Most of the financially literate world has heard the news of the hard fought battle to temporarily maintain the current level of US income and estate taxes. The legislative battle itself has had two long term drawbacks. The first is the emphasis on planning instability. People’s plans for housing, school expenditures, charitable gifts, estate planning and most important of all, business investments, are potentially going to be changed. The memories of the this battle will be refreshed next year on some individual wage earners and business spending decisions. There is no reason to believe that we will quickly get more permanent tax resolutions in two years, in the midst of a presidential campaign. The lack of clear, understandable conditions is likely to retard some long term spending decisions, including job creation.
The second drawback is the absence of dynamic budgeting which would include factoring changes in people’s actions in light of the revisions of taxes.
Fixed Income Investors Discount Their Future
I have tremendous respect for the bond market though I am primary an equity-focused manager of long term accounts. In general, high quality fixed income securities have less normal upside than stocks and other forms of equity and downsides that can approach normal, but not crisis stock declines. The leading bond market players have a much more acute sense of timing and direction than those of us that follow the dreams embedded in many stocks. This week I noticed that the spread between the ten year Treasuries and the ten year TIPS (Treasury Inflation Protected Securities) has widened to over 2.3%, which is significantly higher than the readings this summer before the mid-August announcement of QE2, (the Federal Reserve’s second round of Quantitative Easing). Further, over the last several weeks the Barron’s Confidence Index has been rising close to one basis point each week. This indicator is the ratio of the yields of high grade bonds divided by intermediate bond yields. Normally, a rise in the ratio is viewed as positive for stocks. I interpret the reason a rising index is favorable for stocks over bonds is that inflation is rising, which hurts the purchasing power of bond interest and maturity payments versus the possibility of dividend increases for stocks. Bond investors translating this data see rising inflation.
ETF Flows also an Indicator
Exchange traded funds (ETFs) have attracted a much more active investor than mutual funds and most stocks. The table below shows the dramatic change of the flows from October to November, 2010:
|Invest. Objective||Nov. Flows||Oct. Flows|
|in US$ billions|
|Dedicated Short Biased||- 0.83||+0.26|
|S&P 500||- 2.09||-0.83|
Source: Lipper, Inc.
To me these flows indicate that the fast (and perhaps smart) money is betting on material changes in the stock market’s leadership and is expecting more speculative behavior.
The High End Consumer is Reacting
Long term members of this blog community know that I often use my observations of shoppers at The Mall of Short Hills as a clue to consumer behavior. Today, Sunday there was a considerable line to get into the large parking structures at the Mall. While initially slow to react the first level of discounts, my sense is that the high end buyer is now in a rush to spend money.
There is Too Much Evidence
Last week’s blog , “Market Highs Coming?” advanced the view that at some point we could challenge and eventually surpass the old stock market highs. Since penning those thoughts the combination of various market pundits’ views, seeing the shopping lines and hearing of the more impressive cyber shopping is making me a bit uncomfortable. I do not like to spend too much time with the majority of other people’s thoughts. However, I am a bit relieved that the relatively low volume of market activity indicates that while the talk is bullish, the actions are slower.
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