FED POLICY DANGER

 

Stanley Druckenmiller is a pretty good investor, a guy we never met and don't know, but whose career we followed for a long, long time.

Earlier today he gave an interview to CNBC at a conference. The retired founder of Duquesne Capital Management, Druckenmiller apparently believes that the Fed is risking harming the economy with its continuing "aggressive market intervention."

"I am fearful that today our obsession with what will happen to markets and the economy in the near term is causing us to misjudge the accumulation of much greater long term risks to our economy, " he was quoted as saying.

According to the article, Druckenmiller cited "soaring production, accelerating household net worth and strong retail sales," adding it was time to jettison the Fed's "myopic goals" of  ZIRP, now five years into the previous mess.

Here's a link for more. 
rle louis
http://www.cnbc.com/id/101838762

ENERGY SECTOR

Energy is one of our pullback sectors we're looking to take advantage of.

Brent crude oil yesterday endured its largest one-day loss since the first of the year, hitting a three-month low at $104.39 a barrel while West Texas Intermediate dropped below $100, it's first such foray  there since May.

Some might call at least part of it the Yellen effect.

On the NYmex August WTI fell as low as $99.91. Just a few short weeks ago Brent traded around $115. The reasons for the retracing are numerous and we've touched on them before, some of it owing to the decline in risk premium with Libya's increasing output and the Iraqi situation jumping off the front page.

Behind the scenes lurks the possibility of progress in talks between the U.S. and Iran that, if they go well, could augur for lifting sanctions that have crimped Iranian oil exports. So supply issues for now seemed to be calming markets.

We continue to like energy for the longer term and will add to our positions with any further pullbacks, though a short-term rebound in prices would not surprise.



The above chart is from Market Watch and goes along with what we've been blogging about a pullback in energy and our recent post We Don't Need Your Well-Thought-Out Advice and yesterday's Explain Yourself.

If deflation concerns get any more priced into this market, they would be a super-duper sales day coupon for super-sized soft drinks from one of New York city officials' favorite retailers, Walmart. 
t. man hatter

EXPLAIN YOURSELF

                                          t. man hatter

Today was Humphrey-Hawkins Day and Fed Chair Janet Yellen did her best impression of former Chairmen Ben Bernanke and Sir Alan Greenspan.

But first we digress a bit.

Here's a quote from today's Market Watch

Leading market sectors lower included: Gold Miners (GDX), Junior Gold Miners (GDXJ), Silver Miners (SIL), Small Caps (IWM), Energy (XLE), Biotech (IBB), Social Media (SOCL), Retail (XRT), Consumer Discretionary (XLY), Consumer Staples (XLP), Health care (XLV), Australia (EWA), Solar (TAN), Russia (RSX), Germany (EWG), Austria (EWO), Spain (EWP), Gold (GLD), Silver (SLV), Crude Oil (USO), Natural Gas (UNG), and Bonds (TLT).

Given Fed Chair Janet Yellen's double talk tour de force, a staple of central bankers everywhere, you might want to put some illogic to work and peruse some of the sectors like mining and energy. You might also want to take a look at our recent post, Don't Need You Well-Thought-Out Advice.

A lot of money was flowing out of Australia late last and early this year, partly owing to concerns about China's expected slowdown and weakening demand for commodities. Commodities in the Land Dwn Under is mostly spelled mining. Now according to the WSJ, much of that money is returning. Europe and the U.S., so the earlier Street party line went, were suppose to pick up the slack.

Call it the kangaroo bond trade. There's a lot of yield-starved money sloshing around the globe and the yields on Australian bonds look delectable to famished investors.

Germany's economic numbers came in weak and energy has eased a bit despite troubles around the globe. Retail has been in a funk and the earlier hacking case at Target didn't help. Consumer staples were one of the first half surprises along with utilities and energy.  

Biotech got way ahead of itself before returning to this dimension in February and since has recaptured much of those loses. Spain, well, we all know about the pain in Spain.  

Health care's been on a run of late and rests near it yearly highs as some like its future prospects citing baby boomers. 

Here's another quote: "...was facing another problem, which was perhaps even bigger, but partly secret.  The nation's banks, the foundation of the system, were in big trouble. Bad loans,especially those made in real estate and in Latin America, were taking their toll. Some of the largest commercial banks were on the verge of going under. The depth of the problem was a big secret within the Fed, which had regulatory control.  But it wasn't just the banks. A number of securities firms and insurance companies  were in trouble as well."

If that sounds familiar like something you lived through just a few yesterdays ago you'd be incorrect.The above is a quote from Bob Woodward's 2000 Maestro Greenspan's Fed And The American Boom discussing what was going on in late 1990.

There are three takeaways here. What happened in 2007-08 when numerous big banks were taking on more than water, you had securities firms like Lehman and Bear Stearns biting the bullet and a stock market panic, none of this is new.

In the quote you'll notice that then as now the Fed "had regulatory control." And here's the most troublesome part. In less than a generation the Federal Reserve and their big buddies, big bankers, created not one but two major economic crises. And this last time they actually outdone themselves. 

So ramp up your confidence if you have any left in these bureaucrats and follow their lead. And to help bolster your confidence here's a term for you, one that MSM loves to toss around--transparency.

So much for Humphrey-Hawkins Day which originally came about as part of the Humhprey-Hawkins Full Employment Act of 1978 that required the Fed to appear before Congress twice a year to explain itself. We use the term explain advisedly here.

As one media wag recently wrote: "The more the Fed talks, the less the public understands."

WHERE'S THE ALPHA?

At a recent cocktail party one evening an attractive, young couple off in the corner were apparently debating the market and interest rates.

At one point in the discussion, now at a boisterous level that attracted others in the room, the lady yelled at her companion: 

"Up your alpha!" To which her companion promptly replied: "Well, screw your beta!"

A few minutes later, hand in hand, the couple smilingly announced they were off  to another more hip gathering and ebulliently sauntered out.

Lemmings don't wear stripes or signs. But they should.

In the market these days there's much ado about what many mom and poppers either don't care to or can't grasp--alpha and beta.

Simply stated, alpha is any added value or return active management brings to one's investment table. Beta, on the other hand, is a measure of the risk arising from exposure to general market movements or asset classes, all things equal.

A few years back when hedge funds fell off their once envied shelf, it was hard to avoid all the negative press there were receiving. Recall  hedge funds originally  were the alternative kid in town, taking advantage of things, to use the Street vernacular, not correlated to what was available for many reasons to the mom and pop crowd.

And forget not that once upon a time the mom and pop crowd included, except for their economic clout, pension funds, university endowments, insurance companies and the like. The huge California pension fund, Calpers, should come to mind. It was one of the first to open its deep wallet and invest in hedgers.

The search for return, safe or otherwise, as we're seeing in this yield-starved, Fed-created scenario of low interest rates, has its own energy. Some might refer to the run-up in bond prices and the run-down in yields as a form of momentum investing. A kind of perverted go with the flow mentality MSM and other various talking-heads love to promote.

Hedge funds are noted for taking around 20% off the top of performance and high fees. Their meme, big alpha, supposedly justified the costs. It was a culture available to only a select fee. That is to say they invested in things not correlated for the most part to the general stock market and it's often prosaic movements.

The bad news these bad boys were experiencing then--dwindling assets, closures, toothless returns, to name a few--apparently now rest comfortably on the scrap heap of investor memories. At least that's what the numbers show.

As the stock market get larger, so too have those hedge funds as money once again is pouring in from investors of all stripes. Only this time there's a difference. 

It's the absence of their once ballyhooed negative correlation. According to what we read, not only are assets in these funds growing but the data also shows that they're more correlated than ever with the  stock market.

In short, back to alpha and beta, investors are paying up for the privilege of alpha but mostly likely will only receive beta, which they already most likely are getting other places. If as they say a rising tide raises all boats, then positive correlation can do the reverse.
t. man hatter

SIFIS

 t. man hatter

Who caused much of the financial trouble of the last recession? Most agree it was the Fed's big buddies, big banks.

So what do the bureaucrats in Congress and at the Federal Reserve do, implement more regulations.

David Hunt is CEO of Prudential Investment Management, the $890 billion asset management subsidiary of the huge insurer, Prudential. Here's a quote from a recent  interview in the Financial Times. Prudential has been designated, overlook if you can the stilted economic language used here, a systematically important financial institution. To use the acronym, it's a Sifis.

You should be familiar with them because Fed Chair Janet Yellen loves to bring them up in her little media chats. 

Now we already have selfies, but this is Sifis. Imagine if you can two strangers at a cocktail party and one, after a few brief exchanges, innocently asks the other one what he does. 

"I work for a Sifis."

"What'd you call me?" the first guy responds

A Sifis is bureaucratic babble for too big to fail, also know as TFTB.

Hunt: "... cautions that increasing difficulties of meeting regulatory requirements will reshape asset management as smaller players struggle to meet rising legal and compliance costs."

So what's the point, you ask? The point is simple. Perhaps too simple for most to get. Regulators do what they always do, the only thing they know: Punish the many to get the few.

So let's repeat our original question. Who caused the financial turmoil, the big guys or the little guys? One of the current on-going criticisms of the haves is they have ways or access to ways around things little guys don't  Big corporations is synonymous for haves.

So read Mr. Hunt's statement carefully. If you drive the smaller players out you're only left with the the big players who committed the foul deeds in the first place. Whether it's accounting changes, pension funding, compliance with environmental regulations or health insurance, this principle is true across the entire economic landscape.

When the subject of shadow banking comes up and the increasing role asset managers play in it, Hunt is careful to differentiate his firm. "We don't believe in that model at all, " to which he adds that this firm lends "directly to companies with which it has long-term relationships, instead of via an agent."

A cynic might suggest that sounds like an accurate description of crony capitalism. Last time we checked Washington lobbyists have long term relationships with Congress members who keep getting re-elected. Ask any self-aggrandizing lobbyist his or her worst nightmare and you'll get a one-word answer--turnover.

Prudential is the 10th largest asset manager in the world. With few exceptions the government always lets the little guys go out of business. Keep the concept of level playing field in mind when you're ruminating about this, if you ever ruminate.

Too big to fail is a bureaucratic excuse for keeping dysfunctional, bloated behemoths on the taxpayer funded respirator when in even a semi-free market they'd be mercifully euthanized before you or I can spell Sifis backwards.

HELLO WAGE INFLATION

At the risk of sounding trite, though we've written about it before, we'll mention it again--wage inflation.

In this world of crazy easy money that's been gifted to one and all by the globe's well-intentioned central banking crews, wages are that go-clunk-in-the-night-other-shoe hitting the economic floor.

We've been suggesting for a while now such is the case. Higher wages lead to higher prices and higher prices that dreaded big I word. We'll be kind and skip the bogus numbers about inflation that these bureaucrats, like the mad magicians they are, conjure up.

Some might suggest higher prices lead to higher wages, but we'll bypass the academic economic soirée palaver.

What's important here is we're not alone in our assessment. Here are some charts from Business Insider.



There are more at the link below.
t. man hatter
http://www.businessinsider.com/wage-pressure-charts-2014-7

OUR VIEW

As we skirt around the web reading various and sundry articles it becomes increasingly clear nearly everyone has a pick to bone. Yea, we know that's a play on an old cliche' and we're not embarrassed in the least.
 

Take the recent job numbers MSM sought to rave about as did many economists and the administration. 

The more one learns about economists, the more one realizes how straight out, goofy benighted most are. But we'll get to that on another occasion.

Mort Zuckerman is a billionaire. He's a liberal and he's a prominent editor. He is also a graduate of the University of Pennsylvania and Harvard Law School and a Canadian born, American business tycoon.

Here's a quote from a Washington Post story about him late last year.

Mortimer Zuckerman, 76, is known for being a regular on the political talk show “The McLaughlin Group”and for owning such media properties as the New York Daily News, U.S. News & World Report and the Atlantic Monthly, the last of which he sold to Washington businessman David Bradley for about $10 million in 1999.

But he made his fortune, estimated at more than $2 billion, buying and constructing office buildings. He is the founder and chairman of Boston Properties, a publicly traded real estate investment trust with 138 properties, many of them in the Washington market. His is one of the most respected minds in the real estate business.

To assume Zuckerman is not well-connected enough to get a better scoop on the jobs numbers is to assume that New York City officials love Walmart. In case you don't know, they don't. Recently, Zuckerman penned an article for the Wall Street Journal questioning those fine figures, raising the question MSM loves to dodge at every turn, of why so much ado about what is essentially a bogus report getting bogus kudos.

Here's a quote from Zuckerman's article.

The Obama administration and much of the media trumpeting the figure overlooked that the government numbers didn't distinguish between new part-time and full-time jobs. Full-time jobs last month plunged by 523,000, according to the Bureau of Labor Statistics. What has increased are part-time jobs. They soared by about 800,000 to more than 28 million. Just think of all those Americans working part time, no doubt glad to have the work but also contending with lower pay, diminished benefits and little job security.

On July 2 President Obama boasted that the jobs report "showed the sixth straight month of job growth" in the private economy. "Make no mistake," he said. "We are headed in the right direction." What he failed to mention is that only 47.7% of adults in the U.S. are working full time. Yes, the percentage of unemployed has fallen, but that's worth barely a Bronx cheer. It reflects the bleak fact that 2.4 million Americans have become discouraged and dropped out of the workforce. You might as well say that the unemployment rate would be zero if everyone quit looking for work.

This may seem a bit petty and if MSM and their apologists for this administration had their way, that's how it would get dealt with. But there's more to it here, particularly if you're an investor who invests his capital seeking some kind of return.

Government figures you can't trust is a government you can't trust. And that, my thirsty friends, applies to governments left, right or straight ahead down the middle..  

That's our view. We hope you know yours.
t. man hatter

http://online.wsj.com/articles/mortimer-zuckerman-the-full-time-scandal-of-part-time-america-1405291652

FULLY WIPE THE SLEEPERS FROM YOUR EYES

I never thought that anything was irksome if it helped me to trade more intelligently.
                 JesseLivermore 

Everyone gets good ideas.

Ideas are like viral colds. Nobody's immune. Some just get more than others.

I get some of my better ones out walking Taylor, my four-year-old,13-pound multi-phooh.  I learn a lot from him, especially when it comes to investing and trading.

And judging from the conversations with my significant other it's mutual. She learns a lot from him too, though she doesn't trade or play the market outside of her retirement planning.

To begin with, he's a lot smarter than I am. He doesn't care much for walking in the rain. He always skirts around or jumps small puddles. He'll get his feet wet, but only on his terms. That's the way I like to view entering the market. If it isn't on my terms I probably don't have any business being in there. Some might call this timing.

He always does his homework, particularly when it comes time to relieve himself. On cool mornings and chilly nights it can get a little frustrating. But he refuses to rush. He's got to find just the right spot. Sort of like knowing the right time to enter or exit a trade or the market.

He's got the patience of 10 people. Sometimes when I am slaving away on the computer, he'll come to the doorway of my office and just stand there, staring at me like a statue in utter stillness. I never know if it's one of those bigger-fool stares or what.

Other times if you don't acknowledge him he'll sit up like dogs do when they want some of your food. It can be a real attention getter, a real killer, sort of like those gut market feelings we get from time to time but often fail to heed. 

Especially when they turn out to be correct and we didn't make the trade. I think it means we all get weary and need a break, some fun. So come on, man, lighten up. It's time to play.

Taylor is extremely curious. And alert. No smell is an old smell. Because he's so small his survival instincts are keen. He gets engrossed but not so much that he loses his awareness, another good point for surviving in markets. Just when you think he's not paying attention, he'll pick his head up and look around.

In our neighborhood from dust to dawn coyotes often prowl. Sometimes at night he sees and hears things I don't hear and can't see. They're out there and he smells it. Good smellers, dogs and traders, sounds like a decent title for a good country tune about markets.

He never holds grudges. And he has no ego.

Around the house he doesn't miss much either, whether it's a faint noise outside or you're putting a coat or sweater on to go somewhere. In the car, short or long ride, he knows when you start to slow down it's close to getting-out time. I like to think about that when volume is starting to dry up and prices flatten.

For him the car is exciting to get in, but just as exciting and important to get out. You could say he has an exit strategy. When the movement stops it's time to move on. We humans call it a trend. He hasn't told me yet what he calls it. But I'd love to know.

As far as I've been able to tell, Taylor has only one bad habit. Every morning though he tries, he fails to fully wipe the sleepers out of his eyes.

But even there I learned something.                         

AROUND THE WEB

Fossil Fuel Industry Job Numbers
http://oilprice.com/Energy/Energy-General/The-Fossil-Fuel-Industry-May-Not-Help-the-Planet-But-It-Employs-Millions.html

Different Views
http://www.bloomberg.com/news/2014-07-11/plosser-says-rate-increase-closer-thank-many-people-think.html

Fed Tools For Wthdrawal
http://www.reuters.com/article/2014/07/11/us-usa-fed-exit-idUSKBN0FG2B120140711

Rich Actually Pay More Taxes
http://news.investors.com/ibd-editorials-brain-trust/071114-708479-thomas-pikettys-idea-to-tax-the-rich-would-make-us-all-poorer.htm?p=full

Wage Growth And Inflation
http://blogs.cfr.org/geographics/

Pimco Changes
http://www.bloomberg.com/news/2014-07-10/pimco-s-gross-cuts-u-s-government-related-debt-holdings-in-june.html

Energy Wars
http://oilprice.com/Energy/Energy-General/Twenty-First-Century-Energy-Wars.html

DON'T NEED YOUR WELL-THOUGHT-OUT ADVICE

Are we the only ones who think it vaguely odd that people who believe and invest in gold are called "goldbugs" by MSM.

So far with all the flight to paper assets we haven't yet seen any references to equity-hogs or bond-heads. And given the announced new direction of the Federal Reserve we as yet haven't espied the term  macroprudential prudes crop up.

Maybe that's coming later at a theater near all of us.

After soaring to $800 an ounce in the late 1980s followed by nearly two decades of snoring in ignominious silence, an oxymoron we know literary pundits will love, the yellow metal rampaged for more than a decade to $1,800 an ounce before it's recent slumber.

So at the risk of insulting entomologist everywhere including those chained to their research dungeon walls and risking being labeled a goldbug, we'll take a shot here at MSM, one of our favorite members of the pathetic lemming colony.

Besides the opprobrium of MSM, gold's subject to several bits of nastiness, bear markets, inflation, geopolitics and, yes, complacency.  Strangely, that somehow has a faintly familiar paper asset quality to it. Oh well, what's important is gold and it's orphan status. Not just the metal, but the mining shares.

If you want to know more about it, don't read us. We have a  research dungeon we have to get back to before the lights go dim. But here's a link that might help. Just one word of caution, leave your logic behind before you click on it.

To borrow the words of an old Don Williams tune:

I don't want to hear another word
Don't need your well thought out advice
Though I thank you all for being kind
I can make mistakes myself just fine

Problem here is, MSM ain't even apologetic about their misinformation.
t. man hatter

http://online.barrons.com/news/articles/