Economist Ed Yardeni, a former boss of mine, was on CNBC’s Squawk Box this morning. While I haven’t talked to Ed in awhile, I thought his comments were spot on and sent him a quick note following his interview this morning. He responded with a quick thanks, congratulated us on our strong performance results over the last five years, and commented that “it was too bad that the Fed was out of control.” (This is my first attempt at embedding video in our blog using code, so please forgive me and use the hypertext link instead if I fail miserably.)
In general, I agree with Ed’s views and am similarly focused on the Fed’s dual mandate. Bernanke spoke this morning and reiterated the view that while employment is improving, the rate of improvement is slower than desired given below trend economic growth. As for inflation, he believes it may be too low, a significant tone change from historical precedent when the risk was always viewed to the upside. His comments generally reinforce the view that quantitative easing (QE) will be forthcoming.
I’m in agreement with Ed and wonder to what extent the Fed’s views have been influenced by politics, more so than in the past. We just came off a huge party and it may be unreasonable to believe that unemployment can improve at a pace much faster than the slow crawl we’re experiencing today. A case could also be made that the natural rate of employment or full employment may be higher today than it has been in the past as we adjust to a “new normal” especially as interest rates are already near zero.
The Fed has already done a ton to support the economy and it may be time for them to sit back and allow the economy to heal of its own accord, even if it means doing so slowly — the old fashioned way. I am becoming increasingly convinced that unproven efforts at QE may not generate an improvement in the real economy via job gains and production increases even if it is somewhat successful at generating less desirable and temporary nominal gains, particularly through currency depreciation and the export mechanism. The dollar may fall but as the Fed exports the idea of QE, more monetary bodies around the world may follow suit, bringing a decline in their own currencies and thus no real net impact.
On a different note, Google reported a strong quarter last night and may be one of the first companies to enjoy a healthy stock price response from it so far this earnings season. Currently, the shares are up 10% in trading. In recent quarters, more investors have become skeptical of the Google story, believing they need to start monetizing new businesses like display ads, Android, and YouTube to offset a their dominant yet maturing position in text based ads. Last night’s report suggests that Google may be making progress on this front. The stock has woefully underperformed the market this year, down about 13% before the news, so it could have some room to run.
Apple also reports earnings next week but expectations leading up to the report are quite high. In contrast to Google, it’s shares are up a very strong 40% this year. There is no doubt in my mind that the company will report outstanding results, particularly on the iPad front. The company is, quite simply, amazing. Yesterday, someone mentioned that if the company were a country, it would be the size of South America.
Historically, Apple’s shares have sold off on the actual earnings news after making big gains in advance of it. Typically, the company has also used its quarterly call to talk down earnings guidance. Last quarter marked a significant change in this historical trend, however, and the company’s stock went up post earnings and the company increased its guidance. In the short run, gaming what a company’s stock will do on an earnings release is always a gamble. Over the long run, companies which demonstrate solid earnings trends driven by unique and innovative efforts, eventually climb higher.
Disclosure: Broadleaf Partners maintains positions in both Google and Apple shares.