The Slog Continues

By now you’ve read a dozen articles ripping into the Friday’s jobs data. The big bone of contention of course was the extent to which the decline in the headline rate dropped to 8.6% due to a large contraction in the labor force. Whether you call it new normal or something else this is the middling, sluggish US economy continuing to unfold. A few years ago there was a mix of complacency that the then credit crunch wouldn’t be that big of a deal which then gave way to serious fear, maybe even terror, that this was the end times in terms of the social fabric of the society. Sluggish and/or middling has been my base case the whole time for several reasons and I expect that will continue. Obviously I am biased to seeing my thesis as playing out over the last few years and continuing to play out. If this turns out to be the case that does not mean some equities won’t still do well. If there is an economic condition where GDP growth is sluggish or perpetually teetering into a recession we know that certain defensive stocks tend to do well; usually staples, healthcare, utilities and ma bell telecom (with those last two be careful when interest rates are going up). Year to date the S&P 500 is down a little over 1% while long time client holding Philip Morris International (PM) is up about 30%. Going a little broader the Staples Sector SPDR (XLP) is up a little over 8% which combined with XLP’s yield is close to an 11% return–pretty good for soda...

The Slog Continues

By now you’ve read a dozen articles ripping into the Friday’s jobs data. The big bone of contention of course was the extent to which the decline in the headline rate dropped to 8.6% due to a large contraction in the labor force. Whether you call it new normal or something else this is the middling, sluggish US economy continuing to unfold. A few years ago there was a mix of complacency that the then credit crunch wouldn’t be that big of a deal which then gave way to serious fear, maybe even terror, that this was the end times in terms of the social fabric of the society. Sluggish and/or middling has been my base case the whole time for several reasons and I expect that will continue. Obviously I am biased to seeing my thesis as playing out over the last few years and continuing to play out. If this turns out to be the case that does not mean some equities won’t still do well. If there is an economic condition where GDP growth is sluggish or perpetually teetering into a recession we know that certain defensive stocks tend to do well; usually staples, healthcare, utilities and ma bell telecom (with those last two be careful when interest rates are going up). Year to date the S&P 500 is down a little over 1% while long time client holding Philip Morris International (PM) is up about 30%. Going a little broader the Staples Sector SPDR (XLP) is up a little over 8% which combined with XLP’s yield is close to an 11% return–pretty good for soda...

The World According To Rosie

ZeroHedge posted the following list from David Rosenberg of things that people are not talking about but should be (at least this is how ZH interprets the list): 1) Hedge funds have not piled into the equity market to play catch-up. 2) The Super Committee did not come to a compromise (and remember Moody’s has the U.S. debt rating on “credit watch” and Standard & Poor’s still with a “negative outlook”.., shades of August). 3) The Europeans have not managed to resolve let alone contain their credit crisis. 4) Germany has not acquiesced and agreed to having poor sovereign credits ride off its AAA rating via a “Eurobond”. 5) The ECB has not moved towards QE. Nor will it — have a look at today’s WSJ editorial on the matter. Brilliant. 6) Mr. Market saw through the Q3 earnings season and recognized the lack of visibility in the guidance provided. 7) China did not start to ease policy just because inflation rolled off the 6%-plus peak. 8) U.S. recession risks, as per the San Francisco Fed, did not recede and actually stayed above 50% even with the better statistical tone to Q3 and Q4 GDP. We’ve all heard point number one many times, often referred to as window dressing, but this is something that I have never understood how it can be pulled off. To take an extreme example, if a portfolio reports owning nothing but names that are up 20% but the actual portfolio is only up 2% then wouldn’t all credibility be lost? The apparent failure of the super committee should surprise no one. Washington has become...

The World According To Rosie

ZeroHedge posted the following list from David Rosenberg of things that people are not talking about but should be (at least this is how ZH interprets the list): 1) Hedge funds have not piled into the equity market to play catch-up. 2) The Super Committee did not come to a compromise (and remember Moody’s has the U.S. debt rating on “credit watch” and Standard & Poor’s still with a “negative outlook”.., shades of August). 3) The Europeans have not managed to resolve let alone contain their credit crisis. 4) Germany has not acquiesced and agreed to having poor sovereign credits ride off its AAA rating via a “Eurobond”. 5) The ECB has not moved towards QE. Nor will it — have a look at today’s WSJ editorial on the matter. Brilliant. 6) Mr. Market saw through the Q3 earnings season and recognized the lack of visibility in the guidance provided. 7) China did not start to ease policy just because inflation rolled off the 6%-plus peak. 8) U.S. recession risks, as per the San Francisco Fed, did not recede and actually stayed above 50% even with the better statistical tone to Q3 and Q4 GDP. We’ve all heard point number one many times, often referred to as window dressing, but this is something that I have never understood how it can be pulled off. To take an extreme example, if a portfolio reports owning nothing but names that are up 20% but the actual portfolio is only up 2% then wouldn’t all credibility be lost? The apparent failure of the super committee should surprise no one. Washington has become...

Does the US Need More QE?

This is a complicated question. There is a paradox of what should have been done before versus where the world is now. The first part of the equation is the extent to which poorly thought out policy has made things worse thus prolonging what the natural duration of the financial crisis would have otherwise been. There is no way to know what would have happened if they’d have let banks fail and only bailed out depositors. What if the I-banks had been forced to take realistic haircuts on AIG instead of being made whole. What if the Fed had not lent so much to the banks? What if they had not executed all the various acronym programs. I’m generally of the opinion there should have been less protection for the institutions (but again total protection for depositors), fewer desperate measures enacted by the government. My thoughts could easily be incorrect but regardless what anyone’s version of should have is, we have only one reality which is what happened and what happened, among other things, is that the Fed bought a lot of US treasury debt which has become to be known as quantitative easing. They’ve actually done this under two different QE programs and both times it has come up short. Regardless of whether QE should have been done, it was done at some expense and has not had the desired end result. This raises the question for which I have no answer; if there is no QE3 then were the first two simply a waste of time and money. Put another way, do we have to do QE3...

Does the US Need More QE?

This is a complicated question. There is a paradox of what should have been done before versus where the world is now. The first part of the equation is the extent to which poorly thought out policy has made things worse thus prolonging what the natural duration of the financial crisis would have otherwise been. There is no way to know what would have happened if they’d have let banks fail and only bailed out depositors. What if the I-banks had been forced to take realistic haircuts on AIG instead of being made whole. What if the Fed had not lent so much to the banks? What if they had not executed all the various acronym programs. I’m generally of the opinion there should have been less protection for the institutions (but again total protection for depositors), fewer desperate measures enacted by the government. My thoughts could easily be incorrect but regardless what anyone’s version of should have is, we have only one reality which is what happened and what happened, among other things, is that the Fed bought a lot of US treasury debt which has become to be known as quantitative easing. They’ve actually done this under two different QE programs and both times it has come up short. Regardless of whether QE should have been done, it was done at some expense and has not had the desired end result. This raises the question for which I have no answer; if there is no QE3 then were the first two simply a waste of time and money. Put another way, do we have to do QE3...