Risk/Reward Vol. 215
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Work it/Make it/Do it
Makes us
Harder/Better/Faster/Stronger."---lyrics from "Stronger" sung by Kanye West
"That I'm strong enough to live without you
Strong enough and I quit crying
Long enough, now I'm stong enough
To know you gotta go."---lyrics from "Strong Enough" sung by Cher
"And I can feel this for sure, ooh
I've been here before/I can feel this for sure
For sure/For sure."---lyrics from "Deja Vu" sung by Teena Marie
What amazed me about the high frequency trading revelation made on "60 Minutes" last Sunday by author Michael Lewis was how little it impacted the stock market. Whether high frequency traders (HFT's) extract a penny here or a nickel there as part of order execution or otherwise "rig" the stock market apparently is of no moment to the investing public as another record high was reached by the S&P 500 this week. If not the HFT's, then the market makers of old would be extracting some toll. As someone who has traded stocks for years, I know that order execution is "Easier/Better/Faster/Stronger----and CHEAPER" now than at any time in the past. Whether HFT's "Made it/Did it" or some other actor is responsible, I say good riddance to the days of old.
Friday's selloff was led by NASDAQ's momentum stocks, and I predict will not continue in the broader market next week. Indeed with encouraging data from purchasing agents and good news on the jobs front, some are wondering whether the economy is "Strong Enough" to withstand a quicker pace of pullbacks by the Federal Reserve. In other words, is the economy "stong enough to live without" any quantitative easing and is it time to signal that the 0% Fed Funds rate has "gotta go"? Many suspect not, given counter indications from Federal Reserve Chair Janet Yellen delivered in a speech last Monday in Chicago wherein she discussed at length her view that the labor market still suffers from too much slack (more people willing and capable of filling jobs than there are jobs for them to fill). So long as that slack persists, she is of the mind that accommodative monetary policies will be needed.
But "can I feel this for sure"? Several articles this week pointed to these very same accommodative policies as the cause of many asset classes attaining bubble status, driven there by yield hungry investors like me. Here are some examples. 1) European sovereign debt is in great demand. It is trading at pre-Eurozone crisis levels. Spanish and Italian 10Year rates are as low as they have been since 2005. 2) Corporate bond issuance in general is at near record levels, and the rate spread between the 10Year Treasury and junk bonds is only 355 basis points (3.55%) which is at its lowest point since 2007. 3) Citigroup is launching a new suite of subprime debt instruments--the same poisonous fruit that precipitated the 2008 banking crisis. Add to this the resurfacing of a debate among central bankers as to whether monetary policy should take into account asset bubbles (see comments this week from Fed Gov. Jeremy Stein), and I sense "Deja Vu." It's as if "I've been here before/I can feel this for sure." Indeed, it was exactly one year ago (Vol. 165 www.riskrewardblog.blogspot.com ) that I warned that the Federal Reserve could do something to burst the then growing asset bubbles----exactly the ones inflating today. And it did so a few weeks later when Chair Bernanke hinted that QE3 could end within weeks (it didn't), a hint that caused the bond market and the stocks that trade in relation thereto (e.g. real estate investment trusts, preferred stocks, business development companies, utilities, master limited partnerships, etc.) to plummet. That event is now known as the "Taper Tantrum."
Despite Friday's negative action, both the Dow Jones Industrial Average and the S&P 500 finished up for the week. I sense that Ms. Yellen is at a cross roads. Will she do as she said this week and let the accommodative "Beat Go On" even if it results in asset bubbles continuing to inflate? Or, like Chairperson Bernanke last year, will she hint that accommodative policies will end sooner than expected and cause another interest rate/bond market tantrum? Positioned as I am, if she takes the latter course, I will be Cher-in' the following theme song:
"Bang, bang, she shot me down
Bang, bang I hit the ground
Bang, bang that awful sound
Bang, bang Ms. Yellen shot me down."
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