Investment Ideas and Commentary for Second Half 2011 Sunday, Jun 26 2011 

Investment Ideas and Commentary for Second Half 2011

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Washington DC has become a Significant Risk to Investors’ Portfolios. Sunday, May 1 2011 

S&P’s warning on the US credit rating and the subsequent refusal to acknowledge the problem should give investors pause.

The inability to tackle the budget deficit and debt problem is causing the Dollar to selloff and head towards levels not seen since late 2009.

The US government continues to follow the thesis posited in my 2011 commentary. Instead of cutting spending, both parties in Congress are fighting to see how little they can cut.

As the debt ceiling deadline approaches, Republicans are being backed into a corner with media outlets calling for doom if the debt ceiling is not lifted and constituents screaming for spending cuts.

The recent FOMC statement highlights the problems coming out of Washington DC as Federal Reserve governors Charles Plosser and Richard Fisher made the following comments in recent speeches:

Richard Fisher’s comments from a speech on April 8th, 2011: http://www.dallasfed.org/news/speeches/fisher/2011/fs110408.cfm

Personally, I felt the liquidity needed to propel our economy forward was sufficient even before the FOMC opted last November to buy $600 billion in additional Treasuries on top of the committee’s pledge to replace the runoff of our $1.25 trillion mortgage-backed securities portfolio. I argued as much at the FOMC table. I considered the risk of deflation and of a double-dip recession to have receded into the rearview mirror.

Charles Plosser’s comments from a speech in Harrisburg, PA on April 1, 2011: http://www.philadelphiafed.org/publications/speeches/plosser/2011/04-01-11_harrisburg-regional-chamber.cfm

Some fear that the strong rise in commodity and energy prices will lead to a more general sustained inflation. Yet, at the end of the day, such price shocks don’t create sustained inflation, monetary policy does. If we look back to the lessons of the 1970s, we see that it is not the price of oil that caused the Great Inflation, but a monetary policy stance that was too accommodative. In an attempt to cushion the economy from the effects of higher oil prices, accommodative policy allowed the large increase in oil prices to be passed along in the form of general increases in prices, or greater inflation. As people and firms lost confidence that the central bank would keep inflation low, they began to expect higher inflation and those expectations influenced their decisions, making it that much harder to reverse the rise. Thus, it was accommodative monetary policy in response to high oil prices that caused the rise in general inflation, not the high oil prices per se. As much as we may wish it to be so, easing monetary policy cannot eliminate the real adjustments that businesses and households must make in the face of rising oil or commodity prices. These are lessons that we cannot forget.

Yet when it came time they voted to continue the same policies they spoke out against exposing them as doves rather than hawks. In contrast, Thomas Hoenig who spoke out against accommodative monetary policy not just in speeches but in FOMC statements as well.

We have the Democrats spending like drunken sailors, the Republicans paying lip service to the reason they were elected to Congress, and a Federal Reserve that cannot define how inflation is created.
At this time one should be reducing the leverage in their portfolios until the investment landscape becomes clear.

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.

Stormy skies ahead Tuesday, Oct 26 2010 

Starting on Friday with the release of US 3rd Quarter GDP the markets will begin a wild and volatile ride. A stronger then expected GDP number could send a signal the the QE2 package to be announced the next Wednesday’s Federal Reserve meeting will be smaller than expected.

Of even more interest will be the Personal Consumption Expenditure number which measures the amount of consumption by US households. A strong increase would be a sign that consumers feel confident in the future.

Personally, my expectation will be for a stronger than expected GDP number which will likely be revised downward anywhere from 0.5-1.0% in November and December.

Once the market takes the weekend to digest the 3rd Quarter GDP numbers and what they mean for election day we will be be hit with the major portion of the storm on Tuesday and Wednesday.

Tuesday is Election Day in the US and rumors are circulating about the Republicans taking back both houses of Congress in what will be a hotly contested election.

Both Democrats and Republicans are making a strong push to the finish line as a number of close races around the country bear monitoring.

In states which allow early voting Democrats are coming out early and strong. This may backfire as a strong early lead by the Democrats could fire up the Republicans to put more effort getting voters to the polls.

On average, the sitting party loses approximately 26 House seats and a few Senate seats in the mid-term election following their election which signals a move to the center in order to win a second Presidential term.

On Wednesday, voters will wake up to a new Congress and later that afternoon the Federal Reserve will unveil their QE2 program followed up by the October unemployment rate on Friday.

As for the markets, it appears as though QE2 and Republican control of both houses have been priced into the market right now and markets appear to be in a topping pattern. We are within 3.5% of the high made in April of this year so it would not be surprising if there was a push towards the old high before the markets sell off into November and the end of the year.

I am basing this on strong bullish ratings from AAII, overbought technical indicators, small investors once again piling back into the market, and a significant portion of good news already priced into the market.

While the market has just experienced a bullish cross and this does bode well for the market in the future it does not discount a potential correction in the near-term which should take us down to the 50 day moving average.

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.

Quantitative Easing Program Confirmed by Federal Reserve Friday, Oct 22 2010 

Not content on waiting to reveal to the markets after the conclusion of the November 3rd Federal Reserve meeting, the St. Louis Fed just published an article in the latest Monetary Trends entitled Is More QE in Sight?

A short summary of the article extols the virtues of the first Quantitative Easing program which, according to two recent studies, lowered yields on 10 year Treasuries by approximately 100 basis points.

The article focuses on two successes, the decrease in long-term interest rates and an increase in aggregate spending. The first is that by purchasing securities from the public the interest rate risk is lowered and market rates fall by the size of the risk premium. The purchases are and have been funded by the creation of new deposits rather than the sale of short-term assets.

The second success is less clear in that the Federal Reserve realizes that business spending has been slow due to uncertainty surrounding the economic climate, not high interest rates and that businesses have not been constrained from borrowing and credit is available.

It appears from the one page article that the Federal Reserve’s new QE2 program will be what the market expected in that the Fed will print money and using said money to buy long-term securities.

How successful the program will be is up for debate since the biggest hurdle surrounding the QE2 program is the uncertainty in the residential and business climate.

In a recent poll consumers were asked what they would do with a 10% raise and the top answer was to save or pay down debt, the opposite of what the Federal Reserve desires or needs to happen. The more people choose saving and debt reduction over consumption the more likely we are to continue in the current environment.

The Week in Review, October 15, 2010 Friday, Oct 15 2010 

The week started slow enough with the Columbus Day holiday and picked up steam on the backs of solid earnings reports from Intel, Google, and JP Morgan.

Thursday brought some consternation as the 30-year bond auction came in with a yield of 3.852% well above estimates as foreign buyers apparently stayed home.

Overseas, the Yen fell to fresh lows and Thailand established some curbs to assist exporters and try to stem the flow of hot money into the country without damaging FDI.

China raised the reserve requirement by 50 basis points to try to cool down lending and better manage economic growth.

China’s foreign reserves also soared to 2.648 billion in the 3rd Quarter.

The Bank of Korea held interest rates steady at 2.25% amidst an 8% surge in the Won against the dollar in the past three months amidst faltering exports and inflation.

Policy makers in India stated that they are considering different options aimed at defending the rapidly appreciating Rupee.

Markets sold off on Friday as Ben Bernanke confirmed everyone’s rumors that the Federal Reserve is looking to purchase more US Treasury bonds but is unsure at this time as to the size of the program.

Next Week

Monday – Industrial Production and Capacity Utilization in the US

Tuesday – Reserve Bank of Australia minutes, ECOFIN meeting, Bank of Canada rate announcement

Wednesday – Bank of England minutes

Thursday – China 3rd Quarter GDP,

Friday – Hoenig speaks (noteworthy in that he has been against keeping rates low)

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.

Buy the Rumor, Sell the News Friday, Oct 15 2010 

There is an old adage on Wall Street, buy the rumor and sell the news.

Simply put, investors will typically buy a stock ahead of expected good news then sell when the news is released to the public as said news is now built into the price. So far during September

Over the past few weeks we have been buffeted with stories of QE2 coming at the November meeting from the Federal Reserve. 3rd Quarter GDP is expected to come in below 2% which would indicate the fledgling expansion is loosing steam.

The Federal Reserve will then prime the pump and add additional measures in order to help boost a lagging recovery and protect the US Dollar, which is in a freefall back to major levels of support lasting more than 20 years.

Some of the rumored measures include buying long-dated Treasuries, additional MBS securities to help the mortgage market, and corporate bonds.

There are a couple of problems lying just underneath the surface. First, corporate profits are coming in above expectations partially due to the weak US Dollar and economic numbers coming out of the US Government, with the exception of the unemployment rate, point to GDP growth above 2%.

Next we have the concept of QE2 itself which has not been defined. Rumors have been running rampant about the size (anywhere from $500 billion to $2 trillion) and scope (Treasuries, corporate bonds, MBS, equities) of QE2.

Should QE2 come in on the light side it is likely the markets sell-off as investors will be disappointed.

If the Fed does not have a specific target in the language investors will be disappointed due to the lack of clarity.

If the initial estimate of 3rd Q GDP comes in above 2%, which is likely with an election only days away and the Democrats staring at heavy losses, the market will sell off as it becomes less likely that we get QE2 from the Fed or at least a smaller QE2 than expected.

Market sentiment numbers are near levels that precede a pullback or correction. Bullish and bearish sentiment numbers from the AAII are at levels that often precede a pullback or correction in the market.

Finally, we have hawkish comments coming from one of the biggest doves on the FOMC, Vice-Chairman Yellen warned that low rates are an incentive to for firms to take more risks and the Federal Reserve has to be ready to take away the “punch bowl”.

Politically, the market is expecting a change in leadership in the House while the Democratic lead in the Senate is severely cut back.

In the days leading up to the release of 3rd Quarter GDP on October 29th, the 2010 mid-term Presidential elections on November 2nd, and a Federal Reserve meeting on November 2nd and 3rd we are likely to see an increase in volatility. The chances that we sell on the news will rise considerably as the expected good news is being priced into the market. Investors would be well served to manage their risks accordingly.

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.

Commodities Thoughts – October 7, 2010 Thursday, Oct 7 2010 

Gold has broken out to new highs over the past few weeks on rumors of the Federal Reserve coming to market with QE2 and continued troubles in Europe and Japan.

The current price action reminds me of the December time frame when Gold ran up only to pull back by 10%. Todays selloff is confirming my thoughts that we may be at a short-term top in Gold and investors should tighten stops and get ready to deploy capital. Important support is at the 1250-1265 level.

Silver has moved higher along with Gold as increased demand from investors looking to get access to Gold’s cheaper cousin.

For the past year, Silver has been trapped in a trading range but this breakout is significant as it implies higher prices down the road once the current runup has been digested.

Silver is likely to pull back from here and underperform Gold over short-term time horizon. Investors would be best served to tighten up stops and look for the bottom of the new trading range before allocating capital at this time.

Both charts are seriously overbought so investors should take pause before entering into any long position at this time.

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.