"Remain calm, all is well."
- Kevin Bacon, "Animal House"

The business media has inundated us this week with commentary and specials on the tenth anniversary of The Great Decession of 2008.

Questions are being asked (and answered) about who was responsible and whether our government officials responded on a timely way with decisive action.

While the U.S. banks and other financial institutions brought on the crisis by slicing, dicing and exporting those financial weapons of mass destruction (derivatives on mortgage backed and other securities), I blame the Federal Reserve (and their other economists in the Administration) for their near total absence of concerns (regarding the housing outlook and the dangerous role of derivatives) in the 2-3 years that led up to a crisis that nearly bankrupted the global financial system.

Back in 2017 I described the Fed's misplaced arrogance and ignorance in a column, "Dumb and Dumber" which bears repeating on this tenth anniversary:  

History is littered with very smart people saying very stupid things.

Here are some examples of quotes that their authors would like to take back:

* Irving Fisher (economics professor at Yale University in 1929): " Stocks have reached what looks like a permanently high plateau."

* Albert Einstein: "There is not the slightest indication that nuclear energy will ever be obtainable. It would mean that the atom would have to be shattered at will."

* The president of Michigan Savings Bank urging Henry Ford not to invest in The Ford Motor Company:"The horse is here to stay but the automobile is a novelty, a fad."

* Ken Olsen (president of Digital Equipment and MIT graduate): "There is no reason for any individual to have a computer in their home."

* Tom Watson, IBM chairman (1943):"I think there is a world market for maybe five computers."

* Bill Gates (2004):"Two years from now spam will be solved."

* You Tube Founder Steve Chen:"(I am worried that) there's just not that many videos people want to watch."

* Robert Metcalfe (inventor of ethernet):"I predict the Internet will soon go spectacularly supernova and in 1996 catastrophically collapse."

* Darryl F. Zanuck (founder of 20th Century Fox studio):"People will soon get tired of staring at a plywood box every night."

* Clifford Stoll (astronomer and author of Silicon Snake Oil (1995): "Nicholas Negroponte, director of the MIT Media Lab, predicts that we'll soon use books and newspapers straight over the Internet. Uh, sure!"

* And another head scratcher From Bill Gates:"No one will need more than 637KB of memory for a personal computer. 640KB ought to be enough for anybody."

* Linus Torvalds (founder of Linux):"Really, I'm not out to destroy Microsoft. That will just be a completely unintentional side effect."

* Steve Ballmer, former Microsoft CEO (2007):"There's no chance that the iPhone is going to get any significant market share. No chance."

* Steve Jobs (2008) in discussing Amazon Kindle: "The whole conception is flawed at the top because people don't read any more."

* New York Times (1936):"A rocket will never be able to leave the earth's atmosphere."

* Henry Morton, president of Stevens Institute of Technology on Thomas Edison's light bulb (1880):"Everyone acquainted with the subject will recognize it as a conspicuous failure."

* Variety passing judgment on rock 'n roll (1955): " It will be gone by June."

* Book publishing executive writing to J.K. Rowling (1996): " Children just aren't interested in witches and wizards anymore."

* Astronomer Simon Newcomb (1888):"We are probably nearing the limit of all we can know about astronomy."

* Newsweek predicting where popular holidays will be in the late 1960s: "And for the tourist that really wants to get away from it all, safaris in Vietnam."

* Senator James Inhofe (R-Ok) in 2004:"God's still up there. The arrogance of people to think that we human beings would be able to change what HE is doing in the climate is to me outrageous."

And over a decade ago we had some unique pearls of wisdom from...

Dumb

"All this time I've been going through such pain and personal ANGUISH ... SUCH HELL, for NOTHING!"

"Life is a fragile thing, Har. One minute you're chewin' on a burger, the next minute you're dead meat." 
-Lloyd, "Dumb and Dumber"

Dumb: Ben Bernanke, the former Federal Reserve chairman, who famously made the following statements shortly before The Great Recession during the 2005-07 period:

"We've never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don't think it's gonna drive the economy too far from its full employment path, though." (July, 2005)

"With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly." (November, 2005)

"Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise." (February, 2006)

"At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency." (March, 2007)

And to cap all these extraordinarily stupid quotes over the years, yesterday at a presentation in England we got ...

Dumber



"You just earned your seat at the head table. And we already got the tuxes."
-Lloyd, "Dumb and Dumber"

Dumber: Janet Yellen, the current chairman of the Federal Reserve, who made the following inane statement yesterday in London that, no doubt, will down in the annals of history:

"Would I say there will never, ever be another financial crisis? ... You know, probably that would be going too far, but I do think we're much safer and I hope that it will not be in our lifetimes and I don't believe it will be." 
-Janet Yellen

I don't know whether I should laugh or cry. 

Gold couldn't hold its gains and has reversed.
Nevertheless I am adding to (GLD) at $113.77.
Not a trade but an investment for me.

Pot stock Tilray, Inc. (TLRY) is trading at $123/share (+$19 on the day).
The short squeeze is reminiscent of Robert Wilson's legendary short in Resorts International.
The price action in Resorts, Tilray, Tesla (TSLA) , etc., are examples of why my basic and first tenet in short selling is to avoid stocks with high short interest as a percent of float and as a multiple to average daily trading volume.
I have learned this lesson the hard way and I have the scars on my back from that experience.
But this tenet has worked out well in my short strategy as I have avoided short squeezes over the last 10-15 years!

Comcast (CMCSA) and CBS (CBS)  are on a roll today - two favs.
Comcast, trading at over $37/share was placed on my Best Ideas List 3 1/2 months ago at $31.35.
Five weeks ago CBS was placed on my Best Ideas List at $52.55. Its now trading at $56.30.

This morning bank stocks gapped higher and have now reversed to being down on the day.

I believe that bank stocks, over the intermediate term are among the most attractive sectors extant but not so much over the short term, as I wrote two days ago in "Be Patient onBank Stock Purchases":

A lackluster third quarter banking industry earnings may provide a good entry point for the group in mid October - but a lot will depend on capital market activity and investment banking in the current month of September.

Through the first two months of the quarter, the trends and earnings metrics are:

* A steady but slow improvement in loan demand (+1%quarter over quarter and +5% year over year).
* A much slower rate of growth in deposits than the rate of growth in C and I loans.
* With short term rates higher and the curve narrowing, flat to slightly higher net interest margins and income is seen in 3Q2018.
* Mortgage originations are weak.
* Higher credit costs quarter over quarter (seasonality).
* Aggressive share buybacks have been maintained.

The swing factor will be September capital markets activity. The quarter to date (first two months of the quarter), trading and investment banking are both lower with quarter over quarter down by at least -15% and about -5%, respectively.

My best guess is that this all should lead to about a -1% quarter over quarter drop in EPS on about a +1% rise in revenues.

Nothing to write home about but nothing to get scared about either.

I continue to favor banks over the intermediate term vis a vis most industry sectors.

This is great:

While Kroger (KR) beat bottom line (EPS) estimates, the sales number was punk relative to consensus expectations.
From my perch, Kroger is still a supermarket facing an increasingly competitive business landscape and its leveraged balance sheet limits the scope and timing of the company's response to rising competition from many quarters.
I view it as a "value trap" - much like the auto stocks.

Meanwhile, Treasury yields back to unchanged on the day after the post CPI falls.
The two year yield is now up 6 basis points this week.
German ten year yield rising post ECB to six week high. The ten year gilt yield near four month high.

Buying more Twitter.

From Bloomberg's Tom Keene:

This Trump tweet just took the S&P Index down by about six handles:

My only trade thus far today is to add to my large (GLD) holdings.

Ivy Zelman, the top housing analyst, says surveys suggest downside to home orders lie ahead.
Ivy has a lot of clout - I am short selected homebuilders for a trade.

Not enough inflation for Dragh? Bullard will probably echo later this morning. Powell won't be far behind.

And stocks respond briskly.
From Peter Boockvar:The August CPI rose .2% headline and .1% core m/o/m, both one tenth less than expected. The y/o/y gain of 2.7% (down from 2.7%) was the headline print and 2.2% at the core (down from 2.4%). Rent price growth remained robust as Rent of Primary Residence was higher by another .4% m/o/m and 3.6% y/o/y. Owners Equivalent Rent was up by .3% m/o/m and 3.3% y/o/y. The second month in a row of declines in medical costs is what kept a lid on core inflation as it fell .2% for a 2nd month and is up just 1.5% y/o/y. Services inflation ex energy though was still up 3% y/o/y. Also contributing to the less than expected inflation print was the .3% m/o/m decline in core goods prices and .2% drop y/o/y. Part of this too was lower pricing in medical care commodities and a sharp 1.6% fall in apparel prices which are now down 4 straight months and by 1.4% y/o/y. Used car prices jumped by .4% m/o/m and were flat for new cars. Energy prices jumped by 1.9% m/o/m and 10.2% y/o/y while food prices grew by .1% m/o/m and 1.4% y/o/y.

Bottom line, CPI missed estimates predominantly because of the decline in medical costs and sharp decline in the prices of apparel. Again, though we have very consistent 3% inflation in services and still overall goods deflation. There was an immediate response in Treasuries as the 2 yr yield fell 3 bps to 2.74% right after the less than expected data. The 10 yr yield fell 2 bps to 2.95%. The dollar also fell. 

But this chart doesnt suggest a basic change from a trend of higher inflation:

CORE CPI

Initial jobless claims totaled 204k, 6k less than expected and little changed from 205k last week. These are the lowest levels since the late 1960's. The 4 week average is now down to 208k for reasons we all know in the context of an extremely difficult labor market in terms of finding the right employee for the positions available. 

JOBLESS CLAIMS

As expected, Mario Draghi slightly trimmed its GDP forecasts for this year and next by one tenth. The 2018 estimate is now 2% and the 2019 is 1.8%. They did though hold their inflation forecasts at 1.7% for this year and next. He was pretty confident in achieving these forecasts as he said "domestic costs pressures are strengthening, broadening" and that "uncertainty around inflation outlook is receding." He also cited rising wages. At the same time he laid out the economic risks in response to tariffs and emerging market weakness. The ECB repeated that QE will get cut again by 50% in a few weeks and end by year end. The current level of negative interest rates will remain in place thru the summer.

Here is a chart again of the Euro STOXX bank stock index. Banks are supposedly the transmission mechanism for Draghi's policy but he can't seem to acknowledge the broken connection. He said today it's not the central banks job to protect bank and insurance company profits. Scorched earth monetary policy in order to achieve 'price stability.'

EURO STOXX BANK STOCK INDEX

Asia bounces, Turkey steps up:Asian stock markets bounced nicely with the Shanghai comp up 1.2%, the H share index higher by 2.5% as was the Hang Seng on the chatter yesterday about another round of discussions soon between us and them. Those markets as we know have been so beaten up that real value has been created here if you can look outside the US. As you can see in this chart the MSCI Asia Pacific index is where it was in 2007. It's trading at only 12.7x 2018 earnings estimates. 

The upward rate pressure in the US continues with the 2 yr yield now up to 2.76%. You can now buy a one month T-bill and get 2%. This comes ahead of CPI at 8:30am and we're also just 2.5 bps from 3% again in the 10 yr. Yields are creeping up in Europe too ahead of the ECB and after the no move from the BoE. 

How would you like to be a central banker in Turkey. Ahead of the rate hike today, President Erdogan again is blaming rate HIKES for higher inflation. The ignorance is obvious but the Turkish central bank stood its ground and raised rates to 24% from 17.75%, that was 300 bps above the estimate. The Turkish lira is rallying by 4.5% as of this writing after falling by 4% after the Erdogan comments. Hopefully this can lead to further stabilization in EM.

After an upward revision was seen earlier in the week in Japan's Q2 GDP figure, particularly on the capital spending side, today they reported a better than expected machinery orders number for July. The caveat though is it is an extremely volatile data point each month and the 11% m/o/m rise in July follows a decline of 8.8% in June. They also reported August PPI that held at a rise of 3% y/o/y vs the estimate of up 3.1%. Higher energy prices was a main factor and why JGB yields didn't move. The 10 yr yield at .11% hasn't yet tested the new 20 bps range around zero in the BoJ yield curve control experiment. I still expect it to at some point in coming months.

* If you left early on Wednesday afternoon, go back and read Jim Cramer's closer!
* I continue to believe that the markets effectively hit their 2018 highs in late January

In "The Bear in the Market Is Roving Right Now," Jim "El Capitan" Cramer zeroes in on the developing carnage in selected groups -- something I have harped on this week and, again, in Wednesday morning's opening missive.

Jim writes:

"We've got roving bear and bull markets all over the place and they have come to define what happens every day including today.

That's a big change from my previous view of this market where I had held that there are roving bull markets and when stocks weren't in bull mode, they rested.

No, I am not saying that the market's become too treacherous for most people to handle.

I am saying that there are some incredible declines that must be addressed because they are so glaring and, at times, so nasty, particularly when they occur intraday."

The bear market not only can be seen in Intel (INTC) , Micron (MU) and Facebook FB ; it can be seen, as I have cautioned, in other regions in the world. Indeed, the divergence between the S&P 500 Index and the MSCI Emerging Markets Index hit a 15-year high this week. As meaningful and looking out over the last seven years, the S&P Index is up by nearly 180% while the emerging markets are only up 14%:

Source: Pension Partners

Again, from Jim:

"If you want to see what a textbook bear market looks like, consider the emerging markets with the Hang Seng from Hong Kong, down 21%, Russian, down 20%, Greece, off 29%, the Shanghai index of mostly larger capitalization stocks is off 26%, and the Shenzhen, with smaller cap stocks is off 31%."

As I wrote late yesterday, Wednesday's strength in consumer staples (such as Kraft Heinz (KHC) , PepsiCo (PEP) , Unilever (UN) and Procter & Gamble (PG) ) and a drop of two basis points in bond yields may be construed as a risky backdrop and indicative of concerns regarding a slowdown in the rate of domestic economic growth. Also, weakness in regional bank stocks (I issued a cautious warning yesterday on bank third-quarter earnings)  and the foundering FANG are not healthy signposts.

While the constant flow of corporate buybacks and the stronghold of fearless investors in ETFs continue to provide a tailwind to our markets, it remains my belief that the large stock declines Jim mentions above may broaden out and that we already may have experienced the highs in the Nasdaq and the S&P indices for the year.

Both the bull market and the economic recovery are long in the tooth and face the challenges of a pivot in global monetary policy, competition from ever-higher risk-free rates of return (the one-month Treasury bill yields more than 2.00% compared to the S&P 500 dividend yield of about 1.80%) and a number of other possible adverse outcomes in the economic, political and policy spheres.

Bottom line

Regardless of one's market view, if you left early please make sure to read El Capitan's late Wednesday synopsis of the market. It has a lot of merit, it's a great read and provides pithy food for thought.

Market tops are processes and, from my perch, I believe that since late January 2018 we have been making an important one.