Nothing especially new to report today other than to reiterate our comments from late last week. We are likely witnessing a needed pause and test of this effort to stabilize. Yes, test, does imply some red ink – hopefully some ugly red ink.

Call me a nut but I never like to see a crowd get as terrified as the masses were – in every single sentiment indication – and then quickly feel the pain leave. That’s kind of like taking two aspirin every time you have a mild headache. Suddenly, over time you may find you need 5 aspirin to get rid of the real big headache. Said another way – we all know what happened to the boy who cried wolf. In essence, we don’t want the masses to begin to not fear setbacks.

I am rambling.


If you heard that right before the market opened, it was the ECB finally committing – in a real sense – to the QE process. Mr. Draghi came out with guns blazing with further steps into the same no man’s land Bernanke took the US many years ago now.

Keep in mind our thoughts on the topic – we went into the woodshed first and then came out first. The eurozone waited quite a bit of time before they decided to take the leap. Hence, there is still work to do before they exit the clouded horizon. (just remember the horizon is always cloudy)

Sniff Sniff

While the entire planet of experts, recession callers, doomsday gangs and BSS’s (Black Swan Spotters) – and yes, there is a reason that acronym has a lot of BS in it – tell us that deflation is sure to consume us all – it is imperative that we take a few steps back away from the flame to review.

Back when “inflation was going to consume us” as oil tipped the scales at $140++ and QE 2 and 3 were still in their infancy but sure to snuff out any value in the dollar, we suggested this:

“Now that the entire planet is telling us that inflation will end our world – again – we think we should likely begin to watch for the real culprit – deflation.”

Today, having run the gamut of global deflationary fears and hearing the exact opposite scenario is now set to cause the same “end of the world” prognosis, we suspect that soon…maybe another few quarters – we will begin to see inflation is actually beginning to spread its wings again.

And by the way – while the lessons from experts have left the impression we should be literally mortified of even a whiff of inflation – be sure you get this: you WANT inflation over deflation.

So when I say “sniff sniff” – I mean this: Begin looking for the early stage benefits and signs of inflation….the deflation monster is on life support and is snorting it’s last few hits of oxygen.

Chuckle Heads Part 2

Yesterday we noted this headline picture pasted in below for you.

The chatter was “higher oil prices will now begin to hurt stocks” – keeping in mind of course we are still $100 a barrel lower than the highs of 2008 – and only $80 lower than 18 months ago.

Be that as it may – the laughable headline below just flashed up showing us that once again….news is the after-thought and will be created no matter what prices do:

“Indexes All Turn Red as Oil Falls”

Note it “fell” to $36 and change – 30% higher than 2 weeks ago.

Back to the Flat Tire

I would not get particularly excited about the pause in stocks – if we can get one.
Think of it as if the market has gotten a flat tire. We left base camp – we had rested for months and months, we refilled supplies, we reloaded the pack mules and Jeeps with our stuff and we set out on the next leg up the mountain.

Now we have a flat tire (resistance) where a pause is needed.

I would not mind seeing the markets needing a little more rest for the reasons outline above. Let’s hope for same – even if it brings us back for a week or two – or three. Oddly enough, the longer the better while the whole world frets over the next monster : )

In Closing

While we anticipate a pause – the long-term issues remain the same. Use windows of red ink to build positions. Years from now, we will very likely look back on this cloudy period of time and recognize it for what it was – a goldmine of opportunity for those willing to remain long-term investors.

A helpful chart from our friends:

Check the red arrows out…

It tells us that the equity risk premium for buying those ugly old stocks in the stock market with the outright dire future that we have has not been this high since the 70’s!!


Extremely low Treasury yields are also a good sign that the market is consumed by pessimism, given that the earnings yield on equities is 5.7%.

Choosing 10-yr Treasuries with a yield of only 1.7% in lieu of equities yielding 400 bps more (and considering further that equities have far more upside potential than bonds at this point) only makes sense if one is convinced that earnings will suffer significantly in the years to come.

So far, earnings are down only a little more than 2% in the past 12 months, and almost all of that is coming from the oil patch.

Put another way, the current P/E ratio of the S&P 500 is about 14.5 without the crappy impact of oil’s “collapse”, whereas the P/E ratio of the 10-yr Treasury is 58!

To pay so much for the presumed safety of Treasuries is to have truly dismal expectations for economic growth and corporate profits.