Daily Investment Interpretations

October 27, 2010


2010-10-27 (Wednesday Night):    The markets fell stoutly today, as the markets "sold on the news",and then largely rebounded as dip buyers returned to the markets: Stocks suffer Fed slump.   The NASDAQ Composite ascended 5.97 points (0.24%) to 2,503.26  The Dow fell 43.18 points (-0.39%) to close at 11,126.28, and the S&P 500 lost 3.19 points (-0.27%) to end at 1,182.45. Oil was dropped slightly $81.96 a barrel, and Gold slid slightly to $1,325. The VIX jumped 0.49 to 20.71.
    The markets have been primed for a pullback. 
    Economy is running out of gas Rex Nutting warns that we're "in danger of sliding back into another  recession before we're fully recovered from the last one. The economy is slowly readjusting and rebalancing, but in the meantime it’s also suffering from a lack of demand to keep everyone employed. Our political system tried some half measures to keep demand up, but has apparently given up on even those. The economy is running out of gas, and there’s no fueling station in sight. Levy says he sees “domestic profits eroding, corporate earnings becoming increasingly disappointing, and a 60% chance of a recession in 2011.” Read more about the Levy Forecast. For instance, Jan Hatzius of Goldman Sachs is sticking to his prediction that the economy will avoid a recession, barely. He puts the odds of a recession in 2011 at 25% to 30%, but worries that one of his favorite recession indicators is flashing a red alert. Despite the 11-for 11 track record of this indicator in predicting recessions, Hatzius thinks we’ll avoid one this time, mostly because economic activity is already at such weak levels that the cyclical forces that usually push the economy into a recession aren’t in play. In other words, the economy isn’t strong enough to plunge into a recession. When you’re crawling, you don’t have far to fall."
    Fiscal disaster set to explode This article concerns itself with the fact that, come December 1, state governments are going to have begin paying interest to the federal government on the money that states borrowed in order to cover unemployment insurance payments. 
    Peter Brimelow writes: Is China’s cookie uncrumbling?  This is a review of Cabot's China and Emerging Markets Reports, and concludes that China may now be clear sailing for a while.
    QE2 a 'Ponzi scheme,' says Pimco's Gross  "The Federal Reserve’s highly anticipated plan to engage in quantitative easing to pump money into the economy is a “Ponzi scheme,” said Bill Gross, who manages the world’s biggest bond fund for Pimco. The actions of the Fed, led by Chairman Ben Bernanke, will 'likely signify the end of a great 30-year bull market in bonds and the necessity for bond managers and, yes, equity managers to adjust to a new environment,' he wrote in a commentary posted on Pimco’s website Wednesday. See Gross’s full commentary. 'Check writing in the trillions is not a bondholder’s friend; it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme,' he said. While the U.S. has sometimes paid down its debt, 'there was always the assumption that as long as creditors could be found to roll over existing loans – and buy new ones – the game could keep going forever.' 'It is not a Bernanke scheme, because this is his only alternative and he shares no responsibility for its origin,' he said. Such a plan 'raises bond prices to create the illusion of high annual returns, but ultimately it reaches a dead-end where those prices can no longer go up,' Gross wrote. 'Having arrived at its destination, the market then offers near 0% returns and a picking of the creditor’s pocket via inflation and negative real interest rates.'”
    I think the "30-year bull market in bonds" refers to the secular rise in bond prices over the past 30 years, starting with their peak in the fall of 1981.Given the Fed's goal of lowering long interest rates with "quantitative easing", interest rates on long bonds will fall a little more, and then they'll have gone as low as they can go (with bond prices having gone as high as they can go). The "Ponzi scheme" refers to the government's rolling over of national debt and of an ever-larger federal deficit (though not an ever-larger debt-to-GDP ratio). Mr. Miller is warning bondholders against a future of falling bond prices and inflation that will eat away at the bond returns.
    Record-low mortgage rates will be gone in 2011 
    J.P. Morgan, HSBC accused of silver manipulation, and Did JPM, HSBC fix silver?
    Buying emerging-market growth (video)