Insight and Action

Let's Be Crystal Clear: Low Rates, for Longer

Chairman Ben Bernanke is CRYSTAL CLEAR about holding rates lower for longer. Consider his speech to economists gathered in Washington last night:

We are reminded of the scene in A Few Good Men, where Jack Nicholson's Col. Jessup berates the younger Lt. Daniel Kaffee portrayed by Tom Cruise for failing to understand the code of behavior on the Guantanamo base:

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There were two notes this morning from bond strategists wrestling with the difference between short- and long-term bond yields. With the Janet Yellen's talk of the Fed anchoring near-term yields through continued policy accommodation, and inflation still virtually non-existent, each wonders how 10-year yields can be so much higher than 2-year yields.

Economists refer to the difference between 2-year and 10-year rates as the yield curve. A steep curve, in other words a wide 2-10 spread, suggests the market expects higher inflation in the future. Clearly, investors expect inflation to accelerate significantly. By charting this relationship over time, we see the current spread of 240 basis points is approaching historical highs.

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The Yield Curve May Indicate Gains for Bond Investors

China's Xinhua News Agency has announced a series of major changes in the government's domestic policies, heralding a significant move towards liberalization and privatization. As part of an effort to "improve human rights and judicial practices," Xinhua notes the government will close re-education camps established under Chairman Mao Zedong. As for specific market-related changes, I would highlight these three:

While China ranks as the world's most populous nation, the one-child policy has had a distinct impact on slowing growth, as have restrictive land and lending policies. As a result, China now stands at a crossroads. The exceptional GDP expansion of the past decade, driven by infrastructure spending, must give way to broader consumer-driven demand.

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Good-Bye Mao, Hello Market Economy

New evidence of U.S. housing recovery from the Mortgage Bankers Association:

The record 40 basis point drop in 30-Day delinquencies to 2.8 percent marks the lowest rate since 2Q 2006. As MBA Chief Economist Jay Brinkmann notes:

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Americans love to shop. Our willingness to plunk down cash and credit for goods and services accounts for 56 percent of U.S. gross domestic product, according to Tobias Levovich, a strategist at Citigroup.

Astute investors are well aware of the trend, especially ahead of the holiday shopping season. Chris Verrone, a strategist at www.strategasrp.com, sent us the following chart illustrating retailers' performance compared with the S&P 500 since 1989 -- nearly 14 percentage points from October through March.

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If you think the Federal Reserve is contemplating tapering its $85B-a-month bond-buying program, think again. Three prominent Fed members yesterday stated unequivocally they're leaning toward more stimulus, not less.

Their attention is focused on the slow rate of U.S. jobs growth, which is the slowest of any post-war recession. In fact, the forecasts of 66 economists tracked by Bloomberg indicate unemployment may remain above 6.5 percent through the early half of 2015. This may explain why Fed Chairman Ben Bernanke changed course at the September FOMC meeting, abandoning the taper plan first floated on May 22 and instead conveying "highly accommodative policy" for longer.

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When the Name Is Bond, High Yield Bond

It's a tale of two extremes this week in technology: Twitter will probably price its initial public offering on Wednesday night at a lofty 13x sales, as BlackBerry announces the collapse of its tentative deal with Fairfax Financial. One company has multiple buyers, the other may not have any.

The two firms encapsulate two opposite investment strategies, momentum vs. value. Twitter doesn't make money yet, but it's adding 155,000 users per day. BlackBerry has shrunk every year since 2010 and offers patents plus cash on the balance sheet (whose sum Brian Battle of Wedge Partners pegs at $4-5/share).

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The old adage describing how a frog climbs out of a water well provides an apt analogy for the S&P 500 over the past year. We've seen seven mini-rallies averaging 8.3 percent, followed by seven mini-declines of 4.9 percent.

Technicians refer to this ebb and flow as "backing and filling" or "digesting the gains." It's generally considered healthy action. Here's what it looks like. First the rallies:

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Two Steps Forward, One Step Back

The team at Ned Davis Research (www.ndr.com) relies on four factors:

Quantitative Equity Strategist Brian Sanborn and his team re-balance the portfolio of forty U.S. stocks each month. Today's list reflects the new picks for November. While we cannot share the entire list (it's proprietary to paying clients), we can show the ten companies from the portfolio with the highest short and long term momentum.

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How Do You Make the Most Amount of Money in Stocks?

Time to Sell the Euro?

The euro is hovering near a one year high at 1.38.

Citi FX Strategist Valentin Marinov warns clients this morning the "rally may be close to an end." He cites three reasons why the ECB is likely to reiterate a dovish view at next week's meeting, presumably sending the euro lower.

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About Insight and Action


Insight & Action identifies trends across global markets and finds ways investors may profit. We crunch our own numbers, spotlight commentary from influential thinkers and try to arm investors with insights into what's moving and what's not. Analyses or commentary are the views of the author, and do not necessarily reflect the views of Bloomberg News.

Contributors

  • Adam Johnson
    Adam Johnson