Archive for October, 2010

  • Buy List Update
    , October 31st, 2010 at 9:58 pm

    Now that October is on the books, let’s take a look at the YTD performance of the Buy List.

    Through October, the Buy List is up 10.25% compared with 6.11% for the S&P 500 (dividends not included).

    Here’s a look at the chart for 2010:

  • You STILL Haven’t Sign up for CWS Review!
    , October 29th, 2010 at 3:01 pm

    Well, what are you waiting for? It’s free!

  • “Yes you did. You invaded Poland.”
    , October 29th, 2010 at 2:42 pm

    That’s enough market talk for one week. Have a great weekend everyone, and enjoy this classic John Cleese (who turned 71 this week) clip as Basil Fawlty:

  • Time to Raise Rates?
    , October 29th, 2010 at 2:05 pm

    Last week, Josh Brown brought up the issue of the Federal Reserve raising interest rates. With QE2 around the corner, it doesn’t look like the Fed will, but I think Josh has a good case.

    Here’s a look at the Fed Funds rate against trailing four-quarter nominal GDP:

    The two lines tack each other well. The hotly debated point is the middle of last decade when nominal GDP indicted that rates were too low. Other commentators said this as well, and more sophisticated measures like the Taylor Rule agreed.

    Lately, however, nominal GDP growth has climbed to over 4% while interest rates are still stuck at 0%. Should this be discounted since it’s only making up for the slack caused by negative growth? Or is the Fed again behind the curve?

  • The Double Dip Is Dead
    , October 29th, 2010 at 12:50 pm

    Continuing with what I said before, the Economic Cycle Research Institute also calls the end of the Double Dip:

    The good news is that the much-feared double-dip recession is not going to happen.

    That is the message from leading business cycle indicators, which are unmistakably veering away from the recession track, following the patterns seen in post-World War II slowdowns that didn’t lead to recession.

    For 25 years, we’ve personally spent every working day studying recessions and recoveries. Based on our work and that of our colleagues at ECRI, we’ve called the last three recessions and recoveries without any false alarms, including an accurate forecast of the end of the most recent recession in the summer of 2009.

    After completing an exhaustive review of key drivers of the business cycle, ranging from credit to inventories and measures of labor market conditions, we can forecast with confidence that the economy will avoid a double dip.

    But the bad news is that a revival in economic growth is not yet in sight. The slowing of economic growth that began in mid-2010 will continue through early 2011. Thus, private sector job growth, which is already easing, will slow further, keeping the double-dip debate alive.

    Of course, it is the renewed job market weakness, combined with deflation fears, that is behind the Fed’s promise to implement a second round of quantitative easing, or QE2.

  • QE2 Will Spur Demand for More Risk
    , October 29th, 2010 at 10:19 am

    Next week, the Federal Reserve is expected to announce another round of Quantitative Easing, or as the cool kids are calling it, QE2. All investors need to understand that QE2 will have a major impact on their investments. The most important aspect is that Quantitative Easing will help fuel a demand for riskier asset classes.

    More specifically, Quantitative Easing will aid a shift toward growth stocks at the expense of bonds and value stocks. QE2 won’t affect the direction of stock market—that will remain strong—as much as it will alter the market’s internal leadership.

    Now let me back up and explain this in more detail. Over the last several weeks, the Federal Reserve has made its QE intentions crystal clear. I’m surprised that they haven’t taken out a full-page ad in the Wall Street Journal.

    The Fed’s main problem is that the economy is still grinding its wheels, as today’s GDP report shows, and interest rates are already at 0%. As a result, the central bank now plans to inject money into the economy by buying enormous amounts of U.S. Treasuries.

    The only question now is “how much?” The general consensus on the Street is that QE2 will clock in around $500 billion, although some say it could be as much as $1 trillion. We’re really in unchartered territory here.

    Personally, I think the plan will be less than the Street expects. Remember, the C in FOMC is for “committee” and that means compromises. We can expect uber-hawk Thomas Hoenig, the president of the Kansas City Fed, to be a “nay” vote, and he may be joined by one or two others. I expect an announcement of around $250 billion give or take, which may even cause a near-term pullback. Much like a pampered Hollywood starlet, Wall Street just loves to be disappointed when it receives favors.

    So where will Bernanke and his buddies get all this cash? That’s easy. They have a magical super power where they can write checks out of thin air. Or, at least, they can create currency out of thin air. The U.S. dollar has already gotten smacked around in the currency pits lately, although it’s not nearly as bad as the dollar’s haters make it sound.

    My thesis that the Fed’s purchasing of debt will lead an exodus out of Treasuries and into riskier assets may sound counterintuitive. The important point is that the market is already heavily tilted toward low-risk assets. Currently, there’s a lot of money—too much money—sitting on the sidelines. Moody’s Investors Service reports that U.S. companies are sitting on $943 billion in cash. Three companies; Cisco (CSCO), Microsoft (MSFT) and Google (GOOG) account for the largest portion. Hey, who needs the Fed? They could do a QE all by themselves!

    The simple fact is, to paraphrase Jimmy McMillan, bonds are too damn high. In fact, the move out of bonds has already started. Yesterday, the yield on the 30-year Treasury closed at its highest level in nearly three months and it’s now over 50 basis points from its low point in late August. Not by coincidence, that was right when the stock market bottomed. In short, the stock rally has been at the expense of bonds.

    What this means is that at long last, investors are finally choosing sanity over liquidity. Let’s look at some numbers: Since August 31, the S&P 500 is up 12.8%. That’s a nice run, but the growth side of the index as measured by the S&P 500 Growth Stock Index is up 19.3%. That’s nearly double the 10.4% gain for the S&P Value Index.

    Here’s the key to understanding QE2’s impact: Don’t think of it as a stock movement. Instead, think of it as a risk movement with a seal of approval from the Federal Reserve.

  • Third-Quarter GDP Grew By 2%
    , October 29th, 2010 at 8:31 am

    The official numbers are in and the third-quarter GDP grew by just 2%.

    That estimate matched the consensus forecasts for the gross domestic product, and is a slight uptick from the second quarter.

    Though the recovery officially began in June 2009, growth since then has been tepid, at best. The economy expanded at a 1.7 percent pace in the second quarter, down sharply from a 3.7 percent rate in the first.

    In recent weeks, the economy has presented two faces, which is reflected in the latest G.D.P. numbers. There have been fledgling signs of growth: home sales and chain store sales are up bit, a swelling stock market has raised consumer confidence a few notches, and jobless claims fell noticeably last week, albeit to a still quite high and painful level. At the same time, the steroidal effect of the stimulus spending is fading. City and state governments have shed tens of thousands of employees, and states face a sea of red ink as they look at next year’s budgets.

    Sigh. This is yet another quarter of subpar growth. For the economy to truly recover, we need to see several quarters of GDP growth over 3%. Over 4% would be even better.

    This report is the government’s first attempt at an estimate. The report will be revised two more times, at the end of November and at the end of December, and it will probably be revised a few more times after that.

    The trouble is that the government tries to estimate the trade numbers for the last month of the quarter. They give it a good effort, but we never know exactly. For the third quarter, it turns out that trade knocked off 2% from the final number. Excluding trade, the economy grew by 4%.

    Here are the GDP numbers for the past few quarters:

    Quarter GDP Growth
    Dec-07 2.90%
    Mar-08 -0.73%
    Jun-08 0.60%
    Sep-08 -4.00%
    Dec-08 -6.77%
    Mar-09 -4.87%
    Jun-09 -0.70%
    Sep-09 1.60%
    Dec-09 5.01%
    Mar-10 3.73%
    Jun-10 1.72%
    Sep-10 1.99%

    The good news, if there is any, is that the economy is no longer decelerating, meaning the rate of growth isn’t slowing.

    That’s basically what all the Double Dip hype amounted to: it was all in the second derivative. We never dipped. We grew, but the rate of growth dipped. This report has shown a very, very slight acceleration. Very, very, very slight.

    Over the last 10 years, real GDP has grown by 17.68% which is just 1.64% on an annualized basis. The economy has grown at a slower pace over the last 10 years than over the three-year period of 1963, 1964 and 1965.

  • Morning News: October 29, 2010
    , October 29th, 2010 at 7:55 am

    Economy in U.S. Likely Grew as Consumer Spending Climbed

    Stock Futures Ease with GDP on Tap

    Global Stocks Lower; Nikkei Slides 1.8%

    Credit Suisse Grabs No. 1 Position in Advising Consumer M&A

    Inflation and Unemployment Rise in Euro Region

    Obama to Promote Business Deduction to Spur Investment

    Microsoft Profits Soar 51%

    Sony, Samsung Brace for `Miserable’ Christmas Sales as TV Price War Looms

    Total’s third-quarter adjusted profit up 32%, Production increases more than 4%

    The 5 Dumbest Things on Wall Street: Oct. 29

    This Is What A Blow Off Top Looks Like

    Keith Richards

    “The whole business thing is predicated a lot on the tax laws,” says Keith, Marlboro in one hand, vodka and juice in the other. “It’s why we rehearse in Canada and not in the U.S. A lot of our astute moves have been basically keeping up with tax laws, where to go, where not to put it. Whether to sit on it or not. We left England because we’d be paying 98 cents on the dollar. We left, and they lost out. No taxes at all. I don’t want to screw anybody out of anything, least of all the governments that I work with. We put 30% in holding until we sort it out.”

  • The Last Five Closes for the S&P 500
    , October 28th, 2010 at 5:10 pm

    Date S&P 500
    25-Oct-10 1185.62
    26-Oct-10 1185.64
    27-Oct-10 1182.45
    28-Oct-10 1183.78

    Feel the excitement!

  • Growth Stocks Takes the Lead
    , October 28th, 2010 at 1:55 pm

    Here’s a look at the S&P 500 Growth Stock Index compared with the Value Stock Index:

    Lately, growth has taken a lead, which is what you would expect in a rising market. There’s also another relationship: growth usually outperforms value when interest rates are rising.

    The long end of the yield has climbed over the past few weeks but it’s nothing too dramatic yet. However, it might turn into something. I still think the Federal Reserve will raise short-term rates sooner than most people expect.