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Smell the Tar, See the Feathers
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 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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MONDAY, JULY 6, 2009
Exit Strategy
Wall Street's hottest new buzz-phrase. The monster squeeze on states. Sick job market.

IN CASE YOU'VE BEEN OUT OF TOUCH, SEARCHING for female warriors in the Amazon jungle or engaged in some other worthy pursuit, the new buzz phrase in Wall Street is "exit strategy." Heretofore used primarily to describe politely the urgency of our getting the heck out of some foreign entanglement that we've blundered into, "exit strategy" now has been enthusiastically embraced by financial savants, many of whom are lexically challenged and hence eager to mouth the latest jive.

The exit strategy has also found avid followers among those Nervous Nelly investors who, just because the stock market enjoyed a bang-up second quarter -- with the Dow Jones Industrial Average up 11%, the Standard&Poor's 500 index, 15%, and Nasdaq, 20% -- get all in a lather, fearing another bout of vertigo. Relax, we say. What's to be afraid of? Haven't they heard we're in a new bull market and the trend is your friend?

While exit strategy has not yet reached the quickening popularity among market mavens of "second derivative" (which means hypothetical but bullish), let alone the ad nauseam status attained by "green shoots" and such golden oldies as "Goldilocks economy" and "new paradigm," give it time.

There's lots of chatter now, for example, about whether the Fed is mulling an exit strategy to shed its unseemly balance-sheet bloat, induced by raining dollar bills on the deserving and undeserving alike. That Bernanke&Co. will abandon, however reluctantly, their easy-money mode is a sure bet. Precisely when is hard to predict. But our offhand guess is it'll happen in your lifetime, particularly if you're under 30.

One of the things that strikes us, after observing the sorry episodes necessitating an exit strategy, is that the vast majority of them, whether in war, diplomacy, politics, romantic involvements or finance, could have been avoided by an "entry strategy." But that requires a bit of foresight only arrived at by heavy-duty cognitive labor, which, for the most part, is conspicuously absent from all of those endeavors.

Besides its sudden pride of place in the Street's vocabulary, what got us nattering on this way was the 150-year sentence given to Bernie Madoff. Bernie is a hugely ambitious striver, aiming to be No. 1 in all his undertakings. Anyone can amass a fortune as Warren Buffett did, by buying and selling stocks. But Bernie went Warren one better -- amassing a fortune from the stock market by sedulously not buying a single share.

We haven't the faintest doubt that Bernie suffered profound remorse when he realized that while his fraud was the biggest of its kind in all of history and thus assured him what he prized most -- an indelible prominence in the annals of Wall Street -- his punishment greatly diminished that extraordinary achievement. For his sentence doesn't come close to that meted out to such contemporary swindlers as Norman Schmidt, who drew 330 years, and Sholam Weiss, who got 845 years, and -- this must have really rankled -- for stealing what compared with Bernie's heist was peanuts.

Ah, well, Bernie, if it's any consolation, you can't win 'em all. And look at the bright side: you're only 71, and you know where your next meal is coming from for the next century-and-a-half. That'll give you plenty of time to plan an exit strategy.

REDUCED TO FOUR TRADING sessions to enable Street folk to properly celebrate July Fourth and head to the beaches and the hills, last week encompassed the end of the second quarter (time does fly when investors are having fun). Usually, apart from institutions doing a bit of window dressing (some dare call it manipulation) to put the best face possible on their portfolios to keep the investment masses from getting restive, these truncated weeks when Wall Street goes on holiday are as exciting as watching a cow chew. But the action last week was anything but desultory, mostly because the rest of the world refused to stop spinning and reality refused to take a recess. Stocks started off the third quarter creeping up on Wednesday only to take a big spill on Thursday that was fueled by another awful employment report (details to follow).

No doubt when the cheerleading contingent, whose ranks have swollen with every uptick in stocks, comes back from braving the waves off the Hamptons and smelling the flowers in the countryside, they'll be once again loudly discovering fresh evidence (visible only to their superior vision) that the economy's on the mend. There are signs, though, that Jane and John Doe aren't buying it, for the simple reason that they're hurting so much.

The economic sages likely are too busy tweaking their computer models (you know, the ones that never saw the fiercest postwar recession coming and have been registering recovery ever since) to pay serious heed to the growing financial pickle the states are in, beset by the double whammy of shrinking revenues and spiraling costs while they struggle to balance their budgets as mandated by law. Ordinary people can't blithely ignore the squeeze if for no other reason than it hits them where they live.

Exhibit A is the not-so-golden state of California, with a budget deficit of over $24 billon and counting and a fractious legislature that can't agree on what to do about it. Running dangerously low on cash and credit, the state has resorted to IOUs for the first time since 1992, and temporarily shut down its offices three days a month, placing employees on an abbreviated workweek, increasing the bite from their paychecks this year to 14%.

As David and Jay Levy observe in their latest edition of the Levy Forecast, "The entire state and local government sector, representing about 15% of the economy, is starting a contraction like none other in postwar history." Citing estimates by the National Conference of State Legislatures, they reckon that the states had a combined deficit approaching $102 billon in fiscal '09 and in the new fiscal year will find themselves a cool $121 billion in the red.

And those daunting figures, the Levys sigh, do not count the multitrillion-dollar problem of unfunded future retiree benefits, nor the revenue shortfalls of local governments, including school districts. To close the gaps, states, as California illustrates, are going through conniptions, hacking away at jobs and hours worked. Such measures, the Levys point out, have sorry consequences in the overall economy, and worsen the problems of the still-towering debt load weighing down the consumer.

The bottom line is glum. "The state and local government crisis," they predict, "will worsen, scaring the municipal finance market, creating a divisive national debate on federal aid to states and shaking household confidence in hard-hit areas by forcing painful cuts in basic public services."

But, please, don't tell the cheerleaders.

THE POOR WORKING STIFF. His mother never told him he'd grow up to be a lagging indicator. But, alas, if you credit economists (admittedly always a dangerous thing to do) that's just what he is.

The logic of this designation leaves us bemused. Jobs, the last we looked, were held by men and women. They make up the bulk of what are called consumers. Consumers, in turn, account for roughly 70% of the economy. When a large number of consumers lose their jobs, they don't consume as much and the economy will contract. So how can employment (or the lack thereof) be a lagging indicator?

As the June employment report, released last week, confirmed, the job market remains in the pits. Payrolls were slashed by 467,000 slots last month, bringing the total of people unemployed to 14.7 million. The unemployment rate edged up to 9.5%, the highest level in 26 years. Moreover, the losses would have been worse had the Bureau of Labor Statistics' magical birth-death calculation not conjured up a mythical 185,000 jobs.

To get a truer fix on the woeful condition of the job market, take a gander at table A-12 of the report and, more specifically, at the line devoted to U-6, which includes discouraged job seekers and part-timers who would dearly love to be full-timers. By that gauge, June's unemployment rate weighed in at 16.5%, another new high. And the real number of involuntarily idled workers would rise to an awesome 25 million or so.

As Philippa Dunne and Doug Henwood, proprietors of the Liscio Report, comment ruefully, they can find almost nothing encouraging "buried in the innards" of last month's employment numbers. They note that losses were widespread over the capacious spectrum of industries.

Those lucky workers who managed to hold on to their jobs saw their workweek dip to an all-time low and yearly aggregate hours decline by 7% to the lowest level since the category was added back in 1964. Our savvy duo also remark that had the labor force grown in line with the population, the jobless rate would have risen to 9.6%. Which leads them to wonder "if some serious discouragement is setting in" and "the marginally attached are becoming the formally detached."

And lastly, but scarcely unimportantly, Philippa and Doug observe that forward-looking indicators like temp employment were also "unpromising." And they conclude that while "it's cheering that the rates of decline have slowed from earlier this year," they find nothing to suggest an imminent turnaround.

MONDAY, JUNE 29, 2009
What's Hyping the Market?
Is a big glob of the stimulus money finding its way into stocks? Don't cry for Mark Sanford.

IT'S RARE THAT ANY POLITICIAN ADDS SOMETHING to the knowledge of mankind. So we're grateful to Mark Sanford, the governor of the great state of South Carolina, for expanding our treasured store of euphemisms and especially those that enjoy common usage in foreign lands.

The governor, as no doubt you've heard, went missing for four days last week, and the official story was that he was off hiking on the Appalachian Trail. In fact, he was actually engaged in an exceedingly close encounter with a member of the opposite sex in Buenos Aires. Which, we're forever indebted to Mr. Sanford for enlightening us, is what they call "hiking" in Argentina.

As for the confusion between Appalachia and Argentina, the truth is he has never been much on names. Besides, by his own confession, he was in love, which as everyone knows, often tends to addle the brain.

If there's any legitimate criticism of Mr. Sanford, it's his choice of where to indulge his concupiscence. On that score, he might have done better to emulate Eliot Spitzer, who took care to keep his trysts and the money spent pursuing them in the good old U.S.A., thus doing his bit to shore up the shaky economy and keeping our chronically woeful balance of payments from worsening still further.

The revelation that Mr. Sanford had strayed from the pristine path seemingly has severely lessened the likelihood of his running for the presidency in 2012. That's too bad, really, since the job begs for someone with experience in foreign affairs.

And for the Republicans, it hurts all the more, because another hot possible candidate, Sen. John Ensign of Nevada, a bare week ago, owned up to a similar indiscretion with one of his staff. That pretty much leaves the field wide open to Dick Cheney. Granted, looks may be deceiving, but we have a hard time trying to picture him even puckering up, much less falling prey to a fit of romantic passion.

Since, as Mr. Spitzer and Bill Clinton, among numerous others, have demonstrated, an excess of testosterone appears to be a bipartisan problem and one that pervades every stratum of government, shouldn't male public servants when sworn in be made to take, along with an oath of office, a glandular suppressant? We hope women wouldn't object to being excluded.

The only thing that can be said for the dalliances of our politicos is that it does serve to distract them from tackling with great gusto yesterday's problems or seizing any and every opportunity to make noise rather than progress. Like beating up, as they did last Thursday, on Fed Chairman Ben Bernanke for forcing that tender innocent, Ken Lewis, Bank of America's CEO, to swallow Merrill Lynch, blood-curdling losses and all.

As we've said before, this was a snarky bit of business in which the Fed and the Treasury were complicit, Mr. Lewis a slippery accomplice and the shareholders left holding the bag. But there's no gainsaying that had Merrill bit the dust, as Lehman did the very weekend the deal was sealed, all hell would have broken loose and the very windbags belching fire at Bernanke for pushing BofA to close the merger would have been flaying him for standing idly by.

A more interesting question the huffers and puffers might pose to Bernanke and his buddy, the ex-Treasury honcho Hank Paulson, would be why they chose to let Lehman go under (and Bear Stearns be carried out so ignominiously, for that matter), but opted to save Merrill and AIG. Our own guess is that the answer at the very least might reveal how haphazard the decisions were.

No mystery about who suffered from those decisions. But, just possibly, a serious inquiry instead of the clownish showboating that we got last week might also make clear who benefited from them.

THE STOCK MARKET, WHICH HAD taken a breather of late after its mighty rally, showed signs of reawakening last week. It shrugged off the congressional Punch-and-Judy routine, as well as the predictably gruesome quashing of the mass protests in Iran set off by the rigging of that benighted country's presidential election. The kind of stuff that, were the investment mood less ebullient, might easily have provided an excuse for a spot of profit-taking.

Investors didn't know quite what to make of the Fed's announcement Wednesday that it planned to stand pat on interest rates and asset purchases. So, after fruitlessly mulling the implications, they sensibly chose to ignore it and get back to buying stocks, which they did with a bang on Thursday. Friday, everyone went to the beach early.

And, we're happy to report, this time investors had something more tangible than dreamy images of economic recovery to whet their acquisitive appetites. To wit: Durable-goods orders in May rose 1.8% over the April total, not exactly a monster gain, but twice as much as the Street Nostradamuses had forecast.

The welcome increase was paced by a rush of orders for machinery, up 7.7%, and computers, up 9.8% (private aircraft was up 68%, but since that was pretty much all Boeing, the rise seems more than a little problematic, given the recent melancholy dispatches from the company).

As usual, however, the less-than-cheerful data in the Commerce Department release that lifted hearts and prices failed to get the notice it merited: Durable-goods shipments declined for the 10th month in a row, slipping 2.1%. As Merrill Lynch points out, while shipments fell, inventories continued to climb, boosting the inventory-to-sales ratio to a new cycle high in May. Which suggests that "destocking" is apt to prove a fair-sized drag in the months ahead. Conceivably, then, the report was worthy of fewer than the three cheers the Street gave it.

In like vein, Commerce's latest tally on last month's consumer income and spending was also a mixed bag. Income was up 1.4%, the most in a year. However, the bulk of that increase owed to reductions in payroll-tax withholding, one-shot payments to Social Security recipients and other measures crafted by Obama&Co. to goose the economy. Absent those special items, Jane and John's net income in May would have edged up a modest 0.2%. Still nice, but no cigar.

Moreover, consumers, quixotic souls that they are, reacted to Uncle Sam's generous gestures by refusing to take the bait and blow the dough on a new frock or a toaster. Instead, they stashed away a goodly portion of the stimulus money that came their way. As a result, the savings rate swelled to 6.9%, from April's 5.6%, the biggest leap in 15 years.

Since the same extraordinary bounty via Washington that ballooned income also boosted savings, it wouldn't knock our socks off if June savings turn out not to be as robust as they were in May. But the remarkable transformation of the citizens of this great country from feckless spendthrifts to nifty thrifties isn't likely to vanish overnight.

For the lugubrious truth is the causal agents of that change -- fear of losing your job and not being able to find a new one, fear of losing your house and not being able to afford another one, the evaporation of easy credit and the overall difficulty of making ends meet -- are likely to be with us for quite a spell. Things will get better, of course, but ever so slowly, and at least to these rheumy eyes, it's not entirely clear when.

We've had a hunch for a while now that a quantum gob of the stimulus bucks, under whatever guise and through whatever channel, was finding its way into the stock market. Which would explain a lot of things. Like the size and speed of the surge since the dark days of early March. The more than passing strange upward bursts of prices toward the end of so many sessions. And the overall racy character of so much of the market.

A miniature resurrection, in other words, of what Alan Greenspan called "irrational exuberance." We sure hope we're wrong.

MUCH AS WE HATE TO PILE IT ON, last week brought us other parcels of economic news that were not merely equivocal, but downright negative. A case very much in point was disclosure by the Labor Department that new claims for unemployment insurance -- hailed by the usual incurable optimists a few weeks ago when they came in below expectations as a sign of an incipient upturn in the job market -- were appreciably higher in the latest weekly count.

In case you're keeping score, fresh claims increased by 15,000, to 627,000. That brought the total number of unfortunate folks on the dole to 6.74 million, just a hair away from the peak set at the end of May.

The depressing upswing in the ranks of the newly idled is an ominous portent of what's in the cards when the June unemployment numbers are published early next month. What seems a safe if sad bet is that the jobless rate will mount to 9.6%, from May's 9.4%, or even a notch or two higher. And sometime this summer, the rate will move into double-digit territory.

What's more, with 51% of the CEOs of big corporations polled by the Business Roundtable expecting lower capital investment this year and 49% anticipating a reduction in their payrolls, any turn in the dismal employment trend may not surface until well into next year.

MONDAY, JUNE 22, 2009
Under the Gun
The Fed has been thrust into the middle of the fracas over financial reform. What it means for investors.

WHAT'S THE WORLD COMING TO WHEN YOU CAN'T RIG an election these days without the populace making a big fuss about it? Doesn't anyone have a decent respect for tradition anymore? You run a nice tight theocratic dictatorship in which people breathe only by permission and all of a sudden they're all atwitter just because you stole an election.

Really, one can't blame the bozos in charge of Iran for being sore. You'd be furious, too, if after kicking butts and chopping off heads for 30 years with barely a murmur of complaint, hundreds of thousands of men and -- even worse -- women are pouring out into the streets raising an awful ruckus.

Don't the rabble-rousers realize they're distracting their blessed leaders from the sacred task of building a nuclear bomb, the better to threaten the neighbors with, or maybe drop? A mushroom cloud is a beautiful sight to behold. And, anyway, what's the big beef? -- they let the preordained losers have 34% of the vote.

The stock market, which usually gets riled up if a camel stubs its toe, responded to the Persian turmoil with uncharacteristic aplomb. For that matter, the oil market was similarly unperturbed. Perhaps investors, unlike any number of self-anointed pundits, had correctly divined that the mob running Iran hadn't the slightest intention of surrendering their fiefdom, come hell or high water.

Besides, the Street's attention was fixed on something closer to home and to its heart: the Obama proposal for a sweeping regulatory overhaul of the financial industry. The actual unveiling of the plan was seemingly greeted with a kind of grudging approval manifested in a modest gain in share prices. It's always possible, though, that investors' fears may have been tempered by the comforting knowledge that once Congress waded in, whatever misbegotten legislation emerged would bear as much resemblance to the president's blueprint as a duck to a donkey and, in any case, those Washington vigilantes (a.k.a. lobbyists) would keep them safe.

It could be, too, that they're grown so accustomed to equating not-as-bad with good that anything shy of a ban on capital gains would have occasioned a sigh of relief. On the face of it, moreover, some of the proposals appear simply too outlandish and strikingly contrary to long-standing practice to merit serious concern. Like the idea that brokers must put the interest of their customers ahead of their own.

One unintended consequence of the president's proposal, as alluded to by our friends at ISI Group, has been to thrust the Fed smack in the middle of the budding fracas over what should be regulated and who should do the regulating. If the administration has its way, the Fed's powers would be significantly enhanced.

Whatever the ultimate fate of the legislation -- and it's dead certain that some kind of regulatory reform will become law to appease the populist rage inflamed by bailouts, foreclosures and job losses -- the argument over the Fed's role is destined to leave an imprint on the investment landscape.

As ISI tellingly observes, in the months ahead, the Fed may have to consider nudging rates higher. It's one thing for it to face political pressure not to tighten; that comes with the territory. But it's a much different thing when the Fed finds itself the focus of the debate over regulatory reform. And there's this, too: Chairman Bernanke's contract runs out at the end of January, and we suspect he'd dearly love to hold on to the job.

All of which suggests that he won't be tossing money around with quite the abandon he has been, nor will he be in any great hurry, if he can at all avoid it, to lift interest rates. You can't help but feel a twinge of sympathy for Ben, since the bulk of the blame for the implosion of both the financial system and the economy belongs to his inept predecessor, good old Alan Greenspan.

On that score, no better measure of how the political winds are blowing than the quip repeated by Connecticut's Christopher Dodd, the Democratic point man on the push for financial reform in the Senate, that expanding the Fed's regulatory reach was akin to rewarding a son with a bigger, faster car after he's just totaled the family station wagon.

EVEN BEFORE MR. OBAMA WENT public with his intended redo of the financial sector, and before Iran erupted, and before the revelation that the inmates in charge of the asylum known as North Korea, just for the sheer glee of it, might be pitching a missile in the direction of Hawaii, the stock market began acting a bit more demurely than in this year's rowdy rally that kited the averages as much as 40% higher, and, what's more, performed that amazing feat in a mere four months.

It's not surprising, of course, that after such a rousing dash upward, a touch of buyers' fatigue set in. And there were signs, inconceivable as it may seem to investors in the flush of such a spectacular showing, that the market having gone so far in such a brief stretch had priced everything into share prices but reality.

There were hints, as well, that bullish sentiment, which for a spell remained fairly constrained, had escalated to something approaching euphoria. Investors Intelligence readings of advisory sentiment showed most of these supposed savants, who often function best as contrary indicators, have come a bit late to the party; in recent weeks, the percentage of bulls among them have registered in the mid-40s, compared with the low 20s for the bears.

Moreover, trading took on a distinctly more speculative tone, with small stocks chalking up big gains despite their conspicuous lack of very much in the way of sales and nothing in the way of profits or prospects. And perhaps the most persuasive evidence of the gamier spirit abroad in Wall Street is that, despite the mounting demolition of the commercial-property market, Morgan Stanley plans to sell re-securitized commercial mortgages.

Which, as one portfolio pro acidly observed to Dow Jones Capital Markets, amounts to peddling tarnished assets nicely repackaged with higher ratings. That kind of thing has been going on in residential asset-backed securities in recent months, presumably fueled by the notion that the housing decline has bottomed. But that it now has spread to commercial mortgages when things are getting notably worse is clear indication that the mind-set and, indeed, some of the very stuff that got us into such a jam is back. Alas.

IN OUR UNENDING SEARCH for good news to lighten the mood of our readers and escape the blemish of being labeled a perpetual Gloomy Gus, we've unearthed confirmation that there's always a bright spot, no matter how hard the times. For that heartening epiphany we're grateful to a most unlikely source -- the Memorial Park Cemetery in Indianapolis.

We know you're dying to learn what the good news from Memorial Park is, so we won't keep you in suspense. It's a buy-one, get-one-free sale of grave sites. How about that! In case you were wondering about it, the fellow running the cemetery says this is just one of those promotions it puts on around Memorial Day. Business, he insists, is fine. Whew, what a relief!

THOSE EXCITED SIGHTINGS of green shoots of economic recovery that have fed the voracious investment appetite since the market bottomed back in early March reminds us of nothing so much as the UFO mania that blossomed some years back. And like the UFOs, the green shoots seem to be largely in the eye of the beholder.

We perhaps should mention that at least one market commentator has gone beyond the green-shoot stage and declared that the recession ended in April. We confess we hadn't noticed that resolution so devoutly to be desired, but, then, maybe we need a new prescription for our specs.

In like vein, all the fuss about the dip in continuing claims for unemployment insurance ignored not only the resumed rise in new claims, but also, as Bill King of the King Report has noted, the fact that something in the neighborhood of 50% of the folks on the jobless rolls have exhausted their benefits, which typically are good for 26 weeks. So the decline that prompted so much celebration might just as easily be viewed as eloquent testimony of just how tough it is to find a job.

Prominent among the illusory signs of a turn in the economy is last week's report of an uptick in housing permits and starts. Here, too, the glad cry went out that the "housing slump is over." Mark Hanson, the savvy proprietor of Hanson Advisors, who knows just about everything there is to know about real estate and mortgages, has his own informed and decidedly less optimistic take on the tad better numbers of residential construction.

Mark points out that permits and starts remain only slightly above the January and February lows. And the modest gains they posted "can be viewed as a bad thing" for the housing market because it adds supply at "the very time foreclosure-related supply is rising sharply." By the official count, there's a formidable 10.2 months' inventory of unsold homes hanging over the market, and Mark reckons the actual supply is between 14 and 16 months.

And, he warns, "We still have the mid-to-high-end implosion ahead of us." An implosion that he envisions will drag down that segment of the market some 50% to 70% from its elevated peaks in 2007.

Watch out, below.

MONDAY, JUNE 15, 2009
License to Steal
Why people just love politicians. Making silk purses out of sows' ears.

THE LATE MOLLY IVINS ONCE WROTE THAT she could always tell when the Texas legislature was in session because every village in the state reported its idiot missing. New York's legislators are of a different cut entirely. Don't misunderstand us. It isn't that they're not as dysfunctional as their counterparts in the Lone Star State; we would argue to our last breath that they're second to none in that regard. But being cursed with a six-ounce brain to support a 10-gallon ego is not their principal problem.

Instead, it's that year in, year out, no matter which party they pledge allegiance to, they eerily validate the unsolicited pronouncement to us by a taxi driver, from back in the days when cab drivers were worldly philosophers, that all politicians were crooks. "Or else," he asked, "why would anyone go into politics?" We were at a loss to provide him with a plausible alternative then, and, after the passage of many years and much reflection, we still can't.

That wonderful combination of cupidity and stupidity is on glorious display in the farcical imbroglio over who owns the New York State Senate. For the first time in decades, in the last election, the Democrats eked out a two-vote majority in that body. True to their tradition, they immediately began to squabble, and the Republicans staged a coup, luring two Democratic defectors into their camp -- both of whom are ethically challenged (so what else is new?), and one of whom they immediately anointed a capo in the Senate -- and tried to seize control.

But one of the turncoats tried to play it cute, leaving the coup unconsummated and the legislature in blissful stasis. Regrettably, the resulting inability of the lawmakers to attend to the people's business and their own monkey business (not necessarily in that order) is only temporary.

Despite the distinct odor of a rotting banana republic emanating from Albany, which is what passes for the seat of New York's state government and, to be fair, has always emitted a bit of a stench, we don't want to trivialize what's at stake. For it's nothing less than who gets to issue the licenses to steal. And that's especially important these days, when even a dishonest buck is hard to come by.

As we intimated, the Empire State's governing body is far from unique; indeed, it's the rare state that isn't in this respect a facsimile of New York. For that matter, the U.S. Congress all too often is merely your typical bumbling state legislature writ large. That was evident in last week's hearings as to what role Hank Paulson and Ben Bernanke and their henchmen at Treasury and the Fed played in pushing Bank of America to go through with its proposed acquisition of Merrill Lynch after the bank's chief executive officer, Ken Lewis. seemed to be chickening out.

With Mr. Lewis on the stand, our sagacious solons had plenty of opportunity to preen and pontificate, and they fully exploited it. Apart from what we already knew -- that Hank and Ben put the screws to Ken, who quickly caved after the promise of an additional $20 billion from Uncle Sam as balm for his trouble -- the only notable thing to emerge from all the sound and fury was the comic relief furnished by the frantic e-mails and memos dispatched by various Fed underlings...Such as the comment in one of the communiqués that Mr. Lewis' claim that he was surprised by the rapid growth of Merrill's losses called into serious "question the adequacy" of the bank's due diligence. Now, that's what we call an acute perception. Or, the threat in another that if Mr. Lewis pulled out of the deal "the market would doubt the judgment of management at Bank of America and its ability to manage risk." Which, of course, is exactly what happened when Mr. Lewis failed to pull out of the deal.

The public airing of Ben Bernanke playing the role of "godfather" (Marlon Brando he isn't) and the feigned righteous indignation of our chosen representatives has not, for some reason, strengthened our confidence in the Fed and the Congress to lead us out of the economic morass. Although, to be honest, we never had all that much confidence to start with.

THIS ISSUE OF BARRON'S IS ENLIVENED by the semiannual session of our Roundtable, with colleague Lauren Rublin doing the quizzing. Accompanying it, as usual, are the score cards on the panels' picks and pans. And in happy contrast to January, when the guys and gals last met, the investment climate is extraordinarily buoyant.

We won't spoil your pleasure in reading what Wall Street's best and brightest have to say, but we can't resist a few stray comments.

The first is that, even in such an exuberant stock market as we've had in the past few months, the most astute investor can obviously come a cropper. And that, contrary to the impression a casual observer of the stock scene might get from the spectacular gains in the Dow, the Standard&Poor's 500 and Nasdaq since early March, this hasn't been a one-way Street.

Moreover, the tally of our panelists' hits and misses over the past 12 months offers a pretty bleak picture, not exactly a surprise, given the crash of the overall market, emphasizing once more that in a real honest-to-badness bear market, there's really no place to hide for investors. We're not ignoring the possible rewards of short-selling, but that's a chancy business, best left to those among us who are particularly agile traders and possessed of a strong stomach.

Remember, too, if you will, that all of our illustrious panel are true and tested pros who have weathered bad patches and down-years before, and invariably wound up winners. We've not the slightest doubt they'll do the same again.

We'd be remiss if in ending this brief blurb we failed to give a thumbs-up to Felix Zulauf, Fred Hickey and Marc Faber for their smashing performance in the first half of this year and convey our earnest wish that they do just as well over the rest of '09 (although it won't diminish our admiration for them one whit if their performance is merely great instead of colossal).

OUR GRIPE WITH THE STOCK MARKET is not that it has celebrated its recovery from its frightening brush with outright disaster by staging a booming rally. Hey, after being almost cut in half in barely 12 months, it was more than entitled to a quantum leap (but, frankly, we never dreamed that leap would be quite so quantum).

What continues to bug us about the rebound is that it's largely built on dubious expectations. And it seems like every passing day, just about anything that comes down the news-pipe is transmuted into an excuse to buy. Last week provided abundant examples of the rapidly growing impulse to put a smiley face on the most bland indication that things are getting better, even when closer inspection discloses that they're getting worse.

Thus, the Federal Reserve's so-called beige book, a survey of the economy, stated that five of the Fed's 12 regions reported that "the downward trend is showing signs of moderating." And that was promptly taken as bullish by the crowd, egged on, of course, by their professional cheerleaders.

Unless our arithmetic is faulty, that quote rather strongly suggests that in seven of the regions examined, there were no signs of the recession moderating. Seven, last we looked, was more than five; yet the laggards barely got notice, certainly not on Wall Street.

Manufacturing, moreover, the Fed was clear, remained in the dumps in most regions, consumer spending was "soft," new-car sales were "depressed," travel and tourism dropped, commercial real-estate was weak, and the job market remained rocky just about everywhere. Obviously, all very heartening.

In a similar vein, the Labor Department reported initial claims for unemployment benefits declined 24,000 to 601,000 and that, too, was hailed as a fresh omen of a turn in the jobs market.

However, continuing claims -- made by folks out of work more than a week -- shot up by 59,000 to more than 6.8 million, the highest total since the number-crunchers began counting, back in 1967. And, it was the 19th week in a row that they've hit a new peak.

In any case, the hurrahs are apt to prove a bit premature, as the ranks of those lining up for benefits inexorably swell when the poor souls who have been laboring for the thousands of doomed auto dealers get the ax.

Our point is simple: There's more than a little make-believe to the supposed evidence of a pick-up in the economy. Which, even if one credits it, has had what seems to us an absurdly exaggerated impact on investment sentiment and equity valuations.

With an already stressed consumer beset by foreclosure, pay cuts and job worries now faced with the added pinch of sharply higher gasoline prices; with companies still heavily burdened by debt and leery of capital investment; with export markets withering, and the government spending itself into a deep, dark hole, it's hard to envision where the spark for a strong economic upturn -- which is what the big rally is presumably discounting -- will come from.

But maybe we're just lacking in imagination.

MONDAY, JUNE 8, 2009
No Bottom in Housing
Housing faces another big wave of foreclosures. Jobs report: no cause for celebration.

LAST WEEK, MR. OBAMA VOYAGED TO EGYPT and delivered a truly remarkable speech. It wasn't so much the nicely crafted rhetoric or deftly glossed content that stirred our admiration. Rather, it was that he could speak for nearly an hour and verbally cover the globe, with its profusion of combustible hot spots threatening conflagrations that might consume continents, without once uttering the word "terrorist."

Guess from now on, we'll have to call those guys in Iraq and Pakistan who get up the in morning, brush their teeth and proceed to blow up themselves and everyone else who happens to be within spitting distance "misguided pyrotechnists" and the 9/11 bunch "malign tourists."

While Mr. Obama's trip to the land of the Pyramids got most of the play (for some reason, he neglected to take Joe Biden along and introduce him to the Sphinx to show him what a model vice president is like), the week was also newsworthy as providing still another example of a CE0 failing to follow the iron rule to never send an e-mail and never destroy one.

The culprit in this case is Angelo Mozilo, the man who founded and ran the infamous Countrywide Financial, which made a real contribution to the decline and fall of housing, the deep freeze of the credit market and all the calamitous things that issued from them. After the roof fell in, he walked away with $130 million, the fruits of opportune stock sales. That's not a record for being compensated for making a mess, but it still represents a decent payday.

Mr. Mozilo made the mistake of properly referring in e-mails to the loans his company was making as "toxic." And the SEC awoke long enough from its slumbers to charge him with fraud.

Mr. Obama, as it turns out, couldn't have picked a better week to be abroad, since his absence coincided with release of the May jobs report. It showed a leap in the unemployment rate to 9.4% from 8.9%, the highest in a quarter of a century. Apparently, that stimulus program unveiled with so much hoopla isn't doing much in the way of stimulating employment.

While payrolls slid by 345,000, much below the consensus guess, it was the usual hokey number, getting a lift from the wonderful birth/death model, which somehow summoned up 220,000 jobs and did so, magically, out of thin air.

The harsh truth is that, using the regular payroll data, a rather formidable 14.5 million people are out of work. Moreover, if we look at the category we feel gives a more accurate picture -- the so-called U-6 tally -- which includes people too discouraged to keep looking for a job and those working part-time because they can't find full-time slots, the unemployment rate shot up to a new high of 16.4%. That means that something around 25 million folks are effectively on the dole. Ugh!

CALL US ORNERY (it'll probably shock you to learn we've been called worse). Or, if you're in a forgiving mood, call us grumpy, mulish, obstinate. But, with a willful tenacity that we fear approaches obsession, we find ourselves clinging to the notion -- in the face of the mounting insistence in Wall Street, Washington and other seamy precincts that less bad is the equivalent of good -- that the impaired economy is still a long way from anything worthy of being called a recovery. And what's more, it will stay in that sorry state until housing, whose collapse triggered the chain reaction that threatened to all but demolish the economy, pulls itself up from the depths.

Ah, we can hear the fluttering flocks of cheerful chirpers scolding us for not opening our eyes and catching the luminous signs of a turn in housing's fortunes. Well, our eyes are wide open, and what we see is something quite different: the mother of all head fakes.

Our dour perception coincides with that of Whitney Tilson and Glenn Tongue of T2 Partners, from whose latest tome -- on housing, mortgages, meltdown and all that -- we've filched that superlative. And we couldn't be in better company. For, as perhaps you recall, we've used this space to quote extensively from their earlier warnings, which proved right on target.

Their latest effort runs a mere 75 pages and is adorned with an array of attractive graphics that help make its reading not only informative but relatively pleasurable. In it, they argue persuasively that recent indications of stabilization in housing are the product of some short-term and seasonal factors, and emphatically not, as the wild bulls have been snorting, a true bottom.

In particular, the lifting of a temporary moratorium on foreclosures has prompted Fannie Mae and Freddie Mac and the other usual suspect lenders to move quickly to save homeowners who can be saved -- but foreclose on those who can't. Tilson and Tongue see this as necessary if we're ever going to lay to rest what the bubble and its dreary aftermath have wrought. But it also seems destined to produce exactly what we need least -- a surge in housing inventory later this year. And, alas, that in turn means further pressure on prices.

As any poor soul who has been trying to peddle his abode can mournfully attest, prices are plenty weak already, having declined for 33 months in a row. They're down some 40% from their peak, the T2 pair reckons, and have at least 5%-10% more to go, with a real risk of falling even further than that, owing to homeowner frustration and despair and a continuing ample oversupply of shelter because of the tidal wave of foreclosures, millions more of which they think are in the cards over the next few years.

Tilson and Tongue don't see housing bottoming until the middle of next year, and the recovery, they suggest, will be conspicuous by its lack of vigor.

One of the scarier charts in the report -- but which, we think, brings into jarring focus mortgage credit's current perilous condition -- lists how much each of the various types of loans is severely underwater. To wit: 73% of option ARMs, 50% of subprime, 45% of Alt-A and 25% of prime mortgages are in that uncomfortable category.

T2 posits five waves of losses, two of which have crested, while the remaining three have yet to peak. In the first two waves, the losses of which appear largely behind us, the chief causes of distress were rooted in fraud, feckless speculation and payment shock induced by mortgage resets.

The last three waves, the big losses of which have still to come, include prime loans (mostly owned or guaranteed by Fannie and Freddie); jumbo primes, second liens and home-equity lines of credit (most of these are on banks' books), and loans outside housing, notably the tidy $3.5 trillion of commercial real estate.

Toward the end of their report, as a kind of second opinion, the T2 duo cite some observations last month by Mark Hanson of the Field Check Group, a seasoned research outfit that specializes in real estate and mortgages. And not surprisingly, he's at one with their downbeat analysis. In fact, if anything, he's even more bearish and puts a lot of the blame squarely on ill-conceived attempts to ease the plight of troubled homeowners by tinkering with their loans.

More specifically, he cites all of those "terrible kick-the- can-down-the-road modifications that leave borrowers in five-year teaser, ultra-high leverage, 150% loan-to value balloon loans" that when they start adjusting upward will "turn millions of homeowners into overlevered, underwater, renters, and ensure housing is a dead asset class for years to come."

Field Check's data, he says, show "that the mid-to-upper-end housing market is on the precipice of the exact cliff that the market fell off of in 2007, led by new loan defaults. What happens to the economy when you hit the mid-to-upper-end earners the same way the low-to-mid end was hit with the subprime implosion? We will find out soon enough."

And he concludes on this grim note: "When we look back at the end of 2009, anyone that made positive predictions this year will not believe how far off they were."

WE EARNESTLY HOPE THAT SHOULD he chance to glance at these scribblings, Timothy Geithner isn't disconcerted to the point that he's unable to give his undivided attention to the serious business of running the Treasury. We'd feel just awful if we thought that something we've written had distracted Mr. Geithner from formulating another way to reward the banks for their gross imprudence.

Our concern here springs from a report by the AP last week that Mr. Geithner, who has a house in a posh part of Westchester County in New York, has been unable to sell it, even though he cut the price below the $1.602 million he paid for it in 2004.

Since he has new digs in Washington, but has to shell out $27,000 a year in property taxes, plus the payments on $1.2 million in two mortgages on his old home, he likely figured if he sold it, at the very least he could begin to have a decent lunch instead of the baloney sandwich his missus has been preparing for him to haul to the office.

He was able to rent out the five-bedroom Westchester Tudor for a mere $7,500 a month, but we're afraid, given his mortgage payments and all, he'll probably still have to make do with baloney for quite a spell. Oh, and don't be surprised if the administration unveils a new program to aid those deserving upper-end homeowners whose suffering has gone largely unremarked.

MONDAY, JUNE 1, 2009
Read All About It
What's caused the big decline in the fortunes of the nation's newspapers. Figures don't lie but…

NEWSPAPERS THE NATION OVER, IT'S NO SECRET, have become the quintessentially endangered species. At the typical paper, the only thing falling faster than circulation is advertising lineage. Many a once proud leading daily has folded, while countless others are queuing up to effectively abandon print and take a desperate leap into the vast ethereal expanse of cyberspace.

To be sure, how well they'll fare, or even whether they'll survive, in their new incarnation as super blogs or 24/7 electronic news spewers knows no man (or woman). After pulling thoughtfully on their chins and squinting wisely, the venerable sages proclaim the source of the papers' travails is that the press moguls lack a good business plan (as makers of buggy whips early in the last century could have told them, sometimes the only truly good business plan for dying businesses is interment).

The accepted wisdom is that what brought newspapers to their current low estate was a deadly double whammy of deep recession and killer competition from the Internet. We have no quarrel with that, although we suspect that a creeping vogue for illiteracy is playing a role as well. But we also think the news is to blame: It's so darn repetitious that, it pains us to say, readers get awfully bored with it.

Just by way of example, how many times -- indeed, how many years, now -- have we picked up our favorite paper to be confronted by a boldface headline screaming at us that the incorrigible nukenik, North Korea, is getting ready to blow up the world? Frankly, we're tired of reading about it. OK, if they finally blow up the world, swell, then we'll be happy to read about it.

We're the first to admit we don't count foreign policy among our areas of expertise (which aren't exactly numerous in any case, once you get past martinis and pro football), but it mystifies us why, what with all those myriad pundits in the State Department, not one in over half a century has ever suggested sending Kim Jong Il, North Korea's diminutive supreme leader, a nice pair of elevator shoes. Then he wouldn't always be the shortest guy in the room and, we guarantee, his hostility toward the rest of the mankind would inexorably melt away.

And why -- while we're on the subject of no-news news -- does it warrant front-page coverage that one of our big auto makers is going bankrupt ? For gosh sakes, everyone knows that the car makers don't make their money selling cars anymore. They get their dough by filing for Chapter 11, confident that Uncle Sam feeds them a few billion here, a few billion there, to tide them over. Sure beats having to come out with a new model every year.

As an ink-stained wretch from way back, we'd hate to give the misimpression that we feel newspapers are dispensable. They're not. And we confess to a lifelong addiction to them. No other medium comes close to the exhaustive (even if sometimes exhausting) coverage they offer. A case very much in point is the nomination of Sonia Sotomayor for the Supreme Court.

Among the many details of Ms. Sotomayor's life that all those long columns devoted to her background, education and career revealed was this little-noted gem. She entered Princeton in 1972, a couple of months or so after Samuel A. Alito Jr., one of George W. Bush's appointments to the court, graduated from that ivy-clad institution. Women had been admitted to Princeton a scant few years earlier, and the surge in their presence at the university stirred protest by some of the grumpier male alumni, including, as it emerges, Mr. Alito.

We can hardly wait to see the interaction between the two as they take their respective places on the bench (let's hope they sit side by side). Enjoy the frozen smiles and kindred gestures of collegiality. Keep a careful eye on the body language and the darting glances at each other. It has the promise of a terrific hoot -- and whatever our age, circumstances and political persuasion, we'd all be the poorer for having missed a memorable spectacle, were it not for our ailing but gallant gazette.

NONE OF THE ABOVE, we're sorry to say, lets newspapers or their electronic kin off the hook for their contributions, however inadvertent, to the growing investor giddiness that has helped light a big fuse under this roaring stock market. In particular, a heck of a lot of the reporting has put a gloss on even the dreariest economic news.

Obviously, with an economy that has been flirting with catastrophe for going on six months, any semblance of good news is inarguably newsworthy. But, the job of a journalist is not to swallow whole what an interested party tells him, whether said party draws a paycheck from Washington or Wall Street. Rather, it's to act as a filter, separating out the facts from the flotsam. And that means taking a hard look for himself at the figures.

Thus, there were hosannas and chirping galore about the end of the slump in manufacturing when a 1.9% increase was reported for new durable-goods in April. What seemed to have escaped general recognition among the gushing reporters was that the March numbers were sharply reduced from a decline of 0.8% to a drop of 2.1% -- which might just have had something to do with April's unexpected jump.

And as Bill King of the always informative King Report, who has a thing about how much of the official data virtually across the board is quietly revised downward the next month, points out, in the latest tally of jobless claims, the previous week's data were also shaved from the original number. And that, too, got lost in the jubilation over what was hailed in many quarters as fresh evidence that the labor market was steadying.

While making a big deal over a modest dip in new claims -- the total remains dismayingly above the 600,000 mark -- both the Street and the media pretty much overlooked the new high in continuing claims, which, Bill notes, extended a parabolic rise. Somehow that doesn't quite square with an uptick in employment.

We still envisage unemployment hitting 10% early next year and the bum job market acting as a big drag on everything from housing (the bubble that ultimately broke the economy) to credit (whose 25-year spree came to an inglorious end) and to consumer spending (which is supposed to be the angel of recovery).

Yes, there are signs that the slump is slowing; but after two horrendously bad quarters back to back, the economy was either going to decline at a somewhat gentler pace or implode. We hope we're wrong, but we don't necessarily believe it's all uphill from here. That the consensus among the seers has swung to a second-half recovery only deepens our doubts

DAVID ROSENBERG, EX OF MERRILL LYNCH, is now chief economist and strategist (but a great guy nonetheless) of Gluskin Sheff, a money-management firm based in Toronto. (Dave, as we've mentioned before, hails from Canada.) Anyway, we're pleased to report, he's churning out what he calls his market musings and data deciphering (he's afflicted, poor chap, with a penchant for alliteration).

Crossing the border hasn't caused Dave to miss a beat. After perusing his latest batch of communiques, we can attest he's as sharp and incisive as ever, if anything maybe a touch more. He's that rare bird in the investment business who's skeptical without being invariably negative; who like Lord Keynes changes his mind when the facts change; who has firm convictions without being dogmatic and is able to convey his reasoning without resorting to gibberish. He also has a neat sense of humor.

We were particularly struck in his latest screed by his apostasy on government bonds. In true contrarian fashion, he takes issue with the increasingly popular notion that we've been witness to a bubble in Treasuries. "The Treasury market was never in a 'bubble,' Dave says. "Nothing that is fully guaranteed and pays a coupon semi-annually with no call or prepayment risk goes into a 'bubble' just because it was expensive at the yield's low."

He elaborates: "Sentiment never got wildly bullish; the public never became enamored of Treasuries; there were no widespread ownership or 'new paradigm' thoughts. At the lows in yield, there were legitimate concerns over a depression-like economic backdrop and deflation." But the Treasury market never met "the classic characteristics of a bubble," a la dot-com or housing.

Sounds reasonable to us.

Dave, we might add, in his most recent commentary points out that the delinquency data for the first quarter, courtesy of the Mortgage Bankers Association, were decidedly miserable. The overall mortgage-delinquency rate rose to a new high of 9.12%, from 7.88% the previous quarter and 6.35% in the corresponding three months last year. Subprime delinquencies shot up to 24.95%, from 21.88% in the final quarter of '08, while prime delinquencies rose to 6.06%, from 5.06% in last year's fourth quarter (and 3.71% in the like year-earlier stretch).

As Dave comments, "A year ago, the markets and the financials would have taken a big hit on data like this. But, heck, when the government steps in to guarantee the longevity of the large commercial banks," investors simply shrug off the bad news.

Still, he reflects, such dreary data are eloquent evidence of "the deteriorating level of credit quality, fully 18 months into this crisis." In short, don't do anything foolish.

MONDAY, MAY 25, 2009
Do Be Wary of Green Shoots
Hold your horses on calling a new bull market -- the bear has several years to go.

BLAME THE BRITS. WHEN STANDARD & POOR'S SUGGESTED last week that the credit of the United Kingdom mightn't be exactly sterling because of its deficits and bailouts, it cast a worse light on America's standing. But an even worse blight has spread across the Atlantic.

It's said we are two nations separated by a common language, though English is hardly the lingua franca it once was on these shores. Be that as it may, Yanks have adopted a turn of phrase originated on the other side of pond, the "green shoots" that keep popping up everywhere.

It was originated by former British Chancellor of the Exchequer Norman Lamont, who was quoted as spotting green shoots in the British economy back in 1991, recalls Mark Turner, who heads the Pentagram Fund, a hedge fund that scored a 70% return in last year's collapse. Of course, Lamont would go on to oversee the ignominious withdrawal of the pound from the European Exchange Rate Mechanism the next year, which netted an infamous $1 billion windfall for George Soros.

So, why the attraction of green shoots? One can only speculate that they must be in some ways intoxicating. Perhaps not the shoots exactly, or the stems or seeds, but the leaves of a certain plant. Those might be smoked or otherwise ingested to bring about a euphoric effect. From what I've read, the current crop is far more potent than the commodity available in years past. How else to explain the mind-bending notion that an economy that is declining less quickly is somehow improving?

Yet, in a world going to pot, nothing should be dismissed. Prior to the resounding rejection by California's voters of various patches for the state's budget deficit, Gov. Arnold Schwarzenegger seemed open to a legislative proposal to legalize marijuana and tax it. Now facing a $21 billion budget deficit, the "Governator" isn't in a position to just say No to anything.

As an alternative, the state's treasurer called on the federal government to guarantee California's borrowings in a way the Ford Administration declined to do back in the New York fiscal crisis of the 1970s. That, of course, led to the immortal New York Daily News headline, "Ford to City: Drop Dead."

Having bailed out the banks and provided a lifeline to Chrysler and General Motors, how does Washington tell California, the eighth-largest economy in the world, to drop dead? That's the slippery slope that America's credit rating is on.

LAST YEAR, MANY CELEBRATED THE 40TH anniversary of the tumultuous events of 1968, a year that changed history, at least in the view of Baby Boomers who date it in terms of BE and AE (Before Elvis and After Elvis.)

Market historians have been pointing to 1938 as an antecedent for this year's action, as Mike Santoli has noted in his Streetwise column. So, too, has Louise Yamada, the doyenne of technical analysts, who now counsels clients via her LY Advisors after her long career at Smith Barney. Citigroup (C), in one of its many deft moves before it became a ward of the state, decided to axe Smith Barney's highly regarded technical-analysis group back in the middle of the decade.

"It is almost uncanny the degree to which 2002-08 has tracked 1932-38," Yamada writes in her latest note to clients. She has posited in her so-called Alternate Hypothesis that the structural bear market would be less like its most recent predecessor, from 1966-82, and more like 1929-42.

So the dot-com collapse parallels the Great Crash and its aftermath, followed by a rather nice recovery in 2003-07, similar to 1933-37. The parallels continue, with the collapse from late last year into this March tracing a similar, sickening trajectory to late 1937-38, as illustrated in Louise's chart nearby. That drop led to a strong reaction rally, not unlike the current one, for a total gain of 60%. But that was broken into three segments: an initial rally of 46%, similar to the move from the March lows. Then we saw a 10% pullback, not unusual in a rally, then another gain of 22%.


From there comes the hard part. Starting in November 1938, there was a 22% drop, qualifying for the 20% rule-of-thumb definition of a bear market; then a rally of 26%, fitting the definition of a bull market, into the fateful month of September 1939, the start of World War II.

Then came a series of bull and bear trades -- down 28%, up 23%, down 16%, up 13%, and the final decline into 1942 of 29%. After this nauseating roller-coaster ride, the market was down 41% from the 1938 highs (analogous to where we are now) to the 1942 lows.

The positive aspect of this, writes Yamada, is that the arduous process permitted individual stock consolidations to develop over years ultimately provided the base for a bull market in 1942.

But, she emphasizes, that means investors probably face years of frustration if they think a new, sustained bull market has begun. Structural bear markets typically last 13 to 16 years. Given the declines that have been suffered so far -- topped only by 1929-32 -- the structural bear has several years to go to complete the repair process.

As for the current rebound, it is rather like a bungee jump, with an elastic snap-back after a terrifying plunge. And it has been a kind of worst-to-first move.

David Rosenberg, ensconced at Gluskin Sheff in Toronto after years of distinguished duty as Merrill Lynch's North American chief economist, observes that the best performers have been the lowest-quality stocks or those with biggest short interest. "In other words, this was a rally built largely on short-covering, pension-fund rebalancing and the emergence of hope wrapped up in 'green shoot' data points," he contends. That makes its sustainability in doubt.

But the move has left many on the platform as the train pulled out of the station, including some of the biggest swingers in hedge funds, who are known in the market just by their first names.

WHAT IS LIKELY TO DISAPPOINT THE BULLS is the pace of recovery in corporate profits, according to the perspicacious Smithers & Co. of London. Earnings per share -- the sustenance of equity investors -- will be hampered by punk economic growth ahead and the need to repair corporate balance sheets.

Investors had come to regard the record profit margins of recent years as the new norm. Last year's were above average, despite the general perception they were squeezed.

Profits typically grow when the economy is expanding above trend, and vice versa. With U.S. growth likely to stabilize at only 1% into 2010, the outlook for earnings is apt to be, in a word, lousy.

Apart from the economic forces on profits, financial forces -- depreciation, leverage, interest costs and taxes -- are likely to push earnings per share down, Smithers observes. Deleveraging means share issuance rather than buybacks -- a reversal of the trend of recent years that worked to the benefit of corporate chieftains' bonuses. "The growth rate of earnings per share is thus likely to be worse than that indicated by profit margins alone," his report logically infers.

The bottom line, as it were, is that when the economy recovers, the benefits to corporate earnings accruing to stockholders will be disappointing. That could make for a frustrating equity market until the healing is complete, a moment that, as Yamada's profile suggests, could be years away.

MONDAY, MAY 18, 2009
No Pig Heaven
The stock market missed a chance for a sentimental rally. Bad news brewing for health care.

WHAT MAKES TRYING TO GUESS HOW THE STOCK market will react to some unexpected piece of news such exciting sport is that the blamed thing more often than not is guided by a rationale all its own to which ordinary beings are not privy. A timely case in point is the suggestion by an Australian virologist that the swine-flu epidemic might have been caused by the accidental release of the virus from a laboratory carrying on genetic experiments.

One would think the very possibility of pigs being exonerated as the source of the epidemic would trigger a celebratory rally, since hogs have long occupied an important and unique place in Wall Street's bestiary, along with bulls, bears and sheep. For hogs are a transfigured species that bulls, bears and sheep turn into when they lose their senses. In short, that oink you hear may be your inner self.

Now, granted, the global health-care establishment was quick to pooh-pooh the Aussie researcher's notion, but that is hardly surprising considering that he was, by implication, fingering one or more of its members as having been severely negligent. But, in any case, the market is rarely reluctant to let facts stand in the way when it conjures up a reason to rally.

Don't get us wrong: We didn't expect it to go hog-wild over the possible exculpation of swine as the progenitor of the flu. But a nice, discreet show of sympathy in recognition of a long-standing kinship certainly seemed in order.

To be fair, investors had a full plate of news to weigh that may have distracted them from any purely sentimental gesture, such as President Obama's remarkable revelation that China might grow tired one of these years of lending us money (who knew?). And that, he posited, might pose a serious threat to our ability to continue to happily live beyond our means. Wow! And just to show he means to do something serious about it, he plans to limit this fiscal year's federal budget deficit to a mere $1.84 trillion, instead of the $2 trillion widely expected.

Over in the legislative arena, meanwhile, Nancy Pelosi, boss of the House of Representatives, admitted she had been briefed on harsh interrogation measures in 2003. But, she explained, the CIA flat-out lied to her and told her waterboarding was a favorite among prisoners with pool privileges, so she held her tongue (which, for Nancy, is real torture).

Another bit of intelligence out of Washington was also pretty much ignored, which is rather a pity because it seemed to us to offer an intriguing possibility for investors eager to get a bit of an edge on the crowd in the delicate business of picking stocks. And that was the disclosure that two SEC lawyers apparently had been making profitable use of non-public information, as the bureaucratic boilerplate dubs it, to trade stocks.

Unfortunately, their names weren't disclosed, but the more active of the pair made something like 247 trades during the past two years. These are enterprising types, and it isn't inconceivable they, or some of their like-minded colleagues, might welcome the opportunity to branch out and provide investment advice to nice folks like you -- for a fee, natch -- based on their access to inside information. When we learn more, like who they are and the details of their past performance, we'll be only too happy to pass it along (gratis, of course).

We most certainly don't want to convey the impression that the market has been completely unresponsive to what's happening out there in the real world. The hard numbers on the damage being wrought to auto dealers -- GM informed 1,100 of those franchisers they'll be sacked next year, while Chrysler plans to give the boot to close to 800 -- did dampen animal spirits a tad last week. Another reminder, that for all the exultation that recovery may be just around the corner, it's proving a mighty long corner.

Lest you think we're perennially gloomy, let us disabuse you. We emphatically do not hold with Bob Prechter's forecast to the Market Technicians Association that equities still are at risk of falling between 50% and 80%. We'd hazard that the market won't lose more than a third of its current value, barring anything really bad happening. Feel better?

TOM GALLAGHER and Andy Laperriere, who put out the invariably informative Policy Report for Ed Hyman's ISI Group, provided an early heads-up on the health-care program being crafted by the House Energy and Commerce Committee. In its present form, at least, it promises to be anything but healthy for a host of providers in that fast-growing sector and, Tom and Andy say, "potentially devastating to managed care."

More specifically, by their reckoning, the bill could occasion a "massive shift from commercial, employer-based coverage to government coverage." An exchange would be created to set up and enforce standards for health care. At the start, the exchange would be open to individuals and employees of small business. But, in due time, it would be made available to workers for large companies as well.

One of the choices on the exchange would be a public plan modeled on Medicare. The public plan probably would pay Medicare rates to providers, which, Tom and Andy point out, are 20% to 30% less than commercial rates, obviously a big incentive for consumers to switch. For HMOs, they logically venture, that could mean a "tremendous loss of market share."

They caution that the measure being worked up is by no means the final word on what eventually might become law. But, they contend, "it highlights the risk to health-care stocks." All the more so, since most of the features in the bill "track the white paper" released last fall by Senate Finance Committee Chairman Max Baucus, a major force in the administration's push to overhaul health care.

ONE REASON THE STOCK market lost some of its steam last week, as more than one strategist pointed out, was that the curtain pretty much came down on earnings reports for the first quarter. Although a dispassionate viewer might wonder after perusing that wave of reports why anyone was particularly impressed by results that at best weren't bad as feared, overall they were anything but plump pickings.

According to good old Standard & Poor's, the latest tally on the 500 companies comprising its index offered painful proof that first-quarter earnings were nothing to write home about. The tally, which includes outfits accounting for a trifle over 90% of the constituents' market value, showed the majority suffered lower earnings than in January-March last year and the aggregate decline was more than one-third.

On a per-share basis, first-quarter earnings on the index came in a tad over $10. We're still looking for $40 or a couple of bucks higher for the full year, which means the S&P 500 is selling comfortably over 20 times 2009 earnings. Tell us, again, please, why, with the economy still in the pits, that is a raging bargain.

LOUIS LOWENSTEIN died last month. From his post as a professor at Columbia University specializing in business law, Louis kept a skeptical eye cocked on Wall Street and its multiple sins. Unlike most academics who turn their gaze on the investment scene, he had met a payroll and his exceptions to dubious Street practice and corporate shenanigans were grounded in a wonderful mix of pragmatic experience and exquisite intelligence.

Louis, with whom we chatted from time to time, was particularly exercised over the increasing tendency of investors to succumb, often in response to the Street's urgings, to the lure of short-term trading (that was long before day-trading had its 15 minutes of fame). He was also an earnest and eloquent advocate for individual shareholders, who he felt were given the short end of the stick by everyone from giant brokerage firms to mutual-fund managers.

He was a gentleman and a scholar and, however uninhibited in criticism when he spotted shabby behavior and bad actors, we always found him warm and encouraging. In so many ways, he was an irreplaceable spectator of the investment scene, a one-of-a-kind professional and learned gadfly, and his luminous presence will certainly be missed, not least by us.

While we are in a eulogistic mood, we'd like to say a few kind words about L. William Seidman, who died last week. Bill was an accountant who did a number of stints in Washington and somehow retained a remarkable impulse to speak the truth, no matter how politically incorrect or damaging to the folks he was working for. He was named head of the Federal Deposit Insurance Corp. in 1985 and was there when the great savings-and-loan bubble burst, which he handled with remarkable skill, dispatch and aplomb, shutting down dozens on dozens of bankrupt thrifts in the process.

Just as Louis Lowenstein battled for the individual investor, Bill Seidman waged a gallant fight on behalf of bank depositors. He also ran the Resolution Trust Co., set up in 1989 to snare what he could of the assets of failed thrifts to repay the billions of taxpayer funds spent on cleaning up the mess and here, too, he did a great job.

Bill was a man of many parts. Beyond his considerable government labors, his resume included vice chairman of Phelps Dodge, dean of the business school of Arizona State, talking head on TV, magazine publisher and author. We remember reviewing one of his books for the Sunday Times Book Review. As we recall, we described it as lively and informative, but the writing clunky. Monday morning we got a phone call from Bill, thanking us in his own inimitable clunky fashion.

They don't make them like him anymore -- and we can't think of a higher compliment.

MONDAY, MAY 11, 2009
A Surge in Botanists
Investors turn giddy with visions of recovery. Another glum employment report.

WHAT'S ALL THE EXCITEMENT ABOUT? SIMPLE: the economy has stopped falling off a cliff and -- Glory Hallelujah! -- it's now merely rolling briskly downhill. (We couldn't resist cribbing that description from Société Générale's Albert Edwards.) No guarantee, mind you -- economies being notoriously quirky -- that on the way down, if it espies another nice-looking cliff, the blamed thing won't decide to take a leap off that one.

You doubt that's reason enough for the stock market to go racing for the moon and, in just a couple of months, rack up a 37% gain? Come to think of it, you're right to be skeptical, and we feel sheepishly negligent. For not only are things getting worse more slowly, but equally as important in the remarkable revival of euphoria is that investors en masse, taking a leaf from Federal Reserve Chairman Ben Bernanke, have become budding botanists, able to espy green shoots of recovery in virtually every compost pile.

We're also a tad remiss in not mentioning that the dread stress tests, designed by the famed financial-testing firm of Bernanke, Geithner & Co. to determine how much of a pulse the nation's 19 largest banks still have, proved not to warrant much dread after all. Just by way of example, disclosure that Bank of America was in need of $34 billion in fresh capital promptly sent its shares soaring 17% on Wednesday. Who can blame shareholders for wistfully wondering how high the stock would have jumped had the bank needed $68 billion?

Geithner, Bernanke & Co., nothing if not adept at the care and feeding of investors, sought to take any possible sting out of what they found as they combed through the murky balance sheets of the banking behemoths (the Environmental Protection Agency might have been a better choice, considering the toxic material involved). They did so by cunningly contrived leaks, designed more for reassurance than revelation, in the weeks leading up to D- (for disclosure) Day as to the likely results of their examinations. By last Thursday, when the "scores" on the stress tests were actually released, those leaks had become veritable geysers.

As Philippa Dunne and Doug Henwood, proprietors of the Liscio Report, shrewdly observe, the highly publicized exercise made it look as if Washington's aim was "to restore confidence in the financial system before restoring the financial system." And the stress test itself struck them as being "precooked, with just enough talk of raising fresh capital to be credible, but not so much as to induce fear."

The presumed point of the two-month probe was to determine how the banks would hold up, were the economy to confound the expectations that the worst was over and, instead, suffer further declines. The "worst-case scenario," as the cliché goes, that the Fed crew was able to dream up was one in which the unemployment rate, already a hair under 9%, would rise to 10.3% next year, housing prices would fall another 22%, and the economy -- which has been shrinking at more than a 6% annual rate the past two quarters -- would contract at a 3.3% pace.

Undeniably, that represents something less than a heartening prospect. But to call it a worst-case possibility for the economy is a good deal less than a creditable postulate; rather, it bespeaks a surprising failure of imagination on the part of the same folks who've been able to spot plantlets of recovery in even the most unforgiving data.

Should worse come to worse, those fearless (or feckless?) forecasters allow that the major banks could take a $599 billion hit.

However, our financial guardians decided that it would be enough to dissipate any stress in banking by requiring the 10 big lenders that got less-than-passing grades to come up with a total of nearly $75 billion. That may sound like a lot of money -- because it is -- but to a populace that has become inured to seeing trillions tossed at the banks like confetti, it's not apt to cause a whole heck of a lot of angst.

While gratification at what the stress tests showed evoked widespread relief, touching on giddiness, not everyone was satisfied, much less elated. Ah well; there are always some chronic doubters in every crowd, we suppose.

é Just by way of example, Barry Ritholtz, chief of the eponymous Ritholtz Capital, seems more than a tad aghast at the idea that Messrs. Geithner and Bernanke, after duly weighing the results of their not-exactly-stressful tests, have concluded that banks will be fine in the future with 25-to-l leverage (Tier 1 capital equal to 4% of risk-weighted assets).

And while 25-to-l leverage may have been appropriate for depository banks in the relatively sedate days before the Glass-Steagall Act was dismantled, it seems more than a little much to Barry in "today's toxic-asset-laden banks." As to the cause of the seemingly generous standard, he suggests it may have something to do with the Treasury's new role as "shareholder and cheerleader for bank profitability." That explains at least why Tim and Ben never leave home without their pom-poms.

And then there's Chris Whalen, who, via his Institutional Risk Analytics, keeps a gimlet eye on the banks -- big, small and in between. Institutional Risk Analytics sounds wonderfully authoritative, but it's a mouthful, so we'll content ourselves with referring to the service as IRA. By whatever name, we find it always worth perusing, not least for Chris's caustic take on the financial scene.

As it happens, IRA performs its own stress tests on some 7,600 banks using the vital statistics compiled by the Federal Deposit Insurance Corp. and it has even fashioned a stress-test index. Its latest ratings of bank safety and soundness -- the handiwork of the outfit's Dennis Santiago -- tell a much less comforting tale than does the Washington version.

More specifically, IRA's bank-stress index, which stood at 1.8 at the end of the final quarter of '08, shot up to 5.57 in the first quarter of this year (the benchmark year, 1995, equals 1). Behind this sharp increase in stress is the startling number of the nation's banks -- 1,575 -- that wound up in the red in the first quarter.

In a follow-up report, Chris comments that it's "pretty clear that the condition of the U.S. banking industry is continuing to deteriorate, and we are still several quarters away from the peak in realized losses for most banks." Indeed, he adds, "We're not even on the right block to make the turn."

And, not surprisingly, he feels strongly that this isn't the time for investors to go ga-ga over financials. In case you're wondering, there's no evidence that he's color-blind and just can't see all those green shoots littering the financial landscape.

PERHAPS THE MOST ELOQUENT expression of how delusional Wall Street has become was its response to Friday's report on what happened to employment -- or, more importantly, unemployment -- in April. Payrolls shriveled by 539,000, less than the 550,000 to 600,000 guesstimates of the seers as well as March's initial tally of 633,000. That was enough for the choristers to start humming Happy Days Are Here Again.

A slightly more careful look suggests rather emphatically that they're not. The unemployment rate extended its doleful rise, hitting 8.9%, the highest level since 1983. The jobless ranks have swollen by 5.7 million since the recession got underway in December 2007, and there are now 13.7 million people out of work.

Moreover, our favorite measure of unemployment -- favorite because we think it a truer gauge -- is the Bureau of Labor Statistics' U-6, which includes the likes of workers laboring part-time because they can't land full-time jobs, rose to a fresh peak of 15.8%. That means 24.7 million people are effectively unemployed. It's a figure that doesn't get too much notice -- maybe it's just too depressing -- but it should.

For that matter, bad as it is, 539,000 doesn't do justice to the severity of the payroll shrinkage. For one thing, it was puffed up by the 72,000 federal census takers signed on by Uncle Sam. And for another, it includes 226,000 supposed jobs, or 60,000 properly adjusted, courtesy of what David Rosenberg calls the Alice-in-Wonderland birth/death model. Ex this pair of extraordinary items, he points out, the headline number would approach 670,000.

In one of his valedictory scribblings (David's leaving Merrill Lynch and returning to the glories of his native Canada and money management), he also notes that private-sector employment sank by 611,000 in April, and did so across a wide swath. "The data," he contends, "just don't square with the conventional wisdom permeating the investment landscape."

Take the notion that we're enjoying a commodities boom; If so, it seems more than passing strange that natural resources shed 11,000 jobs last month. Or, how do you reconcile the burst of enthusiasm for leisure/hospitality stocks with 44,000 busboys, bell captains and bartenders being laid off? Or retailers' giving pink slips to 47,000 workers -- atop the 167,000 slots they let go in the first quarter -- if they thought anything more than the timing of Easter underpinned their April results?

Looking ahead, David scoffs at the idea that the "jobs data are about to get better because the markets have enjoyed a nice two-month rally." Among the reasons he's skeptical: the still record-low workweek, at 33.2 hours; the 66,000 downward revision to the back data (which, he avers, tends to feed on itself); the 63,000 slide in temp-agency employment; and the high levels of both initial and continuing jobless claims.

All of which, he believes, foreshadow a further 550,000 payroll plunge when the May data roll out early next month.

To David, as to us, the present buoyant mood on the Street is obviously more the result of rose-colored glasses than of green shoots.

MONDAY, MAY 4, 2009
Shotgun Wedding

A bumpy road ahead for the latest incarnation of Chrysler. Stephanie Pomboy's acerbic take on corporate profits, the stock market and the economy.

LEADING A GREAT NATION, AS BARACK OBAMA confessed in his review of his first hundred days as president, is no piece of cake. Whether it's the Taliban running wild in Pakistan or the Republicans running wild in Congress, the Iraqis shooting each other up in Baghdad or Joe Biden shooting off his mouth in D.C., erstwhile world-class banks begging for handouts, the swine-flu epidemic, the dented remnants of our auto industry desperately embracing bankruptcy or flirting with it -- it's one darn stressful thing after another.

And we haven't even mentioned trying to settle into still-unfamiliar digs with both a new dog and a mother-in-law.

The ceaseless pressures, of course, come with the territory, and not only for Mr. Obama. Recession and its attendant miseries are rife around the globe and putting great strain on leaders virtually everywhere. Our new president ought to thank his lucky stars he has a smart and spirited spouse to help meet the monumental challenges confronting him.

The importance of such a helpmate is too often neglected in the calculations of political pundits, regardless of whether they lean left or right or simply wobble in the center, as they assess the performance of various leaders. But the leaders themselves, to judge by their actions, are highly conscious of it.

Which explains, for instance, what easily could be misconstrued as the erratic, even naughty, behavior of Silvio Berlusconi, the prime minister of Italy -- behavior, we might add, that prompted his wife to write a scathing letter complaining about it to an Italian news service. More specifically, she objected, and not for the first time in a public forum, of his consorting, as the New York Times put it, "with young and chesty women."

Far from acting on any salacious impulses, we're sure it is merely Mr. Berlusconi's way of catching his wife's attention (she, incidentally, is 20 years younger than he and extremely attractive), to remind her how much he needs her to share the burdens of office. We can only infer that the Italian citizenry was quick to grasp his true motives, since the airing of his wife's suspicions hasn't diminished his popularity one bit (eat your heart out, Bill Clinton).

In like vein (or is it vain?), Jacob Zuma, about to become president of South Africa, has gone to great lengths to be prepared for the rigors of his new post by having two wives (the second married only last year) and, according to The Wall Street Journal, is eyeing a third, in keeping with his insightful recognition that you can never have too much help in coping with the multitude of economic, political and social problems that confront a country's leader these days.

As the Journal piece notes, there is still the thorny question as to which of the trio will be South Africa's First Lady, Second Lady or Third Lady. Maybe they'll take turns.

Except for those who are keen on foreign affairs, the denizens of Wall Street are apt to give scant notice to heads of state and their trials and tribulations, much less their spousal arrangements. And who can blame them? After all, no one ever got rich worrying whether a president or a premier of some alien country was faithful or a philanderer.

For that matter, the only marriages Wall Street has ever paid much heed to are the nuptials -- bereft of even a hint of romance -- known as mergers. And there has been a notable paucity of those of late as tough times in the economy, the credit markets and the stock market sharply curbed the corporate urge to merge.

Comes now the shotgun wedding -- proposed but not as yet consummated -- between bankrupt Chrysler and the Italian auto maker Fiat, with a grim Uncle Sam as matchmaker and dowry donor. It's hardly the kind of arranged joining together that sends shouts of "Whoopee!" jubilantly echoing through the Street.

And for several good reasons, not the least of which is that the lenders -- JPMorgan , Citigroup , Goldman Sachs , Morgan Stanley et al. -- who provided Chrysler with $6.9 billion in supposedly secured debt -- are to get back only $2.25 billion, or roughly 33 cents on the dollar. A small bunch composed mostly of hedge funds that bought some of those loans from the banks at a sharp discount balked at the offer and find themselves, for the moment, out in the cold.

The holdouts huff that their rejection of the government's offer is based on principle. Perhaps they mean principal, since reportedly they were willing to accept 36 cents on the dollar. Chrysler debt had been trading for less than half that much, so maybe the better part of wisdom would have been to take the money and run.

Crucial to the deal is Chrysler escaping quickly from the clammy grip of bankruptcy, and quickly, in this instance, means several months, not the years it took airlines in a similar bind to emerge.

Once it does, the company will be 55% owned by the United Auto Workers' retirement fund and something between 20% and 35% by Fiat, with Washington a heavy presence on the liberated company's board. Fiat is bringing its know-how on making small, gas-efficient cars -- but no dough -- to the party.

That expertise, and even more so, its line of agricultural and construction equipment, have stood the company in very good stead in recent years. But in the first quarter of '09, they proved no match for the one-two punch of recession and the big skid of the global auto market. Fiat wound up in the red, its car sales off 18% from the like year-earlier quarter.

Even if the stay in bankruptcy is brief and the merger goes smoothly -- and those are big ifs -- the great unknown is whether Americans will go for a small non-gas-guzzler. And on that score, history and a continuing infatuation with jalopies that boast size and muscle stack the odds against it.

In short, the road ahead for this latest incarnation of Chrysler looks bumpy, especially if, as we suspect, the economy is likely to take its own sweet time getting back in the groove. But, for all that, we still wish it a bon voyage.

THE INCOMPARABLE STEPHANIE POMBOY, no stranger to this space, week in week out spices her intriguing insights with sprightly irreverence. But she was really in top form in the latest edition of her worthy MacroMavens commentary. So we thought we might pass along some of her bon thoughts and bon mots that enlightened and tickled us.

Under the elegant title "Burping Out Loud," Stephanie stands the conventional wisdom on its head on corporate profits and the stock market. We should warn you that recovery isn't currently a prominent part of her lexicon.

For openers, she doesn't buy the growing conviction that what we've been witnessing is more than a bear-market rally.

And her Exhibit A is the amount of financial pain being priced into the credit markets. She readily grants that spreads have narrowed, but notes that they remain "far, far wider than they were at the 2003 cycle lows."

The complacent reaction among the investment cognoscenti is that the credit markets are wildly oversold. More likely, she sniffs, it has something to do with the fact that "an overwhelming portion of some $8 trillion in mortgage debt (or 80% of the total) is teetering on the edge of, or in some state of, negative equity."

As to the Fed's claim that the equity of homeowners as a group stands at 43%, she points out that what the Fed neglects to tell you is that roughly a third of them have their houses free and clear. Lo and behold, some basic arithmetic reveals that 67% of homeowners with mortgages have equity of less than 15%. That, Stephanie comments drily, suggests the "destruction priced into the credit markets hardly seems out of whack with potential reality."

And while, thanks to "the transfer of toxic assets to taxpayers" and the magic of accounting legerdemain, the scarred financials to some significant extent may be spared further pain, the same, alas, can't be said for the nonfinancial sector. Little recognized, she insists, is how much the extraordinary gains in domestic nonfinancial profits from the low in 2001 to the peak in 2006 -- a stunning rise of 388% -- owed to the housing bubble.

"Who in his right mind," she asks, "would believe that explosion in profits during the housing-bubble stretch a mere coincidence and, therefore, in no way subject to the same inexorable decline?" Since we delight in answering rhetorical questions, we'd reckon not more than 95% of the folks who contend we're in a new bull market.

Absent the powerful stimulus provided by the unprecedented boom in housing, she sees a huge hit still in the offing for nonfinancial corporate profits. A worst-case analysis is that such profits would sink to 2003 levels, a further decline of $450 billion, or 54%. Under a less exacting (and frightening) estimate, using their relationship to GDP, they would return to their pre-bubble percentage of 3.5%, which translates into a drop from here of $340 billion, or 41%.

At the end of the day, earnings, to state the obvious, are what makes the stock market go up -- and down. The prospect that they are in for a fresh drubbing is all the more ominous because it's unexpected. As Stephanie reflects, "bear-market rallies come and go, but what makes this one so noteworthy is just how far removed perception is from reality."

Shareholders Be Damned!

How the Washington gang brought Ken Lewis to heel and forced Bank of America to go through with its acquisition of loss-ridden Merrill Lynch. If everything's coming up roses, why are corporate insiders selling?

IT WAS JUST LIKE ONE OF THOSE NOIR FLICKS crafted from a Raymond Chandler novel. Imagine the opening scene. The time is last December. It's a cold night with the wind howling. The camera zooms in on a dimly lit room in the center of which sits a bespectacled banker sweating bullets, his body limp in a ratty chair, surrounded by a bunch of nasty-looking hombres wearing double-breasted suits, sinister fedoras and stone expressions.

One of the gang, obviously a capo, leans menacingly toward the banker and snarls, "Do what we tell you to do or you've had it!" The banker knows he's in the tightest spot he has ever been in his 62 otherwise wonderful years on this blessed earth. (Worse by far than the time he had to collar that killer disguised as a little old lady threatening to blow the bank up with a stick of dynamite "she" had sequestered in "her" bloomers.)

If he agrees to do what they want, he risks losing his good name and with it the irreplaceable precious fruits of a lifetime of earnest labor. If he doesn't...

The toughs grow impatient. Shaking with fear, the banker rises from the chair to face his remorseless tormentors. From the hidden depths of his being he somehow summons up the courage to declare in a suddenly strong and unwavering voice: "I'll take it up with my board."

OK, so this audacious show of verbal defiance may not quite reach the level of "Give me liberty or give me death." But we live in a less eloquent age than did Patrick Henry and, remember, our hero is a banker, not a fiery patriot. And it takes a very brave man to tell his board anything more substantive than what's on the menu for lunch.

Moreover, this was no celluloid chiller. It was the real thing. The banker, as you may have guessed, is Ken Lewis, CEO of Bank of America . And the bad guys harassing him are Hank Paulson, then Treasury secretary, and Ben Bernanke, head of the Federal Reserve, aided and abetted by shadowy henchmen.

The script for this stranger-than-fiction melodrama was provided by that rabid (and fiercely ambitious) bulldog New York state attorney general, Andrew Cuomo. Mr. Cuomo, back in February, had been grilling Mr. Lewis on what his keen canine eye detected as another indignity -- the awarding of $3.6 billion to employees of Merrill Lynch, the giant brokerage firm acquired by BofA on Jan. 1 of this year.

What had Mr. Cuomo frothing at the mouth was that the $3.6 billion was shelled out even though Merrill suffered losses upwards of $15 billion in 2008's fourth quarter alone.

We must point out how fortuitous it was that losses had not reached, say, $30 billion, since by the peculiar calculus being used to reward red-ink, that would have boosted Merrill's bonus tab to $7.2 billion. And enraging the chronically enraged Mr. Cuomo all the more was that the bonuses were distributed even while the losses manifested themselves but were not disclosed, least of all to the bank's shareholders.

According to Mr. Cuomo's dour narrative, the product of four hours of interrogation of Mr. Lewis, the merger with Merrill was proposed in September after two days of due diligence (sounds more like due negligence to us). It gained approval of shareholders of both companies on Dec. 5. Barely a week later comes the revelation: Merrill's losses were spiraling ever higher, causing an increasingly frantic Mr. Lewis to weigh calling the marriage off.

He reckoned he could legally do so thanks to MAC (material adverse event), recognizing that $7 billion more in losses than had been projected when the merger was agreed to was a very big MAC, indeed. He diffidently informed the powers-that-were of his plan to nix the nuptials and was summarily summoned to powwow with them in Washington that very evening. And it was there that Messrs. Bernanke and Paulson put the screws to him to not break the deal lest he trigger a systemic calamity.

On Dec. 21, Mr. Lewis, still of a mind to ditch the merger, communicated his determination to Mr. Paulson, who bluntly warned that he would give the boot to Mr. Lewis and his board unless the acquisition went through. To that bald threat, Mr. Lewis' retort was a resounding purr: "That makes it simple. Let's de-escalate."

And de-escalate he did. The merger became a done deal right on schedule. To help salve any hurt feelings, Bank of America got $118 billon in loan guarantees from rich Uncle Sam to absorb any potential losses from Merrill.

We don't mean to beat up on Mr. Lewis. We haven't the faintest doubt his refusal to stand tall was not prompted by fear of being fired. Heavens to Betsy, no. Rather, it likely sprang from too much heart: a deep-seated solicitude for his shareholders and a touching desire to shield them from the awful truth about the Merrill acquisition. Sure, they're the putative owners of the company, but best not to upset them over something they'd inevitably learn about in due course when those losses started to eat up the bank's bottom line.

As to Mr. Paulson and Mr. Bernanke, we're sure they, too, are decent souls and value truth, except when it's inconvenient. Despite vows of transparency and all that blah, they were more than complicit in a rather shabby cover-up; they conceived it, pursued it and made certain through means fair and foul it was carried out.

Why, then, should anyone worry about the results of the bank stress tests slated to be released early next month and have inspired so much anticipatory dread on Wall Street? As one wise cynic asks, given its demonstrated devotion to the banks and the financial markets, do you really think that the Washington gang is going to throw anybody of significance under the bus?

SINCE WE ENDED THE LAST ITEM with a question (two, to be precise), we feel, just in the interest of interconnectivity, we should begin this one with a question: How come, if the stock market is telling us everything is coming up roses -- the Dow has shot up 23% since March 9, the S&P 500 28% and dear old Nasdaq 34% -- corporate insiders are selling like there's no tomorrow?

Much as anything, we suspect, what has given legs to this rather improbable but undeniably impressive rally is the rally itself. Let us assure you that we haven't gone mystical (we've enough sins to atone for without adding still another).

Let's put it this way: As a stimulus for equities, come rain or come shine, just about nothing beats higher prices. They entice risk-shy investors, including or especially (hard to decide) those who have been mauled by the bear market, to edge off the sidelines and get their feet wet.

Higher stock prices (as Ken Lewis might say) escalate expectations and earnings estimates of analysts, most of whom are, in any case, reflexively bullish. They give the yak-yaks on Tout TV something to crow over and excite their innocent viewers.

In other words, they serve to inject a dose of euphoria into the investment atmosphere, particularly after a long and morose stretch of gloomy markets, like last year's.

Of course, rising equity prices also inspire less chimerical reasons for the quickened interest in the stock market. They are widely taken by institutions, individuals and kibitzers as a welcome harbinger of economic recovery, and there's been a lot of that lately. Our own feeling, as you may have gleaned, is that such hopes are heavily laced with wishful thinking.

Leading us to the question with which we began these musings: If those now infamous shoots of recovery are popping up all over, why would insiders be so aggressively dumping stocks?

Yet, they indisputably are. According to a study prepared for Bloomberg by Washington Service, a research outfit, directors, officers and the like have sold $353 million worth of stock in this fading month, or 8.3 times the total bought. As a matter of fact, according to the firm, insider purchases of $42.5 million are on track to make April the skimpiest month for such buying since July 1992.

The pace of selling in the first three weeks of this month, incidentally, was the swiftest since the market peaked and the bear came out of hibernation with a vengeance in October '07.

We're quite aware that insiders are not infallible. But they are, after all, in the front lines of commerce and industry and so presumably have a better fix on the economy and the prospects for recovery than analysts and economists, whether of macro or micro persuasion.

And just as they wouldn't be laying off people in such extraordinary numbers if they thought their business was about to rebound soon, they'd be loath to liquidate their holdings in such an emphatic way if they espied a turnaround in the offing.

It all boils down to this: Nobody ever sold a stock because they thought it would go up. And as a group, corporate insiders obviously are scarcely enthusiastic about the prospects for a genuine bull market.

MONDAY, APRIL 20, 2009

Don't Bank on It

The banks have been the spark plug of this powerful stock-market rally, but past may not be prologue. Goldman's missing month.

THE AMAZING RANDI. WE'D NEVER HEARD OF THE CHAP UNTIL last week, when we were indulging in an old habit that began way back when we were a copy boy (the journalistic equivalent of a galley slave) and took to passing some of the grudgingly little downtime allotted to us poring over the obituaries. Our interest was not born solely of innate ghoulishness, but nurtured also by the fact that an obit provides a highly compressed and often fascinating biography of those noteworthy souls who have recently departed from the ranks of the quick.

In this instance, the subject was not the Amazing Randi, but John Maddox, a British editor of considerable renown who transfigured a stuffy magazine named Nature into a scintillating science journal. Mr. Maddox, by all description an unflaggingly imaginative and energetic editor broadly versed in the sciences, was graced with a flair for the unorthodox and a sharp nose for bamboozle.

Back in the late 1980s, he published a piece by a French doctor claiming remarkable qualities for an antibody he had studied, but only on the condition that an independent group of investigators chosen by Mr. Maddox monitor the doctor's experiments. Among the investigators he chose was the Amazing Randi (nee James Randi), a professional magician whose knowledge of science may have been limited but whose knowledge of hocus-pocus was peerless. The poor doctor's goose was cooked.

Mr. Maddox's engaging inspiration got us to thinking, gee, wouldn't it be great to have an Amazing Randi handy to help uncover the voodoo that has caused investors virtually en masse to suspend disbelief. We're referring, of course, to their marvelously revived tendency to slip on their rose-colored glasses, which for so long had been gathering dust on the shelf, when viewing corporate fortunes or the economy at large.

Take for example, dear old Goldman Sachs , which has enjoyed a mighty burst of enthusiasm among Street folk that has sent its shares sprinting to the vanguard of this smashing stock-market rally; an enthusiasm, moreover, that has spilled over to other banks and their financial kin. No argument, the firm has handsomely outperformed its few surviving rivals, none of which is blessed with Goldman's deft trading skills or tight Washington connections.

Goldie reported earnings of $1.8 billion for the first quarter. In doing so, it got a lucky boost from its switch from a fiscal year ending November to a calendar year. The shift came in response to statutory fiat, as part of Goldman's change to a commercial bank, a prerequisite to gaining eligibility for all those lovely billions in loans and guarantees the government has been showering on banks.

That $1.8 billion in March-quarter profits was a heap more than its analytical followers expected, and, as intimated, a sparkling demonstration of Goldman's vaunted trading agility (from what we can gather, it made a bundle in part by timely shorting bonds). The switch in its fiscal year took December out of the first quarter and made it an isolated, stand-alone month, relegated to an inconspicuous assemblage of bleak figures far in the rear of the company's 12-page earnings release.

As it happens, Goldman lost some $780 million in December, a tidy sum that obviously would have taken a lot of the gloss off its reported first-quarter performance. And, who knows, it might have even drained some of the zing that the surprisingly good results lent the stock.

But, in any case, the very next day, the spoilsport credit watchers at Standard & Poor's threw a bit of cold water on the shares by venturing that, in light of the soggy economy and unsettled capital markets, it would be "premature to conclude that a sustained turnaround" by Goldman was necessarily in the cards.

The financial sector, as even the most cursory spectator of the investment scene doubtless is aware, has provided the crucial spark to this powerful bear-market rally. And, in particular, the return from the very edge of the abyss by the banks in the opening months of this year has revived fast-swelling bullish sentiment.

The question naturally arises: How did the banks, so many of which seemed to be slouching toward extinction, get their act together to the point where they were in the black in January and February?

In search of an answer, we turned up an intriguing explanation for this magical metamorphosis by Zero Hedge, a savvy and punchy blog focusing on things financial. Not to keep you in suspense, Zero Hedge fingers AIG , that repository of financial ills and insatiable consumer of taxpayer pittances, as the agent of the banks' miraculous recovery.

But not quite the way you might think. As Zero Hedge explains, AIG, desperate to hit up the Treasury for more moola, decided to throw in the towel and unwind its considerable portfolio of default-credit protection. In the process, the badly impaired insurer, unwittingly or not, "gifted the major bank counterparties with trades which were egregiously profitable to the banks."

This would largely explain, according to Zero Hedge, why a number of major banks actually, as they claimed, were profitable in January and February. But the profits, it is quick to point out, are of the one-shot variety, and, ultimately, they entailed a transfer of money from taxpayers to banks, with AIG acting as intermediary.

Lacking any deep familiarity with the arcana of credit swaps and the like, we can't swear to the accuracy of this analysis. But shy of conjuring up the Amazing Randi and have him unveil the truth, it strikes us as plausible -- and easily as persuasive as many of the various explanations we have come across for the surprising and rather mysterious turn for the better by the banks.

If by chance it proves out, it just might act as a sobering influence, and not just on the financial sector.

FRANKLY, WE'RE AS BORED WITH THIS BEAR market as anyone. And we fully understand, after a year of brutal pummeling, the frantic hopefulness with which investors respond to the inevitable bounce, especially when it's as robust as this one has been.

And we understand, too, their eagerness to grasp at the flimsiest hint of recovery and to strain to put a good face on every twist and turn of the economy, no matter how ugly. But we fear -- as some tunesmith crooned long ago -- wishing won't make it so.

There's nothing obviously wrong when investors, confronted by what seems to be a sold-out market and tired of sitting on their hands, decide to take a fling on a bear-market rally. And it certainly has been rewarding for virtually anyone who a month or so ago did just that. But an awful lot of folks don't have the time, the discipline, the nimbleness or the spare cash for that sort of hit-and-run investing.

And the danger resides in being carried away by a momentary spate of quick gains and turning a blind eye to the riskiness of the market, which now is a heck of a lot greater, if only because the advance has carried price/earnings ratios to elevated levels -- something above 20 on the Standard & Poor's 500 -- or to the critical negatives in the economy.

David Rosenberg of Bank of America/Merrill Lynch (we can't believe we said the whole thing) last week offered some worthwhile observations on the stock market and the economic landscape that just happen to buttress our own reservations.

He points out that the two groups that paced the sharp upswing were financials and consumer cyclicals, in which there are, respectively, net short positions of 5 billion and 2.7 billion shares. Which strongly suggests that not an insignificant part of the rally has been provided by shorts running for cover.

He also points out that the Russell 2000 small-cap index is up 36% since the March low, and has outperformed the S&P by some 980 basis points. As David says, "the last time it pulled such a massive rabbit out of the hat" was in the stretch from late November to early January, and the major averages proceeded to make new lows two months later.

Another amber light he spots is investor confidence. Over the past five weeks, he reports, Rasmussen, which takes a daily reading, has seen its investor-confidence index surge 32 points, an unprecedented climb in so short a span. This could be, he suspects, a "fly in the ointment for a sustained equity-market rally."

David has four markers that will signal to him that the economy is finally making the turn and starting an extended expansion. The first is home prices. The second is the personal-savings rate. Marker No. 3 is the debt-service ratio, and No. 4 is the ratio of the coincident-to-lagging indicators of the Conference Board.

Aggregating those four markers, he calculates that we are roughly 44% of the way through the adjustment process. That is a tick up from where we were last month. However, the improvement, he laments, has been very modest and very slow.

We should add that he also stresses that it's critical for both the economy and the market that payrolls stop shrinking. All the talk about jobless claims "stabilizing" is so much poppycock, he snorts. That number of claims, he notes, is still consistent with monthly payroll losses of around 700,000. As with industrial production, which is also in a vicious slump, employment must stop falling before a recession typically ends.

"Call us when claims fall below 400,000," he says, which is his estimate of "the cut-off for payroll expansion/contraction."

Until then, he warns, "the recession will remain a reality. Rallies will be brief, no matter how violent, and green shoots are a forecast with a very wide error term attached to it."

MONDAY, APRIL 13, 2009

More Meltdown

It's only the middle innings of the great housing bust. Three cheers for Mr. Bass.

CARL BASS IS OUR KIND OF GUY. LET US HASTEN TO confess, we don't know Mr. Bass, apart from the fact that he earns his daily bread running Autodesk , which does some $2 billion a year designing and servicing software, and whose stock was a hot number until it got killed by the bear market (12-month high, 43; 12-month low, a hair under 12; current price, 19 and change). In other words, until last week Mr. Bass was, so far as we were concerned, just another corporate honcho.

What brought our attention to Mr. Bass and won him our instant esteem was an item in the latest screed by our Roundtable buddy and indefatigable tech-watcher, Fred Hickey. More specifically, it directed us to February's conference call with analysts, occasioned by release of the company's earnings for the final quarter of its fiscal year, ended Jan. 31.

Mr. Bass kicked off the proceedings, as Fred noted, by telling the telephonically assembled analysts the bad news. Not only were the bum results a far cry from what he had grown accustomed to, but, he sighed, "the global economic downturn is now significantly impacting each of our major geographies and all of our business segments." The turn for the worse, he made it clear, included emerging countries where business had been robust, like China and India. And, he added, the immediate outlook was more than a touch murky.

None of which deterred an analyst, champing at the bit for good news, from asking whether there were any regions left to exploit that so far had proved immune to the global slump. "Well," responded Mr. Bass, "I think Antarctica has been relatively immune, maybe Greenland, as well, although not Iceland, as we all found out."

Besides the pleasure of finding a CEO with a sense of humor and, equally important, one who doesn't suffer foolish questions gladly, the exchange struck us as symptomatic of the insatiable yearning of Wall Street, in general, and sell-side analysts, in particular, to uncover some sliver of bullishness beneath the dismal surface of the unvarnished truth.

That touching tendency to mistake dross for gold has been much in evidence in this spirited stock-market rally, five weeks running and still kicking. And it has by no means been restricted to analysts; it has infected market strategists and portfolio managers, to say nothing of economists (which is about all one can say about them without resorting to invective).

Even the most unfavorable news, from the relentless shrinkage in corporate earnings to the inexorable rise in unemployment, is all too often blithely shrugged off with the observation that "it wasn't as bad as expected," while neglecting to identify by whom. Nor does it seem even passing strange to the growing ranks of wishful bulls that banks that went begging to Uncle Sam for bailouts and were rewarded with billions have magically discovered, come the earnings reporting season, that, by gum, they're suddenly remarkably solvent (or should we say, seemingly solvent; just disregard several trillion dollars' worth of ugly stuff on their collective balance sheet, please).

We realize, of course, that Washington is on the case. And we feel for the poor, anonymous soul charged with the task of almost daily sending aloft still another trial balloon to rescue the banks. But we suppose she or he does gain a measure of satisfaction from the fact that even if the balloon goes nowhere but poof, more often than not it provides a fresh fillip to the markets.

Indeed, if anything, this whirlwind activity by the administration's economic team, this profusion of blueprints for recovery, so many of which are rapidly discarded or revised or embroidered, by all rights should be giving widows and orphans the jitters rather than prompting them to take the plunge. For it smacks of confusion or panic or both.

Believe us, we're impressed by the vigor of the rally and it's gone much further and faster than we expected. And we think those hearty types agile enough to have played the big bounce deserve a big pat on the back. That doesn't mean, though, that we think it's for real or sustainable.

What would cause us to change our minds is some credible evidence that the dark forces that wrought this dreadful recession are starting to dissipate. Instead, it pains us to relate, we see rough going in the months ahead. And that suggests to these rheumy eyes a disappointed market resuming its skittish ways.

BACK IN MARCH OF LAST YEAR, WE RAMBLED on about a piece on housing by T2 Partners, a New York money-management firm. The report weighed a ton, but its heft was made more than palatable by a profusion of easily accessible bold-face tables and charts and a lucid text happily free of equivocation. We waxed enthusiastic about the analysis (and no, we hadn't been drinking). It was, of course, quite bearish.

Well, the T2 folks recently issued a follow-up to that prescient analysis, again festooned with nifty graphics and graced with straight-from-the-shoulder narration. They're still bearish and still, we think, on the money. That original report, incidentally, has blossomed into a book by Whitney Tilson and Glenn Tongue, who run T2 (you'll never guess how they got the name for their firm); the book is called More Mortgage Meltdown and is slated to be published next month (end of public-service announcement).

In their latest tome, the T2 pair begin with a crisp summary of why and how housing collapsed, in the process wreaking havoc on both the credit market and the economy. Among the usual culprits, most of which by now have had the cruel harsh spotlight of publicity turned mercilessly on them, Wall Street comes in for special mention and, in particular, its critical role in disseminating collateralized debt obligations and asset-backed securities, or -- as they're respectively, if no longer respectfully, known -- CDOs and ABSs.

Those structured monsters, note Tilson and Tongue, were a "big driver" of the surge in financial outfits' increasingly bloated profits. To produce ABSs and CDOs, Wall Street needed "a lot of loan product," of which mortgages proved a bountiful source. It's unfortunately quite simple to generate ever-higher volumes of mortgages. All you need do is lend at "higher loan-to-value ratios, with ultra-low teaser rates, to uncreditworthy borrowers, and don't bother to verify their income and assets."

The only catch is that the chances of such a mortgage being paid off are just about nil, a trifling caveat that bothered neither lenders nor pushers one whit. The result of that cavalier approach, as we all have reason to lament, in the end has been anything but happy: Today, mortgages securitized by Wall Street represent 16% of all mortgages, but a staggering 62% of seriously delinquent mortgages.

As for home prices, the T2 duo reckon, the unbroken monthly decline since they peaked in July 2006 will continue to make buyers hesitant and sellers desperate, while the "tsunami of foreclosures" will maintain the huge imbalance of supply over demand. In January, they point out, distressed sales accounted for a formidable 45% of all existing home sales and, they predict, there will be millions more foreclosures over the next few years.

They expect housing prices to decline 45%-50% from their peak (currently, prices are down 32%) before bottoming in mid-2010. They warn that the huge overhang of unsold houses and the likelihood that sellers will come out of the woodwork at the first sign of a turn argues against a quick or vigorous rebound in prices. Nor is the economy likely to provide a tailwind, since T2 anticipates it will contract the rest of this year, stagnate next year and grow tepidly for some years after that.

The first stage of the mortgage bust featured defaulting subprime loans and their risky kin, so-called Alt-A loans. Together with an additional messy mass of Alt-A loans, the next phase will be paced by defaulting option adjustable-rate mortgages, jumbo prime loans, prime loans and home-equity lines of credit.

All told, Tilson and Tongue estimate losses suffered by financial companies from mortgage loans, further swelled by nonresidential feckless lending, will run between $2.1 trillion and $3.8 trillion; less than half of that fearsome total has been realized. Which is why, they contend, we're only "in the middle innings of an enormous wave of defaults, foreclosures and auctions."

We don't want to leave you with the impression that the T2 guys are cranky old perma-bears. They aren't. At the end of their report they point out that "the stocks of some of the greatest businesses, with strong balance sheets and dominant competitive positions, are trading at their cheapest levels in years." Nothing wrong with the companies themselves, they believe; rather, the stocks got beat up mostly because of the cruddy market and soft economy. Victims, as it were, of the bearish trends.

The names they like that fall into that not exactly overly crowded category are familiar enough: Coca-Cola , McDonald's , Wal-Mart , Altria , ExxonMobil , Johnson & Johnson and Microsoft . That doesn't exhaust their portfolio picks, but those are the ones they obviously think are best suited to ride out any resurgence of the bear market.

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