Economy looking better

[dan_s]

Cut from this week's Leeb's Income Preformance newsletter.

The Commerce Dept. said Tuesday that the economy rose at a 2.5% annual rate in the third quarter, up from its initial estimate of 2%, thanks to stronger consumer spending and exports.

But the Fed's new projection is that the nation's unemployment rate, currently at 9.6%, won't drop below 8% until 2012.
Dan's take: If so, Obama is toast.

The economy is seen expanding 3%-3.6% in 2011, up from 2.4%-2.5% this year but below the Fed's June forecast for 2011 of 3.5%-4.2%. The revised projections are further evidence, if any was needed, that the Fed is likely to keep short-term rates low for a long time yet. They also throw cold water on the possibility, voiced by some, that the Fed wouldn't proceed with its current plan to buy $600 billion in Treasury securities via its second round of quantitative easing (QE2).
Dan's take: QE2 means higher oil prices.

After the strong September-October stock-market advance, the focus in recent weeks has been on the possible negative impact of QE2 (including higher inflation), followed by the return to center stage of both the euro debt crisis and North Korea's belligerence. Don't forget the concerns that the economy of China, an increasingly dominant global factor, will slow down.

Back on the plus side, though, are such factors as rock-bottom interest rates, strong corporate earnings and continued (and possibly improving) growth for the U.S. economy. Over time, QE2 should provide a tailwind for stocks and commodities (but not bonds).

The money that investors have in bonds should be moved to the energy sector MLP's on our new MLP Watch List. Current bond holders have a lot more risk than they realize. Investors seeking high yield, can eliminate a significant amount of the risk on MLp's by selling in-the-money covered calls.

Happy Thanksgiving!

[dan_s]

Oil prices edged above $84 a barrel Thursday as a rally sparked by improving U.S. and German economic indicators endured amid light holiday trading.

By early afternoon in Europe, benchmark oil for January delivery was up 36 cents to $84.22 a barrel in electronic trading on the New York Mercantile Exchange. The contract gained $2.61, or 3.2 percent, to settle at $83.86 on Wednesday.

Markets in the U.S. are closed Thursday for the Thanksgiving holiday.

A surge in U.S. stock markets Wednesday, which was fueled by positive signs about the U.S. economy, buoyed oil traders' hopes that demand for fuel will improve.

The Dow Jones industrial average rose 1.4 percent after reports showed U.S. incomes rose last month and consumer spending climbed for a fifth month while fewer people claimed unemployment benefits last week.

An unforeseen rise in the Ifo German business confidence index, which in November hit its highest level since reunification, also helped boost oil prices.

Some analysts expect strong crude demand from developing economies and loose monetary policy in developed countries to push oil prices higher next year.

"Oil demand is set to hit a new record in 2011," Bank of America Merrill Lynch said in a report. "Increased capital flows to emerging markets, the wealth effect created by rising asset values, and lower refinancing costs will help oil hit $100 in 2011."