Nov 8, 2010

Two Out of Three Ain’t Bad

Two Out of Three Ain’t Bad

November 7, 2010

“Republicans want to go back and live in the 1950’s. Democrats want to go back and work there.”—Amity Shlaes

Weekly percentage performance for the major indices
Based on last Friday’s official settlement...

INDU: 2.93%
SPX: 3.60%
COMPQ: 2.85%
RUT: 4.73%


Please excuse my plagiarism of the old Meatloaf song for my title, but it seemed appropriate given the events this past week. A historic election, a Fed announcement and a positive employment report provided the catalyst for a continuation of this rally. Why two out of three? Since all three of these events are only partially positive, I’m saying that combined they were two up, one down. The election was just a repudiation of more failed policy from another Administration; the Fed’s prolifigate printing of dollars is designed to break the dollar; and the employment data was manipulated. It’s up to you to decide which, if any of the three, weren’t bad.

The GOP won across the country by a combined 17 million votes, resulting in what many are hoping will be total gridlock in DC. Normally gridlock is good for the markets, however, the most recent Congress and Administration have put in place such harmful polices that we actually need cooperation and a herculean effort beyond the abilities of most elected officials to overcome. This may be one of those rare occasions where gridlock isn’t good, and doing nothing in DC is actually worse than doing something.


Actual Consensus Prior
Personal Income -0.1% 0.2% 0.4%
Personal Spending 0.2% 0.4% 0.5%
PCE Core Prices 0.0% 0.0% 0.1%
ISM Index 56.9 54.0 54.4
ISM Services 54.3 53.4 53.2
Factory Orders 2.1% 1.7% 0.0%
Nonfarm Payrolls 151K 60K -41K
Nonfarm Payrolls-Private 159K 60K 107K

Non-farm payrolls showed an increase of 151K vs. an expected gain of 60K, the first increase in four months. The unemployment rate remained unchanged at 9.6%, however, I would expect that to start declining as huge swaths of unemployed begin losing their benefits and fall off the rolls. Payroll data was “seasonally adjusted” upwards by 200K by the BLS, according to John Williams at (see chart below), suggesting a weaker than reported jobs picture.

The chart below shows the nonfarm payroll month over month change since 1958. The periods circled are the largest declines over this window.

The ISM measures (manufacturing and services) were both well within the positive growth range, and both came in ahead of expectations. Remember that these are diffusion indices, and anything above 50 indicates expansion.


The Fed’s primary argument for QE-2 is that lack of inflation, based upon the core CPI. In the real world, inflation is starting to appear in a variety of places. The CRB index has risen to its highest level in 2 years, Starbucks has been forced to raise prices over the past month because of higher coffee prices, McDonalds has reported overall higher food commodity prices, General Mills is struggling and had to raise prices due to higher grain prices, Goodyear and Cooper Tire recently raised prices because of higher rubber prices, Kimberly Clark on their earnings call said that they just experienced the highest cost inflation increase in Q3 that they’ve ever seen, mostly from fiber but also from polymer resin and other oil based materials. Cotton is at a 145 year high and copper is at a 27 month high. In spite of all this, the Fed wants higher inflation. All will be OK as long as you don’t drive, eat, drink, wear cotton based clothes, use copper wire for any type of construction, blow your nose, diaper a kid or wipe your behind.

I go back to my earlier opinion of Helicopter Ben: He’s never seen an economic problem that couldn’t be solved with easier money.

Mandate or no-mandate?

The question coming out of the election is whether the Republicans have been given a mandate to enact their agenda, which, as far as I can tell consists of repealing the health care act and extending the Bush tax cuts. According to most of the media, their overwhelming victory isn’t a mandate to govern, but instead a reflection of a poor economy.

I find it interesting that no one questioned the mandate to govern two years ago when the new sheriff rode into town and hi-jacked health care, the auto industry, and the banking industry.

The French

"Going to war without France is like going deer hunting without your accordion." —Norman Schwartzkopf

California-The Lindsay Lohan of States

I could fill a book with the stupidity running rampant in California, which ironically is the only place in the country where not only was there not a revolution, we actually voted for more of the same. Now, Meg Whitman wasn’t exactly anyone’s idea of an ideal leader, however, we elected a re-tread governor whose sole accomplishment the last time he was in office was unsuccessfully fighting against Prop 13 (unless you count dating Linda Ronstadt as an accomplishment).

Amazingly, the same people who re-elected Governor Moonbeam couldn’t agree to legalize pot. What were they smoking?

More California
Remember I said I could fill a book with the stupidly in California? Well here’s another gem. It seems that the city of San Francisco has decided to approve an ordinance that would limit toy giveaways in fast food children's meals that have excessive calories, sodium and fat. It also requires servings of fruits or vegetables with each meal.

McDonald's says the law would take the joy out of the Happy Meal. The company also said the law threatens business and restricts parents' ability to make choices for their children.

Scott Rodrick, an owner and operator of 10 McDonald's restaurants in the city, said none of his current menu items would be allowed under the nutritional guidelines in the ordinance. Those standards have been criticized by the company, who said proponents lack the evidence to support the claim that they would help reduce obesity.

Rodrick also pointed out that anyone could circumvent the law easily: "Someone doesn't have to travel very far — a mile outside San Francisco — to get the traditional McDonald's Happy Meals experience."

Even More California

From Jeff Miller: -
Some 2.3 million Californians are without jobs, for a 12.4% unemployment rate — one of the highest in the country. From 2001 to 2010, factory jobs plummeted from 1.87 million to 1.23 million — a loss of 34% of the state's industrial base. Ask any company, and it'll tell you the same thing: It's now almost impossible to build a big factory in California. With just 12% of the U.S. population, California has almost a third of the nation's welfare recipients. Some joke the state motto should be changed from "The Golden State" to "The Welfare State." Meanwhile, 15.3% of all Californians live in poverty. The state budget gap for 2009-10 was $45.5 billion, or 53% of total state spending — the largest in any state's history. The state's sales tax is the nation's highest, and its income tax the third-highest, the Web site recently noted. Meanwhile, the Tax Foundation's "State Business Tax Climate Index" ranks California 48th. In a ranking by corporate relocation expert Ronald Pollina of the 50 states based on 31 factors for job creation, California finished dead last. In another ranking, this one by the Beacon Hill Institute on state competitiveness, California came in 32nd — down seven spots in just one year. California is home to 25% of America's 12 million to 20 million illegal immigrants. A 2004 study estimated that illegals cost the state's citizens $10.5 billion a year — roughly $1,200 per family. Unfunded pension liabilities for California's state and public employees may be as much as $500 billion — roughly 17% of the nations total $3 trillion at the state and local level.

The Fed’s Impact

Jim Bianco noted that Since August 27, the Federal Reserve bought Treasuries via POMO on 20 different days. Cumulatively the 10-year Treasury’s total return was 1.03% during these days. Conversely, since August 27 the Federal Reserve has not conducted POMO on 24 different days. Cumulatively the 10-year Treasury’s total return was -0.68% during these days.

Since August 27, the Federal Reserve bought Treasuries via POMO on 20 different days. Cumulatively the S&P 500 was up 10.5% during these days on a total return basis. Conversely, since August 27 there have been 24 different days in which the Federal Reserve did not conduct POMO. Cumulatively the S&P 500′s total return during these days was 0.91%.


Quarter to date 46% of S&P 500 companies have reported and 70% beat on EPS, 62% beat on sales, and 49% beat on both EPS and sales (most others in line). The consensus estimate for the quarter has climbed to $21.27 from $20.64. For companies that have reported, sales grew by 1.7% from Q2, an annualized rate of 6.8%.

Approximately 30% of earnings will be reported this week, dominated by Energy and Utilities.


Disney announced they have come to an agreement with China to open a new theme park in the country. The new park will cost a whopping $3.6 billion.


The market has been moving straight up since the Fed’s original QE-2 announcement, without a pause. The most painful move is still to the upside as hedge funds and long only managers both remain underexposed to US equity long positions. As I have mentioned often, the market tends to move whichever direction causes the greatest amount of investor distress.

Have a great week.


PJ O’Rourke-“I vote Republican because they have fewer ideas. We had government by idiot under Bush, and are now realizing it was better than government by genius.”

Nov 7, 2010

Two Out of Three Ain't Bad

I am having some technical issues and won't have this note up until Monday evening. I apologize for the delay.