To understand the markets with as much clarity as possible, it’s valuable to read a lot, keep track of seemingly random news and information items, and later try to piece them together into a narrative. Here are a few ideas that found their way into my notebook over the past week:
— The chief executive of Wal-Mart (NYSE:WMT) said last week that his customers are ”running out of money” due to higher gasoline prices. With 140 million customers weekly, that is a big statement.
— Data shows Americans are also raiding their retirement accounts at a record pace, which provides another unpleasant picture of the underlying economy.
— Weiss Ratings, a new debt ratings agency, last week gave the U.S. sovereign debt a “C” in its new rankings of 47 governments worldwide. The U.S. came in 33rd place, which was lower than Mexico and just a smidge above Argentina. The rating was the equivalent of a Moody’s rating of a couple steps above junk. It’s hard to say how accurate the assessment is, but after all the borrowing and money-printing done by the Bush, Obama and Bernanke administrations, the credibility of U.S. debt has been tarnished. It could take a generation of deficit reduction and restructuring to regain the reputation for thrift and growth we have lost.
— Analysts at ISI Group report that the implied effective federal funds rate now is around -2.6%! Considering that Bernanke told us in his press conference that the balance sheet after June is likely to remain unchanged for a while, that means these incredibly low rates will continue. No wonder stocks have largely had a strong bid for the past year, and the dollar is down to multi-year lows, and the 10-year bond yield is now under 3.15%.
The fed funds rate at the end of the second round of quantitative easing will be 75 basis points lower than at the end of the first round. What has that bought us? Well, payroll employment will be 1.5 million jobs higher and the unemployment rate will be 8.7% instead of 9.7%. So ISI argues that on some level QE has worked, and that the expansion over this summer is likely to be more sustainable than the recovery was last spring. Central bank intervention is working in Japan as well.
Why does the Fed think -2.6% rates are necessary? Just look at the problems that remain persistent: home prices are still falling around the country at a 6% annualized rate. China is tightening, U.S. debt was just downgraded by S&P and Japan is in recession as its department store sales are down 35%, its manufacturing is down 35% and its airlines, according to Nikkei News, are “entering a new ice age.”
— Hey how about some positives? There are plenty! Earnings for companies in the S&P 500 are on track to rise 17% to a $91 annual rate, retail sales are higher, truckers are improving, capital goods sales are rising, housing affordability is at a record high, junk bond yields hit a record low of 6.7% last week, Ford (NYSE:F) was able to sell a seven-year bond at 5%, Germany’s exports are soaring, the Tokyo stock market has surged 15% off its low, China has increased deal flow with neighbors like Malaysia, Australia and Indonesia, and Chinese food prices are down 10% from their recent high, led by vegetables.
— ISI reportedly argues that ”pink” swans are just as likely to emerge as “black” swans. That is, in a period of low expectations, the odds of unexpected positive events are just as likely to emerge as unexpected negative events. A couple of those recently: the raid that took out Osama Bin Laden in Pakistan, the cornering of the Qadaffi regime in Libya, the sharp decline in crude oil prices and the persistent recent decline in raw material prices ranging from cotton and corn to zinc and lead.
Bottom Line: It’s always easy to list all the problems in the world, but when central banks are keeping the money flowing, inflation is low and sharp occasional declines are keeping sentiment in check, corporate earnings growth can surprise on the upside — and keep equity markets on track.
For more guidance like this, check out Markman’s daily trading service, Trader’s Advantage, or his long-term investment service, Strategic Advantage