We wrote then and it's still our story now and we're sticking with it. You want to own oil. Keep some powder dry for big pullback and choose wisely.
 
Here's another point of view about the death of oil. We have argued for some time there are no heroes without villains. Part of the rancor about oil is about vilifying it by blaming it for creating more damage than it actually does.

This is a tried and true tactic globalists and the climate change crowd roll out every chance they get. Hydrocarbons are the dirty word of the decade.
http://www.thedailybell.com/news-analysis/35467/Dont-Fall-for-the-Energy-Hype/

Mr. Warren Buffet is pretty tight with the Obama and Hilary clans. Last time we looked he was also pretty rich. So it appears the "Omaha Scold" is quite happy making lots of money transporting the nasty--and now apparently explosive stuff--out of North Dakota.

FOOTNOTE

                                      t. man hatter

In case you haven't been paying attention metals have started to stir. Here's a quote from today's Barron's.

When the Dow Jones Industrial Average stalled in June just shy of the exalted 17,000 level, something very interesting changed beneath the surface. It was not the sexy momentum stocks but rather the opposite -- industrial metals -- that suddenly started to outperform the market. And the charts point to still higher prices ahead.

This sector comprises commodity producers at the very bottom of the economic food chain, including copper miners and steel producers. It is easy to overlook them in a Google-dominated market, so it took a new high last week in miner Freeport-McMoRan Copper & Gold (ticker: FCX ) to put these stocks on anyone's front burner.

We wrote about the sector and, in particular, two of these puppies, FCX and NEM, months ago when much of the market talk centered on China's economic weakeness and the global slow down.

Freeport McMoran had some trouble in Indonesia which now looks as if its resolved. Newmont was earlier in consolidation talks with Barrick Gold (ABX), but both sides couldn't get it done. Now it appears as if those talks may start up again.

Make no mistake the pessimistic crew is still around. Jabbering about these two being two medium-sized bad companies will beget one bigger really bad company if they unite is the stuff we like to see.

Some folks look for happiness. We look for pessimism. Pessimism usually precedes hope as hope does happiness. So we like our chances, if for no other reason than they're ours.

Copper so the story  goes was first mined around 10 centuries ago. Its uses are numerous, construction and electrical wiring, to mention a few. It's the metal many refer to because of it widespread uses as the Ph'd metal.

Freeport just hit a 52-week high $39.30, well off from its high in early 2011 around $60. Analysts at HSBC recently initiated coverage with an overweight rating and a target price of $44. The stock is up over 40% in the last year while the S&P 500 gained close to 19%.

Now we don't put much stock in analyst reports, buy, sell or hold. Hold is actually a sell from these boys and girls. But biases being what they are, we do like our own research.

AROUND THE WEB

Where Are The Ladies?
http://blogs.wsj.com/brussels/2014/07/10/where-junckers-ladies-at/?mod=wsj_nview_latestright

Metals Up
http://online.barrons.com/news/articles/

Gas Prices Down
http://247wallst.com/author/247wallst/

More Spying Uproar
http://www.csmonitor.com/World/Europe/2014/0709/Another-spy-Germany-fumes-as-US-espionage-scandal-worsens.-video

Chinese Cash Buying California Real Estate
http://globaleconomicanalysis.blogspot.com/2014/07/22-billion-in-california-homes-sold-to.html

Fed Independence Questioned
http://www.reuters.com/article/2014/07/10/us-usa-fed-politics-idUSKBN0FF0C420140710

More Sanctions
http://m.ibtimes.com/eu-extends-sanctions-against-11-more-ukrainian-separatists-russians-1624086

MOM, MARKETS AND FLASHLIGHTS

t. man hatter

My mother was an RN. So it was pretty hard to wake up on a rainy, wintry school morning and feign illness. If you said you felt warm, had a fever, she'd take your temperature. A sore throat, she would get a flashlight and check.

Who knew what she knew or what she saw when she looked in there? It was a lot like one of those days that starts out cloudy and keeps getting clearer and clearer. To fool mom I was going to have to up my game--a lot. And believe me my brother and I tried.

Think of the market as mom. And don't be fooled by the term fool. The market's been there a long time, doing what markets do. Occasionally a newcomer pulls off a stunner or two. Economists, as they do for nearly everything, have a term for that, outlier.

Most of us are hardly outliers. Now don't get your undies all twisted in a bunch. That's neither bad nor good. Just is. Most of us are basic block-and-tacklers, to use a football idiom. We get better with repetition if we keep at it. It's a basic rule of life: Whatever you focus on expands.

A lot of people probably see Warren Buffett as a genius and that doesn't disturb me. Another way to see it, however, is he's a brilliant block and tackler, a real Mr. Fundamentals. He's put in the time, he's consistent and the chances are way better than good he's gotten better at it.

Several years ago I shared an office with an options trader, a pretty good one. One gray November morning when things were particularly slow, he told about his early market experiences. When he got out of college, clutching his freshly, new-minted business degree, he started trading options, something he'd only dabbled at but enjoyed a modicum of success in school.

Curious is as curious does, so I asked him how it went.

He told me terrible at first, just awful, as I recall. So I offered the usual assumption, laced with a trace of empathy such occasions often require:

"Had some big losers, huh.?"

"Oh, no !" he said, laughing. "They were all big winners. My first 8 or 10 trades went like Swiss clockwork. I thought I was a genius, knew everything.  And then...."

It's the "and thens" we all need to be mindful of that usually come without a warning, like mom with her flashlight.

ADDENDUM

Here's an addendum to our earlier post.

It's from davidstockmanscontracorner.com and it highlights what's wrong with the Fed, too much not more micro management, a clear interference with market forces that will not allow, if left untrammeled, for bureaucrats to repair broken furniture whether it belongs to Wall Street or GM.

That's was free markets do.

http://davidstockmanscontracorner.com/the-complete-idiocy-of-professor-john-taylor-statist-economics-in-conservative-garb