Charles Payne's  Instablog

Last Thursday a bridge collapsed, and there was barely a ripple in the news or in the conscience of America. That was mostly because nobody died when a section of the Skagit River Bridge crashed into the water below and also because many were too busy preparing for the Memorial Day weekend. Ironically 34.8 million Americans were preparing to drive more than 50 miles during the holiday weekend which means most would cross a bridge or two, and yet the news didn't seem to ruffle many feathers.

But it's not going away, at some point really soon we'll hear about this bridge and the more tragic I-35W Mississippi River Bridge that collapsed August 1, 2007 killing 13 and injuring 145.

There is no doubt big government types will point to the collapse as an example of America "crumbling" and preach a sense of urgency to rebuild immediately. There will be calls for spending and calls for taxes to pay for that spending, and along the way there will be the usual demonization of anyone that thinks accounting and accountability should also play a role in rebuilding the nation in more ways that just brick and mortar. So, the answer to the question: when a bridge falls and nobody dies does it make a sound?

Yes, it does when it's time to stir up the public through typical fear and loathing.

Sadly, those that will shout the loudest about bridges and dams will get a chunk of money and immediately spend it on everything but bridges and dams. The bait and switch has been the hallmark of the current administration although an old political practice. What's intriguing is how often the tax and spend crowd uses the same scare tactics. But, next time we hear this is why we need more stimulus the reply should be what happened to the first batch of stimulus that was to cure infrastructure problems with a slew of shovel-ready projects.

The American Recovery and Reinvestment Act took $840.0 billion and showered funds all over the place through tax policy and spending, grants and loans.

It was sold as a job creator - it wasn't!

It was sold as a bridge and dam fixer - it wasn't!

It was sold as an economy healer - it wasn't!

Bait & Switch

It really doesn't matter what political persuasion, nobody likes being lied to or played and it feels like all Americans were sold on the stimulus plan as something that would fix our crumbling infrastructure. Instead it became a giant honey pot of money that was distributed to all kinds of pet projects that had nothing to do with shovels.

Only 3.8% of the stimulus budget went towards actual contracts, grants and loans for infrastructure.

It's really amazing when you think about the plan and how it was executed. Beneath the surface the spending of taxpayer money became even more egregious and farther from what was promised in the sales pitch. Check out just a few urgent things that needed your money so desperately you had to be told a big fat fib:

$221,355 spent at University of Indiana to study why young men do not like wearing condoms.

$389,357 spent at NYU to study why young adults drank malt liquor and smoked pot.

$850,000 researching how paying attention improves performance of difficult task.

$1,000,000 was spent on road signs in Ohio to tout the stimulus program.

$14,707,949 was used to build an airstrip to nowhere in a community in Alaska nobody ever heard of.

$30,000,000 of taxpayer money used to build new spring training facilities for Colorado and Arizona baseball teams.

Sadly, there are many more stories like those above.

London...Not Only Bridge Falling Down

The state of Washington got $8.0 billion from the federal stimulus project of which $800.0 million was used to work on that state's ambitious high speed rail project. When it's done, the Washington state high speed rail will be the first intercity passenger line in the nation connecting about two dozen cities. Currently the project is expected to cost $8.0 billion (but will be a lot more if it is ever completed).

20 of these rail projects began in 2012

5 more scheduled to begin this year

It's an ambitious project to say the least but one must wonder if it was a smart and proper use of funds under the circumstances. The American Society of Civil Engineers has outlined several problems with infrastructure in the state that seem more important than a vanity project of high speed rail.

There are 272 high hazard dams (there are only 8.5 full time workers employed for regulating and monitoring 121 dams).

There are 366 deficient bridges in the states.

An estimated $9.8 billion must be spent in next 20 years to ensure safe drinking water.

An estimated $5.3 billion must be spent in the next 20 years to remove waste water.

Then there's that bridge. The Skagit River Bridge had a C- grade from ASCE and recently saw repair projects. The bridge might have been more important than high speed rail.

I know a lot of the crumbling bridge stuff is hype (I-35 was actually a design flaw) designed to get more money from taxpayers that would be diverted to other areas totally unrelated to infrastructure. The greater point is the same people pointing fingers only find ways to redirect money spooked out of the general public or confiscated for emergencies.

Consider this when the next politician tries to scare you into joining his or her war of class envy.

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

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.