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Am I Still Bearish? Sort of Not

I have had very light equity exposure for an extended period of time with periods of being net short to being fairly long. Fortunately, with the indices having been range bound, the opportunity cost has been insignificant. As I mentioned in a prior note being bearish is exhausting, lonely and counter to my natural optimism (although I do admit to always maintaining a healthy dose of cynicism). Imagine taking your child to see 101 Dalmatians and loudly rooting for Cruella deVille to come out on top. Your kid shrinks away to another seat on the other side of the theater while others shun you. That’s how bears are treated.

I continually second guess my investment thesis, trying to see what the other side sees. I weigh the inputs underlying my stance, marking them to market. I try to remove the bias of my position as I seek additional data that is either supportive or unsupportive of my position. And of course, there is always the fear of acting from emotion that prompts a change in thinking, a feeling that you weren’t invited to the party, of being left out. And most of all, there is that greatest fear of all, of having reversed course at absolutely the wrong time. And in full disclosure, I have not always made the turn in a very timely fashion. I did well in 2008 but hardly made any money in 2009. Although I was still ahead of the game, it still didn’t feel good missing out on a ripping bull market move.

So where am I now? I am warming up to the market. Why? Well, I have often said I have seen this movie before and it ended badly but maybe there will be a different ending to this installment because everyone else had also seen the prequel to the 2011 financial crisis. My ending has banks struggling to raise capital, some, like Dexia or perhaps Greece, going belly up, credit continuing to tighten, economies contracting – the culmination of all these fears and others I haven’t listed causing a massive wave of selling. But guess what? Merkel and Sarkozy and the more responsible members of the G-20 and EU were also around in 2008 and they have no interest in revisiting that scenario. Granted they have waited too long and the cost of delay has ratcheted up the price of a cure. Germany and France have the most to lose by not putting forth a viable solution. While expectations for a total and complete solution are still high, they have been ratcheted down enough to be attainable, or near attainable with the promise to be completely resolved in the next 3 to 6 months. Shock and awe is not in the cards and everyone knows it. But will they give us enough to put a floor under the market and cause under invested funds to chase performance? I think so.

Swimming upstream, against the tide of bullishness that is the unwavering stance by the vast majority of pundits and market participants is difficult enough but imagine the flood gates being opened and the water gushing at you as you flutter kick your portfolio like a foam kickboard. The world is awash in liquidity. It all comes down to not fighting the Fed. But the much maligned U.S. Fed has recruited a legion of Central Bankers to fight the battle: the EU, IMF and China. This is a massive liquidity push by every printing press on the planet. So for now, I am entering into surrender negotiations and further increasing my exposure further.

I am by no means becoming fully invested for I still have that evil twin whispering in my ear. The global economy is in terrible shape but what do I know that others don’t? I don’t have an edge on China – it’s a property bubble that has already begun to leak – but the Chief Communist (as opposed to Chief Economist) knows that. I think that will end ugly but they can throw enough money at it in the interim to allow the S&P to rise to 1250, a random number, while their market declines. Europe is in recession but that thinking is convention and is nothing that $1.3 trillion can’t cure.

The most alpha will likely be generated through commodities and materials – the most economically sensitive investments – but I can’t go all that way in. There is too much risk in case I am wrong. I do like the fertilizer companies for the long term and although recovering, they have been beaten worse than a Middle Eastern dictator. I still prefer the more boring fundamentally, bottoms up investments epitomized by MDRX, KO, QCOM, WLP, NIHD. My risk is in bottom fishing on HPQ and, dare I admit it, RIMM. I cut back my Euro short against the dollar but will rebuild that position again at some point.

How long the cure lasts is what keeps a lid on my exposure. At some point austerity leads to slower growth and U.S. economic policy is non-existent as Washington remains rudderless. Everyone believes China will bail out every local government, corporate and individual spectators but I don’t. After all, they are communists and not prone to providing handouts to failing billionaires or local governments who have repeatedly disobeyed central government directives. There will be some pain to teach them a lesson.

I won’t be discouraged if there is a sell on the news mentality once the EU deal is announced. And I am rooting for another delay in the announcement because that means they are still arguing – eh, negotiating. And I expect leaks from the negotiations to cause some volatility. We should continue to move higher, perhaps rally 20% before going lower, likely hitting prior lows.

Whoops, there I go again.

European Sovereign Debt Crisis Survey – What Is/Was Discounted In The Markets

In my view, the most important issue facing the markets is the European sovereign debt crisis. This issue is the breeding ground for so many other factors facing the global economy being that the EU collectively represents perhaps the most significant trading partner for China and the U.S. With this in mind, last Friday, I sent out a survey containing 5 simple questions to a small portion of my contact list with the intent of gauging what sophisticated, institutional investors believe the market is telling us about resolution of the crisis. Admittedly, the sampling was small in terms of respondents but the dollars under management significant. I supplemented the written survey with  conversations soliciting responses to the same questions. Fortunately, not one of my friends added me to their Do Not Call List. Now, in full disclosure, I am not a graduate of Quinnipiac University nor a former employee of Harris Polling, but this did not stop me from understanding the clear message of the data. The overwhelming majority of the respondents believe that the market is discounting the most positive scenario and that if this were not delivered, albeit with a time frame for compliance of 3 to 6 months, that the indices would hit new lows. Giving credence to this view is the fact that the recent rally in the S&P began contemporaneously with the Sarkozy and Merkel speech wherein they stated that they have a meeting of the minds regarding what needs to be done to stem the crisis. November 3rd was the drop dead date they offered for presenting a unified plan although recent chatter and an increased sense of urgency has served to have brought the date for resolution closer by a week.

Today, this changed, as Germany threw cold water on a shock and awe solution resulting in a 2% decline in the S&P. It would not be inappropriate to argue that the market went from an oversold to overbought and today’s action was normal consolidation but I disagree. Now, in fairness, I applaud the Germans for reining in expectations that became much too optimistic. I had, in fact, pointed out in prior notes that the news flow would create peaks and valleys in the averages along the road to November 3rd. Today was the first valley but I feel there will be more to come. I also mentioned late last week (Have We Seen The Future: The European Solution…  October 13th) that I had taken off some long exposure and right now I have no interest in revisiting my strategy. That was the right move and I further reduced my net long exposure early in today’s trading session.

I hope the Europeans continue to reset expectations but even if they do, it will only forestall the inevitable because I do not see shock and awe coming anytime soon. I remain cautious on the market overall and continue to see the Euro short as a compelling investment.

The European Sucker Play; US Stock Bargains; Apple

The most important real near term news coming out of Europe will be the ECB rate decision tomorrow. Trichet is bidding adieu at the end of October and this is his last opportunity to reverse the prior rate hike. Does he head to Hotel du Cap admitting a mistake or stick to his guns and allow Mario Draghi to cut, although he has previously said it isn’t necessary. Perhaps the economic releases this morning may spur the correct decision, in conjunction with recent declines in commodity prices. Eurozone services PMI fell to 48.8 from 51.5 according to Markit survey, first month since August 2009 below 50. In other releases, Germany was sub 50 as well, France barely above 50, Italy and Spain continue below 50 at very low levels of 45 but they are already in recession. My guess is that France and Germany experience contractions in economic growth as well.

More importantly, does the troika come up with a major bail out prior to Trichet leaving and before Draghi takes over. Not sure how many EU members want an Italian telling them they have to pony up vast sums to save Italy. Fox guarding the chicken coop? Not quite but this will ratchet up the opposition or lengthen the time to cure if Trichet doesn’t act first.

The Financial Times had the story that wasn’t a story. The following 2 lines squeezed the shorts, lit a fire under those with light exposure and gave us all something to talk about.

“There is an increasingly shared view that we need a concerted, co-ordinated approach in Europe while many of the elements are done in the member states,” Olli Rehn, European commissioner for economic affairs, told the Financial Times. “There is a sense of urgency among ministers and we need to move on.”

“Capital positions of European banks must be reinforced to provide additional safety margins and thus reduce uncertainty,” Mr Rehn said. “This should be regarded as an integral part of the EU’s comprehensive strategy to restore confidence and overcome the crisis.…”

Rehn’s statement was nothing more than an attempt to put a temporary halt to the market crisis, an admirable goal, but hopefully there is ultimately more substance behind it. With the public division in the EU about solutions, I fear any resolution will be a long time in coming. Even the ESFS is flawed with Italy and Spain committing to guarantees of 79 billion Euros and 52 billion Euros, respectively. And, of course, Greece has agreed to be on the hook for 12 billion. I feel better now.

So the market basically did a hosanna that it has dawned on the EU finance ministers that they have developed a sense of urgency and will act together. Truth is we don’t know that they will act together but ultimately there has to be a plan. Unfortunately, from where I sit, the plan won’t be good for anyone, particularly the banks. We need a flush of the credit markets with tremendous pain being visited on the private sector because the political will for government to bail out all troubled banks and PIIGS does not exist. The result would be to wipe out the equity of a number of French banks as we are seeing with Dexia, which was originally bailed out in 2008 by France and Belgium. Now here they go again. Public shareholders have twice suffered significant losses. Dexia is also a good example of contagion as the municipalities in the US that do business with Dexia will likely see their borrowing costs increase as a result. And this is a minor case of contagion; it will get worse (Plus the 2008 similarities continue with good bank/bad bank solutions that don’t work.)

My bet is that Greece defaults in a “controlled” manner (not sure that exists) with limited alimony payments from the EU as a going away gift. At the same time, Italian and Spanish debt issues are ring fenced, the French banks recapitalized after taking significant write downs which almost wipes out equity holders with new shares or debt being backstopped by Germany and France as the main players. France loses their AAA, which is past its sell-by date anyway. We will also see massive liquidity injected into the European financial system causing a further decline in the Euro.

I’m waiting for this event to increase my exposure. With the slowing in China, Europe and the U.S., I’m highly confident that I can get a better entry point and keep more hair from falling out.

AAPL – still a cheap stock and the issues are well discounted in the stock price. I’m not going to beat up on Street research – well yes I am. The Street clearly has no idea what is going on with the company. If they can’t get major product launches correct, how are they doing the more difficult task of forecasting. It took me a few days to get a number I was looking for which is what percentage of ipads sold are wifi only. I’m going with the only answer that I got which is 65 – 70%. This is interesting because much was made of the fact that the new Amazon product is only wifi. Well, at a $300 difference for a product with a great brand name and very good functionality, if I didn’t own an ipad, I would seriously consider the Kindle Fire. I know that the ipad has 425,000 apps and the Fire doesn’t, but frankly, I ran out of patience after putting the first 150,000 apps on my screen. My issue with AAPL is margins. With strong competitors like Amazon and Google (android) at lower price points, is yesterday’s pricing of the iphone 4 and 4S a harbinger of lower margins and more competition? Apple has never been one to price to competitors’ levels but shouldn’t hat have to change? Tim Cook noted that 92% of the Fortune 500 are testing ipads. The opportunities in the enterprise space are interesting but keep in mind that most likely this is demand push by Apple, a common sales technique which I am glad to see them employ. I’m sure there is reverse inquiry as well. I would also guess that corporate procurement execs are more concerned with costs in a challenging economic environment and agnostic as to which quality brand they purchase. The dominant corporate usage is also likely wifi since it will be on premises as ipads are not a good substitute for laptops. Nonetheless this is a great revenue opportunity particularly if it scales into other Apple products.

Finally, on the US. We’re still without a plan and the economic numbers continue to look punk, today’s non-mfg ISM the latest example. Freight stocks are moving higher despite yesterday’s IATA airfreight numbers remaining below seasonal trends indicating a slow economy. Asia and the US showed particularly poor.

Even though the market is oversold and will have bear market rallies, I remain on the sidelines for the most part but do like a few stocks.

Wellpoint’s valuation seems compelling at less than 9X 2011 EPS. Company guidance is in a tight range either side of $7.00. They just added $5 billion to their buyback, an astonishing 21% of the company. Management said it will be completed over several years but they just bought back $1.5 billion since announcing a $1.6 billion program in February. That was about 5%. Plus I’m getting an okay yield of 1.6%.

I also like KO. Not huge growth but very dependable, the risk to earnings from currency being discounted by recent downgrades from the Street. At a 12 P/E and 3% yield it provides good, lower beta market exposure. If market explodes higher, neither WLP or KO will lead the pack but I will participate in the upside with limited downside.

QCOM remains a core holding. Tim Cook is an engineer and over saw procurement so he’s definitely on board with QCOM as the relationship, started in earnest this year, has taken root on his watch. They own CDMA and are embedded in android as well as ipad and iphone. QCOM ahs also been very friendly to shareholders, often returning capital.

HPQ is also inexpensive, even with a haircut (all the rage in financial circles these days) to earnings. My primary concern management, including the BOD. Still wish Meg didn’t speak about making the quarter. Would rather have had her reset bar lower.

China: Not on Goldilocks World Tour; The Global Economy; Copper, Commodities Lower.

The best thing that can be said for China is Europe.  But the worst thing that can be said for copper is China.

Europe continues to dominate the headlines, the immediacy of their issues relegating China to the back pages of the business press and investors’ minds.  This puts China in a very tough position between rooting for the EU, their top trading partner, to quickly put their sovereign debt issues behind them, and hoping they stay front and center, keeping China’s significant woes off the front page.  I know what Confucius would advise but his teachings have gone by the wayside quicker than a Ferrari barreling down Nanjing Road in Shanghai.

The biggest issue with China of course is the property bubble.  This exists not just for housing but also for commercial construction.  Given restrictions on lending at the local government level and tightening measures imposed by the central government, property developers have had to engage in creative financing techniques to continue building buildings that reportedly have very high vacancy rates. The credit agencies have taken aim at the banks, who own the local government debt, believing that the liabilities are understated, $540 billion being the amount recently mentioned by Moody’s.  I’m going to wager that Moody’s stays true to its reputation for accuracy and has vastly understated the issue, which, given the lack of transparency and controls in China, is a safe bet.  But using this figure and putting it in perspective, it is almost equivalent to the size of China’s stimulus package post 2008 crisis.  Let’s see what happens when that large sum of money works in reverse, choking off the economy and triggering defaults. What is most troubling is how much of the Chinese economy is dependent on this bubble.  This quote from Bloomberg is alarming (http://www.businessweek.com/news/2011-09-23/china-s-squeeze-on-property-market-nearing-tipping-point-.html).  “China Real Estate Information Corp., a Shanghai-based property information and consulting firm, estimates 40 percent of overall local government revenue came from land sales last year.”  And, the local government involvement doesn’t stop there as they set up Trust companies, often in partnership with developers, to fund development.

Of course, there are those that hang onto the vision of the central government acting like the mother of a rambunctious 4 year old who scraps his knee but mommy won’t kiss this boo-boo and make it all better.  Sure, some of the developers who are closest to the ministers remaining open to receiving another Rolex Daytona in exchange for favorable treatment will not suffer as much but I doubt the government will bail out all the banks and developers.  The WSJ had 3 articles, all appropriately yellow flags.  Interestingly, and to this point, one of the world’s and China’s largest banks may seek to raise another $11 billion from the capital markets to protect the balance sheet against increasing bad debts.  When have you ever seen one capital raise be enough?  Exactly, and not here either since this bank has already raised $20 billion over the past two years.

In the most recent survey of home property prices recorded by the statistics bureau, for the first time less than half of the 70 cities posted month on month gains although all cities showed an increase, also for the first time this year.  This is troubling since it indicates that despite Premier Wen’s desire to cool off the overheated market, local governments refuse to participate relying heavily on higher prices on land sales.

Suppose I’m wrong and the government is more magnanimous than I estimate, writing checks to everyone who has wagered on prices forever climbing?  The conclusion for copper won’t change since it will still take a long time to absorb the current building inventory.  Construction is estimated to be between 50-70% of China’s GDP.  That soaks up a lot of energy, copper, steel and construction equipment which all feed into the global economy.

Soft landing for China?  That’s not what the direction of their bank stocks and property development companies will tell you.  I doubt that Goldilocks, she of the “not too cold, not too hot, just right” school of optimism, will be including China on her world tour.  Besides, she has signed on for additional dates in Europe and theU.S.

As to the U.S. indices, China surprisingly doesn’t mean much for now until the tipping point becomes apparent to all and the fog from Europe burns off.  All that matters for now is the impendingU.S.earnings season and Europe.  While I expect the ESFS to be approved, I’m not so sure the political appetite exists for the shock and awe leveraged fund that is needed to put a floor on the market.  But opinions on the outcome are like ipads, everyone has one.

Netflix: Another Negative Datapoint – HULU/DISH

If the CNBC report is accurate and DISH has won the bidding war for HULU, then this is another negative data point for Netflix. Let’s recap recent news flow: 1) changing subscription terms alienating investors; 2) higher content costs; 3) STARZ termination; 4) missing subscriber targets; 5) DISH offering streaming from Blockbuster; and 6) DISH reported acquisition of HULU.
NFLX has had a virtual monopoly on subscription television and movie programming. This has ended with DISH stepping into the market from a position of strength. Now there is a competitor to drive up content costs in addition to the content providers potentially offering their own services. Furthermore, as I look at the disparity between the $1.4 billion offered by DISH and the reported $4 billion offered by Google, the difference tied to contract extensions on content, it tells me that content is worth more than the technology. Content always drives subscriber growth and the providers now intend to take advantage of their positioning versus arguably cut rate pricing during NFLX’s earlier years of existence. Not all that much is known about the deal Netflix cut with Dreamworks but the number that sticks in my mind is $30 million a picture. The question is whether or not each film will be worth $30 million to them or if the price of the content is adjustable. Besides, this does not kick in for 2 years so it won’t help them now. I am not short NFLX but am considering buying puts. i have tremendous respect for Reed Hastings but he is in a tough spot. Keep in mind that the information in this article is based on news reports and not a press release or 8-K from either company.

HPQ: Confessions of a First Time Buyer/Compelling Risk/Reward

Hewlett Packard is one of the most compelling stocks that I see on my monitor right now. I initiated a position on Friday and have added to it since. With all the talk about beaten down stocks, the fact is that most of these equities, including coal, steel, rails, etc., have retained their buy ratings, hardly the hallmark of complete capitulation of sentiment. With HPQ, however, I believe there are as many sell recommendations from the Street as Buy opinions, the rest being neutral (a rough observation). At approximately 5X EPS, even if I haircut the earnings forecast by 20%, a significant cut, I’m still looking at an inexpensive equity that is as unloved as Ahmadinejad would be if he joined my local synagogue. HPQ is a great way to participate in a market rally since the downside is limited and as those with cash look for easy entry into the market and potential value, HPQ has to pop up on their buy list. I don’t remember the last time I owned HPQ, if ever, so I have the advantage of a clear mind, not biased by buying into the prior value propositions that didn’t pan out. In fact, I don’t remember a stock ever being as hated as this one, not even RIMM (which I also recently bought), a great buy signal, particularly for contrarians.

Ray Lane did not acquit himself particularly well in the Faber interview on CNBC on Friday which only served to increase the negative sentiment, mine included, and I took that opportunity, after my knee jerk reaction, to enter a position believing that if I could feel that way toward an equity that I don’t even own, the bottom was reached. The most intriguing point coming out of the interview was Meg Whitman’s statement that her focus right now is on making the quarter, a bold statement given that the quarter is fairly far along. Hopefully she carefully though that comment through, otherwise she is wasting the first quarter of her tenure which is usually a kitchen sink, set expectations low event. If the quarter does now disappoint, I may have made a mistake, with no solace that it will be a lesser error in judgment than she made. But I’m willing to give the well-respected Whitman the benefit of the doubt; she deserves it.

I still believe the Board of Directors has to go en masse and that Whitman is not the optimum choice; that the BOD should have taken their time to search for someone with more experience in this sector of technology. At the very least it would have given the market more confidence in them and Whitman. Retailing is a different business than hardware and when Whitman left EBAY, the growth had already started to ebb, although she should be commended for her timing because the story may have in fact seen its best days.

HPQ is a compelling trade from a risk/reward standpoint. The tell is that most who read this article will shake their heads and quietly utter “been there, done that.”

HPQ: You Can Suffer Permanent Vision Impairment on This Wait and See Stock

David Faber’s excellent interview with Ray Lane on CNBC is a disaster for HPQ and gives great insight into why the Board of Directors should be replaced. To paraphrase Mr. Lane, ‘I have known Leo for years,’ And then, ‘I have been looking at replacing him for 3 months.’ So despite his familiarity with Leo, after only 6 months into his tenure, forgetting about the total time in of 9 months, the BOD decides they made a mistake. And now they bring in Meg Whitman because she knows the company so well. In fact, she has been involved with HPQ for less time than Leo. Whitman did a great job at EBAY but they are a retailer whereas HPQ is a commodity company in technology. Different skill sets are required. Derek Jeter may be a great shortstop but can’t pitch so don’t put him on the mound. What is most stark about this move by HPQ’s BOD is that they should have understood that the market lacks confidence in the comapny at every level and should have taken their time in searching for a new CEO with a skill set more in tune with their needs. A wait and see story has become a don’t wait because it will be a long time before you see any improvement. And, in my view, there is absolutely no chance of ORCL paying in excess of $50 billion for a faltering business. The entire Board of Directors should be replaced and Ray Lane should be the first to go.

Slovenia Could Imperil EU Bailout; Operation Chubby Checker a/k/a Operation Twist; The Recession is here.

Little old Slovenia, that old communist country, could be the fly in the ointment. The government fell last night and elections are not yet scheduled but the party that seems to be in favor of assuming power is apparently less benevolent than the outgoing politicians. Slovenia’s Democratic Party is also much less benevolent than the US Democrats but I guess the word “Democrat” has different definitions in former communist countries than here. They believe that countries like Greece should pay the piper themselves and that it shouldn’t fall on the Slovenians to give up their hard earned cash to profligate spenders. The issue with this is that the approval of the new ESFS proposal requires unanimous approval from all 17 members . If the Democratic Party does assume power, there is no guarantee the Slovenians vote to approve the bailout making for, at least, some suspense. The markets don’t need more uncertainty.

Alpha Natural Resources noted slowing demand in Asia for coal as one reason why they cut guidance today. This is not a good sign. China was supposed to be a bastion of strength. Copper, FCX, at lows, transports getting smeistered, these are the front end of the recession. I’m short CNX and BTU. The rails, who of course benefit from coal shipments, are feeling tremendous pain. CSX had already lowered guidance as did FDX.

In 2002, Bernanke made a speech about Kennedy’s use of Operation Twist and it wasn’t so favorable (link below) Granted the speech referred to Japanese deflation issues but is nonetheless very telling. Quote is from the footnote 11.

http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm

“An episode apparently less favorable to the view that the Fed can manipulate Treasury yields was the so-called Operation Twist of the 1960s, during which an attempt was made to raise short-term yields and lower long-term yields simultaneously by selling at the short end and buying at the long end. Academic opinion on the effectiveness of Operation Twist is divided. In any case, this episode was rather small in scale, did not involve explicit announcement of target rates, and occurred when interest rates were not close to zero.”

Like Chubby Checker, the inventor of the only twist that worked, this move will be for entertainment purposes only since it will have less of an affect on the economy than Chubby’s record sales. And it will hurt the banks.

HPQ – sell it. The Board should be fired. You approve such a radical change in direction such as buying an overpriced software company and the spinning off of your PC business and then you fire the CEO. Can you think of a worse nightmare for a CEO than having the stock decline when you are hired then spike when you get fired. Whitman, a brilliant internet pioneer, is not the answer. EBAY is a retailer, HPQ is, well what is it? It’s a declining hardware business. ORCL isn’t buying HPQ. $60 billion is an awful big price tag for a “told you so” by Hurd even if it were his decision which it’s not.

Most troubling about the bank debt downgrades is the reason. It’s crazy logic. Does Moody’s see a need for the government to bail out the banks? If so, their debt won’t be worth anything so the downgrade should be to junk. If the Lehman deja vu isn’t an issue, then there shouldn’t be a downgrade.

Guess what? I’m still bearish.

Yesterday’s Blog – Nat Gas; Netflix (NFLX) Hastings Has A Solution for Europe; President Obama, Merkel,

My sources provided unique insights into the European Finance Ministers’ Meeting in Poland this past weekend:

Germany: I would like to invite Herr Geithner to our little party.

Poland: Whatever you say, boss.

Austria: Absolutely not. He has no personality and is way too American, always telling people what to do.

France: It’s a long trip and he probably won’t even come. He’ll probably just send a really big check as a gift with his regrets.

Belgium: Rubbish. I heard he’s in debt over his head and his boss is soon to be out of a job which means he’s also on borrowed time.

Germany: Look, I am paying for the party and I want him to come. Hopefully, he says nein and sends a check. If we don’t invite him we stand no chance of getting anything from him.

Austria: Fine. He’s your friend but I’m warning you that if he starts bossing us around, I won’t be able to hold my tongue.
And so it went.

NFLX continues to be a short, the CEO’s mea culpa aside, if for no other reason than content costs will significantly crimp margins. Perhaps the Europeans should look at Hastings strategy and separate insolvent Greece from the rest of the union, the Greeks being the NFLX version of a legacy DVD business. Apparently, Hastings doesn’t want his company’s valuation in the market to be painted with the broad brush of a declining or slower growth business so he is separating the 2 businesses. Perhaps Merkel et al should invite him to their next get together. At least he is sure to bring the entertainment.

So here I am in Nashville sitting at the gate waiting for my flight to Newark. CNN is on and everyone seems to be transfixed by the conversation leading up to the President’s speech on deficit reduction and taxes. I don’t think I have ever seen this level of interest before. Most have barely taken a bite of their deep fried bagels – everything is deep fried here, even the sushi. This is America, Nascar country as their attire attests, Dale Junior’s number featured prominently. I often wonder why they revere Junior given he’s crossed the finish line about as often as an Obama legislative proposal on taxes.

Like an Earnhardt fan, expectations were apparently incredibly high going into the weekend. But like an Earnhardt fan, the experience only resulted in disheartening disappointment. I’ve noted before that our two party system can’t agree on much these days so any expectation that the Euro’s 17 backers, some with effectively more than 2 party systems, will agree on a bailout measure for the banks and the PIIGS in a compressed time frame is folly.

Merkel is losing her mandate as yet another election pointed out this past weekend as her FDP partner suffered defeat. This conceivably puts Europe in a precarious position without a strong voice. Clearly, the coalition is fracturing, unable to even offer a carrot to the markets when they knew one was so desperately needed. Expectations are possibly higher for the FOMC to release a Q3 type statement on Weds. But even if they do, it will only provide a short term lift to the market for the economic fundamentals continue to worsen. Yes there are pockets of strength, the high end has been the savior, and the Apple ecosystem has done more than its share, but there is no disputing the declining economic picture and I would not continue to look for the upper end consumer to thrive, not in the face of higher taxes. Bullish prognosticators note the decline in the averages from the peak as more than having discounted any perceived economic malaise while hanging onto the belief that we are in a soft patch. Need I remind them that when the market rose to such heights, the global economy was on an upswing and the European sovereign mess just a twinkle in a dollar bull’s eye. Now the economy has slowed, if not reversed, and the collapse of the potential for a collapse of the Euro is real.

But the President has an answer for us. He wants to tax investment income as ordinary income, essentially removing any incentive for assumption of risk. In a perilous market environment, why put any capital at risk if there is little chance for reward? Less investment means less money sloshing around the economy and fewer jobs being created. And while we’re watching the acrimony in Washington, how about drafting the rest of us into a financial civil war, dividing the citizenry into two classes, pitting one against the other, all in the name of politics?

None of this is positive for the economy or the markets which is why I continue to be bearish

I added to my Euro short against the dollar on Thursday and still believe par is where the Euro will ultimately reside even if the new Troika comes out with a bailout package. Actually, that will further fortify my already strong conviction. Given my view on the slowing world economy – yes, even China will slow – I have exited my energy positions for the most part recalling that crude got decimated in the ’08 financial meltdown as demand suffered and speculative traders lost their appetite for risk (and their margin). The one bright spot is LNG as global demand is increasing sharply as a function of Japan and Germany using less nuclear power and Japan, China and India looking for a next generation solution to their burgeoning energy demands supposedly willing to pay as much as $20/btu all in. As more tankers and terminals are built for export, this will help sop up our overabundance of natural gas. And although I have little faith it will happen, should the administration ever propose a real energy policy, that, by the way would also create a number of jobs, natural gas would have to be in the equation.

I guess I’m not really surprised by the muted reaction in gold to all the negativity since gold is a risk asset and the appetite for risk is waning once again and margin requirements more lofty. It’s not a bad thing to see a high flying trade enter into a consolidation phase. I will keep my eye on it, looking for opportunity but will probably miss it again.


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