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Celebrating Mediocrity By: Charles Payne

|Includes:Alcoa, Inc. (AA)
"We spent as much money as we could, and got as little for it as people could make up their minds to give us. We were always more or less miserable, and most of our acquaintances were in the same condition. There was a gay fiction among us that we were constantly enjoying ourselves, and a skeleton truth that we never did. To the best of my belief, our case was in the last aspect a rather common one." - Charles Dickens, "Great Expectations"

I have to say that the game of expectations can mask many things, including the human condition. We are riding the wave of a rally that began on rosy interpretations of otherwise horrible news. This was done based on low expectations. I understand how this game is played and yet I find it to be in the same category of sleight of hand as bond rating agencies slamming AAA ratings on sub-prime mortgage bonds. It's disingenuous in the sense that those setting the bar are deliberately setting it too low. The short-term benefits are a runaway stock market in the face of runaway job losses and home values ripped to shreds. The longer term implications are widespread, but culminate with a general acceptance of mediocrity.

When you pass kids along the school system even when they can't read or write you end up with a nation of people that can't do the more difficult tasks and must cling to jobs with menial pay. In a way, the nation is being graded on a curve, using the likes of Europe and our own dismal economy from last year in the equation. In that frame there is no doubt that economic news looks much better. Moreover, we are due to turn the corner, in fact we are overdue. But I want to resist putting on the pom-poms, lest we set the bar so low we can never really benefit. Climbing out of the abyss it's reasonable to embrace lower expectations, but it's not reasonable to mischaracterize eclipsing lower hurdles as Olympic achievements.

It seems like everyone is getting into the act. Yesterday an article in the Wall Street Journal painted a rosy picture of the rescue plan because it will only cost $89.0 billion instead of $250.0 billion. I just don't think that losing billions of taxpayer dollars to shore up Wall Street banks, government sponsored enterprises, and failed automakers was a smart use of those hard-earned funds. With millions of people, perhaps as many as 26.0 million, without work, it must be extra galling to know that a bunch of their money went into these bailouts now being portrayed in positive tones. As for the CBO and Washington expectations games, how often are we going to get snookered? I wrote last year that the estimates were set higher so when the actual losses came in lower it could be viewed as a victory. (By the way, trying to figure out what the government is losing is like playing three card's that transparent.)

I'm all for using psychology to lift spirits but this is something different. I've been riding this bull market from day one despite concerns about monetary and fiscal policies. I'm going to keep riding it, too, but will avoid drinking the Kool-Aid. What I've been asking from subscribers is to use your head and your heart differently. We all want things to get better, and it should get better, but we don't want to be blinded. The strong stock market isn't a reflection of a strong economy and is not a 100% harbinger of things to come. It suggests that things are going to improve, and indeed they have. Ultimate success in the economy will be determined with how many people buy into the notion that it's (NYSE:A) possible, and (NYSE:B) actually underway. The problem is when you don't have a gig or are on the cusp of losing your house it's hard to buy into the hype even when the most reputable newspaper in the world has joined the parade.

It's unreasonable to expect to run before we crawl, but we should never stop having great expectations for this nation. We should never settle for mediocrity, but when we feel it's the only choice let's not say it's the same as excelling.

Contrarian's Delight

Beyond the visible disconnect between the stock market and most American households there are other strange goings on as well. There are times when you expect the market to zig but instead it zags. In other words, there have been moves that defy logic. Case in point is that airline stocks are rocking even as crude oil is on the cusp of a 2008 type breakout. Late last year, crude began slumping and the airlines took off. We actually featured a few on the Hotline service. Since hitting bottom in December, crude has taken off but the airline stocks haven't even hit an air pocket let alone pullback. Part of the move reflects the prospect of increased profitability and massive industry consolidation. Even so, it's not the most logical move but it underscores the fact that stocks in general want to fly the friendly skies.
Need a Better Leadoff Hitter

I'm not sure if they pick by the alphabet but how come Alcoa (NYSE:AA) gets to go first every earnings season? Can we find a company that actually has a track record of good news instead of one that always has a bunch of one-time losses (the joke of non-GAAP accounting) and can't hit the ball out of the park under any condition? Alcoa posted earnings of $0.10 per share, in line with the Street, on revenue of $4.9 billion, missing consensus of $5.24 billion. This was a prime chance for the company to show and prove. Now, investors have to wonder. Our own David Silver says that some hot areas of the business (airline and auto production) are bound to slow. Even with that in mind the stock was slightly higher in the aftermarket.

Tidbits and Observations

In yesterday's "Modesto Bee" an article on Stanislaus County's pension problems served as a reminder of the time bombs brewing across the land. The pension system is only 71% funded, leaving the unfunded liability at $482.0 million. In addition, the county has $48.0 billion in bond debt. In the county sworn law enforcement employees are allowed to retire with up to 90% of salary at age 50 while other country employees can retire at 55 with 75% of their salary. The county retirement association is paying its 50 retirees between $100,000 and $241,000, and 32 are making more in retirement than they made when they worked.

I'm getting a ton of responses to this week's poll and so far "no"
vote is running away with respondents. One guy ripped me a new one because I dared to say things got better after the Bush tax cuts and the rich paid a larger percentage of total taxes. I get the government is thinking like Willie Sutton but it doesn't make it fair or smart.

Last week's poll results on the jobs report is:

A) Proof stimulus spending works and government must play a big role in economy:4%
B) A hopeful sign: 8%
C) Not a big deal most jobs minimum wage will not spur economic prosperity: 29%
D) A disaster as it's too little too late and smoke and mirrors: 59%

The National Bureau of Economic Research says that it's premature to timestamp the end of the recession but they are sure it began in December 2007. Maybe it's me but I'm not sure how you make money on information from the NBER since it waited until July 2003 to declare the 2001 recession over in November of that year. I always felt that was too short a time period and the recession lasted longer. I'm only going with gut feelings and anecdotal observations. I've questioned the end of the last two recessions which seem to provide political cover but don't match up conclusions to previous recessions where unemployment peaked at the same time those recessions ended. I'm sure that the methodology has changed, I just don't know why.

So, everyone has jumped on the ‘economy is great' bandwagon (see "BusinessWeek" on newsstands now) but I don't think a plan that bailed out banks who in turn stopped lending is so great. I don't think that healthcare reform to the extent it made a (further) shamble of our so-called democracy was wise when there was the largest surge ever in food stamp recipients. How can 40 million Americans on food stamps be a positive sign? I understand the rationale, it can't get any worse but it's like a boxer trying to point out all of the good stuff learned after losing for the first time. Such explanations are even more enthusiastic if said fighter was knocked out, often they come across as downright jubilant. "I'm glad I got clocked now I know to always keep my right hand up." Anyway, things are better, but they are supposed to be even better than they are...much better in fact.

Market Psychology and Where to be Weighted Pre 1Q Earnings
By: Brian Sozzi, Research Analyst

In the lead up to corporate America closing up the books on the first quarter at March end, the market was still in a fruitful time warp of sorts. From March 1 to March 31, the S&P 500 advanced roughly 6.0%. For the DJIA, the market bid up the component equities about 4.0% during the same measurement period. Positive earnings pre-announcements regarding 1Q10 sales and earnings and but minimal indications the Federal Reserve was shifting its stance on monetary policy (in fact, it could be argued Fed governors offered a downbeat assessment on the economy in speeches that differed relative to the last policy meeting) kept the bulls firmly outnumbering the bears (wall of worry climbing shook out those shorts...).

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Economic Data

We will go more in depth with the economic data in this afternoon's report, but both the trade deficit and small business index left a lot to be desired. The trade deficit was wider on stronger imports of consumer goods and industrial goods, while the National Federation of Independent Business said its monthly index of small business optimism fell 1.2 points in March to 86.8 and below 90 for the 18th consecutive month. The report showed U.S. small business owners have little confidence in the economy and are in no rush to hire or expand, despite signs the recovery is picking up.

Disclosure: None
Stocks: AA