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Farrell: Shocking! Shameful! Disgraceful!

Friday, 19 Aug 2011 | 3:04 PM ET

Governor Rick Perry made over $1 million in real estate profits during his tenure screamed the TV headlines this morning. He has been the longest serving Governor of the great state of Texas. And that is all he made?

The man is unfit for office.

Didn't he read Lyndon Johnson's biographies? (The best of which is Robert Cato's three book series. It takes some time but they are superb.) A miserable $1 million is all he could do? LBJ walked away from public service a gozillionaire. And he wasn't even Governor. I think we should seriously question his credentials for public office. I mean, really!

We have been writing for some time that estimates for both GDP and earnings per share have been too high and needed to come down. Typically, as estimates fall, stocks tend to struggle. Is that what stocks have been doing? Struggling? Looks more like plummeting to me. But the brain-power at the big firms are catching up. And probably over-shooting.

Recently both Goldman Sachs and Morgan Stanley have downgraded their global outlook. I see on the news ticker today that Citi has lowered its estimate for 2011 GDP to 1.6%. Since the first half saw only .8% GDP growth I guess they think the second half will be a bit better to get to 1.6% for the year. But caution, I did not read the report.

JP Morgan cut its first half 2012 forecast to .5% GDP growth and feels there is a 40% chance of recession. The group there is led by Bruce Kasman who is first rate. I don't know about the precision of a .5% estimate, but I am in the same direction and would guess recession has a 50/50 chance of occurring. Or re-occurring I guess is more accurate. But Bill Dudley, head of the NY Fed and a former Goldman economist, hopes there will be a pick-up in the second half of this year. I have to discount that since there is a very strong motivation/pressure for officials to talk an optimistic party line.

I don't think all is lost by any means, however. Lower oil prices are very helpful. Oil at about $80 is a lot better than oil at $140. For every $10 change in oil for a full year, over $300 billion is transfered from oil producers to oil consumers. Oil producers tend to save most of it , after they buy a few more 747's, and oil consumers tend to spend. A $10 swing is very roughly .5% for world GDP. We are talking then about 1-1.5% GDP points.

A yield of roughly 2% for US ten year bonds will move the 30 year mortgage rate even lower. Freddie Mac announced that the average 30 year mortgage was 4.15% last week. There is historically a 160 basis point difference between the ten year Treasury and the 30 year fixed rate mortgage. If 2% is where the ten year hangs out, mortgage rates will fall below 4%. Many people are underwater and lack equity in their homes, but a less than 4% mortgage would allow refinancing of most mortgages to the consumers benefit.

We spend a lot of time agonizing over weekly initial unemployment claims and the "magic" level of 400,000. I forget that many of you have valuable things to do and don't microscopically look at such drivel. But 400K would allow the US economy to create about 100K new jobs every month. That's a rough rule of thumb. And we need about 100K new jobs to absorb new entrants into the work force (graduates etc.). The four week moving average of initial claims has declined 7 weeks in a row and is now 402,500. We're getting there !

I mentioned the Philadelphia Fed index yesterday. It was terrible, BUT, these indices measure the breadth of sentiment, and not the depth. If I were asked I would be in the negative camp but more towards Bill Dudley's semi-optimistic view that we could grow a bit. We need to keep the nature of these surveys in mind and not go overboard.

And why is a guy like me, basically a fundamental, cash flow, balance sheet strength type doing so much technical analysis lately? It's because of what I quoted Dick Fisher of the Dallas Fed as having said in yesterday's note. There is political paralysis in this country and so many businessmen are on hold. The high frequency trading community has moved in and dominates the scene. That is dangerous, scary, and nuts. They, in my opinion, serve no purpose and screw things up. But since that is what dominates right now, we have to live with it. I read that over 2/3rd's of the volume recently has been high frequency trading. I would shut it down. Until then refer to all the recent notes about a 1/3rd to 1/2 retracement blah, blah, blah. Or is it Yadda, yadda, yadda.

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

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