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Wednesday, August 07, 2013 – A Crack in QE

A Crack in QE by Sinclair Noe DOW – 48 = 15,470SPX – 6 = 1690NAS – 11 = 365410 YR YLD – .04 = 2.60%OIL – 1.12 = 104.18GOLD + 4.70 = 1288.30SILV + .11 = 19.69 Remember back in late May when Ben Bernanke hinted that the Fed might not continue Quantitative Easing forever; there might actually be a time when the Fed stopped pouring $85 billion into mortgage backed securities and Treasuries. The stock market took a hit on the whim of a whisper of a hint that the punchbowl might be removed. Bernanke did some backtracking, and the markets rebounded to hit record highs on the Dow and the S&P, and we all enjoyed milk and cookies. This week, we’ve seen several Fed officials talking about QE again, and again the markets are pulling back; down for three days. On Monday, it was Dallas Fed Bank President Richard Fisher; yesterday it was Charles Evans, president of the Chicago Fed Bank, and Dennis Lockhart, President of the Atlanta Fed Bank. Today, Federal Reserve Bank of Cleveland President Sandra Pianalto said that the central bank would be prepared to scale back asset purchases if the labor market remains on the stronger path followed since last fall. Pianalto said that there have been “clearer signs of a more sustained recovery” in the labor market in the last few months. “In light of this progress, and if the labor market remains on the stronger path that it has followed since …

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Monday, July 29, 2013 – Bees’ Revenge

Bees’ Revenge by Sinclair Noe DOW – 36 = 15,521SPX – 6 = 1685NAS – 14 = 359910 YR YLD + .04 = 2.60%OIL – .13 = 104.57GOLD – 6.60 = 1328.20SILV – .14 = 19.95 Two big economic stories planned for this week. The Federal Reserve FOMC is meeting and they will issue a statement on Wednesday. Then we have the monthly jobs report on Friday. September is the most likely time for the Fed to begin paring its $85 billion in monthly bond purchases. There are some concerns that big gains in jobs numbers could be enough of an economic pickup to prompt an early end to the Fed’s bond buying, a program which has helped stocks rally for much of this year. So, from a Wall Street perspective, good news on the jobs front is bad news from the Fed, but of course signs of a stronger economy are more important in the long run. The S&P 500 is up 18.2 percent for the year so far, however that is not a good indicator of the broader economy. The Fed may not cut back on bond buying. Remember the fact that Chairman Ben Bernanke has said that the decision to do so will be driven by the actual incoming data on the jobs and the economy rather than the Fed’s current expectations regarding that data. Despite the slow, steady job growth, unemployment has only moved about five-tenths of a percentage point down. This movement is barely enough …

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Wednesday, July 17, 2013 – Good Markets, Bad Economy

Good Markets, Bad Economy by Sinclair Noe DOW + 18 = 15,470SPX + 4 = 1680NAS + 11 = 361010 YR YLD – .04 = 2.49%OIL + .59 = 106.59GOLD – 16.90 = 1275.60SILV – .72 = 19.29 Let’s start today with a quick rundown of a few earnings reports. Intel reported second quarter net income of $2 billion, down from $2.8 billion a year ago. Revenue was $12.8 billion, and they expect third quarter revenue around $13.5 billion, both revenue numbers and guidance were below current estimates. IBM posted earnings of $4.3 billion on revenue of $24.9 billion. Earnings were up slightly from a year ago, while revenue was down slightly. Bank of America reports net income rose 63 percent, to $4 billion from $2.5 billion in the period a year earlier, while revenue increased to $22.7 billion from $22 billion. The bank benefited from higher revenue from equities sales and trading and a reduction in expenses, but its mortgage unit continued to struggle. This seems to be a recurring trend for the big banks; more profits from the Wall Street business side, less revenue from the old fashioned loan business, less money set aside for reserves. The concerns are that trading performance tends to be uneven over time, and cutting costs can only go so far, it doesn’t increase revenue. June housing starts fell 9.9% to an annualized rate of 836,000—the lowest level since August 2012. The drop in housing starts was led by a decline in multifamily …

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Friday, June 28, 2013 – Halftime

Halftime by Sinclair Noe DOW – 114 = 14,909SPX – 6 = 1606NAS + 1 = 340310 YR YLD – .05 = 2.48%OIL – .49 = 96.49GOLD + 34.50 = 1236.30SILV + 1.15 = 19.76 What a long strange trip it’s been, and we’ve only just reached the halfway mark of 2013. It started with the fiscal cliff, and after the lemmings jumped, we still had payroll tax hikes, debt ceiling battles, sequestration, mixed with assorted dysfunction; and through it all the stock market climbed. The S&P 500 hit a record high of 1687 in May; the Dow hit a high of 15,542. Those were the days of milk and cookies. And then Bernanke did a little tap dance around the punchbowl, sparking the animal spirits of the marketplace, and transforming bond market vigilantes into feral hogs, raising their snouts in the air and sniffing a whiff of blood. Volatility spiked, with more than 15 consecutive days of 100-point swings for the Dow. The bond market swooned, and June turned gloomy. Still, the first half was generally positive. The best first half for stocks since 1998. The S&P 500 closed the first half of 2013 up 12.6 percent. For the second quarter, the Dow rose 2.3%, the S&P 500 gained 2.4% and the Nasdaq Composite climbed 4.2% We are at a policy inflection point, or at least we are at a point where we can think about an inflection point, which may or may not be a bad thing if …

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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, June 19, 2016 – Don’t Fight It

Don’t Fight It by Sinclair Noe DOW – 206 = 15,112 SPX – 22 = 1628NAS – 38 = 344310 YR YLD + .13 = 2.31%OIL – .52 = 98.15GOLD – 17.00 = 1352.30SILV – .34 = 21.45 One of the best known adages in the financial world is “Don’t fight the Fed”. Marty Zweig is credited with that sage wisdom. Zweig was a professor of finance, and a financial analyst; he went on to become a hedge fund manager and he wrote a newsletter. He famously bet that the market would go down in 1987, and by October of that year he was short the market and made a big profit while most other money managers were getting clobbered. “Don’t fight the Fed”; that meant, according to Zweig’s theory, that if interest rates were going down, stocks would go up, and vice versa. He also claimed the way to make money was to be risk-averse, rather than taking chances on the upside. He said he was a big poker player while at Wharton, but had stopped playing when he became a money manager because he hated losing. In addition to “Don’t fight the Fed”, Zweig is credited with the adage, “Don’t fight the tape”; in other words, the market will have the last word, and complaining that the market is wrong is an excellent way to lose money. Zweig had a third rule: “Never relax”. Today the Federal Reserve concluded their Federal Open Market Committee meeting; they issued a …

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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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Tuesday, May 28, 2013 – The Central Banks Grand Experiment, Continued

The Central Banks Grand Experiment, Continued by Sinclair Noe DOW + 106 = 15,409SPX + 10 = 1660NAS + 29 = 348810 YR YLD + .12 = 2.13%OIL + .88 = 95.03GOLD – 4.90 = 1382.40SILV – .12 = 22.37 New record highs for the Dow, not for the S&P 500. Last week there was considerable hand wringing and flop sweat about the idea that the Federal Reserve might pull back from QE. And you may recall that I told you that I didn’t think so; we might see the Fed change the composition of the accommodative monetary policy in order to avoid particular asset bubbles, but they would not abandon a loose money policy; they might even try out some new tools. The economic stagnation of the major developed nations has driven central banks in the United States, Japan, Britain and the European Union to take increasingly aggressive action. Because governments are not taking steps to revive economies, like increasing spending or cutting taxes, the traditional concern of central bankers that economic growth will cause too much inflation has been supplanted by the fear that growth is not fast enough to prevent deflation, or falling prices. The European Central Bank faces legal and political restraints that make it harder for the bank to imitate the other major central banks. It cannot finance governments, which limits its ability to buy any country’s bonds. Still, there has been a shift in sentiment from the ECB, including lower rates and a change …

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Friday, May 24, 2013 – Where the Puck Will Be

Where the Puck Will Be by Sinclair Noe DOW + 8 = 15,303SPX – 0.91 = 1649NAS – 0.27 = 345910 YR YLD – .01 = 2.01%OIL – .38 = 93.87GOLD – 5.20 = 1387.30SILV – .24 = 22.39 The S&P 500 is now down for 3 consecutive days and the major stock indices posted their first negative week in more than a month. For the week, the Dow slipped 0.3 percent, while the S&P 500 and the Nasdaq each lost 1.1 percent. The Federal Reserve left many people mildly dazed and slightly confused this week, what with Bernanke speaking before the Joint Economic Committee and the release of the FOMC minutes. It used to be easier to figure out the Fed; it was a fairly straightforward cost/benefit analysis of inflation versus employment and inflation was usually at the top of the list. Then all of the sudden financial instability suddenly became the main concern. So, people were rethinking monetary policy; probably thinking too much. I don’t think the Fed is ready to step away from its easy money policies, but they are likely to change the composition. Maybe a little less mortgage-backed securities purchases and a little more Zero Interest Rates; maybe they’ll look toward some other areas altogether. How about jumping into the Muni-bond market? Or something else that might be a bit more direct? Maybe the Fed could make some direct injections of capital for infrastructure. America has dropped in the World Economic Forum’s global rankings of economic …

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Thursday, May 23, 2013 – Premature Punch Bowl Withdrawal

Premature Punch Bowl Withdrawal by Sinclair Noe DOW – 12 = 15,294SPX – 4 = 1650NAS – 3 = 345910 YR YLD un = 2.02%OIL + .01 = 94.29GOLD + 21.80 = 1392.50SILV + .36 = 22.73 Yesterday, Fed Chairman Bernanke delivered testimony before the Joint Economic Council and then the minutes from the most recent FOMC meeting were released. The Fed policymakers seem concerned about bubbles. Stock markets have been hanging out near record highs, the S&P is up about 15% year to date. Look back to earlier this year. The boring stocks led us higher. Your mega-cap, super-safe, dividend-paying names were the stocks to own. These stodgy companies sprinted higher for weeks. Safe became the new speculative. Next, the rally broadened. First, it was short squeezes. Then, the rally focused on the more cyclical names. Energy stocks have found a second wind. Small-caps were. Technology names began pushing the market higher. Bloomberg reports that the most indebted US companies are rallying more than any time in almost four years compared with the rest of the market. The bulls argue that stocks will keep going up,even if the Fed takes away the QE punchbowl; the argument is that there are record corporate profits. But then we have to ask why there are record corporate profits. The answer is the Fed’s accommodative monetary policy. The Fed is effectively subsidizing earnings by providing cheap credit for the federal government. Government spending replaces paychecks as a source of income for consumers to consume. Corporations …

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