The Lead-Lag Report: Forced Reflation

By Michael A. Gayed  SEP 18, 2012 8:35 AM

SuperBen and the League of Extraordinary Bankers are forcing reflation upon us, and for risk assets, that's bullish.



Disenchantment, whether it is a minor disappointment or a major shock, is the signal that things are moving into transition in our lives.
--William Throsby Bridges

Below is an assessment of the performance of some of the most important sectors and asset classes relative to each other, with an interpretation of what underlying market dynamics may be signaling about the future direction of risk-taking by investors.  The below charts are all price ratios which show the underlying trend of the numerator relative to the denominator.  A rising price ratio means the numerator is outperforming (up more/down less) the denominator.

For a full version of the Lead-Lag Report, click here.


Financials (XLF) – Surge

Comments: Financials strongly outperformed on the Fed's QE3 announcement of unlimited stimulus to counter stubbornly high joblessness.  Targeting mortgage backed securities while at the same time not going after longer-duration Treasuries appears to be a net positive for banks as the yield curve steepens.

Junk Debt (JNK) – Credit Spreads Contraction Spikes

Comments: The above ratio is one way of seeing if credit spreads are narrowing (uptrend in the ratio) or widening (downtrend in ratio). The trend remains up.  Credit spread contraction remains a net positive for risk assets.  A spike occurred in recent days due to the Fed's ultra monetary easing stance through QE3.
Treasury Inflation Protected Securities (TIP) – Whoa

Comments: The TIP/IEF price ratio is one way of seeing if inflation expectations are rising or falling within the bond market.  When the ratio is trending higher, it means bets are occurring on rising prices ahead.  TIPS went utterly wild following the Fed's QE3 announcement, as inflation expectations surged.  Holding this ratio level will be very important in the coming weeks ahead for risk assets.
Health Care (XLV) – Re-sync?

Comments: Health care has re-synced to the bear trade, weakening in sympathy with utilities (XLU), and consumer staples (XLP) as the bear trade fades.  Further weakness appears likely given that dividends seem to be getting more and more out of favor on inflationary fears.
Technology (XLK) – Rolling Over

Comments: Despite continued hype and excitement over Apple (AAPL), the technology sector still appears to be in the early stages of weakness as it rolls over relative to the S&P 500 (^GSPC).  More time is needed to confirm, but other sectors are comparatively more attractive.
Bonds (IEF) – Sharp Underperformance

Comments: Two weeks ago I noted that “some strength has crept back in to bonds relative to stocks as the world waits for a new bond buying program by the Fed.  However, other interest rate-sensitive sectors are not confirming bond strength.  Weakness in fixed income instruments relative to stocks may continue shortly. Stocks continue to show resiliency, making continued underperformance in Treasuries likely in the near-term.”  Given the reflationary policies of both the ECB and the Fed, stocks continue to look more favorable.
The most noticeable moves over the past week happened in the bond market, as Treasury Inflation Protected Securities utterly spiked following the Fed's QE3 announcement.  The potential for forced reflation continues as various intermarket relationships continue to favor risk assets.
Editor's note: This update is published every week exclusively for Minyanville, and is compiled by Michael A. Gayed, CFA, Chief Investment Strategist of Pension Partners, LLC.

Twitter: @pensionpartners
No positions in stocks mentioned.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.