The action today was a textbook example of the adage, "Don't fight the Fed." Ben Bernanke made it quite clear in an editorial today in the Washington Post that the Fed wants to inflate the stock market and keep interest rates near zero in the hope that it creates a virtuous cycle that leads to economic growth.
There is no shortage of economists and pundits who think that this quantitative easing policy is a recipe for disaster, but market players don't really care. They are focused on making money today, and that means you set aside any doubts and just keep on buying.
We had a big point gain on great breadth and increased volume. It was breakout action and we gained some additional traction on the backs of bears, who were quite convinced we had a "sell-the-news" response coming after the Fed confirmed the well-anticipated QE 2 program.
Since the low in March 2009, this market has consistently had straight up rallies that go much further than most folks think is possible. If your style is to try to catch turning points you have been having a miserable time. The problem is that none of the usual indicators matter very much when the Fed is the main driving force in the market. This market punishes those who over think the action -- especially if they have a pessimistic bent.
We are a bit technically overbought now, but we certainly have some strong momentum. That creates a very interesting setup for the jobs report in the morning. The bulls like to think they are in a no-lose position when it comes to economic reports. (If the numbers are bad, the Fed is going to keep printing money. If the numbers are good, then that means the economy is improving.) Of course, at some point, this market may worry that we have priced in QE 2, but it sure isn't acting like we have.
Thursday, November 4, 2010
Wednesday, November 3, 2010
Thoughts
No Surprises From Obama
There were no surprises in the President's speech.
Freight Folds
Check out the rollover in the Baltic Dry Index.
Next Stop, Screwflation
Screwflation's ugly head is revealed in the ISM non-manufacturing report this morning, as the prices paid index rose by 8.2 points to the highest level since September 2008.
The increase is the largest one month jump in prices paid in almost five years.
We remain on the road to screwflation.
LNC
Headline earnings disappointed, but core earnings were fine.
LNC reported disappointing headline earnings after the close, but most of the shortfall was in non-trending items, including:
* negative adjustments following the review of DAC and other assumptions (chiefly interest rates); and
* adverse mortality.
Adjusted for these, core earnings were fine.
Sales and deposits were strong.
Government Irrelevance May Deliver Market Sorrow
Don't be too sure that the election results will have a dramatic effect on the market.
A transformative jobs policy is no closer at hand than it was yesterday.
We have many economic issues that need to be addressed, and gridlock may not be the answer this time......
"I don't see anything about this president that speaks to making peace and getting along with the other side of the aisle, and I don't see the other side coming together with him either because, beginning tomorrow, we will be in presidential-election mode."
-- Jim Cramer, Government Irrelevance Is Bliss
As Saturday Night Live's Emily Litella would say, the 2010 midterm elections are now over -- is it time to expect the president to embark on a mid-course erection in policy?
In 2008, the Democratic tsunami-like victory was overstated (in its consequence) by the pundits. Rather, it turned out to be a blessing for the Republican Party.
Similarly, the 2010 Republican tsunami last night is likely being overstated in its positive market consequence going forward.
Most commentators expect the administration to move to the center, and, in doing so, to extend middle-class tax relief indefinitely and, for the top taxpayers, to grant it an extension of two years. Those pundits would add, for dessert, expectations for a reduced (20%) tax on dividends (rather than going to the taxpayers' marginal tax rate as recommended by the administration).
I am dubious.
Interestingly, I view the anticipated inertia, gridlock and growing government irrelevance (Jim's great term) emphasized and supported as a positive by Jim Cramer's remarks late yesterday as a negative -- as I do negatively view, unlike Jim, the likely efficacy and further market impact of QE2.
Importantly, the needed fiscal response and transformative jobs policy are no closer at hand today than they were yesterday before the election results were handed down. Attention to deficits, too, is a loser, with the impractical and more radical agenda (in their suggestions of closing important departments of the U.S. government) of the Republican Party's right wing (the Tea Party) not demonstrably better than the Democrats in holding down the current account balance.
Arguably, with monetary (not fiscal) policy front and center, investors in the gold market seemed to have been handed an election win last night.
The domestic economy faces numerous challenges to growth -- in the form of an overleveraged consumer, still-elevated joblessness and large fiscal imbalances (local, state and federal) -- that need to be addressed posthaste.
Indeed, the current anemic trajectory of growth exposes the economy to policy mistakes, a further drop in consumer and business confidence and other unknown and exogenous factors (such as geopolitical risk).
Stated simply, a government divided is not a price/earnings-expanding event, nor is it a recipe for a new leg of a bull market.
There were no surprises in the President's speech.
Freight Folds
Check out the rollover in the Baltic Dry Index.
Next Stop, Screwflation
Screwflation's ugly head is revealed in the ISM non-manufacturing report this morning, as the prices paid index rose by 8.2 points to the highest level since September 2008.
The increase is the largest one month jump in prices paid in almost five years.
We remain on the road to screwflation.
LNC
Headline earnings disappointed, but core earnings were fine.
LNC reported disappointing headline earnings after the close, but most of the shortfall was in non-trending items, including:
* negative adjustments following the review of DAC and other assumptions (chiefly interest rates); and
* adverse mortality.
Adjusted for these, core earnings were fine.
Sales and deposits were strong.
Government Irrelevance May Deliver Market Sorrow
Don't be too sure that the election results will have a dramatic effect on the market.
A transformative jobs policy is no closer at hand than it was yesterday.
We have many economic issues that need to be addressed, and gridlock may not be the answer this time......
"I don't see anything about this president that speaks to making peace and getting along with the other side of the aisle, and I don't see the other side coming together with him either because, beginning tomorrow, we will be in presidential-election mode."
-- Jim Cramer, Government Irrelevance Is Bliss
As Saturday Night Live's Emily Litella would say, the 2010 midterm elections are now over -- is it time to expect the president to embark on a mid-course erection in policy?
In 2008, the Democratic tsunami-like victory was overstated (in its consequence) by the pundits. Rather, it turned out to be a blessing for the Republican Party.
Similarly, the 2010 Republican tsunami last night is likely being overstated in its positive market consequence going forward.
Most commentators expect the administration to move to the center, and, in doing so, to extend middle-class tax relief indefinitely and, for the top taxpayers, to grant it an extension of two years. Those pundits would add, for dessert, expectations for a reduced (20%) tax on dividends (rather than going to the taxpayers' marginal tax rate as recommended by the administration).
I am dubious.
Interestingly, I view the anticipated inertia, gridlock and growing government irrelevance (Jim's great term) emphasized and supported as a positive by Jim Cramer's remarks late yesterday as a negative -- as I do negatively view, unlike Jim, the likely efficacy and further market impact of QE2.
Importantly, the needed fiscal response and transformative jobs policy are no closer at hand today than they were yesterday before the election results were handed down. Attention to deficits, too, is a loser, with the impractical and more radical agenda (in their suggestions of closing important departments of the U.S. government) of the Republican Party's right wing (the Tea Party) not demonstrably better than the Democrats in holding down the current account balance.
Arguably, with monetary (not fiscal) policy front and center, investors in the gold market seemed to have been handed an election win last night.
The domestic economy faces numerous challenges to growth -- in the form of an overleveraged consumer, still-elevated joblessness and large fiscal imbalances (local, state and federal) -- that need to be addressed posthaste.
Indeed, the current anemic trajectory of growth exposes the economy to policy mistakes, a further drop in consumer and business confidence and other unknown and exogenous factors (such as geopolitical risk).
Stated simply, a government divided is not a price/earnings-expanding event, nor is it a recipe for a new leg of a bull market.
Fed Day...
Although we had two major news events to digest today, the indices ended the day with just minor gains. Under the surface, things weren't so sanguine. We reversed course several times and had a number of swings following the FOMC decision that gave the market the QE 2 for which it had been waiting.
The election news and the speech by President Obama were pretty much as expected. The market got the gridlock it wanted, and the President sounded like he was going to make some efforts at bipartisan solutions to our economic woes. It certainly is an improvement over what we've had and could be a longer-term market positive -- if the politicians actually live up to their promises.
The Fed announcement was also pretty much as expected, with the quantitative easing being big enough to satisfy the bulls. The Fed did manage to surprise quite a few folks, however, by shifting its buying from longer-term bonds to shorter maturities, and that caused some major ripples. The normal correlation we have seen lately with a weaker dollar causing strength in gold and bonds came apart, but stocks seemed pleased with the news.
Things become more dangerous now that the news is over and folks are thinking that there is no longer any reason to worry. It is when the triggers for selling aren't so obvious that the bulls can be caught by surprise. Keep in mind that we have monthly jobs numbers on Friday morning, which is going to be very important.
The election news and the speech by President Obama were pretty much as expected. The market got the gridlock it wanted, and the President sounded like he was going to make some efforts at bipartisan solutions to our economic woes. It certainly is an improvement over what we've had and could be a longer-term market positive -- if the politicians actually live up to their promises.
The Fed announcement was also pretty much as expected, with the quantitative easing being big enough to satisfy the bulls. The Fed did manage to surprise quite a few folks, however, by shifting its buying from longer-term bonds to shorter maturities, and that caused some major ripples. The normal correlation we have seen lately with a weaker dollar causing strength in gold and bonds came apart, but stocks seemed pleased with the news.
Things become more dangerous now that the news is over and folks are thinking that there is no longer any reason to worry. It is when the triggers for selling aren't so obvious that the bulls can be caught by surprise. Keep in mind that we have monthly jobs numbers on Friday morning, which is going to be very important.
Tuesday, November 2, 2010
Thoughts
How about a lighthearted diversion, hmm?
"Life is about not knowing, having to change, taking the moment and making the best of it, without knowing what's going to happen next. Delicious ambiguity."
-- Gilda Radner
Emily Litella was an old woman with a hearing problem, a fictional character played by Gilda Radner in regular appearances on Saturday Night Live's "Weekend Update" segment. Emily was believed to be modeled after Gilda Radner's childhood nanny, Elizabeth Clementine "Dibby" Gillies, who was hard of hearing.
Emily would be attired in a rumpled dress and, peering through her glasses, her high-pitched voice would utter a series of well-anticipated verbal faux pas. These would include such classics as "saving Soviet jewelry (Jewry)," "endangered feces (species)," "violins (violence) on television," "busting (busing) schoolchildren," "conserving our natural racehorses (natural resources)," and "youth in Asia (euthanasia)."
The news anchor (Chevy Chase or Jane Curtin) would invariably interrupt Emily and point out to the error in her lines. Emily would wrinkle her nose and say something like "Oh, that's very different..." then meekly turn to the camera and say, "Never mind."
In real life, Gilda Radner's answering machine had the following message: "Hello, this is Emily Litella. I'm not home right now, but I will call you back as soon as possible. Just leave your name, number and what time you called after you hear the sound of the JEEP."
So, with apologies to Gilda Radner, I make the following offering on this important Election Day:
Jane Curtin: "And now a new addition to our Update team is correspondent Emily Litella with tonight's commentary. [Applause] Well, Miss Litella, you've badgered us all for a long time and now you have a job. Welcome."
Emily Litella [Bespectacled little old lady with squeaky voice]: "Oh, well, thank you, Jane. It's very lovely to be part of a news team. Ah, tonight's commentary is very important. But, what is all this fuss on CNBC today about the mid-term erections? Erin Burnett, Michelle Caruso-Cabrera and even that nice one, Sue Herera -- all they are talking about is mid-term erections. Now, let me warn you it is terrible and disgusting that there are discussions about erections all day long by everybody on a television channel. And with these midterm erections, what's next? Midweek erections? This is outrageous! I can't believe that I am hearing this on CNBC."
Jane Curtin: "Miss Litella."
Emily Litella: "What, what?"
Jane Curtin [Speaking slowly and clearly]: "Miss Litella, you've done it again. CNBC's correspondents are talking about midterm elections, not midterm erections."
Emily Litella: "Ohhhhhh. Well, I'm sorry. [Squints and grins, into camera.] Never mind."
Jane Curtin: "Miss ... Miss Litella. Let's get something straight. We've put up with your slight hearing impairment for a long time now and in the beginning it was cute. But now you're part of a news team and we like to report the news accurately. Now, if you don't report the news accurately, we'll have to let you go. No job is permanent. Do you understand me?
Emily Litella: "Oh, yes, yes, I do. I'll ... I will certainly do my best. I'll try to do better, hmmm."
Jane Curtin: "Please do."
Emily Litella: "Bitch." [Applause -- after a moment, Miss Litella briefly holds up two fingers behind Jane's head to the crowd's delight.]
Jane Curtin: "That's our news for tonight. Good night and have a pleasant tomorrow."
A government divided is not a price/earnings-expanding event, nor is it a recipe for a new leg of a bull market.
The market has continued to be boosted today by the growing probability that the Republicans will comfortably win a House majority -- though the likely outcome is that the Senate will remain controlled by the Democrats.
Despite protestations from several talking heads (e.g., Strategas and Bank of America/Merrill Lynch) over the last half hour on CNBC, a Republican Senate majority would likely require wins in California, Connecticut and Washington state. Victories in these states by the Republicans are unlikely.
In all likelihood we will be left with gridlock after the midterm elections are over.
My view is that while gridlock is seen historically as a plus for the markets, it's different this time.
The domestic economy faces numerous challenges to growth -- in the form of an overleveraged consumer, still-elevated joblessness and large fiscal imbalances (local, state and federal) -- that need to be addressed posthaste.
Indeed, the current anemic trajectory of growth exposes the economy to policy mistakes, a further drop in consumer and business confidence and other unknown and exogenous factors (such as geopolitical risk).
Stated simply, a government divided is not a price/earnings-expanding event, nor is it a recipe for a new leg of a bull market.
Banks Still Stuck
A new leg of upside for this sector looks difficult.
The banks continue to act poorly, and a sustained new leg to the upside seems difficult under this circumstance.
I am not a political analyst, so I have no special insight into the elections;
Nearly all elections make little difference to discounted cash flow;
It's a fair bet that some -- and perhaps most -- of whatever outcome there might be is reflected in prices.
Run, don't walk, to read 'A Hedge-Fund Manager's New Groove' in the Wall Street Journal.
Perhaps this is as much a reflection of the times and of the state of the markets as the shorts become longs.
"Life is about not knowing, having to change, taking the moment and making the best of it, without knowing what's going to happen next. Delicious ambiguity."
-- Gilda Radner
Emily Litella was an old woman with a hearing problem, a fictional character played by Gilda Radner in regular appearances on Saturday Night Live's "Weekend Update" segment. Emily was believed to be modeled after Gilda Radner's childhood nanny, Elizabeth Clementine "Dibby" Gillies, who was hard of hearing.
Emily would be attired in a rumpled dress and, peering through her glasses, her high-pitched voice would utter a series of well-anticipated verbal faux pas. These would include such classics as "saving Soviet jewelry (Jewry)," "endangered feces (species)," "violins (violence) on television," "busting (busing) schoolchildren," "conserving our natural racehorses (natural resources)," and "youth in Asia (euthanasia)."
The news anchor (Chevy Chase or Jane Curtin) would invariably interrupt Emily and point out to the error in her lines. Emily would wrinkle her nose and say something like "Oh, that's very different..." then meekly turn to the camera and say, "Never mind."
In real life, Gilda Radner's answering machine had the following message: "Hello, this is Emily Litella. I'm not home right now, but I will call you back as soon as possible. Just leave your name, number and what time you called after you hear the sound of the JEEP."
So, with apologies to Gilda Radner, I make the following offering on this important Election Day:
Jane Curtin: "And now a new addition to our Update team is correspondent Emily Litella with tonight's commentary. [Applause] Well, Miss Litella, you've badgered us all for a long time and now you have a job. Welcome."
Emily Litella [Bespectacled little old lady with squeaky voice]: "Oh, well, thank you, Jane. It's very lovely to be part of a news team. Ah, tonight's commentary is very important. But, what is all this fuss on CNBC today about the mid-term erections? Erin Burnett, Michelle Caruso-Cabrera and even that nice one, Sue Herera -- all they are talking about is mid-term erections. Now, let me warn you it is terrible and disgusting that there are discussions about erections all day long by everybody on a television channel. And with these midterm erections, what's next? Midweek erections? This is outrageous! I can't believe that I am hearing this on CNBC."
Jane Curtin: "Miss Litella."
Emily Litella: "What, what?"
Jane Curtin [Speaking slowly and clearly]: "Miss Litella, you've done it again. CNBC's correspondents are talking about midterm elections, not midterm erections."
Emily Litella: "Ohhhhhh. Well, I'm sorry. [Squints and grins, into camera.] Never mind."
Jane Curtin: "Miss ... Miss Litella. Let's get something straight. We've put up with your slight hearing impairment for a long time now and in the beginning it was cute. But now you're part of a news team and we like to report the news accurately. Now, if you don't report the news accurately, we'll have to let you go. No job is permanent. Do you understand me?
Emily Litella: "Oh, yes, yes, I do. I'll ... I will certainly do my best. I'll try to do better, hmmm."
Jane Curtin: "Please do."
Emily Litella: "Bitch." [Applause -- after a moment, Miss Litella briefly holds up two fingers behind Jane's head to the crowd's delight.]
Jane Curtin: "That's our news for tonight. Good night and have a pleasant tomorrow."
A government divided is not a price/earnings-expanding event, nor is it a recipe for a new leg of a bull market.
The market has continued to be boosted today by the growing probability that the Republicans will comfortably win a House majority -- though the likely outcome is that the Senate will remain controlled by the Democrats.
Despite protestations from several talking heads (e.g., Strategas and Bank of America/Merrill Lynch) over the last half hour on CNBC, a Republican Senate majority would likely require wins in California, Connecticut and Washington state. Victories in these states by the Republicans are unlikely.
In all likelihood we will be left with gridlock after the midterm elections are over.
My view is that while gridlock is seen historically as a plus for the markets, it's different this time.
The domestic economy faces numerous challenges to growth -- in the form of an overleveraged consumer, still-elevated joblessness and large fiscal imbalances (local, state and federal) -- that need to be addressed posthaste.
Indeed, the current anemic trajectory of growth exposes the economy to policy mistakes, a further drop in consumer and business confidence and other unknown and exogenous factors (such as geopolitical risk).
Stated simply, a government divided is not a price/earnings-expanding event, nor is it a recipe for a new leg of a bull market.
Banks Still Stuck
A new leg of upside for this sector looks difficult.
The banks continue to act poorly, and a sustained new leg to the upside seems difficult under this circumstance.
I am not a political analyst, so I have no special insight into the elections;
Nearly all elections make little difference to discounted cash flow;
It's a fair bet that some -- and perhaps most -- of whatever outcome there might be is reflected in prices.
Run, don't walk, to read 'A Hedge-Fund Manager's New Groove' in the Wall Street Journal.
Perhaps this is as much a reflection of the times and of the state of the markets as the shorts become longs.
Volatile Day Tomorrow
After the poor action yesterday, many expected more nervous action today. But the bulls gapped us up once again and, after a brief dip, we traded steadily higher for the rest of the day. Today, it looked like it was the bears that were nervous about jumping in front of tomorrow's big news events. Many folks are optimistic about the election and the Fed.
Personally, I don't think there is any trading edge at all in front of the big news events. We just have to wait and see what develops. Yes, the steady uptrend for the last couple months has created a good "sell-the-news" setup, but it is so painfully obvious it is tough to believe it is going to immediately work.
Even if we do see some selling tomorrow, I believe the dip buyers will be very active on any weakness and will not let the market roll over too easily. Bears who think this market is going to go straight down will probably be disappointed. In fact, there is a good chance that overly aggressive bears will end up serving as short-squeeze fodder.
It won't be easy to navigate this market tomorrow morning as we digest the election results and await the Fed decision, but we should have some very interesting action. If you are going to play, expect a high level of volatility and be ready to move quickly.
Personally, I don't think there is any trading edge at all in front of the big news events. We just have to wait and see what develops. Yes, the steady uptrend for the last couple months has created a good "sell-the-news" setup, but it is so painfully obvious it is tough to believe it is going to immediately work.
Even if we do see some selling tomorrow, I believe the dip buyers will be very active on any weakness and will not let the market roll over too easily. Bears who think this market is going to go straight down will probably be disappointed. In fact, there is a good chance that overly aggressive bears will end up serving as short-squeeze fodder.
It won't be easy to navigate this market tomorrow morning as we digest the election results and await the Fed decision, but we should have some very interesting action. If you are going to play, expect a high level of volatility and be ready to move quickly.
Thoughts For Monday
The rate of growth of Chinese manufacturing activity (PMI) quickened to 54.7 (the highest reading in six months).
The proximate cause for the rise in U.S. stock futures was an overnight report that the rate of growth of Chinese manufacturing activity (PMI) quickened to 54.7 (the highest reading in six months) vs. expectations of only 53.8.
The Best of Times, the Worst of Times
Expect current optimism to diminish and equities to succumb to the grimmer reality.
"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way -- in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only. "
-- Charles Dickens, A Tale of Two Cities
So began A Tale of Two Cities, one of only two historical works of fiction written by Charles Dickens. Dickens' novel depicts the plight of the French peasants who were beaten down by the French aristocrats in years leading up to the revolution, the corresponding brutality demonstrated by the oppressed toward the upper class amid the early years of the revolution and the depiction of many unflattering social parallels with life in London during those years.
The idea of the "people" against the "elites" in which social and political system changes occur, embodied in Dickens' work, is a recurring one over the course of history -- and is omnipresent today.
In the broadest sense, as investors in November 2010, we face the best of times and the worst of times.
Above all, the "best/worst" literary metaphor is most apt in the tension between the best of times (the cyclical tailwinds of monetary/fiscal stimulation that have buoyed growth) and the worst of times (the secular headwinds of a number of nontraditional factors that have produced a shallow recovery and that threaten a self-sustaining recovery).
The Best of Times
Politics. Today's populism -- manifested by increased activism, distrust in our financial institutions and rejection of the incumbent status quo -- began two years ago with the 2008 Democratic tsunami and has continued with the Republican Tea Party. The midterm elections tomorrow seem likely to produce gridlock, which has traditionally been market-friendly.
The Social Condition. The breathtaking growth in the Tea Party signals a growing conservatism in the U.S., an ideology typically associated with a desire for less government spending and for legislation favoring business.
The economy and policy.
* Global coordination: Through a committed all-in central banking community around the world, we avoided an economic Armageddon two years ago.
* Record low interest rates: With short-term interest rates anchored at zero, there are few alternatives for investors.
* Liquidity aplenty: A resolved Fed is promising that liquidity will remain abundant.
* An uptrending economy:: The overall rate of worldwide economic growth, while shallow, remains positive. Over here, the Chicago, Dallas and Richmond PMIs were better than expected last week. Over there, U.K. GDP rose by almost twice the rate of consensus expectations and, overnight, the rate of growth in the China's October PMI quickened to the most rapid pace in six months.
* A likely peak in the unemployment rate: Future jobs growth, based on improving initial claims data (lowest since July) and a continued improvement in corporate profits, appears likely to improve -- especially within the context of a possible repudiation of the administration's policies in the midterm elections this week (which could serve to reinvigorate business confidence).
* Inflation remains quiescent: Inflation rates remain subdued, owing importantly to minimal gains in the employment cost index. Low wage growth will help to sustain corporate profit margins.
* Housing has bottomed: New-home production continues well below demographic and household formation growth trends, and with mortgage rates at generational lows, affordability at the best gauge in several decades and the benefit of homeownership over renting at 10-year highs, there is an accumulated buildup in latent demand for housing.
* The conditions for a normal and self-sustaining economic recovery are at hand: Interest rates are low, durable expenditures (automobiles and housing) have been deferred, and the unemployment rate has likely peaked. The consensus of forecasters for a moderate improvement in economic growth is a conservative one.
Equities.
* Valuations are not rich: The U.S. stock market's valuations (at around 13x) remain below the historic mean (15.5x). When placed against the currently low level of inflation and interest rates, share prices are even cheaper.
* Return expectations and individual investor participation are low: While slowly building in the near term, multiyear individual inflows into domestic equity funds has been limited, providing the potential for greater equity buying power (and interest) in the years ahead.
The Worst of Times
Politics. It can be argued that the likelihood of gridlock in the aftermath of this week's midterm elections is not a P/E-expanding event, as the significance of our fiscal challenges (local, state and federal) and the currently weak domestic economic growth trajectory need to be quickly addressed. Moreover, the politics and policy of populism will remain with us for the foreseeable future and, with it, is the continuum of higher marginal tax rates for the wealthy and the burden of costly and cumbersome regulation (after years of laissez faire attitudes regarding policy within our regulatory agencies).
The social condition. Our Dickenesque condition of social inequality remains in the forefront of the political tide and future. The contempt for the wealthy and large corporations could be manifested in continued initiatives aimed at increasing upper-income earners' tax rates and in reducing corporate profitability (through increased taxes and the costs of heightened regulation).
The economy and policy.
* Lack of global coordination: Conditions are far different for QE 2 than QE 1. Unlike QE 1, when the world's central banks were all-in. U.S. policy makers are a bit on their own this time, as other areas of the world reject more massive monetary responses in favor of dealing more directly (and urgently) with their own fiscal imbalances. QE 2's impact remains uncertain, and the unintended consequences of more easing pose additional risk (e.g.,the CRB hit a two year high on Friday).
* A cyclical low in interest rates is at hand: Interest rates have already fallen to very low level, but while anchored at zero, they cannot go lower. Moreover, nearly every cycle characterized by the search for yield (as investors buy almost any long-dated asset) has backfired historically. Finally, any evidence of rising inflation (which we have already seen in feedstock and in food inputs) will incite the bond vigilantes and cause interest rates to resume their climb. (I continue to view shorting bonds as the trade of the decade.)
* Late in the liquidity game: By most measures, it is growing late in the liquidity game, and the cost and consequences of imbalances created by fiscal/monetary stimulation are ever closer at hand. Meanwhile, our fiscal imbalances multiply, our currency craters (as a worldwide rush to currency devaluation is offsetting some of the normal trade-deficit benefit), and the bulls rationalize these concerns by suggesting that the consequences "are beyond our investment time frame."
* Anemic economic growth poses inherent risks to its sustainability: The shallow domestic economic recovery is vulnerable to policy mistakes, a drop in business/consumer confidence and other unknown and exogenous variables. Meanwhile, the rate of sales growth is already beginning to decelerate and screwflation threatens record high corporate profit margins.
* Unemployment will remain elevated: The jobs picture is likely to be mired by a structural deterioration in employment and the continued propensity to hire on a temporary basis in the face of higher costs and more regulation. Limited wage growth and sour consumer confidence -- last week the University of Michigan Index dropped to its lowest level in a year -- will constrain personal consumption expenditures.
* The large productivity gains of the last decade are over: With average weekly hours worked stretched to the upper limits, most of the impressive productivity gains of the past few years seems over, as increased hirings are likely to negatively impact profitability.
* Housing's rebound will be muted: Weak confidence and a poor jobs market coupled with the surprisingly large drop in home prices will undermine the housing recovery. Mortgage-gate threatens the rebound in housing by signaling a deluge of unsold shadow inventory in 2011 and another possible fall in home prices.
* Tail risks: The long tail of the last credit cycle promises to show up in new quarters over the next one to two years. Mortgage-gate was a recent example of that tail. Odds favor more -- both here and abroad.
* It's different this time: The residue of the last cycle also brought with it a number of nontraditional headwinds that will continue to serve as a governor to economic growth (higher marginal tax rates, local, state and federal fiscal imbalances, more costly and burdensome regulation etc.). If gridlock means kicking the legislative can down the road until the next Presidential election and avoiding the necessary fiscal focus that would remedy the poor jobs picture, the self-sustaining economic thesis will be in jeopardy.
Equities.
* The market rally has been the world's fair: Equities are substantially off the generational low of March 2009 - as the better-than-expected recovery in corporate profits appears to have been materially discounted. Meanwhile, market leadership appears to be narrowing and market volume is tepid.
* Sentiment measures ebullient: Certain measures of investors' sentiment (AAII and Investors Intelligence) are back to levels that have typically existed at market tops. Another contrarian sign? The cover of Barron's this weekend is entitled "Bye-Bye, Bear."
Time and Tide Waits for No Man
"The water of the fountain ran, the swift river ran, the day ran into evening, so much life in the city ran into death according to rule, time and tide waited for no man, the rats were sleeping close together in their dark holes again, the Fancy Ball was lighted up at supper, all things ran their course."
-- Charles Dickens, A Tale of Two Cities
Implicit in some of the market rise over the last few months is the view that the tension described in today's opening missive will almost certainly be resolved favorably after the outcome of the midterm elections and the scope of quantitative easing are determined this week.
I am less certain.
When I weigh the body of the best and worst of times, I anticipate a government divided (what was described on "Meet the Press" yesterday as an "unearned" win by the Republicans in the House and a continued Democratic majority in the Senate) and few net benefits from QE 2 (and some adverse unintended consequences from further easing).
Looking ahead to early 2011, as the market braces for gridlock and more economic uncertainty and challenges, I expect the current optimism to diminish and for equities to succumb to the grimmer reality of slowing, uneven economic growth prospects, the challenges of nontraditional headwinds and a divided U.S. government unable to address key issues and imbalances.
A Marvell Buyout?
I'm hearing that a private equity firm has expressed interest in Marvell Technology
Thinking About the Week
I am not acting on this, but I expect a disappointing amount of quantitative easing to be announced Wednesday.
And I wouldn't be surprised if gold succumbs to some profit-taking this week.
For What It's Worth
I saw a great deal of capitulation/short-covering Monday morning.
Hmmm...
The SEC is investigating JPM for actions similar to those of GS in improperly selecting securities backed by subprime mortgages.
On Second Thought....
As to my last post, I am told it is "old news."
The proximate cause for the rise in U.S. stock futures was an overnight report that the rate of growth of Chinese manufacturing activity (PMI) quickened to 54.7 (the highest reading in six months) vs. expectations of only 53.8.
The Best of Times, the Worst of Times
Expect current optimism to diminish and equities to succumb to the grimmer reality.
"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way -- in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only. "
-- Charles Dickens, A Tale of Two Cities
So began A Tale of Two Cities, one of only two historical works of fiction written by Charles Dickens. Dickens' novel depicts the plight of the French peasants who were beaten down by the French aristocrats in years leading up to the revolution, the corresponding brutality demonstrated by the oppressed toward the upper class amid the early years of the revolution and the depiction of many unflattering social parallels with life in London during those years.
The idea of the "people" against the "elites" in which social and political system changes occur, embodied in Dickens' work, is a recurring one over the course of history -- and is omnipresent today.
In the broadest sense, as investors in November 2010, we face the best of times and the worst of times.
Above all, the "best/worst" literary metaphor is most apt in the tension between the best of times (the cyclical tailwinds of monetary/fiscal stimulation that have buoyed growth) and the worst of times (the secular headwinds of a number of nontraditional factors that have produced a shallow recovery and that threaten a self-sustaining recovery).
The Best of Times
Politics. Today's populism -- manifested by increased activism, distrust in our financial institutions and rejection of the incumbent status quo -- began two years ago with the 2008 Democratic tsunami and has continued with the Republican Tea Party. The midterm elections tomorrow seem likely to produce gridlock, which has traditionally been market-friendly.
The Social Condition. The breathtaking growth in the Tea Party signals a growing conservatism in the U.S., an ideology typically associated with a desire for less government spending and for legislation favoring business.
The economy and policy.
* Global coordination: Through a committed all-in central banking community around the world, we avoided an economic Armageddon two years ago.
* Record low interest rates: With short-term interest rates anchored at zero, there are few alternatives for investors.
* Liquidity aplenty: A resolved Fed is promising that liquidity will remain abundant.
* An uptrending economy:: The overall rate of worldwide economic growth, while shallow, remains positive. Over here, the Chicago, Dallas and Richmond PMIs were better than expected last week. Over there, U.K. GDP rose by almost twice the rate of consensus expectations and, overnight, the rate of growth in the China's October PMI quickened to the most rapid pace in six months.
* A likely peak in the unemployment rate: Future jobs growth, based on improving initial claims data (lowest since July) and a continued improvement in corporate profits, appears likely to improve -- especially within the context of a possible repudiation of the administration's policies in the midterm elections this week (which could serve to reinvigorate business confidence).
* Inflation remains quiescent: Inflation rates remain subdued, owing importantly to minimal gains in the employment cost index. Low wage growth will help to sustain corporate profit margins.
* Housing has bottomed: New-home production continues well below demographic and household formation growth trends, and with mortgage rates at generational lows, affordability at the best gauge in several decades and the benefit of homeownership over renting at 10-year highs, there is an accumulated buildup in latent demand for housing.
* The conditions for a normal and self-sustaining economic recovery are at hand: Interest rates are low, durable expenditures (automobiles and housing) have been deferred, and the unemployment rate has likely peaked. The consensus of forecasters for a moderate improvement in economic growth is a conservative one.
Equities.
* Valuations are not rich: The U.S. stock market's valuations (at around 13x) remain below the historic mean (15.5x). When placed against the currently low level of inflation and interest rates, share prices are even cheaper.
* Return expectations and individual investor participation are low: While slowly building in the near term, multiyear individual inflows into domestic equity funds has been limited, providing the potential for greater equity buying power (and interest) in the years ahead.
The Worst of Times
Politics. It can be argued that the likelihood of gridlock in the aftermath of this week's midterm elections is not a P/E-expanding event, as the significance of our fiscal challenges (local, state and federal) and the currently weak domestic economic growth trajectory need to be quickly addressed. Moreover, the politics and policy of populism will remain with us for the foreseeable future and, with it, is the continuum of higher marginal tax rates for the wealthy and the burden of costly and cumbersome regulation (after years of laissez faire attitudes regarding policy within our regulatory agencies).
The social condition. Our Dickenesque condition of social inequality remains in the forefront of the political tide and future. The contempt for the wealthy and large corporations could be manifested in continued initiatives aimed at increasing upper-income earners' tax rates and in reducing corporate profitability (through increased taxes and the costs of heightened regulation).
The economy and policy.
* Lack of global coordination: Conditions are far different for QE 2 than QE 1. Unlike QE 1, when the world's central banks were all-in. U.S. policy makers are a bit on their own this time, as other areas of the world reject more massive monetary responses in favor of dealing more directly (and urgently) with their own fiscal imbalances. QE 2's impact remains uncertain, and the unintended consequences of more easing pose additional risk (e.g.,the CRB hit a two year high on Friday).
* A cyclical low in interest rates is at hand: Interest rates have already fallen to very low level, but while anchored at zero, they cannot go lower. Moreover, nearly every cycle characterized by the search for yield (as investors buy almost any long-dated asset) has backfired historically. Finally, any evidence of rising inflation (which we have already seen in feedstock and in food inputs) will incite the bond vigilantes and cause interest rates to resume their climb. (I continue to view shorting bonds as the trade of the decade.)
* Late in the liquidity game: By most measures, it is growing late in the liquidity game, and the cost and consequences of imbalances created by fiscal/monetary stimulation are ever closer at hand. Meanwhile, our fiscal imbalances multiply, our currency craters (as a worldwide rush to currency devaluation is offsetting some of the normal trade-deficit benefit), and the bulls rationalize these concerns by suggesting that the consequences "are beyond our investment time frame."
* Anemic economic growth poses inherent risks to its sustainability: The shallow domestic economic recovery is vulnerable to policy mistakes, a drop in business/consumer confidence and other unknown and exogenous variables. Meanwhile, the rate of sales growth is already beginning to decelerate and screwflation threatens record high corporate profit margins.
* Unemployment will remain elevated: The jobs picture is likely to be mired by a structural deterioration in employment and the continued propensity to hire on a temporary basis in the face of higher costs and more regulation. Limited wage growth and sour consumer confidence -- last week the University of Michigan Index dropped to its lowest level in a year -- will constrain personal consumption expenditures.
* The large productivity gains of the last decade are over: With average weekly hours worked stretched to the upper limits, most of the impressive productivity gains of the past few years seems over, as increased hirings are likely to negatively impact profitability.
* Housing's rebound will be muted: Weak confidence and a poor jobs market coupled with the surprisingly large drop in home prices will undermine the housing recovery. Mortgage-gate threatens the rebound in housing by signaling a deluge of unsold shadow inventory in 2011 and another possible fall in home prices.
* Tail risks: The long tail of the last credit cycle promises to show up in new quarters over the next one to two years. Mortgage-gate was a recent example of that tail. Odds favor more -- both here and abroad.
* It's different this time: The residue of the last cycle also brought with it a number of nontraditional headwinds that will continue to serve as a governor to economic growth (higher marginal tax rates, local, state and federal fiscal imbalances, more costly and burdensome regulation etc.). If gridlock means kicking the legislative can down the road until the next Presidential election and avoiding the necessary fiscal focus that would remedy the poor jobs picture, the self-sustaining economic thesis will be in jeopardy.
Equities.
* The market rally has been the world's fair: Equities are substantially off the generational low of March 2009 - as the better-than-expected recovery in corporate profits appears to have been materially discounted. Meanwhile, market leadership appears to be narrowing and market volume is tepid.
* Sentiment measures ebullient: Certain measures of investors' sentiment (AAII and Investors Intelligence) are back to levels that have typically existed at market tops. Another contrarian sign? The cover of Barron's this weekend is entitled "Bye-Bye, Bear."
Time and Tide Waits for No Man
"The water of the fountain ran, the swift river ran, the day ran into evening, so much life in the city ran into death according to rule, time and tide waited for no man, the rats were sleeping close together in their dark holes again, the Fancy Ball was lighted up at supper, all things ran their course."
-- Charles Dickens, A Tale of Two Cities
Implicit in some of the market rise over the last few months is the view that the tension described in today's opening missive will almost certainly be resolved favorably after the outcome of the midterm elections and the scope of quantitative easing are determined this week.
I am less certain.
When I weigh the body of the best and worst of times, I anticipate a government divided (what was described on "Meet the Press" yesterday as an "unearned" win by the Republicans in the House and a continued Democratic majority in the Senate) and few net benefits from QE 2 (and some adverse unintended consequences from further easing).
Looking ahead to early 2011, as the market braces for gridlock and more economic uncertainty and challenges, I expect the current optimism to diminish and for equities to succumb to the grimmer reality of slowing, uneven economic growth prospects, the challenges of nontraditional headwinds and a divided U.S. government unable to address key issues and imbalances.
A Marvell Buyout?
I'm hearing that a private equity firm has expressed interest in Marvell Technology
Thinking About the Week
I am not acting on this, but I expect a disappointing amount of quantitative easing to be announced Wednesday.
And I wouldn't be surprised if gold succumbs to some profit-taking this week.
For What It's Worth
I saw a great deal of capitulation/short-covering Monday morning.
Hmmm...
The SEC is investigating JPM for actions similar to those of GS in improperly selecting securities backed by subprime mortgages.
On Second Thought....
As to my last post, I am told it is "old news."
Market Summary For Monday
Market players started off with a bang this morning on good economic news out of China and optimism about the election and the Fed later this week, but worries about a possible sell-the-news reaction set in and caused some profit-taking. There has been so much discussion about a possible sell-the-news reaction that nervous market players were anxious to jump in front of it rather than wait for it to actually occur.
When events are well anticipated, market players will usually accelerate the reaction. It will be completely unsurprising to most everyone if the Republicans do well in the election and the Fed announces further quantitative easing. It is too perfect of a setup for a sell-the-news reaction, and that is exactly why we are seeing it happen to some extent today. If we sell off into the news, it will completely change the dynamic for what will occur on Wednesday.
The selling felt worse than the modest losses in the indices, but that was due to the gap up to start the day. The action still isn't that bad at all, but I'm hearing a lot of predictions that we are forming a top. Maybe we are, but I don't think it is going to be that simple. I'm looking for at least another stab or two to the upside before buyers will manage a better pullback. It is just too neat and clean for the news events to be the exact turning points. If there really is some big surprise like no quantitative easing by the Fed or a good showing by Democrats, then that will change things, but if the news is roughly as expected, I expect substantial volatility rather than a straight down sell-the-news reaction.
We have another day of waiting tomorrow, but there is going to be lots of jostling for position in front of Wednesday's news. No one can be very certain how things will play out.
When events are well anticipated, market players will usually accelerate the reaction. It will be completely unsurprising to most everyone if the Republicans do well in the election and the Fed announces further quantitative easing. It is too perfect of a setup for a sell-the-news reaction, and that is exactly why we are seeing it happen to some extent today. If we sell off into the news, it will completely change the dynamic for what will occur on Wednesday.
The selling felt worse than the modest losses in the indices, but that was due to the gap up to start the day. The action still isn't that bad at all, but I'm hearing a lot of predictions that we are forming a top. Maybe we are, but I don't think it is going to be that simple. I'm looking for at least another stab or two to the upside before buyers will manage a better pullback. It is just too neat and clean for the news events to be the exact turning points. If there really is some big surprise like no quantitative easing by the Fed or a good showing by Democrats, then that will change things, but if the news is roughly as expected, I expect substantial volatility rather than a straight down sell-the-news reaction.
We have another day of waiting tomorrow, but there is going to be lots of jostling for position in front of Wednesday's news. No one can be very certain how things will play out.
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