Normally, I look at the Federal Reserve’s Commercial Paper information a few times per week. I like to keep on top of the real data rather than reading the spin from major media sources. I know it’s easy to forget about ABCP or pretend that the liquidity issues were resolved over the past few months. After all, the stock market is higher and pushing back to record levels. Isn’t that when investors choose to ignore reality the most? I am sure that more than a few investors and media hypesters believe that all that Fed liquidity injections and the lowering of the discount rate by 125 basis points over the past 2 months and 75 bps in the Fed Funds rate must have solved our problems. But so far, I have not seen evidence of the ABCP market being priced properly or traded freely. Not even an M-LEC plan brought to us by the Treasury department has been able to convince me things are all better now.

So imagine my surprise when I checked in on the commercial paper maturity distribution data at the Fed’s site. It hasn’t been updated for a couple of weeks and still has October 5th and October 12th data(most recent). Here’s what it says near the top of the site:

“This page will be updated at the discretion of the Federal Reserve Board of Governors”

For the record, I also routinely look at the yield spreads and outstandings of commercial paper at that site. The yields on various classes of CP are inverting, but that is not unusual unless it is sustained and becomes more extreme. The outstandings don’t look too surprising. By the way, both of those have been updated per usual and the data is current. Unfortunately, I cannot tell you the same thing about the maturity distribution page. Hopefully, the webmasters at the Fed will update it soon. It would really suck to have a big problem and not see it reported until after the fact. I am not saying there is a problem. But just that it would suck if the page was not “updated at the discretion of the Federal Reserve Board of Governors.” I’ll let you know what it looks like when I see the current data.

Mark-to-Market has been tough on the financial sector stocks. But not every holder of CDO’s are publicly-traded like Merrill or Bear Stearns where we get to dissect their financial statements. In fact, we know that pension funds and state treasuries were buying up this crap as late as this spring. Did they give it all back? Did they sell it somehow and get it off their books? I doubt it.

After the 2006 Pension Protection Act and the 2006 FAS 158, I think it’s worth watching what big pension funds are doing to value the assets that no one else knows how to value. Pension accounting is still a giant fudge factor, but less so than the system that existed in 1999-2002. Back then, you might remember all the research floating around about the huge underfunding of pension obligations. We had declines in asset values (stocks) and declines in interest rates that increase (mathematically) the pension liabilities.

HMMM? Where are we in 2007? It might be tough to have to mark-to-market CDO’s in the pension portfolios but that’s what I believe the PPA and FAS 158 require. Note that the implication for corporate balance sheets and income statements are a bit tougher for the underfunded portion than they used to be. Oh - and if Bill Gross gets his way and interest rates declined to 3.5% or 1% real (if you believe inflation is only 2.5%) - well, if rates drop - then do the math on the pension liabilities. Boy, I hope stocks (pension assets) don’t fall from here at the same time rates decline and before those CDO’s get reinflated.

I had to wait for a few hours after the FOMC decision before writing this useless summary - yep - useless. The Fed cuts and statement are being parsed, interpreted and spun like usual - totally useless commentary from people in love with rate cuts. So my thoughts are no different. Useless. My comments about other people’s useless comments are (you guessed it) exponentially useless.

Do you really think that anyone is going to dare say that the cut was bad? Of course, you’ll hear a few that say it should have been more, but for the most part, the bulls don’t risk upsetting the momentum on such an important day (to them.) Just think back to the September 18th cut - same basic bullshit. But does it overwhelm the realities of the troubles we face for slowing growth, credit problems, asset problems, inflation problems, currency problems? Who cares!?!

Listening to some interpretations of the hawkish commentary and hinting that the next meeting would not have a cut, I was treated to the concept that the previous easing did enough already. That this one was just an insurance policy and that the economy was rebounding off September’s decision. Wow! Some have even suggested that the Fed didn’t really mean they wouldn’t cut, but it was just their attempt at gaining credibility. Wow! Besides, don’t we already know that if the market demands a cut, or prices one in, that Ben doesn’t have the balls to upset the markets he has worked so hard to calm? I really enjoy hearing (NOT) interpretations of what the statement meant. And what Hoenig’s dissension meant because we have to believe it had to mean more than just a no vote. It had to be some kind of secret signal to keep us offguard.

Of course, this all just adds to the next drama opportunity when a bad economic report comes out or the next time markets decline and CutThroat needs to “calm” investors by rumoring an intermeeting cut. If you haven’t heard it hundreds of times in the last few hours, the Fed left room for future cuts (not 0% yet) and they will be evaluating future economic reports to remain flexible enough to cut or not cut. Impressive. So what do you get out of listening to what Larry Kudlow thinks of the cut versus Bill Gross versus Bob McTeer or some other smartie?

The market got what it wanted…for now. I didn’t want one thing over the other as my performance at HEDGEfolios is independent of interest rate decisions. And since no one should really be spending time worrying what I think about Fed rate cuts, I’ll stop.

In 15 minutes, the FOMC will release their decision on rates. The majority of the market really cares what happens. I suspect that many people are “true believers” that government intervention is necessary to save the economy. Others who want a cut just want a cut because they feel that lower rates will push the market higher and get us back to record highs. And yet, there is a subset of us who see a bigger picture where rate cuts have both positive and negative impacts. But nevermind that for now. Just look at what happened after the last cut of 50 bps on September 18th. The S&P 500 went up 50 points in about 3 weeks before it peaked and then declined 80 points from the record high before the Fed rumors started flying again. So in the end, the last cut provided short term gains for traders - that’s it. The rumor a week and a half ago about an intermeeting cut stopped the decline and pushed us higher again. A nice trade, but is it investment? I don’t see it. Since mid-August, the FOMC has made great decisions for traders, but as for longer term investors - I guess we’ll have to wait for a long term to find out. Just ask yourself, if the market is truly so bullish and all the negative stuff I keep talking about is irrelevant then why are we not a lot higher on positive fundamentals? Who is selling? If you shouldn’t fight the Fed, then who among the bullish crowd are fighting?. Who are the hypocrites that keep selling into the strength just so they can trade on the next Fed rumor or meeting?

I’ve been doing a lot of thinking about my market view versus the predominantly bullish tone that has been in control for the past 5 years. I know it seems that I am never bullish, but if you just take a look at the HEDGEfolios Timing Indicator, you’ll see that there has been a bullish reading 79 of the 148 weeks it has been shown here - that’s 53% of the time. But the market has been extremely bullish except for a few weeks over the past 5 years so it feels worse than it really is and besides, HEDGEfolios has greatly outperformed the S&P 500 each year I have been publishing this stuff.

So why am I bearish? I cover almost 4000 stocks and ETFs - not the 500 shown by the S&P index everyone seems to use as a benchmark and certainly not the 30 shown in the DOW. My perspective is a lot wider and includes all market caps, not just the biggies. Right now, if you pull out about 10-15 stocks from the S&P or Nasdaq composite, they don’t look so hot. There is a massive divergence right now and it’s not getting a lot of attention in the major media. I suggest you take notice because things like this usually don’t last forever and when they stop, it gets ugly fast. So the next time you get all hyped up about a few big companies doing well, think about the other side of that.

Another reason HEDGEfolios results in a bearish view right now is that I do not believe in weighting one stock over the other. I treat every stock the same. Obviously, that is not in line with construction of the major indices but it’s my preference. I don’t like the bias that the high price of a stock has in the Dow or the extra weightings given to a few big stocks in other indices. So when a few of the biggies are doing extremely well, you get the situation we have now.

On a macro level, I am bearish because I believe a lot of the doom and gloom the permabulls love to ridicule or pretend does not exist or use in contrarian ways. I believe we have stagflation with the inflation side being much worse than is being measured and reported by our government. I believe that the economy is struggling and yet, not as bad as some people.  I don’t believe the Fed is the answer to all the market ills.  In fact, I feel they are contributors to some of the things that will end up hurting us.  Many people that are bullish seem to be placing all their faith in the Fed and that is one big difference between my view and the market view.  I feel the consumer is in trouble but spending anyway. If you’ve ever been around a manic depressive person, you’ll note that they seem happy spending while the real part of their life is in deep trouble. I feel many consumers and the measurement of their purchasing behavior reflects this manic depressive scenario.

There are other reasons why my view is not bullish but it really doesn’t matter much. If I obsess about things that the majority of investors ignore, I lose. So I try to balance my personal thoughts with what other people are doing.  I am willing to be bullish even though I think it’s stupid and dangerous to do so.  The difference is that I never stop being a skeptic and cynic and pessimist and realist and all the other negative names associated with how I do what I do.   Right now, there is great risk in this market and while that could change very quickly, I am comfortable not being bullish.

Despite last week’s rally and moderation of the declining slope which began on October 15th, I am still bearish. With the impending FOMC rate decision and the bullish views that intervention will juice stock prices, it’s not easy to be bearish. But that’s what I am seeing and again this week, I gave more DOWN signals(181) than new UPs(89).

The economic data is all over the map with GDP strong, ADP jobs stronger, etc. and other things like housing and consumer data looking weak. Can you say stagflation? The economy is weakening - that is hard to dispute. We all know we have inflation whether the government data wants to report it or not.

It’s been interesting to see the discussion of inflation effects from food and oil lately. Finally the people who keep harping on the fact that input price inflation is not being passed onto consumer inflation are having to deal with the inevitable impacts of that argument: margin compression. If your costs keep going up and you don’t pass it on, you are by definition less profitable. If you finally start passing it on you may improve margins but you will have inflation and eventually, demand destruction/declines in revenue growth. Overall, it’s a tough situation for producers and consumers, employers and employees, and yes, it’s tough on the Fed. I am glad they had two days to discuss everything and I hope they had a contentious debate. If they didn’t and found it really easy to make their decision, they are clearly not living in my world.

Some people just don’t get Halloween anymore. When I was a kid, it was much simpler and more fun. We put on costumes, we walked the city neighborhoods without an adult and we got a bunch of candy. In rural areas we went to the firehouse or school to gather our goodies and play games. Overall, it was a fun day. Of course, this was a bit before a few psychos put harmful things in the Trick-Or-Treat bag and the media sensationalized it to the point that the adults are more scared than the kids.

Today, Halloween starts at 2:15 with the FOMC decision on interest rates. I am tired of thinking and writing about the Fed so I’ll keep this short. I’ll take whatever they give out, I just hope Ben isn’t one of those health nuts that decides not to give out candy (click here for a great post on bad Trick-or-Treat items.)

For the past week and especially since Sunday night, CNBC has barraged us with second-by-second “reporting” of Stan O’Neal’s departure from Merrill Lynch. Charlie Gasparino has gotten a lot of air time reporting nothing - unless of course you find reporting a new rumor to replace the last rumor that he reported incorrectly to be some example of journalism. We need to expect more from the people who pump us full of this crap. Instead, I suspect it’s about as engaging to viewers as car accidents are to rubberneckers who love to slow down and watch. Apparently, people love to listen to rumor reporting. I do find it funny that Gasparino’s wishlist of rumored replacements which centered on Fink, Fleming or McCann hasn’t materialized (except for the “interim co” whatever title Fleming got). For all the rumor reporting by Gasparino, I never heard about Cribiore or Fakahany. I thought I missed those insights until Gasparino had a hard enough time pronouncing “Cribiore” that it appears he may have never even heard the name while on his top secret phone calls to “people familiar with the matter.”

When Merrill Lynch appears to need to raise capital by selling its Bloomberg stake, that concerns me. It’s a scary thought for a capital company to need to conserve it. Where did Merrill’s capital go?

A year ago, Merrill’s CFO Jeff Edwards was bragging about its increased risk strategies. “We will add more risk. And we expect to drive more trading revenue as a result of that.” How’s that working out? They bought First Franklin for $1.3 billion in September 2006 (click here for press release) to gain exposure to the lucrative area of subprime lending. How’s that working out? They used a bunch of capital participating in big Private Equity buyout deals like HCA. How’s that working out? They did a ton of CDO investing. How’s that working out? They’ve been increasing their share buyback plans during the past few years. In 2006, they bought $9.1 billion of MER stock and so far in 2007, they bought $5.3 billion. At the end of April 2007, Merrill announced plans to repurchase up to $6 billion of its shares and CFO Edwards said the plans “will enable us to continue to be active and flexible in managing our equity capital.” How’s that working out?

So if you were wondering where all the capital went to - it’s easy. It went to all the places that investors loved a year ago. Private Equity, Subprime mortgages, riskier trading, riskier loans, CDOs, off balance sheet entities, buybacks, etc. etc. And while in hindsight, that looks a bit dangerous, I’ll just remind everyone that investors cheered these moves at the times they were announced. And as for the indignant analysts that feel blindsided by the unexpectedly crappy results last week…I could post a few quotes from them saying how encouraging Merrill’s strategies for capital allocation and increased returns looked to them.

It’s easy to look at Merrill’s problems and complain or cheer Stanley O’Neal’s departure as if he was the sole responsible party, but there’s enough blame to pass around.  Investors and analysts fell in love with this stock and others like it for doing all the stuff that fueled the big rally.  Now they hate it for the same reasons.  Who’s fault is that?

If a tree falls in the forest and no one is around to hear it, does it make a sound? This longtime philosophical riddle centers on the difference between reality and perception. In a similar tone, I ask the question….

If earnings expectations formed 3 months ago were 81 cents per share and today the company reports 82 cents, did the company beat?

Don’t dismiss the basic math so quickly. Give it some thought. I’ll give my opinion later.

UPDATE 9:00 am EST 10/30/07.

This riddle of mine really doesn’t have just one answer. Everyone’s perception of reality differs and all are relevant. My take is that the 5% decline in the USD index since the end of July means that the example I gave above is actually a miss. The value of the dollar means something to me. If at the same time (3 months ago) I would have had an expectation that the dollar would depreciate by 5%, then I would feel like the 1 cent beat was truly a beat. But 3 months ago and for much of the past last quarter, I was expecting the dollar to stablize around 80-81 on the USD index and head marginally higher. Obviously I was wrong on that but when it comes to the value of earnings for me, I need to see companies exceeding their estimates.  I know this sounds knitpicky but after all the talk from large cap lovers who are constantly saying how wonderful the weak dollar is for exports and the currency translation bump to earnings, isn’t it reasonable?  If the incremental benefit of a falling dollar gives us more nominal earnings, the real value of those dollars should be relevant.  Maybe I am the only one that cares.  It’s kinda like that falling tree in the forest, except in this case there are many people there to hear it.  They choose to be deaf.