Investment Contrarians

Interest Rates

Why “Don’t Bet Against the Fed” Is Now Truer Than Ever

Author id is:35

By for Investment Contrarians | Aug 8, 2012

Why “Don’t Bet Against the Fed” Is Now Truer Than EverWith the recent Federal Reserve meeting just concluded with no change in monetary stimulus policy, all eyes are focused on its September meeting. As the economic data continues to deteriorate, this is having a negative impact on the economic forecast for the future. The Federal Reserve is closely monitoring the situation and, with a lack of strong, positive news, I believe that additional monetary stimulus will occur by the end of the year to avert a continuing diminished economic forecast for the future.

Recent comments by Eric Rosengren, who is the Federal Reserve Bank of Boston President, will surely reignite additional expectations of monetary stimulus, as he commented that the central bank should enact open-ended quantitative easing. He also suggested the Federal Reserve should boost this monetary stimulus program by substantial magnitude.

The economic forecast for America continues to be subpar. Obviously, this Federal Reserve Bank president and others are voicing the opinion that the current monetary stimulus policy is not enough to decrease the unemployment rate and increase the growth rate of the country. The wording that open-ended quantitative easing should be the new monetary stimulus policy initiative is quite a change for Federal Reserve standards.

This policy initiative would be quite bullish for certain markets, such as gold. With the payroll data last week not being horrible, many were led to believe that Federal Reserve policy might be on hold. Even with some doubts, gold has held up quite well. Gold stocks have also performed reasonably well, but I believe there is more to come.

As many analysts will continue to decrease their economic forecast for the American … Read More

What Should You Watch Before the Next Fed Meeting? I’ll Tell You

Author id is:35

By for Investment Contrarians | Aug 3, 2012

What Should You Watch Before the Next Fed Meeting I’ll Tell YouWith the recent Federal Reserve meeting concluded, many investors were disappointed that additional monetary stimulus was not initiated. I, for one, was not surprised at the lack of monetary stimulus at this meeting, because the conditions are not yet set for such a maneuver. However, economic data leading up to next month’s Federal Reserve meeting will be crucial in determining if additional monetary stimulus will be needed.

Recent economic data show that the economy in the U.S. has slowed down from the beginning of this year. The Federal Reserve has the tough task of juggling the economy and the spigot that is monetary stimulus. This has become even more difficult since the data have not been a complete disaster.

Since the Federal Reserve has enacted several bouts of monetary stimulus involving the first and second rounds of quantitative easing, plus “Operation Twist,” the Federal Reserve is now hesitant to take on further action, because the fear is that this might have only a limited impact on the market.

I agree with this line of thought. I believe that the Federal Reserve only has a limited amount of effect left for additional monetary stimulus before deleterious actions occur. The next two months of economic data, especially in the unemployment rate and non-farm job creation numbers, are crucial in determining where the Federal Reserve stands for monetary stimulus. Currently, a large number of market participants believe additional monetary stimulus will be enacted at the September 12–13 meeting of the Federal Reserve.

The real question is, if the jobs numbers come in flat or slightly above expectations, does this mean the Federal Reserve … Read More

LIBOR Scandal Just the Tip of the Bank Corruption Iceberg

Author id is:4

By for Investment Contrarians | Jul 11, 2012

LIBOR Scandal Just the Tip of the Bank Corruption IcebergThis is just the beginning of the London Interbank Offered Rate (LIBOR) scandal that came to surface last week, exposing the alleged fact that some big banks have been fixing interest rates in order to increase their revenues at the expense of, well, almost everyone else in the world.

As the investigation widens, more big banks—20 big banks are implicated thus far—will be named, and central banks and regulators will possibly be revealed to have been part of the scandal as well.

Hopefully this crime provokes fever-pitch levels of anger against the big banks from people around the world, because the interest rates that are set literally affected the interest rates and mortgage rates people save with and borrow from every single day.

Quoted daily, the LIBOR is created by a group of big banks. The LIBOR is the basis by which 10 currencies are set, including many interest rates that affect mortgage rates. For example, representatives of 18 big banks come together to tell those that publish the LIBOR what they would be paying to borrow U.S. dollars on that day from other big banks. The four highest rates submitted and the four lowest rates submitted are tossed out. The rest is averaged out and, voila, the LIBOR to borrow in U.S. dollars appears.

The obvious problem with this process is that the big banks, not the market, are setting the interest rates. The second problem is that nothing prevents the big banks from colluding and submitting interest rates conforming to the interest rates or mortgage rates they want.

The e-mails made public uncover just this type of collusive … Read More

Overlooked Sector Looks Attractive Compared to U.S. Treasuries

Author id is:35

By for Investment Contrarians | Jul 6, 2012

Overlooked Sector Looks Attractive Compared to U.S. TreasuriesThe economic data continue to come in much weaker than central bankers have been hoping for around the world. With the financial crisis in Europe continuing to unfold, and now China slowing down substantially, all of this is putting pressure on the U.S. economy as well. We are seeing a slowing across the board, and this has investors looking for safety and yield. Safety is coming in the form of U.S. Treasuries. However, investors seeking income need to look further than U.S. Treasuries and so are turning to dividend yield. This has pushed prices of dividend paying stocks up, and conversely, the dividend yield has come down.

The distortion that U.S. Treasuries are making with a yield of approximately 1.6% is profound. Income seekers can no longer hold U.S. Treasuries with any expectation of a positive return over the next 10 years. When taking into account any level of inflation, U.S. Treasuries look like a bad investment for the next decade. While many aren’t placing funds in U.S. Treasuries for its yield but for safety, this leaves the income-seeking investor in a difficult position. They are now forced to look for stocks with a dividend yield to provide income.

One sector many investors overlook is preferred shares. Preferred shares offer a higher dividend yield than common shares. Because they don’t trade as often, many investors aren’t aware of them. One easy way to get a diversified portfolio is through an exchange-traded fund (ETF) like the iShares S&P U.S. Preferred Stock Index Fund (NYSE/PFF).

This ETF has over 250 holdings of preferred shares with an attractive dividend yield. With one share, … Read More

What the Federal Reserve Did Not Tell You

Author id is:35

By for Investment Contrarians | Jun 22, 2012

On June 20, 2012, the Federal Reserve meeting ended with only an extension of “Operation Twist” and no new quantitative easing. Following the meeting, Fed Chairman Ben Bernanke held a press conference open to questions. Bernanke answered them in a proper and politically correct manner. But what he didn’t tell you about monetary policy is just as important.

The Federal Reserve only has so many weapons in its arsenal to adjust monetary policy in its attempts to achieve the goals of financial stability and low unemployment. Since the financial crisis began in 2008, the Fed has enacted several traditional tools and several that are unique and more aggressive in nature. Obviously, once interest rates were at or near zero, monetary policy actions had to be expanded to non-traditional methods, which includes two bouts of quantitative easing and “Operation Twist.”

Interestingly, if one charts the stock market against these events, you will see what I believe the Federal Reserve understands inherently: each action was met with less of a market response. What this means is that each monetary initiative is progressively less effective. The Fed clearly sees this effect and it worries its officials, as it should.

At some point, monetary policy might become akin to pushing against a string: largely ineffective. Future policy becoming less effective than calculated worries the Federal Reserve, because these maneuvers need to be incorporated into their models. If one can’t accurately predict the effect of monetary policy, it raises the question of how much more is needed.

Bernanke was asked why the committee didn’t do more now in terms of monetary policy, meaning quantitative easing, … Read More