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

Ned