Upon today’s release of the dovish Fed Minutes, the stock market lit up.   As this is being typed the S&P 500 gained 1%, the DJIA gained 1% and the NASDAQ leapt 1.6%.   The reason for the buzz:   ZIRP.   Our old friend the Zero Interest Rate Policy.

In the minutes, the Fed revealed that the market’s outlook regarding the timing of future interest rate hikes, “overstate the rate rise pace.”

That was all the market needed.   Jawbone a little ZIRP and stocks get high.

To wit, the 50 most shorted stocks in the S&P 500 were down an average of 2% at the end of March.   Some fell more than 20% — placing them squarely in bear market territory.   As of 3:45 pm, 17 of the 50 are outperforming the market, and 9 of them have eclipsed their average 2014 declines.

 A little Fed cough syrup really calmed down a market that had been hacking quite loudly recently.

Pass the Jolly Ranchers. – LL


I got the Taperworm

Today, the Federal Reserve announced its intention to taper the amount of their bond buying by $10 billion per month beginning in January — $5 billion in Treasuries, $5 billion in MBS.

Upon the announcement, the 10-year yield spiked to 2.9226% only to immediately drop back to 2.8738%.   As I type this, the 10-year yield is lower than where it was when the market opened today.   Isn’t it intuitive that less demand should translate into higher prices?

The venerable Dow Industrials (also known as the Nike/Visa Index) leapt from 15, 900 to 16, 055.   Isn’t it intuitive that less liquidity should translate into higher equity prices?

The Fed has also declared that they will hold rates “exceptionally low until jobless falls well past 6.5%.”   At least that is clear.

It seems that both stock and bond buyers are hungry; even though they’ve had plenty to eat over the past few years.

Perhaps they have a taperworm.


I Agree With George Soros

Well…  on one thing at least.

You may have noticed that I haven’t blogged yet this summer.  Hopefully this blog will shine a little light on the reason.

Last week my partner Mike posted some quotes from the Mad Hungarian.  One in particular caught my eye.

“The trouble with you is that you go to work every day (and think) you should do something.  I only go to work on the days that it makes sense to go to work.  And I really do something on that day.  But you go to work and you do something every day and you don’t realize when it’s a special day.”

Now I’ll concede that it’s generally only billionaires that have the luxury of only going to work on days they think are “special.”  But I understand, and agree with, the gist of what he’s saying.

In the money management business, we’re preconditioned to be in constant motion.  24-hour business news, up-to-the-second Fed releases, breaking earnings news, real-time charts, the quest for low latency, nearly free trading commissions…  all commiserate to make us think we need to do something.  Place a trade.  Re-allocate a portfolio.  Develop a new product to catch the latest trend.

And, with no intended malice, clients who share the same preconditioning often clamor for action if only for the sake of action.  “You haven’t traded my account for a month.”  “Why are you sitting on so much cash?”

What George and I have in common is the lack of desire to take action when there is no identifiable reason to take such action.  Asymmetries in risk and reward don’t show up every day.  Or week or month.

Fresh thoughts for a new blog post are sometimes equally hard to find unless one wants to regurgitate “The market makes another all-time high, ” or conjure up some reason why the all-time high is an illogical set-up destined to crush those who dare participate.  The former is boring and the latter is foolish speculation.

When there is a lack of asymmetry (or a missing muse for that matter), inaction is likely the best course of action.

Inaction provides benefits unique to its emptiness.  It clears the mind from stress and bias.  Better to spend the day analyzing objective data and coming to your own conclusions than to be emotionally driven to action by business news, opinion-filled business websites, or left or right wing blogs.

Inaction affords insight as you sit on the porch with a friend or family member discussing the matters of Main Street.  These insights may be more valuable than those you might get being forever mired in the matters of Wall Street.

It’s the pause that refreshes.  It allows room for gathering perspective.

Inaction offers the time to get all the tools laid out on the workbench, so when a real asymmetry (or a “special day”) arrives, action can be taken decisively.

Admittedly, there is a fine line between conscious inaction, paralysis, and laziness.  In this regard inaction can be a gateway drug.  But used judiciously it can mean the difference between being a successful long-term investor and a flash in the pan.  – LL


You’ve Got the Teeth of a Hydra Upon You

I’m not known as a technical analyst (although I play one on TV).  Yet, today’s blog post is a technically-oriented look at the three-headed Hydra that emerged during today’s trading.

Head #1:  At nearly the precise moment when the yield on the 10-year Treasury matched the dividend yield of the S&P 500, the market began an accelerated decline.  Due to the volume and speed with which the decline occurred, one can probably attribute it to our friend the robot.  If this relationship persists, it could spell a bearish omen for stocks.

Head #2:  Today we witnessed the dreaded Bearish Engulfing Outside Reversal.  Put simply, the BEOR occurs when today’s high and today’s low exceed the highs and lows of yesterday’s trading.  If you’re charting in candlesticks, today’s candlestick has a higher top and a lower bottom than did yesterday’s.  Often, this portends a reversal in the direction of the market.

Head #3:  From Doug Kass…  The last two times the S&P 500 hit an all-time high and closed more than 1% from that high were 10/11/07 and 3/24/00.  Things got a little interesting after each of those dates.  Today the high was achieved at 10:29 a.m. with the S&P touching 1687.18.  By the close, the S&P had settled at 1655.34 — a decline of nearly 1.9%.

Taken individually, each of these Hydra Heads could be nothing more than interesting data points.  But when all three occur on the same day, my antenna goes up.

As for why this happened, I can try to glean causation out of correlation.  The market seemed to move in concert with the prevailing winds of the Federal Reserve’s signalling the tapering of POMO or not.

It now looks like we’re in a taper-on/taper-off market.

The robots are going to be quite busy.

Get it on, bang a gong.  – LL


The Mouse That Roared

By now, most everyone is familiar with the weekend bail-in of the Cyprus banks.  Cyprus…  that little mouse of an island with about 1 million citizens.

From Goldman Sachs, here is a bullet-point summary of the action:

  • Over the weekend, Cyprus and Troika agreed on a rescue package with the following key points:
  • €10 billion total rescue package.
  • A tax on deposits, expected to yield €5.8 billion, which has the following characteristics:
    • 6.7% tax on deposit amounts < €100, 000.
    • 9.9% tax on deposit amounts > €100, 000.
    • Deposit amounts are recorded as of Friday close (March 15) and apply to all deposits in Cypriot Banks in Cyprus (across currencies, type of customer account). They do not apply to customer deposits of Cypriot banks held outside of Cyprus (the two large Cypriot banks both have a presence in the UK, for example).
    • Cypriot bank operations in Greece will be taken over by Greek banks, at no cost to the Greek tax payer. This is important as the large Cypriot banks operate a substantial portion of group assets in Greece.
    • In exchange for the tax, the impacted depositors will be granted shares in the Cypriot banks.
  • Tax changes, where (1) the corporate tax rises to 12.5% from 10% and the income from deposits to be taxed at 20-25%.
  • Bail-in of junior debt is expected to take place, however overall impact is limited by a low balance of outstanding securities.
  • Commitment to downsize local banking sector towards EU average size (in relation to GDP) by 2018.
  • A privatization program which is expected to contribute €1.4 billion.
  • Russia will participate, but to a small extent (exact amount / type unclear).

As a result of these actions, even deposits falling below the deposit insurance maximum will be taking a haircut.  ATM’s in Cyprus are empty and the banks are on holiday until Thursday at the earliest.

General reaction in the media has run the gamut from moral indignation to righteous rage.

  • How can government force savers to disgorge a large chunk of their savings?
  • What do you have left when the rule of law can be overturned by edict?
  • What are the implications for property rights of the individual?
  • How can we accept this financial repression of middle and lower class savers?

Feel sorry for the Cypriots.

Except the above questions were not intended to apply only to Cyprus.  They should have been asked years ago when the US Federal Reserve decided to hold interest rates at zero.

Zero nominal rates means negative real rates; forcing savers to disgorge their savings to inflation.  Artificially forcing interest rates to zero is an edict by an unelected central bank.  Hardly the rule of law.  And what are the implications for property rights when inflation backhandedly chips away at your property’s value? Finally, here, in the good-ol’ US it is the lower and middle class saver that is being financially repressed by being paid nothing on their savings.  Think of the retiree trying to make his savings last for the rest of his life.

I somehow missed the moral indignation and righteous rage when these policies were implemented on our shores.

I guess if you implement financial repression quietly and over time, few people notice or care.  Yet, if you overtly and immediately bring about the repression, you make global headlines and become the target of global derision.

So Cyprus is the mouse that roared.

Pay no attention to the whispering gorilla.