Luster, Not Bluster

May 12, 2010  |  

By Charles Payne, CEO & Principal Analyst

I loved the movie but not sure I would have bought any investment affectionately known as “Dead Presidents” but they are at the eye of the latest storm on Wall Street. The CDOs in question were named after presidents James Buchanan and Andrew Jackson (something of an odd mix of Old Hickory & Doughface) and according to reports were arranged and marketed by Morgan Stanley (MS) and are now the subject of a probe into whether they actually made bets against their own product without informing buyers of the products.

The products were underwritten by Citigroup and UBS but no word on whether they are under the same legal microscope. It stands to reason the SEC will go after several firms when it’s all said and done because if something was throwing off a lot of money then everyone would have gotten into the game. That is the interesting thing about this whole boondoggle. These were high stakes games between big boys and girls. In hindsight, it’s easy to convince the public that somehow the masters of the universe had all the answers and abused mere mortals but according to the WSJ, Morgan Stanley lost $9.0 billion on bullish bets related to the housing market.

Good news for investors is these latest salvo against Wall Street isn’t a drag on the broad market although MS will open lower.

Estonia is now fast tracked to join the Euro and I’m saying to myself: “Why.” Actually I said something else that could be abbreviated in three letters beginning with “W” because the timing is weird. In the midst of a fire engulfing most of the house, the folks in charge of the Euro decided it would be a great time to add an extension. In another twist, the ECB is saying this isn’t such a hot idea because Estonia has had too many problems containing inflation (hit 10.6% in 2008). I know it wasn’t so long ago membership to the Euro was seen as validation for these smaller nations, particularly a former satellite of the Soviet Union but the news today probably gives more credibility to the Euro than Estonia.

The ECB backed the $1.0 trillion bailout against every rule it’s ever espoused about fiscal sanity. Moreover to buy Greek bonds the ECB has to take a series of maneuvers and short cuts (because it is against the rules otherwise) that could have debilitating consequences.

Equities put on a brave face yesterday, defying early headlines of angst in Europe and the lingering confusion over last Thursday’s trading activity. Would-be investors eager to buy on weakness made their move, seducing a few other fence-sitters into the fray as well. But, once that pool of buyers dried up equities came down quickly. In the meantime, gold prices remained firm throughout the session, proving once again that there are two types of fear, and one is a serious mother. The bluster of investors that not only bought on weakness but focused on small-cap, and more volatile names, were not nearly as motivated as investors (and non-investors) seeking the comfort of gold. That is an awkward phrase; seeking comfort in gold belies the underlying fear percolating on the surface.

So, while stocks stumbled into the close, gold prices held on for dear life. Gold prices and stocks have for the most part traded in lockstep since last March, but began to divergence a couple of weeks ago just as the Greece news was beginning to heat up. There is no doubt that the bond market is like the canary in the coal mine for equity investors, but gold is like all that wildlife that stealthily vanishes a day before a large earthquake. I’m paying close attention to the divergence, which I think is healthy skepticism that is much needed in the face of non-stop hype about how great the economy has become. Still, the real mover of gold prices is inflation, and for the longest time I have felt that was a FY11 problem. The market is saying something else. Certainly, transatlantic bailouts and more paper churning by our central bank could hasten the threat.

Edging Closer

I’m not sure how last Thursday is going to affect the mentality of those on the sidelines. I have mixed feelings about the influx of investors off of the sidelines. There isn’t going to be a direct cause and effect of the market nose-diving just as individual investors decide to get back into the mix. Not only were investors buying stock funds, but they were buying domestic stock funds (one week they even put more money in funds earmarked for American businesses than foreign). People, having missed the rally, were finally beginning to come to grips with the notion that they had to be in no matter how late they arrived at the party. On March 5, non-government funds in money markets were $1.66 trillion, down 16.5% year over year.

* Individual investors: $614.4 billion, -22.7% y/y
* Non-government institutions: 1.05 billion, -12.3% y/y

Investors are putting money to work and that helps the market move higher, which then seduces others undecided into the market.

I think that growing pools of individual investors are the reason small-caps outperformed yesterday as these folks are looking for “cheap” stocks. Of course, share price is NEVER a reflection of value, but that misnomer persists. I continue to say that most stocks under $10.00 are overvalued and most stocks over $100.00 a share are undervalued. The point is that buying a ton of stock because its $1.00 a share might make you feel like a player but even if all your investment capital could only buy one share of a certain stock that doubled then you double your money. Individual investors have to know the big boys are always trying to manipulate them. I’m not saying that’s happening right now but it will not be by chance that new highs will be greeted with greater volatility. I call it shaking out the weak sisters.

So Many Signs

“Signs, signs, everywhere there’s signs
Blockin’ up the scenery, breakin’ my mind
Do this, don’t do that, can’t you read the sign” – Arthur Thomas

* Gold closed at a nominal record of $1,235 an ounce yesterday.
* Investors are putting money to work.
* Credit default swaps reflect doubt on the Euro bailout.
* The Euro reflects doubt about the Euro bailout.

There are so many signs, some say jump into the market now and others say run for the hills. This kind of confusion is like throwing gasoline on a bonfire. Last Friday, there was a legitimate hopeful sign. Overall consumer credit in March edged up to $2.45 trillion from $2.44 trillion in February; the tally was 1% higher year over year.

* Non-Revolving Credit: +3.9%, driven by new vehicle sales
* Revolving Credit: -4.4%, as consumers continue to pick debit over credit cards

For some reason credit unions are fading as their share of credit was down 9.42% to $229.6 billion.

Charles Payne is the CEO and Principal Analyst of Wall Street Strategies . This post was republished, with permission, from his company’s column, WStreet Market Commentary.

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