Archive for October, 2011
Investors (and the Fed) are addicted to liquidity

By Paul R. La Monica @CNNMoney October 26, 2011: 12:58 PM ET With long-term bond rates as low as they are, is there really a need for the Fed to try QE3 to push them down further?
With long-term bond rates as low as they are, is there really a need for the Fed to try QE3 to push them down further?

NEW YORK (CNNMoney) — The best you can say about “The Godfather: Part III” is that Sofia Coppola recognized her limitations and now spends more time behind the camera than in front of it. “Superman III” proved that Richard Pryor was no Gene Hackman.

And “Return of the Jedi?” I defer to Dante from “Clerks.” All that had was a “bunch of Muppets.”

The third time is rarely the charm in Hollywood. But don’t tell that to investors and central bankers who are loudly calling on the Federal Reserve for a third round of bond buying to help stimulate the economy.

Fed vice chair Janet Yellen, Fed governor Daniel Tarullo and NY Fed president William Dudley have all hinted in speeches recently that another so-called quantitative easing program, or QE3, could be possible.

Why? The Fed has already pumped trillions of dollars into the economy with the first two renditions of QE. It has left its key interest rate near zero since December 2008 and has pledged to keep rates low until the middle of 2013.

And the Fed is buying even more bonds now through Operation Twist, a program that allows the central bank to sell short-term Treasuries and trade them in for longer-term ones so it doesn’t have to add more to its already bloated balance sheet.

What has this accomplished? The economy is still in a sluggish growth phase that feels more like a recession than a recovery. Unemployment remains above 9%. QE ad infinitum isn’t going to change things. Only time will.

“People believe, despite all evidence to the contrary, that there is this omnipotent being at the Fed who can push the right buttons and get the best outcome for the economy,” said Bob Gelfond, CEO of MQS Asset Management, a global macro hedge fund based in New York.

“There is a refusal to just let things in the economy play out,” Gelfond added.

Is Operation Twist already a failure?

But the 10-year Treasury yield is at 2.17%, not much higher than its record low! So it’s a great time to refinance or buy a home .. if you can find a bank to approve your loan. Oh yeah.

More liquidity is not the answer. The economy isn’t being constrained by the affordability of credit. Turning the U.S. into Japan so we can have even lower rates isn’t going to help.

“Quite frankly, the problem existing in the economy right now is whether or not businesses feel confident enough to ask for loans or for consumers to qualify for one,” said Terry Clower, director of the Center for Economic Development and Research at the University of North Texas. “Do we want to encourage borrowers to take on more debt they can’t afford?”

Another possible consequence of more easing is that it could devalue the dollar and lead to higher commodity prices. Even if that isn’t textbook inflation per se, the last thing the U.S. consumer needs is to pay more at the gas pump and grocery store.

Dan North, chief economist with Euler Hermes, a credit insurer in Baltimore, worries that the Fed might be willing to risk that in order to prove it is trying everything it can to get growth back on track.

“It’s possible we’ll get QE3 because it seems like the Fed always has to be doing something,” North said. “But the problem is that you can’t erase injecting that much money into the financial systems without some inflation concerns.”

However, the Fed might be able to help matters with a more targeted form of easing.

Doug Cote, chief market strategist with ING Investment Management in New York, said if the Fed were to only buy mortgage-backed securities, that could push mortgage rates lower without the potential nasty side effects of creating pricing pressures. Tarullo has in fact proposed such a plan.

But Cote said that the Fed would also have to work with mortgage buying agencies Fannie Mae and Freddie Mac as well as banks to loosen some of the constraints on who can refinance. Dudley has said this is something he favors too.

Lower rates still won’t help if nobody can take advantage of them. Cote argues that any borrower current on their mortgage should be allowed to refinance, even if the value of their home has plunged.

“I am against the concept of indiscriminate bond buying. That exposes taxpayers to a lot of risk,” Cote said. “But broadening the base of borrowers that can refinance by eliminating constraints on people with underwater mortgages can only help consumers.”

Brazil cuts rates. Is China next?

That may be true. Still, the Fed would be foolish to keep throwing money at the problem. It can’t stay in firefighter mode indefinitely.

The latest gross domestic product figures will be released by the government on Thursday. According to 21 economists surveyed by CNNMoney, GDP for the third quarter is expected to rise at a 2.5% annualized pace.

That’s still not fantastic, but it would be a major improvement from the first half of the year. And as long as the economy is in slow growth mode as opposed to a full-blown crisis, it’s just greedy to expect the Fed to step in all the time with more bond buying.

Sure, investors may want and crave more quantitative easing. The market, to paraphrase Robert Palmer, might as well face it: It’s addicted to liquidity. (Cue the tall girls with the pulled-back hair and short, black dresses!)

Anything that pushes borrowing costs down further, makes bonds less attractive and weakens the dollar is like manna from heaven for the earnings power of big multinational companies. But the Fed should not bow to the demands of traders.

After all, the hole we’re still trying to dig out from was partially created by a period of easy money that lasted too long.

“All of the QE3 talk is just trying to put Humpty Dumpty back together again so we can go back to 2006,” Gelfond said. “It just prolongs the inevitable.”

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks. To top of page

Gold prices shining again

Click the chat to check prices of gold and other commodities.

NEW YORK (CNNMoney) — Gold seems to be regaining its luster. The precious metal has rallied more than $100 in less than a week as investors turn to the precious metal as a safe haven amid concerns about Europe and signs of slow global economic growth.

The biggest move came Tuesday, when gold prices added nearly $50, or 3%, to top $1,700 per ounce for the first time in more than a month. Investors also poured nearly $564 million into the SPDR Gold Trust ETF (GLD), one of the most popular funds for investors seeking exposure to gold.

Prices gained another 1.4% Wednesday to settle at $1,723.50 an ounce, the highest level since Sept. 22. Silver prices have also rallied, surging more than 10% over the past four sessions.

The recent big moves have broken the link between gold and other risky assets, which had been moving almost in lockstep for two months.

“We’re finally seeing gold prices move up in the flight to quality, along with bonds, the dollar and then yen, which is a positive for long-term investors,” said Adam Klopfenstein, senior market strategist with MF Global. “When we weren’t seeing gold rally in the face of economic uncertainty, a lot of investors didn’t see the point of buying it, and moved to the sideline.”

Now that gold has regained its longstanding status as a safe haven investment, Klopfenstein said prices will likely continue to move higher.

In fact, before the year is over, gold prices could reclaim record levels above $1,900 an ounce that were reached in August, said Carlos Sanchez, precious metals analyst at CPM Group.

“It looks like we’re going to be dealing with continued concerns about Europe, because even though leaders seem to be working harder, we aren’t going to get a resolution overnight,” said Sanchez. “And even if the United States can avoid a double-dip, the data is showing that the economy is treading just above recessionary levels.”

Investors (and the Fed) are addicted to liquidity

Rumblings of another round of bond buying from the Fed — or QE3 — is also likely stoking fears of inflation and helping gold prices, said Keith Springer, president of Springer Financial Advisors.

Fed vice chair Janet Yellen, Fed governor Daniel Tarullo and New York Fed president William Dudley have all recently hinted that another quantitative easing program could be on its way.

Meanwhile, oil and copper prices have been rebound from one-year lows hit earlier this month, as fears of a double-dip fade away.

“Economic growth is going to be slow, but recent data is suggesting that the chance of a double-dip recession is off the table for now,” said Springer. “Oil and copper prices were factoring in the worst possible case, so now we’re seeing a pick-up.”

Oil prices have surged almost 14% in October, while copper prices have climbed more than 8%. To top of page

10 Things to Consider (Other Than Price) When Choosing an Affordable Trading Online System

If you are going to make your own trading decisions in a self-directed account, you have the option of trading by phone with a live broker or online through a trading system. In choosing a trading online system, affordability is an important factor. But if you are an active trader or a professional trade manager, you also should look for a system that accommodates your trading style rather than requiring you to change to fit its parameters. If you settle for yesterday’s technology or for systems or order routing that don’t meet your needs, you could end up dissatisfied and shopping around again.

1. Market
Does this online trading system make available true direct market access to the major global futures exchanges on which I want to trade?

2. Pit trading
Does it also offer an efficient and responsive procedure for trading pit contracts?

3. Strategy support
Does the online system allow me to effectively apply complex trading strategies (OCO, GTC, FOK, IOC STP LIMIT, Trading Stops, Brackets, etc.)?

4. Up-to-date information
Will I need a separate subscription to an external data vendor to access streaming quotes, price alerts or news feed customized to my preferred contracts?

5. Technical charting
Are the built-in charting function, chart styles, and indicators I wish to employ available?

6. Advanced customization
Does it allow me to customize indicators?

7. Detailed reports
Will I need additional software in order to generate detailed, custom reports?

8. Institutional trading
Can it meet my special needs as a CTA or professional trade manager? For the creation of allocation block accounts without back office trade reconciliation? For the efficient handling of large batches of trades?

9. Storage and reliability
If I temporarily lose connectivity between my computer and the server, will my working orders still process?

10. Tech support
Is sufficient tech support available online or phone in order to keep me up and operating when I need to be?

These questions are designed to get you started. Not all “affordable” online trading systems are going to meet your needs. Based on your own specific trading requirements, you will probably have additional queries. An efficient, affordable online system can help you boost your bottom line, so find one that will work well for you. 

This article was originated from

10 Things to Consider (Other Than Price) When Choosing an Affordable Trading Online System


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