ALERT!! Bernanke TKO's Market Bears By TQE!!

Forget about Floyd Mayweather, the new heavyweight Champion of the Markets is Ben Bernanke!  Winner but not by TKO, by TQE (Technical Quantitative Easing).Coming into today I was trying to look objectively at various tapering scenarios and their probabilities.  The consensus was $10-15 billion with a 45-50% likelihood from Wall Street.  $20 billion a long shot outlier and perhaps $5 billion on the taper-light side.  I only heard 'no move' from one analyst and considered that to have a probability of 20%.  The Feds decision to stand pat with their asset purchases is obviously not a "non-event" as some TV commentators initially stated.  The Fed seems to be pointing the finger at DC referencing fiscal policy drag of up to 1% on the current economy.   Washington debt ceiling negotiations will take center stage immediately beginning tomorrow.   Chairman Bernanke noted the suboptimal growth of the economy and sup-par job creation as a few reasons for their lack of action today.  

Way back when, in the throes of the near complete financial collapse of our great country I was initially championing the Fed Chairman's ingenuity and boldness with their various programs of TARP, TALF ultimately winding up at QE.  I state for the record for new comers, I am no fan of the Feds current QE Infinity program and believe they may look back at today as a lost opportunity for a first move to begin winding down this program.  That being said, we remain in a slow growth easy money environment which should reinforce the housing and auto growth story spurring employment, reinvigorating consumer sentiment and in turn boosting sales, revenues, earnings and share prices going forward. 

I'll be hawking the wires for any signs of progress from our fearless leadership surrounding the debt limit and meaningful entitlement reform for any signs we should alter our exposure to the equity markets but for now we maintain our aggressive posture. 

All in all a surprisingly good day.

James.

Investors Should Remember, When In A Rip Tide, Just Go With It

Investors seem to be waiting for signs of a lifeguard.   When I was six years old, so many many years ago, I was playing along the shoreline and got caught in a powerful riptide.  It was forceful and what happened next seemed to do so in a blink of an eye.  Before I knew it I was 50 yards out in very choppy waters lapping up against the rock jetty.  I fought as long and hard as I could and took in a lot of seawater before finally succumbing to exhaustion and water intake.  As I went under for what I thought was the final time I still remember seeing the body of the life guard 8-10 yards away cutting thru the water doing the butterfly stroke coming at me.   I’ve never forgot that sight even though I passed out immediately afterward.   The next thing I remember was being resuscitated on the beach with a slew of strangers standing around staring down at me in horror.   I responded rather appropriate from my vantage point, I coughed up a bit of salt water and balled my eyes out, until my aunt gave me a yo-yo to calm me down.  Unfortunately not enough yo-yo’s to pass out to investors today.

It had been quite a different scenario the markets were facing this past summer compared to the last few years.  Remembering back, we’ve had to battle the fear of a double dip recession, then the US losing its precious AAA credit rating followed by the fear a potential default and ensuing financial contagion caused by the postage stamp sized Cyprus.    Skeptics of this years rally were left suggesting sluggish growth and expensive Price Earnings multiples primed the markets for a return of the bear market and that any rally was one built on a deck of cards waiting to crumble.    Well, 15% later what else are they left to say, except admit their miscalculations. 

Where we are:

Leading Economic Indicators (LEI) - LEI witnessed a .6% jump after having been flat the prior month.  We saw strength notably in the new orders and new building permits indices which points favorably to future growth and continued expansion. 

Housing.  We have a few data points here worth noting.  As mentioned above, building permits as a whole increased 2.7% in July and are up 12 ½% over the trailing 12 months.   Keys to a continued recovery are consistent or an easing of underwriting criteria, pricing, interest rates and of course the availability of credit.   Next we saw housing starts move up 5.9% in July to an 896,000 annual run rate.  

Gross Domestic Product (GDP) – Domestic GDP was recently revised up from an uninspiring 1.7% growth rate up to 2.5%.  The main culprits for the upgrade were firms restocking inventories (which only do so in anticipation of future sales) and a resurgence in our exports.   Both very positive going forward.

Purchasing Managers Index (PMI)- The August Manufacturers PMI came in +.3 to 55.7% the high water mark for 2013.   We saw strength from furniture and related products, fabricated metals and paper products.  They also note some drag from government and military spending and on the cost side seeing some relief from lower commodities prices. 

Purchasing Managers Non-Manufacturers Index (Services Sector PMI).  The SSPMI LEAPT to 58.6% the highest since January 2008.   Again we see reflected here new orders gaining steam to 60.5% and the employment index increased 3.8% to 57% both very good numbers supporting the case for continued growth and economic expansion. 

Retail Sales- Retail sales edged up .2%.  We also saw a nice .2% revision up to +.6% from the prior month.  The consumer continues to defy the experts and adheres to the “Buy Mortimer! Buy! (Trading Places with Dan Aykroyd and Eddie Murphy reference here).  Ex-Autos which tend to be a bit volatile month to month, sales came in at a respectable +.5%.

Weekly Unemployment Claims-Claims came in at 323,000 the lowest level sine July 2008.   Continuing claims following not surprisingly down 3,000 to 328,500.   Less people on unemployment suggest more people re-entering the work force and adding to the throngs of our great consumer nation.

Black Vultures:

1.      Syria-not really a BV since a strike on Syria is all but a given.  The BV is really the aftermath.  I believe the markets will absorb the initial Syrian strikes.  The great unknown is what happens if Syria/Iran responds by striking Israel or Turkey?  The US simply cannot light that fuse and go home.  We have the potential to be dragged into a much longer and wider area conflict. 

2.    Debt Ceiling/Budget negotiations.  The resolution to this problem seems fairly simple.  Congress has already approved the spending now they need to raise the debt ceiling in order to pay for outlays.  Instead Congress wishes to use these negotiations to extract the spending cuts and tax overhaul that both sides agree need to be addressed.  Both thus far seem incapable of agreeing to anything aside from who to aim Patriot missiles at. 

Going Forward:  The global economy continues on the mend with China and the EU showing signs of stabilization and a resumption of growth and expansion.  The US is speeding full ahead on its way towards energy independence, this glut of cheap domestic natural gas is also a boom for a resurgent US manufacturing sector.  This is really a game changer and under discussed. The US as a manufacturer of something other than Intellectual Property and services can and should be the solution to our employment woes.  The millions of jobs lost during the housing collapse evaporated.  Many of those jobs will NEVER come back.  Energy and manufacturing will /can lead us back and be the job creator the current economy is searching for.   The US market is transitioning from one driven by Federal Reserve Stimulus to one focused on Fundamentals.  It will continue to be a rocky road as the Fed removes the monthly $85 billion monthly purchases and nervous investors will tremor with each adjustment to the program to see if we can hold up.  I believe the fundamentals are capable of filling that Fed void.  As the Fed takes its foot off the accelerator and the markets begin to bob up and down investors may begin to look for that Lifeguard when all they need to do, as when caught in any RIP is go with the flow.    

We maintain our aggressive posture to the market and will continue to monitor economic, geopolitical and market releases for any signs to adjust our positions. 

We thank you for your patience and confidence in this very challenging environment. 

Yours in Pursuit of the Kwan. 

James