The Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month.Would the late Milton Friedman have endorsed the Federal Reserve’s plan to make large-scale purchases of long-term Treasury bonds? The idea here is to pump more money into and thus jump-start the economy, reducing unemployment. Some people….. believe the great Nobel laureate would favor this inflationary program. I am certain he would not.– Allan Meltzer, “Milton Friedman Vs. The Fed”, The Wall Street Journal, November 4I grasp the mantle of Milton Friedman. I think we are doing everything Milton Friedman would have us do.– Ben Bernanke, on Saturday at a conference on Jekyll Island, GA, quoted in “Friedman Casts Shadow As Economists Meet”, Sewell Chan, The New York Times, November 8, B1
NOTE: Every week I write a Client Note for my clients. For a limited time, I am allowing non-clients to sign up and receive the Client Note. You can sign up at the top right hand corner of the website. I will also be posting the notes on my blog with a 24-48 hour delay from time to time. Here is this week’s.
Originally sent Tuesday November 9, 4pm PST.
Last Thursday, in a delayed response to the Fed decision, stock markets took off, including the S&P powering through 1200 to a two-year high. Volume was the strongest it’s been in quite some time with composite NYSE volume of nearly 6 billion shares – 44% above the 65 day average.
On Wednesday afternoon, the Fed announced QE2. They will buy $600 billion in treasury bonds over the next eight months ($75 billion/month). The market seemed to be factoring in $500 billion in purchases so the actual amount appeared to be line with expectations.
Interestingly, there has been a substantial backlash to the Fed’s decision in the last few days. It started with an editorial by Fed scholar Allan Meltzer in last Thursday’s Wall Street Journal . That prompted a response from Chairman Bernanke at a conference on Jekyll Island, GA on Saturday. Officials from Germany, China, Russia and Luxembourg have also made critical comments (“Fed Global Backlash Grows”, The Wall Street Journal, November 9, A1).
Last Tuesday, also in line with market expectations, Republicans picked up 61 seats in the House, giving them control, and 6 in the Senate, leaving it slightly in Democratic control. As in 2008, independent voters were the decisive group – this time swinging to the Republicans (“Unaligned Voters Tilt Rightward In Mass”, The Wall Street Journal, November 3, A1).
The day after the election, departing Democratic Senator Evan Bayh, who didn’t run for reelection, wrote in The New York Times: “It is clear that Democrats over-interpreted our mandate” (“Where Do Democrats Go Next?”, Evan Bayh, The New York Times, November 3).
In 2006 and 2008, it appears, voters didn’t so much vote for Democrats as against George W. Bush and the Republicans. With a massive stimulus plan and, most importantly, universal health care legislation, President Obama and the Democrats alienated the center and lost the independent vote.
The Republicans should be on guard against making the same mistake. It’s not that we like you. We just hate you less than the Democrats. For now (“Tuesday’s National Economic Referendum”, Bill Frezza, Real Clear Markets, November 1). Any movement by the Republicans too far to the right could lose the center in 2012.
After all the anticipation of last week’s two big events and market indexes trading at the top of their intermediate term trading range, we seem poised for a move one way or the other.
For my part, I took the high prices at the end of last week as an opportunity to clean up our portfolios. I sold a few stocks including wrapping up our best trade of the year in Goldman Sachs (GS).
In the wake of the SEC’s suit against Goldman, based on my conclusion that it was without merit and would be settled to Goldman’s advantage (“Top Gun FP Client Note: Blowout Earnings Overshadowed By SEC Suit Against Goldman”, Top Gun FP, April 22, 2010), I accumulated a substantial trading position in Goldman.
I initiated a position on April 30 at $148. I added to our position on May 7, June 10 and July 16 at $141, $132 and $148, respectively. At that point, Goldman shares made up almost 13% of all the money I manage. Our average price was $144.
On Friday, I sold the entire stake at $170 a share. The trade added a bit more than 2% to our portfolios in the aggregate.
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