Charles Payne's  Instablog

FOLLY OF CALLING TOPS
By Charles Payne, CEO & Principal Analyst

It's really amazing how many people attempt to pick stock market tops versus how few attempt to call the bottom. What the heck is that all about? Is there an embedded doomsday strand of DNA pulsating throughout our bodies seeking to find fault and subsequent disaster?

Do you secretly hope your neighbors' gory holiday lights short circuit and burn out? Do you root for that arrogant athlete to trip or get knocked out in the first round by a 10 to 1 underdog? Do you laugh when the obnoxious waiter drops a tray of food?

What is it that we have to find things to hate against even when there is no real personal gain when bad things happen to the target(s) of our ire? It's really amazing, but it's truly human. Heck, when it comes to the stock market people rooting for a fall would take a financial hit - directly or indirectly - and yet they can't wait for the next crash.

Schadenfrude: (German) to take pleasure in the misfortunes of others.

Some people calling a top in the stock market legitimately think stocks (A) have come too far too fast, (B) are overvalued or (C) are only up because the Fed has been so accommodative. It's fine to have such opinions; that's what makes markets, opinions and people acting on those opinions. For me, however, rarely has any one that falls under the three scenarios above done much fundamental research beyond the use of traditional valuation metrics.

At this level calling the top seems like a no-brainer. Of course that's the way it seemed at Dow 8,000, 9,000, 10,000, 11,000, 12,000, 13,000, 14,000 and now at 15,000-one day you'll be right ... sort of. For me the real question is what's the strategy? Should people sell everything and hide out on a bomb shelter? How about selling everything and buying gold only? How about selling everything and joining the French Foreign Legion? What's the game plan other than taking a victory lap after missing 9,000 points on the upside for a 1,000 move to the downside (and I don't see that happening for a long time)?

Investors hear a lot of negative noise from a lot of sources including that internal strand of DNA that's innately seeking bad things.

Many are familiar with the Time magazine cover jinx that seems to have a shift in the fortunes of the people that grace its cover. The same jinx/curse has haunted those on the cover of other magazines and Madden NFL video games. Sometimes that kind of thing can work in reverse like when Business Week boldly wrote about the death of equities because of runaway inflation. Well, I guess the editors didn't count on President Reagan and Federal Reserve Chairman Volker who tackled the economy with a tough-love agenda through fiscal and monetary policy.

What is interesting about inflation is how the Fed thinks it will save our economy, including the stock market today (In fact, I found the most interesting part of Bullard's comments yesterday that pulled the market out of its nosedive was about the Fed's target inflation rate being met. These guys want inflation, at least a certain amount). Writing books about doom and gloom is a great way to make a lot of money and sooner or later we hit rough patches and authors and other curmudgeons get to strut their stuff. It doesn't matter how long they were wrong, only that fear and panic are in the air and blood on the streets.

In many ways it's a lot better to call for an end of the stock market than to call for an end of the world because even if the latter comes true, how could the prophet take a victory lap. On the other hand, we had a 24-hour sell off that saw a 1.5% pullback from all-time highs, and the merchants of economic death were celebrating as if they just caught a former dictator trying to race out of the country wearing a women's wig. There is one thing to consider before buying the worst-case scenario for sale these days. Sooner or later there will be a rough patch, but in the history of America it's always been temporary.

Since we're on the topic, a reasonable pullback in the market could make the Dow pull back to its 50 day moving average (exponential) of 14,763 where it must hold or be vulnerable to 13,891 where it must hold or trigger widespread panic. For now, I'm not worried about a crash, but that could change if Business Week decides to feature "Dow 20,000" on its next magazine cover.

https://www.wstreet.com/user/register.asp?source=3

The Street loved the statement but hated the reality that accommodation may be reeled in sooner rather than later. The fact of the matter is there are a number of issues here. The market was actually edging higher after Bernanke was forced to give a time line on tapering that suggested action happening in September ("next few meetings"). But the Fed minutes spooked the market because some see pressures inside for swift unwinding of the $85.0 billion monthly asset buying program. In many ways the minutes suggest an Arab Spring situation inside the Fed.

Is Bernanke losing control?

Alan Greenspan had such a vise-grip control over the Fed it was like a monarchy, but members today understand their voices carry a ton of weight, and they can move markets even when expressing views not in line with the chairman's. Moreover, these members appear to be putting more pressure on policy decisions and that's why this one particular paragraph in the minutes sparked a reversal in the market, leading to the most volatile day since November 2008:

A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth; however, views differed about what evidence would be necessary and the likelihood of that outcome.

Earlier in the day Mr. Bernanke made precise comments designed to counter this statement. He noted policy changes and tapering in next few months (I rule out July because there is no press conference with that gathering and there is no way the Fed makes a major shift in policy without trying to sell it and quell markets) and mentioned "real" improvement in the labor market. I suspect real means people coming back to the job market and the unemployment rate still trending lower. On that note a trend means more than one or two months.

Then there's the fact some in the Fed actually want to see more accommodation, which is probably more in line with Bernanke's thinking:

One participant preferred to begin decreasing the rate of purchases immediately, while another participant preferred to add more monetary accommodation at the current meeting and mentioned that the Committee had several other tools it could potentially use to do so.

To be sure, Ben Bernanke worked hard to make the case the Fed still has room for accommodation even in an improving economy. Yesterday on Varney & Co I pointed out Big Ben came into the meeting feeling like he was finally in his sweet spot-the ability to print at will as the virtuous cycle was taking hold. Yesterday saw strong numbers from the housing market with existing home prices at multiyear highs. But Main Street hasn't bought into the plan enough to even begin to consider tapering, which makes those selling solely on Fed policy probably early.

Bernanke's Sweet Spot

> Consumer Delivering
> Banks double capital of four years ago
> Improved willingness to lend (still needs work)
> Credit availability improving
> Inflation on "low side" historically
> Stock and bond prices not inconsistent with fundamentals

There continues to be a great sense of frustration that the Fed is doing this alone without help from Washington- especially the White House. Bernanke mentioned the grand bargain budget deal would "inspire" confidence in markets and households that would strengthen the economy.

Action in bonds was overshadowed by the equity market, but the 10 year yield pierced 2.0% yesterday which is a red flag for the much ballyhooed bond correction. Such a correction should see funds migrate into stocks, although if too violently, funds might seek the shelter of the sidelines.

I think the reaction to yesterday's events was a bit exaggerated, but in the proper context we are talking about a 1% pullback from the all-time high in the Dow and S&P. There is pressure on the market this morning as the experts continue to guess the Fed's next move.

Mighty Meg and the Retailers

Earnings last night and this morning were pretty good once again, hinting at gradual improvement in the economy, which might be bad news for those that want more Fed action, but in the end it is what we all want and need.

HPQ posted earnings of $0.87, beating the Street's forecast by $0.06 and offered guidance that's well ahead of consensus.

PETM beat the Street by $0.02 and raised the range for the current quarter and full year outlook.

PSUN lost $0.14 per share; the Street was looking for a loss of $0.18, and management hiked revenue guidance for the quarter above consensus.

PLCE posted earnings $0.22, better than expected, and raised guidance for the current quarter and full year.

DLTR beat by $0.02 and raised full year guidance although it's below current street consensus.

Conclusion I do not see the Fed tapering soon, and there is still a chance it could happen next year. But the real deal is we should be cheering an improved economy. Yet this economy will never be as strong as it should be, but it's not the wreck the doomsday crowd says it is.
https://www.wstreet.com/user/register.asp?source=3

In the meantime Mead Johnson (MJN) was a giant winner in a down session yesterday. I gave this idea to everyone on the market commentary in addition to paid subscribers because it underscores one of my main investment theses.

There are companies out there that making real profits around the world, taking market share, inventing new products and that are cheap based on those developments and potential. I don't want to see investors whipsawed. Sure, we've been raising cash mostly by taking profits on a bunch of positions, but there are stocks worth holding during increased volatility.

Let's see how the market shakes out this morning. I'm licking my chops and actually looking for a chance to own great companies at discounts.

As for the Fed I actually think it would be better for swift and determined unwinding rather than trying to appease markets. If the initial reaction is harsh that's fine because we need policies based on the economy and not emotions. In fact, the big problem in this world of soft landings is trying to make tough medicine go down easy. Greenspan kept rates too low for too long, but a greater mistake was raising them at such a slow pace that the damage already planted into the system took full bloom.

If Bernanke wants to take a real victory lap it should ignore the market and make bold moves in the opposite direction. Consider how much the Street is whining from the notion of buying less debt might as well say we've won and cut the juice when they decide the coast is clear. On that note I suspect Bernanke is watching the action in the market and will be more reluctant to change policy.

Yesterday there was a chance of some changes this year, but continued pressure on stocks could push that out to 2014.

I wanna run, I want to hide
I want to tear down the walls that hold me inside
I want to reach out and touch the flame
Where the streets have no name
I want to feel sunlight on my face
I see the dust-cloud disappear without a trace
I want to take shelter from the poison rain
Where the streets have no name
Where the streets have no name
Where the streets have no name

-U2

"For the record U2 and the individual band members have a totally clean record with every jurisdiction to which they are required to pay tax and have never been and will never be involved in tax evasion"
-The Edge to the Baltimore Sun

When U2 saw its taxes leap to $1.1 million in 2006 after only having to pay $46,500 in 2005, the band did what any smart band would do ... moved its corporation to a cheaper tax domain. The move to Amsterdam must have saved the band hundreds of millions on the more than $1.0 billion it's raked in since then. It's always better to find a place where the accounts have no names to shelter hard earned bucks.

This is particularly true of famous leftists banking big time money. Hey, I'm a fan of the music and commonsense action to keep more of what they've earned.

Washington DC was a busy place yesterday with the IRS scandal moving to the Senate while Tim Cook was under the microscope for saving money on taxes but not breaking laws. Apparently, Apple uses a subsidiary in Ireland that doesn't have to pay taxes to that nation because it's managed from outside and doesn't have to pay taxes to America because it's not an American company. I'm sure this angers some people, more often than not people that pay no taxes and those in government see a chance to play the class warfare card and try to embarrass a symbol of American capitalism.

It was really as self-serving as it gets in a town where accountability has been thrown out the window and finger pointing is as close to honest debate as one could expect.

In the meantime the guys in charge of the IRS while it targeted Tea Party groups did their best Barney Fife impression as they continue to claim they know nothing, can't remember anything, but are sure singling out conservatives weren't "politically motivated." The bumbling by itself is disappointing, but using the IRS as a political weapon is deplorable. So, while one guy was defending his company (Apple) because it only paid $6.0 billion in taxes last year some guys down the street were trying to build a moat around the White House using the dirt from excavation to bury truth.

The fact of the matter, and it was only brushed a couple of times yesterday, is American policymakers have their work cut out trying to lure and keep businesses here while the world beckons. Two decades ago jobs began to shift because it was much cheaper to manufacture abroad. Now, the dilemma is the fact that the customer base is growing faster outside the United States. Coupled with an educated workforce, particularly in Asia, it makes a lot more business sense to manufacture closest to your customers with a smart and cheaper workforce.

Add to this mix the highest corporate taxes in the world and just how does America lure some of that $1.5 trillion offshore stash back home.

There have to be pro-growth policies coupled with lower taxes. Otherwise it's the just the armies of the government and giant businesses going around in circles. Yesterday, Tim Cook said he was cool with corporate taxes in the 20% range with expatriated taxes in the single digits. That would be a great start but for a government that doesn't get the idea that generating prosperity across the board that would see even greater tax receipts than confiscatory and punitive policies.

Conclusion

The tax code and IRS would be better used to enforce tax policies that aim to fund government, not create rivals to the private sector. Increasing the army of storm troopers will only embolden more of the despicable action that saw political opponents of President Obama targeted and punished. A terrible mistake is being made when even the most liberal of corporate chiefs fights against current tax policy.

(I do find it funny Cook took shots at companies that use offshore banks in the Caribbean while he found the most convoluted maze imaginable to not pay taxes on billions of dollars. Even with tax avoidance some people think they're nobler than others).

I don't hold out hope for sanity to invade the White House, especially economic sanity, but will we spend the next three years going from excuse to excuse? There are so many challenges for the nation we can't meet any of them without capital and fossil fuels and the same people mucking up works for both. It is time to tear down the walls that hold greatness in the ground and gobs of money outside the country. Let's put an end to the poison rain.

https://www.wstreet.com/user/register.asp?source=3