• Regular afternoon posting should resume tomorrow.

My office has had computer problems all day, and I have been unavailable to post much over the last four hours.

Should be all good by tonight.

Thanks for bearing with me.

Enjoy the evening.

• Crude just rose by $0.75 a barrel in the last few minutes.

Anyone hear anything?

• Argh!

**************For immediate release*****************

New York, March 21, 2012

Subject: The New York Jets trade for Tim Tebow

Doug Kass officially requests a new team to root for. "I hate to say it", said Kass, "but recent events have made continued cheering for the New York Jets impossible."

Family members were unavailable for comment, although off the record one asked why the father of two recently paid for his Jets season tickets.

• I am back short Bank of America (BAC) at $9.92.

• I don't see a lot of upside here.

I just listened to a conversation about Hewlett-Packard (HPQ) on CNBC.

The analyst at Sanford C. Bernstein is of the view that HPQ is among the cheapest stocks extant. In his justification, he mentioned that printing margins are at decade-long lows.

I continue to view HPQ as a value trap -- a PC-centric company with large exposure to the printing business (which is at risk of being an endangered species).

• High above the Alps my Gnome is hearing that the Google (GOOG) dividend rumor is wrong-footed.

• Little price volatility today.

Nazzies continue their ascent, while the S&P 500 is mixed.

Of note, crude starting to erase yesterday's gains, and Spanish 10-year bond yields rose by 16 basis points to the highest read since mid-February (and are now up by more than 50 bps in March).

• Little to write home about.

February existing home sales were 4.59 million (annualized), slightly less than expected. January was revised up by 60,000, not consequential.

In terms of composition, single family was weak while mutli-family were unchanged.

The months of inventory dropped to six months and the median home price increased by 0.3% (year over year). Distressed sales were about one third of existing home sales.

All in all, I wouldn't expect this release to be market moving.

• Courtesy of Steve Cortes of "Fast Money," here is one of the reasons I am buying China.

• Profit margins are coming under pressure.

Profit Margin Conundrum

While the markets continue their resilient and consistent advance, some serious concerns (on the technical, economic, political and geopolitical fronts) are being thrust aside.

Sir Larry Kudlow often says that "profits are the mother's milk of stocks, and for that matter, business and the entire economy" -- and I agree. But, in a series of recent columns, I have suggested that corporate profit margins, the most mean-regressing economic series extant, are likely to contract -- and with it, S&P 500 earnings will likely fall short and disappoint relative to consensus forecasts.

GMO's James Montier has echoed and materially expanded my analysis on profitability in a March commentary piece that is a must-read by all investors.

Corporate margins are the highest in history, at a time when the economy is on stall speed and does not yet show signs of a self sustaining recovery. The condition, as former Federal Reserve chairman might have called it, is the "Profit Margin Conundrum."

For now, interest rates are anchored at low rates, near zero, and, as such, are supportive of market valuations. As I mentioned on The Kudlow ReportTuesday night, risk premiums (earnings yield less the risk-free cost of capital) are back up to 1974 levels. And following that ramp up, the S&P 500 rose by 32% in 1975 and by 19% in 1976.

Profit Margins Are Now Vulnerable

With regard to corporate profits, though the markets paid little attention, Wednesday's unit-labor cost report was an important variable that could dent corporate profitability in the months ahead.

Remember that corporate profit margins are among the most mean-reverting economic series extant. (Already, profit margins have slipped from over 9% in third quarter 2011 to 8.7% in fourth quarter 2011.)

Wage Inflation Is Accelerating

The rate of increase in unit labor costs for the fourth quarter of 2011 accelerated from +1.2% to +2.8% quarter over quarter.

Reflecting a large revision in second-half 2011 incomes to +3.7% from +1.7%, unit labor costs year over year rose by more than +3% in the fourth quarter of 2011, by +2% in the third quarter of 2011, and by +1% in the second quarter of 2011. (CNBC's Kelly Evans discussed the vulnerability of corporate profit margins in a segment yesterday.)

The Fed's Dilemma

Currently, core inflation is rising at about a +1.8% to +1.9%. The year-over-year change of more than 3% in unit-labor costs will likely put pressure on core inflation in the first half of 2012. As such, rising inflation spurred by rising wages poses a dilemma for the Federal Reserve to maintain its continued monetary easing (more and more cowbell).

At the minimum, Wednesday's unit labor release substantially reduces the odds of another round of quantitative easing.

-- Doug Kass, "Signs of Declining Corporate Profit Margins Emerge" (March 8, 2012)

Graham & Dodd P/E Far in Excess of Current P/E

"Whilst we at GMO fret over evidence of the strained nature of profit margins, the ever bullish Wall Street analysts expect profit margins to continue to rise! (Witness Exhibit 4). In our search for evidence of a structural break, this simple-minded extrapolation gives us some comfort because the Wall Street consensus has a pretty good record of being completely and utterly wrong."

-- GMO's James Montier

While price-to-earnings multiples at slightly under 14x are inexpensive by historic standards, they could be very expensive if the currently high profit margins mean regress.

The divergence in current and reported P/Es to a smoothed-out version (Graham and Dodd) of the 10-year moving average in profits ("more normal" profit margins) is conspicuous, and takes the current 14x price earnings multiple to an expensive 24x.

This simple comparison underscores how far earnings (and profit margins) are from "trend line" returns and demonstrates the risk if profit margins mean revert.

The Prognosis for Profits Is Not a Pretty Picture

"To us, the macro profits equation is a simple but powerful tool for understanding the drivers of profits, and helps us assess their sustainability. It is a useful organizing framework for thinking about the possibility of a structural break in profi  margins. When we look at the drivers of today's high profit margins, we find fi scal deficits behind the high profit margins of many countries. There is nothing "wrong" with this per se, but it does suggest that moves toward fiscal retrenchment will bring margins back toward more normal levels. It seems unlikely that "this time is different" when it comes to mean reversion in margins: what goes up must come down."

-- GMO's James Montier

To understand the drivers of profits (and more importantly, frame a forward-looking outlook), Montier provides a framework in the economist Kalecki's macro drivers of profit.

Here is Kalecki's profits equation:

Profits = Investment - Household Savings - Government Savings - Foreign Savings + Dividends

I will put aside Montier's explanation and analysis, as most might be put to sleep (especially the non-fundamentally inclined momentum-based investors and traders who have the patience of a flea). But when Montier deconstructs the above equation, he concludes that "net investment has generally been the biggest driver of corporate profitability over time. However, the standout engine of corporate profits of late has been the fiscal deficit."

Suffice to say, Montier sees the drivers of Kalecki's equation (and that of corporate profits and margins) as vulnerable. Corporate investment may increase slightly, but a strong recovery is needed - and recent economic data (e.g., leading indicators and housing) don't encourage him.

While the federal deficit may stay elevated in an election year, Montier thinks it is "unthinkable" that the deficit will be allowed to stay at current levels in the years ahead.

As a consequence, unless households begin to re-leverage or the current account improves dramatically and assuming some sort of deficit reduction plan is embraced, corporate profits "are likely to struggle."

• Muppets unite!

It's time to play the music,

It's time to light the lights,

It's time to meet the muppets on the Muppet Show tonight.

It's time put on makeup,

It's time to dress up right,

It's time to raise the curtain on the Muppet Show tonight

Why do we always come here?

I guess we'll never know'

It's like a kind of torture

To have to watch the show!"

-- The Muppet Showtheme song

Goldman Sachs discovers that risk premiums are high (duh!) in an upbeat "Birth of Equities" research piece that implores investors to get aggressive in equities after the S&P 500 advances from 666 to over 1400.

Jeez Louise!

I can't help but think that Goldman Sachs might have just rung the bell that the market has topped!