Posts Tagged ‘ Federal Reserve ’

Policy Driven Markets are Treacherous

December 10, 2015
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Policy Driven Markets are Treacherous

Volatility in the stock market is rising, intraday swings more violent, and high-to-low ranges increasing. The lurching action of the market is not driven by fundamentals, it’s difficult to profit from, and disconcerting. There isn’t a single item to pinpoint with respect to market angst, rather, a combination of factors, leading to manic sentiment changes. The sweeping issue of late-2015 is the extent to which global financial markets remain policy driven. During the financial crisis and subsequent few years, the degree of governmental and regulatory involvement in the economy and markets was prudent. Letting a crisis flare served no one. However, it’s worrisome that markets are still sooooo policy dependent 7-years into a recovery. One shudders to think what will happen if the economy really slows. China markets sit...

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ISM sinks to post-2009 lows; Industrial Economy Recession a Catch 22 for Fed

December 2, 2015
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ISM sinks to post-2009 lows; Industrial Economy Recession a Catch 22 for Fed

November ISM sank to the lowest level since 2009. Stunning, that the ISM (Institute for Supply Chain Management) survey, formerly known as NAPM (National Association of Purchasing Managers), printed 48.6, the lowest level since the throes of the financial crisis. For perspective, the last time the ISM printed sub-48, in June 2009, the S&P was 900. Today, at 2,100+, the market is a cool 134% higher. The S&P is up by 1,200 handles, after having earned approximately 620, the cumulative EPS for the market from 2010-2015. The market is up at a much faster pace than earnings as the multiple swelled from 12x to 17x. What a 6-years. Awkward that December marks the potential lift-off, delayed that is, of a sea change in Fed policy: the end of ZIRP (zero interest rate...

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First the Japanese Yen and then Gold – There is No Safe Haven Currency Panacea

March 1, 2012
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First the Japanese Yen and then Gold – There is No Safe Haven Currency Panacea

Beware of the one-way, one-speed runaway train! Usually in the normal chain of events the train stops, lets the passengers off, turns around, and starts going the other way. In a rare circumstance, all hell breaks loose and the train can’t be turned around and runs off the track and over the cliff. In the investment world it is rare to find this type of “accelerating in your favor (or against you)” investment theme. Two recent moves highlight how risks can be largest in the most comfortable havens. In less than a month, the seemingly invincible Yen has sold off from 76 to 81 (the USD dollar now buys 5 more) which is a 6.6% move, and a very large one-month move for the currency market. Not to be...

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The Economic Process of Deleveraging Part Two – Why the US is Well Positioned

February 22, 2012
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The Economic Process of Deleveraging Part Two – Why the US is Well Positioned

The differences between the US situation post-financial crisis and Japan in 1990 are stark. The previous post outlined how extreme things got in Japan and how ahead of itself the Japanese stock market, real estate market and economy got. While Japan was exposed to “extreme extremes” the US economy experienced imbalances that could be worked off much more quickly. Real Estate Excess Has Been Wrung Out Over 5-years The US experienced multiple years’ worth of double digit real estate gains. The gains were spectacular and fueled by credit standards which continued to loosen until the point where the housing market evolved into the concept of “renting with the option to own”. When mortgage financing was willing to underwrite this type of one-way asymmetric risk the party was bound to...

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Operation Twist – What the Fed May Announce Today and the Implications

September 21, 2011
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Operation Twist – What the Fed May Announce Today and the Implications

The Federal Reserve is likely to announce additional easing measures at the conclusion of the two-day Fed meeting today. Additional easing is anticipated by the market but there are a number of uncertainties related to the scope of what the Fed will implement. The most focused on initiative is called “Operation Twist” which is jargon for selling shorter-term Treasury note holdings (which are yielding a number of basis points which can be counted on one hand) and reinvesting the proceeds out the maturity curve. The action has the effect of increasing the duration of the Fed’s treasury holdings and effectively taking duration out of the market. The System Open Market Account (SOMA) is the account where Fed purchased securities reside. It has been estimated by Brian Sack’s New York...

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Flow of Funds Household Net Worth – US Making Progress

September 19, 2011
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Flow of Funds Household Net Worth – US Making Progress

On Friday, the Federal Reserve Board released the quarterly Flow of Funds data which measure the US household sector’s assets, liabilities, and net worth. The data are released with a lag as we just received Q2 measurements, two and a half months after the calendar quarter came to a close. While the level of net worth declined very slightly from Q1 to Q2 (25 basis points) the y/y growth rate in net worth (wealth) actually accelerated from up 5.9% in Q1 to up 8.1% in Q2. 8.1% growth rates are not sustainable nor do they need to be. The strong growth rate in the second quarter is a function of depressed markets in last year’s second quarter coupled with a market rally in June 2011. The market is already...

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Charles Evans Dual Mandate Responsibilities Speech – Goes Too Far

September 8, 2011
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Charles Evans Dual Mandate Responsibilities Speech – Goes Too Far

Yesterday, Charles Evans who is the ninth president of the Federal Reserve Bank of Chicago and a voting member on the FOMC, gave a speech at the European Economics and Financial Center in London. This speech goes too far with starting to push the Fed towards more stimulus as the returns from additional stimulus diminish. The debate revolving around additional Federal Reserve accommodation also made its way to the WSJ this morning. I believe that the economy is actually much stronger than is being presented by the media. Yes the unemployment rate is 9%+ and it has been tough to work it down, but the Fed can do little at this point to actually create jobs. The incremental returns from additional monetary stimulus aren’t needed and become risky with...

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Is yesterday’s 5% rally sustainable?

August 10, 2011
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Is yesterday’s 5% rally sustainable?

Why was the market up 5% yesterday after the Fed meeting? At first the market sold off 2%. Subsequently, the market came back to unchanged and rallied another 5%. Whoa. Our “green light” to buy worked out, if just for a day. Of course what everyone cares about is what to do going forward. We remain skeptical of a market crash based on something as mundane as a Fed statement on the economy or a Standard & Poor’s statement on the credit worthiness of the US. These are absurd reasons for a market crash though we remain vigilant of real reasons for a market crash. 1) Credit availability and liquidity really drying up across the global economy 2) An actual recession – there have been enough fears of one, and...

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