Oct 18, 2012

The Election Countdown

October 18, 2012

The final countdown to the election has begun, with less than three weeks and one debate to go until the official ballot casting. The town hall style debate on Tuesday night was memorable because of three items.  First, the moderator, Candy Crawley, was so blatantly biased that at one point she confirmed that the President had called the Libya terrorist event a "terrorist attack" just hours after it occurred, when in fact the actual transcript disagreed with her.  She had no control over the candidates, and the event resembled a Jerry Springer episode, with the President interrupting Mr. Romney 83 times (not my count) and Mr. Romney interrupting the President 22 times (again, not my count).  Second, true to his law professor and political background, Mr. Obama proved that he is much better at lecturing than dealing with direct confrontation as he so ineptly did in the first debate.  Finally, Mr. Romney showed that he is unable to leap through the door when Mr. Obama leaves it open by telling half truths and in some cases outright lies.  The race is tight, it should be entertaining, with the future of the United States hanging in the balance. 

Speaking of the election, while the candidates dicker and both the House and Senate are on break, the fiscal cliff looms ever closer.  This is a real issue that threatens any type of recovery.  After the 2010 election, during the lame duck session, the President did reverse course on the Bush tax cuts and extend them for two years in exchange for some increased social spending. Whether Obama wins or not, look for some type of action during the lame duck session and partial relief from the cliff.  The question is how large will that relief be and will it help?

How about some investing discussion (since this is a market blog)?  The S&P 500 continues to climb the wall of worry, and is now up almost 16% for the year and 19% for the past twelve months.  Those are great numbers and well above any reasonable estimates from the beginning of the year.  What's driving the market?  How about an extremely accommodative Fed, a slowing economy, low rates, and, let's face it, the best major economy on the planet.  If the economy doesn't fall into a recession next year, look for this run in equities to continue, albeit at a much slower pace as earnings growth has markedly slowed. 

What about 2013?  Remember, it is the first year of a Presidential cycle, historically the worst of the President's four year term for market returns.  The later years are typically better because the President has pulled out all of the fiscal stops that he possibly can to make sure the economy is roaring, or limping as it is this year, heading into the election.  By the time the first year of the cycle rolls around, the stimulus has run its course.  The biggest difference this cycle is we never experienced any true fiscal boost, but instead the markets have been fueled by Fed stimulus. 

We have discussed the possible exit of some of the southern European countries from the Eurozone.  Research firm Prognos estimates that a Greek departure would have little impact, but if it led to a chain reaction where Spain, Portugal, and Italy also left it would result in a plunge in global GDP of $22 trillion. I haven't seen the full study yet, but am skeptical of the conclusion.

China reported Q3 GDP of 7.4%, down from 7.6%% in Q2 and 8.1% in Q1.  This is the seventh consecutive quarter of declining growth.  Recent data points suggest Q4 may be stronger as housing seems to have stabilized (sound familiar?) and both retail sales and industrial production picked up in September.

Speaking of housing, US housing starts hit 872K in September, a 15% jump, the biggest since July 2008.   I've actually heard of a brewing shortage of construction workers as many have left the industry over the past four years to find other employment.  From a market standpoint, home-builder shares have been the best performers this year.

The Apple (AAPL) debate rages on.  Will the iPad mini take away from the company's successful iPad and crimp margins or will it expand the market for the devices?  When I look back at 2002/2003 when the company began  broadening its iPod line to include simpler, lower end models, investor concerns were comparable to those of the iPad mini today.  What was the end result of the iPod line extension?  A rapid uptick in penetration rates and complete dominance of the MP-3 market.  I'm not saying that history repeats itself, but it often rhymes. 

No one is more surprised than I am about the start for Notre Dame.  The Irish are now 6-0, ranked 5th in the country, and actually have a tough schedule this year.  I have always been critical of the Gold Domers because of their typically panzy schedule and the pollsters infatuation with them.  This year they are winning the close ones, and while I still expect them to end with two losses, I am more impressed with Chip Kelly's willingness to schedule a season of opponents worthy of the Notre Dame tradition. 

Have a great afternoon


Oct 8, 2012

Columbus Day

October 8, 2011

Four weeks until the election and the race has tightened somewhat.  Even the mainstream media has had to admit that Romney blew the doors off of Obama in the first debate.  How did the Ken Doll do it?  He actually showed some spirit, stated his case to the American public, and countered Obama whenever he made up facts about Romney's platform.  It has been easy sailing for the President until this point because, as I've often stated, Mr. Romney hasn't laid out his platform in a concise, understandable manner, and that has allowed Mr. Obama to define what Mr. Romney's positions are.  I'd expect the President to come out firing in round two, however, without a teleprompter and with no record of success in any of his lifetime endeavors to back him up, a draw will be viewed as a victory. 

Everyone is familiar with the Dodd-Frank Act, the legislation that is supposed to help stop the next banking collapse even though, despite its enormity, it wouldn't even have prevented the last downturn. The Act is enormous, cumbersome, contradictory, and a perfect example of a well-intentioned piece of legislation gone extremely bad because politicians and bureaucrats wrote the piece, without considering the practicality of implementation.  Now the courts are beginning to knock down specific pieces of the legislation, citing the inability to "enforce because of procedural defects." 

India's Nifty index of top stocks dropped by 16% on Friday because of a series of trading errors.  The problems from electronic trading are going to get worse before they get better. 

The unemployment rate fell last week, and was canon fodder for the media.  The media, not the blogosphere, was howling about a conspiracy theory in the calculation of the measure.  While it wouldn't surprise me that the number has been manipulated, I'd say that this number has been teased around more than just last week, but for a very long time.  The rate, now 7.8%, is now a tick lower than when the President took office.  There were 112K new jobs last month, hardly enough to drop the rate by 0.3%.  The chart below, courtesy of John Williams at www.Shadowstats.com, shows the adjusted unemployment rate, the U-6 underemployment rate, which is still north of 15%. 

I have cited a slowdown this quarter in both earnings and sales growth.  Strategas Research's Jason Trennert calculates that the negative to positive pronouncements is running at 4:1 this quarter, the worst rate since Q3 2001.  While he says that this often augers well for a strong market performance during earnings season, this time might be different given the strong market run since the Fed began signalling its intentions to extend quantitative easing. 

I have received some questions regarding my outlook for Q4 and 2013. My views haven't changed since late 2011-I anticipate a slowdown or possibly a recession for 2013.  As I've often stated, I don't anticipate a Bernanke led Fed to stop their QE programs until inflation is well upon us.  While I expect bond yields to remain low for the next 24-36 months as we continue to meander through this deleveraging process, I fully anticipate rates to explode after that as inflation hits hard.  In the interim, I'm looking for 10 year yields, now at 1.74%, to be under 1% before they blow past 3% and approach high single digits (or more).  The biggest risk will be in bonds as there are very few bond managers on the planet who have managed money in a rising interest rate environment.  It should be interesting.  

Need I say more than the picture below? 

Wow, three of the top five teams got beat this weekend!  My guess is this season will be a shootout.  The SEC is going to be a toss-up, although I'd be surprised if any of them ends the season undefeated (sorry Bama fans). 

Have a great day


Oct 1, 2012

At The Cusp of the 4th Quarter

October 1, 2012

Today is the first day of the fourth quarter after a robust first 3/4 of the year which has seen the S&P 500 rise by 14%.  The economy has been struggling, joblessness remains stubborn, Europe is in a recession, more people have joined the welfare rolls than payrolls over the past four years, taxes are rising, yet the market still has an excellent year.  What gives?  How about an exceptionally generous Fed who doesn't mind priming the pumps in an effort to create a wealth effect?  How about really low interest rates?  How about tame inflation (for now)?  How about no chance of an overheating economy that drives rates up?  While it may not feel good, the environment for stocks has been pretty good. 

Should we be concerned about the lack of volume often cited in this run-up?  Probably, however, usually volume from retail investors doesn't pick up until the very end of a bull market.  Remember 1999, when retail investors poured money into the markets after ignoring stocks since 1992?  How about today's bond market?  How many investors are now looking at bonds as the best place to put their money, nearly 30 years after a generational bull market in bonds began?  The bottom line is don't rely upon the retail investor to confirm trends.  Rely upon the retail investor to signal market tops and bottoms. 

What should we expect when Mr. Obama gets reelected next month?  I know, there is still five weeks left, but unless Romney does something really out of character in the debates and on the campaign trail, or if the softening economic news offsets the challengers oft cited gaffs, the President should keep his job for another four years.  I am anticipating more gridlock in DC as Obama continues his reign as the Great Divider of our nation.  I am guessing that all of the taxes from the Healthcare Act hit in January; some of the Bush tax cuts are extended; the payroll tax cut gets extended; emergency unemployment gets extended (it's now at a record 99 weeks); and that all of the $90 billion in spending cuts hit. 

While the entire exercise is ludicrous, the last one cracks me up.  Because of the sequestration last year, which in my view was the singular turning point in putting Obama in a more positive light and allowing him to get reelected, the US government is going to have to cut spending by $90 billion next year.  Listening to the politicians whine about that makes you think they've eliminated government spending completely. They are still running budget deficits of $1.4 trillion per year!!!  Remember, that isn't the size of the budget, just the deficit.  If they can't cut a measly $90 billion, how in the world are we ever going to eliminate the deficit? 

Speaking of Romney, does anyone else think the more interesting debate pairing would be Romney vs. Biden?  That would be a comedy fest of gaffs that would rival a Bush presentation on global warming.  How about Obama vs. Ryan?  I think Ryan would tear Obama apart, and only the Obama leaning press could save him in the aftermath by saying Ryan was setting a tone too that was too tough. 

In case you haven't been watching, Gold has started to rebound again after a pause.  The rebound in gold (and silver for that matter), has conincided with the resurgence in Fed and ECB action.  While gold may or may not be a great inflation hedge, what it is proving to be is a hedge for those concerned about the mistreatment of the world's reserve currency.  My thought is that the rise in gold is preceding the expected long term deterioration (or should I say continued deterioration) of the dollar. 

The global economy isn't all holes.  The emerging markets are still holding up relatively well.  The emergence of a middle class in many of those markets is driving consumer demand, especially for tech goods.  Reuters reported yesterday that exports should continue to rise as the middle class emerges and consumers progress from spending on basics such as energy and food (remember, according to our Fed those expenditures don't count anyway) to consumer discretionary goods such as electronics and autos.  This shift disproportionally benefits US based firms. 

Bloomberg is reporting this morning that unemployment in Europe is over 11%!!  I'm guessing the response in Europe will vary across the different countries.  In England the response will be something along the lines of "well, these chaps certainly aren't helping.  Let's get some tea."  While in Greece I'm expecting a response more similar to the Arab Spring.  Should be good TV. 

OK, on to college football. All I can say is what in the world happened to Arkansas?  Are you kidding?  They are now 1-4 after getting blown out by SEC newcomer Texas A&M, 58-10.  Arkansas was the preseason #7 ranked team.  Personally I'm glad they're taking a beating, because it takes some of the limelight off the struggles at USC, who was a preseason #1 but hasn't played well enough to even justify their #13 ranking. 

BTW, to my good friend Dave who didn't want me to tell him the Jets score yesterday because he had recorded the game and was going to watch it when he got home.  Was it worth all that effort? 

Have a great day