When in doubt, tell the truth.
-- Mark Twain
It appeared last night that markets would undergo a Yellen surge, thanks to news that indicated that President Obama will be nominating Janet Yellen as the world's most powerful woman, aka, the Chair of the Federal Reserve. Futures rallied, and my Twitter stream became overwhelmed with talk about how her nomination would counter near-term concerns over Washington and the government shutdown. I have argued for some time that if a Yellen-led Fed increases inflation expectations, it could resolve the reflation disconnect that has persisted all year in the US.
The prevailing impression the market has about Yellen is that she would be more accommodative/dovish than Ben Bernanke, given that she has gone on record saying that if she could, she would vote for negative interest rates. The implication is that QE, rather than being tapered next year, could actually be increased. I do not disagree with this whatsoever, but I am a bit troubled by the reaction of markets to her nomination in terms of discounting future monetary policy and effectiveness.
Take a look below at the price ratio of the SPDR S&P Homebuilders Index ETF
(NYSEARCA:XHB) relative to the SPDR S&P 500 ETF Trust
(NYSEARCA:SPY). As a reminder, a rising price ratio means the numerator/XHB is outperforming (up more/down less) the denominator/SPY.
Homebuilders have been poor performers this year, and they really started weakening as taper talk began, yields spiked, and mortgage rates rose. Note that the most recent performance on the far right of the chart indicates some sharp deterioration. If a Yellen-led Fed increases QE, this means mortgage rates likely fall, spurring demand for new homes. The problem is that homebuilder stocks, as of right now, are expressing significant doubt over this.
Bottom line? More time is needed to see if Yellen can juice reflation sustainably. If she can, it should be reflected through inflation expectations within the bond market, and through the outperformance of homebuilders. So far, neither are showing anything has really changed in terms of deflationary pressures that continue to persist. Honey badger continues to not care. He will when Gray-Haired Bears come out in full force to go after him.
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.