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able solution to the euro mess is to have the ecb clean it all up in other words the mantra in financial markets is now ease mario ease last week in the october 25 ft martin wolf led the chant in his column titled be bold mario put out the fire he wants incoming ecb president mario draghi to implement a program of quantitative easing the only problem is that article 123 of the treaty of lisbon 2007 prohibits the ecb from doing just that nevertheless the ecb has started doing it again for a second time the bank s balance sheet rose to a record 2 3 trillion on october 21 up 440 billion from a 2011 low of 1 9 trillion on april 8 this expansion was attributable to the ecb increasing its loans to euro area financial institutions by 177 billion to 585 billion in addition the ecb s holdings of euro area bonds rose 110 billion so far this year to a record 567 billion in the ecb s first round of qe the bank s balance sheet soared by 512 billion to 2 0 trillion during the four weeks through october 17 2008 posted by dr ed yardeni at 8 03 pm no comments email this blogthis share to x share to facebook share to pinterest thursday october 27 2011 home alone update on the homestead act everyone knows that housing was the epicenter of the previous recession and that it is the biggest drag on the recovery president barack obama wants to help by allowing homeowners to refinance their mortgages at record low interest rates even if the values of their homes have fallen below the amounts they owe the majority of the fomc wants to help too that s why they voted to implement operation twist at their meeting on september 20 21 despite the objections of three cold hearted dissenters last week and early this week three of the do gooders on the fomc said they are ready to do more good and are considering a third round of quantitative easing that would include purchasing mortgage backed securities again i don t understand why no one in washington is pushing for more targeted policies that would simply reduce the huge overhang of unsold homes doing so would take the downward pressure off of home prices actually it should boost home prices by convincing would be homebuyers to stop waiting for better deals and jump in and buy a house that s the objective of the homestead act that carl goldsmith and i proposed this past summer it would provide a matching down payment subsidy of up to 20 000 for anyone purchasing a home as their principal residence for two million houses it would provide tax free rental income for 10 years to anyone who purchases a house to rent for another one million houses that would eliminate the current overhang of unsold homes completely carl and i reached out to various political leaders in washington on both sides of the aisle congressman gary ackerman liked the idea well enough to instruct his staff to work on a bill the problem is that our plan would lower the corporate tax rate on repatriated earnings to 10 using the proceeds to pay for the subsidy the congressional budget office scores these tax revenues as though they will be raised at the 35 tax rate even though such a high rate has been a major obstacle for such repatriation so we ve hit a road block though we are still pushing for the plan as best we can posted by dr ed yardeni at 8 05 am no comments email this blogthis share to x share to facebook share to pinterest wednesday october 26 2011 confidence the p e everyone is very depressed investors are very depressed as evidenced by the latest bull bear ratio which is 1 06 this week although that s the first reading above 1 00 in seven weeks it s still very low yet the s p 500 is down only 2 3 ytd and 9 9 from the year s high on april 29 consumers are also very depressed yesterday the conference board released october s consumer confidence index cci which plunged during the month to 39 8 from 46 4 in september it is the lowest since march 2009 the expectations component fell to 48 7 from 55 1 last month yet retail sales have been remarkably resilient there is a close correlation between the forward p e of the s p 500 and the expectations component of the cci they have fluctuated in volatile cycles since 2008 rising together in response to the fed s numerous attempts to make things better but then falling together on disappointment over the results unemployment remains high inflation adjusted incomes are stagnant home prices are depressed profits are great but the european financial crisis increases the risk of a global slowdown or even a double dip yet employment is growing though at a lackluster pace home prices have mostly stopped falling energy prices are down from elevated levels at the beginning of the year borrowing costs are at record lows many business managers seem to be moving forward and not letting the constant meddling of our political leaders get in the way of doing business the p e rebounded during october as investors regained some of their confidence in the resiliency of the us economy it also rebounded on hope that the europeans would muddle along and avoid a financial meltdown there should be more upside in the valuation multiple as long as investors expect that muddling will prevail over melting that s likely to be the case over the rest of the year on the other hand the upside for the p e may be limited if consumers remain as depressed as they were in october are we having fun yet posted by dr ed yardeni at 7 48 am no comments email this blogthis share to x share to facebook share to pinterest tuesday october 25 2011 s p 500 earnings we monitor quarterly and annual earnings expectations every tuesday in our morning briefing this is an especially interesting exercise during earnings seasons allowing us to see how actual results are influencing future projections here is what has happened so far 1 during the week of october 21 the actual estimated blend of earnings for the s p 500 jumped to 24 91 per share from 24 43 the prior week so the y y growth rate rose from 12 3 to 14 5 that jump was certainly boosted by a quirky accounting rule that lets banks book a profit on the falling value of their own debt it accounted for nearly half of the profits gain for both citi and jp morgan chase 2 the uptick in q3 didn t stop analysts from cutting their numbers for q4 and all of 2012 the q4 estimate was lowered to 25 38 which would be up 12 6 y y the 2012 estimate fell to 108 90 which would be up 11 5 from the latest estimate for 2011 next year s estimate has been lowered in 10 of the past 11 weeks 3 the v shaped recovery in forward earnings which powered the bull market since march 2009 is losing steam indeed forward earnings has been flat for the past 10 weeks with a slight downward tilt over the past six weeks joe and i are still expecting that next year s estimate will be lowered to 100 a share by the end of this year forward earnings will do the same since it is a time weighted average of the current and coming year estimates posted by dr ed yardeni at 6 51 am no comments email this blogthis share to x share to facebook share to pinterest sunday october 23 2011 the fed qe we need to find something for fed officials to do in their spare time they insist on subjecting the economy to their new experimental monetary policy fixes that are extremely controversial and replete with dangerous unintended consequences they refuse to believe that they ve run out of policy tools they insist they can do more to revive economic growth and lower the unemployment rate that s despite lots of evidence that record low interest rates and a second round of quantitative easing haven t stimulated growth as they expected although they started to implement their maturity extension program mep a k a operation twist just last month they are already having second thoughts about it rather than cease and desist they want to do more including a third round of quantitative easing and more forward policy guidance let s review the latest developments 1 the minutes of the september 20 21 fomc meeting which were released on october 12 suggested that qe 3 0 is still on the table a number of participants saw large scale asset purchases as potentially a more potent tool that should be retained as an option in the event that further policy action to support a stronger economic recovery was warranted 2 last week fed governor daniel tarullo who rarely comments on monetary policy made headlines with a speech he presented on thursday october 20 in which he said i believe we should move back up toward the top of the list of options the large scale purchase of additional mortgage backed securities mbs something the fomc first did in november 2008 and then in greater amounts beginning in march 2009 in order to provide more support to mortgage lending and housing markets one of the many benefits of doing so he said is that it should induce investors to shift to other assets including bonds and equities 3 the next day in a speech on friday october 21 fed vice chair janet yellen seconded tarullo s consideration of another round of qe she noted that while the fed had only just recently implemented operation twist it is a program limited by the fed s holding of short term securities and buying most of the outstanding long term treasuries might not be such a good idea after all since it could potentially have adverse effects on market functioning wow is she already admitting that mep was a mistake i think she is so what does she want to do instead more more she s ready for qe 3 0 in her opinion securities purchases across a wide spectrum of maturities might become appropriate if evolving economic conditions called for significantly greater monetary accommodation apparently ms yellen doesn t have any doubts about the effectiveness of quantitative easing despite plentiful evidence that qe 2 0 actually backfired the chart above shows inflation adjusted retail sales since 2008 after recovering solidly from september 2009 through november 2010 it s been flat since then through september of this year in my opinion after qe 2 0 was first mentioned by fed chairman ben bernanke on august 27 2010 and actually implemented on november 3 2010 it depressed the purchasing power of consumers by boosting food and fuel prices qe 2 0 backfired it clobbered consumer spending just as the economy was on the verge of transitioning to self sustained expansion without any help from the fed why did fed officials rush to implement qe 2 0 they clearly failed to recognize that the soft patch in economic growth from may through july was temporarily related to the termination of tax incentives to buy houses and appliances at the end of april 2010 despite having hundreds of economists working at the fed they completely misread the economy and meddled at the worst possible time they seem intent on making the same mistake all over again now the second chart in our blog today shows the performance of the s p 500 with overlays showing when qe 1 0 qe 2 0 and operation twist were in effect stock prices rallied during the first and second rounds of quantitative easing they sold off as soon as both programs were terminated they are rallying again under the influence of operation twist and talk of a third round of quantitative easing pushing up stock prices has been one of the main goals of the fed s experiments with untested monetary policy measures how much longer will they succeed in boosting stock prices if they not only fail to boost economic growth but actually adversely affect it posted by dr ed yardeni at 5 47 pm no comments email this blogthis share to x share to facebook share to pinterest thursday october 20 2011 china in my opinion china s success of the past three decades is mostly attributable to the exploitation of chinese workers that s right the world s largest communist country has been exploiting its workers there are an estimated 120 million migrant workers in china these are not people from other countries they were all born in china mostly in rural villages yet they are restricted from living and working freely in their own country many of them have no siblings because their parents were limited by the one child population control policy instituted during 1978 when they were teenagers they swarmed out of the impoverished rural areas to the urban centers on the east coast of china finding jobs in the booming export manufacturing industries these migrant workers provided the cheap exploited labor that transformed china into the world s top manufacturer and exporter their pay was low and they received few if any benefits they were second class citizens subjected to the household registration system known as the hukou which defines where people are officially registered to live and whether they are considered urban or rural residents the distinction is crucial because rural migrant workers who move to cities to work in factories and on construction sites are not eligible for many social benefits including education for their children many migrant workers are now young adults who are very unhappy about their status and their standard of living they are starting to demand better treatment the government responded at the beginning of the year by raising the minimum wages by 15 20 and by promising that the next five year plan will focus on improving the lives of chinese workers the resulting jump in labor costs has been exacerbated by a shortage of young exploitable new entrants into the labor force as a result of the one child policy higher nominal wages and rising labor costs have pushed the cpi up by 6 1 y y through september led by a 13 4 increase in food prices and a 12 3 increase in fuel prices anecdotal evidence suggests that inflation may actually be higher than shown by the official data that explains why monetary and credit authorities have been tapping on the brakes since early last year m2 in yuan rose 13 1 y y through september the slowest since may 2001 bank loans are up 14 3 the slowest since november 2008 small firms are getting squeezed by rising labor costs and much tougher credit conditions they are being forced out of business the authorities are scrambling to provide credit to them fearing that rising unemployment along with erosion in the purchasing power of recently raised wages will exacerbate social unrest no wonder that the chinese stock market is down 15 7 ytd among the worst performing in the world posted by dr ed yardeni at 7 06 am no comments email this blogthis share to x share to facebook share to pinterest wednesday october 19 2011 bull bear ratio the good news for the stock market is that sentiment remains very bearish which is bullish despite the huge rally in the s p 500 since 3 10 p m on october 4 the bull bear ratio bbr compiled by investors intelligence remained under 1 0 for a sixth consecutive week it was 0 87 this week last year it also dropped below 1 0 just when the market bottomed in early july and continued on to have a great yearen...