Big Happenings
Advisors Capital Management
Charles Lieberman
November 1, 2010
Numerous significant economic, political and policy events will coincide this week, with unknowable short-term and long-term effects. Mid-term elections will remove many incumbents from office, new monetary policy initiatives will be announced, both domestically and abroad, that will affect credit markets and exchange rates, and new employment data will affect our perceptions of the health of the economy. Opinions range across all eventualities and don't really matter. Only actions and the resulting outcomes matter and we don't know those yet. So we need to retain flexibility to respond to the circumstances that unfold.
What don't we know? The composition of the new Congress will become clear, but we still won't know for some time whether democrats and republicans will compromise or squabble over policy initiatives. Moreover, this may not become clear for some time, since a lame duck session will surely behave quite differently than the newly elected crew, which won't take their seats until January. Political gridlock is possible, but we won't know for some time whether that is a good or bad outcome. The Fed's new QE2 policy will be announced, but how much will it help? Will it create inflation pressures over time? Will the Fed remove the liquidity on a timely basis? Is the economy improving, after a slowdown in growth this past spring? Or will it respond to the Fed's QE2? While most people have opinions on many of these questions, the outcomes wont be known for some time. In truth, the future is always uncertain and there are always surprises that could arise that can have a major effect on the economy and the market's performance.
What do we know? The economy is growing slowly and the risk of a second recession appears to have receded. Fed policymakers are disappointed with the slow pace of recovery and want stronger growth. If QE2 isn't sufficient to help the economy, QE3 will follow. "Dont fight the Fed." The corporate sector has greatly improved its finances. Profit margins have increased, cheap financing is readily available, and business is sitting on $2 trillion in cash. Companies clearly have the financial capability to increase investment and they have been increasing their merger and acquisition activity. Households have also improved their balance sheets, are paying down debt and have increased their savings rate. Therefore, they have enhanced their financial capability to increase spending. Most critically for investors, we also know that interest rates are at historically low levels, because households are still pouring cash into bond funds, while stock market valuations are low, because retail investors can't handle the volatility and they keep pulling cash out of equities. So despite all the uncertainty, much of which is normal anyway, stocks offer value, while bonds have very limited investment potential. While uncertainty remains, the bet seems highly asymmetric in favor of equities.
About Advisors Capital Management, LLC
Advisors Capital Management, LLC (ACM) is a provider of privately managed portfolios and financial planning services for industry professionals and direct clients. Although the information included in this report has been obtained from sources ACM believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. ACM is a registered investment advisory firm. For program fees and descriptions please request a copy of the firm’s ADV part II Schedule F. Web Address: www.advisorscenter.com 777 Terrace Ave, Hasbrouck Heights, NJ 07604 Phone: 201-426-0081
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