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Farrell: Pelosi Was Right

I hate to say it, but Nancy was right!

I try to be apolitical. I think I succeed most of the time.

Speaker of the House Nancy Pelosi (D-CA) speaks during her weekly news conference at the US Capitol in Washington, DC.
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Speaker of the House Nancy Pelosi (D-CA) speaks during her weekly news conference at the US Capitol in Washington, DC.

Trashing both parties more or less equally allows me to stay balanced. So in that continuing effort to stay bland and uninteresting, I have to give mention to Nancy Pelosi who said a few weeks ago it might take a decline of hundreds of points in the market to get the Republicans attention. I prefer to change that to get 'politicians' attention, but the point is made.

Did Nancy sell the market short? Isn't her husband a big hoo-ha (that's a technical term) in the finance business? Go girl.

Take that market down.

And since everyone's attention is riveted on the stock market, let's pray that crisis begets leadership. It has in the past, and we could use a little forward thinking right now. The Group of Twelve, the modern day apostles, will be selected soon and will have to come up with fiscal recommendations by November 23. If they don't, automatic cuts will be implemented. I don't know why this group will be any better than the entire legislative body, but hope springs eternal. I think what will happen if they punt, will be further downgrades of the US credit worthiness.

People are furious that S&P made a $2 trillion errorafter they had missed the entire sub-prime debacle, and went ahead with the downgrade. But it doesn't matter. The crisis of confidence had to come to a head and now is as good a time as any.

The stock market is (at this moment) getting crushed. "Wouldn't it be nice " (Beach Boys way back in the '60's) if the market closed higher on the day. I know, I should sit down and let that feeling pass. (Real Time Quotes - CNBC's Markets Page)

But I don't think all is doom and gloom.

My pal, Rich Farr, of Boenning & Scattergood (God, I love that name) asked the rhetorical question in his piece earlier today, "Is a 2.48% 10-year yield (now even lower) and $84 oil good for America? The answer is unequivocally, Yes!" Rich muses (we strategists muse a lot) that it is not the rating on a bond that matters as much as it is the yield to maturity. The 10 year Treasury yield is down sharply to 2.38% and it is that, not the rating, that impacts GDP. Oil is down, interest rates are down, and a double dip recession is possible, but not, in my opinion, likely. Recessions are generally caused by credit crunches, and I don't see that unfolding with rates so low.

Earnings coming out of Q2 look to be annualizing at $98 (thanks again, Rich). My guess is that estimates are too high for the year and I am using $93. If roughly correct, the market is at about 12 times. I don't know what is truly appropriate with all the moving parts, but I know interest rates are low and likely to stay low for a long time. 12 times seems attractive to me. And I think that profits will continue to grow. Maybe begrudgingly, but we sell to the entire world. The entire world includes the emerging markets. Sales to Europe might slump, but sales to other sections of the world might pick up. We have achieved today's earnings with little contribution, if any, from housing and with a struggling consumer. Those problem areas are not new news.

Other positive, or at least semi-positive, developments are that the Euro big shots are taking some steps to address the Spanish/Italian fiasco. More on that in later reports but buying the troubled bonds in the open market, if done in size and aggressively, would be a big relief.

While the latest US GDP news was discouraging, it's worth remembering the Japanese tsunami impact is fading and the 100% depreciation tax break is scheduled to end this year. If not extended, cash rich US companies could well step up capital spending towards the end of the year and give a boost to GDP. If extended, all the better. The President has called for the payroll tax break to be extended and the same for unemployment benefits. Maybe the market decline will move the Congress to act on these.

Ed Yardeni, of the firm of the same name, reckons we are closer to tax reform than ever before. Please God! I vote we end tax loopholes (all loopholes; mortgage interest deductions that encouraged speculation in the housing market included) and lower all tax rates, individual and corporate. Any move in that direction would be well received by the markets.

The Fed is out of bullets (again, to be discussed later) but there is a pot-load of cash on the sidelines. Bank savings deposits and money market funds have over $8 trillion. And this earns practically nothing. That is not all stock market money, but it certainly doesn't have to be.

I did mention last week that we had a lot of activity at 1130 on the S&P last summer. I'll take a stab and say that will be the bottom of this awful market. I would sell into any rally if I was of a trading bent. But there are numerous companies with strong balance sheets and generous dividends that are on the sale rack.

Vincent Farrell, Jr. is chief investment officer at Ticonderoga Securities and a regular contributor to CNBC.

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