August 6, 2013

Market Commentary
By Art Cashin
Statistics Fair Value Buy Program Sell Program = = = -505 -410 -60

Prepared by UBS Financial Services Inc.

Cashins Comments An Encore Presentation
On this day in 1890, a piece of Americana began. And, it being America it had to do with violence, punishment, technology and enterprise. In Auburn Prison, in New York, a man named William Kemmler (a/k/a Johnny Hart) was the first person executed in the electric chair. And, as often happens in most American initiatives the first try went bad. And, all because he made the simple mistake of accidently hitting his mistress, Tillie Zeigler, in the head, with an axe, 12 times. But America wouldn't be America without partisans to an issue. And, Kemmler's electrocution had lots of pros and cons. One activist pushing for the execution was Thomas Alva Edison. On the other side was his business adversary, George Westinghouse. And, while the debate was officially about capital punishment, in America naturally, the basis was commerce. Edison had the head start in electricity. But his system was direct current (DC). Westinghouse had introduced a challenge with alternating current (AC). The AC was gaining on Edison. And, although the original electric chair was developed at Edison's laboratories, the NY Legislature approved an experimental model that used the Westinghouse (AC) method. But, lest you think that made Westinghouse the winner, recall one more fact. Both sides wanted folks to put electricity in their homes. And, nothing could kill that idea easier than newspaper headlines of an electrocution in a chair proving electricity can kill. (Not in my house.) So, for months, Edison fostered comments that said - - "Kill the Killer!" And, Westinghouse, whose system was to be used, feared economic defeat. So, he fostered vibrant comments to prevent the use of capital punishment. Perversely, even today, both sides of the capital punishment argument use variations of what the two competitors presented. In the end, Kemmler was electrocuted - - they had to throw the switch three times - but in the end AC won out anyway. There was little electricity in Monday's market according to the reports I've received. Stocks showed some volatility in the first two hours of the session but then went comatose and closed mixed in the lowest trading volume of the year to date. Of Calendars, Customs And Consequences Since, thanks to Wonder Woman, I had the luxury of a four day weekend, I thought it might be inadequate to simply review Monday's action based on telephonic input from the FoF. Instead, I thought a multi-day synopsis might be in order to put things, or the market, in perspective. Late Thursday morning (my last day on the floor), I was chatting about the market with my friends, Carl Quintanilla and Kelly Evans on "Squawk on the Street". The topic turned to why the market was managing to move higher despite the bump up in rates that was occurring that morning. I suggested that it might be "new money for the new month". Since Thursday was the first day of the new month, the pent up pension and other funds were being

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deployed into the market, off-setting worries about the rising rates. I further noted that the new month process tended to influence markets for two or three days and could move into the next week. In the old days, the process was somewhat different. On the first business day of the month, portfolio managers met to finalize the percentage of funds to be allocated to each sector or asset class. The second day they would decide how much to invest in each stock. On the third day, they would deploy the orders, usually making for a volume surge on the third business day of the month. Now, in the fully digital age, they start instantly, making for, the above noted, two to three day process. Wonder of wonders, day one saw the market shrug off the rate rise and rally in the afternoon. Day two saw the market fall again in the morning (in response to weak payrolls) but recoup and close higher as the pattern suggested. Monday, as noted above, saw a narrow range and a rather mixed close. That might suggest that the process was ending or had exhausted. The very low volume, however, was an anomaly. Despite a summer Monday syndrome, the involvement of "new money" should have made things a bit more active. We'll have to watch for further clues in the next few days. The Week Ahead Based upon published data, the watercooler wizards are guessing that this week's calendar may look something like this: Tuesday: (8:30) (10:00) (1:00) Wednesday: (7:00) (12:30) (1:00) (1:30) (3:00) Thursday: (8:30) (1:00) (4:30) (10:00) RBA Rate Cut? Chain Store Surveys Trade Deficit JOLTS Survey IBD Confidence Index Three Year Treasury Auction Chicago Fed's Evans China Trade Balance BOE Guidance Mortgage Apps. Philly Fed's Plosser Ten Year Treasury Auction Cleveland Fed Pianalto Consumer Credit Treasury Strips BOJ Opines Ramadan Ends & Several Markets Closed Greek PM and President Confer Initial Claims Thirty Year Treasury Auction All The M's Wholesale Invent.

-$43B 3.85 mln. N.A.

N.A.

$15.0B

345K 0.4%

Friday:

As you can see, this week does not present a very heavy calendar. Traders will look to the auctions and Fed speak to get a handle on the changing rate picture. They will also focus on the end of Ramadan to see if it brings geo-political surprises. Of Tapering And Tinder And Knotty Problems Dallas Fed President, Richard Fisher, spoke in Oregon yesterday. The audience was the National Association of State Retirement Administrators. His message, as usual was anything but narrow. He touched on the Quantitative Easing (QE) programs and what they have done some things beneficial and not as well as some problems that may occur if they are not reined in. (We presume these state pension fund managers were highly attentive, since five years of zero interest rates have probably left them all underfunded and some badly.) As is his much appreciated wont, Mr. Fisher had a classical allusion, calling the Fed's current quandary a Gordian Knot of its own making. In a series of slides, he showed how the Fed's portfolio mix has change drastically through its QE operation. He then said: Whereas before, our portfolio consisted primarily of instantly tradable short-term Treasury paper, now we hold almost none; our portfolio consists primarily of longer-term Treasuries and MBS. Without delving into the various details and adjustments that could be made (such as considerations of assets readily available for purchase by the

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Fed), we now hold roughly 20 percent of the stock and continue to buy more than 25 percent of the gross issuance of Treasury notes and bonds. Further, we hold more than 25 percent of MBS outstanding and continue to take down more than 30 percent of gross new MBS issuance. Also, our current rate of MBS purchases far outpaces the net monthly supply of MBS. The point is: We own a significant slice of these critical markets. This is, indeed, something of a Gordian Knot. Let those numbers sink in. The Fed is buying 25% of gross Treasury issuance (more of net). They are buying more than the total new issuance of mortgage bonds. To use my own classical allusion, the Fed will have to repudiate Archimedes if they hope to taper or tiptoe out of this pool without changing the water level. Good speech. Lots more meat. Worth a revisit. Consensus Summer sluggishness may be disrupted by a geo-political surprise or unguarded word from Washington. Be wary of rumors and stay very nimble. Trivia Corner Answer - The unscrambled words (we think) are: A) MERASKHLAC = Ramshackle; B) CAROUGIS = Gracious; C) DEOLATINOS = Desolation Today's Question - "Just gimme the darn fish" - Newlywed Mrs. Kaye went to the fish store to purchase a dinner treat. The store owner turned out to be her old math teacher who said his scale was broken but offered another way to figure the weight. He said, suppose the tail weighs nine ounces, the head as much as the tail and half the body, and the body weighs as much as the head and tail together. Now, what would be the weight of the fish?"

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