Guest post by Peter Tchir.
Chasing Yield Is Tiring Work – is the Market fit enough to keep going?
Well we got some chase for yield. High yield did well. EM did okay, as did Munis and Investment Grade. Closed end funds on the fixed income side did very well, benefitting from leverage and short memories, where once again investors want these at a premium (image of Homer Simpson repeatedly burning himself).
Treasuries actually had a good week in spite of the “risk on” mentality, but that was “confirmation” from Hilsenrath that the Fed is likely to continue to find ways to buy long dated treasuries once Operation Twist is officially over.
So it was a nice, and surprising combination for treasuries and risky bonds to do well, but this week was the first time in awhile that we saw some confusion in the broader market about corporate bond performance.
Guest post by Hussman Funds.
In the day-to-day focus on the “fiscal cliff,” our own concern about a U.S. recession already in progress, and the inevitable flare-up of European banking and sovereign debt strains, it’s easy to overlook the primary reason that we are defensive here: stocks are overvalued, and market conditions have moved in a two-step sequence from overvalued, overbought, overbullish, rising yield conditions (and an army of other hostile indicator syndromes) to a breakdown in market internals and trend-following measures. Once in place, that sequence has generally produced very negative outcomes, on average. In that context, even impressive surges in advances versus declines (as we saw last week) have not mitigated those outcomes, on average, unless they occur after stocks have declined precipitously from their highs. Our estimates of prospective stock market return/risk, on a blended horizon from 2-weeks to 18-months, remains among the most negative that we’ve observed in a century of market data.
On the valuation front, Wall Street has been lulled into complacency by record profit margins born of extreme fiscal deficits and depressed savings rates. Profits as a share of GDP are presently about 70% of their historical norm, and profit margins have historically been highly sensitive to cyclical fluctuations. So the seemingly benign ratio of “price to forward operating earnings” is benign only because those forward operating earnings are far out of line with what could reasonably expected on a sustained long-term basis.
It’s helpful to examine valuations that are based on “fundamentals” that don’t fluctuate strongly in response to temporary ups and downs of the business cycle. The chart below compares historical price/dividend, price/revenue, price/book and Shiller P/E (S&P 500 divided by the 10-year average of inflation-adjusted earnings) to their respective historical norms prior to the late-1990’s market bubble – a reading of 1.0 means that valuations are at their pre-bubble norm.
Latest on central banks, liquidity, rates and much more, by PIMCO’s T ony Crescenzi.
- If the eurozone is to endure, it will require reduced economic differences among countries and larger common fiscal capacity.
- Emerging market central banks are likely to remain in wait-and-see mode while looking to the U.S. for clarity on the fiscal negotiations and domestic macro prints for signs of moderation in both inflation and activity.
- While central banks in advanced economies have not traditionally used explicit policies to target exchange rates, the European debt crisis may change all that.
Full read here.
Guest post by Doug Short.
I’ve updated the charts below through today’s close. The S&P 500 is now 7.66% off its interim high set on September 14th, the day after QE3 was announced. We’re still above the 10% correction benchmark. The 10-year note closed today at 1.58, which is 30 basis points off its interim high of 1.88, also set the day after QE3 was announced. The historic closing low was 1.43 on July 25th. But the big news today is Freddie Mac’s Weekly Primary Mortgage Market Survey. The 30-year fixed has set an all-time low of 3.34 percent.
Are yields heading lower? If the post-election selloff in equities continues, the 10-year yield could certainly revisit the levels of late July. Japan is an example (admittedly an extreme one) of a developed nation with its own currency that has experienced a relentless demand for government bonds, as this chart illustrates. Currently Japan’s 10-year yield is around 0.75, less than half that if its US counterpart.
Here is a snapshot of selected yields and the 30-year fixed mortgage one week after the Fed announced its latest round of Quantitative Easing.
Guest post by Azizonomics.
A number of economists and economics writers have considered the possibility of allowing the Federal Reserve to drop interest rates below zero in order to make holding onto money costlier and encouraging individuals and firms to spend, spend, spend.
Miles Kimball details one such plan:
The US Federal Reserve’s new determination to keep buying mortgage-backed securities until the economy gets better, better known as quantitative easing, is controversial. Although a few commentators don’t think the economy needs any more stimulus, many others are unnerved because the Fed is using untested tools. (For example, see Michael Snyder’s collection of “10 Shocking Quotes About What QE3 Is Going To Do To America.”) Normally the Fed simply lowers short-term interest rates (and in particular the federal funds rate at which banks lend to each other overnight) by purchasing three-month Treasury bills. But it has basically hit the floor on the federal funds rate. If the Fed could lower the federal funds rate as far as chairman Ben Bernanke and his colleagues wanted, it would be much less controversial. The monetary policy cognoscenti would be comfortable with a tool they know well, and those who don’t understand monetary policy as well would be more likely to trust that the Fed knew what it was doing. By contrast, buying large quantities of long-term government bonds or mortgage-backed securities is seen as exotic and threatening by monetary policy outsiders; and it gives monetary policy insiders the uneasy feeling that they don’t know their footing and could fall into some unexpected crevasse at any time.
Guest post by Marc Chandler of Marc to Market.
The Spanish economy is continuing the rapid implosion. Unemployment is on fire, the public debt taking new highs while the politicians continue their charades. People are angry to put it mildly, and the protests in Madrid are back. From El Pais.
Spanish Economy Minister Luis de Guindos on Friday said the government would make “important announcements in the next few days” in the area of structural reforms. He also insisted that Europe would not make fresh demands on Spain in exchange for a bailout other than those to which the country has committed itself to reduce the public deficit.
De Guindos, who was speaking to reporters before entering a meeting of the Eurogroup in Cyprus, did not give any details of the planned reforms.
His comments coincided with a statement by the Bank of Spain that Spain’s public debt in the second quarter surpassed 800 billion euros for the first time ever. The figure was equivalent to 75.9 percent of GDP, three points more than last year, and the highest ratio since 1913 when it stood at 77 percent.
If you missed his newest sharp arguments regarding the Eurozone, here is refresher via Spiegel online. George Soros, still going strong.
The fate of the euro will be decided in Germany. That’s what legendary investor George Soros writes in an essay this week published first by the New York Review of Books and later by SPIEGEL ONLINE in Germany. The 82-year-old believes that Germany either needs to be convinced or pushed to take greater action. And he argues that the country must either lead as a “benevolent hegemon” or leave the euro.
Soros, a native of Hungary, has emerged as one of the leading critics of the German government’s policies in addressing the euro crisis. In light of the dramatic developments in recent weeks, the billionaire investor has once again sharpened his arguments. (Full reading here).
Say no more. The next QE 3 is priced in. What could possibly go wrong here?
Full video below.