Tuesday, October 5, 2010


Animal Spirits Beat Skepticism

Cramer was right, as was Tepper.

The animal spirits were alive and well today, in a capital-markets combustion of good cheer.

Chicago Fed President Charles Evans has chimed in for the need of additional quantitative easing.

The artificiality of this approach does nothing to remedy our most serious problem (jobs!).

Evans also explicitly called for the Fed to allow inflation to rise above its 2% target that has been informally set.

It is clear that QE 2 is now set in stone for the Nov. 3 FOMC meeting. The only question is how much and over what period of time.

From my perch, we can now expect about $1 trillion over the course of 2011. In other words, QE 1 redux in size but contributed over a longer period of time.

There will be some indirect benefits from QE 2 as well as there being costs associated with the strategy.

But, I can't see how the artificiality of this approach, similar to Cash for Clunkers, serves to remedy our most serious problem (jobs!).

The bulls are winning, not because their baseline expectations of economic and payroll growth were accurate but because the Fed believes that easy money is the answer.

Goldman's Chief Economist Sticks to His Guns

Jan Hatzius maintains that the odds of a return to a recession in the next six to nine months is about 30%.

Goldman Sachs' chief economist spoke at a Washington conference this morning.

The proximate causes would be a renewed decline in home prices and a fiscal tightening.

Hatzius continues to see QE 2 to be announced on Nov. 3.

Currently at $82 a barrel, crude is again emerging as an economic headwind.

Good ISM Non-Manufacturing

We had a good ISM non-manufacturing print at 53.2.

We are in a fragile economic recovery characterized by excess industrial capacity and by a surplus of labor.

If we were in a sound and non-jeopardized economy, the Fed would not be having a QE 2 discussion.

The efficacy of the efforts to contain the recession now appears to be waning.

This does not preclude a fourth-quarter 2010 stock market rally, but the state of our contained recession is likely to limit the size of any rally.

Reports of the demise of commercial real estate have been greatly exaggerated.

Run, don't walk to read the Wall Street Journal article on the improving state of the nonresidential real estate market.

Despite the hyperbole surrounding the death of the office market, recent rents/sales suggest otherwise. Not only have rents stabilized (e.g., while some markets continue weak, recent data in larger markets suggests stabilization -- New York City office rents dropped by nearly 20% in 2009 but are up in the most recent quarterly period), but commercial building sales prices are also improving.

A good illustration of an improving sales market is Mort Zuckerman's BXP $930 million purchase (including the assumption of $640 million of debt) of the John Hancock Tower in Boston on Monday. While this sales price of $930 million compares unfavorably to the initial purchase price of $1.3 billion in 2006, it is much higher than the approximately $670 million paid in a restructuring by mezzanine debtholders in mid- to late 2008.

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