Thoughts on Fed Moves

Ok, I'm not sure whether Bernanke makes his reappointment vote this week but obviously the market won't like it much if he doesn't get confirmed by this weekend.

More important to the economy is whether the Fed follows through on their indications to withdraw from the MBS market at the end of March. I know I have posted on this topic before but I feel it is going to be an important driver of the markets. Apparently mortgage rates haven't backed up that much yet, so is this the markets telling us that the Fed won't do it or are the markets going to discount this between now and then? The reason I keep harping on this is that the government now plays such a large role in the supposed free markets. You can't just look at different sectors or asset classes without knowing what the Fed and Gov't might do! The Chinese authorities directing their banks to curb lending and thus roiling markets is a recent example.

As I have stated before, if the Fed backs down and continues MBS purchases, this is very bearish for the dollar. Typically when there have been dollar shocks, gold has had a disproportionate move upwards.

Now what I haven't discussed before is, how the banks might fare if the Fed does manage to stop their intervention in the debt market. The long rate is set to go up to what the market deems to be the free rate of interest, thus steepening the yield curve. One thing I do know is that inflation is tame and the Fed is locked into low short term interest rates. Steep yield curves are great for banks in general. Unless the financials blow themselves up with subprime or Alt-A mortgages, any prudently managed bank should thrive under this scenario of tame inflation and a steep yield curve.

This is where I think Cdn financials and XFN still fit in. The Cdn banks have been better managed than their US counterparts and as far as we can tell, they don't have any off balance sheet 'assets' that might still haunt them.

What I'm proposing is to sell QQQQ instead of XFN, and add gold either now or when the Fed looks like they won't follow through.

There's always the question of time lags of course. The banks don't benefit immediately from rate rises and their earnings may not go up for a few quarters. Why couldn't markets only be efficient when we want them to be!

Thinking Big

Ok, I have to apologize to club members here about the new ads appearing on our investment blog. I didn't receive permission from everyone to allow Adsense and Google to invade our blogsite. It's just that I had some free time today and while I was on the Blogger site snooping around, I noticed a new 'Monetize' button on the tabs of the dashboard. Being a good capitalist, I tried to figure out how I could monetize our little club into something bigger.

Let's just say based on the traffic at our blog, I highly doubt the monetary rewards will be anything great! Just out of interest I wanted to see what ads Google comes up with, for our esoteric topics!

I also see that today Google announced recovering ad revenues. Maybe since I've finally caught on to paid ad banners, the top is in for Google's sales! I see that GOOG is down 5% on the day our site starts paid advertising. Nice!

More Volatility Ahead

Apparently there are more senators that are now opposing the confirmation reappointment of Ben Bernanke. The tide seems to be turning on the Fed chairman whose term ends on Jan. 31st. Seems like the politicians are finally paying attention to what many people having been saying all along. No more bailouts!

This is what David Rosenberg had to say:

AS IF WE NEED ANYTHING MORE TO WORRY ABOUT

Greece. Portugal. Ireland. China tightening. Bank bashing. Foreclosures. The housing and mortgage market. Jobs. The Fed’s exit strategy (if it happens). And now we have Ben Bernanke’s confirmation hearings in the Senate and this is not a ‘done deal’. His current term as Fed Chairman ends on January 31 and a vote has been delayed until next week at the earliest – and he needs 60 supporters and a few Democrats have already said publicly that they will not support his reappointment and therefore he will need GOP help. Volatility is still very cheap even after yesterday’s jump.

The last time we had a sudden and unexpected turnover at the Fed was back on June 2, 1987 when Paul Volcker surprisingly announced his resignation. That day, the S&P 500 slipped 0.5%, which was a big deal then since we were in the throes of a major rally, the yield the 10-year note surged 27 basis points, the VIX index jumped 5%, the DXY was crushed 1.2% and gold rallied 1.3%. Keep that in your back pocket just in case.

Time to buy volatility. Bought some VXX for my TFSA this morning.

http://www.nytimes.com/2010/01/23/business/economy/23fed.html

It's About Damned Time!

Don't need to look any further to see if Obama's proposed regulations are necessary and proper. Here are some selected reactions from the bankers:

Goldman Sachs chief financial officer David Viniar called the ideas “impractical” because they run counter to global deregulation.“You have global institutions around the world who are set up in a certain way and to put rules in place that roll back the financial system by 10 years is going to be a very, very hard thing to do,” Mr. Viniar said in a conference call.

The proposal will restrict lending, increase risk, decrease stability in the system, and limit our ability to help create jobs,” warned Steve Bartlett, president and chief executive of the Financial Services Roundtable, which speaks for the big banks.

Glass-Steagall was enacted during the last depression. It basically separated deposit taking banks from investment banks. Will Obama have the political will to undo the damage of the last twenty years?

Happy New Year!

My new year's resolution is to be more active on this forum, now that I've put some busy life events behind me. First thing, I think we need to get out of XFN's. After some quick outperformance from April to August playing the financial recovery theme, it has lagged the broader markets. I think the markets are pricing in some heavier financial regulations coming under the Obama administration which will crimp the banks' profits (if not their bonuses!).

Generally, I think we're in for calmer markets in 2010, with VIX below 20 now, which usually bodes well for the developing markets. Also, the Cdn $ seems to be on a tear, so it could be a good time to buy some foreign assets and repatriate the funds when the dollar cools. Thoughts?