• 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%.

  • Waiting on the Fed
    Posted by on November 3rd, 2010 at 11:30 am

    Now that the election is finally past us, we can turn our attention to the Fed and the announcement that’s due at 2:15 pm. How big will QE2 be?

    I can guarantee you that some commentators will see it as far too big while others will see it as far too small. I’m starting to expect that the Fed may use a two-part strategy to boost the “headline effect.” For example, they may announce $500 billion in Treasury purchases followed by $300 billion in purchases from the payments from their mortgage holdings. Something like that. But really, I just don’t know, though I suspect that the market will be disappointed.

    The indexes are just about flat today. The election seems to have gone according to most expectations, so the market isn’t digesting any major surprises. There also isn’t much going on with the Buy List today. Most of our stocks are near flat. Stryker (SYK) is up about 2.9%, making it our best mover on the day. Currently, the Buy List is up 0.08% today compared with a loss of 0.35% for the S&P 500.

    Stay tuned for the Fed!

  • Morning News: November 3, 2010
    Posted by on November 3rd, 2010 at 7:27 am

    Dollar Steady but Seen Undermined by Fed QE

    Dollar Falls Versus Most Counterparts on Prospects for Fed Bond Purchases

    Bernanke Faces Greater Scrutiny After Republican Election Gains

    Global Markets Look Past U.S. Election to Fed

    SEC Mulls Ban on Unfettered Access to Markets

    San Francisco Bans Happy Meals

    Cotton Clothing Price Tags to Rise

    Aetna 3Q Net Up 53% On Gains, Lower Medical Costs; View Raised

    BP’s Dividend Takes Back Seat

    Companies May Have to Make Amends After Midterm Elections

  • Cyclicals Are Still Rich
    Posted by on November 2nd, 2010 at 1:43 pm

    Here’s an admittedly crude metric I like to use to look at the valuation of cyclical stocks. These are stocks of companies whose businesses are closely tied to the economic cycle. This is the ratio of the Morgan Stanley Cyclical Index (^CYC) divided by the S&P 500:

    In other words, when the line goes up, cyclicals are out-performing.

    On April 26, the ratio closed at 0.8034, its highest reading ever. Since then, the ratio has moved down very slightly. In March of 2009, the ratio got to as low as 0.4184. Historically, when the cycle switches directions, it’s a big deal and it last for a few years (though not always).

    The S&P 500 is currently trading around 1195. If it closes there, this would be the highest close since May 3 when the index was at 1202.26. The high for this year came on April 23 when the S&P 500 closed at 1217.28.

    Even though the S&P 500 is still short of its high, the Dow is very close to making a new high. The Dow is currently at 11,217 which is higher than its April high close (which came on the 24th instead of the 23rd) at 11,205.03. The Dow is currently on track for its highest close since September 19, 2008 at 11,388.44.

  • With 0% of the Vote In….
    Posted by on November 2nd, 2010 at 10:44 am

    While we’re all waiting for the election returns to come in, here are a few items I found interesting:

    Bespoke has a great post that notes the divergence in the recent rally. The weaker dollar is helping more internationally-focused companies. As a result, stocks of companies with no foreign sales are up just 10.36%. But stocks with more than half their sales coming from outside the U.S. are up 17.55%.

    Michael Stokes takes a look at trading gold using my gold model.

    The latest Intrade data shows the GOP gaining 63.75 seats with a standard deviation of 11.3. That’s based on the 50-seat and 60-seat contracts. If we use the 60-seat and 70-seat contracts, it’s a gain of 64.3 seats with a standard deviation of 13.

    The lede of this story sounds like it’s from a Carson monologue from 1986:

    Gov. Arnold Schwarzeneger says welfare recipients can no longer use state-issued debit cards at medical marijuana shops, psychics and other businesses whose services have been deemed “inconsistent with the intent” of the program.

    On November 5, 1974, Jerry Brown was first elected Governor of California. The Dow was at 674.75.

    Check out Josh Brown’s great Star Wars-themed roundup of the financial blogosphere. I’m honored to have been named a Jawa.

  • It’s Mid-Termania!
    Posted by on November 2nd, 2010 at 10:23 am

    The market is up again today but don’t get too excited. We had trouble holding on to gains yesterday which is exactly what happened a week ago.

    For the last seven trading sessions, the closing high has been 1,185.64 and the closing low has been 1,182.45. Kinda narrow. Today we’ve been as high as 1192. Our Buy List is currently up 0.85% today compared with 0.67% for the S&P 500.

    Of course, the big news today is the election. If the polling is to be believed, the Democrats are in for a major defeat. Intrade currently sees the GOP gaining over 60 seats in the House.

    I should caution you from reading too much into the market from politics. I’ve called this the “Larry Kudlow Syndrome” where every uptick or downtick in the market is due to something in Washington.

    I’m reminded of the story when Richard Nixon was asked what he’d be doing if he weren’t president. Nixon said that he’d probably be down on Wall Street buying stocks. They asked an old-time Wall Streeter what he thought of that. He said that if Nixon weren’t president, he, too, would be buying stocks.

    The Federal Reserve also begins its two-day meeting today in Washington. The big news will come tomorrow at 2:15 pm when they will announce their Quantitative Easing plan. As I said before, I expect everyone else to be disappointed so don’t be surprised to see a minor pullback.

    Then on Thursday, we’ll have three more earnings reports. If that isn’t enough excitement, on Friday we’ll have the jobs report. After that, however, most of November ought to be pretty dull.

  • Morning News: November 2, 2010
    Posted by on November 2nd, 2010 at 7:28 am

    Rate Futures Report: Some Doubt About QE2 Before FOMC Meeting

    Australia, India Raise Rates to Slow Inflation Before Fed Move

    Oil Rises a Second Day on U.S. Stimulus Bets, Falling Fuel Supply Forecast

    China Yuan Up On Weak Dollar Ahead of Fed Meeting

    Why the Economy’s Growth Isn’t Easing Unemployment

    GM to Sell over $13 Billion of Shares

    BP Profit Down on Oil Spill Charges

    BBVA to Buy Stake in Turkey’s Garanti Bank for $5.8 Billion

    Gold Miner Newmont’s Third-quarter Profit Soars

    Dell Plans Cloud Computing Acquisition and Tablet PC Push

    The Hedge Fund Structure Is Dead

  • Sysco Moves in the Right Direction
    Posted by on November 1st, 2010 at 2:59 pm

    Michelle Leder spotted some more responsible behavior from Sysco (SYY). The company will no longer foot the bill when an senior exec takes a loss on a house. Michelle is careful to note that her praise is muted but that the company is moving in the right direction.

    Stay tuned for earnings on Thursday.