Market Talk

US stocks close out a quiet week with another modestly positive session, with the S&P 500 just at the 1150 level that’s got so many bulls riveted. But we wonder what lies beneath the surface, because this was an oddly still week and we can’t imagine the condition remaining static for too long.

DJIA rises 13 to 10625, up 0.6% on the week. S&P 500 slip less than 1 to 1149.99, right at the critical level. Nasdaq Comp slips 1 to 2368. NYSE volume’s a bit above average. Now that traders have kissed the 1150 level, what will they do with it? Most expected the market to vault the hurdle on its way to even higher ground. But they haven’t exactly passed it in style; in fact, at 1149.99, and even with yesterday’s close at 1150.24, they haven’t actually passed it at all. Not yet at least.

February’s retail sales come in stronger than expected, even as January’s as revised down. And while it’s being treated as yet another sign of a solid recovery, keep in mind something. February’s sales at $355.5 billion were better than last February’s sales of $342.3 billion, yes. But last February was pretty darn closer to the nadir. You have to go back to 2006 to find a worse month, when sales were $354 billion.

It was consumption, yes, but it was not conspicuous consumption. And it doesn’t exactly presage some imminent return to the salad days.

Meanwhile, we imagine this weekend’s going to see a lot of people in the New York area spending a rainy weekend pouring through Anton Valukas’ Lehman Brothers report. We really wonder what the fallout of this report’s going to be. We imagine it’s got more than just the guys at Zero Hedge fired up.

- “The disease that left [Lehman] vulnerable was a mad embracing of risk, the excess use of leverage, an extensive exposure to mortgage and real estate, and the enormous usage of derivatives — concurrent with a lack of intelligent risk management,” Barry Ritholtz writes. Citi and JPM merely made matters worse when Lehman’s “immune system was compromised.”

- Tapping Janet Yellen as Fed vice chairman is a good choice. “She’s open-minded, a good counterweight to the inflation hawks who think that any day now we’ll be partying like it’s 1979,” Paul Krugman says. “She’ll provide exactly the kind of intellectual flexibility the Fed needs.”

- Interesting to note the examiner’s scathing report on who should be held accountable for Lehman’s collapse doesn’t mention short sellers, Jeff Matthews points out on his blog. Instead blame falls on “a lot of really bad management by people desperate to keep a sinking ship afloat any way they could, including ‘accounting maneuvers.’”

- Is it surprising that allegations surrounding Tim Geithner and the NY Fed surfaced in the examiner’s report on Lehman’s collapse? Yves Smith weighs in.

- “All in all, the entire system failed,” Barry Ritholtz bluntly states. “The situation is utterly disgusting, and if the investing public pulls its money out of the completely corrupt public markets for a generation or more, it would not surprise me.”

- They can’t be too happy at Ernst & Young today. “Enron brought down Arthur Andersen,” Felix Salmon says. “Will Lehman do the same for Ernst & Young?”

- Takeover talks swarm the rumor mill this week. “I don’t know if this would be considered a sign of a healthy market or an ailing one, but we can’t ignore the presence of so many takeover rumors, specifically those concerning high profile retailers,” Joshua Brown writes at The Reformed Broker.

- Fallout from Lehman raises some troubling questions. There’s a “seminal” question, blogger Karl Denninger says at the Market Ticker, “that is, whether the asset class at the core of the original problem, the banking system, now has clean balance sheets and it can be reasonably assumed that what is reported in terms of assets, liabilities and earnings is in fact real.”

- US-subsidized mortgage modifications rise 6% from a month earlier to one million, Treasury says.

- Economy’s in the midst of a “sham recovery,” former labor secretary Robert Reich writes. Big companies, Wall Street and high-income Americans are doing better, but Main Street, small businesses as well as middle and low-income Americans face a much gloomier outlook.

Today we’re breaking down the retail sales figures for February, as well as the odds and prospects for financial reform. They ain’t bright, by the way.

Citigroup (C) CEO Vikram Pandit yesterday said the bank’s ready to return to “sustained profits,” which sent shares soaring and prompted positive reactions about Citi’s future.

To be sure, we’ve heard this script before. Actually it was about a year ago that Pandit was turning bullish, a pattern that WSJ Heard on the Street columnist Peter Eavis picks up on:

Bullish remarks from Vikram Pandit a year ago helped spark the great bank stock rally of 2009. On Thursday, the Citigroup chief executive once again gave a positive outlook for his bank. But investors should think twice before using Mr. Pandit’s thesis as a reason to pile into Citi shares.

When trying to rebuild confidence in a beaten-up bank, detail helps. For example, in Citi’s case, a clear-cut earnings-per-share forecast from management would have been welcome after the credit crunch mangled the bank’s financial results. Instead, Mr. Pandit gave a return-on-asset target of 1.25%-1.5% as a “goal.”

Pandit didn’t mention when he’d be able to sell these assets, and he was unconvincing when saying these assets could actually earn 1.25%, Eavis says.

So while many seem to assume Citi’s worst days are over, Pandit’s comments weren’t nearly as positive as some would like to believe, Time’s Stephen Gandel says.

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So this white stuff hurt jobs, but helped retail sales?

Let me get this straight. All those snowstorms that blanketed the east coast last month had a negative effect on the February jobs data. But those same storms didn’t exactly have the same impact on today’s retail sales report.

Hmmm.

Retail sales rose 0.3% last month, according to the Commerce Department, much better than the 0.3% decline economists had been expecting. The Super Bowl early last month had a positive impact, helping electronic sales soar 3.7%.

“So there you have it,” says Joan McCullough, market strategist at East Shore Partners. “Electronics and appliances led the retail sales parade, +3.7%, courtesy of President’s Day discounting, pay-nothing-for-12-months come-ons and scattered DOE-sponsored ‘cash for appliances.’ ”

And the East Coast blizzards didn’t hurt sales. Non-store retailers – which include mail order and internet shopping – were flat last month despite the snow that kept shoppers at home.

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Why, we can make this just as cheaply in the US.

So Caterpillar is jumping on the “onshoring” trend, the Journal reports, the latest mini-trend in money-saving efficiency efforts whereby companies actually bring production they offshored back to the United States. The given reasons are shipping costs, complicated logistics and quality control. But also, companies are looking across the vast nation of ours, and seeing an economy battered by the worst recession in a generation and just looking for work.

From the Journal:

Caterpillar Inc. is considering relocating some heavy-equipment overseas production to a new U.S. plant, part of a growing movement among manufacturers to bring more operations back home—a shift that will likely spark fierce competition among states for new manufacturing jobs.

The trend, known as onshoring or reshoring, is gaining momentum as a weak U.S. dollar makes it costlier to import products from overseas. Manufacturers are also counting on White House jobs incentives, as well as their ability to negotiate lower prices from U.S. suppliers who were hurt by the downturn and willing to bargain.

Now, hey there, wasn’t it, like, just the other week that I wondered about this? It was:

Now you always hear that U.S. workers make too much. But wages haven’t grown at all in a decade, and I bet adjusted for inflation they’ve barely grown in a generation (I know there’s a good table for this somewhere, just couldn’t find it quickly.) How overpaid could Joe Six-Pack possibly be anymore? It’s time to revive manufacturing.

The Journal article makes it clear that this is more of a trickle than a flood, that companies are still offshoring more than they’re onshoring. But it’s a hint that the gap in pay has narrowed between our blue-collar workers, who once seemed so overpaid, and those poor little shirt-weavers in third world sweatshops.

Just a little.

If you’re lucky enough to have access to David Rosenberg’s work, as we do, well, you’re lucky. The Gluskin Sheff economist, who used to ply his trade on Wall Street but now works in the Great White North, produces interesting, fact-based reports every day, and don’t be misled by his bearishness. He was one of the few prominent voices warning about the falls the economy was about to fall over, back before a well regarded, rock-solid outfit like Lehman Brothers went down and everybody suddenly their eyes pried open.

“It is amazing how so many investors have switched from fear to greed despite the fact that we are still writing chapters in this post-bubble-credit collapse book,” he wrote yesterday. “So many people still do not realize Return of Capital is more important than Return on Capital.”

While everybody’s so hopped up on GDP, Rosenberg pointed to other measures of economic activity every bit as illuminating, and no bit as sunny.

In the final analysis, income is what drives everything in the economy — it is just a different measure of economic activity.

What is interesting is that as of Q3, Gross Domestic Income was still contracting, albeit fractionally. And the ‘statistical discrepancy’ between it and the spending accounts, at $253 billion (annualized), is without precedence.

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Who needs a job!

There’s a new profligate in town, one that isn’t working, isn’t looking for a job, but is just sucking off the government teat while productive citizens slave away. This new welfare queen can be found in living rooms across the country, her (or his) feet up on the coffee table, sucking down a Fuze and turning down job offers while they waste time watching The View. They’re almost, go ahead and say it, European.

“Continuing to pay people unemployment compensation is a disincentive for them to seek new work,” Sen. Jon Kyl said, one of the proponents of this new meme. “I am sure most of them would like work and probably have tried to seek it, but you can’t argue it is a job enhancer.”

That’s right, you 11 million or so unemployed Americans collecting benefits: you’re being “disincentivized” to work by a government handout. And in the process, you’re robbing decent productive, working Americans.

It’s only a matter of time before Mark Levin or somebody starts screaming about unemployment queens.

This is so wrong on so many levels, I’m not sure where to start with it. The worst economic meltdown in our lifetimes has thrown more than 8 million Americans out of work. The jobs have simply vanished. You want to argue the government can’t afford to keep paying benefits to people a year into their job search. That’s fine, but that’s a separate argument.

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Repo 105? Yeah, let's do 105. And 106, and 107, and 108, and 109...

So I had some things I wanted to write about, Jon Kyl’s pathetic bashing of the unemployed, the parallels between Greece and the states of the United States, the continued foot-dragging on financial reform, but this Lehman report thing, well it’s jumped to the top of the charts — with a bullet. There are so many things to talk about with this report it’s hard to know where to start.

Let’s start with the five W’s:

A scathing report by a U.S. bankruptcy-court examiner investigating the collapse of Lehman Brothers Holdings Inc. blames senior executives and auditor Ernst & Young for serious lapses that led to the largest bankruptcy in U.S. history and the worst financial crisis since the Great Depression.

Accounting fraud? Off-balance-sheet debt? Lies? Deceict? Auditor negligence? What are we talking about here, Lehman Brothers or Enron? Congress should repeal Sarbanes-Oxley and start over, because this report makes it fully, painfully obvious that we learned absolutely nothing from Enron’s collapse (we did get a hit Broadway show out of it, though, so it’s not a total loss.) We allowed the same exact kinds of fraud that eventually sank Enron to remain on the scene, and get picked up by other players eager for a quick buck, despite the much despised Sarbox rules.

Al Capone kept cleaner books than these guys. And ask yourself this: do you really think Lehman Brothers and Enron were the only two companies that did this stuff? Who’s being naive now, Kay? The report also makes clear, because clearly it wasn’t clear to some interested parties, that the accounting rules need to be part and parcel, and a big part and parcel, of any and all financial reform.

This report is a daisy cutter through all the self-serving defenses for saving the banks, and more than one reputation is likely to be ruined by it. The financial meltdown wasn’t some hundred-year storm, and it wasn’t a crisis of confidence, and it wasn’t an attack of short sellers. It was a willful, conscious, mad dash for money, come hell or high water. Both eventually showed up.

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US dollar hammered overnight, which helps sturdy the bid for risk trade, with gold and oil getting frisky. US stock futures tilted higher, but restrained ahead of a morning salvo of economic data.

February retail sales due at 8:30am; Reuters/Univ of Michigan preliminary March consumer sentiment at 9:55am; and January business inventories set for 10:00am. S&P 500 and Nasdaq Comp perched near highest levels since 2008. Stocks mixed in Asia overnight, currently higher in Europe.

US dollar index at 79.78. S&P futures up 3.00; 10-yr lower, yield at 3.73%.

And just give us a few minutes to collect our thoughts on this whole Lehman thing. The angles are too numerous to count.