Archive for the ‘Federal Reserve’ Category

Ed’s Daily Notes for August 26th   1 comment

Financial Times: François Hollande purges government after leftwing revolt

Plas brought this up yesterday:

François Hollande has purged his embattled Socialist government of leftwingers opposed to EU austerity after a revolt led by Arnaud Montebourg, the flamboyant economy minister.

Mr Montebourg quit the cabinet on Monday, delivering a blistering attack on what he called “absurd” austerity policies – supported by Mr Hollande – which had brought about “the most destructive crisis in Europe since 1929”.

The outspoken minister said in a televised statement that the eurozone’s fiscal stance was “the cause of the unnecessary prolongation of the economic crisis and the suffering of the European population”.

The cabinet crisis was triggered by figures this month showing there had been no growth in the French economy in the first half of the year, with unemployment continuing to rise.

The economic gloom alarmed the left, already worried by the deep unpopularity of the government. An Ifop poll at the weekend showed Mr Hollande’s approval rating at just 17 per cent, with prime minister Manuel Valls plunging nine points to 36 per cent.

This presents a unique market situation. On one hand, France moving farther away from Germany politically would destabilize the European Union. On the other hand:

Bloomberg: Draghi Pushes ECB Closer to QE as Deflation Risks Rise

Mario Draghi just pushed the European Central Bank closer to quantitative easing.

With euro-area data this week likely to show the weakest inflation since 2009, the ECB president used a high-powered central-banking conference in Jackson Hole, Wyoming, to warn that investor bets on prices have “exhibited significant declines.”

Stocks rose, the euro fell and bond yields dropped to record lows today as the comments fanned speculation the ECB is finally heading for a form of monetary stimulus it has long avoided. Draghi previously said that a worsening of the medium-term inflation outlook would provide a reason for broad-based asset purchases.

The Aug. 22 speech “was a major event and marked a turning point in ECB rhetoric,” said Philippe Gudin, chief European economist at Barclays Plc in Paris. “We think the recent economic developments have increased the chance of outright QE as the next step.”

From a market perspective, central bank action always trumps politics (contrary to popular opinion). One can argue the ECB should have done this several years ago, although I don’t: As we have seen in the U.S., QE only creates economic window dressing by artificially pumping up markets and allowing banks to sell overpriced assets to the Fed (instead of lending money to truly help the economy). If Europe wants to pursue this, expect European markets to do well.

But what about the U.S.? With the Fed ending QE this Fall, around the same time we will possibly getting ECB action, the effect on the world economy should go like this: Dollar rises in value, euro falls, U.S. exports to Europe fall, European exports to the U.S. increase. However, because most European products tend to be high-end, unless the euro falls through the floor (which would require an exceedingly large QE from the ECB, which is not expected), European exports to the U.S. have limited upside. Overall, I would expect the U.S. exporters to be hurt by this news.

As an aside, I would also expect China to be hurt by this news, being effected in the same way as the U.S. If it hurts the Chinese economy severely enough, we might even see the Chinese de-pegging the yuan from the dollar. But this is speculation on activity at least a year away (more likely several years away). Honestly, it is hard to say what the Chinese may do.

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Ed’s Daily Notes for August 25th   1 comment

For the week ahead, the big event will be the release of the second guess on 2nd Quarter U.S. GDP, coming Thursday at 8:30 am EST.

For earnings reports, I get Prospect Capital (PSEC) today, and SeaDrill (SDRL) on Wednesday. Both stocks are currently in my 401(k), which I use for long-term holdings.

Bloomberg: Jackson Hole Theme: Labor Markets Can’t Take Higher Rates

Global central bankers led by Federal Reserve Chair Janet Yellen said labor markets still have further to heal before their economies can weather higher interest rates.

Even as they signaled international monetary policies are set to diverge as economic recoveries increasingly differ, officials meeting over the weekend in Jackson Hole, Wyoming, placed jobs at the center of their decision making by saying stronger hiring and wages are still needed to drive demand.

The focus on jobs suggests the Fed and Bank of England will tighten policy within a year as their economies show signs of strengthening. By contrast, European Central Bank President Mario Draghi and Bank of Japan Governor Haruhiko Kuroda acknowledged they may be forced to deploy fresh stimulus.

Making her debut as Fed chief at the annual central bankers’ conclave in the shadow of the Teton mountains, Yellen said while U.S. hiring has improved and the debate at the Fed is shifting toward when “we should begin dialing back our extraordinary accommodation,” there is still a “significant” underuse of the workforce, and the labor market has yet to fully recover from the worst recession since the Great Depression.

Yellen can cry about “job market problems” all she wants, but she is facing an increasingly hawkish FOMC. As QE nears an end in October, those hawks will become louder.

Yahoo News: Iran says it downed Israeli drone over nuclear site

Iran’s elite Revolutionary Guard said it has brought down an Israeli stealth drone above the Natanz uranium enrichment site in the centre of the country.

This news is from Iran, so take it for what it is worth. And I would normally ignore it, except for the fact recent news stories have reasonably speculated at a potential Israeli strike in Iran. If you are dabbling in the oil markets, keep this in mind.

Posted August 25, 2014 by edmcgon in Economy, Federal Reserve, News, Stocks

Ed’s Daily Notes for August 21st   Leave a comment

Wall Street Journal: Fed Debates Early Rate Hikes

Federal Reserve officials debated at their July policy meeting whether they might need to raise interest rates sooner than expected in light of a strengthening recovery, but they were restrained by lingering doubts about whether the economy’s gains would persist.

The minutes of the meeting, released Wednesday with their regular three-week delay, show an intensifying debate inside the central bank about when to respond to a surprisingly swift descent in the unemployment rate and a pickup in consumer prices.

Some Fed officials say this long-sought economic progress warrants moving toward tighter credit soon, but they were outnumbered at the meeting by those who wanted more evidence before signaling that rate increases are on the way. The minutes don’t identify participants by name or specify the number who held certain views.

Translation: Markets will continue their “bad economic news is good, and vice versa” for awhile. However, the Fed needs to be watched for signs they aren’t seeing the economy the same way as the markets are.

The search for clues on rate-hike timing now turns to Fed Chairwoman Janet Yellen’s address Friday at a central-bank symposium in Jackson Hole, Wyo. The conference is focused on labor markets and Ms. Yellen will update her views on how they are evolving.

She has argued through her first six months on the job that an abundance of part-time workers and long-term unemployed, in addition to soft wage growth, suggest labor markets and the broader economy weren’t near overheating.

Steven Blitz, chief economist at ITG Investment Research, said he expected Ms. Yellen to revisit these points Friday, to indicate her patience about raising rates. “She doesn’t want the market getting too far in front of the Fed,” Mr. Blitz said.

Posted August 21, 2014 by edmcgon in Economy, Federal Reserve, News

The Week Ahead: Ed’s Daily Notes for August 18th   Leave a comment

Here is the calendar for the week ahead, which looks pretty slow:

TUESDAY: The U.S. Consumer Price Index report for July will be released at 8:30 am EST. Home Depot (HD) will also be releasing their quarterly earnings report.
WEDNESDAY: The Federal Reserve’s Open Market Committee meeting minutes from their July 30th meeting will be released at 2 pm EST.
THURSDAY: U.S. Weekly Jobless Claims report released at 8:30 am EST.

And now for an editorial…

Time: The Coming Race War Won’t Be About Race

I haven’t discussed the situation in Ferguson, Missouri, mainly because I haven’t had anything to contribute to the discussion. Fortunately, Kareem Abdul-Jabbar takes care of that for me in the editorial above.

However, while he nails it with most of his editorial, I have to take exception with one point he made:

I’m aware that it is unfair to paint the wealthiest with such broad strokes. There are a number of super-rich people who are also super-supportive of their community. Humbled by their own success, they reach out to help others. But that’s not the case with the multitude of millionaires and billionaires who lobby to reduce Food Stamps, give no relief to the burden of student debt on our young, and kill extensions of unemployment benefits.

Food stamps and unemployment benefits don’t create opportunities for the poor. That is only the “bread” part of the infamous “bread and circuses”. It didn’t solve poverty in Ancient Rome, and it won’t do it in modern America either.

That said, the burden of student debt is something we need to be considering. My view is we need to be targeting certain educational degrees with student grants, instead of using the broad stroke loans for all college educations. If we need more engineers, then let’s give grants to college students studying engineering. If we need more computer programmers, give grants to those students too. If we need more auto mechanics, provide grants to the trade schools for those students. We don’t just need a generation of students with ANY college degree. We need them educated in fields where “we the people” have a need. Unfortunately, this needs to be done intelligently, which means the politicians can’t do it.

Posted August 18, 2014 by edmcgon in Economy, Editorial/opinion, Federal Reserve, News, Politics

August 1st: Ed’s Daily Notes and Traders Corner   25 comments

The S&P 500 levels to watch today:

UPSIDE: 1948 (bottom of the Bollinger Bands), 1952 (July 10th’s low and the 50 day moving average), 1955 (July 17th’s low), 1959-1960 (3 data points), 1962 (2 data points), 1965 (4 data points), 1967-1970 (5 data points and June’s high), 1972-1986 (25 data points and the 20 day moving average), 1989 (July 23rd’s high), 1991 (July 24th’s high and the all-time high), and 1997 (top of the Bollinger Bands).
LAST CLOSE: 1930 (July 31st’s low).
DOWNSIDE: 1924 (May’s high), 1910 (100 day moving average), and 1882 (150 day moving average).

S&P 500 Daily Momentum: Bearish
S&P 500 Daily Overbought/oversold: Neutral (leaning oversold)
S&P 500 Weekly Momentum: Bearish
S&P 500 Weekly Overbought/oversold: Neutral
S&P 500 Futures: Negative
Overall: In spite of the futures and the momentum, I am going to make a contrarian call today: Watch for the bounce. The McClellan Oscillator is at -87 (with -60 being oversold), which is the lowest I have seen it recently. At the very least, the markets should finish flat today. If we get a strong drop at the open, I would recommend a UPRO play if you see the momentum shift positive after the open. But I would also recommend selling UPRO before the end of the day, because the bearish momentum is still pretty strong. Next week could be ugly.

And now for the daily notes…

Bloomberg: No-Exit Strategy May Be Fed Burden in Unwinding Stimulus

The Federal Reserve is trying to change as little as possible as it crafts its strategy to exit from record stimulus. The trouble is financial markets have changed so much that the still-developing plan may prove costly and ultimately unworkable.

The approach, sketched out in the minutes of the Fed’s June 17-18 meeting and in officials’ comments since then, retains a focus on the federal funds rate as the central bank’s target. Policy would continue to be conducted mainly through banks rather than via dealings with money-market funds.

…The strategy has drawbacks, given the way money markets have evolved since the recession. Banks no longer need to borrow in the once-vibrant fed funds market to meet reserve requirements, as they did before the crisis, because the Fed has pumped so much money into the financial system during the last six years. As a result, trading in that market has dwindled and now mainly comprises U.S. branches of foreign banks acting as arbitragers, according to research by economists at the Federal Reserve Bank of New York.

…In the minutes of their June meeting, Fed officials displayed a preference for continuing to conduct policy mainly through the banks, which they regulate, rather than through money funds, which they don’t. Most participants agreed that the rate of interest the Fed pays on bank reserves would be their “central” policy tool when the time comes to increase short-term rates, an event they forecast will occur in 2015.

The flaw in the Fed’s thinking is that they will be able to go back to the old system of managing the economy via rates. That system was permanently broken when they introduced QE. Of course, they could go back, if they don’t mind sacrificing the equity markets…

Bloomberg: New ETF Tracks the Billionaire Dream Team

If you can’t beat ’em, join ’em.

That’s the philosophy behind the new Direxion iBillionaire Index ETF (IBLN). The exchange-traded fund tracks the stock holdings of some of the richest and most successful investors, such as Warren Buffett, David Einhorn and Carl Icahn.

The index uses the billionaires lists produced by both Bloomberg and Forbes to identify 20 or so U.S.-based billionaire investors. (So no Bill Gates or Walton family members.) It then picks the top 10 billionaires by performance. It judges performance by looking at filings called 13Fs that investors overseeing more than $100 million in U.S. equities must file with the Securities and Exchange Commission. The filings, due within 45 days of the end of a quarter, list equity holdings that trade on U.S. exchanges. The 30 stocks where the investors have the most combined money becomes the ETF’s index, which is rebalanced quarterly.

For example, in the 13Fs for 2014’s first quarter, Apple Inc. (APPL) was the big money’s favorite stock. It made up 16 percent of Einhorn’s reported holdings, 12 percent of Icahn’s, 8 percent of hedge-fund manager David Tepper’s and just under 1 percent of George Soros’s. The next most popular stock was Micron Technology Inc. (MU), with a combined exposure of 16.8 percent, and Priceline Group Inc. (PCLN), at 14 percent. The 30 stocks are equal-weighted, with each one making up 3.3 percent of the index.

If this sounds a lot like the Global X Guru Index ETF (GURU), that’s because it is. There are a few differences. IBLN only looks at large-capitalization U.S. stocks while GURU, which has $500 million in assets, will look at small- and mid-cap stocks and some international. This should make IBLN less volatile than GURU, which rose 48 percent in 2013, outdoing the S&P 500 Index’s 32 percent. So far this year, with the performance of small-caps and momentum stocks cooling, GURU is up 2 percent to the S&P 500’s 8 percent.

So far this year — in theory, since the index wasn’t live — the iBillionaire Index is up 7.7 percent, compared with GURU’s 2.3 percent. However, in the past two momentum-driven years, GURU has a slight edge, returning 75 percent to IBLN’s 67 percent. IBLN will charge 0.65 percent of assets annually, slightly less than GURU’s 0.75 percent.

The other big difference is that GURU looks through dozens of hedge-fund portfolios. IBLN only looks through the portfolios of the richest and most successful investors.

Considering most of the big names are value investors, this isn’t a bad idea. IBLN might make a good substitute for a large cap index fund for long-term investors.

Ed’s Daily Notes for July 31st   2 comments

Financial Times: US banks braced for large deposit outflows

US banks are steeling themselves for the possibility of losing as much as $1tn in deposits as the Federal Reserve reverses its emergency economic policies and raises interest rates.

JPMorgan Chase, the biggest US bank by deposits, has estimated that money funds may withdraw $100bn in deposits in the second half of next year as the Fed uses a new tool to help wind down its asset purchase programme and normalise rates.

Other banks including Citigroup, Bank of New York Mellon and PNC Financial Services have also said they are trying to gauge the potential effect of the Fed’s exit on institutional or retail depositors who might choose to switch to higher interest accounts or investments.

…An outflow of deposits would be a reversal of a five-year trend that has seen significant amounts of extra cash poured into banks thanks to the Fed flooding the financial system with liquidity. These deposits, which act as a cheaper source of funding, have helped banks weather the aftermath of the financial crisis.

Now the worry is that such deposit funding may prove fleeting as the Fed retreats. Banks might have to pay higher rates on deposits to retain customers – potentially hitting their profits and sparking a price war for client funds.

SNL Financial estimates that US banks have collectively increased their deposits by 23 per cent over the past four years, at the same time that their cost of deposit funding has dropped to a 10-year low.

…Banks also face the retreat of large institutional deposits as the Fed uses a new tool known as a “reverse repo facility,” or RRP, to stage its retreat. The RRP effectively allows non-banks such as money funds to have reserve accounts at the Fed.

This means the banks are facing a situation where a black swan event could put them back where they were in 2007-2008. But the government fixed everything, right?

Bloomberg: Argentina Declared in Default by S&P as Talks Fail

Standard & Poor’s declared Argentina in default after the government missed a deadline for paying interest on $13 billion of restructured bonds.

The South American country failed to get the $539 million payment to bondholders after a U.S. judge ruled that the money couldn’t be distributed unless a group of hedge funds holding defaulted debt also got paid. Argentina, in default for the second time in 13 years, has about $200 billion in foreign-currency debt, including $30 billion of restructured bonds, according to S&P.

I doubt any of you have Argentinian bonds, but do you have stock in a company with a lot of dealings in Argentina? I would be highly concerned about that.

Posted July 31, 2014 by edmcgon in Federal Reserve, News

Happy Fed Day! Ed’s Daily Notes for July 30th   Leave a comment

janet-yellen-money-printer

And what a Fed Day it is! We open with the U.S. 2nd Quarter GDP report at 8:30 am EST, before getting the Federal Reserve’s Open Market Committee meeting announcement at 2 pm EST.

Bloomberg: Housing Market in France in ‘Meltdown’ After Hollande Rent Caps

For those of you looking for government to solve all problems, take a lesson from France:

French President Francois Hollande’s government may have made a housing slump worse, pushing the construction market to its lowest in more than 15 years.

Housing starts fell 19 percent in the second quarter from a year earlier, and permits — a gauge of future construction — dropped 13 percent, the French Housing Ministry said yesterday.

The rout stems from a law this year that seeks to make housing more affordable by capping rents in expensive neighborhoods. To protect home buyers, the law also boosted the number of documents that must be provided by sellers, leading to a decline in home sales and longer transaction times. While the government is now adjusting the rules, the damage is done, threatening France’s anemic recovery that’s already lagging behind those of the U.K. and Germany.

“Construction is in total meltdown,” said Dominique Barbet, an economist at BNP Paribas in Paris. “It’s difficult to see how the new housing law is not to blame.”

Barbet says the drop in home building lopped 0.4 points off France’s gross domestic product growth last year and cut the pace of expansion by a third in the first quarter. Expenditure in the sector was at its lowest level ever as a portion of total real GDP in the first quarter at 4.7 percent, down from 6.3 percent in the first three months of 2007, he estimates.

Sales of new-build homes fell 5 percent in the first quarter from a year earlier and are down by about a third compared with their level in 2007, according to Credit Agricole.

Posted July 30, 2014 by edmcgon in Economy, Federal Reserve, News, Real Estate