Yesterday, as was widely expected (yet somehow still disappointing to Wall Street) Dr. Bernanke unveiled the Fed’s latest installment of market manipulation. The Fed announced plans to expand Operation Twist by $267 billion over six months. Apparently, record low interest rates for corporate, mortgage, treasury, and almost any other debt you can think of simply aren’t low enough to promote recovery. Since the crisis began, the Fed has held interest rates at zero, engaged in not one, but two rounds of money printing, promised to keep rates at zero through 2014, extended the maturity of its … [Read more...]
Euro-area Black Magic
From the lead article in this morning’s Wall Street Journal: “With foreign investors almost completely absent from Spanish bond markets for months, Spanish banks have propped up the government, which is now forced to turn to Europe for help propping up the weaker banks. Meanwhile, the stronger banks are shying away from buying government bonds—for fear they would be dragged down, too.” Just so this is clear, the Spanish government whose only source of funding is Spanish banks, just bailed out those same banks by taking on an additional $125 billion in debt. Problem solved? Global equity … [Read more...]
Greenspan: We Don’t Have a Plan B
Say what you will about former Fed Chairman Greenspan (yes he made lots of mistakes), but he strikes us as a much deeper thinker than the current gentleman who chairs the Federal Reserve. Mr. Greenspan tends to acknowledge the flaws of interventionist fiscal and monetary policy and at least in these videos he focuses on bigger picture structural issues. In contrast, Mr. Bernanke focuses on manipulating quarterly GDP statistics, at all costs, and misses the forest for the trees. Both videos are well worth a watching. … [Read more...]
Bond Yields Turn Negative
If you thought 25 basis point yields on two-year US Treasuries were bad, take a look at the yields on German Bunds. Two year German government bond yields are now negative. Investors (and rightfully panicked Greek and Spanish savers) are now paying for the right to lend Germany money. 30-year German government yields have also plummeted. Germany can borrow for 30-years at a rate of only 1.6%--a full percentage point less than the U.S. If you are looking for a return on your capital, the German bond market isn’t the place to invest. … [Read more...]
JP Morgan Proves Case against more Bank Regulation
Emboldened by JP Morgan’s $2 $3billion trading loss, proponents of the Volcker rule (provision in Dodd-Frank to restrict banks from making speculative investments) are calling for even tougher financial regulation. Treasury Secretary Geithner said of Morgan’s loss: “this failure of risk management is a powerful case for reform.” And in a letter to regulators, Senators Carl Levin and Jeff Merkley wrote: The massive failed bet by JPMorgan Chase provides a stark reminder why we desperately need your agencies to implement the Volcker Rule—a modern Glass-Steagall firewall that separates our core … [Read more...]
The Commodities Whale
In a recent IMF working paper, author Shaun K. Roache provides readers with some valuable insight on China’s role in world commodity markets. It is no secret that China is a whale in the commodities space, but Mr. Roache helps readers understand just how much of an outlier China’s commodities consumption is when compared to the historical record. The title of the paper is China’s Impact on World Commodity Markets. 2.1. Long-term structural trends China is a large consumer of a broad range of primary commodities. As a percent of global production, China’s consumption during 2010 accounted … [Read more...]
Stocks for the Long-Run
Jeremy Siegel, the famous Wharton School finance professor coined the phrase “stocks for the long-run” with his identically titled 1994 best seller, Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-term Investment Strategies. In the book, professor Siegel looks back at up to two centuries of financial market history to support his claim that stocks are the most profitable long-term investments. And indeed his conclusion has been true. But the good professor failed to adequately warn investors that the long run can be a really long time. Check out my stock … [Read more...]
Income Investors Beware: This Asset Class is a Guaranteed Loser
Yesterday, Bloomberg reported that the U.S. Treasury sold $24 billion of 10-year notes at a record low auction yield. The bonds were sold at a yield of 1.85% which is lower than the 1.9% yield on 10-year notes sold in January. What investor would willingly lend the federal government money for ten years at a 1.85% interest rate? Aren’t these folks aware that this is the same federal government that has racked up trillion dollar deficits for three consecutive years and promises at least one more year of the same? On a fundamental basis, long treasury bonds are one of the world’s most … [Read more...]
The Quarterly Earnings Con Job
Is it just me or has the quarterly earnings season become nauseating? At Young Research we try to spend as little time as possible scrutinizing the short-term results of the companies we follow for Intelligence Report and Global Investment Strategy. But the quarterly earnings headlines are unavoidable in the Wall Street Journal and other financial publications. The chief focus of the media seems to be on quarterly earnings surprises—whether or not a company beat the consensus earnings per share estimate. Companies that beat estimates often see their shares rise and those that miss see their … [Read more...]
Fear and Greed: Read the Market like Warren Buffet
If you tune into to CNBC regularly, you’ve likely come across a segment where the commentators are talking about the VIX Index. You may have wondered what the significance of the VIX was and what its implications are for your portfolio. The VIX isn’t like the Dow Jones or the S&P 500—it doesn’t track the movement of stock prices. The VIX is a measure of risk. Some call it the “fear gauge.” According to the Chicago Board of Options Exchange, the organization that publishes the index, the VIX is a “key measure of market expectations of near-term volatility conveyed by S&P 500 stock … [Read more...]
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