When Good is Bad

What happens when employment numbers improve and the
unemployment rate starts to fall? Is that the point that the Fed
announces an end to its monthly QE2 Treasury purchases?

Yesterday’s blowout ADP payroll number has raised
expectations for tomorrow’s Nonfarm Payroll number. The consensus
expectation was for a gain in the 130K-140K neighborhood. But now, in
light of the
ADP report, expectations have risen to the 150K-160K level.

In fact, I hear that estimates now range as high as

Now, I’m sure we will see a blowout Nonfarm Payroll
number at some point. All indications are that hiring has picked up
fairly dramatically. But I sure wouldn’t put my money on a number that
big tomorrow…

Recent ADP
reports have not translated well to the Nonfarm
Payroll number.

*****Still, the question remains: At what point does
the Fed end QE2 and even take a hawkish stance on the economy?

Since unemployment was the prime motive for
unleashing QE2, we must expect unemployment to also be the reason for
ending it. I would expect that Bernanke himself will be loathe to make
any changes to QE2 based on a month or two of data.

But that won’t stop traders from acting in
anticipation of the Fed’s move. In fact, we can count on traders to
adjust their positions based on what they think the Fed will say.

A Nonfarm Payroll number like 450K would likely
spark a rally that would overwhelm the bearish implications for monetary
policy. But short of that, we may be entering a climate where good news
for unemployment is bad news for stocks, as traders anticipate the
closing of the cheap money window.

is putting its money where its mouth it. Recent
pledges to continue buying Spanish debt are taking the form of euro 6
billion Spanish bond purchase.

There was a time when the U.S. was the lender/buyer of last
resort. You gotta hand it to
for its efforts to buy some European friends.

*****It’s the start of a new year, and that means
analysts and strategists are in prediction mode. I had to chuckle when I
heard one guy in
CNBC say that he thought large cap stocks would be the market leader
this year.

I swear, every year, people say that this is the
year for big caps. Only it never is. Small caps always outperform.
There’s simply more growth and more upside.

That’s not to say I don’t like big caps. I do.
Valuations remain attractive. But let’s try to keep things in

Instead of large caps, I think dividend stocks will
be a great place to be this year. Cash in corporate accounts is at record
highs, and as the economy recovers, many companies will be raising

Plus, as investors seek stable dividends and
diversify away from bonds, dividends stocks could start trading at a
premium. That means capital gains, as well as dividend income.

I’ve seen several IPO applications from natural gas
companies that want to set up royalty trusts. This seems like a good way
to raise capital while natural gas prices are weak, and should also
entice investors to the stocks while natural gas prices languish.

I can’t say too much right now, but I will be
launching a new income advisory service called High Yield
in the near future. You will be among the first to
know when the service is ready to roll.

Please send comments and question to [email protected].

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