Black Swans, White Geese, and Ugly Ducklings By Charles Payne

May 18, 2011 9:25 AM ET
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Long/Short Equity, Portfolio Strategy

Contributor Since 2009

Wall Street Strategies has been providing independent stock market research since 1991 to individual, retail and institutional clients through a balanced approach to investing and trading. Charles Payne, our founder and chief analyst, is routinely sought after for his stock market, political, and general opinions by several prestigious news organizations. Currently, Mr. Payne is a contributor to the Fox News Network and Fox Business Network. He also hosts his own radio show on KFIAM 640 every Saturday from 2-4pm PST. Mr. Payne recently released his first book entitled Be Smart Act Fast Get Rich. Our all-star analytical team is called first when the media needs to know. We are regularly featured on several well respected finance-oriented radio and television programs such as Fox, CNBC, BNN, WSJ to name a few and widely recognized in the media as a leaders in the analyst community. In addition, Wall Street Strategies is part of Thomson-Reuters Consensus Estimates. Brian Sozzi is an equity research analyst specializing in the softline/hardline goods sectors of the retail industry for Wall Street Strategies Inc. Mr. Sozzi graduated Summa Cum Laude from Dowling College, receiving his Bachelors of Business Administration with a concentration in Finance and Accounting. Routinely sought after as a trusted point of reference for opinions and insight on the global economy and retail sector stock evaluation, Mr. Sozzi is a frequent on air contributor to CNBC, Fox Business Network, and Bloomberg, and is cited regularly by online/print publications that include Forbes, Bloomberg, The Wall Street Journal,, CBS Marketwatch, Reuters, Seekingalpha, Associated Press, Crain’s NY Business, Fortune, Barron’s, AOL Finance, and the Financial Times. In 2009, Mr. Sozzi became recognized by Starmine as a top-ranked equity research analyst for stocks under coverage in such categories as EPS Estimate Accuracy and Industry Excess Return. Carlos Guillen is an Equity Research Analyst providing coverage of the technology sector for Wall Street Strategies, Inc. Mr. Guillen has had experience working in both the sell side and the buy side. Prior to working as an analyst, he was a Design Engineer for Lambda Electronics. Mr. Guillen holds an M.B.A. from NYU’s Stern School of Business, and he has a B.S. in Electrical Engineering from Manhattan College. David Urani is a research analyst with concentrations on the homebuilding, staffing, medical devices, and logistical services industries. Along with providing institutional clients with up-to-date reports of individual stocks within his industry coverage, David assists the rest of the Wall Street Strategies research desk with timely analysis of vital economic data. A graduate of the A.B. Freeman School of Business at Tulane University, David earned a Bachelor of Science in Management while majoring in finance. With prior training experience running small businesses, he has an eye for key fundamentals that keep Companies running efficiently. David’s insight has been featured in several outside sources, including the Fox Business Network, MarketWatch, and SeekingAlpha. Carlos Guillen is an Equity Research Analyst providing coverage of the technology sector for Wall Street Strategies, Inc. Mr. Guillen has had experience working in both the sell side and the buy side. Prior to working as an analyst, he was a Design Engineer for Lambda Electronics. Mr. Guillen holds an M.B.A. from NYU’s Stern School of Business, and he has a B.S. in Electrical Engineering from Manhattan College.
Maybe it's commonplace but among the gaggle of Canada geese camped out in the open field across the street from my house is a white one with a couple of dark feathers. Initially I thought a bunny rabbit nestled up with a group of birds, which wouldn't be crazy during these crazy days. I'm not an expert on the species but it seems like a rare occurrence. Is it on par with black swans? I doubt it unless a black swan is just a more elegant phrase than albino goose. But, it does recall all the would-be black swan events that have impacted the economy and stock market in the past four or five years.

We've had a stock bubble followed by a housing bubble, and we are in the midst of a $1.0 trillion student loan bubble and Treasury bubble that smart players have been betting against for almost two years. There are experts that say these aren't bubbles yet, but acknowledge growing risks. I'm going to cover a bubble I don't think anyone's talking about on the Fox Business Network at 2PM EST today. The point is the market is spooked but can whistle past a graveyard. And, there are significant problems lurking. Part of me thinks they'll all be fixed at some point or it would be economic suicide.

Not too long ago Dominique Strauss-Kahn talked about a flock of black swans while pointing out "great uncertainty still prevails." He concluded with an observation that black swans are now "swimming in the global economic lake", and then he passed a hat around and asked for donations to the IMF. I think it would have been a smarter analogy for DSK to say "buzzards are circling socialism" even in nations that have only tinkered with it through progressive policies. His blinders have him focused on Europe, where socialist regimes have completely blown it, and now citizens live in a lake of burning fire. But, it's the entire globe.

Of course, to promote last-minute attempts to rob from producers to give to the squanderers, DSK had been speaking a lot about income inequality. Suggesting income inequality was a silent cause to the crisis in America because it reached levels not seen since before the Great Depression. The Roaring 20s were a boom period for a lot of Americans, and things got out of hand, but the reaction to a tough recession put the "Great" in depression. The same has happened this time around, too. Government intervention and phony programs worked to redistribute wealth and prop up a few failed banks.

The crisis then or now wasn't sparked by rich people that didn't pay their bills. It's unfair and dangerous that rewards for success should be higher taxes and ridicule, but that's the kind of hypocrisy that dominates the IMF and other international organizations that somehow get their hands on U.S. dollars while asking Americans not getting that cash to be angry at someone else, like job-producers. The sleight of hand stuff works a lot in this nation, but in nations where people are just getting a taste of the good life nobody is ashamed of success. In other nations, people with big money are looked up to and emulated.

This is why the IMF game of finger-pointing isn't working. On the contrary, this scandal has opened up a flood of complaints about double standards and double dealing. Friends of DSK say he has helped emerging nations with greater voting, but the fact is many of these countries are still licking their wounds over draconian measures demanded in order to receive bailouts. I don't necessarily disagree with all the terms that demoralized Brazil and Russia, but they were rammed down their throats, while there is still talk (yesterday from head of euro-zone finance ministers) of a soft restructuring of Greek debt.

Brazil in particular is still smarting even after it completed its resurrection with a $10.0 billion loan to the IMF a couple years ago. (The U.S. offered up a $100.0 billion loan and China $40.0 billion.) In some ways, Brazilians should be thrilled at the way the IMF manhandled them during their most depressed periods because it was the last time a Social Democrat won office when voters rejected that party seen as complicit and weak-kneed in the face of IMF demands. Instead, Lulu got the job, and somehow didn't adhere to his stated socialist principles but rather embraced free markets and capitalism, thus propelling Brazil into the upper echelon of global economic players.

But, that medicine forced upon Brazil is being administered in small doses to Greece and other failed European economies.

> Massive layoffs of civil servants
> Dismantled social programs
> Selling of state assets
> Freezing transfer payments to state government
> Devaluing currency

China is now the third largest contributor to the IMF, and for the first time has spoken out about its processes. Saying the next chief of the IMF must be selected through a process of "fairness, transparency, and merit."

Brazil is making no bones about their desire to see the next IMF head come from an emerging country, their finance minister told the steering committee just last month it's "high time that we make a political breakthrough in departing from the outdated practice", referring to the unwritten rule that Europeans get the IMF and the United States gets the World Bank. Since it was formed after WWII, there have been 10 managing directors of the IMF, all European, including four from France, which has ruled the organization for 26 of the past 33 years.

So if we are talking about rare birds, a non-French person would be a good start, but a non-European would be better. Sure, the elitists that run the organization look upon the rest of the world as poor ugly ducklings and wouldn't be bold enough to make such a move right now. There is the issue of finishing European bailouts, which could take a series of infusions especially if the goal is a soft landing. For Americans, I think it's clear we can serve our own best interests without a middleman.

Consider all the money and lives lost over nation-building since World War II. There is no doubt winning the Cold War was vital and spreading democracy now is important, but risk dynamics have changed. Then consider we would pump in hundreds of billions of dollars to a group that doesn't share our same economic beliefs and goals. Then there is the issue of pushing imperialist dreams of European elitists in a world where they have less and less clout and must use ours (see Libya War). Of course, the Administration and IMF share many of the same goals and dreams.

Free Trade Held Up Again

After a long delay it looked like President Obama was going to move ahead on free trade agreements with American allies Panama, Columbia, and South Korea. But, it has all changed as there is a new condition from the White House before moving forward. There must be an extension of the Trade Adjustment Assistance program which retrains workers that lost jobs to outsourcing. I like the idea of retraining, but don't buy the notion that somehow a person supposedly losing a job to an overseas competitor is more worthy of taxpayer money than someone that lost a job to a cross town rival.

I really wonder about this program. It seems to really be another payoff to would-be Democrat voters. By far, the state with the largest pool of recipients is Michigan, where more than 33,000 people were enrolled. In that state, $83.1 million has been dispensed to help in the retraining of people formerly employed in the auto industry. I thought the GM and Chrysler bailouts saved those jobs along with the entire U.S. auto industry. Be that as it may, the President is saying it's a game-changer, and without it will continue to delay opportunities for greater ties and authentic job creation in America.

The plan began with a $220.0 million cap that was expanded to $575.0 million, along with a healthcare coverage tax credit increased to 80% from 65%. The plan also covered full and part -time auto workers. Obviously, this is yet another effort to pay off the unions even at the expense of the nation and our relationship with key nations. (Remember, Columbia just handed the Turk over to Venezuela even though we wanted the billionaire drug lord desperately in America.) The program offers up to $15,000 for training, etc. I checked the website and it looks like the average participant that got a job earned $602.3 a week.

At some point, the nation has to focus on real education reform and stop rerouting taxpayer money to pay for a better life for people that aren't willing to put in the time for a better education. I think joining the military in return for education is a great idea. Right now, we are slipping rapidly. According to a recent Pew Research finding, the U.S. is now 12 out of 36 developed nations with respect to college graduation rates. I realize many don't think it's worth the effort anymore in large part because of cost (that same poll found 75% of respondents believed college is too expensive, while 86% said it was good for them), but there is no choice.
Yes, retraining is critical if it's sincere, but we need to look deeper and understand there has to be a better effort beginning at K through 4. In the meantime, there is a greater obstacle in the way of free trade. Unions are pressing the White House to force sovereign nations to adopt something akin to forced-unionization before they can exchange goods and services with us with guidelines that make sense and promote prosperity. So we are going to make individual states change their own constitutions and now make individual nations change theirs, too.

Unions as Equal Partners

In a leaked memo, NLRB chairman Wilma Liebman is pushing to make businesses tell unions in advance of any plans to relocate so unions can evaluate such a move to see if it's motivated by labor costs. Supposedly, the unions would then be able to negotiate and maybe offer concessions. In reality this makes unions a member of the executive suites and an equal partner, which is just one of the true goals of the Administration. Ultimately, the Administration would like all businesses to be part of the public domain with decisions made by shareholders, environmentalists, unions, and members of the community.

The two-pronged war on businesses and states' rights is a gigantic step toward a socialistic society.

Today's Session

Once again equity futures, higher throughout the early part of the morning, are coming down. It's a slow march, but an ominous way to start the session. Mixed news in retail as Staples (SPLS) missed while Target (TGT) beat big (both are in the model portfolio); these results don't resolve much except to confirm struggles aren't over. Deere (DE) posted better than expected results on the top and bottom lines, yet that stock looks to open lower. The market is grappling with a lack of leadership and mounting confusion. Sadly, the best we could hope for is the Euro rallies for a second day even if it's a tiny move higher against the dollar.

We tested the 50-day moving average for key indices yesterday and more than likely, we have to test them again; they have to hold (on a closing basis). I'm licking my chops as I lick my wounds, looking at great unrealized value but knowing the tide has shifted to massive uncertainty which is just one step from massive panic.

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