Among the posts this past week were entries about the meaning of the payroll report and some Twitter nonsense.
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Productivity Data Signal a Mean Reversion in Profit Margins
Originally published on Thursday, Nov. 14 at 9:34 a.m. EDT.
Year-over-year productivity growth in the third quarter of 2013 was zero compared to +0.2% in the second quarter of 2013.
Productivity growth has slowed steadily over the past year, as year-over-year unit labor costs are now +1.9%.
With profit margins peaking and unit labor costs accelerating a bit, the profits landscape is growing more challenging.
Third-quarter earnings for the S&P 500 grew by +4%, but the quality of that gain was low, as more than half of the gain was the byproduct of share repurchases, lower effective tax rates, declining interest costs and the banking industry's reserve reversals.
For now (and obviously), the liquidity infusions of quantitative easing has trumped the aforementioned concerns -- or any concerns for that matter.
A Stunning Bull Market or the Height of Lunacy?
Originally published on Thursday, Nov. 14 at 7:50 a.m. EDT.
"Every now and then, markets behave like schoolchildren. They overreact; they run around like crazy. We know we're going to have tapering; we know we are living in an artificial state of excess liquidity right now. And it's happening because the economy is recovering."
-- James Gorman, chairman of Morgan Stanley
Yesterday's market reversal was astonishing to me -- from bottom to top, the S&P futures climbed 28 handles.
I write this because the rumor of a dovish Janet Yellen testimony (released at 4:30 p.m. EST yesterday) was the proximate cause of the reversal, and there was little question that the baton exchange from Helicopter Ben to Whirlybird Janet would be a smooth one, with similar objectives to adhere to the Fed's dual mandate.
Here is Yellen's complete written testimony. In it, she highlights that the same old refrain that unemployment is too high and that the domestic economy is running below potential and needs Fed support.
Her remarks were all consistent with prior Fed comments by Helicopter Ben et al.
Most recognize that Yellen is a meticulous planner, so it is unlikely she will tip her hand meaningfully about monetary policy. But we don't know how well she might deal with unscripted questions this morning.
Some of those questions will be predictable, so she will be prepared. For example, Yellen likely knows that this question will be asked by liberals: "Show me the evidence that quantitative easing is helping others than Wall Street and the wealthy." Or, "Isn't continued QE serving to allow our leaders in Washington to not address fiscal issues?"
The surprise to me is how many times our markets and the global markets have discounted this easy baton exchange over and over again.
Also a surprise to me is that Mr. Market continues to ignore sluggish domestic growth, disappointing sales growth and a challenging profits landscape (e.g., Cisco
This is either the sign of a stunning bull market or the height of lunacy.
You make the choice.
Many, including myself and Morgan Stanley's James Gorman (above), have chimed in on the decreasing effectivness of QE.
Few have been as forthright as Andrew Huszar was yesterday, a former Morgan Stanley managing director who managed the Fed's $1.25 trillion agency mortgage-backed security purchase program.
I can only say: I'm sorry, America. As a former Federal Reserve official, I was responsible for executing the centerpiece program of the Fed's first plunge into the bond-buying experiment known as quantitative easing. The central bank continues to spin QE as a tool for helping Main Street. But I've come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.
-- "Andrew Huszar: Confessions of a Quantitative Easer," The Wall Street Journal (Nov. 11, 2013)
All this said, anticipating a market top (by shorting) has been a mug's game as the market climbs ever higher.
But I am not giving up.
I view fair market value to be about 8%-9% under current levels, and I remain net short.
At the time of original publication, Kass had no positions in the stocks mentioned.
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