Diary of a Financier

Top Newsstuffs (November 4-10)

In Bookshelf on Sun 10 Nov 2013 at 05:48


Updated: Four charts to track timing for QE3 tapering | Calculated Risk
Includes actual & projected data for the Fed’s tapering targets:
1. Growth (Real GDP)- 4q13 projection +2.3-2.6% vs 2.0 target
2. Unemployment- YE13 projection 7.1% vs 7.3 current, 6.5 target
3. Headline inflation (PCE)- 4q13 projection +1.1-1.2% vs 0.92 current, 2.0 target
4. Core inflation (PCE)- 4q13 projection +1.2-1.3% vs 1.19 current, 2.0 target
[Previously & See also]

Rail traffic weekly: Incomparable y/y data | Association of American Railroads (AAR)
Weekly traffic +10.8% y/y due to 2012’s Hurricane Sandy; ytd growth increases to +1.5%.

Fed may lower dual mandate targets | Jeff Cox (CNBC)
To offset the negative effects of tapering, FOMC may lower their unemployment target from 6.5 to 6.0% and raise inflation from 2.0 to 2.5% simultaneously with their QE taper–effectively extending ZIRP through 2017 & keeping rates below normal into the early-2020s.
[Fed policy is starting to react to my demographic assessments. This has the potential to change my bearish 2014 outlook & form the blasting cap at the end of a generation-long experiment with a disinflationary credit boom; makes me expect curve steepening with sweet spot <5 years–don’t forget that <2y yields actually fell during the summer’s rate rally.  See also: “Optimal Control” (below)]
#Bullish $SHY $CSJ $SJNK

Massive equity outflows (November 1, 2013) | Bank of America Merrill Lynch (BoAML)
The week ending 11/1 saw the 4th largest net selling of stocks since 2008, with MER clients unloading net $2.7B in US stocks, while $SPX was flat.  Institutional clients led the liquidation (3rd most on record); retail sold a little; hedge funds were marginal buyers.
Ytd, retail & hedge funds are buyers, with institutional unloading the most since 2008.
Cyclicals (-$11.5B ytd) were heavily sold: sectors $XLK $XLF $XLY
Defensives (-$1.25B ytd) selling was light: $XLI $IYZ $XLU
[Buys more time for the rally to transcend into #Euphoria. See also: AAII individual investor survey shows equity allocations (66.3%) at 2007 highs, cash at 2000 lows (16.9%)]
#Bullish (ST)

Janet Yellen’s approach to monetary policy: “Optimal Control” strategy | Business Insider
From her November 2012 speech:
The new Chairwoman’s econometric model derives an optimized policy path (as opposed to Fed Funds Rate using Taylor Rule) to usher the economy to 2% inflation & 6% unemployment targets, given equal weight to each mandate & as little deviation as possible.
Thus, giving the public explicit guidance to gauge expectations, the Fed will fight unemployment & inflation more aggressively, maintaining ZIRP until 2016:
“This highly accommodative policy path generates a faster reduction in unemployment than in the baseline, while inflation slightly overshoots the [FOMC’s] 2% objective for several years.”

Senior loan officer survey (3q13): Credit demand flat & lending standards eased again | Federal Reserve (Fed)
C&I demand decelerates to flat with lending standards still loose & credit spreads extremely tight; small business loan approval rates rose to alltime high 17.4% (+50% y/y).
CRE demand falls just off highest level since 1998 with lending standards just off 2005 lows.
Subprime residential mortgage demand continues to spike higher, despite a corresponding tightening of standards; prime & Alt-A demand plummet, despite loosening.
Consumer loan demand decelerating, with auto loan demand now flat & easing cycle altogether waning.
[Still worried about signs of subprime stress, albeit less frothy; consumer is definitely tapped-out.  See also: Downgrading consumer spending forecasts for holiday shopping season & Peak near term household consumption]
#Credit cycle #Credit bubble

Junk bonds will outperform senior bank loans | Seeking Alpha Market Currents
Read the fine print:
Floating rate loans’ interest rates are tied to 90-day LIBOR, which will not increase as long as the Fed Funds Rate remains at ZIRP (e.g. LIBOR90 fell -2bps from May-June).  Also, most loans have 150bp LIBOR floors vs 26bp current rates, which means LIBOR90 has to rise +125bps before these loans’ rates adjust higher.
$HYG $BKLN #Leveraged loans

Buy cheap Closed-end bond funds| Stifel Nicolaus
Good opportunity in high-yielding #CEFs trading at >12% discounts to NAV, including:


  1. […] past weekend, I highlighted Janet Yellen’s “Optimal Control” academic strategy of central bank/monetary policy […]

  2. […] & personal bankruptcies keep rising, both undoubtedly hurt by rising rates. Previously: Signs of consumer stress] […]

  3. […] Fed’s communications indicate that they’re likely to target higher than optimal inflation over the coming years in order to […]

  4. […] US deleveraging: Why consumers won’t releverage | Elliot Clarke (Westpac) “While it is true that deleveraging relative to income has slowed and that household debt in dollar terms rose in the September quarter, it should be clear that the underlying sectoral breakdown of debt gives little support to the idea that the US is about to embark on a new leveraging episode. Rather, what is most likely is that total household debt will remain at or around current levels as student and auto debt and poor labour market outcomes preclude younger households from leveraging up further, and, all the while, existing mortgage borrowers continue to pay down their outstanding balances. As alluded to last week, poor income growth will make this process painfully slow.” [Flies in the face of Larry Summers' recurring bubble theory below, plus economic data never move sideways along the mean–they always trend with high variance, over & undershooting equilibrium. Counterpoint & See also: Credit & consumer spending] […]

  5. […] all of these bank loans have LIBOR floors ~100bps, so it would take a material rise in the front-end of the yield curve before distribution […]


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