Will the Fed’s Latest QE Program…..

September 30, 2012

For the second week in a row, the S&P500 lost a little ground. Not much, but -1.3% is still a loss. Volume was moderate, but usually greater on the down days. Volatility, as measured by the VIX jumped over 12%. But despite this jump, the overall level is still near multi-year lows, meaning there’s the potential for an explosive upside move.

Interestingly, several breadth indicators broke down a bit. The weekly McClellan Oscillator dropped into negative territory, implying that a price bounce would not be surprising. The slower moving weekly Summation Index also broke lower, but because it started from high levels, there’s quite a bit more downside left in this indicator. The exact same analysis applies to the percent of stocks above the 150 day moving average; it dipped,  but there’s potentially a long way to go.

But why worry about downside, especially when everyone seem to be saying that you “shouldn’t fight the Fed”. Accept that QE3 will boost stock prices and just go with the flow—buy more stocks, and at the very least don’t sell any.

And this is the conventional wisdom, even though the S&P500 has lost ground in the two weeks after the Fed’s QE3 announcement.

But what about longer term? For stocks to reverse the two-week dip and return to their march onward and upward, the Fed’s latest QE program will have to overcome a slew of obstacles.

For one, the Fed’s QE will have to turn around corporate sales and earnings—both of which have been badly deteriorating over the last couple of months.

Also, the Fed’s QE will have to negate the certainly negative effects of the “fiscal cliff” that will be hitting the US in January. There’s no question that negative fiscal effects will occur; the question is only how severe will they be, and given that there’s a good chance that the political polarization in Congress will not go away over the next three months, then it’s very possible that a huge, shocking hit to the economy will arrive soon.

Then there’s the little problem across the Atlantic known as the euro crisis. Somehow, the Fed’s QE would have to counteract the shocking effects of the exit of one of more of the periphery states, which is becoming a greater risk every day, week and month.

And let’s not forget the hard landing in China, and the slow motion train wreck also known as Japan,which is now in its third “lost decade”.

Finally, there are the know geo-political time bombs, currently ticking away in the Middle East and lately in the South China Sea.

What are the odds that the Fed’s QE3 program be able to successfully negate the shockingly deflationary impact from any one of the above developments?

After two, albeit modest, weeks of losses, perhaps the US stock markets are on to something?

Stocks….the Odd Man Out

September 23, 2012

The S&P500 paused ever so briefly last week, losing 0.38% on slightly elevated volume. Volatility slipped back down to multi-year lows. The VIX index ended the week in the 13 point range, levels usually associated with extreme complacency. What can go wrong?

Well the economies of the world, and lately even that of the US, are in fact “going wrong”. Global PMI’s are plunging. Half the eurozone is already in recession. France and even Germany are set to follow. China is in middle of a hard landing and Japan’s economy has been stuck in a perpetual recession for the last 20+ years, and it’s still stagnating. To top it off, global trade flows are plunging. Exports of finished goods from Asia and imports of raw materials from Australia, Canada, Brazil and Africa are falling.

And even the US economy is faltering, with unemployment edging higher, ISM’s and PMI’s all stalling or falling, and regional Fed surveys in bad shape. Most recently, initial unemployment claims have started creeping back up toward the 400 thousand mark often associated with recessions.

On top of the grim economic news, corporate sales and earnings are BOTH falling….for the first time since the beginning of the Great Recession back in late 2007 and early 2008. Global shipping firms such as Fed Ex have warned several times that volumes are dropping. Other globally connected firms such as Intel have also toned down, dramatically, revenue and earnings expectations. And the list of corporate disappointments goes on and on.

So the extraordinary corporate profitability (as a percentage of sales) which just reached record high levels looks like it’s set to correct. And why have corporate profits soared, as unemployment remained stuck in the doldrums? Because the US government stepped in to fill the void—via transfer payments—to the tune of 1.5 trillion annual deficits for almost four years running. The problem is that on January 1, 2013 the US fiscal stimulus is set to go into reverse. The looming “fiscal cliff” if fully implemented could slash up to 5% of US GDP, which would cause corporate sales and profits to tumble….badly.

But stock prices (and yes, admittedly other financial asset classes such as high yield) have entered a world of their own. While the rest of world is grinding to a halt, if not into an outright decline, stock prices are continuing on their merry way…..higher.

This sets up one colossal test: either stock prices are correct and the global economic problems will promptly “fix” themselves, OR stock prices are wrong and will sooner or later get “fixed” themselves by dropping back down to earth, or reality.

In the meantime, the P/E multiple of the market is ballooning. Not only is it now several points higher than it was a year ago, but using the Shiller 10 year earnings P/E, the multiple for the S&P is back up to about 23 times…..a lofty level almost always associated with very POOR prospective returns and very HIGH risk.

Does this mean that a big correction is necessarily around the corner? Of course not. But it does mean that buying stocks now—ie. increasing allocations to equities—will almost assuredly lock in low returns (if not outright losses) and stomach churning volatility over a longer term holding horizon.

That’s most certainly NOT what most folks think they’re signing up for when they invest in stocks.

The key success factor is patience. Being patient by waiting for times when buying risk assets is favorable—being patient by not buying at times when prospective risk and return outlooks are unfavorable…..as they are today.

The Fed Prints….and Food, Oil, and Gold Soar….the Dollar Sinks

September 16, 2012

Well, just as predicted last week, the Fed unleashed another round of money printing, completely unsterilized credit creation, to be used to buy US mortgage securities, driving down 3.5% mortgage rates as if these record low rates weren’t already low enough.

The real surprise was that the printing will be open ended…..it supposedly won’t stop until unemployment falls to an acceptably low level…..however long it takes.

What was the reaction? Well stocks jumped, not surprisingly (due to the surprise of the open-ended printing) but only 1.9%. The Fed believes that this will help lower unemployment.

Although this hasn’t worked so far, higher stock prices are supposed to make folks on Main Street feel wealthier and therefore more inclined to buy stuff, leading businesses to invest more and hire more.

If only most folks on Main Street had big stock portfolios. They don’t. Most of the stock they do own is held in their modest retirement accounts, which by definition, can’t or won’t be spent for decades. So this delusional scheme will not work….yet again.

Meanwhile, the things that most folks on Main Street need to buy is going to jump in price. Grains and other commodities that feed food production were already near record high levels in price—and now they will jump even higher. Oil and gasoline spiked on the news; in fact, gas prices have never been higher in the US during the second week in September. So while incomes will not rise much (because unemployment will not drop very much, if at all), the cost of living will soar. The result? The middle class will get CRUSHED.

Around the world, the impact will be even more grave. Two years ago, rising food and energy prices around the world led to rioting, thousands of deaths, government coups and other forms of social unrest. And since most of these energy and food commodities are priced in dollars, since they are already near record highs, and since families from less developed nations pay a far greater percentage of their incomes for food and energy, the new Bernanke policy will lead to much more global HUNGER, RIOTING, and even DEATH.

Great job Mr. Bernanke! You are destroying the US middle class and will be responsible for the deaths of thousands if not hundreds of thousands of poor folks around the world.

Worse yet, if your policies exert maximum impact, you will likely force nation states to go to war as they compete for the food and energy resources suddenly mad more expensive by you.

Some leaders are already starting to openly question the wisdom of giving so power to a head central banker. The former chancellor of the exchequer in the UK is very concerned that concentrating so much power in the hands of one individual is unwise and even dangerous.

And even the folks with more money, above the squeezed middle classes, seem to be agreeing. How do we know this? Because more and more are flocking to gold. They are starting to sense that holding most of their wealth in dollar denominated financial assets where yield is being paid in a constantly debased fiat currency is becoming too risky.

If the Fed can print, and will print, all the dollars need to satisfy the goals of the Fed’s masters—the banking elites—then had better transfer wealth to a store of value that the Fed cannot print or debase.

Gold is the best example. But silver is another. And so is platinum. Unsurprisingly, all three soared last week. And while the benefits of owning precious metals will likely not accrue to most of the middle class, at least there’s a growing body of people who are rejecting the Fed’s potentially destructive and certainly experimental policies. They’re voting with their feet—getting out of US dollars and getting into precious metals, most often gold.

And unless the Fed discovers a way to print gold, these insightful folks will be protecting themselves and their families from a future crisis that, by the day, is looking like it will be more and more devastating.

Here We Go Again….the Fed is Going to Print Money….Again?

September 9, 2012

The S&P500 jumped on the last day of the week based on a not so impressive announcement by the ECB which will make “sterilized” bond peripheral bond purchases if—and that’s a big if—significant conditions are met by the offending states. For example, the government of Spain would essentially need to hand over control of its fiscal policy to the elites of Europe. While certainly possible, it’s far from certain that this will happen in Spain, and then Italy, and finally perhaps even in France. But don’t tell that to the equity markets, because the surge on Friday implies that stock investors are betting that all will now be well in Europe.

Meanwhile, almost all of the world’s economies continue to slow down, with Germany and Australia joining the “contraction” party. Corporate profits in the S&P are actually looking like they will CONTRACT for the first time in three years. And sales are definitely falling.

And yet, US equity markets are near all-time highs.

But so are precious metal prices. Copper prices are bouncing. Oil and gasoline prices are at or near all-time highs. Food, specifically grain, prices are also near all-time highs.

And official measures of inflation are near the high-end of their recent ranges, whether it’s CPI, core CPI, the 10 year breakeven rate, or the 5 year breakeven rate. Even home prices are looking like they’ve bottomed and slowly beginning to rise.

There is certainly little evidence that prices are stagnating, much less deflating.

So what’s the Federal Reserve about to announce….at it’s upcoming FOMC meeting next week?

The consensus among experts is that the Fed is on the verge of launching QE3.


Because headline unemployment is not falling fast enough.

The problem is two-fold. First, when so many asset prices are already near all-time highs, launching another round of money printing (yes, electronically, not literally) is certain to shove these already lofty prices MUCH HIGHER.

So prepare for $4.50 or even $5.00 gasoline. Prepare for food prices to zoom even higher, and not just for Americans, but for the rest of the world, much of which is already starving! Prepare for housing rents to jump even higher; prepare for all sorts of daily “need to buy” items to rise in price.

Second, there is a growing body of evidence that the Fed’s QE programs DON’T REALLY WORK. Columbia University professor Michael Woodford presented this argument to the central bankers of the world at the most recent Jackson Hole conference. And if so—and the empirical data seems to strongly support this argument—then doing more of the same (more QE) will once again FAIL to accomplish the goal of kick-starting the economy to generate escape velocity.

So this is what it’s come down to. Later this week, if the Fed launches another round of QE, be prepared to see the already squeezed middle class begin to suffer even more….with higher gas, heating fuel, grocery and rent bills.

All the while, unemployment will not get better—the same way it didn’t get better will all the prior monetary programs. As a result, the middle class will NOT enjoy greater incomes to offset the greater living costs created by the Fed.

Who wins?

Why Wall Street, of course! The banks, the investment banks, the insurance industry and others in finance—the folks who the Federal Reserve literally reports to—will win….once again.

At some point this insanity will end. Let’s hope there’s a nation still standing when this lunacy does finally end.

Asia Falling

September 3, 2012

The S&P500 managed to slip again last week, but this time by only 0.3%. Volume was light, which does not support the drop; however volume is always lighter in the week before Labor Day. But the VIX index jumped 15%, which does suggest that something bad could be brewing. Complacency seems to be eroding, and we’ll soon see if it leads to a truly notable spike in volatility and fear.

In US macro news, the housing market seems to be the lone bright spot. After almost seven years of post-bubble collapse, the housing market is finally finding some footing….at least for now. Per the Case-Shiller home price index, prices rose  slightly on a year-over-year basis—without the benefit of a home buyer’s credit gimmick. This is the first time prices have risen like this since the mid-2000’s. But housing aside, all is now well. Initial jobless claims rose, missing expectations. Chicago PMI met lower expectations, as did personal spending and personal income.

Technically, the S&P500 is still in a slight downtrend, using the daily charts. Breadth, as measured by the percent of firms above their 150 day moving average, is not strong, certainly not as strong as it was when the S&P peaked earlier this spring. The sane is true for the percent of firms above their 50 day moving average.

Internationally, things are getting downright ugly. Europe is still a mess, but there—as in the US—equity and corporate credit markets have bounced simply because of expectations of more monetary stimulus from the central banks.

In Asia, on the other hand, the markets have not bounced back very much at all. While India’s stock market has recovered slightly, Japan’s and China’s are near multi-year lows. And their economies are also slipping badly.

Japan is re-entering a recession, for the umpteenth time since the lost decades era began in 1990. And China is suffering from a hard landing, without the benefit of a huge fiscal and credit stimulus that helped rescue its economy back in 2009.

Chinese exports, new orders, PMI’s and production are rapidly falling to levels not seen since 2009. But since China has created a credit and real estate bubble, along with painful inflation in food stuffs, it cannot pull out the stimulus bazooka that it did in 2009. If it did, the credit bubble would get even larger and more dangerous; ditto for the real estate bubble. And food inflation would sky-rocket…possibly leading to social and political unrest.

So as the rest of the world is playing a waiting game….waiting for the central banks to restart their printing presses and “save” their economies, Asia rapidly falling into a nasty recession, taking its equity markets down with it.

It’ll be interesting to see if this time, Western money printing can come to the rescue of Asia, the way Asian stimulus did back in 2009.

It’s not very likely, but we’ll just have to wait and see.