|Buzz on the Street: Mr. Market Walks Into a Bar With QE3, iPhone 5, Mark Zuckerberg, and a Geopolitical Powder Keg|
By Minyanville Staff SEP 14, 2012 5:00 PM
A look back at the happenings on Wall Street this week, as seen by Minyanville's Buzz & Banter.
iPhone 5 is Here!
Okay, so Apple (AAPL) has announced the iPhone 5, and it's pretty much in-line with expectations.
Here's a quick wrap-up with the major specs and talking poitns.
-4" high-res screen
-4G/LTE data access
-18% thinner, 20% lighter
-8 megapixel camera with new enhancements like panorama mode
-New connector called 'Lightning' (yes, exciting)
-Full-screen Safari mode
Overall, not many surprises here, or at least nothing that's a reason for the stock to go up right now.
The spec-obsessed tech blogosphere doesn't have much to get excited about, but I suspect this phone will be a big hit.
Remember, the general public is concerned with just a few things - design, ease-of-use, and how the phone works with all their other stuff. Apple checked all the boxes here, though it would have been nice to have an attention grabbing new feature like Siri last year or the Retina display the year before that.
Now if by some chance Apple also announces an iPad Mini at this event (very unlikely in my view), I'll be looking to buy more Apple even though it's by far and away my biggest position already.
Thursday, September 13, 2012
Waiting on SuperBen
I know, I know. Everyone is waiting for the Fed to announce another round of QE, blah blah blah. There are two questions at hand when it comes to the Fed, which Matt Miller of Bloomberg asked me last night on Rewind. The first is "will the Fed act?"
I have maintained for some time that globalization not only makes stocks correlate closer to one, but also increases the coordination of central bank policies. The ECB fired the first shot, and it looks like the Fed and People's Bank of China will be next. The second and more important question is "will it matter?" The answer to me is probably not. QE3 already happened through the fear trade - QE3 was you and me sending yields to all time lows in the face of no Lehman event having taken place to justify that panic.
It is likely a meaningless exercise for the Fed to act now when the reality is that rising markets are more stimulative than money printing at this point. The one thing I think today will provide is some removal of the "air of uncertainty" over domestic policy. Beyond that, this bull market is being driven by its own merits and the Great Realization that the negative narrative was ultimately a work of fiction after all.
FOMC Rate Decision
The Fed will purchase $40 billion in MBS monthly, continuing "Operation Twist" and it will continue to be "open ended". They intend to keep policy stimulative "for a considerable time. Guidance is kept low through mid-2015. They intend to increase their longer-term holdings by about $85 billion per month.
These purchases will begin tomorrow.
By my last recollections, the Fed was buying $25b in MBS per month to reinvest prepayments on MBS, so if I'm reading this right, that makes this about $15b in new purchases.
More QE As Should Have Been Expected
Bernanke followed through with his Jackson Hole speech and didn't pull the football away from Charlie Brown. More QE he brings totaling $40b per month in MBS with no specific timetable on when it will end, thus considering it 'open ended.' The Fed also extended its desire to keep the Fed Funds rate "exceptionally low" thru mid 2015 from "at least thru late 2014." The Fed "is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook."
Bottom line, Bernanke gave us what many should have expected after his Jackson Hole speech where he defended previous QE and gave his 'grave' concerns with the labor market comment. This policy will do nothing for economic growth, raise commodity prices, will further clog their balance sheet with longer term securities and will make the process of an eventual and inevitable exit highly disruptive and messy. The Fed did little to convince me that the benefits of this new policy comes anywhere near the costs. Also, the Fed again is showing no faith in the regenerative powers of American capitalism where growth naturally happens as long as markets remain free.
Friday, September 14, 2012
T Report: The Carrot and The Carrot
Two Carrots Don’t Make a Stick
I’ve always assumed the adage about a carrot and a stick had something to do with donkeys specifically, but was a great way of summarizing reward and punishment. The “carrot” was the reward. You dangle the carrot as a reward for good behavior. The stick was there to punish failure. In many ways, the Fed removed the stick yesterday. We now live in a carrot and carrot world. I know a few places I would like to stick a stick right now, but I can’t help but think this change is going to have negative repercussions in the longer term.
Two Wrongs Don’t Make a Right
I was wrong yesterday. I didn’t think the Fed would do it. I also thought the initial muted reaction was a sign that it was priced in. I was wrong, but I’ve been right for the most part for awhile, so I can live with yesterday’s mistakes. It bothers me, but not immensely.
What concerns me more is that I was wrong in September 2010. I underestimated the impact of QE2. That is what is bothering me now. Is this a replay of the fall of 2010 where we are at the start of a long relentless march higher, or is that so priced in, that it doesn’t happen again? That is the real question. Will the open ended QE spark another spurt higher, or is it different and too much priced in? I’m trying to get my hands around that, and being wrong in 2010 is clouding my judgment.
Two Mortgage Providers Don’t Make a Fed
If Fannie and Freddie announced that they were going to underwrite more mortgages yesterday, would we have rallied so much? While Fannie and Freddie cannot print, they are as much a part of the U.S. government as the Fed (technical accounting issues aside).
In fact, Fannie and Freddie are shrinking. The government wants their balance sheet reduced. The Fed has stepped in to pick up the slack. Why are we so much more excited about the Fed buying mortgages than Fannie and Freddie? Yes, I can see the printing argument, but the reality is that at least a part of yesterday’s announcement is picking up the slack rather than creating new additional demand.
I am not sure how that plays out, but it is a question we need to ask ourselves. Why does the Fed buying something count more than Fannie and Freddie buying something?
Fed Buying Mortgages Doesn’t Create Final Demand
While the Fed ignited a ramp up in risk assets and commodities, did they do anything for final demand? I spoke to some friends who are senior in real companies (those that manufacture something as opposed to financial services) and they quickly confirmed that nothing had changed on their end. Their stock options were worth more, they had now exceeded their stock price targets for the year, but they weren’t about to change plans. They need to see final demand increase before they change their business plans so nothing about more Fed buying affects businesses immediately.
On the home front, with a bias to people located in overpriced NYC related housing, most people hope this means that their property goes up in value. I haven’t run into anyone looking to buy now because of this. Across the country will this help? Maybe, but rates have been low for awhile, so I’m not sure what benefit this will have in the real world.
Banks Win Big
Anyone long mortgages ahead of this is in good shape. U.S. banks will benefit. European banks looking to shrink will benefit as they now have a ready buyer of a part of their portfolio.
So banks should do well. Bank credit spreads should do well. One consistent theme we’ve had is that bank credit spreads, CDS in particular, have remained stubbornly high relative to their equity valuations. This may be the catalyst that drives them tighter. Any notion that this Fed will somehow let a big bank fail seems ludicrous. They just printed money that helps them at a time when stocks are already at multi-year highs and amid signs that housing has bottomed. If there is one trade where you are supposed to shut your eyes and ignore the volatility for 6 months, it is bank CDS. Hit a bid and walk away. As SEF’s come on line, the last and final bid for bank CDS, the counterparty hedging, will go away.
Commodities and the New World Order
As I try and understand what the Fed did, I keep coming back to the idea that commodities will win. In the short term gold may do well, but the reality is that you need useful commodities. Gold may well have been a store of value, but you can’t eat it, build shelter with it, or burn it for heat. Commodities that let you do that may well become the play.
As the Fed abandons any form of restraint in its efforts to keep rates low, debase the currency, and spur asset inflation, the mindset of investors, companies, and countries is likely to change. China is likely to be the leader in that. Stockpiling useful things, basic resources, seems like the trade.
The Fed isn’t “pushing on a string” it is sitting on a water balloon. That balloon will burst and the consequences of that will be something we have never dealt with before, and quite frankly, aren’t prepared to deal with. Maybe everything will work out, and for now it is hard to be bearish, so I will be neutral, but that doesn’t mean the end game didn’t get uglier.
Neutral, Confused, and Annoyed
I’m pretty much dead neutral in terms of positioning. Too much going on that is too confusing to form a solid opinion. At 1,460 on the S&P, at 118 on MAIN (no that isn’t a typo), IG18, so recently at 102 is now at 82) and highs on so many other asset classes, it is hard to say there is a lot of upside. With the Fed printing money monthly, it is hard to say there is any downside, so I will go with neutral and confused.
I think I have separated my anger from my investment decision, but I am angry. Everything about this move strikes me as dangerous. The one thing that I think the Fed does a HORRIBLE job at, is understanding that human behavior changes. The economists don’t seem to understand that the same inputs into the same model don’t produce the same results because behavior changes over time.
I for one, miss the stick, and I don’t even consider myself a masochist, just a believer in meritocracy and that failure is a necessary part of success.
Bullets Over Broadway
Minyan David asked the question yesterday, "Was the Fed's announcement of QE with no end date the last bullet that the Fed has? If so, do you think the euphoria will turn to panic when everyone realizes that the Fed is out of ammo?"
My short and sweet response was, "Ultimately, yes; the question is whether it's before or after the election and/or quarter or year-end" This is the dynamic we spoke about last summer--which was a reprise of a vibe first shared in 2007 as Central Banks began to mobilize.
It's important to understand that this is my thinking; my positioning, while net short per my buzz late yesterday, is entirely more defined and dare I say surgical. We often say to never let an opinion get in the way of making money; while that's easier said than done, it's paramount to successful trading in this environment.
Chicken or the Egg
While I have an enormous level of respect for those who choose public service and whose job it is to safeguard the safety of our nation everyday, I am afraid that the causality argument offered yesterday that more bond purchases by the Fed will reduce unemployment is akin to me saying that if I eat more spinach, I will grow a third arm.