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Up and Down Wall Street SATURDAY, AUGUST 28, 2010
Stacked Deck
By ALAN ABELSON
Investors seem to be whistling by the graveyard; what, me worry?

A POLISH CHAP LIVING IN GERMANY went to the doctor, so reported the BBC last week, complaining of what he thought was a cyst in his scalp that turned out to be a .22-calibre bullet lodged in the back of his head. The bullet had not, fortunately, penetrated his skull and it was duly removed.

People get plugged all the time these days, of course, but supposedly this happened in 2004 or 2005. In other words, this poor fellow had been carrying around the bullet in his head for five or six years.

The victim, apparently, of a stray celebratory bullet fired at midnight during a New Year's party, the man claimed he was too soused to be aware of being shot but allowed as he felt as if he had received a blow to his noggin. So how come he waited all this time to do something about it?

He explained to the police that although he did remember having a sore head, "he wasn't really one for going to the doctor." We can only conclude that not only is he blessed with a remarkably hard bean, but he also must have a visually impaired barber. Or, maybe it's the latest fashion in Germany to walk around with a bullet in your scalp.

To Société Générale's Albert Edwards, who recounts this incident in his latest market rant, the fellow's lack of awareness is akin to the blithe insouciance of equity investors to the prospect of the global economy sliding back into recession, accompanied by another leg down in the bear market. "The vast bulk of the investment industry," he exclaims, "fails to appreciate that we are locked in a structural bear market" that is about to enter its "final, even bloodier phase."

Albert repeats his oft-voiced conviction that the bear market won't end until stocks become dirt cheap, with the S&P 500 some 800 points below its current price of around 1050 and, equally important, "revulsion in equities as an asset class hangs in the air like a fog."

He contends that excessive valuation is particularly true of our market, but warns that other markets just about everywhere, even those less richly priced, will not escape the full fury of the raging bear. We think we're safe in characterizing his foreboding as not an optimistic forecast. However, his prediction of 250 on the S&P 500 does smack a bit of excessive devaluation.

But we second his notion that the surest sign of a true bottom will be when investors en masse become thoroughly sour on stocks—as they were, as we recall, at the end of the great 1973-74 bear market. Such total disenchantment was decidedly lacking in the aftermath of the dot-com bust and the 2008-early-'09 collapse, despite the enormous damage both ugly episodes wreaked on investors' net worth. Enthusiasm for equities was temporarily chilled but far from extinguished. As Exhibit A, we offer the rousing 80% rally from last year's depths.

However, we don't think investors have been quite as comatose as Albert suggests. For one thing, there has been something of a stampede out of stocks into bonds in a desperate search for yield in a zero-interest environment. In the process, government bonds gained a formidable 1.8% in this fading month, while the Dow lost 3%.

But most importantly, individual investors feel, as Alan Newman of Crosscurrents puts it, "the deck is stacked, the game is rigged against them." And they feel that way because it is. As Alan laments, "The public has gotten the shaft from Wall Street, from the SEC, from short-oriented hedge funds and now from high-frequency trading."

The market everyone knew, he says, has disappeared, and in its place is an arena in which the long term not only doesn't count, it doesn't exist. Indeed, we suspect that the metamorphosis from exchange to casino is the root of individual investor disaffection. And the singular virtue—if that's the word—of the ultimate meltdown Albert Edwards is yearning for would be to clear the air, restore the long-term to its rightful place in the investment quiver and eventually restore Jane and John Q.'s faith in the stock market.

Did we hear somebody say, "Dream on"?

OUR RATHER BLEAK OUTLOOK FOR EQUITIES is in no way diminished by Friday's dead-cat bounce, inspired by that fancier of deceased felines, Ben Bernanke. Speaking at the annual central bank hootenanny at Jackson Hole, Wyo., Mr. Bernanke gave eloquent point to Harry Truman's famous crack about how he'd love to find a one-handed economist who wouldn't be forced to revert to that profession's well-known tendency to reply to every question with on the one-hand this, on the other hand that.

We pored over the text of his speech, all 19 pages of it, and we have to admit it was quite comprehensible, in welcome contrast to the all-but-indecipherable mutterings of Alan Greenspan. And to his credit, Bernanke acknowledged that the recovery is hardly what it might be. Alas, when it came to sharing with us his blueprint for a swifter, more sustaining recovery, he reverted to the old wishy-washy it all depends.

What it all depends on is the recovery which seems to us, anyway, in dire need of resuscitation. Either Mr. Bernanke doesn't really have a grip on the dismal state of the economy, which is doubtful, or doesn't know what to do about it, which is downright discouraging.

What the Street seized on as an excuse to rally after the market's trashing earlier in the week was the chairman's articulation of what the Fed might do in the way of monetary easing if the economy continued to drag. He listed three possibilities: a resumption of so-called quantitative easing (QE, to use the Street lingo), which involves fresh purchases of longer-term securities; reducing the interest rate on the reserves banks hold with the Fed, and changing the statement issued after Federal Open Market Committee meetings to reassure investors not to worry that rates might go up in their lifetime.

Fiddling with the interest on bank reserves and happy talk in the post-FOMC meeting blah-blah seem pretty meager antidotes for what ails the economy. So it all comes down to QE and the evidence that it has a real and necessary impact is slim at best. Which suggests, we're afraid, that the Fed is out of live ammunition.

O.K., so why is the stock market rallying? You tell us.

"THE MARGINALIZING of the Individual Investor" is the title of a piece Harald Malmgren and Mark Stys penned for the summer edition of International Economy magazine. Mr. Malmgren runs the eponymous Malmgren Global, which advises financial institutions, sovereign wealth funds and a scattering of governments and central banks around the globe. Mr. Stys is chief investment officer of Bluemont Capital.

We personally know neither of these gentleman, but Malmgren was kind enough to send us an e-mail and a copy of their article, which has the jazzy subtitle of "the inside story of flash crashes, systemic risk and the demise of value investing."

It's an excellent job of analyzing High Frequency Trading and the rest of the algorithmic crew and describing their baleful effects and we strongly recommend you try to get your hands on a copy of the magazine. As it happens, their theme is right in keeping with our riff above on what's essentially eating the individual investor and wrong with the market.

In his cover letter, Malmgren describes the extensive research he and Stys did into high-frequency trading (HFT, for short). They queried the HFT operators on everything from their funding to how they interacted with the big financial houses and why they were eager to achieve global reach.

High-frequency trading, Malmgren and Stys note, is focused solely on ramping up speed and volume to maximize tiny gains. And they assert: "Investment strategies based on fundamentals have been swept aside by high-frequency algorithms hunting for inefficiencies in daily prices and super arbitrage opportunities."

As a result, individual traders, they report, are confronted with overwhelming momentum-driven forces unrelated to corporate performance. A 'fair price" may exist, but "high-frequency traders are not seeking fair prices—they are focused solely on immediate profit."

And, add Malmgren and Stys, "unfortunately, high-frequency trader interaction with computerized algorithms of large-cap financial institutions is providing opportunities for virtually undetectable market manipulation."

They point out that "in an environment where the range and speed of price movements is ever-increasing, fundamental valuations of a company would seem to be increasingly arbitrary without the ability to distinguish accelerated price movement from actual value."

Malmgren observes that HFT provides an illusion of almost limitless liquidity, liquidity that can vanish abruptly if a few HFT platforms take a break. Implicit, he says, is "mammoth systemic risk."

And since high-frequency traders have become the dominant market makers and shakers, their capacity to turn on a dime and sell off everything, means that a market correction could go much faster and far deeper than the Street imagines.

E-mail: editors@barrons.com


Up and Down Wall Street SATURDAY, JUNE 5, 2010
Bracing for the Fallout
By ALAN ABELSON
The ripple effects of the spill spell trouble for oil outfits and energy prices. A fresh risk to the recovery and jobs.

BARACK OBAMA MUST HAVE A THING FOR KING CANUTE, that 11th- century sovereign who wore a triple crown, simultaneously reigning over Denmark, England and Norway. He was most famous for, in a momentary illusion of excessive grandeur, standing on the shore and ordering the tide to stop rolling in and to start rolling out, so he wouldn't get his feet wet. (A mighty Viking warrior, the king, being royalty, had a congenital aversion to anything common, including the common cold.)

Canute's commanding the waters to recede a thousand years ago echoed eerily in recent weeks in President Obama's futile fulmination and posturing in reacting to the deepwater oil spill in the Gulf of Mexico, courtesy of BP (née British Petroleum) and its oil-field service and drilling mates. As usual, he was slow off the mark in responding to what is now shaping up to be one of the worst disasters of its kind.

Mr. Obama's lack of urgency -- scarcely atoned for by his delayed, vituperative scolding of the culprits -- was all the more bizarre since he can't help but be very much aware of the opprobrium heaped upon George W. Bush for his initial indifference to, and tardy recognition of, the fearsome damage wrought by Hurricane Katrina.

Not that we think the president's early presence at the scene would have stanched the viscous outpouring. He wasn't equipped, after all, with a magic thumb to plug up that violently erupting hole in the briny depths. But isn't getting out in front of the hue and cry what a leader is supposed to do?

To cap the gusher, BP (ticker: BP) has tried a variety of strange (to us, anyway) maneuvers with jazzy names like Top Kill and Junk Shot, in which mud, cement and anything else that was handy was poured into the well. Until Friday, alas, to no avail. If nothing else, that gave Wall Street a chance to pitch in and do something constructive about the big spew, instead of just sending the price of crude bouncing up and down.

There has been, was, we must say, no shortage of armchair roustabouts armed with suggestions as to how to deal with the blowout. We cottoned especially to the notion of nuking it. Of course, there were admitted risks -- such as inadvertently blowing up a good chunk of the Gulf and maybe Louisiana, Alabama and Mississippi along with it, but proponents -- none of whom, oddly, reside in Louisiana, Alabama or Mississippi -- insisted it was worth a try.

Apart from the obvious casualties -- BP and Anadarko (APC), which has a 25% interest in the ill-starred project, Transocean (RIG) and Halliburton (HAL) -- the effects of the spill are destined to ripple far and wide and anything but pleasantly in the energy sector. That's the thrust of a special report put out by Tom Gallagher, Andy Laperriere and Doug Terreson of Ed Hyman's ISI Group. They warn that the blowout of the Deepwater Horizon (BP's underwater rig) could "open a Pandora's Box of legislative risk for the oil industry."

It won't knock your socks off to learn that the trio expects that companies operating in the Gulf of Mexico will suffer a hard hit to earnings from new and anticipated legislation. And vulnerable here to one degree or another are the likes of Royal Dutch Shell (RDS.A), Chevron (CVX), Noble (NE), Diamond Offshore (DO), Nabors Industries (NBR) and Ensco (ESV).

What they see in prospect for all companies involved in the Gulf of Mexico, from the integrated petro goliaths and exploration-and-production companies to oil-field services and drillers is an extended rough patch ahead. That raises the specter of declining investment and slower growth in output of crude and natural gas and, naturally, higher prices -- the very things that a still-wary consumer and a stubbornly sluggish economy need least.

Meanwhile, according to Moody's, the banks still are burdened with nearly $300 billion in bum loans and investments they'll have to charge off in the next two years, in addition to the $240 billion they'd already written off in '08 and '09. You'd think they'd be more than eager to have that heap of cruddy paper sent down the pipe, along with the mud and cement and earn some kudos for a good deed. What may have stayed Wall Street's hand was fear that those miserable so-called assets might be so toxic they'd kill more fish than a ton of oil.

Maybe Mr. Obama ought to see if he can channel Canute and discover how he'd have handled the Deepwater Horizon mess. History tells us that, after an unpromising start, the king turned out to be a better-than-fair ruler. And, in any case, the president couldn't get any worse advice than he has been getting.

WHATEVER HAPPENED TO THAT wonderful Wall of Worry that bulls used to drool over? That magical wall that grew with every piece of bad news and, more than that, provided rock-solid assurance that the market had plenty of room on the upside. These days, it's conspicuous by its absence. Perhaps when everyone were snoozing, somebody stealthily dismantled it, backed up a truck and spirited it away, taking along the Goldilocks economy while he was at it.

Which is too bad, because gosh knows there's plenty to worry about besides the gooey mess in the Gulf: the Middle East, the euro, Hungary, China's real-estate bubble, Korea, Iran, softening retail sales, the cloudy outlook for housing, the parlous condition of state finances, intimations that even Uncle Sam the Munificent is toying with the alarming idea of exercising some fiscal restraint -- and that is by no means the whole roster of rue. In short, there's worry enough to build a wall to the moon and still have some bricks left over.

Yet despite the occasional powerful flare-up, the stock market seems barely able to maintain a semblance of balance, much less gird itself to climb anything higher than a footstool. And it's no great mystery why. Gradually but inexorably, investors are starting to realize that their great expectations for the economy that propelled the indexes 80% higher from the lows of early 2009 are not due to be realized anytime soon.

The economy is staging a kind of half-baked recovery, far from the high-stepping number that was envisioned by the wild bulls. The nasty legacy of the big credit bust and awesomely steep recession is still very much with us, and even more lugubriously stalks a sizable slice of the global economy.

In other words, what's really ailing the market is a strong whiff of reality -- for which, it grieves us to say, there's no quick cure.

WHAT WALLOPED THE MARKET on Friday, sent the Dow reeling 323 points as it plunged through 10,000 once again, and unceremoniously dropped the Standard & Poor's 500 to within spitting distances of 1000 was a downright ugly May employment report. It actually deserved a place high up in that melancholy list of concerns adumbrated in the preceding item, but we purposely held it out because it manifestly merits something more than just a passing reference. The job tally caught the Street with its collective pants down (sorry if the image makes you shudder), and the Street, pants or no, vented its disappointment by thoroughly clobbering poor helpless equities.

The soothsayers had predicted that May saw between 500,000 and 700,000 additions to payrolls. (They were encouraged in this robust prophecy by Mr. Obama, who earlier in the week seemed to be letting the cat out of the bag when he confidently forecast a strong report). On the surface, the 431,000 new slots that the Bureau of Labor Statistics said boosted payrolls last month seemed at worst a tad disappointing. Then, unfortunately, someone took a closer look.

And what they discovered was that of the 431,000 new jobs, no fewer than 411,000 -- or 95% of the total -- represented temps hired for the U.S. Census. (To its credit, the Bureau of Labor Statistics pointed that out on the very first page of its report.) Moreover, the dubious birth/death adjustment swelled the ranks of new jobholders by 215,000. Frankly, we have no idea of how many of those additions were live bodies or mere statistical creations. But neither, we suspect, does the BLS. So it's at least conceivable that there was zilch improvement in last month's job total. Not very encouraging, either, was the puny rise in private-sector employment (a modest 41,000, in case you're keeping score).

Helped by a shrinkage in the overall labor force, the unemployment rate fell to 9.7%, from April's 9.9%. And counting in the underemployed folks -- who'd love to have full-time work but can't land any -- the jobless rate declined to 16.6%, from 17.1%. Other stray pieces of good news included an uptick in the length of the work week and in average hourly earnings.

As Dean Baker of the Center for Economic and Policy Research points out, apart from manufacturing , which got a lift from durables and autos, job growth in most sectors was slow or nonexistent. Construction saw a two-month string snapped , while state and local government, reflecting a financial squeeze, shed 22,000 workers.

As Dean sums it up, the report "is a clear warning that the recovery is very weak" -- and weak despite the temporary stimulus of 550,000 U.S. Census hires. "With house prices falling again, severe state and local cutbacks looming, and troubles in Europe dampening exports," he laments, "the future is not bright."

And obviously, we might add, the suddenly dimmer prospects for a number of oil companies in the wake of the spill makes the future all that much less bright.

E-mail comments to editors@barrons.com


Up and Down Wall Street SATURDAY, MAY 29, 2010
Orgy of Speculation
By ALAN ABELSON
Insiders of the top Nasdaq companies, a recent tally shows, are overwhelmingly sellers.

BLAME IT ALL ON MA. NO, WE AREN'T TAKING shots at anyone's dear old Mom. The Ma we're talking about is Ma Yaohai, a 50-something Chinese computer-science professor. Never heard of him? Well, perhaps you're more familiar with the signature moniker he used in Internet chat rooms of a certain kind -- Roaring Virile Fire.

Mr. Ma preferred to pass his idle hours arranging and, of course, participating in orgies featuring partner-swapping, group sex and that sort of icky stuff. A serial swinger, China-style. Renowned for their Puritan streak, the authorities in Beijing frowned on Ma's recreational preferences, and just this month he was sentenced to 3½ years in the hoosegow for committing "crowd licentiousness."

Reading about poor Ma, we realized how lucky we are that our proud nation doesn't send folks to jail for crowd licentiousness. We mean, if libidinous behavior were punishable by incarceration, why, half the Congress would be behind bars. Which, if nothing else, would make it difficult for our chosen representatives to assemble a quorum to vote themselves a raise or go on vacation.

Just about all of China was transfixed by the accounts of Ma's orgiastic endeavors. Abruptly bereft of such enjoyable diversion, the populace felt a natural letdown and, to fill the excitement gap, some of the more imaginative among them began spreading wild rumors of one kind or another, for the most part about the usual glamorous celebrities -- famous ping-pong players and movie stars. But the rumor mongering also spread to other forms of popular entertainment, like casinos and, of course, what has in recent years become one of the country's great pastimes, speculating in all manner of assets.

So it was that some mischief-maker, bored to tears, just for kicks passed the word to a credulous reporter (is that redundant?) that the powers-that-be had decided to dump some of China's pile of Eurobonds. And as the story with the speed of sound crossed the Pacific, whammo! it caused a bit of havoc on Wall Street. A smart triple-digit rally in Wednesday's trading turned on a dime and was wiped out in the final hour or so.

Happily, the bigwigs in Beijing, including most notably the chaps in charge of the nation's tidy little trove of foreign reserves -- a mere $2.5 trillion worth -- denied China had any such dastardly plan. And, first chance it got, on Thursday, the market took off on one of its now-familiar leaps upward.

That, at least, was the apparent happy ending to what had all the makings of an implausible episode in any case. For when the baleful rumor first surfaced, it struck us as downright fishy. As evidenced by that humongous hoard of foreign reserves the Chinese have accumulated, they're not exactly financial babes in the woods. If they were really poised to unload their European holdings, why would they ever advertise their intentions in advance, since they couldn't help knowing that such a disclosure would cause the value of those holdings to crumple like papier-mâché in a firestorm?

But this remains a market that can't stand prosperity or adversity for more than a day or two, so following that sharp advance it felt obliged to meander lower on Friday. Besides a reluctance of investors to embark on a three-day holiday with an overly heavy portfolio, some tepid news on first-quarter profits -- they weren't as robust as expected -- and consumer spending in April -- it held to March's level, despite a rise in income -- inclined traders to tread more cautiously.

The market's action following the recent mini-massacre has hewed remarkably closely to the analysis and prophecy by our old buddy, a very astute technically oriented market watcher, that we shared with you last week, including the possibility of a brief relapse. He felt a temporary bottom was being formed and a rebound was in the cards, but it would likely come up short of setting a new recovery high. And his conviction remained firm that the big, bad secular bear market was in absolutely no hurry to call it quits.

Sounded good to us when our friend laid it out and sounds even better a week later. Whatever its other claims to fame, the Dow's performance in this fading month was the worst for any May in its history and the poorest monthly showing since the dark cold days of February 2009. Whoever coined that little ditty "sell in May and go away" may have been an indifferent rhymester, but we sure wouldn't mind his managing our money.

WHILE WE FEEL NO CONSTRAINT ABOUT pooh-poohing the cockamamie story about China giving the boot to its euro-zone debt holdings, we must confess that its awesome real-estate bubble and its attempts to let some of the air out as well as signs that its growth might be easing off its torrid pace are genuine causes for concern. And our unease on those scores is only reinforced by the dodgy movement of its equity markets, which, of course, had been world beaters up until this year.

Our concern, moreover, is echoed in the recent economic commentary by Northern Trust's savvy Paul Kasriel and his able sidekick, Asha Bangalore. They even venture that while the investment world has been in a state of high anxiety about the financial woes of Greece, Portugal and Spain, it would have been better advised to be more worried about what could happen in China and, specifically, about that nation's efforts to slow bank lending in order to damp down inflationary pressures in the prices of goods and services as well as property values.

As Paul and Asha point out, "the historical record with regard to a managed deflation of asset prices is not too encouraging," to say the least. While asset prices often continue to shoot up merrily, real economic activity slows significantly. Which is why, in their view, global investors have particular reason to fret when an important economy like China's suffers a double whammy of rising inflation in the price of goods and services as well as of asset prices.

And that's also why they contend that the Sino restrictive economic policies (in league with India's similar approach) "could have a much more adverse effect on the U.S. economy and stock market than the goings on in Greece, Portugal and Spain." Although it seems to us they may be downplaying some of the larger and truly nasty implications of Greece etc., theirs is certainly a novel view and commends itself for that alone as well as the track record of its exponents. And we certainly have no quarrel with their argument that worrywarts might shift their attention to China.

A similar foreboding about China is expressed by David and Jay Levy in their latest edition of the Levy Forecast, which we find an invariably rewarding read. They point out that "when the global economy got clocked in 2008 and 2009," China was hard hit, but the government steadied the economy via a combo of vast fiscal stimulus, extraordinary monetary policy and meaningful prodding of "the banks to pump loans into the economy like mad." The result was a strong upswing in asset values and a full-blown real-estate bubble.

Not entirely comfortable with what its strenuous exertions have wrought, Beijing has set about containing the massive bubble in property values. Alas, as the Levys warn, asset-price bubbles tend not to stop expanding and hold; rather, they just keep expanding until they run out of steam or are unexpectedly popped, and then, as we still have rueful reason to know, they collapse.

It's conceivable, the Levys concede, that China's real-estate bubble might float on for another year; but if it doesn't -- and we'd give odds on that -- the omens for its own and the global economy are both pretty dire.

POWERSHARES QQQ (whose symbol is QQQQ; the extra Q, we assume, is for cute) is the exchange-traded fund for the Nasdaq 100. To be frank, we don't spend a lot of time mucking around the ETFs. Nothing personal, you understand; they're an interesting, explosively growing, immensely popular and mostly worthy new investment phenomenon. But once you've connected them with the sector, subsector or seemingly limitless variation of such, there really isn't much to say that couldn't be said in greater and far more enlightening detail about the industry, say, or group for which they're a proxy.

What leads us to talk about PowerShares QQQ (you thought we'd never get around to telling you) was Alan Newman's CrossCurrents advisory letter, published a fortnight ago. More particularly, his survey of insider transactions in the top eight issues in the ETF. He performed the exercise on May 10 and what he discovered was rather astounding.

There were 231 sellers and three buyers, which works out to a somewhat lopsided ratio of 77 to 1. All told, the insiders sold 59.8 million shares and purchased 15,200 shares, a sell/buy ratio of 3,933 to l. Not exactly a resounding vote of confidence in the prospects for their companies.

Moreover, Alan notes, analysts are just as positive on the QQQ leaders as they were back in March 2008 before a 37% fall in price. At that time, 74.1% of the recommendations were Buys and 2.9% were Sells. As of May 10, 2010, 77.7% were Buys and 3.6% Sells. The more things change, we guess, the more things stay the same, especially on Wall Street.

Insiders are hardly infalliable investors and, as Alan observes, their investment habits are not a timing indicator. Still, they do tend to know a bit more about the company and its outlook than the analysts or the folks buying the stocks they're so determinedly selling.

E-mail comments to editors@barrons.com


Up and Down Wall Street SATURDAY, MAY 22, 2010
May's Mini Massacre
By ALAN ABELSON
It may not have been another "flash crash." But Terrible Thursday proved no slouch at bettering the market. So where do we go from here?

SOMEBODY UP THERE COULD USE A SENSE of humor. Last week, we prayerfully requested that the market stop acting so proper and prissy and, just for kicks, start acting more like a real swinger. But, for heaven sakes, we were only joshing. Instead of a little more action to enliven the trading scene, we suddenly got volatility up the ying-yang. The Chicago Board Options Exchange's measure of volatility, known to the gaming crowd as the VIX, a.k.a. the fear index, shot up some 30% on Terrible Thursday and reached an elevation it last saw in the dark days of March '09. So If anyone up there is still listening, we say please, enough already.

While it may have lacked some of the panache of the previous week's flash crash, Thursday's whipping was a truly impressive wipeout on its own. Big Board volume topped two billion shares with something to spare, and the market came down with a monstrous case of bad breadth: 3015 issues finished in the red, compared with a grand total of 168 that advanced, and new lows outweighed new highs by more than 12 to l. Stocks sliced through supposed support levels -- to lapse into the technical lingo -- like a honed knife through a tub of butter.

Our beloved but battered Dow Jones Industrials closed off 376 points and 1137 points below the recovery high reached less than a month earlier. Not to be outdone, the Standard & Poor's 500 strove to keep pace, and it wound up (or, more accurately, wound down) at 1071.59, which, as it happens, is 146 points, or 12%, below the recovery peak it hit April 23. More than worthy of mention, too, is that Nasdaq fell 94 points to 2204, roughly 326 points below its recent recovery top. (It is still, in case you were curious, something like 3000 points away from the all-time high reached back when lunacy was in flower during the late and much lamented dot-com mania).

This mini May massacre wasn't confined to equities by any means. No surprise, we reckon, that junk bonds, which enjoyed such a spectacular run since financial assets came back into vogue early last year, may wind up this month with their worst performance since the fall of '08, offering further proof -- as if any were needed -- that "risk" is once more a four-letter word.

And commodities, notably oil, were roughed up and even gold was nicked of some its glitter -- the former despite the strength in the dollar which means more bucks for the barrel for OPEC, as investors gave a wide berth to anything but perceived havens, while bullion, as we noted last week, was due for some kind of a breather to let a bit of the incredible gold rush cool.

To an old pal and superb market analyst with whom we checked last week, the rout was pretty much in line with how cyclical rallies -- even ones as spectacular as the one we've been witness to since March 9 of '09 -- perform in secular bear markets, which, he has no doubt, we're still in. After about a year, he observes, they invariably tend to drop 10% to 15% from their highs before finding any footing of sorts.

We were chatting with him as the market was being pummeled and, calm as usual, he thought we might be seeing something of a selling climax, but cautioned that in a market that has refused to follow all the classic patterns, we might still get another shower of offerings next week before the process had run its course. Friday's bounce was nicely in keeping with his script.

Any rebound, he believed, could go on for a spell, but he didn't expect it would carry stocks to new recovery highs. And he saw nothing to suggest that it would herald a new bull market, much less the end of the secular bear market, which could, in his view, have some years to run, punctuated, if it's any comfort, by periodic rallies.

He did feel the financial-reform measure or, as he put it, "the war on Wall Street," would have its impact; the wonder would be, we guess, if it failed to. Among other things, he believed it was destined to sharply reduce turnover. So be prepared for plenty of dog days once the strictures are in place.

Whatever the technical imperatives, the severe decline also reflected the increasingly frayed framework of investors' overly bullish expectations and flawed perceptions that kited stock prices over the past year. The economic recovery here, to be kind, is rather lackluster and, in any case, except to the visually impaired, bears no resemblance to that vaunted "V" that the more exuberant observers prattled on about.

Growth in many parts of the globe is under challenge, from Europe, where more than a smattering of countries struggling with too much debt face the pain of fiscal restraint, to China, pushing to corral its runaway property boom before the bubble goes proof and splatters the rest of the economy. And just about everywhere, the mean market shakeouts have left investors aquiver.

Toss into the mix the dawn here and abroad of a new age of serious financial reform -- whatever, in fact, that turns out to be -- it isn't exactly the kind of climate in which markets, particularly stock markets, flourish. In short, caveat emptor. (Somehow, we can never remember how to say "seller beware" in Latin.)

GEORGE BERNARD SHAW, as we recall, in one of his wonderfully acidulous aperçus, complained that "those who can't do, teach." We don't think that's quite fair to teachers and besides, in any case, as we've recently discovered, GBS's dictum needs updating to apply to these rapidly changing times. A more telling paraphrase would be "those who can't do, advise."

What got us ruminating this way was a recent piece on Time.com, and we are grateful to the indefatigable Doug Kass for bringing it to our notice.

In a Q&A interview, two (natch) economics professors at Yale recommended -- and we kid you not -- that people in their 20s and early 30s (still in their callow youth, in other words) take their pittance of savings and buy stocks on margin. Of course, the profs insisted that their research demonstrated the wisdom of doing so.

It's very sound advice, it strikes us, if you're keen on turning a pittance into a pity. We couldn't help wondering how any young 'uns innocent enough to follow that advice made out with their small but leveraged portfolios during the recent market turmoil. (Maybe it's best not to inquire.)

For that matter, we couldn't help wondering how the professors made out. But perhaps they're smart enough not to eat their own cooking.

UNDER THE HEADLINE "Scary Math," Dave Rosenberg, one of the very few pros, until last week anyway, who has shared our reservations about the stock market and the economy (which, we suppose, is why we quote him so often in this space) has compiled an interesting list of things that polite people don't talk about over the dinner table, that still speak eloquently to the state of the economy. Here's a sampling:

One in every 10 Americans missed a mortgage payment in the first quarter of this year -- a new record. One in 10 Americans' credit-card usage is being written off -- also a new record.

One in six Americans are either unemployed or underemployed. Over four in 10 of those jobless Americans have been out of work for at least six months and there are five unemployed workers competing for every job opening.

One in four Americans with a mortgage have negative equity in their homes. Only one in 50 Americans plan to buy a home in the next six months.

One in eight Americans feel the current government policy is actually helping the economy.

Ask not, then, why so many people are so teed off.

"MODS ARE WORSE THAN subprime loans." Thus spake (or, actually, wrote) Mark Hanson, a familiar name to Barron's readers, we trust. Mark runs Hanson Advisors and his chosen professional turf is, fittingly enough, real estate. Mark was early and more importantly, right in forecasting the collapse of housing.

The "mods" referred to in the chilling quote are not modules, but modifications, and what are being modified are residential mortgages courtesy of, for example, the government's Home Affordable Modification Program, or HAMP for short.

Mark's beef is that even the worst of the mortgage brokers during the top of the housing boom never -- knowingly anyway -- made a loan that was 150% of the value of the house to a borrower whose debt represented 61.3% of income, as does HAMP. That suggests to him that the average modification loan will perform worse than the average subprime did. And he predicts the majority of these loans within 15 months will default once more.

Hardly glad tidings for housing or the economy. Even worse news, obviously, for the home builders, the shares of which have enjoyed something of a revival in anticipation of a solid recovery.

E-mail comments to editors@barrons.com


Up and Down Wall Street SATURDAY, MAY 15, 2010
An Ode to Volatility
By ALAN ABELSON
Whatever else it is, the stock market, suddenly isn't dull. Felix Zulauf on the euro, Greece and other depressing subjects.

IT'S ABOUT TIME THE STOCK MARKET EMERGED from its soporific rut of doing nothing but calmly tacking on points, and got around to providing a few thrills that set our pulse racing and heart aflutter. And these wonderful past couple of weeks, it has done that with a vengeance, first threatening to fall clear off the face of the earth and then, just as we were peering anxiously down the bottomless black hole, darned if it didn't do an about-face and take flight like it was shot out of a cannon, all faster than you can say: "Hip, hip hooray for good old volatility."

More specifically, the week before last, the market suffered its worst setback since March 2009, only to come roaring back early last week with a 405-point gain on Monday and, after a pause for breath, begin tearing up the Street again. But, man, this is not the well-mannered beast plodding ever higher that we've grown accustomed to, but suddenly a real and somewhat wacky swinger. Thus, on Thursday, just when we had our gaze firmly fixed on the lovely blue sky way up there, it decided to take a triple-digit dive, and liked it so much that it continued the plunge on Friday, in the face of some ostensibly upbeat news on the economy.

The banks, whose first-quarter operating reports were a tribute to their recently acquired Midas touch in swapping stocks, bonds, commodities, derivatives, in short, everything but the kitchen sink -- and maybe that, too -- found themselves in the crosshairs of New York state's take-no-prisoners attorney general, Andrew Cuomo (who wants to be governor, which considering the state of the state would suggest the poor fellow may be a wee bit addled by ambition).

What Mr. Cuomo suspects, so reported the New York Times, is that the banks were diddling the all-too-willing credit-rating agencies -- Fitch, Standard & Poor's and Moody's -- into adorning their lucrative mortgage-backed securities with undeservedly glossy alphabetic letters. Now, it's hard to imagine such elegant institutions as Citigroup (ticker: C), Goldman Sachs (GS), Morgan Stanley (MS), Credit Suisse (CS), Deutsche Bank (DB), Crédit Agricole (CRARY), UBS (UBS), and Merrill Lynch, now part of Bank of America (BAC), indulging in such low-down shenanigans. Still, after the revelations about Fabulous Fab and the alleged Abacus scam, you can't help wondering.

Of course, apologists for the banks are sure to seize on the latest accusations of bank misbehavior and exclaim, "See -- they all do it!" As if collective sin exculpates the individual sinner. Which strikes us as the epitome of sophistry, akin to excusing cannibalism because it's the tribal custom.

Even before Mr. Cuomo brandished his cudgels, the banks had been under siege. They're the prime target of the financial-reform legislation being hammered out in Washington. And for the masses, the banks pretty much rate as Public Enemy No. 1 for their egregious actions that helped fell the markets and then soaked up countless billions of taxpayer money in bailouts to keep them afloat. Not surprisingly, their current opulence in a still-far-from-robust economy has only intensified the popular venom.

As it is, the ranks of the banks have been steadily thinning out, in no small measure because of their imprudence. Two hundred thirty-three banks have gone under since 2007, including 68 so far this year, according to the Federal Deposit Insurance Corp. That's quite a contrast with as recently as 2007, when failures totaled three.

Many of the lenders that went belly-up were relatively small fry. However, even some of those goliaths that are the prime targets of both Mr. Cuomo and Washington, should worst come to worst, may be forced to slim down and close some branches. Among other things, that would burden a still-shaky commercial-property market.

But every cloud, we've been told, has a silver lining and, conceivably, the affected banks might recoup something from sales of the buildings housing their outposts, and, in the process, soften the impact of the forced divestitures on the overall economy. For those ex-branches would make handy little neighborhood prisons, and the good part is that you wouldn't have to move all the inhabitants.

FORGIVE US, PLEASE, FOR DIGRESSING from our celebratory note on volatility. We must confess that some of our exultation waned upon reading a brief commentary by David Rosenberg of Gluskin Sheff. Like us, Dave has tended to view the great stock rally with unyielding skepticism. Our major error was focusing on what we dispassionately perceived to be happening in the real world, rather than what investors were ardently imagining was happening. We somehow forgot John Maynard Keynes' maxim that the market could stay irrational longer than he could stay solvent.

In any event, Dave is one of those rare birds among market strategists and economists who rely on facts rather than fancy. And, we should note, his bullish take on bonds and gold was right on the money.

In that memo alluded to above, he points out that there have been 16 rallies of 400 points or more, 12 of which took place as the credit bubble was bursting and the rest during the tech wreck. So the omen of the 405-point rise isn't something to set you dancing around the maypole.

Indeed, Dave believes the "most valuable information contained in last week's intense volatility, underscored by the 400-plus-point bounce in the Dow, is that it's time to take some chips off the table." Obviously, to judge by the action in the final two sessions last week, a lot of folks agree with him.

AS WE OPINED LAST WEEK, the Street's eagerness to clutch at just about every scrap of news -- bad, good and indifferent -- as an excuse to buy was, in itself, fair warning that it was cruising for a bruising. This frenzy of optimism blinkered investors to even the most obvious implications of the way the world was spinning. And then, suddenly, the scales began to fall from their eyes.

Take the great outcry for financial reform resounding through the halls of Congress. When the lawmakers -- more than a little conscious that this is an election year and the natives are restless -- began to translate weeks and weeks of words into action, with Wall Street uppermost in their minds, investors abruptly woke up to the likelihood that whatever emerged from the fetid cloakrooms of Capitol Hill might not prove exactly bullish for the stock market.

Or, take the near-trillion-dollar bailout of Greece and its troubled kin. At first, it seemed another reason to scarf the bubbly. Then, the proverbial lightbulb went on, and it dawned on even the dimmest trader that the austerity pledges by Greeks and the other impecunious countries -- to tighten their fiscal belts and rein in their financial extravagance -- might just come back and take a bite out of own economy, beginning with our exports.

To a get a better fix on Greece, the euro and other depressing subjects, we roused Felix Zulauf via the magic of e-mail in his abode in Switzerland. Felix is the vaunted Roundtable member who runs the aptly named Zulauf Asset Management, and the perfect go-to man for an invariably sensible and informed sizing up of what's happening on the global economic and financial scene.

The origin of the current mess, he says, is that the same monetary and currency policy for the various and varied economies in the euro zone has over time created huge imbalances and stress. While Germany has been diligent in tending to its economy and minding its financial integrity since the formation of the European Monetary Union, Greece and the other so-called Southern European nations have partied.

Enjoying what Felix calls "the windfall benefit" of a stronger currency and, for a spell, much lower inflation and interest rates, Greece, Spain, Portugal et al were caught up in a big credit-driven boom that's gone bust, and they've been suffering the painful consequences, not the least of which was skyrocketing interest rates. Southern Europe, he laments, is laden down with debt and is economically uncompetitive, rather a nasty combo. Which, as night leads to day, prompted the big bailout, unprecedented for Europe in sheer size. In truth, he explains, it's really a bailout of the European banks, which essentially were on the hook as the main creditors.

In deciding to ape our Fed and open the monetary spigots wide, Felix reflects, the European Union policy gang has demolished the very restraints that kept the European Monetary Union on the straight and narrow. And, he predicts mordantly, the euro will join the greenback and the British pound on their way "to eventual self-destruction." Comforting thought.

He suspects that the dizzying drop in the value of the euro may be poised for a temporary respite, and that a two- or three-month bounce could be in the offing. Enhancing that prospect is a contrarian notion, which we think is quite credible, that the euro has no friends left; and short positions are humongous. Moreover, he adds, the reason for the weakness in the currency is scarcely a secret.

All of this, he's confident, is very bullish for -- you guessed it -- gold, especially for the long term. All the central banks in Europe and the U.S. are determinedly printing money like mad "to save the world," and he continues to firmly believe that, as he puts it, "gold expressed in those currencies will gain in value." Buy on any corrections, he advises; a few years from now the yellow metal will be a heap higher.

It won't knock your socks off to discover that Felix would stay away from government paper, and he's wary of equities. All in all, we think he's spot-on in how he appraises the markets. Our only quibble is that news that Abu Dhabi has installed an automatic-teller machine that spits out gold instead of dollars or what-have-you has the strong scent of a near-term top.

E-mail comments to editors@barrons.com


Up and Down Wall Street
SATURDAY, MAY 8, 2010
The Infants' Intifada
By ALAN ABELSON | MORE ARTICLES BY AUTHOR(S)
The real villains behind last week's crazy crash. Where does the market go from here? A partly sunny employment report.

WHATEVER YOU DO, PLEASE, DON'T MESS with those teeny tots or there'll be hell to pay. That warning was writ large in last Thursday's horrifying break in the stock market. Around 12:30 p.m., Yahoo! published an AP piece headlined "Feds Investigate Baby Bottom Complaints," delicately detailing a scattering of reports of severe rashes afflicting poor little tykes who happened to be wearing a new type of Pampers diaper made by Procter & Gamble.

Wall Street being Wall Street -- where rumor rules, but parsing actual news stories makes traders' lips grow tired -- two hours passed before the Pampers problem made the rounds. Once it did, though, it didn't take but five minutes -- literally -- for P&G's stock to shed 22 points to under 40 and help send the Dow screaming 998 points lower.

Happily, cooler heads -- or, conceivably, more tranquil bottoms -- prevailed, and by the scary session's close, all but 348 points had been recovered and P&G closed back over 60. But for bears, after the usual strong Monday, it yielded a trifecta -- three consecutive down days, including a couple of triple-digit losses that sliced 632 points off the poor old Dow. On Friday, moreover, investors were still reeling, and the market fell another 140 points.

There were the usual excuses by the usual suspect sources. You know, stuff like human error caused by somebody's wayward finger or some fancied computer glitch, but they always say that. For ourselves, we remain utterly convinced that what did such a demolition job on stock prices was the infants' intifada.

In one sense, the market had been asking for it. Sentiment -- as we've taken some pains to note, and until last week, admittedly futilely -- had gone from bullish to dangerously so, as stocks continued their extraordinary flight into the wild blue yonder. Speculation, to dig into our ample store of clichés, was rife.

Apart from an occasional spasm of concern over Greece and the increasingly evident debt woes afflicting other impecunious members of the euro zone, investors cheerfully shrugged off just about anything unfavorable, from the jagged edges of our own economic recovery to the possibility of the Chinese bubble popping. Never mind that this latter prospect was largely responsible for the uncharacteristically recent draggy action of the Sino stock markets.

What helped turned a suddenly wobbly market into a ferociously vertiginous one, say Sal Arnuk and Joe Saluzzi of Themis Trading, was the astounding rapidity with which bids melted at the first real sign of selling. "Market participants," they relate, "were tripping over themselves to exit a market that was in free-fall." And they assert pointedly, in the vanguard of the tripping were "your friendly" high-frequency traders. To Sal and Joe, Thursday's market -- which was off at one time an awesome 9.2%, the biggest intraday plunge in all of recorded history (and probably unrecorded history as well) -- demonstrated clearly "the inherent and systemic risk of our automated stock market, with few checks and balances in place." And, they lament, "our market structure has evolved to cater to masters of expensive technology, deployed unfettered by participants whose only concern is to squeeze out every last picosecond and fractional cent."

Proponents of high-frequency trading, which these days accounts for between 50% and 70% of trading, never tire of citing as its supposedly incomparable virtue that it supplies gobs of liquidity to the market. It sorrows us to report that the bare bones of what happened on Thursday is that when the going got rough, the high-frequency crowd stampeded for the exits and their vaunted pools of liquidity vanished with them.

As the Themis pair describe the debacle, "once the market sensed stress, the bids were canceled and market sell orders chased prices down to the lowest possible point." Investors who had sought to protect themselves with the prudent use of stop orders got creamed because those orders were often filled at prices that were temporarily and wildly depressed.

Nor, Sal and Joe warn ominously, is this likely to prove an isolated incident; it will happen again. For the changed market structure, they contend, "at every turn sacrifices protection of long-term investor interests for the profitability of serving hyper-leveraged intraday speculators."

AS A KIND OF P.S. TO THE ABOVE, Bill King, proprietor of the King Report, notes the immediate claim churned out by the rumor mongers was that a trader error was the cause of the fiasco and, specifically, that the sorry lad or lassie who had committed the gaffe had mistakenly entered an order for $16 billion, instead of $16 million.

What nonsense, Bill exclaims. For openers, he asks disbelievingly, "How can a $1 billion sell program collapse the stock market?" But "more importantly," he continues, "what order entry system uses 'b' to designate billion and 'm' to designate million?" And he promptly answers his own rhetorical question with an unequivocal "None!"

Bill also points out that if an error had occurred, it would be known quickly and would take only minutes to finger the culprit. However, he explains, it's better for Wall Street and regulators to blame a hapless trader for what happened last Thursday "than address the nefariousness of high-frequency trading, direct-exchange-connected computers" and the like.

And how come, he wonders, all computer-trading errors somehow occur on the downside?

SO WHERE DO WE GO FROM HERE? To judge by Friday's rather dispirited performance, we'd venture that at the very least investors will be a mite tentative. Which makes sense, really, since the kind of drubbing they took last week obviously isn't calculated to inspire confidence, much less an eagerness to get back into the fray.

On that score, the failure of equities to show any oomph despite a seemingly encouraging report on April employment was not obviously an especially happy omen. The market these past 14 months has treated a lot of folks very well and even after the weird and whacky shock so rudely administered to them last week, all but the Johnnies-come-lately are apt to be sitting on an appreciated portfolio and not particularly disposed to see it eaten away.

The trouble with sharp market reversals like last week's, with breadth collapsing and new highs significantly fewer than new lows, is they tend to dispel the giddiness that both accompanies and feeds buoyant moves and prompts a more sober assessment of the risks, imaginary, real and potential, that lurk possibly just around the corner. Just the stuff, in other words, to put a chill on investor enthusiasm and weigh palpably on a market that's unaccustomed to widespread doubt.

That means negatives like Greece or the festering problems of too much debt and the rest of the poisonous legacy of an unprecedented credit binge both here and in much of the developed world, blithely downplayed when the markets were booming, are now destined to draw uneasy attention from investors across the board.

The upshot isn't necessarily that the greatest bear-market rally we've ever witnessed has run its course and it is downhill from here on. Although we wouldn't rule that out. But it does suggest that for even the most unreconstructed bull, the lights, for the moment, anyway, have switched from bright green to glaring yellow.

As intimated, the job numbers for last month were on the whole more than decent, especially compared with the many dreary months when they were downright awful. Payrolls swelled by 290,000 and the household count came in at 550,000. What's more, both March and February were revised tangibly upward.

The unemployment rate edged up to 9.9%, from 9.7%, mostly because the labor force expanded by 805,000, presumably in some part by workers who had been previously daunted by the difficulty of landing a job but felt more optimistic of doing so last month. So, if you're so inclined, you might consider that something of a plus.

The gains were pretty well spread over the length and breadth of the economy. Manufacturing added 44,000 slots, mining 7,000, construction 14,000 (all of it and then some, from nonresidential building), professional and business services had 80,000 hires, hotels and food services added 45,000 and health care 20,000. Temps -- a muted positive -- were still in demand. In any case, this broad dispersal of hiring does smack of a better economy.

However, there are some dubious enhancements of the totals. Uncle Sam, for example, accounted for something like 66,000 of the additions via census workers. Obviously, that bright-eyed bunch, helpfully padding the monthly employment totals, are likely to be mostly just a memory come the second half of this year.

And no fewer than 188,000 were added to payrolls in April courtesy of the magical birth/death computer model that the BLS uses, to net out the number of firms too new to be included in the survey and presumably those no longer among the living. While we'll grant that the uptick in the company no doubt has spurred a trickle of entries in commerce and industry, we're hesitant to credit the actual birth/death reckoning because of the strange additions during many of the darkest months of the recession.

The April report, in any case, wasn't all peaches and cream. Our preferred barometer for the job market, U6, which measures both underemployment as well as unemployment, rose to 17.1% from 16.9%, just a few notches below the all-time high and, by our lights, not even worth half a cheer.

Worst of all, average hourly earnings increased a paltry penny, while the tally of people out of work for 27 weeks or more extended its remorseless rise, reaching a stunning 6.7 million souls, nearly 46% of the unemployed.

But after last week, we're grateful for even a few crumbs of upbeat news to pass along.

E-mail comments to editors@barrons.com


Up and Down Wall Street SATURDAY, MAY 1, 2010
Leap Before You Look
By ALAN ABELSON | MORE ARTICLES BY AUTHOR(S)
Why the SEC's porngate isn't what it seems to be . Alan Newman on a contrary indicator. Stephanie Pomboy laments.

LEAPING TO CONCLUSIONS CAN HAVE DIRE, sometimes even fatal consequences. Yet who among us is innocent of this invariably rash, but sometimes irresistible, act? And the temptation to leap first and look later is all the greater in the current, anarchistic popular mood, when anything or anyone connected with government is deemed guilty until proven otherwise, and often even then.

A perfect case in point is the huge outcry triggered by the revelation by the Securities and Exchange Commission's inspector general that staff members of that highly respected agency have spent a good part of their days over the past five years studying pornography on the Web, and doing so not only on Uncle Sam's dime but also on government computers.

The report was absolutely right. But the fierce and deeply negative reaction, we fear, was misguided. Far from exhibiting repugnantly lascivious or lecherous inclinations, the stalwarts charged with ensuring the integrity of our financial markets and furnishing protection for investors big and small were diligently doing their job.

Among the younger, unseasoned ones, bereft of much experience of Wall Street and its denizens, there was the occasional failure of their superiors to adequately communicate. Thus, ordered to perform a thorough scrutiny of "bare sterns," they assumed that porno sites were the logical place to carry out that assignment. That misunderstanding led to a dictum that assignments would henceforth be conveyed in e-mails, rather than orally.

Similarly, when commanded to investigate "naked shorts," whose perpetrators bet that this or that stock would tank without bothering to borrow the necessary shares to make the transaction legit, the SEC hound dogs quite reasonably concluded they would find an abundance of such rascals on sites devoted to sexual content. Their only sin here was not habitual prurience, but a regrettable lack of familiarity with Street usage.

Our friends Jay and David Levy, writing in the latest issue of the Levy Forecast, somehow find it in their hearts to suggest that even poor old Wall Street and the big banks, both at the top of everybody's hate list these days, are getting a bit of a bad rap. They agree that the financial sector deserves no small part of the blame for the economy's collapse. But, they complain, greedy bankers and their henchmen were by no means the whole story.

What, they ask, about the irresponsible behavior of consumers "who counted additions to their home equity as regular, spendable portions of their annual incomes?" Or, what about liar loans -- in which would-be homeowners deliberately inflated their income so that they'd seem to be able to afford a mortgage far beyond their actual means -- and the millions of household liars who conspired to get them? And what about unscrupulous appraisers and mortgage brokers who, by hook or crook (more often the latter) helped unqualified borrowers to appear qualified?

Nor does that exhaust the Levys' roster of culprits who contributed to the decline and fall of the economy; but you get their point. And while we're quite willing to spread the blame -- when it comes to villains, the more, the merrier we say -- we remain steadfast in our conviction that, except for the banks and their financial kin and their insatiable greed and reckless pursuit of the almighty dollar, the Great Recession would have been just another bad slump.

Jay and David postulate that the "experience during the past few decades may suggest that Americans will forget their anger at banks and Wall Street once the stock market makes them enough money, and normal lending activity puts them back in touch with their friendly bankers." However, they warn, this time the financial sector faces a triple whammy. To wit:

For one thing, it will be buffeted by the painful results of balance-sheet contraction for years to come. For another, tighter regulation -- the government's weighing of criminal charges against Goldman Sachs, we might interject, makes that a lead-pipe cinch -- will help close off or sharply reduce the profitability of the casino games that have so enriched it in recent years. And finally, a "vindictive public may push government to go well beyond prudence in taxing or straitjacketing financial institutions."

On this last, we'd like to offer a demur. We don't view the public's reaction as vindictive; we see it rather as sweet and deserved vengeance for their loss of jobs or homes, or both. As for the threat that Uncle Sam will go well beyond prudent action, well, the financial sector rewrote the book on imprudent action -- and he who lives by the sword, and all that. The kind of porn the banks et al peddled makes the stuff the SEC guys gazed at look positively innocuous.

The Levys are a sagacious pair, and we take their caution on what's confronting the banks et al quite seriously. All the more so since, apart from some recent hesitation induced by Goldman's regulatory woes, the financial sector has been in the vanguard of the awesome market rally since the depths in March '09, shooting up a spectacular 160%, versus 75% for the Standard & Poor's 500. A splendid performance that discounts everything except unpleasant surprises.

AS A CONTRARY INDICATOR, INVESTOR sentiment may not be flawless, but it beats most everything we've come across in lo! these many years of market watching as a guide for future movements by that ornery and quixotic beast, the stock market.

From time to time, we've cited the surveys of those cockeyed kibitzers, the investment-advisory services, by Investors Intelligence. The latest readings, incidentally, continue to show a preponderance of bulls and a paucity of bears, a pretty good sign that the juice is seeping out of this market. But whether it's a head fake or something imminent is hard to say with any assurance. Best to regard it as the sounding of a tocsin of possible trouble.

This is not all mumbo jumbo, in case the thought happened to cross your mind. It's based on a logical assumption: When bullishness is rampant, the inference to be drawn is that buyers may have already shot their wad, and, of course, the opposite is true -- that is, selling has been largely spent when bearishness is in full roar.

Alan Newman, a crack technician, and chief cook and bottle washer at newsletter CrossCurrents, offers another intriguing contrary-sentiment indicator in his latest commentary. It's based on investor preferences in mutual funds, and he credits some Rydex charts on the Decisionpoint Website with supplying the necessary info.

Recently, Alan relates, money-market and bear-fund assets both fell to multiyear lows, while bull- and sector-fund assets mounted to their highest levels since the October 2007 market peak. Currently, he reports, there is roughly $7.50 in bull and sector funds for every $1 in bear-market fund assets, which he calls "the most ridiculously one-sided sentiment we have seen since the tech mania convinced folks that no price was too high to pay."

And Alan, who's usually a pretty cool cat, warns that it has all the makings of a significant downside reversal, beginning "like right now."

WHAT DISTURBS US ABOUT THE investment scene as much as the flashing technical yellow lights is the stunning revival of a rabid speculative appetite. As Stephanie Pomboy observes in her latest MacroMavens epistle, "the lure of risk" has become steadily more powerful. "As hoped and intended," she exclaims, "the Fed's outsized accommodation has successfully quashed any impulse to get healthy after the U.S. economy's credit-induced cardiac arrest."

So successful have Bernanke & Co.'s dubious endeavors been in this regard, she says, that "a man from Mars (or a woman from Venus) eyeing the financial landscape today would have no inkling that just five quarters ago, policymakers were applying the defibrillators in a desperate attempt to shock the financial markets back to life." Credit issuance, she points out wondrously, has recovered in all segments of the market, including, most recently and most notably, the dormant mortgage-securitization space.

Thus, the Redwood Trust (long may it bloom) securitization of some $222 million in Citibank loans, "was the first major issue of its kind (one that did not rely on government support) since the lights went out in 2008." As further testimony to the new-found, ravenous appetite for risk, Stephanie notes, the spirited recovery in credit issuance has been paced by "the junkiest of junk."

And, she goes on, while the dollar amount of high-yield issues is still a tad shy of the all-time peak, their share of total credit issuance is at a new high, and by a comfortable margin. This achievement she attributes to "a torrent of demand as yield-starved investors rush to get it while it's hot!"

As Stephanie reflects, with the economy "still laboring to shed its bubble excesses," she continues to view the rally in risk as "just a sugar high, destined as all sugar highs, to crash." And she cites the fact the stock-market cap has surged to a startling 148% of gross domestic product in barely a year as a sign that something's out of whack.

Further reinforcing that conviction is the yawning divergence between the fortunes of Wall Street and Main Street, glaringly evident in the fact that 80% of the profits recovery is due to financials. Indeed, Stephanie contends, the fact that financial-sector earnings are within spitting distance of their 2007 record, while the economy and nonfinancial profits are nowhere close, "highlights the lack of depth of the recovery."

Once again, she sighs, we are relying on "financial engineering as a substitute for genuine growth. Having learned nothing from our near-death experience, we're back to the same bad habits."

E-mail comments to editors@barrons.com


Up and Down Wall Street
SATURDAY, APRIL 24, 2010
Wanna Bet?
By ALAN ABELSON
Barry Ritzholtz contends, contrary to the common view, that the case against Goldman is anything but weak. Like it or not, here comes financial reform.

PRESIDENT OBAMA CAME TO NEW YORK CITY TO LECTURE Wall Street on its wicked ways last Thursday, and the stock market shivered in fearful anticipation. Before an audience loaded with political eminences from the city and state (the administration thoughtfully checked ahead of time to get Environmental Protection Agency clearance; smells count, too, you know) and a full complement of leading banksters, as they're affectionately known in the neighborhood, the president made his pitch for financial reform.

But, we're happy to report, trepidation melted as the president delivered his spiel. Frankly, we found that show of investor insouciance a bit surprising. Oh, sure, Mr. Obama liberally applied the soft soap about his warm regard for the titans of the financial industry. (Who wouldn't feel that way if, for example, the Goldman guys -- just to pick a name out of the hat -- had kicked in a mil or so to your campaign?)

Still, we held our breath, lest the market decide to go south again when he declared that the only ones who had cause to fear the proposed new rules were those whose "business model depends on bilking people." When that failed to set off a selling stampede, it's hard to imagine what would.

Of course, Congress hasn't gotten all its licks in yet, so it's tough to even guess what "reform" will look like when it emerges from that body's treacherous coils. And, on that score, the commander-in-chief warned that "battalions of financial-industry lobbyists" have descended on Capitol Hill to wage war on reform. So if you're planning to visit D.C. while the great debate is going on, be sure you're armed with your trusty fly swatter.

Wall Street, in any case, was more a prop for the occasion than anything else. The speech was aimed at the populace at large -- who are already seething at the banks and their cohorts in the financial sector -- and the president was hoping to rouse the people to put lawmakers' feet to the fire and persuade their chosen representatives to go along with his concept of reform. One reason that investors likely shrugged it off: It was heavily laden with the same old familiar unarguable pieties -- playing by the rules, checking excesses, slimming the fat cats, etc., etc. -- while craftily avoiding offending anyone in particular with more than a smattering of detail.

But we wonder. Was it truly, as the market's reaction suggests, just a big yawn? Reform of some sort has the wind at its back, if only because the scars of the recent recession and its malign companion, the bear market, are still with us and still hurtful, and this is an election year. Changes are coming and not all of them are likely to be salutary -- and some could have serious consequences, unintended or not.

The prospect of stiffer regulation, or, for that matter, just about anything else, seemingly is incapable of fazing investors, in their current euphoric mood. But, as even the least perceptive among us has learned to his sorrow, that way lies cruel disenchantment.

WHAT GAVE A CERTAIN, SHALL WE SAY, pertinence to Mr. Obama's admonitions -- however tempered they might have been to suit the assembled financial luminaries -- was the rumpus touched off by the Securities and Exchange Commission's revelation that Goldman Sachs had teamed up with hedge-fund operator John Paulson to create a "synthetic" (as in contrived, or not real) collateralized-debt obligation (CDO in Street parlance) tied to subprime mortgages.

It had the makings of a great double-play: Goldman could market the CDO and Mr. Paulson could short it.

As it worked out, since housing and subprime mortgages were about to go over the cliff, Paulson wound up with a billion dollars, thanks to his propitious short.

Goldman found two institutional buyers for the CDO, somehow neglecting to tell them of Paulson's role in its creation and his interest in seeing its value vaporize. They lost close to a billion. The SEC sniffed fraud and so charged Goldman in a civil complaint.

Despite Goldman's adamant denial of impropriety and vow to fight the charge in court, the fallout continues and has spread. Because one of the buyers is a Dutch subsidiary of the Royal Bank of Scotland, itself very much a ward of the British government which had bailed it out of a potentially fatal earlier misjudgment, Prime Minister Gordon Brown got his dander up and railed against Goldie right out there in public for all the world to see and hear. (That Brown is in the midst of a fierce battle to save his job only added vigor to his wailing.)

In like manner, the other buyer was a German bank, and that didn't sit well with Chancellor Angela Merkel, who was not exactly shy about expressing her displeasure.

Here at home, meanwhile, any number of boisterous bloggers have waded into the fray. The Huffington Post queried economist James Galbraith of the University of Texas, who has not been shy about voicing his conviction that fraud was a prime cause of the financial crisis. Mr. Galbraith obliged with a juicy quote that to repair the damage wreaked by fraud and fix the economy, "economists should move into the background and criminologists to the forefront."

Who ever dreamed the day would come when anyone aspiring to become another Lord Keynes or Milton Friedman would need to take a double major in economics and criminology to get his Ph.D.?

On Wall Street, not surprisingly, sentiment is strongly pro Goldman (at least when uttered publicly). Especially among folks who haven't bothered to read the complaint, which, as we noted last week, was a model of clarity, the feeling is that the SEC has a weak case.

Not so, thunders Barry Ritholtz, who runs Fusion IQ and turns out a steady stream of spirited and highly informative pieces on the markets. On Friday, Barry chose to take on the notion the SEC's case is feeble and show why it ain't necessarily so. He seems ideally suited for the task because, as he confessed to us, he's a recovering lawyer (an earlier professional incarnation) as well as a seasoned and savvy follower of markets.

Barry asserts the case against Goldman, far from weak, is very strong. "Based upon what is in the complaint, parts of the case are a slam dunk. The claim (by Fabrice Tourre, a former Goldman VP pushing the deal) that Paulson &Co. was long $200 million when it actually was short is a material misrepresentation -- that's Rule 10b-5, and it's a no-brainer. The rest is gravy."

He points out, too, that the complaint contains only the bare minimum the prosecutor, who he thinks is first-rate, has to reveal to file his complaint. "What you don't see," he explains, is all the e-mails, depositions, interrogations, phone taps and the like -- "the arsenal of additional evidence" -- that only the government knows about.

Nor does he buy the idea, commonly bruited about, that this is a complex case. Parts of it, he says, are a little more sophisticated than others, but what it boils down to in Barry's view, is a simple case of fraudulent misrepresentation. The most difficult part of the case is likely to turn on just what is a "material omission." Whether Paulson's involvement in selecting mortgages was or not material is an issue of fact for a jury to determine. "But complex? Not even close."

Barry is willing, moreover, to put his money where his mouth is, as evidenced by his offer at the bottom of his analysis: "I have $1,000 against any and all comers that Goldman Sachs does not win -- they settle or lose in court. Any takers? My money is already in escrow -- waiting for yours to join it. Winnings go to the charity of the winner's choice."

So far, as he tells it, the rush to take the other side of his bet has been underwhelming.

THE STOCK MARKET, AS INTIMATED, keeps plowing ahead, hurdling higher over scandal, occasional earnings disappointment, the stubborn refusal of unemployment to vanish -- you name it. There are any number of explanations for why -- mounting corporate profits as a whole, signs that the recovery has some legs (albeit wobbly ones), the huge tax refunds (the bright side of the losses sustained in '08), people forgetting about mortgage payments and using the money for other things.

In no small measure, we suspect, optimism engendered by rising stock prices begets more optimism, a kind of contagion. No question that doubters by the dozen are being converted by the astounding performance of the market itself, whatever the reason. As the latest sounding of advisory service opinion by Investors Intelligence demonstrates, the blue-sky crowd is in command.

More specifically, 53.3% of those polled were bullish, a scant 17.4% bearish. As Mike Burke and John Gray, the main men at II, comment, "You would have to go all the way back to 1987 to see the same low level of advisor pessimism." And, we dimly remember, 1987 wasn't the most auspicious time to buy stocks. But, hey, maybe this time is really different. Maybe.

E-mail comments to editors@barrons.com


Up and Down Wall Street
MONDAY, APRIL 19, 2010
Sad Sachs?
By ALAN ABELSON
The SEC charges Goldman with defrauding investors. Fred Hickey plugs Microsoft.

"POLITICAL RISK" IS ONE OF THOSE SENTENTIOUS caveats that analysts dust off when trying to discourage foolhardy investors from investing in the likes of Nigeria, Venezuela or Zimbabwe. But now, it emerges, that familiar warning also describes, of all places, the good old U.S.A.

We were as shocked as you to learn that. For, as noted, it typically applies to countries run amok, in the throes of a bloody civil or guerrilla war, in the grip of a mad and dangerous dictator or trembling on the cusp of some terrible human carnage. But, it saddens us to report, the inclusion of our beloved nation in such repellent company is not the claim of some spiteful malcontent, but no less an authority than Sam Zell (and, offhand we can't think of any less an authority).

According to Mr. Zell, the present administration's polices are squarely to blame for being branded as a political risk (we have the dim feeling that Mr. Zell did not vote for Barack Obama). What's more, obviously a man who takes a long and measured view, Mr. Zell offers this elegantly phrased prophecy: "If the current situation is indicative of the next half-century, I think we're screwed."

Mr. Zell, in case the name doesn't ring a bell, is a billionaire real-estate mogul (he's often referred to in the press as a real-estate magnate, but somehow mogul fits him better) whose canny purchases of properties that seemed destined for oblivion earned him the name the Grave Dancer, and he knows a thing or two about risk. Back in 2007, he bought the Tribune Co., among other things publisher of the Chicago Tribune, the Los Angeles Times and the Baltimore Sun as well as owner of the Chicago Cubs, for $8.2 billion.

There is no evidence, if you happened to wonder, that Mr. Obama played any role in either the purchase or the subsequent troubles of Tribune Co. On the other hand, Mr. Obama indisputably was a U.S. senator representing Illinois at the time of the transaction and, politically speaking, is Chicago-bred, gruel enough for conspiracy aficionados, of which there's regrettably never a shortage.

To swing the deal, Mr. Zell contrived a rather ingenious device, creating an employee stock-ownership plan, which effectively made the Tribune Co.'s working stiffs its nominal owners, and had it borrow nearly $8 billion. He graciously chipped in $315 million of his own money and was duly anointed chairman and CEO.

His timing could have been better. Actually, it's hard to imagine how it could have been worse. Since the takeover, the newspaper business has been in a tailspin, the victim of a double whammy by the Great Recession, which visited terrible havoc on advertising linage, and the Internet, which sharply cut into circulation. The Chicago Cubs, alas, haven't set any worlds on fire, either.

Saddled with $13 billion in debt, swollen to that formidable level by the Zell-engineered leveraged buyout, and with interest payments alone taking a $1 billion annual bite, barely 12 months after the purchase, Tribune Co. scurried into Chapter 11 and the protection it provides against creditors, prominent among which are, as you doubtless guessed, JPMorgan Chase, Bank of America, Citigroup and Barclays.

Besides supplying the copious credit necessary to do the deal, most of these lending heavyweights happily rendered advice on carrying out the LBO, for which they garnered ample fees. Under a preliminary settlement they'd recover 62 cents on the dollar.

Tribune Co. has yet to emerge from Chapter 11. Mr. Zell is no longer CEO. The Cubs have been sold. Swirls of litigation still surround the company, brought by other creditors whose gripe is that the settlement leaves them short-changed or out in the cold. And the judge overseeing the bankruptcy indicated he would favor an independent examiner to prove the propriety of the 2007 purchase.

It's conceivable that Mr. Zell was so fixated on the political risk when he pursued Tribune Co. that he failed to perceive the financial risk, which, as he now has rueful reason to attest, can do quite serious damage in considerably less time than half a century. We fervently hope that this unfortunate episode won't prompt spiteful observers to start calling Mr. Zell the Grave Digger instead of the Grave Dancer.

THE GHOSTS OF BUBBLES PAST SUDDENLY returned to haunt the concrete canyons of Wall Street. It certainly seemed that way last week. No sooner had we finished off that little reprise on the misadventures of Sam Zell and the Tribune Co., out of the blue came the bombshell that rocked the stock market.

The SEC filed a civil complaint in Manhattan federal court against Goldman Sachs, charging the firm had defrauded investors.

Specifically, it alleged that Goldman failed to inform investors that one of those exotic and ultimately toxic numbers tied to residential-mortgage-backed securities (RMBS to the investment cognoscenti) it was peddling in early 2007, as housing was teetering on the edge, was in no small part the handiwork of a hedge fund that effectively was short the RMBS portfolio it had helped put together.

Charged along with Goldman was 31-year-old Fabrice Tourre, a vice president for the firm who labored in its structured-product correlation trading desk (our jaw aches from just muttering that titular mouthful), and acted as point man in creating and pushing ABACUS 2007-AC1, as the synthetic CDO, or collateralized debt obligation, was dubbed. The hedge fund was Paulson & Co., one of the biggest and most successful of the genre.

Needless to say -- but we'll say it anyway -- Goldman denies it is guilty of any misdeeds. Paulson wasn't charged because, as the SEC's head of enforcement told the AP, "It was Goldman who made the representations to investors. Paulson did not." That seems a rather a fine point, but then we're not a lawyer (and we say that thankfully).

The 20-page complaint is well worth a read not only for the occasional and inevitable indiscreet e-mail, but because it takes pains to make its case against a sophisticated and complex maneuver in admirably graspable form. We learn, moreover, that Paulson paid Goldman Sachs some $15 million for structuring and marketing ABACUS 2007-AC1. The deal closed April 26, 2007. By Oct. 24, 2007, 83% of the mortgage-backed securities in the ABACUS portfolio had been downgraded and 17% put on negative watch.

The result: Investors in ABACUS 2007-AC1 lost over $1 billion. But Paulson cleared $1 billion from essentially betting against the very portfolio it helped create.

It's hardly a coincidence, we suspect (and we're not joining the conspiratorial hordes, merely stating the obvious) that the SEC's move on Goldman comes as Congress is wrangling over fiscal reform. And the complaint, whatever its eventual disposition, strikes us as odds-on to yield a tougher bill than seemed in the making as recently as early last Friday.

At the same time, Paulson's involvement isn't likely to enhance the affection for hedge funds among lawmakers or the public at large. As for the market, stocks were looking for an excuse to take a breather or even, heaven forbid, prove they can still go down. Friday's action suggests, it may have found one.

LAST JULY, WE RAN A LITTLE FAVORABLE blurb on Microsoft and since then, the company and its shares have performed nicely. In that piece, we quoted Fred Hickey, one of our Roundtable gang and proprietor of the High-Tech Strategist, and he pretty much seconded our benign feelings.

What inspires this brief revisit is Fred's latest letter, in which he comes darn close to being exultant over Microsoft's prospects, even while he's a tad apprehensive about the exuberant market as a whole.

Not only has the company's Widows 7 proved a big winner (in contrast to its predecessor, Vista, which was a disappointment for sure and even a borderline bust), but Fred has high hopes for the new operating system that he confidently expects to enjoy a wave of demand from business buyers. He also believes the upgrade of what he calls Microsoft's other cash cow, Office, shipments of which are slated to start in June, will meet a warm reception.

Moreover, he is quite enthusiastic about relatively recent and promising new additions to the product line, like the SharePoint server, Bing search engine and Microsoft's "Project Natal" for the Xbox 360 game console, scheduled for unveiling June 13.

He contends that the stock (ticker: MSFT) is still something of a steal at 16 times depressed trailing earnings. Fiscal third-quarter profits, you might take note, are due to be released Thursday.

As Fred points out, Microsoft's software is firmly entrenched in most large business enterprises and its sundry software offerings are "complex and interoperable," while Google's comparable products just aren't in the same league.

"In this overpriced, dangerous stock market," he says, "I regard Microsoft as a great gift." Despite his usual aversion to hyperbole, he calls it "the most valuable tech stock in the universe." And, he waxes on, "Microsoft generates huge cash flows, pays a nearly 2% dividend, has a stock price upside of, say, 50% if the bull market continues to run, and limited downside if it does not."

Apple, he concedes, may be a great stock, but, at this point in his view, "Microsoft is better."

Oh, incidentally, we kind of like Microsoft, too.

E-mail comments to editors@barrons.com


Up and Down Wall Street
MONDAY, APRIL 12, 2010
A Drop in the Bucket
By RANDALL W. FORSYTH
Now the airlines want to charge for what? At least they have some virtues over banks, whose leaders gathered for a round of Pass-the-Buck.

COME FLY WITH ME" SOUNDS IDYLLIC WHEN Sinatra sings it, but as anybody who has taken to the unfriendly skies recently can tell you, it's anything but.

After being herded through security, shoeless, everybody rushes to get to their gates to board as soon as possible so they can grab an overhead bin to stash their carry-on luggage. Those spaces get filled quicker than ever now that most airlines have taken to charging passengers to check a bag. So if you're rushing to get on just as the attendants are about to bolt the cabin doors (as seems inevitable with our brood), you may find the bins above your seat already occupied by somebody else's bag.

Spirit Airlines has come up with a solution, albeit one that appears worse than the problem. The cut-rate carrier will charge up to $45 for carry-on luggage unless it can be stowed under the seat like a briefcase. "Nobody brings their package to FedEx or UPS and expects them to ship it for free," Spirit Chief Executive Ben Baldanza was quoted as saying in response to the torrent of criticism showered on the idea.

As the New York Times observed, airlines pocketed $2 billion in baggage fees in the first nine months of 2009, more than four times the $464 million taken in during all of 2007, before it became the rule to sock passengers for the privilege of checking a bag.

You'd think that airlines by now have squeezed every nickel they could out of passengers, packing in extra seats or charging extra for adequate legroom; eliminating meals (no great loss there) or charging for a can of beer what a six-pack costs in the supermarket, or hitting you up to watch a movie you assiduously avoided in the theaters. But you'd be wrong.

Ryanair, the European bargain-basement airline, apparently is looking into charging £1 for -- what else -- using the toilets. CEO Michael O'Leary said, "People might actually have to spend a pound to spend a penny," which Google helpfully translates as English slang for going to the bathroom. One might consider this as a fee in lieu of a fare hike, or perhaps in loo of one.

Airlines also are employing more traditional methods to cut costs, such as mergers. The seemingly eternally betrothed US Airways (ticker: LCC) and UAL's (UAUA) United Airlines once again are talking about hooking up after several abortive unions. A US Air-United combination would rank as the No. 2 U.S. carrier after Delta Air Lines (DAL), which, as Mike Santoli discusses in the Streetwise column, could spur more mating dances (if not necessarily consummated unions) among airlines looking to compete with their heftier rivals.

Another industry that has opted for the bigger-is-better model is banking, which, as it turns out, also is wont to target its customers with all manner of nettlesome charges. Forget about paying nothing on deposits while using virtually free money from the Federal Reserve to buy Treasury notes at a fat profit. And while most of the big banks have paid back their TARP bailout, they continue to benefit from government subsidies in the form of cheap debt issued last year with FDIC guarantees. So it's particularly irksome when one such recipient of corporate welfare hits up a taxpayer -- in this case, me -- for a $10 penalty for depositing a $2.10 check, which I failed to notice was out of date. That happened at the Chase unit of JPMorgan Chase (JPM), headed by Jamie Dimon, an adamant foe of the regulatory reforms being considered by Congress.

While the airlines seem intent on emulating the worst consumer practices of banks, the banks would do well to look at the best practices of the airlines. For all the criticism leveled at them, airlines have a remarkable safety record, perhaps because there is no net at 30,000 feet. Moreover, airlines have gone through the bankruptcy court so many times that they should have their own revolving door. Yet neither the industry nor the public has suffered, even as grand old names such as Pan Am, TWA and Eastern flew off into the sunset.

Too-big-to-fail banks nearly crashed the financial system, so Congress last week embarked on a most unfruitful exercise of bringing together those in charge when the credit bubble inflated and burst to find out what they knew and when they knew it. The answer was, for the most part, that they didn't see the catastrophe coming, but it wasn't their fault. And most (but not all) were really, really sorry. Still, the regrets didn't extend to sending back the millions they earned, in the memorable words uttered at the absolute peak in July 2007 by former Citigroup CEO Chuck Prince, while the music was playing and everybody was still dancing.

Two-thirds of the erstwhile "Committee to Save the World" that rescued the financial system from supposed near-meltdown following the Long-Term Capital Management debacle in 1998 -- former Fed Chairman Alan Greenspan and ex-Treasury Secretary and Citi big shot Robert Rubin -- denied culpability in the bubble and its bursting. (The other member of the trio, Lawrence Summers, spent much of the past decade honing his famous people skills at Harvard before returning to government as director of the White House's National Economic Council.)

Greenspan denied the Fed's role in inflating the housing bubble but admitted he was right only about 70% of the time, which, it was observed, made the onetime Maestro a C-minus student.

As for Rubin, he was grilled by the congressional panel about his role in the meltdown at Citi, but insisted that he didn't have any direct management responsibilities. Prince seconded that and took the rap for the near-collapse of the bank that required Uncle Sam to pump $45 billion into it. In the end, what exactly Rubin did for the tens of millions of bucks that the bank paid him remained a mystery.

Yet, after the bankers admitted to the congressional panel not seeing the 100-year flood coming, The Wall Street Journal reported Friday that major banks have been reducing their debt levels just before the end of the past five quarters to avoid showing it on their financial statements. After the turn of the quarter, they expanded their borrowings again in the repurchase-agreement market. While legal, this recalls the notorious "Repo 105" practice used by Lehman Brothers before its collapse to offload big chunks of its balance sheets at the end of the quarter so as not to show the debt on its financials.

Operating an airline requires pilots and mechanics to make sure each aircraft is as safe as is humanly possible, simply because the cost of failure is too great. Banks apparently still don't see fit to operate the same way. As was said of the Bourbons, they learn nothing and forget nothing.

NEVER UP, NEVER IN? The Dow Jones Industrial Average touched the 11,000 mark just before Friday's close but wound up a few points short. The path of least resistance remains higher, so the likelihood is that the Blue Chips will complete the 11K run.

What is interesting is that most asset classes have been moving up, says Louise Yamada, the first lady of technical analysis and the eponymous head of Louise Yamada Technical Research Advisors. The dollar, gold and oil have been rising in tandem with equities, even though that trio usually plays counterpoint to the stock market's tune.

Moreover, there don't seem to be any warning signs for the market right now, but that's what makes it risky. She looks back in history and notes there weren't any technical warnings for steep corrections in 1937, 1977 or 2007, which all counted as endings of rallies in secular bear markets. So, stay at the party but keep an eye on the exit.

Still, there aren't any obvious signs of excess. The market continues to grind higher on light volume while volatility ebbs further. The VIX, the all-purpose fear gauge, is back down to the 16 range, about where it was just before all hell started to break loose two years ago. But the VIX is above the single-digit levels that marked the complacency seen in 2007, when subprime mortgages were a just a blip on the horizon.

Nor are any stock groups breaking down, which can provide warnings for the overall market, Yamada says. In 2006, she pointed to housing-related stocks beginning to give way, followed by underperformance in the financials beginning in 2006-07, as giving distant early warnings for the debacle to follow.

Sentiment is following the averages, however, with Investors Intelligence finding 48.9% of advisors declaring themselves to be bulls and just 18.9% in the bearish camp. That's close to the January peak of good feeling when bulls comprised 52% and bears just 16%. The rest of the crowd says it's looking for a proverbial correction.

In the latter camp is Jeffrey Kleintop, chief market strategist of LPL Financial, who thinks the averages are due for a 5%-10% pullback as the market heads into earnings season, which begins in earnest Monday when Alcoa (AA) throws out the first profit report. The aluminum giant was off 3% Friday after being downgraded to Neutral from Overweight by JPMorgan, in part in anticipation of weak first-quarter results and relatively poor fundamentals for the metal.

The bulls also are buoyed by anticipated good news on the foreign front, with a bailout of Greece reportedly coming even as Fitch downgraded its credit rating to triple-B-minus, the last stop before junk land. And news reports have China about to agree to letting the yuan rise to help defuse trade tensions with the U.S. So, it's all good. That is, unless earnings disappoint.

E-mail: randall.forsyth@barrons.com

Alan Abelson is on vacation.


Up and Down Wall Street
MONDAY, APRIL 5, 2010
Not All Milk and Honey
By ALAN ABELSON | MORE ARTICLES BY AUTHOR(S)
The March jobs report is worth a cheer, but a restrained one. MGIC squares off against Countrywide.

NORTH KOREA ENJOYS A WELL-DESERVED REPUTATION as a scalawag nation (the only thing worse than a rogue nation on the scale of bad to awful). It's equipped with nuclear bombs -- not many, but enough to blow up the world -- which it's positively panting to do once it figures out a way to feed its starving citizens so a sufficient number of them can do the heavy lifting required to hoist the nukes onto missiles.

But even though no one has ever accused it of being nice, North Korea, an incorrigibly Communist country, has come up with an innovative way of responding to a financial crisis, a response that has eluded even the most ardent exponents of capitalism.

The blighted nation, in case you're not au courant with its troubles, has a wickedly enfeebled economy that its rulers desperately sought to pump some life into by revaluing the won (a more descriptive name for the currency might be the wan). The result has been a total mess that, among other unpleasant things, stoked inflation, which, as it happened, was already rising very briskly absent any stoking.

This, not surprisingly, didn't sit well with North Korea's Dear Leader (for once, we're not being sarcastic; that's what he insists on being called) Kim Jong-il, and he made known his displeasure with no beating around the bush. According to the British newspaper the Guardian, a chap named Pak Nam-gi was in charge of the currency reform and he was peremptorily fired. Um, that isn't exactly what happened -- he wasn't fired but, rather, was fired at -- by, of course, a firing squad.

The official explanation, as relayed by the Guardian, was that Pak Nam-gi was guilty of being the "son of a bourgeois conspiring to infiltrate the ranks of revolutionaries to destroy the national economy." Looking at a photograph of him, you'd never guess he was the son of a bourgeois -- he looks very much like an innocuous run-of-the-mill numbers cruncher you might very well be sitting next to on the 7:30 a.m. express to Grand Central.

No argument that the reprimand was draconian, and we most definitely don't recommend it be replicated in civilized venues as a substitute for a trip to the woodshed for errant ne'er-do-wells guilty of committing economic mischief. But it brings into sharp relief the lack of any serious accounting for the dastardly deeds wrought by so many dear leaders of our premier financial firms and the scoundrels who carried their water, virtually all of whom got off not only scot-free but with unimaginable loot, a lapse that's apt to give even the most phlegmatic innocent a hissy fit.

A poster boy for the kind of shenanigans that brought down the house (literally), and darn near the economy with it, is Countrywide, the nation's biggest mortgage lender, now part of Bank of America, and one of the prime casualties in the subprime boom that went bust. As we recall, the founder and main man bade the company good-bye after it was acquired. In the nine years he was top dog, he collected an estimated $410 million in earnings, stock options and bonuses. So there's no need to pass the tin cup.

MORTGAGE GUARANTY INSURANCE CORP., familiarly known as MGIC, which also has taken more than its share of lumps from the housing collapse, is wrestling with Countrywide over a bunch of the latter's bum mortgages it insured. At issue is whether those mortgages were mortally flawed from birth, something, alleges MGIC, that Countrywide had more than a little reason to be aware of.

In its complaint to the American Arbitration Association, MGIC makes no bones that it thinks Countrywide, eager to exploit the housing bubble, embarked on "a reckless strategy to attract new subprime and other high-risk business." And the insurer goes on to cite a clutch of cases to prove its point. We found the narrative lively reading (and we're grateful to Mark Hanson for bringing it to our attention).

There is, for example, the woman who bought a $600,000 house, claiming she worked as an account exec at a California investment firm, earned $13,494.03 (nice touch that three cents) a month, had a $45,000 bank account at Wells Fargo and, according to the insurance application, made a $30,000 down payment.

When MGIC nosed around, it discovered the investment firm she supposedly worked for didn't exist, neither did the bank account, she hadn't made a down payment and she actually earned $3,901.58 a month as a janitor at a medical facility.

In another instance, a $350,000 loan was extended by Countrywide to a fellow who wanted to buy a home valued at that amount and claimed he was a dairy foreman earning $10,5000 a month. Again, the snoops at MGIC discovered the guy was a milker at the dairy who earned $1,100 a month and signed the documents where he was told to -- even though he couldn't read English.

There's plenty more of the same in the complaint by MGIC charging that Countrywide agents were complicit in various and sundry deceptions. Frankly, we found it all something of a hoot, though it's not hard to see why MGIC isn't laughing. But even comic tales typically embody a moral, and this one is no exception. Fraud played no small role in the great demolition of housing, but the principal perpetrators were never diligently pursued and, for the most part, went crying all the way to the bank. Moral hazard, anyone?

DURING A DROUGHT, EVEN a drop of water can seem like a flood. And so it is with employment -- even a semblance of an uptick can take on exaggerated proportions. A case in point was the release by the Bureau of Labor Statistics of the March employment report. And -- hallelujah! -- it showed a gain to the payroll count of 162,000 jobs, the biggest increase in three years.

Truly amazing, besides the fact that the number of jobs added finally scored a rise, was that the improvement was more or less in line with the Street's forecasts of between 150,000 and 200,000. Icing on the cake was a 264,000 increase in the household count.

Gosh knows, we were overdue for something besides disappointing dispatches from the employment front. As David Rosenberg of Gluskin Sheff observes, it's a full 28 months after the start of the Great Recession (we use caps to show our respect for that vicious slump, lest it get huffy and decide to do an encore) and an awesome loss of 8.4 million jobs. So any reversal of that malign trend merits a big hurrah.

And we'll forgo quibbling that the 162,000 includes 48,000 census workers and 81,000 from the BLS's invariably generous birth/death computation. There's always noise in even the sweetest economic compositions, especially those that emanate from the talented fiddlers in Washington.

But at the risk of being called a chronic spoilsport or something a bit more earthy, we should note that the report wasn't all milk and honey. For one thing, the unemployment rate stubbornly refused to budge, holding at 9.7%, and that means 15 million folks are still on the dole. Moreover, the best measure of the strength or weakness of the jobs market, U-6, which includes the underemployed, inched up to 16.9%, and folks out of work for what seems like forever but is actually 27 weeks or longer shot up to a peak 44.1%.

On this score, as Philippa Dunne and Doug Henwood of the Liscio Report point out, among the so-called underemployed, those working part-time for economic reasons rose a not inconsiderable 295,000, which, they comment, "makes you wonder about the quality of jobs people are finding." In like vein, the duo also note that the probability of someone out of work in February finding a job in March sank to 18.7%, from 20.1%, a new low since anyone began to keep track, way back in 1948.

Most disturbing of all are indications that just as this still young century has been marked by the relatively new phenomenon of jobless economic recoveries, it now may be witnessing the advent of incomeless employment recoveries. For what jumps out at you in the latest tally is that hourly pay declined 0.1%, the first decline in seven years.

As David Rosenberg observes, "a contraction in wages in any given month is practically a 1-in-100 event." He also notes that the year-on-year increase in wages has shrunk to 2.1%, from 2.5% "three months ago when employment hit rock bottom, not to mention the 3.5% pace a year ago."

Dave allows "it may be encouraging to see employment, especially in the business sector, begin to rise after such a lengthy and precipitous decline," but he's adamant that "the labor market still remains in the grip of a serious deflationary undertow." And that's not going to change, he believes, so long as nearly one in every six Americans is unemployed or underemployed.

For their part, Doug and Philippa sum up their take on the March numbers "as consistent with a gradually improving labor market but one hardly bounding back to health." The headline jobs gain, they note, was in the 42nd percentile of changes since 1950, but without the lift from the census hires it would have been some notches lower, in the 34th percentile, to be precise.

How anyone thinks the report will encourage the Fed to speed up its tightening schedule, they say, "is beyond us." A sentiment, incidentally, Dave Rosenberg emphatically shares.

E-mail comments to editors@barrons.com


Up and Down Wall Street
MONDAY, MARCH 29, 2010
Red Flags Over China
By ALAN ABELSON
Is the booming Chinese real-estate market headed for a bust? A savvy pro's dire warning.

HEALTH-CARE REFORM FINALLY MADE IT INTO LAW and, contrary to the received wisdom that its effects would not be felt for years, it had an immediate and enormous impact: The Republicans got sick and the Democrats got bullet-proof vests.

Wall Street reacted quite favorably to the bill's passage, with the stock market boiling up to new highs for the past 18 months. Triggering the hearty response was the disclosure the measure provides full coverage for irrational exuberance.

China disclosed that when the March tally is in the books, it will show an astonishing reversal, with imports topping exports for the first time in six years. Only a hopelessly unreconstructed cynic would grouch that Sino statistics are eminently flexible and assume there's something fishy about the trade deficit conveniently emerging while Washington is turning up the heat on Beijing to revalue the yuan.

In striking contrast to the bitter squabbling that mars political discourse here, the negotiations in Brussels led by Germany, France and the International Monetary Fund on shoring up financially ailing Greece were a veritable model of altruism. France insisted Germany should have the privilege, Germany unselfishly demurred, suggesting the IMF deserved the honor, and Greece graciously said it didn't care who coughed up the 20 billion euros ($26 billion to $27 billion) it needed as long as the interest on the loan was half the market rate.

In the end, in a remarkable show of civility, the parties agreed to share the pleasure, but only as a last resort. With a delicate respect for obscurity, which the diplomatic code rates second only to superior grub and plum quarters for its practitioners, "last resort" was not defined. A benign interpretation might be "sometime, maybe," which was more than enough to reassure markets both in the U.S. and Europe. But then, anything but the outbreak of nuclear war seems enough to reassure markets, and even that would likely detonate a mad dash for uranium stocks.

Despite all the talk and even sporadic hard evidence of improvement in the economy, housing remains mired in misery, a lamentable fact that apparently hasn't sunk in to investors, to judge by the 25% rise in the home-builder group. New-home sales in February fell to an annual rate of 308,000, an all-time low. The number of mortgages at least 90 days past due shot up by 270,000, or by more than 20%. And operating on the theory that if at first, second or third times, you don't succeed, try, try again, Uncle Sam is launching still another program to forestall foreclosures.

While you're shedding a tear for those unfortunates who have lost their homes, a report by Bloomberg suggests you might at least emit a sigh of sympathy for those beleaguered souls who have suffered terribly from the restrictions on executives bonuses levied by envious bureaucrats. Because large chunks of bonuses for bankers and similarly important people are increasingly deferred over a spate of years, it makes divorce settlements more nettlesome. And, some of these bonus-deprived souls -- please, don't gasp -- are no longer able to send their kids to private school or keep up their vacation homes. Ah, the pain of it.

As we noted last week, the handwriting's on the wall that you can kiss the era (or, is it error?) of zero-interest rates goodbye, and we take Mr. Bernanke's further mumblings about getting rid of some of that clutter on the Fed's balance sheet as confirmation. The Street, in any case, is fixated on the jobs report slated for April 2, and the estimates gaily bandied about by the chorus of cockeyed optimists are that in March, something like 150,000 jobs or more were added.

We haven't a clue as to whether they're right or not. But then, neither do they. We can only hope they are, since the market has been buoyed mightily by such great expectations, and it's priced accordingly -- that is, for everything but disappointment.

CONGRESS HAS NO PEER IN LEGISLATING for the last cycle. All the more surprising, then, that our much-adored lawmakers have broken with a tradition that's almost as old as the republic itself and addressed themselves to China. More particularly, they've accused China with some justice of being a currency manipulator by striving to maintain the value of yuan artificially de- pressed so as to keep its exports booming. As we noted, Beijing, which long has contented itself with scolding us for our fiscal imprudence, is expected to trot out a trade deficit as proof that the charge is patently untrue.

But, as we've felt for some time now, China has more to worry about than the barking displeasure of our legislators. For although it has enjoyed an awesome record of growth stretching back over three decades, it also shows more than a few of the telltale evidences of an economy headed for trouble -- but real trouble.

As luck would have it, we've come across a recent piece by GMO's Edward Chancellor that provides eloquent chapter and verse for that less than cheerful view. Entitled "China's Red Flags," it contends "China today exhibits many of the characteristics of great speculative manias" over the past three centuries and then outlines those characteristics.

Such debacles usually start, Edward has found, with a compelling growth story. Another feature is a blind faith in the competence of the authorities. The ignominious list includes: excessive capital investment; a surge in corruption; easy money; fixed- currency regimes; rampant credit growth; moral hazard; precarious financial structures; and rapidly rising property prices powered by dodgy loans.

Of these, rapid credit growth is the most important leading indicator of financial instability, followed by an asset price bubble. Low interest rates and strong money growth play a significant part, too, in creating memorably bad outcomes. China, unhappily, has its share of these dubious qualities as well as being inflicted by a huge speculative mania.

Edward points out that "forecasts for urbanization and economic growth make for a compelling Wall Street pitch." But he cautions that like the extravagant expectations for Internet growth during the dot-com mania, investors seem to be swallowing whole China's growth forecasts. A good example is the reckoning that the urban population will increase some 350 million by 2025.

Edward suggests those numbers may not accurately reflect the present density of urban areas in China because a) many rural migrants to the cities tend not to be included in the official count as they lack residency status; and b) officials are rewarded on GDP growth per capita in their districts, so they have an obvious interest in understating how many people those districts contain.

He also notes that "Wall Street tends to downplay the darker aspects of the Chinese demographic story." China's population is set to decline in 2015 and the worker participation rate will peak this year. That will cause a sharp shrinkage in the number of people who migrate to the cities and supply China with its seemingly inexhaustible reservoir of cheap labor, key to its spectacular export success.

In recent years, no secret, Beijing has built up a vast treasury of foreign reserves of some $2.4 trillion. But Edward believes it's a mistake to think that China's gargantuan foreign-exchange reserves render its economy invincible. "These reserves," he acknowledges, "can be used to buy foreign assets, pay for imports or defend a currency under attack." But they aren't especially effective in wrestling with the problems that follow, say, the collapse of an asset-price bubble, such as a broken banking system or a legacy of bad investments.

And, on that score, he quotes approvingly the observation in a recent book on China that "the only two countries which have previously accumulated such large foreign-exchange reserves relative to global GDP were the U.S. in 1929 and Japan in 1989."

While surging credit has "revived the animal spirits of Chinese investors" and hugely whetted their appetites for all manner of stocks, including initial public offerings, quick trades and other classic signs of speculative euphoria, the real action has been in "China's overheating property market." And a goodly number of Edward's red flags are "fluttering around" over-stretched real-estate valuations, rampant speculation and frenzied new construction. Housing, he says, "has become a national obsession."

Pinpointing when the real-estate bubble will burst is a bit tricky, Edward concedes, in part because China is "not a pure market economy. State-owned enterprises can be called upon to prop up markets. Losses may be concealed or shuffled around like a shell game...Such measures, however, won't cure China's problems. They only delay the denouement."

And he cautions that "just because the timing of any future crisis is imponderable, doesn't mean the risk posed by the real- estate bubble should be ignored." All the more so because the property market looms so large in the Chinese economy and financial system. Real-estate investment accounts for roughly 12% of GDP. Construction is the main source of demand for much of China's heavy industry. Real-estate is gobbling up 20% of new bank loans.

China, Edward muses, "has become a field of dreams, a build-and-they-will-come economy." He predicts that were the economy to slow below Beijing's 8% growth target, "bad things are likely to happen." Much of the new infrastructure will turn out to be otiose; excess capacity would linger in many industries; real estate would take a bath, and the banking system would be swamped by a wave of nonperforming loans.

His morose conclusion: "Investors who are immersed in the China Dream ignore this scenario. When the China juggernaut eventually stalls, they face a rude awakening."

E-mail comments to editors@barrons.com


Up and Down Wall Street
MONDAY, MARCH 22, 2010
Kiss Zero Interest Goodbye?
By ALAN ABELSON
A familiar mantra from the Fed. But eager-to-please Bernanke looks antsy about 0% interest rates.

THE FEDERAL RESERVE'S OPEN MARKET COMMITTEE met in solemn conclave last week. At least that's what we assume. For all we know, at these periodic parlays, Ben and the boys and girls who are the nation's monetary panjandrums sit around a big shiny desk shooting the breeze, letting fly paper airplanes at each other and generally having a grand old time before reluctantly getting down to the boring business at hand, which consists basically of issuing a communique that says just about what was said in the communique issued after their previous meeting.

To be fair, they do alter a phrase here, a word there. Typically nothing substantive, understand, but it obviously tickles them to watch Wall Street eagerly parsing those innocuous changes like squinty-eyed archeologists poring over a hieroglyphic script hoping to decipher something of enormous significance. Last Tuesday, this latter-day version of the search for the Rosetta Stone came right on cue, and the only tangible result it produced, we're sorry to report, was the usual babble.

In its traditional post-meeting statement issued by the Fed to inform the great unwashed what had transpired, it reiterated once again the familiar mantra that those bottom-of-the-barrel interest rates would be with us for "an extended period," that is, somewhere between a month and eternity. It affirmed that, as pledged, it intends to stop buying mortgage-backed securities come the end of this month (apparently it feels sated after accumulating something like $1.25 trillion of the things) and, in June, will shut down the Term Asset-Backed Securities Loan Facility (good old TALF), designed to apply a tourniquet to the commercial-mortgage-backed securities market (which last we looked was still hemorrhaging).

The Fed also gave us a quickie rundown on the economy, just about all of which was rather old hat: Capital spending had perked up, unemployment had "stabilized," (although admittedly employers "remain reluctant to add to payrolls"), inflation was still in its cage, moderate growth was likely to continue, while housing, alas, was nothing to write home about. There's more, but we trust you get the drift.

This economic potpourri reminded tart-tongued Joan McCullough, official market watcher and kibitzer at East Shore Partners, of a "garbage pie," a rather unappetizing-sounding concoction that, frankly, we hadn't encountered before. "Garbage pie," she graciously explained, is New Yorkese for "a pizza with every topping known to mankind." In like fashion, "the Fed left no economic topping unused, running the gamut from spicy, pungent, herbaceous and savory right on down to bland, dull, flavorless and tasteless."

And Joanie goes on to fume in her commentary: "Given the positive spin placed on the recent economic statistics by all the pundits, and the rallies that celebrated these victories, why is the Fed still keeping rates at zero for an extended period?"

An eminently reasonable question, it's one that the Street's bullish spinmeisters should answer to as well as the Fed. Mr. Bernanke has invariably taken great care not to upset the markets with any rude actions. He also, when it's avoidable, hates to spring surprises. Just as his predecessor was a master of obfuscation, he's an inveterate signaler of his intentions.

In any case, that any adult with an iota of awareness expected him to hike rates last week, with the economy still fairly comatose, millions of people on the dole and housing in such a bad way, strains credulity. Especially with the president (who deigned to let Mr. Bernanke keep his post for another four years) smack dab in the middle of a no-holds-barred fight over health care and smarting over his dismal poll ratings. On this score, the latest daily Gallup tally on Obama's job performance for the first time recorded more disapproval (48%) than approval (46%).

The stock market dutifully breathed a modest sigh of relief when the Fed seemingly stood pat, pushing its winning streak to eight in a row before faltering in the final session. Our own reaction was less sanguine. For however equivocal the message from the FOMC, it seems pretty evident that for all Mr. Bernanke aims to please the powers that be, he's plainly antsy about the ultimate consequences of zero interest rates, particularly in a world where sovereign default, if not yet a commonplace, is no longer unthinkable.

For one thing, the tilt of the overview of the economy expressed in the Fed's statement was to the positive, however cushioned with caveats. And, the seeming determination expressed to rein in some of those lavish programs we take as the start of a gradual but steady tightening. Just don't ask us when and how much rates will go up. But the key here is that the mere prospect of such a trend would be enough to take at least some of the starch out of this extraordinary equity rally.

WHILE THE FED'S RECITAL OF HOW goes the economy didn't neglect the sorry state of housing, it failed to give a true picture of just how sorry that state is. So we're grateful to Mark Hanson of Hanson Advisors for providing the numbers, notably those courtesy of Fannie Mae, which, together with Freddie Mac, another proud and now sadly humbled outfit, accounts for by far the biggest share of all the residential mortgages these days.

Fannie has updated its forecast for the total of such loans likely to be funded in 2010 to $1.32 trillion. That's quite a heap, you say, and so it is -- except when compared with 2009's $1.9 trillion, let alone the projection a year ago of $2.8 trillion.

Mark doesn't think "investors and the media at large have grasped the variety of consequences" of such a steep drop in mortgage volume this year in lost jobs, income and mortgage-banking revenue. The prospective decline, moreover, is rearing its ugly head despite what he calls incredibly low rates of 4.875% to 5% on such credit. And he feels the only way for refinancing volume, a major driver of mortgage loans, to come to life would be for rates to drop to around 4%, "so everybody who refied in 2009 can refi again."

Don't bet on it.

IN HER LATEST SCREED FOR MACRO-MAVENS headed "Delusions of Adequacy," the incomparable Stephanie Pomboy focuses on the particular delusion of financial adequacy. We found fascinating and especially enlightening how it applies to ordinary Joes and Janes, rendered with her usual insight and sprightliness.

She starts with what sounds like truly thrilling material: the Employee Benefit Research Institute's (known among the cognoscenti as EBRI) latest retirement survey, all 44 pages of it. If it sounds like a snooze, it isn't, we can assure you, at least the way Stephanie peruses it. The first thing she discovered was that although workers felt greater confidence in their ability to afford retirement, savings toward that worthy purpose in '09 shrank to 60% of the total, from 65% the year before, the sharpest drop in the history of the survey. As EBRI morosely commented, workers are "clueless" about their retirement needs.

As Stephanie shrewdly points out, perhaps something like 40% of workers may not be saving because they believe assets -- their house or portfolios, for example -- will once more increase in value. In that regard, she speculates that it is significant that the last time households saved so little for retirement was when the stock market hit its peak in 2007 (and, of course, housing hadn't yet crashed), and the only time they saved less was in 2004, when stocks bounced back strongly from the dot.com collapse.

If workers are really making this kind of bet, she believes, it would be good news, near term, anyway. For it would avoid the big hit to spending necessary to bring savings into alignment with current net worth. To return to an 8% rate, she reckons, would require a savings increase -- or a spending decrease -- of $513 billion. Nice piece of change, any way you look at it.

However -- and, of course, there's always a however -- if the rebound in net worth proves illusory and the Fed can't reflate assets on the household balance sheet, then, Stephanie sighs, "we're in a dilly of a pickle." And the price of delusion, she fears, will be dear. According to the EBRI survey, a "staggering 27% of workers have saved less than $1,000 toward retirement."

She can only hope the 27% are young'uns right out of school, sharing apartments and still scraping to come up with the rent. Alas, the survey doesn't break down the numbers by age.

If, by chance, the panel is representative of the nation as a whole, she winces, with 54% of the labor force over 40, "the figures are truly alarming. Doubly so given the increasingly retractable nature of pension promises."

Ordinary people can be excused to some extent for not grasping how deep a financial hole they're in. But that doesn't hold for banks, Stephanie asserts, whose "affliction is no less acute."

She cites the notion that reserving for losses no longer need be done and, by way of evidence, notes that a $10 billion reduction in the banks' loss provisioning last year was a major contributor to their gain in fourth-quarter earnings. Further, loan-loss reserves cover barely over half -- 58%, to be exact -- of loans past due.

And to make matters worse, at the end of last year, 51% of commercial-bank assets were tied to real estate. Obviously, not a very desirable exposure with housing back in the dumps. And finally, there's the possibility that banks are forced to mark to market all the toxic securities they carry at cost. If they were to follow the example of the FDIC, which in a sale last week marked down a batch of kindred securities, they'd have to take a 50% haircut.

Stephanie's eloquent response to that prospect is: "Gulp!"

E-mail comments to editors@barrons.com


Up and Down Wall Street
MONDAY, MARCH 15, 2010
The Fudge Factory
By ALAN ABELSON
A hard look at how Lehman masked the horrors of its balance sheet. Words of wisdom from Seth Klarman.

HOCUS-POCUS. THAT, IT EMERGES, SANK LEHMAN Brothers and damn near the entire financial system, to say nothing of the economy as a whole. So charged a court-appointed examiner named Anton Valukas, may his tribe increase, in a 2,200-page bombshell of a report made public on Thursday by U.S. Bankruptcy Judge James Peck.

Lehman, in case you were too busy dumping stocks at the time to notice, went belly-up in September 2008, and in one fell swan dive earned the unenviable distinction of being the biggest bankruptcy in our republic's long and glorious history. It took Mr. Valukas, of the New York law firm Jenner & Block, 14 months and $38 million to perform the autopsy, and it has proved time and money very well spent.

Let us confess right up front that we haven't read the entire 2,200 pages of the tome. But we have perused juicy excerpts and plumbed the accounts of sources we've found reliable to get a pretty good picture of why Lehman went belly-up and who the likely villains were. It's an ugly picture and leads inexorably to the conclusion that if what some of the principals did so sneakily to hide the firm's dangerously wretched financial condition in the long months preceding its collapse isn't illegal, it should be.

The list of suspects begins, inevitably, with the boss man, Dick Fuld, on whose watch Lehman went under. Mr. Fuld, who if the allegations in the report are right might need to change his name to Mr. Fudge, denies knowledge of the accounting trickery employed to mask Lehman's seriously deteriorating finances and keep all interested parties, emphatically including its own shareholders, blissfully in the dark. Na¿f that we are, we've always had the silly idea that the shareholders were the true owners of a company.

Other members of the top brass also appear deserving of notice as at least contributing to Lehman's downfall by their yeoman-like labors in aiding and abetting the fetid deception. Certain lenders cited in the report, among them Chase and Citi, were in a sense complicit, deliberately or not, in the firm's collapse. And, as usual, the so-called independent accountants seem to have been out to lunch when the stealthy mischief was being wrought.

The key to Lehman's ledgerdemain (forgive us, it was too sweet a pun to resist) was Repo 105, a form of repurchase agreement between banks that briefly swap loans for assets the borrower is obliged to buy back. As Mr. Valukas reveals, the real purpose of these transactions undertaken by Lehman, which conveniently spiked at the end of the quarter, was "balance sheet manipulation."

The sums involved in this hanky-panky, moreover, weren't exactly chump change: $38.6 billion at year end '07, $49 billion in the first quarter of '08 and $50 billion the following quarter. But, then, Lehman had more than its quota of punk assets to hide.

Dick Fuld, as duly noted, has claimed he was unaware of these shenanigans. It's possible, of course, that Mr. Fuld's memory is a bit fuzzy on this subject since, as Lehman's leader, he had a lot to worry about. Who among us hasn't experienced such a lapse in trying to recall a trivial matter, especially something as dull as accounting?

But, as related by Mr. Valukas, one of Mr. Fuld's trusty subordinates, Bart McDade, claims to have briefed his chief specifically on the firm's use of Repo 105 and the need to reduce it in June of 2008. And, in any case, Mr. Fuld assured the examiner that he had "many conversations with his executives" about cutting back on leverage.

For their part, Lehman's accountants, Ernst & Young, seemingly were reluctant, perhaps out of sheer politeness, to be too nosy about what the Examiner calls Lehman's reverse financial engineering. The report notes that Ernst & Young knew that Lehman was using Repo 105 but neglected to question it, much less raise a fuss about it.

Which would appear to affirm the opinion of our old friend, treasured Barron's contributor and accounting icon Abe Briloff, that the big accounting firms are not all that accountable. In Abe's extremely learned view, they have too often and undeservedly escaped opprobrium for their critical role in the decline and fall of the financial system during the great recession.

In short, to coin a cliché, there's more than enough blame to go around -- and we haven't exhausted the roster of culprits, by a long shot -- for Lehman's demise and all the horrors that issued from it.

SETH KLARMAN IS THE MAIN man at the Baupost Group, a Boston-based money-management firm that has compiled a splendid record stretching back over some 18 years. Although Baupost to the untutored eye may look like a hedge fund, it's rather a different animal. For one thing it eschews leverage; for another, while it does short stocks from time to time, bearish positions typically are an insignificant presence in its portfolios.

Although just about everybody calls himself a value investor, Seth is that rare bird who really is a value investor. And like Seth himself his investment approach is unostentatious, smart, serious and painstaking. His year-end letters to his limited partners are always a joy to read and, unlike so much of the genre, enlivened by insightfulness, wit and that most uncommon ingredient -- common sense.

In his latest commentary on 2009, he reflects with more than a dollop of wryness on the effects of that mother of all rallies (which, we would be derelict and ill-mannered were we to fail to mention, last week celebrated its one-year anniversary). Seth writes that the monster move has been taken as "an all-clear signal." It even, he says a tad wondrously, has rescued from the purgatory where moldy old Street sayings end up the notion that we're in a Goldilocks world for investors, one that's not too hot and not too cold.

Gentleman and scholar that he is, he submits a delicate demur to this vision of "financial utopia," pointing out that its components are inarguably a tad repulsive, encompassing as they do unyielding reduction by Uncle Sam of short-term interest rates to just this side of zero, the printing presses running all-out, all the time, and the dead hand of government cropping up everywhere -- in the financial markets, in accounting standards, in the economy.

Maybe, he suggests, the sure and simple way to reach this wonderful state of nirvana is by simply engineering "a near-total collapse of the system" every few years. Gosh knows, we might interject, there's no lack of experienced hands in Wall Street and Washington capable of doing the job.

We don't want to give you the impression that Seth is a sour cynic. Far from it. He laments that "one might expect that the near-death experience of most investors would generate valuable lessons for the future" instead of gaily resuming what he calls their "shockingly speculative behavior."

Our point is that someone as seasoned as he is in the ways and whims of Wall Street can still be shocked by anything investors do or fail to do is the quintessential opposite of a cynic. And to prove it, in his latest epistle, Seth offers 20 critical lessons investors should have taken away from the market catastrophe they so recently suffered through.

A few of our favorites:

-- Beware leverage in all its forms.

-- Steer clear of financial risk models. Reality is always too complex to be accurately modeled. Markets are governed by behavioral science, not physical science.

-- Rating agencies are highly conflicted, unimaginative dupes, not to be trusted.

Virtually all of Seth's cautions as well as the several we've mentioned have relevance to Lehman and its lugubrious fate. Frankly, we were surprised that release of the Examiner's report and the unpleasant disclosures it contained had so little effect on Friday's market. Perhaps it was merely further demonstration of why Seth sees an increasingly speculative thrust to trading.

AT THAT, THE MARKET in its final session backed and filled languorously before edging higher at the close. And while the trend has been up the past couple of weeks, the gains continue to lack much zest. Doubt obviously still hangs heavy on individual investors and the latest decline in consumer sentiment is partly a reflection of this wariness.

So, too, manifestly is the stubborn refusal of employment to show more than a modicum of improvement. On this latter score, the latest piece of bad news is that Larry Summers now predicts a significant upturn is right around the corner.

Barron's Roundtable stalwart and proprietor of The High-Tech Strategist Fred Hickey has been right as rain this year on the stock market. Which means, of course, his portfolio has prospered. In his latest missive, Fred opines that "my hunch is that this market might roll over and suffer at least a 10% correction," something he points out we haven't had since stocks took off a year ago.

He hazards that if the Fed really decides to ring down the curtain on quantitative easing that could trigger fears of rising rates, or, even worse, a chain reaction of rising rates that might unnerve investors, force Mr. Bernanke to speed up the printing presses again and cream the dollar.

In some ways, Fred's talking his book, since he's loaded with gold, to which such a sequence would add fresh glister. As for tech, although he has enjoyed some profitable trades, he now believes that, with a few exceptions, like Microsoft, Verizon, Cadence Design, and Sybase, the stocks are over-owned and no longer very attractively priced.

E-mail comments to editors@barrons.com


UP AND DOWN WALL STREET
MONDAY, MARCH 8, 2010
Strange Bedfellows
By ALAN ABELSON | MORE ARTICLES BY AUTHOR
Politics and sports don't mix -- and neither do politics and financial reform. February job numbers: just a snow job?

POLITICS AND SPORTS DON'T MIX. IT grieves us to discover that bitter truth, since we're a passionate fan of both. But several recent instances provide persuasive evidence for that melancholy conclusion.

And we're not talking about Jim Bunning, a Hall of Fame pitcher before he completely lost control and became a U.S. senator, where he has been haranguing the rest of that somnolent body for its spendthrift ways for days before their patience and his voice gave out at roughly the same time.

Rather, it's a pair of New York governors -- Eliot Spitzer and his successor, David Paterson -- who brought home for us the incompatibility of sports and politics. It's a pity, in a way, because the two activities have much in common. In baseball, just by way of example, the players steal bases, while in politics the players steal anything that isn't nailed down.

Eliot Spitzer, sad to relate, was forced to resign when it was revealed that he consorted with prostitutes. Although some degraded types might consider that a kind of sport, tennis, not canoodling, was the source of his undoing. So claims Lloyd Constantine, a close aide to the ex-governor who has just published a hiss and tell book about him.

According to Mr. Constantine, tennis provided Mr. Spitzer with "necessary physical release," and his woes began when he abandoned the sport and sought release elsewhere.

In Mr. Paterson's case, it was an abiding affection for baseball, expressed strictly as a spectator, that got him into trouble. He allegedly hit up the Yankees for five free World Series tickets and lied about it to the State Commission on Public Integrity. (Who knew there was such a body, and what have its members been doing all these years, besides drawing a paycheck?)

IT'S RATHER A STRETCH to think of investing as a sport, although in a gaming sense it increasingly resembles one. In any event, politics and Wall Street aren't ideal bedfellows, either, as graphically illustrated by the farcical slips and stumbles by Congress striving to paste together a set of regulations that might possibly inhibit -- for a spell, anyway -- the perps from repeating that sorry sequence of events that came oh so close to demolishing the stock market and the economy along with it.

What makes congressional pratfalls and delay all the more bemusing is that Paul Volcker has provided a viable guide, the workings of which do not take 700 pages to adumbrate, for achieving that incontestably worthwhile goal. The nub of his proposal is to effectively remove temptation from the banks to again behave badly by restricting their ability to act like hedge funds and forcing them to act, well, like banks -- you know, taking in deposits and lending out money with something resembling prudence. What a radical idea!

The banks, especially those behemoths so many of which Uncle Sam snatched from the jaws of oblivion, have been living it up the past year, trading securities, and often with particular relish for their own accounts. They briefly interrupt the joyous task of adding to their growing hoards of cash just long enough to dispatch another band of lobbyists to Washington to put the brakes on a move toward serious reform (in the unlikely event one should emerge) and allow them time to emasculate any legislation that doesn't, by their lights, pass muster.

For their part, the lawmakers respond quite gingerly. Like Willie Sutton, they're all too aware where the money (in this case, read: campaign grease) is, and these days that includes the shadow bankers -- private-equity outfits (which used to be known by the much more revelatory name of leveraged-buyout firms), hedge funds and similar entities, which do their thing largely outside the regulatory orbit and would dearly love to keep it that way.

Paul Volcker's proposal would also limit how great an exposure to risk one of those gargantuan banks could have by limiting their holdings to 10% of the overall financial sector's liabilities. On this score, the redoubtable Henry Kaufman points out in a recent speech that size, indeed, does matter. The real culprit in the latest bust, he contends, was the same one responsible for all the postwar busts -- excessive credit -- which, of course, was even worse this last go-around because, thanks in no small measure to Fed policy, credit was virtually free as well as easy to come by.

Moreover, Henry says, greatly exacerbating the financial meltdown we've just endured was the fact that for the past 20 years, the big banks had gotten steadily bigger as they vigorously pursued mergers and acquisitions, and their impact on the economy ballooned commensurately. The great recession sharply intensified that trend as the survivors, aided and abetted by Washington, swallowed up their failing fellows.

As a result, the 10 largest financial institutions in this blessed land, which in 1990 held 10% of total financial assets, now hold over 60%, and the 20 largest, which held 12% of all financial assets, today boast more than 80%.

In 1990, there were some 16,000 banks insured by the FDIC; currently, there are fewer than half as many. And the shrinkage hasn't by any means been merely a case of the big fish gulping up the minnows: of the 15 biggest financial institutions in 1991, a mere handful -- five, to be exact -- are still independent.

In like vein, in the 1980s, there were nearly 40 recognized dealers in U.S. government markets. But even as the market has grown, their numbers have dwindled to fewer than 20, and most of those are subsidies of foreign institutions.

What makes the major banks' enormous presence in the financial markets all the more disquieting is that they haven't abandoned the securitization and model-driven risk-taking that played such a huge role in, as Henry puts it, "the unprecedented credit creation at the heart of the financial collapse."

We confess to an implacable skepticism that Congress might straighten up and fly right and do something that might encourage Wall Street to mend its errant practices. Still, if Paul Volcker apparently still believes in miracles, maybe we ought to at least give it a try.

THE STOCK MARKET PLOWED ahead in the somewhat desultory and quiet fashion that has pretty much typified its movement for most of the year and is plainly evident in the lack of oomph in trading, with Big Board volume more than once dipping below the billion-share mark. And even that modest turnover doesn't tell the whole story, since so much of it is accounted for by that dubious plaything of institutions known as high-frequency trading.

It may be that all those canny chaps and lassies who caught the market right a year ago and made a bulging bundle in the subsequent spectacular rally that carried equities up 65%-70% and even higher, decided to put a chunk of their winnings to sensible use and scurried off to bask in the sun, far from the canyons of capitalism. More likely, we suspect, investors, particularly those who were taken to the cleaners in the crash, remain too wary or bereft of moola to indulge in another fling. So far, anyway.

But even without the whole-hearted participation of the investment masses, the market pushed ahead last week, buoyed by the increasing tendency of the Street to treat virtually any news shy of outright disaster as it could have been worse -- or even good. Thus, last week's February employment report -- which on the surface, at least, wasn't as bad as the crowed had feared -- was hailed as reason to buy.

The conventional wisdom held that the 36,000 payroll jobs lost could be cheerfully blamed on that always handy villain, the weather. And no argument, we did have more than a sprinkling of snow. But as the Bureau of Labor Statistics forthrightly explained, "in order for severe weather conditions to reduce the estimate of payroll employment, employees have to be off work for an entire pay period" and not be paid.

Workers who drew pay for even one hour during their pay period (typically, two weeks to a month) were counted as employed in February. Too, the BLS points out, some unknown number of workers could well have been added for clean-up and repairs after the storm.

What's more, as Bill King of the King Report spotted, there were 97,000 additions to the job total courtesy of the problematic birth/death model. Worth noting, too, is that the census added 15,000 hires. While the unemployment rate held at 9.7%, our preferred measure, which includes the underemployed, edged back up to 16.8%, from the previous month's 16.5%.

That insightful pair, Philippa Dunne and Doug Henwood, who run the Liscio Report, deftly sum up the February employment story as "more of the same -- minor losses that look good compared to the bloodletting of early 2009, but rather sad compared to a textbook recovery."

Among other less-than-ebullient data they cite, the probability of someone out of work in January finding a job in February fell to 20.1%, from 24.5% the previous month. And though the rate at which folks voluntarily left jobs also declined, from 2.7% to 2.4%, they comment that, alas, "the hiring strike continues."

Philippa and Doug size up the job picture this way: "All in all, it looks like the labor market continues to stabilize, but it's not really turning around." In fact, they explain, its behavior is typical of "post-financial-crisis recessions...a sharp fall followed by extended flatness." And they stress, everything considered, it would be a mistake to write off February's numbers as "nothing but a weather report."

Will somebody please tell Wall Street?

E-mail comments to editors@barrons.com


UP AND DOWN WALL STREET
| MONDAY, MARCH 1, 2010
Here Come the Put-Backs
By ALAN ABELSON | MORE ARTICLES BY AUTHOR
Investors in flawed mortgages are starting to force financial institutions to repurchase bad loans. The health-care summit: much ado about nothing.

THOMAS BRACKETT REED SPENT A SLUG of years as speaker of the House of Representatives late in the 19th century. A native of Maine, he was endowed with a tough skin and an acerbic tongue. Both were on display when he memorably described some of his fellow congressmen as "never opening their mouths without subtracting from the sum of human knowledge."

On reading those words, we couldn't but feel that they had more recent application in describing with eerie accuracy the six-hour-plus talkathon hosted by President Obama in Washington last week. The guests, in case you were fortunate enough to have missed watching the event on television, were identified as leaders of both parties, which all by itself was reason enough to plunge any patriotic soul into despair.

Stuffed shoulder to shoulder around a nondescript table in Blair House, our spiffy solons had gathered at the president's behest to find common ground on health care and presumably pave the way for a bipartisan bill that would finally accomplish reform of that vast and growing, anomalous but critical, and, lest we forget, increasingly costly sector.

Expectations for the success of this high-level powwow were extremely low and fully met. This is not to say that the participants had much reason for regret. It isn't every day they get their mugs on TV and can posture, pontificate and preen before a national audience (however minuscule). We suppose the citizenry theoretically could benefit by seeing just how shallow and subpar these purported leaders are, whichever side of the aisle they occupy, but that's something we suspect most of the electorate already knew.

Like so much of what parades as serious activity in Washington these days, the health-care summit was more than likely a political ploy by the Democrats in preparation for slipping around a potential filibuster via a parliamentary maneuver that requires only a majority vote for passage. There's a certain delicious irony in that such a maneuver is known as "reconciliation," since, if used, it's bound to touch off one heck of a partisan spat.

The stock market wisely paid not all that much heed to the health-care summit. It was, instead, far more attentive to another silly show out of Washington starring Ben Bernanke and alternately noisy troupes of first congressmen and then senators. What investors learned they already should have known: with consumer confidence plummeting, bank lending conspicuous by its absence, weekly data on new claims for unemployment insurance on the rise and housing still in the pits, Mr. Bernanke and his cohorts at the Fed aren't about to bump up interest rates.

Assured that zero interest wasn't about to vanish proved enough to keep the market more or less on an even keel as it bid adieu to February. As if Greece, Spain and all that, along with the uninspiring pace of the economic recovery, weren't enough to cool any flare-up of investor enthusiasm, a humongous snowstorm put a real chill on trading in the final sessions. Our guess is nature soon will take pity on us and warm things up a bit. If only we could say the same of the economy.

TO ECHO POLLY ADLER, A HOUSE is not a home, and Ms. Adler, one might logically assume, knew whereof she spoke. For the late Polly Adler became a household name in the early 1950s as the author of a book titled A House Is Not a Home, recounting her 20-plus-year career as a fabulously successful proprietor of a house of ill repute, frequented by any number of New York City luminaries, including at least one mayor.

Notice she ran a "house," not a "home," of ill repute. Further, Ms. Adler, who managed to keep a dainty step ahead of the authorities by adroitly changing in a wink the apartments in which the business she oversaw was conducted, seemingly provided constant proof that house and home are not one and the same.

And home does have a resonance and an ambient reach that far exceed that of house. Home, after all, as someone pithily defined it, is "where, when you have to go there, they have to take you in," while a house is, well, just a house. So, technically, Polly had it right. If all this seems pedantic frivolity, it is, sort of. Except don't try to tell that to the millions who have lost their abode to foreclosure and eviction. To those benighted folks, Polly's insistence that a house is not a home is pure and simple a distinction without a difference.

What got us parsing semantic subtleties -- a subject we know you must find absolutely enthralling -- is fresh evidence, if any were needed, that housing, whose collapse detonated the devastation that laid the economy low in 2008-09, remains mired in misery. The latest rundown on sales, released last week, confirms that melancholy assessment in spades.

New-home sales dropped an eye-popping 11.2% in January to 309,000 units, the lowest ever since they started keeping track way back when. That was sharply below the anticipated rise to around 350,000 by Wall Street's fearless forecasters and, just to give you a glimpse of how the mighty have fallen, it's about a million and a quarter fewer sales than at the peak in the heady days of midsummer 2005.

To make matters worse, the median home sold for $203,500, almost a seven-year low, and inventories rose to 9.1 months, which, given the so-called shadow inventory of unsold houses the banks are sitting on, does not, to put it mildly, bode well for housing in general and the home builders in particular. Nor does the sharp decline in mortgage applications and the uptick on 30-year mortgage rates to over 5%.

Hard -- in every sense of the word -- on the heels of the nose dive in new-home sales came the disclosure that existing-home sales took a header in January as well, to an annual rate of 5.05 million, a 7% drop and quite a cut below Street expectations of 5.5 million. That was the second-biggest decline (after December's awesome 16.2% skid) in the 11 years such data have been collected. The median price held level with a year ago at $164,700, but necessitous sales accounted for a formidable 38% of the total.

Ugly weather probably was a drag in January, but even in the months when the sun was shining, home sales haven't been setting the world on fire. And the dismal demand for both new and existing dwellings came in the face of hefty tax incentives for first-time buyers and other ameliorative efforts by Washington. The latest brilliant idea of Tim Geithner and his henchmen at the Treasury, of imposing a temporary freeze on foreclosures, seems ideally designed to wreak more havoc in housing.

As Bary Ritholtz of Fusion IQ reminds us, the profound problems that beset the industry spring from the fact that over the past decade, something like five million to 10 million people bought dwellings they couldn't afford and still can't, and a heap of those homes today are worth less, often a whole lot less, than they paid for them.

The Treasury's proposal, he scoffs, will achieve nothing more than keeping those unfortunate folks in homes they can't afford, many underwater and burdened by payments they can't make.

Such mortgages were riddled, not infrequently, with the connivance or encouragement of the lenders -- says Mark Hanson, the insightful real-estate analyst who runs the eponymous Hanson Advisors -- with fraud, white lies and like nasty stuff that violate the loan warranties. Investors, he relates, are only beginning to seize on such breaches to demand so-called put-backs -- repurchases of principal, accrued interest and expenses for loans that have been compromised.

Mark warns that as more investors turn to put-backs to recoup losses, this process will begin to take a toll on financial institutions that were active in the mortgage and housing arena. He points out that because the put-back push is in its infancy, there is no way for financial institutions to estimate future losses or need to recognize the potential costs under current accounting requirements. All of which is apt to make losses that much more painful for those institutions.

Obviously, for investors, home builders and distressed homeowners, the pain inflicted by limp housing, to paraphrase that eminent philosopher, Yogi Berra, won't be over until it's over. And until it is, we have trouble envisioning anything resembling a robust rebound by the economy.

A TREASURED COLLEAGUE, WARM friend and consummate journalist, Harlan Byrne, died last week. He was 89. Harlan came to Barron's in 1985, joining this magazine as Midwest editor after 36 years at our sister publication, The Wall Street Journal, where he served in various capacities, including bureau chief at Cleveland and Philadelphia, before settling in as No. 2 in command at the Journal's Chicago outpost.

From his Barron's perch in the Windy City, Harlan cast an inquiring and knowing eye on a wide swath of Corporate America, especially those muscular companies that made big ugly things that rust in the rain. He was a meticulous reporter of the highest integrity, a prolific writer, an unflappable, low-key interviewer, no matter how grouchy and intimidating the subject, an astute judge of markets and possessed of an extraordinary ability to separate fact from hyperbole, truth from spin.

We can't recall a single instance when one of the countless pieces he wrote elicited a complaint of inaccuracy from even the crankiest corporate chieftain. Would that all of us ink-stained wretches could say the same.

Harlan graced the Barron's masthead until he retired in 2002, but continued to turn out his thoroughly researched, well-wrought pieces for the magazine until 2006. Personally, he was bright, gentle and unfailingly generous, just one great guy. All of us at Barron's and anyone lucky enough to have known Harlan will really miss him.

E-mail comments to editors@barrons.com


UP AND DOWN WALL STREET
MONDAY, FEBRUARY 22, 2010
The Big Stall
By ALAN ABELSON
Why Washington and Wall Street are living on a planet all their own. Is the Fed really starting to tighten?

AN OLD FRENCH PROVERB DEFINES PUBLIC opinion as when everybody knows better than anybody. And that's especially true these days when, thanks to such miraculous contraptions as the Internet and Twitter, all you need is a keyboard and one finger to register your opinion on anything and everything under the sun and whatever's above it as well.

This extraordinary ease of access to eyes and ears just about everywhere on this pullulating, pulsating planet is an all-but-irresistible invitation to sound off, no matter how familiar or recondite the subject and how inane or informed the sentiment or conjecture. Toss in the anonymity, if one chooses, afforded online, and you have the explanation, we suspect, for the massive amplification of the rumbling and grumbling that dominates public discourse.

Put another way, never before in the long and torturous history of mankind (and womankind, too, we hasten to add), have so many been enabled with the means to weigh in on issues, trivial and meaty, and do so with no muss, no fuss. Never before have we had so handy a platform from which to voice our displeasure, unload our beefs, exhale our irritations. For better or worse, the Internet has provided a megaphone for one of humanity's leading pastimes -- complaining.

This phenomenon is vividly evident in the mounting rage and rancor that animates the current political scene in this our native land. To be sure, the populace has quite a bit to complain about, with the trauma of the near-death of the economy still so widely painful, while the administration dallies and Congress fiddles. Slow learners, in any case, and almost willfully insensitive to the public weal until they smell the tar and feel the feathers, politicians have failed to grasp the enormity of the change technology has visited on them.

Justly or not, they are constantly on the griddle of accountability; the lag between what they do, or more glaringly of late, what they fail to do, and the reaction of the citizenry, has been seriously compressed. Granted that there's lots of noise and incoherence, along with a sizable dose of rote ideology in the complaints, but there's no gainsaying that the hurt is real and the sense of betrayal vivid. And while a skeptical view of government is as American as apple pie, the near-ubiquitous distrust of institutions of any kind is unprecedented and disquieting.

Within our personal compass, Wall Street and the banks, which had such a key role in the decline and fall of the financial system and the economy, rank right up there among the entities that folks love to hate, and, we have to say, deservedly. The rapidity with which, thanks to Uncle Sam's solicitude and unstinting generosity, those miscreants recovered and prospered sufficiently to play the same old games has only fanned that smoldering animosity. Wall Street seems as tone deaf as Washington and just as unaware of the quantum leap in the public's perceptive capacities and the speed and volume of its response to what it perceives.

Ordinary folks might not recognize a structured mortgage-backed security if it hit right them right between the eyes, but they weren't born yesterday. You don't need to have a Ph.D. in economics -- it probably helps if you don't -- to grasp how specious is the plea offered by the major banks and their economist camp followers that they had essentially no role in the subprime fiasco that triggered the great recession. Give us a break, please.

Stoking the mutinous mood among so much of the population is the big stall in Congress of any corrective measures to lessen the chances of another credit bust and economic debacle, a state of stasis that owes more than a little to the big bucks the lenders have invested in lobbying the lawmakers. Interestingly, the CFA Institute, the financial analysts' trade group, last week released a poll of its members that showed 68% of the 1,494 investment pros queried supported proposals to curb proprietary trading by commercial banks.

As Jim Allen, head of CFA's capital markets policy, explained, acutely aware of the potential dangers and conflicts of interest that come with such trading, "our members want banks to focus on their specialty -- taking deposits and making loans." What a novel idea! Maybe some civic-minded certified securities analyst should pass it along to Congress, although our chosen representatives are doubtless too busy hitting up the banks for campaign contributions to pay much heed.

As to the lament we voiced above that the pervasive mistrust John and Jane Q. harbor even for institutions free of blame for our recent brush with financial catastrophe, the inexorably creeping skepticism has not spared the Supreme Court. Another recent poll, this one by the Washington Post and ABC News, showed that something like 80% of the respondents turned thumbs down on last month's decision by the Supremes that corporations and unions could spend as much as their little hearts desired to elect a candidate of their choice.

Especially startling is that, according to the Post's Dan Eggen, the opposition to the ruling encompassed the entire political spectrum, from left to right. You can't help but feel a stab of concern when such a huge slug of the population casts doubt on our venerable tradition of having the best government money can buy.

THE STOCK MARKET WAS SAILING along quite nicely in the holiday-shortened week until Bernanke & Co. bestirred themselves after the close on Thursday and announced they were raising the discount rate the Fed charges on loans to banks that need the dough to 0.75%, from 0.50%. Although Ben had tipped his hand several days before, lest the surprise disturb the Street's equanimity, the move caused some selling in overseas markets and a touch of softness here on Friday before equities regained their composure and inched higher again.

Not surprisingly, the rate boost quickly prompted concerns that this was the first step in an effort by Mr. Bernanke to gently wean the economy, and especially the financial sector, away from the punch bowl. In other words, this might prove to be the end of the best of all possible worlds for banks and their like, enabling them to borrow at virtually zero interest and turn around and lend, when the spirit moved, at nicely higher rates.

That sweetheart of an arrangement bears a striking similarity to what's known in Street parlance as the "carriage" trade in foreign-exchange dealings, where traders borrow in dirt-cheap currencies (for years the yen was a favorite) and invest in dearer ones. Logically, then, the equivalent activity for banks in the good old U.S.A. should have been called the Bernanke trade.

In any case, invariably solicitous, especially where the markets are concerned, Ben rushed to assure investors not to worry, there were no plans to tighten in the foreseeable future. Normally, that would be enough to convince us that rates, indeed, were poised to edge higher, but we're more or less persuaded by, among others, John Williams, the savvy proprietor of Shadow Government Statistics, that we're a tad too cynical, or at least premature.

John feels that the rise in the discount rate was meant "as a signal of the Fed's inherent 'restraint' to markets that increasingly are balking at Treasury fundings." But he views the signal as pretty much bluff and bluster. He points out that the Fed has "virtually no room to tighten credit in a system where the real (inflation-adjusted) broad money supply is in severe contraction, and where general bank lending into the flow of commerce is not adequate to maintain economic growth."

Our friends at Institutional Risk Analysis agree that the central bank is probably not going to raise rates right away, but warn that the Fed is increasingly aware that banks, insurers and other fixed-income investors can't really "tolerate artificially low yields on bonds much longer." And they take issue with the notion that the Fed's action is a sign that banks are no longer at risk from asset- quality woes; on the contrary, they expect "continued record losses from some of the largest players in the banking industry through much of 2010."

It all sounds like Mr. Bernanke may yet wish that Congress hadn't decided to renew his contract.

DAVE ROSENBERG, WHOSE ALWAYS worthy commentary we've dipped into from time to time in this space, hails from Canada. After a seven-year stint with Merrill Lynch, he hopped back over the border and is now chief economist and strategist for Gluskin Sheff, a Canadian money-management firm. It seems more than fitting, then, that we pass along his observations on the booming housing market up north.

There's a question and no little dispute among analysts on both sides of the border as to whether the red-hot Canadian market is a bubble, akin to that number we all loved and miss so much here in the states.

The good news, Dave says, is that over the next four or five months, for a number of reasons, including a change in the sales taxes slated for some provinces and expectations that the Bank of Canada will raise interest rates sometime in the third quarter, we are apt to witness a surge of sales, keeping the housing market on a boil.

However, the bad news, he goes on, is that residential-mortgage balances in Canada "relative to disposable income just hit 92%, which is exactly where the ratio was in the U.S. back in 2005 when the mania was about to morph into a full-fledged bubble." And we all know to our sorrow what happens to bubbles in the fullness of time.

E-mail comments to editors@barrons.com


UP AND DOWN WALL STREET
MONDAY, FEBRUARY 8, 2010
Out of Hibernation?
By ALAN ABELSON
Bears show their ugly heads, and markets everywhere take a pasting. Jeremy Grantham on financial razzmatazz.

DON'T ASK, DON'T TELL. Whatever its merits or lack of them in terms of Pentagon policy, for purely humanitarian reasons, we earnestly wish we could invoke that controversial concept right now, at this very moment. For what with coping with winter storms, trying to enjoy and then recover from the Super Bowl and dealing with all those annoying diurnal necessities that abound in every household, the last thing you need is to have some insensitive lug shovel a bucket of bad news your way. But there is no escaping the dictates of our calling: We have to tell you about the stock market, even though you've taken great pains not to ask.

It was, in a word, an awful performance. And what made it worse was that the plunge came after the week began on an upbeat note, raising hopes that the slide that began Jan. 19 might be over. Instead, on Thursday, the equity market was totaled, suffering its biggest drubbing since April 20, and even Friday's fuzzy employment report, featuring a surprising drop in the jobless rate (we're tempted to say suspicious drop) failed to trigger a bullish stampede. But a valiant rally late in the session did stem the selling (or maybe the bears just grew weary and went home), enabling the averages to edge into the black.

The pounding was global in sweep and left, except for the dollar, no place to hide. On that score, even gold was roughed up (ah, the poor bugs that got swatted), and oil and most commodities as well as equities took a rude pounding. Although, we're happy to report, the yellow metal firmed a tad before the final bell.

At week's end, the Dow and Standard & Poor's 500 were down 7% from their January highs, and Nasdaq took an 8% hit. In their frantic search for why the markets suffered a bout of vertigo, professional market-watchers fingered the woes of countries besotted with debt and devilled by weak economies -- Greece, Ireland and Spain-prominent among them -- as engendering fears we might be soon be engulfed by a wave of sovereign defaults. Without blinking at the parlous financial shape Greece and its troubled kin are in, we aren't persuaded that's what really spooking investors. It strikes us as more excuse than explanation.

Our sense remains that the market, and not only stocks and not only ours, has wildly outstripped the prospects for economic recovery. Whether in one big move or, more gradually, the yawning gap between investor expectations and what can reasonably be anticipated for the economy is destined to significantly shrink. Whether last week's tremors signaled the start of the closing of that breach, or merely a foretaste of the eventual resolution, investors are well advised to tread warily.

BACK IN LATE DECEMBER, we took note of a bullish call on the dollar by Deutsche Bank. Their timing was pretty darn good and we ventured that any reasonably sustained bounce could take something out of the global enthusiasm for commodities, so many of which are traded in dollars. And last week's trashing of futures was, as duly noted, in no small measure the result of the allure of greenbacks for investors suddenly blanching at risk.

That, and an interesting piece on Bloomberg (the service, not the mayor) drew our attention to copper, which has been taking a bit of a pasting after its brilliant run in '09 with prices nearly doubling. It quoted David Threlkeld, who runs a metals trading firm named Resolved Inc. With 40 years under his belt as a trader, he obviously has seen it all. And he believes, apparently quite strongly, that copper is headed for a fall.

Threlkeld reckons that China holds about three million tons of unreported inventories. The reported figures, he says, don't add up because of the tendency to assume that anything shipped to China is consumed, which he flat-out feels is "ridiculous."

"What we have now," he claims, "is a unique situation, whereby we have surplus and production that have gone up, while consumption has gone down." That certainly sounds like a perfect recipe for an unhappy outcome.

And, as a matter of fact, Threlkeld expects copper to break $1 a pound, which would represent quite a tumble from its present price of $2.85. While he sounds absolutely convinced he's right, wise fellow, he shies from slapping a date on the prediction. But even if he's a tad too gloomy, it spells bad news for the producers and even worse for the speculators who are long.

WHO KNEW IT WOULD come to such a hideous pass? Oh sure, plain folks have always been a mite scornful of bankers, as evidenced by a feeling summed up in the old gibe by some anonymous wit that bankers lend you an umbrella in fair weather and take it back when it rains. But who would ever have thought that public esteem for them would sink so low that in a recent popularity poll they ranked below -- are you ready for this? -- politicians and lawyers!

We haven't cited the precipitous decline in the regard afforded them by their fellow citizens as a preface to joining the swelling chorus of banker bashers. Any number of distinguished members of the lending profession (what distinguishes them in particular is they haven't been charged with malfeasance, not yet, anyway) have testified that uppermost in their minds at all times is the financial welfare of their clients. So it must be so.

Moreover, numerous pundits have voiced concern that bankers are the target of "populist" rage, stoked by troublemakers with a personal grudge or, even worse, a general contempt for free enterprise. Owing to such tut-tutters and a lexicon-challenged media, "populist," which used to enjoy a salutary connotation, has become an epithet and, in the process, traditional victims -- all of us ordinary people -- have been transformed into the perpetrators.

Now, it's true that the bankers have been shelling out mind-boggling large bonuses, seemingly oblivious of the fact that their banks' balance sheets are decidedly not a beauty to behold, badly marred as they still are by the massive depredations inflicted on them by feckless speculation. However, contrary to popular belief, the bankers are very much aware that joblessness remains rampant in the population at large. But they see the bonus bonanza not as adding insult to injury, but as a positive morale booster, furnishing hope to the downtrodden by showing it's still possible and without raising much of a sweat to strike it rich in this great country.

Obviously, then, we collectively owe the maligned bankers our gratitude as well as any unseemly fees they may have levied on our unpaid balances. Naturally, some cranky types will disagree. And, if for no other reason than to mollify them, we offer a differing view in the person of Jeremy Grantham.

As luck would have it, to his latest quarterly letter to GMO shareholders, Jeremy appends his arguments rendered in a recent debate he engaged in on the topic: "Financial Innovation Boosts Economic Growth." He passionately opposed the proposition on the grounds that the economy has "a painfully overdeveloped financial sector" that has been a serious drag on growth.

As he explains, owing to the flowering of those exotic innovations, in such profusion "clients can't easily distinguish talent from luck or risk-taking." The addition of new products -- options, futures, CDOs, hedge funds and private equity -- means mounting fees, and invariably as "the layers of fees and the layers of agents increase, so too products become complicated and opaque, causing clients to need us more."

Thus, "the client world," as he puts it, "pays up precisely in proportion to how bamboozled it is by unnecessary complexity, which among other negatives is what the fancy new instruments were offering: confusion, doubt and bamboozlement." As you can see, Jeremy has a regrettable tendency to mince his words.

An admitted and highly successful member of the financial sector, Jeremy obviously knows whereof he speaks when he warns, "beware, the financial-industrial complex: they are eating your lunch." And, he adds, "to be honest, I've eaten more than my share. It was a good lunch."

Thanks to what he calls the "razzmatazz" of the past 10 to 15 years, finance has grown to 7.5% of gross domestic product today, from 3% in the economically halcyon '60s. And that change, as intimated, strikes him as anything but sanguine. The financial system is overfeeding on and slowing down the real economy, he laments; it's like having "a large, heavy and growing bloodsucker on your back."

No little of the blame for the economic and financial disaster that in 2008 and early 2009 upended both the economy and the markets, he contends, should be pinned on those fancy new instruments, in league with the belief in market efficiency, as codified (and, we might interject, deified in some quarters) in the Efficient Market Hypothesis.

The damage this ugly combo caused, Jeremy asserts, was "cosmic and may indeed be not over yet."

He chides academics in particular as so badly wanting their theories, notably including the Efficient Market Hypothesis, to be right that they assume them to be so, despite the absence of any concrete proof.

"They assume," he observes, "not only that market participants are efficient and well-informed, but also they are good and worthy citizens." In fact, he sighs, "they're all self-serving and many are slightly wicked."

Jeremy winds up by citing approvingly Paul Volcker's on-the-money dictum that "the only financial innovation useful to the country in the last 20 years is the ATM." To which, as a confirmed Luddite, we can only say "amen."

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Sat Jan 9 2010
UP AND DOWN WALL STREET
Our Financial Godfathers
By ALAN ABELSON
At the Fed, it's do as we say, not as we do. A pretty crummy jobs report.

IF YOU'RE INTO ZANY, THIS COULD BE JUST your kind of year. What inspires that epiphany is the eruption of kooky happenings in 2010's first full week. For openers, in the wake of the foiled Christmas plot to blow up a Northwest plane as it prepared to land in Detroit, terrorist tremors were in full bloom from New Jersey to California.

On Sunday, Jan. 3, Newark Liberty International Airport was shut down and put on high alert after a man was spotted in the sterile zone (which is no-go for unauthorized beings), then slipped away before he could be nabbed. Two days later, across the continent, Bakersfield Airport was discombobulated when a passenger tried to board a plane hugging five bottles, whose contents tested positive for explosives.

The culprit at Newark, subsequent inspection of the film in a security camera revealed, turned out to be merely a latter-day Romeo bent on giving his Juliet one last buss before she boarded her plane. Presumably, now that the all-clear has been sounded, the airport has shifted from high alert to normal lethargy. And in Bakersfield, the "explosives" on further scrutiny proved to be something a bit sweeter -- namely, honey -- which does suggest that detection may not be the Bakersfield lab's strong point.

Always good for a whiff of the antic, Washington happily didn't disappoint. Wednesday evening, with the temperature a few degrees above freezing, a few blocks from the White House, after duly shedding his clothes, a man metamorphosed from jogger into flasher. This for some reason attracted the attention of the gendarmes who, after making sure that, contrary to initial reports, he was not Rush Limbaugh on a mission to moon the president, hustled him off for a mental evaluation.

Unlikely behavior of a different but, if anything, more shocking nature was provided by Connecticut's senior senator, Christopher Dodd, who announced that he wouldn't seek reelection. Mr. Dodd, after five terms, had become a power in the world's gassiest deliberative body. But with his popularity in his home state steadily doddering, he chose to stand down rather than stand and fight.

In like vein, Sen. Byron L. Dorgan of North Dakota and the governor of Colorado vowed not to seek another term. Whatever their failings, the solons are no slouches at reading the handwriting on the wall. So further seepage from the ranks could prove a sorry omen for the Dems in this year's elections, since one of the key tip-offs of the coming change in political fortunes of the Republicans in 2008 was the similar exodus from their cushy legislative posts by a posse of GOP stalwarts.

The week also was host to a bizarre disclosure about our beloved Treasury secretary, Tim Geithner. Back in 2008 he was head of the Federal Reserve Bank of New York and instrumental in the government's frantic exertions to bail out the floundering insurer American International Group, known familiarly as AIG, lest it go under and pull the entire financial sector with it. In a valiant effort to keep the behemoth insurer afloat, a daunting task, Uncle Sam, in one form or another, supplied transfusions of $182.3 billion in cash and credit.

Mr. Geithner played a pivotal role in AIG's paying off in full, penny for penny, dollar for dollar, no haggling allowed, the $62.1 billion it owed to a dozen banks to which it had sold credit-default swaps. Egregious in itself -- but, even worse, one of his underlings insisted the insurer hush up the details of the payments so as not to upset the populace.

As Neil Barofsky, the official watchdog for the bailout program, wrote in a scorching November report, thanks to Federal Reserve officials, the counterparties (i.e., the banks) walked away with "tens of billions of dollars they likely never would have received." And, he thundered, "whenever government funds are deployed in a crisis to support markets or institutions...the public is entitled to know what is being done with government funds."

That is really quite a novel concept that seems to have totally eluded our revered officialdom, as personified in this case by Mr. Geithner. Of course, as Ken Lewis, the former head of Bank of America, can attest, the godfathers of our financial system at the Fed are not above tough-guy tactics when they perceive the necessity, security laws be damned, of hiding the ugly truth from nosy investors and just plain folks generally.

But, then, we shouldn't be too hard on Mr. Geithner and his cohorts. If anything, we're indebted to them. Save for their insistence that the banks get back 100 cents on the dollar of the billions AIG owed them, the banks wouldn't have that lush cache of moola to gleefully put to work in the financial markets, and we might never have had the monster rally that made 2009 so gloriously memorable.

That monster rally seemed to have gotten a fresh lease on life with the dawn of 2010 as it blasted skyward in the new year's opening session. However, it swiftly fizzled and spent the rest of the week milling about inconclusively. Although for the most part, market breadth was more upbeat than some of the indexes, volume was notably tepid. Either the bulls were still too busy counting last year's gains, or investor enthusiasm had decided to take an extra-long holiday.

Besides some encouraging signs from the retail sector, where vicious price cutting proved an irresistible lure no matter how strapped the shoppers, and decent, if spotty, economic data, stoked in part by inventory replenishing, the week was enlivened by a superfluity of highly bullish predictions for the December employment report, perhaps reflecting the lingering effect of too much bubbly over the weekend. We fervently hope that when those cockeyed optimists were confronted by the actual numbers, the sobering-up process wasn't too painful.

For, as it turned out, December was anything but a particularly cheery month for working stiffs. Job losses totaled 85,000, according to the Bureau of Labor Statistics' nonfarm payroll count, and 589,000 by its household survey. By virtue of an extraordinary shrinkage in the labor force, unemployment managed to hold at 10%, while the ranks of the jobless remained a formidable 15.3 million people. Moreover, our favorite measure of the involuntary idled (call it underemployment if you like, it hurts just the same) edged up to 17.3%, a hair under the all-time high.

Moreover, there were an astounding 929,000 discouraged workers in December, up from 642,000 a year earlier. Folks out of work for 27 weeks or longer totaled 6.1 million; which translates into four out of every 10 unemployed souls.

And as that insightful and prescient pair, Philippa Dunne and Doug Henwood of the Liscio Report (they had forecast a 100,000 job loss in December, closer than at least 90% of the Street), observe, the so-called separation rate (clean out your desk, please) rose to 2.6%, from 2.5%.

Obviously, despite all the buzz about the recovery gaining traction and fewer initial unemployment claims, jobs are still beastly hard to come by. Philippa and Doug, afflicted by a regrettable and apparently incurable desire to be as circumspect and balanced as possible, cite unusually bad weather as perhaps making things look a bit worse than they might really be. When they get into the nitty-gritty of the employment scene, however, the picture that emerges is plenty grim enough.

For one thing, losses were rather generously spread across a wide swath of industry -- 53,000 in construction, 27,000 in manufacturing, 18,000 in wholesale trade, 10,000 in retail, 25,000 in bars, restaurants and hotels, 21,000 in government (mainly the Postal Service and munis and states). Health care continued to spout new jobs, 22,000 last month, most of which we'd hazard are relatively low-paying. And hooray! hooray! -- finance added all of 4,000.

Average hourly earnings rose a meager 0.2% and actually slipped 0.1% in manufacturing. The work week was flat at 33.2 hours, only a scant 0.2 hours above the all-time low. For 2009 as whole, employment declined by 3.7%, the biggest drop since the Depression year 1938's 5.9%. And last year's average unemployment rate was 9.3%, the highest since 1983's 9.6%.

After rattling off their sad litany, Philippa and Doug dourly conclude that December's job report "was pretty crummy, with its bright spots visible only with a strong magnifying glass." And they sigh: "While the labor market is no doubt stabilizing, the headwinds we keep talking about are still blowing."

WE HESITATE TO OVERBURDEN you with mournful numbers on jobs, but we think Dean Baker of the Center for Economic Policy Research has some interesting stuff in his latest commentary. He notes that although the current data still show a 378,000 job gain for this century's opening decade, that 378,000 is due to shrink by some 824,000 when the benchmark revision makes its appearance in January's employment report. And while the current data also show a loss of 1.5 million private-sector slots in the decade, the benchmark revision will swell that figure to more than 2.4 million.

Dean expects employment to turn positive sometime next year. The catch is, he doubts it'll be fast enough to make a real dent in the unemployment rate.

At the very least, it seems to us, the dreary digits in the jobs report and the problematic employment outlook make all that talk about the Fed raising rates and the like way too premature. In our jaundiced view, they also suggest that the prices and multiples built into equities by the riotous rally and fired by expectations of an economic surge are way too rich.


Sat Jan 2 2010
UP AND DOWN WALL STREET
An Immodest Proposal
By ALAN ABELSON |
How to ensure aircraft safety. A grim view of the new decade.

THE UNINTENDED CONSEQUENCES OF UMAR Farouk Abdulmutallab's failed Christmas Day attempt to blow up a Northwest flight on its way from Nigeria via Amsterdam to Detroit, we fearlessly forecast, will be huge and lasting.

ot least, the Department of Homeland Security in its frantic efforts to avoid a repeat of the horrifying episode with a less happy ending will hand down a ukase that only nudists will be permitted to fly. That truly distressing prospect is apt to curb airlines' passenger revenues and, we fear, their stock prices as well. On the other hand, think of the money that'll be saved by eliminating the need for those costly devices that perform full-body scans.

It also might do wonders to combat the obesity epidemic in our fair nation by raising everyone's consciousness of the virtues of a svelte figure, which could all by itself put the brakes on runaway health-care costs. And shorn of the encumbrance of bulky apparel, passengers would gain more spacious seating than the sardine-like quarters they're increasingly forced to occupy.

Still another unintended result will be that Janet Napolitano, the Homeland Security secretary whose initial response was that the failed plot showed "the system worked," and then, 24 hours later, announced the "system did not work," henceforth will tell inquiring reporters, whatever the question, that she knows nothing, an answer that is indisputable.

Pledging patriotism over politics, Republicans and Democrats will forswear using the failed plot to gain partisan advantage. The Republicans will, of course, call for an investigation into online rumors that Mr. Abdulmutallab is a distant relative of the president on his father's side, just, please understand, to set the record straight. The Democrats will retort it was all part of a giant right-wing conspiracy, although that doesn't quite ring true, since if the planned explosion had occurred, both the plane's wings would have been incinerated.

Predictably, the hair-raising episode caused Dick Cheney to rattle his cage and with his customary ferocity pronounce that it proved, as he has charged over and over again, that Barack Obama is soft on terrorism. What a pity the stalwart Mr. Cheney, blessed with his uncanny ability to sniff out dastardly plots before they're hatched, wasn't vice president at the time, or we might have been spared 9/11.

Mr. Obama's rather lethargic initial reaction to the news suggested a reluctance to shake loose from the comfortable cocoon of his Hawaiian vacation and, save for the failed bombing's benign resolution, it might well have been his "Katrina moment." He still seems unable to grasp there are occasions that cry out for heat rather than cool. And all the more so when you're unflaggingly striving, as Mr. Obama has been, to project a dynamic and purposeful image.

We don't think that the latest bungled attack will be, to shamelessly resort to the descriptive cliché, the transformative event that 9/11 has been. But the long lines at airport security check points promise to be a permanent fixture and a constant reminder that there are bad people out there intent on doing us harm. Fresh evidence that, easy as it may be to momentarily forget, we inhabit a new age of anxiety whose end is nowhere in sight.

AND, GOSH KNOWS, WHATEVER else it lacked, 2009 was chock full of reasons to be anxious. We'll spare you the glum particulars and content ourselves with noting that the economy has managed to crawl away from the edge of the abyss on which it tottered perilously as the year began, jobs remain hard to get but easy to lose, while foreclosures and underwater mortgages are still the order of the day in housing.

But, on a happier note, stocks markets, ours and just about everybody else's, have had a glorious year. The Russkies led the way, hard as it may be to believe, with a 128% gain, followed by the Brazilian bourse's 83%. Nothing shabby, either, about China and India's equity performance, up a hair under 80% and 81%, respectively. Although nowhere near as exuberant, equities in the so-called developed nations were hardly slouches: German shares were up close to 24%, and the French and British indexes each gained over 22%.

Nor do markets here, in the good old U.S.A. have anything to apologize for. The good old Dow bulled ahead by 19%, the S&P 500 by 23% and the Nasdaq by 44%. Moreover, since hitting bottom in early March, the Dow has risen 59%, the S&P a stunning 65% and the Nasdaq 79%.

All of which shows that there's nothing like a sunny attitude on the part of doughty investors and, lest we forget, trillions and trillions of dollars showered down like confetti on their financial sectors by central bankers wearing Santa Claus suits, to goose markets beyond even a raging bull's wildest dreams.

Our heart (yes, Virginia, we have one) leaps up when we drool over these extravagant performances. What tempers our enthusiasm is -- as an old, wise and perceptive man once pointed out to us -- no tree grows to the sky. That the markets seem to be determined to belie that remarkable observation is evident in their price/earnings multiples, which have risen apace. On the S&P, for example, the multiple is now 25, a lofty perch not reached in some seven years.

There's this, too: Just as governments giveth, so do they taketh away. And, frankly, never have governments in modern memory given in such quantities, a generosity all the more impressive since many didn't have that much to give to start with. So they compensated for that unfortunate lack by printing bundles more of the paper of the realm.

But for countries, just as for humble folk like us, no imprudent deed, regardless of how altruistic its inspiration, goes unpunished. We have no reason to believe that this time is different.

AS A MATTER OF FACT, our friends the Levys -- Jay and David, father and son -- are convinced that this time not only won't be different, but is a good bet to be worse. Authors of the Levy Forecast, whose insights and contrarian views we've had the pleasure of passing along to you from time to time, they're decidedly restrained in their expectations for the 2010s.

As they observe, it's no secret that the consensus is for a slow but steady recovery, one that follows the traditional cyclical pattern, however more deliberately. Thus, instead of growth averaging about 3% as it has for the past 30 years, it will average 2% or so -- not great, but nothing to get too agitated about. There has even been a label pinned on this more subdued economy: "the new normal."

That definitely isn't the way the Levys see the next 10 years. Rather they expect an economy that will more fittingly be called "the new abnormal." And what follows are some of the reasons why they're inclined to a less-than-exuberant outlook.

Consumer price inflation, they believe, will fade away, punctuated by periods of deflation. Unemployment will be chronically high, averaging at least 8% of the labor force. Working stiffs can expect dwindling pay raises, if any at all.

The pressure on paychecks and lack of jobs will worsen household debt service woes. Mortgage default will inexorably increase. Private credit extension will stay stunted.

The price of real estate, corporate equities, risky debt instruments, tangible business assets, trademarks, patents, art, antiquities and the like will bounce around, but wind up a good cut lower than they are today.

We're in for greater swings in the economy; expansions will tend to be shorter, recessions more disruptive.

The Levys also foresee more deterioration in international relations, as politicians around the world struggle to stay in power in the face of severe public dissatisfaction with the economy. That inevitably means rising populist protectionist sentiment. Such sentiment is destined to be further inflamed by the powers-that-be, who burdened by huge deficits and having already slashed interest rates to the bone, are at loss for solutions, and will foist the blame for their sinking economies on that always handy target -- foreign governments and foreign companies.

Here at home, you can anticipate trillion-dollar deficits as far as the eye can see. And while the Fed may craft a comprehensive exit strategy from its easy monetary policy, such a blueprint is likely "to stay on the shelf, collecting dust for a long, long time."

As for hopes of what they call a monolithic boom in emerging economies -- the very prospect that has ignited the sizzling advance in their stock markets -- the Levys are plainly skeptical. At best, they feel, those economies "will remain overly dependent on exports to the U.S., Europe and Japan, and they will stumble."

Even worse, they summon up the possibility of a sweeping global financial crisis and economic instability that might well include Russia and China and send the world spinning into decline.

Investors, they urge, "should take these warnings seriously. There are, the Levys are convinced, more "100-year storms" to come. Strategies ranging from shorting volatility to buying assets in expectation of cyclical appreciation, they caution, will prove quite disappointing and, alas, costly.

We should add that the Levys are neither perennial bears nor cranky gloom-and-doomers. Rather, they have a down-to-earth, common-sensical approach to sizing up the economy and its prospects; they're investor-oriented, with profits a cornerstone of their analysis.

Maybe we should have hung a sign on this piece: "Not to be read with a hangover."

E-mail comments to editors@barrons.com


UP AND DOWN WALL STREET SATURDAY, DECEMBER 19, 2009
More Than an Uptick?
By ALAN ABELSON
Is the dollar due for a six-month rebound? Why the Citi never sleeps.

FOR THE PASSIONATE SPECTATOR OF THE investment scene, this extraordinary year now fast winding down has been the most exciting show in town. And last week was no exception.

Ben Bernanke tasted the bitter with the sweet. On the first score, despite vowing once again not to raise interest rates from here to eternity, he was roundly trashed by one grumpy senator after another as the legislators haggled over whether to let him keep his job as head of the Federal Reserve for another four years. But even while the heckling and the hectoring was in full roar on Capitol Hill, Time magazine crowned him Person of the Year for making a little financial mess out of a big one.

Ben can revel in joining some distinguished predecessors as Person of the Year, as for example, in 1988, when the honoree was no less an entity than The Planet, the whole celestial body, although for some reason, contrary to tradition, Time's cover neglected to feature its inhabitants' photos. Couldn't get them all to say "cheese" at the same time, we guess.

He's lucky, however, that he wasn't part of a twofer Person of the Year. For on the rare occasions that Time has decided to double-up on the winner, it's really tempting fate, and fate, as we all have had reason to learn, can resist everything but temptation.

In 1998, Ken Starr shared the award as Person of the Year with Bill Clinton. No quarrel with the selection, since the Lewinsky Lollapalooza was inarguably the most interesting happening anywhere on earth that year. But, alas, fame proved fleeting, and Mr. Starr's celebrity has dimmed to the point where any reference to him invariably evokes the query, "who he?"

The double hex brought far worse than involuntary anonymity to Richard Nixon and Henry Kissinger, who shared the Person-of-the-Year honors back in 1972. In 1973, the choice of their successor as Person of the Year was Judge John J. Sirica, the no-nonsense jurist who presided over the Watergate trial.

The week also was enlivened by the New York Times' disclosure that hell has no wrath like a woman scorned, especially if she happens to be the ex spouse of a fabulously rich hedge-fund manager. The ex spouse is Patricia Cohen, who used to be hitched to Steven A. Cohen, who runs SAC Capital in Stamford, Conn., and has amassed a personal fortune of something like $6 billion, thanks to a keen trading eye and outsized -- one might even say outlandish -- fees.

They were divorced eons ago and his former wife, obviously not a woman given to impulsive action, has decided after all these years that she was grievously short-changed in the settlement. More specifically, she claims, Mr. Cohen hid millions of his assets from her and the tax collector.

What makes the action noteworthy, besides Mr. Cohen's stellar place in the hedge-fund hegemony and his cultivated reclusiveness that's in sharp contrast to the flamboyance of so many hedgies, is that Mrs. Cohen has filed suit under a civil version of RICO (short for the Racketeer Influenced and Corrupt Organizations Act), accusing her ex of, among things, insider trading in one of those gargantuan takeovers of the 1980s, in which GE gulped down RCA.

Whatever the disposition of the suit -- and she is asking a modest $300 million -- the novel use of RICO might cause any number of hedge-fund managers to take a pledge of marital fidelity and husband their assets so as to avoid too much risk and maintain sufficient liquidity should Mrs. Cohen's action prove contagious. Which may help explain the market's recent loss of [eacute]lan, since hedge funds, along with the usual suspect investment-banking contingent, were prime movers and shakers of the monster rally from the March lows. Let us be quick to affirm that other, more substantive forces were also at work to take some of the zip and vigor out of equities, such as a reasonable urge to cash in profits in a bang-up investment year and the odd bit of unpleasant news from places like Dubai and Greece.

Not to be overlooked, either, as a modest check on animal spirits has been the uptick in the value of the bruised and battered dollar. Kudos here to Deutsche Bank's foreign-exchange folks, who on Nov. 26 suggested the buck was due for a bounce. It was pretty much a technical call, but right on the money, nonetheless.

Using a combo of the percentage decline in the purchasing-power parity of the greenback (versus the euro) and the speed at which it has depreciated, the bank's Forex crew decided the dollar was more than 20% undervalued. What's more, in comparable past instances when the buck's purchasing power parity had buckled to 20% or thereabouts, they point out, the average subsequent rebound lifted the dollar 12.5% over the next six months. If history repeats, it has implications for the immediate outlook for commodities, as well as equities, not all of them benign. In any case, what we find particularly appealing about Deutsche Bank's call is that it's so contrary to the conventional wisdom.

THE CITI NEVER SLEEPS. AND WE couldn't, either, if we were Citigroup, given the way things have been going for the bank and its shareholders. The bank is wallowing in the red, and the stock, which sold at 56 and change in 2007, is now less than 3.50.

Moreover, among its other woes, it's in a legal battle with Abu Dhabi, whose sovereign wealth fund is trying to squirm out of a deal closed back in November '07 that obligates it to buy $7.5 billion of Citi stock at $31.83 a share come March. Abu Dhabi, in case you've forgotten, is the very same member of the United Arab Emirates that's tasked with bailing out its improvident sister emirate, Dubai, and already has poured in billions to fill that little sinkhole.

Last week, determined to get out from Uncle Sam's clammy grip by paying off the $20 billion borrowed from the Troubled Asset Relief Program, or TARP, Citi raised $20.5 billion via the biggest equity offering in U.S. history. That accomplishment was considerably diminished, however, when the government decided not to piggyback on the offering by selling its $5 billion of equity in the bank.

That decision, unquestionably unkind to poor Citi, strikes us as uncommon evidence of investment moxie on the part of the government, since the new shares were being sold at a discount to the going market price. Even Tim Geithner apparently grows weary of holding the bag.

An old friend and top-notch financial analyst, Charlie Peabody, is a honcho at a really classy research boutique, Portales Partners, which, to its great credit, beautifully caught the turn in the group early this year. And last week, Charlie & Co. put out a "deconstruction," as they call it of an internal memo of Vikram Pandit, Citi's CEO, on the bank's repayment of the TARP loan that tickled us. So we couldn't resist passing it on to you.

Citigroup: "Today we announce a series of transactions to repay the $20 billion of TARP outstanding and terminate the asset guarantee we received from the U.S. Government."

Translation: I am sick of working for $1 per year.

Citigroup: "Today we are strongly capitalized..."

Translation: We have diluted the shareholders by a factor of six.

Citigroup: "... efficient..."

Translation: We have cut the company in half.

Citigroup: "...and created a strong foundation for the future."

Translation: We are working on a strategy.

Citigroup: "There are still economic challenges ahead..."

Translation: Forget about any kind of bonus.

Citigroup: "Over the past few months, I have visited many of you in the U.S and around the world..."

Translation: I am trying to avoid the home office.

THE FUTURE HAS A WAY OF MAKING the present look downright silly. Especially when it comes to trying to pin a label on an age that still has to run its course. With that fully in mind, we're still willing to tab these tumultuous times The Great Disconnect. It's apt on many accounts, but nowhere as blatant as in the economy and its close kin, the financial markets.

We'll refrain from the striking contrast between the euphoric mood in Wall Street and the dour one on Main Street. It's an old story by this time of bonuses versus paychecks, and virtually everyone, especially on Main Street, is teeth-gnashing aware of it. So we'll limit ourselves to a specific example of how perceptions differ, often radically, on housing.

Economists and strategists -- not all, but a heap of them -- keep insisting that we've turned the corner. And they point to the latest rise in starts as fresh proof. Yet somehow that long-espied and eagerly awaited turn has eluded the home builders, usually a pretty upbeat bunch. As witness the latest measure of their sentiment revealing an unexpected decline.

And giving point to their lowered expectations (which weren't exactly robust to start with), was the recent report by First American CoreLogic, a California research outfit. It showed that the number of homes in the pipeline for sale because of foreclosure and delinquency shot up 55%, to 1.7 million by the end of September.

That suggests to us, anyway, that the widely predicted revival in housing (widely predicted in Wall Street and Washington, anyway) is still some years away.

E-mail comments to editors@barrons.com


Mon Dec 7, 2009
UP AND DOWN WALL STREET
A Break in the Clouds

By ALAN ABELSON
November's jobs report was a stunning and welcome surprise. Flat: The New up? What of BofA did -- and should have.

OBAMA CAME DOWN FROM the summit carrying a tablet, and said, "Let there be jobs." And, lo and behold, there were jobs. When his trusted aides at the Blessed Bureau of Labor Statistics finished perusing the inscription on the tablet and dutifully did their sums, they discovered, alas, there still weren't quite enough jobs. Obama glowered and his faithful minions promptly returned to their task and uttered all the proper intonations, like "abracadabra," "seasonal adjustment" and "birth/death model," but still came up somewhat short. He thought of going back up whence he had come, but after a glance at that towering peak shrouded in clouds, he shrugged and with a beatific smile, said, "Why quibble?"

And we'll take those wise words as our gospel in discussing the November employment report, which showed a job loss of a mere 11,000 when the guessing gang on Wall Street had hazarded roughly 10 times that number. So we won't even bother to mention the birth/death hocus-pocus that conjured up 30,000 jobs or that the drop in the unemployment rate to 10% from 10.2% was, as Dean Baker of the Center for Economic and Policy Research notes, the likely result of a measurement error. The 10.2% rate originally reported for October, up 0.4 of a percentage point from September, was an exaggerated calculation, and November's change was simply a correction of the sampling error.

And while we're ticking off stuff we won't bother to mention, we might as well include, as the Liscio Report's Philippa Dunne and Doug Henwood note, that the median duration of unemployed rose to a record high 20.1 weeks, as did the mean in mounting to 28.5 weeks, while a formidable 38.3% of the unemployed have been idle for 27 weeks or more, also a record and three times the average for the 61 years the counters have been tracking this stuff.

But, hey, there is always a snippet of shadow on even the most resplendent report. And however welcome the shrinkage in job loss it displayed, November's report was far from resplendent. Rather, in Philippa and Doug's deft phrasing, it was mildly negative, not robustly positive but, then, they remind, "flat is the new up."

Among the noteworthy pluses were sharp cuts of a combined 159,000 in the previous two months' estimates of job losses. And according to Doug and Philippa, the revisions were "clean," not a product of what they call "seasonal-adjustment funniness." Temporary employment shot up by 52,000, and if the past is a reliable guide, which in truth it hasn't especially proven to be over the past couple of years, this might be a favorable portent for the months ahead.

In any case, before you break out the bubbly, you might keep in mind that the most inclusive measure of unemployment is still at 17.2%, an extremely elevated level. And even at the more commonly used yardstick, the ranks of the unemployed have swollen to 15.4 million souls.

We can only hope that Obama will find time in his busy schedule to make another trip up that magic mountain, and soon.

ANY WAY YOU LOOK AT it, the past couple of years have been anything but dull for Bank of America and its shareholders. The bank took over Countrywide Financial, a leading mortgage vendor with a portfolio rich in risky loans, in July 2008, even while housing was already well launched on its astounding swan dive; its acquisitive appetite unsated, late the same year, BofA reached to snatch up Merrill Lynch just as that venerable brokerage firm was taking what had all the makings of a fatal belly whop. And when BofA's CEO, the perpetually harried-looking Ken Lewis, decided maybe that wasn't the best idea in the world, he was muscled into going through with the deal by those twin regulatory roughnecks, Hammering Hank Paulson and Battling Ben Bernanke.

We'll forgo detailing the many misadventures that befell Mr. Lewis and the bank, who are parting ways at the end of this year, out of compassion and also the fact that we've already dutifully related a good many of them in this very space. Suffice to say that the torturous trajectory of the bank's share price, from above 50 in September 2007, to $3.53 on March 6 of this year, to a recent 15 and change, describes quite eloquently the steep descent and partial revival of its fortunes.

What prompts mention of BofA now is its proud announcement that it plans to repay the $45 billion borrowed from the always generous Uncle Sam to keep it afloat during the dark days of late '08 and early '09. In freeing itself of this heavy burden, the bank is also freeing itself of various constraints imposed by the government, not the least of which precluded such humane acts as bountifully rewarding favored employees, who have had to struggle along deprived of their usual lush financial perks and privileges by ukase of smart-alecky whippersnappers loosed on the bank by its Washington overseers.

To help lift the yoke, BofA will scrape up $26.2 billion on its own and last week sold $19.3 billion worth of securities, consisting of a depositary share and a warrant, at $15 a pop, convertible into common. The bank's emancipation declaration was suitably greeted with cheers by numerous Street savants. But that cheerful consensus most emphatically does not include Chris Whalen of Institutional Risk Analytics, whose incisive and authoritative analysis of the financial sector and individual banks we've had the pleasure of citing more than once.

He sees BofA's proposal to pay off its owings to Uncle as fresh evidence that what has drawn investors to the financials is that they're a "liquid momentum play," rather than something as old-fashioned as fundamental value. The seeming stability of the largest banks, he contends, springs from government intervention in the securities markets, notably by dressing up the value of toxic assets by buying them in the open market, and gobs of subsidies, along with investors' speculative urge that makes raising fresh capital less than a Herculean task. And he notes the irony of Bank of America issuing new equity as those vital subsidies are waning.

For that matter, he finds it difficult to assume happy days are here again for BofA or the banks generally. Quite the opposite: He thinks there's a strong possibility of lower revenue next year for the financials as a group. And his reservations about the outlook lead him to conclude the plan to repay the government loan is a great argument for why the Fed should be taken out of the business of bank supervision. The responsible position, he feels, would have been for the powers-that-be to nudge BofA to raise more capital now when the equity markets are accommodating and delay paying off the feds until the first half of next year is over. That way, they could better gauge how much of a hit the bank may have to eventually absorb from its various and sundry bum assets, on and off its balance sheet.

Chris calculates that the loan repayment and securities sale will leave BofA with some $19.5 billion less in capital. Yet he believes credit losses, in contrast to the general impression, haven't necessarily crested, and the assumptions about asset sales that underpin the repayment plan are part and parcel of optimistic rather than realistic projections by Fed economists and investors for real estate and the economy. If, as he suspects, the projections fail to pan out, the capital reduction taken by BofA may force it to sell more equity in a less congenial market and visit hurtful dilution on existing shareholders.

Like the White House's hopes for a resolution in 18 months in Afghanistan, he dryly comments, the Fed's expectations of the gallant rescue of the banks in a year or so "may not be fully supported by reality on the ground."

ALWAYS A CONTENTIOUS BEAST, the stock market, after briefly celebrating the surprise shrinkage in job loss, had some second, third and fourth thoughts as to whether it was good news or not. In consequence, it spent a heck of a lot of the final session dithering and dallying. The Dow finally eked out a modest gain, but the great bulk of stocks were less equivocal and closed solidly on the upside.

What seems to have spooked some investors, at least, was the specter of a strengthening economy compelling the Fed to ditch its policy of zero interest rates and push the cost of loans inexorably higher and, in the process, spoil what had been one dandy party.

That same dour prospect, enhanced by a swift move upward by the dollar (we kid you not, it actually happened) sent a truly horrible shiver through the commodities markets, which had come to love a depreciating greenback. And for good reason: A failing dollar has proved just what the doctor ordered to stimulate demand for real assets of virtually every kind.

An especially startling reaction to the employment report and the rise in the dollar was that of gold, which even the most casual observer of the investment scene knows has been on a spectacular tear, soaring from one new all-time peak to another. On Friday, it lost a resounding $48.60 an ounce, falling to $1,168. Much as we've cottoned to the yellow metal (block those metaphors), it has dawned on us that gold had attracted just too much of a bullish crowd. When the weak sisters get shaken out, which wouldn't take too many more bad spills, we think, it'll be a great buying opportunity, as the cliché goes.

On that score, in view of the uncertain (to be kind) outlook for housing and even the economy as a whole and the wretched financial plight of Jane and John Q, we doubt that the Fed will be in any hurry to raise rates.

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MONDAY, NOVEMBER 30, 2009
UP AND DOWN WALL STREET
The Perils of an Edifice Complex
By ALAN ABELSON
Dubai makes the market quake. The Fed admits (sort of) you can inflate a bubble.

A QUAKE OF 9.2 ON THE RICHTER SCALE unhinged global financial markets last Thursday as Americans sat down to devour their turkey dinners in commemoration of the first Thanksgiving Day feast held by the Pilgrims and the Wampanoag Indians in Plymouth, Mass., 388 years ago. Fortunately, with our markets closed, this year's diners were able to settle back in burping bliss after finishing off their pumpkin pie, happily unaware of the fierce shocks delivered to bourses the world over or what set them off -- the admission by Dubai, one of the United Arab Emirates, distinguished from its sister states by its lack of oil and insatiable spendthrift proclivities, that it was a tad short of cash at the moment and needed a six-month moratorium to scrape up the dough to meet payments on a mere $60 billion of debt.

Emerging markets, which supposedly had found the magic formula for eternal growth, somehow misplaced it last week and quicker than you say "oops!" were transformed into submerging markets. By way of example, last we measured, Hong Kong and South Korea both fell some 6%; lesser but still painful damage was visited on bourses in Japan and Australia. Europe for the most part steadied to lick its wounds on Friday after taking a pretty mean initial whacking.

Investors in our fair land were spared by the holiday for 24 hours from any immediate reaction to the sorry news and, for the most part, seemed more eager to snatch up bargains at Wal-Mart or Best Buy than rush back into the market in the final truncated session. Following a sharp opening selloff in which the Dow lost some 200 points, prices moved warily and finished 154 points lower.

Trouble is the mother of a lot of bad rumors, and the travails of Dubai were quick to spawn a brood of them. We can confidently assert that there's no truth to the notion that Dubai is about to change its name to Nobai or that of its property subsidiary, which has helped mightily to swell its parent's debt, from Nakheel to Achillesheel. So far, anyway, the head of Dubai's investment arm, Dubai World, which has sway over the Nakheel unit, a chap named Sulayem, has escaped such nomenclatural crudities.

To make up for its lack of natural resources, especially, as noted, oil, Dubai has sought to exploit its edifice complex -- building, among a host of other exotica, the planet's tallest skyscraper. In the process, it has gone into hock to the tune of $80 billion all told. A free-wheeling borrower, it owes sizable sums, reports the AP, to such British banking outfits as HSBC and Standard Chartered, Japan's Sumitomo Mitsui Financial and various South Korean lenders. South Korea, moreover, has a huge stake in more than three dozen construction projects in Dubai.

In some larger sense, besides its enormous ambitions to become a kind of combination (with due regard for the local sensibilities) Monaco-Club Med of the Middle East, Dubai is a victim of the bursting of the real-estate bubble in most parts of the world. That it was under financial stress has been no secret for a spell now, but the assumption has always been that Abu Dhabi, the oil-blessed and filthy rich top dog of the United Arab Emirates, would bail it out.

That's still a possibility, of course, but at this writing not a certainty. And if some sort of restructuring is finally worked out, its lenders may not escape having to make some serious concessions while Dubai, itself, is sure to be compelled to lower its sights and tone down its enthusiasms.

The credit agencies were swift to take down its ratings, and the sting is likely to be felt the next time, whenever that may be, Dubai feels the urge to tap one of its old reliable lenders for a few bucks. And the depressing episode could take a good deal of the steam out of emerging markets, up as a group some 65% this year, slow the torrent of foreign capital into emerging economies and tamp down further investors' appetite for risk, which has been slackening in any case of late.

There have been signs that markets were due for a spate of comeuppance for consistently ignoring anything that might give them pause in their wild dash to the moon. On that score, even the benign investment spectator can't help but feel a little queasy by the conviction, rife among herds of investment pros, that despite the most dazzling rally anyone still compos mentis has ever witnessed, there's room aplenty on the upside. In the latest survey of advisory services by Investors Intelligence, no fewer than 50.6% of those cockeyed seers were bulls, versus a scant 17.6% bears. Last time we saw numbers like that was before the market crashed back in '07.

Moreover, not even one of those hardy few bearish portfolio managers, to our knowledge, fingered Dubai as among the various and sundry reasons they cited as cause for pessimism. In the market, as in war, as Donald Rumsfeld memorably observed, it's what you don't know that you don't know, rather than what you know you don't know, that hurts you.

GOT YOUR CALENDAR OUT? GREAT. Now make a double check mark in the little square allotted to Thursday, Dec. 3. For two events of presumed economic import are slated for that date. No. 1, the president is convening a jobs summit. No. 2, Ben Bernanke is scheduled to don his martyr's mask and listen stoically as a pack of senators hold an obligatory hearing to decide on his fitness for a second term as Fed chairman; actually, the good solons are champing at the bit to heap scorn and contumely on his performance during his first term, thus cleansing their spleens of bile before dutifully murmuring "aye".

Frankly, we're not entirely clear what a jobs summit is, let alone why it's called that except that it has a portentous ring to it. Summits are a locution favored by people in high places who can't stand going to plain old meetings, which if nothing else sounds as musty, tedious and commonplace as they invariably are. By whatever name, it does suggest that after 10 months in office, during which millions of jobs have vanished and the unemployment rate has shot up from 8.1% to 10.2%, Obama & Co. have discovered a lot of people are out of work.

Mr. Bernanke's testimony to the senators is destined to follow the script laid out in the recently released minutes of the Fed's Open Market Committee gathering that took place early this month. Over all, the Fed folks were tepidly optimistic. Noting that the jobs market was still in the pits (if they'd only told the administration, maybe it could have avoided the expense and bother of holding a summit) and that probably it would be several years before it could extract itself from the unenviable location, and warning against expecting a quick upturn in corporate hiring or capital spending, they nevertheless expect a gradual, or even very gradual, improvement.

To their credit, the Fed Pooh-Bahs did pay some heed to the impulse toward frugality evident among the citizenry. They saw the savings rate holding around the average of the past few quarters or at most edging up a bit. But they also admitted they couldn't dismiss out of hand the possibility of "a further substantial rise in the savings rate as households took further steps to repair their balance sheets." It's a real comfort to know that they occasionally remove their blinders.

What really caught our eye as we pored over the minutes -- and we hope the inquiring senators leave off their bullying of Mr. Bernanke long enough to decently pursue the subject -- was this tidbit: "Members noted the possibility that some negative side effects might result from the maintenance of very low short-term interest rates for an extended period, including the possibility that such a policy stance could lead to excessive risk-taking in financial markets or an unanchoring of inflation expectations."

We can't remember any time before that the Fed chose to shelve Alan Greenspan's mantra that it's impossible to spot a bubble before it pops, so the only viable stance is to wait for that to happen and be prepared to clean up the awful mess afterward. What we would truly like to learn is what occasioned this epiphany and when. And further, just what elements precisely describe "excessive risk-taking" and what kind of action can be taken in response.

While they're at it, we'd love to know who invented the word "unanchoring," so we can congratulate him or her for his or her unanchored linguistic creativity.

BEFORE WE EXHAUST BOTH our space and you, we might call your attention to the fact the brokerage stocks have been acting rather crummy even before Dubai. And, hard as it is to believe, that includes the seemingly invincible Goldman Sachs. Whether it's simply the result of investors deciding to cash in their profits on shares that have been in the vanguard of the sizzling rally or bad vibes from Washington about punitive regulation, or a combination of the two, it's hard to say. But we do want to take note of the less than stellar action because often in the past, financial issues have led the way down as well as up.

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MONDAY, NOVEMBER 9, 2009
UP AND DOWN WALL STREET
Labored Conditions
By RANDALL FORSYTH
The real secret of Corporate America's profit and productivity miracle.

THE RISING TIDE LIFTS ALL SHIPS, but the galley slaves aren't feeling it. They're rowing harder than ever to make up for their colleagues who have been thrown overboard (getting rid of that extra weight improves the vessel's efficiency).

Now, after a long spate in the doldrums, the captain has called for those still manning the oars to pick up the pace to move some cargoes, which had been notably scarce for well on a year and a half. It seems that money had been showered down like manna from heaven (this was before helicopters). That it came from a printing press or by pledging the credit of the land mattered little. Some of the money was spent, which, in turn, brought forth new orders of goods, since the storehouses had been emptied. And thus the need for the slaves to pick up their pace.

It has all put dough in the pouches of the owners and the captain of the ship, but there isn't much for the slaves. And, no surprise, that's caused some grumbling below. Not that there's much the galley slaves can do about it, lest they become the next to get tossed overboard.

The genius of American business for doing more with less has been evident in the parade of earnings reports showing profits improving far more than the revenue that produces them. The secret: Productivity soared at a 9.5% annual rate in the third quarter, a stunning increase that was nearly half again as much as economists had projected. Business cut labor costs at a 5.2% annual rate, with total hours falling at a 5% pace. Fewer workers worked fewer hours.

But for the laborers, it's been another story entirely. The unemployment rate shot up to 10.2% in October, the highest since 1983, when we were coming out of what had been the worst recession of the post-World War II era. Even the doleful double-digit rate understates the joblessness; more folks are dropping out of the labor force or are among those having to work part-time involuntarily. If you add them to the army of the unemployed, you get what the bean-counters euphemistically call an "underemployment rate" of 17.5% last month, up a full half-percentage point from September.

Not surprisingly, discontent about jobs, taxes, you name it spurred citizens of the fair states of Virginia and New Jersey to send their Democratic governors packing in favor of their Republican opponents, whose greatest advantages appeared to be that they weren't the incumbents. Once again, the great tradition to "throw the bums out" was upheld, a theme that holds greatest sway during dire times. Maybe Messrs. Corzine and Deeds, the soon-to-be ex-governors of New Jersey and Virginia, weren't responsible for all the ills that had befallen their states, but the people figured it's a start. Wait till next year, they vowed, when they wreak their revenge on 535 of the real miscreants in Congress.

Nevertheless, the sunny-side-up contingent is quite willing to ignore the storm clouds apparent to everybody else. As they see it, "only" 190,000 workers were offloaded from payrolls in October, less than a third of the sackings early in the year. The payroll data come from a survey of businesses, different from the household survey that produces unemployment numbers. But the household survey has found about a half-million folks lost jobs in each of the past three months, more than twice as many as the establishment survey.

And while average hourly earnings rose a bigger-than-expected 0.3% in October, they're still up only 2.4% from a year ago. Meanwhile, employees are working (or being paid for) an average of just 33 hours a week, a historic low. Overtime also ticked up last month, but as a money manager related privately, his brother who runs a manufacturing plant has his workers putting in seven-day-a-week shifts rather than adding to payrolls. In other words, keep rowing.

Friday's jobs data underscored Wednesday's reiteration by the Federal Reserve that it will keep its key policy rate at 0-0.25% "for an extended period." What was new was that monetary authorities also outlined the conditions that would justify keeping rates at rock bottom: "low rates of resource utilization, subdued inflation trends, and stable inflation expectations." Translated from Fedspeak, "resource utilization" is unemployment; it is now paramount to Bernanke & Co. now that the official jobless rate is over the psychologically important 10%.

But the second and third conditions pose a dilemma for policy makers, says Mohamed El-Erian, Pimco's chief executive and co-chief investment officer. While the jobless rate argues for continued low rates, the other two conditions -- inflation trends and inflation expectation -- are flashing yellow lights. Gold touched $1100 an ounce last week while the Treasury Inflation Protected Securities market was indicating higher inflation expectations. Then, he adds, there's the question of the Fed's policies feeding asset bubbles, a lesson we should have learned from the past.

"Putting it together, there's no right answer" as to whether the Fed should raise rates or wait, El-Erian says in an interview at Pimco's Newport Beach office. "It's a question of which mistake you're willing to make," which is why he says he doesn't envy policymakers these days.

ONE MORSEL OF GOOD NEWS was that the last time the jobless rate was in double digits, in the early 1980s, so was inflation, producing a record "misery index" -- the unemployment rate plus the change in the consumer price index. Now, with the CPI lower than a year ago, we should be less miserable than those days.

But misery can take many forms. Calamos Advisors, a money management firm, came up with a new gauge more in tune with these times. "Misery is not only inflation and unemployment but also a decrease in net worth," the firm writes in its monthly missive to its investors. The folks at Calamos went back and recalculated its New Misery Index, incorporating net-worth data, going back to 1929. It found the economic shock of the past year and a half actually exceeded the pain of any period, including the Great Depression. But, it should be added, Calamos doesn't think the pain will be as prolonged as back then, thank goodness.

The stock market ultimately reflects waves of social moods, says Robert Prechter, the long-time Elliott Wave theorist. With signs of protest like Tuesday's election results, he sees the mood getting a lot worse before it gets better. "The social mood bottomed in 1974 and rose for 33 years. You don't correct that in two years," Prechter observes.

"It takes a lot of optimism to buy stocks at historically overvalued levels," he continues in a chat in Barron's offices. Lows are made with dividend yields in the 6%-7% range and price-earnings multiples of six times, not the current sub-3% yields and triple-digit P/E on reported trailing earnings, he says.

While the stock market enjoyed a "bear-market rally" after extreme pessimism gripped the market in February, when Prechter says he advised clients to cover shorts and buy, that ended in October. Now, he suggests sticking with cash, as in short-term Treasury bills yielding fewer basis points than the fingers on your hand.

Yield can be the worst grounds for an investment decision, he assets. Prechter recalls that in 1981-82, when he argued equities could increase five-fold from the Dow's level of 800, the response was "how can you buy stocks with T-bills yielding 15%?" Now, he contends near-zero on safe cash is better than the chance of minus 40%.

LOUISE YAMADA, the long-time market analyst who now runs LY Advisors, points to the numerous warning flags that technicians (including Prechter) have been watching: volume has been waning, with more turnover on down days than up days (that includes Thursday's 200-point party on the Dow), various, more esoteric technical measures showing waning momentum and greater divergences, with some groups breaking down even as others, such as technology (excluding semiconductors) leading higher.

The market is the most oversold it's been in eight months, which to her, unlike to most of her technician brethren, isn't a buying opportunity. Rather, Yamada says, it's early evidence of "distribution," the passing of stocks from strong hands to the weak. That doesn't preclude further rallies but also doesn't preclude selling into them. What's likely is a "period of separating the wheat from the chaff," Yamada says That could come as year-end approaches, when investors dump losers for tax losses and replace them with winners.

But Yamada remains unequivocally bullish on gold, as she has been since 2001. Investors would have done better in gold since then, even through the peak of the 2006-7 advance that took the Dow to 14,000 (which seems like an eternity ago.)

Indeed, the Dow in gold terms has fallen from 42 ounces at the peak of the tech bubble in 2000 to nine ounces currently, indicating the Dow has been in a bear market and gold in a bull market since then. That ratio could reach 2:1, which, if the Dow went back to 8,000, would translate to $4,000 gold.

What makes gold stand out now is that it isn't just a play on the ever-weaker dollar, as it's now appreciating in other currencies, Yamada observes. The distrust of Western economies extends beyond the U.S., as evidenced by India's decision last week to purchase 200 tons of gold from the International Monetary Fund. The economies of Europe and America had "collapsed," India's finance minister declared. Hyperbole perhaps, but a sobering assessment from the rest of the world.

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MONDAY, AUGUST 17, 2009
UP AND DOWN WALL STREET
Smell the Tar, See the Feathers
By ALAN ABELSON
Someone forgot to provide much help for the hard-pressed consumer. China's tricky accounting.

NOT THAT ANYONE HAS EVER ASKED US, BUT if perchance some stray soul solicited our advice on how to prepare himself for a career as a congressman, we'd strongly urge him above everything else to concentrate on becoming an artful dodger. That's not only a prerequisite but literally a vital requirement for the job.

Congress has never been burdened with undue respect. More often than not, the citizens' view of that body has been consonant with Mark Twain's fey musing: "Reader, suppose you were an idiot. And suppose you were a member of Congress. But I repeat myself."

But these days, virtually every action by the lawmakers provokes not merely scorn or a yawn, but a fierce vocal and visible negative outcry among the populace, stirred by self-appointed tribunes in the press, online and talk TV and radio. Our chosen lawmakers, for example, decide to spend more than half a billion (a fly speck in a federal budget well on its way to a $2 trillion deficit) on eight new jets to enable them to explore and protect the nation's interests in foreign lands with more alacrity and efficiency.

Comes then a Wall Street Journal front-page report of the proposed purchase and -- lo and behold! -- instead of acclaim for this effort to advance the commonweal, the disclosure ignites public outrage and forces its cancellation (along with carefully wrought plans to inspect such critical economic and environmental concerns as the spicy local night life and the erosion of sun-kissed beaches in faraway places).

And it wasn't that, after careful consideration of the objections, the legislators decided against buying the planes. Nor was it even that they feared to lose support at the polls. It was something a bit more tangible that caused them to cringe: They could smell the tar and see the feathers.

For, as the raucous town meetings on health care convened by various Democratic solons demonstrate quite forcefully, there's a lot of anger out there, and when vented against a congressman in the flesh, it can reach the kind of feverish pitch where words are followed by sticks and stones. Hence, the importance that the target be as versed in bobbing and weaving physically as he invariably is rhetorically.

Ideology, hysteria and political calculations aside, and beyond health care, stoking such white-hot anger is a fairly pervasive frustration with the way things are. For the stunningly huge gobs of liquidity poured into the financial system by our beloved Gang of Two -- the Fed and the Treasury -- although it has averted a plunge into the abyss and put equities on stilts, its beneficence has yet to be bestowed on those humble folks who make up the great bulk of the population.

Indeed, we can't help thinking that, perversely, the roaring stock market and the increasing volume of assurances by Wall Street, Washington and other suspect sources that you can kiss the recession goodbye and happy days will soon be here again only rub it in for Jane and John Q., who are in a real sweat over the prospect -- or, worse yet, the reality -- of losing their livelihoods, their homes or both.

And, although you'd never know it if you listened to the chirping Street choir of professional market kibitzers (best known for their proficiency in rendering loony tunes), Jane and John have more than ample reason for their high anxiety. The employment picture remains grim. Job openings are conspicuous by their absence, corporations are still wielding the scalpel wherever they can and no immediate turn is in sight.

Moreover, how many of the millions of jobs that were swept away by the howling winds of recession will return is by no means clear. The last expansion, after the brief and shallow downturn in the wake of the dot-com bust, was notable as a jobless recovery, suggestive, to lapse into the economic lingo, of a structural rather than a cyclical woe.

On this score, in his latest High-Tech Strategist newsletter, Fred Hickey points out that information-technology jobs have scarcely proved immune to this brutal recession (the unemployment rate in Silicon Valley is something like 11.8%), extending a decade-long trend. In that stretch, around 500,000 high-tech jobs joined the five million manufacturing slots that have migrated overseas, lured in no small part by cheap labor. By way of illustration, more than 70% of IBM 's workforce is now offshore.

In like melancholy vein, despite all the faux sightings of a bottom in housing, delinquencies on home loans continue to spiral upward, especially of the Alt-A, subprime and jumbo variety, soon to be joined by the rest of the spectrum. A recent report by Deutsche Bank, tellingly entitled "Drowning in Debt," estimates that within two years, home loans that are underwater, now 26% of the roughly 51.6 million residential mortgages, will rise to an astonishing 48%.

Not exactly surprising, then, except to the growing crowd of incorrigible cheerleaders, that foreclosures in July, reports RealtyTrac, shot up nearly 7% from June and were 32% greater than in July '08, setting a record high for the third time in the past five months. What this boils down to is that last month one in every 355 housing units in this fair land of ours got a most unwelcome notice of foreclosure.

No accident, obviously, with jobs at risk and the house he so deftly used as an ATM no longer available for that purpose and, in fact, possibly not his all that much longer, Joe Consumer isn't feeling very buoyant, as the latest U. of Michigan survey reveals. Or, as the American Bankruptcy Institute relates glumly, consumer bankruptcies are up so far this year and are on track to hit 1.4 million before 2009 calls it quits (a sizable jump from just over one million last year).

But not to worry. The consumer accounts for only 68%-70% of the economy, and there's no doubt that any shortfall by him will be made up...by...? You're welcome to fill in the blank, but we'll save you the trouble: The answer is no sentient entity. Which leaves only government.

LAST FRIDAY THE MARKET TANKED. Did traders stop smoking whatever it was that they've been so gloriously high on for the past five or so months and suddenly discover things not as rosy as they had thought? Beguiling notion, but dubious.

For one thing, ratiocination is not your typical trader's long suit. And since he's probably made a bundle and credits whatever he's been smoking for his good fortune, he's not apt to kick the habit just like that. More likely, after a scorcher of a run, the bulls felt it was time to smell the flowers awhile, before they got going again.

Sentiment has gotten pretty emphatically bullish, which bothers contrarians, and shorts have been rushing helter-skelter to cover, which removes a reliable font of buying in a rising market. We'd like to imagine the revelation that Bernie Madoff was an adulterer as well a fraudster cast a pall over Wall Street, where such an illicit pursuit has numerous adherents, but felt, nah, that's too much of a stretch.

So we'll call the setback a modest correction after a fantastic rise. A couple of more sessions like that, though, and we'll be only too happy to call it something else.



JOHN MAKIN, A SEASONED ECONOMIST with the American Enterprise Institute, has put out a neat study on China's economic data that shows Beijing routinely dresses up its accounts to give the impression of exceptional growth. That's the beauty, of course, of running a command economy, where if you say "loan," the banks lend like mad, and if you say produce, by golly, by hook or by crook production rises.

Not that we blame China's top brass. There are an awful lot of mouths to feed (well over a billion, although we must admit we haven't personally counted them). And the citizenry, absent Social Security or universal medical care or anything vaguely resembling a safety net, are prone to save rather than spend. Which can make it tough to provide a jolt to a lagging economy by simply throwing a lot of dough around (and to its credit, China has tons of dough to throw around).

And then there's the image thing: China is widely heralded as the quintessential economic miracle. And it finds such eminence quite useful as well as gratifying. So global recession or not, it dutifully reported a 7.9% growth rate for the second quarter, even though its exports have been declining this year at a 21.2% rate. The government late last year launched a massive stimulus program -- equal, John reports, to 14% of GDP -- to spur consumer demand. And that, he says, is one of the keys to realizing its goal of 8% GDP growth, aided and abetted by fancy bookkeeping.

China's economic statistics, John explains, "are based on recorded production activity rather than being a measure of expenditure growth -- defined as the sum of consumption, investment, government spending and net exports -- as U.S. data are." In the process, it permits the government to consider funds from the stimulus as part of production before they're actually spent -- to count production and shipments as de facto outlays by end users, as well as to record shipments to retailers as sales.

John cites reports of washing machines dumped on consumers who couldn't use them because they lacked running water or electricity. But those "sales" were dutifully included in GDP growth.

Oh, well, the Chinese stock markets are up 75% to 90%, helped along by $25 billion of hot money from foreigners, eager to get a piece of the miracle.

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