Just Read the FOMC Minutes

I just read the entire publication, interestingly, there are some seeming contradictions there, especially as it pertains to the labor market. It read more like a partly cloudy weather forecast, if it rains you're right, if it doesn't you're right. 


There were quite a few upbeat assesments of the labor market in certain areas, but they were contrasted with the uptick in unemployment from 9.6% to 9.8%. I find it utterly and disgustingly disturbing that it's not just the headline media that continues to ignore the "U6" employment data, which is the broadest measure of real employment as it pertains to real Americans and their situation. Not only does the media ignore this number which is nearly double the U3 headline rate, but the Fed ignores it as well.


There was a statement that I found interesting, although not surprising. The Fed's POMO in which they monetize debt from Primary Dealers leaving the Primary dealers with abundant cash as they sell debt at a profit to the Fed. These Primary dealers have been said to use that money (most likely at the Fed's direction-after all, they are profiting from selling treasuries back to the Fed) to ramp up the stock market. 


In my posts and analysis on breadth readings, the market's total breadth has fallen drastically while the headline averages head higher, translation-fewer stocks are participating in the rally and the PD's can ramp the market simply by buying the most heavily weighted stocks in an index. For a rough example, if the PD's buy AAPL and it's up 1.5% for the day, the 51 least weighted stocks in the NASDAQ 100 can decline by an average of 1% and the NASDAQ 100 will still close up higher for the day due to index weighting.


The Fed all but flatly admitted this in this staement, 


"Household net worth rose further in the third quarter, as an increase in equity values more than offset the effect of a drop in house prices."


Furthermore, I don't even believe it's true! There's barely any retail left in the market, we've had months upon months of withdrawals by retail (consecutively I might add) from domestic equity funds. So participation by retail investors has to be near the lowest point in history, yet those who own houses are experiencing a double dip recession in prices. Even if retail was in the market at a 5 year average, which they are not, their houses are their biggest investment by far. Lets assume you have a $200,000 house and it has declined in 2010 by 10%, that's a $20,000 net loss. The average person who owns a $200,000 house may have $5-$20,000 in the market at most I'd guess and the high-end of that is pretty generous.  The S&P saw an 11.88% change-again we assume that investors caught the entire move-that leaves them with a net return of $594 to $2,376. The middle class is by far the biggest class and probably being hit the hardest with declining housing values as credit for most buyers in this segment is near impossible to come by. How this statement can be true or even close to true is mind-boggling. And where the data comes from , I don't trust it for a minute. We live in Florida, a pretty affluent area with high demand. It's said that real estate has lost about a 1/3 the last 3 years. I know from experience in a wide range of housing prices, that most people who appraised and took out Helocs or refinanced have lost something more like 50-60%. In looking at real estate recently as we were buyers and talking to all kinds of owners, people who even bought before the boom, most of them are underwater around the same amount. For example, a condo that sold for $145k in 2005 is now sitting for sale for 6 months along with 3 others and they can't get $79k asking for it. Friends who took out HELOCS with appraisals at $450k are seeing homes in their area sell for $160-$175k. 


Add to that the severe underperformance of most funds during 2010-as most people don't manage their own money, the stats become even worse. I know there's a lot of hypotheticals in there, but a I said, it's a rough example. It seems this part of the minutes may have been an attempt to justify what the Fed has been doing-it was very prevalent in QE 1, not so much in QE2 and the returns since QE2 will show that.


In any case, the market's reaction? At first, muted. We just saw a quick burst and here's what we have now...

SPY drifting lower after the Fed release, around 3 p.m. a ramp up and a negative divergence that has thus far reversed the ramp up.


In any case, I have some new perspectives on 2011. The January trade list is up now, it's just starting to be populated. I'll cover themes later tonight.