Forget the September ’15 Fed Tightening – There Has Been a
Stealth Tightening Since September of ’14!
The Econtrarian September 2, 2015 (Closing Thoughts)
The Fed’s creation of thin-air credit likely financed,
directly or indirectly, increased purchases of riskier financial assets, which, in turn, boosted the prices of these riskier assets.
If so, then the Fed’s cessation of securities purchases and contraction in its contribution to thin-air credit would reduce the
demand for riskier assets, which would have an adverse effect on their prices. So, why did I wait until now, after the recent
swoon in the stock market, to tell you that the Fed’s cessation of QE would have an adverse effect on the stock market? Well,
truth be told, I did alert you to this probability back on November 17, 2014, in a commentary entitled “2015 Is Shaping Up
to Be a ‘Turkey’ of a Year for the U.S. Economy and Stock Market” {read now}.http://www.lptrust.com/wp-lptrust/uploads/2014/12/Paul-Kasriel-Commentary-Nov-19-2014.pdf
But the truth also be told, I had no idea that a stock market swoon would occur in August 2015. In fact, I had no idea a stock
market swoon would occur at any time in 2015. But it did appear to me back in November 2014 that thin-air credit growth
was likely to decelerate sharply in 2015 compared to 2014. And that a sharp deceleration in thin-air credit growth would
have adverse effects on nominal aggregate demand and the value of risk assets. The adverse effect on the value of risk assets
appears to be upon us. Of course, the collapse of the Chinese stock market has played a large role in the decline in prices
of U.S. risk assets, perhaps a larger role than the sharp deceleration in U.S. thin-air credit. Weather-adjusted, U.S. aggregate
demand has held up relatively well. I suspect that will change in the fourth quarter of this year.
In the face of very low goods/services price inflation and weak wage growth, the recent U.S. stock market rout is likely to
postpone the previously-anticipated September 2015 Fed rate hike. It is too early to expect QE4. But the Fed certainly has
the leeway to restart securities purchases if need be. In other words, take some comfort in a Yellen put. n
The Econtrarian
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Forget the Sept. ’15 Fed Tightening – There Has Been a Stealth Tightening Since Sept. ’14!
Paul L. Kasriel Senior Economic and Investment Advisor Econtrarian, LLC
http://www.lptrust.com/wp-lptrust/uploads/2015/09/Paul-Kasriel-Commentary-September-2-2015.pdf
http://www.lptrust.com/people/paul-l-kasriel/

Examining this flag reveals consistent higher lows...finger crossed. As Martha Stewart always says, "This is a good thing."

FYI: Below we show the odds of a September Fed Funds hike dating back to the start of the year. The chart shows the odds of a move from either 14 or 15 bps Fed Funds effective (0-25 bps range) to 39 or 40 bps Fed Funds effective (25-50 bps range).
Regards,
Ted
https://www.bespokepremium.com/think-big-blog/rate-hike-odds-still-looking-unlikely/

FYI: Heading into August, the S&P 500 had traded in a tight range between 2,050 and 2,125 over the prior six months. After completely breaking down below that range, the index has formed a very clear “flag” pattern. Check it out in the chart of the S&P below. These flag patterns often result in a big move in either direction, and as you can see below, we’re at the end of the flag right now heading into the FOMC announcement on Thursday
Regards,
Ted
https://www.bespokepremium.com/think-big-blog/sp-500-flagging/

I'm looking at this strategy backwards.
If I were 11+ years away from retirement I would hold only bucket three, but add NAESX to the portfolio. Percentages could be adjusted in bucket three to make it more or less aggressive depending on individuals age and risk tolerance.
When 3-11 years away from retirement hold buckets 2 & 3. Again, phase into this bucket 2 over the 8 years by using profits raised from bucket 3 or from new investment contributions.
When you are 1-2 years away from retirement be sure to raise enough cash to create bucket 1 by reallocating from buckets 2 & 3. Continue reallocating into bucket one from buckets 2 & 3 throughout retirement for distribution needs and during periods of bucket out performance.
I actually like the idea of creating a mechanism that funds bucket one throughout the entire investment time frame by taking profits during periods of market out performance. Always nice to have some dry powder for emergencies, buying opportunities, or to reduce portfolio volatility.

Now that is really a hatchet job. - "hype", like beauty is in the eye of the beholder..
Were someone so inclined, they could cherry pick anecdotes of equity promoters too. -- The 1st one that comes to mind is James Glassman's 1999 tome "Dow 36,000". Still waiting for that one... Or that equity analysts are generally "optimists" by nature and have a consequent bias for over-estimating forward stock prices.
How is that not "hype"?
Further, the legacy broker and fund-distribution racket -- clipping ~ 1.5% of one's portfolio value annually or clipping 5% on broker-sold fund vehicles (and residual commissions thereafter) is much more ubiquitous & sinister than folks buying some Eagles, Maple Leafs etc.

PIMIX / PONDX is doing very well so far this year. Their good picks are clearly compensating for the bad ones. The Petrobras bet hasn't worked out in the short term, but it still might within the next few years. They got bonds paying almost 9% from a company with huge oil reserves and a sovereign standing behind them. Of course no one wants the oil now, and that sovereign is in bad shape, but that could change in a couple of years (especially the oil part.) I personally think the odds are good (though less than 100%) that Petrobras won't default and they'll keep clipping those 9% coupons until they decide to move into something else.
Anyway, you make a bunch of bets on 9% bonds, most work out, a few don't, and you've got a nice return for a bond fund.
I don't own PIMIX, because I don't want any excitement in my bond fund, but those guys ain't dumb and have done well for their investors.

FYI: Before you buy into gold, consider the track record of those behind the hype.
Regards,
Ted
http://fundreference.com/articles/2015/1000693/truth-about-gold-bugs/

FYI: Geared toward retirees with shorter time horizons, this portfolio includes a heavy stake in bonds and cash.
Regards,
Ted
http://news.morningstar.com/articlenet/article.aspx?id=714280

It's not just the 100y bonds; Pimco has quite a bit of P'bras of various issues across the board in their credit FI funds and cef's. And they've also got Gazprom almost everywhere you look ... just don't get it.

To hank's concern - since mutual funds trade on a daily basis, one can't beat fees by trading a few minutes or a couple of hours earlier in the day. The fees would be imposed on all trades for that day, because all trades execute at close of market.
To scott's concern - each situation is different. People long believed that the Chinese government was inflating its market. The market had been up 150% in the trailing twelve months before coming back to earth. Even now, the Shanghai is barely down YTD (-2.3%), and up 36% over the past twelve months. People "panicked" on the upside as well.
So that drop in prices seems to have been at least somewhat justified by fundamentals - something the Chinese government finally failed to paper over. The Chinese government exacerbates the situation with ham handed attempts to prop up stock prices.
In contrast, the 1933 bank holiday did not increase panic, but ameliorated it. It gave the public time to cool down, and time for the US government to take actions that, in contrast to the Chinese actions, served to build confidence. Each situation is different.
More generally, this is not a proposal to shut down daily buying/selling of mutual funds, but to give funds the option of imposing redemption fees when trading costs spike. The redemption fees are not going into the management company's pockets. These are not management fees. They are not going into the pockets of salespeople. They are not commissions. No one is getting ripped off; people are paying for the costs they are imposing on the other investors (in excess of redemption costs in quiescent times).
I agree with the observation that the proposal as described creates uncertainty in whether the redemption fees will be applied on a particular day. Which is why I suggested greater transparency - base the decision to apply the fees on visible market data rather than opaque fund cash flows. Greater transparency = less panic.

Scott said: "Seriously, who's buying 100 year bonds of anything these days, especially a company that has been an incredible mess for a while now."
Yep - Sounds insane. ... I suspect perhaps insurance companies and some pension funds might find 100-year bonds of use in managing their long-term obligations and risks.
Also, possibly a hedging tool for some bond fund managers in extremely limited amounts (I'm thinking of something like 1% of total portfolio.)
To me, the 100-year bond sounds more like a derivative instrument than a real bond. Its risk/rewards are highly dependent on a whole host of unknowns.

"Guys, we have a new 100-year issuance from Petrobras."
"Isn't that company in trouble as part of the country's larger political scandal?"
"Yeah, but they're issuing a ONE HUNDRED YEAR bond! That MUST mean they're okay!"
"Oooh, okay, lets buy a s-ton!"
Cut to a few months later....
"Hey, why did Brazil just get downgraded to junk? Gee, is that bad for the 100-year Petrobras bonds we bought?"
Seriously, who's buying 100 year bonds of anything these days, especially a company that has been an incredible mess for a while now.

FYI: When Petroleo Brasileiro SA sold 100-year bonds in June, the move was largely seen as a sign the corruption-tainted oil producer had put the worst of its problems behind it.
For investors like Pacific Investment Management Co., Fidelity Management & Research Co. and Capital Group Inc. -- the three biggest holders of the securities -- that turned out to be a costly miscalculation. Since the $2.5 billion offering, the bonds have tumbled 15 percent. That’s four times the average loss for emerging-market company debt.
Regards,
Ted
http://www.bloomberg.com/news/articles/2015-09-14/pimco-fidelity-stung-by-collapse-of-petrobras-s-100-year-bond?cmpid=yhoo

The article implies that funds currently can only impose redemption fees for limited holding periods: "Unlike redemption fees, which are imposed on investors who trade frequently ..."
That's not exactly the case. Vanguard used to impose redemption and purchase fees on VEIEX for all transactions, regardless of how long you held your shares. Vanguard clearly said that it did this because: "Funds incur trading costs when they invest new cash or sell securities to meet redemption requests; these costs run higher for funds that invest in small-company or international stocks. "
2003 Vanguard Prospectus:
Sounds like what Blackrock says (in the article) it is currently doing with swing prices in Europe: "shifting trading costs to exiting investors". Seems fair - you pay for what you use. It's not saying that small trades are influencing the trading costs per share; it's saying that everyone should pay whatever their trades cost at the time - more when the costs are high, and less when the costs are low. No special treatment for investors, large or small.
There are already other rules ("circuit breakers") in place to tamp down volatility. Those rules affect everyone, not just the institutional traders. So from the perspective of managing runs on the market, the proposed rule doesn't seem to be that radical.
What is novel is the idea that the fee could be dependent not on the market volatility, but on the net cash flow of the individual fund. If there were tons of redemptions but also tons of matching purchases, it sounds like the fund would not impose redemption fees.
IMHO that should be eliminated. This would cause even more confusion than the article suggests. And it wouldn't achieve an intended effect of reducing volatility, since people wouldn't know for sure that trades on a given day would cost them more.
Instead, the fees could be triggered simply on market volatility - something people can see when they put in their orders. If the fund makes a profit (because cash flows balanced at the end of the day and it incurred lower net trading costs), then the excess fees would flow back into the fund, just as redemption fees do under current regulations.

Makes no sense. Can't make up stuff. Some mutual funds have long lock in periods like 1 year I believe for MXXVX. Fund company welcome to do that by clearly mentioning in prospectus.
Earthquake in San Francisco...I cannot sell my mutual fund without redemption? Who are we helping here? All such rules will do is prevent mom and pop from selling their funds while high net worth investors will cash out. Even if those pay the redemption fees, they will not feel it much and it is THEY who move the markets, not mom and pop investors.
SEC always seemed like a "captured" organization, but now I think they have too much time on their hands.

FYI: Mutual funds may be able to charge their investors who rush to cash out during periods of market stress under a rule being considered by the Securities and Exchange Commission.
Regards,
Ted
http://www.investmentnews.com/article/20150912/FREE/150919960?template=printart

@VintageFreak said

Who cares about the investors in our funds? ...sorry, scratch that, just thinking aloud

No, don't scratch that question; no apologies necessary. It is precisely at these turning points when we need to start to scrutinize just what is going down, because we now have a 10 yr. list, that continues to grow, of formerly up-and-coming MF companies, smallish, tightly-focused, with very good results, that have stalled, become mundane, and in some cases have driven themselves into the ditch. And what do most of them have in common? Either they (1) consented to be acquired by a larger player, or (2) went public with an IPO. And then sooner (1-3 yrs) or later (3-5 yrs), the decline---at first barely perceptible--- becomes obvious, after which things just never take a turn for the better.
So I think a better question to ask, when these transitional steps are taken, after which these outfits are no longer and will never be what they once were again, is:

From this point forward, when you say and think that everything you do will be in the best interest of your shareholders, to whom are you referring--- the shareholders in your company, or the shareholders invested in your mutual funds?

FYI: Stock market volatility has sent taxable-bond CEF share prices spiraling downward, but is this the best deal since the financial crisis?
Regards,
Ted
http://news.morningstar.com/articlenet/article.aspx?id=713949

FYI: Jim Simons was a mathematician and cryptographer who realized: the complex math he used to break codes could help explain patterns in the world of finance. Billions later, he’s working to support the next generation of math teachers and scholars. TED’s Chris Anderson sits down with Simons to talk about his extraordinary life in numbers.
Regards,
Ted
http://www.ritholtz.com/blog/2015/09/jim-simons-the-mathematician-who-cracked-wall-street/print/