Question of the Week

What are your thoughts on the recent actions of Facebook founder, Mark Zuckerberg after its proposed $19.0 billion acquisition of WhatsApp – a smartphone application that allows users to send free text messages internationally?

Bold & Brilliant
Excessive & Unnecessary

Hey, don't worry, I've been lied to
I've been here many times before
Girl, don't you worry, I know where I stand
I don't need this love, I don't need your hand
I know I could turn, blink, and you'd be gone
-Doobie Brothers

The Federal Reserve knows quantitative easing didn't work, and they want to exit as fast as possible without triggering widespread panic.

This isn't something that can be uttered in private, or even during closed-door 'Federal Open Market Committee' meetings, but it's palpable. At this stage of the game it all feels like a lie, and while we're accustomed to the government lying, this time they've put the professorial and mild-mannered Federal chairwoman to put us at ease. The market is saying we don't need your love, and we don't need your hand, but whatever you do...stay where we can see you.

Wall Street wants this crazy adventure to unwind in a manner that doesn't make it explosive.  There can be no shifts in policy without significant foreshadowing. Before the minutes were read yesterday some Federal officials tried to get in front of it, and while they said the right things, the very fact that it felt like the need to assuage the street, backfired. Coupled with cautious warnings from the IMF on the global economy, Fed whispers hit the market with a thud. Investors grappling with a Fed, that's grappling with a reality of failure, but a legacy that could force their hands if economic data continues to deteriorate.

•  "Only dramatic events will alter taper"-Dennis Lockhart
•  "Too early to know why data is weak"- Lockhart
•  "Weather has impacted data"-James Bullard
•  "Deviating from taper is a powerful signal" -Bullard

Those comments sucked the air out of a very flimsy rally, and then the minutes were released and no news was made, which didn't help since the street would love to have guarantees at this point.

Minutes of the Federal Open Market Committee

January 28-29, 2014

In their discussion of monetary policy in the period ahead, all members agreed that the cumulative improvement in labor market conditions and the likelihood of continuing improvement indicated that it would be appropriate to make a further measured reduction in the pace of its asset purchases at this meeting. Members again judged that, if the economy continued to develop as anticipated, further reductions would be undertaken in measured steps.

In considering forward guidance about the target federal funds rate, all members agreed to retain the thresholds-based language employed in recent statements. In addition, the Committee decided to repeat the qualitative guidance, introduced in December, clarifying that a range of labor market indicators would be used when assessing the appropriate stance of policy once the unemployment rate threshold had been crossed.

The message from the investors: Janet, do worry; we need to be reassured over and over, about where you stand.   Moreover, you have to get your members in line as too many of them (no specific number given, but a "few") would like to taper, the taper, the taper...

Rally Breakers?

Last week the market made a stand climbing off the canvass more than once, including an early 100- point dubbing on the Dow last Thursday, which reversed into a decent gain by the closing bell.  Resolve is an important factor in a bull market as any, and must be tested from time to time.  The way I read the tea leaves, the Street wants the Fed to stick to its planned reduction of accommodation, as the economy continues to improve.  On that note, there are concerns:

•  What is the true state of the economy?
•  Is there a deflationary crisis brewing?
•  Is there too much giddiness?

Was that the correction after all?  There are lots of questions after the market stumbled into 2014, with missteps and large down sessions.  One thing we see is the resolve is still there, and that humongous pile of cash sitting on the sidelines might really be ready to get into the game this time around; after hearing for years about trillions that would ultimately seek returns that historically only equities could deliver.

The economy looks shaky, yet we may need an extra month of data to give us a better, more honest glimpse (as honest as government-generated data can be) without the noise of this difficult winter.  I continue to say, that the market is looking for good news and doesn't want the Fed to renege on its implied promise to remove $10.0 billion in monthly accommodation.  I felt that March meeting of the Fed would be the moment of truth - the first of many for the Yellen era, and for the new chairwoman to stamp her imprimatur on policy.

More than likely, the February jobs number will be clouded by the harsh winter. So, unless the experts that come up with the consensus find a way to lower the bar wisely, (a bigger guess than normal) we could see three poor numbers in a row; three in a row is a trend. It would be a good excuse for the Fed to switch course to a less committal reduction of asset purchases, or to go a step further, and begin to buy even more treasuries and agency MBS. Everyone says Yellen likes to print; she'll have an easy excuse in a few weeks.

I do not believe she'll take the bait...

Inflation or Deflation...I forget?

From worst to first, the gold miners are rocking in 2014, with the big players in the space only being outdone by junior miners.  I'm not sure what the message of this move is considering the legitimate treats of deflation. Fed tapering is supposed to hurt the price of gold as it attempts to reel in runaway money printing. Of course using that logic, gold should have been up 30% last year, not down.  Be that as it may, this move has gotten my attention. I said last year we would become aggressive on gold (and add to legacy positions) with a close north of $1,400 an ounce.

Might have to move before then considering the impressive breakout through that long-term trend line (see chart).  For the moment, the move in gold mitigates talk of deflation which helps stocks.

 We know that the official reading of inflation will not show the average supermarket shopper and coupon clipper any justice.  But if we ever slip into a deflationary spiral, it could mean years of pain and higher minimum wages, which will not help this situation.

Too Giddy

Then there's the idea of investor giddiness.  Bullish sentiment surged last week +12 points to 40% according to the AAII, but that's a long way from historic levels of optimism associated with blind greed.  By the way, there are other readings on sentiment with very high levels of bearishness.  All of these are considered contrarian indicators.  The bottom line is investors are not overconfident.

There are questions and there is frustration, because these questions may not be answered for a long time.  Yesterday, the S&P came within inches of a new all-time high, and that should put it all in perspective.  Stocks act like they want to move higher, but the economy must carry the day, since additional help from the Fed can only backfire miserably at this point.

The Market

Yesterday the IMF rattled the market with cautious comments on US economic growth, and while it's a valid point, I look at trends and data on the ground and continue to like what I see in areas such as construction and transportation.   Earnings released from Trinity Resources (TRN) underscore why there should be more optimism.   Not only was execution solid during the quarter, but guidance was robust and encouraging.

This an open position on the Hotline service.

4Q13

* Beat by $0.02 @ $1.43; revenues +24% to $1.26b ($1.23b cons)
* Rail +50% to $855.5m; rail leasing +14% to $151.3m
* Barge -13.6% to $142.9m, lower hoppers
* Energy +12.7% to $188.5m; increase in storage containers; however wind tower backlog -9% q/q to $554m
* Construction +7% to $117.5m; acquisition-related volume increase
* Backlog to $5.0b from $5.1b q/q
* Operating margin 17.9% from 15.7%
* Guides Q1 EPS $2.45-2.65 ($2.06 cons)
* Guides FY14 EPS $6.30-7.00 ($5.88 cons)

The big news of the day comes from Facebook (FB) and its $19.0 billion acquisition of a company with only 55 employees.  I was skeptical of Mark Zuckerberg, but I'm jumping on his bandwagon now because this kid has balls of tungsten and steel, and it's that kind of grit that made America great.   The founder of WhatsApp was once on food stamps in America and now embodies the American dream.  In fact, Jan Koum was born in Kiev, Ukraine which is on the verge of a civil war and a place where a brilliant mind could have never lived up to his potential.

This entire story is a reminder America is the greatest nation in the world.

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