Tsunami of Cash!

The tsunami of cash on the side lines.

The determination of future of the economy is the money supply and cost of money.

We have lots of money supply and cost of borrowing is going down.

The hoards of cash in the system are caused by

US Government:

1. Economic Stimulus Act of 2008 (2-13-08): 170 billion

2. Housing and Economic Act of 2008: 130 billion

3. Emergency Economic Stabilization Act of 2008 700 billion

Total liquidity provided to the system 1,000 billion

Federal Reserve:

1. Term Auction Facility: 1,420 billion

2. Purchase on commercial paper market potential 1, 550 billion

   Total potential liquidity provided by the FED 2, 970 billion

The total potential injection of liquidity into the system thru other buyout guarantees and the numbers stated above has exceeded : 4 trillion dollars. This do not include actions taken by European and Asian central banks. There is no lack of liquidity out there, the current situation of capital market decline is caused by fear. Historically speak over optimism or over pessimism will not last.

The cost of money on all fronts are is sliding:

1. LIBOR from 3.94% (September,08) to 2.18%. (Current)

2. The fed discount rate reduced 2.25% (September,08) to 1.25% (Current)

3. The benchmark federal funds rate 2.03% (September,08) to 0.67% (Current)

The widening yield curve of Junk bond yield compares to Treasury yield is at 16 percentage point. This is the widest ever yield curve has gotten. When the yield curve being to tighten as investor shift to riskier, there will be a tsunami of money flowing into bonds and equities.

The hoards of cash in the system and low cost of money had caused the bull run in the stock market post September 11, 2001. We will be witnessing a similar run in the stock market as other are busy looking at the wreckage of credit crisis. The US stock market is setup to be forward looking, it will recover much sooner than the economy.

Post Election Rally

John McCain Wins: Policy Changes

-Lower taxation on capital gains: McCain is calling for a cut to the capital gains tax cut and an increase in the amount of stock losses that investors can deduct from their income.

-Lower taxation on 401k accounts: He would allow those over the age of 59 1/2 to withdraw up to $50,000 from a 401k account at lower tax rates than they might otherwise face.

-Small business incentives through tax relief to spur economy

-Lowered tax rate for corporations: McCain wants to lower the top corporate tax rate to 25% from 35%.

Result: Sustainable rally

Barack Obama Wins: Perceptual Changes

-Obama favoring media, such as NBC, CNN, Bloomberg, which portray a negative view on the economy, turns positive.

-Regardless of change in policy takes into effect or not, small businesses will benefit which will result in short term rallies, as consistent with the past.

-Obama in office will be viewed as a positive internationally, especially those regions in the Middle East and Europe.

-Obama supporting investors who are selling off the market buy back in post election.

Result: Duration of rally questionable, depending on Obama’s economic advisors.

Conclusion: There should be a rally regardless of whether McCain or Obama becomes the next US president.

Looking Foreward, Not Backwards

The media is confusing many investors with the avalanche of financial information.

Main confusion is: What are leading indicators? What are trailing indicators?

Trailing indicator is an economic measurement of how we did economically in the previous days, months or years. For example, it is like telling how the weather in XYZ was last week, but it wouldn't let you know whether to put on a sweater or just a T-shirt. Two of the most popular trailing indicators are the GDP and quarterly earning's announcement. Both the GDP and quarterly earnings tell us how the economy had performed 3 months ago. It should not be use to predict how the economy will perform 3 or 6 months from now.

We can expect a negative GDP for the upcoming quarters, but many will be confused and think that this is where the economy is headed towards, but GDP only shows us how our economy was for the past 3 months. It adds no value in predicting the direction of the economy.

Leading indicators or controlling economical indicators, as I would like to call them, predict/even determine the state of the economy in 3 months to even a year from now. Two of the key controlling indicators of the economy are the supply of money and the interest rates: LIBOR (Cost of banks to borrow from each other).

We are seeing the supply of money increased in this country by 2 trillion dollars -1 trillion from the various actions taken by the US government, and more than 1 trillion being injected into the system from the Federal reserves thru the various auctions.

We also see that the LIBOR rate had came down from 5.24% (December 2007) to 3.12% (Current). This is a significant sign showing that our credit is beginning to flow again.

The bottom line: Investor should stop looking at the rear view mirror while investing.