Thoughts

The Catalyst for Bank of America's Turnaround

It followed a Reuters release that favored the banks.

The turnaround in BAC's shares came after the following Reuters release:

11:21 AM Eastern Daylight Time Oct 27, 2010
WASHINGTON, Oct 27 (Reuters) - The U.S. Treasury does not see a risk that banks may have to take back mortgage securities because of faulty foreclosure documents as a systemic threat to the financial system, a senior Treasury official said on Wednesday.

"We are very closely monitoring any litigation risk to see if there's any systemic threat but at this point there is no indication that there is," Phyllis Caldwell, chief of the Treasury's Office of Homeowner Preservation, told a bailout oversight panel.

Run, don't walk, to read Bill Gross's view that the 30-year bull market for bonds is ending with QE 2.

Recommended Listening

Run, don't walk, to listen to Mort Zuckerman's Boston Properties earnings call now.

Capital Goods Report Looks Bad

This morning's capital goods report was not market-friendly.

Orders, excluding defense and transportation, dropped by 0.6% vs. an expected gain of 0.8%.

Party Like It's 1994?

We will begin hearing similarities between the markets in 2010-2011 and 1994-1995.

And similar to 2010, 1994 was a sideways year that transitioned into a big year for the markets in 1995 after a fourth-quarter swoon.

Similar to 2011, 1995 was the third year of a presidential cycle, a first-term Democratic President, accompanied by a contentious midterm (1994) election that resulted in a Republican Party turnaround.

Recommended Reading

Run, don't walk, to read Mohamed El-Erian's view on Greece.

Must Be the Season of the Witch

As Halloween, the midterm elections and quantitative wheezing approach over the next week, some strange and spooky developments have occurred:

* Interest rates rise. Interest rates are rising despite the intended opposite effect of QE 2 to be announced next Wednesday. (The yield on the 10-year U.S. note, at 2.68%, has risen by about 30 basis points recently and has retraced the entire yield decline since Bernanke's introduction of the concept of QE 2 at the Jackson Hole meeting in August.)

* As does inflation rise. While the Fed is focused on deflation, inflationary pressures are mounting. (I call this screwflation.) While this is one of the primary stated objectives of QE 2, the unintended consequence of rising input costs and rising prices of food, copper (up 16%), gasoline (up 13%) and so on is to reduce global growth, pressure corporate margins and squeeze consumers' real incomes further. (And, as Sir Larry Kudlow teaches us, the price of gold (up 8%) is the precursor to worrisome inflationary trends.)

* A rapid U.S. dollar drop. Sliding 10% against the euro will surely help exports, but further quick declines could cause tensions with our trading partners.

* Chaos in housing. Mortgage-gate has trumped the impact of unprecedented lower mortgage rates on the slope of the housing recovery. (Rep and warranty issues have served to create market disequilibrium and have put a dagger into the heart of housing and the availability of mortgage credit.)

* The long tail of the last credit cycle remains an ever present risk. Europe's debt woes continue. As an example, spreads on Greek bonds have risen by nearly 50 basis points overnight.

* Quantitative easing lite. A positive outcome from QE 2, viewed as the sine qua non by bullish investors, is starting to look increasingly smaller than the Tepper camp desires or expects. Again, more shucks and aww, not the shock and awe of the first round of quantitative easing.

On the last bullet point, QE 2 has become the panacea for not only our economic ills but nearly everything else. Yet, strangely, no improvements in the jobs picture or in the fiscal imbalances (local, state and federal) have been yet seen.

The coup de grace for me was in watching the breathless commentary from one of the panelists on last night's airing of CNBC's "Fast Money," when Brian Kelly extolled the game-changing virtues of quantitative easing (on housing, on the economy, on corporate financing and, yes, on stock prices) after previously having been emphatically bearish at the July market lows (based, in part, on the structural imbalances of the domestic economy and the long tail of the past credit crisis).

It is important to recognize that Brian, similar to David Tepper and the bullish cabal, has been fully correct in interpreting QE 2 as an engine to higher stock prices.

As Jim Cramer wrote yesterday, there might be many reasons for being bullish on equities, but, as I have expressed over the past month, I don't see quantitative wheezing as one of them. And, in light of the mixed economic releases since the market rallied in response to expectations of QE 2, I can only conclude that the confidence in the benefits of further monetary stimulation has been chiefly responsible for the rise in equities.

From my perch, it seems to me the logic regarding the likely efficacy and benefits of quantitative easing has an increasingly weakened foundation, while the unintended consequences loom ever larger.