Let’s have a look at a long-term perspective on Treasury yields. The chart below shows the 10-Year Constant Maturity yield since 1962 along with the Federal Funds Rate (FFR) and inflation. The range has been astonishing. The stagflation that set in after the 1973 Oil Embargo was finally ended after Paul Volcker raised the FFR to 20.06%.
Here’s the same chart with the S&P 500 adjusted for inflation and the annualized inflation rate subtracted from the yields. The impact of stagflation becomes much clearer. We can better understand the severity of the decline in equities from the mid-1960s to the bottom in 1982. And we can also see why high yields can be deceptive in periods of double-digit inflation.
The most interesting series in the charts is the FFR red line. We can see how the Fed has used rate to control inflation, accelerate growth and, when needed, apply the brakes. Unfortunately, the FFR has been virtually zero since December 2008, so it is no longer available as a tool to stimulate the economy. Incidentally, I annotated the top chart with the tenures of the last three Fed chairmen so we can see who was managing the various FFR cycles since the summer of 1979.
The next chart is based on daily data and adds some additional Treasuries for a close look at yields since 2007.
The word ‘RISK’ is a simple four- letter word; yet, the management of risk is critical in any investment or income generating strategy. When historical norms no longer hold, and markets can make moves within a span of days, or just a few weeks what used to take a whole year or years to make, it becomes critical for trading and investment practitioners to rethink old models and adjust given new information or market realities. Whilst increased volatility increases market risk as a whole, it also provides tremendous opportunities to make an abnormal return if you are on the right side of the market trend. For market participants, the question is – are you prepared to assume the increased risk that can provide the environment to make huge returns, and at the same time, if your thinking is wrong, assume huge losses. Or, is it wise in a period of high volatility to disengage and get back in when sanity returns to the financial markets? This is a critical question that market participants have to answer and honestly face up to the conclusions they come up with. For most people detached from the market and not involved in any trade, there is always the false assumption with the knowledge of hindsight that they are prone to being risk takers. And given the choice, they will definitely take more risk rather than less and that somehow they harbor the wrongful notion that they would have been on the right side of the trade. Taking calculated and limited risk where the risk reward structure is favorable is always preferable to assuming tremendous amounts of risk in the hope of being right.
In an era of investment where crisis, whether real or imagined hit the market with such frequency, and cause extreme market moves within a compressed timeframe, what should one do? Should we totally disengage, call it quits and look for new avenues? Or, should we take cognizance of such realities and design our investment strategy for such markets? The market, it seems is so structured in a way that now a tsunami or an earthquake or a plane crash is no longer a real event that
Having retraced almost 61.8% of the September drop, Gold’s recent run up – as the USD strengthens no less (from 10/28) – suggests some demand for safety is back (or more simply is the demand for German Gold making the German’s hoard a little more?). Silver is actually outperforming from Friday’s close but remains below Friday’s highs for now.
As China ‘threatens/promises’ liquidity injections to its banks, Greek politicians argue over premium parking spaces, US brokers/exchanges squabble over the MF capital leftovers, and global liquidity goes from bad to worse – perhaps it is time to take a step back and focus on what really hasn’t seemed to matter – the economy. Ray Dalio published his Template For Understanding back in October of 2008 and has recently updated it (as of October 2011). For your Sunday evening reading pleasure – “How the Economic Machine Works and How It Is Reflected Now”. Critically, the hedge fund manager provides a framework for considering what he believes are the critical Three Big Forces: trend line productivity growth, the long-term debt cycle, and the business/market cycle.
When I imagined this I was thinking of three things, the hopeless tragedy embodied of last week’s EURO Freak Show, zombie bankers marching across Europe like the fascist armies of WWII and who will benefit most from the explosion when it finally occurs.
Three of the smartest strategists at Goldman, Huw Pill, Francesco Garzarelli, and Peter Oppenheimer, have released what one could tentatively call a white paper on the “next steps” for Europe. Far from being the traditional permabullish sellside drivel, this is a must read note, as it cleanly lays out the risks for the Eurozone from this point. The note focuses on three key aces: 1) fiscal consolidation and the ongoing role of the ECB in the future of a Eurozone which still has no fiscal cohesion (which makes sense: just like in the US, the Fed is aggressively putting the ball in Congress’ court, as neither the monetary nor fiscal apparatus has any interest in being blamed for ongoing economic deterioration, so in Europe the ECB wants a federal union, complete with Eurobond issuance powers, so it is not in the cross hairs: alas, European politicians realize this is career suicide and the question remains: when push comes to shove, and saving the Euro requires career harakiri from politicians, will they step up to the plate?); 2) Italy, of course, as the country under the spotlight now and going forward; and 3) what the above two mean for BTPs and thus the European (and Global) equity markets. The sense we get from the Goldman trio is that while the company which has just spawned Europe’s latest central banking head, while cautiously neutral is pushing for a downside case: after all what better way to unlock the Heidelberger Druckmaschinen true potential, than with a full blown crisis…
From Goldman Sachs
1. Fiscal consolidation is a precondition for further support
Over the past week, the pace of events in the European crisis has again picked up, amidst increasing sovereign bond market tensions, particularly in the case of Italy. After a week of drama, we are likely to see the formation of a government of national unity in Greece, mandated to approve and oversee the financial adjustment package agreed with the EU ahead of national elections next Spring. Meanwhile, a routine vote on last year’s public accounts to be held this Tuesday in the Italian Lower House will be a test of how much support the government can still rely upon and may lead to political change there too. Finally, the much anticipated Cannes G-20 summit – which…
The Federal Reserve officially announced Operation Twist on September 21 with the stated purpose of lowering longer-term interest rates. The yield on the 10-year note had been hovering around 2.19 prior to the much-rumored announcement, which was 47 basis points above the historic closing low of 1.72 set a month earlier on September 22.
The Fed Funds Rate has been essentially at zero for three years. What has the 10-year note done since the “Twist” announcement? The interim high daily close was 2.42 on October 27th. The interim low was 2.01 on November 1st.
It’s too soon, of course, to tell how successful the “Twist” strategy will be for lowering interest rates; the program is barely off the ground. According to the Freddie Mac survey, the 30-year mortgage rate has fluctuated between 3.94% and 4.18% since the first week in September, and the most recent average (as of November 3rd) is 4.00%. But we will watch Treasury yields and mortgage rates in the weeks ahead to see if Operation Twist lives up to the Fed’s expectations.
Background Perspective on Yields
The first chart shows the daily performance of several Treasuries and the Fed Funds Rate (FFR) since 2007. The source for the yields is the Daily Treasury Yield Curve Rates from the US Department of the Treasury and the New York Fed’s website for the FFR.
Even as the EURUSD is surging because of, uh, we are not quite sure – HFTs hitting all stops most likely, it is only 9 short hours until BTPs, that one and only fulcrum security for the entire European continent reopens. And while for Greece getting a new government, even if one headed by a former Fed member is somehow good news (we wonder how the people will react knowing that their fate as debt slaves repaying European banks has just been sealed for a few more months), in Italy government “stability” (we realize the comic value of this statement) is the key to prevent a blow out to the 10 Year BTP, and the launch of a domnino cascade that will stop only with French OATs, and potentially rip through through that final firewall: Germany (with or without BuBa’s billions in gold reserves… which we can only hope are not parked with the New York Fed). So back to Italian government “stability” which according to France 24 is not doing that hot. “Tens of thousands of Italians gathered in Rome on Saturday to protest Prime Minister Silvio Berlusconi’s tackling of the country’s sovereign debt crisis. “Silvio out” was the rallying cry for the large crowd that took part in the rally organised by the Democratic Party, the country’s main opposition movement. Some demonstrators poured scorn on the prime minister after G-20 leaders humiliatingly put Italy’s struggling economy under surveillance, amid a lack of trust in Berlusconi’s reform pledges. At the summit in Cannes, the billionaire prime minister played down the gravity of the economic crisis with a trademark quip, claiming that “restaurants are full and the planes fully booked.” “I go to restaurants… to do the washing up,” read one banner at Saturday’s mass demonstration.” And the kicker is that over the weekend enough defections from his party have taken place which according to many, but not Silvio, are enough to lose him his majority: “There is growing concern Berlusconi no longer commands enough loyalty among MPs to ensure the quick passage that European and international financial officials say Rome must achieve to avoid falling victim to a dramatic debt crisis like that bringing Greece to its knees… “We don’t want elections. We want to govern,” Berlusconi added.” So much for democracy in yet…
Those who think a collapsing currency are a sure-fire way to increase exports need to rethink their beliefs.
Despite a falling Yen, Japan Posts Largest-Ever Trade Deficit. The gap between the value of Japan’s exports and that of its imports grew by more than two-thirds in the 12 months through March, to Y13.7tn ($134bn), according to government data released on Monday. It was the third consecutive fiscal year of deficits, the longest streak since comparable records began in the 1970s.
Toyota, Hitachi and other large Japanese companies have enjoyed soaring profits as a result of the weaker yen, which has fallen by a fifth against other major currencies since November 2012.
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Digital Ally, Inc. (NASDAQ: DGLY) ("the Company"), a leading provider of mobile digital surveillance systems for law enforcement, security, and commercial applications, today announced the following developments in its litigation against Utility As...
As I suspected it might, the stock market bounced strongly last week. Weakness the prior week was due in part to traders exiting positions for vacation during the holiday-shortened week, protecting big capital gains, cashing out to pay taxes on capital gains, and “delta hedging” on put options. However, I’m not convinced that the pullback was sufficient to create the great buying opportunity -- but it was sure a tradable bounce.
Among the ten U.S. business sectors, the big winner last week was Energy, which was up about +4.5%. Also, Financial and Industrial were each up about +3%. Defensive sector Utilities still stands alone as the year-to-date leader, up about +11%, while Energy’s strong performance last week has it in second place, up about +5% YTD. Healthcare has been the big loser as i...
“However, both indexes are at or near MAJOR support levels. That means that we are ‘in the zone’ for a bounce of some sort in the next couple of days.” And a bounce is exactly what we got: But as you can see even with last week’s bounce, we are still locked in a downtrend. As we look ahead to next week, should we break out of the downtrend to the upside, we’ll want to take advantage of buying stocks doing the same. And should we remain in a downtrend, we want to short stocks that are also locked in downtrends. As we’ve said before: Success in the market comes from trading stocks in tandem with the indexes. Should the markets break higher, then FF is an excellent long side candidate: Here we have a leading stock that like the Nasdaq is in a min...
Brave souls who write about stocks always subject themselves to potential embarrassment if they take a stand on the future movement of their selected company. Including both a price target and a time horizon makes you accountable if things don’t go as predicted.
For that reason many media pundits much prefer to explain what’s already happened rather than sticking their necks out. They would rather justify the (supposed) reason...
In the days before the Geneva "de-escalation" conference (and coincidentally, days after the secret visit of CIA director Brennan to Kiev), the top story across western media was the "undisputed" proof that east-Ukraine, populated by "terrorist separatists", is preparing to unleash a neo-nazi wave against local jews, when a leaflet was unveiled, beckoning the Jewish population to register and declare their assets.
Shares in Chipotle Mexican Grill Inc. (Ticker: CMG) opened higher on Thursday morning, rising more than 6.0% to $589.00, after the restaurant operator reported better than expected first-quarter sales ahead of the opening bell. But, the stock began to falter just before lunchtime on concerns the burrito-maker will increase menu prices for the first time in three years. The price of Chipotle’s shares have since fallen into negative territory and currently trade down 3.5% on the session at $532.89 as of 1:50 p.m. ET.
[Facebook] The social network is only weeks away from obtaining regulatory approval in Ireland for a service that would allow its users to store money on Facebook and use it to pay and exchange money with others, according to several people involved in the process.
The authorisation from Ireland’s central bank to become an “e-money” institution would allow ...
I just wanted to be sure you saw this. There’s a ‘live’ training webinar this Thursday, March 27th at Noon or 9:00 pm ET.
If GOOGLE, the NSA, and Steve Jobs all got together in a room with the task of building a tremendously accurate trading algorithm… it wouldn’t just be any ordinary system… it’d be the greatest trading algorithm in the world.
Well, I hate to break it to you though… they never got around to building it, but my friends at Market Tamer did.
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Ladies and Gentlemen, hobos and tramps,
Cross-eyed mosquitoes, and Bow-legged ants,
I come before you, To stand behind you,
To tell you something, I know nothing about.
And so the circus begins in Union Square, San Francisco for this weeks JP Morgan Healthcare Conference. Will the momentum from 2013, which carried the S&P Spider Biotech ETF to all time highs, carry on in 2014? The Biotech ETF beat the S&P by better than 3 points.
As I noted in my previous post, Biotechs Galore - IPOs and More, biotechs were rushing to IPOs so that venture capitalists could unwind their holdings (funds are usually 5-7 years), as well as take advantage of the opportune moment...
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