Economic Timing October Forecast

by: Jason Schwarz

Our hedge fund buddy David Tepper has taken a lot of heat since his CNBC interview when he proclaimed that quantitative easing creates a win/win scenario for stocks. Like clockwork, the academics rushed to research a mess of data to prove the hedge fund titan wrong and the ensuing media coverage caused individual investors' heads to spin wondering which way was up and which way was down. Tuesday, the tide turned in Tepper’s favor.

Japan announced a $60 billion QE plan and the markets reacted very positively to the news. Don’t fight the Fed will become a rally cry into year end as economists expect our own Federal Reserve will introduce similar measures in November. This variable looks to be the tipping point in the battle to break through the year long trading range.

Over the last 6 trading days it has looked as if the market action was moving according to schedule lower in the trading range. On September 27th Apple (NASDAQ:AAPL) dropped from its $295 high, on the 28th it sold off $16 on the Time Cook rumor, and then the stock spent the next few days working its way back into the $270’s. We were licking our chops getting ready to buy at the end of this week with Apple possibly dropping to the low $270’s or even the $260’s but that plan is over because of QE tipping point.

As outlined in the September Economic Timing Newsletter, our plan in the current market was to raise less cash than usual at the high end of the trading range because of our forecast that the market is in a ‘sigh of relief’ rally; aided by hedge fund optimism, the 3rd year/1st term presidential pattern, and the Apple cycle. Tuesday Apple regained its leadership position after a multi-week hiatus and we are ready to put our cash to work with more risk than we have previously taken in 2010. We will be averaging in today, Thursday, Friday and Monday. Tuesday was a 5% allocation of AAPL November 2010 $270 calls and a 5% allocation of BIDU January 2011 $100 calls.

Here are three important reads for the week that confirm the October thesis:

1- 3rd Year Presidential Indicator

2- JP Morgan is Bullish on New Regulatory Environment
here .pdf)

3- Obama Looking to Lower Corporate Tax Rate (here)

We'll update you on our daily buys this week. Stay in touch.

Disclosure: Long AAPL, BIDU