The World According To Rosie

ZeroHedge posted the following list from David Rosenberg of things that people are not talking about but should be (at least this is how ZH interprets the list):

1) Hedge funds have not piled into the equity market to play catch-up.

2) The Super Committee did not come to a compromise (and remember Moody's has the U.S. debt rating on "credit watch" and Standard & Poor's still with a "negative outlook".., shades of August).

3) The Europeans have not managed to resolve let alone contain their credit crisis.

4) Germany has not acquiesced and agreed to having poor sovereign credits ride off its AAA rating via a "Eurobond".

5) The ECB has not moved towards QE. Nor will it — have a look at today's WSJ editorial on the matter. Brilliant.

6) Mr. Market saw through the Q3 earnings season and recognized the lack of visibility in the guidance provided.

7) China did not start to ease policy just because inflation rolled off the 6%-plus peak.

8) U.S. recession risks, as per the San Francisco Fed, did not recede and actually stayed above 50% even with the better statistical tone to Q3 and Q4 GDP.

We've all heard point number one many times, often referred to as window dressing, but this is something that I have never understood how it can be pulled off. To take an extreme example, if a portfolio reports owning nothing but names that are up 20% but the actual portfolio is only up 2% then wouldn't all credibility be lost?

The apparent failure of the super committee should surprise no one. Washington has become more ineffective than I can ever remember. It starts at the top and goes all the way down to both sides of the aisle. This has no shot of changing until Obama is gone. As a side note there was a write up over the weekend in the WSJ making the case that Obama should not run in which case Hilary would, she would win (a comment on how fouled up the GOP is these days) and draw on her experience of having a front row seat (presumably) to the manner in which her husband reached across the aisle.

Points 3, 4 and 5 all underscore the extent to which Europe's fundamentals stink and are going to continue to stink for many years. Long time readers will know I have been saying this for a long time and there appears to be no visibility for substantial improvements. Actually the visibility is for things to continue to deteriorate (it looks like Belgium's temporary honcho resigned last night).

Earnings are complicated these days. As you know, companies give guidance to analysts then report their numbers shortly thereafter creating the appearance (at the very least) that things are going better when they beat their own guidance. It is true that the percentage gains in reported earnings has been good for a meaningful number of companies but Rosenberg's comments are also true.

The other complicating factor is that earnings have not mattered in the short run for quite a while as the market is being driven more by macro factors. The first time I had ever heard of 90/10 days was in 2000 or 2001 in Barron's and it was portrayed as being a very rare event. Now they happen many times in a year contributing to the real or perceived increase in correlation.

Everything about China is complicated, promising, worrisome and exciting all at the same time. The story on the ground of modernization, urban migration and middle class ascendancy is continuing to happen and I contend will continue uninterrupted. This should mean good things for the right stocks long term but there will be short term lumpiness and sometimes it will be severe.

The wrong stocks need to be avoided (obvious statement) and by wrong stocks I mean Chinese banks, real estate companies and the companies that have their primary listing in the US. This will guarantee nothing but if China really implodes then ground zero will be the banks and real estate companies. I am not in the Chanos camp in terms of magnitude but I do believe these groups are on shaky ground. As far as companies that have their primary listing in the US, this is where most of the frauds occur. You may feel that not being able to discern when a company is simply lying makes for an unacceptable risk which would be valid but there are plenty of real companies in China.

And finally about a recession in the US; during the summer I said I thought we were in a recession and I still feel that way. This call will either be right, or early, or too early to be right or simply wrong but I continue to believe that things are unhealthy fundamentally and that jobs and housing a shockingly behind where they should be by now. More important than whether we are in a recession right now or not is that we are still in the event of the financial crisis that started four years ago.

Congratulation to Justin Verlander on winning both the Cy Young Award and the MVP.