Kevin Davitt | May 17, 2013 02:21PM ET
A couple of charts to tickle your cerebral cortex.
First, the NYSE market cap divided by the Federal Reserve's Balance Sheet. Next time you're wondering if the Fed can "exit/taper" without an Equity ripple - think about that chart.
While the S&Ps/RUT closed just shy of new all time highs..... the Fed's balance sheet did hit an all time high today. There is (at least in my mind) a HIGH correlation between Fed purchases and Equity performance.
I see a few things in this chart that goes back to late Reagan/Bush41 times. I'm not making a political argument, but according to Fed Funds from 1% to 5.25% in June 2006.
Until the summer of 2007, when it became apparent that "sub prime was NOT contained" and equity markets topped out.
As I mentioned yesterday, there has been a nearly constant Fed accommodation policy since late 2008 (45 out of 55 months) and the last time the Fed was not active was summer of 2011.
Furthermore, tapering may mean they don't purchase as many Treasuries/MBS (for example, they go from current $85 billion/month back down to a quaint $40 billion - QE3 levels). At some point (probably a LONG time from now) they will have to UNWIND those purchases, correct (depending on duration)? Also, we have to service the interest on the debt (issuing more debt) and at some point there needs to be an unfettered buyer other than the Fed. Or am I missing something?
In September of 2008, the Fed's balance sheet was $900 million. Today, it's $3.35 trillion. It's grown by $2.4 trillion dollars.
Buying less of something is one thing......selling out of it, is quite another. Or, as anybody who has traded for any length of time knows, anyone can get into a position, it's taking it off that is an art.
Moving on to the metals, which have been particularly interesting the past month, it is worth noting that we have not seen unusually high headline inflation numbers during the recovery with the exception of the (Arab) Spring 2011. Keep in mind Core CPI does not include food and energy and Housing values play a large, anchoring role.
A good friend of mine and someone I've relied on for sage advice for many years pointed out the Gold v. S&P spread to me a long time ago. That relationship is back to where it was in fall of 2008 just before Lehman Brothers filed bankruptcy (when the S&Ps were ~1050 and GC at 800). The spread topped out in Feb of 2012 and since that time Gold has dramatically under performed the broad market.
Just as a frame of reference - this spread made lows in March of 2000 (Nasdaq top). It made highs in February of 2012 (Post LTRO in Europe - VERY aggressive monetary intervention globally). Other pivots include Spring 2003 when stocks bottomed around the time the second Iraq War began. Another bottom in July 2007 when stocks made their (previous) all time highs. A top in March 2009 (equity bottom). Look at the chart and see for yourself.
That brings us to the Gold v. Silver ratio going back in time. I believe the that Silver is attractive relative to Gold when the ratio is higher than 60:1 (currently 62:1). The level we're at now on the Gold Silver ratio. At the height of the financial crisis the spread was as wide as 90:1. Gold in tremendous demand relative to Silver.
I believe Silver retested the low end of the range this morning at $22/oz. I would be surprised to see it trade much lower, but if it does break I think somewhere between $18 and $20/oz will be a tremendous opportunity. (Silver has both "precious" as well as "industrial" qualities - so the "growth" story can stimulate SI prices as well as inflationary fears).
From a trading standpoint, the options are pricing genuine concern about a Fed pullback in September (October options cycle).
Fed Funds futures point to about a 25 basis point hike by the end of 2015. April of 2016 - infer a 50 basis point move. Hmmmmm?
Last two visuals - the Fed's balance sheet. As the constantly self promoting Gartman would say, "it goes from lower left to the upper right". As I mentioned before, at some point they will need to start unwinding that position. That said, there is a good reason for the admonition against "Fighting the Fed" - they have unlimited funds and it's a losing proposition.
However, at the risk of being a wet blanket, what I continue to see is an economy producing marginal low end service jobs, a (shadow) banking system that's still levered to the nines, and a Central Bank that's painted into a corner.
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