There has obviously been an enormous amount of data to digest over the last few weeks. Mid-term elections, QE2, G20, and daily wide fluctuations in a variety of commodities have all taken up the headlines recently. Within this macro context I need to determine how this is going to impact the earnings prospects of companies I own or am considering buying.
On Wednesday, the Federal Reserve announced it will begin purchasing $600 billion in Treasury securities through June 2011. In addition, $250 to $300 billion of Treasuries will be purchased, financed through interest payments from its agency and mortgage-backed security assets. These purchases are expected to increase the Fed’s balance sheet by 38% (from $2.34 trillion to $3.24 trillion).
The Federal Reserve made its long anticipated announcement Wednesday on the second round of Quantitative Easing (QE2). For the most part it was met with a pretty large yawn initially. The market was cautious early Wednesday ahead of the Fed announcement.
With a sweeping victory by Republicans on Tuesday, many have debated whether or not the resulting gridlock between the House and Senate will be good or bad for stocks. In general, to answer this question with any decisiveness is probably speculation; however, even with the prospect of gridlock and a governmental brain-freeze, the result of Obama's invitation to a "slurpee summit", which he offered on Wednesday, may actually hold promise for one industry in particular: nuclear power.
With age comes wisdom as the saying goes. This is not always the case but there are a few successful investors who time and time again seem to be one step ahead of the crowd and when they speak the investing crowd listens. Two of these men are Bill Gross from PIMCO and Jeremy Grantham from GMO. Both men have impressive track records and successful businesses to show for it.
I find it odd that the Federal Reserve Bank isn’t worried about inflation. Nor is it worried about a falling U.S. dollar. The 1970s Federal Reserve Bank cared very much about the U.S. dollar, raising rates to the high double digits to curb inflation. On the contrary, the current Fed could care less.
This week will see an enormous amount of data for the market to digest. There will be continued quarterly earnings reports. Tuesday is Election Day. The markets seem to be favoring a victory for the Republicans in the House. Wednesday we’ll get the long anticipated FOMC rate decision where the Fed will announce details of the next round of quantitative easing. All this news comes after two months of spectacular performance in the equity markets.
One week from now we are likely know the final outcome of the Fed’s next round of quantitative easing (QE 2) when the Federal Open Market Committee (FOMC) meets on November 3rd, the day after the mid-term elections. The Fed appears convinced that throwing more money at the financial system through the purchase of US Treasuries (UST) will help to revive economic growth and bring down employment.
Market participants are anxious to know what will come of the FOMC meeting on November 2-3 and how much quantitative easing will be announced. That anxiety is starting to show in the market with identifiable distribution and fewer buyers. As the major market indices sit near or just under the April highs, that anxiety is understandable. After nearly 1,500 up in the Dow Jones Industrial Average and 145 points up on the S&P 500 since this summer, it’s time to dip the technical thermometer into the market’s mouth to gauge its temperature.
Three times a year the market says “I call”, and companies need to reveal their hands. At this time of year there is a long line of CEO’s holding their annual conference calls to announce how things have gone over the last three months and to give forward guidance. This week will see the largest percentage of quarterly reports of the season.