Here's a quote for article today posted on MarketWatch from Jeremy Grantham, head of GMO investments.
“She will not use interest rates to head off or curtail any asset
bubbles encouraged by the extremely low rates that might appear. And
history is clear: very low rates absolutely will encourage extreme
speculation. But Yellen will, as Greenspan and Bernanke before her,
attempt to limit only the damage any breaking bubbles might cause.”
Grantham is critical of Yellen and her predecessors for essentially what we posted in two or our articles earlier, Complacency By Any Other Name and Fed Policy Dangers.
Now to be sure, the Fed has its apologists and defenders, that ought not to surprise you. One of the most outspoken is CNBC commentator Ron Insana who recently wrote a long piece claiming people who had not entirely drudged through recent voluminous pablum from the Fed didn't really understand what a good job the Fed had done and is doing.
With all due respect, we would suggest just the opposite.Those voluminous tombs are proof positive of analysis paralysis, a characteristic of this and the previous two Fed chairs. Furthermore, indirectly it's an indictment of what we the public deserve and get when we turn an institution over to bureaucrats and academics.
Here's the link. We'd like to know your view.
http://blogs.marketwatch.com/thetell/2014/07/21/yellen-encourages-fully-fledged-equity-bubble-says-jeremy-grantham/
t. man hatter
The last correction low in the Dow Jones Industrial
Average happened on 10/3/2011. Since then the famous index has gone 33
straight months without a 10% correction or pullback. The Dow is now up
59% since that last low occurred. Usually, in most bull markets, there
is at least one 10% pullback in the Dow every 12 months.
Small cap stocks after an earlier run-up have faded of
late, but by many metrics hardly appear cheap, trading at a forward p/e
on the Russell 2000 index around where they started 2014 at 21. That
compares with an average of slightly over 19 times earnings.
Another area worth watching is emerging and frontier debt
markets where international sovereign bonds sales soared to record
levels, hitting nearly $70 billion in the first half of 2014. Concerns
about the quality of these bonds are beginning to surface some
quarters.Ecuador, the tiny Latin American country that defaulted on its
debt six years ago and has been locked out of the international
financing market since, recently floated $2 billions in new debt.
Greece, Cyprus and Kenya are similar examples of recently
holding bond offerings that most were over-subscribed to by
yield-hungry investors. With the apparent end of Fed tapering on the
horizon, some worry what will happen when it ends.
--
Besides
the bond market, the Fed recently expressed concerns about another
sector, biotech, and investors have apparently been listening as the
funds flowing this month into the sector receded, turning fund flows
negative so far for 2014. That's a marked change from a sector that not
too long ago captured Wall Street's love and admiration. Though
investors were pulling funds before the Fed put small caps, bonds and
biotech in their cross hairs, $440 billion left the sector since the
beginning of this month, bringing the total for the year so far to a
negative $77 billion.
--
Macro
is out and event-driven investing appears for the time to be in among
successful hedge funds, according to recent blubs in Barron's and the Financial Times. At
the center of this strategy is merger and and acquisition activity now
at booming levels. One such aspect of these events is the so-called tax
inversion deals going on that the failed Pfizer-Astra seemingly kicked
off earlier. As the FT put it; "the economy may be miserable in the US, but takeovers are at boomtime levels."
--
The
European Banking Authority supposedly put a cap on bonuses for high
bank earners.But as the saying goes, where there's a will there's
apparently a way as, according to recent research, 55% of banks in
Europe and 47% of non-Europe banks plan to use allowances to circumvent
the caps for bank high earners.
--
Bill Gross, chief investment officer of bond giant Pimco is a guy who of late knows a thing or three about controversy, revealed in an interview Friday that whenever the Fed starts to crank interest rates back up, they need to be careful.
Gross offered June 2015 as the possible starting date and that the yield on the 10-year Treasury note should not go above the 2.5 to 3 percent range owing to still some structural problems in the economy such as "lower real growth" and job displacement he blamed on technology advances.
He noted too what's important is when, how rapidly and where the Fed stops is of concern to both equities and bonds. Based on a recent survey of analysts the starting date for the Fed has been moved from the third quarter of next year to the second.
Gross warned the rate on those 10-year Treasury notes should be kept in the 2.5-3 percent range for "now and the next few years depending on how long the Fed continued accommodating the market. He also expressed that the Fed should hold the rates once they start back up at 2 percent until sometime in 2017.
Rates have been held near zero by the Fed since 2008.
--
Maybe junk bond investors are apparently starting to see the lights lighting up the exit signs.
Yield-starved investors might be taking their cue form the Fed's recent uncharacteristic comments about the asset class and its "very, very lofty" levels, according to some money managers. Recent figures show that mutual funds and ETFs that invest in the high-yield or junk bond market have witnessed resumptions that totaled around $2 billion in the most recent week that numbers were available.
The outflow, according to Lipper, was the largest since late summer 2013. In mid-June yields hovered near 4.8%, a record low. As of mid-last week the were yielding 5.1%, still low by historical measures but perhaps a sign of things to come as investors begin heeding the Fed's words.
In some quarters there are rumblings that corporate bonds might be next. Liquidity is always a concern in what many perceive as over-valued areas of the market.
t. man hatter
How does one explain U S. Treasury bonds in the face of Fed tapering still yielding around 2.5% and the looming risk of higher interest rates somewhere on the horizon?
One explanation might be simply this: Fear premiums have subjugated risk premiums. In plain English, the fear of missing out supersedes the fear of losing out. If bond yields, for example, drop from, say, 2.5% to 1.5% that's the fear of losing out and it is also a bet on more of the same, meaning the "new neutral" or possibly more deflation ahead that people like those at Pimco are selling.
The absence of risk premium is a clear statement of "We'll worry about that later, but for now..." In our recent post Fed Policy Danger we quoted noted investor Stanley Druckenmiller's comment about Fed policy being too focused on the now and too little concerned about its policy impact down the road.
Back in 1980-81 you could walk into any bank or savings and loan firm (if any were still around after the S & L industry tanked) and purchase a one-year CD yielding 14%. Thirty year Treasuries were yielding around 15% in those days. The long running bull market in stocks that's apparently still going didn't officially start until August 1982.
Now the pundits will cite, as they almost always do, their that-was-then-this-is now argument. So be it. But the truth is almost no one saw the big equity bull market coming. And most certainly not the Fed or the bureaucrats in Washington.
Much of the new neutral argument centers on a macro call. That can be a form of extrapolation of the weakest kind because it leaves little or no margin for surprises. Druckenmiller's comment, at least in our mind, is suggesting exactly what we're talking about.
Despite all the Fed's claims about its tool chest still being adequate one could suggest that after WWI hoards believed the 1930s constructed Maginot Line would be adequate.
The French established the fortification to provide time for their army to mobilize in the event of attack, allowing French forces to move into Belgium for a decisive confrontation with Germany. The success of static, defensive combat in World War I was a key influence on French thinking. Military experts extolled the Maginot Line as a work of genius, believing it would prevent any further invasions from the east.
While the fortification system did prevent a direct attack, it was strategically ineffective, as the Germans invaded through Belgium, outflanking the Maginot Line. The German army ran through the Ardennes forest and the Low Countries, completely sweeping by the line, defeating the French army and conquering France in about six weeks.[1]
As such, reference to the Maginot Line is used to recall a strategy or object that people hope will prove effective but instead fails miserably. It is also the best known symbol of the adage that "generals always fight the last war, especially if they have won it".[2]
For the sake of history there was second line--Alpine Line--facing Italy. In our humble view, too few investors today are considering the possibility that for all its reassurances, Fed policies could turn out to be their Maginot Tool Kit.
t. man hatter
(2) Wikipedia
It's another big earnings week coming up as firms from Apple to Caterpillar to Microsoft to Verizon announce earnings and the dove-hawk show continues with Yellen speaking again in Washington and Fisher in Los Angeles and Bullard, another hawk, in Kentucky.
On the economic front from consumer confidence ex food and energy (as if anyone really believes it) to US durable goods to German consumer confidence are on the docket.
Monday, July 21
US Economics (Time Zone: EST)
08:30 Chicago Fed National Activity Index - expected 0.18, prior 0.21
11:00 Fed to purchase $1b-$1.25b bonds in 22-30 year range
11:30 Treasury to sell $26b 3-month bills and $24b 6-month bills
Global Economics (Time Zone: GMT)
04:30 JPY All Industry Activity Index
06:00 CHF Trade Balance
08:30 GBP Public Trade Balance
Earnings
Before:
Halliburton (HAL)
BB&T (BBT)
Suntrust Banks (STI)
Six Flags Entertainment (SIX)
After:
Chipotle Mexican Grill (CMG)
Netflix (NFLX)
Texas Instruments (TXN)
Rent-A-Center (RCII)
Tuesday, July 22
US Economics (Time Zone: EST)
08;30 Consumer Price Index YoY (June) - expected 2.1%, prior 2.1%
08:30 CPI Ex Food & Energy YoY - exp 2.0%, prior 2.0%
09:00 FHFA Home Price Index MoM (May) - exp 0.2%, prior 0.0%
10:00 Richmond Fed - exp 5, prior 3
10:00 Existing Home Sales (June) - exp 4.99M, prior 4.98M
11:30 Treasury to sell $25b 52-week bills, 4-week bills
Global Economics (Time Zone: GMT)
01:30 AUD CPI
08:30 GBP Boe Minutes
12:30 CAD Retail Sales
Earnings
Before:
Coca-Cola (KO)
duPont (DD)
Harley-Davidson (HOG)
McDonald's (MCD)
Comcast (CMCSA)
State Street (STT)
Lockheed Martin (LMT)
Verizon (VZ)
After:
Apple (AAPL)
Microsoft (MSFT)
Electronic Arts (EA)
Broadcom (BRCM)
Juniper (JNPR)
VMWare (VMW)
Discover Financial Services (DFS)
Xilinx (XLNX)
TDAmeritrade (AMTD)
Regions Financial (RF)
Wednesday, July 23
US Economics (Time Zone: EST)
07:00 MBA Mortgage Apps
11:00 Fed purchasing $2.5b-$3.25b notes in 7 to 10-year range
Fedspeak:
10:00am Yellen (dove, chair) to give semi-annual testimony to House Committee
12:00pm Fisher (hawk, voter) speaks in Los Angeles
Global Economics (Time Zone: GMT)
NZD RBNZ Rate Decision
JPY Trade Balance
01:45 CNY HSBC Manufacturing PMI (July prelim)
08:00 EUR Eurozone Manufacturing & Services PMI
08:30 GBP Retail Sales
Earnings
Before:
Boeing (BA)
Dow Chemical (DOW)
Freeport-McMoran (FCX)
General Dynamics (GD)
Biogen (BIIB)
Delta Airlines (DAL)
Whirlpool (WHR)
Pepsi (PEP)
EMC Corp (EMC)
Norfolk Southern (NSC)
After:
Qualcomm (QCOM)
Citrix (CTXS)
Gilead Sciences (GILD)
F5 Networks (FFIV)
AT&T (T)
CA (CA)
Tractor Supply Co (TSCO)
Etrade Financial (ETFC)
Illumina (ILMN)
Sallie Mae (SLM)
Facebook (FB)
TripAdvisor (TRIP)
Thursday, July 24
US Economics (Time Zone: EST)
08:30 Initial Jobless Claims, June 28, exp. 309k, prior 302k
08:30 Continuing Claims - exp 2513K, prior 2507k
09:45 Markit US Manufacturing PMI (July prelim) - exp 57.5, prior 57.3
10;00 New Home Sales (June) - exp 480K, prior 504K
11:00 Kansas City Fed - exp 6, prior 6
11:00 Fed to purchase $2b-$2.5b notes in 5 to 6-year range
1:00 Treasury selling $15b 10-year TIPS
Fedspeak
1:35pm Bullard (hawk, nonvoter) speaks in Kentucky
Global Economics (Time Zone: GMT)
Japan Investors Purchases of Foreign Stocks/Bonds
JPY CPI
06:00 EUR German GfK Consumer Confidence
08:00 EUR German IFO Current Assessment, Expectations
08:30 GBP GDP (2Q advance)
14:15 BoJ's Kuroda to speak in Thailand
Earnings
Before:
Cabot Oil & Gas (COG)
Cliffs Natural Resources (CLF)
Starwood Hotels & Resorts (HOT)
Noble Energy (NBL)
Union Pacific (UNP)
DR Horton (DHI)
General Motors (GM)
Ford (F)
Southwest Airlines (LUV)
NASDAQ (NDAQ)
Raytheon (RTN)
UnderArmour (UA)
Caterpillar (CAT)
After:
Starbucks (SBUX)
Deckers (DECK)
Amazon.com (AMZN)
Riverbed (RVBD)
Netsuite (N)
Homeaway (AWAY)
Visa (V)
Pandora (P)
American Airlines (AAL)
Bristol-Myers (BMY)
3M (MMM)
Jetblue Airlines (JBLU)
Dunkin Brands (DNKN)
GrubHub (GRUB)
Celgene (CELG)
Friday, July 25
US Economics (Time Zone: EST)
08:30 Durable Goods Orders (June) - expected 0.5%, prior -1.0%
08:30 Durable Goods ex Transports - exp 0.5%, prior -0.1%
08:30 Cap Goods Shipments Nondef Ex Air - exp 1.5%, prior 0.4%
08:30 Cap Goods Orders Nondef Ex Air - exp 0.4%, prior 0.7%
Global Economics (Time Zone: GMT)
01:30 CNY June Property Prices
12:30 CAD CPI
Earnings
Moody's (MCO)
Xerox (XRX)
Twitter: @MichaelSedacca
Read more: http://www.minyanville.com/business-news/markets/articles/7/18/2014/id/55588#ixzz37webgeAJ
