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Return of the POMO Junkies

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Most investors have been lamenting the recent stock market swoon.  The Dow Jones Industrial Average has given up all of the gains earned during 2012.  The economic reports keep getting worse by the day.  Yet, for some people all of this is good news  .   .   .

You might find them scattered along the curbs of Wall Street   . . .  with glazed eyes  . . .  British teeth  . . .  and mysterious lesions on their skin.  They approach Wall Street’s upscale-appearing pedestrians, making such requests as:  “POMO?”   . . .  “Late-day rally?”  . . .   “Animal Spirits?”  These desperate souls are the “POMO junkies”.  Since the Federal Reserve concluded the last phase of quantitative easing in June of 2011, the POMO junkies have been hopeless.  They can’t survive without those POMO auctions, wherein the New York Fed would purchase Treasury securities – worth billions of dollars – on a daily basis.  After the auctions, the Primary Dealers would take the sales proceeds to their proprietary trading desks, where the funds would be leveraged and used to purchase high-beta, Russell 2000 stocks.  You saw the results:  A booming stock market – despite a stalled economy.

Since I first wrote about the POMO junkies last summer, they have resurfaced on a few occasions – only to slink back into the shadows as the rumors of an imminent Quantitative Easing 3 were debunked.

The recent spate of awful economic reports and the resulting stock market nosedive have rekindled hopes that the Federal Reserve will crank-up its printing press once again, for the long-awaited QE 3.  Economist John Hussman discussed this situation on Monday:

At this point, the S&P 500 has achieved a cumulative total return of less than 10% since April 2010. Meanwhile, of course, there remains a great deal of faith in the “Bernanke put,” because even though it’s fairly obvious that QE has done nothing durable for the economy or the financial markets over the last couple of years, a hit of QE might at least be good for a few months of “risk on” delirium.  If the American public can’t get thoughtful economic leadership, at least Wall Street’s speculative junkies can hope for a little taste of Q from Sugar Daddy.

One of the problems with QE here, however, is that it would essentially represent fiscal policy for the benefit of speculators, at taxpayer expense.  To see this, note that the 10-year Treasury yield is now down to less than 1.5%.  One wonders how Bernanke would be able to argue, with a straight face, that this is not low enough.  Nevertheless, a 10-year bond has a duration of 8 years – meaning that each 100 basis point fluctuation in interest rates is associated with a change of about 8% in the price of the bond.  So if you buy the bond and hold it for a full year, an interest rate change of of 1.5/8 = .1875, or less than 20 basis points, is enough to wipe out the annual interest and leave you with a negative total return.

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“QE3 – subsidizing banks and bond speculators at taxpayer expense” – there’s a pithy slogan.  That doesn’t mean the Fed will refrain from more of its recklessness (which will be nearly impossible to reverse when it becomes necessary to do so), but does anyone actually believe by now that QE would improve the economy, durably elevate risky assets beyond a few months, or materially relieve global debt strains?

Obviously, the POMO junkies have no such concerns.  Beyond that, the Federal Reserve’s “third mandate” – keeping the stock market bubble inflated – will be the primary factor motivating the decision, regardless of whether those asset prices hold for more than a few months.

The POMO junkies are finally going to score.  As they do, a tragic number of retail investors will be led to believe that the stock market has “recovered”, only to learn – a few months down the road – that the latest bubble has popped.


 

Unwinding The Spin

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We are caught in a steady “spin cycle” of contradictory reports about our most fundamental concerns:  the environment and the economy.  Will China financially intervene to resolve the sovereign debt crisis in Europe and save us all from the economic consequences that loom ahead?  Will the “China syndrome” finally become a reality at Fukushima?  When confronted with a propaganda assault from the “rose-colored glasses” crowd, I become very skeptical.

Widespread concern that Greece would default on its debt inflamed lingering fear about debt contagion throughout the Eurozone.  Economist John Hussman, one of the few pundits who has been keeping a sober eye on the situation, made this remark:

Simply put, the Greek debt market is screaming “Certain default. Amésos.”

Meanwhile, the Financial Times reported that China Investment Corporation has been involved in discussions with the government of Italy concerning Italian bond purchases as well as business investments.  Bloomberg BusinessWeek quoted Zhang Xiaoqiang, vice chairman of China’s top economic planning agency, who affirmed that nation’s willingness to buy euro bonds from countries involved in the sovereign debt crisis “within its capacity”.

Stefan Schultz of Der Speigel explained that China expects something in return for its rescue efforts:

The supposed “yellow peril” has positioned itself as a “white knight” which promises not to leave its trading partners in Europe and America in the lurch.

In return, however, Beijing is demanding a high price — the Chinese government wants more political prestige and more political power  .  .  .

Specifically, China wants:  more access to American markets, abolition of restrictions on the export of high-technology products to China as well as world-wide recognition of China’s economy as a market economy.

Even if such a deal could be made with China, would that nation’s bailout efforts really save the world economy from another recession?

As usual, those notorious cheerleaders for stock market bullishness at CNBC are emphasizing that now is the time to buy.  At MSN Money, Anthony Mirhaydari wrote a piece entitled, “The bulls are taking charge”.

Last week, Robert Powell of MarketWatch directed our attention to an analysis just published by Sam Stovall, the chief investment strategist of Standard & Poor’s Equity Research.  Powell provided us with this summary:

Consider, at a place and time such as this, with the economy teetering on the verge of another recession, none of the 1,485 stocks that make up the S&P 1,500 has a consensus “Sell” rating. And just five, or 0.3%, are ranked as being a “Weak Hold.”

*   *   *

From his vantage point, Stovall says it “appears as if most analysts are not expecting the U.S. to fall back into recession, and that now is the time to scoop up undervalued cyclical issues at bargain-basement prices.”

However, in S&P’s opinion, it might be high time to “buck the trend and embrace the traditionally defensive sectors (including utilities), as the risk of recession — and downward earnings per share revisions – appear to us to be on the rise.”

On September 14, investing guru Mark Hulbert picked up from where Robert Powell left off by reminding us that – ten years ago – stock analysts continued to rate Enron stock as a “hold” during the weeks leading up to its bankruptcy, despite the fact that the company was obviously in deep trouble.  Hulbert’s theme was best summed-up with this statement:

If you want objectivity from an analyst, you might want to start by demanding that he issue as many “sell” recommendations as “buys.”

It sounds to me as though Wall Street is looking for suckers to be holding all of those high-beta, Russell 2000 stocks when the next crash comes along.  I’m more inclined to follow Jeremy Grantham’s assessment that “fair value” for the S&P 500 is 950, rather than its current near-1,200 level.

While the “rose colored glasses” crowd is dreaming about China’s rescue of the world economy, the “China syndrome” is becoming a reality at Japan’s Fukushima nuclear power facility.  Immediately after the tragic earthquake and tsunami, I expressed my suspicion that the true extent of the nuclear disaster was the subject of a massive cover-up.  Since that time, Washington’s Blog has been providing regular updates on the status of the ongoing, uncontrolled nuclear disaster at Fukushima.  The September 14 posting at Washington’s Blog included an interview with a candid scientist:

And nuclear expert Paul Gunter says that we face a “China Syndrome”, where the fuel from the reactor cores at Fukushima have melted through the container vessels, into the ground, and are hitting groundwater and creating highly-radioactive steam . . .

On the other hand, this article from New Scientist reeks of nuclear industry spin:

ALARMIST predictions that the long-term health effects of the Fukushima nuclear accident will be worse than those following Chernobyl in 1986 are likely to aggravate harmful psychological effects of the incident.

As long as experts such as Paul Gunter and Arnie Gundersen continue to provide reliable data contradicting the “move along – nothing to see here” meme being sold to us by the usual suspects, I will continue to follow the updates on Washington’s Blog.


 

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Keep This On The Front Burner

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June 26, 2008

For the past few weeks, the Senate Commerce Committee has been hearing testimony about the impact of the so-called “Enron loophole” in the Commodity Futures Modernization Act of 2000, 7 U.S.C. §2(h)(3) and (g), which existed throughout Bill Clinton’s tenure in the Oval Office.  This “Enron loophole” is what has made it possible for speculators to drive the price of gasoline beyond $4 per gallon. Consider the Senate Commerce Committee testimony of Michael Greenberger, former Commodity Futures Trading Commission (CFTC) Director of Trading and Markets.  Mr. Greenberger testified that if the “Enron loophole” were closed, we would see “overnight” a 25-percent drop in the price of crude oil and as much as a 50-percent drop in the price of gasoline.  The Senate Commerce Committee hearing featured testimony by hedge fund managers and other market experts, concerning how the skyrocketing price of gasoline, diesel and heating oil are “breaking the back” of the American economy.  Some of these experts (knowing that their testimony would be falling on the “deaf ears” of bought-off lawmakers and friends of the oil industry) were nearly at the point of tears in describing how the rest of American industry is getting killed for the benefit of the oil industry.  Let’s revisit Mr. Greenberger’s point once again:  if the “Enron loophole” were closed, we would see “overnight” a 25-percent drop in the price of crude oil and as much as a 50-percent drop in the price of gasoline.  “Overnight” may be an exaggeration, although I’m sure he means a lot quicker than waiting for unbuilt and unplanned oil wells to start having an effect on the price of a barrel of crude.  (This turnaround time is considered by most experts to be a 10-year period.)

Our old friend, the Former John McCain, whom we once knew, voted with the Democrats to close the “Enron loophole” in 2002 and 2003.  His comments in the February, 2002 issue of The New Yorker told us much about how we got to where we are now, six years after he gave that interview:

Enron made a sound investment in Washington.  It did them a lot of good.  Where they really do well is around the edges, the insertion of an amendment into an appropriate bill.

McCain is no longer so strident about the sleazy origins of this “Enron loophole”.  This is probably because the loophole owes its existence to Phil Graham and his wife, former CFTC Chair, Wendy of Enron.  Phil is now McCain’s “economic advisor”, so don’t hold your breath waiting for McCain to repeat what he said to The New Yorker in 2002.  He has yet to speak out against this loophole as his new self: McCain 2008.  Nevertheless, a very loud, “hard” right-wing voice, that of Bill O’Reilly, has spoken up on this issue.  A visit to the website: http://closeloophole.org/ recites this quote from O’Reilly on his Factor show:

I want those SOBs [speculators] taken down…let’s work together to save the American consumer at the pump.

My favorite issues are those where “liberals” and “conservatives” can work together to solve the crucial problems faced by society.  It appears as though we have one right here.  If we address it, we may solve it “overnight” according to one expert.  If we do solve it, we will be helping more than the individual consumer.  We will probably save the entire roster of Russell 2000 “small-cap” companies from swirling down the toilet.  Most experts believe these companies are the hardest-hit by the uncontrolled cost of petroleum products.

For his part, Barack Obama has spoken on the record numerous times about his opposition to the “Enron loophole”.  This should come as no surprise since his fellow Senator from Illinois, Dick Durbin, is a key advocate for closing this loophole.  Obama supporter, New Jersey Governor Jon Corzine, has a bit of “street cred” on this subject, having served as the former chairman of the investment firm, Goldman Sachs.  Corzine is on the record for blaming this unregulated speculation for the outrageous pricing of petroleum products.

The American public has a notoriously short attention span.  It seems unbelievable that something this important, that erases “discretionary spending” and limits what food can be placed on one’s table, could be overshadowed by the latest celebrity scandal.  Americans must stay focused on this fundamental problem.  A visit to http://closeloophole.org/ will give you the opportunity to send e-mails to your Senators, expressing your opinion on whether our government should perform one of its most important missions:  to save us all from sleazebags.