Lie To Me

Lie to me and tell me everything is all right
Lie to me and tell me that you’ll stay here tonight
Tell me that you’ll never leave,
and I’ll just try to make believe
that everything you tell me is true

If you haven't heard Jonny Lang, give a listen here;  Jonny Lang - Lie To Me

Sometimes we just want to be lied too. We want someone to tell us everything's going to be OK. I think we've grown into a nation that fully accepts liar's, as long as the lie helps us forget the unpleasantness of the truth.

Some recent examples:

 

While I like to have a laugh at the national past-time of burying our heads in the sand, some of this is pretty serious. 

Whenever I unleash a rant at home about our out of control Federal spending, my children roll their eyes, and my lovely wife points out that nobody cares because the deficit doesn't impact them at all. The sad thing is that she's right, it really doesn't impact most of us yet. As long as the government can continue to borrow one year paper at 0.18% the deficit doesn't matter. Heck, you could probably afford a million dollar mortgage at 0.18%, that's only $150 per month in interest. As long as we can find willing buyers of that 0.18% paper! The unfortunate buyers of those Treasuries are actually  getting a real return of -3% (0.18%-3.18% inflation). Historically foreigners have been the biggest buyers of our debt, namely China and Japan. Recently the Federal Reserve has been the biggest buyer via QE2, which is scheduled to end later this month. Of course someone will always want to loan us money at a negative real rate...right. "But right now baby, let me pretend, that our love will never end...lie to me". 

Do You Want Fries With That?

Today's jobs report was pretty close to abysmal, 54,000 jobs versus expectations of >170,000, and an unemployment rate ticking up to 9.1%. The truth is the numbers would have been even worse without McDonalds (the cartoon above is pretty spot on). McDonalds hired 62,000 people last month (24% more than the 50,000 originally expected), after receiving a stunning one million applications. That's right 940,000 people went home without a McDonalds entry level job. Without those McDonalds jobs the employment report would have been negative. And to think some food nazi's want to fire Ronald McDonald, that's all we need, another unemployed clown.

Here is part of the statement from your Secretary of Labor Hilda Solis. "Our nation's labor market continued to add jobs in the month of May. While our rate of job growth slowed last month, our economy continues to grow. While I would have liked to have seen stronger growth in May, we are still on the right trajectory." Lie to me...

Soft Patch or June Swoon

Soft patch is the opposite of green shoots (you remember the green shoots, right). Soft patch is what you get with too much rain and tornados. The markets aren't taking this "soft patch" in stride. They have been heading downward for the last three days, a quick fall of 3% in the S&P 500. The risk-off trade is in play, but our indicators still haven't turned decidedly negative. I simply think that what's keeping this market from a serious correction is the negative real returns on cash. You know for certain that you will lose about 3% real on any cash holdings, so there just isn't a big rush for the exits. I know this breeds complacency, and it is certainly something to watch, but as of now I can't get fully bearish on equities.

Where We Stand Today:

1) Cheap Money = Negative Real Returns on Cash = Speculation - 

The Feds Zero Interest Rate Policy (ZIRP) is making it painful to go to and stay at risk-off. 

IPO and Merger & Acquisition activity have picked up. The S&P 500 has been churning for the last four months, no decisive breaks either up or down. 

US Equities -- 

Bullish, stocks are churning and leaning towards neutral.

Int'l Equities -- 

Bullish, again churning and weakening, but not underweighting yet. 

US REITs --  

Bullish, but showing some signs of tiredness.

Int'l REITs -- 

Bullish, but nearing neutral.

Gold -- Bullish, but moving towards neutral with recent sell-off. Gold miners are neutral. 

Commodities -- Neutral, recent weakness have caused us to cut back

.

US Fixed Income -- Bullish, flight to safety (risk-off) has caused 10 year Treasuries to fall below 3%.

Int'l Fixed Income -- Bullish, after a recent rally.

Cash Equivalents & Currencies -- Currently only 2.5%, divided between US, China, Australia, and Brazil.

 

Too Big To Fail:

HBO's latest movie, Too Big to Fail, is one of the scariest movies you may ever watch. Seriously. 

Maybe its because I was there in the depths of the crisis, and the scars are still too fresh. In the fall of 2008 I was at National City, and I can still vividly remember wondering if we'd survive the weekend.  This went on for many weeks. Eventually we didn't. Of course the behind the scenes intrigue into PNC's taxpayer funded acquisition of NCC would make for a good short story, but the real story was going on in NYC and DC, and it really is scary.

As with any horror movie, the more you realize that this is real, it could actually happen, the scarier it is. This was real. It did happen. And it could happen again.

You'll be terrified to see just how close to the brink we came, and just how human these people in power are. We want to believe that they know what they are doing, but they don't. They are just doing the best that they can in a really bad situation. The truly sad story is that these organizations are now Too Bigger To Fail, we haven't solved the issues of size and interdependence. The 2,319 page Dodd Frank bill does not solve the problem. Letting investors; equity, debt, and CEO's lose everything is the only way to get them to seriously ratchet down their risk.

HBO has done an excellent job. Enjoy.

Be careful out there, and keep the lights on,

Chris Wiles, CFA

412-260-7917

www.rockhavencapital.com

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This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management.  The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.