Buzz on the Street: Mr. Market Walks Into a Bar With QE3, iPhone 5, Mark Zuckerberg, and a Geopolitical Powder Keg
A look back at the happenings on Wall Street this week, as seen by Minyanville's Buzz & Banter.
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.
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