Tired of QE2 Talk?
Is anyone else getting tired of talking about QE2?
I know I'm getting a little tired of writing about it. But the Fed's actions are unprecedented. It's already added $1.7 trillion in assets to its balance sheet. The potential for another $1 or $2 trillion is more than newsworthy.
And the thing is, there's a growing camp that's expecting the Fed's next action to be a disappointment. Bank of America/Merrill Lynch is among those that think there's a "sell the news" risk.
Inflation concerns aside, it's worth considering that asset purchases don't really change the valuations of stocks in any way. The Fed is hoping to push some of the cash that's essentially being hoarded in savings accounts and corporate balance sheets into the system. It's also hoping to keep interest rates low to aid the housing market.
The problem, liquidity doesn't necessarily create demand, especially at the household level. Let's remember that Americans stared into the abyss in 2008. And those that didn't lose their jobs decided they needed to save more and spend less. Absent another Bush-style "check in the mail" stimulus, it's difficult to see how the Fed's actions will shift that psychology quickly.
Now, let's also not forget that there is a Congressional election next week, too. It appears the GOP is going to give the Democratic majority Congress a jolt, and that could lead to fiscal policy changes.
Some new ideas coming out of Congress, combined with the Fed's actions, could actually have an impact. Maybe another homebuyers' tax credit?
Though, as I've said before, a coherent energy policy and some kind of incentives for job re-training would be good ideas, too.
I've been intrigued by an idea I've read from Todd Harrison, the founder of the Minyanville financial website. He notes that the Great Depression was an era, not an event. Depression era psychology affected the behavior of an entire generation.
We should be aware that a similar generational psychology may be in play
right now.
Now, let's get to some reader mail...
J.B. wrote: Have to lament the fact I received a promo piece from you on True Religion some 5 years or so ago. Having received so many other stock recos at that time, I failed to act on it, also thinking there wasn't much of a market for $150-$300 Jeans. I'll always rue the day I missed that one, but I always now pay attention to whatever you put out there!
Ah, the one that got away. Missed opportunities can be painful, but they are also a way of life in investing. Don't spend too much time looking in the rearview mirror.
Consumer goods are a great place to look for big winners, because if get a company at the forefront of fad, the gains can be phenomenal. Crocs (Nasdaq:CROX) did that with their goofy shoes. And Apple (Nasdaq:AAPL) is another example of a company that has perfectly addressed consumer trends.
Chance F. wrote: I ready your column and The Daily Reckoning. They always make perfect sense to me, but the recent one (Oct 26, I think) didn't make sense to me. You mention commodities and the stock market, and then sprinkle the statement with an old maxim about the market can stay irrational longer than one can remain solvent.
Are you stating you think the next bubble is in commodities and/or the stock market? I still like stocks and here's why. It loses the contest of the ugliest investments. In other words, it is the least ugliest. In days past, investors, like myself, had options for a decent return.......real estate, T-Bills, CDs, GICs, angel capital investing, whatever -- they all produced something. Another maxim, "worry about return of your capital versus return on your capital."
Real Estate -- can still be good, but gotta be really selective. Overall, not good. Getting financing, no matter how strong you are, can still be problem.
Tbills or any government IOU -- are you kidding?
CDs -- Banks and Bernanke should be put in prison for stealing old peoples money.
Angel Capital -- can still be good, but the demand isn't there....in days past, I'd look at 2 deals per month from someone wanting money for a venture. today...nothing.
Gold -- maybe. I don't see how these gold bugs are ever gonna cash in -- gotta small scale at your house to weigh your gold coin to trade me for my bag of rice? Gold, can also be debased -- exactly like the U.S. government did with silver coins -- start covering the outside with tin, then start filling the inside with copper, or whatever. All of a sudden, their 3% gold, or silver, or whatever.
Stocks may / may not fare well in inflation. Both sides have valid arguments. Energy stocks, food stocks, staple stocks, dividend stocks may all look TERRIBLE in the face of money printing, but they at least have a bag over their head.
There are different versions of ugly when pretty is gone.
Stocks as an asset class may well be the least ugly. I still believe that there are individual stocks that are downright knockouts. But as with anything, you have to be selective.
As for where the next bubble will form, the jury is still out. Bubbles are usually an example of unintended consequences, and it's tougher to predict where they will form than to recognize them once they have formed.
David F. wrote: I do really enjoy reading your emails, I do religiously try to read them every day and I keep those I miss and catch up by the end of the week. I value the objective approach to your comments and review.
I am writing today to simply offer an opinion on your comment about "China's low labor rate". I have lived in China for a year and have done extensive business transactions purchasing goods from China. I have seen first hand the manufacturing operations and manufacturing plants in China. I would suggest it is not the low labor rates that give China the low cost advantage it is the total cost of manufacturing in China.
The fact that there is no EPA/MPCA; no OSHA regulations, fines or costs; no unemployment insurance costs or the huge new cost impact to US Businesses: employer health care. If one adds up these costs they quickly over run a one to three dollar an hour labor rate when labor is probably 40% or less of the total cost of goods. Not all of the additional manufacturing costs listed above are bad but the regulatory costs have risen beyond common sense and what the US consumer is willing to pay for goods and still enjoy the clean air, rivers, insurance etc.
The average consumer does not realize that all of those benefits have a cost - unless goods are made outside of the United States.
Good point. I glossed over a lot by simply saying that China has cheap labor.
But I would point out a perspective forwarded by Energy World Profits energy economist Gregor Macdonald. He notes that, by making China the world's factory, we have simply outsourced energy demand to China. And China has responded by burning an incredible amount of coal. So we're enjoying clean(er) rivers and air for now...
Ted G. wrote: You mentioned forclosuregate. How about refi-gate and the hazing which is called refinance with all it's self-dealing fees?
The borrowers who can't refinance because their home is underwater (over 30% of California and over 20% of Georgia) would be helped and the economy would benefit if FNMA and Freddie and FHA would simply drop their interest rate on existing loans to the current rate. All banks should do this. Banks are currently curing their balance sheets by refusing to drop the rates on the most vulnerable. As the number of homes under water increases, borrowers are going to get churlish.
I totally agree. And that's why I've suggested that the Fed's QE2 may well target the housing market more directly than previous efforts. That would certainly be more effective than simply buying Treasuries.
Blaise R. wrote: I'm a design engineer up hear in Canada and I've been a little concerned these days with my Bank of America investment. I'm also a little frustrated with my financial adviser as of late. I would appreciate some advise but I also understand that you don't do this for free so if I don't hear back form you, I understand.
I can't blame you for being a bit concerned about Bank of America. The stock has been hammered lately as investors like PIMCO are demanding that BofA buy back billions of dollars worth of bad mortgage debt from Countrywide.
And while this is a short-term problem, stay focused on BofA's tangible asset value of around $12.60.
As you know, BofA reported a non-cash loss for the third quarter on charges related to the finreg bill. I believe BofA is the first bank to do this, which should set it up well for the future. Also note that BofA was able to return more loan loss reserves on a percentage basis to earnings than JP Morgan (NYSE:JPM) or Citi (NYSE:C).
It's tough to forecast near-term upside for the stock with the put-back issue still looming, but long-term, I think the stock is attractive.
Rob M wrote: I am the Canadian investor (new) that wrote you some time ago. I am now following your 100K program, as well as I can.
My question is regarding taking profits. You mention this occasionally and I was wondering if you could clarify this topic for new investors. It may sound somewhat naive, but I'd rather hear it from you.
I do have a few cdn commodity stocks that have seen a good rally, and then got hit hard today. So here we go, topping out on the recent rally, sell in part for some profits, sell all then reinvest after the fall……
Thanks Ian, I very much enjoy your reports and investing in the 100K Portfolio looks promising.
Taking profits is an integral part of investing. Because you haven't really made any money until you sell.
Mutual funds and hedge funds take profits regularly, but their goals are somewhat different than individual investors'.
If you have a great stock, it's tough to sell it because you think the market will reverse. You may want to look into selling covered calls on your positions. That's a good way to lock in some gains and generate some income.
Michael H. wrote: I have been receiving your reports and reading your reports on regular basis for about 3 months now, and I get excited when I read about the returns one can enjoy if invested properly. I was really excited reading your medical report on Mon. Oct. 18.
My problem, I'm a Canadian, have limited income, if I were to invest any money, I would be thinking in terms of under $2000.00 to $3000.00 to begin with. Also how would any investment I might consider be administered? Any info you can provide would be
appreciated.
Also, do you deal with and encourage
small investors...My plan would be to start small, make
enough profit to pay back my original investment and then
fly from that point on.
I absolutely encourage small investors to start investing. One word of caution though: don't invest money you need and don't expect huge gains right off the bat. Investing is a long-term endeavor. Impatience is one of the biggest challenges for new investors.
Of course, I'd like to hear your thoughts. I'll even print them. Write me here: dailyprofit@wyattresearch.com
