Stress Tests: Round 2

See the link below for more information from the Wall Street Journal on the Fed's new round of stress testing for the banks.

http://online.wsj.com/article/SB10001424052748704648604575620732161392908.html?mod=WSJ_hp_LEFTTopStories

The main part of the article I read was:

“The Federal Reserve will require all 19 banks that underwent stress tests during the height of the financial crisis to undergo another review of their capital and their ability to absorb losses under an “adverse” economic scenario.

The Fed, in guidance issued today, said all 19 banks must submit capital plans by early next year showing their ability to absorb losses under a set of conditions to be determined by the central bank.

The request is part of the Fed’s effort to step up supervision at the nation’s largest financial firms.”

To me, the Fed is clearly seeing something that Wall Street does not.  I think they know the housing market is now rolling over again.  Ben Bernanke has implemented QE2 in case he needs to buy some mortgage backed securties to shore up the credit markets.  He wants to avoid a repeat of Q4 2008. 
That’s a good thing if you ask me.

LOOKING for a TOP!

Here we are in the middle of November and the equity markets are still hanging in overbought territory at just over 1200 on the S&P. We at Brotelli Investments continue to wait for confirmation of a top. We feel a strong break of 1200 will mean a correction has begun. Until then, we are watching the US Dollar index ($usd) to see if a bottom can form along with the commidity index ($crb) to see if a top is complete. Finally, we will be closely watching the housing index after the weak data we posted last week.

Until we see evidence of a top as stated above, the market will continue to rise as the bulls are in control.

Housing

Some bad news out of the housing market yesterday as Zillow, a leading online real estate marketplace, released their third quarter report and it largely echos what was released in Monday's Clear Capital Report, the housing market looks to be double dipping. Home values fell an average -4.3% in the third quarter. Stan Humphries, the Chief Economist at Zillow, says the housing market decline is likely to surpass the Great Depression’s decline and that prices are unlikely to recover before next summer.

See links:
http://www.zillow.com/blog/research/2010/11/09/it%E2%80%99s-going-to-be-another-long-hard-winter-in-housing/

http://www.clearcapital.com/company/MarketReport.cfm?month=November&year=2010

We here at Brotelli Investments believe housing still remains a simple supply and demand story.  The overhang of inventory is crushing meager demand and the mortgage mess is not helping matters as shadow inventory is pushed further into the future as banks have trouble with foreclosures.  If you thought the housing crisis in the USA was behind us you might want to think again.  We believe housing set the credit crisis in motion in 2007 and it could pose a very serious risk to the economy in 2011. We will be watching the housing index ($hgx) to see how it performs over the next few months to tell us what is going to occur.

Market Thoughts and QEII

Is the market overbought at S&P 1,225? I think so. A correction may be closer than it appears. We just have to wait for the dollar to find a low.

Ben Graham once described the stock market as follows:

“In the short run it’s a voting machine, but in the long run it’s a weighing machine.”

The votes are in and they are unanimous, so far.  Equity investors are voting that QE will do something to improve the economy.  However, that does not mean it actually will do something for the economy.  I believe there is no fundamental reason for equities to sustain gains due to the Fed's second quantitative easing program.  That is not the same as saying that equities can’t move up here even more in the short-term.  Equities move for any number of reasons in the short-term – many of which are entirely irrational. If QE somehow results in economic recovery down the line and we get back to full employment I will have been proven wrong (and I will happily admit as much because after all we will all be in a better place).  At that point, the market will have weighed the facts and concluded Ben Bernanke was in fact correct to push for higher asset prices.

The very idea of this as an economic strategy is frightening to me.  If QE actually works then there is no need for fundamentals.  Why does anyone get up in the morning and go to work?  We can all just go out and open a Scottrade account and let Ben pour money into our accounts.  Unfortunately, that’s not the way economics works.  You would have thought we would have learned this after two bubbles in less than ten years, but no.  Here we go again.  Some of this appears like common sense, but as Mark Twain once said: “Common sense is not so common.”  Personally, I wish it was this easy.  I wish the Fed could just press a button and make economic growth occur, but that would be beyond naive to believe. 

Place your votes in the short-term.  But don’t forget you could get crushed by the weighing machine in the long-term.

MSCPA Awards Conference

This past weekend I received a scholarship from the Missouri Society of CPAs to go towards my degree at Southeast Missouri State University. I want to encourage each of my employees and future employees to work very hard in college and earn your degree. The world of investing will open up your life if you put in the time understanding what it has to offer. One more thing, get out and vote!

Work/Life Balance

Everyone needs a little time away from work and the markets to focus on the things in life which really matter, Friends and Family.

Here at Brotelli Investments, I take a fishing trip every year with my top clients to get away from the markets  for a week and relax.

As the Holiday season comes ever closer, I thought I would share some photos from this years trip from last month.

Election Day!

As voters across the country drive to the polls today, we here at Brotelli Investments wait to see how this election will impact the markets.

Everyone by now is predicting the Republicans will take the House and pick up around 6 seats in the Senate. We shall see.

Right now Republicans are running on promises they will not cut Medicare and Social Security, but are going to reduce spending and get us closer to a balanced budget. But everyone knows that the only way to get the budget into some reasonable semblance of balance will be to either cut Medicare benefits or increase taxes.

Overall, I believe the election today will change very little in real terms, at least with the things that matter, like whether the US economy can grow. That potential is in our future and it is coming at us faster than you think.