Market Talk

- US GDP growth at 2% is unsustainable; economy either has to break higher or fade lower sooner than later, Stu Hoffman, chief economist at PNC Bank, tells Big Picture blogger Barry Ritholtz. “Just as a 747 cannot maintain altitude at 200 mph, neither can the economy sustain a 2% GDP,” Hoffman says. “So the captain of the plane must increase thrust and fly faster, or lose altitude and land. The economy…behaves the same way.”

- There were warning signs about former H-P (HPQ) CEO Mark Hurd that investors and the media largely ignored, writes Eric Jackson, founder and president of Ironfire Capital. He cites the “piggish behavior [Hurd] and his executive team were exhibiting at the expense of H-P shareholders,” in the form of excessive compensation and lavish perks in last few years. “In my book, if you’re piggish about the small stuff like expense reimbursements, you’re going to be piggish about the big stuff.”

- Disappointing jobs report last week as well as unfavorable monthly revisions don’t bode well for stock market and economic recovery. “Pending a change in policy mix which is anchored by meaningful structural policies, the equity market is unlikely to sustainably regain its composure and yield levels will continue to surprise on the downside,” says PIMCO CEO Mohamed El-Erian.

- S&P 500′s short-term uptrend remains intact. “Looking at the 15-day intraday chart, the index held the bottom of its uptrend channel nicely,” Bespoke Investment Group writes, noting technicals look pretty good this week. “It looks like traders are going to try and at least test the highs made last week.”

- “If you’re on Wall Street, and you’ve seen the stock markets recover and the banks go from virtual insolvency two years ago back to record profit numbers now,” then you may think the recession’s over, Rolling Stone’s Matt Taibbi says. But if you’re looking for a job “somewhere outside the Beltway and/or lower Manhattan, and you’re noticing that the only easy job openings this year were temp gig taking census surveys (and even those have dried up), then your view of things is going to be no way the recession has ended.”

- Investors should embrace the uncertainty and turmoil plaguing the economy rather than whine about it, Justin Fox writes at Harvard’s Business Review blog. “Think about the feelings of relative economic certainty and confidence that prevailed in 2006, or in 1999,” says Fox. “Investing right now may seem scary and dangerous, but chances are that it’s a lot less dangerous than investing three or four years ago.”

- Macroeconomic Advisers changes its stance on when it sees the Fed boosting rates, shifting to late 2011 from mid-2011. “Given our expectation that any downward revision to the forecast will not be ‘appreciable’ and that the recovery is not ‘faltering,’ we do not anticipate either easing steps or changes to the policy guidance,” Macroadvisers blog notes.

- About that whole “cash on the sidelines” argument, John Hussman says it’s nonsense. “Analysts are pointing to an apparent pile of corporate ‘cash on the sidelines’ as if these holdings of debt securities somehow make new corporate spending more likely.”

- AOL’s Daily Finance blogger Peter Cohan wonders how effective former H-P CEO Mark Hurd really was, especially since H-P’s cash and short-term investments have slipped from $13.9B to $13.3B and it’s long-term debt has jumped from $3.4B to $14B.

- Speculation swirling that the Fed this week could announce additional measures to boost the economic recovery. But University of Oregon economics professor Tim Duy isn’t so sure. “My baseline expectation is that the FOMC statement acknowledges the weakness in recent data, but leaves the current policy stance intact.”

- The Dow has posted four-straight days of gains and sits at a 10-week high, all while Treasurys fall on supply; 2-year auction hits record low yield. “Suddenly, investors live in a perfect world: There’s enough money out there to push the stock market higher and keep bond yields down,” Tom Petruno writes at LA Times’ Money & Co blog. “Enjoy it while it lasts.”

- “I really don’t think people appreciate the huge dangers posed by a weak response to 9.5% unemployment, and the highest rate of long-term unemployment ever recorded,” Paul Krugman says. “The point is that while policy makers may think they’re being prudent and appropriately cautious in their responses to unemployment, there’s a good chance that they’re prudenting and cautiousing us into a long-term jobs catastrophe.”

-After a couple of failed attempts, the S&P 500 has finally broken through its downtrend from the April highs, Bespoke Investment Group points out. “The next level of potential resistance now lies just below the 1130 level, which is where the June rally fizzled as well as the flash crash closing low on May 6.”

- BP’s plans to sell about $30B in assets. “The sales could be the best response possible to the spill’s legacy — as could the company’s debt reduction and increased cashflow,” FT’s Alphaville says. “Well, great — BP is turning into a well-functioning litigation-offset machine. That comes at the expense, though, of knowing how it’s actually going to function in the future as a successful — and safe — oil company.”

- Average age of completed but unsold new homes was 12.4 months at end of June, historically high but well off peak levels hit earlier this year. “Like so much else about this recovery, this is an area where the data says things are improving, but remain at bad levels,” NYT’s Floyd Norris notes.

- The second-half slowdown is here, Calculated Risk writes. “I still think we will avoid a technical double dip recession, but that won’t matter to the people impacted by the slowdown.”

- “Q2 earnings for American companies have been remarkable for how disconnected they seem from from the actual economy,” Joe Weisenthal says at Money Game. “Now it could be that these good earnings will soon translate to hiring, and everything will be great. But watch out if the divergence occurs, because that will mean fresh anger and scorn from politicians, and everyone else.”

- Michael Schuman asks if the euro crisis is really over. “Europe may be able to patch up investor confidence by acting like problems are getting solved without actually solving them,” he says. “But that will only get Europe so far.”

- MarketBeat wonders if gold bugs are in retreat?

- “The Boston Red Sox may have beaten the New York Yankees to the punch to become the first billion-dollar baseball club in history,” Brett Arends writes at MarketWatch.

Rising profits amid so-so sales is a common theme this earnings season, especially as companies are cost-cutting their way to profitability while consumer demand has yet to make a comeback.

Trimmed work forces and higher productivity are generating profits, proving to be a successful short-term formula, but certainly one that can’t last forever. From Free Exchange blogger Ryan Avent:

It’s difficult to avoid the conclusion that low demand is responsible for the chasm between where the American economy is and where we’d all like it to be.

That’s basically the long and short of what’s plaguing the economy. The lack of demand is why consumer spending remains depressed. And consumer spending is depressed because the unemployment rate remains stubbornly high. The unemployment rate is high because companies aren’t willing to hire. And companies don’t hire because they aren’t seeing enough demand. It’s a viscous cycle that doesn’t have an easy solution.

But as corporate profits keep rising, one would think companies would have more incentive to start rehiring. Unfortunately that notion hasn’t come to fruition during this recovery.

Fomer labor secretary Robert Reich explains how higher profits are no longer boosting employment. “We’re witnessing a great decoupling of company profits from jobs,” he says. “The next supply-side economist who tells you companies need more incentive (i.e. lower taxes) before they’ll hire is living on another planet.”

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- Google (GOOG) dumped from China Unicom’s (CHU) Android devices. “An obvious and, I suppose, inevitable response to Google’s recent defiance of the Chinese government,” John Paczkowski says. “I imagine we’ll be hearing of a similar move by China Mobile in the near future.”

- “The mortgage mods and foreclosure abatement programs are really all about propping up insolvent banking institutions,” Barry Ritholtz writes. “These programs are another losing round of helping Wall Street at the expense of Main Street. It is the worst kind of trickle down economics that has been seen in decades.”

- Bernanke says record-low interest rates still needed to support the economy, but the central bank has to be ready to tighten credit when needed to prevent inflation. His comments helped propel stocks higher. Then ECB President Jean-Claude Trichet said IMF help for debt-strapped Greece would be bad, really bad, which helped push stocks way off the fresh highs they set earlier in the session.

- If you thought 2009 was bad for newspapers, 2010 may be even worse, Newsosaur blogger Alan Mutter says. “If the rate of decay continues to slow in 2010, the industry will shrink at a slower pace than it did last year. But it still will continue to shrink. And declining shrinkage should not be taken as a sign of health.”

- Venture-backed IPOs might be making a comeback. Four non-biotech venture-backed deals have occurred this year, and all have performed fairly well, Paul Kedrosky notes. “Admittedly, four data points aren’t yet much of a trend, but it’s worth pointing we are seeing the beginnings of a resurgence in the venture-backed IPO market in 2010.”

- It may be a lost decade for some buy-and-hold investors, but keep in mind “some investing rules never go out of style,” Tom Petruno writes. “Try to buy good businesses, try to get them when they’re relatively cheap, and don’t underestimate the power of dividend income over time. And the cardinal rule: Stay well-diversified.”

- Tepid revenue growth won’t placate market much longer. “If we don’t start seeing a pick-up in top-line growth this market is not going to be celebrating for long and the recent optimism in stocks will be proven wrong,” Pragmatic Capitalist says.

- Once again, another weak Treasury auction today. Hard to pinpoint exactly what’s causing it, “but something has changed this week in the US Treasury market and the cost of borrowing is going up as it is in Europe too,” Peter Boocvkar says.

- The Dow Jones Internet Index, which last got any press back when pets.com was still around, surpassed its pre-Lehman levels last summer, and is marching higher and now making a run at its highs from 2007, Bespoke notes.

- AAII’s sentiment survey shows percentage of respondents who expect the market to rise has dropped two weeks in a row, even as stocks keep setting fresh highs. “This is not typical,” Jason Goepfert writes.

- “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.

- Mark Hulbert says some are drawing the wrong lessons from this week’s market anniversaries.

- The view from the bottom. Our MarketBeat bud Matt Phillips compiles some quotes from market watchers when stocks were bottoming out this time last year.

- “As we celebrate the one year birthday of the current bull market, a key characteristic that still looms one year in is the lack of conviction and confidence in the economic outlook for those on Main Street versus the more optimistic view of those who work on Wall Street,” Peter Boockvar writes.

- Wards of the state enjoy a nice day. Citi (C), AIG, Fannie Mae (FNM) and Freddie Mac (FRE) all rally.

- Small business owners now say conditions will be worse six months from now. “It’s not a pretty picture,” Economist’s Free Exchange blog says. “The problem is clearly not labor supply. Rather, the economy’s principal job creators are seeing too little demand to justify increases in hiring. That’s the drag on recovery.”

- Cisco (CSCO) says faster router “will forever change the Internet? Does the announcement live up to hype? Shares close flat at $26.13.

- Government has bailed out the banks, now it’s time to bail out our nation’s schools, former labor secretary Robert Reich says.

- An improved Web browser on Amazon’s (AMZN) Kindle is long overdue, MediaMemo blogger Peter Kafka notes. “At this point having a wireless device that only grudgingly accesses the Web makes no sense. And it certainly won’t fly once Apple’s (AAPL) iPad ships next month.”

- “The biggest banks in some European countries today are already too big to save,” former IMF chief economist Simon Johnson says. “Unless we take immediate and real action to reduce the power – and size – of our largest banks, we are heading in exactly the same direction.”

- Monetary policy and unemployment: Should the Fed have done more? Mark Thoma ponders.

Get this man five billion cc's of liquidity, and call me in the morning.

Uncle Sam wanted to save the banks, to restore them to profitability, and that’s fine. The banking sector is central to the economy. But did they have to make the banks so profitable?

From the Journal:

Major U.S. banks and securities firms are on pace to pay their people about $145 billion for 2009, a record sum that indicates how compensation is climbing despite fury over Wall Street’s pay culture.

An analysis by The Wall Street Journal shows that executives, traders, investment bankers, money managers and others at 38 top financial companies can expect to earn nearly 18% more than they did in 2008—and slightly more than in the record year of 2007. The conclusions are based on an examination of securities filings for the first nine months of 2009 and revenue estimates through year-end.

That’s the culmination of a number of efforts from all over Washington to levitate the bank’s profitability, rather than any organic economic recovery, and that’s what’s generating all this anger and backlash. Look at JPMorgan’s results this morning. Underwriting, trading were big winners; its consumer businesses were losers.

It’s like the banks got rushed through the hospital to the operating room, right past Joe Six-Pack, who’s been sitting on a hard plastic chair in the hall for he doesn’t even know how many hours anymore. Every doctor’s left their post to operate on the banks (gold-plated healthcare plan, don’t you know,) while Joe sits there, clutching his broken arm with his other broken arm and wondering when in the hell anybody’s going to take a look at him.

And, yes, that may be hyperbole, but to the average American, that’s about how it feels these days.

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We won't stand for this much longer.

The Financial Crisis Inquiry Commission hearings certainly have had their fair share of fireworks today. From comparing the financial crisis to hurricanes and Goldman Sachs (GS) CEO Lloyd Blankfein getting compared to a used care salesman, the hearing has been a perfect example of the public anger that’s currently directed at some of the nation’s biggest financial institutions.

Fox Business has a live feed of the hearing. But here’s a snip from NY Times detailing some of the highlights from the hearing:

Phil Angelides, a Democrat and a former California treasurer who is chairman of the commission, focused on Lloyd C. Blankfein, chief executive of Goldman Sachs. At one point, after Mr. Blankfein likened aspects of the financial crisis to an “hurricane” and similar “acts of God,” Mr. Angelides cut in to say, “These were acts of men and women.”

Critics have accused Goldman Sachs and other Wall Street firms of deliberately packaging troubled mortgages and passing the bonds off as sound investments, a point on which Mr. Angelides pressed Mr. Blankfein.

“I’m just going to be blunt with you,” Mr. Angelides said. “It sounds to me like selling a car with faulty brakes, and then buying an insurance policy on the buyer of those cars.”

As the leaders of the biggest banks and the bipartisan commission butted heads, the obvious takeaway is the gap between Wall Street and Main Street continues to widen without an end in sight.

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Here’s the first linkfest of the new year, folks. Hope you enjoy, and please let us know in the comments what else you guys are reading.

- Historians and economists will remember 2009 as the year Wall Street roared back to prosperity while Main Street continued to languish, says former labor secretary Robert Reich. “If 2009 has proved anything, it’s that the bailout of Wall Street didn’t trickle down to Main Street,” he says.

- Newspaper stocks more than doubled last year, but Newsosaur blogger Alan Mutter says time will tell whether booming times are head for the batter industry, or if this is merely a dead-cat bounce.

- Financial stocks continue to lag, but don’t worry. Bespoke Investment Group says it’s better to focus on broader measures of the rally’s health rather than a specific sector.

- Stocks kick off the new year on a high note. Still, the market remains “overbought and tactically vulnerable,” Minyanville CEO Todd Harrison says. Keep an eye on the dollar, financial stocks and market breadth as “intuitive near-term tells.”

- Get ready Apple fanboys, something big is coming in the end of January. Is a tablet announcement in the offing? And will it overshadow CES?

- Corporate insiders continue to remain overly bearish on the market’s prospects.

- It’ll be tough for fixed income to top 2009′s gains.

- Mark Thoma wonders whether the Fed caused the recession?

- Taibbi’s at it again: Fannie, Freddie, and the new red and blue.

- World’s tallest skyscraper opens in Dubai. Could it mark a turning point for Dubai’s fortunes?