Monday, June 10, 2013

That's the news

Lower deficits in Washington mean the Treasury will issue less debt, which could create a shortage of Treasury securities if the Fed continues QE at its current pace.
There was a time when I thought this very thing, but then thought, "Nah, there's got to be something wrong with that idea."  And there clearly must be something wrong with that idea if Bill Gross thinks the same thing.  Seriously though, think about it.  The last I heard the deficit was going to come in at about $600 billion this year, which means the Treasury would be borrowing $600 billion.  But the Fed is buying about $1 trillion a year. But wait, it isn't as simple as that.  Yes, at the current deficit, Treasury needs to issue $600 billion annually in new debt.  But, according to this guy, the Treasury also rolls over half the outstanding debt every two years, or (on average) a quarter every year.  With the current debt level at about $16 trillion, the Treasury basically rolls over on average $4 trillion in debt a year.  Of course, the act of rolling over debt is not something that occurs evenly over the course of time, so at any time, the Fed might be buying more Treasuries than the government is issuing, but over the long run, counting roll overs, the Treasury will be issuing more debt than the Fed is buying, and will be for a long time, unless the Fed raises the amount of government debt it's buying.
By the time the Fed actually does reduce its bond purchases, the move might be anticlimactic.
I expect this to be true.  In fact, I would venture a guess and say that markets will over-react before the reduction, and then correct in an apparently illogical way as market participants rush to purchase Treasuries in a flight to safety, driving yields back down even as a BIG buyer leaves the market, and, most importantly, everyone knows they're leaving the market.  This is the same kind of behavior that happened when S&P lowered the U.S. government's credit rating.

Wall St. edges up after credit outlook raised
S&P raised its U.S. sovereign credit outlook to "stable" from "negative", and put the likelihood of a near-term downgrade of the rating at "less than one in three."
 And as I'm writing this, Yahoo Finance is reporting that the 10-year Treasury yield is up.  While this isn't exactly an upgrade, it implies that S&P is becoming more positive about the outlook for U.S. Treasuries.  This in itself should cause yields to fall.  A better credit profile = lower interest rates, except when you're talking about the U.S. government apparently.

'Almost Every Major Asset Class in the World Is Overpriced': Analyst
Negative real interest rates have helped boost corporate profit levels and made it difficult to determine proper price-to-earnings ratios.
It isn't difficult to determine "proper price-to-earnings ratios."  Unless you're dead set on investing now.  In the long-run, I think investors should just expect a reversion to the mean when it comes to valuation multiples.  Of course, investing based on the mean reversion thesis would result in very few, if any, investment opportunities.  The market is, and has been for the last decade or so, a trader's market.  Sometimes there have been long-term investment opportunities but for the most part, there hasn't been an overabundance of appreciation in stock prices.  However, I wouldn't really call this a bubble in the normal sense.  PE ratios are high, but not that high.  Valuations aren't really all that out of whack.  But, there are some "bubbly" statistics out there.  See the next news item for details.

Investors Rediscovering Margin Debt
As of the end of March, the most recent data available, investors had $379.5 billion of margin debt at New York Stock Exchange member firms, according to the Big Board.

That is just shy of the record $381.4 billion in margin debt set in July 2007.
 I think this is a pretty sure fire sign that stocks don't have much higher to go unless some new money comes into the market.  So, the real question is what happened to all the investors who were waiting on the sidelines for a better market entry point.  The next article addresses that question, at least in part.

Investors are back with a vengeance
Investors have been rushing off the sidelines this year and show no signs of letting up.
So, it looks like there is, perhaps, some more upside.
While some have moved off the sidelines amid fear of missing any further upside, a larger group is waiting for a pullback to "better time" their entrance into the stock market, he said. And that group is just getting increasingly frustrated as stocks continue to grind higher.
In the end, whether stocks continue to "grind higher" is largely dependent on the frustration level of investors who are still waiting on the sidelines.  So, given that the margin level is high, and given that there is still significant money on the sidelines, there is potential for extreme swings either up or down in the general market.  Or, markets may stay relatively flat while we play a kind of game of financial chicken; who's going to give in first?  People who have maxed out their margin accounts or those that are waiting for a better entry point?  I don't think anyone can answer that at the moment.

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