Archive for October, 2014

QE has ended. The document was not as dovish as expected pointing at Labour market on track to achieve its. So hint at rates lower for longer.

The biggest change in the Fed statement is that the reference to significant underutilization in the labor market “has been downgraded,”.

It is interesting to note that the market recovered when Fed’s Bullard hinted to the fact that QE could end December not October. This did not happen and everyone is wary.

Also another wariness to take into account: does this means that the Fed ends also the Open Market Operations?

Risky times and currency movements.  As we digest the news it will take a bit of time to “filtrate the market. Potentially also because tomorrow the release of the US GDP will positive. So next week the real effects.

Funny enough, at the same time Alan Greenspan, one of the longest serving Fed Chairmans, was being interviewed. Notably he said that he thinks  it is not possible for FED to end its easing monetary policy trouble free.

Some research from UBS

The Fed will meet this week and determine the future of QE, UBS has analysed the likely rate policy globally and its implications for markets.

UBS believe that this focus on QE misses the point of modern central bank policy. In the post crisis world, central bank policy rests on three pillars: quantitative policy; regulatory policy; and interest rates (or monetary policy). Action in any one of these areas can constitute a tightening. Modern central bank policy has therefore become more sophisticated than it was under a straightforward interest rate regime. The macroeconomic conclusions of central bank policy being tightened may be the same whichever pillar is used, but the combination of policy options will make a difference to markets and to microeconomics.

UBS have found that judging the stimulus provided by quantitative policy is difficult, because the degree of stimulus depends not just on the supply of money from the central bank but also on the degree of liquidity preference that exists in the economy. The central bank balance sheet to GDP ratio is one proxy for the degree of central bank accommodation via quantitative policy – albeit a far from perfect proxy. This is because there is an assumption that the demand for liquidity in some way relates to the level of economic activity that is taking place.

On this measure the Bank of England is clearly tightening, and has been doing so since the end of the first quarter of 2013. The Federal Reserve’s balance sheet has essentially levelled as a share of GDP and should now start to decline (regardless of what the Federal Reserve undertakes to do this week, as the growth of nominal GDP should exceed the growth of the balance sheet). UBS therefore have a consistent tightening of Anglo-Saxon quantitative policy.

The Bank of Japan is at the other end of the spectrum, happily churning out money with little intention of scaling back the escalation of its balance sheet. Indeed, the balance of probability has to be that there is pressure to increase the speed with which quantitative policy is undertaken. Japan’s example provides a good illustration of the limits of the balance sheet to GDP ratio as an indicator of central bank accommodation, however, for a case can be made that liquidity preference has risen to absorb the additional provision of liquidity, in part or in whole.

The ECB’s quantitative policy is perhaps the most interesting, and the banking sector in the Euro area has clearly eschewed the liquidity that the ECB was offering in over the past couple of years. As a result the ECB’s balance sheet has fallen relative to the size of the economy. If this is a function of a weakening of liquidity preference, then the reduction in quantitative policy does not have to be perceived as a tightening of central bank policy in and of itself. However, the position of the ECB has clearly changed, with the intention to restore the nominal Euro level of the central bank balance sheet to its former heights, implying an expansion of roughly EUR1tn. The somewhat larger than expected asset backed purchases announced during the week reinforce the idea of quantitative (liquidity) policy accommodation. It is worth noting, however, that the quantitative policy to GDP ratio will not be completely restored to the dizzying heights of 2012, as nominal GDP is now slightly higher in the Euro area than it was at that point (and the intention is to restore the nominal Euro level of the ECB balance sheet, and not the balance sheet:GDP ratio).

The fact that central bank policy has more facets than interest rates alone clearly does not mean that monetary policy is irrelevant. Depending on the debt structure of an economy monetary policy can be extremely important as a means of controlling debtor’s income (for instance, where there is a floating mortgage interest rate structure). Interest rates will continue to represent the main means by which a central bank can affect the transfer of income between debtors and borrowers – though not the only means, as the section on regulation indicates.

The US Federal Reserve, the Bank of England and the Reserve Bank of Australia are all forecast to raise interest rates over the course of 2015. The Reserve Bank of New Zealand, indeed, has already raised rates. These rate changes will have a bearing on economic activity, and can be seen in the context of managing increases in the velocity of circulation of money and the history of quantitative policy. However, the tendency of markets to obsess on short term interest rates may, at least in the domestic context, be somewhat misguided given the range of policy options that central banks have at their disposal. It may not be possible to arbitrarily determine the terminal rate of Fed Funds or the UK base rate this cycle, for instance, unless one has some idea of how the Federal Reserve or Bank of England intends to approach regulatory and quantitative policy as well. A change in financial regulation could mitigate the need to raise policy interest rates, or indeed could mitigate the need to reduce the central bank balance sheet in absolute or relative terms.

UBS conclude that tightening central bank policy can, through varying the emphasis on the three pillars identified, target new or existing borrowers, short term or long term interest rates, the volume or the price of credit created. This offers a wider scope than just manipulating the short term cost of capital and attempting verbal intervention at the longer end of the yield curve. The combination of policies will produce generally common macroeconomic consequences in that they will accelerate or decelerate growth, and through adjusting aggregate demand will impact the prospects for inflation. Which micro parts of the economy are impacted by policy will vary according to the combination in which the policies are used. Central bank policy can no longer be reduced to a single line on a chart or a single forecast of policy rates. This means that investors need to think in more complex terms about central banks, and be prepared to live in more interesting times


US Mid Term Election – 2014

Posted: October 27, 2014 in Uncategorized

The 4 November there are the new Mid term election that set the scene for the 2016 “after Obama” Presidential election.

The focus of this election is the Senate. The House is already in solid hands of the Republican and now they will try to seize also the Senate.

If the Republican seize the Senate it will be a major issue for President Obama as both the House and the Senate will be against him – so the Republicans can put more pressure on President Obama’s .

Moreover a Senate win would give the Republican a series of important committees like Banking Committee and the oversight of the Federal Reserve activities.

Currently the poll give the Republican a 60% chances of winning, mostly due to the fact that a lot of Democrats do not vote in the Mid Term Elections.

Funny enough there is very little media coverage outside the US.

Markets, week of 27 October

Posted: October 27, 2014 in Uncategorized

Investors moved back into risk-on territory as strength in US earnings afforded global equities more breathing space. The biggest gains were scored in Japan (+5.5%) and the US (+4.1%). Australian markets climbed 2.6%.

With respect to the reporting catalyst, US corporate fundamentals continued to hold alongside a platform of improving margins and profitability, but sales growth is not there.

The market in effect had a new drug dose of Quantitative Easing when the US Fed, ECB and Bank of Japan.

If history make sense, this drug dose should run out next week, around the US Mid Term Election and have a period weakness/consolidation until mid- late  November.

Kobane, Syria, it looks more and more like Stalingrad for Hitler.

Hitler was within reach of Moscow and he’s obsession with Stalingrad really started the defeat of Nazi Germany (and not the commonly believed Allied Normandy invasion).

Kobani, could still fall or not.

But there are two issues. Kobani has nothing strategic to it. it is more of a moral victory or loss.

The diversion of weaponry meant the Syrian army made some serious advances in other sector and the concentration of men/weapon offered a concentration of targets to the Coalition forces. Also the use of such a force in other area would have been a major boost to IS.

So Kobani is the first serious Achilles heel of IS, showing that it can be defeated or at least reduced to just “another” terrorist threat.

As usual when arrogance takes hold, even terrorists make errors!

Australian Dollar forecast

Posted: October 22, 2014 in Uncategorized

The Australian Dollar stands now around -.88/ .87 US Dollar.

A few month ago was 94 cents and a year ago around $1.

Where it will be in the future?

In the short term (3 to 6 months) should stay around this area (84 cents to 90 cents).

But if history is of any guidance every time the US Dollar started show some strength as part of the US recovery, the US Dollar rallied approximately 35% against the AUD (much more than against other currency).

If this is indicative in the future we could see the AUD valued at .70/.75 USD

How this translate in the markets.

Well overseas exposure (or exposure to companies that have overseas earnings) becomes even more attractive.

The private air plane of the French CEO of energy giant Total crashed taking off from Moscow airport and the CEO Christophe de Margerie dies.

The French CEO is famous for wanting to de – dollarise the French oil transaction and, notwithstanding the US mandated sanctions, he continued the collaboration with Russia.

An accident, on which a criminal investigation has been opened.

And naturally it opens the door to conspiracy theories.

Instead for me it opens the memory of  the death, again in a private jet, of Enrico Mattei in 1962 – the CEO of the Italian energy giant ENI.

Mattei has been heralded as a great Italian functionary and was challenging the dominance of the US oil 7 sisters in the world.

The following is not a conspiracy theory but  what happened in Italy in 1962 as seen by the Italian Court of Law

In 1967 a first inquiry judged the event an accident.

In 1994  the inquiry reopened due a turncoat Mafia killer, Mr. Gaetano Ianni.

At the end of the inquest, 1998, the Italian Court of Law proved that it was an act of terrorism ( a limited charge behind the cockpit).

The kill was requested by the American Cosa Nostra (Napolean Mafia) as Enrico Mattei was damaging US interests in the Middle East.

The following CEO Egidio Egidi, in 1963 changed the entire strategy of ENI with the decision to eliminate the research department of ENI and buy oil from the Americans.

And that is HISTORY.

Apple posted a great result for Q1-2014

  • revenue between $63.5 billion and $66.5 billion, Est. $63.5 billion
  • gross margin between 37.5 percent and 38.5 percent, Est. 38%.
  • operating expenses between $5.4 billion and $5.5 billion
  • other income/(expense) of $325 million
  • tax rate of 26.5 percen


Interesting fact ….the buyback this year have been over USD 45 billion (double the over USD22 billion in 2013) which helped to recover from  the start of the year stock price slump (and part of thereal causes of the  great rally of 2014 – highest buyback level since 2007 till June 2014 ).

Interesting the short-term market investment (so shares) were USD24.8 billion  the 30 June 2014 and USD11.2 billion the 1 September, lowest since 2008 pre Lehman.

Who says market timing cannot be achieved?

What a wild ride this October. As the Fed will meet the 28/29 October it has the potential not to be finished yet.

The markets made a comeback, but we are not at safety levels yet.

If you look back you find the issue with this market.

The market was expecting the FED to taper the Quantitative Easing and the European Central Bank to help fill the void.

Due to the German opposition this did not happen and the market crashed.

Then last week the Federal Reserve, Bank of Japan and Central European Bank hinted at possible intervention and the market started rallying again.

As I always say like a drug addict.

The issue with drug addicts is that, unless they get off the drugs, they die.

The various Reserve Banks cannot expand their balance sheet forever and intervene forever.

They will have to stop soon or later.

The idea is that the politicians make enough changes to make the economy good enough to take away the addiction.

Until now that second part has failed.

As a drug addicted pension, as soon as Bullard (one of the most influential person in the FED) mentioned that QE could (COULD) be extended the market recovered the losses as you can see from the graph.


The indexes during this week actually touched the targets intraday (Dow under 16,000 and SP touching 1,820).

The next meeting of the FED is the 28/29 October. Chairman Yellen always said it would take a lot to move the FED from its pace…but we will see if she has the guts.

Graphically the last day is insignificant as the market had to recover as it was oversold and outside the Bollinger bands…so the automatic algorithm based software started buying.

So there is no clear trend at this point.

I still see more probable a low of Dow 5,350/5,500 – SP 1820 – 1755 as a concluding move by Mid- November. But there is no clear trend.

Again this would be a perfect moment for a terrorist attack or a Putin’s revenge

Well finally we are in the killing zone. I was preparing my clients since July.

So what is now? The issue of Quantitative Easing ending or, better said, the Fed is running out of tools for the economy – while the politicians have not done their bit since 2009?

Whateever it is (I wrote at length about this issues the entire year. Let’s make some forecast.

A big warning; I came up with this forecast in August as some readers know. They are intact unless a black swan event hits (the four main visible issues are: liquidity issue in the high yield bond, Turkey/Syria, Ebola, Baghdad in a major battle (hard to see it fall as there are a lot Iranian trained Shia private armies, anything weird coming out of China) or a Putin’s revenge).

The US market has a minimum target of SP 1,820, which on momentum could be broken to area 1,750 (and this is my baseline)

If something happens in this area we can see in a flash  SPX1,600 (the base of this rally) but I think not

This badness should exhaust by mid November after the US Mid Term Election.

By the year end we should be back around 1,950 until early January.

I can’t really see beyond this points – but we could be in for a strange 2015 ( a long going nowhere scenario or a crash).

If a Black Swan Event appears at the most weak – the gates of hell will open and we go back to 2008 scenario as all the issues hidden in the market will come to light and devastate the economy for a long time – but it will not happen, hopefully