M2 growth is back on track, with a decent surge in this most recent report.
The preliminary January 17th measure stood at $8.862 trillion. Annualized M2 growth over the past 13 weeks was 5.2% vs. annualized growth of 5.1% and 3.5% for the past 26 and 52 weeks.
As mentioned last week, the Federal Reserve has fine-tuned the formula they use for arriving at their seasonally-adjusted number for M2. This renders comparables for the 13-week and 26-week periods difficult. However, what has been slowly climbing, which is unaffected by the seasonally-adjusted calculations, has been the 52-week growth of M2. At the end of October 2010, M2 growth over the past 52 weeks had been 3.0%. At the end of July 2010, M2 growth had only been 1.8% for the previous 52-week period.
It will be intriguing to see how long the Federal Reserve permits this surge in M2 to continue before they begin withdrawing some of their more stimulative measures to stabilize the economy. Treasuries have sold off significantly over the past three months. That sell-off could continue and accelerate without some reassurances from the Federal Reserve that they will not shirk their responsibility to fight future inflation.
Thursday, January 27, 2011
Thursday, January 20, 2011
Tonight's Money Supply Report
Tonight's money supply report comes with a revision in the factors the Federal Reserve takes into consideration when preparing a seasonally-adjusted number for M2. From tonight's report:
As a result, the current numbers being reported differ slightly from the numbers released in recent money supply reports. However, the week-to-week trends remain the same.
The preliminary January 10th measure stood at $8.815 trillion. Annualized M2 growth over the past 13 weeks was 5.3% vs. annualized growth of 5.1% and 3.4% for the past 26 and 52 weeks.
One result of the revisions to the methods used by the Federal Reserve to calculate seasonally-adjusted M2 is that money supply growth for the first half of 2010 was slightly higher with the newer approach, and money supply growth for the second half of 2010 was slightly lower. However, what remains intact despite these revised methods of M2 calculation is that the trend in M2 growth has accelerated.
It's still bad news for U.S. Treasuries.
The benchmark incorporates minor revisions to data reported in the weekly and quarterly deposit reports, and it takes account of deposit data from Call Reports for banks and thrift institutions that are not weekly or quarterly deposit reporters. These revisions to deposit data start in 2007. In addition, this release incorporates data from Call Reports on the amount of small-denomination time deposits held in individual retirement accounts (IRAs) and Keogh accounts; related revisions to deposit data start in 2005. The benchmark also incorporates revisions to data on retail and institutional money market mutual funds, including revisions to IRA and Keogh balances held at those funds. Revisions to data on money market mutual funds begin in 2001. This release also incorporates the receipt of historical information from other sources of data.
As a result, the current numbers being reported differ slightly from the numbers released in recent money supply reports. However, the week-to-week trends remain the same.
The preliminary January 10th measure stood at $8.815 trillion. Annualized M2 growth over the past 13 weeks was 5.3% vs. annualized growth of 5.1% and 3.4% for the past 26 and 52 weeks.
One result of the revisions to the methods used by the Federal Reserve to calculate seasonally-adjusted M2 is that money supply growth for the first half of 2010 was slightly higher with the newer approach, and money supply growth for the second half of 2010 was slightly lower. However, what remains intact despite these revised methods of M2 calculation is that the trend in M2 growth has accelerated.
It's still bad news for U.S. Treasuries.
Sunday, January 16, 2011
Rethinking Momentum
When I go looking for investment candidates to sell short, I am frequently drawn to securities or asset classes whose prices been driven beyond my perception of their fundamental value by "momentum" investors.
Momentum investing is merely the act of buying into assets because they're going up. When speaking to investors who are drawn to the momentum style, the logic seems to be "if it's gone from 50 to 60, then maybe it's on its way to 80 or 100". Many of them do not examine fundamentals at all. As an investment style, it's bewildered me. Instead of buying a security that's just gone from 50 to 60 in the hoped that it'll go to 80, wouldn't it be simpler to just find the next security that's going to go from 50 to 60?
I also seek out these sorts of momentum candidates because of the consequences we've seen in the past of momentum style investing. The dot.com boom and bust was a consequence of momentum style investing, as was the recent collapse in real estate. Shorting all the mortgage originators during the past couple of years has been an excellent way to make money betting against the momentum investing style.
But it doesn't always work so well. And recently The Economist published an article, "Why Newton was wrong", extolling the virtues of momentum style investing:
http://www.economist.com/node/17848665?story_id=17848665&CFID=153742550&CFTOKEN=85693784
The performance differential is very impressive. For any given year, an investor would enjoy an extra 12 points of returns if they had merely bought the best performing stocks from the previous year. As the article points out, this is not a new phenomenon. This effect has been observable for much of the past century.
Will I adopt this strategy? Absolutely not. First of all, the article does not quantify the risk inherent in this strategy. Furthermore, while the strategy works well for the best performers of any given one-year period, the strategy doesn't work so well for the best performers from longer periods, three years or more. This would seem to reinforce the underlying logic to shorting momentum candidates in the first place: Hot money has driven them to valuations that are irrational and unsustainable. Finally, as the article points out at the end, it's momentum style investing that tends to create bubbles. For those who rode the real estate boom and bust wave, many of them might have been rich in the middle of that cycle, but not many investors who played the long-side of that trade took their money and walked away at the top.
Most of them got clobbered when the bubble burst.
Still, this is a very useful study. And for short sellers seeking out momentum candidates whose valuations have gotten out of hand, a more detailed look at the data could reveal some worthwhile information about timing an entry into a short position against a security that's been driven by the momentum crowd.
Momentum investing is merely the act of buying into assets because they're going up. When speaking to investors who are drawn to the momentum style, the logic seems to be "if it's gone from 50 to 60, then maybe it's on its way to 80 or 100". Many of them do not examine fundamentals at all. As an investment style, it's bewildered me. Instead of buying a security that's just gone from 50 to 60 in the hoped that it'll go to 80, wouldn't it be simpler to just find the next security that's going to go from 50 to 60?
I also seek out these sorts of momentum candidates because of the consequences we've seen in the past of momentum style investing. The dot.com boom and bust was a consequence of momentum style investing, as was the recent collapse in real estate. Shorting all the mortgage originators during the past couple of years has been an excellent way to make money betting against the momentum investing style.
But it doesn't always work so well. And recently The Economist published an article, "Why Newton was wrong", extolling the virtues of momentum style investing:
http://www.economist.com/node/17848665?story_id=17848665&CFID=153742550&CFTOKEN=85693784
The performance differential is very impressive. For any given year, an investor would enjoy an extra 12 points of returns if they had merely bought the best performing stocks from the previous year. As the article points out, this is not a new phenomenon. This effect has been observable for much of the past century.
Will I adopt this strategy? Absolutely not. First of all, the article does not quantify the risk inherent in this strategy. Furthermore, while the strategy works well for the best performers of any given one-year period, the strategy doesn't work so well for the best performers from longer periods, three years or more. This would seem to reinforce the underlying logic to shorting momentum candidates in the first place: Hot money has driven them to valuations that are irrational and unsustainable. Finally, as the article points out at the end, it's momentum style investing that tends to create bubbles. For those who rode the real estate boom and bust wave, many of them might have been rich in the middle of that cycle, but not many investors who played the long-side of that trade took their money and walked away at the top.
Most of them got clobbered when the bubble burst.
Still, this is a very useful study. And for short sellers seeking out momentum candidates whose valuations have gotten out of hand, a more detailed look at the data could reveal some worthwhile information about timing an entry into a short position against a security that's been driven by the momentum crowd.
Thursday, January 13, 2011
Tonight's Money Supply Report
The six-week trend in M2 growth was broken tonight as M2 contracted slightly for the figure reported as of January 3rd.
The preliminary January 3rd measure stood at $8.825 trillion. Annualized M2 growth over the past 13 weeks was 6.8% vs. annualized growth of 5.8% and 3.3% for the past 26 and 52 weeks.
The song remains the same: Avoid U.S. Treasuries at this time.
The preliminary January 3rd measure stood at $8.825 trillion. Annualized M2 growth over the past 13 weeks was 6.8% vs. annualized growth of 5.8% and 3.3% for the past 26 and 52 weeks.
The song remains the same: Avoid U.S. Treasuries at this time.
Thursday, January 6, 2011
Tonight's Money Supply Report
Make it six weeks in a row now. M2 continues to surge, which should come as no surprise to anyone following this blog.
The preliminary December 27th measure stood at $8.848 trillion. Annualized M2 growth over the past 13 weeks was 6.9% vs. annualized growth of 5.8% and 3.3% for the past 26 and 52 weeks.
At the risk of being redundant, stay away from U.S. Treasuries. I can not stress enough the risk that these securities pose to investors right now.
The preliminary December 27th measure stood at $8.848 trillion. Annualized M2 growth over the past 13 weeks was 6.9% vs. annualized growth of 5.8% and 3.3% for the past 26 and 52 weeks.
At the risk of being redundant, stay away from U.S. Treasuries. I can not stress enough the risk that these securities pose to investors right now.
Wednesday, January 5, 2011
Three Predictions for 2011
1. Bonds will continue to get clobbered. I've written extensively about what's taking place with M2. Money supply growth will be one of the factors behind the destruction of bond values, but the economic rebound taking place will also add pressure to bonds as investors seek out better investment opportunities. Yields on the 30-Year Treasury Bond should easily top 5% before year's end. Unfortunately, many investors will learn that their "flight to safety" wasn't so safe after all.
2. Stocks will continue to recover, but volatility will increase. Volatility in the bond market will make itself felt in stocks. But the trend for growth in corporate profitability remains intact. And a positive yield curve is extremely helpful for growing corporate profits. This is a great set-up for the S&P, if you can stomach the roller coaster ride.
In many ways, this year is reminiscent of 1994/1995. Few remember the bond crash of 1994, but there's a great paper that discusses its aftermath here.
3. The U.S. dollar will firm up against most currencies. Unfortunately, this will be bad news for commodities investors, as a stronger dollar will dampen gains for most raw materials. I might not bet against $100/bbl oil. The markets for crude are always insane, and the same goes for gold. But as a whole, expect commodities to post lacklustre returns for 2011.
2. Stocks will continue to recover, but volatility will increase. Volatility in the bond market will make itself felt in stocks. But the trend for growth in corporate profitability remains intact. And a positive yield curve is extremely helpful for growing corporate profits. This is a great set-up for the S&P, if you can stomach the roller coaster ride.
In many ways, this year is reminiscent of 1994/1995. Few remember the bond crash of 1994, but there's a great paper that discusses its aftermath here.
3. The U.S. dollar will firm up against most currencies. Unfortunately, this will be bad news for commodities investors, as a stronger dollar will dampen gains for most raw materials. I might not bet against $100/bbl oil. The markets for crude are always insane, and the same goes for gold. But as a whole, expect commodities to post lacklustre returns for 2011.
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