"Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?"

Alan Greenspan
December 5, 1996

"Equity valuations of smaller firms, as well as social media and biotechnology firms, appear to be stretched."
-Janet Yellen

In an awkward attempt to placate detractors that feel like the stock market has rallied too far, too fast, Janet Yellen threw two of the most volatile sectors in the stock market under the bus. It was almost surreal. But it happened. However, will it work?

Sure, biotech and social media stocks fell through trapdoors and eventually the entire market was pulled lower, anchored not by fear of a rate hike, but by the fact that it's now proven that there are no limits for the current Federal Reserve chairman.

Talk about dangerous. Essentially, like the Wicker Man myths spread by Julius Caesar of men locked in giant effigies that were eventually sacrificed for the gods, Yellen was willing to burn stocks that already faced challenging times this year.

 

Big Government Fail

Most of the time, few Americans believe that the government in Washington will do the right thing. This has been underscored by a recent Gallup poll. In fact, it's shocking just how little trust we have in the federal government stepping up to the plate and looking out for us unconditionally.

As it turns out, people aren't just in a bad mood. Government failures are soaring and leaving a lot of questions on how it can be fixed. A report by Paul C. Light at the Brookings Institute follows government failures via news stories and indeed there has been a surge in incompetency as government has failed at either operations or oversight.

Government Failures	Total	Yearly Average
Before 2001	23	1.6
Since 2001	41	3.0

 

Major Failures Under Various Presidents	Averag Yearly Failures
Reagan	1.6
Bush	1.2
Clinton	1.8
Bush	3.1
Obama	2.9 1 Term 2.0 2 term 5.3

His conclusion is that failures usually involve omission, the inability to anticipate, and or act on intelligence. To me, this is more evidence of a broken Washington, DC, which I view as the single biggest impediment to Americans reaching their full potential.

Today's Session

Lots of news out this morning: deals, earnings, and economic data. Almost all of it is good.

Perhaps the biggest news for our economy and stock market is China's GDP report showing 7.5% growth for the second quarter. Consensus was 7.4%, so the news reinforced the notion that China continues to be the economy that is making the most difference in the world today. China now has $3.99 trillion in foreign-exchange reserves.

Corporate Earnings

Intel (INTC) posted earnings of $0.55, beating the street by $0.02. INTC's gross margins soared as PC sales +9%, data center sales +14%, and Internet of Things (IoT) sales +12%. This is not a flash in the pan, as the company pumped guidance higher and margins will continue to rocket higher.

Burying the Hatchet

Apple and IBM hooking up with partnership for 110+ industry-specific enterprise solutions that will include iPhone and iPad apps aimed at improving business efficiency.

On the Prowl

Reports out this morning are saying that Rupert Murdoch is now in full-blown pursuit of Time Warner after the company rejected an $80 a share offer. Most observers believe a deal is a forgone conclusion, hence the surge in TWX this morning (note- it probably goes north of $90 to get the deal done).   Takeover activity is building again after a strong start in beginning of the year. I think it is a positive for business and a good harbinger for the American economy.

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