4th of July R & R

Out for a few days 4th of July R & R.  I'll be back with a post next Wednesday.

President Obama-My Take.

Yesterday I published a Wall Street Journal editorial written by Karl Rove on the President's reelection prospects. Mr. Rove is certainly not neutral on this subject and Democrats could likely find polls more favorable to the President that would indicate that he is not in as serious trouble as Mr. Rove depicts.

I have been thinking for the past several months on whether the President can be reelected. Long time readers and clients know that I prefer to deal with the world in probability. I dislike supposed certainty such as when somebody says something like "President Obama will be defeated next year". Instead I prefer to rephrase such statements into something along these lines, "What is the likelihood of the President winning in 2012?" At the beginning of the year I would have given the President something like 65-35 favorable odds on winning in 2012. I currently think that the President's chances are less than 50-50. Here's why and what I think it means for markets for most of the next 2 years.

Forget polls it's the Electoral College that matters: In 2008 President Obama won 365 electoral votes. Almost 100 more than the necessary 270 to win. Do to reapportionment after the 2010 census at least 8 electoral votes will swing from states that the President carried to states that Republican John McCain won in 2008. This would not be enough to swing the election last time or in 2012. However, it does eat into the President's margin of victory.

In addition the President carried 6 states {Indiana, Florida, Nevada, Virginia, Colorado & North Carolina} that have been traditionally Republican and account for 83 electoral votes. The President is unlikely to have the same success this time in these states as he did in 2008. Should a Republican challenger run the table in the next election in these states and carry all of the states that McCain won in 2008 then the President's margin of victory is reduced to just 6 votes.

That leaves the battleground states of Ohio, Wisconsin, Iowa, Pennsylvania, New Hampshire and Maine. These states have between them 62 electoral votes. In my above scenario the President would need to run the table all 6. It is likely that he will win Iowa, Pennsylvania, New Hampshire and Maine. That leaves Wisconsin and Ohio as the hinge states in the next election. Both states have been battered by the national economy with Ohio being one of the hardest hit northern states.

It's the economy stupid: The next election will be won by which candidate can get the most people {particularly in the battleground states} to see their point of view. The President likely wins next year if people see evidence that the economy is improving and he can run a campaign similar to Reagan's "Morning in America" theme of 2004. On the other hand he loses if a Republican challenger can look into a camera sometime in the fall of 2012 and ask Reagan's famous question, "Are you better off today than you were four years ago?" If the election were held today I think Obama would lose this argument by a large margin.

Decisions, decisions: Some of the President's political decisions could come back to haunt him. Healthcare reform is controversial and deeply unpopular with wide segments of the population, as has been the stimulus plan and the Wall Street and auto industry bailouts. He seems to be largely absent as well on the current deficit and deficit ceiling debates. Currently the President is also catching hell from both the Right and Left for his decision to go to war in Libya. Perhaps the individual weight of any one of these decisions might not hurt him, combined they are likely to create a toxic brew that could prove fatal to his reelection chances.

What it means for investors? First let's discuss what could bail him out which is if the Republicans nominate a candidate that can be labeled to be of the Tea Party branch of the Party. Then it is likely that most of this article's discussion is moot. A Michelle Bachman or Ron Paul candidacy {or third party candidacy that syphons off Republican votes or resources} could make the President's reelection campaign much easier. The problem for him right now is that the Republicans seem serious about nominating somebody with gravitas and experience which is why Mitt Romney is doing so well in Republican and independent voter polls.

It seems to me that the President has two courses. He can veer left hoping that by shoring up his base and more liberal minded independents that he can carry the same states he won in 2008 or not lose those that are the most important to him via the Electoral College. This would likely continue to be a drag on economic growth and a headwind for the stock market. Or the President could take a page out of former President Clinton's book, abandon the far left of his party and look for issues that he can work with a Republican led Congress. Such a swing towards the center could shore up his standings with independents that deeply desire to see Washington start to take a serious view of our many domestic problems. I think this would be in general positive for both stocks and the economy. This is also the more practical and least risky road for the President to take.

A few final thoughts: Rove pointed out that 17 months is an eternity in politics. For the President though the political clock is ticking. His fate will likely be sealed by where economic and job growth is by this time next year. The action this week of releasing 30 million gallons of oil from the strategic petroleum reserve smacks of economic panic on the Administration's part. Unfortunately for the President the Republicans now smell blood in the water. It is probably not coincidence that Republican leaders walked out of the debt ceiling negotiations on the same day this announcement was made. That will likely mean that the President will have to come much more to the center than he would like if he chooses to take that route.

Democrats have a long history of eating their own. If the economy continues to stall and the President's poll numbers plummet don't be surprised if others in the party consider throwing their hat {or handbag in the case of Mrs. Clinton) in the ring.

Karl Rove on The President

A timely editorial last week over at the Wall Street Journal's editorial page by Karl Rove regarding President' Obama's reelection prospects. Today I am publishing an excerpt of it along with my highlights. Tomorrow I'll publish my own thoughts on this and what it could mean for the market over the rest of the year.

Why Obama Is Likely to Lose in 2012 By KARL ROVE

President Barack Obama is likely to be defeated in 2012. The reason is that he faces four serious threats. The economy is very weak and unlikely to experience a robust recovery by Election Day. Key voter groups have soured on him. He's defending unpopular policies. And he's made bad strategic decisions.

Let's start with the economy. Unemployment is at 9.1%, with almost 14 million Americans out of work. Nearly half the jobless have been without work for more than six months. Mr. Obama promised much better, declaring that his February 2009 stimulus would cause unemployment to peak at 8% by the end of summer 2009 and drop to roughly 6.8% today....In Wednesday's Bloomberg poll, Americans believe they are worse off than when Mr. Obama took office by a 44% to 34% margin.

The last president re-elected with unemployment over 7.2% was FDR in 1936. Ronald Reagan overcame 7.2% unemployment because the rate was dropping dramatically (it had been over 10%) as the economy grew very rapidly in 1983 and 1984. Today, in contrast, the Federal Reserve says growth will be less than 3% this year and less than 3.8% next year, with unemployment between 7.8% and 8.2% by Election Day.

Mr. Obama also has problems with his base. For example, Jewish voters are upset with his policy toward Israel, and left-wing bloggers at last week's NetRoots conference were angry over Mr. Obama's failure to deliver a leftist utopia. Weak Jewish support could significantly narrow Mr. Obama's margin in states like Florida, while a disappointed left could deprive him of the volunteers so critical to his success in 2008.

President Obama is now at the mercy of policies and events he has set in motion.

.Mr. Obama's standing has declined among other, larger groups. Gallup reported his job approval rating Tuesday at 45%, down from 67% at his inaugural. Among the groups showing a larger-than-average decline since 2009 are whites (down 25 points); older voters (down 24); independents and college graduates (both down 23), those with a high-school education or less, men, and Southerners (all down 22); women (down 21 points); married couples and those making $2,000-$4,000 a month (down 20). This all points to severe trouble in suburbs and midsized cities in states likes Colorado, Indiana, Ohio, Pennsylvania and Nevada.

There's more. Approval among younger voters has dropped 22 points, and it's dropped 20 points among Latinos. Even African-American voters are less excited about Mr. Obama than they were—and than he needs them to be. For example, if their share of the turnout drops just one point in North Carolina, Mr. Obama's 2008 winning margin there is wiped out two and a half times over.

While many voters still personally like Mr. Obama, they deeply oppose his policies, and he tends to be weakest on issues voters consider most important.....And his health-care reform still holds its unique place as the only major piece of social legislation that became less popular after it was passed. According to yesterday's Pollster.com average of recent surveys, 38% approve of ObamaCare, while its survey average when the bill was passed in March 2010 showed that 41% approved.

Finally, Mr. Obama has made a strategic blunder. While he needs to raise money and organize, he decided to be a candidate this year rather than president. He has thus unnecessarily abandoned one of incumbency's great strengths, which is the opportunity to govern and distance himself from partisan politics until next spring.....

....In politics, 17 months can constitute several geological ages. Political fortunes can wax and wane. And weak incumbents can defeat even weaker challengers. At the same time, objective circumstances like an anemic economy and bad decisions not only matter; they become very nearly dispositive. Mr. Obama is now at the mercy of policies and events he has set in motion. He can't escape accountability, especially on the economy. He's not done yet, but it will be tough to recover....

Mr. Rove is the former senior adviser and deputy chief of staff to President George W. Bush.

Link: Rove on President Obama

Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved

an tSionna {6.27.10}

Longer term picture that I hope illustrates the point I keep making about trading ranges. Markets phase in and out between trending cycles {which can be bullish or bearish} and trading ranges. There's not enough space here today for me to go into my methodology for determining a trading range. Some of the factors though are money flows into and out of stocks, seasonality, market valuation as well as both the economic and political backdrop.

If you look at the chart above you can see a couple of things:

Bear market collapse in 2007 took a much shorter period of time to resolve itself than either of the bullish trending periods.

Since the market broke out to the upside in 2008, it has spent almost an equal amount of time between trending and range bound cycles.

Resolution to the upside since 2008 has occurred in the latter half of the year.

The economic news looks terrible right now and may only marginally improve over the summer. However, I think there are enough underlying positives that will enable stocks to move higher by the end of the year. While we may go a bit lower over the next couple of weeks, probability suggests that stocks will sort through their issues and cycle back into a bullish trending range either by late summer or early fall.

Of course, just in case, we have the defensive pages of the playbook handy as well!  :-}

*Long ETFs related to the S&P 500 in client and personal accounts.

PreMarks: Strategic Reserve

IEA announces US to release 30 million barrels of oil from strategic reserve.  Government is likely hoping that this news will trump the mostly bearish comments by Federal Reserve Chairman Ben Bernanke yesterday.  Traders first gush is to call this a political show.  

Market is going to open lower this AM.  We will have to watch how stocks react to support levels put in place last week.  Stocks are very oversold right now by our work so that may help a bit.

If I Had To Guess....

I don't claim to have any special prognostication powers on where the market might be headed the rest of the year.  What I am able to do is rely on over 20 years of experience and study which gives me some feel as to what I think is likely to occur the rest of the year.  The chart above shows in generalities what I think is likely to happen.  A few things.

1.  This view is probably consensus among those of us who have been in this game a few years.

2.  This is based on what we know today.  An unexpected event could throw this whole exercise down the drain.

3.  Because this is likely consensus there is a very real possibility that this whole scenario could be dead wrong!  Do not go trade or invest based on what you see here!  Remember the consigliere's maxim, "markets will do what they have to do to prove the most amount of people wrong"!

4.  While I think this is the most likely way things will occur it is not the only scenario out there and we will invest based on what we see and facts, not what we think ought to occur.  Translation:  I reserve the right to change my mind where events warrent!

5.  I still think stocks have the potential to experience a total return in 2011 between 8-12%.  Note again the usage of the words "potential to experience " as opposed to "will experience" in the previous sentance! 
*Long ETFs related to the S&P 500 in client and personal accounts.

Earnings Revisited

Chart of the Day revisits earnings this week: 

According to Chart of the Day, "One positive for the stock market has been the dramatic rise in earnings since early 2009. For some long-term perspective, today’s chart illustrates inflation-adjusted, as reported S&P 500 earnings since 1900. One period that stands out is the 92% plunge from the Q3 2007 peak to the Q1 2009 low which brought inflation-adjusted earnings to near Great Depression lows. Since its Q1 2009 low, S&P 500 earnings have surged (up over eleven-fold) and are currently fast approaching credit bubble peak levels. It is interesting to note that the only time that inflation-adjusted S&P 500 earnings have been higher than current levels was a relatively brief 18-month period from late 2006 to early 2008."

Assuming S&P 500 earnings come in between $93-95 dollars per share for 2011, then stocks are trading with a mid 13's price to earnings ratio right now and a mid 7% earnings yield.  That strikes me as attractive even with all of the uncertainty out there right now.

Link:  Chart of the Day: Earnings 

*Long ETFs related to the S&P 500 in client and personal accounts.

Rebuild American: An Opinion

Washington Post Editorial.  {Excerpt with my highlights}

America needs investment in its infrastructure. We need someone to invest hundreds of billions of dollars into for-profit trains, roads, airports, clean electricity generation, high-voltage transmission lines and more. As former Treasury secretary Larry Summers has noted, the nation’s commercial and residential housing stock probably does not need to be increased, but it could be improved in quality by replacing windows, insulation and monitoring systems, which save more in energy spending over time than would be spent on the renovations. Ideally, all the infrastructure projects should generate at least a modest profit, to ensure that the investments are productive......

...Not surprisingly, neither Congress nor state governments believe they can afford to spend money on infrastructure......Moreover, since such infrastructure projects typically provide such small returns on capital, they are not suited to most private-sector investors.

Meanwhile, American businesses have more than a trillion dollars sitting in bank accounts in other countries. They do not want to transfer the money back to the United States because the second the cash hits our shores, the Internal Revenue Service will tax the gains — as much as 35 percent of profits......

....But many in Washington remember that in 2004 the business community persuaded Congress to pass a law allowing firms to bring home profits without incurring taxation in return for the promise to invest the money.....instead firms used “much” to buy their own stock. Democrats in particular felt hoodwinked by the exchange and now don’t want to let firms replenish their American coffers from foreign sources without paying taxes.

In other words, under these circumstances, firms are leaving the trillion overseas and Congress is letting them do so.  But putting these problems together could produce a common solution.

Why doesn’t Congress let firms bring back their overseas profits without taxation — if, and only if, they put the money into an infrastructure bank for a certain period? This bank would then issue low-interest, long-term loans for projects that in flusher times would be funded by municipalities or utilities.

In return for obtaining the cash infusion of overseas profits into the infrastructure bank, the Treasury would forgo taxation on a schedule set by auction. By a bidding mechanism, the Treasury would obtain the best deal offered for funding an amount, say $100 billion, in the infrastructure bank. We believe that firms would agree to invest in the bank for five or even 10 years in return for avoiding taxation. An infrastructure bank capitalized with a hundred billion dollars could be expected to finance projects that, combined with private capital, would exceed a trillion dollars of investment.

The bank would dedicate its capital solely to American infrastructure. That way, U.S. firms’ profits overseas would come back to rebuild America. At least one study of the effect of the 2009 American Recovery and Reinvestment Act suggests that a billion dollars of investment in construction-related activity could create about 10,000 job years. A trillion dollars of investment, then, equates to 10 million job years, created between now and 2020......

Private-sector infrastructure initiatives across the range of transportation, communication and energy needs (examples include high-speed rail in the Northeast Corridor, energy-sector generation and building efficiency), some operating under public-private partnerships, could be launched expeditiously to generate jobs and investments critical to our economic recovery and long-term growth.

If we put the offshore profits and infrastructure bank problems together, we might find a solution that works for both sides of the aisle, even in these sharply polarized times.

Reed Hundt, a former chairman of the Federal Communications Commission, is chief executive of the Coalition for Green Capital. Thomas Mann is a senior fellow at the Brookings Institution.

Link:  Rebuild American Infrastructure.

Stocks at 52 Week Highs.

According to BeSpoke Investment Group, "In Friday's trading, there were three S&P 500 stocks that hit new 52-week highs (CL, DGX, and TDC) and only one stock that traded to a new 52-week low (WFR). This ended a nine trading day streak where more stocks hit new lows than new highs. Since the bull market began in March 2009, there has only been one other period where new lows exceeded new highs for nine trading days (8/19 - 8/31). So at this point at least it hasn't gotten worse than last Summer."

I think this is just further evidence that the market is close to becoming washed out if for nothing else than at least a counter rally.  We've shown by our money flow work last week { a few posts below this one on the blog} how this is also showing up in our analysis.  Another thing indicating this likelihood is that the percent of stocks trading above their 40 and 200 day moving averages is rapidly reaching a point suggestive of some sort of rally.  Neither of these indicators is as yet at it's lowest reading, but both have now returned to levels supportive of some sort of move higher.  

As a note there is a good interview with Bespoke in this week's Barrons. {Subscription required.}

Link:  Bespoke: 52 week highs.  

*Long ETFs related to the S&P 500 in client and personal accounts.

Happy Father's Day!

Happy Father's Day everybody!  

{Picture was taken after my daughter's graduation.  She's the lady in white.  Kids are all grown up!  Darn!} 

PreMarks: An Introduction and Observation

We're starting a new shorter section which we'll label Premarks {Kind of a take on pre-markets and remarks!}.  Like Short Notes I'll use this for a quick thought from time to time when I want to point something out that is happening before markets open in the United States.

Market is going to open substantially higher today.  The excuse for this is that there appears to be some resolution on the Greek debt situation.  I think it is more likely that the markets are reacting to option expiration at the open today as well as they fact that we are extremely oversold in all the time frames we measure. 

We only need something like 3-4 points for the market to have it's first up week in the last seven weeks.

an tSionna {06.15.11}

*Long ETFs related to the S&P 500 in client and personal accounts.

Short Notes: Market

Market gave back all of its gains from yesterday.  It will be important to see how stocks react to tomorrow as we are nearing some pretty critical juntures.  For example, stocks are nearly on top of their 200 day moving average which many investors use as a longer term gage of equities.  My guess is that today's action had a lot to do with options expiration on Friday.  Also if I had to guess, I'd say stocks will be higher from here by Friday's close.  However THAT last comment is as I stated a guess!

Uncertainty

Interesting editorial in yesterday's Wall Street Journal.  {Excerpt with my Highlights.}

Uncertainty Is Not the Problem

It's not the policies we don't know about that are retarding the economy. It's the bad policies we have.  By CLIFFORD S. ASNESS

Many commentators blame our continuing economic woes on "uncertainty." They allege that recent and anticipated dramatic policy changes make business planning difficult, and that this is retarding growth and employment. This view is not wrong—but our main problem is not the uncertainty surrounding new policies. It is the policies.

Consider two uncertain situations. In the first, our business is waiting to find out the location decision for a customer's new industrial plant, so we know where to build our new supply facility. Until this is resolved, we will not invest in building nor will we hire staff. In the second situation, we know we are in for some pain, someone is going to make our business less productive and profitable, but we do not yet know how much. Planning is marginally more difficult, but the main reason we will not grow in the second situation is that investment is less attractive regardless of the precise resolution of uncertainty.

In the first case, uncertainty is the obstacle. Once it is resolved, we invest. In the second case, uncertainty is a small part of the problem. The large part is simply that bad things are happening. The day we are told "well, it's exactly a 30% hit to productivity and profits," all uncertainty is resolved—yet we will still not invest or hire.

The Obama administration's economic policies have defenders. For instance, New York Times columnist Paul Krugman will tell you the stimulus helped, and we didn't have enough. I disagree. I will tell you  the stimulus was wasteful and politicized, and the American people, not being idiots, know they will have to pay for it eventually. People adjust their plans to account for the additional debt heaped on them, meaning lower investment and consumption....

.....Consider a hypothetical.

Imagine, right now, we passed a giant additional wasteful stimulus. Imagine all the rules of Dodd-Frank were revealed and are even more stifling than we expected. Imagine we doubled the new health-care entitlement and expanded government control of health care more than previously predicted, but set all the details today. Imagine assorted government agencies passed more burdensome regulations than we anticipated, increasing both the cost of doing business and the drag of crony capitalism. But all uncertainty was resolved by passing them today.

Next imagine that the president promised, in no "uncertain" terms, to up his hectoring of business in perpetuity. Further, imagine we passed higher taxes going forward on everyone but, again, we settled it for certain right now. Finally, imagine we committed ourselves to no entitlement reform ever. Is all this good or bad? Well, uncertainty has been eliminated, but it sounds pretty darn bad.

Now let's go the opposite way and consider good policies surrounded by uncertainty. Imagine we will move from here toward free-market health-care reforms appropriate for a free people. We will reduce government spending and our debt, letting people spend their own money as they see fit. We will lower taxes across the board for individuals and businesses, and we'll reduce and simplify deductions.

Imagine even more that we'll make grown-up decisions and reform entitlements to levels we might possibly afford. Now imagine that while we know the direction of each of these policy changes, alas, we are very uncertain about how far these wonderful ideas will go. Imagine this uncertainty is even higher than it is around today's bad policies. Would these changes, uncertainty and all, make things better or worse? Well, it seems pretty clear that should these changes occur in any nontrivial fashion, you would have to duck to get out of the way of the ensuing economic boom, regardless of the uncertainty.

Focusing on "uncertainty" takes our eyes off the ball. We should not seek clarity about the many new drags on our economy. We should seek to have the administration cease and desist, then reverse them.

Mr. Asness is the managing and founding principal of AQR Capital Management.

Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved

Link:  Uncertainty is not the Problem

Short Notes: Back From Graduation

Well graduation has come and gone.  I am working on a longer market piece which hopefully will be done soon.  In the meantime market is set to pop this morning on some better than expected economic data.  Another reason for this is that the market has become oversold enough that probability dictates that some sort of rally should occur at this juncture.  {See this post from last week}. The percentage of stocks above their 200  and 40 day moving averages has also now moved to an area where probability suggests some sort of rally should occur. 

Whether this is a short snap back rally {a one or two day sharp move up followed by a resumption of the trend down} or the beginning of some sort of longer counter trend rally is however still up in the air.

Short Notes: Earnings Yield.

Just a quick thought as I was doing some math this AM.  As of right now the earnings yield on the S&P 500 is approximately 7.4%.  As a reminder the earnings yield is the inverse of the market's Price to Earnings ratio.  Earnings divided by price.  The two year treasury yields .40% and the 10 year is priced at a 2.95% yield.  The cash yield alone on the S&P 500 is currently just under 2%.

*Long ETFs related to the S&P 500 in client and personal accounts.

Short Notes: Net Market Positive

We have become selective buyers in recent days in client accounts.  What we have been doing has depended on our various investment strategies and on client risk/reward mandates.  To reflect this fact I will move our short term rating up to NET MARKET POSITIVE.  You can click here  for a definition of that term.  While I don't know where we may be headed in the next few days {in fact as I type this the market is down by about 1/2% this morning}, I think that risk reward analysis is moving back in favor of equities at least for a rally.

I will note that we last changed our short term rating to negative back on April 11, 2011.  While this is meant to be reflective of what we do in client accounts and is not necessarily a timing device, I would note that stocks are down about 4% since that time. 

Our longer term and intermediate ratings remain unchanged also at NET MARKET POSITIVE.

A Graduation

One of the original employees is transferring away from "Global Headquarters" of Lumen Capital Management, LLC on Sunday. 

Here she is as head janitor.

Here she is {with her sister, another employee} as head trader of stocks! 

                   

After a brief stint as a counselor at Red Pine Camp for Girls in Northern Wisconsin this summer, she will be working for us at a new branch office come August at Butler University. 

Due to an influx of family and friends we will be out of the loop until early next week.  We will of course break in if something dramatic occurs.

Her "Boss" is sure gonna miss her!

Fear gu aois, is bean gu bàs

an tSionna {06.09.11}

Market is down now about 7% from its highs of early May.  We have now pulled back to an area where valuation begins to look more compelling.  I also like the fact that we are quickly becoming over sold.  Whether we begin an upside rally from these levels or from levels slightly lower, odds are such that some sort of summer rally taking hold has to be factored into the equation.  We shall see.  Economic news is pretty gloomy right now.

*Long ETFs related to the S&P 500 in client and personal accounts.

60 Questions.

Saw this yesterday over at RealClearMarkets.com.  Thought it was worth a reprint.  Where applicable I've added some comments in red.

Sixty Questions From the Class Warfare Front

By Bill Frezza

Taking the long view, just when was that golden age when the rich were far less so and the poor were better off than today?

When did the poor in America have more to eat? Did poverty and obesity go hand in hand back then as it does now? When was life expectancy longer for a poor person than it is today?

When was infant mortality lower among the poor than it is now? When did the poor have more reproductive freedom? Was there a time and place where unwed mothers and their children were more openly accepted by society than here and now? When and where did poor women have more options to escape drunk and abusive husbands or have a better chance of obtaining legal protection or child support?

When did more poor people have a roof over their heads than today? In what country do those living below the poverty line live in larger houses or apartments than America? {When was there an active attempt by society to make sure those living below the poverty line actually had a roof over their heads?} Who had indoor plumbing and who had to do their business out back, poor people in America today or nobles attending the court of Louis the XXIV? What would the poor from the 1800s think about the living conditions of the poor today? How about the poor from the 1930s? The 1960s?

When did the poor own more cars, TVs, washing machines, refrigerators, air conditioners, microwave ovens, or cellular phones? When did poor kids wear designer sneakers? Putting aside the lifestyles of the rich and famous as seen on TV, when did a family living at the official poverty line have a better absolute standard of living?

Back in the days radical egalitarians pine for did the poor have access to personal computers? Google? MRIs? Free eBooks? Unlimited long distance phone calls? Could they buy a wider variety of less expensive clothing than they can buy today at Wal-Mart? Could they purchase a $99 airplane ticket to visit grandma in Florida?

Exactly when was it that racism, sexism, and discrimination were less prevalent than they are today? When were the civil rights laws stronger? {How many mob motivated or Klan organized lynchings of a minority class have occurred in the past 30 years?} Which other land of opportunity was it that elected a member of a historically repressed minority president?

When was intermarriage between rich and poor, black and white, native and immigrant higher than it is today? In what year were mixed-race children more socially accepted?

When did more children from poor families go to college? When in American history have the children and grandchildren of the poor ever climbed higher up the economic ladder than they have and can today? When have there been more college professors that were born poor? CEOs? Doctors? Mayors? Congressmen? Supreme Court justices?

When in American history did the government take more money from the rich and give it to the poor than it does right now? When did the rich pay a higher percentage of the total income tax burden than they do today? When was it that poor people received more checks from the IRS than the other way around?

If you were a poor person in America today to which country would you flee seeking a better life? If you decided to stay, to what date in history would you return believing you would be better off than now?

Why do countries run by radical egalitarians put up walls to keep poor people in while the U.S. puts up walls trying to keep poor people out? Why do you think so many poor people break the law to come here? Do you think they are eager to be oppressed by the rich?

During which exemplary periods when income inequality was lower than it is today were the poor better off than they are now? The 1950s? 1960s? 1980s?

When in history were a smaller percentage of the rich born into wealth compared to earning it than today? When was it that a person born into a family in the top economic quintile had a lower chance of remaining there his entire life? At what period of time did immigrants arriving on our shores with nothing but the shirts on their backs have a better chance of earning a better life for their children?

In what era did the working poor work shorter hours under safer working conditions than today? When did they have greater legal protections if they ended up in a dispute with their boss or landlord? When and where were their voting rights better protected?

When exactly was it that the poor were victims of violent crime less often than they are now? When did they receive better police protection? When could they walk into any emergency room knowing that they could not legally be turned away?

How can poverty be eliminated if it is defined in relative rather than absolute terms? What is the real goal of the War on Poverty and how much do pandering politicians stand to gain by keeping it going forever?

Bill Frezza is a Boston-based writer and venture capitalist. He can be reached at bill@vereverus.com. If you would like to subscribe to his weekly column, drop a note to publisher@vereverus.com or follow him on Twitter @BillFrezza.

Link:  60 Questions

Seasonality

Chart of the Day takes a look at market seasonality: "Today's chart illustrates the Dow's average performance for each calendar month since 1950 (blue columns) and the average monthly performance of the Dow from 1950 to the present (gray line). Today's chart illustrates that the Dow has tended to perform best during the last several months and first several months of a calendar year. During the middle of a calendar year, the Dow has tended to struggle (with the exception of July). It is worth noting that there have been only two calendar months during which the Dow has declined on average -- June and September."

I have marked in a red box above on the chart the statistical period of market weakness.  We have commented in several past posts on market seasonality. Specifically back on March 23rd we noted:

"{T}here are seasonal variations or patterns that come into play in most years......The study of these bullish and bearish phases means that I accept as a given that stocks at some point this year will experience a sell off between 8-20%. This is simply the normal course of how markets behave in most years. It is part of the seasonal variation of how in a normal investment year stocks will cycle between bullish and bearish phases as measured by money flows."

While market declines can come at any time, statistically stocks are most prone to major sell offs in between the months of March and October. There is not enough space to go into all the theories of why this pattern persists and of course there is also no law that says this has to occur. However we have to add this factor into the equation given the fact these seasonal patterns exist and given where we are in the calendar."

One of the reasons I think this pattern works is the way that most institutional money is invested. Institutional money is managed on a relative basis to a specific benchmark and is also managed so as to not give up the assets. In a market that loses ten percent for instance, institutional accounts that go down only 8% are said to have out performed their peer group. That influences how their portfolios are set up. Institutions generally start a year with some expectation of the economy and what stock assets ought to be worth by year's end.

Because of this institutions have a very strong incentive to be heavily invested in the early months of the new year. They are afraid to fall too far behind their benchmarks. To borrow a baseball analogy, "you don't win a pennant in April but you can lose one". As the year progresses and in particular if stocks have advanced in the first few months, equities begin to look less attractive on year end expectations. They either need an extra bump up {better than expected earnings for example} or prices will begin to stall out.

Stocks will fall of their own weight unless there are marginal bidders for their prices. Summer is typically a down period for Wall Street as the news flow dries up {unless its bad news. It is amazing for instance how many international crises begin in the late spring/summer period. Both World Wars, Korean War, 9/11, and the First Gulf War are examples that come to mind here.} Summer is also the beginning of the period when analysts begin to fine tune their end of year expectations for stock prices as clarity begins to enter the picture about year end economic activity,

Stocks will begin to discount any lower revisions or negative economic news during this period of seasonal weakness. They will usually then begin to rally sometime in the fall. For one thing there is better clarity at this point about expectations regarding year end earnings. For the cynical amongst us, we also know that the only print that matters for most money managers is the one shown when the market closes on December 31st. To put it simply Wall Street want to get paid. So there is a strong incentive to boost prices during the 4th quarter of the year.

This year is shaping up to be a text book example so far of what I've just described. We discussed back in December our expectations that stocks as represented by the S&P 500 had the potential to trade between 1,350 and 1,400 by year end 2011. On May 2nd the S&P 500 printed a close of 1,361.22. By early May we had already reached the lower end of my price targets. Since the estimates I use are available to nearly everybody then it is likely that consensus expectations for most analysts were somewhere near my own levels. Stocks at this point, in order to rise, needed that extra push in the form of better economic news. That has been decidedly lacking these past few weeks. As such stocks first stalled out and have since retreated slightly, being down about 5% from their early May highs.

Where we are going now is any body's guess. Markets aren't nearly as overbought as they were a few weeks ago yet they are also not back to oversold levels that would suggest by our work that a longer duration rally is in the short term offing. It is likely that we will meander a bit more within the trading range that we seem to have now carved out. Our work indicates that trading range is set between S&P price levels of 1,260 on the downside and 1,350 on the upside. That equates to about 3% to the downside from Friday's close and 4% to the upside from our current levels. We still have the defensive pages of both the game plan and the playbook open. Also I would note that we have been at a short term NET MARKET NEGATIVE since back in early April. You can click here for a definition of what that term means.

While we remain defensively oriented, prices of specific securities are beginning to reach levels that look attractive to us. Another week or two of this same action could lead us to change our ratings.

*Long ETFs related to the Dow Jones Industrial Average in certain client accounts. Long ETFs related to the S&P 500 in client and personal accounts.

Chart of the Day Link: Seasonality

an tSionna-The Dow

From Chart Of The Day:

Despite a host of concerns (weak recovery, high unemployment, ongoing foreclosures, commodity price spikes, debt crises, geopolitical issues, etc.), the Dow has managed to rally sharply over the past two years and currently trades 12.5% below its 2007 non-inflation-adjusted, all-time record high. As today's chart illustrates, the post-financial crisis rally was especially sharp during its first year. Since then, the rally has settled into a more confined uptrend channel. It should be noted, however, that the Dow is currently testing support (green line) for the fifth time since March 2009.

Link:  Chart of the Day-Dow

*Long ETFs related to the Dow Jones Industrial Averages in certain client accounts.

an tSionna {06.01.11}

Market is still locked in the trading range we've discussed most of the spring.  The good news is that so far this looks to be a correction of time rather than price.  June however is a statistically weak month so we'll have to see how the next couple of weeks plays out.

*Long ETFs related to the S&P 500 in client accounts.