October 26, 2010: The Market is Convinced….QE2 Will Fix Everything
October 26th, 2010
Last week, seven more banks were seized by FDIC regulators at an Insurance Fund cost of $478 million. That brings 2010’s total of seized banks to 139 at an Insurance Fund cost of $21.1 Billion. In 2009, 140 banks were seized at an Insurance Fund cost of $36.5 Billion.
Apparently, none of that matters.
Yesterday, for the first time ever, the government issued paper with a negative yield. $10 Billion in five-year TIPS (Treasury Inflation Protected Securities) were sold yesterday with a yield of -0.55%. Why? Those investors are betting that the Fed will be wildly successful in introducing controlled inflation into the market and thereby stimulating the economy. Their risk? Stagflation or Deflation. If the Fed is unable to pump enough liquidity into the economy to prop up and sustain a recovery, those investors will actually pay 0.55% for the privilege of loaning their cash to the US Government.
Market response? Zero.
The G-20 Finance Ministers and Central Bank Governors met last weekend in Seoul and agreed to a “plan that would avoid dangerous currency devaluations and would also attempt to reduce trade imbalances.” That plan was reportedly introduced by the US but was met with strong opposition from Japan as well as other export-driven nations. The G-20 Business Meeting and Summit will be in Seoul during November 10-12.
This Friday, we get the first of three estimates of Q3 GDP and economists are expecting +2%. Then, on November 2, the FOMC begins a two-day meeting. While no-one expects a move in interest rates (that used to be important), all the market cares about is the magnitude of quantitative easing that will be introduced or promised.
With as much anticipation as there is heading into next week (throw the mid-term elections in there just for fun), recent price action is saying that the results of GDP, FOMC, and the elections will be overwhelmingly positive.
With the major averages near 2010 highs which are also recovery highs, the idea of “buy low and sell high” seems to have been replaced with “buy high and (hope to) sell higher”. Our view is that when momentum starts to look this one-sided, a sharp reversal can quickly develop.
We maintain our cautious view.
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October 21, 2010: Mid-Terms and the Markets
October 21st, 2010
As we are all about to be subjected to an avalanche of campaign sound bites about which person and which political party is better-suited to lead our law-making bodies of government, the message of the market is worth a glimpse.
There has been much written and discussed in the court of public opinion as to the effectiveness of the past two years during which time the same political-leaning party has controlled the White House and both houses of congress. As we have said many times, one of the most time-honored stock market rules is “don’t fight the Fed”, which means when the Federal Open Market Committee (Mr. Bernanke and company) starts down the path of lowering interest rates and/or embarks on a set of policies intended to support the market, betting against that force is simply a bad idea. When the Fed can marshal the resources (money printing, bond buying, etc) of the entire United State government, it will get its way eventually.
So now what?
The market has enjoyed an unprecedented period of government guarantees and promises of more to come. So that brings us to a question. What happens if/when power shifts to a group of law-makers who wants to cut spending rather than spend freely?
Maybe the market is anticipating a power transfer and has been rallying in reponse to what MAY develop. However, it is possible (probable, we think), that a tightening up of the recent free-spending policies will be at least a short-term market negative.
Separately, a Washington Post story today said that Fannie Mae and Freddie Mac could need as much as $215 Billion more in taxpayer bailout funds over the next three years. That came from the Federal Housing Finance Authority. The article reminds us of the progression of welfare to the mortgage giants. In 2008, President Bush pledged $200 Billion to keep the companies solvent. Then, as the situation escalated in a big, bad way, President Obama in early 2009 doubled that pledge to $400 billion. Finally, in late 2009, President Obama promised unlimited support to Fannie and Freddie. In addition to Fannie and Freddie, there has been $57 Billion in realized losses to the Deposit Insurance Fund of the FDIC as a result of failed banks since the beginning of 2009.
The political barbs and promises are, as I write this, likely being loaded into media canons for rapid deployment during the final push into election day. Over the next several days, we will see some of the worst in people ascandidates simply hammer each other in hopes of swaying voters their way.
As for the investment landscape….if the recent bullish catalyst has in fact been the promise of more quantitative easing, a shift in political power could at least slow if not altogether stop the spending and guarantee spree. Such a development would likely give the bullish camp reason to slow if not outright reverse their collective sentiment.
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October 13, 2010: Bears Kicked to the Curb Once Again
October 13th, 2010
In minutes from the most recent FOMC meeting on September 21 (released yesterday), the central bank’s threat/promise of more intervention was substantiated again. “Policy-makers had a sense that more accommodation may be appropriate before long”, was the dagger to the bears this time around.
Despite growing disagreements on the past and/or future effectiveness of aggressive government measures to stimulate lasting economic growth, the Fed’s comments definitely delivered just what the market wanted…..the promise of an open check book to keep artificially supporting the market that, the thinking goes, must attract real spending and investment at some point.
Interestingly, JPM and INTC earnings this morning were labeled as “superb” and “very strong”. Both stocks are now down on the day. Also, GPN (October 11 post-close) and ADTN (October 12 post close), reported strong earnings but sorely disappointed investors regarding forward guidance.
As the market remains squarely focused on the next FOMC meeting (November 2-3) and is fully expecting a strong confirmation of current hope for more and aggressive quantitative easing (QE2, as some commentators are calling it), crowd psychology suggests that the bullish side of the boat is getting quite full.
At some point (we think sooner than later), investors will be forced to look out beyond a day or a week to consider implications of when the government stops functioning as buyer/guarantor of last resort. Investors are making an enormous bet that there will be no negative surprises in the foreseeable future from earnings or the economy or the geo-political stage or from just about anywhere else.
It is often said in the depths of bear cycles, “Don’t bet on the end of the world…that only happens once.” It is equally dangerous to expect a perfect all-news-is-good-news scenario to last. The market has an uncanny way of surprising the largest group of like-minded investors.
Just look at March 2000 and October 2007.
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October 8, 2010: Bad News=Good News…Again?
October 8th, 2010
BLS released its September Employment report this morning which showed, among many other things, that payrolls fell by 95,000 in September. August and July were also revised lower by a total of 15,000 jobs.
The agency also released a wave of revisions for the twelve month period ending March 2010 which showed, not-surprisingly, that far more jobs were lost in that period than previously reported. 366,000 more overall jobs (21.5% more) and 371,000 more private sector jobs were lost during that twelve month period than previously reported.
Fifteen minutes after the report hit the tape, Reuters put out an article in which many analysts are reportedly calling the likelihood of more (and big) Fed supportive/stimulative measures “almost certain” in wake of today’s Employment report.
So….does more bad Employment news assure that the Fed will keep pumping liquidity to “stimulate” the economy? Maybe not.
The S&P 500 rallied 82.9% during March 2009 to April 2010 based on a wide array of spending programs and guarantees. The April 2010 rally peak of 1219.80 was just below a 50% upside retracement of the October 2007 to March 2009 decline (1228.74). Investors assigned a great deal of value to the 1200-1220 area in April 2010. The index first rallied back up through 1200 on April 14. Over the next fourteen trading days, the index spent three days entirely above 1200 and two days entirely below 1200. The other nine days were extremely volatile as the index vacillated above and below 1200. That brief consolidation was resolved to the downside and the index declined 17.1% from its April peak to July 1’s low of 1010.91.
Some voices within the Fed starting to squirm at the idea of keeping the printing presses in high gear. If those voices actually get traction and a larger following as mid-term elections draw near, the huge bullish catalyst of “don’t fight the Fed” could get shelved and then the market would actually have to stand (or fall) on its own merit.
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