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  • Wall Street Breakfast: Must-Know News [View article]
    gggl, I know Bundesbank president Jens Weidmann has seemingly softened his position on OMT (QE) by saying the ECB could consider purchasing euro zone government bonds or top rated private sector assets.

    But he has emphasized that such purchases would have to meet quality standards and examined in the context of effectiveness, carefully weighing all costs and benefits while adhering to limits under the ECB's mandate on funding governments. A recent German constitutional court ruling on the legality of OMT recently underscored this point.

    And he seems to prefer negative rates to the purchase of assets

    But maybe you are right and, if you are, the second point is full of interesting possibilities. If OMT is tilted towards the purchase of sovereigns in the secondary market then you quite correct in saying countries within the periphery may feel less pressure to undertake needed reforms as they reduce budget deficits through artificially low interest rates. If OMT is geared towards the purchase of asset backed securities, the program will too little to be of consequence.

    The more I think about this, I think ECB QE should comprise negative rates and purchases of both sovereign debt and asset backed securities.
    Apr 24 10:53 AM | 2 Likes Like |Link to Comment
  • Wall Street Breakfast: Must-Know News [View article]
    Morning All,

    The ECB may still be playing poker through trying to talk down the euro or the task may be more difficult than acknowledged. But if QE is implemented, it will be very tricky and need to be tailored to the idiosyncrasies of the EMU and the countries which comprise the EMU. (1) companies inside the EMU rely upon bank debt far more than their US their counterparts, (2) because of opposition by Germany’s Bundesbank to any whiff of “monetary financing” I think sovereign debt purchases will be limited (3) even if government bond purchases were allowed, because fragmentation of the euro zone economy, purchases of a single asset class, such as government bonds, would not likely to affect interest rates across all asset class in all countries, (4) for these reasons, ECB purchases are likely be focused largely on buying bank loans packaged up as asset backed securities, but (5) I keep reading that there are too few ABS and many of the ones floating around have low credit ratings, limiting supply of assets available to the ECB. For this reason, it's possible the ECB will combine QE with negative interest rates.
    Apr 24 08:49 AM | 3 Likes Like |Link to Comment
  • New home sales plunge in March [View news story]
    I'm not so sure weather was a factor as there were declines in three of the four reporting regions with an increase reported in the Northeast, an area one would think to be very sensitive to harsh weather but which reported a gain. The Mid-west, South and West all reported declines. Possible explanations include rising prices, tighter underwriting and higher downpayments.
    Apr 23 11:00 AM | 12 Likes Like |Link to Comment
  • Wall Street Breakfast: Must-Know News [View article]
    Whatever our proclivities, the EU is so fragmented it has simply outsourced their foreign policy to the US which has shown itself to be totally feckless and incompetent in dealing with all mattters within and outside its borders. With respect to foreign policy, Obama has managed to alienate all of the BRICS, with China stepping up territorial claims in the waters off East Asia after our pivot towards Asia. The Arab Spring has staggered into civil war and military coups and the Russian sponsored deal with Syria simply affords Syria the opportunity to continue with mass killings just as the deal with Iran allows them to continue with the enrichment of uranium. And the Middle East remains a mess while relations with Isreal have become further strained. The community organizer is in over his head and the world knows it.
    Apr 22 11:05 AM | 6 Likes Like |Link to Comment
  • Wall Street Breakfast: Must-Know News [View article]
    The comments made by the German Finance Minister are interesting in that he's providing us with a "heads up" on slowing growth brought on by an exceptional first quarter.

    And if the deceleration in the second quarter is worse than expected, events in the Ukraine will be the cause. All bases covered.

    Yields on five-year Spanish bonds fell below those on US Treasuries of equivalent maturity this month. Traders are betting on the ECB turning on the Euro Hoover and sucking up all kinds of assets.

    Apr 22 07:27 AM | 7 Likes Like |Link to Comment
  • Cost-Push Reflation? [View article]
    I normally tend to agree with much of your thinking expressed in excellent articles although I tend to disagree with your copper emerging market thesis.

    Copper futures are down today and prices seem to be stuck at $3.05 a pound. And recent gains of $.10 could be easily attributed to various activities inside China, which accounts for 40% of copper consumption, which Bloomberg has covered on several occasions.

    "Domestic smelters have been hoarding the metal in bonded warehouses to drive up the local price against the rate in London. Copper users in China are paying the highest premium in 29 months as a result of reduced local supplies.

    Copper fabricators in China, the biggest consumer, are paying the highest premium in 29 months to secure delivery of the metal that’s used in everything from electric wires to water pipes.

    Chinese smelters are hoarding the metal in bonded warehouses in an attempt to drive up the local price against the rate in London and sell it abroad at a profit, according to SMM Information & Technology Co. At the same time, local traders have locked up as much as 1 million metric tons as collateral to get credit for other investments, Goldman Sachs Group Inc. said on March 18."

    With growth in China slowing, credit contracting and producer prices declining, I'm not sure the price of copper is sign that emerging markets are about to launch a round of infrastructure building although there is discussion of expanding grids inside of China.
    Apr 21 01:32 PM | 1 Like Like |Link to Comment
  • Wall Street Breakfast: Must-Know News [View article]
    Good Morning All,

    I've provided a link for additional coverage of Japan's yawning trade deficit and an additional link on the possibility that current policies risk crippling the foundations of Japan's monetary system. Meanwhile factory output contracted in February (the latest month for which data is available) while government officials carefully downgraded their outlook for the economy last week citing the recently enacted sales tax hike.
    Apr 21 08:58 AM | 1 Like Like |Link to Comment
  • Weighing The Week Ahead: Springtime Optimism? [View article]
    Jeff another great issue of WTWA but I'm not so sure their markets have stopped serving volatility cocktails. RUT and COMPQ had the strongest runs over the last year and the valuation of the entire RUT became extended while specific sectors of COMPQ(biotech, social media, and others) became stretched leading to a correction which may or may not be over. Both indices hit their 200 dma and rebounded off intermediate lows marked by very weak breadth indicators, something that should not be of surprise. The entire move was very technical with respect for support, resistance, structure and moving averages. Meanwhile, the S&P fell to its 100 dma and rebounded off weak breath indicators but, with the exception of energy, defensive sectors (utilities and staples) took on leadership and are leading the retracement up. Generally speaking, this is not good for equities as cyclicals drive the market higher and persistent strength in defensive sectors can mark maket tops. A second item that is disconcerting is the 10 year treasury, the yield on which is flattening which is at odds with prospects of robust growth and higher inflation. And lastly, I think there are serious headwinds to accelerating global growth and this week we saw several disappointments in China and stagnation In European industrial production. But with that said, the ECB could implement some form of QE and China could announce additional stimulus. Very, very messy.
    Apr 20 01:11 PM | 2 Likes Like |Link to Comment
  • Wall Street Breakfast: Must-Know News [View article]
    Forgot something. From the speech:

    "With the federal funds rate pinned near zero, the FOMC has been forced to rely on two less familiar policy tools–the first one being forward guidance regarding the future setting of the federal funds rate and the second being large-scale asset purchases. T. And here are no time-tested guidelines for how these tools should be adjusted in response to changes in the outlook."

    She's basically saying they are "winging it" and since there are no time tested rules for implementing and calibrating these tools the whole thing becomes an experiment guided by subjective judgments. They are flying by the seats of their pants and its only going to get messier with qualitative guidance, using vague language and based on a wider variety of economic indicators.
    Apr 17 08:36 AM | 9 Likes Like |Link to Comment
  • Wall Street Breakfast: Must-Know News [View article]
    Financial stability has shown itself to be an important concern in any policy mix yet it was not mentioned. Further, any casual examination of US consumer and producer prices reveals they have, as of late, remained in the 1% range notwithstanding asset purchases of $85 billion per month which now, of course, is now being tapered. Studies of Japan's experience with QE show a weak relationship between monetary policy and inflation expectations. Obviously I Have doubts about the direction and effectiveness of Fed policy and (1) do not believe increasing bank reserves is increasing broader monetary aggregates which is rendering QE useless and (2) believe much of the global deflationary pulse is a result of global imbalances (glut) in savings and reduced investment demand in advanced economies.
    Apr 17 08:15 AM | 5 Likes Like |Link to Comment
  • Deflation On The Mind [View article]
    Most of the concerns expressed by the IMF are misguided and are likely to lead to bad policy choices.

    First, inflation across Europe varies widely and only several countries are actually experiencing deflation. Low inflation in the eurozone has been driven by falling energy and commodity prices, the appreciation of the euro, relative price adjustments in countries such as Greece, Ireland and Portugal seeking to regain price competitiveness, the global savings glut and reduced investment.

    Secondly, fears of lower prices leading to deferral of purchases and an economic spiral downwards are misplaced and are not supported by the data. A number of studies show that savings decline as prices fall. It is often claimed consumers postpone their spending when they expect prices to fall, ie, they increase their savings. The evidence is strongly against this.

    And thirdly, the US' experience with QE and most of Japan' experience with QE is that large scale asset purchases do not materially affect prices. In the US, for example, producer and consumer prices have remained relatively stable while the Fed's balance sheet has grown over $3 trillion. One of the reasons for this seeming anomaly is that the Fed's actions have increased the monetary base while having little effect on broader aggregates of money supply

    In conclusion, I believe the author is correct in believing structural reforms combined with policies to expand R&D and investment will prove far more constructive than simply purchasing assets or spending money on bridges to nowhere.
    Apr 14 03:08 PM | 1 Like Like |Link to Comment
  • Weighing The Week Ahead: A Volatility Cocktail [View article]
    Thanks Jeff for another great issue of WTWA.

    With RUT sitting on its 200 dma and COMPQ very close to its 200 dma, I do not think we will see an uninterrupted downdraft next week as these are battle ground averages and offer much support for an index on the way down.

    Because valuations of small caps and certain tech sectors started this "adjustment, I think earnings will take on added significance and will be subject to much closer scrutiny than usual. Rather than being important, they will be critically important.

    Everybody knows the first quarter is likely to be weak with, maybe, a 1% increase in per share earnings over the prior year on the back of revenue growth in the area of 2.3%. But for the market to conclude this needed "adjustment" and grind higher, it will need to believe corporations can meet the higher hurdles set for quarters2, 3 and 4.

    And this, of course, will hinge upon guidance and forward looking comments. In this context, I would argue revenue growth will take on added significance as margins are probably maxed out although this does not suggest they will mean revert as wages gains are well contained.
    Apr 13 11:21 AM | 3 Likes Like |Link to Comment
  • Do You Believe The Global Economy Will Improve This Year? [View article]
    Steve, I think the IMF and other institutions with "vested interests" in the health of the global economy are institutionally biased to see things in the most optimistic light making their forecasts something less than useful. This inclination, of course, would apply to the Fed as well who easily has one of the worst forecasting records ever documented.
    Apr 12 12:44 PM | 3 Likes Like |Link to Comment
  • Wall Street Breakfast: Must-Know News [View article]
    Good Morning All

    Given the fragile state of the markets, we should at least see some fireworks if not scorching napalm.

    Japan's plan to reinstate nuclear energy is all the more necessary under Abenomics as the weak yen is making hydrocarbon imports absurdly expensive and is exacerbating trade deficits which have persisted for the last twenty months.

    The current account, though, which includes capital flows, improved in February and swung into surplus after four months of deficits.
    Apr 11 08:02 AM | 3 Likes Like |Link to Comment
  • Wall Street Breakfast: Must-Know News [View article]
    Good Morning All

    Greece's capacity to return to the bond markets is welcome and likely a great relief to Angela Merkel, the paymaster of the EMU. Perhaps of greater significance, notwithstanding deflation and elevated unemployment, Greece's return to the markets is a vindication of sorts of the seemingly harsh economic conditions imposed upon the country by the troika as a precondition to receiving assistance. Most of these conditions were designed to make Greece more competitive, open-up markets and trades, cut red tape and reverse unsustainable economic policies. Most Keynesian argued against "austerity" and for investment in infrastructure and human capital (code speak for transfer payments) and rallied against "hairshirt" economics. While Greece has further to go and more reforms to implement, it along with Ireland, Britain and several other countries are buttressing more conservative economic thought (leaning towards Austrian) embraced by others outside of Keynesian circles. Aware of this challenge to their thinking, Keynesian's are already quickly attempting to discredit the many success stories in this chapter of Greece's history.
    Apr 10 09:07 AM | 3 Likes Like |Link to Comment