Charles Payne's  Instablog

can you just leave me standing? Alone in a world that's so cold (So cold)
Maybe I'm just too demanding
Maybe I'm just like my father too bold
Maybe you're just like my mother
She's never satisfied (She's never satisfied)
Why do we scream at each other?
This is what it sounds like
When Doves Cry
-Prince

Well did the market come to a bump in the road or the end of the road yesterday? It wasn't a dramatic selloff, except it was a selloff, and it happened at the exact time the market had been rallying. There was a reason for the abrupt stumble into the closing bell. San Francisco Fed President John Williams mentioned the possibility of less bond buying as the economy improves. According to his own models, the economy is picking up the pace, and that means the $85.0 billion a month crutch can be tapered off and maybe ditched by year's end.

This would be big news from any Fed official, but Mr. Williams is a die-in-the-wool dove, and he's beginning to see the light. Well, not see the light per se just thinks the economy is on the cusp of walking like a natural man. I'm not convinced about the strength of the economy, things are gradually getting better, but the things that make the Fed print in the first place are abundant. Be that as it may, one day the Fed has to stop this wild experiment that challenges everything from common sense to laws of math. It would be great if they pulled the plug on the presses in an obviously strong economy.

It would have better if the Fed never printed at all, but it's a moot point.

What is interesting for the second time in as many days is we saw investors bolt for the exits fast. The first time was the initial reaction to earnings from Deere that saw its share collapse $10.00. There is a serious undercurrent of anxiety, a pullback would relieve a lot of that even if it means doves stop crying.

Message of Hard Asset Markets

Very rich people get ready for inflation different than you and I- they don't buy guns and bomb shelters.

While debate rages over how much impact Ben Bernanke has had in the stock market rally, there is no doubt Fed money printing is the main driver for an unprecedented rally in art. On Wednesday, Christie's established numerous records with an auction of contemporary art.

The total haul (with commission) was a staggering $495.0 million paced by an array of new milestones:

> Nine works $10M plus

> 23 works $5M plus

> 16 new artist records

(click to enlarge)

Gold Buyers

Much has been made of the dramatic decline in the price of gold, but there's another phenomenon happening. People around the world are scooping up physical gold. While it's true jewelry demand has additional drivers in places like India and China, but demand popped in the United States as well in the first quarter.

People, central banks and technology still seeking the shining metal and history hedge against inflation.

(click to enlarge)

Notes:

> First increase in jewelry for US since 2005

> Chinese jewelry demand of 185 metric tons a new record

> Middle East jewelry demand +15%

In addition to consumer demand for physical gold, Central Banks acquired 109 metric tons during the quarter marking it the seventh consecutive quarter above 100 metric tons. The big sellers were ETFs which saw net outflows of 177 metric tons. Technology sector demand surpassed 100 metric tons for the quarter as well.

It's obvious the anticipated great rotation into equities from bonds has already begun in the gold market. But the unreported story is that of physical demand, which has several narratives. Taken in conjunction with blazing prices in the art world, it's clear many individuals still see physical hard assets as the best way to hedge against an impending explosion in the rate of inflation. It hasn't happened yet, and it probably becomes the worst-case scenario long after most predictions.

For these purchasers, it doesn't matter when it happens. In fact if they were worried about timing, ETF demand for gold would be much higher as it's more liquid than gold bars. While he's the hot artist of the moment, you just don't wake up with the notion of dumping a Basquiat for $50.0 million that same day.

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

Man ... there are so many scandals and donnybrooks it's hard to keep track of them. Heck, there has been so much shocking news and fisticuffs I've already forgotten about the Garcia-Woods tango over the weekend. This fresh batch of scandals that's popped up like springtime perennials could have enormous conclusions.

> IRS
> AP
> Benghazi
> Army Sex Misconduct

How these are handled will tell us even more about the administration and give insight into how dangerous the power grab of the past four years is.

Obama Administration vs. Tea Party & Individual Rights

This IRS scandal is so egregious it might even ripple through Main Street. How amazing is all the talk of suppression of the Black vote when in reality it was members of conservative organizations like the Tea Party that were being denied opportunities to grow stronger opposition to President Obama. This was real suppression, real intimidation, and real harassment. I don't think anyone had to answer how many bubbles are in a bar of soap but IRS demanded donor lists, copies of speeches, manuals and even list of books people in organizations read.

It's the oldest trick in the book, do to your enemy what you are accusing them of doing to you. It is real underhanded stuff. Yes, the administration really stuck it to organizations that dared to think for themselves and had to gall to ask for nothing from government. Talk about turning the government reliance agenda on its head-how could anyone turn down more food stamps, earned income tax credits, child tax credits, welfare, and more goodies. The Tea Party said "no thanks," and their message was catching on; see 2010 election results.

This is the height of hypocrisy, but the administration isn't very contrite despite the resignation of Steven Miller, acting head of the IRS.

Separate Sinister Entity

"Unfortunately, you're grown up hearing voices that incessantly warn of government as nothing more than some separate, sinister entity that's at the root of all our problems. Some of these same voices also do their best to gum up the works. They'll warn that tyranny always lurking just around the corner. You should reject these voices."
-President Obama

Thank God for voices of tyranny; the kind of voices that rejected a King; the kind of voices that rejected a Madman; the kind of voice that rejected a rule about where to sit on a bus; and the kind of voices that rejected laws of knowledge that could have never conceived personal computers, laptops, smart phones and medicines that doubled life expectancy in a century. The voices of tyranny came along at the exact moment the nation needed them. An agenda to completely remake America had begun; its consequences would have destroyed the greatest nation to every grace in the planet.

To tell kids attending a college graduation to reject the kind of voices that spurred previous generations to greatness is hubris, the kind of hubris that says the ends justify the means. In this case, the best way to shut out those voices was to derail specific organizations by any means necessary. For people that dared to think differently than Barack Obama, tyranny wasn't lurking around the corner, it was lurking in the very government sworn to protect individual liberties and freedoms.

Put up Your Dukes

"I haven't been treated with a lot of respect...this isn't a personal thing, but I am the Attorney General of the United States!"
-Eric Holder

During his hearing in front of congressional leaders, Attorney General Eric Holder ripped into Darrel Issa (R) Ca. After suggesting Mr. Holder was holding back details concerning the nomination process for Labor Department Secretary after Congress got a bunch of emails concerning Tom Perez that simply had to and from and no contents. When Issa made this point, Holder replied that the congressman from California was "unprofessional" and his conduct "shameful."

It was ugly to say the least.

It's Okay ... it's Your Money Anyway

It hurts doesn't it? Your hopes dashed, your dreams down the toilet. And your fate is sitting right besides you.
-Teddy KGB (John Malkovich) in Rounders

After the bell, news broke that Elon Musk would purchase $100.0 million of Tesla's stock sending the shares to the moon ... or I should say the moon of another planet since the stock was already in deep orbit. I immediately thought of a few scenes in the movie Rounders including the one where the protagonist, Teddy KGB just lost a lot of money to Matt Damon's character but goaded him into playing longer by reminding him in not the prettiest way of a prior crushing defeat.

Elon Musk is sticking it to the shorts.

At least 45% of Telsa TSLA shares are short. That means of all the shares issued to the public (float) 45% have been borrowed and are already sold. It's mostly the smartest guys in the room doing this and as I've written for weeks now, those guys aren't looking so smart these days.

(Tesla is featured in our December 2012 Newsletter, and our analytical team wanted to take profits, but I said let's wait until it gets to $100. but now we might have to set our sights higher.)

Rooting Interest

I root for the underdog almost always, and this week I've had a lot to cheer about. Elon Musk is rich and successful, but he's also the personification of the little guy making good. His success hasn't stopped Wall Street from beating hugely on his failure. The Tea Party rose like a Phoenix to influence the conversation and derail a locomotive. Just as titans of the street tried to level Musk, titans of government and their powerful tools were used to level the Tea Party.

This week the little guys are winning, and it feels great.

Today's Session

There was a time when Cisco Systems CSCO could carry the entire market, but that was a long time ago when John Chambers was Chief Excitement Officer. Today, however, it looks like earnings results from Cisco will help NASDAQ open higher while the broad market is dealing with initial jobless claims that were not good.

(click to enlarge)

Cisco is finally making major inroads into the hotter growth areas of technology, and the Street loves it. Revenue increase that reflect strong gains into cloud computing and other areas is what's moving the stock

> Data Center +77%
> Service Provider Video +30%
> Wireless +27%

Yesterday, Dave Bing, NBA legend and very successful businessman announced he's not seeking a second term as mayor of Detroit. The Bing news is not necessarily shocking but points to what has become, in the eyes of many, a hopeless situation. The state has taken over the city and the guy combing the books says it looks dismal.

Migration Series Jacob Lawrence

At this point it would seem some kind of bankruptcy is in the offing. But problems don't go away with such a decision. And while there will be debates over where money comes from and who pays for a bailout, the bigger tougher question is how this once great city truly recovers.

The story of Detroit must be followed closely because of its economic and moral implications. The economic part is not just what's happening at this very moment but policies and ideas that brought the former Paris of the West to the point of state takeover. The city is spending money it doesn't have and now must figure out how to live within its means even as it now must also find ways to pay its massive deficit.

$326.6 million unrestricted deficit
+$60.0 million added at end of fiscal year (June 30)
$386.0 million

In a town where citizens feel services are poor to non-existent, officials will actually have to do even less. This adds to the serious death spiral of pessimism and defiance. It's estimated that $247 million in property taxes and fees went uncollected in 2012 from more than 150,000 (47%) of owners, mostly out of defiance. There were at least 77 blocks were only a single homeowner paid their property taxes. They say "why" taxes go to pay for service that stopped a long time ago.

Then there's word city officials severely inflated property tax rates. In fact, one report says officials are leveling taxes at 10 times the selling price of properties by discarding 94% of sales made last year.
Talk about highway robbery. But this is what happens when lavish promises are made while a city, state, or country bites the hand that feeds it. Government "revenue" is mostly the function of taxes. When politicians promise money they have to know where that money is coming from. Unlike the cyclicality of the economy those promises are never adjusted lower- there is never a recession in government promises.

Almost all municipalities now facing difficulties are in trouble from promises made to government workers and are hiking taxes in order to pay them. Coupled with promises to those with lower incomes, it means higher taxes on successful people and businesses have to be levied. But higher taxes ultimately means lower return - it's the law of diminishing returns personified by less output, and flight of (talented) people and capital, while less talented people keep coming in.

In one hundred years Detroit went from a magical city playing an amazing role in industrialization of America but also assimilation of races (in the beginning painful), and beacon of hope. The Progressive movement played an early role there in trying to mitigate business and in the beginning unions and other pressure did lead to better wages for all - making the city a magnet. But, the pendulum swung too far resulting in wages that were too high, promises too rich and habitual spending that continues to be the unshakable addiction.

There might be state and federal money to help Detroit but in my mind there's only one real solution.

Time to Grab Bootstraps and Embrace Capitalism

Detroit is one of the homes of progressivism in America which helped to make wages better but at some point began to push businesses out of the city. High taxes and tough unions made competition so difficult industry in the city suffered. In the meantime, a certain lifestyle became the norm for both citizens and government officials. Money was spent, promises were made and the seeds of the current economic malaise were sown.

There was a flight of businesses and people, the former often to other states, the latter to the suburbs.

The city must find ways to bring back business, population, and education.

(click to enlarge)

Luring Them Back

Only people fleeing third world nations are going to be lured away from their homes to live in welfare states. Americans, even after four years of being told to limit dreams to the Middle Class status that amounts to living paycheck to paycheck, want more. Even as we are told our earnings and our children are part of the public domain we still seek better lives. For most that means better jobs and better opportunities for our children. This is only going to happen if the private sector thrives.

Government run or dominated economies have always failed and always will no matter how appealing it may seem on paper or in flowery speeches.

Government has to be crowded out by the private sector, easier said than done since it mostly happens the opposite way.

Currently eight of the top ten employers in Detroit are government, education and healthcare. Private businesses are only 10% of employers, and there is simply no way the city can ever get back on its feet with a model that relies on high taxes to create jobs as people flee the city. Those leaving are brilliant and innovative. Those staying behind are needy and have been coddled so much with so many programs their ability to stand erect without government aid has almost vanished.

The city would do better to lower taxes instead of raising them as (soon -to- be-former) Mayor Bing wanted.

Luring Business

Already Dan Gilbert, founder of Quicken Loans, has shown smart, deep-pocketed business people are willing to make investments in Detroit. His purchases in an effort to jump-start a mini Silicon Valley have included the old Federal Reserve Building, Chase Tower and First National Bank. In total his investments include:

> 9 buildings
> 3 parking structures
> 1 lot

Others are following his lead but even that must be pushed with encouragement. Otherwise a citywide recovery where there is an oasis or two wouldn't be much better. Of course importing businesses and smart people is only a part of the equation - there has to be homegrown talent, too.

Homegrown talent means better education and no more excuses. I spoke with a Detroit based professor who informed me that 47% of the population was functionally illiterate. A liberal, the professor gave me the stat as a reason for more government aid in the form of welfare spending. In my mind that would sink the people of Detroit farther down the abyss of despair. But it underscores the sense of urgency and points to how failed economic policy goes to the roots of society.

The good news is graduation rate is above 50%, having hit 65% last year but the dropout rate is still 20% and there is still a lot of hopelessness.

The cure to Detroit is a combination of things, almost all painful. People born into despair will bristle at the idea they must pay such a price for good times had by folks that have passed on or moved on. It's the only way to get this done. Tough austerity that can only work if articulated with a plan that citizens buy into. A plan that somehow gets people to pay their taxes because they understand a metamorphosis will take time and money and sacrifice.

The same people that have been told since birth things are owed to them rather than expected of them will have to be sold on putting skin in the game on the notion there is no other way to be great again.

They have to know they can be Paris of the West again but the foundation starts in a deep dark hole.

Today's Session

Equity futures have been under pressure most of the morning and it looks like we'll start the session lower. Of course that's been a green light for buyers that have put a twist on the notion of buying dips. It used to be buying the dip over a few days or weeks, even months. There will be that dip that keeps on dipping for a real pullback, yet I'm not sure what triggers such a move. Right now the US economy is gradually improving, albeit not at the pace it could or should, and expectations are still low enough to have modest growth and Fed money printing.

But there is angst beneath the veneer of the market, make no mistake. Case in point Deere DE, which posted results this morning that blew away consensus and were the best in company history, yet the initial reaction from the stock market was an immediate $10.00 dive. It speaks to the fact everyone is looking for THE pullback - the real dip. Management offered cautious guidance based on the same stuff everyone's been worried or cautioned about for years.

Income was the highest ever from an increase in the global farm economy:

US & Canada +9%
OUS +9%

Agriculture was on fire, up 12% offsetting a continued slump in construction, -6%. Guidance was cautious but South America, powered by Brazil, is seen up as much as 20%. The most important line in guidance was:

Company will "capitalize on the world's increasing need for food, shelter and infrastructure in the years ahead."

This brings up a serious dilemma. Taking profits after huge moves to avoid the next pullback, even if you have great faith based on the work that same stocks will be much higher down the road. It's easier said than done to say we'll hold when the time between now and "down the road" could see a lot of gains evaporate or fade significantly. Deere is a stock I would hold, but if I were up 20% or more write calls against or even take off the table, but making sure to reenter after 30 days.

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