The Fed has indicated the willingness to buy securities from savers and investors until we get job growth.  But what does this really mean?  Can the Fed induce hiring from further quantitative easing?

Bernanke to investors of capital: “take risks today, lend money to entrepreneurs so they can hire.  Act now, because we are buying bonds and you should expect market returns to be lower tomorrow.”

The problem with this scenario is the returns are crappy and the risks are high.  The economy is performing poorly.  Banks and Governments are loaded down with debt, firing workers and cutting budgets.  Consumers are making no money.  Taxes are presumably going up.  People are concerned that higher food and energy prices will completely blowup their budgets.  And any job created costs the employer a mint in tax and benefit obligations.

Imagine taking out a loan to fund a new company, hiring employees and spending 6 months to a year getting it up and running.  With the uncertainty in this environment, how do you create an accurate or even relevant budget?  What might your raw material costs be a year from now?  Where will interest rates be if you need a line of credit?  Is the government going to mandate higher employee benefits or institute more costly regulation?  What tax rate will you be charged?  Are you going to have a tariff slapped on your imports?  What industry might the government subsidize?

I have my doubts that infinite easing will be a magic catalyst to 2.5 million new jobs.  Perhaps one would be smart to get out in front of some forth coming spurt of economic activity, but the uncertainties and risks seem awfully high.

We can also construct a second interpretation.  If one reads between the lines and listens for the hints and innuendos, the Fed Chairman may be communicating a more sobering message.

Consider the stereotypical cocktail party analogy, a small, planned get together.  Well, it got a little out of hand and extended into the wee hours of the morning.  The police showed up and some of the rowdier crowd had to be bailed out of jail.  Someone drove their car across the neighbors’ lawns, tore up the new sod, and collapsed some front porches.  Additionally, there has been severe damage inflicted upon the party premises, the house your parents built.

Is Chairman Bernanke saying, “I’ve taken some of your savings; and, by the way, some of your kid’s education money and grandmother’s retirement stash.  I’ve posted bond to get you out of jail, and put a little gas in your car.  I will try, as long as possible, to hold off the repo-man and your credit card companies.  I apologize for spiking the punch a bit, but this got out of hand.  You need to sober up, take a shower and get a real job.”

This is not an easy road, but perhaps the only path out of the dark.  Governments should not be throwing parties.  Banks need to stop wagering with each other on who will throw the next great party.  Are the parties the only game in town?  When governments tax labor and subsidize parties we end up with no one working and massive hangovers.

Will the current Fed monetary experiment cause yet another party?  If so, it could be the biggest ever and we would thus expect some DOA partygoers arriving at the local emergency room.

Or will our Chairman hold off Vinnie long enough for us to use our brains, brawn and God given talents to get back on the righteous growth path.

Each scenario is laden with market challenges.

YUM Brands has been a leading performer in our stock portfolio.  If scenario 1 ensues we could see fuel, real estate and food costs go up significantly.  YUM would potentially face some margin issues.  If we tighten our collective belts, YUM may see a hit to their growth rate or even their top line.  We have recently become more risk adverse; YUM has struggled to regain recent highs, has a trailing P/E of over 20 and was thus sold on Friday.

With the selling of a stock like YUM, we will incur a tax liability.  We always account for such in our decision, but there are currently additional factors meriting consideration.  We see a greater probability of higher future tax rates on capital gains income.  In such a scenario, one prefers to incur the tax consequence at today’s rate rather than risk paying more tomorrow.

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For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, Douglas R. Terry, CFA is reachable at: dterry@4kb.d43.myftpupload.com