If anybody credible would have told me at 2013's start the market had a shot at posting up to a 25% gain, I would have scoffed there wasn't sufficient data to make that call. But, even in a churning market, I didn't find a more enticing venue than the Big Board, calling for 1,700 on the S&P 500 Index months ago.
The Fed is our best friend so why no groundswell to keep Bernanke working in place? I'll miss Ben Bernanke who was my Santa. Why President Obama rushed to show him the door is a puzzle. Not only has our maximum FRB leader done the right thing (since 2008) but Ben still forces all our many-handed economists to forecast furiously and retract their freshest faux pas.
The only variance in the Street's foolish guessing game was whether FRB tightening would embrace either a $5 billion or $10 billion monthly retreat from its $85 billion largesse. As if such a gesture carried deep meaning for interest rates.
Read the Federal Reserve's press release dated September 18, a masterpiece of straight talk. It tells you what the Fed thinks it knows about the economy's course, and then, lists imponderables. The imponderables outweigh what everyone knows, which is the latest month's stats on the consumer, manufacturing activity and the country's jobless rate.
The Fed's biggest worry is that the past 3 months' snapback in interest rates slows recovery and stalls-out any gains in the rolls of employment. Additionally, the wise men fuss over inflation's low level, near 1%. For them, this is an insidious element with negative connotations for GDP momentum. Considering our financial history is so marred with long cycles of inflation, I'd brush away low inflation as a serious blight.
Who's going to defer big-ticket commitments like new cars and home purchases because inflation is too skimpy? Already, interest rates on prime 30-year mortgages have bulged by half, from 3% six months ago to 4.75% last week. Low cost credit on new car purchases remains a stimulant to Detroit's monthly selling rate.
Gimme a break guys. Do I defer my purchase of a new sports jacket because inflation is too low? Will my little lady put off purchasing her winter wardrobe? Tell it to the Marines! I'd like to see lower prices and some flattening on luxury items like theater tickets, deluxe hotel suites, not to mention contemporary art canvases, women's jewelry and a glass of plunk at my neighborhood hole in the wall, now pushing beyond $12 the half-filled glass.
The Fed rightly fears fiscal retrenchment sparked by a platoon of know-nothing, shortsighted Republican Congressman determined to shut down the government no later than next month. What I like about the Fed's actions on non-implementation is they're totally pragmatic, needing to see a quickening of the pace of business before any tightening gestures, albeit minimal at first.
Reiteration on keeping the rate on Fed Funds between zero and 25 basis points for longer, not shorter, is an enormous fillip for financial markets, including anyone whose loans are tied to LIBOR. Personally, I arbitrage money, carrying a portfolio of BB corporates and preferred stocks yielding approximately 7%. So far this paper outperforms Treasuries, big time.
The Fed links Fed Funds largesse to the threshold unemployment rate of 6.5%. Liberal economists (me, too) believe the more appropriate level is 5.5%. When you factor in millions of job seekers who have given up looking, you are talking easily double digits, some say 14%. What can a laid off second mortgage salesman do but cut grass?
I expect two more glorious years for Fed Funds near zero. After the initial bump up, maybe mid-2016, I'll bang out my ragamuffin fixed income portfolio. Gone, but not forgotten. I'm not a big player in municipals, but the word is, at least for New York State and The Big Apple Apple, tax receipts have recovered to 2007 pre-recession levels.
If the Fed looks 2 years ahead on the inflation issue and tolerates a 2.5% rate before tightening, what more can anyone ask for? It's as if Bernanke has issued all operators a free hunting license for elephants. There goes Boeing Boeing! Grab it! My mortgage insurance operators, Radian Group and MGIC experience blue skies ahead.
With the Fed on hold, the price-earnings ratio for the S&P 500 Index easily holds above 15 times earnings. Maybe, the market blows off and reaches 18 times earnings. This happens if operating profit margins for major corporations inch up from their current fully recovered level. I rate this a 50 / 50 probability but no more. If GDP accelerates to over 3% next year my odds go to 75 / 25.
Economic projections by FRB members and regional bank presidents are even more restrained than their preceding verbiage. GDP projections for 2014 come in a touch. Nobody expects more than 3% growth or unemployment dipping below 6.4% to 6.8%. For 2015, numbers turn stronger, but predictive power lessens over time.
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