Tag Archives: FED

Left Pocket, Right Pocket

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Posted By: Matthias Paul Kuhlmey

 

Markets have “shrugged-off the Italian scare,” and were off to yet another promised land of stellar returns in global equities. To keep our minds flexible, let us not forget to look beneath the surface. A common “confidence vote,” as it relates to the credibility of a sovereign nation, is the outcome of regular bond auctions held (a standard refinancing mechanism). And, there, was a nice surprise that helped market participants to initiate the recent turn-around: Italy was able to comfortably place a maximum targeted 6.5 billion Euro of long term-debt obligations. Relieved?!

 

Bond auctions held in most European nations, especially in Italy and Spain, are heavily supported by their respective domestic banks. According to data released by the European Central Bank (ECB), Italian banks purchased a record amount of government debt in January 2013, about 18.5 billion Euro(!), and (if this data point was not disconcerting enough) Monday’s auction was mostly absorbed by two Italian banks. Same deal, a little to the West, in Spain. Let’s not forget that these are the same (Spanish) banks, which require a minimum of 60 billion Euro in new capital and keep posting major losses. For some perspective, Spanish banking giant, Bankia, just reported the worst results ever recorded by a Spanish corporation, a screaming 19 billion Euro loss. Bankia was “bailed-out” by the European Commission in December of 2012 and continues to be nationalized ever since.

 

To round things up, there is another big player in the mix:  the U.S. Federal Reserve Bank. The FED reports that most cash reserves held in the US banking system are “under the roof” of foreign banks operating in the U.S. In the month of January 2013, the FED injected a record of $237 billion into foreign banks, a number greater than the liquidity influx seen after the Lehman collapse in September 2008. Something going on here? Let’s broaden the picture:

 

The top five banks in the U.S. receive about $64 billion in government subsidies, an amount roughly equal to their annual profits. Stated differently, our banking system, at the top of the global “financial food chain,” with nearly $9 trillion in combined assets, would just about break even in the absence of “welfare considerations.” The profits those banks are reporting are essentially transfers from taxpayers to their shareholders. None other than FED Chairman Bernanke, in his testimony to the Senate Banking Committee earlier this week, stated that American banks receive implicit subsidies because the market believes they are too big to fail. OK, case closed!

 

The above is exactly the reason why we prefer to talk “crazy” at times. “Drop It Low” was just the perfect outlet …

 

The Only Way is Up – Outlook 360 Fall Edition

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Posted By: Matthias Paul Kuhlmey

 

At HighTower, we take pride in the fact that we do not entertain a “one-size-fits-all” investment view. Our firm’s Partners are considered to be some of the most experienced advisors on Wall Street and beyond. Nonetheless, given the more-than-challenging investment environment over the past years, it is hard to perceive that one single person may hold “all the answers.” With this in mind, we have embraced the concept of a collective knowledge-base, sharing best practices and ideas; our strength derives from the fact that we allow for differences in opinion, along with the necessary creative debate and responsibility that comes with this opportunity.

 

It is for this reason that we have dedicated the attached Economic Update 360 to some of our brilliant thinkers, allowing for brief insights into their ideas and related opportunities, and -last but not least- to allow our respected clients and friends to enjoy the true value of our HighTower Partnership. Please enjoy our collective ideas, including an understanding of where markets are trading “technically,” and what happens if “Wall Streeters” suffer from “CNBCitis” … please follow the below link for full text.

 

2012-09-28 The Only Way Is Up (follow this link for full text)

 

Dr. Twist

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Posted by:  Matthias Paul Kuhlmey

 

Instead of “we told you so,” let us take the high road and begin this blog with “here we (I) go again” (for the music lover, this would be Whitesnake, 1987). Mr. Ben Bernanke, aka Dr. Twist (from now on), is “in it” deep. Ben, it is time to stop the “flip flopping” – either the economy is recovering, or not, and needs financial stimulus, or not. The same request needs to go out to our somewhat spoiled investment community: Market direction cannot indefinitely be determined by simple expansion of a Central Bank’s balance sheet (here, the FED), or the prospect thereof. At the end of the day, a buyer of an asset should be driven by the notion that he or she is paying less than the real or inherent value of that asset; this, most certainly, has not been the case since the onset of the big reflation trade in March 2009.

 

To be clear (apologies if somewhat repetitive): Most developed economies are exposed to the aftermath of a balance sheet recession, not a regular recession; with this in mind, all good effort put forth by the FED cannot heal the issue. Market participants are attempting to reduce debt and are not necessarily tempted by lower rates to “lever-up” further. With U.S. 10-y rates already at 1.60 levels, one may ask how low rates need to go (from the FED’s perspective), and what yesterday’s ill-guided Operation Twist is really all about. In case you missed it, Dr. Twist announced that the FED is extending a 2011 policy of selling shorter-dated Treasuries, with proceeds being used for the purchase of longer-dated paper in the amount of $276 million, thus potentially lowering rates on the long-end of the curve.

 

The main issue remaining is that there is too much debt in the global system; this is what is haunting Europe today. In Monday’s radio interview, we took the position that it is not about Greece any longer (already priced-in to equity and currency markets) – it is about Spain and Italy. According to David Rosenberg, the “average Eurozone country has a median 500% total Debt/GDP ratio across the household, business and corporate sectors,” and “Italy’s sovereign gross financing-needs this year come to 29% of GDP” – unsustainable! Therefore, our global financial system will require a reset, most likely politically motivated, with the “wave being initiated’ in Europe (don’t be fooled, this is also a U.S. issue, but potentially less so and later).

 

Expect volatility to remain high. The strategic, long-term investor needs to consider selective buying into this weakness; the biggest risk in the years to come is loss of real purchasing power. Cash and bond holdings will not “do the trick” to prevent it from happening.

 

P.S. one important addition: For Germany, it is all about Greece. Tune in to watch the EURO 2012 soccer match between Germany and Greece on Friday, June 22, 2012. Even German Chancellor, Angela Merkel, is preparing for a trip to be watching the game live and in color. Bravo!

 

Waiting for Godot

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Posted By: Matthias Paul Kuhlmey

 

Samuel Beckett was a great-grandmaster of absurdist fiction – “a genre of literature … that focuses on the experiences of characters in a situation where they cannot find any inherent purpose in life, most often represented by ultimately meaningless actions and events.” One of Beckett’s most recognized works (a play, to be specific) is entitled, Waiting for Godot. 

 

The play portrays two men, Vladimir and Estragon, “who divert themselves while waiting expectantly, vainly for someone named Godot to arrive. They claim he’s an acquaintance but in fact hardly know him, admitting that they would not recognize him were they to see him. To occupy the time they eat, sleep, converse, argue, sing, play games, exercise, swap hats, and contemplate suicide – anything to hold the terrible silence at bay.”

 

In early conclusion, this is how we feel about, or better yet, how we think of others and their way of perceiving the(ir) so-defined economic recovery and the related investment environment. It is still puzzling to us how things change by the hour:  Markets are up, as revised earnings are beat; markets are down, as Mr. (ECB) Draghi does not want to “play the liquidity game”; then markets are up, again, on the basis of questionable “shortcuts of the collective mind,” with poor economic data (and we had some) being the catalyst for more FED-provided stimulus, consequently driving up markets – a somewhat schizophrenic notion, or absurdist fiction, to stay with the plot.

 

All in mind, and similar to Vladimir and Estragon, most of us have never experienced a true economic recovery, and yet we believe it is right around the corner. The highly acclaimed David Rosenberg, of GluskinSheff, wrote earlier this week that “during this statistical recovery from the 2009 bottom, real U.S. GDP growth averaged 2.4% at an annual rate, and of that, 0.7 percentage points came from inventories. Excluding inventories, otherwise known as ‘real final sales,’ average annual real GDP growth was 1.7%, on average — is the weakest post-recession recovery on record. This despite a 10% deficit-to-GDP ratio, a government debt-to-GDP ratio rapidly heading to 100%, a near zero Fed funds rate, record low mortgage rates, and an unprecedented tripling in the size of the Fed balance sheet.” Not to brag, but those could be our words, except for the fact that Rosenberg is considered a brilliant mind, in contrast to us absurdist fictionists.

 

It is not surprising that “over the years, Beckett clearly realized that the greater part of Godot’s success came down to the fact that it was open to a variety of readings and that this was not necessarily a bad thing.” This is precisely the reason why markets may continue to trade higher; among the reasons cited are “the advantage of election years,” “the FED’s willingness to provide liquidity,” “attractively valued stocks,” etc. To capture the benefits, investors may want to keep an open mind and consider applying a tactical approach to their asset allocation, while maintaining a primary focus on risk mitigation …

 

P.S. Does anyone find it ironic that for the celebration of Samuel Beckett’s 100th Birthday (1906-1989), his portrait was depicted on an Irish commemorative coin that very much looks like a Euro?

 

How to Fix Stuff

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Posted By: Matthias Paul Kuhlmey

 

How do you fix a computer? Turn it off … and then back on. J How do you fix an economy? You cannot turn it off, that’s for sure – it only may have worked once, during the Great Depression, and the system did reset itself. Since Mr. Bernanke was recently declared a “hero,” we thought the “fixing-up” was complete. To be clear, we have no axe to grind and are most certain that our FED Chairman is attempting to do a very fine and thoughtful job; nevertheless, FED communication has been entirely confusing and, to a degree, misleading (at least for market participants that need stimulus money to make investment decisions).

 

This past Monday, Mr. Bernanke, during a clever publicity stunt, expressed his worries that the economic recovery could stall if the FED would end monetary stimulus too soon. So, things are not fixed? Here’s a shocker:  According to “Hero B.,” the recent improvement of the unemployment situation may (only) have been reflective of “a reversal of the unusually large layoffs that occurred in 2008 and 2009,” with this process now in conclusion. Further, Bernanke told ABC news that “It’s far too early to declare victory” (on the economy, that is). Huh?

 

On the other side of the argument stands Charles Plosser, President of the Philadelphia FED, suggesting in an interview that he does not “think there will be any need for further accommodation, or further QEs.” Federal Reserve Bank of Dallas President, Richard Fisher, seems to agree, having stated in a recent speech that the “Federal Reserve has done its job” (in providing liquidity). But, wait, here comes San Francisco FED President, John Williams, carefully remarking  that, “If the economy does need more stimulus, restarting our (the FED’s) program of purchasing mortgage-backed securities would probably be the best course of action.” His buddy, Federal Reserve Bank of Chicago President, Charles Evans, sums it up:  “The central bank should step up record monetary stimulus even as the economy shows signs of gaining traction” (for a selection of other differing FED opinions, click here).

 

So, how do you really fix things? One idea is to agree on what has to be fixed – the economy and related unemployment, or the stock market (easy money has certainly taken care of that). Go on guys!

 

Thank You, America!

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Posted By:  Matthias Paul Kuhlmey

 

There is so much going on in the world, but here and there a headline will capture our attention. According to a recent document (a stunning 29,000 pages) obtained under the Freedom of Information Act, the FED, on December 5, 2008, provided $1.2 trillion in liquidity to ailing banks – to be clear, the number is $1.2 trillion, or the equivalent of 10% of annual U.S. GDP at that time, provided in a single day. What may be even more interesting is the fact that Mr. Bernanke and team, along with the banking community, were fighting the release of this very paper for more than 2 years.

 

In case your jaw has not dropped, let us move this topic further; using the FED’s generous, low-cost contribution, commercial banks globally (remember also non US-banks were entitled to U.S. bailout funds) earned an estimated $13 billion (this most likely the “embarrassing” part that led to the non-release objective). We urge you to read more on the topic here. Also, according to this “secret paper,” the FED had committed $7.7 trillion by March 2009 (when accounting for all guarantees and lending limits), or more than 1/2 of U.S. GDP, mainly with the objective to stabilize the financial system; this truly is commitment!

 

Conversely, European commitment, or lack thereof, is what currently holds the global investment community hostage. In all fairness, however, one must consider that, by definition, the European Central Bank (ECB) has the disadvantage of following only one mandate – price stability, that is. The FED, on the other hand, maintains two key objectives for monetary policy: 1) maximum employment, and 2) stable prices – on this note, “anything goes.”

 

A combination of headlines is floating markets today, with one of particular interest: The IMF is in the midst of preparing an emergency loan facility to Italy in the amount of EUR 600 billion (or $800 billion, which is small money when compared to the generosity of the U.S.-puppeteers in 2008/2009). But wait – here’s the catch: The “U.S.-quota” of the IMF is 17.7% (ownership by SDR’s), meaning about $140 billion of the $800 billion are somewhat linked-back to the U.S. Way to go. Consequently, the U.S. is leading the way, thus indicating, once again, to “Sleepy Europe” that only an aggressive debt monetization can move things forward. Interestingly enough, the ECB action of late has most certainly blurred the lines between what is right, wrong, and to be expected. All of this furthers the notion that Quantitative Easing will facilitate the next wave of global risk-taking.

 

Welcome to Europe’s resurrection – American style!

 

Sugar Rush

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Posted By:  Matthias Paul Kuhlmey

 

Until recently, all appeared to be business as usual – over the course of the year, the U.S. stock market has on several occasions tested a multi-month forming support level, around the 1100 mark in the S&P 500. Practically every time, this support has been the basis for a more or less significant recovery of stock prices. Yesterday, however, this point gave way, with the S&P 500 breaking the 1090 mark to the downside, entering (officially) bear-market territory. While global stocks continued to sell-off, the world was listening in great anticipation to acting FED Chairman, Mr. Bernanke, and the “outcome” of his testimony in Washington D.C. … and you know what everyone was hoping for – The Sugar Rush!

 

There is the notion that the consumption of sugar will lead to increased energy – and even though some say it is a myth, I have seen my young daughters after candy-intake: placebo effect or not – it works. Similarly, the global investing community is waiting for “sugar” provided by the FED and other Central Banks, through Quantitative Easing or similar measures. Bernanke, however, was a “responsible father”, and did not give in. His reservation is understood, as the last round of Easing (i.e., QE2) did not contribute favorably to the intended economic recovery, and, more importantly, the political will for expansive measures is waning in the U.S. – and abroad.

 

The world may appear to be better prepared for the current sell-off in financial markets, but the opposite may actually be true. Whereas the downturn in 2008/2009 came as a surprise to many, policymakers and Central Banks were in a position to act aggressively, and to avoid the total collapse of the financial system; this time around such options are significantly more limited, as it is simply not possible to launch massive stimulus bills as before. Not only are interest rates already low in most developed nations, but their economies are “stretched” with too much debt, high deficits, and slowing economic output.

 

From a technical perspective, markets are in extremely bad condition, and the current weakness could extend to the 1000-1020 level (on the S&P 500 Index) easily, down about another 8-10% in the U.S. We do not rule out forceful recoveries based on oversold conditions and, of course, “sugar news,” especially related to Europe, but we consider the damage to be already done. At this point, market participants have no choice but to re-price their investments for a global economic slowdown of significant proportions. On this basis alone, equities are not as attractive as many would like them to be.

 

Time for Cotton Candy!

 

Game Over (… so outdated)

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Posted By:  Matthias Paul Kuhlmey

 

When the last ball had disappeared, “Game Over” was the light-bulb-powered message that illuminated on pinball machines in the 1950s; this concept was simple and precise and, consequently, was continued throughout the years, mainly as a status report in video-gaming. For the most part, “Game Over” really meant “this is it,” “finito,” “das Ende!” – absolutely not cool today. In more recent years, there has been a decline in the usage of the “Game Over” message, and players are instead allowed to “regroup” after the completion of a game segment, or even entitled to save the status of a given game, thus preserving the outcome (good or bad) without any loss of progress. In other words, there are no real consequences – ever.

 

It all sounds too familiar. In 2000/2001, a massive speculation in financial markets ended with the melting of the dotcom-bubble. But the game was far from over, as acting FED Chairman, Mr. Alan Greenspan, simply invented the “Greenspan Put.” It was his ever-lasting promise of liquidity and, for the most part, a low rate environment that consequently lifted equity markets and, more importantly, fed a national housing bubble in the U.S. The consumer never missed a beat, and while the wealth effect was clearly diminished with lower-valued equity portfolios after 2000, soon rising prices of the national housing stock would serve as leverage for additional, and even excessive, consumption patterns.

 

Acting FED Chairman Bernanke just took over the “saved status,” and continued his version of the game with the “Bernanke Put.” In his mind, there is not an option for a “Game Over” status. Since the onset of the Credit Crisis of 2008/2009, the FED, under his control, has created the lowest yield-environment in decades, injected massive amounts of liquidity, more than quadrupled its balance sheet, and lifted equity markets by more than a 100% since lows were made in March 2009 – all this in total absence of a true economic recovery in the U.S., and a chronic high unemployment situation (which Mr. Bernanke labeled as a national tragedy just last week).

 

“Video-gaming European Style” is even more entertaining: Players across the pond don’t even care about changing tactics to approach a different outcome. Like upset children, they will hit the “save status” button and hope for a better round the next day. While the German Upper House has just passed the expansion of the European Financial Stability Facility (EFSF), German President Christian Wulff stated in an interview, “Solidarity is the core of the European Idea, but it is a misunderstanding to measure solidarity in terms of willingness to act as guarantor or to incur shared debts.” Save status. Try again.

 

The potentially good news in all of this is that the lack of true player commitment has derailed equity markets across the globe. In consequence, valuations are far more attractive when compared to the beginning of this year. In the short-term, we see continued volatility, most likely driven by short-covering rallies in an oversold environment. When judging by the recent Dollar-rally, and the significant decline in the value of the Euro, we may need to brace for more troubles ahead. Today, however, is also the time to think about deploying cash into longer-term opportunities, mainly in an attempt to preserve real purchasing power for the years to come.

 

The End!
 

 

Fata Morgana

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Posted By:  Matthias Paul Kuhlmey

 

A Fata Morgana is an unusual and very complex form of superior mirage, which, like many other kinds of superior mirages, is seen in a narrow band right above the horizon. A mirage is a naturally occurring optical phenomenon in which light rays are bent to produce a displaced image of distant objects or the sky. In contrast to a hallucination, a mirage is a real optical phenomenon. Fata Morgana mirages tremendously distort the object or objects on which they are based, such that the object often appears to be very unusual, and may even be transformed in such a way that it is completely unrecognizable (Source: Wikipedia).

 

By now, it should be clear to everyone that the elusive recovery of the U.S. economy, fueled by trillions of Dollars in stimulus funds, is not working as anticipated. With this in mind, we are convinced that Mr. Bernanke will initiate additional stimulus, as “this (according to legendary investor Jim Rogers) is the only thing he knows.” As stated last week, we will most likely experience a camouflaged version of stimulus, and in this respect an interesting thought comes from our friends at GaveKal Research. A possible support for the housing market, which remains to be one of the leading concerns and drag on the recovery, could include stopping the GSEs (Fannie Mae, Freddie Mac, FHA) from liquidating their housing inventory (which is fuelling the current price declines), and/or using the FED’s balance sheet to more directly support the housing market (Source: GaveKal Ad Hoc Comment, June 8, 2011).

 

Another concern we may share is that bank stocks have been under severe pressure over the last trading sessions. Judging from past history, this is never a good sign, and several significant stock market consolidations were preceded by price declines in the banking sector. Note that Moody’s Investors Service recently placed the ratings of Bank of America Corporation (A2 senior), Citigroup Inc. (A3 senior), Wells Fargo & Company (A1 senior), and their subsidiaries on review for possible downgrade.

 

We do hope that you have taken our cautious advice (as published last week in “Party Pooper”), and reduced risk assets prior to the sell-off in financial markets that has occurred ever since. If conditions continue to be difficult, it is easy to anticipate that the idea (or the actual fact) of QE3 could resurface and in consequence, propel stocks to new highs – regardless of valuations, and more as a function of an “inflation trade.”  As repeatedly stated, investing in such environment has not much to do with a solid approach to value, but tactical trading. It may work, but let’s not forget that at the end of the day, we are dealing with a very complex form of mirage.

 

Conditions may be in place for a bounce, but caution is necessary.