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Economists pumped out notes this week on how the market would react to the Fed’s recently announced quantitative easing program, many offering a unique take on how fixed income instruments and commodities would move.But more so then not, they didn’t offer many compliments to Bernanke and his new policy: one economist went so far to call it heroin that has traders hooked.
Beyond easing, we heard arguments on China and Japan relations, as well as new forecasts for equities.
'I am sure that I am missing some significant piece of the puzzle, but as I watch the news coverage and market reaction, I am reminded of one of my favourite movies, 'Groundhog Day,' he writes in a new blog post. 'I was a sceptic on the efficacy of QE2 and Operation Twist and I remain unpersuaded on QE3. If the definition of insanity is that you keep trying to do the same thing over and over, expecting a different outcome, then we seem to be fast approaching that point with the Fed.'
'October is the next test of market risk appetite. Investors seem to be ignoring weak 3Q EPS, but widespread misses should cause a dip. If investors tolerate weak 3Q EPS, then we are likely to drop our tactical dip call, as we expect y/y EPS growth to resume in 4Q. Our 1500 12-month target is likely to be raised if Republicans take control of the Senate, but not cut if Democrats retain control.'
'Conventional wisdom suggests that when the Fed takes duration out of the market, bond prices are supposed to rise. Even our fearless Colonel Bernanke tells us he is lowering interest rates. But that's not happening. Is he lying? Absolutely!! Has the myopic Treasury trading community completely misunderstood how QE affects bond yields? Absolutely.'
'This doesn't mean bonds are a short tomorrow, but bonds are finished as a place to hide. I'm not trying to make the point that it's a precise moment in time, but in the big sweep of time, yeah bonds are finished. It's just me saying the deflation scare trade is over. But if that's right, metals and inflationary beneficiaries should do better, and bonds should do worse.'
'We see a 'melt-up' into Election Day,' writes Lee on the cover of the report. 'S&P 500 to EXCEED 1,495 short-term...market's base case is Obama victory.' His points include: 'Global economy is turning (or less bad),' 'We see a US durable goods boom larger than 1990s,' and 'No contrarian sell signals yet...'
'We believe the balance of 2012 could remain challenging for investors, given the many negative indicators and warning signs. Certainly extremes in leverage in the Western economies and questions regarding growth in China present investors with a worrying post-2012 future. However, in our view there are nearly zero real choices available to global policy makers.'
'...Therein lies the rub. The economy and earnings are weak, and getting weaker, but the interest rate used to discount the future earnings stream keeps getting more and more negative, and that in turn raises the future profit expectations. It's that simple. And the fact that the S&P dividend yield is triple the yield in the belly of the Treasury curve has also lifted the allure of equities, or at least those that have compelling dividend yield, growth and coverage characteristics.'
BOB JANJUAH: September 2012 Will Be Remembered As The Moment The West Lost Its Status As A Global Economic Superpower
'Namely MORE debt, MORE bubbles and MORE monetary debasement. When future historians look back for the day that the West lost its status as global economic superpower, and for the day that the West lost its aspirational leadership in terms of sound economic and prudent financial system management, I feel that September 2012 may be seen as a significant pivot point.'
'When gold breaks above $1,790, many people will feel they have missed the boat, and they will go to silver instead. So silver should outperform gold. People have to remember that we are only at the midpoint of the gold/silver ratio of the last 45 years. So it is not inconceivable that we could still go lower in terms of that ratio.'
'We stay cautiously positioned overall and sceptical about the risk rally's sustainability without growth improving. Policy action may provide a tailwind for a little longer, but better growth is necessary. Though we wouldn't add risk, there isn't a clear negative growth catalyst to sell, and positioning remains supportive.'
'The Japanese government thus looks likely to forego a Cabinet decision on 'zero nuclear' amid deterioration in Japan-China relations. Whether one views these two events occurring simultaneously as coincidental or inevitable depends on one's imagination. If they are 'inevitable,' effective revision of 'zero nuclear' raises the possibility of 'Japan-China relations' also starting to improve, as we see it.'
'If it's a hedge fund be careful. You don't know what's on the short book,' he told CNBC, adding, you don't know what's on the other side and it can be 'very misleading.' He also told the network: 'I don't know why the long should be shown because that's someone's proprietary work,' he said, adding, 'I don't think the short should be shown. I think they should be shown to the authorities, or the SEC as needed, but not the public in that if somebody's paying for that service, in effect, you're giving it away for free every quarter.'
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