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March 26, 2015

Running in place

Filed under: Forex Strategies — Tags: , — admin @ 4:43 pm

A 1.5% downday, and the SPX is basically unchanged on the year.   There’s a reason that Macro Man hasn’t written too much about equities recently, and that’s it in a nutshell.  For the first three months of the year, US equities have been a bloke on a treadmill, running at a brisk pace simply to stay in place.

Not that this has come as any great surprise.  In October, Macro Man noted that liquidity factors were the primary explanatory variable for the S&P’s stellar run of performance over the past few years, and with the tap being turned off (in the US at least) there was naturally some reason for concern over future returns.

Indeed, more than a year ago Macro Man performed an analysis of the SPX’s return and vol by Fed policy regime; he thought that he had published it here at some point over the summer, but he’s deuced if he can find it.  Regardless, the analysis suggested a very bullish outlook for US equities as long as the Fed was a net purchaser of assets, and a dim prognosis whilst the Fed did nothing.   He’s taken the liberty of updating the study for the full body of the Fed’s QE Era (Dec 2008- Oct 2014); a summary of the results are below.

As you can see, based on this study, the right question for US equities is not “why aren’t they going anywhere?”, but “why are they doing so well?”  Since the end of October, the SPX has generated an annualized price return of 5.4%, with a vol of just over 13%.  Of course, a number of ancillary factors have also impacted the price- ECB QE, the collapse in energy prices (bad for producers, good for energy consumers), and of course, the shifting sands of Fed policy expectations.

There are, of course, limits to this type of analysis, given the paucity of truly independent samples.  Even going back several decades delivers little more than a handful of policy cycles, which is really an insufficient number from which to draw strong statistical inferences.  For what it’s worth, a year ago Macro Man also performed a study on SPX performance by orthodox Fed policy regime, splitting the cohort into the first 6 months of tightening/easing, subsequent tightening/easing, and on hold (defined as no policy moves for the last 6 months.)  The results are set out below.

On the face of it, this might suggest that a rate hike might be the best thing to ever happen to the US equity market, but correlation does not of course imply causality.  One might posit, for example, that early-stage and subsequent tightening cycles are driven by robust economic activity, which would naturally prove supportive of stock prices.  The lower returns from on hold and easing, meanwhile, would reflect the weak underlying economic conditions justifying those policy stances.

In the current environment, the expansion is already somewhat long in the tooth when measured by the calendar (though not by the credit cycle), and earnings have had a lot of “unnatural” support baked into the cake thanks to uber-accommodative policy over the last six years.  This is unlike any of the scenarios captured in the data set above.

Current and future financial conditions in the US look set to be tighter than those of the past several years, so it seems natural to expect equity performance to be worse (and, cough cough, macro performance to be better.)  That being said, Macro Man’s model is still somewhat bullish of the SPX, which informs a moderately long strategic position even as he is agnostic tactically.  He is following developments in the model and the market from afar, however, and is ready to change his stance when and if circumstances warrant.

In the meantime, there’s always the DAX, though it certainly looks like at least a good chunk of the easy money’s been made in that one for the time being….

December 12, 2011

TMM announce the late running of The End of The World

Filed under: Forex Strategies — Tags: , , , — admin @ 4:43 pm

TMM have lost track of which particular version of the Europlan this is, but would guess it is probably something like Plan K (plus or minus a letter or three). Having now digested the events of last week, TMM will attempt below to decipher what it all means.

But first, we cannot resist commenting upon the UK veto and the press reaction in the UK to it. As we have often noted before, the UK press are prone to covering geopolitical events in a self-doubting way, as if the country were losing influence, power and prestige. Well, tell us something new – it is not 1904. However, the uniform broadsheet reaction was one of UK isolation within Europe given that supposedly the other 26 nations are likely to sign up to the new agreement. Well, maybe they will, maybe they won’t – there are plenty of reasons to suggest the Finns, Irish & Swedes will not. But does it really matter? This was a treaty that was, essentially, a power grab by the Germans. Clearly, it is not in the interests of the UK to sign up to something that goes further with transferring financial regulation to Brussels & imposes a financial transaction tax EU wide. Let’s be honest, and call it the “UK Tax” and before you label us as Tea Party-ers, TMM are not against taxes full stop. If France & Germany were not willing to remove the FTT and provide assurances on financial regulation, then in TMM’s view, it was quite right to use the veto. The reality of the situation is that, despite annoying a few civil service types & journos (who will have less jaunts to Brussels) and some disgruntled Eurocrats in Brussels, the EU still needs the very large contribution the UK provides to its budget. Rumours of the UK’s demise have been greatly exaggerated for at least the twentieth time in TMM’s careers.

But what TMM found exceptionally amusing was that the left-wing press in the UK (the BBC, Guardian & Independent etc), along with the Labour Party – a function of having to argue against the Tories – have been forced into arguing for more European integration (not a position an opposition party in the UK ever wants to be in, seeing the post-veto polls painting broad-based support for the use of the veto). But not only that. They have also found themselves arguing in favour of a treaty that would have capped the structural deficit at 0.5% of GDP and also triggered automatic sanctions for breaching a 3% budget deficit and a debt brake requiring fiscal consolidation. In essence, they have found themselves arguing for a fiscal policy going forward that is far tighter than the current government’s and one that would tie Labour’s hands permanently going forward. If that is not irony, TMM do not know what is.

But we digress. Back to Europlan K…

Over the weekend the press, blogosphere and emails that TMM received were uniformly critical of last week’s summit and the ECB’s actions, with the word “failure” bandied about in many places. And certainly, relative to even the lowered expectations it seems to be something of a disappointment given the ECB dugs its heels in further with respect to government bond purchases. TMM were also disappointed, but must admit that this has been somewhat an emotional response. After digesting both the ECB’s actions and the result of the EU summit they cast their minds back to February 2009, and it all seems very familiar… in recession, markets and policymakers searching for “the bazooka”, and the frequent refrain that TARP was not big enough etc…

And that got us thinking. Because it wasn’t a single silver bullet that led to the rebound in the US and final acceptance that the policy response had been enough. It was a combination of a multitude of policy actions, ranging from TARP to the TALF, to ARRA, to liquidity guarantees for bank funding and eventually to Ben Bernanke’s “Greenshoots” fireside chat. Note that these all occurred and the stock market had bottomed well before the FOMC began buying USTs under QE1. Readers may recall TMM have thought along these lines before, but it turned out that the numbers were not big enough.

So, in place of the standard “Mickey Mouse” analysis TMM found in their mail boxes from most places, we are actually going to have a go at seeing if the measures in place are big enough to cover the conditions necessary to end the crisis, which TMM believe are:

(i) A large enough amount of cash to cover Spain & Italy’s financing needs for the next two years,

(ii) Incentives to longer term investors to buy Eurozone government bonds,

(iii) Structural reform measures aimed at rebalancing within the Eurozone and, lastly,

(iv) Clarity on the growth outlook.

In TMM’s view, clarity on the first three of these conditions is enough of a firewall for the rest of the world to chug along, and the last of these would be enough to unwind at least some of the under-performance of European assets and loosen financial conditions significantly.

First let’s get the bad news about growth [condition (iv)] out of the way. While the Composite Eurozone PMI has bounced from its November low and economic surprises have turned less-negative, it is too late to avoid a recession in Europe. Should financial conditions stabilise, TMM’s view is that the current US reacceleration should result in a new global inventory cycle which will aid Europe’s stabilisation. Q1 thus seems a reasonable expectation for the cycle low though, of course, this is a difficult view to have any confidence in but should the next batch of PMIs confirm last month’s base, TMM would be encouraged.

Now, onto the other three conditions.

(i) The funding of Spain & Italy. This has been, in particular, the problem that has to be fixed “Now” in the view of markets, not unreasonably. But in demanding a bazooka – similar to early-2009 – TMM reckon both commentators & markets have missed the wood for the trees. To see this, consider the following European battalions:

– EFSF: About EUR 250bn left in its unleveraged form (and call it 750bn if they can leverage it 3x).

– ESM: Now to be operational from July 2012, size EUR 500bn.

– ECB: Currently purchasing around EUR 5bn/week which adds up to about 250bn/year.- EU/IMF Bilateral loans: The Summit-announced EUR 200bn of bilateral loans to the IMF to increase its firepower.

– IMF: Current space capacity sits at about EUR 300bn.

Totalling that up gives EUR 1.75trn over the next two years. Include the EFSF leveraging and that number starts with a EUR 2trn-handle. Even stripping out the ECB and not leveraging the EFSF in this case would proved EUR 1.25trn, an amount TMM believe sufficient to finance Spain & Italy and more. And even if the IMF is not able to lend its full capacity to Europe for political reasons, there is still well over EUR 1trn of firepower.

Now before anyone starts pointing out that core Europe is about to lose its AAA rating, and thus the lending capacity of the EFSF etc is diminished, TMM would say that this is not new news. What is important to medium/long term investors is a clear institutional framework, not necessarily the presence of a AAA-rating (after all, there aren’t many places sporting such a rating these days…). In short, TMM do not think that it really matters that much.

(ii) Incentives to purchase Eurozone bonds. One of the most difficult problems to balance in any crisis is moral hazard – something discussed at length in many places. With respect to the Eurozone, the Greek PSI undoubtedly spooked many long term holders of Eurozone government bonds, with the subordination to the ECB resulting in larger losses upon banks than would otherwise have been necessary to return Greek to solvency. Additionally, the way Eurocrats went out of their way in order to avoid triggering Sovereign CDS (and one of the key reasons TMM reckon it is an ex-product), further reduced confidence both in policymakers and the rights of bondholders within Europe. TMM thus think it is particularly interesting the lengths the A-Team have now gone to in order to reverse from the PSI stance in ESM to that more of the IMF. Now, cynics would obviously point out that the IMF has often been in favour of PSI in the past, but the softening of the position to being on a “case by case” basis, is certainly one that will lessen the view from the bondholder perspective that they are subordinated. This is key to restoring long term confidence in Spain & Italy, nations that appear to TMM to be illiquid but still solvent.

Related to incentives to purchase Eurozone bonds, TMM move to the ECB’s exceptionally generous liquidity facilities that were dramatically loosened on Thursday. Banks can now post collateral on LTRO for 3yrs, and hedge their duration risk vs. EONIA for just 0.73%. As Sarko pointed out:

“Italian banks will be able to borrow [from the ECB] at 1 per cent, while the Italian state is borrowing at 6-7 per cent. It doesn’t take a finance specialist to see that the Italian state will be able to ask Italian banks to finance part of the government debt at a much lower rate.”

Given the ECB cut its reserve ratio, freeing up capital, posting short-medium term BTPs yielding 6-7% to the LTRO (with just a 1.5% haircut) with funding locked up for the entirety looks like a particularly good trade for Italian banks that are essentially screwed if Italy goes bust anyway. This not only takes a good chunk of Italian funding, but also results in building capital at Italian banks (reducing the need for the State to inject equity). This is the Bank/Sovereign feedback loop working in a positive way.

Note also that EU banks in general are now likely a large buyer of EFSF paper which can be used as collateral at the ECB. TMM would also note that banks can help achieve their new capital targets by purchasing these types of assets and taking the RWA improvement. TMM note that insolvent but liquid banks do not go “bang”.

(iii) Structural measures. The EU Summit clearly went a long way to addressing the problems with EMU in terms of aligning fiscal policy, implementing national debt brakes and structural deficit constraints. Additionally, Italy is enacting more broad-based structural reforms. These types of things take years to have an effect, but eventually they will. And it seems that Super Mario is pretty happy with them. That doesn’t necessarily mean the ECB will step up, but it is certainly a necessary condition to preventing these problems from arising in the future. The agreement is now like a pre-nuptial, and it is certainly vulnerable to difficulties in being passed. But TMM would view the only countries that matter here as Germany, France & Italy. Monti’s package that is being voted upon on Wednesday already contains the debt brake legislation, leaving only France to pass it. No doubt this will be difficult, given that the Socialists are against the package and an election is shortly coming. But there is now a convenient guy to give the blame to – David Cameron & the UK. TMM are optimistic on this front as it also furthers Sarko’s wish for Eurozone-17 integration at the (supposed) expense of the UK.

To sum up, TMM reckon markets have misread the events of the past week. Sufficient firepower does actually appear to exist, with many of the other perquisites for the end of the crisis. TMM reckon looking for a bazooka is the wrong approach, and have just noticed the infantry columns marching from several directions. The above is probably just about sufficient to remove the systemic effects of the crisis globally, making TMM more optimistic broadly on global growth. But at the end of the day, it will be clarity on Europe’s growth outlook that finally puts the issue in Europe to bed.

Simply said, the World isn’t ending just yet, friends.

June 20, 2011

Debt ceiling: Time’s running out

Filed under: Business — Tags: , , , — admin @ 12:28 am

June 17, 2011

Decision time: are you running with the bulls?

Filed under: Currency — Tags: , , , — admin @ 2:31 am

Quotable

“To reorganize preexisting debt is not enough; a continuing flow of new credit must be secured to enable the heavily indebted countries to recover. Commercial banks cannot be counted on. They should not have provided credit for balance-of-payments purposed in the first place; they have learned their lesson and would be unwilling to lend even if they did not suffer any losses on their existing commitments. Balance-of-payments lending ought to be the province of an international lending institution that has the clout to insist that countries follow appropriate economic policies.

At present, the major internal problem in the heavily indebted countries is inflation. As long as the servicing of foreign debt generates large budget deficit there is little hope of curbing it. But once the debt burden is reduced, domestic reforms would have a better chance of succeeding. With less inflation real interest rates would rise, flight capital would be encouraged to return, and perhaps even foreign capital could be attracted once again.

To provide an adequate flow of new credit, the World Bank (or a new institution designed for the purpose) would need a large amount of capital. At present, the political will to make the necessary capital available is missing; any enlargement of international financial institutions would be perceived as a bailout for the banks or for the debtor countries or for both. A comprehensive scheme that would require both creditors and debtors to contribute to the limits of their abilities ought to be able to overcome these objections. The new loans would not go to service the existing debt; they would serve to stimulate the world economy at a time when the liquidation of bad debts is having a depressing effect and stimulation is badly needed.”
                                          George Soros, The Alchemy of Finance

Commentary & Analysis
Decision time: are you running with the bulls?

I poked a bit at James Turk yesterday, asking whether he was right to think gold will benefit from a flight-to-safety bid in the wake of a sovereign default. I think he could be wrong. But he is right about something. I went to his website yesterday, after writing about him, and read an article on the solvency of the ECB. Turk makes a lot of great points so I thought I would share the article with you. You can read it here.

Felix Zulauf recently came out with a market prediction. Relative to equities, he thinks we could see 20% downside from the levels of mid-May. Where might that take us? Here is a chart of the S&P 500:

Using 1325 as our mid-May starting point, a 20% slide would take us to 1060; I’ve marked it with the red line. It seems like a reasonable technical target since it corresponds to congestion where past support came into play. But considering how crazy everyone is getting over the recent slide, a move to 1060 would be huge.

First, though, the S&P 500 needs to break beneath its 200-day moving average – it’s testing that level now (orange). But there’s a good chance that level gives way to more downside since not even the 38.2% Fibonacci retracement level has been reached yet.

When I was talking with Jack last week he mentioned he’d watched a segment of Larry Kudlow’s show – Kudlow was super bullish on stocks, apparently. His reasoning seemed to lie with robust earnings growth and relatively solid balance sheets of US companies.

Okay, fine. But does the earnings trend have the potential to keep up its pace? And if it does, will it be immune to a definancialization trend that might be sparked by the expiration of QE2, the expiration of political order in Greece, the expiration of Chinese grow-to-the-moon expectations, or all of the above?

Many are adamant that the end of QE2 will not mean the end of Federal Reserve easy-money policy. Indeed, rates will likely be kept low for months after the June 30 expiry. A reader of ours, in response to Currency Currents yesterday, emphasized correctly the fact that gold is being supported by low interest rates. Indeed. Since gold boasts no yield, it becomes an even more attractive investment in a low-yield environment. And assuming interest rates don’t change much, my call for a liquidity-driven move out of gold could likely be short-lived relative to other commodities and risk assets.

But I do think a potential liquidity-driven collapse is a more pressing issue today.

Here is a comment from a piece of research we received yesterday:

The European banking system now stands unprotected from the threat of a Lehman-type credit event. And since the European banking system is 62% of global banking in terms of balance sheet size (and 75% of the world’s largest 50 banks), the implications for the entire global financial system are obvious. We are facing the possibility of a sudden “de-globalization” of global finance.

Of course, we know this is the worst nightmare of globalizationist authorities around the world. They will do everything in their power to prevent such a “de-globalization” and specifically the impact such expectations would have on financial markets. [As a side note, I received a comment from a reader yesterday who was disgraced by the English and grammar I used in Currency Currents. He gave me no examples of my apparent butchering of editorial language, but perhaps he was really just disgraced by the fact that I make up tricky words like ‘globalizationist’ and ‘definancialization.’ Too bad.]

The point here, which I am reiterating from yesterday, is that the financial system is very tightly coupled. Remember that authorities thought the subprime fiasco and the housing bubble could be contained and managed. But that was not exactly how things went down, was it?

So as we look to markets we should be very cautious, careful not to jump the gun simply because this looks like an excellent buying opportunity.

Some other analysis I read this morning compared the recent decline and current investor sentiment with the corresponding period last year. Last year, as it turned out, offered up a very nice buying opportunity. Here is the forecast that accompanied the analysis:

This is a setup, in our opinion, for a very strong equity run in the near future. It could be that we have to retrace briefly before the push higher ensues, but as we mentioned above, the wait will not likely be a long one. A quick fall and an equally quick drive higher to new highs – or a grind from current levels to new highs – is what we expect. In either case, we anticipate that the great mass of investors will arrive at a place of zero confidence in the future of equities. That, of course, will occur moments before the bulls begin to run.

You go ahead and run with the bulls. I’ll be sure to catch up …

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May 18, 2011

Inflation Running Wild!

Filed under: Business — Tags: , , — admin @ 12:28 am

At least that’s what is happening in the UK, where CPI data came in showing 4.5% inflation, way hotter than the expectation of 4.1% and now getting to the point where the BOE may have to act. It should be noted, however, that this figure is from last month and was recorded prior to the recent commodity sell-off. 

*Sorry technical problems with the video this morning* This situation is telling in that it represents a stagflationary environment, and it will be interesting to see what, if anything, the BOE can do to avoid this peril. The minutes from the rate policy meeting are due out tomorrow, and hopefully the BOE will be moving toward policy adjustment.

In Australia, the RBA minutes from the rate policy meeting revealed concern about inflation and the potential need for higher interest rates despite an elevated Aussie value if “current conditions persist”.

In Japan, the BOJ chief said that the economy is in a “very severe state” which has given the market reason to suspect that further monetary easing may be forthcoming, perhaps as early as the end of this week.

So there is a bit of risk appetite in the markets, with Yen weakness driving stocks and commodities slightly higher, though those are giving back early gains. New home starts and building permits here in the US may be the decider.

In the forex market:

Aussie (AUD): The Aussie is mostly higher though giving back some gains after the release of the RBA rate policy meeting minutes showed a need for potential higher rates if inflation persisted. Consumer confidence figures are due out tomorrow.

Kiwi (NZD): The Kiwi is mixed, benefiting from a lower Yen but also seeing gains pared as more risk aversion creeps into the market. Tonight will be the release of PPI input and output data, which could be a harbinger of inflation.

Loonie (CAD): The Loonie started the morning higher but is giving back gains as oil prices have retreated further now trading closer to 96.50 than 97 and change earlier. Thursday will bring the review release from the Bank of Canada, and Friday’s CPI data and retail sales figures will show whether or not the BOC is any closer to rate hikes.

Euro (EUR): Economic sentiment figures are mostly lower as EU meeting of finance ministers tries to get back on track after the shocking arrest of the head of the IMF. ECB policy-makers are set to speak this week on the state of the Euro zone’s economy, and the debt crisis is still very much a problem.

Pound (GBP): The Pound is mostly higher after the CPI data release which showed very hot inflation, and the UK may be the first domino to fall into stagflation (besides Japan of course) as the global economy slows down. The BOE minutes tomorrow will show whether or not they will attempt to fight inflation through a change of policy, or will be content to allow the situation to worsen. (Click chart to enlarge)

gbpusd0517.JPG

Dollar (USD): The Dollar is gaining strength as the morning progresses as the mild risk appetite in the market is being replaced by risk aversion. This is because housing starts figures came in way worse than expected, showing a decline of 10.6% vs. an expectation of a gain of 3.6%. New starts were 523K vs. 569K. In addition, building permits were down 4%, vs. an expected gain of .9%. This highlights what the true problem is here in the US—declining asset prices.

Yen (JPY): The Yen is weaker across the board as the head of the BOJ stated that the Japanese economy is in trouble and hinting that further monetary easing may be forthcoming. Friday’s rate decision could be a time that further easing is announced. (Click chart to enlarge)

usdjpy0517.JPG

Just throw the old economic handbooks away and take a look at what is going on in the global economy today. It is a complete government failure by policy-makers around the globe that is making the economic situation worse and not better.

Today’s housing starts figures highlight the problem—biflation whereby commodities prices rise and asset values fall. Rather than attempting to help the common man by keeping commodity price inflation in check, Central bankers and policy-makers prefer to protect the banks who by all accounts are about to see another wave of defaults come in if the demand for home continues to fall along with prices.

Would you buy a declining asset right now? In the face of higher food and energy costs? With an uncertain economy that is not creating jobs? What happens when more people lose their jobs and then can’t afford to buy stuff, creating another wave of losses as businesses pare back to service the now-lower demand?

Inflation? Stagflation? Biflation? What type of “flation” is it? Well it doesn’t matter what you call it—just know that it is being fostered by bad government policy and weak-willed politicians unwilling to face the hard truths. Not to mention fat-cat bankers who will still take big bonuses and try to pay dividends, ahead of the next impending leg down in housing.

We’re in an unfortunate situation folks, and rest assured that your pain won’t be felt by the powers that be. It’s really easy to make policy when it doesn’t apply to you and the damage that’s created will be left for someone else to clean up.

All we can do is attempt to make sense of it all, and put our money where it will earn the most. For me, that’s the forex market!

To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!

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May 6, 2011

Running for the exits of ephemeral fundamental expectations!

Filed under: Currency — Tags: , , , , — admin @ 2:24 am

Quotable

“What if everything is an illusion and nothing exists? In that case, I definitely overpaid for my carpet.”
                                          Woody Allen

Commentary & Analysis
Running for the exits of ephemeral fundamental expectations!

Earlier in the year when JR and I did our “Best Guess” Issue for 2011, aka our “Forecast” Issue, we talked about the key linkages in the global economy; I shared these again during my most recent webinar sponsored by Mirus Futures and CME. I think it still works well as a framework …

Simply put, US demand is still the driver. Chinese demand is critical, but Mr. US Consumer still controls about 50% of the world demand pie. But most important to Germany (and the eurozone by default) is Chinese demand–it has been a huge source of growth for Germany of late (but as I said before, once China is done reverse engineering all those advanced machine tools, Germany may be hurting). Of course China demand is also key to everyone’s most loved asset–commodities. I note with interest and surprise even Jeremy Grantham, the Bostonian Barron of All-Seeing and All-Knowing (proven “for real” in many market cycles past) has been caught up in the Malthusian madness expecting an inevitable march higher in commodities prices.

Three deep bows in respect to the Northeast I do right now to Mr. Grantham, but wholeheartedly disagree with his premise: “We now live in a different, more constrained, world in which prices of raw materials will rise and shortages will be common.”

It’s different this time? It is a Malthusian moment? Oh really Mr. Grantham? No more inventions or material substitutes or new forms of energy or et al? I think you have been spending too much time rubbing elbows with the libs in Cambridge, a crowd that always thinks the sky is falling as they wring their hands in compassion.

Okay…sorry…back to the point…now it seems the US is slowing again; the numbers flowing from China suggest a slight slowdown and it could be a decent slowdown should China really get serious about credit-driven inflation (thanks to our most dangerous export–Ben Machiavelli Bernanke). Plus a host of numbers shows a “surprising” slowdown in Germany, as reported by Reuters.

Now to link these linkages back to the Fed:

  1. We know the Fed is targeting financial assets–it has never been so explicit. And they wonder why their reputation is in the proverbial toilet; oh let us count the ways.
  2. We know every analyst worth his CNBC public relations firm fees loves commodities and the stock market thanks to the cute little dictum–“don’t fight the Fed.”

The big problem with all these beliefs is they were predicated on the belief that yes–growth in risk assets can have a significant feedback loop to enrich holders of those assets and spur consumer demand. Well, as I pointed out in these august pages recently (if Grantham can do it so can I), thanks to a great piece of analysis by Hoisington Investment Management, that dog won’t hunt!

Mr. Consumer ain’t jumping for joy in a world where his feedback loop is rising cost of living everyday instead of a rising portfolio of risk assets. Note to Ben: I realize you don’t get out much so let me bring you in on a little secret: those happy-haves who show up on TV to tout your and their brilliance in identifying and riding this “new” bull market aren’t the ones who drive the bulk of spending in the US economy. No, those guys are the unhappy have-nots and they can’t for the life of them figure out what those boys on the Street are smoking or why your driver and delivery boys don’t tell you how much it costs now to buy a pound of tomatoes.

The game our boy Ben has played has done one thing VERY WELL in my most humble opinion:

It has created a massive spec premium in many, if not all, risk assets.

You name the risk asset: stocks, commodities, high-yield bonds et al

And of course what is the flip side of the ledger that is funding all this risk asset euphoria? Tick…tick…tick….tick….tick….tick….Shazam! The US dollar! That is right boys and girls!

So, in my most humble opinion, despite the fact markets can remain seemingly irrational for much longer than expected (or very rational to some much longer than expected), it seems at some point there has to be a connection with financial and real assets. To date, continued steady growth in the US and elsewhere was the expectation being dragged along by financial assets … but if we have one of those “switch on the light” sentiment swings, i.e. a Wiley Coyote moment–bada bing bada boom … the house of cards Ben just built a la QE1 + QE2 all comes crashing down.

US Treasury bonds aren’t playing nice with the other expectations in the market and haven’t been despite the Bond King’s machinations to the contrary … heck, they seem to be foreshadowing, and dare I say it, a RISK BID!!!!!!!

Notice the relationship between 10-yr Note Futures and the US weekly index in the chart below–if someone yells RISK BID in this crowded theater of risk asset dream-ology, all those Johnny Come Lately dollar bears and commodity bulls will be running for the exits labeled “ephemeral fundamental expectations” as fast as they can.

… bada bing bada boom … we’ve seen it all before.

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March 14, 2011

Is Your Adviser Running Scared?

Filed under: Investing — Tags: , , — admin @ 12:08 am
smscaredbusines

Among the roles financial advisers play – manager, teacher, therapist – perhaps the most important is as a steadying force. But after the market tanked three years ago, many advisers reacted no better than their clients, bailing out of stocks just as they began their steady climb back up.

Nearly one-third of advisers moved clients out of the stock market and into conservative investments in 2009 and the early part of 2010, according to research from GDC Research and Practical Perspectives. That includes bonds, cash and variable annuities, with bonds and cah as the most popular exit strategies: Some 40% of households increased the exposure to bonds and cash during that time, with those 50 to 64 most likely to flee stocks.

Whether the advisers were responding to pressure from nervous clients or reacting to their own anxiety, one thing remains clear, “advisers are no more immune to emotions than their clients,” says Laura Lutton, editorial director of the Fund Research Group at Morningstar. And even those who wanted to stay the course risked angering clients. Terry Donahe, an adviser with Cascade Wealth Management in Lake Oswego, Ore., says he lost several clients during the financial crisis because he refused to dump stocks. “They insisted on getting out of the market,” he says. “I said I understand, but I cannot do that as your adviser, and they left.”

So many advisers acquiesced rather than convince clients to stay invested in equities. “I think partly they gave into their clients’ fears,” says Kate Warne, investment strategist at Edward Jones in St. Louis, who she says encouraged advisers to stay the course. Worse, the market upheaval “blind-sided a lot of advisers,” says Kelly P. Campbell, a financial planner with Campbell Wealth Management in Alexandria, Va., with $300 million in assets. “Clients were upset by their losses and advisers didn’t have a plan.”

Other advisers say they weren’t feeling the heat at all – they recommended that clients dump stocks because they honestly believed more damage was coming. Brian Fricke, an adviser near Orlando, Fla., says the downturn changed his focus from building wealth to preserving his client assets. By March 2009, he had reduced his clients’ equity exposure to less than 30%, and eventually 0%, as he moved to 100% cash. He fully acknowledges that his clients have subsequently missed out on big gains. The Dow has climbed 86% since March 9, 2009, the beginning of a two-year bull market. Even so, he says, “we wanted to keep losses to a minimum.”

Is your adviser still gun-shy when it comes to stocks and riskier assets? While it’s difficult to pinpoint what is “too conservative,” when an adviser makes radical changes to a portfolio following a major event that’s a cause for concern, says Lutton. Instead, look for consistent advice over time, says Warne. She says a good adviser should constantly discuss the mix of equities and fixed income. If they are reacting to hot trends, they are likely to talk about a different investment each time — instead of the overall portfolio.

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