Longboat Retirement Solutions LLC

Sitting on The Fence May 9, 2015

Do you consider yourself a market timer?

Are you a market maker?

Do you know when the next market crash will happen?

Can you call the peak?

Do you have insider information regarding when Goldman Sachs will pull the carpet from under the U.S. stock market?

Is Janet Yellen your cousin?  Does she give you tips?

If your answer is no to all of these questions, then why aren’t you taking this opportunity to divorce yourself from this bubble while it’s still inflated?

It is amazing to me that more people are not taking this amazing opportunity to take profits, and instead are electing to roll the dice on market timing or give the keys to their future to some guy who has no stake in their success.

I know that I should not be surprised, as history seems to repeat itself every 7 to 10 years these days.  People have exceedingly short memories and attention spans that can only be measured in milliseconds.

I really don’t want to be that guy who said “I told you so”…or “I tried to tell you”.  I get no joy in hearing sob stories about how people waited too long and got wiped out by the debt tsunami.

The current market value has no basis in reality.  When it goes pop, it is going to destroy the retirement of millions of Americans who blindly followed the pundits on CNBC.

Please, Americans, spend more time thinking about your future and less time getting re-educated by mass media.

Lars Forsberg
Longboat Retirement Solutions LLC
406-551-4775
www.myselfdirectedretirement.com

Call for a FREE consultation

 

The Fed’s Presence In The Markets Is Pretty Clear January 27, 2013

BY: Lance Roberts, Street Talk Live

Jan. 25, 2013

There has been an burst of exuberance as of late as the market, after four arduous years, got back to its pre-crisis levels.  Much has been attributed to the recent burst of optimism in the financial markets from:

1) Better than expected earnings – not counting the fact that expectations had been dramatically lowered over the last quarter.  If you lower the bar enough you will get better results.  However, if expectations levels had remained where they were previously every single report would have missed so far.

2) Stronger economic growth ahead – expectations are once again, as we have seen over the last 3 years, that the economy will grow at 3% or better in the coming year.  Unfortunately, most of the economic data suggests that 2013 will remain mired closer to 2% after a very lackluster first half of the year.

3) The end of the bond bubble is near – like the economy; bond bears have been calling for the end of bond bubble.  Will 2013 be the year?  Most likely not as the chase for yield continues as masses of baby boomers move into retirement needing income to maintain their standard of living.

4) The long term outlook is getting better – this is true but how much of the long term outlook is already priced in?  How much of the long term outlook is due to artificial stimulus versus organic economic growth?

5) Valuations are cheap – the argument of cheap valuations is a hollow one.  First, comparing forward operating earnings expectations to trailing reported GAAP earnings is apples and oranges.  Using the Shiller 10-year median P/E – valuations are at levels normally associated with bull market peaks.  Secondly, the argument of earnings yield compared to bond yields is garbage.  Bond yields are being artificially suppressed which distorts the argument from reality.  Furthermore, investors do not receive the earnings yield from stocks but they DO receive the interest income from bonds.

6) The great rotation is here – for the third year in a row we are once again hearing that the “mountains of cash” piled on the sidelines is about to flow into the markets.  That has yet to happen and there is little indication as of yet that 2013 will be any different.

The point to made here is that each time the market has rallied the media, and analysts, try to attribute the rally to a fundamental support.  In most cases the arguments boil down to“hope” more than “reality.”   However, what is really driving the current rally is likely far more simplistic:  $85 billion a month.

With the Federal Reserve currently engaged in two simultaneous quantitative easing programs (QE 3 and 4) totaling $85 billion a month in purchases of both mortgage backed and treasury bonds – the excess reserve accounts of the banks have soared in recent weeks.   There is a very high historical correlation (85%) between the expansion of the Fed’s balance sheet and the stock market.

The chart below shows the relationship between the financial market and the expansion/contraction of excess reserves held by banks.  Historically, these excess reserves, prior to 2008, averaged about 18.9 billion.  Today those excess reserves amount to $1.58 Trillion.

 

pastedGraphic.pdf

 

Each market rally is always expected to continue indefinitely into the future.  The reality is that this is never the case and that the inevitable correction is always completely “unexpected.”  The current rally, as shown in the next chart and table, will likely proceed along the same course as we have seen with each previous QE program.  Our current target for the rally is 1560 on the S&P 500 which would be an 11% return from the start of QE3.  Should this target be reached it will continue the pattern of diminished rates of return as these liquidity driven surges have become more fully priced into the markets.

 

pastedGraphic_1.pdf

 
It is clear that the visible hand of the Federal Reserve is firmly in control of the markets at the moment as liquidity flows are increased. However, extrapolating the current advance indefinitely into the future becomes somewhat dangerous.  Each previous program cycle has ended with a fairly nasty decline, in both the markets and the economy, as the fundamental drivers were being supported solely by artificial interventions.  Those declines would have likely been far worse had they not been halted by the next round of “liquidity injected goodness.”   

While the Fed programs that we have witnessed since the financial crisis are historically unique – liquidity driven markets are not.  We have witnessed the effects of excess liquidity in the bull market cycle prior to the 2008 financial crisis.  The only difference during that cycle was that, through government intervention, real estate was turned into an ATM allowing mortgage equity withdrawals to be the liquidity source for the economy and the markets.  The chart below shows the extremely high correlation between these two bull market cycles.

 

pastedGraphic_2.pdf

 
There are many similarities between the peak of the market in 2008 and today.  Investor sentiment is pushing extreme levels, the markets are exceedingly overbought, earnings are weakening, complacency is higher, multiples are expanding, the consumer is beginning to sputter and headlines are beginning to push the boundaries of manic optimism.

One doesn’t haven’t to think back too far to remember that at the peak of the markets in 2008 there was no recession in sight, even though it had already started, as it was a “goldilocks”economy.  Earnings were expected to continue to grow into the coming year and equities were the only investment of choice.  Come to think of it – that is what we heard in 1999 as well.

David Rosenberg summed this up well in his most recent missive:

“As imperfect souls, we as human beings simply don’t see that the existing situation will somehow be resolved and come to an end, and that in the ensuing three to five years, we will either be belly aching over a new bear market or celebrating a bull phase.  And in either case, it’s called ‘living in the moment.’  But the most dangerous thing anyone can do is extrapolate the most recent experience, as enduring as it may seem, into the future.  Good, bad or indifferent, we will be talking about something completely different three to five years from now than we have been for the past number of years.”

The point here is that there are times when one should step back to look at the forest for the trees.  The catalysts that brought the financial markets to its knees in 2000-2002 or 2008-2009 will likely not be the same ones in the future.  Will the markets continue to play out as the chart above potentially forecasts?  I haven’t a clue.  With the Fed fully engaged in stimulus programs domestically, as well as the ECB and Japan globally, there is excess liquidity sloshing throughout the financial system.  The market rally could well rise farther, for longer, than most would expect possible.

The current belief is that the central banks will have the foresight to withdraw the stimulus before the next bubble is formed, unfortunately, there is no historical precedent that supports that claim.  However, with the markets fully inflated, we have reached the point that where even a small exogenous shock will likely have an exaggerated effect on the markets.  There are times that investors can safely “buy and hold” investments – this likely isn’t one of them.

 

Fed members gave their own banks $4 trillion during bailout June 15, 2012

6/15/2012

BY: RT

A report just released by the US Government Accountability Office explains how the Federal Reserve divvied up more than $4 trillion in low-interest loans after the fiscal crisis of 2008, and the news shouldn’t be all that surprising.

When the Federal Reserve looked towards bailing out some of the biggest banks in the country, more than one dozen of the financial institutions that benefited from the Fed’s Hail Mary were members of the central bank’s own board, reports the GAO. At least 18 current and former directors of the Fed’s regional branches saw to it that their own banks were awarded loans with often next-to-no interest by the country’s central bank during the height of the financial crisis that crippled the American economy and spurred rampant unemployment and home foreclosures for those unable to receive assistance.

Although the crisis continues to have an effect on Americans that were devastated by the recession, the banks that survived the near meltdown were largely able to do so because some of their CEOs sat on the same Federal Reserve board the decided on how to dish out trillions of dollars.

“This report reveals the inherent conflicts of interest that exist at the Federal Reserve,” Sen. Bernie Sanders (I-Vermont) says in a statement about the report. “At a time when small businesses could not get affordable loans to create jobs, the Fed was providing trillions in secret loans to some of the largest banks and corporations in America that were well represented on the boards of the Federal Reserve Banks,” adds Mr. Sanders. “These conflicts must end.”

The GAO’s report is believed to mark the first time that the Fed’s records about their major bailout identifying the parties involved to the public.

In a press release published on the official US Senate website for Mr. Sanders, the lawmakers singles out JPMorgan Chase CEO Jamie Dimon over an alleged conflict of interest that could have contributed to the bailout his bank received through the Fed. Sanders also calls out General Electric CEO Jefferey Immelt for sitting on the same Federal Reserve board that approved massive funding to GE during a time of financial insecurity in the United States.

Sen. Sanders’ office has released a report summarizing the information published by the GAO in a four page document hosted on his website titled “Jamie Dimon Is Not Alone.”

“Jamie Dimon, the Chairman a CEO of JPMorgan Chase, has served on the Board of Directors at the Federal Reserve Bank of New York since 2007,” the report mentions. “During the financial crisis, the Fed provided JPMorgan Chase with $391 billion in total financial assistance. JPMorgan Chase was also used by the Fed as a clearinghouse for the Fed’s emergency lending programs.”

One year later, the report notes, the Fed handed Dimon’s bank $29 billion to help acquire Bear Stearns. In the case of General Electric’s Immelt, Sanders recalls that the Fed handed over $16 billion in low-interest financing to GE during the five-year span that the company’s CEO sat on the Federal Reserve’s board of directors.

Other Fed members that benefited by the bailout include officials at the top of Citigroup, Lehman Brothers, SunTrust Banks and PNC, among others.

Testifying before the US Senate Banking Committee this week, Dimon apologized for a recent JP Morgan Chase in-trading gaffe that cost the institute billions.

 

China cuts rates as global economic crisis deepens June 10, 2012

BEIJING (Reuters) – China delivered a surprise interest rate cut on Thursday to combat faltering growth, underlining concern among policymakers worldwide that the euro area’s deepening crisis is threatening the health of the global economy.

The country’s first rate cut since the depths of the global financial crisis in 2008/09 came after the Federal Reserve’s second highest official made a case for more policy easing in the United States, and followed an emergency conference call on Tuesday by the financial leaders of the Group of Seven industrialized nations to discuss Europe’s debt crisis.

It was followed shortly after by comments from Fed Chairman Ben Bernanke that the U.S. central bank was prepared to take action to protect the financial system and U.S. economy.

“The Federal Reserve remains prepared to take action as needed to protect the U.S. economy in the event that financial stresses escalate,” Bernanke said in prepared testimony to the U.S. Congress.

Marc Ostwald, a rate strategist at Monument Securities in London, said the China rate cut combined with Federal Reserve hints and hopes in markets that Europe will deal urgently with Spain’s banking crisis would support risk assets.

“It will be construed positively particularly in close alignment with what we’ve seen,” he said.

The Chinese cut and Bernanke’s statement stood in contrast, however, to the decision by the European Central Bank on Wednesday to leave rates unchanged and hold off on more stimulus, placing the onus on fighting Europe’s crisis on governments.

The People’s Bank of China, the central bank, cut the official one-year borrowing rate by 25 basis points to 6.31 percent and the one-year deposit rate by a similar amount to 3.25 percent.

The cuts confounded the call of many economists who thought the central bank would refrain from cutting policy rates this year even though policymakers had voiced the need to support growth.

“It’s obviously a very strong signal that the government wants to boost the economy, given the current weakness, especially in demand,” Qinwei Wang, economist at Capital Economics in London, told Reuters.

The European Union is China’s single biggest foreign customer, and faltering demand there has led to worries about the knock-on effect to domestic consumption if industrial activity slows dramatically.

A sudden collapse in global trade in late 2008 saw an estimated 20 million Chinese jobs axed in a matter of months, prompting Beijing to roll-out a 4 trillion yuan ($635 billion) fiscal stimulus plan to bolster domestic economic activity.

While the cut to borrowing costs should help in the near term to shore up an economy on course for its weakest full-year expansion since 1999, the central bank also gave banks more room to set competitive lending and deposit rates to further liberalize China’s financial market.

The rate cut, announced after financial markets closed in Asia, helped shares elsewhere rally. World shares, measured by the MSCI world equity index rose to its highest level in more than a week. The euro rose.

China last changed the borrowing rate in July 2011 when the 1-year benchmark lending rate was raised by 25 bps to 6.56 percent.

GOOD AND BAD

Many world leaders, including in Europe, have been alarmed about the latest turbulence in the euro area debt saga as Spain is fast losing the confidence of financial markets, although it did successfully sell debt on Thursday.

A Greek election this month could also push Athens closer to leaving the bloc.

The problems of Spain’s banks were underlined on Thursday when financial sector sources told Reuters an International Monetary Fund report on Spanish banks next week will show the country’s troubled lenders need a cash injection of at least 40 billion euros ($50 billion).

“We must find ways to deal with this fairly quickly because (Spain) is today the major threat to the world economy,” Swedish Finance Minister Anders Borg told Reuters.

After the G7 call this week, Japan’s Finance Minister Jun Azumi said the grouping shared the view that it should work to ease financial market worries ahead of a G20 meeting in Mexico later this month, where Europe is likely to top the agenda.

Janet Yellen, the Fed’s vice chair, warned on Wednesday of “significant” risks facing the economy.

“Hence, it may well be appropriate to insure against adverse shocks,” she said in remarks before the Boston Economic Club.

Several countries, including China and India, have seen economic growth take a hit this year as the euro zone crisis has hurt global confidence. Several euro area countries are struggling with recession.

Britain is among them, but better than expected economic data allowed the Bank of England to hold off on any new stimulus on Thursday

China’s policy announcement on Thursday meanwhile raised concerns for some that the rate move is pre-empting grim news in a deluge of China data due over the weekend that will include all of the country’s key barometers, such as investment and industrial production.

“The concern is that with industrial production and CPI data coming out of China at the weekend, that it’s indicative of them

knowing something about weak data going forward,” said Adrian Schmidt, currency strategist at Lloyd’s Bank in London.

The PBoC has cut bank reserves for the biggest banks by 150 basis points from a record-high of 21.5 percent in three moves since November, after a two-year tightening campaign to rein in inflation and cool steaming economic growth.

That has freed an estimated 1.2 trillion yuan ($190 billion) for new lending, as Beijing sought to stimulate economic activity without resorting to a major fiscal spending package like 2008’s initiative.

Beijing is still tackling the after-effects of that program, which triggered a frenzy of real estate speculation, saw local governments amass 10.7 trillion yuan of debt, and drove inflation to a three-year peak by July 2011.

(Additional reporting by Koh Gui Qing and Aileen Wang; Editing by Neil Fullick/Jeremy Gaunt)

 

Jim Rogers – Markets Rely on Fundamentals Not Short Term News June 9, 2012

 

Quantitative Easing Explained May 26, 2012