QEII: Hyperinflationistas Unite for the Revolution!

Investors are constantly bombarded by triviality and meaningless data. Thus it is hard to make sense of all this noise, and then to know how to take this data to make good investment decisions on. Take for example, this article from MarketWatch titled Weekly jobless claims fall 34,000 to 407,000. Should long-term investors (like RSY investors) be that concerned whether the report said 407,000 or even 441,000? What should be the reaction to reports such as this be? Considering that this is just one weeks data set and is subject to changes, then it seems trends are more important than a single point in time. Even given the facts that weekly jobless claims are less than 450,000 in four out of the last 5 weeks and the four-week average is 436,000 (which is a two year low) is still too high to reduce overall unemployment rates.

So what did investors think of this new data? It seems some took this as a clue that "employment-related companies" would benefit from this decreased level of unemployment claims. Jeffry Bartash noted that MWW, RHI and KFRC gained 7.9%, 3.3%, and 2.7% respectively. It seems to be nearly the opposite by logic as in the less number of newly laid-off employees there is, the less need there is for employment finding services.

There are of course important trends that investors should keep close track on. One of them is inflation or the more scarier side called deflation. This is one reason that A Macro View looks so closely at the price indexes of the ISM reports. I can not deny that there is always a possibility of rising inflation levels, but the trend in inflation is downward. The US being an open liberal economy with a diverse resource base and broad capital base that includes high levels of human capital should prevent rapid changes price stability at least over the short term. While there is a possibility of price changes in a limited basket of products, the US attributes listed above should minimize any vicious cycles of inflation.

Inflationistas and Hyperinflationistas should take their own advice.
There has been much, and I mean way too much written about QE2 (Quantitative Easing). Many good economists from both conservative and liberal points of view have expressed themselves on these issues, so I find no reason to belabor that. (Even Mish felt frustrated when Debating the Flat Earth Society about Hyperinflation.) The question I raise here is what do the Inflationistas and Hyperinflationistas advise us to do and what is their investment strategy? I distinguish between the two for ones that may see some levels of inflation rising but not sure to the degree and are more than likely see any levels of inflation above zero as bad, which are called the Inflationistas. The second group (Hyperinflationistas) only see that the US will end up as either Zimbabwe or Weimar Republic and see no other alternative scenarios.

One place that is always ready to declare hyperinflation is Kitco. Strangely, every article I have read ends with advice to buy gold, no matter what the state of the economy has been over the last 10 years. For example, Chris Mack wants to Quantify What QE2 Means for Future Inflation and Gold and Silver Prices. His conclusion about inflation is:

QE2 Projected to See Inflation Rise by 10-20%!

A dollar on November 1st is now worth 92 cents if measured in treasuries or 91 cents if measured with the money supply. It can be seen that inflation as measured by the growth in money supply is projected to increase by 10 to 20 percent on an annualized basis.

He also implies that inflation could be as high as 100% if we assume it goes to currency solely. So what advice should Hyperinflationists give, aside from buying gold and silver (Gold or Apple?) or whatever they are hawking? Although not very elaborate in explanation, trevorlewthor tells us How to Get Ready for Hyperinflation.

The first bit of advice about buying a new house now for first time buyers is certainly good advice, as this will avoid uncertainty about monthly housing costs. Refinancing is simply a cost-benefit analysis and is good advice no matter the level of inflation in the future. If hyperinflationistas actually believed that inflation levels will skyrocket based on QE2 or the stimulus packages or simply the dropping in the value of the dollar, then of course buying tangible assets is the best course of action now. And taking on more debt now is a way to leverage across time to maximize returns. The simplest way to determine what to invest in is to use net present value (NPV) on each set of assets to determine under which scenarios would return positive returns. The sooner that hyperinflation takes hold then the more number of asset classes will increase above a positive NPV. Take for example this graph (File:GermanyHyperChart.jpg) :

Once inflation starts on a vicious cycle it spins higher and higher. Thus to take advantage of it, an investor should try to get into higher levels of debt when rates are still low.

The second point of the article seems to contradict higher levels of debt. But while the first point was in regards to fixed rates of interest, the second point is mostly in regards to variable rates that will adjust (although with some lag) upward as inflation and inflation expectations increase dramatically. So yes it is good advice to lower these debts that are variable in interest just as moving out of rental to a house will reduce uncertainty about outflows of money. In addition consumers should not necessarily take on more debt, but planned consumption might be better to do it now instead of later when costs have risen dramatically. If the consumer is already planning to make major purchases like a new car or kitchen appliances then purchasing them now and possibly use the low interest rates as mentioned above is sound advice.

The third bit of advice is good no matter what the future holds. Since high levels of inflation and especially hyperinflation alter the structural components of the economy, it is best to think about which sectors of the economy are more likely to grow and which are to shrink. For example, even though tangible assets grow in value including buildings and land, long-term investments are no longer feasible. If a project takes more than a short time, the costs for continuing the project become astronomical even if cost of capital was low and fixed (interest rates). Costs for raw materials and of course labor costs increase dramatically during the final stages of any project. One area that does well under hyperinflation historically is the entertainment business. The growth of German cinema during the 1920s certainly points out that hyperinflation does not stymie this sector, and in fact helps promote it. Although the "blockbusters" may disappear the number of films produced increased dramatically under hyperinflation. Labor costs are relatively low and time to get film projects to the projector can be fairly short.

Point four goes along with buying tangible assets now. Of course stocks do offer more liquidity and thus more savings should be devoted to this liquid asset under hyperinflation. Since cash or cash equivalents become nearly worthless then lowering cash balances is a good move. Margin accounts again would be variable in rates but a second mortgage on a house may result in positive NPV of the investments in stocks. One way to increase assets now is to follow point five and put more in retirement vehicles now. Pre-tax dollars also help to lower taxes now but provide income in retirement when hyperinflation has gone away (hopefully).

Point six is another way to increase a family's well being/wealth and to increase savings as did point three. Increased savings then can be used under the other advice categories listed.

Our Economy Desperately Needs More Hyperinflationistas.
Looking through the advice given above, I see many similarities in what is needed to get the US economy out of this recession. Technically we are out of the recession but clearly unemployment rates of near 10% is too high to consider an economy that is functioning well. The benefits to the economy of this advice to individuals is done through several different avenues. First, by increasing levels of tangible assets in portfolios helps create a base on the prices and prevents nominal asset price declines. Most definitely this is something needed with respect to the housing markets. This changes expectations of prices in the future to a more stable outlook versus deflationary expectations.

Secondly, the advice will lead to increased "absorption" into the economy through both increased production and consumption. This process is through increased spending on education, increasing production at current job or taking on additional jobs, front loading spending now instead of the future, and even increasing household production. Increased levels of savings does not directly raise absorption but this does not lead to stuffing money in a mattress but increasing levels of investment which raises absorption.

Thirdly, the fact of settling some debts and taking on others increases the absorption and number of transactions in an economy, and thus increases the velocity of money.

Should Krugman et al. Worry About the Inflationistas (or Hyperinflationistas)?
From the above analysis, it appears that if enough individuals in our economy take the advice of hyperinflationistas, then our economic troubles will vanish or be greatly reduced at least. Dean Baker tells us Why printing money makes sense and how "right now, even a counterfeiter issuing dud dollars would be better for the economy than our deficit-fixated policymakers". Baker, like most Keynesians, talks in terms of aggregate demand. I used the term absorption to more precisely express not only consumer demand but also aggregate spending that includes planned and unplanned investments for businesses, and of course government demand.

His idea is that if a short-term counterfeiter could produce a lot of money (cash) now and distribute it throughout the economy, then aggregate demand would increase until the time it is no longer needed. One problem with this idea is that it would alter the demand structure of the economy when implemented and then it would make a reversal of that demand structure to the correct one. This is based on the assumption that "free money" would alter people's spending patterns from normal patterns, and more than likely result in a huge increase in luxury goods consumed on the short term. Baker describes how the counterfeiting stimulus would work in the following passage.

In the current situation, it would provide an enormous boost to GDP and create millions of jobs. After all, everyone thinks the money is real. It is no different whether the counterfeiter and his underlings spend $2tn of counterfeit money or if firms suddenly start investing their hoards of cash or households begin to spend again as though the housing bubble had never collapsed.

He did not include increased government spending in the list of sectors that could bring our economy to full employment but that was implied in the article clearly. What he is trying to convey is an autonomous increase in absorption from the various sectors of the economy that through a Keynesian multiplier effect increases aggregate demand.

Essentially whether a counterfeiter or the hyperinflationistas advice works, will depend on whether it changes people's expectations and thus behavior in the markets. It does not appear that the fiscal stimulus packages have worked because it never changed expectations and monetary policy instruments have run against the zero interest rates bound which have not changed overall inflation expectations.





Links on QE2:
5 Ways to Play a Dying Dollar

From 'competitive depreciation' to 'competitive miscommunication'

Economic Code Words and Quantitative Easing -- Seeking Alpha

Investing in hyperinflation: is it worth it?


Eat your heart out Matt Taibbi | Analysis & Opinion |

Mish's Global Economic Trend Analysis: QE II Bet Starts to Unravel

Economist's View: Fed Watch: Will the Fed Scale Up QE2?

Academic Economists Skeptical QE2 Will Work - Real Time Economics - WSJ


Market's Early Reaction to QE2 is Bullish

The QE2 Has Set Sail

Leave QE2 Dockside

Why the CPI Is Understating Inflation -- Seeking Alpha

Charts of the Day: Is Inflation Decelerating or Not? -- Seeking Alpha

CPI: Still Disinflationary -- Seeking Alpha

Revisiting Japan's Reaction to QE -- Seeking Alpha

Did the Fed Just Confirm That QE2 Is Actually a Bank Bailout? -- Seeking Alpha



Not Important Links:
File:GermanyHyperChart.jpg

Does QE Really Stimulate Economic Activity?

Mish's Global Economic Trend Analysis: Debating the Flat Earth Society about Hyperinflation

QE2 to Dilute the US Dollar and Boost Precious Metals

Debating the Flat Earth Society about Hyperinflation | Phil’s Stock World

RSY XX: Buy 100 TSH @ $32.01

Teche Holding Company (AMEX: TSH) is a regional savings bank located in Louisiana, and is rated as a Strong Buy by Sabrient for its outstanding value profile. Its Sabrient fundamental score (financial health) ranks it "substantially higher than the average of its industry group". Even more outstanding, for the aspects the RSY portfolio is looking for, is its consistent dividend payouts for over 10 years, its outstanding forensic accounting scores, and its healthy insider buying. This would be another financial sector stock but would provide exposure into the banking side of the sector. A sector that will be vital if the US is to get back to a full employment economy. The one area that is of most concern is that TSH is a lightly traded micro-cap stock. Part of the reason for low daily volume is due to a lot of "insider" ownership and low turnover rating for the largest owners, including mutual funds. The positive aspect of picking Strong Buy rated micro-cap stocks by Sabrient is their overall performance as a group compared to a comparable benchmark. At the link
Performance: Long Rankings, it shows how micro-cap stocks perform across a variety of investing styles with some of the best performance in micro-caps. Thus RSY recommends a buy order of 100 shares of TSH at a limit price of $32.01 (GTC).



With the Right Dividend Stocks, How Much Money Would You Really Need to Retire? -- Seeking Alpha



ETFs???: NFO {60}, PFM {52}, PID {57}, DLN {63}.
http://www.sabrient.com/clientarea/etf_pdfaccess.php/DLN.pdf

RSY XIX: Update.

It seems about time to review the current holdings of the RSY portfolio and to review the transactions to date including profits {or losses}. The first table is of the current holdings of the RSY model portfolio. (Click on tables for clearer images.)


Some of the gains reported earlier have been "harvested" already. The biggest gainer so far has been MRH. Since Sabrient is continuing to rate MRH as a Strong Buy, RSY recommends holding this until the ratings changes. Thus RSY has no set target for the price and will let the winners ride. But the real proof of the pudding is in how much is the realized gains. Below is a summation of trades along with the gains {or losses} of the model portfolio.

On the 16th, RSY recommended a sell of IVR at a limit price of $22.41. From nearly the moment it opened it dropped below our limit price but on the 17th it hit as high as $22.45. I find the graph on the 17th most interesting.

It is easy to see that for all the times that IVR approached $22.45, it never got over it and the day high was $22.45. It seems obvious that someone was selling a significant amount at the limit price. It might limit our upside potential, if this pattern persists.

RSY XVIII: Profit Harvest IVR.

The RSY portfolio uses ratings changes from Sabrient to signal either diminish shares of an equity position or to exit completely. IVR was recently downgraded to Hold. Thus RSY will recommend to take some partial profit from the position we now hold in IVR, which is to sell 200 {out of the 400} shares of IVR at a limit price of $22.41 {GTC}. RSY still wants to hold some of this stock, especially considering the outstanding dividend yield it produces. RSY will exit though if it gets further downgraded.

The RSY portfolio noted the buy of 400 shares of EGAS at the price of $10.01. I did not mention this before but the RSY portfolio did not enter the position of 200 shares of PL on the 5th. Our recommended limit order was not reached of $24.51, but came awfully close. On the 8th, I was also watching its movement and it never came close to our strike price. The ex-dividend passed on the 9th and since that time it has sagged to as low as $23.80. Update of the portfolio in the next day or so.

RSY XVII: Let us go buy some eGAS.

It is often handy to start with a culled list of prospects when looking for the next investment, so when exploring Seeking Alpha I ran across the following article that provided a list of 21 Utilities Yielding More Than 4.5%. Dividend seeking investors should find plenty of interesting articles and ideas at the new category that Seeking Alpha has added called Investing for Income.

Yields of 4.5% to 6.1% is definitely in the ball park of what we strive for at RSY. Utilities may not offer meteoric rise in capital gains, but it does provide stable value prospects providing long term income through dividends. Alan Brochstein mentions that public utilities acting as monopolies can more easily pass on mistakes to their customers instead of shareholders. As such, downside risks are lower than in purely competitive markets especially with respect to bankruptcy.

Now let us see how Sabrient Systems rates these potential dividend payers. (Click on tables for clearer images.)



Unfortunately, this netted us only two buys and no strongbuys on Sabrient's ratings. Most of the list is of holds with some sells and even one strongsell. Most short sellers would avoid stocks that paid out dividends like FE does at over 6%. (Vectren {WC} does not have a rating from Sabrient at this time.)

Even the two buys of PPL and DPL will not make it into the the RSY portfolio right now. The forensic accounting rating for PPL has plunged to 16 {out of 100} rating it as aggressive. Maybe they will correct their problems in the future but for now, no need to tread there. DPL has an average forensic accounting score and everything looks good...except their last ex-dividend date was on the 10th of this month. Best to hold off until we get closer to the next date and see if we are still interested at that time. Might be a good candidate for a a stock watch.

Public Utilities from MyStockFinder.
But this did inspire me to use the MyStockFinder selection tool to find another list of potential candidates. I limited the search to only Public Utilities with strongbuys and buys under a modified RSY stock search. Out of the 19 candidates, none stood out as a buy for the portfolio. {Upon further exploration RSY has one recommendation.} A brief explanation for each follows the chart of MyStockFinder results.

EBR: As it being an American Depositary Receipt {ADR}, this does not eliminate it from the selection as it would help increase diversification across countries, but it does mean that we need to be even more diligent in choosing them. This is because ADRs do not have all the same requirements as domestic equities and their reporting tends to be more spotty. The biggest problem is that dividends are inconsistent and sporadic for EBR. It appears that they plan to just make one dividend payout per year and more than likely around February each year.
SURW: No dividends paid out yet. Since RSY ranks stocks on a variety of criteria without absolute cutoffs in dividends, we will get some that have no dividends but are good buys by Sabrient's ratings system.
EGAS: Originally, I just passed on this since the ex-dividend date just passed on the 10th. But since it pays out once a month, the next dividend payout is always not far away. George Fisher at Seeking Alpha presents some good analysis about EGAS at Gas Natural: Secondary Offering and Insider Selling, Part II. The forensic accounting score is above average and even insider selling is just part of the CEOs total portfolio. Certainly any individual investor would prudently diversify even more than Richard Osborne and Mr. Fisher addresses that also in both his posts.
DPL: Already addressed with regards to original article concerning utility dividend paying stocks.
PTNR: One aspect that ADRs such as PTNR lack is a forensic accounting score and information on insider trading. Ultimately payout ratios are too high for RSY to recommend buying. Recently we also saw another ADR mislabeled, China MediaExpress Holdings (CCME). Even calling to investor contact information revealed that the information service provider had not updated CCME's current industry and sector identification.
TNE: Another ADR with inconsistent, sporadic dividend payouts. Since none are declared at the moment, RSY will pass on it for now.
SBS: No dividend.
PPL: Already addressed.
UGP: If the pattern continues, this ADR will have its next ex-dividend date on late February or early March. RSY will wait on that for now.
TEO: This ADR is short on history of paying dividends and has no future ex-dividend date declared.
MTA {Changed to MYTAY}: This ADR has been providing dividends yearly around May or April but more importantly it just got sent to the wood shed, pink sheet.
APWR: No dividend.
PT: An ADR that has been providing dividends around May or April. RSY will wait on this for now.
CTEL: RSY will wait also on this ADR.
CHL: This ADR provides dividends twice a year and the next one should be around May of next year. No need to rush on this one.
NGG: This ADR has broken its pattern on dividend payouts. Although investors still seem to be expecting the next ex-dividend date to be in December, RSY will wait on this one also.

Later, I expanded my search to more on the industrial side of the economy including sectors like energy, basic industries and transportation. The only one that stood out from that list was Marathon Oil Corporation {MRO} until I realized that the ex-dividend date was on the 15th and we needed to have purchased it at least by end of close on Friday.

Buy eGAS.
But in any case, RSY recommends a buy order of 400 shares of EGAS at a limit price of $10.01 {GTC}. Sabrient rates this as a buy based on EGAS's outstanding value profile with a value score of 91. Sabrient also indicates a strong fundamental score and stated the following.

The Sabrient Fundamental Score is the broad measure of a company's financial health, including its balance sheet, cash flow, revenue, and earnings quality. With a Sabrient Fundamental Score of 87.9, Energy West is significantly higher than the average of its industry group, which carries a Sabrient Fundamental Score of 40.1.

Stock Watch:
DPL, EBR, NGG, CHL, CTEL, PT, and UGP.

Links:
The 4 Biggest Contrarian Dividend Plays Out There

A Marcro View: Lies or Just Distortions by Distractors.

Over the weekend, Mike Shedlock {aka Mish} considered statements made by Geithner and Bernanke to be Bold-Faced Lies. Normally I find Mish to post reasonable and well thought out posts. This conclusion does not appear to be out of the normal range that people are saying, but it does point to where people are jumping to conclusions and taking words out of context. Mish accuses Bernanke of lying when Ben stated that “We are not in the business of trying to create inflation,” in the following passage.

Bernanke's Lie According to Mish:

Of course the Fed is in the business of producing inflation. It is their first and foremost goal, just as it is in Japan. Consequences, such as asset bubbles be damned.

In a simplistic manner, yes the Fed is in the business of "producing inflation" as the target is always set to a positive number of around 2% inflation rate per year. They don't in fact target 0% as even short bouts of deflation are much more disruptive to an economy than low "stable" rates of inflation. Zero rates would also not be feasible as rates tend to gyrate around a lot and zero would act as a knife edge as it would tend to drift from that rate once achieved. The measured rate of inflation is also suspect that it does not take into account that products are improving. This "rate of improvement" could be around 2% per year according to some economists. One example of this effect is the improvement in cars over the last 100 years. The amount of utility as far as comfort and safety is much improved since the cars of 1910 and also 1960.

To get a better idea of what Ben was talking about let us look for more complete set of quotes aside from the MarketWatch short incomplete quote (1). The WSJ provides the best set of quotes with writer's comments included, as I could not find any transcript.

"There is not really, in my mind, as much discontinuity as people think" in the path the Fed is currently following, the central bank chief said. "This sense out there, that quantitative easing or asset purchases, is some completely far removed, strange kind of thing and we have no idea what the hell is going to happen, and it's just an unanticipated, unpredictable policy—quite the contrary. This is just monetary policy," Mr. Bernanke said.

While he considers himself "very sympathetic" to those unnerved by what the Fed is doing now, in the current environment of tepid growth and ebbing price pressures, more aggressive policy "can be helpful" to improving conditions.

Mr, Bernanke explained "we are not in the business of trying to create inflation," and "I have rejected any notion that we are going to try to raise inflation to a super-normal level in order to have effects on the economy." But because the Fed is "equally committed to both sides of our mandate," the central bank should also avoid having prices fall below levels consistent with price stability, he said.

"If inflation is declining and continuing to decline, at a minimum we should not be satisfied," and should view current price pressure levels as "a signal more should be done."

"We see an economy which has a very high level of under utilization of resources and a relatively slow growth rate," Mr. Bernanke said. "The standard considerations suggest we should be using expansionary monetary policy, and that was the purpose of the action" taken last week, the chairman said. (2)

I bolded the original noted quote and the presumed next line which implicitly states not high levels of inflation but levels that would correspond with their two mandates of stable price levels and maximum employment given the other constraints. After the line about supra-normal levels, Wes Goodman from Bloomberg added the following sentence.

“It’s critical for us to maintain inflation at an appropriate level.” (3)

So Ben is not creating inflation for the sake of inflation but is in fact "creating inflation" for the purposes to fulfill full employment and price stability. Thus inflation is just a secondary consideration.

Mish in the above quote also mentions about asset bubbles. Nothing tells me that the normal tools that Fed has can address asset bubbles that obviously are sector driven. The Fed has a gas and brake peddle for the economy, they do not have controls on every sector. The only obvious answer is that regulations have to become more strict and more closely enforced during seemingly obvious bubbles. Given that Mish felt it was obvious that housing was in a bubble, then I would guess that he must have sold his house and shorted the housing market as much as he could have. More complete markets could have helped him short the markets, but still synthetic shorts might have worked.

Geithner's Lie According to Mish (4)

If a strong dollar was in the best interest of the country, then Geithners {sic} would not be pressuring China to weaken it. Bernanke would not be out to destroy it.

It is one thing to have a "strong dollar", it is another to allow distortions to continue even beyond what is reasonable. China by "hoarding" excess reserves, they have been in essence driving up the price of US dollars in relation to their currency. If the Chinese had already unpegged their currency from the US dollar, or at least pegged it to a basket of currencies {as they promised the world in 2005} then these set of criticisms would have more weight. As it is, on a bilateral situation, we are only rectifying their distortions.

As far as the rest of the world complaining, then they should have done more to correct the "global imbalances" sooner as the IMF has been explaining for years. But there are questions about what is considered a "strong dollar" and one that I also have wondered about. Menzie Chinn at Econbrowser provides some insights into how this term is used, although not this context specifically. (5)

What I think is interesting about this quote is that it highlights two different meanings of the idea of dollar strength. The first is the level of the dollar, adjusted for price levels. This is sometimes referred to as price competitiveness, and can be measured by the trade weighted value of the dollar after adjustment by the CPI (as in the the Fed's index) or unit labor costs (as in the IMF's series reu).

But Tom Fitzpatrick's quote refers to a second (and in my mind confusing) use of the "strong dollar" term. Here he is referring to the returns on dollar assets denominated in a common currency.

The rest of his post is even more esoteric. In more simpler terms, a strong dollar could be oriented toward a consumer society where costs of products and services are maintained at "stable prices", or it can be geared toward investor classes. Whether foreign or domestic, investors search out the highest risk adjusted investments. As long as the nominal GDP is growing faster than inflation then investors will flock to growing economies over stagnating economies. It appears that at this time they are referring to the second classification of a strong dollar.

Fed Chairman Ben S. Bernanke yesterday told college students in Jacksonville, Florida, that “the best fundamentals for the dollar will come when the economy is growing strongly.” (4)

So to come full circle, by the Fed trying to "pump money" into the system, it is in fact trying to make the US dollar strong by encouraging growth and reducing unemployment. And thus Ben is not out to destroy it but to help strengthen it. No matter how many times the inflationary hawks scream {Glenn Beck (6)}, the US has a long way before we are facing rising levels of inflation. This is not to say there is nothing to fear but a good simple explanation is by TPC at the Pragmatic Capitalism titled BEN BERNANKE EXPLAINS THAT QE IS NOT INFLATIONARY, JUST AN ASSET SWAP.

I am delighted to see Rand Paul won a senate seat also. I am sure his rants will be just as effective as Ron Paul's rants were. Most of the time, Ron's time ran out before the Fed chairman had an opportunity to respond. Not sure any response would have helped though. Keynesian vs. someone from Kenya, now that is funny.

Links:
(1) Fed chairman: Increasing inflation not a goal Bernanke say bank’s sole priority is to boost economy

(2) Bernanke Defends Fed Moves - WSJ.com

(3) Goldman Says Bernanke Engineers `Substantial Pickup'

(4) Geithner Says U.S. Won't Use Dollar to Gain Competitive Advantage in Trade

(5) Econbrowser: What's a "Strong Dollar"

(6) Glenn Beck might not know what the word "deflation" means

(7) BEN BERNANKE EXPLAINS THAT QE IS NOT INFLATIONARY, JUST AN ASSET SWAP




Misc. Links:
Jobs Report Adds to Debate Over QE2 - Real Time Economics - WSJ

Foreign exchange: Fool's gold | The Economist


The Hindu Business Line : Strong dollar keeps the US rich

Why traders don't trust word on dollar

Monetary policy: Everyone expects inflation | The Economist

Goldman and Bernanke are Wrong on Inflation

Bernanke Admits, and Defends a Spike in Inflation

Bold-Faced Lies of the Day from Geithner, Bernanke

Wages And The Slide Toward Deflation - NYTimes.com

More FREDding

RSY XVI: Buy 200 PL @ $24.51, Update

Definitely a good day to be long in the market, and our portfolio gains of nearly a thousand dollars today reflect that above. That was over a 3% gain today and nearly a 9% overall gain on a cost basis of held positions. (Click on tables for clearer images.)

The above table is the realized gains for the RSY model portfolio. The table includes the partial harvest of profits from CODI and $152 of dividends from CODI and GAIN combined. The two tables above encourages me to look for other good dividend paying stocks to add to the portfolio.

Protective Life Corporation {PL} has an ex-dividend date quickly approaching on November 9th. There are plenty of things to like about PL and even our own "What the Market Wants" mentioned Protective Life a couple of times since we started the Sabrient blog. The financial accounting score is just average, but its value score is outstanding and the reason for Sabrient to rate PL as a strongbuy. Sabrient's SmartStock report states the following:

Value: Sabrient rates PL as one of the strongest value stocks in the market with a Sabrient Value Score of 91.4. At its current price, PL offers excellent value based on last year's results and projected earnings. This makes the stock a prime candidate for the value-minded investor.

In addition, Sabrient rates PL as very high for a balance sheet score of 90 and 81.6 for a fundamental score, which measures for liquidity and debt issues, and a company's financial health respectively. One reason for the hesitation in choosing this stock was that PL is in the Financial/Life Insurance sector of the economy and RSY portfolio already has MRH which is in the Financial/Prop. & Casualty Insurance sectors. {To its credit, MRH has given gains of nearly $1100 so far.} Even though earnings per share beat Thomson Reuters consensus estimates of 66 cents by 5 cents at $0.71, the market zigzagged since hearing the news yesterday.

Given that, RSY recommends a buy order of 200 shares of PL at a limit price of $24.51 at the opening on Friday {good for the day}. Considering the daily swings in both directions, a trader might in fact wait for opening and then consider the daily direction the price might trend before making a move. Since the 200 shares represents less than a 5% position (assuming $100,000 to start with), RSY might consider dollar cost averaging later on.


What Telecom Stocks Can Teach You About Dividends

Macro View: ISM October, More Structural Rigidity

The last post of the Macro View of the Markets discussed structural rigidity in the context of the ISM manufacturing index. After reading the latest manufacturing and non-manufacturing ISM reports, I find some of the same indicators for structural rigidity. For example, the price indexes continue to be very high, more commodities are not only in short supply but more are rising in prices, supplier deliveries were slower, and in the manufacturing sector customer inventories were too low and backlog of orders is low with manufacturing inventories building up.

On the other hand, the reports showed very positive signs about recovery of the economy. Econoday stated the following about the manufacturing report, "The manufacturing sector surged in October led by a burst in new orders and supported by strong employment gains." (1) and for the non-manufacturing, "This report is very positive, indicating that prior and once again accelerating gains in the manufacturing sector are now spilling into the non-manufacturing sector." (2) Hopefully the last statement is an indication of the creation of a virtuous circle, that is, as the spillover from one sector affects the next sector to expand which then affects another sector until all sectors of the economy are experiencing the "spill over" effects.

Both the manufacturing index {PMI}(3) and non-manufacturing index {NMI}(4) showed continued growth at even a faster pace with PMI increasing 2.6% points to 56.9% and the NMI increasing 1.1% points to 54.3%. The NMI beat the consensus as reported by Econoday and MarketWatch marginally at 53.5% and 54% respectively. The PMI showed the most dramatic move of all with it handily beating the consensus of both sources at 56.9%. MarketWatch consensus even thought the index might drop slightly to 54% while Econoday indicated a minuscule increase of .1% to 54.5%. Most importantly it also blew out the consensus range that Econoday reported as 53.6 to 55.5%. If the consensus is unbiased and not skewed then when an index is outside of its consensus range, then this should be a significant indicator about strength or weakness in the indicator.

Is the Economy Firing on all Cylinders?
One fact that popped out when looking at the comparative numbers in the two reports was that more of the indexes are grouping on the positive side of the 50% dividing line if not also correlating more closely. For example, last November's report showed divergence {one over and one under the 50%} in 6 comparative indexes and the most recent report showed only two. This mostly just reflects the fact that non-manufacturing is catching up with manufacturing with respect to improvement in performance criteria. As shown earlier, the headline indexes {PMI & NMI} are increasing and maintaining levels around the mid-50s. The production/business activity indexes showed substantial gains at 5.6% for NMI and 6.2% for PMI to arrive at 58.4% and 62.7% respectively. New order indexes converged as both sectors increased with PMI doing the catchup work with a gain of 7.8% to 58.9% and NMI increasing 1.8% to 56.7%. Employment for non-manufacturing still maintained its positive stance for the second consecutive month at 50.9%. Unlike non-manufacturing, manufacturing continues to have good employment indexes and the most recent report showed an increase of 1.2% to 57.7%. Lastly, another convergence is happening with regards to the price indexes. Non-manufacturing price index jumped a massive 8.2% to 68.3% while manufacturing increased slightly at 0.5% but was already sky high ending at 71%.

What does it all mean?
The report overall is a good one, but there is plenty of room for concern regarding prices and shortages of commodities. It is worth noticing that 13 industries in both manufacturing and non-manufacturing report higher prices and only one and none reported lower prices respectively. As far as the breakdown in respondents by percentages, 49% reported higher prices and 7% lower in the manufacturing sector and for non-manufacturing it is 32% and 3%. Thus for every firm reporting lower prices, 7 reported higher prices for manufacturing and nearly 11 said it for non-manufacturing. Last month the ratio for manufacturing was over 1 to 11. Definitely those are signs of structural concerns and possible inflation concerns.
To be QE2 or not to be QE2?
But new export orders were still very positive and the overall components of the ISM report were excellent. This then begs the question as to whether the new round of quantitative easing (QE2) is necessary or justified at this time especially given the strong employment reports from the Bureau of Labor Statistics. On the one hand, Bernanke is making a gamble that the economy is not going to heat up in the next 12 to 18 months {as that is the length of time for most monetary measures to take effect}, and the length of time it will take to absorb all the unemployed, underemployed and discouraged workers to become fully employed. The EPI notes that under even the good results from October, this process may take 20 years. (6) They succinctly noted the following:

If the rate of job growth were to continue at October’s rate, the economy would achieve prerecession unemployment rates (5% in December 2007) in roughly 20 years. For the fourth straight month, the unemployment rate held steady at 9.6%.

So far the Fed has been getting the direction of the economy correctly, and I believe that they will continue to make prudential decisions. Just remember that the deficit hawks should be eating humble pie. R.A. from The Economist sums up why much of the criticisms are not substantial and are unfounded (7), while G.I. summarizes why the international criticisms are unjustified (8). Both articles should provide an understanding of why some of the critiques are wrong on QE2.

International Manufacturing Indexes
Maybe there is nothing like the "bond vigilantes" that Paul Krugman talks about, but there still may be gremlins in the form of structural rigidity in the motor we call the US and world economies. In fact the Wall Street Journal thinks that global manufacturing is picking up and gave us the following story (5):

It’s a story that goes something like this: Early in the recovery, manufacturers around the world stepped up production to rebuild inventories that were depleted in the downturn. But they overshot by a bit, lifting inventories above what was necessary, and so had to throttle back a bit to bring inventories back into balance. Now they’ve done that, so manufacturing growth is heating up again.

That story sounds a lot like the case of the US at least. I can not say that the educated economists at J.P. Morgan are wrong about the slowing down of global manufacturing. But hopefully, they are wrong since this recovery is going to only happen with manufacturing leading the way, as it seems was the case in the US.

Links:
(1) Econoday Report: ISM Mfg Index November 1, 2010

(2) Econoday Report: ISM Non-Mfg Index November 3, 2010

(3) ISM - Media Release: October 2010 Manufacturing ISM Report On Business®

(4) ISM - Media Release: October 2010 Non-Manufacturing ISM Report On Business®

(5) Global Manufacturing Picking Up - Real Time Economics - WSJ

(6) Job growth improves, but pace leaves full employment 20 years away

(7) America's economy: The QE backlash | The Economist

(8) QE2 and the Fed: It goes to the Fed’s motive | The Economist


Market Watch:
Actual Consensus forecast
ISM Oct. 56.9% 54.0%

ISM services Oct. 54.3% 53.5%


Misc. Links:
Mish's Global Economic Trend Analysis: Jobs Expand by 151,000, Unemployment Steady at 9.6%; Birth-Death Methodology Changes for the Better; Reflections on the Numbers

Yes, A Recovery Did Begin - NYTimes.com

What we should learn from a big week in the US economy | Gavyn Davies blogs on macroeconomics | FT.com

Econbrowser: The October Employment Situation: Upside Surprise and Shrinking Government

Economists React: ‘Step in the Right Direction’ on Jobs - Real Time Economics - WSJ


Economics One: Empirical Questions About the Anticipation Effects of QE2

Calculated Risk: ADP: Private Employment increases by 43,000 in October

The Tide has not Changed - The Entrepreneurial Mind

You'll Pay the Price for QE2