I’ve been thinking about macro trends for the upcoming year and while I’ve got several questions, maybe some of you can help me with this one: how will the election affect the stock market in the short run? I’ve thought about buying options and puts on military companies since price fluctuations surrounding their options haven’t changed much recently. This leads me to believe that a) not too many people believe the election will have any sort of effect on this industry or b) people aren’t thinking that far ahead yet.

Anyway, just an interesting thought I had. Nothing tangible yet =)

http://www.newyorkfed.org/research/current_issues/ci2-7.pdf

LONDON — The benchmark London interbank offered rate, or Libor, rose Thursday in a move some analysts attributed to new concerns about the rate’s accuracy.

Three-month dollar Libor, which is supposed to reflect the rate at which banks lend to one another, rose 0.03 percentage point to 2.68%, its largest increase in more than two weeks. The move came after the publication of a Wall Street Journal study suggesting banks may have reported flawed borrowing rates used to set Libor.

In response to concerns that some banks may have understated their borrowing costs, the British Bankers’ Association, which oversees Libor, has been conducting a review of the rate system. An initial report is expected Friday.

One of the world’s most important financial indicators, Libor forms the foundation for payments on trillions of dollars in mortgage loans, corporate debt and other financial contracts. The Journal’s study analyzed Libor by comparing banks’ reported borrowing rates with estimated borrowing rates derived from the market for default insurance — another indicator of banks’ financial health. The analysis suggested that many banks’ reported rates — and dollar Libor itself — were significantly lower than what the default-insurance market suggested they should be.
[Chart]

Some Wall Street analysts were critical of the Journal’s study. In a research note, Terry Belton, an analyst at J.P. Morgan Chase & Co., said the Journal’s methodology could unduly inflate the banks’ estimated borrowing costs, and criticized the use of one-year default-insurance prices to construct three-month borrowing rates. Independent academics have said the Journal’s approach was a reasonable way to analyze Libor.

If the BBA decides to alter the Libor system, it could choose to change the makeup of the 16-bank panel that provides quotes for dollar Libor. Any such change would be the first in years. Excluding times when banks were acquired and therefore replaced, there have only been three changes in the panel since 2000.

BBA spokesman Brian Mairs declined to comment on the potential findings of the BBA’s review, which could continue into summer. The BBA said it remains confident about the integrity and accuracy of Libor.

He brings up several interesting issues (no doubt regulation is weighing heavily on the minds of the Fed – he brings up moral hazard more than a couple of times), among which are two topics which we will no doubt see revisited. First, how will the Fed regulate broker dealers in the future (think Bear Stearns)? Can they grant them access to the discount window (think moral hazard)? How can the Fed provide them with ample liquidity?

The second interesting topic he comments about the growing interdependencies of financial markets

Our experience in recent months has underlined the global interdependencies of financial markets. Globally active banks manage their positions on an integrated basis around the world, and pressures originating in one market are quickly transmitted elsewhere. Central banks should consider how to adapt their facilities to help these institutions mobilize their global liquidity in stressed market conditions and apply it to where it is most needed.

For a good read, stop by the Fed website.

Will the company grow to beyond its $130bn valuation? I haven’t done extensive research into this company, although I probably should since it is my belief that they still have plenty of growing to do. With the majority of the world coming to them to do search, Google has already become an integral part of peoples’ lives. As the world becomes more digital, access to the internet will become even easier and with that, an even greater increase in the role of Google in daily life.

Google isn’t just search. It compiles infomation together in a useful and meaningful way. In other words, it makes life more efficient – and that is invaluable.

A Swedish student in Stockholm has drawn the world’s largest picture ever using a briefcase containing a GPS-satellite. The briefcase travelled around the world including 62 different countries. A very cool idea – you can check it out here.

leveragedsellout.com has finally written a new comic article about the recent Wall Street layoffs.

Recently I have been doing research on the alternative energy industry at Merrill Lynch for our financial advising group. My objective was to determine whether or not forays into this speculative industry could provide our clients with appropriate risk-adjusted returns. This research opened my eyes to how valuable an investment in an ETF could be in an investor’s portfolio. Since there are several out there in each industry with very different strategies (some are weighted more heavily in large caps, some in smid caps, some are invested primary in technology, some are more diversified), investors are given a multitude of options. Furthermore, they are often cheaper than mutual funds.

I plan on doing some research about these relatively new ETF-Squareds to see just whats sort of fees quarterly adjustments deserve. Below is a small list of articles I read this morning pertaining which inspired me to do this research.

1) ETF-Squareds
2) An ETF of ETFs
3) Building an ETF portfolio

“Take away Exxon Mobil Corp., Chevron Corp. and ConocoPhillips and profits at U.S. companies are the worst in at least a decade.

Without the $70 billion that oil producers earned in the last two quarters, profits at companies in the Standard & Poor’s 500 Index tumbled 26 percent and 30.2 percent, the biggest decreases for any quarter since Bloomberg started compiling data in 1998.

Energy companies made up almost half the income growth reported by S&P 500 companies in the first three months of 2008 as oil prices surged past $100 per barrel, the data show.”

The S&P500 is down 12 points to 1414.61 (-.85%). This surprise furthers my concerns about the health of the overall economy since the other industries aren’t doing as well. The S&P500 is also testing the 200-day MA today. Signs of accelerating inflation are cropping up and oil is trading at $129/barrel.

1. Producer Price Index – 5.20
2. Mass Layoffs – 5.22
3. Metropolitan Area Employment and Unemployment – 5.28

The following is a partial list of the stocks releasing earnings this week:

5.19
DryShips Inc – DRYS
Excel Maritime Carriers Ltd – EXM
Lowe’s Companies – LOW

5.20
China Sunergy Co Ltd – CSUN
Hewlett Packard HPQ
Home Depot HD
Mitsubishi UFJ Financial Group MTU
Staples, Inc. SPLS
Target Corporation TGT

5.21
Solarfun Power Holdings Co Ltd – SOLF

5.22
Barnes and Noble – BKS
Gamestop Corp. – GME
Suntech Pwr Holdgs Co Ltd – STP
Zumiez Inc – ZUMZ

I’m particularly interested in the alternative energy stocks. This industry has been experiencing a nice run and could potentially be where the next large macro trend is.

“In my view, this is probably as bad or worse than the 1989-1990 crisis and may even rival the worst crisis we’ve seen since the end of the Second World War,” Scholes said. Former Fed Chairman Alan Greenspan has also said the turmoil is the most “wrenching” since the war.

This past weak, Federal Reserve Chairman Ben Bernanke warned investors that financial markets are still far from normal. This makes me wonder just how serious the current problem is. The stock market has been up recently and investor sentiment seems to be perking up. Before we get caught up and buy loads of volatile stock, let’s see what’s been going on with the economy.

1. Institute for Supply Management (ISM) – The ISM is responsible for calculating the Purchasing Managers Index (PMI), a survey of managers in the manufacturing industry. A PMI score over 50 indicates economic expansion in the manufacturing field. Conversely, a PMI of under 50 suggests a contraction. With the exception of January, we have seen this score register under 50 since December 2007.
2. Unemployment – We have seen a decline in unemployment for three consecutive months. Historically, three consecutive months of declining unemployment have led to a recession. Since its peak in December 2007, we have seen a total loss of 260,000 jobs. The unemployment rate last month came in at 5%.
3. Gross Domestic Product – GDP measures the total value of all goods and services produced in the US. It indicates quickly or slowly the economy is expanding. While GDP hasn’t been contracting the past couple of months, we have seen expansion at only approximately .6%. For the economy to be growing smoothly, we typically require a 3% growth rate.
4. Consumer Confidence – The University of Michigan preliminary index of consumer confidence has come in at 59.5 this month. Rising food and oil costs combined with market turbulence has resulted in the lowest rating since the 1980s.
5. Housing Market – While many investors believe the housing market turmoil is largely behind us, it is actually far from having worked itself out. After a 13.8% plunge in housing starts last March, investors saw an unexpected rise of 8.2% just a couple days ago. Upon closer inspection however, we see that this increase in starts are largely fueled by multi-family homes (condominiums, townhouses, etc) – an industry subject to great volatility. Single family home starts have fallen for the 12th straight time, down to approximately 700,000 units at an annual rate. According to Jan Hatzius, chief US Economist at Goldman Sachs in New York, this number needs to drop to about 500,000 to ease pressure on the already existing glut in the housing market. Furthermore, he predicts housing prices need to drop approximately 10-15% based on a 30-year trend line of median US home values. Many predict the housing dilemma to continue until early 2009 at the earliest.
6. Inflationary Pressures – While oil has been trading at records highs ($128/barrel) and food prices have soared, inflation is checking in at 4%. While on the surface it looks like inflationary figures are being kept under control due largely to the slowdown in the economy, employee wages haven’t kept up and benefits have been tremendously. Add that to the devaluing of homes, Americans’ largest asset, and one can quickly see why American’s aren’t feeling very confident about the economy.

As a friend of mine stated, guessing the direction of the economy is a fool’s game. While I agree to a certain extent, it’s fun nonetheless to speculate. Continue watching economic indicators to see where the economy is headed. Particularly interesting will be the effect of the tax stimulus: will Americans continue what we have been doing for years and spend, spend, spend? Will it go straight to the pump and food? Will we actually start saving?

Only time will tell. For now it seems likely that we’re headed towards a prolonged, mild recession. That is, if we’re not already in one.