Tuesday, September 21, 2010


Replacement for Summers?

I'm hearing that Mark Zandi may be the replacement for Obama's economic team.

The market moved randomly after the expected FOMC news.

The fact that a possibility of further quantitative easing was mentioned should be of no surprise.

Negative trends (jobs and home-pricing) are driving more people to rent, rather than buy, homes.

Despite a multi-decade improvement in affordability and the lowest interest rates we've seen in a generation, the combination of the trend towards temporary workers and the shock of the home-price drop of 2008-09 has served to increase the need and preference for renting over ownership.

This might help to explain the large ramp in multi-family housing starts in August.

The single-family residential starts number was the worst August reading in 50 years.

According to real estate maven Mark Hanson, the August single-family residential starts release was the worst starts number in 50 years of Augusts and the eighteenth worst starts month ever!

After their announcements, Microsoft and Cisco saw brief moves higher but no follow-through.

Trennert (Strategas) said on CNBC that the rash of dividend initiations/increases is just what Mr. Market ordered.

Look at the price action of MSFT and CSCO since their announcements, though. There was a brief move higher but no follow-through.

A contagion in confidence will limit the effect of monetary policy.

The prevailing bullish view from thoughtful money managers I pay attention to is that the Fed will do whatever is necessary to promote domestic economic growth and that stocks, in the fullness of time, will respond to this policy.

In other words, there is an inevitability of a bull market because growth will come at any cost.

It is my view that there is a limitation on monetary policy, as a contagion in confidence has dulled its effect and will likely be with us for some time to come.

It follows that economic growth will be uneven and inconsistent in the years ahead as the last cycle's sources of growth (specifically residential and nonresidential investment) are not readily replaced by other drivers of growth.

Away from the demand factors, the demise of the shadow-banking and securitization markets importantly limit the supply of capital and credit, and there are the headwinds of our fiscal imbalances (local, state and federal) and the policies of populism (costly regulation and higher marginal tax rates).

The market debate today is not whether there will be a double-dip. (There will not be.) The market debate today should be what does one pay for a shallow and lumpy economic recovery?

It sure seems like 13x on 2011 S&P profits is the maximum investors will pay!

Yesterday's market ramp possibly had everything to do with an outright coupon purchase of $5.2 billion in the Fed's Permanent Open Market Operations.

From my perch, the strength of the stock market on Monday had little to do with the President's CNBC town hall meeting.

Remember, on Aug. 10, 2010, the FOMC-instituted POMO directed the Open Market Trading Desk at the Federal Reserve Bank of New York "to keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities."

Monday's Fed operations coincided with renewed fears in Europe of needs to tap stabilization funds and an increase in Portugal and Ireland spreads. (Last night's Irish Treasury auction went well - selling $500 million Euros of debt at 4.775) and should ease some of the aforementioned concerns).

Getting back to the President's CNBC gig, there seemed nothing new in substance and delivery. BTIG's Mike O'Rourke put it succinctly in his commentary last night:

The bottom line is that the President did not budge on any of his current policies or plans. When it comes to the most highly watched policy measure, the extension of the Bush tax cuts, the President unequivocally held his ground. There were times when the President advocated that he is "pro-business," but it was rhetoric similar to what the President has espoused in the past. There were feeble attempts by commentators to spin some of the boilerplate rhetoric as a "pivot" or a "tack" to the middle. Some interpreted the market not selling off as an endorsement, but since the President did not say anything substantively new, let's not confuse coincidence with causation. Maybe consolation was provided to those in the audience as they voiced their concerns to the President directly, but as far as the business community he was theoretically targeting, the effort definitely missed the mark.

-- Mike O'Rourke, BTIG

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