Democracy, and Quantitative Easing, at Work.

November 1, 2010

Major market indices finished mixed last week. The DJIA lost 0.13%, the S&P 500 added 0.02%, and the Nasdaq climbed 1.13%. Growth stocks outperformed value stocks. And the small cap index lost 0.01%. The 10-Treasury yield gained five basis points on the week, closing at 2.61%.
Big week upon us. Tomorrow's election will codify the next two year's political landscape for the free world. We think that republicans will take back the house, while democrats will hold onto the senate. Either way, it will be a confidence vote for an unpopular congress and a presidential administration marred by economic uncertainty.
Overseas, the outlook for emerging markets continues to improve. Moody's raised its outlook on Thailand's bond ratings from negative to stable. The bond ratings agency said this was due to the robust recovery in the Thai economy and the new stability in government finance despite the political turmoil. This is good news in that it will bolster the flow of capital into Thailand by large pension funds and their ilk. It underscores our sentiments regarding the prospects for select emerging markets.
Institutional analyst Michael Belkin recently explained that a round of QE amounting to $500 billion would be the equivalent, in percentage terms, of the infusion of money put in the system in 1999 to contend with the Y2K issue. That resulted in a huge adrenaline shot for the Nasdaq 100. Now consider that $500 billion is on the low end of the scale the Fed may have in mind, with the current upper boundary of consensus at $1.5 trillion, or a 65% increase in credit. And there are some estimates that range from $2 trillion to $4 trillion.
Bottom line: if QE2 comes to fruition in the amounts being bandied about, it should be rocket fuel for the entire market.
That said, investors remain nervous. After two wars, two equity bear markets, a real estate bear market and one credit bear market, terrorism, ultra-high unemployment and political uncertainty-it's a wonder many of us get out of bed in the morning.
But, you've got to play contrarian here. We currently are enjoying an accommodative Fed, low inflation, a credit bull market, improving corporate earnings and negative investor sentiment. All of which prospectively adds up to a lot of opportunity for serious investors. Stay tuned...

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