Why the selloff today? Take your pick of answers - a slight increase in Treasury yields or Bear Stearns hedge fund problems - maybe both. Does it matter? I would like to say “no” because I get disappointed with investors who are constantly seeking simplistic answers to why the market moves the way it does.

However, it’s important to watch the questions more than the answers. Kinda like the game show Jeopardy! I find that whenever you hear investors desperate for the reasons why they lost money and when that desperation gets satisfied with bullshit answers provided by financial media, that means something. It doesn’t really matter what the answers are, but the questioning is key.

Usually a meaningful decline begins with a few days that go something like this: The market drops and the bulls who believe that they are entitled to gains every day ask why? In the first stage, they believe whatever reason is given. In today’s case, it was either rates moving higher by a smidgen or renewed subprime fears mixed with a little hedge fund meltdown paranoia thrown in. Regardless, I didn’t sense that investors are too worried by today’s selling and they seemed to buy into the answers that were given. If the market rebounds tomorrow on a reversal of either scenario - let’s say that rates head lower again or Bear Stearns finds a way to salvage the hedge funds - we are back to the races. On the other hand, if stocks head lower whether today’s worries are fixed tomorrow or not, then the questioning really heats up. When that happens, the answers become less and less important. So I’ll be listening for those questions and really don’t care what answers are given.

I am not a fan of buybacks. I know it’s all the rage to worship them and a bit odd for someone who loves equities to be critical of them, but that’s how I feel. Rather than putting out one long post on this topic, I am going to put out small ones from time to time reflecting different reasons for pushing back on buybacks.

Proponents of investing in stocks over other asset classes will point to the outperformance over the long term and depending on the time frame, dividends were a significant contributor. From 1926 - 1997, dividends represented about 40% of the total return but in the past decade, that percentage has slipped dramatically. Dividend payout ratios are about half what they used to be and so is the average dividend yield on the S&P 500. The preference for today’s public companies and their investors is a focus on buybacks. In 2006, share repurchases set a record at $432 billion, compared to $349 billion reported in 2005, $197 billion reported in 2004 and $131 billion in 2003. This year’s total is expected to exceed 2006 by about 30% if the current trends continue.

In 2006, money spent by S&P 500 companies on buybacks were twice as much as dividends paid to investors. In fact, 2003 was the last time when dividends exceeded buybacks.  I truly wonder whether market historians 50 years from now will tell us that investing in stocks over other asset classes was a great idea because of buybacks.  They said it about dividends over the previous 50 years, but I doubt it will be the same for buybacks.

When Bear Stearns reported earnings on March 15th, 2007, they calmed the markets about the subprime crisis and Wall Street’s risk associated with troubled mortgages. When I wrote Vaporizing Subprime on that day, the S&P was just beginning a rally to reverse the late-February selloff. In my opinion, the assurances from Bear Stearns, Goldman and Lehman that subprime would not pose a significant or continuing threat to their business or the markets in general was a primary cause for stemming the slide and pushing us higher. So when I hear the problems with two Bear Stearns hedge funds that are focused on subprime mortgage exposure, it’s a bit troubling. I’ve just read through a bunch of the news coverage from March 15th and comments like this from back then are not impressive now - “Bear’s CFO, Sam Molinaro, said on the conference call that Bear’s overall exposure to subprime is minimal and so the current troubles pose little direct threat to the company.” Contrast comments like you’ll read here to what is being said today and you should be left with an unsettling thought. Either Bear was wrong about their optimism back then or subprime is getting much worse than anyone wants to admit.

Wal-Mart announced it will be offering a reloadable prepaid Visa debit card to serve the group of unbanked residents of America who don’t want to have or cannot have credit checks. Personally I like the product and have been worried about the unbanked population of approximately 10 - 25 million who are often at a disadvantage in our electronic payment economy, not to mention how terribly they have been abused by check cashing operations. So if you happen to be invested in any companies that make their money on this group such as WU, MGI, EZPW, CSH, FCFS, WRLD, etc. you might want to consider the competition from Wal-Mart.

This looks like a great use of Wal-Mart’s real estate and fit with their customer demographic. And it’s a nice compromise to avoid the regulatory hassles it encountered when trying to set up a formal banking operation. But I cannot help but look at this card as a product tailored to illegal aliens who need services like check cashing, money orders, bill payment and money transfers - all the stuff being offered by Wal-Mart’s MoneyCenters. If nothing else, it will certainly make the remittances back to Mexico a little easier.

When Bank of America came out bluntly with its illegal alien credit card program, the major media and bloggers went wild. I don’t see much of a difference with Wal-Mart’s debit card and MoneyCenter products other than they are doing a more subtle job of spinning it. Sorry, but I am just calling it as I see it. It will be interesting to see whether there will be any backlash against Wal-Mart like there was with Bank of America.

I am very critical of automotive manufacturers and their inability to improve fuel economy over the past 20 years. I am even more critical of American consumers who seem to have an insatiable appetite for the big, heavy vehicles being produced. You can read my past commentary on that topic here, so I’ll try to avoid repeating much of it. But when I heard Bloomberg’s interview with Bob Lutz of GM and the snippets where he discussed fuel economy, I need to vent my frustration.

I don’t doubt that Mr. Lutz was a “design guru” as he is often called, but since coming to the aid of GM in 2002, how has the company done? Last time I checked things weren’t so rosey. Obviously, these problems are not of Bob’s doing and one man’s ability to change all the mess is not realistic. However, since he has been given great respect - he is also subject to great responsibility. I hope he does some good. He’s often quoted for his brash comments and today’s rants will not go unnoticed.

For those that missed it, PLEASE read this summary. Here’s my take: GM and the other car companies can improve fuel economy like they did from the mid-70’s until the mid-80’s and I am talking about gas powered combustion engines, not hybrids or electrics. I am betting they won’t even need to make the car’s electrical and mechanical systems much better to do it. If you look back at the statistics I referenced in my Fuel Economy Myths article, the solution seems to come from reducing weight, performance and horsepower.

And that is where the trouble comes in. For all their bitching about high gas prices and greedy oil companies, Americans want speed, power and heavy vehicles. The politicians can propose 35 mpg fuel standards all they want, but Americans have shown minimal changes to their demand for gas consumption and big vehicles regardless of gas prices. If people were really serious about fuel economy, their behavior (other than whining) would reflect that. It hasn’t and I am not so optimistic about when they will. Do we really need to go from 0-60 mph in less than 10 seconds vs. 12 or 13? Do we need cars that can go 120 mph when the maximum speed limits are 70 mph? Do we need 4,000 pounds of vehicle surrounding us as we do battle with other 4,000 pound vehicles in traffic? Do we need so many trucks carrying nothing? Do we need 4-wheel drive when we never go off-roading? NEED is not the key word, WANT is. Most American consumers seem to want these features much more than they want better fuel economy. I agree with Lutz if he is saying that giving people all this gas guzzling stuff and 35 mpg at the same time is just not realistic. Vehicle manufacturers try to make cars that people will buy and that’s what they should do. Until Americans change their energy consumption behavior and desire lighter vehicles with less speed and power, I am not optimistic about 35 mpg.

Two other things about Lutz’s comments. The first is that the political environment and control by the Dems supported by unions like the UAW make tough new fuel economy standards as likely as the flying car Lutz mentions. Lastly, saying that the passing of these standards would ruin the auto industry is a bit funny. Seems to me that they have done a fine job of ruining the industry over the past 20 years when they made no progress on fuel economy.

This week’s list of new signals was smaller than I can remember for a long time and I expect that it was the lowest turnover I’ve had since HEDGEfolios coverage began in 2002. While I gave 77 new UP signals versus only 30 new DOWN signals, the HEDGEfolios Timing Indicator is once again showing a firm bias on the bearish side. Regardless, I am really struck by the lack of movement in the expected direction I have on 97% of the symbols. Normally, I would be relieved by feeling like I have the portfolio of over 4000 symbols positioned where I want them to be, but this calm in the technicals is very odd.

For anyone that has ever experienced a tornado, it feels like the quiet stillness that precedes the unbelievably destructive freight train of destruction. I am not suggesting that a disaster is coming in the market, but this was so out of the ordinary that it was worth mentioning and trying to provide a descriptive metaphor. It could be that volatility is declining so I am looking forward to some hindsight in a few weeks to tell me what this all means, if anything. One of the techniques I use to develop my overall assessment of the market is to take note of abnormal or unexpected trading environments and when an event follows, I try to determine whether the previous abnormality seems related. If so, I bank that knowledge and if I ever see it in the future, it will affect my expectations of a similar outcome until it is proven incorrect. As I mentioned, this calmness is a new thing for me so other than being worth a mention and tracking it for the future, it says nothing about the immediacy or direction of any movement.

Best Buy came out with pathetic earnings today that fell way short of their expectations and lowered guidance for the year. Sales of higher margin products did not go well and their price cutting generated higher revenues in low margin categories with a weak margin as a result. If their quarterly report had gone the other way, you would have heard how BBY is a proxy for how wonderful the consumer is doing and how the technology sector is going strong through computers, software, and cell phones. OOPS! You won’t hear that crap today and conversely, you won’t hear that this is evidence of a problem with the consumer either. You will hear some analysts and big holders trying to cover their asses and minimize the battle by spinning the results and telling you why now is the time to buy BBY. Sorry bears, the bullish tone of investors, the bullish bias of financial media, and the huge momentum isn’t going to allow too much negative to happen. But what we do hear is the statement from the company that investors should not worry so much because more buybacks are on the way. Yippee! How comforting! You know I am not a fan of manipulating earnings through buybacks and it appears they couldn’t repurchase enough during the quarter to hide their operational issues. The romantic view of buybacks is that management feels the company’s stock is undervalued. How’s that concept working today? I guess they will be even more confident that they are undervalued if $2 comes off the stock based on these results. Another mythical reason for buying back shares is the comment that this is the “best use of corporate cash.” HMMMM!?!? Seems to me that a better use of that cash during the preceding quarter would have been to find a way to improve operations enough to generate better revenues, margins, and earnings.

Yahoo booting CEO Semel and then bringing in the founder Jerry Yang as his replacement is interesting but not inspiring. Founders of innovative companies are often whiz kid geeks who are great at developing technology but not so hot at managing the organization through a profitable strategy.  There are exceptions of course, like Mike Dell and Steve Jobs, and their exceptions are the sole reason I reserve hope for Yahoo and Yang.  Both of those guys ceded the top spot for a few years and came back.   Maybe Mr. Yang has developed a great set of skills while watching his predecessors Koogle and Semel - maybe not.  Experimenting with new ideas to improve on old problems was the theme that started “Jerry and David’s Guide to the World Wide Web”, but it’s a big risk to apply that strategy to a $38 billion company.

I cannot stand stock market rumors, especially the M&A kind started by some obscure newspaper. This is a recurring theme for me and I have written on Rumor Mills before so I won’t rail on that again. But today’s AA rumors started by the same rag, Times of London, and recirculating the same bullshit story they have been pushing since February is over the top. At some point, we all have a responsibility to not perpetuate this stuff and hopefully some well-meaning and duly appointed regulator (say SEC) is going to do their job and punish it.  I am all for freedom of the press, but using the media to start rumors about financial transactions and having the ability to profit from it is not covered by that protection. When they turn out to be untrue (AGAIN!), it needs to be investigated.   However, my disgust on this topic does not stop with tabloid journalism. The bigger issue is when credible media outlets report the rumors as if they are fact and that is inexcusable. Some organizations did a great job mentioning the rumor and simultaneously warning that it is an old and inaccurate speculation.  Others did not and I have lost some respect for them.

I am glad to see the “un-inversion” and “un-flattening” of the yield curve. It’s tough to say “conundrum” and I am hopeful we can avoid repeating it any time soon. Yet, it’s not all good news. When Senator Clinton (D-NY), said she wanted to limit foreign governments buying our Treasuries, the 10-year was at 4.55% and now it’s at 5.15%. Obviously, I am not blaming her for the rising yield, but the consequences of protectionism in the form of limiting foreign investment in the US has significant consequences for rates and the dollar. Putting it simply, if foreign investors go away, we are going to have to deal with significant inflationary situations.

While it would be nice to see more American ownership of our debt, that will take a long time and until Americans stop their gluttonous consumption and start saving more, it’s just not likely to happen. And if it does, we will be struggling with other issues surrounding the decline of the American consumer. There is no magic bullet here and all scenarios have dangerous consequences. Whatever the solution, it must be done on a gradual scale or markets will become greatly disrupted. According to Professors Francis and Veronica Warnock at the University of Virginia, American long term interest rates would be significantly higher without foreign capital flowing into Treasuries. A rapid change in their holdings or the value of their currency as per the suggestion of other protectionist politicians would put a major hurt on our economy.

With foreign investors doubling their percentage since 2002 and now owning a record 80% of the Treasury notes due in 3-to-10 years, I can understand Senator Clinton’s concern. However, her comments were initiated by the February stock market swoon and concerns that the US economy can “too easily be held hostage to the economic decisions being made in Beijing, Shanghai and Tokyo.” That anxiety is overblown as was the similar fears in the 80’s when everyone was panicking about Japan’s ownership of US assets (Real Estate and Treasuries). Remember that? It didn’t turn out to be a problem then and I doubt it will now. Besides, China really doesn’t have much of an impact on our overall Treasury debt. They do affect many other challenges to the US economy, but I just don’t see the threat in their ownership of Treasuries. Here’s a great analysis of the whole thing so you can decide for yourself.

Central bank currency reserves swelled to about $5.5 trillion this year and they are buying Treasuries with dollars accumulated from exports of goods and oil to America. In a sense, we are funding their ownership of our debt due to our insatiable appetite for cheap imported goods and our inability to reduce energy consumption. Yet, it looks like foreign governments have reached their limit and Sen. Clinton may get her way by default. China has made it perfectly clear that they are looking for alternative investment classes such as non-government bonds and Private Equity through its planned holdings of $3 billion in Blackstone. Japan, the largest foreign holder of Treasuries with about $600 billion, have slightly reduced their ownership of US government bonds this year. Other countries are following suit and the growing importance of Sovereign Wealth Funds are evidence of this shift in asset preference. As a result, I suspect that US investors will start paying more attention to the Treasury TIC data going forward (or at least they should.) Another factor I am watching are the spreads between 10-year Treasuries and emerging market debt and junk bond yields both of which are currently trading at historically low levels. Lastly, I am following the interest rate differentials of US Treasuries versus European and Japanese bonds of similar maturities.

The last several weeks of stock market action have seen multiple overreactions to interest rate moves. Don’t you find it interesting that the 10-year yield increased 40 bps from the beginning of March until two weeks ago and the markets just ignored it? I am not saying they should ignore them now, but this is a sentiment change and it has been building for months. I agree with Bill Gross and Paul McCulley of Pimco that the 25-year bull year run in bonds is likely over. But I don’t think you need to make drastic moves like has happened this month. You probably have some time to adjust as multi-decade bullish runs don’t turn on a dime in bonds or stocks. I don’t expect foreigners to reduce their holdings of Treasuries, but I don’t see much of an increase either. So my best guess is that we are now in a new tug of war between the risk in bonds and the risk in stocks (US and foreign). I expect that any serious selloffs in stocks here and abroad will give a short term reduction to bond yields from a return flight to quality. When those crises resolve themselves, bonds will take their turn and it will likely be a back-and-forth for quite some time. However, global inflation is here to stay for a while and in the pursuit to find higher returns, the US doesn’t look like a great place to put new money to work in Treasuries.