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Buzz Bits: Dow, Nasdaq Lose Ground


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Editor's Note: This is a small sample of the content available on the Buzz and Banter

Earnings Report - MV News

  • Medtronic (MDT) reported Q4 EPS of $0.62 (in-line) on revs of $3.08 bln vs $3.07 bln cons.

In this corner...from parts unknown...the....Cobbler? - Todd Harrison - 1:12 PM

The Minx slinks through the dew as the critters ponder what to do. After the frazzled flurry this morning, the ticks have stopped flickering as quickly as we take a deep breath and a mindful noodle. For my part, as I wolf down the remains of my Chinese chicken salad, can't help but wonder what the next shoe is gonna be--what, prey tell, will spark the negative gamma crowd and presage another round of forced selling?

I don't claim to have the answers but the funk we've seen typically doesn't abate as methodically as we've witnessed (right at the 200-day). And, as I've learned through the years, it's better to err on the side of caution when times are uncertain. I'm conscious of the oversold condition and haven't pressed bets. Quite the contrary, I've used the morning jig to reposition myself in a more balance fashion.

I've still got the same net profile---long some energy and metals and short some financials--but I've raised some cash and won't look back. My sense is that S&P 1280 and NDX 1635 will tell us a lot, if and when, but it remains to be seen if that incremental jig is the proverbial dime in front of the macro bulldozer.

As I see it, you'll be reading it so stay tuned and stay on your toes. It's gonna thin out into the long weekend and that opens the door for some wild swings.


Position in metals, energy, financial equities

Edgeless - Kevin Depew - 11:56 AM

Fannie Mae (FNM) is halted due to the release of the OFHEO report this morning. Among the items of note:

  • "Arrogant and unethical" corporate culture led employees to massage earnings to trigger bonuses for senior executives, who should be investigated further.
  • A large number of Fannie's accounting practices and policies did not conform with generally accepted practices.
  • The biggest issue is the accusation that FNM consistently took excessive interest rate risk, which worked out well until about 2002 when the comapny took signficant losses.
  • No new accounting issues were brought out or mentioned, so this will likely be viewed as a positive by the brokerage firms covering the stock, some of whom are already out defending it.

I tend to avoid stocks that haven't filed financials in a few years, but that's just me. On a technical basis there are DeMark indicator buy signals across a number of different time scales. Positive technicals aside, I will avoid the stock either way since there is no edge I can find.

Commentary from Katie Townshend, CMT, chief market technician for MKM Partners: - MV technicals - 9:05 AM

Semiconductor stocks have exhibited downside leadership during the sharp pullback. The Philadelphia Semiconductor Index (SOX) has sharply underperformed the S&P 500 Index (SPX) in May (-9.2% versus -3.7%).

The phase of underperformance began in February, after the SOX failed to penetrate long-term resistance near SOX 560. The resulting correction in the SOX brought it below a couple of tiers of support, including the 40-week moving average which now can be considered near-term resistance.

This is a bearish development for semiconductor stocks because the next meaningful support is at the October low (SOX 413), which is more than 11% below current levels. Fortunately, we believe a significant oversold bounce will occur before a decline of that magnitude happens.

A follow up on Professor Succo's Mailbag comments on financial stocks…..about financial bonds…. - John Succo - 8:48 PM

Not only are bank and other shares (except brokerages and companies like Legg Mason (LM)) counter-intuitive lately, Toddo also mentions the 108 level in the BKX. Well, I have a news flash - not advice - just a news flash, and then when these suckers go, they are GONNA GO.

I am referring to their debt, not the shares. I have mentioned many times that the risk premium in corporate bonds, and in particular bank bonds, are a joke. I cannot imagine a prudent investment manager buying financial debt like Citi (C) at 40 and 50 basis points over Treasuries while I am buying GNMA paper 80-100 basis points over.

I have lived through several credit crunches and you want to know what gets crunched? Financial debt. Banks. Brokers. Mortgage guys. In fact, back in 1990, the last real estate led crunch, bonds fell by ½. We are avoiding these issues like the plague. Again, not advice, but if someone can show me the value in this paper, I would love to hear it.

Position in GNMA paper

Keynes and Common Sense... - John Succo - 8:40

If you want to learn more about the philosopy of economics that I adhere to, the antithesis of which is more and more being woven into the fabric of politics and government, please go to this website, the homesite of the Foundation for Economic Education. One basic principle that you should be familiar with, that government intervention in the long run is a de-stabilizing factor, is susinctly put by the president of the foundation in a paper to be found on today's website. These few words from his paper say it all:

"What Keynes succeeded in doing was to provide a rationale for what governments always like to do: spend money and pander to special interests. In the process Keynes helped undermine what had been three of the essential institutional ingredients of a free-market economy: the gold standard, balanced government budgets, and open competitive markets.

In their place Keynes's legacy has given us paper-money inflation, government deficit spending, and more political intervention throughout the market. They (classical economists) had constructed a body of economic theory which clearly showed that governments have neither the knowledge nor the ability to direct economic affairs. Freedom and prosperity are best assured when government is, in general, limited to protecting people's lives and property, with the competitive forces of supply and demand bringing about the necessary incentives and coordination of people's activities."

Sound familiar? In today's world of massive imbalances, government debt, artificial zero interest rates (Japan and yes the U.S.), and popular dependency on ever increasing government spending as a percentage of GDP, you should understand the implications: that the market at some point will massively unwind these mistakes and tear down unproductive capital.

Despite our growing dependency on government we have to realize that it is inherently inept.


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