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Friday, January 03, 2014 – Trust Me

Trust Me by Sinclair Noe DOW + 28 = 16,469SPX – 0.61 = 1831NAS – 11 = 413110 YR YLD + .01 = 2.99%OIL – 1.30 = 94.14GOLD + 15.00 = 1239.00SILV + .14 = 20.25 Fed Chairman Ben Bernanke will retire from public service at the end of the month, and likely wander off to be a well paid consultant or director at one or more banks or private equity firms. Today he gave what might be his final speech as the Fed head. Speaking at the American Economic Association forum in Philadelphia, Bernanke said that even though the FOMC announced taper in December, they were still committed to highly accommodative monetary policy for as long as needed; “Rather, it reflected the progress we have made toward our goal of substantial improvement in the labor market outlook that we set out when we began the current purchase program in September 2012.” He tempered the good news in housing, finance and fiscal policies by repeating that the overall recovery “clearly remains incomplete”, adding that the number of long-term unemployed Americans “remains unusually high.” This is something like the doctor telling you the cancer has been cured but there is still a massive tumor. As of the November jobs report, the labor market has 1.3 million fewer jobs than December of 2007. In a healthy environment, we would have seen jobs added as the population grew; the economy would have needed to add 6.6 million jobs just to maintain the level …

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Wednesday, December 18, 2013 – According to Plan

According to Plan by Sinclair Noe Don’t worry. Everything is going exactly according to plan. The Fed will taper just a little; cutting back to $75 billion a month in Treasury bond and mortgage backed securities; the cuts will trim back equally from both categories. You’ll hardly notice. The Fed said: “In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the committee decided to modestly reduce the pace of its asset purchases.” Great news for people in the hunt for a job; everything is good. And for those of you with two jobs, well your doubled efforts have not gone unnoticed. The Fed expects unemployment to dip to 6.3% to 6.6% by the end of the year, what with more people dropping out of the workforce and the participation rate shrinking. Besides, the current 7% unemployment is apparently just good enough to avoid civil unrest, or as the Fed calls it “progress toward maximum employment.” The central bank also said it “likely will be appropriate” to keep rates near zero “well past the time” that the jobless rate falls below 6.5 percent. Again, this confirms that everything is going exactly according to plan…, for the bankers; for the rest of us – not so much. But if you are a banker, you have to love free money from the Fed. It’s not like they could continue QE forever; they were running out of stuff to buy. The federal deficit has …

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Wednesday, November 20, 2013 – Fed Minutes, Fed Conundrum

Fed Minutes, Fed Conundrum by Sinclair Noe DOW – 66 = 15,900SPX – 6 = 1781NAS – 10 = 392110 YR YLD + .09 = 2.79%OIL – .01 = 93.33GOLD – 32.40 = 1243.80SILV – .49 = 19.95 The Federal Open Market Committee, Federal Reserve policy makers, met October 29-30, and to no one’s surprise they did not change monetary policy. Today, minutes of that meeting were released. The policy makers “generally expected that the data would prove consistent with the Committee’s outlook for ongoing improvement in labor market conditions and would thus warrant trimming the pace of purchases in coming months.” They think the economy is improving, despite the government shutdown and ongoing political dysfunction, the economy is getting better and the FOMC is considering how and when they can exit Quantitative Easing; they would like to scale back $85 billion per month in purchases of Treasuries and mortgage backed securities without triggering a rise in interest rates that could slow economic growth and wipe out gains in the labor market. That is not to say they are ready to raise their Fed Funds target for interest rates. That target has been right at zero and will likely remain at zero for at least a year or more. They want to get out of the bond buying business without the market noticing, and independently pushing interest rates higher. It’ll be a fine trick if they can pull it off. In a speech to the National Economists Club, Ben Bernanke …

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Tuesday, August 20, 2013 – 10 Year and Jackson Hole

10 Year and Jackson Hole by Sinclair Noe DOW – 7 = 15,002SPX + 6 = 1652NAS + 24 = 361310 YR YLD – .07 = 2.81%OIL – .77 = 106.33GOLD + 5.30 = 1371.90SILV – .16 = 23.13 One number keeps standing out from the daily scorecard. The yield on the 10 year note. That is the benchmark for interest rates. As a standalone figure, of course, the yield on 10-year Treasuries is small. But the amount of money it impacts worldwide is flat-out staggering. Out of the estimated $1.5 quadrillion dollars’ worth of derivatives on the planet right now, roughly $500 trillion is specifically related to interest rates. So you can see why the 10-year gets so much attention. Many investors believe the Fed controls interest rates. That’s not true; they merely influence them. Rates are set by trades in the market. And if interest rates rise much further, the support the Fed is counting on in the bond markets may not be there. In fact, it may be running the opposite direction. Foreign custody holdings of US Treasuries continue to decline, which implies that our trading partners are not comfortable with treasuries, so they’re moving to other assets. Meanwhile, emerging markets from Brazil to Indonesia have raised borrowing costs in 2013 to try to aid their currencies as the prospect of reduced US monetary stimulus curbs demand for assets in developing nations. The $3.9 trillion of cash that flowed into emerging markets over the past four years has …

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Monday, August 19, 2013 – Not Attending Jackson Hole

Not Attending Jackson Hole by Sinclair Noe DOW – 70 = 15,010SPX – 9 = 1646NAS – 13 = 358910 YR YLD + .05 = 2.88%OIL – .51 = 1365.20GOLD – 11.60 = 1366.60SILV – .07 = 23.29 It don’t know where Ben Bernanke is. I know he is not scheduled to be in Jackson Hole, Wyoming this week. Most of the Federal Reserve policy makers will be at Jackson Hole for the annual economic get-together to debate whether the Fed should pull back from its $85 billion dollar per month asset purchase plan known as Quantitative Easing, also known as QE, also known as Stock Market Rocket Fuel. QE has lifted the markets to record highs this year, and talk of exiting QE has dropped the markets from highs the past couple of weeks. Egypt continues to slip into a dark place as the military continues its bloody crackdown on civilian protesters. Just don’t call it a coup; that specific designation would require an end to foreign aid. Egypt has been one of the biggest recipients of US foreign aid over the years. Egypt gets about $1.3 billion a year in aid. The money is not sent directly to Egypt; it goes to defense contractors who then send military equipment and expertise to the Egyptian military. The biggest recipients of foreign aid to Egypt are Lockheed Martin, pulling in more than a quarter billion a year, followed by several others pulling in tens of millions, including DRS Technologies, L-3, …

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Friday, August 09, 2013 – May All Your Wishes Come True

May All Your Wishes Come True by Sinclair Noe DOW – 72 = 15,425SPX – 6 = 1691NAS – 9 = 3660 10 YR YLD – .01 = 2.57%OIL + 2.57 = 105.97GOLD + 2.30 = 1315.70SILV + .31 = 20.66 As we started the week, I warned that August can be fairly volatile in the stock market; it seems like the lazy days of summer and volume is usually lackluster, as it was today, but sometimes that just intensifies price swings. The markets were down again today, the fourth decline in the week, and the first weekly decline on the heels of six weeks of gains. The Dow was down 1.5% for the week. The S&P pushed back to 1700 a few times but couldn’t break through. This week’s declines don’t seem to tell us much; we could go either way next week. Yes, I know the rally is long in the tooth; going back to March 2009, the rally is 4.4 years old, longer than the average rally, but it really is too early to start catching falling knives. There wasn’t much in the way of economic reports this week; earnings reporting season is winding down, Congress is away on Summer recess. I guess it’s been about a week since we saw the guesstimates on second quarter GDP, and you’ll recall that the guesstimates included revisions that go back 83 years. The government is recalculating the numbers to try to get a more accurate picture. One of the …

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Thursday, July 18, 2013 – Those FERCing Energy Traders

Those FERCing Energy Traders by Sinclair Noe DOW + 78 = 15,548SPX + 8 = 1689NAS + 1 = 361110 YR YLD + .04 = 2.53%OIL + 1.74 = 108.22GOLD + 8.40 = 1284.00SILV + .09 = 19.48 Record high closes for the the Dow & the S&P, along with record intra-day highs. I know you’re all wondering why we called this meeting; well, I’d like to report that the company is doing all right, we’re managing to scrape by; but we’d be doing a lot better if the staff in the home office would get off their lazy butts and get some work done for a change. Sounds a bit harsh, doesn’t it? Yet that is how Ben Bernanke started his testimony before the House of Representatives yesterday. Actually, what he said was: “The economic recovery has continued at a moderate pace in recent quarters despite the strong headwinds created by federal fiscal policy.” Bernanke has a point. Whatever motivation you assign to monetary policy, there are limits to the potential benefits, and those benefits are primarily limited to banks. Accommodative monetary policy is slow to flow to Main Street. Wall Street has been very happy with QE, as we discussed yesterday. The bankers and hedge funds, and the shadow banks feel the future is assured as long as the economy remains weak and the Fed continues cash infusions into the banking system, and therefore most investments will succeed. In that kind of environment, the income earning ability of an …

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Thursday, June 20, 2013 – Fed Fallout

Fed Fallout by Sinclair Noe DOW – 353 = 14,758SPX – 40 = 1588.19NAS – 78 = 336410 YR YLD + .11 = 2.42%OIL – 3.61 = 94.70GOLD – 73.50 = 1278.80SILV – 1.75 = 19.70 Yesterday the Federal Reserve FOMC issued a formal statement that they were holding steady with their zero interest rate policy and their Quantitative Easing policy which involves buying up $85 billion a month in Treasuries and mortgage backed securities. Then, Chairman Bernanke held a press conference and said the Fed might scale back purchases if the economic data gets better. And while Bernanke was trying to make a very nuanced forecast with no specific call for action, what the market players heard was a threat the Fed would slash the flow of free money; the plug was being pulled on the money printing press. Faced with the economic crisis of 2008, the Fed started creating money at a prodigious pace and giving it to the banks. Catastrophe was averted. The money flowed into the markets and financial asset prices jumped. The US equity markets have been on a 4 year bull run; housing prices have bounced back, at least a partial bounce. The money did not flow into the broader economy. Cheap money and credit, instead, lead to malinvestment. The result is that while some financial asset prices have jumped dramatically, the rest of the economy has stagnated or atrophied. The idea is that the economy did not go through its normal cycle of …

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Wednesday, May 29, 2013 – Behind the Curtain

Behind the Curtain by Sinclair Noe DOW – 106 = 15,302SPX – 11 = 1648NAS – 21 = 346710 YR YLD – .01 = 2.12%OIL – 2.12 = 92.89GOLD + 11.30 = 1393.70SILV + .19 = 22.56 Earlier today, I listened to one of the talking heads on CNBC trying to explain why the markets were up yesterday and down today. It was very entertaining. When mortgage interest rates fall, the probability that an individual will re-finance a mortgage increases. When mortgage interest rates increase, the likelihood of a re-financing of the mortgage goes down. Therefore, in a rising rate environment, the average life of a pool of mortgages increases. For example, if a bond fund held Mortgage Backed Securities (MBS) with an assumed 10-year average life, and interest rates rose, the average life of the MBS portfolio would be extended for a few years. The last thing that a bond manager wants in a rising rate environment is to have the average maturity of the portfolio extended, as this adds to the losses. As a result, MBS players hedge their portfolios against “duration risk” by shorting Treasuries. The higher rates go, and the speed that rates are increasing, forces more and more selling. Is there a level of support that we can watch? There is, and it’s probably 2.2% to 2.5% on the 10-year bond that will bring out an avalanche of selling. The 2.2% tipping point is very close to where the T-bond sits today. Others say we …

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Wednesday, May 22, 2013 – Throwing Ben From the Chopper

Throwing Ben From the Chopper by Sinclair Noe DOW – 80 = 15,307SPX – 13 = 1655NAS – 38 = 346310 YR YLD +.08 = 2.03%OIL – 1.53 = 94.65GOLD – 6.30 = 1370.70SILV – .16 = 22.37 Federal Reserve Chairman Ben Bernanke went to Capitol Hill this morning and that was followed by the release of the Federal Open Market Committee, or FOMC, minutes from their May 1st meeting and that was followed with a big swing lower for stocks on very heavy volume and a big swing lower for bonds and everything was just rocking and rolling. Bernanke was appearing before the Joint Economic Committee this morning; the gavel fell; Bernanke delivered some prepared remarks: “A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further.” So, that sounded like no tapering off of QE anytime soon. Stocks and bonds inched a little higher. Bernanke went on to say that fiscal policy continues to be a drag on the economy. Right, we’ve heard it before. Then, Bernanke stressed that slowing asset purchases would not be the automatic beginning of the exit. The flow of purchases could be ramped up depending on the data. Now, the markets were trying to figure out which direction he’s going. Asked when the Fed will slow down asset purchases, Bernanke says it could come in “next few meetings”, but he won’t …

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