Tired of QE2 Talk?

Is anyone else getting tired of talking about QE2?

I know I’m getting a little tired of writing about it. But
the Fed’s actions are unprecedented. It’s already added $1.7 trillion in
assets to its balance sheet. The potential for another $1 or $2 trillion is
more than newsworthy.

And the thing is, there’s a growing camp that’s expecting
the Fed’s next action to be a disappointment. Bank of America/Merrill Lynch
is among those that think there’s a “sell the news” risk.

Inflation concerns aside, it’s worth considering that asset
purchases don’t really change the valuations of stocks in any way. The Fed is
hoping to push some of the cash that’s essentially being hoarded in savings
accounts and corporate balance sheets into the system. It’s also hoping to
keep interest rates low to aid the housing market.

The problem, liquidity doesn’t necessarily create demand,
especially at the household level. Let’s remember that Americans stared into
the abyss in 2008. And those that didn’t lose their jobs decided they needed
to save more and spend less. Absent another Bush-style “check in the mail”
stimulus, it’s difficult to see how the Fed’s actions will shift that
psychology quickly.

Now, let’s also not
forget that there is a Congressional election next week, too. It appears the
GOP is going to give the Democratic majority Congress a jolt, and that could
lead to fiscal policy changes.

Some new ideas coming out of Congress, combined with the
Fed’s actions, could actually have an impact. Maybe another homebuyers’ tax
credit?

Though, as I’ve said before, a coherent energy policy and
some kind of incentives for job re-training would be good ideas, too.

I’ve been intrigued
by an idea I’ve read from Todd Harrison, the founder of the Minyanville
financial website. He notes that the Great Depression was an era, not an
event. Depression era psychology affected the behavior of an entire
generation.

We should be aware that a similar generational psychology may be in play
right now.

Now, let’s get to some reader mail…

J.B. wrote:
Have to lament the fact I received a promo piece from you on True
Religion some 5 years or so ago. Having received so many other stock recos at
that time, I failed to act on it, also thinking there wasn’t much of a market
for $150-$300 Jeans. I’ll always rue the day I missed that one, but I always
now pay attention to whatever you put out there!

Ah, the one that got away. Missed opportunities can be
painful, but they are also a way of life in investing. Don’t spend too much
time looking in the rearview mirror.

Consumer goods are a great place to look for big winners,
because if get a company at the forefront of fad, the gains can be
phenomenal. Crocs (Nasdaq:CROX) did that with their goofy shoes. And Apple
(Nasdaq:AAPL) is another
example of a company that has perfectly addressed consumer trends.

Chance F. wrote:
I ready your column and The Daily Reckoning. They always make perfect
sense to me, but the recent one (Oct 26, I think) didn’t make sense to me.
You mention commodities and the stock market, and then sprinkle the statement
with an old maxim about the market can stay irrational longer than one can
remain solvent.

Are you stating you think the next bubble is in
commodities and/or the stock market? I still like stocks and here’s why. It
loses the contest of the ugliest investments. In other words, it is the least
ugliest. In days past, investors, like myself, had options for a decent
return…….real estate, T-Bills, CDs, GICs, angel capital investing,
whatever — they all produced something. Another maxim, “worry about return
of your capital versus return on your capital.”

Real Estate — can still be good, but gotta be really
selective. Overall, not good. Getting financing, no matter how strong you
are, can still be problem.

Tbills or any government IOU — are you
kidding?

CDs — Banks and Bernanke should be put in prison for
stealing old peoples money.

Angel Capital — can still be good, but the demand isn’t
there….in days past, I’d look at 2 deals per month from someone wanting
money for a venture. today…nothing.

Gold — maybe. I don’t see how these gold bugs are ever
gonna cash in — gotta small scale at your house to weigh your gold coin to
trade me for my bag of rice? Gold, can also be debased — exactly like the
U.S. government did with silver coins — start covering the outside with tin,
then start filling the inside with copper, or whatever. All of a sudden,
their 3% gold, or silver, or whatever.

Stocks may / may not fare well in inflation. Both sides
have valid arguments. Energy stocks, food stocks, staple stocks, dividend
stocks may all look TERRIBLE in the face of money printing, but they at least
have a bag over their head.

There are different versions of ugly when pretty is
gone.

Stocks as an asset class may well be the least ugly. I still
believe that there are individual stocks that are downright knockouts. But as
with anything, you have to be selective.

As for where the next bubble will form, the jury is still
out. Bubbles are usually an example of unintended consequences, and it’s
tougher to predict where they will form than to recognize them once they have
formed.

David F. wrote:
I do really enjoy reading your emails, I do religiously try to read them
every day and I keep those I miss and catch up by the end of the week. I
value the objective approach to your comments and review.

I am writing today to simply offer an opinion on your
comment about “China‘s low labor rate”. I have lived
in China for a year and have done extensive business transactions purchasing
goods from China. I have seen first hand the manufacturing operations and manufacturing
plants in China. I would suggest it is not the low labor rates that give
China the low cost
advantage it is the total cost of manufacturing in
China.

The fact that there is no EPA/MPCA; no OSHA regulations,
fines or costs; no unemployment insurance costs or the huge new cost impact
to US Businesses: employer health care. If one adds up these costs they
quickly over run a one to three dollar an hour labor rate when labor is
probably 40% or less of the total cost of goods. Not all of the additional
manufacturing costs listed above are bad but the regulatory costs have risen
beyond common sense and what the US consumer is willing to pay for goods and
still enjoy the clean air, rivers, insurance etc.

The average consumer does not realize that all of those
benefits have a cost – unless goods are made outside of the
United States.

Good point. I glossed over a lot by simply saying
that China has cheap
labor.

But I would point out a perspective forwarded by
Energy World
Profits energy economist Gregor Macdonald. He notes that, by
making China the world’s
factory, we have simply outsourced energy demand to China. And China
has responded by burning an incredible amount of coal. So
we’re enjoying clean(er) rivers and air for now…

Ted G. wrote:
You mentioned forclosuregate. How about refi-gate and the hazing which is
called refinance with all it’s self-dealing fees?

The borrowers who can’t refinance because their home is
underwater (over 30% of California and over 20% of
Georgia) would be
helped and the economy would benefit if FNMA and Freddie and FHA would simply
drop their interest rate on existing loans to the current rate. All banks
should do this. Banks are currently curing their balance sheets by refusing
to drop the rates on the most vulnerable. As the number of homes under water
increases, borrowers are going to get churlish.

I totally agree. And that’s why I’ve suggested that the
Fed’s QE2 may well target the housing market more directly than previous
efforts. That would certainly be more effective than simply buying
Treasuries.

Blaise R. wrote:
I’m a design engineer up hear in Canada and I’ve been a little concerned
these days with my Bank of America investment. I’m also a little
frustrated with my financial adviser as of late. I would appreciate some
advise but I also understand that you don’t do this for free so if I don’t
hear back form you, I understand.

I can’t blame you for being a bit concerned about Bank of
America. The stock has been hammered lately as investors like PIMCO are
demanding that BofA buy back billions of dollars worth of bad mortgage debt
from Countrywide.

And while this is a short-term problem, stay focused on
BofA’s tangible asset value of around $12.60.

As you know, BofA reported a non-cash loss for the third
quarter on charges related to the finreg bill. I believe BofA is the first
bank to do this, which should set it up well for the future. Also note that
BofA was able to return more loan loss reserves on a percentage basis to
earnings than JP Morgan (NYSE:JPM) or Citi (NYSE:C).

It’s tough to forecast near-term upside for the stock with
the put-back issue still looming, but long-term, I think the stock is
attractive.

Rob M wrote: I
am the Canadian investor (new) that wrote you some time ago. I am now
following your 100K program, as well as I can.

My question is regarding taking profits. You mention
this occasionally and I was wondering if you could clarify this topic for new
investors. It may sound somewhat naive, but I’d rather hear it from
you.

I do have a few cdn commodity stocks that have seen a
good rally, and then got hit hard today. So here we go, topping out on the
recent rally, sell in part for some profits, sell all then reinvest after the
fall