Commentary for the Week of March 8

[In the daily give-and-take of the Rick’s Picks forum, Mario Cavolo, an American expatriate living in Shanghai, is the perennial optimist, sort of. While hardly unmindful of America’s steep decline, he sees offsets in a rising global middle class, particularly in India and China, and in an upper-class America that will continue to flourish even in hard times.  Skeptical though we are sometimes about his thesis, we must admit that a drive through Palm Beach, Florida, the other day reminded us that there are concentrations of wealth in this country so deep that even if 90% of it were to vanish tomorrow, the super-rich will still be driving Bentleys and shopping on Worth Avenue and Rodeo Drive.  For a summation of Mario’s thoughts as U.S. stocks continue their descent into Hell, read on. RA] Let's begin this commentary by asking exactly what specific Lehman-type crisis recently occurred or will occur to justify the nasty global equities decline and its continuation as, perhaps, the 2011-2012 Crisis? We can quickly dismiss the idea that it was Standard & Poor’s credit downgrade of U.S. debt.  I mean, come on folks, it has been beyond obvious that global credit markets are awash in debt and therefore higher-risk. Things were known to be bad before the downgrade, and the downgrade itself did not make the fundamental problems any worse. The credit downgrade was a message to Washington, long overdue, but it probably did more to soil S&P’s reputation, since it is still well recalled that the firm rated sub-prime junk as triple-A a few years back. So let’s move on to more substantive issues to identify what is wrong with the  global economy right now. Can we say it was the recent "realization" that Washington bankers and politicians have been pillaging the financial system greedily? 

The news media will eventually figure out the truth -- that stocks got pulped yesterday simply because they are in a bear market. The Mother of All Bears, quite possibly.  The Dow finished the day down 419 points after trading more than a hundred points lower than that intraday.  The selloff was attributed to the usual suspects: “fears” over Europe’s shaky financial condition, and America’s apparent relapse into recession. Although both concerns have been with us in spades for more than a little while, they seem, suddenly, to have become overwhelming and unmanageable now that the world’s stock markets are imploding.  Of course, there will be equally spectacular rallies in the days, weeks and months ahead, and, as was the case during the 1930s, they will be interpreted as signaling a glimmer of hope for the economy. The press will do the interpreting, but most Americans will know better. The Great Recession has returned with a vengeance, and predictions of 2% GDP growth are about to be trimmed to sub-zero by the same morons who were so optimistic just a few weeks ago. With Dow stocks down 500 points in the opening hour yesterday, Reuters and some other news sources initially theorized that “investors” – a euphemism these days for algorithm-driven machines -- were despondent over a Philly Fed report that factory activity in the Middle Atlantic region had “unexpectedly” fallen to its lowest level since March 2009. Reuters tactfully refrained from identifying by name the experts who had been looking for better numbers, but they would have to have emerged from a sarcophagus to have been surprised by the bad news. Meanwhile, although the eggheads who compile economic statistics may be deaf, dumb and blind to the real world, Joe Sixpack, unemployed for the last 36 months and no

[With unemployment above 9% and productive capacity heavily underutilized, the U.S. economy is slipping back into official recession. In a letter to clients, our friend and financial advisor Doug Behnfield has predicted that deflation is about to return with a vengeance -- presumably with bullish implications for high-quality bonds and, get this… municipal bonds. For Doug’s take on the stock market, fixed-income securities and a Baby Boomer cohort that is ill-prepared financially for retirement, read on. RA] Over the last few weeks, stock, bond and commodity markets appear to have played "catch up" to fundamental economic changes that began early in the first quarter. In early February, 30-Year Treasury Bond yields peaked at 4.8% and started down sharply as bond prices rose. The municipal bond market did the same. The S&P 500 hit 1300 and essentially stopped rising, creating a volatile topping process that lasted until late July. Since then, the bottom has been dropping out of both stock prices and bond yields. The Fed has promised to keep very short term interest rates at 0% for at least the next two years. The economy now appears to have rolled over early in the year. Employment and housing prices peaked in the first quarter and GDP growth was revised down to 0.4%. At year end 2010, Q1 2011 GDP growth was widely expected to exceed 3.5%. State and local governments began aggressively tightening their budgets and it seems clear that the federal government will be doing the same. Standard & Poor's (and the other rating agencies to a lesser degree) have put congress and the administration on notice that the debt bomb must be defused immediately and the vast majority of voters seem to agree. The fiscal drag could be enormous. Or we become a Banana Republic. The median age of

We wish Google all possible success in taking on playground bullies Apple and Microsoft in a battle that has crucial implications for the use of patents to stifle competition. Google’s $12.5 billion purchase of cell phone maker Motorola Mobility, its largest acquisition to date, is a shot across the bow of more established competitors who would seek to throttle the search engine giant’s cell phone development and other promising technologies by suing them to death in patent court.  The Wall Street Journal recently detailed how high tech companies have been acquiring every patent they can get their hands on so that they stand a better chance of being predator rather than prey in patent litigation. Lawsuits over patents have become so ubiquitous that they are beginning to supersede innovation itself as the primary means through which high tech companies grow and prosper. In this respect, Google is the new kid on the block in head-to-head competition with firms like Microsoft and Apple that have been around since the 1980s.  As a relative newcomer to the technology scene, the company’s war-chest of patents was practically empty until recently. To play catch-up, Google has been on a tear acquiring patents directly or buying patent-rich firms outright, such as cell phone pioneer Motorola.  In late July, Google bought about a thousand pending and issued patents from IBM to build up its patent ammo. Many of these patents have little to do with the company’s core businesses of search and advertising. One reportedly covers ways of automatically adjusting a clock, and another deals with surface treatments for electrical contacts. In the hands of a company as innovative and aggressive as Google, every little patent helps to thwart other firms that would seek to stifle them. “As things stand today, one of a company’s best

As The Great Recession tightens its grip on the urban slums of the U.S. and Europe, a darker side of social networking has begun to emerge.  Last week, the civilized world was appalled to read about rioting British “youths” tweeting their friends and comrades-in-arms to join the fun. “We need more MAN than Feds so Everyone run wild, all of London and others are invited! Pure terror and havoc & Free stuff…just smash shop windows and cart out da stuff.”  Ahh, “da stuff!”  Such swag as has seldom been seen in London’s dismal rookeries: bowler hats from Locke. Brigg umbrellas. Church shoes.  London’s bobbies should have no trouble picking out the perpetrators on Monday.  They’ll be wearing bespoke suits that fit as poorly as O.J.’s infamous glove. Yobs will be firing up Cohibas with (unmonogrammed) Dunhill lighters, broad-tossers’ wrists will be adorned with Patek Phillipes, and louts will be ordering up Dom Perignon by the flagon in Piccadilly taverns. All of this may sound vaguely familiar to Americans who endured the urban riots of the 1960s, decades before social networking was even imaginable.  Back then, FM radio was the medium best suited to celebrating the spoils of rioting.  And celebrate it they did: “Good morning!! boomed WUST disk jockey "Moon Man" the day after Washington D.C. erupted in flames in response to Martin Luther King’s assassination in April 1968. “How are all of you Boss Jocks out there with new color TVs and radios?!!  he asked, addressing and audience that must have included at least some listeners who had thrown bricks through store windows and crated off stolen appliances the previous day.  Riots were ostensibly “political” back then, and a news media that was only beginning to incubate White Guilt made all of those who watched the violence from their

To hell with the stock market, which continues to jump around like a flea in a microwave. Our favorite story yesterday concerned how customers are deserting cable and satellite TV in droves. It couldn’t happen to a more deserving bunch.  Dippin’ Dots and $8 ballpark beer aside, pay TV may be the worst value one can get for one’s buck.  So why are subscribers canceling in record numbers? There are two apparent reasons: 1) The Great Recession; and 2) the availability of cheaper video entertainment online. One might hope this trend would induce cable and satellite providers to do something they have never done before and have probably never even considered – i.e., lower their prices – but we’re not going to hold our breath.  Recall that back in the 1960s, for $9.95 a month, cable companies promised commercial-free television that would put network programming to shame.  Movie theaters felt so threatened by it that one local theater we can recall had a television set in the lobby with a bobble-head dragon and a sign that asked, “Would you let a monster into your living room?”  In retrospect, theater owners needn’t have feared the incursion of cable TV, since we all need an occasional night out.  People will continue to go to the movies no matter what, even with theaters charging $8 for a bucket of popcorn and showing movies that are getting worse and pricier by the year. In retrospect, the premium programming that $9.95 bought in the 1960s was a great deal compared to what $70 buys today from the likes of Comcast.  Yes, there are 500 channels, just like futurists promised us back in the Sixties.  But about 400 of them are infomercials, and the rest – including such formerly commercial-free fare as AMC – are so

Comic relief came yesterday in the novel form of a Colorado shootout that put the until-recently-unheard-of Dougherty Gang behind bars and left gun-moll and self-styled redneck stripper Lee-Gracey Dougherty with an exit wound in her leg.  Only in America, as they say.  As we went to press early Thursday morning following an all-day outage of Rick's Picks (and a thousand other web sites served by a Dallas data center that was hit by a power blackout), the Bonnie-and-Clyde wannabees were still the top story on Google news, proving that timing is everything if you want to be an overnight sensation. Wall Street in particular must have welcomed the entertaining story of the Dougherty siblings' interstate armed robbery spree, since, without it, the evening news would surely have been dominated by video clips of trading-floor denizens puking their guts out following a 520-point plunge in the Dow.  However, as of late Wednesday night, it would appear that the traders had lost little time trying to wrest back control of the headlines with their own brand of comic relief:  a 200-point rally in Dow index futures that was continuing into the wee hours on Thursday. We wouldn't be so churlish as to admonish them for their newly reinvigorated faith in America, but shouldn't someone break the bad news to them about the dire condition of Spain and Italy? Meanwhile, the previous, huge dead-cat bounce, a 429-pointer on Wednesday, elicited in the Boulder, Colorado Daily Camera what may have been the most clueless headline concerning the economy that we've seen all year:  Fed Pledge Boosts Stocks.  So, did yesterday's 520-point reversal perhaps occur because somebody discovered the Fed had crossed its short, slimy little fingers when it made that promise? The sub-headline was just as bad: Market Soars After Reserve Vows to Maintain Low Rates

Twenty-nine months into the Mother of All Bear Rallies, it was unlikely that mere mortals would predict the precise start of the stock market's collapse, inevitable and long overdue though it may have seemed.  However, no one should be surprised by the selloff’s ferocity, nor by the prospect that the first wave down may have run its course in mere days. Traders who have been waiting for the Big One for years undoubtedly are re-discovering how hard it can be to reap a windfall even when you are right about the trend. We think shares still have a long, long way to fall, although we harbor no illusions that the Mother of All Bear Markets will be easy pickings. That much should have been obvious yesterday, for not even bears with brass cahones could have withstood a spectacular short-squeeze rally that saw the Dow trampoline from lows around mid-morning to a final-bell peak 600 points higher. Five hundred of those points came in the final hour alone. The proximal cause of this wilding spree was a Fed announcement that short-term rates would be held near zero through mid-2013.  Although no one, not even Paul Krugman, could believe at this point that more easy credit will have a positive effect on the economy, traders bought the news anyway. As we have explained here many times before, they did so not because the news was bullish, but because they expected others traders to react as though it were. Bears would have found it no easier to catch a ride south a week ago, when the onslaught of selling began.  Three days earlier, on Friday, a strong rally trapped bulls and wrung out bears. But the hook was set Sunday night when news of a debt-limit deal sent index futures into a second

And how did Treasury paper do following Standard & Poor’s bombshell downgrade of U.S. debt?  Why, T-Bonds, Bills and Notes came through unscathed, thank you. Actually, they did much better than that, rallying so sharply yesterday that one might have inferred the U.S. was the last citadel against the panic, confusion and fear that rein elsewhere in the world. Which is more or less true, relatively speaking.  We hesitate to describe yesterday’s tidal surge in Treasurys as counterintuitive, however, since, officially, U.S. debt is still rated AA+.  That’s a tad optimistic, if not to say delusional, given the fact that U.S. borrowing is eventually headed north of $20 trillion.  How could debt not be about to go parabolic now that Congress has discovered that the debt ceiling can be raised without exacting a fiscal price, or even a political one? Even so, and as the mortgage boom/bust demonstrated, institutional investors base their allocations not on fundamentals or even reality, but on the official say-so of the ratings agencies.  And although we all understand that the AA+ rating is conferred with a wink and a nod, it has always been in Wall Street's best interests to pretend to take it seriously. Keep in mind as well that neither Moody’s nor Fitch’s has gone along with the downgrade, at least not yet.  This will suffice to allow those who have been mindlessly pouring cash into the Treasury of a nation edging toward bankruptcy to credibly claim down the road that, at the time, the U.S. was still officially the safest place on earth to park one’s cash.  They’ll be correct about that, too, since U.S. Treasury paper has become the only sanctioned safe haven for the very biggest money.  George Soros undoubtedly recognized this when he decided to shut down Quantum.  These