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


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