• Morning News: November 4, 2010
    Posted by on November 4th, 2010 at 8:06 am

    Bernanke Experiments With Crisis Tools to Boost Economy

    Dollar Jettisoned After Fed, Risk Appetite Stoked

    Emerging Market Countries Criticize Fed Decision

    China Should ‘Normalize’ as U.S. Eases, PBOC Official Urges

    German Bonds Fall After Fed Decision; France, Spain to Auction Securities

    Crude Oil Extends Gains After Breaching 6-Month High

    SEC Bans ‘Naked Access’

    Time Warner Cable to Buy Back $4 Billion in Stock in Its First Repurchase

    Samsung Tops U.S. Mobile Phone Market

    Unilever Upbeat on Pricing as Q3 Sales Rise

    GM Said to Have Disagreed With Treasury Over IPO Price Range

    Mythbuster: Russolillo on Stocks During Gridlock

  • Bernanke’s Editorial
    Posted by on November 4th, 2010 at 6:12 am

    In the Washington Post, Ben Bernanke explains why the Fed went ahead with Quantitative Easing:

    This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

    While they have been used successfully in the United States and elsewhere, purchases of longer-term securities are a less familiar monetary policy tool than cutting short-term interest rates. That is one reason the FOMC has been cautious, balancing the costs and benefits before acting. We will review the purchase program regularly to ensure it is working as intended and to assess whether adjustments are needed as economic conditions change.

    Although asset purchases are relatively unfamiliar as a tool of monetary policy, some concerns about this approach are overstated. Critics have, for example, worried that it will lead to excessive increases in the money supply and ultimately to significant increases in inflation.

    Our earlier use of this policy approach had little effect on the amount of currency in circulation or on other broad measures of the money supply, such as bank deposits. Nor did it result in higher inflation. We have made all necessary preparations, and we are confident that we have the tools to unwind these policies at the appropriate time. The Fed is committed to both parts of its dual mandate and will take all measures necessary to keep inflation low and stable.

    Read the whole thing. This doesn’t strike me as terribly convincing.

    He’s saying that because we need to get inflation higher, we’re resorting to the same strategy we tried before, which, by the way, didn’t result in higher inflation the first time.

  • Psst — Don’t Tell Anyone But Earnings Have Been Great This Quarter
    Posted by on November 3rd, 2010 at 10:27 pm

    Lost in all this talk of QE2 and elections has been the fact that this has been a great earnings season. (No, really. It has.)

    We’re more than two-thirds done and this season is on track to have one of the best “beat rates” ever. The media earnings surprise has been 4.9%. Normally, surprises run around 3%. As of Monday, there have been 255 positive surprises and just 56 misses. That’s really good.

    There is a downside, though. Most of the good news has been due to higher margins. The sales beats have been nowhere near as impressive as the earnings beats. Higher margins are good, but the catch is that margins can only go so high. Eventually, you have to have sales growth. We’ve also seen that analysts haven’t been raising estimates for next year.

    The overriding fact is that the market is still cheap on a valuation basis. The S&P 500 is probably on track to make $84 this year, give or take. Assuming there are no meteor strikes next year, we’ll probably make $95.

    The S&P 500 closed just shy of 1200 today, so we’re talking about a forward P/E Ratio of 12.6. Flip it over and that’s an earnings yield of 7.9%. Last I checked, yields aren’t anywhere close to that.

    As I’ve said before, the Fed is telling everyone to shift up the risk ladder. They want all those companies to use their cash hordes to hire people. They’ll do whatever it takes.

  • Becton, Dickinson Misses By a Penny
    Posted by on November 3rd, 2010 at 9:01 pm

    Becton, Dickinson (BDX) sneaked up on us and reported earnings after today’s close. Unfortunately, this became our first earnings miss of the season, although it was only by a penny.

    For their fiscal fourth-quarter, Becton, Dickinson earned $1.24 per share compared with Wall Street’s forecast of $1.25 per share. I’m a little disappointed since the last two earnings reports were quite good.

    The good news, and more important in my view, is that the company gave guidance for the next fiscal year (ending September 2011) of earnings ranging between $5.45 per share and $5.55 per share. The Street was at $5.42 so it’s nice to see them exceed expectations. For this past year, BDX made $4.90 per share. The revenue forecast for next year of 4% growth is on the light side. The stock fell a bit after-hours.

    The company also said it plans to buy back $1.5 billion worth of stock next year and another $600 million in 2012. I know investors don’t like high-priced stocks, but BDX is a solid buy. Any entry below $80 is a good value.

    Update: Here’s the transcript of the earnings call from Seeking Alpha.

  • Ford Hits Five-Year High
    Posted by on November 3rd, 2010 at 3:20 pm

    If anyone cares about stocks today, Ford (F) just broke out above $15 per share. This is Ford’s highest price since July 2004:

  • The 30-Year Yield Soars
    Posted by on November 3rd, 2010 at 3:09 pm

    Can you guess when the QE2 announcement came? I’ll bet you can!

  • Detail from the NY Fed
    Posted by on November 3rd, 2010 at 2:56 pm

    From the NY Fed’s website:

    Statement Regarding Purchases of Treasury Securities
    November 3, 2010

    On November 3, 2010, the Federal Open Market Committee (FOMC) decided to expand the Federal Reserve’s holdings of securities in the System Open Market Account (SOMA) to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate. In particular, the FOMC directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to purchase an additional $600 billion of longer-term Treasury securities by the end of the second quarter of 2011.

    The FOMC also directed the Desk to continue to reinvest principal payments from agency debt and agency mortgage-backed securities into longer-term Treasury securities. Based on current estimates, the Desk expects to reinvest $250 billion to $300 billion over the same period, though the realized amount of reinvestment will depend on the evolution of actual principal payments.

    Taken together, the Desk anticipates conducting $850 billion to $900 billion of purchases of longer-term Treasury securities through the end of the second quarter. This would result in an average purchase pace of roughly $110 billion per month, representing about $75 billion per month associated with additional purchases and roughly $35 billion per month associated with reinvestment purchases.

    The Desk plans to distribute these purchases across the following eight maturity sectors based on the approximate weights below:

    Nominal Coupon Securities by Maturity Range*

    1.5 to 2.5 years: 5%
    2.5 to 4 years: 20%
    4 to 5.5 years: 20%
    5.5 to 7 years: 23%
    7 to 10 years: 23%
    10 to 17 years: 2%
    17 to 30 years: 4%
    1.5 to 30 year TIPs: 3%

    *The on-the-run 7-year note will be considered part of the 5½- to 7-year sector, and the on-the-run 10-year note will be considered part of the 7- to 10-year sector.
    **TIPS weights are based on unadjusted par amounts.

    (This distribution is why the belly of the yield curve is plunging. The two-year is at a record low. The 30/5 spread is at a record.)

    Under this distribution, the Desk anticipates that the assets purchased will have an average duration of between 5 and 6 years. The distribution of purchases could change if market conditions warrant, but such changes would be designed to not significantly alter the average duration of the assets purchased.

    To provide operational flexibility and to ensure that it is able to purchase the most attractive securities on a relative-value basis, the Desk is temporarily relaxing the 35 percent per-issue limit on SOMA holdings under which it has been operating. However, SOMA holdings of an individual security will be allowed to rise above the 35 percent threshold only in modest increments.

    Purchases associated with balance sheet expansion and those associated with principal reinvestments will be consolidated into one set of operations to be announced under the current monthly cycle. On or around the eighth business day of each month, the Desk will publish a tentative schedule of purchase operations expected to take place through the middle of the following month, as well as the anticipated total amount of purchases to be conducted over that period. The schedule will include a list of operation dates, settlement dates, security types to be purchased (nominal coupons or TIPS), the maturity date range of eligible issues, and an expected range for the size of each operation.

    The Desk expects to conduct the November 4 and November 8 purchase operations that were announced on October 13, and it plans to publish its first consolidated monthly schedule on November 10 at 2:00 p.m.

    Purchases will be conducted with the Federal Reserve’s primary dealers through a series of competitive auctions operated through the Desk’s FedTrade system. Consistent with current practices, the results of each operation will be published on the Federal Reserve Bank of New York’s website shortly after each purchase operation has concluded. In order to ensure the transparency of our purchase operations, the Desk will also begin to publish information on the prices paid in individual operations at the end of each monthly calendar period, coinciding with the release of the next period’s schedule.

  • QE2 Is On!
    Posted by on November 3rd, 2010 at 2:19 pm

    $600 Billion, $75 billion per month.

    I was off. The plan is larger than I expected. Here’s the Fed’s statement:

    Press Release
    Federal Reserve Press Release

    Release Date: November 3, 2010
    For immediate release

    Information received since the Federal Open Market Committee met in September confirms that the pace of recovery in output and employment continues to be slow. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts continue to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters.

    Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.

    To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.

    The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

    The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.

    Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Sandra Pianalto; Sarah Bloom Raskin; Eric S. Rosengren; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

    Voting against the policy was Thomas M. Hoenig. Mr. Hoenig believed the risks of additional securities purchases outweighed the benefits. Mr. Hoenig also was concerned that this continued high level of monetary accommodation increased the risks of future financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy.

    The two-year Treasury is spiking while the 30-year T-bond is falling. I believe the two-year is now at a record low.

  • Alert Levels Around the Globe as a Result of the Recent Terrorst Threats
    Posted by on November 3rd, 2010 at 2:12 pm

    While we’re waiting for the Fed, you can enjoy this missive which is making the email rounds today:

    The English are feeling the pinch in relation to recent terrorist threats and have raised their security level from “Miffed” to “Peeved.” Soon, though, security levels may be raised yet again to “Irritated” or even “A Bit Cross.” “A Bit Cross” has not been used since the blitz in 1940 when tea supplies all but ran out. Terrorists have been re-categorised from “Tiresome” to a “Bloody Nuisance.” The last time the British issued a “Bloody Nuisance” warning level was during the great fire of 1666.

    The Scots raised their threat level from “Pissed Off” to “Let’s get the Bastards.” They don’t have any other levels. This is the reason they have been used on the frontline in the British army for the last 300 years.

    The French government announced yesterday that it has raised its terror alert level from “Run” to “Hide.” The only two higher levels in France are “Collaborate” and “Surrender.” The rise was precipitated by a recent fire that destroyed France’s white flag factory, effectively paralysing the country’s military capability.

    The Italians have increased the alert level from “Shout loudly and excitedly” to “Elaborate Military Posturing.” Two more levels remain: “Ineffective Combat Operations” and “Change Sides.”

    The Germans also increased their alert state from “Disdainful Arrogance” to “Dress in Uniform and Sing Marching Songs.” They also have two higher levels: “Invade a Neighbour” and “Lose.”

    The Belgians, on the other hand, are all on holiday as usual, and the only threat they are worried about is NATO pulling out of Brussels.

    The Spanish are all excited to see their new submarines ready to deploy. These beautifully designed subs have glass bottoms so the new Spanish navy can get a really good look at the old Spanish navy.

    The Americans meanwhile are carrying out pre-emptive strikes on all of their allies, just in case.

    The Australians, meanwhile, have raised their security level from “No worries” to “She’ll be alright, mate.” Three more escalation levels remain, “Crikey!, “I think we’ll need to cancel the barbie this weekend” and although this one has never been warranted, “The Barbie is cancelled.”

    The New Zealanders have also raised their security levels – from “baaa” to “BAAAA!” Due to continuing defence cutbacks (the air force being a squadron of spotty teenagers flying paper aeroplanes and the navy some toy boats in the Prime Minister’s bath), New Zealand only has one more level of escalation, which is “Shit, I hope Australia will come and rescue us.”

  • Some Election Numbers
    Posted by on November 3rd, 2010 at 12:07 pm

    Here are a few observations on the elections. I think it’s interesting how economic factors aren’t as important as concerns involving race or education.

    The national exit poll on House races showed that:

    Nearly twice as many Democrats voted for Republican candidates as vice-versa.

    Democrats won voters making less than $100,000 by a margin of 49% to 48%. That’s not much at all. Over $100,000, the GOP won 58% to 40%.

    Whites who make under $50,000 went for the GOP 54% to 43%.

    White college grads voted 6% more Democratic than non-college grads. But non-white college grads voted 6% less than Democratic than non-white non-college grads.

    I think “moderate” has become a replacement for “liberal” for people who don’t like that word. Thirty-nine percent of voters call themselves moderate and they went for the Democrats 56% to 42%.

    It looks like “independent” does the same thing for people who don’t like to call themselves Republicans. Independents went for the GOP by 55% to 39%.

    On the question of the stimulus—33% said it has helped the economy, 33% said it has hurt the economy and 32% said it has made no difference.

    Here’s something that would have made no sense 80 years ago: Thirty-five percent of voters blame Wall Street for our economic problems. They broke for Republicans 56% to 42%.