Season's Greetings

The season wherein that which has lain dormant and desiccated springs to life is most definitely upon us. The Texas Hill Country is having one of the best wildflower seasons ever, as so much verdant energy, long suppressed by drought, has been unleashed by a half a year of relatively cool, wet weather. The cattle and wildlife seem to be more abundant, and much less stressed than in that awful period, and for the past few weeks most of the afternoons have had that soft, warm breezy feel that one guesses might be the temperature of Heaven. It has been anything but heavenly for allergy sufferers, though, as apparently all those frolicking photosynthesizers have been spewing record quantities of pollen.

Spring also brings the highest of Holy Days for the great faiths of the West, and almost as predictably, yet another tediously recycled attack on the papacy and all that it stands for. It is as if every Easter, an abuse scandal take turns with yet another “rediscovery” of some Gnostic Gospel that supposedly changes everything (until someone points out that it has been “rediscovered” and discredited more times over the past few centuries than anyone can remember) in trying to crash the party and spoil the occasion. This time around, the “scandal” seems to pose the question as to whether the present Vicar of Rome was incompetent or indifferent in the execution of his administrative duties some thirty years ago. It is as if the CEO of one of the world’s largest corporations were being taken to task because of claims that back when he was in his first managerial job he made some mistakes. Anyone who has managed much of anything for longer than a few hours, especially within an enterprise which systematically challenges its young managers so as to see what they are made of, will recognize how fallacious this is. It is Monday morning quarterbacking, akin to listening to analysts who have never managed anything taking a management to task for not living up their (the analyst’s) estimates. (Could it also be a misperception regarding whatever Papal infallibility means?) As others have ably pointed out, there are not a few bottom feeders who have an acute pecuniary interest in keeping this “abuse” narrative going. My sense is that just like Stalin’s “how many divisions does this Pope have?” outcome, a good man we call Benedict XVI will be remembered and respected long after the erstwhile “paper of record” is nothing but another signifier amid the digital archives, and its editors and publishers long forgotten as well.

Of course, the season most on our minds (unless we are ardent baseball fans) at this time is the earnings season that had just kicked off. Intel’s big “beat” certainly added heft to what was already a rather extended, anticipatory advance. It should be noted that no small amount of credit for blowing by all that collective brainpower, as manifested in 40+ analyst estimates, goes to Intel itself. They got my attention a few years back, when conventional wisdom had it that “AMD was kicking Intel’s ass”. That episode managed to blow away whatever hubris might have crept into the atmosphere at Intel, and the company set to work to reassert its dominance. There were a few promising signs just before the Big Panic interrupted, but with a resurgence of more normal demand, Intel is looking leaner and meaner than ever. They are also riding a global wave that they helped trigger, brought about by a step change in the value of mobile communication. So the answer to whether this latest “beat” by INTC was because they were lucky (as in at the right place at the right time) or smart (as in good fortune being the result of one’s own diligence) is: Both.

This is probably not quite 1994/Wintel driving what by 1999 burgeoned into the Tech Bubble of a lifetime. Let’s just say that History is not about to repeat itself, but as Mark Twain (who I understand lost a bundle on a Tech investment, i.e., a new system for typesetting that likely “came in second” or was a little ahead of its time) would have put it, it is setting up to rhyme. The onset of this latest earnings season has me feeling very good about the rather big bet I have made on Web 2.0 (see the List, that is upwards of 44% of my investable assets in companies that have been making that happen). Somewhat sane, somewhat rational niches within the Tech sector have been a very long time in coming. The valuations are still as if evolution-to-the-good within an industry never happens. Decrepitude is, of course, out there in time, but not just around the corner. The next few years are going to be a wonderful time to own a lot of the stocks that crashed and burned a decade ago. This does not mean our patience will not be tested. We should be surprised if 2010 does not include another correction at least as meaningful as that which marked January. It might even start before this earnings season has run its course. It will probably be a good idea to trim some marginal positions in the days and weeks ahead if there is any doubt about having flexibility when the inevitable correction arrives, but my sense is that we are in the very early innings of what just might end up being the Web 2.0 Bubble.

Change the Subject!

The melt-up continues. We see in the WSJ the Sherlockian insight that strong earnings just might be “baked into stock prices”. You think? Everywhere we look, we see indicates that the economy was much more resilient than we gave it credit for, that rumors of its demise had been greatly exaggerated. For example, what ever became of that wave of mortgage defaults that was going to set off by re-sets? That this tsunami hasn’t let loose is not just because it has turned out that many of the scheduled re-sets of adjustable mortgages have actually lowered payments. It also has to do with the likelihood that the idiot speculators who indulged in that government sponsored insanity are long gone. The flippers who took that mania to its apex in 2006 either quit showing up about three years ago or started walking away from their losses two years ago. It was speculators who blew the last bit of air into that balloon, and speculators don’t tend to sit and wait, hoping for some kind of uptick to bail them out of their heavily leveraged investment. It is relatively easy to stop throwing good money after bad on a speculation (as opposed to the home in which one resides; one has to live somewhere and pay for it somehow), so we got a flush of defaults not long after the great real estate bubble started to lose air. This was then extrapolated into the inscrutable future and correlated with expected interest rates. Wrong on all counts. Real estate will be a tough way for non-astute investors to make money (as opposed to that rising tide that lifted so many boats for a couple of generations) but it is not dragging us down the way so many smart guys said it would.

Which brings us back to the melt-up. Its not just the marginally astute trying to eke out returns on their still shriveled (relative to the plan, five or ten years ago) retirement stakes. It’s the disappointed, painfully flummoxed Bears. There has clearly been a ton of money bet that the world should have more or less ended by about now, or at least that signs of the end would be clearly in sight. If the short side of things is part of what you do, not much of that has been working lately. A few stocks are trading down, but that’s always the case. More generally, they can trade ‘em down but they can’t keep ‘em down. The Bears will get some kind of respite some time this year, especially if stock prices keep melting up right into the earnings season, but it won’t be enough, especially on a heartburn adjusted basis, to have made it worth their while.

Of course, we have been treated to assurances that the Market is applauding the signing into law of “health care reform” (Typing these words reminds me of what someone said about how “holy”, “Roman” or an “empire” the “Holy Roman Empire” was NOT.) This is to be expected, especially as one takes stock of the all out effort underway for the last two weeks to change the subject. They came out blazing. Shortly after Mr. Bart Stupak took his place in the ashcan of history (“right over there, sir, next to Neville Chamberlain.”) we started getting a full throated Chicago style charm offensive. From the talking heads at the media outlets that still register blips in the ratings down to blog trolls who seemed to have been in hiding for the past few months, we got what was supposed to pass for an end zone dance. We also got what seems to have been yet another campaign to demonize anyone who speaks up in opposition to Fearless Leader. We are supposed to be scandalized that when a country so large and diverse gets worked up about something so ultimately personal, a few yahoos show up and express themselves in ways that cross the line out there somewhere between spirited and vile. I think that we should be surprised, maybe even concerned about testosterone deficiency, if in this polity of 310,000,000 souls, we did not have at least 31 or even 310 whose utterances managed to gross us all out. A couple of broken windows, which for all we know might have been done by disgruntled Obamanauts (like in Denver last year), is somehow the equivalent of Kristallnacht? How odd, that despite big cash offers for hard evidence, the only perp in custody was uttering his vile threats against a Republican. And how surprised should we be that the same weekend that the Commander in Chief takes off to “support the troops” and wax censorious with yet another erstwhile ally, the Feds decide to drop the hammer on a bunch of crazies? Again, in a great big country like ours, we should be surprised if there were not dozens of cells like the one just busted up in Michigan, any one of which might dragged down to headquarters when it gets so bad that the chief needs to show that he is still in charge, or his claque wants to create the illusion that its not much different than in 1910, when anarchists’ bombs were going off almost every week.

This is all political theatre, and it continues to go badly for the statists. The bill just passed settles about as much as the Compromises of 1850 did, which is to say that probably the most enduring thing it has done is to scandalize an awful lot of normally placid and apolitical people. Who among us is holding his breath for that “once it passes, the people are going to love it” groundswell? Other than that not insubstantial segment of society that was already in favor of “spreading it around” (i.e, they already vote the Parasite slate), such “love” is not going to be forthcoming. A center-right country has been goaded slightly more so. The Pied Piper’s tune has turned tinny and annoying. The more the Change horn blows, the more we wish he would just go away. A few more bad laws will be passed in the next few months, but those laws will be like so many barnacles on a very big ship whale that was already pretty encrusted, yet sometimes manages to knock a few off. The debate/theatre we just lived through (which, by the way, was over a bill that was supposed to be “on my desk” in time for the late summer recess) amply demonstrated that said leviathan still has a pulse. This means that however dreadful the last few years have been, we are still a few adverse developments at least away from it no longer being the world’s leading “mattress” for capital.