A couple key questions:
Let’s move on to your recent research note, which is titled “Springing Leaks.” What are some of
your key points?
I think the Fed isn’t anywhere close to tightening. But the markets have pulled forward
expectations of tightening from the November Fed meeting to the September meeting, on the
back of these stronger data points. But it is almost laughable to think that the Fed can tighten in
this environment. I expect that, at the end of June, unless you have had one of the two things I
mentioned — a spontaneous increase in consumer borrowing or an increase in job creation — the
Fed will be forced to extend QE [quantitative easing], because it needs to arrest this back-up in
mortgage rates before it starts to get into those ARM resets. And it also needs to mitigate the
blow from higher commodity prices.
As far as trades:
Are there any other themes that come to mind?
Another is related to consumer discretionary spending, which, again, is an area where
disappointment would be particularly punitive. I would be looking to short some of the
discretionary stocks, including XRT [SPDR S&P Retail], an ETF that gives investors exposure to
retailing. And with this mortgage reset wave unfolding against a backdrop of higher food and
energy prices and consumers who don’t have the government support from transfers and
stimulus anymore, I would be looking to short the financials again. I think we are going to have
some mortgage mayhem.