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Mark Gomes
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Mark Gomes is one of the world's most experienced technology analysts, with over 20 years in the market. He is also a Masters Track & Field world record holder and U.S. Gold medalist (http://www.fasterthanforty.com/hello-world/). Currently, Mr. Gomes is the CEO of PTTResearch.com, Pipeline... More
My company:
PTT Research & Pipeline Data, LLC
My blog:
Poised To Triple
My book:
Faster Than Forty
  • Stock Market Update 5 comments
    Sep 15, 2010 2:02 PM

    Four Key Items Today:

     

    1. The latest Duke/CFO survey is out. This is one of the key indicators I watch, because CFOs know more about what's going on than most anyone. It has been a coincident indicator at worst and a leading one at best. Historically, divergences between the Duke/CFO results and stock prices have been quickly reconciled, with stocks tracking the Duke/CFO results. We may be seeing such a divergence now -- the latest survey results were underwhelming to say the least. All measures of confidence tumbled, as you can see here: http://www.cfosurvey.org/

     

    Aside from the obvious, it's also important to note that CFOs expect earnings to rise 12% over the next 12-months. Meanwhile, Wall Street analysts are expecting S&P earnings to grow about 20%. Interestingly, Wall Street strategists are expecting growth to be closer to 10%. Analyst estimates are derived by adding up earnings estimates for each company one-by-one, while strategists take a top-down approach. The CFOs seem to be siding with the strategists (or vice versa). One last point is that earnings risk is clearly weighted to the downside, as nearly half of the CFOs surveyed said that expected growth can only persist for 6-months unless the economic outlook improves. This is further evidence that analyst estimates are likely too high.

     

     

    2. I got a great response to my latest SeekingAlpha article from Zebra 365. Check it out in the comments section here: http://seekingalpha.com/article/225238-fed-poised-to-duke-it-out-with-a-weakening-economy.

     

    The jist is that the increased "money-in" from the Fed is simply a swapping of maturing securities they currently have with new securities. If this is indeed the case, new money is NOT coming into the system (though the Fed is still likely to time its new purchases to favor option expiration weeks).  Assuming this is all correct, I think the market should start heading back down, barring the announcement of a new initiative from Bernanke. I don't expect such an announcement until after the elections. Goldman Sachs agrees:

     

    "Our view remains that the Federal Open Market Committee (FOMC) will once again ease monetary policy via unconventional measures in late 2010 or early 2011. Our views have not changed, and today’s comment discusses them in Q&A form. We believe that purchases of US Treasury securities cumulating to $1 trillion or more are the most likely cornerstone of the program; that the September 21 FOMC meeting is probably too early for a big announcement, but that November 2-3 is a possibility; and that it would likely “work” to a limited degree, perhaps boosting real GDP growth by a little under ½ percentage point per $1 trillion in purchases."

     

    3. For the first time in 6-years, the Bank of Japan intervened in the currency markets to stop the Yen from continuing to go up. A higher Yen makes its goods more expensive to other countries, which is bad for Japan's all-important export businesses. In addition, in the absence of inflation, any Yen-diluting activities could be a boost to Japan's internal economy. This cause the Dollar to strength, which would normally be bad for stocks. However, the Fed is making open-market purchases today and tomorrow, which is likely offsetting the BoJ's moves.

    If the BoJ is serious and continues these activities, the Dollar may stop falling in the short-term, which would be an additional pressure against U.S. equities.


    4. Beyond QE2, an inflation-watcher believes that "Risk remains exceptionally high in the next six-to-nine months for a combination of massive U.S. dollar selling and heavy Federal Reserve monetization of Treasury debt to boost inflation". I'm gonna file this under "unlikely, but keep an eye on it". If inflation does start to kick in, the stock market is going to get REALLY ugly:  http://www.zerohedge.com/article/john-williams-sees-onset-hyperinflation-little-6-9-months-fed-tap-dances-land-mine


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Comments (5)
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  • Hey Mark, can you please elaborate on the fourth point about inflation making equities "ugly"? I'm not really sure the mechanism that would cause stocks to decrease if inflation set in.

     

    Also, is it correct to think equities should head down in both cases of either inflation or deflation? Same for hyperinflation? Thanks!
    15 Sep 2010, 04:48 PM Reply Like
  • Author’s reply » In the absence of economic recovery, inflation would hinder the Fed's power to prop the economy by printing money. Therefore, the economy's woes would exacerbate. Modest inflation combined with economic recovery would actually be great.

     

    Hyperinflation in the absence of a strong recovery would also be bad. If the recovery was strong enough, it could withstand interest rates going up to kill inflation.

     

    It all depends on the state of the economy at the time.
    15 Sep 2010, 06:55 PM Reply Like
  • Awesome, thanks Mark
    15 Sep 2010, 07:21 PM Reply Like
  • Wow just caught the purchase of Occam! Pretty crazy news. They must have swept in just at the right time when the stock was lower in the last few weeks, since 7.75 is a lot less than you predicted it COULD be in the next year.

     

    Hope you still profited from it!
    16 Sep 2010, 03:41 PM Reply Like
  • Author’s reply » Half of the OCNW deal is in CALX stock for a reason ;^)

     

    More on this later...
    16 Sep 2010, 07:03 PM Reply Like
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