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Farrell: I'd Like to Club Him!

Kerry Killinger, former head of the failed Washington Mutual, appeared before Congress the other day and "accept(ed) responsibility for our performance and (was) deeply saddened by what happened." And then blamed everyone and everything under the sun for the largest bank failure ever.

He dared to say that "those who were part of the inner circle...were too clubby to fail." He should have got his former chief risk officer, James Vanasek, to put a sock in it. Vanasek said "...Washington Mutual would find some way to make a loan."

He claimed he made repeated attempts to "cap the percentage of high risk and subprime loans in the portfolio", and to curb the "making of loans without income verification" but was continually rebuffed. He added that "borrowers were coached to fill out applications with overstated incomes or net worth adjusted to meet the minimum underwriting requirements." A visibly annoyed Senator Carl Levin quoted defaults from several branches that totaled 82% of mortgages made and wondered what could have been going on. One hell of a club.

At the same time an article appeared in the Wall Street Journal that claims the big banks are fighting the financial reform bill making its way through Congress. One very touchy aspect of the proposed regulation revolves around the highly profitable derivatives business.

Someone actually said the rewrite of the regs would put the economy at risk. I can't believe this. This is the area that almost caused the economy and financial system to implode. The regulations might be good or bad, but wasn't the economy almost destroyed during the last two years? The bonuses these guys pay themselves are going to their heads.

The market remains highly skeptical of the Greek financial situation. Greek ten year bonds closed Wednesday at a 6.86 yield. Also a Goldman economist, Erik Neilsen, was quoted as saying that "No Euro zone government can lend without going to their parliament." That could take weeks and presumably Greece would apply for the money only after all capital markets spurned them which implies a crisis situation.

Germany would be the biggest lender and their constitution requires Parliamentary approval. Germany would be on the hook for 8.4 billion Euros. Angela Merkel is trying to pass a 16 billion euro tax cut and a huge expansion of health care. Local authorities are complaining they don't have enough money to maintain roads and schools. There is a May 9th regional election and Merkel is above all else a skilled politician. Does she really think she can loan money to Greece.

France would be the second largest lender and they just increased the estimate of this years deficit as a percent of GDP. Italy would be responsible for a few billion and who is kidding who? They are probably on the brink themselves. All this debate has gone on like all the Euro members have the money to bail out Greece and the only clear deep pockets belong to Germany. This is a farce.

In the good old USA the Consumer Price Index for March increased a mere 0.1%. The year over year change is +2.3%. The core CPI, ex food and energy, was flat and up just +1.1% year over year. The core rate is the Fed's preferred measure.

Some are taking this as a sign that the risk of deflation has not disappeared. San Francisco Fed researcher Glenn Rudebusch said the odds of deflation are higher now than they were in 2002 and 2003. Rudebusch wrote "The rate of compensation increases has been falling steadily since the start of the recession...and this suggests the probability of deflation is even higher. Going forward we expect the economy to grow...almost 3.5% this year and 4% in 2011 and 2012. However, the level of economic activity is so depressed that...it will take years to eliminate slack and return to full employment."

Retail sales were also announced on Wednesday and increased by an impressive 1.6% in March. Ex autos, core sales were up .6%. The retail sales figures have surprised on the upside several months in a row. Q1 GDP will probably show a solid advance of 3.5% or better. But with high unemployment, weak income growth, tight credit conditions and consumer credit falling 12 out of the last 13 months, I doubt this burst of spending will last.

But there are always stocks to look at. On the strength of Intel's solid quarterly performance, Soleil's Neil Herman advises taking a look at Microsoft (buy rated, recent price $30.50). He expects MSFT to report a healthy fiscal third quarter April 22 after the close. He believes IT spending is starting to improve. His quarterly estimate is $.45, well ahead of the consensus of $.41.

Microsoft is trading at 13.5 times his FY 2010 estimate of $2.23, and 11.8 times the FY 2011 estimate of $2.55. The company has over $30 billion in cash (about $3.40 per share) and will generate free cash flow for the fiscal year ending June of over $20 billion ($2.30 per share.) He has a price target of $34.

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