James Byrne's  Instablog

The decision by the Federal Reserve to maintain its basic zero interest rate policy has many in search of bubble formations.  There is a term, hiding in broad daylight that applies here.  While investors monitor equity markets, precious metals and believe it or not even real estate they've glossed over the 800 pound gorilla in the room.  US Treasuries. 

While progress is being made in stemming the deflationary tide and freeing up credit, the recovery remains fragile.  The Federal Reserve recognizes this and Fed Fund futures suggest a tightening should not be a concern until the later half of 2010.   U.S. treasuries are at generational lows in the face of bulging budget deficits and seemingly endless stream of new supply.   Foreign demand for new supply has waned. Frightened retail investors flocked to the safety of treasuries during the meltdown which continues to replace some of that demand. Domestic banks, flush with taxpayer dollars, instead of recirculating those billions are stepping in purchasing treasuries filling the remaining gap.   This cannot continue.  

At some point, rates will rise, and precipitously whether in response to the debasing of the dollar, a whiff of inflation or signs of a sustainable economic recovery.   Chairman Bernanke's legacy most likely will be defined in this next period.  Leave policy too accommodative too long and risk igniting a bout of hyper-inflation and potentially double digit interest rates, aka Fmr. Chairman Volker ( I don't fall into this camp).  Take away the punch bowl too early and risk choking off the economic recovery.  Either way, if not articulate and definitive with policy response, he risks losing both domestic and foreign investor confidence and damaging the greenback further.  

Investors looking to gain access to a recovering housing market may look no further than Home Depot- HD.  Home depot, after cleaning out the CEO office and bringing in fresh blood, has been aggressive in cutting costs and regaining its footing against a hungry Lowe's.   The company shuttered unprofitable store fronts and has been opportunistic in opening new centers.  HD should benefit as the economy and housing continue to stabilize.  In the interim investors get to collect a healthy 3.4% dividend yield.  Earnings are out on November 17 so interested investors should sit in on the conference call.  

As always, investors should conduct their own due diligence and contact their investment advisors before making any investment decisions. 

As a note of full disclosure, I may currently own or look to own in the future securities mentioned here for myself and my clients. 

Investors turned cautious as we closed out October seeing swings of 200 points the last three sessions.   Troubling was the rejection of higher prices in the face of what appeared to be investor friendly news from Corporate earnings and Economic data.  What needs to kept in mind, is October is year end for many hedge funds, and could have added to the volatility. 

This week kicked started November with strong numbers on pending home sales and the Purchasing Managers Index (PMI) both.  Buried within the PMI is an employment index which finally went from contraction mode last month, 46.2 (above/below 50 reflect contraction/expansion) came in at 53.1 suggesting jobs are being created.   Will that expansion be reflected in Friday's Non-Farm Payrolls release.  If not, it would be just the fourth time over the last thirty years that a positive ISM employment index is not reflected by a positive non farm payroll number.  Now Friday's number, estimated to reflect a contraction in the job market by 175,000, may come in negative, but the PMI cannot be ignored. 

On the corporate front, Ford (F) came front and center with terrific news of an almost $1billion dollar profit.   That profit came on cost cuts and market share gains, but a dramatic improvement from the staggering losses we've grown accustomed to hearing.  

The good news as of this writing, is the market is responding as expected with a triple digit move higher.   It makes it a bunch easier, when the data releases and corresponding market response makes sense.   We'll continue to monitor the dollar and the inverse relationship it currently enjoys with the equity markets.  For now, we'll enjoy the level of chi achieved within the market this morning.  

For fixed income investors I'll refer to one I've touched on in the past as well as in this post, Ford 8% ABS Trust (XVF).  While Mullaly continues this turnaround of the automaker, investors can enjoy a yield just inside of 11% with the opportunity for capital appreciation above 30%.   Obviously risks remain to this turnaround, but with the company's ability to trim capital outlay while continuing to introduce attractive new models into the marketplace, confidence is building that Ford will be a winner. 

As always, do your own due diligence and consult your financial professional before making any investment decisions. 

In a note of full disclosure, I may currently own or may plan to purchase for my own account or those of my clients the securities listed above. 

 

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In the past I’ve received compliments for me terse market commentary.  I’m not entirely certain, but there may have been a hint of sarcasm buried in there.  Keeping that in mind here’s today’s update. 

The hits keep rolling in, just not enough of them for the Los Angeles Angels last night.  With a touch over 100 of the 500 companies in the S&P index having reported the results look pretty darn good.  Over 80% are beating on earnings estimates.  Importantly over 60% are beating in top line revenue.   Coming into earnings season market participants were looking for two things.

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Short and Sweet!  I first need to announce I am putting together a petition drive that I believe will be the first ever to receive 100% support and zero detractors.   I propose replacing the annual clubbing of the baby white seals (as fun as that has been) with “The First Annual Skinning of The Bears”.   I know what you’re thinking, Brilliance!  However I cannot take full credit.  This year they have been highly visible, overly aggressive and annoyingly persistent which makes for easy targets.   I’m looking forward to easy passage and celebrating every October.

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The market seems to be at a pause phase these last few days.   We are in the process of closing out the third quarter and heading down the home stretch of a very challenging year.  Valuations may begin to appear stretched and rich if we utilize a trailing twelve month basis.  But reflecting upon the current low interest rate environment along with the lack of any “reportable” inflation, a higher price earnings (P/E) is easily attached to equities.  What is or should follow would be the growth phase ramping up, spurring higher earnings and bringing those P/E multiples closer to the midrange levels.    Another way to view this would be, since the markets, both equity and fixed income, are forward looking or anticipatory vehicles, we can look at market valuations on a forward basis.  Meaning, we use earnings estimates for the calendar year 2010.  Earnings estimates were entirely too pessimistic coming into this current quarter.  Analysts are still being calculated and updated, but I see the range of estimates coming in between $65.00-$80.00 share.  Let’s take the middle ground of $72.50 and attach a 15 and 17 P/E.  Viola, we have a range of 1087-1232 for the S&P 500 index.   I believe earnings will surprise many for this current quarter and future estimates will need to be revisited again.  

 

The Leading Economic Indicator (LEI) once again turned out positive for the fifth month in a row.  This is very positive for the economy and a market searching for a directional signal.  The LEI is not definitively stating the US economy will be raging through 2010 but it is strongly suggestive of a continued recovery for the first half of 2010.   US economic expansion as measured by GDP has received notable revisions over the previous two months.  Entering this current third quarter, economists estimates on average called for a contraction of between 1%-2%.  Now, with the information available estimates have swung to an expansion of between 2%-6%.  This is a huge swing.  Let’s take out the high (someone is looking to be the high water mark here) estimate of 6%, although with all the easy money sloshing around it could happen, and look at even the mid-low estimates of 3%.  That is a 4%-5% swing for an economy as mature and in excess of $12 trillion.  The stimulus, it can be argued whether it could have more targeted and the sheer enormity, but the effects, if this plays out, can no longer be disputed. 

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