Archive for ND&S Updates
One More Time: the Fed and QE
December 16, 2013
The market was flat last week, no doubt cautiously anticipating this weeks Fed meeting. Wednesday will be Bernanke’s last post-meeting press conference, since Janet Yellen will be confirmed as the next Fed Chairman [perhaps by the end of the week]. The week is doubly poignant, since the Federal Reserve System is celebrating its 100th birthday. The three living chairmen each played a pivotal role: Volker slayed the 15%+ inflation dragon, Greenspan kept it in check, and Bernanke [after initially tightening excessively] steered us through the 2008-2009 financial crisis and prevented deflation.
However, Bernanke’s Fed has deployed some extraordinary methods in an effort to accomplish these ends. Most recently, this includes an enormous asset purchase program. He has been adding $85 Billion of long-duration assets to the Fed’s balance sheet every month! This Quantitative Easing, part 3 [QE3], has to end … the question is when.
An increasing minority of Fed-watchers are expecting near term “tapering” of QE3. Others point out that although economic indicators are strengthening, fiscal and regulatory drag continues. Moreover, over the eight policy cycles over the last 40 years [since the stagflation initiated by Nixon’s wage and price controls], no major change in direction has occurred in the fourth quarter. Perhaps because no one wants to spoil the Christmas holiday!
“Never doubt that a small group of thoughtful, committed citizens can change the world; indeed, it’s the only thing that ever has.”
-Margaret Mead
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The Myth of America’s Decline-Why the Declinists Are Wrong Again
December 9, 2013
12.09.13
Our thanks to Yahoo/Finance for presenting Josef Joffe, an Economist at Stanford, for exposing the myth of America’s decline. He points out that the so-called Asian tigers and dragons are slowing themselves-Japan to 0%, Korea to 4%, and China to perhaps 7% and despite the dysfunction in Washington many of our states are stepping up to stimulate growth. North Dakota is one of the clearest examples.
One reason for optimism is that inventors are busy and entrepreneurs are stepping up. Investment in research and development as a share of output matched the previous record set during the space race of 2.9%. The stimulus from shale gas drilling is felt in a number of states. We have 17 of the 20 finest universities in the world, 34 of the top 50 as well. Joffe uses the term “Brute Dynamism” to describe America.
Certainly there are concerns to overcome. For example the slow growth in wage income and the problems in Washington getting anything done, but perhaps the stock market is reflecting the good things going on in the world outside the beltway.
“I don’t have a lot of respect for talent. Talent is genetic. It’s what you do with it that counts.”
-Martin Ritt
Giving Thanks
December 3, 2013
12.02.2013
Markets eked-out gains last week as investors settled-in to celebrate Thanksgiving.
For the week, the Dow Jones Industrial Average finished at 16,086 to close up by 0.2%. The broader-based S&P 500 closed at 1,806 for a gain of 0.1% for the week. The Nasdaq Composite closed the week at 4,060 for an advance of 1.7%. International markets fared slightly better than the broad U.S. market as the EAFE Index (Europe, Australia, Far East) gained 0.8%. Emerging markets advanced 0.9% for the week. The 10-year Treasury closed the week at a yield of 2.75% … unchanged for the week. Crude oil prices fell 2% for the week (every 1 cent decrease in the price of a gallon of gasoline saves Americans $3.65 million a day).
This week is full of important economic data releases – Purchasing Manager’s Index, ISM figures, light vehicle sales, ADP payrolls, the Fed beige book release, factory orders, and non-farm payrolls for Novembers (very closely watched)). Overseas data include China’s PMI and the European Central Bank rate decision.
We expect a bit of volatility as investors lock-in gains and/or take losses for tax purposes. Conflicting economic news may confuse investors and take the market averages down a bit, but any correction will likely be shallow (3-5%).
As always, we urge investors not to get caught up in the day-to-day noise of the markets. Instead, focus on long-term goals and enjoy the holiday season.
“Gratitude is not only the greatest of virtues, but the parent of all others.”
Treasuries Hold Near Their Lows
December 23, 2013
12.23.13
After months of speculation in the press the Federal Reserve last week announced a very modest start to a tapering of its bond buying program. The Fed said it would reduce its monthly bond purchases by $10 billion per month from $85 billion to $75 billion. This modest reduction was well received by the stock market and with further positive economic news of 4.1% GDP growth in the 3rd quarter the S&P 500 advanced 2.4% for the week. So far, the S&P 500 is up 27% YTD and if it holds those gains till the end of the year it will be the largest annual gain since 1997.
Bond price reaction was less enthusiastic with prices for the 10 year U.S. Treasury dropping slightly and the yield rising above 2.9%. Next year look for continued upward pressure on interest rates as economic growth and tapering continue. As for equities, most forecasters are looking for continued but more modest gains in 2014.
“To be a consistent winner means preparing not just one day, one month or even one year – but for a lifetime.”
– Bill Rodgers