Amidst the recent stock market volatility, one of my favorite companies went on sale and is now worth purchasing in my opinion.  The industrial giant known for Scotch Tape and Post-It Notes is a remarkably diverse and innovative company that lost less than the overall market in 2008. Since then its stock price has stayed in the black until this past July when it fell back to very attractive levels.

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Our first Fund in Focus article looks at our change  from an ETF that tracks Micro Cap stocks to a mutual fund using the same strategy.  In theory, two passively managed funds should have relatively similar results, but $1 invested in the DFA Micro Cap mutual fund (DFSCX) over the past three years  would have yielded $1.03 while a $1 investment in iShares Russell Micro Cap ETF (IWC) would have fallen to $0.92.  As usual, the devil is in the details.

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When we founded Acropolis as an independent firm nine years ago, there was one thing that we weren’t going to invest in: open-ended mutual funds.

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U.S. stocks traded pretty much flat on Friday as the latest income data combined with some doubts over the implementation of Europe’s latest, and unofficial, master plan.  For the week though the bounce was large, up 3.8% -- marking three-straight weeks of rebound.

Basic materials, energy and telecoms outperformed.  Consumer discretionary, utilities and financials were the laggards.

The commodity complex has bounced back too, the CRB Index is back above the 320 level, up 40 points in three weeks after plunging nearly 100 points April-September.  So that explains the basic materials and energy run of late (the two best-performing sectors for the quarter thus far).

It wasn’t especially apparent via stock-market activity, but the bloom is coming off the rose a bit as people are beginning to wonder if a fumbling Europe can really implement the plans they laid out on Wednesday night -- why this thought didn’t arise immediately is beyond me, more hopium I guess.  Besides, the announcement wasn’t even official as they delayed actual details until November.  This uncertainty was more obvious within the bond market as a little run for safety sent those prices higher (yields lower).

And despite all of the talk about a boosted, leveraged and more flexible EFSF, Italian govies have seen their yields rise again – the 10-year is back above 6%, which is seen as a dangerous level because of their economic stagnation.  If these bonds sell off much more we’ll see some real concerns that contagion has spread to a country that’s too large for current bailout plans to cover.  And this occurs even as the ECB provides massive support.

The strange and amateurish belief that a vague plan to pile more debt on top of a debt problem is going to solve Europe’s problems is getting plenty of firms in trouble.  The poster child is MF Global, their outsized (relative to the size of the firm) positions in euro-zone bonds has caused that firm’s collapse.  They’ll be filing for bankruptcy in the coming days as their short-term funding evaporates, ala Lehman Brothers.  Thankfully, MF Global is a much smaller firm and money funds have learned their lesson from the initial stages of this financial crisis back in 2008-2009.

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U.S. stocks bounced hard yesterday as EU countries agreed to boost the EFSF (bailout fund) and officials cornered the banks into accepting a 50% haircut on Greek debt (using the threat that they’ll otherwise allow Greece to go insolvent and wreck the banking system, which seems a rather easy bluff to call but with many GGBs trading at 40 cents on the dollar, why call them out). 

The market obviously liked what it heard; the rally extended the S&P 500’s gain for October to 13% (best monthly run since 1974).  Of course, large gains are a bit easier to come by following five-straight months of losses that totaled 17%.

Financials, basic materials and industrials led the market higher.  Consumer staples, health care and utilities were the laggards.

U.S. Treasurys have sold off 19 of the past 25 sessions as the yield on the 10-year, for instance, has backed up to 2.38% from the 1.71% it bottomed out at on September 22.  It’s pretty ugly when the yield backs up by 70 basis points and we’re still at the pathetic 2.4% for 10 years.  I would expect more of the same (stupidly low yields) as the Fed is not about to let rates spike and there’s surely plenty of trouble ahead that will send traders running for cover again. 

So EU officials stated that the EFSF will be boosted, China will be buying some of that debt and banks agreed to accept a 50% haircut on Greek debt – an event that is not supposed to trigger CDS (debt insurance).  I’m sure those who bought CDS see things a little differently.

These are unofficial statements as details have been delayed, which is the European way.  We went over all of this yesterday, so no reason to revisit it.  But what I forgot to mention was that even with the agreed upon forgiveness of Greek debt, their debt/GDP ratio will still stand at 125%, according to reports – a dangerous level alone, but add in no ability to grow the economy and it remains a death sentence.  Further, boosting EFSF to €1 trillion is not enough to take care of the debt that Italy and Spain alone must roll over the next couple of years.  In addition, that fund is being tasked with recapitalizing the euro-zone’s banks (if necessary) and buying the bonds of Greece and Portugal -- and all with newly issued EFSF debt.  Good luck Germany, that monkey on your back just morphed into Gargantua. 

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U.S. stocks rebounded from Tuesday’s losses as it was said the day’s economic data offset the fact that EU officials missed yet another self-imposed deadline regarding the latest and greatest debt fix.  Not sure why that story should receive any credence as the new-home sales data was hardly inspiring and while durable goods orders did beat expectations, the inventory data within that report showed activity is probably not lasting.  More on the economic reports below the click.

The more likely impetus behind the bounce was the report that Sarkozy will go begging to the Chinese to buy EFSF debt.  We’ve heard this one before, it ended with China saying no thanks.  But this time the Chinese apparently are more likely to do so as they are more aggressively diversifying away from U.S Treasurys (evident via last week’s latest TIC data) and it will give them bargaining leverage for more IMF voting rights. 

Energy, financials and basic materials led the rally.  Consumer discretionary, tech and utilities underperformed by the most. 

Well, as everyone should have expected, October 26 came and went with no great ground-breaking deal having been agreed upon, but today is a new day, and another chance for markets to get all juiced as the latest EU talks are long on words and extremely short on detail yet again – action isn’t needed, which is the hilarious aspect of this mercurial market.  Continued below…

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U.S. stocks fell for the first session in four as optimism that Europe will right its ship waned yet again, 3M became the first major company to miss earnings estimates in several quarters and the most-watched gauge of consumer confidence continues to slide.

Consumer staples and utility shares outperformed, as the increasingly mercurial investor shifted back to safety once again.  Financial, consumer discretionary and basic materials led the market lower.

3M Co. reported earnings results and became the first major to miss estimates in many quarters; firms have handily beat estimates for about eight quarters now as profit growth is much easier to achieve with significantly lower payroll expenses.  Is this miss by 3M the start of something?  My own expectation is that profit growth will turn meaningfully weaker by Q1 2012.

The ugliest aspect of yesterday’s trading activity was to watch crude power higher, hitting $93.17/bbl, even as stocks lost steam.  The crude market anticipates more Fed action (and why shouldn’t traders have this expectation after the comments from Tarullo, Dudley and Yellen over the previous days).  Stocks would normally rally too on this more-QE-is-coming news but the expectation reversal regarding Europe had an offsetting effect.

We mentioned yesterday that hoping the EU’s latest and greatest bailout plan would prove to be a success (and even a short-lived delay in this crisis is defined as success these days) was more a pipedream than anything – EU policymakers have shown themselves to be quite the fumblers.   Well, that analysis looks to be correct.  First EU officials issued a statement that today’s scheduled announcement of that plan was canceled.  Then just minutes later, and after European bourses summarily tanked on the news talks were canceled, they stated the “summit” was back on.  What will occur is the respective country leaders will meet but the finance ministers will not be involved.  I think it’s safe to say they don’t really have a plan at all.   More below the click…

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U.S. stocks got a lift from Caterpillar’s Q3 earnings results and the company’s raised guidance for Q4 – that increased guidance boosted optimism that weakness in Chinese factory activity is short lived.  The latest adjustment on a mortgage refinancing program and the hope (or a more accurately a pipedream) that EU ministers will get the next debt/banking industry backstop right may have also played a role.  EU officials are expected to unveil the next great bailout proposal tomorrow.

Basic material, financials and tech led the rally.  Telecoms, staples and utilities underperformed as all three closed lower.

As I talk about so often, we can’t get stock price higher without dragging the price of oil right along with it.  It’s my view this positive correlation is a result of the Fed juicing the market – if they’re going to push investors into riskier assets by pumping money into the system and making the return on safe assets horribly unattractive (from a rate scenario), then the geniuses within the FOMC cannot direct to which risky asset cash goes.  Crude closed up $4.10 to $91.50/bbl.  That’s a four-fold gain in percentage terms relative to the rally in stock prices, a jump driven by more Fed comments – both Dudley and Yellen (part of the FOMC’s Big Three) talked about the central bank rolling out more QE.

And on that note of the Fed pushing people into stocks as they zero out the return on safer assets,, it reminds me of a quote from the South Sea Bubble of the 18^th century.  When the president of Martins Bank (the Goldman Sachs of the era) was asked why he paid $500/share for South Sea shortly before it collapsed he replied:  “When the rest of the world is mad, we must imitate them in some manner.”  Whenever I hear people state that investors must buy stocks simply because the return on safer assets has been decimated by Fed action I think of that quote.  If one is going to buy stocks as part of a long-term investing strategy, then that is one thing.  However, those who are lurching into stocks for short to intermediate-term returns merely because returns on safer assets have been manipulated away by the FOMC, that is certainly a much more dangerous activity.

More below the click…

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U.S. stocks rallied hard on Friday as traders were juiced by comments from FOMC Governor Daniel Tarullo – he gave a speech Thursday night suggesting the Fed will buy more mortgage-backed securities.  The move sent the broad market, as measured by the S&P 500, to the highest level since the slide began in early August.  At its worst recent levels the S&P 500 was off by 20% from the April 29 three-year high.  Currently, the market is little more than 9% below that multi-year peak.

Consumer discretionary, basic materials and financials led the rally.  Telecoms, tech and consumer staples lagged, but all 10 of the major industry groups did close in positive territory. 

In that speech from Fed Governor Tarullo on Thursday he pointed to a very troubled housing market as he assesses this is the reason the money multiplier is dead.  Essentially what he means by that is the normal mechanism by which the Fed lowers rates, pumps money into the system and the velocity of money increases.  Today that is not the case as money isn’t changing hands as frequently as would otherwise occur in a normal environment.  Tarullo thinks it is housing; specifically it’s just too much debt as lower interest rates do not have the capacity to spark things right now. 

The thing I found most interesting about Tarullo’s comments was that he made a point of mentioning that such action (more bond buying) may have just a temporary and marginal effect on economic activity.  That is, they are willing to become even more aggressive, manipulating the market to a greater extent even as they suspect that the action cannot get us out of this mess.  I wonder if the geniuses within the FOMC ever think about the longer-term distortions they create by taking such action – namely by conditioning the market to ultra-low rates and pushing investors into risky assets merely because they erase the return (from a rate perspective) on safer assets.  I don’t pose this as a question because I know they don’t.  They are always willing to experiment, hardly worrying about adverse consequences, because they never accept blame for the troubles they wrought. 

More on what’s going on this morning below the click…

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U.S. stock indices ended mixed yesterday as the Dow Industrials and S&P 500 gained ground, while the NASDAQ Composite was unable to close above the cut line. 

The day’s economic data was mixed as we received a solid positive reading from a manufacturing gauge out of the Philly region (much better than expected as everyone thought it would post another negative print), but jobless claims and home sales disappointed.  More on this data below the click…

Financials, basic materials and energy led the broad market higher.  Tech and telecoms were the session’s worst performers as they closed lower.

Yesterday’s story from what’s become the European circus involved German Chancellor Merkel canceling today’s planned statement on the EFSF (bailout fund), obviously because an agreement hasn’t been met. 

So, just to keep the markets from tanking (well equity markets at least as European credit spreads continue to blow out) they announced more vague plans such as combining the EFSF with the ESM (European Stability Mechanism – a backstop that would actually operate with paid-in capital – unlike the EFSF which just rides on a bunch of guarantees.  Prior to yesterday, the ESM wasn’t supposed to be up and running until 2013 because the capital has yet to be supplied.  How it would get off the ground by mid-2012 now is beyond me.   If this all sound confusing, it is because EU ministers don’t have a plan at all – which should be obvious by now.  Instead, they simply announce a panoply of ever-changing plans on a daily basis. 

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