Monthly Archives: September 2013

S&P500 Earnings Estimates For Years 2013, 2014, And 2015

As many are aware, Thomson Reuters publishes earnings estimates for the S&P500.  (My other posts concerning S&P earnings estimates can be found under the S&P500 Earnings tag)

The following estimates are from Exhibit 12 of “The Director’s Report” of September 23, 2013, and represent an aggregation of individual S&P500 component “bottom up” analyst forecasts:

Year 2013 estimate:

$110.46/share

Year 2014 estimate:

$122.92/share

Year 2015 estimate:

$135.39/share

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I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not agree with many of the consensus estimates and much of the commentary in these forecast surveys.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1704.22 as this post is written

Standard & Poor’s S&P500 Earnings Estimates For 2013 & 2014 – As Of September 19, 2013

As many are aware, Standard & Poor’s publishes earnings estimates for the S&P500.  (My posts concerning their estimates can be found under the S&P500 Earnings tag)

For reference purposes, the most current estimates are reflected below, and are as of September 19, 2013:

Year 2013 estimates add to the following:

-From a “bottom up” perspective, operating earnings of $108.08/share

-From a “top down” perspective, operating earnings of N/A

-From a “top down” perspective, “as reported” earnings of $98.28/share

Year 2014 estimates add to the following:

-From a “bottom up” perspective, operating earnings of $122.32/share

-From a “top down” perspective, operating earnings of $113.75/share

-From a “top down” perspective, “as reported” earnings of $108.29/share

_____

I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not agree with many of the consensus estimates and much of the commentary in these forecast surveys.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1702.47 as this post is written

Current Economic Situation

With regard to our current economic situation,  my thoughts can best be described/summarized by the posts found under the 28 “Building Financial Danger” posts.

My thoughts concerning our ongoing economic situation – with future implications – can be seen on the page titled “A Special Note On Our Economic Situation,” which has been found near the bottom of every blog post since August 15, 2010.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1701.24 as this post is written

Broad-Based Indicators Of Economic Activity

The Chicago Fed National Activity Index (CFNAI) and the Aruoba-Diebold-Scotti Business Conditions Index (ADS Index) are two broad-based economic indicators that I regularly feature in this site.

The current levels of each are notable, as they are vacillating from a short-term perspective and their long-term trends continue to sink.

Doug Short, in his blog post of September 20, titled “The Philly Fed Business Conditions Index” displays both the CFNAI MA-3 (3-month Moving Average) and ADS Index (91-Day Moving Average) from a variety of perspectives.

Of particular note, two of the charts, shown below, denote where the current levels of each reading is relative to the beginning of past recessionary periods, as depicted by the red dots.

The CFNAI MA-3:

(click on charts to enlarge images)

Dshort 9-20-13 Chicago-Fed-CFNAI-recession-indicator

The ADS Index, 91-Day MA:

Dshort 9-20-13 ADS-index-91-day-MA

Also shown in the Doug Short’s aforementioned post is a chart of each with a long-term trendline (linear regression) as well as a chart depicting GDP for comparison purposes.

_________

I post various indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not necessarily agree with what they depict or imply.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1711.60 as this post is written

Ben Bernanke’s September 18, 2013 Press Conference – Notable Aspects

On Wednesday, September 18, 2013 Ben Bernanke gave his scheduled press conference.

Below are Ben Bernanke’s comments I found most notable – although I don’t necessarily agree with them – in the order they appear in the transcript.  These comments are excerpted from the “Transcript of Chairman Bernanke’s Press Conference“(preliminary)(pdf) of September 18, 2013, with the accompanying “FOMC Statement” and “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, September 2013” (pdf).

From Ben Bernanke’s opening comments:

In the Committee’s assessment, the downside risks to growth have diminished, on net, over the past year, reflecting, among other factors, somewhat better economic and financial conditions in Europe and increased confidence on the part of households and firms in the staying power of the U.S. recovery.  However, the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and the labor market.  In addition, federal fiscal policy continues to be an important restraint on growth and a source of downside risk.

Apart from some fluctuations due primarily to changes in oil prices, inflation has continued to run below the Committee’s 2 percent longer-term objective.  The Committee recognizes that inflation persistently below its objective could pose risks to economic performance, and we will continue to monitor inflation developments closely.  However, the unwinding of some transitory factors has led to moderately higher inflation recently, as expected; and, with longer-term inflation expectations well-anchored, the Committee anticipates that inflation will gradually move back toward 2 percent.

also:

At the meeting concluded earlier today, the sense of the Committee was that the broad contours of the medium-term economic outlook—including economic growth sufficient to support ongoing gains in the labor market, and inflation moving toward its objective—were close to the views it held in June.  But in evaluating whether a modest reduction in the pace of asset purchases would be appropriate at this meeting, however, the Committee concluded that the economic data do not yet provide sufficient confirmation of its baseline outlook to warrant such a reduction.  Moreover, the Committee has some concern that the rapid tightening of financial conditions in recent months could have the effect of slowing growth, as I noted earlier, a concern that would be exacerbated if conditions tightened further.  Finally, the extent of the effects of restrictive fiscal policies remains unclear, and upcoming fiscal debates may involve additional risks to financial markets and to the broader economy.  In light of these uncertainties, the Committee decided to await more evidence that the recovery’s progress will be sustained before adjusting the pace of asset purchases.

Bernanke’s responses as indicated to the various questions:

PEDRO DA COSTA. Thanks, Mr. Chairman. Pedro da Costa from Reuters. You cite meaningful progress on the labor market both on the unemployment front and in terms of payroll growth. But much of the decline in the unemployment rate has been due as you know to the decline in participation. So my question to you is and also on the payroll front, some people would argue that, while there has been growth, it hasn’t been strong enough to keep up with population growth and make up the gap that we have from the recession. So, how high do you think the jobless rate would be if it were not for the decline in participation? I’ve heard estimates as high as 10 to 11 percent. And could you put the labor market in that context?

CHAIRMAN BERNANKE. Certainly. So, I think there is a cyclical component to participation and in that respect, the unemployment rate understates the amount of sort of true unemployment if you will in the economy. But on the other hand, there is also a downward trend in participation in our economy which is arising from factors that have been going on for some time including an aging population, lower participation by prime-age males, fewer women in the labor force, other factors which aren’t really related to this recession.

Over the last year, the unemployment rate has dropped by eight-tenths of a percentage point. The participation rate is dropped by three-tenths of a percentage point, which is pretty close to the trend. So in other words, I think it would be fair to say that most of the improvement in the unemployment rate, not all, but most of it in the last year is due to job creation rather than lower participation. I would also note that if you look at the broader measures of unemployment that the BLS publishes including part-time work, including discouraged workers and so on, you’ll see that those rates have fallen about the same amount as the overall standard civilian unemployment rate. So, I think that there has been progress and it’s obscure to some extent by the downward trend in participation. But I also would agree with you that the unemployment rate is, while perhaps the best single indicator of the state of labor market is not by itself a fully representative indicator.

also:

JON HILSENRATH. Jon Hilsenrath from the Wall Street Journal. Just to follow up on Binya’s question, Mr. Chairman, you said that you could pullback the purchases possibly later this year. You sound a little bit less certain that it’s going to happen later this year. So I’d like you–to ask you to talk a little bit more about your conviction about whether these are like–the pullback is likely to start this year, where you stand on that. And I also don’t think I heard you mentioned that 7 percent unemployment number that you’ve talked–you talked about back in June. That was the rate that was–the unemployment rate that was supposed to prevail when the Fed was done doing this, is that no longer operative?

CHAIRMAN BERNANKE. So, there is no fixed calendar—a schedule, I really have to emphasize that. If the data confirm our basic outlook, if we gain more confidence in that outlook, and we believe that the three-part test that I mentioned is indeed coming to pass, then we could move later this year. We could begin later this year. But even if we do that, the subsequent steps will be dependent on continued progress in the economy. So we are tied to the data, we don’t have a fixed calendar schedule, but we do have the same basic framework that I described in June.

The criterion for ending the asset purchases program is a substantial improvement in the outlook for the labor market. Last time, I gave a 7 percent as an indicative number to give you some sense of, you know, where that might be. But as my first answer suggested, the unemployment rate is not necessarily a great measure in all circumstances of the–of the state of the labor market overall. For example, just last month, the decline in unemployment rate came about more than entirely because declining participation, not because of increased jobs. So, what we will be looking at is the overall labor market situation, including the unemployment rate, but including other factors as well. But in particular, there is not any magic number that we are shooting for. We’re looking for overall improvement in the labor market.

also:

ANNALYN KURTZ. Annalyn Kurtz with CNNMoney. This week marks five years since the financial crisis began, and Hank Paulson, who you worked very closely with, has said his biggest regret was that he wasn’t able to convince the American people that what was done– the bank bailouts–weren’t from Wall Street, they were from Main Street. What is your biggest regret as you reflect on the five-year anniversary? And do you believe that the Fed, Congress, and the President have put the necessary measures in place to prevent another deep financial crisis?

CHAIRMAN BERNANKE. Well, on regrets, as Frank Sinatra says, I have many. I think my–you know, reasonably, the biggest regret I have is that we didn’t forestall the crisis. I think once the crisis got going, it was extremely hard to prevent. You know, I think we did what we could, given the powers that we had, and I would agree with Hank that we were motivated entirely by the interest of the broader public, that our goal was to stabilize the financial system so that it would not bring the economy down, so that it would not create massive unemployment and economic hardship that was even more–that would be–would have been even more severe by many times than what we actually saw. So, I agree with him on that, and I guess, since you gave me the opportunity, I would mention that, of course, all the money that was used in those operations has been paid back with interest. And so, it hasn’t been costly even from a fiscal point of view. Now, in terms of progress, that’s a good question. I think we made a lot of progress. We had, of course, the Dodd-Frank law passed in 2010, and then we recently, you know, have come to agreement internationally on a number of measures, including Basel III and other agreements relating to the shadow banking system and other aspects of the financial system. I think that our-today, our large financial firms, for example, are better capitalized by far than they were certainly during the crisis and even before the crisis. Supervision is tougher. We do stress testing to make sure that firms can withstand not only normal shocks but very, very large shocks, similar to those they experienced in 2008. And very importantly, of course, we now have a tool that we didn’t have in 2008–which would have made, I think, a significant difference if we had had it-which is the Orderly Liquidation Authority that the Dodd-Frank bill gave to the FDIC in collaboration with the Fed. Under the Orderly Liquidation Authority, the FDIC, with other agencies, has the ability to wind down a failing financial firm in a way that minimizes the direct impact on the financial markets and on the economy. Now, I should say, I don’t want to overstate the case, I think there’s a lot more work to be done. In the case of resolution regimes, for example, the United States has set the course internationally. Other countries and international bodies like the FSB are setting up standards for resolution regimes, which are very similar to those of the United States, which is going to make for better cooperation across borders. But we’re still some distance from being fully geared up to work with foreign counterparts to successfully wind down international–multinational financial firm. And that’s–we’ve made progress in that direction, but we need to do more, I think. So, I think there’s more to be done. There’s more to be done on derivatives, although a lot has been done to make them more transparent and to make the trading of derivative safer. But it’s going to be probably some time before, you know, all of this stuff that has been undertaken, all of these measures are fully implemented. And we can assess, you know, the ultimate impact on the financial system.

also:

STEVE BECKNER. Steve Beckner of MNI. Mr. Chairman, a number of economists, and indeed, some of your Fed colleagues, have argued that the effectiveness of quantitative easing has greatly diminished, if not disappeared, and they point to the recent performance of the economy as proof of that. And there have been a number of people who have argued that there are regulatory and other impediments to growth beyond the reach of monetary policy. To what extent are these valid arguments? And if the economy does not speed up, that does not reach your objectives, how will you ever get out of quantitative easing?

CHAIRMAN BERNANKE. Well, on the effectiveness of our asset purchases, it’s difficult to get a precise measure. There’s a large academic literature on this subject, and they have a range of results, some suggesting that this is a quite powerful tool, some that it’s less powerful. My own assessment is that it has been effective. If you look at the recovery, you see that some of the strongest sectors, the leading sectors like housing and autos, have an interest sensitive sectors. And that these policies have been successful in strengthening financial conditions, lowering interest rates, and thereby promoting recovery. So I do think that they have been effective. You mentioned that there hasn’t been any progress. There has been a lot of progress, as I said at the beginning. Labor market indicators, while still not where we’d like them to be, are much better today than they were when we began this latest program a year ago. And importantly, as actually is referenced in our FOMC statement, that happened notwithstanding a set of fiscal policies which the CBO said would cost between one and one and a half percentage points of real growth and hundreds of thousands of jobs. So, the fact that we have maintained improvements in the labor market that are as good or better than the previous year, notwithstanding this fiscal drag, is some indication that there is at least a partial offset from monetary policy. Now, just as you say, there are a lot of things in the economy that monetary policy can’t address. They include the effectiveness of regulation, they include fiscal policy, they include developments in the private sector. We do what we can do and what–if we can get help, we’re delighted to have help from other policymakers and from the private sector and we hope that that will happen. The criterion for ending asset purchases is not, you know, some very high rate of growth. What it is, is the criterion–let me just remind you, the criterion is a substantial improvement in the outlook for the labor market and we have made significant improvement. Ultimately, we will reach that level of substantial improvement and at that point, we will be able to wind down the asset purchases. Again, you know, and I think people don’t fully appreciate that we have two tools: We have asset purchases and we have rate policy and guidance about rates.

It’s our view that the latter, the rate policy, is actually the stronger, more reliable tool. And when we get to the point where we can, you know, where we are close enough to full employment, that rate policy will be sufficient, I think that we will still be able to provide–even if asset purchases have reduced–we will still be able to provide a highly accommodative monetary background that will allow the economy to continue to grow and move towards full employment.

also:

PETER COOK. Peter Cook at Bloomberg Television. Mr. Chairman, one of my colleagues was remarking as we came in here, we don’t often get surprises from the Federal Reserve. This was a surprise, you talked about–you hadn’t telegraphed anything specifically, but you’ve seen the market reaction, I’m sure. My question for you is, were you intending a surprise today, and did you get the intended result judging from the market reaction? And related to that, by taking this action today, continuing the bond purchases going forward. At what point do you believe you’re starting to complicate the exit strategy? Simply by continuing to keep the Fed’s foot on the gas pedal, do you make life more complicated for the Federal Reserve down the road?

CHAIRMAN BERNANKE. Well, it’s our intention to try to set policy as appropriate for the economy, as I said earlier. We are somewhat concerned. I won’t overstate it, but we do want to see the effects of higher interest rates on the economy, particularly in mortgage rates on housing. So to the extent that our policy makes conditions–our policy decision today makes conditions just a little bit easier, that’s desirable. We want to make sure that the economy has adequate support and in particular, is less surprising the market or easing policy as it is avoiding a tightening until we can be comfortable that the economy is in fact growing, you know, the way we want it to be growing. So, this was a step–it was a step, a precautionary step if you will. It was a–the intention is to wait a bit longer and to try to get confirming evidence whether to these-to whether or not the economy is, in fact, conforming to this general outlook that we have. I don’t think that we are complicating anything for future FOMCs. It’s true that the assets that we’ve been buying add to the size of our balance sheet. But we have developed a variety of tools, and we think we have numerous tools that we–can be used to both manage interest rates and to ultimately unwind the balance sheet when the time comes. So I, you know, I’m–I feel quite comfortable that we can, in particular, that we can raise interest rates at the appropriate time, even if the balance sheet remains large for an extended period. And that will be true of course for, you know, future FOMCs as well.

also:

DON LEE. Don Lee, L.A. Times. As you may know, the Census Bureau reported yesterday that poverty rate and the median household income saw no improvement last year. And I wonder when you see median income is turning up significantly for most people, and in light of the fact that people in the middle and the bottom have seen very little of the gains relative to higher income households, how would you assess the–both quantitative easing and Fed policies?

CHAIRMAN BERNANKE. Sure. So that’s certainly the case that there are too many people in poverty. There are a lot of complex issues involved. There are complex measurement issues, I would just have to mention that. There are a lot of issues that are really long-term issues as well. For example, it might seem a puzzle that U.S. economy gets richer and richer, and yet there are more poor people. And the explanation, of course, is that our economy is becoming more unequal. The more, very rich people and more people in the lower half who are not doing well, these are–there’s a lot of reasons behind this trend, which have been going on for decades, and economists disagree about the relative importance of things like technology and international trade and unionization and other factors that have contributed to that. But I guess my first point is that these long run trends, it’s important to address these trends but the Federal Reserve doesn’t really have the tools to address these long run distributional trends. They can only be addressed really by Congress and by the Administration. And it’s up to them, I think, to take those steps. The Federal Reserve is–we are doing our part to help the median family, the median American, because one of our principal goals, are–we have two principal goals, one is maximum employment, jobs; the best way to help families is to create employment opportunities. We’re still not satisfied, obviously, with where the labor market, the job market is. We’ll continue to try to provide support for that. And then the other goal is price stability, low inflation, which, of course, also helps make the economy work better for people in the middle and the lower parts of the distribution. So, we use the tools that we have. It would be better to have a mix of tools at work, not just monetary policy but fiscal policy and other policies as well. But the Federal Reserve, we can, you know, we only have a certain set of tools and those are the ones that we use. Again, our objective, our objectives of creating jobs and maintaining price stability, I think, are quite consistent with helping the average American, but there’s limits to what we can do about long run trends and I think those are very important issues that Congress and the Administration, you know, need to look at and decide, you know, what needs to be done there.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1714.23 as this post is written

Long-Term Charts Of The ECRI WLI & ECRI WLI, Gr. – September 20, 2013 Update

As I stated in my July 12, 2010 post (“ECRI WLI Growth History“):

For a variety of reasons, I am not as enamored with ECRI’s WLI and WLI Growth measures as many are.

However, I do think the measures are important and deserve close monitoring and scrutiny.

The movement of the ECRI WLI and WLI, Gr. is particularly notable at this time, as ECRI publicly announced on September 30, 2011 that the U.S. was “tipping into recession,” and ECRI has reiterated the view that the U.S. economy is currently in a recession, seen most recently in these seven sources :

Other past notable 2012 reaffirmations of the September 30, 2011 recession call by ECRI were seen (in chronological order)  on March 15 (“Why Our Recession Call Stands”) as well as various interviews and statements the week of May 6, including:

Also, subsequent to May 2012:

Below are three long-term charts, from Doug Short’s blog post of September 20 titled “ECRI Recession Watch:  Weekly Update.”  These charts are on a weekly basis through the September 20 release, indicating data through September 13, 2013.

Here is the ECRI WLI (defined at ECRI’s glossary):

(click on charts to enlarge images)

Dshort 9-20-13 ECRI-WLI 132.4

This next chart depicts, on a long-term basis, the Year-over-Year change in the 4-week moving average of the WLI:

Dshort 9-20-13 ECRI-WLI-YoY 5.9 percent

This last chart depicts, on a long-term basis, the WLI, Gr.:

Dshort 9-20-13 ECRI-WLI-growth-since-1965 4.5

 

_________

I post various economic indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not necessarily agree with what they depict or imply.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1716.32 as this post is written

St. Louis Financial Stress Index – September 19, 2013 Update

On March 28, 2011 I wrote a post (“The STLFSI“) about the  St. Louis Fed’s Financial Stress Index (STLFSI) which is supposed to measure stress in the financial system.  For reference purposes, the most recent chart is seen below.  This chart was last updated on September 19, incorporating data from December 31,1993 to September 13, 2013, on a weekly basis.  The September 13, 2013 value is -.449:

(click on chart to enlarge image)

STLFSI_9-19-13 -.449

Here is the STLFSI chart from a 1-year perspective:

STLFSI_9-19-13 -.449 1-year

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis; accessed September 19, 2013:

http://research.stlouisfed.org/fred2/series/STLFSI

_________

I post various indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not necessarily agree with what they depict or imply.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1725.62 as this post is written

Chicago Fed National Financial Conditions Index (NFCI)

Each week I have been posting two charts of the St. Louis Fed’s Financial Stress Index (STLFSI), which is supposed to measure stress in the financial system.

Of course, there are a variety of other measures and indices that are supposed to measure financial stress and other related issues, both from the Federal Reserve as well as from private sources.

Two other indices that I regularly monitor include the Chicago Fed National Financial Conditions Index (NFCI) as well as the Chicago Fed Adjusted National Financial Conditions Index (ANFCI).

Here are summary descriptions of each, as seen in FRED:

The National Financial Conditions Index (NFCI) measures risk, liquidity and leverage in money markets and debt and equity markets as well as in the traditional and “shadow” banking systems. Positive values of the NFCI indicate financial conditions that are tighter than average, while negative values indicate financial conditions that are looser than average.

The adjusted NFCI (ANFCI). This index isolates a component of financial conditions uncorrelated with economic conditions to provide an update on how financial conditions compare with current economic conditions.

For further information, please visit the Federal Reserve Bank of Chicago’s web site:

http://www.chicagofed.org/webpages/publications/nfci/index.cfm

Here are the most recently updated charts of the NFCI and ANFCI, respectively.

The NFCI chart below was last updated on September 18, incorporating data from January 5,1973 to September 13, 2013, on a weekly basis.  The September 13, 2013 value is -.77:

(click on chart to enlarge image)

NFCI_9-18-13 -.77

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis; accessed September 19, 2013:

http://research.stlouisfed.org/fred2/series/NFCI

The ANFCI chart below was last updated on September 18, incorporating data from January 5,1973 to September 13, 2013, on a weekly basis.  The September 13, 2013 value is .10:

(click on chart to enlarge image)

ANFCI_9-18-13 .10

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis; accessed September 19, 2013:

http://research.stlouisfed.org/fred2/series/ANFCI

_________

I post various indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not necessarily agree with what they depict or imply.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1725.52 as this post is written

Has The Financial System Strengthened Since The Financial Crisis?

The last two weeks have seen a variety of articles that discuss the five-year anniversary of the Financial Crisis of 2008, of which many date to the bankruptcy filing of Lehman Brothers on September 15, 2008.  One frequent topic is whether today’s financial system has been sufficiently “strengthened” since September of 2008, so that subsequent “financial crises” can be avoided.

Many seem to believe that today’s financial system has been sufficiently “strengthened” and safeguards have been enacted to avoid the hazards encountered during the Financial Crisis, such as overleveraged financial institutions, “aggressive” lending practices, weak regulation and enforcement, etc.  In order to prove that the financial system is in much better shape now – and able to avoid future problems – various statistics are cited, including increased bank capital, strong bank earnings, lower bank leverage ratios, and increased supervision and regulation, including provisions of the Dodd-Frank Act.

However, the vast majority of the discussions of whether the financial system of today is “strong” and whether it will avoid future upheavals seems to be lacking recognition of various problematical areas.

My analyses indicate that the financial system is rife with “problems areas”; a few include:

“Too Big To Fail” (TBTF) and other “Moral Hazard” Issues:

Over the last few years, there has been much mention of “Too Big To Fail”; however, there appears to have been little done to solve the problem.  In fact, “Too Big To Fail” issues seem to have grown over the last few years.  I consider “Too Big To Fail” to be a subset of Moral Hazard, which overall remains at wildly elevated levels.

Quantitative Easing Issues:

I have written extensively about Quantitative Easing (QE) as I believe many of its aspects lack recognition and understanding.   My analyses indicate that QE (also referred to as “Large-Scale Asset Purchases” (LSAPs)) in general carries an array of risks, detrimental impacts, and unintended consequences.  It has complex impacts on the economy and markets.

One of the many problems inherent in QE is that of exit issues.  As I wrote in the December 17, 2010 post (“Quantitative Easing Exit Issues“) :

While it is possible that the eventual exit from QE will go smoothly, I think that the possibility of adversity in doing so is high.  There is much that can go wrong in “a big way” on numerous fronts – especially if an exit is done under exigent circumstances.  As well, there are many conflicting incentives inherent in Quantitative Easing, which further complicates the “exit” issue.

Asset bubbles:

No discussion of financial system stability can be complete without consideration of whether asset bubbles exist –  and if so, how they will be “resolved.”   Almost by definition, asset bubbles breed (future) financial instability.  My analyses indicate that there are various immensely large asset bubbles, a subject of which I have extensively written.  While all of these asset bubbles are wildly pernicious and will have profound adverse future implications, hazards presented by the bond market bubble are especially notable.

The Threat Of Rising Interest Rates:

I’ve most recently discussed this issue in the post of August 22, titled “The Impact Of Rising Interest Rates.”  As I mention in this post, “…my analyses indicate that interest rates can rise to levels much higher than generally expected.”  The threat of rising interest rates is inherent in the deflating and/or bursting of the bond bubble.   A substantial rise  in interest rates will have wide-ranging, pernicious impacts on the financial system.

For reference, here is a monthly chart of the 10-Year Treasury Yield from 1980, on a LOG basis:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

EconomicGreenfield 9-18-13 TNX Monthly LOG Since 1980

Conclusion:

The level of peril inherent in the financial system is outsized from a long-term historical standpoint.  I believe that the financial system will have substantial “upheaval” via a future “crash.”

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1704.76 as this post is written

Corporate Bond Yields And OASs

I often write about interest rates and related topics as my analyses indicates that the overall bond market is an exceedingly large asset bubble.

The characteristics and price levels of corporate bonds is highly noteworthy.

For reference purposes, here are three bond indices and their FRED charts, as well as depictions of their spreads (as seen in OASs) :

The BofA Merrill Lynch US Corporate Master Index

An excerpt from the FRED description of the BofA Merrill Lynch US Corporate Master Index :

This data represents the effective yield of the BofA Merrill Lynch US Corporate Master Index, which tracks the performance of US dollar denominated investment grade rated corporate debt publically issued in the US domestic market.

A chart of the BofA Merrill Lynch US Corporate Master Index,  with an effective yield of 3.58% as of September 13, 2013:

(click on chart to enlarge images)(chart last updated on 9-16-13)

BAMLC0A0CMEY_9-16-13 3.58 percent

The BofA Merrill Lynch US Corporate Master Index Option-Adjusted Spread (OAS)

An excerpt from the FRED description of the BofA Merrill Lynch US Corporate Master Index Option-Adjusted Spread (OAS):

The BofA Merrill Lynch Option-Adjusted Spreads (OASs) are the calculated spreads between a computed OAS index of all bonds in a given rating category and a spot Treasury curve. An OAS index is constructed using each constituent bond’s OAS, weighted by market capitalization. The Corporate Master OAS uses an index of bonds that are considered investment grade (those rated BBB or better).

A chart of the The BofA Merrill Lynch US Corporate Master Index Option-Adjusted Spread (OAS), with a value of 1.54% as of September 13, 2013:

(click on chart to enlarge image)(chart last updated on 9-16-13)

BAMLC0A0CM_9-16-13 1.54 percent

The BofA Merrill Lynch US High Yield Master II Index

An excerpt from the FRED description of the BofA Merrill Lynch US High Yield Master II Index:

This data represents the effective yield of the BofA Merrill Lynch US High Yield Master II Index, which tracks the performance of US dollar denominated below investment grade rated corporate debt publically issued in the US domestic market.

A chart of the The BofA Merrill Lynch US High Yield Master II Index, with an effective yield of 6.51% as of September 13, 2013:

(click on chart to enlarge image)(chart last updated on 9-16-13)

BAMLH0A0HYM2EY_9-16-13 6.31 percent

The BofA Merrill Lynch High Yield Master II Option-Adjusted Spread (OAS)

An excerpt from the FRED description of the BofA Merrill Lynch High Yield Master II Option-Adjusted Spread (OAS) :

The BofA Merrill Lynch Option-Adjusted Spreads (OASs) are the calculated spreads between a computed OAS index of all bonds in a given rating category and a spot Treasury curve. An OAS index is constructed using each constituent bond’s OAS, weighted by market capitalization. The BofA Merrill Lynch High Yield Master II OAS uses an index of bonds that are below investment grade (those rated BB or below).

A chart of the BofA Merrill Lynch High Yield Master II Option-Adjusted Spread (OAS), with a value of 4.60 percent as of September 13, 2013:

(click on chart to enlarge image)(chart last updated on 9-16-13)

BAMLH0A0HYM2_9-16-13 4.60 percent

The BofA Merrill Lynch US High Yield CCC or Below Effective Yield

An excerpt from the FRED description of The BofA Merrill Lynch US High Yield CCC or Below Effective Yield :

This data represents the effective yield of the BofA Merrill Lynch US Corporate C Index, a subset of the BofA Merrill Lynch US High Yield Master II Index tracking the performance of US dollar denominated below investment grade rated corporate debt publically issued in the US domestic market. This subset includes all securities with a given investment grade rating CCC or below.

A chart of The BofA Merrill Lynch US High Yield CCC or Below Effective Yield, with an effective yield of 9.87% as of September 13, 2013:

(click on chart to enlarge image)(chart last updated on 9-16-13)

BAMLH0A3HYCEY_9-16-13 9.87 percent

The BofA Merrill Lynch High Yield CCC or Below Option-Adjusted Spread (OAS)

An excerpt from the FRED description of The BofA Merrill Lynch High Yield CCC or Below Option-Adjusted Spread (OAS):

This data represents the Option-Adjusted Spread (OAS) of the BofA Merrill Lynch US Corporate C Index, a subset of the BofA Merrill Lynch US High Yield Master II Index tracking the performance of US dollar denominated below investment grade rated corporate debt publically issued in the US domestic market. This subset includes all securities with a given investment grade rating CCC or below.

A chart of The BofA Merrill Lynch High Yield CCC or Below Option-Adjusted Spread (OAS), with a value of 8.12 percent as of September 13, 2013:

(click on chart to enlarge image)(chart last updated on 9-16-13)

BAMLH0A3HYC_9-16-13 8.12 percent

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1698.51 as this post is written