TED, My Boy, It's Going To Be Legen- ... Wait For It.... -Dary... L-E-G-E-N-D-A-R-Y!

by: The Fortune Teller


The Fed has, once again, has decided not to decide.

The TED, on the other hand, is speaking loud and clear.

Credit markets usually lead the equity markets and I expect the latter to adjust to the former soon.

Once this happens, it's going to be legen-. wait for it. -dary. L-E-G-E-N-D-A-R-Y!

Ok then...

The Fed has once again decided to stick to what it is doing the best: Nothing... Much ado about nothing...

That which hath been is that which shall be; and that which hath been done is that which shall be done: and there is no new thing under the sun (Ecclesiastic Chapter 1)

I must admit that this decision hasn't come as a big surprise, not only because to the Fed proven lack of courage to take bold decisions but mainly due to the technical aspect of this meeting not having a press conference following the statement. It's hard to believe, especially nowadays, that the Fed will take a bold, i.e. tightening, decision without having the appropriate opportunity/stage to explain the move immediately. No wonder then that the Fed adheres to the following two unwritten rules:

  1. No press - No compress
  2. No balls - No calls

I wish to remind the Fed members that their mandate is defined as follows:

The Congress established the statutory objectives for monetary policy--maximum employment, stable prices, and moderate long-term interest rates--in the Federal Reserve Act.

Now, let me see... Have we already achieved the objective of "moderate long-term rates"? Looking at long-term treasury yields (IEF, SCHR, TBF, TBT, TIP, TLT, TLH), it certainly doesn't look like this:

10 Year Treasury Rate Chart

As such, how can the Fed declare that...

The Federal Open Market Committee (FOMC) is firmly committed to fulfilling this statutory mandate. In pursuing these objectives, the FOMC seeks to explain its monetary policy decisions to the public as clearly as possible. Clarity in policy communications facilitates well-informed decision making by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.

!!!??? It sounds to me as the exact opposite of explaining their moves "as clearly as possible"...

But let's leave that alone and move from the Fed to the TED

The TED spread is the difference between the interest rates on interbank loans and on short-term US government debt ("T-bills", BIL, GOVT, IEI, SHY, SHV, SCHO, VGSH). TED is an acronym formed from T-Bill and ED, the ticker symbol for the Eurodollar futures contract.

The TED spread can be used as an indicator of credit risk. This is because US T-bills are considered risk free while the rate associated with the Eurodollar futures is thought to reflect the credit ratings of corporate borrowers. As the Ted spread increases, default risk is considered to be increasing, and investors will have a preference for safe investments. As the spread decreases, the default risk is considered to be decreasing.

It's worthwhile noticing that lately, the TED spread has climbed to levels not seen since January 2012:

Click to enlarge

The short-term LIBOR interest rates have moved up recently due to various reasons: BREXIT and its implications (To be continued...), New legislations that force money market funds, under certain circumstances, to charge investors with a redemption fee and/or to suspend redemptions temporarily, Interest rate hike expectations (cf.), etc.

None of these reasons has yet materialized and there's the TED widening has so far caused neither real fear nor a pullback in and within the main indices (SPY, DIA, QQQ, IWB, IWD, IWF, IWM).

As a matter of fact, positive earnings reports by Tech giants such as MSFT, AAPL, FB, that are expected to be followed by other Tech giants such as GOOG and AMZN (reporting today) have provided additional fuel to the current-continuous drive up.

In spite of the no-existing "fear factor", I remain very cautious in regard to this rally. The are plenty of reasons not to "buy" it. Therefore, I maintain my call to hedge and protect intact and I would even dare saying that, following the conclusion of the FOMC meeting yesterday, cautiousness is more warranted than before.

Being a fixed-income investor by nature and soul, I look at the credit markets, e.g. the TED spread, and they tell a completely different story than the equity market tell. Something's gotta give - and if history is of any value - those are usually the equity markets that lag the much larger debt markets and not the other way around.

Follow the TED, not the Fed!

At some point, I expect the equity market to adjust to the credit market and when that is going to happen, you should have Barney Stinson's famous words to Ted (Mosby) in the back of your mind:

Because, folks, it's going to be legen-.... wait for it.... -dary... legendary indeed!; just wait for it... It's only a matter of time.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.