Thursday, December 15, 2016

"Greenback Extends Gains on Back of Fed"

Sometimes markets confuse me.
Then I remember that markets, like soylent, are people.
Even markets traded by machines.

The lack of Fed-day anticipation in the dollar is one example, we have another after the jump.

From Marc to Market:
The Federal Reserve delivered the widely expected hike yesterday.  A year ago it suggested four hikes in 2016 were likely appropriate.  The market never accepted that, and as the year progressed many derided it.  Yesterday the Federal Reserve's projections anticipated three hikes next year instead of the two anticipated in September.  

The distribution of the forecasts illustrates what happened.  In September, seven of the 17 members expected Fed funds would finish 2017 in the 1.25%-1.50% or higher.  Yesterday 11did.  In September, 10 expected that Fed funds would finish 2017 1.0%-1.25% of lower.  Now six do.  

Yellen made two important points that ought not to be lost.  First, she noted that the change in the median forecast was small and was the result of a few members changing their forecasts.  Second, and arguably more important, some but not all the participants incorporated changes in fiscal policy.  This gives meaning to the old saw about a camel being a horse made in committee.   We did not anticipate a change in forecasts based on fiscal policy that is impossible to make any judgments.  It is not just about size, but they simply contribute the disparity of income and wealth or do they lift the growth potential. 

What changed in the market's reaction function is that the rise in US rates was an adjustment in the real rate.  That is to say that it appears that inflation expectations did not change.  Here we measure inflation expectations by the 10-year breakeven rate (inflation-linked bond yield and the conventional bond yield).  For example, the 10-year US yield is up 14 bp on the week.  The 10-year break-even is down three basis points this week.  

There are several other developments today, though the dollar's rally and bond sell-off appear driven by the Fed.  Equity markets are more mixed, with Asia following the US lower, and Europe is mostly moving higher. 

First are the central banks.  The Swiss National Bank kept policy steady and repeated its usual threat to intervene.  It appears that it will accept some modest franc appreciation.  Norway's Norges Bank surprised many by leaving its rate path unchanged.  Many had expected that although there would be no change in policy, the central bank would lower the rate path due to the krone's strength.  However, officials seemed more concerned about financial excesses and real estate prices.   The knone is the only major currency not to have fallen against the dollar today.    The Bank of England is ahead.  No change is expected in the neutral bias.  Of note sterling and interest rates are higher than when the MPC last met....MORE 
Back in 2009 I posted a few lines on adventures in short selling:
...Prior to and just after filing for bankruptcy, Northwest Airlines seemed to offer a short opportunity. A friend had me double-check his balance sheet analysis and I ended up selling myself on the idea. The common shareholders would be wiped out and the stock was trading around $1.25. We got the short on. The stock tripled or quadrupled. I started quoting Keynes (attributed) as we threw money at the monster:
The market can stay irrational longer than you can stay solvent.
It worked out, the stock went to zero and I kept quoting Keynes:
“It is the one sphere of life and activity where victory, security and success is always to the minority and never to the majority. When you find any one agreeing with you, change your mind...."
There a a few lessons to take away from this adventure:
1) If your timing is wrong you had better be right in your analysis.
2) It is really, really good to have a friendly banker.
3) Keynes talked a lot.
The airline was actually concerned enough about people buying the stock that they warned against the practice. Here's another NWA post, this time from 2015:
I'm always amazed when the stock of companies that have entered bankruptcy protection continue to trade as if the common shareholders had claims that were anything more than dreams.
Yet it happens over and over again. And can be immensely profitable if you can locate stock to short....

...Here's one of those bankruptcy stories

Northwest's reorganization jolts investors
Updated 5/31/2007 6:14 AM
Anthony Hicks thought he was getting a bargain when he saw Northwest Airlines stock trading for $1.70 per share.

Tempted by that low price, the 39-year-old Detroiter bought 2,000 shares earlier this year, knowing that the airline was restructuring in bankruptcy. It was in bankruptcy that Northwest's stock had skyrocketed from 60 cents to $7.50 in January, on speculation that the company would merge with another airline.
Hicks saw that surge and hoped to catch it on a second wave.
There was no second wave. What Hicks didn't know was that those Northwest shares would be worthless the day the company emerged from bankruptcy.
That day is today. After 20 months of shedding billions of dollars in debt and costs, Northwest is set to leave bankruptcy protection.
The airline had warned since it filed for bankruptcy in September 2005 that its stock could be cancelled....
The company was warning for twenty months that the stock would be canceled!....