Tag Archives: federal reserve

Hoisington Investment Management – Quarterly Review and Outlook, Second Quarter 2016

By Dr. Lacy Hunt and Van Hoisington

The Separate Constraints of Deficit Spending and Debt

Real per capita GDP has risen by a paltry 1.3% annualized since the current expansion began in 2009. This is less than half of the 2.7% average expansion since the records began in 1790. One of the most persistent impediments to growth has been the drag from fiscal policy, a constraint that is likely to become even more severe in the next decade. The standard of living, or real median household income, has only declined in the 2009-2016 expansion and stands at the same level reached in 1996.

Continue reading Hoisington Investment Management – Quarterly Review and Outlook, Second Quarter 2016

2014 – Equity Flop & Commodity Hop

I thought taking a vacation at the end of 2013 might allow me to come back to the markets with a clear head and new viewpoint. My hope was that a little detachment would bring the forest back into the picture at 35,000 feet. I’ve now caught up on my reading and research and find the markets just as schizophrenic as they were when I left. While the markets remain as confusing as ever, our trip did provide me with the sense of awe that comes from physically standing in the presence of thousands of years of history. One thing is for certain; mankind always finds a way.

Continue reading 2014 – Equity Flop & Commodity Hop

What’s Wrong with Equities

The economic black hole between the equity markets and the man on the street has never been greater. Earlier this month the media trumpeted about the all time highs in the Dow Jones Industrial Average. The President commends Congress for creating policies that “put Americans back to work,” and points to unemployment levels that are 25% below their 2009 peak. Meanwhile NBC News publishes the results of a new study, which states that four out of five of us will, “struggle with joblessness, near-poverty or reliance on welfare for at least parts of their lives.” Please bear with the following few paragraphs as we discuss the social issues that we all feel and use some correlational analysis to come up with a trading plan.

Anecdotal evidence of the government’s failed economic bailout plans to help the working class and small businesses abounds. Finally, we have some research that quantifies where TARP funds went as well as how much of the stimulus reached its intended target. We suggested five years ago that the major banks who were deemed, “too big to fail” were more likely to sit on the funds they received in order to shore up their own loan to equity ratios than they were to make those same funds that had been ear marked for small business creation and maintenance available to them.

The best summation of these events comes from John Mauldin, a republican economist from Texas. “We are watching the Fed employ a trickle-down monetary policy. They hope that if they pump up the banks and stock market, increased wealth will lead to more investment and higher consumption, which will in turn translate into more jobs and higher incomes as the stimulus trickles down the economic ladder. The kindred policy of trickle-down economics was thoroughly trashed by the same people who now support a trickle-down monetary policy and quantitative easing. It is not working.” Mauldin’s condemnation of trickle down economics is especially telling given his own personal background.

The government bailed out the owners of the large banks and their related business entities. Warren Buffet’s Berkshire Hathaway is a good example. When the financial crisis set in Mr. Buffet, who already owned a considerable position in Goldman Sachs, doubled down as the stock hit the skids. He was betting that the Goldman was, “too big to fail” and that the government would bail them out, which they did. Goldman Sachs received $10 billion in TARP aid. Berkshire Hathaway stock is 10% higher now than before the collapse and is up approximately 30% this year. The point is that those with equity ownership and the resources to increase their equity ownership by using the Federal Reserve as a backstop profited handsomely. Unfortunately, a Gallup poll shows that the percentage of Americans owning individual stocks and securities is at its lowest level since 1999 and has declined by 13% since 2007.

Human nature is a terrible trader. The scarcer something becomes, the more we want it. The more that’s available, the less we want it. When stocks were cheap, we were scared. We as individuals are never, “too big to fail.” Collectively, we rarely succeed. This is evidenced by the recent run up in margin buying, which just hit a new all time high. Margin buying is akin to buying stocks on leverage. Currently, investors are only required to put up 50% of the face value of a stock and the brokerage house, “loans” you the balance. The last recent highs were 2000 and 2007. Ring any bells? This is a significant indication that individual investors are doubling up at the top to catch what’s left of the rally they’ve missed. Conversely, When the Federal Reserve Board announced a possibility of easing back on the stimulus and bonds tanked, these were the same people pulling their money out. This is a clear, ugly and leveraged speculative rotation.

The markets themselves tell a different story. The Fed can’t afford to let off the stimulus gas just yet and the major market players know it. They also see the sucker top forming in the equity markets. The appropriate strategy we see is to tighten up equity risk and look towards the long end of the yield curve to regain some of its losses. Frankly, we think moving from equities to bonds should be the primary move between now and October. Take advantage of the access to information we now have and know that ignorance is a choice.This material has been prepared by a sales or trading employee or agent of Commodity & Derivative Advisors and is, or is in the nature of, a solicitation. This material is not a research report prepared by Commodity & Derivative Advisors’ Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.

The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources thatCommodity & Derivative Advisors believes are reliable.  We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades.

Tidal Shift in the Bond Market

The recent spike in Treasury yields could very well be signaling a change in trend direction. We rarely try to pick tops or bottoms in major trending markets. It simply doesn’t pay. However, we’re seeing lots of corroborating evidence that this may signal a shift in the global macroeconomic outlook. Therefore, this is one of the rare times when a pull back within the interest rate sector may not be a buying opportunity. In fact, if this is the beginning of the Great Unwinding we need to focus on all of the evidence to obtain a complete picture view, all the way from the trading screens to the man on the street.

The trading screens always provide the first clues of market direction. It’s important to remember that prices and yields trade inversely to each other. Therefore, when the price of the security rises, the interest rate declines. The opposite is also true. This is why we can talk about all time high prices and record low yields in the same sentence. The 10-year Treasury Note is the global proxy for US interest rates.

The last leg of this rally began in late November of 2007. The employment situation was starting to deteriorate and interest rate adjustment was the primary tool the Federal Reserve used to pump life into a faltering economy – prior to the economic collapse. The Fed lowered rates by a quarter point in four out of the last five months of 2007. They lowered rates eight more times in 2008 and finally committed to a zero rate policy in February of 2010.

The combined inventive efforts at the Fed eventually drove the 10-year rate to an all time low just under 1.5% in the cash market and an all time low on the 10-year futures of 2.3%. This is where it starts to get interesting. The 10-year Note has been trading at a negative real return for over a year. This means the interest generated by the instrument’s yield would not keep pace with inflation’s erosion of principle. The recent sell off has pushed its nominal yield above 2% while inflation is expected to remain a hair under that mark. Thus, bringing our first, “normal” look at a yield curve in ages.

The high water mark set in early May was fueled in part by Japan’s concerted depreciation of the Yen. The markets were well prepared for this. The US has provided massive stimulus over the last five years. Europe has added their share over the last three years through Greece, Spain and now, Cyprus. The logical next step in a globally competitive devaluation race was obviously a form of Quantitative Easing by Japan. Commercial traders here in the US stocked up on 10year Notes, accumulating their largest long position since February of 2008. Their expectation was that we would continue pushing the zero bound interest rate plan.

This may very well be one of the rare times when the commercial traders are just plain wrong. Historically, they’ve been very good at forecasting rate direction. This time the largest trading group may have been faked out as a whole. Two important points bring this home. First of all, their buying did fuel a rally to new highs…by a hair. Secondly, the weekly chart is beginning to show an obvious reversal bar. Will this turn into an, “Everybody out of the pool,” moment? I doubt it. However, I do expect them to continue to offload recent purchases, which will build up resistance on any attempted rallies.

The other primary point to make is the effect of the rise in interest rates on the housing market and its effect on the anemic economic recovery 99% of us have participated in. The national average 30-year mortgage has climbed by nearly 25% over the last few weeks rising from 3.4% to 4.2% according to Bankrate.com. This will have a big impact on the housing market, which had just begun to clear some inventory. This will also affect mortgage refinancing just as the deadline for governmental forgiveness approaches. The result of the spike in interest rates has caused a decline in the broad S&P 500 of nearly 4%. Meanwhile, the homebuilders ETF (XHB) has declined by almost 10%. The homebuilders have been a primary driver of the broad market’s rally since 2012 gaining nearly 100% in two years.

Higher interest rates are the last thing any of the major economies can afford. Half a decade’s worth of rate cuts, Quantitative Easing and Operation Twist, etc. have created a coiled spring of leveraged money hunting for that last bit of yield. The major reversal bar in the 10-year futures coupled with a large, unprofitable, commercial trader’s position could leave them left holding the hot potato. At its worst, this spike in rates steers us towards stagflation. An environment with rising inflation and no growth characterizes this. How far it spills over into the markets is unsure. Please call with any questions as this may well mark the inflexion point of what has been THE dominant trend over the last five years.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

J.P. Morgan Locking in Silver Losses?

There’s an old investment saying that says, “Never marry a loser.” When the ego gets in the way, the trade becomes more about being right, than about being profitable. When J.P. Morgan used Federally backed funds to acquire Bear Stearns in March of 2008, it seemed like the steal of the century. They bought Bear Stearns at $2 a share and the Federal Reserve guaranteed Bear’s illiquid debt and counter party risk allowing J.P. Morgan to step in and take immediate control of Bear’s trading operations.


Apparently, part of Bear Stearn’s proprietary portfolio included a rather large short position in the silver market. J.P. Morgan, rather than liquidate the position at a loss, clean up their new balance sheet and pocket the profits decided they were smart enough to trade their way out of it using the profits accrued from Bear’s acquisition to sustain the ongoing trading losses. Thus, they’ve continued to add on to their short position selling more silver futures to increase their average price the entire way up. It has been reported by the UK’s Guardian that J.P. Morgan may now be short the silver futures market to the tune of 3.3 BILLION ounces. As a comparison, the total outstanding deliverable interest in the silver futures market is 320 million ounces and annual global supply is approximately 900 million ounces.


Short positions in the futures market can only be settled in two ways. First, the contracts can be repurchased at the current market price, which in J.P. Morgan’s case would be a losing trade. The second way out is to physically deliver the silver itself. This would make the people who bought the silver from J.P. Morgan, whole.


J.P. Morgan has the ability to hire some of the top minds in the trading game and over the last two years, they’ve been working hard to try and trade their way out of this mess. Their primary strategy thus far has been to take advantage of the limited trading in the overnight electronic markets to manipulate the market prices. The basic plan they’ve been following is to place large orders to sell more silver which make the overnight markets appear to have an abundance of sellers. When normal market players come in and need to get their own silver sold, their own human instinct takes over and they make their offer at a lower price than what they’re seeing on their screens. Once J.P. Morgan feels that enough sell orders have piled up under their own bluff of an order, they come in and buy up the lower priced offers and withdraw their large bluff sitting over the market. They have been under investigation by the Commodity Futures Exchange Commission for their manipulation of the silver market for the last year.


Clearly, J.P. Morgan has a problem. They owe the market more silver than the world produces and their previous attempt to unwind their position is under investigation. So, what’s the next logical move? They’re currently attempting to corner the copper market from the long side. They are essentially, creating a hedge. The idea is that they’ll make in the copper market what they’re losing in the silver market. Over the last three months as silver as silver has gone from $19 an ounce to more than $30 an ounce, J.P. Morgan has been managed to accumulate between 50 and 80% of the copper traded on the London Metals Exchange.  It’s no coincidence that they also announced their plans to offer an Exchange Traded Fund backed by physical copper. Clearly, they’re hoping to recoup some of their losses through price appreciation in copper while the generating a new revenue stream, as well.


Time will tell how this plays out on their balance sheet. History has shown that traders who lock into one idea, like selling the silver market, typically go broke before they are proven correct. J.P. Morgan’s dominant purchases in the copper market reflect their fear of outright loss in the silver market. Considering the notional amount (3.3 billion ounces) they are short relative to the size of the silver futures market and the global supply of physical metal, it will be interesting to see how they manage to divorce the loser they’ve inexorably hitched their wagon to.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.