The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

Vincent Farrell, Jr. is Chief Investment Officer of Soleil Securities, a New York based investment  management company. Over his long career on Wall Street, he has worked for numerous distinguished firms. Mr. Farrell graduated from Princeton University in 1969 and received his M.B.A. from the Iona College Graduate School of Business in 1972.

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According to the Stock Trader’s Almanac, a Santa Clause Rally starts with five days left in the trading year and goes to the second day of the New Year. Since 1950, the rally, when it showed itself, moved the S&P average 1.5%. This years version started Wednesday, December 24, and for Wednesday the 24th and Friday the 26th the market is up 1.1%. For whatever it’s worth.

Another old Wall Street favorite is “as goes the first five days in January” so goes the year. Or if you don’t like that one use “as goes January so goes the year.” The last one tends to be accurate more often than not in my experience.

What might help the market is the incredible flood of liquidity the Fed is introducing to the system. M-2 is defined as currency (cash), savings deposits, time deposits (C.D.’s) and most retail money market funds. M-2 has averaged 5.5% growth for the last five years. It has grown at a 14% annual rate the last three months, but has recently accelerated to a 27% annual pace the last five weeks (thanks Tony Crescenzi of Miller Tabak and RealMoney.com).

I mentioned last week that the banking system has over $1 trillion in cash on its books so the liquidity is not flowing through the system the way it ordinarily would. Banks expand the money supply via the creation of credit and I believe the New Year and the new Obama Administration will see renewed flows and accelerating velocity of money. With Treasury yields as low as they are, if we had a period of no more bombs going off some risk appetite will return and money will move to other higher yielding assets searching for greater return.

Because the Fed is starting to aggressively buy mortgage backed securities, mortgage rates are coming down. Applications for refinancings have spiked. While many will be surprised they can’t get refinanced with the value of their home much lower, many will. Lower oil and gas prices will help the embattled consumer as well.

If I had a New Year’s economic wish list, one priority would be to eliminate mark-to-market accounting. Rick Karlgaard, Forbes publisher wrote recently if that rule had been in effect in 1990-1991 “every major U.S bank would have been destroyed.” There was a little wiggle the other day when the Financial Accounting Standards Board “began steps to loosen a rule regarding when financial firms must book losses on a narrowly defined subset of lower rated mortgage backed securities…auditors would have more leeway to put off a potential write-down…(and) help boost regulatory capital” (Wall Street Journal 12/23/2008).

The other thing I would wish for is an across the board tax cut. Stimulus programs are bureaucratic and slow (but better than nothing) and lower tax rates, if perceived to be permanent, incentivize investors to take more risk and encourage businesses to think of expanding. People adjust their behavior when they get to keep more of what they earn. And, lower taxes yield more revenues!

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via Soleil Securities

This communication has been prepared for informational purposes. Nothing in this communication should be construed as an offer or a solicitation for the purchase or sale of any financial instrument. The text of this communication is not a research report as defined by NASD Rule 2711.