We are heading into the home stretch here at EconomyBeat — the project concludes at the end of April. Thus, this will be our last post on the stock market. Last fall, with stocks enjoying a half-year’s worth of gains, we asked if a September swoon was in the cards. A bullish month later, we wondered if an October apocalypse might prove the market’s undoing. Then, nearing November, we posted a warning from stock guru Jeremy Grantham on a coming correction.

Yep. Wrong, wrong, and wrong. We’re at Dow 11,000, S&P 1200, and Nasdaq 2500 (any moment now). With the bulls running free and the bears still in hibernation, is it as simple as happy days are here again?

Not really. Last week, New York Times columnist Floyd Norris wrote about the lingering pessimism in the face of mounting evidence that the country is experiencing an economic recovery.

Regarding the stock market, he wrote:

Which means a lot of people who pulled their money out of the market in the heart of the crisis have missed out on some big gains over the past year. Which is understandable — once bitten, twice shy; twice bitten (remember the dot-com bust just 10 years ago?), stock up on food, bottled water, and ammunition.

Here are some random opinions from various stock sites about whither and whence the stock market is headed. (Disclaimer: Predicting the future is only possible when using a time machine, which is expensive.)

Prudent Bear: Botox Economy

by Satyajit Das

Stock prices assume a rapid recovery in corporate earnings. Beating much reduced expectations and a return to previous earnings levels are easily confused.

The “E” in the P/E ratio remains difficult to forecast. Equity pricing assumes a return to 2006 levels when U.S. corporate earnings represented a record share of profits in GDP.

In 2009, full year earning per share for the S&P 500 were around $60, down from $65 in 2008 and 30% below peak earnings of $85 recorded in 2006. In 2009, company results reflected the effects of aggressive cost cutting and the benefits of government support. To return to pre-crisis levels and rates of growth, improvements in revenue and underlying demand are necessary.

Stocks are also not cheap. Jeremy Grantham, founder of Boston-based fund manager GMO, recently noted ruefully that after 20 years of more or less permanent overpricing of the S&P 500, the market saw just five months of underpricing after the March 2009 trough.

Investment Watch: P/E Ratios Set tO Rise in Q4 Through 2010

Aug. 2009 – The New Normal theory states that the recovery will be long and hard with GDP at 1.5 – 2.0 for possibly a decade.

If true, Earnings will bump along at a similar pace and will not recover to the high Earnings before the recession. So now we have low Earnings.

Why should the Price part of the P/E ratio rise?

Simple. Once investors that have nearly a trillion dollars earning nothing in money market funds come to accept this new low Earnings rate, they will decide to jump into the market because it is the lesser of two evils. This will bid up the price of stocks based simply on greater demand, not greater performance.

So now you have a new LOW Earnings number and a new HIGHER Price number and the new P/E ratios will jump higher than before the recession.

Again, this will not signify a higher expectation of future earnings as in the past, but instead, will reflect the New Normal of low growth, high unemployment and a long drawn out 5 years of debt defaults in credit cards, commercial loans, and housing mortgages which will force the further consolidation of the banking industry.

WHAT THIS MEANS TODAY IS THAT YOU CAN INVEST IN JUST ABOUT ANYTHING AND YOU WILL SEE A GAIN IN YOUR POSITIONS JUST BECAUSE OF THE NEW MONEY POURING BACK INTO THE MARKET.

The Reformed Broker: Vacillating Bulls and Dogmatic Bears

To complement the slow but persistent grinding higher of the major stock market indices, we’ve now got two new groups of market commentators – the Vacillating Bulls and the Dogmatic Bears.

I’m trying very hard to tune out both camps at this juncture in an effort to hear what the market is telling me. It is not easy, they are everywhere.

The vacillating bulls are predominantly coming from the the asset management/fund complex and they are typically those who have been underinvested or too risk averse. Their public proclamations of “why fight it” and “ok, NOW I’ve finally gotten the economic confirmation I’ve been waiting for” are a distraction. I do not view their recent prominence in the mainstream press as a market positive, their utterances smack of capitulation.

The dogmatic bears are less threatening to the market’s rise than the neo-bulls are, because they are basically repeating themselves ad nauseum at this point and very little of their dogma is any different from what it was a year ago and even two years ago. Their missives are laden with more dropping shoes than the closet of Imelda Marcos in an earthquake. Yawn.

The vacillating bulls should spare themselves these embarrassing media appearances, they are not “furthering their brands” as they say in PR Speak. The dogmatic bears should likewise cease their spewage and rethink a few of the tentpoles of their argument – to continue the rhetoric against the backdrop of comps turning positive across most surveys would at this point cross over into slapstick territory.

It is one thing to change your mind or stick to your guns, it is quite another to become a public spectacle while doing so.

The Reformed Broker: Hypselotimophobia – The Fear of High Prices

f you are uncomfortable buying or trading stocks that are at new highs, this is not your tape.

There are only two categories of investors who are unfazed by the deluge of new 52 week highs – the nimble and the desperate.

The nimble are in a position to act quickly should things change. With every tick, they are tossing blades of grass into the wind to gauge direction in real-time. If you run a machine shop or have a waiting room full of patients, this is not feasible.

The desperate are most likely professional runners of money, those without the luxury of waiting for their pitch. They must get more stocks on the books to show that they “didn’t miss it” and they must do so regardless of the top-tick risk. An ill-timed buy today can quickly be described as an “intermediate-term” pick to the investment committee if need be, but a swollen cash position in a vortex of up stocks cannot be explained at all.

There’s a bumper crop of gaps and breakouts, hundreds of 52 week highs daily – so why isn’t everybody happy?

Most market participants are not incredibly nimble nor are they under career pressure to buy at any price. The drumbeat of daily new highs can be more frustrating than fun for them.

Unless you’re in the habit of buying new highs, the ascent of this market has been way less enjoyable over the last 6 weeks than the headlines would lead outsiders to believe.

If you are a a hypselotimophobe, there isn’t much for you to do at this juncture, so maybe you want to just chill out.

The Pragmatic Capitalist: Morgan Stanley: This Is Not the Utopia Investors Are Pricing In

MS is one of the few big banks that isn’t buying into the utopian environment for equities. In fact, they believe equity investors are ignoring several risks here – primarily the global tightening that is occurring. They were one of the few banks that actually issued a bearish fiscal 2010 outlook and have remained skeptical of the rally thus far.

Morgan’s analysts believe the equity market is pricing in a permanent utopia for risk assets – a period of high growth with permanently low rates, but in reality, they say the Fed is ready to start altering their accommodative approach:

“Clearly the markets are in a utopia-type environment; with the Fed seemingly on perma-hold and upside in growth… We are on the other side of those views. As we see it, strong growth will ultimately be met with withdrawal of liquidity, and the risk markets will not like that medicine.”

MS says equities could be at risk of substantial declines should the tide shift from the “rates on hold” camp to the “rate hikes” camp. With the VIX falling to its lowest level since Summer 2007 it certainly appears like investors are complacent and pricing in a utopian environment. Unhedged investors might find themselves in their own personal hell if an unforeseen risk should creep into the equity markets.

Slope of Hope

Signs of extreme bullishness abound, whether in the plummeting VIX, net long speculative interest in the Nasdaq, put call ratios, bullish percentage indices, new highs, Dow 11000 hoopla, the Newsweek cover story on the Comeback Country, the $SLIX indicator, they almost got Art Cashin to capitulate on CNBC et. al. Someday, maybe soon, this will reverse direction, but who knows if there will be any bears left to see it happen. One measure of declining bearishness is seen in short interest…The upshot — the wall of worry represented by shorts is a smoldering pile. To be short has been to be annihilated. It is within living memory when all these values were much higher, and ETFs were often hard to borrow. Will this evacuation of standing shorts accelerate the speed of the decline should it ever happen? Stands to reason, but reason is not leading the charge right now…

Financial Sense: Sovereign Debt Disaster Will Favor Hard Assets

by Justice Litle

Last week, in “How to Protect Against Currency Collapse,” we talked about the mounting debt problem and how Western governments will deal with it. If the debt is issued in your own currency, you ultimately just print more currency to inflate that debt away. (If the debt is issued in someone else’s currency, you are in deep trouble… as Greece, Latvia, Iceland and others have all found out.)

Right now the global economic recovery has the appearance of being cost-free. This is due to an age-old confidence trick known as “ignoring the bill.” To pull off this trick, you spend huge amounts of money on a high-limit credit card… ignore the mail when the bill comes due… and conveniently forget to reconcile your accounts.

Complacency reigns because the true costs are not being tallied. The Bank for International Settlements – an age-old central banking watchdog based in Switzerland – is having none of it.

The “simmering fiscal problem” of sovereign debt is set to bring industrial economies “to the boiling point,” the BIS reports in a new study. “Bond traders are notoriously short-sighted,” the BIS further scolds, “assuming they can get out before the storm hits… the question is when markets will start putting pressure on governments, not if.”

The Bank of International Settlements further believes that, if we do not turn from this path, inflation will spiral out of control. “Monetary policy may ultimately become impotent to control inflation,” the BIS scowls, “regardless of the fighting credentials of the central bank…”

Where Have You Gone, Joe DiMaggio?

Try as they might, investors will not be able to ignore the sovereign debt problem forever. When the reckoning comes due, the printing presses will kick into hyperdrive… and faith in the system will crumble (or perhaps shatter like brittle glass).

At this point, investors will turn their lonely eyes to hard assets, looking at precious metals and basic building-block commodities in a new light.

Up till now, hard assets have more or less been treated as a “hot money” play on global economic recovery. Price movements have been linked to speculative appetite and the general degree of optimism.

The onset of a sovereign debt panic could thus lead to a short, sharp and temporary drop in hard asset prices, as the “hot money” beats a hasty retreat. But over time, a post-crisis shift in psychology will occur. In a world where all major currencies are being debased, oil and metal in the ground will stop looking like speculative plays and start looking more like stores of value.

A Pending Rocket Ride

…There is widespread belief that the U.S. economy is in a sweet spot, with a goldilocks-like ability to push profits up while keeping short-term interest rates near zero. The Fed is widely revered at moment for having succeeded in its mission. Some bulls are even musing aloud now whether the “great recession” was even all that “great” – as if it were over and done, finis, all consequences postponed indefinitely.

It is an environment, in other words, that very much favors “paper” (leveraged financial plays) over “stuff” (hard assets).

But when faith in Western governments’ ability to shoulder the sovereign debt load evaporates, that equation will reverse rapidly.

And so, after a period of renewed fiscal panic, in which it is driven home, yet again, that the grossly indebted central bankers of the world do NOT have control – only the illusion of it – a need to take shelter from the ensuing inflationary paper-debasement storm will become paramount.

THAT is when hard assets will become most attractive… not as hot money speculative vehicles, but emergency stores of value. A true rocket ride for commodity prices – the likes of which we haven’t seen yet – could be the result…

As the sovereign debt crisis unfolds, investors may well flock to these “hard” currencies in droves as their home-based scrip turns to confetti.

Business Insider: So, How Are Stock Prices Now That We’re Back At DOW 11,000? They’re 30% Overvalued

So, how do stock values look now that the DOW is back to 11,000?

Not outrageous. But certainly not cheap.

Measured using our favorite valuation technique, Professor Shiller’s cyclically adjusted PE analysis, the S&P 500 has a PE of 22X. The long-term average (1880-2010) is about 16X. The current level is actually close to the big bull market peaks of the past–with the exception of the gigantic one that peaked in 2000.

Note a few things:

* The long-term average for the cyclically adjusted PE is about 16X.
* Stocks have spent vast periods above the average and vast periods below it, usually in multi-decade cycles
* We’ve just descended from the longest period of extreme overvaluation in history, suggesting (to us, anyway) that the next multi-decade cycle is likely to be below average
* At today’s level, 1200 on the S&P, stocks are trading at a 22X CAPE, about 30% above the long-term average

Now…valuation doesn’t tell you anything about what will happen next…. (S)tocks can get a great deal MORE overvalued than they are today. And they can stay even more overvalued for a decade or more.

But what the apparent overvaluation does tell you–or, at least, has told you in the past–is that your future long-term returns will likely be below average. There’s a strong correlation between starting valuations and ending returns (high valuations lead to low returns and low valuations lead to high returns). And today’s valuations can now be described as “high.” (Not extreme, but high.)

Yes, you can argue that “it’s different this time.” You can argue that, since stocks have traded at an average CAPE of more than 20X for the past two decades, we’re in a new normal. And you might be right. But they don’t call “it’s different this time” the “four most expensive words in the English language” for nothing.

The Daily Reckoning: Stop Worrying About the Financial Crisis

by Bill Bonner

When will the de-leveraging bust resume?

When we stop worrying about it.

This afternoon, we realized that deep down, our feelings had changed: we had stopped worrying about a resumption of the bear market.

Not that we’ve stopped thinking about it. We think about it every day. And we’re sure it’s coming. But we have stopped worrying. No matter what we think, we feel that somehow this will work out okay…we’ll be all right. We’ll stumble along…

Thinking and worrying are two very different things.

Thinking is purely superficial. It’s the worrying that counts. When you’re worried about a financial crisis, you sell out your risky positions and hunker down with cash. When you’re not worried, you’re happy to float along… You’ll change course when the danger becomes more imminent, you tell yourself.

But don’t forget:

This is a Great Correction. It began almost exactly three years ago, when New Century Financial – the second largest subprime mortgage company in the US – filed for bankruptcy. It will continue until debt levels in the private sector have worked themselves down to more reasonable levels.

How long will that take? Maybe 5 years. Maybe 20.

Meanwhile, you can’t expect much from this economy. Businesses are not going to add jobs. Consumers are not going to shop.

Is that all there is to it? No, there’s a lot more. That’s why it’s a Great Correction and not just an ordinary run-of-the-mill correction.

…there’s the correction of the huge the expansion of credit

…there’s also the correction of the stock market

…and the correction of the real estate bubble

…and the correction of the world economy and its dollar-based monetary system

Here’s what to expect:

…US stocks will begin falling again

…foreclosures, already running at twice their normal level, will increase

…bankruptcies, now at record levels, will go up too

…bonds will eventually collapse (but may turn out to be decent investments for a while longer…as the de-leveraging continues)

…the dollar too could go up when the crisis feeling returns; over the longer run it will be dangerous to hold it

…China will go through a financial crisis (potentially ‘Dubai times 1,000.’ As Jim Chanos puts it)

…states, cities, and entire countries will declare bankruptcy…

Those things don’t seem like threats to you? Well, they don’t feel like threats to us either. But that’s what makes them so dangerous…

…we’ve stopped worrying about them.

InvestorsInsight.com: Is This a Recovery?

by John Mauldin

I think we are in for yet another Muddle Through period, at least for 5-7 years and maybe for the decade, depending on a few scenarios I will come to in a minute. …(I)f we measure the stock market by either earnings or dividend yields, valuations are in the top 10% historically. Average (!) returns, going out for ten years, are 2.6% real, with some historical 10-year periods being negative. Below is the range of returns, based on dividend yields. It does not look much different from the chart based on earnings. We are currently at the far right-hand bar.

This does not suggest a happy outcome for those who espouse buy-and-hope portfolios, at least not if you have expectations or needs of 7-8% or more.

Financial Armageddon: Time for the Bulls to Reconsider

Based on data going back 90 years, whenever the 12-month rate of change (ROC) in the Dow Jones Industrials Average has exceeded 40 percent, it has generally signaled trouble ahead.

In three cases, a 12-month ROC above that level has only marked a short-term pause, after which the market traded higher.

But on 11 other occasions, similarly rapid advances have been followed by notable corrections, including the collapses that followed the 1929 and dot-com era peaks, as well as the 1987 crash.

Given those odds, increasingly exuberant bulls might want to have a rethink.

Here is the complete paper, titled “WARNING: Physics Envy May Be Hazardous to Your Health,” by Andrew W. Lo and Mark T. Mueller. From the introduction:

The Financial Crisis of 2007–2009 has re-invigorated the longstanding debate regarding the effectiveness of quantitative methods in economics and finance. Are markets and investors driven primarily by fear and greed that cannot be modeled, or is there a method to the market’s madness that can be understood through mathematical means? Those who rail against the quants and blame them for the crisis believe that market behavior cannot be quantified and financial decisions are best left to individuals with experience and discretion. Those who defend quants insist that markets are efficient and the actions of arbitrageurs impose certain mathematical relationships among prices that can be modeled, measured, and managed. Is finance a science or an art?

In this paper, we attempt to reconcile the two sides of this debate by taking a somewhat circuitous path through the sociology of economics and finance to trace the intellectual origins of this conflict—which we refer to as “physics envy”—and show by way of example that “the fault lies not in our models but in ourselves”. By reflecting on the similarities and differences between economic phenomena and those of other scientific disciplines such as psychology and physics, we conclude that economic logic goes awry when we forget that human behavior is not nearly as stable and predictable as physical phenomena. However, this observation does not invalidate economic logic altogether, as some have argued.

In particular, if, like other scientific endeavors, economics is an attempt to understand, predict, and control the unknown through quantitative analysis, the kind of uncertainty affecting economic interactions is critical in determining its successes and failures… Fully reducible uncertainty is the kind of randomness that can be reduced to pure risk given sufficient data, computing power, and other resources… (O)ur taxonomy is reflected in the totality of human intellectual pursuits, which can be classified along a continuous spectrum according to the type of uncertainty involved, with religion at one extreme (irreducible uncertainty), economics and psychology in the middle (partially reducible uncertainty) and mathematics and physics at the other extreme (certainty).

However, our more modest and practical goal is to provide a framework for investors, portfolio managers, regulators, and policymakers in which the efficacy and limitations of economics and finance can be more readily understood. In fact, we hope to show through a series of examples drawn from both physics and finance that the failure of quantitative models in economics is almost always the result of a mismatch between the type of uncertainty in effect and the methods used to manage it. Moreover, the process of scientific discovery may be viewed as the means by which we transition from one level of uncertainty to the next….

Unfortunately, however, that may be the only way these days to get the real scoop on a company’s financial health. Investor outsourcing of crucial due diligence to the media, stock analysts, and even the ratings agencies led to massive losses in the accounting scandals early last decade and in the financial collapse later on.

So when it comes to your money, how can you trust anyone but yourself?

That’s the concept behind footnoted.org, which we highlighted in our last post. The site scours public SEC filings and looks for red flags that have been reduced to footnotes by companies looking to avoid investor scrutiny.

But what are those red flags, and how can the average investor find them? From Footnoted.org’s Inside Footnotes page:

Any investor who wants to pick their own stocks needs to feel comfortable reading, or at least skimming, a company’s 10-Q, 10-K and proxy statement. Investors should also pay attention to several other key forms, including 8-Ks, Form 4s (insider trading) and Schedule 13Ds. All of this information is available on the SEC’s Edgar database and on various subscription-based websites…

Once you become familiar with these documents, looking for a few key items shouldn’t take much time — figure around 30 minutes to skim a 10-Q or a proxy and an hour for a 10-K — and could save you a lot of money by helping you avoid potential problems.

Remember: there’s no need to read every word or even understand everything that you are reading. What you’re looking for are significant changes that were not in the filing last quarter or last year. What makes something significant? That’s difficult to say. It’s kind of like the way the Supreme Court defines obscenity: you’ll know it when you see it.

Also keep in mind that reading SEC filings is more of an art than a science. The language used in SEC filings — a mix of accounting-speak and legalese — takes some getting used to. When it comes to risk factors, for example, companies often list every conceivable possibility, even if the likelihood of that specific lightning strike is very rare.

With that in mind, here are a few suggestions on what to look for in these documents:

Quarterly:

* How does net income compare with pro-forma income? What is the company excluding to arrive at the pro-forma number and does it make sense?
* Are there any sizable differences between the numbers reported in the quarterly earnings release and the 10-Q?
* Does the company consistently report “special charges” quarter after quarter?
* What impact (if any) have restructuring charges had on the quarterly earnings?
* What impact (if any) have stock options had on the quarterly earnings?
* Have there been any significant changes to lawsuits that the company is involved in?

10-K: (in addition to the above questions)

* Are the company’s deferred income taxes growing? What is the company’s effective income tax rate?
* Has the company made any changes in the way it recognizes revenue or accounts for its expenses?
* How is the company handling its debt? Is the new debt at favorable interest rates?
* What sorts of related party transactions is the company including and how does this compare to the disclosure in the proxy on related party transactions?
* What is the company including in its other assets/liabilities other income/loss? Are derivatives a substantial component of these numbers?
* How has stockholder’s equity changed over the past year?

Proxy:

* How many times did the audit committee meet in the past year? Does the audit committee seem to have enough experience and independence to ask tough questions of company management?
* What types of related party transactions are being disclosed? Has there been a substantial increase in these transactions? Do they seem reasonable?
* How much stock do executive officers own? What about the directors?
* Do executive salaries correspond in any way to the company’s financial performance over the past year?
* Do the retirement benefits for executives (including pension benefits) seem excessive given the company’s performance?
* How much is the company paying its accounting firm for non-audit services? How does this compare to previous years?
* What sorts of shareholder proposals are being included in the proxy? Do they raise concerns about the company’s approach to corporate governance?

Not an easy task. But if you’re going to invest in individual companies in particular, perhaps this type of knowledge and time commitment is what it will take to feel confident you’ve got all the necessary info.

It’s interesting to note that footnoted.org now has a subscription site called FootnotedPro.

Designed for the sophisticated individual investor or advisor, this newsletter will deliver short takes on various filings – raising questions or pointing out hidden details, including new lawsuits, unusual executive changes, and questionable deals and disclosures that can be early indicators of potential problems or opportunities. It will also provide insight on significant trends in filings — and the opportunities they represent — that can only come from reading several hundred filings a day.

The price? $2500 per year. Yowsa. Nothing concerning investing is for the faint of heart these days…

The web site footnoted.org received a lot of favorable press last year, including this report on Marketplace. The site delves into the arcane medium of company SEC filings, plucking out footnoted items that might serve as red flags to investors. Considering the grave business climate, the wholesale disappearance of jobs across the country, and the lack of transparency in investments that have contributed to massive losses by the public, this is a site worth following for not only those who put their money in anything riskier than a mattress, but also for anyone interested in the issue of soaring executive pay.

On New Year’s Eve, footnoted.org posted the results of its Worst Footnote of 2009 poll, as chosen by readers. Here are the winner and finalists.

Winner: Chesapeake Energy (CHK) spends $12.1 million to purchase Chairman and CEO Aubrey McClendon’s antique map collection

The proxy statement disclosure :

“In December 2008, the Company purchased an extensive collection of historical maps of the American Southwest from Mr. McClendon for $12.1 million, which represented his cost. A dealer who had assisted Mr. McClendon in acquiring this collection over a period of six years advised the Company that the replacement value of the collection in December 2008 exceeded the purchase price by more than $8 million. The maps have been displayed at the Company’s Oklahoma City headquarters for a number of years, during which the Company has been insuring the maps in exchange for their display. Our corporate headquarters in Oklahoma City is comprised of numerous buildings in a campus-type setting. These maps have been displayed throughout the Company’s headquarters for a number of years, complementing the interior design features of our campus buildings and contributing to our workplace culture. Our employees and visitors appreciate the maps’ depiction of the early years of the nation’s energy industry and the discovery and expansion of Indian Territory (now, Oklahoma) and the surrounding territories of the early United States. In addition, the collection connects to our Company’s everyday use of mapping in our business of exploring for and developing natural gas and oil. The Company was interested in continuing to have use of the map collection and believed it was not appropriate to continue to rely on cost-free loans of artwork from Mr. McClendon. The Board of Directors authorized the purchase of Mr. McClendon’s collection following review and approval by the Audit Committee and required that the Company’s purchase price be applied as a credit to Mr. McClendon’s future FWPP costs. Future purchases, if any, of historical maps or artwork for the Company’s headquarters will be made directly by the Company.”

This particular disclosure got a lot of exposure this year after we wrote about it and even prompted Chesapeake to issue a amended proxy a few days later to provide additional details on the maps and other goodies the McClendon received.

Runner-ups

Perot gets a gross-up

…the 8-K that Dell filed on Friday left us no choice (but to highlight it)… The filing noted that Ross Perot Jr. received $952.4 million as a result of the $3.9 billion merger that closed on Nov. 3. Granted, that money was spread amongst various entities, including a limited partnership, his spouse, and the Perot foundation and was a payment for stock owned, which Dell paid $30 a share for.

But then there was the cherry-on-top: a severance payment of $3.9 million, which included a gross-up of $1.1 million. Oh, and another $35 million “cash payment for his Perot Systems equity awards.” Come next September, when Forbes puts out its annual rankings of Richest Americans, that ought to help since in 2009, Perot’s ranking fell to #317 on Forbes’ annual list compared with #205 in 2008.

There’s a Yiddish word to describe this type of behavior: chaza.

Another $3 million for Martha Stewart

…we just couldn’t ignore Martha’s new employment contract in the 10-Q filed by the company yesterday, which includes a $3 million “retention payment” for the domestic goddess. That’s in addition to a $2 million salary, which according to the proxy the company filed last month, represents a $1.1 million raise. The contract also includes a wide range of other goodies, including “automobiles and drivers seven days a week,” reimbursement for all business, travel and entertainment expenses (which seems like a pretty broad definition), security expenses and even internet and telephone expenses at her various homes.

All of this makes us wonder: where exactly is the company’s board of directors? While the stock has bounced back off its lows, it’s dropped dramatically since 2005. There have also been several rounds of layoffs. Given that, does Martha Stewart really deserve a $3 million bonus just for signing her name not to mention a 122% raise?

Taxpayer funded signing bonus at Freddie Mac?

Last we checked, Freddie Mac (FRE) was still operating under a conservatorship, having received over $51 billion in taxpayer money. And, we seem to recall lots of chest-beating last year about sharply lower salaries and fewer perks for the new group of top executives charged with setting Freddie (and Fannie Mae) back on the path to prosperity.

So you can imagine our surprise when we came across this employment contract yesterday for Freddie’s newly named CFO, Ross J. Kari. Here’s a few key bullets:

* annual compensation of $3.5 million (this includes $675K in salary, $1.6 million in something called “additional annual salary” and $1.1 million in a target incentive
* a $1.95 million signing bonus
* immediate buyout of Kari’s house (or perhaps houses)
* reimbursement for travel between Washington D.C. and Kari’s residences in Ohio, Washington and Oregon

Needless to say, none of this — and certainly not the ridiculous sounding additional annual salary — was included in the press release that Freddie put out earlier this week…

(Y)ou don’t have to be a tea-bagger to wonder why something like Freddie, which is being propped up by the government to the tune of billions of dollars, is able to hand out such a generous welcome package to a new executive.

Revisiting expenses at InfoGroup

While there aren’t a lot of hard and fast rules for mining SEC filings for interesting nuggets, it’s a pretty safe bet that if the words “company yacht” are mentioned in the filing, it’s worth at least a quick skim.

Late yesterday, InfoGroup…filed an amended 10-K.

The purpose? To restate some expenses that the company had previously disclosed in relation to (CEO Vinod) Gupta. The review was related to a two-year old SEC investigation which InfoGroup announced on Oct. 20 had been “settled in principle”. Here’s a key sentence from yesterday’s filing: “On completion of the analysis, the Company concluded based on new methodology…that there were more personal benefits to Mr. Gupta than had been previously concluded for fiscal years 2003 through 2008.”

How much more? A lot more. Take the company yacht, for example. In 2008, the company reported no personal benefit to Gupta for use of the company yacht. In the revised filing, the number was listed as $873,078! In 2007, that expense was listed as $5,836. The actual number per yesterday’s filing? $770,433. The yacht — remember this company is based in land-locked Omaha, so there’s also the question of getting to the yacht first since we don’t think it was sailing on the Missouri — isn’t the only oops. In 2006, the company reported Gupta’s personal jet usage to be $125,708. Yesterday, that number was revised to $460,950, or nearly three times as much. Expense reimbursements to Gupta were also vastly understated in the original filing: just $156,682 in 2007. Under the “new math” that number blossomed to $368,309.

What’s interesting here — at least to us — is how the numbers all boil down to what’s considered a business expense and what’s a personal benefit, or a perk. It’s a fine line that many companies walk and it’s one of the reasons why the numbers in almost all proxy statements need to be taken with a huge grain of salt…

Here’s a 2007 interview with footnoted.org editor Michelle Leder (was was called a “national treasure” by blogger/journalist Felix Salmon) on the video podcast Wallstrip Chat. Leder says she started delving into SEC reports after losing money in Qwest during the early-2000sk, the accounting scandal years. It was a loss she discovered could have been avoided by paying attention to the company’s public disclosures.

Those in the know about poetry will enjoy these mannered musings even more, as many of them parody famous poets. Take, for instance, “The Plight of the Charge Brigade,” in the style of Alfred Tennyson.

I
Charge it up, charge it up,
Charge up that purchase,
Deep in the valley of Debt
Plunge the card holders.
Stuff they don’t really need!
Charge for the fun! their creed.
Into the valley of Debt
Plunge the card holders.

II
Stuff they don’t really need!
Why should they be afraid?
Their stocks are doing well
They figure what the hell.
No stops to reason why
Just buy until you die,
Into the valley of Debt
Plunge the card holders.

III
Soft goods in front of them,
Hard goods in back of them,
Goods on all sides of them
Goods without number;
Rush through the big mall store,
Scope out its sales floor,
Into the jaws of Debt,
Into the Land of More
Plunge the card holders.

IV
Why should this frenzy stop?
O what great stuff they got!
All the world marvels.
Honor the charge brigade!
Forget the int’rest paid,
Happy card holders!

Or how about “Hedging Our Bet on a Risky Merger,” in the style of Robert Frost.

Whose got the cash we think we know,
To make this shaky deal go
But rumors fly he’s often prone
To stuff his nostrils full of blow.

My firm to risk is not adverse
We know the pangs of sharp reverse
In arbitrage you take some lumps
When playing markets quite diverse.

My partners, though, now have the shakes
They think this guy makes bad mistakes
It’s said his magic touch has fled
A victim, too, of coca flakes.

So we demand a special hedge,
To take away our nervous edge.
A written, witnessed addict’s pledge,
A written, witnessed addict’s pledge.

Then there’s “The Guru Men,” in the style of T.S. Eliot.

We are the guru men
We are the pitch men
Hot tip purveyors
Spouting the obvious. Boldly!
Our pale visions, which
We parrot endlessly
Are dull and insipid
As boiled beef on toast
Or luke warm white wine in chipped cups
From screw top bottles.

Talk without thought, views without content,
Pasteurized dreams, knowledge without wisdom;

Those who have placed
In markets faith, their hopes for better lives
Bought our puff—completely—at their peril
And remember us sadly
As the guru men
The pitch men.

This is the way the boom ends
This is the way the boom ends
This is the way the boom ends
Not with a crash but a lawsuit.

What a Blowout Year! Wall Street Rocking Without All Those Pesky Former Employees. Profits and net revenues are back up for Wall Street firms. Can bonuses be far behind?

It’s a bit hard to assess where we are in the health care debate. On the one hand, the (House) Democrats pushed through and passed a bill…clearing a hurdle that meaningful health care reform has never before cleared. On the other hand, the vote in the House was perilously close, there were new complications introduced by the Stupak amendment, and the bad jobs numbers and arguably the outcomes of the elections last Tuesday Virginia and New Jersey last will give nervous lawmakers plenty to worry about.

One leading indicator of the prospects for health care reform so far has been the performance of the half-dozen or so publicly-traded health insurance company stocks. Favorable developments for health care reform have been met with decreases in the prices of these stocks, and unfavorable developments with improved valuations….

I don’t necessarily think that the stock market is particularly adept at forecasting political risk, but to the extent that you’re looking for an objective assessment of the consequences of (the) results for the Democratic agenda, this is a pretty decent one.

If you’re interested in keeping a running tab on the share prices of Big Healthcare (Aetna, UnitedHealth, Cigna, Wellpoint, Humana) you can do so at Yahoo! Finance, using this link. (By the way, the share prices of all these companies have increased over the past month.)

The idea behind my forecast six months ago was that regardless of the fundamentals, there would be a sharp rally. After a very large decline and a period of somewhat blind panic, it is simply the nature of the beast.

After the sharp decline in the fall of 1929, the S&P 500 rallied 46% from its low in November to the rally high of April 12, 1930. It then, of course, fell by over 80%. But on April 12 it was once again overpriced; it was down only 18% from its peak and was back to the level of June 1929. But what a difference there was in the outlook between June 1929 and April 1930!…By April 1930, unemployment had doubled and industrial production had dropped from +16% to -9% in 5 months, which may be the world record in economic deterioration. Worse, in 1930 there was no extra liquidity flowing around and absolutely no moral hazard. “Liquidate the labor, liquidate the stocks, liquidate the farmers” was their version. Yet the market rose 46%.

How could it do this in the face of a world going to hell?

My theory is that the market always displayed a belief in a type of primitive market efficiency decades before the academics took it up. It is a belief that if the market once sold much higher, it must mean something. And in the case of 1930, hadn’t Irving Fisher, arguably the greatest American economist of the century, said that the 1929 highs were completely justified and that it was the decline that was hysterical pessimism? Hadn’t E.L. Smith also explained in his Common Stocks as Long Term Investments (1924) – a startling precursor to Jeremy Siegel’s dangerous book Stocks for the Long Run (1994) –that stocks would always beat bonds by divine right? And there is always someone of the “Dow 36,000” persuasion to reinforce our need to believe that as markets decline, higher prices in previous peaks must surely have meant something, and not merely have been unjustified bubbly bursts of enthusiasm and momentum.

Today there has been so much more varied encouragement for a rally than existed in 1930. The higher prices preceding this crash (that were far above both trend and fair value) had lasted for many years; from 1996 through 2001 and from 2003 through mid-2008. This time, we also saw history’s greatest stimulus program, despearate bailouts, and clear promises of years of low rates. As mentioned six months ago, in the third year of the Presidential Cycle, a tiny fraction of the current level of moral hazard and easy money has done its typically great job of driving equity markets and speculation higher. In total, therefore, it should be no surprise to historians that this rally has handsomely beaten 46%, and would probably have done so whether the actual economic recovery was deemed a pleasant surprise or not. Looking at previous “last hurrahs,” it should also have been expected that any rally this time would be tilted toward risk-taking and, the more stimulus and moral hazard, the bigger the tilt. I must say, though, that I never expected such an extreme tilt to risk-taking: it’s practically a cliff! Never mess with the Fed, I guess. Although, looking at the record, these dramatic short-term resuscitations do seem to breed severe problems down the road. So, probably, we will continue to live in exciting times, which is not all bad in our business

Oy vey and happy halloween.