Daily Investment Interpretations

October 14, 2010

 2010-10-14 (Thursday Night):  The markets rose heftily today: Street swings higher. The NASDAQ Composite climbed 15.59 points (0.65%) to 2,417.  The Dow added unto itself 75.68 points (0.69%) to close at 11,020.40, and the S&P 500 eased up 8.33 points (0.71%) to end at 1,178.10. Oil closed at  $81.74 a barrel, while Gold ended at $1,351. The VIX exited the day essentially unchanged at 18.93.
    Mark Hulbert writes that the "wall of worry" is still robust, which is a bullish indicator for the equity markets: Wall of worry still surprisingly strong.  
    Minutes show Fed close to easing  
    'Frightful prospect' is an article by David Stockman denigrating the Fed for printing money.
    Read Minyanville’s “What a Republican Victory Means for Equity Markets.”  This article examines the Republican economic platform and concludes that spending cuts aren't going to happen.
    Read Minyanville’s “Quantitative Easing II: The Ship Is Leaving the Dock.”  This is Jeff Harding's arguments for "Why the Fed has it wrong". I'm in no position to take a position regarding his position.
    Read Minyanville’s “How Much QE2 is Already Priced into the Market?”  Todd Harrison notes that Goldman Sachs has estimated that $750 billion to $1 trillion in quantitative easing II is already priced into the market. He also notes that "Teachers are getting fired as Wall Streeters are again cashing in big. How much will that help societal tension?", and he writes "When it comes to meaningful catalysts, investors like to buy the rumor. It remains to be seen what happens if and when the news is announced." Also, "Is this the polar opposite of the depression chatter on September 1st?"
    So how well am I doing? If the U. S. markets regain their April 23rd highs, my portfolio value should be approximately what it was then. If so, I'll be quite happy to have broken even, given all the angst of the summer's slowdown, and given the fact that what's happened this last three years has been unprecedented since the early '30's. 
    My investment advisory service is still 50% invested, and will stay that way until their indicators flip one way or the other. In the meantime, it labels the markets "smokin' hot".
    My investment advisory service is concerned about the basis for the rally (the anticipation of Quantitative Easing II by the Fed) and about sentiment becoming overly optimistic, but for the moment, They'll go with the flow.
    Let's see if we can make any kind of sense out of what's going on. I hate to do this because this calls for mathematical models and deep expertise, and all I can do is suggest (as a rank amateur) some possible qualitative influences that are in play. But here goes.
    Apparently, the Great Recession is causing more and more work to be being shipped offshore in corporate efforts to boost corporate profits. That may be leading to booms in low-cost, eastern-Asia countries such as China, India, Malaysia, and Viet Nam. (It should take relatively little outside money to boost their relatively low-GDP economies.) In turn, emerging nations are buying products from Western multinationals, helping to insulate Western corporations from their internal consumer-demand shortfalls.
    The U. S. stimulus package was, presumably, too small. Unemployment is now running about 16⅔ %, with no sign of declining very fast. There's no prospect for a new stimulus package, so it's up to the Fed to do what it can. The Fed appears to be heeding Paul Krugman's advice concerning raising the actual inflation rate to something closer to what the Fed has previously stated its target rate to be. The question is: "How much printed money is quantitative easing going to need to stimulate the economy enough to boost the unemployment rate?"
    The bottom line here is that this whole situation is still quite dicey. It seems to me that we can't be sure we're out of the woods yet. What happens if the Fed fails to re-ignite the economy?