Archive - Jun 2014

Many market participants are scratching their head as to whether the low VIX levels are an anomaly or some kind of utopian new normal. JPMorgan's Quant Derivatives shop warns the current environment is not similar to the great moderation of 2004-2007 as volatility appears to be disconnected from fundamentals and pressured by structural effects, including central bank intervention, low trading volumes, and pressure from option hedging. Crucially, based on an examination of 'gamma imbalances', the current (low) volatility regime may change significantly after the June expiry.

It appears there is something far more structural with America's long-term unemployment problem, something not even the "smartest academics in the (Marriner Eccles) room" can diagnose. Surprisingly, earlier today Gallup reported one factor that may be contributing to America's unemployment malaise - the same problem that is the reason for the insolvent US welfare state coffers: obesity. According to Gallup, Americans who have been out of work for a year or more are much more likely to be obese than those unemployed for a shorter time. The obesity rate rises from 22.8% among those unemployed for two weeks or less to 32.7% among those unemployed for 52 weeks or more.

Yellen has got to be the most dovish Fed chairperson going into the most important policy initiative withdrawal phase ever to be recorded since the inception of the Federal Reserve! 

Bank of America believes the increasing geopolitical tensions in Iraq risk regional contagion, with the potential for negative spillover to global markets. If Iraq were to see further turmoil, in addition to the civil war in neighbouring Syria, we believe it could destabilize the region further, disrupt oil production and exports, and provide fertile ground for terrorist activity to extend its reach. They review the background of Iraqi turmoil, and discuss the political, economic and market implications in 10 questions; noting that the root of the problem is the central government’s non-inclusive and sectarian policies.

Their names are familiar to all of us: Cleveland, Flint, Youngstown, Saginaw, Gary, Toledo, Reading, Akron, Flint and Buffalo were all once booming manufacturing cities that were absolutely packed with thriving middle class families. But now most of the manufacturing jobs are gone and all of those cities are just shadows of their former selves.

As he said all along "investors should have some exposure to gold" and Marc Faber has been adding recently as gold (and gold stocks) are so much cheaper than over-inflated stocks. Faber holds around 25% of his assets in gold becaquse he believes eventually the monetary policies of central banks will lead to a further loss of purchasing power in the value of paper money. The CNBC anchor is perturbed as the market is selling gold and buying stocks; to which Faber rebuffs; investors are shunning gold "because the media doesn't like gold, nobody at CNBC owns gold. Nobody at Bloomberg owns gold. Gold is being constantly talked down by the media, and Fed officials, and economists, who also don't own any gold. They're all stocked up in equities." "When people talk about people who are optimistic about gold, they call them 'gold bugs.' A bug is an insect. I don't call equity bulls 'cockroaches.' Do you understand? There is already a negative connotation with the expression of 'gold bug.'"

Presented with no comment...

While the Fed's magical money transmission mechanism in mortgages (and thus housing 'wealth') broke in the middle of last year, this last week's move is a perfect summary of the sensitivity of whatever is left of the recovery. Mortgage rates rose a mere 5bps but this triggered a 7% plunge in refinancing activity. It appears clear from the chart below that, like most other 'markets' the Fed has intervened in, mortgages are broken - rising rates (from any Fed signaling of confidence in the economy or otherwise) will slump refi activity at the margin no matter how rosy the future; and lowering rates is now having no impact at all on the marginal homeowner's ability to refi. That's another fine mess you've got us into Bernanke/Yellen.

The slaughterhouse that Iraq has become in the past week is the stuff that nightmares are made of. And this is just the beginning. Here's why...

You name the Obama administration scandal/screw-up and Hillary Clinton is distancing herself from it as she prepares to run in 2016 on a clean slate of 'well, I would have done it better/different'. As Reuters reports, recent interviews on Fox and CNN show her claiming she tried but failed to persuade Obama to arm the rebels fighting Syrian President Bashar al-Assad; that NSA spying was "absolutely uncalled for"; and that "changes need to be made at the IRS" seemingly disagreeing with Obama's claims that it was a "phony scandal." With friends (party colleagues) like this, who needs enemies.

Because when it comes down to it (as we explained here), all that matters is the resources...

The Army general who oversaw the U.S. military’s surge of troops into Iraq in 2007 issued a stark warning Wednesday on any further military action. As WaPo reports, Retired Gen. David Petraeus says a number of preconditions should be met before Washington intervenes in the growing crisis - the United States should not offer military support unless Iraqi Prime Minister Nouri al-Maliki (whoc has stated "it's too late fort regret," is able to adjust political conditions there so that his Shiite-led government is seen as fair and representative throughout the country. The bottom line, he warns, "this cannot be the United States being the air force for Shia militias or a Shia on Sunni Arab fight. It has to be a fight of all of Iraq against extremists."

Moments ago, Janet Yellen was asked if there is something out of place with the S&P hitting all time highs at a time when even she (not to mention numerous other Fed presidents) discuss froth in the bond markets. Her answer: no. Specifically, based on some "model" the Fed watches to get a "feeling" for valuations, she concluded the equity valuations are not out of historical norms. In other words, "no bubble here."

And here is what JPM had to say about that.

So here we are yet again, another FOMC day, and more new ATH's as Yellen goes on to say that all is well, the economy is growing , and that she doesn't see a bubble in the stock market

Cognitive biases are an anathema to portfolio management as it impairs our ability to remain emotionally disconnected from our money.  As history all too clearly shows, investors always do the "opposite" of what they should when it comes to investing their own money.  They "buy high" as the emotion of "greed" overtakes logic and "sell low" as "fear" impairs the decision making process. Here are 5 of the most insidious biases that will keep you from achieving your long term investment goals. As individuals, we are investing our hard earned "savings" into the Wall Street casino. Our job is to "bet" when the "odds" of winning are in our favor. With interest rates at abnormally low levels, inflation rising, economic data continuing the "muddle" through and the Federal Reserve extracting their support; exactly how "strong" is that hand you are betting on?