Marc Faber: Fed’s QE2 Could Trigger Market Correction
by ilene - October 30th, 2010 5:10 pm
Marc Faber: Fed’s QE2 Could Trigger Market Correction
Courtesy of asiablues at Zero Hedge
By Dian L. Chu, Economic Forecasts & Opinions
Marc Faber, publisher of the Gloom, Boom & Doom report, discusses the potential impact of further quantitative easing (QE2) by the U.S. Federal Reserve in a Bloomberg interview on Oct. 36 (clip below).
Correction Triggered by QE2?
Faber sees Democrats--"sadly enough"--would get a shot at still retaining the majority, which would mean the monetary and fiscal policy will most likely stay on its current course.
Equity has done well in Sep. and Oct months; however, Faber thinks the markets are stretched in the inflation trade, and weak dollar, high commodity and precious metal prices, along with high equity valuations, all suggest a correction is overdue.
Now, with QE2 being largely priced in, anything less than $1 trillion from the Fed would disappoint the markets and may trigger a correction in U.S. stocks, which could result in more quantitative easing.
But the correction should provide a buying opportunity for investors leading to an up cycle, instead of another bear market.
Equity Better for the Next Decade
Looking at investing for the next ten years, equities, emerging economies in particular, would be a relatively better place to invest than U.S. government bonds, and cash. However, Faber advises against financial, auto, and aircraft. He’s been in the high tech sector and likes Microsoft (MSFT).
Precious Metals Due for Pullback
Faber is currently recommending agriculture commodities, and the accumulation of precious metals. On precious metals, he thinks they are overdue for "some kind of correction" by year end, and expect the next leg up in 2011.
Dollar Near An Inflection Point
Faber says dollar is oversold, while in contrast, some of the foreign currencies such as Yen and Franc are overbought. So, an inflection point could be near for a short-term dollar rally which could temporarily push down asset prices.
He warns investors to be very careful about shorting dollar and long assets as the trade has become quite crowded.
Expect a Strong Pullback of Chinese Economy
Although not quite gloom and doom, Faber does expect a "strong pullback" on the Chinese economy due to its many imbalances.
According to Faber, the 0.25% interest rate hike effective Oct. 20 by the PBoC is "meaningless," because of skyrocketing property prices, and the cost of living inflation has gone up much more than the official figure.
He notes food prices have seen high inflation, and because of low GDP per capita where food would account for a high percentage of total expenditure, Faber estimates that the typical consumer…
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DiggMad Dash Into Junk Sets October Record
by ilene - October 30th, 2010 5:03 pm
Mad Dash Into Junk Sets October Record
Courtesy of Mish
The mad dash into junk bonds continues. Please consider Junk Sets October Record, Mortgage Bonds Rally
Sales of junk bonds in the U.S. set a record for October as returns topped investment-grade debt and more borrowers were raised than cut. Government-backed mortgage bonds may beat Treasuries by the most in at least 10 years.
Fortescue Metals Group Ltd. and Calpine Corp. led speculative-grade companies issuing $33 billion of debt this month, according to data compiled by Bloomberg. The notes have gained 2.32 percent on average in October, compared with a loss of 0.16 percent for high-grade securities, Bank of America Merrill Lynch Index data show. Not since March have high-yield, high-risk securities outperformed by such a wide margin.
Investors have driven relative yields down to the lowest in five months on confidence the Federal Reserve will flood the economy with money, allowing the neediest borrowers to access capital and refinance debt. The rally is robust enough to extend into next year, said James Murren, chief executive officer of Las Vegas-based casino operator MGM Resorts International, which sold $500 million of notes rated CCC+ on Oct. 25.
“The bond market will get better,” Murren said yesterday in an interview at Bloomberg headquarters in New York. “People are going to start to have a more positive outlook toward 2011. They’re going to be searching for yield and they’re going to go down the rating scale and that’s going to benefit companies like us.”
U.S. junk bonds have gained 14.4 percent this year, compared with the record 57.5 percent in all of 2009. The 1.96 percent increase this month in the Bank of America Merrill Lynch Global High Yield & Emerging Markets Plus index exceeds gains on the Global Broad Market Corporate Index by 215 basis points, after outperforming by 233 basis points last month.
Global corporate bonds have lost 0.19 percent in October, after rising 0.22 percent in September and the worst performance since losing 0.4 percent in May. Year-to-date returns total 8.84 percent.
Lehman High Yield Bond ETF
S&P 500 Weekly Chart
Buy the Dip?
The last two downturns in January and May of 2010 were buying opportunities. Will buy the dip work next time? Fundamentally I see no reason it should, but that does not mean it won’t.
I have been saying for 18
…
Irish NPRF Up 1.9% in Q3
by Zero Hedge - October 30th, 2010 4:32 pm
Courtesy of Leo Kolivakis
A follow-up to my recent post on the luck of the Irish running out. Bloomberg reports, Irish National Pension Fund Posted 1.9% Return in Third Quarter:
Ireland’s National Pensions Reserve Fund earned a return of 1.9 percent to 24.5 billion euros ($34 billion) in the third quarter.
The fund’s so-called directed investments in the country’s two biggest banks, Allied Irish Banks Plc and Bank of Ireland Plc, delivered a return of minus 2.5 percent, the NPRF in Dublin said in an e-mailed statement today.
The return on the fund’s discretionary portfolio was 3.6 percent. That fund amounted to 17.9 billion euros at the end of September, it said.
Donal O’Donavan of the Irish Independent reports, National pension fund loses €400m in AIB and BoI deals:
The National Pensions Reserve Fund (NPRF) has suffered a loss of €400m on the investments it was forced to make in Bank of Ireland and AIB, according to figures released last night.
In 2009 the NPRF invested €3.5bn in preference shares in AIB and the same amount in Bank of Ireland.
However, this €7bn investment was worth €6.6bn by the end of September, according to data released by the NPRF.
Overall the fund showed a return of 4.9pc in the nine months to the end of September. It brings the total value of the fund to €24.5bn.
The NPRF was instructed by Finance Minister Brian Lenihan to make the “directed investments” to meet the banks’ capital requirements.
Some of the preference shares have since been converted into ordinary shares, which have fallen in value.
The most recent figures do not take into account the fall in the value of AIB shares since its effective nationalisation was announced on September 30.
News of the losses comes as the NPRF prepares to pump up to €5.4bn in equity into AIB on behalf of the State at a fixed price of 50c per share.
Based on AIB’s closing share price of 32.4c yesterday, the NPRF will suffer an immediate loss of €1.9bn if it funds the full amount.
The set
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TV Pricing Bloodbath Threatens Already Razor-Thin Retailer Margins, Will Send Japanese FX Interventions Into Overdrive
by Zero Hedge - October 30th, 2010 2:16 pm
Courtesy of Tyler Durden
So much for the 3D TV craze… and for overestimating the indiscriminate purchasing power of the US consumer. After much fanfare, and visions for record sales, TV makers such as Sony, Samsung and LG have gotten reacquainted with gravity, and are now gearing up for a “miserable” Christmas as an all out price war confirms the US consumer, even if not paying mortgage bills, refuses to purchase indiscriminately. The result: price drops of over 25% for the upcoming holiday season, huge margin cuts for already margin lite retailers (read Amazon), and an increasing reliance on corporate sales to pick up for the sudden and dramatic consumer slack. But the biggest hit will be to Japanese and Korean exporters, who will soon need to add to a dramatic decline in end demand, such factors as a ramp in Rare Earth Minerals: a key component to flat screen TV production, and, of course, record expensive currencies. All in all, it is shaping up for a miserable existence for the Japanese export economy, and we are very confident that a tsunami of export-led anger is about to be unleashed on Kan’s government, demanding to at least moderate the one variable that is under Japanese control: the FX rate. Which means that many more USDJPY interventions are coming as soon as next week, when the Fed’s QE2 announcement is sure to send the FX pair far below 80. In other words, QE2, in addition to confirming that the Fed cares little about the dollar’s purchasing power, is about to set the FX, and trade wars, into overdrive.
Bloomberg describes the upcoming carnage in TV sales:
TVs are about to get cheaper.
Sony Corp. gave up yesterday on a goal to profit from televisions this fiscal year and Panasonic Corp. forecast price drops will deepen this quarter. Earlier, Samsung Electronics Co. predicted “severe” competition for the year-end season, echoing comments from LG Electronics Inc. a day earlier.
Projections from the world’s four largest TV makers signal the industry will fail to capitalize on the biggest sales quarter of the year, with some analysts predicting price declines of as much as 25 percent in 2010. Companies from Microsoft Corp. to Intel Corp. are increasingly counting on corporate demand as consumers are reluctant to shop.
“There’s going to be a price war
…
FRAUDCLOSURE BEFORE CHRISTMAS (Banzai7 Halloween Countdown Saturday Edition)
by Zero Hedge - October 30th, 2010 1:53 pm
Courtesy of williambanzai7
LAMENT OF MAESTRO THE LEVERAGE KING
(Jack’s Lament, The Nitemare Before Christmas)
WilliamBanzai7
There are few who’d deny,
at what I do I am the best
For my talents are renowned far and wide
When it came to surprises of the monetary type
I exceled without ever even trying
With the slightest little effort of my fractional reserve charms
I have seen global investors give a shriek!
With the wave of my hand,
and a well-placed groan
I have cut interest rates and swept the very bravest bankers off their feet!
Yet year after year, it was the same routine
And I grew so weary of the sound of bubbly dreams
And I, Maestro, the Leverage King
Have grown so tired of the same old market capitalist thing
Oh, somewhere deep inside of the economy
An emptiness began to grow
There was something else out there,
far from my Chicagoan home
A longing that I’ve never known
I’m a master of risk,
and a demon of market sleight
And I’ll scare you right out of your trading pants!
To a guy in Kentucky,
I was Mister unlucky
But now I’m known as the financial Bill Buckner of an ill fated September nite
And since I was with the Fed,
I could take off my head
To recite Keynesian quotations
No banksta nor PhD could babble like I could
With the opacity of my recitations
But who here would ever understand
That the Leverage King with the Randian grin
Would tire of his crown, if they only understood
He’d give it all up if he only could
Oh, there’s an empty place in my bones
That calls out for more unknown unknowns
The fame and notoriety that will come through the years
Does nothing for these empty central banksta’s tears…
To be con’t
WB7
Guest Post: Concentrated Wealth and the Purchase of Political Power: Democracy’s Death Spiral
by Zero Hedge - October 30th, 2010 1:34 pm
Courtesy of Tyler Durden
Submitted by Charles Hugh Smith from Of Two Minds
Concentrated Wealth and the Purchase of Political Power: Democracy’s Death Spiral
Democracy’s Death Spiral is a positive feedback loop between ever-greater concentrations of wealth and the ever-higher costs of retaining political power.
Positive feedback loops lead to “death spirals” in which destructive forces reinforce each other until the dynamic implodes. One example is an “arms race” in which ever more costly and complex weapons systems must be matched lest one nation in the race fall behind.
Since the number of weapons and their cost are essentially unlimited, then the race continues until one contestant is bankrupted.
Though many would claim it is a simplification, this dynamic was at the root of the Soviet Union’s collapse: as the U.S. embarked on a massive expansion of its military and technological power, the Soviet Union exhausted its much smaller resources attempting to keep up.
Though statistics from the Soviet era are not entirely reliable, various scholars have estimated that fully 40% of the Soviet GDP was being expended on its military and military-industrial complex.
The U.S. was spending between 4% and 6% of its GDP on direct military expenditures, even during the height of the Reagan buildup. If you include the Security State (CIA, NSA, et al.), the Veterans Administration and other military-related programs (DARPA, etc.) then the cost was still far less than 10% of GDP.
The greater freedom to exchange information between government-funded research labs, private firms and government-funded universities enabled the U.S. to outdistance the Soviets technologically. Once again a positive feedback loop can be discerned in the way that increased spending on military-related R&D in the U.S. led to increasingly networked nodes of technological advancement which led to greater advances and more spending to develop those technologies.
The U.S. emerged victorious as the sole superpower, but a more closely matched rivalry might have ended with the collapse of both competitors: a Death Spiral of the sort Jared Diamond describes on Easter Island in his book Collapse: How Societies Choose to Fail or Succeed.
In the U.S., the ever-greater concentrations of wealth gathered by an ascendant Financial Power Elite has entered a positive feedback loop with the costs of gaining or retaining political power. The costs of winning an election have skyrocketed to the point that fundraising is the key function of any politico…
Watch Rice For Clues to Corn.
by Zero Hedge - October 30th, 2010 1:21 pm
Courtesy of madhedgefundtrader
Those wondering what to do about their hugely profitable ag positions better take a look at the contract for rough rice, which has skyrocketed by 50% since July to $14.50 a pound. Rice is the primary food stuff for 3 billion of the world’s 7 billion population, but is predominantly traded and consumed in Asia. That means that it is not widely followed by analysts in the West, and the futures contract for rough rice has been relegated to a quiet, illiquid, backwater of the commodities markets in Chicago.
However, the price of rice may be a valuable leading indicator for the things we do trade in size, like corn (CORN), wheat, and soybeans. Many of the disaster scenarios for the global food supply revolve around Asia, like the melting of the Himalayan glaciers, rising sea levels drowning the Chinese coast, or draughts parching crops in India. Crisis shortages will hit the rice markets there first, then spill over to other foodstuffs here. If China’s rice harvest comes in anywhere less than perfect, then it could suddenly become a large net importer and send prices to the 2008 high of $28/pound.
If that happens, you can count on Vietnam and India immediately banning exports, as they did two years ago, sending prices soaring. That’s when people hit my local Costco branch, cleaning them out of supplies so they could FedEx 50 pound bags to hungry relatives in Asia. It is all just another facet of the great global bull market in food, which I believe started in June (click here for “Going Back Into the Ags” at http://www.madhedgefundtrader.com/june-24-2010.html ).
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
Will QE2 Impact Equity Market Fundamentals: Consensus And Fringe Views
by Zero Hedge - October 30th, 2010 12:48 pm
Courtesy of Tyler Durden
In his weekly “kickstart” piece, Goldman’s David Kostin shares a glimpse of how portfolio strategists view the impact of QE2 on UW equity market fundamentals. In a nutshell, per Goldman bulls cite 20% upside to Fed model and a lower equity risk premium. Goldman is far less optimistic: “We believe QE2 is unlikely to change our sales or margin forecasts, so return prospects become a valuation debate. Our targets imply less upside, given 13.5x P/E is consistent with prior 1-2% real rate regimes.” Furthermore, Goldman’s economic team has already priced in $1 trillion of QE2 in its 2011 GDP forecast of 1.8% (below consensus of 2.5%), meaning at worst the overall economy will continue to operate at negative growth rates, once Q3 GDP is revised lower and Q4 GDP found to be negative following the inventory crunch. As Kostin puts it: “The US has a demand, not a supply, problem.” Alas, the Fed is completely unable to grasp this. And the more it tinkers with the market, and the more fundamentals are disconnected from reality, the less Americans will trust the economic situation and retrench even more, leading to an even more pronounced demand “problem.” As for markets, AJ Cohen’s successor hits it right on the head: “We believe the forward path of stocks will be determined by potential asset allocation shifts by owners of 70% of the US equity market. Individuals own in aggregate 53% and pension funds own 17%. Shares will trade sustainably higher if these investor groups decide to re-risk from bonds to stocks. Any shifts most likely will be gradual.” In other words, unless investors regain their faith and confidence in stocks, the market will merely trade on Fed liquidity and not on anything resembling fundamentals… or reality.
More insights from Kostin:
The consensus view is the Fed will announce next Wednesday, Nov 3rd that it intends to start buying US Treasury securities. Clients have coalesced around the belief the initial announcement will be $500 billion in size, with an indication of willingness to purchase up to $1 trillion. Another possibility is the Fed might announce an initial purchase of $100 billion of securities and a commitment to buy a similar amount per month for an extended, but undefined, time period.
The bullish argument for equities goes as follows: (1) The Fed buys longdated Treasuries to reduce term premium and…
Fraud Caused the 1930s Depression and the Current Financial Crisis
by Zero Hedge - October 30th, 2010 12:39 pm
Courtesy of George Washington
Robert Shiller – one of the top housing experts in the United States – says that the mortgage fraud is a lot like the fraud which occurred during the Great Depression. As Fortune notes:
Shiller said the danger of foreclosuregate — the scandal in which it has come to light that the biggest banks have routinely mishandled homeownership documents, putting the legality of foreclosures and related sales in doubt — is a replay of the 1930s, when Americans lost faith that institutions such as business and government were dealing fairly.
The former chief accountant of the S.E.C., Lynn Turner, told the New York Times that fraud helped cause the Great Depression:
The amount of gimmickry and outright fraud dwarfs any period since the early 1970′s, when major accounting scams like Equity Funding surfaced, and the 1920′s, when rampant fraud helped cause the crash of 1929 and led to the creation of the S.E.C.
Economist Robert Kuttner writes:
In 1932 through 1934 the Senate Banking Committee, led by its Chief Counsel Ferdinand Pecora, ferreted out the deeper fraud and corruption that led to the Crash of 1929 and the Great Depression.
Similarly, Tom Borgers refers to:
The 1930s’ Pecora Commission, which investigated the fraud that led to the Great Depression ….
Professor William K. Black writes:
The original Pecora investigation documented the causes of the economic collapse that led to the Great Depression. It … established that conflicts of interest and fraud were common among elite finance and government officials.
The Pecora investigations provided the factual basis that produced a consensus that the financial system and political allies were corrupt.
Moreover, the Glass Steagall Act was passed because of the fraudulent use of normal bank deposits for speculative invesments. As the Congressional Research Service notes:
In the Great Depression after 1929, Congress examined the mixing of the “commercial” and “investment” banking industries that occurred in the 1920s. Hearings revealed
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GDP is the trick for Bernanke’s QE2 treat
by Zero Hedge - October 30th, 2010 12:12 am
Courtesy of MoneyMcbags
The Commerce Department’s Bureau of Economic Analysis (the uglier, less douchey stepsister to the B(L)S) released their first take on Q3 GDP this morning and it was unsurprisingly relatively more benign than a testicular mole or even Henry the IV of France. With both the mid-term elections and Fed meetings slated for next week, every single BEA model was likely hardcoded to produce a number just unfucked enough (to use a technical term) so the administration can have their elections and QE2.
The report showed the economy grew by 2% in the Q, was up slightly from Q2′s 1.7% growth, and most bizarrely matched consensus analyst guesses proving that even a broken regression model in a non-gaussian environment is right at least once a decade.
On the surface, the GDP number seemed relatively decent since any growth right now is good, especially as time is the only thing that is going to heal the economy’s gaping wound so the longer we can try to stall for that to happen, the better. That said, there were a few issues below the surface of the GDP headlines and Money McBags is here to peel away the onion on them (or unlatch the push-up bra if you will) to better understand the data.
1. Much of the growth seems to have been driven by a huge uptick in business inventories which ramped up to $115B. This is likely the result of businesses stocking up on cardboard boxes and cans of lysol to properly dispose of laid off workers’ personal effects when the next round of lay offs comes.
2. Consumer spending increased at a 2.6% rate which is above last Q’s 2.2% rate and the biggest gain since 2006. This would normally be a good sign, but it was more likely a result of the back to school shopping season featuring items cheaper than on a five finger discount as retailers strove to push inventory and hit top line numbers. To be frank (though if Money McBags is going to be frank, hopefully it’s not this Frank), Money McBags is a bit perplexed by consumer spend as we saw strong Qs from high end companies like COH and yet the unemployment rate remains more shittastic than a Four Loko hangover. The best explanation is that we truly live in…
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