If you watch the stock market closely each day and follow analyst reports from the financial media, then you have been inundated with talk about the Price-to-Earnings Ratio (P/E) of the broader stock market (i.e. - the S&P 500). The historical "average" for the S&P 500 is a P/E of 14-15. When I look at this "average" valuation, I assume that the possible risks that could hurt the economy are also "average". With the S&P 500 sitting right at the average P/E ratio, one should ask are we in an "average" period of global uncertainty? Given the crisis in Europe, China slowing, and the US sputtering along with a fiscal cliff hanging in the balance - I would say the risks are "above average".
Boston Federal Reserve President Eric Rosengren came out on CNBC yesterday to say that the Fed should start QE 3 by purchasing mortgages in order to lower interest rates for borrowers. Now, keep in mind that one Fed president's opinion is not a game-changer. However, let's pretend that the Fed's next option for QE 3 is to buy up mortgages to suppress interest rates. If this news were to hit, the markets would rally initially in expectations that "this time it's different". The really important factor is whether or not purchasing mortages will help spur the housing market (and hence the rest of the economy). Okay, if you haven't fallen asleep yet (then you're a nerd like me) - why would banks lend money out for 30 years at mortgage rates any cheaper than they are today? What will ensue, is the fact that banks will only lend to very high quality creditworthy borrowers, thereby suppressing the housing market. Even mortgage refi's will be depressed due to skeptical banks that would like to have a better return on investment than 2% for 30 years.
P.S. - On a side note, does the Boston Fed Prez look like Craig T. Nelson from the TV series "Coach"?
Today - the S&P 500 closed at 1394, just 6 points below the key phsychological level of 1400. Looking at the chart provided, this is a key resistance level to maintain the downtrend from the highs set in the spring of this year. If you are a bull, then selling at these levels may be a wise decision for the short-term. The next entry-point to go long would be at the 50-day moving average. If you are a bear, this creates an excellent point to go short and ride down to the 50 day moving average with the expectation that the S&P 500 will break these levels. There hasn't been any news out lately to justify a break above 1400-1408, but that could always change if a EU Finance Minister comes out and says "we are going to plan to make a plan" - unless the market wakes up and calls their bluff. Therefore, as a risk managment strategy - a trader should play the range of the 50 day moving average as possible support and the 1400 level as resistance. This may seem elementary, but the high-frequency trading machines have these levels as their trigger points either up or down.
Knight Capital Group (KCG) has been in the news the past two days for a software glitch that has brought the company to its knees in a little more than 24 hours. The software malfunction caused the electronic trading system to rack-up hundreds of millions of dollars worth of losses, approximately half of the company's market cap. Currently, the company is considering bankruptcy options. It is amazing to me that a software glitch can bring down a billion dollar company in 15 minutes of trading. So what are the future ramifications from this event, and how will it affect your finances? The regulatory sharks are sharpening their teeth as we speak (or type), and the news will start to trickle out on how more regulatory measures are needed for financial institutions. The one positive that will come from this horrendous debacle is the fact that people will continue to question the use of machines over people to process orders. This also sheds light on how setting stop-orders and walking away from your computer could really bite you in the ace.
Let's look at the U.S. economy like a "super-star" professional athlete. Much like a star athlete, the U.S. economy is always in the spotlight, and others look for leadership from said "super-star". That being said, global investors should focus on the performance of the U.S economy as a barometer. Here is what I am getting at, if an athletic phenom is taking a boat-load of steroids (much like the Fed pumping trillions of dollars into the economy) - then we should expect exceptional results (one would think). Instead, despite all of the inflationary printing of U.S. dollars by the Fed - the U.S. economy is putting out a whopping 1.5% GDP (and shrinking). The next question should be, what will happen when the Fed runs out of "tools" to spur growth? One answer may be that the Fed will never run out of "stimulus", as they can continue to print more money. The most important question is how markets will digest stimulus measures in the intermediate term. A term that you already know, but is not in the media currently - is stagflation (declining growth with increasing inflation). This is the worst scenario any central bank could deal with, as their hands are tied to make future policy moves. The way the economy has reacted to unprecedented stimulus measures from the Fed should be a clue that stagflation may be much closer than one expects.
I am sure the powers that be at Facebook have already considered this, but I think this could be the easy solution to their looming issue with the increasing migration to mobile viewership. In order to monetize mobile use, FB should look to Zynga's app model (I know - Zynga is a crap stock, but FB should take a slice of their strategy and implement it for their own benefit). Zynga has a free app and a paid app for their products. They are able to advertise with their free app, and offer a paid app without advertisements. FB may want to extract a part this business model and have a free app with ads delivered at certain times, and a paid app that has zero advertisements. Realistically, FB could charge for their non-advertisement app at say $10/year. I don't know about you, but if FB rolled this out - I would be pissed at first but then succomb to the fact that I access FB so often with my mobile devices that it would make sense to pay the $10 subscription fee per year. And for those who put their feet down, they will access FB less often with their mobile devices due to annoying ads popping up - thereby encouraging them to use their PC's to access FB which provides a better advertising environment for the company. Maybe Mark Zuckerberg will read this and hire me on as an advisor (as I have many more ideas for the company), but don't hold your breath!
It would be an understatement to say that Facebook's earnings release tomorrow after the markets close will be closely watched. I have no opinion on what the earnings are going to be like, but I will try to give my views on how the markets will trade on the news. The first outcome would be if Facebook (FB) beats expectations. This would give some additional confidence to the markets, but stocks won't roar from it. The second outcome is that FB disappoints, on either current earnings or guidance. If this were to happen and the stock sells off massively - the markets will tank due to the residual effects on investor confidence, especially retail investors. Morgan Stanley (MS) will also tank, and they are at critical support levels on its stock chart. Again, I have no clue what FB will do tomorrow regarding earnings. I am only stating how I think the markets will treat either outcome.