Fed Suggests Economy Is Stabilizing

The monetary aggregates have been flat for months, the problem will come when it is time to drain 1.5 trillion in liquidity from the market to return to a normal fed balance sheet and at the same time purchase a little over 1 trillion in mortgage back securities adding an equal amount of money back. One finds it difficult to think removing almost 3 trillion is very practical. A 1 per cent change in a 30 treasury will change the price almost 20 per cent for a retail investor and crush PE multiples when the yield curves shifts up from 0.

Cash for Clunkers

Yeppers, the program works really well. I open up government store and give away $4,500 checks. Might have a line several miles long, as long as the government is giving away money it will work until all the people who can afford to buy cars have done so; then demand will dive. No cars will be sold! Why? Demand has artificially been pulled forward, creating a void in the future. At 5% interest on 30 years bonds x how much money.

As to the enviorment, buy the chucker, kill then engine, separate it from the body, crush it, put it on a ship, so China can melt it down, make it back into cars which will be sold back to us by GM in China, now let us pay the interest on the money for 30 years at 5%. Where does the solvent go after the engine is killed? Does is cost any co2 to ship the cars, energy to crush, gas to ship them to the crusher. Brilliant. You really believe the process saves anything.

Think people, think!

Another bight idea sponsored by the government. Kick em all out!

Howard Fineman, heathcare and stocks

Mr. Fineman,

Now is seems the tide is against the President or haven't you noticed? The President's goal of riding a wave into history (read the linked article) will be great for readers in the future, but is it really the quality people want in a President of the United States? The President has divided the country into a million pieces, each of us pitted against the other, the have's vs. the have not's, the white against any one of color, the rich vs. the poor, ACORN vs. Glen Beck, the senate vs. the house, republicans vs. democrats, media vs. media, and now the insured vs. the uninsured.

Divide and conquer is the mantra, a government entity for every color, religious persuasion, sexual preference, the rich, the poor, financial regulation, health care (one for each malady); do anything to keep the eyes off the real change. The centralization of powers in the Presidency through the use of czars. Soon there will be a media czar to make sure everything is fare and Mr. Fine man will yell about his rights being quieted; but there will be no one to listen!

Back in March ( I think) S&P500 was around 665, suggested might be time to buy some stocks. Were up 300 S&P points and I do not think the rally is over. Do not like why it is going up, but who is to complain. As long as President Obama's agenda is going poorly, the congress remains impudent, and no other great calamity occurs stay with the trend, it is your friend, no matter what you think about the economy or politics. How much? Maybe 1100 or so, I would be taking money off the table if indeed a rally does happen, Things to remember - it is seasonable a week time of the year - you could see a pullback first, only play it if you are nibble. Individual issues will do better than indexes, interest rates should be rising at the same time. The market climbs a wall of worry.

Inflation, The Feds, and the Stock Market

Since my last post the stock market has dropped considerably. Today close was the yearly low of 11215, the last close near this level was in july, 1006. Why? My last post regarding wage deflation has been born out and even verified by Bill Gross of PIMCO, one of the largest bond managers in the country. Mr. Gross estimates the inflation has been under reported, the reason, many government programs are index the the CPI. The components of corp inflation is made up of items we puchase infrequently such as cars, or washers and dryers. Increases inprice are adjusted for increases in efficiency; an item costing 100 yesterday may be 120 today, but the increase in the avereage life of the product adjusts the price back to 105. Non Corps inflation includes those item we have to puchase every day to live. Gas, food, tolit paper, water, gas, and eletric. Based ont hose items inflation is out of control.

Thep rice of oil is 140 and some change. Mopst estimates of earnings and inflation have used an average price of 90 dollars per barrell. What would the estimates of those compaies look like of the adjustment were made. This would be the equivalent of having to mark illiquade assts to market to for the earning of corporations; more importantly what would happen to the inflation estimates if mark to market were required as the Fed is demanding the banks todo. Companies whose cost of good sold included petromlum products would be pounded. Companies who produce petrolem earnings would expand tremendously.

The Fed is in deep deep trouble. The dollars collaps as a result to to many dollars. These dollars were added be the federal reserve and then financial institutions leveraged theses dollas much as 20 to 1 in the case of a bank. Print too many dollars by the fed or the fed allowing leverage thru the financial systems are the same thing , both acting in concert magnified the number of dollars circulating in the market. This cased the dollar to drop and commodities to rise. While the EU has increased interest rates even in the face of the financial crisis, the US has lowered rates. The EU will raise rates tommarow adding more pressure to the dollar and the FED to increase rates, but they will not due to the timing of the next several meeting cooinciding with the elections and holidays. The faint is they do not want to effect/affect the elections, but quite the oppsite is true.

Bottom line the Fed will have to eventually raise rates significantly over the next several years. The effect: a one percent change in rates will change the price of a 30 treasury bond by about 20 per cent, bot including the interest. In the early eighties when I was selling 7 and 8% GNMA's yeilding 13% and no one would buy them, they were trading all around 50 cents on the dollar. The risk premium assigned to 30 year treasuries was 3 per cent above the inflation rate. If the same risk premiumum was assigned today the yeild on the long bond would be north of 7%. Let the buyer be ware.

Next post: What effect an increase in rates has on the stock market and why.