Blog Posts by Jeff Macke

Lincoln Ellis of the Strategic Financial Group says the disconnect between stocks and bonds is getting more troublesome with every uptick, creating a market tension likely to end in tears for equities.

A quick review for those who don't spend their free time studying the way markets are supposed to work. Financial assets are all priced relative to the cost of "risk-free money" as represented by U.S. debt. When rates are low investors seek better returns by buying risk assets like stocks and corporate bonds. The Fed has kept rates at essentially zero for five years and counting. Once the stimulus ends, rates will rise and investors will sell risk assets and go back into government securities.

Cut that paragraph out and pin it to your wall. Whenever you hear an economic type person fretting over the fate of stocks once Bernanke removes the punch bowl / heroin / speed or "stops the printing presses" it's that to which he or she is referring.

Of course, the inevitability of stimulus going away has kept many funds and individuals on the sidelines for a better than 100% rally. With corporations now swimming in liquidity and the Fed vowing to keep rates "accommodative" until the economy improves, the question is whether or not all this hand-wringing is justified.

The bullish case is that corporations are sitting on more cash than ever and productivity is at record highs. The problem is they aren't putting the money to work because, as Ellis puts it, they're still gun-shy about consumer end demand.

Since being added to the Dow Jones Industrial Average shares of Microsoft (MSFT) have lost somewhere in the neighborhood of 20% including dividends. That makes almost 14 years of virtually dead money for investors in what is still the largest software company in the world.

With Mr. Softie trading at a market multiple and carrying a greater than 3% dividend yield, the stock seems like a diamond in the rough. But then the same could have been said for the last decade. After all this time it's hard to find anyone except Steve Ballmer or a few software analysts who can recommend Microsoft stock with a straight face.

Breakout found one of the few intrepid bulls in Brian Sozzi of NBG Productions. In the attached clip Sozzi lays out three reasons he wants to own Microsoft right here, right now.

1) The Surface

Sozzi's done his channel checks and found the Surface in short supply. He generously takes that as evidence of exceptional demand. Whatever the cause, Sozzi thinks the potential success of the tablet is being underestimated.

Also in the hardware category is the latest Xbox expected for the holidays. Sozzi envisions rocking Microsoft stores with kids playing Xbox demos while mom and dad consider the Surface.

Not even Kate Upton could convince Time Warner Inc. (TWX) to keep its magazine segment. The company announced Wednesday that it will be spinning off its Time Inc. division, creating a new public freestanding company. The announcement comes less than a year after News Corp. (NWSA) announced similar plans for its own publishing business.

Rich in history but light in profits TWX's publishing division has seen its business shrink dramatically, never recovering from the recession of 2008. Last year publishing saw revenues shrink 7% to $3.4 billion. Operating income declined a whopping 25% to $420 million, less than half of the $907 million in profits posted in 2007.

The spin-off will leave Time Warner focused on its growing cable television and film segments which include TNT, TBS, HBO and Warner Brothers film studio. The remaining assets accounted for nearly 90% of Time Warner's revenues and 92.5% of operating income in 2012.

The timing of the deal reflects both the failing economics of the print industry as well as optimism about the stock market's willingness to buy shares of a struggling company in a dying industry. The swimsuit edition of Sports Illustrated which this year featured Ms. Upton wearing nothing but dab of bodypaint is one of the few bright spots for the company. The annual edition regularly sells more than a million copies and accounts for 7% of all Sports Illustrated's advertising revenues.

Even if money managers, actors and world leaders were all willing to strike unnatural positions wearing wildly inappropriate clothing Time Inc. would be in trouble. Time, Fortune, Money and People may have less and less to offer other than prestige. According to the Wall Street Journal, People magazine which once accounted for half of the magazine division's profits is struggling to compete with the instant gratification found on TMZ and other celebrity gossip sites.

For any number of reasons (20 of which listed here) the record highs being posted on the Dow Jones Industrial Average come with dozens of asterisks, the largest of which being that the DJIA is only 30 stocks and when adjusted for inflation we're still some 10% away from 2007 highs.

The Dow setting a new high water mark is largely irrelevant. What is important is what the renewed interest in equities suggests about the next move. To help get a read on whether we're setting the stage for a multi-year bull run or inflating another bubble, Breakout welcomed Jeff Kilburg, founder and CEO of KKM Financial.

There have been enormous improvements in the fundamentals of corporate America since the lows of 2009, but Kilburg says the Federal Reserve deserves the lion's share of the credit. "We have seen corporations become leaner and meaner (than 2007) but Big Ben is the reason we're at all time highs again," Kilburg says from his perch over the trading floor of the CME.

Like all good traders Kilburg is able to question Fed policy while still profiting from the manipulation. Kilburg told Breakout viewers to get long stocks back before this rally got started at the end of 2012. With the Dow now up nearly 10% for the year he's not getting bearish but he does think it's time to start protecting profits.

"We don't want to see these gains get washed away," Kilburg cautions. "Be hedged here, these are sensational gains, these are impactful, 10% on the Dow year to date, that's tremendous. You can't let that go away."

The Dow Jones Industrial Average is hitting nominal all-time highs even as the approval ratings of our elected officials sit at real, all-time lows. While perhaps just a coincidence, investors have to wonder if the loathsome gridlock in DC is actually a tailwind for stocks and, if so, would a deal on sequestration, CR or anything else that could be construed as effective governance bring this rally to a halt.

David Leonhardt, author of the book Here's the Dealand Washington Bureau Chief of The New York Times, says corporate profits are improving at a much faster clip than the rest of the economy — one of the hallmarks of the last four years.

It's not a new point. Much of the President's campaign centered around getting corporations and the rich to "pay their fair share." It made for a nice soundbite, but any resemblance to actual policy is strictly a coincidence.

"The effective taxes that companies pay have declined substantially," Leonhardt notes. Promises notwithstanding, he sees no

After spending the better part of a month flirting with a breakout, the Dow Jones Industrial Average (^DJI) finally set a new record high today, trading as high as 14,286 intraday, before closing at 14,253.77. The prior closing high was 14,164 set on October 9, 2007.

Today's record-breaking close marks an unofficial end to one of the most troubling financial periods in American history. Precipitated by an implosion of the mortgage market and a wildly over-levered banking system, stocks lost more than 50% during the 17 months after setting the prior record in 2007. It was a period during which a collapse of the entire global financial system seemed very much at risk.

Many argue that the stock market has been artificially inflated by government intervention during the financial crisis and so called "great recession" that lasted from December 2007 to June 2009. To this day the Federal Reserve is still adding $85 billion worth of stimulus every month; presumably inflating asset prices in an effort to generate economic activity.

Nesto makes this bearish case in the attached video, arguing that the eventual end of government stimulus could cause stocks to have a collapse similar to that of 2007 once the Fed "takes away the punchbowl."

All of which is for another day. Americans who have stayed in the market through the highs and lows of the last decade are finally ahead, if only on paper. Let it ring down through the ages: Today, March 5, 2013 the Dow Jones Industrial Average made a new all-time high!

By way of celebration here are 20 things you may not have known about the Dow Jones Industrial Average. Feel free to toss them around to impress your friends:

The hits keep coming for JC Penney (JCP). JCP's stock has dropped 10% since news leaked yesterday afternoon that board member Steven Roth sold 10 million shares of JCP late Monday.

According to The Wall Street Journal Roth's firm Vornado Realty Trust (VNO) has lost more than $300 million on its investment in JCP. Together with Bill Ackman's Pershing Square hedge fund, the two firms own 27% of JCP. Ackman still holds 39 million shares with an average cost of $25, giving Ackman a paper loss of over $350 million on the disclosed portion of his position.

As if the story needed more drama, today Martha Stewart takes the stand in the three-way lawsuit between Martha Stewart Living Omnimedia (MSO), Macy's (M), and JCP. Macy's is suing MSLO and JCP, claiming it has exclusive rights to sell certain Martha Stewart products. Everything up to this point in the trial has been little more than highly entertaining prelims — Stewart is the main event.

Related: Martha Stewart, Macy's & JC Penney Take High-Stakes Love Triangle to Court

What's at stake? For Macy's, some agitation and possibly negative publicity. Also, CEO Terry Lundgren's feelings seem to have been hurt.

JCP has more exposure. The company invested nearly $40 million in Stewart's MSO as part of a plan to build "Stores within a Store." The deal is now being contested, and the judge has ruled that JCP can't sell Stewart goods until the conclusion of the case. That means there's a very real possibility that JCP will have inventory sitting on a boat, empty shelves and a 17% stake in a company that does business with JCP's main competition.

Last week Barnes & Noble (BKS) founder Leonard Riggio expressed an interest in buying the company's 677 book stores. Riggio made it clear that he has no interest in bidding for the Nook Media subsidiary which, until recently, was thought to be Barnes & Noble's best chance at survival.

The biggest hurdle to Riggio's proposal is price; specifically how much is Nook worth? Last April Microsoft (MSFT) invested $300 million in Nook, and in December British publisher Pearson kicked in another $89.5 million for a 5% stake. Based on the price of those investments, Nook Media is worth about $1.8 billion, making Barnes & Noble's 78.2% of the company worth about $1.4 billion.

The company has a current market cap of less than $1 billion. In terms of performance in the most recent quarter, EBITDA at the stores was $212 million on $1.5 billion in revenues. The Nook segment lost $190 million on $316 million in revenues.

As the debate between Riggio and the board of directors heats up, the major issue figures to be which of the business segments is dragging the company lower. In order to get the lowest price, Riggio will point to the the Microsoft and Pearson deals as evidence that the stores are of little to no value. In order to counter his argument the board will need to concede that its new business partners got fleeced when they put money into the Nook.

Retail expert Hitha Prabhakar thinks Barnes & Noble needs to get the deal done or risk ending up with nothing at all. The stores are carving out good profits but they're doing so on shrinking revenues. The company is slowing down investments in its store base at a time when customers are searching for reasons to shop someplace other than Amazon (AMZN).