May 27, 2011: Market Update
QE3: Unavoidable Fact of Life?
Despite less than stellar economic news this week, the markets seem to have hung on remarkably well. In large part, this is due to a growing belief that the end of QE2 in a couple of weeks could cause the economy to stall and require… wait for it… QE3! While the Federal Reserve remains sharply divided on the consequences of fiscal stimulus, it is becoming clear that investors want, and to some degree are beginning to expect, further stimulus.
If you stop and think about it, the Fed has done an extraordinary job keeping the markets on an even keel. We’ve had revolutions, oil at $120, the reemergence of Greek debt problems, war, the nuclear and flood crisis in Japan and the upcoming end of QE2. Without the $600 billion in stimulus the Fed has pumped into the economy these past nine months, one would have to believe the stock market would be considerably lower than it is today. We’re not suggesting that deficit spending is necessarily good, nor that the national debt isn’t a problem but that we, as investors, have benefited from the Fed’s actions in the short-run.
So what happened this week? As previously touched upon, the economic data was weaker than anticipated. The April Chicago Fed National Activity Index went negative versus the increase that was expected. The May Richmond Fed Manufacturing Survey dropped a whopping six points while shipments dropped 13 points and new orders dropped 15 points. April Durable Goods Orders were down 3.6% versus being up 4.4% in March. Perhaps most important was that Q1 GDP (second estimate) was not revised higher as had been projected but instead remained at an anemic 1.8%. Each of these data points are broad measures of economic activity over the past couple of months. The slow recovery, largely spurred by the Fed, looks to be slowing precipitously.
There was little in the way of corporate news this week. Perhaps the most interesting news is that Google introduced what it is calling the “Google Wallet.” Without going into too much detail, it would essentially make your phone your wallet. In conjunction with Citibank (and presumably may other credit card companies in the future), you will be able to make payments using your phone just like you would with a physical credit card. It is an interesting concept and one that will probably be quite popular. Starbucks has a similar proprietary application and it is surprisingly useful. At the moment it will only work on Android based smartphones but should be available on other platforms later this year. We suspect that this will eventually prove to be a good move for Google.
To close out the week, I bring you an interesting study from 2004 and confirmed in a new study released this week.
“A 2004 study of the results of stock trading by United States Senators during the 1990s found that Senators on average beat the market by 12% a year. In sharp contrast, U.S. households on average underperformed the market by 1.4% a year and even corporate insiders on average beat the market by only about 6% a year during that period. A reasonable inference is that some Senators had access to—and were using—material nonpublic information about the companies in whose stock they trade.
Under current law, it is unlikely that Members of Congress can be held liable for insider trading. The proposed Stop Trading on Congressional Knowledge Act [H.R. 1148] addresses that problem by instructing the Securities and Exchange Commission to adopt rules intended to prohibit such trading.”
The study released this week indicates that those in the House of Representatives aren’t quite as adept as their counterparts in the Senate. House members on average beat the market by only 6% a year. In case you were wondering, H.R. 1148 was never brought to the floor for a vote. Now you know.
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