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Yellen Says High Degree of Accommodation Still Needed

Yellen Says High Degree of Accommodation Still Needed

Yellen Says High Degree of Accommodation Still Needed 

Here is the opening from this report from Bloomberg: Federal Reserve Chair Janet Yellen made it clear she believes the economy still requires a strong dose of stimulus five years after the recession ended because unemployment and inflation are well short of the Fed’s goals.

“A high degree of monetary accommodation remains warranted,” Yellen said today in testimony prepared for delivery to the Joint Economic Committee of Congress. “Many Americans who want a job are still unemployed,” and inflation is below the central bank’s 2 percent target, she said.

Data show “solid growth” in the second quarter, bolstering the case for a faster expansion this year, Yellen said. Gains in household wealth from rising home prices, less drag from federal and state and local budgets, and stronger growth abroad should all drive investment and consumption.

The Fed chair cited the slowdown in U.S. housing as a risk, along with “heightened geopolitical tensions” and financial stress in emerging markets.

“While conditions in the labor market have improved appreciably, they are still far from satisfactory,” Yellen said. She called the unemployment rate, which stood at 6.3 percent in April, “elevated,” and said the share of the labor force that has been unemployed for more than six months, as well as those working part-time who would prefer full-time work, “are at historically high levels.”

“We’ve never really seen a situation where long-term unemployment is so large a fraction of unemployment,” she said in response to a question.

David Fuller's view 

There was nothing in Yellen’s comments to worry the markets today.  In fact, they were reassuring for investors.  US short-term interest rates will probably not rise until the economy is clearly stronger and 10-year government bonds are closer to 3% than today’s level of 2.587%

Yellen will know that smart machines are the main reason for the “elevated” unemployment rate and the huge number of people who are working part-time rather than full-time which they would prefer.  In fairness to the Chairman, ‘full employment’ is one of her two mandates but more difficult to achieve due to the accelerating rate of technological innovation which this service has so often emphasised.

 

U.S. Stocks Fluctuate as Tech Stocks Tumble Amid Yellen Comments 

Here is the opening to this informative report on tech stocks from Bloomberg: The Nasdaq Composite Index (CCMP)fell as Yahoo! Inc. and Groupon Inc. led a selloff in Internet stocks for a second day. The Standard & Poor’s 500 Index rose amid optimism the Federal Reserve will continue to support the U.S. economy.

The Dow Jones Internet Composite Index dropped 2 percent and touched the lowest level since October. Groupon fell 19 percent as sales and profit projections trailed some estimates. Yahoo slumped 5.8 percent as Alibaba Group Holding Ltd. filed for a U.S. initial public offering. Whole Foods Market Inc. declined 20 percent after cutting its 2014 profit forecast for a third time because of increasing competition. Electronic Arts jumped 18 percent after reporting better-than-forecast results.

The Nasdaq Composite slipped 0.7 percent as of 12:30 p.m. in New York, paring an earlier drop of 1.5 percent. The S&P 500 gained 0.3 percent to 1,873.98, rebounding after dropping below its average trading level for the past 50 days. The Dow Jones Industrial Average gained 107.43 points, or 0.7 percent, to 16,508.45. Trading in S&P 500 stocks was 10 percent above the 30-day average during this time of day.

“You’re seeing a brutal shift from growth and momentum investing to more value-based investing,” Chad Morganlander, a fund manager at Stifel Nicolaus & Co., which oversees more than $150 billion, said in a phone interview from Florham Park, New Jersey. “The momentum stocks are ridiculously overvalued, but nonetheless, the overall broader market is fairly valued. Any kind of shift in momentum does spook investors.”

Technology stocks led this year’s selloff among companies whose growth are more tied to economic swings after a rally drove valuations to about double that of the S&P 500. The Nasdaq Composite is trading at 35 times reported earnings, compared with a multiple of 17.2 for the broad market measure.

David Fuller's view 

Janet Yellen’s comments were favourable for Wall Street today but I think Putin’s U-turn, if you believe him, was at least equally responsible for the firm close. 

This item continues in the Subscriber’s Area.

 

Email of the day 1 

On the pace of the post credit crisis recovery and also the ‘new tech’ bubble:

“David you have been consistent on your view of the post credit bubble recovery pace, and have nailed it. Most other commentators seem to be grasping at straws.

“Now that the 2nd tech bubble in 15 years is bursting won't it be interesting to see what bargains appear near year end? They may bottom before that but an inevitable tax selling / window dressing effect may get us the retest which could be buyable. Would you buy Facebook as an investment if it came off at year end and initiated a dividend or is the "leapfrog" risk too great?”

David Fuller's view 

Thanks for a thoughtful comment and your interesting questions.  They are partially answered by my comments above.

This item continues in the Subscriber’s Area.

 

Russia Pulls Troops From Ukraine Border, Putin Says 

Here is the opening and another brief section of this eyebrow-raising report from Bloomberg:

President Vladimir Putin called on separatists in Ukraine to postpone a vote for autonomy and said he’s pulled Russian troops from the country’s border after weeks of tension, as the U.S. said there’s no sign of a withdrawal.

The Donetsk and Luhansk regions should delay referendums planned for May 11 in order to help “create the necessary conditions for dialogue” between pro-Russian forces in Ukraine and the government in Kiev, Putin said today in Moscow. He said Russian troops “are not on the Ukrainian border, they are in places where they conduct their regular drills.”

Ukraine’s border service said it wasn’t able to confirm the pullback, and that military drills near the frontier continued. Pentagon spokesman Army Col. Steve Warren told reporters today that “we have seen no change in the Russian force posture along the Ukrainian border.”

Ukraine’s government and its U.S. and European allies have accused Russia of fomenting separatist unrest in eastern Ukraine, and warned that Putin may follow his annexation of Crimea with another land grab against his neighbor. The Russian leader’s speech today may ease those tensions, and it sparked a rally on Russian and Ukrainian financial markets.

“He is seemingly moving off the brink,” said Martha Brill Olcott, a senior associate with the Russia and Eurasia Program at the Carnegie Endowment in Washington. “It still doesn’t defuse the situation in Ukraine unless Russia signals to the separatists that it won’t support their activities.”

And:

Putin said today violence in Ukraine must stop for any dialogue to begin, and voiced support for the presidential election Ukraine plans to hold on May 25, which Russia has previously opposed. Foreign Minister Sergei Lavrov said yesterday it should be delayed because of Ukraine’s internal unrest. The U.S. and EU say the vote should go ahead.

David Fuller's view 

These are either completely disingenuous comments, such as one would expect from old KGB operatives, or evidence that Putin is under considerable political and economic pressure within Russia. 

Whatever, a large invasion of Ukraine’s long Eastern border, rather than the current disguised presence of Russian military personnel would be more dangerous, provocative and expensive to maintain.  Putin’s aggression to date has created bitter resentment among non-Russian Ukrainians in the country which supplies more military goods to Russia than any other nation.  It has jeopardised Russia’s trade with many other European countries.  More countries in the region are now planning to increase their defence spending and also join NATO.   

 

Email of the day 2 

In response to my comments on Russia:

BP and Shell continue to invest in assets situated IN Russia. Are they clever or stupid? Boardroom groupthink or a long-term strategy? What yield should BP, in particular, be valued on?”

David Fuller's view 

Thanks for these question which will be of interest to a number of subscribers.

This item continues in the Subscriber’s Area.


The Markets Now: 9th May at the East India Club 

Here is the latest brochure. 

David Fuller's view 

‘May you live in interesting times.’ Whether you view that saying as a blessing or a curse, there will be plenty of interesting developments to talk about on the 9th, from market trends to geopolitics and investment strategies. I have just seen Iain Little’s and Bruce Albrecht’s PowerPoints and they are interesting. I am still working on mine.  Do come along to listen and participate, if you wish.  At 8:00, following three interactive presentations, Iain, Bruce and I will head to the Club’s spacious cash bar, where you are welcome to join us.

 

Treasury Yield Curve Steepens as Fed Chief Sees Accommodation 

This article by Susanne Walker for Bloomberg may be of interest to subscribers. Here is a section: 

The Treasury market yield curve steepened after Federal Reserve Chair Janet Yellen said a “high degree” of accommodation remains warranted, tempering expectations for an acceleration of interest-rate increases.

The difference in yields between five- and 30-year securities increased to about 175 basis points, or 1.75 percentage points, as investors bet moderate growth will prompt the central bank to stick with forecasts for increases next year. Benchmark 10-year notes were little changed before today’s auction of $24 billion of the securities.

“The Fed is going to remain in the game for now,” said Sean Simko, a money manager who oversees $8 billion at SEI Investments Co. in Oaks, Pennsylvania. “It keeps Treasuries in the range it’s in. She has alluded to the economy making strides. We still need to remain patient.”

Eoin Treacy's view 

The term “high degree” when referring to monetary accommodation is sufficiently opaque to allow the Fed plenty of wiggle room as it tapers quantitative easing while allowing its balance sheet to continue to expand. Against this background, it is worth remembering that one of the reasons the Fed has felt able to taper is because the government’s deficit has been shrinking which has resulted in fewer Treasuries being issued. As a result there have been fewer bonds to buy.

 

BlackRock World Mining boosts income 

This article from the Investors Chronicle dated February 5th may be of interest to subscribers. Here is a section:

About half the trust's income comes from ordinary dividends, which Mr Hambro says are on the rise, but it has also boosted its income by investing in royalties. This is where in exchange for putting money into a company the trust, for example, receives a percentage of the revenue from the company's mine over its life. The trust holds three royalties, though can invest up to 20 per cent of its portfolio in these and is looking to increase exposure.

It entered into its first royalty agreement in 2012 with London Mining (LOND). For a consideration of $110m, the trust gets a 2 per cent revenue related royalty calculated from iron ore sales over the life of the mine from London Mining's Marampa licence in Sierra Leone. This is paid quarterly.

Eoin Treacy's view 

Over the last month we have highlighted a number of energy and resources companies which have returned to positions of relative outperformance. As part of my search for suitable vehicles likely to benefit from this theme, I took a look at the Blackrock World Mining Trust’s constituents. 

While Rio Tinto and BHP Billiton remain its largest weighting, London Mining is its four largest at 6.7% of the portfolio. The trust may hold a royalty in the company’s production but the share remains in a medium-term downtrend and its market cap has declined to a mere £80 million. This underperformance may be contributing to the trusts inability to sustain a rally. 

 

Eoin personal portfolio: commodity long profit taken 

Eoin Treacy's view 

Full details of this trade are available in the Subscriber's Area.

 

Chinese Giant Alibaba Will Go Public, Listing in U.S. 

This article by Vindu Goel, Michael J. De La Merced and Neil Gough for the New York Times may be of interest to subscribers. Here is a section: 

In the filing, Alibaba said it intended to raise $1 billion in an initial public offering — a figure used to calculate its registration fee. But the company is expected ultimately to raise $15 billion to $20 billion, which would make it the biggest American I.P.O. since Facebook’s $16 billion offering in May 2012.

When it makes its debut on the New York Stock Exchange or the Nasdaq market, Alibaba is also expected to have a share price that could value the company at roughly $200 billion — more than the market value of Facebook, Amazon.com or eBay, although still trailing that of Google or Apple.

The immense size of the offering means that Alibaba shares will probably find a home in a broad swath of mutual funds and pension funds — and thus indirectly in the portfolios of small investors around the world.

Wall Street has been eagerly awaiting the Alibaba I.P.O., seeing it as perhaps the best chance yet to buy into China’s growth. Online shopping there is expected to grow at an annual rate of 27 percent, according to the iResearch Consulting Group, and Alibaba is the leader in that area.

Eoin Treacy's view 

While Alibaba is best known as a facilitator for wholesalers, factories and as an online retail mall, the company’s foray into deposit taking is less remarked upon. 

Alibaba is currently enjoying a legal loophole which allows its Alipay arm to take deposits and pay a highly competitive yield in excess of 6%. Due to regulations on deposit rates traditional banks have so far been unable to compete. Liberalising the deposit rate is a key policy objective announced at the recent Party Congress but it may be two years before it is enacted. 

 

The Chart Seminar and Global Strategy Sessions 

Eoin Treacy's view 

Following an encouraging start to the year’s speaking engagements I am looking forward to our events later this year. . . 

We are also available to conduct private seminars and occasionally agree to speaking engagements at investment conferences and professional societies. 

With regard to The Chart Seminar, 2014 marks a number of changes in how we organise the event.  In order to facilitate more venues we are open to partnering with other groups to market the event. If your organisation would like to arrange a seminar either internally or for your clients please do not hesitate to contact us. .

The remaining dates and venues for 2014 are:

September 22nd & 23rd The Chart Seminar Chicago

November 13th & 14th The Chart Seminar London - Radisson Edwardian Hotel, Leicester Square

If you are interested in any of our remaining venues please contact Sarah Barnes at [email protected]

The full rate for The Chart Seminar is £950 + VAT. (Please note US, Australian and Asian delegates, as non EU residents are not liable for VAT). The early booking rate of £875 for non-subscribers expires two months ahead of the event start date. Subscribers are offered a discounted rate of ¡ê850. Anyone booking more than one place can also avail of the £850 rate for the second and subsequent delegates.

The full rate for the Global Strategy Sessions will be £450 + VAT). The early booking rate of £375 for non-subscribers expires two months ahead of the event start date.

Subscribers are offered a discounted rate of £350. Anyone booking more than one place can also avail of the £350 rate for the second and subsequent delegates.

Delegates who attend both The Chart Seminar and the Global Strategy Session receive a reduced rate of £250 on the Global Strategy Session.

 

52nd Annual Contrary Opinion Forum 

Eoin Treacy's view 

It has been my pleasure to accept an invitation to return to the Basin Harbor Club in Vermont to speak at the 52nd Annual Contrary Opinion Forum hosted by Fraser Asset Management between October 1st and 3rd. The Forum’s convivial atmosphere is something Mrs.Treacy and I look forward to not least because it gives us an opportunity to meet so many subscribers.  

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