Bernanke Comments Don’t Signal QE3

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The market took this speech as dovish, and expectations for QE3 rose slightly. I, however, don’t particularly find the comments “dovish.” Anyone who knows to watch the average work week component in the monthly jobs data knows that we’re not seeing additional hiring because of expanding economic conditions.

Bernanke, in my opinion, just said out loud what many already know. The labor market is getting better, but it isn’t healed, and it is still very fragile.

For a while we’ve known that Bernanke and the Fed are data dependent, and if the data gets worse, they’ll be more accommodative.

We knew this coming into the speech: If the economic data gets worse, the Fed will be quick to move with more accommodative policy. If the data gets better, the Fed will be much slower to raise rates. That was the reality we all knew before the speech, and I believe that is the reality after the speech.

 

 

Steepening Yield Curve a Bullish Sign for Bank Stocks

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As you probably know, the banking sector has been one of the best performing of the year (up 28% year to date). I think it’s safe to say that the banks have probably become a bit overbought here, and that a correction of some sort is due. So, if you’re not already long the banks, it would be foolish to buy them here.

But, that short term overbought situation aside, one of the things that has been happening lately, that is very bullish for banks, is that the yield curve has been steepening for the first time in a while.

The difference in yield between the 10 year government bond and the two year government bond has risen sharply so far this year, and that speaks directly to banks “Net Interest Margin.“

As you probably know, banks make money by borrowing short term at low rates, and lending long term at high rates. That difference is called the Net Interest Margin, and that’s the profit the bank earns.

Well, as the yield curve steepens, the net interest margin of banks increases. So, despite the potential of a decline in the short term, the underlying fundamentals are turning more positive for banks, and a decline in the banks should be viewed as a long term buying opportunity.

Finally, while a steepening yield curve is bullish for bank stocks, there is actually an ETN that you can buy that actually rises as the yield curve itself steepens. The ETN symbol is STPP. Seems like there’s an ETF (or ETN) for everything these days.

 

Important Shift in Yields

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While everyone was focused on equities yesterday, I think the most important market movements we saw yesterday came from the 10 and 30 year treasuries.

It looks at though 10 and 30 year yields have finally, after months, broken out to the upside.  As I’ve said repeatedly, getting long yields is going to be one of those “trades of a lifetime” but the trick is you’re got to be patient.

It looks to me like yields have finally broken out to the upside, and with the fundamentals of a less accommodative/more hawkish Fed, the technical and fundamentals are in line.

I’ve been faked out too many times on this trade so I’ll wait for another close or two before putting a position on, but it looks like the time is finally near to get long yields.

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Greece Recap and Preview – Watch the Deadlines

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The net/net of Thursday’s news on Greece is that the Greek government has agreed to the troika’s austerity demands.  However, the European financial ministers now say the deal isn’t done, and that there won’t be a formal announcement this week.

The best way to keep an eye on this theatre of the absurd is to look to the deadlines, as we can reasonably guess the various groups will get their act together by then . . .

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So There’s Just One More Thing About Greece

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Just when you thought it was safe to finally stop paying attention to Athens, we have a pretty important event occurring on Thursday of this week with regards to the Greek bailout.

Thursday is the day that private Greek bond holders have to agree to exchange their current bonds for longer dated bonds with lower interest rates.

This is important for two reasons:  First, unless 66% of the private bond holders agree to the voluntary swap, the entire debt renegotiation is void (and so is the Greek bailout, because the private bond holders are an integral piece to the entire package).  Second, if less than less than 75% of the private debt holders agree to the voluntary swap, that will trigger “Collective Action Causes.”

CAC’s are basically laws passed in the Greek Parliament last week that would force those private bondholders to swap their debt, voluntary or not (it would basically say they aren’t going to pay the old bonds and instead will pay them what the new bonds state) . . .

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A Quick Note on the Expiration of the ECB’s LTRO’s

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I’ve been saying for a while now that one of the most important events of the week was the expiration of the ECB’s LTRO’s that occurred Wednesday.

Like goldilocks, the demand for the 1% loans for 3 years from European banks was almost perfect at a little over 500 billion Euro’s.  It wasn’t too little (if so, the market would think that banks might need it later) and it wasn’t too much (if so, the market would think things were worse than they appear) . . .

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The Consumer Financial Protection Bureau

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The recently formed Consumer Financial Protection Bureau released an email on Wednesday that showed its intent to begin an inquiry into bank’s checking account courtesy overdraft practices.

In the announcement, the group cited a 2008 study that found just under 10 percent of bank customers incurred more than 80 percent of overdraft fees.

In what must have been a shocking discovery to them, the vast majority of those people were young customers and those with low incomes.

In fact, the number one reason for the inquiry is the fact that courtesy overdraft fees disproportionately affect those two groups, again those with low incomes and young people . . .

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Payroll Tax Cut Date

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On Friday Congress passed an extension of the payroll tax cut, removing the prospects for another drawn out, down to the wire drama that unnerves markets.

As a rule, markets hate uncertainty, and removing uncertainty in this regard will be a net positive, as the market has come to expect these public showdowns and last minute deals . . .

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China-Canadian Trade Talks

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I briefly mentioned last week the high level trade talks that occurred between China and Canada in Beijing.  The net result of those talks, the most material and fruitful in years, was the signing of a declaration of intent to agree to a “Foreign Investment Promotion and Protection Agreement.”  (FIPA).

The lengthy name aside, it’s an important step in further Canadian/Chinese trade, as it sets a broad frame work for ensuring equitable treatment for foreign investors in both countries.  Basically, it removes a large degree of risk for Chinese or Canadian firms investing with the other country by providing a legal framework and set of laws that protect foreign investors . . .

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The AAPL Effect/in /by

One of the things traders are constantly monitoring is internals of an index or market, for clues about the strength or weakness of that market beyond what the simple headline numbers say.

That is why investors and trader monitor which sectors are rising and falling, because it can give insight into the “health” of a market rally.

For instance, if you have a market rallying but defensive sectors like utilities or consumer staples are leading the rally, that’s not a good thing.  The reason is because those defensive sectors outperform when the economy isn’t growing or people aren’t confident about the direction of a market (they are both economically insensitive—people need electricity and basic consumer goods like razors regardless of whether the economy is growing or expanding) . . .

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