Federal Reserve Moves Sensationalized and Twisted by Blogosphere Paparazzi

The actions of the Federal Reserve may be a symbol for everything that’s wrong with American business and ethics. However, sometimes the ‘paparazzi’ go too far and vilify the Fed unjustly … at the cost of Mom and Pop investors.

Before we talk about the blogosphere paparazzi, allow me to set one thing straight: I don’d like the Federal Reserve and I’m not sticking up for the Federal Reserve.

The Federal Reserve is an institution set up by bankers for bankers, an insurance company for the bankster mafia.

However, an analyst, reporter, journalist, or blogger should be driven by facts, not personal biases or dislikes. Just because an institution has a closet ‘packed with skeletons’ doesn’t give us the right to invent misleading information.

It’s no secret that the Federal Reserve has been pumping money in the market, sending indexes like the S&P 500 and Dow Jones to never before seen highs; in the process enriching the very banksters that caused the worst financial collapse since the Great Depression.

The Federal Reserve is the deserving scapegoat for many wrongs committed on Wall Street.

But publishing sensationalized and misleading reports just for the sake of capturing attention is bad for investors. How so?

Just recently, a very popular blog stated that “QEternity may have to be increased by 50% in the coming year.”

This claim was based on a tweet by the president of the Chicago Federal Reserve, Charles Evans (see original tweet below):

According to Evans’ tweet, the Fed may need to purchase $1.5 trillion in assets until January.

How Does $1.5 T Compare to Current Asset Purchase Pace?

Based on the assumption that the Fed is buying $85 billion worth of bonds per month ($1.02 trillion/year), we can see where the 50% increase claim is coming from.

However, the haphazard calculation overlooks the fact that the Federal Reserve is ALREADY spending an additional $25 billion per month on reinvestment of maturing bonds. Is that what Charles Evans may have meant?

Mortal humans just don’t have the ability to decode the enigma-like messages of Federal Reserve personnel, but based on the numbers in Evans’s statement it could mean that asset purchases will continue at the same pace or that asset purchases may only increase 26% – $85 b x 14 (November 2013 – January 2014) compared to $1.5 trillion.

This conclusion is less sensationalistic, but it won’t persuade investors to buy into the S&P 500 or Dow Jones just because the Fed may beef up asset purchases.

It’s not necessary to ‘enhance’ Federal Reserve news to make them more interesting. The Federal Reserve is quite capable of making fools of themselves without anyone else’s help.

For example, an official 2012 Federal Reserve study (posted on the Federal Reserve NY website) revealed that the Fed’s FOMC meetings drove the S&P 500 55% above fair value and that the S&P 500 (NYSEArca: SPY) would be flat since 1994 if it wasn’t for the Fed (click here for report: Federal Reserve Study: FOMC Drove S&P 500 55% Above fair value).

In direct conflict with the above study, a recent official report by the Federal Reserve of San Francisco claims that the Fed’s QE barely affected stocks and the economy (click here for report: Federal Reserve Reflects Responsibilty for Stock Market Overvaluation)

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. We are accountable for our work, because we track every recommendation (see track record below).

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Advertisements

Most Important Number in Finance is Slipping Out of the Fed’s Control

The Federal Reserve is the most powerful financial institution in the world and yet it is like the emperor without clothes. Ironically, the very force the Federal Reserve is most afraid of may be the only thing to save the Treasury.

Mirror mirror on the wall, what is the most powerful financial institution of them all?

The S&P 500, Dow Jones and pretty much all other markets seem to dance to the tune of the QE rhythm … and yet the Federal Reserve resembles the vain king portrayed in Christian Andersen’s “The Emperor’s New Clothes.” How so?

Rogue Interest Rates

The chart below shows the Federal Reserve’s monetary base sandwiched by the S&P 500 (SNP: ^GSCP) and the inverted 10-year Treasury Yield (Chicago Options: ^TNX).

The purpose of the chart is to show QE’s effect (or lack thereof) on stocks (represented by the S&P 500) and bonds (represented by the 10-year Treasury yield).

The 10-year Treasury yield has been inverted to express the correlation better.

I’ll leave the big picture interpretation of the chart up to the reader, but I have to address the elephant in the room.

Since the Federal Reserve stepped up its bond buying in January, the 10-year yield hasn’t responded as it ‘should’ and that’s very odd (the chart below shows the actual 10-year yield performance along with forecasts provided by the Profit Radar Report).

As of December 5, 2013, the Federal Reserve literally owns 12% of all U.S. Treasury securities and by some estimates 30% of 10-year Treasuries.

Icahn More Powerful Than Fed?

The Federal Reserve basically keeps jumping into the Treasury liquidity pool without even making a splash. If Carl Icahn can allegedly drive up Apple shares (with a 0.5% stake), why can’t the Fed manipulate interest rates at will?  This is just one of the many phenomena that makes investing interesting and keeps the financial media in business.

Conclusion

We do know why the Fed wants low interest rates. Rising yields translate into higher mortgage rates, and a drag on real estate prices. Eventually higher yields make Treasury Bonds (NYSEArca: IEF) a more attractive investment compared to the S&P 500 (NYSEArca: SPY) and stocks in general.

Ironically, what the Fed is trying to avoid (higher yields) may be the only force to save the U.S. Treasury. How can the Federal Reserve ever unload its ginormous Treasury position without the help of rising interest rates?

The emperor without clothes maintained his dignity (at least in his mind) as long as everyone pretended to admire his imaginary outfit. Perhaps a market wide realization that the Federal Reserve isn’t as powerful as it seems may ‘undress the scam.’

Regardless, the Fed’s exit from bonds would likely be at the expense of stocks, a market the Federal Reserve has been able to manipulate more effectively than bonds.

The Federal Reserve owns 12 – 30% of the U.S. Treasury market, but how much of the U.S. stock market has the Federal Reserve financed?

This stunning thought is explored here: Federal Reserve ‘Financed’ XX% of all U.S. Stock Purchases

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. We are accountable for our work, because we track every recommendation (see track record below).

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Most Important Number in Finance is Slipping Out of the Fed’s Control

The Federal Reserve is the most powerful financial institution in the world and yet it is like the emperor without clothes. Ironically, the very force the Federal Reserve is most afraid of may be the only thing to save the Treasury.

Mirror mirror on the wall, what is the most powerful financial institution of them all?

The S&P 500, Dow Jones and pretty much all other markets seem to dance to the tune of the QE rhythm … and yet the Federal Reserve resembles the vain king portrayed in Christian Andersen’s “The Emperor’s New Clothes.” How so?

Rogue Interest Rates

The chart below shows the Federal Reserve’s monetary base sandwiched by the S&P 500 and the inverted 10-year Treasury Yield (Chicago Options: ^TNX).

The purpose of the chart is to show QE’s effect (or lack thereof) on stocks (represented by the S&P 500) and bonds (represented by the 10-year Treasury yield).

The 10-year Treasury yield has been inverted to express the correlation better.

I’ll leave the big picture interpretation of the chart up to the reader, but I have to address the elephant in the room.

Since the Federal Reserve stepped up its bond buying in January, the 10-year yield hasn’t responded as it ‘should’ and that’s very odd (the chart below shows the actual 10-year yield performance along with forecasts provided by the Profit Radar Report).

As of December 5, 2013, the Federal Reserve literally owns 12% of all U.S. Treasury securities and by some estimates 30% of 10-year Treasuries.

Icahn More Powerful Than Fed?

The Federal Reserve basically keeps jumping into the Treasury liquidity pool without even making a splash. If Carl Icahn can allegedly drive up Apple shares (with a 0.5% stake), why can’t the Fed manipulate interest rates at will?  This is just one of the many phenomena that makes investing interesting and keeps the financial media in business.

Conclusion

We do know why the Fed wants low interest rates. Rising yields translate into higher mortgage rates, and a drag on real estate prices. Eventually higher yields make Treasury Bonds (NYSEArca: IEF) a more attractive investment compared to the S&P 500 (NYSEArca: SPY) and stocks in general.

Ironically, what the Fed is trying to avoid (higher yields) may be the only force to save the U.S. Treasury. How can the Federal Reserve ever unload its ginormous Treasury position without the help of rising interest rates?

The emperor without clothes maintained his dignity (at least in his mind) as long as everyone pretended to admire his imaginary outfit. Perhaps a market wide realization that the Federal Reserve isn’t as powerful as it seems may ‘undress the scam.’

Regardless, the Fed’s exit from bonds would likely be at the expense of stocks, a market the Federal Reserve has been able to manipulate more effectively than bonds.

The Federal Reserve owns 12 – 30% of the U.S. Treasury market, but how much of the U.S. stock market has the Federal Reserve financed?

This stunning thought is explored here: Federal Reserve ‘Financed’ XX% of all U.S. Stock Purchases

Simon Maierhofer is the publisher of the Profit Radar ReportThe Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. We are accountable for our work, because we track every recommendation (see track record below).

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Media Hides Behind Biggest Phenomenon in Financial Markets

Ben Bernanke is not only Wall Street’s best friend. The media, in particularly the financial media, loves him too (although begrudgingly). One Bernanke-made phenomenon assures that certain reporters never run out of ink to spill.

Ben Bernanke and his inkjets have generously supplied the financial media with a never-ending and convenient, one size fits all supply of hindsight explanations, a herd of virtual scapegoats.

It’s the good news = good news / bad news = good news phenomenon.

Bad economic news is good for the S&P 500 (SNP: ^GSPC) because it will force the Fed to print and pump.

Good economic news is good for the S&P 500 because it means business is actually improving.

The media’s cookie cutter hindsight interpretation of the S&P 500 (NYSEArca: SPY) or any other major market index looks something like that when economic news is good and stocks are up (such as on Thursday):

“S&P 500 closes higher as jobless claims fall” or
“Dow Jones closes above 16,000 on jobless claims”

It looks something like this if the economic news is bad and stocks are up:

“Bad economic data fuels hope of continued asset purchases” or
“Jump in jobless claims cools fears of taper”

Don’t readers deserve better than this intelligence insulting commentary junk food?

Stop Milking the Scapegoat

I don’t claim to have all the answers, but I believe readers deserve a well-researched, ‘home-cooked’ analysis of what’s going on. Actually, let me rephrase this: A well-researched analysis on what went on and what likely will go on.

Here’s a simple example. The two S&P 500 charts below were featured in the November 20 Profit Radar Report update and provide a short and long-term look at the S&P 500.

It shows that the S&P 500 closed above long-term trend channel support and key short-term support on Wednesday. This is net bullish and should lead to marginal new highs as long as the S&P 500 stays above key support (forgive me for reserving the exact stop-loss level for the eyes of subscribers to the Profit Radar Report).

Additionally, the November 17 Profit Radar Report update provided a specific up side target for this rally. Since the structure of the Dow Jones (NYSEArca: DIA) is the cleanest, the up side target is based on the Dow Jones.

You actually don’t have to be a subscriber to get access to the Dow Jones up side target. It is provided for free right here:

Forget Dow 16,000 – Here’s the Real ‘Bubble Popper’

Of course, the problem with sticking your head out the window and making actionable predictions is that I might be wrong (which has happened and will happen again).

Fortunately, I’ve found that readers that appreciate the effort it takes crafting actionable market analysis understand that no one has a crystal ball.

My analysis, including forecasts and actionable recommendations for all major asset classes is available via the Profit Radar Report.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report uses technical analysis, dozens of investor sentiment gauges, seasonal patterns and a healthy portion of common sense to spot low-risk, high probability trades (see track record below).

Federal Reserve ‘Financed’ 17% of all U.S. Stock Purchases

At one point or another over the last few years we’ve all heard about the bursting Federal Reserve Balance sheet (it’s still growing by the way). However, how big is the Fed’s balance sheet in correlation to the total U.S. stock market? It’s big!

A billion used to be a big number, but ‘billions’ today are outdated like Myspace.

Today we (and with ‘we’ I mean the Federal Reserve) talk in trillions.

The Federal Reserve’s balance sheet is about $3.7 trillion. As recently as July 2008 the Fed’s balance sheet was below $900 billion.

Since then the Fed embarked on a little shopping spree (about $3 trillion worth). As it turns out, when the Fed goes shopping, Wall Street goes shopping.

According to the World Bank, the total market capitalization of the U.S. stock market in 2012 was $18.67 trillion (2013 estimate around $21.4 trillion).

Based on preliminary 2013 figures, the Federal Reserve’s balance sheet could have bought 17% of all U.S. traded stocks.

The chart below provides a visual as it plots the total annual U.S. stock market capitalization against the S&P 500. According to Standard & Poor’s, there is over $5.14 trillion benchmarked to the S&P 500 index (NYSEArca: SPY).

We know that the Federal Reserve doesn’t directly buy equities (other central banks do), but it may as well have.

The Federal Reserve is pumping about $85 billion of fresh money (about $110 billion total since maturing funds are reinvested) into the ‘economy.’

‘Economy’ sounds better than big banks and financial institutions (the Fed calls them primary dealers, there are 21 such primary dealers, most of them U.S.-based), but that’s where the money is going.

Big banks on the other hand turn around and buy stocks and ETFs – which may include Financial Select Sector SPDR (NYSEArca: XLF), or SPDR S&P Bank ETF (NYSEArca: KBE), and of course Twitter, LinkedIn and Facebook (not Myspace).

Aha Moment

We’ve all heard how big the Federal Reserve’s balance sheet is before and have gotten used to (and desensitized) to the number.

However, when viewed in comparison to the total market capitalization of all U.S. traded stocks, it becomes obvious just how big a player the Federal Reserve really is.

If you – like me – are fascinated with large numbers, you’ll like this little piece of trivia:

Is it possible to put a price tag on all the assets held in the entire United States of America? Yes it is. In fact, we’ve done this right here (based on Federal Reserve data): How Much is The Entire United States of America Worth?

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE Newsletter.

‘Lazy Money’ – The Biggest Bear Market You’re Not Hearing About

Money isn’t created equal, just as economic growth isn’t created equal. There’s real organic growth and there’s artificial growth. The same is true for money. Although the system is flush with money, it’s lazy money.

What is ‘lazy money?’

Lazy money doesn’t move. It keeps to itself and doesn’t spread the love. Lazy money is like a couch potato, it plops itself down and stays down.

Today’s U.S. money supply is lazy, it has no motility or (to use Wall Street jargon) velocity.

What is money velocity?

The velocity of money is the frequency at which one unit of currency is used to purchase domestically produced goods and services within a given time period.

In simple terms, money velocity measures how often one dollar is used to buy goods and services. Decreasing money velocity means that there are fewer transactions between individuals in an economy.

Lower money velocity means that each dollar is touching fewer lives. To illustrate:

A dollar earned by an employee, spent in a restaurant, paid in wages to a waiter, who uses it to buy an iPod does more for the economy than a bailout dollar given to banks (NYSEArca: KBE), where it’s kept as a stagnant number on the balance sheet or dumped into stocks (NYSEArca: VTI).

What’s the velocity of money right now or how lazy is the dollar?

The chart below plots the S&P 500 against velocity of M2 money stock. M2 velocity data goes back to 1959, so does the chart.

The S&P 500 ETF (NYSEArca: SPY) is obviously at an all-time high, but M2 Money velocity has been in a bear market since 1998 and has never been lower.

Here’s my theory. The Federal Reserve prints money and gives it to select financial institutions (NYSEArca: XLF), which park it in stocks and reap fat returns. Banks no longer need to lend. The stock market is where money goes to grow and velocity goes to die.

The conclusion is one you’ve heard before: QE benefits stocks more than the real economy and Fed-printed money isn’t benefiting the economy as much as ‘organic’ money.

If you were to liken the different ‘types of money’ to food; QE money would be considered junk food. Wasn’t there a documentary (Super Size Me) that showed what a diet of junk food does to a human body?

Bernanke likes Wall Street Fat Cats and we won’t have to deal with artery-clogging side effects of the QE junk diet. This will be up to Janet Yellen, Bernanke’s successor to be.

Based on the market’s reaction, investors believe that Janet Yellen will continue Bernanke’s legacy of QE junk food (there are even rumors she’ll super size the banks’ portion).

President Obama went out of his way to praise his nominee’s financial acumen.

In fact, best case scenario the President spread his praise on too thick, worst case scenario he flat out lied about Yellen’s ability.

You can read the glaring conflict between fact and the President’s misleading praise right here: Did Obama Lie About Yellen?

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE Newsletter.

 

The Most Important Number in Finance is Falling … For Now

What’s the most important number in the financial world? You could ask Congress … but of course they couldn’t agree on it. The most important number in finance pulls almost every financial market in its wake. One more hint: The Federal Reserve (thinks it) is in control of it.

What is the most important number in finance?

GDP, unemployment rate, consumer confidence, or CPI?

The most important number in finance is the 10-year US Treasury Yield (Chicago Options: ^TNX).

When this number changes, almost every other number in finance changes.

The 10-year yield nearly doubled since May. The 7-10 Year Treasury Bond ETF (NYSEArca: IEF) dropped as much as 10%, a huge move for Treasury Bonds. The iShares Barclays 20+ Treasury Bond (NYSEArca: TLT) fell as much as 16%.

With rising yields came higher mortgage rates. But it doesn’t stop there. The yield rally also stifled stocks’ performance in two ways:

1) Low interest rates make bonds less attractive to investors and force them to move into stocks (NYSEArca: VTI). Bernanke calls this much-desired side effect the ‘wealth effect’ (although it robs retirees of their income).

2) Rising interest rates cause higher loan rates for businesses. This puts a squeeze on the profit margin and ultimately the stock price.

Yes, the 10-year yield is arguably the most important number in finance and therefore the chief target of Bernanke’s QE programs. The Federal Reserve buys its own Treasury bonds in an attempt to drive interest rates lower.

In the financial heist game it’s called an inside job.

Ironic QE Revenge

Ironically for much of 2013, the 10-year yield has been revolting against its puppet master (the Fed). The almost unprecedented 2013 yield rally is the opposite of the Fed’s objective.

The chart below plots the S&P 500 against the 10-year Treasury Yield.

1) The green box highlights the unwanted, unexpected and unprecedented yield rally.

2) The solid red lines marks yield resistance mentioned by the September 8 Profit Radar Report: “Yields have been rising dramatically, but may be at or near a top (at least a temporary one). As long as yields stay below 3%, odds are starting to favor falling yields and rising Treasury prices.”

Yields tumbled as much as 12% since.

3) The dashed red line shows what the S&P 500 (NYSEArca: SPY) has done since the meteoric yield rally: The S&P 500 is essentially flat and has been range bound since May. Apparently QE money is still finding its way into stocks, but rising yields prevented further gains for stocks.

4) A closer look at the correlation shows that rising yields are not always bad for stocks and shouldn’t be used as a short-term indicator.

Yield Outlook

The long-term trend for the 10-year yields seems to have changed from down to up. Over the short-term, yield may drop a bit further to digest the recent rally.

As the U.S. politicians are ‘impressively’ demonstrating (debt ceiling battle), U.S. Treasuries are not without risk. Even if/once an agreement is hammered out, the long-term futures for Treasuries doesn’t look bright.

As mentioned earlier, the Federal Reserve is deliberately inflating Treasuries. At one point the much-feared taper will begin. Via a brilliant preemptive move – probably in an effort to deflect responsibility – the Federal Reserve has already warned of a market crash (not caused by the taper of course). More details about the Fed’s market crash warning can be found here:

Surprising Fed Study – Is it Warning of a Market Crash?

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE Newsletter.