martes, 10 de septiembre de 2013

martes, septiembre 10, 2013

Up and Down Wall Street

SATURDAY, SEPTEMBER 7, 2013

Unease About QE

By RANDALL W. FORSYTH


Federal Reserve tapering draws nearer, like it or not.


 "Lord, make me chaste -- but not yet," St. Augustine famously prayed.


Federal Reserve Chairman Ben Bernanke and some of his colleagues on the Federal Open Market Committee may be invoking analogous words when they gather next week to consider what to do about its $85 billion-a-month bond-buying program after the "disappointing" August employment numbers reported Friday.

Disappointing was the characterization from our friends at the Liscio Report, Philippa Dunne and Doug Henwood, of the jobs data, which showed a 169,000 increase in non-farm payrolls, just shy of the 180,000 consensus forecast but after sizable downward revisions totaling some 74,000. And while the jobless rate ticked down to 7.3%, instead of holding steady at July's 7.4% as expected, the decline reflected further shrinkage in the labor force. The labor-force participation rate slid to 63.2% -- the lowest since August 1978, when women's entrance into the workplace was ramping up.

The percentage of the population that's employed -- an all-inclusive measure whose denominator doesn't discriminate among those seeking work or not -- also fell to 58.6%, at the low end of its recent range, they add. "As we've pointed out before, this matches 1983 levels -- but 1983 was early in a recovery from a deep recession. Today's ratio is below its 1979 level and on a par with 1977 -- an awful time, economically speaking, in the popular memory."

As with every jobs report, the data weren't all good or all bad. JPMorgan economist Michael Feroli points out that, unlike the pattern for most of the year, the household survey (the source for the unemployment rate that gets the main attention on the evening newscasts), showed that full-time jobs rose by 118,000 while part-time employment fell by 234,000. In addition, the U-6 "under-employment" measure that takes in discouraged workers and those who work part-time because they can't find full-time work, declined to 13.7% from 14%.

In addition, Feroli turned up a factoid in the establishment data that might account for some of the shortfall in payrolls -- a record 22,000 plunge in motion-picture jobs last month. "Some reports attribute this to a temporary work stoppage in the adult-film business which, if true, should contribute to a rebound in job growth in September."

How much the FOMC might be swayed by that swing is hard to say. For their Sept. 17-18 confab, they'll have to go with the August jobs report, which was not good, former Fed Vice Chairman Donald Kohn told Greg Valliere, chief political strategist at the Potomac Research Group. Kohn still expects the FOMC to begin gently tapering its asset purchases, but adds that the odds of that happening has shifted, to perhaps 60-40 from 80-20 a few days ago, according to a research note published after the jobs numbers' release.

Given that the August employment report "wasn't a disaster," the Fed is likely to go ahead with the taper because it was "pre-announced," Kohn continued. Bernanke broached the idea of trimming the securities purchases in late May and laid out a tentative timetable after the June FOMC meeting -- contingent upon economic data improving in line with its forecast. Had the Fed not pre-committed, "they might wait until they see whether the economy and labor markets are indeed strengthening as expected," Kohn added.

But the central bank has tied the end of quantitative easing to a 7% jobless rate, "and even if it's for the wrong reason, they're getting closer to that," Kohn continued. Fed officials also would prefer to shift attention away from QE and toward "forward guidance" -- the notion that they can shape the markets' expectations about policy by declaring their intent to keep short-term rates anchored near zero well into next year and beyond.

While a fair contingent of Fed officials is dubious about QE (with Kansas City Fed President Esther George, a voting member of the FOMC this year, wanting to begin tapering earlier), other members would argue for a delay, according to Kohn. Still, the FOMC probably "will go with a very gentle first step -- complete with caveats about how it could be reversed and how it doesn't imply anything about when rates will be raised."

Fed watchers guess that the central bank could begin paring its monthly purchases from the current $85 billion pace by perhaps $10 billion or $15 billion. Barry Knapp, Barclays' chief equity strategist, suggests that there may be little or no tapering in the purchases of agency mortgage-backed securities, from the current $40 billion a month, with the reduction being concentrated in the $45 billion Treasury portion.

That would continue to support housing, important because the mortgage-credit channel remains impaired and is having outsize effects on first-time home buyers, Knapp writes. Moreover, some research papers presented at last month's Jackson Hole confab suggest that the mortgage-backed securities purchases were more effective than buying Treasuries.

The impact of the anticipated tapering has been evident on housing, with mortgage applications down sharply and new-home sales beginning to buckle. As anyone who has bought a house knows, months can pass between the time someone starts shopping and the time he or she gets a mortgage commitment, goes to contract, and finally closes. The summer's deals probably reflect borrowers' behavior in the spring, when rates were at historic lows and buyers were looking to be settled before the new school year started.

In sum, the impact on housing from the percentage-point-plus jump in fixed-rate mortgages is only beginning to be felt, and likely most acutely by first-time buyers, who usually are constrained by the monthly nut.

Keeping the monthly nut in check for automobiles is another sign of the Fed's success. Car and light-truck sales surged to a 16 million seasonally adjusted annual rate in August, matching the cyclical peak of 2006-07. While the average selling price of a new car is north of $30,000, cheap leases can put you behind the wheel for $200 or less for mid-size sedans and under $400 for some luxury models. Credit the revival of the asset-backed securities market by the Fed's zero-rate policy for the boom in car sales.

No matter how many times Fed officials insist that tapering doesn't equate with tightening, the credit markets nonetheless begin to anticipate the first boost in short-term rates as the eventual, inevitable next step -- even if that isn't likely until 2014 or maybe 2015. In any case, tapering wouldn't help what have been two bright spots for the U.S. economy: housing and autos. Perhaps chastity could be put off a bit longer.

SOME ARGUE THAT THE PROSPECTS of a Fed taper have been largely discounted, at least in the Treasury market where, ahead of Friday's jobs report, the benchmark 10-year note yield touched the psychologically important 3% for the first time since mid-2011. That represented a huge surge since the beginning of May, when the 10-year bottomed a hair over 1.60%, which as noted has translated to a jump in mortgage rates.

But it hasn't deterred a new generation of Internet stocks from partying like it was 1999. Facebook (ticker: FB) has more than doubled from its lows, has climbed past its May 2012 $38 initial public offering price, and Friday was closing in on its record, never-to-be repeated $45 peak trade on its first fete day.

But that pales next to the surges this year in the likes of Zillow (Z), LinkedIn (LNKD) or Yelp (YELP). And so what if Netflix (NFLX) has more than tripled and sports a triple-digit price-earnings multiple? At least it has earnings, unlike the dot-com wunderkinder of the previous generation.

Those kinds of surges don't happen without a rising tide of liquidity, to which corporations are availing themselves by the truckload. Verizon's (VZ) buyout of Vodafone's (VOD) stake in their wireless business will be funded in part by a record $50 billion debt financing, a sum impossible to contemplate in the absence of Fed QE. Elsewhere in telecoms, Sprint (S) did a $6.5 billion junk-bond offering late in the week.

But emerging markets have suffered mightily from the prospect of Fed tapering. Countries with large current-account deficits had been able to fund those gaps cheaply and painlessly as all the central-bank liquidity flowed in search of higher returns. That flow reversed in anticipation of the Fed's tightening the tap, hitting emerging equity markets such as Indonesia, Turkey, Brazil, and Thailand.

It's a trading desk clichƩ that the pain trade is the right one. None has been more painful tan EM equities and bonds, which have seen $60 billion of outflows from their funds in the past three months, including $6.1 billion in the latest week. To Michael Hartnett and Brian Leung, respectively chief investment strategist and global equity strategist at Bank of America Merrill Lynch, those massive outflows equal capitulation.

The pain has been especially acute in India, which has suffered a huge collapse in the rupee, doubling the hit to U.S. investors in its stocks. The heavily advertised WisdomTree India Earnings exchange-traded fund (EPI) plunged by about one-third from late May (coincidentally when Bernanke started his taper talk) to its late-August low. But a new head of India's central bank has taken steps to steady the rupee. And proving itself a perfect contrary indicator, the New York Times last week ran a page-one story on India's economic travails; the ETF jumped 7% on the week.

The Fed might well take into account the impact of tapering on emerging economies, significant markets for U.S. multinationals. Those who are willing to speculate that the worst has been seen on the subcontinent can consider two closed-ends selling at double-digit discounts to net-asset value: Morgan Stanley India Investment (IIF) and India Fund (IFN.) 

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