Some Stuff I'm Reading this Weekend...

Doug Kass's beware of bonds piece in this weekend's must-read.  (TSC)

Former Labor Sec Robert Reich - "Welcome to the worst Labor Day in recent memory."  (RobertReich)

Study indicates that the big winner of Health Care legislation will be Small Business.  (Forbes)

Investors are buying emerging market stock and US bond funds, show no love for domestic stock funds at all.  (NYT)

Seth Godin: "Whatever Happened to Labor?"  (SethsBlog)

The 20 Richest People of All Time.  (WallStCheatSheet)

Bill Singer on PIPEs, an emerging area of investor abuse.  (BrokeAndBroker)

SEC puts the ratings agencies on blast with Reg AB.  I'd have preferred the RICO Statute, personally.  (TBP)

That $3 trillion Iraq War cost estimate may actually be low.  (WaPo)

Based on the 1940's playbook, higher bond yields would be a major plus, not something to shriek about - they would indicate real recovery.  (PragCap)

Howard Lindzon prefers having "customers" over "users".  (HowardLindzon)

We lost edgy comedian Robert Schimmel this weekend.  (ComicsComic)

For some background, my friend is the opposite of me in his spending proclivities - his consumer footprint is probably twice the size of mine.  He's got two parking garage spots in Manhattan, one by his apartment and the other by his office, both of which cost him $300-something a month.  You can extrapolate from there to get a sense of what kind of bills this kid is seeing each month.

Anyway, he's in the commercial real estate brokerage biz which is basically Ground Zero for the deflationary spiral right now.  In the absence of businesses expanding and forming, prices per square foot are plummeting pretty much up and down NYC and around the clock.  No one's bringing in new employees so taking more space is literally the furthest thing from their minds.  In a city that recently had eleventy-five hedge funds starting up each weekday that were willing pay whatever you quoted them for space, even the most sought-after buildings now sit at fractions of full capacity.  What's worse, there is no burgeoning industry waiting in the wings to take up all the recently vacated hedgie offices - there are only so many law firms and bankruptcy specialists after all!

My friend the broker may be profligate, but he is also realistic and sees that, because of capacity slack, this could continue for quite some time.  His question is, short of moving to Tahiti with an easel and paint brushes, what can we do to counter the deleterious effects of this deflationary miasma?

My answer?  Not having lived through any periods of sustained deflation in my own lifetime (born in '77), I gave him the only answer I could, one based on common sense.  I told him to Get Small.

Reducing the expenditure footprint allows you to preserve both cash and cash flow, two of the most valuable commodities of all when prices and returns on investment are falling all around us.  Many will be forced to puke up properties, investments, businesses and crown jewel assets in a deflationary environment - but kings are made on the other side.  The kings would be the counter-cyclically prepared, the guy showing up to the estate sale with an unencumbered bankroll.

We're not concerning ourselves in this post with the debate about will we have deflation or not, we already do.  It may not last or get much worse, but who's to say?  Better to Get Small now and be wrong than to stay big, sprawling and at risk.

Remember, the armies that have won the great wars throughout history were not necessarily the most illustrious or fierce.  Rather, they were those armies that could be amply protected, supplied and fed without breaking the royal treasury.

Cartoon by Stuart Carlson/ The Record

Source:

Cartoons of the Week (TIME)

Alan Abelson's column in Barron's nails something important about this past week's big bounce in stocks - he's basically saying that all the fundamental and technical analysis you want can't even touch the power of a mightily wrong estimate in terms of moving the markets.  To wit, we did not have a "good" August jobs number, but we did have a number that was much better than the consensus punk estimates - and that was all we needed for some up-field progression.

The trouble with relying on rallies from whack expectations is that the expectations don't remain so whack for so long.   The ranges also tend to narrow as well; better to be a typically wrong analyst in broad company than attempt to be an infrequently correct outlier.

If the better-than-expected game is going to get harder to play for those looking to get more constructive on stocks heading into the fall, then where will the strength needed come from?  Ask any NFL coach, they'll tell you that true leadership can only come from the locker room.

Stocks need strength in other stocks at this junction.  In my view, after last week's reprieve from the recent and relentless out-of-stocks-into-bonds trade, we're going to need a better foundation to work higher.  Leadership must emerge from the ranks, not from the economic data or our weakness in forecasting it.  A lackluster number from the PMI or the BLS that just happens to be not quite as lackluster as what was expected is not going to do the trick going forward.

Better-than-expected on the economic front has given us a reason to stop selling stocks, but stocks themselves need to give us a reason to come in and buy them if we're to finish the year nicely.  And no, the quarterback Apple Inc ($AAPL) can't do it all alone.  We're going to need the oil services and drilling complex to pick itself up off the field along with some spunk out of the large cap banks.

In the meanwhile, a few more shock merger announcements or rumors (Burger King, Potash, Genzyme, Dollar General, MacAfee)  should keep the short-sellers off the blitz.  This may buy us time for that stock leadership to make itself known amidst the cacophony.

This one'll keep the kids up at night for sure, watch this robot snake climb a friggin' tree:

hat tip Laughing Squid

Chris Cernich, a former numbers guy from Ford Motor, is now being called one of the most powerful men on Wall Street.

From the WSJ:

The 46-year-old is the new head of M&A and proxy-contest research at proxy-advisory firm Institutional Shareholder Services Inc. For a mouthful of a title, the job is relatively simple. Mr. Cernich advises some of the world's biggest institutional shareholders about how to vote shares on mergers, proxy contests and corporate governance issues.

The clients—largely mutual funds, insurance companies, and pensions—almost always follow ISS recommendations, largely because they can't devote resources to the slew of shareholder votes arising in their portfolios.

That means Mr. Cernich can often represent the crucial swing votes that decide whether a merger is approved or dissident directors elected to a company board.

Proxy advisory firms weigh in on board votes and contests, essentially providing an opinion for voting shareholders as far as which candidates or measures are in their best interests.  There will be no shortage of these crucial decisions ahead of us.

Source:

Wall Street's New Power Broker (WSJ)

Good luck and be careful, intrepid investors!