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Senior Portfolio Manager and individual investor who started in high school and has been at it ever since. I have an MBA and have earned the right to use the Chartered Financial Analyst designation. I have worked in the business for over 15 years. My specialties are micro and small-cap value... More
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  • Week In Review: The Must Knows

    Timely Perspectives About the Week

    Taper This!

    Clearly the largest and most profound piece of news to come out this week was Gentle Ben not commencing the taper of the latest round of quantitative easing.

    Bernanke reinforced his standing as the most activist Federal Reserve chairman in history by doing the unexpected: nothing. The policy-setting Federal Open Market Committee yesterday refrained from reducing the $85 billion pace of its monthly securities buying, sending stocks to record highs and triggering the biggest rally in Treasuries since 2011 as investors repositioned for a more accommodative central bank. Bernanke said the Fed must determine its policies based on "what's needed for the economy," even if it surprises markets.

    (Bloomberg)

    Expectations were pushed back....

    From Goldman's Jan Hatzius

    • We now expect the QE tapering process to start at the December 2013 FOMC meeting and to conclude in September 2014, three months later than before. Our baseline is that the first step will consist of a $10bn cut in Treasury purchases. These steps remain data dependent in all respects--timing, size, and composition.
    • A change in the explicit forward guidance for the federal funds rate is also likely, probably at the same time as the first tapering step. Our baseline is an indication that the 6.5% unemployment threshold is conditional on a forecast of a near-term return of inflation to 2%, and that a lower threshold would apply otherwise. But there are also other options, such as an outright inflation floor or an outright reduction in the unemployment threshold.
    • Our forecast for the first hike in the funds rate remains early 2016. The reasons are the large output gap, persistent below-target inflation, and some weight on "optimal control" considerations. The market and most Fed officials see an earlier hike, although the number of FOMC participants projecting the first hike in 2016 rose from 1 to 2 and the "dots"--the projections for the appropriate funds rate at the end of 2016 by FOMC participants--came in below expectations.

    (zerohedge)

    Meanwhile, Warren Buffett compared the US Federal Reserve to history's greatest hedge fund.

    "The Fed is the greatest hedge fund in history," Buffett told students yesterday at Georgetown University in Washington. It's generating "$80 billion or $90 billion a year probably" in revenue for the U.S. government, he said. "And that wasn't the case a few years back." The Fed remitted $88.4 billion to the U.S. Treasury Department last year. The payments have ballooned as the central bank built its balance sheet during the past five years.

    (Bloomberg)

    Stock Investors Are Left Wondering When on Fed's Taper

    (click to enlarge)

    (WSJ)

    Ten Year yield is attempting to break through the 50 day moving average. Next stop 200 at 2.20% or will we just bounce off?

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    Gold continues to gyrate driven by the Fed. Todd Salamone: The inability of the SPDR Gold Trust (GLD) to move above the key 140-day moving average is hinting strongly at a return to underperformance and bearish price action ahead. Adding to this concern is the fact that total buy-to-open volume on GLD options is at three-year lows.

    (click to enlarge)

    (Shaeffers Research)

    So how does the market's performance under Chairman Bernanke compare to past Fed Chairmen? Using start and end dates from the Wikipedia page for the Fed, below is a table highlighting the Dow's performance during the tenures of all 14 Fed Chairs. As shown, Daniel Crissinger had the best annualized return of any Fed Chair at 17.72% from 1923 to 1927. Noted hawk Paul Volcker ranks second with an annualized gain of 15.42% from 1979 through 1987. Keep in mind, though, that both of these chairs left just in time to avoid historic market crashes. Relatively speaking, Bernanke's annualized gain of 4.81% is in the middle of the pack, but most people will take it given where things stood just a few years ago.

    (BESPOKE)

    With the FED meeting behind us, investors are now turning to the next drama unfolding in Washington. In the next two weeks we have the continuing resolution and the more important debt ceiling debate pushing both Syria and the FED to the back-burner. The House is going to pass its CR version which the Senate will then reject. The solution to this will originate in the Senate where the path towards some type of compromise legislation is a lot easier although McConnell will prob. need to get more involved in the process than he is at the moment (recall the last debt ceiling impasse was solved at the last minute by McConnell negotiating w/VP Biden). Boehner will probably have to violate the "Hastert Rule" and take up whatever the Senate sends him back - but this likely won't happen until the very last minute (recall the CR expires at the end of Sept and the Treasury is expected to breach the debt ceiling as soon as mid-Oct).

    (JP Morgan)

    Inside Boehners Plan to Avoid a Shutdown (and wound ObamaCare). 'The Republican plan, molded by leadership and some top conservatives, presupposes two things: First, the House passes a CR that funds the government through mid-December while permanently defunding Obamacare (North Carolina Rep. Mark Meadows, among others, expects an "overwhelming" victory on the House floor Friday); and second, the Senate promptly strips the anti-Obamacare language and sends back to the House a "clean" CR (Texas Sen. Ted Cruz, the Republican ringleader of the anti-Obamacare drive, acknowledged Wednesday that the GOP proposal stands little chance in the Senate.)

    If all goes according to plan on these two fronts, the ball will be back in the House's court, and the threat of shutdown will be less than a week away. House Republicans, it has been assumed, will have two choices at that point: Either instruct leadership to hold their ground and send another anti-Obamacare CR to the Senate; or acknowledge their lack of leverage and pass the clean CR, hoping for another opportunity to fight Obamacare soon thereafter.

    But, sources familiar with the planning say Boehner is preparing a third option, one that keeps the government open at post-sequester spending levels while not conceding defeat on Obamacare. To accomplish this, the Republican leadership is planning to propose a debt-ceiling package -- perhaps as early as next week -- that has as its centerpiece a one-year delay of President Obama's health care law.'

    (National Journal)

    Is Apple positioning itself as a niche, high margin player ceding the volume, lower-margin space to Android?

    The new Apple Iphone launched this week but the stock is off 5% off the level from the start of last week, before it unveiled the new phones. Meanwhile, GOOG continues to quietly and slowly take over the world.

    (click to enlarge)

    Apple's Most Boring iPhone Launch Ever

    "Meant as a tongue-in-cheek introduction of Apple's (NASDAQ:AAPL) latest offering to a frothing press and public, Tim Cook's deadpan delivery was actually right on the nose considering the already familiar product he was about to show off to the world. Two products, actually.

    At Tuesday's big press event, the company rolled out the iPhone 5S, iPhone 5C, and iOS 7 at its headquarters in Cupertino, California, which only served to reinforce Apple's unfortunate shift from reinventing the wheel to simply reshaping it. For a fan base that has been champing at the bit through the longest drought in new hardware releases since the iPad, Apple served up very little for them to sink their teeth into.'

    (Schaeffers Research)

    "The Global Interest Rate Spike of 2013. Not surprising the emerging markets lead the global rate spike. Also note, Italy, Spain and Greece are more credit instruments rather than sovereign bonds in the truest sense (sovereign real rate + expected inflation). The move in rates, combined with the shrinking U.S. current account deficit, could be why gold is so volatile and trading so poorly."

    (click to enlarge)

    (Macromon)

    Income inequality has been in the news heavily as of late. What most Americans do not know is that it is driven primarily by the FED and the stock market. With the FED attempting to parlay the wealth effect to pump up the economy, they are really blowing up the asset balloon which benefits the top 10% who own 80% of all assets.

    (Epoch Times)

    Is it time to being dipping our toes into some Muni CEFs while selling our Bank Loan and Floaters? 'Bank loan funds chalk up 66th straight weekly inflow while Muni's lose $1.1 Billion in 17th straight weekly outflow.'

    (Barron's)

    Obama to press ahead w/new coal plant regulations; the White House/EPA will unveil new coal power plant regulations today mandating all new facilities to keep carbon emission under 1100 pounds per megawatt hour of electricity.'

    (WSJ)

    Shipping statistics point to a slow but steady recovery underway.

    LA Area Port Traffic: Import and Export Traffic Increases in August. On a rolling 12 month basis, inbound traffic was up 0.7% in August compared to the rolling 12 months ending in July. Outbound traffic increased 0.6% compared to July. In general, inbound traffic has been increasing slowly, and outbound traffic had been declining slightly (but picked up in August).

    (CalculatedRiskBlog)

    The Association of American Railroads (AAR) ... reported increased total U.S. rail traffic for the month of August 2013, with intermodal setting a new record and carload volume increasing overall compared with August 2012.

    Intermodal traffic in August 2013 totaled 1,031,179 containers and trailers, up 4.4 percent (43,398 units) compared with August 2012. The weekly average of 257,795 units in August 2013 was the highest weekly average for any month in history. Carloads originated in August totaled 1,178,619, up 0.5 percent or 5,285 carloads compared with the same month last year.

    (AAR)

    Equity allocations highest since February 2011. A September Bank of America Merrill Lynch survey of fund managers showed equity allocations haven't been this high in 29 months. Cash balances, however, remain elevated, which is a "contrarian buy signal" according to the report. Equity allocations increased to 60% overweight in September from the prior month's 56%, according to the survey.

    (click to enlarge)

    (Fusion Market Site)

    The housing market has cooled a bit however an outright reversal of the recent improvement is unlikely.

    (click to enlarge)

    (WSJ)

    Weekly Returns

    For the week, equity indexes finished in the green with the SPX up 1.31% while smaller cap stocks finished slightly better signaling a strong risk on trade. Meanwhile the GLD finished modestly higher after a volatile week which saw it jump $60/oz in a few hours on Wednesday but it ended up giving back most of those gains over the subsequent day and a half. The FED action helped EM catch a bid with the JPM USB EM Bond index up 3.33% and the MSCI EM Equity index up 3.15%.

    (click to enlarge)

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    (Casey McCallister)

    "Those three things - autonomy, complexity, and a connection between effort and reward - are, most people will agree, the three qualities that work has to have if it is to be satisfying."
    - Malcolm Gladwell, Outliers: The Story of Success

    Disclosure: I am long AAPL. 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.

    Sep 22 3:23 AM | Link | Comment!
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