Post FOMC / Town Hall Thoughts
Velma Hart stole the show during Monday's town hall on CNBC with a brilliant question, "Is this my new reality?" In the half hour post-town hall commentary that followed the event, I answered Velma's question for the President, "Yes it is. This is a structural economic adjustment." I truly believe that. The unemployment rate will remain uncomfortably high for many more months, growth will be tepid at best, and, for those making above $250,000, your taxes are going higher in 2011.
Tuesday, the FOMC introduced language directly targeted at the lack of inflation. In fact, my interpretation of the communiqué was an extreme focus on how to push up inflation. Investors would be correct to interpret their efforts as "monetizing our sizable debt." On the table for the two day FOMC meeting taking place November 2nd and 3rd will be additional asset purchases that expand the Fed's balance sheet from its current $2.3 trillion size well above $3 trillion. Is your portfolio inflation protected?
The impact from these two events on capital markets was rather benign. The S&P 500 Index did advance above some technically important price points that have acted as critical resistance during this Baseball Season of Frustration. For those following the critical technical price points, maintaining the S&P 500 Index above the 200 day moving average @ 1116 will be structurally important.
I encourage investors to begin to focus on the upcoming earnings season; Alcoa kicks it off on October 7. Given the FOMC economic outlook and the economic softening experienced during Q3, the upcoming earnings season sets up as the most interesting year-to-date. Two questions to be answered are: what impact did the softening data have on final demand and how corporations will utilize the robust cash sitting on balance sheets. I suggest "buybacks" will be on the rise.
Finally, most of the extensive conversations I had late Tuesday evening with institutional money managers related to creating that extra alpha as we close out 2010. For those following my commentary, you are familiar with my 2010 conventional ideas - emerging markets, corporate bonds. Very quietly, some unconventional ideas such as utilities, REITs and small caps continue to perform very well. If I were to suggest a rising star as we close out 2010, I believe it will be energy. An October appreciation similar to last year is what I am looking for.
S&P 500 Index the last 52 weeks
XLU Utilities ETF 6/1/10 to 9/21/10
XLE Energy ETF 5/1/09 to 12/31/09