Ed’s Daily Notes for July 23rd   7 comments

Bloomberg: Bernanke Seen Tapering QE to $65 Billion in September in Survey

Federal Reserve Chairman Ben S. Bernanke in September will trim the Fed’s monthly bond buying to $65 billion from the current pace of $85 billion, according to a growing number of economists surveyed by Bloomberg News.

Half of economists held that view in the July 18-22 survey, up from 44 percent in last month’s poll. Even as expectations of a September taper rose, 10-year Treasury yields continued to fall last week from an almost two-year high after Bernanke said reducing bond-buying wouldn’t constitute policy-tightening.

…None of the 54 economists surveyed expects the Federal Open Market Committee to begin paring its purchases at its meeting scheduled for July 30-31. In its first trim, the FOMC will probably cut monthly bond buying by $20 billion, with purchases divided between $35 billion in Treasuries and $30 billion in mortgage-backed securities, according to the median estimate of economists.

The central bank will probably halt the asset purchases in the second quarter of next year, according to half of the economists. Twenty-four percent forecast the FOMC will end so-called quantitative easing in the third quarter of 2014.

Be prepared to get out of the markets before mid-September, unless the economy underperforms before then. Note that last part is a strong enough possibility to make it worthwhile to remain in the markets for now. Even if the economy tanks, the markets will do just fine as long as Uncle Ben keeps tossing money from his QE helicopter.

Bloomberg: Biggest Banks Face Fed Restoring Barriers in Commodities

This is long overdue:

The Federal Reserve’s review of its decision to let banks store, transport and trade raw materials signals a potential rebuilding of the wall between banking and commerce that legislation and rulemaking have eroded.

The central bank said July 19 that it’s reviewing a decade-old decision that physical commodities are “complementary” to banking, allowing lenders such as Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM) to operate in both industries. Goldman Sachs Group Inc. (GS) and Morgan Stanley may be less at risk from the review as some businesses owned before the firms became bank holding companies in 2008 are grandfathered.

The move into physical commodities exposed the biggest banks to additional risks and allegations of price manipulation, creating potential legal liabilities and threatening to damage their reputations. The shift also weakened the barrier between government-insured banks and other commerce established by the 1956 Bank Holding Company Act.

“What the Fed has to do, what they are doing, is setting boundaries where the banks really will pull back into what their primary business is,” said Marty Mosby, an analyst at Guggenheim Securities LLC in Memphis, Tennessee. Regulators are “trying to re-envision how they should draw these boundaries. They got kind of blurred.”

The Senate Banking Committee’s Subcommittee on Financial Institutions and Consumer Protection, led by Ohio Democrat Sherrod Brown, is holding a hearing today on banks’ investments in physical commodities assets.

The reason why banks shouldn’t be involved in physical commodities, specifically warehousing them, is due to the conflict of interest involved with their investment banks. Consider this scenario: A bank could store up a warehouse with a specifically traded metal, then bid up the price of the metal with their investment bank. Then they could dump the metal on the market at the higher price. Once the price is down, they could perform the reverse activity, shorting the metal to get the price down further, and then accumulate it.

If you want to know why oil prices seem to act strangely, look no further than this:

Physical commodities businesses generated $1 billion in revenue in 2012 for the 10 largest global investment banks, according to data from industry analytics firm Coalition Ltd. That was down from $1.47 billion in 2011 and represented one-sixth of overall commodities revenue.

Storage and transportation of oil, such as tanker businesses, accounted for more than half of the physical revenue each of the past two years, said George Kuznetsov, head of research for Coalition. Banks also generated revenue from electricity and natural gas production facilities, power grids, warehouses for storing base metals and vaults to house precious metals, he said. [Bold part added by me]


7 responses to “Ed’s Daily Notes for July 23rd

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  1. Buy and hold wins again
    Commentary: Easy ways to diversify and spread risk


    Buy and Hold is not the rush day trading is nor does it generate a lot of comment on a blog but it is a safer way to invest and make money.

    • For most retail investors I think this is good advice. I’m not going to run the numbers, but my guess is buying the SPY once a month with an equal amount invested each month, would have even done better.

      • Trader, you and w_seattle are the only two day/or very short term traders who I’ve seen make money in good time or bad. You both use options, you cut your loses when you have to, and each trade appears to have an “out”. I enjoy reading how each of you play the market.

  2. What do folks think the best “end of QE” investments are?

    • Cash.

      • Surely there is some way to profit from this. I’m not saying it’s easy to figure out, but what happened a couple of weeks ago when there was a reaction to Bernanke’s words and people thought QE was ending sooner rather than later? Or is that not a good comparison?

    • Clearly anything that is short bonds. So TBT is up from $58 to $73 since May 2nd when the job report signaled that QE could start tapering.

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