Saturday, October 30, 2010

Rest Up This Weekend

Next week, the market could be exciting, maybe too exciting! As I've been predicting all year, the market will begin to rally when the election outcome comes into focus. I expected that in October and was pleasantly surprised when it started in September. Historically, the market likes gridlock, which appears to the outlook.

Another reason for the recent rally is the expectation that the Fed will announce another round of "Quantitative Easing" this week. While this is inflationary in the long term, it may jumpstart the economy in the short term. I expect the market will fall after the announcement. (There is an old market axiom about "buy on the rumor and sell on the news".) If the Fed announces less than $500 billion, expect the sellout to be more violent.

On Friday, the Department of Labor will issue the single most important economic report of each month, i.e., the "Jobs Report". Expectations are low, about 75-80 thousand private sector jobs. If significantly more jobs are created, expect the rally on Friday to be strong.

Only one thing is certain . . . it will be an exciting week!

Friday, October 29, 2010

Nailed it!

Economists get ridiculed frequently and richly deserve it. In fact, they usually enjoy it!

However, today was a good day, in that they accurately predicted the GDP growth rate in Q3 would be 2.0%, compared to 1.7% in Q2.

This makes it even less likely we will see a "double-dip" or experience the worst of the recession again. This makes my forecast of a "long, hard slog" even more likely, darn it! I was still hoping we would sharp a sharp rebound, which is more typical following a recession.

Sometimes, economists don't want to be correct ...

The Halloween Indicator

Of all the many market indicators, this is the most useless but must be fun, as it rolls out year after year. Here it is:

Since 1950, the stock market performs best from the last trading day of October to the end of April. (Of course, there are always obvious exceptions, like the oil embargo of 1973-74, the dot com bust of 2001-2, and the Great Global Financial Crisis of 2007-9.)

It is not news that the market does better during the winter and spring than it does during the summer and fall. In fact, it does a lot better!

The only thing scary about this is that we call it The Halloween Indicator. Let's just hope it works this year, and the market does as well as it usually does after goblins go away!

Thursday, October 28, 2010

Baking a Cake . . . or Baking a Market

When you look at a cake, you are seeing the end result of whatever ingredients went into it. The same is true when you look at the market. Instead of flour, butter, mix or whatever goes into a cake, information and expectations go into the market.

Most people understand why information moves a market, but expectations about information are just as important. Yesterday's roller-coaster market is a good example.

Yesterday's Wall Street Journal reported the quantitative easing by the Fed to be announced next week would be much less that expected and over a longer period of time. The market promptly dropped almost 160 points. That afternoon, legendary Abby Joseph Cohen of Goldman Sachs predicted the Fed would do more than the Journal reported, about $500 billion as earlier expected. As a result, the market rallied over a hundred points, finally closing down only 43 points.

Expectations are important. Just imagine how you would feel if you expected a German chocolate cake from Neiman Marcus and only got a Twinkie from 7-11. You might lose your appetite for sugar . . . and for stocks.

Wednesday, October 27, 2010

Paddling Hard . . .

Arthur Conan Doyle once described how Sherlock Holmes unraveled a mystery because of the "dog that didn't bark". That's reminds me of the G-20 meeting in Korea. China is clearly manipulating its currency, but so is the U.S. But, there was little furor about this.

While the finance ministries are warning of a currency war, there was no furor that we were already in it.

U.S. Treasury Secretary Geithner proposed measurable goals for the emerging markets to reduce their trade surpluses, which is as ridiculous as the U.S. promising to reduce our trade deficit. Again, no indignation, no furor?

There must be an unusual amount of behind-the-scenes negotiation going on, but we won't know anything until the dog barks.

If logic prevails, China will revalue their currency. Since that has nothing to do with the only thing China does care about, i.e., internal tranquility, don't expect to hear the dog bark anytime soon.

Tuesday, October 26, 2010

Please Take My Money?

Yesterday, the Treasury Department issued $10 billion in five-year bonds. In other words, they borrowed another $10 billion. But, something was different . . . very different. Instead of repaying $10 billion at the end of five years PLUS interest earned by the bond-holder, the government will repay $10 billion LESS interest paid to the government for holding the money. This has never happened before! The lender or bondholder doesn't get paid regular interest.

What made this possible was that the bonds were TIPS or Treasury Inflation Protected Securities, which means the principal amount ($10 billion in this case) will be increased to offset inflation. It is a good way to protect investors with minimal income needs from inflation. Yesterday's investors were willing to take a negative interest rate in order to get protection from inflation.

What makes this significant is that it clearly shows the market is expecting inflation. The Fed is widely expected to begin another round of quantitative easing on November 3rd, which the market expects will create inflation. Actually, this is a good thing, as deflation is much worse than inflation. Now that an inflationary psychology has developed, the fear of deflation is reduced . . . hallelujah! That's a good thing!!

Friday, October 22, 2010

A Benefit of Aging

One of the benefits of aging is that a person has had time to benefit from all the good advice they have received over the years. One of the disadvantages is that you cannot remember who gave you the advice . . .

Some of the best advice I received as a young investment advisor was to be an "economics agnostic and a political atheist".

Long time readers know I have written often that there are lessons to learn from Supply-side economics, Keynesian economics, Monetarism, Classical economics, etc. No one school of economics has a monopoly on forecasting, truth, realism, or logic. I'm agnostic on economics.

Whomever it was that gave me this advice also said "The Repubican Pary and the Democratic Pary both make whorehouses look respectable." A person may hold conservative or liberal philosophies, but neither political party reflects well on either political philosophy. I'm an atheist about politics.

What does all this mean? Don't expect predictability in economics and don't expect truth in politics. Trust only in unpredictability.

And, if you are the long forgotten person who gave me this advice . . . Thank You!

Keyboarding Burnout?

With regret, I have noticed my blog gets neglected whenever I finish doing my quarterly column for Inside Business. (You can receive copies by email at no cost by signing up at

To be even more confessional, I have also been working on a book, which is still another excuse for my keyboard burnout. No more excuses, just apologies!

With the highly important G-20 meetings in Korea this weekend, amidst a bull run in the market, there will be much to blog about. So, stay tuned . . .

Friday, October 8, 2010

S.O.S. = Same Old Song . . . Whew!

The famous fat lady sang this morning, and, thankfully, didn't sing anything surprising. The rate of unemployment remained constant at 9.6%, instead of increasing to 9.7% as expected.

Total non-farm jobs decreased by 95 thousand, far better than the 600-700 thousand monthly decreases we saw last year but way below the 250 thousand a month increases that we need. Tragically, 6.1 MILLION people have been out of work for six months or more. If job growth were 250 thousand monthly, it would still take over two years to get them back to work, and that doesn't count the millions unemployed less than six months or those millions who have quit looking. This is one of two major reasons I've forecast a long, slow recovery.

Private sector jobs were up 64 thousand and is probably the most important number released today. This is slightly better than the expected 55-58 thousand.

Government jobs decreased 159 thousand, which were mostly census jobs. Except for this, there would have been actual job growth last month.

Because the numbers were close to expectations, the market didn't react nor over-react. Whew . . . ! Of course, Friday afternoons are notariously unpredictable.

Wednesday, October 6, 2010

. . . Waiting for the fat lady . . .

She will sing this Friday morning, when the monthly Civilian Unemployement Report or "Jobs Report" will be released. To the market, this is the single most important economic report each month, probably too important.

But, it is even more important this month. Yesterday, the Non-Manufacturing ISM Report indicated there was more job growth in the services sector than expected. As a result, the Dow roared upwards, almost 200 points. This morning, the ADP National Employment report was released, showing job growth in the private sector at only 20 thousand, compared to 60 thousand the market was expecting. Getting two contradictory reports in two days makes the report on Friday even more important to the market.

In addition, Friday's report will be the last one before the all-important mid-term election. Politicians of one side or the other will make a bigger deal of this report than normal, which is already too big a deal. Since Friday afternoons are normally the most volatile part of the week, expect anything this week!

Friday, October 1, 2010

Sometimes . . . The Truth Hurts!

For years, economists and financial analysts have talked about the BRIC countries, i.e., Brazil, Russia, India, and China. As a group, they were rapidly growing economies dependent upon export growth. As a group, they need to curb their internal savings by individuals and increase consumption spending by those individuals. This is a happy problem.

Now, economists and financial analysts are talking about the HIIC countries, i.e., heavily indebted industrial countries, like the U.S., England, Europe and Japan. As a group, they are well-established democracies with a high level of social benefits, such as Social Security and Medicare, which creates a high level of debt. As a group, they are growing slowly and are dependent upon consumption spending to power their GDP. As a group, they need to increase internal savings at the expense of consumption spending and to increase exports. This is not a happy problem.

So, which set of countries will have the best performing stock markets? Here are the BRICs for the third quarter: Brazil (+22.1%), Russia (+12.3%), India (+16.1%) and China (+12.1%). The U.S. stock market gained a relatively puny +11%. Of course, one of the reasons foreign markets beat us so badly is because the dollar has resumed its expected depreciation. But, since it is easier to increase consumption spending than to increase exports, I continue to believe the emerging markets are very attractive for investors. The depreciating dollar will only magnify the difference.

Talk about an inconvenient truth . . . we need to save more, export more, and consume less!