Deep Thoughts from the Gurus

The S&P500 finished the week essentially unchanged.  Volume dropped off quite a bit, but the more telling signal was the VIX (or fear) index, which jumped up almost 13% in a sign that traders are getting nervous about the near-term outlook for the stock market.  So they’re willing to pay more for protection against a downturn in stocks.

The economic numbers were mixed.  September’s existing home sales, although slightly better than expected, were still the third worst of the year.  Median prices fell 2.4%, and 35% of all sales were distressed.  The Case Shiller August report was worse than expected.  All in all, housing is not recovering and on the verge of another significant downturn.  Durable goods orders  were better than predicted, but only because of airline orders.  When transportation was excluded, the drop in orders was worse than expected.  Initial jobless claims were better than expected, but still near the recession-level mid 400,000 range.  Even worse for employment, over 250,000 long-term jobless folks lost their benefits in the last week alone; these 99ers will severely affect consumption (eg. retail sales, personal spending, etc.) results over the next six months.  The first estimate for third quarter GDP came in as expected:  an anemic 2.0%, a rate that is consistent with a RISING unemployment rate.  The Chicago PMI was slightly better than expected; consumer sentiment was slightly worse.

Technically, the S&P500 is rolling over on the daily charts.  Virtually all the price indicators are strongly suggesting that a pullback is imminent.  And after the upcoming week’s election results, the Fed announcement, and jobs report, the S&P will have lots of highly charged news to serve as a possible catalyst for a sell-off.

Speaking of the Fed, several world-famous investment gurus recently offered their views of the Fed’s expected QE announcement and it’s implications.

Pimco’s Bill Gross put out a newsletter in which he stated “Check writing in the trillions is not a bondholder’s friend”, “it is , in fact, inflationary and, if truth be told, somewhat of a Ponzi scheme”.  Needless to say, Mr. Gross is highly doubtful that the Fed’s money printing scheme will get the economy out of its liquidity trap and return it to full employment.

Jeremy Grantham, of highly regarded GMO Asset Management, in a paper titled “Night of the Living Fed”, described QE2 as “the last desperate step of an ineffective plan to stimulate the economy through higher prices, regardless of any future costs.”  He argued that the “asymmetric policy of stimulating stock moves by setting artificially low rates” is dangerous, and will wind up creating a bubble that will burst.

Finally, Felix Zulauf, a member of Barron’s roundtable, was quoted in this week’s Barron’s magazine.  He started by noting that “Most of the banks are not sound.”  “The crisis has only begun; there will be a long-term process of one mini-crisis after another.”  He compared investing in the industrial world to ” moving chairs around on the Titanic” which could get hit by a number of global-macro icebergs.  Zulauf said that investors should worry about where they store their money because “you might not be able to get it out when you want it.” 


The takeaway?  The global financial crisis is not over.  The Fed will not fix the problem.  You need to worry about preserving wealth, not just chasing–the currently seductive–greater returns.

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