Tuesday, August 3, 2010

Thoughts

Sign of a bond market top?

IBM borrows at 1% for three-year paper.

Good for the sellers of the debt, not for the buyers of the debt!

Today's economic data suggest that second-quarter 2010 GDP will be revised lower from up 2.4% at the end of August.

Indeed, the last quarter's GDP should have a one in front of it.

Be forewarned.

June factory orders and pending-home sales data confirm that the U.S. economy is still in a soft patch.

Despite recent protestations from the bullish cabal, the U.S. economy is still in a soft patch.

This was confirmed by the June factory orders and by the June pending-home sales data.

On the order front, the fall was against an expected rise. Furthermore, May factory orders were revised lower.

Pending-home sales also were weaker than expected, as it grows increasingly clear that the home tax credit borrowed from future sales.

This feels like deja vu all over again.

"The belief by market participants that in times of stock market distress, Fed chief Alan Greenspan was willing to increase liquidity by whatever level necessary to keep the stock market from declining in any meaningful way."

-- Bill Fleckenstein (explaining the Greenspan put)

Market participants have embraced the notion of a Bernanke put.

This feels like deja vu all over again.

This always ends badly.

A Risk-On, Risk-Off Investment World

Monetary policy is not the solution to our nation's economic and financial problems.

As I have written, either risk is on or risk is off these days for Mr. Market.

"Those nerds are a threat to our way of life."

-- Stan Gable (Ted McGinley) Revenge of the Nerds,

Algorithms (managed by the high-frequency-trading puppeteers) accentuate the moves up and down.

Some very evident contradictions (heads I win; tails you lose) seem to be emerging, especially among the bulls.

One group of bulls sees the need for a second round of quantitative easing because the economy stinks. The other group of bulls sees an ongoing and healthy domestic economic expansion -- one that believes that a second round of quantitative easing is either unnecessary or is icing on the cake.

Meanwhile, since early July, everyone seems to love the market action on a technical basis, which really doesn't surprise me as investors seem to prefer to buy up, when there is more clarity, and sell down, when there is less clarity.

My guess is that some of these people will be proven wrong -- that's a safe bet -- but I am not sure which ones.

"Domestic inflation reflects domestic monetary policy."

-- Martin Feldstein

What I am relatively certain about is that monetary policy is not the solution to our nation's economic and financial problems. We need to freeze entitlements, lower government spending, establish a flat tax and resist increasing taxes on the "wealthy." We may well have to wait for another crisis before the three fiscal constraints and strategies are implemented.

And I am also reasonably certain that the current policy efforts (on the monetary front) are putting us on the road to more and deeper problems, and that will serve as a cap to the market's upside.

Just look at the action in certain commodities (a ripping wheat market, higher oil prices, etc.). They are sending a message to Mr. Market.

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