• Riffing off Grant Williams' excellent "Things That Make You Go Hmmm..." column.

I often find news stories that stun in their utter obviousness. To close the day, here are a few from the last couple of weeks that should leave you snickering at the reporters that thought they were news! (Headlines courtesy of CFA's SmartBrief.)

IMF economists say they underestimated austerity consequences

International Monetary Fund economists Olivier Blanchard and Daniel Leigh say they incorrectly forecast how much austerity measures in Europe would affect the economy. "Forecasters significantly underestimated the increase in unemployment and the decline in domestic demand associated with fiscal consolidation," according to a paper by the economists. EUObserver (Brussels)

Researchers: Trade deal with China cut U.S. factory jobs 29.6%

Giving China "permanent normal trade relations" status in 2000 has reduced U.S. manufacturing employment by 29.6%, according to a paper by Federal Reserve researcher Justin Pierce and Yale University's Peter Schott. Without the deal, U.S. manufacturing jobs would have increased nearly 10% rather than contracting, they concluded. The Washington Post/Wonkblog

AIG will not participate in lawsuit against U.S.

American International Group said its board of directors unanimously decided not to join a lawsuit against the U.S. government over terms imposed on the firm when it was bailed out by taxpayers. Former CEO Maurice Greenberg had asked AIG to become a party in his $25 billion lawsuit. The New York Times/DealBook

U.S. tax code needs full revamp, expert says

Nina Olson, the Internal Revenue Service's taxpayer advocate, calls on Congress in her annual report to overhaul the tax code. Filing a tax return has become a "significant, even unconscionable, burden," she says. The New York Times

U.S. economy is growing at modest pace, Fed says

The U.S. economy has continued expanding in recent weeks, but there were few signs of an increased pace, according to the Federal Reserve's Beige Book. The report says uncertainty about government spending and the state of Europe's economy are a drag on hiring. "Hiring plans were more cautious for firms doing business in Europe or in the defense sector," the Fed said. Reuters

IMF's Lagarde warns world not to lose momentum

International Monetary Fund Managing Director Christine Lagarde warns that just because Europe avoided a collapse doesn't mean the work is done. "We should make sure that none of the decision-makers and none of the authorities relax, assuming that because there is a bit of recovery in sight ... it is time to slow the pace and go back to business as usual," she said. Further steps need to include continued monetary easing to stoke demand, Lagarde says. Bloomberg

$14B write-down prompts departure of Rio Tinto CEO

Tom Albanese, CEO of global mining giant Rio Tinto, abruptly resigned after $14 billion in write-downs on acquisitions that went sour. Chairman Jan du Plessis said the board turned against Albanese after learning of a $3 billion write-down on coal assets in Mozambique for which the company paid $3.7 billion nearly two years ago. He said the board concluded that "a write-down of this scale in relation to the relatively recent Mozambique acquisition is unacceptable." Reuters

U.S. regulators still have many rules to write

The Commodity Futures Trading Commission is two-thirds done writing 60 rules as mandated by the Dodd-Frank Act. The Securities and Exchange Commission has written 33 of 95 rules. Analysts expect the most important outstanding rules to be finished this year, but the entire process likely will take until at least 2014 to complete. The Trade (UK)

Have a great evening, Doug "Orson Welles" Kass will be back tomorrow.

• Here's a rundown of after-hours reports.

Most reports after the close so far look solid, and this will be helpful to market tone tomorrow. Big news is blowout positive from rails (CSX  (CSX) and Norfolk Southern (NSC)), and this will augur for better economy, depending on what they say on their conference calls. This refutes the rail-car loading data circulating that showed a higher-than-normal plunge in loadings last month.

Earnings highlights:

• Cree (CREE) EPS $0.32 vs. $0.30 consensus; revenue $346.3 mil vs. $331.06 mil consensus
• RF Micro Devices (RFMD) EPS $0.08 vs. $0.06 consensus; revenue $271.2 mil vs. $245.73 mil consensus
• Google (GOOG) EPS $10.65 vs. $10.56 consensus; revenue $11.34 bil vs. $12.36 bil consensus (is being complicated by Motorola Home revenue)
• Celestica (CLS) EPS $0.25 vs. $0.19 consensus; revenue $1.50 bil vs. $1.49 bil consensus
• CSX (CSX) EPS $0.43 vs $0.39 consensus; revenue $2.9 bil vs. $2.85 bil consensus
• Tuesday Morning (TUES) EPS $0.37 per share vs, $0.37 consensus; revenue $285.3 mil vs. $277.9 mil consensus
• Intuitive Surgical (ISRG) EPS $4.25 vs. $4.02 consensus; revenue $609 mil vs. $584.36 mil consensus
• Total System Solutions (TSS) EPS $0.33 vs. $0.33 consensus; revenue $479.1 mil vs. $484.52 mil consensus
• IBM (IBM) EPS $5.39 vs. $5.25 consensus; revenue $29.3 bil vs. $29.09 bil consensus; sees FY13 EPS of at least $16.70 vs. $16.63 consensus
• Norfolk Southern (NSC) EPS $1.30 vs. $1.20 consensus; revenue $2.68 bil vs. $2.67 bil consensus 
• Compuware (CPWR) EPS $0.12 vs. $0.10 consensus; revenue $257.9 mil vs. $254.51 mil consensus
• Advanced Micro Devices (AMD) EPS ($0.14) vs. ($0.19) consensus; revenue $1.16 bil vs. $1.15 bil consensus
• CA Technology (CA) EPS $0.63 vs. $0.61 consensus; revenue $1.2 bil vs. $1.17 bil consensus
• Anaren Microwave (ANEN) EPS $0.33 vs. $0.25 consensus; revenue $38 mil vs. $39.02 mil consensus 
• International Game Technology (IGT) EPS $0.28 vs. $0.24; revenue $530.3 mil vs. $527.23 mil consensus 

• Quietly, the IPO market is back.

The number of deals peaked at 214 in 2007, plunging to only 31 in 2008, but climbed back to 128 in 2012. Those deals raised $42.6 billion, a touch below the $49 billion raised in 2007. Forty-four were private-equity-backed, 46 venture-capital-backed. The rate of private-equity-backed deals was steady, but venture capital is still half the 2007 rate, meaning the rate of new business formation (or at least new business growth) is subpar, a partial explanation for the persistent employment issues.

Average performance was +20.5%, not bad -- even including Facebook (FB). Forty percent was priced below the initial indicated range, however, worse than last year's 34% pricing below and close to the record in 2010. Nineteen percent broke syndicate, better than the 33% in 2011. The average first day's return was 14%.

Only 2008 and 2011 had negative average performance. No surprise that technology dominated the deals with 38, with financials and energy a close second. Facebook stole the deal size headlines, raising $16 billion, but other $1 billion-plus deals were Grupo Financiero Santander Mexico (BSMX), Linn Co (LNCO), and Realogy (RLGY).

The best performers in 2012 were Vipshop (VIPS), Proto Labs (PRLB), HomeStreet (HMST), Guidewire Software (GDRE), Intercept Pharmaceuticals (ICPT), Nationstar Mortgage (NSM) and Eloqua (ELOQ), all up over 100%. With investors hungry for yield, limited partnership deals are on the rise, with 14 raising $4 billion, up from zero in 2009.

There were only two china IPOs, down from 41 in the fraud year of 2010. Vipshop and YY (YY) were deals that got done. Considering the consternation over China, the fact that they got out could mean they are worth looking at. The Caterpillar (CAT) news today will keep a pall over China stocks for the near term.

Conclusion: The IPO market continued another year of recovery. Absent a debacle in markets overall, IPOs should be even better this year. Some notable coming deals include Zoetis (Pfizer's animal health spinoff), Intelsat, ING US (U.S. unit of ING), AutoTrader online car sales, Norwegian Cruise Lines.

Data courtesy of Renaissance Capital.

• Has the Fed's prop under all markets engendered a cozy cocoon of comfort for the banks and other financial firms?

The Fed minutes discussed earlier show some marginal concern about moral hazard.

Bernanke notes (back then) they are not in the business of rescuing businesses from failure.

So has the Fed's prop under all markets engendered a cozy cocoon of comfort for the banks and other financial firms?

Well, the CFA Institute recently ran a poll asking what was the greatest investing lesson of the past five years.

Source: CFA Institute

One might think the investment industry would be more cautious, but the leading answer by far was that the Fed "put" is more firmly in place than ever. Only 9% of respondents saw more prudent lending standards as a result! No one has any faith that Dodd-Frank reforms will prevent systemic failure.

This is damning evidence about the pathetic results from our regulatory efforts.

• By rotating through two or three names during a quarter, you can boost the income generated by any given block of capital.

Real Money readers know me as the Dividend Diva, my moniker when I am advocating dividend capture trading to boost the effective yield on your equity portfolio. I regularly share names with upcoming dividends that look playable,  meaning you can buy the stock now, wait for it to go ex-dividend (thus collecting the income), and then have a reasonable chance of selling it for at least your purchase price within the next couple weeks.

By rotating through two or three names during a quarter, you can boost the income generated by any given block of capital. I run a fund using the strategy that has paid out 10% in dividend distributions in each of the last three years, so it does work with real money.

Below is a table of upcoming dividends that you can trade for the income.

Upcoming Dividends

Source: FactSet Research Systems

View Chart »View in New Window »

The table is screened for dividend size (not too small to be not worth the effort, not too large to introduce excess risk into the portfolio) and liquidity.

I highlighted the names that are of interest to me. Ford (F) would be a new one for me, but I play ConAgra (CAG) and Pfizer (PFE) every quarter, and BMO Financial (BMO) often. With BMO, keep in mind that U.S. investors will have about 20% of the dividend withheld for taxes.

• A great spot to troll for trading ideas is in stocks trading below cash value.

The market is basically telling you they are going out of business, so the slightest whiff of success can send them soaring. In a recent Real Money post, I pointed out one promising name worthy of more research: UT Starcom (UTSI). UTSI is Chinese, so no one believes the numbers -- and today's Caterpillar (CAT) news does nothing to burnish the reputation of Chinese companies -- but I suspect UTSI is for real and if new management pursuing a new strategy can return them to at least cash flow breakeven, the stock will move.

Expanding the idea, below is a list of names trading below cash. I screened for $50 million and up market cap, to remove the tiny "junk" names and keep the focus on real companies.The especially interesting ones are those that have the prospect of not burning through cash, so I included the most recent quarter's operating cash flow.

Some names would be better served closing their doors and paying back shareholders. For instance, Sycamore Networks (SCMR) has a huge cash hoard that should be returned. Imation (IMN) is in the middle of a "strategic transformation," but could plausibly go to cash flow breakeven in the near term.

As always, don't buy these on a screen alone, but use this as a starting point to find names poised for a quick move as the market recognizes going concern value.

• Significant pain for the longs.

Verizon (VZ) blew it today, which affords me the opportunity to point out my view on the coming price wars in wireless. I elaborated the thesis in this post in Real Money in December.

The summary is this: Sprint (S) is selling wireless services dirt cheap to remain competitive and, with the investment from Softbank, will now be able to field a competitive network. I think Verizon Wireless and AT&T (T) will have no choice but to lower prices over time.

This is negative for the large carriers, of course, but I also think Apple (AAPL) is collateral damage because lower plan pricing means less subsidies for handsets. All handset vendors will need to price at a consumer price point, and Apple will not be able to hold margins.

I can't claim credit for predicting the Verizon miss this morning, since my thesis was not the proximate cause.  But beware if you are playing Verizon and/or AT&T; this thesis is likely to play out over the next three years, causing significant pain for the longs.

• Stocks to avoid. 

What about the downside? Below is a table of names with market cap greater than $500 million whose fourth-quarter EPS estimates have been revised down by more than 10% in the last three weeks. They are at very high risk of missing earnings. Keep in mind you are likely to see a pre-announcement rather than them reporting a miss next month or in March.

One caveat on this list: These are more likely to be "avoid" rather than "short."

Often, when the estimate is going down, the bad news is in the stock, so absent a gigantic miss, you may not make much on the short side. But if you are long these names, you really should be looking elsewhere for inspiration, they are probably going nowhere in the near term.

Standouts in my mind include Coeur d'Alene Mines (CDE), Belden (BDC), Cypress Semiconductor (CY), Atlas Energy (ATLS), KBR (KBR).

• My favorite indicator to ferret down the long list of names is to look at the recent EPS estimate trend.

Brace yourself, the earnings reports are about to come fast and furious. The best way to make quick money on the long side is to own the ones reporting the biggest upside surprises. My favorite indicator to ferret down the long list of names is to look at the recent EPS estimate trend. If analysts are ratcheting up estimates in front of the earnings report, you can surmise that the tone of business is strong and an upside surprise is likely.

The table below shows all names with market cap over $500 million that have had their fourth-quarter 2012 EPS estimate raised by more than 10% in the last three weeks. Of course, this is no guarantee of an upside, but where there is smoke, there is fire. If you are looking for upside candidates, start with this list.

I especially focus on sectors with high volatility. For example, don't spend a lot of time on utilities; they are too stable to be interesting. More cyclical names such as Louisiana-Pacific (LPX) or names with strong secular trends such as Sturm, Ruger & Company (RGR) are the most likely to surprise. I also like huge upward revisions such as in Alon USA Energy (ALJ) or Adecoagro (AGRO).

• Here's an historical footnote in 'The Book of Duh.'

Anyone active in the markets should look over the weekend's release of Fed 2007 meeting minutes. While I am sympathetic to the challenge of running an institution that impacts the economic behavior of most every person on the planet, the lack of real-world experience is disconcerting. Investors should also make note of the "leakage" of information into the market. I argued repeatedly during the crisis period in 2008-2009 that not only did the Fed (and Treasury) intervene in the stock market, but that it was their duty to intervene.

For some reason, many believe that the government would freely and visibly intervene in currencies, interest rates, terms of trade, and so forth -- every other financial market but not in equities. Really?

Here are a few highlights, and links to longer articles summarizing the minutes. My conclusion: Fisher should be nominated to replace Bernanke in 2014.

Lacker said, "Vice Chairman Geithner, did you say that they [the banks] are unaware of what we're considering or what we might be doing with the discount rate?"

"Yes," replied Geithner.

Continued Lacker: "Vice Chairman Geithner, I spoke with Ken Lewis, President and CEO of Bank of America, this afternoon, and he said that he appreciated what Tim Geithner was arranging by way of changes in the discount facility. So my information is different from that."

Top policymakers at the Federal Reserve felt for most of 2007 that problems in housing and banking were isolated and unlikely to tear down the economy as they ultimately did. "We have no indication that the major, more diversified institutions are facing any funding pressure," Geithner said.

When then-New York Fed President Timothy Geithner told FOMC participants that "direct exposure of the counterparties to Bear Stearns is very, very small compared with other things," Mr. Fisher responded by saying, "I was once a hedge fund manager—I know all the tricks that are played there, including, by the way, the valuation of underlying securities." He added, "I don't think the issue is contained. I do think there is enormous risk."

Some links (hat tip to Bill King for summarizing):

• The Washington Post
• The New York Times
• Reuters
• Dow Jones Business News
• The New Yorker

• The gap is widening even as we speak.

While Doug is completing his road trip, I am fortunate to get the opportunity to spend the day with you today, this first day of a new presidential term. (Make a note: S&P 500 1,485.98, gold 1,693.40 an ounce, oil 96.04 a barrel, the 10-year yields 1.84%.) Today we will take a top-to-bottom approach, looking at some macro items related to earnings, a bit of sector work and a detailed account of how I am trading my portfolio now, since this is a trading diary.

Let's start the day with an ominous chart, one of the most worrisome as I compiled data over the weekend. The analysis is not new to those who read me on Real Money -- I track the revisions in the earnings estimates for the S&P 500 as an indicator of the earnings strength of the market as a whole.

Keep in mind, no matter the debate on jobs, deficits, debt, you name it, the only thing that matters to stocks are earnings. If they are going up, stock prices will eventually go up. If not, well, you understand. But simply rising earnings are not enough, because the market is discounting expected growth. Absent earnings growth above the current consensus, market returns will be acceptable but not exciting. For the bull to roar, earnings must come in better than we all expect.

If you accept that view -- and it is supported by plenty of data -- then my S&P 500 tracker should make you nervous. The chart below shows the index price against the 2013 operating earnings estimate, courtesy of First Call. Over the past few months, the estimate is not rising and, in fact, recently started to be cut. There is nothing worse for a stock price, including the overall market, than to have the earnings estimate being cut. The probability of positive performance in the face of declining earnings is very low.

S&P 500 Price vs. Earnings Estimates

Source: FactSet Research Systems

View Chart »View in New Window »

The gap was wide, and is widening even as we speak. This is not sustainable! Either the estimate must start rising, or this market is ripe for a correction. I understand the sentiment that the price momentum is strong and investors should let it ride -- and I agree, if the earnings are rising as well. When they aren't, and with each passing day, I get more nervous.

Unfortunately, we can make a strong case for weak earnings in the first half. Taxes were just raised on the working class, and Joe Consumer has less money to spend as of this week. Political uncertainty is about to skyrocket as the real battle over the federal budget begins. Sentiment indicators are printing surprise weakness; the only group with any strength is housing.

Across the board, economic indicators are not all bad but not pointing to robust earnings. Compounding the issue is this strong start-of-the-year rally. Perhaps we get an average year in 2013 -- that is, 9% up. We already booked half of it this month. That means plenty of volatility for the next 11.5 months.

I enjoy a rally as much as the next guy but not without fundamental support. This one is feeling ephemeral. I want to see the right direction in earnings before I commit to the bull case.