Academics Need a Visit to the Real World – Bloomberg 08-26-13

Salient to Investors:

Caroline Baum writes:

Arvind Krishnamurthy at Northwestern and Annette Vissing-Jorgensen at Berkeley found that Treasury purchases themselves have had limited beneficial spillovers to private borrowers, i.e. the Treasury was able to borrow at lower interest rates but not the rest of us. The researchers found that the purchase of mortgage-backed securities had a bigger impact, so recommend Treasury purchases could be stopped without any untoward effects while purchases of MBS should be the last part to be discontinued.

However, emerging-markets debt and equity markets have gyrated since May, while the 30-year fixed-rate mortgages spiked 1.25 percent. And most economists, including those at the Fed, believe the Fed should get out of the credit business and get back to a Treasuries-only policy.

Jim Bianco at Bianco Research is right when he says the Fed has been perfectly clear about tapering – they have no clue, and we have no clue.

In an econometric model, uncertainty about the future cannot be captured in an equation.

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Treasuries Not Safe Enough as Foreign Buying Slowest Since 2006 – Bloomberg 07-21-13

Salient to Investors:

Foreign investors are adding Treasuries at the slowest pace since 2006 amid the worst rout in 4 years, and own less than 50 percent of Treasuries outstanding for the first time since March 2012. However, China boosted its stake in 2013 to the most on record – adding US bonds in 7 of the last 8 months.

The biggest sellers this year are from the Caribbean. James Bianco at Bianco Research said American hedge funds domiciled in Greenwich, Connecticut, that have their nameplates in the Cayman Islands were huge sellers of Treasuries in May; and hedge funds, many of which are registered in the Caribbean, move much faster than everybody else.

Thomas Atteberry at First Pacific Advisors said if foreign central banks are not an incremental buyer of new Treasuries and the Fed is going to taper then the Treasury will have to find another source of demand, which will want a higher return. First Pacific only owns Treasuries that mature in a maximum of 6 months.

Thomas Roth at Mitsubishi UFJ Securities USA said his firm’s Japanese clients stepped back because they don’t want to catch the falling knife.

Michael Pond at Barclays said there is optimism about the US economy and Asian foreign officials were hesitant, but wanted to put on bearish positions in Treasuries to reflect that.

Investment Company Institute said assets flowed out of bond mutual funds for 6 straight weeks, the longest stretch since December 2008.

Thomas Higgins at Standish Mellon Asset Mgmt said people saw no value in Treasuries at yields as low as they were, and clearly suppressed by the Fed to below fundamental value,

The median estimate calls for yields on 10-yr Treasuries to rise to 2.63 percent in 2013.

Michael Brandes at Citi Private Bank sees a shift occurring with a leveling out of Treasury purchases: an inflection point in the US rate cycle with the trend for higher yields.

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Fed Taper Would Swap Stimulus for U.S. Market Stability: Economy – Bloomberg 07-08-13

Salient to Investors:

Stephen Stanley at Pierpont Securities sees nothing on the economy side to have precipitated such a seismic shift in the Fed’s approach to QE. Stanley said QE was contributing to a market environment where people were taking too much risk, and the beginning of tapering in September is a lot more predetermined than the Fed is letting on.

Michael Gapen at Barclays says making the unemployment rate the dominant factor in determining the course of monetary policy has made it easier for officials to make the case for taking the foot off the accelerator, so near-term there will probably be less volatility on any data point that is not related to unemployment. Gapen expects tapering to begin in September and end by March 2014.

James Bianco at Bianco Research said if the Fed were truly data dependent, it should have been talking about increasing or extending QE, not about getting out. Bianco said it is no longer just about the economy, it’s also about the markets, and QE is distorting markets – when you distort markets, things end badly.

Alan Blinder at Princeton said there is some sentiment on the FOMC that a primary consideration should be that investors are taking on excessive risk in search of yield, though how much of that sentiment in Bernanke himself is unknown.

Michael Woodford at Columbia University says it is also important to tell investors that as the Fed balance sheet gets bigger, the bar to justify additional purchases rises.

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S&P 500 in Cheapest Bull Market Since Reagan 26% Below Peak – Bloomberg 11-19-12

Salient to Investors:

The S&P 500’s P/E ratio is below the ending level of 8 of the 9 bull markets since 1962, below the average of any bull market since Reagan, and up 35 percent since March 2009 versus an average 55 percent in bull markets since 1962. 245 of 500 S&P 500 companies have P/E ratios below their 5-year means versus 196 same time last year and 174 two years ago.

The average strategist expects the S&P 500 to rise 17 percent to a record 1,585 by year-end 2013. Earnings are forecast to rise to a record $110.80 a share in 2013, double those in 2008.

The average economist predicts global GDP will increase 2.6 percent in 2013 versus 2.2 percent in 2012, and US growth will fall to 2 percent in 2013 from 2.2 percent in 2012.

Brian Jacobsen at Wells Fargo Advantage Funds said stocks are cheap and predicts the S&P 500 will rise 47 percent to 2,000 in 2014.

Douglas Kass at Seabreeze Partners Mgmt expects the S&P 500 to rise 18 percent to 1,600 in 2013 as the economy expands. Kass said investors are playing the last war and their fears misplaced.

Savita Subramanian at Bank of America says the S&P 500 will rise to 1,600 on rising profits and diminishing global economic concerns. John Stoltzfus at Oppenheimer expects 1,585 and David Kostin at Goldman Sachs expects 1,575 on QE3.

James Bianco at Bianco Research said optimism is misplaced unless we avoid the fiscal cliff. Bianco said we’ve only been pricing in the fiscal cliff for a week and expects much more pain.

James Paulsen at Wells Capital Mgmt said we go from glum to glee over and over again.

Hank Smith at Haverford Trust said valuations are cheap relative to earnings, and corporate balance sheets are exceptionally strong and corporations flush with cash. Smith expects profit growth to re-accelerate in half2 2013.

Michael Shaoul at Marketfield Asset Mgmt said bull markets normally end with a burst of hyper enthusiasm – the transition from tepid enthusiasm to hyper enthusiasm is worth another few hundred points in the S&P.

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Bond Bubble Dismissed as Low Yields Echo Pimco’s New Normal – Bloomberg 06-11-12

Salient to Investors:

Moody’s John Lonski says G-7 bond rates indicate the markets don’t expect economic growth to exceed 3 percent.

Blackrock’s Jeffrey Rosenberg says the greed that produces bubbles is absent.

Pimco’s Bill Gross says global bond markets are turning ‘Japanese’.

UBS’ George Magnus says we are replicating the Japanese experience.

Bianco Research’s James Bianco says the balance sheets of the world’s six biggest central banks have more than doubled since 2006 to $13.2 trillion. The bond market has no value but the central banks don’t care about value right now.


Pimco’s Mohamed El-Erian says we may be in a synchronized slowdown in global economic growth for a while.”

Marc Faber expects the government bond bubble to burst sooner rather than later, because the consensus is to buy U.S. Treasuries.

Scottish money manager Stuart Thomson doesn’t see a bear market because yields are extremely low for a very good reason, fear.

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