Charles Payne's  Instablog

You know I can understand why primitive societies once worshiped and feared active volcanoes, but we are being told to pay for sidewalks over and over again and to sacrifice our paychecks in the future as tribute.

Legitimate red flags from the market yesterday came from all angles.

Transportation stocks got crushed with names like Kansas City Southern (KSU) and Union Pacific (UNP) down big with tons of volume. The Dow Jones Transportation Average really took it on the chin, off 3.18% for the session. The index is nearing a very pivotal support point.

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Apple (AAPL) is collapsing when it could have become a safe haven; it's simply entered into a freefall.

Tech stocks in general are getting hammered even ahead of the much-hyped Facebook initial public offering. It is really remarkable that FB has no coattails whatsoever.

Advanced Auto Parts (AAP) issued a warning and took down names that have firing on all cylinders for a few years. In fact, AAP, Auto Zone (AZO), and O'Reilly (ORLY) have been perfect recession investments. Man it would be great if people were not going to those locations because they were buying new cars, but that may not be the case. Furthermore, high-end retailers Macy's (M), Nordstrom's (JWN), Saks (SKS), and Abercrombie and Fitch (ANF) have been crushed, but yesterday one of the top dollar stores took a kidney punch on earnings.

Then there's the record low yield on 10 year treasuries. That is the biggest red flag concerning confidence among deep-pocketed investors. The yield of 1.7% doesn't even keep up with inflation and yet billions continue to pour in. It's a statement that says less about the greatness of America and more about the weakness in the rest of the world. The dollar is soaring because the Euro is the Euro. But you must know that when they get a chance, and when there's a legitimate alternative the dollar and treasuries, investors will dump them with both hands.

For now, the influx is a reminder of how great we have been in the past and how great we could be in the future. But to accept such a paltry return speaks volumes about uncertainty.

Having said all of these things, good stocks are being taken to the woodshed with bad stocks as if someone yelled "fire" in a crowded theater. This is what makes being an investor challenging. The swoons are seen as a reason to take losses rather an opportunity to become owner of great businesses on the cheap. The problem is the market is hyper-sensitive, and panic is beginning to creep into the mix. This is a tough period, and I'm concerned. I'm more worried, about investors making mistakes they will regret a month, six months, or even a year from now.

The administration scares me a lot more than corporate America. This week we have witnessed the game plan expedited to the point where the money grab moves to lower income brackets. I felt a second term would see an aggressive attempt to redefine rich below a triple-digit annual income. In Maryland, that tax hike on people earning $100,000 will go to pay for union raises of 2%-an incentive to get the vote out even as schools remain closed, and the state will surely lose lots of talented folks. That's the price to be paid as out of control spending means higher taxes, and to be honest, there aren't enough rich people, really rich or $100,000 rich, to go around.

Another example that many people missed is the proposal to go after Eduardo Saverin of Facebook who gave up his citizenship in part to avoid paying more than $60.0 million in taxes. While I think these capital gains taxes are egregious, I don't like the wham-bam-thank-you ma'am style of Saverin who originally hails from Brazil. But for me, the real story is hidden in the fine print. This proposal is looking to punish expatriates that earned more than $148,000 over the years. That is not rich, although the effort to target this income bracket is rich in hubris.

Schumer and Casey's proposal is called the Ex-PATRIOT Act ("Expatriation Prevention by Abolishing Tax-Related Incentives for Offshore Tenancy" Act).

Under the proposal, any expatriate with either a net worth of $2 million or an average income tax liability of at least $148,000 over the last five years will be presumed to have renounced their citizenship for tax avoidance purposes.

The individual will then have an opportunity to demonstrate otherwise to the IRS by meeting specific IRS requirements. If the individual has a legitimate reason for renouncing his or her citizenship, no penalties will apply. But if the IRS finds that an individual gave up their passport for substantial tax purposes, then it will prospectively impose a tax on the individual's future investment gains, no matter where he or she resides. This would eliminate any tax benefit and financial incentive from renouncing one's citizenship. The rate of this capital gains tax will be 30 percent, in keeping with the rate that is already applied on non-resident aliens for dividends and interest earnings.

So, while the economy struggles, the war on success continues to seek more casualties. By the way, this is the main reason the economy is struggling. Yes, I'm worried about the market and the economy but I think it's a mistake to sell great companies in a huff. In fact my greatest fear is too many investors giving in to their fears - founded and unfounded.

When will the coast be completely clear? I'm not sure, but don't put your head in the sand and don't become too discouraged.

By the way, even though AAP got hit, AZO got an upgrade this morning at Credit Suisse and even though the rails got smacked KSU (my favorite) got an upgrade at Oppenheimer. These are smart upgrades, which isn't always the case on the Street which is often very late. Our economy isn't dead nor has it peaked; only faith in those that could and have attempted to derail and loot success. Again, a great reason for concern, but I don't think they'll win in the long run. As for the spark look for action real soon out of Europe with the ECB taking action to prop banks. Greece is belligerent and is trying to pull a fast one-not only not paying money they've borrowed and squandered but demanding more.

There could be big (positive) news over the weekend. In the meantime it's all about Facebook today, and I don't know how to play it other than to say it might be best to watch from afar unless you have the ability to watch and trade all session long.

Every now and then, The Economist magazine will write something that makes sense. In the current issue, there is a headline about the Tea Party's latest "victim" (Luger) and David Cameron's mid-term crisis, so I braced for the run of the mill attack on prosperity, independence and individual rights. But there it was, a piece on a page labeled Free Exchange-hope springs a trap titled "An absence of optimism plays a large role in keeping people trapped in poverty." My goodness, I could have written this for them from experience and study. The article discusses an MIT study of data from a microfinance program in West Bengal. The BRAC program made loans to locals stuck in deep poverty.

It was assumed the loans wouldn't be paid back.

These loans were in the form of a farm animal like a cow, or a couple of goats or chickens. There was a stipend as well to deter recipients from eating their assets. The folks were taught how to tend and manage their animals to produce a small income. Long after the program ended, the randomly selected recipients were still going very well:

> 15% eating more
> 20% earning more each month
> Skipping fewer meals
> Saving more money

The trick to this longer term success was A) these people worked 28% more hours B) their work goes beyond the assets they were given and C) researchers found mental health improvement. These were extremely poor people that are now seeking new opportunities. The very smart people at MIT came to the conclusion that the absence of hope kept these people in penury while BRAC injected a dose of optimism. I've argued the difference between hope and optimism is that the former relies on an outside force to save the day while the latter relies on the person in the mirror to make it happen. The article went on to discuss the fuel of self-belief.

I love that term...it makes for the perfect replacement for the notion we can only make it as a collective.

Of course, while there is an occasional positive surprise in liberal rags, the world of academia never fails to surprise in their efforts to strike the idea of accountability from human check list to a fulfilling life.

These MIT mavens could have saved a lot of time and money by just reading an old Chinese proverb: Give a man a fish and feed him for a day, teach him to fish and he eats every day.

My Brain Made Me Do it

I remember the skit Flip Wilson used to do on his eponymous named show where a female character named Geraldine's excuse for poor behavior was "the devil made me do it." As it turns out it's not the devil but it's also not you- not the conscience you. Now the experts say we are born a certain way and that's that. It's about the bad seed. More recently a piece from PNAS.org says that our genetic architecture plays a predetermined role in our political choices and economic decisions.

In other words, people that take risk are predetermined to do so and people that vote republican or democrat are also bending to the will of their DNA.

The bottom line is we can control our own destiny. The real truth is we do control our own destiny, even if it means we enter into that Faustian deal of letting government pay for all our stuff in return for our allegiance in voting booths and erasing chances of our children living a better life. The powers that be must promote fuel of self belief, even if it means they relinquish their princely relationship with common folk. I doubt politicians will do this from either side of the aisle (unless those evil Tea Party types collect more victims), so it's incumbent upon us to escape the grip of hope and embrace the freedom of optimism.

Mount Olympus

Of course, as an investor these days, it's harder and harder to embrace optimism as the market continues its version of the Bataan Death March. Interestingly, you can now toss out the charts and income statements, along with balance sheets, cash flow statements and Ouija boards. The market is taking its cue solely in response to worries about Europe and impatience about more money printing operations on both sides of the Atlantic. In the meantime, the US dollar gets stronger and the world continues to crowd into American treasuries. Sadly, a strong dollar hurts the stock market, which is counterintuitive, but a new fact of life. The reason for this is the fact that we have more faith in international economies (outside of Europe) than domestic growth.

The dollar in the meantime has no competition.

Individual names are more likely to move with the broad market than on great individual developments and potential. Then there are the market Gods- those hedge fund managers that are on television more than Ryan Seacrest. Perhaps the most influential these days is David Einhorn, whose observances on stocks have the power to move prices the way it was once thought Zeus could move the winds. Late yesterday, he didn't mention being short Herbalife (HLF) and the stock soared, but he said Dick's Sporting Goods (DKS) will ultimately lose against Amazon and investors forgot about that amazing earnings and outlook from the retailer just a day earlier.

As frustrating as this is for investors (unless you bought NUS or HLF yesterday), imagine being the CEO of a company Einhorn or other hedge fund gods don't like (see MLM). To a lesser extent Paulson, Soros, Lambert and Icahn have the same power, although their modus-operandi is more about shakedowns that actual trading.

I will say that I do agree with Steve Mandel of the Lone Pine fund who observed at the Ira Sohn conference yesterday's Mount Olympus that saw a parade of hedge fund guys pontificate on the subjects ranging from Marx to the Economy. Mandel spoke of fixed income having no value because of inflation. He is spot on but investors are motivated more out of fear than fundamentals. I know these guys are good, but I don't think they are so good stocks should move in double digit clips on their whims and words. Heck, they are grappling in many cases and relying on quant strategies, insider information and other edges and seem to be going for the quick buck just like everyone else.

I'd rather take my chances on self-belief based on good old fashion work that gets muffled from time to time in these hectic markets but never goes out of style or lets you down for long.

Today's Session

The Euro continues to crack on confusion, anxiety and impatience with the process that has newer rules and fewer scruples each day. At least the market isn't acting like it will be higher today, instead it's looking lower on a complete lack of enthusiasm. Investors continue to seek a catalyst beyond corporate earnings and economic data. On that note initial jobless claims of 370,000 are in line but nothing to cheer. I'm looking for the session that begins lower and ends strong so let's keep our powder dry at the moment.

I've warned everyone at every turn about the seductive power of getting even with those with more than you. It's a dangerous thing, envy, as it can lead to any kind of destruction from relationships to sparking wars. It can even lead to the destruction of the greatest nation on the planet. In part to their inability to heal and grow the economy, this administration has been fanning the flames of anger, envy and hate to a boiling point. This week they've added to the cauldron the JP Morgan story. Apparently, JP Morgan losing $2.0 billion of their money is worst than MF Global losing a similar amount of customer money. That story got no mention in the mainstream media, and the ladies on the View never discussed it.

Of course, MF Global was headed by a giant in the Democratic Party; a man Joe Biden said had no peers when it came to understanding finance, the former governor of New Jersey- Jon Corzine. That money vanished and I didn't hear about a slew of investigations and outrage. It's truly amazing. With that said, it's all a smoke screen. The reality is our government is addicted to power and spending, and the only way to continue both is to deflect attention. But you can't make someone feel better about their own dismal economic condition, so you elevate another emotion that deflects the blame from the real source of our misery.

I've searched for the answer, but there are many as to the most powerful of emotions. One website (Kingdom Hearts) ranked emotions from a survey:

* Anger 40.0%
* Fear 13.3%
* Other 13.3%
* Happiness 10.0%
* Sadness 10.0%
* Envy 6.6%
* Hope 6.6%

It's easy to glean from the survey, if you wanted to lead at any expense, selling "hope" might not snare as many people as selling anger and other negative emotions. And so the average person on the street knows JP Morgan lost a couple billion but not that it was 2% of a position. Just as they hear Warren Buffet pays less taxes than his secretary, when in fact his income has a lower rate, but the check is a lot more.
By the same token, there was no demonization when MF Global could not find its customers' money. The double standards are despicable and nauseating.

Fanning the flames of fear are dangerous and not only to its intended targets, or as I call them great Americans that worked hard and climbed the ladder of success. In the end, just as envy eats at a person's soul, we are all going to burn from losing track of the true reason our government is changing the meaning of this nation as a "melting pot." Our spiritual wings are singed and can't flap so our economy remains grounded. But it doesn't stop there-it's insidious just as our government's desires for power and money. If you buy into this premise that somehow successful people are the reason there aren't more successful people.

The public relations campaign to make people hate or envy those with more has been a success. To what degree, I'm not sure, but more and more people are okay with taxing businesses and the rich. While this campaign has been in our face nonstop so, too, has spending been going on nonstop. The Federal debt is now equal to our annual economic output and several states are in danger of melting. But they will not stop spending so they must increase the intensity of propaganda. You have to be angrier than you were yesterday and somehow JP Morgan losing money in a position does the trick.

While you were stewing about a Wall Street bank losing money something monumental occurred. The definition of rich changed, again, and yes it's a lot lower. In Maryland the state's Senate passed a series of tax hikes to pay for its profligate spending.

Hundred Thousandaires Watch Out

Maryland is in the process of hiking taxes from 5 to 15% on individuals whose income exceeds $100,000. Yes, it is official; the "millionaires" tax is now impacting those making the lowest six figure income. Money made north of $100,000 would be taxed at 5.0% while incomes above $500,000 would be hit by 5.75%. There would be similar increases for couples as well. The question is how will this help business? How will this help or encourage investment? Layer on the $36.0 million in taxes on commercial mortgages, and it's pretty clear Maryland is in deep trouble. Why would any productive couple stay in the state when it's so much cheaper in neighboring states?

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There will be more tax hikes in Maryland covering everything from cigars to loopholes for small businesses. If you earn or hope to earn a six figure income in life, you should be appalled. If you want your children to make six figure incomes, then you should redirect that feeling of anger back to its true source. That would mean directing it against a powerful wind. This is dangerous stuff in so many ways. I tend to focus on the individual impact because without strong individuals we never will rebound as a nation.'

In the meantime, the economic impact is obvious. The only thing worse than smart austerity is dumb and irresponsible spending. If you're rooting for more taxes on the rich, you better know it's only a smoke screen and your taxes will increase, too, unless you completely drop out and live on the government dole.

"Above all, you must fight conceit, envy and every kind of ill-feelings in your heart."
Abraham Cahan

Yesterday's Session

I'm really shook up about yesterday's session because the market got hit twice on news from Greece that really shouldn't have been news as it wasn't new or unexpected. The idea these guys couldn't put together a government wasn't news, I bet the Vegas odds were 1,000 to 1 they would come together. Still, the market recoiled on Greek election results despite strong upside bias ahead of the open. Nonetheless, the market rebounded only to be crushed by news that €700.0 million has fled Greek banks. Again, I say, of course it has-who is going to wait for the Drachma?

Last summer we had to deal with all of this stuff every Monday; the market getting hammered because Greece couldn't pay its bills and refused to be contrite about it. Now it looks like the communists are going to take over in June. They will make waves and cause trouble, but I don't think they have the guts to bolt the Euro. Yet, after watching how the American stock market reacted yesterday, these Communists understand their power and will drive a hard bargain. It's an odd world when the borrower has all the leverage over the lender. It's an odd world when a country that is 0.40 of global GDP can roil markets and destroy prosperity.

It's an odd and dangerous world. The reaction of our market may mask other concerns as well. There is a giant tax hike lurking at the turn of the calendar and there is a giant election between now and then. Economic data is lurching lower and people are really concerned and confused. There is an amazing amount of value in the market but we know cheap stocks can get cheaper. This is the time to hold great companies, bite the bullet on those that are struggling and to be prepared to pounce once the market turns.

Celebrity Worship

I've often warned of celebrity worship on Wall Street. It's different than Main Street celebrity worship where people can get famous for doing nothing, at least on the street you have to have some success. But the mistake is assuming these people will always do great and always make shareholders money.

Rob Johnson took over at JC Penney (JCP) in November 2011 and the stock was in an upswing from a low of $23.00 (the announcement was made in June), trading at $32 and soon hit $43.00 a share. Everyone was excited that Johnson, architect of the Apple store, would weave his magic at a department store that needed Merlin, Houdini and a couple of witch doctors.

The company posted an earnings number so disappointing yesterday that management rescinded its dividend. Johnson is livid, but still confident having already said it would take four years to make the transformation. According to the WSJ, he's trying to wean shoppers off the "drug" he calls coupons and make this giant Titanic a bunch of wave runners. In the meantime, same store sales were off 19% while gross margin shrank to 37.6%.

Today's Session

The major indices have broken well below their 50-day moving averages and now look vulnerable to test the 200-day moving average. The problem is what could be the catalyst(s). I will say inflation data leaves open the possibility of more money-printing and the market is getting low enough to force the Fed's hand.

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