Monday, November 1, 2010

Worried About the Economy? Buy Stocks (part II)

The markets are up nicely this morning, as manufacturing data continues to show that industrial activity is expanding at a moderate rate. Still, most Americans would say that economic conditions are relatively poor.

For example, did you catch 60 Minutes last night? David Stockman - former Budget Director under President Reagan - was on talking about the need for a combination of tax hikes and spending cuts to address our $10 trillion fiscal deficit. At one point in his interview, however, he makes that statement that the economy is improving. Correspondent Leslye Stahl looks incredulous, but even Stockman acknowledges that unemployment will remain high for some time to come:

That's what makes today's market environment so tricky. Corporate profits are booming, but cost-cutting and overseas investing are the reasons. The Fed is poised to begin another round of quantitative easing, which will flood the markets with liquidity that will probably boost asset prices and keep interest rates low - but will have an uncertain impact on the lives of Americans.

For example, Goldman Sachs suggested last week that bond investors buy 30-year Treasury notes in front of any announcements from the Fed:

Goldman Sachs (GS) was out with a note on Friday recommending that clients buy long-dated Treasuries ahead of the Federal Reserve quantitative easing announcement, which will take place on Wednesday.

Previously, the consensus was that the Fed would focus on shorter maturity bond purchases. Goldman, however, believes that the purchases will extend out to the 30-year bond.

As long as Fed policy is driving the market, investors will have to spend as much time focusing on Fed pronouncements instead of economic fundamentals to figure out how to position portfolios.

Frontrunning The Fed: Buy Long-Dated Treasuries - BloggingStocks