Daily Investment Interpretations
November 3, 2010
(Wednesday Night): One
more time, after jumping up and down wildly, the markets have settled out
practically where they were yesterday. The NASDAQ Composite rose 6.75
to 2,540.27 The Dow added 26.41
to close at 11,215.13,
and the S&P 500
added on 4.39
to end at 1,197.96. Oil rose to $84.92 a barrel,
and Gold dropped to $1,345. The VIX fell 1.93
The Fed announced that it would buy $600 billion in bonds between now and next June. This was squarely between the $500 billion-to-$750 billion that has been bandied about as a proper range for QE II. This will take place over a period of 8 months (through next June), so it's a fairly aggressive program. In addition, the Fed will reinvest maturing securities into Treasury bonds, adding another $250 billion-to-$300 billion through next June.
Also, the unemployment rate has edged up to 9.7% from 9.6% as job creation continues to lag job creation requirements.
Nothing doing (audio) This stock market seer sends the same message Mark Hulbert transmitted yesterday: that, popular misconceptions to the contrary, legislative gridlock is bad, not good, for the equity markets.
Americans are angry, not reactionary, by Marketwatch's Rex Nutting. "Washington was transformed by Tuesdayís vote, but America wasnít. The America that voted for Republicans in 2010 isnít so different from the America that voted for Democrats in 2008: It wants an economy that works and a government that doesnít screw up. The triumph of Republicans in Tuesdayís vote isnít a sign that weíve suddenly seen the errors of our ways. It wasnít a ringing endorsement of the Republican Party. More like a reluctant, lesser-of-two-evils pick. Despite what you hear, we didnít take a sudden right turn. Voters havenít endorsed small government in 2010 any more than they favored big government in 2008. We just want a government thatís competent, one thatís fair, one that doesnít waste our time or our money. The politicians and the talking heads donít get it. They tell us the election was about big changes, a new direction, a return to our core conservative values, a repudiation of the Democrats and a coronation of the tea party. But most people havenít changed their minds in the past two years; most voted the same way they had two years ago.".
Unprecedented action, limited impact "The hope is that the owners of those bonds and notes will put their new-found cash into riskier investments that will actually help the economy grow and stave off deflation. The danger is that the money will go into commodities or into foreign markets, or, god forbid. fuel inflation here at home.
"Needless to say, the Fedís action is nearly unprecedented, as so many things are these days. Itís also exceedingly controversial, and is likely to have only a limited impact on the economy.
"So why do it? Because no one else is doing anything about getting the economy moving again.
"Fed officials know that monetary policy has just about exhausted its utility, with interest rates near zero.But at least the Fed can act, unlike the rest of the government, which is paralyzed by fear and hypnotized by the promise of austerity."
Paul Krugman also believes that the Fed's quantitative easing will have little impact upon, for example, unemployment. The dollar amount is too small.
Private sector adds jobs, but not enough to lower the unemployment rate.
The market indices have continued to inch their ways up, with the Dow and the NASDAQ Composite surpassing their April highs.
Today's stock market's reaction to yesterday's and today's news has so far been, "ho-hum". So now what? Do professional investors "sell the news"? Stock market futures are neutral tonight.
And what does last night's Republican landslide mean for equities?
It seems to me that this Republican win, especially with Tea Party activists bearing down on the Republican Party, could augur some efforts to rein in government expenditures. The problem is that the current government deficits are being driven by reduced government revenues because of the recession rather than by increased government spending in any area. One area where cuts could occur, though not rapidly and easily, is in military spending. Nearly 50% of the world's military expenditures are made by the United States, with 5% of the world's population. U. S. citizens bear about 18 times the per capita military expenditure as the rest of the average citizen in the rest of the world. But this would be met with intense lobbying by the military industrial complex, which, I should think, depends largely upon the U. S. government for its support.
When it comes to Social Security, we and our employers paid in a little over 15% of our salaries for, typically, 40 years. The maximum amount we can draw from Social Security is about 28% of our lifetime average earnings, so if we were paid back our Social Security savings with no interest, we could draw 28% for a little over 20 years before we withdrew all the money that we put in. If we die before we get back all our money, Social Security keeps what's left. The point is: Social Security isn't a government relief program. It's a compulsory savings plan managed by the federal government. Right now, with the economy on skids, it doesn't look as fiscally sound as it did in 2007, but both the retirement program and Medicare are self-supporting, and actuarially sound. (It's Medicaid that's in trouble.) Any attempt to steal the elderl's' Social Security savings will be met with (I presume) blood in the streets.
.Most of us are willing to see programs cut as long as they aren't our programs. But let Rand Paul try to cut programs that feed his constituents and let's see how supportive they are of goring their own oxen.
One of the interesting questions will be that of whether or not senior Republicans can tame and rein in their Tea Party candidates to allow business as usual.
It ought to be interesting.