"If you're going to panic, do it fast and beat the crowd." ~ Jesse Livermore

Thursday, February 28, 2013

Jobs, factory, inflation data favor easy Fed policy

Jobs, factory, inflation data favor easy Fed policy | Reuters: "More Americans filed new claims for jobless aid last week, factory activity slowed in February and consumer prices were flat in January, supporting the argument for the Federal Reserve to maintain its very accommodative monetary policy stance. The reports come after signs of divisions at the Fed over its bond buying program aimed at stimulating the sluggish economic recovery. "If the Fed is looking for evidence to keep their foot to the floor on policy, they are still getting it," said Jim Baird, chief investment strategist at Plante Moran Financial Advisors in Kalamazoo, Michigan. Initial claims for state unemployment benefits increased 20,000 to a seasonally adjusted 362,000, unwinding the bulk of the prior week's decline, the Labor Department said. It said in a second report that consumer prices were flat for a second consecutive month in January as gasoline prices fell and food costs were unchanged after several months of gains."

There's a Feeling of Instability Bubbling Up - WSJ.com: " . . . these days to win a currency war. So long as global consumer-price inflation is low, estimates of spare capacity are high and central banks are willing to "look through" short-term inflation spikes, every country has access to the chief weapon needed to fight the war—ultraloose domestic monetary policy. Indeed, the yen's previous rise partly reflects the Bank of Japan's reluctance to expand its balance sheet as much as the Fed, BOE, or the European Central Bank. At the same time, the global prohibition on competitive devaluations appears asymmetric; countries that have intervened to prevent their currencies rising, such as Switzerland, have so far escaped censure. Goldman Sachs GS -0.60% argues this de-facto global stand-off over currencies represents an unofficial Global Exchange Rate Mechanism. But if the price of avoiding currency wars is even looser monetary policy, this brings risks of a different kind. How policy makers respond to possible new asset-price bubbles will be crucial in determining whether the rest of this decade is a replay of the '70s, the Noughties or something more benign. . . ."

TCW.com - And All Our Yesterdays: "Further, if money is essentially a measure, a unit of exchange, then how can Fed money printing (credit creation) truly and sustainably create wealth? Isn’t true wealth a function of the ability of a business or employee to provide or invent a good or service that has value to another? In that event, pumping up home prices may have some perverse second-order effects. For instance, say you are a renter. The Fed’s policies are helping to drive up not just the price of homes but also of rents. A “typical” young couple has to shell out more for rent today and has a bigger lifetime “nut” to pay in the form of future mortgage payments for that home they aspire to purchase. Do these policies make the couple wealthier – or simply transfer existing wealth? Is there not a fundamental distinction between rising home prices driven by the higher wages of a growing economy versus higher prices resulting from mortgage “price fixing” courtesy of the Fed’s QE?"

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Tuesday, February 26, 2013

Bill Gross: Be very afraid of the markets

Bill Gross: Be very afraid of the markets - The Buzz - Investment and Stock Market News: "Bond guru and Pimco (PTTRX) managing director Bill Gross isn't buying into the bull market. In fact, he's warning investors to be afraid, be very afraid, of how inflation and the flood of cheap money will affect all investments. Investors should be prepared to accept "lower returns on bonds, stocks, real estate and derivative strategies," Gross wrote in his monthly letter entitled "Credit Supernova!" Championing something of a bunker mentality, Gross told investors to buy Treasuries with shorter durations and buy gold or other investments that "you can sink your teeth into." Go outside of the U.S., he says. Buy currencies from countries "with less hyberbolic credit systems" including Australia, Brazil, Mexico or Canada. The U.S. won't fit that bill. He doesn't suggest totally eschewing stocks, but says investors should look to global stocks with stable cash flows. Gross has been warning investors about the potential downsides of the Federal Reserve's bond buying strategy for months, but the tone of this month's letter was decidedly more fearful. While the letter's title obliquely references the band Oasis, Gross opted to lead his monthly missive with an ominous T.S. Eliot quote rather than his usual song lyric: "This is the way the world ends... Not with a bang but a whimper. . . . "

It’s Time to Go 'Risk Off': "Insiders Are Bearish: Corporate insiders are selling stock at the fastest clip since late July 2011, according to some reports. The S&P 500 crashed 15% in a matter of weeks soon after that point — and it took the index about seven months to claw back those losses before moving higher. Sure, insiders might just be trying to take a little bit of profit while their company stock is at multiyear highs … but it could be more than that. Valuations Are High: And whether you’re an insider or not, it’s worth looking at your own portfolio and considering how your stocks are valued vs. historical norms. The S&P 500 has a trailing 12-month price-to-earnings ratio of 17.9 as of this writing vs. 15.1 a year ago; the Nasdaq-100 has a P/E of 16.6 vs. 11.1 a year ago; the Dow Industrials have a P/E of 15.4 vs. 14.4 a year ago. These figures are high not only compared to recent valuations, but also to historical norms. . . ."

Insiders now aggressively bearish - Mark Hulbert - MarketWatch: "This is worrisome because corporate insiders — officers, directors and the largest shareholders — presumably know more about their companies’ prospects than the rest of us do. If they were confident that the shares of their companies would soon be trading markedly higher, they wouldn’t be selling them now. Yet selling they are — at an alarming pace. Consider an insider indicator calculated by the Vickers Weekly Insider Report, published by Argus Research. The indicator is a ratio of all shares that insiders have recently sold in the open market to the number that they have purchased. For the week that ended last Friday, this sell-to-buy ratio for NYSE-listed shares listed stood at 9.20-to-1. That means insiders of these companies, on average, were selling more than nine shares of their firms’ stock for every one that they were buying."

Virginia in the Vanguard - The New York Sun: " . . . This is why, when the Constitution was written, it prohibited the states from coining money or emitting paper money or making “any Thing but gold and silver Coin a Tender in Payment of Debts.” This means that Virginia can’t make its own coins, but it can make gold and silver coins legal tender within the state. More than a dozen states are exploring doing just that, spurred, at least in part, by the American Principles Project and also by the collapse in the value of the fiat dollars being issued by the Federal Reserve. It’s unclear at the moment whether the measure in Virginia will clear the state’s senate. . . . "

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Saturday, February 23, 2013

Generational Theft Needs To Be Arrested

Canada, Druckenmiller and Warsh: Generational Theft Needs to Be Arrested - WSJ.com: " . . . The Federal Reserve's policies reinforce this short-term orientation. To offset weak economic conditions, the Fed's principal policy objectives appear to be twofold: suppress interest rates and raise stock prices. As a result Congress may be missing market signals and failing to see the costs of its spending addiction in time to undertake real reforms. Ultimately, economic fundamentals—not the promises of central banks—will determine the prices of stocks and bonds. But the deeper failing is one of essential fairness. The benefits of rising stock prices accrue to those who have already amassed wealth at the expense of those who are struggling to save. And failing to deal with runaway spending will burden the country's children with higher interest rates and a debt bomb that will come due in their lifetimes. Third, too many politicians appear more eager to divide the spoils of electoral victory among their own than to increase the size of the economic pie for all. The grab-bag of special tax favors under the guise of the recent fiscal-cliff deal is only the latest example. Crony capitalism and corporate welfare aren't just expenses we cannot afford. They are an anathema to economic growth. They deny opportunities to aspiring people and companies who seek to better their lot. They ration opportunity based on things other than merit and hard work. They further ensure that poor children—who already are disadvantaged by failing schools, inadequate health care and little access to necessary resources—will never get the chance to break the cycle of generational poverty through education. . . . "

Fed Easy Credit Becomes Inside Debate Focusing on Escape - Bloomberg: " . . . . Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co.; Jim Rogers, chairman of Rogers Holdings; Wells Capital Management Inc. and Goldman Sachs Group Inc. all have voiced concern about long-term bonds. The Jan. 3 release of the minutes from the FOMC’s Dec. 11-12 meeting illustrates investors’ sensitivity, Cohen said. Central bankers discussed possibly curtailing or halting their asset purchases this year. That surprised analysts and traders, sending the Standard & Poor’s 500 Index down 0.2 percent and pushing up yields on the benchmark 10-year Treasury note0.07 percentage point that day. James Bullard, president of the Federal Reserve Bank of St. Louis, says the “communication challenge” the central bank faces with the end of QE3 is comparable to all periods of easing. . . . Even though Bernanke said Dec. 12 that the transition to economic thresholds “doesn’t change our mid-2015 expectation,” money-market-derivatives traders since have accelerated their time frame for policy tightening. Forward markets for overnight index swaps, whose rates show what traders expect the federal-funds effective rate will average over the life of the contract, signal a quarter percentage-point advance around February or March of 2015, according to data compiled by Bloomberg as of Feb. 5. In December, these traders were pricing in a rate increase about June 2015. “There is no doubt that when the Fed pulls back you will see a big shoot upward in Treasury yields,” said Karl Haeling, head of strategic-debt distribution in New York at Landesbank Baden-Wuerttemberg, one of Germany’s largest banks. “There are a lot of people who think the only reason rates are here is because the Fed put them here. Nobody wants to be the last man standing.”

The 5 biggest investor mistakes of 2013 - Mark Hulbert - MarketWatch: " . . . . Mistake #4: Paying too much attention to politics. The panelists were united that good-quality companies are able to adapt to whatever the political environment may be in Washington. Finding and investing in them should be our focus, rather than trying to predict the outcome of our inscrutable political process. As one panelist put it: “Don’t let a politician tell you what to do in your portfolio.” Mistake #5: Being a dumb trader. . . ."

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Thursday, February 21, 2013

When Bonds Went Truly Bad

No One Remembers When Bonds Went Truly Bad - Businessweek: "All this consternation and kvetching—“headline risk,” traders call it—over a comeuppance in the bond market. Makes you wonder if investors and Wall Street, with its battalions of freshly hatched MBAs, have enough of a frame of reference for when a bond bear last truly happened: in 1994. . . .Today, according to the Leuthold Group, if corresponding interest rates were to shoot up a mere point from where they are now over 12 months, a T-bond maturing in February 2031 would sustain a total hit of between 6 percent and 11 percent (your yield gets subsumed by the bond’s plunging price)."

FINRA Offers Regulatory Road Map for 2013 | BakerHostetler - JDSupra: " . . . FINRA has identified algorithmic trading, high-frequency trading abuses and alternative trading systems as areas that will be carefully monitored to protect individual investors, as well as the integrity of the markets as a whole. The purpose of increased scrutiny of these systems seems to be a fear that these automated, computer-based systems may not be adequately equipped or capable of reacting to a market event without serious market disruption. 1. Algorithmic Trading - The move toward algorithmic trading in the securities industry continues to be an area of concern for FINRA. Algorithmic trading refers to the practice of designing an algorithm that is capable of executing pre-programmed trading instructions automatically and without human involvement. The ease of use and market risk factors associated with algorithmic trading make this practice appealing to market participants. However, automated trading raises significant concerns due to the perceived lack of a human fail-safe. . . ."

Asian Currencies Tumble. Yes, This Is A Global Currency War. - Forbes: "Market participants naturally suspect that the People’s Bank of China, the central bank, was behind the surprising accumulation of greenbacks.  Traders also believe that recent dollar purchases by China’s state banks are really on behalf of the central bank. Since early December, the meddling of the People’s Bank in the currency market has been evident but not, in the words of Reuters, “overwhelming.”  Stephen Green, the well-known analyst from Standard Chartered, estimates that the intervention last quarter was “to the net tune of $34 billion.” Central bank operations do not have to be large to be effective, however.  Traders, despite strong corporate demand for the renminbi, saw the signals from Beijing and have reined themselves in."

The Dow at 14,000: not as good as gold - NYPOST.com: " . . . . if you take one share of each of the stocks in the Dow index, their combined value as measured in gold is lower than it used to be. The price in paper money may be going up, but the real value is slumping. At about 14,000, the Dow Jones Industrial Average stands at nearly twice the 7,949 at which it stood on the day in January 2009 when President Obama first took the oath of office. But value of the stocks in the index has drifted downward; a portfolio of one share of each stock is worth only 8.3 ounces of gold, down from 9.3 ounces on Jan. 20, 2009. . . . In other words, it wasn’t the price of gasoline that was going up. It was the value of the United States dollar that was going down. This is the part of the policy partnership of Barack Obama and Federal Reserve chief Ben Bernankethat no one likes to talk about. What it means is that there’s little joy on the street — Wall Street or (especially) Main Street — even in a week when the Dow Jones Industrial Average touches a historic high of 14,000. Track the Dow in terms of gold, and you see what a collapse it’s been: The index was valued at 41.3 ounces of gold as recently as 2000. . . ."

The Fed’s Worst Fear - The New York Sun: " . . . Even now, in the absence of any shred of White House fiscal responsibility, the Fed faces a cruel dilemma. It can reduce market support, let bond prices fall and suffer the unhappy consequences. Or it can keep on its present course of trying to satisfy the beast by buying up further trillions of dollars in Treasury paper. The latter is the current course preferred by Chairman Ben Bernanke and Board of Governors bureaucrats notwithstanding the worries of regional Fed presidents..That course inevitably leads to inflation. Over the last four years, the damage to the dollar has been partly meliorated by global investors fleeing weak currencies elsewhere for the relative safety of the dollar. But there has to be a limit to how long that will be true. We already are seeing signs of renewed asset inflation not unlike the run-up that occurred in the first half of last decade. Stocks and farmland are up and housing prices are recovering from their slump. The wealth illusion from asset price inflation makes it insidious. Brendan Brown, London-based economist for Mitsubishi Securities, reminds us that asset inflation is usually followed by asset deflation, and that’s no fun, as the events of 2007 and 2008 testified. More seriously, asset inflation often presages a general rise in the prices of goods and services. Inflation can ultimately destroy the bond market, as it did in 1960s Britain when the socialist Labour Party was trying to save its sinking boat. No one wants to commit to an investment that might be worthless in 30 or even 10 years. Yet, through history, governments have inflated away their debts by cheapening the currency. That process is well underway in the Fed’s abdication to irresponsible government. If Fed policies continue, another huge tax, inflation, will weigh down the American people. The politicians will try to escape public censure, as they always do, by blaming it all on “price gouging” by producers, retailers and landlords. A substantial cohort of the press will buy into that phony rationale and spread it as gospel. The Fed’s dilemma is in fact everyone’s dilemma, given the universality of the dollar. . . . "

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Tuesday, February 19, 2013

Krugman: expansionary monetary policy, with currency depreciation as a byproduct

Feb. 15 (Bloomberg) -- Paul Krugman, Princeton University Professor of Economics, compares the United States economy to Japan in the 1990's. He speaks on Bloomberg Television's "Bloomberg Surveillance."


"what Japan, the US, and the UK are doing is in fact trying to pursue expansionary monetary policy, with currency depreciation as a byproduct"--Paul Krugman, NYTimes.com 

"At this point, then, we have private demand still severely depressed by the aftermath of the housing-and-debt bubble, while government spending is barely higher than it was at the height of that bubble. Of course the economy is still weak"--Paul Krugman, NYTimes.com 

"for those who still think that even more austerity is somehow the road to recovery, the question has to be, what category of spending, exactly, do you expect to rise? Business investment in the face of slack demand? Consumer spending when debt levels are still high and wealth has been savaged by the housing bust? What?"--Paul Krugman, NYTimes.com

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Saturday, February 16, 2013

Goldman Sachs braces for bond market blow up

Goldman Sachs braces for bond market blow up - The Term Sheet: Fortune's deals blogTerm Sheet: "Cohn told Bloomberg, "At some point, interest rates will go higher again, and all of the money that has piled into fixed income over the past three years, some of it will come out." Cohn, perhaps tellingly, noted that a bond crash would be "interesting" for Goldman. In December, Goldman's CEO Lloyd Blankfein said at a conference sponsored by New York Times that the risk of a bond market crash was growing and that investors appeared unprepared. What's more, Blankfein said Goldman was advising clients to increase their borrowing to take advantage of low rates. MORE: The old Goldman Sachs is back Goldman (GS) is taking its own advice. This month alone, Goldman has borrowed $8 billion from the bond market, including a three-part $6 billion debt offering, which was the firm's largest ever. Some of that is refinancing. But the borrowing is up from $5.2 billion in January a year ago. And Goldman has been swapping out some of its 3-year bonds for debt that it won't have to pay back until 2023."

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Thursday, February 14, 2013

John Taylor: Fed Policy Is a Drag on the Economy

John Taylor: Fed Policy Is a Drag on the Economy - WSJ.com: "Research presented at the annual meeting of the American Economic Association this month by Eric Swanson and John Williams of the San Francisco Fed is consistent with this view of credit markets. It shows that during periods of forward guidance, the long-term interest rate does not adjust to events that shift supply or demand as it does in normal periods. In addition, while credit to corporate businesses is up 12% over the past two years, credit has declined to noncorporate businesses where the low rate is more likely to be a disincentive for lenders. Peter Fisher, head of fixed income at the global investment-management firm BlackRock and a former Fed and Treasury official, wrote in September: "[A]s they approach zero, lower rates . . . run the significant risk of perversely discouraging the lending and investment we need." Ironically, the harmful effects of these interventions lead policy makers to expand them, which further increases their harmful effects. No one should want a continuation of this vicious circle. If the economy surprises a bit on the upside this year, we can hope that it results in fewer interventions by the Fed—perhaps a halt to asset purchases. This will bolster growth and help put the economy on a sustained recovery path."

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Tuesday, February 12, 2013

Shale Gas Will Fuel US Manufacturing Boom

Shale Gas Will Fuel a U.S. Manufacturing Boom | MIT Technology Review: "Now the ability to access natural gas trapped in shale rock formations, using technologies such as hydraulic fracturing and horizontal drilling, has lowered American prices to a fraction of those in other countries (see “King Natural Gas”). Over the last 18 months, these low prices have prompted plans for the construction of new chemical plants to produce ethylene, ammonia for fertilizer, and diesel fuels. Dow Chemical, for example, plans to spend $4 billion to expand its U.S. chemicals production, including a new plant in Freeport, Texas, that’s due to open in 2017. The plant will make ethylene from the ethane found in many sources of natural gas. (The last such plant to be built in the U.S. was completed in 2001.)"

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Saturday, February 9, 2013

Dr Doom: Clouds Ahead

The Economic Fundamentals of 2013 by Nouriel Roubini - Project Syndicate: "several risks lie ahead. First, America’s mini-deal on taxes has not steered it fully away from the fiscal cliff. Sooner or later, another ugly fight will take place on the debt ceiling, the delayed sequester of spending, and a congressional “continuing spending resolution” (an agreement to allow the government to continue functioning in the absence of an appropriations law). Markets may become spooked by another fiscal cliffhanger. And even the current mini-deal implies a significant amount of drag – about 1.4% of GDP – on an economy that has grown at barely a 2% rate over the last few quarters. CommentsSecond, while the ECB’s actions have reduced tail risks in the eurozone – a Greek exit and/or loss of market access for Italy and Spain – the monetary union’s fundamental problems have not been resolved. Together with political uncertainty, they will re-emerge with full force in the second half of the year. . . "

U.S. New-Home Sales Drop Blemishes Best Year Since 2009 - Bloomberg: "Purchases of new U.S. homes unexpectedly decreased in December, a temporary blemish as the industry wrapped up its best year since 2009 to emerge as a bright spot for the economy. The 7.3 percent drop in December sales to a 369,000 annual pace followed the prior month’s 398,000 rate that was faster than previously estimated, Commerce Department figures showed today in Washington. Builders sold 367,000 homes in 2012, the most in three years and the first annual increase in seven."

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Thursday, February 7, 2013

Expansionary Policy

Grand Mal Economics by J. Bradford DeLong - Project Syndicate: In the worst case, have the government step in, borrow money, and buy stuff, thereby rebalancing the economy as the private sector deleverages. CommentsView/Create comment on this paragraphThere are many subtleties in how governments and central banks should attempt to accomplish these steps. And, indeed, the North Atlantic region’s governments and central banks have tried to some degree. But it is clear that they have not tried enough: the “stop” signal of unanchored inflation expectations, accelerating price growth, and spiking long-term interest rates – all of which tell us that we have reached the structural and expectational limits of expansionary policy – has not yet been flashed. CommentsView/Create comment on this paragraphSo we remain far short of full employment for the third reason. The issue is not that governments and central banks cannot restore employment, or do not know how; it is that governments and central banks will not take expansionary policy steps on a large enough scale to restore full employment rapidly. Read more at http://www.project-syndicate.org/commentary/the-unreached-limits-of-expansionary-economic-policy-by-j--bradford-delong#FgxGbUloIrTPdklh.99

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Tuesday, February 5, 2013

Feds bungled foreclosure crisis

9 ways feds bungled foreclosure crisis- MSN Money: "1. No one's getting much. Only $3.3 billion is actually going to people who have been in foreclosure. The government tried unsuccessfully to review a small portion of 3.8 million foreclosed homes, The New York Times reports. But no one knows how many of those borrowers were harmed, so all 3.8 million will get the money regardless if they were wronged. That comes to $868 per home, writes columnist Joe Nocera. 2. Skewered by fees. The government got banks to hire expensive consultants to review every foreclosure from 2009 and 2010, Nocera reports. It was so slow and tedious that the consultant fees, sometimes coming in at $250 an hour, eventually topped $1 billion. "The feds and the banks finally threw up their hands," Nocera writes. "The settlement made the whole thing go away.". . . . Some banks spent much more on consultants than they did on actually helping those homeowners they abused. A now-bankrupt mortgage servicer called ResCap spent $250 million to review its loans. It will probably only pay $35 million to $60 million to homeowners who were harmed, reports American Banker. "This is Kafkaesque," an industry source told American Banker. "The reviews don't provide any closure [to borrowers], and their cost is going to be orders of magnitude beyond what banks pay out.""

RealClearMarkets - Uncle Sam's 'F' Rated Bonds: "That interest rate risk makes long-term U.S. Treasury securities lousy investments -- they have no place in most retirement portfolios. For rating agencies, Washington's monopoly on printing dollars makes it difficult assigning a conventional rating between AAA and D on its bonds. Those can't default but investors' capital is still at risk. Perhaps a special grade: "F" -- flee now before you get stuck."

Techno-pessimism: When will the good times return? | The Economist: " . . . As of 2005, however, something seemed to go wrong. Productivity in manufacturing slipped a bit and dropped substantially for the economy as a whole. The 2000s were also a trying period in terms of employment and wage growth. This has led some thinkers, including Mr Gordon, to conclude that the boost from IT has run its course. . . . The unknown is the unknown. So while I'm optimistic about the prospects for innovation and economic growth, it's worth acknowledging that there's no telling how it all will end up until well after the fact.

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Saturday, February 2, 2013

Managing Risk and Minimizing Losses

The Dangerous Fallacy in JPMorgan’s ‘Whale’ Report: "While the JPMorgan Chase report said what investors and regulators needed to hear – it provided a detailed analysis of what went on and outlined strategies to address it – the document would have been more convincing had its authors simply acknowledged that ultimately, not every risk can be anticipated and removed. Perhaps they know better – after all, they’re in the business of risk transfer – or perhaps it isn’t politically acceptable to say that, just as one day we’ll die, one day every organization will find that, despite careful planning, something goes awry. . . . It’s called career risk, and in this case, it’s related to compensation. Managers needed to do a better job of telling the team that they would still be “properly compensated” for safeguarding the bank’s well being and minimizing losses, even if they negatively affected the company’s overall profits. The traders need to understand that, in many circumstances, managing risk and minimizing losses can be of as much value to the firm as capturing profits."

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