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March 10, 2011

3 Months From Now, US Fed Will Stop Buying

Filed under: Uncategorized — bigcapital @ 5:43 pm
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3 Months from now, US Fed Will Stop Buying.

Thursday, March 10, 2011 — http://marketpin.blogspot.com

== US Fed bond buys to finish, greenback and global stocks on radar ==

Fed’s Fisher warns could vote to stop bond buying

WASHINGTON (Reuters) – A senior U.S. Federal Reserve official warned on Monday that he would vote to scale back or stop the central bank’s $600 billion bond-buying program if it proves to be “demonstrably counterproductive.”

Dallas Federal Reserve Bank President Richard Fisher, who has repeatedly said he would not support any more bond buying after the program ends in June, said he was doubtful the purchases were doing much good.

“I remain doubtful enough as to its efficacy that if at any time between now and June, it should prove demonstrably counterproductive, I will vote to curtail or perhaps discontinue it,” Fisher said in remarks prepared for delivery to an Institute of International Bankers’ conference in Washington.

“The liquidity tanks are full, if not brimming over. The Fed has done its job,” he said.

The Fed launched its bond buying program in November to help an economic recovery that was struggling with high unemployment after the worst recession since the 1930s.

But since then, the economy has shown signs of strengthening with the jobless rate falling to a nearly two-year low of 8.9 percent in February.

Fed officials are due to meet March 15 to discuss the bond purchase program. In January, Fisher voted with the rest of the central bank’s policy-setting Federal Open Market Committee to continue it.

In comments to the bankers’ conference, Fisher said he did not feel that further monetary accommodation would help put more Americans back to work.

“It might well retard job creation, should it give rise to inflationary expectations,” he said, adding that perhaps the Fed’s policy has compromised the central bank by implying it is “a pliant accomplice to Congress’ and the executive branch’s fiscal misfeasance.”

== How About U.S dollar ? ==

Stretching out Treasury purchases past the end of June while reducing the monthly amount would help bond dealers adjust to the Fed’s withdrawal from the market, said Lou Crandall, chief US economist at Wrightson ICAP in Jersey City, N.J

NEW YORK – The Federal Reserve’s $US600 billion bond purchase program will be completed as planned, top Fed officials signalled, though they saw heightened economic uncertainty from unrest in the Middle East.

US central bank officials from Atlanta, Chicago and Dallas said they were keeping an eye on the risk higher oil prices could feed through into broader inflation, as well as their potential to hurt growth.

Atlanta Fed President Dennis Lockhart said he would not rule out more bond buys if the recovery dwindles. Dallas Fed President Richard Fisher said he would vote to end the program early if higher oil prices fed into broader inflation.

The program, announced in November to bolster a fragile economic recovery, is due to end in June. Since it began there have been signs the recovery is picking up steam.

Mr Lockhart, a policy centrist, said he was more concerned about the risk to growth from the oil price rise. He said he would be “very cautious” about increasing the size of the purchase program.

“Given the emergence of new risks, however, I prefer a posture of flexibility,” Mr Lockhart said.

He expected overall price pressures to remain subdued and warned it is too early to “declare a jobs recovery as firmly established”.

Mr Fisher, an inflation hawk, said he “fully expected” the $US600 billion program to “run its course.”

Mr Fisher told an international bankers’ conference he would vote to curtail or stop the program, however, if it proves to be “demonstrably counterproductive.”

The Fed meets on March 15 for its policy-setting meeting, at which it is expected to reaffirm its purchase plan. Fisher is a voter on monetary policy this year, Mr Lockhart is not.

In a CNBC interview, Chicago Fed Bank President Charles Evans said the Fed was closely watching rising oil prices, adding that they were “obviously” a headwind for growth.

Revolutions beginning in Tunisia and Egypt have spread to other countries in the region, including Libya and Bahrain. This has pushed the price of oil above $US100 a barrel, complicating the Fed’s objective of stimulating economic growth while keeping prices under control.

That said, Mr Evans pointed to the improving job market and said he expected economic growth of four per cent this year and next. He called the size of the purchase program “good”.

“I continue to think the hurdle is pretty high for altering our currently announced” program, Mr Evans, seen as a monetary policy dove and one of the most outspoken proponents for quantitative easing, said. Mr Evans does not have a vote on monetary policy this year.

Mr Fisher said the question will be whether the oil price rise is sustained.

“It is really a question of how that works its way through,” he said. “We have already seen very high gasoline prices. That’s one of the ways that it most affects the consumer.”

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February 23, 2011

Inflation Building, Fed Should Back Off: LaVorgna

Filed under: Uncategorized — bigcapital @ 12:22 am
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Inflation Building, Fed Should Back Off: LaVorgna

As government economists and Fed apologists continue to dismiss inflation pressures, the fear that easy money and commodity pressures are about to come home to roost is building.

While Michael Pento at Euro Pacific Capital and a handful of others have been pounding the table about inflation ever since the Federal Reserve began quantitative easing, the sentiment is beginning to spread.

The latest on board is Joe LaVorgna, chief US economist at Deutsche Bank, who warns in a note sent to clients Friday that “inflation pressures are inflating.”

The threat is two-pronged: On one hand this week’s producer and consumer price numbers show pressures are building in the crude, or initial, price pipeline that will spread to intermediate and finished products in the months ahead.

On the other hand is “energy inflation contagion,” in which surging prices in that space “have shown a significant capacity to breed inflation contagion among related categories and have destabilized inflation expectations.”

Taking both threats into consideration, LaVorgna posits that the Fed should reconsider completing the entire $600 billion of Treasury buys it has planned for the second leg of QE.

Unless the brakes are put on, LaVorgna argues that core finished PPI prices will increase at an annualized 4 percent rate, and he concedes that if his calculations are wrong they are on the low side.

Finally, he warns against the pervasive mindset that commodity price increases will not cause so-called “pass-through” costs into the broader economy. The rise in CPI and PPI comes as manufacturing activity and capacity are rising, as opposed to the last bout of commodity-induced inflation when the economy was shrinking.

An excerpt from the LaVorgna note:

“We believe the rise in commodity prices is significant, because it is occurring alongside robust factory activity and a general strengthening in underlying domestic demand—a crucial difference from the 2008 run-up in commodities, when the factory sector was shrinking and demand was slowing. Therefore, monetary policymakers should be cognizant of the pipeline pressure brewing in the PPI.

“The risk is that an overstay of aggressively accommodative monetary policy could lead to even larger gains in retail goods prices down the road—the Catch 22 of Fed folks worried that higher commodities will crimp demand. Rather it is ample demand that is pushing commodities higher. Consequently, as long as monetary policy remains extraordinarily accommodative, thereby further boosting demand, we expect these trends to persist if not become more durable.”

.

November 12, 2010

Stock Market BubbleOmics: S&P 500 Race to 1,300 by Christmas ?

Filed under: Uncategorized — bigcapital @ 8:54 am
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Stock Market BubbleOmics: S&P 500 Race to 1,300 by Christmas?

 

Well it’s nice to see that Ben has managed to un-leash some good-old-fashioned Irrational Exuberance with the latest round of Quantitative Easing. That’s something that’s been sadly missing over the past few years…I wonder why?

 

It’s probably good news too that he has apparently given up on his strategy to persuade people to buy AAA rated collateralized debt obligations lovingly crafted by Goldman Sachs, by creating a “market” and of course a “mark-to-market”. That didn’t work very well because sadly, most people figured out that if the Sucker of Last Resort is the only player in town (as in the Wall Street line “the value of something is what you can sell it for to some poor sucker dumber than you”), well that doesn’t actually constitute a “market”.

 

But this time he’s going to buy Treasuries, whoopee!! Gold is up 3% in a day, and oil is getting ready to go through $90, let the good-times-roll!!

 

Perhaps that will make all the difference, perhaps that will increase the money supply, increase the velocity of that money, and so America can get back to Living the Dream. Although one can’t help having that nagging thought that what Einstein said might apply, as in, “The definition of lunacy is to try the same thing over and over, and hope for a different result”.

 

Either way, QE-2 will keep the pressure on yields of long-term debt (down), and it will provide plenty of scope for the companies represented by the S&P 500 (who by and large, have lots of cash, good business models, and a “healthy” portion of their earnings generated outside USA (50% at the last count)), to increase their debt (i.e. decrease their equity), and thus gear their profits and thus their return on equity.

 

Whether the beneficiaries of that will be USA (via increased capital expenditure and hiring in USA), or everywhere except USA, is “debatable”. Well actually you can debate that if you like, but the answer is pretty obvious.

 

I noticed a headline the other day, “Dubai Stands to Gain from QE-2”, written by a brokerage firm that I had only heard of in connection with a scam they played on the Dubai Stock Exchange (and they got away with it). I thought it was a joke, but it wasn’t, the idea was that QE-2 (in America) would increase credit in Dubai. You can understand the logic there…assuming of course that the people who got shafted the last time they lent to Dubai will not have heard about Einstein’s Rule?

 

Anyway, that’s all “background”, the reason that I’m writing this article is that I have this “thing” about when the S&P 500 hits 1,200.

 

And the reason for that is because over a year ago or so the Immutable Laws of BubbleOmics indicated that the prospects for the S&P 500 (then 1,100) were:

 

Won’t go above 1,300 in 2010 but it won’t go down much until hits at least 1,200 at which point it risks a 15% to 20% reversal which will be relatively short-lived.

http://seekingalpha.com/article/180450-bubble-onomics-10-predictions-for-2010

 

So far so good; the index bounced about a bit then it crept up above 1,200 and then it had a mild reversal of 16% off its peak…which was fairly short lived (five months), and here we are with 1,220 on the Board today. With the only item remaining on the check-list being whether it will go above 1,300 before Christmas?

 

By way of background the basic idea behind that had two elements:

 

1: “Fundamental Value”.

 

I personally don’t like that word, mainly because it means different things to different people. But “fundamentally” the idea there is that the price of anything in an efficient market reflects a fundamental value. The catch is that markets are not always “efficient”, in fact they are inefficient a lot of the time, and that makes it complicated to figure out when it was valued at its fundamental, or in other words to figure out when the market was “efficient” and when it was not.

 

The real big inefficiency is when there is a bubble. That’s when people get persuaded to pay a lot more than the fundamental; or in the bust that inevitably follows a bubble when people persuade themselves that they should not pay the fundamental, or more to the point buyers who borrowed money to pay too much in the past, often get squeezed into having to sell at a price below the “fundamental”, so they can pay their debts.

 

The fundamental is thus the price that people would pay, if the market was not distorted by a bubble or a bust, and a credit crunch is when the people who borrowed, so they could buy things at a price much more than the fundamental, don’t pay the money back.

 

There are three main ways (outside of the one I use) to figure out what the “fundamental” of the S&P 500 is.

 

(A):  Trailing P/E ratios are compared to the long-term mean; that’s the approach Professor Shiller uses and on a micro level it’s much loved by accountants. There are two problems with that, the first is that what happened in the past is not necessarily a good predictor of the future (I love the way accountant’s write that in big letters after they have done a valuation based precisely on the opposite of that premise), and second, it doesn’t account for the opportunity cost of equity which changes in tandem with long-term bond yields.

 

(B): Tobin’s “q” which is based on an assessment of book value, which is all very well in principle although that says little or nothing about intangible value or depreciated replacement cost, which is what, for example Warren Buffet was interested in when he bought his new train-set.

 

(C): Warren Buffet once said that it’s a function of Gross National Product (GNP), which is smart (I would say that because that’s what I say), but that was just a throwaway line. What he didn’t throw away is how it’s also dependent on the opportunity cost of money. Although I’m sure he knows that, just he didn’t “share”.

 

But he did go on record once on that subject. That was when he was asked by some talking-head…“how do you know when to buy (or sell)”?  He said “I know how to do a valuation”. Based on his track-record, I reckon he does too.

 

Currently P/E ratios are saying that the S&P 500 is too expensive, and so is Tobin’s “”q”, in fact they have been saying that for more than a year. So if you buy that line, then get ready to short the market!!

 

Nobody is quite sure what Warren Buffet thinks, and anyway he’s just sitting on the sidelines eating donuts, playing with his ukulele and his new train set, and cracking jokes, like he always does.

 

My opinion is that historically the “fundamental” (which International Valuation Standards calls Other-Than-Market Value), is a function of (a) GNP (nominal, i.e. current prices), divided by a function of (b) some function (which I’m still not completely sure about), of the yield on a Thirty Year Treasury. And so if (a) is going up a bit and (b) is set to keep going down, or at least stay low; then the “fundamental” is going to go up.

 

2: BubbleOmics

 

There is a twist to all that. There was a bubble in US stock prices which peaked in 2000 (that’s not news), but according to the Immutable Laws of BubbleOmics, what’s happening now is still predicated by that bubble (that is (relatively) new).

 

The Immutable Laws of BubbleOmics say that for every bubble, there must be a bust, and that the size and the timing of the bust is predicated by the size and the timing of the preceding bubble.

 

That’s the theory, like a pebble thrown in a pond (the pebble is the cause of the bubble (often lunatic credit)), which causes an “up” wave, which must inevitably be followed by a “down” wave since all bubbles are zero sum; they are just a transfer of wealth, generally from the poor to the rich.


 

The first time I looked at the S&P 500 from that angle was in January 2008 when I said that looking back at the amount of mispricing of the previous bubble, the bottom of the trough would be 675 which was pretty close (that happened two months later).

 

There was probably an element of luck there, although using the same logic “BubbleOmics” predicted that from that point it would be plain sailing up to 1,000, which is what happened.

 

So what next for the S&P 500?

 

It’s tedious to run the numbers and there are complications…”when did the fundamental get crossed? Do you use today’s 30-Year yield, or a moving average? How do you account for the fact, that now 50% of the earnings of S&P 500 companies are outside USA?” That’s a sort of analysis best saved up for a quiet rainy day round about Christmas.

 

But now that the “uncertainty” is less, the “will he won’t he” for QE2 is no more, house prices are still drifting down…the picture is clearer than it was, and although the lunatics are still in charge, so what, that’s not news, and like Samuel J. Jackson said in Jackie Brown, “Darn, of course I can’t trust Melanie, but I can trust Melanie to be Melanie”.

 

Here’s how I see it:

 

* The S&P 500 is undervalued compared to its “fundamental” and it’s still in the post-bubble trough, but it may take a couple of years to get back to the “fundamental”.

 

* Regardless, the “fundamental” is going to go up, driven by low long-term interest rates, plenty of debt for “qualified” corporations to gear their earnings and hire new people (outside USA), and a world economy that is growing even if the US economy is in the doldrums (50% of their earnings come from there).

 

* There is no chance there will be a reversal of more than 20% however bad some event that comes out of the blue might be. When markets are in the “down” phase, they don’t have big reversals.

 

* There is a chance there will be a build up to say 1,700 in 2011 as the market gets back to the fundamental, but I think it’s too early for that.

 

* Will it hit 1,300 before Christmas? I hate to say it (because it would prove me wrong) but there is a good chance of that.

 

Remember the corporations in the S&P 500 don’t care about Food Stamps or unemployment in USA. And they all “got medical”, it’s the small companies and start-ups that will be hammered by Obama-Care, and those are they guys who can’t borrow from the big trough that Ben is creating.

 

But who cares? Perhaps in five years time 75% of the earnings of the companies that make up the S&P 500 will come from outside USA?

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