Fourth Quarter Outlook

In the past a major critique of market watchdogs has been that Federal Reserve officials stand idly by watching, even fostering the formation of bubbles instead of acting decisively and preemptively thus saving us all from the ensuing shocks to the system. More importantly the dents to our wallets and investments. Key example was the tech bubble. At the time, Federal Reserve Chairman Greenspan even identified the bubble in the making. His preemptive strike? He searched deep into his arsenal of tools available. Should he raise the Fed Funds Rate? Raise the Discount Rate? Perhaps hike the reserve levels banks are required to hold in order to stem the free flow of credit? No no to arcane and blunt. No this called for all the force he could muster his most powerful tool at his disposal, his exquisite grasp of the English language. Thus he launched his assault and we were buried with "Irrational Exuberance". Oh the pain! No, Chairman Greenspan did nothing but observe and we see ten years later the NASDAQ Index still trades well below fifty percent off the highs.

There is and had been evidence of bubble formation in a few areas. Look no further than commodities. The Federal Reserves easy money policies have consequences. Inflation and possible bubbles. The difference this time is our watchdogs are engaged. In response to the rapid rise and possible speculative bubbles in gold, silver, wheat, corn and oil etc., the regulators have hiked margin requirements on all of these futures contracts numerous times this year alone. Regulators finally acknowledged the last time oil traded up to $140 under the Bush administration it had more to do with hot money and rapid speculation than the fundamental supply and demand equation. Listen when you go to the casino you know you're gambling and more likely than not to come away with a few more vacancies in your wallet or purse. The commodities trading floors are not supposed to be casinos though, and futures contracts are a legitimate tool utilized to help mitigate risk. When speculators drive commodity prices into the stratosphere and completely decoupled from the underlying commodity the effect on the consumer and his spending habits can and have been stifling to the economy. We seem to be shaking out some more of the hot money as witness the price of oil back from $120 to $75, see gold hitting a high of nearly $1900 intra-day and recently tanking to $1560 the same price action can be seen with all the food stocks. I haven't been able to say this about our regulators to often this decade, but WELL DONE!. The battle isn't over but those speculators that were using cheap funding and excess leverage to make huge directional bets on our food sources and energy (basically everyday staples) have been put on alert. There is one more bubble that is being allowed and fostered. That is the one in the US Treasury market. Savers balk when they look at bank CD's yielding 1/2%. Why are investor scrambling to lock up their money for ten years at 1.75% and thirty years at 2.8%? The Federal Reserve has launched operation Twist (Chubby Checker). This entails the Federal Reserve selling off the shorter maturity bonds in the 1-3 year vicinity in their portfolio and purchasing bonds that mature in 6-30 years to push down long term lending/borrowing rates to help stimulate the economy. The Fed is breaking out all the tools in an attempt to support the US economy. The Chairman seems to be the only passenger on this boat with a set of oars, or is it a bucket he's trying to bail us all out of a mess our elected officials seem unable or unwilling to tackle? History will answer whether the Chairman was right. I'm willing to side with him and give him credit for his creativity and willingness to try and do something and near about anything to spark the economy.

The current environment is fraught with danger, amplified by the upcoming election year. At a time where the primary theme for all involved should be "it's the jobs stupid", we're left to scratch our heads at the goings on in Washington. The EPA (Employment Prevention Agency) is on a full frontal assault focusing on Nat Gas and Oil Fracking. Pennsylvania and North Dakota are terrific success stories of states that encouraged companies and the new technology utilized to access these once unreachable resources. Pennsylvania alone boasts 70,000 in job creation along with $2 billion in revenues. North Dakota is a similar story. The EPA response to take on ND with fines for killing 24 ducks while windmills are slaughtering 440,000 birds a year without a blink is again, a head scratcher. Similarly the NLRB is attempting to block Boeing from utilizing good paying high skilled workers in South Carolina instead of Washington state. Whew! What would they say/do if Boeing decided Mexico was a more friendly environment and site for its plant? The message in these instances is the White House and Capitol Hill need to get out of the way of businesses that work and would put some of our 16 million unemployed back to work.

Front and Center. What's infected our economy and markets is rancid debt festering in the Petri dish in Europe. The Greek debt crisis 2 1/2 years and counting is desperate for a soothing financial tonic. The prescription, cultivated here in the US laboratory called Wall Street is what I refer to as Euro-Tarp. Direct injections of capital into the strategically important Euro zone banks. The fiscal and monetary impotence demonstrated by the European Central Bank and the European Union membership in general has left our domestic markets solely reliant on Federal Reserve stimuli. In our current global financial structure the response must be global. Which helps explains the limp response of the markets thus far.

Where we're at. The US economic recovery is progressing as anticipated, below trend expansion. Housing remains a constant drag that must be addressed. Homeowners, with borrowing rates and generational lows, need to have access to refinancing. The Fed has done their part in pounding rates into the dirt. Banks and regulators need to come together to allow underwater borrowers that are current on their payments to refinance. In many cases home owners cannot refinance because the outstanding balance on their mortgage is more than the value of their homes due to the housing market collapse. What needs to be done is 1.banks need to waive a new appraisal .2. banks need to receive a waiver from Fannie Mae and Freddie Mac from putting back any of these mortgage that may default citing lax underwriting. That simple. This would stem the tide of foreclosure along with the flood of supply currently flooding the resale markets depressing values and deterring new home buyers. Allowing homeowners to refinance at today's low rates would put billions of dollars into consumers wallets/purses. Next Euro Tarp and a Greek restructuring needs to happen sooner than later. Lastly the White House and Capitol Hill need to cease this political gamesmanship on Free Trade, Energy Policy, Tax Reform all of which should result in job creation. Do any combination and potentially unleash a tsunami of investment and job creation to steady this, at best, shaky economic recovery.

For now, no surprise, we remain on Euro watch. As Federal Reserve Chairman Bernanke stated in his recent testimony, "in this current situation we, the US, are the tail and the EU is the dog". With the final departure of ECB President Trichet hope springs eternal. We have most recently heard rumors floating in the market a bailout of the banks and Greece is coming and at long last there is a sense of urgency to move with scope and force. Domestically the US economy is anticipated to expand at a 2-2 1/2% GDP pace for the just completed third quarter and 2 1/2-3% for the upcoming fourth quarter. Obviously we have not been able to obtain break away velocity from the pull of the severe recession we are attempting to extricate ourselves from. While worries of a double dip recession have been elevated by the Euro woes, recent data do not support this conclusion. But, again the longer EU zone countries take to address and contain any potential contagion, the greater the risks to the global economy. GSA remains cautious and continues to build out our watch list. We'll wait for the market to signal the time to get fully re-engaged again and continue to monitor this very fluid situation as it develops.