10-31-2014, 06:12 AM
Eddy Elfenbein at Crossing Wall Street always has an interesting and experienced take on the economy. I only glance at his "Buy List" as he isn't not a DGI'er (although I did pick up Ford using him as a bet on America's recovery (and a 3% yield). Here is the October 31st E-Letter that pertains to the historic end of QE:
CWS Market Review
October 31, 2014
“Sometimes the hardest thing to do is to do nothing.” – David Tepper
I’m happy to report that my favorite investment strategy, doing absolutely nothing, has been very successful of late. The S&P 500 has rallied on nine of the last 11 trading days. On Thursday, the index closed at 1,994.65, which is a dramatic turnaround from the intra-day low of 1,820.66 which we hit just two weeks ago.
The stock market has regained nearly everything it lost during the mini-panic of early October. On Thursday afternoon, the S&P 500 came within 0.6 points of touching 2,000 for the first time in more than a month. Several of our Buy List stocks, like CR Bard, Stryker and Medtronic, recently broke out to new 52-week highs. The sudden reversal clearly upset a lot of market bears. I’m often surprised by how many people are disappointed that the world didn’t end.
![[Image: big.chart10312014.gif]](http://www.crossingwallstreet.com/wp-content/uploads/2014/10/big.chart10312014.gif)
The big economic news this week was that the Federal Reserve announced that Quantitative Easing will finally come to an end. This has been a hugely misunderstood policy. I’ll tell you what this means for the market and our portfolios. We also had some very good Buy List earnings this week. AFLAC not only beat earnings, but raised its dividend as well. Fiserv beat earnings, raised guidance and broke out to a new 52-week high. Later on, I’ll preview our remaining Buy List earnings reports. But first, let’s look at what Janet Yellen and her friends at the Fed had to say this week.
QE Finally Comes to an End
The Federal Reserve met earlier this week, and as expected, the central bank announced the end of Quantitative Easing. This was hardly a surprise, since the Fed has been gradually tapering its asset purchases for nearly a year.
Let’s take a step back and review what QE was all about. Since the economy was in such poor shape, the Fed responded to the financial crisis by lowering interest rates. The problem was that rates were already near 0%, and they couldn’t go any lower, yet the economy needed more help. Several models indicated that interest rates need to be negative by a few percentage points.
The Fed then decided that the best way to simulate negative rates would be by buying bonds. Lots and lots of bonds. The Fed had tried bond buying twice before but exited both efforts. Then in September 2012, Ben Bernanke embarked on round three, but this one was different. The Fed said it would buy tons of bonds, and it wouldn’t stop until things got better. No timeline. That was a strong message the market needed to hear. The Fed’s plan was that each month, it would buy $45 billion worth of Treasuries and $40 billion worth of mortgage-backed securities.
The goal of QE was to lower interest rates and thereby help the housing market. Economists are divided on the efficacy of all this bond buying. Of course, economists are divided on nearly everything. Personally, I’m a pragmatist. I don’t know if QE helped, did nothing or even caused more pain, but I can’t help noticing that the stock market liked QE a lot. Any pro-QE announcement (or rumor) could send shares soaring, while any hint that it would end would cause a rash of sell orders. That’s all the evidence I need.
In addition to helping the stock market, I think QE also gave a boost to riskier assets at the expensive of more secure ones. Or at least, those that are perceived as being more secure. Gold, for example, has not done well over the third round of QE. The yellow metal rallied to over $1,920 per ounce three years ago, and it’s been a painful ride ever since. On Thursday, gold closed below $1,200 per ounce.
We’re in an unusual situation for the market and the economy. For the last few years, the market has done well. while the economy has experienced a very tepid recovery. Now it looks as if the economy is poised to do better, but the market probably won’t be able to repeat such stellar gains.
On Thursday, the government announced that the economy grew by 3.5% in the third quarter. That’s a good number, but some of the details were pretty mediocre. Personal consumption only grew by 1.8%. Frankly, that’s kinda blah. Here’s what’s happening: At first, the economic recovery was held back by the dead weight of the housing market. Then it was held back by austerity by state and local governments. Fortunately, we’re now passed both those hurdles, so I expect to see better economic growth in the months ahead.
In fact, the economic growth rate of the last two quarters was the best for back-to-back quarters in more than a decade. It doesn’t end there. On Tuesday, we learned that Consumer Confidence jumped to a seven-year high. The initial jobless claims reports are still quite good. The only bump this week was a lousy report on Durable Goods.
I’m even going to say something that might be blasphemous on Wall Street, and that’s that the monthly jobs reports aren’t so important anymore. (GASP!) Of course, they’re important in the sense that people are getting more jobs, and we can see that companies are expanding. But don’t expect to see any dramatic inflexion points soon. The jobs-growth trend has been established, and that’s what the Fed wants to see.
The next question for the market and the Fed is, when will the central bank finally raise interest rates? That’s a tough one. So far, every forecast (mine included) has been far too premature. Initially, Janet Yellen said that the first rate hike would be about six months after the conclusion of QE. That was a rookie mistake, and she’s disavowed those comments ever since.
The futures market currently sees the first rate hike coming in August 2015. I’m a doubter, but I can’t say I have a strong conviction either way. The problem is that the Strong Dollar Trade, which I’ve discussed in recent issues, has held back inflation and economic growth. That gives the Fed a little more breathing room. As a result, that could put off a rate increase for a few more months. I wouldn’t be surprised if the first rate hike doesn’t come until 2016.
What does this all mean? The overall climate remains the same. As long as rates are low, stocks are the place to be. It’s just that simple. This earnings season has been a good one for the market. The latest numbers show that nearly 72% of the stocks in the S&P 500 have topped earnings expectations, while 53.7% have beaten on sales. I should add that these are reduced expectations compared with a few weeks ago. The earnings growth rate is currently tracking at 6.5%. That’s not great, but it sure beats anything you’d see in the bond market.
Until interest rates become competitive with stocks, stocks are the best place to be. I encourage investors to keep focusing on high-quality stocks like you see on our Buy List. Now let’s turn to our recent earnings reports.
http://www.crossingwallstreet.com
Cheers!
Rob
CWS Market Review
October 31, 2014
“Sometimes the hardest thing to do is to do nothing.” – David Tepper
I’m happy to report that my favorite investment strategy, doing absolutely nothing, has been very successful of late. The S&P 500 has rallied on nine of the last 11 trading days. On Thursday, the index closed at 1,994.65, which is a dramatic turnaround from the intra-day low of 1,820.66 which we hit just two weeks ago.
The stock market has regained nearly everything it lost during the mini-panic of early October. On Thursday afternoon, the S&P 500 came within 0.6 points of touching 2,000 for the first time in more than a month. Several of our Buy List stocks, like CR Bard, Stryker and Medtronic, recently broke out to new 52-week highs. The sudden reversal clearly upset a lot of market bears. I’m often surprised by how many people are disappointed that the world didn’t end.
The big economic news this week was that the Federal Reserve announced that Quantitative Easing will finally come to an end. This has been a hugely misunderstood policy. I’ll tell you what this means for the market and our portfolios. We also had some very good Buy List earnings this week. AFLAC not only beat earnings, but raised its dividend as well. Fiserv beat earnings, raised guidance and broke out to a new 52-week high. Later on, I’ll preview our remaining Buy List earnings reports. But first, let’s look at what Janet Yellen and her friends at the Fed had to say this week.
QE Finally Comes to an End
The Federal Reserve met earlier this week, and as expected, the central bank announced the end of Quantitative Easing. This was hardly a surprise, since the Fed has been gradually tapering its asset purchases for nearly a year.
Let’s take a step back and review what QE was all about. Since the economy was in such poor shape, the Fed responded to the financial crisis by lowering interest rates. The problem was that rates were already near 0%, and they couldn’t go any lower, yet the economy needed more help. Several models indicated that interest rates need to be negative by a few percentage points.
The Fed then decided that the best way to simulate negative rates would be by buying bonds. Lots and lots of bonds. The Fed had tried bond buying twice before but exited both efforts. Then in September 2012, Ben Bernanke embarked on round three, but this one was different. The Fed said it would buy tons of bonds, and it wouldn’t stop until things got better. No timeline. That was a strong message the market needed to hear. The Fed’s plan was that each month, it would buy $45 billion worth of Treasuries and $40 billion worth of mortgage-backed securities.
The goal of QE was to lower interest rates and thereby help the housing market. Economists are divided on the efficacy of all this bond buying. Of course, economists are divided on nearly everything. Personally, I’m a pragmatist. I don’t know if QE helped, did nothing or even caused more pain, but I can’t help noticing that the stock market liked QE a lot. Any pro-QE announcement (or rumor) could send shares soaring, while any hint that it would end would cause a rash of sell orders. That’s all the evidence I need.
In addition to helping the stock market, I think QE also gave a boost to riskier assets at the expensive of more secure ones. Or at least, those that are perceived as being more secure. Gold, for example, has not done well over the third round of QE. The yellow metal rallied to over $1,920 per ounce three years ago, and it’s been a painful ride ever since. On Thursday, gold closed below $1,200 per ounce.
We’re in an unusual situation for the market and the economy. For the last few years, the market has done well. while the economy has experienced a very tepid recovery. Now it looks as if the economy is poised to do better, but the market probably won’t be able to repeat such stellar gains.
On Thursday, the government announced that the economy grew by 3.5% in the third quarter. That’s a good number, but some of the details were pretty mediocre. Personal consumption only grew by 1.8%. Frankly, that’s kinda blah. Here’s what’s happening: At first, the economic recovery was held back by the dead weight of the housing market. Then it was held back by austerity by state and local governments. Fortunately, we’re now passed both those hurdles, so I expect to see better economic growth in the months ahead.
In fact, the economic growth rate of the last two quarters was the best for back-to-back quarters in more than a decade. It doesn’t end there. On Tuesday, we learned that Consumer Confidence jumped to a seven-year high. The initial jobless claims reports are still quite good. The only bump this week was a lousy report on Durable Goods.
I’m even going to say something that might be blasphemous on Wall Street, and that’s that the monthly jobs reports aren’t so important anymore. (GASP!) Of course, they’re important in the sense that people are getting more jobs, and we can see that companies are expanding. But don’t expect to see any dramatic inflexion points soon. The jobs-growth trend has been established, and that’s what the Fed wants to see.
The next question for the market and the Fed is, when will the central bank finally raise interest rates? That’s a tough one. So far, every forecast (mine included) has been far too premature. Initially, Janet Yellen said that the first rate hike would be about six months after the conclusion of QE. That was a rookie mistake, and she’s disavowed those comments ever since.
The futures market currently sees the first rate hike coming in August 2015. I’m a doubter, but I can’t say I have a strong conviction either way. The problem is that the Strong Dollar Trade, which I’ve discussed in recent issues, has held back inflation and economic growth. That gives the Fed a little more breathing room. As a result, that could put off a rate increase for a few more months. I wouldn’t be surprised if the first rate hike doesn’t come until 2016.
What does this all mean? The overall climate remains the same. As long as rates are low, stocks are the place to be. It’s just that simple. This earnings season has been a good one for the market. The latest numbers show that nearly 72% of the stocks in the S&P 500 have topped earnings expectations, while 53.7% have beaten on sales. I should add that these are reduced expectations compared with a few weeks ago. The earnings growth rate is currently tracking at 6.5%. That’s not great, but it sure beats anything you’d see in the bond market.
Until interest rates become competitive with stocks, stocks are the best place to be. I encourage investors to keep focusing on high-quality stocks like you see on our Buy List. Now let’s turn to our recent earnings reports.
http://www.crossingwallstreet.com
Cheers!
Rob
There are people who use up their entire lives making money so they can enjoy the lives they have entirely used up
Frederick Buechner
Frederick Buechner