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


The Myth of America’s Decline-Why the Declinists Are Wrong Again

December 9, 2013


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


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.”


Equity Markets Continued Their Advance

November 25, 2013


Last week the equity markets continued their advance with the S&P 500 adding 0.4% for the week and closing above 1800 for the first time.  Earlier in the week the DJIA closed above 16,000 for the first time.  This was the 7th straight weekly gain for the DJIA the longest streak since January of 2011.  Money continued to flow into stocks with U.S. equity funds attracting $548 million in new cash for the week.

While some analysts say the stock market is overvalued and the PE ratio for the S&P500 has risen from 12.7 to 15.1 during the year that is still near the historic average.  While a correction at any time cannot be ruled out the fundamentals of earnings, inflation and Fed policy are still positive. Strategists are taking a cautious but positive outlook for next year predicting an average increase of 4.1% based on modest increases in earnings and revenues for 2014.

Teamwork is the ability to work together toward a common vision. The ability to direct individual accomplishments toward organizational objectives. It is the fuel that allows common people to attain uncommon results.

– Andrew Carnegie

“Bubble Trouble”

November 19, 2013


The market moved from strength to strength last week, with the indices advancing an average of ~1.5%. The action started slowly since Monday was Veterans Day [the bond market was closed]. The midweek highlight was Janet Yellen’s confirmation testimony. This seems to have convinced the markets that Fed asset purchases will continue indefinitely [although she conceded that QE cannot go on forever]. The S&P is now up 26% so far this year, with the smaller stock averages up in excess of 30%. This is the best year for the S&P since 2003.

Barron’s cover story over the weekend did a good job putting this year’s advance in context: the broad market advance includes several pockets of exuberant excess [cloud, 3D printing, etc.], yet stocks are still the most attractive broad asset class. Note that the level of margin debt, investor complacency [VIX index] and cash levels are some indicators which do require close monitoring.

Market veterans advise to “never short a dull market”, but that is exactly what some experts now seem to be advising. This includes [by implication] Barron’s headline scribe: “Bubble Trouble?” and several CNBC gurus. Corrections can occur at any time, but this Bull market still has room to run.

The anniversary of JFK’s untimely demise provides us with an opportunity recall one of his many memorable quotations:

We dare not tempt them with weakness. For only when our arms are sufficient beyond doubt can we be certain beyond doubt that they will never be employed.”
 –John Fitzgerald Kennedy’s Inaugural Address



November 11, 2013


Last week was mostly positive for US equities with the exception being the Nasdaq. The Dow Jones was up 0.9%, the S&P 500 up 0.5%, and the Nasdaq slipped 0.1%. Interest rates moved higher for the week which put pressure on the Barclays Aggregate Bond index. For the week the “Agg” dropped 0.52% and remains negative 1.9% for the year.

Over the last couple of years, we have talked about the shrinking stock market. Initial public offerings (IPOs) have been minimal and companies have been purchasing their own stocks at record rates which has led to a decline in available stock for sale. However, 2013 may be a turning point. Flows into stock mutual funds have been the strongest since 2004 with net inflows of $76 billion this year.  With market confidence up and stocks at record prices we have seen the IPO market return as U.S. companies have raised $51 billion in IPOs. That is the most since $63 billion in the same period of 2000, the year bubbles in tech stocks and IPOs both popped. Follow-on offerings by already public companies have been even larger, surpassing $155 billion this year. That is the most for the first 10-plus months of any year in Dealogic’s records, which start in 1995.

We are cognizant of this renewed confidence as an eventual concern. However, we see the equity markets as fairly valued and still a good investment for the long term.

“Confidence is contagious; so is lack of confidence”
– Vince Lombardi


November 5, 2013


The market marked time last week, with the S&P and Dow slightly advancing while the Nasdaq declined half of one percent.  The small cap Russell 2000 continued its recent correction by falling 2% [but it is still up 29% YTD]. Company specific developments did move individual stocks: AAPL fell 2.5% as investors listened to management discuss upcoming mobile margin pressure. Conversely, Bristol-Meyers climbed 6.7% on additional study details about its experimental anticancer drug. The Wednesday release of the Fed’s latest policy directive was telling. Although it was little changed from previous Fed statements, markets seized on the Fed’s housing comments [recent slowdown] and fiscal policy [a headwind to GDP growth] to put a lid on stock prices.

In the “glass is half full” department, it is worth noting that domestic manufacturing is showing signs of life.  Wal-Mart announced that it will source some additional footwear, curtains and glassware from the US. Motorola and designer jeans are additional examples of on shore manufacturing. These shifts are occurring because of Asian wage increases, shipping rates and the benefits of rapid response. More automation by onshore manufacturers is also a factor.  Macro confirmation obtains from Chicago PMI [up to 65.9%] and BLS manufacturing jobs up ~1/2 million since 2/10. In addition, the ISM reports that manufacturing sector activity expanded in September for the 4th consecutive month.

We can all agree that investing should follow a “Buy low, sell high” methodology, but on average investors do just the opposite. Note that 12/02 and 12/08 were two excellent opportunities to buy, yet equity mutual funds experienced net outflows during both of those time periods. As Kipling observed: “If you can keep your head when all about you are losing theirs …”

The Boston Red Sox beat the St. Louis Cardinals last week to win its 3rd World Series in the last 10 years (2004-2013). In the previous 85 seasons (1919-2003), the Red Sox had won no World Series titles (source: Major League Baseball).

Consumer Headwinds

October 29, 2013


The S&P 500 closed the week at a record high as third quarter results have been received as mostly favorable.  Adding to the market strength has been a change in outlook for the Fed’s unwinding of “Quantitative Easing.” Most prognosticators do not see the program winding down until April of 2014, compared to previous estimates of September 2013 not long ago. For the week the Dow Jones was up 1.1% and the S&P 500 up 0.9%.

Today we saw consumer confidence is at its lowest point in 6 months mostly due to the government shutdown and debt-ceiling debate. This data is consistent with the recent declines in consumer sentiment. Below is a chart of the University of Michigan: Consumer Sentiment Index showing the decline since August:

Wells Fargo & Company recently released a study conducted on middle class retirement.  Here are a few statistics from their study:
•    52% of 1,000 “middle class” Americans (defined as having household income less than $100,000) surveyed in August 2013 have no money invested in the stock market, citing the volatility of equities as the main reason they avoid this asset class.
•    60% of middle-class Americans say that getting monthly bills paid is their top concern, up from 52% in 2012.
•    34% of middle-class Americans say that they will work until they are 80 years old, because they will not have enough money saved up for retirement. In 2012, the number of respondents with a similar opinion stood at 30%; and in 2011, this number was at 25%.
Wells Fargo Institutional Retirement and Trust summarized with the following comment, “We do this survey every year and for the past three years, the struggle to pay bills is a growing concern and the prospect of saving for retirement looks dim, particularly for those in their prime saving years.”

Real estate has been in recovery mode and the S&P 500 has doubled from it’s lows of 2009. Main Street is missing the boat.

Stink Bug

October 21, 2013



We read in in today’s Wall Street Journal that reeking legions of the bugs have solidified their grip on the nation’s capitol.  Actually this is no laughing matter since the stink bugs threaten up to $21 billion of crops.  In a classic display of DC ineptitude, head of the USDA project team and seven of her eight staff were furloughed as nonessential employees.  You really can’t make these stories up.

We wish the nasty bugs had attacked the bureaucrats who have harassed JP Morgan into a $13 billion civil settlement.

Moving to happier tales, earnings for the third quarter have been coming in slightly better than expectations (4% better).  Leading the way have been financial services stocks, followed closely by technology and health care.  Much of the earnings success has been through cost-cutting, as revenue growth has been modest at best.

The government shutdown pushed the employment report for September back to this Tuesday.  The only economic report we saw today was for sales of existing homes.  Sales dipped 3.1%, but prices are up 11.7% over the same month last year to an average of $199,200. One of the issues in real estate is a shrinking inventory of houses for sale.

“The basis of effective government is public confidence, and that confidence is endangered when ethical standards falter or appear to falter”
– John Fitzgerald Kennedy

Kick the Can

October 15, 2013


Recently the markets’ focus has been on the battle in Washington DC over the government shutdown. Last week a major economic report, the monthly jobs report, was postponed due to the shutdown.  It is likely that more economic news will be delayed therefor shifting more importance to corporate earnings for the third quarter.

Initially, analysts were estimating a 6% increase for third quarter earnings but that has been gradually reduced to a 2% go ahead. If the shutdown continues on it will be a drag on fourth quarter earnings as well. Right now the solution seems to be to “kick the can” into next year.

Continuing the uncertainty does not bode well for consumer spending or corporate earnings in the fourth quarter.

“Do not yield to misfortunes, but advance more boldly to meet them, as your fortune permits you.”
– Virgil