Tuesday, October 26, 2010

Tuesday's Thoughts

Benchmark Blasts Nasdaq

Benchmark's comments that clients have turned cautious has stopped the Nasdaq rally in its tracks.

IBM Buyback Lights a Fire Under the Market

The company announced an additional $10 billion buyback, which fueled the market higher.

This was expected and doesn't seem like a big deal relative to its market capitalization of $180 billion.

For emphasis, I am highlighting Dr. John Hussman's 'Bernanke Leaps Into a Liquidity Trap.'

Quantitative easing promises to have little effect except to provoke commodity hoarding, a decline in bond yields to levels that reflect nothing but risk premiums for maturity risk, and an expansion in stock valuations to levels that have rarely been sustained for long (the current Shiller P/E of 22 for the S&P 500 has typically been followed by 5-10 year total returns below 5% annually). The Fed is not helping the economy -- it is encouraging a bubble in risky assets, and an increasingly unstable one at that. The Fed has now placed itself in the position where small changes in its announced policy could have disastrous effects on a whole range of financial markets. This is not sound economic thinking but misguided tinkering with the stability of the economy.

-- Dr. John Hussman, "Bernanke Leaps Into a Liquidity Trap"

Hussman's thoughts are well thought out, and his analysis is well documented.

His ultimate conclusion underscores my writings of the past month that quantitative wheezing will not move the economic needle much and that it has only served to turn up the volume on screwflation and will continue to pressure the increasingly large savers' class.

It remains my view that, more than ever, we live in a one-way, risk-on/risk-off world in which the last algorithm standing, the last economic release governs short-term (and even not-so-short-term) direction, serving to essentially trump individual company earnings reports.

Moreover, in an uncertain economic environment characterized by experimental policy (e.g., quantitative wheezing) with indefinite outcomes, the risk-on/risk-off trade takes increased precedent in determining stock prices.

As well, the magnitude of the market advance over the past few months against a backdrop of mixed economic signals that has produced a stall speed of growth calls into question how many individual company beats have been discounted in the marketplace.

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