11/20/14…the Fed is going to tighten! They’re going to tighten! NOT!!!

Quote of the Day from the Friars Club Encyclopedia of Jokes: “A guilty conscience is the mother of invention.” – Carolyn Wells

Bloomberg Quote of the Day: “Research has shown that the best way to be happy is to make each day happy.” – Deepak Chapra…and we all know why he is happy!

Bloomberg Top Stories:

*Stocks Drop on Signs of Slowing Economies While Bonds Advance with Dollar – told ya!

*Europe’s Economy Risks Renewed Slump as Manufacturing, Services Weaken – etc.

*Consumer Prices in U.S. Little Changed in October as Fuel Costs Decreased – that they did!

*Fewer Than 300,000 Americans File for Unemployment Benefits for 10dth Week – oh joy!

*Wall Street Banks Gained Unfair Advantage Owning Commodities, Levin says – shocking!

*Goldman Sachs Dismissed Two Employees After Getting Secret Fed Documents – not a first!

*ECB Prepares for Purchase of Asset-Backed Securities by Publishing Rules – we got them!

*BNP Paribas Shuffles Markets Unit as Frederic Janbon Quits Fixed Income

*Bond Record in Sight as Corporate Sales Near $4 Trillion – almost as big as Fed’s portfolio!

*Some Answers Top Mario Draghi’s 41.3 Trillion Quantatative Easing Conundrum – see below

*Iron’s Tumble today Begets Takeover Treasure for Buyers Tomorrow – what about Crude?

*Germany Urges Peace Effort in Eastern Ukraine to Counter Spiraling Tension – please?

*SeaWorld Tries to Save Itself After Backlash Over Tough ‘Blackfish’ Film – where’s Wamu?

*Mike Nichols, Director of ‘The Graduate’, ‘Virginia Woolf’. Is Dead at 83 – nice career!

*Tax cut luring Pimco Shows Columbian Foreign Push Paying Off – for some…

*Cheap Oil Era Shifts Global Geopolitical Power to U.S., Away From Russia – nice tradeoff!

Wednesday’s Market Summary

Setting up very nicely for tomorrow’s options expiration. Round and round she goes where she stops? Who knows? A DOWn day (sorry). Actually, the Dow 30 and Dow Utilities, both flat were the only things that weren’t down: Russell 2000 the big loser -1%; the two Nasdaq’s -0.5%+; Dow Transports -0.3% and the S&P 500 -0.2%…how special. A/D’s and Breadth were negative –especially Nasdaq stocks! New 52 week highs were more than halved to 135 (low), while new lows rose to 141. NYSE Volume was not bad but same as Tuesday. Pattern identical for the last five days…or more?

Continuing on that theme everything was down…well, everything except the S&P VIX which closed at another bearish 13.96 +.10 and with a range of 13.83-14.78! Bonds were down…mainly after the FOMC statement; Commodities were soft too…what’s a mother to do? Pay attention for one thing! As today’s commentary suggests, the market (and TB does not mean ‘investors’ here is merely trying to gain an edge, be it up or down. After all everything headed south ‘after’ the FED release…not in a big way

Total NYSE Volume was steady at 3.4B shares vs 3.41B vs 3.13B vs 3.2B vs 3.46B. Average volume since 9/30 is about 3.6B shares and slipping, or about 600M more than the 12-month average. Shares traded on the NYSE floor – affectionately referred to by TB as REAL volume was also stable at 738M shares vs 731 vs 694M vs 705M vs 708M. For comparison purposes, for the prior 12 months it is a historically weak 712M shares…but since 10/1: 823B shares and slipping – including that HUGE 1.22B share day – highest since 9/19, followed by two more 1B plus days leading to options expiry!. The lowest was 10/6’s 696M share session. April 30 – September 30 we had just SEVEN 800M shares…since 10/1: 16, and FIVE 900M+ days.

A/D’s were negative: NYSE: -1.6x vs +1.6x vs -1.3x vs +1.1x vs -1.8x; Nasdaq -2.6x! vs +1.5x vs -1.9x vs -1.1x vs -2x. Breadth was similar: NYSE -1.6x vs +2x vs 1:1 vs +1.5x vs -2x; Nasdaq -2.2x! vs +2x vs -1.7x vs +1.4x vs -1.2x. New 52 Week Highs were nearly halved to 135 (weak) vs 304 vs 242 vs 207 vs 249 – their range for the year is 39-612!!! New Lows slightly higher at 141 vs 117 vs 115 vs 127 vs 146. The 2014 range is 24-1043!!! S&P VIX traded in a range of 13.83 – 14.78, then settled at 13.96 +.10 – and well in bear territory. This is its 17th sub-15 close since peaking on 10/15. Heading back toward those bearish extremes that had a high of 31.06 (highest since 11/28/11!!!)? You decide. The average of the past 12 months is 13.99, with a low of 10.28!…high close of 26.25 on 10/15/14! Put protection is getting expensive again.

U.S. bond market closed weaker…it was down slightly then tanked on the FOMC statement. The recent 12 month low yields (10’s 2.09%; 30’s 2.87%; and long TIP 0.83%), 10’s closed at 2.36% -3/8; 30’s 3.08% -3/4; and the long TIP 1.06%! -1-1/2!!! No inflaton concerns! Overnight recovering most of the loss, ex-TIPS: 10’s 2.32% +5/16; 30’s 3.04% +3/4; and long TIP 1.04% +3/4.  

Libor update: 0.232% 3 mos.; 0.326% 6 mos., both steady and just above new record lows! The Fed Funds rate has averaged 0.09% and is steady at 0.09-0.10%. T-Bills: 0.3%, one-month, 0.00%! 3 mos, 0.12% one year???

Foreign bond yields LOWER, ex-Greece; Japan steady again (Benchmark is 10yr): Germany 0.81% -4; UK 2.10% -4; France 1.16% -3; Italy 2.31% -1; Spain 2.10% -2; Portugal 3.11% -2; Greece 8.09% +11 – couldn’t hold below 8%: 10/16’s close was 8.54%! – cycle low: 5.42%; Crisis high: 12.57%. Japan: 0.46% -1.

Gold closed weaker again and could not take out Tuesday’s new high of $1204.10, highest since 10/30, closing at $1193.90 -$3.20. Still following thru on Friday’s ‘positive key reversal. 11/7’s low was $1130.40, a new recent low!). The recent intraday high of $1255.60, highest since 9/10/14, was rejected. The last 16 sessions have had prints below $1200 first time since 12/31/13 Last close above $1300 was on 8/15. 7/17’s session high was $1346.60, highest since March 19th!!! Res is at $1200 (psychological), then the 40 day at $1205, the 50 day $1209, then the 200 day at $1278. The 12-month high is $1392.60 on 3/17, highest high since 9/4/13. $1130.40. 11/7’s low was $1130.40! Overnight, weaker in another inside session at $1187.80 -$6.10. Silver holding above $16 (support), also highest since 10/31, and back from 11/5’s low of $15.12, more than a five year low.

Crude closed a tad lower at $74.58 -.03 in an unremarkable session (oil drillers are anything but boring as they have lost nearly half their value). Just four days ago it set a new recent low of $74.07, lowest since 9/17/10!!! 10/25’s high was $84.83. There have been 33!!! handles since peaking at $107.73 on June 13th, highest since 9/19/13. The record high of $147.27 was on 9/30/08, the low since on 12/30/11 is $74.95: $93.60 is the midpoint!!! Recent rally high and close are $110.70 and $110.53 respectively. RES at the 40 day ($82.75!), then the 50 day ($84.78!), and lastly the 200 day (96.92!), all accelerating to the downside. If it fails here we are now looking at $70! The recent range is now $74.07-$112.24 since 3/1/12. Overnight it is slightly weaker in a tight range at $74.47 -.11. CAUTION!

Global equities weaker: UK -0.6% vs -0.1% vs +0.5% vs -0.1% vs -0.1%; France -1.1%! vs +0.6% vs +0.7% vs – vs +0.4%; Germany -0.6% vs +0.7% vs +1.2% vs – vs +0.1%; Japan +0.1% vs -0.3% vs +2.2%! vs -3%!!! vs +0.6% vs +1.1%! Hang Seng -0.1% vs -0.7% vs -1.1%! vs -1.2%! vs +0.3%; Korea -0.5% vs – vs +1.2%! vs -0.1% vs -0.8%; India +0.1% vs -0.5% vs -0.1% vs +0.5% vs +0.4%. U.S. equity futures also weaker: DOW -67 (range 80); SPX -8.30 (11); NDQ -17 (25). Rock and roll!

 

Some random thoughts:

…wonder if Janet Yellen, Mario Draghi, and Shinzo Abe could borrow Camp David for a few days of soul searching…what to do? …also what did they do…as in what have they done?

The Fed unanimously voted to raise rates next year even though inflation is not a problem now or even expected to be anytime soon (note how long U.S. Treasury TIPS took the hit yesterday – who needs inflation protection?), and the funny thing, as First Tennessee’s Chris Low points out last March and at this meeting they supported their decision with the Taylor Rule – but here’s the rub: for opposing reasons!?! Makes you wonder if they know what they are doing because we sure the hell don’t!

The Taylor Rule, named for Stanford economics professor, John Taylor (also a fellow of the Hoover Institute…but not a ‘jolly good’ one – the ‘Hoov’ doesn’t allow that!) says, quoted from Investopedia:

“Taylor’s rule suggests that the Fed increases interest rates in times of high inflation, or when employment is above the full employment levels, and decreases interest rates in the opposite situations. This method of controlling interest rates has been fairly consistent with interest policy decisions, even though the Fed does not explicitly subscribe to the rule.”

Consistent? What about this: in March they said they would not tighten because of low inflation and high unemployment; now they say that they will tighten next year (didn’t leave an out), because of rising inflation and declining unemployment (guess the Fed doesn’t look at the U-6 report which includes discouraged people and those working part-time but wish to work full-time).

This time only Fed Governor Narayana dissented and as Economic Data Service reported:

Mr. Kocherlakota dissented because he believed that, in light of continued sluggishness in the inflation outlook and the recent slide in market-based measures of longer term inflation expectations, the Committee should commit to maintaining the current target range for the federal funds rate at least until projected inflation one to two years ahead has returned to 2 percent and should continue the asset purchase program at its current pace. Mr. Kocherlakota noted that when the Committee first reduced its asset purchases in December 2013, it said in the post-meeting statement that it would be monitoring inflation developments carefully for evidence that inflation was moving back toward its objective over the medium term; Mr. Kocherlakota indicated he saw no such evidence. (emphasis added)

Sooo, it appears to TB that ‘the lady (Yellen?) doth protesteth too much’. Why? Because that’s her job…to paint an ‘image’ of the Fed doing its job despite those dual mandates which remain in conflict. Note that Mr. K. want to continue the QE’s, no tapering and definitely no selling of those inflated assets. Besides, sell them? To whom??? …at what price? As Colin Powell would say, “you break it, you own it.” But in this case Jamie Dimon and friends broke it and we, the people, now own it…that is not quite write, because the Fed is only a ‘quasi-governmental’ agency, but one with power unlike any other entity in the U.S. Why? Because the Fed has the power to act immediately and then answer to Congress after the fact (isn’t that what Obama, rightly or wrongly

is trying to do?).

First, let’s look at those assets: the Fed purchased them from ‘drowning’ financial institutions at face value…isn’t that putting an asset on your books at an inflated value?…and what caused the Keating and friends S&L Crisis? Stop being picky TB! Ok, there are over $4 trillion of them and guess who is financing them? The very banks who caused the problem! See, starting in 2008, the Fed got something it (Greenspan?) wanted for years: to be able to pay the banks interest on excess reserves (currently 0.25% and we would all agree that is cheap).

Then, they got the banks (probably didn’t take much prodding) to maintain excess reserves to finance the QE purchases, thus avoiding ballooning government bond issuance. The banks, especially the big ones since they were not eager to lend back then due to broad credit concerns. What they did lend was mainly on mortgages which the held the required minimum of 60 (?) days, then sold to FNMA/FHLMC who then (and now) bore the risk…oh, and the banks in addition to pocketing origination fees, retained the servicing of the loans…worth another 0.25%! Question: with 3% 30-year mortgages how long would it take you to earn the same as the mortgage would yield and still have no mortgages on the balance sheet…oh and maintain those excess reserves earning another 0.25%. TB calculates about 4-5 turnovers…and you are being patriotic. All of this while the government wants you to make loans…wink, wink.

So here is the quandary: by merely stopping the tapering…let alone outright selling the assets, how can the Fed ‘grow’ the economy? With T-Bills currently yielding 0.15% or less (sometimes even negative returns!), and Fed Funds changing hands at 0.09%, where’s the juice, i.e. incentive for the banks to want to do anything different…especially since their stocks are back near 2008 levels (they peaked in mid-2007), and they are paying paltry dividends to the suckers…oops, shareholders! Quandry? It’s a no-brainer.

But the question is how do you convince Main Street that the economy is doing well? Keep doing what you are doing but you sure as hell don’t want to see interest rates go to zero or, horrors, negative…this said when we are and have been on the cusp since the crisis began! Oh, and you are making the wealthy even richer by driving asset prices higher…that would be stocks!

So, don’t let the gyrations scare you…even if stocks may be overvalued by as much as 25% (Jonathan Clements), because as smart money investor Jeremy Grantham says, you can earn 15% over the next 12 months…sure they are overvalued, he continues, but even with a pullback you have an expected loss of less than 10%…a safe bet?…or do you wait for a correction? Who knows…you decide…but don’t factor a rate increase into your projections…its futile.

That’s how TB sees it…you decide…

Have a great day!

TB

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