Market Talk

Yeah, we're gonna continue to sit this one out.

Joe Sixpack still wants nothing to do with the US stock market.

Despite July being the best month for US stocks in a year, retail investors continued to show little regard for equities. The mutual-fund industry’s main trade group says investors during the month pulled more than $11 billion out of funds that invest mainly in US stocks. That’s $3.6 billion more than they pulled out in June, which was a crummy month for stocks.

Meanwhile, the average Joe continued to pour more money into bond funds. Bond funds saw a $30B inflow in July, after taking in $20.6B in June. Fund investors have now plowed more than $185 billion into bond funds so far this year, while removing a net $1.68 billion from stock funds, which include world equity funds. Flows into international equity funds have been strong most of the year.  

Stock funds continue to run lean on cash, with just 3.4% of total net assets in liquid assets, compared with 3.8% in June and 4.2% in July 2009.

Just need a some more unconventional measures to get airborne again.

Not at all surprising that the stock market is rallying after Ben Bernanke outlines actions the Fed can take, so-called “unconventional measures,” in an attempt to prop up a laboring economy. The measures would basically just offer another boost to asset prices.

And dismiss right now the notion that the Fed’s waiting for the outlook “to deteriorate significantly” before it resorts to its “unconventional measures.” We’ve just seen GDP growth drop from 5% to 1.6% in six months — that’s some significant deterioration, in our book, and the central bank has proven to be consistently behind in its assessments of the economy. Prepare forthwith for unconventionality.

Unconventional measures…”to provide further stimulus,” Ben says. Sounds imposing, but it’s not. Not imposing and not really that unconventional. The measures are as follows: buy more Treasurys or other assets, further expand the bank’s balance sheet; jawbone, telling the market the Fed will leave rates at zero for longer than the market currently thinks; or cut interest rates on excess reserves.

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US stocks once again seemed on the precipice, but investors pulled them back from the edge. How far they were pulled back, and how long it lasts, is another question.

DJIA rises 20 to 10060, after falling as much as 103 (to 9937) in the morning. S&P 500 gained 3 to 1055, Nasdaq Comp rose 18 to 2142.

Equities were reeling after two more bad economic reports, on durable goods and new home sales. It’s the second day in a row where equities seemed on the verge of a really big sell-off. Treasurys meanwhile were surging, with the yield on the 10-year falling as low as 2.418%, the lowest point since January 2009.

But the two assets reversed direction in the afternoon. Equities hit session lows late in the morning, and Treasurys started fading after the 1 p.m. auction of five-year notes, which was well subscribed, but didn’t really get anybody very excited (and the yield on the new notes was slightly higher than the yield on the existing notes, meaning Uncle Sam had to pay up a bit to get people to take them, even though the yield was still a record low for an auction.)

That started folks all over apparently getting to thinking that enough was enough, and bonds starting sliding while stocks started rising.

As that gaudy rally from last March to May recedes further into the past, the market is finding new preoccupations. The market’s favorite letter back then was V, as in the V-shaped recovery. But now it’s most dread letter (no pun intended) is D, as in demand, as in deflation, as in deleveraging, as in as in double-dip, as in depression.

That flashy rally got a lot of people thinking the worst was over. It had to be, because the market is a leading indicator, the stock market is a discounting mechanism that’s always ahead of the economy. If the market is rallying, it means the smart money is betting on a recovery, and the smart money is never wrong (if it was, it wouldn’t be the smart money, now, would it?)

Yet, and we’ve made the point several times but it’s worth repeating: they thought the worst was over in 1930, too. And in 1931. And in 1932.

One of my favorite websites is the Joliet, Ill., library’s site. They have this great page with business headlines from the local papers from the early years of the Depression. All the leading lights of the day, from President Hoover to Irving Fisher to John Jacob Raskob, thought the “worst was over,” and some bright, shiny recovery was just on the horizon. They were all wrong.

I wonder if our leading lights today may be similarly mistaken. It’s amazing that for as much as the current Fed Chairman made his bones as a student of the Depression, the Fed today finds itself stuck, unable to figure out a realistic path for monetary policy that can alleviate the economy’s biggest problem, which is that nobody’s hiring (at least, in any great numbers.)  The Fed was supposed to be managing its exit from the markets by this point, but instead all the conversation is about what it needs to do next to prevent the economy from sliding backwards. Which it’s doing on its own regardless.

So let the sell-side blather on about bond bubbles. It’s amazing that the same end of the spectrum that couldn’t see the dot-com bubble or the housing bubble somehow suddenly has crystal clarity on the subject. What the bond market is really saying is that the recession never really ended. Sure, part of what’s going on in the bond market has to do with the Fed nailing interest rates to the floor, with plans to keep them there until the economy improves or pigs fly, whichever comes first.

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For most of this year, while the stock market’s been flopping around like a fish, the bond market has been steadily rising, with bond yields steadily falling. It’s hard to say exactly how much of this is due to investors seeking the safety of bonds and how much is due to the Federal Reserve consciously keeping yields low. Suffice it to say that while investors have been dumping stocks, look at mutual fund flows, the sell-side on Wall Street, those “bulls” who somehow always are somewhere telling you now’s the best time to buy stocks, have been crying that bonds are in a bubble, and that bubble is bound to burst.

It’s quite amazing that this crowd, which didn’t see any bubble in stocks in 2000, which didn’t see any bubble in housing or stocks in 2007, somehow suddenly has crystal clarity on the subject. They don’t. They’ve just been in stocks for so long, they can’t conceive of a time when stocks wouldn’t be the best investment around.

I read the best rebuttal to this argument I’ve yet to see this morning (albeit David Rosenberg has also been banging this drum loudly and convincingly) from Capital Economics’ Julian Jessop. Pay particular attention to his first line, because that sums it up in a nutshell.

An asset bubble develops when prices move far out of line with anything that could reasonably be justified by fundamentals. That was the case with dot.com stocks in 2000 and many property markets since. However, the current low levels of bond yields (and even further falls) would be consistent with the prospect of a very long period of near-zero short-term interest rates, low or negative inflation, and lacklustre returns on riskier assets that increase demand for the safety of government bonds. After all, these factors have kept Japanese government bond (JGB) yields very low for many years – much lower than the levels currently seen in the US and Europe – despite the dire fiscal position in Japan.

Admittedly, structural factors have also played a key part in driving down JGB yields, including a large pool of captive domestic buyers. But similar factors may come increasingly into play in the US and Europe too, as changing regulatory requirements and additional QE prompt both private institutions and central banks  to hold more government bonds on their balance sheets.

The upshot is that we see no compelling reason why bond yields cannot fall further in the US and Europe from their current levels, without this amounting to a bubble.

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Ignominious day for the state of New Jersey, as it officially becomes the first in the union to be charged by the SEC for violations of federal securities laws. As any respectable defendant does in such cases, Jersey settled without admitting or denying. Ah, fugetaboutit.

Not to cast any aspersions, but it is interesting to note that the owner of Jersey’s tallest building, Goldman Sachs, also didn’t admit or deny and then settled SEC fraud charges not long ago. Coincidentally, former Goldman CEO Jon Corzine’s public service as a Jersey US senator and then NJ governor overlap the period (August 2001 to April 2007) when the SEC says NJ committed the violations. SEC says the problems were in the state treasurer’s office.

NJ sold more than $26 billion in muni bonds in 79 offerings, SEC said, in which it failed to disclose the underfunding of both a teachers’ and a public employees’ pension fund. Oops.

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How many of your problems have you kicked down the road that have eventually gotten better?

Hedge-fund manager Kyle Bass’ testimony before the Financial Crisis Inquiry Commission back in January was a hit with us. He’s another gent who we’d be proud to initiate into the Committee for the Continuation of Keeping It Real. Kudos to CNBC for giving him the floor this afternoon. 

He’s looking a lot more tanned and trim than in January, when he resembled more of small Gandolfini. Good stuff follows: 

Part II

- Time’s Curious Capitalist blogger John Curran offers several themes to keep an eye on about current market conditions. “First, stocks are going nowhere,” he says, as there are lots of headlines and big moves in both directions, but the market is still flat year-to-date. Corporate earnings are way up, though mostly on cost-cutting. Oil prices are inching backing up, especially as dollar weakens. Consumer spending isn’t improving, savings rate is increasing and European debt crisis isn’t over.

- AOL’s struggling so much that it couldn’t even meet the Street’s diminished 2Q expectations. MediaMemo blogger Peter Kafka notes two important themes to watch: AOL’s ad business and rate of decline at its subscription business.

- Investors and consumers have been so conditioned to look out for inflation that the threat of deflation, particularly in housing and wages, isn’t being taken as seriously as it should be, Yves Smith writes at naked capitalism. “It is hard to prove in a tidy way, but I see more signs of discounting in the economy, even in goods and services aimed at upper income consumers supposedly unaffected by the downturn.”

- “Inflation expectations are falling and there is currently no end in sight,” notes David Beckworth, assistant professor of economics at Texas State University. “Let me be very clear what all of this implies: by failing to stabilize inflation expectations the Fed is effectively tightening monetary policy at a most inopportune time. I hope this is not how the Fed wants to be remembered.”

- Hackers have released their latest set of instructions to help iPhone 4 owners run their devices on multiple carriers.

- Bearish sentiment among advisers fell for a second-straight week, according to Investors Intelligence. Now, only 33% of the survey’s respondents say they are in the bearish camp. “While a decline in bearish sentiment is typical when equities rise, one could make the case that it should be lower,” Bespoke Investment Group says. “After all, the current level of bearish sentiment is the same now as it was when the S&P 500 was trading at it correction lows in early July.”

- “Maybe, just maybe, the thing to do is let the deleveraging/saving/expense cutting process take place,” Credit Writedowns says. “Just as forest fires are a part of the natural life cycle of forests, so is the cleansing and seeding process of an economic downturn.”

- Research In Motion’s (RIMM) Torch may be the best BlackBerry to date, but it’s not as good as Apple’s (AAPL) iPhone or the plethora of phones using Google’s (GOOG) Android software, Dan Frommer writes at Silicon Alley Insider. “The biggest problem is that RIM has not been able to build a mobile operating system that feels nearly as modern and elegant as Android or Apple’s iOS,” Frommer says. “As a result, even RIM’s newest phone feels old next to a new iPhone or Android device.”

- Oracle’s Larry Ellison joins other billionaires in following a call by Warren Buffett and Bill and Melinda Gates to pledge the majority of their wealth to charity.

- Mosque near Ground Zero gains approval, but opponents are expected to fight it in court.

- National savings rate in June inched up to 6.4% from 6.3% a month earlier and is approaching the 50-year average of 6.9%. “On the one hand, higher savings will put a crimp on consumer spending which of course makes up a majority of US GDP,” says Miller Tabak’s Peter Boockvar.. “But on the other, higher savings is the fuel for investment which helps to finance businesses everywhere that are getting crowded out in their borrowing by the enormous needs of the US government and some European ones.”

- The Wells Fargo/Gallup Small Business Index hit its lowest level since the index’s inception in 2003. Most of the poll’s decline came from the “Future Expectations” category of the survey, which follows business owners’ expectations for cash flows, new jobs, access to credit and capital spending. “In other words, as dour as the subjects are about the present sitch, they are even more so about the near future,” Josh Brown writes at The Reformed Broker.

- By next year, Apple (AAPL) will likely become the second-largest semiconductor buyer in the world, thanks to the iPhone, which prompts TechCrunch’s Steve Cheney to ponder: “Should Apple own its own wireless chip development?” Rumors are swirling Intel (INTC) may be close to acquiring Infineon’s (IFX.XE) wireless chip business, but “based on Apple’s deep relationship with Infineon, and its famed secrecy around M&A, it is a pretty safe bet that Steve Jobs is analyzing the implications of a deal.”

- Consumer spending and personal income were both flat last month, slightly below economists’ expectations. “That’s not terribly surprising these days, but it’s hardly encouraging. Perhaps the best we can say is that it’s more of the same,” James Picerno writes at The Capital Spectator.

- Android may not be a money-maker, yet, but it’s still a success. Google’s (GOOG) strategy differs from Apple (AAPL), which sells great products while tightly controlling its hardware and software distribution. Conversely, Google “sprays its software all over the place for free, betting on owning the future of the mobile Internet and search advertising businesses the way it owns them on the web,” Dan Frommer notes. “That’s why, despite Apple’s huge financial lead, Android is already a big early success for Google.”

- About the Fed potentially plowing cash from its maturing debt back into the Treasury market: “It’s not a huge move, but letting the MBS portfolio slowly burn off is inherently tightening,” Joe Weisenthal says at The Money Game. “Rolling over that portfolio, therefore, maintains the status quo.”

- “Lately the Fed seems more interested justifying why it doesn’t need to do anything more to boost the economy rather than grappling with actual data showing that the economy needs more help from the Fed,” University of Oregon economics professor Mark Thoma writes.

- Ever since stocks bottomed out in early July, gold hasn’t been able to generate a sustainable rally. And for much of 2010 gold and the US dollar, which are usually inversely correlated, have essentially moved in lockstep. “Over the last six months the two assets have been more positively correlated than at any other time in at least ten years,” Bespoke Investment Group says.

- Research in Motion (RIMM) Co-CEO Mike Lazardis calls BlackBerry Torch launch one of most important in the company’s history, which certainly isn’t an understatement. But the question remains: Is this device a “buzzworthy breakthrough or just another BlackBerry?” asks Digital Daily blogger John Paczkowski.

- Many corporations and their shareholders are enjoying surging profits and boosted dividends, but employees are still waiting on returns of the 401(k) matches.

- Microsoft (MSFT) insists one of its top priorities is to bring a Windows-based tablet to market sooner than later. Sounds straightforward. The problem is, [Microsoft] doesn’t always manage to do things really right,” Digital Daily blogger John Paczkowski says. “Certainly, it didn’t manage it with Windows Vista. Or Windows Mobile. Or Zune. Or, more recently, Kin. Who’s to say this time will be any different?”

- Tough to get true read on what’s happening in the stock market these days. “The cross-currents lately are absolutely cartoonish — back-to-back-to-back triple digit rallies while each morning we are treated to fresh evidence of ‘Slouching Housing, Hidden Consumer,’” Joshua Brown writes at The Reformed Broker.

- Hank Paulson says government policies promoting homeownership should be blamed as a major cause of the financial crisis, but FusionIQ CEO Barry Ritholtz disagrees, saying the former Treasury secretary ignores facts and is rewriting history. “His commentary is thinly veiled attempt to rewrite what actually occurred, and to shift his own sad role from conductor of the theft, to hapless victim of long standing government policy. If this exercise wasn’t such a transparent attempt at self-exoneration, it would be amusing.”

- Facebook isn’t planning to go public until 2012, Bloomberg reports. “That certainly sounds plausible,” MediaMemo blogger Peter Kafka says, especially considering Facebook likely doesn’t need to raise cash for operations. And if Facebook doesn’t IPO anytime soon, expect social games giant Zynga to face less pressure to go public too.

- “There is good news and bad news,” Ryan Avent writes at Economist’s Free Exchange blog, regarding 2Q GDP report. “Underlying growth looks quite weak, and in quarters to come the contribution from both government and inventory shifts will fall, or turn negative. All indicators suggest that second half growth will be no faster than first half growth.”

- GDP growth rate of only 2.4% isn’t nearly enough for the economy to properly recovery. “This shows clearly that Congress and the Fed should have taken a more aggressive posture already, not doing so was a mistake, and it’s a clear signal that the economy still needs more help,” Mark Thoma writes at MoneyWatch.

- But NYT’s Floyd Norris still thinks the recovery will pick up steam in near future. He notes this was third-straight quarter in which private sector investment rose at an annual rate of more than 25%. “The last time that figure rose as rapidly was in 1984, in the midst of a very strong recovery,” Norris says. “To be sure, private investment is coming off a very depressed level. But it is worth recalling that 1984’s recovery was also widely doubted.”

- As the Fed grapples with methods to support flagging economic growth, Monument Securities economist Stephen Lewis says (via Alphaville) that central bankers “seem close to recognizing” that their actions don’t determine the economy’s performance. “They can no longer demonstrate, or credibly claim, the omnipotence attributed to them by credulous markets in the era of the Greenspan cult.”

- Slate Group, the Washington Post’s (WPO) online unit, is shutting The Big Money, a business site it launched in September 2008, Kafka reports. “The problem, in a nutshell, is that the site is not pointed toward profitability on a fast enough timetable,” Slate said.

- “The global corporate-bond boom is gathering steam as companies rush to take advantage of some of the lowest borrowing costs in history,” WSJ says.