Market Talk

As with many others, I’m keenly interested in what happens when the Fed’s QE2 program ends. Will there be a QE3? Will the markets crash without the Fed in there proffering support? Will anyone even notice what the Fed does if Charlie Sheen keeps talking?

One thing I’m wondering is this, and I don’t have a good answer for it although I’m asking around: let’s say the Fed decides not to do another round of asset purchases. It’s still sitting on more than $2 trillion of securities. Let’s say the Fed decides to hold them to maturity, something that been talked about. If that’s the case, sans a bond-selling program that would effectively drain some of the liquidity it put out there, the Fed can sit on its zero-percent interest rates and bloated balance sheet and still have interest rates that are negative on an inflation adjusted basis.

In other words, they don’t need to do a QE3 to still be very loose with their policies. There are issues of timing and reinvesting maturing debt on the balance sheet, but in general I think the Fed can keep monetary policy wide open without undertaking another big program.

It seems reasonable to me to see it that way, but I don’t have a PhD in economics. Actually, I don’t have a PhD in anything, but that’s another story. Gluskin Sheff’s David Rosenberg has contemplated a world without QE3, and comes to the conclusion that it’ll look a lot like the world without QE2, an era that lasted from approximately April to August 2010.

WHAT HAPPENS IF THERE IS NO QE3?

We are now being asked this constantly and the follow-up is “who picks up the slack if the Fed stops its bond-buying program”?

The answer(s) is hardly complicated since we have a template for this in 2010. It is a very simple guidepost.

Last year, from April 23rd through to August 27th, the Fed allowed its balance sheet to shrink from $1.207 trillion to $1.057 trillion for a 12% contraction as QE1 drew to a close. Go back a year to the Federal Open Market Committee minutes and you will see a Federal Reserve consumed with forecasts of sustainable growth and exit strategy plans. A sizeable equity correction coupled with double-dip fears were nowhere to be found.

Now over that interval …

Continue reading…

If you’re not already paying $3.50 for gas at the pump, and some of you are, are you ready for it? Because it’s coming, and when it gets here, things are going to get sticky.

It’s almost a given, because the spike in crude-oil prices this week will be filtering through to the pump over the course of the next few weeks. I know the gas station in town I go to was charging $2.95 last Friday, and was charging $3.09 yesterday (I live in Jersey; high taxes, cheap gas.)

Don’t kid yourself: the “recovery,” already a weak, pale thing, could be totally unwound by a spike in gas prices. In 2008, $4 gas was the last straw that pitched the economy over. Given how much weaker the average American is today than then, it wouldn’t surprise me if $3.50 was the trigger this time.

Once prices starting going above $3.50, we’re in seriously perilous territory (as if perilous itself isn’t perilous enough.) Now, most people think the only way that happens is is we get a serious supply shock, like if Saudi Arabia goes under, and the market universally doesn’t think that can happen. Of course, how many times have you heard a line like that?

Gluskin Sheff’s David Rosenberg’s heard it quite a few:

I have to say that it is amazing how myths become so quickly promulgated in the financial industry. First, it is now taken as a given that the Saudi Arabian political regime will remain intact because surveys show how well loved the King is and how great it is to see the population now being bought off with $36 billion of fiscal assistance from the Royal Family. As if the population is going to be bribed into trading in economic freedom for fiscal transfers, especially if the large Shiite population sees democratic concessions take hold in neighbouring Bahrain (where most of the people are Shiites, many from Iran, and ruled by the Sunnis).

Now sure the odds as of this moment are low that the revolution will spread to Saudi Arabia. But the Saudis are worried about it, which is what that payoff was all about. If the House of Saud thinks it can happen (and you don’t spend $37 billion if you don’t) then why’s the market so unconcerned? Because whistling past the graveyard is a favored strategy on Wall Street.

Newswires’ David Bird lays out the domestic picture for you: (subscription required.)

NEW YORK — U.S. gasoline prices, already at record highs for February, don’t fully reflect the surge in crude-oil prices amid turmoil in the global oil patch. A $3.50-a-gallon national average–the highest since September 2008–is in sight well ahead of the peak driving season.

Gasoline prices, already up 20 cents a gallon in the futures market this week as global benchmark Brent crude climbed to as high as $120 a barrel, could hit $4 a gallon or higher, raising the spectre of economic turmoil and a double-dip recession in the world’s biggest energy user, analysts said.

Continue reading…

I seem to recall that one of the selling points for the government bailouts in the wake of the Panic of 2008 was that the private sector had to be saved if we were ever going to create jobs again in this country. It was sold as that we weren’t so much bailout out a bunch of private players that wreaked havoc with the economy so much as we were preserving a system that would help repair the damage done to the citizenry. That we were, in effect, bailing out ourselves.

I think we can close the book on that one as a big fat lie. The private sector has done very little, especially considering how much they were given, to get the jobs market back to health. Hiring’s going nowhere and wages are going nowhere. But corporate profits have soared. Meanwhile, with the government picking up the slack for what the private sector isn’t doing, federal debt has soared. But GE can work the tax code to the point where it effectively pays no corporate tax.

Gluskin Sheff’s David Rosenberg lays it out for you:

The U.S. corporate sector gets bailed out by the taxpayer in unprecedented fashion, to only then see said corporate sector experience a surge in profits without having to increase the size of the workforce very much, if at all, or increase pay to their staff so they can share in the spoils, for that matter. What the government then does is replace the business sector’s role in doling out wage increases to the working class to the point where a record 20% of personal income is now derived from federal transfers.

This is the principal cause of the U.S. deficit soaring to unprecedented heights of $1.5 trillion and it is so obvious from the latest White House budget that there is no realistic plan to redress the rising tide of fiscal red ink. But the major point here is Uncle Sam’s generosity has given the proletariat the leeway to spend, thereby helping support volume growth in the corporate sector and further widening out profit margins, which were already underpinned by declining unit labour costs. And the stock market rallies to new cycle highs. What an economy! What a market! Boom times with a 9%+ unemployment rate and a 16%+ underemployment rate.

(Photo: Library of Congress)

This shouldn’t come as a surprise to dedicated readers of The Upshot or this blog, but there are a couple of reasons why corporate America looks so healthy these days, and it has nothing to do with the state of the consumer.

The main source of revenue growth for corporations is overseas sales, as Gluskin Sheff’s David Rosenberg points out today (see below.) That plus a ruthless obsession with cost-cutting have been the two drivers of corporate America’s recovery (you could add, too, official government policy to make banks profitable again. Okay, three, three main drivers.) Meanwhile, sales growth is the U.S. is running at barely a 3% clip, Rosenberg points out. It gets back to something we’ve been saying for a while: there just isn’t a lot of demand in the U.S., and because of that, companies aren’t doing a lot of hiring over here.

Do not kid yourself; the American economy is still digging its way out of a deep, deep hole, and it will be some time before it’s capable of supporting the populace on its own. It’ll be interesting to see whether or not the Fed has the brass to turn off the spigots in June when QE2 runs out or, Heaven forbid, actually raise interest rates.

Mark this well: the fact that the Fed still has its fed funds rate at zero, zero, tells you everything you need to know about how the Fed really feels about the economy. Absolutely everything.

Continue reading…

In our earlier post, Dennis Gartman references David Rosenberg, the Gluskin Sheff analyst who’s been one of the more prescient voices in the wilderness these past years, and one of the only analysts who seems to never get invited to investing roundtables.

Here’s a bit more detail on what Rosenberg is talking about today in regards to Friday’s jobs report and the economy, from his daily market comment.

You read this stuff, and again it becomes clear that there is no paradox, no mystery as to why corporate profits are rebounding so sharply, but that rebound isn’t leading to a commensurate increase in hiring. Because the profits rebound isn’t coming from the natural result of increasing consumer demand. If it were, companies would have to hire new employees to meet the demand. That isn’t what’s going on here.

From Rosenberg:

It’s incredible how the masses of pundits have responded to the data (the jobs report: editor.)

Real labour compensation contracted at a 0.6% annual rate in Q4, and since the recession technically ended, it has shrunk in four of the last six quarters. How is this the hallmark of a well functioning labour market? We can see now how this environment has been wonderful for equities:

-The Chinese government stimulates to the effect of 13% of GDP in late 2008 and this spills over globally.

- The T.A.R.P. money is distributed around the financial and industrial sector in the U.S.A.

- Bank shares are bought by the Treasury; ditto for shares of auto companies.

- Accounting rules are changed so the banks can start showing a profit.

Continue reading…

With the Dow crossing 12000 and the S&P 500 poised at 1300, and commodities across the globe on a tear, we leave it to Gluskin Sheff’s David Rosenberg to put things in perspective. We pick this up from Rosenberg’s daily commentary, right after he noted that some retailers are sounding a bit panicky.

We’ll tell you someone who isn’t panicky at all. His name is Ben Bernanke. He runs the nation’s printing press, and he is one cool customer. His nickname is Helicopter Ben. We’ll call him HB for short.

We just saw in the King Report that HB gave an interview on CNBC last Thursday when he was queried about the success of QE2, especially since bond yields and mortgage rates have gone up substantially in recent months. Here was his response:

“Policies have contributed to a stronger stock market just as they did in March 2009, when we did the last iteration of this. The S&P 500 is up 20%-plus and the Russell 2000, which is about small cap stocks, is up 30%-plus.”

Well, there you have it. When you have a central bank chief talking about the virtues of small-cap stocks, you know you really have a pro looking after the country’s monetary affairs. One has to wonder whether Cramer will end up on the short list for HB’s replacement when the time comes. So what we have is a Fed that is now targeting the stock market and engaging in some form of manipulation to invite the same speculative risky behaviour that has ended so badly in the past. But make no mistake, HB is spiking the Kool-Aid in a significant way and it is working for now. So the Bernanke put is really an extension of the old Greenspan put, but with just a different strike price.

Jim Cramer for Fed chair. That’s the quote of the day, right there. Boo-yah!

Today’s quote of the day — well, it’s more than a quote, really, it’s like a passage, but nobody says the passage of the day, sounds like a weird Henry James novel or something, The Passage of the Day. So, today’s quote of the day comes from one of our favorite market observers, the stubbornly realistic David Rosenberg of Gluskin Sheff, who’s talking about the illusion of recovery, as opposed to the real thing.

Policymakers have done an admirable job of creating the illusion of recovery, and it has worked because it would seem based on asset pricing that the vast majority of investors have bought into this illusion hook, line and sinker. Doubters are either cast aside as traitors, idiots or stubborn perma-bears who don’t get it…the “it” being that the government will simply not allow another bear market or downdraft in economic growth from taking hold again!

The business cycle has miraculously been repealed, and the shorts have been scared off for good. But you can’t tinker with human nature for very long. What people should put in their back pocket is how surreal this so-called recovery really is. With yesterday’s data, housing starts are now down 9.3% since the recession apparently was stopped in its tracks in June 2009. Go back to every other post-WWII economic recovery, and never before — 18 months into it —were housing starts still down from the point that the recession ended…until now, that is.

Continue reading…

There was a quote in a story this morning in the Journal that just sticks in my craw. It’s from the Phil Izzo story Economists Optimistic on Growth. It came in the second paragraph:

“The U.S. economy appears to have successfully navigated the adjustment from a recovery driven primarily from economic stimulus and inventory rebuilding to one driven by private domestic demand and rising exports,” said economists at Wells Fargo & Co. “Three percent growth looks pretty good, particularly with housing stuck in low gear.”

With the Fed pumping roughly $80 billion worth of Treasurys into the marketplace every month, with the Fed holding interest rates at zero, with the President and Congress not only holding tax rates down, but cutting your payroll taxes to add a little more boost to spending, with the Treasury Department trying to give people their tax refunds via debit cards, for crying out loud, I find it hard to believe that the economy’s navigated anything on its own.

Now, contrast that with this comment from Gluskin Sheff’s David Rosenberg today:

The economy remains on government-assisted life support, and the government has been very successful in creating the illusion of economic prosperity. It is doing this to buy time and help preserve social stability as the adjustment towards housing deflation, consumer deleveraging, and chronic unemployment takes its toll on the growth rate in organic final demand.

If the economy had navigated anything on its own, if the economy had reached some level of sustainability, the Fed would be under intense pressure to raise rates. As it stands, there is no pressure anywhere to do so. Keep in mind, too, that a 0% fed funds rate was unprecedented before the Panic of 2008. Former Fed chairman Alan Greenspan lowered rates to 1% after the 2000 recession, and you saw where that got us. Zero is 1 less than 1.

So are we really sailing along on our own? Of course not. Not even close, actually. More from Rosenberg.

The question really is still one of sustainability. If the Fed and our public officials were as comforted as the financial markets now seem to be over the sustainability of the recovery, then after a full year into it the central bank would not have embarked on another monetary experiment and the government would not have dipped into Social Security as a means to put more change in people’s pockets for spending purposes. Money, as an aside, that isn’t really ours.

Look, I’m pessimistic. I get it. The more I see others discounting any risks to the economy, both U.S. and global, the more convinced I get that those people are wrong. Just seems like I’ve heard this song before.

To that end, here’s a list of 10 reasons to be cautious about 2011 if you’re investing in stocks, or anything else for that matter, from Gluskin Sheff’s David Rosenberg. (And for whatever reason, the ten thing reminded me of the Latin Playboys’ song “Ten Believers.” “Eight, nine will never know; ten believers in a row.”) Clip it out, hold onto it, tape it to the refrigerator or wherever it is you make your investment decisions. Or just chuck it and get onto the “drought is over” bandwagon.

Don’t say we didn’t give you anything for Christmas. From Rosenberg:

TEN REASONS TO BE CAUTIOUS FOR THE 2011 MARKET OUTLOOK:

1. In Barron’s look-ahead piece, not one strategist sees the prospect for a market decline. This is called group-think. Moreover, the percentage of brokerage house analysts and economists to raise their 2011 GDP forecasts has risen substantially. Out of 49 economists surveyed, 35 say the U.S. economy will outperform the already upwardly revised GDP forecasts, only 14 say we will underperform. This is capitulation of historical proportions.

The last time S&P yields were around this level was in the summer of 2000, and we know what happened shortly after that.

2. The weekly fund flow data from the ICI showed not only massive outflows, but in aggregate, retail investors withdrew a RECORD net $8.6 billion from bond funds during the week ended December 15 (on top of the $1.7 billion of outflows in the prior week). Maybe now all the bond bears will shut their traps over this “bond-bubble” nonsense.

3. Investors Intelligence now shows the bull share heading up to 58.8% from 55.8% a week ago, and the bear share is up to 20.6% from 20.5%. So bullish sentiment has now reached a new high for the year and is now the highest since 2007 ― just ahead of the market slide.

4. It may pay to have a look at Dow 1929-1949 analog lined up with January 2000. We are getting very close to the May 1940 sell-off when Germany invaded France. As a loyal reader and trusted friend notified us yesterday, “fighting” war may be similar to the sovereign debt war raging in Europe today. (Have a look at the jarring article on page 20 of today’s FT — Germany is not immune to the contagion gripping Europe.)

Continue reading…

Sorry for the light posting; thin staff here this morning.

Lot of data out there today, most of it jibbing with the party line these days, the only line it seems, that the economy’s getting better, the American consumer is back, and well, it’s time to get back into stocks, silly!

That NY Times article linked to above is almost too much to bear.

The last-minute holiday surge is heralding the return of the American consumer, who is shedding the recession’s thrifty ways and rediscovering the pleasure of shopping.

The malls are jammed, parking lots snarled and sales expected to stay strong in the few remaining days before Christmas.

Are they ever empty the week before Christmas? Honestly, can you realistically take what is traditionally the busiest time of the year for consumer spending, look at jammed malls and crowded parking lots, and draw the conclusion that the consumer is back? You can, but you shouldn’t. Gluskin Sheff’s David Rosenberg paints it thusly:

So people are loosening their purse strings during the holiday season and journalists are going to use that as a commentary on how the entire thing is playing out or how it will continue to play out. Let’s wait and see what happens in the next few months as the bills come in and the reality of deflating home values and inflating gas prices start to sink in.

Yes, there’s going to be payroll-tax holiday, so we’ll all get a little extra cash in our paychecks starting in January. I’m looking forward to it as much as everybody else. But I’m also looking crude oil prices pushing $91/barrels, and seeing prices at the pump creep toward $3/gallon, in New Jersey at least, where gas is cheap — give us a break, it’s the only thing that is cheap in the Garden State — I know it’s already over $3 elsewhere. I don’t know if you’ve been watching commodities lately, but you may want to start, because they’re all going up.

Unemployment is near 10% — and let’s not kid ourselves, realistically it’s above that. Add in all the people who are working only part-time because companies don’t want to hire full-timers, and the 99ers who’ve fallen off the labor rolls into oblivion, and you’ve got a very large part of the labor force under direct pressure. Those poor folks are also exerting indirect pressure on the rest of the work force, since all those available workers are helping companies hold off on hiking wages.

The Fed wanted to create inflation, and they’re creating it. Deflation is still an issue, because I believe, and clearly the Fed believes, that if the central bank takes its foot off the pedal, prices will start dropping. But right now, we’re seeing things like corn, cotton, oil all rising. While wages are going broadly nowhere.

So why would anybody draw the conclusion that the consumer is “back?”