Monday, April 25, 2011

The Fed Speaks


This Wednesday will mark a historic event for financial markets.  At 2:15PM on April 27, U.S. Federal Reserve Chairman Ben Bernanke will hold his first ever press conference.  The session will occur immediately after the latest Federal Open Markets Committee (FOMC) meeting where the course of monetary policy and interest rates is decided.  Given that investors are highly sensitive to anything that is merely discussed during these meetings, this press event may also end up being particularly memorable for its impact on the markets.  

Until recent years, the Fed was an organization that mostly operated behind the scenes.  The fact that investment markets are so reactive to changes in interest rates was a primary reason for this discretion.  For the first 80 years after its founding in 1913, the Fed didn’t even disclose the outcome of these meetings.  Starting in 1994, they began issuing statements only when they changed interest rates.  And it was only just 12 years ago in 1999 when they started issuing statements at the end of each meeting.  Since then, investors have anxiously awaited each statement to comb it over, dissecting each and every word across a handful of paragraphs for any hint of a change in the direction of monetary policy. 

The Fed holding a post FOMC press conference is the latest in what has been a rapid public relations evolution.  This change has been an attempt to better inform investment markets about Fed actions on monetary policy.  In recent years, members of the FOMC including Bernanke, the Board of Governors and selected regional Fed bank presidents have become increasingly ubiquitous.  It is no longer uncommon to see Bernanke interviewed on 60 Minutes or a Fed governor/president speaking at some dinner event.  And comments from FOMC members at speeches can range from the “dovish” members like Bill Dudley and Janet Yellen indicating they are inclined to keep interest rates low to the “hawkish” members like Richard Fisher and Charles Plosser suggesting the need to raise interest rates soon.  It’s almost as if the FOMC as a group has coordinated to get a voice out there for everyone.  This way, if you have concerns about what the Fed is doing – whether its keeping interest rates too low or raising them too quickly - you can be potentially reassured that somebody in the FOMC meetings is speaking on your behalf.

So what can we expect from the Fed’s latest PR outreach on Wednesday?  The format is set for Bernanke to make an opening statement followed by a 45-minute question and answer session with the press.  Under this format, those that have been concerned about the way the Fed is handling monetary policy, they will have an open shot to address these concerns directly with the Fed Chairman.  For example, questions are likely to focus on the Fed potentially ignoring mounting global inflation pressures (low interest rates helps to ignite inflation) and the chronically weakening dollar.  Instead of trying to translate these conclusions from a brief statement or cobbling together comments from different FOMC members, we can hear the answer straight from the Fed Chairman’s mouth directly to the press.

The true key to the meeting will be any signals from Bernanke on the end of the Fed’s stimulus program.  It was at one of those speeches talked about above at the Federal Reserve Bank of Kansas City Economic Symposium in Jackson Hole on August 27, 2010 that Ben Bernanke kicked off the current stock market rally with his comments that definitively confirmed that another round of monetary stimulus to boost the economy was soon on its way.  This latest program from the Fed – widely known as QE2 - is set to end on June 30, 2011, and FOMC members have widely suggested the need to avoid any further Fed stimulus (QE3) and let the economy stand on its own.  However, a lively debate remains ongoing in investment markets as to whether the Fed will quickly return with QE3 once QE2 has come to an end.  If the Fed really wants to make a splash at its first press conference, the setting would be right for Bernanke to communicate with clarity that the Fed intends to let QE2 expire and that it also has no plans to intervene again with QE3 later in the year (at least for now).  Going a step further, any mention for the need for fiscal or monetary “austerity” would steal the headlines.  Such comments would likely send stocks lower – just as monetary stimulus has helped inflate stocks to this point, the lack of stimulus would likely deflate stocks going forward. 

So just as Bernanke’s Jackson Hole speech in August 2010 marked the beginning of the stock rally, Bernanke’s first press conference on Wednesday has the potential to mark the end.  Of course, it is just as likely that Bernanke and the Fed will stay neutral in its comments on Wednesday and wait a few months before they begin to become more decisive on the end of QE2 and the potential for QE3 in the future.  Regardless of the outcome, the Fed’s Wednesday press conference represents the first major potential inflection point for investment markets in the current stimulus cycle, which makes it certainly worth the watch.

This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.

Monday, April 18, 2011

S&P 'Negative Outlook' May Be a Catalyst for a Trade in Treasuries

From a contrarian perspective, the announcement by S&P that they have placed a negative outlook on the United States may actually serve as a buy signal to initiate a trade in U.S. Treasuries.

Several factors support this bullish case:

1. The Treasury market appears to have bottomed - After reaching a low in early February, the Treasury market has been gradually picking up momentum to the upside and is setting up well from a technical perspective.

2.  The 'negative outlook' announcement is a call for fiscal discipline - While it's already a growing topic in Washington, such a headline event will encourage even greater emphasis on getting fiscal spending under greater control.

3.  QE2 is ending in June - The last time Treasuries rallied was following the end of QE1.  If the economy is not strong enough to hold up without government stimulus, investors may move to safe haven Treasuries

4.  Major buyers have already exited the market - As an example, PIMCO, which is the largest bond fund in the world and one of the largest holders of U.S. Treasuries, has already made it well known that they have fully exited the Treasury market.  As a result, they will be a net buyer of Treasuries if anything going forward.

Any positions, particularly longer duration exposures including ETFs like IEF and TLT, should be viewed as short-term trades at this stage, as more work must be done in Washington to change the long-term view.

This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.

Two New Posts on Seeking Alpha

I have two new posts to Seeking Alpha that may be of interest.

The first is entitled Best Post-QE2 Opportunities Lie Beyond Stocks

The bottom line from this article: The best post QE2 opportunities lie beyond the stock market, as many asset classes performed well in the post QE1 market last summer. Positioning in these categories must be handled carefully, however, as the forces driving markets emerging from QE2 will be unique and different from the last time around. As a result, each category should be dissected for its merits and flaws in a post QE2 market.
The second extends the discussion from the first article, focusing on Silver.  It is entitled Navigating the Silver Mania: Exiting Long Positions May Be Prudent

The bottom line from this article:  The silver rally appears to be entering the late stages. Exiting current long positions and locking in gains may be prudent in the coming weeks leading up to the end of QE2 on June 30. Volatility is likely to continue for silver, particularly on the upside in the short-term, which may provide for early exit points ahead of mid June. Technical signals also merit close attention in the coming weeks to protect against any sustained breaks to the downside.

Monday, April 11, 2011

2011 Q2 Preview: Cresting the Wave

As we emerge from the cold of winter, investment markets continue to run hot.  Despite the risks and volatility pressing markets in 2011 Q1 - social unrest in the Middle East, an ongoing debt crisis in Europe, the tragic earthquake in Japan, a U.S. economic recovery that is still struggling to gain traction, etc. – virtually all asset classes ended the quarter solidly higher.  This performance must be taken with a healthy grain of salt.  After all, stocks were lower for the quarter as recently as March 16.  But the market strength in the face of these challenges is notable.

As discussed in previous commentaries, the key behind this market strength remains the $600 billion “Quantitative Easing 2” (QE2) stimulus program from the U.S. Federal Reserve.  This program set to end on June 30, 2011, which is the last day of Q2.  As a result, is necessary it keep a sharp eye on the implications of the end of QE2 for each asset class as we move through the current quarter.

The following is a review and preview for each of the major asset classes:

Stocks – The upward move in stocks since last summer has been driven almost exclusively by QE2.  And this benefit continued in the first quarter, with stocks up over +5%.  Performance was particularly strong in U.S. Mid-Cap stocks, which were up over +9%.  But stocks are likely to face increasing pressure as we approach the end of QE2.  Stocks dropped by nearly -20% in a matter of weeks following the end of QE1, and this is a fact not at all lost on the market - investors will almost certainly be anticipating the end of QE this time around.  Just as Fed Chairman Ben Bernanke’s speech in Jackson Hole on August 27, 2010 confirming QE2 marked the start of the rally in stocks, his first ever monetary decision press conference coming up on April 27 potentially confirming the end of QE2 may very well mark the peak in stocks and a shift to the downside.  Stay tuned.

High Yield Corporate Bonds – High yield bonds enjoyed a nearly uninterrupted move higher in the second quarter, rising nearly +4%.  Although the asset class has “bonds” in its name, high yield bonds actually trade more in line with stocks but usually with less volatility.  In short, high yield bonds are more like “stocks lite”.  But unlike stocks, high yield bonds continued to move steadily higher following the end of QE1 last summer following an initial pullback.  With companies in this category continuing to stockpile cash and paying down debt, it is reasonable to expect that this category may hold up relatively well again this time around.

Gold & Silver – The money printing by global central banks including the Fed has raised concerns about the value of the U.S. dollar and other fiat currencies.  This has led investors toward hard assets such as gold and silver as a store of value.  Gold has spent the last few months consolidating gains and only recently experienced an upside breakout in the first few days of April.  Silver, on the other hand, is now fully engaged in a mania phase.  Overall, silver was up +22% in the first quarter, is up +8% already in the first few trading days of April and has nearly doubled since Bernanke’s August 27 Jackson Hole speech last summer.  Manias like this usually end badly regardless of the fundamental reasons behind the story, so a very close watch is necessary in the coming weeks for even the first signs of any inflection point in the white metal.  And while both gold and silver performed well following the end of QE1 last summer, gold will likely be the preferred position to emphasize in working to navigate the post QE2 environment.  Caviat: the flood of central bank liquidity has clearly played a role in driving metals higher during QE2, so any subsequent post QE2 draining of liquidity may end up pushing gold to the downside.

Investment Grade Corporate Bonds – Investment Grade Corporate Bonds continue to provide steady performance since the days following the outbreak of the financial crisis in late 2008.  Just like their high yield counterparts, higher quality investment grade companies are also flush with cash and working to pay down debt.  But unlike their high yield brethren, this category trades independently of stocks.  Investment grade corporate bonds have generally risen when stock markets were rising over the last two years, but they’ve done even better when stocks were falling.  They gained +7% when stocks dropped by -20% after QE1 last summer, and they currently represent a decent value heading toward the end of QE2.  While the potential for rising inflation is a threat for this category, investment grade corporate bonds still provide favorable portfolio diversification benefits overall.

Treasuries – This category has essentially become a trade against stocks.  In short, when QE is on and stocks are going up, U.S. Treasuries are typically trading sideways or selling off.  And when QE is off and stocks are going down, U.S. Treasuries have rallied.  As a result, Treasuries may offer the potential for a short-term trading position heading into the post QE2 market.  Otherwise, they remain richly priced and offer little long-term appeal given the current fiscal state of the U.S. government and rising inflation pressures.  Caviat: if the U.S. economy fell back toward recession later in the year, Treasuries may provide more interesting total return prospects.  But this is still a big “if” at this point.

TIPS – Treasury Inflation Protected Securities (TIPS) are a special category of U.S. Treasuries that are backed by the U.S. government but are also adjusted for inflation.  As a result, they trade on their own path separate from the broader Treasury market.  TIPS have traded steadily higher since the days following the financial crisis in late 2008.  And unlike traditional Treasuries, they’ve traded higher both during stock rallies and stock pullbacks – TIPS gained +4% when stocks sold off after QE1 last summer and are up another +4% since.  Mounting concerns about inflation have added to the appeal for TIPS, and these concerns are not likely to dissipate with gasoline prices heading north of $4.00 a gallon this summer.  Despite all of these positives, these bonds are still issued by the U.S. government.  If concerns about the U.S. fiscal situation or the government’s handling of it persist, investors could start to become wary.

The bottom line – Investment markets have performed well in recent months but may be approaching a major inflection point with the end of QE2 approaching at the end of June.  As a result, increasing volatility should be expected as we move through the quarter.  Also, an increasing priority will be to focus on investment categories that fundamentally make sense and are also positioned to rise in a post QE2 environment.

This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.

Sunday, April 3, 2011

Campbell Soup: Not Very Exciting as a Post QE2 Investment

Here is a link to another article that was posted to Seeking Alpha over the weekend.

http://seekingalpha.com/article/261460-campbell-soup-not-very-exciting-as-a-post-qe2-investment

The bottom line from the article: Campbell Soup is a largely unexciting investment opportunity at this time for a post QE2 market. The company faces operational headwinds and the technical outlook is currently weak. Campbell Soup is a financially solid company with a steadily increasing dividend, however, and its recent track record as a defensive stalwart during times of extreme market turmoil are notable. Thus, a reversal in technical trends may create some appeal in the coming months for a possible short-term position in the stock. Otherwise, better stock investment opportunities likely reside elsewhere.

I will be following up in the next day or two with a Quarterly Review for 2011 Q1.


This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.