Category Archives: Equities

Mortgage Applications in U.S. Increase for Third Week on Gain in Purchases

Posted on by

Still at extremely low levels, but moving up none the less, along with car sales, as happens at the early stages of a consumer credit expansion, supported by the trillions in financial equity from federal deficit spending that continues to add large quantities of income and savings to the economy.

Risks for equities remain the possibility of a near term dollar reversal, proactive fiscal tightening by Congress, and the ECB changing its mind with regards to supporting member funding needs.

Mortgage Applications in U.S. Increase for Third Week on Gain in Purchases

By Courtney Schlisserman

November 25 (Bloomberg) — The number of mortgage applications in the U.S. rose as purchases increased for a third straight week and refinancing picked up.

The Mortgage Bankers Association’s index increased 5.8 percent in the week ended Nov. 5, the Washington-based group said today. Refinancing rose 6 percent and purchase applications were up 5.5 percent, the most since Oct. 1.

Share

Zoellick Sees ‘Elephant,’ Not Endorsing Gold Standard

Posted on by

Back pedaling from yesterday’s remarks, but just getting the fish hook in deeper.

Gold is a non financial asset,not an ‘alternative monetary asset’

Starting to look like the QE fairy dust is wearing off.
The dollar selling was the focus of the ‘risk on’ hysteria, and it looks like the dollar may have stopped going down.

From what I see, the risk positions mostly look like short dollar bets, including long gold, commodities, and commodity currencies, etc. And long equity trades have had support from weak dollar assumptions as well.

I’ve yet to see any fundamental reason for the dollar weakness apart from misunderstanding QE. In fact, the firming US economy continues to lower the US budget deficit modestly, which tightens things up a bit, and also attracts foreign direct investment and financial investment. (I recall in the late 90’s reading that US FDI was the highest in the world, and it sure wasn’t due to cheap labor.)

So I’m watching for what’s potentially a dramatic dollar reversal here and all the other reversals that will come with it.

Zoellick Sees ‘Elephant,’ Not Endorsing Gold Standard

By Robin Knight

November 10 (Bloomberg) — Gold is the “elephant in the room” that must be addressed by policymakers, as it’s being used as an alternative monetary asset because of unease about the strength of developed economies, Robert Zoellick, president of the World Bank, told CNBC Wednesday.

What “the price of gold has been telling people is that there is a lack of confidence in some of the fundamentals growth policies,” Zoellick said.

“The golden elephant in the room, whether people recognize it or not, is being used as an alternative monetary asset,” he said.

Share

QE still driving portfolio shifting

Posted on by

When Japan First Did QE, Stocks Shot Up And Then Quickly Cratered Massively

Pragmatic Capitalist

November 4 — There appears to be some confusion over the response of equity markets to quantitative easing. Of course, the Fed is hoping that they can ignite a “wealth effect” by driving stocks higher. But as we saw in Japan this failed to materialize. In fact, anyone buying in front of the QE announcement in Japan ultimately got crushed in the ensuing few months and years. When the BOJ initially announced the program in March 2001 the equity market rallied ~16%.

But the euphoria over the program didn’t last long. In fact, within 6 weeks of the announcement the Nikkei began to crater almost 30% over the course of several months. In the ensuing two years the Japanese stock market fell a staggering 43%! It wasn’t until the global economic recovery in 2003 that Japanese equities finally bottomed and went on a tear. Ultimately, the BOJ ended the program in March 2006 and deemed it a failure.

Share

QE and the wealth effect

Posted on by

>   
>   (email exchange)
>   
>   On Thu, Nov 4, 2010 at 11:26 PM, wrote:
>   
>   Do you have any thoughts on this supposed wealth effect?
>   

There is one but I see it as coming from deficit spending, and probably not QE.

Federal deficits support income and add to net financial assets,
which is the financial equity and income that supports the credit structure.

The question is whether QE net adds to nominal wealth via the equity price channel, via ‘valuation’ due to lower long term risk free rates/higher pe’s.

First, the evidence isn’t clear that QE results in higher equity prices, with Japan as the leading example.

Second, there’s the question of whether the maybe 75 billion of annual income- about 1/2% of gdp removed from the private sector- is a stronger force than the valuation benefits of the lower discount rates.

Third, let me suggest that by doing QE on a quantity basis rather than targeting a rate, the change in rates on a ‘bang for the buck’ basis could be a lot lower than if the rate was directly targeted.

Let me give a possible example. Let’s say the Fed simply targeted the 10 year tsy at 2.25%. They would have a bid at that level and buy all the secs the market didn’t want to buy at that level. They may in fact buy a lot or a very few, and possibly none at all, depending on tsy issuance, investor demand, and market expectations. But let’s say for this example they did that and bought a total of $1 T 10 year notes defending the 2.25% level.

Now let’s say that instead, the FOMC had limited the Fed to buying $900 billion. The question then is how high would 10 year notes trade with that $100 billion free to trade at market levels?

What I’m saying is it could be at much higher yields, as the market expectation component of demand does its thing. The yield would simply be the same as if the Tsy had issued $900 billion fewer 10 year notes.

Note that we went for years with no issuance of 30 year t bonds, and 30 years t bond rates on the outstanding bonds did not fall to 0.

Yes, the curve flattened maybe 50 basis points, and steepened again when issuance resumed, but in the scheme of things it was a factor for the macro economy.

In other words, qe, without a rate target, qe might actually reduce rates very little.

It’s all about how much net govt issuance alters the term structure of rates.

So is there a wealth effect?

Yes, but in both directions- removing income lowers it and valuations help it.

And, recognizing QW when done the way they are doing it probably doesn’t reduce rates all that much, the cost of QE in lost income is more likely to be higher than the valuation gains.

Hope this helps!

Also:

Looks like it was buy the rumor and then double up on the news.

Either it all sticks or it all unwinds that much more intensely.

Still looks like the latter to me as the notion that QE doesn’t work sinks in. The mood now is there will be QE 3,4,5 or whatever it takes until it does work.

Like the kid in his car seat who keeps turning his toy steering wheel as much as it takes to turn the car.

Share

QE still driving portfolio shifting

Posted on by

I’ve been watching for a ‘buy the rumor sell the news’ ‘risk off’ reversal, but it happened at best only momentarily after the Fed announcement, when the 10 year tsy note dipped to maybe 2.62 very briefly, stocks dipped, the dollar sort of held, gold was off a touch, etc. But now it looks like it’s ‘risk back on’ with a vengeance as both believers in QE and those who believe others believe in QE are piling on.

The fact remains that QE does nothing apart from alter the term structure of rates.

There are no ‘quantity’ effects, though from the following article and market reactions much of the world still believes there are substantial quantity effects.

And what we are seeing are the effects of ongoing portfolio shifting and trading based on the false notions about QE.

To review,

QE is not ‘money printing’ of any consequence. It just alters the duration of outstanding govt liabilities which alters the term structure of risk free rates.

QE removes some interest income from the economy which the Fed turns over to the Tsy. This works against ‘earnings’ in general.

QE alters the discount rates that price assets, helping valuations.

Japan has done enough QE to keep 10 year jgb’s below 1%, without triggering inflation or supporting aggregate demand in any meaningful way. Japan’s economy remains relatively flat, even with substantial net exports, which help domestic demand, a policy to which we are now aspiring.

QE does not increase commodity consumption or oil consumption.

QE does not provide liquidity for the rest of the world.

QE does cause a lot of portfolio shifting which one way or another is functionally ‘getting short the dollar’

This is much like what happened when panicked money paid up to move out of the euro, driving it briefly down to 118, if I recall correctly.

No telling how long this QE ride will last.

What’s reasonably certain is the Fed will do what it can to keep rates low until it looks like it’s meeting at least one of its dual mandates.

Asians Gird for Bubble Threat, Criticize Fed Move

By Michael Heath

November 4 Bloomberg) — Asia-Pacific officials are preparing
for stronger currencies and asset-price inflation as they blamed
the U.S. Federal Reserve’s expanded monetary stimulus for
threatening to escalate an inflow of capital into the region.

Chinese central bank adviser Xia Bin said Fed quantitative
easing is “uncontrolled” money printing, and Japan’s Prime
Minister Naoto Kan cited the U.S. pursuing a “weak-dollar
policy.” The Hong Kong Monetary Authority warned the city’s
property prices could surge and Malaysia’s central bank chief
said nations are prepared to act jointly on capital flows.

“Extra liquidity due to quantitative easing will spill
into Asian markets,” said Patrick Bennett, a Hong Kong-based
strategist at Standard Bank Group Ltd. “It will put increased
pressure on all currencies to appreciate, the yuan in particular
has been appreciating at a slower rate than others.”

The International Monetary Fund last month urged Asia-
Pacific nations to withdraw policy stimulus to head off asset-
price pressures, as their world-leading economies draw capital
because of low interest rates in the U.S. and other advanced
countries. Today’s reactions of regional policy makers reflect
the international ramifications of the Fed’s decision yesterday
to inject $600 billion into the U.S. economy.

Share

next week….

Posted on by

Getting really bad feelings for the next week or so:

QE believed to be inflationary money printing but doesn’t actually do anything

Gridlock presumed good but is actually bad as it could mean taxes rise at year end

Republican fiscal conservatives deemed ‘good’ but in fact bad with their spending cuts and budget balancing bias.

So three big ‘buy the rumor sell the news’ things coming together?

Could be a reversal of risk on, or even a confused reshuffle of what’s risk on and what isn’t.

For example, could be lower 10 year tsy yields as it will all be perceived to keep the Fed on hold that much longer, as well as gold and commodities and commodity currencies selling off due to the realization that the fed can’t reflate even if it wants to.

That means crude could be selling off and the dollar getting stronger, even with rates lower.

Not a good time to have any risk on, in my humble opinion.

Share

cross currents

Posted on by

I wasn’t sure whether to send this, as it reveals my lack of clarity on current events, but decided to send it to make the point.

Here’s what I see:

Markets are already discounting a large QE and are also discounting that QE actually makes a difference:

The dollar went down
Gold went up
Commodities went up
Interest rates fell
Stocks went up

So we have a big ‘buy the rumor sell the news’ leading up to the Fed meeting.

AND a potential ‘QE doesn’t work anyway’ let down.

I’ve never seen a more confused set of circumstances.
I recommend all traders stay out of this one.
Making money on this probably falls into the ‘better lucky than good’ category.

One of two things will happen- QE will or will not happen, data dependent

1. Good news for the economy means QE might not happen.

So the dollar reverses, and it went down for the wrong reason anyway, as QE fundamentally doesn’t alter the dollar, so it’s probably net short.

But how about the euro? It’s fundamentally strong with no end in sight, and good econ news helps them as much as anyone.
But an over sold dollar reversing can rally it against most everything while the unwinding goes on.

Stocks up, as that would be good news for stocks?
Or stocks down as rates go up and the dollar goes up, and the world goes to ‘risk off mode?’
(Stocks were helped by the weak dollar and lower rates.)

Is good econ news good or bad for gold? More demand in general is good, but less risk, less fear, and a strong dollar hurts. And it could be over bought in the QE craze as QE in fact has nothing to do with demand, currencies, or gold. It’s just a duration shift for net financial assets.

10 year notes? QE buying reverses and they go higher in yield.
But strong dollar and weak commodities and weak stocks and the Fed still failing on both mandates means low for long is still in place, even without QE.

It’s been strange enough that rates fell with a weak dollar (inflation) and rising commodities, so who knows what actually happens when whatever has been going on is faced with some combo of no QE and/or the realization that QE doesn’t do anything of consequence.

2. Bad news for the economy means QE happens.

Dollar keep falling? Or already discounted?
Gold and commodities keep rising? On bad econ news? And when already discounting QE working?
Stocks keep rising? On bad econ news? And already discounting QE working?

To a point, based on the presumption that QE actually works to add to domestic demand.
But has it already been discounted? And if markets believe QE works won’t they discount the Fed hiking after it works and the economy ‘takes off’???

The answer?

Don’t think of the medium term, just the short term.
Short term technicals will rule due to what’s been discounted.

The dollar is the pivot point, as it’s moved the most and for the wrong reason (except maybe vs the euro).

If nothing else, the dollar will appreciate if:

No QE due to good econ news
Buy the rumor sell the news/already been discounted forces
There is awareness that QE doesn’t do anything in any case
Foreign govt buying (currency war, etc.)

The dollar continues to fall if QE is larger than expected and the belief that it does something holds.

Recent economic news and Fed speak indicate that is not likely.

The other short term market moves will be reactions to the dollar move, and not so much reactions to what made the dollar move.

I do continue to like BMA forwards.
The one thing there is to be know is that high end marginal tax rates won’t go down, and that forward libor rates won’t fall below 50 bp.

Share

deficits vs corporate profits since 97

Posted on by

>   
>   (email exchange)
>   
>   On Tue, Oct 12, 2010 at 11:31 PM, Michael wrote:
>   
>   Thought you might like this. There is a hugely strong relationship between deficit
>   spending and corporate profits 1 year later. This is corporate profits with a 1
>   year lag, regressed against Quarterly debt to GDP.
>   

Yes, the old Levy profit equation from the 30’s maybe!

>   
>   From 1970 on, this is a strong relationship, except for a few quarters around 1997.
>   I’ll follow with another chart in a minute.
>   
>   The Senate run is improving your visibility – plus I am seeing Chartalism everywhere
>   now. It used to be fringe, now many people use it as a given…
>   

Good to hear it, thanks!

Share

Unfunded state and local pensions

Posted on by

Not to worry – as long as they keep full allocations to equity markets the coming doubling of equity prices over the next few years will bail them out.

Provided the political leadership doesn’t get too serious about federal govt deficit reduction with tax increases and spending cuts.

US Cities Face Half a Trillion Dollars of Pension Deficits

By Nicole Bullock

October 12 (FT) — Big US cities could be squeezed by unfunded public pensions as they and counties face a $574 billion funding gap, a study to be released on Tuesday shows.

The gap at the municipal level would be in addition to $3,000 billion in unfunded liabilities already estimated for state-run pensions, according to research from the Kellogg School of Management at Northwestern University and the University of Rochester.

Share

Boehner says he’d support a middle-class tax cut

Posted on by

As previously suggested, Boehner reverses course and does what should have been his obvious choice.

This gives everyone in Congress a pre election window to try to tax cut their way to victory before the election.

With the current level of deficit spending already supportive of modest GDP growth, and these latest developments taking away the risk of fiscal tightening through tax hikes, look for prospects for a double dip to be all but forgotten, and equities to firm accordingly.

In sum, federal deficits are supporting enough income/savings/agg demand for modest gdp growth even with a relatively weak consumer and no credit expansion,
corps have already demonstrated the ability to generate reasonably good cost cutting/profits with very modest gdp growth,
high unemployment keeps unit labor costs under control, and relatively low term interest rates continue to support valuations,
housing can’t go any lower and even if starts doubled they would still be relatively modest,
and same goes for cars and lots of other areas of deferred consumption and deferred investment.

Boehner says he’d support a middle-class tax cut

September 12 (AP) — House Minority Leader John Boehner says he would vote for President Obama’s plan to extend tax cuts only for middle-class earners, not the wealthy, if that were the only option available to House Republicans.

Boehner, R-Ohio, said it is “bad policy” to exclude the highest-earning Americans from tax relief during the recession. But he said he wouldn’t block the breaks for middle-income individuals and families if Democrats won’t support the full package.

Income tax cuts passed under President George W. Bush will expire at the end of this year unless Congress acts and Obama signs the bill. Obama said he would support continuing the lower tax rates for couples earning up to $250,000 or single taxpayers making up to $200,000. But he and the Democratic leadership in Congress refused to back continued lower rates for the fewer than 3 percent of Americans who make more than that.

The cost of extending the tax cuts for everyone for the next 10 years would approach $4 trillion, according to congressional estimates. Eliminating the breaks for the top earners would reduce that bill by about $700 billion.

Boehner’s comments signaled a possible break in the logjam that has prevented passage of a tax bill, although Republicans would still force Democrats to vote on their bigger tax-cut package in the final weeks before the November congressional elections.

“I want to do something for all Americans who pay taxes,” Boehner said in an interview taped Saturday for “Face the Nation” on CBS. “If the only option I have is to vote for some of those tax reductions, I’ll vote for it. … If that’s what we can get done, but I think that’s bad policy. I don’t think that’s going to help our economy.”

Austan Goolsbee, new chairman of the White House Council of Economic Advisers, said on ABC’s “This Week” that he hopes that Democratic lawmakers who also want an across-the-board extension will join Obama and others in the party in supporting legislation aimed at the middle class before the November elections.

In response to Boehner’s comments, Goolsbee said, “If he’s for that, I would be happy.”

With congressional elections less than two months away, both parties have been working to score points with voters generally unhappy with Congress. Democrats are bearing the brunt of voter anger over a stubborn recession, a weak job market and a high-spending government, giving the GOP an opening for taking back control of the House and possibly the Senate.

Democratic leaders would relish putting up a bill that extends only the middle-class tax cuts and then daring Republicans to oppose it. In response, GOP lawmakers probably would try to force votes on amendments to extend all the tax cuts, arguing that it would be a boost to the economy, and then point to those who rejected them.

A compromise over the tax-cut extensions had been suggested by some senior Democrats. In a speech last week in Cleveland, Obama rejected the idea of temporarily extending all the tax cuts for one to two years.

The tax-cut argument between Obama and Republican lawmakers focuses on whether the debt-ridden country can afford to continue Bush’s tax breaks, which were designed to expire next year. Republicans contend that cutting back on government spending ought to be the focus of efforts aimed at beginning to balance the federal budget.

Share