Friday, November 5, 2010

Doug Kass is one intelligent market dude; here's his last entry for today: (I have sympathy for him, by the way...)

I will spend the weekend analyzing where I have gone wrong and what my strategy should be over the balance of the year.

It is clear that my guidance and directional views have been diametrically opposed to reality of late.

I am signing off early today, and I will spend the weekend mulling over where I have gone wrong in my analysis, what the future might hold and what my tactical strategy should be over the balance of the year.

Thanks for reading The Edge, and enjoy your weekend.

The Long Tail of the Election

Keith Olbermann has been suspended indefinitely from MSNBC for contributing to three Democratic campaigns (against company rules).

Long Bonds Taking More Heat

The stronger-than-expected jobs report and the absence of the Fed buying that maturity are the catalysts.

The long end of the bond market is getting hit further from the stronger-than-expected jobs report coupled with the absence of Fed buying at that maturity.

It looks like Thursday redux, with gold again leading the parade.

How much lower can mortgage rates go?

I am hearing plenty about people reducing five-year ARMs from 4.5% to 3.5%, for exmaple.

The spreads in Spain, Portugal, Greece and Ireland are all widening as funding issues are at the forefront of discussions in Europe.

Fed Chairman Ben Bernanke believes that higher stock prices should improve personal consumption expenditures.

Unfortunately for Ben, the math fails to support his belief.

"Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending."

-- Fed Chairman Ben Bernanke, Washington Post op-ed

In Chairman Bernanke's Washington Post op-ed piece on Wednesday, he cited that easy money will promote economic growth by:

1. lowering mortgage rates, making housing more affordable and allowing homeowners to refinance; and

2. reducing corporate bond rates, which will likely encourage investment.

To begin with, it remains unclear to me whether QE2 will generate much lower mortgage and corporate bond rates from here. But for this exercise, let's dive into the Chairman's statement that higher stocks might improve personal consumption expenditures.

Miller Tabak's Dan Greenhaus wrote yesterday that he is "sympathetic to his (Bernanke's) view ... but the math is less cooperative."

I agree.

According to the Federal Reserve Bank of Atlanta and other research reports, consumers have historically spent 3 to 4 cents out of every additional dollar of stock market wealth.

Currently, households own nearly $11 trillion in equities, ETFs and mutual funds (again, a hat tip to Dan).

Let's assume that the Fed's move has been responsible for a 10% rise in stock prices, serving to increase the aggregate value of equities by $1.1 trillion. Applying the historic stock market wealth multiplier mentioned in numerous research pieces on the subject would only translate to a modest $40 billion rise (or thereabouts) in personal consumption expenditures in a U.S. economy with a GDP that exceeds $14.0 trillion.

If indeed it follows that the real impact of rising stock prices on personal consumption is trivial, where's the beef, Ben?

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