Market Talk

On today’s News Hub, we wonder if Wall Street dodged a bullet, and look into that annual springtime ritual, calculating how much money corporate America loses due to hoops-addicted employees watching the NCAA tournament.

- Retail stocks have been some big beneficiaries of this yearlong bull market. Bespoke Investment Group finds more than half of the 31 S&P 500 retail stocks trade within 2.5% of their 52-week highs. Only four of those 31 trade below their 50-day moving averages and six are down this year. Macy’s (M) up the most year to date.

- Money market funds yielding virtually zero create a dangerous situation where people tend to chase yields elsewhere, with the stock market being a big beneficiary of that, writes Fred Wilson. “Find an acceptable place to put your money for a year or two at a low, but positive, yield. And then wait for rates to rise. Because they will and you don’t want to be in the wrong place when that happens.”

- “Reasonable reform has almost no chance of passing the Senate,” Simon Johnson notes. “But a well-crafted debate, drawn up on the right terms — and with the support of the president (although don’t hold your breath on that) — could really help shift popular understanding of the issues.”

- Apple (AAPL) got a lot of press last week for its market cap surpassing $200 billion and exceeding Wal-Mart’s (WMT) value. “I always snicker when I start hearing [these] stories,” Paul Kedrosky says. “When we press our noses against the market glass and ‘oooh’ and ‘aaah’ at a company’s market capitalization exceeding something it shouldn’t…let’s just say bad things tend to happen. Eventually.”

- “The trouble is that speculation is to financial markets what claptrap is to the political system: absolutely crucial,” Paul Murphy writes at FT’s Alphaville blog. “Speculators, faceless or otherwise, make markets more efficient by providing the liquidity which makes trades possible and, ultimately, produce more accurate prices…How is it that our political elite does not know this?”

- Most online readers still aren’t ready to climb pay walls, according to Pew Research. “It also does not give me comfort that we’re wasting previous time futzing over walls when we should be paying attention to the big problems we have…dreadful engagement and loyalty,” BuzzMachine blogger Jeff Jarvis says.

- Yahoo’s (YHOO) Senior VP of US revenue and market development, Joanne Bradford, is planning to leave the company and become chief revenue officer of online startup Demand Media, Kara Swisher reports. Departure marks a big step for Demand and a “definite blow” to YHOO CEO Carol Bartz’s turnaround efforts.

- Atlanta Fed looks at the discrepancy between the income and expenditure sides of GDP calculations in the past couple of years.

- In a blog post, Google looks back at how it brought its technologies and DoubleClick together over the past two years and its plans for online display advertising in the future.

- Check out who WSJ predicts will win the National Championship.

US stocks end up mixed, with the blue-chips actually poking into positive territory at the end of the day, even after Sen. Dodd unveiled his much ballyhooed financial-reform bill.

DJIA adds 17.46 to 10642.15, S&P 500 adds less than 0.52 to 1150.51, Nasdaq Comp slips 5.45 to 2362.21. Stocks were weak in the morning, but whittles away the losses in the afternoon. Crude settles below $80/barrel, dollar rises.

Financial sector finishes down, but recoups almost all of the day’s losses, which says something about how much Wall Street fears the bank bill. You have to wonder. Dodd unveils this bill that’s supposed to remake the culture on Wall Street, reign in the reckless behavior that led to the credit crisis, collar the greed, all that good, Main Street vs. Wall Street stuff, and what happens on Wall Street? Almost nothing. The financial sector was down about 0.80% around 2 p.m. when Dodd unveiled his bill, and it finished down 0.08%. Goldman and Citi were down, BofA was flat and AIG and Wells Fargo were up.

This bill has a long way to go until it becomes a law, and Lord only knows what’ll happen to it before then. But the banks don’t seem particularly worried, and that’s not a particularly good sign when this bill supposedly had more “teeth” than anybody expected.

Don't know what your problem is, everything looks great to me.

We’re a little surprised at how well stocks have behaved in the aftermath of the examiner’s report on the Lehman bank-out. Granted, the market hasn’t exactly been tightly tethered to reality anyway, but still, a little surprised.

One might think this thing with Lehman would put investors on the defensive in the same way Enron and Worldcom rattled their faith years ago, and they’d be particularly suspicious of what lurks behind the curtains in the financial sector. Gullible enough to believe Lehman was the only outfit playing games with its balance sheet? Looks that way.

No proof that Lehman wasn’t alone, but considering what many of these leveraged-up institutions faced in 2008 and ’09 (and arguably still today) with their “sticky” assets, the choice to get “creative” seems easy. Go with an almost-certain trip down the tubes, or a fix-up job on the balance sheet that an incompetent SEC might, by some off-chance, stumble on, some day. No brainer, right?

And what appears unshakeable now is investors’ willing suspension of disbelief. That was necessary with the hiatus of mark-to-market accounting a year ago, and investors continue to steadfastly buy the illusion that banks have fixed all their problems.

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New homes struggling against 'nearly new' homes.

Home builders take a hit after National Association of Home Builders’ monthly confidence gauge falls two points to 15 – out of 100 – in March.

Wall Street had been expecting the index to hold steady at its February level of 17, so the decline signals more evidence of trouble in the beleaguered housing market.

March’s decline was the fourth in six months. But NAHB blamed severe winter weather for the reason why building stopped last month in large parts of the East and Midwest.

“So, here we are, $1.25 trillion of MBS/Agency paper purchases later to suppress mortgage rates and a home-buying tax credit to bring out first-time home buyers, and builders still have very little confidence even with historically low inventory of new homes,” says Miller Tabak equity strategist Peter Boockvar.

The index measuring present buyer traffic slumped to 10 from 12 – the lowest reading in a year, points out Weiss Research.

“Home buying activity remains muted, especially on the new housing side of the ledger,” firm writes. “Builders of new homes are simply having a very difficult time competing against ‘nearly new’ homes being dumped on the market by burned speculators and banks. That dynamic will persist for some time.”

The Dow Jones builder index was recently off 2%.

(Dawn Wotapka contributed to this post.)

Just because Goldman Sachs’ (GS) reputation has been hit hard in recent months doesn’t mean its shares have taken the same sort of abuse.

Quite the opposite, in fact, as Goldman’s stock has enjoyed an 18% run-up throughout the last six weeks even as the firm’s rep has been under attack.

Goldman, famously dubbed the “Vampire Squid” by Rolling Stone writer Matt Taibbi, has often been criticized for its controversial role throughout the financial crisis. Recently it seems like Goldman has been bending over backward trying to preserve its reputation. The latest defense came last month from Lucas van Praag, Goldman’s head of corporate communications, who went into granular detail in a blog post rebutting a NY Times story that described the firm’s controversial relationship with AIG.

But putting the negative publicity aside for a second, Chad Brad, founder and president of Peridot Capital, makes the case that Goldman shares are undervalued and at current levels present a good buying opportunity for investors.

Goldman is still the “best investment bank in the world…has seen many of its competitors go out of business or dramatically scale back operations, and yet at around $170 per share the stock still trades for less than 10 times estimated 2010 earnings,” he says.

Brand, which discloses his firm is long Goldman shares, notes the firm trades at a lower valuation than both Bear Stearns and Lehman did pre-crisis.

And buying Goldman at less than 10x earnings is a “tremendously attractive risk-reward opportunity,” he adds.

Goldman shares were recently off 1.4% at $172.44.

This is the kind of thing that worries me:

Funeral Plans: Requires large, complex companies to periodically submit plans for their rapid and orderly shutdown should the company go under. Companies will be hit with higher capital requirements and restrictions on growth and activity, as well as divestment, if they fail to submit acceptable plans. Plans will help regulators understand the structure of the companies they oversee and serve as a  roadmap for shutting them down if the company fails. Significant costs for failing to produce a credible plan create incentives for firms to rationalize structures or operations that cannot be unwound easily.

That’s one proposal in the Dodd bill , under the section outlining the Financial Stability Oversight Council. Asking the banks to come up with their own deathbed criteria sounds a sure fire way to get the banks to game the system.

What incentive, to use a popular term these days, is there for them to be honest? It reminds me of the stress tests, where the banks were given some very broad economic suppositions, and asked to determine how their operations would hold up under them.

Surprise! Just about everybody did swimmingly.

UPDATE: Here’s the link to the committee summary. On first blush, I have to say it touches on all the big points (I personally don’t care where they house the protection agency, so long as they get the rest of it right.) It’s got provisions for moving derivatives to exchanges, for limiting the leverage banks can employ, for preventing the government from bailing out banks. It’s got a long way to go, but given Congress’ track record, this is a pleasant surprise.

Alright, kids, we’re coming up on the 2 p.m. press conference Sen. Dodd’s scheduled to unveil his big financial reform bill. You can expect to find a summary of the bill here. If history is going to remember for for anything other than a sweetheart deal on an Irish cottage, this is where he’s going to change those perceptions.

Without sounding too naive, I’m trying to keep an open mind about this thing. I’m not at all convinced that by the time this bill gets through the meat grinder, it’ll resemble anything like its original form, or will be very effective for that matter. But until I see it for myself, I’ll reserve judgment.

Keep in mind, with this bill we want to make sure that a couple of broad goals are met: are leverage limits set on the banks, are accounting holes addressed (ahem, we’re talking to you, mark-to-model,) is transparency addressed, as in the treatment of derivatives, is the problem and resolution of too-big-to-fail banks addressed.

And even if those goals are addressed, there’s still that meat grinder called “the process” to fear. Didn’t it all look so much easier back in the Schoolhouse Rock days?

I’m just a bill.
Yes, I’m only a bill.
And I’m sitting here on Capitol Hill.
Well, it’s a long, long journey
To the capital city.
It’s a long, long wait
While I’m sitting in committee,
But I know I’ll be a law someday
At least I hope and pray that I will,
But today I am still just a bill.

Money manager John Hussman has largely remained on the sidelines throughout much of this yearlong run-up. The S&P 500′s remarkably rallied about 65% off last March’s lows, yet Hussman hasn’t seen much of that upside.

But don’t knock him just yet. To his credit, he missed almost all of the downside when the market collapsed in 2008. The Hussman Strategic Growth Fund lost only 9% in 2008, when the S&P 500 fell 34%. (He gained 4.6% last year, when S&P 500 rose 38%.)

Now, with the market once again approaching excessively overvalued levels, he sees additional long-term risk.

In his weekly commentary, he cites a 2005 article from the Economist which details many warning signs of the inflating housing bubble that ultimately went bust and caused the credit crisis which turned into arguably the worst downturn since the Great Depression.

This Economist article from five years ago should help investors understand that the credit crisis wasn’t an “unpredictable surprise,” but rather than outcome of “extraordinary recklessness” that built up for years prior to the recession’s official beginning in December 2007, according to Hussman.

Though the mounting problems in 2005 were utterly ignored by the stock market for more than two years after this analysis was published, the fact is that even with the recent rebound, the S&P 500 remains below where it was in mid-2005. Overvaluation and reckless lending do not always translate into near-term market weakness, but they invariably haunt investors in the form of poor long-term returns.

Hussman has been knocking this purported recovery since the market turned last March and sees additional risks with the housing market set for another round of monthly mortgage rate resets.

To reiterate what the reset curve looks like here, the 2010 peak doesn’t really get going until July-September (with delinquencies likely to peak about three months later, and foreclosures about three months after that). A larger peak will occur the second half of 2011. I remain concerned that we could quickly accumulate hundreds of billions of dollars of loan resets in the coming months, and in that case, would expect to see about 40% of those go delinquent based on the subprime curve and the delinquency rate on earlier Alt-A loans.

Hussman says his fund is fully hedged and is currently in its “most defensive position” since the 2007 peak.

Interesting observations, especially from a man who knows a thing or two about long-term performance. Just because he missed most of last year’s run-up shouldn’t overshadow the fact that his fund has gained 8.19% since inception in 2000.

The S&P 500′s performance in that same 10-year time frame: down 1.09%.

One of the signs of a resurgent corporate America, one that will start hiring at least some of those 11 million or so unemployed Americans who currently living it up on unemployment compensation, will be a surge in capital expenditures. Companies will start spending money to expand their operations, and will need to hire people to operate those operations. Recent data suggest that ramp up may be a very long, very low-grade one.

According to the Fed’s latest Flow of Funds report, US nonfarm, nonfinancial firms raised a net $380 billion in 2009. “One might expect this to reflect an increased appetite to invest. But firms have primarily been borrowing more from the bond market to compensate for borrowing less from other sources,” Capital Economics’ John Higgins writes in a research note.

Companies were less likely to tap the equities markets, meaning the total raised in 2009 was down $327.5 billion, a record low, as Higgins points out.

Admittedly, this “financing gap” was less negative in the final quarter of 2009 than in the prior three quarters. Nonetheless, even if the financing gap turns positive this year, we doubt it will become very large. Firms are likely to remain reluctant to invest heavily given the weakness of final demand and a still low rate of capacity utilization. And to the extent that they do choose to ramp up their capital expenditure, they will probably prefer to finance it with their cash flow.

As we saw this morning, capacity utilization remains well below its long-term average. Real demand remains in the doldrums. The economy is going to need a spark, a new Cabbage-Patch Kid, a new Internet, a new something, to get the whole job-creation machine going again.

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