The notable element of the week was Ben Bernanke telling congress that rates will remain low for the foreseeable future:
“Although the federal funds rate is likely to remain exceptionally low for an extended period, as the expansion matures, the Federal Reserve will at some point need to begin to tighten monetary conditions to prevent the development of inflationary pressures.”
After a substantial increase last week; the S&P appears to be in a consolidating pattern for week - despite myriad bad news and concerns. Contagion from the Greek sovereign crisis is a notable concern. As Kenneth Rogoff has observed the financial crises are bound to be the norm and not the aberration going forward. The Money Multiplier fell off a cliff in September of 2008 falling dramatically to a multiyear low (Bloomberg will only go back to February of 84). The full implications of this remain to be seen but the fact remains that lending and spending are down significantly. I don't know how consumption can hold up under these conditions and this is not a mere exercise: betting against consumer discretionary companies is one of the things that pays the bills around here. Washington remains in perpetual gridlock and our budget deficits are just plain frightening. Fourth Quarter US GDP just printed its first revision this morning; it was up but the inventory adjustments in the number are nothing to cheer about. Corporate profits look okay so far but revenues, or revenue growth, remain elusive and profitability in the second half cannot be easier as stimulus spending fades. In short, not much to be happy about.
But we do have cheap money and extremely low rates. Commodity prices have run up substantially, portending future inflation, and real estate remains impaired. Where to go then? Stocks. Best guess is that stocks will do okay for the next few months ex any substantial negative surprises.
Lastly, Calgon Carbon reported very promising earnings this morning replete with a 1000bp improvement in gross margin quarter over quarter. The stock is currently up 10% and no wonder; 14% of its float is sold short. Looks like a nice squeeze.