This year has been a strong one for the stock market and for Broadleaf Partner's Growth Equity Portfolio.

For details on our performance and insights on our current market outlook and strategy, please read the attached Second Quarter Market Commentary.

Doug will also be sharing his thoughts on the market with CNBC's Squawk on the Street hosts Mark Haines and Erin Burnett this Monday, July 6th at 9:35am.  Please tune in if you can.

Enjoy the Fourth!

    

We'll be very busy for the next week or so as we complete our quarter end activities.  As a result, it will also be a little quieter on the blog front.  Please bare with us.

The good news is that it was a great quarter for the stock market and for the Broadleaf Growth Equity portfolio.  Subscribers to our economic newsletters will get a full performance report and commentary shortly.  If you'd like to sign up for those, please visit our website at www.broadleafpartners.com and enter your preferred email address in the yellow box in the upper right hand quarter.

Before signing off for the next few days, here are some basic thoughts on recent economic releases and the coming earnings season.  As a whole, we remain positive on the markets through year end, believing that the worst is behind us.  "Less bad" news got a lot of mileage for the markets when Great Depression scenarios were being priced in this winter.  Now that this possibility has diminished, some strong gains have been made, investors feel a little more comfortable, and mutual fund flows for many equity asset classes have finally turned positive.

A key economic statistic we will be watching is the ISM survey.  This morning, the numbers came in at 44.8, up from the prior month and basically inline with expectations.  This survey is as strong a leading indicator for the economy and the stock market as any we follow.  In general, a survey reading above 50 indicates the economy and production levels are expanding.  So, while the economy is likely still contracting, it is at a lower rate than it had been.  As long as the number stays below 57, we believe it makes sense to stay focused on the cyclical areas of the market that stand to benefit from the recovery tailwinds as opposed to defensive areas that may play catch up once we've fully recovered.   

Consumer confidence, on the other hand, ticked down yesterday to 49 from 55 in May and also was below expectations.  Higher gas prices and views on jobs being hard to get likely set the reading back a tad, even though it remains substantially above its all time low of 25 last fall.  Fortunately, this series hasn't been a very good leading indicator for the economy, so it doesn't concern us as much.   

Unemployment will likely continue to increase, but hopefully at a slower rate.  We expect, as we've long believed, that it will peak in the 10% range.  While this may be bad news for those that are unemployed, the indicator has usually been lagging in nature and is therefore not as much of a concern for the stock market itself.  In other words, in the past, stocks have usually performed well during recoveries even as the rate of unemployment increases.  

As you enjoy the 4th, take a minute to remember this country's revolutionary roots.  Thugs and despots always stand in the way of freedom the world over.  Unfortunately, it is almost a universal truth that the only way to gain freedom is to go through those that stand in its way, often at tremendous personal sacrifice.  

In spite of all the well intentioned efforts to spread democracy worldwide, it will only flourish if those who are poised to benefit the most from it also bear its costs and have a majority stake in the game.  In an odd sense, this may be one of the few areas where traditional conservatism seems to be more liberal in its orientation.  Welfare based independence simply doesn't and can't work over the long haul.   

This is still the best country in the world, bar none.  Sure, others are catching up, but I know of few Americans who are actually emigrating elsewhere.  As other countries open up, competition increases and consumers on a worldwide basis benefit from improved standards of living.  As China leads the worldwide economic recovery, perhaps we would be wise to recognize the role that broader based capitalism may have played in keeping a second Great Depression at bay.  

Enjoy your 4th of July, be thankful for your independence, and remember above all, it wasn't free.   Would you still fight for yours today?

    

Ben Bernanke got a major grilling from Congress yesterday over whether or not he had threatened to replace Ken Lewis and the entire board of Bank America if he didn't follow through with the acquisition of Merrill Lynch last fall.  While Ben denied making any such threats, Ken Lewis apparently still felt pressured, or at least several in Congress felt he might have been. 

Unfortunately, no one ever asked the right question.  If Ken Lewis didn't think the acquisition was the right thing to do for Bank of America shareholders, why would the prospect of losing his job over the matter have any effect on the decision he made?  Somehow, the Congressional silence on this angle implies that we can't and shouldn't expect leaders to do the right thing if the consequence of their decisions require sacrifice, particularly personal sacrifice. 

Ken Lewis made the decision to acquire Merrill and in my opinion, we must trust the notion that he believed it to be the best long term course of action for his shareholders at that time.  To do otherwise would be the real reason to fire him.   

With regards to health care reform, Jason Trennert makes the fascinating observation that the official actuarial estimate for the 1965 Medicare legislation forecasted total Medicare spending of $9 billion by 1990.  In the final analysis, however, it topped nearly $100 billion!  Lesson learned?  Discount to the extreme any projections provided by politicians, particularly for future social programs.  

                             

In the entertainment category, Michael Jackson and Farrah Fawcett both died yesterday.  Talk about a gut punch for a kid raised in the 80's.   My own children knew who Michael Jackson was, but they didn't know Farrah Fawcett, proof positive that I'm advancing in age.  Kids, here's the poster that was on every teenage boy's bedroom wall across America in 1976.  I think my brother even had a t shirt just like it.  As for Michael Jackson?  As of 8am this morning, 28 of the top 100 songs on I Tunes were by the King of Pop.  Like him, hate him or not understand him, the dude could dance. 

    

I like this chart from JP Morgan.  As many of you know, I strongly believe that fund flows into and out of equity funds are a huge and often overlooked determinant of stock market returns.  In particular, when fund flows go wild after certain sectors, those sectors tend to do well, but when they are in a funk they don't do so well.  

While the chart only goes back ten years, you can clearly see how excess fund inflows coincided with the tech and commodity bull markets while excess outflows coincided with their respective bear markets.  This, of course, should be entirely obvious and I may even seem silly to some for pointing it out.  So why do I do it?  Simply to suggest that all the fundamental and valuation based analysis in the world may mean very little if everyone on the block wants to sell their house but you.  

Even more interesting is the fact that it may not take very much in the way of fund flows in or out of the equity markets to make a very big impact on the level of many common stock market indices.  For instance, even though the stock market declined nearly 50% from its peak, losing I believe trillions in stock market wealth, only a cumulative $144 billion in equity funds were actually withdrawn over this period of time.  While these figures simplify fund outflows by not including entities like hedge funds, it probably still suggests that a large multiplier effect exists for the market when the anxiety and greed associated with fund flows takes over.  

As recently as February, fund flows into domestic equities were as depressed as they had been in the last ten years.  Not too surprisingly, as the market has gained nearly 40% from the bottoms, fund flows back into equities have also turned positive to the tune of $29 billion.  

In the past, periods of excess fund outflows persisted about a year while periods of fund inflows persisted for four years.  With fund inflows turning positive in April, let's all hope the historical pattern remains intact.  In the next few days, I hope to share some similar insights from a sector perspective.

    

The World Bank may be driving markets lower today on its disappointing outlook for worldwide economic growth this year - down 2.9% - and a tepid outlook for 2010.   The truth, of course, is that no one knows what's responsible for moving the markets on any single day. 

Here's my two cents.  I think we've had a tremendous run on "less bad" economic data.  With a torrent of earnings expected next month, investors are on pause, knowing that at some point "better" as opposed to simply "less bad" becomes necessary for the markets to make further progress.  We're at an important crossroads technically and long time bears like Nouriel Roubini are getting some press once again, knowing that the bulls will be forced to show their hand in the coming weeks when earnings season begins in earnest.  

Will we get the better news?  I suspect we will, but there is enough doubt that some churn and consolidation is likely in the meantime.  The reasons to be positive include unprecedented global easing, a rebound in industrial production following a significant draw down in inventories from many industries, declining corporate bond yields, and even evidence that the employment situation may be moderating.  Historically, it is also worth pointing out that the deepest recessions are typically followed by the greatest rebounds, which would also bode well for this recovery even though that prospect feels like a long shot. 

There are those, of course, who believe that the significant global stimulus is actually the market's greatest risk.  While I concur on the concern over inflation, I think it is an issue much farther down the road.  Right now, growth is the most pressing concern, which would be consistent with the argument that today's weakness reflects the World Bank's economic forecast.  One also wouldn't expect to see the commodity complex leading on the way down as it today if the inflation risk was the market's most pressing concern.

I still think we've seen the markets lows and won't revisit them anytime soon.  In the meantime, volumes are light, consistent with the arrival of summer, the U.S. Open, and a wait and see attitude. 

    

Health care stocks are enjoying a nice rally today.  In fact, they are leading the markets higher for the first time I can remember in a very long time.  What's also different about today's move is that it doesn't appear to be related to a reemergence of the defensive trade even though the market has pulled back some from its recent highs.  While staples are performing in line with the market, consumer discretionary shares and semiconductors - improving economy plays -  are also doing well.  If the defensive trade was back, we wouldn't likely see these latter two areas outperforming as well.

Health care stocks may be staging inordinate gains today on hopes that Obama's ambitious health care plans may end up having a lot less bite than was promised during his campaign.  In recent days, the Obama administration has received criticism from its own party for ratcheting back some promises and last night, the Congressional Budget Office sent the plan back for review after declaring it too expensive. 

The administration also came out with some new regulatory ideas for the financial services industry.  It feels weird to say this, but I actually agree with many of the ideas.  I think the derivatives and credit default swap markets should be more regulated.  These products brought down Lehman Brothers and have cost taxpayers billions in bailouts of companies like AIG.  If we're not going to allow companies that make bad business decisions to fail or believe that some are too big to fail, then regulations may be the only alternative short of banning the products altogether.  One great idea is a requirement that all financial institutions maintain an equity interest in any assets they securitize and then package for sale.  This seems like a no brainer.   I think we would all agree that owners tend to be better stewards of resources than renters, whether the assets are homes or mortgage loans.     

Some, of course, will argue that these regulations are coming too little too late.  Perhaps there is some truth to that, but at least in my opinion, the argument doesn't fly.  After 9/11, would we have been better off doing nothing to beef up airport security measures under the argument that terrorists wouldn't likely try the same thing twice?  I think a do nothing approach would have been foolish although I could never prove it.  The financial markets have experienced tremendous levels of innovation over the last decade and perhaps the regulatory framework needs some innovation of its own.

The greatest thing about our government may also be its least appealing, especially if you're comparing us to speedy ole' China in recent months.  Our system of checks and balances is so extensive that very little is usually accomplished, especially when it comes to extreme policy measures from both side of the aisle.   The Clinton administration started in office with many aggressive policy ideas which were quickly tempered by government and market forces at work.  And in the end, his Presidency wasn't nearly as bad for the economy as had originally been feared.

There's an important lesson for investors in there somewhere.  Take note!

    

In recent weeks, I have been a buyer of late cyclical stocks, including energy, materials, and industrials.  Within the energy space, I've really been interested in natural gas plays.  I saw a chart that came across my desk this morning from Jason Trennert at Strategas Partners that made natural gas appear even more interesting as a reflation play.

The chart shows that the ratio of crude oil to natural gas prices is at a fifteen year high and more than two standard deviations above the norm.  Essentially, it shows that natural gas simply has not kept pace with the recent run up in oil prices.  Incidentally, energy stocks haven't kept pace with the rise in oil either.

Part of the reason for the difference, I believe, is that oil has become an important currency (a store of value) in its own right.  When you think about it, all nations, developed and developing, have a need for oil, perhaps more so than even the dollar.  This likely explains part of the unusually wide disparity between natural gas and oil prices.  Even so, I still think natural gas should eventually benefit from the upturn in the value of crude.

In another note, there is an excellent article on the Roth IRA conversion/reverse conversion process in today's WSJ.  If you can qualify based on income, then converting part of an existing IRA/IRA rollover to a Roth Ira by paying taxes today may be a smart long term move and one that can also be undone to give you the best possible tax benefit.  Check out the article here.

Finally, Pepper and Salt, WSJ 6/11/09. 

    

Long term treasury yields have backed up above 4% today, making a significant move off their lows in the 2's a number of months ago.  While there are a number of folks claiming that this back up in yields reflects a change in inflation expectations, I'm not convinced. 

From a technical perspective, if inflation were the reason for the back up in yields, one would expect that corporate bond yields would have backed up by a similar amount.   But, at least for the corporates I track, yields have stayed steady in recent weeks and in some cases even declined.  I tend to believe, therefore, that the back up in government yields reflects a renewed interest in taking risk.  Folks feel a bit more comfortable about the state of the economy and as a result, they are no longer willing to buy risk free treasuries at any price.  The bubble in treasuries is finally being deflated.  

From a practical perspective, I also see little evidence of building inflation pressures.  I know of no one who is getting raises and other than the recent spike in gas prices, I see very little evidence that overall price levels are increasing across any type of consumer good be it housing, autos or otherwise.  Price competition is relentless, causing venerated companies like P&G to revisit their commitment to the private label business and abandon - at least partially - an exclusive focus on "new and improved".

From a theoretical and political affiliation point of view, there are many reasons to be concerned about future rates of inflation even though the current indicators aren't expressing it in the financial markets or the market for goods and services, be it labor or otherwise.  The government has pumped a lot of money into the system with the recent cuts in interest rates and the numerous government bailout programs. 

At this point, however, very few banks are taking their huge excess reserves and making new loans.  If anything, lending procedures remain very tight, overcompensating for years of being too loose.   It is through the lending process that the money supply is generally expanded and too much money ends up chasing too few goos. Even when money was extremely loose a couple of years ago and private equity shops went on a bank enabled buying binge, the overall CPI failed to budge much above 4%, hardly the level we witnessed in the 1970's.  

I do believe that inflation could become a problem at some point down the road, but believe that those who are incessantly worrying about it today do so prematurely and to the detriment of their own personal gains at this particular moment in time.  This isn't to suggest that I'm against the reflation trade.  To the contrary, I have been a buyer of commodities, materials, energy and industrial stocks in recent months.  

As we've said recently, some inflation would actually be a welcomed event, as an additional sign that the economy is on the mend.  I'm confident that if greater inflationary risks lie ahead, the Fed will take corrective actions, perhaps as unprecedented in nature as those have been to fight deflationary concerns in the past twelve months. 

Inflation, monetarists, say is everywhere and anywhere a monetary phenomenon.   While the government is certainly spending alot these days, other members of the economy still aren't. 

I'll become worried when making money becomes easy again.   

    

New unemployment claims came in at 345,000 this morning.  The bad news is that 345,000 more people lost their jobs, but the good news is that there has been a clear inflection point in the rate of change.  A couple of months ago, new claims peaked at over 600,000.  Many forecasters expected this morning's number to come in at around 500,000 losses. 

The unemployment rate, on the other hand, continues to increase, hitting 9.4%, the highest levels since the early 80's.  Historically, the unemployment rate has been a lagging indicator, often increasing for 6-9 months after a recession is officially over.   This means that you can still be bullish about the stock market even though the unemployment rate may be increasing.  As we said in previous updates, the market was likely discounting an unemployment rate as high as 10% and perhaps even substantially more than that when it hit the newer lows in early March.    

Stocks are quoted up this morning on this positive news.  It will be interesting to see if they can hold these gains or if we'll see a bit of profit taking after such a strong run.   While some consolidation wouldn't surprise us, we  believe the market can make additional progress this year and think a target of 1100 on the S&P 500 remains within reach, or about fifteen percent additional upside from current levels.

In the course of the last year, we've had one of the worst performing markets on record, an environment that conjured fears of a second Great Depression like no other.  While the economy remains very weak, wouldn't it be amazing, if in hindsight, things really weren't so different this time? 

In an era of recurring asset bubbles -- tech stocks, housing stocks, commodities -- sometimes I wonder if what we've just been through was one of the economy's first "bear" bubbles -- exaggerated prices, only in reverse this time.  Investment bubbles, at their base level, are always caused by "fund flows gone wild", a term we coined to describe the bubble like action in oil and other commodities in a CNBC appearance about one year ago.  

With the proliferation of readily available products and strategies that can and do short the market, it would make some sense that a "bear" bubble would be far more possible in today's investment world.  Add the fact that many of the products that short the market use leverage -- sometimes 3 to 1 -- and you have a key ingredient common to asset bubbles of all types.  
  
In pointing out this possibility, I don't mean to minimize the carnage that has occurred in the economy -- the GDP declines in the last two quarters have been both staggering and real.  At the same time it could be said that the fundamentals for technology, housing and commodity companies were quite staggering during their halcyon days.  In hindsight, they didn't last.   

Historically, bears have hibernated through long, cold winters, emerging from their caves during springtime well rested and skinny.  Today's bears might be different.  They can be very active during long, cold investment winters, gorging on the flesh of the fallen and getting fat and happy in the process.  

Today's bears can be greedy.  And as surely as we're human, we know how that story ends.   

 

    

The markets have continued to do very well, moving above their 200 day moving average for the first time in eighteen months.  Yesterday's ISM index continued to improve in April as it had in March.  While it is not yet signaling an expanding economy, it is getting closer.  Several commodities are also setting new shorter term highs on the sense that worldwide economies are beginning to recover. 

Interest rates on long term government bonds have backed up considerably from their depression fear lows to about 3.7% in recent days.  In almost every recovery on record, a back up in bond yields has occurred as a reflection of recovering confidence and a renewed appetite to take on riskier asset classes.  As we've said before, a little inflation would be a good thing for the economy and a nice reprieve from the fears of deflation felt a few short months ago.   The back up in yields does not concern us.     

Late stage cyclical stocks, particularly energy, materials and industrials, continue to lead the markets higher.   Eventually, the recovery will spread its wings further and laggards like health care and consumer staples should participate.  But for now, the wind is clearly in the sails of the cyclical camp and we are positioned accordingly.  

You can read some additional thoughts we shared with CNN Money last week here.     

    

Stephen Moore wrote this excellent editorial today on Milton Friedman, a proud father of global capitalism, who passed away in 2006 at the age of 94. 

Friedman - like Reagan - had a way with words that helped capitalism to become a populist ideal.  Unfortunately, socialism is becoming the new populist.

If you haven't seen this you tube clip of Friedman being interviewed by Phil Donahue on the subject of greed, it is a must view.  While all social programs are well intentioned, they deny humanity's tendency towards self-interest and therefore are inevitably inefficient.  

Enjoy the weekend.

    

Readers know that I'm intrigued by the prospects for consumer staples stocks.  While we don't own anything in the space currently, this is largely because the area has tended to underperform during cyclical recoveries in the economy.  Historically, the space is a safety play or defensive sector of the market.  The view is that people use the same amount of toilet paper and toothpaste during recessions as they do during good times.  As a result, the stocks tend to outperform during downturns as their earnings hold up on a relative basis, but tend to lag during upturns when other areas of the economy start to grow faster.

So far, this has been the case during this cycle.  Consumer staples stocks, along with health care issues, have not participated much, if at all, in the recent rally.  As a result, the valuations on the group are near all time lows.  Of course, I've also learned that being cheap or expensive often doesn't mean much for stock prices until you get a fundamental catalyst to spark a change.  

I'm thinking that the catalyst in this case could be the weakening dollar.  However, I don't view a weakening dollar as a sign of U.S. weakness as much as a sign that many areas of the rest of the world may be stronger.  Certainly, the U.S. government has pumped a great deal of money into the system, but so have countries throughout the world.  On a relative basis, I'm thinking other currencies might rise.

The chart shown below just came across my desk a few days ago and shows actual correlations that may verify what I am thinking intuitively.  Of course, everyone knows that staples underperform in recoveries, but perhaps the dollar weakness play might make this time around different.  Even if I'm wrong, the stocks may have limited downside from here, so the only issue may be one of timing in a relative performance context. 

I haven't moved on the idea yet, but would be curious to hear your thoughts.  Let me know by email or by sharing your thoughts with the rest of the blog's readers by posting your own comment.  

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A friend passed along the following YouTube clip of Art Linkletter interviewing children on his television show.  Kids do indeed say some of the Darndest Things!  This will make you laugh out loud!

Art Linkletter on YouTube

Enjoy your Memorial Day weekend and remember -- in between the burgers and dogs -- to give thanks to all of our uniformed officials who fought for and maintain the freedoms we enjoy today.

God bless!

    

    

A few of our friends and clients have been asking specific questions on our views of the market in recent days.  We thought we'd share our responses.

1.)  Given the market correction, do you perceive securities and other market instruments are at bargain prices?  If so, where are the bargains?
 
We believe many areas of the market remain bargains in spite of the recent recovery.  In hindsight, the 666 level on the S&P 500 was likely discounting an environment of rampant bankruptcies.  Now, after a strong run, it's merely discounting a "less bad" scenario.  

From a statistical point of view, the market doesn't look cheap, but that assessment is based on cyclical lows in earnings estimates, which we believe will work their way higher over time.  There are bargains, especially if you're willing to look out two to three years, where gains could still be significant. 

Right now, we're most interested in later stage cyclical stocks in the materials, energy and industrial sectors.  As the recovery gains traction, the recent out performance of early cycle plays in the financials and consumer discretionary sectors should begin to fade as these later stage names begin to shine.  

Consumer staples stocks also look like incredible bargains, but theory suggests the area may face performance headwinds as money flows into areas more leveraged to economic improvement.  We believe, however, that this theory may be tested this time around as consumer staples stocks may be unique beneficiaries of a weakening dollar, or alternatively put, greater relative strength from emerging economies. 

2.)  Given the significant impact of the economic outlook (perceived or real) on the markets, what is your perspective on the state of the economy?
 
We believe we're seeing signs that things have stabilized, a sentiment shared by many corporate managements during this earnings season.  Of course, at some point the markets will need to see more than  "less bad" results to make additional progress.  But "less bad" is an important first step.  Having been through a hurricane, companies can now assess the damage and begin the rebuilding process on firmer ground rather than still shifting sand.   
 
Sentiment plays a huge role in determining the actual state of the economy in the extreme short run.  After a nice bounce, moods are understandably better across many measures of consumer sentiment, but it also remains fragile.  Investor sentiment, on the other hand, remains bearish even by historical standards rivaling lows only seen once in the last forty years.  While a 10-20% pullback from here wouldn't be unprecedented, it is doubtful that we'll revisit the old lows in the face of such bearish sentiment.  Bull markets invariably climb a wall of worry and we still have far more worry than jubilee. 

On the political front, conservatives are up in arms over the rise of big government, but liberals aren't entirely to blame as the trend clearly got started during President Bush's last year in office.  While I am a conservative, I believe the minority party is beginning to sound fatalistic, which has dangers of its own.  Things aren't likely to be nearly as bad as the extremes of either party might suggest, even though these voices will always be the loudest.  We'll get through this, we always do.   

3.)  What is your recovery plan to address these historically low returns?
 
Ten year rolling average rates of returns on large cap stocks have never been as low as they are today, even going back to the Great Depression.  Unless this is really the end of the world, current levels suggest that forward ten year rates of return could have significant upside.  This may be an incredibly compelling buying opportunity for today's long term investors. 

I would also note that "buy and hold" is now disdained worldwide.  Often, whenever an investing style or economic sector becomes universally despised or loved, an impending inflection point may be close at hand.  Even Warren Buffet has taken shots lately.  Ditto with the "it's different this time mantra".  I hear alot of that these days.  

History has repeatedly taught that it pays to go against the grain during points of maximum pessimism and maximum greed.  The key, of course, lies in finding one's courage to act.  There are no free lunches, after all.  
 
4.)  What single most significant change have you made to your own personal investment philosophy and how have you incorporated this change, or will you incorporate this change, in your personal investments?
 
After the tech wreck earlier in the decade, we adopted a selling discipline which we compared to caring for a garden.  Regular pruning, weeding and transplanting of investment holdings based on relative performance criteria and changing economic seasons has served us well over the last few years.    
 
More recently, we've also recognized that the greatest gains in the portfolio have tended to come from the names that are most universally out of favor, a characteristic that may be unique to extreme environments.  This has caused us to take a closer look at similar areas of opportunity, not only within the portfolio, but outside of it as well.  Every morning, we review the performance of our holdings year to date and off the lows in both November and March.  We've been more quick to prune gains, but have also been more eager to hold or add to names under significant pressure. 
 
Historically, we've only invested in bonds where clients need income or would like to achieve some downside protection.  I've never been a personal fan of corporate bonds as a diversification source in downside environments, preferring, the risk return profile of equities instead.  Where a fixed component is needed or desired, I've tended to only invest in government debt.  

Given the recent downturn, I'd say I'm more inclined to have a fixed income component in almost any portfolio, including my own.  Hundred year floods do occur and you have to make sure the liquidity exists for near term survival.  You also can't take advantage of buying low, if you have nothing to sell.  

5.)  This rally seems crazy and has nothing to do with earnings.   What am I missing?

While it may be true that "less bad" isn't the same as "better" earnings, it is still an important first step.   As mentioned in our answer to question two, First Call earnings estimates have been trending up for the first time in quite awhile.  Remember that the market discounts improvements in earnings ahead of their actual occurrence, just as it discounts deteriorating earnings ahead of their actual occurrence.  There are certainly false positives on both sides, but in all cases, stocks end up moving up or down in advance of the fundamentals.  

In our last update, we closed with the comment that religious faith is defined as being sure of what one hopes for and certain of what one cannot see.  The greatest blessings often come to those who move ahead of the crowd, when the evidence for such belief isn't always readily apparent.  Investing may be similar.  

    

Most of the economic data in recent days has been consistent with a "less bad" economy, but with a twist.  After a month or two of "less bad" readings, expectations for economic indicators like employment and retail sales have started to trickle upwards.  While reported readings for these indicators in recent days were still "less bad" than prior months, the market's response has generally been less positive -- a change in behavior.  This may suggest one of two things.  One, that the markets are beginning to need signs of something more than simply "less bad" to get investors to position more aggressively from here or two, that we're merely in pause mode after a significant run up.  I tend to think the latter, with a smaller dash of the former.

The inflation statistics released this morning continued to be benign for April, with the CPI declining .7% year over year and remaining flat month to month.  With energy prices prices rebounding at the pump and elsewhere as a function of stronger emerging market economies -- particularly China -- these numbers are likely to turn in coming months.  Some inflation, as we've said recently, could actually be seen as a positive for the economy.  Consumer confidence this morning was also improved and in fact the best reading since September.

As we said in our blog entry earlier this week, it is quite likely that if we are indeed in a recovery and not simply another bear market rally, we should see a shift in sector leadership in the coming weeks and months as a function of a recovery gaining additional traction.  The late cycle trade is something we're watching and have been moving towards over the last few weeks.  

I am also intrigued by the potential impact of a falling dollar as a function of stronger relative growth in overseas economies and commodity markets.   Consumer staples stocks have fallen less than the market in the last year but have not enjoyed much of a rebound off the lows, consistent with what would expect for a more defensive sector.  However, I'm starting to think that this sector could show uncharacteristic outperformance into an economic recovery as a function of a falling dollar.  Many large consumer staples companies have significant sales exposures to overseas economies.  

Anyway, it's something I'm thinking about. 

Boy, I sure am exciting, aren't I?

    

The biggest news in recent days, in my opinion, has been the rise in oil prices and gasoline at the pump.  Where I live, I've seen prices climb from roughly $1.94 per gallon to $2.40 per gallon in about ten days.  I've long felt that a return in oil prices to $50-60 a barrell might signal a more stable economy and we're at the higher end of this range today.  In response to these improvements, we have been inclined to increase our weighting to later stage cyclicals on the theory that improvements in emerging economies may help areas like energy, materials and multinational industrials the most. 

There is a fine line, however, to how much gas prices can increase without causing a change in consumer behavior.  Looking at my personal budget today compared to a year ago, I'm saving about $150-200 per month in gasoline costs.  For those with longer commutes, the amount could be much more substantial, perhaps as much as a monthly car payment.  For me, the savings amounts to a couple of dinners per month out with the family.  If you take away this savings too quickly without an uptick in employment, the benefits of budget shift spending to some companies within the early cyclical consumer discretionary sector might be lost.  (ie retail, restaurants etc.)  Since these areas of the market have been very strong recently, taking some profits might not be a bad idea.

The market feels a little bit tired here and in this sense, I wouldn't be surprised if we had a pullback.  I don't, however, believe a return to the old lows is likely.  In hindsight, these lows were clearly set on fears of additional high profile bankruptcies and a more severe recession, perhaps even a depression.  Many of the banks which had to raise additional capital following the stress tests did so very quickly late last week and yesterday, even some of the banks that didn't have that requirement did so anyway.  An important thing to realize here is that the private capital markets are functioning much more effectively than they were a few months ago, when the only source of capital for many institutions was the government.  In this sense, it is encouraging that some institutions may now be positioned to replace taxpayer funds with those raised in the private marketplace. 


 
In summary, no change to our more bullish tone.  Late cyclicals look interesting, early cyclicals may be a bit tired and defensives, while very cheap and thus interesting, may face near term headwinds as investors position more aggressively ahead of a recovery.  My advice for investors?  Have an idea of where we're headed, but never make sudden and complete shifts all at once. 

    

To all the Mother's out there, Happy Mother's Day!
   ---  The Sons of Broadleaf Partners

************

WHY GOD MADE MOMS

All answers given by 2nd grade school children to the following questions:

Why did God make mothers?
1. She's the only one who knows where the scotch tape is.
2.. Mostly to clean the house.
3. To help us out of there when we were getting born..

How did God make mothers?
1.. He used dirt, just like for the rest of us..
2. Magic plus super powers and a lot of stirring.
3. God made my Mom just the same like he made me.. He just used bigger parts.

What ingredients are mothers made of?
1. God makes mothers out of clouds and angel hair and everything nice in the world and one dab of mean.
2. They had to get their start from men's bones. Then they mostly use string, I think.

Why did God give you your mother and not some other mom?
1.. We're related.
2. God knew she likes me a lot more than other people's moms like me.

What kind of little girl was your mom?
1. My Mom has always been my mom and none of that other stuff.
2. I don't know because I wasn't there, but my guess would be pretty bossy.
3.. They say she used to be nice.

What did mom need to know about dad before she married him?
1. His last name.
2. She had to know his background. Like is he a crook? Does he get drunk on beer?
3. Does he make at least $800 a year? Did he say NO to drugs and YES to chores?

Why did your mom marry your dad?
1. My dad makes the best spaghetti in the world. And my Mom eats a lot.
2. She got too old to do anything else with him.
3. My grandma says that Mom didn't have her thinking cap on.

Who's the boss at your house?
1. Mom doesn't want to be boss, but she has to because dad's such a goof ball.
2. Mom. You can tell by room inspection. She sees the stuff under the bed.
3 . I guess Mom is, but only because she has a lot more to do than dad.

What's the difference between moms & dads?
1. Moms work at work and work at home and dads just go to work at work.
2. Moms know how to talk to teachers without scaring them.
3. Dads are taller & stronger, but moms have all the real power 'cause that's who you get to ask if you want to sleep over at your friend's.
4. Moms have magic, they make you feel better without medicine.

What does your mom do in her spare time?
1. Mothers don't do spare time..
2. To hear her tell it, she pays bills all day long.

What would it take to make your mom perfect? I really like this one!
1. On the inside she's already perfect. Outside, I think some kind of plastic surgery.
2. Diet. You know, her hair. I'd diet, maybe blue.

If you could change one thing about your mom, what would it be?
1. She has this weird thing about me keeping my room clean. I'd get rid of that.
2. I'd make my mom smarter. Then she would know it was my sister who did it and not me.
3.. I would like for her to get rid of those invisible eyes on the back of her head.

    

There is a sizable divergence between the performance of the S&P 500 today, up about 1%, and the Russell 1000 Growth index, which is down slightly.  The S&P 500 has a greater exposure to value stocks than the Russell growth index.  Today's difference, may largely be a function of the out performance of historically value oriented industries, including financials and cyclical areas like materials and energy.  Technology is also lagging, which is a bigger concentration among many classically oriented growth portfolios.

As we've said in recent updates, we expect that as the recovery gains steam, the out performance of early cyclicals will likely broaden to include late cyclicals.  This may imply that classically value orientated styles may have an opportunity to catch up to their growth brethren in the coming months.  Until April, growth had sharply been outperforming its value oriented peers.  In managing our portfolio, we tend to care less about strict definitions of value and growth and instead like to consider what should generate the best portfolio growth given a variety of inputs, including the economic cycle and trends in innovation.  

The biggest news of the day was the ADP employment report which showed a 491k drop in payrolls for April, substantially below expectations of 650k and a three month average of 685k.  These numbers represent an important inflection point in trend and may bode well for Friday's regular employment report.  On the earnings front, tech heavyweight Cisco Systems reports earnings tonight.
 
The results of the Treasury department's long awaited bank stress tests will also be released tomorrow.  There have been several rumors about the results of these tests over the last three days and it wouldn't surprise me in the least if officials leaked different scenarios to see how the markets would respond.  In general, the responses have been favorable for stock prices even when appearing pretty dire.  For instance, it is rumored today that BofA may have to raise $34 billion in additional funds and in spite of that news, the stock is up 16%!   One might conclude that the markets are looking beyond worst case scenarios, perhaps rendering the results of these tests irrelevant.

Don't forget, Sunday is Mother's Day.  

    

Yesterday, my five year old son Johnny learned to ride a bike.  It was late in the evening and close to getting dark, but we had been talking about an attempt "sans" training wheels all day and so I said okay.  Removing the training wheels, I took his bike to the back yard where the grass was soft and asked him to get on.  I held the backseat of the bike a couple of times and ran alongside him, but it didn't seem to work too well as he was always leaning against me, his substitute for training wheels.

So, on the third attempt, I do what many parents of their younger children do.  I got him going, gave him a good shove and let go.  And you know what?  He kept on going!  Sure, he eventually fell, but all in all he became a bona fide bike rider in very short order.   The outcome was an unexpected joy to behold.  Wow, how easy!

My older daughter also learned to ride a bike this year.  She had never gotten past the training wheel stage largely due to lack of interest, a little fear, and very little in the way of personal incentives.  That quickly changed about a month ago when a good friend asked her to go biking, but she knew she wasn't capable.  In similar fashion to Johnny, Molly learned to ride in extremely short order.  It just took incentives, personal ones.    

Like many, I often wonder what's the worst thing that would have happened had the government refused to be the economy's training wheels for the past twelve months and for some industries, perhaps decades.  How do both behavior and incentives change when dad's hand is always there?  I know it isn't a perfect analogy to learning to ride, but last night, I was really thinking about it.    

The market continues to move upward today.  Wells Fargo, in particular, is up 17% and strengthened even after rumors surfaced at noon, indicating that they would have to raise additional capital on poor stress test results.    

When you ride a bike on your own for a little while, you build the necessary confidence to ride it further.  If the Wells news is true and the reaction in the stock price legitimate, then it's as good a sign as any that being bearish may no longer pay.  The market may be past worst case scenarios. 

Let's ride!

 

    

We have published a new Economic Update titled The Road to Recovery to our website.   For an up to date view of our thoughts on the market and an elaboration on yesterday's entry, please check out the link.

Doug

    

I'm hoping to put some more substantial thoughts into an update soon, but have been bogged down by this earnings season.  So, here's a real quick summary of our current thinking on recent new data points.

1.) The market has continued to move higher.  If the current rally, up just shy of 30%, proves to be of a bear market variety rather than the beginning of a new bull market, it would qualify as the fourth largest bear market rally since 1900.  The other three larger bear market gains all came in the 1930's, lasting about 100 days and gaining between 35-60%.  Every other rally proved immeasurable since it marked the beginning of a new bull market.

2.) If you want to measure this rally from the November lows, then we're over 100 days into the current one, a tad longer than Obama's time in office and coinciding with his election.  However, to be fair, ten percent lower lows were hit in early March, so this date may represent a better measure of duration.   (I believe the new March lows were hit due to an overly ambitious political agenda and budget from the new administration.  Having put a number of issues on the back burner, let's hope Obama is a quick learner like Clinton proved to be.  So far, I am  encouraged.)

3.)  Technically speaking, the markets have acted great through earnings season and are now resting at minor resistance levels in the 875 area on the S&P 500.  Q1 GDP came in worse than headline expectations this morning, showing an economy that contracted about 6%.  With all the "less bad" talk lately, many had hoped for something in the high 4's.   The markets seem to be shrugging off this seemingly negative data point today, however.  GDP growth was negatively impacted by a 3% reduction in inventories and a surprisingly large 3.9% reduction in government spending.  While time will tell if the 3% reduction in inventories is repeatable, the decline in government spending should appear suspicious to anyone reading the newspapers in the last six months.  

4.) April consumer confidence ticked up to 39 from 26 and a consensus read of 30.  Granted this number is still very low, but it is much better than it was.  This has also been the first earnings season since the third quarter of 2007 that S&P estimate revisions have been positive relative to the beginning of the quarter.  Again, the read is only slightly positive, but like many things, it represents a change.  It is worthwhile noting that after this reading first tuned negative in the fourth quarter of 2007, it only took a few short months for the stock market to start its string of uninterrupted and brutal negative performance quarters.  Reversion to the mean?

5.)  As this rally continues to move forward, we should expect new leadership groups to emerge.  So far, while many areas have done well, the market's rally has largely been powered by consumer discretionary, technology, and to a lesser and more questionable extent, financials.  If this is not a bear market rally, then we will most likely see a pickup in the performance of later stage cyclicals.  From our reading of earnings transcripts, better or less bad results have been confirmed by the tone of management teams from consumer discretionary, technology and financial shares, but not those of later stage cyclical groups.  Management team comments from these groups were still pretty dour, with a less of an end in sight mentality.   Nevertheless, if you're in recovery mode, as we prefer to be, then the are groups worth exploring.   

6.)  An article in today's Wall Street Journal seems to declare the death of "buy and hold" investing and a preference for tactical asset allocation and trading.  Contrarians take note!  Talk of premature deaths and attitudes of "this time it's different" often seem to mark interesting turning points in the performance of various industry groups, stock market indices and performance styles. 

Wow, so that was a little more than I intended, but perhaps it will catch you up on our interpretation of the recent news and events.  I'll have more cogent thoughts and elaboration for an Economic Update shortly. 

    

Each quarter seems to have a rhythm to it in the investment management business - at least from where we sit.  As a quarter winds down and comes to an end, we spend a fair amount of our time communicating those results to our clients and investors in writing, over the phone and face to face.  After this flurry of activity, earnings season quickly rushes into high gear.  During this period of time, we not only monitor continued economic releases, but we also read the earnings call transcripts for our common stock holdings, others that we may be considering for purchase or have proven to be decent barometers of the economy's overall health. 

Earnings calls are important to us for a few reasons.  First, after listening to the same calls over a period of quarters and years, we get to know the nuances of different management teams, particularly how they tend to view the world and how they communicate those views.  This is important as it sets a benchmark for each management team's unique pattern of behavior.  Second, the earnings results often provide the opportunity to see where the rubber meets the road.  In other words, most economic releases on the state of the economy have an air of academics about them, while company commentaries help provide real color and can at different times both confirm and deny the existing macroeconomic evidence.

So, the river of earnings is upon us.  While we won't post the third installment of The Flop, The Turn and the River just yet, I thought I would share some insights from Google's earnings commentary.  Google enjoyed a good quarter, all things considered, but hasn't been immune to the decline in worldwide economies.  Over the last few quarters, this company has been able to cut alot more from expenses than many companies, improving their margins considerably.  The good news is that as the economy turns, Google's margins will likely move up even further as the company has become more lean and mean after enjoying a great many "fat" years.   Does Google see a recovery today? No, not yet, but they do believe one will occur.

The following quotes from management on the call were of particular interest.    

"What's interesting from my perspective is to see how graphically search engines shed light on the state of the economy.  Searches on foreclosures are up 42% year over year, bankruptcy is up 53% year over year and unemployment has more than doubled.  We also have seen increases in education, self help, spirituality, and on the other side of the stress release spectrum, alcohol and gambling.   We are also seeing strong search results in U.S. health care, automotive and auto maintenance and auto parts, which may be a do it yourself phenomena."

I think it is safe to say that you can see what areas of the economy are doing well by following the topics folks are currently googling the most.  I'll also wager a bet that companies that benefit from bankruptcy, foreclosures, education, and do it yourself auto repair have enjoyed stronger relative stock price performance over the past twelve months.  What isn't clear to me is how quickly these trends can shift and whether or not they are leading, coincident or lagging indicators.  I think Google, if it wanted, could enter a whole new business providing this grass roots, real time data to Wall Street.  Maybe someone does already.   

Pretty soon, earnings season will be over and then another quarter will draw to a close and the process will repeat itself once more.  As bad as things may feel, the path to recovery is always paved one quarter at a time.
  


Today's Pepper and Salt.  Economics, ergonomics...it's all the same.

    

So far, the economy's new cards have looked pretty good, at least compared to where we've been.  Fed officials were on record last week claiming that the "worst" of the recession may now be past us and Treasury Secretary Geitner said he doesn't see a second round of banks collapsing.  (To be fair, I don't think he saw the first round coming either.)

The capital markets also seem healthier, as evidenced by last week's initial public offering of two companies, including Rosetta Stone.  This morning, Oracle announced the intention to buy Sun Microsystems and Pepsi is buying up shares of independent bottling operations.  These deals are important in that they show that the capital markets are functioning in their primary capacity and that companies may want to get deals done now before prices slip away from them. 

ISI, an economics firm we closely follow, raised their Q2 GDP forecast to -2% from -3%, kept their Q3 estimate at   -1 %, and increased their Q4 estimate to +1% from -1%.  Barton Biggs, a well known strategist formerly from Morgan Stanley, sees the S&P making a move to 1050-1100 on further cyclical strength.  This forecast fits with our game plan, calling for the market to trade between 740 on the low end and 1000-1100 on the high end this year.

Only a few players bought into this rally's hand in early March, but those that did are likely still in the game, eager to see the economy's next card.  Unfortunately, today's card, the "turn", doesn't confirm much of anything.  March's Leading Economic Indicators declined for the third month in a row and came in a little lower than expectations.  While this is a negative data point, particularly as a leading indicator, there was some offsetting good news as February's reading was revised upward and many expect an improvement in April.      

The banks are led the markets sharply lower today on rumors that the government may force some to convert their preferred share holdings to common when the stress test results are announced in early May.  With TARP funds running low, this rumor has some plausibility.  But is it real, or merely a bluff?    

With most investors watching from the sidelines, the burden of proof has shifted to the bears, where anxiety levels have likely risen to levels not seen in quite some time.  If bull markets do indeed climb a wall of worry, this could be a positive sign. 

A "river" of earnings reports is due out this week.  Let's see where it leads.

    

Continuing yesterday's poker analogy, let's take a look at the cards dealt from today's deck of economic data.  (Aka, the "flop".)      

Card #1.  The Philadelphia Fed Index was similar to the Empire Manufacturing Index, suggesting that while contraction in the economy is still expected for April, the rate of decline has slowed.  The most notable component of the report was the jump in the six month outlook for general business activity, which rose to a reading of 36.2 from 14.5.   This is a good card, indicating that the economy has likely begun to stabilize and that a marked increase in optimism is now beginning to show itself.

Card #2.  Unemployment claims declined 53,000 to about 610,000, while continuing claims increased 172,000.  This card is consistent with the first one, suggesting that the pace of job losses may be declining, but that people are still having a difficult time finding new jobs.  Again, this card is a good first derivative indicator of a change in momentum to the downside, but perhaps is not yet consistent with an overall improvement in the economy.

Card #3.  The companies that reported earnings last night and this morning are generally seeing nice positive moves in their stock prices today.   I am particularly encouraged by the move in Harley Davidson (HOG).  After nearly doubling from its lows, I was a bit concerned that it might be ahead of itself.  But, the company reaffirmed its full year guidance and is now up another 9% today.  With analyst sentiment so negative on the name, this action suggests that short sellers may no longer be willing to press their bets.  Once again, this card is market friendly and perhaps an even better real time indicator of what may come than cards one and two. 

All in all, the "flop" suggests additional upside in the market is more likely and that the economy may indeed be in the first stages of mending itself.  Given the flop, I'd stay in the game and certainly wouldn't fold.  Would I increase my bet?  Hmm.  Let's wait for the "turn" and the "river".      

    

As we head into earnings season, I've been reviewing the performance of different stocks and industry groups over various time periods, including year to date and from the market lows in both March and last November. 

One observation that clearly sticks out in the data is that defensives like health care, staples, and utilities have lagged the market, while companies with cyclical characteristics, particularly technology and consumer discretionary stocks, have outperformed.  Industrials and energy appear to be in line, with no clear trend in relative performance quite yet evident.

As is always the case, the stock prices of some companies are responding nicely to their earnings results (Schwab), while others are giving up some of their recent gains (Intel).  Intel felt comfortable predicting that PC sales had likely reached a bottom and that inventory levels were now generally in line with reduced demand.  Their guidance is for flat results quarter over quarter, which suggests that while they may have seen a bottom, they aren't yet willing to predict a recovery in growth.  

I am having a difficult time discerning any insights from this navel gazing, but it hasn't stopped me from trying.  
The only conclusion I can offer is that the markets have done very well in the last six weeks and the performance patterns of the aforementioned industries imply that the market is either beginning to discount a cyclical recovery in the economy or alternatively, the increasing unlikelihood of a second Great Depression.  

With some groups of stocks more than doubling off their lows, I am asking myself if the moves are rational, reflecting the "less bad" environment, overdone, or simply a partial recovery from downside levels that had been ripped by an irrational fear of profligate bankruptcies.    

I wish I could be more decisive, but for now, I'd be bluffing if I were.  So, it's a push.  I'll wait to see what new cards are flopped in the coming days.     

    

Pepper & Salt, The Wall Street Journal 4/11/09

As we move into springtime, Wall Street has been using the term "green shoots" a great deal to describe signs of potential new life in the economy.  The bears of course are warning against a dangerous late term frost that will likely kill these delicate "green shoots" as quickly as they've emerged.   (Perhaps the bears should stay in hibernation for awhile; they've certainly had their fill!)

Frankly, I think it's nice to hear Wall Street using words that we can all understand for a change.  Perhaps the events of the past year have made some in this business just a little more human, a little more soft, a little more comfortable being vulnerable in the eyes of the rest of the world.  Personally, I think that's a good thing.

Green shoots or not, this is the season of new life.  Faint red buds are forming on the tree just outside my window and the grass is greener on the town square than it was just one week ago.  The sounds of new bird chirps are in the air, proclaiming the impending death of winter. 

Humans the world over are taking Passover meals in remembrance of God's protection and deliverance from the bonds of harsh and evil slavery.  Easter is being celebrated by others, in remembrance of the death and resurrection of God Himself, who cleared a path for those eager to lay their pasts to rest and be reborn.

I don't know whether today's green shoots will survive the coming months, but I do know that through weakness, we are made strong. 

Strength is a matter of perspective.  

Rejoice and be glad!

May God bless you this season.

    

First of all, my apologies for posting such a massive chart.  I tried to make it smaller, but it wasn't readable and links just don't jump out at you like a picture does.

Anyway, this graph shows the annualized rates of return on the S&P 500 for each year, going back 182 years.  The red block is 2008.  Yes, it was a historically poor calendar year.

The good news - if you're into mean reversion and big charts - is that the last two times things were this bad, the markets gained 30-40% (1938) and 50-60% (1933) in subsequent years.  Could this bode well for 2009?

Wells Fargo had some nice things to say about earnings this morning.  The stock is rallying 22% and was up as much as 33% earlier.  It's unlikely to see such gains sustain themselves in the short run, but the movements clearly show you just how oversold and likely shorted some areas of the market have become. 

On another note, same store sales were also okay, although in a turn of events, warehouse clubs like BJ's, CostCo and WalMart generally were light of expectations while other higher end, mainline retailers were generally ahead of expectations.  Could it be that we're seeing a trickle of consumers trading back up from shopping the Wal Mart's of the world?  It's hard to say for sure, but it would be an expected pattern of behavior if things are indeed stabilizing a bit.  

    

Earnings season is always ushered in by the results of Alcoa - which reported last night - and then picks up steam, ending in a crescendo of conference calls four or so weeks later.  We have had a nice bounce off the lows so it will be interesting to see not simply what companies report, but what they see in the quarters ahead. 

My guess is that inventory levels have been worked down a fair bit given the dramatic slowdown of the last few months.  The expectation of rebuilding may allow some room for management teams to be more cautiously optimistic this go around.

In addition to the earnings season, same store sales results for many companies will be released tomorrow.  Decent results will likely be characterized as those that aren't as bad as feared or whose pace of deceleration has slowed.  If the pace of declines has slowed, it will mark the third consecutive month of improvement, or perhaps better put, "less bad" results.

On an unrelated note, it looks as though many life insurance companies will be eligible to receive TARP funds, which angers me a bit.  As I noted in our recent update, Something for Nothing, Free Lunches and Fool's Gold, the variable annuities that may have put many of these companies in trouble in the first place are likely products that should never have been sold in the first place.  Don't the words stock market and guarantee bother anyone else out there?

Check out the R Section of Monday's Wall Street Journal for more.

    

It's hard to believe, but it's been another great week for the markets, the second in a row!  Let's hope it's habit forming!  So now what?

Our basic premise remains the same.  While the S&P 500 briefly violated its 740 lows this quarter, it may have seen the devil itself at 666, when it made an aggressive about face and returned to a more heavenly 800 by quarter end.  We continue to believe that the index will likely trade in a range of 740 and 1000 for the remainder of the year. 

No one knows, of course, whether the current rally is sustainable or simply another in a series of bear market rallies, but we can’t help but be encouraged by recent economic indicators.  The ISM index of leading indicators, released on April 1st, increased for the third month in a row and the new orders component of the survey ticked over forty for the first time in seven months.  China’s leading indicators also appear to be showing signs of life.  Pending home sales were up in February, with one survey improving for the eleventh week in a row and auto sales seem to be stabilizing as well.   The Washington Post/ABC Consumer Sentiment Survey, established in the early 70's, showed that 42% of consumers see the economy moving in the right direction, the highest level since 2004 and a significant increase from the record low of just 8% in October of 2008.  And while jobs are scarcer, the good news is that inflation adjusted pay, thanks to declines in many commodity prices, is actually at record levels!

On the negative side, new unemployment claims increased to more than 750,000 this week, the highest level that the ADP survey has ever seen -- although not its greatest percentage gain.  Fortunately for the markets, unemployment tends to be a lagging indicator and usually increases – sometimes considerably – even after the economy and the markets have officially bottomed.  We continue to believe that the unemployment rate, currently at 8.5%, could move as high as ten percent in this recession without causing us to revisit our overall game plan of investing now for an eventual upturn in the economy.    

We’ve made an historical descent in the past year and a quarter and are now in a valley hiking among the foothills of what will eventually become tomorrow’s new bull market. 

There are still new mountains to climb.    

    

    

I took a short spring break last week with my family and visited the amazing landscape of Hocking Hills based in southeastern Ohio.  If you're looking for a fun weekend trip, I'd give it an enthusiastic nod.  The terrain reminded me a great deal of northern California, thanks to the many hemlock evergreens brought by glacial deposits from Canada millions of years ago and very cooperative weather.  The caves and rock formations were quite striking and kept me wondering, was I really in Ohio?   

In a similar vein, last week was a nice one for the stock market that has everyone wondering, is it for real?  Are we witnessing another bear market rally or the start of something more sustainable?   The economy will recover at some point, but are we at that point now?  Will economic data that has been "less bad" give birth to data that is a "tad better"? 

Several economic releases are due out this week that will likely give us further clues on the answer to this question.  In particular, we'll get leading indicators from both the service and manufacturing sectors on Wednesday and Friday of this week.   If the data is "less bad", the stock market may continue to do well from here.  But if not, we may need to chalk recent gains up to the bear market rally variety.  

Over the weekend, I was able to get a head start on some outdoor spring cleaning and even flipped five patties on the Smokey Joe last night.   But, as I left for work this morning, I was greeted by a dusting of snow.  

Hey, even Mother Nature's got game.

    

The Broadleaf blog will be on Spring Break next week, so we'll leave our texting to the Pileated woodpeckers out there.

While the markets have pulled back a tad in the last two days, it has been a good couple of weeks.   Hopefully, we will return to the office next week with more green on the screen. 

Enjoy. 

    

For those that may have missed our CNBC appearance this morning, here is the clip , which should be available for the next week or so.  The interview went well and we actually succeeded in getting a laugh out of host Mark Haines, which may be an accomplishment in itself. 

In the interview, we discussed why we liked early cyclical stocks in the current market environment, which includes financials and consumer discretionary names, as well as technology as an innovation play.  We also mentioned several names for investors to consider, including Starwood Hotels (HOT), Cisco Systems (CSCO) and Harley Davidson (HOG).  

While I'd love to take credit for the seventeen percent rally in Harley's stock this afternoon, I honestly can't lay claim to any special knowledge and certainly don't have an ounce of influence among the fast trigger, trading crowd.  Regardless, the sudden and explosive move in the name helps emphasize a point I was trying to make.  

From current levels, some of the most suspect and wildly despised stocks may actually have the potential to enjoy the greatest gains.  If you feel like saying "e gads" to describe a stock recommendation - a word we used in the interview - perhaps it's a clue that you should take a closer, more serious look.  

At some point, the economy will turn.  And while few are buying higher end motorcycles today, this might then change.  Everyone may clamor for stocks like Harley and Starwood, similar to the craze over gold and treasuries in recent months.  

As Wayne Gretzky said, skate to where the puck will be, not to where it is right now.

If only it were so easy.




 

    

Less Bad. 

Those are the operative words of the past week.  Retails sales, housing starts, new claims, company survey work, company stocks hitting new lows...all have been "less bad" than feared in recent days or realized in recent months.   

"Less Bad" doesn't always mean "Better Days" are immediately ahead, but it is a precursor for when those days eventually come.  Today, the markets strengthened into the close, finishing up 3.2%.   

Regardless of whether or not this is "it", "Less Bad" does "Feel Better".

We will be on CNBC's Squawk on the Street Show tomorrow morning, March 18th at 9:35am.  Tune in as we discuss the current market environment with hosts Erin Burnett and Mark Haines.

    

On the positive front, the market is posting nice gains today, up over 2%.  Retail sales, excluding autos and gas, were up a surprising .5% month to month, clearly much better than the market had been expecting particularly in light of all the job losses.  

While discounting is playing a role here, it is encouraging to know that price may be influencing consumer behavior.   Consumer discretionary shares, which include the retailers, are known as early cycle plays because they have historically been among the first to show signs of life leading the economy out of recessions.   In this light, the retail sales data may pack a little more punch in sustaining a run that many technicians now believe has legs. 

Our gameplan remains the same; the markets are due for a bear market rally and will likely see several throughout the remainder of this year.  If you can muster the courage to buy here, do it now rather than waiting to get more comfortable after a strong run.

On different note, I've been thinking that a great many of our problems today stem from making promises that should have never been made in the first place.  We are a society that has become obsessed with insuring everything.  We want to win big, but are only willing to risk little.  We want "something for nothing" and covet our "free lunches".  We cling to the notion that alchemy exists, though we call it by another name.  Somehow, the notion of social progress blinds us to the fairy tales we create for ourselves.   

Many airlines hedged their energy supplies last year at prices sharply above current levels.  These hedges are now significantly underwater.  I read recently that a chicken company went bankrupt because they locked in higher prices, while another, Sanderson Farms, remains viable because they elected not to.  Many natural gas producers have hedged their future production levels in the $10 range, but with prices now as low as $4, one wonders what they will do when 2010 arrives and the hedges run dry.  AIG made so many huge counter party promises that the government had no choice but to bail them out several times over, in spite of having at one time an investment grade balance sheet and stellar insurance reserves.

A while back, someone talked to me about variable annuities for my mother in law.  These investments promised equity like returns on the upside, but also guaranteed that her losses would be limited on the downside to half of the market's.  In my mind, the product seemed expensive, but was also quite alluring given its promises.   And then it hit me.  Was it too good to be true?  If I were ever caught guaranteeing an equity rate of return for my clients, I can assure you that the SEC would be quick to throw me in jail or at the very least, risk uncovering another Madoff scheme at some point down the road.   A pattern of simple, neat equity returns?  Fool's gold.

If we are indeed on the eve of a strong market rally and you've ridden it all the way down, take care not to be too hard on yourself.   In fact, take some time to feel good about it.  You've invested the old fashioned way.

You've earned it. 

    

The markets are enjoying a nice rally today likely spurred on by Citigroup's comment that they were profitable during the first two months of the quarter.  Bank of America, JP Morgan and Wells Fargo made similar comments in recent days, but only Citigroup's comments have had the power to move the markets up as they are doing today. 

Barnie Frank's comments that Congress would reinstate the up tick rule for short sales within the month and review mark to market rules may also be causing a little anxiety for the market's short sellers.  As a sign of how prevalent and mainstream short selling has become, a friend of a coworker recently told him he was considering purchase of "some stock" that had done well this year.  Eager to know what this stock was, my coworker looked it up and discovered that it was an exchange traded fund that was short banking and financial stocks and leveraged three to one.  

This is yet another example of fund flows going wild, similar to what happened with tech stocks and housing stocks, but this time in reverse.  As we've discussed ad nauseum, when an area of the markets do well, people want a piece of it.  Fund flows go gaga and the stocks in the area surge even further as cash pushes the price ever upwards. 

The combination of successful short selling strategies in the past year and the ease of access to vehicles like exchange traded funds that are short various areas of the market are proving to be a combustible mix.  To make matters even more absurd, many of these vehicles are leveraged 3X.   It's shocking that this is occurring in spite of what we're learned about leverage in recent months.  Of course, it would be easy to say buyer beware, but if there is anything that the past two years have taught me, it's that excessive leverage can create toxic secondhand smoke, obliterating not only the user but possibly many innocent bystanders along the way.     

I just can't understand why our regulators aren't looking into this situation.  It may be one thing to put your own funds at risk, but doing the same thing in triple X fashion with other people's money is pornographic, plain and simple.  

Pure filth. 

    

In the past two weeks, I've posted comments made by Rick Santelli and Jim Cramer from CNBC. 

This segment by The Daily Show with Jon Stewart is a humorous rebuttal to their rants and a reminder to always be suspicious of anyone who tells you they saw the economic crisis coming.

In fairness to Rick Santelli, he has consistently spoken up against all of the corporate bailouts made in the past year and a half, not just those being proposed for homeowners. 

In spite of that key truth, Stewart's piece is still a great laugh.  It reminds me that there is plenty of blame to go around and humility that should be shared.  

I just hope we don't make the situation worse than it already is.  

    

    

It's Wednesday and the markets are acting a tad better.  I am becoming increasingly convinced, based on conversations with others, that the market's latest downdraft through the November lows is related to Obama's ambitious plans.  Hopefully, he will look to the response of the markets for some guidance on the longer term wisdom of his plans as Clinton did in the early 90's.  Some changes are obviously needed, but you can't turn an economy around by squelching personal incentives.



Other noteworthy events include the Fed's announcement yesterday that they would begin to administer their Term Asset Backed Securities Loan Facility later this month.  This should help the banking system restore some semblance of liquidity for the asset backed securities markets.  It remains to be seen whether or not consumers will spend on things like cars that back such loans, but it should at least help the system in the short run and the longer run insofar as lending standards have been strengthened.  

There has also been considerable talk about reinstating the up tick rule for short sellers given the severity of the markets.  Jim Furey of Furey Research Partners makes a good case for this, comparing the removal of the rule to "providing a machine gun without a trigger-lock to aggressive traders everywhere."  Over the long run, companies that deserve to be worthless will still become worthless regardless of whether or not the rule is in place. 

Finally, for anyone in need of some encouragement, there were two excellent articles in today's Wall Street Journal.  The first offered some helpful advice for anxious investors and the second discussed how an attitude of gratitude may be on the upswing as a positive dividend of the poor economic environment.  

    

I took Friday off to go skiing in Western New York.  When we arrived at Peak N Peak, it was about fifty degrees outside and raining cats and dogs, so we took a pass and continued to a friend's house on Chautauqua, where we proceeded to eat, play poker, and watch more movies than I would care to admit.  Over a few short hours, the temperature dropped no less than forty degrees, which provided us with a great, albeit cold Saturday of skiing at Holiday Valley.  This morning, the pipes in one of our bathrooms started to freeze, it snowed in Atlanta, and a Nor'easter hit the East coast of the United States.  




That just about sums up how the markets have made me feel over the last two trading sessions.  I had held out high hopes that we'd be able to hold the November lows in spite of more difficult news, but Friday's last half hour of trading proved me wrong.  The markets are selling off even more aggressively today, and it is difficult to handicap where the next resting point might be.  Friday's Citigroup news, General Electric's dividend cut, today's additional government "investment" in AIG, and Obama's overly ambitious first hundred days may be partly to blame, but who knows for sure.  People just don't want to own anything and for now, everything is being marked down to clear inventory.  

Warren Buffet's company, Berkshire Hathaway, reported its worst quarter in history, with profits down over ninety percent, while the company's book value declined by roughly nine percent for 2008.  Warren admitted to making some "dumb" mistakes in 2008 and sees a rocky year for the economy in 2009 and perhaps beyond.  He still, however, holds out hope that stocks can perform well from here.  I agree with Warren, but it ain't easy.  It's been an all out drubbing this year, with the worst February on record following one of the worst January's. 

For now, the pain reminds me of exam week during my college days.  It's unbearably grueling, but - I keep telling myself - the end WILL come.   Persevere.  Tomorrow WILL be brighter.
  

    

The S&P 500 came within a point of caressing the November lows yesterday and is bouncing a tad today.  I wouldn't say that anything new has surfaced over the last few months to suggest that further weakness is likely beyond these levels.  Surely, whenever you see a retracement, it means that the bears are in control.  Many strategists are climbing over themselves to come up with new price targets for even lower levels on the S&P 500 by reducing their aggregate earnings estimates even further and then applying some expected multiple to those results.  These analysis are always interesting, but given all the assumptions, should hardly be taken as gospel.  Just as analysts jumped over themselves to raise index targets and aggregate earnings estimates on the upside, they are now doing the same thing but on the downside.  Reality may likely reside somewhere in the middle.  

Earnings results for the fourth quarter have been difficult, but nothing any more disastrous than the declines in most stocks would have already implied.  I suspect that the retracing of the bear market bounce since January has largely been based on the skepticism with which the market has greeted many of Obama's stimulus programs or the vagueness of the Treasury Departments approach to the beleaguered banks.  Geithner and crowd will be spending the next several weeks stress testing some of the nations largest banks to see how solvent they would be in the event of a dramatically worse downturn in the economy.  In many respects, these stress tests may be similar to the aforementioned aggregate earnings reduction exercises many strategists are undertaking.  While these exercises have value in that they help all of us understand and better prepare for worst case scenarios, it is also important to realize that just because you take a look at them doesn't mean they will occur.  

On a surprisingly positive note, several retailers over the last few days, including Nordstrom's and Macy's, have reported results that weren't nearly as bad as feared.  Ee gads --- someone is still shopping.   I only point this out because consumer discretionary stocks like these are also known as early cyclicals and typically respond first in an economic recovery.   In addition to watching any progress in the banks, early clues as to an economic recovery might be expected from this group of stocks.  Granted, they may represent the start of another bear market rally, but a rally it still would be.  

We believe that now is an excellent time to begin committing new funds back into equities, but with the clear understanding that we may likely see several more bear market rallies and retracements throughout the year.  Better economic fundamentals will likely be a 2010 event, which may be partially discounted later this year. 

We have also received many questions from our readers wondering whether or not it makes sense to hold onto overweighted positions in corporate credits and other fixed income investments rather than rebalancing these funds back into "junior" equity positions.  My general reaction to the question is that unless you believe many companies are going under, corporates and equities should respond similarly, just as they started to turn down together.  In the absence of going under, "junior" may never come to pass  and equities might see the "senior" returns.  Weeks like the last one certainly give anyone contemplating an equity rebalance a reason for pause, but the truth of the matter is that no one will time their move perfectly.  When you manage huge pension or foundation assets, it is unlikely that you'll be able to make the move at the perfect time.   As a result, an incremental approach is advised and with the S&P 500 nearly fifty percent off its highs and near support levels, now may be a good a time as any to begin the tiptoe process.  (And we'd love to help you with that dance...hint, hint!)

JP Morgan provided some analysis on the subject as well in this morning's research.  In looking at credit spreads during the Great Depression, they noticed that equities did not start to perform better until spreads peaked and moved back below 300 basis points  (BAA less AAA yields).  While history rarely repeats itself, it is nevertheless encouraging to know that spreads did peak last November and that they narrowed to 300 basis points on January 29th.  Healed, no, but healing?  It would seem so.  

In other news,  JP Morgan's stock is holding up today despite a decision to trim their dividend by 85% and Apple has finally firmed up details for distribution of their i phone in China.   At least for today, the bark of dividend cuts may be worse than their much feared bite.   And, in spite of all the bad news, the world still has one new opportunity for American products, selling i Phones to the Chinese.   

Call me a lunatic, but I think there will be others.  But if not, the i Phone is still pretty cool. 

    

If you read our blog or subscribe to any blog for that matter, you have probably already seen this morning's CNBC video clip of Rick Santelli speaking up on the government's mortgage bailout plan.  But if not, it's worth viewing here.

The video is making its way around the internet and I'm sure will find itself in many more in boxes by tomorrow morning.  I caught the segment live this morning, and I admit, it struck a nerve, which is, no doubt, why it is making its rounds.  Apparently a real Tea Party on the shores of Lake Michigan is in the works.

There are no great solutions to this mess, but there are likely better solutions.  I'm not so sure about this one.

    

As I write, there are a number of market technicians calling for a rally in gold to $2,000 an ounce and for the stock market, measured by the Dow, to fall an additional thousand points or so to 6500.  While I do pay attention to technicals, they are also momentum based strategies, that generally hold to the view that prices that are moving up will continue to do so and that prices that are moving down will continue to do so.  They aren't so good at determining inflection points, which may be extraordinarily important to keep people from buying at nosebleed levels and then selling too low, after all hope has been lost. 

Speaking of gold, lots of folks are bullish on it, perhaps because it is being viewed as an alternative store of value to paltry treasury yields (backing dubious stimulus programs) and the dollar safety trade.  The same thing, of course, could have been said about oil over the summer - that it was a good hedge against inflation.  But look what happened.  Technicians were calling for oil to hit $200 as it moved through successive prices on the upside and yet now it has fallen to $32, hardly even reaching $150.  If you're going to buy oil, today's prices look much better! 

John Lisy, a former institutional salesman who covered me from Merrill Lynch makes some good comments on gold, which you can read on his new blog, Yet Another Investment Opinion.  I would only add the question as to why gold is valuable in the first place.  It seems to be valuable only because people believe it is.  Other than dentistry, I don't know of many industrial uses for it and the jewelry market isn't exactly hot these days.  In a sense, it has temporal "value" because it is one of the few prices moving up in a market devoid of such action.  The upward move, in my mind, reflects the beginning stages of fund flows gone wild, which almost invariably ends badly.  I can hear the faint sucking sound of a black hole where a red giant once dwelled.   

  Today's Pepper and Salt sure works. 



As markets come dangerously close to testing their November lows, many technicians are saying that we'll likely violate these lows and move exponentially downward.  Again, the view is that prices that are moving down will move down, perhaps forever.   Instead of buying lower and selling higher, we are coaxed to buy when the market has moved up (January) and sell lower after it has moved down (now).  Now, I know that it is easy to be bearish right now.  Things are not rosy in the least.  But to a large extent prices are discounting some really tough times already.  

What am I worried about?  Personally, I question the wisdom of some of the spending in the stimulus programs and some of the current proposals to fix the mortgage mess.  I'm not sure that lowering the payments of mortgage holders that are at risk of foreclosure will be effective.  I would guess that if you're close to foreclosure, you've likely already tapped most of your sources of liquidity and so saving an additional few hundred dollars a month may only delay the inevitable.  Check out today's NY Times article on the subject, which seems to support this view.  While I do believe that we should act charitably as individuals, doing what we can, government money - our taxes - might be better spent elsewhere or if in this area, in alternative ways.  

It's probably safe to say that the Obama honeymoon is over.  The Presidency isn't an easy job.  

I'm guessing you have to really want it.            

 

    

    

After an extended three day weekend, the markets reopened yesterday and sold off aggressively, closing at the lowest levels since November 20th.  There have been many reasons proposed for the recent declines, including a buy the rumor sell the news mentality following the passage of the stimulus plan, a new fraud uncovered by the SEC, and very weak European and Japanese economic data.  

Several strategists also reduced their 2009 earnings estimate for the S&P 500 to below $50, which would place the market's P/E multiple at 16x - not expensive, but not entirely cheap either.  It is important, however, to realize that for cyclical businesses, P/E ratios always look the cheapest at earnings peaks and the most expensive at the earnings troughs.  Following a strict valuation approach here would mean buying when prices are high and selling when they are low, which would, of course produce disastrous outcomes.  This is why it is important to consider "normalized" earnings when thinking of valuations rather than coming to hasty conclusions.  What constitutes "normal" is of course open to a wide set of interpretations, but I certainly hope that the current environment doesn't prove to be "normal" going forward.  

On the banking front, Greenspan and some Republicans in Congress have actually been talking up the idea of nationalizing some of the nation's banks.  You could argue that with all of the government money in many of these banks already, they have been nationalized to some extent.  The Geithner and Bernanke approach is to first find out the facts by sending in more regulators to look at the banks books and "stress test" them to see how solvent they would be if things become much worse in the economy than they already are.  This approach makes some sense in that it may help everyone understand what the downside case might look like, which will be important information for the public markets to price troubled loans appropriately and thus implement an effective bad bank plan. 

In spite of the declines, the S&P 500 has still managed to hold its November lows which are now 6% below current trading levels.  Our short term investment play book continues to be based on the view that these lows should hold and that investors will be best served by buying and adding to positions near these lows rather than waiting for when it is emotionally easier to do so following a 30% bear market rally.  We expect that repeated bear market rallies are likely this year, with hopes of a more sustained run likely occurring in 2010 as the economic fundamentals begin to improve.  We would also note that the markets are unlikely to make a sustained upward move without the participation of financial stocks, particularly the banks.  These entities are, after all, vital to the long term functioning of a healthy economy.

    

I have been relatively quiet on the whole Stimulus debate.  A client, however, forwarded the following Bloomberg article on some of the health care provisions within the plan as well as some anecdotes regarding his own difficult experiences with health care in Canada, a system where it has been socialized.  His stories were a bit disturbing, to say the least.  I'm not going to post them, but perhaps he will as a comment.

Isn't it ironic that the man who authored these provisions to spend your tax dollars - Tom Daschle - dropped his nomination as head of the Health and Human Service Department last week when it was discovered that he failed to pay his own taxes?  Perhaps, though, it is really not ironic at all, but to be expected.

Last night, I watched an old You Tube Clip of Phil Donahue interviewing Milton Friedman about capitalism and greed, recorded a number of years ago.  A friend posted it on my Facebook account.  Check it out.  In the rush to paint all business as "evil" and the government as "good", Milton provides a timely reminder that the ideas of politicians aren't without their own set of conflicts.

We do need some sort of plan, but like many, I'm a tad disgusted by all of the pork being thrown around. 


******
Ruin Your Health With the Obama Stimulus Plan: Betsy McCaughey
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Commentary by Betsy McCaughey

Feb. 9 (Bloomberg) -- Republican Senators are questioning whether President Barack Obama’s stimulus bill contains the right mix of tax breaks and cash infusions to jump-start the economy.

Tragically, no one from either party is objecting to the health provisions slipped in without discussion. These provisions reflect the handiwork of Tom Daschle, until recently the nominee to head the Health and Human Services Department.

Senators should read these provisions and vote against them because they are dangerous to your health. (Page numbers refer to H.R. 1 EH, pdf version).

The bill’s health rules will affect “every individual in the United States” (445, 454, 479). Your medical treatments will be tracked electronically by a federal system. Having electronic medical records at your fingertips, easily transferred to a hospital, is beneficial. It will help avoid duplicate tests and errors.

But the bill goes further. One new bureaucracy, the National Coordinator of Health Information Technology, will monitor treatments to make sure your doctor is doing what the federal government deems appropriate and cost effective. The goal is to reduce costs and “guide” your doctor’s decisions (442, 446). These provisions in the stimulus bill are virtually identical to what Daschle prescribed in his 2008 book, “Critical: What We Can Do About the Health-Care Crisis.” According to Daschle, doctors have to give up autonomy and “learn to operate less like solo practitioners.”

Keeping doctors informed of the newest medical findings is important, but enforcing uniformity goes too far.

New Penalties

Hospitals and doctors that are not “meaningful users” of the new system will face penalties.  “Meaningful user” isn’t defined in the bill. That will be left to the HHS secretary, who will be empowered to impose “more stringent measures of meaningful use over time” (511, 518, 540-541)

What penalties will deter your doctor from going beyond the electronically delivered protocols when your condition is atypical or you need an experimental treatment? The vagueness is intentional. In his book, Daschle proposed an appointed body with vast powers to make the “tough” decisions elected politicians won’t make.

The stimulus bill does that, and calls it the Federal Coordinating Council for Comparative Effectiveness Research (190-192). The goal, Daschle’s book explained, is to slow the development and use of new medications and technologies because they are driving up costs. He praises Europeans for being more willing to accept “hopeless diagnoses” and “forgo experimental treatments,” and he chastises Americans for expecting too much from the health-care system.

Elderly Hardest Hit

Daschle says health-care reform “will not be pain free.” Seniors should be more accepting of the conditions that come with age instead of treating them. That means the elderly will bear the brunt.

Medicare now pays for treatments deemed safe and effective. The stimulus bill would change that and apply a cost- effectiveness standard set by the Federal Council (464).

The Federal Council is modeled after a U.K. board discussed in Daschle’s book. This board approves or rejects treatments using a formula that divides the cost of the treatment by the number of years the patient is likely to benefit. Treatments for younger patients are more often approved than treatments for diseases that affect the elderly, such as osteoporosis.

In 2006, a U.K. health board decreed that elderly patients with macular degeneration had to wait until they went blind in one eye before they could get a costly new drug to save the other eye. It took almost three years of public protests before the board reversed its decision.

Hidden Provisions

If the Obama administration’s economic stimulus bill passes the Senate in its current form, seniors in the U.S. will face similar rationing. Defenders of the system say that individuals benefit in younger years and sacrifice later.

The stimulus bill will affect every part of health care, from medical and nursing education, to how patients are treated and how much hospitals get paid. The bill allocates more funding for this bureaucracy than for the Army, Navy, Marines, and Air Force combined (90-92, 174-177, 181).

Hiding health legislation in a stimulus bill is intentional. Daschle supported the Clinton administration’s health-care overhaul in 1994, and attributed its failure to debate and delay. A year ago, Daschle wrote that the next president should act quickly before critics mount an opposition. “If that means attaching a health-care plan to the federal budget, so be it,” he said. “The issue is too important to be stalled by Senate protocol.”

More Scrutiny Needed

On Friday, President Obama called it “inexcusable and irresponsible” for senators to delay passing the stimulus bill. In truth, this bill needs more scrutiny.

The health-care industry is the largest employer in the U.S. It produces almost 17 percent of the nation’s gross domestic product. Yet the bill treats health care the way European governments do: as a cost problem instead of a growth industry. Imagine limiting growth and innovation in the electronics or auto industry during this downturn. This stimulus is dangerous to your health and the economy.

(Betsy McCaughey is former lieutenant governor of New York and is an adjunct senior fellow at the Hudson Institute. The opinions expressed are her own.)

To contact the writer of this column: Betsy McCaughey at Betsymross@aol.com
Last Updated: February 9, 2009 00:01 EST

    

After a strong showing on Monday, the markets pulled back aggressively yesterday as folks were largely disappointed by the Treasury Department's plans for helping the banking system.  It was a clear case of buy the rumor, sell the news.

We continue to believe that an RTC type bad bank structure could be an effective solution.  The new secretary Tim Geithner seems to agree, but may be intentionally vague on the details of a plan to "stress test" the system into pricing bad loans on their own.  Unfortunately, it is true that banks are unlikely to sell bad assets if they think the government will pay up for them, but with the political pressure of the public rightly focused on taxpayer liability, the only thing that may force the issue is if the market pressures continue, forcing the weakest players to fold.  This is, of course, a dangerous mix, but one with perhaps no viable alternative given the environment.  If things are that bad, someone must cry uncle. The past fourteen months have been like a giant game of hot potato.  Unrecognized losses are being tossed around in musical chair type fashion, waiting for someone to own up to them, or for the mother of all players, the U.S. government, to socialize them.    

The good news is that the credit markets have been operating much better than they were back in September when the fall of companies like Lehman Brothers threatened to bring down the entire money market system and the commercial paper markets were in shambles.  (A reason the Treasury Department must be careful with their "stress" testing.)  On Monday, Cisco Systems managed to raise $4 billion in debt at a yield of roughly 5%, suggesting that those who are credit worthy can raise just about whatever capital they'd like.  With nearly $30 billion in cash on their balance sheet, Cisco could enter the banking business itself if it so chose.  
 
On an unrelated note, there was also an interesting article in yesterday's journal which highlighted China's efforts to stimulate the demand of its own consumers to make up for the lack of demand from places like the United States.  An emerging Chinese consumer is indeed the next logical progression in that country's arrival as a developed country, but the journey is likely to be a long one.   It bears keeping an eye on.

One final comment.  Over the past few days since Walt Disney reported earnings, there has been a great deal of talk about weakness in the advertising markets, not just within newspapers, but television as well.  To a large extent, advertising has always been a hugely cyclical industry, but there is no doubt that strong secular changes may be at work as well.  Tough times almost always cause an acceleration in changed behavior if for no other reason than that it is necessary and to do otherwise would be too painful.  (Crying uncle, hot potato and musical chairs...yada yada yada.)  

With some of the younger generation canceling their cable television service and finding their video programming online, there can be no doubting the fact that the current weakness, though predominantly cyclical, also has secular undertones.  Creative content will always be rewarded in the marketplace, but how it is delivered and the cost of such delivery will certainly change.  We'll be certain to keep that in mind as we manage our investment portfolios for the years ahead.   

    

Bill Hoover Joins Broadleaf Partners 

It is with great pleasure that Jeff and I announce the arrival of William Hoover as President and Chief Operating Officer of Broadleaf Partners, LLC.  Bill joins our firm as an equity partner after spending over sixteen years at Wall Street wirehouse firms serving the financial needs of high net worth individuals and institutions.   
 
Bringing a capable sales and marketing focused investment professional on board has been a longer term goal of ours as an organization and now that we are over three years old, the timing for such a move is perfect.  In addition to meeting the needs of his own clients under the Broadleaf umbrella, Bill will help expand our marketing efforts for our growth equity portfolio and build upon the firm's financial advisory capabilities. 
 
As the firm's founder, I will remain Chief Executive and Chief Investment Officer, continuing to devote my time to investment research and the management of client portfolios.  Jeff will assist me with this role as he has always done as Director of Research and Vice President of Operations.    
 
I have known Bill on a professional and social basis for the past ten years and have long admired him for his personal integrity and ability to cultivate lasting, long term relationships.  I am very excited about Bill's decision to join us as we begin a new stage in our evolution as a world class investment management organization. 
 
On the personal front, Bill and his wife Paige keep busy in their home town of Bath, Ohio, raising their five growing children.  Bill is a graduate of the College of Wooster, where he earned a degree in Business Economics and was Captain of the men's tennis team. In addition to serving as an officer on the Revere Local School District Board of Education, Bill is also a Trustee of The Canton Student Loan Foundation and a graduate of Leadership Stark County.
 
Please join us in welcoming Bill Hoover to Broadleaf Partners, LLC.
 
 

    

The markets have been making some positive progress today.  Each day of this troubled earnings season that goes by and we don't touch or break the November lows is a very positive and constructive sign. 

There have been some hints of positive fundamentals, including the following, in recent days.

1. The ISM non-manufacturing services index yesterday came in at 42.9, better than the 39 expected and the 40 upwardly revised reading in December.  As a leading indicator of the stock market, this is a positive blip. 
2. Yesterday, Goldman Sach's CFO commented that they were starting to see opportunities again in the marketplace and would increase the size of their balance sheet as warranted.
3. Long bond yields on treasuries have backed up fairly significantly, which may be a sign that the flight to safety at all costs is abating, at least somewhat.  There could be other interpretations as well, but this would be the positive one.
4. The four horsemen of 2006-2007, Google, Apple, Research in Motion, and Amazon, have started to trot again.  While definitely damaged from a stock perspective, the fundamentals for these companies are far better than most.
5. The Baltic Dry Index, a daily measure of the price of moving many commodities over seas has doubled off its lows at the beginning of the year.  This is a sign that commodity prices may be stabilizing.  In addition, China's stock market has done decently year to date. 

Again, with many of these indicators, we don't yet know if the recent readings are temporary blips or are the beginning of a sustained recovery.  Nevertheless, they fit with our notion that the markets have likely seen their lows and will be range bound for much of this year, in search of economic recovery.  This gives us increased confidence in a floor in the market and a reference point for making future investment decisions as new data unfolds.