Here is some interesting market information which is worth noting. I have been out of the office so not much stock picking has been getting done. The stocks I have picked have been doing well but not as strong as the S&P500 which is up 5.4%.

Evidence That Wall Street Analysts Really Hate Stocks Right Now
By Sam Ro

So stocks have been on a tear lately. The S&P 500 is up a staggering 5.4% since the beginning of the year.

Meanwhile, corporate earnings estimates have been slashed sharply and Q4 earnings season hasn’t been that great in terms of upside surprises.

So, what happens when stocks go up while earnings come down?

You get downgrades by Wall Street analysts.

In fact, analysts all over the world have been downgrading stocks. From Deutsche Bank’s Lars Slomka:

Global earnings 2012E have continued to see moderate downgrades of 1.3% over the last month (mid December to mid January). These downgrades are primarily driven by Materials and Financials while the other eight MSCI sectors have all seen small downgrades of less than 1%. Downgrades in Europe and Japan have been slightly more pronounced over the last month while the US and Asia-ex-Japan have held up better. In Europe, the cyclical production sectors with a global focus like Autos, Chemicals and Industrial Goods & Services see downgrades continue to slow down.

The folks at Bespoke Investment Group….. captures the number of daily net upgrades (upgrades less downgrades) on Wall Street. …..there hasn’t been a single day this year when upgrades outnumbered downgrades.

As I have said before, I believe this year we will see a slow growth in the market. Evidently, some people don’t agree with my thinking. Below is an article looking at the negatives of the economy and a prediction of the future.

The Economy Is Entering A Period Of High Risk
Comstock Partners

Although a number of economic indicators have recently improved, the economy is now entering a period of high risk. In their now well-known book, “This Time It’s Different”, Rogoff and Reinhart showed that once a nation’s government debt-to-GDP ratio reached and exceeded 90%, the period ahead was marked by credit crises, exceedingly slow growth and frequent recessions. The latest example, among many, is the experience of Japan in the years following 1989 and continuing until today.

As everybody now knows, after going through last year’s debt ceiling debate, the U.S. federal government debt/GDP ratio is now about 100%. In addition, as we have written about ad infinitum, the ratio of household debt to both disposable income and GDP is far above historical averages.

Although the book, which came out over two years ago, may have been regarded by some as too theoretical or impractical, so far the economy has essentially followed the slow-growth trajectory anticipated by the two economists. Since the economic trough in 2009, GDP has grown at an average annualized rate of only 2.5%, and at a rate of only 1.5% in the last four reported quarters. Real personal income less transfer payments are still below the previous peak and industrial production has only come back to the level reached in 2005. Employment is still at the same level as in early 2000, while real median income has declined in a recovery for the first time in the post-war period.
In our view, even the mild recovery seen to date is unsustainable. When we look at the numbers, it is difficult to tell where additional growth will come from. Although consumer spending, which accounts for 70% of GDP, picked up from June through November, this was accomplished largely by reducing the household savings rate from 5% to 3.5%, the lowest rate since the economy peaked in 2007. Without even further reductions in this already low rate, there is little in the economic picture to drive spending. Household net worth is down.

Real wages and disposable income less transfer payments are not growing. Employee hiring is still tepid. Housing is still in the doldrums with additional home price decreases still likely as a result of the backlog of foreclosures. Note, too, that December retail sales crept up by a paltry 0.1%, indicating that holiday sales were disappointing despite all the hoopla and exaggerated predictions following “black Friday”.

Government spending is another key area that is likely to be a drag on GDP. The impartial Congressional Budget Office (CBO) is projecting a 1% decline in federal government spending in 2012 at the same time that states and local governments are also cutting back.

Exports, which have accounted for almost half of the GDP growth since the bottom, are another unpromising area. Even if the European sovereign debt crisis doesn’t blow up, (not a sure thing), Europe is, at best, entering a recession and overall global growth is softening. This week the IMF lowered its global growth forecast, saying that prospects have turned bleak as contagion from the European Union is spreading to the rest of the world—-and this was their base case.

Underlying their base case was a more ominous assessment of what could go wrong in Europe’s currently precarious position. Anecdotal data indicates that China, too, is feeling the adverse effects of the global slowdown. Although this is barely reflected in the official numbers, most of those who know China well regard their data as suspect.
U.S. capital spending is also subject to strong headwinds in 2012. Spending last year was boosted by the 100% accelerated depreciation allowance for items installed by year-end. This probably shifted a significant amount of capital spending from 2012 to 2011. Furthermore, in contrast to some economic theories, the empirical data clearly demonstrates that capital spending lags consumer spending by one or two quarters. In other words, capital spending is a response to consumer demand, unless influenced by meaningful tax incentives.

Summing up, we see lower consumer spending growth, declining government spending at all levels, less exports and lower capital spending. That pretty much accounts for the entire GDP. The upshot will be heavy downward revisions in upcoming corporate earnings estimates and a negative shock for those looking at what they regard as an increasingly strong recovery. Under this scenario the current market rally does not have far to go and the downside risks are high.

Below is a long article going over the fraud in the markets that happens every day. With the markets being up a few percent since the first of the year one sometimes forgets what a jungle the financial world really is about. We need to always have our guard up to things that sound too good to be true. This is just a reminder of things that have happened in the past and the unscrupulous people that we are dealing with daily.

Everything You Need to Know About Wall Street, in One Brief Tale
by: Matt Taibbi

The Hotel Jerome in Aspen.

If there was ever a news story that crystalized the moral dementia of modern Wall Street in one little vignette, this is it.

Newspapers in Colorado today are reporting that the elegant Hotel Jerome in Aspen, Colorado, will be closed to the public from today through Monday at noon.

Why? Because a local squire has apparently decided to rent out all 94 rooms of the hotel for three-plus days for his daughter’s Bat Mitzvah.

The hotel’s general manager, Tony DiLucia, would say only that the party was being thrown by a “nice family,” but newspapers are now reporting that the Daddy of the lucky little gal is one Jeffrey Verschleiser, currently an executive with Goldman, Sachs.

At first, I couldn’t remember how I knew that name. But then I looked it up and saw an explosive Atlantic magazine story, published last year, called, “E-mails Suggest Bear Stearns Cheated Clients Out Of Millions.” And then I remembered that piece, and it hit me: Jeffrey Verschleiser is one of the biggest assholes in the entire world!

The story begins at Bear Stearns, where Verschleiser used to work, up until the company exploded, in large part because of him personally.

Back in the day, you see, Verschleiser headed Bear’s mortgage-backed securities operations. Toward the end of his tenure, his particular specialty began with what at the time was the usual industry-wide practice, putting together gigantic packages of crappy subprime mortgages and dumping them on unsuspecting clients.

But Verschleiser reportedly went beyond that. According to a lawsuit later filed by a bond insurer called Ambac, Verschleiser also masterminded a kind of double-dipping scheme. What he would do is sell a bunch of toxic mortgages into a trust, which like all mortgage trusts had provisions written into their pooling and servicing agreements (PSAs) that required the original lenders to buy the loans back if they went into default.

So Verschleiser would sell bad mortgages back to the banks at a discount, but instead of passing the money back to the trust, he and other Bear execs allegedly pocketed the funds.

From the Atlantic story by reporter Teri Buhl:

The traders were essentially double-dipping — getting paid twice on the deal. How was this possible? Once the security was sold, they didn’t have a legal claim to get cash back from the bad loans — that claim belonged to bond investors — but they did so anyway and kept the money. Thus, Bear was cheating the investors they promised to have sold a safe product out of their cash. According to former Bear Stearns and EMC traders and analysts who spoke with The Atlantic, Nierenberg and Verschleiser were the decision-makers for the double dipping scheme.

Imagine giving someone a hundred bucks to buy a bushel of apples, but making a deal with him that he has to buy back any apples that turn out to have worms in them. That’s what happened here: Bear sold the wormy apples back to the farmer, but instead of taking the money from those sales and passing it on to you, they simply kept the money, according to the suit.

How wormy were those apples? In one infamous email cited in the suit, a Bear exec colorfully described the content of the bonds they were selling:

Bear deal manager Nicolas Smith wrote an e-mail on August 11th, 2006 to Keith Lind, a Managing Director on the trading desk, referring to a particular bond, SACO 2006-8, as “SACK OF SHIT [2006-]8″ and said, “I hope your [sic] making a lot of money off this trade.”

So did Verschleiser himself know the mortgages were bad? Not only did he know it, he went so far as to tell his colleagues in writing that it was a waste of money to even bother performing due diligence on the bad bonds:

Jeffrey Verschleiser even said in an e-mail that he knew this was an issue. He wrote to his peer Mike Nierenberg in March 2006, “[we] are wasting way too much money on Bad Due Diligence.” Yet a year later nothing had changed. In March 2007, Verschleiser wrote to Nierenberg again about the same due diligence firm, “[w]e are just burning money hiring them.”

One of the ways that banks like Bear managed to convince investors to buy these bonds was by wrapping them in bond insurance through companies like Ambac, commonly known as “monoline” insurers. Investors who knew the bonds were insured were less worried about default.

Verschleiser, seeing that Bear had gotten firms like Ambac to insure its “sack of shit” bonds, saw here a new opportunity to make money. He first induced the monolines to insure the worthless bonds, then bet against the insurers! (Is it any wonder this guy ended up hired by Goldman, Sachs?) From the Atlantic story again:

Then in November 2007, Verschleiser wrote to his risk committee that he knew insurers for mortgage securities were going to have big financial problems. He suggested they multiply by ten times the short bet he’d just made against stocks like Ambac. These e-mails show Verschleiser’s trading desk bragging to firm leadership that he made $55 million off shorting insurers’ stock in just three weeks.

So in essence, Verschleiser was triple-dipping. First he was selling worthless “sacks of shit” to investors, representing them as good investments. Then, he kept the money from the return sales of the wormy apples. And then, on top of that, he made money by betting against the insurers he was sticking with these toxic assets.

We all know what happened from there. Bear, Stearns went under, thanks in large part to insane schemes like Verschleiser’s, and all of us were forced to pick up at least part of the tab as the Fed spent billions subsidizing Bear’s emergency takeover by JP Morgan Chase. In subsequent litigation, Chase has steadfastly refused to buy back the bad mortgages dumped on investors by the likes of Verschleiser, and has even fought tooth and nail to prevent the information in the Ambac suit from being made public.

Ambac went into Chapter 11 bankruptcy in 2010 for a variety of reasons, some of which had nothing to do with its losses in deals like these. But certainly Ambac and other monoline insurers like MBIA suffered for having insured worthless mortgage bonds sold onto the market by the Verschleisers of the world. Ambac in its suit asserted that it paid out over $641 million in claims related to the bonds from the Bear deals.

With all of this, though, Verschleiser landed happily on his feet. He reportedly heads Goldman’s mortgage division now. And after cutting a mile-wide swath of losses through the American economy, helping destroy two venerable firms in Bear and Ambac, bilking the taxpayer for untold millions more (he is also named in a lawsuit filed by the Federal Housing Finance Agency for allegedly speeding bad loans onto securitization before they defaulted), Verschleiser is now living the contented life of a proud family man, renting out a 94-room hotel for three days for his daughter’s Bat Mitzvah.

It’s certainly heartening that Verschleiser is spending this money on his daughter instead of, say, hiring a busload of Jamaican hookers to spend the weekend lounging with him in a hot tub full of Beluga caviar. People ought to give their children the best, I guess. But there’s this, too: at a time when one in four Americans has zero or negative net worth, renting a 94-room hotel for three days for a tweenager party might already be pushing the edge of the good taste/tact envelope. Even for the most honest millionaire in Aspen, it would seem a little gauche.

But for this burglarizing dickhead to do it? It’s breathtaking. I hope he at least invited his bankrupted investors to the pool party.

p.s. Since this blog was posted, I’ve received a number of letters all asking the same question — how could it be possible that what Verschleiser did is not illegal? How is he not in jail?

The answer is that if the allegations in the Ambac suit are true, it certainly would seem to be illegal. Most notably, the pocketing of putback money almost has to be a form of theft or embezzlement.

The rest of Bear/Verschleiser’s scheme, however, is also illegal, but in a more complicated way. If you read the complaint in the Ambac suit, what you see is a sort of extreme blueprint for how mortgage securitization worked in general during that period.

There is a veritable sea of fraudulent and corrupt practices one may gaze upon here, if the SEC were looking for something to target — everything from withholding material facts from customers and ratings agencies, to threatening ratings agencies with lost business if they didn’t overrate bonds, to lying in offering documents, to the manipulation of accounting procedures (this went on after the loans had moved onto Chase’s books), etc. — but the most flagrant violation in the suit involves the issue of due diligence, and here we do know a lot about Verschleiser’s role.

It seems that when Bear did do due diligence in these deals, it very frequently overrode the firms they’d hired to do that due diligence, and put the loans in the deals anyway. In the third quarter of 2006, Bear overrode its due diligence firm an incredible 65% of the time, putting loans into their securitizations despite an outside firm finding red flags in the notes.

Even worse, Bear went out of its way to hide the evidence that it was knowingly ignoring due diligence. This is from the complaint:

Bear Stearns ignored the proposals made by the heads of its due diligence department in May 2005 to track the override decisions, and instead took the opposite tack, adopting an internal policy that directed its due diligence managers to delete the communications with its due diligence firms leading to its final loan purchase decisions, thereby eliminating the audit trail.

This is fraud because in its agreements with investors, Bear promised to conduct “due diligence,” it promised to conduct “quality control” testing of the loan pools, it promised to “repurchase” defective loans, and it also promised to implement “seller monitoring,” i.e. to prevent the securitization of loans from bad suppliers.

But it not only didn’t do these things, it engaged the opposite behavior and knowingly covered up its fraud by deleting its communications.

Verschleiser was personally named in the evidence offered in the Ambac suit. In a letter to Ambac, Bear’s RMBS Investor Relations managing director Cheryl Glory wrote that “Jeff will,,, provide you with the due diligence results of all three deals once complete.”

But this is the same Jeff who we now have in writing saying this about those promised due diligence results: “We are wasting way too much money on Bad Due Diligence,” and “We’re just burning money hiring them.”

It doesn’t take a genius to deduce that Bear was not upholding its contractual obligations by delivering what it itself considered “bad due diligence” to Ambac. At the very least, this is actionable.

Verschleiser undermined due diligence in other ways. One good one was to demand that his due diligence people operate at speeds that made genuine due diligence impossible.

At one point during these deals, Verschleiser reamed out his immediate subordinate, co-head of mortgage finance Baron Silverstein, over the “problem” of the due diligence department taking too much time to do its work. Silverstein responded by issuing the following tirade to John Mongelluzzo, Bear’s VP for Due Diligence, demanding that he not get in the way of Bear’s insane goal of funding 500 mortgages a day:

I refuse to receive more emails from [Verchleiser] (or anyone else) questioning why we’re not funding loans every day. I’m holding each of you responsible for making sure we fund at least 500 each and every day. I was not happy when I saw the funding numbers and I knew NY would NOT BE HAPPY,,, I expect to see 500+ every day. I will do whatever is necessary to make sure you’re successful in meeting this objective.

Whenever any right-wing loon, or Bloombergite, tries to tell you the mortgage crisis was caused by the government forcing the poor banks to lend to broke black people, please direct them to this passage. The banks not only wanted to give out these loans, they wanted to give them out at the speed of light. They wanted to crank them out so fast that their own auditors literally couldn’t read the writing on the loan applications. This was greed, not policy. Anybody who says anything else is high on something.

Anyway, given that much of Verschleiser’s questionable behavior is in writing, his case sure seems court-ready. But for whatever reason, he has not been indicted.

One can almost understand a regulator not wanting to take on the whole circular securitization scheme — Bear lends money to corrupt mortgage firm, mortgage firm makes bad loans, Bear packages bad loans and sells to investors, then takes the proceeds and creates more bad loans — because it is so complex and difficult to prove.

But in this case there are simple issues of fraud and theft thatcould be taken on without having to prosecute broader crimes related to securitization. But prosecutors, apparently, just blew those off. In the current environment, regulators even miss the layups.

After almost six months it looks like the little guy is beginning to get back in to this market. Some believe that this might be a bad sign. You need to judge for yourself.

From Dan Greenhaus at BTIG:

Elsewhere, we wanted to point out a bit of good news. Following twenty consecutive weeks of outflows, domestic equity funds actually saw an inflow in the most recent week according to data from ICI.. $753 million was added to funds in the week of January 11th, albeit a modest amount – $24 billion had been removed in the prior five weeks — but an addition nonetheless. Interestingly, after three weeks of outflows, bond funds saw inflows of $11.3 billion in the same week. We keep an eye on fund flow data to gauge public interest in various sectors and it appears the new year — and a near 20% rally in equities — may be turning sentiment more positive.

I have been too busy to post lately, hopefully things will settle down again. The market right now is kind of ugly and the volume is low which tells me people are waiting for a signal of some nature as to where to invest next. As for myself, I have bought some quality stocks in hopes that is where investors will move next. But, there might be something ugly coming so one needs to be very careful. The markets have been down so long that we may be due for an upturn. Let’s hope so.

Wall Street Strategists Are Freaking Out About Low Volatility
by AP

NEW YORK (AP) — After wild price swings that left investors bewildered and not a cent richer last year, stocks are rising again, and calm has settled over the market like blue skies after a storm.

Or maybe eye of the storm is the better metaphor.

“It’s a little too calm,” says the usually unflappable Jim Paulsen of Wells Fargo Management, a bullish stock strategist not easily spooked. “Maybe we’re setting up for a break.”

Whether that break will bring a rise or fall in stocks, Paulsen is not sure. But he suspects it’ll be big whichever direction.

For eight straight days, the Standard & Poor’s 500 index has moved up or down less than 1 percent, a run that is both remarkable and a tad eerie. The last time stocks moved so little for so long was a 13-day streak starting last April 21 — just before a bumpy five-month drop to near bear-market lows.

Other curiosities, ominous or otherwise, from the first two weeks of the year:

— The hapless and helpless are hot. Netflix Inc., the DVD-by-mail and streaming entertainment company that enraged customers by raising rates, is up 36 percent. Bank of America is up 19 percent. Both lost more than half their value in 2011.

— The first is last. The best-performing of the S&P’s 10 categories last year, utilities, is now the worst. Those stocks rose 15 percent last year but have fallen 3 percent this year. Investors apparently have decided they’re too expensive. The second-best sector last year, consumer staples, is down 1.3 percent.

— Stocks are up, even if profits aren’t. The S&P has risen 17 percent from its 2011 low on Oct. 3 despite increasing pessimism among analysts about profits. In three months since that low, analysts have cut fourth-quarter profit estimates at companies they follow by 19 percent, the most since the depths of the Great Recession three years ago.
For all of 2012, the analysts now say earnings will rise 10 percent, down from a projected 17 percent five months ago, according to FactSet, a provider of financial data.

— Where have all the traders gone? The markets have been calm even though few shares are trading hands. Low volume typically exaggerates price moves. Experts say last year’s abnormally low average daily volume on the New York Stock Exchange, 4.3 billion shares traded, was one reason stocks gyrated so much. This year, volume has averaged 3.9 billion.

The good news for investors is that the S&P has risen 2.5 percent in 2012. But Barry Knapp, head of U.S. equity strategy at Barclays Capital, smells trouble.

The usual explanation for stocks rising this time of year is what’s known as the January effect: Investors sell stock at the end of previous year to lock in losses for tax purposes, then buy again in the new year.

This year, it’s more like the January defect.

Knapp says investors sold as expected, but then got nervous and didn’t follow through with the crucial second part — buying. That’s his explanation, anyway for the low volume. He’s worried the small gains this year could prove fleeting.

“Investors don’t have a lot of conviction about the rally,” he says. “Most don’t believe the Europeans have solved their problems or that the slowdown in China won’t get worse.”

Or apparently that the U.S. economy will grow much faster.
The big news so far this year is that unemployment in the U.S. fell to 8.5 percent in December, the lowest in almost three years. That raised hopes that the labor market is finally on the mend.

But then the government reported Thursday that unemployment claims rose to 399,000 in the first week of the year, the highest in six weeks, and now investors are not so sure.

Further dampening spirits was a report that sales at retailers increased just 0.1 percent in December. Earlier, several retail chains, including Target, J.C. Penney Corp. and Kohl’s Department Stores Inc., cut their earnings forecasts. After Tiffany & Co. warned of disappointing holiday sales, investors pushed its stock down 11 percent.

Among S&P 500 companies making so-called pre-announcements about their fourth quarter earnings, FactSet says those cutting forecasts have outnumbered those raising them by three to one.

Which would be bad for stocks — except in the upside-down world of investing. Linda Duessel, an equity market strategist at Federated Investors, says investors tend to drive down stocks too far on warnings that profits could fall short of expectations, creating bargains.

“We’re betting investors will be surprised,” Duessel says. “We’re bullish.”

So is Paulsen of Wells Fargo, notwithstanding his talk of an eerie calm. He says investors are paying 12.5 times expected per-share earnings for the S&P 500 versus a more typical 14.5 times, meaning they’re relatively cheap.

He thinks the gap will close, and stocks could jump 15 percent, assuming the unemployment rate continues to drop this year and investors become more confident. For an extra kick in your portfolio, he suggests buying stocks in industries closely tied to the economy, like industrials, materials and financials. All three fell last year.

“There’s a huge discount (on stocks) due to all the fear and phobia,” Paulsen says. “Rising confidence could be a big boost.”

Below is a negative prediction on the future which I don’t agree with but one has to read both sides to get a full understanding of things. I expected to see a big gain in the market today but was disappointed. I did buy some Walmart (WMT) this morning at the open and got a bad price but I expect it to continue to move up over the next few weeks so it makes little difference.

Bob Janjuah: The Rally Just Has A Few Days Left, Greece Will Hard Default, And The Worst In Europe Is Yet To Come
by Joe Weisenthal

Nomura’s famously bearish Bob Janjuah is out with his first note of the year (via FT Alphaville), and he’s… bearish.

“The worst of the eurozone mess is still haead of us,” he says, and the US is not out of the woods.

He has some very specific predictions.

I think we are very close (days) from a top of some sorts in equities and the risk-on trade. Depending on price action, I reckon the time to get short risk is around/by January 13th – as a proxy guide the S&P should be within 3% to 5% of current levels (1277 S&P).

I think Q1 is going to be extremely bearish for risk, for equities, for the periphery, for the euro, for credit spreads, etc. The real pain may only be seen in March, when I expect the hard Greece default to happen. In Q1 I expect the S&P will trade down to/below 1000, and core US, UK and German government Bond yields will be closer to 1.5% than 2%.

He concludes with this shrill statement:

Apologies to all for not telling you anything new or very different. One day, when we collectively abandon the neo-communist experiment in the West that relies on more debt and printing money in order to maintain the status quo, then I will hopefully have a different and far more positive view of the years ahead. I look forward to this time. But for now, expect more of the same as in 2011. And I know it’s a few weeks early, but as I am unlikely to write anything for at least a month, Kung Hei Fat Choi. The year of the dragon will soon be upon us.

Right now, I am buying blue-chips and building a solid portfolio again. If you believe the market will be going up this year, like I do, then you start by putting down a solid foundation of blue-chip stocks. For example, I bought Johnson and Johnson (JNJ) this morning because it has had a dip over the past few days. After I build a solid portfolio foundation I plan on returning to doing more stock picking. But, first things first.

The Most Impressive Thing About Stocks This Year
By Joe Weisenthal

Jeff Saut of Raymond James observes…

It’s pretty amazing that the equity markets have rallied in light of the super strong U.S. dollar. That action suggests that stocks are not quite ready for the pullback I have been expecting following last Tuesday’s upside blow off. Still, while the Dow Industrials and Dow Transports have tagged new reaction highs, the SPX and NDX have not. Such divergences always leave me in a cautious mode, especially since we are past the seasonally sweet spot for stocks. At some point we are going to get a profit-taking event, whether it is from last Tuesday’s intraday high (1284.62 SPX) or the 1300 – 1320 overhead resistance zone remains to be seen. Until that pullback occurs there just isn’t a whole lot to do on a trading basis.

Dollar aside, this year has seen spiking rates across the PIIGS, the stock market crash of one of Italy’s biggest banks (UniCredit), threats of Greece leaving the Eurozone, and so on. And yet, markets had a very solid week last week. Furthermore, US banks have been particularly strong, despite, you’d think, being particularly vulnerable to Eurozone shocks.