Monday, September 27, 2010


Second Thoughts on QE II?

According to the WSJ, the Fed may enact a smaller-scale quantitative easing than many people expect.

Jon Hilsenrath, a Wall Street Journal reporter thought of as having a connection with the Fed, has just written a column that suggests the Federal Reserve will take baby steps and not conduct a "shock and awe" policy for QE II.

This is an important news item that all should read. A smaller-scale approach toward monetary stimulation could dull the market enthusiasm initiated by hedge-hogger David Tepper when he said the Federal Reserve might move more aggressively!

My guess is that most of the week into month-end will be similar to today.

We have had a quiet inside day after the Tepper fireworks on Friday.

I still see poor breadth and the continuing disturbing relative performance of the financials.

Both the Republican and Democrat parties were responsible for the credit crisis and for the economic malaise that followed. The Bush administration let AIG and C run roughshod over the system, but Clinton Treasury Secretary Larry Summers was, in many ways, an architect of the credit crisis -- Timothy Geithner and Bob Rubin were his accomplices -- as he endorsed and failed to speak out against the repeal of the Glass-Steagall Act, the Financial Services Modernization Act of 1999 and the Commodities Futures Modernization Act of 2000.

President Obama inherited a mess. Let's use a sports metaphor to describe his predicament upon inauguration in January 2009. Casey Stengel (voted the fourth best manager in Major League Baseball history by Sporting News) won seven World Series and 10 American League pennants in managing the New York Yankees during a 12-year period ending 1960. His locker room (led by Billy Martin, Mickey Mantle, Whitey Ford, etc.), similar to the economy in the last cycle (in its egregious behavior toward credit and in the proliferation of financial derivatives), was well-known to be quite raucous, featuring plenty of booze, extramarital affairs and late-night carousing. He left the New York Yankees to manage the New York Mets in 1962. Like the U.S. economy, the Mets were a mess and Stengel was only able to mount a record of 40 wins and 120 losses in 1962. In 2009-2010 President Obama's administration has faced a similar headwind!

I admire the independence of Credit Suisse's strategists -- Andrew Garthwaite, Credit Suisse's global strategist, is quite positive on equities, while Doug Cliggott (concerned with the trajectory of corporate profit and economic growth) is less so.

On Friday, Appaloosa's remarkably successful hedge hogger, David Tepper, discussed the inevitability of a bull market. Though not going "balls to the wall," Tepper opined that either the economy recovers on its own or QEII is instituted and serves to jump-start U.S. growth -- either way market participants should be paid off handsomely on their equity ownership.

Stocks galloped ahead on Friday, with, at least from my perch, surprising gusto, prompted, in part, by David Tepper's comments on CNBC as well as a better-than-expected durable goods report.

In other news, the situation over there (in Ireland) continues to worsen. Ireland's domestic economy has likely double-dipped in third quarter 2010, and the collapse of the ruling party now seems inevitable, as, over the weekend, South Tipperary TD Mattie McGrath has threatened to withdraw his support for the government over planned cutbacks in health service. This follows Friday's announcement that former Progressive Democrat Noel Grealish also withdrew his support for the current regime.

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